Nafscobvolume3.pdf

OPERATIONAL MANUAL FOR COOPERATIVE BANKS (REVISED - 2013)

VOLUME – III

LOANS AND ADVANCES

PART-I

OPERATIONAL MANUAL FOR COOPERATIVE BANKS (REVISED - 2013)

VOLUME – III

LOANS AND ADVANCES

PART-I

FOREWORD The 'Operational Manual for Cooperative Banks' brought out by National Federation of State Cooperative Banks Ltd. (NAFSCOB) in four volumes in 2004 was extensively used and appreciated by the member State Cooperative Banks, District Central Cooperative Banks and their affiliates, cooperative training establishments, research scholars, freelancers etc. The manual had facilitated adaption of standardised procedures and practices in the member banks and their affiliates helping them in providing professional customer services.The said manual also had facilitated number of member banks to bring out their own in house manuals/handbooks on various operational issues for efficient functioning, resulting in professional approach to cooperative banking and improved regulatory compliances. With the increasing demand for higher quality of services, ever increasing competition in the banking sector, innovations in the banking sector, policy guidelines, directives from the policy makers as well as higher financing agencies, regulatory compliance requirements etc. an urgent need for revision/upgradation of the manuals brought out in 2004 was felt. The member banks urged NAFSCOB to take necessary initiatives in this direction. Accordingly the Executive Committee/Board of Directors of NAFSCOB constituted a 'Working Group' and 'Sub Groups' to examine and suggest necessary revision. The Working Group/Sub Groups, after extensive deliberations, suggested various alterations/incorporations to the existing volumes of the manual. The expert intervention of Tamil Nadu State Apex Cooperative Bank in this regard is highly appreciated. NAFSCOB also requested NABARD headquarters to re-examine the revised volumes of the manual and suggest improvements. NABARD suggested number of improvements which have been incorporated in the revised manual to make it more up-to-date. With the ever changing and improving operations in the financial sector, the user of this manual need to constantly cross refer the latest guidelines/directives on many of the issues for clarity as well as updated direction. The revised and updated 'Operational Manual for Cooperative Banks' is now ready for publication and distribution among all the stakeholders. It is a matter of pride for NAFSCOB that we could undertake such a mammoth task and accomplish the same. This would not have been possible without the collective and concerted efforts of so many experts, expert agencies and the member banks. I would like to place on record my personal appreciation to Shri B Subrahmanyam, Managing Director, NAFSCOB for his relentless endeavour to bring out the Operational Manual. Further, I am pleased to acknowledge the efforts made by each one of the members of the Working Group/Sub-Groups constituted by NAFSCOB for re-examining the existing 'Operational Manual for Cooperative Banks'. I am especially thankful to Chairman, NABARD for ensuring valuable inputs and contributions from NABARD in finalising the Operational Manual.

(DR. BIJENDER SINGH) CHAIRMAN

Mumbai 01-03-2013 i - III

ii - III

P R E FA C E The National Federation of State Cooperative Banks Ltd. (NAFSCOB) for the first time published an 'Accounting Manual' in 1979 to facilitate the member State Cooperative Banks (SCBs) and their affiliates to adopt standardised procedures and practices in their banking and other operations. Subsequently, many of the SCBs also brought out operation specific manuals/handbooks such as 'Loan Manual', 'Inspection Manual', 'HRD Manual', etc. for strengthening their in-house operations. After more than two decades, it was in the year 2000, NAFSCOB initiated steps to review the 'Accounting Manual'. As a result of extensive review, research, deep insight and laborious effort, an extensive and elaborate set of operational guidelines was finally brought in the form of 'Operational Manual for Cooperative Banks' in the year 2004. The 'Operational Manual for Cooperative Banks' in four volumes was made available to all SCBs and their branches, District Central Cooperative Banks (DCCBs) and their branches, as well as few Urban Cooperative Banks, cooperative training institutes, research scholars, academicians, higher financing organisations, regulators, etc. The feedback received with regard to the contents and usefulness of the said manual from various stake holders and others has been very encouraging. Over a period of time with innovations and improvements in the finance and banking sector, new policy guidelines, operational directives, regulatory compliance requirements etc., there has been an increased demand for revision/upgradation of the said 'Operational Manual for Cooperative Banks'. As a result, in 2009, the Executive Committee/Board of Directors of NAFSCOB decided to constitute a high-level 'Working Group' and four 'Sub Groups' consisting of Chief and Senior Executives of member SCBs with adequate representation from key departments such as IDD, PCD, DOS, HRDD and DCRR from NABARD to review and revise the Operational Manual for Cooperative Banks. The Working Group and the SubGroups had extensive consultations and deliberations on various segments of the 'Operational Manual for Cooperative Banks'. With the inputs provided by various stakeholders and the number of experts, the said Four Volumes of the 'Operational Manual for Cooperative Banks' were suitably modified and upgraded. The modified volumes were reassigned to Tamil Nadu SCB for final fine-tuning and finalisation. These four volumes were then forwarded to NABARD for their suggestions, comments and views. The feedback received from NABARD were duly incorporated and the 'Operational Manual for Cooperative Banks' (Revised) in following four volumes has been finalised. Volume Volume Volume Volume

I II III IV

: Manual on Branches and Banking Operations : Manual on Functions of Head Office : Manual on Loans and Advances (Part I & Part II) : Manual on Inspection and Internal Audit

It is hoped that the revised 'Operational Manual for Cooperative Banks' will further enhance the operational efficiency of the short-term cooperative credit structure, in general and the cooperative credit & banking sector, in particular. Further, it is also hoped that the said revised manual will serve as an effective and broad-based set of operational guidelines for cooperative practitioners as well as preachers. It has to be iii - III

borne in mind that the said manual per se is not an end by itself but a means for higher quality of performance, efficiency, better housekeeping, improved customer services and viable operations. It is necessary to refer to the latest policy directives, operational guidelines, regulatory requirements on each of the issues dealt in the manual as there is constant innovation and changes in these aspects. We would like to place on record our heartfelt gratitude to all members of the 'Working Group' as well as the members of 'Sub-Groups' for their relentless efforts, keen interest and valuable contributions in developing a broad framework for finalisation of the revised 'Operational Manual for Cooperative Banks'. We would also like to place on record the keen interest, positive interventions and valuable contributions of NABARD, particularly IDD, PCD, DOS, HRDD and DCRR etc. We would like to place on record our deep appreciations and gratitude to Thiru M.P. Sivan Arul, Special Officer, The Tamil Nadu State Cooperative Apex Bank; Thiru K.M. Thamizharasan, the then Special Officer of The Tamil Nadu State Cooperative Apex Bank; Thiru R. Elango, General Manager, The Pondicherry State Cooperative Bank; Thiru K. Manohar, Assistant General Manager, The Tamil Nadu State Cooperative Apex Bank, K. Sudhakar, the then Director, NAFSCOB and presently our Consultant, for shouldering the responsibility of editing, correcting and fine tuning the revised Operational Manual. We are sure that the revised 'Operational Manual for Cooperative Banks' will meet the requirements, expectations and aspirations of the cooperative credit and banking sector and will serve as an effective operational and management tool in further enhancing the quality and quantity various services of the sector.

(B.SUBRAHMANYAM) Managing Director

Mumbai 01-03-2013

iv - III

OPERATIONAL MANUAL FOR COOPERATIVE BANKS (REVISED - 2013) VOLUME-III LOANS AND ADVANCES PART-I CONTENTS Chapter

CHAPTER - 1

CHAPTER - 2

Titles

Page Nos.

FOREWORD PREFACE CONTENTS INTRODUCTION 1. General 2. About Volume-III PRINCIPLES OF LENDING 1. General 2. Safety of Funds 3. Identification of Borrower 4. Purpose 5. Liquidity/Repayment 6. Security 7. Remuneration/Profitability 8. Risk Management 9. National Interest 10. Norms on Credit Exposure 11. Fair Lending Practices Code 12. Bank’s Loan Policy 13. Types of Credit 14. Pricing of Loan Products 15. Charging of Interest 16. Service Charges on Advances 17. RBI Regulations and Restrictions v - III

i iii-iv v-xxvii 1-3

4-13

CHAPTER – 3

CHAPTER – 4

CHAPTER – 5

CHAPTER – 6

TYPES OF BORROWERS 1. General 2. Minors 3. Joint Accounts 4. Sole Proprietorship 5. Partnership Accounts 6. Joint-Stock Company 7. Cooperative Institutions PROCESSING OF CREDIT PROPOSALS 1. General 2. Forms of Credit 3. Documents/Documentations 4. Pre-sanction process 5. Credit Report 6. Net Worth 7. Assessment of Quantum of Credit Required 8. Time Norms for Disposal of Credit Proposals 9. Sources of Information 10. Over Trading and Under Trading 11. Staff Related Advances 12. Rejection of Proposals CREDIT SANCTION 1. General 2. General Terms and Conditions Of Sanction 3. Allowing Excess Over Sanctioned Limit 4. Guidelines on allowing Excesses 5. Confirmation of Excesses Allowed 6. Overdue Excess/Out of Order 7. Penal Interest CREDIT DOCUMENTATION 1. General 2. Stamping and Execution of Documents 3. Importance of Documentation 4. Defective Documentation : Consequences 5. Points for Observation while obtaining Documents 6. Periodicity of Renewal of Documents vi - III

14-37

38-53

54-58

59-80

CHAPTER – 7

CHAPTER – 8

CHAPTER – 9

7. Regularisation of Time Barred Debt 8. Annexure/s CREATION OF CHARGE 1. Lien 2. Set-off 3. Pledge 4. Hypothecation 5. Mortgage 6. Assignment 7. Procedure for creation of Second Charge CREDIT DISBURSEMENT 1. General 2. Documentation Process 3. Registration of Charges in Case of Limited Companies 4. Conduct of Pre-Release Audit 5. Valuation and Verification of Securities 6. Precautionary Measures for Different types of Facilities 7. Release of Bills Purchased Limit 8. Export Credit 9. Ensuring End Use of Funds 10. Insurance 11. Financial Discipline 12. Other Aspects 13. Utilisation of Limits 14. Takeover of Accounts from other Banks/Financial Institution 15. Precautions 16. Transfer of Loan Accounts between Banks 17. Security 18. Liquidation of Liabilities 19. Repayment of Terms CREDIT MONITORING 1. General 2. Security Monitoring 3. Collection and Analysis of Data 4. Scrutiny of Stock Statements 5. Inspection of Stocks 6. Stock Audit vii - III

81-92

93-103

104-119

CHAPTER – 10

CHAPTER – 11

CHAPTER – 12

CHAPTER – 13

7. Periodical Inspection of Units and Verification of Securities 8. Monitoring of Operations in the Account 9. Early Warning Signals 10. Review/Renewal of Advances 11. Keeping the Documents alive for Legal Action 12. Monitoring Recovery of Periodical Interest and Instalments 13. End Use of Funds 14. Certificate from Chartered Accountants (For Project Finance) RECOVERY OF ADVANCES 1. General 2. Precautionary Measures to avert Recovery Proceedings 3. Objectives of Recovery 4. Persuasive Measures 5. Negotiated/Compromise Settlement for Recovery of NPAs 6. Write –Off of NPA Accounts 7. Board for Industrial and Financial Reconstruction (BIFR) SARFAESI ACT 1. General 2. Applicability of The Act 3. Operational Guidelines 4. Amendment to Securitisation Act 5. Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Act, 2012 6. Amendment to ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’ PRUDENTIAL NORMS 1. General 2. Definitions 3. Income Recognition - Policy 4. Reporting of NPAs 5. Guidelines for Classification of Assets 6. Provisioning Norms 7. Examples 8. Annexure/s, Case Exercises THIRD PARTY GUARANTEE FOR ADVANCES 1. General 2. Consideration for Guarantee viii - III

120-130

131-137

138-170

171-179

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Capacity to give a Guarantee Bank’s Standard Format Banker’s Duty of Disclosure Liability of the Guarantor Rights of the Guarantor Determination of Guarantee by Guarantor Death of the Guarantor Insolvency of the Guarantor Death of the Principal Debtor Insolvency of the Principal Debtor Payment by the Guarantor Payment by Principal Debtor Change in the Constitution of the Borrower Renunciation of Common Law Rights of the Guarantor Release of the Guarantor Consent of the Borrowers/Guarantors for disclosure of information to CIBIL CHAPTER – 14 CREDIT RATING AND RISK MANAGEMENT 1. General 2. Aspects of Credit Risk 3. Competition/ Market Risk 4. Technology Risk 5. Financial Risk 6. Exchange Risk 7. Economic/ Political Risk 8. Change of Government Regulations 9. Management Risk 10. Mitigation of Credit Risk 11. Tools of Credit Risk Management 12. Credit Rating System & Sanction of Final Rate of Interest 13. Consortium Accounts 14. Rate of Interest for adhoc Sanctions/ Penal Interest 15. Loan Review Mechanism (LRM) CHAPTER – 15 CREDIT INFORMATION – INDIAN CONTEXT 1. General 2. Credit Information Bureau (India) Limited (CIBIL) 3. Consumer Credit Information Report ix - III

180-188

189-203

CHAPTER – 16

CHAPTER – 17

CHAPTER – 18

CHAPTER – 19

4. Portfolio Review Report 5. CIBIL Information Scheme 6. Commercial Credit Information Report 7. Benefits of CIBIL 8. FAQs 9. Annexure/s LAW OF LIMITATION 204-207 1. General 2. Limitation Periods as per the Act: Some Transactions 3. Period of Limitation against Guarantors 4. Periods excluded while computing Limitation 5. Extension of Limitation Period 6. Procedure for obtaining Revival Letter (RL) /Certificate Of Balance (COB) 7. Regularising Time Barred Debts 8. Number of RLs that can be obtained/taken 9. Miscellaneous STAMPING OF DOCUMENTS 208-213 1. General 2. Instruments Chargeable with Stamp Duty 3. Stamp Duty 4. Types of Stamps - How Stamped 5. Time of Stamping 6. Stamp Duty on Documents Executed in more than one State 7. Unstamped/ Under Stamped 8. Adjudication 9. Refund or Allowance for the amount of Stamp 10. Stamping of Documents 11. Rule 7 of Stamp Rules, 1926 FAIR PRACTICES CODE ON LENDERS LIABILITY 214-217 1. General 2. Declaration 3. Fair Practices BASE RATE 218-220 1. General 2. Computation of Base Rate 3. Significance of ‘Base Rate’ 4. Annexure/s x - III

CHAPTER – 20 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS 1. General 2. Analysis of Balance Sheet 3. Analysis of Profit and Loss Account 4. Ratio Analysis 5. Funds Flow & Cash Flow Analysis 6. Contribution Analysis 7. Break - Even Analysis 8. Margin of Safety 9. Profitability Analysis - Selected Ratios CHAPTER – 21 ABOUT NABARD 1. General 2. NABARD’s Role & Function 3. Core Functions 4. Objectives of Inspection 5. Instruments of Supervision 6. Types of Refinance Facilities 7. Supporting Cooperatives 8. Short Term Credit 9. Refinance against Investment Credit 10. Government Sponsored Schemes 11. Farm Sector/ Non-Farm Sector Schemes 12. Enterprises Loan Scheme (ELS)

221-239

240-251

PART – II CHAPTER - 22 AGRICULTURAL CREDIT 1. General 2. Policy Functions 3. Operational Functions 4. Role of DCCBs 5. Operations on the Limits - Eligibility 6. Period of the Limit and Sources of Finance 7. Basic Objectives of Refinance 8. Basic Norms of Eligibility for Credit Limits xi - III

252-294

9.

Financial disciplines governing the Operations on sanctioned Credit Limits 10. Special Conditions Governing the continuance of operations on sanctioned Credit Limits 11. Separate Credit Limits for Financing Cultivation of Oil Seeds in NODP areas 12. Special Rice Production Programme 13. Time Schedule for Submission of Application 14. Scrutiny and Sanction of Credit Limit Applications and Issue of Sanction Letters by NABARD 15. Sanction of Credit Limits by NABARD 16. Documents to be Executed 17. Operations Discipline 18. Application to NABARD for Sanction of ST (SAO) Limits 19. Availing of Drawals from NABARD – Procedure 20. Scrutiny of Credit Limit application and Assessment of Limits by Apex Bank 21. Sanction of Limits by Apex Bank 22. Norms and Procedures for Allowing/Sanction of Drawals to DCCBS from Apex Bank 23. Repayment of Loans and Charging of Interest 24. Passing on of Recoveries 25. Maintenance of Demand, Collection and Balance (DCB) Register by DCCBs 26. Maintenance of Crop Verification Register 27. Submission of Revolving Credit Return 28. Investment of Reserve Fund and Other Reserves with the Apex Bank 29. Stopping further Advances 30. Accounting Procedure 31. Annexure/s CHAPTER – 23 KISAN CREDIT CARD (KCC) 295-310 1. General 2. Applicability of the Scheme 3. Objectives 4. Eligibility 5. Issue of Cards 6. Fixation of Credit Limit 7. Validity /Renewal 8. Scrutiny/Margin 9. Maintenance and Operations in the Accounts xii - III

10. Rate of Interest 11. Application of Prudential Norms 12. Reporting of transactions in LBRs 13. Operational Norms for refinance support from NABARD under KCC for a SAO 14. Maintenance of separate accounts for SAO under KCC 15. Computation of DCB position 16. Maintenance of NODC 17. Financial of SF/MF 18. KCC – Payment of interest on Credit Balances 19. KCC – Sugarcane Borrowers 20. Procedures to be followed at DCCB level 21. Annexure/s CHAPTER – 24 CROP INDUSRANCE SCHEME 311-332 1. General 2. Scheme -1 : National Agricultural Insurance Scheme (NAIS) 3. Scheme -2 : Weather Based Crop Insurance Scheme (WBCIS) 4. Scheme -3 : Rainfall Insurance Scheme for Coffee (RISC) 5. Scheme – 4 : Varsha Bhima (VB) 6. Scheme – 5 : Coconut Farm Insurance Scheme (CFIS) 7. Annexure/s CHAPTER – 25 MEDIUM TERM CONVERSION (AGRI.) LOANS 333-346 1. General 2. Sources of Funds to ACS Fund 3. Utilisation of ACS Fund 4. When Conversation can be given 5. ‘Annawari’ Assessment 6. Eligibility for Conversion 7. Share of Conversion 8. Duration of Conversion Loan 9. Security for Conversion of ST (SAO) Loans 10. Rate of Interest 11. MTC/MTCR Loans 12. Suspension / Remission of Land Revenue 13. Financial Commitment to the State Govt. – Sharing of Conversions 14. Eligibility Norms 15. Process of Conversion xiii - III

16. Re-phasement and Re-schedulement of MT Loans/Instalments 17. Conversion facilities for Crop Loans covered under Crop Insurance Scheme 18. Application for Credit Limits 19. Documents and Certificates 20. Operations on Medium Term (Conversion) Limits 21. Annexure/s CHAPTER – 26 HANDLOOM FINANCE 347-427 1. General 2. Financing of Primary Weavers Cooperative Societies (PWCS) 3. Eligibility for NABARD Refinance 4. Sanction of Short Term Credit Limit by NABARD 5. Eligibility criteria for sanction of credit limits to PWCS 6. Assessment of Working Capital 7. Cover and Margin for borrowings of WCS 8. Application for Credit Limits 9. Sanction of Credit Limits 10. Operation in the Limits 11. Adjustment of Payments to PWCS from Apex Society 12. Inspection of PWCS by DCCBs 13. Right of the Apex Bank to Recall the Advance 14. Government Guarantee 15. Books and Registers required to be maintained CHAPTER – 27 NON - AGRICULTURAL CREDIT 428-440 1. General 2. Non-Agricultural Cash Credit Limit proposal 3. Sanction of Cash Credit Limits for Non-Agricultural Purposes 4. Accounting Procedures 5. General Terms and Conditions 6. Operational procedures 7. Annexure/s CHAPTER – 28 CREDIT MONITORING ARRANGEMENT (CMA) 441-450 1. General 2. CMA operations 3. Mechanism of CMA 4. Revision of Exposure Norms and Monitoring & Reporting Procedures 5. CMA Returns/Reports xiv - III

6. High Value Advances 7. Appraisal of High Value Advances 8. Sanction of Loans & Advances – Operational Guidelines 9. Financing Units with negative Net worth/ other irregularities 10. Block Capital/Term Loans 11. Rephasement Products 12. Credit dispensation to certain activities 13. Exposure Norms 14. Sanction of Credit Limits to Coop. Sugar Mills 15. Terms & Conditions for sanction of WC to Coop. Sugar Mills CHAPTER – 29 CONSORTIUM ADVANCES 1. General 2. Role of Leader Bank in Consortium 3. Role of participating Banks 4. Borrower’s Role in a Consortium 5. Consortium Meetings 6. Admission of New Members 7. Exit of a Member from the Consortium 8. Other Activities of the members in Consortium 9. Documentation 10. Annexure/s CHAPTER –30 FINANCING OTHER APEX COOP. INSTITUTIONS 1. General 2. Documents to be obtained 3. Board Resolution 4. Procedure to sanction CC limit 5. Operations in CC A/c 6. Terms & Conditions CHAPTER – 31 APPRAISAL OF TERM LOAN 1. General 2. Term Loan to Industrial/ Manufacturing Unit 3. Managerial Competence 4. Technical Feasibility 5. Commercial Viability 6. Financial Viability 7. Cost of Project xv - III

451-494

495-497

498-506

8. Means of Finance 9. Time and Cost Overrun 10. Projected Profitability Statement 11. Projected Funds Flow/ Cash Flow Statements 12. Annexure/s CHAPTER – 32 ASSESSMENT OF WORKING CAPITAL 507-522 1. General 2. Components of Working Capital for Trade/ Business 3. Proforma for Calculation of Working Capital Requirement 4. Traditional method of assessment of Working Capital Requirement 5. Tandon Committee Norms 6. Chore Committee Norms 7. Nayak Committee Recommendations 8. Clarifications on Nayak Committee Recommendations for Assessment of Working Capital Limits 9. Cash Budget Method 10. Calculation of Term Loan Requirements 11. Documentation 12. Annexure/s CHAPTER – 33 RURAL PROJECTS FINANCE 523-528 1. General 2. Thrust Areas of Activities 3. Total Liability Register (scheme - wise) 4. Book Entries 5. Edibility Criteria 6. Automatic Refinance Facility 7. Other Terms & Conditions CHAPTER – 34 NATIONAL RURAL LIVELIHOOD MISSION (NRLM) 529-541 1. General 2. NRLM and SGSY - Key difference 3. Women SHGs and their Federations 4. Financial Assistance to the SHGs 5. Role of Banks 6. Credit Target Planning 7. Post credit follow-up 8. Repayment 9. Deputation of the bank officials to SRLMs xvi - III

10. Supervision and monitoring 11. Data Sharing 12. NRLM support to the bankers 13. Closure of SGSY Scheme 14. Annexure/s CHAPTER – 35 DAIRY ENTREPRENEURSHIP DEVELOPMENT SCHEME 1. General 2. Activities covered and Indicative Unit Costs 3. Eligibility 4. Scheme Funding/Pattern of Investment 5. Security Norms 6. Financial Assistances available from Banks/ NABARD 7. Scheme formulation for Bank Loan 8. Scrutiny of Schemes by Coop. Banks 9. Sanction of Bank Loan and Disbursement 10. Lending Terms 11. Annexure/s CHAPTER – 36 PIGGERY DEVELOPMENT 1. General 2. Implementation and Area of Operation 3. Eligibility 4. Subsidy 5. Funding Pattern 6. Promotional Assistance 7. Sanction by Banks 8. State Level Sanctioning and Monitoring Committee (SLSMC) 9. Release of Subsidy 10. Repayment 11. Rate of Interest 12. Security 13. Time Limit for completion of the Project 14. Monitoring 15. Other Conditions 16. Annexure/s CHAPTER – 37 POULTRY DEVELOPMENT 1. General 2. Poultry Estates xvii-III

542-561

562-577

578-590

3.

Objectives of the Scheme

4.

Area of Operation

5.

Allotment of Land and selection of Facilitator

6.

Selection and Training of beneficiaries

7.

Creation of infrastructure for feed manufacturing

8.

Components which can be supported

9.

Preparation of Projects

10. Mother Units for rural backyard Poultry 11. Sanction of Project and release of IFL 12. Repayment period and recovery of loan 13. Refinance assistance 14. Security Norms 15. Rate of Interest 16. Monitoring 17. Role of various Agencies 18. Publicity 19. Other Conditions 20. Annexure/s CHAPTER – 38 AGRI - CLINICS AND AGRI - BUSINESS CENTRES 1.

General

2.

Objectives of the Scheme

3.

Eligibility

4.

Project Cost

5.

Linkage with Credit

6.

Term Loan

7.

Margin Money

8.

Security

9.

Time Limit for completion of Project

10. Other conditions 11. Refinance assistance from NABARD 12. Subsidy 13. Monitoring 14. Awareness and Training Program 15. Empowering Steering Committee 16. Annexure/s xviii-III

591-608

CHAPTER – 39 SWAROJGAR CREDIT CARD SCHEME 1. General 2. Swarojgar Credit Card (SCC) Scheme 3. Model Scheme 4. Review of Progress 5. Role of NABARD 6. Annexure/s CHAPTER – 40 SELF-HELP GROUPS (SHGS) & JOINT LIABILITY GROUPS (JLGS) A. Self-Help Groups (SHGs) 1. General 2. Parameters 3. Task for SHGs 4. Operations 5. Characteristics of SHGs 6. Functions of SHGs 7. Documents to be obtained 8. Operation of SB Account 9. Credit support to the Group 10. Essential documents 11. Credit needs of the Group 12. Advantages to the Society 13. Philosophy of the linkage 14. Strength of SHGs 15. Role of NABARD 16. Role of Banks 17. Model of SHG – Bank Linkage 18. SHGs graduation process B. Joint Liability Groups (JLGs) 1. General 2. Objectives 3. General Features of JLGs 4. Criteria for Selections of JLG members 5. Size of the JLG 6. Formation of JLG 7. Savings by JLG 8. JLG models xix-III

609-616

617-636

CHAPTER – 41

CHAPTER – 42

CHAPTER – 43

CHAPTER – 44

9. Critical factors in JLG approach 10. Credit Assessment 11. Purposes of Credit 12. Type of Loan 13. Loan limit 14. Rate of Interest 15. Margin and Security Norms 16. Documents - Model A 17. Credit to JLGs 18. Insurance Cover 19. Crop Insurance 20. Monitoring and Review 21. Annexure/s FARMERS' CLUB PROGRAMME 1. General 2. Diversified Role of Farmers Club 3. NABARD Policy 4. Farmers Club - Routine and Non-routine Activities 5. Rating of Farmers Club -Broad Guidelines APPRAISAL OF LOAN PROPOSALS OF SMALL AND MICRO UNITS 1. General 2. Objectives 3. Credit Risks 4. Appraisal Aspects 5. Sanction of Loan 6. Break Even and Contribution Analysis 7. Annexure/s SCB SPECIFIC LOAN SCHEMES 1. General 2. Revolving Cash Credit 3. Kalinga Kissan Gold Card Scheme of OrissaSCB 4. Annexure/s DIRECT LENDING -OVERDRAFT AGAINST TERM DEPOSITS 1. General 2. Advances against Borrower’s own Deposits 3. Procedure xx-III

637-641

642-650

651-663

664-671

4. Margin 5. Quantum of Loan 6. Rate of Interest and Periodicity of Payment 7. Period of Loan 8. Issue of Loan Card 9. Foreclosure of Term Deposit under Loan Cover 10. Documents to be obtained 11. Lien 12. Additional Loan 13. Minors 14. Illiterate Depositors 15. Nominee 16. Legal Heirs of the Deceased Depositors 17. Loan to Firm/ Proprietary Concern 18. Joint Depositors 19. Deposits of other Banks 20. Vouchers and Book Entries 21. Loan Repayment 22. Trial Balance 23. Other Key Points CHAPTER – 45 CONSUMER LOAN 1. General 2. Persons Eligible 3. Area of Employment or Residence 4. Application 5. Associate Membership (Nominal Member) 6. Purchase of Article 7. Second Hand Goods 8. Applicant to be Customer 9. Adequate Balance in the Account 10. Guarantors 11. Documents 12. Quantum of Loan 13. Carry Home Pay 14. Period of Loan 15. Rate of Interest xxi-III

672-676

16. Repayment 17. Insurance 18. Accounting 19. Loan Ledger 20. Trial Balance CHAPTER – 46 SALARY LOANS 1. General 2. Persons Eligible 3. Purpose 4. Eligibility 5. Guarantors 6. Associate Member (Nominal Member) 7. Maximum Loan 8. Period of Loan 9. Undertaking by Employer/Pay Disbursing Officer 10. Loan Disbursement 11. Loan Repayment – Borrower’s Responsibility 12. Rate of Interest and Penal Interest 13. Recovery of Overdues 14. Documents 15. Trial Balance CHAPTER – 47 ADVANCES AGAINST MORTGAGES 1. General 2. Mortgagor 3. Margin 4. Valuation 5. Scrutiny of Security 6. Legal Opinion 7. Simple Mortgage (Registered Mortgage) 8. Equitable Mortgage 9. Follow – Up and Supervision 10. Other Aspects 11. Procedure for Sanction 12. Legal Fees and Processing Fees 13. Documentation 14. Book Entries xxii-III

677-680

681-702

15. Documents for Loan Application 16. Other Key Points 17. Annexure/s CHAPTER – 48 ADVANCES ON HYPOTHECATION OF MOTOR VEHICLES 1. General 2. Pre-Sanction 3. Sanction and Disbursal 4. Follow Up 5. Annexure/s CHAPTER – 49 PENSIONER’S LOAN 1. General 2. To whom can be Sanctioned 3. Loan Amount 4. Security 5. Period of Loan 6. Associate Membership 7. Rate of Interest 8. Penal Interest 9. Documents 10. Sanctioning Authority 11. Books of Accounts 12. Vouchers/Entries 13. Overdues – Recovery Action 14. Trial Balance CHAPTER – 50 JEWEL LOAN 1. General 2. Application 3. Associate Membership 4. Purpose 5. Persons Eligible 6. Valuation of Articles 7. Sanctioning Authority 8. Appraiser Fee 9. Loan Amount 10. Period of Loan 11. Interest Rate xxiii-III

703-712

713-715

716-727

12. Safe Keeping of Pledged Jewels 13. Custody 14. Loan Issue & Other Procedures 15. At the time of Redemption 16. Overdue Loan – Recovery Procedures 17. Insurance 18. Gold (Jewel) Loan to Staff Members 19. Verification 20. Books of Accounts & Forms 21. Claims CHAPTER – 51 ADVANCES AGAINST LIFE INSURANCE POLICIES 1. General 2. Precautions 3. Maximum Amount of Advance 4. Assignment of the Policy 5. Documents 6. Loan Sanctioning Authority 7. Period of Loan 8. Rate of phones Interest 9. Penal Interest 10. When the loan becomes Overdue 11. Reassignment of Policy 12. Repayment CHAPTER – 52 ADVANCES AGAINST NATIONAL SAVINGS CERTIFICATES (NSCs) & KISAN VIKAS PATRAS (KVPs) 1. General 2. Precautions & Procedure for sanction of Loan/OD 3. Amount of Advance 4. Period of Advance 5. Rate of Interest / Charging of Interest 6. Closing of Account CHAPTER – 53 CASH CREDIT LIMIT TO TRADERS 1. General 2. Eligibility 3. Procedure 4. Security xxiv-III

728-731

732-733

734-736

5. Limit Eligibility 6. Margin 7. Loan Limit 8. Period of Limit 9. Rate of Interest 10. Penal Interest 11. Documents 12. Sanctioning Authority 13. Insurance 14. Utilisation of Cash Credit 15. Stock Statement 16. Procedure for Overdue Recovery CHAPTER – 54 TEMPORARY OVERDRAFT 1. General 2. Application 3. Associate Membership 4. Documents to be obtained 5. Maximum TOD to be allowed 6. Period of TOD 7. Rate of Interest 8. Penal Interest 9. Operation of TOD Account 10. Outstanding in the Account 11. Renewal of TOD limits 12. Sanctioning Officer Responsible 13. Overdue TOD Recovery Action 14. OD Register 15. Return CHAPTER – 55 LOCAL CHEQUES, DEMAND DRAFTS AND OUTSTATION CHEQUES –PURCHASE, INSTANT CREDIT 1. General 2. Monetary Ceiling 3. Safe - Guards to be observed 4. Books 5. Procedure 6. Vouchers xxv-III

737-739

740-741

CHAPTER – 56 BANK GUARANTEES ON BEHALF OF CONSTITUENTS 1. General 2. Indemnity and Guarantee - Definitions 3. Types of Guarantees 4. Specific and Continuing Guarantee 5. Pre- Sanction Stage 6. Precautions at the Pre- Sanction Stage 7. Nature of Facility 8. Terms of Guarantee 9. Analysis of Specimen of Guarantee 10. Securities 11. Sanctioning Stage 12. Duration of Liability Period 13. Limit for Issuing Un-secured Guarantees 14. Security for the Guarantees 15. Commission on Guarantees 16. Restrictions on issue of certain type of Guarantees 17. Format of the Guarantee 18. Signing of Guarantees 19. Documents to be obtained 20. Accounting Procedure 21. Guarantee Margin 22. Commission 23. Guarantee to be sent Directly to Beneficiary 24. Follow - up 25. Balancing 26. Renewal of Guarantees 27. Honouring of commitments under invoked Bank Guarantees 28. Diarising the due date 29. Extinguishing of Bank Guarantee 30. Registered Notice 31. Caution 32. Reversal of entries where Guarantee Bond is received back 33. Reversal of entries where Guarantee Bond is not received back 34. Maintaining Files 35. Release of Securities xxvi-III

742-764

36. Return to be submitted by the Branches to Head Office 37. Additional Guidelines 38. Obtaining of Confirmation in respect of Bank Guarantees 39. Bank Guarantees favouring Customs/Exercise Department 40. Deferred Payment Guarantees 41. Advance Payment/Performance Guarantees 42. Additional Guarantees 43. Guarantees issued for the release of Confiscated Goods 44. Annexure/s CHAPTER – 57 INLAND LETTER OF CREDIT 1. General 2. Contingent Liability 3. Parties to a Letter of Credit (LC) 4. Classification of Letter of Credit 5. Types of Letter of Credit 6. LCs on DP/DA basis 7. Pre- Sanction stage 8. Nature of Credit 9. Arrangements for meeting the LC Obligations 10. Sanction and Release 11. Amendments to the Letter of Credit 12. Custody of Documents 13. Procedures to be adopted by the Advising/Negotiating Branch 14. Negotiation of Documents 15. Procedure on receipt of Documents at Issuing Branch 16. Other aspects under ILC 17. Annexure/s CHAPTER – 58 ADVANCE AGAINST GOODS 1. General 2. Pledge 3. Hypothecation 4. Categories of advances on Produces 5. Pre-Sanction Stage 6. Security 7. Sanction and Release 8. Follow - Up and Post - Credit Supervision xxvii-III

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9. Timely Action 10. Additional particulars for Cash Credit Accounts 11. Submission of Stock Statements and Fixing Drawing Power 12. Inspection of Stocks CHAPTER – 59 DOCUMENTS TO BE OBTAINED FOR VARIOUS LOANS 1. General 2. Clean Loans 3. Clean Overdrafts 4. Guarantees 5. FDR/SDR 6. Recurring Deposits 7. Life Insurance Policies 8. Mortgage of Title Deeds to Properties and / or Hypothecation of Machinery etc. 9. Hypothecation of Vehicles 10. Overdrafts against FDR/SDR 11. Road Transport Operators 12. Personal Loan Schemes 13. Staff Loans CHAPTER – 60 LOANS AND ADVANCES : DOs AND DONT’s 1. General 2. Dos and Don’ts in ‘Loans and Advances’ CHAPTER – 61 GENERAL ANNEXURE/S 1. List of General Annexures (62 Annexures)

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VOLUME - III LOANS AND ADVANCES PART - I

CHAPTER – 1

INTRODUCTION 1.

General: a. The Short Term Cooperative Credit Structure (STCCS) comprising of State Cooperative Banks (SCBs) at the apex level, District Central Cooperative Banks (DCCBs) at the intermediary level in the districts, and Primary Agricultural Credit Societies (PACS) at the grass root level in the villages play an important role in deployment of credit to agriculture and allied activities. The STCCS also provides efficient banking and other ancillary services to contribute effectively to the overall socio-economic development of the country. As at the end of March 2012, the STCCS consisted of 31 SCBs with a branch network of 1047 branches, 371 DCCBs with 13495 branches and 92432 PACS. b. The SCBs and DCCBs perform the role of both credit purveyors and banking organisations. They are covered under the provisions of Reserve Bank of India Act,1934, the Banking Regulation Act, 1949(AACS), respective State Cooperative Societies Act and Rules etc. Presently, the ST CCS has a market share of more than 22% of agriculture credit and has collectively issued more than 70% of the Kisan Credit Cards issued in the country. The policies of Reserve Bank of India with regard to banking operations and practices as well as other statutory regulations and requirements such as maintenance of CRR and SLR etc. including investment of funds as per the prescribed norms are also applicable to the SCBs and the DCCBs. The Prudential Norms such as Provisioning, Income Recognition, Assets Classification and Capital Adequacy have been made applicable to SCBs and DCCBs. However, Basel Norms are yet to be introduced to the SCBs and DCCBs. c. The cooperative credit and banking institutions are expected to be democratic in their functioning and member driven in their character. Notwithstanding number of constraints in maintaining these important features on a continuous basis, the cooperative credit and banking institutions have been functioning as an important channel for deployment of rural credit and other services, particularly in the rural areas where the commercial banks are yet to make a significant presence. d. The National Cooperative Policy formulated by the Ministry of Agriculture, Government of India provides necessary framework, encouragement, support and assistance to ensure cooperative organisations function as autonomous, self-reliant, accountable people's institutions and ensure significant contributions to the mainstream economy. Further, the policy also impresses on the need for innovations in the Cooperative Societies Act with regard to banking as well as cooperatives in other sectors. The successive National Policy on Cooperatives identified number of constraints related to legislative and policy matters, availability of resources, infrastructural deficiencies, institutional inadequacies, insufficient awareness among members, lack of member participation, erosion of democratic character and management constraints, avoidable bureaucratic & political interference etc. in their operations. In spite of the visible quantitative as well as qualitative improvement in the functioning, STCCS is faced with number of policy as well as operational hurdles which do not facilitate the growth of a robust cooperative credit delivery system in the country. 1 - III

e. Banking being the most delicate and important operation, depends on public trust and active participation. The banks in addition to offering prompt and satisfactory customer services also have additional responsibility of ensuring safety of funds of the investing public. SCBs and DCCBs keeping in line with the banking norms and procedures of the country are expected to develop suitable and appropriate systems and procedures to streamline their operations including banking operations both at Head Office and the Branches and are required to constantly upgrade the same to comply the regulatory and supervisory requirements. Realising the need for such appropriate systems and procedures, some of the banks have already prepared their own Book of Instructions or Manuals to serve as guidelines to their employees with a view to put in place a robust and prudent banking practices and provide value added services. f. National Federation of State Cooperative Banks (NAFSCOB) for the first time prepared a set of operational guide lines entitled 'Accounting Manual' in 1979 in three volumes, covering various procedural and practical aspects of banking. Further, in the light of changed banking requirements and to keep pace with the financial sector reforms, NAFSCOB initiated steps to upgrade as well as revise the said 'Accounting Manual'. After an elaborate exercise, NAFSCOB brought out the 'Accounting Manual' in the form 'Operational Manual for Cooperative Banks' in 2004, in four volumes, i.e. Volume – I: Manual on Branches and Banking Operations, Volume–II: Manual on Functions of Head Office, Volume–III: Manual on Loans and Advances, Volume – IV: Manual on Inspection and Internal Audit. g. Since the last revision of the 'Operational Manual for Cooperative Banks' in 2004, there have been number of innovations and improvements in the finance and banking sector, new policy guidelines, operational directives, regulatory compliance requirements etc. for the banking institutions and there has been increased demand for revision/modification of the 'Operational Manual for Cooperative Banks'.As a result, in 2009, the Executive Committee/Board of Directors of NAFSCOB decided to constitute a high-level 'Working Group' and four 'Sub Groups' consisting of Chief and Senior Executives of member SCBs and NABARD to review and revise the said Operational Manual. After extensive consultations and deliberations on various segments of the 'Operational Manual for Cooperative Banks' and with the inputs provided by various stakeholders and number of experts, the said manual has been suitably modified, updated and finalised as: Volume – I Volume – II Volume – III Volume – IV

: : : :

Manual on Branches and Banking Operations Manual on Functions of Head Office Manual on Loans and Advances (Part – I & Part – II) Manual on Inspection and Internal Audit

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2.

Volume – III: Manual on Loans and Advances:

a. Volume – III of the 'Operational Manual for Cooperative Banks' covers various aspect involved in the' Loans and Advances' portfolio of SCBs and DCCBs. The Volume is divided into Part –I and Part-II containing 61 chapters. Part –I containing 21 chapters covering mostly pre-loaning operations and various steps as well as procedures to be adopted with regard to same. Part II of the manual, on the other hand deals with various types of credit portfolios, schemes, programmes etc. and various procedures that are required to be followed in financing these loan portfolios. In order to facilitate and guide the personnel in the cooperative banking sector the 'Operational Manual' on 'Loans and Advances' is arranged in an elaborate manner covering number of aspects and areas which are relevant in the day-to-day operations. Number of latest instructions and guidelines etc. are incorporated to make the manual more up-to-date. The formats / guidelines used in the current volume have been drawn from the best practices adopted in few of the selected SCBs. Some of the guidelines / instructions / formats which have references in more than one chapter have been grouped under the Chapter' General Annexures' i.e. Chapter-61. b. The practitioners, researchers as well as the casual users etc. are advised to keep in mind that there is constant revision/modification/amendment in the policy directives/guidelines on various operational aspects. While referring/using the revised operational manual it is important to refer to the latest circulars/directives/operational instructions, change in the schemes and programmes etc. communicated by various authorities as well as regulators for up-to-date guidance, clarity and professional operations.

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CHAPTER – 2

PRINCIPLES OF LENDING 1.

General: a. Banking is both an art and science, which cannot be guided by merely a set of rules. It is to be guided by general principles only. Even then there is no rigidity in the application of the set of principles in banking. b. The banker has to shift good things out of the elements which he comes across and, in it lies his skill and diligence. No set of uniform rules can be invariably applied even in two similar circumstances. In other words, he cannot be static. He should be changing according to the changing types, times and conditions. c. The banker should take into consideration the following aspects while dealing with a lending proposition.

2.

Safety of funds: a. Safety is the first and foremost thing that the banker has to consider, especially because he has to disburse depositors' money. As it is his primary duty to safeguard the monies of others, he has to exercise caution, prudence and tact. Only out of experience the banker generally gets the necessary caution and tact which go a long way in ensuring the safety of the money lent. Sometimes a Bank gets such experience at a huge price. b. The banker ensures that the moneys advanced by him go to the right type of borrowers and is utilized in such a way that it will not only be safe at the time of lending but remains so throughout and is repaid with interest after serving an useful purpose in trade, industry and agriculture etc. for which the money is lent.

3.

Identification of borrower: a. The lending banker should satisfy himself by using all available sources of information as regards the prospective borrower's character, integrity and business acumen. The usual sources are: i. observation, ii. market enquiry and if possible, iii. study his past connections with any other institution. b. Generally, the banker should not be carried away by the appearance of the borrower. The banker should tap other sources to know on the character and integrity at all times and not merely at the time of taking the loan. 4 - III

c. Branches should apply the parameters prescribed by the Bank under the Customer Acceptance Policy and Customer Identification Procedures before opening an account. The KYC norms as envisaged in the Bank's Anti-Money Laundering Standard should strictly be adhered to since the borrower customers are treated as low risk category. d. In the case of partnership firms, the banker should collect extensive material and record comments regarding the integrity, worth, etc. of all the partners. The collection and updation of information about the borrowers/guarantors should be an on-going process. e. In the case of partnership firms, the banker should collect extensive material and record comments regarding the integrity, worth, etc. of all the partners. The collection and updation of information about the borrowers/guarantors should be an on-going process. 4.

Purpose: a. Purpose for which the loan is required is very important. The banker should be clear about the purpose for which the loan is required and the sources wherefrom the borrower is expected to repay the loan. If the advance is for hoarding stocks or for speculation, it should be discouraged. These are anti-national and anti-social activities. Again, if the money required is for liquidation of prior borrowings or to make good the loss incurred or for unproductive expenditure, then the banker should cautiously appraise the proposal. b. The borrower may require stop-gap finance till the money from other sources flows in. Such proposals may be favourably considered for good parties depending upon merits of each case and subject to RBI guidelines from time to time. c. After nationalisation financing of agriculture, small scale industries and rural economy had gathered momentum. Banks were asked to extend credit facilities to new classes of people namely professionals, self-employed persons, retail traders, agriculturists and transport operators for productive purposes and generation of employment. d. Bank's lending has to be purpose oriented and the purpose shall be socially and economically desirable.

5.

Liquidity/Repayment: a. Due emphasis on repayment should be there. The sources and method of repayment should be decided upon while disbursing credit and the borrower should adhere to it. The security offered should be preferably easily realizable and/or self-liquidating. The reason why banker attaches more importance to repayment is to recycle the funds and make available these funds for other needy borrowers apart from the fact that deposits raised are required to be paid on demand or at short notice. For example, an advance of Rs.50 lakhs on the security of legal mortgage of posh building in the heart of a Metropolitan City with a market value of Rs.100 lakhs is safe indeed. If 5 - III

however, the recovery is to be made through a Court process, it may take a few years, in which case the loan is not liquid. In essence, the borrower should pay-off the loan on due date and the banker should reserve the right to call back the advance at any time. b. In short term loans, there is more liquidity than in medium or long term advances. Although much of the credit extended by the banks is in the forms of CC/OD/loans repayable on demand and mostly for the purpose of Working Capital, they also evince interest in providing Term Loans for asset creation etc. The refinance facility offered by RBI/SIDBI/NABARD etc. have been helpful to banks in providing liquidity in their term loans. However, refinance is availed from respective refinancing agencies for all eligible advances subject to the interest spread and bank's liquidity position. c. In recent times, commercial banks have been increasing their term lendings either singly or in participation with financial institutions. Banks should ensure that such increased participation in term loans does not result in any asset liability mismatch i.e. the maturity of term loans should commensurate with the maturity period of deposits and/or any borrowings made. 6.

Security: a. The banker should take into consideration the security aspect also. It can be compared to the lifeboat in a ship, where the passenger takes recourse to it in times of emergency and extreme difficulty. Likewise, under circumstances which affect the safety and liquidity of the advance, the banker grabs the security, realises it and reimburses himself. It is incorrect to approach an advance from the point of view of security alone. Credit is granted on its own merits with regard to safety, liquidity, purpose etc., after looking into character, capacity, capital etc., of the borrower. b. Security may be classified as personal and tangible as well as primary and collateral. i.

Personal security means personal liability of the borrower and or guarantor. The banker has got a right of action against the borrower and it is not a tangible security.

ii. Tangible security is something that can be realised by sale or transfer (example: shares, stocks, lands and goods). iii. Primary security is that which is regarded as the main cover for an advance; generally, the assets created out of the credit disbursed and against which the advance is made. e.g.. Stocks for cash credits, machinery for term loans. iv. Additional/Collateral security is the security other than the primary security created out of the advance and lodged by the borrower or by a third party. c. Characteristics of Securities: i. Marketability: The main consideration which weighs with the banker is the ready marketability of the security. Articles of necessity, primary commodities, seasonal goods, 6 - III

raw materials etc., are generally in good demand. Articles of luxury or valuables (example: pearls, diamonds) have a limited market. A rich person might have constructed a bungalow at a heavy cost in a remote place but it will fetch a low value in a distress sale. ii. Ascertainment of title: The borrower's title to the security must be clear and undisputed. It has to be verified, if there are any prior charges or encumbrances. The solicitors have to verify the title of the borrower to the property. iii. Stability: The banker must make sure that the value of the security does not fluctuate violently over short periods. Due to hoarding, commodities like pepper, onion, chillies, cement are at times subject to heavy variations in prices. In such cases, the margin taken will be such as to cover the extra risk. iv. Storability: Certain securities such as Life Policies, Government Promissory Notes (GPNs), can be easily stored even in the smallest place. Large logs of timber, iron girders etc., present peculiar problems of storage. Film and certain chemicals are to be stored in air-conditioned godown. v. Transferability: l Physical Transfer: The security must be transferable from one place to another without much difficulty. For example, certain cloth varieties, which do not find a favourable market in a place, can be moved quickly to another ready market by rail or road transport. l Legal Transfer: The title to the security should be easily transferable. In case of LIC policy, shares etc. the transfer formalities are simple/quick. In case of immovable properties the transfer is comparatively cumbersome. vi. Yield: Certain securities are a source of income (example: shares and Government Promissory Notes (GPN) yield dividend and interest). vii. Durability: Vegetables, mutton, fruits, etc., are perishables. Gur, cement etc., require special care. Otherwise, they deteriorate in quality. Grains and oil seeds last for one or two seasons. In other words, the goods stored should not be perishable during the period of advance. 7.

Remuneration/Profitability: a. Equally important is the principle of profitability in bank's advance. Banks have to pay interest on deposits, incur expenses on establishment, rent, stationery, make provision for depreciation of fixed assets and Non-Performing Assets. After meeting all these items of expenditure which enter the running cost of banks, a reasonable profit must be made. b. Different rates are charged depending upon the borrower's Credit Rating, nature of security, mode of charge, etc. The Term Loan and other Working Capital limits of the borrower including those under Priority Sector shall be aggregated and the applicable interest rate be determined.

7 - III

Direct personal loans against our own deposits and Government securities need not be taken into account for determining the size of the credit. The transaction on the whole must be profitable to the Bank. c. In the present context of liberalization, integration with global economy, which leads to more competition among various financial intermediaries, banks should pay more attention on their profitability and viability. 8.

Risk Management: a. Another important principle of good lending is the diversification of advances. An element of risk is always present in every advance and the banking business is one of taking calculated risks. b. A successful banker is keen on mitigating the risks, by lending to a large number of borrowers in a number of industries and areas and against different types of securities. If the Bank has many branches, it gets a wide assortment of securities. A business slump in particular sphere does not affect all these borrowers simultaneously.

9.

National Interest: a. Even if the advance satisfies all the aforesaid principles, it may not be suitable if it runs counter to the national interests. RBI may issue directives restricting advances against commodities such as food grains, cotton, oil etc. In the changing concept of banking, factors such as purpose of the advance and national interest are also of greater importance like adequacy of security. b. Due to liberalization measures initiated by the government, banks have to operate in a competitive environment. More emphasis should therefore be given to aspects of increasing market share of business, profitability, diversification of advance and investment portfolio etc.

10.

Norms on credit exposure: a. The Norms of NABARD have to be followed for ensuring that the norms on Credit exposure for individuals, units and Industry/Sector are strictly followed. The NABARD's circular on Credit and Monitoring Arrangements will have to be referred to for complying with the exposure limits.

11.

Fair Lending Practices Code (FLPC): a. FLPC came into effect from 1st November 2003. FLPC is put in place for retail credit facilities up to Rupees two lakhs. The purpose of FLPC is to render courteous and speedy services to all the borrowal customers. b. All necessary information like range of loan products available, securities, interest, service charges, other terms and conditions, the likely timeframe for sanction etc., should be furnished to a prospective borrowal customer. c. The general Terms and Conditions for Advances and Schedule of service charges as advised by Head Office from time to time should be furnished to the prospective borrower along with the Application form. 8 - III

d. The chart showing interest rate and service charges for advances to public should be displayed by the branches on their Notice Board. e. On receipt of loan application complete in all respects, branches should give an acknowledgement. f. If any additional details are required while processing the application, the same should be immediately intimated to the customer. In case of loan applications under Priority Sector Advances upto Rs.2 lakh, the acknowledgement should also indicate the timeframe for disposal of such applications. g. On sanction of the loan, branches should obtain the customer's signature for acceptance of the terms and conditions of the sanction in the copy of the sanction ticket. h. Statement of accounts should be regularly provided to the customers, unless the borrower expressly states that it is not required. i. In case of rejection of loan applications, branches should furnish reasons for the same to the loan applicant through a letter. j. FLPC provides for Grievance Redressal Mechanism by which any grievance of the customer shall be attended to within the timeframe mentioned in Para 3.10 of FLPC for redressal. Branch Manager will attend to the grievances during bank hours on any working day and inform the customer within one week. If the customer is not satisfied with the reply, he can approach the next higher level officers for redressal. 12.

Bank's Loan Policy: a. The Loan Policy is formulated by Head Office with long term perspective to achieve a wellstructured Loan portfolio. The Policy enumerates strategies for branches/ will include to improve advances, monitoring of Standard Assets and focus on recovery of NPA. The Policy Document include the concept of Risk Management in loan administration. b. The Policy is based on the following factors: i. ii. iii. iv. v.

RBI's Monetary and Credit Policy RBI's new thrust on Risk Management The Bank's strategy for profit through qualitative credit expansion An analytical study of the industries- their present position and future prospects The views and suggestions are solicited and received from HO Executives and the field level functionaries vi. The Enterprise Resources Plan (ERP) evolved by the Head Office vii. Comparative market forces emerging in the economy due to liberalization of the market viii. Targets prescribed by RBI/NABARD in regard to social and other lending ix. Comments made in the LFAR Reports x. The long term objective of the Bank to build up a loan portfolio which is both qualitative and remunerative. 9 - III

13.

Types of Credit: a. Bank, normally considers the following types of Loans and Advances: i. ii. iii. iv. v.

14.

Temporary overdrafts / Clean Cash Credits Demand Loans Cash Credits Bills discounted and Purchased which included LC Bills receivable (LCBR) Term Loans

Pricing of Loan Products: a. The Bank staff should be conversant with the concept of Pricing of loan products. The various terms involved in the pricing mechanism are explained below: Base Rate: Bench-mark PLR has given way to Base rate. The banks have to follow the RBI rules relating to Base rate calculation while determining the rates of interest for different types of advances and loan products. As per RBI regulations, barring the exceptions mentioned by RBI no loan product shall be priced below the base rate. ii. Commercial Rate:Commercial Rate is the rate applicable for public or staff without any relaxation. For staff, commercial rate means, the rate quoted for loans other than concessional loans such as SHL, Conveyance Loan, etc., and shall be applicable to public. iii. Penal Interest:It is the penalty charged over the contracted rate, for the portion of the loan which is overdue / irregular part as per guidelines issued from time to time. It may be on account of financial irregularity or non-financial irregularity or both. iv. Fixed Interest Rate: If the interest rate quoted at the time of sanction/disbursement will not undergo any change despite change in base rate/ spread for the stated period, it is known as fixed rate. i.

l

Fixed rate can be offered only for the schemes/ products/ category for which it is specifically permitted by HO. EMI will not undergo any change throughout the repayment period, unless there is a major policy change like periodicity of charging interest.

l

In fixed rate accounts, for overdues, penal interest is to be charged at Contracted Rate + Penal Rate. For considering fixed interest rate for term loans to good Corporates requiring project finance, the proposal should be taken up with the Sanctioning Authority.

l

Fixed Interest Rates may also undergo change whenever Bank exercise the interest reset option.

v. Variable Interest Rate: Unlike fixed rate, this rate of interest varies/ changes along with the change in the Base Rate or Spread. 10 - III

Finer Rate of Interest:Customers having high volume/hi-tech facilities may be considered for finer rate of interest from card/commercial rate as per rating of borrowal accounts, business consideration, value addition, cost of servicing the advance and other internal parameters. The system of Finer Rate of Interest is not popular in Cooperative Banks. But with changing times and evolving challenges, Cooperative Banks can also consider finer interest rates on a case by case basis with due Board Level approvals. vii. Bank Rate:It is the rate at which RBI is prepared to lend to Banks or rediscount Bills of Exchange or buy other Commercial Paper eligible for purchase under Section 49 of RBI Act. viii. Call Money Rate: Prevailing interest rate for overnight/short duration borrowing by banks in the interbank market. vi.

15.

Charging of Interest : a. As per RBI guidelines Banks switched over to charging of interest on loans / advances at “Monthly Rests” with effect from April 01, 2002. b. Accounts brought under this system are all loans/advances such as loans on deposit, personal loan products, structured loan products (for both of the schemes under variable rate of interest and fixed rate of interest), Cash Credits, OD, etc. Advance Bills, Defaulted Guarantees, Short term loans/Demand loans such as WCDL, Premises loan accounts/certain category of Staff Loans, etc. c. Bills Purchased:For all bill finance (DP/ DA/ Supply etc.,) recovery of interest should be on the date of purchasing/discounting the bill, for the specific/notional number of days. For the frontend recovery, it should not be compounded for every 30 days / calendar months. For Bills purchased/negotiated/discounted (Inland/Foreign), besides recovering usual charges, the interest at applicable rate for the period from the date of Purchase to the notional/committed due date (in supply bills) of the bill shall also be collected as Up Front. i.

In case the bill is realised/ reversed after the notional due date, the interest for the extended/delay period, at the penal rate, shall be compounded at monthly rests and recovered. d. Exceptions from monthly compounding: i.

ii.

Agricultural loans:As the agricultural advances are linked to crop seasons, branches shall follow the periodicity of charging/compounding of interest as per RBI/NABARD/HO guidelines. Accounts permitted for longer rests than quarterly:Accounts under simple interest will not have any impact. Wherever the 'Simple Interest' moves over to quarterly compounding as per the in-built terms of an advance, the same shall be put on monthly compounding instead of quarterly from that point of switch over (e.g., after holiday period in Educational Loan) and also when such loans become overdue. 11 - III

iii. While charging interest on monthly compounding, branches should ensure that the effective rate does not go up on account of charging compounding interest at monthly rests. In other words, branches should charge discounted rate of interest for monthly rest vis-à-vis effective rate of interest for quarterly rests. iv. Recovery of Interest: The monthly interest debited has to be recovered immediately as and when charged. Customers shall be informed well in advance about the monthly charging of interest and to service the same. However, on a case to case basis, Branch Managers can grant time as per HO guidelines, for adjustment of the interest, from the date of debit. 16.

Service charges on Advances: a. The rates of commission and other service charges on various advances including Non fund based facilities will have to be charged as per rules framed for the purpose by the Bank from time to time.

17.

RBI Regulations and Restrictions on Loans and Advances: a. Reserve Bank of India has, from time to time, issued a number of circulars containing guidelines/instructions, directives to banks on Loans and Advances. These guidelines are on the aspects of eligible borrowers, eligible securities, bankable purposes, margin stipulations, creation of charges over securities etc. The segments of Loans and Advances which are regulated/ restricted would be communicated through, internal circulars as and when required by the respective Banks. b. Statutory Restrictions: i.

Advances against banks' own shares: A Bank cannot grant any loan or advance on the security of its own shares in terms of Section 20(1) of the Banking Regulation Act, 1949 either during the initial public offer or thereafter.

ii. Also, lending should not be made against the shares of its own subsidiaries. iii. Advances to Banks' Directors: Banks are prohibited from entering into any commitment for granting any loan or advance to or on behalf of any of their directors or any firm/company in which any of their directors is interested as Director or as Partner, Manager, employee or guarantor. However, the restrictions shall not apply to, l Loans and Advances made against Govt. Securities, LIC policies, Fixed Deposits. A Credit limit granted under credit card facility provided by a bank to its Directors to the extent the credit limit so granted is determined by the bank by applying the same criteria as applied by it in the normal conduct of the credit card business. 12 - III

iv. Loans and Advances to Chairman and Managing Director/Executive Director for the purpose of purchasing furniture, car, personal Computer or constructing/acquiring house for personal use, Festival advance can be given with the prior approval of RBI and on such terms & conditions as may be stipulated by RBI. v. The Banks may refer to the RBI's Master Circulars (issued by RPCD) for latest clarifications/ guidance on matters of restrictions on loans and advances: l l l l

to Bank's Directors restriction on holding shares in companies advances against sensitive commodities under selective credit control restriction on payment of commission to staff, etc.

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CHAPTER – 3

TYPES OF BORROWERS 1.

General: a. The Barron's Banking Dictionary defines a borrower as a 'Person or organization obtaining funds from another, called a lender, normally repayable with Interest at a future date. Another definition of borrower is 'a person that has applied, met specific requirements, and received a monetary loan from a lender. The individual initiating the request signs a promissory note agreeing to pay the lien holder back during a specified time frame for the entire loan amount plus any additional fees. The borrower is legally responsible for repayment of the loan and is subject to any penalties for not repaying the loan back based on the lending terms agreed upon. Different types of borrowers are elaborated in this chapter.

2.

Minors: a. A minor does not have the contractual capacity. A minor cannot bind himself in any way to repay money lent to him. Any money lent can never be recovered against a minor, even after he attains majority. Any security given by a minor for a loan is also void ab initio. If a third party gives a guarantee to secure an overdraft to a minor (the guarantee having been given for a debt which is void), the guarantor is not liable. Hence, no credit facility should be sanctioned to a minor. b. However, advances may be granted for a minor's education as per any educational loan scheme of the Bank against the signature of the guardian. Loans can also be granted against fixed deposits standing in the name of a minor subject to precautions/ conditions viz., the loan documents to be executed by his/ her guardian and loan availed for benefit of minor.

3.

Joint Accounts: a. If an advance is given to more than one person (joint borrowers), all the borrowers should join in the application for accommodation. In case any security standing in joint names has to be charged against the advance, all the parties should execute cover documents. i. Joint Promise: A joint promise differs from a joint and several promise. In case of joint promise, the obligation is single and entire and the creditor can bring one cause of action and not several actions against the Joint Promissors, but if he does not choose to do so, he loses his rights against those whom he has omitted. No action for the same debt can be brought against the other or others, who have been omitted by him. The joint liability can be enforced against all or any one of them but at one time. ii. Account holders are jointly liable and in the event of the death of one of them the estate of the deceased is not released and the banker can look for payment to the survivors as well as to the legal representatives of the deceased. iii. Joint and Several Liability: In the case of joint and several liability there is a right of action against all parties severally and successively, until the whole debt is recovered. Moreover, a right of set-off exists between a private account with credit balance and the joint overdraft. 14 - III

4.

Sole Proprietorship: a. There is no distinction in law as between a sole proprietorship concern and its proprietor. Creditors of the business could look to the personal assets of the proprietor, should the business fail and should the business assets be insufficient to satisfy the debts.

5.

Partnership Accounts: a. When a partnership account is opened, the following aspects should be borne in mind: i. A partnership should not consist of more than 10 persons, if it is engaged in banking business or more than 20 persons in any other class of business. ii. It is not necessary that there should be a partnership deed between the partners. It is adequate, if a partnership letter is taken and to rely on the declaration contained therein regarding the constitution of the firm, etc. If the firm has a partnership deed, a certified true copy of the partnership deed is to be obtained and got registered with the Bank. Before registration of a partnership deed in the books of the Bank, it should be carefully scrutinized to see that all the partners of the firm have signed it. If all the partners have not signed it, it cannot be treated as a complete document and should not be accepted. iii. While examining a partnership deed, it should be closely studied to see if any restrictions have been imposed on one or more partners to open, operate or overdraw the account or whether there are any limitations on the borrowings by the firm. If there are any such restrictive clauses, the same should be carefully noted in the power of attorney register and also in the ledger. It should be ensured that operations in the account are in strict conformity with the relevant provisions in the deed. iv. The account should be opened in the name of the firm and not in the name of any partner for firm's business. Partners, while operating the account, will always sign for and on behalf of the firm or in the firm's name but not as individuals. v. If the partners desire to give authority to a third party by way of a mandate or power of attorney to operate the account, all the partners must sign the mandate/power of attorney. All mandates and powers of attorney are automatically revoked by change in the constitution of the firm as by death or insolvency of a partner or retirement or induction of a new partner. Any change in the constitution of the partnership calls for a review of the position. vi. Cheques payable to a firm should not be collected in the private account of a partner or an employee of the firm, unless an express authorization for such a course has been obtained from all the partners. vii. Cheques drawn by a partner in favour of third parties and lodged by that partner or any other partner or by an employee of the firm in his personal account should evoke enquiry. viii. If a partner pays to the credit of his private account a cheque drawn by him on the firm's account there is no prima facie case for enquiry- the transaction may represent repayment of loan or share of profits etc. It is, however, desirable that the drawer- partner and the payee- partner of the cheques are different persons. However, when a partner who has been pressed for repayment of an overdraft allowed to him personally, responds by offering a cheque drawn by him on his firm's account, it is clearly a case calling for caution and enquiry. 15 - III

ix. x.

Any one of the partners has power to countermand payment of cheques drawn by him or another partner and the Bank is bound to comply with such instructions. A partnership as such cannot guarantee the lending to a third party, unless the firm carries on the business of issue of guarantees. In all other cases, if any guarantee is to be issued by the firm, all the partners should join in the execution of the guarantee bond or a partner should hold the written authority of all other partners when he signs the guarantee singly. However, any partner in his individual capacity may give guarantee or secure third party's obligations without binding the firm.

b. Limited Company as a Partner: i.

ii.

Where a limited company is a partner in a firm, a question may arise as to the liability of the partner – limited company constituting the partnership. The liability of the limited company vis-à-vis the partnership is not limited in proportion to its share in the partnership. The limited company being a legal entity will be considered as one partner with unlimited liability as in the case of other partners so far as the question of meeting the liability of the partnership is concerned, i.e., the entire liability of a partnership can be realised from the company alone subject to the extent of its assets, but no director or shareholder of the company is personally liable for the liability of the company. Another question that may arise in regard to such partnership is whether a charge created by the partnership, on its assets in favour of the bank requires registration under Sec.125 of the Companies Act. If the advance is secured by the assets of the Limited Company, then charge on such assets should be registered with the Registrars of Companies (ROC).

c. Minor admitted to the benefit of partnership: i.

ii.

iii.

A minor cannot be a partner but can be admitted to the benefit of the partnership. He cannot be made personally liable. However, his property in the firm is liable for the firm's debt. The date on which the minor attains majority should be diarised so that he may be requested to join with the other partners in signing fresh documents immediately, on his attaining the majority. Neither the natural nor the legal guardian can enter into agreements of partnership on behalf of the minor beneficiary. Therefore, obtaining the signature of the guardian on behalf of the minor in the opening form, partnership letter or charge document for advances etc., will not serve any purpose. A minor may repudiate his liability as a partner within six months of his attaining majority or within 6 months of his obtaining knowledge that he was admitted to the benefit of the partnership whichever date is later. His silence after expiry of the above period will be taken to mean, in law, that he has been elected to be partner. He will, thereafter, be liable personally from the date on which he was admitted to the benefit of the partnership.

d. Implied powers of partners: i.

A partner is the agent of the firm for the purpose of the business of the firm. There are certain implied powers and duties, which every partner has and with which he can bind the firm merely because he is a partner of the firm. The partners can, by agreement, extend or 16 - III

restrict the implied authority of any partner but to an outsider dealing with the firm who is not aware of the restrictions on the partners' implied authority, all partners are liable. ii.

iii.

Partners are jointly and severally liable for all acts done on behalf of the firm or on all instruments executed in the firm's name and relating to the normal business carried on by the firm. What a partner cannot do: In the absence of usage or custom of trade to the contrary, the implied authority does not empower a partner: l l l l l l l l

submit a dispute to arbitration, open an account in his own name for the firm's business, compromise or relinquish his firm's claim, withdraw a suit filed on behalf of the firm, admit any liability in a suit against the firm, acquire immovable property on behalf of the firm, transfer immovable property belonging to the firm and enter into partnership on behalf of the firm with another firm.

e. Personal liability of the partners: i. All partners of a firm are jointly and severally liable for the debts of the firm subject to certain restrictions, in case the individual partners have also individual liabilities. In order to fix the liability of all the partners for the borrowings of the firm and to give the Bank positive rights against the private assets of the partners along with other preferred creditors, the signatures of all the partners in their individual capacity should be obtained on all documents executed by the partnership creating personal liability. f. Registration: i. Under the Partnership Act, registration of a partnership firm is not compulsory. There is no time limit for registration. Non-registration of a firm does not prejudice the rights of the third parties to enforce their rights against the firm and its partners. But it disables the firm and its partners from enforcing the rights under contract or those conferred under Partnership Act. When credit facilities are considered, the ability of the firm to enforce its rights by filing suits in a court of law for recovery of monies due to the partnership has a telling effect in its repaying capacity. Therefore, credit facilities should be granted only to registered partnership firms. ii.

A copy of the registration certificate should be obtained and kept in files, after verification.

g. Admission of a partner: i.

ii.

No person shall be admitted as a partner into a firm without the consent of all the existing partners except where (i) the partnership deed itself provides for taking in new partners and (ii) in cases where minors admitted to the benefit of partnership desire to become partners, on their attaining majority. A partner newly admitted in a partnership (unless he has been previously a minor admitted to the benefit of partnership and continuing as a partner after attaining majority) does not 17 - III

become liable for any act of the firm done, before he became a partner. However, it is open both to the creditor and the new firm including the new partner to enter into an arrangement as regards the liability in respect of the existing debts of the old firm. h. Retirement of a Partner: i.

As per the provisions of the Partnership Act, a partner may retire (a) with the consent of all the other partners, (b) in accordance with an express agreement by the partner, (c) where the partnership is at will, by giving notice to all other partners of his intention to retire. Unless public notice is given of his retirement, such partner shall continue to remain liable to third parties. However, if the third party actually knows about the retirement, then the absence of public notice will not make the retiring partner liable in respect of the liabilities arising after retirement.

i. Expulsion of a Partner: i.

A partner cannot be expelled by any majority of the partners, except in exercise of powers in good faith conferred by agreement among the partners. The other guidelines stated for retirement will be applicable here also.

j. Insolvency of a partner: i.

On adjudication of a partner as insolvent, he ceases to be a partner effective from the date of adjudication whether or not the firm is thereby dissolved. It is to be noted that if the firm is not dissolved, the estate of the insolvent partner is not liable for any act of the firm done after the date of adjudication.

k. Death of a partner: i.

Similarly, if the firm is not dissolved on death of a partner, his estate will not be liable for any act of the firm done after his death.

l. Dissolution of the firm: As per the provisions of the Partnership Act, 1932, a partnership firm is dissolved under the following circumstances. i.

ii. iii. iv.

On death of a partner or adjudication of a partner as insolvent, unless there is a provision to the contrary entered in the Partnership Deed or other contract entered into between the partners; If the partnership is constituted for a fixed term by the expiry of the term and If the partnership is constituted to carry out one or more adventures or undertaking on completion thereof. There are further provisions for compulsory dissolution, dissolution by agreement and dissolution by the court. However, dissolution of the firm becomes effective as regards third party, on a public notice given by the firm or its partners. 18 - III

m. Partnership accounts with debit balances: The following steps should be taken, when a notice of death/retirement/insolvency of a partner is received: i.

Death certificate/notice of retirement/notice of adjudication of a partner as insolvent should be verified and a note should be made in the ledger account and on the opening form under the initials of an officer. ii. Name of the deceased/retiring/insolvent partner should be deleted from the bank's record under the signature of an officer. The Officer should indicate the mode as to what satisfactory proof of death/retirement/insolvency of partner was produced to the bank. Full details of the same must be recorded in the bank's books. iii. Cheques signed by the deceased/retiring/insolvent partner and presented after the receipt of notice of death/retirement/insolvency should not be paid without the confirmation of the surviving/continuing/solvent partners and without verifying the partnership deed as to the continuance of the firm. iv. The partnership deed should be verified to ascertain whether the business can be continued after the above event. v. When the Partnership gets dissolved: If the partnership deed is silent on the point, death/insolvency/retirement of a partner leads to dissolution of the firm and in such cases operations in the account should be stopped. Surviving partners including the legal heirs of the deceased/remaining partners including retired partner should be called upon to liquidate the liability. If the liability is not adjusted within a reasonable time, instructions should be sought from the sanctioning authority as to the recovery of the bank's dues. Branch should not allow the documents to get time barred. vi. If the business is continued:Operations in the account should be stopped to determine the liability of the deceased/retired/insolvent partner for the debt due to the bank and a new account should be opened. l The account should be immediately reviewed taking into consideration the various factors such as credit worthiness and financial resources of the reconstituted firm, future business prospects, etc., and a decision has to be taken as to whether the credit facility is to be continued or withdrawn or curtailed. In the event of recommending for the continuance of the facilities to the reconstituted firm, fresh proposals should be submitted giving all the particulars required. In case it is decided not to continue the facilities, necessary steps should immediately be taken to get the advance adjusted. l Cheques can be passed within the credit balance available in the new account for the purpose of continuance of business as authorised by the partnership deed. But no overdrawing in the new account should be allowed, till a fresh sanction/permission is obtained from the appropriate sanctioning authority in the name of the reconstituted firm. vii. Documentation: After the limit is sanctioned, favouring the reconstituted firm, fresh security documents for advance should be obtained by the branch duly signed by all the partners of the reconstituted firm and thereafter the balance in the old account should be got adjusted by the cheques drawn on the new account and signed by all partners of the newly reconstituted firm or under a letter of authority signed by all the partners of the new firm. 19 - III

viii. A fresh joint and several DPN along with a covering letter and other agreements, namely, stamped partnership letter, should be signed by the reconstituted firm and its partners. ix. Clean loans: Joint and several DPN for the balance due as on the date of execution by the reconstituted firm along with a covering letter should be obtained. x. Term loans: Acknowledgement letter for the balance due as on the date of execution of documents by reconstituted firm along with a suitable covering letter should be obtained. n. Insanity of a partner: i.

Insanity of a partner does not lead to dissolution of the firm, unless provided in the partnership deed. Sane partners can be allowed to continue to operate the account. An application for dissolution may be made to the Court either by another partner or by any person interested in the insane partner. In respect of running facilities like Overdraft, cash credit, decision to continue/discontinue the facility has to be taken. It is relevant to note that the Bank's terms of sanction includes a clause that the Bank reserves the right to withdraw/cancel/suspend a facility at any time without notice and without assigning any reasons there for.

o. Continuing guarantee given for firm's borrowings: i.

6.

Any guarantee given to the bank in respect of the firm's borrowings automatically gets crystallized on reconstruction of the firm. Such revocation will be effective, only with regard to future transactions and not to the transactions the firm had as on the date of change in the constitution. If the reconstituted firm is allowed to avail the credit facility on the same terms and conditions, fresh guarantee agreement should be obtained from the guarantor(s).

Joint Stock Company: A Joint Stock Company is a legal entity and is regarded as a person in law with perpetual succession and a common seal with the capacity to contract or handle obligations or undertake transactions in its own name. The liability is limited to the share capital and the liability of the shareholder is to contribute unpaid value of shares. A Company may either be a Private Limited or a Public Limited Company. a. Private Limited Company: A Private Ltd. Company is a company which has a minimum paid up capital prescribed under the Companies Act 1956 [Rupees One lakh as per Companies (Amendment) Act 2000] and by its articles. A Private limited Company, i. ii.

iii.

restricts the right to transfer its shares limits the number of its members to 50 (not including persons who are in the employment of the Company and also persons having been formerly in the employment of the Company who were members of the company while that employment has ceased) and prohibits any invitation to the public to subscribe for any shares or debentures of the Company or issue of Prospectus. When two or more persons hold one or more shares in a Company jointly, they shall for the purpose of this definition be treated as a single member. 20 - III

iv. was hitherto deemed to be a Public limited Company where not less than 25% of the paid up share capital is owned by one or more bodies corporate. The above provision relating to Deemed Public Company i.e. private company deemed to be a public company, have become inoperative vide Companies (Amendment) Act 2000. b. Public Limited Company: A Public Company means a Company which i. ii. iii. iv.

is not Private Company; has a minimum paid up capital of Rupees Five lakhs or such higher paid up capital as may be prescribed; is a company which is a subsidiary of a company which is not a private company. Every company registered under Section 25 of Companies Act 1956 and every company limited by guarantee and not having a share capital will be a Public Company, the number of persons not being limited to 50 and all the provisions of the Companies Act 1956 applicable to Public Companies will apply to them also.

c. Procedure for opening an account in the name of a company: While opening a Current Account in the name of a Company, besides its application in the relevant account opening form, the following documents should also be obtained. i.

ii.

iii.

iv.

Certificate of Incorporation: This Certificate of Incorporation is issued by the Registrar of Companies, only after he is satisfied that all the necessary requirements under Companies Act are fulfilled by the (newly formed) Company. The original copy of this Certificate should be returned after inspection and a Certified true copy should be kept in the branch file. Memorandum of Association: Memorandum means the Memorandum of Association of the Company as originally framed or as altered from time to time, in pursuance of any provisions of the Company Law or of the Companies Act. The Memorandum of Association is the charter on which the Company exists and within which it operates. This is the fundamental document within which the Company has to operate. The Company cannot undertake any operation, which is not mentioned in the objects clause of the Memorandum of Association. Articles of Association: Articles of Association is another important document which contains the regulations for the management of the internal affairs of the Company. The articles of a Company are subordinated to and controlled by the Memorandum of Association, which is the dominant instrument and contains the general constitution of the Company. In case of new companies, the bank should verify whether the first directors are named in the articles of association. The Memorandum is a fundamental document and can be altered only under certain circumstances provided by the Companies Act. The articles are only internal regulations, over which the members of the Company have full control and which they may alter as they think fit. The Memorandum is the area beyond which the Company cannot go inside that area, the shareholders may make such regulations as necessary. 21 - III

v.

A copy of each, the Memorandum and Articles of Association brought up to date and duly certified as True and up to-date copy by a competent officer/Managing Director/Chairman of the Company should be kept at the branch. Paragraphs affecting the bank's relations with the Company should be conspicuously marked and the relevant portions noted on the ledger head for guidance. (Note: Articles of Association will contain a provision as who is the competent officer of the Company to certify a copy of the Memorandum and Articles of Association as 'True and up to-date'. The Manager should get these documents certified by such authorized official/s of the Company). vi. The Company should be requested to keep the branch informed of any subsequent amendments to Memorandum and Articles of Association. The branch can also verify the copies filed with Registrar of Companies, if the registered office is located in the same centre or get the same verified by any of the branches situated in the place where the registered office is situated. vii. Certificate of Commencement of Business:A public Limited Company is required to have a certificate to commence business from the Registrar of Companies, before it is entitled to commence business and or to exercise borrowing powers. The original of the certificate to commence business may be returned after inspection, but a true copy thereof duly authenticated by the officer concerned should be kept in the branch's file. For Private Limited Companies, this Certificate is not required. viii. Board Resolution: The Board Resolution is a decision by the Board of Directors of the Company resolving that the account may be opened with the Bank named therein and as to who will open and operate on the account., who will carry on other acts such as dealing with securities, deposits with the Bank, who has power to draw, accept, endorse, etc. This resolution should be on the lines indicated on the reverse of the account opening form of the Bank. A copy of the resolution certified by the Chairman who presided over the meeting and countersigned by the Secretary/ Manager of the Company should be kept in the branch's files and operations on the account should be allowed only in terms of this resolution. ix. Where the Board of Directors of the Company has empowered any officer/ officers to open and operate the Company's account, the power of attorney on an appropriate stamp paper in his favour by the Company should be registered in the Bank's Power of Attorney Register along with their specimen signatures duly verified by the Company. x. A certified list of the Directors of the Company should be obtained at the time the account is opened. The Company should be requested to notify changes, if any, from time to time and also furnish the specimen signatures of the Directors who are authorized to operate the account with the Bank. Branches should make proper and thorough enquiries of the promoters/directors of new companies and verify their antecedents as per the KYC Policy of the bank, before taking up their proposals. xi. In respect of existing companies the copies of the Balance Sheets for the last three years (if available) should be obtained. 22 - III

d. Powers and responsibilities of Directors: i.

ii.

iii.

A Company, being an artificial legal person, must have a human agency to carry out its objects. Its Board of Directors provides the agency. While a Public Company should have at least 3 Directors, a Private Company should have at least 2 Directors. The Directors of a Company collectively are referred to as the Board of Directors or the Board. Only individuals can be appointed as Directors. The Directors have the powers of the Company subject to such regulations as are consistent with the Memorandum and Articles of Association and/ or such other regulations including regulations made by the company in its General Body Meeting and subject to other requirements if any, laid down by the Companies Act. (The shareholders by a resolution passed in the General Body Meeting may amend/ alter the articles on the management of the Company by the Directors). The powers vested in the Directors shall be exercised collectively by the Board. As a rule the Directors cannot unless the Articles specifically authorize them to do so, transfer to others any duty imposed on them which involves the exercise of judgement and discretion.

e. Borrowing powers of a Company: i. ii.

iii.

iv.

The Branch Manager/Loan officer should satisfy himself that the company has power to borrow in its Memorandum of Association. A trading company has an implied power to borrow even though there is no express authority to that effect in its Memorandum of Association. In respect of non-trading companies, there must be express power to borrow which shall be exercised by the Board of Directors. The power to borrow may not include a power to change or encumber any property of the company. Hence, the memorandum and Articles of Association should be carefully scrutinised to ascertain that the Directors have such powers. Loans to companies for buy back of shares/ securities should not be provided. Borrowing Ultra Vires the Company: Where the directors borrow more than the company is empowered by its Memorandum or when the company has no express or implied power to borrow or for the purposes not mentioned in the 'Object clause' of the Memorandum, such borrowing is ultra vires the company and void to that extent. Even if a resolution is duly passed at the Meeting of the Board of Directors, borrowing for ultra vires purposes beyond the powers of the Board and of the company will not bind the company. If the borrowing is beyond the powers of the company, even if all the members of the company join together and pass a resolution in the General Body Meeting, the transaction cannot be brought within the powers of the company and it will not, therefore, bind the company. The transaction is void abinito.The remedies which are available to the bank in the event of the borrowings ultra vires the company are as follows: l

The company may voluntarily pay the debt because there is nothing to prevent the company repaying the ultra vires debt on its own accord. 23 - III

l

l

l

It may be feasible to follow the money into the possession of the company and recover it, if it still exists in the form of a separate fund, investment or asset. This remedy is unlikely to be of much avail to a bank, unless the accommodation has been taken by way of loan and credited to the current account of the company where it remains undrawn. There is no doubt of recovery in these circumstances. Even if the money has been withdrawn and allocated in the company's own books as a capital item for which a corresponding asset appears, then the amount can be recovered. Where the money of an ultra vires lender has been used to pay off lawful debts of the company, he would be subrogated to the position of the creditor paid off and to that extent shall have the right to recover his loan from the company. The debts which were paid off must have been legal debts. This right is commonly known as the right of subrogation. Directors may well be personally reasonable in the event of failure by the banker to recover money lent to a company, which had no capacity to borrow it. A claim may be made against the directors as trustees of the money so lent or for a breach of warranty or authority. Whilst the matter is not, perhaps, free from doubt, the better view is that the banker will be able to effect recovery from the directors personally. If it can be established that the directors had full knowledge of the company's incapacity to borrow when they raised the loan, an action for deceit might be maintainable and to which a claim for damages could be added.

v.

Borrowing which is ultra vires the directors: Although an advance may be within the borrowing powers of the company but may be in excess of the directors' powers, transgressing a limitation imposed on their powers by the articles of association or Section 293 of the Companies Act, 1956. The bank's position in regard to such transgressions may not be serious but the fact remains that any borrowing ultra vires the directors is void and the bank cannot sue the company as a creditor in respect of any excess, unless the company ratifies the transactions. The Memorandum and Articles of a company are public documents, the contents of which are known to anyone dealing with the company and it follows that a bank cannot acquire contractual rights against the company when the loan is inconsistent with the articles.

vi.

In case of an advance ultra vires the directors but intra vires the company the following remedy is available to the bank: l

l

If the limit to borrow has been exceeded under section 293 (1)(d) of the Companies Act 1956 then under sub-clause 5 of the same section if the lender advanced the money in good faith and without knowledge that the limit has been exceeded the debt would be recoverable. The burden of proving good faith and absence of knowledge is on the lender. As there is no restriction on the powers of the company to borrow (the directors can borrow beyond the limit with the sanction of the company in general meeting) the company may ratify the irregular borrowing by a resolution in general meeting. 24 - III

l

If the borrowings are beyond the powers mentioned in the Articles of Association, it may alter its articles by a special resolution in general meeting or it may alter its articles by a special resolution extending or removing any restriction.

l

The Manager/Officer-in-charge should satisfy himself that the persons who sign the documents and operate the accounts have the necessary authority to do so. Such authorization should be available in the form of a resolution of the Board of Directors of the Company. The power to borrow on behalf of the Company can, however, be done only by a resolution passed at a Meeting of the Board.

vii. By Section 293 (I)(d) of the Companies Act the Board of Directors of the Public Company cannot borrow money in excess of the aggregate paid-up capital and its free reserves i.e. reserves not set apart for any specific purpose except with the consent of the Company in General Meeting. Temporary loans obtained from the company's bankers in the ordinary course of business may be excluded when reckoning the limit up to which a Company may borrow.(Explanation: Temporary loans mean loans repayable on demand or within six months from the date of the loans such as, short term Cash Credit arrangements, the discounting of bills and the issue of other short term loans of seasonal character but does not include loans raised for the purpose of financing expenditure of a capital nature. Borrowing above the limit should be authorized by the General Body. Any restriction on the powers of the Board of Directors imposed by the above section not, however, apply to a Private Company, if it is not a subsidiary of Public Company. Borrowing powers of the Board of Directors in excess of such powers may, however, be revised by a resolution passed by the General Body Meeting of shareholders of Public Companies but every such resolution should specify the total amount up to which the money can be borrowed by the Board). viii. The power to borrow cannot be exercised by the Board of Directors by means of a circular resolution passed by them without holding a meeting of the Board. The Bank should, therefore, ensure that the resolution furnished to them by a company in connection with any credit facility sanctioned or granted to it is not a circular resolution, but the resolution has been passed at a duly convened meeting of the Board of Directors. For this purpose, a certificate in the following form signed by the Secretary of the company and countersigned by the Chairman of the meeting of the Board of Directors at which the resolution was passed should also be furnished by the company along with the true copy of the resolution.

25 - III

CERTIFICATE Certified that the above is a correct copy of the resolution passed on………….. at a duly convened meeting of the Board of Directors of………………… and that it has been entered in the usual course of business in the Minute Book of the Company and signed therein by the Chairman of the Meeting/ Company and is in accordance with the Memorandum and Articles of Association of the Company.

……………………

……………………

Secretary

Chairman of the Meeting

ix.

The Board, by a resolution passed at a Meeting, can delegate to any Committee of Directors, the Managing Director, the Manager or any other principal officer of the company or in the case of a Branch Office of the company, a principal officer of the Branch Office, the power to borrow money otherwise than on debentures to the extent specified and on such conditions as the Board may prescribe. Such resolution must specify the total amount outstanding at any time up to which moneys can be borrowed by the delegate/s. The exercise of the powers delegated to their attorney/ s by the Board of Directors of company cannot be further delegated by the attorney/ s to other person or persons. The attorney of a company cannot sub-delegate to any person the power to borrow, etc., vested in him and all sub-delegation in this regard will be invalid and ineffectual.

x.

Before an application for advance by a Limited Company is entertained, a resolution should be passed by the Board of Directors of the Company specifying:

xi.

l

Nature and extent of borrowing;

l

Securities offered;

l

Persons authorized to give securities and sign documents; and

l

Persons authorized to operate on the account.

No resolution of the Board of Directors will bind the company on matters in which a Director having an interest also participated in the discussion of the Board on that particular subject. In a matter in which an individual Direct or has interest, the Branch Manager should satisfy himself of the compliance of the requirement and call, if necessary, for a certificate that the particular Director did not participate in the proceedings thereof. 26 - III

xii. A delegation of authority by the Board of Directors in favour of the officers of the company or by the company at its General Meeting in favour of the Board of Directors should be clear and specific as already stated. The resolution to execute the documents including affixing of common seal and charge the securities for the advances should be separate and distinct. xiii. The power to operate the account should name the person and define the extent of his powers, as mere power to operate on an account alone will not be sufficient to permit borrowings by him or his endorsement on instruments or discount bills for and on behalf of the company. Further, the power to pledge or discount or endorse should be expressly provided for in the resolution authorized by the Board of Directors. In the absence of such explicit mention, the company will not be bound by the borrowings or charging of securities by the person named. xiv. A power to execute a document may not include power to deposit title deeds of the company's property to create an equitable mortgage. A power to deal with the assets of the company may not empower a company to create an encumbrance on them. All such acts/operation should be specifically indicated in the resolution of the Board of the company. The Bank may ask for the additional personal guarantee of some or all of the directors or other third parties to ensure the fulfilment of its obligations and strengthening the security. In such an event, the resolution of the company authorizing the availing of the advance should also make a mention of the additional guarantee required. An authorization by a resolution is also required for any subsequent variation in the terms of the advance to the company. xv. Common seal is the official signature of the company. Affixing the common seal of a company on the documents is not necessary and therefore need not be insisted upon, unless the same is enjoined in the Articles of Association or in the relative resolution of the Board of Directors authorising the borrowing. In that event, affixing of the common seal should be done in the manner indicated therein. According to Table A of the Companies Act, the seal of the company shall not be affixed to any instrument except by the authority of a resolution of the Board or of a Committee of the Board authorized by it in that behalf and except in the presence of at least two directors and the Secretary or other person as aforesaid shall sign every instrument to which the seal of the company is so affixed in their presence. xvi. If the seal is affixed without an authority the act will not be an act of the company and the instrument to which it is affixed shall be treated as a forged instrument. f. Advances to banking companies: i.

Certain additional requirements under the Banking Regulation Act may have to be complied with, if the advance is to a banking company. Generally, borrowings are sought by non-nationalised banks. Non-nationalised banking companies entering into transactions which may result in borrowings (e.g., against Government Promissory Notes, encashment facilities, grant of guarantees etc.,) will be subject to the regulations under both the Companies Act and the Banking Regulation Act as amended from time to time. 27 - III

Prior sanction of Board of Management should be obtained in all cases and the Branch Manager should satisfy himself that the G.P.N. or shares pledged do not form part of the securities left with them by their own customers i.e., not re-pledges – but they were out of their own investments by obtaining a declaration to that effect. These will be in addition to the other general requirements under the Companies Act. g. Guarantee by the company: i.

ii.

iii.

iv.

v.

The Memorandum of Association of the company must specifically and unequivocally give power to the company to give guarantees on behalf of the company. No reliance should be placed on the omnibus clause of the Memorandum reading“The Company shall have power to do such other things as are incidental or conductive to the attainment of the above objects or any of them”. If a limited company has no power to give guarantee and the guarantee is taken from such a company, the transaction would be ultra vires and void against the company. The guarantee can neither be enforced nor ratified. The Articles of Association should be studied to understand the mode of execution of guarantees. Certified copy of the resolution of the Board should be taken authorising the giving of guarantee and the person authorised to sign the guarantee. The draft copy of the form of guarantee should be attached to the resolution and initialled by the Chairman of the company for the purpose of identification. Where the company's Articles of Association provides for giving guarantees under the company's seal, then it is essential to affix the same in accordance with the provisions contained in the Articles. There are certain statutory restrictions under Section 295,369,370, etc., of the Companies Act, 1956 on guarantees to be given by a limited company. It would, therefore, be advisable to seek legal advice before accepting the guarantee of a company.

h. Advances to Private Companies becoming Public Companies: i.

ii.

If, in a private company, not less than 25% of the paid up share capital is held by one or more bodies corporate, then such private company becomes a public company. For advances made to such a private company which has subsequently become a public company, by virtue of the above section, no fresh documents need be taken, since even after the change in the nature of the company by operation of law, the changed company will continue to be liable for the debts of the private company. However, in such cases the branches should obtain consent/fresh guarantee from the guarantors, if any, to avoid any possible chance of raising this issue by them, to get discharged. Similarly, in case of existing companies taken over by new group/management also, the consent of the guarantors to continue the guarantee for the company in new management/group or fresh guarantee should be obtained. 28 - III

i. Guarantees of Directors: i.

ii.

iii.

iv.

v.

Advances made to Private Limited Company customers are often covered among other things by the joint and several guarantees of its directors. Where the directors have ample means outside the company, such a guarantee is a good security, but usually the guarantee is obtained in addition to and not instead of direct security from the company. Where advances are sanctioned taking the director's guarantee as collateral security, the branch should obtain an undertaking letter from the company that the company will not pay any fee/commission or brokerage to the directors for furnishing guarantees/coobligancies, counter-guarantees or indemnities or for undertaking any other liabilities in connection with any financial assistance for the company. It should be remembered that there is risk in taking the company's security subsequent to the directors' guarantees because if these directors voted on the resolution authorising the charging of the security and the Articles do not expressly permit them to vote on a contract in which they are interested, the security may be void as against a liquidator. In case, for any reason, a guarantee by Directors is not considered expedient by the bank at the time of sanctioning the advance, an undertaking should be obtained from the individual Directors and covenant should invariably be incorporated in the loan/CC/BP agreement that in case the borrowing unit shows cash losses adverse current ratio or diversion of funds, the Directors would be under an obligation to execute a guarantee in their individual capacities, if required by the bank. The bank may also obtain a guarantee at its discretion from the parent/holding company, when credit facilities are extended to borrowing units in the same group. Reserve Bank of India has advised that ordinarily banks need not insist on personal guarantees from professional Managers/Directors except in cases where they have a significant shareholding in the company. However, branches should insist on the personal guarantees of all financially involved directors i.e., other than managerial personnel and professional directors. They should also take the personal guarantee of the managerial personnel and professional directors wherever those persons have a significant shareholdings in the company. If any request is received for waiver of personal guarantees of the directors, such request should be forwarded to Head Office along with their recommendations. Even if some promoters are not in the Board of Directors guarantees of such promoters should also be obtained. Any waiver from this stipulation should be referred to Head Office.

j. Debentures of companies: i.

Application for advances against debentures should be submitted with an upto date certified copy of the Memorandum and Articles of Association, copies of balance Sheets for the last three years together with a draft copy of the Debenture Trust Deed. A debenture which includes debenture stock, bonds and any other securities of a company is an acknowledgement of debt under its signature whether constituting a charge on the assets of the company or not though it is usually secured by the tangible assets of the company, the 29 - III

ii.

iii.

details of which are cited in the Debenture Trust deed. The charge on the assets may either be limited to its fixed assets or by way of a floating charge over all its assets both fixed and current assets. The debentures may either be redeemable after a certain period of time or re-issued after redemption of the earlier issue/s. A trustee is usually named for all debentures issued at the time of issue. A debenture deed is usually backed by all the fixed assets of the company and sometimes also by a floating charge on all or any other particular asset/assets. The debenture deed, the scheme framed for issue of debentures and the resolution of the company in that regard should be carefully scrutinised before any advance is considered for the company. The assets charged for the debentures would be insured for the usual risks at all times. When debentures are issued for the specific purpose of raising finance from banks and/or financial institution, the lenders (Bank and others) are consulted before the trustee is appointed. Any modification of the terms of debentures can be made by convening a meeting of the debenture holders and with the consent of the company and as per Companies Act. In some of the debenture deeds, there may be restrictions against creation of any further charge on the assets of the company in general or certain specified assets. Where such restrictions are noticed or apparent a meeting of the debenture-holders should be called for to pass a resolution and issue a supplementary deed raising such restrictions. Where debentures are issued by a company where stock-in-trade is already under pledge or hypothecation, Branch Managers should take care to see that the Bank's interest is protected by exclusion of such items from the debenture security, before considering any advance to the company as already mentioned. Issue of debentures should be registered with the Registrar of Companies within the 30 days period.

k. Search in the Books of the Registrars of Companies: i.

Before considering applications for borrowings, the branch shall arrange for a search in the books of the Registrars of companies to ascertain company's earlier borrowings and the nature of charge created by it and extracts thereof should be taken and kept in the branch's file so that the company's indebtedness/business dealings may be known to the Bank at the time the borrowings are sought or earlier.

l. Registration of charges: i.

ii.

Mortgages and charges of the description mentioned in Sec.125 of the Companies Act, 1956 must be registered with the Registrar of Companies within 30 days from the date of creation of charges. Therefore, prior search should be made in the books of the Registrar of Companies to take a list of subsisting charges in duplicate and a copy of the same should be sent along with the proposal. Filing of charges with Registrar of Companies:Section 125 of the Companies Act applies to the following charges: 30 - III

l l l l l l

l l l

iii.

iv.

v.

vi.

vii.

a charge for the purpose of securing any issue of debentures; a charge on uncalled share capital of the company a charge on any immovable property, wherever situated or any interest therein; a charge on any book debts of the company a charge not being a pledge, on any movable property of the company; a floating charge on the undertaking or any property of the company including stock in trade; a charge on calls made, but not paid; a charge on a ship or any share in a ship; a charge on goodwill, on a patent or a license under a patent, on a trademark, or on a copyright, or a license under a copyright.

A hypothecation accepted from a Company registered in a foreign country must, in addition to being registered in the country concerned, be also registered with the Registrar having jurisdiction over New Delhi, as well as with the Registrar of the State where the company has its principal place of business in India.(vide Sections 597 and 600 of the Act). The responsibility for registration of charges is primarily that of the company. However, the bank, to safeguard its interest, should ensure that the requirements are completed within the prescribed period. The obligation to register the charge within the time is statutory. If the registration is not made in time, necessary condonation of delay up to 30 days may be allowed by the Registrar of Companies, condonation for further delay shall have to be sought from the Company Law Board of the Region through the Registrar. The application for registration should be made in the forms prescribed under the Act, remitting the prescribed fee along with certified copy of documents executed by the Company. In the interest of the Bank, the charge or modification thereof should be filed with the Registrar of the Companies of the State in which the Registered Office of the Company is situated soon after execution of documents so that anyone seeking to acquire any interest in the Company's assets may have notice of the charge to the Bank at the earliest. Before issue of certificate of Registration of charge, the Registrar may ask for clarification or further information subsequently but the charge is deemed to have been registered on the date on which it was filed and fee paid. However, for obtaining the Registration of Charge from the Registrar, necessary clarification/information or further documentary evidences if any, called for by the Registrar may have to be produced to the Registrar. During the pendency of the advance, a search should be made once in a year in the books of the Register of Companies and an updated list of charges should be sent along with the review/renewal proposals in the prescribed form. 31 - III

m. Procedure for Filing of charges with Registrar of Companies i. ii. iii. iv.

v.

Form-13 and Form-8 should be prepared in triplicate and signed by Branch Manager as well as the authorised officials of the company. Three copies of the agreement/documents creating/modifying the charge should be certified as true copies by the company. Form-8 and13 with certified copies of the documents should be filed with the Registrar of Companies by paying the prescribed fee. A copy of forms 8 and 13 along with copies of agreements/documents containing the date, signature of the Registrar under the stamp 'Registered' should be obtained and kept in the records of the Branch/Bank's H.O. Branches may utilize the services of Chartered Accountants wherever necessary for this purpose by paying the appropriate fee as specified from time to time. (Note: As per the amended rules Registrar of companies shall affix his stamp on the related forms and accompanying instruments with the word 'Registered' under his signature with date and shall deliver a copy of such forms to the company and the charge holder e.g.Bank).

n. Filing of Charge prior to disbursal of advances: i.

ii.

Not with standing the legal provision m (v) above the release of credit limits to the companies should be made only after the charges are filed with ROC and a copy of Form 8 and Form 13 duly containing the stamp 'Registered' and signature of the Registrar with date is obtained and kept in the Bank's records. Branch Managers have no discretion whatsoever in disbursing the advance before receipt of the 'Registered' forms and documents from the Registrar of Companies. The above decision has been taken in view of the following legal aspects: l

l

A charge is a security for the debt. If a charge is created and the consideration is paid at a later date, even then the charge is enforceable. After creating a charge, if it is found that there is a failure of consideration, the charge would become unenforceable. If the consideration for the charge is not to the extent to which there is a recital in the deed, then the charge would be enforceable only to the extent to which consideration was passed. It is not necessary that the consideration should be paid on the date on which the charge was created. It would, therefore, be in order for the bank to file Form-8 and Form-13 with the Registrar of Companies along with certified copy of the instrument creating charge, though at the time the charge was created, the charge was not supported by consideration. It is said so because consideration can be paid at a later date and when once the consideration is paid, the-charge becomes enforceable. 32 - III

l

l

iii.

iv.

If the borrower of the bank becomes the owner of any property purchased out of loan availed of by him, he can certainly create a charge over the property. On the other hand, if the terms and conditions of the loan stipulate that he cannot claim ownership to the property, no charge can be created in respect of the said property. In various cases, courts have held that charge can be created in respect of future property and charge operates as soon as it comes into existence. Likewise, charge can be created for a future debt, since the use of the word debt includes future debts also.

The DPN can be obtained even in respect of an advance to be granted. In view of the bank deferring disbursement of the advance till filing of Form-8 and Form-13, the executants in respect of advances to limited companies. Procedure for creation of Equitable Mortgage:In respect of joint stock company borrowers, the execution of DPN and the deposit of title deeds (with an intention to create a valid equitable mortgage) should be simultaneously done i.e., on the same day. However, the date of memorandum of title deeds should be a day subsequent to the deposit of the title deeds.

o. Consequences of Non-Registration of Charges: i.

ii.

iii.

If a mortgage or charge which requires registration is not registered, it does not mean that the transaction is altogether void or the debt not recoverable. The only consequence is that the security created by the mortgage or charge becomes void as against the liquidator and other creditors. It must be noted that as against the company itself (so long as the company does not go into liquidation) the mortgage or charge is good and may be enforced. Where an earlier charge and a subsequent charge have been created in succession in favour of the same charge holder, if, on account of non- registration or other cause, the later charge is or becomes void, the equitable doctrine of reviver will apply so as to revive the earlier charge. Where a charge is void for non-registration no right or lien can be claimed on the documents of title, as they are only ancillary to the charge and would have been delivered pursuant to the charge.

p. Registration of Modification of Charges: i.

As per Section 135 of the Companies Act, 1956, any change in the terms and conditions of advances like acceptance of additional securities, changes in the places of storage of goods, enhancement in limits, rephasement of repayment schedule, changes in the rate of interest should be registered with the Registrar as modification of original charge within 30 days of such modification. For this purpose Form-8 and Form-13 with copies of relevant documents duly signed by the company and the bank should be filed. The forms and documents with the Seal, date and signature of the Registrar under the seal 'Registered' should be obtained and kept in Bank's records. 33 - III

ii.

iii.

Searches should be made at the office of the Registrar of Companies to find out if there is any intervening charge before enhancing the limits on the same securities or accepting any other securities. Whenever there is any change in terms and conditions or extent or operation of any charge no fresh deed of hypothecation should be obtained and instead a supplemental deed of hypothecation regarding the change in the terms and conditions or extent or operation or advances should be obtained from the company. Before execution of a supplemental agreement, a true copy of the resolution passed by its Board of Directors approving the said changes and authorising any of the directors to execute the documents required in connection therewith should also obtained.

q. Registration of complete satisfaction of charge: i.

ii.

iii.

As per Section 138 of the Companies Act 1956, when the advance is completely paid by the Limited Company, satisfaction of charge should be filled with Registrar of Companies within 30 days of the payment or satisfaction of charge. For this purpose three copies of Form-17 prescribed under the Companies Act, 1956 duly completed and signed by the bank and borrowing company should be filed with the Registrar of Companies. If the debt is required to be progressively reduced in instalments, it is not necessary to register part satisfaction every time. It will be enough if the satisfaction is filed within the prescribed period of 30 days after complete adjustment of the liability. It may be noted that though there is no specific provision in Section 138 of the effect that the person who files the charge should also file satisfaction thereof, this seems to be the requirement of the law, if a reference is made to Section 142. It would appear from subclause (1) of the said section that the person who files the charge must also file satisfaction thereof failing which he will be liable to pay penalties prescribed under the Section. As in most of the cases, bank files the charge, it is necessary for branches to ensure that on final adjustment of the account, the satisfaction of charge is filed by them or the borrower within the stipulated period.

r. Fraudulent conveyance of property to a company: i.

When a sole proprietor customer or partners sell a business of a limited company and immediately make application to the bank for accommodation on the account of the new company secured by a charge on its assets, there is always the risk that unsatisfied creditors of the original business may object to the sale of the assets to the limited company and succeed in setting aside the sale as a fraudulent conveyance. In other words, a trader cannot remove his assets from the reach of his creditors by transferring them to a limited company formed to acquire his business. Prudence demands in such circumstances that steps be taken to ensure that the creditors of the original business have agreed to the conversion in to a limited company. 34 - III

s. Board Resolution at the time of renewal of documents: i.

Board Resolution is necessary for the purpose of execution of renewal documents/Acknowledgement of Debt. Board Resolution should contain the following particulars: l Nature of Facility l Limit l Securities charged l Details of renewal documents (to be executed) l Persons authorised to execute renewal documents/acknowledgement of debt.

ii.

Ratification from the Board of Directors has to be obtained in cases where renewal documents have been obtained from the company without appropriate Board Resolution.

t. Negative Lien: i.

ii.

7.

Sometimes, it is stipulated by the Bank that the borrowing company should not create further charges on any of its assets. This is required especially when the advances are 'Clean'. In such cases, the bank may stipulate that no loan from any other source shall be raised by the Company against its assets so long as the advance to the Company persists or that the borrower shall not alienate the stipulated assets owned by them without the written consent of the Bank. As negative lien does not create any encumbrance on the properties of the company, it does not amount to a charge. As such, the provisions of Section 125 of the Companies Act, 1956, relating to registration of charges would not be applicable.

Cooperative Institutions: a. The Cooperative institutions borrow either for their own requirements or for on-lending to their member-affiliates. The Cooperative Institutions function as per the guidelines of the Cooperative Societies Act, Rules framed under the statute, bye-laws of the institution and also as per the terms and conditions of the financing institutions from which monies were borrowed. b. The resources of a cooperative institution for functioning depend on the various ingredients of items in its liabilities side of the balance sheet. This may be briefly explained as follows: c. A cooperative institution formed of members, by the members benefited the members. As such, core capital contributions from the members along with the capital contributions from Government become the main stay in the organisation. The reserve fund and other statutory/ non-statutory allocations out of profit earned (each financial year) deposits from its members and other payables (in the liabilities side of its balance sheet) are the internal resources available to the cooperative institutions. d. In order to expand its activities, the cooperative institutions may approach the financing institutions and borrow funds subject to the terms and conditions laid down by such lending institutions. 35 - III

c. A cooperative institution formed of members, by the members benefited the members. As such, core capital contributions from the members along with the capital contributions from Government become the main stay in the organisation. The reserve fund and other statutory/ non-statutory allocations out of profit earned (each financial year) deposits from its members and other payables (in the liabilities side of its balance sheet) are the internal resources available to the cooperative institutions. d. In order to expand its activities, the cooperative institutions may approach the financing institutions and borrow funds subject to the terms and conditions laid down by such lending institutions. e. If the borrowing unit is a cooperative financial institution, the guidelines prescribed by the Bank for International Settlements (Basle Agreement) to be followed in total. The Board of Management of the lending institutions will determine the rules and regulations for its lending to the cooperative institution including any or all of the under mentioned stipulations viz. i. ii. iii. iv.

Required share capital contribution to the higher financing agency Executions of agreement accepting laid down terms and conditions. Execution of DPN and continuing guarantee Agreement wherever necessary, endorsing its own securities in favour of lending institution. v. Submission of monthly/ quarterly/ half- yearly on due dates vi. Provide adequate cover to the lending institution vii. Agreeing for inspection of its books by the lending institution. f. If the cooperative institution borrows funds for on-lending to its affiliates, it will be constrained to follow strictly the guidelines of financing institution in its lending operations. The member of a cooperative institution can alone get the services of financial assistance by becoming a regular member/ associate member of the organisation.In the aftermath of the implementation of Prof. Vaidhyanathan Committee recommendations, despite the nomenclature of Short Term Cooperative Credit Structure, these institutions have been permitted to finance ST/MT/LT agricultural/ non-agricultural activities. g. On Lending: The credit cooperatives which are being financed by the (higher) lending cooperative institutions inter-alia have to enforce certain disciplines based on the policy circulars of lending institutions. There are multifarious government loan schemes for the benefit of backward class and minority class people. Under these schemes, the Government lends at subsidised interest rate to the ultimate identified borrowers through credit cooperatives. The borrowing institutions from government have to strictly enforce financial discipline so that benefit reaches the targeted people. The medium term loans for asset creation for rural people through credit cooperatives attract subsidy from Government subject to the condition that such subsidy amount to be adjusted to loan dues towards final instalments of the loan provided earlier instalments were duly repaid. The cooperative institutions which implement these schemes should carefully watch the loan accounts while availing refinance for them. 36 - III

h. Prudential norms: The higher financing agencies viz., NABARD, Apex Cooperative Bank cautiously provide refinance to DCCBs under ST Agriculture and ST Weavers, based on the Non-overdue Cover (NODC), etc. Despite the implementation of prudential norms to DCCBs (from 1996-97 onwards) PACS (from 1.4.2010), the major issue of imbalance at the level of PACS is to be dealt with by improving collection at ground level of 100% of the loans by due date. Similarly certain conditions while sanction ST weavers imposed which is to be scrupulously followed by the borrowing cooperative institutions viz., i. ii. iii. iv.

One Junior Supervisor for inspecting Ten PWCS One Senior Supervisor for overseeing Three Junior Supervisor Adequate cover for drawing under wavers' finance as per NABARD guidelines. Special programmes under weavers' finance to be followed by Asst. Director of Handlooms.

j. The large scale lending activities to cooperative processing institution/ NFS activities by DCCB were done previously by 'Credit Authorisation Scheme' which have subsequently come under 'Credit Monitoring Arrangement'. This transformation led to turning of such loan accounts into NPA. Hence borrowing units to be supervised by technical persons and monitored by Chartered Accountants following NABARD guidelines. Even though in certain cases finance is provided under consortium arrangement, the funds of cooperative lending institution are to be safeguarded. k. The recovery mechanism prescribed under the State Cooperative Societies Acts ensures relatively faster recovery at cheaper rates and hence the cooperative recovery procedures shall form part of loan policy of the cooperative institutions.

37 - III

CHAPTER – 4

PROCESSING OF CREDIT PROPOSALS 1.

General: a. The ideal advance is one, which is granted to a reliable customer for an approved purpose in which the customer has adequate experience and a security is taken as insurance in case of need.The management of credit portfolio has three important stages, viz.,

2.

i.

Pre-sanction appraisal.

ii.

Sanction and disbursal.

iii.

Post sanction/disbursal follow up and monitoring.

Forms of Credit: a. Working Capital Loans: i.

The borrowers generally require credit facilities either for meeting their working capital requirements or for purchase of fixed assets, construction of factory buildings or office buildings etc.

ii.

The borrower may require finance for pre-sale transactions i.e. for the purpose of production. During the process of production it is required to hold raw materials, work-inprocess and finished goods at different levels. The actual holding of such inventory depends on factors like nature of industry, size of the unit, volume of production and sales, availability of raw material, capacity utilisation, etc. Banks are extending cash credit limits for financing against stocks and inventories.

iii.

The borrower may require finance for meeting post-sales transactions i.e. credit sales through bills. Banks extend credit facilities for post-sales transactions by way of Bill Finance (Bill purchase and discounting of Bill, Bills Negotiated under LC).

iv.

Consideration of Credit Needs:While considering the proposals for working capital assistance, the Bank/branch should inter alia take the following aspects into consideration. l

Past performance, past holding level

l

Future projections - It must be ensured that they are realistic, justifiable and there is no huge increase in projection as compared to past performance except in case of expansion/ modernisation programme.

l l

possible diversion to other units or uses, the quantum of funds being ploughed back from profits into business, 38 - III

l

l

total outside liabilities (there should be a reasonable proportion between the total outside liability and the owned funds of the borrower so that the creditors can also have a satisfactory margin) and goods bought on credit - Goods which have already been obtained on credit should not be financed.

b. Term Loan:

3.

i.

The borrower may require funds for purchase of fixed assets, for construction of Factory Building, for construction of Office Building, for purchase & erection of machinery and equipment.

ii.

Such assistance may be provided by the Bank/Branch in the form of Term Loans/Deferred Payment Guarantee (DPG). Project appraisal techniques must be followed for considering proposals involving Term Loans/DPG.

Documents / Documentations: Irrespective of the nature/quantum of credit facility, a fresh/renewal proposal should contain the following essential particulars: a. Name, address of the borrower/guarantor along with Asset Classification assigned to the borrower. b. Net Worth of the borrower/guarantor along with the Assets and liabilities statements and credit reports. c. Purpose of advance/nature of facility required. d. Quantum of Credit requirements of the borrower. e. Basis on which projection of performance viz., production/sales etc. given and the reliability of such projections. The acceptance of the projections must be based on the actuals of the previous period and firm orders on hand. f. Margin proposed, sources from which the borrower would bring in such margin. g. Nature and value of security offered, its title, the mode of charging such security. h. Deposit/business connection already available from the borrower or from associate concerns or proposed deposit/business connection. i. Scope of availability of refinance, if any, in case of term loans j. Availability of Credit Guarantee cover, in case of Export credit facility or facilities granted to priority sector segments. k. Detailed working of account/facilities in case of existing borrowers enjoying facilities with the Branch along with the Branch Manager's comments. l. The renewal proposals should also carry the particulars such as : 39 - III

Date of inspection, l Name and designation of the officer who inspected the go down/unit and l Brief remarks with observation made during the inspection by the branch regarding value of stocks and other securities including adverse features, if any. m. Proposals should contain full information regarding the extent of deposit held by the customer/guarantor and/or the relatives/connected concerns or the extent to which the customer has been useful to the bank in canvassing deposit from others. Since the level of bank's advances has to be oriented with bank's deposit position, it is necessary that branches invariably furnish information on deposits held by the borrower/guarantor with the Bank, while submitting proposals for advances, in order to avoid the risk of the bank rejecting proposals which may be beneficial to the bank from the deposit angle. l

n. At the same time, it should be ensured that there is no dilution in credit appraisal for the sake of deposit benefits. It should also be seen that there is no violation of any of the guidelines of the RBI, NABARD, Government of India and any other laws of the country. 4.

Pre-sanction Process:The stages of Pre-sanction are: a. Obtaining duly filled in application in the prescribed format from the prospective borrower along with the requisite documents. b. Analysis of the financial statements submitted by the borrower to assess his credit worthiness. c. Analysis of project/proposals to assess/confirm the credit requirements. d. The borrower and the Guarantor /surety should be personally interviewed by the Bank Officer authorized to sanction the credit facility to ascertain the identity of the borrower as per KYC Norms. e. The details of relations employed in the Bank and the details of legal heirs of the borrower and guarantors shall be obtained. f. During the personal interview of the borrower, the complete details of the borrower, his status, his family background, nature of business/income, his economic conditions, financial stability, various types of risks involved, etc. should be collected. g. During the interview, the Bank Officer should adhere to the Banker – Customer relationship with the Borrower and furnish the details / terms & conditions to be adhered to, as per the prescribed Policy / norms by the Bank without any violation of his discretionary powers. h. The details of legal heirs of the borrower / guarantor (Name, Age, Relationship, Address, etc.) should be obtained in the loan application. These details should be obtained from the borrower and guarantors separately. The information should be updated on an on-going basis, till the loan dues are totally cleared, even after filing suit against the borrower. The recourse for recovery from the legal heirs (to the extent of property inherited by them) should not be impaired for want of these details. 40 - III

i. After scrutiny of the application, analysis of the financial statements and personal interview of the Borrower, subject to the delegation of powers, the sanctioning authority vests with the Branch / authorized officer of the Head Office of the Bank. j. If the applicant is already a customer of the bank, a scrutiny of the operations in the account will reveal the trends, connections, nature of business dealings etc. Before sanctioning a credit facility, the borrower's place of business should be visited and the correctness of the data furnished by the borrower should be ascertained. It should also be ensured that the borrower confines himself exclusively with one bank except in case of borrowers coming under consortium arrangement. k. The data collected should be critically and carefully analysed. After analysing the data, the branch has to prepare Credit report/s of the borrower / guarantors and present the applicant's request in the form of a credit proposal to the sanctioning authority. l. For all credit proposals, branches should bring in all major aspects/particulars that are covered in the Board Memorandum Format, wherever warranted. 5.

Credit Report: a. Credit Report is the basic document prepared by the Banker for assessment of the borrower's Character, Capital and Capacity (3 Cs). b. Before extending any credit facility whether fresh or additional, to any of the units belonging to a particular group, the branch should obtain a credit report/consent of the Lead Bank financing the main Company. c. In preparing credit reports, the branch should be careful about the following: l l l l l

Inclusion of assets not standing in the applicant's name Inclusion of other's share of property Suppression of encumbrances on the property Overvaluation of assets Suppression of liabilities.

d. As the sanctioning authority relies on the credit reports received from the Branch Manager, it is necessary for the latter to compile credit reports on borrowers, only after independent verification of the information relating to the assets and liabilities furnished by them. e. If the estimates of the means as furnished by the applicant is very much higher than those furnished by outside parties, the Branch Manager should have a cautious approach in assessing the credit worthiness of the party. f. The branch should indicate in the credit report both the fund based and non-fund based limits enjoyed by the party at different offices of the bank including the branch compiling the credit report and also at other banks. If the borrower has stood as co-obligant/guarantor for any facility extended to a third party, such details should also be incorporated. 41 - III

g. In the event of the prospective borrower enjoying credit facilities with other banks, confidential report should be obtained from such banks and a certified true copy of the same should be sent to the appropriate sanctioning authority along with the proposal. h. Particulars of all litigation against the borrower/s or their partners/Directors etc. (initiated by other financial institutions/banks) should also be incorporated in the credit report. 6.

Net Worth: The tangible net worth shall be arrived at as under: a. For individuals/ Proprietorship concerns. i. Add:l Movable assets such as Bank deposits, gold ornaments/jewellery etc. l Personal immovable properties ( self acquired properties of an individual and also any share in the ancestral properties acquired on the division of the Joint Hindu Family) ii. Less:l Loans taken against any of the above assets in individual name or offered as third party security. b. For partnership / Joint Hindu Family firms: i.

Add:l Capital invested in the business l Undivided profits l Total worth of individual partners

ii.

Less:l l

Accumulated losses Investments made by partners in the firm.

c. For Limited companies:i. ii.

d

Add:l Paid up capital and Free Reserves Less:l Accumulated balance of loss, balance of deferred revenue expenditure and also intangible assets in all the above cases.

When the borrower's/ guarantor's declared Net worth exceeds Rs.50 lakhs, the following documents should be obtained: i. Certificate from a Chartered Accountant ii. Photocopy of the title deeds in case of immovable properties iii. A declaration that any disposal of properties will be intimated to the Bank iv. A declaration that additional liability assumed will be intimated to the Bank 42 - III

e. It is necessary to obtain a separate statement on the contingent liabilities of a borrower/guarantor along with the Assets and Liabilities statement. Even though the contingent liabilities need not be taken into account for the purpose of arriving at the net worth, a footnote should be given in the Credit report. While appraising proposals, the appraising authority should consider the likely impact of the contingent liabilities on the party's financial position. f. Branches should send one set of all financial statements such as Profit and Loss Account, Balance Sheet, Assets and Liabilities Statement, Wealth Tax/Income Tax Assessment Order and Credit Reports received from other banks directly to the appropriate sanctioning authority along with the fresh/renewal proposal. g. Reasons for increase or decrease in net worth should be indicated in the report. Reduction in net worth due to disposal of fixed assets or incurring of loss is a danger signal. If there is any increase in fixed assets, source of acquiring them should be ascertained or it should be verified whether it is due to any revaluation of the assets. 7.

Assessment of quantum of credit required: a. In order to assess the credit requirements of the applicant, the purpose, the period for which the advance is required, type of facility, security offered, additional benefits that may accrue to the Bank etc. should be ascertained without any ambiguity. b. The assessment of Working Capital shall be made, taking into account reasonable projected level of activity, so as to avoid frequent sanction of adhoc limits and excess drawings. Sanctioning of adhoc limits shall be restricted to execution of additional orders, bunched import, procurement, etc. Excess drawings shall also be permitted only against expected receipt of funds in transit/ receivables and not on a regular basis. c. The assessment process involves three stages i.e.: i. Assessment of the level of current assets required to be held for a given level of production, ii. Determination of credit other than bank finance available to the borrower and iii. Calculation of bank finance required. d. The following methods are adopted for assessment: i. Turnover Method: Under this method, the limit will be arrived on the following basis: l 20% of the projected annual turnover or l The actual working capital needs as assessed in detail by STBC method (refer para on STBC below ) whichever is higher; l The Bank Finance is intended only to support the need based requirements of the borrower. In order to ascertain the extent of assistance, the marginal contribution by way of Net long surplus viz., Networking Capital (NWC) should be reckoned. If it is more than 5% of the turnover, the limit (being 20% of the turnover) shall accordingly be reduced. For instance, if NWC is 8% (3% in excess of the prescribed 5%), then the limit will be computed as 17% (20% minus 3%) of the turnover. Thus, the aggregate of the limits plus NWC shall not exceed 25% of the turnover. 43 - III

l

While applying the above simple formula of 20%, it has to be ensured that the borrower's financial health is satisfactory as revealed by the following: Ø Ø

Ø

ii.

Borrower's operations result in net profit every year. Borrower's Credit Ratio as per the latest Audited Balance Sheet is not less than 1.20. (Current Assets around 331/3% of sales and Net Working Capital around 5 to 6 % of sales). Borrower's Total Outside Liabilities do not exceed 3 times of the equity (equity would include quasi-equity represented by subordinate debt, owned to owners of the business).

Short Term Bank Credit (STBC) Method: l

The Short Term Bank Credit Methodology of working capital assessment should be made applicable to all industrial advances in excess of Rs. 2 Crores. However for SSI units, the method will be applicable only for fund based working capital limits of over Rs.5 crores. The computation of working capital under this method is primarily concerned about the level of Current Assets and the Net Working Capital.

l

Level of Current Assets: The level of Current Assets is expressed as a percentage of Gross Sales projected. However, it is necessary to ensure that no individual item of Current Assets is held for unduly longer periods. Banker has to use his judgement and experience in appraising inventory. There should not be any excessive inventory with speculative interest to make profits. If excessive raw materials is due to poor working capital management and inefficient distribution channel, Bank should not encourage this.

l

Net Working Capital: The minimum level of Net Working Capital (NWC) will be the highest of the following: Ø

25% of the assessed level of current assets less Annual maturing term liabilities Ø 16.66% of assessed level of current assets* Ø Actual projection as per Balance Sheet *Applicable only for companies with annual maturing term liabilities l For borrowers with no Annual Maturing Term Liabilities, current ratio should be minimum 1.33. However, in respect of borrowers having annual maturing term liabilities, the relaxation is made in the following manner: 44 - III

Ø

e.

f.

g.

h.

i.

8.

Current Ratio should be at least 1.20 where annual maturing liabilities are included under Current Liabilities. Ø Current Ratio should be at least 1.33 where annual maturing liabilities are excluded from current liabilities. Ø In cases where the Current Ratio remains below the benchmark level continuously for a period of 3 years, the Bank has to re-examine the need for restructuring or otherwise after analysing the reasons. If the borrower enjoys more than one facility with the bank, the particulars of all the limits including the proposal under consideration, the outstanding balances and the conduct of the respective accounts should be given in the proposal. In case of advances commented upon by NABARD Bank's inspectors in the Inspection Reports, the nature of comments and the progress of rectification of irregularities should also be mentioned in the proposal. Where a customer who enjoys facilities with other banks approaches us for fresh/additional facility, reports from other banks should be obtained and sent along with the proposal. The need for having facilities with more than one bank should also be stated in such cases. RBI guidelines on Consortium Lending should be borne in mind, before handling the proposals of borrowers enjoying credit facilities with more than one bank. If any branch of another bank has an attitude of non-cooperation and fails to furnish reports in spite of our reminders, branches need not give up pursuing the proposal. They could obtain written or oral reports from reliable and knowledgeable persons/firms/companies. In case of oral reports, branches must record in their books the name/s and mailing address/addresses of the informant/s, the date/s and time and place/s of the report/s and the precise text of the reports. Branch Managers should report to the sanctioning authority the fact of his failure to obtain the required information despite his concerned efforts. He has to furnish the name/s address/addresses, date/s, time and place/s and precise nature of reports obtained from other persons/firms/companies. The sanctioning authority will then examine the proposals on their merits. While assessing the credit requirements of a party, the branch should take into consideration the party's financial requirements for the next 12 months. This will avoid referring to the sanctioning authority very often for additional/adhoc facilities. However, for reasons unexpected, if temporary increase in limits or additional facilities are required and recommended, the reasons for such increase or additional facility and the period for which they are required must be clearly stated.

Time Norms for disposal of Credit Proposals a. Proposals must be prepared in triplicate of which two copies shall be forwarded to Head Office and the third copy retained for branch records. Of the two copies received, one copy will be returned by the Head Office with their sanction or rejection order. b. In any case, a proposal should not be kept pending beyond three months from the date of receipt from the branch subject to the time norms prescribed for priority sector advance/other advances. 45 - III

c. All sanctioning authorities should exercise caution, while entertaining fresh proposals and refer to the list of Defaulters/Wilful Defaulters /caution Lists circulated by HO/ECGC/RBI/BIFR/CIBIL so that financing to such persons/activities shall not be entertained. For this purpose, they must diarize the lists circulated by the above authorities. 9.

Sources of Information: a. Application for advance:The application tendered by the prospective borrower is one of the primary sources of information available to the Bank. The Branch Manager has to verify the same including for KYC compliance, while appraising a proposal. b. Market reports through friends or competitors of similar trade or business:All such reports sometimes through contradictory to each other have to be weighed independently and a balanced opinion has to be formed about the 'three Cs' of the borrower. At least, two opinions from parties unconnected with the constituent should be furnished. c. Mode of living: While preparing a credit report, the applicant's mode/style/status of living has to be ascertained to assess whether he is normal/moderate/lavish in his lifestyle. d. Borrower's other accounts: i.

If the Borrower is having accounts with other banks, the transactions of such accounts are to be analysed.

ii.

Income-tax assessment order/returns to ascertain the various sources of income and the investments declared may be studied.

iii.

Wealth-tax assessment order/returns may be verified to ascertain the various properties furnished in the Assets and Liabilities statement.

iv.

Sales-tax assessment order/returns may be compared to ascertain the turn over declared/assessed in the financial statements given by the borrower.

v.

More details about the borrower may also be obtained from the following:: l

Reports about auctions and decrees in Government Gazette.

l

Registration, revenue and municipal records.

l

Reserve Bank Credit Information Bureau/ Credit Information Bureau of India Ltd (CIBIL).

l

Report from Trade bodies, Merchant Associations and Export Promotion Councils. 46 - III

Note: The Reserve Bank of India is empowered under Section 45 B of the Reserve Bank of India Act 1934 to collect credit information from banks and furnish such information to any bank which applies for such information. In order to get the requisite information from RBI, the applicant bank must be contemplating to enter into or should have already entered into a financial arrangement with the party on whom the report is sought. e.

Interviewing the borrower: The points that will be covered in an interview with the borrower are. i. his business, ii. his capital, iii. his experience in the line, iv. working results, v. amount of advance and period, vi. purpose of the advance, vii. source of repayment, viii. terms of repayment, ix. security offered, x. type of charge available, etc.,

Note: While ascertaining the assets and liabilities of the borrower/ co-obligant/ guarantors from independent sources, Branch Managers should also ascertain this information from the borrower/ coobligant/ guarantor orally where submission of written Assets and Liabilities statements have been waived under exceptional circumstances. Separate Credit Reports for borrowers, guarantors, directors, etc., are to be compiled. f.

Statements of Assets and Liabilities – Scrutiny and Verifications:One of the vital sources of information for compilation of credit reports is the Assets and Liabilities Statement submitted by the borrower/ guarantor to the Bank. The Assets and Liabilities Statements are to be necessarily obtained along with the applications for credit facilities. The general guidelines forScrutiny of Assets and Liabilities Statement shall be: i. The Assets and Liabilities Statements should be obtained separately for each applicant and guarantor. ii. While obtaining the Statements, it has to be ensured that they are duly dated and signed by the borrower/guarantor. They should bear the latest date as far as possible and should be obtained within a reasonable time, say, not more than 3 months from the date of such statements. ii. The statement shall contain complete details regarding the assets and liabilities of the borrowers and guarantors. It must be accurate by collecting documentary evidences regarding all movable and immovable assets of the firm/ person to whom the statement is related to. Similarly, all liabilities must also be recorded to arrive at the actual worth. 47 - III

iv.

In respect of immovable properties, the particulars of the document like registration number, date and address of the Registrar Office etc. should be recorded in the Assets and Liabilities statements submitted. v. If the property of a guarantor has already been offered as a security to the Bank or/ Financial Institution, the value of the same has to be excluded while arriving at the net worth of the guarantor. vi. It is necessary to obtain contingent liabilities of a borrower/ guarantor along with the Assets and Liabilities Statement. Even though the contingent liabilities need not be taken into account for the purpose of arriving at the net worth, a footnote should be given in the Credit Report. vii. While appraising a proposal, the appraising authority should consider the likely impact of the contingent liabilities on the party's financial position. viii. If any of the guarantees issued by the Bank on behalf of the borrower/ guarantor in favour of other banks/ Government Department is invoked or action initiated, then such commitments must also be treated as funded liabilities. ix. Branches must obtain Assets and Liabilities Statement from borrowers and guarantors once in a year in all borrowal accounts and compile reports. All proposals (fresh and renewal) should invariably be accompanied by Assets and Liabilities Statements and Credit Reports. x. Reasons for increase or decrease in net worth should be indicated in the credit reports. Reduction in net worth due to disposal of fixed assets or incurring of loss is a danger signal. If there is any increase in fixed assets, source of acquiring them should be ascertained or it should be verified whether it is due to any revaluation of assets. g.

Sole Proprietorship Concerns: In case of sole proprietorships, the assets and liabilities of the firm and that of the proprietor should be merged to have a clear picture of the net worth. Alternatively, in the personal assets and liabilities statement, the capital employed in the sole proprietorship concern should be shown as Investment in Business. The other assets held by the sole proprietor outside the business should be shown in respective columns of the Assets and Liabilities statement.In respect of sole traders/partnerships, it may be based on their declared assets and liabilities (and their audited Balance Sheets, if available) and verification thereof shall be done from independent sources, the sales-tax/ income-tax/ wealth-tax returns and assessment orders, etc.

h.

Partnership Firms: In the credit report format of the firm, there are columns for reporting individual net worth of each partner of the firm. For compiling the individual net worth of the partners, Assets and Liabilities statements from individual partners showing all their private assets and liabilities should be obtained and credit report prepared. The capital employed by a partner in the firm should be ignored in the individual credit reports of the partners, as these 48 - III

these investments form part of the firm's Net Worth.In case a firm is reconstituted after submission of the credit report, the same should be indicated at the top of the report. Any reduction in the estimated worth of the firm/partners should be cautiously studied.In the event of the branch accommodating the partnership firm and the partners, it has to be ensured that a partner's Assets and Liabilities statement submitted for the firm's advance is not inconsistent with the one submitted for advances availed by him in his personal capacity.The particulars of the bankers of associated firms, facilities enjoyed and the financial position of the associated firms should be carefully studied to avoid diversion of funds. i.

Limited Companies: In case of companies, their audited Balance Sheets and Profit & Loss accounts for three years should be obtained and an analysis and interpretation of the financial statements shall be done. In case of non- corporate borrowers enjoying working capital limit of Rs.10 lakhs and above or having an annual turnover of Rs.40 lakhs and above, audited Balance Sheet and Profit and Loss account should be obtained along with the auditor's report.

j.

Verification and Valuation of Assets and Liabilities: A check list on verification and valuation of various assets shown in the Assets and Liabilities Statement is given below: No.

List of Documents to be verified

Valuation Procedure

i. In case of Immovable properties (Land and Building) a. b. c. d. e.

Non- encumbrance certificate Sale deed and other title deeds, patta, etc. Wealth tax assessment order Municipal tax receipt, ground rent receipt Search report on the searches made in the office of the Registrar of Assurances f. Registration of charges with Registrar of Companies in case of Limited companies e. Verification of charges in the register of charges maintained by the company ii. In case of Machinery a. Original sale invoices of plant and machinery should be verified. Copies of the same should not be accepted Cost less Depreciation. i.e., Note: The factory should also be visited Book value to see that the machinery is in working condition iii. In case of Case and Bank balances a. Pass Book or Statement of account As cash balance cannot be physically verified by the Branch b. Balance Sheet statements or discount enquiries.

49 - III

iv. Realisable Book Debts a.

Making enquiries as to the long pending

b.

Search at the office of the Registrar of Companies (in case of limed companies) Test check of prospective borrower's account books Bazaar reports In case of Investment in Government Pro-notes(GPNs) Value given in the Balance Sheet (it is usually valued on the cost price or market price whichever Government Promissory notes is lower) Shares and Share certificates and Value given in the Balance Sheet Dividend Warrants (it is usually valued on the cost price or market price whichever is lower). In case of D'mat shares the statement of account issued by the depository participant should be verified. Life Policies and last Premium paid Total amount of premium paid receipts

c. d. v.

vi.

vii.

10.

Sundry Debtors figure less reserve for bad and doubtful debts given in the audited Balance Sheet

Over-trading and Under-trading: a. Over trading implies doing more business than that can be conveniently carried on with the finance available. In other words, given the credit period for debtors and creditors and the net working capital available, there is a limitation on the sales/turn over that is possible. Any further increase in sales requires pumping in of additional working capital. b. If a unit attempts to sell more without bringing in the necessary working capital, then it is a case of over trading. The main feature of over trading is that the unit is bent upon selling goods without having control over realization of the sale proceeds. With the result, it is not in a position to meet the obligation to its creditors, payment of Government dues etc. Acute cash shortage is always felt and the facility is always fully utilized and/or the account is in excess without any seasonal fluctuations. c. Symptoms of over trading: Bank account will reveal hand-to-mouth position as follows: i. Smaller swing-no healthy fluctuations in the operations ii. Development of hard-core- balance in the account, which remains almost constant. iii. Frequent excess drawings 50 - III

iv. Frequent return of cheques v. Payment in round sums to suppliers vi. Issuing post-dated cheques d. Two clear symptoms of over trading are: i. High inventory turnover ratio. ii. Low current ratio. e. The following are the dangers arising out of over trading: i. Most of the profits tend to be book profits only. ii. Severe cash shortages will be experienced. iii. Heavy bad debts will result. iv. Pressure from creditors will mount up and they may take the business to bankruptcy. f. Under-trading (Conservative): i. There is another typical situation known as under-trading which is just the opposite of over trading. Under-trading means trading at a level which is far below the limit that the resources can permit. Its major symptoms are: l Low inventory turnover ratio and l High current ratio. ii. If an organization under-trades, its installed capacity remains under-utilised. Due to low inventory turnover, there will be high stock carrying costs. 11.

Staff Related Advances: a. Normally, no credit facility should be granted by the bank to the spouse/close relatives of their employees for the purpose of any trade/business. On exceptional circumstances, the competent authority can grant such credit facility depending upon the genuineness of the case. Close relative for this purpose would include the relationships as shown below:

Spouse Father Mother (including step-mother) Son (including step-son) Son's wife Daughter (including step-daughter) Daughter's husband

Brother (including step-brother) Brother's wife Sister (including step-sister) Sister's husband Brother (including step-brother)of the spouse Sister (including step-sister)of the spouse

51 - III

b.

c.

d. e.

f.

12.

HO alone is empowered to grant advances to relatives of staff, even if the limits would otherwise fall under the discretionary power of the authorities at a lower level. Stricter credit appraisal and staff accountability should be ensured in processing/monitoring of staff related accounts. In case of advances to relatives of staff, the guarantee of the staff to whom the proposed borrower is related shall, normally, be stipulated in the terms of sanction by the sanctioning authority. Even for the existing loans, the guarantee must be insisted upon, if sanction stipulates so. Advances to the directors / relatives of Directors of any Bank has to be referred to Head Office. No officer or any committee comprising inter alia an officer as member, should, while exercising powers of sanction of any credit facility, sanction any credit facility to his/her relative. such a facility should ordinarily be sanctioned only by the next higher authority. When a credit facility is sanctioned by an authority other than the Management committee of the Board to: i. any firm in which any of the relative of any senior officer of the bank holds substantial interest or is interested as a partner or guarantor or ii. any company in which any of the relative of any senior officer of bank holds substantial interest or is interested as a Director or guarantor, the sanctions, other than the exempted categories, should be reported to the Management committee of the Board. iii. In case of consortium arrangements, norms relating to grant of credit facilities to relatives of senior officers of financing bank will apply to the relatives and senior officers or all the participating banks. iv. It should be made as a condition that where the declaration made is found to be false subsequently, then the bank should be entitled to revoke and/or recall the credit facility.

Rejection of Proposals a. To have consistency, the reasons for rejecting a proposal may be stated as: i. Past dealings with the bank not satisfactory; ii. Project not considered technically feasible; iii. Project not considered financially viable; iv. Party's experience in business does not inspire confidence; v. Credit rating is not of the required standard; vi. Any other to be specified; b. If a proposal is rejected, the reason for rejection shall have to be communicated in writing. The rejection letter should be worded briefly on the following lines and any wording to suggest that the rejection was made by a particular office or officer shall be avoided. 52 - III

'

i.

We have for acknowledgement your letter/application dated ………… requesting for an accommodation for Rs……… We gave full and mature consideration to the matter and regret to have to advise you that the proposal does not suit the Bank, (express the appropriate reasons applicable to each case) in view of (1) economic reasons (2) technical viability (3) operational difficulties. Thanking you for the interest shown in us'.

c. In case of credit proposals upto Rs.2 lakhs, any of the reasons as illustrated below may be attributed for rejection of the same. Branches should incorporate the appropriate reason in the rejection letter written to the applicant: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv.

Applicant not within the service area of the Bank's branch Activity not viable/ not feasible Lack of experience/ skill of the borrower in the activity proposed. Past experience of the borrower is unsatisfactory Bank's experience with similar line of activity is not satisfactory. Borrower overaged. Persisting overdues (direct or indirect) with the Bank/ other banks. Application not conforming to the Bank's Loan policy. Application not conforming to scheme requirements Projections/estimates not realistic Borrower's financial ratios not within the Bank's acceptable parameters. Proposed activity does not come under bankable proposition. Insufficient income to meet commitments to the Bank. Application does not hold the registration / permission issued by competent authority (wherever registration is applicable) xv. Non-compliance with the terms/ conditions of previous sanction. xvi. Other reasons(to be clearly specified) b. In cases of SSI sector, Educational Loans, borrowers belonging to SC & ST and other general proposals falling under the powers of higher authorities, if rejection of application is to be made by the Branch Manager, it can be with the approval of the Head Office. c. A proper note shall be made about the rejections including applications related to priority sector advances.

53 - III

CHAPTER - 5

CREDIT SANCTION 1.

General: a. After analysis of the credit proposals, the credit shall be sanctioned by the appropriate authority of each Bank as per the prescribed norms/delegation of powers, duly approved by the Board of Management along with relevant/necessary/prescribed terms and conditions. b. On approval by the Board of Management, the sanction should be informed to the borrower in writing mentioning therein the terms and conditions to be complied with. The sanction communication should clearly divide the terms and conditions into Pre-disbursement conditions and Post-disbursement conditions.

2.

General Terms and Conditions of Sanction: a. A copy of the sanction letter and terms and conditions should be resubmitted to the Bank duly signed by the borrower as a token of acceptance. b. The advance will be released only upon completion of documentation in all respects as per Bank's rules. c. The limit /advance is valid for a period of …………. years and is repayable in monthly/ quarterly/ half – yearly/ yearly instalments. d. Processing fee and other charges as prescribed by the Bank should be paid in time. e. The rate of interest/charging of interest will be …… % as prescribed by the Bank f. Bank is entitled to charge and recover interest, various fees, charges as per actuals / prescribed tariff from the borrower as applicable from time to time. g. The limits shall be availed within the prescribed time limit from the date of communication of sanction. h. The advance must be used for the purpose for which it is sanctioned. Unless otherwise specified, the working capital limits disbursed are valid for a period of one year from the date of sanction. For any request for renewal/enhancement, application should be made at least three months in advance furnishing all the relevant data as required by the Bank. i. Acceptance of immovable properties offered as security is subject to the legal opinion of the Bank's approved lawyer conveying a clear, valid, subsisting and marketable title. j. Valuation of the property, wherever given as security, should be done by the Bank's approved engineer/revenue authorities/ approved valuer. k. In the case of immovable properties given as security, the borrower should furnish up-to-date encumbrance certificate showing NIL encumbrance and up-to-date tax paid receipt at the time of documentation. l. Immediately on completion of 4 months from the date of creation of Equitable Mortgage, further encumbrance certificate should be produced. Thereafter, encumbrance certificates and property tax paid receipts shall be produced every year. 54 - III

m. Securities for one or more facilities shall also stand as additional security for all other facilities granted or shall be granted from time to time to the said borrowers, unless specifically waived by the Bank. n. Fixed assets charged to the Bank shall not be leased / disposed / substituted / re-located / mortgaged / assigned without the prior approval of the Bank. o. All the assets charged to the Bank [except for the assets exempted from insuring in certain loan Products/ Schemes] shall be adequately insured against all attendant risks at the expense of the borrower(s). The insurance policy with Bank clause (viz. Bank as mortgagee, hypothecatee or pledgee as the case may be) shall be lodged with the Bank. The insurance cover shall be kept in force at all times through prompt renewals and with suitable enhancements to include any increase in the value of securities. p. Machinery, equipment, vehicles, etc. charged to the Bank should be painted with the Bank's name or affixed with the bank's name board. In the premises where stocks hypothecated/pledged to the Bank are stored, Bank name board with specific mention of the branch name should be displayed prominently both inside and outside the premises. q. Assets charged to the Bank are subject to inspection by Bank's officials from time to time. r. For working capital facilities against stock etc, monthly stock statement with breakup of stocks as required by the Bank is to be submitted. Delayed submission of stock statements / financial statements etc., will attract levy of penal interest as per Bank's rules in force from time to time. s. All fund based/non-fund based /fee based transactions shall be routed only through the account with the Bank. t. Interest will be generally charged on the last working day of every month and should be paid as and when charged. u. Default in payment of interest / instalments on the respective due dates will attract overdue interest on the defaulted amount at a described percent over and above the contractual / Maximum interest rates or at such rates as applicable from time to time. v. Stipulated margin on securities charged to the Bank should be maintained during the currency of the advance. w. If any default / deterioration occurs in any security charged to the Bank, the liability of the borrower shall become immediately due and payable. x. The Bank is not under any obligation to make further advances or other accommodation to the borrower, unless deemed fit and necessary by the Bank. y. Changes, if any made to the structure of ownership/management of the borrowing concern shall be promptly informed to the Bank. z. Besides the general terms and conditions, Scheme-specific / activity-specific terms and conditions will also be stipulated in the sanction order and should be complied by the applicant, based on the nature of facility; constitution of the borrower; purpose; end use; security and nature of charge on the security. 55 - III

aa.

For Scheme-specific / activity-specific loans for activities like Small Scale Industries, Agriculture, allied activities, Poultry, Minor irrigation, Land Development, Self Help Group, Crop Loans for specific crops, Personal loan products, consumer articles, vehicles for Commercial / Personal use, Retail Traders, service providers, etc. specific terms and conditions in additions to the general conditions will have to be insisted upon in the sanction letter. bb. The Bank may at its discretion recall the entire advance upon default of a single instalment / interest. cc. In addition to these terms and conditions all the facilities sanctioned shall be subject in NABARD, guidelines directives issued by RBI or any other Regulatory Authority from time to time. dd. The Bank reserves to itself the right to withdraw/cancel / suspend / reduce any or all the facilities sanctioned/alter /amend /vary the terms of sanction including rate of interest at its sole discretion at any time without notice and without assigning any reason. ee. No relaxation shall ordinarily be made in respect of the Bank's norms or in the standard set of terms and conditions. In exceptional cases, requests for relaxations may be considered on merits by appropriate Higher Authority as provided for in the rules by the bank. ff. No relaxation shall ordinarily be made in respect of the Bank's norms or in the standard set of terms and conditions. In exceptional cases, requests for relaxations may be considered on merits by appropriate higher authority as provided for in the rules by the Bank. gg. Cover Documents must be obtained for the facilities extended; Proportionate processing charges should be recovered; The stocks / securities / asset created out of Adhoc Limits, if applicable, should be inspected; Stock statements should be obtained, wherever applicable. Note: The standard terms and conditions as stated above are only indicative. They should be suitably rephrased according to specific requirements. For instance, depending on the repayment schedule proposed, holiday allowed, etc., the condition for repayment of instalments may be suitably modified. 3.

Allowing Excess over Sanctioned Limit: a. Credit disbursed beyond the sanctioned level or drawing limit (whichever is less) in a working capital account is termed as Excess. One of the vital areas of credit discipline relates to sanctioning of limits within delegated powers / allowing operations within the sanctioned / drawing Limits. The excess may be caused in any working capital account by any one or combination of the following factors. i. powers as per the prescribed norms. Depletion of stocks under hypothecation leading to reduced drawing limit. ii. Erosion in value of stocks under hypothecation/pledge. iii. Non-servicing of interest, other charges debited to the account and default by the borrower to conduct the account properly. 56 - III

b. Branches should desist from the practice of granting excess over the sanctioned/drawing limits. If there is a need to allow excess based on business requirements, it may be permitted strictly within delegated powers as per the prescribed norms. c. If the credit requirements of a borrower who conforms to financial discipline are properly evaluated, there will not be any need for allowing excess drawings to him. However, considering the need to allow excess for business considerations, which may arise due to unforeseen situations, Branch Managers can consider allowing further debits consciously in the account over the limit sanctioned or drawing limit on the request of the party or otherwise. When there is need to allow excess beyond the tolerance level, the request is to be taken up with the appropriate higher authority. c. Excesses due to depletion or erosion of stocks should be detected in time and ascertained on a case to case basis. Suitable remedial measures should be initiated for recovering the excess or to secure the advance adequately as per the terms of sanction. d. The risk arising out of non-servicing of interest and other charges debited to the account or due to default by the borrower to conduct the account properly shall be mitigated by informing the customers in advance about the interest to be charged and to provide for the same so as to keep the account within the Drawing Limit on the date of debit of interest. However, 15 days' time may be allowed by the Branch Manager to regularise the interest on a case to case basis and on merits. 4.

Guidelines on allowing excesses: a. Branch Managers may be empowered to allow excess drawing in an account subject to the prescribed tolerance level and monetary ceiling, if the following conditions are fulfilled: i. Account is of standard category, ii. Group accounts, if any, are also regular, iii. All terms and conditions of sanction have been complied with, iv. Accounts have regular sanctioned limits in force duly reviewed/ renewed or for which proposals have already been submitted and v. The track record and the operations in the sanctioned working capital limits are good.

5.

Confirmation of Excesses allowed: a. Sanctioning authorities exercising their delegated powers for allowing excess has to report all such sanctions periodically, as per the prescribed reporting system. Such excesses allowed do not warrant a confirmation, if they are allowed within the delegated ceilings and as per the guidelines. b. Prompt reporting is to be made in the prescribed format to facilitate the sanctioning authority to accord confirmation within 30 days. c. The confirmation of excess accorded shall be for the specific transaction or uptothe monetary limit and for the specific period. 57 - III

6.

Overdue Excess / Out of order: a. Any amount due to the Bank under any credit facility is overdue, if it is not paid on the due date fixed by the Bank. Accordingly, beyond the permitted period, if excess persists then it is to be treated as Overdue Excess. b. RBI defines that an account should be treated as Out of Order if the outstanding balance remains continuously in excess of the sanctioned limit / drawing power for 90 days. c. Situations/ requests may come to allow operation in an out of order / overdue excess account, against the credits brought in. Such operations can be allowed with the approval of the competent authority, if the excess level is beyond the delegated limit of the Branch Manager. d. Vigorous follow up action has to be taken for recovery/regularisation of such overdue excesses.

7.

Penal Interest: a. Penal Interest at an appropriate rate over the contracted rate as fixed by the Bank from time to time should be levied for the excess portion till the excess portion is cleared.

58 - III

CHAPTER – 6

CREDIT DOCUMENTATION 1.

General: a.“Documentation”means obtaining of RELEVANT documents (here' relevant' means relevant to the advance, to the terms and conditions of the advance, to the security and to the legal status of the borrower) properly executed by the constituents to whom credit facilities have been sanctioned by the Bank and/or by whom the said facilities are guaranteed. While nature of documents obtained varies with the nature of advance, terms and conditions of the advance, nature of security and nature of the legal status of the borrower, mode of execution thereof varies with the legal status of the borrower alone. b. Correct documentation is essential to ensure the safety of an advance. The documents should be rightly stamped, properly executed and should effectively create the necessary charge on the security. c. The documents should mention : i. The correct name of the parties ii. contain proper recitals iii. Give a detailed description of the security if any to be charged iv. the consideration v. rate of Interest vi. Terms of repayment and vii. Other important conditions agreed to. d Any deviation from the standard form should not be permitted without obtaining the requisite permission from controlling office (Regional/Zonal/Head Office). The legal formalities as to the registration of charge with the Registrar of assurances and /or the Registrar of Companies should be complied with wherever necessary.

2.

Stamping and Execution of Documents: a. Section 17 of the Indian Stamp Act, 1899 states that all the documents chargeable with duty and executed by any person in India shall be properly and duly stamped before or at the time of execution. An unstamped or insufficiently stamped document will not be admitted in evidence or form the basis of a suit. Permission however can be accorded in certain cases by the Court or an appropriate authority to admit an unstamped or insufficiently stamped document on payment of certain penalties in addition to the duty with which the document is chargeable or in the case of an instrument insufficiently stamped the amount required to make up the required stamp duty. It must however be remembered that an unstamped or insufficiently stamped, acknowledgement of debt or promissory Note or Bill of Exchange is an invalid document ab- initio and cannot be admitted in evidence even on payment of duty and or penalty. Stamps are of three kinds i.e. 59 - III

i.

Adhesive Revenue Stamps: Adhesive Revenue Stamps are affixed on Promissory Notes, receipts and acknowledgement of debts. Revenue stamps are cancelled by borrowers by signing across or otherwise. The best way of cancelling a Revenue stamp is by ensuring that the executants signs over all the stamps in such a manner that the signature extends even beyond the stamps.

ii.

Special Adhesive Stamps: Special Adhesive Stamps when affixed to documents are cancelled by Treasury by punching dates across them. Special Adhesive stamps are affixed on Agreements, Bill of Lading, Contracts, Insurance, Bill of Exchanges, Shares etc. Sometimes the Treasury impresses or engrosses the Stamp value on the documents when the Special Adhesive Stamps are not available. If Special Adhesive Stamps or impressed /engrossed documents are not readily available, documents may be executed on Non Judicial Stamp paper for the requisite value of stamps. The Stamp duty must be in accordance with the provisions of Stamp Law in force in the respective States.

iii.

Bill of exchange Stamps.

b. All documents must be executed in the presence of the Manager or any other Officer of the Bank. The parties should sign in full, according to their specimen signatures. If the document consists of number of pages all the pages should be signed by the borrower. As far as possible there should be no correction or overwriting or interlineations in the document. Corrections, overwriting etc. must be signed by the executants. All the blank places in the document should be filled in with the relevant particulars. The execution of the documents and the disbursement of the advance should be on the same date. 3.

Importance of Documentation: a. Appropriate documents properly executed, signify and incorporate the following: i. ii. iii.

The contractual relationships between the Bank and the constituent such as creditor – debtor, agent – principal etc., The nature and description of the security, if any, offered for the advance, and The terms and conditions of the advance.

b. Documents obtained by the Bank form the basis upon which a suit, as and when found necessary, may be filed by the Bank in a competent Court of Law against the defaulting borrower. Although it may be argued that the Bank may be able to proceed legally against the defaulting borrower on the basis of debit entries themselves appearing in its books, the difficulties that confront the Bank in proving each such debit entry to the Court's satisfaction are so enormous that no Bank generally relies totally upon them. In other words, the burden of proof gets shifted to the defaulting borrower when proper documents (which are enforceable) can be produced to the Court by the Bank. In the absence of such properly executed documents, the onerous burden of proof is on the banker. 60 - III

4.

Defective Documentation: Consequences: a. Defective Documentation' means: i. Inappropriate documents, i.e. documents not relevant to the advance. ii. Incomplete set of documents. iii. Documents, not filled in/partially filled in/incorrectly filled in. iv. Documents with unauthenticated over – writings / erasures / cancellation / corrections / Insertions. v. Unstamped or inadequately stamped or improperly stamped documents. vi. Documents not executed properly or not executed by all the persons who are required to execute such documents. vii. Documents executed by persons incompetent to contract, i.e. by persons who have no Legal capacity to contract and hence to borrow. viii. Documentsexecutedbypersonsnotauthorizedtosoexecute,e.g.byagentswhodonot have necessary power to borrow and execute the documents. b. Consequences of Defective Documentation: Defective Documentation may lead to a situation where the Bank may either lose the legal remedy against the borrower and/or the guarantor or may not be able to enforce its rights and the advance may become irrecoverable.

5.

Points for observation while obtaining Documents for Advances: a. Before obtaining documents for advances, it should be ensured that all the facilities are supported by sanction from the appropriate authorities. (Credit facilities, if any sanctioned, beyond the discretionary powers of the branch manager the same should be supported by confirmation of the higher authorities. Sanction letters should be kept attached to the documents.) b. All relevant documents as stipulated in the sanction or as per the bank's laid down guidelines should be obtained in respect of different kinds of facilities granted to the borrowers. c. Documents must ordinarily be executed in the presence of the Branch Manager / Accountant in the branch premises. If documents are required to be got executed outside the branch premises, they must be sent with one of the officers of the Bank, in whose presence only they should be executed. d. The Branch Manager or the Officer in whose presence documents are executed should not initial or sign thereon to authenticate the genuineness of the signature or thumb impression of the executants as such authentication is likely to be interpreted attestation, which in turn may attract higher stamp duty. For this purpose 'Attestation Memo' (as given in the General Annexures (LDOC-1) under Chapter – 48) should be filled in and kept along with the documents. However, where a document is required to be witnessed as in the case of a Mortgage Deed, it may be witnessed and the name, description and address of the witness should be given. 61 - III

e. Where a document is executed by an illiterate or by a person not knowing the language in which the document is written/printed, a letter (as per LDOC) should be obtained duly signed by a person conversant with English language as well as the language of the executant and also known to the bank. In addition the officer in whose presence the documents are executed should prepare a note as per the 'Attestation Memo' (LDOC-1) and keep it along with the documents. f. Documents should be complete in all respects. Blank spaces in the printed document forms should be correctly filled in, before execution and the same should be initialled / authenticated by the executants. Wherever blanks are filled in, the executants should initial/sign against the portion so filled in. The executants should also sign at the end of each page of document. g. All documents should state the place and date of their execution. Normally, all documents should bear a uniform date of execution unless a particular document is required to be executed on a different date. h. Rate of interest entered in all the documents in respect of a particular credit facility granted to a borrower should be uniform. It should be as stipulated in the sanction. i. All documents should be properly and adequately stamped as per law in force at or before the time of their execution. For rate of stamp duty branches should seek guidance from their Regional / Zonal authorities. Stamp duty should be borne by the borrower j. The documents should be affixed with the stamp of the State in which the Branch granting the advance is functioning.If one or more of the executants is / are residing in different states. No further stamps need to be affixed if the Stamp Duty in both / all the States is the same or if the instrument has already been stamped with a higher value stamp. If the Stamp Duty in any state is higher than that prevailing in the state wherein the advance has been granted, the stamps of the former state, (i.e. where the Stamp Duty is higher) should also be affixed. The amount of stamps so to be fixed would be the difference in the rate of Stamp Duty prevailing in these two states. k. If any advances are given in one state to a company the Registered Office of which is situated in another State where the documents are executed, the documents so executed should be first stamped with the requisite stamps of that State where the registered office of the company is situated and thereafter, the said documents when brought into another state where they are to be used, the deficit amount if any, as per the Stamp Act of the second State should be paid. The same will be the position in respect of the documents executed by the partners of a firm in different states. l. The above conditions are not applicable to an instrument executed in or brought into the State of Jammu & Kashmir after it is executed outside the said State. As regards the documents executed in Jammu & Kashmir and relating to properties or things to be done in another state, the said documents when brought in that State will have to be stamped with the full stamp duty payable in that state according to that state laws. 62 - III

m. Revenue stamps should be used for paying stamp duty in respect of the demand promissory notes (and the letters of acknowledgement of debit in some states). In other cases, special adhesive stamps are to be used. Usually, branches should approach the Government Treasury or stamp office to get a reasonable stock of blank document forms duly affixed with special adhesive stamps of proper value. In case of non-availability, non-judicial stamp papers can be purchased in the name of the Bank or the party executing the documents. The Government Treasury / Sub-Treasury, Stamp Office or the authorized stamp vendor (or the Managers of Nationalized Banks in some States) are entitled to affix the stamps and cancel the same. The whole document is not to be typed on the non-judicial stamp paper and the printed document may be typed on the non-Judicial stamp paper and the printed document (with the typed matter duly cancelled under authentication) should be attached to the non-judicial stamp paper. Pages should be numbered beginning with the non-judicial stamp paper and the borrower's full signatures be obtained on all pages. n. Revenue stamp affixed on a document should be cancelled by the executants by putting his/her signature across it. In addition, the executants should also sign the document separately without revenue stamp. Where a document is to be executed by a joint stock company under its common seal, the seal should be put across the revenue stamp. `

o. Documents are required to be stamped at or before their execution. Therefore, branches should note that in no case the date of execution of a document is earlier to the date mentioned in the seal affixed by the Treasury Officer on the stamp for cancelling the special adhesive stamp or the date on which a non – judicial stamp paper is purchased. p. The documents should be executed by the borrowers themselves. However, if it is decided for valid and just if iable reasons to permit the Power of Attorney holder to execute the documents, the relative powers of attorney should be registered in the book soft he Bank and a true copy of the Power of Attorney should be kept with the documents. It should be ensured that they have been conferred with necessary powers to execute the documents on be half of the principals. The irrepresentative capacity should clearly be indicated in the documents. The documents should be signed by the principal also as soon as he/she is available for execution. i.

The document should state full names of the parties. Initials/short names or abbreviated names of the parties should not be written.

ii. In single account, D.P. Note meant for individual should be obtained. Signature of the borrower should be obtained across the revenue stamp/s affixed on the D.P. Note. Letter of continuing security and other documents should also be executed in the same manner as D.P. Note but without affixing revenue stamps (but stamping is necessary). iii. In a joint account, joint and several D.P. Note should be obtained. Parties executing the D.P. Note should sign across the revenue stamp/saffixed there on. Letter of continuing security and other documents should be executed in the same manner as D.P. Note but without affixing revenue stamps. 63 - III

iv.

In case of sole proprietorship concern, joint and several D.P. Note should be signed by the sole – proprietor over the revenue stamp/s in the capacity of the proprietor of the firm by affixing the rubber stamp of his concern, while his signature in the personal capacity should be obtained on the left hand side of the D.P. Note.

q. Letter of continuing security and other documents should be got executed in the same manner but without affixing revenue stamps thereon. The letter of sole proprietorship should, however, be signed by the proprietor in his personal capacity only. i.

In case of partnership firm, joint and several D.P. Note, letter of continuing security and other documents should be executed by all the partners of the firm as usual in the firm's capacity, and personal signatures of all of them should also be obtained on the left hand side of the above documents. The partnership letter should however be signed by the partners in their personal capacity only. Execution of the documents should be under the firm's rubber stamp.

ii.

At the time of scrutinizing proposals for advances to a limited company, the company's objects and powers to borrow and the method prescribed for such borrowing should be ascertained. The Articles of Association of the company should specifically empower it to borrow for the objects stated in the Memorandum. The power to borrow should also indicate the power to give security. It should be ascertained from the Memorandum and Articles of Association whether any restrictions have been imposed upon the company in the matter of mortgaging / charging of its assets. The Articles of Association vest the exercise of the power of borrowing by the company within the limit approved by the General meeting of Shareholders, the borrowing power can be allowed to be exercised after getting a certified copy of the resolution of the General meeting authorising the borrowing.

iii.

Under section 292 of the Companies Act, the Board of Directors of a Public Limited company on behalf of the Company can exercise the powers to borrow only by means of resolutions passed at a meeting of the Board and not by circular resolution. The resolutions should be certified true by the Chairman of the meeting.

iv.

Under Section 293 (i)(d) of the Act, the Board of Directors of any Public Limited Company cannot borrow in excess of the Paid – up capital and free reserves of the company without the consent of the company in their General meeting. Temporary loans (i.e. the loans which are granted for a period not exceeding six months and are not meant for financing expenditure of a capital nature) obtained by the company from the Bank in their ordinary course of business are excluded from the purview of this Section. Therefore, a certificate should be obtained from all borrowing companies that their total borrowings together with the limit fixed by the Bank for the advance are not in excess of the limit prescribed under this section for borrowings by the Board of Directors and that the Board of Directors will see that such limit is not exceeded at any time. If in certain cases, their borrowings exceed their paid – up Capital and Free Reserve, a resolution passed by the Company in their General meeting authorizing the borrowings from the bank should be obtained. These instructions apply only to Public limited Companies and to Private limited Companies, which are subsidiaries of Public limited Companies incorporated under the Companies Act, 1956. 64 - III

v.

Advances to limited companies should be made only after satisfying by a search in the office of the Registrar of Companies in the respective State, that there is no outstanding charge on the securities proposed to be given to the Bank. The branch has to arrange to make a search in the books of the registrar of companies to ascertain whether any prior charge exist against the same security. The search can be made by the officials of the branch or by utilizing the services of a chartered accountant.

vi.

The execution of all documents by a limited company should be in conformity with the stipulations contained in the relative resolution of its Board of Directors which should mention clearly who would execute the documents and the manner in which the same will be executed on its behalf. If, however, the provisions contained in the Articles of association of the Company specifically require any or all documents to be executed only under its common seal, it will be necessary to do so. In cases, where no common seal is required to be affixed, the mode of execution of documents will be simple one viz. “for and on behalf of the company” by the office bearer named and authorised in the resolution.

vii.

Where common seal is affixed, relative narration is also mentioned in the documents. The officials of the company, who are witnesses to the affixation of the common seal, should not sign on behalf of the company but only in their individual capacity. However, their designations may be mentioned below their signatures.

r. Registration of Charges : In the case of all companies including private limited companies, certain charges on their assets have to be compulsorily registered with the registrar of joint stock companies under Sec 125 of Companies Act 1956.The charges by way of hypothecation (but not pledge) or legal or equitable mortgage or its modification should be registered in form 8 with the Registrar of Companies of the respective State / Union Territory within 30 days of the execution of the documents, or creation of equitable. Failure to do so within the time frame would involve the company to unnecessary expenses for obtaining an order of the Company Law Board for permission to register it after the expiry of the stipulated period. The charge should be registered with the Registrar at the place where the property is situated. The copy of the letter of hypothecation or the mortgage deed should bear the seal of the Registrar's Office. The Certificate of Registration should be attached to the documents. Charges by way of pledge of movable properties are not required to be registered. Supplementary agreements for increase in hypothecation limit or extension of legal / equitable mortgage to secure additional advance should also be registered. Modification on account of increase in rate of interest, which is not because of change in the Bank Rate/Bank's Prime Lending Rate, should also be registered with the Registrar of Companies. (As regards other countries, the position of law prevalent in such countries will have to be ascertained. For this purpose, branches should obtain notarised certified copies of the Act under which the company is incorporated). 65 - III

i

In case of H.U.F. accounts, joint and several D.P. Note and letter of continuing security should be executed by the karta of H.U.F. for and on behalf of the firm and by karta and all the adult members personally. Other documents should be executed only by the Karta for and on behalf of the firm.

ii. In case of advance to Club / Association / Trust, D.P. Note and the other relative documents should be executed as per the resolution passed by the Club / Association / Trust in terms of the rules of the respective institutions / Bodies. Bye – laws of Club / Association and rules of the Trust, as contained in the Trust deed should specifically permit such borrowings. iii. In the State of Maharashtra and Gujarat the Charity Commissioner's permission is required for borrowings by the public trusts. In other States, similar permission should also be obtained if so required by the law of the concerned State. s.

The following points should be noted while taking documents in respect of advance facilities granted to a partnership firm wherein a private trust is one of the partners: i.

All the Trustees must pass a resolution to the effect that the trust do become a partner in the firm and one or more Trustees (as may be provided in the Trust Deed) do represent the trust as the partner in the firm. ii. The mode of execution of the document will be as under if the partnership firm is named say, X & Company having A and B as the individual partners and the trust T as the third partner with power to C to sign on behalf of the Trustees, the documents should be signed as under: For X & Co. For T Trust Sd/- A Sd/- B Sd/- C Partners Trustee Partner Signature of the Trustee in the individual capacity, wherever required, should be as under: For T Trust Sd/- C Trustee iii. The documents should include the usual partnership letter, which the Bank takes in all advances to partnership firm. iv. In addition to the usual documents, joint and several Guarantees should be obtained in the prescribed format (as given in the General Annexures (LDOC-1) under Chapter – 48) from all the Trustees in their individual capacities. This means, they should sign their names at the end of the form and nothing should be written there under to show that they are Trustees. v. In addition to Guarantee as aforesaid, it will also be necessary to take an indemnity from all the Trustees as well as the individual partners of the firm. The Indemnity Letter be stamped as an agreement. 66 - III

vi.

In some cases all or some of the beneficiaries, or the beneficiary, may be minor/s that however, does not affect granting of the advance and adopting the above procedure.

vii.

Letter of Guarantee executed by a partnership firm should be signed by all the partners on behalf of the firm and also in their individual capacities.

viii. All corrections, cancellations, overwriting and additions in the documents should be duly authenticated by all the Executants of the document. t. Equitable mortgage: For creating equitable mortgage, the title deeds must be deposited by owner of the property or his agent, authorized by a power of attorney who must attend the office of the bank for the purpose. If there are more than one owner, all the owners must attend the office and incase all cannot attend, a power of attorney in the name of one of them must be executed by others for depositing the title deeds. i.

Where the title deeds are in favour of a partnership firm, the documents must be deposited by all the partners jointly and in case all the partners cannot attend office they must authorize in writing one or more of them to attend and deposit the title deeds on their behalf. If the borrower is a company a resolution delegating the powers to one of the Directors or to one of their officers to deposit the title deeds must be passed by Board of Directors. The Power of Attorney / certified copy of the resolution should be kept along with the title deeds.

ii.

The title deeds should be original. Copies of the title deeds should not be accepted without prior reference to the controlling office (Regional/Zonal/head office). The narration in the title deeds registered has to be made in the title deed register by an officer of the bank and witnessed by two officers. The owners of the property/borrower should not sign the register and no acknowledgement or receipt should be passed on to their mortgager/borrower by the bank. The owner/borrower should however execute a letter of confirmation of deposits of title deeds preferably on the next day of the deposit.(In Tamil Nadu its required that the memorandum has to be registered with sub registrar office after creation of equitable mortgage).

iii.

Mortgage by deposit of title deeds or registered mortgage is valid for a period of 12 years from the date of mortgage. To extend the mortgage a fresh mortgage has to be created. An equitable mortgage can only be created at notified centres / towns and an equitable mortgage taken at any place other than a notified centre / town is ab-initio void and unenforceable against a mortgagor. Therefore, branches located at places other than notified centres / towns should arrange for creation of equitable mortgage by the borrower at any of the branches located in the notified centres / towns. A list of notified centres / towns may be obtained from Regional / Zonal authorities. 67 - III

u. As regards the Guarantee to be executed by the State Government to secure Bank's advance, the position is as under: i. Articles 293 of the Constitution of India provides that the State issuing the Guarantee, must do so, within the limits, if any, as may be from time to time be fixed by the State Legislature. It will, therefore, be necessary to ascertain whether the Guarantee to be issued by the State Government is within the limits, if any Fixed by the State Legislature. Secondly, article 299 of the Constitution of India provides that all contracts made in the exercise of the executive power of the state shall be executed on behalf of the Governor, by such manner as he may direct or authorize. It will, therefore, be necessary for the Bank to obtain from the Government a true copy of the notification under which the officer executing the Guarantee on behalf of the Government has authority to do so. ii.

A mere letter / Resolution written passed by the Govt. agreeing to Guarantee the advances is not sufficient and document of Guarantee should be got executed.

v. Consortium advance: In consortium advances two or more financial institutions join together in meeting the financial requirement of a borrower .They share the securities on pari-passu basis or in such a manner as per the terms of agreement among themselves.If the Bank decides to participate in a consortium advance, it has to be ensured that the terms and conditions stipulated by the Bank are correctly incorporated in the relevant documents. In addition to the usual security documents, a pari-passu agreement or inter – se agreement setting down the relative shares of participating institutions and the respective rights, duties, responsibilities etc, is entered into. This is usually finalised by the lead banker, a solicitor appointed by mutual consent of all concerned. Where working capital is provided jointly with other banks, separate D.P. Notes should be obtained by each of the participating banks for the limits sanctioned. w. Other documents such as letter of continuing security, undertakings, Power of Attorney, letter of acknowledgement of debt etc. as applicable should be obtained by the Branches. However, only original joint deed of hypothecation may be executed by the borrowers for hypothecating the stocks jointly to the Banks for the aggregate limit. The original executed deed would remain with the lead Bank, while the others keep a copy thereof. The Bank holding the original security documents should certify that it holds the original set of documents for itself and on behalf of the participating banks / institutions. The certificate so issued by the Bank holding the original security documents should remain with the participating Bank and it should not be parted with. The following matters are worth noting: i.

In case of limited companies, the resolution should also mention the names of all participating institutions and the limits sanctioned by each of them.

ii.

Names of all participating institutions should appear in the certificate of registration of charge when the advance is granted to a limited company.

iii.

The institution holding the original certificate of registration of charge should send certified copy thereof to the other participating institutions. 68 - III

iv.

No change in the terms and conditions whatsoever should be made without the consent of the other participating institutions. Insurance policy should be taken out in the joint names of all the participating institutions covering all the required risks. The original policy should be kept with the lead Bank or one of the participating financial institutions which should issue necessary certificate periodically to the other participating institutions stating the total amount of insurance taken out. However, if copies of the policy are available with the company, the same could be sent to the other participating institutions also.

v.

When Limited Company is the sole proprietor of a Sole Proprietorship firm: D.P. Note as prescribed by the bank should be obtained [Specimen given in General Annexures LDOC3(c)(i) under Chapter – 48]. The documents should be executed as indicated therein.

vi.

When Limited Company is one of the partners of Partnership Firm D.P. Notes as specified by the bank should be obtained. The documents should be executed as indicated therein.

vii. Where advances are made to parties against securities standing in the names of one or more of them, a letter (as per Specimen LDOC-61 given in General Annexure Chapter – 48) duly signed by all the borrowers should be obtained. Similar letter should be obtained in the case of an advance to a partnership firm against securities standing in the names of some or all the partners of the firm. viii. Where an advance is made against securities standing in the name of a third party (and not in the name of the borrower) branches should obtain his / her Guarantee for the said facility. The person in whose name the securities are standing should execute the relative security documents and should not join execution of other documents other than the general form Guarantee such as D.P.N. etc., signed by the borrower as otherwise he / she would become a joint borrower. ix.

Additional clauses to be incorporated in printed document forms: (if not already incorporated): l

Loans granted under Refinance Scheme of NABARD: -Where loan has been granted to a borrower under the Refinance Scheme of NABARD, the following clauses should be incorporated in the loan agreement executed by the borrower:

l

“In case of failure of financing bank: To apply for refinance as per schedule or to get the scheme rephased or due to failure of the ultimate borrower to draw the loan instalment/s from the financing bank as per schedule, or to advise the financing bank to apply for rephasement (in view of the anticipated delay in the implementation of the project) respectively, the commitment charges levied on the financing bank by the NABARD may be passed on by the financing bank to the ultimate borrower.” 69 - III

l

6.

“The Borrower will buy / procure only such equipment as shall comply with the specifications for such equipment laid down by the Bank in conformity with the specifications given in the NABARD's sanction to such schemes.”

Periodicity of Renewal of Documents: a. In case of all advances the renewal documents should be obtained before the end of the fourth year calculated from the date of the documents on hand. But a letter of acknowledgement of debt signed by all the signatories who have signed the original documents, should be obtained at the end of every second year, calculated from the date of documents on hand for all types of advances whether the advance is to limited companies, firms or individuals. b. In respect of advances to limited companies, the matter regarding obtaining fresh documents should be referred to the Regional Authority for necessary guidance. Along with the letter of reference, a copy of the last search report taken from the records of the Registrar of Companies should be sent to the Regional Authority. c. In case of secured advances (mortgage) the following procedure should be followed: i.

A letter of acknowledgement of debt should be obtained every two years from the date of documents on hand.

ii.

As the period of limitation for mortgage is 12 years, the branch should obtain only a letter of acknowledgement of debt for about ten years, at the end of which each such case should be referred to the Zonal Legal Department through the Regional Authority for further advice.

d. In case of Bills Purchase / Discounting facility (Inland/foreign) fresh B.P. Undertaking letter should be obtained every two years from the date of existing documents. e. In all letters of acknowledgement of debt subsequent to the first one (relating to the same set of documents) reference to all the previous letters of acknowledgement of debt should be made in addition to the reference to the documents. f. Signatures of each of the borrowers and guarantors to an advance should be obtained on separate revenue stamps of appropriate value, on the letter of acknowledgement of debt. g. In respect of advance account wherein a letter of Guarantee is obtained, same letter of acknowledgement of debt should be got signed by the principal parties as well as by the guarantor/s. h. In case of change in the constitution of a borrower's firm, fresh sanction and documents should be obtained and a fresh account should be opened. In case the existing advance is secured by mortgage of title deeds to landed property then the bank should ensure that the property mortgaged is unencumbered before closing the existing loan and opening fresh loan facility. 70 - III

i. Branches in such cases should ensure creation of fresh equitable mortgage over the properties, simultaneously with closing and opening of loan accounts. j. When the limit in an existing account is subsequently increased, supplemental set of documents should be obtained for the amount by which the limit is enhanced. For example, if a limit is increased from Rs. 1 lac to 2 lacs or from Rs. 5 lacs to Rs. 10 lacs, the supplemental set of documents to be taken will be for Rs. 1 lac and Rs. 5 lacs respectively. As regards obtaining of the renewal documents in such cases, the renewal documents should be taken for entire limit (including the enhanced limit). k. If a charge by way of loan or overdraft or Cash Credit has already been created and the same is to be either extended or otherwise a fresh additional advance is to be made, then the documents required to be obtained in such a case will be full set of documents as may be appropriate to the type of advance and the document should be limited to the extended or a fresh additional advances, as the case may be. l. Memorandum of deposit taken in connection with equitable mortgages should not be renewed, as otherwise any lien created in the meantime would take priority over the Bank's lien. However, a letter of acknowledgement of debt should be obtained. m. It should be carefully seen that the advance documents do not become time-barred due to not obtaining in time the renewal documents, confirmation letters or letters of acknowledgement of debt from the borrowers/guarantors. n. Usual debit balance confirmation letters and confirmation letter of securities should invariably be obtained every half year. 7.

Regularization of time barred debt: a. For any reason if a loan account is time barred in the absence of any revival letter or a confirmation of balance or letter of acknowledgment or payment under borrowers full signature, the matter should be immediately reported to head office for further guidance/for necessary instructions as to the remedial measures to be taken to revive the time barred debts.There are two ways to revive the time barred debts: i.

New loan can be opened after taking fresh loan/security/guarantee documents in order to close and transfer the debit balance in the time barred account to the new account.

ii.

Without closing and opening the account, an agreement can be taken from the borrower and a fresh guarantee can be taken from the guarantor. In this case the agreement should be stamped with stamp duty payable on an agreement.

iii.

A model 'Letter to be obtained from the borrower/guarantor for revival of time barred debts' is given below: 71 - III

Model Letter to be obtained from the borrower/guarantor for revival of time barred debts To The Manager ………….State Cooperative Bank, ……………Branch Dear Sir, Sub: Credit facilities granted to me/us by way of ………. Loan. Account no: I/We availed a loan of Rs……… on ….. from the bank. There is an outstanding of Rs……… as on…………which remains unpaid till date due to my financial difficulties. As I/we would like to keep up my/our obligation to pay the said dues and to maintain good relationship between the bank and myself/ourselves, I/we hereby expressly promise to pay the said dues entirely with interest within………………… months. Yours Faithfully,

Date Place iv. Model Title deeds narration applicable for borrowers other than limited companies: a. Shri/Sarvasri………….. called at the bank and deposited the above mentioned title deeds. When making the deposit he/they stated that he/they did so with intend to create a mortgage in favour of the bank as continuing collateral security for advances made and/or to be made by the bank to……………….. by way of ……………… (nature of facility) or otherwise and for all other indebtedness and liability of his / theirs whatsoever and all costs, commission and charges outstanding at any one time together with interest of their own. 8.

Annexure/s: a. The following Annexures are appended to this Chapter: Annexure – 1 : A chart indicating the Mode of Execution of Documents (with Illustrations) Annexure –2 : List showing the documents to be obtained in respect of Credit facilities sanctioned to constituents - TNSCB practice.

72 - III

Annexure – 1 to Chapter – 6 CHART INDICATING MODE OF EXECUTION OF DOCUMENTS (WITH ILLUSTRATIONS) 1. 2. 3.

For Individual/s : Arvind A. Shah For Joint Borrowers : Arvind A. Shah Govind A. Shah (a) for sole-proprietorship firm: for M/s. Arvind & Company (where an individual is the Arvind A. Shah sole-proprietor) sole-proprietor personal signature of Sole Proprietor in full Arvind Ambalal Shah (b) For Sole-Proprietorship firm: For M/s. Arvind & Company (where a limited Company For M/s. X & Company Limited is the Sole-Proprietor) Personal Signature of the: A.A. Shah Sole-Proprietor Director / Sole-proprietor For x and company Ltd. A.A. Shah Director (c) For sole-Proprietorship Firm: For M/s. Arun & Company (where a private Trust is the Sole-Proprietor) For Xyz Trust: For Xyz Trust A.A. Shah Trustee Sole-proprietor. (d)

4

(a)

For Sole-Proprietorship Firm: For M/s. Arvind & Company (Where the HUF is the Sole-Proprietor) For Xyz HUF : For Zyz HUF A.A. Shah Karta Sole-Proprietor For Partnership Firm: For M/s. Arvind & Company (where all the partners are individuals) Personal Signatures of the : Arvind A. Shah Partners in full Govind A. Shah Arvind Ambalal Shah: Partners Govind Ambalal Shah 73 - III

A.A. Shah Trustee

A.A. Shah Karta/Manager

4

5.

(b) for partnership Firm: for M/s. Arvind & Company (where a limited company : for X & Company Limited is a Partner) Personal signatures of the A.A. Shah Partner Director For X & Company Limited Arvind A. Shah A.A. Shah Govind A. Shah Director Partners Arvind Ambalal Shah Govind Ambalal Shah (c) For Partnership Firm For M/s. Arvind & Company (where one Partner is a Private Trust) For Xyz Trust For Xyz Trust A.A. Shah A.A. Shah Trustee Trustee Personal Signatures of the (Signatures of other Partners) Partners Partners (d) For Partnership firmFor M/s. Arvind & Company (Where are Partner is a HUF) For XYZ HUF For XYZ HUF A.A. Shah A.A. Shah Karta Karta/Manager & Personal Signature of the Partners Signature of the Partners PARTNERS For Limited Company For Arvind & Company (P) Ltd. i) when the document is to Arvind A. Shah be executed for and on Director behalf of the Company, (that is, without affixing common seal) ii) when the document is to be executed under the common seal of the Company The common seal of______________ Privated Ltd. Was hereunto affixed pursuant Common seal of to a resolution passed by the company Board to Directors at their meeting held on _____ (date) in the presence of _________sd/-Director __________ and _________ two-directors of the company sd/-Director and ___________ secretary who have affixed their signatures here to sd/- Secretary 74 - III

Note : In case of illiterate individual Borrower/s, the left-hand thumb impression in case of a male borrower (right hand thumb impression in case of female) should be got affixed in the presence of the Bank's official and the wordings “left/right hand thumb impression of Shri/Smt/Kumari __________________ “should be written just below the thumb impression. 6.

Association / Society Club For __________________________ Association/Society Club

President/Secretary/Treasurer

75 - III

Annexure – 2 to Chapter – 6 List showing documents to be obtained in respect of credit facilities sanctioned to constituents – TNSCB practice. Sr. No (1)

LDOC NO. (2)

1.1 2.2 3.3 4.3

Single 3(a) For Joint (b) For Sole-Proprietary Concern

Name of the Document

(3)

When to be obtained

(4)

Attestation Memo. In all cases where any kind of document Advances to individuals. Borrowers Advances to Concern

5.3

is obtained

individuals in Joint Names Proprietary Concerns, Joint Hindu Family Firms and (all institutions other than Private/PublicLimited Companies). When Limited Company is the SoleProprietor of a Proprietary Concern Partnership Firm.

(b)(I) For Sole-Proprietary Concern (where Limited Company is the proprietor) 6.3 (c) For Partnership Firm Advances to 7.3 (c) (I) For Partnership Firm When Limited Company is one of the Partners of the Partnership Firm 8.7 Letter of continuing security (with negative lien clause) Unsecured Overdrafts/Cash Credits/ Packing Credits to all types of borrowers. – all secured advances 9.8 Application for Letter of Credit. For opening In land/Foreign Letters of Credit on behalf of all kinds of constituents 10.11 Letter of Pledge(for Government Securities, Advances to all constituents against Shares, Documents of Title pledge of shares, Government to good setc. other than Securities, LIC Policies, Documents securities of immovable of Title to goods, etc. property). 11.16 Letter Depositing the F.D.R./S.D.R. (Time Advances to all constituents against Deposit Receipts). pledge of discharged Fixed/Short Deposit Receipts of the Bank standing in the name of the borrower of third parties. 12.17 (b) Composite HypotheLoan (including secured Packing cation Agreement of Credits) and Cash Credit facilities to Stocks/ Book Debts/ all constituents against HypotheVehicles Movable cation of goods/stocks/Book debts/ Machinery. Movable / Machinery / Vehicle

76 - III

Whether required to be stamped or not (5) No. Yes Yes Yes

Yes Yes Yes Yes

Yes

Yes

Yes

Yes

Sr. No (1)

LDOC NO.

Name of the Document

(2)

(3)

When to be obtained

(4)

Whether required to be stamped or not (5)

13.19 Instrument of

Hypothecation of movable machinery

Loan/Cash Credit facilities to all constituents against hypothecation of movable machinery.

Yes

14.20 Instrument of

Hypothecation of Vehicles.

Advances to all constituents against hypothecation of Vehicles such as Trucks, Cars Passenger Buses, Dumpers, etc.

Yes

15.23 Refinance Agreement in

Form 'A'

Term loans to all constituents under Refinancing Scheme of I.D.B.I. against mortgage of fixed assets (equitable or registered and/ or hypothecation of movable machinery.

Yes

16.33 General Form of

Guarantee.

Where credit facilities are to be Guaranteed by third party/ies.

Yes

17.34 Counter-indemnity/ Guarantee for issuance of a Bank Guarantee.

Where Guarantees are to be issued by the Bank on behalf of all kinds of constituents.

No

18.37 Letter of undertaking with “No Lien” clause.

Unsecured Demand Loans to all types of borrowers.

Yes

19.38 Letter (Declaration) of

Sole-Proprietorship

All kinds of advances to soleproprietary firms

No

20.39 Letter of Partnership

All kinds of advances to

Partnership Firms.

No

21.39 A Letter of Authority Advances to

Partnership firm Accounts No

Advances to Joint Hindu Family.

No

22.40 Letter of request from HUFs.

Advances to Joint

Hindu Family.

No

23.48 Letter of Appropriation–

Advances against balances in Recurring Deposit account.

Loan/Over draft facilities to all constituents against balances in Recurring Deposit A./c.in the Bank, in the name of the borrower.

No

24.49 Letter of Lien-Advance

against balances in Savings Bank / Current Accounts

Advances to all constituents against earmarking of balances in Savings Bank /Current A/cs. Standing in the name of the borrower of third parties.

25.50 Letter of Recording for

temporary over drafts granted with prior arrangements.

Temporary Over drafts to all constituents granted with prior arrangements

No

26.53 Letter of Attestation

To be obtained when thumb-

impressions are to be witnessed.

No.

77 - III

No

Sr. No

LDOC NO.

(1)

(2)

Name of the Document

When to be obtained

(3)

(4)

Whether required to be stamped or not (5)

27.

57

Letter of instalment with “Acceleration Clause”.

Demand loans repayable in instalments.

No

28.

60

Take Delivery Letter.

For advances against shares securities.

No

29.

63

Letter of Cost For advances against mortgage of

properties

No

30.

64

An undertaking not to withdraw deposits by the Partners/Director still the advances is liquidated.

When stipulated in sanction.

Yes

31.

72

Letter of Authority to make payment directly to the dealer

For Personal Loan Scheme

No

32.

81

Draft of resolution of the Managing Advances to Clubs, Literary Committee of a Club/Literary Societies Schools, Associations, Society/ Schools, etc. when any Committees, etc credit facilities are to be made available

33.

84

Form of assignment of Life Policy.

Advances to all constituents against No pledge of L.I.C. Policies which are to be assigned in Bank's favour

34.

85

Letter of assignment of Life Insurance Corporation

Advances to all constituents against No pledge of L.I.C. Policies

35.

90

Memorandum Deposit of Where equitable mortgage of immovable Depending

Title Deeds. property is created for upon the local stamp securing an advance. act provisions

36.

90A

Memorandum of Entry. Individual's property

Incase of mortgage of Depending

37.

90 C

Declaration for Mortgage Equitable

In case of mortgage of individual's property.

No

38.

90D

Letter of confirmation of Equitable Mortgage.

Incase of mortgage of individual's property.

No

39.

90E

Declaration Incase of mortgage offirms'/

Companys' property

No

40.

90F

Memorandum of Entry Incase of mortgage of Company's

property

78 - III

No

Depending upon the local Stamp Act provisions

Sr. No

LDOC NO.

(1)

(2)

Name of the Document

(3)

When to be obtained

(4)

Whether required to be stamped or not (5) Depending upon the local stamp act provisions

41.

90G

Supplemental memorandum of Entry

In case of mortgage of Company's property.

42.

90H

Confirmation Letter Incase of mortgage of Company's

property (Consortium Accounts)

No

43.

90J

Confirmation of Extension of mortgage

Incase of mortgage of property jointly owned by individuals

No.

44.

90K

Confirmation of Extension of mortgage

Incase of mortgage of company's property

No.

45.

90L

Second Extension of mortgage

Incase of mortgage of individual's property to secure advances to company

46.

90P

Letter of Confirmationmortgage creation/extension

In case of all advances

No

47.

92

Letter of Authority for creation/extension of equitable Mortgage

In case of all advances

No

48.

96

Draft of irrevocable Power of Attorney for equitable mortgage of property

Advances to all constituents against mortgage by deposit of title deeds to properties and/or hypothecation of movable machinery (for conversion of equitable mortgage in to registered mortgage, as and when desired by the Bank).

Yes

49.

100

True Copy of Board resolution for facilities against uncleared effects

To be obtained from Limited Companies

No

50.

101

Power of attorney in favour of the Bank for transfer of vehicle in its name

(a) Under Scheme for Financing Road Transport Operators. (b)Under Scheme for Financing Purchase of Tractor Tailors etc.

Yes

51.

104

Letter of undertaking to For loans to the members of the staff.

repay advance in stipulated instalments-Loans to staff members form arriage and miscellaneous purposes.

52.

107

An undertaking to maintain vehicle for five years.

For loans to the members to the staff

79 - III

Depending upon the local stamp act provisions

Yes

Yes

Sr. No

LDOC NO.

(1)

(2)

Name of the Document

(3)

When to be obtained

(4)

Whether required to be stamped or not (5)

53.

108

Irrecoverable Power of Attorney empowering the Bank to execute in its favour a legal mortgage of the right, title and interest in the said flat/plot.

For loans to the members to the staff.

Yes

54.

109

Stamped letter of authority to deduct instalment from salary every month.

For loans to the members of the staff.

Yes

55.

111

Undertaking to obtain and tender(I) For loans to the member of original agreement between the the staff Housing Society and the borrower (ii) share certificate issued by the Housing Society (iii) letter from Co-operative Housing Society Ltd. accepting Bank as nominee when Society is formed.

Yes

56.

112

Undertaking to create a legal mortgage in favour of the Bank of the right, title and interest in the flat/plot/House .

For loans to the member of the staff

Yes

57.

115.

Letter of instalment under Personal Loan Scheme.

For loans to the members of the staff and Constituents.

No.

58.

136

General Undertaking

To be obtained in all advances

Yes

80 - III

CHAPTER – 7

CREATION OF CHARGE 1.

Lien: a. Lien is the right to retain securities/goods belonging to another, until a debt due from the latter is paid. There are two kinds of lien viz., general and particular. A particular lien is the right to retain securities/goods in respect of which the debt was incurred. For example, a carrier has a lien on goods entrusted to him for transport for the transportation and other charges incurred in transporting such goods and not for any other debt. A general lien is the right of retaining not only for a debt incurred for particular security/goods but for the general balance due. The general lien of a banker is defined by Section 171 of the Indian Contract Act, 1872. Bankers have a general lien on all securities deposited with them as bankers by a customer, unless there is an express contract or circumstances that show an implied contract inconsistent with the lien. A general lien does not, as a rule, carry with it the right to sell the security/goods. The person exercising the lien has simply the right of retention till the dues are paid. A banker's lien is more than a general lien; it is an implied pledge. It, therefore, follows that the bank can exercise all the rights of the pledge in case of banker's lien. In the event of default by the customer, the bank can exercise the right of sale after giving a reasonable notice to the customer. What is a reasonable notice is a question of fact depending on the circumstances of each case. b. The criteria for deciding whether a particular security will fall under the Banker's lien will be as follows: i. ii. iii. iv.

the property should come in the hands of the banker in his capacity as a banker; the possession of the property should have been lawfully obtained in his capacity as a banker; there should be no entrustment for a special purpose inconsistent with the lien; and there should be no agreement inconsistent with the lien.

c. When Lien cannot be exercised, i. No lien can be exercised in respect of the customer's valuables received for safe custody, as they are received for a specific purpose. ii. No lien can arise on the valuables or documents left inadvertently by a customer or on property which is placed in the Banker's hands with the object of covering an advance which is not granted. iii. It must also be noted that a banker to whom money is paid by mistake, cannot set up a lien or claim for a set-off, which he can otherwise do against his own customer, even where the money is paid to the banker as an agent for that customer. Lien can only extend to the customer's money or securities, but not to the money, which is paid by a mistake of fact by a third person, as it belongs to him and not to the customer. 81 - III

iv.

Lien cannot be exercised in respect of a contingent liability. (E.g.) Bills discounted but not yet due. But a contingent debt is provable in insolvency and a lien can then be claimed. v. No lien arises, if the credit and the liability are not in the same right (E.g..) If the customer maintains a separate Trust Account, lien cannot be exercised thereon for customer's debts in his personal name. vi. A banker does not have a lien over a customer's credit balance. The banker's right over a customer's credit balance is the right of set-off. vii. In the absence of an agreement to the contrary, the banker has a lien on all bills, cheques and notes sent to him by a customer for collection. It should be noted that a lien does not give any property in the thing subject to lien, but merely a right to retain it. The banker whose interest in a bill is partial does not have the property in the bill that an ordinary holder for value would have. The property remains with the true owner. But the banker who has a lien on the bill can retain his interest even against the true owner. viii. No lien can be exercised by a banker where securities are deposited specifically for specific debts, unless there is a contract to the contrary. In the bank's agreements, the following clause has to be incorporated. Note: The borrowers agree that the bank may hold all securities belonging to them (which may now be in bank's possession or which may at any time hereinafter come into bank's possession) and the proceeds thereof respectively not only for the specific advance made thereon but also as collateral security for any other moneys now due or which may at any time be due from them, either singly or jointly with another or others. ix. The bank has a lien on securities allowed to remain in the banker's hands, after adjustment of the advance. x. The banker's right of lien is not barred by Law of Limitation. The effect of limitation Act is to bar the remedy and not to discharge the debt. Consequently, it does not affect property over which the banker has a lien. 2.

Set Off: a. Set-off means the total or partial merging of a claim of one person against another in a counter claim by the latter against the former. It is in effect the combining of the accounts of the debtor and the creditor so as to arrive at the net balance payable to one or the other. b. The right of set-off is a statutory right and can also arise out of agreement between the parties. c. All the branches are considered as one for the purpose of exercising the right of set-off. The right to combine the accounts is, however, a right only of the banker and not of a customer and so a customer cannot expect his cheques on one account to be paid by combining the balance of all accounts which he maintains and the aggregate balance of which would have been adequate to pay the cheques unless, of course, he has asked the bank specifically to do so.

82 - III

d.

Ingredients of set-off: i.

Both the debts must be certain sums. The debts must be due as between the parties. In other words, debt accruing due cannot be set-off against a debt already due.

ii.

The banker cannot set-off the credit balance in the account of the guarantor till the liability of the guarantor is determined. For this purpose, it is essential that the banker must first demand payment from his debtor. If the latter commits a default in making payment of the debt due, only then the liability of the guarantor arises and the banker can exercise his right of set-off against the credit balance in the account of the guarantor, after demand for payment is made against him.

iii.

The credit balance in a Current Account cannot be set-off against a contingent liability of a bill discounted but not yet due. However, in the case of insolvency of the customer/liquidation of the company, all future debts and contingent liabilities become immediately due and the bank would be justified in combining these accounts, even in respect of debts which were not hitherto due.

iv.

Similarly in the event of the customer's death or insanity the credit balance in the account could be retained against bills discounted but not yet due. Further, a mere appointment of Receiver of a Company does not have the same effect and this event will not by itself give a banker the right to combine accounts in regard to a contingent liability.

v.

A banker cannot set-off a debt due to him upon a loan account repayable on demand or at a specified date against a credit balance in the Current Account, for until the demand is made or due date arrives the loan is not due for payment.

vi.

The parties must be mutually indebted in the same right. A customer may maintain two or more accounts in some of which he may be acting in a fiduciary capacity.

vii.

The credit balance of a solicitors' client account cannot be set-off against moneys owing on Solicitor's other accounts.

viii. If the customer has one account in his own name and another for Trust money, the bank cannot set-off the credit balance in the Trust Account against a debit balance in the personal account. ix.

The credit balance on a Joint Account cannot be set-off against a debt of one of the joint parties.

x.

The credit balance in the partners account can be set-off against a debit balance of partnership account since the liability of the partners is joint and several according to Sec.25 of the Partnership Act and also joint and several DPN signed by the firm and its partners in their individual capacity is usually taken. 83 - III

xi.

The Partnership firm is not a separate entity distinct from partners. Right of Set-off can be exercised as between two firms, which have separate names but are composed of the same set of partners.

xii. The credit balance in the personal account of the sole proprietor can be set-off against the debit balance of the sole proprietary concern account and vice versa. xiii. The bank has the right of set-off under law provided the conditions stated above are satisfied and further there is no express or implied agreement to the contrary. e.

Notice of Set-off: i.

It is sometimes argued that the bank when allowing a customer to open two or more separate accounts cannot arbitrarily combine them as the very basis of the dealings with the customer is that the two accounts should be kept separate. Therefore, if any cheque drawn by a customer on his account in credit is returned for want of funds after the accounts are combined, the bank may be inviting trouble for itself.To avoid this situation, a clause has been incorporated in most of our agreements which reads as under: Note: That in addition to any general lien or similar right to which the bank may be entitled by law, the bank may at any time and without notice to me/us combine or consolidate all or any of my/our accounts with the liabilities to the bank and set off or transfer any sum or sums standing to the credit of anyone or more of such accounts in or towards satisfaction of any of my/our liabilities to the bank on any other account or in any other respect, whether such liabilities be actual or contingent, primary or collateral and several or joint.

ii.

This clause of set-off has definite advantage. It is a proof that the banker's right of set-off exists and he has not waived it. Such a letter also dispenses with the need to issue notice to the customer in combining various accounts to avail himself (Banker) of the right of setoff. Note: In practice, however, the bank sends a notice to the customer as so as the right of setoff is exercised.

f.

Set-off against surplus: i.

According to Sect. 176 of Indian Contract Act, 1872, in case the proceeds of the sale are more than the amount of the debit, the pledge shall pay over the surplus to the pledger. In order to safeguard the Bank's interest, the following clause may be incorporated in the pledge/hypothecation Agreement.

84 - III

Note: 'Inthe event of there being a surplus available out of the net proceeds of such sale of my/our securities after payment in full of the balance owing due to you, it shall be lawful for you and you shall have the right to retain and apply the said surplus together with any money or moneys belonging to me/us or any one or more of us for the time being in your hands in or under whatever account as far as the same shall extend in or towards the payment or liquidation of any and all other moneys which shall be or may become due to you from me/us or any one or more of us whether solely or jointly with any other person or persons, firm or company on any account, whether by way of loans, bills discounted, letters of credit, guarantees, charges or any other debt, liability or obligation, whether current or not yet become due and whether by way of principal or by way of surety'. ii. Automatic right of set off arises on the death, insanity or insolvency of the customer or on the insolvency of a partner of a firm or winding up of a company or on receipt of a Garnishee order or on receipt of notice of assignment of a customer's credit balance. 3.

Pledge: a. Pledge is bailment or delivery of goods as security for payment of a debt or performance of a promise (Section 172, Indian Contract Act).The pledge gets the possession of the property but does not become its legal owner. Any kind of goods, documents or valuables of a personal nature, can be pledged as security. Government promissory notes, which are negotiable instruments, can also be pledged when duly endorsed and delivered. Delivery of the goods pledged by the pledger to the pledge is essential for creating a pledge. The delivery may be (i) actual or (ii) constructive. Delivery of the key of a godown with the intention to create a pledge would be a constructive delivery. b. A pledge is entitled to the possession of the goods pledged till the debt is repaid with interest or the promise is performed. In the event of default, the pledge can (i) sue the pledger, retaining the goods pledged as a collateral security or (ii) sell the goods after giving a reasonable notice to the pledger of his intention to sell (Section 176, Indian Contract Act). The notice need not specify the date, time or place of the intended sale and what period of notice would be reasonable will depend on the facts of each case. The period of notice for the sale of a commodity in a rapid falling market cannot be the same, when the market is steady. If the sale proceeds are less than the amount due in respect of the debt or promise, the pledger will be liable to pay the balance and if there is any surplus, the pledge must pay the surplus to the pledger. c. The pledge cannot retain the goods pledged for any debt or promise other than that for which the pledge has been contracted. However, in the absence of any contract to the contrary, such an agreement will be presumed in regard to subsequent advances made by the pledge. Normally, it would also be covered by a letter of continuity or a continuity clause in the letter of the pledge making the security a continuing security, in case of a fluctuating cash credit or overdraft account. 85 - III

d. If the pledger has a limited interest in the goods pledged, the pledge is valid to the extent of that interest. If he has no title, he can give none to the pledge. If the pledger has obtained possession of the goods under a voidable contract like misrepresentation or undue influence, a pledge will acquire a good title to the security, if he acts in good faith and without any knowledge of the defect in the title of the pledger. Since a pledge is a bailment of goods (Indian Contract Act. Sec.172), the pledger and the pledge will have all the rights and the obligations of a bailer and bailee. e. According to Section 151, bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. The burden of proof is on the bailee that there has been no negligence, when he fails to return the goods or returns them in a damaged condition and that the loss or damage occurred in spite of the fact that he took reasonable care of them. Section 152 provides that in spite of the bailee's reasonable care, if goods are damaged or destroyed in any way, the bailee is not liable for the loss, destruction or deterioration of the thing bailed. 4.

Hypothecation: a. When the possession of the property in the goods and other movables offered as security remains with the borrower and only an equitable charge is created in favour of the lender, the transaction is called a hypothecation. Mortgage of immovable property is covered by the Transfer of Property Act and pledge of movable is covered by the Indian Contract Act. But neither of the Acts deals with mortgages of movable property which stands on the same footing as hypothecation. b. Hypothecation of movable property not accompanied by delivery of possession is valid and recognized in Indian Law. The charge which is normally created by an instrument in writing known as the 'letter of hypothecation' is ambulatory and shifting in nature and it hovers over and floats with the property until some event like default in the covenant between the borrower and the lender causes it to settle on or seize the hypothecated security. c. Since a transfer of movable property is not complete without delivery of possession, hypothecation creates only an equitable charge which is liable to be defeated, if the borrower in possession sells the goods to a bonafide purchaser without notice or creates a pledge in favour of another innocent lender. Only in case of advances to limited companies the lender is protected by such charge being registered with the Registrar of Joint Stock Companies according to the provisions of Section 125 of the Indian Companies Act which serves as a notice to all. 86 - III

d. The hypothecator not only has the possession of the security hypothecated but he is free to deal with it. He can sell, transfer, process and substitute the security provided the value of the security continues to cover the advance in the manner agreed in the letter of hypothecation. Hypothecation can, therefore, cover goods coming into the hands of the borrower in future as also future crops. e. After obtaining possession of the property hypothecated, in the event of any default or any breach of covenant of the borrower, provision for which is normally made in the letter of hypothecation, the lender can sell the property without the intervention of the court. Otherwise, he can sue the hypothecator and try to seize the hypothecated movables (if they have not disappeared as the borrower is free to deal with them) by obtaining a court decree. f. Apart from movables, book debts can also be hypothecated by a letter of hypothecation. An equitable and floating charge similar to that of hypothecation of movables can be created on the present and future book debts of the borrower. If the borrower is a joint-stock company, the charge has to be registered as in the case of movable property, according to the provisions of Section 125 of the Indian Companies Act. a. Although the security is not in his possession, a hypothecatee is a secured creditor and he would be treated as such in insolvency or liquidation proceedings. 5.

Mortgage: a. Mortgage is defined by Section 58 (a) of the Transfer of Property Act, 1882 as: A Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, an existing or future debt or performance of an engagement, which may give rise to a pecuniary liability. b. A person who creates the mortgage is called Mortgagor, the person in whose favour the mortgage is created is known as Mortgagee and the principal money and interest, payment of which is secured for the time being is called Mortgage Money and the instrument(if any) by which the transfer is effected is called a Mortgage Deed. c. Who can create mortgage: The owner/s of the property having clear marketable title and competent to contract can create a mortgage. A mortgage by a minor is void. A mortgage can be created by an individual, joint owners, partners of a firm (if empowered to do so by the Partnership Deed), the Karta of a Hindu undivided family (if it is for legal necessities or for the benefit of the estate), a guardian of a minor (if permitted by a competent court).In case of joint owners, all the co-owners must join creating the mortgage and in the case of a partnership firm all partners should join in creating the mortgage. 87 - III

d. Consideration for mortgage: Like any other contract, consideration is necessary for creating a valid mortgage. Consideration in a mortgage may be i. Payment of money by way of loan, ii. Existing or future debt or iii. Performance of an engagement giving rise to a pecuniary liability (for example- creation of a mortgage in respect of bank guarantees). e. Different kinds of mortgage: There are the six types of mortgages: i.

Simple Mortgage: l l l

l

ii.

The mortgagor does not part with the possession of mortgaged property. The mortgagor binds himself personally to pay the mortgaged money. The mortgagor agrees, expressly or impliedly that in the event of his failing to pay according to his contract, the mortgagee shall have the right to cause the mortgaged property to be sold. The words “cause the mortgaged property to be sold” imply that the mortgage has no power to sell the property without the intervention of the court. A simple mortgage will invariably be registered with the Sub-Registrar, where the principal money secured is Rs. 100/- or more.

Mortgage by Conditional Sale: It is a transaction in which the mortgagor ostensibly sells the mortgaged property on condition that, l on default of payment of the mortgage-money on a certain date, the sale shall become absolute or l on such payment being made, the sale shall become void or l on such payment being made, the buyer shall transfer the property to the seller. l It is to be distinctly understood that the transaction will not be considered to be a mortgage, unless the aforesaid condition is embodied in the very same document, which ostensibly purports to effect the sale. l If the mortgage-money is not repaid on the agreed date the ostensible sale will become absolute, upon the mortgagee applying to the court and getting a decree in his favour since the right to redeem is then lost. The mortgagee can sue for foreclosure (foreclosure means and implies the loss of the right possessed by the mortgagor to redeem the mortgaged property). The failure of the mortgagor to pay the mortgage debt within the period allowed to him to do so puts an end to his right of redemption of the mortgaged property, after the mortgagee obtains a decree for foreclosure but not for the sale of the property. This type of mortgage is not usually taken by banks, as there is no personal covenant for repayment of the debt. 88 - III

iii.

iv.

v.

Usufructory Mortgage: l

Where the mortgagor delivers possession or binds himself expressly or by implication to deliver possession of the mortgaged property to the mortgagee and authorise him to retain such possession until repayment of the mortgage-money and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage-money or partly of both, then the transaction is known as an usufructory mortgage and the mortgagee an usufructory mortgagee. Unless there is a personal covenant for the repayment of the mortgage-money, the usufructory mortgagee cannot sue the mortgagor for repayment of the mortgage debt; nor can the mortgagee sue for the sale or foreclosure of the mortgaged property.

l

The only remedy for the mortgagee is to remain in possession of the mortgaged property and pay himself out of the rents and/or profits of the mortgaged property. No one can say when the mortgagee will fully recover the mortgage money through this process. Banks hardly entertain advance proposals of this type.

English Mortgage: l

Where the mortgagor binds himself to repay the mortgage-money on a certain date and transfers the mortgaged property absolutely (i.e. conveys all interests in the property)to the mortgagee subject to the proviso that the mortgagee will retransfer it to the mortgagor upon repayment of the mortgage-money as agreed, the transaction is called an English Mortgage.

l

It is characteristic of the English mortgage that the personal liability of the mortgagor remains notwithstanding the absolute transfer of the property to the mortgagee. Further, in case of default in repayment of the mortgage-money, the mortgagee has a right to sell the mortgaged property outside the court in special circumstances mentioned in Section 69 of the Transfer of Property Act, 1882.

Anomalous Mortgage: l

A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructory mortgage, an English mortgage or a mortgage by deposit of title deeds is called an anomalous mortgage. An anomalous mortgage must, however, satisfy the definition of mortgage as given in Section 58 of the Transfer of Property Act, 1882.

l

There are two kinds of anomalous mortgages which are often noticed in practice. They are a simple-cum-usufructory mortgage and an usufructory mortgage accompanied by a conditional sale. 89 - III

6.

vi.

Equitable Mortgage:

l

Equitable Mortgage is defined by Section 58(f) of the Transfer of Property Act as 'Where a person, in any of the following towns, namely, the towns of Kolkata, Chennai and Mumbai or in any other towns which the State Government concerned may, by notification in the official Gazette, specify in this behalf, delivers to a creditor or his agent, documents of title to an immovable property with an intent to create a security thereon, the transaction is called a Mortgage by deposit of title deeds'.

l

This form of mortgage is very popular amongst bankers because it is easier to create, takes less process time and is not much expensive. No lengthy formalities are required to be compiled with nor is such Mortgage subject to stamp duty or payment of registration charges except in the states of Maharashtra, Gujarat, Tamilnadu and Andhra Pradesh. Moreover, this type of mortgage enables the mortgagor to avoid undue publicity of the mortgage. There is no compulsory registration with Registrar of Assurances.

l

The Bank can sue on the personal covenant. The Bank can exercise the Right of sale or the Right to appoint a Receiver or the Right to take possession only with the intervention of the Court. However, the provisions of SARFAESI ACT 2002 empowers the Bank to exercise these rights provided the liability is above Rs. 1 lakh and the property is not an agricultural land.

l

Essential requisites of an Equitable Mortgage include, Ø There must be an existing or future debt. Ø Delivery of documents of title must be by a Debtor or his authorised Agent or by guarantor or third party in case of advance against third party immovable property is sanctioned. Ø Delivery of Title deeds must be in the towns mentioned in the Act or notified by the State Government for the purpose. Ø Delivery must be to the Creditor or his Authorised Agent Ø Delivery must be of documents of title to immovable property. Ø Delivery must be with intent to create a security on the property comprised in the documents of title deposited.

Assignment: a. The transfer of the right, title and interest in a contract by a party to the contract to another person is called an assignment of the contract. Assignment may also be made by operation of law. Insolvency or death of a party to the contract, when the legal representative or the official assignee or the receiver steps in, are examples of assignment by operation of law. If the contract involves personal factors, qualification or consideration or if the benefit to be assigned is 90 - III

coupled with any special liability or obligation which the assignor is required to discharge, the assignment of the benefit would require the consent of the other party. The benefit of a contract can be assigned, but not the burden, because the promisor cannot shift the burden of his obligation without entering into a new contract with the promise. Otherwise, it can be assigned without the consent of the other party. A contract for future performance can also be assigned. b. In terms of section 130 of the Transfer of Property Act, the transfer of an actionable claim, whether with or without consideration, can be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent. Section 3 of the Transfer of Property Act defines actionable claim as a claim to any debt other then a debt secured by a mortgage of immovable property or by a hypothecation or pledge of an movable property or to any beneficial interest in movable property not in the possession of the claimant which the Civil Courts recognise as affording grounds for relief. All the rights and remedies of the transferee vest with the transferee whether the notice of assignment is given or not. Notice is thus not necessary to perfect the title of the assignee of a debt but until the debtor receives notice of the assignment, his dealings with the original creditor will be protected. The transferee of an actionable claim takes it, subject to all the liabilities and equities to which the transferor was subjected to on the date of the transfer (Transfer of Property Act, Sec.1o2). c. As regards the mode of assignment, no particular form of words is necessary for effecting an assignment, if the intention is clear from the language used. An assignment can be absolute or by way of security. A deposit merely creating a pledge cannot amount to an assignment. Generally speaking, negotiable instruments can also be assigned by an instrument in writing but such assignment would be subject to the equities to which the assignor himself was subject. d. A policy of marine or fire insurance can be assigned by endorsement on the back of the policy or by a separate deed of assignment. These policies constitute an exception to the general rule of giving notice, because they cannot be assigned without a transfer of the property insured. Under the provisions of the Insurance Act, a life Insurance Policy can be assigned by an endorsement on the back of the policy or by a separate deed of assignment but notice of such assignment must be given to the insurer by the assignee or by the assignor. 7.

Procedure for creation of second charge: a. At the time of considering a working capital proposal, the Bank should obtain a consent letter from the borrower agreeing to create second charge in favour of the Bank on the fixed assets in respect of which first charge in favour of a financial institution already exists. b. A letter should be sent to the financial institution concerned seeking a no objection certificate for creation of second charge. c. The first charge holder, before giving the no objection, will send a format of the consent/authority letter to be signed by the Bank which contains the details of terms and conditions on which the first charge holder is willing to cede second charge on fixed assets. 91 - III

d. The above formalities should be completed, before sanctioning of working capital facilities to a borrower. e. After sanction of working capital facilities, the branch should sign the authority letter and send it to the first charge holder for ceding of second charge. f. The borrower will have to call on the first charge holder on an appointed day for creation of second charge by extending the mortgage/charge already created in favour of the Financial Institution. Generally, this extension is done in the presence of the bank's representative by recording a memorandum of entry in the books of the Financial Institution/s holding the title deeds of the immovable property/fixed assets including machinery. The second charge in respect of some State Financial Institutions holding the first charge is created by entering into a tripartite agreement to be signed by the institution, borrower and the bank ceding second charge. g. Branches should follow up and ensure that the second charge is actually created by the browser as agreed. A letter to this effect from the first charge holder ceding second charge in favour of the bank along with the copies of memorandum of entry/tripartite agreement should be obtained and kept along with the documents. h. In case of limited companies, modification of charge should, be registered with the register of companies (ROC) by filling Form Nos.8 and 13 along with the copies of memorandum of entry/tripartite agreement, board resolution, etc. i. On renewal of the working capital limits to be availed, there is no necessity for any further documentation. j. When there is any enhancement in limit on renewal, a simple agreement of second charge should be obtained from the browser. The agreement should be sent to the first charge holder and his acknowledgement duly obtained. Arrangement should be made at the earliest for creation of second charge.

92 - III

CHAPTER – 8

CREDIT DISBURSEMENTS 1.

General: a. The advance will be released only upon i. ii. iii. iv.

Completion of documentation in all respects as per Bank's rules. registration of charge with Registrar of Companies, wherever necessary payment of processing fee, EM creation charges and any other charges as may be prescribed by the bank from time to time and prior clearance by the competent authority based on pre-release audit report(s) in those where the aggregate of the limits sanctioned is Rs.50 lakhs or above.

b. A copy of branch sanction duly signed and accepted by the borrower should be received back and kept with documents. c. In case of corporate accounts, societies and trusts, the facilities sanctioned and other terms and conditions have to be accepted by the company's Board of Directors, General Body and Trustees and the branch should obtain a resolution to this effect. The resolution should specifically state the names of persons authorized to execute the security documents. d. On being satisfied that complete documentation / security creation / compliance of terms and conditions are completed, pre-release audit to be conducted for applicable advances. 2.

Documentation Process: a. The purpose of documentation is to enforce Bank's legal rights when it becomes difficult to recover an advance in the normal course. The form of documents, mode of execution, stamping, attestation, registration, etc., are dealt with in detail in the Documentation Manual. The instructions in the Documentation Manual should be strictly complied with. b. Branches should scrutinise the sanction, list out documents appropriate to the advance with reference to the terms and conditions, procure them and fill in the blanks correctly without overwriting, cutting, erasing, etc., Advances should not be released except when all the relevant documents are obtained from the parties concerned duly executed by them. The documents should be duly filled in and properly stamped before obtaining the signature of the borrowers. c. It must be ensured that all the documents / undertaking letters as stipulated in the sanction letter are obtained. d. A separate declaration from the borrower should also be obtained that the documents were executed by him / her / them, only after they are duly filled in and understood by him / her / them. 93 - III

e. Branches should appreciate that once the borrower/s avail(s) the facility, it may become very difficult to get the documents or other covenants executed by him / them afterwards, if not already done. Practice of disbursing advance before obtaining proper and full set of cover documents and securities may go against the bank's interest at a later date. f. All fresh disbursements under consortium (whether additions / adhoc / new / modification) shall be effected only after the documentation is completed, which shall be certified by the Circle Head under whom the Branch falls. g. As regards advances for which no standard forms have been prescribed, the branch manager should get the document drafted by a competent legal adviser / bank's approved lawyer. The draft format of the document should be sent to HO : Legal Services Dept for their approval. h. In cases where the prescribed formats of documents are not suitable to any of the terms and conditions, modification/s as considered necessary should be made only with the approval of HO: Legal Services Department and the concurrence of the sanctioning authority. i. In the process of documentation, it should be ensured that, l

l l l

l

l

l

the set of documents are those stipulated for the category of borrower, nature of facility, nature of charges and securities involved. the stamping is adequate for the State concerned. the executants are duly empowered to execute the documents. DPN is stamped adequately with adhesive revenue stamps and signed by the executants across the stamp. printed documents are stamped for appropriate values at the stamp office of the State concerned. In certain states like Tamilnadu, Branch Managers are empowered to affix special adhesive stamps on the documents before or at the time of execution and cancel them by signing across the stamp with date. any correction / addition / deletion / interlineations in documents are authenticated by all the executants. each page of the document is signed by the executants as a token of having read the terms and also as a safeguard to avoid interpolation of pages.

j. If the sanctioning authority has prescribed any pre-conditions before allowing disbursals or operations, these conditions should be fulfilled without fail before disbursal. There should not be any laxity in this area. k. Before actual release / disbursement, a note of compliance shall be prepared indicating whether all terms of sanction have been complied with. l. The Branch Manager / Chief Manager / Assistant General Manager shall endorse an order clearly permitting release of limits. 94 - III

3.

Registration of charges in case of Limited companies: a. In case of advances to Limited companies charges as required by Companies Act should be filed with Registrar of Companies. b. Before creation of charge on land, buildings, Plant and Machinery, share securities, fixed deposits etc., income tax certificate as required u/s 281(i) and (ii) should be obtained in all cases where borrowers are assesses to Income Tax. c. The advance(s) sanctioned shall be secured by the personal guarantee of all financially involved Directors. A declaration shall be furnished to the effect that the Company has neither paid nor pay in future any commission /fees/salary to any Director for giving his/her guarantee. d. Charge by way of hypothecation/mortgage must be registered with the Registrar of Companies within 30 days from the date of execution of the documents and copies of Form 8/13 and receipt for payment of necessary fees for filling the same must be furnished. e. Search will be conducted at the office of the Registrar of Companies to ascertain the subsisting charges, if any. All fees, charges and other expenses in this regard shall be to the account of the borrower(s). f. The Bank shall have a nominee director on the Board of the borrower-company, whenever so required by the Bank. Promoter directors / majority shareholders shall not sell / pledge their shares to third parties without bank's prior approval. g. The company shall pass necessary resolutions under the Companies Act 1959, for availing facilities from the date. h. The borrower – company shall produce the certified copy of the relevant pages of Register of Charges maintained in accordance with Sec.143 of the Companies Act, 1956 as and when required by the Bank.

4.

Conduct of Pre-release Audit: a. Pre-release Audit is stipulated in respect of advances with limits of Rs.10 lakh and above in order to bring in discipline with regard to compliance of terms and conditions of credit sanctions, zero error documentation and conduct of accounts. b. Pre-release Audit shall cover only pre-disbursement conditions and completeness in documentation. c. Request for any modification / amendment / waiver of the terms and conditions of sanction and for taking individual documentation pending finalization of joint documentation should be referred to the respective sanctioning authority. 95 - III

5.

Valuation and Verification of Securities: a. Fixed Asset - Acceptance of immovable properties offered as security is subject to: i. legal opinion of the Bank's approved lawyer(s) conveying a clear, valid, subsisting and marketable title. ii. valuation of the property by the Bank's Approved Engineer / Revenue authorities. iii. furnishing of up-to-date encumbrance certificate showing NIL encumbrance and up-todate tax paid receipt at the time of documentation. iv. If immovable property is taken as additional security, Equitable Mortgage by depositing original title deeds or Registered Mortgage as the case may be should be done before disbursal. The property should be valued by the Bank's approved Engineer and also legal opinion from Bank's lawyer should be obtained in the prescribed formats. v. In respect of landed property, the valuation may be obtained from the Revenue Authorities. In any case, the valuation must be conservative and the Branch Manager should make discreet and independent enquires about the property, the market value and the guideline value to satisfy himself that the value of the property, the market value and the guideline value to satisfy himself that the value of the property has not been inflated. vi. Immediately on completion of 4 months from the date of creation of Equitable Mortgage, further encumbrance certificate shall be produced; Thereafter, encumbrance certificates and property tax paid receipts shall be produced every year. vii. In case where first charge on fixed assets is in favour of other banks/financial institutions, it should be ensured that second charge on such assets is made in our favour, unless waiver of the same has been permitted by the sanctioning authority. viii. Machinery, equipment, vehicles, etc., charged to the Bank shall be painted with the Bank's name or fixed with the bank's name board. ix. Securities offered for one or more facilities and charges to the bank shall also stand as additional security for all other facilities already granted or shall be granted from time to time. x. Fixed Assets charged to the Bank shall not be leased / disposed / substituted / re-located without the prior approval of the Bank. b. Stocks under Hypothecation / Pledge: i.

Bank's name board with specific mention of the branch name shall be displayed prominently both inside and outside the premises where the stocks pledged / hypothecated to the Bank are stored.

ii.

It should be impressed upon the borrowers that they could undertake job works only with the prior approval of the Bank. Such cases should be advised that the goods received for job works should be kept separate and should not be included with the stocks under hypothecation. During inspection of the unit, this aspect should be specifically verified.

96 - III

iii.

iv. v.

vi.

Where our borrower has given goods/stock to third party for processing, the said third parties processors / their bankers should furnish a no-lien certificate on the stock lying with them on behalf of our borrowers. A list of such third party processors / location should be held on record for registration at their sites. Strict discipline should be ensured in regard to the monthly submission of stock statements by the borrowers. Periodical inspection of the unit/stocks/assets should be conducted. While arriving at the drawing power against stocks/book-debts in the monthly statements, sundry creditors for goods (including those under suppliers' credit and co-acceptance) and stock under DA/LC are to be deducted from the value of stocks declared. Confirmed orders based on which packing credits are to be advanced shall be subject to obtention of proper credit opinion on the buyers.

6.

Precautionary Measures for Different types of Facility: a. Term Loans: i. No advance payments should be made to the suppliers of machinery. While making disbursements of the term loan for purchase of assets including machinery, payments should be made directly to the suppliers. Proper follow-up should be made to ensure that the assets have been delivered / installed in terms of the delivery schedule. ii. Disbursements towards cost of construction should be made in stages depending on the progress made. For valuation upto Rs.5 Lakhs. Bank's approved valuation need not be insisted at each stage and the assessment could be done by the Branch Manager himself. Where the valuation exceed Rs.5 Lakh, certificate from the approved engineer should be obtained at each stage, before making further disbursements. iii. Any shortfall in margin/cost overrun shall be met by the borrower(s) from his/their own sources. iv. Repayment of instalments shall commence from the month succeeding the month of availment. Interest shall be paid as and when charged by the Bank. Any default in payment of interest/instalments on the respective due dates will attract overdue interest on the defaulted amount at 2% over and above the contractual rates or at such rates as applicable from time to time. v. The Bank may at its discretion recall the entire advance even upon default of a single instalment. vi. In case of advance against vehicles, Bank's hypothecation shall be noted in the RC book and a copy of the RC Book along with the duplicate keys of the vehicle shall be lodged with the Bank. Comprehensive insurance cover must be obtained for the purchase value and renewed thereafter annually. vii. At its sole discretion, the Bank may consider availing refinance from IDBI/SIDBI or such other refinancing agency and the borrower(s) shall be bound by the terms and conditions stipulated by such refinancing agency.

7.

Release of Bills Purchased Limit: a. In case of DABP limit, pre-accepted hundies should not be purchased. 97 - III

b. Documentary bills must be accompanied by RRs/LRs of IBA approved transport operators. c. In case of DABP limit, bills drawn on reputed parties on whom satisfactory credit reports are available from their bankers will alone be purchased. d. In case of Supply BP limit, bills drawn on Government Departments/Undertakings and reputed Limited Companies alone will be purchased. A Power of Attorney in favour of the Bank to receive all payments shall be executed. e. The Power of Attorney executed in favour of the Bank in respect of supply bills limit should be registered with the drawees. f. Permitting operations in KCC / PC g. In case of KCC/PC limits sanctioned, the Bank will advance only against fully paid stocks. Stocks of more than 6 months old will not be reckoned for drawing power, unless specifically approved by the sanctioning authority. Whenever job works are to be undertaken, they shall be only with the prior approval of the bank. In such cases, the goods received for job works should be kept distinctly and not included with the borrowers' stock under hypothecation. h. Monthly declaration of stocks with break-up of items as (a) less than 6 months old and (b) others shall be submitted in the Bank's format within 15 days from the end of every month. Noncompliance in this regard may lead to the return of cheques issued for want of cover, as the Drawing Limit in such cases will be marked as 'NIL'. Delayed submission will also attract levy of additional interest as per Bank's rules in force from time to time. i. While submitting stock statements, the amounts payable to creditors / suppliers of materials, advance received against orders, etc., as on the date of stock statement as also the full particulars of stocks sent to subcontractors for processing shall be furnished. j. In case of KCC, separate godowns / enclosures must be provided to the satisfaction of the Bank and free accessibility to the Bank's officials for lodgement / release / inspection of goods must be ensured. k. Assets charged to the Bank are subject to inspection by Bank's officials from time to time. Goods charged will also be subject to stock audit as per the Bank's norms. All expenses incurred in this regard will have to be borne by the borrower(s). l. Stock under hypothecation shall be converted into pledge at the Bank's discretion, as and when considered necessary. m. Where goods are purchased under Letters of Credit on usance terms, the borrower(s) will build up funds to meet the LC on the due date. Such goods should not be included in the stock statement. 98 - III

n. The borrower should ensure that the balance in the account including the periodical interest chargeable is well within the drawing limit at all times. o. Before availing packing credit facility, irrevocable LCs of prime banks / firm orders shall be lodged with the branch. Where post-shipment credit is sanctioned by way of FBN / FBP etc., pre-shipment advance against the relative irrevocable LC/Confirmed Order will be adjusted out of the proceeds of the said bills. 8.

Export Credit: a. In case of exporter borrower(s), he / they shall, i. ii. iii.

9.

apply for suitable credit limit, buyer-wise and get them approved by ECGO, obtain for suitable credit limit, buyer-wise and get them approved by ECGC, obtain specific approval of ECGC for any extension of Usance under DA or conversion of DP Bill into DA Bill and

Ensuring end-use of funds: a. The branch should take utmost care to verify whether the advance granted is used for the purpose for which it is raised. In case of advances for purchase of equipment/machinery/vehicle/other movable assets, the cost price of such articles should be sent directly to supplier of goods. The delivery of articles by the supplier to the borrower should be ensured. On arrival of equipment or machinery etc. a visit to the factory/premises of the borrower should be made to ensure the equipment/machinery is installed and is in working condition. The case receipt / bill should be kept with our records similar procedure may be followed in case of advances given for purchase of immovable property, say for example, purchase of flat or industrial shed by the borrower. b. In case of advances given to construction activity the disbursal should be made in stages in accordance with the progress of construction already achieved. c. In case of OCC accounts borrower's factory or shop or premises is to be visited to ensure availability of sufficient stocks to cover our limit. The first stock statement obtained should be attached along with OCC agreement executed by the borrower(s), as it forms part and parcel of the agreement. d. When borrower(s) purchase(s) stock from the advance amount, it is desirable to instruct the borrower to ask his suppliers to route the bills and document of title to goods through our branch. e. Before allowing operations in KCC account, the Branch Manager should personally inspect the goods offered as pledge which is stored in the godown.

99 - III

10.

Insurance: a. Insurance against fire, strike, riot and wherever necessary burglary risks covering the goods/articles/machinery/immovable property taken as primary or collateral security should be taken. Due date of expiry of insurance policies covering our securities should be diarised and action taken for renewal of such policies well in time. For this purpose an insurance register should be maintained month wise so as to enable the Branch Manager / Officers to get the dates of policies expiring on a particular month at a glance. a. If loss of securities occurs at a later date due to fire, burglary or any risk covered under the policy, steps should be taken immediately for lodging our claims with Insurance Companies. If the Branch Manager has a liaison with the field level officers of the Insurance Company, his work will become easy for getting settlement of claims etc.

11.

Financial Discipline: a. All fund based / non-fund based / fee-based transactions shall be routed through the account with our Bank only, unless specifically exempted. Incase of consortium accounts pro-rata share shall be routed through our Bank. b. The borrower(s) shall submit audited / unaudited financial statements on quarterly / half yearly / annual basis. c. Borrowing / investment programmes having an adverse impact on cash flow i.e., those affecting the liquidity of the borrower shall not be undertaken without the prior approval of Bank. d. The borrower(s) shall not enter into any borrowing arrangement/extend guarantee to others without the prior concurrence of the Bank. Entering into leasing / HP transaction will be subject to Bank's prior approval and ability of the borrower(s) to generate sufficient surplus to secure the liabilities. (However this condition will not apply to NBFCs whose main business activies indulge leasing / hire purchase). e. Unsecured loans from friends / relatives / partners / Directors shall not be repaid during the currency of the advance. An undertaking letter from such creditors to this effect shall be submitted to the Bank.

12.

Other Aspects: a. Changes, if any made to the structure of ownership/management of the borrowing concern shall be promptly informed to the Bank. b. The Bank reserves to itself the right to cancel/suspend/reduce any or all the limits sanctioned and to alter / amend / vary the terms of sanction including rate of interest at its sole discretion without assigning any reason whatsoever. 100 - III

c. In addition to these terms and conditions, all the facilities sanctioned shall be subject to the Bank's rules as well as the directives issued by RBI from time to time.

13.

Utilisation of Limit: a. Working Capital Advance is generally in the form of cash credit against stocks/book debts and the parties are allowed to draw to the extent of the drawing limit for their working capital requirements. b. The advance must be used for the purpose for which it is sanctioned. The facility is liable to be recalled in case of any deviation in this regard. c. Unless otherwise specified, the sanction of working capital limits will remain in force for a period of one year the date of sanction. Any request for renewal/enhancement should be made at least three months in advance and the application should be accompanied by all the relevant data as required by the Bank. d. Processing charges for renewal of facilities will be charged irrespective of the fact whether the renewal papers are submitted or not. However, continuation of facilities will be at the sole discretion of the Bank.

14.

Take-over of accounts from other banks/financial institution: a. Take-over of accounts from other bank/s shall be considered where, i. ii.

iii.

15.

the unit's genuine credit needs are not being met by their present bankers as evidenced by their scale of operations or for better terms with our Bank. substantial foreign exchange business especially exports will accrue to the Bank as a result of the takeover. (The entire advances should be taken over in such cases and no concurrent borrowings should be permitted, unless we are entering a consortium as member or lending under a multiple banking arrangements). the existing bankers approach us for such take over either as a result of constraints in resources or otherwise or in the interest of providing the units with better facilities than what they are able to provide.

Precautions: a. The unit's financial position and past performance should be satisfactory. The unit's equity, liquidity and profitability should be in conformity with our Bank's norms. b. Only borrowal accounts classified under the Standard Asset category should be considered for take over. No sick or unsatisfactory accounts should be taken over under any circumstances. 101 - III

c. Satisfactory credit opinion on such account should be obtained from their bankers. d. The Credit Rating parameters as applicable to other category of advances shall also be applied to accounts proposed to be taken over. 16.

Transfer of loan accounts between banks: a. All parties including those enjoying aggregate credit limits in excess of Rs.5 Crores are free to transfer their accounts from one bank to another without the requirement of a no objection letter from the existing bank. Thus, for taking over any borrowal account, the transferee bank need not obtain the consent of the transferor bank provided it involves take-over of the entire liabilities in respect of both fund-based and non-fund based facilities enjoyed by the borrower concerned. However, if any industrial group maintaining more than one account with a bank seeks to transfer only a good account leaving an unsatisfactory account with the existing bank the latter can refuse to allow such transfer, unless arrangements are made by the party concerned to the existing bank's satisfaction. b. Incase of borrowal under consortium arrangement, if a borrower desires to replace an existing member bank by a non-member bank, the consortium leader or the others banks should not resist the entry of the new bank into the consortium irrespective of the amount involved, unless the members are satisfied/convinced that there is no need for inducting a new members just because the borrower proposes the same. c. Before taking over an account, the transferee bank should obtain the necessary credit information from the transferor bank (a) Setting out the state of borrowers accounts as well as his financial position and credibility and (b) indicating whether the borrowers relationship with the transferor bank has been generally satisfactory and if not the specific adverse features noticed etc., so as to enable the transferee banks to be fully aware of the irregularities, if any, existing in the borrowers account with the transferor bank. d. The formalities such as fresh documentation, transfer of securities etc. should be completed between the transferor and transferee banks as expeditiously as possible and it should be ensured that the transferor bank's interest are fully protected, e. Soon after the takeover, the transferee bank should make an independent assessment of the credit requirements of the borrower by calling for complete financial, production and sales data as also the latest annual accounts of the borrower so that the borrower's genuine credit needs are fully met by that bank. If on the basis of such assessment, grant of additional /enhanced credit limits is warranted, the transferees bank should ensure that there is no relaxation in financial discipline vis-à-vis the method of lending , information system, etc. f. No Bank shall extend any additional banking facility or open current accounts, in favour of a party already banking with one or more banks (with or without a formal consortium) without obtaining the prior concurrence of the existing bank(s) 102 - III

g. It will not be permissible for any bank outside the consortium to extend any additional credit facility by way of bill limits, guarantees/ acceptances, letters of credit etc. or open current account for the borrowers without the knowledge and concurrence of the consortium members. h. Entry in a new account under a consortium or multiple- banking arrangement shall not be regarded as a take –over. In a running consortium/Multiple Banking arrangement, our Bank can propose to take over the existing/ fresh share of lending from the existing member banks and such entry is subject to the following conditions: i. An independent marker report should be obtained which would reveal a good opinion on the borrower. j. Satisfactory credit opinion from banks from whom the account is being taken over shall also be obtained, before release of the sanctioned limits. k. Statements of account with existing banks for a reasonable period reflecting satisfactory operations for verification and records to be obtained. l. Standard Asset Classification for the last two years with the existing banks shall be ascertained by obtaining Certificates/ credentials to that effect from the banks. m. Account should have recorded net profit after tax for the previous two years out of 3 years and business conditions indicate improvement in profitability, unless the account is in operation for less than three years. NB. Once the system of obtaining CIBIL report gets stabilised, Credit information Report (CIR) can be taken from CIBIL in lieu of credit opinions from banks. 17.

Security: a. While taking over of facilities from other banks, the primary security offered/charged to them should continue as security for our Bank. In respect of additional securities/ personal guarantees, any substitution/ modification may be considered by the sanctioning authority based on the current exposure and adequacy of security coverage. The proportion of security coverage for the liabilities proposed to take over should be based on the exposure and commercial judgement and in accordance with our policy.

18.

Liquidation of liabilities: a. In respect of take - over of standard accounts, we may consider liquidation of liabilities of loan from the Financial Institutions/ banks, provided those liabilities are in order.

19.

Repayment Terms: a. Repayment terms shall be based on the cash flow statement and the sanctioning authorities may determine the repayment schedule.

103 - III

CHAPTER - 9

CREDIT MONITORING 1.

General: a. While a qualitative credit appraisal indicates the viability and bankability of a credit proposal, post sanction measures such as timely disbursement, proper documentation, monitoring and follow-up play a crucial role in ensuring that the account continues to be a performing asset. b. While timely disbursement of advances is the sine qua non for the initiation of a project as scheduled, monitoring ensures that the project continues to run in terms of the projections made. Monitoring also includes anticipation of problems in advance and taking suitable corrective action in consultation with the borrower. c. No industry becomes sick overnight and a careful watch over the working of the unit would help in tracking and averting sickness in the incipient stage itself. d. Close monitoring is of paramount importance particularly in the light of the fact that once a unit slips into sickness, it becomes difficult for the Bank to recover its advance in full or even part of it, at times. e. When the release of working capital is after the capital assistance for a new project or expansion of an existing project, bank has to be satisfied about the promoters having brought in their share of margin on working capital provided for in the project cost. Release of working capital in such cases need to be commensurate with the installed capacity and production projected for the forth coming period.

2.

Security Monitoring: a. Bank borrowings must be adequately secured by core current assets. For ensuring this, margins are prescribed on each of core current assets. Irregularity in the cash credit account arises when bank borrowings exceed the Drawing Power and the security position is adversely affected. In cases where assets, whether existing or to be created out of bank borrowings are taken as security, the branch should ensure that, i. the security conforms to the terms of sanction, is adequate, in good condition and readily enforceable. ii. all the legal formalities have been complied with and a valid charge on the security in the bank's favour has been created. 104 - III

iii.

the movable property such as goods, stock exchange securities, documents of title to goods, life insurance policies, etc., pledged to the bank are in the effective possession of the branch. iv. where the security is not so held (as in the case of hypothecation), the branch has obtained adequate legal documents for taking 'effective' possession of the property in case of need. v. in cases where the securities are held with other branches, their confirmation of holding is obtained periodically. vi. all the securities are received and entered in Securities Register against the authentication of Branch Manager or the officer concerned. vii. the securities are always kept in the joint custody of two officers. viii. the confirmation letters of securities held and the acknowledgement of securities released are examined and marked off in the Securities Register against their joint signature. ix. a close watch is kept by the branch on the market price of the security held, through personal enquiries and reference to published price lists (like stock market quotations) as also information available in financial and other newspapers, journals and periodicals, besides obtaining from the borrower's documentary evidence, vis-à-vis the value declared by them. x. the goods pledged or hypothecated to the bank are according to the specifications furnished for their prices, quantity (expected turnover) and quality and that they are inspected periodically by the Branch Manager or other officers on rotation basis. b. While arriving at drawing limits on stocks/book debts, sundry creditors for goods should be deducted from the values of such stocks/book debts. 3.

Collection and Analysis of Data: a. Following are important returns/statements in the monitoring of working capital advances: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi.

Monthly stock statement and Monthly Data on Production and Sales (MSOD) Inspection of stocks Operations in the account Statements under Quarterly Information System (QIS) Annual Audited Accounts Review/renewal of advance Asset classification under IRAC and other norms. Credit Rating Review during quarterly consortium meetings wherever applicable Stock audit and concurrent auditor's report, comments by external auditors or by LFAR and the reports of Credit Monitoring Officers. Report on Unit Inspection 105 - III

4.

Scrutiny of Stock Statements: a. Borrowers should submit a stock statement showing the quantity and value of stocks hypothecated to the bank. The stock statement should clearly show the value of unpaid stock, stocks under DA/LC etc. b. Branches should ensure submission of stock statements by borrowers at regular/prescribed intervals. The stock statement received should be properly made use of by entering the advance value, insurance in force, verification of declaration in the statement, entering the relevant details in the appropriate registers, cross verification of particulars with borrower's books and physical verification of stocks during inspection etc. Operation should not be allowed based on an old stock statement which would not give a correct picture of the state of affairs. c. On obtention of stock statements, branch should scrutinise the same keeping in view the following : i.

Valuation of stocks should be done in the same manner and adopting the same principles as for annual financial statements. ii. Stocks - quantity and value should be reconciled from month to month showing opening stock, receipts, issues and closing stock. iii. While arriving at drawing power on stocks, trade creditors (including LC creditors) should be deducted. iv. Wherever book debts are financed, the book debts upto the tenor accepted in the CMA only should be recognised. v. In case no specific tenure is fixed by the sanctioning authority, only book debts upto 180 days are to be taken cognisance for arrival of Drawing Power. vi. Receipts and Issues in turn should be reconciled with the data on production and sales. For example, receipts in finished goods should be equal to the value of production during the month and issues should tally with the cost of sales. vii. All companies enjoying credit limits in excess of Rs.10 lakhs should send monthly data on production and sales (MSOD). These data shall also be used in conjunction with the Stock Statement. viii. The monthly data on production/sales is to be reconciled with quarterly returns furnished under QIS, wherever applicable. ix. A review of stock statements (at least once in 6 months) shall reveal the degree of movement of inventory, raw material, finished goods, etc., and indicate the non-moving items and the degree of obsolescence of inventory. For this purpose, borrower should give break up of large value items under raw materials, stock in progress and finished goods. Such observations shall be confined only to high value items constituting substantial monetary value of inventory. (Stock-in-process, for instance, would remain the same if production is more or less uniform every month) 106 - III

x.

5.

For advances to construction companies, stock statement should include data on contract, extent of work done, amount of advance received and value of bills raised etc.

Inspection of stocks: a. Stock inspection is usually done on a monthly basis with an element of surprise maintained at the time of inspection. Such inspections are besides Stock Audit exercise for fund based and nonfund based working Capital limit of Rs.1 crore and above. b. Where there are large volumes of stocks, thorough stock inspection should be taken up on a small portion in quantity but significant in value. c. All the establishments of the borrower in the same city like factory, godown and office should be inspected on each inspection. d. Stocks shown in the stock statement shall be cross verified with those in the books of accounts and the records maintained for the purpose of excise and other statutory authorities. e. Valuation rates adopted for stocks with market rates/cost shall be verified to ascertain whether the company follows the same basis of valuation as disclosed in the audited Balance Sheet. f. The supplementary data on consumption, production, sales etc., shall also be verified with the books of accounts of the borrower. g. Insurance on stocks shall be examined for its adequacy and coverage and to ensure that all the policies are in force. h. Wherever the companies have an internal audit system, the respective reports shall be called for and checked up for its effectiveness in controlling the financial functions. i. ii. iii.

Other factors of relevance at the time of inspection General working and tempo of activity Power supply, alternate of power supply if any. Utilisation of power shall be verified from meter reading. If through alternate supply the fuel consumption etc., shall be cross checked. iv. No. of shifts worked and labour statements v. Purchase/sales returns, quality control, scrap/wastage management vi. Maintenance of Account Books and Records vii. Slow-moving/old stocks and book debts viii. Statutory liability/pressing creditors 107 - III

ix. x.

Difficulties, if any, experienced in carrying out inspections. Wherever shortfall in stocks/book debts is noticed, the matter should be reported to controlling office. While the borrower would be asked to regularise the accounts, the financial position of the company has to be examined in detail. xi. For Book Debts, books of accounts and records of the borrower must be verified and it should be ensured that periodical confirmation from debtors has been obtained by the company. xii. Internal Reports of the company as to age and quality of book debts, sales returns of finished goods may also be scrutinised. i. Consignment stocks in and out to be supported by proper records. j. Wherever any additional construction/other capital expenditure is noticed/incurred during unit inspection, it should be cross checked for source of funds to finance such activities. 6.

Stock Audit: a. Stock Audit is an effective credit-monitoring tool, which offers an opportunity for making a qualitative assessment of the advances. The scope of stock audit is to go in for a detailed study on the adequate availability of primary security, its nature and quantity. Stock audit covers in its ambit the quality of stocks and Book Debts, their value and their conformity to the criteria of current assets holding levels. b. Stock Audit is a supplement to the system of inspection. It helps in identifying irregularities, thereby prompting for initiation of suitable and timely remedial measure which is crucial in improving the quality of loan assets of the Bank c. Conduct of stock audit: i.

ii.

The stock audit shall be carried out by an agency appointed by the Bank, the charges of which are to be borneby the borrower. Any deviation in this regard shall be with the prior approval of the sanctioning authority. The branch should initiate steps for conducting Stock Audit for all eligible accounts well in advance before the expiry period and should time it with an element of surprise.

d. Eligible Accounts and Frequency: i.

Stock Audit has to be conducted once in a year for accounts with fund based and non-fund based working capital limit of Rs.1.00 crore and above. The non-fund based limit includes LC DA, Standby LCs and Guarantees permitted for procurement of raw materials. However, the gap between two successive Stock Audits should not exceed 15 months and not less than 6 months. 108 - III

ii.

For accounts identified by the Monitoring Committee for slippage/showing signs of slippage and for accounts specifically directed by the Sanctioning Authority, Stock Audit has to be conducted at Quarterly / Half yearly intervals as directed.

e. Consortium / Multiple Banking accounts: i.

ii.

In respect of Consortium accounts in which we are the leader, wherever stock audit norms are applicable, our Bank has to conduct Stock Audit and circulate to all the member banks . If our Bank is a member of the Consortium, it should be ascertained from the leader the arrangement made for conducting stock audit wherever applicable. If stock audit is not initiated by the leader, our Bank may conduct it by an approved cost accountant of our Bank in consultation with the leader and other members in the consortium. This will be applicable to multiple Banking arrangement also.

f. Coverage: i. Stock audit should cover Book Debts, Pledge stocks, Fixed assets (charged to Bank either as primary or as collateral security) and goods covered under LCs on DA terms and standby LCs in addition to inventory. ii. The stock audit report should cover the following: l Physical verification of the quantity of stock declared in the stock statement by visiting the places of storage; l Reconciliation with the stock statement lodged with the bank; l Correctness of valuation of stock by scrutinising invoices, valuation of raw material, stock-in-process, finished goods, age, quality etc.; l Valuation of obsolete / slow moving stock; l Recovery of obsolete / non-moving stock; l Major customers of the borrower; l System for maintenance of stock and stock records, movement of stock from stores, l policy of procurement, management of stocks; l Credit policy and control of receivable (evaluate the debtors); l Age-wise break-up of receivables and their realisability in normal course; l Evaluation of Sundry Creditors for purchase and its relationship to the bank finance; l Major Sundry Creditors and period of credit and outstanding LCs; l Comment on the accounting practices of the borrowal company; l Computation of drawing power based on physical inspection and verification of records and whether there is variation from statements submitted to the Bank; l Scrutiny of QIS returns, cash flow, funds flow statements etc.; 109 - III

iii.

Besides the above, the stock audit shall also be extended to cover details pertaining to plant and machinery purchased out of the Term loans. A critical evaluation in this regard will help in ascertaining the installed capacity, life span and working condition of the machinery.

g. Reporting, Monitoring and Closure: i. The commencement, progress and completion of stock audit should be monitored by the bank. The Auditors to be clearly apprised of the Bank's requirement as regards the extent and coverage of stock audit. ii. The bank should obtain the stock audit report and after analysis forward it to their controlling authority along with their views/observations.. iii. In consortium accounts where we are the leader, it should be part of the agenda for the next meeting, to be discussed and recorded. iv. Bank should follow up for rectification of the irregularities pointed out in the Stock Audit Report and process the closure of Stock Audit Report within 3 months from the date of submission of the Report. 7.

Periodical Inspection of Units and verification of Securities: a. Periodical inspection and verification may also be undertaken of machineries and immovable properties taken as security for term loans. It is to be noted that the purpose of inspection is not only to ensure the availability of sufficient security cover for the advance but also to have a first-handknowledge about the borrower's current business position, his problems, bottle necks faced etc. so that necessary corrective measures can be taken immediately. b. Branches should verify the records available with the borrowers and confirm that cash sales are invariably remitted in the borrower's accounts and payments made for daily cash expenses are proportionate to the size of the business. c. Inspection of the units financed / securities charged on a regular basis constitutes a vital tool in effective credit administration. Besides, the signals forewarning the onset of anyproblems could also be detected during such inspection. d. Though the inspection report must be an extensive one specifying the areas where the attention of the inspecting official is drawn for necessary checking, the comments of the official, may be made in brief, except where details / comments / views are required in detail so that the report can be completed immediately after the inspection. The purpose of including various columns is that the inspecting official does not miss anyone. e. The inspection of units should be done on a monthly basis unless or otherwise the periodicity of the same is specified quarterly / half-yearly etc., in the sanction. 110 - III

f. During the year between the renewals, one of the inspections may be done by an official of the branch, who is not directly handling the account. g. Periodical valuation of securities i.

ii.

8.

In case of goods taken as security for CC/KCC account, a market rate register should be maintained. Periodical movement of prices of commodities offered as security should be recorded in that register and in case of shortfall in value below the limit, drawing limit should be suitably altered or refixed and recovery of excess drawings if any, should be made forthwith. If such excess drawings could not be recovered immediately, a report of such excesses should be made to controlling authority and efforts made for regularisation of the account early.

Monitoring of 'Operations in the Account': a. The operations in the Cash Credit/Overdraft account should be watched to verify whether, i. ii.

iii.

there are healthy fluctuations in the account, depending on the sales etc. there are any drawings for purposes other than the one for which the advance is granted. While it is not possible to check every drawal in cash credit account, a casual check periodically and also as and when large cash payments are drawn, it should be possible for the Branch Manager including the officers in charge of loans and advances department to ascertain that the funds drawn are used only for the business purposes of the customer for which limits have been sanctioned. there is any frequent instances of request for excesses or cheques returned for financial reasons.

b. Branch Managers should take prompt action to get any temporary excess/overdraft adjusted immediately. In all cases, Branch Managers should report the same to respective Circle Head and ensure that proper cover documents are taken and temporary excess/overdraft is adjusted at the earliest. c. In case of borrowers not having multiple banking facilities with us/consortium arrangement, the entire sale proceeds including cash sales should be routed through the OCC accounts or all bills raised should be under bills purchased account. If this is not done, Branch Managers have to verify whether the borrower is having account with any other bank and if so, the borrower must be advised to close that account and ensure that all transactions are routed through the account maintained at the branch. d. Branches should exercise due caution to keep proper vigil over the request of their client for cash withdrawals from their accounts for large amount. This is particularly neces- sary in the case of any cash withdrawals from the newly opened accounts. Withdrawals are allowed normally, only when the accounts are within the drawing limits. The Branch Managers are expected to be cautious when cheques are issued to chit companies and for self drawals for substantial amount. 111 - III

e. Inspectors during the course of scrutiny of accounts shall comment on adverse features, if any, noticed in the operation of the accounts by way of special report to draw the immediate attention of the sanctioning authority. f. The Branch Manager/Officer-in-charge should also closely watch the turn over of various goods pledged/hypothecated to the bank. If certain types of goods charged to us are not moving regularly, it may be a case of dead stock deposited with us. Irregularity of such nature should be immediately brought to the notice of the borrower to regularise the same. In case of persistent irregularities of such nature, the sanctioning/controlling authority should be informed and proper guidance sought. g. The operations in the account need to be put on critical scrutiny in the following aspects: i. ii. iii.

Unusual debit/credit entry Return of Bills Receivables/ Cheques unpaid Repeated requests for additional funds which may indicate decline in sales, low realisation of debtors or payment to pressing creditors, diversion of funds, cash loss etc. iv. Decline in level of operations in the account. v. Large return of inward bills vi. Default in payment of Term Loan instalments/interest vii. Devolvement of LCs, invocation of guarantees or excessive extension. viii. Notice of demand from PF/Tax assessment, law suits or other legal action against the borrowers. h. Though scrutiny of cheques and payments in Cash Credit account is one of the methods to detect diversion of funds, such a study of operations in the account has to be in conjunction with examination of the relationship between current asset and current liabili- ties from time to time. The Current Ratio (with proper classification of Current Assets and Current Liabilities), respective share of the bank and borrower's long term funds in meeting the working capital gap are a few indicators of use of bank funds. 9.

Early Warning Signals: a. Basically, it becomes necessary for the branch to be informed of all developments in the borrower's account. Safety of the advance depends a lot on the continued viability of the enterprise in addition to the availability of security of adequate value. Therefore, the performance of the borrowing company should be regularly monitored without compromising on the supervision of the security. b. Some of the warning signals that may help in detecting the slippage of borrowal accounts into NPA category and the proactive measures required at the operational level are given below: i. Frequent excess/devolvement of commitments under letter of credit/non-servicing of ii. Interest/request for release of margins, unencumbered deposits. ii. cheques issued getting dishonoured for want of funds. iii. delay in submission of stock/book debt statement. iv. delay in submission of returns v. year ending being postponed/non finalisation of accounts. vi. attachment orders from sales tax/IT/PF/central excise authorities. 112 - III

vii.

opening and operation of accounts with other banks without our permission resulting in our bank's account becoming dormant. viii. bills purchased/discounted becoming overdue (may be due to direct collection of proceeds by the borrower). ix. activity level coming down in the factory leading to lay off/strike. x. disappearance of stocks hypothecated/machineries charged to the bank. xi. The operating profit is very low but the borrower declares a higher level of Net Profit, which may be due to other income like profit on sale of investments/fixed assets, stock market operations etc., which will be only a one time measure in nature. xii. change in the management/unusually high turnover of key executives/supervisors. c.

Proactive measures required at the operational level, i. ii.

Watching the operations of the account regularly. Carrying out periodical inspection of the unit, at more frequent intervals, if warning signals are noticed. iii. Visit to the administrative office of the borrower and frequent interaction with iv. Accounts/Marketing/Sales personnel of the borrowing entity. v. Scrutiny of the financial statements and the auditors' comments/notes on accounts. vi. Stock audit by external agency. vii. Comparison of the projections with actuals especially sales and profit on a quarterly basis. viii. Informal market enquiries locally and with other banks/institutions will be an enabling factor. ix. Getting information about operations with other banks/FIs. x. Analysing financial data of associate/group companies. xi. Evaluating quality of assets and liabilities which have a bearing on the safety and security/realisability of dues to bank. xii. If comparison of returns with earlier quarters reveal undue movement in the composition of current assets and current liabilities, it will certainly indicate whether the borrower is heading for a liquidity problem. xiii. It is essential that a detailed discussion with the borrower is held and his viewpoints/support needed is ascertained so that any action initiated is not unilateral. xiv. Any rigid attitude on the part of the operational level will result in the borrower distancing himself from the bank, leading to a possible stalemate situation. 10.

Review/Renewal of advances:

a.

Scope: i. Review/renewal of advances is an important post sanction exercise requiring attention on priority basis from Branch Managers and other sanctioning authorities. Review helps to identify the state of health of an advance and is an opportunity to evaluate the performance of borrowers and to adopt remedial measures to safeguard our Bank's interest. 113 - III

ii. iii.

As review / renewal of advances is one of the parameters for evaluation of a bank's performance by RBI, all theborrowal accounts are subject to periodical review/renewal. Review/renewal of advances involves collection and analysis of individual account data like l account behaviour l financial performance l market reports of the borrowers l production performance l overall change in credit rating

iv.

Such an analysis would also be seen in the perspective of industry level performance during the relevant period. Interaction with the borrower is also an important factor at every stage of monitoring and shall provide valuable insights into the working of the company. It is very important that there is regular and periodical flow of information to sanctioning author- ity on the above aspects. v. The review exercise has to pay more attention to future performance of the company, apart from detailing account operations, profitability and security. In this connection, the review will have to cover the market risks and management risks (for example, there may be change in the management or in the quality of management). vi. The financial performance analysis has to give importance to the underlying reasons for the variance in actual performance vis-a-vis projections and management action required to correct the situation. vii. While, normally, an increase in sales is accompanied by an increase in profits, profit projections should be viewed from the point of reasonableness to guard against optimistic projections. Proposals for increased working capital assistance shall be based on increase in sales projection. While sales projections are subject to an objective study as to the feasibility, increase in working capital requirements shall have to be critically studied. More often, the projected increase in sales shall not call for more or less the same increase in Working Capital limits. Any increase in demand for Working Capital without considerable improvement in sales calls for deeper study of the circumstances. Such a trend shall indicate that the company is using current surplus towards liquidation of term loan dues or acquisition of capital asset. viii. The limits sanctioned by the Bank are, normally, valid for 12 months from the dates of their sanction. However, in the following circumstances, branches should review the accounts and submit renewal proposals immediately, even if the limits are not due for renewal: ix. When a partnership firm is reconstituted owing to death or retirement of one or more of the existing partners; x. When there is a change in the directors of a limited company and where one or more of the directors are guarantors; xi. When there is a change in the management, which may materially affect the business adversely; 114 - III

xii. When there is a reduction in the net worth of the borrower; xiii. When there is any other factor, which affects the advance adversely. xiv. The system of periodical renewal of limits provide the Branch Manager with an opportunity to evaluate the borrower's operational performance both quantitatively and qualitatively, to reassess his credit requirements, to check up afresh the continuity or other- wise of his financial solvency, to review the rating of his credit worthiness etc. These aspects help him decide his recommendations as to whether the limits should be renewed or reduced or cancelled. This process also provides an opportunity to the Head Office to consider a proposal afresh from all relevant angles. b. Time Norms for Review/Renewal of Advances: i. Branches should review all advances listed below once in six months and renew the facility once in a year: l Overdrafts l Packing Credit l Cash Credits l Clean Cash Credits l Trust Receipts l Loan Others l Bills Discounted l Inland Bills Purchased l BP/DA Bills l Foreign Bills Purchased l Foreign Bills Negotiated l Although the following are not in the nature of facilities with a regular sanction, these had to be apprised to the sanctioning authority/controlling authority by way of bimonthly reviews, apart from regular follow up: l Temporary Overdrafts l Defaulted Guarantees l Overdue Bills l BP's Returned Unpaid l Foreign Bills Returned Unpaid l Advance Bills ii.

Review of accounts listed below should be made once a year: On Own Deposits l Medium Term Loans – Investment credit l Other Medium Term Loans l Clean Small Loans l DRI Loans l IRDP/SPDA Loans l On Promissory Notes l Consumer Credit Loans l Staff Vehicle Loan l

115 - III

iii. iv.

The time frame prescribed for submission of renewal proposals is as under: For disposing credit proposals the time frame as given below may be followed:

Ø Fresh/renewal with enhancement – within 45 days Ø Renewal of existing limits -- within 30 days Ø Review of existing limits/sanction of adhoc limits -- within 15 days v. The Branch Manager will not be in order in continuing the facility, if the proposals are not processed before due dates. vi. The due dates for renewal of limits should be promptly diarised so that the job of gathering particulars can be taken up sufficiently in advance and the proposals can reach the sanctioning authorities well within the time frame given above. vii. If for some unavoidable reason, the proposals for renewal could not be submitted in time, the branch should submit a review proposal with working of the accounts. When audited statements are not available, financial statements can be prepared based on projections or proforma statements. If proforma statements are also not available, branches may submit the renewal proposals with necessary remarks. But on no account the proposals should be delayed beyond due dates. viii. Branches must, however, follow up with the borrowers for early submission of particulars/financial statements etc. They should be educated in this regard and apprised that for sanction of realistic credit limits, provision of all necessary/relevant particulars in time is necessary. Sanctioning authority should be kept informed of the status. ix. Regular and adhoc credit limits need to be reviewed/regularised not later than three months from the due date/date of adhoc sanction. In case of constraints such as nonavailability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. c.

Study of Balance Sheets and other financial statements: i.

The financial statements from borrowers are supplementary to the bank's assessment on the operation of accounts, securities and documents. Branches should study the Balance Sheet and other financial statements submitted by the borrower and give their comments on the liquidity, solvency, profitability and turnover of assets, while submitting the review/renewal proposals.

ii.

If the study of financial statements indicates symptoms of over-trading, decline in profits, decline in sales (in terms of quantity and/or price) decline in net worth/negative net worth, deterioration of current ratio, decline in gross profit and/or operating profit margin, mounting external debt, poor inventory turnover, diversion of funds outside the business, diversion of short term funds for long term uses etc., the Branch Manager should offer his comments on the reasons responsible for such situations and on the advisability or otherwise of continuing the limit. 116 - III

iii.

d.

11.

Branch Manager should make a study of performance vis-à-vis the projections made and list out major area of variance/s and comment on the reasons for such variance/s, external or internal, controllable factors, etc. Reports on Review/Renewal of Advances:

i.

Branches should submit a Quarterly Statement on Review/Renewal of Advances to their Circle Office. The statement should include the entire borrowal accounts credit limit wise under the respective heads including loan against deposit, Term Loans etc.

ii.

In cases where neither renewal nor review is possible, a status report of the account has to be necessarily submitted without loss of time and such reports have to suggest the plan of action for regularisation of the account.

Keeping the documents alive for legal action: a. Acknowledgement of debt in a bank specified format should be obtained from borrowers/guarantors once in a year. This will afford an opportunity for the Branch Managers to have a discussion with the borrower about the advance account. b. Branches may segregate loans with balances upto Rs.25,000 schemes separately for easy and prompt follow up.

and government sponsored

c. Acknowledgement of Debt should be obtained every year from all the borrowers and the guarantors, which would extend the Limitation period d. The Branch Managers should maintain a diary of DPNs/dates of documentation and even when the DPN/documents are two years old they should initiate appropriate action to get the same renewed. e. Officials from Head Office should be deputed to branches where time barred documents are reported to verify the reasons given by Branch Managers like non availability of borrowers, refusal by borrowers to renew documents etc. f. If the DPN/documents are allowed to get time barred, the Branch Manager will be held personally responsible and appropriate action will be initiated against him. 12.

Monitoring recovery of periodical interest and instalments: a. Proper notices should be sent to the borrowers before the due date of term loan instalments. b. Irrevocable authority to debit loan instalments to cash credit/Current account should be obtained before disbursing the amount. 117 - III

c. Interest debited to loan and overdraft/cash credit account should be recovered immediately. In overdraft/cash credit account, after application of interest, the drawal should be regulated to bring the account within the sanctioned limit or drawing limit which- ever is lower. The excess if any created in cash credit account due to the debiting of loan instalments, should be recovered within 10 days d. The same procedure may be followed for reversing amount in BP returned unpaid accounts and also in overdue bills account. 13.

End-use of Funds: a. In case of Project Finance, branches should ensure end use of funds inter alia by obtaining certification from the Chartered Accountants for the purpose. The Head Office/branch should not depend entirely on the certificates issued by the Chartered Accountants. Branches should strengthen their internal controls to enhance the quality of their loan portfolio. b. The following are some of the illustrative measures that could be taken by the branches for monitoring end-use of funds : i. Meaningful scrutiny of quarterly progress reports/operating statements/balance sheets of the borrowers; ii. Regular inspection of borrowers' assets charged to the lenders as security; iii. Periodical scrutiny of borrowers' books of accounts and the no-lien accounts maintained with other banks; iv. Periodical visits to the assisted units; v. System of periodical stock audit, in case of working capital finance vi. Periodical comprehensive audit of the 'Credit' appraisal function of the branches//Head Offices so as to identify the systemic-weaknesses in the credit administration, if any.

14.

Certificate from Chartered accountants (for Project Finance only): a. With a view to monitor the end-use of funds for project finance, in case the branches/ Head Offices desire to have a specific certification from the borrowers' auditors regarding diversion/siphoning of funds by the borrower, the Bank should awarda separate mandate to the Auditors for the purpose. To facilitate such certification by the Auditors the branches/Head Offices will also need to ensure that the following clause/covenants is incorporated in the loan agreements or suitable consent letter is obtained to enable award of such a mandate by the Bank to the borrower's auditors. I / We hereby confirm the Bank is entitled to a specific certification from my / our auditors regarding end use of funds of the facilities availed from the Bank. I / We have given necessary mandate in this regard to my / our auditors for this purpose. 118 - III

b. c.

d.

The borrowers shall issue a mandate to their auditors under copy to the branch Head Office to facilitate the certification by the latter. In case any falsification of accounts on the part of the borrowers is observed by branches, they, with the permission of Head Office should lodge a formal complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) if it is observed that the auditors were negligent or deficient in conducting the audit to enable the ICAI to examine and fix accountability of the Auditors. Inclusion of Consent Clause in the Loan Documents to disclose Defaulters in future: i.

ii.

As per RBI direction, branches have to obtain consent clause by an undertaking in the loan document from the existing/fresh borrowers/Guarantors to disclose their names in the event of the borrowers committing default in payment of their dues. In case the said borrower wilfully defaults in repayment of loan, decision shall be taken to publicise the names of such borrowers. For this a notice of 10 days is to be given to the borrower communicating our intention to make public the information, unless the borrower rectifies the default within such period.

e. Penal measures: i. In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters would henceforth be forwarded by RBI to SEBI as well. RBI has also decided that the following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated: ii. No additional facilities should be granted by any bank/FI to the listed wilful defaulters. In addition, the entrepreneurs/promoters of companies where banks/FIs have identified siphoning/diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI.

119 - III

CHAPTER – 10

RECOVERY OF ADVANCES 1.

General: a. Bank funds lent are to be recycled. Recycling helps to augment lendable resources of the bank by bringing in more number of needy borrowers to its fold. Better recovery performance boosts the image of the bank. It reduces/eliminates need for provisioningfor bad debts thereby increasing the profits of the bank. Quick recycling of funds through timely recovery of advances by least efforts will reduce unnecessary costs involved, if advances were to be recovered through courts of law. b. As per the recommendations of the Narasimham Committee on Financial system, Reserve Bank of India introduced the prudential norms for income recognition, asset classification and provisioning for credit portfolio of banks. The implementation of the above norms has brought unprecedented reforms in the Indian Banking Industry and the NPA Management in banks has assumed greater importance. Greater emphasis was laid for recovery of the dues and keeping the NPA level at the lowest possible level, as it will have direct impact on the profitability of the Bank. c. In the recent context of Income Recognition and Asset Classification norms, non- recovery of interest/instalment will have a dual effect of reducing our interest income and also increasing the provisioning requirement both of which will be having a bearing on our profitability. d. Steady increase in depositsof a bank is an indicator of growth. The lendable resources of the bank can also be augmented through timely recovery of advances already made. In fact, the recovery of funds thereby mobilising resources for further lending has an additional advantage. That is the entire resources mobilised through recovery can be re-lent without any CRR, SLR restrictions. Thus, the importance of timely recovery need not be over emphasised.

2.

Precautionary measures to avert recovery proceedings:

a. Appraisal: If the appraisal of an advance proposal is properly done and the credit requirements of the borrower are correctly assessed, we can say that the half of recovery is done. It is reiterated that the branches should follow the appraisal procedures meticulously without any deviation. b. The provisions of the Coop. Societies Act should be strictly adhered to while enrolling the borrower as a member which will ensure speedy action for recovery in case of default. Adherence to the relevant provisions of the Respective State Coop. Societies Act will help later in filing of arbitration proceedings and following it up until coop. decree is obtained and the dues are recovered. 120 - III

c. Security/Documentation and terms and conditions: Documents/ Documentation should be strictly adhered to as prescribed by the Bank for various types of credit. d. The advance should be released only after obtaining all cover documents and securities prescribed by sanctioning authorities and also ensuring fulfilment of all terms and conditions by the borrower. e. Disbursal: Disbursal should be so made that it would facilitate proper end use of funds. The cost of machinery etc. should be directly sent to supplier of machinery in case of term loans. The borrower should be allowed to avail working capital limit only after ensuring whether construction of building, installation of plant and machinery are completed and provision of other infrastructure facilities are available. f. Regular Monitoring of Follow-up: Proper utilisation of the credit and the operations/ transactions in the CC A/c, Loan A/c will reduce the risk of default and thereby NPA and improve the recovery performance and the profitability. 3.

Objectives of Recovery: a. The first and foremost objective of a quality 'Recovery Management' is to minimise the accretion of Non-Performing Assets by i. Effective monitoring of the borrowal accounts ii. Timely Review / Renewal of the Credit limits iii. Proper classification of accounts and close monitoring thereof iv. Ensuring recovery of critical amount to avoid slippage v. Ensuring obtention of stock statements from the borrowers in time and review of D.P. vi. Ensuring obtention and proper analysis of other financial statements vii. Restructuring of Standard Advances wherever needed b. Reduction in the level of NPA could be achieved by adopting the following measures: i. Frequent contact / follow up with the borrowers for normal recovery, ii. Filing of suits in appropriate civil courts, iii. Filing Arbitration will ensure speedy recovery as compared to Legal action proceedings. iv. Resorting to debt restructuring, wherever applicable, v. Referring the cases for OTS wherever available. vi. Settlement through Compromise at the Bank/ Branch level. vii. Compromise settlement of dues through LokAdalats as per the NABARD guidelines NB.IDD (COOP)/2143/V-11(mix)/2002-03 dated 24.12.2002. viii. Enforcement of SARFAESI Act, 2002. 121 - III

c. The third objective is close follow-up of the sticky/ irregular accounts including sick units, suit filed and decreed accounts and the cases referred to ARC for speedy recovery of the dues by: i. Timely revival / rehabilitation of the potentially sick and viable units and ii. Execution of decrees within one year of their obtention. d. Another objective of Recovery Management could be upgradation of the existing NPAs by improving the quality of assets through, i. recovery of the overdue amount ii. restructuring/re-phasement/rehabilitation of accounts wherever possible and iii. recovery of amount as per approved schemes of OTS, debt restructuring. e. The last but not the least objective is to prevent deterioration of the quality of the assets by ensuring i. Regular inspection of the securities (both movable/immovable) and ii. Initiation of quick action wherever warranted. Note: Legal action is the last resort adopted for the recovery of the dues. Before initiating any legal action, Bank has to exhaust all other avenues of recovery and after considering the prospects of recovery, the pros and cons of filing of suit have to be thoroughly examined. 4.

Persuasive measures: a. Dialogue with the borrower: Immediately when repayment of an instalment falls dues, the borrower should be contacted in persons to have a dialogue for repayment and to avoid overdues. i. If the overdue continues to the next instalment due, then the borrower and the guarantors should be approached immediately and necessary steps should be taken for repayment. ii. Regular demand notice should be sent and the borrower and guarantors should be repeatedly contacted for repayment. iii. Timely contacts will ensure speedy recovery and no hesitation should be shown in this regard. iv. Further legal/ arbitration proceedings should be initiated. v. Even part payments should be accepted and credit to the loan account to keep the documents alive in the eyes of Limitation Act. vi. All these actions should be in order to ensure enforceability by law. vii. In case of secured advances, proper actions (as per the by-laws of the Bank and as per the provisions of Coop. Societies Act/ Law) should be taken to realise the security and clear the dues/overdues.The Coop. court procedures enshrined in the respective State Coop. societies Act provide ample and faster mode of recovery of dues from the borrowers from Coop. Banks/ Coop Societies. For making the borrowers liable/answerable under the arbitration proceedings – a recovery procedure exclusive to Coop.Banks,-the borrowers had to be made members or Associate members first, i.e., before loans are sanctioned to them. Unlike civil suits, the arbitration proceedings provide faster relief to the coop. Banks. 122 - III

viii. The Bank/Branches should strictly follow the instructions given by RBI / NABARD / HO while taking up rehabilitation proposals of sick units. b. Compromise Proposals:When a borrower approaches the bank for reduction in interest amount/principal amount etc., his request should be considered cautiously. Usually when the borrower is not in a position to carry on his business, and thereby increase his income and where repayment of the dues mainly depends on the realisation of securities/other assets, a compromise proposal can be taken up. i. Such proposals may be considered, keeping in view the securities/other assets available, the time/cost that may have to be incurredon filing a suit, initiating action under SARFAESI ACT, 2002 etc. ii. Compromise proposals should be taken up by the branches only as a last resort, before filing a suit where the Branch Manager considers that the cost of filing suit for recovery will overweigh the benefit. iii. The main objects of a Compromise/ Negotiated settlement are to, l reduce the level of NPAs by accelerated recovery of the same l improve the profitability by reducing NPAs and l recycle the funds so recovered in good performing assets l helps the bank to get an early decree and also reduces the cost of suit and other expenses iv. Compromise formula has to be worked out with the approval of the Board of Management and all compromise proposals should be executed only on approval by the Board of Management. c. Compromise proposals during pendency of a suit: i. During the pendency of a suit, the defendants or some of them may seek to settle the matter either by making the full payment or by submitting a decree. If they make the full payment - plaint claim, cost of suit, interest up to date etc., the matter stands settled out of court and on the advice of the lawyer and the Head Office, the suit may be withdrawn in which case courts refund a portion of the court fees paid at the time of filing the suit. If they intend to submit a compromise decree the proposed terms of the decree may be got ascertained and conveyed to Head Office. ii. If the dues stand recovered within a reasonable time, the branch may agree to a compromise decree, only after getting sanction of H.O. Legal Department/Circle Office whether it grants instalments or fixes a period by which all the dues are to be paid. iii. Normally, compromise decree provide for a default clause enabling us to execute the decree, if the defendants fail to pay the amount/instalments by the stipulated date. Default clause always has to be insisted upon. iv. Care should be taken to see that the terms of the compromise decree are very clear and do not give rise to any dispute at a later date. Care should be taken to include the guarantors also when they propose any compromise with a defendant who is the principal debtor (the other defendant who may be a guarantor will get discharged, in case we compromise with the principal debtor/defendant alone). 123 - III

5.

Negotiated/Compromise Settlement for recovery of NPAs: a. Every Bank may have a policy on Negotiated/compromise settlement for recovery of NPAs the same may be modified from time to time. The policy shall contain, i. formula to determine the compromise amount based on the present paying capacity of the borrower at stipulated rates of return on the dues to the Bank. ii. methodology for reducing the rate of interest. iii. flexible norms for early recovery of hard-core NPAs. iv. provisions to link the recovery to the realisability of securities. v. simplified norms for compromise settlement offer under the small borrowers category. vi. shall aim at recovery of the 'Book Balance', Legal Expenses and the maximum feasible amount of accrued interest through negotiated settlement. vii. shall aim at a Negotiated settlement only when the recovery of dues to the bank in the normal course is found difficult or would take unduly longer period depriving the Bank the immediate benefit of recycling of funds. viii. shall be to recover maximum amount possible with minimum sacrifice. b. Definitions of certain Terms used in the Recovery Policy: i. Total Dues:Total dues shall mean the amount outstanding as on the Reckoning Date together with unapplied interest (calculated at contracted rate, as applicable from time to time, compounded, inclusive of penal interest or as per court order, if decreed).i.e. Total dues = Ledger Outstanding (BOOK BALANCE)+ Accrued Interest + penal Interest + Law Charges, if any. ii. Net Worth: Net Worthof the borrower / guarantor is the realisable assets of the borrower/ guarantor minus the borrowings / outstanding from other Banks as on a date very close to the date of submission of the compromise proposal by the branch. iii. In the case of a limited company, co-operatives or other institutions, the net worth shall be the paid up capital + accumulated reserves minus accumulated losses in the Profit and Loss Account as given in the Balance Sheet as at a recent date. iv. Compromise Amount:It is the amount which the Bank shall accept as the total amount towards full settlement of its dues as per the terms of negotiation. v. Sacrifice:Sacrifice is the quantum of liability of the borrower which the Bank is prepared to forego or waive or write off on account of a negotiated/compromise settlement between the borrower and the Bank. vi. Valuation of Securities: While considering compromise settlements, valuation of securities should be based on the current realisable value. vii. Realisable value of securities: For Fixed assets like land and building, plant/machinery and vehicles under charge to the Bank will be lowest of the following: 124 - III

l l

c.

government guidelines/ registration valuation to be certified by approved engineer. realisable value (given by approved Engineer) taking into account the, Ø location aspects, Ø nature of security, Ø age / size/ volume of security, Ø possession status like tenancy / freehold / accessibility, Ø condition of security, Ø marketability / availability of buyers, Ø statutory dues to the Government on the security). Ø assessed market value (by branch manager after making local enquiries during the visit for inspection of security)

Operational Guidelines: i.

While considering compromise proposals, due emphasis is given to the benefits that accrue to the Bank by way of income, retrieval of provision held, yield and effective rate of return on the NPA, income accrual by way of recycling, besides impact on the capital adequacy requirements. ii. For deciding the quantum of compromise amount or concession, the realisable value of securities (primary/collateral) charged to the bank and networth of the borrower/guarantor as at the time of compromise settlement, form the basis. iii. Every compromise proposal should be supported by or substantiated with the need, reasons or factors as to why the Bank should accept the compromise mode of recovery. e.g. failure of the unit, Government policies, Court Orders, continuous losses and nonviability, death of principal promoter, deteriorating securities, etc. Where securities are adequately available, the reason for entertaining the compromise proposal should be given specifically. iv. Under the negotiated settlement, it should be endeavoured to recover as much amount of non-performing advance, as possible keeping the sacrifice by way of write off or waiver to the barest minimum. v. The Book Balance reflected in the accounts together with the amount outstanding under the Legal Expenses and maximum portion of Interest should be recovered. vi. As far as possible, 'Writing off' of even a part of the book balance should be avoided. vii. Emphasis should be made to recover the doubtful and loss assets which cannot otherwise be upgraded. viii. NPA accounts where irregularities are committed by the borrowers also can be considered under compromise settlement, with a view to avoid blocking of Banks' funds in such accounts. ix. Accounts categorised as wilful defaulter may also be considered for a Compromise Settlement. x. While recommending the compromise proposals to be accepted by the Bank, the adequacy or otherwise of realisable value of primary/collateral securities, net worth of borrower/guarantor at the time of compromise settlement shall be taken into account. 125 - III

xi.

Age of the borrowal account, amount of provision held, marketability of securities, documentation defects such as non-creation of charge, time involved in the on-going legal proceedings, the range of interest rates charged etc. should also be analysed and specified in the proposal. xii. The benefits to the Bank, as illustrated hereunder, arising out of sanctioning the compromise proposal should be highlighted: l Income that goes to Profit and Loss Account, l Amount of provisions which could be retrieved back, l Quantum of NPA reduction and impact on the Capital Adequacy requirement of theBank, l Income that accrues to the Bank on account of recycling of funds recovered or investments in call money/rediscounting operations/alternatives available for profitable deployment of such funds, l Yield / Effective rate of interest considering interest income and retrieval of provision, l Net Present Value/Discounted Cash Flow for the dues recoverable. xiii. An up front amount as prescribed by the Bank should be deposited by the Borrower in a No Lien account with the Bank. xiv. In staff related accounts, when the accounts are guaranteed by the staff, no compromise settlement shall be considered. However, OTS can be considered based on the nature of account with the prior approval of the Board of Management. xv. Any offer/settlement which involves relaxation from the prescribed norms shall be referred to Head Office / Board of Management for approval. xvi. Non-Performing Accounts for which government guarantees are held by the Bank may also be considered for compromise settlement, subject to the approval of the Board of Management. xvii. Negotiated settlements can also be considered in respect of standard assets/ Substandard Assets under special circumstances where the Bank had to exit by taking a view on sacrifice on a case to case basis outside the purview of the Recovery policy. d. The scheme/ proposal for 'One Time Settlement'(OTS) to wilful defaulters, i. shall be considered at the appropriate time to improve the recovery performance with the approval of the Board of Management. ii. senior Executives from Head Office may visit circles / branches where NPAs are concentrated, for an on the spot negotiation of OTS, wherever feasible with prior authorisation by the Board of Management. iii. visiting head office officials can exercise their discretionary powers for on the spot settlement of OTS. However, the OTS proposal should be submitted in the prescribed format containing all relevant particulars. iv. on settlement of OTS, the proposal should be submitted to Head Office/ Recovery Department, for information.

126 - III

e. Terms of Payment: i. Efforts should be taken to recover the dues as per the sanctioned / communicate repayment schedule. ii. Where funds are raised by disposal of fixed assets, full settlement by way of LumpSum Payment must be insisted upon. iii. In case the amount by way of disposal of the assets is not sufficient for full settlement, proper instalments should be fixed depending on the other sources of the borrower/guarantor/s for the remaining amount. iv. It is advisable to fix the number of instalments at not exceeding 12 months for repayment of the principle and interest/ compromise settlement amount. v. The sanctioning authorities may grant extension of time for payment, provided the waiver/sacrifice recalculated upon the date of extended period falls within his powers. vi. Extension of time beyond 12 months need not be considered. In such cases, the compromise sanction shall be treated as cancelled, renegotiated and fresh proposal should be submitted. vii. No compromise proposal should be rejected at Branch Manager's level. It should be referred to the next higher authority or to the concerned sanctioning authority for decision. f. Release of Securities: i. The authority considering the compromise proposal can authorise release of security after all the due are cleared and after ensuring that there are no other direct or indirect liabilities connected to the account/ borrower/ guarantors. ii. In all cases of sanction, the Board of Management may permit authorised officers of the Bank/ Branch to release the securities in full or in part depending upon the nature of credit/ dues. g. Issue of Certificate on closure of account: Wherever after settlement, a certificate on closure of accounts is requested, such certificate is to be issued only after full and final settlement of the liability, duly indicating the fact of the compromise having been accepted by the Bank and adjustment of the account, involving sacrifice by the Bank. h. Appropriation of Recoveries in NPA Accounts: i. In case of recovery through compromise method, recovery is first taken to Book Balance and after fully adjusting, the Balance will be taken to income. ii. In case of suit-filed accounts, recovery both under normal and compromise modes is appropriated towards Book Balance first, then to income, recovery of Legal Expenses, etc. 127 - III

6.

Write off of NPA accounts: a. After critically analysing the chances of recovery in all the NPA accounts, the accounts can be written off only after exhausting all avenues of recovery through normal course / by legal means/ through OTS etc. The exercise of write off has to be undertaken on merits of each case after considering various factors like low / nil income generation, capacity of the borrower / guarantor to pay the dues, availability / state of the securities etc. b. Write-off exercise shall have to be used only as a last resort, when i. the account is classified as doubtful or loss asset. ii. there are no securities available or there is nil / nominal salvage value of securities. Net worth of the borrower / guarantor is nil or nominal. iii. the borrower / guarantor are not traceable after reasonable enquiries. iv. the borrower / guarantor has no source of income. v. full provision has been made. vi. it would only add to the costs to the Bank. vii. there is no use of continuing the suit in case of suit filed accounts and the amount cannot be recovered even if the suit is decreed. c. The authority vested with powers for write off, generally the Board of Management, can exercise such powers for full or partial write off in respect of all NPA accounts requiring write off, subject to the above and the overall powers delegated to them. d. Sanctioning authorities at the time of permitting write off shall stipulate a condition in the sanction letters that recovery efforts shall be pursued in the written off in the following cases. i. Borrower / guarantor would have revived income generating activity so that the branch can strive for recovery ; ii. Borrower / guarantor would have returned to their native place / place of business so that recovery efforts could be pursued; iii. Pursuance of recovery through the legal heirs / close relatives of the borrower/guarantor, is possible on a later date/ stage. iv. Realization through residual value of assets left if any, which has been charged to the Bank; v. Identifying other assets of the borrower/guarantor not charged to the Bank at a later date to write off; vi. Pursuing for recovery from Assets acquired / inherited by the borrower / guarantor subsequent to write off ; vii. Improvement in the position of Net Worth of the borrower / guarantor; viii. Identifying / locating the borrower / guarantor and finding their present address with the help of Village Presidents / Govt. Officials / Previous Managers, staff members etc., ix. The authority exercising the powers of write off should not use such discretion in respect of loans sanctioned by himself / herself earlier and such accounts will have to be referred to the next higher authority. 128 - III

e. After issue of proper notices for recovery of principal and interest and other charges to the borrower and guarantors, if there is no recovery of the dues, then legal action/ arbitration proceeds may be initiated with the approval of the Board of Management. Even after the decree, if there is no recovery, steps may be taken to realise the assets/ securities offered for the advance or for attachment of the goods/ assets of the borrower/ guarantors. 7.

Board for Industrial and Financial Reconstruction (BIFR): a. In the wake of sickness in the country's industrial climate prevailing in the eighties, the Government of India set up in 1981, a Committee of Experts to examine the matter and recommend suitable remedies. Based on the recommendations of the Committee, the Government of India enacted a special legislation namely, 'The Sick Industrial Companies (Special Provisions) Act, 1985' (1 of 1986) commonly known as the 'SICA'. b. The main objective of SICA is to determine sickness and expedite the revival of potentially viable units or closure of unviable units (unit here in refers to a Sick Industrial Company). It was expected that by revival, idle investments in sick units will become productive and by closure, the locked up investments in unviable units would get released for productive use elsewhere. c. SICA' was enacted with a view to securing the timely detection of sick and potential sick companies owning industrial undertakings, the speedy determination by a body of experts of the preventive, ameliorative, remedial and other measure which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. d. The Board of experts named the 'Board for Industrial and Financial Reconstruction' (BIFR) was set up in January, 1987 and functional with effect from 15th May 1987. The Government of India have set up BIFR for taking necessary measures for revival of sick industrial companies under SICA, 1985. e. BIFR has wide-ranging powers with regard to sick industrial companies including, among other things, their revival, change or take-over of management; reconstruction including restructuring of share capital by reduction of the interest or rights of the shareholders; amalgamation with another company and sale or release of a part or whole of the industrial undertaking, as also their winding up. f. The Schemes of rehabilitation as sanctioned under the orders of BIFR shall be binding on all concerned. The civil courts shall not have jurisdiction in respect of any matter which falls within the purview of the BIFR or the Appellate Authority. No injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any powers conferred by or under the SICA, 1985. g. When a unit becomes sick its Board of Directors should make a reference to the BIFR for determination of measures to be adopted with respect to that company. Banks should also independently report to BIFR the cases of sick companies in their portfolios. Where a formal consortium arrangement exists, the lead bank should make the reference to the BIFR. 129 - III

h. The Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) was constituted in April 1987. Government companies were brought under the purview of SICA in 1991 when extensive changes were made in the Act including, inter-alia, changes in the criteria for determining industrial sickness. SICA applies to companies both in public and private sectors owning industrial undertakings: i. pertaining to industries specified in the First Schedule to the 'Industries (Development and Regulation) Act, 1951' (IDR Act) except the industries relating to ships and other vessels drawn by power and; ii.

not being "small scale industrial undertakings or ancillary industrial undertakings" as defined in Section 3(j) of the IDR Act.

iii.

the criteria to determine sickness in an industrial company are, §

the accumulated losses of the company to be equal to or more than its net worth i.e. its paid up capital plus its free reserves.

§

the company should have completed five years after incorporation under the Companies Act, 1956.

§

it should have 50 or more workers on any day of the 12 months preceding the end of the financial year with reference to which sickness is claimed.

§

it should have a factory license.

i. Important provisions of SICA: i. Procedure of the Board and the Appellate Authority. ii. Filing of references u/s 15 and criteria of sickness. iii. Provision of enquiry u/s 16. iv. Appointment of Special Directors and OAs u/s 16(4) and 17(3). v. Preparation of sanctioned scheme under section 17(2), 17(3) & 18(4). vi. Provision for monitoring of schemes u/s 18(12) vii. Rehabilitation by giving financial assistance u/s 19. viii. Winding up of sick industrial companies u/s 20. ix. Protection to safeguard the interests of the sick companies u/s 22(1), 22(2), 22(3). x. Provisions for dealing with potential sickness u/s 23, 23(a), 23(b xi. Provision in case of misfeasance u/s 24. xii. Provision for seeking information and giving information – Central Govt., RBI, FIs State institutions and sick companies and in case of amalgamation other companies. xiii. Power to seek assistance of MMs & DMs u/s 29. xiv. SICA has overriding provisions u/s 32 over other laws except the provisions of FERA, 1973 and the ULCRA,1976. xv. Penalty u/s 33 for violation of the Act.

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CHAPTER - 11 THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SARFAESI) ACT, 2002 & THE ENFORCEMENT OF SECURITY INTEREST AND RECOVERY OF DEBT LAWS (AMENDMENT) ACT, 2012 1.

General: a. The banking industry has been experiencing delays and difficulties in recovery of NonPerforming Assets (NPAs) through the legal proceedings of Courts and therefore were seeking provisions to proceed against the securities without the intervention of Courts. In response to their requests, the 'Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002' was promulgated on 21. 06. 2002 which subsequently became an Act (SARFESI Act, 2002) replacing the ordinance. b. This Act empowers Banks including cooperative banks and Financial Institutions as Secured Creditors to proceed against the securities without the intervention of a Court or Tribunal, after complying with certain procedural formalities and realise their dues. The applicability of the Act to Cooperatives as per the Gazette of India issued by the Ministry of finance and Company th Affairs(Dept. of Economic Affairs-:Banking Division)28 Jan 2003.:S.O.105(E)-In exercise of powers conferred under item (V) of clause (C) of subsection (1)of section 2 of the Securitisation and Reconstruction of financial Assets and Enforcement of Security Interest Act 2002(54 of 2002), the central Government hereby specifies “coop. bank” as defined in clause (CCi) of section 5 of Banking Regulation Act, 1949,as 'Bank for the purpose of the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'. c. The Act mainly consists of three parts viz., i. ii. iii.

Formation and regulation of Asset Reconstruction Company/Securitisation Company. Enforcement of Security Interest (under Chapter III of the Act) by Banks and FIs without the intervention of Courts/Tribunals and Maintenance of a Central Registry.

d. This Chapter deals only with the salient features of Chapter III of the Act pertaining to Enforcement of Securities without intervention of Court/Tribunal. e. The Bank or any of its Authorised Officers shall not be held liable for anything done or omitted to be done in exercise of their powers under the Act in good faith and no suit, prosecution or other legal proceedings shall lie against them in this regard. f. The provisions of the Act can be invoked not-withstanding anything contained in such other legislations. The provisions of this Act are in addition to and not in derogation of the provisions of existing legislations like Companies Act, Recovery of Debts due to Banks and FIs Act and any other law in force. 131 - III

2.

Applicability of the Act: a. Proceedings only against Securities offered: Under the Act, Banks can take possession and sell/ transfer only the properties which were offered as security by way of mortgage, hypothecation etc., Bank cannot take possession of other assets of the borrower/guarantor which are not secured for the purpose of enforcement without the intervention of a Court/Tribunal. The Act is not applicable to, i. Any security interest created in the agricultural land ii. Any debt where the amount due is less than 20% of the principal amount and interest thereon iii. Any financial asset not exceeding Rs.1.00 lakh. iv. Pledge of movable assets within the meaning of Section 172 of Indian Contract Act 1872. v. Any conditional sale, hire purchase or lease or any other contract in which no security interest has been created. b. Eligible accounts: Provisions of the Act can be made use of for realisation of assets classified as NPA (i.e., sub-standard, doubtful or loss asset) as per the guidelines relating to Asset Classification issued by RBI. c. Period of Limitation: Claim should be made within the period of limitation prescribed under the Law of Limitation Act 1963. d. Consortium Lending: In the case of financing by more than one secured creditors under consortium arrangement or joint financing, bank is not entitled to exercise the powers under Sec 13 (4) of SARFAESI Act, unless secured creditors representing not less than 75% in value of the amount outstanding ( the total amount due to be payable) agree for such action. This consent is required only at the stage of taking possession etc., and not at the stage of issuance of Demand Notice. e. Guarantors' Liability and Pledge: By resorting to measures under the Act, the rights of the Bank as a secured creditor to proceed against the guarantors is not taken away. Similarly, the right to sell the pledged goods under general law also subsists.

3.

Operational Guidelines: a. Identification of accounts: The Bank has to identify the accounts where borrowers are in default of repayment of debts and which are classified as NPAs. The balance outstanding including Memorandum of Interest (MOI), if any, should be more than Rs. 1.00 lakh. The cover documents should be live and within the Limitation period. b. Sanction to initiate action under the Act: Branches are required to obtain sanctions from competent authority to initiate action under the Act. c. Competent Authority: The Board of Management will nominate the Authorised Officers for initiation of action. After nominating the AO, the same has to be informed to Recovery and Legal Departments at Head Office. 132 - III

d. Issue of Demand Notice: Under Section 13 (2) of the Act, the branch has to issue a Demand Notice in writing duly signed by the Authorised Officer seeking the borrower/guarantor/mortgagor to discharge the liabilities in full within 60 days from the date of the notice: i. The notice shall give details of amount payable and secured assets intended to be enforced by the secured creditor. ii. The Bank shall send the notice to the borrower/guarantor/mortgagor or his agent by Registered post AD or Courier or by Speed Post or by any other means of transmission of documents like fax or electronic mail, etc., to ensure that the notice reaches the addressee definitely. iii. When the notice cannot be served in the above manner or it is returned undelivered, the service shall be effected by affixing the same in a conspicuous part of the house in which the borrower ordinarily resides or place where he carries on business or works for gain. The contents of the notice should be published in two leading newspapers, one in English and one in vernacular language having sufficient circulation in the locality. The 60 days waiting period starts from the date of severing/ publication of the notice. iv. Notice intended for body Corporate/ Limited companies could be served on the Registered Office or at any of its branches. e. Extension of time: If the amount demanded in the Notice is not paid within the stipulated time, the Bank is conferred discretion to grant further time extension. Branch has to take up with the appropriate authorities with due justification in case of such situations. f. Objections/Representations of the borrower to the Demand Notice: If the branch/AO receives reply from the borrower/guarantor raising objections or representations to the notice, branch/AO has to analyse the objections and have to give the Bank's reply on the points raised by him within one week – statutory requirement. Only after sending a reply to the objection, further steps like taking possession of the securities etc. can be resorted to. g. Security Enforcement Committee (SEC): To oversee the process of enforcement of securities and to ensure effective implementation in accordance with the provisions of the Act, a Security Enforcement Committee (SEC) with a minimum of three members may be constituted. However, the Authorised Officer shall not be a member of SEC. The Department Head of Legal/Recovery Cell shall be the convenor for this Committee who has to ensure maintenance of all relevant records and submitted to the Board of Management on a quarterly basis. Irrespective of the claim amount, the SEC shall give its recommendations in all vital issues to the Board of Management in both suit filed and non-suit filed accounts. The SEC is empowered to recommend Reserve Price, EMD, norms on Resale, confirmation of sale etc., for being communicated to the AO. h. Borrower's failure to comply with the Notice: If the borrower/guarantor/mortgagor, fail to discharge the liability within the 60 days' time as stipulated in the notice, under Section 13(4) of the Act, Bank can take recourse to one or more of the following measures to recover the secured debt: 133 - III

i. ii. iii. iv.

take possession of the secured assets including the right to transfer by way of lease, assignment or sale for realising the secured assets take over the management of the business of the borrower, including the right to transfer by way of lease, assignment or sale for realising the secured asset appoint any person ( as Manager) to manage the secured asset seek any person in writing who acquired secured asset and from whom money is due or may become due to the borrower/guarantor to pay the Bank to the extent as is sufficient to pay the secured debt.

i. Taking possession of the Secured assets: The Authorised Officer (AO), in co-ordination with the branch, should do the necessary ground work as described under within the 60 days waiting period. i. He has to collect the details of the account. ii. He should scrutinize the notice issued, title deeds, EM documents, up-to-date EC and other relevant documents. iii. He shall check-up and ensure from the branch records that there are no stay orders passed by the High Court or other judiciary bodies. iv. He shall ascertain the location of the property and carry out physical inspection of the securities. v. If the asset intended to be taken possession of is a unit engaged in specialised services, then the AO should take the assistance of experts in that field who will identify the items correctly at the time of taking inventory of the movables. vi. The AO shall fix the probable date of taking possession and proceed to do so in consultation with the Legal / Recovery Cell at Head Office, as the case may be. vii. Arrangements for taking photos, video on the date of taking possession shall be made. viii. Possession of the movable secured assets has to be taken by drawing a Panchnama in the presence of two witnesses and making an inventory. A copy of the inventory shall be delivered to the borrower. ix. Possession of the immovable property has to be taken by delivering a possession notice to the borrower. x. While taking possession of mortgaged immovable assets, AO may come across movables which are charged and not charged to the Bank within the premises. In such cases, another separate inventory for items not charged to the Bank have to be prepared and a notice shall be sent to the borrower/owner. xi. If the items found inside the mortgaged premises are only those not hypothecated to the bank, an inventory of such movables should be prepared and a notice calling upon the owner/mortgagor to arrange for removal of those items at the earliest shall be sent. xii. Likewise, when the property is in possession of tenants, Bank can only take symbolic possession. In such cases, AO shall issue a notice and call upon the tenants to remit further rentals to the Bank. 134 - III

xiii. The AO has to keep entire records of expenses / costs incurred and accounts should be maintained for all the expenses account-wise. xiv. Bank has to safeguard/preserve the property/securities, after taking possession. xv. AO should ensure that the assets taken possession of are adequately insured. j. Seeking assistance of District Magistrate/Chief Metropolitan Magistrate: In case of need where the Bank finds or apprehends any difficulty in taking possession, the AO/Bank may request the District Magistrate or Chief Metropolitan Magistrate within whose jurisdiction the assets are lying to take possession of the assets and hand over the same to the AO drawing their attention to the specific provision (sec 14) in this regard in the Act. The Magistrate can use as much force as required. k. Valuation of assets and fixing of Reserve price and Earnest Money Deposit: i. After taking possession of the property, AO has to value the assets through an approved valuer of the Bank and based on the same a Reserve Price has to be fixed. ii. Care/prudence to be exercised in such a manner that valuation is done on a realistic basis. iii. Before fixing the Reserve Price, AO has to consult the Legal / Recovery Cell and get their approval. iv. The Security Enforcement Committee shall fix the Earnest Money Deposit and communicate the same to the AO through the Legal / Recovery Cell. l. Guidelines to SEC for fixing Reserve Price/EMD/ Resale etc.: i. The SEC may consider the Reserve/upset price even 10 to 25% less than the valuation, taking into account the realisable price of the assets at the given point of time. ii. SEC shall fix the EMD of movable assets offered as securities in such a manner that it shall be 5% of the reserve price subject to a maximum of Rs.50 lakhs and a minimum of Rs.10,000. iii. Chairman and Managing Director of the Bank may be empowered to fix/reduce the maximum limit of EMD on a case to case basis. m. Sale of Secured Assets: The secured assets (both movable and immovable) can be sold in one or more lots and/or in whole or in part to realise the maximum price by obtaining quotations, by inviting tenders from public, by holding a public auction, by a private treaty. n. Appropriation of sale proceeds: The AO shall apply the money so received by him in the manner mentioned in Sec 13(7) of the Act i.e. first towards the costs, charges and expenses incurred , thereafter towards amount due under the loan transactions and the balance or surplus if any, shall be paid to the person entitled. o. Informing Court about payment received: In accounts wherein Suit/Recovery Application has been filed and thereafter measures under the Act are resorted to, details of recovery effected should be informed to the Court by filing a suitable memo. If dues are fully satisfied, then also a suitable memo shall be filed. 135 - III

p.

q.

Procedure for recovery of shortfall amount: In a non-suit filed account, if the dues of the Bank are not fully satisfied for the balance amount, Bank can initiate appropriate legal action provided the claim does not get barred by the law of limitation. Transfer of assets by borrower/guarantor after receipt of notice: As per Sec 13 (13) of the Act, after receipt of notice, borrower/guarantor / mortgagor who created security interest shall not transfer (other than in the ordinary course of business) any of the secured assets without the consent of the Bank in writing.

4.

Amendment to Securitisation Act: The Apex Court had struck down the provisions under Section 17(2) of the Act mandating that defaulters have to deposit 75% of the outstanding dues to be able to seek legal recourse at the time of disposing the case of Mardia Chemicals.

5.

The Enforcement of Security Interest Recovery of Debt Laws (Amendment) Act, 2012: a. The provisions of 'The Securitisation and Reconstruction Financial Assets and Enforcement of Security Interest Act, 2002' (SARFESI Act, 2002) have been amended by 'The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Act, 2012' and the same had come into effect from 15.01.2013. Following are the amendments in SARFAESI Act, 2002: i. The definition of bank contained in section 2(1)(c) of has been amended to include 'Multi State Cooperative Banks'. ii. Sub section (5) has been added to section 5 which provides for acquisition of financial assets from various financial institutions by ARCs to substitute the transfer if any proceedings pending before Debt Recovery Appellate Tribunal or any other court or authority in the name of ARC on acquisition of assets from the banks/financial institutions. iii. Section 9 of Act provides for various measures the ARC can take for the purpose of reconstruction by any account taken over by such ARCs. Additional measures of conversion of part of the debt in equity has been incorporated in section 9. ARCs will therefore be now entitled to convert part of the loan into equity in a scheme of reconstruction. iv. In section 13 of the Act, which provides for enforcement of securities by banks provision has been made for the bank and financial institutions to purchase immovable property if the auction held for the same of such property fails and no bidder are coming forward to purchase property. Such purchase of immovable property by banks belonging to borrower is subject to section 9 of Banking Regulation Act which provides that bank cannot hold such property, except such as is required for its own use, for any period exceeding seven years. The restriction of holding period of 7 years us applicable to private sector banks and not to public sector banks. 136 - III

v.

Section 14 has been amended to prescribe filing of affidavit by authorized officer of the bank/Financial Institution before the District Magistrate (DM) or Chief Metropolitan Magistrate(CMM) for the purpose of taking possession of the secured assets. The object of this amendment is to standardize the procedure to be followed by the DM for the purpose of taking possession of securities and handing them over to the bank. Provision has also been made for delegation of the functions of the DM/CMM to any other officer by theDM/CMM. vi. Provision has been made for the lodging a caveat before the Debt recovery tribunal (DRT) in cases where borrower file an application or appeal against the measures taking possession by bank/financial institutions under section 13 (4) of the Act. vii. Section 23 has been amended to make a provision for registration of past transactions of creation of equitable mortgage prior to the establishment of the Central Registry w.e.f. 31.3.2011. This provision will enable the Government to issue a notification requiring the banks to register equitable mortgage created prior to 31.3.11. viii. A new Section 26A has been added to empower the Government to condone any omission to file particulars of Security interest with the Central Registry and extend time for filing such registration. 6.

Amendment to 'Recovery of Debts due to Banks and Financial Institutions Act, 1993' (RDDB Act, 1993): a. The following are the amendment to 'Recovery of Debts due to Banks and Financial Institutions Act, 1993' (RDDB Act, 1993): i. The provisions of 'Recovery of Debts due to Banks and Financial Institutions Act, 1993' (RDDB Act, 1993) have also been extended to 'Multi State Coop. Banks' by amending the definition of 'Bank' contained in Section 2(d)of the Act. ii. Section 15 of the Act has been amended empowering the Central Government to suspend the presiding officer of a DRT during the pendency of any enquiry against such Presiding Officer. iii. Provision of section 18 & 19 have been amended to provide for consequential provision required for continuation of any recovery proceedings filed by Multi State Coop. Banks for recovery which are pending. iv. Provision of section 19 have been amended to require DRT to pass order in terms of any settlement or compromise arrived between the bank and the borrower. v. Provision of section 19 have been amended for the purpose of refund of fee paid by the bank if the proceeding before the DRT are withdrawn on account of any settlement with the borrower.

137 - III

CHAPTER - 12 PRUDENTIAL NORMS ON INCOME RECOGNISTION, ASSET CLASSIFICATION AND PROVISIONING 1.

General: a. Reserve Bank of India has been issuing number of circulars from time to time containing instructions/ Guidelines to Banks on matters relating to Prudential Norms on Income Recognition, Asset Classification and Provisioning. It becomes very difficult for the members to know the instructions issued by Reserve Bank of India on a given point of time. We have tried to consolidate the various circulars issued by Reserve Bank of India as of August, 2001 on the above subject matter. However members are requested to keep themselves abreast of changes taking place in today's ever changing environment. A consolidation of the Reserve Bank of India guidelines is as follows: b. In line with the international practice and as per the recommendations made by the Committee on the Financial System (Chairman, Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, Prudential Norms for Income Recognition, Asst. Classification and Provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. c. The policy of Income Recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the Classification of Assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms. Also, the Provisioning should be made on the basis of the Classification of Assets based on the period for which the asset has remained non-performing and the availability of security and the realizable value thereof. d. With the introduction of Prudential Norms, Health Code-Based System for classification of advances has ceased to be a subject of supervisory interest. As such, all related reporting requirements, etc. under the Health Code System also cease to be supervisory requirement. Banks, may, however, continue the system at their discretion as a Management Information Tool.

2.

Definitions: a. Non-Performing Assets: i. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A 'Non-Performing Asset' (NPA) was defined as credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for a specified period of time. 138 - III

ii.

An amount due under any credit facility is treated as “past-due” when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, up gradation of technology in the banking system etc. Reserve Bank of India decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non-Performing Asset (NPA) shall be an advance where, l interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. l the account remain 'out of order' for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CD), l the bill remains overdue for a period of more 90 days in the case of bills purchased and discounted, l interest and/or instalment of principal remains overdue for two crop seasons for (w.e.f. 30.9.2004 the word harvest season has been substituted by crop season) short duration crops and one crop season for long duration crops in the case of an advance granted for agricultural purposes, and l and amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

b. Out of Order' status: i.

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In case where the outstanding balance in the principal operating accounting is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited the same period, these accounts should be treated as 'out of order'.

c. 'Overdue': i.

3.

Any amount due to the bank under any credit facility is 'overdue 'if it is not paid on the due date fixed by the bank.

Income Recognition -Policy: a. Income Recognition-Policy: i. The policy of Income Recognition has to be objective and based on the record of recovery. Internationally income from Non-Performing Assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. ii. However, interest on advance against term deposit, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. 139 - III

iii.

iv.

Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized.

b. Reversal of Income: i.

ii.

4.

If any advance, including Bills Purchased and Discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reserved or provided for if the same is not realized. The same will apply to Government guaranteed accounts also. In respect of NPAs, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

Reporting of NPAs: a. Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks' global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure-1 to this Chapter. b. While reporting NPAs figures to RBI, the amount held in 'Interest Suspense Account', should be shown as a deduction from 'Gross Advances' while arriving at the net NPAs. Banks which do not maintain 'Interest Suspense Account' for parking interest due on 'Non-Performing Advance Accounts' may furnish the amount of 'Interest Receivable on NPAs as a foot note to the Report. c. Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the Outstanding Gross Advances and Gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

5.

Guidelines for Classification of Assets: a. Broadly speaking, Classification of Assets into above categories should be done taking into account the degree of well-defined credit weakness and the extent of dependence on collateral security for realization of dues. b. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper Asset Classification may be fixed by the banks. The system should ensure that doubts in Asset Classification due to any reason are settled through specified internal channels within one month from the date on which the amount would have been classified as NPA as per extant guidelines. 140 - III

c. Accounts with Temporary Deficiencies: i.

The Classification of an Asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification accounts with such deficiencies, banks may follow the following guidelines: l

l

Banks should ensure that drawings in the Working Capital Accounts are covered by the adequacy of Current Assets, since current Assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A Working Capital borrowal account will turn NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. Regular and ad hoc credit limits need to be reviewed/regularized not later than three months from the due date / date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ad hoc credit limits have not been reviewed/renewed within 90 days from the due date/date of ad hoc sanction will be treated as NPA.

d. Advances under Consortium Arrangements: i.

Assets Classification of Accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper Asset Classification in their respective books. 141 - III

e. Accounts where there is erosion in the Value of Security: i.

ii.

A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightway classified as Doubtful or Loss Asset as appropriate. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value of the assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under Doubtful category and provisioning should be made as applicable to Doubtful Assets. If the realizable value of the security, as assessed by the bank/approved valuers/RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.

f. Advances to PACS/FSS ceded to Commercial Banks: i.

In respect of agricultural advances as well as advances for other purpose granted by banks to ceded PACS/FSS under the on-leading system, only that particular credit facility granted to PACS/FSS which is in default for a period of two crops season for short term crop and one crop season for long term corps., as the case may be after it has become due will be classified as NPA and not all the credit facilities sanctioned to a PACS/FSS. The other direct loans & advances, if any, granted by the bank to the member borrower of a PACS/FSS outside the on-lending arrangement will become NPA even if one of the credit facilities granted to the same borrower becomes NPA.

g. Advances against Term Deposits, NSCs, KVP/IVP etc.:

i.

Advances against Term Deposits, NSCs, IVPs, KVPs and life policies need not be treated as NPAs, Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

h. Loans with Moratorium for Payment of Interest: i.

In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence NPA with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. 142 - III

ii.

iii.

iv.

v.

In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only where there is a default in repayment of instalment of principal or repayment of interest on the respect due dates. In respect of advances granted for agricultural purpose where interest and / or instalment of principal remains unpaid after it has become overdue for two crop seasons, in respect of short term loan and one crop season for long term loan such an advance should be treated as NPA. The above norms should be made applicable only in respect of short term agricultural loans for production and marketing of seasonal agricultural crops such as paddy, wheat, oilseeds, sugarcane, etc. In respect of other activities like horticulture, floriculture or allied activities such as animal husbandry, poultry farming etc., assessment of NPA would be done as in the case of other advances. Where natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure-conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to various guidelines issued by Reserve Bank of India, from time to time. In such cases of conversion or re-schedulement, the terms loan as well as fresh short-term loan may be treated as current dues and not be classified as NPA. The Asset Classification of these loans would be thereafter, be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remain unpaid, after it has become overdue, for two crop seasons.

i. Government Guaranteed Advances: i.

The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPAS is not for the st purpose of recognition of income. With effect from 1 April 2000, advances sanctioned against State Government guarantees should be classified as NPA in the normal course, if the guarantee is invoked and remains in default for more than 90 days. With effect from March 31, 2001 the period of default is revised as more than 90 days.

j. Restricting / Rescheduling of Loans:

i.

A Standard Asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as Sub-Standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of SubStandard and Doubt Assets also, rescheduling does not entitle a bank to upgrade the quality 143 - III

Standard and Doubt Assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the reschedule/ renegotiated terms. Following representations from banks that the foregoing stipulation deter the banks from restricting of Standard and Sub-Standard Loan Assets even though the modification of terms might not jeopardize the assurance of repayment of dues from the borrower, the norms relating to restricting of Standard and Sub-Standard Loan Assetseven though the modification of terms might not jeopardize the assurance of repayment of dues from the borrower, the norms relating to restructuring of Standard and Sub-Standard Assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place, can be identified: l l

l

before commencement of commercial production. after commencement of commercial production but before the asset has been classified as sub-standard. after commencement of commercial production and after the asset has been classified as sub-standard.

k. In each of the foregoing three stages, the rescheduling etc. of principal and/ or of interest could take place, with or without sacrifice, as part of the restructuring package evolved. 6.

Provisioning Norms: a. The primary responsibility for making adequate provisions for any diminution in the value of Loan Assets. Investment or Other Assets is that of the bank managements and the statutory auditors. The assessment made by inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. b. In conformity with the Prudential Norms, provisions should be made on the non-performing assets on the basis of Classification of Assets into prescribed categories. Taking into account the time lag between an accounts becoming doubt of recovery, its recognition as such, the realization of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against Sub-Standard Assets, Doubtful Assets and Loss Assets as below: i. Loss Assets: l

The entire asset should be written off. If the assets are permitted to remain in the book for any reason, 100 per cent of the outstanding should be provided for.

144 - III

ii.

Doubt Assets: l

100 per cent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis.

l

In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 % to 50 % of the secured portion depending upon the period for which the asset has remained doubtful.

Period for which the advance has been considered as doubtful >3 Years <4 Years >4 Years <6 Years Above 6 Years

Provision requirement (%) 20 30 50

c. Guidelines for Provision under Special Circumstances: i.

Government Guaranteed Advances: l

With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and remains in default for more than 90 days at present), the banks should make normal provisions as prescribed in paragraph 5 (i) above.

l

As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 % each year.

l

Advances against term deposits, NSCs, IVPs, KVPs, and life policies are exempted from provisioning requirements. Provisioning requirements Std. Asset. Direct advance to agriculture and SME Sectors 0.40% w.e.f. 01.04.2007 Would attract 0.25 provision hither to 145 - III

ii. Treatment of Interest Suspense Account: l

Amount held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction.

iii. Advances covered by ECGC/DICGC guarantee: l

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made as illustrated hereunder:

EXAMPLE Outstanding Balance

Rs.4 lakhs

DICGC Cover Period for which the advance has remain doubtful Value of security held (excludes worth

50 percent More than 3 years remained doubtful Rs.1.50 lakhs

of (Rs.) Provisions required to be made Outstanding balance Less: Value of Security held Unrealised balance Less: DICGC Cover (50% of unrealizable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance

Rs.1.50 lakhs Rs.1.50 lakhs Rs.1.25 lakhs Rs.1.25 lakhs Rs.1.25 lakhs Rs.1.25 lakhs (@ 100 percent of unsecured portion) Rs.0.75 lakhs (@ 50 percent of secured portion) Rs.2.00 lakhs

Total provision required to be made (Morethan 6 years 50%) Existing NPA under “D3” category as on 31.3.07 Provision as on 31.3.07 50% 31.3.08 60% 31.3.09 75% 31.3.10 100% Loan classified as D-3 on or after 01.04.07 provision @ 100/146 - III

iv. Advance covered by CGTSI guarantee: EXAMPLE 1 In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount of outstanding in excess of the guaranteed portion should be provided as per the extent guidelines on provisioning for non-performance advances. Two illustrative examples are given below:

Asset Classification Status

Doubtful-more than 8years

CGTSI Cover

75% of the amount outstanding or 75% of the unsecured amount or R.18.75 lakhs, whichever is the least Rs.1.50 lakhs

Realisable value of security Balance outstanding Less Realisable value of security Unsecured amount Less CGTSI cover (75%) Net unsecured an uncovered portion Secured portion Unsecured & uncovered portion Total provision required

Rs.10.00 lakh Rs.1.50 lakhs Rs.8.50 lakh Rs.6.38 lakh Rs.2.12 lakh Provision required Rs.1.50 lakh

Rs.1.50 lakh (100%) as on 31.03.2010 Rs.2.12 lakhs (100%)

Rs.2.12 lakh

Rs.3.62 lakh

147 - III

EXAMLE II Asst Classification Status CGTSI Cover

Reliable value of security Balance outstanding Less Realisable value of security Unsecured amount Less CGTSI cover (75%) Net unsecured an uncovered portion Secured portion Unsecured & uncovered portion Total provision required v.

Doubtful-more than 6years 75% of the amount outstanding or 75% of the unsecured amount of Rs.18.75 lakhs, whichever is the least Rs.10.00 lakhs Rs.40.00lakhs Rs.10.00 lakhs Rs.30.00 lakhs Rs.18.75 lakhs Rs.11.25 lakhs

Provision required

Secured portion

Rs.10.00 lakhs (100% as on 31.03.10 Rs.11.25 lakh (100%)

Rs.11.25 lakhs

Rs.21.25 lakh

Take-out finance:

- The lending institution should make provisions against a 'take-out finance' turning into NPA pending its take-over by taking-over institution. As and when the asset is taken over by the taking-over institution, the corresponding provisions could be reversed. ************************

148 - III

Annexure- I to Chapter – 12 PRUDENTIAL NORMS FOR CO-OPERATIVE BANKS ASSET CLASSIFICATION AND PROVISIONING STTEMENT st (FOR THE YEAR ENEDED 31 MARCH 2010) MODEL WORKING SHEET - ….SCB (Rs. in lakhs) (A)

LOANS AND ADVANCES

1. 2. 3.

Short Term Medium Term Long Term

I.

AMOUNT OUTSTANDING

II. 1. 2.

ASSETS CLASSIFICATION Standard Sub-standard (Overduesupto 3 years) Short-term: 4.36 Long-term: 1.20

3. i) a) b) c)

Doubtful Secured Overdues Over 3 years to 4 years Over 4 years to 6 years Over 6 years

ii) a) b) c)

Unsecured Overdues Short term Medium term Long term

93780.74 18197.00 7987.86 119965.60

119650.72

5.56

-------

147.39 10.42 0.08 Total

d)

Loss Assets- S.T. - L.T.

III.

PROVISION REQUIRED 1. Standard 0.40% of Item 11 (1) 2. Sub-standard (1-% of item II (2)) 3. i) Doubtful Assets ii) 20% of item II (3) (i) (a) iii) 30% of item II (3) (i) (b) iv) 50% of item II (3) (i) (c) v) 50% of item II (3) (ii) (a) (b) ©

Total

147.39 10.42 0.08 157.89 0.24 151.20 151.44 478.60 0.56

------— 149 - III

IV. V.

Loss Assets 100% of item II (4) Total of item III 1 to 3

157.89 151.44 788.49 OTHER ASSETS / LIABILITIES (Outstanding)

Sl. No. 30.03.2010

Particulars

Provision Required as on

i)

Income Recognition

a)

Overdue interest taken to P & L Account

b)

Accrued Interest taken to Income Account in the previous year but not realised

c)

Fee.Commission and other income taken to P&L Account in the previous year but not realised -- interest margin subsidy due receivable From Govt./CCB on Weavers' Finance Total of (i)

Provision Made as on 31.03.2010

320.55

320.55

---

---

40.34 360.89

40.34 360.89

180.91

180.00

ii)

Depreciation in investments

a)

Govt.Securities / Bonds, etc.

b)

Share in other Coop. Institution

---

---

c)

Other investments – Shares, etc. Total of (ii)

--180.91

--180.00

iii) iv)

Frauds, Embezzlements, etc. PF, Gratuity, etc. – Gratuity provision

-----

— ---

v)

Other liabilities like rent, rates, taxes, etc.Income Tax Provision

50.00

50.00

Contingent/Off-balance sheet exposure (under Sundry Debtors. Audit Objection & others) 615.96

615.96

vi)

vii)

Interest deposits and borrowing Outstanding as liability

— 150 - III

1. 2. 3. 4.

“ “ “

Spinning Mills to a Coop. Publishing Society a Coop.Town Bank Individual (C.A/C., TOD)

1,45,44,496.74 894.73 5,287.34 1,87,960.93 _____________ 1,47,39,179.74

B. 1. 2. 3.

UNDER MEDIUM- TERM LOAN Doubtful – Unsecured Loan to Salaried persons Consumer Loan Loans to Weaker Section – Subsidy

5,66,298.24 2,01,140.40 1,98,723.49 76,387.10 2,75,110.59 ____________ 10,42,549.23 _____________

b)

Long-term : Staff Loans

7,950.00

LOSS ASSETS UNDER SHORT-TERM LOAN Jewel loan UNDER LONG – TERM LOAN “A” .Coop. Spinning Mills Ltd. (Generator Loan)

23,700.00 2,26,000.00

“A”Coop.Spinning Mills Ltd (Marginal Expansion Loan) 4. “B” Coop. Spinning Mills (Expansion Loan) 5. “C” Coop. Spinning Mills Ltd. (Bridge Loan) 6. Staff Housing Loan 7. Staff Loan (Consumer)

UNDER B.VI Details of Audit Objected Items 1. Reserve for DD Receivable Ex-advice 2. Sundry Debtors (As per list enclosed inVol.II) 3. Library Books Stock – Deficit 4. Different in Sundry Debtors 5.

Reserve for difference in Sundry Creditors

90,00,000.00 44,00,000.00 14,31,906.50 44,324.77 17,550.00 _____________ 1,51,19,781.00 _____________ 31,314.50 6,15,47,403.11 8,601.39 8,640.00 39.00 _____________ 6,15,95,998.00 _____________

151 - III

THE 'XYZ' STATE COOP. BANK LTD PROFORMA FOR N.P.A. STATEMENT AS ON 31.3.2010 Sl No. Type of Loan

Amount of NPA a on 31.3.2010

A.

Standard Assets 1196,50,71,548.24 (Performing assets) B.1 Sub-standard Assets (Secured and Unsecured) 5,55,678.97 2. Doubtful Assets (Unsecured) Unsecured assets Exceeding 3 years 1,57,89,678.97 Unsecured Govt.guarantee (Un-renewed/ withdrawn) — 3. Doubtful (Secured) D.A. I 3 to 4 years — D.A. II 4 to 6 years — D.A. III Above 6 years — 4. Loss Assets 1,51,43,481.00 Total 3,14,88,853.99

Provision Required In % 0.40% (contingent)

Amount of Provision Made as on 31.3.2000 478,60,286.16 55,570.00

10%

100%

1,57,89,679.00

25% 20% 30% 50% 100%

Total amount of N.P.A.as on 31.3.2010 (excluding performing assets)

1,51,43,481.00 7,88,49,016.16 Rs. P. 3,14,88,853.99

Total provision made as on 31.3.2000 Less:Contingent provision for performing assets Net provision for N.P.A.

4,78,60,286.16 -----------------

7,88,49,016.16 2,99,12,678.87 ------------------

3,09,88,730.00

3,09,88,730.00 ------------------

Percentage OF total amount of Performing Assets to Total Loan Outstanding: 1196,50,71,548 -------------------x 100 = 99.74% 1199,65,60,402 Percentage of total amount of Non-performing Assets to Total Loan Outstanding: 3,14,88,853 -------------------

x 100 = 0.26%

1199,65,60,402

152 - III

Annexure – 2 to Chapter – 12 CHART ON CHANGES IN NPA NORMS SINCE THEIR INTRODUCTION i)

April 1985

:

No provisioning required for 1 year for providing additional facilities sanctioned to sick companies under BIFR Norms.

ii)

March 1996

:

Government guaranteed advances exempted from provisioning even if overdue so long as guarantee is not invoked.

iii)

January 1997 :

Non provisioning is required for loans with temporary deficiencies such as non-availability of adequate drawing power. Permission to different Banks to classify the same loan under consortium-lending, differently using their own records.

iv)

March 1998

:

Advances granted for agricultural purposes to be classified as NPA only if left unpaid for 2 harvests seasons-not-2 quarters.

v)

May 1998

:

Freedom to reschedule return of loans from units which have become sick on account of external conditions without provisioning

vi)

March 1999

:

In cases of conversion or re-schedulement the term loans as well as short term loans granted to the agriculturists on account of natural calamities, may be treated as current dues and need not be classified as N.P.A.

vii)

April 1999

:

Provisioning should be made on standard assets at 0.25% from the year ending 31st March 2000. When the advances Guaranteed by state government remained in default for two quarters Even the guarantee is invoked, such advances should be classified as NPA with effect from March 31, 2000. The credit facilities backed by Government guarantee should also be fully provided for by the Financial year ending March 31, 2003 (from March 31, 2000 to March 31, 2003 at 2% each year)

viii)

June 1999

:

When the terms and conditions of principal have been renegotiated or rescheduled after commencement of production such asset should be classified as sub-standard and should remain in that category for atleast one year (instead of 2 years) . Of satisfactory performance under the negotiated or rescheduled terms.

ix)

December1999:

Provision of standard assets should not be reckoned for arriving at Net NPA, dispensing with the earlier procedures of netting at Net NPA to be shown as such in the Balance Sheet. 153 - III

x)

December1999

:

The stipulation of percentage for bifurcation of State Central Coop. Banks investments into permanent and current Category has been withdrawn.

xi)

May 2000

:

The provision for standard Assets need not be netted as earlier, but it should be shown separately as “Contingent Provision against standard Assets” under “Other Liabilities and Provision – other”.

xii)

October 2000

:

The “Past Due” concept has been withdrawn with effect from st March 31 2001 and such assets should be treated as NPAs as given under. (Reference – RBI circulars & RBI Information Review)

Nature of Assets

Criteria for N.P.A.

i.

Term Loans

Interest earned of principal remain overdue for a period of more than 90 days.

ii.

O.D.C.C.

Remains out of order for more than 90 days.

iii.

Bills purchase and Discounted

Remains overdue for more than 90 days.

iv.

Agricultural advance

Overdue for two crop seasons but for a period

v.

Any other accounts Overdue for a period of more than 90 days. (any amount to be received)

154 - III

Annexure – 3 to Chapter – 12 Flow Chart on Prudential Norms as Applicable to SCBs/DCCBs for the year ending 31.03.2010 I.

II.

Norms for Income Recognition: a.

Unrealised income in respect of overdue loans should not be taken to profit and loss account. If the same is taken to profit and loss account, 100% matching provision is to be provided for.

b.

Accrued interest taken to income account in the previous year should also be provided in Full in case the same becomes overdue.

c.

Fees, commissions and other income debited to loan account may be treated as income only when the account is classified as standard or performing asset.

d.

Fees and commission in respect of renegotiated or rescheduled loan accounts may be recognised as income on an accrual basis.

e.

Overdue interest in respect of credit facilities backed by Govt. Guarantee can be taken to P & L account only if matching provision is made.

f.

Overdue interest in respect of bills purchased / discounted may be treated as income provided matching provision is made.

g.

Relevant provisions of State Coop. Societies Acts/ Rules may be followed if they are More stringent than guidelines prescribed by RBI.

Norms for Determining Non-Performing Asset (NPA) Accounts: LOAN ACCOUNTS

Advances For Agriculture

Int./Inst. Remains Overdue for Two harvest Seasons (1 yr. Or 2 Half yr.)

Bills Purchased/Discounted & Other Accounts

OD/CC

Out of Order for More than 90 days

Int./Inst. Overdue for More than 90 days

155 - III

Term Loan

Int.or Inst. Overdue for 2 or more than 90 day

Project Loans & Staff Loans

Inst. Due Date

III.

a.

In the case of direct loans and advances granted to a borrower, all loan accounts will become if one loan a/c becomes NPA. Not applicable in respect of loan accounts Granted under on = lending system.

b.

Advances fully secured by TD, NSC, LIC Policies are not to be classified as NPA.

c.

Advances sanctioned against Govt. Guarantee with effect from 1.4.2000 will become NPA where guarantee has been invoked and has remained in default for more than 90 days quarters.

d.

In respect of consortium advances basis for classification would be bank's own record of Recovery.

e.

Out of order norm for KCC facility be treated as NPA if there are no credits as on the date of balance sheet for one year from due date . In respect of an OD/CC other than KCC, the a/c. will become NPA if it is out of order for a period of more than 90 days.

Norms for classification of Banks's Assets (Loan Accounts): LOAN ACCOUNTS

Non-Performing Asset

Performing Asset

Loan A/Cs/. Which Are not NPA

Overdue upto 3 years

Overdue over 3 years

@@@

**** Standard

Standard

Loan Considered As Not recoverAble by Bank / Auditors/RBI /NABARD Inspectors

&&&

Sub-Standard

Doubtful

Morethan D1 - >3 years < 4 years D2 - >4 years < 6 years D3 - Above 6 years 156 - III

Loss

***

-

Term loans of all types where installments have remained overdue for a period not exceeding 90 days.

&&& -

Rescheduled/Renegotiated loans will continue to be classified as sub- Standard for a period of one year of satisfactory performance.

@@@ -

All types term loans where instalments are overdue for more than 90 days.

1.

Loan Accounts which have become NPA and thereafter rescheduled remain as sub-Standard for one (revised to one year from two years vide RBI circular dated 1.6.1999) year (i.e., four quarters) of satisfactory performance under the revised terms. However, in cases of conversion or reschedulement of agricultural loans (ST Production) into Term Loan as well as fresh ST loan granted to agricultural Borrowers on account of natural calamities may be treated as current dues and not NPA.

2.

Five criteria for identifying loss assets. a. Decrees or execution petitions have been time-barred or documents are lost or no other legal proof is available to claim the debit. b. Where the members and their sureties are declared insolvent or have died Leaving no tangible assets. c. Where the members have left the area of operation of the society leaving no Property and their sureties have also no means to pay the dues. d. Where the loan is fictitious or when gross misutilisation is notices. e. Amounts which cannot be recovered in case of liquidated societies.

IV.

Provisioning Requirement for NPA Accounts

Type of Asset

Provision Required

Standard

Sub-Standard

Doubt

Nil (31.3.97 to 31.3.99) 0.25% FROM 31.3.2000 0.40 other than Agriculture & SME 10% of total outstanding balance under this category Period

Secured

Unsecured

3 to 4 years

20%

100 %

4 to 6 years

30%

100%

Above 6 years

50%

100%

Loss

157 - III

50% 60% 75% 100%

06-07 07-08 08-09 09-10

I.

All agricultural loans to be treated as secured loans.

II.

Advances fully secured by TD, BSC,IVP,KVP & LIC Policies are exempted from Provisioning However, advances against jewels are not exempted from provisioning.

III.

Provisioning requirement for existing and old advances guaranteed by State Govt. Which stood invoked and classified as NPA as on 3.3.2000 (From March 31, 2000 to March 31,2003-25 per cent each year).

IV.

Liabilities towards PF and gratuity should be estimated on Actuarial Basis and fully provided.

V.

Provisions towards Standard Assets should be shown separately as contingent provision against standard Assets.

IV.

Investments – Accounting Procedure Investment Portfolio 1.Approved Securities (Govt. Securities)

II.Other Securities

Category

Depreciation

Valuation

Permanent

Cost Price

Not needed

Current

Lower of cost price Of Market price

To be fully provided For

Shares Cooperative Institutions

Carrying cost price Lower of cost price Or market price

Not needed To be fullyprovided for

i. Permanent investments are those which banks intend to hold till maturity. ii. Current investments are those which banks intend to deal in i.e.buy and sell On a day to day basis iii. Banks following a more prudent method of valuation (e.g.showing only realizable Value) should continue to do so. iv. In terms of RBI circular dated 3 December 1999, the stipulation of percentage for bifurcation of investments into Permanent and Current category stands withdrawn. 158 - III

Annexure -4 to Chapter – 12 CHART ON REASONS FOR NPAs

v

Appraisal End Use Monitoring Wilful Default Over / Under Finance Repayment Schedule

-

v

Natural Calamities

-

v v v v v

Defective Appraisal Not Ensured Not Done Properly

Not Fixed Properly / Unrealistic Approach

Warning Signals of Sickness from CC Ledger

v v v v v v v v v v

Persistent irregularities in the conduct of the Account Stagnation in sales turnover Frequent requests for Over Drawings Persistent unadjusted Over Drawings A fully Drawn Account indicating the presence of hard coreunhealthy swings in the account Downward Trend in Credit Summations Sudden shift from Cheque to Cash transactions Frequent large Self-Drawings Large Drawings in round sums Cheques for large amounts made out in favour of parties notconnected with the business

Chart on various steps for reducing NPAs v v v v v v v

Study the problems of NPAs – branch-wise, amount-wise and age-wise Prepare a loan recovery policy & strategies for reducingNPAs Create Special Recovery Cells at HO / Controlling Office level Identify critical branches for recovery Fix targets for recovery & draw time-bound action programme Select correct technique for solving problems Monitor implementation of the time-bound action plan drawn

159 - III

SAMPLE CASES OF NPA AND SOLUTIONS – DCCBS Case – 1:Purpose Name of the Borrower Limit Sanctioned Repayment Period Interest Due Date

: : : : :

Crop Loan PACS Rs.8.00 lakhs One year from date of drawal th st 30 June 31 December

Date 29.06.2008 31.07.2008 27.09.2008 27.09.2008 31.10.2008 27.02.2009 “ “ 19.05.2009 06.06.2009 26.09.2009 “ 06.10.2009 31.10.2009 “ “ “ 01.12.2009 08.12.2009

Loan No. 102702 718 726 727 747 766 767 768 727

Debit 13980 82880 287740 9778 224930 45410 51590 3690

853 854 718 863 864 865 866 102718 102718

130040 14736

08.12.2009 31.01.2010 23.02.2010 04.03.2010 04.03.2010 09.03.2010 10.03.2010 16.03.2010 18.03.2010 20.03.2010 31.03.2010

102718 102718 718 718 726 726 726 726 726 726 726

Credit

9778 13980

821003 811255 811255 797245

10000

942021 932021

181660 28462 82660 51840 16700 16700 CB 10000 4605 8000 16975 13025 10000 17000 22600 19000 30000 25074 CB 160 - III

Balance 13980 96860 394378 619308 720313

1263643 1246943 1230343 1243343 1233343 1228738 1220738 1196738 1180738 1163738 1141138 1122138 1092138 1067064

Note:- Interest recovered in full upto 31.03.2010 Solution for Case Exercise – 1:1. 2.

Limit Sanctioned Rs.8.00 lakhs. The Account exceeds limit sanctioned on 03.12.2008 and remains so till 31.03.2010, hence this is out of order account.

Date of Balance Sheet Out of order since

-

31.03.2010 03.12.2008

Period for which the Account has remained out of order 1 year, 3 months, 28 days. Hence this account comes under sub-standard for which the provision required is 10%. The outstanding as on 31.03.2010 is Rs.10,67,064/-. Hence Provision required is 10% on Rs.10,67,064/- i.e. Rs.1,06,706/-. 1.

Under KCC, limit is valid for 5 years.

2.

Review to be conducted every year and limit has to be refixed every year based on cropping pattern and land holdings.

3.

In this exercise even if it is presumed that Rs.8.00 lakhs has been renewed every year, drawals may not be allowed over and above limit fixed – limit exceeded on 3.12.2008. Therefore the question of further drawal may not arise.

4.

Eligibility for renewal every year – credit summation should be equal to highest outstanding in that year.

Case:-2 Purpose Limit Operative Period Interest Due Rate of Interest Security

: : : : : :

Cash Credit for Provision Store Rs.91,000/One year from 12.07.2009 Quarterly 20% p.a. Hypothecation of stock & Mortgage of 15 Cents of Land

Realisable value of Security as on 31.03.2010 : Rs.2.50 lakhs Date 13.07.2009 15.07.2009 18.07.2009 20.07.2009 22.07.2009 23.07.2009 24.07.2009 30.07.2009

Loan No. To Cheque “ “ “ “ “ “ “

Debit 25000 10000 10000 10000 15000 5000 10000 5000 161 - III

Credit

Balance 25000 35000 45000 55000 70000 75000 85000 90000

Date

Loan No.

01.08.2009 “ 03.08.2009 “

By Cash To Cheque To Cheque “

28.08.2009

By Cash To Cheque

Credit

Balance

1000

89000

1360

By Cash

06.08.2009 “

Debit

90360 16000

74360

1476.70 15000

90836.70 25000

65836.70

964

66800.70

31.08.2009

“

15000

81800.70

02.09.2009

“

8000

89800.70

23.09.2009

By Cash

24.09.2009

To Cheque

28.09.2009 “

“

2000 1993

89793.70

702.80

90496.50

By Cash

30.09.2009

To Interest

14.10.2009

By Cash

05.11.2009

To Cheque

700 3596 2472.80

“

By Cash

“

To Cheque

2124.70

To Interest

4603

03.01.2010 31.03.2010

“

87800.70

89793.70 93392.50

2000

91392.50

3000

88796.50

2200

88665.30

4707

90790.00 100100.00

Solution for Case Exercise-2:1) The last remittance is on 5.11.2009 for Rs.2200/- i.e, as on date of Balance Sheet (i.e., 31.03.2010-25-112009) there is no remittance for 4 months and 25 days i.e, exceeding 90 days. Hence this is out of order account and falls under Sub-Standard category, which attracts 10% provision. The provision required therefore is Rs.100100 x 10% = 10010/-. Int. to be charged on monthly basis 1. 2. 3.

Exceeded the limit of Rs.91000/- on 5.11.2009. Last remittance was made on 5.11.2009. There is no remittances for 4 months and 25 days continuously. 31.03.2010

162 - III

Case – 3 Purpose Limit Period

: : :

Rate of Interest Security

: :

CC for Oil Mill business Rs.10.00 lakhs Last renewed for the period. 1.4.2006 to 31.03.2007 18% p.a. Mortgage of land & Building

Realisable Value as on 31.3.2010

:

Rs.20.00 lakhs

Date

Loan No.

Debit

Credit

March 2006

Balance 597473

18.04.2006

By Cash

19.04.2006

To Cheque

7000

590473

7076

597549

8836

606385

I 02.05.2006

To Interest

03.05.2006

By Cash

9000

597385

II 31.05.2006

To Interest

30.06.2006

“

9137

606522

8973

615495

III 21.07.2006

By Cash

01.08.2006

To Interest

16000

599495

9323

608818

30.092006

“

18315

627133

31.12.2006

“

28453

655586

03.01.2007

To Fees

31.03.2007

To Interest

31.03.2010

Balance

15

655601

33948

689549 1318298

Solution for Case-3:This is an non-agricultural cash credit advance. 1. Interest for the period 01.04.2006 to 30.06.2006 is Rs.8836 + Rs.9137 + Rs.8973 i.e. Rs.26946 corresponding credit for that period is only Rs.7000 + Rs.9000 i.e. Rs.16000/- which is not sufficient to cover interest debited. Interest Date of Balance Sheet Out of order since 01.09.03

-

only quarterly basis for non-agri. 31.03.2010 30.06.2006 163 - III

Period remained out of order for 3 years 9 months 1 day below 4 years which comes under secured. Doubtful Asset I which attracts 20% Provision Therefore Provision required is Rs.1318298 X 20% = Rs.2,63,659.60 (if the balance is changed the provision will get changed) 1.

As per prudential norms, in the event, account has been classified as NPA, Int. should not be charged to the account i.e., as on 31.3.2010 the account exceeded the limit of Rs.10.00 lakhs.

2.

Income to be booked on record of recovery basis.

Case – 4:Purpose Limit Expiry Interest due on Security Realisable Value

: : : : : :

Date 24.07.2009

Overdraft Limit Rs.25000 24.07.2010 Quarterly Personal Guarantee Nil Loan No.

Debit

Credit

Balance

To Cheque

20000

20000

02.08.2009

“

4000

24000

02.08.2009

“

500

24500

30.09.2009

“

818

25318

31.12.2009

“

1153

26471

02.01.2010

By Cash

31.03.2010

To Interest

1000 1500

26971

Solution for Case-4:This is non-agricultural cash credit. Limit Rs.25000/Security Nil Outstanding exceed limit on 30.09.2009 Date of Balance Sheet - 31.03.2010 This CC account is out of order since 30.09.2009 (Because the outstanding exceeds limit) i.e. for 6 months and one day

31.03.2010 30.09.2009

Hence it comes under Sub-Standard Category which requires 10% Provision Hence Provision required is 26971 x 10% = i.e. Rs.2697/164 - III

25471

Case Exercise – 5:Purpose Limit Repayment period Due date Rate of Interest Security Realisable value Date

: : : : : : :

Jewel Loan Rs.20000/one year 28-11-09 17.5% 24 gms of gold Rs.25000/-

Loan No.

Debit

Credit

28-11-08

To Loan

20000

31-03-10

Balance

Balance 20000 20000

Solution for Case No.5:Date of loan Interest due on Interest O.D. on Balance Sheet Date INTERST O .D since 03-03-01 Principal O/D

: : : : :

28-11-08 27-12-08 28-12-08 31-03-10 28-12-08

:

28.11.09

Over due for 1 year 3 months and 3 days, hence it is a Sub Standard Asset requiring 10% provisioning. Provision required is Rs.20000 x 10% i.eRs. 2000/-. Int. O/D on Principal O/D on

28.12.08 28.11.09

st

1 O/D date alone should be taken for arriving and making provision for NPA. Case Exercise No.6:PURPOSE AMOUNT MATURITY VALUE MATURITY DATE LOAN AMOUNT Date

: : : : :

LOAN AGAINST DEPOSIT AMOUNT Rs.30000/-. RS. 50370/30-05-10 20000/-

Loan No.

Debit

29-07-08

To Loan

20000

31-03-10

Balance

Credit

Balance 20000 28930

165 - III

Solution for Case Exercise No.6:This has to be classified under standard asset, since loan against deposits/NSC/KVP/IVP/LIC policies do not come under NPA norms. Provision for standard will be at 0.40% of Rs.28930 i.e. Rs.116/-. Case Exercise No.7:Purpose : Manufacture of Phenyl Limit : Rs.20000/-. Repayment Period : 5 years. Issue Date : 06.12.2004 Moratorium : 6 months Instalments : 60 Monthly Instalments of Rs.370/- from 06-06-05 onwards. Rate of int. : 12%P.A. Security : PERSONAL GUTANTEE Realisable Value : NIL B/S : 31.03.2010 Date

Loan No.

Debit

06.12.2004

To Loan

10000

10000

12.12.2004

“

10000

20000

31-03-10

Balance

Credit

Balance

14450

Solution for Case Exercise No.7:Loan Amount : Rs.20000/C.B.31-03-10 : Rs.14,450/-. Amount repaid : Rs.5,550/Monthly instalment paid : Rs.370/-. No. of. Instalments paid 5550/370=15months. Due Date : 06-06-05 During 2005 : 7 instalments During 2006 : 8 ” Total instalments paid : 15 months That is upto August 2006 paid. Over Due from : 06-09-06 Date of B/S. : 31-03-10 Age of Over Due : 25-06-03 i.e. above 3 years below 4 years. i.e., D1 unsecured category Provision to be made 100% Therefore Provision required is Rs.14,450/-. 166 - III

Case – 8:Purpose : Limit Sanctioned : Repayment Period : Loan Disbursed : Moratorium : Instalments : Security : Realisable Value as on 31.03.2010 : Date

Purchase of New Autorickshaw Rs.3.00 lakhs 4 years 29.04.2007 6 months 48 monthly instalment of Rs.6520 from 29.10.2007 Hypothecation of Vehicle & Two Guarantors Rs.2,00,000/-

Loan No.

29.04.2007

To Loan

31.03.2010

Balance

Debit

Credit

3,00,000/-

Balance 3,00,000/1,23,960/-

Solution for Case Exercise No.8:Loan Amount

:

Rs.300000/-

BAL. DUE ON.31-03-10

:

Rs.123960/-

Amount repaid

:

Rs.176040/-

Instalment Amount

:

Rs.6520/-.

Instalment Payable from

:

29.10.2007

No. of. Instalments paid

:

Rs.176040 Rs.6520

= 27

During 2007

:

3

During 2008

:

12

During 2009

:

12

Total

:

27

Over Due from

:

29.01.10

Date of B/S.

:

31-03-10

Age of Over Due

:

02.02.00 (2 days & 2 months)

:

Standard Asset

:

0.40% an outstanding of Rs.123960/-

:

i.e., Rs.496/-.

Classification Provision Required

167 - III

Case Exercise No.9:Purpose : PACS (AGRICULTURAL LOAN) DEVELOPMENT OF ARECA GARDEN. Loan Amount : Rs.1,35,090/Loan Disbursed : 04.03.2007 Moratorium : 12 months Repayment Period : 6 YEARS Due Date : 6 Annual Instalments of Rs.22,515 From 04-03-08 Rate of Int. : 9% B/S : 31.03.2010 Date

Loan No.

04.03.2007

To Loan

31.03.2010

Balance

Solution for Case Exercise 9:Purpose of Loan Loan amount Balance Amount repaid Instalment amount No. of instalment paid Due date of subsequent instalment Over due since B/s. Date Age of over due

: : : : : : : : : :

Hence classification of asset Provision required Actual provision required

: : :

Case Exercise No.10:Name Purpose Limit Loan Issue Repayment period Gestation period Instalments

: : : : : : :

B/S

: Date

Debit

Credit

1,35,090/-

Balance 1,35,090/1,12,575/-

Development of areca garden i.e. Agri. purpose Rs.1,35,090/Rs.1,12,575/Rs.22,515/-. Rs.22,515/-. one 04-03-09 04-03-09 31-03-10 27- 0-01 i.e. One year and 27 days sub-std. 10% 1,12,575 x 10% = 11,258/-. PACS Digging Of Well Rs.45,840/-. 09.03.2005 9 years. one year. 16 half yearly instalments of Rs.2865/from 09-03-06. 31.03.2010

Loan No.

Debit

09.03.2005

To Loan

45,840/-

31.03.2010

Closing Balance

Credit

Balance Rs.45,840/Rs.34,380/-

168 - III

Solution for Case Exercise 10:Loan amount : Repayment : Loan Amount : Closing Balance : Loan Amount repaid : Instalment amount : No. of instalments paid : i.e., I – instalment : II – “ : III – “ : IV – “ : Over Due from : B/s. Date : Age of over due : Classification : Provision to be made : Provision required :

Rs.45,840/Half Yearly Instalment since 09.03.2006 Rs.45,840 Rs.34,380 Rs.11,460/-. Rs.2,865/-. Rs.11460/Rs.2865 i.e., 4 Half Year Instalment 09.03.2006 09.09.2006 09.03.2007 09.09.2007 09-03-2008 31-03-10 22-00-02 (2 years and 22 days) Sub-Standard Asset 10% Rs.34,380 x 10% = i.e, Rs.3,438/-.

Case Exercise No.11:Name Limit Loan Disbursed Moratorium Repayment period Instalments Security Realisable Value B/S

: : : : : : : : :

Date

Housing Loan Rs.2,00,000/-. 10.02.2004 6 months 15 years. E.M.I. of Rs.2600/- from 10-08-04 Mortgage of 34 Cents of Land Rs.3,40,000/31.03.2010

Loan No.

Debit

Credit

Balance

10.02.04

To Loan

80,000/-

80,000/-

30-04-04

TO LOAN

80,000/-

1,60,000/-

27-05-04

TO LOAN

40,000/-

2,00,000/-

31-03-10

BALANCE

1,54,000/-

169 - III

Solution for Case Exercise 11:Loan amount Balance due as on 31.3.2010 Amount Repaid Instalment Amount No. of instalments remitted Instalment Due from date 2004 2005 Loan Overdue from B/s. Date Age of over due

: : : : : : : : : : :

Rs.2,00,000/Rs.1,54,000/Rs.46,000/Rs.2,600 Rs.46000/Rs.2600 i.e., 17 instalments 10.08.2004 5 months 12 “ 10.01.2006 31-03-10 21-02-04 (4 years 2 months and 21 days) i.e., Doubtful Category II Secured

Provision required is 30% Actual Provision required

:

Rs.1,54,000 x 30% = i.e, Rs.46,200/-.

: : : : : : : : :

Housing Loan Rs.2,00,000/-. 15 years. 10.09.2003 6 months E.M.I. of Rs.202/- (102+100) from 10-03-04 Mortgage of 34 Cents of Land Rs.3,60,000/31.03.2010

Case Exercise No.12:Name Limit Repayment period Loan Issue Gestation Due date Security Realisable Value B/S Date

Loan No.

Debit

Credit

Balance

10.09.03

To Loan

80,000/-

80,000/-

30-09-03

TO LOAN

80,000/-

1,60,000/-

31-03-10

BALANCE

1,60,000/-

Solution for Case Exercise 12:Loan amount : Rs.1,60,000/Outstanding : Rs.1,60,000/No Repayment Due date : 10.03.2004 Overdue since : 10.03.2004 B/s. Date : 31-03-10 Age of overdue : 21-Nil-06 (Above 6 Years) Classification : Doubtful Asset III Provision required is 100% = i.e. Rs.1,60,000/-.

170 - III

CHAPTER – 13

THIRD PARTY GUARANTEE FOR ADVANCES 1.

General: a.

Definition of “Guarantee”: i.

Section 126 of the Contract Act defines “Guarantee” as 'A contract of guarantee is a contract to perform the promise, or discharge liability, of a third person in case of his default'.

ii.

Three parties are involved in a contract of guarantee: · the bank making the advance · Principal Debtor or the Borrower and · Guarantor In such cases, there are two contracts: · Principal contract between the Principal Debtor and the Bank and · Secondary contract of Guarantee between the Bank and the Guarantor.

iii.

iv. 2.

3.

The Guarantor is the potential Debtor to the Bank. His liability crystallizes on the default of the Principal Debtor.

Consideration for a Guarantee: a.

Consideration accruing from the Bank to the Principal Debtor is a good consideration for the Contract of Guarantee.

b.

Section 127 of the Contract Act reads, 'Anything done, or any promise made, for the benefit of the Principal Debtor, may be a sufficient consideration to the surety for giving the guarantee.'

Capacity to give a Guarantee:While accepting the guarantee, the capacity of the Guarantor to contract should be taken into account. Special care should be taken while accepting guarantee from the following persons. a.

Minor: Since a minor has no capacity to contract, the Guarantee given by a minor is invalid and hence not acceptable.

b.

Married Woman:Even though a woman is equally capable of understanding the business transaction as such, it is desirable that when the guarantee of a woman is taken, she is advised by independent solicitors. This is essential particularly when she is guaranteeing advances granted to her husband or son,etc. Where it is not practicable to get guarantee executed under the guidance of an independent Solicitor, it is customary to obtain the woman guarantor's signature on a declaration written on the agreement itself to the effect that she understood its implications and signed it on her own free will and accord. 171 - III

c.

Partnership Firm: Unless it clearly appears from the partnership Deed or Partnership Agreement that the giving of guarantee is part of the ordinary business of the firm, a Bank should either have the guarantee signed by all the partners on behalf of the firm or alternatively, have it executed by one partner with a written authority of others.

d.

Limited company: A Trading Company has the implied power to borrow and give securities for the purpose of its business. But a power to execute guarantee cannot ordinarily be implied. If therefore, a Bank is offered a guarantee by a Limited Company, it should be examined whether the Company's Memorandum contains an express power to this effect. In this connection, no reliance should be placed upon the concluding words usually found in the Objects clause to the effect that the company shall have power “to do all such other things, as are incidental or conductive to the attainment of the above objects or any of them” for it seems very doubtful whether they really add anything to what the law itself implies as incidental to the specifically enumerated objects. There are certain statutory restrictions under sections 295, 369, 372A etc. of the companies Act 1956 on guarantees to be given by a Limited Company. It would, therefore, be advisable to seek a legal advice, before accepting the guarantee of a Company. A Certified copy of the Resolution of the Board authorising the giving of the guarantee should include the specimen format of proposed guarantee and the terms of the specimen guarantee. The Resolution should inter-alia state the names of persons authorised to sign the guarantee on behalf of the company.

e.

Hindu Undivided Family: Guarantee given by a Hindu Undivided Family should not be accepted because, normally, they do not engage in the business of issuing guarantees.

f.

Guarantees by two or more persons: While taking a guarantee jointly and severally from two or more persons, it is important to obtain the signatures of all the persons, before advancing money on the strength of the guarantee. Otherwise, if one of the guarantors does not sign the guarantee agreement for any reason whatsoever, the others whose signatures are already taken shall be absolved from their liability under the guarantee.

4.

Bank's Standard Format: a.

A guarantee should be drafted leaving no loopholes so that the guarantor is not left in possession of all his legal rights. Accordingly Bank forms should have been specially drafted to give us the utmost freedom of action and to take away from the guarantor all those rights and remedies that are likely to conflict with the Bank's interests. The guarantee should, therefore, be taken in the prescribed standard form.

b.

At times a guarantor acting under a legal advice may object to some of the clauses in the standard form. Deletion of/variation in clauses can be done only after approval from the HO, Legal Department. The printed guarantee agreement is the product of expert legal minds; every sentence has a definite significance and the deletion or addition of a word or two may rob us of some remedy, if and when we have to enforce our rights under the guarantee. 172 - III

5.

6.

Banker's Duty of Disclosure: a.

Unlike a contract behind a life insurance policy, a 'contract of guarantee' is not a contract of utmost good faith and the Bank is not normally expected to volunteer any information. But relevant questions raised by the guarantor have to be answered truthfully. Before doing so, the permission of the Principal Debtor should be obtained to avoid any suggestion of breach of the Bank's duty of secrecy. Alternatively, a tripartite conference is a good strategy.

b.

If it is apparent that the guarantor is under any wrong impression or has any misapprehension concerning the relative facts, the matter should be clarified. The guarantor is presumed to know the contents of the guarantee agreement, when he has signed it and failure to read it is no excuse for avoidance of his liability. Therefore, it is sufficient to describe to the guarantor the general nature of the liability under the guarantee. However, of questions concerning specific clauses call for complete answers by the Branch Manager so that the substance of the guarantor's liability can be known and understood by him.

c.

It should be borne in mind that during the currency of the guarantee, the guarantor may seek to know the extent of his liability under the guarantee. If, at the time of the enquiry, the borrower's debt is less than the amount up to which the guarantee is covered, the guarantor should be only informed that his liability is within the limits. If the debt exceeds the amount of his guarantee, the guarantor should be only informed that the Bank is relying fully on his guarantee, the excess not being disclosed without the prior consent of the principal debtor.

d.

The guarantor is not entitled, nor it is proper for the Branch Manager to give, without the consent of the Principal Debtor, any information regarding the conduct of the account by the principal debtor, such as, whether the account is being run satisfactorily or whether cheques are returned unpaid or whether there are any outside borrowings.

e.

The guarantor has no right to inspect the books of account, or demand a copy of the guaranteed account. The Bank is under no obligation to advise the guarantor of any change in the financial position of the principal debtor.

f.

On paying the amount guaranteed, the Guarantor is entitled to know what securities are held.

Liability of the Guarantor: a.

Section 128 of the Contract Act reads “the liability of the surety is coextensive with what that of the Principal Debtor, unless it is otherwise provided by the contract”. The liability of the guarantor would strictly depend on the terms of the contract .The liability of the guarantor under a continuing guarantee is not affected, even if the account is brought to credit or nil balance. 173 - III

7.

8.

b.

The liability of the guarantor continues as long as the debt continues to be enforceable by obtaining renewal documents from the principal debtor before the expiry of the limitation period. However, branches are instructed to obtain acknowledgement of debt-cumconfirmation of securities once in a year signed by both the principal debtor and the guarantor.

c.

If the principal debtor, whose account is guaranteed, pays all the dues and close, his account, the guarantor is discharged and is not liable, if the account is reopened later and a fresh advance is granted.

d.

Once the principal debtor is called upon to pay the entire advance, no further advance shall be granted to the Debtor on the strength of the guarantee taken earlier. The best course for the Branch Manager is to break the account once the demand is made, so as to avoid the operation of the rule in Clayton's Case. The borrower may be allowed to open and operate a separate current account but no overdrawing should be allowed on that current account.

Rights of the Guarantor: a.

Before the Demand for Payment: The guarantor can be called upon to repay the advance, only after the default of the principal debtor and due notice is served on him. The Bank is not bound to exhaust all the legal remedies against the principal debtor, before proceeding against the guarantor.

b.

On demand for payment: The guarantor is entitled to claim a set-off which the principal debtor may be possessing against the Bank.

c.

Banker's right of set-off against the Guarantor'sAccount: In instances where the guarantor maintains accounts in the Bank, right of set-off can be exercised, only if the demand for payment has been made against the guarantor.

d.

Rights of Lien: Bank has got a right to exercise its lien over the securities lodged by the guarantor, only in case of default by the principal debtor. Before exercising lien, a notice demanding the entire dues should be sent to the borrower/guarantor.

e.

After payment by the Guarantor: Upon payment, the guarantor is entitled not only to proceed against the principal debtor, but also to claim the benefit of any of the debtor's securities that are in the Bank's hands for the purpose of securing the debt. The guarantor is not entitled to any part of the debtor's securities, until the whole debt is satisfied.

Determination of guarantee by Guarantor: a.

Section 130 of the Contract Act reads: “A continuing guarantee may at any time be revoked by the surety, as to future transaction, by notice to the creditor”. 174 - III

The guarantee agreement has to provide for 3 months' written notice by the guarantor to the Bank before the guarantee can be determined. Immediate stoppage of facility, on receipt of notice would upset the outstanding business commitments of the principal debtor. Continuing of the facility till the expiry of the notice period may appear inequitable, because at the time of receipt of notice, the debt may be inconsiderable, while by the time the notice period has expired, it may have mounted to a peak figure. b.

9.

10.

To get out of this embarrassing situation, the Branch Manager should take an early opportunity of conferring with both the guarantor and the principal debtor and coming to some mutually satisfactory arrangement, keeping in mind, the interest of the Bank. The Branch Manager has to exercise his discretion judiciously depending upon the circumstances of each case and he should be able to justify the course of his action to the sanctioning authority.

Death of the Guarantor: a.

Section 131 of the Contract Act reads: “The death of the surety operates, in the absence of any contract to the contrary as a revocation of a continuing guarantee, so far as regards future transactions”. The guarantee agreement has to contain clause calling for the bank's notice of determination from the personal representative of the deceased guarantor as to the account of the principal debtor can be continued unbroken, until the expiry of such notice at the sole discretion of the bank.

b.

Continuance of the facility after receiving the notice of death of guarantor / notice of determination from legal representatives shall be a matter of very rare exception that too with the prior approval of the sanctioning authority.

Insolvency of the Guarantor: a.

A notice to the Bank of the guarantor's insolvency determines the guarantee. The Bank thereupon can prove before the Official Receiver for the debts incurred by the principal debtor till that date together with interest upto the date of receiving the order but any subsequent advance will not be covered under the guarantee. In the preparation of the proof of the debt, no account need be taken of the securities lodged by the principal debtor. Only securities lodged by the Guarantor himself should be shown, as it is with his estate that the Official Receiver or the Assignee is concerned.

b.

If a guarantee has been signed by two persons jointly where one is an adjudged insolvent, the Bank can seek remedy against the solvent signatory as well as the estate of insolvent. 175 - III

c.

11.

12.

The insanity of the Guarantor determines the operation of the continuing guarantee as from the date when the branch receives the notice of insanity. The account must be stopped and further transactions of the Debtor should be placed in a new account subject to report to the sanctioning authority. The account should not be allowed to be overdrawn. The guarantor being no longer capable of managing his own affairs cannot be held liable for any obligations incurred after the notice of insanity.

Death of the Principal Debtor: a.

Upon the notice of death of the Principal Debtor, his account will be stopped and the liability of the guarantor will be determined as to the future transactions. Any cheque paid after the death, but before receipt of notice will be covered by the guarantee.

b.

It will be prudent to advise the guarantor in a tactful manner that consequent upon the death of the Principal Debtor, his liability has been determined and he is liable to pay the balance as on the date of determination along with interest.

c.

All monies received from the guarantor must be placed in 'Sundry Deposit' account and should not be credited to the loan/overdraft account. This will enable the bank to preserve its full claim against the estate of the deceased.

d.

By the terms of the guarantee, the guarantor cannot make any attempt to recover from the estate, until the Bank has recovered its entire debt.

Insolvency of the Principal Debtor: a.

In the event of the insolvency of the principal debtor, the Bank will advise the Official Receiver or the Assignee the full amount due from the insolvent debtor and give full details of the securities lodged by the Principal Debtor. The guarantee need not be disclosed. A proof can be lodged for the whole debt less the value or proceeds of any direct securities. After receiving the final dividend from the Official Receiver/Assignee, the collateral proceeds received from the guarantor kept in Sundry Deposit/Sundry debtor account may be transferred to the advance account so as to wipe off the liability in full and the balance, if any, in Sundry Deposit account may be paid to the guarantor.

b.

If the guarantor wishes to prove his claim on the insolvent's estate, he must first repay the entire debt and he can, then, step into the shoes of the Bank and collect what he can from any direct security and by way of dividend. There cannot be two proofs for the same debt and the guarantor cannot attempt to intervene in the insolvency proceedings unless he first repays the whole debt. 176 - III

c.

13.

14.

From the practical angle, there are two points to be watched. The collateral position has to be preserved throughout, by placing the guarantor's money in Sundry Deposit/Sundry debtor account and the guarantee should remain intact to retain the covenants of the guarantor.

Payment by the Guarantor: a.

If the guarantor pays the whole debt in response to the Bank's demand, on the principal debtor's account, the advance should be deemed as repaid and the guarantee duly receipted and returned to the guarantor. Once the guarantor pays the entire debt, he steps into the shoes of the creditor (Bank) and becomes legally entitled to take over all direct and collateral securities already held by the Bank. However, permission must be taken from the sanctioning authority, before the securities are delivered to the guarantor.

b.

If the debt is greater than the amount of guarantee, the Bank can accept any payment made by the guarantor and place it in Sundry Deposit account to preserve its collateral position, in the event of insolvency of the principal debtor. It is usual to retain the guarantee as evidence of the Guarantor's contract not to claim against the Principal Debtor or to prove in his insolvency proceedings, as long as any liability remains unsatisfied.

c.

If the debt is less than the amount of guarantee, the Bank will accept the payment and credit Sundry Deposit account on the condition that the guarantor has to give notice of determination in accordance with the Guarantee Agreement. Receipt given for such money should show clearly that this is only to be regarded as part payment, until the liability of the guarantor can be established on the date of determination.

Payment by Principal Debtor: a.

The guarantor will be discharged by the payment made by the Principal Debtor. Payment must be valid payment and must not amount to a fraudulent preference. A 'fraudulent preference' means a preference given to some of the creditors in the matter of payment or transfer of property to the exclusion of others. It would be a fraudulent preference, if the principal debtor on the date of payment was unable to pay his debts as they became due and he is adjudged insolvent on a petition presented within three months after the date.

b.

It is immaterial whether payment has been made voluntarily or under compulsion. The Guarantee agreement should protect the Bank's interest, in the event of fraudulent preference being established. According to the clause, the guarantor's liability to the Bank on the basis of the guarantee shall revive to the same extent and in the manner as if such payment had never been made. 177 - III

15.

Change in the Constitution of the Borrower: a. A guarantee is not affected by any change in the name or the constitution of the corporation, unincorporated body or firm. b. Absence, infirmity or irregularity of borrowing powers on the part of the principal debtor or any irregularity in the exercise thereof, will not affect the guarantee. c. However as a matter of precaution, we should get the consent of the consent of the guarantor for continuing a credit facility in favour of a reconstituted firm/corporate body.

16.

Renunciation of Common Law Rights of the Guarantor: a. According to a Guarantee agreement, the guarantor contracts out rights conferred on him by sections 133,134,135,139 and 141 of the Contract Act. i.

Section 133: Any variance, made without the surety's consent in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variation.

ii. Section 134:The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. iii. Section 135: A contract between the creditor and the principal debtor, by which the creditor makes a composition with or promises to give time to or not to sue the principal debtor discharges the surety, unless the surety assents to such contract. iv. Section 139: If the creditor does any act which is inconsistent with the right of the surety or omits to do any act which his duty to the surety requires him to do so and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged. v. Section 141: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not and if the creditor loses or without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security. 178 - III

17.

Release of the Guarantor: a. The Branch Manager does not have any discretion to release the guarantor without getting the permission of the sanctioning authority. The release of guarantor and acceptance of a new guarantor in his place requires the consent of sanctioning authority. b. As a matter of fact, the reason for revocation of the guarantee has to be ascertained. If the reason for the revocation of the guarantee is due to deteriorating financial position of the principal debtor, a definite view has to be taken as to whether the limit has to be continued or curtailed or recalled. c. The recommendation of the Branch Manager will depend upon the facts and circumstances of each case, reason for the revocation of the guarantee / release of guarantor, credit worthiness of the principal debtor, securities given by the principal debtor, credit worthiness of the guarantor who has given notice of revocation and who may have to be released, securities given by the guarantor, the financial position of the principal debtor as on the date of receipt of notice of revocation, finished transactions and business commitments of the principal debtor at the time of receipt of notice of revocation of the guarantee, ability of the principal debtor to bring securities/new guarantor in substitution of the guarantee and if so the value of the security/net worth of the new guarantor, the turnover in the account, the financial results of the business of the business of the principal debtor, etc.

18.

Consent of the borrowers/guarantors for disclosure of information to CIBIL: a. As per RBI directives, banks are required to furnish credit information of all their borrowal accounts in the prescribed formats to CIBIL. As a prudential requirement consent of borrowers/guarantors is necessary for such disclosure. b. It is, therefore, necessary that a consent clause is included in any one of the agreement or documents signed by the borrower and guarantor. In case the consent clause is not included in the existing documents, the same can be obtained from the borrower and the guarantors/directors etc.

179 - III

CHAPTER - 14

CREDIT RATING AND RISK MANAGEMENT 1.

General: a. The Banking Scenario in our country has been undergoing transformation, especially from the nineties. The process is marked by the opening up of economy to global forces as a result of liberalization. The competition has intensified causing the stress on spread of profit of banks besides making the vulnerable to greater risks. b. In recent times, the financial sector has undergone far-reaching changes in the operational arena of Banking both in respect of such approach and procedure. One important dimension is Credit Risk Management. c. In terms of the guidelines of RBI on Credit Risk Management it is the responsibility of Head Office to formulate annual Credit Risk Policy focusing on improving the quality of the assets and healthy credit growth for overall business development of the Bank. The Policy document covers elaborately on the architecture, entire process of Credit Risk Management like risk identification, risk measurement, risk control and mitigation. Branches shall plan their Credit portfolio in tune with the annual Loan Policy and Credit Risk Management Policy of the Bank. d. Taking a lending decision is choosing between an affordable risk and non-affordable risk and need, therefore, arises to design a yardstick to accurately measure risks. Risk needs to be i. Accurately measured (Identification) ii. Carefully Selected (Assessment for decision making) iii. Adequately priced (Risk based loan pricing) and iv. Effectively monitored (Risk Control) e. Banks are thus subject to various kinds of financial and non-financial risks on i. Credit ii. Interest Rate iii. Exchange Rate iv. Liquidity v. Commodities vi. Legal, Regulatory and Operational aspects f. These risks are highly interdependent and events that affect one area will have ramifications for a range of risks in other areas. For example, Credit Risk will affect the position of overall liquidity of the bank, should there be default in repayment. g. While liquidity and interest rate risks are broadly in the purview of overall Assets and Liability Management of the Bank, specific risks related to Credit are: 180 - III

i. Transaction or Default Risk and ii. Portfolio Risk that consists of l Intrinsic Risk: Intrinsic Risk is one which is inherent to the type of industry (e.g. pollution in Tanning/Processing of Leather) l Concentration Risk: Concentration Risk is the risk incurred by the extent of exposure to a particular trade/industry in comparison with other industries/trade and total exposure of the bank as a whole. h. The Credit Risk depends on both external and internal factors. i.

A few of the internal factors are: l Deficiencies in Loan Policy / Administration l Absence of prudential credit concentration limit l Deficiency in Loan Appraisal l Absence of Loan review mechanism ii. Some of the external factors are: l State of economy l Wide swings in commodity/Equity price l Exchange/Interest Rates l Trade restrictions/Economic sanctions 2.

Aspects of Credit Risk: a. Even at the loan appraisal stage, it is important to have clear perceptions of risks involved. In fact, risk analysis is a new facet of traditional Credit Appraisal in the area of say, Economic, Technical, Financial, Managerial aspects but with a futuristic approach. While the approach is essentially long term for a Term Loan proposal, short-term view is predominant for Working Capital limits. A proper understanding of various risks is vital for improving our credit appraisal skill. Any inadequate focus on credit risk assessment may adversely affect the quality of the credit portfolio. b. Precisely, for example, Working Capital Assessment is more centered around financial and on the arithmetic of Net Working Capital. To have a refined appraisal system, the assessment should take into account the risk perspectives of the borrower concerned. The ultimate aim of risk assessment is to ensure that the borrowing Company's prospect of earning profit continuously is so evaluated as to keep the account under 'Standard Asset' category. With this in view, important components of risk particular to the area of Credit are enumerated below: 181 - III

3.

Competition/Market Risk: This comprises the following factors: a. Status/Trends in the economy b. Status/Trends in the industry c. Competitive factors in the industry: i. barriers to entry/exit ii. intensity of competition both in price front and service front iii. pressure from substitutes iv. bargaining power of buyers v. bargaining power of suppliers. d. Thus, for example, a venture into Fast Moving Consumer Goods(FMCG) implies lot of competition, money power to spend on advertisements and developing brand name at considerable cost. As such, for a project in that particular line/ industry, huge capital investment shall be a high barrier.

4.

Technology Risk: a. This is intricately linked to Management Risk. A poor choice of technology has, more often landed projects in serious troubles. This shall arise from poor quality of output, mismatch in capacity, prohibitive cost under Indian conditions, etc. Moreover, in highly technology-oriented fields like consumer electronics, computer hardware, etc., new innovations undergo fast changes and the rate of obsolescence is very high. Cassette Player eliminating Record Players and now, CD players posing threat to cassette players are examples of fast changing technology. b. Unless a company gears up with good Research and Development, the products run the risk of going stale and losing the market share very fast. Further, the process technologies in chemical industries, emissions of fumes / gas, etc. shall even result in plants being shut down. c. There are instances of projects that have not even taken off due to incompatibility of foreign technologies under Indian conditions.

5.

Financial Risk: a. Financial Risk is linked to the operational performance and arises from: i. Sales growth ii. Gross margins iii. Operating expenses (%) iv. Accounts receivable (days) v. Inventory (days) vi. Accounts payable (days) vii. Investment in Fixed Assets 182 - III

b. While seeking to assess this risk, it is essential to judge the reasonableness of presumptions on various aspects e.g. price of raw material, sale price, etc. c. Sometimes risks hall emanate from factors peculiar to specific industry. Present day difficult situation for Textile Industry is a case in point, with no parity between increasing cotton prices and price realization for yarn in the midst of stagnant demand. 6.

Exchange Risk: a. In the course of business, borrower enters into monetary transactions involving currencies of other countries. Thus, for example, imports/exports involve foreign exchange and the risk of fluctuation in value (in Rupee Terms) associated with various currencies. So also, while availing a Foreign currency loan with fixed repayment schedule, the borrower has to evaluate the risk of depreciation of rupee against foreign currency to save on cost of funds. b. The bank, as a lender, shall have to be cautious about un-hedged exchange risks of the borrower. It is necessary for the borrower to protect against these risks by forward cover/hedging with export receipts for any outflow of foreign exchange. c. Buy back arrangement and advance remittances from overseas could mitigate these risks to some extent. d. Import substitutes and outsourcing are also other ways to explore for an entrepreneur to get around foreign exchange risk.

7.

Economic/Political Risk: a. Hostile/unfavourable conditions inside a country may affect tourist traffic and may affect tourism-related industry like Hotels. Likewise, breakout of a particular disease may go to eliminate an entire poultry farm. b. Financial risk factors are closely interrelated with external environment in which the business functions. If the user industries are not doing well, the product manufacturer concerned will also be facing quite a risk.

8.

Change of Government Regulations: a. Change of government regulations is also a source of risk. To illustrate, a reduction in import duty on PSF has affected off-take of products from local manufacturers. Cheaper imported second hand textile machinery reduced the demand for new indigenous textile machinery. b. In these days of growing ecological concern, it is not surprising to see leading car models getting affected by stringent emission norms. Such developments cause sudden and adverse impact by way of loss of Sales and Profit generation. 183 - III

9.

Management Risk: a. The prime factors of management are skill and integrity of promoters of the project. Some elements of good management are: i. Aggressive and growth-oriented approach; ii. Well-developed and adequate facilities for Research and Development; iii. Dynamism and flexibility in approach to problems. b. It requires constant vigilance to watch for management errors. It is difficult to enumerate all management risks. c. The Business Risks arise out of managerial inefficiency. The indicative factors are,

i. ii. iii. iv. v. vi. vii. viii. ix.

Location Shortage of Raw material Labour problem Power cuts Pollution related issues Failure of Technology Quality of Technology Chronic shortage of funds Difficulty in marketing

d. When factories remain closed due t high incidence of labour unrest, there is risk of loss of production with harmful consequences on profitability and quality of Bank Credit. e. Perception of the risk: This involves basic understanding of the element of risk in each industry/activity for which lending is undertaken. f. Identification of various types of risks: The process which is being assessed out of operations of normal Banking.

10.

Mitigation of Credit Risk: a. As risk is inherent in every form of lending, the management of risk involves scientific management of the risk aimed at mitigating adverse effects. The Credit Risk Management would encompass: i. Measurement of risk through credit rating/scoring ii. Risk pricing (based on past experience, by quantifying the risk through estimation by expected and unexpected loan losses) iii. Control of Risk through effective Loan review mechanism and Portfolio management. iv. Zero Error Documentation 184 - III

b. It is part of Risk Management concerned with monitoring various borrowal accounts on an ongoing basis. This will enable timely preventive action in managing the risk elements. Additionally, it also refers to a strategy to assess the risk potential, for example, of various industries and bank's conscious decision to increase (or not) loans for select industries. c. While risk is inherent in every type of active, success of the Bank lies in the art of managing the risk assumed by it, by stipulating suitable covenants in the sanction for risk mitigation and by proper monitoring. Such an approach will enable the Bank to minimise the level of risk and optimize profitability of lending. d. Every loan appraisal has to identify the risk elements involved and find out to what extent the risks are acceptable. In the process, it needs to be ascertained from the borrower as to how the risks faced by the borrower are proposed to be mitigated. e. After carefully weighing the strengths and weakness of the proposal, ultimately, it will be possible to arrive at a balanced credit decision. f. Thus Risk Assessment has an important role to play in credit appraisals. Besides financially assessing borrower's needs, we have to perceive the risk elements and present a balanced perspective while recommending credit facilities. Such an analysis of risk and its impact on the borrower would go a long way in ensuring the quality of loan and prevent slippages and reduce the incidence of NPAs and ultimately strengthen the Bank by preservation and growth of Profitability.

11.

Tools of Credit Risk Management: a. Credit Approving Authority: This essentially means that no credit proposal should be approved or recommended to higher authorities if majority of the members of the 'Approval Committee' do not agree on creditworthiness of the borrowers. There will also be a suitable framework for reporting and evaluating the quality of credit decision taken by various financial groups. b. Prudential Limits: This will cover various aspects of credit like financial parameters, borrower/group-wise exposure limits, maximum exposure limit to industries. c. Risk Rating: Banks will have comprehensive risk scoring/rating system as a single point indicator of diverse risk factor. The rating exercise would also facilitate the credit granting authorities some comfort in its knowledge of loan quality at any moment of time. The risk assessment would be say, at half-yearly intervals and possibly at quarterly intervals for low quality loans. 185 - III

d. Risk Pricing e. Loans Portfolio Management f. Loan Review Mechanism: This is a tool available to the Bankers to identify loans which develop credit weaknesses, to evaluate portfolio quality and isolate potential problem areas etc., g. Off Balance Sheet exposures: The types of exposure are standby letters of credit, Money guarantees, bonds, letters of credit, indemnities etc. The current and potential credit exposure is measured on a daily basis to evaluate the impact of potential changes in market conditions, on the bank's exposure. 12.

Credit Rating System & Sanction of Finer Rate of Interest: a. Credit Risk Rating is one of the important tools put in place by the Bank for assessment / measurement of risk in respect of exposures to counter party i.e., borrowers. Assessment of risk in the exposure also is utilized as a tool for appraisal, decision making and also pricing the facilities by adding risk premium as enunciated in the Loan Policy of the Bank. b. With deregulation of interest rate structure of advances and articulation of different financial instruments such as Certificate of Deposits, Commercial Papers, etc., the market has been opened up for Corporates instead of solely looking to Banks for financing their needs. Further, Corporates in their quest to be cost efficient are demanding finer rates of interest leaving the Banks to determine their comfort level on advances and the spread over base rate taking into account the quality of asset portfolio. With the reserve strength of expertise and network of branches, Credit Marketing thus has become imperative. c. For this purpose, a Credit Risk Assessment- Rating system has to be in place in the Bank, which will serve as a single point indicator of diverse risk factors and for taking credit decisions in a consistent manner. d. The features of the system are: i. All accounts with a sanctioned facility of Rs. 2 lakhs and above are subject to the rating system. ii. The Board of Management is empowered to consider finer rate of interest as per delegated powers. iii. On receipt of Audited Balance Sheet, an interim Review of the account has to be made and applicable rate of interest (concessions) shall be decided by the Sanctioning Authority iv. In respect of large volume accounts of Rs.10 Crore and above, a half yearly review shall be made based on provisional results. v. Negative marks shall be allotted for deterioration under Track Record in Financial Parameters and wherever Group accounts are in Sub-standard/Doubtful category. 186 - III

e. The qualitative aspects should also be taken into consideration along with quantitative aspects. Branch Managers have to record in the proposal, the merits of the account and the need for considering finer rate of interest while recommending the proposal to higher authorities. f. Credit Rating in respect of the following categories of Advances need not be done: i. Sick accounts under rehabilitation. ii. Loans against deposit/NSCs/Shares/ Mutual fund units/IVPs/LIC Policies etc. g. Applicability: Irrespective of whether any concession in interest rate is sought/recommended or not, all borrowal accounts with credit limits of Rs.2.00 lakhs and above should be rated every year based on audited balance sheet in accordance with the revised parameters. h. The very purpose of the exercise is to, i. ascertain the quality of advances in our fold, ii. ensure proper monitoring of advances that show a tendency of slippage and iii. manage the advances portfolio on the lines specified earlier in the note apart from pricing of advances (finer rate of interest). i.

13.

Bank will also view with caution any adverse remarks pointed out by the auditors in the Balance Sheet of the borrower which will have a bearing on the conduct of the account. The matter should be taken up with the borrowers for necessary rectification.

Consortium Accounts: a. Where we are leaders: The discretion to sanction / consider finer rate of interest will rest with the delegated authority. Branch will arrive at the risk rating parameters based on Audited Balance Sheet and recommend the eligible finer rate taking into consideration the value of accounts, other benefits that will be available to the bank, threat of losing borrowers, etc. b. Where we are members: While the branch assess the rating and also the applicable finer rate of interest, sanction of the same shall be based on other parameters as detailed above besides the rate of interest charged by other member banks. Rate of interest for our share of limits will not be lower than the rate charged by the leader/any other member in the consortium.

14.

Rate of Interest for Adhoc Sanctions / Penal Interest: a. In respect of accounts where finer rate of interest has been sanctioned, the applicable rate of interest for Adhoc facility shall be finer rate to +2%. b. The finer rate of interest, if approved, will be valid for a period of one year from the date of sanction. In case where renewal of limits could not be taken up for various reasons, specific permission from the Sanctioning Authority (who has allowed finer rate) should be obtained. c. The norms for considering finer rate of interest to borrowers not conforming to the stipulated rating may be relaxed based on business consideration and value of connection and powers (that would be beneficial to the Bank). 187 - III

d. Interim Review: While the sanction of finer rate of interest will be based on available Audited Balance Sheet, at the time of renewal, an interim review has to be made if subsequent Audited Balance Sheet is received irrespective of completion of 6 months from the date of renewal. Based on the Audited Balance Sheet, the respective sanctioning authority will review the account and applicable finer rate of interest will be sanctioned / withdrawn based on merits of the account. 15.

Loan Review Mechanism (LRM): a. LRM is an effective tool for constantly evaluating the quality of loan book and to bring about qualitative improvements in credit administration. Banks should, therefore, put in place proper LRM for large value accounts with responsibilities assigned in various areas, such as, i. evaluating the effectiveness of loan administration; ii. maintaining the integrity of credit grading process; iii. assessing loan loss provision; iv. Portfolio quality. b. The main objective of LRM concept are, i. To identify promptly loans which develop credit weakness and initiate timely corrective action; ii. To evaluate portfolio quality and isolate potential problem credits; iii. provide information for determining adequacy of loan loss provision; iv. To assess the adequacy of adherence to, loan policies and procedures and to monitor compliance with relevant laws and regulations. v. To provide top management with information on credit administration including credit sanction process, risk evaluation and post sanction follow up. vi. Review of credit risk independently. vii. Picking up warning signals and suggest remedial measures. c. Loan Review Policy: Salient Features of Loan Review Policy relating to LRM are: i. Extent of coverage: Atleast 30% to 40% of the standard borrowal accounts exposure are to be brought under Loan Review Mechanism. ii. Reviewing Authority:The accounts have to be reviewed under Loan Review Mechanism by a committee. iii. Format for Review under LRM:The exercise is considered as a tool to evaluate the default risk probability. It is to be carried out with risk perception and comments are to be made on the possible migration of the rating of the unit based on the performance of the industry / financial position / Government policy etc. Further it is also expected that suitable corrective measures be prescribed. Branches have to submit the reports.

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CHAPTER – 15

CREDIT INFORMATION - INDIAN CONTEXT 1.

General:

a.

Current Indian Scenario: i. Rapid industrialisation. An expanding economy. Growing aspirations. Increased incomes. Improved lifestyles. Availability of high quality products and services. An expanding market. ii. These factors have created an atmosphere conducive to rapid credit off take. While the demand for credit has risen exponentially, there has been a parallel increase in competition, and credit delinquencies. In such an environment, risk assessment is of critical importance. Not only, in deciding on what business to book and the speed at which a credit grantor does so, but also in determining the appropriate pricing. iii. Comprehensive credit information, which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record, has become the need of the hour. iv. As per Reserve Bank of India circular RPCD.CO.RF.BC.No.44/07.40.06/2009-10 dated 1.12.2009, the cooperative banks are 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 in the format prescribed by the credit information company. A copy of the said circular is reproduced in Annexure – 1 to this Chapter. Further, the RBI circular dated September 6, 2010intimating the panel of credit information companies registered with RBI is reproduced in Annexure – 2 to this Chapter. v. A brief about one of the three registered Credit Information Companies with RBI is given hereunder to help understand the roles played by credit information companies to the advantage of banking and non-banking financial institutions.

2.

Credit Information Bureau (India) Limited (CIBIL): a. The Credit Information Bureau (India) Limited (CIBIL) was incorporated in 2000. CIBIL's aim is to fulfil the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members. Banks, Financial Institutions, NonBanking Financial Companies, Housing Finance Companies and Credit Card Companies use CIBIL's services. Data sharing is based on the Principle of Reciprocity, which means that only Members who have submitted all their credit data, may access Credit Information Reports from CIBIL. The relationship between CIBIL and its Members is that of close interdependence.

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b. Integral Solution:The establishment of CIBIL is an effort made by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors' portfolio quality. CIBIL provides a vital service, which allows its Members to make informed, objective and faster credit decisions. c. "CIBIL would be a the Catalyst in informed credit decisions, thus enabling growth in credit at better terms through, i. being a trusted partner to credit granters by offering innovative solutions, ii. empowering employees to be responsive towards changing customer needs, and iii. adopting international standards of technology, security and availability of up to date information"

d. “CIBIL has pioneered the Credit Information Bureau concept in India, which enables informed credit decisions by lenders at better terms. As pioneers in this field, they introduce innovative products & services that are useful to their members and help them make valuable credit decisions. In order to perform their role effectively, they apply the best available technology and processes in our operations.

e. CIBIL's Consumer Bureau banks upon its vast and dynamic information repository of the India market to provide its members with comprehensive risk management tools pertaining to individual borrowers. The objective is to minimise defaults and maximise credit penetration and portfolio quality. The software for the Consumer Credit Bureau is developed and licensed by TransUnion, one of the largest consumer credit bureaus in the world and CIBIL's equity and technical partner.

f. CIBIL's risk management offerings assist and empower its members to make objective decisions at every stage of the customer lifecycle- Acquisition, Portfolio management, Collections etc. 3.

Consumer Credit Information Report (CIR): a. This is CIBIL's core offering based on the vast information database pertaining to individual borrowers. Consumer Credit Information Report (CIR) is a vital tool used by credit grantors at the time of new customer acquisitions. CIRs provide factual information on credit histories of borrowers enabling institutions to make objective lending decisions. With CIBIL Consumer CIRs credit grantors are equipped to identify risk areas, disburse credit faster and with greater efficiency and grow business profitability. 190 - III

4

Portfolio Review Report: a. Portfolio Review Report is an extremely effective tool for credit grantors to review the risk associated with their existing portfolio of customers. The report provides the credit grantor with a comprehensive view of their borrower's credit relationships across multiple lenders. Lenders can enhance their portfolio returns through effective risk monitoring and management and through identification of loyal relationships - thus turning their customer base into profit engines. b. CIBIL TransUnion Score: The CIBIL TransUnion Score is India's first generic score and has become the most trusted indicator for prudent decision making by credit grantors.With the CIBIL TransUnion Score, the credit grantor can effectively predict the likelihood of an applicant becoming more than 91 days delinquent on one or more tradelines over the subsequent 12 months. c. CIBIL TransUnion Personal Loan Score: The CIBIL TransUnion Personal Loan Score is the first and only score for the Indian market to predict the likelihood of an applicant or customer becoming more than 91 days delinquent on a personal or consumer loan over the next 12 months. This score is the result of collaboration between Credit Information Bureau (India) Limited (CIBIL) and TransUnion, a trusted global leader in analytic and decision services. d. Bureau Credit Characteristics (BCC): Bureau Credit Characteristics is a list of predefined characteristics that summarize various aspects of a customer's credit information. The set comprises 258 credit characteristics which can be used for model development, data analysis, customer profiling, migration analysis and a variety of other account management analyses. e. CIBIL Market Insights: These reports are designed to provide an overview of the credit market basis geographic, demographic and behavioural borrowing trends. By profiling their customer base across various dimensions, benchmarking their performance with the market and identifying their strengths and weaknesses organizations can take proactive corrective decisions and enhance business growth. f. CIBIL Locate Plus:One of the challenges lenders may face is keeping updated and accurate contact details on all of their customers. CIBIL Locate Plus leverages CIBIL's vast and comprehensive information repository to provide Financial Institutions with comprehensive contact information on their customers in a faster and more cost effective fashion. CIBIL, being your partners in risk management, constantly endeavour to bring new solutions to cater to the market need and customize existing offerings to suit your requirements. 191 - III

5.

CIBIL Information Scheme: a. CIBIL's Commercial Bureau banks on a vast information database of credit histories of commercial borrowers. CIBIL's Commercial Credit Bureau benefits the industry and the economy overall, by helping minimize instances of concurrent and serial defaults through providing credit information pertaining to non-individual borrowers such as public limited companies, private limited companies, partnership firms' proprietorships, and others. CIBIL maintains a central database of information as received from its Members. CIBIL then collates and disseminates this information on demand to Members, in the form of Commercial Credit Information Reports (CIR) to assist them in their loan appraisal process. b. In its initiative to improve Credit flow to SMEs, CIBIL is being supported under SME Financing and Development Project implemented by Project Management Division, SIDBI, with an aim to facilitate flow of credit to the under penetrated SME sector while increasing banks' profitability and market penetration (via sound credit decisions) and reducing non-performing loans (via credit information tools). The software for the Commercial Credit Bureau is developed and licensed by Dun & Bradstreet, a world leader in commercial credit information and one of CIBIL's equity and technical partners.

6.

Commercial Credit Information Report (CIR): a. The information in the Commercial Credit Information Report broadly covers information about the borrowing entity and the credit/ loan account details like: i. Borrower information: l Name and Address l Other Identification numbers; e.g. PAN, Registration No. l Legal constitution l Relationship details; e. g. major shareholders, directors and their addresses and ® D-U-N-S Number l Number of inquiries made on the borrower ii.

Account Details: l Number of credit facilities l Credit type l Loan amount l Outstanding amount l Asset classification l Wilful defaulter and suit-filed status l Guarantor details

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iii.

7.

Suit-Filed cases: The information contained in this section relates to the suit filed accounts against defaulters of various banks, all India notified Financial Institutions (FIs) and State Financial Corporations (SFCs). The contents of this Information have been provided by various banks, FIs and SFCs, pursuant to the directions of the Reserve Bank of India dated the 4th of June, 2002, bearing reference number DBOD No.DL.BC. 111/20.16.001/200102. In the event of any person seeking clarifications with respect to the information or being aggrieved in any manner, such person may directly contact the bank or FI or SFC concerned for clarifications and/or actions.

Benefits of CIBIL: a. Increased Credit Volumes: Credit Bureaus facilitate increased lending opportunities for credit grantors while allowing easier access to credit for borrowers. The existence of credit bureaus in developed countries has facilitated increased market penetration of credit (to more than 66% as a percentage of GDP as compared to 3% for India) while keeping non-performing loans in check (approximately 1% of outstanding credit). b. Operating Efficiencies: i. Credit Portfolio Quality: The use of CIRs accessed from a credit bureau will enable credit grantors' loan officers to accurately evaluate borrower risk by making comprehensive credit histories available to decision makers. The CIRs will facilitate an objective and transparent assessment of credit applications. Concurrent borrowers and serial defaulters will be identified and minimized early in the approval process - consequently reducing associated recovery and write-off costs. Similarly, premium borrowers will be identified and serviced faster. Ultimately, CIRs will enable Members to judiciously mix relationship-based lending and information-based lending. CIRs will serve as the first level of due diligence in the appraisal of a credit application. ii. Speed and Cost: The use of CIRs will make processing loan applications easier, faster and cheaper by sometimes eliminating the need to additionally research and verify borrower details. The average loan in India is sanctioned in 2-3 days. A credit grantor using CIRs will be able to significantly reduce this turn round time and thus have a competitive edge in the marketplace. c. Differential Pricing: i.

Owing to the lack of comprehensive credit information, all borrowers are charged an interest rate with an assumed level of default risk. This means that all borrowers are charged identical risk premiums regardless of their payment history and thus pay a premium that in developed countries is only applied to previously defaulting borrowers. As credit grantors begin to use comprehensive credit information they will be able to differentiate between good borrowers and defaulters. In an increasingly commoditized credit market, credit grantors will be able to use price in order to differentiate their loan products.

ii.

In addition, borrowers who have diligently serviced their loans in the past will be able to demand cheaper loans in the future. Past defaulters will also have an opportunity to improve their credit histories by servicing their debt obligations in a timely fashion and thus earn access to lower interest rates. 193 - III

iii.

The Indian credit industry has only recently begun to offer differential pricing to their customers. As the credit environment becomes increasingly competitive, CIRs will play a pivotal role in the speed and confidence with which credit grantors will be able to increase their business volume.

d. Hence, the use of CIRs will prove beneficial to both credit grantors and borrowers;

8.

i.

Credit grantors: The use of CIRs will enable loan officers to make objective and informed credit decisions quickly, competitively and cost-effectively. The use of CIRs will enable them to increase their lending volumes and improve the quality of their credit portfolios while reducing their delinquencies and loan processing costs. This will translate into improved profit margins.

ii.

Borrowers: The widespread use of credit data will provide consumers with fast and easy access to the lending resources they need while reducing operating and risk costs for credit grantors. These reduce costs will be passed on to an extent to consumers with demonstrated credit performance in the form of lower interest rates. This easy availability of reasonably price credit will provide borrowers with the means to a higher standard of living.

Frequently Asked Questions (FAQs): a. What is CIBIL? - CIBIL - India's first credit information bureau- is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of credit information reports. b. Who owns CIBIL? - CIBIL's equity was held by State Bank of India, Housing Development Finance Corporation Limited, Dun & Bradstreet Information Services India Private Limited and Trans Union International Inc. The shareholding pattern was in the proportion of 40:40:10:10 respectively. c. On which segments does CIBIL provide credit reports? - CIBIL is a composite Credit Bureau, which caters to both commercial and consumer segments. The Consumer Credit Bureau covers credit availed by individuals while the Commercial Credit Bureau covers credit availed by non-individuals such as partnership firms, proprietary concerns, private and public limited companies, etc. d. Who are Members of CIBIL? - Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies and Credit Card Companies are Members of CIBIL. e. How does CIBIL function? - For credit grantors to gain a complete picture of the payment history of a credit applicant, they must be able to gain access to the applicant's complete credit record that may be spread over different institutions. CIBIL collects commercial and consumer credit-related data and collates such data to create and distribute credit reports to Members.

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f. Where does CIBIL get the information from? - CIBIL primarily gets information from its Members only and at a subsequent stage will supplement it with public domain information in order to create a truly comprehensive snapshot of an entity's financial track record. g. What is a Credit Information Report? -A Credit Information Report (CIR) is a factual record of a borrower's credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors make informed lending decisions - quickly and objectively. h. What are the measures taken by CIBIL to ensure the security of Member's data? -The security of the Members' data is of paramount importance to CIBIL. CIBIL's security measures are aligned with global 'best practices', stringent risk management standards and are subject to regular audits by independent auditors. CIBIL has adopted state-of-the-art technology to provide information security. The important aspects are detailed below: i. Information in our database is accessed only on a strictly 'Need to Know' basis. For example, the access to the Data Centre is available only to authorized personnel engaged in regular systems and database administration. ii. Access control devices, surveillance cameras installed at strategic locations and biometric access system at the Data Centre with the highest levels of security. iii. Comprehensive perimeter security solution consisting of a Firewall, Intrusion Detection and Vulnerability Assessment System to secure the network infrastructure from external security risk. iv. Installation of the following devices to deal with fire hazards: l State-of-the-art (VESDA) smoke detection system to provide early warning and isolation of potential fire hazards. l FM200 based Fire Suppression System to extinguish fire with minimal damage to the IT systems. v. Anti -Virus software installed on all servers in the Data Centre. Security patches and necessary configurations are continuously applied to the Servers and Network appliances. vi.

Another vital area in which security is of the utmost importance is the two-way transmission of information between CIBIL and its Members. In this regard, CIBIL uses: l 128-bit SSL encryption for all Web-based transactions including FTP. l Cryptographic solutions for all information sent or received through any physical media i.e. CD, DAT and DLT.

i. What is encryption? - Encryption is technique used to mask proprietary information in order to prevent it from being accessed by unauthorized individuals. Only authorized individuals who have been provided with the appropriate decoding software can unscramble the information. Thus, encrypted information that our Members provide us with is extremely secure. 195 - III

j. What type of information on a borrower is available in the CIR? -The CIR includes the following information: i. Name ii. Address iii. Identification numbers iv. Passport ID v. Voters ID vi. Date of birth vii. D-U-N-S® Number (for non -individuals) viii. Registration Number (for non -individuals) ix. Legal Constitution (for non -individuals) x. Records of all the credit facilities availed by the borrower xi. Past payment history xii. Amount overdue xiii. Number of inquiries made on that borrower, by different Members xiv. Suit-filed status. k. What type of information is NOT included in the CIR? - The CIR does not contain: i. Income / Revenue details ii. Amount(s) deposited with the bank iii. Details of borrowers' assets iv. Value of asset(s) mortgaged v. Details of investment(s) l. When is a credit facility classified as 'default'? - CIBIL does not classify any accounts as default accounts. It merely reflects this information after the Member has classified it as such. The Number of Days Past Due and / or Asset Classification as per RBI definition as submitted by Members is reflected in the CIR. m. How do I ensure that a CIR drawn on me as an individual / organisation does not contain negative information? - The best preventive measure is to exercise good money management practices and make repayments on time. Please see 'How to improve your credit' section for more details. n. If I am a first-time borrower, will I be at a disadvantage as there will be no information on me? - As a new borrower, there will be a new file created for you. It will then be in your interest to build up a favourable repayment track record for future credit applications. o. Who can access CIBIL Credit Reports? - CIBIL Members, which include leading Banks and Financial Institutions, can access information from CIBIL on the principle of reciprocity i.e. only those Members who have provided all their data to CIBIL are permitted to access CIBIL Credit Reports. Members can do so only to take valid credit decisions. Disclosure to any other person or entity is prohibited.Individuals can also request access to their Credit Reports directly from CIBIL. Please refer to the section on 'Access Your CIBIL Credit Report'

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p. Can the borrower obtain his own CIR from CIBIL?- Yes. As informed above borrowers /individuals can also access their own credit reports. Please refer to the section on 'Access Your CIBIL Credit Report'. q. Can CIBIL provide CIRs to credit providers in other countries? -No. CIBIL will provide credit information reports only to its Members in India. r. Whether Right to Information Act, 2005 is applicable to CIBIL? - No. The reason being that the CIBIL is not a “Public Authority” as defined under Sec 2(h) of the Right to Information Act, 2005. s. Does the CIR indicate if credit should or should not be given? -The CIR only provides available factual credit information and does not provide any opinion, indication or comment pertaining to whether credit should or should not be granted. The credit grantors who have received an application for credit will make the credit decision. CIBIL does not grant or deny credit. t. If my credit application has been rejected, will this fact appear in my credit record? -The Members do not provide this information to CIBIL and hence it will not be in the CIR. u. If a credit grantor has denied me credit, could others reject my application? -Not necessarily. Different credit grantors may use a CIR differently, or take into account other factors when they assess your application. Although one bank may deny you credit, another bank could take a different view and accept your application. v. What benefits does a borrower get from CIBIL? -CIBIL's CIRs are aimed at helping credit grantors make fast and objective lending decisions. This will contribute to a more competitive credit marketplace among Credit Grantors. With a Bureau in place, responsible customers can expect faster and more competitive services at better terms from the Credit Grantors. w. How do I rectify information in a credit report drawn on me? -Please contact the credit grantor from whom you have availed the loan and request the necessary changes. The credit grantor will then report the change to CIBIL and we will subsequently make the necessary updates in our records. x. What is the CIBIL Credit Report? - CIBIL Credit Report is a factual record of your credit payment history compiled from information received from different credit grantors. Credit grantors are leading Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies, Credit Card Companies, who are Members of CIBIL. The purpose is to help credit grantors make informed lending decisions - quickly and objectively, and enable faster processing of your credit applications to provide you speedier access to credit at better terms.

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y.

Where does CIBIL get the information from? -All leading banks and financial institutions are members of CIBIL. CIBIL collects information from these Members, collates and disseminates it in order to create a truly comprehensive snapshot of a borrower's credit history.

z.

What type of information on a borrower is available in the CIR? -The CIBIL Credit Report includes the following information: i. Name ii. Address iii. Identification numbers l PAN number l Passport number l Voters number l Telephone number l Date of Birth l Records of all the credit facilities availed by the borrower l Past payment history l Amount overdue l Number of inquiries made on that borrower, by different Members l Suit-filed status.

aa.

What type of information is NOT included in the CIBIL Credit Report? -The CIR does not contain: i. Income / Revenue details ii. Amount(s) deposited with the bank iii. Details of borrowers' assets iv. Details of investment(s)

bb. When is a credit facility classified as 'default'? - CIBIL does not classify any accounts as default accounts or any borrowers as defaulters. It merely reflects this information after the Member has classified it as such. The Number of Days Past Due and / or Asset Classification as per RBI definition as submitted by Members is reflected in the CIBIL Credit Report. cc.

Does the CIBIL Credit Report indicate if credit should or should not be given? -The CIBIL Credit Report only provides available factual credit information as submitted by CIBIL members and does not provide any opinion, indication or comment pertaining to whether credit should or should not be granted. The credit grantors who have received an application for credit will make their own credit decision depending on their risk management policies. CIBIL does not grant or deny credit.

dd. How do I ensure that a CIR drawn on me as an individual / organization does not contain negative information? -The best preventive measure is to exercise good money management practices and make repayments on time. Please see 'Manage credit' section for more details. 198 - III

ee.

If I am a first-time borrower, will I be at a disadvantage as there will be no information on me? - As a new borrower, there will be a new file created for you. It will then be in your interest to build up a favourable repayment track record for future credit applications.

ff.

Who can access CIBIL Credit Reports? -CIBIL Members, which include leading Banks and Financial Institutions, can access information from CIBIL on the principle of reciprocity i.e. only those Members who have provided all their data to CIBIL are permitted to access CIBIL Credit Reports. Members can do so only to take valid credit decisions. Disclosure to any other person or entity is prohibited. Individuals can also request access to their Credit Reports directly from CIBIL. Please refer to the section on 'Access Your CIBIL Credit Report'.

gg. Can the borrower obtain his own CIBIL Credit Report from CIBIL? -Yes a borrower can now obtain his/her CIBIL Credit Report from CIBIL. Please refer to the section on 'Access Your CIBIL Credit Report'. hh. How can I access my CIBIL Credit Report from CIBIL? -Please refer to the section on 'Access Your CIBIL Credit Report'. ii.

Can CIBIL provide Credit Reports to credit providers in other countries? -No. CIBIL will provide credit information reports only to its Members and consumers in India.

jj.

Whether Right to Information Act, 2005 is applicable to CIBIL? -No. CIBIL is not a "Public Authority" as defined under Sec 2(h) of the Right to Information Act, 2005.

kk. How does an individual rectify information in his/her CIBIL Credit Report? – The followingsteps should be followed for rectification of credit information report: i. ii. iii. iv.

ll.

Access your Credit Report from CIBIL. Link to the section- 'Access Your CIBIL Credit Report' Please refer to the section on 'Access Your CIBIL Credit Report' Identify the error in your report and write to [email protected] with your queries. Contact the related credit grantor(s) immediately and inform them of the error by providing them with the necessary proof of having cleared your dues. Once the credit grantor validates the error/s, the updated information to will be resubmitted to CIBIL. Note: CIBIL does not make changes to any information on its own. It is only a custodian of information received from credit institutions. CIBIL is permitted to make changes to your credit information only when it is confirmed by the credit institution(s). If my credit application has been rejected; will this fact appear in my credit record?Members do not provide this information to CIBIL and hence it will not be in the CIBIL Credit Report. 199 - III

mm. If a credit grantor has denied me credit, could others reject my application? -Not necessarily. Different credit grantors may use a CIBIL Credit Report differently, or take into account other factors when they assess your application. Although one bank may deny you credit, another bank could take a different view and accept your application. Every credit institution has its own level of risk appetite related to granting credit, which is based on their credit and risk management policies. nn. Who decides if I get my loan? - Loan officers decide if you get your loan. CIBIL Credit Reports are tools the loan officer uses to help make the credit granting decision. Lenders vary in how they interpret the information on the CIBIL Credit Report and credit score. Variations might also include how they weigh the importance of income, length of employment, and value of assets and collateral. oo. Why was I denied credit? - CIBIL does not grant or deny credit. Each lender/insurer has its own formula for evaluating an application, and only the lender can tell you why the decision was made. CIBIL's role is to supply the lender with the CIBIL Credit Report, which assists them in making informed credit decisions. Apart from the CIBIL Credit Report banks can also evaluate other criteria like your income, length of residence, or employment details etc. pp. What are the benefits of having a good credit history? What benefits does a consumer get from CIBIL? - Speedier access to Credit Information Reports facilitate faster and more objective lending decisions. A good credit history therefore implies cost efficiencies for Credit institutions and faster access to credit for consumers at better terms.CIBIL Credit Reports are aimed at helping credit grantors make fast and objective lending decisions. qq. What are the macro benefits of Credit Information Bureaus? - Credit Information Bureaus are set up with the core purpose of creating a sound lending environment to increase credit penetration thereby aiding economic prosperity and growth. World Bank reports indicate that countries having Credit Information Bureaus have shown improved lending performance and increased credit penetrations. The broad and consistent conclusions across many studies are that: Credit Information Bureaus allow borrowers to have, i. ii. iii.

Greater access to credit, in the form of a greater acceptance rate for a given default level; Fairer access to credit, in the form of a greater proportion of those traditionally underserved (women, and lower-income group) being accepted; and Improved lending performance, in the sense of lower default rates. 200 - III

rr.

9.

RBI notifications to furnish information to CIBIL: i.

Dated May 12, 2001, on Credit Card Business of Banks

ii.

Dated June 4, 2002, on Submission of Credit Information to Credit Information Bureau (CIB).

iii.

Dated November 6, 2004, Banks/FIs advised to ensure submission of borrowal accounts data to CIBIL.

iv.

Dated November 12, 2003, on prudential guidelines on banks' investment in non-SLR securities.

Annexure/s: a. Following annexures are appended to this chapter: i. RBI Circular dated December 1, 2009 on 'Credit Information Companies (Regulation) Act, 2005'. ii. RBI Circular dated September 6, 2010 on ‘Submission of data to Credit Information Companies'.

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Annexure -1 to Chapter-15 RESERVE BANK OF INDIA RPCD.CO.RF.BC.No.44/07.40.06/2009-10

December 1, 2009

All State and Central Co-operative Banks Dear Sir, Credit Information Companies (Regulation) Act, 2005 1.

As you are aware, the Credit Information Companies (Regulation) Act, 2005 has been operationalised with effect from December 14, 2006. In terms of Section 15(1) of the Act, every credit institution has to become member of at least one credit information company within a period of three months from commencement of the Act or any extended time allowed by the Reserve Bank on application.

2.

As Co-operative Banks fall under credit institutions as defined in sub-section (f) of Section 2 of the Act, they would be 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 in the format prescribed by the credit information company. The success of credit information collection and dissemination system depends on the data supplied by banks to the credit information companies. Therefore, it is desirable that all State and Central Co-operative Banks should be in readiness to supply data to credit information companies as and when they become operational. In view of this, they are advised to urgently initiate steps to build up database and be in readiness for effective exchange of credit information without any loss of time.

3.

In this connection we also invite your attention to the provisions of sub section (1) of Section 21 of the Credit Information Companies (Regulation) Act, 2005, which provides "any person, who applies for grant or sanction of credit facility, from any credit institution, may request to such institution to furnish him a copy of the credit information obtained by such institution from the credit information company". Further, sub-section (2) of the said Section also specifies that every credit institution shall on receipt of request, as indicated in sub-section (1), furnish to such person a copy of the credit information subject to payment of charges specified by the Reserve Bank under the Regulations.

4.

You might be aware that Reserve Bank, in Credit Information Companies Regulations, 2006, framed under the Act, has already prescribed in Regulation 12(3) a maximum fee of Rs. 50/(Rupees fifty only) for the purpose.

5.

State and Central Co-operative Banks are, therefore, advised to ensure strict compliance with the provisions of the Credit Information Companies (Regulation) Act, 2005 as well as the rules and regulations framed thereunder. Yours faithfully, (R.C.Sarangi) Chief General Manager 202 - III

Annexure -2 to Chapter-15 ______________________ RESERVE BANK OF INDIA____________________ RPCD.CO.RF.BC.No.17/07.40.06/2010-11

September 6, 2010

All State and Central Co-operative Banks Dear Sir, Submission of data to Credit Information Companies Please refer to our circular RPCD.CO.RF.BC.No.44/07.40.06/2009-10 dated December 1, 2009 on the captioned subject. 2.

We advise that apart from Credit Information Bureau of India Ltd., (existing credit information company in operation since January 2001), the Reserve Bank of India has issued certificate of registration to Experian Credit Information Company of India Pvt. Ltd. and Equifax Credit Information Services Pvt. Ltd. on February 17, 2010 and March 26, 2010 respectively to commence the business of credit information. The addresses and other details of the companies are given below: (i)

Credit Information Bureau (India) Ltd. Hoechst House, 6th floor, 193, Backbay Reclamation,Nariman Point, Mumbai – 400 021 Tel.No. 022-66384600 Fax No.02266384666

(ii) M/s Experian Credit Information Company of India Private Ltd. Platina, 9th Floor, C-59, G Block BandraKurla Complex, Bandra East, Mumbai 400051 Tel. No. 022-39530851 Fax No. 022-39530605 (iii) Equifax Credit Information Services Pvt. Ltd. 2nd Floor, Centre Point Junction of S. V. Road and Juhu Road Santacruz West Mumbai 400 054 Tel. No. 022-42375600 Fax No. 02242375601 3.

In terms of sub-sections (1) and (2) of Section 17 of the Credit Information Companies (Regulation) Act, 2005, a credit information company may require its members to furnish credit information as it may deem necessary in accordance with the provisions of the Act and every such credit institution has to provide the required information to that credit information company. Further, in terms of Regulation 10(a) (ii) of the Credit Information Companies Regulations, 2006, every credit institution shall: (a) keep the credit information maintained by it, updated regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the credit institution and the credit information company; and (b) take all such steps which may be necessary to ensure that the credit information furnished by it, is up-to-date, accurate and complete.

4.

It is, therefore, advised that banks which have become members of the above credit information companies may provide them the current data in the format prescribed by the Credit Information Company. Such banks may also provide historical data in order to enable the credit information companies to validate their software and develop a robust database. Please acknowledge receipt to our regional office concerned.

5.

Yours faithfully, (B.P.Vijayendra) Chief General Manager 203 - III

CHAPTER – 16

LAW OF LIMITATION 1.

General:

2.

a.

Limitation Period is the time limit within which action can be taken in a Court of Law to enforce any legal right. A suit filed after the limitation period will be dismissed by the Court, even in cases where limitation has not been set up as a defense [Sec. 3 (i)].

b.

The limitation period bars the remedy of filing a suit. It does not take away the right of recovering the debt. There is no limitation period for recovering the debt by exercising the right of lien, setoff or selling the goods pledged to bank (which does not involve filing suits).

c.

‘The limitation Act, 1963’ provides period of limitation for different types of suits, appeals and applications. This act is applicable throughout India except Jammu and Kashmir. It has 32 Sections and 137 articles.

Limitation periods as per the Act: Some Transactions: Period of Limitation

Description a.

e. f. g. h.

For money payable for money lent (viz., Temporary overdraft without DPN, Jewel loan without DPN) For money payable for money lent when the lender has given a cheque for money For money lent under an agreement that it shall be payable on demand (Demand Loan) For money deposited to be payable on demand (viz., S.B. account, Current Account) On a promissory note payable on demand On a bill of exchange payable on demand On a usance bill of exchange or promissory note Mortgage

i.

Right of foreclosure by the Mortgagee

j.

Any suit by State / Central Government

k.

Fixed deposits with bank

l.

Money paid by oversight in excess (in SB account discovered later)

b. c. d.

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3 years from date of loan

3 years from the date of payment of cheque 3 years from the date of loan 3 years from the date of demand 3 years from the date of DPN 3 years from the date of bill. 3 years from the date of bill / note. 12 years from the due date of the loan (money sued for became due). For personal decree limitation is 3 years. 30 years from the date when money secured became due 30 years (from the date when the period of limitation would begin to run, in case of like suit by a private party). 3 years from the date of demand by / on behalf of depositor. 3 years from the date of discovery of the mistake

m.

o. p.

Appeal to be filed in High Court against the judgment of Lower Court Appeal to be filed in other Courts against the decree at Lower Courts Execution of Decree Recovery of loss caused by fraud

q.

Recovery of goods given on bailment

r.

Any other suit where the limitation is not provided for in the Act

n.

3.

30 days from the date of decree. 12 years from the date of Decree. 3 years from the date of detection of fraud. 3 years from the date of refusal by the bailee. 3 years from the date when the right to sue accrues.

Period of Limitation against Guarantors: a.

4.

90 days from the date of decree.

What is the period of limitation for taking legal action against guarantors? There is no specific answer to this question in as much as different High Courts have given different views on this subject. Kerala High Court has held that the surety is bound by the acknowledgement of the principal debt or and there is no separate limitation period for guarantors. Madras High Court has held in SBI Vs Sampooranand & others (1983 MLJ3) that the acknowledgement by the principal debtor will not save limitation against guarantor. The Supreme Court in Margaret Lalitha Samuel Vs. Indo Commercial Bank Ltd. is of the opinion that the limitation against the guarantor does not start unless a demand is made on him to pay the debt. Though the predominant view is that limitation period against the guarantor starts from the date of demand (to guarantor) it is better to obtain Revival Letter within 3 years from the date of execution of guarantee.

Periods Excluded while computing Limitation: a.

b. c. d. e.

First Day of Cause of Action as per Sec.12 of the Act, First day of the cause of action can be excluded in computing period of limitation. Thus, a suit based on a DPN dated 5.3.2007 can be filed latest by 5.3.2010. Closure of Court: Where the limitation period expires on a day when the Court is closed, the suit can be filed on the day when the court re-opens. Absence from India: In computing limitation period for any suit, the period for which defendant has been absent from India shall be excluded. Suit in wrong court: When a suit is filed in a wrong court due to in advertence but in good faith, the time spent in such proceeding can be excluded, for computing limitation. Injunction: When cause of action is restrained by injunction from court such period of injunction is to be excluded for the purpose of computing limitation.

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5.

6.

Extension of Limitation Period: a.

Limitation period can be extended either by, i. acknowledgement of the debt as stated in Sec. 18 or ii. part payment as mentioned in Sec. 19 of the Act.

b.

Acknowledgement: Acknowledgement or part payment after the expiry of limitation period does not extend Period of Limitation. It means admission by the borrower of the subsisting liability. It can be through Revival Letter (RL), Certificate of Balance (COB) and even by Ordinary Letter where liability to the bank is admitted. Even such a letter addressed to any other person, than the Balance Sheet passed in Annual General Meeting and singed by an authorized person will extend limitation as against a company.

c.

Part Payment: When borrower makes payment on account of debt either by himself or by his authorized agent before the expiry of the limitation period a fresh period of limitation starts from the date of such payment.

Procedure for obtaining Revival Letter (RL)/ Certificate of Balance (COB): a.

Cash Credit A/c.:In case of Cash Credit Account, Certificate Of Balance (COB) is to be obtained both from the borrower and guarantor. For a Term Loan, confirmation of balance need to be obtained from the guarantor alone.

b.

Partnership: Incase of a Partnership Firm which has become defunct, RL should be obtained from all partners, (Sec.20). Where partners have signed acknowledgement in different dates, the limitation period so far as the firm is concerned is to be calculated from the date on which one of the partners signed the revival letter.

c.

Company: For a company COB is to be obtained from persons authorized to operate the account. However RL is to be obtained from directors/persons who were authorized by Board Resolution to execute the documents including RL in case the same persons are not available, then RL can be signed by persons who are authorized by a fresh Board Resolution to do so.

d.

Joint Debts : Where a debt is taken in joint names, revival letter is to be obtained from all the joint borrowers. In case some of the joint borrowers have not signed the RL, no action can be taken against them after the limitation period.

e.

HUF : Incase of HUF, the Karta will sign the RL. But after the disruption of HUF his acknowledgement will not suffice.

f.

Power of Attorney Holder : The agent who was authorized to sign documents does not get automatic authority to sign RL. Express Authority to sign RL should be given. Thus in case specific authority is given by the principal to sign RL the agent can sign RL or otherwise the RL has to be signed by the Principal.

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g. 7.

Deceased Persons:RL is to be signed by legal heirs.

Regularising Time Barred Debts: a.

A debt which is time barred can be given life by obtaining an Express Agreement to pay the time barred debt. This is to be stamped as an agreement. The legal basis for obtaining this agreement is Sec.25(3) of the Contract Act which states that a time barred debt is a valid consideration for a fresh promise to pay. Banks can file suit within three years from the date of fresh promise or can extend its limitation by obtaining revival letters.

b.

Filing Suit in case of Dishonour of Cheques: i. For filing a civil suit limitation period is 3 years from the date of dishonour of cheque. ii.

8.

Number of RLs that can be obtained /taken. : a.

9.

For filing a Criminal proceeding in case of dishonour of cheques limitation period as given in section 142 of 'Negotiable Instruments Act' is one month from the date of the Cause of action.

Acknowledgement / RL can be obtained any number of times. Each acknowledgement is to be obtained within 3 years from the date of its previous acknowledgement/ Revival letter.

Miscellaneous: a.

Change in Limitation Period by mutual consent: Parties to a contract cannot contract out (waive) the limitation period. They cannot provide for a longer or shorter period of limitation by mutual agreement (Sec. 28 of Indian Contract Act).

b.

Limitation Period for Certificate Proceedings: Limitation period is equally applicable for initiating proceeding with Revenue Authorities under Public Debt Recovery Acts, Agricultural Dept. Recovery Acts framed by State Govts.

c.

Standing Instruction: Part payments in to the loan account made on the basis of standing instruction does not extend limitation.

207 - III

CHAPTER – 17

STAMPING OF DOCUMENTS 1.

General:

2.

a.

The members of the coop society (Coop. Banks) are exempted from paying stamp duty on the instruments executed by them. However when any instructions are required to be stamped, the following procedure has to be followed by the Co-op Banks.

b.

The law of stamps in India is governed by the Stamps Act, 1899, as amended in its application to various states by local amendment Acts. The Stamp Act, 1899 extends to the whole of India. The main object of the Stamp Act is to raise revenue by means of stamp duty on certain documents. If an instrument requiring stamping is not properly and adequately stamped, it will not be entertained by the court in any legal proceedings.

Instruments Chargeable with Stamp Duty: a.

The instruments chargeable with Stamp Duty are listed in Sec.3 of the Stamp Act.

Stamp Duty: Stamp duty in respect of some documents is imposed by the State Government and others by the Central Government.

3.

a.

Central List:

i.

Stamps duty on demand promissory notes, bills of exchange payable otherwise than on demand (i.e. usance bills), money receipts, proxies and transfer of shares comes under the Central list and is therefore the same for all the States in India. DPN: Stamp duty on demand promissory notes will be in the form of revenue stamps affixed on them. The value of stamp for Receipt of money or property if the amount is Rs.500 and above is Re.1.00. No stamp duty is required for value below Rs. 500.

ii. iii.

iv. S. No. 1. 2. 3.

For usance D.P.Note and usance Bills of Exchange, the stamp duty depends on period and amount of the bill. More than Period not exceeding Amount (Rs.) one year three months Upto Rs.500 above Rs.500 but not exceeding Rs.1000/For every additional Rs.1000/or part thereof

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Rs.1.25 Rs.2.50

Rs.10 Rs.20

Rs.2.50

Rs.20

Note : It usance period is more than 3 months / quarter or part thereof, multiply the above stamp duty with number of quarters upto one year. a) Money Receipts Rs. 0.20 b) Share Transfers Rs. 0.50 for every Rs.100 or part thereof c) Proxies Rs. 0.30 d) Letters of Credit Rs.2.00

4.

b.

State List:

i.

In respect of other documents requiring stamp duty the value of the stamp duty varies from State to State. Branches should therefore consult the Bank's Legal Advisers in this regard, wherever necessary.

Types of Stamps - How Stamped: a.

Revenue Stamps: Documents like demand promissory notes, cash receipts, acknowledgement of debt should be stamped with adhesive revenue stamps of appropriate value before execution.

b.

Special adhesive stamps: Printed agreements/ Xerox copies of printed blank documents should be affixed with special adhesive stamps of requisite value at the right hand top corner of the documents by the Stamp Office / Collector's Office / Treasury, after remitting the value of the stamp to be affixed and making a request to that effect producing blank copies of the document.

c.

The provisions of the Stamp Act requires that the adhesive stamp when affixed to the instrument chargeable with duty, which has been executed by any person, should be cancelled by the Stamp Office/Collector's Office/Treasury. If the stamps are not cancelled then the instrument is deemed to be unstamped.

d.

Embossed/Engraved Stamps: The stamps can also be embossed or engraved by the stamp authorities on bank's standard forms. The printed forms of the bank, along with requisite amount of stamp duty, should be sent to the stamp authorities. The forms are impressed or engraved with stamps according to the stamp duty prevailing at the time.

e.

Non-Judicial Stamp Paper: Non-judicial stamp paper carries the stamp duty embossed on the paper itself and as such stamped papers of requisite value may be purchased from local stamp vendors and the text of the documents, as approved, typed/written thereon and executed by the parties concerned, whenever it is not possible to get printed agreements and have them affixed with the special adhesive stamps. 209 - III

f.

Where a single sheet of paper is insufficient to write the whole document, Rule 7 of the Stamp Rules 1925, provides as follows: i.

ii.

5.

Where two or more sheets of paper on which stamps are engraved or embossed are used to make up the amount of duty chargeable in respect of any instrument, a portion of such instrument shall be written on each sheet so used. Where a single sheet of paper not being paper bearing an impressed hundi stamp, is insufficient to admit the entire instrument being written on the side of the paper which bear the stamps, so much plain paper may be subjoined thereto as may be necessary to the complete writing of such instrument: Provided that in every such case a substantial part of the instrument shall be written on the sheet which bears the stamp before any part is written on the plain paper subjoined.

Time of Stamping: a.

Instruments executed in India are required to be stamped before or at the time of execution.

b.

Any bill of exchange payable otherwise than on demand or promissory note drawn or made out of India must be stamped by the first holder in India before he presents the same for acceptance or payment, or endorses, transfers, or otherwise negotiates, the same in India. It will be quite in order if the stamp is affixed at a time when any of these events happens. He must affix the proper stamp and cancel the same. The special adhesive stamp affixed on such an instrument must bear the words "Foreign Bill". It should be noted, however, that these provisions do not apply when the first holder of a foreign bill or note does not present it for acceptance or payment, or does not endorse, transfer or otherwise negotiate the same in India.

c.

If a promissory note executed out of India and stamped at the time of execution with the proper Indian stamps is subsequently brought to India, it will have to be stamped again by the first holder within three months of its arrival in India. It was held that the Act commences to operate on foreign bills and notes when they are brought into India, and subsequently sought to be acted upon; it was irrelevant, therefore, that the note had already been stamped with an Indian stamp outside India.

d.

Instruments other than bills of exchange and promissory notes executed out of India may be stamped within three months after being first received in India. The time has to be computed from the date on which the document was first received in India and where there is doubt about the date of receipt, the person presenting the instrument for stamping may be called upon to produce evidence of the date when it was received in India. 210 - III

6.

7.

Stamp Duty on Documents executed in more than one State: a.

When a document is required to be executed by two persons in different States in India, it must bear the stamp duty of that state where it is signed first. It is then to be sent to the second State for the signature of the other person. If in that State, the duty on the document is higher than in the first State, the excess amount will have to be paid before the person in the second state signs it. The document should be sent to the stamp office along with the amount of deficit stamp duty and then the stamp office certifies the document.

b.

If the document is signed in one State and is to be acted upon in another State where the duty is higher than the duty in the former State, the deficit amount of stamp duty is to be paid in the State where it is to be acted upon within three months of its receipt in the latter State.

c.

If documents are to be executed by a party who is residing at a place other than the place of the advancing branch and he cannot call at the branch to execute them, the documents should be sent to the branch nearest to the place of availability of the executant. The branch receiving the documents should get the documents executed in the presence of the Manager/Officer of the branch. If the executant is not known to the branch, proper identification must be insisted upon before execution of documents. Record of execution should be made in the Documents Execution Register. If the branch from which the documents were received is in another state, arrangement should be made to pay additional stamp duty, if so required, before the documents are got executed.

Unstamped /Under Stamped: a.

As to the effect of not stamping a document or inadequately stamping it, there are two categories. The first category consists of the following documents which, if unstamped or inadequately stamped, are not at all admissible in evidence and for all practical purposes nullities: i. Demand Promissory Notes ii. Usance bills of exchange and iii. Acknowledgement of debt.

b.

Therefore, these documents, if unstamped or insufficiently stamped, will not be admitted in evidence of the debt/due payable. A suit based or such unstamped or insufficiently stamped promissory notes, or usance bills of exchange or acknowledgements of debt would therefore fail in law. Except these documents all others fall in the second category, i.e. they are admissible in evidence even if they are unstamped or inadequately stamped, on payment of penalty which may be at the maximum ten times the duty chargeable.

c.

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8.

Adjudication: a.

9.

Refund or Allowance for the amount of Stamps: a.

10.

Sometimes, it is difficult to determine the requisite stamp duty to be affixed on the document. At that time it is advisable to present it to the collector of stamps for adjudication. The collector is empowered to certify the adequacy of stamps on the documents. On presentation of the document for adjudication to him, he will verify and certify the stamp duty (Sec.31).

Sec. 49 to 55 deals with refund or allowance on the following grounds. The refund or allowance may be made for the amount of stamps: i. Spoiled Stamps ii. Printed forms, no longer required for use. iii. Stamps not required for use. iv. Renewals of certain debentures.

Stamping of Documents: a.

In order to render a valid and legal document, it should be properly stamped as required under the India Stamp Act, 1899 (a central legislation). The States are empowered to vary the stamp duty payable on, certain documents.

b.

However the stamp duty payable on documents such as a Promissory Note, Bill of Exchange and receipt is governed by the India Stamp Act and the State are not competent to vary the same.

c.

According to law, certain documents such as Promissory Notes, Bills of Exchange or acknowledgement are to be compulsorily stamped with the appropriate stamp duty at the time of execution and failure to do so would render them inadmissible in evidence before a court.

d.

Except these documents, all other documents fall in another category, which are admissible in evidence, even if they are unstamped or inadequately stamped, on payment of penalty which may be at the maximum of ten times the duty chargeable.

e.

There are two methods of stamping, one is by affixing revenue stamp/adhesive stamps of the requisite value on the documents and the other is by having the document prepared on nonjudicial stamp paper.

f.

Promissory Notes, cash receipts and acknowledgement of debts should be stamped with adhesive revenue stamps of appropriate value.

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11.

g.

Printed agreements/Xerox copies of printed blank documents should be affixed with special adhesive stamps of requisite value at the right hand top corner of the documents by the Stamp Officer/Collector's office.

h.

As per provisions of the Stamp Act, the adhesive stamp when affixed to the instrument should be cancelled by the Stamp Officer/ Collector's office. If the Stamps are not so cancelled, the instrument will be deemed to be unstamped.

i.

Non-judicial stamp paper carries the stamp duty embossed on the paper itself. Stamp paper of the requisite value may be purchased from the stamp vendor and the text of the document may be types or written thereon and executed by the parties.

j.

The date of the document should be subsequent to the date of purchase of the stamp pages.

Rule 7 of the Stamp Rules 1926 provides that; a.

Where two or more sheets of paper on which stamps are engraved or embossed are used to make up the amount of duty chargeable in respect of any instrument, a portion of such instrument shall be written on each sheet so used,

b.

When a single sheet of paper bearing an impressed hundi stamp, is insufficient to admit the entire instrument being written on the side of the paper which bear the stamps, so much plain paper may be subjoined thereto as may be necessary for the complete writing of such instrument, provided that in every such case, a substantial part of the instrument should be written on the sheet which bears the stamp before any part is written on the plain paper subjoined.

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CHAPTER – 18

FAIR PRACTICES CODE ON LENDERS' LIABILITY 1.

General: a.

2.

As per RBI guidelines, every Bank has to set out Fair Lending Practices in a transparent manner.The Lender's Fair Practices Code aims at achieving excellence in the services offered by the Bank on the following: i.

Applications for Loans

ii.

Processing

iii.

Loan Appraisal and Terms & Conditions

iv.

Loan Disbursement and Supervision

v.

Charges prescribed

vi.

Grievance Redressal Mechanism

Declarations: a.

We, the _______Cooperative Bank Ltd., hereinafter called 'the Bank', declares and undertake to: i. ii. iii. iv. v. vi. vii. viii.

provide a professional, efficient, courteous, diligent and speedy services in the matter of lending. affirm no discrimination whatsoever on the basis of Religion, Caste, Sex, Descent or any of them. be Fair and Honest in advertising and marketing of Loan products. provide our customers, accurate and timely disclosure of terms, costs, rights and liabilities as regards to loan transactions. provide such assistance as and when sought for or advise to customers in contracting loans attempt in good faith to resolve any disputes or differences with customers by setting up complaint redressal mechanism within the organization. comply with all the regulatory requirements in good faith. spread general awareness about potential risks in contacting loans and encourage customers to take independent financial advice and not to act and rely only on representation from Bank.

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3.

Fair Practices:

a.

Product Information :

b.

i.

A Prospective customer would be given all the necessary information adequately explaining the range of loan products available with the Bank to suit his needs.

ii.

On exercise of choice, the customer would be given the relevant information about the loan product of his choice, available with the Bank.

iii.

The Customer would be explained the processes involved till sanction and disbursement of loan and would be notified of time frame within which all the processes will be completed in general course of the Bank.

iv.

The Customer would be informed of the names and phone numbers of branches and the persons whom he can contact for the purpose of loan to suit his needs.

v.

The Customer would be informed the procedure involved in servicing and closure of the loan taken.

Interest Rates: i.

Interest Rates for different loan products would be made available through and in any one or all of the following media, namely: l

On the Bank's Web site.

l

Over phone, (if Telebanking services is availed).

l

Through prominent display (on notice board) in the branches and at other delivery points.

l

c.

d.

Through other public media (News Paper, TV, Radio Advertisement) from time to time.

ii.

Customer is entitled to receive periodic updates on the interest rates applicable to the respective loan product.

iii.

On demand, Customer can have full details of application of interest.

Revision in Interest Rates: i.

The Bank would notify immediately or as soon as possible any revision in existing interest rates and make them available to customers in the media listed under 3b. above.

ii.

Interest Rate revision to the existing customers would be notified to them within a reasonable period of time from the date of change.

Default Interest/ Penal Interest: i.

The Bank would notify clearly about the default interest / penal interest rates as applicable to the particular product, to the customers.

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e.

f.

g.

Charges: i.

The Bank would notify details of all charges payable by the customers in relation to their loan account.

ii.

The Bank would make available for the benefit of prospective customers all the details relating to charges generally in respect of their retail products, in the media listed under 3b. above

iii.

Any revision in charges would be notified in advance and would also be made available in the media as listed under 3b. above

iv.

The Bank would clearly specify the charge account for interest and charges, wherever necessary and get a mandate for debiting the said charge account along with the documentation.

Terms and Conditions for Lending: i.

At the time of applying for the loan, the Bank will provide information about the interest rate applicable, processing charges, pre-payment charges, documentation charges, etc. with regard to the loan applied.

ii.

On receipt of the completed application the Bank would generally give an acknowledgement (Proposal Number in case of loan application) of receipt of loan. On sanction, terms & conditions governing the advance would be communicated to customer for acknowledgement and acceptance.

iii.

The time frame for disposal of applications for all loans shall be within 4 weeks from the date of receipt of loan application completed in all respects (or) as may be fixed by the Bank.

iv.

Immediately after acceptance of terms and conditions by the customer, the Bank would show draft of the documents that the customer is required to execute and would explain, if demanded by the customer the relevant terms and conditions of sanction and disbursement of loan.

v.

Loan Application forms, Draft documents or such other papers to be signed by a customer would comprehensively contain all the terms and conditions relating to the product or service of his choice.

vi.

The Bank reserves the right to either sanction or reject the loan application. In case of rejections, the reason(s) for rejection of loan application would be conveyed to the applicant in writing.

vii.

The loan application will be considered based on the merits of the request and in accordance with the bank's prescribed appraisal norms.

viii.

Before disbursement of loan and on execution of the loan documents, copy of the duly executed documents may be delivered to the customers, if so requested by them.

Account Practices: i.

The Bank would provide regular statement of accounts, unless not required by the customers. 216 - III

h.

i.

ii.

The Bank would notify relevant due dates for application of agreed interest, penal interest, default interest, and charges if they are not mentioned in the Loan applications, documents or correspondence.

iii.

The Bank would notify in advance any change in the implementation of accounting practices, which would affect the customer.

Information Secrecy: i.

The Bank undertakes that all personal information of the customer would be confidential and would not be disclosed to any third party unless agreed to by the customer. The term “Third party” excludes all Law enforcement agencies (including court of Law), Credit Information Bureau, Reserve Bank of India, other banks and financial institutions.

ii.

Subject to above Para, customer information would be revealed only under the following circumstances: l If the Bank is compelled by Law. l If it is in the Public interest to reveal the information. l If the interest of the Bank requires disclosure.

Grievance Redressal Mechanism: i.

The Bank would have a Grievance Redressal Mechanism within the Bank.

ii.

The Bank would make available the following details to the customers individually on demand and through the media listed under 3b. above l Where a complaint can be made l How a complaint should be made l When to expect a reply l Whom to approach for redressal of grievance etc. The complaint/ grievance would be resolved as per the Bank's norms/ guidelines within a period of 45 days.

iii.

j.

Financial Discipline: i. Each Bank shall frame its own Lending Policies including nature of credit, rate of interest, period of repayment, time discipline for scrutiny of applications, sanction of credit limit, disbursement of credit, inspection of credit, redressal, etc. and make them available for the customers on demand. ii. This code of Fair Lending Practices would be reviewed from time to time to enhance the value and relevance to the borrowers.

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CHAPTER - 19

BASE RATE 1.

2.

General: a.

Till June 30, 2010 the floating rate products were priced with reference to their Benchmark Prime Lending Rate (BPLR). Clearly the BPLR system was not functioning in a transparent manner.

b.

After setting up a committee to examine the issue and a draft note inviting public suggestions, the guidelines relating to the new Base Rate System have been made effective for all loans issued or renewed on or after July 1, 2010. So this new system is expected to be effective, considering the transparency it is supposed to offer.

Computation of Base Rate: a.

b.

3.

The 'Base Rate' is to be computed taking into consideration: i.

cost of funds;

ii.

operational expenses and

iii.

a minimum margin to cover regulatory requirements of provisioning, capital charge and profit margin

If one sees the non-binding “illustrative methodology” for the computation of the Base Rate in the guidelines, it also more or less lays out the same set of parameters, but in greater detail.

Significance of 'Base Rate': a.

While each bank can choose its own benchmark for the cost of funds, they will have to document the detailed formula for the calculation of the Base Rate and follow it consistently. This formula will need to be disclosed to RBI, which can also scrutinise that it is being followed consistently. This is unlike the BPLR regime, where BPLR was supposed to take into account the same set of parameters but no documentation was required and it was not open to RBI scrutiny.This is a significant difference as it forces banks to follow a consistent method of calculating the Base Rate.

b.

The second big difference is that unlike BPLR, banks are not allowed to lend below the Base Rate (there are a few exceptions, but they are not very relevant for this purpose).

c.

It is a fact that blue chip corporates are always able to get good rates from banks. They are likely to be borrowing at interest rates very close to the banks' Base Rates. When market interest rates fall, they will naturally expect to get better rates and naturally, the banks will be forced to drop their Base Rate if they still want to maintain their market share. This will exert downward pressure on the banks' Base Rates when market interest rates fall.

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d.

From July 1, 2010 banks were directed to move to this new and more transparent regime of loan pricing. They have to jettison the Benchmark Prime Lending Rate (BPLR) and price loans off a 'Base Rate'.

e.

Unlike the BPLR that was set somewhat arbitrarily by banks, the Base Rate will follow an explicit formula that factors in a bank's cost of deposits, operating costs (expenses of running its branches, for instance), the cost of statutory drafts on bank funds imposed by the Reserve Bank of India (the Cash Reserve Ratio and Statutory Liquidity Ratio) and the profit margin. The Base Rate will help borrowers to compare interest rates offered by various banks and make the process of how banks arrive at interest rates for loans more transparent.

f.

RBI has stipulated that banks cannot charge below the Base Rate for most loans. (There are a couple of exceptions like agricultural loans and export credit.) While the new model will ensure greater transparency, it need not mean lower lending rates for borrowers.

g.

In fact, banks' blue-chip corporate borrowers could see some increase in their cost of borrowing. The reason is somewhat simple. RBI allowed banks to lend below their prime lending rates and the majority of banks did the bulk of their corporate lending at 'sub-PLR rates'.

h.

The best 'credits' for a bank could drive the hardest bargains. This led to peculiar situations in which a bank whose official BPLR was in the range of 14-16 per cent was found lending to its best customers way below its costs at 5-6 per cent. The incentive for this 'irrational' pricing was to keep the ratio of non-performing assets low, particularly in the wake of the global financial crisis when banks' risk appetite waned and safety got precedence over margins. The Base Rate regime does away with this.

i.

Previously, banks used to price the loans they offered you on a complicated system called benchmark prime lending rate (BPLR). Each bank has its own BPLR methodology which made it difficult for borrowers to compare rates across banks. Now, with the Base Rate in place, it will be easier for all bankers to compare across banks and to get a more transparent sense of how the interest rate for the loan is being arrived at.

j.

Banks are required to review the Base Rate at least once in a quarter, with the approval of the Board. The Base Rate is the sum of the following four factors;

k.

i.

cost of deposits/funds

ii.

negative carry on CRR/SLR

iii.

un-allocatable overhead cost

iv.

average return on net worth

RBI's Illustration for calculation of Base Rate is given as Annexure-I to this Chapter.

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Annexure – 1 to Chapter-19 ILLUSTRATIVE METHODOLOGY FOR THE COMPUTATION OF THE BASE RATE Base rate = a+b+c+d a. cost of deposits/funds = D (benchmark)

[[{d cost –( SLR * Tr)} ] *100]- D cost b.

Negative carry on CRR and SLR =

c. d.

Unallocatable Overhead Cost = average return on Net Worth=

Type equation here {1-(CRR+SLR)}

Where: D cost: Cost of Deposits /funds D : Total Deposits = Time Deposits + Currents Deposits + Saving Deposits D Ply : Deployable Deposits =Total deposits less share of deposits locked as CRR and SLR balances, i.e. =D * [1 - (CRR + SLR)] CRR : Cash Reserve Ratio SLR : Statutory Liquidity Ratio Tr: 364 T – Bill Rate Uc : Unallocatable Overhead Cost NP: Net Profit NW: Net Worth =capital + Free Reserves Negative Carry on CRR and SLR = Negative carry on CRR and SLR balances arises because the return on CRR balances is nil, while the return on SLR balances (proxied using the 364 – day Treasury Bill rate ) is lower than the cost of deposits .Negative carry on CRR and SLR is arrived at in three steps. In the first step, return on SLR investment was calculated using 364 – day Treasury Bills. In the second step, effective cost was calculated by taking the ratio (expressed as a percentage) of cost of deposits (adjusted for return on SLR investment) and deployable deposits (total deposits less the deposits locked as CRR and SLR balances). In the third step, negative carry cost on SLR and CRR was arrived at by taking the difference between the effective cost and the cost of deposits. Unallocatable Overhead Cost = Unallocatable Overhead Cost is calculated by taking the ratio( expressed as a percentage) of unallocated overhead cost and deployable deposits. Average Return on Net Worth = Average Return on Net Worth is computed as the product of net worth ratio and net worth to deployable deposits ratio expressed as a percentage.

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CHAPTER – 20

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS 1.

General: a. Financial Statements can be analysed in the following manner: i. Analysis of Balance Sheet ii. Analysis of Profit and Loss Account iii. Ratio Analysis iv. Cash Flow Analysis v. Contribution Analysis vi. Break-Even Analysis

2.

Analysis of Balance Sheet: a. Classification of Current Liabilities i. Short term borrowings (including bills purchased and discounted) from Banks and Others ii.

Unsecured Loans

iii.

Public Deposits maturing within one year

iv.

Sundry Creditors (trade) for raw material sand consumable stores and spares and Bills Payable.

v.

Interest and other charges accrued but not due for payment.

vi.

Advance / progress payments from customers

vii.

Deposits from dealers, selling agents etc.

viii.

Instalments of term loans, deferred payment credits, debentures, redeemable preference shares and long termed posits payable with in one year. (However, term loan instalments falling due for payment within one year need not bereck one dasitem of Current Liability for the purpose of arriving at Maximum permissible Bank Finance asper RBI'sCredit Policy dated 11.10.1993).

ix.

Sundry Liabilities: l Provident Fund dues l Provision for Taxation l Sales Tax / Excise Duty etc. l Obligations towards workers considered as statutory l Others (to be specified)

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x.

l

Miscellaneous Current Liabilities:

l

Dividends (unpaid)

l

Liabilities for Expenses

l

Gratuity Payable within one year

l

Other Provisions

l

Any other payments due within 12 months

The concept of the Current Liabilities would include estimated or accrued amount which are anticipated to cover expenditure within they ear for known obligations viz. the amount of which can be determined only approximately, such as, provisions for accrued bonus payments, taxes, etc.

xi.

Incases where specific provisions have not been made for these liabilities and the liabilities will be eventually paid out of general reserves, estimated amounts should be shown as Current Liabilities.

b.

Classification of Current Assets: i.

Cash and Bank Balances: l

Investments such as Government and other Trustee Securities (other than for long term purposes e.g. sinking fund, gratuity fund etc.) and Fixed deposits with banks.

l

Sundry Debtors or Receivable arising out of sales other than deferred. receivables, (including bills purchased and discounted by bankers).Duty benefit arising out of unutilised advance licenses should not be treated as an item of “Current Assets”.

l

Instalments of deferred receivable due within one year.

l

Raw materials and components used in the process of manufacture including those in transit.

l

Stock – in – process including semi – finished goods.

l

Finished goods including goods in transit.

l

Other consumables pares.

l

Advance for purchase of raw materials, components and consumable stores.

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l l l l

l

c.

d.

Advance for purchase of raw materials, components and consumable stores. Advance payment for tax. Prepaid expenses. Deposits kept with public bodies, etc.,forthe normal business operation gearset de posits kept by construction companies etc., maturing within the normal operating cycle. Monies receivable from contracted sale of Fixed Asset during the next 12 months.

Points for Classification: i. Investment in shares and advances to other firms/companies, not connected with the business of the borrowing firm, should be excluded from Current Assets. ii. Dead inventory i.e. slow moving or obsolete it ems should not be classified as Current Assets iii.

Amount representing inter–connected company transactions should be treated a s current only after examining the nature of transaction sand merits of the case. For example, advance paid for supplies for a period for more than then or mal trade practice in spite of any other considerations such as regular and assured supply should not be considered as current.

iv.

While computing Working Capital finance, the classification of Current Assets and Current Liabilities should be as per RBI guidelines in this behalf so brought out above according to the companies Act, 1956.

Bifurcation of Current Liabilities: i. Bank borrowings including bills purchased / discounted. ii.

Other Current Liabilities (OCL) excluding bank borrowings.

iii.

Workings Capital Gap–the difference between Current Assets (CA) and the Current Liabilities (WCG = CA – OCL).

iv.

It is very important to note that according to the recommendations of the Study Groups. (Tandon and Chore Committee), the banks are required to finance only a part of the Working Capital Gap of a borrowing unit.

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e.

Provisions for Taxation: i.

Netting of tax provision and advance tax paid (vide item 1.2.9. of Current Assets) maybe effected for all the years uniformly and, as such, for the current year also the advance tax paid can be set off against the provision, if any, made for that year.

3.

Analysis of Profit and Loss Account: a.

Objectives of Profitability Analysis is to know: i.

Whether there is adequate return on capital employed.

ii.

Whether there is adequate cash generation to service the debts and/or to set right liquidity imbalances.

iii.

As to what fact or shave caused set back in profit and whether they are temporary in nature or otherwise and what sort of corrective steps are required.

iv.

Whether there is siphoning of profit by way of heavy salary to Directors/Partners, high interest on its funds etc. making the residual surplus inadequate to service the long-term debts or to strengthen the liquidity imbalance.

v.

Whether every item of income and expenditure as given in the Trading and Profit and Loss Account of the borrower should be analysed and compared with that of earlier years to arrive at certain conclusions.

vi.

Whether any meaningful analysed is of profit invariably in all proposals is necessary and the heads of income and expenditure in the Trading and Profit & Loss accounts have to be condensed into the broad headings.

vii.

Whether individual items of expenses and income in the Trading and Profit & Loss account must be consolidated and grouped under these broad headings and be given for the past three years in the Credit Appraisal as done in the case of Balance Sheet.

viii.

Whether branch has to furnish the detailed analysis of Profit & Loss Account for Credit Limits of Rs.1 Crore and above (both fund and non-fund based).

ix.

Whether, for others, although data in the analytical form need not be furnished, Branch/Regional Office must explain in their report the reasons for any major ups and down in the profit and about its implications, as indicated above.

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ii.

In cases where the borrower could not get adequate price, it should be found out whether it is because of competition or deterioration in quality of products/goods sold by him. If latter is there as on, due caution should be exercised unless immediate corrective steps are taken.

iii.

Whether the manufacturing/procuring expenses have increased disproportionate to the increase in selling price.

iv. c.

Whether any improvement has been made in the current year.

When there is high variation in Net Profit, it should be verified as to: i.

Whether it is purely because of increase / decrease in Gross Profit.

ii.

Whether there is any unusual fall / increase in other Non-Operative Income.

iii.

Whether the income earned during the current year/yesteryear is unusual and windfall in nature and whether the unit can sustain even without this extra/windfall income in the current year.

iv.

Whether it is due to increase or decrease in any head of expenses. (Such expenses and amount should be identified and reported).

v.

Whether corrective steps could be taken to sustain the profitability, if the increase in any expense is high and permanent in nature.

vi.

Whether the decrease in Profit is on account of interest paid on outside borrowing and ; if so, whether such borrowing limit is with in the tolerable level and not too high so that there will not be extra pressure on the unit and consequent default of such borrowing would not result in the bank's securities (stock, machineries etc.) vanishing at one stage and the unit coming to a standstill.

vii.

Whether the fall in profit is on account of increase in interest paid to borrowings made from their own family members/close relatives. In such case, the capacity of the borrower to service the Term Loan/D.P.G. liabilities with the residual profit must be ensured, otherwise, such lenders will not be allowed to withdraw the interest, but reinvested in the unit. The same exercise should be made when the Liquidity/Net Working Capital of the unit is below the required level.

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viii.

ix.

4.

Whether the fall in profit is on account of increase in salary to partners, remuneration to Directors and the like or because of interest paid to partners' capital/loan, and if so, it should be ensured that there area dequate funds/Net Working Capital and the residual profit to take care of repayment commitments in Term Loan/D.P.G. and others and any payment for Royalty/Patent right to the Promoters / Directors/ Partners in their personal capacity. Whether there are any other relevant points requiring the analysis and reporting on credit decision should also be analysed and reported.

Ratio Analysis: a.

Liquidity Ratios i

Current Ratios : (Current Assets

÷

Current Liabilities)

l

A very high ratio is not desirable, as it shall mean less efficient use of funds. Usually Long-Term Liabilities are costlier than Current Liabilities as the for mercury higher burden of interest or dividend while the latter are usually free or available at nominal cost.

l

A high ratio may mean excessive dependence on long-term sources thus reducing the profitability of the unit.

l

A low Current Ratio may mean too much strain on the Working Capital sources.

l

A part from the numerical figure, the composition of the Current Assets is also important to decide about liquidity. Greater the liquidity of the Current Assets the lesser is the marg in needed above the Current Liabilities. Receivables also form an important component of the Current Assets. The liquidity of receivables, is estimated by the following ratios: Ø

Receivables Turnover

Ø

Average collection period

l

A ratio less than lindicates that the unit is bound to have cash flow problems during the year. A ratio reasonably higher than 1 indicates that cash flow problems may not arise.

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ii. l

Quick Ratio: (Current Assets (Current Assets – Inventories & prepaid expenses): Current Liabilities – Bank borrowings A high quick ratio indicates that the concern would not default in a crisis situation. Lower ratio would indicate that major composition of Current Assets is stock. Under such circumstances the necessity of keeping more stock should be examined. It is also to be ascertained that the stock do not include obsolete stocks.

iii. Working Capital Turnover Ratio: (Net Sales ÷Net working Capital) l Clarifications Ø Gross Working Capital = Total current Assets Ø Net Working Capital (Liquid Surplus) = Current Assets Current Liabilities Ø The Working Capital Turnover Ratio as such will not give any indication whether it is too high or too low. Ø If Liquid Surplus or Net Working Capital is too high, it may indicate less effective utilisation of funds and vice versa. b.

Solvency (Leverage) Ratios: i.

Debt Equity Ratio :(Term Liabilities÷Tangible Net Worth) l Clarifications Ø Tangible Net Worth = Net Worth Intangible Assets Ø Debt = Long Term Liabilities Ø Equity = Tangible Net Worth l l

l

This ratio compares the owner's stake in business with the outside liabilities. The units, where outside liabilities are very large as compared to owned funds, are said to be trading on a thin equity and this may affect profit since the Long Term Loans carry the obligation of payment of interest. In the reverse case, where equity is too high as compared to Long Term Liabilities, the unit is said to be trading on a thick equity and normally a good sign, unless there is evidence to believe that the owner of the unit is dishonest and enjoys poor credit worthiness in the market. It indicates: Ø Borrower's stake Ø The extent of reliance on term borrowings Ø Cushion available for withstanding future losses, if any, by the promoters.

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ii.

Leverage Ratio (Total Indebtedness Ratio): (Total Outside Liabilities (Term+ Current Liabilities) ÷ Tangible Net Worth): This ratio differs slightly from the Debt–Equity Ratio, as instead of term liabilities only, we take the total outside liabilities. This may reflect the solvency position in a better way. In this case too, the lower the ratio the better it shall be, as it indicates the adequacy of the unit's equity in making payment of outside liabilities.

iii. Fixed Assets Coverage Ratio: (Net Fixed Assets (i.e. after depreciation) ÷Long Term Debts secured by Fixed Assets): l This ratio indicates whether the value of Fixed Assets is sufficient to cover the amount of the loan granted against them. The Fixed Assets figure should always be high because of them agin stipulations in loans. Usually this ratio improves with the passage of time (if there is no addition to Fixed Assets) as the instalment of debts very year is usually higher than the reduction in value by the amount of depreciation provided. l The unsecured term loan should be excluded, as they do not have direct charge over Fixed Assets. iv. Proprietary Ratio: (Capital or Share Holder's funds÷Total Tangible Asset x 100): l This ratio indicates the percentage of tangible assets financed by the proprietor/ partners/shareholders. This ratio would be100, if there are no outside liabilities and the units as been financed by owners only. It is useful for creditors/bankers as it indicates the margin of safety for them. Higher the ratio the stronger is the financial position of the unit and higher its capability to bear financial stress. v.

Coverage Ratios: l Coverage Ratios shows the relationship between debt servicing commitments and the sources for meeting these burdens. The two important coverage ratios are: l Interest Coverage Ratio: However, as the source for interest payments is' Earnings Before Interest and Tax' (EBIT) and not 'Earnings After Interest and Tax' (EAIT), this ratio is greatly improved, if we add depreciation to the numerator thus: EBIT (Earnings Before Interest and Tax) ÷ Debt Interest l Debt Service Coverage Ratio (DSCR) : Net profit after tax+Depreciation+Int. on Term Loan ÷Annual Repayments + Int. on Term Loan. DSCR is a measure of there payment capacity of the borrower in respect of a Term Loan and the ratio can be from1.5 to 2. A lower ratio will indicate inability to service the Term Loan and a higher ratio will indicate ability to repay earlier than the scheduled time.

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c.

Profitability Ratios: i.

Gross Profit Ratio: Gross Profit ÷Sales

l

Gross Profit =Sales –Cost of sales

l

This ratio shows the relation ship between Gross Profit and Sales. It is there fore, in deceptive of the efficiency of the production operations and the relation between production costs and selling price. To analyse the factors under lying the Gross Profit Margin the proportion of various elements of

l

cost (labour, materials, direct expenses) to Sales may be studied. This ratio is useful as an indicator of cost control and as such the ratio indicates the margin available to a firm to meet the other costs. If this ratio indicates an increasing tendency during the last year, it indicates that the proportion of cost of goods to the sale price has come down. This may be due to: Ø Costs and sales price have gone up but costs have increased at a lower rate. Ø Costs have remained constant but the sale price has gone up Ø Costs have gone down while the sale price has gone up Ø Costs have gone down while the sale price has remained the same Ø Costs and sale price have gone down but costs have fallen at a faster rate. Ø Manipulation in valuation of stocks. e.g. The closing stock being valued at a higher price (This is to be treated as unhealthy practice) l

l

l

l

A fall in ratio will indicate that the proportion of cost of goods sold to the sale price is increasing, which may be because of maladjustments between these two factors in the reverse of the above described manner. Fall in ratio may also be due to over investment in Fixed Assets and / or unsound purchase policies An increasing ratio is welcome as it shall provide a bigger cushion for administrative and selling expenses. In a downward trend of the ratio, Branch must have a dialogue with the borrower to identify the precise reason responsible for such a change.

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ii.

Operating Profit Ratio: Operating Profit (Earnings Before Interest and Tax) ÷ Net Sales: l EBIT is arrived at after reckoning all expenses : Production, administration, selling that have gone into making the product except interest and tax. l This ratio is, therefore, indicative of the overall operational efficiency of the firm. The ratio should be seen in relation to the industry as a whole. It should also be studied over a period of time because the trend could very significant. If in the past years, the trend has been of a falling ratio, it reflects the deficiency of the firm in controlling the expenses properly. l The profit margin ratio is also indicative of the ability of the firm to with standard diverse conditions, which may arise from several sources such as the following: Ø Falling Prices Ø Rising costs Ø Declining sales l A high ratio shall indicate that the competitive strength of the unit is quite high. While a low ratio indicates that the competitors can force the exit of the unit by the reduction of their sales price to the extent of this ratio.

iii.

Assets Turnover Ratio: (Sales ÷ Total Assets) or (Sales ÷ Operating Assets): The assets should include all actual operating assets i.e. we eliminate assets that are not used to produce the reported profit before interest and tax but includes assets taken on lease / hire purchase which are not reflected in the Balance Sheet. l This ratio highlights the amount of assets the firm used to produce its total sales. The ability to produce a large volume of sales on a small asset base is an important part of the firm's profit picture; l Idle or improperly used assets increase the firm's need for costly financing and the expenses for maintenance and upkeep. l By achieving a high Asset Turnover, a firm reduces costs and increases the eventual profit to its owners. l

iv.

Return on Investment: l PBIT ÷ Investment x 100 l Investment = Networth + Term liabilities l Interest = Interest on Term loan and Debentures l It reflects the earning power of the funds secured on long term or permanent basis and indicates whether adequate return is being earned as compared to the risks undertaken.

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d.

Activity Ratios: i.

Inventory Turnover Ratios: (Cost of goods sold ÷ Average Inventory):

l

Cost of goods sold

l

Two points are to be noted in calculating this ratio: -

l

=

Sales - Gross profit

Ø

Cost of goods sold is taken and not sales because the sales figure includes profit.

Ø

For inventory it is preferable to use an average figure.

Having stated this, in actual practice, the ratio more commonly used is Sales ÷ Inventory as figure of sales is readily available from the financial statements. This ratio indicates as to how quickly the goods are sold in the business or how many times the inventory turns over during a year.

l

A high ratio means that the inventory is being turned over a larger number of times during the year or in other words goods are being sold promptly and inventory management and control is good and, non–accumulation of inventory and lesser chance of the stock containing obsolete or un-saleable items.

l

Low ratio indicates lockup of larger sums in inventory and/or slow moving stocks. A declining trend in the ratio means that either the sales are falling or the inventory holdings are increasing.

l

An increasing trend in the ratio means a larger turn over of inventory and less block age of money in to it, resulting in high profits, rapid turnover of inventory indicates sound controls and good financial management.

l

Regarding level of inventory to be held, there are basically two risks involved: Ø

Too little inventory entails the possibility of running out of goods to sell, and or/raw materials for production.

Ø

Too much inventory entailstying up of funds and additional expenses for storage, protection, insurance etc.

ii.

Account Receivables (Debtors) Turnover Ratio: (Credit Sales ÷ Account Receivables or Sundry Debtors): l l

A lower ratio shows a strict credit policy and aggressive collection procedures. A higher ratio indicates a larger quantity of receivables and probably the firm is experiencing difficulties in collecting its unpaid bills.

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l

l

l l

l

l

l

l

iii.

Collection Period: Receivables (Bills receivables+sundry debtors)÷ Sales (or annual credit sales) x365. This ratio indicates the average time taken to realize the accounts receivables. i.e. the number of days the credit remains outstanding at a time. An increasing trend means more credit is being extended which may be due to Poor realization, Competitive forces compelling a liberal policy of credit, mounting of bad and doubtful debts. A decreasing trend would mean less likelihood of doubtful debts. To further analyse the significance of the Receivable Turnover and Average Collection Period Ratios, the following points may be noted. Comparison with similar firms in the industry must be made as the terms of trade and selling practices are usually common in the particular trade. The average collection period has to be seen in the context of the terms of trade of the individual firm as well. For the figure of sales we may substitute credit sales as these alone become receivables. This would give a more accurate turnover ratio as well as average collection period. For receivables, an average figure should be used. e.g. the average of beginning and end in receivable balances. This is especially important where the ending receivable balance is not a 'normal' or representative figure. Where a firm's business is cyclical in nature two separate ratios should be worked out for the peak and quiet seasons. Average of figures under such circumstances would give us quite meaningless results.

Account Payable (Creditors) Turnover Ratio: (Account Payable (Bills payable+Sundry creditors)÷Purchases or annual credit purchases x 365): l Instead of the purchase figures the sales figures may be used as the denominator. l This ratio indicates the period for which credit is enjoyed by the unit. l An increasing trend shall mean an increasing credit worthiness of the party resulting in lesser dependence on banks. l A declining trend may mean that the unit is promptly paying its creditors. l A good concern not only collects its debts in time but also pays its creditors in time. l If for a particular unit, the trend indicates that the creditors are being paid with greater delay than the period allowed to debtors every year, it may indicate shortage of funds with the unit.

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5.

Funds Flow and Cash Flow Analysis: a.

A Funds Flow Statement is quite simply a movement of funds to and from the company's cash box. Thus, sources of funds include in crease in owner's equity, increase in debt and sale of assets. Uses of funds include purchase of assets, liquidation of loans and other liabilities and reduction in owner's equity. The Fund Flow Statement discloses the sources and uses of funds. It is quite essential for the management to have an idea of the cash flow without which cash management will be rendered an unplanned exercise leading to defaults in payments.

b.

Funds Flow Analysis: i. Thus Funds Flow analysis depicts the movement in the relative positions of various items of assets and liabilities between two dates. Based on this concept, we may outline the following steps in casting a Funds Flow statement: l Step1: To find the cash generation from the operations–add to the net profit after tax, all non–cash outlays or expenses like provisions for depreciation and bad debts, provisions for wasting assets, write off of miscellaneaous / deferred revenue expenditure and goodwill / other intangible amortisation of leases, rights, etc. l

Step 2: To identify all sources of funds – these will be: Ø Issue of capital stock in cash Ø Objection of term loans Ø Receipts under schemes of debentures and public deposits Ø Increase in other liabilities (current and deferred) Ø Sale of Fixed Assets and investments Ø Reduction in other assets (current and non-current)

l

Step 3: To recognise and list all uses of funds – these are as under: Ø Cash loss i.e., a loss before providing for all non - cash expenses. Ø Capital expenditure (Increase in Fixed Assets) Ø Investments in other companies etc. Ø Dividends paid / payable Ø Redemption of term loans and repayments of other term liabilities. Ø Liquidation of other liabilities (current and deferred) Ø Acquisition of other assets (current and non-current)

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c.

Basically the credit analysts should be interested in the following aspects of the financial position of the units financed: i. ii. iii. iv. v. vi. vii. viii. ix.

d.

6.

End use of profits Declaration of dividend in spite of decrease in profit / loss. Increase in Net Current Assets despite loss. Sources to meet capital expenditure Need for external finance while depreciation provision available within. Use of sale proceeds of Fixed Assets Sources for repayment of debts The method of raising additional capital Use of the proceeds of the debenture issue or fixed deposits raised from the public.

Significant and important facets of management functioning like dividend policy, plough back policy, growth objectives (expansion or diversification), optimum use of Fixed Assets through timely capital expenditure programmes for renovation/modernisation or plant and machinery etc., are revealed by the Funds Flow Analysis.

Contribution Analysis: a. Types of Costs: i. Broadly speaking costs could be divided into two categories : Fixed and Variable Costs, though some analysts classify certain Costs as Semi–Fixed or Semi–Variable also. b.

Fixed Costs: i. Fixed costs are those which tend to remain the same irrespective of the volume of output. In other words, they do not vary when output changes. Factory rent, Director's salary, expenses on Research and Development, General Administration, Interest on Capital, Depreciation etc. are all examples of Fixed Costs. ii. Fixed costs are, however not truly fixed for all-time but only over a comparatively shorter time period a quarter or over year. Over very long period, Fixed Costs also undergo changes. iii. Further more, Fixed Costs remain the same within a well-defined range of output, but once a new range is reached which is adequate for one shift, but once the organization decides to operate two shifts one more foreman may have to be employed and the Fixed Cost representing the salary of foreman would double. Fixed costs are, therefore, referred to as stepped costs also in such cases.

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c.

Variable Costs: i. Variable costs are those costs, which vary directly in relation to the output. As a result when output is increased variable costs group proportionately. Raw materials consumed, packaging, fuel and power consumption for factory, stores and spares consumed, power, direct labour expenses etc. are examples of variable costs. If on some occasion the factory is shut down temporarily due to any reason the variable cost should be nil.

d.

Semi – Variable Costs: i. There are some costs, which are called Semi–Variable Costs or Semi–Fixed Costs. These are hybrid costs made up of some fixed elements and some variable elements. There is a tendency for the costs to vary with output but the variation is irregular. It is however possible to segregate fixed and variable component after detailed examination of the behavior of such costs. However, bankers generally segregate all costs into fixed and variable costs as it becomes easier to study the behavior of profit in relation to volume.

e.

Contribution: i. Contribution can help management in identifying the directions in which selling efforts should be made. ii. Consider the following data in regard to two products manufactured by a concern. Product A -Selling Price Rs.10 -Variable Costs Rs.4 -Contribution Rs. 6 -Fixed Costs Rs. 5 -Profit on selling price Rs. 1 Or 10% -P/V ratio = Contribution = 60% Selling price

7.

Product B Rs.15 Rs.10 Rs. 5 Rs. 3.50 Rs. 1.50 Or 10% 33%

Break – Even Analysis: a.

Break–Even Analysis is very much an extension or even a part of the Contribution Analysis. Basically Break–Even Analysis concerns itself in finding the point at which sales realisations and costs match. The Break–Even point is therefore, the volume of output at which neither a profit made nor a loss is incurred. 235 - III

i.

ii.

8.

Example: l Consider the example of a housewife wishing to start a cottage industry of manufacturing jams. The following data is available: Selling price per bottle Rs.10/Cost of fruits, sugar, flavour Preservative, bottle label i.e. the Variable cost per bottle Rs.6/Contribution per bottle Rs.4/l

Assuming that the housewife employs a salesgirl to sell the jam on a salary of Rs.20/- per day, it would be necessary for the housewife to produce and sell at least 5 bottles per day to cover the Fixed Costs (salary of sales girls). This, therefore, is the Break – Even point for the cottage industry in the instant case.

l

Break – Even point can be expressed as: Sales revenue (Rs.50/- per day in the above example) Number of units (5 bottles) Capacity utilisation (50% assuming 10 bottles can be produced every day)

In other words, Break – Even point, in terms of l Volume of production, will be: Fixed Cost/Contribution per unit = Fixed Cost/Unit Sales price – Unit variable cost. l Sales revenue, shall be: Total FC/1 – Ratio of unit VC to Unit Sale Price l Plant capacity, shall be: BEP in terms of volume x 100 (Capacity is expressed in percentage) Total installed capacity.

Margin of Safety: a.

Margin of safety is the percentage drop in sales that can occur before a loss starts. This formula is a dramatic way of bringing to management's attention as to how close their sales level is to Break – Even point. i. Margin of safety = Sales – Break–Even Sales x 100 Sales The answer is expressed as a percentage. ii. l

Example Consider the following data: Sales Variable costs Contribution Fixed Costs Profit

: : : : :

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Rs.1000 Rs.600 Rs.400 Rs.300 Rs.100

l

l

l l

l

iii.

9.

At Break–Even point, the sales level would be such that the contribution is equal to Fixed Costs so that neither any loss is incurred nor is any profit earned. If Rs.400/- contribution is earned for Rs.1,000/-sales, then Rs.1/- contribution will be earned for 100/400 sales. Therefore Rs.300/- contribution (to cover Fixed Costs) will be earned for = 1000 x 300 400 i.e., Break – Even Sales = Rs.750/Margin of Safety = Sales – Break – Even Sales x 100 Sales = 1000 – 750 x 100 1000 = 250 x 100 = 25% 1000 This shows that the concern would start incurring losses if sales were to drop by more than 25 per cent. A banker's main role as a lender will be to supplement the borrower's resources in carrying a reasonable level of Current Assets in relation his production requirements. These Current Assets will be carried partly by a certain level of creditors for purchases and other Current Liabilities. Funds required to carry the remaining Current Assets may be called the Working Capital Gap which can be bridged partly from the borrower's owned funds and long term borrowings and partly by bank borrowings.

Profitability Analysis – Selected Ratios: a.

b.

Evaluation of the financial soundness of an institution not only discloses the current policies and practices followed, but also helps in the management's endeavors to bring about desired improvements in financial as well as managerial decisions. The primary function of banking institution is mobilization of resources through deposits and borrowings and lending the same to borrowers thereby making a profit after meeting the costs. The ratio analysis helps in finding out the diligence of the banks in these functions. The selected ratios (generally expressed as percentages) given below indicate the nature of Asset Liability Management, the quality of assets, Managerial Efficiency and the Profitability of the bank.

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I.

FINANCIAL RATIOS: A.

Yield on Assets

=

Total Interest Income (P & L) x 100 Average Working Fund (AWF)

(i)

Yield on Advances

=

Int. Income from Advances (P & L) x 100 Average Advances

(ii)

Yield on Investments

=

Int. Income from Investments (P & L) x 100 Average Investments

B.

Cost of Funds

=

Total Interest Expenditure (P & L) x 100 Average Working fund

(i)

Cost of deposits

=

Int. Expenditure on Deposits (P & L) x 100 Average Deposits

(ii)

Cost of borrowings

=

Int. Expenditure on borrowings (P & L) x 100 Average Borrowings

C.

Gross Financial Margin =

(A – B)

D.

Miscellaneous Income =

Total Non-Fund Income (P & L) x 100 Average Working Fund

E.

Risk Cost

=

Provisions for NPA (P & L) x100 Average Working Fund

F.

Net Financial Margin

=

(C + D) – E

G.

Transaction Cost

=

Staff salaries & other expenses (P & L)x100 Average Working fund

H. II.

Net Margin

=

(F – G)

PROFITABILITY RATIOS: 1.

Net Profit as per cent to Total Income

2.

Return on Assets – Net Profit to Total Assets

3.

ROE (Return on Equity) – Net Profit to Capital

4.

Net Profit as per cent to Deposits

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III.

PERFORMANCE RATIOS: 1. Capital Adequacy Ratio – Owned Funds to Risk Weighted Assets 2. Cash in Hand to Deposits 3. CRR (Cash Reserve Ratio) – Cash in Bank to Deposits. 4. Investment (SLR & Non SLR) Deposit Ratio (IDR) – Investments to Deposits 5. Credit Deposit Ratio (CDR) – Loans & Advances outstanding to Deposits 6. Gross NPA – Non Performing Assets to Gross Loans and Advances Outstanding

IV.

PRODUCTIVITY RATIOS : 1. Per Employee Business – Deposits plus Advances to Number of Employees 2. Per Branch Business – Deposits plus Advances to Number of Branches 3. Per Employee Voucher – Number of Vouchers to Number of Employees 4. Per Branch Voucher – Number of Vouchers to Number of Branches

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CHAPTER – 21

ABOUT NABARD 1.

General: a. NABARD is set up as an apex development bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with i. Providing refinance to lending institutions in rural areas ii. Bringing about or promoting institutional development and iii. Evaluating, monitoring and inspecting the client banks b. Besides this pivotal role, NABARD also, i. Acts as a coordinator in the operations of rural credit institutions ii. Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development iii. Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development iv. Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development v. Acts as regulator for cooperative banks and RRBs c. With a capital base of Rs.2,000 crore provided by the Government of India and Reserve Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts. d. It is an apex institution handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas. e. Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. f.

Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

g. Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India, State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation. 240 - III

h. Prepares, on annual basis, rural credit plans for all districts in the country. These plans form the base for annual credit plans of all rural financial institutions: i.

Undertakes monitoring and evaluation of projects refinanced by it.

j.

Promotes research in the fields of rural banking, agriculture and rural development.

k. Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks.

2.

Role and Functions: a. Credit Functions: NABARD's credit functions cover planning, dispensation and monitoring of credit. This activity involves: i. Framing policy and guidelines for rural financial institutions ii. Providing credit facilities to issuing organizations iii. Preparation of potential-linked credit plans annually for all districts for identification of credit potential iv. Monitoring the flow of ground level rural credit b. Development and Promotional Functions: Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence, strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. In order to reinforce the credit functions and to make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as: i.

Help cooperative banks and Regional Rural Banks to prepare Development Action Plans (DAPs) for themselves. ii. Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated time frame. iii. Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated time frame. iv. Monitor implementation of development action plans of banks and fulfilment of obligations under MoUs.

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v.

Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells. vi. Provide Organisation Development Intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD) Lucknow, National Bank Staff College, Lucknow and College of Agriculture Banking, (CAB) Pune, etc. vii. Provide financial support for the training institutes of cooperative banks. viii. Provide training for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks. ix. Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmer's Clubs. x. Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations and development of human resources. c. Supervisory Functions:As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs). As part of these functions, it i.

Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.

ii.

Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis

iii. Undertakes portfolio inspections, systems study, besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) iv. v. 3.

Provides recommendations to Reserve Bank of India on opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) Administering the Credit Monitoring Arrangements in SCBs and CCBs.

Core Functions: a. NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis.

4.

Objectives of Inspection: a. To protect the interest of the present and future depositors. b. To ensure that the business conducted by these banks is in conformity with the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc.

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c. To ensure observance of rules, guidelines, etc. formulated and issued by NABARD/RBI/Government. d. To examine the financial soundness of the banks. e. To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit.

5.

Instruments of Supervision a. Periodic on-site inspection of 31 SCBs, 371 DCCBs, 20 SCARDBs and 82 RRBs and other Apex level Cooperative institutions. b. Supplementary Appraisal. c. Off-site Surveillance System (OSS). d. Portfolio inspection/System study. e. CMA returns.

f. Broad Powers and Functions of the Board of Supervision: i.

Giving directions and guidance in respect of policies and on matters relating to supervision and inspection, reviewing the inspection findings, suggesting appropriate measures

ii.

Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of frauds and internal checks and control

iii.

Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc.

iv.

Suggesting necessary follow-up measures

v.

Recommending appropriate training for Inspecting Officers of NABARD for imparting necessary skills and knowledge

vi.

Suggest measures for strengthening of DoS

vii. Recommend issue of directions by RBI viii. Oversee the quality of inspections carried out and the reports issued ix.

Review the information generated through off-site surveillance and other supplementary vehicles, action taken thereon

x.

Undertake any other functions entrusted from time to time by the Board of Directors of NABARD. 243 - III

g. Other Initiatives:

6.

i.

The day-to-day functioning of the supervised banks is being monitored through various statutory returns prescribed by the RBI/NABARD including OSS returns

ii.

Periodic coordination Meets are conducted with RPCD, RBI to discuss the policy and operational matters relating to supervision

iii.

State level groups comprising RCS, Apex bank, Cooperation and Finance Department, State Government, Director of Audit and non-compliant banks have been constituted/convened for preparing/discussing suitable strategy for Section 11 noncompliant banks and monitoring the progress of Action Plan prepared by them to facilitate them recompliance with the provision

iv.

Periodic meetings are held with the Chief Executives & SCBs, RCS, State Government etc. to discuss the supervisory concerns.

Types of Refinance Facilities:

Agency

Credit Facilities

Commercial Banks

Long-term credit for investment purposes, Financing the working capital requirements of Weavers' Co-operative Societies (WCS) & State Handloom Development Corporations

Short-term Co-operative Structure (State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies)

Short-term (crop and other loans), Medium-term (conversion), loans Term loans for investment purposes, Financing WCS for production and marketing purposes, Financing State Handloom Development Corporations for working capital by State Co-operative Banks

Long-term Co-operative Structure (State Co-operative Agriculture and Rural Development Banks, Primary Cooperative Agriculture and Rural Development Banks)

Term loans for investment purposes, Pilot scheme for financing short term loans in three states

Regional Rural Banks (RRBs)

Short-term (crop and other loans) Term loans for investment purposes

State Governments

Long-term loans for equity participation in co-operatives, Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects

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Non-Governmental Organisations (NGOs) - Informal Credit Delivery System

a.

Revolving Fund Assistance for various micro-credit delivery innovations and promotional projects under 'Credit and Financial Services Fund' (CFSF) and 'Rural Promotion Corpus Fund' (RPCF) respectively

The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, the beneficiaries of the programme are partnership concerns, companies, state-owned corporations or cooperative societies. But, finally the assistance reaches the individuals, who are members of the primary credit institutions. The refinance is usually 50% to 95% of the project cost. The balance will be met by the banks and the concerned state governments or the Government of India in the case of SCARDBs. With a view to ensure credit flow to certain thrust areas, the quantum of refinance is enhanced to 100% as in the case of special category beneficiaries like SC/ST members and self-help groups.

b. Direct Credit: Direct credit from NABARD constitutes loans to State Governments. 7.

Supporting Cooperatives: a. In order to strengthen the owned funds position of cooperative credit institutions and thereby increasing their capacity to leverage larger resources, NABARD provides loans to State Governments to contribute to the share capital of these institutions. b. Rural Infrastructure Development: With the objective of assisting State Governments in the completion of on-going rural infrastructure projects and to take up new infrastructure projects, the Rural Infrastructure Development Fund (RIDF) was set up with NABARD in 1995-96 with contributions from Commercial banks The shortfall in agri/priority sector lending was deposited by the commercial banks with NABARD as part of their contribution to the RIDF. The total corpus covering RIDF I (1995-96) to X (2004-05) is Rs. 42,000 crore. Sanctions under all trenches of RIDF as on 31 March 2005 were Rs.42948.51 crore against which the disbursements were Rs. 25384.02 cr. c. Co-financing: To ensure substantial credit flow to agriculture and rural sector and to instil confidence in banks for financing hi-tech/export oriented agriculture projects involving large financial outlays/sunrise technologies, etc., NABARD has entered into agreements for cofinancing with 12 Commercial Banks thereby sharing the credit risks with partner banks. Under this arrangement, projects have been sanctioned in areas like floriculture, organic farming, milk processing, ethanol production, infrastructure development and forestry. d. Bulk-lending/ Revolving Fund Assistance: NABARD provides bulk-lending facilities to NGOs. e.

Production Credit: This is a short-term refinance facility, aimed at supporting, i. Agricultural production operations and marketing of crops by farmers and farmers cooperatives. 245 - III

ii. iii.

iv.

8.

Marketing and distribution of inputs like fertilizers, seeds and pesticides. Production and marketing activities of village cottage industries, handicrafts, handlooms, power looms, artisans, small scale and tiny industries and other rural non-farm enterprises. Eligible institutions for this facility are State Cooperative Banks (SCBs) and Regional Rural Banks (RRBs). The period of credit is 12 months.

Short Term Credit: a. Seasonal Agricultural Operations (SAO): i. In order to ensure availability of timely credit to farmers, banks follow productionoriented system of lending. The system has features like assessment of credit, needs based on area brought under cultivation, crop wise scales of finance, provision of credit for purchase of inputs like fertilizers and pesticides. ii. Refinance is provided for production purposes at concessional rate of interest to State Cooperative Banks (SCBs) and Regional Rural Banks (RRBs) by way of sanction of credit limits. Each withdrawal against the sanctioned credit limit is repayable within 12 months. iii.

New line of credit for financing short-term agricultural /allied and marketing activities:To provide liquidity to the cooperative banks and to boost credit flow to the agriculture sector, a new line of credit was introduced in 2003-04 encompassing loans for agricultural purposes against security of gold and security other than charge on crops, working capital credit for allied agriculture activities, working capital credit for procurement and distribution of agriculture inputs, marketing of agriculture/allied products, collection and marketing of minor forest produce etc. and short-term credit support provided to cultivators for higher scales of finance for commercialisation of agriculture, exports and value addition.

b. Marketing of Crops: With a view to improve the flow of marketing credit to cultivators for augmenting their holding capacity and checking incidence of distress sale, NABARD encourages cooperative banks and RRBs to finance marketing of crops, through its refinance facility for this purpose. Each drawal against the sanctioned credit limit is repayable within a maximum period of 12 months. c. Distribution of Agri. Inputs: With a view to ensuring timely supply of agri. inputs like fertilizers, pesticides etc. a line of credit is made available to cooperative banks for financing Apex/Primary Societies for stocking and distribution of agri. inputs by way of sanction of yearly limits. Each drawal is repayable within a period of 120 days. d. Pisciculture Activities: Refinance facilities is extended to cooperative banks and RRBs for meeting the working capital requirements of farmers in pisciculture activities by way of sanction of ST credit limits. Each drawal is repayable within 12 months. 246 - III

e. Other than SAO (OSAO): i.

Refinance is available to cooperative banks for financing the working capital requirement of PWCS/Apex Weavers' Society, working capital requirements of industrial societies, financing individual rural artisans, etc. Each drawal against the sanctioned credit limit is repayable within 12 months. OSAO refinance is available to RRBs for financing production and marketing activities of artisans, village industries and also for financing persons belonging to weaker sections engaged in trade/business/services. Refinance support is also available to commercial banks for financing the working capital requirements of PWCS.

ii.

Refinance support is available to SCBs and CBs for meeting working capital requirements of State Handloom Development Corporations (SHDCs).

f. Special Initiatives: i. ii. iii. iv. 9.

Special line of credit for oilseeds and pulses production. Special line of credit for development of tribe in predominantly tribal areas. Liquidity support to cooperative banks and RRBs for providing relief to farmers in distress and farmers in arrears. Revision in methodology for fixing scale of finance.

Refinance against Investment Credit: This is a long-term refinance facility. It is intended to create income generating assets in the following: a. Agriculture and allied activities b. Artisans, small scale industries, tiny sector, village and cottage industries, handicrafts, handlooms, powerlooms, etc. c. Activities of voluntary agencies and self-help groups working among the rural poor d. The credit is normally provided for a period of 3 to 15 years. e. Investment credit leads to capital formation through asset creation. It induces technological upgradation resulting in increased production, productivity and incremental income to farmers and entrepreneurs. f. Eligible Institutions:SCARDBs, SCBs, RRBs, CBs, Scheduled Primary Urban Cooperative Banks, North East Development Finance Corporation Ltd. (NEDFI) and NBFCs are eligible from NABARD for their investment credit in the rural sector. g. Eligible Purposes: Some of the major purposes covered under Investment credit are Minor Irrigation, farm mechanisation, plantation/ horticulture, animal husbandry, storage/market yards, fisheries, post-harvest management, food/agro processing, non-farm sector including rural industries, microfinance, purchase of land (for small/marginal Farmers, share croppers etc.), rural housing and disbursements under poverty alleviation programmes like SGSY and SC/ST Action Plan etc. Hi-tech projects and agri-export zones are identified as thrust areas and NABARD helps in techno-financial appraisal of such projects besides providing refinance. h. In recent years, refinance support has been extended to new activities like financing of diesel generator sets in Madhya Pradesh and LPG kits to rural households all over the country.

247 - III

i.

j. k.

l.

m.

n.

o.

10.

Criteria: The technical feasibility of the project, financial viability and generation of incremental income to ultimate borrowers thereby enabling them to have a reasonable surplus after repayment of the loan instalments are the necessary conditions to be satisfied for sanctioning investment credit. The period of loan ranges between 3 and 15 years depending on the purpose for which it is provided. The beneficiaries of the programme are individuals / group of individuals, SHGs, proprietary / partnership concerns, companies, state-owned corporations or cooperative societies. The refinance is usually 90% to 100% of the loan amount. The balance, wherever applicable, will be met by the banks or the concerned state governments or the Government of India in the case of SCARDBs. With a view to ensure credit flow to certain thrust areas, such as special category beneficiaries like SC/ST members, self-help groups, etc., the quantum of refinance is enhanced to 100%. Interim Finance:SCARDBs are being extended interim finance in order to enable them to provide investment credit to ultimate borrowers for eligible purposes and avail refinance within 3 months against the same. Under Non - Farm Sector, NABARD provides refinance for industrial units which qualify as Small Scale Industries, Rural Housing, Small Road and Water Transport Operators, Health Care units and other Service Sector activities. NABARD refinance covers wide range of activities like Minor Irrigation, Land Development, Dry Land Farming, Watershed Development, Farm Mechanisation, Plantation & Horticulture, Poultry / Dairy / Other Animal Husbandry Activities, Fisheries, Bio-gas, Forestry, Storage/Market Yard, Non-Farm Sector (Small Scale Industry & Tiny Cottage Village Industries), Self Help Groups / Joint Liability Groups (JLGs), Self Employed / Professionals, Small Road and Water Transport Operators, Agri.-clinics & Agri. Business Centres, Financing in Agri. Export Zones / Contract Farming/ Organic Farming, Agro Processing, Non-Conventional Energy, Rural Housing, Govt. Sponsored Programmes. Keeping in view the potential and the demand for a particular type of projects in a particular area, NABARD prepares Area Development Projects in consultation with the line departments of the State Govt. and the bankers in the area. Under the ADP, targets are decided and achievements monitored at periodical intervals. Investment Credit Department has also opened a window for direct lending by way of Cofinancing under Section 30 of NABARD Act 1981 for areas or projects where new / innovative / sunrise technology is involved or where large outlays and long gestation period keep the banks away or projects having longer repayment period.

Government Sponsored Schemes under Investment credit: Presently NABARD is administering the subsidy under various schemes of Government of India as follows: a. Centrally Sponsored Scheme - Integrated Development of Small Ruminants and Rabbits. b. Centrally Sponsored Scheme - Establishment/ Modernisation of Rural Slaughter Houses c. Centrally Sponsored Scheme for Establishing “Poultry Estates” and Mother Units For Rural Backyard Poultry d. Capital Investment Subsidy Scheme for Commercial Production Units of Organic Inputs e. Capital Investment Subsidy Scheme for Commercial Production Units of Organic Inputs f. Capital Investment Subsidy Scheme for Commercial Production Units of Organic Inputs

248 - III

g. Capital Investment Subsidy Scheme for Cold Storage and Onion godowns, Capital Investment Subsidy Scheme for Rural godowns.

11.

Farm Sector / Non-Farm Sector –Eligible for Refinance under Investment Credit : a. Farm Sector Schemes: i. Village Adoption/Village development Plan ii. Backward Blocks iii. Bamboo Farming iv. MACs v. Bio Fuels vi. Crop Insurance vii. Agriculture Commodities viii. SGSY ix. Farm Mechanisation x. Land Purchase xi. Scheme for Agri Clinic/ Agri-Business Centres (ACABCs) xii. SEMFEX xiii. Capacity Building for Adoption of Technology (CAT) xiv. Agri. Export Zone (AEZ) xv. Contract Farming xvi. Farmer's Club b. Non-Farm Sector Schemes:

12.

i.

Rural Non-Farm Sector (RNFS) holds the key to faster economic development of the country. It has potential and promise for generating employment and increased income in the rural areas. Hence, NABARD has identified financing, development and promotion of RNFS as one of its thrust areas.

ii.

NABARD has evolved several refinance and promotional schemes over the years and has been making constant efforts to liberalise, broad base and refine/ rationalise the schemes in response to the field level needs. The focus has been on greater credit flow and provision of linkages for small, cottage and village industries, handicrafts and other rural crafts and service sector in the decentralised sector in the rural areas.

Enterprises Loan Scheme (ELS):The refinance schemes which are in force viz. Integrated Loan Scheme (ILS) and Composite Loan Scheme (CLS) have been merged and modified into a new scheme ie. Enterprise Loan Scheme (ELS). a. Salient features: Institutions eligible for drawal of refinance. Commercial Banks, Regional Rural Banks, State Co-operative Banks, State Co-operative Agriculture and Rural Development Banks and Scheduled Primary Urban Cooperative Banks. 249 - III

b. Borrowers: Individuals, artisans, small entrepreneurs, groups of individuals, associations (formal and informal), proprietary/partnership firms, co-operative societies, registered institutions/ trusts, NGOs/voluntary agencies, private and public limited companies, etc. financed by the above eligible institutions. c. Purpose: i.

To set up new units as well as for modernisation/ renovation/ expansion/diversification of existing units and also for replacement of old and obsolete machinery even if the units were not initially financed by the banks and refinanced by NABARD.

ii.

To change over to new process of manufacturing/introduction of new technology/ computerisation, etc. For Expansion/Diversification, any unit which is in existence for at least two years will be eligible.

iii. For acquisition of new machinery and equipment resulting in additional production capacity and/or improving productivity or introducing new product/product line, etc. (The total cost of investment in Plant and Machinery including that of modernisation/ renovation / expansion / diversification of the existing units to be financed should not exceed the SSI limit prescribed by the Govt. of India). d. Eligible activities: All manufacturing, processing, marketing and approved service activities in the SSI sector with emphasis on Cottage, Village, Tiny Industries, Rural Artisans and Rural Crafts. All activities in rural areas or benefiting rural areas that are income generating and/or employment generating, including all service sector activities, are eligible activities under NFS for refinance assistance. For e.g. Educational Services (Educational institutions such as schools, colleges set up privately and Educational loans to students). Health services (Hospitals/ Clinics, Health Care Units (both human & animals) set up in rural areas, mobile hospital vans with necessary equipment, para- health services, etc.). Construction sector (Building Material Supply Bank, Shops/ marketing outlets for rural products). Tourism sector (Theatres, Eco-Tourism, Fair/Exhibition Complex, Hotels, Motels, etc.). Vehicles (Two wheeler/ three wheelers and four wheelers other than those covered under SRWTO scheme). Information Technology (All activities providing information technology to the rural people). Infrastructure (Rural Industrial Estates, Growth Centres, Communication Networks, Rural Safe Drinking Water, etc.). e. Project Components: i.

For block and/or working capital requirements of tiny/SSI/Service sector units. In respect of cottage and village industries, artisans etc. a component for consumption credit could be built in the Working Capital component keeping in view the value of the family labour engaged in the productive activity. If a unit avails Working Capital alone, the ceiling for refinance limit per unit shall be limited to Rs.10 lakh. 250 - III

ii.

Block capital will include the Cost of land (to the extent of borrowers' down payment), work shed, plant and machinery, equipment and tools, computers, technology upgradation, project formulation and consultancy charges, preliminary and pre-operative expenses, etc. and working capital for one operating cycle.

iii.

While sanctioning loans, banks may carefully work out the credit requirements of the borrowers both for term loan and working capital. The quantum of working capital component may be assessed taking into account the incremental requirement also for a reasonable period within which the unit is expected to stabilise. Also, wherever the loan includes both term loan and working capital components, while drawing up the repayment schedule, it may please be ensured that, as far as possible, the working capital component of the loan is recovered after the block capital component is repaid, so that the unit will have adequate funds for meeting the working capital requirements.

f.

Repayment period of loan: The repayment period should be fixed between 2 years and 10 years with a need based moratorium of upto 18 months for individual cases, based on the debt servicing capacity of the borrower and taking into account the nature of activity to be financed, operating cycle, cash flow and the borrower's sustenance needs.

251 - III

VOLUME - III LOANS AND ADVANCES PART - II

CHAPTER 22 AGRICULTURAL CREDIT

1. General: a.

The Agricultural Credit Department/ Section (ACS) of a SCB or DCCB performs two major functions. One relates to policy functions such as sanctioning of limits to the DCCBs, utilising the limits from NABARD, issuing all Policy Circulars, attending to correspondence with NABARD, Government, RCS, and all DCCBs and the other relates to operational functions such as allowing of eligible drawals to DCCBs, borrowing from and repayment to NABARD, adjustment of recoveries passed on by the DCCBs, maintenance of all books / registers and other operational matters.

2. Policy Functions: a.

Annual Credit Limits: i.

NABARD issues Annual Policy Circular to all the SCBs and DCCBs setting out their Terms and Conditions for sanctioning various ST & MT Agricultural Credit Limits, revision in norms, if any, for assessment of eligible limits, etc. Based on such circulars the SCBs (AC Section) will issue a detailed circular to all the DCCBs specifically pointing out the main conditions on which NABARD will be considering the credit requirements of the DCCBs for the forthcoming financial year. ii. It is the responsibility of the ACS to call for credit limit applications for all the eligible DCCBs for availing credit limits from the Apex Bank and NABARD. Based on the credit limit applications of the DCCBs and their eligibility for refinance limits from NABARD as per their policy circular for the year, the Apex Bank will have to prefer a consolidated credit limit application to NABARD on behalf of all the DCCBs. b. Scrutiny of Limit Applications: i.

c.

The Section will scrutinize all the ST credit limit applications received from various DCCBs. Based on compliance with the norms of NABARD by the DCCBs, the targets as fixed for each DCCBs for the year, the ILR of the DCCBs, the recovery performance of the DCCB etc. The section will put up a detailed note to the CEO.

Board Approval: i.

On approval of the recommendation of the Section by the CEO, the subject will be placed before the Board of Management for approval and for passing necessary resolution. ii. After approval by the Board, the Section will forward a consolidated Credit Limit Application 252 - III

on behalf of the DCCB to the concerned Regional Office of NABARD together with all the enclosures and Board Resolution. d. Sanction of Credit Limit: i.

e.

Passing of Drawals: i.

f.

On receipt of NABARD's sanction order by the SCB on behalf of the DCCBs, this section will immediately communicate to all DCCBs through a 'sanction order', the credit limits sanctioned under NABARD limit and under SCB limit together with the specific conditions, if any, as laid down by NABARD / SCB for drawals under the sanctioned limit.

All eligible drawals will be passed / sanctioned by the Section Head / authorized Officer concerned as per delegated powers and only drawals proposed to be disallowed will be put up to General Manager.

Sanction of Additional Limits: i.

All credit limits as well as additional credit limits which satisfy the terms and conditions of NABARD can be initially sanctioned by the CEO (if he is empowered by the Board) and then ratified by the Board. ii. Sanction as well as rejection of proposals seeking fresh / additional limits can be done only by the CEO (if he is empowered by the Board) or by the 'Loan Committee' or the 'Board'.

3. Operational Functions: a.

Short Term Seasonal Agricultural Operations (ST SAO): i.

The operational functions of the Department/Section include allowing drawals and accepting repayments from DCCBs seeking drawals and making repayments under ST-SAO to NABARD, collection/payment of interest, regulating of drawals as per NODC statements and maintaining all books relating to loans availed from NABARD and loans sanctioned to DCCBs and other subsidiary books.

b. District Level Technical Committees: i.

The quantum of crop loan each farmer can avail from the PACS is determined on the basis of i) extent of land under cultivation (area); ii) per acre scale of finance as fixed every year by the SLTC; and, iii) the Individual Maximum Borrowing Power (IMBP).The Scales of Finance for various crops are recommended by the District Level Technical Committees constituted in each DCCB's jurisdiction with representation from progressive farmers, Agricultural department, Horticultural department, Sugar Mills in the District, etc. ii. The DLTCs have to recommend the scales taking into account mainly the cost of cultivation and gross yield. The scale of finance for each crop will mainly comprise cash and kind 253 - III

components (Fertilizers, seeds, pesticides, etc.) The DLTCs can recommend scale of finance for major crops grown in the District and for other crops they can adopt the scales followed in the neighbouring Districts where they are grown extensively, or accept the scale fixed by the SLTC at the State level. c.

For e.g. the practices in Tamil Nadu are as follows: i.

'District level Technical Committees' (DLTC) recommends the scales of finance for various crops to the State Level Technical Committee (SLTC) which in turn approves fixing of scales of finance for various crops.

ii. The DLTC are convened every year by the DCCBs before 31st December and scales of finance are revised and proposed every year, taking into account the cost of cultivation, and yield. iii. The scales of finance and the seasonality chart for all crops to be financed are proposed by DLTC, indicating scales for both cash and kind components separately. Scales are proposed for both irrigated and rain fed crops separately. iv. While proposing the scale, it should be ensured that the scale of finance does not exceed 50% value of gross yield per acre or cost of cultivation whichever is less. The scale of finance in the neighbouring Districts can be taken into consideration while proposing the scale of finance for a particular crop. v. The scales of finance as revised and proposed by DLTCs should be forwarded to be SCB st before 31 January with their recommendations for approval by SLTC. The Apex Bank will consolidate the DCCB-wise recommendations for reviewing the scales of finance crop-wise, component-wise, District/Region-wise for irrigated and rain fed areas separately and send the copies of the same to all the members of SLTC, well in advance before the Committee meeting is convened. vi. The SLTC will meet once in a year before April, and approve the scales of finance proposed by DLTCs with modifications, wherever necessary for adoption from 1st April of that year. vii. After approval of scales by SLTC, the scales are adopted for sanction of loans. The copies of the approved scales are sent by the SCB to DCCBs and to Commercial Banks through DCCBs for their adoption. viii. During the year, if any revision in scales is required and sought for by DCCBs, such revision may be referred to SLTC for its concurrence and got it ratified by the next SLTC meeting.

4. Role of District Central Cooperative Banks (DCCBs): a.

The DCCBs will then proceed to consider the extent to which it may be able to meet the requirements as reflected in the scales of finance recommended by the SLTC. In doing so, the bank will have to estimate the resources which it may be in a position to mobilize on its own and through borrowings from the State Coop. Bank for providing the Short-Term agricultural credit. For estimating the internal resources, the Bank may take into account not only the position of owned funds and deposits already reached, but also the growth likely to take place in this respect and allow for investment in the shares of the apex bank, requirements of fluid cover, financing of activities 254 - III

other than agricultural credit, etc., before arriving at the estimate of funds which will be available for the provision of Short-Term agricultural credit. To these may be added the amounts that may become available to the DCCBs from the Apex bank out of its own resources, besides supplemented by borrowings from NABARD. As NABARD is the major source of refinance, the DCCBs have to take note of the policies followed by NABARD in fixing of credit limits from year to year. b.

The ST (SAO) limit sanctioned by the Apex Bank to DCCBs is of reimbursement in nature and is available for operations on revolving basis. In other words, the DCCBs can draw and repay the funds against their limit any number of times subject to eligibility norms.

c.

Preparation of Credit Limit Statements by the PACS: PACS will have to prepare a Realistic Lending Programme (RLP) statement in triplicate. The statement is to serve not only as the loan application of the society but also the requirement of each member is included in it. Therefore, the details, particularly of the crops grown and the area proposed under each crop by a member may be filled up in consultation with him and his signature or thumb impression obtained on it as evidence of such consultation.

d.

Points for Preparation of RLP: In preparing the Realistic Lending Programme (RLP) statement: i.

The Statement should provide the details of the land holding of members propose to cultivate during the next year. It should be ensured that fictitious acreages are not indicated and that, for this purpose, the acreage shown in the statement is verified with reference to the register of lands maintained for all members. The register should be prepared carefully with reference to the village revenue records and checked and verified annually so as to note all the changes that may have taken place in the meanwhile. It should also be ensured that information about the crops to be grown is correctly given, so that a farmer does not show larger acreage under crops which attract higher scales of finance. ii. With a view to facilitating easy verification and avoiding the possibility of the same piece of land being shown under different crops during the same season, only one statement should be prepared for the whole year and for all crops grown by a member instead of separate statements for different crops and seasons. iii. Though the crop loan system envisages the provision of credit to members to meet their full production requirements on the basis of the acreage and scales of finance, it is necessary to see that their eligibility does not individually exceed the absolute limit represented by the individual maximum borrowing power i.e. the ceiling on the amount which any individual may borrow from his society. e.

Need for Fixing Individual Maximum Borrowing Power: The need for placing limit for individual borrowing arises on account of various practical considerations, such as: i.

it is reasonable to expect that a big farmer should be able to meet a larger part of his production outlay from his own resources than the small farmer and consequently his need for credit per 255 - III

acre should be relatively lower than that of the latter. ii. the individual maximum limit helps to ration the available resources, preferences being shown to the needs of the small and marginal farmers. iii. concentration of loans with a few big farmers will mean that in the event of their failure to repay, a large number of small and medium farmers who account for a relatively small amount in the aggregate may suffer, as the eligibility of the society for fresh credit from the DCCB will be impaired. While the imposition of an individual maximum borrowing power is justified for these reasons it should be ensured that the ceiling is not fixed at such a low level that the farmers who wish to raise high value cash crops or adopt improved practices are handicapped. Liberalisation of individual maximum borrowing power in Societies where it is unduly low should, however, be undertaken with due regard to the ability of the societies and DCCBs to raise the resources required or financing agricultural production. iv. After the credit limit statement is prepared as indicated above, the General Body or the Managing Committee of the Society may recommend the amounts that may be sanctioned to each member by indicating the details. The Managing Committee may work out the disposable resources of the society for lending and apply to the DCCB for the balance, furnishing the financial particulars such as the latest Balance-Sheet and Profit and Loss Account and also copies of the resolutions of the General Body or the Managing Committee for raising the necessary loan from the DCCB. f.

Sanction of Limits to PACS by DCCBs and time schedule: The Credit Limit Statement as passed by the Society may be forwarded in triplicate to the DCCB (being routed through a supervisory staff if one is functioning). The DCCB's inspector should then scrutinise the statement with reference to the Society's books, to ensure particularly that the details of the crops and acreages given therein for the different members are correct. He should also give a report on the society's working bringing out serious irregularities in its working, if any, the position of overdues and the action taken against defaulters etc. The statement, with his recommendations, should then be placed for consideration before the Board or the Loan Committee of the District Central Cooperative Bank with the Manager's remarks. It should be ensured that the credit limits to Societies are thus sanctioned well in advance of the season and communicated to each one of them, together with a copy of the Credit Limit Statement and also to the branch of the DCCB as well as the Marketing Society which is to supply the Kind Component of the loan.

g.

Once the statement is approved by the bank, the Society will be authorised to draw on the limit specified therein as and when it is convenient, subject of course, to the conditions of eligibility prescribed by the DCCB for the Societies and individuals.

h.

An important feature of the crop loan system is that all the necessary procedural steps should be so planned as to ensure that the finance becomes available to members at the time when they need it. It is, therefore, important that all the stages of the procedure described earlier should be completed according to a time schedule drawn up for the purpose i.e.:

256 - III

 



January:- Communication by the SCB of the decisions taken in the SLTC. January February:- Preparation of Credit Limit Statements by Supervisors or Managers of Primary Agriculture Credit Societies (PACS), their consideration by the Managing Committees of the Societies and forwarding the applications to the DCCB. February-March:- Sanction of credit limits to Societies by the DCCB.

5. Operations on the Limits-Eligibility: a.

The actual drawals on the limits should be subject to the individual establishing his eligibility with his Society and the latter with the DCCB. The individual may be allowed to borrow up to the limit sanctioned to him provided (i) he is not a defaulter; (ii) he holds shares in the Society in the prescribed proportion; (iii) he has furnished the prescribed security to the Society; and (iv) he has executed the necessary documents, e.g. pronote agreement to sell through an approved Marketing Society, etc.

b.

The Society may be allowed to operate on the sanctioned limit provided (i) it has repaid the prescribed proportion of the demand (which is expected to be fixed at not less than 40%) (ii) it holds shares of the DCCB in the prescribed proportion; and (iii) it executes the necessary documents, e.g. pronote, agreement etc.

c.

It is important to note that the sanction of limits as indicated in the credit limit statement either by the Society or the bank should not depend upon prior fulfilment of any of the conditions mentioned above. It will be enough if the conditions are satisfied by the borrower concerned only at the time of drawals on the limit.

d.

Drawals Against Cash Component: On an application from the President or the Secretary of the Society in the prescribed form for the drawal of cash loan on behalf of a given number of members, the amount may be advanced to the office-bearers who are authorized to receive such advances on the drawal amount may be credited to the Savings Bank a/c of the PACS concerned. In case of crediting the savings bank account, the PACS will draw the amount from SB account and disburse the loan amounts to its eligible borrower-members. However, a Statement of Disbursement with the signatures of the recipients of the loan as in the form prescribed should be required to be submitted to the bank within a fortnight of such disbursement. On receipt of such statements, their verification with the lists submitted at the time of drawal will ensure that: i. the amounts are actually advanced to those for whom they were intended, ii. the Society has not diverted the amount to its other activities such as consumers' stores, payment of instalment of godown loan etc., and iii. the amounts have not been used by the Society for repaying another loan due later. iv. At the time of the next visit to the Society, the Supervisor should verify the disbursements from entries in the loan ledger.

e.

In the case of Kisan Credit Card (KCC) holders, the PACS have to either use their own funds for 257 - III

allowing drawals and thereafter avail refinance from DCCB (or) as in the case described under this (i) above prepare a drawal application and draw cash from DCCBs and disburse to KCC holder. f.

Drawals on the Kind Component: Where the Primary Credit Society is itself a sub-agent of the Marketing Society for distributing fertilisers, the PACS will itself supply the required quantity to the borrowers by debiting their loan accounts and crediting the account showing the borrowings from the DCCB. The PACS should request the bank to debit its loan account and credit the Marketing Society's account with the bank so that the PACS would be given corresponding credit by the Marketing Society against fertilisers supplied on a consignment basis.

g.

Where the system of cheques has been introduced and officer-bearers have become familiar with it, the Society may issue a cheque in favour of the Marketing Society for the amount representing the cost of the fertilizers etc., required by a member. The concerned member's signature may be obtained on the back of the counterfoil of the cheque issued by the Society. In such a case, the Society may also issue a forwarding slip indicating the name of the member and the number and amount of the cheque issued. On presentation of such a cheque with the forwarding slip, the Marketing Society will issue fertilisers to the member concerned. To prevent any misuse of this facility, the cheques may be marked 'Account-Payee Only'. Further, such cheques may be made payable only into the 'Fertiliser Cash Credit Account', drawals against which may be permitted only for payment for fertilizers. When the cheques are presented to the DCCB, debits and credits will be raised in its books against the concerned PACS and the Marketing Society respectively.

h.

Execution of Time-Pronotes: After sanction is received by the Society, the person(s) authorized to raise loans from the DCCB and execute the necessary documents for the purpose, will have to execute a consolidated Time Promissory Note to cover the total of the Cash and Kind Components of the loans intended to finance the production of the Kharif crops.

i.

The pronote should have an appropriate due date for the payment of the loans out of the sale proceeds of crops and will cover all the drawals under the limit during the year. For drawals intended to finance the second or Rabi crops, the Society will execute another Time Pronote subsequently with a different due date, covering both the Cash and Kind Components. This second pronote is necessary in view of the difference in the dates of maturity.

j.

Security for Short-Term Loans: The essential feature of the crop loan system is that a farmer's eligibility for loan and the size of the loan are determined by the fact that he is a genuine farmer who needs credit for production and that he will repay it from out of his production and not by the fact of his ownership of land or the value of any other tangible security he can offer.

k.

The most convenient security from the point of view of the lending agency as well as the borrowers is the charge created by a mere declaration in favour of the Societies on the identifiable right or interest (whether as owner or tenant) of the farmer in the land cultivated by him. The necessary legal provision exists in some of the States and is being made elsewhere. It should, however, be ensured that such a charge is vacated in case a borrower obtains a loan from the Agriculture and Rural Land Development Bank (ARDB) against the mortgage of the same lands as is the case in 258 - III

Maharashtra. l.

Seasonality in Disbursement: Since under the crop loan system, the loan is for production of crops and the recovery is expected out of the sale proceeds of such crops, it follows that the advances should be confined to the period shortly before sowing and ending shortly before the harvest.

m. If a cultivator wants to stock the fertilisers in advance i.e. even at the beginning of the season, he may be allowed to do so.

6.

n.

It would be preferable to provide the Cash Component in instalments separately for Kharif and Rabi crops.

o.

Seasonality in Recovery: Seasonality is necessary also in the recovery of loans and, for this purpose, the due date may be so fixed that it is not too distant from the harvesting season, and at the same time,a reasonable period is allowed for enabling the cultivator to dispose of his produce.

p.

The practice of some DCCBs to fix the due date at the end of twelve months from the date of drawal is inconsistent with the concept of seasonality. Such a practice may lead to overdues, as repayment does not coincide with the period when most cultivators are likely to have funds.

q.

The guiding principle should be to fix the due date or dates with reference to the points of time when the majority of cultivators in the area are likely to market their produce.

r.

Linking Credit with Marketing: Except in the case of cash crops like sugarcane it proves difficult to persuade the borrowers to sell their produce through Cooperative Marketing Societies (CMS). In the areas where the CMS are strong and are doing effective marketing the members of PACS automatically dispose of their produce through such CMS. However it is desirable to persuade the members to dispose their produce through CMS.

Period of the Limit and Sources of Finance: a.

The sources of funds for financing Seasonal Agricultural Operations through PACS are: i. Internal resources of Apex Bank and DCCBs. ii. Refinance from ST(SAO) credit limits sanctioned by NABARD to Apex Bank on behalf of DCCBs.

b.

7.

ST (SAO) credit limits are sanctioned to DCCBs by the Apex Bank and to the Apex bank by st st NABARD for a period of one year i.e. from 1 April to 31 March every year.

Basic Objectives of Refinance: a.

The refinance facilities provided by NABARD aims at serving two basic objectives, viz.: i. that of supplementing the resources of the Cooperative Credit System for meeting the credit needs of its clientele as adequately as possible by providing refinance, particularly the 259 - III

agricultural credit needs of the farming community; and ii. ensuring simultaneously the building up of a sound, efficient, effective and viable Cooperative Credit Structure for purveying credit in the rural sector of the economy. b.

The main aspects of this policy which have been receiving increasing attention are the need to ensure that: i.

the expansion of agricultural credit with the support of refinance facilities proceeds on sound lines especially from the point of quantum of credit, manner of disbursement, supervision over utilization and recovery of loans. ii. the needs of small and marginal farmers are met increasingly year after year. c.

Accommodation by way of Refinance to SCBs: NABARD sanctions consolidated Short-Term Credit Limits to the SCBs on behalf of their affiliated DCCBs for financing SAO and these limits can be drawn upon by way of refinance. In other words, the credit limits sanctioned by NABARD can be drawn upon by the SCBs only in respect of Short-Term agricultural loans already advanced by the concerned DCCB and the SCB.

d.

Nature of Accommodation: i.

The credit limits sanctioned by NABARD to the SCBs for financing SAO are in the nature of Cash Credit (CC) accommodation. This means that the drawals and repayment under the sanctioned credit limits can be made as many times as required, provided the outstanding in the account do not at any time exceed the sanctioned credit limit. ii. All drawals on the credit limits are in the nature of reimbursement finance. However, each drawal is treated as a separate loan and may be allowed to run a period not exceeding twelve months. In actual practice, however, the advances are repayable on demand but are ordinarily not recalled before the expiry of twelve months from the date of each drawal. iii. The credit limits are sanctioned for one year and are operative from April to March. However, the credit limits sanctioned for a particular year are exclusive of outstanding under the credit limits sanctioned for the previous year. iv. Credit limits are sanctioned to the SCBs for refinancing the DCCBs or for direct lending to the PACS in areas where the SCB is functioning as a Central Financing Agency (CFA). e.

Security for Advances: i.

The Consolidated Short-Term credit limits sanctioned by NABARD to the SCBs on behalf of affiliated DCCBs for financing SAO may be secured against Stocks, funds and securities other than immovable property in which a trustee is authorized to invest trust money by any law for the time being in force (Section 21(1)(i) read with Section 21(4) of NABARD Act). ii. The audit classification of the Bank is considered as an indicator of its financial soundness and for accepting the pronotes of a DCCB as collateral, the DCCB should have been placed in A or B or C class in audit. However, pronotes of a DCCB placed in C class in audit may also be 260 - III

accepted and credit limit on its behalf sanctioned (without Government guarantee), provided the credit limit application is specially recommended by the Registrar of Coop. Societies (RCS). Otherwise, the credit limits on behalf of a DCCB placed in C class in audit and those classified as weak are sanctioned against Government guarantee. 8.

Basic Norms of Eligibility for Credit Limits: a.

The ST credit limits for financing SAO are sanctioned by NABARD to the SCBs on behalf of affiliated DCCBs. In order to be eligible for sanction of credit limits by NABARD, the SCBs as well as the DCCBs shall have to comply with certain basic norms. These are discussed below: i.

Compliance with Section 11(i) of B.R. Act: In terms of section 11(i) of the Banking Regulation Act, 1949 (As applicable to Coop. Societies), no Coop. Bank shall commence or carry on the business of banking in India unless the aggregate value of its paid up capital and reserves is not less than one lakh of rupees. The 'aggregate value' refers to the real or exchangeable value of paid up capital and reserves, and is worked out by the inspecting officers of NABARD during each of the statutory inspections of the banks. ii. In view of the aforesaid provisions of B.R. Act, the State and District Central Coop. Banks which do not satisfy the provisions of Section 11(i) of the Banking Regulation Act, 1949 (As applicable to Coop. Societies) are not eligible for sanction of credit limits by NABARD till they either start complying with the said provisions or have applied and have been granted exemption by the Government of India from the provisions of Section 11(i) of the Act Ibid up to a specified period.

9.

b.

Receipt of Audit Reports: Audit should not be in arrears for more than a year, i.e., the audit for the year 2009-10 should have been completed while applying for the year 2011-12.

c.

Receipt of Compliance Report on Statutory Inspection Reports: NABARD conducts Statutory Inspections of SCBs and DCCBs and the concerned Banks are expected to submit a compliance report within three months of the date of receipt of the Inspection Report by them. In order to ensure timely action on Inspection Report and submission of a Compliance Report, the ST credit limit applications of banks whose Compliance Report on the Statutory Inspection Report has become due but has not been submitted, are not considered till the Compliance Report is submitted to the concerned Regional Office of NABARD. In case, however, the credit limit is sanctioned, operations are not allowed till the Compliance Report has actually been received.

Financial Disciplines Governing the Operations on Sanctioned Credit Limits: a.

The operations on Short-Term credit limits sanctioned by NABARD to the SCBs on behalf of DCCBs for financing SAO are governed by certain financial disciplines which are as follows: i. Availability of Non-Overdue Cover: The SCBs and DCCBs should absorb each overdue loan within their own resources. The concept of 'non-overdue cover' was, therefore, brought into the refinance facilities. This discipline envisages that borrowings from NABARD should be backed up by the non-overdue loans outstanding at the level of DCCBs. However, to avoid 261 - III

hardships to the SCBs/DCCBs, this condition is required to be satisfied at the time of each drawal on the sanctioned credit limit and in case the outstanding borrowings from NABARD at any time subsequently exceed the non-overdue loan, because of either increase in overdue loans or repayments by PACS/DCCB, further drawals on the credit limit are not allowed till the position is regularized and non-overdue cover is built up. ii. The state Coop. Bank at the time of each drawal, on the credit limit, has to furnish to NABARD a certificate to the effect that the drawal and outstanding under earlier drawals made on behalf of the concerned DCCB will together not be more than DCCB's Short-Term loans for SAO outstanding against PACS exclusive of overdues. iii. The SCBs are expected, particularly in the case of weak DCCBs, to advance loans to them from out of their own resources to enable the DCCB to finance the societies and build up nonoverdue cover and thereafter draw upon the credit limit sanctioned by NABARD on the basis of non-overdue cover so built-up b. Financing of Small and Marginal Farmers: The percentage of the credit limit earmarked for financing the small / marginal farmers and the free portion are specified in the sanction letter. There are no penal provisions for non-compliance with the stipulation except that the operations on the credit limit get restricted to the extent of the free portion of the credit limit plus loans actually advanced to small farmers. 10. Special Conditions Governing Continuance of Operations on Sanctioned Credit Limits: a.

Recovery of Overdues: In cases where overdues, though within the eligibility norms, are found to be substantially high, say, exceeding 50% of the demand, the banks are advised to make concerted efforts for recovery and the concerned Regional Office of NABARD will keep a watch on the progress achieved.

b. Avoidance of Default in Cash Reserve / Liquid Assets: Timely Submission of Statutory Returns c.

Compliance Report on Statutory Inspection Report: A condition is included in the sanction letter that NABARD would have a right to stop further advances from the sanctioned credit limit if the bank fails to submit the compliance report on the last inspection report issued by NABARD within the stipulated time or defects noticed/suggestions made remain unrectified / unimplemented.

11. Separate Credit Limits for Financing Cultivation of Oilseeds in NODP Areas: a.

NABARD, from the year 1986-87 has started sanctioning separate credit limits to SCBs on behalf of DCCBs functioning in NODP areas, for financing cultivation of oilseeds. These separate credit limits are, by and large, on the lines of the normal ST credit limits sanctioned by NABARD each year for financing SAO. The important features of this separate line of credit are as under: i.

PACS financing oilseed growers in the project district have to indicate in the normal credit limit statement separately the acreage proposed to be brought by the borrowers under the 262 - III

ii.

iii.

iv.

v.

vi. vii.

approved oilseeds. PACS, by adopting the revised scales of finance recommended for oilseeds crops under the project have to prepare separate Credit Limit Statements for financing cultivation of oilseeds in Project areas. It is not necessary for the DCCBs to prepare separate Credit Limit Applications. Based on the Credit Limit Statements for financing of oilseeds in project areas, the DCCBs, while applying for sanction of credit limits for financing SAO, may indicate separately in the application form the total area to be brought under NODP and the estimated credit requirements for the same. The resolutions of DCCBs and SCB applying for sanction of SAO limits and the recommendations of RCS thereon have also to be provided in two parts, one for financing growers of oilseeds under NODP and the other for remaining crops. Separate ledger accounts and DCB register in respect of crop loans under NODP and other crops are to be maintained at each level viz. PACS, DCCBs and SCB. Further, separate drawal application and disbursement certificate for NODP have to be prepared. In the case of DCCBs, which are not eligible for sanction of SAO limit on account of high level of overdues, special credit limits may be sanctioned against Government Guarantee for the limited purpose of financing oilseeds cultivation in NODP areas. The drawals on the limit are to be utilized for the exclusive purpose of financing oilseeds under NODP. Similarly, recoveries effected from societies under the loans provided for financing oilseeds under NODP are to be passed on to the SCB and by the SCB in turn to NABARD towards the repayment of outstanding borrowings under the special credit limits. The drawals by the SCBs on the special limits for NODP may be permitted on the basis of total non overdue cover subject to the condition that the total drawals made under the separate credit limit for NODP shall not at any time exceed the total disbursements made for NODP during the year as reflected in the books of accounts of the banks. At the time of each drawal, the SCB has to furnish to NABARD a certificate to this effect in the prescribed form. Similar certificates are to be obtained by the SCB from the DCCBs in the proforma prescribed. The drawals under the NODP limits are also subject to usual disciplines as in the case of normal credit limits such as seasonality discipline, financing of small farmers, etc. It has to be ensured by the State Governments that the crop insurance scheme is extended to cover all the crops of oilseeds production under NODP so that farmers can take full advantage of the scheme as advised by the Government of India.

12. Special Rice Production Programme: a.

Every year in the month of January/February, NABARD issues a 'Policy Circular' inviting applications in the prescribed form for sanction of Short Term credit limits to the SCBs on behalf of DCCBs for financing SAO for the next financial Year, indicating therein its policy in this regard. The Policy Circular indicates broadly the eligibility criteria, the terms and conditions governing the sanction and methods of operations on the credit limits. The circular emphasises the need to work out and indicate separately the credit requirements of the various Special Agricultural Production Programmes undertaken in the area. The aspects such as financing of new and nondefaulting members of PACS and treatment of defaults involving small and marginal farmers 263 - III

are also covered in the policy circular. b.

Public Distribution System would be treated as a legitimate charge on the lendable resources while working out the credit gap for financing SAO.

c.

In order to ensure that the resources of SCBs / DCCBs are deployed judiciously and efficiently in the order of priority so as to make optimum use of resources, the need to introduce the concept of and to prepare the Annual Credit Plans and Performance Budgets is emphasised.

13. Time Schedule for Submission of Applications: a.

The applications for sanction of normal credit limits in the prescribed proforma for financing both Kharif and Rabi crops during the next Year complete in all respects and accompanied by a copy of the proforma balance sheet of the DCCB as at the end of March are required to be forwarded in duplicate by the SCB to the concerned Regional Office of NABARD by 30 April. The application for additional normal credit limit, if any, has to be similarly forwarded to the Regional Office in duplicate furnishing therein relevant information to justify the need for enhancement of the normal credit limit already sanctioned.

b.

The SCBs have to obtain the credit limit applications from the affiliated DCCBs along with their own application for a credit limit on behalf of the DCCBs whose applications are being forwarded. The SCB has to submit with its application the last audited Balance Sheet and Trial balance, the last annual report and copy of the resolution of the Board of Directors of the SCB authorizing it to obtain financial accommodation from NABARD. All credit limits applications are required to be duly recommended by the RCS before they are forwarded to NABARD.

c.

Preparation and Submission of Credit Limit Applications by DCCBs: The Credit limit applications of DCCBs have to be prepared in the prescribed format and have to be accompanied by the requisite documents, financial statements, etc.

d.

Each DCCB is required to furnish in the credit limit application, its Realistic lending Programme in respect of short term loans for financing Seasonal Agricultural Operations. This is expressed in terms of maximum level of outstanding advances expected to be reached during the next Kharif season / year. In the Normal Credit Limit Application for financing Kharif crops, the maximum level of outstanding expected to be reached during the Kharif season i.e. upto September, by which time the Kharif financing is by and large over, has to be indicated while in the Credit Limit Application for supplementary credit limit for financing Rabi crops, the maximum level of outstanding expected to be reached during the entire year has to be indicated.

e.

Based on the scales of finance, the Realistic Lending Programme is to be prepared by PACS in the month of January in respect of all its members and submitted to the DCCB for sanction. The DCCB should be able to sanction all Credit Limit by the month of March. The same has to be prepared separately for small farmers and for other farmers.

f.

Normally, the increase in the lending programme of a DCCB for financing SAO shall be within 20 264 - III

percent of the level reached during the previous year and in correlation with the target fixed by the Government for the respective year. 14. Scrutiny and Sanction of Credit Limit Applications and Issue of Sanction Letters by NABARD: a.

SCB has to prepare a consolidated credit limit application for financing ST-SAO on behalf of all the DCCBs eligible for refinance from NABARD. SCB has to examine the credit requirements of all the eligible DCCBs on the basis of credit limit applications received from them and has to arrive at the total credit limit to be sought from NABARD for the ensuing year. This limit will be on behalf of all the eligible DCCBs.

b.

While assessing the credit limit that has to be applied for on behalf of all the eligible DCCBs, the SCB shall examine/take into consideration the following aspects: i.

All applications for credit limits for financing Seasonal Agricultural Operations are required to be submitted to the concerned Regional Office of NABARD for scrutiny. A comprehensive scrutiny note has been prescribed for recording the findings based on the scrutiny of the credit limit application, the audit and statutory inspection reports, statutory returns and other material relating to the DCCB/SCB available in the Regional Office, and to make recommendations to the Sanctioning Authority in NABARD at Regional Office or Head Office in accordance with the sanctioning powers. A copy of the format for preparing the scrutiny note for ST normal credit limits for financing SAO is given is given in the Annexure1 to this Chapter .

ii. The scrutiny is aimed at making a performance appraisal of the DCCB in respect of various important aspects relevant to the consideration of the credit limit application arriving at an acceptable lending programme for the DCCB, working out the resource gap for fulfilling the lending programme and determining the quantum of credit limit that may be sanctioned. The aspects covered in the scrutiny note for normal credit limit applications are:  Provisions of NABARD Act, under which limit is applied for / recommended.  Details regarding documents submitted, audit etc.  Credit limits for various purposes sanctioned by NABARD during the previous year and operations thereon.  Compliance with various terms and conditions, which govern the credit, limits sanctioned previous year and other operation requirements, viz. nonoverdue cover, seasonality discipline, Advance to small farmers, defaults in repayment of borrowings, maintenance of cash reserve and liquid assets and submission of statutory returns.  Compliance on the Statutory Inspection report.  Realistic Lending Programme (RLP)  Actual eligibility  Special conditions, if any, that may be imposed while sanctioning.  Sanction of credit limit. 265 - III

c.

The consolidated credit limit application under ST-SAO for the ensuing year has to be submitted to the NABARD, RO duly supported by the resolution of the Board of Management for seeking the credit limit and also other enclosures as prescribed by NABARD in its policy circular every year.

d.

The scrutiny note for supplementary credit limit is in followup of the scrutiny note for normal credit limits and is, therefore, brief.

e.

The sanction letters are addressed by NABARD to the SCB and copies to the RCS, concerned DCCB and the HO / RO of NABARD as the case may be.

f.

Additional limits from NABARD: In case, the DCCB has fully utilized the ST (SAO) limits sanctioned by NABARD, it can apply to NABARD for additional limits, furnishing the necessary data in respect of lending programme under ST Agricultural loans and the targets fixed by RCS for the same. The procedure for making application for additional limits to NABARD will be the same as followed under normal ST (SAO) Credit Limits. NABARD will sanction additional limits subject to the fulfilment of eligibility norms and the genuine need for such additional limits.

15. Sanction of credit limits by NABARD: a.

On receipt of SCB's credit limit application for ST-SAO, NABARD, RO will examine the same against the eligibility criteria fixed in the policy circular and sanction a consolidated credit limit under ST-SAO to the SCB on behalf of all the eligible DCCBs.

b.

The consolidated credit limit sanctioned by NABARD will be on the basis of the credit eligibility of each (eligible) DCCB for refinance for the ensuing year. The maximum credit limit that will be sanctioned by NABARD to the SCB will vary according to the Annual Policy of NABARD on STSAO. Presently, the maximum credit limit sanctioned by NABARD to SCBs on behalf of eligible DCCBs is 45% of the ground level crop loan issues targeted for the year 2010-2011.

16. Documents to be executed: a.

On receipt of sanction letter, the SCB has to write to the Officer in charge of R.O. confirming that the terms and conditions of sanction of credit limit are acceptable to them. Before commencement of operations on the sanctioned credit limit, the SCB and DCCBs are required to execute the following documents: i.

A Demand Promissory Note is to be executed by the SCB in favour of NABARD which has to be backed by Time Promissory Note executed in respect of each drawal by the concerned DCCBs in favour of the SCB, as collateral security. The Time Promissory Note executed by DCCBs in favour of SCB are to be endorsed by SCB in favour of NABARD and held by the SCB in its custody as agent of NABARD. ii. The SCB has also to execute an Agreement in the prescribed form. Separate Agreement forms have been prescribed for credit limits sanctioned without Government Guarantee, with Government Guarantee and for SCBs functioning in Union Territories and those functioning 266 - III

as Central Financing Agencies to all of whom credit limits are sanctioned against Government Guarantee. iii. The SCBs are required to execute a Certificate as to the character of accommodation enclosing therewith a schedule of Pronotes. Similar Certificates are to be obtained by the SCB from the DCCBs borrowing either with or without Government guarantee. iv. The SCB is required to give in triplicate an irrevocable 'Letter of Authority' addressed to Reserve Bank of India (RBI) authorizing it to debit the Current Account of SCB with RBI on receipt of a written requisition to this effect from NABARD by such amount as may be indicated in the requisition. Two copies of this authority letter are required to be sent to the concerned office of RBI which returns the duplicate copy of the letter indicating separately its agreement to comply with the requisition of NABARD in terms of the letter of authority. b. Certificates to be Furnished at the Time of Drawal: Along with the application for drawal on the credit limit, the SCBs are required to furnish certain certificates at the time of each drawal. These certificates are as under. i. ii. iii. iv.

Certificates of Non Overdue Cover Certificate of Reserve Borrowing Power Certificate of Cover for OPP Borrowings Monthly Non-Overdue Cover Statements: This is by far the most important operational statement, which the DCCBs are required to submit to the SCB and, in turn, SCB to the R.O of NABARD by 20th of the next month. v. Certificate of Safe Custody and Intrinsic Value of Pronotes Executed by DCCBs Quarterly: As collateral security for advances under credit limits sanctioned by NABARD, the Promissory notes executed by the DCCBs in favour of the SCB are assigned by SCB to NABARD. However, the SCBs continue to hold these Pronotes in safe custody on behalf of NABARD. The SCBs in this connection, are required to furnish to NABARD every quarter a certificate that they are holding the Pronotes in safe custody and that the intrinsic value of the pronotes held by them at any time during the quarter was not less than the aggregate amount borrowed by the SCB on behalf of each of the DCCBs for the purpose. vi. Progress in Financing New and Non Defaulting Members and Small Defaulters by Ineligible DCCBs Half-Yearly: The SCBs are required to collect and furnish half yearly the data in the prescribed form in respect of Short-Term and Medium Term agricultural advances by the ineligible DCCBs for financing new and non-defaulting members and small defaulters. The reasons for not financing such members are also to be furnished. 17. Operations Discipline: a.

Non-Overdue Cover (NODC): i.

The Apex Bank has to allow drawals to the DCCBs on the credit limits sanctioned by the Apex bank / NABARD, subject to the availability of NODC. 267 - III

ii. The Apex bank has to consolidate the NODC particulars of all the DCCBs and furnish the same in the prescribed format to NABARD'S Regional Office, on or before 20th of every month. iii. For getting the drawals from NABARD, the Apex Bank should furnish a certificate in the prescribed format regarding the availability of NODC. iv. If any deficit occurs in the maintenance of NODC, the DCCBs should regularize the same by disbursing fresh loans out of their own funds or by reducing their borrowings by utilizing the surplus resources. If the DCCB experiences any difficulty in this regard, the Apex Bank may make good the deficit from its own resources. v. If separate limits for other crops, oilseeds and any other scheme are availed by Banks, the NODC position in respect of these loans and advances should be reported to NABARD separately. The drawals in respect of these separate limits will be allowed, subject to availability of separate NODC under each category. b. Advance to Small Farmers: i.

The DCCBs will have to ensure that not less than the prescribed minimum (by NABARD at present 30%) of the ST agricultural advances made to the PACS during the financial year are issued for financing small / marginal / economically weak farmers. ii. The drawals will be allowed to the DCCBs subject to fulfilment of this condition. iii. For the purpose of compliance of small farmer condition of NABARD, a small farmer is defined as one who 'owns or cultivates 5 acres of land, wet or dry'. c.

Compliance with Sections 18 and 24 of the B.R, Act 1949: i.

SCB / DCCBs should maintain Cash Reserves and Liquid Assets without any default as per the provisions of Section 18 and 24 of B.R. Act as applicable to Cooperative Societies. ii. In case, the Apex bank or any DCCB persistently defaults in maintenance of CRR and SLR, NABARD may withhold all refinance facilities and / or charge penal interest on the refinance equivalent to the quantum of such default for the period during which such default persists. d. Due Date Defaults: i.

In case, the Apex bank fails to repay the principal, interest and other charges due to NABARD on due dates, it will not be eligible for any refinance from NABARD. ii. All refinance facilities will be stopped by NABARD till the clearance of defaults by SCB. e.

Compliance on Inspection Reports: i. If the Bank fails to submit the compliance report on time or the report submitted is found to be far from satisfactory, NABARD will not consider the limit applications of SCB on behalf of DCCBs.

268 - III

18. Application to NABARD for Sanction of ST (SAO) Limits: a.

The DCCBs have to prefer a single limit for the whole year for meeting the credit requirements of all crops that are grown in the area of the operation of DCCB.

b.

The DCCBs, which have tribal population, have to prepare separate credit limit applications for crop loan requirements of tribals.

c.

While preferring the credit limit applications, the DCCBs have to forward, among other things, the following documents along with the prescribed limit application. i. A copy of the audit certificate for immediate second preceding financial year along with the audited Balance Sheet and Profit and Loss Account. ii. Demand, Collection and Balance Statement in respect of all loans for the preceding year st ending 31 March duly certified by the Auditor. iii. Performance Budget for the ensuing year.

19. Availing of drawals from NABARD-Procedure: a.

The drawals are allowed to SCB by NABARD against credit limits sanctioned on behalf of DCCBs on reimbursement / refinance basis, i.e., Apex Bank have to disburse the ST agricultural loans to DCCBs and then apply to NABARD for drawal for reimbursement of the loan.

b.

To become eligible for drawals: Apex Bank must also furnish a monthly Non-overdue Cover th (NODC) positions of all DCCBs to NABARD so as to reach 20 of the succeeding month to which the statement relates.

c.

The SCB has to apply to NABARD for drawals in the prescribed format which shall include the following points: i. A certificate confirming that the drawal applied for is within the Reserve Borrowing Power of the Bank. ii. Confirmation to the effect that the drawal is in reimbursement of loans issued to DCCB for Seasonal Agricultural Operations. iii. A certificate specifying that the Non-overdue loans and advances outstanding from Societies affiliated to the DCCBs, in respect of Seasonal Agricultural Operations are not less than the aggregate of the amount already drawn by the SCB on behalf of DCCBs.

d.

The SCB has to apply for drawals to NABARD requesting them to grant an advance (specifying the amount) under Section 21(1)(i) / 21(3)(b) of NABARD Act, 1981 against Apex Bank DPN (specifying the date and amount) already executed and credit the amount to our account with RBI. The application for drawal in the prescribed format should be signed by two authorized officers or the SCB and forwarded to NABARD.

e.

NABARD will scrutinize our drawal application to ensure that it has been made in accordance with the terms and conditions stipulated by them for operating on the credit limits. If the drawal applied 269 - III

for by the bank is found to be in order, the drawal amount will be sanctioned and credited to Apex Bank account with RBI under advice to Apex Bank. f.

On receipt of advice from NABARD of disbursement of the drawal to the credit of Apex Bank account with RBI, SCB shall endorse the pro-notes / hundies (against which the SCB reimbursement) executed by DCCBs in favour of NABARD and hold the same on their behalf in safe custody.

g.

The DCCBs have to furnish following particulars in the Prescribed Credit Limit Application: i.

Programme for ST agricultural lending for the current year and the performance in the previous year.

ii. Crop wise disbursement performance in the previous year and the programme / projections for the current year. iii. Particulars of credit limits sanctioned by NABARD and its utilization by DCCBs for the previous year indicating maximum outstanding to Apex bank and percentage of utilization. iv. Credit support required from NABARD v. Details of financing of small farmers for the previous year. vi. Maintenance of NODC during the previous year. vii. Particulars of due date default to SCB, if any. viii. Particulars of scales of finance crop wise as fixed by the SLTC ix. Completion of Audit and issue of audit certificate. x. Compliance report on NABARD inspection. xi. Staffing pattern xii. Maintenance of cash reserve and liquid assets during the previous year with minimum and maximum liquid assets maintained month wise. xiii. Borrowing power of the Bank and the Reserve Borrowing Power. xiv. Compliance of NABARD's instructions regarding rates of interest. h.

The credit limit applications submitted by DCCBs should also be supported by its Board's Resolution, resolving to borrow (indicating amount) from the Apex Bank and requesting the Apex bank to apply for credit limits for a like amount to NABARD under section 21(1) (i) read with section 21(4) of NABARD Act, 1981 with / without Government Guarantee. Such Board Resolution should be signed by the Chairman and countersigned by the Chief Executive of the Bank.

i.

Sanction of limits by NABARD: After thorough scrutiny of the limit applications and based on the fulfilment of eligibility norms by DCCBs, NABARD will sanction the limits to Apex Bank on behalf of DCCBs. Separate credit limits will be sanctioned for other crops, oil seeds under OPP etc.

270 - III

j.

The letter of sanction of limits sent to Apex Bank by NABARD will indicate the name of DCCB for whom limit is sanctioned, the purpose of limit etc. and also the terms and conditions to be fulfilled by Apex Bank while operating the limits with NABARD and while allowing the drawals under the limits to DCCBs.

k.

On receipt of sanction orders from NABARD, the SCB has to give its acceptance to NABARD, accepting the terms and conditions stipulated by NABARD.

20. Scrutiny of Credit Limit Application and Assessment of Limits by Apex Bank: a.

On receipt of the Credit Limit Applications from DCCBs, the Apex bank should ensure that the applications along with all the statements as required have been prepared and submitted in the prescribed format.

b.

After completing the process of assessing the credit limit requirements of DCCBs as per norms above, a note to Board of Management, indicating the purpose of the limit, limit applied for by the DCCB, the limit for which the Apex bank may make application to NABARD etc. will be put up for consideration and approval.

c.

The Board of Management will pass a resolution to apply to NABARD for credit limit (indicating the amount) for the year under Section 21 (1) (i) read with Section 21 (4) of NABARD Act, 1981 to refinance the DCCBs for financing Seasonal Agricultural Operations.

d.

On approval by the Board of Management of the Apex Bank to apply to NABARD on behalf of DCCBs for sanction of ST SAO credit limits, the Credit Limit Applications of DCCBs supported by Apex Bank's Board Resolution should be forwarded to NABARD together with the following documents pertaining to the Apex bank: i. Financial particulars as on …… (latest month Proforma balance sheet). ii. Liquid Assets position as on last Friday of the previous month. iii. Particulars of Borrowing Power as on 31st March.

21. Sanction of Limits by Apex Bank: a.

Based on the sanction order from NABARD, the Apex bank will sanction ST (SAO) credit limits to each DCCB for a like amount as sanctioned by NABARD stipulating its terms and conditions to be followed by DCCBs while operating the limits. Two copies of its terms and conditions have to be sent to each DCCB. While informing the DCCBs the sanction of credit limits by NABARD the Apex bank has to advise them to forward the following documents and ensure to receive them before applying for the first drawal on the credit limit: i.

A certified copy of the Resolution passed by the Board of Management of the DCCB, agreeing to hold promissory Notes of PACS on behalf of the Apex Bank, duly endorsed in its favour and authorizing the officials of DCCB by name to furnish the security certificate, undertaking etc., 271 - III

and also authorizing the officials to sign the drawal applications and the enclosures thereto under the credit limit. ii. Pronote and agreement for the credit limit together with the specimen signatures of the officials authorized to operate on the credit limit. iii. Duplicate copy of the terms and conditions, governing sanction of credit limit duty signed by the officials authorized to sign the pronotes etc. in token of having accepted the terms and conditions. b. Apex Bank's own limits: i.

In addition to NABARD's limit sanctioned to DCCBs, SCB also sanctions its own limit for financing ST agricultural operations.

ii. The Apex Bank should watch and ensure that the funds drawn from Apex Bank limits have been utilized by DCCB for issuing of ST Agricultural Loans. This can be verified from the information furnished by DCCB at the time of making subsequent drawals. iii. Interest may be charged at a rate higher than the rate applicable to NABARD limit (normal limit) on the outstandings under this limit.as may be decided by the Board of Management of the apex coop. bank from time to time. A specimen of the note for ST (SAO) Additional Credit Limit from own Resources of the Bank is given in the Annexure-2 to this Chapter. 22. Norms and Procedures for Allowing / Sanction of Drawals to DCCBs from Apex Bank: a.

The Apex bank should ensure that the DCCB has complied with the following: The DCCB should forward to the Apex bank NODC statement on or before 14th of every month, succeeding the month to which the statement relates. While allowing the drawals to DCCBs, the Apex bank should ensure that DCCB has forwarded the following documents / certificates: i. Application for drawal in the prescribed format. ii. Hundi (Time Promissory Note) drawn and executed by the authorised official/s of the DCCB, the amount of the drawal applied for, together with a schedule indicating the particulars of pro-note drawn / issued for the purpose of financing agricultural operations and also agreeing for the endorsement of the said pro-note / Hundi by the Apex bank in favour of NABARD. iii. The latest Non overdue cover (NODC) statement. iv. Latest particulars of issues and recoveries of ST agricultural loans. v. Certificate of Reserve Borrowing Power as per format. vi. Statement of CRR and SLR as on the latest preceding operative Friday. vii. Particulars of investment of deposits with commercial Banks. viii. The DCCB has to furnish certificates in respect of the following: i.

b.

272 - III

c.

d.

e.

f.

g.

 The securities obtained from PACS bear the first charge of the Apex bank,  The DCCB has sufficient non- overdue cover / pronotes duly endorsed in favour of Apex Bank to cover the outstanding.  The outstanding against PACS tally with the General Ledger and DCB Register.  The overdues furnished are as per DCB Register.  NODC particulars are furnished after posting General Ledger and DCB Register.  All PACS are maintaining the crop verification register and verification done as prescribed.  The signatures on pronotes are genuine signatures of the official authorised by Board of Management. The Apex bank has to ensure that the drawal application and other documents / certificates enclosed thereto have been properly prepared and signed by the official/s of the DCCB as authorised by the Board of Management. The eligibility amount for drawal should be assessed to the extent of gap between the total limit sanctioned and outstanding borrowings of DCCB from the Apex bank. (or) The difference between Non-overdue cover (NODC minus dues payable to Coop. Marketing Societies and Balance in LSB a/c. of Societies) and the total borrowing of DCCB as on the date of drawal application, whichever is less. ST (SAO) drawal application Scrutiny Sheet should be prepared and put up along with the application for drawal and other enclosures to the Executive (in charge of Agricultural Section) concerned for his orders for allowing the drawal. The amount of drawal allowed is to be credited to the DCCB's Current Account with the Apex Bank, under advice to the DCCB concerned. When the drawal is disallowed, the Apex Bank has to inform the same to the DCCB concerned immediately. For the purpose of allowing drawals, ST agricultural loans pending conversion will be reckoned as cover upto the period of 3 months from the original due date only when such extensions are granted to borrowers who have obtained Annawari / Kist remission Certificates. As soon as the drawals are allowed to the DCCBs the Apex bank will have to endorse the Pronotes / Hundis executed by the DCCB in favour of NABARD and hold the same on their behalf under safe custody.

23. Repayment of Loans and charging of Interest: a.

Each drawal by DCCB on its credit limit is repayable within 12 months without grace period from the date of availment of each loan.

b.

The Apex bank has to pay interest to NABARD on the amounts drawn under the credit limits as per the rate of interest prescribed by NABARD and it has to be paid to NABARD at the end of September and March each year.

c.

Similarly, DCCB has to pay interest to the Apex Bank at half yearly rests on 31st August and 28th/29th February every year as the case may be. The apex bank will recover the interest amount to the debit of Current Account of the DCCB concerned.

273 - III

d.

Advances made by NABARD on the credit limits sanctioned on behalf of DCCBs are payable on demand. However, each drawal allowed by NABARD is payable by Apex Bank on due dates of pronote so discounted on behalf of DCCB.

e.

In case DCCB commits default in repayment of each loan on due date, such loan amount becomes overdue. Similarly, if each loan amount drawn from NABARD is not repaid by SCB on due date, such advance also becomes overdue.

24. Passing on of Recoveries: a.

The DCCB should pass on the entire collections received under ST agricultural loans to the credit of ST (SAO) account with the Apex Bank, then and there. If the DCCB has repaid its dues on the due date, the DCCB shall be deemed to have complied with passing on of recoveries.

25. Maintenance of Demand, Collection and Balance (DCB) Register by DCCBs: a.

Every DCCB should maintain and post the particulars of Demand, Collection and Balance etc. in DCB Register on fortnightly basis as per NABARD'S instructions.

b.

The particulars of overdues furnished in NODC statement should be as per DCB Register.

c.

The DCCB may also maintain DCB Register on a day-to-day basis or weekly basis.

d.

The DCCB should furnish a certificate about the periodicity of maintenance of DCB Register.

e.

The drawals on ST (SAO) limits should be regulated with reference to NODC position furnished along with the drawal.

f.

If DCCB maintains DCB register on day-to-day basis or weekly basis, the drawals may be regularized with reference to NODC position on any day close to the date of drawal or NODC position as at the close of business on the preceding Friday, as the case may be.

g.

In case, NODC is maintained on fortnightly basis, the drawals will be regulated as per the NODC position as on the first preceding Friday of the fortnight.

26. Maintenance of Crop Verification Register: a.

The DCCB should ensure that all PACS financed maintain the Crop Verification Register (CVR) as prescribed by the Apex Bank.

b.

The staff of PACS, supervisors and Field Mangers of DCCBs should supervise the utilization of crop loans disbursed as per the norms fixed by the Apex Bank and record the particulars of such verification in the Crop Verification Register. The DCCB should ensure that the loan issued for raising of crops requiring high scales of finance are utilized only for cultivating such crops and not for raising other crops. 274 - III

c.

The DCCB has to send a consolidated verification report to Apex Bank within 3 months from the month of issue of the loans and it should reach Apex Bank on or before the 15th of every month.

d.

The loans unutilized or misutilised or underutilized within one month from the date of issues should be foreclosed and recovered immediately.

e.

Drawals will not be allowed to DCCBs if the Crop Verification Report is not submitted to Apex Bank on or before the due date.

27. Submission of Revolving Credit Return: a.

The DCCB should furnish the Revolving Credit Return in the prescribed format as on the last Friday of every month (excepting for the month of March and June, which should be as on 31st th th March and 30 June respectively) so as to reach the Apex Bank not later than 20 of the succeeding month.

28. Investment of Reserve Fund and other Reserves with the Apex bank: a.

The DCCB should invest its entire Reserve Fund, Agricultural Stabilization Fund and other reserves in Special Deposits with the Apex Bank / Govt. Securities.

b.

Earmarking on Fixed Deposits towards investment of the said funds should not be done by DCCB. In the event of such earmarking, the Apex bank has to foreclose such deposits and take them to Special Deposits.

29. Stopping Further Advances: a.

The Apex Bank may stop making further advances even when the limit is not fully utilized, if the DCCB, i. makes a default in the submission of Form I and IX as required under B.R., Act., ii. fails to maintain CRR and SLR as required under sections 18 and 24 the B.R, Act., iii. fails to submit the rectification / compliance report in respect of inspection report issued by NABARD / Apex bank, iv. fails to comply with the Section 11(i) of B.R. Act. As per the findings of NABARD's Inspection Report, v. defaults in repayment of dues under ST (SAO), vi. deviates from the regulations and instructions stipulated by RBI/NABARD/Apex Bank, in the issue and repayment of loans and interest thereon and also those relating to conversion, rescheduling / deferment (rephasement) of loans or other relief.

30. Accounting Procedure: a.

General Ledger Accounts: In respect of advances to DCCBs and borrowings from NABARD under ST SAO limits, the following heads of accounts are maintained in the General Ledger. 275 - III

i. Advances to DCCBs ST SAO other crops/Oilseeds ii. Loans from NABARD under section 21 (1) (i) / 21(3) (a) (b) as the case may be. b.

While disbursing loans to DCCBs the Apex bank has to prepare the debit and credit vouchers as under: i. Debit : Advance to DCCBs ST SAO other crops / oilseeds ii. Credit : Current Account of the DCCB concerned (for reimbursement Finance ) / TT and DD charges to Commercial banks.

c.

When the repayments are received from DCCBs, the following debit and credit vouchers are to be prepared: i. Debit : RBI, Mumbai A/c. ii. Credit : Advances to DCCBS ST. SAO…..DCB Other Crops / Oilseeds.

d.

In the case of borrowings from NABARD under refinance limits, the debit and credit vouchers are to be prepared as under: i. Debit : RBI A/c. (Apex bank Current Account with RBI) ii. Credit : Loans from NABARD under Section 21 (1)(i) / 21(3)(a) / (b) (as the case may be) Other crops / Oilseeds.

e.

When repayments are made by the Bank towards borrowings from NABARD, the above accounts will be credited and debited respectively.

f.

Entries for Interest Provision & Charging of Interest: i.

While making monthly provision for interest on advances to DCCBs, the following debit and credit vouchers are to be prepared:  Debit : Interest receivable on Advances to DCCBs ST SAO

 Credit : P & L Interest received on Advanced to DCCBs ST SAO ii. When charging interest to the DCCBs,  Debit : Current A/c. of DCCB  Credit : Interest receivable on advance to DCCBs ST SAO g.

While making interest payment to NABARD the debit and credit vouchers in respect of interest provision on loans from NABARD under section 21 (1) (i) / 21(4) i. Debit: Interest paid on loans from NABARD under Section 21 (1) (i) / 21 (4) ii. Credit: Interest payable on loans from NABARD

276 - III

h. ST SAO Advances Ledger: i.

In respect of advances to DCCBs under ST SAO a ledger is maintained Bank wise and purpose wise i.e., other crops, OPP, Tribals Development Programme (TDP) etc. The loans disbursed to DCCBs in respect of the limits from NABARD and from owned funds of the Apex bank will be posted in the Bank-wise and purpose-wise Ledger. The debit and credit vouchers are posted daily as in the case of Current Account Ledger and the products are arrived at the end of the day. At the top of each ledger account, the following particulars are to be recorded:  The name of the DCCB  Purpose such as crops other than Oilseeds, TDP, OPP etc.  NABARD and SCB limits.

ii.

iii.

iv.

v.

vi.

 Interest rate. Purposewise total liability of the DCCBs is also to be maintained at the end of the ledger. The debit and credit vouchers pertaining to all DCCBs are posted daily and daily products are arrived as in the case of CC accounts. The aggregate outstanding balances in all DCCB's accounts under each purpose should tally with the balance as arrived in the total liability column. Separate bankwise ledger account in respect of interim finance will have to be maintained. Whenever the DCCBs are not eligible under normal limits on account of insufficient NODC, they may avail advance under this limit from the Apex Bank. Under interim finance also, total liability account shall be maintained and all the debit and credit vouchers are to be posted daily and the balance and products are arrived at the end of the day. The monthly interest provision on advances to DCCBs is calculated on the products arrived in the total liability account maintained in the advances ledger and the debit and credit vouchers are prepared accordingly. The monthly interest provision on borrowing from NABARD is calculated on the products arrived in total liability account and debit and credit vouchers are prepared accordingly.

i.

ST SAO Borrowing Ledger: In respect of Borrowings from NABARD, ledgers are maintained for each purpose such as other crops, OPP, TDP etc.

j.

Subsidiary Books: i.

Hundi Due Date Register: The Hundi Due date Register is maintained Bank-wise and Purpose-wise. The details of the date of discount, date of Hundi, Hundi number, amount of Hundi, period of Hundi, due date are entered in this register. The date of clearance of Hundi, date of repayment, Hundi number, amount of credit are also entered in this register. The balance in respect of all Hundies received from a particular DCCB is to be arrived in the register. The date of return of discharged Hundi is also to be entered in the Column concerned. 277 - III

 The outstanding balance under each purpose in respect of each bank, after deducting part payments should tally with the outstanding in the concerned account maintained in the advances ledger, on the day.  The Hundi numbers are given in the serial order by the Bank. When the entire amount of a Hundi is repaid by the DCCB, the Hundi Number concerned will be rounded off in this register to indicate full repayment by the DCCB in respect of that particular Hundi. ii. Part payment Register: In this Register, bank-wise particulars of due date of Hundi, date of re-discount, amount of Hundi , repayment by DCCBs towards the Hundi with date will be entered.  When repayment in full or part is received from the DCCB, the above particulars will be entered in appropriate column indicating the date and amount of repayment.  When the entire amount of a particular Hundi is repaid by the DCCB in full, the Hundi number concerned will be rounded off in the Hundi Due Date Register. k. NABARD Borrowing Due Date Register: i. Due Date Register in respect of Borrowings from NABARD is maintained bank-wise. When borrowings are made from NABARD, the particulars such as S.No. (of Hundi), Date of borrowing, Amount borrowed, Due date and Date of clearance are to be entered in the appropriate columns:  The date and amount of repayments from DCCBs are also entered in this register. The repayments are to be adjusted towards repayment of Hundi in full. The balance of repayment, if any, after adjustment to a Hundi, will be entered in the “Carried Over” column (repayment less borrowing). This carried over amount along with the subsequent repayment can be adjusted to another Hundi towards its full payment.  The outstanding balance in respect of borrowings from NABARD is also arrived in this register. l.

Balancing of Books: i. Trial balance in respect of advances to DCCBs shall be taken purpose wise and Bank wise and the consolidated outstanding to be tallied with GL balance as at the end of each month. ii. Trial balance in respect of borrowings from NABARD will also be taken from the borrowings ledger and tallied with the G.L. balance as at the end of each month.

31. Annexure/s: a. The following Annexures are appended to this Chapter: Annexure 1 : Specimen of ST (SAO) Credit Limit Scrutiny Note (Year 2010 - 11) Annexure 2 : Specimen of the note for sanction of ST (SAO) additional Credit Limit from own resources of the Bank (Year 2010 - 11) Annexure 3: Specimen of terms and conditions governing ST SAO credit limit to DCCBs

278 - III

Annexure-1 to Chapter -22 SPECIMEN OF ST (SAO) CREDIT LIMIT For the year 2010 - 2011 - Scrutiny Note C.No. / ACS / 2010 – 11

(All figures in Rs. Lakhs)

1. Name of the DCCB.

:

2. Section of NABARD Act, 1981 under Which the limit has been applied for

:

Sec.21(I) (i) / 21 (4) (as the case may be)

3. Whether the DCCB is functioning in area Covered under (indicate Yes or No) : OPP/SFFP/NPDP 4. General Particulars: Sl No 1. 2.

3. 4. 5. 6.

7. 8. 9.

10

DCCB

Particulars

SCB

RCS

Date of Application/ recommendation Amount applied/ recommended Other Crops Oil Seeds (OPP) TOTAL No. & Date of Board Resolution Whether the resolutions are in order? Is the application as per our prescribed Proforma and complete in all respects Whether the bank has complied with Section 11(i) of the B.R. Act 1949 (AACS) as per the latest inspection Date of receipt of audit report for the year 20082009 Audit Classification of the DCCB 2008-2009 % of overdues to demand for the year ………. (i.e. DCB position as on………..) D : C : B : % of O.D. : % of NPAs to total loans as on 31st March _____

Comments: The NPA of the DCCB is less than 10% and the DCCB is eligible for the credit limit from NABARD. 279 - III

5. Progress of the Bank for the last 2 years and as on 31st December ________ % growth

Position as on Sl No

Particulars

31.3.2009

31.3.2010

Last Friday of 2009-10 Position of Dec. 2010 over Dec.2010 over 2008-09 31.3.2010

1. Owned Funds 2. Deposits 3. Loans & Advances a. ST Agricultural Oilseeds under OPP other Crops b. Other loans and Advances Total 4. Total Demand as on 31.3........ 5.a. Total Overdues b. % of overdues to demand c. Reasons if any for increase or decrease 6. Profit or Loss for the year 7. Accumulated Loss/ 6.

Operations on ST Credit Limits for the year 20...... 20........ (i) Limits sanctioned by NABARD to SCB on behalf of DCCBs and utilisation Outstanding reached Type of Limits

Normal Additional

Total

Maximum amount

date

Maximum amount

ST SAO OC OPP Total

(ii) Limits sanctioned by Apex Bank and utilisation during previous year*

280 - III

date

Average Utilisation

Outstanding reached Type of Limits

NABARD

SCB

Total

Maximum amount

Average Utilisation

Maximum amount

date

date

ST SAO OC OPP Total

Comments: The DCCB has been utilising the limits to the maximum extent possible. iii) Whether any adverse features were noticed in the operation on the Apex Bank's limits by the DCCB? If so, give full details. Yes/ No. iv) Whether the bank had reported compliance on our follow up letter issued last year? Comments on its quality. Yes/ No. v) Loans and Advances for SAO purposes during April ........ to March ........ Maximum

Particulars

Date

Amount

Minimum Date

Amount

Loans o/s against Societies – OC OPP Loans o/s from Apex Bank - OC OPP Loans o/s from NABARD - OC OPP vi) Percentage of borrowings from Apex Bank/ NABARD to loans outstanding against PACS. Particulars

1999 Apex Bank

NABARD

2000 Apex Bank

NABARD

OC + OPP 7.

Compliance with various terms and conditions: The concentration of recoveries / advances was due to collection drive and consequent lending. i. Non-Overdue Cover a. whether the non - overdue cover statements in respect of borrowings for OPP and OC upto 281 - III

March 20……….. have been received: Yes/No. Compare availability of NODC with utilization of limits sanctioned during the last year.

b.

Limits sanctioned

Type of Limit

Maximum utilisation

Average utilisation

Maximum NODC

Minimum NODC

OC OPP Total Comments: The DCCB was having sufficient cover for its borrowing with the Apex Bank. c.

Whether the bank has maintained adequate NODC in respect of its ST (Agrl) borrowings from NABARD? Yes / No. If no, the details of deficit in NODC were as under:

Type of Limit

Period

Minimum Deficit

Period

Maximum Deficit

OC OPP Total d.

Whether continuous deficit observed and if so, action taken by SCB :

ii. Default in repayment of dues: Whether the Bank has defaulted in the repayment of its borrowing from the Apex Bank? If so give details. Yes / No i.

Advances to Small Farmers Compliance with percentage norms for issue of loans to small farmers (last 2 years) Percentage Year (Apr Mar)

Fixed by NABARD

Achieved

2009-2010 2010-2011 8.

Other Features of the DCCB. a.

Maintenance of Cash Reserve and Liquid Assets (April ......... - March ........) Whether the DCCB has defaulted in the maintenance of cash reserve and liquid assets required to be maintained under section 18 and 24 of the Banking Regulation Act, 1949 (AACS) respectively? 282 - III

Yes / No If yes, give details: b.

Submission of Statutory Returns i. Whether the DCCB was regular in submitting the statutory returns? YES/NO ii. If No, give details: Name of the Return No. of occasion of delay Form IX Form I

c.

Management Whether the DCCB has an elected Board? Adverse features noticed in the functioning of the Board may be specified. The DCCB was having elected board upto (month) 20………….

d.

Steps taken by the State Govt. / DCCB for introducing professionalism in Management. The staff of the DCCB have been deputed for the training programmes conducted by the various training institutes run by SCB / NABARD.

e.

Crop Loan System i)

Holding of the Technical Group Meeting : The DLTC was convened by the DCB on ________ to consider scale of finance for various crops for the year 20………. - ………………. ii) Major cropping pattern in the District: iii) Any Major shortcoming in implementation of special programmes with reference to targets: iv) Disbursement and recovery performance during the last 3 years Year (Apr Mar)

9.

Advances Kharif

Rabi

Recoveries Total

Kharif

Comments: v) Comments on the % of kind component to total advances. NIL Lending Programme of the DCCB for the year 20……. 20…….: 283 - III

Rabi

Total

a)

The total lending programme of the DCCB is as under

Type of Loans 20....-20...

20....-20...

20....-20...

Expected by DCCB

Estimated by SCB

OC OPP Total Remarks on RLP: b) i) Maximum NODC created during the last 3 years: O.C. O.P.P. i) 20…. 20…. : + = ii) 20….-20….. : + = iii) 20….-20….. : + = ii) NODC likely to be available during 20…. 20….. 10. Determining the quantum of credit limit 11. Special Focus 12. Special conditions, if any proposed for stipulation in the Sanction Letter. 13. Recommendation: Considering the eligibility of the bank, the allocation of SCBs involvement to the DCCB and the aforesaid special aspects, the following short - terms credit limit(s) is /are recommended. Type of Limit

Amount

OPP OC Total

For approval please.

284 - III

Annexure-2 to Chapter-22 SPECIMEN FOR THE NOTE FOR ST (SAO) ADDITIONAL CREDIT LIMIT FROM OWN RESOURCES OF THE BANK Submitted to the Chief Executive: The '______________________' DCCB has applied for sanction of additional credit limit of Rs.______________________________ lakhs from own resources of our Bank for financing seasonal agricultural operations for the year 20.. 20.. We have already sanctioned ST credit limit of Rs lakhs from own resources of our bank in addition to the ST credit limit of Rs. lakhs sanctioned by NABARD for the year 20…. 20….. The '_______________' DCCB has utilized the existing credit limit as per details furnished below: (Rs. In lakhs) 1.

RCS target fixed for the year 20…. – 20……

2.

Loans issued from 01.04.20….. to 31.10.20....

3.

Limit sanctioned by a) NABARD b) Apex bank c) Total

4.

Borrowing with Apex Bank as on

5.

Outstanding against PACBs as on

6.

Non - overdue cover as on

7.

NODC surplus as on

The DCCB has fully utilized the credit limit sanctioned by NABARD and Apex Bank for the year 20….. 20…... The DCCB has maintained an average involvement of Rs._______________ Further the DCCB, has non overdue cover to the extent of Rs._____________ lakhs and NODC surplus to the extent of Rs.____________ lakhs as on (Date) NABARD has fixed an involvement at Rs.______ lakhs to the Apex Bank for the year 20…. - …. we have already allocated Rs.__________ lakhs to various DCCBs on the basis of past performance and requirement of ST (SAO) loans for the current year. The said DCCB has so far issued Rs._____________ lakhs as ST(SAO) loans upto _______the balance amount of Rs._____________ lakhs have to be issued to achieve the target of Rs. ._____________ lakhs fixed by RCS for this current year. The following projected loan programme has been proposed by the DCCB for the remaining period of the year 20…… - 20………. 285 - III

Particular

Recovery

Issue

Out standing

Nov 20….... Dec 20……. Jan 20……. Feb …… March …… Total In the above circumstances we may sanction an additional credit limit of Rs._________________ lakhs to '__________________' DCCB for financing seasonal agricultural operations for the year 20….. 20…... For instructions approval please.

286 - III

Annexure -3 to Chapter- 22 TERMS AND CONDITIONS GOVERNING SANCTION OF ST (SAO) CREDIT LIMIT (BASED ON NABARD' POLICY FOR THE YEAR 2010-2011) - MODEL 1.

NATURE OF THE LIMIT: The credit limit is sanctioned to the DCCB from the consolidated limit sanctioned to the Apex bank on behalf of the eligible DCCBs by NABARD in addition to the own funds of the Apex bank. The said limit is inclusive of the limit applied for OPP (Oil Seeds) for 2010-11. However the DCCBs must maintain separate figures for the loans issued to other crops and oilseeds. The limit is reimbursement in nature and will be available for operation as a revolving credit limit. The District Central Coop Bank can draw and repay on the limit any number of times, subject to the condition that outstandings shall NOT exceed the limit sanctioned.

2.

TENURE OF LIMIT The operative period of limit for the year 2010-2011 will be from 01.04.2010 to 31.03.2011. The refinance will be provided to the DCCBs based on the issue of fresh crop loans ONLY disbursed during st the operative period i.e. loans issued after 1 April 2010.

3.

PURPOSE OF LIMIT The DCCB should ensure that the drawals availed from this limit are in recoupment of the advances made by the DCCB for Seasonal Agricultural Operations to the Primary Agriculture Cooperative Credit Societies. The cumulative outstanding against the PACSs shall not be less than the loans availed from the Apex Bank.

4.

LIMIT EXCLUSIVE OF OUTSTANDING IN THE LIMIT SANCTIONED FOR THE YEAR 2009-2010. The limit sanctioned for the year 2010-2011 is exclusive of the outstandings in the limit sanctioned for the year 2009-2010. If the opening outstandings on 01.04.10 is higher than the limit sanctioned for the year 2010-2011, there is no need to bring down the outstandings immediately. However, the DCCBs have to pass on the amount collected under the previous year loans to have adequate cover for the outstanding. In case of inadequate cover for the outstanding borrowings under ST.SAO for 2009-10, further drawal will be NOT be allowed under the NEW limit sanctioned for 2010-2011, even if sufficient cover is available for the present limit till such time the cover deficit is cleared. The condition is stipulated to ensure better financial discipline in respect of passing on the advance collections at the ground level.

5.

RATE OF INTEREST AND PERIODICITY (a) The rate of interest for the year 2010-11 as approved by the RCS vide his letter RC.57291/2010/CBP1 dated 16.06.2010 is as below: 287 - III

Name of the Institution

Rate of interest

Margin

NABARD to SCB

4.00%

--

------- SCB to DCCBs

4.20%

0.20%

DCCBs to PACSs

5.20%

1.00%

PACSs to farmers

7.00%

1.80%

(b) The rate of interest is applicable to the fresh loans/issues from 01.04.2010. THE ULTIMATE RATE AT THE FARMER LEVEL i.e. AT THE PACS LEVEL IS 7% pea ONLY. Any violation will result in denial of drawals under the limit. The outstanding of the previous year will carry the interest rate stipulated for that year. (c) If at any point of time, it comes to the notice of NABARD/------- SCB that the rate of interest charged on loans provided to the farmers is more than 7% p.a., NABARD/APEX Bank shall be free to charge additional interest as may be determined by NABARD/APEX Bank from time to time or recall the refinance or stop further refinance. (d) Interest is payable at half-yearly rests on last working day of August and February as the case may be. The ------- SCB would recover the same to the debit of Current Account of the DCCB with the Apex Bank. No extension of time will be given for payment of interest. The DCCBs will keep sufficient funds in advance to meet the demand. (e) If the borrowings from the ------- SCB is fully repaid by the DCCB at any time before the last working day of August or February, the interest due would be debited to the Current Account of the DCCB on the date of clearance of the outstanding. (f) The interest rate is subject to revision on the instructions of the NABARD and on the direction of the Government from time to time 6.

DURATION OF LOAN Drawals to the DCCB against the credit limit are repayable on demand, to the NABARD/ ------- SCB without prejudice to its right to recall the advances at any time, may not ordinarily exercise this right for a period of 12 months from the date of each advance. Each drawal on the credit limit is repayable within 12 months from the date of the Hundi enclosed to the drawal application without any grace period.

7.

DCCB NOT ELIGIBLE FOR DRAWALS ON THE LIMIT IN THE EVENT OF DUE DATE DEFAULT The DCCB will not be eligible to obtain further drawals in the credit limit in the event of due date default in repaying the amount borrowed under the limit till clearance of the amount due.

288 - III

8.

PENAL INTEREST ON DUE DATE DEFAULT i)

The DCCB is liable to pay penal interest to the ------- SCB at 10% in the event of default in clearing each loan on or before the due date. Penal interest will be collected from the date of default to the date of clearance of default on the actual defaulted amount and the same would be collected soon after clearance of default by the DCCB.

ii) In the event of default by the DCCB in paying the interest or any portion thereof on due dates, the DCCB shall be liable to pay to the Apex Bank on demand interest at 10% from the date of default till the date of clearance of the actual interest outstanding to the Apex Bank. 9.

RIGHT TO ADJUST PROCEEDS OF DRAWALS IN OTHER ACCOUNTS The ------- SCB reserves the right to debit the current account of the DCCB with it, if the DCCB does not make arrangements to repay the loan on the due date and if the ------- SCB is satisfied that the DCCB has committed default despite having adequate resources for clearance of default.

10. The ------- SCB also reserves the right to adjust certain percentage of drawal proceeds in respect of other accounts to the due date defaults under this limit as per the percentage stipulated in the respective terms and conditions. 11. FINANCING OF SMALL FARMERS The DCCB will have to ensure that out of the DCCB's short term agricultural advances made to PACSs during the year, at least 30% as prescribed by the NABARD, is issued for financing small/marginal farmers. 60% of the total limit will constitute the free portion. Over and above free portion, drawals will be allowed only if the SF/MF coverage is satisfied. Otherwise, drawals would be permitted on pro rata basis to the extent of SF/MF coverage actually achieved. The DCCBs should further encourage issue of crop loans to tenant farmers and oral lessees and ensure better coverage of tenant farmers and oral lessees. For compliance of stipulated coverage of SF/MF, the aggregate of maximum outstanding in the KCC of SF/MFs can also be reckoned together with the aggregate of crop loans issued to SF/MF under normal loaning system. 12. DCCB TO MAINTAIN DCB REGISTER ON A FORTNIGHTLY BASIS The DCCB shall maintain and post the DCB register once in a fortnight as per the instructions of the NABARD. The drawals on the short term credit limit sanctioned will be regulated with reference to the NODC position to be furnished along with the drawal application. The particulars of overdues furnished in the NODC Return should be as per the DCB register maintained. If the DCCB maintains the DCB register on a day-to-day basis, the drawals will be regulated with reference to the NODC position on any day close to the date of drawal application. If the DCB Register is maintained on a weekly/ fortnightly basis, drawals will be allowed as per the NODC position as at the close of the preceding Friday/ two preceding Fridays. The DCCB will also furnish a Certificate about the 289 - III

periodicity of maintenance of the DCB Registers (daily, weekly or fortnightly) along with the NODC particulars enclosed to the drawal application. Further, the DCCB has to maintain separate books of account for DCB, NODC, etc. for disbursement of ST SAO Loan under Kisan Credit Card Scheme. The Maximum outstanding under ST (SAO) loans in the KCC accounts reached during the year (April March) may be treated as demand and the outstanding in the unrenewed KCC accounts may be reckoned as overdues. The outstanding in the KCC accounts against PACSs for financing SAO excluding the amount outstanding under the unrenewed KCC accounts will be reckoned as NODC for the purpose of borrowings on the limit. 13. SUBMISSION OF NON-OVERDUE COVER STATEMENT The DCCB should furnish NODC Statements separately for other crops, Oilseeds etc. in the prescribed proforma as on the last DAY of every month so as to reach the ------- SCB on or before 14th of the succeeding month. The DCCB shall send NODC Statement for the outstanding for the year 200910 and also for the outstanding for the year 2010-11. th

Drawals on the ST Credit Limit from 14 of the month will be allowed only if the latest NODC return due is received at the TNSCB. In the event of non-submission of these statements, no drawals on the credit limits will be allowed till such time the statements are furnished. Drawals will not be allowed under the limit sanctioned for the year 2010-11, if there is any cover deficit for the loan sanctioned for the year 2009-10, even if sufficient cover is available for the year 2010-2011. 14. DRAWALS TO BE REGULATED WITH REFERENCE TO NODC The DCCB will be permitted to obtain refinance from the ------- SCB only to the extent of non-overdue outstandings against PACSs. The DCCB should also ensure that the loans issued for financing seasonal agricultural operations and outstanding against PACSs excluding overdues are at no time less than the outstanding borrowings from the ------- SCB under the credit limit sanctioned for the year 2009-10 and 2010-11. In other words, the DCCB must have adequate cover for the loans sanctioned for the year 2009-10 and 2010-11 individually and collectively. 15. NON-OVERDUE COVER DEFICIT AND DRAWALS In the event of deficit in the maintenance of Non-overdue Cover, further drawals in this limit will not be allowed till the deficit is made good. The DCCB should send the return in the prescribed proforma on a weekly basis from the date of occurrence of deficit, till the deficit is regularised. 16. ADDITIONAL INTEREST ON THE DEFICIT IN NODC In case of deficit in NODC, DCCB will have to make good the deficit in NODC. If the DCCB fails to 290 - III

make good the deficit within one month from the date of occurrence of such deficit, additional interest @ 1% p.a. will be charged on the deficit in NODC for the duration of deficit from the date of occurrence of such deficit till the date on which the amount of deficit is regularised. 17. CERTIFICATE REGARDING ADEQUACY OF NODC The DCCB should, at the time of every drawal on the credit limit sanctioned, furnish a certificate to the effect that the drawal, together with the outstanding borrowings will not be more than the NODC. Separate NODC has to be maintained for other crops and Oil seeds and statements have to be furnished accordingly to the ------- SCB before the due dates stipulated for the same. 18. PASSING ON OF RECOVERIES If the DCCB repays the amount drawn on the due dates then it will be construed that the DCCB has complied with the condition. However, the DCCB should pass on the advance collections if any, received over and above their involvement then and there to the SCB. The Head Office of the DCCB should maintain a Register to watch the collections made by the Branches/ Head Office and the amount remitted to the SCB. The Branches should also maintain a similar Register. 19. TAKING ADVANCE ACTION FOR COLLECTION OF OVERDUES/ DEMAND The DCCB should organise special collection drive before huge ST demand falls due, with a view to collecting a major portion of the demand and also the earlier overdues at the time of raising the demand. This is necessary for the purpose of avoiding NODC deficits and also for raising of adequate resources for issue of ST agricultural loans. 20. DRAWAL PROCEEDS NOT TO BE UTILISED FOR REPAYMENT The DCCB should ensure that the repayments made under this account are made out of collections only. The drawal proceeds under this limit or other accounts from the ------- SCB should not be utilised for passing on of recoveries under ST Agricultural Loans. However, in the event of NODC Deficit or the due date default, the DCCB will be allowed to draw from other accounts and regularize the deficit/ default. 21. MAINTENANCE OF CROP VERIFICATION REGISTERS BY THE PACSs The DCCBs will ensure that all the PACSs financed by them, maintain the CROP Verification Register (CVR) as prescribed by the SCB. The DCCB should ensure that the PACSs maintain proper records of verifications done by them, in the CVRs prescribed by SCB. The Staff of the society will have to verify 100% of commercial crop loans and 50% of the crop loans issued for raising other crops. The Supervisors of the DCCB will have to super check the utilisation of the loans issued by the societies at 10% and 5% at random, for commercial and other crops, respectively. The field managers of the DCCB will have to verify at least 1% of the loans at random issued by each PACS. 291 - III

The DCCB will obtain necessary particulars from the PACSs regarding the verifications done by them and send a consolidated Verification Report to the ------- SCB within 3 months from the month of issue of the loans and returns should reach the ------- SCB on or before 15th of every month to enable the ------ SCB to allow drawals on the limit. Loans which are unutilised or misutilised or underutilised within one month from the date of issue should be foreclosed and recovered immediately. 22. LOANS ISSUED TO BE REGULARISED WITH REFERENCE TO PLAN OF ACTION: The DCCB will issue short-term agricultural loans on the basis of the plan of action drawn up by it and as per the target fixed by the Government. The Crop wise loans disbursement shall be as per the pattern of cultivation in the district and major crops grown in the district should receive larger quantum of assistance from DCCB. The DCCB should also ensure that adequate coverage is given in respect of paddy, groundnut, other oilseeds, pulses and millets as prescribed by the Government from time to time. The DCCB will send a crop wise (Major crop only) month wise loan issue details to the ------- SCB along with the NODC return. 23. ISSUE OF LOANS IN KIND The DCCB shall ensure that a substantial portion of kind component prescribed in the scale of finance is lifted by the farmers. 24. SUBMISSION OF REVOLVING CREDIT RETURN The DCCB will furnish the revolving credit return in the form prescribed as on the last Friday of every month (excepting for the month of March and June which should be as on the 31st and 30th) so as to reach the ------- SCB not later than 20th of the succeeding month to enable the ------- SCB to consider the drawal applications on the limit. 25. RIGHT OF INSPECTION OF DCCB BY SCB/ NABARD/ RBI It will be open to the SCB/ NABARD/ RBI to depute their officers to inspect the DCCB and the PACSs availing of financial accommodation out of the above sanction. NABARD would have the right to cause audit of the books of accounts and other materials of the DCCBs either by itself or through other agencies to ensure that the same are maintained as per the rules and regulations in force and the terms and conditions of refinance are adhered to by the DCCBs. 26. INVESTMENT OF RESERVE FUND AND OTHER FUNDS The DCCB should invest its entire Reserve Fund, Agricultural Credit Stabilisation fund (unutilised portion) and other special funds in special deposit with the ------- SCB carrying interest at the maximum applicable rate. It will not be in order for the DCCB to do earmarking on the Fixed Deposit or other investments made with the Apex Bank towards the above mentioned funds. If it is found that there is violation of this condition, the ------- SCB would foreclose such deposits and take such funds to the special deposits without reference to the DCCB.

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27. CERTIFICATE REGARDING RESERVE BORROWING POWER The DCCB should, at the time of every drawal on the credit limit sanctioned, furnish a certificate to the effect that the drawal applied for is within its Reserve Borrowing power. 28. DCCBs TO PREFER DRAWAL APPLICATION The DCCB while applying for drawals on the limit should send an application for the amount applied for in the format prescribed together with the certificates prescribed from time to time and the statement showing the cash reserve and liquid assets particulars as at the close of business on the Friday prior to the date of drawal application, but in any case not earlier than 13 days from the date of drawal application. The Hundi and schedule must be drawn in the manner prescribed and more so as per letter C No.60/ ACS(OPR) dated 27.12.2008 of the Apex Bank. 29. The DCCBs shall ensure that drawals are availed only based on the actual disbursements made to the PACSs and the APEX Bank would take a serious view in case the DCCBs have availed drawals by furnishing incorrect data on crop loan disbursement by way of recalling back the excess refinance or stopping further drawals. 30. RIGHT TO STOP MAKING FURTHER ADVANCES The ------- SCB reserves to itself the right to stop making further advances even when the limit sanctioned is not fully utilised, if the DCCB: i) defaults in the submission of statutory returns in Form I and IX under the Banking Regulation (Cooperative Societies) Rules 1966; ii) defaults in the maintenance of cash reserve and/or liquid assets as required under Section 18 and 24 of the Banking Regulation Act, 1949 (as applicable to Coop. Societies) ; iii) fails to submit the compliance report on the last inspection report issued by the NABARD/ ------SCB within the stipulated time, or the compliance report is found perfunctory and defects noticed, suggestions made remain unimplemented without proper rectification and iv) fails to comply with Section 11(i) of the Banking Regulations Act, 1949 (AACS) as per the findings of NABARD's inspection report and is not exempted by the Central Government from the application of the said provisions. 31. The Apex Bank shall be constrained to stop drawals on the credit limits if (a) the DCCB defaults in repayment of dues in any type of credit limits sanctioned till the defaults are cleared and (b) the DCCB deviates from the regulations and instructions laid down by RBI/ NABARD/ Apex Bank relating to issue and repayment of loans and interest thereon and instructions issued by RBI/ NABARD relating to conversion, reschedulement / deferment of loans or other relief. 32. In case a DCCB is in default to the ------- SCB under ST.SAO continuously for a period exceeding 3 months, refinance will not be provided by NABARD till the default is regularized. 33. In case a DCCB is in continuous deficit in CRR/SLR for a period of 3 or more consecutive months in the 293 - III

previous calendar year, the lending programme of such banks, while working out the eligibility for sanction of credit limits, will be restricted to the maximum level of ST.SAO loans reached against PACBs during the previous year. 34. The DCCB should take necessary steps for proper implementation of DAPs and effect monitoring and follow-up of the plans. A review at periodic intervals should be made on implementation of DAP and the position should be appraised to NABARD/ State Government at the end of every quarter. 35. AVAILING OF REFINANCE FOR SAO LOANS UNDER KISAN CREDIT CARD SCHEME (KCC SCHEME) The DCCBs/PACSs should maintain separate details of sanctions and accounts of operations on credit limits for SAO purposes under KCC scheme both for other crops and oilseeds separately and also for small/ marginal farmers exclusively. 36. RIGHT TO MODIFY THE TERMS AND CONDITIONS The ------- SCB reserves the right to alter/ modify the terms and conditions governing the sanction of this limit during the currency of the limit, and such modification would be communicated in the form of circulars/Letters and these instructions will have the same effect as the terms and conditions indicated herein. 37. RIGHT TO RECALL THE ADVANCE The ------- SCB reserves the right to recall the advances to the DCCB even before the due date, if the DCCB fails to adhere to any of the terms and conditions stipulated herein or any other terms and conditions that may be stipulated during the year 2010-2011 regarding this limit, in part or full.

294 - III

CHAPTER 23

KISAN CREDIT CARD (KCC) 1.

General: a.

2.

Applicability of the Scheme: a.

3.

Kisan Credit Card Scheme aims at adequate and timely support from the banking system to the farmers for their cultivation needs including purchase of inputs in a flexible and cost effective manner.

Eligibility: a.

5.

The Scheme provides broad guidelines to the banks for operationalising the KCC Scheme, implementing banks will have the discretion to adapt the same to suit location specific requirements.

Objectives: a.

4.

The Hon'ble Union Minister for Finance in his Budget Speech for the year 1988-99 had desired that the banks should issue Kisan Credit Cards to farmers on the basis of their land holdings so that the farmers may use them to readily purchase agricultural inputs such as seeds, fertilisers, pesticides, etc., and draw cash for their production needs and that NABARD should prepare a Model Scheme for uniform adoption by the banks. Accordingly NABARD, in consultation with RBI has formulated the Kisan Credit Card Scheme (KCCS) for adoption by the banks so that farmers may use them for purchase of seeds, fertilisers etc., and also to draw cash to meet production cost towards labour etc.

The Scheme would primarily cater to the short term requirements of the farmers. Under the Scheme, banks may provide the Kisan Cards to farmers who are eligible for sanction of production credit.

Issue of Cards: a.

The beneficiaries under the Scheme will be issued with a Credit Card and a Pass Book or a Credit Card cum Pass Book incorporating the name, address, particulars of land holding, borrowing limit, validity period, etc. which will serve both as an identity card as well as facilitate recording of the transactions on an ongoing basis. The card, among others, would provide for a passport size photograph of the holder. The borrower would be required to produce the card cum Pass Book whenever he operated the account. A specimen of the Kisan Credit Card cum Pass Book is given in the Annexure-1 to this Chapter. 295 - III

6.

7.

Fixation of credit limit: a.

The credit extended under the KCC Scheme would be in the nature of a revolving cash credit and provide for any number of drawals and repayments within the limit. Such an approach would provide the much needed flexibility to the farmer in choosing the appropriate time to repay his loan and reduce the interest burden, being in a position to draw on the card to meet his urgent credit requirement.

b.

While fixing the limit, the bank may take into account the entire production credit requirements of the farmer for the full year, including the credit requirements of the farmer for the ancillary activities related to crop production such as maintenance of agricultural machinery / implements, electricity charges etc., In due course, the credit limit could provide for allied activities and nonfarm credit needs of the borrowers.

c.

The credit limit under the card may be fixed on the basis of the operational land holding, cropping pattern and scales of finance as recommended by the District Level Technical Committee (DLTC) and approved by the State Level Technical Committee (SLTC). Wherever the DLTC/SLTC have not recommended scale of finance for any crops or in the opinion of the bank, has recommended lower than the required amount, the bank may fix appropriate scale of finance for the crop. For fixation of Credit Card limits, operational land holdings will include the leased in land and exclude leased out land.

d.

Banks may at their discretion fix appropriate sub-limits within the overall credit limits sanctioned, taking into account the seasonality in credit requirements.

Validity / Renewal: a.

The Credit Card should normally be valid for 3 years subject to an annual review.

b.

The review may result in continuation of the facility, enhancement of the limit or cancellation of the limit/withdrawal of the facility, depending upon the performance of the borrower.

c.

The aggregate credits into the account during the 12 month period should at least be equal to the maximum outstanding in the account.

d.

No drawal in the account should remain outstanding for more than 12 months.

e.

When the bank has granted extension and / or reschedulement of the period of repayment on account of natural calamities affecting the farmer, the period for reckoning the status of operations as satisfactory or otherwise would get extended together with the extended amount of limit. When the proposed extension is beyond one crop season, it would be desirable to transfer the aggregate of debits for which extension is granted to a separate term loan account with stipulation for repayment in instalments.

296 - III

8.

Security / Margin: a.

9.

Security / margin norms etc. should be in conformity with the guidelines issued by RBI / NABARD from time to time

Maintenance and operations in the account: a.

The issuing branch would maintain the ledger account in respect of each KCC account and all the operations in the account will be generally through the issuing branch. However, banks may, at their discretion permit operations through other designated branches, taking into account the convenience of the clientele.

b.

Withdrawal in the card account will be through withdrawal slips / cheques accompanied by the Kisan Credit Card and Pass Book. Withdrawal slips / cheques of a different colour could be issued to distinguish the KCC account holders.

c.

In the case of cooperatives, the primary KCC account will be maintained at the PACS concerned, and the cards will be issued by the DCCB branch / PACS. Cash withdrawals will be permitted at the DCCB issuing / designated branch / PACS only. All transactions at the DCCB branch level will have to be reported to the PACS concerned to enable them to make appropriate entries in the ledger account of the card holder. The DCCB branch and the PACS concerned will have to develop appropriate system for proper accounting of entries and reconciliation.

10. Rate of Interest: a.

Banks may apply the same rates of interest as are applicable to crop loans. The interest rates are to be fixed with reference to aggregate credit limit sanctioned to an individual. Even if separate limits were sanctioned for Kharif and Rabi crops, interest is to be charged at the rate applicable based on total amount already sanctioned and levied with reference to the amount actually drawn on product basis.

11. Application of Prudential Norms: a.

The KCC facility being in the nature of cash credit accommodation for agricultural purposes, the prudential norms as applicable to such facilities would apply to the KCC accounts. In other words, the Credit Card account would be deemed to be a Non-Performing Asset (NPA) if it remains out of order for a period of two crop seasons. An account will be treated as out of order in the following circumstances: i.

There are no credits in the account continuously for two crop seasons as on the date of balance sheet Or ii. The outstanding remains continuously in excess of the limit for two crop seasons as on the date of balance sheet Or 297 - III

iii. The credits in the accounts are not sufficient even to cover the principle amount debited in respect of the account for two crop seasons. 12. Reporting of transactions in LBRs: a.

The instructions of the RBI in regard to reporting of transactions under cash credit accounts in LBRs wide their circular No. LBS(SAA)BC.139/6590/91 dated 18 June 1991 as modified from time to time, would apply mutatis mutandis to the KCC accounts. In this connection the following aspects may be kept in view: i.

The Credit limits sanctioned / likely to be sanctioned to the borrowers under the KCC may be included in the Branch Credit Plan and reported in LBR-1. ii. All debit entries (excluding those relating to interest charges) may be reported in LBR 2 as and when such transactions take place. iii. Renewal of existing limits should not be computed as fresh disbursement. iv. The amount outstanding in the KCC account may be taken as credit being provided for target purpose. 13. Operational Norms for refinance support from NABARD under KCC for SAO: a.

NABARD provides short term refinance to State Co-operative Banks (SCBs) on behalf of District Central Co-operative Banks (DCCBs) under Section 21(1)(i) of the NABARD Act, 1981 against their financing of Seasonal Agricultural Operations (SAO)by way of loans and cash credit. With the introduction of Kisan Credit Card System (circulated vide out circular letter No. NB.PCD (OPR) / 794 / A.137 (Spl.) / 98 99 dated 14 August 1998), the production credit for SAO disbursed by SCBs / DCCBs under the Scheme would also be eligible for refinance support from NABARD in this connection. Since the operations under the KCC Scheme are envisaged to be in the nature of cash credit, the instructions on computation of Demand , Collection and Balance (DCB) position, maintenance of Non overdue Cover (NODC). Financing of small / marginal farmers, etc. conveyed vide NABARD circular letter No. NB.PCD(OPR)/5980/A. 135/9091 dated 17 December 1990 will also be, mutatis mutandis applicable for advances made under the KCC Scheme. NABARD has further modified the KCCS and the modifications are spelt out in the NABARD circular dated 3 May 2000 which is given in the Annexure-2 to this Chapter.

14. Maintenance of separate accounts for SAO under KCC: a.

Although under the KCC Scheme, production credit for SAO, advances for allied activities, non farm activities and consumption purposes can be covered, only the production credit for SAO is eligible for refinance from NABARD under the ST (SAO) credit limits. As such, the banks will be required to maintain separate details of sanctions and accounts for operations on credit limits for SAO purposes under the KCC Scheme so as to facilitate submission of drawal applications for obtaining refinance from NABARD in respect of eligible loans and reporting such loans in the monthly NODC statements for ST (SAO) loans and advances. The short term loans outstanding 298 - III

for financing ancillary activities relating to crop production such as maintenance of agricultural machinery implements, electricity charges etc., under the KCC Scheme are also eligible for refinance from NABARD under ST (SAO) credit limits. 15. Computation of DCB positions: a.

The maximum outstanding under ST (SAO) loans in the KCC accounts reached during the financial year may be treated as Demand, and the outstanding in the unrenewed KCC accounts may be reckoned as Overdues. The percentage of Overdues to Demand may be calculated accordingly. In this connection it is clarified that for the purpose of renewal of accounts, as stipulated under Para 7 of the KCC Scheme, the aggregate credit into the account during the 12 months period should at least be equal to the maximum outstanding in the account and no drawal in the account should remain outstanding for more than 12 months.

16. Maintenance of Non-Overdue Cover (NODC): a.

The outstanding in the KCC accounts against PACS for financing SAO excluding the amount outstanding under the unrenewed KCC accounts will be reckoned as NODC for the purpose of borrowings from NABARD. Thus for the purpose of working out the aggregate NODC for borrowings from NABARD for SAO, the non overdue short terms agricultural loans outstanding under the normal loan accounts plus the non overdue outstandings under the normal cash credit accounts under the KCC Scheme against PACS will constitute the NODC.

17. Financing of Small Farmers (SF) / Marginal Farmers (MF): a.

For the purpose of compliance with the condition in regard to financing of SF / MF, the maximum outstanding under production credit for SAO reached in the KCC accounts of such farmers during the year April to March should be reckoned as loans issued to SF/MF.

18. KCC-Payment of interest on Credit Balances: a.

th

Vide NABARD Circular Ref. No. NB. PCD (KCC)/H-436/KCC-1/2000-01 dated 24 Oct.2000 and RBI circular RPCD, PLFS, 100/05.05.09/99-2000 dated June 20, 2000. Cooperative Banks / Regional Rural Banks have been permitted, at their discretion, to pay interest at a rate based on their perception and other related factors on the minimum credit balances in the cash credit accounts under the Kisan Credit Cards of farmers during the period from 10th to the last day of each calendar month (as the case may be).

19. KCC-Sugar Cane Borrowers: a.

Usually the sugarcane farmers are to be assisted by PACs and the proceeds from the sugar mills are routed through branches of DCCBs which in turn is required to be passed on to the PACs for necessary adjustment towards loan account as well as payment of the balance to the SB account of the borrower. In this way, there may not be hitch in issue of KCC to Sugarcane farmers or in realization of proceeds due under loan accounts. 299 - III

b.

Loan limits to Sugar Cane farmers are to be fixed based on land records, Scale of finance fixed by DLTC/SLTC (mill wise for registered sugarcane farmers) etc., Issue of loans to registered sugarcane farmers should be on the basis of registration with the concerned mill and not on the certificate of a Cane Assistant who is no way connected to certification/issue of loans.

20. Procedures to be followed at DCCB Level: a.

The CCBs have to identify the PACs for implementation of the Scheme. The identification of the PACS should be carried out based on the performance of the PACs for the past 3 years in both issues and recoveries, maintenance of records, availability of own resources, overall performance etc.

b.

The assessment of PACs in selecting the farmers who is eligible to receive KCC has to be verified card-wise by the Supervisors of the DCCBs.

c.

The DCCBs, through the branches have to provide special cash credit limit to the PACs for operating under KCC Scheme. The cash credit limit to the PAC can be fixed based on the total amount of cash credit limits sanctioned by the PACs under the KCC Scheme to their members for the year as a whole.

d.

The PACS have to be provided with Pass Book and cheque book by the DCCBs for operating the cash credit account.

e.

The rate of interest to be charged by the DCCB on the CC account of the PACS on half-yearly rests as applicable to crop loans. No drawal in the account should remain outstanding for more than 12 months.

f.

A comparative analysis of the Operational Issues and the Clarifications given by NABARD on KCC is given in Annexure-3 to this Chapter.

g.

In respect of failure of crops grown by the farmers due to natural calamities like drought, flood, riot, etc., the Crop Insurance Scheme takes care of providing sufficient insurance in respect of specified/ notified crops.

h.

Similarly insurance cover has been made available to farmers also in case of their death or injury due to accidents. The NABARD in its circular No. NB.PCD (KCC)/ H.182/KCC 11A/01-02 dated 14.06.2001 introduced the scheme of providing insurance to the farmers in the event of death due to accident, total disability, loss of limbs and eyes. Accordingly premium is collected from the farmers at a nominal rate of Rs.15 per year from the borrower and Rs.30 to be contributed by the PACS concerned on behalf of the borrower.

i.

The insurance coverage made available to the farmers as per NABARD circular above, is as follows: i. Death due to accident (within 12 month of accident) caused by outward violent and visible means 300 - III

: Rs.50,000/-

ii. Permanent total disability iii. Loss of two limbs or two eyes or loss of one limbs or one eye iv. Loss of one limb or one eye j.

: Rs.50,000/: Rs.50,000/: Rs.25,000/-

The DCCBs will have to arrange for insurance cover by choosing any one public sector insurance company and purchase of blanket policy to cover all the borrowers who have availed loans from PACS. It is left to the DCCBs to recover the cost of insurance premium from the PACS (both borrower's share and PACS share) or to shoulder a part of the insurance burden along with the borrower and PACS.

21. Annexure/s: a. The following Annexures are appended to this Chapter: Annexure 1 : Specimen of KCC and the Pass Book Annexure 2 : KCC Modifications NABARD Circular dated 03.05.2000 Annexure 3 : KCC - Operational Issues & Clarifications for NABARD

301 - III

Annexure 1 to Chapter 23 SPECIMEN OF KISAN CREDIT CARD CUM PASS BOOK

Issuing Bank: Valid upto Valid for operation at _______ Branch / (es) / PACS ______ Name of the Card Holder : Father’s / Husband’s Name : Name of the PACS : (incase of coops.) Address : Name of the village Block P.O.

Signature of issuing Authority with seal

Photograph

Signature / Left Hand thumb impression of the card Holder KISAN CREDIT CARD Serial No: Operational Land holding: (in hectares)

Irrigated

Un-irrigated

Owned: Leased in: Total Less : Leased out Total C.C A/c No.: Ledger Folio: 302 - III

Limits sanctioned: Sub-Limit if any: Operative Period:

Signature of Issuing Authority

Signature of Secretary with seal of PACS (incase of Cooperatives)

PASS BOOK PARTICULARS OF TRANSACTIONS Date

Particulars

Debit

Credit

303 - III

Balance

Signature of Bank / PACS Official

Annexure-2 to Chapter-23 NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT Ref. No. NB.PCD(OPR)/336/A.137(Spl.)/20002001 Circular No.03 / 2000 2001

03 May 2000

The Managing Director All State Coop. Banks The Chairman All Regional Rural Banks

Dear Sir, Kisan Credit Card Scheme Modifications Please refer to our circular letter No. NB.PCD (OPR) 794/A.137(Spl.)/98-99 dated 14 August 1998 forwarding therewith a Model Kisan Credit Card Scheme with a request to introduce a suitable KCC Scheme in your area of operation. Operational guidelines were issued to SCBs and RRBs vide our circular letter Nos. NB.PCD(OPR) / 662 & 662A/A.137 (spl)/1999-2000 respectively both dated 26 May 1999. Since then the Scheme has made rapid strides and has been successfully operationalised in several States. More than 50 lakh cards have been issued till 31 March 2000 by all agencies of which 37.50 lakh and 1.80 lakh cards/cards cum Pass Books have been issued by Cooperative banks and RRBs respectively. Following the Hon'ble Finance Minister's Budget announcement for issue of additional 75 lakh Kisan Credit Cards by banks during the year 2000-2001, we have already communicated state-wise targets both for cooperatives (45 lakh cards) and RRBs (5 lakh cards) to be issued additionally by them and the bank-wise targets would be finalized and communicated by our RO concerned to them shortly. The banks are requested to take necessary steps to ensure that the targets given to them for issue of additional cards are achieved. In some of the following discussions, certain operational issues have also been raised viz., removal of the minimum floor limit of Rs.5000/- suggested under the model Scheme as eligibility for issue of Kisan Credit Cards and also coverage of medium / long term investment credit under the Scheme so as to improve the coverage of rural borrowers and have synergic impact at the level of the farmers. These issues have been examined by using consultation with RBI and we have to advice as under. i.

It has since been decided to dispense with the floor limit for issue of Kisan Credit Cards and banks at their discretion may issue Kisan Credit Cards for any amount below Rs. 5000/- also, keeping in view their operational convenience.

ii. As regards the feasibility of inclusion of medium and long term investment credit component in the credit limit fixed under the Kisan Credit Cards, we clarify as under: a.

Unlike production credit, disbursement under term loan is by and large, made in one or more installments depending upon the type of assets purchased and repayment period in these cases 304 - III

is fixed depending upon the surplus generated by the investments and useful life of the assets. Hence there is little scope for frequent transactions justifying the inclusion of term loan component in the credit limit fixed under the Kisan Credit Cards. b.

There are also other aspects such as provision of margin money, variations in repayment period, validity of the Credit Card, collateral and documentation requirements, etc. in respect of term loans which may be difficult to be dovetailed into the mechanism of cash credit facility which KCC basically seeks to provide. If term loan is to be covered, the card holder may have to be required to offer mortgage / collateral to the banks, which may be cumbersome and delaying the whole process.

c.

Moreover, the quantum involved in the acquisition of agricultural assets through term loans could be quite substantial which may require critical appraisal. It may also not provide may tangible benefit to the borrowers since it is one time sanction and disbursed in installements.

iii. In view of the above, both RBI and NABARD are of the view that it may neither be desirable nor feasible to include term (investment) loan component under the KCC Scheme. 3.

The contents of this circular letter may please be brought suitably to the notice of DCCBs (by SCBs) and your controlling offices and branches.

4.

Kindly acknowledge receipt.

Yours faithfully-Sd(G.K.Agrawal) Chief General Manager

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Annexure 3 to Chapter 23 Kisan Credit Card Scheme Operational Issues & Clarifications by NABARD Sl No

Issues

1.

Eligibility Criteria

a.

Satisfactory dealings by borrowers: Some of the banks have stipulated a minimum number of 2-3 years satisfactory dealings for the borrowers to be eligible for KCC

Clarifications

Kisan Credit Card Scheme aims primary to cater to the short term credit requirements of the farmers and the banks may provide Kisan Credit Cards to farmers who are eligible for sanction of production credit (crop loans). As such, the same eligibility norms adopted by banks under the conventional Crop Loan System to existing as well as new borrowers may be followed for issue of KC Cards also.

b.

Opening of SB A/c. Opening of SB A/c. should not be a precondition for issue of KC cards. However, in case KCC holder desires on his own to Some banks insist on opening of Saving Bank Accounts before issuing KC Cards open SB A/c. he may be issued allowed to do so.

c.

KC Cards to new farmers: KC cards may be issued to the farmers approaching for production credit for the first time.

If such a farmer is considered eligible for sanction of production credit, he may be issued KC Card.

d.

Minimum land holding: A few banks have fixed minimum land holding as eligibility criteria for issue of KC Cards.

The Scheme provides for issuance of KC cards to all farmer borrowers eligible for crop loan facility. It is clarified in terms of NABARD's circular letter No. NB.PCD(OPR)/366/137 (Spl)/2000-2001 dated 3 May 2000 that banks can now issue KC cards for any amount below Rs. 5000 also, keeping in view their operational convenience. Hence, it may not be proper to insist on the minimum land holding area.

e.

Non-availability of KCC facility for rainfed crops: Some banks have issued instructions to issue cards to farmers with irrigated lands only. Hence the farmers with rainfed crops are deprived of the facility under KCC.

The Scheme provides for insurance of KC cards toall farmer borrowers who are eligible for crop loan facility. Even in rainfed mono-crop areas the farmers should have the flexibility in operations and KCC Cards may be issued to farmers with rainfed crops.

f.

Financing illiterate farmers: At present some banks are not extending KCC facility to illiterate farmers.

Since there are no restrictions on sanction and disbursement of loans to illiterate farmers under normal crop loaning system such farmers may be issued KC Cards with suitable safeguards.

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2. a.

Fixing Credit Limits IMBP: DCCBs have fixed a maximum loan limit per borrower. Scale of Finance:

b.

Scale of finance adopted is less than the actual requirement

3.

Interest RatesCharging of interest at quarterly / Half yearly /Annual rests: Banks debit interest rate at half yearly or quarterly basis amounting to compounding of interest under KCC accounts.

The banks are required to charge interest in respect of KCC Accounts as applicable to crop loans as per the guidelines of the RBI. As per the present interest rate guidelines issued by RBI, the banks should not compound the interest in the case of current dues in respect of direct agricultural advances. Hence there shall be no compounding of interest under KCC accounts until the account becomes overdue.

b.

Charging higher interest rates: Earlier, Kharif and Rabi loans were sanctioned separately and interest rates fixed on slab basis i.e., a) up to Rs.2 lakhs etc. After introduction of KCC, interest is charged at higher rate than earlier.

The banks are required to charge the same rate of interest on the credit limit under KCC as is being charged on crop loans. The interest rates are to be fixed with reference to aggregate credit limit sanctioned to an individual even if separate limits were sanctioned for Kharif and Rabi. Interest is to be charged at the rate applicable to the appropriate slab, based on total amount already sanctioned and levied with reference to the amount actually drawn on a product basis.

4. a.

Disbursement at PACS level In some banks, the disbursements under KCCS are made by the DCCB branches only. The disbursements could be made at PACS level also. Some banks allow cash disbursements only at DCCB's branches.

The Model Scheme provides for disbursements at issuing/designated branch / DCCB PACS. Cash disbursements may be permitted at PACS level also on the lines of the practice followed in respect of normal crop loans.

5.

Fixation of Due dates / Seasonality discipline

a.

The due dates for repayment of loans are being fixed on old pattern of lending

a.

Under the Scheme, while fixing the limit, the banks may take into account, the entire production credit requirements of the farmers for the full year on the basis of the operational land, holding, cropping pattern and scale of finance as recommended by DLTC/SLTC. Individual Max Borrowing Power, fixed by the bank in respect of crop loans would be applicable to KCC accounts also. If need be, the IMBP may be reviewed to take care of the credit requirements under KCC Scheme.

The credit extended under KCC Scheme would be in the nature of a revolving cash credit providing for any number of drawals and repayments. Each drawal is repayable within a maximum period of 12 months. Any outstandings beyond this maximum permissible period is to be treated as overdues.

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b.

As the crop loans were sanctioned separately as kharif and Rabi loans no collateral was sought as a security when the crop loans were upto a limit of Rs.25000/-. In the case of KCC Scheme, the farmers are expected to bring a collateral when the loan is more than Rs.25000/-

The existing security norms of RBI as applicable to crop loans are to be followed under KCC also.

6.

Levy of high Service Charges Some banks levy service charges to the extent of Rs. 100 to Rs.300 per card.

Issue of KC Cards may be taken as a refinement in the loan disbursement procedure which may be advantageous both for the banks and the borrowers. As such, the banks may consider not to levy any service charges on the issue of cards under the Scheme.

7.

Changing of Commission Some of the RRBs are charging 2% commission in case of withdrawal from designated branches other than issuing branch.

The Scheme provides that operations on the KC Cards may be at issuing branch and / or at the discretion of the bank through other designated branches. Since levy of commission / other charges for operations at designated branches other than issuing branch will be a restrictive feature and will not be keeping with the spirit of the Scheme, the banks may review and consider to waive such charges.

8.

Credit balance in KCC cash credit account

a.

Whether interest on credit balance in KCC cash credit account can be paid.

Banks were advised vide our Circular letter No. NB.PCD (KCC) / H.436/KCC-11/1999-2000 dated 24 October 2000that they may at their discretion pay interest at a rate based on their perception and other related factors on the minimum credit balances in the cash credit accounts under the Kisan Credit Cards of farmers during the period from 10 to the last day of each calendar month.

9.

Permitting operations in the accounts despite part repayment

a.

Whether it would be in order to permit drawals to the extent of the undrawn balance in the limit sanctioned to the account holder, in case where only a part of the loan amount has been repaid.

KCC accounts are basically in the nature of revolving cash credits and as such there may not be any objection to permit drawal on the unutilized portion of the sanctioned limit even after making part repayment subject however to the fact that there is no overdue. In other words, in cases where more than 12 months have elapsed from the time the drawal was made and the same has not been fully repaid, the fresh drawals may not be permitted till overdues are cleared and the account is regulated.

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10.

Classification of operations under Kharif / Rabi OPP, OCC, NPDP, etc.

The Model Scheme provides for fixing sub-limits within the overall credit limit sanctioned. KCC accounts are basically Crop. Loan Accounts. In case a KCC borrower cultivates crops falling under different seasons/categories Kharif/ Rabi (OPP, OC, NPDP, etc.), sub limits may have to be fixed to enable proper accounting of drawals and repayments. At the time of each drawal/repayment, the borrower may have to be, in such cases, requested to indicate the relevant crop category/ purpose to enable booking of the transaction under the respective sub limit.

a.

As the Scheme does not provide for crop wise disbursement, what should be the procedure to be followed to classify the operations under kharif/ Rabi OPP, OC, NPDP etc.

11.

Computation of DCB

a.

Whether the stipulation that no drawal in the account should remain outstanding for more than 12 months in the Model Scheme Since KCC accounts are cash credit accounts, computation of Demand is to be based 12 months, it is not necessary for the card holder to repay the loan in full before the cut-off date/due date for repayment for such crop? Further, how the demand should be calculated in respect of drawals which are yet to complete the cycle of 12 months

b.

As per NABARD circular dated 26 May 1999, the maximum outstanding under loans in KCC accounts reached during the year (July-June) may be treated as demand and the outstanding in the unrenewed KCC accounts / and the drawals outstanding for more than 12 months may be reckoned as overdues. However, the problem arises in calculation of DCB including sugarcane, as due date for repayment of sugarcane may fall after 15 months.

In cases where the duration of the crop for which a credit limit sanctioned under KCC exceeds 12 months, the banks may reckon the Demand, Collection and Balance as and when the Demand actually falls due for repayment i.e., after taking into account the due date fixed for that crop.

12.

Possibility of inflation of NODC

a.

As the card holders can operate at both the DCCB's branches and PACS, the possibility of excess drawals /inflating Non- overdue Cover cannot be ruled out.

For permitting drawals to SCB on behalf of any DCCB by NABARD, the NODC is verified only with reference to DCCB's Non-overdue outstandings against PACS. The mirror Accounts are expected to be maintained at DCCB and PACS level. Any drawal / repayment at PACS level is expected to be

Outstanding reached in the limit / Account and for reckoning of overdues, a maximum period of 12 months from the date of drawal is allowed. If however, any cut-off date/due date for repayment is fixed for a particular season, all drawals for that crop/season, even though not completing 12 months could be treated as fallen due for payment and demand / overdue worked out accordingly

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reflected in the concerned A/c. at DCCB level within a reasonable period. Similar, arrangements for proper reporting / monitoring would have to be made where operations are allowed at more than one branch. Also, as and when drawals / repayments are made, these are required to be entered in the Pass Book issued to the borrower under proper authentication.

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CHAPTER - 24 CROP INSURANCE SCHEME 1.

General: a.

2.

Agriculture Insurance Company of India Limited (AIC of India Ltd.) was incorporated under the Indian Companies Act 1956 on 20th December, 2002 with an authorised share capital of INR 15 billion and paid up capital of INR 2 billion. AIC commenced business from 1st April, 2003 for the exclusive purpose of providing crop insurance to the farmers throughout the country. The prominent insurance schemes formulated by AIC are briefed hereunder:

Scheme - 1: National Agricultural Insurance Scheme (NAIS): a.

The objectives of the NAIS are as under:i.

To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases. ii. To encourage the farmers to adopt progressive farming practices, high value inputs and higher technology in Agriculture. iii. To help stabilise farm incomes, particularly in disaster years. b.

Crops Covered: Food crops (Cereals, Millets & Pulses) Oil Seeds, annual Commercial/annual Horticultural crops (sugarcane, cotton, potato, onion, chilly, turmeric, ginger, jute, tapioca, banana, pineapple have been covered almost in 25 states/UTs in our country. More crops will be added in future.

c.

Farmers to be covered: All farmers including sharecroppers, tenant farmers growing the notified crops in the notified areas are eligible for coverage. The Scheme covers following groups of farmers: On a compulsory basis: All farmers growing notified crops and availing Seasonal Agricultural Operations (SAO) loans from Financial Institutions i.e. Loanee-Farmers. ii. On a voluntary basis: All other farmers growing notified crops (i.e., Non-Loanee farmers) who opt for the Scheme. i.

d. Risks covered & exclusions: Comprehensive risk insurance will be provided to cover yield losses due to non-preventable risks, viz.: i. ii. iii. iv.

Natural Fire and Lightning Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc. Flood, Inundation and Landslide Drought, Dry spells

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v.

Pests/ Diseases etc.

e.

Losses arising out of war & nuclear risks, malicious damage & other preventable risks shall be excluded.

f.

Sum Insured / Limit Of Coverage: The Sum Insured (SI) may extend to the value of the Threshold Yield (TY) of the insured crop at the option of the insured farmers. However, a farmer may also insure his crop beyond value of Threshold Yield level up to 150% of Average Yield (AY) of notified area on payment of premium at commercial rates. In case of Loanee farmers the Sum Insured would be at least equal to the amount of crop loan advanced. Further, in case of Loanee farmers, the Insurance Charges shall be an additionality to the Scale of Finance for the purpose of obtaining loan. In matters of Crop Loan disbursement procedures, guidelines of RBI / NABARD shall be binding.

g.

Premium Rates:

S.No.

Season

1

Khariff

2

Crops

Premium Rate

Bajra & Oilseeds

3.5% of SI or Actuarial rate, whichever is less

Other crops (cereals, other millets & pulses)

2.5% of SI or Actuarial rate, whichever is less

Wheat

1.5% of SI or Actuarial rate, whichever is less

Other crops (other cereals, millets, pulses & oilseeds)

2.0% of SI or Actuarial rate, whichever is less

Annual Commercial / Annual Horticultural crops

Actuarial rates

Rabi

3

Kharif & Rabi

h.

Premium Subsidy: Govt of India offers 5% premium subsidy for Loanee Non Loanee Small and Marginal farmers. Additionally in Tamil Nadu 45% Premium Subsidy is allowed for Loanee Small & Marginal and other farmers and 50 % subsidy for Non loanee S/M Farmers.

i.

Sharing Of Risk:Risk will be shared by Implementing Agency (IA) and the Government in the following proportion: i.

Food crops & Oilseeds: Claims beyond 100% of premium will be borne by the State and Central Governments equally. ii. Annual Commercial / Annual Horticultural crops: Implementing Agency shall bear all normal losses, i.e. claims upto 150% of premium. j.

Area Approach and Unit of Insurance: The Scheme is operated on the basis of 'Area Approach' 312 - III

i.e., Defined Areas for each notified crop for widespread calamities and on an individual basis for localised calamities such as hailstorm, landslide, cyclone and flood. The Defined Area (i.e., unit area of insurance) may be a Gram Panchayat, Mandal, Hobli, Circle, Phirka, Block, Taluka etc. as decided by the State/UT Govt. Individual based assessment in case of localised calamities, to begin with, would be implemented in limited areas on experimental basis initially and shall be extended in the light of operational experience gained. The District Revenue administration will assist Implementing Agency in assessing the extent of loss. k.

Seasonality Discipline:The broad seasonality discipline followed for Loanee farmers will be as under: Activity

Rabi

Kharif

Loaning period

April to September

October to next March

Cut-off date for receipt of Declarations

November

May

Cut-off date for receipt of yield data

January / March

July / September

l.

The broad cut-off dates for receipt of proposals in respect of Non-loanee farmers will be as under : i.

Estimation of Crop Yield: The State/UT Govt. will plan and conduct the requisite number of Crop Cutting Experiments (CCEs) for all notified crops in the notified insurance units in order to assess the crop yield. The State / UT Govt. will maintain single series of Crop Cutting Experiments (CCEs) and resultant Yield estimates, both for Crop Production estimates and Crop Insurance.

S.No.

Unit Area

Minimum number of CCEs required to be done

1.

Block

16

2.

Fhirka /

10

3.

Gram Panchayat comprising 4-5 villages

08

m. Levels of Indemnity & Threshold Yield: Three levels of Indemnity, viz., 90%, 80% & 60% corresponding to Low Risk, Medium Risk & High Risk areas shall be available for all crops (cereals, millets, pulses & oilseeds and annual commercial / annual horticultural crops) based on Coefficient of Variation (C.V.) in yield of past 10 years' data. However, the insured farmers of unit area may opt for higher level of indemnity on payment of additional premium based on actuarial rates. 313 - III

n.

The Threshold yield (TY) or Guaranteed yield for a crop in an Insurance Unit shall be the moving average based on past three years Average Yield in case of Rice & Wheat and five years Average Yield in case of other crops, multiplied by the level of indemnity.

o.

Nature of Coverage and Indemnity: If the 'Actual Yield' (AY) per hectare of the insured crop for the defined area [on the basis of requisite number of Crop Cutting Experiments (CCEs)] in the insured season, falls short of the specified 'Threshold Yield' (TY), all the insured farmers growing that crop in the defined area are deemed to have suffered shortfall in their yield. The Scheme seeks to provide coverage against such contingency.

'Indemnity' shall be calculated as per the following formula: Shortfall in Yield X 100 or Sum Insured for the farmer Threshold yield { Shortfall in Yield = 'Threshold Yield - Actual Yield' for the Defined Area }. p.

Indemnity In Case Of Localised Risks:Loss assessment and modified indemnity procedures in case of occurrence of localized perils, such as hailstorm, landslide, cyclone and flood where settlement of claims will be on individual basis, shall be formulated by IA in coordination with State / UT Govt.

q.

The loss assessment of localized risks on individual basis will be experimented in limited areas initially and shall be extended in the light of operational experience gained. The District Revenue administration will assist IA in assessing the extent of loss.

r.

Procedure for Approval & Settlement of Claims: Once the Yield Data is received from the State/UT Govt. as per the prescribed cut-off dates, claims will be worked out and settled by IA. The claim cheques along with claim particulars will be released to the individual Nodal Banks. The Banks at the grass-root level, in turn, shall credit the accounts of the individual farmers and display the particulars of beneficiaries on their notice board. In the context of localised Phenomenon viz. Hailstorm, landslide, cyclone and flood, the IA shall evolve a procedure to estimate such losses at individual farmer level in consultation with DAC/State/UT. Settlement of such claims will be on catastrophic individual basis between IA and insured.

s.

Management of the Scheme, Monitoring and Review:In respect of Loanee farmers, the Banks shall play the same role as under CCIS. In respect of Non-Loanee farmers, Banks shall collect the premium along with the Declarations and send it to IA within the prescribed time limits. However, in areas where IA has requisite infrastructure, a non-loanee farmer will have option to send premium along with Declaration directly to IA within the time limits.The Scheme will be implemented in accordance with the operational modalities as worked out by IA, in consultation with GOI, Department of Agriculture & Co-operation.

t.

Role Play of Various Agencies: i.

Role & Responsibilities of Financial Institutions (FIs): For the purpose of the Scheme, the 314 - III

Scheduled Institutions engaged in disbursing SAO loans as per the relevant guidelines of NABARD / RBI will be reckoned as Financial Institutions. Each scheduled Commercial bank shall with concurrence of IA fix Nodal points which would deal with IA on behalf of branches in the division / district / state. The Nodal points for Commercial banks will be minimum one level above the Branch office. The Nodal points for Cooperative banks will be DCC Banks and those for RRBs, their Head Office. ii. Nodal points would be designated for implementation and these banks would attend to the following functions:  On receipt of the communication on notification of crops and areas from the State Govt./ UT, the Nodal banks will communicate the same to the branch offices under their control.  The FIs would advance additional loan to Loanee farmers to meet requirement of Insurance charges / premium as applicable upto the extent of crop loan.  Each such Nodal point would submit crop-wise, defined area-wise, monthly Crop insurance Declarations to the Office of IA, in the prescribed format, along with Insurance charges payable on all crop loans coming under the purview of the Scheme in case of Loanee farmers and based on Proposals received in case of other farmers.  The Apex FIs shall issue appropriate instructions to Nodal banks as well as crop loan disbursing branches to ensure smooth functioning of the Scheme.  For insurable crop loans disbursed under Kissan Credit Card (KCC), the FIs shall maintain all controls and records as required under the Scheme. iii. Other Responsibilities of FIs will be:  To educate the farmers on the Scheme features.  To guide the farmers in filing the proposal forms and collecting the required documents.  Following the guidelines while disbursing crop loans and ensuring proper end-use of loan disbursed.  To prepare the consolidated statements for Loanee and Non-Loanee members, forwarding the same to the branch along with the premium amount.  Maintaining the records of proposal forms, other relevant documents, statements for the purpose of verification by the district committee or representative of the insurer. iv. Special Conditions for FIs / Nodal Banks / Loan Disbursing Points:  FIs will submit Crop Insurance Declarations to IA on monthly basis, where sum insured is on the basis of amount of loan disbursed and within one month time from cut-off date for receipt of proposals, where sum insured is on any other basis.  Claims received by the Nodal points, will be remitted to individual branches/PACS with all 315 - III

particulars within seven days and these branches/PACS will in turn credit the Accounts of beneficiary farmers within seven days. The list of beneficiary farmers with claim amount will be displayed by the branch / PACS.  The IA will have access to all relevant records/ledgers at the Nodal point/Branch/PACS at all times.  The IA will be provided with all the norms / guidelines relating to SAO crop loan disbursements as formulated by RBI / NABARD. Any amendments / simplification of procedures / norms from time to time will be duly made available to IA by the concerned institutions. In the absence of such communication, IA shall be free to not take cognisance of such modifications.  In case a farmer is deprived of any benefit under the Scheme due to errors / omissions / commissions of the Nodal Bank/Branch/PACS, the concerned institutions only shall make good all such losses.  If the farmer is adopting mixed cropping, the sum insured of a crop should be on the basis of its proportionate area in the mixed cropping. v.

Role & Responsibilities Of State Government / UT Administration :  The State Government / UT will notify crop wise notified areas and premium rates as applicable (in case of commercial/horticultural crops) well in advance of each crop season.  The State Government / UT administration would, in advance provide to the IA, Unit Areawise yield data of immediate past 10 years for all crops notified under the Scheme.  To the extent possible, the State Government / UT administration would notify smaller defined areas for various crops, keeping in mind that smaller areas will be more homogeneous and would be more reflective of all crop losses, including localized perils like hailstorm, landslide etc.  The State Government shall issue the requisite Notification and communicate to all participating FIs during every crop season. The Notification of the State Government may essentially contain the following information:  Crops and Defined areas notified in various districts.  Premium rates and subsidy, if and as applicable for various groups of farmers and crops.  The cut-off dates for collection of proposals and remittance of premium with Crop Insurance Declarations to IA.  The State / UT administration will release it's contribution to Corpus Fund as per the scale and dates fixed by MOA, the Government of India.  The State / Union Territory administration would ensure that Crop Estimation Surveys (CES) in general, and estimation procedures in case of multiple picking crops in particular be strengthened in order to furnish accurate estimates of yield. Further, the State / UT administration will assist IA in assessing the extent of crop loss of individual insured

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farmers due to operation of localised perils.  To set up various monitoring Committees as required.  The final Yield data in the standard format for all Unit Areas for notified crops for the crop season will be furnished to IA within the stipulated date.  In case, the State /UT administration fail to furnish yield data based on requisite number of CCEs or fail to furnish yield data within the stipulated date, responsibility of such claims, if any arising out of such data will totally rest with State / UT Administration.  The IA will be allowed unrestricted access to records of CCEs at grass root / District / State level.  State Government / UT Administration shall set up District Level Monitoring Committee (DLMC), headed by the District Magistrate. The members will be District Agriculture Officer, DCCB, Lead Bank representative and IA. The committee will monitor implementation of Scheme by providing fortnightly crop condition reports and periodical reports on seasonal weather conditions, loans disbursed, extent of area cultivated, etc. The DLMC shall also monitor conduct of CCEs in the district.  As the Scheme is optional to Non-loanee farmers, adequate publicity will be provided to ensure maximum coverage of farmers through all means available at the disposal of State / UT administration. vi. Role And Responsibilities Of The Implementing Agency (IA):  Implementing Agency of the Scheme.  The IA shall open separate Accounts to deal with Corpus Fund and also premiums received under the Scheme.  Building up crop yield database and preparation of Actuarial premium rates through a Professional agency.  Underwriting and Claims finalization.  Responsibility for claims to the extent mentioned in the Scheme.  Negotiating Re-insurance arrangement in the international market.  Co-ordination in organizing training, awareness, publicity programmes.  Providing returns / statistics to the Government of India.  Examining and exploring possibilities of setting up separate agency for implementation of the Scheme. vii. Duties Of Farmers :  As the Scheme is compulsory for all Loanee farmers availing SAO loans for notified crops, it is mandatory for all Loanee farmers to insist on coverage of all eligible loans (as per the Scheme provisions) under the Scheme. 317 - III

 If the farmer is adopting mixed cropping, the proportion of different crops in a mixed cropping will have to be compulsorily declared.  In respect of Non-loanee farmers, the Proposals will be accepted only upto stipulated cutoff date, which will be decided in consultation with State Government / UT Administration.  The important duties in case of Non-loanee farmers are as follows:  The farmer desiring coverage should have an Account in the branch of the designated bank.  The farmer must approach the designated branch / PACS and submit the proposal form in the prescribed format.  The farmer must provide documentary evidence in regard to the possession of cultivable land (copy of the pass book, 7/12 / land extract or land revenue receipt should be enclosed). The farmer must furnish area sown confirmation certificate, if required. 3.

Scheme - 2: Weather Based Crop Insurance Scheme (WBCIS): a.

Weather Based Crop Insurance aims to mitigate the hardship of the insured farmers against the likelihood of financial loss on account of anticipated crop loss resulting from incidence of adverse conditions of weather parameters like rainfall, temperature, frost, humidity etc.

b.

While Crop Insurance specifically indemnifies the cultivator against shortfall in crop yield, Weather based Crop Insurance is based on the fact that weather conditions affect crop production even when a cultivator has taken all the care to ensure good harvest. Historical correlation studies of crop yield with weather parameters help us in developing weather thresholds (triggers) beyond which crop starts getting affected adversely. Pay-out structures are developed to compensate cultivators to the extent of losses deemed to have been suffered by them using the weather triggers. In other words, Weather based Crop Insurance uses weather parameters as 'proxy' for crop yields in compensating the cultivators for deemed crop losses.

c.

Operation: Weather based Crop Insurance Scheme (WBCIS) operates on the concept of “Area Approach” i.e., for the purposes of compensation, a 'Reference Unit Area (RUA)' shall be deemed to be a homogeneous unit of Insurance. This RUA shall be notified before the commencement of the season by the State Government and all the insured cultivators of a particular insured crop in that Area will be deemed to be on par in the assessment of claims. Each RUA is linked to a Reference Weather Station (RWS), on the basis of which current weather data and the claims would be processed. Adverse Weather Incidences, if any during the current season would entitle the insured a pay-out, subject to the weather triggers defined in the 'Pay-out Structure' and the terms & conditions of the Scheme. The “Area Approach” is as opposed to “Individual Approach”, where claim assessment is made for every individual insured farmer who has suffered a loss.

d.

Who Can Join: All Cultivators (including sharecroppers and tenant cultivators) growing the crop (insurable under the scheme) in any RUA in the Pilot areas shall be eligible for coverage. However, 318 - III

the Scheme is mandatory for all Loanee Cultivators of Lending Banks/ Financial Institutions who have Sanctioned Credit Limit for the particular crops and optional for 'Others'. e.

Sum Insured: Amount of insurance protection (sum insured) is broadly the cost of inputs expected to be incurred by the insured in raising the crop. Sum insured is pre-declared per unit area (Hectare) by AIC at the beginning of every crop season, in consultation with experts in State Government; and it may be different for different crops in different RUAs. Sum insured is further distributed under the key weather parameters used in the insurance in proportion to the relative importance of the weather parameters. In case of Loanee cultivator, the sum insured per crop is calculated by multiplying the sum insured (pre-declared cost of inputs) with the crop-specific 'Acreage' declared in the Loan Application Form by the Loanee cultivator for the purpose of “Maximum Borrowing Limit (MBL)” fixed for him by the Lending Bank. ii. In case of Others (Non-Loanees), the sum insured per crop is calculated by multiplying the sum insured (pre-declared cost of inputs) with the 'Acreage' expected to be sown / planted under the particular crop and mentioned in the 'Insurance Proposal Form' There are many advantages of Weather Based Crop Insurance Scheme (WBCIS) which makes it beneficial for cultivators in their production risk management. The major advantages / benefits are: i.

 Trigger events like adverse weather (rainfall, temperature, relative humidity etc.) can be independently verified & measured.  It allows for speedy settlement of claims, say within 45 days from the end of the insurance period.  All cultivators irrespective of Loanee or Non-Loanee; Small / Marginal or Others; Owners or Tenants / Sharecroppers can buy Weather Based Crop Insurance Scheme (WBCIS).  The Government is providing Subsidy in Premium and hence, the premium payable by the cultivator is affordable.  It provides transparent, fully objective, efficient & direct pay-outs for adverse weather incidences and thus, an effective risk mitigation tool against weather risks.  The insured is not required to submit claim form or other documents as proof for his/ her loss. The claim pay-out is automatically calculated on the basis of weather data collected from the Reference Weather Station at the Tehsil / Block level.  Since the weather data decides the compensation, the insured retains the incentive for putting in extra effort for getting better yield of his / her crop. 4.

Scheme - 3: Rainfall Insurance Scheme for Coffee (RISC): RISC is a unique rainfall insurance product specially designed for the coffee growers of Karnataka, Kerala and Tamilnadu. This product is designed in consultation with Coffee Board, Central Coffee Research Institute and the Coffee Growers of Karnataka. RISC is expected to provide effective risk management aid to those coffee growers likely to be impacted by adverse rainfall incidence. The most important benefits of RISC are:

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i. Trigger events like adverse rainfall can be independently verified and measured. ii. Parameters considered in designing this insurance product are relevant, appropriate and to a large extent captures the rainfall induced risks affecting Coffee production. iii. Allows for speedy settlement of indemnities. a.

Scope of Coverage:The policy compensates the insured, against the likelihood of diminished coffee output / yield resulting from shortfall / excess in the actual rainfall (as the case may be) for different coverage options within a specific geographical location and specified time period, subject to a maximum of the Sum Insured specified in the policy under each of the coverage options.

b. The policy provides the following coverage options: th

“Monsoon Showers” shall mean the rainfall received during 1st July to 30 September for st Gudalur Coffee Zone of Nilgiri District in TamilNadu for Arabica and Robusta and from 1 October to 30 th November 2010 for Bathlagundu, Adalur, Perumalmalai, Pannaikadu,Yercaud, Bodi and Connoor Coffee zones with an aggregate rainfall beyond a specified limit (distinct for each zone/sub zone) in any seven consecutive days during the period. ii. “Post Monsoon Showers” shall mean the cumulative rainfall of at least 100 mm received continuously over a period of 3 days in case of Arabica during 1st November to 31st January and cumulative rainfall of at least 125 mm received continuously over a period of 5 days in case of st Robusta coffee during 1 December to end of February. This is applicable only for Gudalur Zone. i.

c.

st

Period of Insurance: The insurance operates during 1 March to end of February. The periods under different coverage are as follows: i.

th

Monsoon Shower: 1st July to 30 September 2010 For Gudalur Zone 1st October to 30th November 2010: For other Coffee Zones. st

st

ii. Post Monsoon Shower: 1 December to end of February (Robusta) / 1 November to 31 January (Arabica) applicable only for Gudalur Zone of Tamil Nadu State.

st

d. Insured: Any coffee grower, cultivating Robusta / Arabica variety of coffee in the selected Sub zones of Tamil Nadu are eligible to buy the insurance. e.

Phases to choose: The Insurance phases available during RISC 2010 are (a) Monsoon Showers, (b) Post-Monsoon Showers and (c) Monsoon & Post Monsoon Showers.

f.

Claim triggers: “Monsoon Showers Trigger” shall mean a point above which the pay-out triggers. The pay-out shall commence if the aggregate rainfall is beyond a specified limit (distinct for each zone) in any seven consecutive days during the period. One event of highest rainfall would be considered for deciding the pay-out. 320 - III

g.

“Post Monsoon Showers” shall mean a point above which the pay-out triggers. The pay-out shall commence if the aggregate rainfall is beyond a specified limit (distinct for each zone) in any 3 consecutive days for Arabica and any 5 consecutive days for Robusta during the period. One event of highest rainfall would be considered for deciding the pay-out.

h. Agencies for data: “Reference Weather Station. and the Automatic Weather Station (AWS) set up by National Collateral Management Services Ltd. (NCMSL) the Rainfall data shall be collected from the “Reference Rain gauge Station”, as specified in the Cover note/policy. i.

“Backup Rain gauge Station” : The rainfall data of the Backup Rain gauge station shall be considered for those specific dates for which rainfall data from the Reference Weather station are not available. The rainfall data shall be collected from the “Backup Rain gauge station as specified in the cover note/Policy.

j.

How claims become payable: In the event that, in the geographical location (coffee zone) and during the time period specified in the Schedule to this policy for different options, the Actual Rainfall is deficit / excess compared to the specified trigger level, the benefit payable to the insured shall be a sum specified corresponding to the trigger level, subject to maximum of the Sum Insured specified under various options of the Scheme.

k. Sum Insured: Maximum sum insured per hectare for Robusta and Arabica varieties shall be Rs.12,000 and Rs.16,000 respectively for Monsoon & Post Monsoon phases. This is the maximum indemnity that AIC will pay in all under each cover note / policy. The phase-wise break-up is as follows:

l.

Phase

Robusta

Arabica

Monsoon Showers

Rs. 6,000

Rs. 8,000

Post Monsoon Showers

Rs. 6,000

Rs. 8,000

Total

Rs. 12,000

Rs. 16,000

Premium: Premium chargeable would be statistically/actuarially calculated based on the type of coffee crop, location, the coverage sought, the past rainfall pattern in the specified geographical area and the acreage under cultivation. Those growers who buy all two phases together would save on the premium.

m. Premium Subsidy: Coffee Board is extending premium subsidy to all small coffee growers with plantation size up to 10 hectares in all coffee zones of Tamilnadu state to particularly cover the Sum Insured for all two risk windows i.e. Monsoon & Post Monsoon Showers. The subsidy is as follows:

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Robusta

Arabica Subsidy (per Hectare) 50% of the premium amount subject to a ceiling of Rs.2500

Subsidy (per Hectare) 50% of the premium amount subject to a ceiling of Rs.2000

n. The phase wise breakup is as follows: Phase Blossom Showers Backing Showers Monsoon Showers Post Monsoon Showers Total o.

Robusta Rs. 5,000 Rs. 3,000 Rs. 6,000 Rs. 6,000 Rs. 20,000

Arabica Rs. 9,000 Rs. 5,000 Rs. 8,000 Rs. 8,000 Rs. 30,000

How to avail insurance: Planters can avail insurance in the respective Coffee Board Liaison Office (JLOs & SLOs) of all coffee zones of Tamil Nadu who are authorized to collect proposal form & premium. The respective Coffee Board Liaison Office (JLOs & SLOs) would also help the growers in providing and filling up insurance proposals. Premium net off subsidy.

p. Insurance availing period: Only for Gudalur Coffee Zone: During RISC 2010 season Monsoon coverage insurance can be availed till 30th June 2010 and Post Monsoon insurance can be availed till 31ST October 2010for both Arabica and Robusta varieties (may be extended up to 30th November 2010). q. For Other Zones in Tamil Nadu: Monsoon Coverage: Insurance can be availed till 30th September 2010 for Arabica and Robusta varieties. 5.

Scheme - 4:Varsha Bima (VB): A Rainfall based scheme of AIC of India Ltd. Sixty five per cent of Indian agriculture is heavily dependent on natural factors, particularly rainfall. Studies have established that rainfall variations account for more than 50% of variability in crop yields. It's known that yields are variable, however, it's now being realized that the weather, particularly rainfall is also becoming increasingly unpredictable and uncertain. Although there is no way of controlling weatherfactors, there is now a hope of mitigating the adverse financial effects that rainfall can have on the rural economy, particularly farm incomes. a.

Scope: Varsha Bima covers anticipated shortfall in crop yield on account of deficit rainfall. Varsha Bima is voluntary for all classes of cultivators who stand to lose financially upon adverse incidence of rainfall can take insurance under the scheme. Initially Varsha Bima is meant for cultivators for whom National Agricultural Insurance Scheme (NAIS) is voluntary.

b.

Coverage Options: The Scheme covers Deficit Rainfall, Consecutive Dry Days, Excess Rainfall during the Sowing, Vegetative, Reproductive and Maturity stage of the Crop.

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c.

Crops: Implemented for all the field crops on optional basis.

d. Claim Pay-outs: Insured cultivators would become eligible for pay out if the “Actual Weather” Data recorded at a “Reference Weather Station (RWS)” during the specified time period shows deviation (Adverse Weather Incidence) as compared to the specified “Trigger Weather”. In such case, the specified 'crop' in that particular RUA shall be deemed to have suffered the same level of Adverse Weather Incidence, and consequently the same proportion of loss of crop yield, and become eligible for same proportion of Pay-outs. Pay-out / Claim settlement is an automatic process based on weather readings recorded at the RWS. Insured cultivators are not required to 'make a claim'. 6.

Scheme - 5: Coconut Palm Insurance Scheme (CPIS): CPIS is being implemented in selected st districts in the 1 phase, in the state of Tamil Nadu, Kerala and Andhra Pradesh with Premium subsidy support form Coconut Development Board of 50%, State Government of 25% and farmers share of 25%. a.

The full Premium per tree (4 years to 15 years ) is Rs 4.69 & for the trees from 16years to 60 years the premium is Rs. 6.35 subject to above subsidy.

b.

Sum Insured : Trees from 4 years to 15 years the sum insured is Rs. 600/- per tree. For the trees from 16 years to 60 years the sum is Rs. 1150/-.

c.

All farmers can avail the scheme through Agriculture / Horticulture Department and the claim assessment will be done if the palm is unproductive due to wilt or dead. The healthy Palm has to be insured yielding 30 nuts per year.

d.

All round the year the farmers can join in the scheme. Annual policies are issued subject to one month waiting period.

e.

The loss is intimated by the farmers within 48 hrs. of any one incident resulting in total loss. The survey done by the State Agriculture / Horticulture Department and based on the recommendations the claims will be considered subject to scheme provisions like excess and franchise clause, etc.

f.

Modified NAIS Scheme: Government of India letter on Modified NAIS scheme is also given in Annexure for future reference. Modified National Agricultural Insurance Scheme (MNAIS) is given as Annexure - 1 to this Chapter.

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Annexure 1 to Chapter - 24 Modified National Agricultural Insurance Scheme (MNAIS) Ministry of Agriculture, Department of Agriculture & Cooperation has been implementing National Agricultural Insurance Scheme (NAIS) as Central Sector scheme since Rabi 1999-2000, to insulate farming community against agriculture risks. In view of representations received from States/UTs and farmers, ongoing National Agricultural Insurance Scheme (NAIS) has been reviewed to make it more farmers friendly and accordingly the scheme has been modified and a new scheme, namely, Modified National Agricultural Insurance Scheme (MNAIS) is proposed to be implemented, as Central Sector Scheme on a pilot basis in 50 districts, from Rabi 2010-11. MNAIS aims at sustainable production in agriculture sector, thereby ensuring food security, crop diversification and enhancing growth and competitiveness from agriculture sector, besides protecting farmers from production risks. The proposed scheme has following main features :(i) actuarial premiums will be paid for insuring crops and hence claims liability will be on insurer; (ii) unit area of insurance for major crops is village/village panchayat; (iii) indemnity amount will become payable, for prevented sowing/planting risks and for post-harvest losses, due to cyclones; (iv) on account payment up to 25% of likely claim under MNAIS will be released as advance, for providing immediate relief to farmers; (v) uniform seasonality norms will be applicable for both loanee and non-loanee farmers; (vi) more proficient basis for calculation of threshold yield (average yield of last seven years excluding upto two years of declared natural calamity) will be applicable; and (vii)minimum indemnity level in case of MNAIS of 70% will be, instead of 60% as in NAIS. Loanee farmers will be insured under 'compulsory category' while non-loanee farmers will be insured under 'voluntary category'. Private sector insurers with adequate infrastructure and experience will also be permitted to implement MNAIS. NAIS will be withdrawn for those area(s)/crop(s) of districts, in which MNAIS will be implemented. All State/UTs are requested to take necessary action urgently and issue appropriate instructions to concerned Departments/agencies, at State level and are requested to give wide publicity to the Scheme for creating awareness amongst farmers in notified districts, so that farming community can avail full benefits of the scheme. Implementation of the scheme will require close monitoring and periodic review at State and district levels. Concurrent evaluation of parameters and impact of scheme will be undertaken, after two years of implementation of MNAIS, by an external agency.

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1.

OBJECTIVES

The objectives of the Scheme are as under: i)

To provide insurance coverage and financial support to the farmers in the event of prevented sowing & failure of any of the notified crop as a result of natural calamities, pests & diseases. ii) To encourage the farmers to adopt progressive farming practices, high value in-puts and better technology in Agriculture. iii) To help stabilize farm incomes, particularly in disaster years. 2. SALIENT FEATURES OF THE SCHEME In addition to Agriculture Insurance Company of India Ltd., Private sector insurance companies with adequate infrastructure and experience will be allowed on selective basis to implement the scheme by the implementing States from out of the companies short listed by the Department of Agriculture & Cooperation. 3. CROPS COVERED i. Food crops (Cereals, Millets & Pulses) ii. Oilseeds iii. Annual Commercial / Horticultural crops (a) Loanee farmers would be covered under compulsory component. (b) Non-loanee farmers would be covered under voluntary component. (c) The Crops are covered subject to availability of i) the past yield data based on Crop Cutting Experiments (CCEs) for adequate number of years, and ii) requisite number of CCEs are conducted for estimating the yield during the proposed season. Ten years historical data is adequate for setting premium rates, fixing indemnity limit and threshold yield etc. Wherever such historical yield data at insurance unit is not available for some years, the data of nearest neighbouring unit / weighted average of contiguous units / next higher unit can be adopted, subject to appropriate loading in the premium rate, if necessary. 4.

STATES AND AREAS TO BE COVERED

Modified NAIS based on major improvements suggested by the Joint Group is to be implemented in 50 districts. These districts may be identified in consultation with the States/UTs. 5. FARMERS TO BE COVERED All farmers* including sharecroppers, tenant farmers growing the notified crops in the notified areas are eligible for coverage.

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I.

Individual owner-cultivator/ tenant farmers/ share croppers.

II. Farmers enrolled under contract farming, directly or through promoters / organizers III. Groups of farmers / societies serviced by Fertiliser Companies, Pesticide firms, Crop Growers associations, Self Help Groups (SHGs), Non-Governmental Organisations (NGOs), and Others The Scheme will extend coverage Component-wise:Compulsory Component All farmers availing Seasonal Agricultural Operations (SAO) loans from Financial Institutions (i.e. loanee farmers) would be covered compulsorily. Voluntary Component The Scheme would be optional for all non-loanee farmers. 6.

RISKS COVERED & EXCLUSIONS (A).

STANDING CROP (Sowing to Harvesting)

Comprehensive risk insurance is provided to cover yield losses due to nonpreventable risks, viz.: (i) Natural Fire and Lightning (ii) Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc. (iii) Flood, Inundation and Landslide (iv) Drought, Dry spells (v) Pests/ Diseases etc. (B) PREVENTED SOWING / PLANTING RISK In case farmer of an area is prevented from sowing / planting due to deficit rainfall or adverse seasonal conditions, such insured farmer who failed to sow / plant (but otherwise has every intention to sow / plant and incurred expenditure for the purpose), shall be eligible for indemnity. The indemnity payable would be a maximum of 25% of the sum-insured. The scale of payment for different crops will be worked out by implementing agency in consultation with experts. (C) POST HARVEST LOSSES Coverage is available only for those crops, which are allowed to dry in the field after harvesting against specified perils of cyclone in coastal areas, resulting in damage to harvested crop. Further, the coverage is available only upto a maximum period of two weeks from harvesting. Assessment of damage will be on individual basis.

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(D) GENERAL EXCLUSIONS Losses arising out of war & nuclear risks, malicious damage and other preventable risks shall be excluded. 7.

SUM INSURED / LIMIT OF COVERAGE

In case of Loanee farmers under Compulsory Component, the Sum Insured would be at least equal to the amount of crop loan sanctioned/advanced, which may extend up to the value of the threshold yield of the insured crop at the option of insured farmer. Where value of the threshold yield is lower than the loan amount per unit area, the higher of the two is the Sum Insured. Multiplying the Notional Threshold Yield (district/region/state level) with the Minimum Support Price (MSP) of the current year arrives at the value of Threshold Yield. Wherever Current year's MSP is not available, MSP of previous year shall be adopted. The crops for which, MSP is not declared, farm gate price established by the marketing department / board shall be adopted. Further, in case of Loanee farmers, the Insurance Charges payable by the farmers shall be financed by loan disbursing office of the Bank, and will be treated as additional component to the Scale of Finance for the purpose of obtaining loan. For farmers covered on voluntary basis the sum-insured is upto the value of Threshold yield of the insured crop. If the farmer so desire he may be provided with higher level of risk coverage. Sum insured up to 100% of threshold/average yield of notified area with normal premium subsidy but sum insured above 100% and up to 150% of the value of average yield without premium subsidy. 8.

PREMIUM RATES & SUBSIDY

Premium rates are to be worked out on actuarial basis. However, the premium paid by the farmer is subsidized on the following lines: Subsidy to Farmers 1 Upto 2% Nil 2 >2 - 5% 40% subject to minimum net premium of 3 >5 10% 50% subject to minimum net premium of 4 >10 15% 60% subject to minimum net premium of 5 >15% 75% subject to minimum net premium of

2% 3% 5% 6%.

Before the start of each crop season, insurance companies shall work out actuarial premium as well as net premium rates (premium rates actually payable by farmers after premium subsidy) for each notified crop through standard actuarial methodology approved by the Govt. of India. Premium structure would be worked out with a discount provision on the premium in respect of an unit area where all farmers have adopted better water conservation and sustainable farming practices for better risk mitigation. 9.

SHARING OF RISK All claims will be borne by the Insurance Companies. 327 - III

10. SCHEME APPROACH AND UNIT OF INSURANCE (A) WIDESPREAD CALAMITIES The Scheme would operate on the basis of 'Area Approach' i.e., Defined Areas for each notified crop for widespread calamities. The Defined Area (i.e., unit area of insurance) is village/Village Panchayat level by whatsoever name these areas may be called for major crops and for other crops it may be a unit of size in between Village Panchayat to Taluka to be decided by the State/UT Govt. The scheme on pilot basis at reduced insurance unit area would be implemented in those villages/village panchayats where appropriate yield data are available at least for last five years at village panchayat or higher level or in neighboring village in different States. (B) LOCALIZED RISKS In case of localized risks, viz. hailstorm and landslide, the claims will be assessed on individual basis. For other calamities the assessment will be on the basis of 'area approach'. 11. SEASONALITY DISCIPLINE (a) The broad seasonality discipline for Loanee and Non-Loanee farmers can be as under: Activity: Kharif-Rabi Loaning period (loan sanctioned) for Loanee farmers covered on Compulsory basis. - April to June/ July October to December Cut-off date for receipt of Proposals of farmers covered on Voluntary basis. 15th June / 15th July 31st December Cut-off date for receipt of Declarations of Loanee farmers covered on compulsory basis from Banks - 31st July 31st January Cut-off date for receipt of Declarations of farmers covered on Voluntary basis from Banks 31st July 31st January Cut-off date for receipt of yield data within a month from final harvest within a month from final harvest In case of Kharif crops, the cut off dates are fixed in such a way that these dates correspond to historical onset / coverage by the South-West Monsoon. The tentative schedule is as follows :Historical onset and coverage by South-West (SW) Monsoon and proposed cut-off dates for Kharif : 1. 2. 3. 4. 5.

Kerala & Tamil Nadu - 1st Week of June 15th June Andhra Pradesh, Karnataka, Orissa, West Bengal, North-Eastern States- 15th June 30th June Maharashtra, Chhattisgarh, Jharkhand, Bihar- 3rd week of June 30th June Gujarat, Madhya Pradesh, Uttar Pradesh, Uttarakhand, Himachal Pradesh- 4th week of June 30th June Rajasthan, Punjab, Haryana, Jammu & Kashmir - 1st week of July 15th July

Further, in case of three crop / season pattern, a modified discipline keeping in mind the overall seasonality 328 - III

discipline prescribed above, will be adopted by the State Level Co-ordination Committee on Crop Insurance (SLCCCI). Farmers covered on voluntary basis can buy insurance before actual sowing / planting based on advance crop planning for the season. For any reason, if farmer changes the crop planned earlier at the time of buying insurance, such changes should be intimated to financial institution at which insurance proposal was submitted, within 30 days from the cut-off date for buying insurance, accompanied by sowing certificate issued by concerned official of the State at village level. Where required, the farmer will pay the difference in premium or implementing agency will refund difference in premium, as per the premium structure. 12. ESTIMATION OF CROP YIELD The State govt./UT will plan and conduct the requisite number of Crop Cutting Experiments (CCEs) for all notified crops in the notified insurance units in order to assess the crop yield. The State govt./ UT will maintain single series of Crop Cutting Experiments (CCEs) and resultant yield estimates, both for Crop Production estimates and Crop Insurance. Planning and supervision for all CCEs will be of the same order as that of General Crop Estimation Surveys (GCES). CCEs shall be undertaken per unit area /per crop, on a sliding scale, as indicated below: Minimum sample size of CCEs 1. 2. 3. 4.

District - 24 Taluka / Tehsil / Block -16 Mandal / Phirka / Revenue Circle / Hobli or any other equivalent unit -10 Village Panchayat - 08

However, a Technical Advisory Committee (TAC) comprising representatives from Indian Agricultural Statistical Research Institute (IASRI), National Sample Survey Organisation (NSSO), Ministry of Agriculture (GoI) and implementing agency shall be constituted to decide the sample size of CCEs and all other technical matters. Inputs from satellite imagery could also be utilized in deciding sample size. In instances where required number of CCEs could not be conducted due to non-availability of adequate cropped area, the yield data for such units can be generated by Insurer by proxy indicators, such as clubbing with neighbouring / contagious units, adopting yield of next higher unit, yield data generated by correction / correlation factor with next higher unit, etc. Alternative yield assessment techniques, such as satellite imagery, agro-meteorological and bio-metric and a combination of such techniques, etc. can be explored and adopted after establishing reasonable level of standardization. 13. LEVELS OF INDEMNITY & THRESHOLD YIELD Three levels of Indemnity, viz., 90%, 80% & 70% corresponding to Low, Medium & High Risks areas respectively shall be available for all crops. The criteria for deciding low and high risk will be determined by implementing agency. The Threshold yield (TY) or Guaranteed yield for a crop in a Insurance Unit shall be the average yield of the preceding 7 years excluding the year(s) in which a natural calamity such as drought, 329 - III

floods etc. may have been declared by the concerned Government/authority, multiplied by level of indemnity. However, it may be ensured that at least 5 years' yield data is available for calculating the threshold yield. 14. NATURE OF COVERAGE AND INDEMNITY (A) WIDE SPREAD CALAMITIES If the 'Actual Yield' (AY) per hectare of the insured crop for the defined area [on the basis of requisite number of Crop Cutting Experiments (CCEs)] in the insured season, falls short of the specified 'Threshold Yield' (TY), all the insured farmers growing that crop in the defined area are deemed to have suffered shortfall in their yield. The Scheme seeks to provide coverage against such contingency. 'Indemnity' shall be calculated as per the following formula: (Shortfall in Yield / Threshold yield) X Sum Insured for the farmer [Shortfall = 'Threshold Yield - Actual Yield' for the Defined Area] (i) ON ACCOUNT PAYMENT OF CLAIMS In case of adverse seasonal conditions during crop season, claim amount upto 25 percent of likely claims would be released in advance subject to adjustment against the claims assessed on yield basis. The on account payment will be considered only if the expected yield during the season is less than 50 percent of normal yield. The criteria for deciding on-account payment of claims shall be based on proxy indicators such as weather, agro-meteorological data / satellite imagery/acreage damaged or such other indicators to be decided by the Government, and will be implemented in States and for crops for which such proxy indicators can be established. (ii) PREVENTED SOWING / PLANTING CLAIMS The extent of claims payable will be decided in respect of the insurance unit area on the basis of rainfall position issued by the concerned Indian Meteorological Department (IMD) for the area during the sowing season and acreage-sown particulars issued by the State Government. Other authentic rain gauge stations which the government shall install for the purpose/ insurer/insurer nominated agencies can also be considered for the purpose of measuring rainfall. The maximum claims payable will be 25 percent of the sum insured. Having received indemnity based on prevented sowing / planting, the insurance cover is automatically terminated. (iii) POST HARVEST LOSSES Coverage is available only for those crops, which are allowed to dry in the field after harvesting against specified perils of cyclone in coastal areas, resulting in damage to harvested crop lying in the field in 'cut & spread' condition. In other words, the crop, which after harvest is left in the field for drying, is only covered against the peril specified above. The state/ UT concerned will bring out the list of such crops in consultation with Implementing Agency. The harvested crop bundled and heaped at a place before threshing is beyond 330 - III

coverage under post-harvest losses. Further, the coverage is available only upto a maximum period of two weeks (14 days) from harvesting. Assessment of damage will be on individual basis. (B) LOCALIZED RISKS The losses would be assessed on individual basis in case of loss / damage resulting from occurrence of identified localized risks viz., hailstorm and landslide. The cost of inputs incurred until the time of occurrence of peril, and the expected loss in final yield due to the peril, would form the basis for loss assessment. In case of localized risks, implementing agency may utilise the services of concerned departments of the State government, such as Agriculture, Revenue etc. 15. COMMISSION & BANK SERVICE CHARGES Rural agents and others who are engaged for procuring and servicing business of farmers may be paid appropriate commission as decided by implementing agency. The servicing banks are allowed at present, 2.5% of gross premium under NAIS as service charges. 16. REINSURANCE COVER Efforts will be made by the implementing agency to obtain appropriate reinsurance cover for the Scheme in the national / international reinsurance market. In the event of failure to procure such cover at competitive rates, and in case premium to claims ratio exceeds 1 : 5, at national level, the Government would provide protection to insurance company. A Catastrophic Fund at the national level would be set up for this purpose, which would be contributed by the Centre and the State Governments on 50 : 50 basis. The overall loss exceeding 500% would be met out of this fund. 17. REVIEW OF THE SCHEME The Scheme will be reviewed after two years and necessary modifications will be incorporated based on the review. 18. IMPORTANT CONDITIONS/CLAUSES APPLICABLE FOR COVERAGE OF RISK (a) The banks will display the list of all insured farmers at the village panchayat office. Further, the banks will also display the list of benefited farmers together with claim amount soon after the claims are received from implementing agency. (b) Implementing agency possesses the discretion to accept or reject any risk of defined area(s) for any crop(s) considering the prevailing agricultural situation. Mere sanctioning / disbursement of crop loans and submission of proposals/ declarations and remittance of premium by the farmer / bank without explicit intent to raise the crop, does not constitute acceptance of risk by implementing agency. (c) In the event of near total crop failure during early or mid-season affecting the entire defined area, implementing agency shall adopt a graded scale indemnity settlement restricting the indemnity to 331 - III

the proportion of input cost upto that stage. The graded scale shall be worked out by implementing agency. (d) Implementing agency if deemed necessary shall investigate the coverage on its own or by an agency appointed for the purpose and shall for this purpose utilize satellite imagery data for identification of anomalies in crop insurance coverage vis-à-vis actual field conditions. Upon identification of adverse phenomenon based on such investigations, implementing agency may resort to scaling down of sum insured. 19. BENEFITS EXPECTED FROM SCHEME The Scheme is expected to: ! ! ! !

!

Be a critical instrument of development in the field of crop production, providing financial support to the farmers in the event of crop failure. Encourage farmers to adopt progressive farming practices and higher technology in Agriculture. Help in maintaining flow of agricultural credit. Provide significant benefits not merely to the insured farmers, but to the entire community directly and indirectly through spillover and multiplier effects in terms of maintaining production & employment, generation of market fees, taxes etc. and net accretion to economic growth. Streamline loss assessment and enable expeditious settlement of claims.

20. MONITORING AND EVALUATION The proposed scheme shall be monitored closely at the levels of District, State & Nation by the State Govt., the Implementing Agencies & GOI. As the proposed Modified NAIS is to be implemented on the pilot basis in 50 districts, independent evaluation of the scheme shall be carried out after two years of implementation. Evaluation has been considered as an essential aspect of the formulation and execution of this scheme which is essential for the assessment of the progress & impact of programmes and for analysis of the reasons for success failure and indication of the direction of improvement in programmes' operation. Keeping this in view, an independent evaluation of Pilot Modified NAIS may be carried out through study for assessing the impact and success of the scheme with respect to the set objectives and based on the findings of the evaluation study, possibility to extend the scheme to implement in all the districts in place of NAIS during 12th Five Year Plan would be examined.

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CHAPTER 25

MEDIUM TERM CONVERSION (AGRI.) LOANS

1.

2.

General: a.

The farmers are sanctioned ST Loans by Primary Agricultural Coop, Societies (PACS) for cultivating various crops. As soon as the harvest is over, the farmers are expected to repay their crop loans from out of sale proceeds of agricultural products. Agricultural operations by and large depend on seasons. When the season fails, the farmer's ability to repay the crop loans is affected and consequently, they make default in repayment of loans on due dates to PACS. This may make the farmer borrowers ineligible for further loans for the next agricultural season. In order to overcome this difficulty, the farmers are to be allowed extension of period for repayment of defaulted loans and at the same time sanctioned further loans for raising the crops.

b.

Pursuant to the recommendations of 'All India Rural Credit Survey Committee' (1985) and based on the RBI's recommendations, the State Government had set up 'Agricultural Credit Stabilisation Fund' at Apex Bank level as well as DCCBs level. The purpose of this fund is to grant medium term loans to DCCBs by the Apex Bank and to PACS by DCCBs for converting Short Term agricultural loans into Medium Term loans, when the farmers are unable to repay their ST agricultural loans on account of crop failure due to natural calamities such as drought, floods etc.

Sources of Funds to Agricultural Credit Stabilisation (ACS) Fund: a.

Every State and District Central Cooperative Bank have to set up ACS Fund at their level and this Fund is augmented from the following sources: i. 15% of the Net Profit of the Bank every year. ii. 3% interest credit on the amount at the credit of this fund from the general resources of the Bank. iii. The excess dividend declared on the ordinary shares over and above the contractual dividend (3% now) payable on the Government's Share Capital. iv. In the case of SCB:

3.



Outright grant from the Government of India under the centrally sponsored scheme to strengthen ACS Fund of SCBs which is channelled through the State Government.



Long term loans from State Government.

Utilisation of ACS Fund: a.

The ACS Fund is intended only to be utilized for granting conversion of ST (SAO) loans medium term conversion loans (MTC Loans) / rephasement loans, on account of failure of crops and cannot be utilized in the general business of the Bank. 333 - III

4.

b.

The unutilized portion of the ACS Fund should be invested in approved unencumbered securities. The DCCBs may also invest ACS Fund in Special Deposits with SCB.

c.

It should be noted that ACS Fund remain intact at all times, whereas the deployment of the fund gets changed from investment to MTC/MTCR loans as and when conversion takes place.

d.

The securities earmarked towards ACS Fund Investment should not be taken for computation of liquid assets as required to be maintained under Section 24 of the B. R. Act.

When Conversion can be given: a.

The ACS Fund can be utilized for conversion of ST Agricultural Loans into Medium Term Loan when, i. There is failure of crops due to natural calamities such as floods, drought, etc. and ii. The crop yield has gone down by 60% in the case of irrigated crop and by 50% in the case of unirrigated crop. The assessment of the crop yield should be based on the crop cutting experiments done at District / Block / Group of villages, level.

b.

5.

It should be noted that cases of sporadic or individual failures of crops will not be eligible for conversion under this scheme.

'Annawari' Assessment: a.

The procedure for “Annawari” assessment has been streamlined on the following basis: Annawari Certificate: Annawari Certificate should be issued by revenue authorities not lower than the rank of Tahsildar. ii. Annwari Certificate should indicate the following points: i.

b.

6.



Nature of calamity indicating whether it is drought or flood etc.



The season and the year during which such calamity has occurred.



The villages / area affected by the failure of crops.



Crops affected.



Extent of crop yield.

The DCCBs should advise the PACS concerned to send proposals for conversion on the basis of the declaration made by the Revenue authorities.

Eligibility for Conversion: a.

Medium Term Conversion facility is available in respect of ST crop loans current outstanding (overdues not exceeding 3 months) in the areas affected by natural calamities where Annawari declared is less than 6 annas i.e. less than 60% in the case of irrigated crop and less than 50% in the 334 - III

case of unirrigated crops, provided the extension of original due date is approved by the DCCB/ SCB pending conversion of ST loans.

7.

b.

Conversion can be given only in respect of principal dues outstanding under ST (SAO) loans and not in respect of interest due. However, the interest due must be collected from the farmer borrowers other than Small and Marginal Farmers before conversion is to be effected.

c.

The eligibility for each PACS has to be assessed with reference to the ST SAO outstanding against PACS at DCCB level or the aggregate of the conversion proposed as per Annawari Certificate whichever is lower.

d.

The eligibility of DCCB for assistance from SCB will be to the extent of 85% of amount of conversion, the difference between eligible conversion amount and the balance to the credit of ACS Fund with DCCB or the ST SAO loans outstanding loans due to SCB as on the date of application whichever is less.

e.

SCB will be eligible for assistance from NABARD to the extent of difference between eligible amount of DCCB from SCB and the balance in ACS Fund of SCB or the outstanding of STSAO loans due to NABARD as on the date of application whichever is lower.

f.

In the case of crops which have been covered by Crop Insurance Scheme, the eligibility for conversion stands reduced by the amount of insurance claims received from Insurance Company before effecting the conversion.

g.

In case, it is found impossible to complete the formalities relating to conversion by due dates, the due dates may be extended upto a period not exceeding three months.

Share of Conversion: a.

The financial burden of conversion of ST. SAO into M.T. loan should be borne by DCCB, SCB, State Government and NABARD indicated below: i. ii. iii. iv.

b.

8.

DCCB : 15% of the amount proposed to be converted SCB : 10% of the amount proposed to be converted State Govt. : 15% of the conversion proposed. NABARD : 60% of the amount proposed to be converted.

In case, the unutilized balance in the ACS Fund of SCB/DCCB is not sufficient to meet its share of conversion, the same should be met from the general funds (own resources) of the Bank.

Duration of Conversion Loan: a.

The current ST crop loans outstanding in the affected areas are to be converted into loans repayable in three years such as 15, 24 & 36 months respectively. 335 - III

9.

b.

In the event of another crop failure during the currency of MTC loan, the remaining instalment of MTC loan could be rephrased / rescheduled and made repayable within a total period not exceeding 5 years.

c.

In the event of two or more successive failure of crops, the aggregate burden of ST loans and MTC loans could be rescheduled into MT conversion loan repayable in a period not exceeding 7 years.

Security for Conversion of ST. (SAO) Loans: a.

MTC loans upto a specified amount which may vary from state to state can be secured by personal security (surety). MTC loans exceeding the specified amount should be secured either by first mortgage of land or charge on such land in terms of declaration made by the individual borrower under the Cooperative Societies Act.

b.

In case, a charge on land or first mortgage of land is not possible, loans above the specified amount may also be secured by personal security of one or more members of the Society.

10. Rate of Interest: a.

The rate of interest that could be charged on MTC loans will be the same as applicable to ST Loans for financing SAO which are being converted.

11. Basic Conditions for MTC/MTCR Loans: a.

The objective of annawari system is to help arrive at an assessment of crop condition. The normal crop i.e. average of crops in satisfactory season is reckoned as 12 annas crop and the cultivators are deemed to be eligible for relief wherever crop turnout is less than 50 per cent of the normal crop i.e. where annawari is less than 6 annas. Annawari is used as a practical index of crop situation and, based on annawari, the state Governments provide relief to the cultivators by way of full / partial suspension or remission of land revenue and other Government dues. In the absence of any other method to assess crop situation, the stabilisation arrangements in Cooperative Credit Structure are also linked to annawari declared by the State Government and MediumTerm credit limits are sanctioned by NABARD to the SCBs on behalf of DCCBs from out of the National Rural Credit (stabilisation) Fund for converting the outstanding Short Term crop loans into Medium-Term loans in areas where the annawari declared by the State Government is less than 6 annas i.e. where the crops have been damaged to the extent of more than 50 per cent by a widespread natural calamity.

b.

Annawari Certificate by the state authorities in the prescribed form will have to be furnished by the SCBs along with the MediumTerm conversion applications. The RCS will have to clearly indicate the progress in the implementation of various recommendations of the Working Group by the State Government. The revised proforma of 'Annawari Certificate' is given in the Annexure-1 to this Chapter.

336 - III

12. Suspension / Remission of Land Revenue: a.

Conversion facilities are provided only in respect of areas where relief has actually been provided by the State Governments by way of suspension / remission of land revenue and other Government dues. A certificate to this effect based on Gazette Notifications has to be submitted along with the conversion application.

13. Financial Commitment of the State Government-Sharing of Conversions: a.

The financial burden of conversion of ShortTerm crop loans into MediumTerm Conversion loans in the event of natural calamities have to be borne by different agencies at various levels in the following proportions: i. 15 per cent by the DCCB from its stabilisation fund and other own MediumTerm resources; ii. 10 per cent by the SCB from its stabilisation fund and other own MediumTerm resources; iii. 15 per cent by the concerned Stare Government and iv. Balance of 60 per cent by NABARD way of refinance from National Agricultural Credit (Stabilisation)

b.

In the case of States/Union Territories having two tier credit structure, refinance at 70 per cent is provided by NABARD and 15 per cent each is to be provided by the SCB and the State Government.

14. Eligibility Norms: a.

MediumTerm conversion facilities are available only in respect of current ShortTerm crop loans outstanding in areas affected by widespread natural calamity where the annawari declared is less than 6 annas i.e. less than 50 per cent of the normal / standard yield provided the State Government has granted suspension / remission of land revenue and other Governments dues.

b.

In the case of DCCBs whose areas are covered by Crop Insurance Scheme, the eligibility for conversions stands reduced by the amount of insurance claims.

c.

Only the current ShortTerm crop loans will be eligible for conversion. In case, it is not found possible to complete the formalities relating to conversions by the due dates, extension of due dates may be granted upto a period not exceeding three months. However, such extensions should be confined to the dues eligible for conversion determined on the basis of annawari certificates and suspension / remission of land revenue and other dues by the State Government.

15. Process of Conversion: a.

The process of granting conversions should start at societies level and completed at NABARD level in that order. It would however be preferable to put through these transactions simultaneously at the DCCB and SCB levels and thereafter at NABARD level.

337 - III

16. Rephasement and Reschedulement of MT Loans / Instalments: a.

The facilities of rephasement and rescheduling of MediumTerm conversion loans are provided in the case of recurrence of natural calamities. If during the pendency of a MediumTerm loan, natural calamity re occurs and crops are affected to such an extent as to justify stabilisation arrangements again, the period of first conversion loan is extended from 3 to 5 years. The instalment falling due for repayment in the year in which the calamity re occurs is deferred and the balance amount of the outstanding conversion loan is suitably rephased to correspond to the extended period of rephasement i.e. 5 years. In the event of two or more successive natural calamities, the aggregate burden is similarly rescheduled to correspond to a period of 7years.

b.

State Government's concurrence to rephase or reschedule Medium Term Conversion loans/instalments are necessary as all these loans are covered by the guarantee of the State Government.

c.

An illustration of Conversion / Reschedulement facilities to be granted to farmers' affected by drought / flood for three years in succession ending with 1997-98 is given in the Annexure-2 to this Chapter.

17. Conversion facilities for Crop Loans covered under Crop Insurance Scheme: a.

Crop Insurance Scheme had been introduced in several states from Kharif 1985 in the notified areas in respect of specified crops. In terms of the Scheme formulated by GOI the areas covered by the Crop Insurance Scheme may fall into four broad categories as under: i.

Where actual yield is more than the threshold yield and no insurance claim is admissible.

ii. Where the indemnity payable is more than the crop loan and there is no net loss to the farmer. iii. Where the crop yields is estimated at less than normal yield but more than 50 per cent of the normal yield. iv. Where the yield is estimated to be less than 50 per cent of the normal yield and the indemnity payable under crop insurance is less than the loan amount. b.

The farmers under categories (i) and (ii) above will not be eligible for any conversion facilities. In the case of farmers in category (iii) above, although indemnity payable will not be enough to repay the entire outstanding loan amount, the damage to the crops being less than 50 per cent of the normal yield, such loans would not be eligible for conversion. As regards farmers in category iv above, where the annawari relating to the crops is less than 50 per cent, the relief to the borrower would amount to only about 56.25 per cent of the loan amount and he will still have to repay the balance of 43.75 per cent of the crop loan if he is not to be declared as a defaulter. In order to provide relief to such farmers, NABARD agreed to provide conversion facilities to the extent of the balance amount i.e. the crop loan minus insurance claim, provided other conditions relating to grant of

338 - III

conversion facilities such as declaration of annawari, suspension / remission of land revenue and other Government dues, etc. were complied with. c.

The terms and conditions governing the Credit limits under Section 22(ii) of National Bank for Agriculture and Rural Development Act, 1981 are: i.

Only such of the DCCBs which are eligible for refinance from NABARD under Section 21(1)(i) of NABARD for Act, 1981 but either did not apply for a credit limit on whose behalf was not sanctioned as they had adequate internal resources for meeting the requirements of their lending programmes and also those on whose behalf ShortTerm credit limits have been sanctioned by NABARD but there are no outstanding borrowings on their behalf from NABARD but eligible for financial accommodation under Section 22(ii) of the Act, ibid.

ii. In the total amount involved in conversions at the level of PACS, the concerned DCCB will provide 15 per cent or the unutilised balance to the credit of its stabilisation fund, whichever is more, the SCB will provide, 10 per cent or the unutilised balance to the credit of its stabilisation fund, whichever is more, the concerned State Government will provide 15 per cent and the balance 60 per cent will be provided by NABARD from the NRC (Stabilisation) Fund as loans and advances to the SCB on behalf of such DCCBs. iii. The loans and advances under Section 22(ii) of National Bank for Agriculture and Rural Development Act, 1981 will be sanctioned subject to fulfilment of usual basic conditions viz. 

declaration of annawari by the concerned State Government, issue of annawari certificates by the Collector / revenue authorities of the district concerned in the prescribed proforma, suspension or remission of land revenue and other dues by the State Government and release of State Government share in conversions.



The advances have to be fully guaranteed by the State Government as to the repayment of principal and payment of interest.



The rate of interest on these advances from NABARD will be the same as applicable on short-term loans for financing SAO, which are being converted.



These advances will be sanctioned initially for a converted period of 3 years subject to rephasement/reschedulement upto 5 to 7 years in the event of successive natural calamities.

iv. The advances under Section 22(ii) of NABARD Act, 1981 will not be by way of adjustment towards ShortTerm borrowings under Section 21(1) (i) of NABARD Act, 1981 as there would not be any such outstanding borrowings; but would be by way of fresh loans and advances to SCBs on behalf of DCCBs for reimbursement of the conversion loans granted by the DCCBs, SCBs will have therefore to maintain separate accounts in respect of borrowings under Section 22(i) and Section 22(ii) of NABARD Act, 1981. 339 - III

18. Application for Credit Limits: a.

Applications for sanctions of MediumTerm Conversion loans and rephasement and reschedulement of MediumTerm Conversion loans / instalments have to be prepared separately in the prescribed proformae. The applications duly recommended by RCS together with the annawari certificate and the certificate of suspension / remission of land revenue have to be submitted directly to the Head Office of NABARD. Applications for credit limits- under Section 22(1) of NABARD Act, 1981 may be prepared in the same form.

b.

The scheme of NABARD in the conversions to be granted at the individual members' level is determined on the basis of the accepted pattern as under: i. ii. iii. iv. v. vi.

c.

Total ShortTerm crop loans outstanding against members of PACS ineligible areas Amount expected to be recovered out of (i) above (directly / under insurance claims) Amount requiring conversion at members level (i + ii) Amount that may be sanctioned by NABARD (60% of iii) Amount to be provided shall be DCCB (15% of iii), SCB (10% of iii), State Govt. (15% of iii), of (iv) above, amount to be sanctioned: 

Under Section 22(1) of NABARD Act, 1981.



Under Section 22 of NABARD Act, 1981.

The credit limits are sanctioned at the Regional Office / Head Office in accordance with the sanctioning powers and sanctions conveyed. Drawals are allowed by the concerned R.O.

19. Documents and Certificates: a.

On receipt of sanction letter, the SCB will have to write to the concerned R.O. confirming that the terms and conditions of sanction are acceptable to them and furnish the following documents: i. ii. iii. iv.

Time promissory notes executed by SCB in favour of NABARD. Agreement executed by SCB. Guarantee deed executed by the State Government. Letter of concurrence from the State Government in the case of rephasement and reschedulement. v. Mandate from SCB for debit of Current Account with RBI in the event of default. vi. Time Promissory Notes executed by DCCBs in favour of SCB will be endorsed by SCB in favour of NABARD and held by SCB as agent of NABARD. vii. Certificates as to the character of pronotes by SCB and DCCBs together with the schedule of promotes lodged.

340 - III

20. Operations on MediumTerm (Conversion) Limits: a.

In the case of MediumTerm Conversion limits sanctioned under Section 22(1) of NABARDAct, 1981, drawals are allowed by adjustment of the amount towards repayment of outstandings under ShortTerm credit limits for financing SAO sanctioned under Section 21(1)(i) of NABARD Act, 1981. In the case of rephasement / reschedulement, the repayment schedule of the amounts rephased / reschedule is readjusted as per the terms of sanction.

b.

MediumTerm (conversion) credit limits sanctioned under Section 22 of NABARD Act, 1981 are by way of loans and advances and drawals are allowed as reimbursement of the conversion loans granted by SCBs to DCCBs. In the case of rephasement / reschedulement, the repayment schedule is readjusted as in the case of loans under Section 22(1) of the Act, ibid.

21. Annexure/s: a.

The following AnnexureS are appended to this Chapter: Annexure 1 : Specimen of 'Annawari Certificate' to be given by the District Collector or Authorised Revenue Official regarding implementation of the scientific method of crop cutting experiment. Annexure 2 : Specimen of an illustration of conversion / reschedulement facilities to be granted to farmers affected by drought / flood for 3 years in succession(ending with 199798).

341 - III

Annexure 1 to Chapter 25 Specimen of 'Annawari Certificate' to be given by District Collector or Authorised Revenue Official regarding implementation of the scientific method of crop cutting experiment This is to certify that the standing crops for the Kharif / Rabi season for the year 19. . . . In the following villages were damaged due to . . . . . . . . . . . . . (State the type of natural calamity) and the yield in terms of annawari was less than 6 annas, i.e. less than 50% of the normal yield. Sl No. (1)

Name of the Village/s (2)

Name of crop damaged Extent of damage in terms of per (3) centage or annas (4)

1.

(a)

2.

(b)

3. * Strike out whichever is not applicable.

(c)

It is also certified that the procedure for 'annawari' assessment has been streamlined on the basis of the various recommendations of the Working Group on Scientific Method of Assessing Crop Yield in the event of natural calamities for conversion of Short Term production Loans into MediumTerm and Long Term loans appointed by the Government of India, Ministry of Agriculture in January 1980 and the following concept / basis in particular have been followed while declaring 'annawari'. (a) Area Concept In determining the crops for assessment of yields, the area concept has been followed; i.e. the crops which covered 70 per cent of the normal cropped area in the district have been taken into account. (b) Comparison of yields The yields for the affected year have been compared with the average of yields of the preceding five years. (c) Scientific Methodology The average crop yield has been estimated by adopting scientific methodology, i.e., by crop cutting experiments. (d) Annawari On the basis of comparison of per yield date of crop / crops for the affected region, the District Level Committee has certified that the yield has gone down by 50% or more in the case of unirrigated crop in the affected and accordingly the Revenue Department has declared 'annawari' for these areas. Signature of District Collector / Authorised Revenue Official. NB: Revised format in terms of the National Bank's circular NO.NB.POD I (OPR) 4134/A.10/86-87 dated 12 January 1987. 342 - III

Annexure 2 to Chapter 25 Specimen of an illustration of Conversion / Reschedulement facilities to be granted to farmers affected by drought / flood for 3 years in succession (ending with 199798) The manner in which relief extended to borrowers who were affected by drought / flood for 3 years in succession, i.e. 1995-96, 1996-97 and 1997-98 was follows. (For the purpose of illustrations it is assumed that the ShortTerms (crop) loan eligibility of a member is Rs.300 and in every year / consecutive year of natural calamity, the affected Short Term (crop) loan is converted / rescheduled and a fresh crop loan for an equal amount issued for agricultural operations). As stated in the circular letter, there will be a moratorium of two years i.e., 1997-98 and 1998-99 for the recovery of principal instalments and interest and interest due in the current year (1997-98) and as such the recovery of deferred instalments / interest will commence from 1999-2000 onwards. If however, 1998-99 happens to be a normal / good crop year, the recovery will commence from that year itself. The repayment schedule for the converted / rescheduled loans with instalments commencing in 1998-99 if it is a normal year vide Section A below, and with instalments commencing in 1999-2000 if 1998-99 is not a normal year vide Section B hereunder: Section A 1. ShortTerm (crop) loan of Rs.300 issued for Kharif 1997 (1997-98) The ShortTerm (crop) loan issued for the kharif 1997 season will be converted into a Medium Term loan for a period of 7 years. Assuming that a ShortTerm loan of Rs. 300/- has been given to a farmer as crop loan for kharif 1997 and originally due on 31.3.1998, the conversion will be granted with repayment schedule as follows: Repayment schedule, if 1998-99 is a normal year vide column (3) (Amounts in Rupees) Year (1) 1997 – 1998 1998 – 1999 1999 – 2000 2000 – 2001 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005

Due Date (2)

Principal Instalment (3)

31-3-1998 31-3-1999 31-3-2000 31-3-2001 31-3-2002 31-3-2003 31-3-2004 31-3-2005

— 43 43 43 43 43 43 42

Interest Liability (4) — 60.00 25.70 21.40 17.10 12.80 8.50 4.20

Note: (i) Interest that will be charged is 10%p.a. (ii) Interest on crop loan of kharif 1997 and the converted loan would be recovered in 1998-99 343 - III

(iii) For the purpose of illustration, the due date is uniformly fixed as 31 March and the period of crop loan/instalment of MediumTerm loan is treated as 12 months.2. ShortTerm (crop) loan of Rs.300 issued for 1996-1997. The ShortTerm loan issued for 1996 1997 and converted into a MediumTerm loan repayable from 1997 1998 will now be rescheduled for a period of 7 years from the date of first conversion. The revised repayment schedule will be as given overleaf. Repayment schedule, if 1998-99 is a normal year vide column (4) (Amount in Rupees) Principal instalments as fixed / revised on Year

Due Date

(1) 1997 – 1998 1998 – 1999 1999 – 2000 2000 – 2001 2001 – 2002 2002 – 2003 2003 – 2004

(2) 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002 31.3.2003 31.3.2004

31.03.1997

31.03.1998

(3) 100 100 100 -

(4) 50 50 50 50 50 50

Interest Liability (5) 60.00 25.00 20.00 15.00 10.00 5.00

* If interest on crop loan was not collected on 31.3.1997, it will also stand postponed to 31.3.1999 raising the total interest liability as on 31.03.1999 to Rs.90.00 3.

Short Term (crop) loan of Rs.300 issued for 1995- 96 The Short Term loan given in 1995-96 converted into Medium Term for a period of 3 years and rescheduled during 1996-97 for a period of 5 years shall again be rescheduled for a period of 7 years from the date of first conversion. The repayment schedule of the 7 year Medium Term loan will be as follows: Repayment schedule if 1998 99 is a normal Repayment schedule, if 1998 99 is a normal year vide column (4) (Amount in Rupees) Principal instalments as fixed / revised on Year

Due Date

(1) 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003

(2) 31.3.1997 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002 31.3.2003

31.03.1997

31.03.1998

31.3.1998

(3) 100 100 100 -

(4) 75 75 75 75 -

(5) (Deferred) 60 60 60 60 60

344 - III

Interest Liability (6) (Deemed as collected) (Deferred) 60.00 24.00 18.00 12.00 6.00

(It is assumed that interest for the year 1996-1997 (conversion loan) and for the year 1995-1996 (crop loan) would have been already collected. Section B 1.

Short Term (crop) loan of Rs.300 issued for kharif 1997 (97 98)

The ShortTerm (crop) loan issued for the kharif 1997 season will be converted into MediumTerm loan for a period of 7 years. Assuming that a Short Term loan of Rs.300 has been given to a farmer as a crop loan for kharif 1997 and originally due on 31.3.1998, the conversion will be granted with repayment schedule as under: Repayment schedule if 1998-1999 is a drought (Amounts in Rupees) Year (1) 1997 1998 1999 2000 2001 2002 2003 2004

Due Date (2)

1998 1999 2000 2001 2002 2003 2004 2005

Principal Instalment (3)

31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002 31.3.2003 31.3.2004 31.3.2005

50 50 50 50 50 50

Interest Liability (4) 94.50 25.00 20.00 15.00 10.00 5.00

* Interest on the crop loan of kharif 1997 and interest in conversion loan at 10% to be recovered in 19992000. 2.

ShortTerm (crop) loan of Rs.300 issued for 1996 1997 The ShortTerm loan issued for 1996 1997 and converted into a MediumTerm loan repayable from 1997 1998 will now be rescheduled for a period of 7 years from the date of first conversion. The revised repayment schedule will be s follows: Repayment schedule if 1998-99 is a drought / flood year vide col.4 (4)

(Amount in Rupees)

Principal instalments as fixed / revised on Year

Due Date

(1) 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Interest Liability

31.03.1997

31.03.1998

(2)

(3)

(4)

(5)

31.31998 31.3.1999 31.3.2000 31.3.2001 31.3.2002 31.3.2003 31.3.2004

100 100 100 -

60 60 60 60 60

90.00 24.00 18.00 12.00 6.00

345 - III

*

If interest on crop loan was not collected on 31.3.1997 it will also stand postponed to 31.3.2000 raising the total interest liability as on 31.3.2000 to Rs.120.00

3.

ShortTerm (crop) loan of Rs.300 issued for 1995-96 The ShortTerm loan given in 1995 96 converted into MediumTerm loan for a period of 3 years and rescheduled during 1996 97 for a period of 5 years shall again be rescheduled for a period of 7 years from the date of first conversion. The repayment schedule for the 7 year MediumTerm loan will be as follows: Repayment schedule if 1998-99 is a drought / flood year vide col.5 (Amount in Rupees) Principal instalments as fixed / revised on Year

Due Date

(1) 1996 1997 1998 1999 2000 2001 2002

1997 1998 1999 2000 2001 2002 2003

Interest Liability

31.3.1996

31.3.1997

31.3.1998

(2)

(3)

(4)

(5)

(6)

31.3.1997 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002 31.3.2003

100 100 100 -

75 75 75 75 -

(Deferred) (Deferred) 75 75 75 75

(Deemed as collected) (Deferred) (Deferred) 90.00 22.50 15.00

Note: In the illustration given above, it has been assumed that a farmer would have borrowed one crop loan for each of three years. It might have happened that some borrowers had taken only one or two crop loans. It might also have happened that not all of them had been converted / rescheduled. The concessions listed in the circular letter vide paragraph 3 would apply to such cases also, in areas affected by drought / flood for 3 or more years in

346 - III

CHAPTER - 26 HANDLOOM FINANCE SECTION

1.

2.

General: a.

NABARD's policy for sanction of Weavers Credit limits to SCBs/ DCCBs / PWCS has been undergoing changes every year, primarily to give boost to this sector. The policy changes were normally in respect of eligibility norms and rate of interest.

b.

As in the case of Agricultural Credit Section, this section also will have to issue detailed circular to all the DCCBs every year in December, advising the DCCBs to prepare credit limit applications for financing Primary Weavers cooperative Societies (PWCS) and forward them to the Apex bank latest by February. This annual circular should cover all the policy changes announced by the NABARD including its Terms and Conditions relating to weavers finance for the current year.

c.

In case the NABARD announces revised norms to work out the eligibility of the WCS both under handloom and Powerloom groups, then the Handloom Finance Section in the Apex bank will have to give detailed guidelines, in its circular to the DCCBs about the preparation of the credit limit applications based on the revised norms of NABARD.

d.

It is also the responsibility of this Section to ensure that all the eligible DCCBs are able to get their eligible limits from NABARD.

Financing of Primary Weavers Cooperative Societies (PWCS): a.

Nature of Credit limits: i.

The credit limit sanctioned by the NABARD is in the nature of reimbursement finance (refinance). The DCCB should, therefore, use its funds first in making advances towards working capital requirements of PWCS and later approach the SCB for reimbursement. ii. Similarly, the Apex Bank should disburse loans to DCCBs in the first instance and later reimburse itself from out of the credit limit sanctioned by the National Bank on behalf of DCCBs concerned. b. Period of the credit limits:The Credit limits sanctioned by DCCBs to PWCS, by SCB to DCCBs and by NABARD to SCB are for the financial year (April to March) and are inclusive of outstandings against previous year's limits. c.

NABARD Refinance: The National Bank provides refinance under a consolidated ST. Weavers credit limit to SCB on behalf of the eligible DCCBs under section 21(1) (v) read with Section 21(4) of NABARD Act, 1981 for financing the production and marketing activities of the Primary Weavers Coop. Societies (PWCS).

347 - III

d. Need for refinance: Financial assistance is required for WCS for procuring inputs like yarn, dyes, chemicals and other raw materials required for production of cloth and also for holding stocks of finished goods before sale. i. NABARD is sanctioning credit limits to SCB on behalf of DCCBs for financing PWCS:

3.



for production and marketing of cloth,



for implementation of Special Programmes



against pledge or hypothecation of finished cloth and against bills payable by Apex society etc.

Eligibility for NABARD Refinance: a.

Type of WCS: i.

Only societies which are working as production-cum-sale units (i.e. WCS producing cloth on their own account by supplying yarn and other materials to their members and taking back the finished goods on payment of wages) are eligible for finance. ii. WCS working purely as marketing societies are not eligible. iii. The cotton, silk, woollen, and polyester Handloom WCS and Powerloom WCS are eligible for NABARD refinance. b. Viability: i.

The WCS should be viable or potentially viable. A society is treated as viable when it has an office owned or rented, has paid Manager/Secretary and has its own staff and earns sufficient profits to declare a reasonable dividend to its members after making appropriations towards Reserve Fund and other reserves. ii. Society having at least 100 active looms is considered viable. iii. The State Level Committee may lay down suitable norms for viability depending on the conditions of the Handloom Sector in the state. c.

Net worth: The WCS should have Net Disposable Resources (NDR). WCS whose accumulated losses exceed owned funds are not eligible for financial accommodation.

d. Satisfactory Operations in Cash Credit account: The Cash Credit account of the WCS should not have been inoperative for more than 3 months, unless the Society is under a specific programme of reorganization. 4.

Sanction of Short Term Credit Limit by NABARD: a.

Eligibility norms for SCBs / DCCBs - (The illustration given below is based on the Annual Policy of NABARD for the year 2009-10): i. Audit: Audit of SCB/DCCB for the year should have been completed and relative audit reports along with financial statements should have been received by NABARD. Wherever 348 - III

audit for 2008-09 has been completed and audit report is available, the same should be submitted along with the application. ii. Compliance with Section 11(1) of BR Act of 1949, AACS: 

All SCBs/DCCBs complying with the provisions of Section 11(1) of the BR Act (AACS) or exempted from complying with the said provision by Govt. of India, will be eligible for sanction of credit limit.



SCBs/DCCBs not complying with Section 11(1) of Act, ibid, where exemption from complying with said provision has not been granted by GOI, will be eligible for sanction of credit limit provided their exemption applications, duly approved and recommended by NABARD, are not pending with RBI/GOI for more than one year.



Sanction of credit limits to Section 11 (1) non-compliant banks, subject to the above conditions, would be either against Government guarantee or pledge of Government securities and such sanction will be decided by NABARD, HO.



However, SCB/ DCCBs whose license applications have been recommended by NABARD to RBI for rejection or already rejected by RBI will not be eligible for credit limit.



Special relaxation would be granted in respect of states which have accepted and executed MoU as per Vaidyanathan Committee I recommendations. Accordingly, Section 11(1) non-compliant SCBs/DCCBs of such States will be eligible for refinance even though:  their exemption applications, duly approved and recommended by NABARD are pending for more than a year with RBI/Govt. of India  NABARD had recommended for rejection of license, provided SCBs/DCCBs have submitted fresh application together with suitable action plan seeking exemption from the provisions of Section 11(1) of B.R. Act, 1949 (AACS), acceptable to NABARD Head Office(DOS). However, SCBs/ DCCBs in such states whose license applications have already been rejected by RBI will not be eligible for sanction of credit limit. iii. In case of ineligible DCCBs, the WCS affiliated to such DCCBs may be financed by branch of SCB or nearby DCCB, subject to approval by their bye law. Such financing by SCB/DCCB to such WCS would be eligible for NABARD refinance. iv. Sanction of credit limit to SCB whose deposits have been eroded as per the latest statutory inspection would be against State Government guarantee or pledge of securities in lieu of Govt. guarantee. Credit limit applications of such SCBs may be forwarded to NABARD H.O. b. Quantum of Refinance: i.

The amount of refinance will be linked to the level of 'Net' NPAs of the SCB as on 31 March 2008/2009 as indicated below:

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Level of Net NPAs of SCB

Eligible limit

Upto 10%

Normal eligibility as per norms

Above 10% and upto 15%

Maximum O/s reached by SCB against limit sanctioned by NABARD during 2008-09. Cases of SCBs not sanctioned limit during 2008-09 may be referred by NABARD RO to HO for consideration on merit.

Above 15%

Cases to be referred by NABARD RO to HO for consideration on merit.

ii. The SCBs in the Eastern Region i.e. Bihar, Chhattishgarh, Orissa, West Bengal and Jharkhand would be eligible for additional refinance of 5% over and above the applicable quantum of refinance. iii. However, with a view to increase the credit flow in the North Eastern region, Jammu & Kashmir, Sikkim, Andaman and Nicobar Islands, Himachal Pradesh and Uttarkhand the eligibility in these states will be as under: Level of Net NPAs of SCB

Eligible limit

Upto 15%

Normal eligibility as per norms

Above 15% and upto 20%

Maximum O/s reached by SCB against limit sanctioned by NABARD during 2008-09. Cases of SCBs not sanctioned limit during 2008-09 may be referred by NABARD RO to HO for consideration on merit.

Above 20%

Cases to be referred by NABARD RO to HO for consideration on merit.

iv. If NPA level as per statutory audit is less as compared to NPA level as revealed by inspection report of NABARD, NPA level as revealed by inspection report will determine the eligibility. v. The net NPA position as on 31 March 2008 should be considered for sanction of credit limit. vi. However, in view of receipt of grant under ADWDR scheme 2008 as well as recapitalization assistance under VC I package, if duly audited NPA position as on 31 March 2009 is beneficial for sanction of credit limit, the same may be considered for determining the quantum of credit limit. c.

Drawal Conditions (SCBs/DCCBs): i. The operative period of the limit would be 01.04.2009 to 31.03.2010. ii. Drawal by Section 11 (1) non-compliant banks would be permitted only up to the period of exemption. Drawal beyond the exemption period granted by the GOI but during the remaining part of the operative period of the credit limit would be permitted only after the banks 350 - III

application seeking further exemption from the said provisions, along with action plan duly recommended by the state government concerned, is received by NABARD and is found acceptable. iii. In case of SCBs found not complying with Section 11(1) of Act, ibid, after sanction of credit limits, further drawals may be allowed either against Government Guarantee or pledge of Government securities provided it has submitted exemption application and action plan for recompliance within one month of receipt of IR. Otherwise operations will be suspended. In case of DCCBs not complying with Section 11(1) of Act, ibid, after sanction of credit limits, further drawals may be allowed only after the exemption application along with action plan submitted by the bank has been submitted before expire of one month from the date of receipt of NABARD's inspection report and found acceptable for being forwarded to RBI for favourable consideration. iv. In case SCB/DCCB is under direction of RBI for non-acceptance of fresh deposits from public, no drawals will be allowed. v. In the case of new units, SCB/DCCB may submit an undertaking that it had not availed refinance for such units for the purpose under any other refinance scheme of NABARD. d. Consolidated limit: i.

A consolidated limit will be sanctioned to SCBs on behalf of eligible DCCBs. The limit will be sanctioned under Section 21(1)(v) read with Section 21(4) of the NABARD Act, 1981 against the DPN executed by the SCB and declaration in writing at the time of each drawal that the drawal preferred and the refinance already availed are against the loans provided to eligible D C C B s f o r f i n a n c i n g e l i g i b l e P r i m a r y We a v e r s ' C o o p e r a t i v e Societies(PWCS)/individuals/HWGs/MWs and are covered by adequate non-overdue loans o u t s t a n d i n g a t D C C B l e v e l a g a i n s t P r i m a r y We a v e r s ' C o o p e r a t i v e Societies(PWCS)/individuals/HWGs/MWs etc. However, SCB will continue to endorse the TPNs executed by DCCBs in favour of SCB and keep the endorsed TPNs with them as agent of NABARD. The amount of such TPN at all times should not be less than the outstanding of the individual DCCBs against the SCB and the DCCBs/ SCBs refinance outstanding from NABARD. ii. Good working PWCS in the jurisdiction of ineligible DCCBs may be considered for refinance through neighbouring branches of SCB or nearby DCCB subject to their bye laws and approval of director of Handlooms/RCS. e.

Eligible activity: i.

working capital finance extended for production and marketing of cloth by primary Handloom/Powerloom WCS. ii. working capital finance extended to the individual weavers. iii. working capital finance extended to the HWGs/Master weavers.

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5.

6.

Eligibility criteria for sanction of credit limits to PWCS: a.

Society should be functioning as production-cum-sale unit.

b.

Society should be viable/potentially viable and should have paid Manager/ Secretary.

c.

Society should have positive Net Disposable Resources (NDR). NDR should be worked out as the aggregate of owned funds and deposits of the society minus the investments in Government and other trustee securities, shares in cooperative institutions, fixed assets, fixtures and fittings and accumulated losses, if any.

d.

Society should not be placed in 'D' class audit.

e.

Audit of the Society should not be in arrears for more than 1 year [i.e., for sanction of credit limits to SCBs/DCCBs for financing PWCS during 2009-10, audit of society should have been completed upto 2006-07].

f.

Banks should sanction society-wise credit limits as per prescribed norms and ensure that drawals made on the consolidated sanctioned credit limit are utilised only for financing eligible societies and as per the norms prescribed by NABARD.

Assessment of Working Capital: a.

50% of anticipated production based on actual production during the previous year or the average production during the preceding 3 years, whichever higher, plus reasonable increase during the year (generally assumed at not exceeding 20%).

b. Renewal of the credit limit upto previous year's limit i.

Provided PWCS has remitted into the cash credit account an amount equal to at least either 50% of sales or 60% of the credit limit sanctioned. ii. In case of any shortfall in remittances, credit limits should be reduced proportionately. iii. Societies failing to remit even 30% of sales or 40% of the credit limit sanctioned whichever is lower, should be treated as defaulter to the bank, their outstandings should be considered as overdues and such societies will not be eligible for any credit limit. c.

Enhancement of cash credit limit to a PWCS only where society has remitted at least 60% of sales or 75% of the limit sanctioned, whichever is higher.

d. Additional credit limit - If the normal credit limit is not adequate for continuing its production and marketing activities during the slack sales season when sales are less, resulting in accumulation of stocks, PWCS having good sales record can apply for additional limit against pledge or hypothecation of finished cloth, procurement dues from Coop. Textile Emporium and rebate dues from govt. Such additional credit limit will be subject to the following:

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i. Achievement of at least 80% of the previous year's anticipated production. ii. Remittance of at least 60% of sales or 75% of limit sanctioned, whichever higher. iii. Aggregate of normal and additional limit not exceeding 75% of the anticipated production during the year. iv. Liquidation of additional limit, ordinarily, within a period of 6 months. v. Quantum of additional limit together with the normal limit not exceeding 9 times the NDR of the PWCS. vi. Both normal and additional credit limits should be within the prescribed multiples of owned funds of the bank concerned. e.

Working capital finance under Special Programmes: In case of newly established PWCS/dormant societies activated and in case of established/running societies, where new looms are acquired/idle looms are activated, assessment will be on the basis of per loom scale of finance fixed by the unit cost committee (State Level Standing Committee) on regional basis. In such cases:i.

Number of new/active looms should be certified by the Director of Handlooms and Textiles. In cases where such looms are not operative, the limit will be reduced proportionately. ii. Assessment of working capital on per loom scale of finance should be made for an initial period of 2 years and thereafter with reference to the anticipated production as in the case of normal working societies. iii. Banks financing such special programmes/new societies should ensure proper supervision over the end-use of funds. iv. Separate accounts should be maintained in regard to production under normal programme and special programmes, and the production under special programmes should not be clubbed along with the normal programmes. f.

Fixation of Per Loom Scale of finance: i.

The per loom scale finance is fixed by the “Unit Cost Committee” constituted for the purpose and the same is revised every year. ii. The Unit Cost Committee is convened by the SCB every year and the committee consists of representatives from the: 

NABARD



Department of Handlooms & Textiles



State Apex Coop. Society/ Textile Emporium

 selected DCCBs iii. The committee meets once a year to review the per loom scale of finance fixed for various types of looms. The per loom scale of finance is fixed taking into account the cost of inputs that go into production, the performance of the existing WCS in the previous year and the general trend of costs and prices prevailing in the industry. 353 - III

iv. To assess the cost of production, details of cost of production of different types of cloth produced both on handloom and powerloom in the cooperative sector are obtained from some good working WCS in the districts where most of the WCS are concentrated through a structured proforma. v. For applying for credit limit to NABARD, the special programmes drawn-up should be supported by the specific recommendations of the Asst. Director of Handlooms concerned. vi. Under special programmes, working capital is assessed on the basis of per loom scale of finance for the first two years. After the initial period of 2 years, the credit requirements will be assessed with reference to anticipated production. vii. The per loom scale of finance fixed for the year 2009-10 was as follows. Sl.No

*

Per Loom Scale of Finance fixed for the year (in Rs.)

Variety of Cloth

1

Hand loom - Cotton

26000

2

Hand loom- Special Cotton/ Hand loom - Polyester

44000

3

Power loom

49000

4

Handloom - Pure Silk with Half Fine Zari

60000 *

5

Handloom - Pure Silk with Pure Zari

75000 *

Maximum amount fixed for HF silk & pure silk. However the DCCBs can even fix lower amount also while sanctioning the limit under special programmes by taking into account of the cost of production of particular variety of cloth that may be produced on the particular loom. g.

Margin & NDR: i.

Societies should maintain margin of 10% for working capital limits provided by cooperative banks from out of their NDR. ii. As the WCS are required to maintain a margin of 10% on Cash Credit borrowings, limits are sanctioned upto 9 times of their ability to provide margin(NDR). iii. The banks shall calculate the NDR on the basis of Balance sheet as on the preceding 31st March. 7.

Cover and margin for borrowings of WCS from DCCB: a.

Normal and special limits: i.

WCS should submit a monthly cover statement so as to reach the DCCB within one week of the close of the month to which the cover statement relates. ii. The Drawing Power for the month should be fixed at 90% of the available cover since the WCS is required to maintain a margin of 10%. 354 - III

b. Items Eligible for Cover: i. Fully paid yarn-in-stock with the society valued age-wise. ii. Yarn with members issued for production of cloth on society's own account. iii. Fully paid dyes and chemicals and other raw materials required for production of cloth. iv. Advances towards wages made by the PWCS to their weaver members subject to the following conditions:! Advance wages should not exceed 50 % of the value of knots of yarn issued to the members in respect of ordinary cotton varieties and 25% of value of yarn issued in respect of costly varieties of cloth viz. silk sarees, polyester, special varieties of cotton, etc., and ! Overdue wage advances, if any, should be excluded from the advance wages worked out in the above manner and shown as cover for borrowings. v. Finished goods in stock valued age-wise: valuation of yarn/finished goods/ cloth for the purpose of cover would be as under:-

Valuation at cost price Age-wise classification yarn/cloth Silk cloth Upto 12 months

Other cloth

100%

100%

Over 12 months and upto 24 months

90%

80%

Over 24 months

80%

60%

vi. Rebate claims due from government duly certified by the Department. vii. Dues admitted and outstanding payment by the Apex/Regional WCS for cloth sold to it. viii. Bills payable by the Apex/Regional WCS for cloth purchased by it from PWCS but not paid for. ix. Book debts arising from credit sales of cloth to other parties subject to the following conditions:  Demand bills should have been drawn by the society on the party to whom it has supplied cloth against firm orders. 

x.

Relative documents like railway receipts or lorry receipts should have been lodged with the bank duly endorsed with instructions to release the documents only on payment and to credit the proceeds of the bill of realisation to the cash credit account. In case of usance documentary bills:  Bill should be of usance not exceeding 90 days.

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

Bills should have been drawn by the society on the party to whom it has supplied cloth against firm orders.



Relative documents like railway receipts or lorry receipts should have been lodged with the bank duly endorsed with instructions to release the documents on acceptance of the bills by the drawee or his banker and to hold the bills till maturity and to credit the proceeds of the bills on realisation to the cash credit account.



Bills not accepted or paid for by the drawee and/or his banker on presentation for acceptance or payment should be excluded from the cover and the society asked to make good the shortfall in the cover immediately. xi. Book debts comprising bills receivable upto 6 months, those over 6 months from Apex Society and State Government but not exceeding 20 % of the previous year's sales turnover and sundry debtors not outstanding for more than 3 months, may be accepted as cover for borrowing. However they may not exceed 50 per cent of the total outstanding in the cash credit account of the society at any point of time. xii. Cover for drawals on the credit limits sanctioned by the NABARD will be the DCCB's nonoverdue outstandings against weavers' societies excluding the outstandings in unrenewed cash credit accounts, the amounts due against societies in default and also the amounts received by the concerned SCB/DCCB for Apex/Regional WCS and dues payable/receivable and pending for adjustment for more than 3 months to the account of Apex/Regional/Primary WCS. c.

Supervisory Machinery: i.

As per the norms prescribed the DCCB have adequate supervisory machinery to supervise the functioning of WCS. The norms fixed are as one Junior Supervisor for 10 WCS and one senior Supervisor for 3 Junior Supervisors. ii. It should be ensured that each PWCS has a defined exclusive area of operation and loom numbering with a view to avoiding problems resulting from dual membership between societies. iii. The DCCB may restrain from financing new societies which do not have an exclusive nonoverlapping area of operation. iv. It should be ensured that PWCS maintain the important books and registers, post the transactions on a daily basis and extract balances on the same date. d. Rate of interest: i.

The rate of interest for borrowings in respect of Handlooms and Powerlooms will be as per the rate fixed by the NABARD from time to time. ii. The SCB and the DCCBs shall add their margin and fix the rate of interest for their lending to WCS. st

iii. The rate of interest is applicable to the outstanding as on 31 March and for borrowings as well. iv. Interest is payable half yearly or earlier when the outstanding in the loan account is repaid in full in the following pattern: 356 - III

 SCB to NABARD (loan A/c) - September and March.  DCCB to SCB (loan A/c) - August/September and February/March (as specified by SCB). v.

 WCS to DCCB (CC A/c) - Monthly. Interest rate on the finance provided by SCB/DCCBs to PWCS from their own resources:  WCS eligible for finance as per NABARD norms should be charged at the rate as per NABARD refinance rate.  WCS which do not qualify for NABARD limit for one reason or other and is financed entirely from out of the own resources of the DCCB can be charged at the NABARD refinance rate or at a reasonable rate of interest taking into account their cost of funds and the risk involved in it.

e.

Penal interest: i.

Each drawal is repayable within 12 months from the date of Hundi lodged for the drawal and in case of default, additional interest at 2.5% per annum over and above the normal rate of interest or such other rate as may be specified by the SCB will be charged from the date of default to the date of clearance of such default. ii. In the event of default in payment of interest or any portion thereof on due date, additional interest at 2.5% per annum over and above the normal rate of interest or such other rate as may be specified by the SCB shall be payable by the DCCB on such amounts from the date of default till the date of its clearance. f.

Cover for borrowings of DCCBs from SCB: i.

The DCCB is eligible for drawals from the limit only in respect of its advances to the PWCS (1) which are functioning as Production-cum-Sale Societies and (2) which are eligible for limit, as per norms prescribed by NABARD from time to time. ii. The DCCB shall ensure that its outstanding to the SCB under ST. Weavers Finance are covered by Non-overdue outstanding against PWCS, distinctly under (a) Production Basis, (b) Special Programmes, (c) Additional Limits. The DCCB has to watch the outstanding against PWCS vis-à-vis borrowings from the SCB, on a day-to-day basis and should regularize excess borrowings from SCB if any, immediately. iii. In case of any deficit, the same shall be regularized within 30 days of such occurrence. If the deficit persist beyond that will attract additional interest at 1% over and above the prescribed rate. g.

Overdues: The following outstanding against WCS shall be treated as overdues for the purpose of assessing Non-overdue Cover. i. Outstanding against WCS which are not eligible for NABARD Refinance. ii. Outstanding against WCS, whose limits have not been renewed for the current year. 357 - III

iii. Outstanding in excess of eligible drawing power/sanctioned limits, as per NABARD norms. iv. Outstanding against WCS from whom stock statements have not been received. v. Advances made to WCS from the own resources of the DCCB (a) against Reserve Fund and (b) Others, viz., dues from Apex societies etc. vi. Advances to WCS, which are purely Marketing Societies. vii. Advances to WCS, which are having audit arrears for more than one year. h. Submission of periodical returns:

i.

8.

Monthly

Due date

Quarterly

Due date

NODC

10th

Rebate dues

25th

Dues from Apex society

20th

Interest subsidy

25th

Inspection of WCS

25th

Insuring Stocks: WCS shall insure their stocks in trade including yarn and cloth on looms at their full value, against: i. Fire and other risks ii. Burglary iii. Cyclone/flood (necessary only in the case of WCS situated in cyclone/flood prone areas) iv. The insurance policy should be taken in the joint names of the WCS and the bank or with a bank clause.

Application for Credit Limits: a.

Submission of Credit Limit Application: The validity period of the credit is April to March and the time schedule for the submission of credit limit application shall be: i.

th

WCS to DCCB - 15 January

ii. DCCB to SCB - 15th February th

iii. SCB to DH/NABARD- 28 February (as applicable) iv. DH to NABARD- 15th March Note: In states where MoU have been executed and Cooperative Societies Act has been amended, credit limit application need not be routed through the Director of Handlooms. b. PWCS to DCCB: PWCS based on its financial position as on 31st March preceding year and the st st production, sales, remittances etc. during the preceding year (from 1 January to 31 December) may apply for credit limit. The application should be recommended by the Assistant Director of Handlooms and should reach the DCCB latest by 15th January.

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c.

DCCB to SCB: i.

The DCCB should process the application of PWCS and apply for Normal Credit Limit (production basis and special programmes) to the SCB before 15th February. ii. DCCBs while preparing the credit limit application should take care of the defects, if any, communicated by the SCB/NABARD in the previous year application and avoid recurrence of such defects and it should be also indicate the arrangements made in supervising the PWCS in the absence of adequate supervisory machinery. iii. As regards special programmes the DCCB should arrange to furnish specific recommendation (by way of certificates) from the Assistant Director of Handlooms of the circle concerned. The reasons for shortfalls, if any, in the achievement in earlier years, should be given clearly. The first year programme should be based on the achievement in the earlier years. The second year programme should be based on the achievement in the first year programme. iv. The DCCBs should also submit the following, along with the application for credit limits: 

Latest Balance sheet and Profit and Loss Account of the Bank.



Audit certificate.



Reserve Borrowing Power statement of the DCCB.



Financial statement of the DCCB as on 31st December.



Resolution of the Board of Directors (or) the Special Officer (Board of Management) authorizing the Bank to obtain financial accommodation from the NABARD



A certificate from the Assistant Director of Handlooms furnishing the consolidated quantum of funds required for implementation under Special Programme.



Certificate of the audit classification of PWCS to be financed by the DCCB.



Statements (1 to 12-as applicable)



Worksheet I, II and III.



Annexure I and II.



Write up on the Weavers/PWCS status in the district, along with the details of PWCS. (viz.,) Active, Dormant, Liquidated PWCS and action plan for financing Individual Weavers and Self Help Weavers Groups.

d. SCB to NABARD: i.

On receipt of the application from the DCCB, the SCB will scrutinize it and ensure that the application and the statement enclosed are in accordance with the guidelines.

ii. The Apex Bank has to put up a Board Note furnishing the following particulars for approval: 

Particulars of credit limits applied for the current year on the basis of production, under Special Programmes and additional limits, if any. 359 - III



Operations in the CC limit sanctioned to DCCBs by the Apex Bank, indicating the opening outstanding balance, drawals made during the previous year, repayments during the previous year, outstanding at the end of the year and the maximum outstanding reached during the year etc.



Particulars of eligibility of the DCCB for the year under handloom and power looms, with reference to production norms.



Eligibility under Special Programme for financing activation of idle looms, admission of new looms, new societies, renewal of dormant Societies, conversion from cotton to polyester/silk looms year-wise for 2 years, on the basis of performance under Special Programmes during the previous year.



Additional limits against dues from Apex society, Stock of cloth and rebate dues from Governments.



Total eligibility of the DCCB under normal and additional limits.



Whether the additional limit applied for is as per the norms.



Suggesting that the Apex Bank may prefer a consolidated short term Weavers Credit limit application on behalf of DCCB indicating the amount separately on production basis, under Special Programme and additional limit in the forms prescribed by NABARD.

e.

Based on the particulars as above, a resolution is to be adopted by the Board of Management of the Apex Bank indicating the amount and year under Section 21(1) (v) read with Section 21(4) of NABARD Act, 1981 for financing Handloom (cotton/ silk/wool/ polyester) Weavers Coop. Societies for production and Marketing activities and sanction of a consolidated limit from NABARD for the purpose.

f.

While applying to NABARD for credit limits, the Apex Bank has to furnish the following documents/statements to the National Bank: i. Application in the prescribed form on behalf of DCCB (Annexure ….) ii. An attested copy of the resolution passed by the Board of Management of the Apex Bank as indicated above. iii. Reserve Borrowing Power statement of the Apex Bank. iv. Latest audited Balance Sheet and the latest financial position of the Bank. st

v. Statement of liquid assets as 31 December/latest. vi. CCB's application copy. g.

In states where MoU have been executed and Cooperative Societies Act has been amended, credit limit application need not be routed through the Director of Handlooms. In case of other states, the consolidated credit limit application should be recommended by the Director of handlooms, as hitherto.

360 - III

[A set of specimen application formats for enabling the DCCBs and SCBs to prepare and submit the WCS credit limit application to NABARD is given in the Annexure to this Chapter.] 9.

Sanction of credit Limits: a.

NABARD to SCB: On receipt of the sanction letter of the NABARD, the Apex Bank has to furnish the following documents/certificates to the National Bank before availing drawals under the sanctioned limit. i. ii. iii. iv.

Letter of acceptance of the terms and conditions governing sanction. Demand Promissory Note duly executed by the SCB in favour of NABARD. Guarantee Deed executed by the government (if applicable). Mandate for debiting the Current account of SCB with RBI in the event of default in repayment of principal or repayment of interest (if not already given).

b. SCB to DCCB: As soon as the credit limits are sanctioned and communicated to SCB on behalf of DCCBs, the Apex Bank has to sanction CC limits based on the consolidated limit sanctioned on behalf of the eligible DCCBs and communicate the same by a letter in duplicate to DCCBs. Along with the sanction letter, the Apex Bank should also send 2 copies of the terms and conditions governing operations in the CC limits. On receipt of sanction, the DCCB will submit the following documents to the SCB before availing drawals under the sanctioned limit: i.

Duplicate copy of the sanction letter duly signed by the authorised official of the DCCB in token of acceptance of terms and conditions. ii. A copy of the terms and conditions duly signed on each page by the authorised officials of the DCCB in token of having accepted the same. iii. A Demand Promissory Note duly executed and signed by the authorised officials of the DCCB. iv. An attested copy of the resolution of the Board of management of the DCCB authorizing its officials by name to give undertaking and to operate on the limits and to furnish security certificates etc. and agreeing to hold promissory notes of PWCS on Apex Bank's behalf, duly endorsed in SCB's favour. v. Specimen signatures of the authorised officials of the DCCB who are authorised to operate on the CC limits and execute the required documents/statements, duly attested by the Chief Executive of the DCCB. c.

DCCB to PWCS: The DCCB will send Sanction letters to PWCS (which are eligible for NABARD refinance and whose credit requirement is included in the credit limit application), communicating the sanction of cash credit limit (not exceeding 9 times of NDR) with the terms and conditions. The PWCS will execute a Demand Promissory Note to the DCCB for the limit sanctioned.

361 - III

10. Operation in the limits: a.

DCCB to PWCS: The DCCB will allow drawals to the PWCS in the cash credit limit account to the extent of difference between:

i. Total limit and outstanding in the limit.(or) ii. NODC/Drawing Power and outstanding in the limit (or) iii. NODC on production basis plus achievements under Special Programme and outstanding in the limit, whichever is lower. (It is desirable to get cover statements separately for normal and special programme limits) b. SCB to DCCB: i.

While allowing the drawals to DCCBs against their CC limits sanctioned, the Apex Bank should ensure that the DCCBs have preferred drawals separately for handlooms and power looms. ii. The DCCBs should submit the following documents and certificates along with each drawal application to the Apex Bank. 

Non-overdue cover particulars in the form prescribed by the Apex Bank as at the close of business on a date not earlier than 7 days prior to the date of drawal application. The DCCB need not furnish the list of WCS and the outstanding against each of them at the time of every drawal under normal limit.



A certificate to the effect that the drawal applied for by the DCCB is within its Reserve Borrowing Power, in the form prescribed.



The cash reserve and liquid assets maintained as at the close of business on a Friday not earlier than 13 days period to the date of application.



In addition to the above, the DCCB has to furnish a certificate to the effect that separate books of accounts are being maintained by the DCCB in respect of its advances for special programmes.



Certificate to the effect that the outstanding against the following categories of societies have been excluded from cover for the drawals and are not being reimbursed from the limit sanctioned by the SCB/NABARD, in the format prescribed.  PWCS placed in 'D' Class in audit.  PWCS which are having audit arrears for over 1 year.  PWCS whose accounts with the Bank have remained inoperative for over 1 year unless such Societies are under Special Programme of revival or reorganization.  PWCS whose accumulated losses exceed the owned funds.  PWCS which have been excluded by NABARD/SCB for purpose of reimbursement from the credit limit sanctioned.

362 - III

 PWCS which have not been included in the credit limit application preferred to NABARD by the DCCB.  PWCS which are not eligible for sanction of limit as per norms prescribed by NABARD/SCB from time to time.  Outstanding in excess of eligible drawing power/sanctioned limits, as per NABARD norms.  Outstanding against WCS from whom stock statements have not been received.  PWCS which are purely Marketing Societies. 

For Power looms: In addition to the above, (a) to (g) for drawal under power looms, the following certificate are to be furnished by the DCCB.  A certificate to the effect that the PWCS having power looms have obtained the approval of the Textile commissioner and necessary license for operating such power looms from the Central Government, State Government and Civil Authority as indicated in the SCB's circular No._______, dated ________.  A certificate to the effect that separate books of accounts are being maintained by the DCCB in respect of its advances to PWCS having power looms.  Security Certificate to the effect that, -

Sufficient securities have already been obtained by the bank from the Weavers Cooperative Societies for the cash credit limit sanctioned and outstanding against each one of them to cover the total loan of Rs. lakhs ( Rupees ……………….. ) drawn from the SCB including the present drawal of Rs. lakhs (Rupees ………………… ) for financing Weavers Cooperative Societies.

-

The security obtained by this bank from the Weavers Cooperative Societies bears the first charge of the SCB.

-

The pronotes of the Weavers Cooperative Societies are held in our custody on behalf of SCB which will be endorsed in your favour as and when demanded.  In respect of limits sanctioned on the basis of per loom scale of finance, the DCCB should submit a certificate to SCB at the time of each drawal to the effect that it has conducted verification of the looms working for each society under the programme during the previous quarter and then the drawals against the limits have been regulated based on the actual number of looms worked during the previous quarter.  They will have to prefer a separate drawal application for drawals under additional limit, subject to NODC or Drawing Power. iii. The DCCB will be eligible for drawal to the extent of difference between:

Total limit and outstanding in the limit (or)



NODC and outstanding in the limit (or)



NODC on production basis plus achievements under Special Programme and outstanding in the limit, whichever is lower. iv. After scrutiny of the drawal application and the documents/ certificates submitted by DCCB, 363 - III

the Apex Bank will arrive at the eligibility amount of drawal as per the scrutiny sheet and put up the same to the Executive concerned for sanction of the drawal. v. On sanction of the drawal, the amount should be credited to the Current Account of the DCCB concerned under advice to it. vi. In case, the drawal is not sanctioned due to some reason or the other, the same should be informed to the DCCB concerned immediately. c.

NABARD to SCB: i.

After allowing the drawals to DCCBs, the SCB may prefer reimbursement in the prescribed format. ii. The SCB is required to furnish the following particulars along with every drawal application prepared to NABARD: 

We hereby certify that the drawal preferred and the refinance already availed are against the loan provided to the eligible DCCBs for financing production and marketing of handloom (Cotton/Silk/Wool/Polyester)/Power loom weavers' cooperative societies and individuals and are covered by adequate non-overdue loans outstanding at the eligible DCCBs level against Weavers societies/individuals.



The aggregate amount of refinance, inclusive of present drawal preferred, is not more than loan outstanding against Weavers Societies/Individuals at the level of eligible DCCBs.



The drawal of Rs.-------- now applied for is within our reserve borrowing power and while allowing drawals to the eligible DCCBs we have ensured the drawals were within their borrowing power.



The pronotes executed by the eligible DCCBs in our favour are duly discharged in favour of NABARD and are held by us as agent of NABARD.

iii. The drawal application and the above certificates should be signed by two authorised officials of the SCB. d. Monthly NODC Return to NABARD: The Apex Bank should submit a separate consolidated NODC statement for normal and additional limits in the prescribed formats as on the last day of th each month so as to reach the NABARD before 20 of the succeeding month. 11. Adjustment of Payments to PWCS from Apex Society to Weavers' borrowings:a.

The payments received from the Apex Society towards the cost of cloth procured from PWCS in the DCCB's jurisdiction will be adjusted to the loan account of the DCCB with the SCB. The DCCB, on receipt of advice from the SCB for such adjustments should credit the same to the respective PWCS' Account with the DCCB immediately.

b.

However, if there are no outstandings in the loan account of the DCCB, the payments received from 364 - III

Apex Society / Government will be credited to the centralized Current Account No. I of the DCCB with the SCB. c.

Adjustments by the SCB of the amounts received from Apex Society /Government mentioned above to normal limit or additional limit will be in the order of the due date of the borrowings of the DCCB from the SCB.

12. Inspection of PWCS by DCCBs: a.

The DCCB should also furnish a statement as at the end of the December every year about the number of Societies inspected etc., so as to reach the SCB before the end of the following January.

13. Right of the Apex Bank to recall the advance: a.

The SCB will have the right to recall the advance even before the due date and even before the limit is fully utilized in the event of the credit limit being not fully utilized by the DCCBs and if any of the terms and conditions stipulated by the SCB has not been adhered to by the DCCBs.

14. Government Guarantee: a.

The advances made by the DCCBs to PWCS may be covered under any of the following Guarantee schemes. The advances granted by the Coop. Banks to Handloom WCS can be covered under either of the first two schemes as mentioned below. Under both the Guarantee schemes, losses in respect of non-payment of loans and defaults arising from looms of all types of industrial societies are shared by the Central Government, state Government and the financing banks concerned in the ratio of 50:40:10, provided the maximum aggregated amount payable by the Central Government shall not exceed 5% of the total loans disbursed in the state and outstanding under the scheme on th st the preceding 30 June and 31 December. From 01.04.1979 onwards, Losses were shared by State Govt. and the financing banks in the ratio of 90:10. (Apex Bank- 5% & DCCB 5%) 90% Loss Guarantee Scheme: The loss Guarantee Scheme was formulated by Govt. of India in 1956 with a view to provide guarantee cover to Coop. Banks to offset the losses arising out of non-recovery of loans advanced by them to weavers societies. It covers all advances to Handloom WCS under the Reserve Bank of India Scheme for weavers finance. It covers only ultimate losses incurred by Coop. Banks up to the extent of 90%. The scheme is administered through the State Government. ii. 90% Default Guarantee scheme: It provides guarantee up to 90% in respect of default arising from the loans of all types of Industrial Coop. Societies such as those undertaking production and or sales activities, providing services, federal societies as well as processing societies. The scheme is left to the option of the State Government to implement. iii. Credit Guarantee Scheme: Advances granted by DCCBs to the PWCS working on production-cum-sale basis can also be covered under the Credit Guarantee Scheme for small scale industries of the Govt. of India. The Reserve Bank of India which is designated as “Guarantee Organisation” has been administering the scheme on behalf of the GOI. The i.

365 - III

scheme provides for payment of 75% of the amount in default or the amount granted, whichever is lower, subject to a ceiling per borrower. All the credit cooperative banks in India are eligible institutes under the schemes and can avail of the guarantee facilities under the scheme by executing the necessary agreement with the Guarantee organization. iv. when the Guarantee can be invoked: The guarantee can be invoked only in respect of individual losses arising out of non-recovery of loans advanced to the WCS in spite of the best efforts taken by the DCCB concerned for the recovery of the loans and the invoking of Government Guarantee for the loss is a step to be taken only extreme cases as a last resort. v. If any loss has arisen in respect of the finance made available to a WCS in spite of all effective steps taken, because of trade risks and circumstances beyond the control. vi. The claims have to be prepared, in case of the WCS which are beyond revival and for which all action had been taken by the banks as well as the Department Officers with facts and figures in the proforma prescribed for reimbursement of losses. 15. Books and Registers required to be maintained: a.

At PWCS level: The PWCS shall maintain the following books and Registers post the transaction on daily basis and extract balances on the same date: i.

Cash book

ii. Day book iii. General Ledger iv. Yarn/Dyes stock Register v.

Yarn/Dyes issue Register

vi. Members production/wages paid Register vii. Sales/stock register viii. Rebate due Register ix. Dues from Apex Society/Emporium x.

Interest subsidy Register

xi. Sundry creditors/Debtors Register xii. Membership Register Note:The PWCS should submit the stock statement, Receipts and Disbursement statement, Profit and loss account statement etc. to the DCCB every month on or before the prescribed due date. The PWCS should operate the CC account as instructed by the DCCB in the sanction order. b. At DCCB level: The DCCB shall maintain the following: i.

Application and sanctions Register: Application and sanctions Register, year- wise indicating the PWCS-wise position of different limits sanctioned by the DCCB under 366 - III

NABARD refinance scheme and out of its own resources. These two lines of sanction and their break-up into Normal, Special programmes and Additional Limits may be indicated. It is desirable that particulars in respect of PWCS not eligible under NABARD scheme are recorded separately. ii. Cash Credit Ledger: The DCCB has to maintain a Cash Credit ledger at the branches/HO to record the operations on the CC limit sanctioned to each PWCS. The operations on each type of limit shall be recorded in separate folios. Where a PWCS is unable to submit cover statements separately for normal and special limits, the DCCB may still maintain separate folios and ensure that the total outstanding under the two limits do not exceed the drawing power. However, a separate cover statement will have to be submitted in respect of the additional limits sanctioned for meeting the slack season sales requirements. iii. Books of accounts: Books of accounts to facilitate the furnishing of separate figures (purpose wise outstandings, production particulars, utilisation etc.) in respect of 

Production by PWCS on looms which has been sanctioned on anticipated production basis.

 First/second year production made by PWCS under the special programmes. iv. Borrowings Register v. Hundi Due date Register for borrowings from SCB c.

At SCB level: The following registers/records shall be maintained: i. ii. iii. iv. v. vi. vii.

Weavers loan ledger Part payment Register Borrowings Register Due date Register for borrowings from NABARD DCB Register Subsidiary Registers for month wise due dates and total liability Hundi due date Resister: After allowing drawals to DCCBs, the SCB will enter the particulars of Hundi (DCCB wise) in the due register to watch their due dates. The Hundies executed by the DCCBs to the SCB will be endorsed in favour of NABARD and held by the SCB as its agent. On repayment of loan/s to NABARD, on behalf of the DCCBs, the Hundies will be discharged and sent to the DCCB concerned.

367 - III

Annexure -1 to Chapter - 26 SPECIMEN FORMAT - I (used by SCB to NABARD) (A specimen of Weavers credit limit applications and other related formats) Note: In the states where MOU have been executed and Cooperative Societies Act had been amended, credit limit application need not be routed through Director of Handlooms. THE …………………. STATE APEX CO-OPERATIVE BANK LTD., HEAD OFFICE C.No. /HFS/

Date:

The Chief General Manager, National Bank for Agriculture and Rural Development, (Local regional Office)

Sir, Sub: Application for credit limit under Section 21(i)(v) read with section 21(4) of NABARD Act, 1981, for financing PWCS for production and marketing of handloom/ powerloom cloth for the year …… Sanctioning of Credit limit requested Reg. Ref: NABARD's circular No. NB.PCD-Policy (Weavers)/…. dated …... *** We are forwarding herewith the ST Weavers credit limit applications of … DCCBs, along with our recommendations, for sanction Credit limit of Rs…… lakhs to our bank, under Section 21(1) (v) read with section 21(4) of NABARD Act, 1981, on behalf of the DCCBs for financing Handloom/Power WCS for production and marketing of handloom/ powerloom cloth for the year …... We, the ….. State Apex Cooperative Bank Ltd, hereby apply for a consolidated STW Credit Limit of Rs….. lakhs (Rupees ….. lakhs only) on behalf of the …. DCCBs, as per details given below, for financing PWCS for the year …..

368 - III

(Rs. in lakh) Sl. No.

Name of the DCCB

Credit limit applied by SCB Handloom Powerloom Special Production Programmes Basis

Total

1 2 3 4 5 6 7 TOTAL We hereby forward the following documents to NABARD along with the limit application. 1) Annexure to the limit application (I to V) 2) Proforma Balance sheet (Financial Statement) of our bank as on ……. 3) Liquid Assets Position as on …….. 4) Borrowing Power statement as on …….. 5) Resolution of Board of Directors of SCB to borrow from NABARD 6) Certificate by SCB indicating that it has obtained resolutions of Board of Directors of DCCBs to borrow from it and also to seek refinance from NABARD 7) Applications of the DCCB Hence, we request the NABARD to sanction STW Credit limit of Rs….. lakhs to our bank on behalf of the DCCBs for the year …., at the earliest. Yours faithfully, GENERAL MANAGER Encl: as above Copy to The Director of Handlooms and Textiles,

369 - III

THE ……. STATE APEX CO-OPERATIVE BANK LTD. C.No. /HFS/

Date:

The Director of Handlooms and Textiles, Sir, Sub: Application for Credit Limit under Section 21(1)(v) read with Section 21(4) of NABARD Act, 1981 for financing Handloom/ Power loom Weavers Coop. Societies for production and marketing of Handloom / Power loom cloth for the year …… Consolidated credit limit applied on behalf of … DCCBs Reg. Ref: NABARD's circular No. NB.PCD-Policy (Weavers)/…. dated ****** We are forwarding herewith copy of the credit limit applications of …. DCCBs to NABARD for sanction of a consolidated credit limit of Rs….. lakh to our bank on behalf of the DCCBs under Section 21(1)(v) read with Section 21(4) of NABARD Act, 1981 for financing Handloom/Power loom Weavers Coop. Societies for production and marketing of Handloom/Power loom cloth for the year …... We have forwarded one set of applications of the DCCBs along with our recommendations and other enclosures to NABARD, RO, to speed up the process of limit sanction. Along with the limit application we are forwarding the certified copy of the Resolution of Board of Management of our Bank and other necessary statements, in support of the application. We request the Director of Handlooms and Textiles to kindly send his recommendations on the above credit limit application to NABARD, under copy to us, early.

Yours faithfully, GENERAL MANAGER

Enc: As above. Copy to The Chief General Manager, National Bank for Agriculture and Rural Development, (Local Regional Office)

370 - III

ANNEXURE (I)TO THE CREDIT LIMIT APPLICATION Name of the DCCB

:

Purpose

: For financing Production & Marketing activities of PWCS

Limit applied

: Rs.

lakhs (Rs in lakh)

I.

A. 1. 2. 3. 4. 5. 6. 7. 8. 9. B

ELIGIBILITY OF DCCB a. Audit Classification for the year 20 - 20 b. Audit Marks Whether the DCCB has complied with Sec.11(1) of B.R.Act, 1949 (AACS) % of Gross NPA under all loans and advances as on 31.03.20 % of Net NPA under all loans and advances as on 31.03.20 Whether the DCCB had earning profit for the year 20 20 Accumulated losses, if any % of collection to demand under all loans and advances as on 31.03.20 a. Owned funds as on 31.12.20 b. Reserve Borrowing Power 31.12.20 Whether the latest inspection compliance report sent to NABARD UTILISATION OF CREDIT LIMIT SANCTIONED FOR 20 - 20 Credit limit sanctioned for 20 - 20 Outstanding as on 01.04.20 Drawals availed by the CCB during the year Repayments made by the CCB during the year Outstanding as on 31.03.20 Maximum NODC Maximum outstanding at SCB level % of utilization Average outstanding at SCB level % of average utilization Issues to PWCS by DCCB up to 31.12.20 Maximum outstanding at DCCB level PWCS Overdues as on 31.12.20

371 - III

II

PRIMARY WEAVERS COOP. SOCIETIES No. of PWCS affiliated No. of Borrowing PWCS No. of ineligible PWCS No. of PWCS audited up to 20 - 20 No. of PWCS working in profit No. of PWCS working at loss No. of dormant PWCS No. of liquidated PWCS Limit applied for No. of PWCS for 2009-10 Limit applied for No. of New PWCS

HL

PL

III. A. Credit Limit applied under Production Basis for 20 -20 : (Rs. in lakhs) Hand loom Credit Limit applied by DCCB

No. of PWCS

Amount

Power loom No. of PWCS

Amount

As per Worksheet I (for enhancement of credit limit) As per Worksheet II (for renewal of credit limit) As per Worksheet III (for proportionate credit limit) Total

III. B. CREDIT LIMIT APPLIED UNDER SPECIAL PROGRAMME for 20 - 20 : (Rs. in lakhs) I YEAR

Purpose

Type of Looms

Variety

Activisation of Idle Looms

HL

Cotton

Admission of New Looms (others if any) Total

HL

No. of Looms

Silk etc Cotton Silk etc

Grand Total for I year & II year 372 - III

Amount

II YEAR No. of Looms

Amount

IV.A.Credit Limit eligible under Production Basis for 20 -20

: (Rs. in lakhs)

Hand loom

Eligible Credit Limit arrived as per norms

No. of PWCS

Power loom No. of PWCS

Amount

Amount

As per Worksheet I (for enhancement of credit limit) As per Worksheet II (for renewal of credit limit) As per Worksheet III (for proportionate credit limit) Total IV. B. Eligible Limit arrived as per revised Per loom Scale of finance for 20 - 20 under SPECIAL PROGRAMME: (Rs. in lakhs) I YEAR

Purpose

Type of Looms

Variety

Activisation of Idle Looms

HL

Cotton

Admission of New Looms (others if any) Total

HL

No. of Looms

II YEAR

Amount

No. of Looms

Amount

others Cotton others

Grand Total for I year & II year Whether the Special Programmes have been recommended by ADH: YES V.

ELIGIBLE CREDIT LIMIT FOR 20 -20 (Rs.in lakhs) Purpose

H.L.

Under Production Basis Under Special Programmes Total

REMARKS: 373 - III

P.L.

THE ….. STATE APEX CO-OPERATIVE BANK LTD., SHORT TERM WEAVERS CREDIT LIMIT APPLICATION FOR 20 - 20 Annexure II 1

Name of the SCB:

2

Year of Audit:

3

Audit Class:

4

Audit Marks:

5

Whether complying with the Section11(1) of B.R. Act 1949(AACS):

6

If not, date from when not complying:

7

Exemption valied upto:

8

If exemption expired status of Action Plan:

9

Extent of erosion in Deposits (%): Gross NPA as %of loans as on 31 March 2008:

10 Net NPA as %of loans as on 31 March 2008:

Year

11

Operation of limits during last 3 years:

For The …… State Apex Co-operative Bank Ltd.,

General Manager

374 - III

Aggregate limits sanctioned to SCB by NABARD ( April to March) (Rs in crore)

Maximum outstanding reached against limits sanctioned (Rs in crore)

Maximum outstanding expected to be reached during 2009-10 (Rs in crore)

For The …… State Apex Co-operative Bank Ltd.,

General Manager

375 - III

Gross NPA as % of loans as on 31st march 20 % of recovery as on 31.03. ( all loans)

Extent of erosion in deposits (%)

If exemption expires status of action plan

Exemption valid upto

If not, date from when not complying

Whether complying with Sec11(1) of BR act 1949 AACS

Audit marks

Audit class

Year of audit

Name of the DCCB

S.No

THE …. STATE APEX CO-OPERATIVE BANK LIMITED;

SHORT TERM WEAVERS CREDIT LIMIT APPLICATION 20 - 20

Annexure III

For The …… State Apex Co-operative Bank Ltd.,

General Manager

376 - III

Amount applied for by SCB from NABARD

Limit likely to be sanctioned by SCB to DCCB

Maximum O/S expected to be reached during 20 - 20

Limit proposed to be Individuals sanctioned by DCCB to Total

PWCS

20 - 20

20 - 20

20 - 20

20 - 20

20 - 20

Maximum O/S at DCCB level against PWCS /Individuals during last 3 years (up to Dec)

Maximum O/S reached against Limits sanctioned during last 3 years

20 - 20

20 - 20

20 - 20

Limits sanctioned to DCCB by SCB during last 3 years (April-March)

20 - 20

Name of DCCB

S.No.

THE …. STATE APEX CO-OPERATIVE BANK LIMITED;

SHORT TERM WEAVERS CREDIT LIMIT APPLICATION 20 - 20

Annexure IV

THE …. STATE APEX CO-OPERATIVE BANK LTD; Annexure V Total No. of DCCBs in the State : Details of limits applied for in respect of DCCBs. (Rs. in lakhs) S.No.

Name of the DCCB

LIMIT APPLIED BY DCCBs No. of PWCS

Total For The …… State Apex Co-operative Bank Ltd.,

General Manager

(Format Credit limit agreement to NABARD by SCB) 377 - III

Amount

Recommendation of the SCB No. of PWCS

Amount

THE ……. STATE APEX COOPERATIVE BANK LTD. C.No. /HFS/

Date:

The Chief General Manager, National Bank for Agriculture and Rural Development, (Regional Office) Dear Sir,

In consideration of your agreeing to make to us loans and advances in your discretion, from time to time, under Section 21(1)(v) read with Section 21(4) of the National Bank for Agriculture and Rural Development Act, 1981, under the refinance scheme for financing the production and marketing activities of Primary weavers' cooperative societies on the terms and conditions contained in the letter of sanction No. …….. dated ….. and addressed to us by you, to the extent of a sum not exceeding Rs…. (Rupees …. only) for which amount we have delivered to you Demand Promissory Note in your favour carrying interest at the rate hereinafter mentioned, which advance shall be utilized for the purpose of financing the production and/or marketing activities of the Primary Weavers' Cooperative Societies, directly by DCCBs and shall be repayable on demand. We agree with and undertake to you as follows: 1.

The terms and conditions set out in your above letter of sanction shall form part of this agreement.

2.

We agree to abide by and observe and comply with stipulations/ instructions as contained in your circular issued from time to time and any amendments or modifications thereto as may be advised by from time to time.

3.

The balance of the said advances at any time outstanding shall be repayable by us to you on demand in accordance with the said scheme as may be amended by your from time to time.

4.

Interest shall be payable by us to you on the said advances at ….% or as specified by National Bank from time to time, with half-yearly rests on 30th September and 31st March or earlier when the entire balance outstanding is repaid. The amount of such interest calculated on the daily balances may be debited to the account of the said advances. We also agree that in the event of our committing default in repayment of principal and interest or any part thereof on due dates, we shall be liable to pay to NABARD interest on amount of default at …%p.a. for the period for which the default persists. FOR THE ….. STATE APEX COOP. BANK LIMITED, MANAGER

378 - III

ASST. GENERAL MANAGER

5.

As security for the said advances, we shall assign to you such bills of exchange and promissory notes as are acceptable to you and are drawn on and payable in India and drawn or issued for the purpose of financing the production and marketing activities of Primary Weavers' Cooperative Societies directly by DCCBs and which bills of exchange and promissory notes shall be held by us as agent on your behalf and shall mature within 12 months from the respective dates of their assignment by us to you, exclusive of days of grace.

6.

We undertake that each such bill or promissory note so assigned to you will be paid on its due date and in default of payment by the principal debtor thereon, will be paid by us to you.

7.

In case of default on our part in repayment of any loan or portion thereof or interest on the respective due dates under the terms hereof, the National Bank for Agriculture and Rural Development may, but without any obligation on its part so to do, request the RBI to debit our current account with the RBI for the amount due to you and credit the same to your current account with the RBI. On receipt of such requisition from you, the RBI, may without further notice to us, comply therewith and shall thereupon be discharged of all its obligations to us in respect of the sums so debited to our current account with it.

8.

We undertake that we will not assign to you any bill or promissory note in terms of this Agreement unless we are satisfied that all parties liable thereon are financially sound, solvent and creditworthy and that by such assignment and we certify the signatures of such persons thereon. We agree that the fact of your not taking steps to enforce payment of such bills and promissory notes or any of them against the principal debtor thereon shall in no way release us from our liability thereon and we further agree that it shall be unnecessary for you to give any notice of dishonour.

9.

We agree that we will, from time to time, while the advances continue and whenever required by you to do so furnish you with true reports in such form as you may prescribe regarding the solvency of the parties on each such bill or promissory note and agree to advise you promptly of any change in the position of any such party which can reasonably be considered to affect your security hereunder.

10. We agree and undertake that the amounts of the loans or advances obtained by us from you, shall not, at any time be more than the amounts of the eligible short term loans and advances granted by us to DCCBs for financing the production and marketing activities of PWCS. 11. We further agree to maintain in your favour such margin as you may from time to time prescribe so that the total amount at any time due to you towards principal, interest, charges and costs in respect of the aforesaid loans and advances shall not exceed the outstanding balances in respect of the eligible shortterm loans and advances after deducting the amount of margin required to be maintained. Should there be a shortfall in the margin stipulated by you pursuant to this clause, we shall, forthwith, on demand from you, reduce the balance due to you by cash payment so as to make good the amount of margin required to be maintained. FOR THE ….. STATE APEX COOP. BANK LIMITED, MANAGER 379 - III

ASST. GENERAL MANAGER

12. We further agree that we will, from time to time, while these advances continue and whenever required by you, furnish you such information in such form as you may specify and also maintain separate books of account and records relating to the said advance. 13. We hereby agree to assign to the NABARD as and when required by it at our own expense our book debts relating to the eligible short term loans and advances granted by us to the DCCBs or to vest in you all the securities and security documents and the benefit of any personal guarantees obtained by us in respect of the loans and advances granted to the DCCBs. 14. We hereby understand and agree that this Agreement and the said Demand Promissory Note for Rs…. (Rupees ….. only) shall operate as a continuing security for the loans and advances granted herein, notwithstanding the existence of a credit balance at any time or any partial payment or fluctuations of the account or withdrawal of any part of the security, that may be given by us to you. 15. If at any time you decide to increase the limit of the advances to us, we shall execute and deliver to you a fresh demand promissory note for the additional limit as you may determine in addition to the one delivered to you and held by you and the provisions of this agreement and the securities given hereunder shall apply to such new promissory note also. 16. We agree that the said advances shall be utilized for the purpose for which they have been granted. Yours faithfully, For and on behalf of THE ….. STATE APEX COOP. BANK LIMITED,

MANAGER

380 - III

ASST. GENERAL MANAGER

FORMAT PROMISSORY NOTE Rs. …./On demand, We, The ….. State Apex Cooperative Bank Ltd., promise to pay to the National Bank for Agriculture and Rural Development or order the sum of Rs….. (Rupees ….. only) with interest at …% or as prescribed by National Bank for Agriculture and Rural Development per annum with half-yearly rests on 30th September/31st March for value received. Dated at …….(place), this the …. (date)day of …..(month), 20...(year)

For and on behalf of THE ……. STATE APEX COOPERATIVE BANK LIMITED,

MANAGER

381 - III

ASSISTANT GENERAL MANAGER

SPECIMEN FORMAT - II (formats from DCCB to SCB) (A specimen of Weavers credit limit application and other related formats) [FORMAT prescribed by TNSCB for 2010-2011] APPLICATION FOR SHORT TERM WEAVERS CREDIT LIMIT

The General Manager ………………….. Dist. Central Coop. Bank Ltd., ……………………..

To The Chief General Manager National Bank for Agriculture And Rural Development, Regional Office

THROUGH THE (i) (ii)

The State Apex Co-operative Bank Ltd., The Director of Handlooms and Textiles, (if applicable)

Sir, We, …………………….. District Central Co-operative Bank Ltd., ………………… hereby apply for short-term credit limit of Rs. ………………lakhs (Rupees……….. …………………………………………. only) on our behalf to the ….. State Apex Co-operative Bank Ltd., ….., under Section 21(1)(v) read with Section 21(4) of the National Bank for Agriculture and Rural Development Act, 1981 for the year 2010-2011 for financing Handloom/Powerloom Weavers Co-operative Societies, Individuals and Self Help Weavers Groups for production and marketing activities. The under noted documents and statements are enclosed herewith. DOCUMENTS (A) (B) (C) (D) (E) (F) (G) (H)

Audited Balance Sheet and the copy of the Audit Certificate of the DCCB for the year 2008 -2009 NPA Certificate issued by the auditor for the year 2008 - 2009 Trial Balance as on 31.12.2009 Resolution of the Board of Directors (or) the Special Officer (Board of Management) authorizing the Bank to obtain financial accommodation from the NABARD (Form prescribed). Statements/certificates (1 to 12-as applicable) Worksheet I, II and III. Annexure I and II. Write up on the Weavers/PWCS status in the district, along with the details of PWCS. (viz.,) Active, 382 - III

Dormant, Liquidated PWCS and action plan for financing Individual Weavers and Self Help Weavers Groups. We hereby certify that advances outstanding against PWCS under Cash Credit Limits sanctioned to them for their production and marketing activities during the year 2009 -2010 were are at no times less than the amount drawn from and outstanding to the NABARD against the credit limit sanctioned on our behalf under Section 21(1)(v) read with Section 21(4) of the NABARD Act, 1981 and that the PWCS maintained the prescribed margin for their borrowings from the DCCB. Yours faithfully,

GENERAL MANAGER (Seal of the Bank)

383 - III

………………………………. District Central Co-operative Bank Ltd., COPY OF THE BOARD RESOLUTION NO………….. DATED………………….. Present:

Shri ……………………………. President And ……………………………..Directors

Subject

Resolution

To consider on requesting the NABARD through the ……. State Apex Co-operative Bank Limited, ….. to sanction Short term (Weavers) Credit Limit to the extent of Rs. ………….. lakhs for the year 20 -20 for financing the production and marketing activities of (Cotton/Silk/Special Cotton/Polyester) Handloom/Powerloom Cooperative Societies, Individual Weavers and Self Help Weavers Groups under Section 21(1)(v) read with Section 21(4) of the NABARD Act, 1981.

Resolved to borrow during the year 20 -20 from the ….. State Apex Co-operative Bank Limited, Rs.……….. lakhs for financing the production and marketing activities of (Cotton/Silk/Special Cotton/Polyester handloom/Powerloom Weavers Co-operative Societies, Individual Weavers and Self Help Weavers Groups and to request the ….. State Apex Co-operative Bank Ltd., to apply to the NABARD for a credit limit for a like sum on our behalf under Section 21(1)(v) read with Section 21(4) of the NABARD Act, 1981.

Sd/President and …. Directors (BOARD OF MANAGEMENT)

GENERAL MANAGER

384 - III

STATEMENT No. 1 Name of the DCCB : Statement showing the Reserve Borrowing Power of the DCCB as on 31.12.2009 S.No. I

Particulars

Amount in Lakhs

OWN FUNDS i) Paid up Share Capital ii) Reserve Fund iii) Other Reserves of permanent nature * TOTAL (i + ii + iii)

II

Maximum borrowing power of the bank@ 30 times of the owned fund III i) Deposits ii) Borrowings TOTAL (i + ii)

IV

Reserve Borrowing Power (II – III)

V

Share Capital investment with Apex Bank For the ….. District Central Coop. Bank Ltd

Authorised Officer * Other Reserves ACS Fund, Building Fund, Dividend equalization fund, Furniture & Fittings Redemption fund, Machinery Redemption fund, Building Redemption fund and subsidies / Donations (Vehicle, Computer from TNSC Bank, Building fund from ICDP/ Co-op. union) The following items are not to be taken as other Reserves. Share Capital suspense (loan waiver), NPA Reserve, OD interest Reserve, NSR Reserve, BDR/ Spl. BDR Reserve, Risk fund, Cooperative Education/ Development fund and fund created for specific purpose.

385 - III

STATEMENT-2 OPERATIONS IN THE CASH CREDIT LIMIT SANCTIONED TO THE PWCS FOR THE YEAR 2009 - 2010 1.

2.

3.

4.

(Rs. in lakhs)

Credit Limit sanctioned to PWCS under NABARD/SCB Credit Limit a)

Limit on Production Basis

:

b)

Limit under Special Programme

:

c)

Additional Limit, if any, sanctioned

:

Outstandings under the above Cash Credit Limits as on 31.12. 2009. a)

Under Production Limit

:

b)

Under Special Programme Limit

:

c)

Under Additional Limit

:

Cash Credit Limits sanctioned by the DCCB from its own funds (i.e. to PWCS which are not eligible for NABARD Limit) a)

Limit On Production Basis

:

b)

Limit under Special Programmes

:

c)

Additional Limit, if any, sanctioned

:

Outstanding under own funds limit as on 31.12. 2009. a)

Under Production Limit

:

b)

Under Special Programme Limit

:

c)

Under Additional Limit

:

For the ….. District Central Coop. Bank Ltd

Authorised Officer

386 - III

STATEMENT NO. 3

Particulars of PWCS financed by DCCB during 2009-2010 (Position as on 31.12.2009 )

Sl. No.

Particulars of the PWCS

(Rs. in lakhs)

1

No. of PWCS affiliated

:

2

No. of PWCS financed

:

3

No. of PWCS ineligible

:

4

No. of New PWCS financed, if any

:

5

Issues during the year

:

6

Collection during the year

:

7

Outstanding against PWCS

:

8

Maximum outstanding of PWCS at DCCB level

:

9

Demand for the year against PWCS

:

10

Overdues against PWCS

:

11

% of overdues to demand against PWCS

:

12

No. of dormant PWCS

:

13

Outstanding against dormant PWCS

:

14

No. of liquidated PWCS

:

15

Outstanding against liquidated PWCS

:

For the ….. District Central Coop. Bank Ltd

Authorised Officer

387 - III

Name of the Society Registration No. Date of Registration Date of Commencement of Business Paid-up Capital Reserve Fund Other Reserves Total Owned Funds (6+7+8)

1 2 3 4 5 6 7 8 9

388 - III 10 11 12 13 14

Net profit for the financial year ended 31.03.2009 Net loss for the financial year ended 31.03.2009 Accumulated loss, if any, as at the end of the financial year ended 31.03.2009

Audit Classification ( A / B / C )

Period of Audit

Investments in Shares, Buildings, Plant and Machinery Accumulated losses and intangible Assets *, if any NDR available with the Society ( 9 - 10 -11)

Sl.No\Particulars

Statement No. 4

(HANDLOOM WCS / POWERLOOM WCS) Financial particulars of old Weavers Societies engaged in production activities for more than two years and which are proposed to be financed for the financial year April 2010 to March 2011 (Rs. in lakhs)

POSITION AS ON 31st MARCH 2009, WORKING RESULTS OF THE SOCIETY

15 16 17

* - Amounts involved in frauds and stock deficit shall be treated as Intangible Assets.

For the ….. District Central Coop. Bank Ltd

Authorised Officer

STATEMENT NO. 4 Contd.

(Rs.in lakhs)

Maximum outstanding reached in the Cash Credit A/c. during 1st Jan.2009 to 31st Dec.2009

Sales during 2009

( * * ) Receivables as on 31st Dec.2008 realised during the calendar year-2009

( * * ) Receivables outstanding as on 31st Dec. 2009

22

23

24

25

26

1

2 3 4 5

27

28

29

Other borrowings/outstandings as on 31.12.2009

Outstanding as on 31st Dec.2009

21

Eligibile for limit under work sheet I or II or III

Aggregate remittances made from 1st Jan.2009 to 31st Dec.2009

20

% of remittance to limit (Col.28 / Col.18 x 100)

Aggregate drawals from 1st Jan.2009 to 31st Dec. 2009

19

( * ) Sales remittances (out of amount in Col.27) made from 1st Jan.2009 to 31st Dec.2009 % of remittance to sales realised ( Col.28 / Col.27 x 100)

Outstanding as on 31st Dec.2008

18

Total sales amount realised during the calendar year 2009 [Col. 24 + 25 - 26]

Limit sanctioned for the year (2009-2010)

Operations in the Cash Credit Limit sanctioned for the year 2009-2010 (as per DCCB Books)

30

31

32

Names of the societies should be furnished without using abbreviations and arranged in alphabetical order. They should also be grouped under cotton, silk, polyester and powerloom in that order. The names of the societies should be furnished in the same order in Statement No.4 and in worksheet. Limit operative as on 31.12.2009 should be given under Col.18 ( * ) Only sales related remittances (exclude other remittances from govt. schemes, Interest subsidy, etc.) ( * * ) Receivables - the sales amount due(cooptex/govt/others) & Rebate dues. In Col.25, the amount collected during the calendar year 2009, out of the outstanding receivable dues as on 31.12.2008.

For the ….. District Central Coop. Bank Ltd Authorised Officer 389 - III

Total Owned Funds (6+7+8)

5 6 7 8 9 10

390 - III 11 12 13

Audit Classification (A/B/C) Net profit for the financial year ended 31.03.2009 Net loss for the financial year ended 31.03.2009 Accumulated loss, if any, as at the end of the financial year ended 31.03.2009

Period of Audit

Investments in Shares, Buildings, Plant and Machinery Accumulated losses and intangible Assets *, if any NDR available with the Society ( 9 - 10 -11)

Other Reserves

4 Reserve Fund

3 Paid-up Capital

Date of Registration

2 Date of Commencement of Business

Registration No.

1 Name of the Society

Sl.No.

Statement No. 5

(HANDLOOM WCS / POWERLOOM WCS) Financial particulars of NEW Weavers Societies and DORMANT Societies revitalized which are proposed to be financed for the financial year April 2010 to March 2011 (Rs. in lakhs)

POSITION AS ON 31st MARCH 2009, WORKING RESULTS OF THE SOCIETY

14 15 16 17

* - Amounts involved in frauds and stock deficit shall be treated as Intangible Assets.

For the ….. District Central Coop. Bank Ltd

Authorised Officer

STATEMENT NO.6 (HANDLOOM / POWERLOOM WCS) Statement showing the particulars of eligibility for cash credit limits in respect ofNew and Revitalised societies proposed to be financed and listed in Statement No.5 during the ensuing financial year 2010-11)

Silk

Polyester

Total

Cotton

6

7

8

9

10

11

12

(9 to 12)

Special Cotton 5

Total

Cotton 4

Polyester

Regn. No. 3

Silk

Name of the Society 2

(4 to 7)

S.No. 1

Special Cotton

No. of looms proposed to be admitted/activised

No. of Looms working at present

13

NB:- The names of PWCS should be furnished in full without using abbreviations and arranged in alphabetical order as in Statement No.5.

For the ….. District Central Coop. Bank Ltd

Authorised Officer

391 - III

STATEMENT NO. 6 Contd (Rs.in lakhs)

Total (14 to 17)

Cotton

17

18

19

20

21

22

Total (19 to 22)

Polyester

16

Polyester

Silk

15

Silk

Special Cotton

14

Special Cotton

Cotton

Total number of looms proposed to be financed Amount eligible for cash credit limit on the basis of Per Loom Scale of Finance

23

NB:- The names of PWCS should be furnished in full without using abbreviations and arranged in alphabetical order. Also see notes given in Statement No.5.

For the ….. District Central Coop. Bank Ltd

Authorised Officer

392 - III

STATEMENT No.7 Special Programmes to be implemented for the first time in 2010-2011 ( I Year Programme) (Handloom/Powerloom) (Rs. in lakhs) Programme

No. of Looms proposed to be financed

No. of PWCS

Cotton

Special Cotton

Silk

Polyester

Amount required *

1. Activisation of Idle Looms 2. Admission of New Looms 3. Financing of New Societies 4. Revival of Dormant Societies 5. Conversion of Cotton Looms into i. Silk Looms ii.

Polyester Looms

iii.

Special Cotton Looms

* Amount required has be arrived as follows: 1. For Sl.No.1, 2, 3 & 4 above, No. of looms for each variety multiplied by Perloom scale of finance fixed 2. For Sl.No.5, No. of looms for each variety multiplied by the difference between the scale fixed for that variety and for the cotton variety (i.e. for silk looms, the difference amount between the scale fixed for silk and cotton multiplied by the No. of looms proposed to be financed).

For the ….. District Central Coop. Bank Ltd

Authorised Officer

393 - III

STATEMENT No.8

2.

Admission of New Looms

3.

Financing of New Societies

4.

Conversion of Cotton Looms into i.

Looms proposed to be financed under II Year finance during 2010-2011

Silk

Polyester

Special Cotton

No. of PWCS

Silk

Looms

Polyester

Special Cotton

Cotton

No. of PWCS

Silk

Looms

Polyester

Special Cotton

No. of PWCS Activisation of Idle Looms

Cotton

Looms

Programme

1.

Looms achieved under I Year finance as on 31.12.2009

Cotton

Limit sanctioned under I Year finance during 20092010

Amount required for II year finance

Special programme implemented in 2009-10 for which II Year finance is applied on per loom scale for the year 2010-2011 (Handloom/Powerloom)

Silk Looms

ii. Polyester Looms iii. Special Cotton Looms

For the ….. District Central Coop. Bank Ltd

Authorised Officer 394 - III

STATEMENT No.9 CERTIFICATE ON FUNCTIONING OF LOOMS UNDER SPECIAL PROGRAMMES The introduction of new looms/activisation of dormant looms in individual societies during the year 2009-2010 was verified by us. The society-wise position of introduced/activised looms during the year 2009-2010 as revealed in our verification are as under (Rs. in lakhs)

For The ………. Dist. Central Co-operative Bank Limited AUTHORISED OFFICER 395 - III

Remarks

Value of Production

Part of the Year

Silk

Polyester

Special Cotton

Cotton

Year of Working I/ II

Name of the Society

S.No.

TYPE OF LOOMS

Full Year

NO. OF LOOMS WORKING FOR

STATEMENT No.10 CERTIFICATE FROM DEPARTMENT OF HANDLOOMS AND TEXTILES Special Programme for admission of new looms/activisation of idle looms during the year 2010-2011

Admission of New looms Name of the Society

No. of looms I year

II year

Total

Activation of Idle looms Name of the Society

No. of looms I year

396 - III

II year

Total

Statement No. 10 (Continued)

Certified that:-



the idle looms proposed to be activated during the year 2010-2011 indicated in the statement are in good working condition.



the Activisation Programme indicated in the statement would be accomplished during the year 20102011 and Programme of Activisation would be closely monitored by the Department.



the looms in the statement had remained idle for want of adequate finance.



the programme for admission of new looms for the year 2010-2011 to the extent indicated in the statement would be ensured by the Department and provision of working capital as per Per-loom scale of finance is recommended for sanction.



the financial requirements applied by the PWCS will be fully utilized during the year concerned.



the Department is satisfied about the programme of the Societies and that the stocks produced by the additional members would be marketed through Co-optex/own marketing arrangement. The programme for admission would be seen by the Department.

Circle Deputy Director of Handlooms &Textiles Assistant Director of Handlooms & Textiles

397 - III

Statement No.11 PARTICULARS OF PWCS ( as on 31.12.2009 )

Whether the WCS have paid Manager / Secretary

Cover deficit, if any,

Overdues, if any,

CC a/c Outstanding

Cover available

No. of looms working

Limit sanctioned for the year 2009-10

Regn. No.

Name of the PWCS

S.No.

(Rs. in lakhs)

Note : (1) Particulars to be provided to all the affiliated Handloom and Powerloom WCS (Active / Dormant / Liquidated)

For the ….. District Central Coop. Bank Ltd

Authorised Officer 398 - III

Statement No.12 PARTICULARS OF SHWG

Note :(1) The above figures should agree with figures given in statements / Annexure to the application (2) Particulars to be provided to all the affiliated SHWG For the ….. District Central Coop. Bank Ltd

Authorised Officer

399 - III

LIMIT PROPSED TO BE SANCTIONED FOR THE YEAR 2010-11

TOTAL AMOUNT REMITTED DURING THE YEAR

TOTAL SALES DURING THE YEAR

CLOTH PRODUCED DURING

DCCBs OWN RESOURCES

TYPE OF LOOMS

NO. OF LOOMS WORKING FOR

NABARD/TNSCB REFINANCE

LIMIT SANCTIONED FOR THE YEAR 2009-10

WHETHER HANDLOOM OR POWERLOOM

TOTAL MEMBERS

REGN NO.

NAME OF THE SHWG

S.No.

(Rs.in lakhs)

WORK SHEET - I ELIGIBILITY OF PWCS FOR SANCTION OF ENHANCED CREDIT LIMIT UNDER PRODUCTION BASIS FOR THE YEAR 2010-2011 (i.e. PWCS WHICH HAVE BEEN AUDITED UPTO 2007-2008 AND HAVE REMITTED NOT LESS THAN 60% OF SALES OR 75% OF THE LIMIT SANCTIONED FOR 2009-2010 WHICHEVER IS HIGHER, ARE ELIGIBLE FOR ENHANCED CREDIT LIMIT, SUBJECT TO 9 TIMES OF NDR)

9 times of NDR

Limit sanctioned for 2009-2010 @ @

Net production during 2009 (i.e. total production minus production under Special Programme)

Average of 3 years net production (i.e. average of 2007, 2008 and 2009 net p roduction) * *

Col.6 or Col.7 whichever is higher

Anticipated production for 2010-2011 (i.e.

50% of anticipated production (i.e. 50% Col.9)

2

NDR @

1

Name of the Society

Sl.No.

(Rs. in lakhs)

3

4

5

6

7

8

9

10

Furnish the particulars of Handloom WCS first and then Powerloom WCS @ - particulars as in Column 12 of Statement No.4 @ @ - particulars as in Column 18 of Statement No.4 * * While arriving at the average production, the production figures furnished in the earlier credit applications should be verified. For the ….. District Central Coop. Bank Ltd

Authorised Officer

400 - III

60% of Col.11 75% of Col.5 Col.13 or Col.14 whichever is higher

Whether Col.12 is equal to (or) more than Col.15. Indicate "Yes/No" If Col.16 is "Yes" then eligible limit as per NABARD norms (Col.4 or Col.10 whichever is less) Limit applied by the CCB (Production purpose) Limit applied by the CCB (For Special Programmes)

11 12 13 14 15 16 17 18 19

* - particulars as in Column 27 of Statement No.4

* * - particulars as in Column 28 of Statement No.4

For the ….. District Central Coop. Bank Ltd

Authorised Officer

401 - III

Total Limit (Col.18+Col.19) [should not exceed Col.4]

Sales remittance made into CC Account during 2009 * *

ELIGIBILITY AS PER REMITTANCE NORMS OF NABARD

Sales realised during 2009 *

Name of the Society

S.No.

WORK SHEET - I (Contd) (Rs. in lakhs)

20

WORK SHEET - II ELIGIBILITY OF PWCS UNDER RENEWAL OF CREDIT LIMIT FOR THE YEAR 2010-2011 (i.e. PWCS WHICH HAVE BEEN AUDITED UPTO 2007-2008 AND HAVE REMITTED THE AMOUNT EQUAL TO ATLEAST EITHER 50% OF SALES (OR) 60% OF THE LIMIT SANCTIONED FOR 2009-2010 ARE ELIGIBLE FOR RENEWAL OF PREVIOUS YEAR (2009-2010) PRODUCTION LIMIT SUBJECT TO 9 TIMES OF NDR

50% of anticipated production (i.e. 50% Col.9)

6

Anticipated production for 2010-2011 (i.e. 120% of Col.8)

5

Col.6 or Col.7 whichever is higher

Limit sanctioned for 2009-2010 @ @

4

Average of 3 years net production (i.e. averages of 2007, 2008 and 2009 net production) * *

9 times of NDR

3

2

Net production during 2009 (i.e. total production minus production under Special Programme)

NDR @

1

Name of the Society

Sl.No.

(Rs. in lakhs) ELIGIBILITY AS PER PRODUCTION NORMS OF NABARD

7

8

9

10

Furnish the particulars of Handloom WCS first and then Powerloom WCS @ - particulars as in Column 12 of Statement No.4 , @ @ - particulars as in Column 18 of Statement No.4 * * While arriving at the average production, the production figures furnished in the earlier credit applications should be verified.

For the ….. District Central Coop. Bank Ltd

Authorised Officer 402 - III

11 12 13 14

* - particulars as in Column 27 of Statement No.4

* * - particulars as in Column 28 of Statement No.4

For the ….. District Central Coop. Bank Ltd

Authorised Officer

403 - III

ELIGIBILITY AS PER REMITTANCE NORMS OF NABARD

15 16 17 18

Total Limit applied by the CCB (Col.17 + Col.18) (should not exceed Col.4)

Limit applied by the CCB (for Special Programme)

Limit applied by the CCB (Production Purpose)

If col.15 is Yes, then Eligible limit as per NABARD Norms (i.e. Col.4 or 5 or 10 whichever is lower)

Whether, either Col.13 is equal to or more than 50% or Col.14 is equal to or more than 60% (indicate Yes/No)

% of remittance to limit sanctioned (i.e. % of Col.12 to Col.5) Minimum 60%

% of remittance to sales realised (i.e. % of Col.12 to Col.11) Minimum 50%

Sales remittance made into CC account during 2009 * *

Sales realised during 2009 *

Name of the Society

S.No.

WORK SHEET - II ( Contd ) (Rs. in lakhs)

19 20

WORK SHEET - III HANDLOOM WCS/POWERLOOM WCS ELIGIBILITY OF PWCS FOR RENEWAL OF PROPORTIONATE PREVIOUS YEAR (2009-2010) LIMIT (i.e. PWCS WHICH HAVE BEEN AUDITED UPTO 2007-2008 AND WHICH HAVE REMITTED 30% TO 49% OF SALES (OR) 40% TO 59% OF THE LIMIT SANCTIONED FOR 2009-2010 ALONE ARE ELIGIBLE FOR RENEWAL OF PROPORTIONATE PREVIOUS YEAR (2009-2010) LIMIT, SUBJECT TO 9 TIMES OF NDR)

@ - particulars as in Column 12 of Statement No.4 ,

% of remittance to sales (i.e. % of Col.8 to Col.7) Minimum 30%

% of remittance to limit sanctioned (i.e. % of Col.8 to Col.5) Minimum 40%

6

Sales remittance made into CC A/c. during 2009 * *

5

ELIGIBILITY AS PER REMITTANCE NORMS OF NABARD

Sales realised during the year 2009

4

Net [production during 2009 (i.e. total production minus production under special programmes)

Limit sanctioned for 2009-2010 @ @

3

@

9 times of NDR

2

NDR

1

Name of the Society

Sl.No.

(Rs. in lakhs)

7

8

9

10

@ @ - particulars as in Column 18 of Statement No.4

* - particulars as in Column 27 of Statement No.4 * * - particulars as in Column 28 of Statement No.4

For the ….. District Central Coop. Bank Ltd

Authorised Officer 404 - III

Col.13 or Col.4 whichever is lower

For the ….. District Central Coop. Bank Ltd

Authorised Officer

405 - III

Limit applied by the CCB (Production purpose)

12 13 14 15 16

Total limit applied by the CCB (Col.15 + Col.16) should not exceed Col.4

ELIGIBLE LIMIT AS PER NABAR

ELIGIBILITY WITH REFERENCE TO SHORT FALL IN REMITTANCE TO

Limit applied by the CCB (for Special Programme)

Sales/Limit sanctioned Col.11 or Col.12 whichever is higher

11 Limit sanctioned (Col.5 X Col.10/60)

Sales (Col.5 X Col.9/50)

Name of the Society

S.No.

WORK SHEET - III ( Contd) (Rs. In lakhs)

17

ANNEXURE - I I. II. A) i. ii. iii. iv. v. vi. vii. viii. ix. x. B) i. ii. iii. iv. v. vi. vii. viii. c) i ii. iii. iv. D) i. ii. iii. iv.

Name of the DCCB: Particulars of the DCCB Financial Position of the DCCB Share Capital Reserves Other Reserves (permanent nature) Owned Funds Deposits Borrowings Investments Profit Loss, if any Accumulated loss, if any Audit particulars of the DCCB Year of Audit Audit Class Audit Marks Whether complying with Sec.11(1) of B.R. Act 1949 (AACS) If not, date from when not complying Exemption valid up to If exemption expired, status of action plan Extent of erosion in deposits (%) Non-performing Assets (as per audit certificate) Gross NPA of the DCCB % of Gross NPA under all loans and advances Net NPA of the DCCB % of Net NPA under all loans and advances Demand, Collection & Balance Total demand for the year (of all loans) Total collection for the year % of collection to total demand Total Overdues (D i D ii)

406 - III

: : : : : : : : : : : : : : : : : : : : : : : : : : : :

as on 31.03.2009 (Rs. in Lakhs)

Annexure I (contd) III.

Inspection of the DCCB

:

i

Latest Inspection (for the year ended)

:

ii

Date of Inspection

:

iii

Compliance Report sent by the DCCB to NABARD/TNSCB on Lending Programme

:

IV.

: i) ii) iii) iv) V. i. ii. iii. a) b) iv.

a) Normal production basis - HANDLOOM b) Normal production basis - POWERLOOM a) Special Programme I year b) Special Programme II year In respect of Individuals/Self Help Weavers Groups(please specify) Total Arrangement for supervision over PWCS/SHWG No. of PWCS/ SHWG affiliated to the DCCB No. of borrowing PWCS/ SHWG Supervisory staff available No. of Junior Supervisors No. of Senior Supervisors Action taken to strengthen the Supervisory Machinery, if inadequate

For the ….. District Central Coop. Bank Ltd Authorised Officer

407 - III

By By NABARD TNSC Bank

2010 - 2011 (proposal) No. of PWCS Amount (Rs.in lakhs)

: : : : :

PWCS : : : : :

SHWG

ANNEXURE - II DATA ON LIMIT SANCTIONED & UTILISED BY THE DCCB/PWCS AND QUANTUM OF CREDIT LIMIT APPLIED FOR FINANCING PWCS/INDIVIDUALS/SELFHELP WEAVERS GROUPS BY THE DCCB FOR THE YEAR 2010-11 (Rs.in lakhs)

2008-09

2009-10 (Upto December 2009)

2007-08

2008-09

2009-10 (Upto December 2009)

2007-08

2008-09

2009-10 (Upto December 2009)

2

2007-08

2008-09

1

Maximum O/s. at DCCB level a g a i n s t PWCS/Individuals during last 3 years

2009-10

2007-08

Limits sanctioned to DCCB Maximum O/s. reached at Limits sanctioned by SCB during last 3 years SCB level during last 3 t o P W C S b y DCCB during last (April-March) years 3 years (AprilMarch)

3

4

5

6

7

8

9

10

11

12

(Seal of the Bank)

For the ….. District Central Coop. Bank Ltd

Authorised Officer

408 - III

ANNEXURE II (contd) DATA ON LIMIT SANCTIONED & UTILISED BY THE DCCB/PWCS AND QUANTUM OF CREDIT LIMIT APPLIED FOR FINANCING PWCS/INDIVIDUALS/SELFHELP WEAVERS GROUPS BY THE DCCB FOR THE YEAR 2010-11 (Rs.in lakhs)

Maximum O/s. expected to be reached during 2010-11

16

17

18 * *

WS I -

WS I -

WS II -

WS II -

WS III -

WS III -

* Total -

* Total -

For the ….. District Central Coop. Bank Ltd

Authorised Officer

409 - III

19

20

Total Limit applied by the CCB (Col.18 + Col.19 + Col.20)

Total

15

Limit applied by the CCB (Powerloom)

Self Help Weavers Groups

14

Limit applied by the CCB (Handloom - Special Programme)

Individuals

13 *

Limit applied by the CCB (Handloom - Production Purpose)

PWCS

Limit proposed to be sanctioned by DCCB to

21

THE ……. STATE APEX CO-OPERATIVE BANK LTD.

TERMS AND CONDITIONS GOVERNING SANCTION OF SHORT TERM CREDIT LIMIT FOR THE YEAR 2009-2010 TO DCCBs FOR FINANCING PRIMARY HANDLOOM AND POWERLOOM WEAVERS CO-OPERATIVE SOCIETIES.

PART A GENERAL CONDITIONS APPLICABLE FOR NORMAL (INCLUDING SPECIAL PROGRAMMES LIMIT) AND ADDITIONAL CREDIT LIMITS. 1.

2.

NATURE OF LIMIT a.

The limit is reimbursement in nature and is available for operation as a revolving limit, i.e. the District Central Coop. Bank (DCCB) can draw and repay as many times as required provided the outstandings in the account do not exceed the sanctioned credit limit or Non Over Due Cover available.

b.

The credit limit sanctioned for 2009-2010 is inclusive of the outstandings in respect of the limit sanctioned during the year 2008-2009.

TENURE OF LIMIT The limit is available for operation during the year 2009-2010 i.e. from 01.04.2009 to 31.03.2010.

3.

PURPOSE-WISE BREAK-UP OF LIMITS a.

The consolidated limit (NABARD+SCB) sanctioned to the DCCB is in reimbursement of DCCB's advances to PWCS under Normal Production Programme and Special programmes, as under:

i) Production Basis : ii) Special Programmes :

Handloom & Powerloom Handloom

Special Programmes will have to be financed under per loom scale basis, as per the scales of finance fixed for the year 2009-2010. The limit sanctioned for Special Programmes will be allowed to be availed only on the basis of actual implementation of the programme up to the end of the previous month. b.

The DCCB should furnish the progress in regard to implementation of Special Programmes, purpose-wise, along with drawal applications as well as with the monthly NODC Returns, as per Proforma prescribed by our bank. 410 - III

4.

5.

ELIGIBILITY FOR DRAWAL a.

The DCCB is eligible for drawals from the limit only in respect of its advances to the PWCS (1) which are functioning as Production-cum-Sale Societies and (2) which are eligible for limit, as per norms prescribed by NABARD from time to time.

b.

If it is found at any time during the currency or after the operative period of the limit that the DCCB has used the funds for financing the societies which are not functioning in the manner indicated in NABARD's refinance policy and hence deemed ineligible, the DCCB shall be liable to pay to NABARD/SCB on demand interest @ 2% over and above the rate actually charged under the sanction, on the amount misutilised, for the full year. Besides, the banks which are found to misuse the limits availed from NABARD/SCB are liable to be denied credit limits for the subsequent years.

RATE OF INTEREST a.

Interest on the outstandings in respect of Handlooms and Powerlooms will be charged, as detailed below: Purpose

SCB to DCCB

DCCB to PWCS

Handlooms & Powerlooms

….%p.a.

….%p.a.

The above rate is applicable to the outstandings as on 01.04.2009 and for borrowings from 01.04.2009 as well.

6.

b.

The rate of interest is subject to change without notice as per directives of RBI/NABARD and as per SCB's instructions with prospective as well as retrospective effect. The DCCB is requested to indicate this fact in its sanction orders to the PWCS.

c.

Interest is payable by the DCCB, half-yearly as on the last working day of August and February or when the outstanding under the limit is brought to 'NIL', whichever is earlier. The DCCB should provide sufficient balance in its I A/c. with the SCB for meeting the interest commitments as on the last working day of August and February.

OUTSTANDING TO SCB TO BE SUPPORTED BY NON-OVERDUE COVER a.

The DCCB shall ensure that its outstandings to the SCB under S.T. Weavers Finance are covered by Non-overdue outstandings against PWCS, distinctly under (a) Production Basis, (b) Special Programmes, (c) Additional Limits. The DCCB has to watch the outstandings against PWCS vis-à-vis borrowings from the SCB, on a day-to-day basis and should regularize excess borrowings from SCB if any, immediately.

b.

In case of any deficit, the same shall be regularized within 30 days of such occurrence. If the deficit persist beyond that will attract additional interest at 1% over and above the prescribed rate. 411 - III

7.

8.

SUBMISSION OF MONTHLY NODC RETURNS a.

The DCCB shall furnish a monthly NODC Return as on the last day of every month, giving the particulars of outstandings against PWCS, the overdues there against (separately for production basis, special programmes and for additional limit against pledge of stocks), so as to reach us on or before the 10th of the succeeding month in the format prescribed.

b.

The drawals under the limits will not be allowed after 10th of every month, unless the latest monthly NODC Return is received.

OVERDUES The following outstandings against WCS shall be treated as overdues for the purpose of assessing Nonoverdue Cover.

9.

a.

Outstanding against WCS which are not eligible for NABARD Refinance.

b.

Outstanding against WCS, whose limits have not been renewed for the current year 2009-2010.

c.

Outstanding in excess of eligible drawing power/sanctioned limits, as per NABARD norms.

d.

Outstandings against WCS from whom stock statements have not been received. (For example, for NODC Statement for the month of April 2009, stock statement as on last Friday of April 2009, due in May 2009 should have been received).

e.

Advances made to WCS from the own resources of the DCCB (a) against Reserve Fund and (b) Others, viz., dues from COOPTEX etc.

f.

Advances to WCS, which are purely Marketing Societies.

g.

Advances to WCS, which are having audit arrears for more than one year (i.e. WCS whose accounts are not audited up to 2006-2007).

RIGHT TO SET-OFF DRAWAL PROCEEDS TO OVERDUES/DEFAULT In case of overdues and defaults to the SCB by the DCCB in other loan accounts/cash credits, 25% of drawal proceeds under this account will be adjusted to such overdues/defaults.

10. ADJUSTMENT OF PAYMENTS TO PWCS BY APEX SOCIETY TO WEAVER'S BORROWINGS a.

The payments received from the Apex Society / Emporium towards the cost of cloth procured from PWCS in the DCCB's jurisdiction will be adjusted to the loan account of the DCCB with us. Similarly, rebate dues received from Government on behalf of PWCS will also be adjusted at our level to the loan account of the DCCB with us. The DCCB, on receipt of advice from us for such 412 - III

adjustments, should credit the same to the respective PWCS' A/c. with the DCCB, immediately. b.

However, if there are no outstandings in the loan account of the DCCB, the payments received from Apex Society /Government will be credited to the Centralized Current A/c. No. I of the DCCB with us.

c.

Adjustments by us of the amounts received from Apex Society /Government mentioned above to normal limit or additional limit will be in the order of the due date of the borrowings of the DCCB from our Bank.

11. MAINTENANCE OF BOOKS OF ACCOUNTS BY THE DCCB A. As security for the advances made to the PWCS, the DCCB must obtain demand promissory note from each PWCS for the limit allowed to them and the same will have to be produced at the time of inspection by SCB/NABARD along with the terms and conditions of sanction of limit to the PWCS. B. The DCCB should maintain necessary books of accounts separately to facilitate the furnishing of separate figures to the SCB/NABARD in respect of: a.

Production by PWCS on looms for which limit has been sanctioned on anticipated production basis.

b.

I & II year production made by PWCS under the following Special Programmes: i) Activation of idle looms ii) Admission of new looms iii) Conversion from Cotton to Special Cotton/Silk/Polyester Looms iv) Financing of new societies v) Revival of dormant societies

c.

Additional limit against pledge of stock dues from Apex Society /Government rebate to enable the DCCB to furnish purpose-wise outstandings, production, particulars, utilization etc., to the SCB/NABARD.

12. DCCB TO HAVE ADEQUATE SUPERVISION MACHINERY A. The DCCB should have adequate supervision machinery, as per the Government of India norms viz., one Junior Supervisor for every 10 PWCS and 1 Senior Supervisor for every 3 Junior Supervisors. The Supervisory Machinery indicated above should be maintained throughout the year, exclusively for monitoring the WCS.

413 - III

B. The DCCB will exercise close supervision over the working of the PWCS on a continuing basis with a view to ensuring that: i. The PWCS produce cloth at least to the level of anticipated production for 2009-10, as indicated in its limit application. ii. The Special Programmes sanctioned for the year 2009-2010 are implemented by WCS in full. The DCCB has to ensure that the funds sanctioned for Special Programmes are utilized for the purpose and without any diversion. The DCCB may seek and utilize the services of the Asst. Director of Handlooms in the implementation of Special Programmes. iii. The PWCS remit the entire sale proceeds to the Cash Credit Account with the DCCB. iv. The drawals allowed are utilized by the Societies for the legitimate business needs of the PWCS and that no diversion of funds is made. v. The PWCS do not lock up their working capital in: a. Overdue sets b. Cash Advances to members disproportionate to the sets outstandings; and c. Credit Sales. vi. The PWCS write the books of account on day-to-day basis, post stock registers regularly and ensure adequacy of cover for the borrowings from the DCCB. vii. The stocks under hypothecation are verified by the officials of the DCCB/Department, periodically. viii. The amounts shown as dues under rebate claims and dues from Apex Society are correct and are backed by necessary acknowledgements by Apex Society /Certificate from Local Assistance Director of Handlooms and Textiles; and ix. The Societies maintain 10% margin for their borrowings from the DCCB. 13. RIGHT TO CONDUCT INSPECTION The NABARD and the SCB will have right to inspect the books of accounts of the DCCB as well as that of PWCS financed out of the credit limit. The DCCB should stipulate the condition regarding the right of inspection by NABARD and SCB in the sanction order to PWCS and get the acceptance from them. 14. MONTHLY RETURNS TO BE FURNISHED BY THE DCCB INDICATING THE DUES TO PWCS FROM APEX SOCIETY AGAINST PROCUREMENT OF CLOTH i.

The DCCB should obtain a monthly return from all the PWCS indicating the dues to them from Apex Weavers Coop. Society, in respect of cloth procured by Apex Society from them and should send a consolidated return to us for all the Societies, with age-wise classification of the above dues.

ii. The return as at the end of each month should reach us on or before 20th of the succeeding month as per proforma prescribed.

414 - III

15. QUARTERLY RETURN TO BE FURNISHED BY THE DCCB INDICATING THE REBATE DUES TO PWCS FROM THE GOVERNMENT The DCCB should obtain a quarterly return from all the WCS functioning in the area of the DCCB indicating the rebate dues to them from the Government as at the end of each calendar quarter and should send a consolidated statement indicating the rebate dues from the Government to all the WCS with age-wise classification, as per Proforma prescribed so as to reach us on or before 25th of the month succeeding every quarter. 16. QUARTERLY RETURN TO BE FURNISHED BY THE DCCB INDICATING THE INTEREST SUBSIDY DUES TO THE WCS IN RESPECT OF THEIR BORROWINGS FROM THE DCCB th

The DCCB shall furnish a quarterly return as at the end of each calendar quarter, on or before the 25 of the month succeeding each quarter, indicating age-wise amount claimed as interest subsidy by WCS and outstanding as at the end of each quarter, as per Proforma prescribed. 17. RIGHT OF SCB TO RECALL/STOP THE ADVANCES a.

The advances made under this sanction order are repayable on demand by the DCCB. But, the SCB without prejudice to its right to recall the advances at any time may not ordinarily exercise this right for a period of 12 months from the date of advance for normal limit.

b.

It will be open to the SCB to recall any loan (or) any portion thereof, if any of the conditions laid down herein is violated (or) without assigning any reason.

c.

The SCB reserves itself the right to stop making further advance, if necessary, even if the credit limit sanctioned is not fully drawn.

d.

The SCB shall also be constrained to stop drawals under this limit in case the DCCB commits default in repayment of principal, payment of interest and / or any other dues under any line of credit sanctioned.

18. RIGHT TO DEBIT DCCB's CURRENT A/C. FOR THE DCCB's DUES TO SCB In the event of default by the DCCB in (1) repaying the principal or paying interest; (2) in regularizing the deficit in maintenance of NODC, the SCB shall, without prejudice to its other rights and remedies, be entitled to debit the sums due to it to the Current Account of the DCCB, on the respective due dates without any further notice. 19. INSPECTION OF WCS BY THE OFFICIALS OF DCCBs a.

The DCCB should inspect the PWCS financed by them at least once in a year (Calendar year basis) and should notify the defects, etc., observed in such inspection to the Societies concerned and should take necessary follow-up action for rectification of defects, etc.

b.

The DCCB shall furnish a quarterly return as at the end of each calendar quarter, on or before the th 25 of the month succeeding each quarter about the number of societies inspected, follow-up action for rectification of defects, etc. 415 - III

20. DURATION OF EACH DRAWAL AND PENAL INTEREST FOR DUE DATE DEFAULT a.

Each drawal is repayable within 12 months from the date of Hundi lodged for the drawal and in case of default, additional interest at 2.5% per annum over and above the normal rate of interest or such other rate as may be specified by the SCB will be charged from the date of default to the date of clearance of such default.

b.

In the event of default in payment of interest or any portion thereof on due date, additional interest at 2.5% per annum over and above the normal rate of interest or such other rate as may be specified by the SCB shall be payable by the DCCB on such amounts from the date of default till the date of its clearance.

21. AVAILING OF DRAWALS UNDER NORMAL LIMIT AND DOCUMENTS TO BE LODGED Along with each drawal application, the DCCB shall furnish the following particulars: i.

Non-overdue Cover particulars, in the form prescribed, as at the close of business on a date not earlier than 7 days prior to the date of drawal application. The DCCB need not furnish the list of WCS and the outstanding against each of them at the time of every drawal under normal limit. ii. A certificate to the effect that the drawal applied for by the DCCB is, within its reserve borrowing power, in the form prescribed. iii. The Cash Reserve and Liquid Assets maintained as at the close of business on a Friday not earlier than 13 days prior to the date of application. iv. The particulars relating to the achievement of Special Programmes at the end of the month preceding the date of drawal application. v. A certificate to the effect that the outstandings against the following categories of WCS have been excluded from cover for the drawals and are not being reimbursed from the limit sanctioned by the SCB/NABARD, in the format prescribed. a. b. c. d. e. f. g.

PWCS placed in 'D' Class in audit. PWCS which are having audit arrears for over 1 year; (i.e. WCS whose accounts are not audited up to 2006-2007). PWCS whose accounts with the Bank have remained inoperative for over 1 year unless such Societies are under Special Programme of revival or reorganization. PWCS whose accumulated losses exceed the owned funds. PWCS which have been excluded by NABARD/SCB for purpose of reimbursement from the credit limit sanctioned. PWCS which have not been included in the credit limit application preferred to NABARD by the DCCB. PWCS which are not eligible for sanction of limit as per norms prescribed by NABARD/SCB from time to time. 416 - III

h. i. j.

Outstanding in excess of eligible drawing power / sanctioned limit, as per NABARD norms. Outstanding against WCS from whom stock statements have not been received. PWCS which are purely Marketing Societies.

vi. A security certificate to the effect that a. b. c.

the pronotes of WCS are held in our custody on behalf of SCB as collateral security which will be endorsed in favour of SCB as and when demanded. the security obtained from the WCS bears the first charge of the SCB sufficient securities have already been obtained by the DCCB from the WCS for the cash credit limit sanctioned and outstanding against each one of them to cover the total loan amount drawn from the SCB.

FOR POWERLOOMS In addition to the above, for availing drawals under power looms, the following certificates are to be furnished by the DCCB. i.

A Certificate to the effect that the PWCS having power looms, have obtained the approval of the Textiles Commissioner and necessary license for operating such power looms from the Central Government, State Government and Local Authority. ii. A Certificate to the effect that separate books of accounts are being maintained by the DCCB in respect of its advances to Powerloom PWCS. 22. DCCBs NOT COMPLYING WITH SECTION 11(1) OF B.R.ACT, 1949 In case DCCB concerned is found to be not complying with Section 11(1) of the Banking Regulation Act, 1949 (AACS) after sanction of credit limits, further drawals will be allowed under the credit limit sanctioned to it/on its behalf, only against unconditional default guarantee of the State Government concerned or against the pledge of Government Securities held in the name of the SCB on the lines of SAO financing till the expiry date of the operative period of the said limit. The rate of interest as applicable to the S.T. Weavers Credit Limits sanctioned would continue to be charged for such advances against Government Securities and Banks will also have to comply with operational disciplines as are normally applicable to the respective S.T. Credit Limits. 23. COVER FOR BORROWINGS BT PWCS FROMM DCCB Not less than 90% of the aggregate value of:a.

fully paid yarn-in-stock with the society valued age-wise.

b.

yarn with members issued for production of cloth on Society's own account.

c.

fully paid dyes and chemicals and other raw materials required for production of cloth. 417 - III

d.

advances/wages made by the PWCS to their weaver members subject to the following conditions: i)

advance wages should not exceed 50% of the value of knots of yarn issued to the members in respect of ordinary cotton varieties and 25% of value of yarn issued in respect of costly varieties of cloth vi., silk sarees, polyester, special varieties of cotton etc., and ii) Overdue wage advances, if any, should be excluded from the advance wages worked out in the above manner and shown as cover for borrowings. e.

Finished goods in stock valued age-wise: Valuation of yarn/finished goods/cloth for the purpose of cover to be made as under:Valuation at cost price

Age-wise Classification of yarn/cloth Silk cloth Up to 12 months

Other cloth

100.00%

100%

Over 12 months & up to 24 months

90.00%

80%

Over 24 months

80.00%

60%

f.

Rebate claims due from Government duly certified by the Department.

g.

Dues admitted and outstanding payment by the Apex/Regional WCS for cloth sold to it.

h.

Bills payable by the Apex/Regional WCS for cloth purchased by it from PWCS but not paid for.

i.

Book debts arising from credit sales of cloth to other parties subject to the following conditions: a)

Demand bills should have been drawn by the Society on the party to whom it has supplied cloth against firm orders. b) Relative documents like railway receipts or lorry receipts should have been lodged with the bank duly endorsed with instructions to release the documents only on payment and to credit the proceeds of the bill of realization to the cash credit account. j.

In case of usance documentary bills: i. Bill should be of usance not exceeding 90 days. ii. Bills should have been drawn by the society on the party to whom it has supplied cloth against firm orders. iii. Relative documents like railway receipts or lorry receipts would have been lodged with the bank duly endorsed with instructions to release the documents on acceptance of the bills by the drawee or his banker and to hold the bills till maturity and to credit the proceeds of the bills on realization to the cash credit account. iv. Bills not accepted or paid for by the drawee and / or his banker on presentation for acceptance or payment should be excluded from the cover and society asked to make good the shortfall in the cover immediately. 418 - III

k.

Book debts comprising bills receivable up to 6 months, those over 6 months from Apex Society and State Government but not exceeding 20% of the previous year's sales turnover and sundry debtors outstanding for not more than 3 months, may be accepted as cover for borrowing. However they may not exceed 50% of the total outstanding in the cash credit account of the society at any point of time.

l.

Cover for drawals on the credit limits sanctioned by the NABARD/TNSCB will be the CCB's nonoverdue out standings against weavers' societies excluding outstanding against WCS which are not eligible for NABARD refinance, the out standings in unrenewed cash credit accounts, the amounts due against societies in default and also the amounts received by the concerned SCB/DCCB for Apex/Regional WCS and dues payable/receivable and pending for adjustment for more than 3 months to the account of Apex/Regional/Primary WCS.

24. INSURANCE COVER The DCCB shall ensure that the stocks with the societies are covered by the adequate insurance policies. 25. ADDITIONAL LIMITS In respect of additional limits, sanctioned to facilitate production by the societies during the slack sales season, the DCCB shall ensure that it sanctions such additional limits for a period of only 6 months during the year and that the outstanding in the additional limits accounts of each society is fully recovered on within 6 months from the date of sanction of the limit to the society. The outstanding in the account after completion of 6 months from the date of sanction of the limit shall be deemed to have become overdue. The amount of overdue shall immediately be recovered out of cash remittance / remittance by the apex weaver's cooperative society. Such overdue shall not be reckoned for the purpose of cover for borrowing from SCB. It may also be ensured that the additional limit together with the normal limits sanctioned to each society shall not exceed 75% of the anticipated production for the current year. 26. OPERATION OF ACCOUNT WITH SCB BY THE DCCB The DCCB would avail full refinance against the outstanding borrowing of the PWCS on a continuous basis. 27. RIGHT TO MODIFY THE TERMS AND CONDITIONS The SCB reserves to itself the right to alter/modify the terms and conditions governing the sanction of this limit during the currency of the limit. Such modifications would be communicated in the form of Circulars/Letters and these instructions will have the same effect as the terms and conditions indicated herein.

419 - III

PART-B SPECIAL TERMS AND CONDITIONS FOR IMPLEMENTATIONS OF SPECIAL PROGRAMMES I.

DCCB TO MONITOR THE IMPLEMENTATION OF SPECIAL PROGRAMME The DCCB will take the following safeguards in regard to implementation of Special Programmes. i.

ii.

iii.

iv. v.

vi.

vii.

The DCCB should draw up a month-wise schedule for the implementation of Special Programmes, WCS-wise, in consultation with the WCS concerned and the Assistant Director of Handlooms and Textiles. The DCCB should draw the I Year Programme in such a manner that the entire I Year Special Programmes is completed before 31.12.2009. It will not be proper for the DCCB to release the entire funds required for implementing the Special Programmes for the 1st year in one lump sum. The DCCB will have to release Working Capital every month for implementation of Special Programmes on the basis of actual number of looms to be activised/admitted, etc. in each month by WCS. The implementation of the Special Programmes should be closely monitored by the DCCB, with a view to ensuring that the entire Special Programmes (I & II Year Programmes) approved by NABARD is achieved by 31.12.2009 to be eligible for sanction of limit for next year. The DCCB shall verify on a quarterly basis the number of looms actually working with the WCS, as revealed by the Production Records of the WCS. The drawing power of the WCS under these limits for the succeeding quarter shall be determined with reference to the actual number of looms found working during the previous quarter in the WCS during the verification. Where the outstanding of the WCS is in excess of the eligibility as worked out on the above basis, the amount overdrawn should be recovered by the DCCB immediately out of remittances received in cash/remittances from Apex Society through the SCB. The DCCB shall submit a Certificate to the SCB at the time of each drawal to the effect that it had conducted verification of the looms working for each WCS under the programmes during the previous half-year (September/March) and that the drawals against the limits are being regulated based on the actual number of looms worked for the WCS during the previous half-year (September/March).

II. PWCS TO MAINTAIN SEPARATE PRODUCTION DETAILS OF SPECIAL PROGRAMMES: The DCCB will ensure that all the PWCS implementing Special Programmes, maintain details of 1st year and 2nd year production particulars separately for the looms financed under Special Programmes to facilitate segregation of figures of Production by looms under (1) Special Programmes and (2) Production Basis.

420 - III

(ST weavers Drawal Application format) THE ………

DISTRICT CENTRAL COOPERATIVE BANK LTD;

RC. No.

DATE:

To The Managing Director, The …… State Apex Cooperative Bank Ltd,

ST Weavers Drawal Sir, Sub: Revolving Credit Limit Limit sanctioned for financing Weavers Cooperative Societies under Section 21(1)(v) read with Sec.21(4) of NABARD Act 1981 Disbursement of Drawal requested Reg. *** We enclose herewith a Hundi and Schedule for Rs. …...... lakhs (Rupees ……. Only) duly executed in your favour towards the drawal applied for. The following particulars are enclosed along with the drawal application: 1. Certificate for drawal of loan 2. Security Certificate 3. Non-overdue cover statement as on ---4. Statement of Cash Reserve and Liquid Assets as on ---We request that the drawal may kindly be disbursed and the proceeds credited to our Current account with you. Yours faithfully,

AUTHOURISED OFFICER

421 - III

THE …………… DISTRICT CENTRAL COOPERATIVE BANK LTD; …………… CERTIFICATE FOR DRAWAL UNDER WEAVERS CREDIT LIMIT The Reserve Borrowing Power of our bank as on …….. stood at Rs. ….. lakhs and we certify that the present drawal is within our Reserve Borrowing Power. We certify that the advance now applied is for recoupment of our advance already made to the Primary Weavers Cooperative Societies eligible under Section 21(1)(v) read with Sec.21(4) of NABARD Act 1981 for production and marketing activities. We certify that the outstanding against the weavers cooperative societies under the limit which have been renewed for the current year are not less than the amount drawn and outstanding with the SCB including the amount applied for now. We certify that the weavers cooperative societies are maintaining the margin of 10% and the non-overdue cover is arrived in the form and manner indicated in the NABARD's policy circular communicated. We certify that the outstanding against the following categories of WCS have been excluded from cover for the drawals and are not being reimbursed from the limit sanctioned by the SCB/NABARD. a. b. c.

PWCS placed in 'D' Class in audit. PWCS which are having audit arrears for over 1 year. PWCS whose accounts with the Bank have remained inoperative for over 1 year unless such Societies are under Special Programme of revival or reorganization. d. PWCS whose accumulated losses exceed the owned funds. e. PWCS which have been excluded by NABARD/SCB for purpose of reimbursement from the credit limit sanctioned. f. PWCS which have not been included in the credit limit application preferred to NABARD by the DCCB. g. PWCS which are not eligible for sanction of limit as per norms prescribed by NABARD/SCB from time to time. h. Outstanding in excess of eligible drawing power/sanctioned limits, as per NABARD norms. i. Outstanding against WCS from whom stock statements have not been received. j. PWCS which are purely Marketing Societies. Further, We certify that the figures of non-overdue cover furnished are those relating to the date as appearing in the Register maintained by the bank and there is enough non-overdue cover for the outstanding already due to SCB and the amount now applied for.

422 - III

We certify that the outstanding against weavers cooperative societies shown for drawal against limit sanctioned by the NABARD/SCB in this application do not include loans disbursed from the own resources of the DCCB (a) against Reserve Fund and (b) Others, viz., dues from Apex Society etc. We certify that the stock of cloth and dues reckoned for as cover for additional limit have been excluded while working out cover for the borrowing on the regular limit. We certify that the weavers cooperative societies having power looms in respect of which loans were issued have obtained the approval of the textile Commissioner and necessary licenses for operating such power looms from the central government / state government and civil authority. We certify that the pronotes of weavers' cooperative societies are held in our custody on behalf your bank as collateral security which will be endorsed in your favour as and when demanded. We certify that the stocks under hypothecation are verified by the officials of the DCCB periodically. We certify that the amounts shown as dues under rebate claims and dues from Apex society are correct and are backed by necessary acknowledgements by Apex society / Certificate from Local Assistance Director of Handlooms and Textiles. We certify that the stocks with the societies are covered by the Insurance policies. We certify that the signature in the Hundi enclosed with the drawal application is the genuine signature of the officer, who is authorised by our Board of Management, who continue to be in office and not disqualified under the provisions of the State Cooperative Societies Act. We certify that the separate books of accounts are being maintained in respect of limit sanctioned under Hand loom, Power loom and Special Programme. We are obtaining a quarterly certificate from the supervisors regarding working of looms under Special Programme and the drawal against the Special Programme limit are being regulated based on the actual number of looms working in the societies.

For THE ……… DISTRICT CENTRAL COOPERATIVE BANK LTD

AUTHOURISED OFFICER

423 - III

THE …………… DISTRICT CENTRAL COOPERATIVE BANK LTD; SECURITY CERTIFICATE (Advances for financing Primary Weavers Cooperative Societies) I … (Name) , … (designation) of the ……… District Central Cooperative Bank Ltd, ….. hereby certify under the authority vested in me by Resolution No. … dated ………….. of the proceedings of the Board of directors of the bank that, 1. Sufficient securities have already been obtained by the bank from the Weavers Cooperative Societies for the cash credit limit sanctioned and outstanding against each one of them to cover the total loan of Rs. …. lakhs ( Rupees ………………………….. ) drawn from the …… State Apex Cooperative Bank Ltd, including the present drawal of Rs. …..lakhs (Rupees ………………………. ) for financing Weavers Cooperative Societies. 2. The security obtained by this bank from the Weavers Cooperative Societies bears the first charge of the …… State Apex Cooperative Bank Ltd. 3. The pronotes of the Weavers Cooperative Societies are held in our custody on behalf of …… State Apex Cooperative Bank Ltd, which will be endorsed in your favour as and when demanded.

For THE ……… DISTRICT CENTRAL COOPERATIVE BANK LTD

AUTHOURISED OFFICER

424 - III

[Hundi format]

ST WEAVERS Twelve months after date without grace period, We the --- District Central Cooperative Bank Limited, --promise to pay to the ……. State Apex Cooperative Bank Limited or order the sum of Rs. (Rupees … ) with interest at -- or as prescribed by the ….. State Apex Cooperative Bank per annum with Half - Yearly rests on the 31st August and 28/29th February for value received. Dated at ---(place) this --(date) day of ------(month & year) For and on behalf of The --- District Central Cooperative Bank Limited, ---. Signature

:

Name

:

Son of

:

Bank Seal

Designation : Witnesses : Signature

:

Name

:

(1)

(2)

Designation :

Pay the National Bank for Agriculture and Rural Development For the ……. State Apex Cooperative Bank Limited

Date :

Authorised officer

Authorised officer

425 - III

[SCHEDULE format] STW 21(1)(v)/21(4) To The ….. State Apex Cooperative Bank Limited; ………. We, the --- District Central Cooperative Bank Limited, --- hereby certify that the promissory notes / bills specified in the schedules hereto executed endorsed by us in your favour are payable in India and were drawn / issued for the purpose of financing the production and / or marketing activities of Primary Weavers Cooperative Societies and are as such eligible for purchase or rediscount by the National Bank for Agriculture and Rural Development under Section 21(1)(v)/21(4) of NABARD Act 1981 and that our signature(s) on such promissory notes / bills is / are our genuine signature(s) and that we further agree that on the faith of the correctness of the contents of this certificate, you will endorse the said promissory notes / bills to the National Bank for Agriculture and Rural Development as security for the advance to you under Section 21(1) of NABARD Act 1981. SCHEDULE Date

Sl.No.

Name of the Drawer/ maker The --- District Central Cooperative Bank Ltd; ---

Total Rs.

( Rupees …… only )

Dated at --- this - day of -----

For and on behalf of The --- District Central Cooperative Bank Limited, ---. Signature

:

Name

:

Designation :

426 - III

Amount Rs.

Usance Twelve months after date

THE …………… DISTRICT CENTRAL COOPERATIVE BANK LTD; …………… Statement showing the Particulars of Cash Reserve and other assets maintained as on ………. (Rs. in lakhs) A

Liabilities in India (DTL) 1. Demand 2. Time 3. TOTAL (A.1 + A. 2)

B

Assets in India ( Cash Reserve) 1. Cash in hand 2.Balance with SBI 3. Balance with other banks 4. Balance with TNSCB C a/c 5. TOTAL ( B. 1 to B. 4) 6. 3% of A. 3 7. Difference ( B.5 B.6)

C

Other Eligible Liquid Assets 1. Balance of all types other than B. 4 with SCB 2. Other eligible funds with DCCB 3. Gold 4. Unencumbered approved securities 5. Surplus Cash (B. 7) 6.TOTAL (C.1 to C. 5) 7.Liquid assets to be maintained 25% of A.3 8. Difference ( C.6 C.7)

Certified that the figures furnished are as per the liquid assets register maintained by the bank.

AUTHORISED OFFICER

427 - III

CHAPTER-27 NON-AGRICULTURAL CREDIT

1.

General: Every State Coop. Bank shall have a diversified portfolio of advances. In addition to Agricultural Advances, Banks may provide credit for Non-Agricultural purposes. The Non Agricultural Advances are: a). Direct finance b). Refinance and c). Consortium Finance. a.

Direct finance: Under Direct finance, the SCBs may sanction Non Agricultural Advances from their own funds directly to: i. Coop. Apex Institutions in the State. ii. Other Coop. Societies for various purposes. iii. Retail lending to customers.

b.

Refinance: Under Refinance, the SCBs may sanction Cash Credit limits to DCCBs to advance the Coop. Societies/ Primaries in the Districts for: i. ii. iii. iv. v.

c.

Employees' Coop. Societies. issue of jewel Loans by PACS. issue of Jewel Loans by DCCBs through its Branches. Sugar Mills / Spinning Mills. any other purpose, specified by each Bank.

Consortium Finance: Under Consortium Finance, the SCB may be a Consortium member with other Banks.

(Note: Separate chapters for Retail Lending, Direct Finance to Apex Institution and Consortium Advances are provided elsewhere in this manual). d.

2.

All the above Advances are from the own funds of the SCB and are not eligible for NABARD refinance. However, the above Advances are subject to the exposure norms proscribed by NABARD. In this chapter, we study about the Non-agricultural advances under refinance to DCCBs from the own funds of the SCB.These Cash Credit limits are sanctioned / renewed every year (April to March).

Non-Agricultural Cash Credit Limit proposal: a.

The SCBs for sanction of Cash Credit Limits to DCCBs for the above Non Agricultural purposes require the following documents from the DCCBs: i. Application for the limit in the prescribed format. ii. A copy of latest audited Balance Sheet and Profit and Loss Account. 428 - III

iii. A copy of latest Financial Statement iv. Statement of resources and deployment of funds in Loans and Advances as at the end of October / November v. Statement of Non-agricultural advances and borrowings as on the last Friday of October/November vi. Board Resolution of the DCCBs; vii. Utilization certificate for the limit sanctioned for the previous year viii. Statement showing the Reserve Borrowing Power of the DCCB. b.

The SCB will have to study in detail all the financial statements/particulars received from the DCCBs along with its limit application to ascertain: i.

Ability of the DCCBs to meet the Total Borrowings from the Net tangible assets (Net tangible assets = total assets less accumulated losses less overdues for which reserve has to be created) ii. Ability of the DCCBs to repay Short-Term borrowings from out of Current Assets. iii. Ascertain total Internal Lendable Resources of the DCCBs iv. Ascertain the Net ILR available for lending for non-agricultural purposes v. Ascertain the total limits sanctioned by the DCCBs to PACS for various purposes vi. Ascertain the details of various limits already availed by the DCCBs from the SCB. vii. Ensure that the total limits sanctioned by the DCCB for non-agricultural purposes does not exceed its net ILR. viii. Ascertain whether the DCCB has involved its Net ILR in such a way to cover all the nonagricultural lending areas (if there is a big gap between the Net ILR available and its actual deployment, then it will amount to deployment of sizable portion of its Net ILR in ST agricultural lendings (or) in the maintenance of CRR and SLR over and above the optimum level. c.

The Board Resolution of the DCCB should contain the following: i. ii. iii. iv. v.

Request to the SCB for a CC Limit, specifying the amount applied for and the purpose The names of officials of the DCCB, with their designation, authorized to operate the CC Account with the SCB with their specimen signatures duly attested by the CEO. To execute the DPN and other loan documents by the authorized officials To create a charge on the pronotes, executed by the Societies in favour of the DCCB or repledge or hypothecate the goods/debts and empowering the authorized officials to create such charge. vi. To accept and abide by the terms and conditions imposed by the SCB at the time of and subsequent to sanction of the limits. vii. Undertaking that the total borrowing including the present borrowing will be within the Reserve Borrowing Power of the DCCB. 429 - III

3.

Sanction of Cash Credit Limits for Non-Agricultural purposes: a.

On receipt of the prescribed limit application duly filled in along with all the required financial and other particulars as well as documents from the DCCBs, the SCB shall examine the limit application in detail and assess the eligible amount of CC limit based on the: i. ii. iii. iv. v.

total limits sanctioned by the DCCB to the Societies for this specific purpose, total non-overdue outstanding against the Societies under the said limit, limit sanctioned by the SCB for the same purpose during the previous year maximum and minimum outstandings reached in the said CC Limit with the SCB during the previous year and average utilization of the limit by the DCCB.

A General format of the scrutiny sheet for assessment of credit limit for non-agricultural advances is given in Annexure-I to this Chapter. b.

After assessment of the amount of CC limit for each Non Agricultural purpose, the same should be got approved along with the terms and conditions governing the sanction and operation of the specific Cash Credit Limit.

c.

On approval of the proposal to sanction the specific Cash Credit Limit to the DCCB by the Board of Management, the SCB shall issue a letter of sanction to the concerned DCCB along with two copies of the terms and conditions governing the CC Limit. The DCCB should be advised to return one copy of the Terms and Conditions duly signed on its each page by the officials authorized to execute all the documents as a token of acceptance and also to operate the said CC Account.

d.

Terms and Conditions: i. Period of limit: One year ii. Rate of Interest: As fixed by the SCB from time to time. iii. Penal Interest / Additional Interest: Penal Interest at 2% per annum shall be charged by the SCB on the excess drawals (over and above its eligibility) availed by the DCCB from the date of such availment till date of regularization of the account. Penal Interest at 2% per annum shall be charged on unrenewed limit.

e.

Returns/Statement to be submitted by the DCCB: i.

The DCCB shall furnish the following statements/Returns to the SCB as per the periodicity prescribed by the SCB.  Weekly/Fortnightly Stock Statements (wherever applicable - like in the case of CC Limit for financing Sugar/Spinning Mills)  NODC return as on the last Friday of each month in the format prescribed by the SCB.

430 - III

 A weekly certificate as at the close of business on every Friday, furnishing the particulars such as Limits sanctioned purpose by the DCCBs for all Non-Agricultural purposes, Amounts outstanding against the Societies under such limits and Refinance limit (purpose wise) sanctioned by the SCB and the outstandings under each limit. 4.

Accounting Procedures: a.

G. L. Account: In the case of Non-agricultural advances to DCCBs under various Cash Credit Limits, a single head of account under the style “Non-Agricultural Cash Credit Advances” shall be maintained in the General Ledger (G.L.). All disbursements made against drawals under various CC Limits shall be debited as a single item to the above G.L. account. The total repayments made under various accounts by DCCBs shall be credited to the above account.

b. Ledger : i.

Cash Credit ledgers shall be maintained purpose-wise and DCCB-wise. In addition to the particulars of limit sanctioned, date of sanction, etc. the due dates of each drawal shall be entered to monitor the repayment on due date. ii. The debit and credit vouchers shall be posted in the appropriate ledger Bank-wise and purpose-wise. The Closing Balance and the products are arrived at, at the end of the date. iii. Interest to be charged to DCCB concerned shall be calculated on the basis of daily products in this ledger on quarterly basis. In case of Cooperative Banks which are computerized, interest will be calculated at the end of every month automatically by the system. iv. At the end of each purpose-wise CC Limit ledger, Total Liability column is maintained. The total disbursements made to and repayments from all DCCBs against their limits sanctioned for a particular purpose are posted daily then and there and the consolidated balance is arrived at the end of the day. v. The total amount of all outstanding balances of all DCCBs under a particular purpose should tally with the balance in the Total Liability column. c.

Total Liability Register : i.

The Total Liability Register is maintained to know the total outstanding balance of all CC Limits sanctioned to DCCBs for various purposes. ii. The debit and credit vouchers pertaining to all CC Limits will be posted daily and the balance will be arrived at, at the end of the day. iii. The outstanding balance as shown by this Register should tally with the balance in the G. L. head of account “Non-Agricultural Cash Credit Advances”. This Register enables the Bank to know the total outstanding balance under various Non-agricultural CC Limits on any day. d. Drawing Power Register : i.

In the case of CC Limits granted for financing Sugar Mills, Spinning Mills, etc. periodical 431 - III

Stock Statements should be obtained. The particulars of drawing power as assessed from the Stock Statement should be entered in this Register. The important particulars, among other things that should be entered in this Register are, aggregate value of eligible securities/stocks, rate of margin, amount of margin, drawing power, validity period, highest debit balance during the validity period, the details of limit sanctioned, Government guarantee available, if any, Insurance cover etc. On the basis of the drawing power arrived, the drawals should be allowed against the sanctioned limits. e.

Due Date Register : i.

f.

NODC Register : i.

5.

A due date register shall be maintained to ensure that the Periodical Stock Statement, NODC and other statements / periodicals are received on or before the due date.

In the case of CC Limits sanctioned against Non-overdue Cover (NODC), periodical NODC statement should be obtained from DCCBs. The details of outstandings, overdues, nonoverdue cover, issues, recoveries etc. as on the last Friday of the month at the DCCB as well as Apex Bank level will be recorded in this Register to ensure that the outstandings at any point of time have not exceeded the NODC position at DCCB level.

General Terms and Conditions for sanction of Cash Credit Limits for various non-Agricultural purposes: a.

Nature of Limits: The Apex bank sanctions Cash Credit Limits to the Dist. Central Coop. Bank as refinance limit in respect of their advances to various institutions viz. PACS/Coop. Spinning Mills/ Coop. Sugar Mills/Marketing Societies/wholesale stores/Employees Societies etc. borrowing for non-agricultural purposes.

b.

Extent of Refinance: The DCCB is eligible to obtain refinance from the Apex Bank to the extent of outstanding against the borrowing institution(s) or the respective drawing power(s) / Non overdue cover of the borrowing institutions or the limit sanctioned by the Apex Bank, whichever is less.

c.

Repledge or Rehypothecation of Stocks:The DCCB will have to rehypothecate/repledge the stocks hypothecated/pledged to it by the borrowing institution to the Apex Bank as security for the refinance facility availed by it. The DCCB will incorporate in its terms and conditions to the borrowing institutions that the stocks hypothecated / pledged to the borrowing institutions are subject to re hypothecation/repledge to the Apex Bank.

d.

Cover: As indicated in special conditions stipulated separately for each purpose. The DCCB should compare the value of stocks acquired by the borrowing Societies with the drawals made in Cash Credit Account during the month and the remittances to the Cash Credit Account with the value of sales effected during the month. There should be reasonable correlation between the 432 - III

amount drawn and purchased and also between the sales and remittances. The DCCB should insist on the borrowing Societies for remitting the entire sale proceeds into its Cash Credit Account. e.

Insurance: The DCCB should ensure that the borrowing Societies insure their stocks under hypothecation's / pledge preferable on a declaration basis for the full value of stocks hypothecated / pledged to it against the risks of fire and burglary. The policy should be in the joint names of the DCCB and the Society and lodged with the DCCB. The details of the insurance policies in force must also be furnished in the Stock Statement.

f.

Drawal Applications to be Signed by the Authorised Officials: Only the Authorised Officials of the DCCB should sign the drawal applications preferred by the DCCB. To facilitate this, the Board of Management of the DCCB should authorise officials, by name, to sign the drawal applications and the DCCB should send us a true copy of the resolution together with the specimen signatures of the officials empowered duly attested by an official whose specimen signature is already on our record.

g.

Right to Adjust the Drawal Proceeds in the Event of Due Date Default / Overdues to the State Cooperative Bank in Other Accounts: In the event of due date default / overdues by the DCCB under other loan or accounts, the Apex Bank reserves the right to adjust the entire proceeds of drawal applied for by the DCCB under this account to the due date default / overdues under other accounts.

h. Verification of Stocks: The DCCB should verify the stocks under: Hypothecation / Pledge once in 6 months and send us a report about the results of such verification to the SCB. i.

Inspection of the Borrowing Units: The DCCB should conduct a full pledged inspection on the working of the Societies financed by it and of the books of accounts at least once a year. The defects pointed out should be promptly communicated to the borrowing Societies and rectification thereof should be obtained. A copy of the inspection report should be sent to the SCB.

j.

Introduction of Systems and Procedures in the Borrowings Societies: The DCCB should ensure that the borrowing Societies introduce systems, to see that the cheques are issued by them after satisfying that such issuance of cheques by them would not result in outstandings exceeding the drawing power fixed.

k. Preparation of Quarterly Trading and Profit and Loss Account and Balance Sheet and Quarterly Returns of the Borrowing Units: i.

The DCCB should ensure that the borrowing Societies write their Books of Accounts, Post Stock Registers, etc., up-to-date. The DCCB should further ensure that the borrowing institutions prepare Trading and Profit and Loss account and Balance Sheet as at the end of each quarter and obtain such financial statements as quarterly returns within one month from the completion of each quarter. ii. In the case of Cooperative Stores / Societies coming under centrally sponsored scheme, the 433 - III

DCCB should ensure that the Societies send the quarterly management report and Balance Sheet to the Government of India within one month after completion of each quarter. The DCCB shall also obtain the quarterly Balance Sheet as a quarterly return from such Societies. l.

Audit Position of the Borrowing Societies: The DCCB shall closely watch the progress made by the borrowing Societies in completing the audit for their accounts. The DCCB shall hold quarterly review meetings regarding the audit position and progress in audit along with the Dist. Coop. Audit Officer and representatives of the borrowing Societies. The DCCB shall take necessary steps to ensure that the Audit Certificate of the borrowings Societies are issued within a period of 6 months from the date of closure of the financial year.

m.

Inspection of Societies Financed by the DCCB by RBI / NABARD and Apex Bank Officials:The Officials of the Apex Bank and the RBI / NABARD reserve the right to inspect the books of accounts of the DCCB and its borrowings Societies and to verify the stocks hypothecated / pledged to the DCCB. The DCCB should incorporate this condition in its sanction order to the borrowing Societies and obtain their concurrence.

n. Right to Alter or Amend the Terms and Conditions: The SCB has right to alter, amend, modify any of the above terms and conditions or stipulate any new condition. Such condition would be communicated through circulars / letters and these conditions will have the same effect as the conditions stipulated herein. o.

Right to Recall the Advance: The Apex Bank reserves the right to recall the advances made to the DCCB if the DCCB fails to adhere to any of the terms and conditions stipulated therein, or any other condition that may be stipulated in future in regard to relevant Cash Credit Limit, in part or full. The Apex Bank also reserves the right to recall / reduce the limit sanctioned to the DCCB if the same is not utilized or utilized very sparingly. Further the Apex Bank reserves the right to recall / reduce limit sanctioned to the DCCB according to the funds availability with the Apex Bank. i.

Each SCB has to formulate its own set of general guidelines with regard to reimbursement of Cash Credit for various Non-Agricultural purposes. ii. Further, in the year 2001, NABARD also took initiatives to include 'Rural Housing' as an eligible activity for refinance facility from NABARD under Section 25 of the NABARD Act. 6.

Operational Procedures: i. On Receipt of the Stock Statement / NODC returns, the DCCB shall scrutinise the same with a view to satisfying that the items shown as cover are admissible as per terms of sanction. It should further ensure that the stocks have been valued at cost price or market price, whichever is lower. The DCCB shall fix drawing power and send a communication to the borrowing Societies. The DCCB may further advise the borrowing institutions to ensure that the outstandings under the Cash Credit Limit do not exceed the drawing power fixed by the DCCB / Non Overdue Outstandings against the members of the Societies. ii. If the outstanding against the borrowing Societies is more than the drawing power fixed / non overdue outstandings against members of the borrowing Societies, further drawals should not be 434 - III

allowed by the DCCBs and the borrowing institutions should be asked to regularise such excess drawals further drawals in the account should be allowed by the DCCBs only after the deficit is regularised. iii. If there are outstandings to the Apex Bank beyond the drawing power / non overdue outstandings of the borrowing institutions such excess outstandings shall be charged with a penal interest fixed by the Bank over and above the normal rate fixed for the Cash Credit Account. iv. All the Documents for Purchase of Goods by the PACS / Borrowing units shall be routed through the DCCB. v. Every drawal availed of from the Apex Bank should be repaid by the DCCB within 12 months from the date of drawal and if any outstanding remains beyond the prescribed period the same will be construed as overdue and the DCCB is liable to pay penal interest for such overdue as fixed by the Bank from time to time. vi. Each drawals on the limit, sanctioned should be, in the form prescribed, duly filled in and signed with the particulars of outstanding against borrowing institutions together with the respective drawing power / non-overdue outstandings against Societies or members overdues and Non Overdue Outstandings as the case may be, the amount already drawn from the Apex Bank under Cash Credit Accounts and the statement showing the Cash Reserve and the Liquid Assets particulars of the DCCB as at the close of business on the Friday prior to the date of drawal application. 7.

The following Annexure/s are appended to this Chapter: a.

Annexure/s

Annexure 1 :

General Format of the scrutiny sheet for assessment of Credit Limit for non-Agricultural advances.

435 - III

Annexure 1 to Chapter 27 GENERAL FORMAT OF THE SCRUTINY SHEET FOR ASSESSMENT OF CASH CREDIT LIMITS FOR NON - AGRICULTURAL PURPOSES 1. 2. 3. 4. 5. 6. 7. 8.

Name of the DCCB Date of Credit Application CC Limit applied for Purpose for which the CC limit is applied Whether all the requisite enclosures to the application are received Whether the Board Resolution is complete in all aspects (or as required) Date of the Board Resolution

: : : : : : :

DETAILS OF LIMITS APPLIED FOR: The details of Cash Credit Limits applied for by the Central Coop. Bank for various Non-Agricultural purposes for the year ……… are furnished below: Sl.No.

A/c. No.

Purpose

Limit Applied for the year

i) ii) iii) iv) v) vi) vii) viii)

9.

Details of limits sanctioned for the previous year and Utilisation of the limits by the DCCB: The details of various Cash Credit Limits sanctioned to the DCCB for the previous year and the maximum utilization against each limit are furnished hereunder:

436 - III

(Rs. in Lakhs) Sl No

A/c No

1.

2.

Purpose

3.

Limit Sanctioned

4.

Utilisation at bank level Max. Min

5.

Average O/s

6.

7.

% of utilization Max. of limits O/s reached Max. Min at CCB level

8.

9.

10.

O/s. at bank level as on

11

1. 2. 3. 4. 5. 6. TOTAL

10. The details of Financial Position of the CCB: (Rs. in lakhs) 1. 2. 3. 4. 5. 6. 7. 8. 9.

Share Capital Reserves Deposits Borrowings Investments Advances Working Capital Profit Dividend

: : : : : : : : Declared

:

11. Assessment of Lendable Resources of the DCCB: I.

A. Total Internal Resources of the Bank: i)

Owned Funds (ie., Paid-up Share Capital and all Reserves) excluding Agricultural Credit Stabilization Fund : ii) Deposits (Net of Loans against Deposits) : iii) Total owned resources (i) + (ii) : 437 - III

B. i) ii) iii) iv)

Commitments on Internal Resources : Share Capital invested in TNSCB : Investments in Shares of other institutions : CRR and Liquid Assets required to be maintained : Investments in Fixed Assets such as Building (including advances to construction wing for construction of building, furniture, etc.) : v) Loss : vi) Total commitments : C. Internal Resources available for lending A(iii) B(vi) : II. Commitments on the ILR (Legitimate): i) Involvement of the CCB in Concessional Finance : ii) Amount outstanding against liquidated Societies : iii) Amount of advances to Societies which are ineligible for NABARD Refinance : iv) Overdues : v) Total commitments : III. Balance of Resources available for Non-Agricultural Lending I (c) - II (v) 12. Sectoral Deployment of Non-Agricultural Advances by the CCBs as on ................in areas wherein …. ................SCB refinance obtained. (Rs. in lakhs) Sl. No.

Purpose

Amount

% of each loan to total O/s.

01. 02. 03. 04. 05. 06. 07. Total

13. Projected requirements of credit in certain sectors where, refinance is being provided by Apex Bank:

438 - III

Sl. No.

Existing O/s. at CCB Likely O/s. in 20…. Level

Purpose

Increase

01. 02. 03. 04. 05. 06. 07. Total

(Rs. in lakhs) 14. Increase in Deposits likely in the ensuing year: i) ii) iii) iv) v)

Existing Increase expected at ____ % LESS: _____ % for CRR and SLR Balance available for lending Resources available for lending on existing Deposits at ____ % vi) Increase in Deposit Resources available for lending 15. Refinance support required

:

: : : :

i) Increase in Non-Agricultural Advances as per Sl.No.13 ii) LESS: Increase in Deposits as per Sl.No.14 (vi) iii) Balance of Additional Refinance required from SCB iv) ADD:Borrowings from SCB under NonAgricultural advances as on __________ Total v) Refinance support required from SCB for the year …….. (iii) + (iv)

439 - III

: : : : : :

16. CC Limits eligible Sl. No.

A/c. No.

(Rs. in lakhs) Purpose

01. 02. 03. 04. 05. 06. 07. 08.

Total

440 - III

Limit applied for

Limit recommended for sanction for the year…. Eligibility

Recommended

CHAPTER 28 CREDIT MONITORING ARRANGEMENT (CMA)

1.

2.

General: a.

The Credit Authorisation Scheme (CAS) was reviewed from time to time and the cut off points for credit limits requiring prior authorisation of NABARD, were raised periodically, both for Working Capital and term loans.

b.

The exposure norms were also prescribed and reviewed periodically. Over the last few years of liberalised economy and the reforms ushered in by the Government of India, it was being increasingly observed that the Commercial Banks were operating with greater autonomy and operational flexibility. In the case of Cooperative Banks also, there has been a steady increase in their deposit resources. Therefore, they had been representing in various fora that they needed to be permitted to operate with greater autonomy to withstand the increasing competition among banks brought about by the Financial Sector Reforms.

c.

It was, therefore, increasingly felt that in view of the comfortable resource position of Cooperative Banks and the Banking Sector becoming increasingly competitive, these banks should be given autonomy of operations for which purpose; Credit Authorisation Scheme may have to be dispensed with.

d.

The External Expert Committee on the Supervisory Role of NABARD had also recommended for abolition of Credit Authorisation Scheme as it could never be a substitute for an efficient and adequate credit appraisal system within the financing bank.

e.

In the above context, a proposal was made to RBI in February 2000 for replacement of CAS by CMA, which was approved by RBI and with effect from 24 April, 2000 the Credit Authorisation Scheme was replaced by Credit Monitoring Arrangements (CMA).

Credit Monitoring Arrangement (CMA) Operations: a.

3.

With the replacement of CAS with CMA, prior authorisation of NABARD for sanction of Working Capital Credit Limits and Term Loans to Non-Credit Cooperative Societies and to the units outside the Cooperative fold, above the prescribed cut off points, has been withdrawn. However, NABARD will continue to lay down the broad parameters of credit dispensation for major sectors / sub sectors and watch the observance of these norms, through periodical monitoring studies and statutory inspections.

Mechanism of CMA: a.

Under the Credit Monitoring Arrangement, NABARD's intervention is envisaged in the following areas: 441 - III

i. The banks should restrict their lending only to the permitted sectors / industries. ii. The banks should not sanction any loans for activities in the real estate. iii. Lending to infrastructural activities, where budgetary support from the Central / State Govt. is available would not be sanctioned. iv. Since Sugar is a commodity governed by Selective Credit Control Norms of Reserve Bank of India, NABARD will continue to review and lay down the broad guidelines regarding the policy for financing of Block Capital and Working Capital needs of sugar mills by Cooperative Banks from time to time. v. The sanction of Cleans Limits for financing the preseasonal exposure of the sugar mills will continue to be reviewed by NABARD from time to time. vi. NABARD will continue to prescribe prudential norms in terms of exposure to individual unit / sectors etc. vii. NABARD would require banks to continue to seek its prior permission for participating in certain areas like financing of Central / State purchase / procurement schemes. 4.

Revision of exposure norms and Monitoring & Reporting procedures: a.

5.

As per NABARD Circular letter No. NB. PCD(CAS)/171/A.75/1998-99 dated 16 May 1998 read with Circular letter No. NB.PCD.CAS/1193/A.75/1997-98 dated 19 September 1997 NABARD advised sector-wise and unit-wise exposure norms in respect of loans by the State Cooperative Banks and District Central Cooperative Banks. As per Circular letter No. NB.PCD.CMA/1393/A.75/2000-01 dated 23 September 2000 NABARD communicated the salient features of the policy governing Credit Monitoring Arrangements (CMA). The policy in this regard has since been reviewed by the Board of Supervision (for SCBs, DCCBs and RRBs) and it has been decided to rationalize and simplify the norms and procedures so as to provide flexibility and operational freedom to cooperative banks, based on the financial position and operational competence of the banks. The salient features of the policy are indicated in the circular No. 68/008/10/2008 of NABARD.

CMA Returns/Reports: a.

As per existing instructions, SCBs and DCCBs are required to furnish to the Regional Offices of NABARD quarterly returns, CMA-I to V so as to reach them within one month from the end of each quarter.

b.

CMA Returns: i. CMA I Return: relates to working capital limits sanctioned to Non-credit Coop. Societies. ii. CMA II Return: relates to Block capital facilities including non-fund based facilities like Letter of credit, Bank Guarantee etc. sanctioned to Non-Credit Coop. Societies. iii. CMA III Return: relates to working capital limits to the units outside coop. fold. iv. CMA IV Return: relates to Block capital facilities including non-fund based facilities 442 - III

v.

sanctioned to units outside the coop. fold. CMA V Return: relates to exposure of Bank credit facilities to various sectors/sub-sectors, consisting of all loans/limits sanctioned by a bank including financing of individuals, Sole Prop; Partnership Firms and all other unincorporated bodies/concerns.

c.

Sanctions made by the banks under refinance schemes from NABARD/other financial institutions/term lending institutions are excluded.

d.

Post Sanction Scrutiny under CMA: Post sanction scrutiny has been introduced in respect of comparatively bigger accounts. For this purpose, all sanction/renewals of credit limits to borrowers enjoying the following facilities will be subjected to post sanction scrutiny. Working Capital: All sanctions/renewals of credit limits to borrower enjoying fund based working capital facilities (including credit limits against the pledge and hypothecation of stocks, stores and spares, gunny bags, clean limits, if any) except the credit limits for financing PDS and other Central/State Govt. purchase /procurement schemes for Rs.20.00 Crores and above by SCBs and Rs.10.00 crores and above by DCCBs in respect of Non-Credit Coop. Societies and Rs.2.00 crores and above by SCBs and Rs.0.50 crores and above by DCCBs in respect of units outside the Coop. fold and sanction of any additional credit limit to the existing borrowers which would take their total limits to these levels would be reported by banks in CMA Return I & III.Such sanction will be accompanied by the latest audited balance sheet of the borrower, a copy of the memorandum /appraisal note put up to the Board indicating the assessment of working capital and the need therefore as also the Credit Risk Analysis. ii. Block Capital: All block capital sanction by SCB/DCCB beyond the prescribed ceiling i.e. Rs.5 crores and above to SCBs and Rs.2.5 crores and above for DCCBs in respect of Noncredit Coop. Societies and Rs.1.00 crore and above by SCBs and Rs.0.25 crores and above by DCCBs in respect of units outside the coop. fold, would be reported by Bank in CMA Return II & IV. Such sanction would be accompanied by a copy of the latest audited balance sheet of the borrowers and a copy of the memorandum/appraisal note put up to the Board, along with the report on Technical Feasibility and financial viability of the project, as also the credit risk analysis. iii. The Bank would be advised by NABARD about the irregularities observed during the post sanction. The basic aim of post sanction scrutiny would be to improve the quality of lendings. If it is found that a Bank is not observing the basic discrepancies persistently, banks may be advised to refer all larger loan proposals to NABARD for prior authorisation. i.

6.

High Value Advances-Sugar, Spinning etc.: a.

Within the Cooperative fold, the activities of Cooperative Banks coming under the purview of CMA comprise loans and advances to Processing Societies, Marketing Societies, Marketing- cumProcessing Societies and Consumer Societies. Within these categories, the clientele of banks availing various Working Capital facilities (such as Cash Credit (pledge / hypothecation / clean limits) include Sugar Factories, Spinning Mills, Consumer Cooperative Stores, Marketing 443 - III

Federations for distribution of fertilisers / procurement of agricultural produce, societies procuring minor forest produce, Milk Cooperatives, Cotton Federations, etc. In the area of Block Capital Finance, Cooperative Banks for financing new Cooperative Societies like Sugar Factories and Spinning Mills. They also finance expansion / diversification of existing Cooperatives AgroProcessing units and extend nonfunded accommodations such as issue of guarantees to the above clients.

7.

b.

Outside the Cooperative fold, the clientele of Cooperative Banks availing Working Capital / Term Loan nonfunded accommodations usually comprise Small Scale Industries (both incorporated as well as unincorporated), business houses including Partnership Firms and Sole Proprietors, Professional, etc.

c.

Normally the following Cash Credit Limits are being sanctioned by SCB / DCCBs to Non-Credit Cooperative Societies. i. Cash Credit (Clean) Limit The Cooperative institutions like Marketing Societies Cooperative Consumer Stores require a certain amount of Cash Credit (clean) limit to have flexibility in their operations. Further, the Sugar Mills also seek clean limits for meeting their financial needs for pre seasonal expenses like advance payments to sugarcane harvesters, transporters of sugarcane and repairs and maintenance of plant and machinery before the commencement of the sugar season. ii. Cash Credit (hypothecation) Limit the Cash Credit (hypothecation) limit is sanctioned by the SCB / DCCBs to the NonCredit Cooperative Societies against the stocks of fertilisers, cotton bales, food grains, minor forest produce, milk products, etc., for the Societies dealing in the above commodities the CC (hypothecation) is their main source of Working Capital. The Sugar Mills on the other hand obtain the CC (hypothecation) limit against the stocks of stores and spares to sustain operation of their plants and machinery, while pledge limits are obtained against stocks of sugar. iii. Cash Credit (pledge) Limit The above limit is mainly availed of by the Spinning Societies for availing of the Working Capital against the stocks of yarn produced by them. This limit also forms the major source of Working Capital to Sugar Mills.

Appraisal of High Value Advances: a.

With the withdrawal of CAS, the Cooperative Banks would be required to evaluate credit risks themselves, and take micro credit decisions, based on commercial judgement. The banks should also review the quality of their lending to NonCredit Cooperative Societies and individuals / units outside the Cooperative fold on a quarterly basis and submit a Memorandum thereon to their Board. Such a review may cover, interalia, details of sectoral / subsectoral credit limits / loans sanctioned, comments on operations on the major account, adequacy of margin, utilisation of the limit, end use of credit, irregularities, if any, in the operations of the unit or any unanticipated problems faced by the unit etc., together with the banks' sectoral exposure and any other relevant issue.

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8.

Sanction of Loans and Advances - Operational Guidelines: a.

Working Capital Limits: i.

ii.

iii.

iv. v.

vi. vii.

9.

The limits for financing PDS and other Central State Govt. purchase / procurement schemes beyond the prescribed cut-off points as specified in the Requirements of Prior Authorization would continue to be authorised by NABARD in consultation with Reserve Bank of India, as hitherto. In the case of advances against commodities covered by the Selective Credit Control Directives of RBI, it should be ensured that the relevant provisions relating to the margins etc. are strictly compiled with. In respect of the industries where norms relating to inventory and receivables have been laid down, credit limits should be determined in accordance with such norms and in tune with past trends. Where deviations from norms / past trends are warranted, the banks should ensure that these are justified on merits and the reasons for such deviations incorporated in the Sanction Memoranda / Appraisal Notes placed before the Competent Authority for sanction. The CC pledge / hypothecation limits to Sugar Mills will be sanctioned as per the instructions issued by RBI /NABARD from time to time. The banks are not expected to sanction clean limits along with CC pledge / hypothecation limit to Cooperative Processing Societies / Marketing Societies. Clean limits, when sanctioned, should not exceed the owned funds of the borrowing unit and twice the owned funds in the case of pure marketing societies against govt. guarantee by SCBs) The ceilings for sanction of clean limits for financing the pre seasonal expenses of the sugar factories will be as per the instructions issued by NABARD from time to time. In the case of the borrowing units being financed by a consortium of banks, the reporting of sanctions to NABARD may be done by the leader bank / concerned Cooperative Bank, which is a member of the consortium.

Financing Units with negative net worth / other irregularities: a.

The banks should insist on drawing and implementation of a time bound realistic programme for bringing back such units to normalcy / viability in operations, monitor such programmes closely, and pending such revival any fresh finance should be subject to closer scrutiny and case by case review / approval by the Board / Competent Authority. Further any credit facility to such units should be subject to obtention of state govt. Default Guarantee for NonCredit Cooperative Societies / Govt. owned units, and against adequate collateral security for the units outside the Cooperative fold.

b.

State Govt. Default Guarantee In respect of Sugar Mill having negative net worth, the condition of State Government's irrevocable default guarantee in favour of the financing bank would have to be obtained and adhered to strictly. The negative net worth is a sign of weak financial position of the Sugar Mills and denotes complete erosion of owned funds of such units. As a result, these Sugar Mills are not in a position to provide requisite margin on pledge / hypothecation limits. In order to 445 - III

safeguard the interest of the financing bank, collateral security in the form of State Government guarantee is considered essential, besides the primary security in the form of sugar stock. This would also signify intention of continuing involvement of the State Govt. in the well being of such units. 10. Block Capital / Term Loans: a.

The Cooperative Banks are not, normally, expected to sanction Term Loans beyond the prescribed levels. In the case of new Cooperative Sugar Mills, the project cost should be as per the normative cost, as may be approved from time to time by Ministry of Consumer Affairs, Govt. of India and Debt Equity Ratio of 60:40 should be followed. The debt portion sharing by Cooperative Banks should not be more than 60% and the remaining by Term Lending Institutions / Commercial Banks, with project appraisal by the participating TLI / Commercial Bank, or an institute / Consultant approved by them. Participation of Commercial Banks / TLIs in the financing of new SSKs is considered necessary to take advantage of their appraisal and monitoring expertise.

b.

Sanction of bridge loans for financing units pending release of term loan by TLIs, should not be resorted to. Further financing of new cooperative Sugar Mills should invariably be supported by the default guarantee of the State Govt. All block capital facilities should be in compliance with the exposure norms and other prudent banking norms and practices and all Term Financing should be within the Long Term Net Lendable Resources of the financing banks. All sanctions by SCBs / DCCBs beyond the prescribed ceilings even if they are in consortium with TLIs / Commercial Banks within the ratio of 60:40, would be subjected to post sanction scrutiny by NABARD.

c.

Normally, in the case of sugar finance, the banks should not grant terms loan facility for clearing short margins and / or payment of other short term liabilities in arrears, such as cane growers dues, harvesting and transportation charges or any other dues. In case, such term loans are considered absolutely necessary to be sanctioned to enable the sugar factories to clear such liabilities, the financing bank should ensure that a time bound rehabilitation plan is drawn by such mills securing commitment from TLIs / other financing banks and State Govt. Repayments period is fixed as per realistic cash flow. Fresh irregularities / short margin / liabilities are not allowed to be created. As the facility is covered by State Govt. default guarantee, each proposal is critically assessed and approved by the Board of Directors of the banks.

11. Rephasement Products: All rephasement / extension of set aside proposals may be considered by banks on merits of each case within the exposure limit of the individual unit and with the approval of Competent Authority. 12. Credit dispensation to certain activities: Considering their resource pattern, priorities and the expertise available, the banks are not expected to grant credit facilities for certain activities / institutions, such as real estate, housing (except to the extent permitted by RBI), infrastructure, power schemes / projects especially where State Govt.'s budgetary support is available, NBFCs, etc.

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13. Exposure Norms: a.

The exposure norms shall be uniform for both SCBs and DCCBs irrespective of whether the unit financed is within the cooperative fold or outside the cooperative fold.

b.

The norm shall not apply to the loan sanctioned / outstanding to PACS, and other credit societies and agricultural advances.

c.

The unit-wise exposure norm shall be linked to Capital Fund, while sector-wise exposure norms shall be linked to the Lendable Resources as on 31 March of the latest audited Balance Sheet of the bank, based on the 'rating' of banks given by NABARD after the inspection of banks conducted under Section 35 (6) of B.R. Act, 1949 (AACS).

d.

Capital Fund shall comprise paid up capital and free reserves. Reserves created by way of revaluation of Fixed Assets, etc., if any, should not be included for the purpose.

e.

Lendable Resources shall be computed as the sum of share capital reserves including provisions and excluding the balance under Agricultural Credit Stabilisation Fund (ACSF), deposits and borrowings less sum of optimum liquid assets (35%) of TDL, Fixed Assets, accumulated losses and any other commitments except loans and advances.

f.

The term 'individuals' shall include individual partners, sole proprietors, partnership firms and unincorporated bodies.

g.

The exposure shall include funded credit limits like working capital limits, short term/temporary loans and block capital facilities like term loans, interim/bridge loans granted by the banks either from out of their own resources or out of the refinance assistance availed of by them from higher financing agencies. It shall also include non-funded financial accommodations like guarantees, letter of credit, etc.

h.

The sanctioned limit or loan outstanding whichever is higher, shall be reckoned for arriving at the exposure in the case of cash credit limits. In the case of term loan, outstanding amount may be reckoned for the purpose of exposure. However, in the case of non-funded credit limits, only 50% of such limits or the outstanding loan amount whichever is higher, may be taken into account for the purpose.

i.

Borrowers for whom credit limits are allocated directly by the RBI for the purposes like food credit limits, etc. will be outside the purview of exposure limit.

j.

The ceiling on financing of individuals shall be Rs.60 lakh for banks having 'A' rating, Rs.40 lakh for banks having 'B' rating and Rs.25 lakh for banks having 'C' or 'D' rating as per the latest inspection conducted by NABARD.

k.

There may be certain circumstances requiring SCBs/DCCBs to extend financial assistance to certain units/ sectors in excess of the cut-off limits indicated above. In such cases, the banks may, 447 - III

with relevant details, seek specific relaxations from NABARD. NABARD may, in exceptional cases, permit banks to extend such finance exceeding the exposure limits, based on merits of the individual case. l.

The banks are required to evaluate the credit risks themselves, especially when extending financial assistance to bigger borrowers and take their own credit decisions, based on commercial judgment and market information. For the purpose of containing the credit risk, it is desirable, if the bank restricts its exposure to a single unit within the 'net owned funds' of the unit concerned. Banks may take steps to achieve this norm over a period of 3 to 5 years, especially when financial assistance is extended to units exceeding Rs.20 crore.

m. The exposure limit shall be as under: NABARD's Inspection Rating

Unit-wise exposure as % to Capital Fund

Sector-wise exposure as % to Lendable Resources

A

60

50

B

50

40

C

45

35

D

40

30

14. Sanction of Credit limits to Co-operative Sugar Mills: a.

The State / Central Cooperative Banks may, sanction / renew Cash Credit (Pledge) limits to the Cooperative / Government owned Sugar Mills for the sugar season on the basis of realistic assessment, risk & sensitivity analysis, and their market risk perception subject to the following conditions / guidelines. i.

Compliance with exposure norms The prevailing exposure norms, as prescribed vide circular No. NB.PCD.CAS/1193/A-75/1997-98 dated September 1997 and NB.PCD.CAS/171/A75/1998-99 dated 16 May 1998 should be complied with by the State / Central Cooperative Banks with effect from 01 July 2001. In the context of the huge carryover of stocks with Sugar Mills resulting in overextended exposures of the banks to the sugar industry, banks are further advised to take the following steps to ensure compliance with the exposure norms: ! The Working Capital Limits may be linked to the realistic production programme and would be subject to exposure norms and financing in consortium with other banks where such norms are exceeding the exposure ceilings. ! Before renewing / enhancing credit limits to mills having irregular accounts, banks may insist on such Sugar Mills to draw and implement a time bound programme for regaining normalcy / viability in operations and, monitor such programmes closely. Pending such revival, any fresh finance should be subject to closer scrutiny and case by case approval by the Bank's Board / Competent Authority. Further, any credit facility to such units should be 448 - III

subject to obtention of State government default guarantee. ! Sugar Mills with negative net worth The present stipulation which subjects the sanction / renewal of limits to mills having Negative Net Worth have to obtain of unconditional irrevocable State Government Default Guarantee in favour of the financing Cooperative Bank should continue. In this connection, it is clarified that a letter of comfort may not be legally valid and cannot substitute a Guarantee. ii. Fixation of credit limits Fixation of Cash Credit (pledge) Limits will continue to be made on the basis of valuation of anticipated realistic peak level stocks, likely to be reached by a factory during the relevant crushing period and valued on the basis of levy price fixed by the Government for levy sugar and, at the average price realized in the preceding three months (moving average) or the current market price, whichever is lower, for free sale sugar (including buffer stocks), in the prescribed proportion. Besides working out drawing power net of margins, drawals in the account should be regulated with reference to the actual cash deficit of the concerned mills worked out on a monthly cash flow or drawing power whichever is lower. Banks may also bifurcate the CC (pledge) Limit into peak season and slack season limits. iii. Payment of cane price to cane grower Initial drawals under the CC (Pledge) limit for cane payments should be restricted to SMP and higher cane payments could be permitted out of the surplus left after other current dues such as average conversion costs, liabilities under term loan instalments / other loan instalments, tax liabilities, statutory bonus to employees interest due and payable etc., have been met or out of subsidy provided by the State Government. iv. Margins Margins on free sale sugar will be decided by the banks based on their commercial judgement. However, for the present, the prescribed margin requirement at 10% of the value of levy sugar and Zero margins on buffer stocks have been continued. v. Cash Credit (Hypothecation) Limits - CC (Hypothecation) limits for Stores and Spares (including Gunny Bags) could be sanctioned / renewed by banks upto 120% of the average maximum utilisation of the limits during the preceding three years or Rs. 2.00 Crores, whichever is less or as may be specified by NABARD, from time to time. 15. Terms and conditions for sanction of working Capital to Co-operative Sugar Mills: a.

The financing bank should ensure that all the preliminary formalities in regard to eligibility of the unit for availing finance from the bank / eligibility of the bank to finance the unit are complied with by it, such as: i.

Necessary provisions in the bye-laws of the unit regarding validity of the purpose for which the borrowing unit has sought bank finance and its eligibility to avail the same from the bank. ii. Adequacy of borrowing powers with the unit. iii. Regular and timely payment of dues to Government / other authorities by the unit. iv. Passing necessary resolutions by the Board of Directors of the bank for sanctioning the facility to the unit and, of the unit to obtain the proposed finance from the bank.

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b.

Drawals under the sanctioned CC (Pledge) limits could be allowed to the Sugar Mills by the banks only after ensuring effective custody of sugar stocks. The stock movements should be monitored effectively with reference to periodical stock statements. Godowns where sugar stocks are stored be properly maintained and stocks in custody of banks should be insured against all anticipated risks.

c.

The guidelines / Instructions prescribed in the NABARD circular letter No. NB.PCD.CAS/ 983 / A.75/97-98 dated August 1997 with respect to the following should be followed by the banks i. Monitoring of cane payments by the Sugar Mills. ii. Utilization of cash incentives for liquidation of term loans. iii. Instructions regarding transfer of borrowal account

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CHAPTER 29 CONSORTIUM ADVANCES 1.

General: a.

Consortium Advance is an arrangement between two or more Banks joining together to finance the credit requirements of a single borrower, generally a corporate client through a common appraisal with common documentation against a common security charged in their favour on pari passu basis.

b.

Consortium banks follow joint supervision, monitoring and follow up exercises in credit management.Coop. Banks may enter into the consortium advance to provide finance to sugar mills/ spinning mills/ any big industry in the coop. sector.

c.

A consortium arrangement will have a leader bank to head the consortium. Normally the bank having the largest share in the consortium will be the leader bank (called as 'A' Bank). However, for the sake of convenience the DCCB of the concerned district in which the borrowing unit is situated may act as the consortium leader.

d.

As per the present RBI guidelines, where the total credit limits to a single borrower/ unit exceeds Rs.50 crores, it is obligatory to form consortium of Banks to finance such borrower. Even if the total fund based credit to a single borrower is less than Rs.50 crores, the Banks will be free to form a consortium at their discretions.

e.

RBI has not prescribed ceiling on the number of banks in a consortium. However it is ideal to have 5 to 10 banks as consortium members.

f.

As per the Circular No. 68/DoS 10/2008 12.05.2008 (Ref. No. NB.DoS/CMA/768/A.75/2008-09) the exposure limit of a cooperative bank to the borrowing unit shall as under: NABARD's Inspection Rating

g.

Unit-wise exposure as % to Capital Fund

Sector-wise Exposure as % to Lendable Resources

A

60

50

B

50

40

C

45

35

D

40

30

To ensure meaningful participation in the consortium, share of a bank as a member of the consortium should be a minimum of 5% of the fund based credit limit or Rs.1 crore whichever is higher.

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2.

h.

No bank outside the consortium should extend any additional banking facilities or open Current Account or extend bill limits, guarantees / acceptances, letter of credit, etc. to the borrowing unit without the concurrence of the existing consortium members.

i.

The bank having the next highest share shall be the second leader Bank (called as 'B' Bank).

Role of Leader Bank in Consortium: a.

The Leader Bank performs the duties of appraisal of the credit, circulation of appraisal note to other member banks, approval of credit, conducting periodical review meetings, joint documentation, periodical joint inspection and exchange of information on the borrowing unit as detailed below: i.

ii. iii. iv. v. vi.

b.

Arranging for the joint appraisal of the loan proposal by all the member banks. It has to prepare the joint appraisal memoranda, circulate it among member banks and finalise the assessment after deliberation. Determination of the quantum of finance by the members. Reporting to RBI, NABARD under CMA for credit authorization Syndicating the credit limit determined among participating banks. Finalising the security documents to be obtained from the borrower. Convening a meeting of the member banks for the execution of the common documents and completing other formalities like registration of charges with the appropriate authority.

In addition to the application and connected documents to be executed by the borrower, the leader Bank shall arrange for execution of: i.

common loan agreement mentioning the share of advance of each member, Rate of Interest, margin, repayment schedule, creation of security, insurance and realisation of security. ii. Joint Equitable Mortgage of the existing assets and assets to be created out of term loans. iii. Joint Deed of pledge or hypothecation for the total limit in favour of all the participating banks providing equal or pro-rata rights on the charge. c.

Holding the charge, securities, mortgage / title deeds, etc. on its own behalf and also on behalf of the other members.

d.

Conducting inspection of securities charged to the consortium either by themselves or jointly with other members of the consortium.

e.

Liaison/Corresponding with the all India Financial Institutions or the State Level Financial Institutions on matter of mutual interest between Consortium Banks and the Term Lending Institutions.

f.

For various services rendered, the lead bank may charge a suitable fee (say 0.25% of the limits per annum, to be borne by the borrowers). 452 - III

3.

Role of participating Banks: a.

The duties of the participating banks are: i.

To participate in the Consortium Meetings and contribute their expertise for the common good of the Consortium. ii. to accept and follow the decisions of the consortium on any matter relating to the credit/ borrowing unit. iii. To advise their firm decision on the extent of participation. iv. Not to arbitrarily vary the quantum of participation or the margin or the interest rate etc. without specific reference to consortium and without ascertaining the views of other Banks. v. Not to recall the advance by an unilateral decision. vi. To carry out the inspection of stocks as agreed and forward the inspection reports to the leader and other Consortium Banks. vii. To advise any adverse features noticed by them to other banks / Leader Bank. viii. To take up a share in the annual or adhoc increase in proportion to the original share allotted to them. ix. Not to show any indulgence to the borrower with a view to soliciting a major share of the other remunerative business of the borrowers which will jeopardize the interest of other members. x. To seek their legitimate share in the ancillary business offered by the borrower. xi. To depute to the consortium meetings Executives / Officers who would be able to take spot decision, where necessary. 4.

Borrower's Role in a Consortium: a.

To provide the necessary applications, financial papers, etc. to all the members so that the loan proposal can be processed quickly.

b.

To register / cause to be registered all the charges created with the appropriate authorities as required.

c.

To submit stock statements and other prescribed Statements/ periodicals to the banks without delay.

d.

To help the banks in the inspection of stocks, verification of the security charge to the Banks etc.

e.

To distribute the availment under the Cash Credit and other ancillary business equitable among all the participating banks without preferring one or few banks to the exclusion of others.

f.

The borrower has to abide by the decision taken by the consortium.

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5.

Consortium Meetings: a.

The Leader Bank should convene the consortium meeting at least once in a quarter to: i. discuss/review of technical / financial performance of the unit/projects. ii. review of operations in the Cash Credit Account with reference to physical performance, remittances of sale proceeds, drawing power, outstanding, cover deficits if any. iii. collecting the share of members, delay in claiming the member share, change in sharing of assistance.

6.

b.

Annual Consortium Meeting may be held to consider renewal / enhancement in the credit limits and for including of new members or exit of any existing member for revising the share of the member banks, etc.,

c.

The meetings should be attended by all member banks represented by senior officials having authority to commit the bank on its share of any enhancement in limits. The relative appraisal note has to be circulated to member banks 10 days in advance of the meeting. After the meeting, the lead bank has to circulate the minutes of the meeting among the members within 15 days. The collective decision taken by the Consortium Banks should be honoured within 30 days. Formal sanction of limits should be conveyed by the member banks to the Leader Bank within two months after the 'in principle' commitment is given.

Admission of New Members: a.

7.

8.

If a member bank is unable to take up its enhanced shares of credit, such enhanced shares could be reallocated among the other existing / willing members. In case other existing member banks are also unable to take up such enhanced share, a new bank may be admitted into the Consortium with the consent of the borrower.

Exit of a Member from the Consortium: a.

A member bank may be permitted to leave a Consortium after expiry of at least two years from the date of its joining the consortium with the consent of the existing member banks and of the new bank willing to take up its share by joining the Consortium.

b.

The bank permitted to leave the Consortium sells its debts at a discount and furnish an unconditional undertaking that the repayment of its dues would be deferred till the dues of other members are repaid in full.

Other Activities of the members in Consortium: a.

The following maximum time frames have been prescribed for taking decisions in respect of consortium advances.

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i. Proposals for renewal of existing credit limits : 45 days ii. Proposals for sanction of adhoc credit facilities : 30 days

9.

b.

The decision of the Consortium regarding the quantum of the credit will be binding on the lead Bank and other member Banks.

c.

The lead bank may sanction an additional credit upto a predetermined percentage in emergent situations / contingencies which should be immediately shared prorata with other members.

d.

The terms and conditions finalized at the Consortium Meeting should be applied uniformly by all member Banks.

e.

All member banks should issue a letter of authority in favour of the Leader Bank to make available their share of the entire / enhanced limit, if their decision is not advised to the Leader Bank in time.

f.

The Leader Bank should disburse the funds in accordance with the immediate needs of the borrower. The member banks should reimburse the amount immediately on receipt of the advice from the Leader Bank. If there is delay beyond one week in providing reimbursement, the member bank concerned has to pay a penal interest @2% per annum for the entire period of delay. After the first disbursement as above, the borrower would operate his accounts with different member banks according to his requirements within the limits allocated to them.

g.

The security documents should be obtained by the leader bank.

h.

Rate of Interest including penal rates for various types of credit, waiver of penal interest or varying the margin stipulated may be left to the discussion of the member banks.

i.

The decision on all matters should be taken with the consent of all the members. If there is any disagreement, decision of the consortium leader and the 'B' bank having the next highest fund based share will be final.

j.

The member banks may exchange information on monthly basis regarding the operation and outstanding of the limits with them.

k.

The member banks may also circulate among themselves the outcome of the inspection undertaken by them and suggest the steps that may be taken to rectify deficiencies, if any.

Documentation: The following set of documents (as evolved by IBA) is to be executed and obtained: a.

Resolutions passed by the Board of Directors of the Borrower.

b.

Resolution passed by the Board of Directors of the Bank having the second largest share (called 'B' Bank)

c.

Resolution passed by the Board of Directors of other Member Banks (called C,D and E Banks) 455 - III

d.

Letter of Authority to be given by the C Bank, D Bank, and E Bank to the Leader Bank (called A Bank)

e.

Letter of Authority to be given by C Bank, D Bank and E Bank to B Bank.

f.

Working Capital consortium agreement.

g.

Joint Deed of pledge/ hypothecation

h.

Inter-Se Agreement entered into between the member Banks.

i.

Revival letter for purpose of limitations

j.

Letter of Undertaking from the borrower for creating a second mortgage on the Fixed Assets.

k.

Letter of Authority to Leader Bank to make the first disbursement on behalf of the consortium members.

l.

Pari passu agreement executed by borrowing unit to Banks.

m. Government Guarantee. 10. Annexure/s: a.

The following Annexures are enclosed to this Chapter:

Annexure 1 Annexure Annexure Annexure Annexure Annexure Annexure Annexure

:

1(a) : 2 : 3 : 4 : 5 : 6 : 7 :

Annexure 8 Annexure 9

: :

Annexure 10 :

Specimen of 'Terms and Conditions covering the Cash Credit Account - Sugar Mills for the Sugar Season under Consortium basis along with DCCBs Checklist of documents required Specimen of Appraisal Note for sugar mill finance under consortium Specimen of Sugar Mills Cash Credit (Pledge) Limit Terms and Conditions Specimen of “Deed of Pledge” Specimen of 'Pari Passu Agreement' Specimen of 'Inter Se Agreement' Specimen of 'Operation of CC Account Procedures in Consortium Advances to Sugar Mills. Specimen of 'Disbursement Note' Specimen of formats to avail reimbursement from Member Banks by the Leader Bank Specimen of Weekly Statement from the Leader Bank to all Member Banks under Consortium.

456 - III

Annexure-1 to Chatper-29 Specimen of 'Terms and Conditions covering the Cash Credit Account - Sugar Mills for the Sugar Season under Consortium basis along with DCCBs: 1.

Nature of the Limit: It is a Cash Credit / Hypothecation / pledge limit to Sugar Mills for the sugar year __________ under consortium arrangements with DCCB/ _____________.

2.

Validity of the Limit: The limit is valid upto _____________.

3.

Cover: The Sugar Mills should incorporate the condition that the stocks of sugar is subject to hypothecation / pledge to the leader DCCB and Member Banks.

4.

Margin: ! ! !

5.

The Sugar Mills should maintain 10% margin on the value of sugar not released for sale by Government under pledge i.e. levy sugar. The Sugar Mills should maintain 15% margin on free sale sugar. The margin is liable for change on the basis of the directives issued by the RBI / NABARD, from time to time.

Valuations:

The Sugar Mills should ensure to value the levy sugar stocks at levy price fixed by the Government and free sugar stocks at the average price realized during the preceding 90 days (moving average) or current market price excluding excise duty whichever is lower or as stipulated from time to time. 6.

7.

Extent of Finance to the Sugar Mills: !

The Sugar Mills may obtain finance from the Leader Bank / Member Banks to the extent of drawing power fixed by the Leader Bank (CCB)

!

The Sugar Mills should regulate its borrowings with the Leader Bank / Member Banks with reference to the drawing power fixed and excess drawals, if any, should be regularized then and there.

Procedure for Drawal of Funds from the Leader Bank: !

A Board Resolution for the requirement of limit and a pronote for the same amount may be furnished at the beginning of the sugar year. 457 - III

!

! !

! !

!

! 8.

Custody of Goods: !

!

! 9.

The Sugar mills while applying for drawals on the sanctioned limit, should send an application for the amount applied for in the form prescribed with the particulars of stock held together with the respective drawing power, amount already drawn under the Cash Credit Account and the statement showing the Net Disposable Resources (NRD) position of unit, cash flow statement, estimates of production and working results of the unit, month wise closing stock position of borrowing unit as at the close of business on the Friday prior to the date of drawal application. Drawals in the Cash Credit Account should be for a minimum of Rs.1.00 lakh and drawals in excess thereof should be in multiples of Rs.1.00 lakh. Repayment under the Cash Credit Account shall be in multiples of Rs.1.00 lakh only. Drawals would be allowed on the basis of drawing power fixed as per latest stock statement available with the Bank. The Leader Bank will get reimbursement from other member banks within a reasonable time and the transactions would be made with Apex Bank as usual. The outstandings of sugar mills at any time with the Leader Bank / member Bank should be as per the ratio of limits sanctioned. Drawals and Repayments should not be accepted on the same day. The drawal applications preferred by the Sugar Mills should be signed only by the Officials authorized by the Board of Management of the Sugar Mills. to facilitate this, the Board of Management of the Sugar Mills should authorize officials by name to sign the drawal applications and the Sugar Mills should send a true copy of the Resolution together with the specimen signatures of the officials empowered duly attested by the Special Officer / Chief Executive / Administrator. It should be ensured to maintain two separate accounts one for payment of cane and the other for operational expenditure and statutory dues as per the NABARD's directives. The Sugar Mills should give suitable undertaking to ensure prompt and regular payment to the cane growers by furnishing a certificate along with each and every drawal. The drawal proceeds will be credited into Current Account maintained by the Mills with the financing Bank / Leader Bank.

The stocks of sugar under pledge shall be in the joint custody of the Mills and Leader / member Bank. However the / Leader DCCB will hold the keys on behalf of other Member Banks for operational convenience. The Godown Keeper or the Leader Banks' representative shall maintain necessary records regarding receipt, release and custody of sugar bags. The Delivery Order issued by Bank(s) shall also be preserved by the Bank representative. The Sugar Mills should furnish a necessary Board Resolution for executing the above undertaking before making drawals under the present limit.

Stock Statement: The sugar mills should submit weekly stock statement relating to the stocks of sugar under pledge on 458 - III

every Friday indicating the value of stocks held at the beginning of the week, value of stocks produced during the week, value of stocks sold during the week and value of stocks held at the end of the week, in respect of both levy and free sale sugar (quantity and value to be furnished separately) 10. Signing of Stock Statement by Authorised Official: 1.

The Stock Statement shall be signed only by the Officers of the Mill, who are empowered to sign the stock statement by the Board of Management of the Mill. The stock statement should also be countersigned by the godown keeper of consortium bankers' viz., DCCB.

2.

The Sugar Mills should obtain and forward to the Bank a true copy of the Resolution passed by the Board of Management of the Mill authorizing the Officers by name to sign the stock statements together with the specimen signatures of the officers of the Mill empowered to sign the stock statement, duly attested.

3.

The Sugar Mills shall furnish to the Bank the specimen signature of consortium Banks (CCB) authorized to sign on behalf of the respective Bank duly attested by the Administrator / Managing Director.

11. Penal Interest for Excess Drawals: If as per the weekly certificate, any excess drawal is noticed, sugar mills is liable to pay penal interest at 2% p.a. 12. Routing of documents for Purchase of Goods: 13. Ensuing Correlativity between Purchase and Sale of Stocks and withdrawals and Prepayments in the Cash Credit Account: The borrowing unit should compare the value of stocks acquired with the drawal made in the Cash Credit Account with the value of sales effected during the month. There should be reasonable correlation between the amount drawn and purchases and also between the sales and remittances, the sugar mills should remit the entire sale proceeds into its Cash Credit Account. 14. Inspection of Sugar Mills by Apex Bank Officials: The officials of the Apex Bank / NABARD reserve the right to inspect the Books of Accounts of the sugar mills and to verify the stocks pledged by the Sugar Mills. 15. Preparation Of Quarterly Trading And Profit And Loss Account And Balance Sheet By The Sugar Mills: The Sugar Mills should ensure to write their books and accounts, post-stock register, etc. upto date. The Sugar mill will prepare Trading and Profit and Loss Account and Balance Sheet as at the end of each quarter and send the copies of such documents to Apex Bank within one month from the completion of each quarter. 459 - III

16. Audit Positions of the Sugar Mills: The Sugar Mills should ensure to upto date the audit position and report the progress in audit. Audit certificates of the sugar mills are to be issued within a period of 6 months from the date of closure of the respective financial year. 17. Avoidance Of Diversion Of Working Capital: The sugar mills should ensure that the working capital provided should not be diverted for acquisition of capital assets, etc. 18. Insurance: The Sugar Mills should insure their stocks under pledge preferable on a declaration basis for the full value of stocks pledged against the risk of fire, flood and burglary. The policy should be in the joint names of all Consortium Bankers and the Sugar Mills with Bank's clause and lodged with the Consortium Bankers. The details of the insurance policies in force must also be furnished to Apex Bank in the stock statement. 19. Rate of Interest: 1.

Interest will be charged by the Leader Bank / Member Bank / Apex Bank on the daily outstanding in the Cash Credit Account on monthly basis (applying discounting factor)

2.

The Leader Bank is empowered to charge a service charge from the other member Banks at the rate of 0.10% p.a. as the Leader Bank acts as the custodian on behalf of the member Banks.

20. Credit Monitoring Arrangements: The sanction of CC limit by forming consortium is based on the Credit Monitoring Arrangements (CMA) of NABARD. 21. Right To Recall The Advance: The Leader Bank / member Bank reserves the right to recall the advances made to the sugar mills fails to adhere to any of the terms and conditions stipulated herein, or any other conditions that may be stipulated in future in regard to relevant Cash Credit Limit, in part or full. 22. Execution of Documents: The sugar mills should arrange to execute the necessary documents / certificates with the bankers of the consortium viz, leader DST, Central Cooperative Bank and Member Bank for the limit sanctioned.

460 - III

The following documents have to be executed under consortium arrangements as per formats / specimen already supplied. a. b. c. d.

Pledge Deed: To be executed over Rs.10/- (Non Judicial Stamp Paper) signed by borrowing unit / sugar mills. Paripassu Agreement: Executed over Rs.100/- (Non Judicial Stamp Paper) signed by sugar mills, Leader Bank and all member Banks. Inter Se Agreement: (Between Banks only) Executed under Rs.10/- (Non Judicial Stamp Paper) signed by Leader Bank and all member Banks. Paripassu Letter: Since it is a letter, stamp paper is not necessary and it is prepared by each and every Bank and shared between leader / member Banks. The copies of items No.(a) to (c) have to be given to the member Banks. Paripassu letter (original) should be shared between member Banks. If the requirement of sugar mill is enhanced all documents in respect of consortium arrangements have to be executed afresh for the enhanced total amount or the documents have to be executed for the additional amount separately. It is to be noted that the document executed is to be covered for the total amount of limit sanctioned to the sugar mills.

23. Quarterly Consortium Meeting: The sugar mill has to ensure that the quarterly consortium meeting is convened regularly and proceedings should be forwarded to member Banks including Apex Bank. 24. Submission of Government Guarantee: The mill will have to obtain unconditional irrevocable default guarantees from the state Government for the principal and accrued interest on the advances from the Banks for the limits sanctioned by them in case the mills was having negative networth and account irregular during the previous year. 25. Remittance to the Cash Credit Account: It should be ensured that the recoveries effected by the Sugar Mills should be appropriated on the share of the each Bank under Consortium Agreements. 26. Invoking of Dues: In the absence of non remittance into the CC accounts, the Leader Banks / member Banks have the right to invoke the Assets pledged by the Sugar Mills for the CC limit sanctioned for the year __________. The Necessary assets in respect of the limit sanctioned will have to be earmarked as securities to the Apex Bank. 27. Right to Alter or Amend the Terms and Conditions: The Apex Bank reserves the right to alter, amend, modify any of the above terms and conditions or stipulate any new conditions. Such conditions would be communicated through circulars / letters and these conditions will have the same effect as the conditions stipulated herein.

461 - III

Annexure 1(a) to Chapter-29

CHECKLIST OF DOCUMENTS REQUIRED 1.

Cash Credit Application

2.

NDR position as on 31st March_______

3.

Audited Balance Sheet and Profit and Loss account for the previous year, proforma balance sheet and profit and loss account for the current year.

4.

Statement of month end closing stock position of the borrowing unit in quantity and value for the previous year and projection for the current year.

5.

Statement of monthly operations on the working capital limits sanctioned to the unit during the previous year.

6.

Project Report/Cost Analysis.

7.

Statement of projections.

8.

Cash flow statement (monthly actuals) for previous year/season.

9.

Cash flow projections (monthly) for the ensuing years.

10. Board Resolution.

462 - III

Annexure 2 to Chapter 29 Specimen of 'APPRAISAL NOTE' (Sugar Mill)

01. 02. 03. 04. 05. 06.

Name of the Unit Address Constitution Capacity Type of Assistance Details of Proposals

: : : : :

TCD (Tons crushing per day) Working Capital

I. Security Sugar Stock: Sl. No.

II.

PREVIOUS SEASON

Particulars

Estimates

01

Cane Area Registered *

02

Cane Crushing (Lks Tons) 03 Date of Starting of crushing

04

Date of Completion crushing 05 No. of days crushed

06

Recovery %

07

Sugar Produced in Qtls 08 Peak Stock (Qtls) 09 Peak Stock (Value) 10 Margin

08

Bank Finance (as per peak level stock)

09

Bank Finance (as per Cash Flow)

10

Bank Finance (as per application)

11

Fair & Remunerative Price

12

SAP

Security Stores & Spares: a. Stock Value b. Margin c. Cover / Drawing Power d. Bank Finance

463 - III

Actual

Present Request

III. Security - Molasses: Sl. No.

Particulars

01.

Production (Qty)

02.

Stock (Qty)

03.

Rate

04.

Stock Value

05.

Margin

06.

Cover / D.P.

07.

Bank Finance

PREVIOUS SEASON Estimates

Actual

Present Request

IV. Security Spirit: Sl. No.

V.

Particulars

01.

Production (Lakhs Ltrs)

02.

Stock (Lakhs Ltrs)

03.

Rate

04.

Stock Value

05.

Margin

06.

Cover / D.P.

07.

Bank Finance

PREVIOUS SEASON Estimates

Actual

Present Request

Financial Position:

Sl. No.

Particulars

01

Share Capital

02

Reserves

03

Net Profit / Loss

04

Accumulated Loss

05

NDR

06

Current Liabilities

07

Cane Dues

As on Previous year 31st March

464 - III

Current Year 31st Marc

Performance and Financial Ratios: 31.03..... (Audited)

As on

31.03…….. (Projection)

*31.03….. (Estimate) #

Net Sales Operating Profit Net other Income Profit before Tax PBT / Net Sales Profit After Tax Net Cash actuals for the year Paid up Capital Tangible Networth Total outside Liabilities / TNW Gross Fixed Assets Net Working Capital Current Ratio VI

Operations in Cash Credit Account: Sl. No.

PREVIOUS SEASON

Particulars

Estimates 01. 02. 03. 04. 05.

Actual

Sales Opening Balance Drawals Repayment Closing Balance

VII Cost of Production: Sl. No.

Particulars

PREVIOUS SEASON Estimates

01 02 03

Sugar / Ton Molasses Spirit

VIII. Compliance with Terms and Conditions of Financial Assistance: 465 - III

Actual

Projections

IX. Consortium Meeting and Documentation: Consortium Meeting was held on __________; Documents were executed on ________ X. Inspection: Inspection was held on _____________. Defects communicated on ____________ Rectification Report obtained on ______________ Observations / Recommendations: Sugar Production: ! ! a. b. c.

As per the application, the Sugar Mill could not crush the quantity estimated during the last season / exceeded the crushing quantity estimated (due to non availability of cane / diversion of cane) The recovery percentage was lower / higher than the estimated rate (extended crushing / good quality of cane). The stock value as estimated by the Sugar Mills has not reached: Due to fall in market price Lesser recovery Not able to reach the peak level stock as projected. On account of the reasons given above the sugar mill could not achieve the estimates / exceeded the estimates and as such the projections appear to be unrealistic / realistic. The sugar mill has given reasons justifying the projection to enable the Bank to consider the present request.

Cash Flow Statement: As per projected cash flow statement, the maximum deficit in cash is Rs.___________ which is not correct/ correct due to a. b. c. d. e.

cane payment is not correct sales arrived is not correct other payments are not correct other income are not correct any other observations

Financial Position: From the details of the financial position given above: a.

The Sugar mill has earned a profit / incurred loss of Rs.

b.

The accumulated loss has increased / decreased to Rs.

466 - III

c.

The networth of the Mills is positive / negative by Rs.

d.

The NDR of the Mills is Rs.

e.

The Current Liabilities position has increased / decreased by Rs.

f.

The cane dues is at Rs. Lakhs

g.

The borrowing power as per byelaw is Rs.__________ and borrowing outstanding as on _________ is within the borrowing power.

Operations in Cash Credit: As per the data given by the sugar mills, the sugar mill has reached / not reached the production level and also achieved not achieve the sales estimated during the last season. As per the operations in the Cash Credit Account, the entire proceeds of sales has been credited / not credited. The drawals in the Cash Credit Account has exceeded the remittances an account of sales realization was far below the cost of manufacture. The outstanding in the Cash Credit Account a.

Within the DP / limit

b.

Has exceeded the DP temporarily / continuously

c.

The cover deficit occurred from month.

Cost of Production: The sugar mill has estimated the cost of sugar production at Rs. Per Ton. However the actual cost of production of Sugar / ton is at Rs. On account of payment of SAP, labour cost, overheads, etc. Compliance with the Terms and Conditions of Sanction: As per the terms and conditions of sanction the sugar mill has to arrange for a.

Government Guarantee

-

GG was made available after long delay And GG was submitted in the month of deed of guarantee executed/ not executed.

b.

Submission of Stock Statement

-

The Sugar Mill was regular / Occasional delays in submission

c.

Submission of financial statement

-

The sugar mill has submitted technical / Financial informations quarterly / annual basis.

d.

Insurance

-

The sugar mill has insured the security given and also ensured periodical renewal. 467 - III

e.

Inspection & Compliance

-

As per the inspection undertaken by the leader / member banks, the mill has submitted the compliance.

f.

Maintenance of Accounts

-

As per the NABARD guidelines, the sugar mill is maintaining two separate A/cs, viz., i. Cane Payments ii. Other Expenditure

g.

Stock cover / DP

-

The Sugar Mill has adequate cover for the drawals / exceeded the DP and also having cover deficit.

In the light of the above, the sugar mills request for financial assistance may be considered as follows: a.

Against Sugar Stock

-

Rs. Lakhs (being the maximum stock / deficit in cash flow / amount applied for)

b.

Against Stores & Spares

-

Rs. Lakhs

c.

Against Molasses stocks

-

Rs. Lakhs

d.

Against Spirit

-

Rs. Lakhs

The above sanction may be considered subject to the various terms and conditions as given in the Annexure and also subject to execution of documents, Obtention of government guarantee on or before __________. The financial assistance may be extended under consortium with the existing banks new banks to be considered in the consortium meeting.

AUTHORISED OFFICER

468 - III

Annexure 1(a) to Chapter 29 CHECKLIST OF DOCUMENTS REQUIRED 1.

Cash Credit Application

2.

NDR position as on 31st March ________

3.

Audited Balance Sheet and Profit and Loss account for the previous year, proforma balance sheet and profit and loss account for the current year.

4.

Statement of month end closing stock position of the borrowing unit in quantity and value for the previous year and projection for the current year

5.

Statement of monthly operations on the working capital limits sanctioned to the unit during the previous year.

6.

Project Report/ Cost Analysis

7.

Statement of projections.

8.

Cash flow statement (monthly actuals) for previous year/season

9.

Cash flow projections (monthly) for the ensuing years.

10. Board Resolution.

469 - III

Annexure 3 to Chapter-29 Specimen of “Sugar Mills Cash Credit (Pledge) Limit”: Terms and Conditions 1.

The working Capital facility sanctioned is a Cash Credit Limit secured by pledge of stocks.

2.

The advance is repayable on demand. The Cash Credit Limit is valid for 1 year from ____ to ___.

3.

The Cash Credit Limit is secured by pledge of stock of sugar belonging to the sugar mills.

4.

The sugar mills shall furnish irrevocable government guarantee.

5.

The Sugar mills should maintain a margin of 10% of the levy sugar or the margin flexed by the RBI from time to time and 15% on the free sale sugar.

6.

The levy sugar shall be valued at the price fixed by the Government of India and the free sale sugar shall be fixed at the quarterly moving average rate or the current market price whichever is less.

7.

The sugar mills shall insure the stock against fire, riot, flood risks, civil commotion and strike in the joint names of the bank and the sugar mills.

8.

The Cash Credit Limit shall be at a specified interest rate, which is subject to revision from time to time. Any irregularities such as cover deficit, outstanding in excess of the sanctioned limit, non submission of statements etc will entail charging of penal interest at the rate of 2% p.a. over and above the normal rate of interest.

9.

The sugar mill shall furnish weekly stock statements in the format prescribed to the Leader Bank and member banks promptly.

10. The sugar mill shall arrange to execute the documents under single window concept of lending to the Leader Bank. 11. The sugar mill shall not resort to outside borrowings / banking or maintain accounts with any other bank without the written consent of the consortium. The sugar mill shall not without the bank's consent in writing invest by way of Share Capital in or advance funds to or place deposits with any other concern. 12. The Cash Credit Limit will be operated separately for cane payments (for SMP only) and general account as per the NABARD guidelines. The sugar mill shall not make any payment in excess of SMP towards cane supply without the consent of the consortium. 13. The member banks of the consortium or their representatives may inspect the sugar mill once a month. The sugar mill shall maintain proper books of accounts and make them available for inspection by financing banks / NABARD / RBI. 14. The sugar mill shall arrange to submit statements / details on the financial / technical performance of the mills periodically (Monthly / Quarterly) and also as per the request made by the bank. The sugar mill shall also furnish the Audited Financial Statements to the Leader Bank within 6 months from the close 470 - III

of the financial year. 15. The stocks of sugar under pledge shall be under the custody of the Leader Bank and the sugar mill shall bear the expenses of the godown keeper posted by the bank. The sugar mill shall release the sugar stock only after getting written clearance from the bank. 16. The sugar mill shall participate in the consortium meeting convened by the Leader Bank and furnish the required particulars for the same. 17. The sugar mill remits the entire sales realisation into the Cash Credit account with the Leader Bank and on no account any amount shall be diverted to any other purpose.

Accepted Chief Executive . . . . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills Limited.

471 - III

Annexure 4 to Chapter-29 (To be executed in Rs.10/- Stamped paper) Specimen of 'DEED OF PLEDGE' This Deed of Pledge is executed by the . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills . . . . . . . . . . . . . . . . . . . . . . . (hereinafter called the 'Borrower') in favour of the . . . . . . . . . . . . . . . . . . . . . . . Dist. Central Cooperative Bank . . . . . . . . . . . . . . . . . . . . . . . (hereinafter called the Bank). Now this DEED OF PLEDGE witnesseth as follows: The Borrower has executed this Deed of Pledge in consideration of the Bank allowing or having allowed Cash Credit Advance against stocks of sugar to the borrower for Rs. . . . . . . . . . . . . . . . . . . . . . . . lakhs, to be in force upto _______, the date permitted by Bank in accordance with terms of this Pledge Deed, repayable on demand and thus hereby pledge and create a charge, in favour of the Bank as collateral security, for the due payment of the amount remaining outstanding in the said Cash Credit Account with accrued interest upto date and that might accrue hereafter, on the goods held, in terms of this Pledge Deed, as per schedule attached herewith, and on the goods that might hereafter be manufactured by or be deposited with and held in possession of which particulars will be furnished to the Bank as and held in possession of which the borrower undertakes to hold, as bank's agents for and on behalf of bank as security for cash credit advance allowed and for due payment of the amount remaining outstanding in the said Cash Credit Account with interest that might have accrued or that are likely to accrue, and in the event of the said goods or any portion thereof being sold and delivered, the proceeds realized from such sales or disposals shall be received by borrower as bank's agents and shall be handed over or paid to the bank as and when received or whenever demanded. The Borrower shall hold these pledged goods described in the appended schedule as agents as security for the Cash Credit Account as long as there is any amount due to the Bank and in the event of the Borrower failing to repay or reimburse to Bank, the aggregate amount that has been accrued or may hereafter accrue in the said Cash Credit Account, on demand, the borrower hereby agrees to deliver or give possession of the said Cash Credit Account, on demand, the borrower hereby agrees to deliver or give possession of the said goods to the bank at any time without raising any objection, to enable the bank to sell or in any other way to dispose of or deal with the goods with the object of realising the whole or any part of the amount of the said Cash Credit Account as if the bank were the absolute owner thereof. The Bank and its Officers shall be entitled at any time and without notice to borrower but at borrower's risk and expenses, and if so required as Attorneys for borrower, name to enter and remain at any place where the pledged goods shall be stored and to take possession of, recover and receive the same and / or appoint any officer of the Bank as Receiver of the pledged goods and / or sell by public auction or private contract, otherwise dispose of or deal with any right aforesaid without being bound to exercise any of these powers or without being liable for any loss in exercise of the powers thereof and without prejudice to the Bank's rights and remedies of suit against the borrower and to apply the net proceeds of such sale in or towards liquidation of the balance due to the Bank and the borrower hereby agrees to accept the Bank's account of sales, or realization and to pay any shortfall or deficiency therein shown.

472 - III

The borrower hereby agrees to pay interest at --- % per annum daily balances with quarterly rests, that may be calculated and charged in the Bank's favour, due upon the said Cash Credit Account, until the same is fully liquidated, as and when the Bank demand it. The amount due in respect of the said Cash Credit Account shall be repaid by the borrower on or before --- and the Bank shall not be bound to allow or continue the cash credit advance to any further extent for any further time which the Bank shall in its absolute discretion deem fit to do so. The borrower hereby guarantees that the advances allowed to them shall in no case exceed 90% in case of levy sugar and 85% in case of free sale sugar of the cost value of the goods hereby pledged to the Bank. The borrower hereby also undertakes that in case at any time pledged goods held by them decline in value or deteriorate in the price and the margin falls short. They will forthwith pledge other goods or property of the sufficient value or pay in cash to square up the short margin and put their account in order at any time. The borrower hereby likewise undertakes and agrees to convey to Bank the Paripassu charge on all the property, assets or goodwill of the Borrower including the uncalled share capital, if any. The goods hereby pledged to the Bank shall also be a security to bank for the payment on demand of all other amounts or dues, which are now or shall at any time be due to the Bank from the Borrower on any other account. The borrower hereby agrees to submit every week a Statement of the Goods so pledged by them in the Form prescribed by bank or that might be prescribed by bank in future duly certified by the Officers of the Borrower authorized in this behalf. The borrower hereby also agrees that the bank or its officers or its agents will be entitled to enter upon and remain in any place where the pledged good are stored in order to inspect or to take inventory of the goods or in other similar way to deal with the goods without notice to borrower and to have undeterred access to borrower's books of account or borrower's stock. The borrower further agrees that the pledged goods and all sale realizations and insurance proceeds thereof shall be held as the Bank's exclusive property specially appropriated to this security and the borrower undertakes not to create any mortgage, charge, lien or encumbrance affecting the same or any part thereof nor do anything which would prejudice this security, and shall not part with the pledged goods have by way of sale in ordinary course of the business nor shall any sale be made after prohibition in writing from the Bank against selling. The borrower hereby declares that all the pledged goods are the absolute property of the borrower at the sole disposal and free from any prior charge or encumbrance and that all future goods and property so pledged shall be likewise unencumbered and that the borrower have not done or knowingly suffered or been party or privy to anything whereby the borrower are anyway prevented from pledging the goods in the manner aforesaid and that the borrower will do and execute at its costs all such acts and things to further and more particularly assure the pledged goods or any part thereof to the Bank as shall be required by the Bank for giving better effect to these presents. The borrower authorises and irrevocably appoints the Bank and / or their Officers as Attorney for and in the name of the borrower to act on its behalf and to execute and to do any act, assurance and things which ought to execute and do under these presents and generally to use the name of the borrower in exercise of the powers hereby conferred. For and on behalf of (Signature of the authorized official of Sugar Mills with designation and seal) 473 - III

SCHEDULE Pledged goods held in trust as collateral security for advances made as per this agreement and in terms of this agreement. Kind of goods 1 SUGAR

Quantity 2

Market Value 3

(As per the details furnished in weekly stock statement)

For and on behalf of the . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sugar Mill. (AUTHORISED SIGNATORY)

474 - III

Annexure 5 to Chapter 29 To be stamped as an Agreement Rs.100/-

Specimen of 'PARI PASSU AGREEMENT'

This Agreement made on this . . . . . . . . . . . . . . . . . . . . . . . day of Two thousand . . . . . . . . . . . . . . . . . . . . . . . at . . . . . . . . . . . . . . . . . . . . . . . among the . . . . . . . . . . . . . . . . . . . . . . . 1.

A Coop. Society registered under the State Cooperative Societies Act (in case of cooperative sugar mills)

2.

A Company incorporated under the Company's Act 1956, having its Registered Office at . . . . . . . . . . . . . . . . . . . . . . . (hereinafter called the borrower) of the one part. (in case of Government owned mills) The . . . . . . . . . . . . . . . . . . . . . . . District Central Coop. Bank . . . . . . . . . . . . . . . . . . . . . . . a Coop. Society registered under the State Co operative Societies Act, having its office at . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of the second part. The . . . . . . . . . . . . . . . . . . . . . . . Dist. Central Coop. Bank . . . . . . . . . . . . . . . . . . . . . a Co operative Society registered under the State Co operative Societies Act, having its Office at . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of the third part. The __________ State Apex Coop. Bank Ltd., _________ a Co- operative Society registered under the State Co-operative Societies Act, having its Office at ____________________________________ of the fourth part; hereinafter called 'The Banks'. In this agreement, the terms, 'Borrower' The . . . . . . . . . . . . . . . . . . . . . . . DCCB, The . . . . . . . . . . . . . . . . . . . . . . . DCCB, The . . . . . . . . . . . . . . . . . . . . . . . DCCB and the __________ State Apex Coop. Bank Ltd., shall wherever the context so admits mean and include their respective assigns, administrators, attorneys, receivers and successors in interest. 1. WHEREAS by pledge deed dated . . . . . . . . . . . . . . . . . . . . . . . relating to stocks of sugar made between the borrower part and . . . . . . . . . . . . . . . . . . . . . . . DCCB, Leader Bank (which pledge deeds are hereinafter jointly and severally referred to as 'The Said' Leader Bank Charge) for the consideration therein mentioned, the borrower has covenanted to repay to . . . . . . . . . . . . . . . . . . . . . . . DCCB the cash credit limit of Rs. . . . . . . . . . . . . . . . . . . . . . . . lakhs (Rupees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . only) at such rate sanctioned / to be sanctioned as may be specified from time to time.

3.

WHEREAS by pledge deeds dated . . . . . . . . . . . . . . . . . . . . . . . relating to stocks of sugar made between the 475 - III

borrower and . . . . . . . . . . . . . . . . . . . . . . . DCCB for the consideration therein mentioned, the borrower has also covenanted to repay . . . . . . . . . . . . . . . . . . . . . . . DCCB, the Cash Credit Limit of Rs. . . . . . . . . . . . . . . . . . . . . . . . lakhs (Rupees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . only) advanced and to be advanced together with interest thereon at such rate as may be fixed by . . . . . . . . . . . . . . . . . . . . . . . DCCB from time to time. The pledge deeds dated . . . . . . . . . . . . . . . . . . . . . . are hereinafter jointly and severally called as (The . . . . . . . . . . . . . . . . . . . . . . DCCB's charge) 4.

WHEREAS the pledge deeds dated . . . . . . . . . . . . . . . . . . . . . . . relating to stocks of sugar made between the borrower and . . . . . . . . . . . . . . . . . . . . . . . DCCB for the consideration therein mentioned, the borrower has also covenanted to repay . . . . . . . . . . . . . . . . . . . . . . . DCCB the Cash Credit Limit of Rs. . . . . . . . . . . . . . . . . . . . . . . . lakhs (Rupees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . only) advanced and to be advanced together with interest thereon at such rate as may be fixed by . . . . . . . . . . . . . . . . . . . . . . . DCCB from time to time. The pledge deeds dated . . . . . . . . . . . . . . . . . . . . . . are hereinafter jointly and severally called as (the . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DCCB charge). NOW THESE PRESENTS WITNESSETH AND it is hereby agreed by and between the parties hereto as follows: a.

Notwithstanding anything to the contrary contained in the said . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) charge . . . . . . . . . . . . . . . . . . . . . . . DCCB charge . . . . . . . . . . . . . . . . . . . . . . . DCB charge . . . . . . . . . . . . . . . . . . . . . . . DCCB, charge / __________ State Apex Coop. Bank Charge, and the right of . . . . . . . . . . . . . . . . . . . . . . . DCCB . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . .. . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB, / __________ State Apex Coop.Bank interest in respect of the securities mentioned in the respective schedules thereto excluding the stocks of sugar earmarked as 100% margin for issue of Letter of Credit / Bank Guarantee shall ran pari passu.

b.

During the subsistence of the said securities referred above, all insurance policies in respect of them shall be taken out in the joint names of the borrower and . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) and shall be held by . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) for the benefit of . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB and _________ State Apex Coop. Bank.

c.

Prior to taking any action for enforcement of the aforesaid securities . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) . . . . . . . . . . . . . . . . . . . . . . . DCCB . . . . . . . . . . . . . . . . . . . . . . . DCCB and _________ State Apex Coop. Bank shall duly inform the other, of the same and each of them shall consult the other in respect of all matters pertaining to the security aforesaid, so far as the same is practicable without affecting its own rights and each of them shall at all times keep the other informed of all serious and important matters coming to its knowledge relating to the security or any part or proportion thereof or otherwise relating to the Borrower.

d.

All money resulting from the enforcement of . . . . . . . . . . . . . . . . . . . . . . . DCCB charge (Leader Bank) . . . . . . . . . . . . . . . . . . . . . . . DCCB charge . . . . . . . . . . . . . . . . . . . . . . . DCCB charge and _________ State Apex Coop Bank charge, (hereinafter collectively refereed as 'the said securities') or the amount realized in respect of any policies of insurance of insurance or any other realization from the said 476 - III

securities either by enforcement or otherwise shall be applied in the manner hereinafter appearing. i. Firstly, all costs, charges and expenses incurred by the Banks (. . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB and _________ State Apex Coop. Bank) for and incidental to the enforcement of the said securities or realization of receipt of such monies. ii. Secondly, the balance of such moneys shall in the event of moneys available for distribution to the said banks being SUFFICIENT to pay to them, the full amount of money due under the said securities be applied simultaneously in the payment to the said Banks the full amounts respectively due to each and in the event of moneys available for distribution to the said banks being insufficient to pay to them the full amount of moneys due under the said securities, the money available shall be applied pari passu as nearly as may be practicable towards payment to the said Banks, the amounts due to them without any preference or priority whatsoever. The amount distributable to the said banks shall bear to the total distributable amount the same proportions which the outstanding amount / the said banks, bear to aggregate of the outstanding amount due to them by the borrower under the said securities. iii. Thirdly, the surplus if any out of such moneys shall be paid to the person or persons entitled thereto or otherwise to the borrower. e.

If at anytime during the currency of the respective advance by the said banks the borrower commits any default in payment of their respective debt or in observance or performance of any covenant or condition either . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) or . . . . . . . . . . . . . . . . . . . . . . . DCCB . . . . . . . . . . . . . . . . . . . DCCB or _________ State Apex Coop. Bank in pursuance of the powers reserved to them decide to enforce the right to take possession and to sell the securities or any part thereof or to exercise any other rights conferred by their documents, then and in such cases, . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB and _________ State Apex Coop. Bank shall consult each other before enforcing such securities or exercising such powers. If at any time in the course of enforcing the securities . . . . . . . . . . . . . . . . . . . . . . .DCCB (Leader Bank) or . . . . . . . . . . . . . . . . . . . . . . . DCCB or . . . . . . . . . . . . . . . . . . . . . . . DCCB or _________ State Apex Coop. Bank decides to appoint a receiver in exercise of the powers reserved therefor in their documents, then neither . . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank) . . . . . . . . . . . . . . . . . . . . . . . DCCB or _________ State Apex Coop. Bank shall appoint such receiver except in consultation with the other.

f.

The borrower doth hereby conform these presents and undertake that during the subsistence of the securities created by the borrower in favour of the said securities, the borrower shall not door suffer to be done or be party or privy to any act, deed, matter or thing which may in any way prejudicially affect the securities and right of the said Banks.

g.

It is hereby agreed by and between the parties hereto that the provisions contained in or implied to the said pledge deeds of . . . . . . . . . . . . . . . . . . . . . . DCCB (Leader Bank), . . . . . . . . . . . . . . . . . . . . . . . DCCB, . . . . . . . . . . . . . . . . . . . . . . . DCCB and _________ State Apex Coop. Bank shall be read and 477 - III

construed in conjunction with their presents and shall be regarded as modified accordingly. IN WITNESS WHERE OF, the parties have executed these presents on the day, month and year first above written.

For . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills, Witness 1. 2. Authorized Signatory (Borrower) Name to be mentioned in Capital Letters, Designation And Address For . . . . . . . . . . . . . . . . . . . . . . . Dist. Central Coop. Bank Ltd., Authorized Signatory (Leader Banker Bank) For . . . . . . . . . . . . . . . . . . . . . . . Dist. Central coop. Bank Ltd. Authorized Signatory (Member Bank No.1) For . . . . . . . . . . . . . . . . . . . . . . . Dist. Central Coop. Bank Ltd., Authorized Signatory (Member Bank No.2) For The _______________ State Apex Coop. Bank Ltd., Authorized Signatory (Member Bank No.3)

478 - III

Annexure 6 to Chapter 29 To be executed on Stamp Paper SPECIMEN OF “INTER SE AGREEMENT” BETWEEN THE . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD., THE . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD., THE . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD., THE . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD., THE . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD., THE . . . . . . . . . . . . . . . . . . . . . . . STATE APEX COOP. BANK LTD., (A Bank Consortium) THIS AGREEMENT is made at . . . . . .. . . . . . . . . . . . . this the . . . . . .. . . . . . . . . . . . . of Two thousand . . . . . .. . . . . . . . . . . . . between THE . . . . . .. . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK, a Cooperative Society registered under the State Coop. Societies Act and having its Head Office at . . . . . .. . . . . . . . . . . . . hereinafter called “A Bank” (which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns) of the FIRST PART, The . . . . . .. . . . . . . . . . . . . Dist Central Coop. Bank Ltd., a Co operative Society, registered under the concerned State Coop. Societies Act and having its Head office at . . . . . .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . hereinafter called “B” Bank which expression shall unless it be repugnant to the subject or context thereof, include its successors and assigns) of the SECOND PART, The . . . . . .. . . . . . . . . . . . . Dist, Central Coop. Bank Ltd., a cooperative Society registered under The concerned State Cooperative Societies Act and having its Head Office at . . . . . .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . hereinafter called as 'C' Bank (which expression shall unless be repugnant to the subject or context thereof, include its successors assigns) of the THIRD PART, The . . . . . .. . . . . . . . . . . . . Dist, Central Coop. Bank Ltd., a Cooperative Society registered under the Cooperative Societies Act and having its Head Office at . . . . . .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . hereinafter called as 'D' bank (which expression shall unless be repugnant to the subject or context thereof, include its successors and assigns) of the FOURTH PART. The ……………… State Apex Coop. Bank Ltd., a cooperative Society registered under the …………………. Cooperative Societies Act and having its office at ………………………………. hereinafter called the 'E' Bank (which expression shall unless be repugnant to the subject or context thereof, include its successors and assigns) of the FIFTH PART, (All of which A Bank, B Bank, C Bank, D Bank and E Bank are collectively reterred to as the “A Bank Consortium” which expression shall, unless it be repugnant to the subject or context thereof, include each of them or any of or more of them and their respective successors and assigns). By consent of all the parties, 'A Bank' is designated and recognized as the Leader Bank of the “A Bank consortium”. If the number of members of the Consortium of Banks is increased or decreased from time to time by adding to or dropping of one or more Banks or is changed by substitution of one Bank by another during the 479 - III

currency of this Agreement, then the Reconstituted Consortium will be governed by the provisions of this Agreement as if they have been added or dropped herein as the case may be and the term 'the Said Banks” shall mean and shall be deemed to include the Reconstituted Consortium as well. 1.

WHEREAS the . . . . . . . . . . . . . . . . . . . Sugar Mills / Co.op Sugar Mills Ltd, a Cooperative Society registered under the ……………… Cooperative Societies Act, having its Office at . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (hereinafter called 'the Borrower' which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns) has been sanctioned by the 'A Bank Consortium', inter alia, the working capital facilities in the proportion as mentioned in the working capital consortium Agreement dated the . . . . . . . . . . . . . . . . . . . day of . . . . . . . . . . . . . . . . . . . between the Borrower the said Banks (hereinafter called the Consortium Agreement) for meeting a part of the working capital needs of the Borrower in addition to / in replacement of existing facilities and replacement of certain other facilities on the terms and conditions set out in the said Consortium Agreement and such other conditions as may be stipulated by the Bank Consortium from time to time, the working capital facilities are hereinafter collectively referred to as 'the said facilities' which expression shall, unless it be repugnant to the subject or context thereof, include each such facility or any one or more of them. The limits or sub limits as so fixed from time to time during the tenure of the said Consortium Agreement shall be deemed to be the limits or sub limits covered under the said facilities.

2.

As security for the repayment of the said facilities together with interest, cost, charges and other expenses, payable in respect of the said facilities, the Borrower created in favour of the said banks first charge by way of pledge on its Current Assets, both present and future, wherever situated but pertaining to the Borrower as mentioned in the joint deed of pledge dated the . . . . . . . . . . . . . . . . . . . day of . . . . . . . . . . . . . . . . . . . executed by the Borrower in favour of the said Banks and also created in favour of the said Banks by way of collateral, a first / second / third charge on the fixed assets, both present and future, of the Borrower. (The aforesaid charges are hereinafter collectively referred to as (“the said Securities")

3.

For operational convenience, the said Banks have agreed to enter into an Inter se Agreement being these presents to define the rights inter se the said Banks in the manner and with such convenants and conditions are hereinafter contained. Now, therefore, it is recorded that the parties hereto have mutually agreed as follows: a.

The Member Banks hereby recognize 'A Bank' as the Leader Bank of the 'A Bank Consortium'

b.

The Member Banks hereby agree to abide by the directions, instructions and clarifications as may be given from time to time by the Leader Bank in respect of any matters arising out of our in relation to the Cash Credit Account(s) or other Accounts opened by the Borrower with the 'A Bank Consortium'.

c.

Notwithstanding anything to the contrary contained in or arising out of or implied by the said Consortium Agreement and / or the Joint Deed of pledge and or the first / second / third charge on the fixed assets, it is hereby agreed and declared by between the said Banks as follows: 480 - III

i)

A Bank shall act as the Leader Bank of the 'A' Bank Consortium and all the members shall act in the spirit of the consortium and all decisions should, as far as possible, be arrived at unanimously including those to sharing of ancillary business and drawings under different facilities sanctioned to the Borrower. ii) The members of the consortium do hereby agree to execute in favour of the Leader Bank a Power a Power of Attorney or other authorization as may deemed appropriate for constituting the Leader Bank as their true and lawful attorneys for them, in their name and on their behalf to do, execute and perform all acts, deeds and things as to the Leader Bank may deem appropriate, necessary of expedient in the given circumstances, as the Leader Bankers of the 'A Bank Consortium' and to take decisions for and on behalf of the Consortium'. The member Banks do hereby agree to ratify and confirm whatever all acts, deeds and things lawfully and bonafide done, taken or effected by the Leader Bank as such attorneys in exercise of the Powers, authorities and liberties hereby conferred upon, under and by virtue of this Agreement. iii) The Members of the consortium do hereby agree that they would act in the best interests of the Consortium having due regard to the interest of each of he Members of the Consortium. iv) Each Bank shall consult the Leader Bank in respect of any matter relating to the said facilities including those relating to sanction of adhoc / temporary credit to the Borrower and act in consonance with the clarifications, directions and decisions as may be given by the Leader Bank. v) A Bank Consortium shall set in accordance with the directions and instructions given by the Leader Bank is so far as the monitoring of the Borrower's Cash Credit Account(s) or other Account(s) with them are concerned and abide by the decisions of the Leader Bank and the Apex Bank, which will be binding on the other members of the Consortium, in case of any dispute or difference of view on the quantum of the Bank finance, terms and conditions to be imposed or any other matters pertaining to the Borrower's Cash Credit Account(s) or other Account(s). vi) If an account of operational difficulties or locational problems, the Borrower desires to avail of any non fund based facility from one member Bank in preference to another, the Leader Bank should as far as possible evolve a suitable system of sharing the relative income thereof at a consortium meeting and the decision of the Leader Bank thereon shall be binding on the members of the consortium. vii) Each Bank shall not, without the consent of the Leader Bank agree to any modification of the terms of this agreement nor waive the rate of interest or defaults or vary the margins stipulated earlier unilaterally. viii) Subject to the provisions of the Inter Se Agreement as may be entered into between the said Banks and the other Lenders, all proceeds of the sale or other proceeds out of or in connection with any of the said Securities created by the Borrower shall be applied in the manner as set out in Clause 5 herein. ix) Any action for the enforcement of the said Securities against the Borrower shall be taken by the Leader Bank in consultation with the other Members of the A Bank Consortium and the A Bank as the Leader Bank shall be at the liberty to take any steps to realize or enforce the said 481 - III

Securities agreed to be created or close and cause to be closed the respective Cash Credit Account(s) or other Account(s) opened in the Books of the said Banks but in the morning of the full working day immediately preceding, if any action intended to be taken under this clause due notice of such intention and of the action intended to be taken shall be communicated in writing by the Leader Bank to the Other Banks and the other Banks shall immediately or as soon as possible after receipt of such notice demand repayment of the moneys due under the relative Cash Credit Account(s) or other account(s) and stop all further advances or accommodations to the Borrower on the relative Cash Credit Account(s) or other Account(s) of the Borrower with it and notify its intention in writing either to act jointly in such action with the Leader Bank or otherwise and in the case the other Banks shall agree to act jointly in such action then the said Banks shall act jointly and in case of failure, neglect or refusal by the other Banks to join in any such action, the Leader Bank taking action shall make the Banks so refusing, a defendant /respondent in any action which it may take against the Borrower. x) All Members of the Consortium should jointly and severally ensure that there is no slackness in follow up of and supervision over credit extended to the Borrower and each of the said Banks shall keep the Leader Bank advised as may be deemed appropriate in mutual consultation with one another of the A Bank Consortium. xi) Inspection of the Books of Account(s) verification of securities and spot checks shall be done by such member bank by rotation as may be decided by the Leader Bank and the Notes of Inspection and Verification shall be forwarded to all the members of the Consortium, the Member Banks shall ensure that there is no piecemeal collection of data from the Borrower by each member separately but that all connection of data is made by the Leader Bank or as it may direct. xii) Each of the said Banks shall at the request of the Leader Bank join in the exercise of any power hereby made exercisable by the said Banks or any of them and shall join or occur in all such acts, proceeding, things or steps as may be necessary or convenient to enable any of the said Banks to recover any moneys due to it upon the said Securities or otherwise to obtain the benefit of the said securities and in default, the defaulter Bank shall be made an defendant / respondent in any action the other Banks may decide to take. xiii)The Leader Bank shall meet at quarterly intervals to assess the performance of the Borrower based on the statements from the Borrower under the Quarterly Information System (QIS) and fix at such meeting the operating limits / Individuals Bank's share thereof for the next quarter which shall be binding on the members of the consortium. xiv) No member of the consortium shall opt out of the Consortium mainly on account of the sickness / impending sickness / weakness of any of the Borrower's units. In the event of a Member of the Consortium desiring to opt out of the Consortium for any other reason considered to be the valid by the Leader Bank either by itself or at the instance be offered to one or more amount the other member Banks and only if one of them is willing to take up that share, one or more new Banks may be admitted into the Consortium in consultation with the Leader Bank. xv) The Leader Bank will be solely responsible for submission to the Reserve Bank of India / NABARD on behalf of Consortium Members for Post sanction security under the Credit 482 - III

Authorization Scheme and for answering to the requisitions as may from time to time be made by the Reserve Bank / NABARD in that regard. The Leader Bank will also be solely responsible for submitting an application on behalf of the Consortium Members for authorization, if requisitions as may from time to time be made by the Reserve Bank / NABARD in that statement.4. Each of the said Banks shall supply to the other or others of the said Banks statements monthly or more often as may be agreed upon , showing the state of the Cash Credit Account(s) or other account(s) in the Books of the Bank supplying such statement and the amount of payments in and the drawings out of or any other sum debited to the Cash Credit Account(s) or other Account(s) during the period preceding the date of the statement. 4.

Notwithstanding anything to the contrary contained in the said Consortium Agreement and / or the Joint deed of Pledge and / or the Second Charge or arising from or by virtue or reason of or implied by the same, all moneys resulting from the enforcement or realization of the said Securities by or on behalf of the said Banks and the amount realized from any policy or polices of insurance in respect of the said securities though payable to the Borrower and any other realization from or out of the said securities or any part thereof by enforcement of the securities or be resource to any special legislation for recovery of dues as may be applicable or otherwise howsoever shall be available for distribution amongst the said Banks inter se in the same proportion to their respective outstandings in the said facilities, without any preference or priority of one over the other or others for all purposes and to all intents and shall be applied by the Leader Bank with all convenient despatch in the manner herein provided. a.

First there shall be paid out of such moneys or provisions made there out for the costs, charges, expenses incurred by the said Banks for and incidental to the enforcement of the said securities and / or realization or receipt of such moneys;

b.

Secondly, the balance of such moneys shall: i.

In the event of the moneys so available for distribution being sufficient to pay to the said Banks the full amounts of the Debts (including the contingent liabilities) due from the Borrower to them respectively be applied simultaneously in the payment to each of them of their respective Debts in full. ii. In the event of moneys available for distribution being insufficient to pay to each of them the full amount of the debts (including the contingent liabilities) due from the Borrower to them respectively, be applied pari passu as nearly as may be practicable towards payment to each of them without any preference or priority whatsoever. The amount distributable to each of them shall bear to the total distributable amount the same proportion which the outstanding amounts of Debts (including the contingent liabilities) due to all of them under the said securities created and / or to be created by the Borrower. c.

5.

Thirdly, the surplus if any, out of such moneys shall be paid by the Leader Bank to the Borrower or the person entitled thereto.

All realisations out of policies of Insurance taken out by the Borrower in respect of the said Securities although taken only in the name of the Borrower shall be available for the benefit of the said Banks. 483 - III

6.

Notwithstanding that the Leader Bank shall distribute the realization in the manner mentioned above, as between the said Banks and the Borrowers, the said Banks shall be entitled to enforce their rights by suit against the Borrower for any moneys that may still be due to them from the Borrower. 8. All documents of title evidencing the creation of the said securities by the Borrower and all documents relating to the said Cash Credit Account(s) or other account(s) shall be held by the Leader Bank or as it may direct. The Leader Bank shall make available the said documents to the Member Banks or any of them against their accountable receipt for the same.

7.

The Leader Bank shall take all the necessary and appropriate steps and actions to ensure compliance by the Borrower with all the terms, conditions and stipulations in respect of the said facilities, the repayment and payment obligations of the Borrower or the Guarantor/s to the said Banks, the quality, quantity and sufficiency of the security there for and shall undertake at the cost and expense of the borrower the requisite inspection of the said securities in accordance with the relevant provisions of the said Consortium Agreement and / or the Joint Deed of pledge and / or the second charge. Whenever the Leader Bank take any action, which in its opinion and discretion is necessary or appropriate in pursuance, or for the enforcement, of its rights over the said Securities for other security by taking possession of the said Securities, dealing therewith, or disposal thereof, or any other manner or by filling suits, actions or other proceeding of in any other manner in accordance with terms, conditions the stipulations contained in the said Consortium Agreement and / or the second charge otherwise, such actions shall be taken for itself and for and on behalf of the member banks and where such actions have not been specifically so taken they shall be deemed to have been taken for itself and for behalf of the Member Bank. For all the services rendered by Leader Bank the other Member bank of the Consortium shall pay service charges at 10% out of the 16% interest Received.

8.

Each of the said Bank hereby agrees that all acts, deeds and things done in accordance with this Agreement by the Leader Bank shall be construed as acts, deeds and things done by each of them and each of said Banks undertakes to ratify and confirm all and whatsoever the Leader Bank shall do or cause to be done for itself and on their behalf. The Leader Bank shall not be liable to the member banks for any act, deed or thing done or omitted to be done in good faith under this agreement.

9.

Any further assistance by way of working capital facilities granted to the Borrower by the said Banks would have a ranking of a pari passu nature with the present assistance on receipt of the said facilities to the Borrower and shall deemed to be included in the said facilities and secured like wise.

10. A. It is declared and agreed by and between the parties hereto that notwithstanding anything to the contrary contained herein or in the securities created or purported to have been created by the Borrower in respect of the said facilities granted or continued prior to the execution of these presents, shall be governed and be deemed to have always been governed by the provisions, terms and conditions contained in this Agreement, as if such facilities were and are part of the said facilities referred to herein and hereunder. B. It is declared and agreed by and between the parties hereto that notwithstanding anything to the contrary contained herein or in the Securities created or purported to have been created by the Borrower in respect of the said facilities or such other facilities as are subsisting from time to time 484 - III

in favour of the A Bank Consortium, the provisions contained herein shall govern not only the A Bank Consortium as constituted at the time of execution of these presents but also such consortium or the reconstituted consortium shall enter into and execute such documents or deeds as maybe deemed necessary in the opinion of the Leader Bank and as directed by the Leader Bank. In witness whereof the parties hereto have set their hands into these presents the day, month and year herein above written. SIGNED AND DELIVERED for and on behalf of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . District Central Cooperative Bank Ltd., the Leader Bank by the hand of . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .. It's authorized officials in this behalf. Shri SIGNED AND DELIVERED for and on behalf or The Member Banks as mentioned below by the Hands of its duly Authorized Officials in this behalf. . . . . . . . . . . . . . . . . . . . District Central Cooperative Bank Ltd. . . . . . . . . . . . . . . . . . . . District Central Cooperative Bank Ltd. . . . . . . . . . . . . . . . . . . . District Central Cooperative Bank Ltd. . . . . . . . . . . . . . . . . . . . District Central Cooperative Bank Ltd. The ______________State Apex Cooperative Bank Ltd. INTER SE AGREEMENT BETWEEN DATED THIS THE . . . .. . . . . . . DAY OF . . . . . . . . . . . . TWO THOUSAND..............................

485 - III

Annexure-7 to Chapter-29 Specimen of 'OPERATION OF CASH CREDIT A/C PROCEDURES CONSORTIUM ADVANCES TO SUGAR MILLS' I.

The Leader Bank should open separate day book accounts under the heads. i. ii. iii. iv.

Advances to sugar mills under consortium Member Bank - B Member Bank - C Member Bank - D

II. Allowing Drawals: While allowing drawals, the Leader Bank shall make the following entries. Cr

Dr Advances to CSMs under Consortium

Cash Credit Account of the CSM

III. Claiming reimbursement from Member Banks: The Leader Bank allows drawals and receives remittances on behalf of the consortium by debiting its “Advance to CSMs under Consortium” account. At an interval of 15 days the Leader Bank arrives at the relative shares in the Drawing Power of the Member Banks and accordingly claims reimbursement / makes repayment from / to the member banks. If reimbursement is claimed from the members and received, the following entries are to be made; Cr

Dr Member Bank B

Advances to CSM under consortium

Member Bank - C Member Bank - D IV. Remittances By The CSM: When remittances from the Sugar Mills are received, the Leader Bank makes the following entries:Cr

Dr Cash Credit account of the Sugar Mills

Advances to CSM under Consortium

V. Repayments To Member Banks: When any repayments are made to the member banks, the following entries are to be made by the Leader Bank: 486 - III

Cr

Dr Advances to CSM under consortium

Member Bank – B Member Bank - C Member Bank – D

VI. Whenever the CCB accounts are maintained at the branches of the DCCBs, the Branch may make adjustments to the Head Office Account instead of the “Advances to CSMs under consortium” account. ILLUSTRATION Sugar Mills “XYZ is sanctioned a Cash Credit Limit of Rs.4,000.00 lakhs in the following proportion: Leader Bank : Member Banks : Member Banks : Member Banks :

50% 20% 15% 15%

On 01.10.2001, there is a carry over outstanding of Rs.3,200.00 lakhs against the DP of Rs.3,800.00 lakhs. The CSM makes the following transactions: Date

Drawals

Remittances

October 1

--

20.00

3

30.00

10.00

4

40.00

20.00

5

70.00

30.00

6

25.00

--

8

35.00

--

9

60.00

30.00

10

20.00

--

11

280.00

110.00

Hence as on 11.10.2010, the outstanding increases to Rs.3,370.00 lakhs and the D.P. is at Rs. 3.700.00 lakhs. Now the Leader Bank should apportion the Current D.P. of Rs.3,700.00 lakhs to all the members of the consortium according to their percentage of shares. Therefore, the relative share of DP will be as follows:

487 - III

Sl. No.

Particulars

Amount (Rs. in Lakhs)

01

Leader Bank 50%

1,850.00

02

Bank B 20%

740.00

03

Bank C 15%

555.00

04

Bank D 15%

555.00

TOTAL

3,700.00

Now, the Leader Bank should ensure that the outstanding against each member bank does not exceed the relative DP fixed above. Hence, if the outstanding in the account of the Leader Bank is in excess of its share in the D.P. reimbursements should be claimed from other member banks immediately.

488 - III

Annexure-8 to Chapter-29 SPECIMEN OF 'DISBURSEMENT NOTE' (format used by Member Banks after allowing the Share amount to Leader Bank under Consortium Arrangements)

The . . . . . . . . . . . . . . . . . . . . . . . . . . District Central Co.op Bank. Ltd., ******** We hereby disburse / reimburse the sum of Rs. Lakhs against our share of Rs. (lakhs) under consortium arrangement for the season 1998 99 in respect of the advances to the . . . . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills as per the reimbursement claim . . . . . . . . . . . . . . . . . . . dated of the . . . . . . . . . . . . . . . . . . . . . . . . . . District Central Coop. Bank, the Leader Bank of the Consortium. The amount is credited / transferred as per the instructions of the Leader Bank as follows: Amount transferred : Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . (in Lakhs) Mode of Remittance : For . . . . . . . . . . . . . . . . . . . . . . . . . . District Central Coop. Bank Ltd., GENERAL MANAGER. To . . . . . . . . . . . . . . . . . . . . . . . . . . District Central Coop. Bank (Leader Bank) Copy to: 1. The . . . . . . . . . . . . . . . . . . . . . . . . . . DCCB 2. The . . . . . . . . . . . . . . . . . . . . . . . . . . DCCB 3. The ______________ State Apex Coop. Bank Ltd., Chennai 1. 4. The . . . . . . . . . . . . . . . . . . . . . . . . . . Sugar Mills Ltd.

489 - III

Annexure-9 to Chapter-29 Specimen of format to avail Reimbursement of Funds from Member Banks by the Leader Bank under Consortium Arrangements) THE . . . . . . . . . . . . . . . . . . . . . . . . . . DIST. COOPERATIVE BANK LIMITED R.c No. . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . To The Special Officer, . . . . . . . . . . . . . . . . . . . . . . . . . . District, Central Coop. Bank / Apex Bank, .......................... Sir, Sub: Cash Credit Limit sanctioned to the . . . . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills, . . . . . . . . . . . . . . . . . . . . . . . . . . Reimbursement of share from Member Bank under Consortium Arrangement for Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . lakhs Reg. Ref: ……………… Bank letter C.No.______/_____/________ dated _______ ******* We wish to state that the outstanding in the Cash Credit (Pledge) Account of the . . . . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills is Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . lakhs as at the close of . . . . . . . . . . . . . . . . . . . . . . . . . .. The CSM has pledged a stock of . . . . . . . . . . . . . . . . . . . . . . . . . . qtls. of sugar and the value of the same works out to Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . lakhs. Please reimburse the Sum of Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . lakhs against your share of Rs. . . . . . . . . . . . . . . . . . . . . . . . . . . lakhs on the advances to the above Sugar Mills under consortium arrangement and credit the same to our Centralized Current Account with ………………………………….. Bank. Yours faithfully, Encl: Enclosure I to III.

GENERAL MANAGER

490 - III

Enclosure-I Specimen of format to avail reimbursement from Member Banks under Consortium Arrangement THE . . . . . . . . . . . . . . . . . . . DIST. CENTRAL COOPERATIVE BANK LIMITED. ********* Details of eligibility of . . . . . . . . . . . . . . . . . . . . . . . . . . Co.op. Sugar Mills . . . . . . . . . . . . . . . . . . . . . . . . . . with reference to limit sanctioned as on . . . . . . . . . . . . . . . . . . . . . . . . . . under consortium arrangement. (Rs. In lakhs) 01. Limit sanctioned for . . . . . . . . . . . . . season : 02. Outstanding against the Column 1 as on . . . . . . . . . . . . under pledge limit : 03. Drawing Power : 04. Share of Leader Bank : 05. Share of Member Banks : a. . . . . . . . . . . . . . . . . . . . . . . . . . DCCB : b. . . . . . . . . . . . . . . . . . . . . . . . . . DCCB : c. . . . . . . . . . . . . . . . . . . . . . . . . . DCCB : d . . . . . . . . . . . . . . . . . . . . .. . . Apex Bank : 06. Deed of pledge dated : 07. Pari Passu Letter executed on : 08. Pari Passu Agreement signed on : 09. Last Consortium Meeting held on (Consortium Meeting Proceedings should be furnished periodically) : 10. Amount of reimbursement / Member Banks Share so far claimed : 11. Present amount claimed under consortium Arrangement from Member Banks (specify the Bank) : (A latest Drawing Power Statement from Sugar Mills should be furnished along with this statement). For …………….DCCB, GENERAL MANAGER

491 - III

Enclosure-II Specimen of format to avail reimbursement from member banks under Consortium Arrangement THE . . . . . . . . . . . . . . . . . . . DIST. CENTRAL COOPERATIVE BANK LIMITED. ELIGIBILITY OF SUGAR MILLS (DRAWING POWER) AS ON . . . . . . . . . . . . Name of the Sugar Mills : . . . . . . . . . . . . . . . . . . . . . . . . . . Coop. Sugar Mills. (Rs. In lakhs) 01.

02.

03. 04. 05.

06. 07. 08.

Value of Levy Sugar at the rate of . . . . . . . .per Qtl.for . . . . . . . . . . . . qtls. : LESS: Margin at 10% : BALANCE : Value of Free Sale Sugar at the rate of Rs. Per qtl. for . . . . . . . . . . . . . qtls. : LESS: Margin at 15% LESS: Earmarking if any for IC / LG etc. : BALANCE : Eligible Drawing Power of the Mills (1 + 2) : Amount already advanced by DCCB (Leader Bank) : Eligible amount to be drawn from Member Bank (Member Banks share under consortium arrangement) : Amount already drawn : Balance available for further drawals : Amount now claimed : for . . . . . . . . . . . . . . . . . . . . . . . . . .DCCB GENERAL MANAGER

492 - III

Enclosure-III Specimen of Certificate to avail reimbursement from member banks under Consortium Arrangement THE . . . . . . . . . . . . . . . . . . . . . . . . . . DIST. CENTRAL COOP. BANK LIMITED CERTIFICATE 01. Certified that the Mills stocks are insured for Rs. . . . . . . . . . . . . . . .lakhs on declaration basis vide Policy No. . . . . . . . . . . . . . against fire, riot, strike and flood clause with . . . . . . . . . . . . . . Assurance Company for the period from . . . . . . . . . . . . to . . . . . . . . . . . . . . in the joint name of the Mills and the Dist. Central Coop. Bank. It is further certified that the above insurance Policy covers the entire sugar stocks pledged with the Banks. 02. Certified that the stocks of sugar stored in the mills godown and outside godwons are pledged with the . . . . . . . . . . . . . . . . . . . . . . . . . . Dist. Central Coop. Bank . . . . . . . . . . . . . . . . . . . . . . . . . . towards cover for the borrowing under the Cash credit Limits sanctioned to the Mills by the DCCB on its own behalf and on behalf of Member Banks under consortium arrangements. 03. Certified that the sugar stocks pledged with the Dist. Central Coop. Bank under consortium arrangements are the Sugar Mills own property and no one else has got any claim or lien over them other than the Leader Banker and Member Banks under Consortium Finance. 04. Certified that the daily average price register is maintained by the Mills in respect of sale of Free / Buffer Stock Sugar and the same is checked by the authorized officials of the DCCB and found to be in order. For THE . . . . . . . . . . . . . . . . . . . . . . . . . . DISTRICT CENTRAL COOP. BANK LTD. GENERAL MANAGER

493 - III

Annexure-10 to Chapter-29 Specimen of Weekly Statement to be furnished by Leader Bank to all the member banks of the Consortium and the Apex Bank Name of the Sugar Mill Particulars as on 1. Sugar Stock LEVY FREE SALE a. Quantity b. Rate per qtil c. Total Value d. Margin @ 10% /15% e. Drawing Power (c-d) 2. Value of Buffer Stock, if any 3. Total Drawing Power (1(e)+2) 4. Amount out standing 5. Surplus Drawing Power / Cover Deficit 6. Other liabilities of the Mills : a. Term Loan b. LC / LG c. Blocked Loan d. Others (please specify) TOTAL 7. Consortium Share details

: : : : : : : : :

: : : : : : : (Rs. In LAKHS)

Sl. No. 1.

Name of the Bank

Relative share in the DP

Outstanding

Lead Bank

2. 3. 4 TOTAL

AUTHORISED OFICER . . . . . . . . . . . . . . . . . . . . . . . . . . DCCB

494 - III

CHAPTER 30

FINANCING OTHER APEX COOPERATIVE INSTITUTIONS 1.

2.

General: a.

In each State, in addition to the SCB, other Apex Cooperative Institutions like State Coop. Agriculture and Rural Development Bank (SCARDB), State Coop. Marketing Federation, State Coop. Consumer's Federation, State Coop. Housing Federation, etc., will also be functioning.

b.

All these Apex Cooperative Institutions may require working capital assistance to carry out their day to day business and credit activities. Further Apex Coop. Institutions like SCARDB and Coop. Housing Federation may require refinance for credit to their Primaries similar to that of DCCBs availing refinance to provide credit facilities to PACS.

c.

Since these Coop. Institutions are State Level Apex Cooperatives, the SCBs may provide credit facilities to these Apex Cooperative Institutions from their own funds under direct finance for their working capital requirements.

d.

The SCB may sanction cash credit limits to these apex cooperative institutions against hypothecation of goods/stocks/ outstanding dues as the case may be.

e.

These credit limits may be sanctioned for a period of one year. Normally, these CC limits will be for the calendar year from Jan to Dec.

f.

The CC limits may be enhanced / reduced / renewed / cancelled for subsequent years based on their requirement and operation in the CC account and the utilization of the credit during the previous year.

g.

The Rate of Interest for these CC limits will be as fixed by the Banks from time to time. The interest will be charged to the CC account on monthly basis at the end of every month on the daily outstanding in the CC account.

h.

The credit facilities provided to the Coop. Apex Institutions also will be subjected to the norms prescribed by NABARD under CMA and Exposure Norms.

Documents to be obtained from the Coop. Apex Institutions: a.

Application form in the prescribed form duly filled in and signed.

b.

Board Resolution.

c.

Demand Promissory Note.

d.

Latest Audited Balance Sheet and Audit Certificate.

495 - III

3.

e.

Recommendation / Permission from the Registrar of Coop. Societies or appropriate authority.

f.

NODC statement as on the date of application.

g.

Statement showing the credit facilities availed by the Apex Coop. Institution during the previous year along with the details of utilization and repayment schedule.

h.

Statement showing the projections for the next 3 years.

i.

Hypothecation Deed, if required.

j.

Stock statement / cover statement.

k.

Specimen signatures of authorized officers of the Institution to operate the CC a/c.

l.

Statement showing the maximum borrowing power.

Board Resolution: a.

The Board Resolution should contain the following: i.

Request to the SCB to sanction the CC limit mentioning the purpose and the quantum of credit required. ii. Names and designations of officers of the Institution authorized to operate the CC limit. iii. Specimen signatures of the officers authorized to operate the account duly attested. iv. Nature of security offered. v. Undertaking to abide by the rules/ terms and conditions prescribed by the bank form time to time. 4.

Procedure to sanction the CC limit: a.

5.

On receipt of the application for the CC limit in the prescribed format along with the required documents, the SCB has to scrutinize the application and analyse the statements and other documents based on the appraisal norms fixed by the SCB and put up to the Board of Management for approval.CC limit will be considered based on the requirement, drawing power. On approval by the Board of Management, the SCB may sanction the CC limit to the Apex Coop. Institution and send the sanction letter and the terms and conditions for acceptance by the Coop. Apex Institution.

Operation in the CC A/c: a.

The Apex Coop. Institution has to resubmit a copy of the sanction letter and the terms and conditions duly signed by the officers authorized, as a token of acceptance.

b.

The CC limits will be fixed to the Apex Coop. Institution and drawals will be allowed based on the drawing power / requirement / utilization / NODC, etc. as per the terms and conditions prescribed for the Limit. 496 - III

6.

Terms and Conditions: a.

The CC limit will be valid for one calendar year from _________.

b.

Drawals will be allowed based on the requirement / borrowing power / NODC.

c.

The rate of interest will be ____ % (as fixed by the Bank) and the interest will be charged to the CC account at the end of every month on the daily outstanding in the account.

d.

Adequate funds have to be provided in the CC a/c or current a/c of the Apex Coop. Institution to debit the interest due on the due date.

e.

If interest is not paid on the due date, Penal Interest over and above the normal rate of interest fixed for the CC limit will be charged at the rate fixed by the Bank from time to time.

f.

All the transactions of the Apex Coop. Institution should be roughed through the CC a/c.

g.

NODC / Stock statements, etc. should be submitted every month on or before 10th of the subsequent month.

h.

Demand Promissory Note and other documents should be signed by the authorized official.

i.

The stocks should be hypothecated to the SCB; if refinance is provided to Primaries stocks should be re- hypothecated in favour of the SCB.

j.

Adequate insurance coverage should be provided for all the securities offered for the CC limit.

k.

Adequate margin should be provided as fixed by the Bank based on the nature of credit / transaction.

l.

Periodical review will be done by the SCB on the utilization of the cc limit and the SCB has every right to enhance / reduce / cancel / renew the CC limit at any time.

m. The SCB, RBI and NABARD may conduct periodical / surprise inspection of the Apex Coop. Institution / their primaries / Security at any time. n.

The SCB has every right to alter / amend any of the terms and conditions prescribed at any time and the Apex Coop. Institution should adhere to the terms and conditions strictly. Note: Since the Financing to Apex Cooperative Institutions is a part of the Non Agricultural Advances of the SCB, the terms and conditions prescribed for DCCBs for providing refinance from the own funds of the SCB will also apply based on the nature of transaction / apex coop. institution.

497 - III

CHAPTER-31

APPRAISAL OF TERM LOAN 1. General:

2.

a.

A Term Loan is sanctioned for acquiring fixed assets i.e. land, building, machinery, vehicles, etc. and is normally, repayable in equated monthly instalments spread over a specified number of years.

b.

Repayment of a Term Loan should be out of profit.

c.

Repayment of working capital finance is generally made out of the sale proceeds of current assets.

d.

Term loan may be sanctioned either under direct finance or under refinance.

e.

Banks prefer to sanction Term Loans which are eligible for refinance. To be eligible for refinance, the Term Loan should be given as per the norms prescribed by the Refinancing Institution and the industry should not be one which is classified under Negative List.

Term Loan to Industrial/ Manufacturing Units: a.

While sanctioning Term Credits to Industries, a detailed analysis is to be made on the following aspects of a project. i. ii. iii. iv.

3.

Managerial Competence Technical Feasibility Commercial Viability Financial Viability.

b.

Generally the entrepreneur submits a project report prepared and Approved by appropriate authority.

c.

The appraising official has to cross check the reliability of the assumptions made in the project report and if necessary recalculate the projections on fresh assumptions made.

Managerial Competence: a.

A thorough study on the capability of the entrepreneurs in implementing and managing the project is to be made by examining the following: i. Past experience, ii. Qualification, iii. Technical and Managerial Skill 498 - III

iv. Entrepreneurial Skills, v. Character (Honesty, integrity) vi. Capability to arrange promoter's contribution/margin and other funds in contingencies. 4.

Technical Feasibility: a.

Technical feasibility involves the study of the following aspects relevant to production of finished goods of proper quality. i. Licences, permits required to start the project and their availability. ii. Location of the project vis-à-vis the availability of raw material, utilities, (Power, steam, water, fuel, etc.) and transport. iii. Product and Process: (The manufacturing process adopted, vis-à-vis the modern technology available and the standing of the supplier of technology and his stake (as collaborator, shareholder, etc.) is to be examined. Wherever feasible, performance guarantee may be insisted upon from the suppliers of technology). iv. Plant and Machinery (Suitability, Capacity, Standing of Suppliers, Availability of performance guarantee and cost etc. are to be examined). v. Raw material and Labour Availability (Quality, cost, regularity in supply are to be studied).

5.

Commercial Viability: a.

One must examine whether the goods can be sold in quantity and price as projected by the entrepreneur. Unless the products are sold at or near to the projected level the expected cash flow will suffer and the unit would become sick. To avoid such an eventuality, a thorough examination is to be made on the following points. i. The present and futuristic trend of demand for the product. ii. The level of competition from similar products and substitutes and the strength of the competitors. iii. The marketability of the product (by aggressive/innovative marketing strategy). iv. The present stage in the life cycle of the product. v. Price of the product vis-à-vis the substitutes and price elasticity of demand

6.

Financial Viability: a.

Financial Viability involves the study of the following aspects: i.

Whether sufficient finance at reasonable cost is available to execute the project (cost of project and means of finance) ii. Whether sufficient profit will be available to service the creditors and shareholders, (Project Profitability Statement and Funds Flow Statement). 499 - III

iii. Whether sufficient funds/cash will be available to repay Term Loan instalment (Debit Service Coverage Ratio and Projected Cash Flow) iv. Whether the break-even-point and margin of safety are satisfactory. A specimen of the v. 'Break-Even Point Analysis' is given in the Annexure 1 to this Chapter. vi. What will be the position of the company in future years (study of projected Balance Sheets for the years covering the currency of Term Loan). 7.

Cost of the Project: a.

The cost estimate/ analysis of fixed cost and variable cost and break-even level for the project should be prepared by a Cost Accountant and to be studied in detail by the banker before ascertaining the quantum of credit.

b.

Cost of the Project includes all expenditures required to bring the project into the stage of commercial production and consists of the following major components: i. ii. iii. iv. v. vi. vii.

Land and Site Development Building Plant & Machinery Miscellaneous Fixed Assets (Electric Installation, Vehicles, Furniture, etc.) Technical knowhow (cost of technology, patents, etc.) Preliminary expenses (expenses in formation of company, public issue, law charge, etc.) Pre-operative expenses (Salary, Interest on Term Loan, etc. before commencement of production).

viii. Margin on Working Capital (as per 2nd Method of Lending). Provision for contingencies (unforeseen expenditures). 8.

Means of Finance: a.

Answers to the following questions for means of finance should be scrutinised: i. ii. iii. iv.

9.

Whether the means of finance is sufficient compared to the cost of the project? What is the average cost of finance and how it compares with the return from the project? What is the Debt Equity Ratio? Is it as per IDBI/SIDBI requirement? Or is it satisfactory? What is the Promoter's Contribution? Is it as per IDBI/SIDBI norms or is it satisfactory?

Time and Cost Overrun: a.

Time overrun refers to the delay in implementing a project. One of the major causes of time overrun is the scarcity of finance which in turn occurs mostly due to the underestimation of project cost and means of finance.

500 - III

b.

Cost overrun means the escalation in the project cost due to one reason or the other. Time overrun invariably leads to cost overrun. Besides this, there can be cost overrun due to inflation, fluctuation in exchange rate, or any other reason which has the effect of increasing the components of project cost.

c.

Cost overrun disrupts the project profile of a project, its viability and its repayment capacity. Sometimes the overrun even leads to abandoning the project as promoters fail to arrange the incremental requirement of fund, or the project becomes unviable.

10. Projected Profitability Statement: a.

Projected Profitability Statement is to be prepared for all the years covering the repayment period of the Term Loan.

b.

The starting point for preparing a projected profitability statement is the estimation of sales in units which is based on demand forecast.

c.

After the calculation of sales, one should calculate capacity utilisation. The capacity utilization during the initial years should be around 40% to 45% and then it should increase year after year to reach optimum level of around 75% to 80%.

d.

Then the amount of sales should be determined by multiplying the unit sales with current market sale price of a unit. (The present market price should be applied for all the years as increase in sale price will be offset by increase in cost and need not be taken into account).

e.

The next step is to determine all the costs to be incurred to achieve the estimated level of sale. Raw material cost is calculated at present actual cost.

f.

Wages are calculated by multiplying the number of workers with wages to be paid. Wages should include Bonus, perquisites etc. to be paid. The wage level should be increased by 5% to 10%from one year to another.

g.

Repair and maintenance should be around 2% of the machinery cost.

h.

Other costs like Insurance, Rent and Stationery should be realistically projected for the first year and then increased by 5% to 10% every year.

i.

Depreciation should be as per actual calculation. Pre-operative Expenses and Contingencies (in cost of project) should be added proportionately to fixed assets for calculating depreciation.

j.

Interest on borrowing should be calculated taking into account the repayment schedule.

k.

Preliminary expenses in excess of 2.5% of the project cost should be added to machinery for calculating depreciation.

501 - III

l.

Then the next step is to calculate profit before tax and after tax.

m. The credit officer must ascertain the reasonableness of projected sales in units, unit sales price, cost of production and the profit. 11. Projected Funds Flow / Cash Flow Statement: a.

Funds Flow Statements covering the entire period of loan (including construction period) are studied to ensure that sufficient funds will be available year after year to implement the project and to repay the loan.

b.

Further Funds Flow Statement helps to monitor the loan account by comparing actual uses and sources of funds with the projected figures.

12. Annexure/s: The following Annexure is appended to this Chapter: Annexure 1 : Specimen of 'Break-Even Point Analysis'.

502 - III

Annexure 1 to Chapter 31 Specimen of 'BREAK EVEN POINT ANALYSIS' I.

DEFINITION OF BEP: BreakEven Point is the amount of Sales at which a unit makes no profit or no loss. In other words, it is the level of sale at which sales revenue is equal to the total cost of the units sold. A unit can earn profit only if its level of sale is above the break-even point.

II. WHY BEP IS CALCULATED? - A Term Loan should be serviced out of profits. If the unit functions at a level of sale at which there is no profit, it is natural that it cannot repay the Term Loan instalments. This brings the necessity for calculating the level of sale above which profits are earned by the unit. In other words it is necessary to calculate BreakEven Point. - Once the BEP is calculated, the sale projection made in the profitability statement is compared with BEP sale. In case the difference between the projected sale and BEP sale is very low, it is risky to finance the project. A minor deviation in some elements of projected cost may result in a loss and likely default in repayment of the term loan dues. - On the other hand, where the projected sale is appreciably higher than the BreakEven Point, the profitability of earning some profit is still there even if there are some deviations in projections. A unit with comparatively low BEP is generally preferred for finance. - The difference between Projected Sales and BEP sale is known as Margin of Safety. A unit with a Higher Margin of Safety is generally preferred by banks for finance. III. STEP BY STEP PROCEDURE FOR CALCULTING BEP 1.

Optimum Capacity Where projected profitability statements for many years are given one should chose the first year of optimum capacity utilization for calculating BEP.

2.

Classification of costs All costs (i.e. manufacturing, selling and administrative) relevant to this year should be taken into consideration and they should be classified into FIXED COSTS and VARIABLE COSTS. Fixed Cost: is one which is incurred irrespective of the level of production. It is incurred even if there is no production or sale. It is a sort of PERIOD COST a cost which is be compulsorily incurred whether there is sale or no sale. Examples of Fixed Cost are Plant & Machinery, Depreciation, Rent, Manager's Salary, Interest on Term Loan etc. (Note: Total Fixed Cost of a unit

503 - III

remains constant, but fixed cost per unit of sale/production goes down with increase in number of units). Variable cost: A variable cost is one which varies directly with sales/production. As the sales/production increases this cost also increases. If there is NIL sales/production this cost should be Nil. Examples of Variable cost are Raw material, wages, fuel, power, interest on working capital etc. (Note: Total Variable cost of a unit goes up with increase in production/sale, but variable cost per unit remains constant). IV CALCULATION OF BEP - BEP can be expressed in three ways in terms of: (i) number of units of sale (ii) amount of sale in rupees and (iii) capacity utilization. Depending on the requirement in which BEP is to be expressed, different formulae are used in calculating BEP. i.

BEP in units of Sale: Anyone of the three formulae can be used depending on the availability of data (in fact they are just different forms of the same formula). BEP in units =

BEP in units =

ii

Fixed cost Contribution per unit OR Fixed cost Sale Price per unit Variable cost per unit

BEP in Rupees: Any one of the following two formulae can be used. (a) BEP in Rupees = BEP in units x Sales price per unit. (b) BEP in Rupees = Fixed cost x Total sale in Rs. Total Contribution

iii BEP in terms of capacity utilisation BEP in capacity = Fixed cost Total Contribution V.

Calculation of BEP when p/v Ratio is given P/V ratio (profit volume ratio) is equal to = Break Even Point =

x

Projected capacity Utilization at Optimum sales level

Total contribution Total Sales

Fixed cost P/V ratio

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VI. MARGIN OF SAFETY Margin of Safety = Actual Sale BEP (Sales) It is the measure of cushion available in the given level of sale. More the margin of safety, stronger is the unit. Where the margin of safety is low, the possibility of the unit coming to loss is quite high and banks avoid financing such units. Margin of Safety is also calculated in the form in the form of ratio (in percentage) as given below. Margin of Safety = Actual Sale BEP (Sale) x 100 Actual Sale VII.STANDARD BEP There is nothing called Standard BEP. Capital intensive industrial units generally have BEP. As a thumb rule, units showing BEP higher than 65% should be treated as risk Units with BEP less than 45% are relatively more attractive as they have a greater show absorbing capacity. VIII. NET PRESENT VALUE: Net present value is calculated by deducting present value of cash outflows from the present value of cash inflows. Investments in projects with negative present value should be rejected, and investments with higher net present value should be preferred. IX. INTERNAL RATE OF RETURN (IRR): - Internal Rate of Return is the rate of discount at which present value of cash inflow equal to the present value of cash outflows. - In other words, it is the rate of discount at which the inflows and outflows of cash should be discounted so as to make the net present value ZERO. X. ILLUSTRATION FOR CALCULATING IRR: Let us calculate IRR for the following project where initial investment is Rs.10,000/- Total Project life is 5 years, Cash inflows from 1st year onwards to 5th year are Rs.4,000/- Rs.2,500/-, Rs.2,000/-, Rs.3,500/-, Rs.3,500/-. (Total for five years: Rs.3,500/-) Step I: First We calculate the 'fake' payback period by dividing initial investment (Rs.10,000/-) by average cash inflow (Rs.15,500/5 = Rs.3,100/-). It comes to 3.23 years. Then we try to locate this 'fake' payback period (3.23) as a factor against 5 years in the annuity table. The nearest factors are 3.274 under 16% and 3.199 under 17%. This indicates that IRR in between 16% and 17%. Step II: We try to find the present value of cash inflows by multiplying them with present value factor as applicable for 16% and then 17%

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Year

Cash Inflow

PV Factor 16%

4,000 2,500 2,000 3,500 3,500

0.862 0.743 0.641 0.552 0.476

I II III IV V

Present Value 3,448 1,857 1,282 1,932 1,666 10,185

PV Factor 17%

Present Value

0.855 0.731 0.624 0.534 0.456

3,420 1,827 1,248 1,869 1,595 9,960

Step III : Then we use the following steps for calculating IRR. At 16% the present value is Rs.10,185 and At 17% the present value is Rs.9,960. For 1% difference in discount rate present value differs by Rs.225/-. Thus for Rs.225/discount factor changes by 1%. For Rs.185 (Rs.10,185 Rs.10,000) discount factor will change by 0.82%. Therefore, Internal Rate of Return 16% + 0.82 = 16.82% XI. USES OF IRR 1.

A project is acceptable when the Internal Rate of Return is more than the expected rate of return (determined by the management taking opportunity cost of capital and risk factor into account).

2.

A project is acceptable only when the IRR is more than the cost of capital.

3.

Normally for agriculture projects to be financed by bank, NABARD stipulates a minimum IRR of 15%. Higher the IRR, better is the acceptability of the project.

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CHAPTER 32 ASSESSMENT OF WORKING CAPITAL

1.

2.

General: a.

The capital required by an industrial unit can be classified broadly as Fixed Capital and Working Capital.

b.

The shopkeeper / dealer / distributor selling any goods from his shop / establishment is required to block his funds in such goods. In addition to funds blocked in goods, the funds are also blocked in debtors or receivables. The funds so blocked are called Working Capital because these funds are required for carrying the Current Assets and to enable the business to carry on its operation without break.

c.

Fixed Capital: For the acquisition of Assets like Building, Machinery, Equipment, etc.

d.

Working Capital: For the day today manufacturing and selling activities required for carrying required current assets to enable the unit to carry on its operations, without break.

Components of Working Capital for Trade / Business: a.

The components of Working Capital are: i.

Minimum stocking period for goods less trades Creditors: The trading concern hold the goods it trades in to bridge the gap between demand and supply and to exhibit different brand of commodities to the customers. Value of minimum stock will naturally depend upon various factors like, market nature, acceptability of brand, use of commodity (consumer durables or perishable good), orders in hand and transport availability. The stocking pattern differs from business to business, for example, in case of perishable goods (hotels, restaurant and confectionery shops), the stocking period ranges from one day to fifteen days. Whereas in other items it may range from fifteen days to three months. Stocking period can be worked out with following formula: No. of working days X Average stock of goods Cost of goods sold

Where, No. of working days Average Stock of goods

= =

Cost of goods sold

=

365 days or actual number of working day Opening stock + Closing Stock 2 Sales Gross Profit

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ii. Minimum credit period allowed to Debtors: This can be calculated as under: No. of working days X Average stock of raw materials Credit sales during the year Where, No. of working days = 365 days or actual number of working days Average Debtors = Opening Stock + Closing stock 2 iii. The most common methods adopted by banks for assessing the working capital requirement and the extent of Bank finance are: a. Operating Cycle Method b. Traditional Method c. Recommendations of Tandon/ Chore Committee d. Nayak Committee e. Cash Budget Method 3.

Performa for Calculation of Working Capital Requirement: a.

Working Cycle

No. of days

i. Stock in trade: ii. Sundry Debtors: iii. Less: Sundry Creditors Operating Cycle / Cost

b.

Working Capital Required: i.

c.

____________ ____________

Formula

= Operating cost full year or operating period Numbers of days in operating cycle

Operating Cycle Method: i.

Any manufacturing activity is characterised by a cycle of operations consisting of purchase of raw materials for cash, converting these into finished goods and realising cash by sale of finished goods.

CASH SUNDRY DEBTORS

RAW MATERIALS

FINISHED GOODS

STOCK IN PROCESS

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ii. The operating cycle is the time that elapses between a cash flow and a cash realisation by the sale of finished goods and realisation of sundry debtors. E.g.:

a. Time taken to acquire raw materials b. Conversion process time c. Average period for which finished goods are in store d. Collection period of receivable e. The operating cycle is

: : : : :

60 days 10 days 20 days 30 days 120 days

This means in a year, the industry can have three operating cycles i.e. 365 = 3 cycle 120 4.

Traditional method of assessment of Working Capital requirement: a.

Under this method, Working Capital Requirements are calculated based on the projected level of sales for next year at the peak level of production. As discussed earlier, a unit has to stock raw materials, carry stock in process, finished goods and sundry debtors so that smooth production can be carried on. The Working Capital Requirements for these purposes are assessed first.

b.

The sources from which the Requirement will be met will be analysed next. Usually the sources are Sundry Creditors, Advance Payment Received, and Net Working Capital in the Business. The short fall will be met by Bank finance, provided the unit has satisfactory Net Working Capital. Reasonable margins will be prescribed on the various assets.

c.

Under this method while computing the working capital requirement of a unit, two additional factors are taken into account. One is the credit received on purchases. Secondly advances received against orders placed with the units. i. ii. iii. iv. v.

5.

Raw materials months requirements Stock in process weeks period of processing Finished goods Months cost Sundry Debtors Outstanding credits Expenses 1 month A+B+C+D+E LESS: i. Credit received on purchases ii. Advance payment on order received W/C required (H) = A+B+C+D+E - (F+G)

-A -B -C -D -E -F -G

Tandon Committee Norms: a.

Manufacturing units have to carry adequate Current Assets for uninterrupted and steady production. The main components of Current Assets are stock and debtors. Till late 60s there were 509 - III

no widely accepted norms for Current Assets that can be carried by carried by industry and for determining Working Capital requirement. As early as 1969 Dahejia Committee studied the increase in bank credit and production and observed that the increase in bank credit was greater than the increase in production. It also observed that many individual borrowers were originally carrying huge inventories (i.e. stock) unrelated to production needs with a view to making stocking profit. In 1974 RBI appointed Tandon Committee to study the question of bank credit to industry. Its recommendation as approved by RBI are as under (Tondon Norms were applicable to Working Capital Limits of Rs.10 lakhs and above). b. Inventory Norms / Receivable Norms: i.

Industries must carry reasonable or normal level of stock and stores, which are necessary for production. Also trade credit extended by them must be a reasonable period. The Committee had recommended norms for 15 industries and observed that a similar approach should be adopted towards all categories of industry. Deviation up to 20% of the standard norms / past trends may be permitted by the bank in deserving cases. ii. Inventory consists of two parts one 'fluctuating' and the other 'steady'. The “Steady” part has a core element: The core represents the absolute minimum level of raw materials stock in process, finished goods and stores which is essential to ensure continuity of production. The funds invested in the 'core' inventory represents the long Working Capital unit. c.

Lending Norms: i.

Commercial bank shall not be looked upon as the source for meeting the entire Working Capital need of the unit. Bank finance is only a supplementary source. A manufacturing unit should have adequate Net Working Capital in the business; usually it also enjoys trade credit. It should approach the bank only for meeting the short fall. There are two methods by which bank can meet the Working Capital needs of industry.  First Method: The Working Capital Gap is the difference between Current Assets and Current Liabilities other than bank borrowings. The borrower must meet 25% of the gap from long term funds (i.e. owned funds and term borrowings). Under this method, current ratio is 1:17:1  Second Method: The borrower must meet a minimum of 25% of total Current Assets from long term funds. Under this method the current ratio is a minimum of 1:33:1

In the first method the permissible level of Bank finance is determined as under: METHOD I : (Amt. in Rs) Current Assets as per the Norms : 360 (+) Other Current Assets : 10 -----------370 (-) Current Liabilities : 150 -----------220 510 - III

Less 25% of the gap to be brought from long term sources

:

55 ----------165 -----------

Current Assets as per the Norms (+) Other Current Assets

: :

(-) 25% from Long Term sources

:

(-) Current liabilities

:

360 10 -----------370 92 -----------278 150 ----------128 -----------

Maximum Bank Borrowings permissible METHOD II

Maximum Bank Borrowings permissible

6.

Chore Committee Norms: a.

RBI introduced the following modifications in late 1980 based on the Chore Committee recommendations. These are in force at present, too.

b. Working Capital Term Loan: i.

c.

All large borrowers (Rs.50 lakhs and above) must be placed under the Second Method of lending and the Working Capital Term Loan (WCTL) must be computed accordingly. The WCTL is to be repaid in 5 years. Borrowers with limits ranging between Rs. 10 lakhs and Rs.50 lakhs must conform to the Ist method of lending and increase the current ratio progressively to achieve the recommended level under IInd method.

Information System: i.

In term of the recommendations of the Chore Committee the following statements have to be submitted by borrowers (non-food) enjoying Working Capital Limits of Rs.50 lakhs and above. 

Quarterly Information System (QIS) Form - I: before the start of every quarter (say December for the quarter January to March) the projected Current Assets and liabilities at the end of the quarter must be submitted.



Quarterly Information System (QIS) Form I: Within 6 weeks after the end of a quarter the borrower has to submit this statement containing the detail of actual and projected reduction, sales, Current Assets and Current Liabilities.



RBI have now given discretion to the banks to decide whether to charge penal interest or 511 - III

not in case of non submission / delay in submission of QIS statement. As will be seen QIS Forms reveal the complete picture of the position of Current Assets, Current Liabilities, Operating Results and Funds Flow. Hence, it is an important control tool for the bank. ii. The specimen of the said Form I and Form II are given in the Annexure-1 and Annexure 2 to this Chapter, respectively. d. Operating Limits: i.

7.

The Operating Limit will be fixed for a unit based on the projection in the QIS statements. This limit will be equal to or less than the sanctioned limit based on the projections accepted by the bank. Actual drawing should be permitted depending on the regularity /reliability of the information or on the basis of monthly stock statement ensuring that there is no double financing. QIS is applicable to manufacturing / non manufacturing borrowers and also to seasonal industries (exception: Sugar Mills).

Nayak Committee Recommendations: a.

Based upon its recommendations, RBI has advised that Requirements of village industries, tiny industries and SSI units would be computed on the basis of minimum of 20% of the projection turnover for new as well as exiting units enjoying aggregate fund based Working Capital Limits of less than Rs. 1 crore from the banking system and the norms for inventory and receivable, as also the 1st method of lending will not apply. The recommending and sanctioning authorities will satisfy themselves about the reasonableness of projected annual turnover on the basis of the document, such as returns filed with Sales Tax / Revenue authorities. It is also to be ensured that the estimated growth during the year is realistic and achievable by the unit. The borrower must be advised at the time of sanction to route the entire sale proceeds through their C.C. account with the bank.

b.

For sanctioning of credit limits to the borrowers enjoying aggregate fund based credit limit of amount less than Rs.1 crore from the banking system, it should be ensured that minimum margin of 5% of the output annual turnover is brought by the promoter of the SSI unit. i.

c.

In other words 25% of the output value should be computed as Working Capital requirement of which at 80% should be provided by the bank and remaining 20% should be contributed by the promoter towards margin money. In case output exceeds the projections or where he initial assessment of Working Capital is found inadequate, suitable enhancement in Working Capital Limit should be considered in time by competent authority on merit as and when it is deemed necessary. When drawals are allowed proper safeguards should be taken to ensure proper and use of funds. Branches must ensure regular and timely submission of monthly statement of stock, receivable etc. and periodic variation of such statements vis-à-vis the physical stocks.

Other units having aggregate fund based Working Capital Limits of Rs.1crore and above from the nd banking system would, however, continue to be governed by existing guideline, i.e. 2 method of lending be followed so as to ensure maintenance of a minimum current ratio 1:33:1. However sick / weak units under rehabilitation will be exempted from the application of 2ndmethod of lending. In 512 - III

view of P.R. Nayak committee recommendations, an appraisal form for Working Capital assessment is given below: i. Computation of Working Capital requirement as per Nayak Committee Recommendations and accepted by the RBI: 

Projected Annual Turnover : Rs.. . . . . . . . . . . . . lacs



Margin money to be contributed by the



Unit (5% of item 1) : Rs.. . . . . . . . . . . . . lacs



Working Capital facilities to be provided By the bank : Rs.. . . . . . .. . . . lacs 'A' (20% of item 1)

 Total Working Capital requirements of the units (2 + 3 which is 25% of item 1) : ii. Working Capital Cycle Approach as per Extant Instructions: 

Margin money to be contributed by the unit :Rs. . ……. lacs



Sundry creditors : Rs.. . . . . . . . . . lacs



Working Capital facilities arrived at* : Rs. . . . . . . . . . . lacs 'B'

 Total Working Capital requirements of the unit (1+2+3) : Rs.. . . . . . . . . . . . . lacs iii. Actual Working Capital to be provided 

by the bank :(A)or(B) whichever is higher

Note: The excess liquid surplus & credit available on purchases will be treated according to clarifications given later in this Chapter. 8.

Clarifications on Nayak Committee Recommendations for Assessment of Working Capital Limits: a.

RBI instructions relate to computation of Working Capital Limits, which is only a part of appraisal process and the assessment of credit limits is a part of this process. The appraisal procedure as such need not be changed except for some modifications in respect of assessment of Working Capital Limits. The Broad parameters of the present appraisal system are: i. Basic credit decision based on the financial health and prospects of the unit. ii. Fixing up the quantum of limit based on its Working Capital requirement.

b.

These parameters need not be changed but they will now be subjected to the stipulation that the credit limit so fixed is at least 20% of the projected turnover. The evaluation of the financial health of the unit based on various financial parameters exciting as well as projected will be important as hitherto.

c.

The assessment of Working Capital Limits as per the traditional method will continue. However, the levels of inventory and receivable assumed for the purpose will no more be restricted by the levels stipulated under Tondon Committee norms. Similarly the permissible Bank Finance will not

513 - III

be subjected to the ceiling as per the 'First Method'. Permissible Bank Finance will have to be compared to the projected turnover of the unit. d.

Where the Working Capital cycle is shorter than 3 months the Working Capital requirements would be less than 25% of the projected turnover.

e.

If the liquid surplus available is higher than 5% of turnover then ensures that the genuine requirements of the unit are met adequately.

f.

If the unit has a longer Working Capital cycle, the limit can be set at a higher level because there is no restriction in finance at a level, which is higher than 20% of turnover.

g.

As the basic objective is to meet the genuine requirements of the unit the peculiarity of the particular industry has to be taken into account. In case of seasonal industries, the peak season and off-season turnover, instead of annual turnover, can be separately considered for determining the respective 20% levels.

h.

The creditors/advance payment received are among the sources of funds required for building up the Current Assets hence Working Capital Limit will be reduced accordingly.

i.

In terms of Reserve Bank circular IECD No.19/08.13.09/93-94 dated the 28 October 1993, the procedure to be adopted by bank for extending Working Capital to village, tiny and other SSI units has been extended to all borrowing units enjoying aggregate Working Capital facilities up to Rs.1 crore from the banking system.

j.

Sundry creditors and advance payments received will not be reckoned towards margin. Liquid surplus available will be reckoned for the purpose of margin. This surplus may arise from long term borrowing; however, the unit's debt equity should be within the acceptable range.

k.

As a general rule there should not be dilution in the stipulation of margin requirements except under the circumstances, where it is otherwise permitted, e.g. under the Entrepreneur Scheme, in case of rehabilitation of sick units.

l.

Bank can decide the level of holding of each item of inventory as also of receivables, which in their view would represent a reasonable build-up of Current Assets for being supported by bank finance, the banks may have, therefore, to fix the limit and sub limits taking into account all relevant factors.

th

m. The exciting system of regulating the drawing in the account will continue. However, it would also be necessary to obtain the sales data every month and compare the drawings in the account with this. These should be broadly in the proportion, which was arrived at while fixing the limits. n.

The extant range of margins will continue to be effective for the purpose.

o.

The data on actual system turnover should be obtained every month and the drawing compared with these. This is however a measure for monitoring and follow up of the account and not for 514 - III

regulating drawings, which will be done on the basis of inventory and receivables.

9.

p.

Calling for sales data on a monthly basis and comparing it with the drawing in the account would be helpful, particularly, in the matter of arriving at effective operative limits as also in monitoring the borrowal account since under the revised guidelines the QIS has been made applicable to borrowers enjoying fund based Working Capital Limits of 1 Crore and more.

q.

Further, under the revised guidelines, banks have been vested with discretion to decide the quantum, rate of interest as also period of any ad-hoc credit facilities based on their commercial judgement and marits of individual cases. It is no longer mandatory to charge additional interest of 1% over and above the normal rate of interest for sanction of ad hoc limits.

r.

In the case of existing units, sales data pertaining to actuals of last 5 years, estimates for the current year and projection for the next year together with trend analysis of the industry to which the borrowing unit belong would also be useful while appraising sales projections. Other relevant information i.e. modernisation / expansion of the existing manufacturing capacity.

s.

Government policy, taxation and other relevant internal factors also need to be taken into account. Any unreasonable projection say beyond 15% of the previous year's actual / current year projection would need a closer look.

Cash Budget Method (for industries like Sugar, Tea, etc.): a.

It involves preparation of a Cash Budget, comprising receipts from sales and payments for production expenses, which would throw up the month end cash position. The total credit requirements of such seasonal industries are now being assessed on Cash Budget basis.

b.

RBI Guidelines (October 1993): i.

Henceforth, Banks may themselves decide the levels of holding of individual items of inventory and receivables, taking into account production, processing cycle and other relevant factors. Banks will also be free to decide the period and quantum of adhoc credit limits without level of additional interest. The requirement of maintaining a minimum current ratio of 1:33 will continue. For the benefit of banks, which do not have an adequate infrastructure for determining the inventory norms, the Reserve Bank will advise the overall levels of current assets for different industries, which could be used as broad indicators.

ii. In its Slack Season Credit Policy (April 1997), the RBI has given freedom to the Bank to take their own decision on the issue of assessment of Working Capital. 10. Calculation of Term Loan Requirements: a.

The procedure for calculation of Term Loan requirement is illustrated below:

515 - III

Sl. No.

Particulars

A. i. ii. iii.

Land including development Building and Civil works Plant and Machinery a) Indigenous b) Imported Essential Tools, Spares & Accessories Testing equipment's Misc. Fixed Assets Erection / Installation Preliminary Expenses Pre-operative expenses Provision for Contingencies a.Building b. Plant & Machinery c. Other fixed assets Margin for Working Capital Total Means of Finance: Capital Reserves and Surplus Unsecured Loans and Deposits (indicate sources rate of interest repayment) Deferred payment guarantee arrangements including supplier's credit Equipment to be acquired under Lease or Hire Purchase (indicate lease rent interest and repayment) Subsidy: a. Central Government b. State Government Seed Capital (indicate source) Internal Cash Accruals Others sources (specify) Term loan requirement (A-B)

iv. v. vi. vii. viii. ix. x xi.

B. i. ii. iii. iv.

v. vi.

Cost Already Incurred

TOTAL

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Cost to be Total Cost Incurred

b. Sanction of Term Loans Terms and Conditions: i.

After satisfying itself as to the borrower, unit repaying capacity etc. the Bank may sanction the proposal. The usual terms and conditions put forth in the sanction letter along with the steps to be taken by branch in-charge are as under: 

Facility sanctioned:  Term Loan  Cash Credit Limit  Interest Rate  Security  The Sanction letter should specify the nature of the Limit sanctioned, rate of interest to be charged along with the period when it should be charged i.e. monthly / quarterly or half-yearly. ii. Duration of Facility  

In case of Term loan it should mention the amount of instalment log with period of first instalment and last instalment. In case of Cash Credit Limit it should mention the period when it will expire for renewal (Cash Credit limit is given for one year)

c.

Financial Statement should be submitted at the close of financial year.

d.

Proper Books of Accounts have to be maintained and quarterly select data submitted.

e.

Exclusive dealing with the Bank, i. The bank should obtain an undertaking from the borrower to deal exclusively with bank. ii. The moratorium period to be specified. The start of moratorium period should be mentioned i.e. starting from first disbursement, or starting from last disbursement, etc. iii. The mode of recovery of moratorium period interest should also be mentioned.    

In equated monthly instalment of 3 to 6 months Or lump sum at the end of moratorium period. Or to be converted into loan amount and to be recovered along with main loan account. Or to be recovered as and when due.

f.

Comprehensive insurance of 'Primary Security' with Bank clause.

g.

Periodic inspection of 'Primary Security' at the cost of Borrower.

h.

Collateral security at the cost of Borrower. The sanction letter should indicate the Collateral Security to be obtained and the type of mortgage i.e. whether equitable or registered mortgage (as per the legal opinion of approved Advocate).

i.

The Guarantees to be obtained should be from outside persons not closely related to the borrower. An affidavit from the guarantor should be obtained that he has not given any other guarantee or 517 - III

taken loan from the Bank. The guarantee from staff members of the Bank for loans to outsider should be avoided. Branch Manager should ensure that the persons who stand guarantee be of good repute having net worth to his satisfaction. j.

The sanction letter should clearly mention the documents to be executed before disbursement

k.

Bank's right to cancel and recall the loan amount.

l.

Bank's right to set off balance in other accounts.

m. Displaying Bank's name at Borrowers premises. n.

Borrower to abide by The State Co-op Societies Act and Rules and bye-laws of the Bank.

o.

Mortgagor (if other than Borrower) Guarantors, to become nominal members of the Bank.

p.

Affidavit for acceptance of conditions.

q.

Penal interest: The sanction letter should mention rate and the circumstances under which penal interest is to be charged.

r.

Borrower to introduce fresh capital to meet the margin requirement, if necessary.

s.

Only for Cash Credit, i. Stock Register to be maintained. ii. Periodic submission of Stock Statement. iii. No Drawing Power against unpaid / unsolvable stock.

t.

Only for Companies, i. Increase of authorized capital (if required). ii. Registration of charge with Registrar of Companies within 30 days of Agreement. iii. All directors to give personal guarantees in addition to two outside guarantees.

11. Documentation: a.

The next important and logical aspect is to ensure creation of charges over the securities by getting proper documents executed from the borrower and all other parties, so that proper contractual relationship comes into existence. This is important from the angle of enforcement of the securities at the time of need. Precautions like getting right kind of printed documents forms with all modifications, getting them signed appropriately at all places, getting them filled in all respects, getting them from only the authorized persons and then keeping them in safe custody are required to be taken.

12. Annexure/s: a.

The following Annexures are appended to this Chapter: Annexure - 1: Specimen of Quarterly Information System (QIS): Form I Annexure - 2 : Specimen of Quarterly Information System (QIS): Form II

518 - III

Annexure 1 to Chapter 32 FORM 1 QUARTERLY INFORMATION SYSTEM (QIS) Estimates for the ensuing quarter ending . . . (To be submitted in the week preceding the commencement of the quarter to which the statement relates.) (000 omitted) NAME OF BORROWER A. Estimates for current accounting year.

: :

B. Estimates for the ensuing quarter ending . . . . . . .

:

C. Estimates for Current Assets & Current: Liabilities for the ensuing quarter ending. CURRENT ASSETS: I. Inventory: (i) Raw Materials: (a) Imported (Month's consumption) : (b) Indigenous (Month's consumption) : (ii) Stock in process (Month's cost of Production) : (iii) Finished goods (Month's cost of sales) : II. Receiving including bills discounting (Month's sales) : III. Advances to suppliers of raw materials & stores : IV. Other Current Assets including Cash and Bank Balances. TOTAL (Estimated) CURRENT ASSETS CURRENT LIABILITIES : : V. Short term bank borrowing including bills Discounted. : VI. Creditors for purchase of raw materials And stores (Month's purchases) : VII. Advances from customer : VIII. Accrued expenses : IX. Statutory Liabilities : X. Other Current Liabilities : TOTAL (estimated) CURRENT LIABILITIES : 519 - III

(a) Production: (b) Gross Sales: (c) Net Sales: (a) Production: (b) Gross Sales: (c) Net Sales:

NOTES: (i) Information in these forms is to be furnished for each line of activity/unit separately as also for the Company as a whole and where the different activities / units are finance by different banks, the concerned activity/unit wise data relating to the whole company should be furnished to each financing bank. (ii) The valuation of Current Assets and Current Liabilities in these forms should be on the same basis as adopted for the Statutory Balance Sheet, and should be applied on a consistent basis. (iii) The period to be shown is in relation to the annual projection for the relative items. If the levels of inventory / receivables are higher than the norms indicated by the Bank, reasons may be given. (iv) If the canalised items form a significant part of raw materials inventory, they may be shown separately. (v) Amount of bills discounted with the bankers, included in item II of part C should be indicated separately. (vi) Amount of bills discounted with bankers, in respect of purchases, included in item V or item VI of Part C should be indicated separately. (vii)The classification of Current Assets and Current Liabilities should be made as per the usually accepted approach of the bankers are not as per definitions in the Companies Act.

520 - III

Annexure 2 to Chapter 32 FORM II QUARTERLY INFORMATION SYSTEM (QIS) (To be submitted within six week from the close of the quarter to which the statement relates.) Name Of Borrower: A. Estimates for current accounting year. Indicated in the Annual Plan

(a) Production (b) Gross Sales (c) Net Sales

B. Actual production / sales for the current: accounting year. During the Cumulative Quarter position Production Production Sales Sales 1st quarter ended . . . . . . . . . 2nd quarter ended . . . . . . . 3rd quarter ended . .. . . . . . . . . 4th quarter ended . . . . . . . . . . . C. Data relating to the latest Complete quarter ended . . . . Production : Gross Sales : Net Sales : Current Assets : I. Inventory: (i) Raw Materials (a) Imported (Month's consumption) (b) Indigenous (Month's consumption) (ii) Consumable stores (do.) (iii) Stock in process (Month's cost of production) (iv) Finished goods (Month's cost of sales) II. Receivable including bills discounting (Month's sales) III. Advances to suppliers of raw materials & Stores IV. Other Current Assets including cash and bank balances TOTAL CURRENT ASSETS 521 - III

: : :

Estimated Actuals (as given in Form 1)

: : : : : : : :

Estimate Actual

Current Liabilities: V. Short term bank borrowings including bills discounted : VI. Creditors for purchase of raw materials and stores (Month's purchases). : VII. Advances from customers : VIII. Accrued expenses : IX. Statutory Liabilities : IX. Other current Liabilities : TOTAL (estimated) CURRENT LIABILITIES : Notes: (i) Information in these forms is to be furnished for each line of activity / unit separately as also for the Company as a whole and where the different activities / units are financed by different banks, the concerned activity / unit wise data relating to the whole company should be furnished to each financing bank. (ii) The valuation of Current Assets and Current Liabilities in these forms should be on the same basis as adopted for the Statutory Balance Sheets.

522 - III

CHAPTER 33

RURAL PROJECTS FINANCE 1.

2.

General: a.

Investment of Medium/Long Term Loans for various activities under the schemes of NABARD and the Central Government is termed as Schematic Lending. NABARD under Section 25 of NABARD Act 1981 extends refinance assistance to the eligible institutions such as SCBs Scheduled Primary/ Urban Coop. Banks, Commercial Banks for farm sector, non-farm sector activities. The refinance facility is extended to the financing Banks for the loans sanctioned for creation of income generating assets.

b.

NABARD and State Coop. Banks are signing a Memorandum of Agreement for granting refinance to SCBs for the loans sanctioned the DCCBs under Investment credit/ Schematic Lending.

c.

The SCB sign a Memorandum of Agreement with the DCCBs for granting refinance to the DCCBs for the loans issued through their Branches and PACS under Investment Credit/ Schematic Lending.

Thrust Areas of activities: a.

Swarnajayanti Gram Swarozgar Yojana (SGSY)

b.

Dairy Entrepreneurship Development Scheme

c.

Pig Development Scheme

d.

Poultry Development

e.

Agri. clinic and Agri. Business Centres

f.

Swarojgan Credit Card Scheme

g.

Self Help Groups/ JLGs/ RMGs linkage programme

h.

Waste Land Development

i.

Dry Land Farming

j.

Contract Farming

k.

Plantation and Horticulture

l.

Agro-forestry 523 - III

m. Seed Production

3.

n.

Agri. marketing infrastructure including cold storage, godowns, market yard

o.

Farm Mechanisation

Total Liability Register (Scheme-wise): a.

Format of the Register:

Date

i.

Particulars

Debit

Credit

Balance

Initial

No. of days

Products

Total Liability (Percentage-wise) Register (7.5% - Project, SHG, NFS, RH)

b. Bank-wise Ledger (Two Ledgers One for NFS and Another for Projects) Schemewise/ Ratewise to be maintained. The Format of the Register is as follows: Date

c.

Particulars

Debit

Credit

Balance

Initial

No. of days

Products

Borrowing from NABARD: i. Total Liability (Scheme-wise) ii. Total Liability (Rate-wise) iii. Ledger Bank-wise, Scheme-wise, Rate-wise (NFS, Projects Separate Ledger)

d. General Ledger Heads of Accounts: i. ii. iii. iv. 4.

Advances to DCCB / MT / NABARD / Schematic / SGSY Advances to DCCB / MT / NABARD / NFS Advances to DCCB / MT / NABARD / SHG Advances to DCCB / MT / NABARD / Rural Housing

Book Entries: a.

For borrowals from NABARD when borrowed from NABARD and on receipt of credit advice from NABARD informing the credit to the SCB A/c with RBI. i. Dr Reserve Bank of India (GL head) ii. Cr Loans from NABARD/ MT/ Project Loan, SHG (GL head)

b.

When the SCB disburses to DCCB on sanction, the following entries may be passed. 524 - III

i. c.

Dr Advances to DCCB/ IRDP SHG NFS, etc.

If the SCB is already processing the transactions through system, arrangement may be made to have the data scheme-wise and DCCB-wise.

Date

Name of the DCCB

Amount advanced

Balance

Interest accrued

Date of drawal

Rate

d. Half Yearly Interest Demand for the Half Year Ended: Project Name

5.

Rate

Balance as on

Principal Half year Current demand interest provision

Total

Previous provision

Interest demand

Eligibility Criteria: Availing refinance from NABARD for investment credit is governed by their eligibility criteria policy communicated by them every year, the criteria includes compliance with Section 11(1) of the B.R. Act 1949 (AACS) exemptions of its compliance in certain cases; NPA level, profitability, etc. a.

Eligibility / Quantum of refinance (as per NABARD POLICY FOR THE YEAR 2010-11): The eligibility of the bank will be determined on the basis of its Net NPAs, Profit and position of accumulated losses, if any, as on 31 March 2009. The quantum of refinance will be restricted based on the performance of the banks in respect of the these parameters as per details given below: Quantum of refinance

Criteria Category A (i) Net NPA up to 5% as on 31 March 2009. (ii) SCB to be in profit for 2008-09. (iii)No accumulated losses as on 31 March 2009.

The quantum of refinance will be unrestricted subject to the banks' realistic disbursement plans acceptable to NABARD and the overall allocation for the state.

Category B (i) Net NPA above 5% and up to 10% as on 31March 2009. (ii) SCB to be in profit for 2008-09. (iii)No accumulated losses as on 31 March 2009.

The quantum of refinance will be fixed at 5% over and above the refinance drawn in the previous year subject to the banks' realistic disbursement plans acceptable to NABARD and the overall allocation for the state.

Category C (i) Net NPA above 10% and up to 15 % as on 31March 2009. (ii) SCB to be in profit for 2008-09. (iii)No accumulated losses as on 31 March 2009.

The quantum of refinance will be fixed at the same level as the refinance drawn in the previous year subject to the banks' realistic disbursement plans acceptable to NABARD and the overall allocation for the state.

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Category D (i) Net NPAs above 15 % and up to 20% as on 31March 2009. (ii) SCB to be in profit for 2008-09. (iii)No accumulated losses as on 31 March 2009.

i.

The quantum of refinance will be fixed at 5% less than the refinance drawn in the previous year subject to the banks' r e a l i s t i c disbursement plans acceptable to NABARD and the overall allocation for the state.

No refinance will be extended to SCBs with Net NPAs more than 20% even though they had profit during 2008-09 and had no accumulated losses as on 31.3.2009.

ii. In case, there is improvement in any of the above parameters as on 31 March 2010, same will be reckoned for eligibility of refinance. iii. Additional refinance may be extended to SCBs which show distinct improvements in the implementation of the reform measures outlined in the Government of India (GoI) package based on Vaidyanathan Committee - I (VC- I) recommendations. iv. With a view to increasing the credit flow to the states in Eastern region viz., West Bengal, Orissa, Bihar, Jharkhand, Andaman and Nicobar Island, North Eastern Region (Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura), Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Lakshadweep, Sikkim and Chhattisgarh Net NPA norm would be relaxed, subject to satisfaction of NABARD, by 5 percentage points. v.

During 2010-11, SCBs will be given the benefit of unutilised eligibility of 2009-10 in respect of pending drawal applications with the RO as on 31 March 2010. This will be in addition to the quantum of eligibility fixed during 2010-11.

b. Compliance of Section 11(1) of BR Act, 1949 (AACS): i.

SCBs which are Section 11(1) non-compliant will be eligible for refinance provided they have been exempted by GoI from the requirement of the compliance thereof or exemption application along with Action Plan submitted by the bank is not pending with RBI for a period not exceeding one year. Drawals would, however, be permitted to such banks only upto the period of exemption. There would be exception for SCBs located in states which have executed MoU for the implementation of GoI package based on VC-I recommendations. In such cases, they will be eligible for refinance even though their exemption applications are pending for more than a year with RBI/GoI.

ii. SCBs will be eligible for availing refinance in respect of section 11(1) non-compliant DCCBs provided the bank has been exempted by GoI from complying with the requirements of said section or exemption application along with the Action Plan submitted by the bank has been forwarded by NABARD to RBI for favourable consideration and the same is not pending with RBI / GoI for more than 1 year. Drawals would, however, 526 - III

be permitted for such banks only upto the period of exemption. There would be exception for DCCBs located in states which have executed MoU for the implementation of VC-I recommendations. In those cases, they will be eligible for refinance even though their exemption applications are pending for more than a year with RBI / GoI. c.

Thrust Areas: The thrust areas for which preference will be given for release of refinance during 2010-11 shall include minor & micro irrigation, water saving and water conservation devices, agriculture implements including small machinery, threshers, rotors, sprayers, weeding equipments, fisheries, animal husbandry, SHGs/JLGs/RMGs linkage programme, Agri-Clinics and Agri-Business Centres, agro-processing, wasteland development, dryland farming, contract farming, plantation & horticulture, agro-forestry, seed production, tissue culture plant production, agri-marketing infrastructure, including cold storage, godowns, market yards, etc., non-conventional energy sources and financing in areas of watershed & tribal development programmes already implemented.

d. Extent of Refinance: i.

The extent of refinance for the States in North Eastern Region (Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura), Hilly States (Jammu & Kashmir, Himachal Pradesh, Uttarakhand), Eastern States (West Bengal, Orissa, Bihar, Jharkhand and Andaman & Nicobar Islands), Lakshadweep, Sikkim and Chhattisgarh shall be 100% of eligible bank loans for all purposes. ii. For Other Regions the extent of refinance shall be 100% for all thrust areas as indicated at Sl.No. 5 (c), 95% for all other diversified purposes and 80% for Krishak Sathi Yojana. 6.

Automatic Refinance Facility: Automatic Refinance Facility will be extended to the SCBs without any upper ceiling of refinance quantum, bank loan or TFO for all kinds of projects of Farm and Non-Farm Sector (FS & NFS). In case, any bank intends to avail refinance under pre-sanction procedure, they may submit projects to NABARD.

7.

Other Terms and Conditions: a.

Audit: i.

Audit of SCB and the concerned DCCBs for the year 2008-09 should have been completed and relative audit report along with financial statements should have been received by NABARD. The SCB / DCCB must have been awarded the audit class of either 'A' or 'B'. ii. In case, there is improvement in Audit position as on 31 March 2010, the same will be reckoned for eligibility of refinance. b. Security Norms: Refinance to the SCBs both for FS & NFS will be extended against Govt. Guarantee. However, the requirement of Govt. Guarantee for SCBs could be waived on 527 - III

compliance of certain conditions. Refinance to Section 11 non- compliant SCB/ DCCBs will always be against Govt. Guarantee. In the event of Govt. Guarantee (wherever required) not forthcoming, alternative security like pledge of Govt. Securities or pledge of Fixed Deposit Receipts issued by Scheduled Banks could be considered on a case by case basis. c.

Reckoning of NPAs: i.

ii.

iii. iv.

v.

vi.

vii.

For 2010-11 the eligibility of SCB in both 3 tier and 2 tier systems will be reckoned on the basis of Net NPAs at the SCB level and not on the basis of Net NPAs at DCCB or branch of SCB. NPA position as indicated in the statutory audit report will form the basis for eligibility. However, in the event of any variation in the NPA position as indicated in the audit report and the inspection report of NABARD, the latter would be reckoned for determining the eligibility. Reconciliation of inter-bank and inter-branch accounts pending beyond 6 months could result in denial of refinance assistance from NABARD. In the event of the eligibility falling short of the committed expenditure, NABARD would permit drawals beyond eligibility in terms of circular No NB.ICD.1295/ PPS-9/200506 dated 05 October 2005, to enable the SCB to meet the committed expenditure, on a case by case basis, on submission of complete information in the prescribed format. Thus, the SCB will utilise the eligibility first to meet the committed expenditure followed by fresh disbursements. The eligibility norms will be applicable for drawal of refinance under both FS & NFS including Government sponsored schemes like Swarnajayanti Gram Swarojgar Yojana (SGSY), SC/ST Action Plan, etc. NABARD would have the right to cause special audit of the books of accounts and other relevant material of the Cooperative banks either by itself or through other agencies (at borrowing entity's cost) to ensure that same are maintained as per the rules and regulations in force and the terms and conditions of refinance are adhered to by the bank. NABARD reserves the right to conduct spot verification/checks to ensure that terms and conditions of refinance are adhered to.

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CHAPTER - 34

NATIONAL RURAL LIVELIHOOD MISSION (NRLM) 1.

General: a.

The Ministry of Rural Development, Government of India has launched National Rural Livelihood Mission (NRLM) by restructuring Swarnajayanti Gram Swarozgar Yojana (SGSY) replacing the existing SGSY scheme, effective from April 1, 2013. The scheme is named as 'Aajeevika'.

b.

NRLM is the flagship program of Govt. of India for promoting poverty reduction through building strong institutions of the poor, particularly women, and enabling these institutions to access a range of financial services and livelihoods services. NRLM is designed to be a highly intensive program and focuses on intensive application of human and material resources in order to mobilize the poor into functionally effective community owned institutions promote their financial inclusion and strengthen their livelihoods. NRLM complements these institutional platforms of the poor with services that include financial and capital services, production and productivity enhancement services, technology, knowledge, skills and inputs, market linkage, etc. The community institutions also offer a platform for convergence and partnerships with various stakeholders by building environment for the poor to access their rights and entitlements and public service.

c.

A women's self-help group, coming together on the basis of mutual affinity is the primary building block of the NRLM community institutional design. NRLM focuses on building, nurturing and strengthening the institutions of the poor women, including the SHGs and their Federations at village and higher levels. In addition NRLM will promote livelihoods institutions of rural poor. The mission will provide a continuous hand-holding support to the institutions of poor for a period of 5 7 years till they come out of abject poverty. The community institutional architecture put in place under NRLM will provide support for a much longer duration and of a greater intensity.

d.

The support from NRLM will include all round capacity building of the SHGs ensuring that the group functions effectively on all issues concerning their members, financial management, providing them with initial fund support to address vulnerabilities and high cost indebtedness, formation and nurturing of SHG federations, making the federations as strong support organizations, making the livelihoods of the poor sustainable, formation and nurturing of livelihoods organizations, skill development of the rural youth to take up self-enterprises or jobs in organized sector, enabling these institutions to access their entitlements from the key line departments, etc.

e.

The implementation of NRLM is in a Mission Mode. NRLM adopts a demand driven approach, enabling the States to formulate their own State specific poverty reduction action plans. NRLM enables the State rural livelihoods missions to professionalize their human resources at state, district and block level. The State missions are capacitated to deliver a wide range of quality services to the rural poor.

529 - III

2.

f.

NRLM emphasises continuous capacity building, imparting requisite skills and creating linkages with livelihoods opportunities for the poor, including those emerging in the organized sector, and monitoring against targets of poverty reduction outcomes. The blocks and districts in which all the components of NRLM will be implemented, either through the State Rural Livelihood Missions (SRLMs) or partner institutions or NGOs, will be the intensive blocks and districts, whereas remaining will be non-intensive blocks and districts. The selection of intensive districts will be done by the states based on the demographic vulnerabilities. It will be rolled out in a phased manner over the next 7 - 8 years. All blocks in the country will become intensive blocks over time.

g.

The Rural Planning and Credit Department (RPCD) of Reserve Bank of India, vide Circular No. RPCD.GSSD.CO.No./81/09.01.03/2012-12 dated 27.06.2013 issued to the Scheduled Commercial Banks including Regional Rural Banks has enumerated the details of the NRLM and the operational guidelines on the same.

NRLM and SGSY - Key difference: a.

NRLM is promoting a major shift from purely 'allocation based' strategy to a 'demand driven' strategy wherein states have the flexibility to develop their own plans for capacity building of women SHGs and Federations, infrastructure and marketing, and policy for financial assistance for the SHGs.

b.

NRLM will identify the target group of poor through a 'participatory identification of the poor' process instead of using the BPL list as was done in SGSY. This will ensure that the voiceless, poorest of poor are not ignored. In fact under NRLM, the first preference is given to the poorest of poor households.

c.

NRLM will promote the formation of women SHGs on the basis of affinity and not on the basis of a common activity, as it used to be under SGSY. It is definitely possible that members who come together on the basis of affinity could be having a common activity.

d.

Unlike SGSY, the NRLM has taken a saturation approach and will ensure all the poor in a village are covered and a woman from each poor family is motivated to join the SHG.

e.

SHG Federations: All SHGs in a village come together to form a federation at the village level. The village federation is a very important support structure for the members and their SHGs. The cluster federation is the next level of federation. A cluster consists of a group of villages within a block. The exact configuration will vary from State to State, but typically a cluster consists of 25 40 villages. The Village federations and the Cluster federations are the two critical support structures for the SHG s and their members in their long journey out of poverty.

f.

NRLM will provide continuous hand-holding support to SHGs, and their federations. This was missing in SGSY. Under NRLM this support will be provided to a great extent by capacitating the SHG federations and by building a cadre of community professionals from among the poor women. The federations and the community professionals will be imparted the necessary skills by the mission. 530 - III

g.

3.

4.

The objective of NRLM is to ensure that SHGs are enabled to access repeat finance from Banks, till they attain sustainable livelihoods and decent living standards. This was missing in SGSY, where the emphasis was on one time support. Key features of NRLM are given in the Annexure -1 to this Chapter.

Women SHGs and their Federations: a.

Women SHGs under NRLM consist of 10-15 persons. In case of special SHGs i.e. groups in the difficult areas, groups with disabled persons, and groups formed in remote tribal areas, this number may be a minimum of 5 persons.

b.

NRLM will promote affinity based women Self help groups.

c.

Only for groups to be formed with Persons with disabilities, and other special categories like elders, transgenders, NRLM will have both men and women in the self-help groups.

d.

SHG is an informal group and registration under any Societies Act, State Cooperative Act or a partnership firm is not mandatory (Circular RPCD. No. Plan BC.13/PL-09.22/90-91 dated July 24th, 1991). However Federations of SHGs formed at village level, cluster level, and at higher levels are to be registered under appropriate acts prevailing in their States.

Financial Assistance to the SHGs: a.

Revolving Fund (RF): NRLM would provide a Revolving Fund (RF) support to SHGs in existence for a minimum period of 3/6 months and follow the norms of good SHGs, i.e they follow 'Panchasutra' regular meetings, regular savings, regular internal lending, regular recoveries and maintenance of proper books of accounts. Only such SHGs that have not received any RF earlier will be provided with RF, as corpus, with a minimum of Rs.10,000 and up to a maximum of Rs. 15,000 per SHG. The purpose of RF is to strengthen their institutional and financial management capacity and build a good credit history within the group.

b.

Capital Subsidy has been discontinued under NRLM: No Capital Subsidy will be sanctioned to any SHG from the date of implementation of NRLM.

c.

Community Investment support Fund (CIF): CIF will be provided to the SHGs in the intensive blocks, routed through the Village level/ Cluster level Federations, to be maintained in perpetuity by the Federations. The CIF will be used, by the Federations, to advance loans to the SHGs and/or to undertake the common/collective socio-economic activities.

d.

Introduction of Interest subvention: NRLM has a provision for interest subvention, to cover the difference between the Lending Rate of the banks and 7%, on all credit from the banks/ financial institutions availed by women SHGs, for a maximum of Rs 3,00,000 per SHG. This will be available across the country in two ways:

531 - III

i.

In 150 identified districts, banks will lend to all the women SHGs @7% upto an aggregated loan amount of Rs 3,00,000/- . The SHGs will also get additional interest subvention of 3% on prompt payment, reducing the effective rate of interest to 4%. ii. In the remaining districts also, NRLM compliant women SHGs will be registered with SRLMs. These SHGs are eligible for interest subvention to the extent of difference between the lending rates and 7% for the loan upto Rs. 3 lakhs, subjected to the norms prescribed by the respective SRLMs. This part of the scheme will be operationalized by SRLMs. (A separate guideline on interest subvention and its operationalization across the country alongwith the list of 150 identified districts is made available by the RBI/NABARD). 5.

Role of Banks: a.

Opening of Savings accounts: The role of banks would commence with opening of accounts for all the Women SHGs, SHGs with members of Disability and the Federations of the SHGs. The 'Know Your Customer' (KYC) norms as specified from time to time by Reserve Bank of India are applicable for identification of the customers.

b.

Lending Norms: The eligibility criteria for the SHGs to avail loans i.

SHG should be in active existence at least since the last 6 months as per the books of account of SHGs and not from the date of opening of S/B account. ii. SHG should be practicing 'Panchasutras' i.e. Regular meetings; Regular savings; Regular inter-loaning; Timely repayment; and Up-to-date books of accounts; iii. Qualified as per grading norms fixed by NABARD. As and when the Federations of the SHGs come to existence, the grading exercise can be done by the Federations to support the Banks. iv. The existing defunct SHGs are also eligible for credit if they are revived and continue to be active for a minimum period of 3 months. c.

Loan amount: Emphasis is laid on the multiple doses of assistance under NRLM. This would mean assisting an SHG over a period of time, through repeat doses of credit, to enable them to access higher amounts of credit for taking up sustainable livelihoods and improve on the quality of life. The amount of various doses of credit should be as follows: i. First dose: 4-8 times to the proposed corpus during the year or Rs. 50, 000 whichever is higher. ii. Second dose: 5-10 times of existing corpus and proposed saving during the next twelve months or Rs. 1 lakhs, whichever is higher. iii. Third dose: Minimum of Rs. 2 lakhs, based on the Micro credit plan prepared by the SHGs and appraised by the Federations/Support agency and the previous credit history iv. Fourth dose onwards: Loan amount can be between Rs. 5-10 lakhs for fourth dose and/or higher in subsequent doses. The loan amount will be based on the Micro Credit Plans of the SHGs and their members. v. The loans may be used for meeting social needs, high cost debt swapping and taking up 532 - III

sustainable livelihoods by the individual members within the SHGs or to finance any viable common activity started by the SHGs. Note: Corpus is inclusive of revolving funds, if any, received by that SHG, its own savings and funds from other sources in case of promotion by other institutes/NGOs. d. Type of loan facility: SHGs can avail either Term loan or a CCL loan or both based on the need. In case of need, additional loan can be sanctioned even though the previous loan is outstanding. e. Repayment schedule could be as follows: i. The first dose of loan will be repaid in 6-12 instalments ii. Second dose of loan will be repaid in 12-24 months. iii. Third dose will be sanctioned based on the micro credit plans, the repayment has to be either monthly/quarterly /half yearly based on the cash flow and it has to be between 2 to 5 Years. iv. Fourth dose onwards: repayment has to be either monthly/quarterly /half yearly based on the cash flow and it has to be between 3 to 6 Years f. Security and Margin: No collateral and no margin will be charged upto Rs. 10.00 lakhs limit to the SHGs. No lien should be marked against savings bank account of SHGs and no deposits should be insisted while sanctioning loans. g. Dealing with Defaulters: i. It is desirable that wilful defaulters should not be financed under NRLM. In case wilful defaulters are members of a group, they might be allowed to benefit from the thrift and credit activities of the group including the corpus built up with the assistance of Revolving Fund. But at the stage of assistance for economic activities, the wilful defaulters should not have the benefit of further assistance until the outstanding loans are repaid. Wilful defaulters of the group should not get benefits under the NRLM Scheme and the group may be financed excluding such defaulters while documenting the loan. ii. Further, non-wilful defaulters should not be debarred from receiving the loan. In case of defaulters due to genuine reasons, Banks may follow the norms suggested for restructuring the account with revised repayment schedule. 6.

Credit Target Planning: a.

Based on the potential linked plan/state focus paper prepared by NABARD, SLBC sub-committee may arrive at the district-wise, block-wise and branch-wise credit plan. The sub- committee has to consider the existing SHGs, New SHGs proposed, and number of SHGs eligible for fresh and repeat loans as suggested by the SRLMs to arrive at the credit targets for the states. The targets so decided should be approved in the SLBC and should be reviewed and monitored periodically for effective implementation.

b.

The district-wise credit plans should be communicated to the District Coordination Committee (DCC). The Block-wise/Cluster-wise targets are to be communicated to the bank Branches through the Controllers.

533 - III

7.

8.

Post credit follow-up: a.

Loan pass books in regional languages may be issued to the SHGs which may contain all the details of the loans disbursed to them and the terms and conditions applicable to the loan sanctioned. The passbook should be updated with every transaction made by the SHGs. At the time of documentation and disbursement of loan, it is advisable to clearly explain the terms and conditions as part of financial literacy

b.

Bank branches may observe one fixed day in a fortnightly to enable the staff to go to the field and attend the meetings of the SHGs and Federations to observe the operations of the SHGs and keep a track of the regularity in the SHGs meetings and performance.

Repayment: a.

9.

Prompt repayment of the loans is necessary to ensure the success of the programme. Banks shall take all possible measures, i.e. personal contact, organization of joint recovery camps with District Mission Management Units (DPMUs) / DRDAs to ensure the recovery of loans. Keeping in view, the importance of loan recovery, banks should prepare a list of defaulters under NRLM every month and furnish the list in the BLBC, DLCC meetings. This would ensure that NRLM staff at the district/ block level will assist the bankers in initiating the repayment.

Deputation of the bank officials to SRLMs: a.

As a measure of strengthening the (DPMUs) / DRDAs and for promoting a better credit environment, deputation of the bank officials to DPMUs/ DRDAs has been suggested. Banks may consider deputing officers at various levels to the State Governments/DRDAs in consultation with them.

10. Supervision and monitoring: a.

Banks may set up NRLM cells at Regional/Zonal office. These cells should periodically monitor and review the flow of credit to the SHGs, ensure the implementation of the guidelines to the scheme, collect data from the branches and make available consolidated data to the Head office and the NRLM units at the districts/ blocks. The cell should also discuss this consolidated data in the SLBC, BLBC and DCC meetings regularly to maintain the effective communication with the state staff and all banks.

b.

State Level Banker's Committee: SLBCs shall constitute a sub-committee on SHG-bank linkage. The sub-committee should consist of members from all banks operating in the State, RBI, NABARD, CEO of SRLM, representatives of State Rural Development Department, SecretaryInstitutional Finance and Representatives of Development Departments etc. The sub- committee shall meet once a month with a specific agenda of review, implementation and monitoring of the SHG-Bank linkage and the issues/ constraints in achievement of the credit target. The decisions of SLBCs should be derived from the analysis of the reports of the sub-committee. 534 - III

c.

District Coordination Committee: The DCC (NRLM sub-committee) shall regularly monitor the flow of credit to SHGs at the district level and resolve issues that constrain the flow of credit to the SHGs at district level. This committee meeting should have participation of LDMs, AGM of NABARD, district coordinators of the banks and DPMU staff representing NRLM and office bearers of SHG federations.

d.

Block level Bankers Committee: The BLBC shall meet regularly and take up issues of SHG bank linkage at the block level. In this Committee, the SHGs/ Federations of the SHGs should be included as members to raise their voice in the forum. Branch wise status of SHG credit shall be monitored at the BLBC (Annex - 2 and Annex - 3 may be used for the purpose)

e.

Reporting to Lead District Managers (LDMs): The banks/branches are required to furnish the progress report and the delinquency report achieved under various activities of NRLM in two formats which is given in Annexure -2 and Annexure -3 this Chapter to the LDM every month for onward submission to Special Steering Committee/sub-committee constituted by SLBC.

f.

Reporting to RBI: Banks may give a state-wise consolidated report on the progress made on NRLM to RBI/NABARD at monthly intervals.

g.

Reporting on SHG-Bank linkages: NABARD shall submit monthly report on the SHG bank linkage, data for which shall flow from the CBS platform to NRLM on regular basis.

h.

LBR returns: Existing procedure of submitting LBR returns to be continued duly furnishing the correct code.

11. Data Sharing: a.

Data sharing on a mutually agreed format / interval may be provided to SRLM for initiating various strategies including recovery etc. The financing banks may enter into a Memorandum of Understanding (MOU) for regular data sharing with the State Rural Livelihood Missions, through the CBS platform.

12. NRLM support to the bankers: a.

SRLM would develop strategic partnerships with major banks at various levels. It would invest in creating enabling conditions for both the banks and the poor for a mutually rewarding relationship.

b.

SRLM will assist the SHGs through imparting Financial literacy, extending counselling services on savings, credit and training on Micro-investment Planning embedded in capacity building.

c.

Improving quality of banking services to poor clients by positioning customer relationship managers (Bank Mitra).

d.

Leveraging IT mobile technologies and institutions of poor and youth as business facilitators and business correspondents. 535 - III

e.

Community based recovery mechanism: One exclusive sub - committee for SHG Bank Linkage may be formed at village/cluster/ block level which will provide support to the banks in ensuring proper utilization of loan amount, recovery etc. The bank linkage sub - committee members from each village level federation along with project staff will meet once in a month under the chairmanship of the Branch Manager in the branch premises with the agenda items relating to bank linkage.

13. Closure of SGSY Scheme: a.

Banks have been directed to commence extending credit under NRLM replacing SGSY from 1st July 2013.

b.

In respect of Loans sanctioned under SGSY during 2012-13 for which subsidy is released, the banks were advised to disburse the loan before 30th June 2013 or return the subsidy amount, if the loan is not disbursed.

c.

The loans sanctioned by banks on or after April 1st, 2013 will be covered under the ambit of NRLM.

d.

In case of part disbursal of loans, the Banks may disburse the full amount by availing the balance subsidy amount under SGSY.

e.

Under NRLM Interest subvention scheme is not applicable for the outstanding loans sanctioned under SGSY, where capital subsidy is already released.

14. Annexure/s: a.

The following Annexure is appended to this Chapter: Annexure 1: Key Features of NRLM Annexure 2: Format for monthly Progress Report. Annexure 3: Format for monthly Delinquency Report.

536 - III

Annexure 1 to Chapter 34 Key Features of NRLM 1.

Universal Social Mobilization: To begin with, NRLM would ensure that at least one member from each identified rural poor household, preferably a woman, is brought under the Self Help Group (SHG) network in a time bound manner. Subsequently, both women and men would be organized for addressing livelihoods issues i.e. farmers organizations, milk producers' cooperatives, weavers associations, etc. All these institutions are inclusive and no poor would be left out of them. NRLM would ensure adequate coverage of vulnerable sections of the society such that 50% of the beneficiaries are SC/STs, 15% are minorities and 3% are persons with disability, while keeping in view the ultimate target of 100% coverage of BPL families.

2.

Participatory identification of poor (PIP): The experience from SGSY suggests that the current BPL list has large inclusion and exclusion errors. To widen the target groups beyond the BPL list and to include all the needy poor, NRLM will undertake community based process i.e. participation of the poor process to identify its target group. Participatory process based on sound methodology and tools (social mapping and well-being categorization, deprivation indicators) and also locally understood and accepted criterion ensures local consensus that inadvertently reduces the inclusion and exclusion errors, and enables formation of the groups on the basis of mutual affinity. Over the years, the participatory method of identifying the poor have been developed and applied successfully in the states like AP, Kerala, Tamil Nadu and Odisha.

3.

The households identified as poor through the P.I.P process will be accepted as NRLM target group and will be eligible for all the benefits under the programme. The list finalized after PIP process will be vetted by the Gram Sabha and approved by the Gram Panchayat.

4.

Till the PIP process is undertaken by the State in a particular district/Block, the rural households already included in the official BPL list will be targeted under NRLM. As already provided in the Framework for implementation of NRLM, up to 30% of the total membership of the SHGs may be from among the population marginally above the poverty line, subject to the approval of the BPL members of the group. This 30% also includes the excluded poor, those who are really as poor as those included in BPL list but their name does not figure in the list.

5.

Promotion of Institutions of the poor: Strong institutions of the poor such as SHGs and their village level and higher level federations are necessary to provide space, voice and resources for the poor and for reducing their dependence on external agencies. They empower them and also act as instruments of knowledge and technology dissemination, and hubs of production, collectivization and commerce. NRLM, therefore, would focus on setting up these institutions at various levels. In addition, NRLM would promote specialized institutions like Livelihoods collectives, producers' cooperatives/companies for livelihoods promotion through deriving economies of scale, backward and forward linkages, and access to information, credit, technology, markets etc. The Livelihoods collectives would enable the poor to optimize their limited resources. 537 - III

6.

Strengthening all existing SHGs and federations of the poor. There are existing institutions of the poor women formed by Government efforts and efforts of NGOs. NRLM would strengthen all existing institutions of the poor in a partnership mode. The self-help promoting institutions both in the Government and in the NGO sector would promote social accountability practices to introduce greater transparency. This would be in addition to the mechanisms that would be evolved by SRLMs and state governments. The learning from one another underpins the key processes of learning in NRLM.

7.

Emphasis on Training, Capacity building and skill building: NRLM would ensure that the poor are provided with the requisite skills for: managing their institutions, linking up with markets, managing their existing livelihoods, enhancing their credit absorption capacity and credit worthiness, etc. A multipronged approach is envisaged for continuous capacity building of the targeted families, SHGs, their federations, government functionaries, bankers, NGOs and other key stakeholders. Particular focus would be on developing and engaging community professionals and community resource persons for capacity building of SHGs and their federations and other collectives. NRLM would make extensive use of ICT to make knowledge dissemination and capacity building more effective.

8.

Revolving Fund and Community investment support Fund (C.I.F): A Revolving Fund would be provided to eligible SHGs as an incentive to inculcate the habit of thrift and accumulate their own funds towards meeting their credit needs in the long-run and immediate consumption needs in the short-run. The C.I.F would be a corpus and used for meeting the members' credit needs directly and as catalytic capital for leveraging repeat bank finance. The C.I.F would be routed to the SHGs through the Federations. The key to coming out of poverty is continuous and easy access to finance, at reasonable rates, till they accumulate their own funds in large measure.

9.

Universal Financial Inclusion: NRLM would work towards achieving universal financial inclusion, beyond basic banking services to all the poor households, SHGs and their federations. NRLM would work on both demand and supply side of Financial Inclusion. On the demand side, it would promote financial literacy among the poor and provides catalytic capital to the SHGs and their federations. On the supply side, it would coordinate with the financial sector and encourage use of Information, Communication & Technology (ICT) based financial technologies, business correspondents and community facilitators like 'Bank Mitras'. It would also work towards universal coverage of rural poor against loss of life, health and assets. Further, it would work on remittances, especially in areas where migration is endemic.

10. Provision of Interest Subvention: The rural poor need credit at low rate of interest and in multiple doses to make their ventures economically viable. In order to ensure affordable credit, NRLM has a provision for subvention on interest rate above 7% per annum for all eligible SHGs, who have availed loans from mainstream financial institutions. (The final guidelines on this will be released after the requisite approvals.) 11. Funding Pattern: NRLM is a Centrally Sponsored Scheme and the financing of the programme would be shared between the Centre and the States in the ratio of 75:25 (90:10 in case of North Eastern States including Sikkim; completely from the Centre in case of UTs). The Central allocation earmarked for the States would broadly be distributed in relation to the incidence of poverty in the States. 538 - III

12. Phased Implementation: Social capital of the poor consists of the institutions of the poor, their leaders, community professionals and more importantly community resource persons (poor women whose lives have been transformed through the support of their institutions). Building up social capital takes some time in the initial years, but it multiplies rapidly after some time. If the social capital of the poor does not play the lead role in NRLM, then it would not be a people's programme. Further, it is important to ensure that the quality and effectiveness of the interventions is not diluted. Therefore, a phased implementation approach is adopted in NRLM. NRLM would reach all districts by the end of 12th Five-year Plan. 13. Intensive blocks. The blocks that are taken up for implementation of NRLM, 'intensive blocks', would have access to a full complement of trained professional staff and cover a whole range of activities of universal and intense social and financial inclusion, livelihoods, partnerships etc. However, in the remaining blocks or non-intensive blocks, the activities may be limited in scope and intensity 14. Rural Self Employment Training Institutes (RSETIs): RSETI concept is built on the model pioneered by Rural Development Self Employment Institute (RUDSETI) a collaborative partnership between SDME Trust, Syndicate Bank and Canara Bank. The model envisages transforming unemployed youth into confident self- employed entrepreneurs through a short duration experiential learning programme followed by systematic long duration hand holding support. The need-based training builds entrepreneurship qualities, improves self-confidence, reduces risk of failure and develops the trainees into change agents. Banks are fully involved in selection, training and post training follow up stages. The needs of the poor articulated through the institutions of the poor would guide RSETIs in preparing the participants/trainees in their pursuits of self-employment and enterprises. NRLM would encourage public sector banks to set up RSETIs in all districts of the country.

539 - III

540 - III 1(b)

1( c ) = 1(a)+1(b) 2(a)

2(b)

Amount disbursed* 3(a)

No of loans

3(b)

Amount disbursed*

Repeat Loans

Credit outstanding

Cumulative

No of loans 5(a)

4(a) = 2(a) 4(a) = 2(a) +3(a) +3(a)

5(b)

Amount disbursed*

*Rs lakhs

Amount disbursed*

No of loans

Branch Name: Bank Name:

Annexure 2 to Chapter 34

*New loans : First linkage loans to be considered as the new loans *Second and third linkage to be counted under repeat finance * Credit Outstanding 5(a) and 5(b) should be inclusive of the cumulative credit disbursed in the month i.e. 5(a) = 4(b) + credit outstanding till last month

1(a)

No of loans

New loans

Credit linked SHGs in this month

Block Name: District: State:

S. Total S/B No accounts New a/c opened Cumulative till last this month month

No of SHGs with S/B acnts

Progress report for the month of xxxx, 20xx

Format for Monthly Progress Report

Annexure - 3 to Chapter - 34

Format for Monthly Delinquency Report

Delinquency Report for the month of

SL No

No of loan accounts

Amount outstanding*

Branch Name: Bank Name: Block Name: District: State: Irregular accounts ( 4 ) Overdue No of accounts Amount*

1

2

3

4(a)

541 - III

4(b)

*Rs lakhs Details of the NPA accounts(5) No of accounts

Amount*

5(a)

5(b)

CHAPTER 35

'DAIRY ENTREPRENEURSHIP DEVELOPMENT SCHEME' (DEDS) 1.

General: a.

2.

3.

Dairy and Poultry Venture Capital Fund launched in 2005-06 was segregated into Dairy Venture Capital Fund and Poultry Venture Capital Fund during the year 2009-10. The mode of implementation of Dairy Venture Capital Fund is changed from interest free loan to capital subsidy and a revised scheme 'Dairy Entrepreneurship Development Scheme' (DEDS) has come into effect from 1 September 2010. The objectives of DEDS include to: i. promote setting up of modern dairy farms for production of clean milk ii. encourage heifer calf rearing thereby conserve good breeding stock iii. bring structural changes in the unorganized sector so that initial processing of milk can be taken up at the village level itself. iv. bring about upgradation of quality and traditional technology to handle milk on a commercial scale v. generate self-employment and provide infrastructure mainly for unorganized sector

Activities covered and indicative unit costs: a.

Small dairy farms - Cross bred cows, Indigenous descript breeds and Graded buffaloes (upto 10 animals) - Rs.5 lakh.

b.

Vermicompost (with milch animals unit) - Rs 20,000/-.

c.

Heifer calf rearing - upto 20 calves - Rs 4.80 lakh.

d.

Purchase of milking machines / milko testers / bulk milk coolers (upto 2000 lr. capacity) - Rs.18 lakh.

e.

Indigenous milk products manufacturing units - upto Rs.12 lakh.

f.

Dairy product transport facilities and cold chain - Rs.24 lakh.

g.

Cold storage for milk/milk products - Rs.30 lakh.

h.

Private veterinary clinic - Rs.2.4 lakh - Mobile Units, Rs.1.80 lakh - Stationary Units.

i.

Dairy parlour - Rs 56,000/-.

Eligibility: a.

Farmers, individual entrepreneurs, NGOs, companies, groups of unorgainsed and organized sector etc. 542 - III

4.

Scheme funding/Pattern of Investment: a.

Entrepreneur's Contribution : 10% of total outlay minimum

b.

Back ended capital subsidy : 25% (33.33% for SC/ST beneficiaries) of total outlay, subject to a ceiling

c.

Cold storage for milk/milk products - Rs.30 lakh.Bank's share : Balance portion - Minimum 40%.

d.

Implementing Institutions: Department of Animal Husbandry Dairying and Fisheries, GoI is the focal department for the scheme. NABARD will implement the scheme through Commercial Banks, State Cooperative Banks, SLDBs Regional Rural Banks and other agencies eligible for refinance from NABARD.

5.

Security Norms: The security norms will be as prescribed by Reserve Bank of India from time to time.

6.

Financial Assistance Available from Banks/NABARD for Dairy Farming

7.

a.

NABARD is an apex institution for all matters relating to policy, planning and operation in the field of agricultural credit. It serves as an apex refinancing agency for the institutions providing investment and production credit. It promotes development through formulation and appraisal of projects through a well organised Technical Services Department at the Head Office and Technical Cells at each of the Regional Offices.

b.

Loan for dairy farming can be extended with refinance facility from NABARD.. For obtaining bank loan, the farmers may be advised to apply for a loan from the nearest branch of a co-operative Bank in their area in the prescribed application form which is available in the branches of financing banks. The Technical Officer attached to or the Manager of the bank can help/give guidance to the farmers in preparing the project report to obtain bank loan.

c.

For dairy schemes with very large outlays, detailed reports will have to be prepared. The items of finance would include capital asset items such as purchase of milch animals, construction of sheds, purchase of equipment etc.

d.

The feeding cost during the initial period of one/two months is capitalised and given as term loan. Facilities such as cost of land development, fencing, digging of well, commissioning of diesel engine/pump set, electricity connections, essential servants' quarters, godown, transport vehicle, milk processing facilities etc. can be considered for loan.

e.

Cost of land is not considered for loan. However, if land is purchased for setting up a dairy farm, its cost can be treated as party's margin upto 10% of the total cost of project.

Scheme Formulation for bank loan: a.

A Scheme can be prepared by a beneficiary after consulting local technical persons of State animal husbandry department, DRDA, SLPP etc., dairy co-operative society / union / federation / 543 - III

commercial dairy farmers. If possible, the beneficiaries should also visit progressive dairy farmers and government / military / agricultural university dairy farm in the vicinity and discuss the profitability of dairy farming. A good practical training and experience in dairy farming will be highly desirable.

8.

b.

The dairy co-operative societies established in the villages as a result of efforts by the Dairy Development Department of State Government and National Dairy Development Board would provide all supporting facilities particularly marketing of fluid milk. Nearness of dairy farm to such a society, veterinary aid centre, artificial insemination centre should be ensured. There is a good demand for milk, if the dairy farm is located near urban centre.

c.

The scheme should include information on land, livestock markets, availability of water, feeds, fodders, veterinary aid, breeding facilities, marketing aspects, training facilities, experience of the farmer and the type of assistance available from State Government, dairy society/union/federation.

d.

The scheme should also include information on the number of and types of animals to be purchased, their breeds, production performance, cost and other relevant input and output costs with their description. Based on this, the total cost of the project, margin money to be provided by the beneficiary, requirement of bank loan, estimated annual expenditure, income, profit and loss statement, repayment period, etc. can be worked out and shown in the Project report. A format developed for formulation of dairy development schemes is given as Annexure-1.

Scrutiny of Schemes by Coop. Banks: The scheme so formulated should be submitted to the nearest branch of bank. The bank's officers can assist in preparation of the scheme for filling in the prescribed application form. The bank will then examine the scheme for its technical feasibility and economic viability on the following lines: a.

Technical Feasibility: i. ii. iii. iv. v. vi.

Nearness of the selected area to veterinary, breeding and milk collection centre and the financing bank's branch. Availability of good quality animals in nearby livestock market. Availability of training facilities. Availability of good grazing ground/lands. Green/dry fodder, concentrate feed, medicines etc. Availability of veterinary aid/breeding centres and milk marketing facilities near the scheme area.

b. Economic Viability: i. Unit Cost. ii. Input cost for feeds and fodders, veterinary aid, breeding of animals, insurance, labour and other overheads. 544 - III

iii. Output costs i.e. sale price of milk, manure, gunny bags, male/female calves, other miscellaneous items etc. iv. Income-expenditure statement and annual gross surplus. v. Cash flow analysis. vi. Repayment schedule (i.e. repayment of principal loan amount and interest). vii. Other documents such as loan application forms, security aspects, margin money requirements etc. are also examined. A field visit to the scheme area is undertaken for conducting a techno-economic feasibility study for appraisal of the scheme. Model economics for a two animal unit and mini dairy unit with ten buffaloes are given in Annexure-2 and Annexure - 3. 9.

Sanction of Bank Loan and its Disbursement: a.

After ensuring technical feasibility and economic viability, the scheme is sanctioned by the bank. The loan is disbursed in kind in 2 to 3 stages against creation of specific assets such as construction of sheds, purchase of equipment and machinery, purchase of animals and recurring cost on purchase of feeds/fodders for the initial period of one/two months. The end use of the fund is verified and constant follow-up is done by the bank.

10. Lending Terms: a.

Unit Cost: Each Regional Office (RO) of NABARD has constituted a State Level Unit Cost Committee under the Chairmanship of RO-in-charges and with the members from developmental agencies, commercial banks and cooperative banks to review the unit cost of various investments once in six months. The same is circulated among the banks for their guidance. These costs are only indicative in nature and banks are free to finance any amount depending upon the availability of assets.

b. Margin Money: NABARD had defined farmers into three different categories and where subsidy is not available the minimum down payment as shown below is collected from the beneficiaries. Sr. No. (a)

Small Farmers

(b)

Medium Farmers

Rs.11001 - Rs.19250

(c)

Large Farmers

Above Rs. 19251

c.

Category of Farmer

Level of predevelopment return to resources Upto Rs.11000

Beneficiary's Contribution 5% 10% 15%`

Interest Rate: As per the RBI guidelines the present rate of interest to the ultimate beneficiary financed by various agencies are as under :

545 - III

No.

Loan Amount

CB's and RRB's

(a)

Upto and inclusive of Rs.25000

12%

(b)

Over Rs. 25000 and upto Rs. 2 lakhs

13.5%

(c)

Over Rs. 2.0 lakhs

As determined by the banks

SLDB/SCB As determined by SCB/SLDB subject to minimum 12% -do-do-

d. Security: Security will be as per NABARD/RBI guidelines issued from time to time. e.

Repayment Period of Loan: Repayment period depends upon the gross surplus in the scheme. The loans will be repaid in suitable monthly/quarterly instalments usually within a period of about 5 years. In case of commercial schemes it may be extended upto 6-7 years depending on cash flow analysis.

f.

Insurance: The animals may be insured annually or on long term master policy, where ever it is applicable. The present rate of insurance premium for scheme and non-scheme animals are 2.25% and 4.0% respectively.

11. Annexure/s: a.

The following annexures are appended to this chapter. i. Format for Daily Development Scheme ii. Economics of two Animal Units. iii. Economics of a Mini-Diary Unit

546 - III

Annexure - 1 to Chapter- 35 FORMAT FOR DIARY DEVELOPMENT SCHEME 1. General i) ii) iii) iv)

Name of the sponsoring bank Address of the controlling office sponsoring the scheme Nature and objectives of the proposed scheme Details of proposed investments

S.No

Investment

No. Of units

(a) (b) (c) v) Specification of the scheme area (Name of District & Block/s) S.No

Block

District

vi) Names of the financing bank's branches: S.No

Name of the Branch/District

(a) (b) (c) vii) Status of beneficiary/ies: (individual/Partnership/Company/Corporation/Co-operative Society / Others) viii) In case of area based schemes, coverage of borrowers in weaker sections (landless labourers, small, medium & large farmers as per NABARD's norms, SC/ST, etc.) ix) Details of borrowers profile (Not applicable to area based schemes) (a) Capability (b) Experience (c) Financial Soundness (d) Technical/Other special Qualifications 547 - III

(e) Technical/Managerial Staff and adequacy thereof 2.

Technical Aspects : a)

Location, Land and Land Development : i) Location details of the project ii) Total Area of land and its cost iii) Site map iv) Particulars of land development, fencing, gates, etc.

b) Civil Structures : Detailed cost estimates along with measurements of various civil structures - Sheds - Store room - Milk room - Quarters, etc. c)

Equipment/Plant and Machinery : i) Chaff cutter ii) Silo pit iii) Milking machine iv) Feed grinder and mixer v) Milking pails/milk cans vi) Biogas plant vii) Bulk coolers viii)Equipment for manufacture of products ix) Truck/van (price quotations for the above equipment)

d) Housing : i) Type of housing ii) Area requirement - Adults - Heifers (1-3 years)\ - Calves (less than 1 year) e)

Animals : i) Proposed species 548 - III

ii) Proposed breed iii) Source of purchase iv) Place of purchase v) Distance (kms.) vi) Cost of animal (Rs.) f)

Production parameters : i) Order of lactation ii) Milk yield (ltrs. per day) iii) Lactation days iv) Dry days v) Conception rate vi) Mortality(%) - Adults - Young stock

g) Herd projection (with all assumptions): h) Feeding: i) Source of fodder and feed - Green fodder - Dry fodder - Concentrates ii) Fodder crop rotations - Kharif - Rabi - Summer iii) Fodder cultivation expenses v) Requirement and costs : Quantity required (kg./day) Cost(Rs. / Kg)

Lactation

Green Fodder Dry Fodder Concentrates i)

Breeding Facilities: i) Source:

549 - III

Dry Period

Young Stock

ii) Location : iii) Distance (km.): iv) Availability of semen : v) Availability of staff : vi) Expenditure per animal/year j)

Veterinary Aid : i) ii) iii) iv) v) vi)

Source Location Distance (km.) Availability of staff Types of facilities available If own arrangements are made a) Employed a veterinary doctor/stockman/consultant b) Periodicity of visit c) Amount paid/visit (Rs.) vii) Expenditure per animal per year (Rs.) k) Electricity : i)

Source

ii) Approval from SEB iii) Connected load iv) Problems of power failure v) Arrangements for generator l)

Water : i) Source ii) Quality of water iii) Availability of sufficient quantity for drinking, cleaning and fodder production iv) If investment has to be made, type of structure, design and cost

m) Marketing of milk : i) Source of sales ii) Place of disposal iii) Distance (km.) 550 - III

iv) Price realised - (Rs. per litre of milk) v) Basis of payment vi) Periodicity of payment n) Marketing of other products: i)

Animal - age - place of sale - price expected ii) Manure - Qty./animal Price/unit (Rs.) iii) Empty gunny bags - Number - Cost/bag (Rs.) o) Beneficiary's experience : p) Comments on technical feasibility : q) Government restrictions, if any : 3.

Financial Aspects : i)

Unit Cost :

Sr.No

Name of the Investment

Physical units and specification

Unit cost with component wise break-up (Rs.)

Whether approved by state level unit cost committee

Total ii) Down payment/margin/subsidy(Indicate source & extent of subsidy): iii) Year-wise physical & financial programme : Year 1

InvestMent 2

Physical Units 3

Total Bank Margin/ Refinance Unit Cost (Rs.) Outlay (Rs.) Subsidy (Rs.) loan (Rs.) Assistance (Rs.) 5 7 6 8 4

Total iv) Financial viability (comment on the cash flow projection on a farm model/unit and enclose the same.)

551 - III

Particulars :

4.

a) Internal Rate of Return (IRR) : b) Benefit Cost Ratio (BCR) : c) Net Present Worth (NPW) : v) Financial position of the borrowers (to be furnished in case of corporate bodies/partnership firms) a) Profitability Ratio : i) GP Ratio ii) NP Ratio b) Debt Equity Ratio : c) Whether Income Tax & other tax obligations are paid upto date : d) Whether audit is upto date (enclose copies of audited financial statements for the last three years) vi) Lending Terms : i) Rate of Interest : ii) Grace Period : iii) Repayment Period : iv) Nature of Security : v) Availability of Government guarantee wherever necessary : Infrastructural Facilities: a) ailability of technical staff with bank/implementing authority for monitoring b) Details of i) technical guidance ii) training facilities iii) Govt. support/extension support c) Tie-up arrangements with marketing agencies for loan recovery d) Insurance - Type of policy - Periodicity - Rate of premium e) Whether any subsidy is available, if so amount per unit f) Arrangements for supply of green fodder and cattle feed

552 - III

Annexure 2 to Chapter -35

ECONOMICS OF TWO ANIMAL UNIT (BUFFALOES) Project at a Glance 1

Unit Size

:

2 Animals

2

Breed

:

Graded Murrah

3

State

:

Karnataka

4

Unit Cost (Rs.)

:

18,223

5

Bank Loan (Rs.)

:

15,400

6

Margin Money (Rs.)

:

2,823

7

Repayment period

:

5

8

Interest rate (%)

:

12

9

BCR at 15% DF

:

1.50:1

10

NPW at 15% DF (Rs.)

:

29,187

11

IRR(%)

:

>50%

Model Project for Two Animal Units (Buffaloes) A. Investment Cost Sr.No.

Items

Specifications

Phy. units

Unit Cost (Rs. /Unit)

Total Cost (Rs.)

1

Cost of animals

2

8,200

16,400

2

Insurance

2

689

1,378

3

Conc. Feed (4.5 kg/ day/animal for 30 days)

1

3.3

446

4

Total cost

5

Margin money (15% of total cost)

Say Rs.

2,733 2723

6

Bank laon (85% of total cost)

Say Rs.

15490 15500

135 Kg

18,223

553 - III

B. Techno Economic Parameters i)

No.of milch animals

2

ii)

Cost of milch animals

8,200

iii)

Lactation period (days)

280

iv)

Dry period (days)

150

v)

Milk yield (lts./day)

7

vi)

Sale price of milk (Rs./lt)

7.75

vii)

Sale of manure/animal/year (Rs.)

300

viii)

Insurance premium for five years (%)

8.4

ix)

Veterinary aid/animal/year (Rs.)

150

x)

Labour (Rs.)

Family labour

xi)

Cost of electricity & water (Rs./animal)

100

xii)

Interest rate (%)

12

xiii

Repayment period (years)

5

xiv)

Income from sale of gunny bags 20 bags/tonne @ Rs. 5/bag

100

xv)

Feeding schedule

S.No.

Type of fodder/feed

Price (Rs./kg)

(Quantity in kg/day) Lactation Dry Period

a)

Green fodder0.2

25

25

b)

Dry fodder

0.5

55

c)

Concentrate

3.3

4.5 1

xvi) Animals will be purchased in two batches at an interval of 5 - 6 months xvii) It is assumed that the expenditure on calf rearing will nullify the sale value of calf / hiefer. xviii) Closing stock value (Rs. per animal) 4100.

554 - III

C. Lactation Chart Sr.No

Years

Particulars II

III

IV

250 180 430

280 210 490

250 210 460

210 210 420

210 210 420

110 110

80 150 230

110 150 260

150 150 300

150 150 300

I i) a) b) ii) a) b)

Lactation Days First batch Second batch Total Dry Days First batch Second batch Total

V

D. Cash Flow Analysis Sr. No.

Years

Particulars II

III

IV

2,150 1,075 6,386 9,611

2,450 1,225 7,277 10,952

2,300 1,150 6,831 10,281

2,100 1,050 6,237 9,387

2,100 1,050 6,237 9,387

550 275 363 1,188 225 150 28,951

1,150 575 759 2,484 300 200 13,936

1,300 575 858 2,733 300 200 13,514

1,500 750 990 3,240 300 200 13,127

1,500 750 990 3,240 300 200 13,127

23,328 205 450

26,583 232 600

24,955 218 600

22,785 200 600

22,785 200 600 8,200

I I 1 2 a)

b)

c) d) II a) b) c) d)

Costs: Capital cost* Recurring cost Feeding during lactation period Green fodder Dry fodder Concentrate Total Feeding during dry period Green fodder Dry fodder Concentrate Total Veterinary aid & breeding cover Cost of electricity & water Total BENEFITS Sale of milk Sale of Gunny bags Sale of manure Closing stock value

V

17,777

555 - III

Total III DF @15% IV Discounted Costs At 15% V Discounted Benefits At 15% VI NPW @ 15% VII BCR @ 15% VIII DF @ 50% IX Net Benefits X Discounted Net Benefits At 50% XI IRR

23,982 0.870 25,175 20,854 29,187 1.50:1 0.667 -4,969 -3,313 >50%

27,414 0.756 10,537 20,729

25,773 0.658 8,886 16,946

23,585 0.572 7,505 13,485

31,785 0.497 6,526 15,803

58,630 87,817

0.444 13,479 5,990

0.296 12,259 3,632

0.198 10,458 2,066

0.132 18,658 2,457

10,833

* excluding the capitalised expenditure on concentrated feed E. Repayment Schedule Bank Loan (Rs) - 15500 Interest Rate (%) - 12 Capital recovery factor - 0.277 Equated annual instalment

Income

Expenses

Gross surplus

I

23,982

10,728

13,254

4,294

8,961

II

27,414

13,936

13,479

4,294

9,185

III

25,773

13,514

12,259

4,294

7,966

IV

23,585

13,127

10,458

4,294

6,165

V

23,585

13,127

10,458

4,294

6,165

Year

556 - III

Net surplus

Annexure-3 to Chapter -35 ECONOMICS OF A MINI DAIRY UNIT-TEN ANIMAL UNIT (BUFFALOES) Project at a Glance

1

Unit size

:

10 animals

2

Breed

:

Graded Murrah

3

State

:

Karnataka

4

Unit cost (Rs.)

:

155,030

5

Bank loan (Rs.)

:

131,700

6

Margin money (Rs.)

:

23,330

7

Repayment period (yrs.)

:

5

8

Interest rate (%)

:

13.5

9

BCR at 15% DF

:

1.53:1

10

NPW at 15% DF(Rs.)

:

154,403

11

IRR (%)

:

>50

Model Project for Ten Animal Unit (Buffaloes) A. Investment Cost S. No. 1 2 3 4 5

Items

Cost of animals Transportation cost of animals Cost of construction of shed Cost of Store cum office Equipment (chaff cutter, milking pails, cans, technicians 6 Insurance 7 Fodder raising expenses @ Rs.3000/acre 8 Total cost 9 Margin money (15% of total cost) 10 Bank loan (85% of total cost)

Specifications Phy. units

Sq.ft. Sq.ft.

557 - III

Unit Cost (Rs./unit)

Total Cost (Rs.)

10 10 650 200 10

8,200 300 55 100 500

8,200 3,000 35,750 20,000 5,000

10 2

328 3,000

3,280 6,000

Say Say

155,030 23255 23330 131776 131700

B. Techno Economic Parameters i ii

Animals will be purchased in two batches at an interval of 5-6 months Second/Third lactation animals within 30 days of calving will be purchased in first year iii No. of acres of irrigated land for fodder production considered in the project. Green fodder will be produced on the farm. Fodder production expenses are considered in the cash flow analysis. During first year only two seasons are considered. iv In the first year the fodder production expenses are capitalised for one season (Rs. per acre per season) and manure is utilised for fodder production v It is assumed that the expenditure on calf rearing will nullify the income realised from its sale. However, the heifer will be retained on the farm and the old animals will be sold out. vi No. of milch animals vii Cost of milch animals viii Transportation cost (Rs. per milch animal including followers) ix Civil structures: a) Shed (sft. per milch animal) b) Store and office (sft) x Cost of construction a) Shed (Rs. per sft) b) Store and office xi Cost of equipment (Rs per milch animals) xii Lactation period (days) xiii Dry period (days) xiv Milk yield (lts/day) xv Sale price of milk (Rs/lt) xvi Income from sale of gunny bags (20 bags/tonne @ Rs.5/bag) xvii Expenditure on dry fodder for dry and lactation period requirement (kg/day) Cost (Rs/kg) xviii Expenditure on concentrates a)Requirement (kg/day)Lactation period Dry period b) Cost (Rs/kg) xix Veterinary aid/animal/year (Rs) xx Labour (Rs./month) xxi Insurance premium (%) xxii Cost of electricity, water & other overheads (Rs/animal)

558 - III

2

3,000

10 8,200 300 65 200 55 100 500 280 150 7 7.75 100 5 0.5 4.5 1 3.3 150 900 4 200

xxiii Depreciation (%) a) Sheds b) Equipment xxiv Value of closing stock xxv Interest rate (%) xxvi Repayment period (years)

5 10 4,100 13.5 5

C. Lactation Chart II

Years III

IV

V

1,250

1,400

1,250

1,050

1,050

900

1,050

1,050

1,050

1,050

2,150

2,450

2,300

2,100

2,100

550

400

550

750

750

-

750

750

750

750

550

1,150

1,300

1,500

1,500

II Year

III Year

IV Year

V Year

12,000

18,000

18,000

18,000

18,000

Dry fodder

5,375

6,125

5,750

5,250

5,250

Concentrate

31,928

36,383

34,155

31,185

31,185

Total

37,303

42,508

39,905

36,435

36,435

1,375

2,875

3,250

3,750

3,750

S.No

Particulars

I

Lactation Days

a)

First batch

b)

Second batch

I

Total II

Dry days

a)

First batch Second batch Total

D. Cash Flow Analysis S.No

Particulars

I

Costs

1

Capital cost*

2

Recurring cost

a)

Green fodder raising expenses

b)

Feeding during lactation period

c)

I Year

145,750

Feeding during dry period Dry Fodder

559 - III

Concentrate

1,815

3,795

4,290

4,950

4,950

Total

3,190

6,670

7,540

8,700

8,700

d)

Veterinary aid & breeding cover

1,125

1,500

1,500

1,500

1,500

e)

Cost of electricity & water

1,500

2,000

2,000

2,000

2,000

f)

Insurance

3,280

3,280

3,280

3,280

3,280

g)

Labour cost

10,800

10,800

10,800

10,800

10,800

Total

188,868

52,678

50,945

49,503

48,635

132,912

124,775

113,925

113,925

1,218

1,165

1,095

1,095

II

Benefits

a)

Sale of milk

116,637

b)

Sale of Gunny bags

1,023

c)

Depreciated value of sheds

-

d)

Depreciated value of equipment

e)

Closing stock value

26,813 2,500 41,000

Total

117,660

134,130

125,940

115,020

185,333

III

DF @ 15%

0.87

0.76

0.66

0.57

0.50

IV

Discounted Costs At 15%

164,233

39,832

33,497

28,303

24,180

290,045

V

Discounted 102,313 Benefits At 15%

101,422

82,808

65,763

92,143

444,448

VI

NPW @ 15%

154,403

VII

BCR @ 15%

1.53:1 0.444

0.296

0.198

0.132

VIII DF @ 50%

0.667

IX

Net Benefits

-71,208

81,453

74,995

65,518

136,698

X

Discounted Net Benefits At 50%

47,472

36,201

22,221

12,942

18,001

XI

IRR

>50

* excludes the capitalised cost for fodder raising for three months and insurance for one year

560 - III

41,893

E. Repayment Schedule: Bank Loan (Rs.) - 131700 Interest rate (%) - 13.5 Capital recovery factor - 0.287

(in Rs.)

Year

Income

Expenses

Gross surplus

Equated annual instalment

Net surplus

I

117,660

33,838

83,823

37,798

46,025

II

134,130

52,678

81,453

37,798

43,655

III

125,940

50,945

74,995

37,798

47,197

IV

115,020

49,503

65,518

37,798

27,720

V

115,020

48,635

66,385

37,798

28,587

561 - III

CHAPTER - 36

GUIDELINES FOR CENTRAL SECTOR SCHEME ON PIG DEVELOPMENT 1.

General: a.

To encourage commercial pig rearing by farmers/ labourers to improve production performance of native breed through cross breeding by using selected animals of high performing breeds and by providing incentives in terms of capital subsidy for ensuring the viability of the pig breeding, rearing and related activities. th

2.

Implementation and Area of Operation: The scheme will be implemented during the XI five year plan period throughout the country. The high potential districts identified in 15 States are indicated in Annexure-1. However the proposals received from other than these districts/ States can also be considered for providing subsidy assistance under the scheme.

3.

Eligibility: Producer companies, partnership cooperatives and individual entrepreneurs.

4.

Subsidy: The ceiling on capital subsidy for different activities is given below. S. No

Component

firms,

Unit size and indicative Unit Cost#

corporations,

NGOs,

SHGs,

JLGs,

Pattern of Assistance

1

Pig breeding farms

20 F+ 4M (Unit Cost Rs 6.00 lakh)

25% of the outlay (33 1/3 % in NE States including Sikkim and hilly areas*) as back ended subsidy subject to a ceiling of Rs 1.50 lakh (Rs 2.00 lakh in NE States including Sikkim and hilly areas*)

2

Pig rearing & fattening units

3F+1M (Unit Cost Rs 0.76 lakh)

25% of the outlay (33 1/3 % in NE States including Sikkim and hilly areas*) as back ended subsidy subject to a ceiling of Rs 19000/- (Rs 25,300/- for NE States including Sikkim and hilly areas*)

3

Retail outlets

(Unit Cost Rs 10.00 lakh)

25% of the outlay (33 1/3 % in NE States including Sikkim and hilly areas*) as back ended subsidy subject to a ceiling of Rs 2.50 lakh (Rs 3.33 lakh in NE States including Sikkim and hilly areas*)

4

Facilities for live markets

@ 2 per district

50% of the outlay as back ended subsidy subject to a ceiling of Rs 2.50 lakh

562 - III

F : Female (Sows), M : Male (Boars), TFO: Total Financial Outlay * where the project site is located at a height of more than 1000 meters above mean sea level. # These are indicative costs . The subsidy will be calculated based on the indicative or actual cost, whichever is less. Banks are, however, free to sanction higher/lower TFO also based on the local conditions. 5.

b. c. d. e.

6.

Funding pattern: a. Beneficiary contribution (margin)

-

10 % of the outlay (minimum). The cost of land not exceeding 10% of the project cost can form part of the entrepreneur's contribution. Back ended capital subsidy as indicated at Sl. No: 4 Effective Bank Loan Balance portion Linkage with credit: Assistance under the scheme would be purely credit linked and subject to sanction of the project by eligible financial institutions. Eligible Financial Institutions: i. Commercial Banks ii. Regional Rural Banks iii. State Cooperative Banks iv. State Cooperative Agriculture and Rural Development Banks, and v. Such other institutions, which are eligible for refinance from NABARD. NABARD would provide refinance assistance to these institutions considering their eligibility. The quantum and rate of interest on refinance will be as decided by NABARD from time to time. Promotional Assistance: To support and encourage these activities by organizing SHGs / JLGs / Farmers Clubs / Cooperatives, providing training to farmers / butchers & shop owners, giving publicity and campaign, mapping of resources and reviving of Govt. Farms the following promotional programmes are proposed under the scheme. Funds will be routed through NABARD after approval by State Level Sanctioning & Monitoring Committee (SLSMC) : S. No

Component

Unit Rate (Rs. lakh) 0.20

Funding Pattern 100% Grant

Eligible Organisations/ Agencies NGOs through NABARD

1

Organisation of SHGs/ JLGs Farmers Clubs/ Cooperatives

2

Training of Farmers / 0.01 / 0.02 Butchers & Shop Owners

100% Grant

NGOs through NABARD

3

Resource Mapping

0.75

100% Grant

By NABARD

4

Publicity & Campaign of Scheme Revival of Government Farms (20 Sows + 4 Boars)

150

100% Grant

By NABARD

3

50% Grant

SIA, KVK, State Governments

5

563 - III

* 50% from Central Government and remaining from concerned State Government. KVK : Krishi Vikas Kendra; NGO : Non-Government Organization; SHG : Self Help Group; JLG: Joint Liability Group; SIA : State Implementing Agency 7.

Sanction by banks: The entrepreneurs/ eligible organizations shall apply to the banks for sanction of the project. The bank shall appraise the project as per their norms and if found eligible, sanction the total outlay excluding the margin as the bank loan. The loan amount is then disbursed in suitable instalments depending on the progress of the unit. After the disbursement of first instalment of the loan the bank shall apply to the concerned Regional Office of NABARD for sanction and release of subsidy in the format given in Annexure- 2.

8.

State Level Sanctioning & Monitoring Committee (SLSMC)

9.

a.

State Level Sanctioning & Monitoring Committee(SLSMC) will be Chaired by the Secretary, State Animal Husbandry Department with representatives from Department of Animal Husbandry, Dairying and Fisheries (DADF), GoI, lead bank of the state, State Dept. of Local Administration, NGO in this field, an expert in the related field, and O-I-C of NABARD as members. The SLSMC will be constituted by the State Government concerned. O n l y o n e SLSMC will look after all the schemes relating to Animal Husbandry Department. OIC of NABARD Regional Office will be convener of the SLSMC.Initially NABARD shall convene the meeting as and when the projects are received for sanction and later at quarterly intervals to review the progress of the scheme. Banks that have submitted projects for sanction may be invited as special invitees.

b.

As the number of projects that would be submitted is expected to be more in due course, the SLSMC may delegate the sanctioning powers in respect of these units to the Project Sanctioning Committees (PSC) of NABARD Regional Offices. On quarterly basis the PSC will put up the sanctioned projects to SLSMC for ratification.

Release of Subsidy: a.

After sanction of the subsidy by the SLSMC, the Regional Office of NABARD shall release the subsidy amount after confirming the availability of funds from NABARD Head Office. The subsidy shall be released on first come first serve basis subject to availability of funds.

b.

After crediting the subsidy in the subsidy reserve fund account of the borrower, a Utilization Certificate in the prescribed format as given in Annexure - 3 shall be submitted by the participating bank to NABARD to the effect that the amount of subsidy received by them has been fully utilized and adjusted in the books of account within the overall guidelines of the scheme.

10. Repayment: a.

Repayment period will depend on the nature of activity and will vary between 5 to 6 years including grace period of one (1) year. 564 - III

b.

The repayment schedules will be drawn on the total amount of the loan (including subsidy) in such a way that the subsidy amount is adjusted after liquidation of net bank loan (excluding subsidy).

11. Rate of Interest: Rate of interest on term loan shall be as per RBI guidelines and declared policy of the bank in this regard. The bank may charge interest on the entire loan amount till the subsidy is received and from the date of receipt of subsidy by the implementing branch, interest has to be charged only on the effective bank loan portion i.e. outlay excluding the margin and subsidy. 12. Security: The security for availing the loan will be as per guidelines issued by RBI from time to time. 13. Time limit for Completion of the project: a.

Time limit for completion of the project would be as envisaged under the project, subject to maximum of 12 months period from the date of disbursement of the first instalment of loan which may be extended by a further period of 3 months, if reasons for delay are considered justified by the financial institution concerned.

b.

If the project is not completed within the stipulated period, benefit of subsidy shall not be available and advance subsidy placed with the participating bank, if any, will have to be refunded forthwith to NABARD.

c.

Adjustment of subsidy: The capital subsidy will be back ended with minimum 3 Years lock-in period. The capital subsidy should be refunded one year after the account becoming NPA and remaining NPA as on that date. The capital subsidy will be adjusted against the last instalments of repayment of bank loan. The capital subsidy admissible under the scheme will be kept in the “Subsidy Reserve Fund Account (Borrower-wise) in the books of the financing bank. No interest will be paid on this amount by the bank. In view of this, for the purposes of charging interest on the loan component, the subsidy amount should be excluded. The balance lying to the credit of the “Subsidy Reserve Fund Account” will not form part of Demand and Time Liabilities for calculation of CRR and SLR.

14. Monitoring: a.

Central Monitoring Committee (CMC) at National level Chaired by Joint Secretary, DADF, GoI with members from DADF, Planning Commission, Secretaries of Department of AH from three States (on rotation basis), three banks (on rotation basis), M/O Rural Development, Environment and Forest, Micro, Small & Medium Enterprises D/o Commerce & Industry (Leather Division), and NABARD will review the implementation of the scheme at half yearly intervals.

b.

The SLSMC will review the progress on quarterly basis.

c.

The participating banks should conduct periodic inspections of the units and give a feedback to the SLSMC at regular intervals. 565 - III

d. Indicative Farm models for Pig rearing is given in Annexure - 4 to this Chapter. 15. Other Conditions: a.

The participating banks should adhere to the norms of appraising the projects regarding technical feasibility and commercial/financial viability.

b.

Financing bank should ensure that regulations /laws of Govt, Corporation/ Municipality/ Local Self Government are complied with wherever necessary.

c.

The participating banks should ensure insurance of the assets created under the project.

d.

A signboard displaying “Assisted by Department of Animal Husbandry Dairying and Fisheries, Ministry of Agriculture, Government of India through NABARD” will be exhibited at the unit.

e.

Pre and post completion inspection of the project shall be undertaken by the participating bank to verify physical and financial progress as and when required.

f.

DADF reserves the right to modify, add and delete any terms / conditions without assigning any reason and its interpretation of various terms will be final.

g.

DADF reserves the right to recall any amount given under the scheme without assigning any reason thereof.

h.

Any other pre and post inspection would be undertaken by DADF representative to find out the physical and financial progress as and when required.

i.

Other operational instructions issued by DADF / NABARD from time to time will be strictly followed.

16. Annexure/s: Annexure 1 :State wide High Potential Districts for Pig Rearing Activities Annexure 2 :Claim Form for release of Capital subsidy Annexure 3 :Utilisation Certificate Capital Subsidy Annexure 4 : Indicative Farm Models for Pig rearing units

566 - III

Annexure -1 to Chapter 36 State-wise identified high potential districts for Pig rearing activities

S.No.

State

High Potential Districts *

1

Andhra Pradesh

Guntur, Nalgonda, W Godawari

2

Arunachal Pradesh

Lohit, Lower Subansiri, West Siang

3

Assam

Berpeta, Bongaigaon, Cachar, Darrang, Dhamaji, Dubri, Goalpara, Golaghat

4

Bihar

Gaya

5

Chattisgarh

Dantawada, Jogdalpur

6

Jharkhand

Dumka, Ranchi

7

Kerala

Pattanamthitta

8

Manipur

Bhinupur, Chendel, Churachundpur, Imphal East, Imphal West

9

Meghalaya

E Goro hills, E Khasihills, Ri Bhoi, S Garo hills

10

Mizoram

Aizwal, Champai, Kolasib, Lunglei

11

Nagaland

Dimapur, Kiphire, Kohima, Longleng, Mokokchung

12

Odisha

Kendrapara

13

Tripura

Dhalai, North, South and West Tripura

14

Uttar Pradesh

Basti, Muzzafarnagar, Pililbit

15

West Bengal

Bankura, Burdwan, Darjeeling, Midnapore (W)

Total

50

* Proposals received from other than these districts/ States can also be considered for providing subsidy assistance under the scheme.

567 - III

Annexure -2 to Chapter 36 Claim Form From the Controlling Office of the Bank for Release of Capital Subsidy in Respect of Scheme for Piggery Development (To be submitted to the concerned Regional Office of NABARD) Name of the Bank :

Date:

Total Amount of Current Claim: Details of Current Claim : [Rs] Particulars Name and address of the Entrepreneur (Pl indicate district also) Location of the Project ( indicate the district and whether it is a hilly area) Whether SC/ST/Women Bank/Branch address ( indicate district also) with BSR code Loan A/c No. Date of sanction Purpose of Loan Unit size Total Financial Outlay Margin Bank Loan Repayment prescribed Rate of Interest Date of release of 1st instalment of loan Capital Subsidy claimed Any other information relevant to the project 1.

We undertake having complied with all the instructions contained in NABARD circular No. regarding operational guidelines of the scheme while sanctioning above proposals.

2.

We request you to release an amount of Rs. above entrepreneurs.

dated

(Rupees ….) as Capital Subsidy in respect of the

Place : Date : Seal and signature of the Branch Manager (financing bankAuthorised signatory Controlling Office of the bank (For the use of NABARD RO, ) 568 - III

The above claim is scrutinised. HO is requested to confirm the release of Advance subsidy amount of Rs. (Rupees only) to be released to (Name of the Bank). (Signature) AGM/DGM (NABARD, RO) (For the use of ICD, NABARD HO)

Release of Subsidy - Confirmation RETURN FAX MESSAGE Date FROM :

CGM, ICD, NABARD, HO, MUMBAI

FOR:

CGM/GM/OIC, REGIONAL OFFICE NABARD

Scheme for Piggery Development Release of subsidy - confirmation The claim No. is admitted. Since sufficient funds are available with NABARD, under the scheme, the above proposal of releasing advance subsidy amount Rs............................. (Rupees...................... ............................................. only) is confirmed for release. AGM ICD, NABARD-HO, MUMBAI Date :

569 - III

Annexure - 3 to Chapter 36 Format for Utilization Certificate - Capital Subsidy (For the use of financing bank to be submitted to the regional office of NABARD) Scheme for Piggery Development 1. 2. 3. 4. 5. 6. 7.

Name, address of the beneficiary and location of the project Name of the financing bank : Name & address of the financing branch: Date of sanction of loan by bank : Date of field monitoring of the unit by the bank Date of completion of the unit : Financial details

i. ii. iii. iv. v.

Total financial outlay: Rs. Margin Money: Rs. Bank loan: Rs. Subsidy received from NABARD Date of receipt: Amount (Rs.): Date of credit to the "Subsidy Reserve Fund A/C" of the Borrower:

8. 9.

Brief description of facilities created. Rate of interest charged by the financial bank : ----- ------% p.a.

10.

The bank has / has not availed refinance from NABARD

This is to certify that the full amount of capital subsidy received in respect of the above project has been fully utilized (by way of crediting to the "Subsidy Reserve Fund Account - borrower - wise) and adjusted in the books of account under the sanctioned terms and conditions of the project within the overall guidelines of the scheme. Place : Date :

570 - III

Annexure -4 to Chapter-36 Economics of Piggery ( 3 Sows + 1 Boar ) A. Summary 1 2 3 4 5 6 7 8 9 10 11

Unit Size Type of animal Unit Cost (Rs.) Margin Money (Rs.) Bank Loan (Rs.) Capital Subsidy (Rs.) Repayment period (years) Interest rate (% p.a.) NPW @ 15% DF (Rs.) BCR @ 15% DF IRR (%)

: : : : : : : :

3 sows + 1 boar Improved breed 76000 7600 49400 19000 6 years including first year grace period 12 83542 1.49:1 >50

B. Investment Cost Sr.N

1A B C 2 3 A B 4 A

B

Item

Boar Pen Sow Pens Fattener Shed Equipment Cost of Animals Sow Boar Feed Adults

Fatteners (20)

5 6 7

Insurance Labour Cost of Medicines

8

Misc. Expenses Total

Physical Unit

Specifications

Unit Cost

70 sqft 60 sqft/sow 12.5 sqft/fattener --

70 sqft 180 sqft 250 sqft -- LS

70 sqft 70 70 1000.00

Improved Improved

3 2500 1 3000

7500.00 3000.00

3 kg/day/boar 3.5 kg/day/boar Conc.Feed-30% Waste-70% 1.75 kg/day/fattener Conc.Feed-30% Waste-70% 5% of value of animals Family ----

4927 kg 1477 kg 3450 kg 6300 kg 1890 kg 4410 kg 4 --- -4 Adults -- 25 per Fattener -- --

571 - III

6 1 6 1 525.00 -50 per Fattener 213.00 76000.00

Total Cost (Rs.)

4900.00 12600.00 17500.00

8862.00 3450.00 11340.00 4410.00

700.00

C. Techno-Economic Parameters 1

Space requirement for shed (sqft) Boar Sow Fattener 3-8 months Cost of shed (Rs./sqft)

: : : : :

70 60 12.5 70

: : : : :

8 9 20 10 60

: : : : : :

3 3.5 1.75 30% 6 1

Sow ~7 months age (Rs.) Boar ~7 months age (Rs.)

: :

2500 3000

5

Insurance (%)

:

5

6

Labour

:

family labour

7

Cost of medicine, vaccine, etc.

:

Rs. 50/adult & Rs. 25/fattener

8

Sale price of 8 months old fattener

:

Rs. 2000/fattener

9

Salvage value of animals

:

Adults - Rs. 2500/animal Piglets - Rs. 500 / animal

2

Farrowing details Farrowing interval (month) No. of piglets per sow Mortality among piglet (%) Mortality among fatteners (%) Weaning period (days)

3

Feed requirement : Kg/day Boar Sow Fattener (Average) Ratio of concentrateto total feed Cost of Conc. feed (Rs./kg) Cost of waste (Rs./kg)

4 Cost of animals at purchase

10 Depreciation (%) Civil structures

: :

5% Equipment : 10%

D. Cash Flow Statement

Sl.No. I 1 2 a b

c

Particulars Cost Capital cost Recurring cost Conc. feed adult fattener Waste/Garbage Adult Fattener Vet. care

I

II

III

8862 11340** 3450 4410** 1100**

8862 (15120) 3450 (5880) (1200)

IV

V

VI

46500 8862 * 7560 * 3450 * 2940 * 600 *

572 - III

8862 18900 3450 7350 700

8862 15120 3450 5880 1200

8862 1890018900 3450 73505880 7001200

Sl.No. d e II a b c

Particulars Insurance Misc. expenses Total Cost Benefits Sale of fattener Salable value of closing stock Residual value of shed/equipment Total Benefit Net Benefit (Total Cost- Total Bene DF @ 15% PW @ 15% NPW @ 15% BCR @ 15% IRR

I

II

525 * 213 * 70650

-70650 0.87 -61465 83542 1.49 : 1 61%

IV

III

V

VI

525 525 426 213 30113(35463) 40000

525 426 35463

525 213 40000

525 213 25463

100000

50000

100000

50000

100000 64537 0.756 37714

50000 10000 0.658 0

100000 64537 0.572 45760

50000 10000 0.497 33796

100000 20000 26000 146000 110537 0.432

* Capitalised ** Other than capitalised @ Figures in parenthesis include the capitalised amount E. Repayment Schedule Capital Subsidy : Rs.19,000/- Bank Loan : Rs. 49,400/- Interest : 12 %p.a. Year Gross Surplus

Interest @ 12% Repayment Loan Total outstanding outgoings of principal p.a. Bank loan

1 2 3 4 5 6

69887 10000 64537 10000 64537

49400 49400 34400 34400 17400 17400

Bank loan 5928 5928 4128 4128 2088 2088

F. Economics of Piggery Breeding Farm (20 + 4) A.

Summary

1 2 3 4 5 6

Unit Size Type of Animal Unit cost (Rs.) Margin Money- minimum 10% (R Capital Subsidy @ 25% of UC Bank Loan - balance portion (Rs.)

20 Sow + 4 Boar Improved breed 6,00,000 60,000 1,50,000 3,90,000 573 - III

Net Surplus

0 15000 0 17000 0 17400

5928 20928 4128 21128 2088 19488

-5928 48959 5872 43409 7912 45049

7 8 9 10 11

Repayment period (Years) Interest rate (% p.a.) NPW @ 15% DF (Rs.) BCR @ 15% DF IRR (%) Bank Loan (Rs.) Capital Subsidy @ 25% of UC

B.

Investment cost

S. No

Item

1 A B C D 2 3 4 A B 5 A 3. B

6 7 8 9 C. 1 A B

Pig Sty Boar Pens Sow Pens Farrowing Shed Gorwers Shed Equipment Water Supply, Biosecurity, etc. Cost of Animals Sow Boar Feed Adult 5/kg/day/sow 60% waste Growers 70% waste Insurance Labour Cost of Medicines Pig Misc. Expenses Total Investment Cost Tecbno-Economic Parameters Space requirement for shed (sft) Boar Sow

5 years including 1 year grace period 12% 2,85,890 1.24: 1 41% 3,90,000 1,50,000

Specifications

Physical Unit

Unit Cost (Rs./Unit)

Total Cost (Rs.)

70 sqft/noes 20 sqft/sow for 15 sows 100 sqft/sow for 7 sows 10 sqft/grower

280 sqft 300 sqft 700 sqft 810 sqft

80 80 90 80 LS

22400 24000 63000 64800 20000 50000

Improved Improved

20 4

2500 3500

50000 14000

3/kg/day/boar 25000 kg 17712 kg 1.75 kg/flattener 30% conc. feed 35721 kg 5% of value of animals 2 persons till 3 after

4230 kg 40% conc. feed 1 51030 kg 15309 kg 1 24 6 6 Adult 25/fattener

11808 kg 17712

782656

7 35721

107163

lets & Grow

100 50/adult 4050

3200 30000 1200 10098 600000

70 sqft for Rs.80 20 sqft for Rs.80

574 - III

C 2 A B C D 3 A B C D

Farrowing pens Growers 3-8 months Farrowing details Farrowing Interval (months) No. of piglets per sow Mortality among piglets (%) Weaning period (days) Feed requirement : kg/day Boar Sow Grower (Average) Ratio of concentrate to total feed

E F 4 A B 5 6

Cost conc. feed (Rs./kg) Cost of waste (Rs./kg) Cost of animals at purchase Sow - 7 months age (Rs.) Boar - 7 months age (Rs.) Insurance (% of value) Labour

7

Cost of medicine, vaccine etc.

8

Sale price of 2 months old piglet for rearing Sale of breeders Sale price of 8 months old pigs for breeding Sale of breeding pigs Salvage Adult Value Piglets Depreciation (%) Civil Structures Equipment

9

10 11 A B

100 sqft for Rs.90 10.0 sqft @ 80/sqft 7 9 10% 60 3 3.5 1.75 40% of breeding stock 30% of grower 7 1 2500 3500 5 2 persons for 1st 6 months 3 persons after 6 months Rs.50/adult Rs.25/fattener 1000 50% 3000 100% Rs.2000 per animal Rs.500 per animal 5% 10%

575 - III

D. CASH FLOW STATEMENT (20+4 Unit) Years S. No. Particulars 1 A 1 2 a.

b.

c.

d. e. B

First 2

Second

Third

Fourth

Fifth

4

5

6

7

Cap Cap

82656 89303

82656 89303

82656 89303

82656 89303

Cap Cap

17712 32744

17712 32744

17712 32744

17712 32744

Cap Cap Cap Cap 600000

1200 4050 3200 36000 266865

1200 4050 3200 36000 266865

1200 4050 3200 36000 266865

1200 4050 3200 36000 266865

80000 0 2000

80000 486000 4000

162000 246000 4000

162000 486000 4000

162000 486000 4000

82000 -518000

570000 303135

412000 145135

652000 385135

652000 385135

3

Costs Capital Cost Recurring Costs Concentrate Feed -Adult - Fattener Waste/Garbage Adult Fattener Veterinary Care Adult Fattener Insurance Miscellaneous Expenses Total Cost Benefits Sale of Weaners Sale of Adult pigs Sale of Manure etc. Salvage Sale Total Benefits Net Benefits (Total Benefits-Total Cost)

DF @ 15%

15.00%

NPW @ 15%

285890

BCR @ 15%

1.24:1

IRR

41%

600000

576 - III

E. Repayment Schedule i. Capital Subsidy: ii. Bank Loan: iii. Interest: iv. Repayment Period

Rs.1,50,000/Rs.3,90,000/12% per annum 5 years including first year grace period

Loan Outstanding Year

Gross Surplus

Bank Loan

Interest @ 12% p.a.

Repayment of Bank Loan

Total Outgoings

Net Surplus

1

390000

82000

46800

0

46800

35200

2

390000

303135

46800

100000

146800

156335

3

290000

145135

34800

50000

84800

60335

577 - III

CHAPTER-37

POULTRY DEVELOPMENT 1.

2.

General: a.

India produces an estimated 53.5 billion eggs per annum, with per capita availability of 42 per annum. It has recorded an average growth rate of 7-8% over the years. Even more astounding was growth in production of poultry/chicken meat from only 0.12 million metric tonnes in 1981 to 2.0 million metric tonnes presently, a phenomenal growth of 15% per year, on an average. The Indian poultry industry with an annual output value of nearly Rs. 20,000 crore provides direct & indirect employment to about three million people catering primarily to domestic market.

b.

This has been made possible by policies / interventions of Government, proactive role of private sector and entrepreneurs and large scale funding by the financial institutions. However, these efforts resulted in unequal growth with development being mainly concentrated in few states. A considerable segment in the poultry sector is still unorganized and is spread over in the form of small units in far-flung areas that still needs organized effort to exploit the existing potential. Training and marketing continue to be the weakest links in various poultry development programs. With all these weaknesses, poultry development programmes under the cooperative sector were not able to make a dent.

c.

Poultry related activities have become highly scientific and to survive marginalization, small farmers have to work in groups. Further, most crucial linkages (both forward and backward) have to be set-up for enabling small farmers to directly participate in marketing operations, as far as possible.

d.

It is envisaged that the current scheme will enable small and marginal farmers including landless farmers, women and other socio-economically weak segments, educated unemployed youth to take up poultry farming as an income generating activity in organized way.

Poultry Estates: a.

Poultry Estates will have establishments of small farmers who will organize and form societies- thus accruing both, benefits of economies of scale and achieve better market opportunities with promotion of quality products, instilling confidence in consumers.

b.

Creation of estates is primarily envisaged on line of other industrial estates where majority of facilities will be made available within an area to facilitate both backward and forward linkages. As far as Poultry Estates are concerned, State Government will provide facilities in terms of land on lease, development of estate area, electricity and water supply, training, common facilities like feed mixing, storage, etc. Entrepreneurs who will set up either layer or broiler units in these estates will be assisted with interest free loan provided they adopt scientific production methods. State Governments may also be considering providing incentives like tax holidays & 578 - III

waiver from sales tax, etc. Direct participation of farmers in Poultry Estates can lead to sale of wholesome & hygienic product at a better price. c.

3.

4.

5.

The scheme to establish Poultry Estates is envisaged as a unique attempt not only to have a specific outcome from few estates but also to turn mind-set of a large section of private producers, who mostly work on short-term gain policy compromising on either quality of products or cutting down costs, showing little regard to poultry health, bio-security and waste disposal protocols. Success of these estates will enable the way poultry farming should be done and maybe we may not need a law or act to impose quality and bio-security norms upon a self-disciplined industry.

Objectives of the Scheme: The objective of the scheme will be to establish two Poultry Estates, either layer or broiler depending on the demand, to: a.

Encourage small & marginal farmers, educated & unemployed youth, women, socially & economically backward section of the society to take up activities of poultry sector in a compact area by providing required infrastructure and related facilities.

b.

Achieve economies of scale by adopting cluster approach, better resource sharing etc.

c.

Putting technical-backstopping, training and operation procedures in place in these units to prevent risk of loss from breach of biosecurity and disease.

d.

Restore consumer confidence in products from these estates and encourage brand - recognition and therefore ensure a steady market. Farmers may exploit opportunity provided by these estates to become exporters of poultry products.

e.

Eventually, these model poultry estates should have a snowball effect and propel private sector to pay attention to bio-security issues, hygienic, pollution-free production and most important of all, welfare of primary farmer etc.

Area of Operation: a.

These farming estates may be established in low poultry-intensive areas (non- traditional areas for poultry) or States where commercialization/ intensification of production has not yet taken place but potential exists. The list of eligible areas/ states are given in Annexure - 1. As only two estates are approved on pilot basis, States which come forward to provide land, necessary infrastructure and share 25% of the infrastructure cost will be given preference.

b.

Depending on the demand, the estates will be housing either layers or broilers. Both the birds however are not allowed in a single estate.

Allotment of Land and Selection of a Facilitator: a.

The first step will be to allot land and other facilities required for undertaking poultry farming in a common place for small farmers. Each estate will be either for layers or for broilers. An estate 579 - III

would be requiring about 50 acres of land. State Governments should take initiative and allot land for establishing an estate taking into account the suitability of the activity to the area, potential to benefit scheduled castes and scheduled tribes and create employment opportunities etc.

6.

b.

A State Level Sanctioning and Monitoring Committee (SLSMC) is constituted by the Regional Office of NABARD which will be chaired by the Principal Secretary / Secretary (AH) of the State Government with members from NABARD, financing bank and DAH. Once the State Government comes forward to establish poultry estate, the SLSMC shall decide on the suitability of the land keeping in view factors like distance from water bodies, existing farms, connectivity, migratory birds flying route, etc. and if found suitable, will invite proposals from NGOs, companies, integrators and Government departments for working as a facilitator.

c.

The agencies who are applying have to submit a detailed action plan as to how they want to proceed in the matter.

d.

SLSMC shall scrutinize the proposals and identify a facilitator and recommend to GoI through NABARD.

e.

Once a facilitator for an estate is approved, that agency will be responsible for creation of common infrastructure like supply of electricity and water, internal roads, fencing, foot bath/foot dip and other bio-security measures like waste disposal system outside the individual units; but within the estates. This expenditure subject to a ceiling of Rs. 200 lakh will be given on grant basis and will be shared by Central and State Governments in the ratio of 75:25. The grant assistance will depend on the number of units to be housed in the estate. A minimum of 50 units should be there in each estate and the maximum number of units that can be housed in an estate shall be 100. The facilitator would work under the overall supervision of the SLSMC as per the conditions laid by them. SLSMC has the right to remove any facilitator if they deviate from the guidelines or act against the interest of the beneficiaries

Selection and Training of Beneficiaries: a.

An advertisement shall be given by the facilitator in the local dailies calling for applications from interested persons. The requisites such as the social and financial status of the candidates shall be given in the advertisement. Preference will be given to women, SC/ST, educated unemployed youth and economically backward section of the society.

b.

A committee comprising representatives of NABARD, district Animal Husbandry Department, DRDA, lead bank and facilitator shall select the candidates from out of the applicants.

c.

The facilitator shall arrange for training of the selected beneficiaries under the guidance of local Animal Husbandry Department.

d.

The selected beneficiaries will be organised into a society, which will be responsible for running the estate under the guidance of the facilitator. 580 - III

e.

The land shall be given by the State Government to the society / individual beneficiaries on long term lease so that a charge can be created in favour of the financing bank. Modalities of the lease shall be decided by the SLSMC in consultation with the financing bank.

7.

Creation of Infrastructure for Feed Manufacturing: The input industry of poultry like feed manufacturing units should be connected to the efforts of establishing estates. These units shall be located nearby. Similarly disease investigation labs may have to be in a place, accessible by the beneficiaries. Assistance to eligible activities like feed manufacturing or poultry disease investigation labs should be facilitated.

8.

Components which can be supported: a.

Common Items of Expenditure: i. Publicity for launching the scheme: upto Rs.5.50 lakh per state as grant. ii. Creation of common infrastructure like roads, electricity and water supply, bio security measures, etc. within the estate but outside the individual units and also managerial subsidy to the estate: upto Rs.200 lakh per estate as grant. iii. Selection and Training of 100 beneficiaries in two stages: upto Rs.12.50 lakh per estate as grant iv. Planning and Escort services to Beneficiaries: upto Rs.17.00 lakh per estate as grant. v. Common facilities at Stage II (for processing and storage, etc. after 2 years of functioning): upto Rs.17.00 lakh per estate as grant.

b. Individual Proposals: i. Sl. No

Interest free loan to 100 beneficiaries (upper limit) in each estate. Activity

Interest Free loan

Margin

1

2000 bird layer unit

50% of total financial outlay 10% ( minimum) subject to a ceiling of Rs. 3.00 lakh

2

2000 bird broiler unit* (all in all out system)

50% of total financial outlay 10% ( minimum) subject to a ceiling of Rs 1.20 lakh

* Contract farming is suggested in case of the broilers as it is well established and will ensure supply of inputs, technical guidance and marketing. Further the margin money to be provided by the beneficiaries would be less as term loan is provided for construction of sheds and purchase of equipment. Accordingly, the recurring expenditure for firstoperating cycle is not to be included in the total financial outlay for broiler units.

581 - III

ii. Input Services (Feed Manufacturing Unit in the case of layer estates) upto Rs.25 lakh for each estate as 50% grant. 9.

Preparation of Projects: a.

For Common Facilities: i.

The facilitator will prepare a detailed project report for creation of infrastructure and submit to the SLSMC, which after scrutiny will sanction the eligible amount subject to the .deposit of State Government's share with the concerned Regional Office of NABARD. The amount shall be released by NABARD Regional Office to the facilitator on obtaining confirmation from their Head Office. ii. The eligible amount for land and infrastructure development shall be released in two instalments, the first instalment will be released immediately after sanction of the project and the second and final instalment on submission of utilisation certificate for the first instalment amount released . iii. Utilisation of the first instalment shall be verified by the representatives of State Animal Husbandry Department and NABARD and the second instalment shall be released on receipt of a satisfactory report. b. For Individual Units: i.

The facilitator will coordinate with the local banks for sanction of loans to the selected farmers under the scheme. They shall help the farmers in applying for loan from a bank in the vicinity. The banks will adhere to their own appraisal norms for sanctioning the projects. ii. Wherever the banks are not very familiar with the appraisal of any project, they can consult concerned NABARD Regional Office for guidance. iii. The financing bank will sanction the entire loan amount, i.e., the project cost excluding the party's margin. Documentation may be done for the entire loan amount. The bank then shall apply through their controlling offices in the format given in Annexure -2, to the Regional Office of NABARD for sanction of Interest Free Loan. iv. The unit cost may vary depending on the local conditions. However, assistance under the scheme is restricted to 2000 bird layer (1:2 system) and broiler units (all in all out). The SLSMC may consider fortnightly (500 birds) or monthly batches (1000 birds) of broilers depending on the local conditions . However, interest free loan (IFL) is restricted to the ceiling indicated at 2.6(II). v. The banks, if they so desire, can disburse the loan before receipt of IFL, in which case they can charge interest on the entire loan amount till they receive the IFL portion. On receipt of IFL, interest shall be charged on their loan component only and no interest shall be charged on the IFL. However, this will not confer any right on the bank / beneficiary for the IFL component which shall be sanctioned / released subject to the project's eligibility and availability of funds from Government of India.

582 - III

10. Mother units for Rural Backyard Poultry: a.

It is proposed to set up mother units where day old chicks of low input birds are reared upto 4 weeks and supplied to the beneficiaries under Rural Backyard Poultry programme. These mother units will get the day old chicks from State Poultry Farms or private hatcheries producing low input birds.

b.

The State Governments shall submit proposals to GoI for rural backyard poultry in the proforma prescribed by DAHD&F, GoI and communicated to them vide administrative approval no. 43-23/2009/LDT-P dated 07 August 2009.

c.

The details on mother units like number of mother units, State Poultry Farms or private hatcheries to which these mother units are proposed to be linked for supply of day old chicks shall be given by the State Government.

d.

Unless justified, there should not be more than 10 mother units in each district / cluster.

e.

After approval by DAHD&F, State Animal Husbandry Department shall identify the beneficiaries for establishment of mother units in consultation with DRDA and local banks. The beneficiaries could be individuals, SHGs, NGOs, who are trained in management of day old chicks and rearing them upto 4 weeks. If necessary, Animal Husbandry Department will arrange for training of the identified beneficiaries.

f.

The funding pattern for a mother unit with 3 pheriwalas is as follows: i. Unit cost (unit size 1500 chicks per batch): Rs. 1.36 lakh (of which Rs.1.00 lakh would be fixed cost and Rs.0.36 lakh for kick starting the operations of the unit). ii. Subsidy :Rs.0.20 lakh (to be treated as borrowers margin when bank loan is availed) iii. Interest Free Loan : Rs.0.36 lakh iv. Bank Loan : Rs.0.80 lakh

g.

The District Animal Husbandry Department will sponsor the applications for mother units and release the subsidy amount to the financing banks. The financing banks on receipt of the subsidy will sanction the amount of unit cost excluding the subsidy as bank loan and apply to the concerned Regional Office of NABARD through their controlling office in the proforma (Annexure -2 similar to poultry estates). In case the unit cost is more than that indicated, banks shall finance the additional cost as their loan or the beneficiaries may bring that amount as margin.

11. Sanction of the project and release of IFL: a.

NABARD RO will scrutinise the claim proposals and ensure that those which satisfy the terms and conditions laid down in the guidelines only are put up to SLSMC for sanction. The meeting will be convened initially as and when proposals are received and later at quarterly / half-yearly intervals to review the progress of the scheme. The SLSMC in each State are expected to meet quickly after 583 - III

its constitution and decide whether proposal concerning each beneficiary is to be placed before the Committee for approval or proposals of a district/cluster are to be firmed up and bunched together for consideration of the Committee or the Committee would ratify the action taken by the financial institution on individual projects. b.

The SLSMC will sanction the Interest Free Loan portion (50% of the outlay subject to the ceiling) for eligible proposals in respect of poultry estates and Rs.36,000 per unit in case of mother units.

c.

On receipt of the confirmation from HO, the concerned ROs of NABARD will release the sanctioned IFL to the respective banks. The sanction and disbursement of IFL will be for the selected beneficiaries only.

d.

The banks will release the first instalment within a month of receipt of the IFL component from NABARD. If the bank is not in a position to release the loan due to some reasons, the IFL shall be remitted back to the concerned Regional office of NABARD within a month of its receipt. In case of delay of such refund the bank has to pay interest on such amount @10% per annum from the date of its receipt by the nodal branch.

12. Repayment Period and Recovery of Loan: a.

Repayment period of loan will depend upon the cash flow and will be up to maximum of 9 years including grace period of 2 years in case of layer units and 6 months to 1 year in case of broiler and mother units. The bank will submit the repayment schedule for the entire loan inclusive of IFL to NABARD and may take all steps to ensure proper follow-up and recover the loan provided to the borrower and return the pro-rata amount to NABARD on a half- yearly basis. For convenience sake, the repayment received during January to June should be passed on by the bank to NABARD on 31st July and likewise those received during July to December should be passed on to NABARD on 31st January next year. The risk, if any, will be shared by Government of India on a pro-rata basis. However, the banks will take effective steps for recovering the entire loan amount.

b.

Banks shall furnish the status of the accounts on a yearly basis in the format given in Annexure -3.

13. Refinance Assistance: NABARD would provide refinance assistance to commercial banks, RRBs, SCBs SCARDBs and other such eligible institutions. Quantum and rate of interest on refinance will be as decided by NABARD from time to time. 14. Security Norms: The security norms will be as prescribed by Reserve Bank of India from time to time 15. Rate of Interest: Rate of interest on the loan component shall be as per RBI guidelines and declared policy of the bank in this regard. The bank shall however not charge interest on the IFL component. 16. Monitoring: a.

The Central Level Joint Monitoring Committee will be headed by Joint Secretary (Poultry), Department of AHD&F, Ministry of Agriculture, Government of India with representatives 584 - III

of NABARD, financing bank, state government and facilitator. The Committee will monitor the progress of implementation of projects on half yearly basis. b.

SLSMC will sanction the projects and also monitor the progress initially on quarterly basis and after creation of infrastructure on a half yearly basis, the progress under the scheme and take necessary steps for smooth functioning of the scheme

17. Role of Various Agencies: a.

NABARD: i. ii. iii. iv.

To administer the revolving fund and conduct SLSMC Meetings. To scrutinise the claims of the banks and release eligible Interest Free Loan amount. To submit returns at periodical intervals on sanction and utilisation of the fund To plan for improvement and expansion of the scheme for future, based on the feedback.

b. Facilitator: i. To develop the infrastructure for establishment of poultry estates ii. To identify the beneficiaries for poultry estates. iii. To organise training programmes for them under the guidance of Animal Husbandry Department. iv. To coordinate with banks for sanction of loans to the identified beneficiaries. v. To mobilize the beneficiaries to form cooperative societies and guide them. vi. To arrange for supply of inputs and marketing of output. c.

Banks: i.

To identify the borrowers, receive, sanction the projects for various components identified under the scheme. ii. To recover the loan amount as per repayment schedule and repay the amount recovered prorata to NABARD on half-yearly basis. iii. To provide feedback on implementation of the scheme at State and National level. d. State Animal Husbandry Department: i.

To identify the borrowers in association with the local banks, provide training and arrange for sanction of loans. ii. To release subsidy for the mother units. iii. To provide technical guidance to the beneficiaries. iv. To monitor the progress of the units and assist the banks in recovery of the loans. 585 - III

v. e.

To provide feedback on implementation of the scheme

Department of Animal Husbandry, Dairying and Fisheries, GoI i.

To convene the meeting of the Joint Monitoring Committee regularly (half yearly basis) and review the implementation with NABARD and financing banks. ii. To plan and expand the scheme in future years as per the feedback received from NABARD and financing banks. iii. To undertake field visits of project on sample basis. iv. To make funds available as and when needed or keeping the amount with NABARD in advance. 18. Publicity: NABARD and the implementing banks, AH departments of State Governments will make efforts for wide publicity at the district and state levels through organisation of workshops and through farmer's clubs, NGOs and rural branches of financing banks. The details of the scheme will also be put on the website of NABARD and DAHD&F. 19. Other Conditions: a.

A signboard at the site “Assisted by Department of Animal Husbandry, Dairying and Fisheries, GoI through NABARD” will also be exhibited.

b.

DAHD&F reserves the right to modify, add and delete any terms / conditions without assigning any reason. DAHD&F's interpretation of various terms will be final.

c.

DAHD&F reserves the right to recall any amount given under the scheme without assigning any reason thereof.

d.

Any other pre and post inspection would be undertaken by DAHD&F representative to find out the physical and financial progress as and when required.

e.

Other operational instructions issued by DAHD&F / NABARD from time to time will be strictly followed.

20. Annexure/s: a.

Annexure -1 : List of eligible areas/ states.

b.

Annexure -2 :Consolidated claim format for release of loan component.

c.

Annexure -3: Status Report format.

586 - III

Annexure -1 to Chapter - 37 List of eligible areas/ states States with low commercial activity (Non-traditional States)

S.No

Name of the State

1

Bihar

2

Chattisgarh

3

Gujarat

4

Jharkhand

5

Madhya Pradesh

6

Maharashtra – Vidharba area

7

All North Eastern States including Sikkim

8

Orissa

9

Uttar Pradesh- some districts

10

Uttaranchal

12.

West Bengal- some districts

587 - III

Annexure -2 to Chapter 37 SCHEME FOR POULTRY DEVELOPMENT CONSOLIDATED CLAIM FROM THE CONTROLLING OFFICE OF THE BANK FOR RELEASE OF INTEREST FREE LOAN PORTION (To be submitted to the concerned NABARD, Regional Office) 1. NAME OF THE BANK:

2. MONTH/YEAR OF CLAIM:

3. TOTAL AMOUNT OF CURRENT CLAIM: 4. DETAILS OF CURRENT CLAIM: (Rs.lakh) S.No

1.

Particulars

1

1

Name & address of Beneficiary (Plindicate district also)

2

Category (SC/ST/others)

3

Gender (M/F)

4

Constitution (Individual / SHG/Others)

5

Branch Address (indicate districtalso)

6

Loan a/c No.

7

Date of sanction

8

Purpose of loan

9

Unit size

10

Total financial outlay

11

Margin

12

Bank loan

13

IFL claimed

14

Repayment prescribed

15

Rate of interest

16

Any other information relevant tothe project

2

3

4

5

We undertake having complied with all the instructions contained in NABARD circular No. ------------------------------------------- regarding operational guidelines of the scheme and as amended from time to 588 - III

time while sanctioning above proposals. 2.

We request you to release an amount of Rs.________________ (Rupees) as interest free loan portion in respect of the above beneficiaries under the scheme for poultry development

3.

We also certify that the IFL in respect of previous claims have been fully utilised.

Place:

Seal and signature of the Officer

Date :

(Controlling office of the financing bank)

(For the use of NABARD RO,) The above claim is scrutinised. HO is requested to confirm the release of Interest free loan amount of Rs. (Rupees only) to be released to (Name of the Bank). (Signature) AGM/DGM (NABARD, RO)

(For the use of ICD, NABARD HO) Release of IFL - Confirmation RETURN FAX MESSAGE Date FROM : CGM, ICD, NABARD, HO, MUMBAI FOR: CGM/GM/OIC, REGIONAL OFFICE Central sector scheme for Poultry Development- confirmation The claim No. is admitted. (Ref. Claim No........................ for IFL). Since sufficient funds are available with NABARD, under the scheme, the above proposal of releasing IFL amount of Rs................................. (Rupees........................................................................................ only) is confirmed for release. AGM / DGM ICD, NABARD-HO, MUMBAI Date 589 - III

Annexure -3 to Chapter 37 SCHEME FOR POULTRY DEVELOPMENT STATUS OF LOAN ACCOUNTS UNDER THE SCHEME AS ON 31 MARCH Name of the Bank: State :

Name of the S. No beneficiary 1

2

Date:

Branch 3

Loan Of col As on 31 Mar Purpose Outlay sanctio (6) IFL Demand Repay- ned ment 4

5

6

7

8

9

Of Col.(9) Loan amount O/S as on Remarks remitted 31 to 10

11

12

It is hereby certified that the amount at col.9 has been remitted to NABARD towards IFL component out of the recoveries made in the account on pro-rata basis. Place: Date :

Seal and signature of the Officer (Controlling office of the financing bank)

590 - III

CHAPTER 38

SETTING UP OF AGRI-CLINICS AND AGRI- BUSINESS CENTRES SCHEME (ACABCs) 1.

General: a.

Financial inclusion may be defined as the process of ensuring access to timely and adequate credit and financial services to vulnerable groups such as Weaker Sections and Low-income Groups at an affordable cost.

b.

A sizeable majority of the population, particularly the low income groups, continue to remain excluded from the opportunities and services provided by the financial sector.

c.

Accordingly, the committee on financial inclusion “set up by the Government of India” under Dr. C. Rangarajan, recommended the establishment of two Funds, namely the “Financial Inclusion Fund” (FIF) for meeting the cost of developmental and promotional interventions for ensuring financial inclusion and the “Financial Inclusion Technology Fund” to meet the cost of technology adoption.

d.

The Hon'ble Union Minister of Finance, in the Union Budget Speech for 2007-2008 announced the constitution of the Financial Inclusion Fund and Financial Inclusion Technology Fund, with an initial corpus of Rs.500/- crores each. The Financial Inclusion Fund shall be used for the following activities/ purposes: i.

Funding support for capacity building inputs to business facilitators and business correspondents. ii. Self-Employment Training Institutes, Farmers Service Centre, etc. to enable them to provide improved technical and financial services arrived at increasing technology adoption, effective management of Assets, nurturing entrepreneurial capacity and increasing financial education to literacy. iii. Providing funding support for promotion, nurturing and credit linking of Self Help Groups. iv. Capacity building of personnel of NABARD, Banks, Post Offices, State Governments, MFIS, NGOS, Village Associations, Members of SHGs/ Joint Liability Groups, etc. v. Funding support for setting up of Rural Credit Bureaus and credit rating of rural customers. vi. Supporting initiatives of Village level associations/ federations. vii. Development of innovative products viii. Developmental and promotional interventions recommended by the Advisory Body for the FIF. 2.

Objectives of the Scheme: a.

To provide extension and other services to farmers on payment basis. 591 - III

b.

To support agriculture development and entrepreneurship.

c.

To promote self-employment.

d. Concept/Definition: Agri-Clinics: Agri.-Clinics are envisaged to provide expert advice and services to farmers on technology, cropping practices, protection from pests and diseases, market trends, prices of various crops in the markets and also clinical services for animal health, etc., which would enhance productivity of crops/animals and increased income to farmers. ii. Agri- Business centres: Agri.- Business centres are envisaged to provide farm equipment on hire, sale of inputs and other services. i.

3.

4.

Eligibility: a.

The scheme is open to agriculture graduates /graduates in subjects allied to agriculture like Horticulture, Animal Husbandry, Forestry, Dairy, Veterinary, Poultry farming and Pisci- culture.

b.

The subsidy would be admissible only in respect of agricultural graduates trained under the st ACABC scheme on or after 1 April 2004.

c.

The agricultural graduates who were trained on or after 1st April 2004 and had availed of loan earlier for ACABC project, would also be eligible for subsidy for expansion / additional to exiting units or for fresh investments, only if the earlier loan is not closed prematurely.

d.

The trained graduates could also undertake group projects. If the group consists of a total of five more persons, all except one of them would have to be agriculture graduates trained under the scheme and the remaining person could be non-agriculture graduate with experience in business development and management.

e.

Delivery of Extension services shall be the main component of ACABC projects for availing of the benefit of subsidy under the scheme. Commercial activities in agriculture and allied sectors may, on a case-by-case basis, consider as eligible component of ACABC projects with a view to improve their viability.

f.

States are encouraged to provide information on all government policies, programs, schemes, etc. to agri-entrepreneurs and also use their services in implementation of extension activities funded by the Government.

Project Cost Ceiling: The ceiling of project cost for individual projects will be Rs. 10.00 lakhs. The ceiling of project cost for group projects would be 10.00 lakhs per trained graduates, subject to an overall ceiling of Rs. 50.00 lakhs. In case of groups having five persons, of which one is nonagriculture graduate, the ceiling of such group projects would also be Rs.50.00 lakhs.

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5.

6.

Linkage with credit: a.

Assistance under the scheme would be purely credit linked and subject to sanction of the project by Commercial /Cooperative/Regional Rural Banks based on economic viability and commercial considerations.

b.

The eligible financial institutions under the scheme are; i. Commercial Banks ii. Regional Rural Banks iii. State Cooperative Banks iv. State Cooperative Agriculture and Rural Development Banks: and v. Such other institutions, which will be eligible for refinance from NABARD.

Term Loan: a.

The term loan would be composite in nature and participating banks would extend bank loan as per the project cost, which would be inclusive of subsidy amount eligible, as capital subsidy is backended, but exclusive of margin money as stipulated.

b.

The repayment schedules will be drawn on the total amount of the loan (including subsidy) in such a way that the subsidy amount is adjusted after liquidation of net bank loan (excluding subsidy).

c.

Repayment Period will depend on the nature of activity and will vary between 5 to 10 years. The repayment period may include a maximum, grace period of 2 years (to be decided by the financing bank as per needs of individual projects).

d. Rate of Interest On term loan shall be as per RBI guidelines and declared policy of the bank in this regard. Interest would be chargeable on borrower's accounts as per procedure laid down by RBI for direct agricultural advances under priority sector guidelines. e. 7.

The financial institutions may also provide working capital separately, if needed for the project.

Margin Money: a.

In case of loans up to Rs. 5.00 Lakhs, no margin money is required as per present norms. The margin money to be contributed by the general category entrepreneur will be as per prevailing norms.

b.

However, concessions would be made in respect of SCs/STs, women and beneficiaries of Northeastern States, Hill areas. In such cases, a maximum of 50% of the margin money prescribed by banks could be given by NABARD to meet the shortfall in borrower's contribution, if the bank is satisfied that the borrower is unable to meet the margin money requirements. Such assistance to banks by NABARD will be without any interest. The banks may, however, levy a service charge up to 2% per annum from the borrowers. 593 - III

8.

Security: The security for availing the loan will be as per guidelines issued by RBI from time to time. As most of the eligible activities pertain to agricultural input supply and services and the cost of investment will be less than Rs. 25.00 Lakhs in most cases, the security norms applicable to tiny industries as prescribed in RBI circular No. RPCD.PLNFS.BC.65/06/02.31/99-2000 dated 31.03.2000 would be made applicable to these units. Accordingly, up to a loan amount of Rs. 5.00 Lakhs, the loans can be secured against hypothecation of assets created and no further security would be necessary.

9.

Time limit for Completion of the Project: a.

Time limit for completion of the project would be as envisaged under the project, subject to maximum of 6 months period from the date of disbursement of the first instalment of loan by a further period of 6 months, if reasons for delay are considered justified by the financial institution concerned.

b.

If the project is not completed within the stipulated period, benefit of subsidy shall not be available and advance subsidy placed with the participating bank, if any, will have to be refunded forthwith to NABARD.

10. Other Conditions: a.

Projects under the scheme may be treated as direct financing to agriculture.

b.

The participating banks will adhere to the norms of appraising the projects regarding technical feasibility and commercial/financial viability.

c.

The participating banks should ensure insurance of the assets created under the project, wherever required statutorily. If beneficiary opts to buy insurance on these assets, even if insurance is not required statutorily, such expenditure would be eligible component of ACABC project.

d.

A signboard displaying “Assisted under the scheme of Agri-Clinics and Agri-Business centres, Ministry of Agriculture, Government of India” will be exhibited at the unit.

e.

Pre and post completion inspection of the project shall be undertaken by the participating bank to verify physical, financial and operational progress as and when required.

11. Refinance Assistance from NABARD: NABARD would provide refinance assistance to commercial banks, RRBs, SCBs SCARDBs and other such eligible institutions at the rate of 100% of the amount financed by the banks as term loan. Rate of interest on refinance will be as decided by NABARD from time to time. 12. Subsidy: a.

Credit linked capital subsidy @ 25% of the capital cost of the project funded through bank loan would be eligible. This subsidy would be 33.33% in respect of candidates belonging to SC, ST, Women and other disadvantaged sections and those from North-Eastern and Hill States.

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b.

In addition, full interest subsidy would be eligible for the first two years of the project.

c.

In case subsidy of whatever amount is availed of under any other scheme of Central of State Government, subsidy will not be admissible under this scheme.

d.

The benefit of subsidy will be extended only once.

e.

The capital subsidy will be back ended with minimum 3 Years lock-in period.

f.

The interest subsidy would, however, be concurrent.

g.

The capital and interest subsidy would be admissible only if all repayments till date had been made as per schedule.

h.

The capital subsidy will be adjusted against the last few instalments of repayment of bank loan.

i.

The capital subsidy admissible under the scheme will be kept in the “subsidy reserve Fund Account” (Borrower-wise) in the books of the financing bank. No interest will be charged on this by the bank. In view of this, for the purposes of changing interest on the loan component, the subsidy amount should be excluded. The balance lying to the credit of the “Subsidy Reserve Fund Account” will not form part of Demand and Time Liabilities.

j.

Interest subsidy shall be provided for a period of First two Years of bank loan sanctioned as per the net outstanding balance in the account.

k.

The banks should levy interest on annual basis and claim interest subsidy accordingly during this period.

l.

Banks should prescribe interest rates as per declared policy of the bank, at the time of sanction of the loan amount.

m. Procedure for Release of Subsidy. i. The subsidy will be routed through NABARD by the Department of Agriculture and Cooperation, Government of India and the amounts will be placed with NABARD in advance. ii. For the present, NABARD shall not change any service charge for handling subsidy under the scheme. If at a future date, Ministry of Finance approves payment of service charge to NABARD for handling subsidy under all the schemes similar to the Agri.-Clinics Scheme, the matter could be revisited on the amount of advance subsidy placed with them. n. Capital Subsidy: i.

An interested Agri.-entrepreneur will submit the project proposal for term loan and subsidy to the bank on an application form as prescribed by the concerned bank along with the project report and other documents for appraisal and sanction of loan. 595 - III

ii. Bank, after sanction of the project and disbursal of first instalment of loan, the project and disbursal of first instalment of loan, will furnish a brief project profile-cum-claim form for advance subsidy in the prescribed format as given in the Annexure-1 to this Chapter along with a copy of a banks sanction letter to RO, NABARD, in the state where the unit is located. iii. NABARD, on receipt of project profile-cum-claim form from the participating bank will sanction and release 50% advance subsidy to the participating bank for keeping the same in the subsidy Reserve Fund A/c (Borrower-wise). The release of subsidy by NABARD will be subject to availability of funds from GOI. iv. When the project is nearing completion, the agri. - entrepreneur will inform the participating bank for conducting inspection. v.

The participating bank would conduct inspection on the project site, within the overall scope of the operational guidelines of the scheme.

vi. After inspection is conducted, the bank will submit the claim for final capital subsidy in the prescribed format as given in the Annexure-2 and Annexure 7 to this Chapter to NABARD, Regional Office. The inspection report and completion certificate should be enclosed with the claim form for final subsidy. vii. After crediting the final instalment of subsidy in the reserve fund of the Borrower, a Utilization Certificate in the prescribed format as given in the Annexure-3 to this Chapter shall be submitted by the participating bank to NABARD to the effect that the amount of subsidy received by them has been fully utilized and adjusted in the books of account of the project within the overall guidelines of the scheme. viii. NABARD shall release the final subsidy to banks, which will be replenished by GOI or adjusted against the subsidy amount provided to NABARD in advance. ix. NABARD would delegate adequate powers to Chief General Managers/In charges of Regional Offices of NABARD so as to facilitate expeditious sanction of projects and release of refinance/subsidy amount under the scheme. o.

Interest Subsidy: i.

Interest subsidy would be released to bank(s) after completion of one year for the first year and after completion of two years for second year, from the date of first disbursement, based on rate of interest actually charged by the bank, on balance outstanding in the account against principal amount of loan net of capital subsidy released.

ii. The participating bank will claim interest subsidy annually from NABARD, which was charged to the loanee account and upon receipt of interest subsidy from NABARD, the bank should credit the borrowers account with the interest subsidy. 596 - III

iii. The participating bank shall visit the unit on completion of one year/two years as the case may be, and conduct inspection to satisfy that unit is physically, financially and operationally progressing well and submit its report in prescribed format as given in the Annexure-4 to this Chapter recommending release of first/final instalment of interest subsidy. iv. The participating banks should prefer claim for interest subsidy within 90 days, after completion of the stipulated period together with the certificate/inspection report. The claims for first/final instalment of interest subsidy may be submitted by Banks on quarterly basis, in the prescribed format. v.

After release of capital and interest subsidy to the borrower, the participating bank shall submit a final Utilization Certificate, in the prescribed format as given in the Annexure-5 to this Chapter to NABARD to the effect that the amount of subsidy received by them has been fully utilized and adjusted in the books of account under the sanctioned terms and conditions of the project within the overall guidelines of the scheme.

13. Monitoring: a.

The participating bank shall do the monitoring of each project. Review will be undertaken on a monthly basis by participating bank/NABARD.

b. NABARD may prescribe suitable formats for submission of various reports by participating banks, taking in to account reporting requirements of the DAC and subject to guidance off DAC/Empowered Steering Committee. c.

The progress report of the scheme in the prescribed format as given in the Annexure-6 to this Chapter shall be sent to the Department of Agriculture and Cooperation, Government of India by NABARD on monthly basis, with a copy to MANAGE.

d.

The scheme of ACABC and the progress there under shall be reviewed invariably in all District Level Consultative Committee and State Level Bankers Committee meetings with a view to sorting problems/issues emerging in smooth implementation thereof.

14. Awareness and Training Programme: a.

General Awareness, publicity and training programmes for eligible candidates and hand holding support would be undertaken by MANAGE Nodal Training Institutions as per the scheme.

b.

MANAGE will be responsible for providing training to eligible candidates, through its Nodal institutes and motivating them for setting up of ACABCs.

c.

MANAGE will ensure sponsoring of sufficient number of cases to the participating banks for financing under the scheme and arrange to establish required number of units at ground level, as envisaged, to make the scheme a success. 597 - III

15. Empowering Steering Committee: a.

The following empowered 'Steering Committee' would take all important decisions within the framework of approved scheme, for its smooth implementation: Secretary (A&C) Chairman Additional Secretary (Extn.) AS & FA, DAC DDG (Extn.), ICAR DG, MANAGE, ED, NABARD JS (EXTN.)

Member Member Member Member Member Member Secretary

b.

Another independent evaluation of the scheme should be organized two years after implementation of subsidy.

c.

Government's interpretations of these Guidelines will be final.

d.

Government reserves the right to modify, add and delete any part of the Guideline without assigning any reason therefore.

16. Annexure/s: a.

The following Annexure/s are appended to this Chapter: Annexure 1 : Consolidated Claim Form From the Controlling Office of the Bank for Release of Capital Subsidy (Advance) in respect of Agri-clinic & Agri -Business Centres (ACABC). Annexure 2 : Consolidated claim form from the controlling office of the bank for release of Capital Subsidy (final) in respect of Agri-clinic & Agri -Business Centres (ACABC). Annexure 3 : Format for Utilization Certificate for Capital Subsidy- Financing bank to NABARD R.O. Annexure 4 : Format for Consolidated claim from the controlling office of the bank for release of Interest Subsidy in respect of Agri-clinic & Agri -Business Centres (ACABC) to be submitted to NABARD R.O. Annexure 5 : Format for Utilization Certificate -Capital & Interest Subsidy (For the use of financing bank to be submitted, in triplicate, to the Regional Office of NABARD). Annexure 6 : Format for submission of status Progress Report on Agri-clinic & Agri -Business Centres (ACABC). Annexure 7 : Format for submission of Inspection Report on Agri-clinic & Agri -Business Centres (ACABC). 598 - III

Annexure-1 to Chapter -38 CONSOLIDATED CLAIM FORM FROM THE CONTROLLING OFFICE OF THE BANK FOR RELEASE OF CAPITAL SUBSIDY(ADVANCE) IN RESPECT OF AGRICLINIC & AGRI BUSINESS CENTRES (ACABC) (To be submitted to the concerned Regional Office of NABARD) NAME OF THE BANK : DISTRICTS COVERED CLAIM :

MONTH/YEAR OF CLAIM: TOTAL AMOUNT OF CURRENT

DETAILS OF CURRENT CLAIM : Particulars Name and address of the Entrepreneur Whether SC/ST/Women Whether from North-Eastern Region Details of training by MANAGE From To Bank/Branch address Loan A/c No. Purpose of Loan Total Financial Outlay Items of Investment Date of Sanction Repayment prescribed Security Advance Capital Subsidy claimed Rate of Interest Any other information relevant to the project such as potential/ Permission/ Approval to be obtained

[Rs. in lakh] 1

2

1.

3

4

5

6

7

We undertake having complied with all the instructions contained in NABARD circular No. NB ICD/1826/ ACABC-4/2006-07 Dated 20-12-2006 regarding operational guidelines of the scheme while sanctioning above proposals. 2. We request you to release an amount of Rs. (Rupees) as Capital Subsidy (advance) in respect of the above entrepreneurs. Place : Date : Seal and signature of the Branch Manager (financing bank) Encl: [1] Brief project profile [2] Bank's Sanction letter p.t.o

599 - III

(For the use of NABARD, RO) The above claim is scrutinised. HO is requested to confirm the release of Advance subsidy amount of Rs. (Rupees only) to be released to (Name of the Bank).

(Signature) AGM/DGM (NABARD, RO)

(For the use of ICD, NABARD HO) Release of Subsidy - Confirmation RETURN FAX MESSAGE Date

FROM : CGM, ICD, NABARD, HO, MUMBAI FOR: CGM/GM/OIC, REGIONAL OFFICE, NABARD ACABC - Release of advance subsidy - confirmation The claim No. is admitted. Since sufficient funds are available with NABARD, under the scheme, the above proposal of releasing advance subsidy amount of Rs................................. (Rupees ........................................................................................ only) is confirmed for release.

AGM / DGM ICD, NABARD-HO, MUMBAI Date

600 - III

Annexure 2 to Chapter -38 CONSOLIDATED CLAIM FORM FROM THE CONTROLLING OFFICE OF THE BANK FOR RELEASE OF CAPITAL SUBSIDY (FINAL) IN RESPECT OF AGRICLINIC & AGRI BUSINESS CENTRES (ACABC) (To be submitted to the concerned Regional Office of NABARD in triplicate) NAME OF THE BANK : DISTRICTS COVERED CLAIM : Particulars Name and address of the Entrepreneur Whether SC/ST/Women Whether from North-Eastern Region Details of training by MANAGE From To Bank/Branch address Loan A/c No. Purpose of Loan Total Financial Outlay Items of Investment Date of Sanction Repayment prescribed Security Date of advance Capital Subsidy received Date of inspection by Inspection team Final Subsidy claimed Any other information

MONTH/YEAR OF CLAIM: TOTAL AMOUNT OF CURRENT 1

2

3

4

5

6

7

DETAILS OF CURRENT CLAIM: 1. We undertake having complied with all the instructions contained in NABARD circular No. NB.ICD/1826/ACABC-4/2006-07 Dated 20-12-2006 regarding operational guidelines of the scheme while sanctioning above proposals. 2. We request you to release an amount of Rs. (Rupees………………….) as Capital Subsidy (Final) in respect of the above entrepreneurs. 3. We also certify that the previous claims have been fully utilised and adjusted in the books of account under the sanctioned terms and conditions of the project within the overall guidelines of the scheme. 4. The inspection report and completion certificate are enclosed.

Place : Date : Encl:[1] Inspection Report [2] Completion Certificate

Seal and signature ofthe Branch Manager (Financing Bank)

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(For the use of NABARD, RO) The above claim is scrutinised. HO is requested to confirm the release of final subsidy amount of Rs. (Rupees only) to be released to (Name of the Bank).

(Signature) AGM/DGM (NABARD, RO)

(For the use of ICD, NABARD HO) Release of Subsidy - Confirmation RETURN FAX MESSAGE Date

FROM : CGM, ICD, NABARD, HO, MUMBAI FOR: CGM/GM/OIC, REGIONAL OFFICE NABARD ACABC - Release of final subsidy - confirmation The claim No. is admitted. (Ref. Claim No........................ for advance subsidy). Since sufficient funds are available with NABARD, under the scheme, the above proposal of releasing final subsidy amount of Rs................................. (Rupees ........................................................................................ only) is confirmed for release.

AGM / DGM ICD, NABARD-HO, MUMBAI Date:

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Annexure-3 to Chapter -38 Format for Utilization Certificate - Capital Subsidy (For the use of financing bank to be submitted to the Regional Office of NABARD) SCHEME FOR SETTING UP OF AGRICLINICS & AGRIBUSINESS CENTRES 1 2 3 4 5 6 7

Name, address and location of the beneficiary and project Name of the financing bank : Name & address of the financing branch: Date of sanction of loan by bank : Date of verification by Joint Verification Team Date of commission of the unit : (i) Total financial outlay Rs. (ii) Margin Money (iii)Bank loan Rs. (iv) Subsidy received Date of receiptAmount Date of credit to the from NABARD (Rs.) "Subsidy Reserve

Rs.

Fund A/C" of the Borrower (a) 50% Advance subsidy (b) Final instalment of capital subsidy 8 9

Brief description of facilities created with capacity etc. Rate of interest charged by the financial bank :

% p.a.

10 The bank has / has not availed refinance from NABARD 11 This is to certify that the full amount of capital subsidy received in respect of the above project has been fully utilized (by way of crediting to the "Subsidy Reserve Fund Account - borrower - wise) and adjusted in the books of account under the sanctioned terms and conditions of the project within the overall guidelines of the scheme. Place: Date :

(_ _) Seal & Signature of the Branch Manager (Financing Bank) -------------------------------------603 - III

Annexure 4 to Chapter -38 CONSOLIDATED CLAIM FORM FROM THE CONTROLLING OFFICE OF THE BANK FOR RELEASE OF INTEREST SUBSIDY IN RESPECT OF AGRICLINIC & AGRI BUSINESS CENTRES (ACABC) (To be submitted to the concerned Regional Office of NABARD) NAME OF THE BANK : MONTH/YEAR OF CLAIM: NAME & ADDRESS OF THE BANK BRANCH : DISTRICTS COVERED TOTAL AMOUNT OF CURRENT CLAIM : DETAILS OF CURRENT CLAIM : Particulars Name and address of the Entrepreneur Whether SC/ST/Women Whether fromNorth-Eastern Region Details of training by MANAGE From Bank/Branch address Loan A/c No. Purpose of Loan Total Financial Outlay Items of Investment Date of Sanction Repayment prescribed Security Total Amount of interest recovered from entrepreneur Total amount of interest subsidy eligible Amount of interest subsidy claimed Any other information

1. 2. 3. 4.

1

2

3

4

5

6

7

To

We undertake having complied with all the instructions contained in NABARD circular No.B B I C D /1826/ACABC-4/200607Dated 20-12-2006 regarding operational guidelines of the scheme while sanctioning above proposals. We request you to release an amount of Rs. (Rupees) as Interest Subsidy in respect of the above entrepreneurs. We also certify that the previous claims have been fully utilised. We certify that the unit is inspected and satisfied that the unit is physically, financially and operationally progressing well and release of ............................. instalment of osubsidy is recommended.

Place : Date:

Seal and signature of the Branch Manager (Financing Bank) 604 - III

(For the use of NABARD, RO) The above claim is scrutinised. HO is requested to confirm the release of interest subsidy amount of Rs. (Rupees only) to be released to (Name of the Bank).

(Signature) AGM/DGM (NABARD, RO)

(For the use of ICD, NABARD HO) Release of Subsidy - Confirmation RETURN FAX MESSAGE Date FROM : CGM, ICD, NABARD, HO, MUMBAI FOR: CGM/GM/OIC, REGIONAL OFFICE NABARD

ACABC - Release of interest subsidy - confirmation The claim No. is admitted. (Ref. Claim for advance subsidy ........................................ Claim for final subsidy ................................... ). Since sufficient funds are available with NABARD, under the scheme, the above proposal of releasing interest subsidy amount of Rs................................. (Rupees ........................................................................................ only) is confirmed for release. AGM / DGM ICD, NABARD-HO, MUMBAI Date:

605 - III

Annexure 5 to Chapter -38 Format for Utilization Certificate -Capital & Interest Subsidy (For the use of financing bank to be submitted, in triplicate, to the Regional Office of NABARD)

SCHEME FOR SETTING UP OF AGRICLINICS & AGRIBUSINESS CENTRES 1 2 3 4 5 6

Name, address and location of the beneficiary and project Name of the financing bank : Name & address of the financing branch: Date of sanction of loan by bank : Date of verification by Joint Verification Team [a] Date of commission of the unit : [b] Date of completion of the unit:

7

Brief description of facilities created with capacity etc.

8

(i) Total financial outlay (ii) Margin Money (iii)Bank loan (iv)Subsidy received Date of receipt A.Capital Subsidy Reserve a. 50% Advance Subsidy b. Final Instalment of Receivable capital subsidy

Rs. Rs. Rs. Amount Date of credit to from NABARD (Rs.) Subsidy Fund A/c/ Interest Subsidy A/C. of the Borrower

B. Interest Subsidy a. First Instalment (Ist Year) b. Final Instalment (IInd Year) 9

Rate of interest charged by the financial bank :

10 11

The bank has / has not availed refinance from NABARD This is to certify that the full amount of subsidy received towards both capital cost and interest on bank loan in respect of the above project has been fully utilized (by way of crediting to the ubsidy Reserve Fund Account / Interest Subsidy receivable Account - borrower - wise) and adjusted in the books of account under the sanctioned terms and conditions of the project within the overall guidelines of the scheme.

% p.a.

Place : Date :

( ) Seal & Signature of the Branch Manager (Financing Bank) ------------------------------------------------

606 - III

Annexure 6 to Chapter -38 PROGRESS OF SCHEME FOR SETTING UP OF AGRICLINICS & AGRIBUSINESS CENTRES SANCTIONED / PENDING PROJECTS (ABSTRACT)* STATUS AS ON_______________ Amt. (Rs.) S.N

State

Name of the project Location

Nature of Activity

TFO Sanctioned

Bank Loan

Total Agri amt. of Entrepreneurs eligible Contribution subsidy

Capital Subsidy released to financial banks

Advance Final subsidy instalment

Total subsidy

1) The above information breakup may be furnished in the same format for schemes sanctioned in NE States, hilly areas, SC/ST / Women & other disadvantageous entrepreneurs separately. 2) Information to be submitted by banks to NABARD, RO for submission through HO to GoI, MoA, DoAC, with a copy to Director General, MANAGE for information on monthly basis. 3) Information to be submitted separately for (i) sanctioned projects and pending projects at NABARD level & (ii) Capital subsidy & Interest subsidy.

607 - III

Annexure-7 to Chapter -38 PROFORMA FOR INSPECTION REPORT for release of final instalment of Capital Subsidy BY THE PARTICIPATING BANK (Specify the name of Bank & address of implementing branch) Scheme for Setting up of Agriclinics & Agribusiness Centres A. Name and Address of Agri/Entrepreneurs : B. Members of Inspection Team and set up by participating bank (Name, Designation & Address) C. (i) Date of completion of the project : (ii) Date of intimation of completion of project to NABARD (iii) Date of joint verification D. Project at a glance i. Location and facility created ii. Financing Bank iii. Total Project cost iv. Amount of term loan provided v. Date & amount of first instalment of loan disbursed vi. Date & amount of first instalment of subsidy released. vii. Owner's contribution in the project E. viii. Whether project implemented as per approval i. If no, specify the deviations ii. Whether project implemented in time: F. Recommendations of the Inspection Team G. Signature of the Inspection Team Members : Team Members (1) NABARD (DDM/DDO) (2) Financing Bank (3) Nodal Institute of MANAGE

608 - III

Signature & Date

CHAPTER -39

SWAROJGAR CREDIT CARD (SCC) SCHEME 1.

2.

General: a.

Availability of adequate and timely financial resources is one of the most important factors for the success of any venture. In almost all cases, the entrepreneurs depend on external sources for financial support and the formal financial sector including the banks provides the needed resources by way of credit. The banking scenario in the Country has been fast changing. The process of financial sector reform highlighted the need for innovative credit interventions from financial institutions. Any such innovation should comprise timely credit in adequate quantity with operational flexibility to the borrowers and insurance protection.

b.

For various reasons , credit flow from the formal system to small borrowers especially persons of small means has not been satisfactory which has been confirmed by various studies. Various credit delivery innovations in the form of SHG- Bank Linkage Programme for making financial services available to the poor, Kisan Credit Card Scheme for meeting the production credit needs of the farmers, Laghu Udyami Credit Card Scheme for SSI Sector have been introduced. However, tiny, cottage and village industries sectors and self-employed persons were left out from any credit card scheme. Majority of the artisans, handloom weavers, handicraftsmen, fishermen, self-employed persons, etc. whose credit requirement is of the order of Rs.25000/ are to be given preferential treatment for easy access to credit. As far as small borrowers are concerned, their credit needs are for investment, production and consumption purposes . If all types of their requirements are met from one source with due flexibility, the venture undertaken by them could be successful. Viewing from this angle, there is an urgent need to introduce an innovative credit delivery mechanism for these groups of small borrower s in the form of a credit card scheme. In order to meet their requirements, a new credit card scheme viz. Swarojgar Credit Card Scheme was announced by the Hon'ble Prime Minister in his Independence Day Speech on 15 August 2003.

Swarojgar Credit Card (SCC) Scheme: a.

Consequent upon the announcement made by the Hon'ble Prim e Minister on the introduction of a suitable credit card system for artisans and other small entrepreneurs, a special meeting was held in New Delhi in which Government of India, Reserve Bank of India and N A B A R D h a d participated. It has been decided to implement a special credit card scheme viz. Swarojgar Credit Card (SCC) Scheme benefitting the rural artisans and other small entrepreneurs. The salient feature of the scheme is that it takes care of investment and working capital requirements of a wide range of small borrower s especially in the non-farm and service sectors.

3.

Model scheme:

a.

NABARD has formulated a Model scheme and the same is given in Annexure-1.We request you to 609 - III

introduce a suitable Swarojgar Credit Card Scheme in your Bank on the lines of the model scheme. SCBs may suitably advise DCCBs in this regard. 4.

Review of progress: a.

Progress in issue of the SCC is required to be closely monitored and reviewed at regular intervals as under : At Block Level At District Level At State Level For RRBs

: : : :

in BL BC Meetings in DCC/DLRC Meetings in SLBC Meetings. in Board Meetings of respective Banks and in State Level Coordination Committee Meetings

Apart from the above, the progress could be reviewed at regular intervals as part of internal reviews. b. At the National level: 



5.

NABARD will review the progress in the implementation of the SCC Scheme at various National/State level forums like the meeting of CEOs of SCBs , Chairman of RRBs , Board Meetings of NAFSCOB, etc. GOI and RBI will be regularlykept apprised of the progress achieved and steps taken to ensure success of the SCC scheme.

Role of NABARD:

NABARD will:  

Be the nodal agency and programme holder for SCC Scheme. Monitor the progress of the scheme.

As in the case all credit related developmental programmes, the successful implementation of the SCC Scheme also depends on the participation of all banks. 6.

Annexure: The following Annexure/s are appended to this chapter. Annexure-1: Model scheme for Swarojgar Gold Card.

610 - III

Annexure-1 to Chapter -39 MODEL SCHEME FOR SWA ROJGA R CREDIT CARD The scheme: The scheme is called Swarojgar Credit Card Scheme (SCC Scheme). Objectives: SCC Scheme aims at providing adequate an d timely credit i.e. working capital/ or block capital or both to small artisans , handloom weavers, service sector, fishermen, self-employed persons, rickshaw owners, other micro-entrepreneurs , etc. from the banking system in a flexible, hassle free and cost effective manner. The facility may also include a reasonable component for consumption needs. Participating banks: The Scheme is to be implemented by all Commercial Banks , RRBs , State Cooperative Banks / DCCBs /PACS, SCARDBs/PCARDBs and Scheduled Primary Cooperative Banks. The banks will have to actively market the scheme to the eligible clientele. Nature of financial accommodation: The credit facility extended under the Scheme is in the nature of a composite loan including term loan /revolving cash credit. Sanction of term loan/ Fixation of working capital limit: 

The term loan will be provided for meeting the investment requirements and it will be repaid within five years in suitable instalments.



The Revolving cash credit will be fixed taking into account the operating cycle/nature of the investment and shall be fixed based on available balance after sanction of term loan.

Quantum of limit: Rs. 25,000/ per borrower as composite loan. The initial investment in fixed assets and/ or working capital requirement / recurring expenditure of the borrower are to be taken as the base for fixing the limit. The working capital/ recurring expenditure limit may be in the form of a revolving cash credit and fixed as a percentage of the turnover divided by the number of operating cycles per annum. A component for consumption credit could be built in keeping in view the value of the family labour in the productive activity. The total limit would have a relationship with the projected net earnings and the repayment capacity of the borrower. Validity: SCC is normally valid for 5 years subject to satisfactory operation of the account and renewed on a yearly basis through simple review process. The operations in the account should be regular. Issue of cards: 

The beneficiaries under the scheme will be issued with a laminated credit card and a pass book as per specimen enclosed (Appendix). This will serve as an identity card as well as facilitate recording of the transactions on an on-going basis. The pass book would contain the repayment schedule of the term loan also. A passport size photograph of the holder will be affixed on the card at the space provided for .The card holder would be required to produce the card and the pass book whenever he/she withdraws cash from the account.

611 - III



Self Help Groups (SHGs) can also be issued cards in their name and they will be liable jointly and severally for repayment.



As far as possible cluster approach will be followed in implementing the scheme.



Fees towards issue of card/processing may not exceed Rs. 50/.

Renewal of Working Capital limits: 

Limits will be renewed annually based on the amount credited to the cash credit account and the repayment performance in the term loan account.



Under the Scheme, term loan component could be enhanced within the overall limit in case of need subject to satisfactory repayment performance of the borrower.



The Revolving cash credit to the extent of working capita l repaid may be renewed within the overall ceiling of Rs. 25,000/ and it should be normally repaid within 12 months from the date of drawal. However, the minimum discipline expected is that applicable to cash credit accounts. Where necessary, the working capita l component could be enhanced within the overall ceiling to provide for escalation in the cost of inputs, etc. subject to satisfactory repayment performance.



No drawal will be permitted if revolving cash credit remains outstanding for more than 12 months.



The aggregate credits in the account during the 1 2 month s period should normally be equal to the maximum outstanding in the working capital component plus the instalment of the term loan availed of, if any.

Operation of the scheme: 

The banks will have absolute freedom to select the clients for the card.



There will be no subsidy from the Government under this Scheme.



The borrower can avail the credit facility as per his/her requirements i.e. either term loan or working capital loan or a combination of both.



The beneficiaries under the Scheme are to be issued with a laminated credit card and a passbook incorporating the name, address, borrowing limit, validity etc. which will serve both as an identity card as w ell as facilitate recording of the transactions on an on-going basis.



The issuing branch would maintain the ledger account in respect of each SCC account holder. The term loan component and working capital component will be accounted for separately. The operations in the account will be generally through the card issuing branch. However, the banks ma y at their discretion permit operations through the designated branches , taking into account the convenience of the clientele.



Withdrawal from the account will be through withdrawal slips/cheques.



The SCC and Pass Book should be produced each time cash withdrawal is made.



Opening of S B A/c should not be a precondition for issue of SCC.



However, in case SCC holder desires on his/her own to open SB A/c, he/she may be allowed to do so. 612 - III

Insurance: Beneficiaries under the scheme would automatically be covered under the group insurance scheme and the premium would be shared by the bank and the borrower equally. Each bank ma y negotiate the terms of insurance with a company of its choice o n a national or regional basis . Security/Margin/Rate of interest /Prudential norms: Security, Margin, Rate of interest and Prudential norms are applicable as per RBI/NABAR D norms. The interest rate would not exceed that for comparable farm loans. At present the rate is 9% per annum. The rat e o f interest may be linked to BPLR as per RBI directives. Interest linked incentives may be given for timely repayment. Women borrower s may be given preference and some concession in the rate of interest. Joint liability groups could be encouraged as a collateral substitute. NABARD refinance: NABAR D refinance will be provided for advances under SCC Scheme to eligible banks against their lending to the borrowers in rural areas as per norms under the Composite Loan Scheme. Monitoring NABAR D being the nodal agency for monitoring the scheme in order to facilitate clos e monitoring of the Scheme at the ground level, banks are required to report the monthly progress to the Regional Offices of NABAR D concerned in the format enclosed (Appendix). Medium Term Strategy: It is expected that banks would issue 2 lakh cards during the year 200 304 and achieve a target of 40 lakh before the end of the X Five Year Plan. The stat e -wise and bank -wise targets would be proposed by NABAR D and approved by the SLBC .

613 - III

APPENDIX Format for Swarojgar Credit Card cum Passbook

SWAROJGAR CREDIT CARD Serial No.____________

Date :___/__/_ Bank Operating Branch

Name of the Card Holder Age Father's/Husband's name Address Village Bloc k P. O.

Photograph of the card holder

Valid upto Signature/ Left Hand Thumb impression of the Card holder

Signature of the issuing Authority with seal

Page 2

Occupation Land holding, if any Purpose of loan i Term loan ii Cash Credit

(in Rupees )

Total Limit sanctioned :

Type of loan

Year I 200 -0

Year II 200 - 0

Year III 200 -0

Year IV 200 - 0

Year V 200 -0

Term Loan Cash Credit Total

0

Signature of Issuing Authority seal

Signature of the Secretary with (in case of PACS )

614 - III

TERM LOAN REPAYMENT SCHEDUL E Date of sanction of term loan

Amount (Rs)

Amount

Due date

Amount repaid

Date of repayment

PASS BOOK Left Page

Right Page

Term Loan Date

Particulars Dr Cr Bal- Init ance ials

Cash Credit Date

615 - III

Particulars

Dr Cr

Bal- Init ance ials

Appendix Progress Report under Swarojgar Credit Card (SCC) Scheme

For the month of _ Name of the State Name of the bank: Aggregate credit limit sanctioned till the end of the the month of_____

No of S C Cards issued till the end of the month of ____

Term Loan

Cash Credit

Date Signature of the Authorised official NB: To be sent to the Regional Office of NABARD by 5th of the succeeding month

616 - III

CHAPTER-40

SELF HELP GROUPS & JOINT LIABILITY GROUPS A. SELF HELP GROUPS: 1.

General: a.

2.

Parameters Working Group suggestions for organizing SHGs: a. b. c.

3.

Hamlet basis i.e. men/women living in a cluster of houses with a common economic activity/interest. Commodity basis i.e. people producing same commodity. Members of such groups may range from 10 to 20 members. Under this activity/interest around which the groups ought to be organized warrants need for larger membership to ensure viability.

Tasks for Self Help Groups: a. b. c. d. e. f. g. h. i.

4.

The Self Help Groups (SHGs) are self-managed groups of persons to help among themselves. These groups primarily came into existence to mobilize financial resources through their own savings and lend the same among themselves to meet credit needs of their members. It is an informal and voluntary association of persons and homogeneous groups.

To act as a financial intermediary between individual members and Banks. To act as a joint liability group, deposit group savings with Banks and taking group loans for all lending to members. To improve savings habits To mobilize savings To generate additional internal funds To examine loan applications from members To give loans to members To decide on loan volume, maturity and internal interest rates. To refer members directly to the PACS/Bank as the case may be if the financial needs surpass handling capacity of the SHGs.

Operations: a.

The SHG conduct meeting once in a week/fortnight/month and transaction like collecting savings, issuing loans and collection of repayments take place at this meeting, where all the members are present and collectively take decisions. During the initial stages, the own funds of SHGs are primarily used for meeting small time consumption and emergency needs. In fact, the SHGs are 617 - III

b.

c.

d.

e.

f.

g.

h.

i.

running a “micro Bank” by doing savings and lending activities. In Tamil Nadu as per G.O. Ms. No.280, of Cooperation Food and Consumer Protection Dept. dated 20.12.1999, the Primary Agricultural Cooperative Banks/societies are permitted to admit the Self Help Groups identified by the Tamil Nadu Corporation for Development of Women as members of the Banks to enable them to avail loan from PACBs/Societies.. Subsequently the DCCBs and Urban Banks were permitted (vide G.O. Ms. No.291, Cooperation, food and Consumer Protection Dept. dated 8.8.2001) SHGs as their members for the purpose of availing loan from the Banks. Micro Credit is defined as the provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit institutions are those which provide these facilities. Interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self-Help Groups/member beneficiaries has been left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues to remain in force. The banks may formulate their own model(s) or choose any conduit/intermediary for extending micro credit. They may choose suitable branches/pockets/areas where micro credit programmes can be implemented. Micro Credit extended by banks to individual borrowers directly or through any intermediary would be reckoned as part of their priority sector lending. It may be desirable for banks to deal with micro credit organization having proper credentials, track record, system of maintaining accounts and records with regular audits in place and manpower for closer supervision and follow-up. Banks may prescribe their own lending norms keeping in view the ground realities. They may devise appropriate loan and savings products and the related terms and conditions including the size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. The intention is to provide maximum flexibility in regard to micro lending keeping in view the prevalent local conditions and the need for provision of finance to the poor. Such credit should, therefore, cover not only consumption and production loans for various farm and non-farm activities of the poor but also include their other credit needs such as housing and shelter improvements. A simple system requiring minimum procedures and documentation is a pre-condition for augmenting flow of micro credit. Hence banks should strive to remove all operational irritants and make arrangements to expeditiously sanction and disburse micro credit by delegating adequate sanctioning powers to branch manager. The loan application forms, procedures and documents should be made simple. It would help in providing prompt and hassle-free micro credit. NABARD had earlier, vide circular No. NB. DPD .FS.4631/92-A/1991-92 dated 26 Feb. 1992, indicated to the banks some broad criteria for selection of SHGs for the purpose of lending. Such criteria envisage active existence of SHGs for at least six months, successful savings and credit operations from own resources, democratic working, maintenance of proper accounts/records, homogeneity and affinity among members and support from NGO-SHPI in the grooming of SHGs. Based on these indicative criteria and on their own field level experience in promotion and financing of SHGs, certain banks/other agencies are found to have developed their own detailed 618 - III

but easy-to-use norms for identification of mature SHGs for credit linkage. Such norms not only help in assessing the maturity of SHGs in an objective manner, but also throw up weak areas of their functioning requiring urgent attention. Four sets of such norms developed by various banks/agencies are given in the Annexures-1 to 4 to this Chapter. 5.

Characteristics of Self Help Groups (SHGs): a. b. c. d. e. f. g. h. i. j. k. l.

6.

Functions of SHGs: a. b. c. d. e. f. g. h.

7.

Conduct regular meetings. Direct participation of members in decision making. Regular savings. Internal lending. Prioritisation of loans granted to members. Flexible repayment terms. Group norms. Sharing of responsibilities in the group. Common interest. Mutual self-help. Non-political. All are poor.

Functions through regular meetings (weekly/fortnightly/monthly meetings) Members' meet at regular intervals at a predetermined place and time Contribute their savings and repay their loans and interest. Loan needs range from consumption to income generation Sanction and disburse loans ,fixing rate of interest and repayment period based on members' needs and status Discuss other issues, Record the proceedings Work through sharing of responsibilities

Documents to be obtained to open SB accounts: a. b. c.

Resolution from the members of the group resolving to open account with a particular PACS/CCB Copy of norms of the group, if documented or a copy of the minutes of the book indicating the names of members and norms of the group. Resolution authorizing two members to open and operate the SB account of the group with the society.

619 - III

8.

Operation of SB Account: a. b.

9.

Cash flow approach: Group deposits all its savings in the account and withdraw its loans sanctioned through issue of fund withdrawal authorization, to its members Balancing centre approach: Either depositing or withdrawing the net surplus or requirement of funds from the group account.

Credit support to the group: a.

When the group approaches a branch of a society for credit support, observe the following in a group meeting: i. comparison between corpus and micro credit plan(credit needs of members) ii. internal recovery process and performance of the group. iii. provide credit support as a multiple of corpus * *(corpus = internal lending +cash with group+balance with PACS / CCB)

10. Essential Documents: a. b. c. d. e.

Acceptance of terms and conditions in sanction letter. Loan agreement. Inter-se agreement. Demand promissory note. Repayment schedule linked to recovery plan of the micro credit proposal or could be a fixed period based on corpus management process.

11. Credit needs of the group: a. b. c. d. e. f. g.

Consumption loans. Small livelihood loans. Small income generating activities in rural areas. Loans for improving living standards. Micro enterprise proposal from a sub-group with-in All members need not seek credit for activities. The members should have the freedom to operate at a level comfortable to them, based on their family needs.

12. Advantages to Society: a. b. c. d.

Promote thrift among members. Internal credit prioritisation. Improves national thinking process. Prompt repayment encourages banking ethics. 620 - III

e. f. g. h. i.

Proper end use and prompt repayment. Micro-enterprises improve rural employment opportunities. Improvement in deposits of societies/CCBs. Externalization of functions like collection of deposits, lending decisions and recovery loans to members. Society is a large SHG, SHG is a small cooperative with group dynamics.

13. Philosophy of the Linkage: a. b. c. d. e. f. g.

The poor has the capacity to save. Savings represent mainly deferred consumption. The poor is bankable. The Bank lends to the Groups and not through the Group. NGO functioning as a facilitator. All decisions about credit as per group mechanism / wisdom. Peer pressure as a substitute to collateral.

14. Strength of SHGs: a. b. c. d. e.

Propagator of volunteerism. Practitioner of mutual help and cooperative principles. Promotion of thrift and savings. Provider of timely / emergency loans. Purveyor of development credit.

15. Role of NABARD: a. Liberal refinance assistance to commercial banks/ RRBs and cooperative Banks. b. Promotional assistance to NGOs for capacity building. c. Providing training opportunities to Banks / NGOs and development agencies on SHG. d. Conducting studies / seminars and action research projects. e. Creating policy environment for promotion of linkage of SHGs with Banks. f. Accelerating the program through consultation / coordination and collaborative arrangements. g. Simple procedures and automatic refinance facilities. h. Inbuilt flexibility in the scheme. 16. Role of Banks: a. Play a vital role in providing funds to SHGs in a quick and flexible manner. b. External relaxation in managing security norms. c. Establish liaison with NGOs / SHGs. d. Oversee the healthy functioning. 621 - III

e. f.

Credit dispensation activities through guidance and continuous rapport. Make available profiles of bankable schemes.

17. Model of SHG / Bank Linkage: a. b. c.

Model 1 - NABARD BANK SHG - Bank acting as Self Help Group Promoting Institution SHPI. Model 2 NABARD BANK NGO SHG - NGO acting as a facilitator. Model 3 NABARD BANK NGO SHG NGO acting as facilitator and financial intermediary.

18. Self Help Group Graduation Process: Forming: Identification of potential village, village resource, inventory survey, assessment of potential, analysing data, educating target group and utilizing farmers club. b. Storming: Identifying specific problem, identifying first person, motivation for preparing for meeting, brainstorming the problems, finalizing list of members. c. Norming: Evolving norms, collecting thrift, opening bank account, evolving byelaws. d. Performing: Conducting meetings, maintaining records, loan disbursement, identifying, communicating, rating of groups, Bank's credit linkage. a.

B. JOINT LIABILITY GROUPS: 1.

General: a.

Innovations such as the SHG-Bank Linkage programme have proved to be successful in providing financial services from the formal banking sector to asset-less or very poor. This is also in line with RBI's policy of "financial inclusion". In order to develop effective credit products for clients like the tenant farmers, oral lessees, sharecroppers and small and marginal farmers the bank is implementing the following schemes in line with the model schemes formulated by NABARD: i. Scheme for provision of Credit to Tenant Farmers and Oral Lessees for cultivation of crops through Tenant Farmer Groups. ii. Scheme for financing Tenant Farmers, Oral Lessees, Share Croppers and Small and Marginal farmers through Rythu Mithra Groups (Implemented in Andhra Pradesh only).

b.

2.

The experience gained in the implementation of the above programmes have demon-strated that the Joint Liability Group (JLG) approach can be successfully adopted by banks to reach clients like tenant farmers, share croppers, oral lessees, farmers with small land holdings without proper land records etc. Accordingly, a scheme is evolved on the lines of the model scheme prepared by NABARD and RBI/IBA has advised all the Banks to implement the scheme. The salient features of the scheme are as under:

Objectives: The scheme aims at the following objectives; a.

To augment flow of credit to tenant farmers cultivating land either as oral lessees or share croppers 622 - III

b. c.

and small farmers who do not have proper title of their land holding through formation and financing of JLGs. To extend collateral free loans to target clients through JLG mechanism. To build mutual trust and confidence between banks and tenant farmers.

3.

General features of JLG: A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members are expected to engage in similar type of economic activities like crop production. The management of the JLG is to be kept simple with little or no financial administration within the group.

4.

Criteria for selection of JLG members: a. b. c. d. e. f. g. h.

JLGs can be formed primarily consisting of tenant farmers and small farmers cultivating land without possessing proper title of their land. Members should be of similar socio economic status and background carrying out farming activities and who agree to function as a joint liability group. The groups must be organised by the likeminded farmers and not imposed by the bank or others. The members should be residing in the same village/ area and should know and trust each other well enough to take up joint liability for group/individual loans. The members should be engaged in agricultural activity for a continuous period of not less than 1 year within the area of operations of the bank branch. The group member should not be a defaulter to any other formal financial institution. JLG should not be formed with members of the same family and more than one person from the same family should not be included in the JLG. There is a need for a very active member of the group to ensure leadership role and ensure the activities of the JLG. The selection of a good/able/active leader for the JLG is an essential need, which will ultimately benefit all the JLG members. However, care should be taken to ensure that benami loans are not cornered by the group leader.

5.

Size of the JLG: The group should be formed preferably with 4 to 10 members to enable the group members to offer mutual guarantee. While informal group of up to 20 members could also be considered, such large groups are found to be not effective in fulfilling mutual guarantee obligations in the case of farmers. Therefore, smaller groups of farmers (4- 10 members) are recommended for effective functioning of JLG.

6.

Formation of JLGs: a.

Branches may form JLGs on their own or through the facilitation of intermediaries like NGOs, MFIs etc., On formation of JLGs, the Branch Manager should discuss with the JLG members the bank's regulations, lending procedures, services etc. The principles of self-help and group strength need to be emphasized. Group cohesion has to be ensured. Adequate emphasis should be placed on the roles, expectations and functions of the group/members and the benefits of group dynamics. 623 - III

b.

State Government Departments like Agriculture Department also could form JLGs of tenant farmers and small farmers not having clear land title. The JLGs of such eligible farmers can also serve as a conduit for technology transfer, facilitating common access to market information; for training and technology dissemination in activities like soil testing, training, health camps and assessing input requirements.

7.

Savings by JLG: The JLG is intended primarily to be a credit group. Therefore, savings by the JLG members is voluntary. All the JLG members may be encouraged to open an individual "no frills" account. However, if the JLG chooses to undertake savings as well as credit operations through the group mechanism, such groups should open a savings account in the name of JLG with at least two members being authorised to operate the account on behalf of the group.

8.

JLG Models: Branches can finance JLG by adopting any of the two models. a.

b.

9.

Model A - Financing Individuals in the Group: The JLG would normally consist of 4 to 10 individuals. The group would be eligible for accessing separate individual loans from the financing bank branch. All members would jointly execute one inter-se document (making each one jointly and severally liable for repayment of all loans taken by all individuals in the group). The financing bank could assess the credit requirement, depending on the crops to be cultivated, available cultivable land and credit absorption capacity of the individual. However, there has to be mutual agreement and consensus among all members about the amount of individual debt liability that will be created. Model B Financing the Group: The JLG would consist preferably of 4 to 10 individuals and function as one borrowing unit. The group would be eligible for accessing one loan, which could be combined credit requirement of all its members. The credit assessment of the group could be based on the available cultivable area by each member of the JLG. All members would jointly execute the document and own the debt liability jointly and severally. JLG is mainly a credit product. But if the members want to save through the group, banks can open saving account in the name of the JLG to be operated by two members of the group as decided through a resolution by the JLG.

Critical factors in JLG approach: The success of JLG concept depends on several factors. However, following factors are critical: a. b. c.

The concept depends heavily on mutual trust within the group and on peer pressure for the repayment of loans. The quality of group leadership is critically important for the sustainability of the group. The JLG exists only for the single purpose of expediting certain categories of loans. Generally they are not multifunctional groups.

10. Credit Assessment: a.

Model A: The JLG would prepare a credit plan for its individual members and an aggregate of that is submitted to the banks. Branches may use the prescribed Introduction Form and Application 624 - III

form. The individual members of JLG would be eligible for bank loan after the bank verifies the individual members' credentials. b.

Model B: JLGs that undertake savings apart from credit are required to maintain books of accounts. They may also be granted loans by branches on the basis of performance parameters. (SHG grading chart may be used). However, the quantum of credit need not be linked to groups' savings as in the case of SHGs. The credit requirements for the group may be worked out based on combined credit plan needs of individual members. Branches may use the prescribed Introduction Form and Application form.

11. Purposes of credit: The finance to JLG is expected to be a flexible credit product addressing the credit requirements of its members including crop production, consumption, marketing and other productive purposes. 12. Type of loan: Branches may consider cash credit, short-term loan or term loan depending upon the purpose of loan. 13. Loan limit: Considering that the loan to be granted is against the mutual guarantee offered by the group, maximum amount of loan may be restricted to Rs.50, 000/- per individual both under Models A & B. 14. Rate of interest: As per existing norms applicable to Agricultural advances. 15. Margin and Security Norms : No collaterals are insisted upon against loans to JLGs. It may however, be ensured that the mutual guarantees offered by the JLG members are kept on record. Margin as per the usual norms may be applied. 16. Documents-Model A: a.

The documents to be obtained in respect of financing under Model-A

b.

i. Demand Promissory Note (DPN) ii. Self-Declaration Form iii. Application cum Appraisal Form iv. Mutual Joint Liability Agreement v. Letter of under taking vi. Agreement for Hypothecation - Agricultural Loans Model B: Documents as applicable to SHG lending may be adopted.

17. Credit to JLGs (to form normal business activity under Priority Sector): As the programme is intended to benefit farmers cultivating lands who may not have adequate collateral to offer to avail of bank loan in their individual capacity, lending to JLGs are to be treated as direct agricultural advances under priority sector advances segment. 625 - III

18. Insurance cover: The members belonging to Below Poverty Line may be encouraged to insure the following risks, which are optional. As finance to JLG is expected to be a flexible credit product, the premium amount may form a part of the financing package. i. Life and Personal Accident cover under the Janashree Bima Yojana in terms of the guidelines. ii. Health (Mediclaim) Cover under the Universal Health Care Policy in terms of the guidelines. 19. Crop insurance scheme: All the crop loan borrowers under this scheme should be given KCC and compulsorily covered under National Agricultural Insurance Scheme (NAIS) in respect of notified crops in notified areas depending on the type of crop cultivated by the individual JLG member and also under Personal Accident Insurance Scheme (PAIS) as per existing guide-lines. The premium amount in respect of NAIS, may form a part of the loan limit and in respect of PAIS, as the borrower's contribution of premium is only Rs.5 /- per borrower, the same may be debited from the borrower's loan account/SB account or recovered in cash from the borrower. 20. Monitoring and Review: Branch Heads should closely monitor the programme at regular intervals and during the Branch Managers review meetings. Branches should submit a progress report to Head Offices concerned in the prescribed format on a monthly basis as on last working day of every month so as to reach within 7 days of completion of the month to which the report relates. 21. Annexure/s: The following Annexures are appended to this Chapter: Annexure 1 : Assessing SHGs under Bank Linkage Programme Annexure 2 : Assessing SHGs under Bank Linkage Programme Annexure 3 : Assessing SHGs under Bank Linkage Programme Annexure 4 : Assessing SHGs under Bank Linkage Programme

626 - III

Illustrative Set I Illustrative Set II Illustrative Set III Illustrative Set IV

Annexure-1 to Chapter 40 Illustrative Set - I Sl. No

Category

Indicators

Rating

1.

Number of Members

Less than 10 Between 10 15 From 16 and upto 20

02 03 05

2.

Composition

Target group only Having 1 to 5 Target Group Members Having more than 5 nontarget group Members

05 03 01

3.

Age of the SHG

More than 2 years 1-2 years 6 months to 1 year

10 07 05

4.

Monthly meetings during last six months

Four and above Two to three

05 03

5.

Attendance of members in the groups meetings

More than 90% 70% to 90% Less than 70%

05 02 05

6.

Participation of members at group meetings (should be ascertained through interview)

High Medium Low

03 02

7.

Savings: If default rate is

10

Upto 10% Upto 25%

07 05

b) Quantum of Savings (through members only) Group's Internal Loaning

But default is met during succeeding month More than Rs.5000/Between Rs.2000/- and Rs.5000/Below Rs.2000/-

10 07 05

a) Utilisation of savings by grant of internal loans

Above 90% 51% to 90% 30% to 50%

10 07 05

b) Interest rate on group's internal loans. c) Group's internal loan recovery rate. d) Members benefited out of group's internal loaning. Awareness among members;

Depending upon purpose 18% to 30% Less than 18% 100% between 80% to 95% between 70% to 80% More than 50% Between 25% - 50% Less than 25% Known to all members

05 03 02 10 07 05 05 03 02 05

knowledge of SHG rules, functions, procedure of

Known to 50% more Known to less to 50%

03 02

a) Regularity

8.

9.

627 - III

Sl. No

Category

Indicators

Rating

10.

meeting, maintenance of books and records, etc., Education level

If 25% or more members

11.

Rotation of group leaders

Read, write, speak and sign Read and sign Sign only Once in two years

05 03 02 03

12.

Maintenance of books and records

Between 1-2 years Every year Without outside assistance

04 05 without outside assistance

a) Attendance Register b) Minute Book c) Loan Ledger d) Savings Ledger e) Internal Pass Book

1 4 4 4 2

1 2 2 2 1

Selection Criteria of SHGs for Linkage SCORING Status for Selection 1. SHG scoring more than 90 points

Selection without any reservation

2. SHG scoring 60-89 points

Selection with caution.

3. SHG scoring less than 60 points

Not suitable for linkage.

628 - III

Annexure-2 to Chapter-40

Illustrative Set - II

Assessing Self Help Groups under SHG Bank Linkage Programme Sl. No Composition

Indicators

Rating Key

a) Membership is homogeneous b) No homogeneity in membership

10

The rating is based on the judgement of a assessing official.

a) One year and above b) Six months and above but less than

5 10

There is no need to evaluate an SHG if it is less than six months old (ignore marginal shortfall upto 1 month)

Group meetings

a year. a) Four meetings per month b) 2-3 meetings per month c) 1 meeting per month

5 10 8

Attendance

a) More than 90% b) between 70% to 90% c) less than 70%

5 10 5

The total number of meetings conducted during the last 3 months may be divided by 3 to arrive at average number of group meetings. *Note: See explanation 1 at the end

Minutes book

a) Written in detail b) Maintained but not in detail

3 10

Peruse minutes book pertaining to meetings held during the last 3 months

Participation in group discussion

a) participation by only a few members b) Participating by majority of members

5 5 10 10

1. Peruse minutes book (if rating is 10 for item 5)

Savings (frequency)

a) 4 times a month (by majority members) b) 4 times a month (but not by majority members) c) 2-3 times a month (but not by majority)

8

2. Observe during a couple of group meetings. 3. Interact with members

Age of the Group

8 8 8

d) 4 times a month (but not by majority)

3 e) 2-3 times a month (by majority members) 5

Step 1: Take the average number of members making savings during last 3 months. Step 2: Compare this with the total number of members.

f) 2-3 times a month (but not by majority members).

Step 3: Majority means 60%.

g) 1 time a month (by majority members)

Step 4: Compare this with the total number of members. Step 5: Majority means 60% Step 6: For average number of meetings follow rating given for item 3 above. *Note: please see explanation 2 at the end

629 - III

Sl. No

Indicators

Rating Key

Savings and loan recovery (mode of collection)

a) Collected in groups meetings b) House to house collection

10 05

Ascertain from group leaders and members in this regard. Also peruse minutes book. Peruse minutes book

Style of functioning and group decisions

a) democratic and transparent b) decisions taken by few dominant members/group leaders.

10 00

Interact with members. Observe in few group meetings. Ascertain whether periodical whether periodical elections are conducted for the leadership and whether all decisions are in group meetings and on democratic lines.

Sanction and disbursement of loans

a) Selection of borrowers in group meetings b) Sanction and disbursement 2 of loans in group meetings c) Loan terms and conditions discussed in group meetings and recorded in miunutes d) utilization of loans reviewed regularly in group meetings. e) recovery of loans reviewed regularly in group meetings

2

a)Ascertain in the positions from group leaders/members. b) Peruse minutes book (each item will get marks shown against in if the condition are satisfied) peruse loan registers

I. a) Uniform rate irrespective of source of funds

5

b) Different rates depending on source of funds.

3

Ascertain from group leaders/members

II. a) Interest rates vary according to the purpose of loan

5

Peruse loan register

b) Uniform interest rate for all purposes.

3

Ascertain from group leaders/members.

a) Above 80 %

10

b) above 50% and upto 80%

5

Compare savings our standing on a given date with loans outstanding on the same date to obtain the percentage. No marks for utilisation of savings below 50%.

a) attendance cum minutes book

3

b) Saving's Register

3

c) loan ledger

3

d) bank passbook

1

Interest on SHG loans

Utilisation of savings for loaning

Books of accounts

630 - III

2 2

2 2

Each record/register it Maintained properly and upto date will get marks shown against each

Sl. No Bye laws/ group rules

Indicators

Rating Key

a) known to all members

10

b) known to most of the members

05

c) not known to many members

00

Total marks

150

Ascertain from the members through interaction

Selection Criteria of SHG for Linkage to Bank Loan 1. SHG scoring more than 120 marks out of maximum of 150 marks can be chosen for linkage. 2. SHG scoring less than 120 marks will have to be further developed before linkage. The areas of improvement may be apprised to group leaders and members. Evaluation may be again be taken after 3 months. *Note Explanation 1 Please use the following formula Total number of members attending meeting during last three months x 100 (Total no. of members in the groups) x (No. of meetings held during the last 3 months) Explanation 2 Example 1. 12 meetings during last three months the membership of SHG is 18. The respective number of members who saved in each meetings is 12, 14, 9, 7, 15, 17, 12, 13, 14, 9, 8 and 15 the average number of savers works out to (145 divided by 12) 12, the group scores 10. Example 2. In the groups, the number of members who saved in each meeting is 6, 8, 4, 9, 10, 5, 3, 4, 7, 5, 4, 7 and the average number of savers works out to (72 divided by 12) 6 the group scores 9.

631 - III

Illustrative Set - III

Annexure-3 to Chapter-40

Assessing Self Help Groups under SHG-Bank Linkage Programme Sl. No

Category

Indicator

Rating

1.

Group size

a. members less than 10 b. members from 10 to 15 c. members from 15 to 20

5 8 10

2.

Composition

1. a. Target group only b. Having 1-5 non-target group c. Having more than 5 non-target group

10 5 0

II. a. Homogeneous b. Mixed group

10 8

1. Monthly 4. meetings 2-3 meetings 1 meeting

1 10 8 5

II. a Irregular b. Regular

5 10

III. Timigs a. Night or after 6 p.m. b. Evening (between 3 and 6 p.m.) c. Morning (between 7 and 9 p.m.) d. Other timings

10 5 8 3

3.

Meeting

4.

Attendance of members

More than 90% 70% to 90% Less than 70%

10 8 3

5.

Participation

High Medium Low

10 8 3

6.

Savings

1. Frequency-Monthly 4 times 3 times 2 times 1 time

10 8 5 3

II. Regular Irregular

10 8

III. Fixed (Rate) Optional (Rate)

10 8

IV. Interest on Group Loans Nil More than 36% 24% to 36% Depending upon the purpose

0 5 8 10

V. Full Utilization Less Utilisation No Utilisation

10 8 1

632 - III

Sl. No

Category

Indicator

Rating

11.

Group rules and knowledge of Group functions

If known to all members If not known to members

10 3

13.

Awareness about

a. If all are aware b. If partially aware c. If not aware

10 5 0

Government programmes by members and banking procedures

Selection Criteria

1. SHGs scoring more than 150 points can be selected without any reservation. 2. SHGs scoring less than 150 but more than 100 points can be selected with caution. 3. SHGs scoring less than 100 points need not be considered.

633 - III

Illustrative Set - IV

Annexure-4 to Chapter-40

Assessing Self Help Groups under SHG-Bank Linkage Programme Sl. No

Category

Indicator

Rating

1.

Feeling of Homogeneity/

Very Strong

3

2.

Solidarity Feeling on

Moderate Not very much Very Strong

2 1 3

3.

Relevance of group formation Awareness about

Moderate Not very much Very Strong

2 1 3

4.

objective of group formation Regularity in meeting

Moderate Not very much <50%

2 1 1

5.

Attendance in

50-75% >75% <50%

2 3 1

6.

Meeting Regularity in

50-75% >75% <50%

2 3 1

7.

Saving Regularity in

50-75% >75% <50%

2 3 1

8.

repayment of loan The group has

50-75% >75% Has elected members

2 3 3

9.

A mix of both Follows only opinion of leaders By newly literate member

2 1 3

10.

elected executive members/follows opinion of leaders Record keeping/Book keeping etc. Operation of Bank account and other dealings with Bank

By upper class member (not elected) By animator / others

2 1

11.

Awareness about loan rules and

< 50%

1

12.

bank loan details among the members (in case of credit activity) Percentage of members availing

50-75% > 75% <30%

2 3 1

13.

loan to total members Decision on loan taken during

30-60% >60% Meeting by all

2 3 3

14.

Awareness about bye-laws and

By elected leaders By Opinion leaders Or others Written and

2 1 3

whether they are written or oral.

Strong awareness

634 - III

Sl. No

Category

Indicator

Rating

15.

Participation in discussion and

Oral but Strong awareness Oral and not aware <50%

2 1 1

16.

Group Functioning by members

17.

Creation of Emergency/core Fund Has the group able to Stand up against constraints

50%-75% >75% Yes No Yes

2 3 1 0 3 2

18.

Imposition of sanctions and enforcement of bye-laws

Still continuing Moderate extent No Strongly enforced sometimes Not at all

1 0 2 1 0

Decisions When all 18 parameters ranking is given, total ranking/score may be calculated. Based on the ranking, decision to credit link immediately or to wait for further improvement can be taken. SHGs Linkage with Bank The following criteria is suggested for consideration by Bankers while considering SHGs for Credit Linkage: (i) SHGs should have been active for atleast a period of 6 months with successful savings and credit operation with own resources. (ii) Proper Books of accounts and lending systems should be maintained. (iii) Group should be functioning in a democratic manner. (iv) The SHG members should have homogeneous back ground and interest. (v) The interest of the NGO or SHPI (Self Help Promoting Institution) in the Group should be to help the SHG by way of training and other support for skill upgradation and proper functioning. The credit is extended by Banks only after 6 months from the date of opening of SB A/c with them. Quantum of Loan First time Loan - Ratio of own fund to loan 1:1 Second time Loan - ” 1:2 Third time Loan - ” 1:4 635 - III

Purpose of Credit: It is left to the choice of the SHG. Security Since, SHG could not be in a position to offer any collateral security, the security norms for lending is to be relaxed. Documentation: The following documents are obtained 1) Loan application 2) Inter-se Agreement 3) Loan Agreement 4) DPN 5) Copy of the resolution passed in the group meeting to apply for the loan 6) Sponsorship letter from NGO, if available. 7) Open SB A/c in the name of SHG, not joint A/c. Rate of Interest NABARD to SCB - 7% SCB to DCCB - 7.5% DCCB to PACB - 9.5% PACM to SHGs - 12% NABARD provides 100% refinance for this SHG lending. Advantages 1) Reduction in transaction cost by way of externalisation of a part of items of the credit cycle (appraisal, disbursal, supervision, repayment). 2) Mobilisation of Small savings. 3) Assured and timely repayment leading to faster recycling of funds. 4) An opportunity for expansion of business and coverage of poor clientele. 5) Prospects of future quality clients.

636 - III

CHAPTER-41

FARMERS' CLUB PROGRAMME

1.

General: a.

2.

th

In terms of NABARD Circular No.23/mcid-II/2007 dated 28 February 2007, the Commercial Banks and other promoting agencies of farmers' Clubs are expected to share the cost of promoting and nurturing Farmers' Clubs right from the first year of formation of clubs effective from 1st April 2007. This was subsequently relaxed in the case of RRBs and Cooperative Banks. NABARD has further reviewed its policy for supporting Farmers' Clubs, their emerging role as “Business Facilitators”/”Business Correspondents” for institutional agencies.

Diversified Role of Farmers' Clubs: a.

Keeping in view the diversified role, being played by Farmers' Clubs, it may be necessary to address specifically the following areas so as to strengthen the programme “content” and “quality” and make it much more farmer and market friendly. i.

Capacity building of members of Farmers' Clubs especially covering aspects such as leadership, Accounting, Communication, etc. ii. Financial literacy and credit counselling iii. Business and enterprise orientation iv. Transitions with markets/corporate houses v. Graduation of Farmers' Clubs into Producers' Groups / Companies / Federation of Farmers' Clubs. 3.

NABARD Policy: a.

NABARD has formulated a new policy for extending support for Farmers' Clubs Programme, effective from 1st July 2008. The new policy will lay stress on linking technologies with Farmers' Club members and also facilitating market access through the following mechanism: i. Capacity building of members including leadership training ii. Self Help Groups (SHG)/Joint Liability Groups (JLGs) Formation iii. Forming federations of Farmers' Clubs/Producers' Groups/Companies iv. Linkage with technology institutions/markets

b.

NABARD has decided to support recurring expenses of farmers' counselling and training centres set up by institutional agencies to the extent of Rs.15 lakhs or 50% of the recurring expenses p.a., th whichever is lower (circular No.43/DPD.FD-02/2008 dated 27 March 2008). NABARD has also set up a Farmers' Technology Fund (FTTF) with a corpus of Rs.25 crores to be used to facilitate 637 - III

transfer of technologies and market linkages especially through Farmers' Clubs besides need based support for formation of Producers' Groups/Companies, Federations of Farmers' Clubs (circular th No.117/DPD-FS-FTTF/2008 dated 11 June 2008). c.

All Regional Rural Banks have been directed by Union Finance Minister to have at least one Farmers' Club per Branch. In view of the importance attached to the programme, by NABARD and GoI and also in the context of the business advantages that accrue to institutional agencies, NABARD encourages banks to adopt the Farmers' Club Programme (FCP) as part of their corporate goal and strategy on the lines of Self Help Groups - Bank Linkage Programme. In the context of financial inclusion, Village Development Programme and also RBI's circular on Business Facilitator/Business correspondent models, it would be most appropriate, if the institutional agencies initiate efforts to form at least two-three Farmers' Clubs by each of their rural branches.

d.

Under the new policy, NABARD has segregated the requirements of Farmers' Clubs into 'routine' and 'non-routine' activities and restrict the support to routine activities to the barest minimum, so as to make the programme more performance and purpose oriented.

e.

Highlights of the New NABARD Policy for extending support for Farmers' Club Programme: i.

st

The new policy will cover all existing and new clubs and become operative from 1 July 2008. It will also supersede all previous instructions on the programme.

ii. All institutional agencies (Commercial Banks, Cooperative Banks and Regional Rural banks) and all grass-root level organisations (NGOs, PRIs, State Agricultural Universities, KVKs, ATMA, Post Offices, etc.) are eligible to form Farmers' Clubs. iii. NABARD assistance to all agencies will uniformly be Rs.10,000/- per club per annum for a period of 3 years irrespective of whether they are institutional or other agencies and also the region concerned. The assistance will be towards meeting the following minimum and mandatory expenses. : Rs.2,000.00 : Rs.5,000.00 : Rs.3,000.00 -----------------: Rs.10,000.00 -----------------iv. Assistance exceeding Rs10,000/- may be met by the sponsoring agencies. v. NABARD has segregated the requirements of Farmers Clubs into 'routine' and 'non- routine' activities, which are listed in this chapter. vi. All 'non-routine' activities of the clubs can be supported by NABARD on merits. ! ! !

Formation and maintenance expenses Awareness/orientation meet at base level Meet with experts programme (2 programmes in a year)

638 - III

vii. Sponsoring banks are expected to give a consent letter for maintaining the clubs beyond the agreed period of 3 years of NABARD assistance. viii. NABARD will release the assistance of Rs.10,000/- in two instalments (50% by way of release in advance and the remaining 50% by way of re-imbursement). ix. There is no restriction on number of clubs to be formed by various agencies. x. To facilitate the graduation of Farmers Clubs into Federations of Farmers Clubs or Producers' Group/Companies, it would be desirable for the sponsoring agencies to rate the Farmers Clubs as per parameters indicated by Nabard. However, the rating of the clubs is not linked to any releases to be made out of the assistance under the new policy. xi. NABARD's CAT (Capacity Building for Adoption of Technologies) may be used for the benefit of Farmers Club members for training and exposure visits within and outside the state. xii. Sustainability of Farmers Clubs may be ensured through creation of a corpus at the club level through measures such as the following: ! Token Membership fee (to be decided by club members) ! Monthly savings (to be decided by club members) ! Service charges for SHG/JLG loans recommended to banks @ 0.5% and 1%. (This is suggestive and club members can decide themselves). ! Commission for selling insurance products (as per negotiations with individual insurance companies) ! Incentive/commission for acting as “Business Facilitators” for banks to be negotiated with individual banks). ! Any other charges for services provided to other agencies like Government, corporate bodies, etc. Such steps /measures will make the Farmers' Clubs self-sustaining over a period of 3-5 years, when funding support by institutional agencies is withdrawn. 4.

Farmers' Club -Routine and Non-routine Activities*:

Sl. No.

Routine

Non-routine

Expenses relating to 1.

Formation of Farmers' Club

PRA exercise /Training

2.

Maintenance of the clubs for 3-5 years

Skill development training / AEDPs

3.

Awareness / orientation meets

Exposure visits within and outside states

4.

Preparation of plans

Implementation of special projects / programmes

5.

Identification of borrowers

Transfer /adoption of new /innovative technologies

6.

Maintenance of Village Profile /Data/MIS etc.

Publication of materials in local languages (on selective and need basis)

639 - III

Sl. No.

Routine

Non-routine

7.

Recoveries

Formation and nurturing of SHGs (to act as SHPIs)

8.

Any other expenses in connection with specific work assigned by banks/NGOs / Govt. departments, etc.

Marketing related expenditures such as participation in exhibitions / Fairs / Melas / futures trading

9.

Access to e-education /IT enabled services /Kiosks. Any other innovative activity

10. *These are only illustrative and not exhaustive. 5.

Rating of Farmers' Clubs-Broad Parameters

Sl. No.

Particulars

1. i. ii. 2. 3. i. ii. iii. 4.

Formation of FC (By Banks/NGOs/other Agencies) Men Women Role clarity amongst FC Members Functions of FC Normal (Routine) activity Non-routine activity Innovative activity Relationship with sponsoring agencies (Banks, NGOs, Aus, PRIs, KVKS, etc.) Nature of work done On behalf of sponsoring agencies On their own behalf Work done on any other agency's behalf Commission / fee, if any received Any savings or corpus fund created amongst FCs Yes No Impact on functions undertaken on behalf of Increase in flow agriculture / non-farm Credit Increased access in terms of new and repeat borrowers Increase in deposit mobilisation Increase in recovey of farm and non-farm credit Reduction in transaction cost

5. i. ii. iii. iv. 6. i. ii. 7. i. ii. iii. iv. v.

Marks

640 - III

2 3

5 20

5 10 10

25 5

5 3 2 5 5 Nil 1 1 1 1 1

15

5

5

Sl. No. 8. i. ii. iii. iv. v. vi. vii. viii. ix. x.

Particulars

Marks

Other Activities No. of visits of agricultural experts organised No. of farm demonstrations conducted No. of exposure visits undertaken New technology, if any adopted No. of SHGs promoted and linked with banks Involvement in providing backward and forward linkages to farmers No. of other social activities organised No. of meetings conducted Members' participation in the meeting Maintenance of records by club Total

2 2 2 2 2 2 2 2 2 2

Note: Sl. No.

Category

FCs score range

1.

More than 90

Excellent

2.

Between 70 and 90

Very good

3.

Between 60 and 70

Good

4.

Between 50 and 60

Average

5.

Between 40 and 50

Below average

6.

Below 40

poor

641 - III

20

100

CHAPTER 42

APPRAISAL OF LOAN PROPOSALS OF SMALL AND MICRO UNITS 1.

General: a.

2.

Appraisal of loan proposals is an “art of lending” and requires professionalism on the part of Bank Manager. The appraisal may vary from borrower to borrower, unit to unit, product to product, segment to segment, type of loan to loan etc. Different tenets are to be applied accordingly while appraising the loan proposals. In the case of micro units, sophisticated technical appraisal may not be necessary. It may be enough to appraise the borrower and his business so as to ensure sufficient cash accrual which will be available for repayment of Bank loans.

Objectives: a.

The objectives of appraisal of credit proposals are: i. Identification of “Credit Risk” associated with the borrower and his business. ii. Assessing whether there will be prompt repayment of loans by the borrower in time.

3.

4.

Credit Risks: a.

Credit Risks include: i. Business Risk ii. Financial Risk and iii. Default Risk.

b.

These risks should be identified and assessed before sanctioning of loans. The appraisal of credit will help in this direction.

Appraisal Aspects: a.

Appraisal of the borrower: i.

The success or failure of a business enterprise largely depends on the capability of the entrepreneur to manage men, money, materials, machinery, market and technology. Hence the appraisal of the borrower occupies a first place. The tools of appraisal are; 

Application Form,



Interview of the borrower and the Surety, if any

 Pre-sanction Inspection Report. ii. The borrower's capital / margin money invested / proposed to be invested, his ability to manage his business qualification and experience in the business can be assessed from the 642 - III

information provided in the application. The Assets and Liabilities of the borrower and his surety should also be analysed from the information provided therein. The trust worthiness of the borrower should also be assessed. Interview with the borrower / surety will enable the Bank Manger to get clarifications and additional information required, if any. The preinspection of borrower's unit and his residence will through light on: 

Borrower's life style.



His visible wealth.



Correctness of the information given in the application form.



Antecedents of the borrower.



His neighbourhood and relation with them and

 His other business or income, if any. iii. The credit worthiness and financial position of the borrower can also be assessed by going through the Income Tax / Sales Tax assessments and other tax receipts. iv. The surety should also be interviewed on the same lines, besides taking the proof of his income and the statement of Assets and Liability when a guarantee is to be obtained from him for the repayment of loan. b. Appraisal of the Project Proposal: i.

The appraisal of technology should relate to the following points: 

Cost effectiveness.



Flexibility for future expansion



Appropriate to the nature of production



Not becoming obsolete very soon and

 Capability to produce different quantities and qualities of the same product. ii. Infrastructure: It should be satisfied that the infrastructure like land, work shed, sufficient power, water, other fuels etc. are available. It should also be verified whether different types of raw materials are available freely and reasonable costs. The road / rail and other transport facilities are also available. The availability of cheap labour in the area is also another important factor to be reckoned. iii. Product Quality and Quantity: We should satisfy ourselves about the feasibility of the projected quantity and quality of the product with the given technology and raw materials available and the capacity of the machinery. iv. Sales and Marketing: If the products need to be sold and at a reasonable profit margin, we must assess: 

The unit price of the product,



The area of market,



Easy access to the market / concerned area, 643 - III

c.



Marketing arrangements, whether through unit's distribution network or through agency, if so, the commission payable to the agent,



The period of credit to be allowed to the purchasers of the products,



Competition of other entrepreneurs producing and selling the same product in the area. It is not enough that the products are produced, but they should be sold within a reasonable period, to sustain viability.

Financial Appraisal: i.

We have to undertake financial appraisal to assess the capital investment required to establish the unit upto the stage of production. The capital investment should include the costs of:  Purchase or leasing of land. 

Site development.



Construction of work shed



Purchase and erection of plant and machinery, tools and equipment.



Pre-operational expenses.



Promotional activities of marketing initiated before the commencement of production.



The total cost of investment should be estimated by looking at the project estimates and purchase invoices or quotations. We must assess the Bank's term loan finance after taking into account the capital invested/ to be invested by the borrowing unit and the borrowings from other sources, if any. ii. Working Capital Requirement: 

The next step is to calculate the Working Capital required to sustain continuous production. Assessment of Working Capital is to be done on the basis of “Operating Cycle'. Working Capital is required to finance Current Assets engaged in the production process. The Working Capital amount should be computed on the basis of “Working Capital Turnover Ratio” which can be worked out as under: 365 ÷ length of the operating cycle = times of rotation in a year



If the period operating cycle is 40 days, there will be a turnover of 8 to9 times in a year. The Working Capital required can be assessed by dividing the estimated operating expenses by the number of turnover in a year. iii. Margin Money: Except in the case of micro / tiny units, the margin money available in the business should be assessed. The margin money / liquid surplus is indicated by the difference between “Non-Current Liabilities and non-Current Assets. iv. Current Assets: Current Assets comprise of cash and other Assets or resources commonly identified as funds which are reasonably expected to be realised in cash or gold or consumed or turned over during the operating cycle of the business usually not exceeding one year. v. Current Liabilities: These are otherwise known as short term liabilities. All liabilities which are repayable within a period of one year are grouped under current liabilities i.e. acceptances, 644 - III

sundry creditors, advance payments, unexpired discounts, unclaimed dividends, interest accrued but not due on loans, etc. Other than the current assets and current liabilities have to be classified as non-current assets and non-current liabilities.  The Working Capital to be sanctioned by the Bank can be assessed as given below: Working Capital amount required for one operating cycle :Rs……………… LESS: Credit purchases and advances against Orders :Rs…………… LESS: Margin Money :Rs……………… Net Working Capital eligible for Bank Finance :Rs…………… d. Viability Analysis: i.

The next step should be to assess the financial viability of the unit by computing the “BreakEven Point (BEP)”. The B.E.P. indicates that level of production or sales turnover at which the unit makes neither profits nor loss. The production / sales over and above B.E.P. level will yield profit to the unit. The higher the production level required to meet the expenses of the unit, the vulnerable is the unit, as even a small fall in the production level will affect the viability and profitability. ii. The B.E.P. can be calculated as: 

B.E.P. = Fixed Costs ÷ Value of Sales Variable Costs x 100 = ……..%



B.E.P. Sales = Sales x B.E.P. (%)

 B.E.P. Units = Units produced x B.E.P. (%) iii. Fixed Cost: Fixed cost are those which have to be met regardless of whether the unit operated or not. Example: Rent, Interest on borrowings (Term Loans) salaries, wages and permanent labour, taxes, insurance, depreciation, etc. iv. Variable Cost: Variable costs, on the other hand, have definite relation to the volume of production. These cost related to materials, power bill, wages to temporary employees/ labourers. v. Margin of Safety: It indicates as to what extent the sales may decline before the unit starts incurring losses. The distance between break-even point, and the point of actual sales indicate the margin of safety. 

Actual sales

-

Rs. 75,000/-



Sales at Break-even point

-

Rs.50,000/-



excess sales

-

Rs.25,000/-



Margin of safety expressed as %

=

Rs. 25,000 x 100 = 33.33% 75,000

 In other words, the Company will incur losses if the sales decline by more than 33.33%. vi. Study of the B.E.P. is important to assess the viability, profitability and debt repayment capacity of the unit. 645 - III

e.

Assessment of Cash Accruals / Repayment of Debt: i. To ensure the loan repayment capacity of the borrowing unit, cash accruals from operations should be assessed with the help of the profitability statement. Cash should be assessed with the help of the profitability statement. Cash surplus is generated after meeting the total cost of production and interest payable on Cash Credit Limit etc. A Portion of the cash surplus is available for repayment of term loans / composite loan and the balance towards depreciation and retained profit. ii. The amount of instalment (both principal and interest) of term loan and the repayment period have to be fixed on the basis of Debt Service Coverage Ratio (DSCR) which can be computed thus: 

iii.

iv. v. vi.

vii.

5.

6.

-DSCR = Net Profit after Tax + Depreciation + Term Loan Interest Term Loan instalment (Principal & Interest) The desired ratio is 2:1. in other words the instalment of Term Loan should not exceed 50% of the cash accrual / surplus. The balance of cash surplus will be available to take care of the depreciation and sustenance allowance to the proprietor(s) of the unit. In the case of small and micro units, Term Loans and Working Capital finance are sanctioned in the form of “Composite Loan” repayable over a period of time from and out of cash surplus. The DSCR will enable the Bank to fix the amount to Term Loan instalment and the period of repayment. In the case of new units, projected average DSCR should be calculated for the period of repayment. The repayment schedule may be reconsidered as and when DSCR changes adversely in the future years. This is to be done to avoid any possible default of repayment of Term Loan by the borrower. In short, the appraisal of credit proposal should focus on Man, Money, Machinery, Material, Men, and Market. The Bank Manager should be a good lender and recovery expert.

Sanction of Loan: a.

After satisfying with the appraisal of loan proposal, the loan should be sanctioned by the appropriate authority of the Bank. The letter of sanction with terms and conditions should be sent to the borrower, advising him to sign and return the copy of the letter, thereby signifying his acceptance to the terms and conditions.

b.

NOTE: The analysis and interpretation of Balance Sheet Ratios is not done here, as the appraisal relates to Micro and Small units. However this exercise is a must in the case of SSI units, Medium and Large units. A case exercise on financial appraisal of a Micro Unit is given in the Annexure 1 to this Chapter.

Break Even and Contribution Analysis: If any concern whether Industrial or trading, a number of decisions have to be taken by its management on the following factors: a.

The total quantum of sales which will be required to make profit. 646 - III

b.

The range of prices at which the product can be sold.

c.

Whether a particular product should be purchased from the market or should be manufactured by the unit itself.

d.

To help the management in taking proper decision in issues of the above nature, exercises known as “Contribution Analysis” and “Break Even Analysis” are carried out in all progressive enterprises: i.

What is Break Even Point: The Break-even point of an enterprise may be defined as that level of sales at which it recovers all its costs (including depreciation). At this point, the organisation neither makes a profit nor incurs a loss i.e. it provides an effective index of the viable or minimum level of activity that ought to be achieved by the enterprise.

ii. Calculation: Bifurcate the total costs incurred by a unit in producing the product into fixed and variable items of cost: BEP / BEL

:

assume :

BEP

Fixed Costs . Selling price per unit Variable Cost per unit Rs.20,000/- is Fixed cost Rs.10/- per unit selling price Rs.6/- per unit variable cost.

20000 = 20000 = Rs.5,000/-. Rs.10 Rs.6 Rs.4 iii. What is contribution: Having segregated the costs into fixed and variable, the next step is to calculate the contribution. The difference between sales revenue and variable costs is known as “Contribution”. This represents the surplus revenue available to meet fixed costs. Exp. :-

7.

=

Rs.10/- per unit Selling Price Rs.6/- per unit - Variable cost Rs.4/- per unit - Contribution available to meet fixed costs.

Annexure/s: a.

The following Annexure is appended to this Chapter:

Annexure 1 : Case Study on Financial Appraisal of an Apiary Unit

647 - III

Annexure 1 to Chapter 42 FINANCIAL APPRAISAL OF AN APIARY UNIT A beekeeper is having 10 beehives at present. Considering the potential and his capacity to manage more number of beehives, he desires to expand his unit size to 60 by adding 50 more hives. The beekeeper has estimated the project outlay at Rs.56,000/-, comprising block capital of Rs.41,000/- and recurring expenses for the first year at Rs.15,000/-. He is eligible to avail 25% capital subsidy from the KVIC as the costs adopted by him are in conformity with the norms of KVIC. In addition, the beekeeper is prepared to contribute 25% of the investment cost out of his own resources. He has submitted his project report to his Branch seeking sanction of bank loan to the extent of Rs.28,000/-. The bank loan, if sanctioned, will carry interest at 16% p.a. and the opportunity cost of the borrower's margin money is 15% p.a. The details of initial investment cost as well as the recurring expenses for the first year as culled-out from the project report are furnished hereunder : Beehives: 50 Nos. @ Rs.500/- per hive Cost of 50 bee colonies @ Rs.200/- per colony 50 Hive stands @ Rs.80/- per stand Honey extractor Knives, smokers, feeding bottles, etc. Plastic drums for storing honey 3 Nos. Total

Rs.25000.00 Rs.10000.00 Rs. 4000.00 Rs. 500.00 Rs. 500.00 Rs. 1000.00 Rs.41000.00

Recurring expenses for the first year 1. Feed cost @ 2 Kg sugar per hive for for 50 Bee-hive at Rs.16 per kg 2. Labour charges for 70 days @ Rs.100 per day 3. Migration cost Total

Rs. 1600.00 Rs. 7000.00 Rs. 6400.00 Rs.15000.00

Means of finance Borrower's margin Rs.14000.00 Capital subsidy from KVIC Rs.14000.00 Bank loan Rs.28000.00 Total Rs.56000.00 Yield of honey: 8 Kg per hive in the first year and 14 kg from the second year onwards. Sale price of honey: Rs.50.00 per kg. Income from wax has been ignored, as the same is not significant. The salvage value of the 50 beehives and the colonies at the end of the fifth year can be taken at Rs.15,000/The Branch Manager is satisfied with the costs and prices assumed in the project report as also the experience and managerial capacity of the beekeeper. You are requested to do a SWOT analysis of the 648 - III

proposal and appraise the same adopting the DCF criteria. The beekeeping activity is occasionally affected due to un-seasonal rains. Assuming that there will be un-seasonal rains, which is expected to affect the yield of honey by 10% examine whether the investment is still viable and the loan can be sanctioned. CASE EXERCISE ON THE FINANCIAL APPRAISAL OF AN APIARY UNIT SOLUTION Calculation of Cost of Capital Cost of capital = Proportion of equity & subsidy x opportunity cost + proportion of debt x cost of debt = 0.50 x 15% + 0.50 x 16% = 7.5% + 8.0% = 15.5% Income and Expenditure (Amount in Rupees) Items I year II year Initial investment cost 56000 Annual recurring Expenses 15000 Total Cost 56000 15000 Expenditure Sale proceeds 20000 35000 of honey Net Benefit (36000) 20000 D.F. @ 16% 0.862 0.743 Present value 48272 11145 of costs Present value of Benefits 17240 26005 Present value of Costs (Total): 84452 Present value of Benefits (Total): 101660 Net Present Value (NPV) = 101660 84452 = 17208 Benefit Cost Ratio = 101660 / 84452 = 1.2 D.F. @ 40%: 0.714 0.510 0.364 NPV = - 25704 + 26400 = + 696 D.F. @ 45%: 0.690 0.476 0.328 0.226 0.156 NPV = - 24840 + 23720 = - 1120 IRR = 40 + (45 45) x 696 / (696 + 1120) = 40 + 1.9 = 41.9%

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III year -

IV year -

V year -

15000 15000

15000 15000

15000 15000

35000

35000

35000

20000 0.641 9615

20000 0.552 8280

20000 0.476 7140

22435

19320

16660

0.260

0.186

Sensitiveness Analysis (When the yield of honey decreases by 10%) Item Year I Year II Year III Year IV Year V Income 18000 31500 31500 31500 31500 Net Benefit (38000) 16500 16500 16500 16500 D.F. @ 16%: 0.862 0.743 0.641 0.552 0.476 NPV = - 32756 + 39798 = + 7042 As the IRR of the project works out to more than 16%, which is the hurdle rate, even when there is a reduction in income to the extent of 10%, the project can be considered as financially viable. Repayment Schedule Year : I II III IV Gross surplus 20000 20000 20000 20000 Repayment of principal 7000 7000 7000 7000 Payment of interest 4480 3360 2240 1120 Total outflow 11480 10360 9240 8120 Net surplus 8520 9640 10760 11880

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CHAPTER-43

SCB SPECIFIC LOAN SCHEMES 1.

General: a.

2.

Some State Cooperative Banks have been innovative in their approach and have created new schemes and loan portfolios to assist their borrowers. Some of these innovative schemes are described in this Chapter.

Revolving Cash Credit: a.

The Punjab & Haryana States have introduced and are operating a new / fresh line of credit to farmers which is called a “Revolving Cash Credit”.

b.

This facility is provided to progressive farmers against collateral securities to meet out their socio economic requirements upto Rs. 3.00 lakhs in Punjab and upto Rs. 2.00 lakhs in Haryana.

c.

Salient features of the scheme: i. This loan facility by way of Revolving Cash Credit is provided only to owner of the land. ii. Limit is operative for 1 year - The operations in the a/c is reviewed and renewed after 12 months from the date of original sanction. iii. Revenue Official (Patwari) will have to certify about the land holding of the applicant. iv. Branch Manager of the DCCB concerned issues the loan application to the individual. v. Copy of Ration Card; recent Passport size Photos to be provided along with the limit application. vi. “No Dues” certificate from all banks and PACS in that area to be provided. vii. Branch Manager after verifying all the particulars and enclosures recommends to the HO for sanction. viii. Individual (applicant) is admitted as a “Nominal Member” ix. Loan application is scrutinized by the Loan Section in the HO of DCCB then sanctioned by the authorized official of the DCCB. x. Then DCCB HO sends the sanction letter and the relevant file to the Branch and the xi. Branch Manager Communicates the sanction order to the applicant. xii. Loan a/c is opened and maintained in the branch. All documents will be with the branch. xiii. A Pass Book and one Cheque Book will be issued to the borrower. xiv. For loan upto Rs.1 lakh one acre of land and for loans upto Rs. 3 lakhs two acres of land will have to mortgage in favour of the DCCB and registered without stamp duty. xv. Interest at the rate of 15% pa is charged. xvi. This loan is in addition to regular crop loan. 651 - III

xvii.Those tenants for Temple properties or Wakf Board properties, though eligible for normal/ regular crop loan, are not eligible for availing this revolving Cash Credit. d.

3.

The specimen of formats such as the Report of the Branch Manager, specimen of the Certificate from the Secretary of PACS, application for nominal membership and the office note on the same, Demand Promissory Note, Cash Credit Agreement etc. are given in the Annexures to this Chapter.

Kalinga Kissan Gold Card Scheme of Orissa State Cooperative Bank: a.

Scheme: i.

The Orissa SCB, considering the multi-dimensional problems faced by PACS, the DCCBs and in turn the SCB itself in the issue and recovery of short term agricultural loans like coverage of borrowing membership remaining static in view of increasing defaulters and mounting over dues in certain districts there by affecting the recycling of funds / credit in the state, formulated and launched a unique and innovative scheme called “Kalinga Kissan Gold Card” to reward the regular repayment habits of farmer members of PACS.

b. Objectives: i. To facilitate the Kalinga Kissan Gold Cardholders avail of a package of facilities and benefits. ii. To create a conducive recovery climate in the State. iii. To boost up agriculture production and productivity by facilitating increased use of hybrid seeds, fertilizers, pesticides and advanced technology. iv. To empower the rural people to make use of the facilities provided under different schemes and avail of the said facilities without any hassle and without running from pillar to post in the process. c.

Eligibility: i.

A farmer member of the PACS satisfying the following criteria shall be eligible to get a Kalinga Kissan Gold Card: 

Member of the PACS for past 3 years.



Should have availed SAO loans from the PACS at least for a period of two years.



Should not have been a defaulter for the last two years.



The Card shall be ceased to be in operation from the dare of default of the borrower.

d. Package of facilities for the “Kalinga Kissan Gold Card” holders: i. Loans shall be available at 1% less interest than the prevalent rate. ii. Free accident insurance of Rs. 25,000/iii. Consumption loan up to Rs. 3,000/- at a rate of interest at par with SAO loan. 652 - III

iv. Free membership of “Kalinga Kissan Gold Card Club” at District level. Selected card holders shall be taken on a study tour once in a year to see advanced agricultural practices, rural banking and agricultural Short and Long Term applications in the field etc. v. Eligible for a lottery to be conducted among the card holders on the Foundation Day. Three prize @ Rs. 50,000/-, Rs. 30,000/- and Rs. 20,000/- shall be distributed to the first, second and third lucky winners. vi. The card holders shall be free to purchase fertilizers and pesticides from the retail outlet of MARKFED, PACS/ LAMPS/FSS/retail dealer in the market. vii. Schematic loans shall be available on a priority basis. 4.

Annexure/s: a.

The following Annexures are appended to this Chapter Annexure Annexure Annexure Annexure Annexure Annexure Annexure

1 : Specimen of the Report of the Branch Manager for Revolving Cash Credit 2 : Specimen of Certificate from Secretary of PACS 3 : Specimen of the application for Membership and the report of the Branch Manager 4 : Specimen of the Demand Promissory Note 5 : Specimen of the Letter of Continuity 6 : Specimen of Cash Credit Agreement 7 : Specimen of Operational Guidelines for 'Kalinga Gold Card Scheme' of Orissa SCB.

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Annexure-1 to Chapter-43 THE FATEHGRAPH SAHIB CENTRAL COOP. BANK LTD. B.O. (Punjab State) REPORT OF THE BRANCH MANAGER

Sh.____________________________S/o. Shri_______________________________ village _____________________Tehsil___________________Dist. Fatehgraph Sahib has applied for Cash Credit Limit of Rs. ___________________ (Rs._________________) against his land holding of _____________acres in his name situated in village______________(Fard, Jamabandi attached). He is a member/not a member in village _________________ (Fard, Jamabandi attached). He is a member / not a member of the C.A.S.S. He has never defaulted in the repayment of crop loan for the last three crops. I have personally verified all the particulars of the applicant which I certify to be correct. I have also verified the land having Khasra No.___________________in village_______________being offered by the Borrower as security which is accessible by pucca / kacha road and it is a good security. This case fulfils all the conditions stipulated in the rules framed by R.C.S. Punjab issued vide No. No. 1265 dated 1.12.1997 and Head Office instructions issued vide no. 11030-51 dated 6.1.1998. I, therefore, recommend that Cash Credit of Rs._______________ (Rs.______________) may be sanctioned to Sh.__________________ S/o. Sh.______________of vill._________.

BRANCH MANAGER B.O________________ FOR HEAD OFFICE USE The Branch Manager B.O._________________has recommended and submitted above mentioned application for sanction of Cash Credit Limit of Rs.___________ (Rs._____________) to Shri_________________s/o. Shri____________________. All the documents have been examined and are correct. As per Fard JAMABANDI total land in the name of application is _____________acres. Hence limit of Rs.____________ may be sanctioned against mortgage of land as mentioned in the application

ACCOUNTANT DY. MANAGER Sanctioned C.C.Limit of Rs._______________(Rs._______________________) to the above mentioned applicant. MANAGER H.O.

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Annexure-2 to Chapter-43

SPECIMEN OF “CERTIFICATE FROM SECRETARY OF PACS” CERTIFICATE 1 . C e r t i f i e d t h a t S h r i . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ S / o . S h . _ _ _ _ _ _ _ _ _ _ _ _ _ Vi l l a g e ___________P.O._________________Teh._________________________Dist. Fatehgarh Sahib is the member of the ____________C.A.S.S. and his khata No. is __________________. He is a regular payee of all the loan installments from the last three crops and at present he is not defaulter in any loan of the society. He has a regular account with this society, hence the bank may advance loan under Cash Credit Limit to this farmer. 2.Shri_____________________________S/o/ Shri.____________________ Village __________________Post Office __________Tehsil__________Distt Fatehgarh Sahib is not member of this society. (Secretary) The Pry. Agri.Ser.Society Ltd.

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Annexure-3 to Chapter-43 SPECIMEN OF “APPLICATION FOR MEMBERSHIP / MANAGER'S REPORT” The Manager The Fatehgarh Sahib Central Coop. Bank Ltd., Sirhind. SUBJECT: NOMINAL MEMBERSHIP Sir, I beg to request that I want to avail Cash Credit Limit from the Bank for Agriculture Machinery equipments, consumption & Socio economic needs. So it is requested that I May please be admitted as Nominal member of the Bank. I shall abide by the terms and conditions as laid down in the Punjab Coop. Societies Act 1961, and the rules framed there under and bye-laws of the bank as amended from time to time. Thanking you Yours faithfully, (Signature) Name: S/o.Shri. Village The. Dist. Fatehgarh Sahib. OFFICE REPORT Shri._____________________________________S/o._______________________ Vill._____________Teh.________________Dist. Fatehgarh Sahib has deposited admission fee of Rs.1/on _______________.He is eligible to be enrolled as a Nominal Member of the bank. So, it is recommended that he may please be admitted as Nominal Member. The Borrower is well known to be and he has signed in my presence. BRANCH MANAGER B.O.______________ Admitted as Nominal Member MANAGER H.O.

656 - III

Annexure-4 to Chapter-43 SPECIMEN OF “DEMAND PROMISSORY NOTE” Rs._______________

Place: _________ Dated: _________

On demand I promise to pay to the Fathgarh Sahib Central Coop. Bank Ltd., B.O______________________________or order the sum or Rs.______________for the purpose of repair and purchase of agriculture machinery, purchase of pesticides, consumption and other socio-economic needs with interest thereon @ 18% p.a. from the date of drawal to the date of payment in full with half yearly rests. i.e. 30.9 and 31/3. I also undertake to pay penal interest @ 3% over and above the normal rate of interest, in case, I fail to abide by the terms and conditions of the Agreement and Sanction letter. I also undertake that any change in the rate of interest, penal rate of interest or any other condition for the grant of Cash Credit Limit shall be acceptable and binding upon me. Signature of the Borrower Name_________________ S/o. Sh._______________ Address:______________ _____________________ _____________________ Distt. Fatehgarh Sahib. (Affix revenue stamp)

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Annexure-5 to Chapter-43 SPECIMEN OF “LETTER OF CONTINUITY” Whereas on ___________________20…. ___________the Fatehgarh Sahib Central Coop. Bank Ltd., B.O.__________________________hereinafter referred to as Bank has agreed to open a Cash Account for purchase and repair of Agricultural Machinery, purchase of pesticides etc. and for consumption purpose not exceeding Rs.____________ (Rupees:__________________Sh._________________________ resident of village ______________P.O._________________Teh.____________Dist. Fatehgarh Sahib, hereinafter referred to as the Borrower and member, on such terms and conditions as have been set out in the Cash Credit Agreement (Consumption purpose) dated______________Between the member and the Bank in consideration of the said sum, the member has delivered to the Bank Demand Promissory Note for the sum of Rs. ______________(Rupees:____________________). I, hereby agree to undertake that the said Promissory Note for Rs._______________ (Rupees:_________________________________________) shall operate as continuing security for all moneys existing and further which may at any time hereafter become due in the said Cash Credit Account, not withstanding that it may in the meantime or from time to time brought to credit. Place: Dated:

Signature of the Borrower) Name_______________ S/o.________________ Vill.________________ P.O._______________ Dist. Fatehgarh Sahib.

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Annexure-6 to Chapter-43 SPECIMEN OF “CASH CREDIT AGREEMENT” An agreement made this _______day of _____20…_____ between Shri._________________, S/o Shri.___________Vill. ____________Teh._______________Dist.________Fatehgarh Sahib (hereinafter called the Borrower, which expression shall include its successor and assigns) of the one part and the Fatehgarh Sahib Central Coop. Bank Ltd., having one of its branches at ______(hereinafter called the Bank, which expression shall include its successor and assigns) of the other part. Whereas at the request of the Borrower the Bank has agreed to advance to the Borrower by way of Cash Credit accommodation for repair and purchase of agricultural machinery and equipment, purchase of pesticides etc., consumption purpose and other socio-economic needs from time such sums not at any time to exceed Rs.________ (Rupees:__________) in the manner and to the extent hereinafter mentioned, now it is agreed by and between the parties hereto as follows:1.

That the Bank shall not under this agreement, be required to make advances exceeding the sum of Rs.______inclusive of interest and other charges at any time.

2.

That the interest at the rate of __________% per annum Shall be calculated on the daily balance of the said Cash Credit account until the same is fully liquidated and shall be charged to the account half yearly on the last working day of September and March each year, and it will form part of the principal and will earn interest at the above rate. The interest rate, however, shall be subject to such variations as per directives by the RBI/NABARD from time to time.

3.

That the Borrower agrees that in case of default of any amount he shall pay penal interest. @ 3% over and above the normal rate of the interest on the amount.

4.

That on demand being made by the bank on any earlier date, the Borrower shall pay to the Bank, the balance then outstanding and owing to the bank on the said account inclusive of interest at the rate mentioned above to the date of payment together with all charges and expenses incurred by the Bank as ascertained in the books of the said bank, which Borrower agrees to accept as sufficient proof of the correctness thereof, without the production of any voucher or paper.

5.

That the Head Office of the bank being at Sirhind the bank will be at liberty to sue the Borrower at Sirhind or any place in Punjab State.

6.

That in case of any dispute between the Borrower and the Bank the borrower shall be liable to pay cost having been incurred by the Bank.

7.

That the Borrower has delivered to the bank a demand Promissory Note dated ____for Rs.____ _ duly executed and signed by him to do so to secure payment of the sum which may at any time become due to the bank under this account and this demand promissory note will be continuing security for the Cash Credit account notwithstanding it may in the meantime, or at any time or from time to time be brought to credit until notice in writing that the same is closed, is given by the Bank. 659 - III

8.

That the borrower has mortgaged his one acre of land in favour of the bank to avail the Cash Credit Limit which is free from all encumbrances and mutation of the same have been recorded in the revenue record. The said property will not be disposed off by the borrower in any way till the entire loan of the bank along with interest and other expenses is repaid. The said properly will remain under cultivation of the borrower and will not be given on rent by him till the realization of the Bank loan.

9.

That the Borrower will pay the entire taxes etc. to the Govt. well in time and if he/she fails to pay the same, the bank will pay the amount when required to do so, debiting the Cash Credit account.

10. That the bank shall always be at liberty to stop making advances at any time without assigning any reason, even though the said limit of Rs._____________has not been fully availed. 11. That the Borrower shall not be entitled to any interest for any sum which may at any time stand to their credit in this account. 12. In case of any dispute arising out of this agreement the Borrower shall be bound by arbitration under Punjab Coop. Societies Act 19671 and undertakes not to resort any civil suit on dispute. 13. That the Borrower will abide by the Bye-laws of the Bank, Punjab Coop. Societies Act and Rules thereof and all other conditions as member of the Bank. 14. That in case the borrower failed to repay the loan and the bank had to realize the loan by selling the land mortgaged in favour of the bank, but the amount so realized is not sufficient to liquidate the loan in full, then the Bank shall have every right to recover the loan from the borrower by selling other properties of the borrower or from any dues receivable by him from any quarter. 15. That the repayment in C.C. limit shall be at least equal to the drawal or maximum limit sanctioned whichever is less during the year. Otherwise it shall be treated as overdue and penal rate of interest. @ 3% shall be charged over and above the normal rate. 16. That the terms and conditions given in the sanction letter of the bank shall also form part of this agreement. Witnesses: 1. Signature Name S/o. Sh. Address: 2.

Signature of the Borrower Name____________________ S/o.______________________ R/o.______________________ _________________________ District. Fatehgarh Sahib For and on behalf of the Fatehgarh Sahib Central Coop. Bank Ltd., B.O._____________________________

Signature Name S/o. Sh. Address

BRANCH MANAGER

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Annexure-7 to Chapter-43 SPECIMEN OF “OPERATIONAL GUIDELINES FOR EXTENDING VARIOUS BENEFITS TO KALINGA KISSAN GOLD CARD HOLDERS (KKGC HOLDERS)” OF ORISSA SCB. Issuance of loan at a discounted rate: i)

The Gold Card holders will be charged interest at 1% less than the prevalent rate provided if he repays the loan on or before the due date. This facility will be available to all kinds of loans availed from the Society including schematic and non-farm sector loans. Interest incentive will also be allowed on the existing loan outstanding from the date of issue of Gold Card. To illustrate: “If X has availed ST (SAO) loan in March, 2001 and the Gold Card was issued to him on 26.04.2001, has loan outstanding from 26.04.2001 onwards shall be eligible for interest incentive. Therefore, he will pay interest at the normal rate form the date of advance till 25.04.2001 and from 26.04.2001, Interest Incentive will be admissible”.

ii) The Society will issue receipt showing actual interest amount at the prevalent rate and allow interest incentive of 1% in the receipt. The discount so allowed shall be maintained in a separate register and the Society shall submit claim statement to the DCCB on monthly basis for 90% discount allowed. The Accounting Procedure: In the loan ledgers, the card number of the Gold Cardholders shall be mentioned in red ink in all his loan accounts. At the time of repayment of the loan, interest shall be calculated at the prevalent rate and 1% interest incentives as admissible to the Gold Card holder shall be calculated and the amount shall be shown as interest incentive allowed to the member concerned. The cash receipt shall contain both the entries. The following entries shall be passed at Society and DCCB Branch level. Society Level: Daily transaction in the Cash Book: As and when the Gold Cardholder repays his loan, the following entries are to be passed in the cash book of the Society. Receipt Interest received on loan

Payment Interest incentive paid (The entire interest incentive admissible) 661 - III

At the end of the month, the Society shall prepare a claim statement and submit the same to the DCCB Branch after passing the following transfer entries once in a month. Month end transaction in the Cash Book Receipt Interest incentive received (90% of the admissible interest incentive to the Gold Cardholders allowed during the month as per the cash book)

Payment Interest incentive receivable from DCCB

After passing these two entries, 10% of the interest incentive admissible will automatically go to the expenditure account whereas the balance 90% is shown receivable from the DCCB under the Scheme. After receipt of the claim from the concerned Branch of the DCCB, the interest incentive receivable account will be credited. DCCB Branch Level: On receipt of claim statement from the Society, the concerned DCCB Branch shall allow reimbursement to the extent of 90% of the interest incentive allowed by passing the following entries and forward the claim statement to the Head Office. i) Branch Adjustment Account Dr. ii) Loan a/c of the concerned society Cr. DCCB H.O. Level: After receipt of the claim statement from the Branches along with the advice, the H.O. of the DCCB shall pass the following entries. i)

Interest incentive under KKGC Scheme Dr. (30% of the interest incentive admissible being the share of the DCCB) Interest incentive receivable from OSCB (60% of the Dr. interest incentive admissible being the share of OSCB)

ii) Branch adjustment account Cr. The DCCB shall prefer the claim from OSCB on a monthly basis in KKGC Form No.-3. On receipt of the claim, the interest incentive receivable account shall be credited. Sanction of consumption loan limit of Rs. 3,000/i)

The Gold Cardholder shall apply to the Society in the prescribed proforma enclosed for availing the consumption loan. By virtue of the blanket resolution passed by the Society, the Chief Executive 662 - III

shall intimate the concerned DCCB Branch regarding formal sanction of the loan. The DCCB shall authorize the Branch Managers to sanction on receipt of request from the societies. ii) Drawals and repayments on the consumption loan shall be allowed at the Branch level and separate account for the purpose shall be maintained in the shadow register prescribed for KCC. The concerned DCC bank branch may prepare a voucher, make entry in the loan ledger and allow drawals on the account without insisting on a cheque. On receipt of advice from the branch, the Society shall maintain the detailed accounts at their level. iii) The consumption loan account shall be operated just like a revolving Cash Credit account and interest will be calculated on daily product basis. This consumption loan limit shall be treated as a separate loan facility to the Gold Cardholders in addition to the normal agricultural loan as per eligibility under KCC. iv) The interest on consumption loan account shall be calculated on quarterly rests, but will not be compounded in the account. The Gold Card holder is free to pay the quarterly interest once in a quarter so that his repayment burden is evenly distributed throughout the year. Non-repayment of quarterly interest, however, shall not make the Gold Card holder a defaulter. On 31st March every year, the interest is to be fully paid by him, if not paid earlier, failing which the Card holder shall be treated as a defaulter and all the facilities under the scheme shall be withdrawn. Eligibility to participate in the Annual Lottery: It has been arranged to award three prize first prize being Rs. 50,000/-, second prize Rs. 30,000/- and third prize Rs. 20,000/- once in a year on lottery on the Foundation Day of OSCB i.e. on 2nd April every year. No entry fee is required for participation in the lottery. All the Gold Card holders will be automatically qualified to participate in the lottery. The OSCB will adopt random number generation technique to select the winners.

663 - III

CHAPTER-44

OVERDRAFT AGAINST TERM DEPOSITS

1.

2.

General: a.

One of the two main functions of a bank is Lending and the other is Mobilisation of Resources.

b.

A Bank derives its income mainly by way of interest on advances, interest on Investments, Commission etc. The interest earnings on advances constitute a major part of the total income of a Bank. Along with higher yield this area carries the maximum risk also. This has to be kept in mind by the Managers at all times. They should sanction/recommend facilities only after satisfying that the borrower is a person of high integrity and honesty, the proposal is viable, etc.

c.

Under the present situation, when most of the SCBs are having surplus funds and that the traditional way of lending for agricultural purposes proving non-remunerative and recovery of which again causing major problem, it is the right time for the SCBs to diversify its lending.

d.

Banking is essentially for the purpose of lending, by using funds mobilized through deposits. The differential interest is the major source of income for most of the banks. Hence each SCB will have to develop new loan schemes to cater to the needs of their customers.

e.

Many SCBs have already developed such loan schemes and are operating through their branches. A few loan schemes extended / operated as direct advance by the bank and the branches are discussed in this Chapter and other preceding Chapters.

Advances against Borrower's Own Deposit: a.

Advances against Term Deposit may generally be granted to the depositors.

b.

For availing such loan, the deposit holder must make a written request to the Bank to sanction a loan against the security of his Term Deposit.

c.

A Demand Promissory Note must be executed for the loan amount.

d.

The Term Deposit Receipt, duly discharged over revenue stamp, as Cover / Security for the loan must be pledged.

e.

This type of advance is subject to a margin prescribed by the Management of the Bank or H.O.

f.

Interest will be charged at the rates prescribed by the Bank (H.O) at its own discretion or as per the Directives of the RBI, since RBI has deregulated the interest rate structure.

664 - III

3.

Procedure: a.

When a customer having FD with the branch in his name approaches the Branch for a loan against the security of his FD, we have to get a written request. This is normally done through the prescribed format available with the Branches.

4. Margin:

5.

6.

a.

Though this loan is provided to a customer against the security of the customer's own Term Deposit Receipt with the Bank, a margin is always prescribed in order to cover the interest accruing on the loan.

b.

At present 15% margin is normally maintained for loans against FD & Cash Certificate as well as Recurring Deposit.

c.

In the case of loan against Cash Certificate reinvestment plan the accrued interest till the date of sanctioning the loan is reckoned towards this margin.

Quantum of Loan: a.

In the case of loan against FD Receipt, the maximum amount of loan should not exceed 85% (if margin is 15%) of the FD amount.

b.

In the case of loan against cash Certificate Receipt though the accrued interest on the said Cash Certificate is reckoned towards the margin, the maximum loan that can be sanctioned should not exceed the face value (invested amount) of the Cash Certificate.

c.

In the case of loan against a Recurring Deposit, the maximum amount of loan should not exceed the balance available (total amount of instalments remitted by the account holder) in the account LESS the prescribed (15%) margin.

d.

However, it is desirable to stipulate a condition that at least 6 monthly instalments should have been remitted to be eligible to avail loan against that RD. The RD depositor should also be advised that he has to continue to remit the monthly instalments' for the RD account till the final instalment.

Rate of Interest and Periodicity of Payment: a.

The rate of interest shall be 2% above the rate applicable for the Deposit which is offered as security for availing loan.

b.

The periodicity shall be Monthly/Quarterly depending upon the periodicity at which interest is paid on the Term Deposit. Interest on Fixed Deposits should be credited to Loan interest A/c only.

c.

If the interest due on the loan amount is not paid in full, as and when due, penal interest at the rates fixed by the Bank from time to time should be charged with effect from the due date till date of payment. 665 - III

7.

8.

Period of Loan: a.

The period of loan account shall not exceed three years from the date of DPN or the due date of the deposit, whichever is earlier.

b.

Advances should not be allowed to continue after the date of maturity of the relative deposits. Each deposit, as and when it matures, shall be credited to loan / OD account and the limit / drawing power should be reduced correspondingly by such amount credited.

c.

Under no circumstances, the loan on deposit account shall be allowed to go irregular.

d.

In case the borrower does not clear the loan dues before the due date, the loan account dues should be adjusted out of the proceeds of the Deposit lodged as security for the loan.

Issue of Loan Card: a.

9.

A loan card with full particulars as to the names of the borrower, nature of deposit, loan amount, the DPN date, etc. shall be issued to the borrower at the time of release of the loan, which should invariably be got back at the time of closure of the loan account by the borrower. In case of loan where Deposit Receipts are pledged, the loan card acts as an acknowledgement of receipt of Deposit Receipts from the borrower.

Foreclosure of Term Deposit under Loan Cover: a.

When the loan is outstanding if the depositor borrower wants to fore close the Term Deposit lodged by him as security for the loan availed, then interest on the loan amount at 2% above the rate of interest actually allowed on the fore closed deposit should be collected.

10. Documents to be obtained: a.

The Term Deposit Receipt against which the loan is to be availed duly discharged by the depositor(s). In the case of loan against RD, the RD Pass Book with the receipt in the last page duly signed by the depositor over a revenue stamp.

b.

A Demand Promissory Note for the loan amount duly signed over revenue stamp by the depositor(s). A fresh promissory note should be obtained for the total loan amount when a second loan is sanctioned against the same deposit.

c.

A consent cum authorization letter by the borrower authorizing the Bank to adjust the proceeds of the Term Deposit to the loan account dues on the due date, in case he does not clear the loan dues before such date.

d.

In case of deposits with former or survivor clause, only the former should sign the DPN.

666 - III

11. Lien: a.

The Bank's lien over the Deposit Receipt / RD account should be marked in red ink on the face of the Deposit receipt / RD Pass Book and also in the FD/CC/RD Ledger, maturity register, standing instructions card/ register as "Under L/C Loan Account Number. …….. .

12. Additional Loan: a.

If the borrower desires to raise additional loan against a FD/CC/RD under pledge to the Branch, the existing loan should be closed and new loan should be issued for the aggregate amount.

13. Minors: a.

Since all contracts with minors are void ab- initio (void right from the beginning), no advance shall be granted directly to minors, under any circumstances.

b.

However, if the deposits are standing in the names of minors represented by a guardian, loans may be sanctioned, in very special cases, for the minor through the natural or court appointed guardian, provided the purpose of the loan is for the benefit of the minor and the guardian executes a declaration.

c.

If the deposit stands solely in the name of the minor and loan is required by the guardian, for the benefit of the minor, the loan documents should be prepared in the name of the Natural Guardian (or guardian appointed by court) as “(Name of the Guardian) for self and as Guardian of (Name of the minor” and should be signed by the guardian as follows: Sd……………………………………….. For Self and as Guardian of Minor ………………………

d.

If the deposit stands jointly in the name of the minor, the loan documents should be prepared in the joint names of the natural guardian (or guardian appointed by court) of the minor and the other depositor and signed by them. The loan documents on behalf of the minor shall be prepared and signed as given in the previous paragraph

14. Illiterate Depositors: a.

If the deposit stands in the name of an illiterate person, the Left Thumb impression of the account holder should be taken in the presence of the Manager / Officer on all the loan papers and witnessed by a person known to the Bank with full address (The pronote should not be witnessed).

15. Nominee: a.

No loan against deposit shall be released to the Nominee against the deposit for which the person is the nominee.

667 - III

16. Legal Heirs of the Deceased Depositor: a.

No advance is to be made to the legal heirs of a deceased depositor against the security of the deposits held in the name of deceased depositor.

17. Loan to Firm / Proprietary Concern: a.

Loan against deposit can be given to Partnership Firms / Proprietary Concerns, if depositor is a Partner in the firm or proprietor of the firm.

18. Joint Depositors: a.

When all the Joint Depositors are alive i.

In the case of term deposit receipts, in joint names with or without a mandate payable to “either or survivor” or any one or survivor”, advances can be granted only to all the depositors jointly

ii. Therefore, advances can be granted provided all of them sign the documents, or all the joint depositors authorize a person to execute the documents and receive the loan. 19. Deposits of Other Banks: a.

As per existing regulation, no advance shall be made against deposit receipts issued by other banks.

20. Vouchers and Book Entries: a.

The head of account in the General Ledger may be "Depositor Loan Account" or "Loans against Term Deposit Account" Accordingly the Debit / Credit vouchers will have to be prepared. E. g.

b.

Once the loan Debit Voucher is prepared the following details should be recorded in this Loan Ledger: i. ii. iii. iv. v.

c.

DEBIT: "Depositor's Loan Account" CREDIT: "Borrowers Current or SB Account" or CASH (if the loan amount is paid in cash to the borrower)

Name of the borrower (i.e. the Depositor) His Residential Address Rate of Interest Due date of the Term Deposit receipt lodged as security for the loan

Then the Date of sanction of loan, purpose for which the loan has been sanctioned and the amount of loan disbursed should be correctly recorded in the respective columns of the Loan Ledger. 668 - III

d.

The entries in the Loan Ledger should be checked and authenticated and the Loan Debit Voucher should be passed for payment by the Authorised Officer of the Branch.

e.

If the loan amount is credited to borrower's current / saving account with the Branch the relative credit voucher should also be checked in respect of the name, account number and the amount and passed by the Authorised Officer. In this case both the Debit as well as Credit Vouchers should be scrolled in "TRANSFER SCROLL" and in both the vouchers "TRANSFER" stamp should be affixed.

f.

After releasing the Credit Voucher the Loan Assistant should, with the help of Loan Debit Voucher, mark the lien as "Under L/C loan account No................" in the following: i. ii. iii. iv. v.

Term Deposit Ledger (FD/CC/RD Ledger) Term Deposit Receipt /RD Pass Book lodged with the Bank as security. Standing Instruction Card (if there is any such instruction relating to adjustment of periodical interest thereon). Maturity Register.

g.

The Branch should maintain a "Securities Register" wherein all Scrips / Deposit Receipts / Pass Book etc., lodged as security for the loans availed should be recorded. In this register the Term Deposit Receipt / RD Pass Book against which the branch has sanctioned the "Depositor's Loan" should be entered. Such Term Deposit Receipts / Pass Books must be kept under safe custody of the Officer. The lodgement letter or application, DPN and other documents executed by the borrower should be kept in separate file as "Loan Documents File".

h.

When the loan dues are cleared and the loan account is closed by the borrower, the securities lodged by him (in this case it may be Term Deposit Receipt or RD Pass Book) the lien (under L/C account No.........) marked should be cancelled, entries in "Securities Register" should be rounded off with the date of closing the loan account. Then the Term Deposit Receipt / RD Pass Book should be handed over to the borrower after getting his signature in the Loan Ledger.

21. Loan Repayment: a.

Loan repayments have to be clearly entered in the Depositors' Loan Ledger. Once the loan is fully repaid by the borrower along with the interest, the Loan a/c should be closed. i.

If the repayment is by cash, prepare Credit Voucher. 

CREDIT "Depositor's Loan Account" (The contra being cash received). ii. If the repayment is out of his Current / SB Account to get an authorisation letter from the Borrower to debit his account towards loan dues. 

DEBIT: Current/Savings Account of the borrower 669 - III



CREDIT:” Depositor's Loan Account".

b.

If repayment is by cash, record the Credit Voucher in Officer's Cash Scroll.

c.

Make Proper entries in Depositor's Loan Ledger towards principal amount as well as interest amount.

d.

Cancel the lien marked (under L/C Loan Account No.........) on the TD Receipt, RD Pass Book, Term Deposit Ledger, RD Ledger, Maturity Register.

e.

Cancel the Demand Promissory Note and punch the revenue stamp on this DPN and draw a line across the signature of the borrower on this revenue stamp.

f.

Affix "Account Closed" stamp on (a) this DPN, (b) Lodgement Letter/application, (c) authorisation letter to adjust the proceeds of the TDR to the loan dues, (d) in the Loan Ledger.

g.

Write "Documents received" and get the signature of the borrower as acknowledgement in the loan ledger beneath this "Account Closed" stamp.

22. Trial Balance: a.

As at the end of each calendar quarter a Trial Balance of all outstanding Depositors Loan accounts should be extracted and tallied with GL.

23. Other Key Points: a.

Loans and advances are normally granted at the branch where the deposits are held. Advances can be made by a branch (Lending Branch) against term deposits with other branches of the same bank only, subject to the following: i.

On ensuring the reasons / genuineness behind availing loan against deposits held with other branch of the bank.

ii. After proper identification of the depositors iii. After receipt of confirmation from the branch where the deposit is held that they have verified the specimen signature and marked the lending branch's lien on the deposit. iv. After verifying the signature of the officer on the deposit receipt with that in the Officer's specimen signature book. b.

Before noting lien the deposit holding branch should verify the depositor's signature with the specimen signature in the deposit opening form.

c.

The request of the lending branch for noting lien is to be accompanied by an authorization letter from the party to remit the proceeds of the deposit on maturity or as and when requested by the 670 - III

lending branch and also periodical interest payable on the deposit to the lending branch. d. These loans are, generally, to be made to the depositors in whose names the deposits are held. e.

Sometimes, a depositor may offer a deposit as security for an advance to a third party. Such loans should not be called loan against deposit.

f.

The depositor should sign the loan paper as a second signatory (co-obligant / guarantor). If this is not convenient, a separate lien letter over adequate stamp paper must be taken.

671 - III

CHAPTER - 45

CONSUMER LOAN 1.

General: a.

2.

Persons Eligible: a.

3.

6.

The applicant must submit his loan proposal in the application form prescribed / supplied by the Bank.

Associate Membership (Nominal Member): a.

The applicant as well as the guarantors should be admitted as an Associate Member by collecting a non-refundable, Associate Member fee of Rs.5/- or Rs.10/- per member, as the case may be.

b.

At a later stage if the borrower commits any default in repaying this loan dues, the Bank can easily arrange for attachment of the consumer article purchased out of the Bank loan or his salary through Arbitration proceedings instead of going through Court of law which may cause lot of delay.

Purchase of Article: a.

7.

The applicant should either be residing or should be employed / working within the area of operation of the Branch.

Application: a.

5.

Normally this loan is sanctioned to employees with stable income in state or Central Government, Quasi Government, Coop. Institution, Educational Institutions, well known and established Industries etc. Professionals like Doctors, Engineers, Architects, Advocates, Chartered Accountants, and Businessmen are also eligible to avail this loan. Creditworthiness of the person should be assessed first.

Area of Employment or Residence: a.

4.

Head Office of the Bank will frame rules and regulations for sanctioning loans to individuals for purchase of consumer durables like TV, Fridge, Washing Machine, Furniture, Music Systems, Water Heaters etc.

Proforma Invoice from authorised dealer / Coop. Super Markets (as permitted in the bank's rules relating to this Loan Scheme) should be submitted to the Branch along with Loan application.

Second Hand Goods: a.

No loan shall be granted for purchase of second hand goods. 672 - III

8.

Applicant to be Customer: a.

9.

The applicant and the guarantors must be asked to open SB accounts, if they are not already account holders of the Branch.

Adequate Balance in the Account: a.

Upon sanction of this loan, the borrower should be asked to maintain adequate balance in his Savings Account. It is desirable that he deposits his salary Cheque in this account every month, so that the monthly instalment due under his consumer loan could be easily adjusted.

10. Guarantors: a.

The loan must be guaranteed by at least two persons having equal income / salary as the borrower. The guarantors must be the one acceptable to the Bank. These guarantors should also be admitted as "Associate Members".

11. Documents: a.

The following documents should be obtained from the applicant. i. Loan application in bank's format ii. Proforma invoice for the article proposed to be purchased from authorised dealer / Coop. Super Market. iii. Salary certificates of the applicant and the two guarantors if all of them are employed. It must be ensured that the salary certificates have been issued by competent authority empowered to issue such certificates. In the case of professionals, Income Certificate duly prepared and signed by a Chartered Accountant, Copy of latest IT return filed or copy of assessment orders for the last 2/3 years should be collected. iv. Pronote duly executed jointly by the borrower and the two guarantors. v. Hypothecation Deed, hypothecating the article purchased out of bank's loan should be executed by the borrower in favour of the bank. vi. Delivery Note from the supplier with the endorsement thereon by the borrower that he has received the articles in good condition. vii. Letter of Authority viii. Copy of Paid Bill ix. Insurance Policy covering the consumer article.

12. Quantum of Loan: a.

The maximum loan under this category of loan should not exceed the prescribed maximum amount of Rs.1 lakh or 75% of the cost of the article or 3/4 times the monthly gross salary of the applicant whichever is LESS. The applicant should remit the 25% or the difference between the loan amount 673 - III

sanctioned by the bank and the cost of the article to the Bank and the bank should issue a pay order / Banker's cheque crossed account payee for the cost of the article in favour of the supplier. 13. Carry Home Pay: a.

In case the applicant is a monthly salary earner his carry home pay should not be below 25% or 33.33% or 35% or 40% (as may be fixed by the Bank). If the carry home pay of the applicant is below this stipulated level then no loan should be sanctioned. However, if the spouse of the applicant is also a wage earner, her/his take home pay may be taken (added) in to account to assess whether the applicant, by reckoning his spouse carry home pay also, will be in a position to repay the loan. In that case the salary certificate of his spouse may be obtained and she should also sign the pronote and other documents along with her husband.

14. Period of Loan: a.

The duration / period of the loan in most banks is 36 months. In case the quantum of loan is high i.e. Rs.50,000/- or more, then the Bank Management may fix suitable repayment period and the Bank may take post-dated Cheques for repayment of the loan.

b.

The Branch should follow the Rules framed by the H.O. for this Loan Scheme and accordingly fix the repayment period. Recovery is normally by the way of equated monthly instalments.

15. Rate of Interest: a.

The rate of interest shall be as fixed by the Bank. Under this loan scheme the interest shall form part of equated instalment for the entire period of the loan.

16. Repayment: a.

Repayment will commence from the month following the month of availment (disbursement) of the loan and the instalments should be paid before 10th of each month.

b.

No payment of instalment on or before the stipulated due date (i.e. 10th) will attract penal interest at the prescribed rate on the amount of defaulted instalment from the due date till date of payment, if the instalment is not paid on date when it is due.

c.

Reminder should be sent to the borrower and the guarantors if the instalment is not remitted by the due date.

d.

In case three consecutive instalments are not paid then an officer of the branch should personally contact the borrower and the guarantors and the article hypothecated to the bank should be inspected.

e.

In case the instalment Cheque has been dishonoured then the Bank should proceed for legal action.

674 - III

f.

As per the Rules of loan scheme, the Bank will have the right to recall the entire outstanding with interest in case of default in repayment of monthly instalments. The Branch should therefore, in respect of loan accounts where 3 consecutive monthly instalments have been defaulted, send a notice to the borrower & the guarantors recalling the entire loan dues.

g.

In case the notice does not produce positive result then the Branch must refer such loan accounts to H.O. Legal Department for legal action.

17. Insurance: a.

The borrower shall insure the article(s), purchased out of bank loan at his cost against the risks of fire, theft, accident etc. The policy shall be in the name of the borrower and the Bank with Bank clause and the policy should be lodged with the Branch.

18. Accounting: a.

A separate General Ledger Account called "Consumer Loan Account" should be maintained. When a Consumer Loan is sanctioned and disbursed the following entries should be passed. i.

STEP I : 

DEBIT : "Consumer Loan Account"

 CREDIT : Borrower's "Current/Savings Account" ii. STEP II:  DEBIT : Borrower's Current / S.B. account, the cost of article. (before sanction of the loan amount the borrower should have remitted the margin or the difference amount as explained earlier).  CREDIT : "Pay orders / Banker's Cheque issued Account. iii. STEP III : Whenever the monthly instalment is repaid by the borrower i.e. to the debit of his Current / S.B. account.  DEBIT : "Borrowers Current / S.B. account with monthly instalment amount. (as per standing instruction of customer) 

CREDIT : (Since the recovery is in equated instalment)  "Consumer Loan Account" with the portion of principal amount.  "Interest on Consumer Loan Receivable Account" (with interest portion of the instalment).

19. Loan Ledger: a.

The Branch should maintain a separate "Consumer Loan Ledger". All loans should be given serial numbers like CL 1, CL 2, CL 3, etc.

b.

The following particulars should be recorded in the Ledger: 675 - III

i. ii. iii. iv. v. vi. vii.

Name of the borrower with address Names of guarantors with their address Rate of interest Monthly installment Period of loan & last due date Description of article purchased Bill number.

c.

The date of disbursement of loan and the actual amount of loan disbursed should also be noted. The loan amount shown as outstanding should be entered in this ledger in red ink.

d.

Whenever monthly instalment is recovered, the same should be entered under "receipt column" and the balance O/S should be reduced to that extent.

e.

In the Bank's Common "Document Register" separate pages for "Consume Loan" may be allotted and details of all documents received from the borrower should be entered in this register prominently recording the name of the borrower and the loan account number on top.

20. Trial Balance: a.

As at the end of each calendar Quarter, Trial Balance of the loan amounts outstanding under common loan accounts should be extracted and tallied with General Ledger.

676 - III

CHAPTER - 46

SALARY LOANS

1.

General: a.

2.

3.

Persons Eligible: a.

Loan may be granted to all permanent employees of State / Central Government / QuasiGovernment or Public Sector undertakings and Government aided educational institutions.

b.

In certain cases even the employees of reputed Private Sector establishments are extended this loan facility provided the Management of such institutions has to give an undertaking in writing to recover out of the salary of each employee, availing this facility from the bank, the instalment amount due and to remit to the Bank.

c.

The applicant must be either residing or his work place must be within the area of operation of the Branch where the loan has to be availed.

Purpose: a.

4.

This is a loan scheme introduced mainly to cater to credit requirements of salaried employees. The sanctioning authority for this loan shall be the Branch Manager concerned.

This loan may be sanctioned to meet urgent domestic expenses or medical treatment / educational expenses of children etc.

Eligibility: a.

The applicant must be a permanent employee. Some banks stipulate that the applicant's job should not be transferable.

b.

He / She should not have borrowed from other Banks / Coop. Banks / Salaried Employees Coop. Thrift & Credit Societies etc., for the same purpose.

c.

He / She must also give an undertaking in writing to the effect that till the entire dues under the proposed loan (once availed) is cleared will not borrow from any other financing institution against his salary.

d.

He / She should produce 'No Objection Certificate' from the Employees Coop. Society of the institution in which he is employed, if applicable.

e.

He / She should have a Carry Home Salary of not less than 67% (as prescribed by the Bank)

677 - III

f.

5.

Guarantors: a.

6.

7.

a.

The borrower as well as the Guarantors should be admitted as Associate Members of the Bank by collecting nominal non-refundable Associate Member fee of Rs.5/- or Rs.10/- per member, as prescribed.

b.

Only when they are admitted as Associate Members Arbitration action can be taken against them through Coop. Department for recovery of loan dues in case of default. Otherwise the Bank has to resort to legal action through Court of Law which takes longer time.

Maximum Loan: The maximum loan amount has to be fixed by the Bank Management. At present few Private Sector Banks are sanctioning salary loans upto a maximum of Rs.50,000/-, while few Foreign Banks are providing up to Rs.1.00 lakh.

Period of Loan: a.

9.

The applicant should produce to the Bank Two guarantors who are Co-Employees of the applicant with equal monthly salary (income). The guarantors must have left over service (prior to retirement) of at least 2 years prior to retirement.

Associate Member (Nominal Member):

a.

8.

He / She should be able to produce an undertaking in writing from his / her employer to the effect that upon sanctioning this loan, the monthly instalments of this loan availed by their employee, will be recovered out of his monthly salary and remitted to the Bank.

This loan has to be repaid within 24/36/48/60 months. The period will depend on size of loan/retirement age/the left-over service of the borrower. The Banks while framing the Rules will take care to specify these terms.

Undertaking by Employer / Pay Disbursing Officer: a.

The salary loan is generally sanctioned to a group of employees of a Department / wing of Government / an Educational Institution i.e. School / College / an Industrial Establishment.

b.

By this method the Branch will be able to disburse sizeable amount of loan as "Salary Loan". If mutual sureties could be arranged the recovery of loan also will be easy.

c.

The Pay Disbursing Officer of the establishment, whose employees express their desire to avail "Salary Loan" from the Coop. Bank Branch, shall give an undertaking in writing that he will recover from out of the salary the monthly instalment amount due from each employee who had availed the "Salary Loan" from the Bank and to remit the amount to the Bank before 10th of the following month. 678 - III

10. Loan Disbursement: a.

Individual loan application shall be sanctioned by the Authorised Officer and the loan amount is paid / released to the borrower by way of Pay Order or credit to his Savings Bank Account with the Branch.

b.

The Branch will then prepare an institution wise consolidated statement showing the following details and shall send the same to the Pay Disbursing Officer with a covering letter: i. ii. iii. iv. v. vi.

The name of the borrower with designation The name of the Department / institution in which he is working. Amount of loan disbursed to each employee borrower with his loan account number. Monthly instalment to be recovered. Month of commencement of recovery Month & year in which the last instalment due.

c.

In case any such borrower employee has been transferred (this will be applicable in most cases of State/Central Government employees, Government Schools/Colleges, the fact should be intimated to the Bank with the particulars of (i) the name of the New Pay Disbursing Officer, (ii) postal address of the office to which he is transferred. He must also inform the New Pay Disbursing Officer about the undertaking given by the Department and advise him to recover the monthly instalment from out of the pay of the particular employee and to remit the amount to the Branch.

d.

The Branch on its part on getting the information about the transfer of a borrower employee, should also write to the New Pay Disbursing Officer about the loan availed by that employee from the Bank against the written undertaking given by the appropriate officer, the amount of principal due recovered so far, the balance amount due and the amount of monthly instalment with a request to recover the amount of monthly instalment from the employee concerned and to remit the amount th to the Branch on or before 10 of the following months. DD Commission & Postage etc. will have to be collected from the employee concerned.

11. Loan Repayment - Borrower's Responsibility: a.

Though the employer has given a written undertaking to recover the loan dues out of the salary / wages payable to the borrower employee concerned, the primary responsibility to repay the loan rests with the borrower.

12. Rate of Interest and Penal Interest: a.

The rate of interest should be as fixed by the Bank Management. If any monthly instalment due is not remitted before 10th of the following month that instalment will be treated as overdue and it will attract penal interest @ 3% above the interest rate applicable to this "Salary Loan" , from the first day of the month in which default was committed to the date of regularization. 679 - III

13. Recovery of Overdues: a.

Whenever the borrower commits default in repayment of monthly instalments, reminder notice should be sent to the borrower as well as guarantors and the Pay Disbursing Officer. Despite such reminder, if the borrower does not repay three consecutive monthly instalments then the Branch should refer such overdue cases to H.O. Legal Department for suitable recovery action like Arbitration proceedings through the Coop. Department.

14. Documents: a.

Loan application in the form to be supplied by the Bank.

b.

Salary Certificates of the applicant and the Guarantors.

c.

Undertaking (in Bank's format) by the Pay Disbursing Officer of the Office where the applicant is working.

d.

Pronote jointly executed by the applicant (borrower) and the Guarantors.

e.

Self-declaration of the applicant stating that he has not availed any Salary Loan from any other institution and will not avail one till this Salary Loan is cleared.

15. Trial Balance: a.

A Trial Balance of Salary Loan Accounts should be extracted as at the end of each month and tallied with the General Ledger balance.

680 - III

CHAPTER - 47

ADVANCES AGAINST MORTGAGES

1.

General: a.

2.

Mortgager: a.

3.

Mortgage of immovable properties is taken as primary security for advances for construction of residential houses & shopping complexes, etc. But existing properties are also taken as collateral to strengthen the security position of Working Capital and other limits as and when required by the Bank.

A valid mortgage can be created only by the owner(s) of the property who can be a borrower/coobligant/guarantor. Whenever a mortgage of security is accepted from a third party, Branches should take the signature of such third party either as a co-obligant or as a guarantor (personal guarantee), as the validity of the mortgage can be questioned for want of consideration in respect of the owner of the property.

Margin: a.

When loans/advances are granted for the construction of buildings the Margin shall be, as decided by the Bank, from time to time.

b.

When land and buildings are offered as collateral security the margin requirement shall be governed by the nature of the primary security viz., goods, book-debts, plant and machinery, etc.,

4. Valuation: a.

Valuation of proposed land and building shall be obtained from an Engineer or an Architect approved by the bank, for the purpose.

b.

As the valuation of immovable property is a paramount requirement to safeguard the interest of the bank, care shall be taken that valuation shall be done reasonably and on a realistic basis taking into consideration the recent sale price in the locality or by contacting reliable persons in that area.

c.

In the case of lands situated in the rural areas, the valuation must be arrived at, on the following basis and the least of these values can be taken for the purposes of proposal. i. ii. iii. iv.

Value as compared with the recent sales of similar properties in the neighbourhood. Value as per Valuation certificate given by the Village Officer. Estimated value on personal inspection. Value obtained on enquiries from parties having good knowledge of local land values. 681 - III

v. Government guideline on value of the property can be obtained from Sub-Registrar. vi. Allowance must always be made for the fact that the price realised under a forced sale often falls short of the real worth of the property and that it usually takes considerable time to sell landed property, even at a reduced price.

5.

d.

Branches should not insist on the valuation of securities to be done by the approved valuer at the stage of appraisal. Preferably, it should be verified and assessed by the Manager himself. Managers are expected to make a fair judgment of value after verifying the property, making proper enquiry about the prevailing market rate and according to the area/type and age of the structure, if any, raised on the land.

e.

The valuation by the bank's approved valuer should be done after getting the credit sanctioned and before disbursal. For any valid reasons, if the Manager prefers to have the valuation done by the bank's approved valuer before recommending the credit, he must inform this fact to the applicant and get his written consent to bear the expenses, whether the credit is sanctioned or not.

Scrutiny of Security: a.

Mortgage Property: i. The mortgage property must be specific and identifiable. ii. “Undivided share” in immovable property offered as mortgage security should not be accepted. iii. Unless the Head Office permits, leasehold interest should not normally be accepted as mortgage security.

b. Preliminary Verifications: i.

Before considering the proposal involving offer of property by way of mortgage, the Branch must satisfy themselves, by examination of the deeds, that the title is prima facie in order and must ascertain that the property is unencumbered and the mortgagor is having unquestionable title over the property. ii. The Branch must invariably send the following particulars about the security at the time of sending the proposal itself, in the format, as given in the Annexure-1 to this chapter. c.

Ownership of Property under Land Reforms Act: i.

In many of the States Land Reforms Law has been introduced. The effect of this Law on the property offered as security must be taken into account by the Branch/Approved Legal Adviser (ALA). ii. Branches should ensure that the properties offered as security are not affected by any Land Reforms Law and also by the provisions of the Urban Land (Ceiling and Regulation) Act 1976. iii. If the property is in excess of the ceiling limit necessary exemption/permission should have been obtained by the proposed mortgagor under the provisions of the Act from the Competent

682 - III

Authority. If the property proposed to be given under mortgage is situated in an area to which the Act is applicable, prior permission of the Regional Office should be obtained for creating mortgage. d. Title Deeds: i. The proposed Mortgagor is required to produce all the documents in Original. ii. Wherever Original documents are not available, registration copies of the same may be obtained, but proper explanation for absence of the original documents must be sought. iii. If necessary, and whenever occasion demands, such explanation may be obtained in the form of an affidavit on a requisite stamp paper and duly authenticated by Magistrate / Notary Public. e. Encumbrance Certificate: i. Whenever original documents of more than 25 years are produced, Encumbrance Certificate for the past 13 years should be obtained and it must be seen if there are any charges. ii. If original documents of title to the property are not produced Encumbrance Certificate for the past 35 years must be obtained to ascertain the flow of title. NOTE: It is likely that in the implementation of law relating to Land Reforms, title on the tenants has been conferred by documents and if these documents are recognized as documents of title under Land Reforms Act, the same may be accepted, in which case, scrutiny of title for previous years is not necessary. However, lawyer's opinion should be obtained for this specifically. f.

Tax Receipts: i.

g.

Wherever the properties are situated within Panchayat, Municipality or Corporation limits, proposed Mortgagor must be required to give proof of the payment of tax to such authorities, for the latest year.

Records for satisfaction of Prior Charges: i.

If registered charges are reported, otherwise than by a registered document, then the original document of such charge must be produced by the proposed Mortgagor bearing the endorsement of the charge holder that the charge has been cleared.

h. Inherited Property: i.

Whenever title is sustained on the ground of inheritance, the family genealogy must be ascertained and flow of title considered in the light of such genealogy bearing in mind the provisions of Succession Law applicable to the property owners. The genealogy must be sworn to, by means of an affidavit, by the proposed Mortgagor or the eldest member of the family.

ii. If inheritance, then the original receipt evidencing payment of assessment for the past over 15 years must be required to be produced by the party. All the assessment receipts must be either in the name of the proposed Mortgagor or his predecessors in title.

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iii. If, for any reason, original assessment receipts are not available, the parties should be required to produce proof of the same with reference to records maintained by Revenue Authorities. Such record must indicate the person who has paid the assessment for the past 15 years and the amount of assessment paid each year and the details of property to which the assessment relates. i.

Proposed Mortgagor Being A Legatee: i.

j.

Wherever title to the property is sustained on the ground of the proposed Mortgagor being a legatee, then it must be seen whether the Will has been probated or Letter of Administration obtained, wherever necessary. Without such legal document of title, the title of the legatee cannot be accepted.

Income-Tax, Wealth-Tax Clearance Certificate:: i.

Based on Income Tax Rules, it must be seen if the proposed Mortgagor has produced the necessary Income-Tax, Wealth Tax clearance certificates.

k. Conveyance of Property for and on behalf of a Minor: i.

l.

If there are any conveyance for and on behalf of minor, it must be seen whether the minor was represented properly and validly and whether the conveyance is liable for dispute by such minors, on attaining majority.

Where the Property belongs to a Company: i.

In case the property belongs to a company, then prior charges, if any, created by the company

m. Where the Property belongs to Society, Etc.,: i.

Where the property belongs to Society, Association etc., Branch must call for Bye-laws to ascertain the competency of the applicants/executants to create a charge over the said properties.

n. Execution of Title Deeds by Agents: ix. If agents have executed the documents, Branches must call for a copy of the power of attorney to ascertain that the agents were duly and adequately empowered to execute the documents. 6.

Legal Opinion: a.

Forwarding the Title Deeds for Legal Opinion: i.

The title deeds obtained shall be got scrutinized by the Bank's 'Approved Legal Advisor' (ALA). 684 - III

b. Scrutiny of Title by the Lawyer: i.

The ALA must verify that all the documents are valid. Needless to add here that a document merely because it is registered, is not valid. It must be seen that the executants of the documents were competent to execute the documents.

ii. ALAs must also be satisfied that the documents are properly stamped and registered by the competent authority. iii. The title to the property must be scrutinized for a minimum of 13 years. Title must be traced for the said period with all the documents in original. If there are any documents executed for and on behalf of Joint Hindu Family, it must be seen, if the document has been executed validly by competent persons. It must also be ascertained if there are any minors and if so whether they have attained majority or whether the sale is in order. iv. Wherever a lawyer scrutinizes title to the property, if he has the slightest doubt, it must be got cleared from the proposed Mortgagor. c.

Search of Records at the Registrar's Office: i.

Wherever local practice so requires, the ALA may himself visit the Registrar's Office and ascertain the encumbrance and flow of title to the property and issue necessary certificate.

d. Content of the Legal Opinion: i.

First part should give the description of documents produced before the ALA for scrutiny, in chronological order.

ii. Second part must give the description of the property and the extent and assessment of the properties. iii. Third part should analyse the flow of title for the past 13 years in the manner prescribed. The ALAs shall reveal the names of the present owners of the properties who are competent to create a charge over the properties. iv. Fourth part should say about the clear and marketable title of the owner of the property and the manner and method of creating charge over properties in favour of the bank as security for advance, remission of stamp duty, if any, etc., e.

ALA's Report: The ALA's report should include the following: i. ii. iii. iv.

Name of the owner Name of his/ her father/ husband The status of the owner of the property. (State Individual / HUF / Firm / Limited Company/etc. Description of property in the following format: 685 - III



Survey No. situated in (give full postal address)



Extent of Property :



Door/Plot No.



Amount of tax/ Kist Rs. P.a./ per half year

 Boundaries v. List of documents verified whether original/registration copy/photocopy/ etc., are to be stated. vi. History of title for a minimum period of 13 years vii. The person in whose name the patta stands in the name of the present owner. viii. Details of encumbrances, if any, and if so, how they were discharged (Encumbrance Certificate for a minimum of 13 years to be verified) ix. Whether any minor interest/litigation/attachment charge is involved in the property x. Whether latest Tax/Kist receipts have been produced? The number of preceding years for which Tax/ Kist receipts are produced? xi. Whether Chitta 10(i) extract (Adangal) verified? xii. Whether involves any excess/vacant land attracting provisions of Land Ceiling Acts? xiii. Whether the property is affected by Urban Land Ceiling and Regulation Act, if so, whether permission of relevant authority been obtained for creating encumbrance? xiv. Whether the title and possession of the proposed Mortgagor to the property is clear, absolute and marketable and valid mortgage by deposit of title deeds could be created? xv. The list of documents which are to be deposited for creating mortgage. xvi. The list of additional documents, Encumbrance Certificate for subsequent periods, affidavit / indemnity required to be obtained by the bank xvii. Any other remark which the ALA providing title deed opinion wishes to make. f.

Land Reforms Law: i.

g.

ALA in his opinion should cover all relevant facts and provisions of Land Reforms Law. The opinion must also say whether permission from the competent authority is necessary and if so should state the competent authority.

Proof of Possession: i.

ALAs must also obtain satisfactory proof of possession of the properties and their opinion regarding the same must be given.

h. Documents in Vernacular Language: i.

If the title deeds are in vernacular language, the ALA should give brief particulars of the title deeds in English to render the scrutiny possible by the Bank's Inspectors. 686 - III

i.

Concluding Opinion: i.

j.

The ALA must state in unambiguous terms whether the proposed Mortgagor is having clear, marketable and valid title over the property.

Retention of Documents after Opinion: i.

Once the documents were received from the proposed Mortgagor and handed over to the ALA for legal opinion, it should NOT be handed over to the parties. It should be handed over to the bank's authorized person.

NOTE: The ALA will have to be required to examine the title deeds and if need be, obtain clarifications from the parties and make out an unambiguous opinion. k. Creation of Charge: i.

l.

7.

Generally banks accept the creation of Mortgage by deposit of Title Deeds (Equitable Mortgage) where permitted by the Government and in some cases insist on the registration of the Memorandum of the Deposit of Title Deeds. It may be necessary in some cases to insist on a simple Mortgage.

Types of Mortgages: i.

Types of Mortgages that can be created are Simple Mortgage (Registered Mortgage), Equitable Mortgage (i.e. Mortgage by deposit of Title Deeds), English Mortgage, Anomalous Mortgage, Usufructuary Mortgage and Mortgage by Conditional Sale.

ii.

Simple Mortgage and Equitable Mortgage are common, whereas the others are not. Therefore, only Simple Mortgage and Equitable Mortgage are dealt within this chapter. When the other type of Mortgages becomes necessary, the bank should seek instructions from R.O. / H.O., on a case by case basis.

Simple Mortgage (Registered Mortgage): a.

Where Equitable Mortgage not possible, the bank may insist for Simple Mortgage (Registered Mortgage). The draft of Simple Mortgage shall be executed over a non-judicial stamp paper of requisite value and executed by the proposed Mortgagor in favour of the bank and registered at the Sub-Registrar's Office.

b.

In case of existing Registered Mortgage, whenever there is enhancement in the value of charge proper re-registration should be done.

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8.

Equitable Mortgage: a.

Requisites of an Equitable Mortgage: i. There must be a debt (present or future) ii. Delivery (deposit) of documents of title, such delivery must be made: 

by the owner of the property.



in the notified town



to a creditor or to his agent

 to secure the debt (present or future) iii. The delivery of documents of title should be made with intent to create a security for an existing or future advance. b. Procedure for Creation of Equitable Mortgage: i.

c.

Equitable Mortgage is created when the owner of a property deposits in a Specified/Notified town, the title deeds of his immovable property with the bank and gives his oral assent which establishes his intent to create a security thereon.

Who can Deposit the Title Deeds and where: i.

The owners should be asked to personally present themselves, at the Branch on the appointed date, to make the deposit of title deeds.

ii. When the title deeds are in favour of a partnership firm and all the partners of the firm cannot attend the bank, they may authorize, in writing, one or more of them to attend and deposit the title deeds on their behalf. This letter of authority must be kept along with the title deeds. iii. In case of Limited Companies, a resolution delegating the powers to one or more of the Directors or to any of their Officers to deposit the title deeds must be passed by the Board of Directors as required in its Memorandum and Articles of Association. The persons authorized to deposit the title deeds and to execute the documents, on behalf of the company, should be specified in the resolution. The certified copy of the resolution be kept along with the title deeds. iv. This kind of charge can be created in respect of any advance made, at any of the Branches of the Bank provided the deposit of title deeds is made at Branches situated in places, notified by the State Government in this behalf. The property can be situated in any part of India. d. How to Deposit the Title Deeds: i.

When the Lending Branch is situated at a Notified Centre: The owners should be present to deposit the documents 688 - III

Note: The title deeds taken for obtaining legal opinion from ALA should not have been handed over to the party other than the Bank. If handed over, a fresh EC from the date of handing over to date of deposit would be additionally necessary at the time of deposit. The documents should be received by the Branch directly from the ALA and may be handed over to the proposed mortgagor at the time of creation of mortgage, at the Branch at the notified centre. After the deposit is made all the title deeds are to be entered in the Document Register under signature of the Manager/Officer. ii. Confirmation of Deposit of Title Deeds: Mortgage by deposit of Title Deeds is a mere oral transaction. However, in a banking institution it may be difficult to prove this oral transaction, on a future date. Therefore, a letter in the form of Memorandum of Deposit of Title Deeds is to be obtained from the Mortgagor. iii. Where Memorandum is to be Registered: 

Whenever the Mortgage by Deposit of Title Deeds is required to be registered, the specimen of the format as given in the Annexure-2 to this Chapter is required to be used.



Memorandum as in prescribed form should be executed by the parties. Memorandum must be engrossed on requisite stamp paper and must be presented for registration, immediately after execution.



Branches must also note that all the owners of the properties must execute these forms and NONE of the owners can be exempted. However, one or more amongst the joint owners can authorize one or more amongst them to deposit the title deeds and execute necessary letters and/or memorandum but this should be done by properly stamped and authenticated power of attorney.



Caution: In case of death of a person, the letter of authority/Power of Attorney granted by him to a third party becomes invalid from the moment of death.

iv. When the Lending Branch is not situated at a Notified Centre: 

In case the Branch is not coming under the list of notified towns for creating equitable mortgage, the title deeds to property must be deposited by the owner at a Branch in a notified town.



The title deeds should be forwarded to the Branch situated at the nearest notified place through the staff of the concerned bank with the following documents accompanied by proposed Mortgagor(s)  the lawyer's opinion/certificate in original  valuation report in original

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 a covering letter from the Branch to the effect that the title deeds have been scrutinized by the Bank's lawyer at their end and that they convey a clear and absolute marketable title to the owner thereof and the name/s of person/s who are required to deposit the title deeds as per legal opinion. The Manager should also confirm that the requirements, if any, stipulated by the lawyer have been fully complied with and  Letter of introduction with specimen signatures of the owners who will call at the other Branch to formally lodge the title deeds. 

As a measure of abundant caution the Branch should send the title deeds in a sealed cover.



The owners should be asked to personally present themselves at the Branch at the notified centre to make the formal deposit. The Manager/Officer at the notified centre Branch (or the staff from the Branch at the non-notified centre) should provide the Mortgagor(s) the title deeds just to make the deposit of the title deeds.



The Branch at the non-notified area should maintain a register recording therein the list of documents deposited at the notified center.



The lending Branch should keep the following documents for scrutiny by the inspecting officials  Duplicate copy of lawyer's opinion / certificate  Duplicate copy of valuation certificate  Certificate confirming the deposit issued by the Branch where the documents are deposited  True copy of the memorandum of deposit of title deeds  Copy of the letter forwarding the title deeds to the Branch at the notified centre.  Copy of the Encumbrance Certificate (EC) for the broken period.  Subsequent EC. Property tax receipts, etc.,

e.

Duties of Notified Branch: i.

When the mortgagor calls at the Branch for the purpose of creating equitable mortgage, the sealed cover (sent by the Branch in the non-notified centre through their staff member) containing the title deeds and other documents, must be opened by the Manager/Officer in the presence of the proposed Mortgagor and ensured that the contents are in conformity with the covering letter. Branch should also compare the title deeds with the legal opinion and satisfy that all the title deeds referred in the opinion are deposited by the owners of the property. 690 - III

ii. On completion of the formalities connected with the deposit of title deeds, the Branch should issue a certificate to the Branch, where advance is to be made, that the title deeds have been deposited by the mortgagor with an intent to create an equitable mortgage in favour of the bank. iii. Managers of Branches where the deposit is made (notified centre) should also furnish to the former (lending Branch) the list of title deeds along with the certificate confirming the deposit of title deeds made by the Mortgagor. f.

Extension of Mortgage: i.

g.

Obtention of Second Charge over the Property: i.

9.

Whenever any additional or fresh credit facility is to be granted on the security of the very same property the Mortgage extension letter should be obtained. In case of Registered Mortgage, re-registration should be done.

Unless sanctioned by the Head Office, only first charge on the properties must be obtained. In case acceptance of Second Mortgage is permitted by Head Office, branches should follow the procedures, as laid down in the Manual on Documentation, for obtaining Second Mortgage of property.

Follow-Up and Supervision: a.

Latest Encumbrance and Tax Receipts: i.

Branches should call for the broken period Encumbrance Certificate from the date of coverage under earlier Encumbrance Certificate till the date of creation of mortgage and hold it with other documents. Encumbrance, for the further period, must be taken, once in a year or at the time of renewal of the loan account, whichever is earlier. The obtention of the latest EC and Property tax receipts is to be recorded in the EC/PT Verification Register.

ii.

After the advance is made, during the continuance of the advance the Branch should obtain and file the receipts in respect of periodical payments of municipal and revenue taxes in respect of freehold properties. In case of leasehold properties along with the above receipts, receipts from the landlord for having received the yearly rent to be obtained. All such letters must be kept together, with the other title deeds, making necessary entries in the Register.

b. Insurance: i.

Except where insurance has been specifically waived by the Head Office, all buildings must be kept fully insured. If the property is situated in an area where an airport is situated Branches should arrange to take insurance cover against aircraft damages. Similarly, if the property is situated in earthquake-prone/cyclone-prone/flood-prone area, insurance cover must be obtained against damages by earthquake/cyclones/floods. Insurance policies must be in the 691 - III

joint names of the Mortgagor and the Bank as Mortgagee with Bank Clause. A record of premia payable and their due date must be maintained. c.

Inspection of Building: i.

Building mortgaged should be inspected periodically (at intervals not exceeding a year) and a report of such inspection must be sent to Regional Office retaining a copy in the borrower's file.

ii. If any inspection has been made by the Manager, along with the Bank's Inspector during inspection, the Manager shall send his independent report to the Regional Office retaining a copy in the file and no separate inspection is necessary during the year. iii. Whenever, it is found that the property has depreciated in value, a full report should be sent to the Regional Office. d. Return of Documents on Closure of Liability: i.

e.

When the advance is recovered in full, the fact should be intimated to Regional Office mentioning particulars of direct and indirect liabilities of the proposed Mortgagor and their permission sought, to return the documents to the party. A specimen of Mortgage Discharge format is given in the Annexure-3 to this Chapter.

Where Release Deeds are Required: i.

Wherever release deeds are required by the Mortgagor, the same may be executed after getting the directions of the Regional Office at the cost of the borrower. ii. Documents SHOULD NEVER be handed over to Mortgagor, for whatever reasons under whatever circumstances during the currency of facility with the bank. Even after closure of all limits, it should be examined whether the bank should exercise General Lien, if necessary for any other irregular loan wherein the property owner(s) may be a borrower, co-obligant / guarantor. f.

Sale of Mortgaged Property in case of Default: i.

g.

Where it becomes necessary to recover the advance by sale of the mortgaged property, such sale can be arranged only through court of law after filing a suit.

Limitation: i.

Under Article 62 of the Limitation Act 1963 money secured by mortgage becomes due for enforcement of payment, there under, within a period of 12 years. This limitation period of 12 years applies to both Registered mortgage and Mortgage by deposit of title deeds. However,

692 - III

the limitation period to proceed against the Borrower and Guarantor personally and against their other properties is only 3 years from the date the amount is due or execution of DPN. 10. Other Aspects: a.

Where the Advance is for Construction: i.

When the Bank advances against mortgage for construction of buildings or industrial sheds, it has to be ensured that the borrower utilised the money for such purposes only. Therefore, in case of such advance the borrower has to produce certificate from an approved engineer certifying that the building has come upto the particular stage and the cost of the construction up to the date of certificate. On the basis of the certificate, after applying the prescribed margin, the money is to be permitted to be drawn. This will ensure the end utilisation of the loan and also ensure that the borrower is assured of finance up to the completion stage of the construction.

b. Insurance Cover for Buildings Under Construction: i.

There have been instances where losses have occurred due to collapse, lightning, faulty materials, poor workmanship, explosion, storm, hurricane, tornado, typhoon, floods, inundation, landslide, theft, burglary etc., to the buildings under construction. In the absence of an insurance policy to cover these risks, the customer is bound to have a setback due to the loss arising out of such calamity and it may become difficult for the Bank to recover such advance.

11. Procedure for Sanction : a.

Before issuing Bank's pre-printed Mortgage Loan Application the Branch should collect from the applicant (i) a preliminary letter exposing his intention to avail a "Building Mortgage Loan" from the Bank, (ii) all relevant documents like Title Deeds with parent documents, current property tax receipt, Encumbrance Certificate for 13 years, (iii) his income statement together with documentary proof for the source of income like salary certificate, rent receipts etc.

b.

The Branch Manager should then forward the Property Documents, property Tax receipt, E.C. etc. to Bank's Legal Adviser for Legal opinion. For this purpose "Legal Fees" as prescribed by the Bank will have to be collected from the applicant.

c.

Upon getting the Legal Opinion the Branch Manager may issue the Building Mortgage Loan application to that party.

d.

On receipt of filled up Loan application from the party the Branch should collect "Processing fee" from the party and then forward the Loan application, required documents furnished by the applicant and Legal Opinion of Bank's Legal Adviser to Head Office.

e.

Then the authorised officer at H.O. will arrange for inspection of the property by a Senior Officer at 693 - III

H.O. along with the Branch Manager concerned. f.

This team will inspect the property and file their "Preliminary Report" Covering: i. ii. iii. iv. v. vi.

Location of the property - Address. Description of the property (shop residential house etc.) Boundaries How old is the building and the present condition What is the total area of site and what is the total built up area Value of land (on which the building has been constructed). For this purpose the guidelines value issued by the Sub-Registrar (Registration) concerned should be the basis. vii. Valuation of Building - reckoning materials used, type of construction and age of the building. Thereafter Depreciation should also be provided. Then this team will have to issue a valuation certificate as per their estimation. g.

On receipt of this joint inspection report the Section Officer concerned at H.O. will assess the loan amount eligibility with reference to the least of (i) estimated value of the property, (ii) repaying capacity of the applicant keeping in mind that the EM1 of this loan should not exceed 1/3rd of the total monthly income of the applicant and (iii) restricting the loan eligibility to 50% of the estimated value of the Building.

h.

The Executive / Senior Officer at H.O. authorised to sanction Building Mortgage Loan should then inform the Branch about the applicants loan amount eligibility and the other formalities like (i) registration of Mortgage in favour of the Bank, (ii) Provision of Insurance Cover for the Building, (iii) Production of E.L. subsequent to registration of Mortgage which have to be fulfilled by the applicant to enable the Branch to disburse the loan. This is in effect sanction / approval of H.O.

i.

On receipt of this approval or sanction order from H.O. the Branch Manager shall advise the applicant to comply with the above requirements (detailed under "h" above).

j.

Once the registered Mortgage Deed, subsequent EL and the Insurance Policy are received then the Branch Manager should disburse the loan amount to the borrower by crediting his savings account with the Branch under advice to him.

k.

The Insurance Coverage must be for the estimated value of the building and it should be ensured that the Insurance Cover is made available till date of clearance of this Mortgage Loan dues.

l.

Branch should also ensure that the borrower pays the property Tax dues without default and copy of the Tax paid receipt is produced to the bank which should be kept in the file relating to this particular Mortgage Loan account.

12. Legal Fees and Processing Fees: a.

The amount, as fixed by the Bank, should be collected from the applicant towards Legal Fees. The 694 - III

Processing Fees shall be at the rate fixed by the bank should be collected from the applicant. Normally banks charge 1/2% or 1% of the loan amount subject to a minimum & maximum. In most cases minimum is Rs.500/- & maximum is Rs.1,500/-. These fees may be fixed on the basis of the rates prevailing in the market. 13. Documentation: a.

Complete particulars of all documents received from the borrower should be properly recorded in the Bank's "DOCUMENTS REGISTER".

b.

All the important documents like (i) Registered Mortgage Deed, (ii) Title Deeds, (iii) EL should be kept in a sealed cover which should be kept inside a Fire Proof Filing Cabinet or in a steel cupboard inside Strong Room.

c.

On the said sealed cover the name of the borrower and the Building Mortgage (BM & No.) loan number should be noted.

14. Book Entries: a.

Admission of the applicant CREDIT: ASSOCIATE MEMBERS as Associate Member DEBIT : ADMISSION FEES (Debit being cash remitted by applicant)

b.

To get Legal Opinion CREDIT: LEGAL FEES DEBIT : CASH (Debit being cash remitted by applicant)

c.

d.

Processing fees CREDIT: "Service Charges or Commission account"

At the time of i. Disbursement of Loan ii. While adjusting monthly

-

iii. Penal interest

-

DEBIT: CASH DEBIT: BUILDING MORTGAGE LOAN ACCOUNT CREDIT: Party's Savings Account DEBIT: Party's Savings Account installments ( f o r f u l l amount of Equated Monthly Installment) CREDIT: "Building Mortgage Loan" account (for principal portion of EMI) CREDIT: "Interest receivable on Building Mortgage Loan account" (for interest portion of EMI) DEBIT: Party's Savings Account (whenever there is delayed remittance of monthly CREDIT: "Penal interest Account" instalments)

695 - III

15. Documents for Loan Application: a.

Original Sale Deed / Parent document.

b.

Declaration of non-encumbrance

c.

Encumbrance certificate for 13 yrs.

d.

Applicant's income statement including that of his source wherever included, with valid documents (like salary certificate) as proof. (if rental income is shown as source then valid rent receipts, if business income is shown then IT assessment orders / copies of IT returns filed).

e.

Legal Opinion on the title deeds of properties (this will have to be by Bank's Legal Advisor). This is the responsibility of the Bank.

f.

Latest / Current Tax receipts.

g.

Valuation certificate by a Qualified / Certified / Competent person i.e. an approved value.

h.

Demand Promissory Note (once the loan is sanctioned & prior to disbursement).

i.

Registered Mortgage Deed (on approval of the loan proposal before disbursement).

j.

Patta

k.

Urban Land Tax receipt

l.

In case the loan is for renovation / additional construction / repairs etc. the applicant will have submit the following additional documents: i. Building Permit issued by competent authority ii. Plan approved by appropriate authority iii. Estimate of construction / renovation / repair by an approved / Certified Engineer.

16. Other Key Points: a.

The maximum loan to be disbursed under this scheme will be as fixed by the Bank Management. However it is desirable that the maximum loan limit does not exceed Rs. 10 lakhs, since this loan will have a longer repayment period and in case of necessity, realisation of the security involves lengthy procedure.

b.

It is also desirable that the maximum loan limit is restricted to 50% of the estimated value of the property. The bank has to ensure that the value of the property has not been artificially boosted.

c.

The interest rate will be as fixed by the bank taking into account the cost of funds, risk cost, etc.. 696 - III

d.

Repayment period normally ranges from 5 years to 10 years. But, it is preferable to fix 5 year repayment period.

e.

The repayment should be by way of Equated Monthly Instalment. Each instalment should be th remitted on or before 10 of the following month.

f.

Delayed payment will attract penal interest, as decided by the Board from time to time, over and above the normal interest rate.

g.

The property against which the loan is proposed to be availed should be situated within the area of operation of the Branch where the loan is sought.

h.

Loan application relating to the following properties should not be entertained (i) Vacant land, (ii) Building constructed on Lease Land, (iii) Third Party Property.

i.

For assessing the repaying capacity the applicant's self income, spouse's income, his additional income by way of rent etc. will be ascertained. From this total income all his monthly expenses should be deducted and if the net surplus is more than 1/3rd of his monthly total income he is normally considered to have repaying capacity.

17. Annexure/s: a.

The following Annexures are appended to this Chapter: Annexure 1 : Specimen of Details of Property as Security Annexure 2 : Specimen of Memorandum of Title Deeds Registered Annexure 3 : Format of Discharge of Mortgage

697 - III

Annexure-1 to Chapter-47 DETAILS OF PROPERTY PROPOSED AS SECURITY Enclosure to proposal No. ……………… 1) Name/s of Owner/s (State clearly if there are any minors, and if so, the extent of their interest,. If property not owned by the borrowers, the relationship, if any, between the owners and borrowers and nature of interest of the owners in the borrower should be stated. 2) Brief Description of Property (Shop/Residential House/Open Site/ Agricultural Land/ Flat/ etc) (In case of building age and present Condition and number of floors, building approved plan) 3) Location 4) Boundaries 5) Extent (Total area / Built-up area/etc) 6) Leasehold Land or Freehold Land. If Leasehold Land a) b) c) d)

From whom taken on Lease Date of lease Period of lease Date of expiry of lease

7) Particulars of valuation a) b) c) d) e)

Valuation done by Date of valuation Value of land Value of construction Total value

8) Particulars of scrutiny of title deeds (In case of existing securities) a) Name of the approved Lawyer b) Date of the opinion c) Whether the title to the owner is perfect and certified so by lawyer 698 - III

d) Whether EC obtained till date of deposit/ upto date e) Period covered by EC f) Whether the property is free from encumbrance 9) a)

Nature of mortgage Simple/Deposit of Title Deeds followed by Regd. Memo random/ Deposit of Title Deeds b) Date of Mortgage c) Branch at which mortgage was made

10) Date of Letter of Confirmation obtained from the depositors with regard to simple deposit of title deeds. 11) Property Tax particulars a) b) c) d) e)

Date of last payment of Property Tax In whose name the Receipt is issued Period covered Date of verification of cash receipt by Branch official. Whether the description of the property as per the receipt agrees with the title deed

12) Insurance particulars (with regard to the property) a) b) c) d)

Name of Insurance Company Amount of Insurance Date of Expiry Risks Covered

13) Whether property maintained in good condition. 14) Date of last inspection of property by Branch official(s) indicating his/their designation 15) Whether charge has been registered with the Registrar of companies? If so, date of charge (in the case of advance to companies) 16) Whether the property is situated in an area where the Urban Land (Ceilings and Regulations) Act applies? If so, whether the permission of the competent authority has been obtained for creating mortgage over the property in favour of the Bank 17). The particulars/description of the property as mentioned in the proposal tallies with a) Title deeds b) Encumbrance Certificate

699 - III

c) d) e) f)

Tax paid receipts Insurance policy Legal Opinion Valuation Certificate MANAGER

Date : NOTE : 1) A mortgage is valid only for 12 years and hence deposit of title deeds by the owner/s should be revalidated by them before the expiry of 12 years from the date of original deposit, subject to verification of whether Encumbrance Certificate shows NIL encumbrance. The procedure for revalidation of mortgage is covered elsewhere. 2) Property should be insured for the full value of the superstructure.

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Annexure-2 to Chapter-47 MEMORANDUM OF DEPOSIT OF TITLE DEEDS REGISTERED The Title Deeds relating to the properties belonging to _____________________ S/o.__________ __________________________ residing at ______________________ specified in the Schedule hereto have been deposited with Tamil Nadu Mercantile Bank Ltd., _________________________ to remain with the bank as security for the repayment of a sum of Rs. ________________ (Rupees _______________________ only) advanced by the said Tamil Nadu Mercantile bank Ltd., on _____________ on demand promissory notes, payable on demand with interest thereon at _______ per cent per annum and all moneys that may become due to the Bank on all transactions including Overdraft account. I/We ______________________________________ S/o, D/o, W/o. _______________________ residing at ____________________________________ solemnly declare on this day of __________________ 20 ___ that the properties mentioned in the Title Deeds scheduled hereto are all my ancestral/self-acquired properties and are without encumbrance. This document is in pursuance of Section 58(F) of the Transfer of Property Act. LIST OF TITLE DEEDS 1) 2) 3) Schedule of Property Sl.No., Registration District and Town or village

Survey No., Extent Sub-District

IN WITNESS whereof I/We have set my/our hands this ____ day of ________ 20__ Signature WITNESSES 1. 2. Note: The columns given under Schedule of property is only illustrative. The Branch shall include other relevant particulars also, if any.

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Annexure-3 to Chapter-47 FORMAT OF DISCHARGE OF MORTGAGE: This document executed on this ................. day of ...................... 20.......... by .................. Coop. Bank having its registered office at .............................. and the Branch Office at .............................. represented by its Branch Manager Shri................................ S/o. ............................................. hereinafter called the MORTGAGEE, in favour of Shri..................................... S/o................................. (Occupation), residing at ................................. hereinafter-called MORTGAGOR, it is hereby stated that the mortgage created by the Mortgagor in favour of the mortgagee under the Mortgage Deed dated .................... registered as document no......................... in volume no......................... with the Sub-Registrar ..................... has been discharged in view of the repayment of the loan secured under the mortgage. For ........................................... Coop. Bank Manager. ............................................... Branch.

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CHAPTER-48

ADVANCES ON HYPOTHECATION OF MOTOR VEHICLES 1.

2.

General: a.

Banks provide credit facilities to transport industry by granting direct finance to owners or operators of vehicles and indirect finance to dealers or financiers of vehicles. Banks should, however, show a keen interest in direct finance as this encourages self-realisation and selfemployment.

b.

The guidelines given in this Chapter cover the Advances made to vehicles for commercial purposes. Wherever advances are sanctioned for purchase of vehicle for own use, the guidelines wherever applicable and necessary are to be followed without fail.

Pre-Sanction: a.

Type of Advance: i.

Advance on vehicle is extended as a term loan as the repayments can be effected only out of income generated over a period of years with the use of the vehicle by the borrower. The Branch Manager should study the viability/feasibility aspects of the entire proposal to ensure income generation for future repayments. ii. If the loan is to be sanctioned for the purchase of vehicle for own use, the repayment capacity of the borrower out of present business line should be studied and satisfied. b. Borrowers: i.

The borrower should be introduced properly to the bank by a responsible party. It is desirable that the borrower has sufficient experience of, at least, one year as a driver. His success in the trade depends very much upon his technical knowledge of the vehicle, professional skill, experience, knowledge of trade, and the capacity for hard work. If there is a Taxi Union or Association at the place, this will serve as a very good source of information to the bank regarding borrower's social and personal information. ii. A visit to the borrower's residence would indicate his life style. If the borrower is already driving a taxi, enquiries with owner of his present vehicle or garage where the present vehicle is serviced or the petrol bunk where he normally fills up fuel would provide information regarding the dependability, integrity and honesty of the borrower. c.

Driving Licence A Source of Information: i.

The driving licence discloses the length of driving experience. It will show the endorsement, thereon, by Regional Transport Authorities. The licence will reveal his accident record and the endorsements, if any, would indicate his driving habits. 703 - III

d. Purpose: i.

e

The Motor vehicles should be a new one. However, old vehicles may be taken as collateral security.



The facility will generally be by way of term loans as it would be helpful in monitoring the progress of recoveries.



As far as possible, advances should be considered for fleet owners (for bus or trucks) or to owners of self-driven vehicles. In the case of owner-driven vehicles, the borrower should hold a valid driving licence.



It is essential that the borrower has a sustained and continued stake and interest in the business and for this purpose he should provide adequate margin towards the capital cost of the vehicle.

The primary security will be the vehicle(s) purchased out of bank finance.

Second-Hand / Old Vehicles: i.

g.



Security: i.

f.

Advances are considered for acquiring transport vehicles like trucks, tempos, taxis, autorickshaws, etc. The general guiding principles for consideration of these advances are, the following:

If, as a special case, vehicle to be hypothecated is a second-hand/old vehicle, the year of purchase and the normal depreciation to be allowed will have to be taken into account, to determine the value of the security. Though, that would be the normal procedure, the market value may also be considered for purposes of valuation. In arriving at the market value of the vehicle, the branch should utilize the services of our Approved Engineer.

Margin: i.

Margin is insisted on Advances to: 

ensure that the borrowers show continued interest in the activity.



provide cushion against fluctuations in the value of the assets financed.

 ensure a higher recovery from the forced sale of asset. ii. During preliminary enquiries the bank has to satisfy itself whether the borrower has already arranged for the margin money and the source of such funds. If the borrower can spare the required margin from his savings, such savings would establish the borrower's bonafides (genuineness) and facilitate the sanctioning process. If the borrower has to seek loans from outsiders or money lenders, at very high rates for the margin, this will complicate recoveries by the bank as the money lenders insist upon clearance of their loans first. The Margin may be 704 - III

maintained in the SB/CA/OD accounts, while the loan application is submitted. h. Repayment Capacity: i.

The total period of the loan is determined by the following factors: 

The economic life of the vehicle



The borrower's anticipated continuing ability to repay



The restriction, if any, on the lender regarding the maximum period for which the loan can be extended ii. In general, long term loans are not favourable. The longer the period of the loan, the greater the uncertainties regarding the value of the vehicle and the borrower's ability to pay. This also locks up the lender's fund for an unduly long period and entails higher interest and service charges for the borrowers. With a longer period, the possibility of the vehicle becoming worn out and / or obsolete, is also greater, thereby weakening the value of the main security. iii. In metropolitan cities and other capital towns road transport industry is very profitable and an honest borrower can repay the loan in lesser installments. But, in places situated in towns, where demand is not much, branches may have to give longer time to repay the loan. The bank should be well informed of the potentiality of the area in which the borrower proposes to operate his vehicle. iv. The estimate of income should be made on a realistic basis taking into account the scope for business, the number of vehicles already operating and estimated future growth of business in the area. v. The cost of operation of the vehicle, for the entire period of the loan, on annual basis, should be worked out. The following operating expenses should be taken into account: 

Cost of petrol / diesel for distance traveled.



Cost of lubricating oil.



Salaries to driver/cleaner



Annual tax.



Insurance



Maintenance



Interest on loans from commercial banks.

 Depreciation of the vehicle at 20% of Cost. vi. In case of truck loans, it is beneficial to find out if the borrower has made arrangements for plying his truck with any other transport operator or whether he has any contracts with mills or factories, so that, he is always assured of full utilization. The condition and potentiality of the area for transport business and the expected take home monthly income should be discussed and studied.

705 - III

i.

Repayment Programme: i.

j.

In case of new vehicles the repayment programme should be so fixed that 45% of the loan amount is repaid in the first phase of the repayment schedule, 30% of the loan amount is repaid in the second phase of the repayment schedule and remaining 25% of the loan amount is paid in the third phase of the repayment schedule. Any deviations from this norm should be done only on proper sanction from the Regional Office.

Forwarding Proposals for Sanction: i.

The branches shall submit the proposal to the sanctioning authority alongwith: 

Proforma Invoice of the supplier of Chasis and the body builder with necessary information about the vehicle to be purchased by the applicant.



Copies of driving licence



Copy of the permit, if necessary

 Statement of Projected Income. ii. In the case of old vehicles, a valuation report from a competent person in the prescribed form shall be obtained. A specimen of the Valuation Report by the approved Automobile Engineer is given as Annexure-1 to this Chapter. 3.

Sanction and Disbursal: a.

Amount: i. When the appraisal is over, the Manager decides on the amount to be advanced within the rate of advance, as permitted by the bank. At present, margin is generally stipulated at 25% on the net invoice value of the new vehicle. Cost of body building, and cost of meters etc., will form part of vehicle cost. ii. In case of old vehicles (not more than 3 years old) the advance can be made on obtaining valuation report from an approved Automobile Engineer, retaining a margin of 50% of the valuation report. Second advance on the security of old vehicles, already held by the borrower, should not be encouraged.

b. Interest: i.

c.

Interest is compounded every calendar quarter at the Bank's usual rate of interest applicable and is payable along with the monthly instalments of the subsequent quarter. If however, the borrower finds it difficult to pay the quarterly interest in a lump sum, he may be permitted to pay in instalments so that the entire interest amount is paid, by the time interest is debited, for the further quarter. The bank may fix appropriate Equated Monthly Instalments (EMI) also.

Disbursement: i.

After getting the sanction from the Head Office, the applicant should be intimated about the 706 - III

limit sanctioned with full particulars of the terms and conditions laid down by Head Office. ii. Apart from the other documents branches should obtain blank T.O. form (Transfer of Ownership) duly signed by the owner of the vehicle. This helps the bank to transfer the ownership in case the loan becomes sticky and recourse is made against the vehicle for recovery. iii. The loan amount along with the margin money should be remitted directly to the dealers by means of Demand Draft/Pay Order Crossed “A/c. PAYEE” iv. While remitting the amount to the dealer he should be requested that at the time of registration of the vehicle with the RTO the bank's interest should be got noted. An endorsement to the effect that the vehicle is hypothecated to the bank should be incorporated in the Registration Certificate. The original certificate should be verified whether the charge of the Bank has been recorded in the RC Book and a copy of the same should be maintained with the loan papers. v.

In order to safeguard the bank's interest during the period between body building wherever necessary and registration of the new vehicle with RTO, a letter should be addressed to the body builder intimating the bank's charge on the truck.

d. Post-Release Documents: i.

e.

After the loan is granted it is essential to obtain the following papers. 

Original Invoice of the vehicle



Delivery Letter



Receipt for the money paid



Duplicate Key of the vehicle



(In the case of old vehicles, if it has only a single key, a declaration from the seller to that effect has to be obtained or noted likewise in the invoice).



R.C. Book copy



A comprehensive insurance policy with a bank clause



Route Permit and Fitness Certificate



Original Insurance Policy

Advance to Limited Companies: i.

If the borrower is a limited company, the charge on hypothecated vehicle should be registered with Register of Companies under Sec. 125 of the Companies Act 1956 within 30 days from the date of execution of documents and other requirements such as proper resolution etc., would have to be complied with. The other terms and conditions of the sanction should be strictly adhered to. 707 - III

4.

Follow-Up: a.

Supervision of the Credit: i. This part of the job is even more essential than assessment of the credit. The following important steps should be taken to ensure proper repayment and to protect the interest of the bank 

The borrower should be educated by the branch and persuaded to credit the day's net collection (after allowing personal expenses) to his Savings Account.



Notice of instalment due should be sent seven days before the due date



In case the party fails to pay the instalment on due date prompt reminders may be necessary.



If the reminders have no effect, visiting the borrowers personally is essential.



A letter to the borrower with a copy to the guarantor should be sent demanding payment in case of a continuous default for several months.



It is essential to inspect the vehicle at regular intervals, at least, once in a month and call for the Registration Certificate and Driving Licence from time to time to ensure that taxes are paid regularly and vehicle is kept in good running condition.



In case of persistent default, the bank should take possession of the vehicle by following the procedures and arrange to sell it to realize our advance.

b. Inspection: i.

c.

The vehicle should be inspected on delivery and a personal inspection report of the Manager after inspecting the vehicle is to be kept on record. Further, inspection of the vehicles should be done, once in a month, with the previous arrangement with the Borrower and a record of such personal inspection shall be maintained.

Confirmation regarding Charge: i.

The recording of charge on the Registration Certificate Register at the R.T.O office should be got confirmed by sending letter in duplicate one month after the advance, to the Regional Transport Authority and the endorsement or acknowledgement obtained should be kept along with the security. A specimen of the Letter to R.T.O. is given as Annexure-2 to this Chapter.

d. Name Board: i. Hypothecation Plate: - A small tinplate reading “This vehicle is hypothecated to the “…………………………………. Bank Ltd.,” should be riveted inside the bonnet near the manufacturer's plate, or whosesoever possible. 708 - III



The hypothecation plates may be carried by Managers / Officers/ Inspectors whenever they go for inspection, so that the plates can be fixed immediately at the time of inspection itself. ii. Bank's name: The banks charge over the vehicle should be displayed over the vehicle conspicuously by painting Note: Requirements under (i) and (ii) may be waived in case of private cars and scooters with the consent of the appropriate Higher Authorities in the Bank. e.

Verification of Taxes Paid: i.

f.

Insurance: i.

g.

The Registration Certificate should also be called for and examined at periodical intervals to ensure the payment of quarterly taxes and surcharge. This should be done within a month from the last date of the quarter. Such verification should be recorded in the R.C. Book Verification Register under the initials of the verifying officer. However, in the case of default in the payment of instalment, the Registration Certificate should be called for immediate verification.

The vehicle should be insured for its full value, under Comprehensive Policy with bank clause. The expiry date of the policy should be diarised and arrangement should be made to get the policy renewed well before the date of expiry.

No Objection Certificate: i.

While renewing the permit in the case of transport vehicles, R.T.Os will not renew the permit without “No Objection Certificate” from the Bank whose charge has been noted in the Registration Certificate of the vehicle. While issuing such certificate, where the advance is not regular, the arrears should be reported.

h. Monitoring the financial status: i. i.

The financial position of the borrower and the guarantors should be periodically reviewed.

Realisation in case of Default: i. Where the advance becomes overdue or irregular by non-payment of instalments and interest, final demand notice should be sent to the borrower and surety by Registered Post A.D. Arrangements may be made to take physical possession of the vehicle either by seizing the vehicle under the powers vested in the Bank by the hypothecation deed or through court attachment as may be appropriate, in such cases. ii. Thereafter, the vehicle should be sold by public auction and the proceeds appropriated towards the advance. Surplus, if any, may be credited to party's bank account and if there is a shortfall, it should be recovered from the borrower/surety by taking appropriate action. 709 - III

j.

When the Loan is closed: i.

On closure of an advance, the Bank's charge noted in the R.C. may be got cancelled by the R.T.O. and the Insurance Policy, the Ignition Key etc., may be redelivered to the borrower against his written acknowledgement, provided there is no direct or indirect liability to the bank by the owner of the vehicle. Permission from the Regional Office must be obtained before releasing the security. ii. Forms prescribed for this purpose may be used. iii. Insurance Company has to be instructed to cancel the Bank's interest in the policy. 5.

Annexure/s: a.

The following Annexures are appended to this Chapter: Annexure 1 : Specimen of a Valuation Report of a Motor Vehicle by the Automobile Engineer. Annexure 2 : Specimen of a letter to R.T.O. for confirmation of Registration of Bank's Charge

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Annexure-1 to Chapter-48 FORM OF VALUATION REPORT OF A MOTOR VEHICLE BY AN APPROVED SURVEYOR / AUTOMOBILE ENGINEER 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Name of the Owner : Full Address : Particulars of the Vehicle : Class of Vehicle : Registration No. : Type of Body : Year of manufacture (model) : Year of Registration : Horse Power : Chassis No. : Engine No. : Wheel Base : Seating capacity : Unladen weight : Regd. Laden Weight : Size of Tyres : Front/ Rear : How used : Private Car / Taxi / Carrier / Public Carrier Date of Expiry of Permit : Date of expiry of Fitness Certificate : Date of Expiry of Insurance : Nature of Insurance Policy : Immediate repairs and replacements required i) Piston : ii) Piston Rings : iii) Brake Liners : iv) Tie-Rod Ends : v) Springs : vi) Shock Absorbers : vii) Battery : viii) Tyres : ix) Gear Box : x) Triplex Glasses : xi) Other Repairs : xii) Distance Run as per meter : xiii) Whether meter reading is genuine : xiv) Manufacturer's Price : xv) Price paid by the present owner : xvi) Resale value you fixed Before / After Repairs: xv) Whether duplicate key is in Owner's possession:

I hereby certify the correctness of the above report: Place Date

Signature Name and address of the Surveyor

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Annexure-2 to Chapter-48 LETTER TO REGIONAL TRANSPORT OFFICER REQUESTING CONFIRMATION FOR REGISTERING BANK'S CHARGE

Regd. Post with A.D. To The Regional Transport Authority ………………………… Dear Sir, Motor Vehicle No. Engine No. Chassis No. We shall be grateful if you can confirm whether our charge on the above vehicle stands recorded in your registers. An endorsement below will serve our purpose. Thanking you, Yours faithfully, Manager Endorsement Regional Transport Authority i) A service charge of Rs.2/- may be collected for getting the charge confirmed. ii) Two copies of the Registration Certificate are to be taken and one retained with the loan papers, while the other sent to Head Office/Zonal Office with the Disbursal letter.

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CHAPTER-49

PENSIONER'S LOAN 1. General: a.

This facility is provided by way of a Demand Loan to the eligible pensioners to meet their urgent Medical Expenses.

2. To Whom can be Sanctioned: a. All individuals who are drawing their monthly pension (from Government and other Public Sector undertaking etc.) through any SCB/ DCCB. They must also maintain an operative Current or Savings Account with the Branch. Upper age limit 'say below 70 years' to be decided by the respective Bank 3. Loan Amount: a.

The eligible loan amount should be restricted to an amount fixed by the Management or 5 months pension amount whichever is less. However the minimum loan amount may be fixed as Rs.10000/-.

4. Security: a. The Branch need not insist on any other collateral security. Pension Pass Book has to be retained by the bank till the loan is cleared. 5. Period of Loan: a.

Loan is repayable in equated monthly instalments. The no. of EMI may be decided by the Bank. Repayment will commence from the succeeding month from the month of availing the loan.

6. Associate Membership: a. The borrower and one of the legal heirs of the borrower are to be admitted as Associate Members. 7. Rate of Interest: As fixed by the Bank Management. 8. Penal Interest: a.

Monthly instalment will have to be paid on or before 5th of the following month. In case of default or delayed remittance penal interest @ 3% over & above the normal rate shall be charged from the first of the month, in which it is due, till date of remittance.

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9. Documents: a. Application in bank's format with a medical certificate b. DPN c. Pension Pass Book d. A letter of authority from the pensioner authorising the Bank to recover the loan instalment from his account in which the pension amount is credited. e. A letter of undertaking from the identified legal heir (who is also admitted as Associate Member) to repay the outstanding loan amount with interest. 10. Sanctioning Authority: a.

This loan shall be sanctioned and disbursed by the Branch Manager subject to the Rules framed by the Bank Management for this Loan Scheme.

11. Books of Accounts: a. A separate loan ledger called as "Pensioner's Loan Ledger" shall be maintained by the Branch. b. Details of Pension Pass Book serial number etc. should be recorded in "Documents Register" of the Branch. 12. Vouchers / Entries: a. Admission i. DEBIT : "Borrower's Current or Savings Account" ii. CREDIT : "Associate Membership Admission Fee A/C” (to be collected in respect of the applicant & one of his legal heirs) b.

Loan Sanction i DEBIT : "Pensioner's Loan Account" ii CREDIT : Borrower's Current or Savings Account.

c.

Repayment i DEBIT : "Borrower's Current or Savings Account" (Towards monthly instalment) ii CREDIT : - "Pensioners Loan account" (for the portion of principal amount out of EMI) iii. CREDIT : - "Interest receivable on Pensioners Loan account" (for the interest portion out of the EMI)

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d. Penal interest i DEBIT : Borrower's Current or Savings Account ii CREDIT : Penal interest account. 13. Overdues - Recovery Action: a.

If a borrower fails to remit a monthly instalment by the due date of the month then a reminder (in pre-printed inland letter format) should be sent on after two days of the due date of that month under copy to the identified legal heir who has been admitted as Associate Member.

b. If the defaulted instalment is not remitted till twenty days after the due date of that month despite the reminder, a second reminder notice by Registered Post should be issued on after twenty two days of that month. c.

In case three consecutive instalments are defaulted, then after sending the two reminders as stated above, the Branch Manager should refer the case to H.O. legal department for suitable recovery action through Arbitration proceedings.

14. Trial Balance: a.

A trial balance of all outstanding “Pensioners Loan Accounts” should be extracted as at the end of each month and tallied with G.L. Figures.

715 - III

CHAPTER-50

JEWEL LOAN 1. General: a.

Loans may be given against pledge of gold jewels wholly belonging to the applicant / borrower. This loan facility should be made available only to individuals.

2. Application: a. The applicant / borrower will have to fill up the loan application provided by the Branch. 3. Associate Membership: a.

The borrower should be admitted as an Associate Member of the Bank against remittance of a nominal Membership fee (which may vary according to each Bank).

4. Purpose: a.

It is mostly for meeting Medical / Educational / Agricultural activities or any other family expenditure. At times it may be to clear prior debts to carry out repairs to homes, small extensions, improvements to homes, to develop one's business etc.,

5. Persons Eligible: a. Advances against gold ornaments should be confined to parties whose bonafides and reliability are established to the complete satisfaction of the bank / branch. He must be the true owner of the gold ornaments which he wants to pledge to avail a loan. 6. Valuation of Articles: a.

The valuation of the ornaments must be based on the weight and fineness of gold content only. Normally jewels with precious / semi-precious / imitation stones should be avoided.

b.

It is always desirable not to entertain pledging of gold ornaments with diamonds or equally valuable precious stones set in them.

c.

Appraising of these jewels will be done by jewel appraisers engaged by the bank on commission basis or by regular staff with that appraising skills. However banks may also train their own Cashiers and Managers, as in the case of SBI, to be competent to value the gold ornaments.

d.

The weight of all extraneous materials such as wax/strings/fastenings as well as stones (precious or artificial) must be entirely ignored when ornaments containing them are entertained as cover, under pledge, for the loan. The rough estimate of the weight of such items should be more liberal 716 - III

(i.e. on the high side) so that the loan sanctioned by the bank will be adequately covered by the gold contents alone. 7. Sanctioning Authority: a.

The Branch Manager will be the sanctioning authority who can sanction and disburse loans against pledge of gold ornaments.

8. Appraiser Fee: a.

9.

The Branch at the time of sanctioning "Jewel Loan" should collect "Appraiser Fee" from the borrower at the rates fixed by the Bank Management along with "Associate Membership Fee". Appraiser fee is subject to service tax.

Loan Amount: a.

The loan amount shall be as fixed by the Bank Management. Interest has to be charged at monthly rests.

b.

However, the loan amount per gram (22 carat-purity) shall not exceed 75% of the market value of the gold per gram.

c.

Rate per gram may be fixed by a Committee appointed by the Board and the rate may be based on the average price for 3 years or 75% of the present market value, whichever is less.

10. Period of Loan : This loan will have to be cleared together with interest due, within 12 months from the date of availment. On any day the outstanding against any borrower should not exceed the maximum loan amount prescribed by H.O. 11. Interest Rate: This loan will carry interest at the rate fixed by the Bank Management. 12. Safe Keeping of Pledged Jewels: The gold jewels pledged with the Bank shall be kept in a separate Iron Safe (other than cash safe) which is also kept inside the strong room under Double Lock System, i.e. not only the Strong Room is under Double Lock System but also the Iron Safe. 13. Custody: a.

The jewels under pledge the bank should be under the joint custody of the Branch Manager and another officer of the Branch or the Cashier of the branch.

717 - III

b.

One set of keys of the iron safe in which the gold ornaments are stored should be with the Branch Manager and 2nd set should be with the 2nd Officer / Cashier who will be the joint custodian.

14. Loan Issue & Other Procedures: a.

The jewel loan application with round seal of the Branch and date seal with Officer's initial to be given to the prospective borrower for filling up. This application should be kept ready by the Branch in complete sets i.e. containing i. ii. iii. iv.

Loan application, Associate Membership Application, Jewel pledge letter, Pronote.

b.

The officer who receives the filled up application should verify whether the required particulars / all columns have been properly filled up or furnished and duly signed by the borrower in the relevant columns ascertaining his true ownership too.

c.

Then the Borrower will deliver the gold ornaments to the appraiser who will weigh them in jewel balance provided in the Branch. He will also check in the Loan application whether the gold ornaments delivered by the borrower tally with the list he had made in the loan application in the appropriate column.

d.

The appraiser will then record under appropriate column in the application form the Gross weight of the jewels pledged, the weight in grams to be deducted towards stones, wax, etc. and the net weight. He will also ascertain the 22 ct purity of jewels pledged.

e.

He will also record therein the loan amount based on the net weight of gold jewel pledged and the "Loan rate" per gram of gold fixed by the Bank from time to time (This is done by H.O. based on Market rates with reasonable margin towards fluctuations). The borrower has to sign the loan ledger wherein entries made about the loan.

f.

The appraiser or the Bank clerk attached to this section/assigned this job will then prepare the following vouchers : i. Associate Membership Admission Fee. ii. Appraiser fee. iii. Loan Voucher iv. Credit Voucher, if the loan amount is to be credited to party's account with the Branch.

g.

The officer will then check up the entries in the Loan application and loan ledger i.e. the Gross weight & Net weight of the gold jewel and also per gram rate at which loan has to be issued, the loan amount and then will sanction in the application itself wherein specific space/column has been 718 - III

provided. He will also pass the Loan Voucher. If the payment is in cash then he will also scroll it in "Payment Cash Scroll". He will also issue a "Token" to the borrower to receive the loan amount at the Cash Counter. The "Token Number" will be entered in one corner of the Debit voucher and circled by the Officer. h. The borrower will be paid cash at Cash Counter after collecting the token from him. i.

Cashier will either receive cash towards "Associate Membership Admission fee" and "Appraiser's fees" from the borrower or adjust these amounts out of the jewel loan amount and pay the balance to the borrower.

j.

He should affix "Cash received" stamp on "Admission fee" & "Appraiser fees" vouchers and "Cash paid" stamp on jewel loan Debit Voucher and sign on all these vouchers.

k.

The vouchers shall be sent back to Jewel Loan Section where the clerk had already opened the loan account in the Jewel Loan Ledger and J.L. No. (which should be in serial order). The application form, Associate Membership Application form, Pronote, Loan debit voucher and pledge Agreement form to contain J.L. No. He should also record the due date of the loan in the "DUE DATE REGISTER".

l.

A separate "Associate Members" register should be maintained. The membership number should be maintained. The membership number should be given in serial order like "AM1", "AM2", "AM3" etc.

m. As and when new member are admitted member number should be assigned in serial order against which the name of the member and his address should be recorded. The register may have the following column: ASSOCIATE MEMBERS REGISTER Date n.

AM No.

Name of the Member with address

He should record all relevant particulars as per column in the Jewel Loan Ledger like i. ii. iii. iv. v.

AM No. JL No. Name of the Borrower Address Full details of the gold ornaments pledged as recorded in the Loan application which entries have been authenticated by the jewel appraiser.

o. He must then prepare "Jewel Loan Card" in triplicate. These pre-printed cards with serial numbers, which number should be noted in Jewel loan ledger.

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p. The officer will then check the JL ledger, JL cards and deliver the third copy to the borrower against his acknowledgement. q.

He will then crosscheck the jewels pledged with reference to the description furnished in loan application, Loan Ledger & JL card.

r.

The appraiser under the supervision of the officer place all the gold ornaments pledged by the borrower in a strong cloth bag, he will also place first copy of the JL card inside this bag and the second copy should be tied around on the outside of this bag.

s.

Banks adopt a system wherein the gold ornaments pledged are tied together using a twine thread and the first copy of the JL card also will be tied with this. On this card the appraiser will affix his "Seal" on red sealing wax.

t.

This "appraiser's seal" should be broken only in his presence during inspection after which a fresh seal will be affixed by him or at the time of delivering the jewels back to the borrower when he clears the jewel loan dues.

u.

Once the jewel bag is closed, with jewels inside, and tied and the second copy of JL card is tied outside this bag, the Manager / Officer will affix bank's seal on the Red Sealing wax poured on this knot.

v.

After the day's transactions are over, all the jewel bags relating to jewels loans issued that day will be arranged in jewel trays in the order of the loan account numbers and the tray will be placed inside "Jewel Safe" with strong room, by both the joint custodians.

w. A separate register called "Jewels pledge Register" with the following column should be maintained. JEWELS PLEDGE REGISTER: Date

No. of JL issued

JL No.

No.of Jewel Bags lodged

No. of JL closed

Actual No. No. of JL Loan of bags in A/c closed bags released the safe

Signature of Custodian

This Register should be kept inside the Jewel Safe and this should be signed by both the joint custodians. x.

"JL Card" of the Bank issued to the borrower with the following particulars which will help him to remit periodical interest on the jewel loan availed by him. 720 - III

AM No. : JL No. : Name : Date of Loan : Loan amount availed

y.

Repayment Date

Amount

Balance Loan Date

Amount

Interest accured upto Date Amount

Interest remitted Date Amount

On the reverse of this card, columns for Date, amounts remitted towards principal, interest and initials of Officer should be provided so that whenever the borrower makes any payment towards part of principal or interest due the entries would be made in this card.

15. At the time of Redemption: a.

When the borrower clears the entire jewel loan dues i. Make appropriate closing entries in the JL ledger ii. Withdraw the jewel bag, relating to loan accounts closed, from the Jewel Safe iii. Make proper entries in Jewels Pledge Register (Security Register) iv. Withdraw the documents i.e. the loan application, pledge agreement, pronote etc. submitted by the borrower at the time of availing the loan and cancel these forms drawing two parallel lines diagonally across these documents within which "Account Closed" should be written using red ink, record the date of closing the loan also in these forms. After this 2/3 punch holes should be made in the Pronote.

b. All the above cancelled documents should be kept in a separate file captioned as "JLs Closed File" c.

Borrower should surrender the JL card at the time of closing the Jewel loan account. As per the procedure detailed above these should also be properly cancelled & filed. Officer-in-charge should check the closing entries in JL ledger, Security Register (Jewels pledge Register). Bank's seal outside the jewel bag should be removed by the officer. This JL bag should be opened only in the presence of jewel appraiser. Then the seal of the appraiser should be removed. The jewels should be delivered to the borrower after getting his acknowledgement at the appropriate place in the jewel loan ledger.

d.

In case of a borrower requesting the Bank to hand over the jewels while he/she is abroad, the following procedures should be followed.

e.

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i.

The borrower has to execute a Power of Attorney Deed in the presence of Ambassador or a Notary Public of that country appointing any one from the legal heirs to remit the loan dues and receive the jewels. A copy of the deed should be sent directly to the Bank. ii. The power holder has to produce satisfactory proof of identification. iii. The power holder has to produce an indemnity bond for the value of the jewels. iv. In case of loss of JL identity, duplicate JL receipt can be issued under indemnity bond. v. The copy of power of attorney deed should be compared with the original deed before allowing the power holder to remit the dues. 16. Overdue Loan - Recovery Procedure: a.

Branch should review all the jewel loan accounts once in six (6) months and take the following actions for the recovery of dues. i. Issue first Demand Notice after one month before the due date. ii. In case the borrower does not respond to the first Demand notice, issue 2nd demand notice on the due date. iii. In case there is no response even for the 2nd notice, issue final notice by registered post, after 15 days from the date of issue of 2nd notice, informing the borrower that in case the borrower does not pay the dues to the bank and close his JL account within 7 days from the date of notice the bank will arrange for the sale of pledged jewels through public auction. iv. In case there is no response even after the final demand notice or all such demand notices are returned undelivered to the bank, a responsible staff of the bank should personally visit the last known address of the borrower to which address the bank had sent all the demand notices. In case the borrower is not available in that address, he should enquire the neighbours to know the where-about of the borrower. After such a visit and enquiries the staff concerned should file a report to the Branch Manager. v. All notices returned undelivered to the Branch should be kept unopened and must be kept with other loan documents. So that it may be produced to Government, if need be, as evidence of notice having been sent. vi. Thereafter the Branch Manager should refer all such overdue jewel loans to H.O. So that H.O. could either arrange for a centralized or region wise auction sale of gold ornaments relating to overdue jewel loans. vii. For this purpose the branches should list out all such overdue / irregular loans giving the particulars of Loan Member, Date of issue of loan, Name of the borrower with address, Amount of original loan, present O/S, Gross weight of jewels under pledge, Net weight & fineness of gold etc.

b.

Once the H.O. communicates its decision / agreement to arrange for sale of jewels relating to overdue jewel loan through public auction the Branch should observe the following steps : i.

Branch should again issue a fresh Registered Notice with Acknowledgement due calling upon 722 - III

the borrower to close the loan account and take delivery of his jewels under pledge to the bank within 15 days from the date of the letter. This notice should also advise the borrower that in case he fails to clear the overdue jewel loan dues within the stipulated time the jewels under pledge will be sold by public auction to recover the loan dues and in case the sale proceeds less cost of auction fall short of the total amount due to the bank under the overdue jewel loan the bank shall proceed against him for recovery of the balance amount due. ii. Ten days prior to conduct of auction sale, the Commissioners/ Collector, Central Excise shall be informed about the proposed sale giving details of jewels, weight and the name of the borrower to whom the jewels belong. iii. The auction sale shall be conducted by an approved auctioneer of the Central Excise Department. iv. Prior to actual sale in case there is no response from the borrower to the bank's registered notice, the branch will publish the proposed auction sale in one or two local dailies, preferably in local / vernacular language giving the details of the Name of the borrower with last known address, description of the jewels pledged by him which are proposed to be auctioned and Gross weight of the jewel. v. A copy of this Notice should also be displayed in the Notice Board of the Branch together with date of auction with the following condition: that immediately after the auction sale, the highest bidder should deposit 50% of the bid amount. - that the sale will be subject to the confirmation within 10 days by the appropriate authority of the Bank's H.O. - once the sale is confirmed and the bidder is informed he should deposit the balance amount within 3/5 days from the date of receipt of intimation (such intimation should be personally delivered by a bank staff through bank's "Local Delivery Register" against the party's acknowledgement in the register) and in case of failure the 50% deposit amount paid by him on the date of auction would be forfeited. - that in case the sale is not confirmed the amount deposited by the bidder shall be returned to him without interest. - that the bank is not liable for the quality / quantity of the jewels. vi. The auction should be conducted in the presence of two directors nominated by the Bank or two respectable witnesses and full record of the auction duly authenticated by these witnesses should be kept by the branch. vii. While auctioning a minimum bid amount of 80% of the current market rate per gram of gold should be insisted. The market rates will be available in all local dailies. viii. Jewels relating to each loan should be taken for auction sale separately. ix. On the date of auction the intending bidders should first remit a token amount fixed by the bank as EMD and should furnish his name residential address with phone, business address with phone, if any, and sign in the "participating bidder's List" of the branch. He will then be given a TOKEN (as ID) by the Bank to participate in the auction sale. 723 - III

x. This EMD will be adjusted towards 50% of the highest bid, if he is the highest bidder for any of the jewels auctioned that day. In case a bidder was not the highest bidder for any item of jewels auctioned that day, the Branch should on the conclusion of auction sale of all the listed jewels, refund his EMD amount against his acknowledgement in "Participating Bidders List". xi. For each item of jewel auctioned the branch should record the bid amounts as the auction proceeds (i.e. as per progress in the auction) noting in a separate sheet for each jewel loan account (the jewels relating to which are auctioned) with the name of the bidder and the bid by him. The highest bidder should sign with the date in that particular sheet against the highest amount bid by him which should be countersigned by the Manager and another authorised officer (authorised by the H.O. for the purpose) such sheets should be retained in bank's records. xii. In case a borrower had pledged many pieces (items) of jewel to avail the loan which has now become overdue, the branch shall auction only as many items of jewellery as are necessary to realise the entire dues under the said jewel loan account and the remaining pieces (item) of jewellery should not be auctioned. xiii. Care must be taken to see that the Branch realises proper prices for the jewels auctioned. If the Manager suspects that the bidders have formed a Syndicate and feels that the highest bid for a particular jewel is not a fair price, the sale of that jewel need not be concluded that day, but adjourned to some later date. xiv. When the auction sale i.e. the highest bid is confirmed by the appropriate authority in the Bank and the confirmation of the sale had been communicated to the bidder and he remits the balance 50% of the bid amount within the stipulated time the relative jewel should be delivered / handed over to the purchaser after getting his acknowledgement in the jewel loan ledger. xv. The borrower should also be intimated of the auction sale particulars by registered post with acknowledgement due. All charges (postal charges relating to Demand & Registered notices sent to him etc.) should be adjusted out of auction sale proceeds after adjusting loan dues, Balance amount of the sale proceeds, if any, should be credited to the borrower's SB account or remitted by means of a Banker's Cheque / Pay Order Crossed account payee. In case the auction sale proceeds is not sufficient to liquidate the dues under the J.L. account of the borrower the branch should inform the H.O. immediately for necessary legal action by H.O. against the borrower for recovering the short fall. xvi. Detailed report of auction sale, adjustment of J.L. account etc. should be sent to H.O. within a month from the date of auction. xvii.The staff members of the Bank / Branch should not be allowed to participate in the auction sale. 17. Insurance: a.

The gold jewels under pledge with the bank shall be insured against risks of fire and burglary for their market value. This Insurance will be arranged by the H.O. collectively for all the branches issuing jewel/gold loans and many banks are collecting this Insurance charge from the borrowers at 724 - III

the time of closing the J.L. account. For this purpose the J.L. issuing branches should send a statement to H.O. at on every Friday giving the following particulars. The Branch manager will have to follow the following important instructions to ensure effective management of jewel loan portfolio. Jewel loan - Jewels under pledge - Insurance cover - Statement As on FRIDAY ............................... Day

Date

Net weight of gold Net weight of gold Net weight of gold Net weight of gold jewels pledged jewels released of jewels pledged jewels pledged opening value during the day during the day closing value

Saturday Sunday Monday Tuesday Wednesday Thursday Friday 18. Gold (Jewel) Loan to Staff Members: a.

Jewel loan can be granted to the members of the staff subject to the limits fixed by the H.O. from time to time. The rules to be followed, rate of interest to be charged, etc. should also be communicated by H.O. through circulars / office orders. The pledged jewels should be owned by the staff member (his spouse). Staff member availing jewel loan should become Associate Member.

19. Verification: a. The jewels under pledge to the Bank should be verified by the joint custodians in the presence of the appraiser once in a quarter. They should record in the respective J.L. ledger folios "verified & found correct" and should sign with date. The Branch should send a certificate to H.O. after each such quarterly verification. b.

At the end of each month one of the officers in the branch (other than the joint custodian) in the presence of the joint custodian should check the number of jewel bags inside the "Jewel Safe" and verify whether the number agrees with the number shown in "Jewel Loan Security Register". After verification the officer should record in this Security Register "Verified the number of Jewel bags & found to agree with the Security Register" and affix his signature with date.

c.

Inspecting Officer / Internal Auditor whenever they visit the branch for regular inspection or conducting Internal Audit should count the number of Jewel bags inside the jewel safe and check

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with the J.L. ledger & Jewel Security Register whether both figures agree. They must also choose 20% of number of outstanding Jewel loans at random and pull out the jewel bags relating to such randomly chosen jewel loan accounts, remove the seal in the presence of the appraiser and physically verify the jewels under pledge to cover the respective loan amount. 20. Books of Accounts and Forms: a.

The branch should maintain the following ledgers / Books / Registers and Forms: i. Jewel loan Ledger ii. Associate Membership Register (Common for the Branch) iii. Jewel Security Register iv. Due date Register v. Auction Sale Register vi. Trial Balance Register. vii. Jewel loans (net weight) Insurance purpose register

b.

The following Forms should be maintained in files: i. ii. iii. iv.

Jewel Loan Application Form Associate Membership Application Form Pledge Agreement Form Pronote.

c.

Associate Membership application forms may be kept in a separate file. Before filing the loan number of the first jewel loan availed by that Associate Member should be noted in the A.M. application form. Similarly the A.M. number should be marked in the J.L. application form, pledge agreement form and pronote. These three forms should be stapled together and kept in a file called "J.L. applications" file.

d.

As and when the jewel loans are closed (cleared) the relevant J.L. applications, Pledge Agreement Forms and Pronotes should be removed from this file and "Account closed" stamp should be affixed on all the said form with date of closing the loan recorded in red ink. These forms of the closed accounts should be kept / retained in separate file called "Jewel loans closed".

21. Claims: The claimants (legal heirs) have to submit the following documents. 1. 2. 3.

Claim form signed by all the claimants simultaneously and notarized Death certificate of the borrower Legal heirship certificate

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4. 5. 6. 7. 8. 9.

Indemnity bond with two sureties for the value of the jewels Proof of creditworthiness of sureties Jewel loan card Consent letter from the other legal heirs with notary attestation to hand over the jewels to one among them. Probate order in case the borrower had left any will and the claim is based on the Probate Letter of Administration issued by a competent court in case of rival claim or the bonafides of the claim is doubtful.

Precautions/instructions to be followed in respect of jewel loan issue: Two Personnel should sign in all Jewel Loan applications Jewel Loan Cards and Jewel Loan Ledger Sheets. One Officer has to authenticate the weight of Jewels, No. of Jewel Loan Item along with the signature at the time of issue of loan to the borrower and the other has to authenticate the same at the time of the sealing the Jewel Bags with the Jewels pledged. Both Officers should sign the Jewel Bags Stock Register kept inside the Safe Room and similarly Deposits and Withdrawals of Jewel Bags should be authenticated in the Register then and there. Revenue Stamps should be insisted upon and affixed on the Pronote before disbursement of Jewel Loans, where stamping is not exempted. Latest address proof along with borrower's Mobile/Landline No. should be obtained every time. For new customers, proof of identity and address along with his/her passport size photograph should be compulsorily obtained. One photo should be affixed in the Ledger Sheet and other one in the application to comply with KYC Norms. Postage expenses should be collected from the borrower at the time of redemption of Jewels. Whenever reminders/notices are returned suitable follow-up actions should be initiated by the Branch to trace out the borrower and recover the dues to the Bank. The Officer in-charge should take charge of overdue Jewels every month and initiate suitable follow-up action and to realize the overdues. In case of overdues, the Officers should recommend for Jewel auction as per the laid down rules of the Bank and ensure recovery of the dues to the Bank.

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CHAPTER-51

ADVANCES AGAINST LIFE INSURANCE POLICIES 1. General: a.

Demand Loan or OD / Cash credit may be granted to the customers against Life Insurance Policies issued by LIC of India. The customer shall be admitted as an Associate member of the Bank.

b.

Such advances should normally be granted only against Endowment Policies with profits.

c.

No advance shall be granted against Life Insurance Policies having any conditional undertakings, either as per the Insurance Act / IRDA norms or otherwise.

d.

According to Sec.39(4) of the Indian Insurance Act 1988, a nomination is automatically cancelled by subsequent transfer or assignment. As such it should be specifically ensured that all policies are assigned in favour of the Bank and all are being effected under Sec.39(4) of Insurance Act.

e.

No advance should be granted against a policy which stands assigned to a minor.

f.

The policy should be carefully examined to ensure that it does not contain any special condition which restricts its assignability and affect its value as security for bank's advance.

g.

Life Insurance Policies may be accepted either as a Primary Security or Collateral Security for advances.

2. Precautions: a.

To ascertain that no prior charge exist on the said policy.

b.

Premia on the policies have been paid upto date and the policy is in force and the latest premium receipt should be taken and retained on bank's records.

c.

The original policy duly stamped and signed by the issuing authority should be obtained.

d.

The age of assured must have been admitted in the policy. If not admitted it must be arranged for before granting the advance.

f.

The surrender value of the policy should be ascertained from LIC.

g.

No loan can be granted against policies which have not acquired any surrender value.

h.

The Policy offered as Security must be at least 3 years old.

i.

If the policy stands in joint names, all of them should assign the policy jointly.

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j.

No loan will be sanctioned on a policy taken by a partnership concern on its partners.

3. Maximum Amount of Advance: a.

The maximum amount of loan / advance against the security of Life Insurance Policy shall not exceed 85% of the surrender value of the Policy or at any percentage as may be fixed by the bank from time to time.

4. Assignment of the Policy:

5.

a.

All the policies must be assigned in favour of the Bank as Security and the assignment should be registered with LIC before granting any advance. In the case of Postal Life Insurance Policy it should be registered with the Post Master General of the Circle who had issued the Policy.

b.

The assignment should be executed by the assured on the policy itself or on a separate stamped paper.

c.

The assignment should be witnessed by a person, other than wife or a near relative of the assured stating his name occupation and address.

d.

The assigned policy together with a notice of assignment in duplicate signed by the assignor should be forwarded to the concerned office of the LIC by Registered Post with Acknowledgement Due letter for registration of the assignment and return of policy along with a copy of notice of assignment after incorporating an acknowledgement by them.

e.

Due dates of premia should be properly diarised to ensure that they are regularly paid. It should also be ensured that the policies do not lapse for non-payment of premia on time. For this purpose standing instructions, to debit his account with the bank to remit the premia should be taken from the borrower customer. All premia receipts as well as Bonus receipts (wherever applicable) should be obtained and retained with the policy.

f.

All the Insurance Policies held as security for advances must be recorded in bank's "Security Register" and retained in strong room.

g.

The applicant must be resident / employed within the area of operation of the branch.

Documents: a. Loan application in the prescribed format. b. Letter of pledge for advance against Life Insurance policy. c. Single / joint and several DP Note. d. Assignment made on policy itself or a separate assignment on stamped paper. 729 - III

e. Letter of continuity in case the facility is provided to the borrower by way of overdraft in his Current Account. f.

Any other Document like Associate Membership form etc. as prescribed by the Bank from time to time.

6. Loan Sanctioning Authority: a.

The Branch Manager shall be competent to sanction the loan/overdraft against the security of Life Insurance policies. He should satisfy himself about the integrity and credit worthiness of the borrower. The Delegation of Powers for sanction of such advances rest with the Board of Management.

7. Period of Loan: a.

8.

The period of the loan shall be as fixed by the Bank. Normally it is desirable to restrict the period to 3 years. Loan must be repayable either by monthly / quarterly instalments.

Rate of Interest: a.

The Rate of Interest shall be as fixed by the bank from time to time. Normally, it is desirable to fix the Rate of Interest as applicable to secured advances. Interest should be charged at the end of each calendar month for both overdraft as well as loan accounts on the basis of products of daily outstanding and capitalised. Interest demand notice should be issued to the borrower 15 days before the actual date of charging of monthly/quarterly interest with a request to remit the interest due on or before the due date prescribed.

9. Penal Interest: a. If the interest due is not cleared on the due date, penal interest will be charged at the rate fixed by the Bank, on the interest amount due from the due date to the date of actual remittance. b.

Similarly if the instalment of principal is not repaid on the due date, penal interest as above should be charged.

10. When the Loan becomes Overdue: a. Where the loan against the Life Insurance policy becomes overdue and remains so despite repeated reminders, a final demand notice demanding the payment of the entire dues together with interest due there on should be sent by Registered Post with acknowledgement due intimating the date by which the borrower should settle the dues to the Bank. (normally 30 days' time may be given from the date of Registered notice). In the same notice the borrower shall be informed that in case of failure to clear the dues to the bank within the stipulated date the bank will surrender the policy without further intimation to the borrower.

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b.

If after the lapse of the stipulated period, the loan remains unadjusted and it is decided to surrender the policy and realise its value, the letter addressed to the LIC of India for the purpose should contain, inter alia, a certificate to the effect that the policy is being surrendered after due notice to the policy holder.

11. Reassignment of Policy: a.

When an advance against a life policy is fully repaid, the policy should be reassigned in favour of the assignor - borrower (Policy holder). The reassigned policy thereafter should be sent by the Branch along with the notice of Re-assignment direct to the concerned office of the LIC of India for registration of the re-assignment in their books.

b.

When sending the re-assigned policies to the concerned office of LIC for registration of reassignment, the covering letter should specifically point out that the policy is being sent (i) for registration of reassignment and (ii) for subsequent transmission thereof to the policy holder. The policy holder should be suitably advised.

c.

Insurance policy should be reassigned only in favour of the life assured and it should not be reassigned in favour of third parties even when the borrower desires the Bank to do so and issue a letter of authority, it might impose on the Bank unnecessary liability which must be avoided.

12. Repayment: a. If a policy matures before the due date of the advance, the Branch should address LIC of India, as to the procedure it should follow to surrender the policy. The proceeds of the policy should then be collected and credited to the Loan account. Any surplus should be credited to borrower's Current or S.B. account with the Branch. b.

In the event of death of the borrower (Life Assured), the Bank is entitled to receive the Policy Amount. The Bank should get the necessary forms from Life Insurance Policy and claim policy amount by submitting the forms duly filled in along with the death certificate of the borrower.

c.

On receipt of the policy amount, it should be adjusted to the Loan Account and if any surplus amount is available, it should be paid to legal heirs of the borrower.

731 - III

CHAPTER-52

ADVANCES AGAINST NATIONAL SAVINGS CERTIFICATES (NSCs) & KISAN VIKAS PATRAS (KVPs) 1. General: a. Advances by way of Loans / Over drafts against Kisan Vikas Patras (KVP) may be granted to i. the Bank's customers, ii. persons of good reputation iii. Central Government/ State Government / National Saving Certificates (NSCs) / employees of PSUs, iv. persons introduced by the long standing customers of the Branch v. staff members of the Bank 2. Precautions & Procedure for sanction loan/ OD: a.

The NSC should be in the name of the Borrower

b. To ensure that the certificates offered as security for loan are the originals and not duplicates. c.

Specimen Signature of the beneficiary of the NSC should be got verified by the Post Office concerned. However, when the identity certificate issued by the Post Office is available this is not necessary.

d. An authorisation letter from the borrower as per specimen supplied by the Post Office without date, addressed to the concerned Post Office for effecting transfer of the certificate in favour of the Bank should be obtained and retained with the N.S.C. e.

A letter from the borrower requesting the Post Office to register the lien in favour of the Bank and hand over the certificate to the Bank after such registration.

f.

The Bank should obtain a letter of authority from the borrower at the time of granting the advance and ensure collection of periodical interest from the Post Office and credit the same to the loan account.

g. In case of NSCs in the Joint Names, Letters of Authority should be taken from all parties. h.

No loan/ OD may be sanctioned to minors, lunatics, etc.

3. Amount of Advance: The amount of advance against NSCs may be upto 65% of the face value or at the percentage fixed by the Bank from time to time.

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4.

Period of Advance: a. b.

Loan against NSC may be sanctioned for a maximum period fixed by the Bank or upto the date of maturity of the NSC, whichever is earlier. O/D against NSC may be sanctioned for a period of 1 year and may be renewed every year upto the date of maturity of the NSC.

5. Rate of Interest/Charging of Interest:

6.

a.

The rate of interest and the method of charging the interest shall be as prescribed by the Bank. The ROI may be fixed by each bank based on the Prime lending rate of the bank.

b.

Interest may be calculated on the daily outstanding and charged to the loan /OD a/c at the end of every month/ quarter.

c.

Interest Demand Notice is to be sent to the borrower advising to pay the interest to the loan / OD A/c on or before the end of every month/ quarter as the case may be.

d.

In the event of failure to pay the interest as per demand, penal interest may be charged/ collected on the rates prescribed by each Bank.

e.

The security must not be discharged by the holder at the time of pleading as security.

f.

Demand Promissory Note executed by the borrower for the total amount of loan/ OD sanctioned should be obtained.

g.

The accepted N.S. Certificate should be forwarded to the Post Office which has issued the certificate along with an appropriate transfer application form, as prescribed by the Postal authorities for transfer of N.S. Certificates in the name of the Bank. The Bank should ensure that no loan or advance is granted before the securities are transferred in favour of the Bank.

h.

The authority to sanction loans or overdraft limits against the security of NSC/KVP will be as per the delegation of powers as prescribed by the Bank from time to time.

i.

The NSC/ KVP should be kept in safe custody with the Bank with proper entries in the Security Register.

Closing of Accounts: a.

On repayment of the loan/ OD before maturity of the NSC, the Bank has to arrange for cancellation of Lien/transfer from Bank's favour in the Books of the Post Office by executing the prescribed forms. And on cancellation of lien, the NSC should be returned to the customer against acknowledgement.

b.

In case of default in repayment of dues till maturity of the NSC, the proceeds of the matured NSC should be collected from the Post Office and adjusted for the dues with interest, penal interest, etc. and the balance amount if any, may be credited to the customer's savings account or sent to the customer by a Banker's cheque/ pay order. 733 - III

CHAPTER-53

CASH CREDIT LIMIT TO TRADERS 1. General: a.

Proposals for Cash Credit Limits from customers received by the branches should be forwarded to HO for approval and sanction by authorised Executive of the Bank at HO.

b. After sanction full details should be placed before the Board of Management for ratification. c.

On receipt of sanction from HO, the Branch Manager will issue sanction orders to the applicant, collect all required documents.

2. Eligibility: a. The applicant should be a wholesale/ retail trader having a certificate of registration under the State Sales Tax Act. b. The applicant shall be a Sole Proprietor / Partnership Firm. c. Any trading or business activity approved under the State's (State concerned) General Sales Tax Act will be eligible for Cash Credit Limit. d. The business / trading activity of the applicant should be in the area of operation of the Branch. 3. Procedure: a.

An application for Cash Credit Limit should be collected from the customer in bank's printed Application Form.

b. The applicants / guarantors should be admitted as an Associate Member. c. The applicant must open a Current Account (if not already an Account Holder) d. On receipt of approval of the proposal and sanction by HO, the accommodation should be provided by the Branch as Cash Credit facility. e. The Cash Credit Limit should be valid only upto end of the calendar year in which it is sanctioned. f.

Renewal of the limit for subsequent year(s) will be based on the performance / operations in the Cash Credit account during the previous year.

4. Security: a.

The primary security for the Cash Credit accommodation will be hypothecation of paid stocks in Trade / Permissible level of book debts. 734 - III

b. Valuation of stocks will be on the basis of cost price or market price whichever is less. c. In addition to hypothecation of stocks the borrower should furnish collateral security in the form of urban immovable property at least equal to the Cash Credit Limit sanctioned by the Branch. 5. Limit Eligibility:

6.

a.

Limit will be assessed basing on the last two years sales turnover as reported in the State Government Sales Tax Assessment orders. Limit will be sanctioned not exceeding 20% of the average turnover of stocks during the previous two Sales Tax Assessment years.

b.

In respect of high turnover commodities like petroleum products / cigarettes etc., limit will be assessed at a lesser rate of turnover figures based on actual optimum level of requirements.

Margin:The margin shall be as prescribed by the Bank. It is desirable to have a margin of 40%. Drawing Power will be arrived at after deducting the margin amount from the value of stocks and permitted level of book debts.

7. Loan Limit: Minimum and maximum Cash Credit Limit to any single individual trader will be fixed by the bank. It may be desirable to have the minimum as Rs.25,000/- and the maximum limit as Rs.10.00 lakhs. 8.

Period of Limit: Initially the period of limit shall be for one year only. However, the limit shall be reviewed for further period.

9. Rate of Interest: The rate of interest shall be as prescribed by the Bank. 10. Penal Interest: a.

Outstanding in excess of drawing power / limit as well as the O/S under the unrenewed Cash Credit account will be considered as overdues.

b. Such overdues will attract penal interest at 3% p.a. over and above the normal interest rate from the date of such overdue till date of regularisation of the account. 11. Documents: a. Application for Cash Credit Limit should be in banks printed Application Form. b. Hypothecation Agreement duly executed by the applicant. c.

Title Deed and other relevant documents relating to collateral securities offered as cover for Cash Credit Limit.

d. Pronote for the amount of CC limit sanctioned by the Branch. e.

Original of Insurance Policy, covering the stocks in trade in the shop insured against the risks of fire theft etc., in the joint names of the trading concern and the bank with bank's clause. 735 - III

12. Sanctioning Authority: a.

Once the Cash Credit limit has been sanctioned by such authorised executive, the subject will be placed before the Board of Management for ratification at its next meeting.

13. Insurance: a.

The borrower (Trader) should arrange for insurance cover for the stock-in-trade in his shop / godown against the risks of fire, theft, etc. in the joint names of the bank and the trading concern with bank's clause.

14. Utilisation of Cash Credit: a.

The Cash Credit Limit should be utilised only for the purpose for which the same has been sanctioned.

b.

Any diversion or misuse of this Cash Credit funds will render the borrower liable to repay the entire dues to the bank immediately and the Bank will stop further operations in the CC account.

15. Stock Statement: a.

The borrower shall furnish the stock statement every month in the prescribed format to the Branch to reach the branch on or before 10th of the succeeding month.

b.

On receipt of the stock statement, the value of available stocks in the shop / godown at cost price or market price whichever is less to be assessed out of which the prescribed margin. (may be 40%) should be reduced and the Drawing Power should be fixed. This Drawing Power should be communicated to the borrower and this D.P. is to be operative from 15th of the month to 14th of the succeeding month.

c.

At no point of time the outstanding in this CC account exceed the Drawing Power.

16. Procedure for Overdue Recovery: a.

If the CC account becomes overdue and the borrower does not, despite written Demand notices by the bank, regularize the account or repay the entire dues within the stipulated period, the Branch Manager should refer the case to HO for Legal / Arbitration action against the borrower for recovery of dues to the bank after exhausting the following steps: i. Issue first Demand notice within one week from the date of occurrence of overdue. ii. If the account is not regularized issue second Demand notice, after 15 days from the date of issue of first demand notice. iii. Even after the second notice if the account is not regularized then issue a Registered notice with acknowledgement due after 30 days from the date of second notice.

736 - III

CHAPTER-54

TEMPORARY OVERDRAFTS

1. General: a. This is a facility provided to most trustworthy and credit worthy constituents of the Branch. b.

The Branch Manager should have complete knowledge about the individuals, to whom he allows TOD facilities, such as their social status, employment, business details, monthly earnings, family background, whether owns a house / flat, etc.

c. The TOD shall be sanctioned at the discretion of the Branch Manager. d. Normally cash drawals should not be permitted under TOD limit. e. Staff members of the bank are not eligible for TOD facility. 2. Application: a,

The Current Account customer should make a specific written request to the Branch Manager seeking TOD facility mentioning the amount required, purpose and period for which the same is required.

3. Associate Membership: a.

Once the Branch Manager has agreed to extend TOD facility to the customer who had applied for the same, he should be admitted as an Associate Member.

4. Documents to be obtained: a.

The following documents should be obtained from the customer to whom TOD facility is allowed by the Branch: i. An application seeking TOD facility. ii. DPN for the TOD limit sanctioned by the Branch. (As and when the existing TOD facility i.e. the entire outstanding together with interest due is remitted by the customer by end of the period for which the TOD had been sanctioned, the DPN covering the TOD O/S should be cancelled. Fresh Pronote should be obtained when again the TOD facility is extended to the same customer). 5. Maximum TOD to be allowed: a. Maximum TOD to be allowed should be as fixed by the Bank Management. In most banks a ceiling of TOD per individual customer as well as overall ceiling for total TOD limits to be sanctioned by each Branch are being fixed from time to time. 737 - III

b.

A Cooperative Bank has to allow TOD facility to well-known borrowers based on their credit standing and integrity as assessed by the Branch Head.

6. Period of TOD: a.

The period of TOD normally is fixed 3 months. In few banks it is 6 months. However the period of TOD will have to be as fixed by the Bank Management.

7. Rate of Interest: a.

The rate of interest shall be as fixed by the Bank Management with revisions from time to time. However, the rate of interest should be highest for TOD.

b. Interest should be charged on the basis of daily outstanding. c.

Interest should be charged on the last working day of each month or as and when the outstanding is cleared, whichever is earlier.

8. Penal Interest: a.

If the O/S amount with interest under the TOD account is not cleared within the stipulated period of 3/6 months then the outstanding is treated as overdue for which penal interest @ 3% p.a. in addition to the normal rate should be charged from the original date of availment of TOD till date of regularisation.

9. Operation of TOD Account: a.

On each occasion any debit or passing of a cheque drawn on the TOD account which results in causes Temporary Overdraft i.e. debit balance in the said Current Account the same should be recorded in cheque referred book and the approval of the Passing Officer / Branch Manager should be obtained.

10. Outstanding in the Account: a. The outstanding under TOD account should not be allowed to exceed the TOD limit sanctioned. b.

Since interest on the O/S in the TOD account should be charged (i.e. debited) to the account on the last working day of each month in case such a debit of interest amount is estimated to result in an outstanding which will exceed the sanctioned TOD limit, the customer should be asked to remit sufficient funds.

11. Renewal of TOD limits: a.

It should be ensured that the entire O/S with interest under TOD, the limit sanctioned to any customer is cleared within the stipulated period i.e. 3/6 months as fixed by the bank.

b.

Any renewal of TOD limit should be considered only after a lapse of at least 10/15 days from the date of repayment of dues under the previous TOD limit. 738 - III

12. Sanctioning Officer Responsible: a.

Since the TOD facility is sanctioned purely & solely on the personal assessment of an individual customers integrity, credit worthiness the facility is sanctioned by the Branch Manager on his personal risk and responsibility.

b.

Hence the sanctioning officer is responsible for recovery of dues under the TOD limit sanctioned by him.

13. Overdue TOD Recovery Action: a.

If the TOD is cleared within the stipulated period of 3/6 months then such account should be treated as overdue.

b.

The Branch Manager should then issue a Demand Notice to the customer within 7 days from the date of expiry of the TOD limit advising him to clear the dues to the bank within 10 days from the date of the Demand Notice.

c.

In case he fails to respond then a second notice should be issued to the customer within 30 days from the original date of expiry of the TOD limit.

d.

If there is no response even after the second notice a final demand notice by Registered Post with Acknowledgement Due should be issued to the customer after 15 days from the date of 2nd notice.

e.

Even after this final demand notice, if the customer do not respond then the Branch Manager should refer the case to HO after 15 days from the date of final notice for suitable Legal / Arbitration action against the defaulted customer.

14. OD Register: a.

The Branch should maintain a register called "Current Account OD Register" wherein details of daily O/S under both POD as well as TOD accounts should be recorded separately and the entries should be authenticated by the Branch Manager.

15. Return: a.

The Branch should furnish a weekly return to HO showing all particulars relating to all TOD accounts in the Branch as on each Friday.

739 - III

CHAPTER-55

LOCAL CHEQUES, DEMAND DRAFTS AND OUTSTATION CHEQUES - PURCHASE, INSTANT CREDIT 1.

General: a.

b.

2.

Monetary Ceiling: a. b. c.

d.

3.

This facility can be extended to all Current Account customers and in select cases of S. B. Account Holders, who are maintaining good operative account with good standing. This is a service provided to customers. The customer to whom this facility is extended should be in a position to make good the amount in short notice in case the purchased instrument is returned unpaid by the Drawer bank.

A monetary ceiling per customer should be fixed by the Bank. This facility is not provided by way of limit. (Bills purchase / Bills discounting limits are provided to business class of customers as a separate line of credit). This is a facility provided to the customers who desire to encash the local / out station cheques/bills/DDs drawn in their favour immediately without waiting till the proceeds of said instruments could be realised by the bank in the normal course. Since no other collateral security is available and this facility is a clean accommodation till the realisation of the instruments deposited by such a customers, the Bank will fix a monetary ceiling per customer for provision of this facility.

Safe-Guards to be observed: a.

The bank will have to establish the following in order to get a good title as "Holder for value": i.

The bank should not have notice of any previous dishonour of the cheque or any defect in the title of the customer. ii. It should not have given value for the cheque in good faith. iii. It should not have paid the value under suspicion of forgery of the cheque. iv. The cheque should not have been crossed "Not Negotiable". v. The cheques should be drawn in favour of the customer who wants the same to be purchased. vi. The cheques should be crossed by the constituent before tendering to the Branch. vii. The cheques must be drawn on well-known and sound banks. viii. If the purchased / discounted cheque is returned unpaid for want of funds or due to stoppage of payment by the drawer (i.e. other than technical reason) the customer for whom the said cheque has been purchased should not be extended the same facility again.

740 - III

4.

Books: a.

5.

Procedure: a.

b. c. d. e. 6.

The Branch should maintain Bills Purchased Register. This Register may be subdivided providing few pages for recording the particulars of “Local and Out station Cheques” and “DDs purchased”.

To collect a request letter from the customer for purchasing the cheque / DD drawn in his favour which he lodges for realisation and credit to his account with the branch. He must mention whether he wants instant credit of full value or part value of the cheque lodged by him, mentioning clearly his account number. Get the authorisation from the Branch Manager. Then prepare necessary vouchers for purchasing the said cheques. After passing necessary "purchase" entries send the cheque to HO / Clearing House for collection of proceeds. Upon realisation of the cheque amount make necessary adjustment entries.

Vouchers: a.

At the time of purchasing the instrument for part value of the cheque, debit the amount paid to the customer against the value of the cheque purchased and make entry as: i. Debit ii. Credit iii. Debit iv. Credit -

General Ledger Head of Account "Bills Purchased account" Customer's Current or Savings account for the amount paid Less commission. "Commission account" for the value of commission charged. "Clearing House Account" (GL account) for full value of the cheque. Bills purchased account (for the amount paid to customer). Customers account (for the balance amount of cheque). e.g. In case the cheque is for Rs.10,000/- but the customer wants immediate payment of Rs.5,000/- only.



Debit Bills purchased account for Rs.5,000/-



Credit Customer's account for Rs.4,900/- (if Commission charged is Rs.100/) - Commission account for Rs.100/-



Debit Head Office account (GL account) for Rs.10,000/-



Credit "Bills purchased account" for Rs.5,000/- Customer's account for Rs.5,000/- e.g. B. If the cheque for Rs.10,000/- is purchased for full value.



Debit "Bills purchased account" for Rs.10,000/-



Credit "Customer's account" for Rs.9,800/ - "Commission account" for Rs.200/-. 741 - III

CHAPTER-56

BANK GUARANTEES ON BEHALF OF CONSTITUENTS 1.

General: a.

Bank Guarantees are highly remunerative business without the need for use of funds. However, the risks and the precautions in this business are similar to fund based advances.

b.

The Banks issue Guarantees on behalf of their customers, mainly favouring Government Departments, Public Sector undertakings, Corporation and Companies / Firms in Private Sector. These Guarantees come under various types depending upon the purpose, period and security. It is relevant to know the difference between a Guarantee and an indemnity.

c.

Banks are prohibited from issuing Guarantees favouring: i.

Financial institutions, other banks and / or other lending agencies for the loans extended by the latter, as it is intended that the primary lender should appraise and assume the risk associated with sanction of credit and not pass on the risk by securing themselves with a Guarantee. ii. Chit funds for due payment of the chit amount by successful bidder. iii. Non-Banking financial Institution in floating prize Chit Schemes. iv. National Stock Exchange in lieu of security deposit. d.

Exceptions: i.

Issuance of Guarantee in favour of the Industrial Development Bank of India, in the case of import of technical know-how by way of drawings and designs under the Technical Development Scheme of IDBI, under certain circumstances and where no tangible security is available to IDBI ii. Issuance of Guarantee favouring different Development Agencies. Boards like Indian Renewable Energy Development Agency, National Horticulture Board, etc., for obtaining soft loans and / or other forms of development assistance from such Agencies / Board subject to certain conditions such as: Banks should satisfy themselves, on the basis of credit appraisal, regarding the technical feasibility, financial viability and bankability of individual projects and / or loan proposals i.e. the standard of such appraisal should be the same, as is done in the case of a loan proposal seeking sanction of term finance / loan. iii. Banks should obtain suitable and adequate security before extending such Guarantees 2.

Indemnity and Guarantee-Definitions: a.

The Indian Contracts Act, 1872 defines an indemnity and a Guarantee in Section 124 and Section 126, respectively. These Sections area reproduced here below:

742 - III

i.

Indemnity (Section 124): A contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person is called a contract of indemnity”. ii. Guarantee (Section 126): “A contract of Guarantee is contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the Guarantee is called 'the surety', the person in respect of whose default the Guarantee is given is called the 'Principal Debtor' and the person to whom the Guarantee is given is called the 'Creditor'. A Guarantee may be either oral or written”. b.

Distinction between Indemnity and Guarantee: i.

The distinction between indemnity and a Guarantee can be understood with an illustration. In a contract in which A says B “If you lend Rs.5,000/- to C, I will make good any loss sustained by you”. This is an indemnity. On the other hand, if A says to B “If you lend Rs. 5000/- to C and If C does not repay you, I will repay”. This is a contract of Guarantee. The distinction between the two is subtle but noticeable. ii. In the case of an indemnity, the person who indemnifies (indemnifier in the above illustration 'A') is primarily responsible if the loss occurs, in the case of a Guarantee the liability of the guarantor arises only of the principal debtor (in the above illustration C) makes a default. iii. It will also be observed that in the case of indemnity, there are two parties, the person who indemnifies (the indemnifier) and the person who is indemnified. In the case of a Guarantee there are three persons, the debtor, creditor and the guarantor. 3.

Types of Guarantees: a.

Guarantees come under two broad classifications. Financial Guarantees and Performance Guarantees. There is also what is known as Deferred Payment Guarantees. i.

Financial Guarantees: 

These are Guarantees which are given in lieu of purely monetary obligations, e.g., the obligation of a contractor to make an Earnest Money Deposit. E.g. If a contractor is to submit tender for a work of Rs.5.00 lakhs for the construction of building and the specified earnest money (which is normally 3 to 5% of the contract work) of Rs. 25,000/is to be deposited with the Government Department. In lieu of the Earnest Money to be deposited with the Government, the Department would accept a Guarantee. Such Guarantee is only upto the point of finalisation of the tender and if the tender of the bank's customer is not accepted, the Guarantee ceases to be effective and has to be returned. Such Guarantees are normally for a period of 3 months. In case the contractor is awarded the work, this earnest money deposit Guarantee will continue for such period as may be specified by the Government Department. Similar Guarantees may be required by the customers, in favour of Customs, in lieu of duty payment, dealers of large companies as earnest money for dealership or similar business purposes.

743 - III

ii. Performance Guarantees: 

These are Guarantees issued in respect of performance of a contract or obligation. In such Guarantees, in the event of non-performance or short performance of the obligation, the Bank will be called upon to make good the monetary loss arising out of the non-fulfilment of the Guarantee obligation.



Although, these Guarantees are for performance, the quantum of the pecuniary obligation is reduced to money terms and a Guarantee is called for. For instance, if a party has undertaken to supply 50 tonnes of forgings to the Railways and the contracted supply is to be completed in six months, the Railways will require a performance Guarantee from the company. In doing so, the money value of the loss occurring in the event of nonperformance or short performance, is measured and reduced to a definite sum of money. In this case if the maximum loss is estimated to be Rs. 3 lakhs, a Guarantee for Rs. 3 lakhs is demanded for awarding the contract.



The nature of the financial Guarantee and performance Guarantee is different from each other as can be seen from the above two illustrations.



While recommending Guarantees for customers, performance Guarantees which are more onerous (contain more difficult commitments / obligations) than financial Guarantees, will have to be carefully scrutinised with reference to the nature of the performance, competence of the contracting party to fulfil his obligation, duration of the contract, etc. Therefore, the margin to be insisted is higher if the risk and complications involved in the performance of the work contract is higher. iii. Deferred Payment Guarantees:

4.



These Guarantees normally arise in the case of purchase of machinery or such other capital equipment by industrial units and users of machinery (from suppliers in India or abroad).



In the case of these Guarantees, an advance, generally up to 10% to 15% of the entire cost of machinery is paid and the balance of 85% to 90% of the cost and interest, thereon, is payable in instalments spread over a period of three, five or seven years or even longer, as the case may be. The manufacturers of the machinery supply the machinery against cash payment, as above, and get bills executed for the balance amount. In respect of the balance amount, the sellers of the machinery insist on a Bank Guarantee.



The bills executed in favour of the machinery manufacturers in India can be discounted by the sellers' Bankers with the Industrial Development Bank of India.

Specific and Continuing Guarantees: a.

Specific Guarantee: A Guarantee may be for a single specific transaction. For e.g. if a dealer is called upon by the Sales Tax Officer to submit a Bank Guarantee in lieu of an advance deposit of tax and the Guarantee is issued, the said Guarantee will be for a specific purpose and covering a single transaction. It will get extinguished on payment of the sales tax or exemption of the payment of the tax or partial exemption. 744 - III

b. Continuing Guarantee: A continuing Guarantee covering a number of repeated transactions. For e.g. if an importer of raw materials requests for a Guarantee, in favour of the Customs in respect of customs duty payable by the importer, from time to time; upto a limit of say Rs. 1 lakh, under this Guarantee, at any time, amount upto Rs. 1 lakh can be invoked in respect of customs duty, in arrears, by the importer. Even here, a date upto which the Guarantee is to be in force, i.e., the period of the Guarantee is to be specified (Guarantees cannot be for an indefinite period). Such a Guarantee will be returned if there are no dues or is cancelled by mutual consent by the Bank and the Customs authorities. As such, it will be a continuing Guarantee upto Rs. 1 lakh. 5.

Pre-Sanction Stage: a.

The purpose of the Guarantee should be productive not capital but xxxxxx. The Bank Guarantee should assist the free flow of genuine business transactions. It should be for productive activities rather than for consumption.

b.

When a Bank Guarantee can ensure supply of goods to the borrower on credit basis either for manufacture or resale it would be assisting business transactions.

c.

When a Bank Guarantee assists in winning a Government Contract, it would be for a productive purpose.

d.

When a Bank Guarantee, favouring the sellers of machineries and equipment, ensures prompt repayment of Hire Purchase instalments, it will be for a productive purpose.

e.

The Guarantee must cover only those contracts or credit purchases to be undertaken / effected, afresh, after the date of issue of out Guarantee and not the earlier ones made before the date of issue of the bank's Guarantees. So, the specimen Guarantee form must be studied, thoroughly, and amendments must be made, wherever it is required, to ensure the above.

f.

The purpose may be for meeting anyone of the following requirements: i. To perform a contract or any other obligations. ii. In lieu of earnest money deposit. iii. Bid Bond Guarantees. iv. Mobilisation Guarantee to be given when the contractor receives advance payment from his principals during the execution of the contract. v. Shipping Guarantees to be issued when the importer wants to get delivery of imported goods in the absence of shipping documents. vi. Customs Guarantee to be issued to customs authorities when any goods / machinery is imported with concession / total relief on customs duty with an obligation to export goods upto a specified extent within a specified time frame. vii. Suppliers Credit Guarantee to enable the buyer to get goods on credit terms. viii. Financial Guarantee for due repayment of financial obligation. ix. Guarantees issued to tax authorities while going on an appeal against their assessment of tax or to get release of valuables confiscated during a raid. 745 - III

6.

7.

Precautions at the Pre-Sanction Stage: a.

While presenting any proposal for Guarantee, it should be mentioned in the report, more particularly in the prayer column, the nature of Guarantee as described above; rather than mentioning simply “Bank Guarantee limit”. This direction is applicable to the Regional Offices also.

b.

For Guarantee mentioned under items 3(a) above, the capacity of the party to perform the contract / obligation must be assessed.

c.

As regards Customs Guarantee, it should be enquired and reported in the proposal, the quantum and value of export obligation and the time frame within which, it has to be performed. The capacity of the party and arrangement made by them to fulfil the export obligation within the allowed time frame should also be assessed.

d.

While recommending for a Suppliers Credit Bank Guarantee the capacity of the party to clear the recurring dues to be emerged on account of credit purchases vis-à-vis the liquidity position, net working capital in the concern, normal stocking period, credit terms on sales etc. should be assessed. For all such transactions, it is always better to recommend for an Inland Letter of Credit facility in lieu of Bank Guarantee.

e.

When a customer asks for a limit for issuing Guarantees for multifarious purposes, say for bid bond, mobilisation advance, Performance Guarantee, etc. limits must be sought accordingly. If found to be appropriate, sub-limits for various purposes within an overall Bank Guarantee limit may be recommended.

Nature of Facility: a.

8.

Terms of Guarantee: a.

9.

If the Guarantee is for effecting credit purchases it is always better to sanction the facility in the form of an Inland Letter of Credit so that the branch can have an effective control and supervision over each and every credit purchases and their settlements. If any delay is sensed in meeting the ILC obligations, further opening of LCs may be withheld.

The extent of duties and liabilities of our borrower should be known to us (the Banker), in detail, indicating the performance commitments of the borrower very clearly. Any default by the borrower would make the Banker directly liable to the persons in whose favour the Bank Guarantee has been issued.

Analyses of Specimen of Guarantee: a.

For the reasons given in the foregoing paragraph the specimen of the Guarantee to be issued should be meticulously scrutinized for details, specify the grounds on which the liability would devolve on the Banker. 746 - III

10. Securities: a.

Banker should have a strong hold on the benefits arising out of the Bank Guarantee. In case Bank Guarantee ensures supply of goods on credit basis, banker should ensure either hypothecation or pledge of such goods in favour of the Banker.

b.

If the same borrower is enjoying Cash Credit Limit, Banker should be very alert, that at no time the goods received through Bank Guarantee is included in calculating drawing power.

c.

In case of Deferred Payment Guarantee the machineries or equipment supplied on credit must be hypothecated to the Bank.

11. Sanctioning Stage: a.

Purpose: As regards the purpose of the Guarantee, commercial banks should, as a general rule, limit themselves to the provision of financial Guarantees and exercise due caution with regard to their Performance Guarantee business. The following are the some of the purposes for which Guarantees are issued by banks. i. Bank Guarantee in lieu of Air Way Bill: Goods by air, move faster than the movement of documents of title to goods. In such a case it is common that goods land at the recipient's airport well before, the Air Way Bills reach him. To minimise / eliminate unnecessary wharfage, Bank Guarantees are issued in favour of Air Port Authorities to enable party to release goods without the relevant documents. ii. Bank Guarantee in favour of Suppliers of Raw Materials and Other Trade Commodities: Many of the suppliers of engineering goods and fertilizers, of late, call for Bank Guarantees in their favour for providing supplies on credit basis to shield themselves against the possibility of non-recovery.

12. Duration of Liability Period: a.

As regards duration (liability period) it would be advisable for banks to issue Guarantees with shorter durations. No Bank Guarantee should normally have a duration exceeding 10 years.

13. Limit for Issuing Unsecured Guarantees: a.

Banks should limit their commitments by way of unsecured Guarantees in such a manner that 20 per cent of the bank's outstanding unsecured Guarantee plus the total of its outstanding unsecured advances should not exceed 10 per cent of total outstanding advances.

b.

This percentage will be monitored by the HO. However, branches are to be careful in recommending unsecured Guarantees.

Note: The above guidelines are to be kept in view by the branches when recommending a one Time Guarantee or Regular Guarantee Limit. 747 - III

14. Security for the Guarantees: a.

Secured Guarantees: i.

Guarantees may be fully or partly secured or unsecured. Security may be either deposits or other tangible security acceptable to the Bank, such as Insurance Policies having adequate surrender value, quoted shares or any other security like immoveable property / ies. The bank should follow the Ratio of Securities fixed by RBI from time to time.

ii. Securities can also be by way of a Counter Guarantee from any other bank. This arises during switchover of limits by a customer from one bank to another. iii. Security can also be by way of Counter Guarantee from any Department of the Central or State Government or any other Public Sector Undertaking such as Hindustan Steel Ltd., or any Public Sector Financial Institution like the Industrial Finance Corporation. Counter Guarantees of Insurance Companies or Banks are also accepted. In cases where the banks have to issue Counter Guarantee, security will have to be taken just as in the case of Bank Guarantees issued by us. b.

Unsecured Guarantees: i.

Unsecured Guarantees are normally not sanctioned except under special circumstances, considering the relationship of the customer with the Bank, the amount of the Guarantee and its nature, duration etc.,

15. Commission on Guarantees: a.

Commission for Claim Periods: i.

b.

The Guarantee issued should be for a specific period. Where a Guarantee contains a clause regarding period for lodgement of claim beyond the period of the Guarantee to prefer claim for damages etc., occurring during the validity period of the Guarantee, commission for such claim period should be collected at the appropriate rate.

Commission on Deferred Payment Guarantee: i.

In the case of Inland Deferred Payment Guarantees, Co-acceptance of bills, the instalments should be paid on the respective due dates and the liability under the Guarantee gets automatically reduced to that extent of the payments effected. Hence, the commission for the Inland Deferred Payment Guarantees / Co-acceptance of bills should be collected, on yearly basis, on the balance outstanding at the beginning of each year.

16. Restrictions on issue of certain type of Guarantees: a.

Any Guarantee for an unlimited amount or for an unlimited period. 748 - III

b.

Guarantees favouring Shipping Companies to cover the issue of bills of lading without surrendering to the shipping company of the relative mate's receipt.

c.

Guarantee favouring Collector of Customs for clearance of goods without production of the customs copy of the relative import licence. However, when the proof is produced of the issue of a licence, Guarantee may be issued.

17. Format of the Guarantee: a.

After complying with the terms of sanction of RO/HO in all matters, Guarantee in the approved format on stamped paper of requisite value may be issued.

b.

Guarantees containing onerous (difficult obligations/ burdensome commitments) clauses should not be issued.

c.

All Guarantees should contain the following standard limitation clause restricting the Bank's liability amount and liability period. This clause should be typed out at the end of the Guarantee i.e., it should form part of the body of the Guarantee itself, while issuing the Guarantee: i.

d.

“Notwithstanding anything contained in this Bank Guarantee our liability under this Guarantee is restricted to Rs………. (Rupees……………………...........only) Our Guarantee shall remain in force until …….and unless a demand or claim under this Guarantee is received by us in writing on or before ……..all your rights under the said Guarantee shall be forfeited and we shall be deemed relieved and discharged from all liabilities thereunder”

In order to protect the bank against possible disputes branches should incorporate the following clause in the Counter Guarantee Form i.

That if for any reason the bank is prevented by any action initiated by me/us from making payment to the beneficiary of the Guarantee amount. I will also be liable to pay the bank, apart from other amounts payable to the bank, towards the costs, expenses, damages incurred by the bank consequent to my/our proceedings to prevent payment to the beneficiary. Guarantee commission for the extended period for which I / We delay such action, the payment or discharge of the Guarantee.

18. Signing of Guarantees: a.

Bank Guarantees issued for Rs.50,0000/- and above are to be invariably signed by two authorized officers. In the absence of second officer, the Guarantee shall be countersigned by an officer at Regional Office or by an officer of a nearby branch of the bank.

19. Documents to be obtained: a.

For documentation aspects a reference shall be made to the Manual on Documentation in each bank. If such a Manual does not exist the banks must make efforts to develop such a Manual. 749 - III

20. Accounting Procedure: a.

The particulars of the Guarantees issued should be entered in the Bank Guarantee Register. The duly filled in register should be signed by Manager / Officer.

b.

On issuing the Guarantee, debit and credit slips are to be prepared for the amount of the Guarantee, as follows: i. Debit: Customer's Liability Under Guarantee ii. Credit: Banker's Liability Under Guarantee

21. Guarantee Margin: a.

Normally, a margin is to be stipulated, and such margin may vary from 5% to 10% or even full margin may be taken, wherever necessary.

b.

The cash margin collected should be held under Margin on Bills account maintained in a register. The amount of margin, so held, may be refunded only after cancellation of the Guarantee.

c.

The margin stipulated by the Head Office is only the minimum. The branch may insist on a higher margin, if it feels necessary, depending upon the circumstances.

22. Commission: a.

The commission collected at the time of issuing / renewing the Guarantee or extending the period of the Guarantee should be credited to Commission Account.

23. Guarantee to be sent Directly to Beneficiary: a.

As far as possible, Guarantee Bonds should be sent direct to the beneficiary.

24. Follow-Up: a.

Sale Proceeds to be Credited to the Account with the Bank: i. In case of Bank Guarantees issued for effecting credit purchases, all sale proceeds must be credited to the account of the party maintained at the branch and all payments must also be made through it.

b. Operations in the Account to be monitored: i. The operations in the accounts should be monitored to make sure that prompt payments are being made to the supplier. Branches should devise a system to ensure that each and every credit purchase is settled promptly. For this purpose the party must submit a statement once in a fortnight, as per the Specimen, given in Annexure-1 to this Chapter. ii. In case of Guarantees issued in favour of Tax and other Revenue authorities the branch should carefully monitor each of such Guarantees and ascertain the position of the case/appeal filed 750 - III

by the party. The branches must get a declaration from the party, on a monthly basis, regarding position of the claim / appeal. c.

Security follow up: i. In case of Guarantees issued for the supply of goods the procedures and precautions laid down for hypothecation/ pledge of goods as the case may be for monitoring the goods must be followed and it should be satisfied that the stock of goods is adequate to cover the liability. ii. In respect of DPGs., it should be followed that: 

The instalments are paid by the party as and when it fell due.



The assets created are charged to the Bank.

25. Balancing: a.

The outstanding balance in the “Customer's Liability Under Guarantee Account” and “Banker's Liability Under Guarantee Account” in the General Ledger should, on any date, agree with the amount of outstanding Guarantees as stated in the register maintained at the branch. The account should be balanced, at periodical intervals, as prescribed in this regard.

26. Renewal of Guarantees: a.

In case the limit falls beyond the discretionary powers of the Managers, renewal of Guarantee or extending the period of the Guarantee may be done only after obtaining sanction /approval, therefore, from R.O. by forwarding application from the customer.

b.

Revised or fresh entries need NOT be passed unless a fresh Guarantee is issued.

c.

Fresh documents need NOT be obtained where the period of the Guarantee is extended. However, a requisition letter from the party countersigned by Guarantor(s), if any, should be obtained and kept along with the original documents. The date of expiry of the extended Guarantee period should be noted in the Register.

d.

Commission should be collected for the extended period.

e.

A letter, as per Annexure-2 to this Chapter, should be issued to the beneficiary regarding the extension of the Guarantee.

27. Honouring of Commitments under invoked Bank Guarantees: a.

It is needless to say that for smooth operation of Bank Guarantee Scheme and to ensure credibility of the Guarantee issued by the bank in business circles, prompt honouring of commitments, is absolutely essential.

b.

In the case of invoked Bank Guarantee branches shall first remit the amount under the Guarantee to the beneficiary, immediately, on receipt of claim, if it is within the prescribed period and seek reimbursement from the party/ies on whose behalf the Guarantee is issued. 751 - III

c.

If for any reason, honouring of the commitment is not possible due to court injunctions, the beneficiary shall be informed of the position assigning the exact reasons for the inability to honour the commitment and also the circumstances under which payments could not be made.

d.

If delays are due to court injunctions, the commitments should, however, be met no sooner the injunctions etc., are vacated by the court.

e.

The amount of the Guarantee may be paid by debiting the customer's account for the amount payable after adjusting the margins and / or deposit held as security, irrespective of the fact, whether there is sufficient credit balance/ O.D. account, as the case may be under information to the customers, who should be called upon to reimburse the shortfall, along with interest, immediately. All such cases and developments should be reported to R.O. NOTE: i.

Branches shall not give scope for delay in order to enable the customers to obtain orders from a court of law to restrain the bank from making payments under Guarantee. ii. Branches should also not give scope for customers to prevail upon them to defer action on one pretext or the other and on frivolous grounds iii. For delays on frivolous grounds and resultant demands, if any, from the beneficiaries for interest and / or damages, the concerned branch manager would be responsible for consequences. f.

Where the bank is a party to the proceedings initiated by Governments for enforcement of the Bank Guarantee and the case is decided in favour of the Government by the Court, banks should not insist on production of certified copy of the judgement as the judgement / order is pronounced in the open court, in the presence of the parties / their counsels and the judgement will be known to the branch.

g.

In case the bank is not a party to the proceedings, a signed copy of the minutes of the order certified by the Registrar / Deputy or Assistant Registrar of the High Court or the ordinary copy of the Judgement / order of the High court duly attested, to be true copy, by the Government Counsel, should be sufficient for honouring the obligation under the Guarantee unless the bank (Guarantor) decides to file an appeal against the order of the High Court.

28. Diarising the Due Date: a.

Branches shall diarise the date of expiry of the Bank Guarantee issued by them. Whenever additional claim period is stipulated in the Bank Guarantee, the date of expiry of claim period will be deemed to be the date of expiry of Guarantee

29. Extinguishing of Bank Guarantee: a.

Unless otherwise specified, a Guarantee is automatically extinguished on the date specified in the Guarantee bond. Branches shall reverse the entries relating to the concerned Guarantee, when the Guarantee bond is received back from the beneficiary. In case of expired Guarantees where the 752 - III

Guarantee bonds are not received back the branches shall follow the procedure as laid down under the heading “Reversal of entries where Guarantee bond is not received back”. 30. Registered Notice: a.

On the date of expiry of the Bank Guarantee, branches shall send a letter to the beneficiary by Registered Post Acknowledgement Due requesting them to return the original Guarantee bond within 30 days of date of the letter. The specimen of the letter to be sent to the beneficiary is given in Annexure-3 of this Chapter. A copy of the letter and the acknowledged AD card, when received shall be kept with the concerned BG documents. The receipt of the acknowledgement card must be followed up as it confirms the receipt of the notice by the addressee.

31. Caution: a.

Registered notice should not be issued to courts for return Guarantees given to courts as it may be deemed as a contempt of court. In such cases, branches should file an application before the court requesting the court to return the original Guarantee. For this purpose, services of the bank's approved lawyer may be utilized. The expenses incurred for filing the applications should be collected from the party on whose behalf the Guarantee was issued.

32. Reversal of Entries where Guarantee Bond is received back: a.

Branches shall reverse the entries relating to the concerned expired Bank Guarantee as soon as they receive the original Guarantee bond from the beneficiary.

33. Reversal of Entries where Guarantee Bond is not received back: a.

In case the original Bank Guarantee bond is not received back by the branch within 30 days of date of the letter by the beneficiary, branches shall reverse the entries relating to the concerned expired Bank Guarantee. This is, however, only after getting back the A.D. card from the beneficiary.

b.

A letter to the beneficiary informing about the cancellation of our liability is to be sent by way of “Registered Post with Acknowledgement Due”.

34. Maintaining Files: a.

Branches shall open a file in respect of expired Bank Guarantees and after reversal of entries, the papers relating to the concerned expired Bank Guarantee viz. the copy of the letter sent to the beneficiary and the Acknowledgement Card shall be filled in this file.

35. Release of Securities: a.

Branches may release the securities obtained, if any, in respect of the expired Bank Guarantees only after reversal of the accounting entries in their books.

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36. Returns to be submitted by the Branches to Head Office: a.

Prescribed statements are to be submitted by the branches to Head Office.

b.

Apart from the other statements the branches should send the “Statement of Guarantee Invoked” on the very date of invocation of the Bank Guarantees as per the specimen format given in Annexure-4 to this Chapter.

37. Additional Guidelines: a.

b.

Guarantees to Govt. Department on behalf of customers, under the Bank Guarantee Scheme of the Govt. of India: i. The Govt. of India have, in consultation with the Reserve Bank of India, formulated a Scheme in terms of which the Guarantees furnished by approved Banks, on behalf of their clients, will be accepted by the Railways and such other Govt. Departments. ii. This scheme has also been accepted by all State Governments. iii. Under this scheme, contractors who take up Govt. contract work may furnish a Bank Guarantee or tender Deposit Receipt (earnest money), cash Certificates etc., issued by all approved banks to the concerned Govt. Department instead of depositing with them or Govt. securities or making payment in cash. A specimen of the Guarantee Bond to be issued to the Department concerned is given in Annexure -5 to this Chapter. iv. All Ministries / Departments have instructions to accept the Bank Guarantees on the 'Model Form' and wherever additions / alterations are found essential to the existing provisions of Model Guarantee Forms, such additions shall be made with the prior approval of Regional Office / Head Office. However, if any modifications are to be made in the format it should be carefully ensured that: 

there are proper limitation clause specifying the maximum amount of the Bank's liability under the Guarantee and the last date by which claims, if any, should be filed; and



there are no extraneous clauses affecting / endangering the Bank's Interest or devolving on the Bank with any additional liability or onerous (difficult / burdensome) risks.

Specifying The Name Of The Beneficiary Department: i.

While issuing Guarantees to the Govt. Bodies / Departments, the name of the beneficiary department concerned should be indicated in the Guarantee Bond. This will facilitate identification of the specific beneficiary department/s in the course of correspondence, complaints etc., received by the Govt.

38. Obtaining of Confirmation in respect of Bank Guarantees: a.

Procedure: Branches shall mark copies of all Bank Guarantees issued/renewed by them, sanctioned at branch level or by higher authorities, to the concerned R.O. , furnishing the following 754 - III

details of the transactions; i. S.No. ii. Name of the Party. iii. BG No. iv. Limit, if any. v. Amount of Guarantee. vi. Outstanding balance. vii. Name of the beneficiary. viii. Sanctioning Authority. ix. Validity of the BG. b.

The Regional Officers shall maintain a seriatum record of the Bank Guarantees issued, branch wise, besides other details.

c.

Whenever a beneficiary seeks confirmation of Guarantee(s) issued by a branch, such confirmation shall be issued by Regional Offices to the beneficiary on the basis of the record maintained. (For facilitating this, such letters seeking confirmation, if received by other branches / offices shall be passed on to the concerned R.O.

d.

If there is no record of a particular Bank Guarantee, sought to be confirmed, the matter shall be immediately followed-up with the concerned branch for ascertaining the correct position. If any discrepancy irregularity is noticed, the same shall be immediately reported to the sanctioning authority/R.O for suitable action.

39. Bank Guarantees Favouring Customs / Excise Department: a.

Where Bank Guarantees are required to be furnished to Customs / Excise Departments on account of any dispute arising between the Custom / Excise Departments and the applicants, Bank Guarantees shall be issued only against100% cash margin.

b.

Additional margin may be stipulated in case the interest is payable to the beneficiary as per contract/ agreement.

c.

Where such cash margin is given in the form of term deposits, refund value of the certificate / deposit, (inclusive of accumulated interest, if any) as on the date of issue, should not be less than the amount of the Guarantee.

40. Deferred Payment Guarantees: a.

Reversal entries should be passed, to the extent of the instalments, as and when due, and paid under the Guarantee(s).

b.

In case where instalments under the D.P. Guarantee are not paid by the customer the amount should

755 - III

be paid to the beneficiary by debiting “Demand Loan” and the fact should be informed to Regional Office. c.

The entries are to be reversed on the expiry of the Guarantee, when the Guarantee bond is received back for cancellation.

d.

When the Guarantee is closed, the serial number should be rounded off with date of cancellation under due verification.

41. Advance Payment / Performance Guarantees: a.

Branches should, while accepting the requests from the borrowers for Guarantee limits analyse, thoroughly, all the risk factors and the infrastructure available for monitoring the contracts for which Guarantees are sought. Branches should also monitor the progress of contracts for which Guarantees have been furnished by the branch.

b.

Branches should obtain a statement every month from the borrower, in the format, as given in the Annexure-6 to this Chapter, for monitoring the progress of the contracts. Branches should obtain an undertaking letter from the borrower, at the time of issuing Guarantee, that he would submit such statement with the details of securities etc., regularly.

c.

In the case of advance payment / Performance Guarantees, branches should monitor the progress of the contracts by: i. periodical site inspection. ii. ensuring that the advance payment received for a particular contract is not diverted to other contracts. iii. controlling the end use of funds. iv. scrutinising the progress made in collection of bills supported by a confirmation from the borrower.

d.

The project site must be inspected periodically to verify the execution and progress as per the terms. Any irregularity or delayed execution sensed during Post Credit Supervision should be taken up with the party.

42. Additional Guarantees: a.

It should be ensured that the borrower does not have unpaid dues to the government. The party must be asked to remit the sale proceeds to the bank, on a daily basis, and the monthly rental must be paid through the bank, promptly. If, for any other valid reason(s), the party is not able to remit the sale proceeds daily, he must be asked to submit the receipt for payment of rental / licence fees every month.

756 - III

43. Guarantees Issued for the release of Confiscated Goods: a.

Branches may also come across issuance of Guarantees in favour of Income Tax and other departments for getting back the goods and other valuables, including Jewels etc., confiscated by them during a raid. For such Guarantees, a margin of not less than 50% is to be taken. In case of gold ornaments, the branches must get possession of such jewels and keep them under pledge as a cover for the Guarantees issued. This is in addition to the usual cash margin to be obtained. Such valuables should be kept under pledge till the Guarantee bond is returned to the bank. Necessary documentation, similar to pledge, should also be obtained.

44. Annexure/s: a.

The following Annexures are appended to this Chapter: Annexure 1 : Specimen of Statement of Reporting on Bank Guarantees by the party which has availed the Bank Guarantee. Annexure 2 : Specimen of Letter of Extension / Renewal of Period of Guarantee. Annexure 3 : Specimen of the Letter to be sent to the Beneficiary before Reversing the Accounting Entry of the Bank Guarantee in the Bank's Books. Annexure 4 : Specimen format of Statement of Invoked Guarantees. Annexure 5 : Specimen of Form of Guarantee Bond in favour of Government Department. Annexure 6 : Specimen of Statement under Advance Payment / Performance Guarantees.

757 - III

Annexure-1 to Chapter - 56

(To be submitted by the borrower once in a fortnight) REPORTING STATEMENT ON BANK GUARANTEES AVAILED AS ON … Name of party: (Amount in Rs..) ------------------------------------------------------------------------------------------------------BG.No Name of the Bank Guarantee Quantity and Amount due Beneficiary Amount value of to supplier Stock puron this chased under Guarantee this Guarantee ------------------------------------------------------------------------------------------------------(1) (2) (3) (4) (5) ------------------------------------------------------------------------------------------------------Qty Value (a) (b) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Value of Amount outstanding Remarks(**) stock on from the debtors hand profor the supply cured made against against credit (*) this Guarantee ------------------------------------------------------------------------------------------------------(6) (7) (8) ------------------------------------------------------------------------------------------------------Qty Value (a) (b) ------------------------------------------------------------------------------------------------------(*) Break-up for the age wise debtors outstanding against the sale of goods under the relative Guarantee alone should be submitted along with this statement. (**) The amount of sale proceeds held by the party, as Cash and Bank Balances, may be shown in the remarks column.

758 - III

Annexure-2 to Chapter-56 SPECIMEN OF LETTER FOR EXTENSION / RENEWAL OF PERIOD OF GUARANTEE TO Dear Sir, Sub: Our Guarantee No_____________________Dt_________ for Rs………………issued in your favour on behalf of _____________________________________ towards _________________________________________ .x.x.x.x.x This is to inform you that the period of the above Guarantee issued in your favour on behalf of _______________________________is hereby extended for a further period upto ____________________________________________________________(@) Our liability under the Guarantee is hereby renewed / extended and shall be restricted to an amount not exceeding Rs________________(Rupees ______________only) and not withstanding anything stated above or in the original Guarantee. We shall stand completely discharged from all our liabilities under the Guarantee and all your rights under the Guarantee shall stand extinguished if not claimed or demand is made upon us, in writing, or before _____________________________($) This letter of extension forms part of the original Guarantee referred to above Yours faithfully Manager Note: @ = Mention the date of expiry of the Guarantee period. $ = This refers to the date of expiry of the claim period

759 - III

Annexure-3 to Chapter-56 SPECIMEN OF THE LETTER TO BE SENT TO THE BENEFICIARY BEFORE REVERSING THE ACCOUNTING ENTRY OF THE BANK GUARANTEE IN THE BANK'S BOOKS REGD. POST ACK. DUE Ref. No. Branch : Date : TO

Dear Sir/s Sub: Bank Guarantee No…………….dated……………….. Executed by us in your favour for a sum of Rs…………………….(Rupees…………………….) .x.x.x.x.x.x You are aware that the aforesaid Guarantees executed by us for and on behalf of our client _______________ has expired on __________________ and cannot be enforced with effect from that date. We, therefore request you to return the said expired Guarantee within 30 days from the date of this letter Yours faithfully, Manager.

760 - III

Annexure 4 to Chapter 56 SPECIMEN FORMAT OF STATEMENT OF INVOKED GUARANTEES

PART – I Guarantees Invoked and Not Paid (Outstanding) for the quarter ended___________________________ —————————————————————————————————————————— ————————— Sl.No. Name of the Name of the Guarantee Invoked Reasons Party on Beneficiary Amount ————for nonWhose behalf and address Date Amount payment Guarantee was Issued (1) (2) (3) (4) (5) (6) (7) —————————————————————————————————————————— —————————————————————————————————————————— PART –II Guarantees Invoked and Not Paid for the quarter ended________ —————————————————————————————————————————— Sl.No. Name of the Name of the Guarantee Invoked How the Party on Beneficiary Amount ————claim Whose behalf and address Date Amount was Guarantee was adjusted Issued (1) (2) (3) (4) (5) (6) (7) —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— If adjusted through DL Date of Bal o/s DL in DL (8) (9) —————————————————————————————————————————— In this part II the outstanding balance in the demand loan should be mentioned in Column No.9 if invoked is paid by raising demand loan. In Column No.8 the date on which the demand loan was raised should be shown (i.e., the demand loan is raised on __________ and adjusted on ___________ .

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Annexure-5 to Chapter-56 FORM OF GUARANTEE BOND IN FAVOUR OF GOVERNMENT DEPARTEMENT In consideration of the President of India (hereinafter called “the Government”) having agreed to exempt _______ (hereinafter called “the said Contractor(s)” from the demand under the terms and conditions of an Agreement dated ____made between _____and _____ for _______(herein after called “the said Agreement”) of security deposit for the due fulfilment by the said Contractor(s) of the terms and conditions contained in the said Agreement, on production of a Bank Guarantee for Rs.___ (Rupees________) we ………SC Bank Ltd., (hereinafter referred to as “the Bank”) do hereby undertake to pay to the Government an amount not exceeding Rs____ against any loss or damage caused to or suffered or would be caused to or suffered by the Govt. by reason of any breach by the said Contrator(s) or any of the terms and conditions contained in the said Agreement. We, …….SC Bank Ltd., do hereby undertake to pay the amounts due and payable under this Guarantee, without any demur, merely on a demand from the Govt. stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Govt. by reason of any breach by the said Contractor(s) of any of the terms and conditions contained in the said Agreement or by reason of the Contractor’s(s) failure to perform the said Agreement. Any such demand made on the Bank shall be conclusive, as regards the amount due and payable by the Bank, under this Guarantee. However, our liability under this Guarantee shall be restricted to an amount not exceeding Rs……………. We …….SC Bank Ltd., further agree that the Guarantee herein contained shall remain in full force and effect during the period that would be taken for the performance of the said Agreement and that it shall continue to be enforceable till all the dues of the govt. under or by virtue of the said Agreement have been fully paid and its claims satisfied or discharged or till _________(Office / Department), Ministry of _______certificates that the terms and conditions of the said Agreement have been fully and properly carried out by the said Contractor(s) and accordingly discharges the Guarantee. Unless a demand or claim under this Guarantee is made on us, in writing, on or before the ____________, we shall be discharged from all liability under this Guarantee thereafter We……SC Bank Ltd., further agree with the Govt. that the Govt. shall have the fullest liberty without our consent and without affecting in any manner our obligations hereunder to vary any of the terms and conditions of the said Agreement or to extend time of performance by the said Contractor(s) from time to time or to postpone from time to time any of the powers exercisable by the Govt. against the said Contractor(s) and to forbear or enforce any of the terms and conditions relating to the said Agreement and we shall not be relieved from our liability by reason of any such variations, or extension being granted to the said Contractor(s) or for any forbearance, act or omission on the part of the Govt. or any indulgence by the Govt. to said Contractor (s) or by any such matter or thing whatsoever which under the law relating to sureties would but for this provision have effect of so relieving us “Notwithstanding anything contained hereinbefore our liability under this Guarantee is restricted to Rs………. .(Rupees______________only). Our Guarantee shall remain in force until_________and unless a demand or claim under the said Guarantee shall be forfeited and we shall be deemed relieved and discharged from all liabilities thereunder”. We…..SC Bank Ltd., lastly undertake not to revoke this Guarantee during its currency, except with the previous consent of the Govt., in writing Date : For_______________________Bank 762 - III

Annexure-6 to Chapter-56 SPECIMEN OF STATEMENT UNDER ADVANCE PAYMENT / PERFORMANCE GUARANTEES ISSUED FOR EXECUTING CONTRACTS PROGRESS STATEMENT (To be submitted by the borrower once in a fortnight) 1) Contract value 2) Work executed during the month a)

Raw materials supplied by the beneficiary

b) Raw materials purchased by the party c)

Labour charges

d) Other overheads related to the contract 3) Value of bills raised during the month 4) Cumulative value of bills raised upto this month 5) Value of Bills paid by the beneficiary during the month 6) Cumulative payments received upto this month 7) Balance amount payable by the beneficiary 8) Estimates for next month a)

Expenditure unde a,b,c, & d as stated under 2 above

b) Bills estimated to be raised c)

Bills expected to be paid

9) Security position a)

Raw materials at borrower’s risk

b) Raw materials at beneficiary / work site i.

Lying unutilized

ii. Utilised in execution of the contract and bills have been raised but not yet paid (outstanding debtors) (If stock at beneficiary’s site are shown in the stock statement, branch should obtain NO LIEN letter from the beneficiary) 10) Certificate to be obtained from the beneficiary regarding percentage of work executed and for proportionate reduction of the Advance Payment Guarantee to the extent of the bills and accepted by the beneficiary 11) Certificate should be obtained from the beneficiary regarding progress of the work. 763 - III

Nature of Guarantee (Advance payment / performance / security deposit / Earnest money)

Name of the Beneficiary and nature of contract secured

Period of the contract (bar chart should be submitted for execution of the contract – as contract may not be executed throughout the year on an Uniform basis – eg. during monsoon season execution of contract may be suspended / slowed down)

(1)

(2)

(3)

Amount of the Guarantee Issued (% of the Contract value)

Date of advance Amount received by the Borrower

(4)

(5)

Value of Work Certificate So far

Bills raised so far

Bills paid so far

(a)

(b)

(c)

Validity period

Claim period if any

(6)

Balance due after deducting advance Payment (d)

(8)

(9)

Add.period Required to Complete the Work

whether the project has been implemented as per schedule

(11)

(12)

(7)

Balance work to be completed

Security

(10) If no, reason for the delay and steps taken for timely Execution of Work (13)

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Remarks

(14)

CHAPTER-57

INLAND LETTER OF CREDIT 1.

General: a.

A letter of credit is a payment term generally used for international/ internal sales transactions. It is basically a mechanism, which allows importers/ buyers to offer secure terms of payment to exporters/ sellers in which a bank (or more than one bank) gets involved. The technical term for letter of credit is “Documentary Credit”. At the very outset what one must understand is that Letters of Credit deals in documents, not goods. The idea is to shift the risk. Thus a L/C is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer.

How L/C works Stage I Stage II Stage III Stage IV 2.

Contingent Liability: a.

3.

After a contract is concluded between buyer and seller, a buyer's Bank supplies a letter of credit to the seller. Seller consigns the goods to a carrier in exchange for a Bill of Lading. Seller presents Bill of Lading for payment from buyer's Bank. Buyer's Bank exchanges Bill of Lading for payment from the Buyer. Buyer provides bill of lading to carrier and takes delivery of goods.

In undertaking the responsibility to pay bills drawn under the Letter of Credit the issuing bank assumes liability. When the bills drawn in accordance with the terms and conditions of the credit, are paid by the negotiating bank/branch, the transaction becomes an advance extended by the issuing bank against documents, similar to purchase of documentary bills, Hence, due precautions should be taken by branches in respect of documents under the LCs, as applicable to documents under Bills Purchased category.

Parties to a Letter of Credit (LC) : a.

A Letter of Credit has the following parties: i. Applicant (Buyer) - the party on whose behalf the LC is issued. ii. Issuing (opening) Bank / Branch-the bank / branch which issued the LC and thus guarantees payment. iii. Beneficiary (Seller) -the party to whom the L/C guarantees payment. iv. Negotiating Bank / Branch -the bank / branch which is designated in the LC credit, to negotiate the documents drawn under the LC i.e. to make payment on submission of documents by the beneficiary. 765 - III

4.

Classification of Letter of Credit: a.

Letter of Credit may be broadly classified under two Heads: i. Foreign Letter of Credit ii. Inland (Domestic) Letter of Credit

5.

b.

This chapter will deal with Inland (Domestic) Letter of Credit only. 'Foreign Letter of Credit' are dealt with in the Manual of Instructions on Foreign Business.

c.

An Inland Letter of Credit is one which is issued by a Bank at the request of its customer (buyer) in favour of the seller within the same country.

Types of Letter of Credit: a.

Irrevocable Letter of Credit: i.

b.

Revocable Letter of Credit: i.

c.

It can be revoked, cancelled or amended, at any time, by the bank without prior notification to the beneficiary and without obtaining prior consent from parties other than the customer on whose behalf the Letter of Credit has been issued. However, the bills negotiated by the negotiating bank / branch prior to receipt of such notification, should be honoured by the LC issuing bank.

Revolving Letter of Credit: i.

6.

It cannot be revoked, cancelled or amended, without the consent of all the parties to the Letter of Credit and the LC issuing bank is irrevocably committed to pay the beneficiary upon presentation of the documents specified in the LC drawn strictly as per terms and conditions of the Letter of Credit.

Under Revolving L/C the amounts to the extent of the bills negotiated under the overall limit of the credit and honoured by the issuing bank/branch are automatically renewed/reinstated and made available to the beneficiary for further drawings during the currency of the L/C. This facilitates continual drawings / negotiation of bills without having to establish fresh L/C, each time the facility is fully utilised, by negotiation of bills to the extent of the original credit.

LCs on DP/DA basis: a.

A LC may be established either on DP terms or on DA terms. In the case of LCs established on DP terms, the payment will be due within 24 hours of the presentation of the documents for payment. The bills along with RRs/ approved LRs shall be delivered to the party only against payment of the entire amount.

766 - III

b.

7.

In the case of LCs on DA terms the payment will be due on the last day of the usance period from the date of negotiation. In this case the documents along with RRs / approved LRs shall be delivered to the party against acceptance.

Pre-Sanction Stage: a.

Contingent Liability: i.

Letter of Credit is a non-fund based facility with the possibility of turning into a fund based facility. It is a contingent liability and at any time can become an actual liability. The necessity for issuing of LCs arise in conjunction with acquisition of moveable assets, purchasing of inventories or services. ii. Therefore, it can give rise to term loan commitments or result in working capital requirements. It is either a component of Term Loan or Working Capital requirements. So, it is to be summed up that the proposal for sanction of LC should take into consideration all the parameters observed in connection with the sanctioning of the Term Loan and Working Capital facilities. b.

General observations: i.

c.

Limits should be sanctioned for issuing ILCs generally in favour of beneficiaries who are Govt. or Semi-Govt. undertakings and with sufficient ratings. In other cases, status reports on the beneficiaries should be obtained from their bankers and ILCs should be issued only if such reports are worthy. This is necessary to safeguard the interest of the bank, as the goods covered by the negotiated bills are charged to the Bank as security and the bank has to rely on the integrity of the supplier (beneficiary) for the quality and type of goods despatched. In the event of the buyer not honouring the bills drawn under the credit, the Bank has recourse only to the goods covered by the documents. Though, the documents may conform to the credit, the interests of the Bank would be endangered, if the goods turnout to be inferior or if the value of the goods is inadequate to cover the liability.

ILCs may lead Inventory Finance: i. Inland Letter of Credit ultimately may lead to inventory finance and the goods received under the Inland LC may be pledged / hypothecated to the Bank under the inventory limit. It is therefore essential to examine ILC at the proposal and ILC issuing stages itself, as to whether the goods would be acceptable for finance under the key Loan / Cash Credit limit. Due consideration should be given to the following factors: 

As to whether the party actually requires for his business operations, the commodities proposed under the ILC and the extent to which it is to be purchased.



The previous experience of the branch with regard to the commodities pledged/ hypothecated by the party under PL / CC or goods received under ILCs previously issued by the branch on behalf of the party.



The previous experience of the branch in respect of the ILCs issued for similar purchases, on behalf of other parties or in favour of the same beneficiary. 767 - III

8.



Whether the party is capable of meeting the LC obligations from his own sources. or



Whether suitable back-up facility is needed.

Nature of Credit: a.

Letters of Credit are opened under the following circumstances: i. One time Letter of Credit: For acquisition of capital goods like machineries for industries etc., ii. Letters of Credit at time: For acquisition of inventories, for use, spread over a period of time. It is opened as and when required as a permanent operative limit. iii. Continuous Letter of Credit: it is satisfied by the revolving Letter of Credit. It is usually in connection with the purchase of inventories for trade or manufacture.

b.

Letters of Credit are opened with the following stipulations: i. Branches should specifically mention the type of Letter of Credit required ii. Letters of Credit accompanied by Demand Documentary Bills and Document of title to goods i.e. RR/BL/LR and invoices and other documents or Drawing by Clean Bills not accompanied by documents of title to goods iii. Documentary Usance bills with DA terms or DP terms iv. Nature of credit such as one time, or revolving Letter of Credit etc.,

c.

Documents that can be presented for payment: i. Financial Documents Bills of Exchange, Co-accepted Draft ii. Commercial Documents Invoice, Packing List iii. Shipping Documents Transport Documents, Insurance Certificate, Commercial, Official or legal Documents. iv. Transport Documents Bill of Lading (ocean or multi-nodal or charter party), Airway Bill, Lorry/ truck receipt, railway receipt, forwarding cargo receipt, delivery challan, etc. v. Official Documents - License Embassy Legalization, origin certificate, inspection certificate, phyto sanitary certificate. vi. Insurance Documents Original policy/ certificate and not cover note

9.

Arrangements for meeting the LC Obligations: a.

The proposals for establishing LCs, should clearly indicate the sources of funds for payment of LC bills, i.e., whether the party proposes to retire the bills from own funds or whether any back up finance is necessary.

b.

Normally LC should be issued for acquisition of capital equipment, only if back up finance by way of term loan is sanctioned either by the Bank or by any financial institution. 768 - III

c.

In the case of LCs for purchase of raw materials, it is necessary to examine whether any back up finance by way of CC/KL is necessary. It is essential that all such limits should be considered along with the proposal for LCs. It is not a desirable practice to recommend fresh credit limits or enhancement in credit limits to meet the commitment under LC, when the goods actually arrive.

d.

In all cases where back up finance is not considered, branch manager should ensure that adequate funds are made available by the party, for retirement of LC bills, on due date.

10. Sanction and Release: a.

Commission on LC: i.

b.

LC commission and negotiation charges, etc., should be collected at the rates stipulated by HO. LC commission is to be recovered, in advance, before the Letter of Credit is issued.

Margin on Letter of Credit: i.

While sanctioning / recommending limits for ILCs, suitable margin should be prescribed as applicable in the case of CC / KL / TL against the goods / machineries / etc., which are proposed to be covered under the ILC ii. Margin may be accepted by way of term deposits of the Bank standing in the name of the party, properly discharged in favour of the Bank together with appropriate lien letter. Lien should be noted on the deposit receipts and in the ledger folio. iii. Notwithstanding the margin stipulated in the sanction, Branches may obtain, at their discretion, higher margin depending upon the financial position of the party, the marketability of the commodity etc., at the time of opening the ILC iv. The margin held in respect of an LC should be released to the party (buyer / opener) only after the final bill under LC is paid by him. c.

Period of ILC: i.The ILCs should be issued for a period not exceeding the period stipulated in the sanction letter.

d.

Procedure for issuing of Letter of Credit: i.

The officer in charge of the section should prepare an “ILC ISSUE NOTE” as per the specimen given in Annexure 1 to this Chapter. ii. ILCs should be issued strictly in accordance with the terms of sanction. It should be verified that there is sufficient limit available for issuing of the ILC. iii. Since all the LCs issued are subject to Uniform Customs and Practice for Documentary Credits branches should ensure that all the ILCs issued carry the following notation: “Expressed so far as otherwise expressly stated it is subject to uniform customs and practice for Documentary Credits (1993 Revision) ICC, Paris, France publication no. 500 and engages us in accordance with the terms there of.” 769 - III

iv. Before issuing the ILC margin as stipulated in the terms of sanction should be collected. Commission for issuing the ILC should be collected as per the bank's procedure. v. Apart from other documents the following documents are also to be obtained: 

Letter of Credit Agreement: Stamped Agreement Form should be obtained for the total ILC limit, only once. The original ILC should be stamped with the adhesive stamp of requisite value as applicable to the concerned state. The cost of stamps is to be recovered from the applicant.



Letter of Credit Application Form: As and when party requests for issue of ILCs “Application Form” is to be obtained, duly filled in incorporating the instructions that are required to be conveyed by the buyer (applicant) to the beneficiary (seller) and a reference is to be made, therein, regarding execution of the stamped agreement.



The following particulars should be set out in the application:  Name of the Applicant with full address.  Name and address of the consignor (beneficiary) in whose favour the Letter of Credit is to be issued.  Amount of L/C.  Documents to be submitted with the bill and whether Transit Insurance Policy is to accompany the documents.  Term of the L/C, i.e., the period for which it is valid.  Particulars of goods and price agreed to be paid.  Amount of advance, if any, paid to the consignor as margin.  Copy of agreement between the buyer / seller should be obtained so as to find out the basic clauses affecting the LC.



Each ILC should be given a serial number and recorded in ILC Issue Register. Margin, commission and other charges collected should also be noted therein.



Contra entry for contingent liabilities are to be passed as and when Letter of Credit are opened.  Dr. Constituent Liability for Acceptance on account of Letter of Credit  Cr. Acceptance for Constituent on account of Letter of Credit



All the instructions should be incorporated in the ILC. Specimen form of Inland LC is given in Annexure-2 to this Chapter. Negotiations under the L/C should, normally, be restricted to the bank's own branch at the place of the beneficiary. Where we have no branch, or in exceptional cases, negotiations at other banks may be permitted.



When all the documents are obtained, the ILC may be issued in favour of the beneficiary under advice to the applicant (customer) at whose instance it was issued, retaining a copy in the file to be maintained for the purpose. The Letter of Credit should be signed by two authorised officers, their names and signing power number should be mentioned.

770 - III

e.

Protective Clause: i.

The following protective clauses should invariably be incorporated in the Revolving ILCs: 

The amount of drawings made under a Revolving Letter of Credit is reinstated and made available to the beneficiary again for further drawings during the currency of the L/C, subject to certain conditions specified in the ILC by way of protective clause as “The amount utilised under this credit shall be again available for utilisation only on receipt, by the negotiating branch / bank, of the advice that the draft already drawn by the beneficiary has been reimbursed by the buyer (applicant)”

Note: Reinstatement of Amount: When a bill under a Revolving ILC is paid by the drawee (buyer / applicant of the ILC), the ILC issuing branch should send an advice to that effect, by way of a letter, to the negotiating branch / bank. The ILC negotiating branch / bank should reinstate and make available the amounts drawn, only on receipt of a specific advice from the ILC issuing branch that the bill has been paid by the buyer. f.

Advising of the ILC: The ILC should be advised to the beneficiary through the negotiating branch. The opening branch should forward the original and second copy of the ILC to the negotiating branch along with a covering letter. Where negotiating is permitted at another bank, the ILC is to be advised through that bank.

11. Amendments to the Letter of Credit: a.

Amendments to 'Letter of Credit' into an 'Irrevocable Letter of Credit' becomes effective only if the amendments are acceptable to the beneficiary. Otherwise, the documents negotiated in accordance with the terms and conditions already existing, will have to be honoured.

b.

Requests from the opener (buyer) for amendments should be obtained in Amendment Application. Where an application for amendment involves increase in the amount of Inland Letter of Credit, additional margin money wherever applicable should be collected and such enhancement should also be within the available limit. The procedure and other instructions in respect of opening of an Inland LC should also be followed in the case of amendments to the Inland LC.

c.

Inland LC amendment advice should be prepared (with suitable modifications) signed and sent to the negotiating Branch / Bank in the same manner as in the case of the relative LC.

d.

Amendments to an Inland LC should be recorded in the ILC Issue Register. Where the amount of the credit is amended, the liability of the party should be correspondingly adjusted and accounting entries passed.

e.

The amendment application/s and copies of amendment advice should be kept along with other documents relating to the Inland Letter of Credit.

12. Custody of Documents: a.

The following set of documents in respect of ILC should be kept in double lock: 771 - III

i. ii. iii. iv. v. vi. b.

Stamped Agreement Form Application for issue of ILC Copy of the ILC issued Acknowledgement of the ILC received from the negotiating branch / bank Application for Amendment (of ILC), if any, and Copy of the Amendment Advice

For the purpose of easy follow-up, an additional copy of the ILC issued and also amendment advice, may be maintained in a separate file, in serial order, together with all correspondences in respect of the ILC. When the ILC is fully utilised, and / or expired, the entire set of these papers may be transferred to the “Closed ILC” file or to the party's file.

13. Procedure to be adopted by the Advising / Negotiating Branch: a.

Sending Acknowledgement: i.

b.

Entries in the Inland Letter Of Credit Issue Register: i.

c.

On receipt of the ILC the advising / negotiating branch should send an acknowledgement to the ILC issuing branch / bank.

The ILC should be entered in the 'Inland Letter of Credit Issue Register' to be maintained by the advising / negotiating branch. The round seal of the branch should be affixed on the ILC and on its copy, noting the advising / negotiating branch's reference number.

Confirmation of LCs: i.

Sometimes, the beneficiary may insist on confirmed ILCs to ensure payment of the amount “without any recourse”. Such confirmation should be at the request of the issuing branch / bank. The issuing branch has to take a careful decision based on the financial standing and integrity of the buyer as by confirmation the bank would lose the opportunity of recovery from beneficiary in the event of default. Hence branches have to consult H.O. for extending confirmation. ii. Adequate care should be taken while confirming the LC. Once confirmation is made by the Advising Bank / Branch or Negotiating Bank / Branch, it is the responsibility of the Bank / Branch to make payment to the beneficiary. iii. While negotiating the bills under LCs of the bank's own branch, Manager / Officer should verify the signature/s of the signatory/ies who has / have issued the LC and affix the “Signature Verified Stamp” under his initials. iv. The original ILC (Beneficiary's copy) should be immediately delivered to the beneficiary, against acknowledgement, after necessary identification. The other copy of the ILC should be retained by the branch.

772 - III

d.

Documents to be Maintained: i.

e.



Copy of the ILC received from the issuing branch / bank (i.e. negotiating branch's copy / bank's copy)



Acknowledgement of the beneficiary for having received the original ILC



Copies of Amendment Advices, if any, received and delivered to the beneficiary with acknowledgement, and



All correspondence relating to the ILC

Documents after utilization of ILC: i.

f.

The advising / negotiating branch should maintain the following documents, in a folder or a separate file, in safe custody:

When the ILC is fully utilized, and / or is expired the entire set of these papers may be kept along with the concerned vouchers.

Advice /s of Amendment: i.

Advices of amendment to the ILC should also be recorded in the ILC register in the 'Remarks' column and dealt with, as stated in the foregoing paragraphs.

14. Negotiation of Documents: a.

A Letter of Credit is an authority to the designated branch/bank therein to negotiate the documents drawn in accordance with the terms and conditions of the L/C and to claim reimbursement from the issuing branch / bank. Hence, documents tendered by the beneficiary should be paid by the negotiating branch / bank, if they conform to the terms and conditions of the L/C.

b.

No L/C limits or separate permission of the Head Office is needed for negotiation of documents under Inland LCs opened by the bank's branches.

c.

The negotiating branch/bank is bound by the terms and conditions of the ILC. When it receives documents from the beneficiary, for negotiation, the documents should be scrutinised. It should be ensured that the drafts and documents are drawn and presented exactly in accordance with the terms and conditions of the ILC. Where there are discrepancies in the documents the beneficiary should be advised to get them rectified.

d.

When the drafts drawn under the L/C are paid, the fact should be endorsed on the Inland Letter of Credit and returned to the Branch which has issued the Inland Letter of Credit (if the limit is already fully utilised) with the relative debit advice.

e.

Care should be taken by the Branch paying the drafts to examine that the following points are complied with and all the terms and conditions mentioned in the ILC have been fulfilled. 773 - III

i.

The term of the ILC has not expired and that the same is in force at the time when the drafts drawn under the ILC are presented for payment. ii. That all documents accompanying the draft and required to be submitted under the ILC are apparently in order and conform to the ILC terms. iii. When several bills have to be honoured under one ILC, care has to be taken to see that the total amount of all the bills does not exceed the amount of the ILC. iv. In the case of revolving ILC, fresh bills may be paid only on receipt of a specific advice from ILC issuing branch that the bill has been paid by the buyer. v. When all the drafts drawn under the ILC are paid and duly endorsed on the back thereof, it should be filed in the relative file. f.

The negotiating branch should insist on the production of the original ILC along with the documents at the time of negotiation. The particulars of negotiations, such as date of negotiation, amount of negotiation and balance available should be recorded on the reverse of the original ILC, under the authentication of an officer and seal of the branch, and also on the office copy of the ILC with the negotiating branch. Payments should also be noted in the 'ILC Received Register'.

g.

Payments to the beneficiary should be made by debiting Head Office account of the opening branch. If the beneficiary is not a customer of the negotiating branch, payment should be made by a Pay Order, crossed “Account Payee”.

h.

In case of partial drawings, the original ILC is to be returned to the beneficiary after noting the particulars on it, as stated above. When the drawings are for the full amount of the ILC, the balance in the ILC is exhausted by negotiation. The original ILC should be obtained by the negotiating branch and forwarded to the opening branch along with the last set of documents negotiated. A note has to be made in the ILC Received Register in the 'Remarks Column' in this regard.

i.

The negotiated bill and document should be forwarded to the ILC issuing branch/bank with the bill covering letter mentioning the details of ILC.

j.

If there are discrepancies in the documents presented for payment under the ILC, the discrepancies should be pointed out to the Beneficiary and the Beneficiary should be asked to get them rectified. If, however, the discrepancies cannot be rectified and if the beneficiary is a valued customer and creditworthy, payment may be made, under reserve, after obtaining an indemnity for the discrepancies. In the case of other beneficiaries, indemnities should be obtained from their bankers before making 'payments under reserve'.

k.

While forwarding the bill to the ILC issuing branch / bank, list of the discrepancies in respect of which indemnity is obtained, should be sent stating that the payment has been made under reserve.

l.

In the case of revolving ILC the amount reinstated should be recorded on the reverse of the ILC copy with the negotiating branch and in the ILC Received Register.

774 - III

15. Procedure on receipt of Documents at Issuing Branch: a.

Scrutiny: i.

The documents should be scrutinised to ensure that they are in conformity with the terms and conditions of the ILC. All other precautions should be taken in the case of bills and documents under ILCs, as applicable to IBCs. ii. If the documents are not in accordance with the terms and conditions of LCs issued, the documents should be rejected and intimation of such rejection should be given to the negotiating bank / branch by the quickest means within 7 banking days. However, this does not preclude the branch from referring the discrepancies to the opener in writing and also obtain his acceptance or otherwise in writing. If the opener accepts the discrepancies and communicate their acceptance in writing to the branch such acceptance and its due date, if any, payment should be informed to the negotiating bank / branch immediately b.

Lodging: i. On receipt of documents at the ILC issuing branch, the bills should be entered in the 'ILCBR register' with all the relevant particulars. Each bill should be given a number in the serial order with the prefix 'ILCBR'. Bills under ILCs should receive the special attention of the ILC issuing branch, as these bills are to be honoured, in terms of the Bank's commitment under the ILC and in turn reimbursement is to be claimed from the drawee (applicant / buyer). The particulars of the bills should also be noted in the ILC ISSUE REGISTER. The following entries are to be made at the time of receipt of bills under LCs issued. -Dr: Acceptance for Constituent on account of Letter of Credit -Cr: Constituent Liability for acceptance on account of Letter of Credit -Dr: Constituents Liability on Inland Bills under LC -Cr: Acceptance on account of Inland Bills under LC ii. The relative entries made at the time of presentation for booking of the bills received under ILCs should be reversed at the time of payment either by the applicant or the bank on behalf of the applicant by debit to back-up facilities Account / Advance against overdue bills under ILC account.

c.

Presentation for Payment and Scrutiny by Drawee: i.

d.

Bills under ILCs should be presented to the drawee on the day it is received,mentioning therein, “Bills drawn under ILC Number _____________________.” The particulars of commission and interest etc., due should be incorporated in the demand notice and the drawee should be called upon to pay the bill within 24 hours of presentation, if it is a demand bill. List of discrepancies should also be sent.

Discrepancies in Documents: i.

If there are discrepancies in the documents they should be notified to the applicant (buyer) of 775 - III

the ILC (drawee) immediately on receipt of the documents. The drawee (applicant-buyer) should be asked to reply within 24 hours as to whether the documents are acceptable to him. If the documents are not acceptable to the applicant, the negotiating branch/bank should be informed for getting the reimbursement from the beneficiary, immediately, if payment has been made under reserve. e.

Where the Buyer (Applicant) Delays Payment: i.

ii.

iii.

iv.

v.

vi.

vii.

f.

The opening branch should reimburse the negotiating branch / bank in terms of its obligations under the ILC within 24 hours or receipt of the bill, irrespective of whether the drawee (buyer) has paid it or not. Thus, the bill should be paid by the opening branch on the day, following the day of receipt thereof, even if the drawee has not paid it. In such cases, bills should be reimbursed by debiting the “Advance Against Overdue Bills under ILC”, under information to the Regional Office. Particulars of reimbursement should be noted in 'ILCBR register', 'ILC Issue Register' and on the reverse of the office copy of the ILC. Manager should ensure that such accounts are closed with the least possible delay. This should deem to be an overdue account and steps should be taken to compel the borrower to provide necessary funds. If it is found that the party is frequently in the habit of not providing funds, ILC will haveto be made a sub-limit under the inventory limit so that the margin to cover cost of goods and duty is provided for, in advance. When the bill is finally paid by the drawee, the “Advance Against Overdue Bills under ILC” A/C should be credited. If the LCs are opened with backup finance, necessary authority should be obtained from the opener, at the time of opening of LCs itself debiting the account for adjustment. For the information of the negotiating branch and the drawer of the bill, it should be mentioned in the branch advice to the negotiating branch, as to whether the bill is actually paid by the drawee or reimbursed by the opening branch. This is particularly essential in the case of Revolving ILCs. If the terms of ILC requires the collection of negotiating commission, interest etc., from drawee (buyer) such negotiating commission and interest, as eligible, is to be collected from the drawee from the date of negotiation till the date of realisation of the Bill and credited to the income account under the appropriate head. The branches should submit the “Statement of Devolved Letter Of Credit” on the very date of invocation, as per the format given in Annexure-2 to this Chapter.

Payment by the Drawee: i.

The drawee should retire the bills under ILC within 24 hours of presentation either by cash payment or by way of finance from the Bank under CC/KL limits extended to the party. If the bill is adjusted to the negotiating branch by debiting the “Advance Against Overdue Bills under ILC” as stated in the foregoing paragraphs the proceeds should be credited to the 776 - III

ii.

iii. iv. v. vi.

vii.

“Advance against Overdue Bills under ILC” Account. Otherwise the proceeds should be remitted to the negotiating branch/bank. The applicable interest should be collected from the date of payment by the Bank till the date of payment by the applicant. This interest should be credited to the interest received on overdue bills A/c of the ILC opening branch. When the bill is paid by the drawee, entries should be made in the ILC issue register, ILCBR register and on the office copy of the ILC. An acknowledgement of the customer should be obtained in token of having received the documents. Accounting entries should be passed and the party's liability reduced. In the case of Revolving ILC, the amount reinstated should be recorded in the ILC Ledger maintained account wise and on the office copy of the ILC and necessary entries passed. An advice of payment by way of a Letter should be sent to the negotiating branch / bank. In addition to negotiation charges and commission, the branch has to collect interest for the transit period i.e., from the date of negotiation till the date of reimbursement of funds. If the bills are not paid, on presentation, overdue interest should also be collected.

16. Other Aspects Under ILC: a.

Drawing by Usance Bills: i.

As stated earlier specific sanction is required for issuing ILCs stipulating drawings by documentary usance bills (i.e. with DA terms). ii. Documents relating to goods received under ILC on DP basis (Documents against Payment) should not be handed over to the party before receiving payment, inspite of the fact that the relative goods can be hypothecated / pledged subsequently. Where circumstances necessitate handing over of such documents to party (applicant / buyer), specific permission from the appropriate sanctioning authority must be obtained, for Trust Release, at the time of sanction of the ILC limit itself. iii. In cases where ILCs call for usance bills with DA terms (Documents Against Acceptance) the goods covered by the usance bills should be hypothecated to the Bank. A hypothecation agreement should be got executed by the party (applicant / buyer) for this purpose. The hypothecation agreement should be adequately stamped and should be obtained for the total ILC limit. b.

Other Precautions:The procedures / safeguards as applicable to Cash credit / key loan accounts viz., insurance, stock verification, etc., are also to be followed. Where the party (applicant buyer) is also enjoying CC /KL limits, the stocks received under the usance bills with DA terms are to be held separately and also shown separately in the relative stock statements. For the purpose of determination of drawing limit, such stocks received under ILCs usance should be EXCLUDED.

c.

Balancing: Balancing of ILCs issued, Bills received under ILC and Advance Against Overdue 777 - III

Bills under ILC should be done as on last Friday of each month. The liabilities of individual parties should be taken separately, account wise. The total of outstanding LCs of each party should tally with the party's outstanding liability. The summation of liabilities of all the parties should tally with the balance in the General Ledger. d.

Negotiation of Bills under ILCS issued by another Bank: Where bills are negotiated under ILCs of other banks, negotiating branch should ensure that transit interest and negotiation charges are invariably collected from the other bank.

e.

Issuing of duplicate ILCs in lieu of Lost Originals: Before issuing a duplicate of an ILC, the party at whose instance the credit was established as also the beneficiary, should execute an indemnity letter in the form that will be supplied by the Head Office, on request.

f.

Follow-up of ILCs: i.

The branch has to verify whether the assets, covered by the ILC, is duly received by the Applicant (buyer) and that the ILC is utilised for the purpose for which it was issued. ii. In case of Letter of Credit issued for supply of goods, the procedures and precautions laid for hypothecation / pledge of goods as the case may be for monitoring the goods must be followed and it should be confirmed that the stock of goods is adequate to cover the liability. iii. Stock / Debtors statement should be obtained once in fortnight. g.

Risks: i.

Fraud Risk: 

The payment will be obtained for non-existent or worthless merchandise against presentation by the beneficiary of forged or falsified documents.

 Credit itself may be forged. ii. Sovereign and Regulatory Risk:  Performance of L/C may be prevented by Govt. action. iii. Legal Risk:  May be disturbed by legal action. iv. Force Majeure and Frustration of Contract: v.

 External factors Natural disasters, armed conflicts. Risks to the applicant: 

Non delivery of goods



short shipment



inferior quality



early/ later shipment



damaged in transit 778 - III



Foreign Exchange

 Failure of Bank/ issuing bank/ collecting bank vi. Risks to the Issuing Bank: 

Insolvency of the applicant

 Fraud Risk, Sovereign and Regulatory/ Legal Risk vii. Risk to the Reimbursing Bank  no obligation to the reimburse the claiming bank unless it has issued an undertaking. viii. Risk to the Beneficiary 

Failure to comply with credit conditions



Failure of or delay in payment from the issuing Bank

 Credit issued by party other than Bank. ix. Risk of Confirming Bank 

Insolvency of the issuing Bank



Results in not getting reimbursement.

17. Annexure/s: a. The following Annexures are appended to this Chapter: Annexure 1: Specimen of ILC Issue Note. Annexure2: Specimen of Statement of Devolved Inland Letter of Credit.

779 - III

Annexure-1 to Chapter -57 ILC ISSUE NOTE ………………..….SC BANK LTD., _____________BRANCH 1) Name of Party 2) Particulars of sanction – ILC limit a) Amount b) Date of sanction c) Sanctioning Authority d) Dt. of first availment e) Due date f) Commodity to be dealt with As per sanction g) Margin 3)Present outstanding under a) ILC b) DP Bills c) DA Bills d) Overdue Bills e) Trust Release 4) Present Request a) Amount b) Commodity c) DA / DP d) Validity e) Commission 5) Reasons for earlier crystallisation, if any and how it was / will be recovered The total liability including the present limit is within the sanctioned limit OFFICER HANDLING THE ISSUE COUNTER SIGNED MANAGER

780 - III

Annexure-2 to Chapter-57 SPECIMEN OF STATEMENT OF DEVOLVED INLAND LETTER OF CREDIT PART I Devolved and Liability outstanding for the quarter ended_______ Sl.No.

Name of the Party on Whose behalf L.C. was issued

(1)

Name of the Beneficiary and address

(2)

(3)

How the claim was adjusted DL Amount DL Raised On (7) (8)

LC Amount

(4)

Devolved ----------------Date Amount

(5)

Outstanding balance as on____ in DL / BP raised to adjust the devolved LC --------------Date Amount

(6)

(7)

(8)

Remarks Closed on (9)

(10)

PART II Devolved and Liability closed for the quarter ended…………… Sl.No.

Name of the Party on Whose behalf

Name of the Beneficiary and address

LC Amount

Devolved

(1)

(2)

(3)

(4)

Date (5)

How the claim was adjusted DL Amount (7)

(8)

Amount (6) Remarks

DL Closed on (9)

(10)

In part II under Column 8 the amount of demand loan raised for LC devolvement must be shown In Part II Column 10 the account in which the amount is debited and on which date should be given. (i.e. liability was closed by debiting CA, CC or paid by party on __________)

781 - III

CHAPTER-58

ADVANCE AGAINST GOODS 1. General: a. This facility of advances against goods can be in two ways. i. Pledge ii. Hypothecation of Goods 2. Pledge: a.

A pledge is said to be created, when the goods are physically handed over by the borrower or the prospective borrower to the lender or to someone as authorised, on his behalf, with the intention of the goods being treated as security for the repayment of the advance. Legal delivery actual or constructive, is an essential part of a contract of pledge.

b.

Sections 148 to 179 of the Indian Contract Act are related with the bailment and pledge. The definitions given in the Indian Contract Act create a relation of bailor and bailee between the borrower and the lender [Banker].

3. Hypothecation: a.

Hypothecation is the creation of an equitable charge over the goods, the borrower having possession of the goods. A breach of contract under hypothecation, usually leaves only a right to sue for damages, but the agreement of hypothecation incorporates a binding on the borrower that the banker will be allowed to enter the premises and that the possession of the goods will be given to the banker who called upon to do so. As soon as the possession is handed over to the banker, hypothecation becomes pledge.

b. The difference between a pledge and hypothecation is that in the case of a pledge, the borrower's goods are in the Bank's own lock and key whereas, in the case of hypothecation, the stocks remain in the possession of the borrowers and are merely equitably charged to the bank under documents signed by them. In actual practice, it may be difficult to take possession of the goods, when it becomes necessary for the bank to do so, if the borrowers resist, even though, the bank is empowered to do so under the documents executed by the borrowers. It would even be necessary to secure the consent of the borrower for obtaining valid possession of such goods. c. Advances are also made against document of title to goods i.e. Bill of Lading, Railway Receipts and Warehouse Receipts. 4. Categories of Advances on Produces: a. Cash Credit against hypothecation of goods b. Key Loans against pledge of goods 782 - III

5. Pre-Sanction Stage: a. Eligible Borrowers are those customers of the bank, i. Who are entirely trustworthy ii. Who are regular dealers in the line of goods against which advances are granted iii. Who have adequate resources to pay the shortfall in margins, without difficulty, if the prices of goods tend to fall iv. Who can be thoroughly relied upon for the repayment of the advances, without recourse to forced sale of goods, by the bank and v. who are solvent (if the borrower's own funds (tangible networth) is negative they are not solvent and cash credit facility should be denied / terminated. vi. Who are empowered to have the share of goods b.

Purpose: i.

Credit facilities against goods are granted to increase the working capital resources of the applicant and thereby, increase the turnover leading to an overall growth in profitability and /or productivity

c. Limit: i.

6.

Limit is fixed taking into consideration the various aspects of lending and upon the genuine business requirements of the customer. Banks never lend a sum beyond the customer's needs. For a manufacturing unit, the cash credit facility is linked to the level of inventories.

Security a. Primary Security: i.

The grant of this facility is linked to the stock holdings including raw materials, Work-inprocess and finished goods. So, the primary security is goods.

b. Essential Qualities of the Security i.e. Goods: i.

The goods are ordinarily those on the approved list of Bank and in case of other readily marketable goods, not subject to wide fluctuations, approval of the competent authority has to be taken for accepting them as security. ii. The goods accepted belong to the borrower (except in the cases of advances granted to a Mercantile Agent). iii. The Bank maintains with it original invoices or authenticated copies thereof, in respect of goods pledged. iv. The goods should be lying in the custody and possession of the borrower. These advances 783 - III

should not be granted against goods, which are lying in the possession / premises of third parties, viz:- borrower's suppliers or borrower's job workers. v. No advance should be granted against goods whose quality, quantity and value cannot be easily ascertained. The goods should be of good quality, of adequate quantity and without wild fluctuation in value. vi. Goods should be readily marketable. There should not be rapid deterioration in quality. Perishable goods and goods of inflammable character should not be accepted as security without prior approval of R.O./H.O. vii. The goods should not be very old. No. goods should be allowed to be held for an unduly long period (say) more than 6 months viii. Seasonal goods should be cleared at the end of the season and not continued, beyond, to the next season. ix. Proper storage facility must be available x. The goods should be cash paid goods (and not those obtained on credit basis) and free from any encumbrance xi. Goods should not be that manufactured against a particular specific order for a particular buyer only eg. Calendar, cakes. xii. Goods are kept adequately insured against fire risks and where necessary, cover against other types of risks is also obtained. Insurance policies are in joint names of the Bank and borrowers, with the usual Bank clause, on the warranties in the policies are being fully observed and the policies are being retained at the Bank. The insurance Register is to be satisfactorily maintained and the Bank has a proper system for ensuring renewal of policies on respective due dates. xiii. The Market Rate Register is properly maintained and the trend in prices of all commodities pledged are watched constantly. xiv. The margin stipulated in the account have been maintained, clean loans/overdraft facilities have not been allowed to borrowers with a view to enable them to maintain the prescribed margins, particularly in regard to advances against commodities covered by RBI Credit Control Directives. xv. The Bank should ensure to comply with the directives issued by RBI from time to time, imposing restrictions against certain commodities. xvi. The possession of pledged stocks has not been parted with by the Bank except against proportionate repayment, releases under Trust Receipts, if any have been made under arrangements as approved. xvii.Deliveries have invariably been effected against delivery orders signed by the competent authority and duly discharged by the borrowers or their authorised representative and the Delivery Register is properly maintained. xviii.The Register of Godown Keys is maintained and proper control is exercised over the custody and issue of keys. The duplicate keys of the lockers are also held in joint custody.

784 - III

c. Sole Property of the Borrower: i.

The value of goods proposed to be offered as security should have been fully paid for , by the borrower, to the seller of the goods. The borrower may be asked to state the cheque number by which payment has been made on the purchase invoice so that the branches can verify the payment from the ledger. It should be ensured that no “Unpaid Vendor's Lien” exists on the goods that are offered as security. However, the fact of possession of goods is the vital factor in determining whether the seller can have any lien on the goods which have not been fully paid for by the borrower ii. The seller cannot have any lien on the goods when he has given lawful possession of the goods to the buyer. d.

Indigenous Goods / Manufactured Goods: i.

When the invoice value of the goods is known, the goods should be valued on the basis of the invoice value or market value, whichever is less. Where, however, the invoice value is not ascertainable, the market value of the goods may be taken as the basis for valuation. In such cases, Bank should ascertain the market rates, at frequent intervals, and maintain a record thereof. In the case of Manufactured goods the basis of valuation should be either cost price or market price, whichever is lower and the manufacturer's invoice should be produced for verification.

7. Sanction and Release: a. Sanction: i.

Before sanctioning, the applicant's place of business and his residence should be visited and suitability assessed. ii. The appropriate application form supported by the required supporting statements, including financial statements such as balance sheets, profit and loss accounts, annual cash flow projections, income tax assessment orders, sales tax assessment orders etc., must be obtained and scrutinized b. Duration: i.

Advances against “Mercantile Produce” are granted usually for short periods of six months or less and, at any rate, not exceeding twelve months, so that by lending against them the bank's funds are not locked up for any considerable time. ii. Cash Credit Limits are sanctioned for a period of 12 months, unless it is for seasonal purpose. The limits are to be renewed before the expiry of due date. Renewal also should be done on reconstitution of the borrower's firm. c.

Rate of Interest: i.

The branch should charge rate of interest applicable, from time to time, as per Bank's Rule. 785 - III

ii. The additional interest /charges should be collected in case of -Inadequate collateral security -Non-submission / delayed submission of Stock Statements, statements under MSOD / QIS, etc., d. Margin: i.

Sufficient margin must be retained, which will depend upon the nature of the commodities, market rate etc. The drawing power in the account should be arrived at only after excluding margin. ii. Fluctuations in market rates of commodities should be watched and drawing powers should be reversed accordingly. e. Other Conditions: i.

In respect of commodities coming under the Selective Credit Control the Bank should adhere to the level of credit, the margins and the rates of interest as stipulated by the Directives of RBI from time to time. ii. Most State Governments have enacted laws, whereby, traders/ manufacturers are required to obtain licences to store particular type of goods like chemicals, explosives and other hazardous goods. Banks shall ensure that such regulations of the local bodies are strictly complied with, by the borrower before accepting such goods as security. List of items which require licences can be had from the respective Municipalities / Corporations. Banks should ensure that the borrowers have obtained licences, wherever necessary, from local bodies before granting advances against such goods. f.

Release of the Limit: i.

Copy of the licence required, if any, to deal with certain commodities is obtained by the Bank from the borrower. ii. All required and additional / collateral securities required, as per the terms of sanction, should be obtained and proper charges in favour of the Bank should be created by executing documents. g. Ledgers and Registers: i.

The following are the ledgers and registers involved in the release of limits: -Loan Register - Limit /DP register -Loan account due date register - Market Rates Register - Stock Register Register of Godown keys - Delivery order Register

786 - III

h. Loan Register: i.

8.

Full particulars are to be entered in the respective columns. The detailed particulars of documents obtained, with serial number for each loan, should be entered in the register under the appropriate column. The entries are to be made by the concerned clerk and checked and initialled by Officer.

Follow-Up and Post-Credit Supervision: a. Inspection of Stocks: i. Banks must inspect the stocks charged as security to the Bank, periodically, and as per the instructions in force. Proper records should be maintained for the inspection of the securities. There should be an element of surprise and inspection should be carried out at random intervals, at least, once in a month. b. Verification of Stocks: i.

The Bank shall cause inspection so as to verify the physical stocks, margin, market value, insurance, age of goods, movement etc., guidelines issued are adhered with reference to the following: -Inclusion in the approved list -Quality -Quantity, -Value, (marginal fluctuations) -Storage, -Insurance -Age of the stocks, -Durability, -Marketability, etc.,

c. Adverse Features: i.

If any shortage of stocks / inventory or any adverse feature is observed during the course of the verification, the verifying officer should give a report to the Bank. Such reports with appropriate comments of the Branch Manager about the reasons for the irregularities and steps taken for their rectification should be sent to the Regional Office. Branches should not submit such inspection reports without suggesting the follow-up actions needed to rectify the irregularities. Besides, Branches should ensure that the Bank's interest is not endangered, under any circumstances

d. Godowns not Inspected: i.

Whenever stocks could not be inspected, for any reason, the reasons for the same should be obtained from the concerned officer and a report should be sent to the respective Regional Office. 787 - III

e. Godown Structure and Location: i. Godowns should be strong and safe ii. Where there is no free access and the front portion is used by someone else other than the borrower, a letter of free access should be obtained such user. iii. Godowns should be located in a safe and unobjectionable locality. iv. In case of godown not belonging to the borrower, he must be a lessee either with a written or oral lease. The rent receipts are to be produced for verification and a letter from the owner of the building, waiving his right over the goods in lieu of the rent payable, should be obtained v. The municipal door number should have been painted, at the entrance of the premises, where the goods offered as security to the bank are stored. vi. The name board of the borrowing firm is to be displayed at the entrance of the godown / premises. f.

Goods Held at Far-Off Places: i.

g.

Goods at Processing Units: i.

h.

If the goods are to be held at places quite far away from the lender branch or left in possession of third parties in remote entries, either for job work or for other purposes, it should not be accepted and the proposal should be turned down politely expressing the bank's inability to handle such advances.

If the borrower hands over stocks for processing with various processing units, the names of such unit, location of such unit., etc., should be obtained from the borrower at the time of accepting the proposal itself. The Manager should ascertain the possibility of exercising post credit supervision vis-à-vis the location of goods. All these aspects should be mentioned in the proposal explicitly and a specific request must be included in the proposal seeking sanction to take goods stored in various places under hypothecation. If the goods are to be located at remote distances from the branch, the proposal need not be entertained.

Godowns situated outside Municipal / Panchayat Limits: i.

In such cases where goods are stored in godowns situated outside the Municipal / Panchayat limits, previous permission of H.O. should be obtained. In such cases the Manager should satisfy himself that the locality of the godown is not prune to the risk of theft, looting etc., and that not prune to there are good facilities for inspecting the godowns. In case the borrower is keen to avail the advance, the borrower should accept, the responsibility of maintaining a watchman, and for the safety of the goods stored therein, in writing.

i. Name Board: i.

The bank's name board depicting the charge over the commodities should be displayed conspicuously, in the premises where the goods offered as security to the bank are stored. 788 - III

9.

Timely Action (in case the financial position of the Borrower deteriorates): a.

When the financial position of the borrower suffers a set back or deteriorates, prompt steps should be taken to take possession of, the goods hypothecated, as under pledge and if possible with the written consent of the borrower and arrange for the recovery of the loan amount. Branches should initiate similar action, if suits are filed by other creditors.

10. Additional particulars for Cash Credit Accounts: a. This type of advance is normally considered for borrowers who, by reason of daily turnover of their stock-in trade, are unable to give possession of goods to the bank by way of pledge. They should always maintain up to date and proper books of accounts with supporting invoices for purchases and credit or cash memos for sales. As the Bank largely relies on such books of accounts and stock registers for verification of the correctness of the Stock Statements, the Bank may not entertain such proposals unless these conditions are fulfilled. b. Cash Credit is a running account. A limit is fixed for the borrowings taking into account of various aspects. The drawing power within the fixed limit is determined based on the stock holdings of the party. The drawings are allowed within the sanctioned limit or within the drawing power, whichever is less. c. Nature of Charge over the Primary Security: i. d.

The nature of charge under Cash Credit is Hypothecation

Period: i.

Cash Credit limits are sanctioned for a period of 12 months. The limits are to be renewed before the due date of the limit or when the circumstances so warrant for early renewal (say reconstitution, enhancement, etc.)

e. Release of the Limit: i.

Branches should take proper care while releasing and ensure that such release is done only after commencement of commercial production in case of manufacturing unit.

f. Conduct of Accounts: i.

The following are the registers / statements / documents that should be maintained for Cash Credit Account. -Cash Credit Ledger -Cash Credit Stock Statement Register -Drawing Power Register -Drawing Power Information Sheet 789 - III

-Market Rate Register -Insurance Register -Total liability Register. ii. The Banks guidelines are to be observed with reference to the following requirements.Specimen Signatures -Cheque Books Stock, issue, etc., -Maintenance of Ledgers and Registers -Payment of Cheques -Balancing of Ledgers -Statement of Accounts -Folio Charges -Standing Instructions -Operations in the Account iii. A time limit of 15 days may be allowed to the borrowers to remit the interest and other charges debited to Cash Credit account in cases where such charges cause excess drawal over the limit. When the outstanding in the account is well within the limit, after debiting of the above charges, no debit operations beyond the limits should be allowed. In other words, the over drawings are permitted for the limited purpose of recovering the quarterly interest and not for allowing routine transactions. g.

Drawings in the Account: i.

Operating the Limit: -When a Cash Credit limit is sanctioned it does not mean that the borrower can be allowed to draw upto the limit sanctioned. The borrower is allowed to draw within the drawing power, calculated on the basis of the Stock Statements after maintaining stipulated margin or within the sanctioned limit, whichever is less. -At the time of availing the limit, the borrower has to submit the Stock Statement, which should be duly verified and checked. Subsequent drawings should be within the drawing power arrived at, on the basis of subsequent Stock Statements to be submitted at periodical intervals. The debit balance, at any time, should be within the drawing power arrived at, or the sanctioned limit, whichever is less. -Frequent return of cheques issued by the borrower would indicate overtrading or financial weakness which has to be brought to the notice of the sanctioning authority and proper action should be initiated. ii. Allowable Debits in the Account: -While opening the account itself, the nature of business and commodity dealt with by the borrower should be understood and ensured that the debit and credit operations are correlated to the borrower's business transactions. It is also essential to note down the sources from which the goods / raw materials / services of others are being acquired / availed to ensure that the 790 - III

withdrawals made from Cash Credit / Overdraft accounts are meant for making payment to such sources. Cash withdrawals may also be permitted only to meet administrative expenses. -Unless there is sufficient drawing power in the account, the branch should not debit:! Instalments of the term loan account and its interest. ! The amount of returned bills iii. Cash Withdrawals: -When cash withdrawal is made from such account, the branches must be doubly cautious, because it is an easy way of diverting the fund for unapproved purposes. So, cash withdrawal must be avoided, as far as possible, unless the Branch Managers know very well about the purpose for which the credit has been given, such as payment to agriculturists, cash purchases from the market, etc., iv. Credit Entries: -All sale proceeds must invariably be routed through the account. The summation of credit must match with the quantum of sale made by the borrower. If not, it amounts to diversion of sale proceeds by opening accounts with other bank(s). So, it must be verified, on an on-going basis, (not at the end of the year or during renewal) and taken up with the borrower, then and there. -If the borrower has opened any Current Account with other bank(s), the said bank(s) must be alerted and requested to take necessary steps to close it. The borrower must be instructed to route all their sale proceeds through the Cash Credit Account. If there is no response from the borrower, further withdrawals must be stopped (not the credits) and the matter must be referred to Regional Office / Credit Department for further course of action. -If huge amounts are deposited in cash in the account, the source of the same should be enquired into. v. Funds Transfer to Associate / Sister Concerns: -Any withdrawal made for transferring funds to sister / associate concern of the borrower must be discouraged, unless, it is for advance payment / purchase of goods made from such concerns. In the latter case, Branch Managers must confirm whether the borrower is a marketing outlet for the product of the sister / associate concerns. This must be assessed at the time of appraising the proposal itself and be reported in the recommendations. Other than this, on rare occasions, fund transfers, just to transfer surplus funds / extra liquidity may be permitted provided Manager is satisfied with the nature of the excess liquidity available with the borrower concern, as per the latest balance sheet, and that this transfer will not affect the required Liquidity and Net Working Capital of the concern. In all other cases, it will amount to diversion of the funds and the branch should not allow such type of withdrawals. This condition must be made known to the borrower, explicitly. vi. Action to be taken: If any withdrawal is found to be not relating to the business dealings for which the bank has financed or for meeting their administrative expenses, the officer/s should seek clarifications from the borrower, immediately on notice. Any withdrawal, meant for the purpose unrelated to the business of operation for which the facility is granted, must be denied firmly, although it is 791 - III

within the sanctioned limit. The borrower cannot claim withdrawals, as a matter of right, from the limit sanctioned, irrespective of the purpose. Before opening a Cash Credit the Branch Managers must create awareness for the officers and staff members of the concerned section about the nature of business operation of each borrower, commodity dealt with by them, sources from which the goods are acquired, expected monthly sales and such other information relevant to the operation of the account. Such information must be recorded and verified during operations. The borrowers must also be made aware of these conditions, in writing, while entertaining the proposal itself to avoid possible future litigation. vii. Measures to Prevent Diversion of Funds: Branches should ensure proper end use of the working capital limit and the diversion of funds should not be allowed under any circumstances, say, for acquiring any fixed asset. 11. Submission of Stock Statements and Fixing Drawing Power: a. Stock Statements: i.

The borrowers should be instructed to submit statement of stocks in the bank's prescribed “Stock Statement Form”. The Stock Statement should contain a declaration by the borrower(s) -Regarding their clear title to the goods, -The correctness of the quantity -Valuation thereof and -Purchase and sales particulars ii. The declaration firmly bind the borrowers and form the basis of the hypothecation advance. The Stock Statements obtained should be signed by the borrower. b.

Periodicity for Submission of Stock Statement: i.

Stock Statements from the borrowers whose limits are upto Rs. 25,000/- may be obtained on quarterly basis nd

ii. For the borrowers who are having facilities for above Rs. 25,000/- statements as on 2 and Last Friday may be obtained. iii. Where the borrowers are encountering genuine difficulties in submission of the Stock Statements, the Branch Manager may recommend for obtention of the Stock Statement, at a longer rest. The Regional Manager could consider the recommendations based upon the genuineness of the difficulties faced by the borrower. iv. In as much as the number of items hypothecated by small business units are large and consequently they find difficulty in compiling Stock Statements, in the form required by the Bank, the Branch Managers shall recommend to their controlling authorities for obtaining a Stock Statement showing the selected items, the value of which should be more than 75% of the total value of the stock. The remaining items which constitutes less that 25% of the value of 792 - III

the total stock shall be clubbed together and shown as a single item provided no single item which is clubbed under this 25% constitutes more than 5% of the total value of stocks. The fortnightly Stock Statements as on Friday (2nd and Last Fridays) should be submitted to the branches on or before the following Monday. vi. In case of the borrowers submitting the Stock Statements on a monthly / quarterly basis, the statement should be received by the branch within one week from its reporting date. v.

c. Penalty for Delay / Non-Submission of Stock Statement: i.

If the statements are not submitted by the next Friday following the due date for submission of Stock Statement, a default interest at 1% p.a., on the balance outstanding as on the reporting Friday should be charged for the subsequent fortnight and debited to the account. The instances of default in submission of Stock Statements should be taken note of at the time of the renewal of the account. The repeated instances of default may force the Bank to cut down the facility during renewal. However, branches should send a formal notice to the defaulting borrowers (Registered Letter with Acknowledgement Due) informing the levy of Default Interest. ii. In case of continuing non-submission of Stock Statements, the reasons shall be studied. Branch Managers should meet the borrowers personally and have a discussion to impress upon them the purpose and the need for which Stock Statements are required by branch. In cases where the borrowers encounter genuine hardship branches may take up with R.O. recommending revision of periodicity of statements. iii. In cases of persistent default (if the Stock Statements are not submitted in time and if the default is for a period beyond the date of next submission of the statement) the operations in the account shall be stopped / the limit reduced / account recalled, if necessary to safeguard the interest of Bank. d.

Scrutiny of Stock Statements: i.

On getting the Stock Statement the required particulars are recorded in the Drawing Power Register, after verifying the correctness of value, calculations, etc., carefully. ii. In order to avoid double finance (i.e. inclusion of goods already financed by Trust Receipt/ DA bills / LC / BG) in the hypothecation account, branches are advised that, before arriving at the drawing power in the Cash Credit Account, on the basis of the borrower's Stock Statements, they should verify whether the value of unpaid stocks covered by outstanding DA bills etc., are segregated and deducted from the total value of stocks shown in the Stock Statement. The drawing power will be the net value of paid stocks less stipulated margin or the limit, whichever is less. The unpaid goods such as that procured by the borrower, on credit basis and against Guarantees / Letters of Credit / Trust Receipts etc., should not be included for calculating the drawing power and shall be shown, separately, in the Stock Statement. iii. In case the stocks are located at different places, the Stock Statement shall contain details of stocks location wise and the insurance shall accordingly be taken location wise for adequate 793 - III

value. iv. The Stock Statement and the entries in the Drawing Power Register should be verified by an officer and duly initialled / signed fixed an appropriate columns in token of verification. v. The Drawing Power of the hypothecated security fixed on the basis of the latest Stock Statement should be noted in the ledger by keeping a master instruction sheet. One sheet should be maintained for every borrowal account. The drawing power calculated on the basis of the Stock Statement submitted by the borrower should be entered by the concerned clerk in the Drawing Power Register and must be authenticated by an Officer. The concerned clerk in the Section should always make sure that sufficient Drawing Power is available for passing the debit by verifying the latest Drawing Power entered in the instruction sheet. The official who is passing the drawal should check that sufficient Drawing Power is available. vi. The genuineness of the transaction is verified in case of the goods in transit (inward) a n d i s included in the Stock Statement. Proper sanction from R.O. should be obtained, to include the goods in transit, for arriving at the drawing power. vii. The turnover of stocks calculated from the Stock Statements, shall be cross-checked with the operations in the account. 12. Inspection of Stocks: a. Goods Stored at more than one Centre: i.

b.

Where stocks of the borrower are stored at more than one centre arrangements should be made for simultaneous inspection of stocks, at all centres, on the same day.

Goods with Agents / Processors / Etc.: i.

Godown inspection should be carried out, even where goods are held with Approved Clearing Agents, with the help of the storage receipts made out in the Bank's name, together with an undertaking that the delivery will be made only to the Bank or the Bank's order. The insurance cover obtained, for the stocks held with the clearing agents, must be verified, at the time of stock inspection. ii. Where advances are made to manufacturing / processing units, arrangements should be made to inspect the goods as per instructions. No objection / no lien / access letter obtained from the processors, weavers, artisans, etc., should be verified at that time and it should be ensured that the bank's name board is prominently exhibited in the premises. While handing over the goods to the units owned by third parties, for processing purposes, the borrowers must maintain a clear and detailed record for exchange of goods, in between them and the processing units, both at their point and with the processing units. c.

Verification of Stocks [Additional Particulars]: i. The goods must be verified with that of the Stock Statement of a recent date and compared with that of the stock registers of the customer to confirm correctness of the Stock Statement given to the bank and to ensure that the value is sufficient to cover the limit. The value of the 794 - III

securities shall be individually assessed and compared with the value given in the Stock Statement for detecting over valuation, if any. d. Verification of Books of Accounts of the Borrowers: i.

The borrower's stock register should be examined, at the time of stock inspection, to verify the stocks under hypothecation to our Bank. In fact, the Stock Statement should agree and be consistent with the stock registers maintained by the borrower. Officials should not initial or sign on the borrower's stock book. They should only compare the stock, as given in the Stock Statements, with the stock register kept by the borrowers ii. Branches should call for the documentary evidence, which can be in the form of paid invoices / bills. Such documentary evidence must be scrutinized, thoroughly to ascertain -the title of the borrower to goods and -the basis of valuation of goods. iii. The borrowers should give the cheque numbers by which they have made payments for the goods on the relative invoices so that the payments can be verified by the branches by referring to the parties' Current Accounts / Cash Credit Accounts. iv. Branches must be aware that the turnover in an account must be judged not merely by reference to the ledger account which reflects financial turnover but also by reference to the movement of the goods as it is a reliable pointer to the marketability. Non-movement of the goods in an account may indicate either any or all of the following features about the goods. -Not in regular demand -Over valued -Obsolete or out of fashion -Substandard v. Such statements also reflect transaction of the borrowers, in particular, to the sale / purchase of the goods and its movement. Branches should go through the statements to keep a close watch on the conduct of the account to pick up any signal thrown out and to arrest the trend of the account becoming sick, speculative / overtrading and thereby an NPA. Allowing operations in an account without obtaining Stock Statements is fraught with grave risks. Technically, the drawing power of any account secured by hypothecation of stock, is to be treated as “NIL” if statements have not been received by the due dates. Delay in submission of Stock Statements will also result in classifying the account as irregular. e.

Healthy Operations: i.

To ensure liquidity of these advances, borrowers should ordinarily bring their account to credit, at least, once in a year. A seasonal cash credit should, invariably, be recovered at the end of the season and not permitted to continue beyond the end of the season, to the next season.

795 - III

CHAPTER-59

DOCUMENTS TO BE OBTAINED FOR VARIOUS LOANS 1.

General: a.

2.

Loans requires different sets of documents. The list of various documents that are required to be obtained for various kinds of loans are furnished hereunder:

Clean Loans:

Sl No. (i)

(ii)

(iii)

(iv)

Type of the Borrower

Individual

Joint Borrowers

Sole Proprietary Concern

Documents to be obtained

Code No.

D.P. Note Letter of guarantee, if any. Letter of undertaking relating to payment of advance in stipulated instalments with acceleration clause Letter of undertaking containing negative lien clause.

(2) (33)

Joint and several D.P. Note. Letter of guarantee, if any. Letter of undertaking relating to payment of advance in stipulated instalments with acceleration clause. Letter of undertaking containing negative lien clause.

(3a) (33)

Joint and several D.P. Note. Letter of guarantee, if any Letter of undertaking relating to payment of advance in stipulated instalments with acceleration clause. Letter of undertaking containing negative lien clause Sole Proprietorship letter

Partnership Firm

Remarks

(57) (37)

(57) (37) (3b)(i) Sole Proprietorship letter should be signed (33) by the proprietor in his (57) personal capacity only. (37) (38)

Joint and several D.P. Note (3c) Letter of Partnership Letter of guarantee, if any. (33) should be signed by all Letter of undertaking relating to the partners in their payment of advance in stipulated personal capacity only. instalments with acceleration clause. (57) Letter of undertaking containing negative lien clause. (37) Letter of Partnership (39) Note: for D. P. Note (Code Nos.), please refer to various Annexures under Chapter 61 'General Annxures'.

796 - III

3.

Clean Overdrafts:

Sl No. (i)

(ii)

(iii)

4.

Type of the Borrower

Individual

Joint Borrowers

Sole Proprietary Concern

Documents to be obtained

D.P. Note. Letter of continuing security (with negative lien clause). Letter of guarantee, if any. Letter of recording to adjust the overdrawings within the stipulated period (wherever applicable) Joint and Several D.P. Note. Letter of continuing security (with negative lien clause). Letter of guarantee, if any. Letter of recording to adjust the overdrawings within the stipulated period (wherever applicable)

Code No.

Remarks

(2) (37) (33) (50)

(3a) (37) (33) (50)

Joint and several D.P. Note (3b) (i) Letter of continuing security (with (37) negative lien clause). (33) Letter of guarantee, if any Letter of recording to adjust the (50) overdrawings within the stipulated period (wherever applicable). (38) Sole Proprietorship letter

Sole Proprietorship letter should be signed by the proprietor in his personal capacity only.

Guarantees:

Sl No.

Type of the Borrower

Documents to be obtained

Code No.

(i)

Individual

Stamped CounterIndemnity/Guarantee executed by the borrower

(34)

(ii)

Joint Borrowers

Stamped Counter-Indemnity/ Guarantee executed by the borrower

(34)

(iii)

Sole Proprietary Concern

Stamped Counter-Indemnity/ Guarantee executed by the borrower Sole Proprietorship letter

(34)

Partnership Firm

Stamped CounterIndemnity/Guarantee executed by the borrower Letter of partnership

797 - III

(38)

(34) (3)

Remarks

Sole Proprietorship letter should be signed by the proprietor in his personal capacity only. Letter of Partnership should be signed by all the partners in their personal capacity only.

5.

F.D.R./S.D.R.:

Sl No. (i)

(ii)

(iv)

Type of the Borrower

Individual

Joint Borrowers

Partnership Firm

Documents to be obtained

DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Joint & several (DPN) Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Joint and several DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Sole Proprietorship letter Joint and several DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Letter of Partnership

Code No.

Remarks

2 (16) -(16) -3(b)(i) (16) -(38)

3(c) (16) -(39)

Sole Proprietorship letter should be signed by the proprietor in his personal capacity only.

Letter of Partnership should be signed by all the partners in their personal capacity only.

NOTE : (i) All the parties to the F.D.R./S.D.R. should discharge the deposit receipt on revenue stamp and the signatures should be verified by the branch. Lien should be marked on the receipts and in the ledger/register. (ii) If the advance is against third party deposit receipts, letter depositing F.D.R./S.D.R. should also be signed by the third party after duly filling in the relevant clause in the letter depositing F.D.R./S.D.R. 6.

Recurring Deposits:

Sl No.

Type of the Borrower

Documents to be obtained

Code No.

(i)

Individual

DPN Unstamped Letter of Appropriation. Recurring deposit pass-book duly discharged by the party

(2) (48)

(ii)

Joint Borrowers

Joint and several DPN Unstamped Letter of Appropriation,. Recurring deposit pass-book duly discharged by the party

3(a)

798 - III

(48)

Remarks

7.

(iii)

Sole Proprietary Concern

Joint and several DPN Unstamped Letter of Appropriation,. Recurring deposit pass-book duly discharged by the party. Sole Proprietorship letter

(iv)

Partnership Firm

Joint and several DPN Unstamped Letter of Appropriation. Recurring deposit pass book duly discharged by the party. Letter of Partnership

3(b)(i) Sole Proprietorship letter should be signed (48) by the proprietor in his personal capacity only. -(38) 3(c) (48) --

Letter of Partnership should be signed by all the partners in their personal capacity only.

(30)

Life Insurance Policies:

Sl No. (i)

(ii)

(iii)

Type of the Borrower

Individual

Joint Borrowers

Sole Proprietary Concern

Documents to be obtained

D.P. Note Letter of pledge of securities with additional clause. Take delivery letter. Form of assignment in Bank's favour. Copy of notice of assignment addressed to Life Insurance Corporation of India signed by the party Joint and several D.P. Note Letter of pledge of securities with additional clause. Take delivery letter. Form of assignment in Bank's favour Copy of notice of assignment addressed to Life Insurance Corporation of India signed by the party. DPN Letter of pledge of securities with additional clause. Take delivery letter. Form of assignment in Bank's favour. Copy of notice of assignment addressed to Life Insurance Corporation of India signed by the party Sole Proprietorship letter

799 - III

Code No.

Remarks

(2) (11) (60) (84) (85)

(85) (3a) (11) (60) (84) (85) (3)(b)(i) Sole Proprietorship letter should be signed by the (11) proprietor in his personal (60) capacity only (84) (85) (38)

(iv)

Partnership Firm

Joint and several D.P. Note Letter of pledge of securities with additional clause. Take delivery letter. Form of assignment in Bank's favour. Copy of notice of assignment addressed to Life Insurance Corporation of India signed by the party. Letter of Partnership

(3c) (11) (60) (84)

Letter of Partnership should be signed by all the partners in their personal capacity only.

(85) (39)

NOTE : (i) The original notice of assignment should be handed over by the party to the branch and the same should be forwarded to Life Insurance Corporation of India by the branch. (ii) Premium receipts should be verified periodically to ensure that life policies are kept alive. 8.

Mortgage of Title Deeds to Properties and/or Hypothecation of Machinery etc.:

Sl No. (i)

(ii)

Type of the Borrower

Individual

Joint Borrowers

Documents to be obtained

D.P. Note Memorandum of deposit of title deeds. Instrument of hypothecation of movable machinery. Letter of guarantee, if any. Original documents of title to the property (including all prior documents) Letter of undertaking relating to repayment of advance in stipulated instalments with "acceleration clause". Declaration (Letter of confirmation) D.P. Note Memorandum of deposit of title deeds. Instrument of hypothecation of movable machinery. Letter of guarantee, if any. Original documents of title to the property (including all prior documents) Letter authorising one of the joint borrowers for depositing the title deeds with an intent to create charge thereon. Letter of undertaking relating to repayment of advance in stipulated instalments with "acceleration clause". Declaration (Letter of Confirmation)

800 - III

Code No.

Remarks

(2) 90(c) (19) (33) -(57) (90d) 3a) 90(c) (19) (33) --

(57) (90d)

In other cases, power of Attorney should be obtained.

(iii)

(iv)

Sole Proprietary Concern

Partnership Firm

Joint and several D.P. Note Memorandum of deposit of title deeds. Declaration Instrument of hypothecation of movable machinery. Letter of guarantee, if any. Original documents of title to the property (including all prior documents) Sole Proprietorship letter Letter of undertaking relating to repayment of advance in stipulated instalments with "acceleration clause". Joint and several D.P. Note Memorandum of deposit of title deeds. Declaration Instrument of hypothecation of movable machinery. Letter of guarantee, if any. Original documents of title to the property (including all prior documents) Letter of Partnership One of the partners letter authorising to create mortgage on the firm's property. Letter of undertaking relating to re-payment of advance in stipulated instalments with "acceleration clause".

(3b) 90(c) (90d) (19) (33) --

Sole Proprietorship letter should be signed by the Proprietor in his personal capacity only.

(38) (57)

(3c) 90 (90E) (19) (33)

Letter of Partnership should be signed by all the partners in their personal capacity only.

-(39)

--

In other cases, P/A should be obtained.

(57)

NOTE : (i)

Wherever hypothecation of machinery is obtained, the schedule of the machinery clearly indicating the date of purchase, description of machinery, number of units and value thereof should be obtained duly signed by the constituent that the machinery belonging to the borrower has been hypothecated to the Bank as per Agreement which should be the date of execution.

(ii)

Wherever additional plant and machinery is acquired, a further list as above, should be obtained and kept along with the documents.

(iii)

Supplements to the memorandum of deposit of title deeds should be recorded wherever extension of equitable mortgage is stipulated to cover the enhanced limit.

(iv)

While obtaining additional D.P. Note for enhanced limit, a reference to the previous D.P. Note should be made in the fresh D.P. Note in the case of all advances.

(v)

Similarly, supplemental agreement to the letter of hypothecation of movable machinery should be obtained wherever extension of movable machinery has been stipulated to cover the 801 - III

enhancement in the limit. (vi)

The same procedure as stated in (i) and (ii) above should be followed wherever fixed machinery are mortgaged to our Bank. An additional declaration should also be taken that whatever machinery mortgaged are fixed machinery and whatever machinery hypothecated are movable machinery.

(vii) With a view to ascertaining whether the borrower has clear and marketable title, the branch should obtain a legal opinion regarding borrower's title to the property. The branch should also obtain valuation report as per administrative instructions or as per stipulation in the sanction. The mortgaged properties should be revalued at least once in three years if the sanctioned limits are more than Rs.1 lac by a qualified architect/approved valuer. For limits below Rs.1 lac, valuation should be made every year by the Branch Manager or the Accountant or one of the senior officers of the branch. (viii) The branch should take out insurance policy to cover the full market value of the property/machinery charged to the Bank. The policy should be taken out in the name of the Bank A/c. the borrower's name, the policy should be endorsed in Bank's favour. The policy should cover all the required risks as prescribed by the Bank. (ix)

9.

In case of term loans sanctioned under refinance scheme of SIDBI, refinance agreement & Hypothecation of movable machinery. (for refinances) LDOC 23 should be obtained.

Hypothecation of Vehicles:

Sl No. (i)

(ii)

Type of the Borrower

Individual

Joint Borrowers

Documents to be obtained

Code No.

D.P. Note Instrument of hypothecation of vehicles. Letter of guarantee, if any A note stating that the lien has been verified from the R.T.O.'s books prepared by the Officer who has verified from the same may be kept along with the documents. Letter of instalment to repay the advance.

(2) (20) (33)

Joint and several D.P. Note Instrument of hypothecation of vehicles. Letter of guarantee, if any A note stating that the lien has been verified from the R.T.O.'s books prepared by the Officer who has verified from the same may be kept along with the documents. Letter of instalment to repay the advance.

(3a) (20) (33)

802 - III

-(57)

--

(57)

Remarks

(iii)

Sole Proprietary Concern

Joint and several D.P. Note Instrument of hypothecation of vehicles. Letter of guarantee, if any A note stating that the lien has been verified from the R.T.O.'s books prepared by the Officer who has verified from the same may be kept along with the documents. Sole-Proprietorship letter

(iv)

NOTE :

Partnership Firm

Joint and several D.P. Note Instrument of hypothecation of vehicles. Letter of guarantee, if any A note stating that the lien has been verified from the R.T.O.'s books prepared by the Officer who has verified from the same may be kept along with the documents. Letter of Partnership

(3b) (20) (33)

Sole Proprietorship letter should be signed by the proprietor in his personal capacity only.

-(38)

(3c) (20) (33)

Letter of Partnership should be signed by all the partners in their personal capacity only.

-(39) (57)

(i)

The same facility can also be sanctioned by way of term loan under refinance scheme of SI.D.B.I. in which case D.P. Note should not be obtained, but refinance agreement should be obtained.

(ii)

Power of Attorney in favour of the Bank should be obtained to enable the Bank to get the vehicle transferred in its name when necessary. This power of Attorney should be got executed in the presence of a Presidency Magistrate or First Class Magistrate or a Notary Public.

(iii)

The branch should take out insurance policy to cover the full market value of the vehicles charged to the Bank. The policy should be taken out in the name of the Bank A/c. the borrower or if it is taken out in the borrower's name, the policy should be endorsed in Bank's favour. The policy should cover all the required risks as prescribed by the Bank. 10. Over Drafts against F.D.R./S.D.R.: Sl No. (i)

(ii)

Type of the Borrower

Individual

Joint Borrowers

Documents to be obtained

Code No.

DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party.nt to repay the advance.

(16)

Joint & several DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party.

(16)

803 - III

--

--

Remarks

(iii)

(iv)

NOTE :

Sole Proprietary Concern

Partnership Firm

(i)

(ii)

(iii)

DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Sole-proprietorship letter. & several DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party.

(16)

Joint and several DPN Letter depositing F.D.R./S.D.R. F.D.R./S.D.R. duly discharged by the party. Letter of Partnership

(16)

-(38)

-(39)

Sole Proprietorship letter should be signed by the proprietor in his personal capacity only.

Letter of Parnership should be signed by all the partners in their personal capacity only.

All the parties to the F.D.R./S.D.R. should discharge the deposit receipt/s on revenue stamp/s and the signatures should be verified by the branch. Lien should be marked on the ledger/register/Computer system If the advance is against third party deposit receipts, letter depositing F.D.R./S.D.R. should also be signed by the third party after duly filling in the relevant clause in the letter deposing F.D.R./S.D.R. Whenever operations in the account are to be restricted to only one or some of the partners of the borrowing firm, a stamped "Letter of Restrictive Operation" should be obtained in addition to the above documents.

11. Road Transport Operators Sl No. (i)

Type of the Borrower

Demand Loan

Documents to be obtained

Application Form D.P. Note or Refinance Agreement in Form. 'A' if I.D.B.I. Refinance is obtained

Instrument of hypothecation of vehicle. Guarantee letter, if any. General Power of Attorney

NOTE :

(i)

(ii)

Code No.

Remarks

(1) (2) or 3(a), 3(b) or 3(c) as the case may be (ii) (23) if, under SI.D.B.I. Scheme. (20) (33) (101)

Insurance : Insurance Policy, for the full market value of the vehicle covering comprehensive risks including third party and other required risks should be obtained. It should be assigned in Bank's favour and should be kept alive all the time by renewing it on due dates. Documents : A 'note' stating the lien has been verified from the R.T.O.'s Books prepared by the officer who has verified the same, should be kept along with the documents. 804 - III

12. Personal Loan Scheme: Sl No. (i)

Type of the Borrower

Demand Loan

Documents to be obtained

Application Form D.P. Note or Refinance Agreement in Form. 'A' if I.D.B.I. Refinance is obtained

Instrument of hypothecation of goods/ vehicle. Guarantee letter, if any. Half-yearly declaration that the goods are in good working condition and are in possession of the borrower. Letter of authority to make payment to the dealer directly.

Code No.

(2) or 3(a), 3(b) or 3(c) as the case may be (17) or (20) or as the case may be. (33) -(72)

13. Staff Loans: (ii)

(iii)

Staff loans to individuals for purchase of Cycle, Car, Scooter, Motor Cycle, Refrigerator, Air-conditioner, etc

Staff loans to individualsHousing Loan to Individuals against Equitable mortgage of land and house constructed or to be constructed.

D.P. Note

(2)

Letter of instalments under personal loan scheme.

(115)

Instrument of hypothecation of vehicle (in case of motor cycle, scooter, car). OR Instrument of hypothecation of goods (in case of refrigerator, air cooler etc.) Undertaking to maintain vehicle for five years. Copy of R.C. book indicating lien on/hypothecation of vehicle to the Bank

(20)

D.P. Note

(17-b)

(107) (2)

Letter of authority to deduct instalment from the salary every month. Letter of undertaking to create legal mortgage. Memorandum of deposit of title deeds of land/house. Legal report Valuation report Irrevocable Power of Attorney empowering the Bank to execute in its favour a legal mortgage of the right, title and interest in the said Flat / Plot

(109) (112) (90-A) ---

(108)

NOTE : Other undertakings, in addition to above, should be obtained as stipulated in sanction

805 - III

Remarks

CHAPTER-60

LOANS AND ADVANCES DOs & DON'Ts

1.General: a.

2.

The Volume on 'Loans and Advances' of the 'Operational Manual for Cooperative Banks' has dealt with various issues concerning the steps that are required to be followed under the loans and advances portfolio, functions and duties of various sections such as Agricultural Credit Section, Handloom Finance Section/ Division, Non-Agricultural Credit Section (Jewel loans, PDS, Working Capital to Coop. Spinning Mill, Sugar Mills, etc. Industrial Finance Section (SRTO, SSI Units, Industry, Nursing Homes, etc.) Rural Projects Finance sections (Biogas, ISB, etc.), requirements of documentation under various schemes and programmes, facilities available from various agencies, loan monitoring etc. in detail. In this regard a list of Dos and Don'ts for each Section/Department as well as various other issues that are dealt in this Volume is given below for the purpose of ready reference. Adhering to these 'Dos and Don'ts' would further enhance the performance of each section/department in the bank.

DO's and DONT's DOs

DONTs

A. Agricultural Credit : a. Scrutiny of ST Credit limits application of DCCBs with reference to the norms of NABARD, utilization of limits for the past years, and recovery performance of DCCBs etc. Then take approval of the Board before sending the application to the RO of NABARD. b. After getting the sanction order from NABARD, convey the same to DCCBs and then allow eligible drawals subject to satisfaction of terms and conditions of NABARD. c. Scale of finance consisting of cash and kind component approved by the State Level Technical Committee (SLTC) for each crop per acre should be used while advancing loans to farmers. Wherever the DLTCs have been empowered or delegated powers by the SLTC, the scales recommended by DLTCs have to be adopted. d. Prepare a realistic lending programme in respect of each member of PACS in triplicate covering the crops to be grown and the area proposed under each crop and obtain his signature or thumb impression as evidence of his consultation.

A. Agricultural Credit : a. Do not reject the proposal of the DCCBs unless the same is done by the competent Authority i.e. CEO (if he is empowered by the board)/ loan committee or the Board. b. Do not insist on taking kind component as a condition for the drawal of the cash component. c. Do not fix scale of finance exceeding 1/3 value of the gross yield per acre or cost of cultivation. d. Do not allow an individual to borrow upto the limit unless : i. he is not a defaulter ii. he holds shares in PACS in the prescribed proportion iii. he has furnished prescribed security to the society and iv. he has executed necessary documents. e. Do not allow PACs to operate on the sanctioned limit unless i. it has repaid the prescribed percentage of demand if any.

806 - III

DOs e.

f.

g.

h.

i.

B. a.

b.

c.

DONTs

Fix maximum borrowing power for individuals. However, keep in mind the high value cash crops or improved practices which the farmer wishes to adopt while fixing the Maximum Borrowing Power. After disbursement of cash components to societies, obtain a statement of disbursement with the signature of recipients of loans within fortnight from the societies. Crop Loan recovery to be done keeping in mind the harvesting season and reasonable period for disposal of crops. Work out the credit requirements of Special Food grain Production Programme (SFPP), on a realistic basis which have to be mentioned separately in ST credit limit application for financing SAO. Obtain following certificate at the time of drawal i. Certificate of NODC. ii. Certificate of Borrowing Power. iii. Certificate of cover for OPP borrowings. iv. Monthly NODC statement. v. Certificate of safe custody and intrinsic value of pronotes duly executed by DCCBs. vi. Progress in financing new and non-defaulting members and small defaulters by ineligible CCBs (Half yearly) vii. Certificate to the effect that the prescribed minimum percentage of the ST agricultural advances are made to small/ marginal/ economical weak farmers as per NABARD norms. viii. Compliance with Sec. 18 and 24 of the B.R. Act, 1949 (i.e. maintained) Kisan credit card scheme (KCC) In case natural calamities affecting the farmers, the bank has granted extension and/ or reschedulement of the period of repayment, in such cases transfer the aggregate of debits for which extension is granted to a separate term loan account with stipulation for repayment in installments. Maintain separate account for SAO under KCC scheme. For SCB purposes, maximum outstanding reached during the year (April March) should be treated as Demand and outstanding in the unrenewed KCC account may be reckoned as overdues. Cooperative Banks may pay interest on the credit balance at the rate based on their perception and other related factors on minimum credit balances in the cash

f.

g.

h.

i.

ii. it holds shares in DCCBs and iii. executed necessary documents. Do not obtain single time pronote for Kharif and Rabi crops as the due dates of loans will be different i.e. obtain separate time pronotes for Kharif and Rabi crops. Do not allow cash component for Kharif and Rabi in one instalment. However, kind component may be allowed if farmer wants to stock fertiliser in advance. Do not forward the credit limit application for sanction to RO of NABARD in respect of non-compliant banks (Sec. 11 (1) of B.R. Act, 1949 (AACS) not applied for exemption from the provision, audit report of preceding year not received, compliance report on statutory inspection reports not submitted. Do not refuse sanction of limit to DCCBs for financing National Oilseeds Development Programme (NODP) when overdue of the banks is high and Govt. Guarantee is available.

B.

Kisan credit card scheme (KCC)

a.

Do not allow any drawal in respect of KCCs remaining outstanding for more than 12 months.

807 - III

DOs

DONTs

credit accounts under the KCC of farmers during the period from 10th to the last day of each calendar month. C.

National Agricultural Insurance Scheme (NAIS) Rashtriya Krishi Bima Yojana (RKBY) Do not delay submission of declaration of the loanee / non-loanee farmers to insurance agency beyond the cut off dates prescribed by the Agricultural Insurance Corporation of Indiain respect of Kharif and Rabi crops.

D. a.

Comprehensive Crop Insurance Scheme (CCIS) Cover all farmers availing crop loan for growing paddy, wheat, millets, oilseeds and pulses and commercial crops viz., cotton, sugarcanes, chillies and potato, and other notified crops under CCIS.

E. a.

Medium Term Conversion (Agricultural) loans SCB's assistance to DCCBs in respect of conversion should be to the extent of 85% of amount of conversions, difference between eligible conversion amount and the balance to the credit of ACS fund with DCCB or ST (SAO) loan outstanding due to SCB as on date of application, whichever is less. In case of crops covered by Crop Insurance Scheme, the eligibility should be reduced by the amount of insurance claims received from GIC before effecting conversion. Extend due date by 3 months, if the formalities cannot be completed before the due date. In case of two or more successive failure of crops, the aggregate burden of ST loan and MT(C) loans could be rescheduled into MT conversion rephasement loans repayable in a period not exceeding 7 years.

E. a.

Medium Term Conversion (Agricultural) loans Do not give conversion in respect of interest due.

MT credit limit for conversion of ST loans into MT loans and rephasement/ reshedulement of MT conversion loans In case of re-occurrence of natural calamity and crops are affected during the pendancy of the MT loan, the instalments falling due in that year and the outstanding amount of first conversion loan should be rephased to a period of 5 years. In the event of two or more successive natural calamities, aggregate burden is rescheduled upto a period of 7 years.

F.

MT credit limit for conversion of ST loans into MT loans and rephasement/ reshedulement of MT conversion loans Do not grant conversion facility unless the Annewari is declared Govt. give notification in the Gazette and remit/ suspend collection of land revenue and other Govt. dues. Do not provide MT conversion facility for overdue S.T crop loans. Do not provide any conversion facility to any farmer if the actual yield is more than threshold yield or the indemnity payable (under Insurance Scheme) is more than crop loan or the crop yield is estimated at less than normal yield but more than 50% of the normal yield.

b.

c. d.

F.

a.

a.

b. c.

808 - III

DOs G. a.

b.

iii.

H. a.

b.

DONTs

Handloom Finance G. Weavers Coop. Societies, having 100 active looms and a a. minimum prescribed sales turnover, if any, should only be considered for finance. Besides this, such societies should work as Production-cum-Sale units and not as b. marketing society alone. Allow drawals to the PWCS on cash credit limit only to the extent of difference between i.Total limit and outstanding in the limit or ii.Drawing Power and outstanding in the limit or Drawing power on production basis plus achievement under special programmes and outstanding in the limit/ whichever is lower.

Handloom Finance Do not consider any Weavers' Coop. Society (WCS) for refinance if the audit is in arrears for more than 3 years and have been placed in 'D' class. Do not allow drawal on the limit unless there is a certificate to the effect that the drawal applied is within the Reserve Borrowing Power of DCCB and the same is only in respect of eligible WCS as per NABARD norms.

Non-agricultural Credit H. Maintain total liability Register to have the total a. outstanding balance of all CC limits sanctioned to DCCBs for various purposes and to tally the same with b. G.L. Head of Account - “Non Agricultural Cash Credit Advances”. Maintain Drawing Power Register (for assessing drawing power from the stock statement) with columns viz., aggregate value of eligible securities/ stock, rate of margin, amount of margin, validity period, drawing power, highest debit balance during the validity period, etc. On top of the register, mention details of sanction, Govt. Guarantee, if any, Insurance cover, etc.

Non-agricultural Credit Do not sanction total credit limit for non-agricultural purposes exceeding net ILR of DCCB. Do not sanction credit limit if the total borrowings cannot be met out of the realizable value of assets. The realizable value of asset should be equal to at least external liabilities, i.e., deposits and borrowings.

I. a.

b. c.

d.

e.

809 - III

Credit Monitoring Arrangement (CMAs) Do not sanction any loan for activities in the real estate or infrastructural activities where budgetary support from the Central/ State Govt. is available. Do not finance any unit which have negative networth. Do not sanction new Coop. Sugar Mill having project cost more than the cost approved by Ministry of Commerce, GOI and not having Debt Equity Ratio of 60:40. The debt portion sharing by Coop. Bank should not be more than 60% and remaining by Commercial Bank or Term Lending Institutions. Do not sanction Block Capital to new sugar factory unless it is ensured that capacity of the unit is not below 2500 ton crushing per day and there is sufficient sugarcane available in the command area. Do not sanction any loan/ limits beyond the prescribed norm. In case of financing beyond prescribed norms is necessary, enter into consortium arrangement. Normally no relaxation in exposure norms will normally be entertained by NABARD.

DOs J. a.

b.

DONTs

Consortium Advances J. Hold quarterly and Annual Meeting of consortium a. members and discuss the performance of the projects, problems, etc. Permit the member to leave the consortium by selling its b. debits at a discount and furnishing an unconditional undertaking from the member leaving the consortium that the repayment of its dues would be deferred till the dues of other members are repaid in full.

K. j.

Financing other Apex Coop. Institutions Sanction hypothecation loan to the Apex Level Federation under Central Govt. Guarantee Scheme with 10% margin. In case Govt. Guarantee is not received, the bank may be allowed to draw before the receipt of guarantee with 40% margin.

L. a.

Appraisal of Term Loan Sanction Term Loan only if the project is (i) Technically feasible (ii) Financial viable (iii) Economically viable and (iv) Managerial competence is there. Recover the amount of term loan and interest thereon out of profit and working capital finance out of the sale proceeds of current assets.

b.

L. a. b.

Consortium Advances Do not extend any additional banking facilities to the Mills outside consortium without the concurrence of the existing consortium members, Do not permit any member to leave a consortium before expiry of at least two years from the date of joining the consortium.

Appraisal of Term Loan Do not finance any industry which is classified in Negative List. Do not sanction any term loan for acquiring fixed assets normally with repayment period beyond 10 years or as may be fixed / regulated by the Bank's Management policy.

M. Rural Projects Finance a. Apportion the allocation made by NABARD/ SCB for refinance for various activities depending upon the recovery as well as feasibility and scope for further lending etc. in the district.

M. Rural Projects Finance a. Do not allow any drawal for availing refinance from NABARD unless the norms and guidelines of NABARD are followed and such drawal is within the original allocation.

N.

N.

a. b.

c.

O. a. b.

Swarna Jayanti Gram Swarozgar Yojana (SGSY) Scheme Sanction entire cost of the scheme including subsidy as the subsidy is back ended. Keep the subsidy in Reserve Fund Account and amount should not form part of Demand and Time Liabilities (DTL) for the purpose of SLR/ CRR Adjust subsidy lying in Reserve Fund towards last few instalments of repayment of loan under SGSY. Refinance for Farm Mechanisation from NABARD Ensure availability of subsidy under Govt. of India Scheme before sanctioning any loan. Ensure that the tractors are insured and the relative policy is got assigned in favour of the bank and the same is registered with the Insurance Company.

a. b. c. d.

O. a. b.

810 - III

Swarna Jayanti Gram Swarozgar Yojana (SGSY) Scheme Do not sanction any loan to any beneficiary under SGSY unless he has undergone training for the activity. Do not sanction loan for activity for which there is no project report prepared by the District Level Committee. Do not fix repayment period less than five years. Do not give loan to any person from a village where recovery under the scheme was less than 80%. Refinance for Farm Mechanisation from NABARD Do not finance tractors exceeding 50 HP more than 5% of the allocation made under Farm Mechanisation Do not collect down payment for financing new tractor and old tractor more than 15% and 30% of the cost of tractor respectively.

DOs c.

DONTs

Down payment for power tiller should be 5%, 10% and c. 15% of the cost for SF, MF and other Farmers. d.

P. a.

b.

c.

Q.

b.

Do not fix repayment period more than 5 years (including grace period) for financing Power Tiller/ Thresher and Power Sprayers. Do not advance loan for renovation/ repairs to tractors unless it is more than 5 old and but not be older than 12 Years.

Rural Housing Scheme P. Sanction loans for construction of new as well as for a. repairs/ renovation of the existing houses in rural areas with population less than 50000. While considering the proposal for construction of the b. house, land cost may be considered as down payment (margin money). However, total cost of dwelling house should not be more than Rs. 7.5 lakh. Repayment of loan for new house and repairs / renovation of old houses should not be more than 15 years and 5 years respectively.

Rural Housing Scheme Do not sanction loan for construction of new house or repair/ renovation of old house more than Rs. 5 lakh and Rs. 50000/- respectively. Do not give Moratorium for more than 18 months from the date of disbursement of first instalment.

Self - Help Groups (SHGs). Ensure before financing Q. SHGs that they have been graded and scored more than a. 80% marks i.e. grading mostly cover that SHGs have membership between 10 and 20; is more than 6 months old; regularly conducting meetings, regularly collecting their savings; issuing loans; repayments of loan is regular; their decisions for lending and other issues are collective decisions and maintaining proper records about meeting and monetary transactions. While sanctioning loan to SHGs for the first time, it should be in the ratio of own fund to loan 1:1, For second time, the ratio should be 1:2 and for third time the ratio should be 1:4.

Self - Help Groups (SHGs) Do not insist on collateral for purpose of loan to SHG.

R. a.

b. c. d.

811 - III

Calculation of Working Capital/ Term Loan requirement under Non-Farm Sector Do not dilute in margin requirement stipulation except under special circumstances where it is permitted i.e. Entrepreneur scheme, rehabilitation of sick units. Do not have collateral security at bank's cost but at borrower's cost. Do not accept guarantee from a person closely related to the borrower. Do not take guarantee from a guarantor who has given guarantee to other person or has taken loan from the bank.

DOs S. a. b.

T. a.

b.

c.

DONTs

Analysis and Interpretation of financial statements S. Analysis and Interpretation of financial statements Prefer an institution with high quick ratio concern as it a. Do not include in current assets shares and advances to would not default in a crisis situation. other firm/ companies not connected with the business of the borrowing firm. A Debt Service Coverage Ratio (DSCR) from 1.5 to 2 should be preferred. Higher ratio indicates ability to b. Do not include in current assets the dead inventory i.e. slow moving or obsolete items. repay earlier than the scheduled time. c. Do not consider any amount as current assets if the same is paid as an advance for supplies for a period for more than the normal trade practice in spite of any other consideration such as regular and assured supply. d. Do not finance a unit which has current ratio less than 1 as it indicate cash flow problem during the year. Appraisal of Loan Proposals of Small and Micro Units Loan proposal appraisal should include credit risk appraisal, the borrower appraisal, financial viability and Technical feasibility appraisal, viability analysis and cash accruals and repayment of debt assessment. Always compute the Break-even point (BEP) and the same can be calculated as under : BEP = Fixed Cost X 100 Value of Sales - Variable cost BEP Sales = Sales X BEP (%) = % BEP units production = Units produced X BEP (%) Higher the production level required to meet the expenses of the unit means unit is vulnerable. Similarly, even a small fall in production level will affect the viability and profitability. Debt Service Coverage Ratio (DSCR) can be computed as under : DSCR = Net profit after tax + term loan interest Term loan instalment (Principal + Interest) The desired ratio should be 2:1. In other words the instalment of Term loan should not exceed 50% of the cash accrual/ surplus. However, on this basis the bank should fix the amount to Term loan installment and period of repayment.

U. Prudential Norms on Income Recognition, Asset U. Prudential Norms on Income Recognition, Asset classification and Provisioning - Pertaining to classification and Provisioning - Pertaining to Advances portfolio Advances portfolio a. Take into income account, the interest on advance a. Do not recognise income on accrual basis but on the against term deposits, NSC, IVPs, KVPs and Life basis of receipt. policies only on due date provided adequate margin is

812 - III

DOs b.

c.

d.

e.

f.

g.

h.

i.

j. k.

l.

DONTs

available in the account. Recognise fees and commission earned by the banks as a result of renegotiations or rescheduling of outstanding debts on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit. Treat the account as NPA if remittance by the borrower under consortium lending arrangements are pooled with one bank and/ or where the bank receiving the remittances is not parting with the share of other member banks as the account deemed to have not been serviced. Classify the account under Doubtful category if the erosion in value of security is such the realisable value is less than 50% of the value assessed by the bank or accepted by RBI/ NABARD at the time of last inspection. Similarly, if realisable value as assessed by the bank/ approved valuer/ RBI is less than 10% of the outstanding in the borrowal accounts, ignore this value and classify the same as Loss asset. Treat all other credit facilities granted directly to a member borrower of a PACs/ FSS outside the onlending arrangement, as NPA if one of the credit facilities granted to him become NPA. Treat advances against gold ornaments, govt. securities and all other securities as NPA if they remained overdues for a period of two harvest seasons in case of agricultural advances / 90 days in the case of non agricultural advances.. Treat the credit facilities backed by guarantee of Government as NPA only when the Govt. repudiates its guarantee when invoked and remain in default for more than 90 days. After classification of assets into sub-standard, loss assets and doubtful assets, make provisions to the extent of 10%, 100% and 20% - 100% (depending upon period) respectively for secured category and 100% for unsecured category ,in case of loans and advances falling under doubtful category. Deduct the amount lying in the 'Interest Suspense A/c' from the relative advances and make provisions as per norms thereafter. Make provisions for advances only for the balance in excess of the amount guaranteed by ECGC/ DICGC. In respect of loans guaranteed by ECGC/ DICGC, make provisions for doubtful assets after deducting realisable value of the securities eg : Outstanding balance - Rs. 4.00 lakhs

b. c. d. e.

f. g.

h.

813 - III

Do not charge and take into income account interest on any NPA. Do not take to income account interest on advances guaranteed by the Govt. unless the same is realised. Do not classify an advance account as NPA merely due to the existence. Do not classify all credit facilities granted to a PACS/ FSS ceded to the bank are the agricultural advances as well as advances for other purposes granted to PACS/ FSS under the on lending system. (and only that particular credit facility) which is in default for a period of two harvest seasons/ 180 days, should be classified as NPA. Do not treat any advances against Term Deposits, NSCs, IVPs, KVPs and life policies as NPAs. Do not treat an Asset whose terms of loans agreement have been renegotiated or rescheduled after commencement of production, as Standard Assets unless the same remains in Sub-Standard Category for at least one year and have satisfactory performance under the renegotiated or rescheduled terms. Do not reckon the amount held in 'Interest Suspense Account' as part of provisions.

DOs m. n. o. p. q. r. s. t. u. v. w. V. a.

b. c.

d.

e.

f.

g.

DONTs

DICGC cover - 50% Period for which the advance has remained doubtful above 3 years Value of security held - Rs. 1.50 lakhs -Provisions to be made Outstanding - Rs. 4.00 lakhs Less : Value of security held - Rs. 1.50 lakh Unsecured balance - Rs. 2.50 lakhs Less : DICGC cover (50%) - Rs. 1.25 lakh Net unsecured balance - Rs. 1.25 lakh Provisions for unsecured portion of advance (100%) Rs. 1.25 lakh Provisions for secured portion of advance Rs .1.50 lakh (50% as more than 3 years old) - - Rs. 0.75 lakh Total provisions required to be made - Rs. 2.00 lakhs Direct lending (advances/ overdraft against term deposit) Treat the accrued interest on the Cash Certificate as margin. Maximum loan on such certificate should be upto the face value (invested amount) of the cash certificate. Loan against RD should be given only after 6 monthly instalments have been remitted. Charge interest 2% or the rate prescribed by the Bank above the rate applicable to the Deposit which is offered as security for availing loan. Collect interest 2% or as prescribed by the Board above the interest actually allowed on the foreclosed deposit when the depositor borrower wants to fore close the Term Deposit lodged as security for the loan availed. Collect FD Receipt duly discharged by the depositor against which loan is availed. For RD, collect RD Book duly signed by him on the revenue stamp on the last page of the RD Pass Book. Collect DPN for loan amount duly signed by him over revenue stamp and a consent letter from the borrower authorising the bank to adjust the proceed of the Term Deposit to the loan amount on the due date in case the loan dues not cleared before that date. Extract, on quarterly basis, a Trail Balance of all outstanding Depositors Loan Account and tally with GL.

V. a. b c.

d.

e.

f.

814 - III

Direct lending (advances/ overdraft against term deposit) Do not give loan against FD more than 85% of the FD amount. .Do not give loan against RD more than the balance available after deducting the prescribed (15%) margin. Do not give loans against FD/ RD for a period more than 3 years from the date of DPN or the due date of the deposit, whichever is earlier. Do not allow the advance to continue after the date of maturity. Credit the maturity amount to loan/ OD account. Do not give additional loan against FD/ CC/ RD under pledge unless existing loan is closed and new loan is issued for the aggregate amount. Do not give loan against deposit to the nominee/ legal heirs of the deceased depositor. Do not give any advance against the deposit receipts issued by other banks

DOs W. a. b. c. d.

e.

f.

g.

h.

X. a.

b. c.

d.

Y. a.

DONTs

Consumer Loan W. Sanction loan to employees in Govt. and private sectors a. and professionals with stable income. b. Admit the applicant as well as the guarantor as an Associate Member. Margin Money prescribed shall be remitted by the borrower before the cheque is issued as per the invoice. Attach the consumer article, purchased out of the bank or salary through arbitration proceeding in case of default in repayment of loan dues. Ask the applicant and the guarantor to open SB account, if not there. Also ask the applicant to deposit his salary cheque in this account every month so as to adjust monthly instalment due under his consumer loan. The monthly carry home pay of the applicant after deduction of instalment should not be below 25% or as may be fixed by the bank. Period of loan should not exceed 36 months. However, Bank Management may fix suitable repayment period if loan amount is high. Ensure that the borrower insure all articles purchased with bank loan against theft, fire, accident, etc.

Consumer Loan Do not give loan for purchase of second hand goods. Do not give loan more than the maximum amount prescribed under the scheme subject to the percentage of margin money and number of times of the monthly gross salary of the applicant.

Salary Loans X. Before sanctioning loan and permitting drawal, obtain a. NOC from the Employee Coop. Credit Society of the institution in which he is employed, an undertaking from b. the employee in writing to the effect that till the entire dues under the loan is cleared he will not borrow from any other financial institution against his salary and also an undertaking in writing from his/ her employer to the effect that upon sanctioning this loan, the monthly instalment of this loan will be recovered from his salary and remitted to the bank. For sanctioning loan, obtain two guarantors who are coemployees with equal or more monthly salary. Admit the borrower and the guarantor as Associate member and the loan may be given for a period within 24/ 36/ 48/ 60 months as per bank's rules and also the size of the loan. On non-receipt of monthly instalment before 10th of the month, charge 3% as penal interest in addition to interest applicable on the loan.

Salary Loans Do not give loan against salary to a person who is not permanent employee. Do not give loan against salary to a person who has already borrowed from other bank/ Coop bank, for the same purpose and whose carry home salary is less than 25% of the gross salary after deducting the proposed loan instalment amount.

Advances against Mortgages Y. Obtain from an Engineer or an Architect approved by the a. bank, valuation of proposed land and building before

Advances against Mortgages Do not accept mortgage from a person other than the owner.

815 - III

DOs b.

c.

d.

e.

f.

g.

h.

i.

j. k.

Z. a.

b.

DONTs

sanctioning loan. b. Obtain margin (down payment) for loan to acquire land/ building and also take as collateral land/ building c. financed. While accepting mortgage of security from the third party, take signature of the third party as a co-obligant or as a guarantor (personal) guarantee. In case of leasehold interest in the property the same may be accepted as mortgage only after approval of Head Office. Before sanctioning loan, ensure that the property offered as security are not affected by any land Reforms Law, Urban Land (Ceiling and Regulation) Act, 1976. Before sanctioning loan, obtain income tax and wealth tax clearance certificate, probated will or letter of administration in case of legatee; change registered with the Registrar of companies in case of property belonging to a company; Bye-Laws of the Society in case property belonging to the society; power of attorney if the title deeds executed by the agents; legal opinion from Bank's Approved Legal Advisor (ALA); and Search Report from the record of the Registrar's office. Proceed against the borrower and Guarantor personally within 3 years (limitation period) from the date of amount is due or execution of DPN. Ensure enforcement of payment against loan secured by mortgage (both Registered and Equitable) within a period of 12 years (Article 62 of the Limitation Act 1963). Release payment for construction of buildings or industrial sheds on certification by an approved engineer about the stage of construction and cost of construction upto the date of certification. Make sure that building under construction is insured. Collect at least 1/2% or 1% of the loan amount as processing fee and legal fee as fixed by the bank.

Do not accept mortgage property as security which is not specified and identified and having undivided share. Do not accept second charge on the property unless HO permits.

Advances on hypothecation of motor vehicle. Z. Sanction loan for purchase of vehicle for a period upto a. the economic life of the vehicle or borrower's capacity to repay whichever is earlier. However repayment b. schedule should be so fixed that 45% of the loan amount is repaid in the first phase, 30% in second phase and 25% remaining in the third phase. Get the charge registered on the Registration Certificate, at the RTO office, display Bank's hypothecation plate on the vehicle and get the vehicle insured.

Advances on hypothecation of motor vehicle. Do not fix margin money less than 25% (in case of new vehicle) and 50% (in case of old vehicle) Do not make any advance against vehicles more than 3 years old and without valuation report submitted by an approved Automobile Engineer.

816 - III

DOs

DONTs

AA. Pensioner's Loan AA. Pensioner's Loan a. Sanction loan only by way of Demand loan to the a. Do not sanction loan to a pensioner above 70 years of eligible pensioner to the extent of 5 months pension age. amount or maximum loan amount prescribed under the b. Do not insist on any collateral security but must retain Pension Loan Scheme or Rs. 50000- whichever is less. pension pass book till loan is cleared. b. Admit the borrower and one of the legal heirs of the borrower as nominal/ Associate member. c. Period of repayment of such loan should be 24 months and penal clause with interest 3% over and above should be imposed in case of default. BB. Jewel Loan a. Sanction loan against gold jewellery only to the owners whose bonafides and reliability have already been established to the satisfaction of the bank. b. Get valuation of the gold jewellery done by an approved valuer/ appraiser. c. Avoid Jewellery with precious/ semi-precious/ imitation stones. d. Keep the pledged jewellery in separate iron safe kept inside the strong room under double lock system. e. In case of overdue loan, issue demand notice. If no response, second notice after 3 weeks from the date of first notice. Again if no response, issue third notice by registered post after 15 days from the date of issue of second notice informing the borrower that in case of non-receipt of dues to the bank on or before that date the bank will arrange for sale of pledged jewels through public auction. f. Refer to HO all such overdue jewel loans so as to enable HO to arrange auction sale of gold ornaments. Once HO communicates its decisions/ agreement to arrange for sale of jewels through public auction, in such situation Branch Manager should send a fresh Registered Notice with Acknowledgement due calling upon the borrower to close the loan account and take delivery of his jewels under pledge to bank within 15 days from the date of letter failing which jewels under pledge will be sold by public auction to recover the loan dues and in case of sale proceeds less cost of auction fall short of the total amount due the bank shall proceed against him for recovery of the balance amount due. g. Inform the Commissioner/ Collector, Central Excise at least 10 days prior to conduct of auction sale, the proposal sale giving details of jewels, weight and the name of the borrower to whom jewels belong. h. Auction sale shall be conducted by an approved auctioneer of the Central Excise Department and that

BB. Jewel Loan a. Do not give loan against gold jewellery more than 75% of the market value. b. Do not open all notices/ covers returned undelivered to the bank. c. Do not allow the minimum bid amount less than 80% of the current market rate in the auction.

817 - III

DOs

DONTs

also in the presence of 2 directors nominated by the bank or 2 respectable witnesses. Record of auction duly authenticated by these witnesses should be kept by the branch. CC. Advance against LIC Policies a. Get the policy assigned in favour of the bank and also registered with LIC before granting any advance. b. The policy must be in force and latest premium receipts should be obtained. c. Advance loan against LIC policy not exceeding 85% (to 90% as per bank rules) of the surrender value or the monetary ceiling as may be fixed by the bank. d. If the loan against LIC becomes overdue and remains so despite repeated reminders, a final demand notice demanding the payment of entire dues together with interest due there on should be sent by Registered Post with A/D, intimating the date by which bank's due should be settled (normally 30 days' time is given). In the same notice, the bank should also mention that, the bank will surrender the policy without further intimation to the borrower. e. After lapse of the stipulated period, the letter addressed to the LIC should contain, inter alia, a certificate to the effect that the policy is being surrendered after due notice to the policy holder.

CC. Advance against LIC Policies a. Do not normally accept 'Whole Life Policies” as security. b. Do not grant any advance against an insurance policy of a married man to which policy the provisions of Sec. 6 of Married Women's Property Act 1874 are applicable. c. Do not grant advance against a policy assigned to a minor. d. Do not re-assign the policy in favour of third parties even if the borrower desires the bank to do so and issue a letter authority.

DD. Advances against NSC and Kissan Vikas Patras DD. Advances against NSC and Kissan Vikas Patras a. Obtain an authorisation letter from the borrower as per a. Do not accept NSC in the name of the minor as security. specimen supplied by the Post Office without date, addressed to the concerned Post Office for effecting transfer of the certificate in favour of the bank and retain with the NSC. In case of NSCs in joint names such letter of authority should be taken from all parties. b. Maintain minimum margin of 25% on the issue price/ face value of the NSC. However, margin may be changed depending upon the Maturity period and Maturity value. EE. Cash Credit Limit to traders EE. Cash Credit Limit to traders a. Extend this facility only to wholesale/ retailers traders a. Do not take margin less than 40%. who are a sole proprietor/ partnership firm having a b. Do not allow at any point of time outstanding in CC certificate of registration under the State Sales Tax Act account exceed the Drawing Power. and having trading or business activity approved under the State's General Sales Tax Act. b. Valuation of stock should be the cost price or market value whichever is less. c. Obtain collateral security in the form of urban

818 - III

DOs

d.

e.

f.

DONTs

immovable property at least equal to the cash credit limit sanctioned besides hypothecation of stock (If the loan policy of the Bank insists on collateral) Sanction limit not exceeding 20% of the average turnover of stocks during the previous two sales tax assessment years. However, in case of high turnover commodities like petroleum products/ cigarettes, etc. limit will be assessed at lesser rate of turnover figures. Have minimum and maximum cash credit limit for any single individual trader and it is desirable to have maximum limit as Rs. 10.00 lakhs. The limit may be fixed at a lower or higher level as per individual banks credit policy and board approval. Obtain stock statement from the borrower every month by 10th of the succeeding month.

FF. Temporary Overdrafts a. Allow TOD facility only to well-known individuals who are trustworthy and credit worthy constituents of the bank. b. Extent TOD facility as per Bank Managements decision which is normally for a period between 3 - 6 months and maximum amount as fixed by the Bank. c. Renew the TOD after the entire outstanding amount with interest is repaid within the stipulated period and after a lapse of atleast 10/15 days from the date of repayment of dues.

FF. Temporary Overdrafts a. Do not extend TOD facility to staff members of the bank b. Do not allow outstanding under TOD to exceed the TOD limit.

GG. Local Cheques, Demand Drafts and Outstation Cheques - Purchase, instant credit a. Extend this facility to all current account holders and in select cases of S.B. Account holders who are maintaining good operative account with good standing and should be able to make good the amount of short notice.

GG. Local Cheques, Demand Drafts and Outstation Cheques - Purchase, instant credit a. Do not extend the facility against Cheques crossed “Not Negotiable”, or not drawn in favour of the constituent.

HH. Bank Guarantees on behalf of constituents a. Bank guarantee normally should have period less than 10 years. b. Limit your commitment by way of unsecured guarantee in such a manner that 20% of the bank's outstanding unsecured guarantee plus the total of its outstanding unsecured advances are not exceeding 10% of total outstanding advances. c. Stipulate margin varying between 5% to 10% or even full margin wherever necessary. Refund the margin after cancellation of the Guarantee. d. Send Guaranteed Bonds directly to the beneficiary. E . Renew the guarantee or extending the period of

HH. Bank Guarantees on behalf of Constituents a. Do not issue guarantee favouring financial institutions, other banks/ or other lending institutions, chit fund for due payment, Non-Banking institution in floating prize chit schemes and NSE in lieu of security deposit. b. Do not take margin less than 50% for issuing guarantee for release of confiscated goods.

819 - III

DOs

f.

II. a. b.

c.

d.

e.

f.

g. h.

DONTs

guarantee must be done only after obtaining sanction/ approval of RO. Send a letter to the beneficiary by a Registered post A/D on expiry of the Bank Guarantee to return the original Guarantee Bond within 30 days of the date of letter; Reverse the entries after receiving back guarantee bond. Inland Letter of Credit Recover LC commission in advance. Accept margin, as prescribed by the management, by way of term deposits of the bank standing in the name of the party, properly discharged in favour of the bank together with appropriate lien letter. Besides other documents obtain stamped agreement form for the total ILC limit only once. However 'Application Form' should be obtained as and when requested for issue of ILC by the party and making a reference regarding execution of stamped agreement. Keep the document in respect of ILC viz., stamped Agreement Form. Application for issue of ILC copy of the ILC issued, acknowledgement of the ILC received from the negotiating branch/ bank etc. in double lock. Present to the drawee Bills under ILCs on the day it is received and call upon him to pay within 24 hours of presentation, if it is demand bill. Irrespective of the payment by the drawee within 24 hours, reimburse the negotiating branch/ bank in terms of its obligations under ILCs. Obtain indemnity bond before issuing duplicate ILCs. Amend LC into irrevocable LC only if amendments are acceptable to the beneficiary.

II. a.

b.

JJ. Advance against Goods a. Obtain and scrutinize the supporting statements to the application form including financial statement such as balance sheet, profits and loss accounts annual cash flow projects , income tax assessment orders, sales tax assessment orders, etc. b. Sanction CC limit for a period of 12 months unless it is for seasonal purpose and in case of 'Mercantile Produce' CC limit should be usually for six month or less. c. Take sufficient margin keeping in mind the fluctuations in the market rates of commodities. d. In case of commodities under the Selective Credit Control Directives of RBI, branches must adhere to the level of credit, the margins and the rate of interest

820 - III

Inland Letter of Credit Do not make payment by cash to the beneficiary if he is not customer of negotiating branch but by a Pay order crossed “Account Payee”. Do not accept the documents with discrepancies in terms and conditions of LCs issued.

DOs e.

f.

g.

h.

i.

DONTs

prescribed by RBI form time to time. In case of traders/ manufacturers require licence to store particular items like chemicals, explosives and other hazardous goods under state Govt. laws, the branches must ensure compliance before sanction of limit. Insure goods at all times for all types of risks, viz., fire, burglary, earthquake/ flood/ cyclone, strike and riot, risks against self-combustion, etc. Insurance cover should be for the full value of the goods lying in the godown. Verify the stock on periodical basis and it should be in relation to physical stock, margin, market value, insurance, age of good, movement etc. In case of adverse features observed during the course of the verification, advise RO about the reasons for irregularities and steps taken for their rectifications. Display conspicuously the bank's name board depicting the charge over the commodities in the premises where goods are stored as security. Obtain stock statement on quarterly basis if limit is upto Rs. 25000/- and on fortnightly basis (2nd and last Friday) if limit is above Rs. 25000/-.

KK. Credit Documentation a. Ensure that all documents are executed by the borrower in the presence of the Branch Manager/ an officer of the bank and the Branch Manager/ the officer should initial or sign to authenticate the genuineness of the signature or the thumb impression of the executants. b. Obtain a letter as per LDOC duly signed by a person conversant with English language as well as the language of the executant and also known to the bank, if the executant is illiterate or knowing the language in which the document is written/ printed and the same is explained and understood by the executant. c. Ensure that documents are completed in all respect and executant should also sign all pages of the documents d. Besides this, it should state the place and date of execution. e. All documents should be stamped as per the State Act where the branch granting the advance is functioning. f.If the stamp duty in any state is higher than the prevailing in the state, wherein the advance has been granted, the stamps of the former state should also be affixed i.e. stamp to be fixed should be the difference between the rate of stamp duty prevailing in the two states.

KK. Credit Documentation a. Do not accept the documents executed outside Jammu & Kashmir and brought into that State.

821 - III

DOs g. h. i.

DONTs

Use Revenue stamp for paying stamp duty in respect of the demand promissory note and special adhesive. In case of Partnership firm documents should be signed by all the partners. In case of a registered company or a Club/ Association/ Trust, obtain resolution passed by the Company/ Club/ Association/ Trust, Article of Association/ Bye-laws etc of these institutions empowering a person to sign documents of their behalf.

LL. Law of Limitation a. Ensure that the suit is filed within the limitation period as failure to do so would bar the remedy of filing a suit. However, it would not take away the right to recover the debt by exercising the right of lien, set off or selling the goods pledged to the bank. b. Have thorough knowledge about the period of limitation provided under the Limitation Act, 1963 for different types of suits, appeals and applications. MM. Stamping of Documents. Ensure that all documents that require stamping are stamped in accordance with the requirements of the Central / State Act on stamping.

822 - III

CHAPTER-61

GENERAL ANNEXURES 1.

General: a.

Various formats of 'Loan Documents' (LDOC) and other formats etc. which have cross reference more than once in a Chapter and/or in more than one Chapter are separately listed as 'General Annexures' in this Chapter. Further, these formats are largely drawn from the practices and procedures adopted at the level of 'Tamil Nadu State Apex Cooperative Bank'. The banks may make suitable amendments to the same while adapting.

b.

The list of various LDOCs/Formats are as follows:

Annexure No. 1. 2. 3. 4. 5. 6. 7.

LDOC No. 1. 2. 3 (a) 3b (i) 3b (ii) 3 (c) 3c (i)

8. 9.

8 11

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

16 17(B) 19 20 23 33 34 37 38 39 39(A) 40 48 50 53 57

Type of Loan Document / Format Attestation Memo D.P. Note (for Individuals) D.P. Note (for Joint Borrowers) D.P. Note (for Sole Proprietorship Firm) D.P. Note (When Limited Company is the Sole Proprietor of the Firm) D.P. Note (For Partnership Firm) D.P. Note (When Limited Company is one of the Partners of the Partnership Firm) Application for Irrevocable Documentary Credit Letter of Pledge for Govt. Securities Shares, Documents of Title of Goods etc. other than Securities of Immovable Property Letter Depositing Fixed/Short Deposit Receipt/s/Cum Undertaking Composite Hypothecation Agreement Hypothecation of Movable Machinery Instrument of Hypothecation of Vehicle Refinance Agreement “A” General Form of Guarantee Counter Indemnity for Guarantee Letter of Undertaking with Negative Lien Clause Letter of Sole Proprietorship Letter of Partnership Letter of Authority (in Partnership Accounts) Letter of Request (Where H.U.F. is a Partner in Partnership Firm) Letter of Appropriation Recurring Deposits Letter of Recording for temporary overdraft. Letter of Attestation Letter of Instalment with Acceleration Clause

823 - III

26. 27. 28.

60 63 64

29.

72

30.

81

31. 32. 33.

84 85 90

34. 35.

90(A) 90 (C)

36.

90(D)

37.

90(E)

38. 39. 40.

90(F) 90(G) 90(H)

41. 42. 43. 44. 45.

90(J) 90(K) 90(L) 90(P) 92

46.

96

47. 48. 49. 50.

101 104 105 106

51. 52.

107 108

53.

109

Take Delivery Letter Letter of Cost (For Title Opinion) An Undertaking not to Withdraw Deposits by the Partners/Directors till the Advance is Liquidated Letter of Authority to make Payment Directly to the Dealers (Personal Loan Scheme) Draft Resolution Required to be Passed by a Society/Club etc. (When it Obtains an Advance from the Bank by way of a Loan, Cash Credit or an Overdraft/Other Credit Facilities) Specimen of Assignment of Life Insurance Policy Notice of Assignment to Life Insurance Corporation of India Form of Memorandum of Deposit of Title Deeds to be Recorded in Respect of Advance Secured by Equitable Mortgage of Immovable Property Memorandum of Entry (in case of Mortgage of Individual's Property) In the Matter of Mortgage by Deposit of Title Deeds in respect of Individual's immovable Property Letter of Confirmation of Equitable Mortgage in respect of Personal Property I n t h e m a t t e r o f M o r t g a g e b y D e p o s i t o f Ti t l e D e e d s in respect of Immovables and Hypothecation of Movable (in case of Partnership Firm/Company) (Declaration) Memorandum of Entry Where Company's Property is Equitably Mortgaged Supplemental Memorandum of Entry (Company's Property) Confirmation of Creation of Equitable Mortgage Relating to Company's Property (in Consortium Accounts) Confirmation of Extension of Mortgage by Joint Owners - all individuals. Confirmation of Extension of Mortgage by Company Second Extension of Mortgage by Deposit of Title Deeds Letter of Confirmation of Mortgage Creation/ Extension Letter of Authority for Creation of Equitable Mortgage/Extension of Mortgage Power of Attorney for Converting Equitable Mortgage into a Legal Mortgage Irrevocable Power Attorney Letter of Instalments Against Provident Fund Letter Addressed to the Trustees of Provident Fund Letter of Authority cum Intent to Guarantee Another Staff Members Loan (If Stipulated) Address to Trustees of P.F. Undertaking to Maintain Vehicle for Five Years Irrevocable Power of Attorney Empowering the Bank to Execute in its Favour a Legal Mortgage of the Right, Title and Interest in the Flat/Plot Letter of Authority to Deduct Instalment from the Salary Every Month

824 - III

54.

112

55.

115

56. 57. 58. 59. 60. 61.

136

62.

Undertaking to Create a Legal Mortgage in Bank's Favour (Where Society is Formed) Undertaking to Repay Loans in Stipulated Instalments (Under Personal Loans Scheme) General Undertaking CCB Ledger Sheet Project Finance Advances/Borrowings Total Liability Register Repayment Schedule Cash Credit Accounts Drawal Scrutiny Sheet TNSCB for CO-OPTEX Drawal Application Scrutiny Sheet ST-SAO (Normal)/Oil Seeds TNSCB Model Drawal Application Scrutiny Sheet- S.T. Weavers

825 - III

Annexure-1 to Chapter-61 LDOC 1

ATTESTATION MEMO ------ SC BANK ________________________ Branch Name ____________________________________________________ Overdraft / Loan / C.C. against ________________________ Limit Rs. _________

Signature Verified Specimen Signature Filed signed in Documents obtained as per Sanction. Examined by an Officer other than the officer in whose Presence docs are executed (With Name/Design.)

_________ Documents presence of __________

Date:

Sr. Mgr./Mgr. Chief/Sr. Br./Branch Manager/Mgr. NOTE: All the columns should be filled in, in all respects. Branch Head should sign this memo after scrutinizing all the documents. ATESTATION MEMO SC BANK-------Branch Due Date of Account Due Date of Interest Due Date of Insc. Pol. Due Date of Insc. Prem.

noted in diary _______ Checked _____________ noted in diary _______ Checked _____________ Noted in diary _______ Checked _____________ Noted in diary _______ Checked _____________

Due Date of Insc. Govt. & Mun. Dues noted in diary _________ Checked _________ Noted in Ledger/computer system “ “ ______________ Checked ________ Noted in Security Register “ “ “ ______________ Checked _______ I hereby declare that the signature/s/ left/right hand thumb impression of ____________ Placed on the above said documents dated ____ is/ are that / those of ____ and is/are placed in my presence in witness whereof I subscribed my name. The contents of the aforesaid documents are translated / explained to the said executants, who admit/s the same. “The contents of documents are translated in vernacular and explained to the party/ies who admit/s the same”. “The contents of attached document/s have been explained / interpreted to the executant in the vernacular language, namely, and he/she appears to have understood the same”. ________ 20… Sr. Mgr./ Manager Chief / Sr. Br. / Br. Manager NOTE: All the columns should be filled in, in all respects. Branch Head should sign this memo after scrutinizing all the documents.

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Annexure-2 to Chapter-61 LDOC 2

D.P. NOTE (FOR INDIVIDUALS) Date:______________ Place: ____________ Rs. ______________

On Demand, I, _____________S/o…………………residing at……………………………………….. promise to pay -SC BANK or order at their office in ____________ the sum of Rupees ____________for value received with interest thereon at the rate of ___________ % over Base rate of the Bank with minimum ________ % p.a. with monthly / Quarterly / half-yearly / yearly rests. Signature without revenue stamp

Signature over Revenue Stamp of appropriate value.

N.B.: * Strike off whatever is in-applicable

Annexure-3 to Chapter-61 LDOC 3(a) D.P. NOTE (FOR JOINT BORROWERS) Date:______________ Place: ____________ Rs. ______________ On Demand We , ( 1 ) … … … … … … … … … S / o … … … … … … … … … … , ( 2 ) … … … … … … S/o……………………………. Jointly and severally promise to pay _..........SC BANK or order at their office in _____________________ the sum of Rupees ____________ for value received, with interest thereon at the rate of __________ % over Base rate of the Bank with minimum _____ % p.a. with monthly / Quarterly / half yearly / yearly rests. Signatures without revenue stamp

Signature over Revenue Stamp of appropriate value

N.B.: * strike off whatever is in-applicable.

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Annexure-4 to Chapter-61 LDOC 3b(i) D.P. NOTE (FOR SOLE PROPRIETORSHIP FIRM) Date:______________ Place: ____________ Rs. ______________

On Demand We, __________promise to pay ___________ SC BANK or order at their office in _______________ the sum of Rupees ____________for value received, with interest thereon at the rate of __________ % over Base rate of the Bank with minimum ____________ % p.a. with monthly / Quarterly / half yearly / yearly rests.* Signature without revenue stamp

Signature over Revenue Stamp of appropriate value

N.B.: * strike off whatever is in-applicable.

Annexure 5 to Chapter 61 LDOC 3b(ii) D.P. NOTE (WHEN LIMITED COMPANY IS THE SOLE PROPRIETOR OF THE FIRM) Date:______________ Place: ____________ Rs. ______________

On Demand We, ______________jointly and severally promise to pay ___________ SC BANK or order at their office in the sum of Rupees _______ for value received, with interest thereon at the rate of __________ % over Base rate of the Bank with minimum ____________ % p.a. with monthly / Quarterly / half yearly / yearly rests.* Signature without revenue stamp

Signature over Revenue Stamp of appropriate value

N.B.: * strike off whatever is in-applicable.

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Annexure-6 to Chapter-61

LDOC 3(c) D.P. NOTE (FOR PARTNERSHIP FIRM) Date:______________ Place: ____________ Rs. ______________

On Demand We,_____________ jointly and severally promise to pay ___________ SC BANK or order at their office in __________ the sum of Rupees ________for value received, with interest thereon at the rate of __________ % over Base rate of the Bank with minimum ____________ % p.a. with monthly / Quarterly / half yearly / yearly rests.* Signature without revenue stamp

Signature over Revenue Stamp of appropriate value

N.B.: * strike off whatever is in-applicable.

Annexure 7 to Chapter 61 LDOC 3c(i) D.P. NOTE (WHEN LIMITED COMPANY IS ONE OF THE PARTNERS OF THE PARTNERSHIP FIRM) Date:______________ Place: ____________ Rs. ______________

On Demand We, ____________ jointly and severally promise to pay ___________ SC BANK or order at their office in______________ the sum of Rupees _________for value received, with interest thereon at the rate of __________ % over Base rate of the Bank with minimum ____________ % p.a. with monthly / Quarterly / half yearly / yearly rests.* Signature without revenue stamp

Signature over Revenue Stamp of appropriate value

N.B.: * strike off whatever is in-applicable.

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Annexure-8 to Chapter-61 LDOC 8 APPLICATION FOR IRREVOCABLE DOCUMENTARY CREDIT ………. SC Bank…… Branch Dear Sirs, Advising Bank

Credit No. _______________ in confirmation of our brief cable / telex /e mail /swift of date

Beneficiary's Name & Address

Credit No. _______________ in confirmation of our brief cable / telex /e mail /swift of date

Applicant

We hereby issue our irrevocable letter of credit in your favour available up to the aggregate sum not exceeding as above by negotiation of your sight / presentation of ___ days usance draft to be drawn on us a/c. applicant named above and bearing the clause drawn under - SC Bank ______ branch credit no.

Covering full _____________ invoice value of shipments / dispatches purporting to be ____________from ___ to ____________ FOB / C & F. CIF ____ Partial shipment permitted / not permitted, transshipment permitted / not permitted. Drafts are to be accompanied by the following documents in English, in duplicate, unless otherwise specified. (1) Signed Commercial Invoices, in triplicate, quoting Import License No. ______ / import not included in the negative list of export import policy of 1992-1997) and certified that the goods are as per order / indent no. _________________. *I/We further place on record the fact that there is no mortgage or lien of any kind whatsoever created on my/our properties and that I/We undertake not to create any mortgage or lien of whatsoever kind or nature over the same nor to sell or alienate any of my/our immovable properties or assets of a capital nature until all the debts due by me/us to _________ SC BANK are fully paid. I / We know that it is on the faith of the representations and undertakings contained in this paragraph that the Bank has agreed to open the said account. The said account will be operated by ______________________ and the indebtedness Caused by such drawings from time to time will be binding on me/us jointly or severally.

Yours faithfully,

(APPLICANT)

*NOTE:- if advance is secured, please delete this.

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Annexure-9 to Chapter-61 LDOC 11 LETTER OF PLEDGE (FOR GOVERNMENT SECURITIES, SHARES, DOCUMENTS OF TITLE TO GOODS ETC., OTHER THAN SECURITIES OF IMMOVABLE PROPERTY) Stamp as on agreement

--- SC Bank………..branch GENTLEMEN, Date --I/We the undersigned hereby agree that all securities issued by Government and Local Authorities, debentures and shares of Corporation and Companies, all goods, documents of title to goods, and Securities of every description, motor lorry receipts endorsed in favour of the Bank or made out in the name of the Bank, other than securities for immovable property (which goods, documents and securities are hereinafter referred to as “the said securities”) including the property, money and advantage comprised in, cover or represented by and derivable under or by virtue of such documents and securities which I/We may from time to time deposit with --- SC Bank (hereinafter called “the Bank”) by way of security for the loan/advance/facility up to a limit of Rs. _________ with interest, additional interest, penal interest as may be stipulated by the Bank from time to time shall be deemed to have been deposited with and shall be held by the Bank upon subject to the terms & conditions hereinafter mentioned, that is to say. 1. The said security shall be security to the payment to the bank by me/us on demand of (a) All moneys which now are or which at any time or times hereafter may become due and owing from me/us to the Bank whether alone or in partnership with any person, firm or company by way of overdraft in Current Account or by way of loan or by way of Cash Credit with the Bank or otherwise howsoever (including money owing upon any cheques, promissory notes or bills of exchange, drawn, accepted or endorsed by me/us or which shall have been paid for my/our credit either solely or jointly with another or others). (b) Interest on the moneys aforesaid from the respective date on which the same shall have been advanced to me/us at the rate of ____% over Base rate of the Bank with a minimum of ____ % per annum plus interest tax with monthly / quarterly / halfyearly/ annual rests or at such rate or rates as the Bank may specify to me/us in writing in accordance with the Bank's Base rate and my/our credit rating with the Bank from time to time”. (c) Commission and other customary charges. (d) All expenses which may be incurred by the Bank in selling or attempting to sell the said securities or any of them or in realizing the said securities or any of them. (e) All costs, charges and expenses including legal charges as between attorney and client, which the Bank may be put to in connection with the premises or the exercise or enforcement of any right or powers hereby conferred. 2. In consideration for the said advances I/We jointly & severally hereby promise to pay to the Bank at _____________ on demand made by the Bank or the Manager or any other Officer thereof the said several items specified in paragraphs (a) to (e) of the last preceding clause. 3. (a) I/We hereby agree at all times while any money hereby secured remains owing and payable to deposit and keep deposited with the Bank goods, documents of title to goods and securities approved by the Bank of such value that the agreed margin shall be maintained for the benefit of the Bank. The agreed margin shall be at the rate of margin which the Bank may from time to time in its absolute discretion fix (whether generally with regard to all its customers or some of them or specially for the purpose of these presents) with regard to

831 - III

4.

5.

6.

7.

8.

the nature of goods, documents of the title goods and the goods therein comprised and securities so deposited. The value of the goods, documents of title to goods and the goods therein comprised, and securities shall for the purpose of these presents be the market value thereof or the normal value thereof whichever be less. The decision of the local Manager or other Officer of the Bank as to what is the normal value of any goods shall be conclusive. Should the Bank through its Manager or other Officer so require such margin shall be maintained by me/us either by an immediate delivery of further security to be approved by the Bank or by an immediate cash payment. The terms and conditions contained in these presents shall apply to all goods, documents and securities so deposited from time to time. If I/We fail to maintain such margin within 48 hours after receiving notice from the Bank requiring me/us so to do, the Bank shall be entitled. (but not obliged) without prejudice to its other rights, and without any further authority from me/us to sell such part of the securities that in its hands as it may consider necessary so as to put the account in order by providing the required margin and to continue the said account. The provision of clause 4 and the other clauses hereof shall apply to such sale. (b) I/We hereby also agree that at all times while any money hereby secured remains owing and payable the Bank shall be entitled to have all the shares of Corporation and Companies stock of every description pledged with the Bank transferred to the Bank's name without giving any intimation to me/us and that the Bank shall have in respect of such shares and stock exclusive voting rights exercisable by the Bank in any manner whatsoever and that we shall henceforward not exercise any voting rights or issue any proxies in respect of such shares / stock until any money hereby secured remains owing and payable to the bank. I / We hereby agree that the Bank shall be entitled if default shall have been made by me / us in the repayment of moneys due by me / us for 48 hours after demanding payment at any time or times thereafter and without further intimation to me / us to sell the said securities in such manner as the Bank may think fit and that such 48hours notice shall be reasonable notice of such intended sale. For the purpose aforesaid or to effect any sale of the said securities the Bank may stamp, complete and register any transfer or other documents and pending any such sale, the Bank may collect, receive any recover any dividend, interest and money relating to the said securities or any of them and give receipts therefor. The Bank shall at any sale of the said securities have power to buy in or rescind any contract of sale and resell without being accountable for any loss or diminution in the price thereof or being answerable for and deterioration of the said goods or for any depreciation in the value of the said securities. I / We hereby agree to execute from time to time on demand made by the Bank or the Manager or any other officer thereof and make over to the Bank all such further or other documents and do all such acts as may be required by the Bank to vest the full legal title to the said securities or any part thereof in the Bank and to render the same readily saleable or transferable by the Bank at any time. The bank shall not be liable to me / us for any involuntary losses which may occur during its custody of the said securities by reason of the sale of the said securities or any of them nor for any deterioration of the goods or for any depreciation in the value of the said securities. The bank shall apply the net proceeds of sale of the said securities in satisfaction so far as the same shall extend to all moneys owed by me / us in my / our said account under the several items specified in paragraphs (a) to (e) of clause 1 hereof. It shall be lawful for the Bank to retain and apply the surplus, in any of the sales proceeds. After payment in full of the said moneys together with any other money or moneys belonging to me / us for the time being in the hands of Bank in whatever account as far as the same shall extend in or towards payment of any and all other moneys with interest thereon which shall be or may become due from me/ us or any one more of us whether solely or jointly with any other person or persons, films or company to the Bank including obligation current though not then due or payable or other demands legal or equitable whether I / we or any one or more of us or such person or persons or any of them shall become or be adjudicated bankrupt or insolvent or be in liquidation.

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If the net sale proceeds or such sale be insufficient to cover the said moneys. I / We shall be liable forthwith on demand to pay and make good such deficiency to the Bank. 9. All accounts of sale rendered to me / us by the Bank shall be conclusive evidence both in and out of court of all matters therein stated. 10. I / we hereby also agree that notwithstanding anything herein-before contained, the Bank shall not be bound to allow or continue my / our overdraft in Current Account, loan or Cash Credit to any extent or for any time further than the Bank shall in its absolute discretion see fit to do. 11. I / We hereby also agree that if at the time when the said account current, loan or Cash Credit shall be closed, if a balance shall be owing from me / us to the Bank, I / We will so long as such balance or any part thereof shall remain owing, pay interest thereon to the Bank at the rate aforesaid with rests as aforesaid from the time when such balance shall be ascertained. 12. The security shall operate as continuing security for all money owing by me / us and my / our indebtedness and liabilities [whether absolute or contingent] to the Bank as aforesaid notwithstanding the existence of a credit balance in the said account or any other account at any time or any payment or fluctuation of account and shall remain in force until terminated by the Bank on notice in writing by the Bank to me / us. 13. The above terms and conditions shall apply and shall be deemed to have applied to securities which may from time hereafter be deposited by me / us with the bank as securities for any moneys due by me / us to the Bank on any account whatsoever. 14. I / we, hereby declare that the said securities are and shall always be my / our absolute properly and at my / our sole disposal and free from any encumbrance whatsoever and I / We hereby undertake not to deposit with the bank any securities, which shall not be my / our absolute properly and at my / our sole disposal and free from all encumbrances and that it shall be taken as term between me / us and the Bank that all securities deposited by me / us with the Bank as securities are my / our absolute property and at my / our sole disposal and free from encumbrances. 15. The Bank will be discharged and protected from any claim if it delivers the said securities to or in accordance with the instructions given by me / any one of us. But this provision shall nor restrict or prejudice the Bank's right to sell the securities without my / our consent. 16. I / We hereby undertake to hold you harmless and indemnified in respect of any defect in any securities which I / We deliver to you or request you to take delivery of from any other source on my / our account whether with or without blank transfers or in respect of any delay in causing the same securities to be transferred to my / our or yours name/s. x __________________________________ x __________________________________ Note: Clause to be added to letter of pledge when advance is made against the security of Life insurance Policies under the borrower's signature as under:“It is hereby agreed that in the event of my / our failing to repay the advance when recalled at any time as required, Bank can proceed on the basis of the assignment in its favour to surrender the policy and to obtain the proceeds from the insurer or have the policy paid at its desertion and obtain payment on maturity. I / We hereby undertake to keep the policy alive during the currency of the advance by paying the premia as and when they fall due, failing which the Bank may at its discretion recall the advance or continue to keep the policy alive by paying their premia to the debit of any of my accounts with the Bank or by paying the premia direct from its own funds, in which latter case any such premia paid by the Bank could be offset from the proceeds of the policy remaining when received by the Bank after adjusting the advance made by the Bank:.

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Annexure-10 to Chapter-61 LDOC 16 LETTER DEPOSITING FIXED / SHORT DEPOSIT RECEIPT (S)/ CUM-UNDERTAKING The Branch Manager, SC Bank

Stamp as on agreement

Date: ________________ PART 'A' LETTER OF DEPOSIT (a) In case of depositor borrower, i.e. for advance against One's Own Deposit/s (including joint Accounts): I / We hereby apply for the facility of loan / overdraft limit of Rs.______ with you against the security of my / our own deposit/s with you at the interest rate of _______% p.a + taxes if any (as application from time to time) *with monthly / quarterly / half yearly / yearly rests* (b) For Advances Up to Rs.2.00 Lacs against Third Party Deposit/s. I / We hereby apply for the facility of loan / over draft limit of Rs.________ with you against the security of deposits of Mr./Mrs./ Merssrs._______ with you at the interest rate of _________% p.a. + taxes if any (as applicable from time to time with monthly / quarterly / half yearly / yearly rests.) (c) For advances of Over Rs.2.00 lacs against Third Party Deposit/s. I / We hereby apply for the facility of loan / over draft / other facility limit of Rs._____ with you against the security of deposit/s of Mr. Mrs. Merssrs._______ with you at the interest rate of 3.5% over the deposit rate payable on the concerned time deposit (which is _______% p.a. for the present) subject, however, to the minimum of the Bank's Base rate (Which is at present _______% p.a. and the same is subject to change without notice from time to time) plus interest tax (as applicable from time to time with monthly / quarterly / half yearly / yearly rests. As security for the fluctuating balance from time to time of the said loan / overdraft or other facility which you may grant to me / us, I am depositing Mr. /Mrs./ Merssrs. ___________ is /are depositing with you herewith the fixed / short deposit receipt/s No./s __________DT ___ standing in the name/s of myself/overselves/ Mr./Mrs./,Merssrs. ____________ for Rs.____________ & _____________ __________due from the bank so that you may hold / continue to hold the said Fixed / Short Deposit Receipts as security for the dues to you from time to time. I am aware that such renewal of deposit/s and continuance of advance shall be purely / entirely at the bank's discretion and it shall not be obligatory for the bank to do so under any circumstances. If the loan / overdraft / 834 - III

other facility together with interest / penal interest / additional interest including tax on such interest (as applicable) and banking charges, payable by me / us is not paid when called upon to do so, or in any case before the due date/s of the said Fixed / Short Deposit/s, the aggregate amount due thereon to me / us / Mr. /Mrs./ Merssrs. _____________ (depositor/s) may be credited to loan / over draft / other account and the balance if any may be paid to me / us /Mr./Mrs./Merssrs _________ (depositor/s) if the bank recalls the loan / overdraft / other facility granted to Mr./Mrs./Merssrs. _________ (borrower), the bank shall in that event be entitled to adjust the said loan / over draft / other account and liquidate the same in full by pre payment foreclosure of the said deposit/s and in that case the bank may allow such rate of interest as may be permissible from time to time as per the rules of the Bank in case of pre-payment / foreclosure. If the said fixed / short deposit/s is/ are renewed by me/us/Mr./Mrs./ Merssrs. __________(depositor/s) for a further period/s, then until the said loan / overdraft/other facility, together with interest (including penal interest additional interest and tax thereon) and banking charges, is paid in full, the renewed fixed / short deposit receipt/s shall be duly discharged by me / us / Mr. Mrs. Merssrs.________ (Depositors) and deposited with you so that you may hold the same and the amount/s due there under as security as aforesaid until the loan / over draft / other facility, together with interest (as defined above) and banking charges, is paid by me / us (borrower) in full. PART B UNDERTAKING Now in consideration of the bank, at our request, granting/ continuing to grant and having continued the abovementioned facility I / we _______ (name of the borrower) agree, confirm and undertake: (d) Where the Deposit(s) is/are collateral / par security: That all the monies advanced or to be advanced by the bank under the facility mentioned here in above shall be utilised exclusively for the purpose set-forth in my/our proposal / application and for no other purpose, and if the said loan / advanced is utilised or attempted to be utilised for any other purpose or if the bank apprehends or has reason to believe that the said loan / advance is being utilised for any other purpose, the bank shall have the right to forthwith recall the entire or any part of the loan / advance without assigning any reason therefor. (e) In case of All Advances: That notwithstanding anything to the contrary contained in any of the documents / agreements executed/ to be executed by me / us as also in the letters of sanction by the bank, the bank shall be entitled to change the contractual rate of interest prescribed by the Reserve bank of India / the Bank (SC Bank) or any other eventuality such as reintroduction of interest Tax, etc. from time to time and the same shall be binding on me / us as if such change/s was/ were already incorporated in the documents executed by me/us. (f) Where the deposit(s) is are collateral / part security: That in the event of any irregularity, the bank at its discretion, shall be entitled to charge on the entire outstanding or any portion thereof interest at such enhanced rate/s as it may fix during the continuance of 835 - III

such irregularity. I/we understand that it is on the faith of the aforesaid representations and express undertakings that the bank has consented to entertain my / our proposal / application for the said facility. Yours faithfully, (NAME/S OF THE BORROWER/S) PART C DEPOSITOR'S/S'REQUEST FOR ADVANCE TO OTHER/S (i.e. NON-DEPOSITOR/S) And I / we me / us / Mr. / Mrs. / Merssrs.________ (Depositors) hereby request the bank to grant the above facility to me / us / Mr. Mrs. Merssrs__________ (Borrower/s) and agree that the said fixed / short deposit/s Nos. ________dt _______ for Rs.____& ___ issued by SC Bank to me / us and all renewal/s thereof and the amount/s due there under shall be held by the bank as security for the loan / overdraft / other facility, together with interest and banking charges as aforesaid. SIGNATURE/S & NAME/S OF THE DEPOSITORS N.B: Please delete the inapplicable paras / clauses / words

836 - III

Annexure-11 to Chapter-61 LDOC 17(B)

COMPOSITE HYPOTHECATION AGREEMENT

AN AGREEMENT made at ____________ on this_______________ day of ____________ Between ________________________________________ (hereinafter called “The Borrower”) of the ONE PART and …. SC bank having its Head office at ………….………………………………. one of its branches at ______________________________________________________ (hereinafter called “The Bank” ) of the SECOND PART. WHERAS the Bank has at the request of the Borrower agreed to grant and / or continue to grant banking facilities or accommodation to the Borrower by way of_____________________________ facilities (hereafter collectively referred to as “banking facilities” with an aggregate maximum limit of Rs. ______ (Rupees______________________________________) and the repayment of all monies including principal sums, interest, interest tax, additional interest, further interest, penal interest, commission, costs, charges and expenses etc., payable under or in the respect of such facilities have been secured /agreed to be secured by various agreements and documents executed by the Borrower from time to time in favour of the Bank AND WHEREAS one of the conditions stipulated by the Bank is that the repayment of all monies under the banking facilities or accommodation or accounts shall inter alia be secured by the Borrower by way of hypothecation of all the Borrower's Raw Materials, Stocks-inprocess, Finished Goods and all the Book-Debts, Movable Plant and Machinery/Vehicles/Crafts,. Consumable Stores and Spares, both present and future and on the terms and conditions set out in the Bank's sanction advice to the company dated________ and/or monies payable and due to Bank in each of the accounts of the Borrower with the Bank. (as set out in the First Schedule hereunder Written) NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED AND DECLARED AS FOLLOWS: 1.

Subject to the terms and conditions contained in these presents the Bank has granted or agreed to its discretion to grant or continue to grant to the Borrower at __________ or at any of its branches in India banking facilities or accommodation to the Borrower as mentioned in the sanction advice set out in First Schedule hereto and / or outstanding and due to the Bank in each of the accounts of the Borrower upto an aggregate maximum limit of Rs.___________ (Rupees____________)

2.

The Borrower hereby agrees and undertakes that the amount/amounts advanced or to be advanced by the Bank will not be used for any purpose other than for which it has been sanctioned/advanced. It is distinctly understood by the Borrower that the Borrower is hereby expressly prohibited from using the amount advanced and / or to be advanced of any part there of for any purpose other than for which it has been advanced/ sanctioned and that if the Bank apprehends or has any reasons to believe, the Bank's decision in this regard being final, that the Borrower has violated or is violating or is likely to violate this condition it shall be lawful for the Bank and the Bank shall have a right to recall the entire balance due under all, any and / or each of the facilities or accommodations then outstanding or any part there of forthwith notwithstanding anything to the contrary contained herein or in any other document or letter of sanction or terms and conditions and without prejudice to any of the rights of the Bank hereunder or under any law, rule or regulations to initiate appropriate Civil and / or criminal action/s against the Borrower. The Borrower further agrees that on such demand, the Borrower shall forthwith pay the amount/s due together with interest, interest tax, further interest, additional interest, penal interest, commission fees, cost, charges and expenses incurred or to be incurred by the Bank till date of payment. The Bank shall have an absolute

837 - III

discretion to determine what amount/s within the aforesaid limit it will advance and/or allow to be outstanding from time to time in the respective separate account opened/ to be opened by it and the Bank shall be at liberty to refuse to allow further drawings or advances or to make available any facility at any time without previous notice to the Borrower and without assigning any reasons therefore. 3.

The Bank may at the request of the Borrower vary or diversify the facilities allowed by it to the Borrower but so, however, that the overall limit of the principle amount at any time outstanding shall not exceed the aggregate maximum limit secured hereunder and this will not in any way affect or prejudice the security by way of hypothecation created by this deed. The facilities and their limits so varied/ diversified from time to time during the tenure of this security shall be deemed to be the facilities / limits secured under these presents.

4.1. Subject to clause 4.4 below, the Borrower shall pay interest/ commission to the Bank in respect of the said banking facilities from time to time on the outstanding in their respective banking facility accounts at the respective rate/s as contained in the sanction advices forming part of First Schedule hereunder written PROVIDED HOWEVER the bank shall at any time or from time to time be entitled to change or vary the rate of interest/ commission in respect of any one or every facility or accommodation. Notice of variation of rate of interest from time to time as per the directions of the Reserve Bank of India / or as per Base rate fixed by the Bank or the Head Office of the Bank is waived. Such variation in the rate notified in the notice board in the Bank premises shall be sufficient notice to us and I/We agree to pay interest at the rate notified in the notice board from time to time until all dues are cleared in full. Provided further that the interest/ commission payable by the Borrower shall be subject to the change in Prime Lending Rate of the Bank from time to time as determined and / or interest /commission that may be levied /prescribed revised rate/s of interest/commission were already mentioned in the said Schedule and agreed to be paid by the Borrower and hereby secured. The Bank shall be entitled to demand payment of interest for the time being due or other amounts payable by the Borrower under these presents without at the same time demanding payment of the balance due to the Bank exclusive of such interest or other amounts.\ 4.2 Interest payable at the rate/s aforesaid shall be calculated on the daily balance in the Cash Credit and other banking facility/account(s) and charged accordingly in the said account(s) on the last working day of each month or quarter or half-year as the bank may decide. 4.3 Without prejudice to the generality of the foregoing the bank shall also be entitled to charges at its own discretion and the borrower shall be liable to pay and hereby agrees to pay additional/enhanced rate of interest on the said banking facility account(s) either on the entire outstanding or a portion thereof as the Bank may fix for any irregularity, non-compliance, of/by the Borrower or any breach of the terms and conditions hereof or of those set out under sanction advice and for such period as such irregularity or breach continues or for such time as the Bank may deem it necessary, regard being had to the nature of the irregularity or breach, Provided that the charging and payment of such additional interest/enhanced rate of interest shall be without prejudice to the other rights or remedies of the Bank either hereunder or under any law, rules or regulations to proceed with or exercised by the Bank for such irregularity or breach against the Borrower and or the security hereby created, and it is hereby agreed by the Borrower that the provision herein contained for payment of higher rate of interest shall not entitle or be deemed or construed to authorize the Borrower to delay or postpone payment of the monies hereunder or any part thereof and/or interest on their respective due dates. 4.4 In the event of the Borrower not paying any amount due to account of interest, fees, costs, charges and expenses payable from time to time under these presents the bank shall be at its discretion entitled to debit or charge such interest amount(s) to any of the banking facility account(s) namely the Overdraft Account, Cash Credit Account,

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Current Account or any other account of the Borrower. Any amount(s) so debited to the overdraft account, Cash Credit Account, Current Account or any other account of the Borrower with the Bank shall form part of the account(s) to which such amount(s) is/are debited and shall carry interest at the rate or rates in force at the relevant time applicable to the accounts(s) to which the amount(s) is/are so debited. 4.5 The Borrower agrees to pay and shall pay to the bank commission, fees on the bills of exchange accepted /agreed to be accepted / discounted within the specified limits and the guarantees issued /agreed to be issued and deposit/keep deposited with the bank margin money at such rate or rates as the Bank may specify from time to time by notice in writing to the Borrower and the rate/s so specified shall be deemed to be the rate/s expressly agreed to by the Borrower and as if mentioned in these presents and the security hereby created shall be deemed to be securities created for securing such bills of exchange from time to time within the specified limit as mentioned in the sanction advice. 5.

The Borrower shall on demand pay at ____________ to the Bank, all monies including principle sums, interest, interest tax, additional interest, further interest, penal interest, commitment charges, commission, fees costs, charges, expenses and other monies whatsoever due, owing or payable by the Borrower in respect of or in any wise concerning or relating to the banking facility/facilities granted/agreed to be granted/ continued by the Bank to the Borrower as aforesaid including those incurred by the Bank for the preservation, protection, defence and perfection of the security hereby created or for attempted or actual realisation or enforcement thereof with interest as provided under these presents, all of which monies including principal sums, interest, interest tax, additional interest, further interest, penal interest, commitment charges, commission, costs, charges, expenses and the monies whatsoever at any time and from time to time due to the Bank, whether debited to the account(s) or not, are hereinafter collectively referred to as “ the balance due to the Bank” which expression shall, wherever the context so admits include any of them or any part thereof.

6.

In consideration of the Bank having granted/agreed to grant/continue to grant banking facilities or accommodation to the Borrower upto an aggregate maximum limit of Rs._______________) as aforesaid, the Borrower hereby hypothecates to and charges in favour of the Bank.

a) All its stocks of raw materials, semi-finished goods, both present and future, and more particularly in item l of the Second Schedule hereunder written. b)

All the present and future book-debts, outstanding monies, receivables, claims, bills challans in action, contracts , engagements and securities of the Borrower and more particularly described in item ll of the Second Schedule hereunder written.

c)

The specific items of movable machinery/vehicles/crafts etc. as more particularly described in items IV of the Second Schedule hereunder written to secure the Cash Credit/ Loans/S/ Deferred Payment Guarantees/s facility granted /agreed to be granted by the Bank to the Borrower.\

d)

Subject to the exclusive /prior charge created /agreed to be created on the specific items of movable machinery/vehicles /crafts in respect of the Cash Credit/loan/s/ Deferred Payment Guarantee/s facility sanctioned to/availed by the Borrower with the consent of the Bank (details of which specific movable machinery/ vehicles/crafts the Borrower hereby undertake to provide to the Bank),all the movable machinery/vehicles/crafts of the Borrower, both present and future, and more particularly described in item lll of the Second Schedule hereunder written. (All of which Stocks, Book-Debts, Movable Machinery/Vehicles/Crafts of the Borrower are hereinafter collectively referred to as “ the Hypothecated Premises” as security by way of first charge for due payment on demand of the balance due to the Bank in

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respect of accounts/accounts of the facilities / accommodations granted to the Borrower by the Bank as aforesaid. 7.1 The Borrower shall at all time during the continuance of this security keep and maintain such margin of security in favour of the bank (hereinafter called “ the said margin”) as mentioned in the First Schedule hereto or such other percentage (s) as the Bank may from time to time determine of the cost or market value (Market value as found by the Bank) which ever is lower of the Hypothecated Premises or part thereof. 7.2 The Bank shall be entitled to and shall be at liberty to change from time to time the said margin(s) and the Borrower shall be bound by such change 7.3 The Borrower will at all times maintain a sufficient quantity of the assets constituting Hypothecated Premises to provide the necessary margins (s) on the security as specified herein and as may be required by the Bank from time to time and will forthwith, whenever necessary, provide further assets approved by the Bank to restore such margin(s) or reduce the amount from the time being due to the Bank by cash payment so as to maintain the said margin(s). 7.4 Except for the purpose of sale or dealing in the ordinary course of business the Borrower shall not, so long as any monies remain due to the Bank, except with the prior approval in writing of the Bank and subject to the margin of security required by the Bank being fully maintained, remove or cause to be removed any of the Hypothecated Premises or divert or dispose of or cause or permit any of the Hypothecated Premises in transit to be diverted or disposed of or otherwise deal with any of the Hypothecated premises and that the realisation /proceeds of sale of any of the Hypothecated Premises as soon as received shall be paid over to/ appropriated by the Bank in satisfaction of the balance due and owing on the said facility/accounts or any of them as hereinafter provided but not to any of the party without the prior written consent of the bank and till then all sales proceeds and realisations howsoever in respect of the Hypothecated Premises shall be held by the Borrower in trust for the Bank as the Bank's exclusive property for appropriation to the said facility/accommodation of account(s) PROVIDED that the Borrower shall not make any sale of or recover, transfer, assign, dispose of or deal with any of the Hypothecated Premises upon being prohibited in writing by the bank from doing so. 8.1 The Borrower shall whenever and so often as required by the Bank furnish to the Bank full particulars of all the assets of the Borrower and of the Hypothecated Premises and shall allow the Bank or its authorized agents to take inspection thereof and of all records, books and vouchers pertaining thereto and will produce such evidence as the Bank may require as to the cost and value of the said assets and/or the Hypothecated Premises The Borrower shall display sign board/s with words “Hypothecated to ...SC Bank ” inscribed thereon, at the place/s where the Hypothecated Premises or any part thereof may be lying or be stored by the Borrower for the time being time to time. 8.2 The Borrower shall value the Hypothecated Premises at the appropriate rates whether fixed by the Bank or not and shall not over value the same . In any case, the Bank shall be at liberty from time to time and at any time to have any of the Hypothecated Premises inspected and valued by an appraiser or valuer appointed by the Bank which value shall be conclusive and binding on the Borrower both in and out or court. 8.3 The fees, cost, charges and expenses of such inspection , appraisal or valuation (the Bank's statement in regard thereto being conclusive)shall be borne and paid by the Borrower to the Bank on demand shall if not so paid ,be debited by the Bank to any of the said banking facility account(S) namely Cash Credit Loan, Overdraft or Current Account/s or any other account of the Borrower with the Bank and shall form part of the monies hereby secured.

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9.1 The Hypothecated Premises shall be kept at the Borrower's risks and expenses and the Borrower shall at its own expenses during the continuance of this security keep the Hypothecated Premises in good and marketable condition and in proper working order and shall likewise at its own expense insure and keep insured in the name of the Bank the hypothecated Premises against loss or damages by fire, theft, pilferage, robbery, riot, civil commotion, earthquakes, malicious damages and all such other risks as the Bank shall require for the full market/replacement value thereof by insurance company or companies approved by the Bank and shall deliver the policies of insurance to the Bank and shall likewise deliver receipts for the last premium paid for every such policy of insurance and if in the name of the borrower, the borrower shall assign and deliver to the Bank every such policy of insurance and shall pay to the Bank all proceeds of any policy received by the Borrower during the continuance of this security and shall, renew, keep in force and maintain such insurance throughout the continuance of this security and deliver to the Bank the renewal receipts and policies. In default the bank may (but shall not be bound to) effect or renew such insurance .Any premium paid by the Bank and any such costs, charges and expenses incurred by the Bank shall be repaid by the Borrower on demand forthwith and shall until repayment with interest at the rate aforesaid, be a charge on the Hypothecated Premises. The Bank shall be entitled without prejudice to all their other rights and powers to debit the amount of such premium, costs, charges and expenses to any of the banking facility or account(s) namely the Cash Credit/Overdraft or any other account(s) of the Borrower in such manner as the Bank deems fit. All sums received under such insurance shall be applied in or towards liquidation of the amount for the time being due to the Bank as provided therein. 9.2 The Bank shall be entitled to adjust, settle and compromise in any manner whatsoever including by reference to arbitration, at the Borrower's cost any dispute arising under or in connection with any such policy of insurance and such adjustment, settlement, compromise and any award made or decision given in such arbitration or otherwise shall be valid and binding on the Borrower and the Bank shall also be entitled to all monies payable under any such insurance or under any claim made there under and to issue a valid receipt therefore and that the amounts so received shall be credited to any of the banking facility account(s) namely the Cash Credit / Overdraft / Current or any other account(s) of the Borrower and that the Borrower will not raise any dispute that a larger sum might or ought to have been received or be entitled to raise any dispute for the balance in any of the said accounts after such credit, provided that the Bank may at its own discretion waive any of the requirements as to insurance , to such extent and in such manner as it may deem fit. 9.3 The Borrower shall pay all rents, rates, taxes, payments and outgoings in respect of any immovable property in or upon which the Hypothecated Premises or any part thereof may for the time being be laying and shall keep such property insured against loss or damage by fire and shall also insure the same against such other risks as the Bank shall require and shall produce the policies of insurance to the Bank whenever required by it. 10.1 The Borrower shall make best endeavours to obtain payment of all debts and assets forming part of the Hypothecated Premises as and when the same shall become payable and pay all such sums when the same shall become payable and pay all such sums when received into any of the banking facility account(s) namely Cash credit/Overdraft or any other account(s) with the Bank. Further, the Borrower shall not, except in the ordinary course of business, receive release or compound any of the said debts and assets without the consent in writing of the Bank and will not do anything whereby the recovery thereof may be impeded, delayed, prejudiced, prevented or becomes time barred. 10.2 The Borrower shall keep proper books of accounts of the business and carefully keep and preserve all the documents, papers and vouchers in connection with or relating to or which prove or are likely to prove the debts forming part of the Hypothecated Premises or any part thereof and will at any time when required produce such books, documents, papers and vouchers for the inspection of the Bank and its officers and agents and allow them

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or it or him access thereto and to make copies of or extracts from the same. 10.3 Save and except as herein specifically provided for, the Borrower shall not create any further or any additional change on this hypothecated premises without the written consent of the Bank first had and obtained. 11.1 If the Borrower shall fail to pay on demand any money which ought to be paid by it hereunder or shall commit any breach of any agreement or declaration on their part herein contained or shall fail to observe or perform any of the terms and conditions or covenants herein contained or if any circumstance shall occur, which in the sole judgement of the Bank, is prejudicial to or imperils the security or if any distress or execution is levied or enforced against any property or assets whatsoever of the Borrower or if any person, firm or company shall take any steps towards appointment of a Receiver of any property or assets whatsoever of the Borrower or if such Receiver is appointed or if any person firm or company shall apply for or obtain an order for the winding up of the Borrower or if any person, firm or company shall apply for or obtain an order for the winding up of the borrower or if any such order is made or if any step is taken by any person towards passing any resolution to wind up the Borrower's company or if any such resolution shall be passed or if the Borrowers shall cease to carry on business or to conduct its business to the satisfaction of the Bank or if any person firm or company shall take any steps for adjudication of the Borrower as insolvent or if any such adjudication is made then and in any such case, it shall be lawful for the Bank through any of its officers/agents to enter into or upon the factory or any godown jatha or any of the place/s of storage of the Borrower where any of the Hypothecated Premises may be lying or stored or kept and to inspect, value, insure and/or to take charge of and/or to seize, recover, revive, appoint Receivers and/or take possession of all or any of the Hypothecated Premises and the books of account and other documents relating to the debts and assets forming part of the Hypothecated Premises inter-alia by putting its locks on godowns and other premises where the said goods or account books and other documents relating to the debts and assets forming part of the Hypothecated Premises are lying or kept and thereupon either forthwith or at any time and from time to time and without any notice either by public auction or tender or private contract or tender, sell and dispose of all or any part of the Hypothecated Premises in such manner as the Bank shall think fit and also to give notices of demand to the Borrower's debtors and third parties liable therefore sue for, recover, receive and give effectual receipt for the same and sell and realize for the same and sell and realize by public auction or private contract and transfer, assign or otherwise dispose of or deal with all or any part of the Hypothecated Premises. Without prejudice to the foregoing powers, if necessary, the Bank shall at the Borrower's risk and expenses be entitled to act either as attorney for and on behalf of and in the name of the Borrower or otherwise as the Bank may deem fit (the Borrower hereby appointing the Bank as its attorney). The Bank shall be entitled to deduct and appropriate from the proceeds realised as aforesaid all expenses in connection with the exercise of the aforesaid powers and to appropriate the net proceeds towards the balance due to the Bank in any of the account(s) pertaining to the banking facilities. 11.2 The Company irrevocably appoints the Bank to be the Attorney of the Company and in the name and on behalf of the Company to execute and to do any assurances and things which the Company ought to execute and do under the covenants herein contained and generally to use the name and seal of the Company in the exercise of all or any of the powers hereby conferred on the Bank or any Receiver appointed by the Bank. 11.3 The Bank shall also be at liberty to enforce, realize, recover, settle, compromise, refer to arbitration and for the purpose deal in any manner with any rights or claims which may be set up in respect of the Hypothecated Premises, to complete any engagements and carry on the business of the Borrower through agents, managers nominees or otherwise without being bound to exercise these powers. The Bank shall not be liable in the event of the exercise of any of the aforesaid powers for any involuntary loss which may occur in or arise from such exercise shall be without prejudice to any other rights and remedies and notwithstanding any pending suit or

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other proceedings relating to the Hypothecated Premises. Notwithstanding that there may be any pending suit or other proceedings the Borrower hereby undertakes to transfer and deliver to the Bank all relative contracts, securities, bazaar chits, bills, notes, hundies and documents. The borrower shall accept the Bank's account of sales and realisation as conclusive and shall forthwith pay to the bank on demand any shortfall or deficiency thereby shown. And if the net sum realised by such sales is not sufficient to pay the amounts secured, the Bank shall be at liberty to apply any other money or monies in the hands of the Bank standing to the credit of or belonging to the Borrower in or towards the payment of the balance due to it, AND in the event of there being still some deficiency, the Borrower shall forthwith pay/make good such deficiency provided that nothing herein contained shall in any manner prejudice or affect the rights and remedies of the Bank against the Borrower. 11.4 The Borrower shall not be in any way concerned with the proportion in which any monies realised and applicable under these presents are appropriated towards the balance due to the Bank and shall not have any claim whatsoever against the Bank in relation to any act thing done, omitted, permitted or suffered by the Bank in regard to the appropriation of any money applicable as herein provided, 11.5 As and when the Bank seeks to enforce the securities and take possession of the Hypothecated Premises hereunder the Borrower shall comply with all such directions as may be given by the Bank and afford every facility for placing and keeping the Bank in exclusive possession, custody and control of the hypothecated premises, and the books of account and other documents relating to the books of account and other documents relating to the debts and assets forming part of the Hypothecated Premises, in such manner that such possession, custody and control shall be apparent and indisputable. It is hereby further agreed that if any when the Bank exercises its rights to demand payment of the monies due to it or take possession or assignment of the Hypothecated Premises and the books of accounts and other documents relating to the said debts and assets, the Borrower until actual delivery or assignment thereof to the Banks shall be deemed to be in possession of the same as agent of the Bank but entirely at the risk and costs of the Borrower. Provided always and it is expressly agreed and declared that even after the Bank shall have taken possession of the Hypothecated Premises and/or the books of accounts and other records, documents, etc. relating to the said debts and assets in enforcement of the securities or the Bank has got appointed or caused to have appointed a Receiver thereof or shall have taken any other action in exercise of the powers or any of them hereby conferred on the Bank, the Bank shall be entitled to store the said goods and the books of accounts and other records, documents, etc. relating to the said debts and assets in the Borrower's Premises where they may be lying until the full and complete enforcement and realisation of the security and the Borrower shall be liable to and shall bear any pay on demand the cost of storing the Hypothecated Premises and the books of accounts, records, documents, etc. relating to the said debts and assets in such premises including the rent or compensation payable to such premises and the salary and remuneration of watchman and other personnel that may be engaged for security, preservation and handling of the Hypothecated Premises and the books of accounts and other records, documents, etc. relating to the said debts and assets. It is agreed that the Borrower shall not until realisation of the security created in favour of the Bank adversely deal with such premises belonging to or occupied by the Borrower not the Borrower`s right thereto. The Bank shall also be entitled to hire or acquire storage space in any other premises and to engage watchman and other personnel as aforesaid and the Borrower shall pay the rent or compensation payable for or in respect of such other premises and salary of watchmen and other staff on demand to the Bank and in default the Bank may pay the same but until repayment by the Borrower of such rent or compensation and other monies to the Bank the same with interest thereon at the rate provided for shall be charged upon the Hypothecated Premises. 11.6 Among such directions as aforesaid, the Bank may without incurring any responsibility for the consequence provide for the following:

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a)

that the Hypothecated Premises shall be stored in such godown or other places of storage and the books of accounts or other records be kept and maintained at such places/s as the Bank shall direct b) that the register(s) shall be kept of the Hypothecated Premises brought in or removed from any godown or other place of storage. Such register(s) shall be open for inspections to the Bank at all times and shall always be considered to be the property charged to the Bank;

c)

For the placing of private identification marks/numbers of the Bank on any of the Hypothecated Premises stored in any godown or other place/s of storage.

11.7 From and after the Bank have taken possession the Hypothecated Premises or any part thereof and/or the books of accounts and other records, documents, etc. relating to the debts and assets shall not be removed from the said godowns/s or other place/s of storage except on production of delivery orders(s) signed by the bank or any of its officials authorized in this behalf. 11.8 From and after the Bank shall have taken possession, the Borrower shall be solely responsible in all respects and the Bank shall not in any way be responsible for or in respect of the quality or condition or final turn-out or for loss, destruction or deterioration of the Hypothecated Premises, books of accounts, vouchers, papers and other records relating to the debts and assets or damage thereto occasioned by theft, pilferage, robbery, fire, riot, strikes, civil commotion or otherwise howsoever whatever may be the circumstances or the reasons under or for which such loss, destruction, deterioration, or damage may arise including any act, omission, negligence or default of the Bank or any of their servants or agents. 11.9 The Borrower shall accept without question the accounts of such sale or sales or other transactions signed by any agent or other authorized officer of the Bank as sufficient proof of the amount realised or due under the sale or sales or transactions and the costs, charges and expenses incurred in connection therewith. 11.10 The Bank shall have all other power incidental to and necessary for the realisation of its security under these presents. 11.11 On the sale by private contract or public auction under the provisions of sub-clause (1) hereof, the Bank shall be entitled to charge and retain as part of the costs, charges expenses incurred in connection therewith such commission as the Bank shall in its sole discretion fix and shall not be liable to accounts for the same to the Borrower. Such commission shall be in addition to any brokerage or outgoings payable in respect of any such sale. If the sale proceeds are not sufficient to pay the amount of such commission the Borrower shall pay the same forthwith to the Bank on demand.\ 11.12 The Borrower shall indemnify and always keep indemnified the Bank against all losses, damages, claims, demands, charges and expenses in respect of the Hypothecated Premises sustained by or made against the Bank.\ 12. In case the Bank does not consider it necessary or desirable for any reason either to exercise any authority or power hereby exercisable by the Bank and /or to take action in pursuance of the foregoing clause 11 or in the event of its not exercising such power or authority or to taken any action in pursuance of that clause, the Bank shall so far as regards the Borrowers be at liberty to exercise any power or authority exercisable hereunder by the Bank including to file any suits or legal proceedings for recovery of its dues from the Borrower and to take steps to realize or enforce the security hereby created in favour of the Bank either by sale or otherwise and either through the intervention of the court or by appointing a receiver or in any other manner howsoever as it thinks fit and may close the said accounts (s) with it relating to the banking facilities.

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13. All monies resulting from the enforcement and/or realisation of the securities, i.e. Hypothecated Premises or any part or portion thereof or otherwise, howsoever, and the amounts realised under any policy or policies of insurance or any compensation monies for acquisition or requisition of the securities or any of them on any part thereof or any other realisation from the said securities either by enforcement or otherwise and whether the same is received or realised by the Bank directly or by any Receiver appointed in any suit filed by it shall be applied with all convenient dispatch in the manner hereinafter provided. FIRSTLY: There shall be paid out of such monies or provision made there out for all costs, commission, charges and expenses paid or incurred and to be paid or incurred by the Bank and/or any Receiver, agent or manager for or incidental to the enforcement of the said securities or realisation or receipt of such monies. SECONDLY: The balance shall be applied in liquidation of the respective amounts due for interest, interest tax, additional interest, further interest, penal interest due to the Bank in the said, account(s) in respect of the banking facilities.\ THIRDLY: (i)

In the event of the monies available being sufficient to pay the principle monies due to the Bank then the same shall be applied towards payment of the principle monies in respect of the facilities given and/or continued, infull PROVIDED THAT an amount equivalent to the monies that may become payable to the Bank in respect of any contingent liability or liabilities under any facility or facilities given under these presents and secured by the security created hereunder shall be kept aside by the Bank in a separate account to be opened with the Bank and shall be appropriated towards reimbursement to the Bank in the event of the said contingent liability/ies arising or becoming due and payable and are paid by the Bank.

(ii) In the event of the said contingent liability or liabilities not arising or becoming due and payable the amount allocable to liability or liabilities which is/are not required to be paid by the Bank shall be treated as part of the surplus realisation from the hypothecated security; The surplus realisation, if any, from any hypothecated security including any surplus becoming available on account of any contingent liability or liabilities not arising or becoming due and payable as aforesaid shall be applied for repayment to the Bank of all other debts and liabilities of the Borrower due and payable to the Bank on any other account or accounts whatsoever whether actually or contingently, alone or jointly with other/s and whether as principle or surety. (iii) In the event of monies so available being insufficient to pay to the Bank all the monies due to it as provided in (i) above the Borrower shall be liable forthwith on production to the Borrower of an account to be prepared and signed as provided herein (which shall be conclusive) to pay the balance appearing due to the Bank. Without prejudice to the obligation of the Borrower, the Bank shall be entitled (but shall not bound) to apply any other money or monies in the hands of the Bank standing to the credit of or belonging to the Borrower towards satisfaction of the balance then remaining due to the Bank (iv) Provided however, that in respect of monies due in Cash Credit Account, or accounts of the Borrower, the principle sum shall be treated inclusive of interest accumulated and applied to such account and amount due at the foot of the account without any distinction thereof from principle as per prevailing Banking practice. 14. Pending seizure and/or taking possession of by the Bank, all the Hypothecated Premises and all proceeds of sale of other realisations and proceeds of insurance thereof and all documents under this security shall always be kept

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distinguishable and held as the exclusive property of the Bank specifically appropriated to the security to be dealt with only under the directives of the Bank and the Borrower shall not without the prior written permission of the Bank create any mortgage, charge, lien or encumbrance upon or over or affecting the same or any part thereof.\ 15.1 The Borrower shall promptly submit to the bank particularly monthly or as often as may be required stock statement and also statements of book-debts and particulars of other Hypothecated Premises together with the list of current insurance polices and amounts insured verified by certificates of the Borrower or the Manager for the time being of the Borrower that the quantities, amounts, value and marks stated in the statements are correct and that all the tangible assets are fully covered by insurance and containing such other certificates and particulars as may be specified by the Bank and will also furnish and verify all financial and other statements, reports, returns, certificates, accounts, documents, particulars and information and such other periodical data as may be required by the Bank. 15.2 The Borrower will also execute all documents, transfers, assignments and endorsements and do all acts deeds and things which the Bank may require for vesting the Hypothecated Premises or any of them in favour of the Bank and to render the same readily realizable or transferable by the Bank at any time and also for giving full effect to this security. 15.3 The Borrower hereby irrevocably appoints the Bank to be attorney of and for and in the name of the Borrower to do all such acts, deeds and things and execute all such documents, transfers, assignments, endorsements whatever which the Borrower may be required by the Bank to do or execute under or in respect of this Agreement in the event of the Borrower failing to do so within a week from the date of demand by the Bank for such purpose. 16. The security hereby created shall be a continuing security for the balance from time to time due to the Bank on the said banking facilities and for all monies, indebtedness and liabilities hereby secured, and none of the accounts in respect of the said banking facilities is to be considered to be closed for the purpose of this security and the security is not to be considered exhausted by reason of the said accounts or any of them being brought to credit by payment made into the said accounts(s) at any time or from time to time or of its/ their being drawn upon to the full extent or its/their being reduced or extinguished and afterwards reopened. 17. Subject to the provisions of clause 14 hereof, any general or special lien to which the Bank is or may be by law or otherwise entitled or any rights or remedies of the Bank in respect of any present or future indebtedness or liabilities or guarantee obligations of the Borrower to the Bank shall continue to be in force and effect and it shall be open to the Bank to enforce or have recourse to such rights or remedies or securities without being bound to enforce any security, right or remedies under this agreement. 18. The Borrower hereby covenants with the Bank that all the Hypothecated Premises are the absolute property of the Borrower at the sole disposal of the Borrower and free from any prior charge or encumbrance and that all future stocks, debts, assets and properties that will be hypothecated shall be likewise the unencumbered and absolute and disposable property of the Borrower. 19. The Borrower shall carry on the entire banking transactions of its business through the Bank only wherever they are having their office. Such banking business of the Borrower at other centers also shall, as far as practicable , be placed with the Bank. 20. The Borrower shall at the beginning of each quarter in the calendar year advise the Bank the aggregate amount that the Borrower proposes to draw from the Bank during the quarter and upon being advised by the Bank of its commitment, the Borrower shall pay to the Bank any commitment charge that may be agreed upon from time to

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time between the Borrower and the Bank. In default of such payment, the Bank may without prejudice to its rights hereunder debit the amount of such commitment charge to any of the banking facility account(s)namely the Cash Credit/Overdraft or any other account(s) of the Borrower and the same shall thereupon from part of the moneys hereby secured. 21. The Borrower has and shall continue to have necessary powers to enter into this agreement and do all things incidental therto and the Bank shall not be bound to enquire into the powers of the Borrower and this security shall not be affected by reason of absence or deficiency or excess or irregularity in the exercise of any powers of the Borrower.\ 22. The officers or agents or nominees acting or purporting to act on behalf of the Borrower in this respect and executing these documents have and shall continue to have the necessary powers from the Borrower and further that the Bank shall not be bound to enquire into the powers of any officer or agent acting or purporting to act on behalf of the Borrower and this security shall not be affected by reason of absence or deficiency or excess or irregularity in the exercise of any powers of any such officers or agents aforesaid. 23. Any delay in exercising or omission to exercise any right, power or remedy exercisable by the Bank under these present shall not impair any such right, power or remedy or be constructed to be an acquiescence in any default, nor shall the action of the Bank in respect of such default or any acquiescence affect or impair any right, power of remedy of the Bank in respect of any other or subsequent default. 24. This Agreement shall not prejudice the rights or remedies of the Bank against the Borrower irrespective and independent of this agreement in respect of any other advances made or to be made by the Bank to the Borrower. The Borrower agrees that in the event of the Bank receiving intimation from the Reserve Bank of India of any default by the Borrower in payment of any one or more instalments of the loan and/or interest due and payable to any financial institution/s from whom the Borrower has taken any advance or otherwise borrowed any moneys, the Bank shall be entitled to stop any further operations by the Borrower in the said banking facility account(s) and the Bank shall be at liberty to refuse to make payment of cheque/s drawn by the Borrower to the debit of such account(s) and the Borrower shall not hold the Bank responsible or liable in any manner by reason of the Bank's refusal to make payment of such cheque/s and the Borrower further agrees that in the event of there being any fixed deposit account, recurring deposit account or anytime deposit account with the Bank in the Borrower's name ,the Bank will be at liberty to withhold payment to the Borrower of the amount/s deposited with the Bank on the date/s of maturity thereof and the Bank will be entitled in its sole discretion to appropriate the balance or proceeds of such deposit account/s on or before maturity and towards any advances/s granted by the Bank to the borrower or remit the balance in any of the said facility accounts or the proceeds of such deposit accounts as the case may be ,to any financial institution/s from whom the Borrower may have taken advance or borrowed monies and has defaulted in making payment thereof or interest thereon as aforesaid.

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Annexure-12 to Chapter-61 LDOC 19 HYPOTHECATION OF MOVABLE MACHINERY ---- SCBANK

Place

___________branch

Date:____________

AN AGREEMENT made this_____________day of ___________________________ BETWEEN__________________________________________________________________________ __(hereinafter called the “Borrower”) of the one part and SC BANK, incorporated in and having aplace of business amongst other place in __________________(hereinafter called “the Bank') of the other part WHEREAS the Borrower has applied to the Bank to open a Cash Credit/Loan /other account with the Borrower in the Books of the Bank at ________________ and the Bank has agreed to do so upon being secured in the manner hereinafter appearing and upon being further secured by a single joint and several Demand Promissory Note signed by the Borrower, viz______________________ __________________________________________________________________________________ ______________________and upon being further secured by all movable machinery of the Borrower including all stocks and spare parts, both present and further, belonging to the Borrower being and lying in the Borrower's premises or godowns of or returned by the Borrower or otherwise used in connection with the business of the Borrower. NOW IT IS HEREBY AGREED as follows:1.

This Agreement shall operate as a security to the Bank in addition to any other security already held by the Bank for the repayment to the Bank at____________________on demand of the balance due to the Bank by the Borrower at any time or ultimately on the closing of the said Accounts upto the sum of Rupees _________________________________________________ (Rs.____________________). The expression “the balance due to the Bank” in this and the subsequent clauses of this Agreement shall be taken to include the Principle moneys from time to time due to on the said Accounts, whether demanded or not and also all interest, calculated from day to day in manner and at the rate hereinafter mentioned and the amount of all cost (between attorney and client),charges and expenses of the Bank which the Bank may have paid or incurred in any way in connection with the hypothecated premises described in clause 2 here of including the sale or disposal thereof and any other sum that is hereunder declared to be debitable to the account.

2.

The Borrower hereby hypothecates and charges to the Bank all movable machinery of the company, including all stocks and spare parts, both present and future, belonging to the Borrower being and lying in the Borrower's Premises or godown of or rented by the Borrower or otherwise used in connection with the business of the Borrower (but excluding claims such as claims on Life Insurance policies , Goodwill, Outstandings, Debts, Claims for arrears of Rent, Benefit of executors contracts and share in partnership) as security for the payment to the Bank on demand of the balance due to the Bank by the Borrower on the Cash Credit/Loan /other Account. All such movable machinery of the Borrower 848 - III

including all stocks and spare parts, both present and future, belonging to the Borrower being and lying in the Borrower's premises or godown of or rented by the Borrower or otherwise used in connection with the business of the Borrower are hereinafter referred to as “the hypothecated premises”. 3.

The Borrower hereby engages that all sums drawn from the Bank in the said Cash Credit/Loan other Accounts shall be solely applied for the ordinary purposes of the Business of the Borrower as now conducted.

4.

It is distinctly understood that all advances made under their above Cash Credit/Loan/other accounts and the balance due to the Bank shall be repayable to the Bank on demand.

5.

Interest at the rate of ________% over Base rate of the Bank with a minimum of _____ % per annum with monthly/quarterly/half-yearly/yearly rests or at such rate or rates as the Bank may specify to the Borrower in writing in accordance with the Bank's Prime Lending Rate and the Borrower's credit rating with the Bank from time to time shall be calculated on the amount due on the said account. It is agreed that all interest calculated as above shall accrue due from day to day and shall be debited to the account at the end of each and every month or day to day and shall be debited to the be account at the end of each and every month or on the 31stMarch, 30th June, 30th September and on the 31st December in each year and thenceforth carry interest at the like rate and that in the event of the Bank making demand for payment on any not being the date not being the date of expiration of any such (month/quarter/half year/year)the Bank shall be at liberty to debit in the account all interest down to the rate of demand and to include the same in the demand for payment. And that the total amount demanded shall continue to carry interest as aforesaid until payment with monthly/quarterly/half yearly/yearly rests. And that the Borrower shall at all times accepts the Bank's figures as correct (manifest errors excepted ) in or out of Court.

6.

The Borrower agrees that the balance due to the Bank on the said account at any time shall be payable on demand to the Bank at ________________ at the Office of the Bank together with all further interest calculated as above provided at the rate above mentioned together with the amount of all further charges and expenses (if any) to the date of payment PROVIDED that nothing in this clause shall be deemed to prevent the Bank from demanding payment of the interest for the time being due or other amounts hereby made debitable to the said account without at the same time demanding payment of the balance due to the Bank exclusive of such interest or other amounts.

6.

A The Borrower agrees and undertakes to deposit from time to time all the sale proceeds of the hypothecated premises as and when the same are sold and undertakes not to open any advance or deposit account with any other bank/s without the prior consent in writing of the Bank during the continuance of this advance. The borrower is aware that relying on the aforesaid representations, the Bank has agreed to grant the borrower the advance against the security of the hypothecated premises.

7.

The hypothecated premises shall at all times during the currency of this security and so long as any money shall remain due to owing in the said Cash/Credit/Loan/other Accounts be maintained in good and saleable condition and insured and kept insured by and at the expense of the Borrower against fire and such other risks as may be required by the Bank or be required by law to the full extent of the value thereof in an Insurance Office or Offices approved by the Bank in the name of the Bank or in the name of 849 - III

the Borrower and assigned to the Bank, and in either case the said Policies shall be handed to the Bank, The borrower shall duly and punctually pay the premia due to the policies at least one week before the same shall have become due or payable and hand the receipts to the Bank and the Borrower agrees not to arise at any time any dispute as to the amount of the insurable interest of the Bank. If the Borrower makes default in effecting such insurance as aforesaid or renewing any policy or in payment of such premia or in keeping the hypothecated premises so insured or in delivering the bank the policies or receipts for the premia it shall be lawful for (but not obligatory) the Bank to effect such insurance or to renew or to pay such premia and to keep the hypothecated premises insured and to debit the expenses incurred by the Bank for the purpose to the said account and the same shall be treated as advances secured by this Agreement. The Borrower agrees to pay the same on demand with interest as provided in clause 5 hereof. All sums received under any such insurance as aforesaid shall after deduction there out of all expenses be applied in or towards the liquidation of the balance due to the Bank for the time being and in the event of there being a surplus the same shall be applied as provided in clause 18© hereof . The Borrower agrees that if any moneys under any such insurance are received by the Borrower, he will pay the same forthwith to the Bank. In the event of the movable machinery hypothecated to the Bank and insured as aforesaid being destroyed by fire or otherwise howsoever, the bank shall be entitled to negotiate and settle the claim in respect thereof arising under the Insurance Policy with the Insurance Company without any reference as if the borrower himself has made the claim and the borrower will not dispute the Bank's right to negotiate and settle the claim with the Insurance Company or question the settlement. 8.

It shall be lawful for the bank and its Agents without notice and at the expense in all respects of the Borrower to enter at any time into or upon the offices, godowns or jaithas of the Borrower or places of storage of any of the hypothecated premises for the purpose of taking inspection of or checking the hypothecated premises and taking account and inspecting of the books of account of the Borrower (which the Bank is hereby authorized to do) and it shall also be lawful for the Bank from time to time as it may see fit to have all or any of the hypothecated and charged as aforesaid valued by an appraiser or other valuer to be appointed by the Bank and all such expenses and the fees and expenses of such valuation shall be treated as advance by this Agreement debited to the Borrower in the said Cash Credit/Loan/other Account as be payable accordingly and shall until payment be treated as an advance secured by this Agreement.

9.

The Borrower shall, if so required by the Bank, cause and in default the bank may itself cause a Board or Boards with the name of the Bank legibly and distinctly printed or written thereon to be placed and at all times maintained in a conspicuous position upon and within all godowns, jaithas or other places of storage into or upon which any of the hypothecated premises for the time being hypothecated and charged as aforesaid are or shall be brought during the continuance of this agreement.

10. The Borrower shall forthwith upon obtaining leave or license to occupy any godown or jaitha or any place containing any of the hypothecated premises which is not his own property, if so required by the Bank, register the same in the name of the Bank and hand the receipts for any rents or other dues payable in respect thereof to the Bank and keep the Bank indemnified against all liability in consequence of such transfer or registration in the Bank's name and any sum becoming payable to the Bank by reason of such 850 - III

indemnity shall be debited to the Cash/Credit/Loan /other Accounts and shall carry like interest and shall be treated as an advance secured by this Agreement. 11. The Borrower shall from time to time on demand by the Bank in writing at anytime furnish to the bank a full and correct written statement with such particulars as the Bank ,may require of the hypothecated premises together with the market value or (where the market value exceeds normal value ) the normal value thereof and produce such evidence in support thereof as the Bank may from time to time require. The Borrower shall also without demand render unto the Bank weekly and on the first day of each Calendar month a similar written statement. 12.The Borrower shall on demand in writing by the Bank forthwith deliver to the Bank on account of such part of the hypothecated premises as shall be in course of transit to _________ or else where and shall on demand by the bank deliver the Railway Receipts or other documents of title in respect therof duly endorsed to the Bank or as the Bank shall direct. 13. The Borrower will so long as any moneys due under the said Cash/Credit/Loan/Demand Loan Account or interest thereon remain unpaid, carry on and conduct the business of the Borrower and use the hypothecated premises in a proper and efficient manner. 14. The Borrower shall not remove or dismantle any of the movable machinery including all stores and parts thereof or other hypothecated premises now in use in the Borrower's premises without the consent in writing of the Bank except in any case where such removal or dismantling shall in the opinion of the Borrower be rendered necessary by reason of the same being worn out, injured, damaged or broken by others of a similar nature and of at least equal value, and shall also whenever necessary renew or replace all such plant, machinery or other hypothecated premises with other of a like nature and values as now used or henceforth to be used for the purpose of or in connection with the business of the Borrower when and as the same shall be worn out, injured, damaged or broken. 15. The Borrower will keep all the plant, machinery and other hypothecated premises in a good state of repair and in perfect working order and condition and further that all such movable machinery, including all stores and parts thereof, and other hypothecated premises at present or for the time being not in use will be properly coated with rust proof preservatives and oiled, packed or encased and stored or housed in proper rain and waterproof premises. 16. This Agreement is made on the faith (a) of the declaration which the Borrower hereby makes that the hypothecated premises now and from time to time hereafter comprised in the security hereby created are and will at all times be the absolute property of the Borrower (except for and subject to the security hereby created) and free from other trust, pledge, lien, claim, or encumbrances and (b) on the undertaking hereby given by the Borrower, that the Borrower will not create a further mortgage or lien or any charge upon the hypothecated premises during the currency of the said Cash/Credit/Loan /other Account. 17. If the Borrower shall fail to carry out and perform any of his obligations under these presents or in the event of any damage occurring to the hypothecated premises from any cause whatsoever or if any event 851 - III

shall happen or is believed by the bank to have happened so as in the opinion of the Bank to impair the security hereby created or the credit, of the borrower or, if the Bank shall be of opinion that the security hereby created is otherwise imperiled (as to all or any of which matters the opinion of the Bank shall be conclusive) it shall be lawful for the Bank, its Agents and Nominees with a view to obtaining possession for and on behalf of the Bank at all times and without assigning any reasons and without any previous notice to the Borrower but at the Borrower's risk and expense and if so required as Attomey for and in the name of the Borrower ( but not so as to alter the character of the possession which shall be the possession of the Bank) to enter any place where the hypothecated premises or any of them may be and taken charge and or possession of all or any part of the hypothecated premises and the Borrower shall afford every facility for placing and shall place the hypothecated premises and every part thereof as the Bank may require in the exclusive possession of and the exclusive control of the Bank and in such manner that such possession and control shall be apparent and indisputable. The Borrower shall on demand deliver to the Bank the keys of any place in which any of the hypothecated premises may from time to time be stored. In default the Bank may take any necessary steps to open and close the said place without any further notice At any time after taking possession the Bank may place the said godown or godowns or other place or places of storage in charge of a clerks and/or durwan or durwans who shall hold the possession of the hypothecated premises and the Borrower shall pay regularly on or before the first of every month the monthly salaries of such clerks and durwans who may be placed by the Bank in charge of the said godown or godowns or other places of storage to hold possession for and on behalf of the Bank of hypothecated premises and the Borrower shall provide suitable lodgings in the compound of the said godown or godowns for such clerks / durwans and shall pay upon demand all the traveling, board and housing accommodation cost and expense of or in connection with the sending at any time of a representative or representatives of the Bank to such place or places to inspect the said goods and the fees and expenses of an appraiser or valuers. Any moneys payable by the Borrower (under this clause shall until payment by the Borrower) be debited to the Borrower in the said Cash Credit/Loan/other Accounts and be payable accordingly and shall until payment be treated as an advance secured by this Agreement. 18. The Bank shall not be in any way liable or responsible for any loss, damage or depreciation which the hypothecated premises may suffer or sustain on any account whatsoever while the same are in possession of the Bank during the continuance of this agreement or thereafter and all such damage or depreciation shall be wholly on account to the Borrower howsoever the same shall have been caused nor shall the Bank be responsible for any shortage resulting from/arising out of theft or pilferage or otherwise however notwithstanding that the hypothecated premises may be in the possession of or under the control of the Bank. 18. (a) It shall be lawful for the Bank at any time after taking possession of the hypothecated premises without assigning any reason after 48 hours' notice to the Borrower demanding payment (which the Borrower hereby agrees to be reasonable notice) or at any time or times thereafter (with prejudice to the Bank's right of suit or any other right against the Borrower) to recover, receive, appoint Receivers of or remove and/or sell either by public auction or private contract subject to such conditions as the Bank may deem fit to otherwise dispose of or deal with at any time or times the hypothecated premises or any part or parts thereof and to enforce, realize, settle, compromise and 852 - III

to deal with at any rights or claim regarding any of the hypothecated premises without being bound to exercise any of these powers or liable for any losses in the exercise thereof and notwithstanding there may be any pending suit or other proceeding the Borrower undertakes to transfer and deliver to the Bank all relative contracts securities, bazaar chits, bills, notes, hundies and documents. The Borrower hereby agrees that the Bank shall be entitled to admit, reject to arbitration or compromise without consulting the Borrower any claims by any other person to the hypothecated premises or any part thereof and that the Borrower shall be bound by the Bank's decision and that any loss damage or costs & expenses that may arise or be caused by such decision shall be at the risk and on account of the Borrower. b) The Bank shall apply the net proceeds of sale of the premises in satisfaction so far as the same shall extend of the balance due to the Bank or so much thereof as shall remain unpaid including interest at the rate aforesaid until payment and including all costs as between Attorney and Client charges and expenses incurrent by the Bank on any account whatsoever including Sales. If the net sum realised by such sale be insufficient to cover the balance due to the Bank, the Borrowers shall be liable forthwith on production to the Borrower of an account to be prepared and signed as provided in clause 18 (e) hereof (which shall be conclusive) to pay the balance appearing due to the Bank. Without prejudice to such obligations of the Borrower the Bank shall be entitled (but shall not be bound) to apply any other money or moneys in the hands of the Bank standing to the credit of or belongings to the Borrower(or if there be more than one Borrower or if there be more than one partner in the Borrower firm then to the credit of or belonging to any one or more of such persons) or any money which the Borrower (or which any one or more of them as the case may be) may then or at any time thereafter be entitled to draw from the Bank under any Loan, Cash Credit, Overdraft or other arrangement or goods the property of the Borrower (or any one or more of them as the Case may be) stored in the Bank's premises or godowns in or towards payment of the balance for the time being due to the Bank . And in the event of such money or moneys being insufficient for the discharge in full of such balance, the Borrower shall be liable forthwith on production to the Borrower of an account to be prepared and signed as in the clause 18 (e) hereinafter provided (which shall be conclusive) to pay any balance which may appear to be due to by the Borrower thereon PROVIDED ALWAYS that nothing herein contained shall be deemed to negative, qualify or otherwise prejudicially affect the right of the Bank (which it is hereby expressly agreed the Bank shall have) to recover from the Borrower the balance for the time being remaining due from the Borrower to the Bank upon the said Cash Credit/Loan /other Account notwithstanding that all or any of the hypothecated premises may not have realised. c)

In the event of there being a surplus available of the net proceeds of such sale after payment full of the balance due to the Bank it shall be lawful for the Bank to retain and apply the said surplus together with any other money or moneys belonging to the Borrower for the time being in the hands of the Bank in or under whatever accounts as far as the same shall extend against in or towards payment of liquidation of any and all other moneys which shall be or may become due from the Borrower whether solely or jointly with any other person or persons, firm or company to the Bank by way of loans, discounted bills, letters of credits, guarantees, charges or of any other debits or liability including bills, notes, credit, and other obligations current though not then due or payable 853 - III

or other demands legal or equitable which the Bank may have against the Borrower or which the law of set-off or mutual credit would in any case admit and whether the Borrower shall become or be adjudicated bankrupt or insolvent or be in liquidation or otherwise with interest thereon from the date on which any and all advances in respect thereof shall have been made at the rate of respective rate at which the same shall have been so advanced. d) If after the settlement of all claims of the Bank against the Borrower any surplus shall remain, the Bank shall pay such surplus to the Borrower. e)

The Borrower agrees to accept without question in and out of Court as conclusive proof of the amount realised by any such sale as aforesaid and of any sum claimed to be due from Borrower to the Bank under this Agreement and of the costs and expenses incurred in connection therewith a statement account made out from the papers and/or Books of the Bank and signed by the Manager or the Agent or the Accountant or other duly authorized officer of the Bank without the production of any other voucher, document or paper.

19. This agreement and the securities here in referred to shall be security for the payment by the Borrower of the balance due to the Bank from time to time and also of the ultimate balance with interest thereon plus costs and expenses to become payable on the said Cash Credit /Loan /Other/Account. 20. The Borrower shall duly and punctually pay perform and observe all rents, rates taxes, assessments and other outgoing whatsoever convenient and obligations which ought to be paid or observed or performed by the Borrower in respect of the premises in which any of the hypothecated premises may from to time to time be situated. 21. This Agreement is not to prejudice the rights or remedies of the Bank against the Borrower irrespective and independent of this agreement in respect of any other advances made or to be made by the Bank to the Borrower. The Borrower agrees that in the event of the Bank receiving intimation from the Reserve Bank of India of any default by the Borrower in payment of any one or more instalments of the loan and/or Interest due and payable to any financial institutions/s from whom the Borrower has taken any advance or otherwise borrowed any moneys, the Bank shall be entitled to stop any further operations by the Borrower in the said loan/Cash Credit/other account and the Bank shall be at liberty to refuse to make any payment of any cheque drawn by the Borrower to the debit of such account and the Borrower shall not hold the Bank responsible or liable in any manner by the reason of the Banks refusal to make payment of such cheques; and the Borrower further agrees that in the event of there being any fixed deposit account, recurring deposit account, or any time deposit account with the Bank in the Borrower's name, the Bank will be at liberty to withhold payment to the Borrower of the amount/s deposited with the Bank on the dates of maturity thereof, and the Bank will be entitled in its sole discretion to appropriate the balance or proceeds of the time deposit account/s on the due date/s or before maturity for any advance/s granted by the Bank to the Borrower or remit the balance in the said loan/Cash Credit/other account or proceeds of time /demand deposits account/s ,as the case may be , to any financial institution/s from whom the Borrower may have taken advance or borrowed moneys and has defaulted in making payment thereof interest thereon as aforesaid.

854 - III

22. Any notice in writing required to be served hereunder shall be sufficiently served if addressed to the Borrower at his address registered in the Bank or in the event of any such address being registered, at the last known place of residence or business and left at such address or place or forwarded to him by post at the address or place aforesaid. A notice sent by post shall be deemed to be given at the time when in due course of post it would be delivered at the address to which it is sent , and in proving such notice when given by post it shall be sufficient to prove that the envelope containing the notice was posted and a certificate signed by the Bank's local Manager or Agent or Accountant or other authorized Officer that the envelope was so posted shall be conclusive. If for any reason the Borrower cannot be given any such notice, the same inserted once in any advertisement in a newspaper circulating in the District of the Bank's office shall be deemed to have been effectually given and received on the day on which such advertisement appears. 23. If the Borrower be more than one individual all shall be bound hereby jointly and severally and if the Borrower shall be a firm, such firm and all members from time to time thereof and all remaining members shall be bound hereby notwithstanding any change in the constitution or style thereof and whether the firm shall consist of or be reduced to one individual. No changes whatever that may take place in the constitution of the Borrower or Bank (whether by amalgamation or otherwise) shall impair or discharge the liability of the Borrower hereunder. The Borrower (if a firm) shall not however make any change in the firm without previous reference to the Bank. 24. The Borrower hereby agrees on demand by the Bank in that behalf to execute such documents in favour of the Bank as may be necessary or advisable to hypothecate or further assure the hypothecated premises in favour of the Bank. 25. The Borrower also agree that notwithstanding anything herein before contained, the Bank shall not be bound to allow or continue the Cash Credit/Loan/Other Accounts to any extent or for any time other the Bank shall in its absolute discretion see fit to do. IN WITNESS WHEREOF the Borrower has executed these presents the day and year above written.

855 - III

Annexure-13 to Chapter-61 LDOC 20 INSTRUMENT OF HYPOTHECATION OF VEHICLE Stamp as on agreement

-----------SCBANK

Place

_________ branch.

Date:_________

AN AGREEMENT MADE at ________________ the __________day of _____________________ BETWEEN___________________________________(hereinafter called the “Borrower” which expression shall include his/her heirs, executors, administrators) of the ONE PART and SC BANK having its Head Office at State of …….. and a Branch Office amongst other places at _________________(hereinafter referred to as “the Bank” which expression shall include the successors and assigns ) of the OTHER PART.\WHEREAS the Borrowers applied to the Bank for a loan of Rs. __________ for the purpose of enabling the Borrower to purchase therewith from __________________________________ _________the news/second hand __________________ (name of vehicle described in the Schedule `A` hereunder written which the Bank agreed to do upon having repayment thereof secured on the terms and conditions hereinafter mentioned. NOW IS HEREBY AGREED as follows :1.

The Borrowers to open and maintain with the Bank a Current or Savings Bank Account and keep the account in sufficient funds and hereby authorizes the Bank to debit the same with the amount of the loan as and when it falls due.

2.

The Borrowers shall repay the said loan of Rs. _____________by _________________equal monthly/quarterly/ half-yearly/yearly instalments of Rs. ___________________each the last of such instalments being of Rs. _______________ as set out in Schedule `B` hereunder written, the first, of such instalment being payable on the _____________________day of _______, and the subsequent instalments being payable on the __________________day of each succeeding month/ quarter/ halfyear/yearly until entire loan is repaid in full.

3.

The Borrowers shall pay interest on the loan amount at the rate of_________% over Prime Lending Rate of the Bank with minimum ___________ % p.a. with Monthly /Quarterly / half yearly rests. st th th st Payment on the 31 March,30 June,30 September and 31 December in each year.

4.

The Borrower doth hereby hypothecate by way of first charge in favour of the Bank all that the said vehicle which is described in the Schedule `A` hereunder written (hereinafter called `` the hypothecated article `` which expression shall include all fittings, tools, accessories, spares and parts whatsoever pertaining to the said vehicle and all replacements or additions made therein or thereto from time to 856 - III

time) as security for due repayment to the Bank of the said loan of Rs.______ by the instalment on the days and manner aforesaid and for interest at the rate stated in Clause 3 hereof and for all costs, charges and expenses (the legal costs being between Attorney and client) incurred by Bank for the protection, preservation, defence and perfection of this security and for attempted or actual realisation thereof. 5.

That the Borrowers shall not during the continuance of this agreement, sell, transfer, dispose of, pledge, hypothecate or otherwise charge or encumber, lend or in any manner part with the possession of or deal with the hypothecated articles nor shall the borrowers do or permit to be done any act whereby the security given to the Bank hereunder shall be in any way prejudicially affected or whereby any distress or attachment or execution may be levied thereon by any creditor or other person.

6.

So long as any money remains due in respect of the said loan, the Borrower shall not use or suffer the same to be used contrary to law and shall not use or allow to be used the said vehicle for any reliability trial or racing competition, without the permissions of the Bank.\

7.

The Borrower undertakes at all time to keep the hypothecated article and all parts thereof and all equipment therein in thorough working order and in good repair and condition and to make no major alterations therein without the previous consent of the Bank and to keep the hypothecated article fully and regularly serviced. Provided always that the Borrower shall not have or be deemed to have any authority to create a lien upon the same in respect of such repairs.

8.

The Borrower shall notify the Bank at once of any change in his own address and the address of the Premises to which the hypothecated article may be moved subject to the provisions of Clause 6 above.

9.

The Borrower hereby empowers the Bank and any person or persons from time to time authorized by the Bank in that behalf and without previous notice to the Borrower to enter any premises whatsoever for the purpose of inspection of the hypothecated article or taking possession thereof pursuant to the power herein contained.

10. The Borrower shall whenever required by the Bank allow the Bank or its authorized agent to inspect and/or value the hypothecated article. All costs, charges and expenses incurred by the Bank of and incidental to such inspection and valuation shall to paid to Bank forthwith on demand (the Bank's statement being conclusive) and until payment the same shall with interest at the rate of ___% p.a. be a charge upon the hypothecated article. Any such valuation shall be conclusive and binding on the Borrower. 11. The Borrower shall pay all rents, taxes, rates and outgoings in respect of the premises in which the hypothecated article is or may be garaged and also all taxes, licence duties , fees, registration and other charges payable in respect of the hypothecated article either to the Government or to the Municipality or to any local /or public body or authority. In default the Bank may (but shall not be bound to) pay the same without prejudice to any of its right hereunder. 12. The Borrower shall at his own expenses keep the hypothecated article insured against all such risks as may be required by law and also against all such further and other risks as the Bank shall from time to 857 - III

time require for the full amount required by the Bank in one or more insurance office/s approved by the Bank in the joint names of the Borrower and the Bank and shall pay the premises payable in respect thereof atleast one week before the same shall have become due or payable and shall deliver to the Bank the policies of insurance (duly assigned to the Bank if so required by it) and shall keep on foot and maintain such insurances throughout the continuance of the security and deliver to the Bank the renewal receipts. The Borrower shall forthwith notify the Bank of any loss of or damage to the hypothecated article or any parts or accessories by theft, fire, collision, accident or any other cause and shall on the happening of any such event lodge the necessary claim with the Insurance Company within the prescribed time and shall also take steps to have the hypothecated article put in thorough working order and in good repair and condition as soon as possible. All moneys receivable by Borrower under the Insurance Policy shall be applied by him in towards repayment of the amount for the time being due hereunder to the Bank. 13. If default is made by the Borrower in payment of any rents, rates, taxes, duties fees, charges and out goings or any premium or any costs, charges and expenses of keeping the hypothecated article, its parts and accessories in good repair and condition and in thorough working order or for any other purpose or any other sum of money payable by the Borrower hereunder the Bank may (but shall sums not be bound to) pay the same without prejudice to its rights hereunder and all such sums of money shall be repaid by the Borrower forthwith on demand by the Bank and Shall until repayment with interest at the rate aforesaid be a charge on the hypothecated article. 14. Notwithstanding anything herein contained the whole advance or the entire balance thereof outstanding at the time become forthwith due and payable by the Borrower to the Bank and the Bank will be entitled to enforce its security hereunder upon the happening of any of the following events, namely: a)

any instalment of the said loan being unpaid upon the respective due date for payment thereof:

b) the Borrower committing any breach or default in the Performance or observances of any term or condition contained in these presents. c)

Any execution or distress or other process being enforced or levied upon or against the whole or any part of the Borrower's account with the Bank on the hypothecated article or any other property of the Borrower.

d) The Borrower being adjudicated insolvent or taking advantage of any law for the relief of insolvent debtors or entering into any arrangement or composition with his creditors or committing any act of insolvency; e)

If the Borrower shall without the consent in writing of the Bank create or attempt or purpose to create any mortgage, pledge hypothecation or lien or encumbrances on the hypothecated article.

f)

If any event or circumstances shall occur which shall in the opinion of the Bank be prejudicial or endanger or be likely to endanger its security hereunder.

858 - III

15. If the Borrower makes any default in payment of any instalment of the said loan on the respective due dates for payment thereof as mentioned above for one week after the same shall have become due whether demanded or not or if any event or circumstances shall occur which shall in the opinion of the Bank be prejudicial to or endanger or be likely to endanger this security or if any event or if any event or circumstances mentioned in Clause 14 above happens or occurs the Bank if it thinks fit shall be entitled at the risk and expense of the Borrower without any notice at any time or times after such default or event or circumstances occurs or happens to enter (and for that purpose to do any necessary act, deed or thing) any place where the hypothecated article may be and to inspect, value, insure and take charge or possession of the hypothecated article . And to seize, recover, receive, appoint receivers of or remove and/or sell by public auction or private contract or otherwise dispose of or deal with the hypothecated article. And to enforce realise / settle compromise and deal with any rights aforesaid without being bound to exercise any of these powers or being liable for any losses in the exercise thereof and without prejudice to the Bank's rights and remedies of suit or otherwise and notwithstanding there may be any pending suit or other proceedings. The Borrower hereby also agrees to accepts the Bank's accounts of sales and realisation and to pay an shortfall or deficiency thereby shown; And if the net sum realised by such sale shall be insufficient to pay amount secured, the Bank shall be at liberty to apply any other money or moneys in the hands of the Bank standing to the credit or belonging to the Borrower towards the payment of the balance. And in the event of there being still deficiency, the Borrower shall forthwith pay such deficiency provided that nothing herein contained shall in any manner prejudice or affect the Bank's remedy against the person of the Borrower. 16. In the event of there being a surplus available out of the net proceeds of such sale after payment in full of the balance due to the Bank it shall be lawful for the Bank to apply the said surplus together with any other money or moneys belongings to the Borrower for the time being in the hands of the Bank in or under whatever accounts as far as the same shall extend in or towards payment or liquidation of any and all other moneys which shall be or becomes due to from the Borrower whether solely or jointly with any other persons, firm or company to the Bank by way of loans or overdraft or any other demands legal or equitable which the Bank may have against the Borrowers or which the law of set-off or mutual credit would in any case admit and whether the Borrower shall become or be adjudicated bankrupt or insolvent or otherwise and interest thereon from the date on which any and all advance or advances in respect thereof shall have been made at the rate or respective rates at which the same shall have been so advanced. 17. The Borrower hereby declares and guarantees that the hypothecated article is and shall remain the absolute and unencumbered property of the Borrower with full power of disposition there over. 18. The Borrower shall furnish and certify all statements and information from time to time and as required by the Bank and give and execute any necessary documents required to give effect to this security. 19. The Borrower agrees to accept as conclusive proof of the correctness of any sum claimed to be due from him to the Bank under this Agreement a statement of account made out from the Books of the Bank and signed by the Accountant and/or other duly authorized officer of the Bank without the production of any 859 - III

other voucher document or paper. 20. The Bank shall not in any way be liable or responsible for any damage or depreciation which the hypothecated article or any part thereof, may suffer or sustain on any account whatsoever while the same shall at any time come into possession of the Bank. 21. Nothing herein shall operate to prejudice the Bank's rights or remedies in respect of any present or future security, guarantee, obligation or decree for any indebtedness or liability of the Borrower to the Bank. 22. Any notice by way of request or otherwise hereunder may be given by the Bank to the Borrower personally or may be left at the then or last known place of service of residence of the Borrower (as the case may be) or may be sent by post to the Borrower as aforesaid and if sent by post such notice shall be deemed to have been given at the time when it would be delivered in due course of post and in providing such notice when given by post, it shall be sufficient to prove that the envelope containing the notice was posted, and a certificate signed by the Bank's Local Manager or Agent that the envelope was so posted shall be conclusive. Dated at __________________this _______________ day of _____________

SCHEDULE 'A' (Description of Vehicles) SCHEDULE'B' (Repayment Schedule) Signed and delivered by the above named.

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Annexure-14 to Chapter-61 LDOC 23 REFINANCE ARGEEMENT “A” Stamp as on agreement

Place: _______________

ARTICLES OF AGREEMENT made this the ___________ day of ________ between __________ _____________________________ (hereinafter referred to us “the Borrower “) of the one part and SCBANK having its Head Office at …….…… and a branch office at ______________ (hereinafter referred to as “the Bank”) of the other part. WHEREAS the Borrower has applied to the Bank for a loan/ advance of Rs. _________________ upon the basis of and for the purpose set forth in the Borrower's proposal dated the _________________a copy whereof is annexed to this Agreement (hereinafter called ”the Borrower's proposal”). AND WHEREAS the Bank has agreed to advance such loan upon the terms set forth in these present and in other documents listed in the Schedule hereto (hereinafter collectively referred to as “the security documents”). NOW IT IS AGREED in consideration of the premises as follows:1.

The Borrower's proposal shall be deemed to constitute the basis of this Agreement and of the loan to be advanced by the Bank hereunder and the Borrower hereby warrants the correctness of each and every one of the statements and particulars herein contained and undertakes to carry out the proposals therein set forth.

2.

The Borrower hereby agrees that the said advance shall be governed by the terms contained herein as well as those embodied in the security documents listed in the Schedule hereto except in so far as the security documents may expressly or by necessary implication be modified by these presents.

3.

The Borrower expressly agrees and undertakes that the said advances shall be utilized exclusively for the purpose set forth in the Borrower's proposal and for no other purpose, and that the Borrower will not undertake any expansion programme during the pendency of the advance without obtaining the Bank's prior permission in writing to do so. We understand that it is on the faith of the aforesaid representation that the Bank has consented to entertain the Borrower's proposal for an advance.

4.

The Borrower agrees and undertakes to notify the Bank in writing of any circumstances affecting the correctness of any of the particulars set forth in the Borrower's proposal within _______days after the 861 - III

occurrences of any such circumstance. 5.

The advance shall be repayable by the Borrower as under and the Borrower shall in the meantime pay interest at the rate of ______________% over Prime Leading Rate of the Bank with minimum _______________% p.a. with monthly/quarterly/half yearly/yearly rests or at such rate or rates as the Bank may specify to the Borrower in writing in accordance with the Bank's Base rate and the st th Borrower's credit rating with the Bank from time to time payable every quarter as on the 31 March ,30 th st June, 30 September and 31 December in each year:Amount of Instalment Due on“In case of default in payment of the instalment of principle and/or regular payment of interest on the due dates as agreed to, the Borrower shall be liable to pay additional or penal interest on the amount in default at the rate of ________ % per annum over the rate of interest on the loan, for the period from the due date of instalment/interest to the date on which the amount is actually paid.”

6.

Notwithstanding anything herein or in the security documents contained the whole advance shall become forthwith due and payable by the Borrower to the Bank and the Bank will be entitled to enforce its security upon the happening of any of the following events, namely-(a) any instalment of the principle moneys being unpaid on the due date of payment thereof; (b) any interest remaining unpaid and in arrears for a space of three months after the same shall have become due whether demanded or not. (c) The Borrower's committing any breach or default in the performance or observance of these presents and/or the borrower's proposal and/or security documents or any other term or condition relating to the advance; (d) The Borrower's entering into any arrangement or composition with its creditors or committing any act of insolvency. (e) Execution or distress being enforced or levied against the whole or any part of the Borrower's property; (f) The Borrower's (if a Company) going into liquidation (except for the purpose of amalgamation or reconstruction); (g) Any of the partners of the Borrower (if a firm) being adjudicated insolvent or taking advantage of any law for the relief of insolvent debtors;\ (h) A Receiver being appointed in respect of the whole or any part of the property of the Borrower; (i) The Borrower ceasing, or threatening to cease, to carry on business; (j) The occurrence of any circumstances which is prejudicial to or impairs, imperils or depreciates or 862 - III

is likely to prejudice, impair, imperil or depreciate the security given to the Bank; (k) the occurrence of any event or circumstance which would or is likely to prejudicially or adversely affect in any manner the capacity of the Borrowers to repay the loan; On the question whether any of the above has happened, the decision of the Bank shall be conclusive and binding on the Borrower. 6

A. It is hereby agreed that if any instalment is paid by the Borrower before, it falls due the amount will not be credited to the loan account but will be treated as a separate deposit with the Bank on which interest will be allowed at our current rate on similar deposit.

7.

It is hereby expressly agreed that the Bank shall be at liberty to assign the debt and the benefit of these presents and the securities for the advance and the security documents to the Small Industrial Development Bank of India as security for any refinance obtain by the Bank from the said Small Industrial Development Bank of India in respect of the loan agreed to be advanced by the Bank to the Borrower and the Borrower shall if and whether required by the Bank to do so at the Borrower's own expense do and execute and join in doing and executing all such acts, things, deeds, documents or assurances, as the Bank may require for the effectuation of such assignment.

7.

(a) The Borrower shall not, without the written consent of the Bank sell or otherwise dispose of , or create in any manner any charge, lien or other encumbrance on the security given to the Bank in respect of such advance or create any interest in such security in favour of any other party or person.

8.

The Borrower shall insure to the satisfaction of the Bank and keep insured all property constituting the bank's security against fire and all other risks in a sum equivalent to its full market value in an office approved by the Bank in the joint names of the Bank and the Borrowers or otherwise as the Bank may require and shall duly and punctually pay all premises and shall not do or suffer to be done any act which may invalidate or avoid such insurance and shall deposit the insurance policy and all cover notes, premium receipts and other documents connected therewith with the Bank. Any moneys realised from such insurance shall at the option of the Bank be applied either in reinstating the security or in repayment of the loan advance and interest.

9.

The Borrower shall, upon every reasonable request of the Bank allow the Bank and any nominee, servant or agent of the Bank to inspect the Borrower's premises and plant and the Borrower's book of account for ensuring that the Borrower has duly complied with the terms of the advance.

10. The Borrower will furnish the Bank with all such information as the Bank may reasonably require for the Bank's satisfaction as to due compliance with the terms of the advance and all such periodical reports and information at such times, In such form and containing such particulars, as the Bank may call for, for the purpose of ascertaining the results of the utilization of the said advance. 11. The Bank shall be at liberty to furnish to the Small Industrial Development Bank of India any such information or report, whether received by the Bank from the Borrower or otherwise in the Bank's possession. 863 - III

THE SCHEDULE Date of

Parties

Brief Description

Document

Brief particulars of property Secured by instrument

IN WITNESS where of the Borrower has caused Common Seal to be affixed hereunto and the Bank has set its hands hereunto through its accredited representative on the ________________ day of ___________ The common Seal Of __________________________________________ was hereunto affixed pursuant to a resolution passed by the Board of directors of the Company at their meeting held on __________________in the presence of _________________ SIGNED AND DELIVERED by ...SC Bank by its accredited representative,_______________ acting in the premises on behalf of and under the authority of Board Resolution.

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Annexure-15 to Chapter-61 LDOC 33 GENERAL FORM OF GUARANTEE Stamp as on agreement plus Power of Attorney

...SC Bank,

Place:_____________

_____________ branch

Date: _____________

In consideration of ……. SC Bank (hereinafter called the Bank ) giving credit or accommodation or granting facilities to _________________________________by making/ opening/continuing a Loan/Overdraft/Cash Credit account or by discounting / purchasing and/or negotiating bills with or without security and / or in consideration of the Bank opening and giving Letters of Credit and/or trust receipt facilities in favour of ____________________ on terms and conditions that may be settled between you and the said _____________________________________ at any time or from time to time without reference to me /us, I/We ________________________ jointly and severally hereby agree with and guarantee to you the due payment and discharge on demand of all amounts due and payable to you by _________________ __________________________________ (hereinafter called The “Principal”) at any time and also of all bills, promissory notes or guarantees held by the Bank bearing the Principal's signature in respect of the said facilities together with interest, banking and other charges and expenses that the Bank may in course of its business charge against the Principal together with all relative interest, charges, cost,(as between attorney, advocate, and client) and expenses Provided Nevertheless that our liability under this Guarantees shall not exceed in the whole the sum of Rupees ____________ apart from and in addition to all interest, Banking, Law and other costs, expenses above-referred-to. For the consideration aforesaid I/We jointly and severally further agree as follow: 1.

This guarantee shall be continuing security binding me/us and my/our personal representative until the expiration of three calendar months from the receipt by the Bank of a notice in writing to discontinue in and notwithstanding the discontinuance by or any release or granting of time or indulgence to any one or more of us this Guarantee shall remain a continuing security as to the others and if discontinued by notice this Guarantee shall nevertheless as to the party or parties giving such notice continue to be available (subject to the aforesaid limit of total amount)for and shall extend to all indebtedness and liabilities of the Principal to you at the date of receipt of such notice whether then certain or contingent and whether then payable forthwith or at some future time or time and also for and to all credits then established by you for the Principal and for and to all credit facilities granted and to all cheques, drafts, bills, notes and negotiable instruments drawn by or for the account of Principal on you and dated or purporting to be dated on or before such date although presented to or paid by you after such date and all guarantees signed by the Principal and delivered to you or on or before such date and that in the event of my/or any of us dying or becoming under disability the liability of the executors, administrators or legal 865 - III

representative of such person so dying and of his estate shall continue until the expiration of three calendar months from the receipt by the Bank of a written notice given by such legal representative (or the survivors of survivors of me/us) to determine this guarantee. You shall be at liberty on receipt of any such notice as contemplated in this clause at any time within the three calendar months to open a fresh account and/or to grant fresh facilities to the Principal and to appropriate thereto all payments subsequently made to you by the principal and not expressly appropriated to the old account without prejudice to my/our estates liability to the extent aforesaid. I/We shall not be released from my/our liability in respect of B.P. limit of Rs. _________ covered by this guarantee in the event of any omission delay or default in presentation of bill or in the issue of notices of dishonour on the part of the Bank. 2.

The Guarantee is additional and without prejudice to any securities or obligation which you may now or hereinafter have from us, from the Principal or from anyone else in respect of any indebtedness or liabilities hereby guaranteed and all rights and remedies in respect thereof are reserved.

3.

This Guarantee shall be a continuing guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payments from time to time made to the Bank or any settlement of any account or by reason of the account being brought to a credit at any time or from time to time or its being drawn upto the full extent or exceeding the extent of the limit from time to time and its being reduced or extinguished and thereafter re-opened. The Guarantee shall continue in force notwithstanding the discharge of the Principal by operation of law or my death or of any one of us and shall cease only on payment of the amount guaranteed hereunder either by me or any of us.

4.

I/We expressly agree that the Bank shall have full discretionary power, without my / our further assent or knowledge and without discharge or in any way affecting my / our liability under this guarantee from time to time AND at any time to negotiate with the Principal and settle and alter the terms and conditions, to promise, to grant time or indulgence to or not to sue the Principal or any person liable with or for Principal, whether as guarantor or otherwise or make any other arrangement with the Principal or any persons so liable with or for the Principal as the Bank may think fit and to hold over, renew, vary, exchange or release in whole or in part and from time to time any securities held or to be held by the Bank for or on account of the moneys and liabilities intended to be hereby secured or any part thereof. I/We also agree that I/We shall not be discharged from my/our liability by your releasing the Principal debtor or by any act or omission of yours the legal consequence of which may be to discharge the Principal debtor or by any act of yours which would, but for this present provision, be inconsistent with my/our rights as surety or by your omission to do any act, which but this present provision your duty to me/us would have required you to do. We hereby consent to each and every of the acts mentioned above you may think fit. Moreover though as between the Principal debtor and me/us, I am /We are sureties only, I/We agree that as between yourselves and me/us, I/am/We are Principal debtor(s) jointly with him and accordingly I/We shall not be entitled to any of the rights conferred on sureties by Sections 133,134,135,139 and 141 of the Indian Contract Act. And we further expressly agree that the Bank shall also have discretionary power without my/our further assent or knowledge or without discharging or in any way affecting my/our liability under the Guarantee from time to time and at any time to agree to the variations of the terms and conditions of any Letter of Credit that has been and/or may be opened for the benefit of the Principal to convert documentary Letter of Credit into clean or open Letter of Credit and vice versa, to convert a revocable Letter of Credit into irrevocable one and vice versa, to vary or alter the 866 - III

other terms, as to the nature and amount of credit, war risk, as regards the conditions of advance, the nature of the documents to be tendered, the names of the beneficiaries the nature, quality, quantity of goods, the country of origin and the conditions regarding port of shipment, certificates of country of origin, nature, quality, quantity, weight or otherwise, the terms of shipment such as F.O.B./ CIF C/FA. S/C. I.F. /C&F as regards shipments by instalments or to convert a contract for shipment by instalment into shipment into one lot, the terms of draft as to insurance and the terms thereof , the terms regarding payments and to part with the shipping documents and/or goods covered by such shipping documents negotiated under the said Letter of Credit or a Trust Receipt of the principle or otherwise, and other conditions as may be comprised in the Letter of Credit within the limit of Rs. ____________________ referred to in cl.1 hereof and to release or vary any security granted therefore and for the purpose aforesaid to settle and/or alter the terms and conditions to grant time or indulgence to Principal or any person liable with or for the Principal whether as Guarantor or otherwise or compound or any other person so liable with or make any other arrangement with the Principal or any other person so liable with or for the Principal as the Bank may think fit and to hold over, renew, vary, exchange or release whole or in part and from time to time any securities held or to be held by the Bank for/or on account of the moneys and liabilities intended to be secured hereby or any part thereof. And for all purposes of this claim the Principal is empowered to give consent on my/our behalf and any consent given by the Principal shall be deemed to have been given by me/us and shall bind me/us in all respects as if the same had been expressly given by me /us in writing. The Principal is also hereby empowered to acknowledge the debt/s and/or security/ies for and on behalf of me /us and the said acknowledgement and/or the security /ies shall be valid as against me/us though they were executed by me/ourselves. 5.

The Bank may recover against me/us to the extent herein before mentioned notwithstanding that the principal or his agents, partners, directors or officers may have exceeded his or their powers or that the arrangement with the Bank may have been ultra vires and without being bound to enforce its claims against the Principal or any other person or other security held by the Bank. The Bank shall not be bound to inquire into powers of the Principal or his agents or partners, directors or officers purporting to act on behalf of the Principal and all moneys dues or liabilities incurred shall be deemed to form part of the present guarantee notwithstanding that the Principal or his agents, partners, directors and officers may have exceeded his or their power or the arrangement with the Bank may have been ultra vires.

6.

I/We waive in the Bank's favour all or any of my/our rights against the Bank or the Principal as may be necessary to give effect to any of the provisions of this guarantee.

7.

I/We declare that I/We have not received any security from the Principal for the giving of this guarantee and I/We agree that I/We will not so long as any moneys remain owing by the Principal to the Bank or any liability incurred by the Bank remains outstanding, take any security in respect of my/our liability hereunder without first obtaining the Bank's written consent and I/We agree that in the event of my/our taking any such security amount for which I/We am/are to be liable under this guarantee shall be increased by the amount by which dividends payable by the Principal to you on a winding up is thereby diminished. I/We have not received any consideration by way of Commission or otherwise for giving this guarantee; nor shall I/We receive any consideration of my/our standing as Guarantor/s to the Facility/ies above mentioned.

867 - III

8.

I/We further agree that in respect of my/our liability hereunder the Bank shall have a lien on all securities belonging to me /us now or hereafter held by the Bank and at moneys now or hereafter standing to my/our credit with the bank on my Current or any other Account.

9.

And this guarantee shall be applicable to the ultimate balance that may become due to the Bank from the Principal and until repayment of such balance the Bank shall be entitled to retain, realize, or otherwise dispose of in such manner as the Bank may think fit any securities now or hereafter held by the Bank and without any liability to account to me/us for my/our any portion of such securities or of the proceeds thereof until all your claims have been fully satisfied, and in the meantime I/We will not take any steps to enforce any right or claim against the Principal in respect of any moneys paid by me/us to the Bank hereunder. And, further that if Bank should receive payment from the Principal or any person on behalf of the Principle or from any security held by the Bank, or if the Principal shall become insolvent or go into liquidation or compound with his creditors, the Bank shall be at liberty without discharging my/our liability to make or assent to any compromises, compositions or arrangements or to prove and to rank as creditor, in respect of the amount claimable by the Bank or any items thereof, and to receive dividends thereupon and all such payments and dividends received shall be treated as payments in gross and my/our liability shall extend to the ultimate balance after deducting such payments and to the entire exclusion and surrender of all my/our rights as sureties in competition with the Bank any rule of law or equity to the contrary notwithstanding. And I/We shall not be paying off the sum guaranteed or any part thereof or upon my ground, proven or claim to prove in respect of the sum guaranteed or any part there of or take advantage of any securities held by the Bank until the whole of your claim against the Principal has been satisfied.

10. A demand in writing shall be deemed to have been duly given to me/us or my/our heirs or assigns by leaving the same at my/our last known address hereunder written and shall be effectual notwithstanding any change of address or notwithstanding notice thereof to the Bank, and such demand if sent by post shall be deemed to be received by me/us or my/our heirs, assigns 24 hours after posting thereof and shall be sufficient if signed by any officer of the Bank and in proving such service it shall be sufficient to prove that the letter containing the demand was properly addressed and put into the Post. 11. In the event of this guarantee being determined either by notice by me/us or by demand in writing by the Bank, it shall be lawful for the Bank to continue the account of the Principle notwithstanding such determination and my/our liability or for the moneys advanced or paid or agreed to be advanced or paid and liabilities or obligations incurred by the Bank at the date when the guarantee is so determined shall remain notwithstanding any subsequent payment or out of the Cash Credit Account by or on behalf of the Principle up to the limit aforesaid. 12. The Guarantee shall not affect or be affected by any other or further securities taken or held by you or by any loss by you of any collateral or other security nor by your failing to recover by the realisation of collateral securities or otherwise any such sum or sums due from, the Principal or any other person, or any lacks on your part, nor shall you be responsible to me/us for any such loss or lacks. 13. Any account settled or stated between you and the Principal or admitted by the Principal shall be accepted by me/us as conclusive evidence. A certificate in writing signed by any officer of the Bank

868 - III

stating the amount at any particular time payable under this guarantee shall be conclusive evidence against me/us. 14. This guarantee shall be enforceable notwithstanding any change in the name of the bank and it shall ensure for the benefit of any banking company with which the Bank may become amalgamated or to which the Bank shall assign it. 15. Should the Principal be a limited company, corporate or unincorporated body, committee, firm, partnership, trustees, or debtors on a joint account, the provisions herein before contained shall be construed and take effect where necessary as if words importing the singular number included, also the plural number. This guarantee shall remain effective notwithstanding any death, retirement, change , accession, or addition, as fully as if the person or persons constituting or trading or acting as such body, committee, firm, partnership, trustees or debtor on joint account at the date of the Principal's default or at any time previously was or were the same as the date hereof. In the event of there being more than one guarantor the liability of the remaining guarantors shall not be affected or released or given up by time or other indulgence to one or more of the guarantee nor by the death of any one or more of the guarantors until notice shall have been given to the Bank as provided in Clause 1 hereof. The Bank shall be entitled to fix with the Principal a period for such loan, Overdraft Cash-Credit account facility and to alter to extend such a period from time to time. The Bank shall be entitled from time to time to take renewals of hundies, promissory notes or other documents and securities from the Principal. The Bank shall be entitled to take one hundi or promissory notes or other documents for the whole amount hereby guaranteed or to split up the amount and takes separate documents for each part and taken any such document from the Principal alone or from the Principal and other persons whose identity may vary from time to time. My/Our liability under this Guarantee shall not be discharged or affected in any way by reason of any such or similar acts or dealings. Name & Address

Signature(s) of the Guarantor(s)

869 - III

Annexure-16 to Chapter-61 LDOC 34 COUNTER INDEMINITY FOR GUARANTEES Stamp as on agreement

SC Bank,

Place: ___________

__________________

Branch Date: ____________

Dear Sirs, In consideration of SC Bank agreeing at my / our request to execute and executing a guarantee favoring __________________________________________________________________ I / We_________________ __________________________________________________________do hereby agree and undertake to indemnify and keep indemnified SC BANK of from and against all actions, losses, costs, consequences, charges, expenses, claims and demands which SC BANK may incur or sustain by reason or on account of its agreeing as above or howsoever in the premises. I / We hereby agree to pay interest at the rate of _______% over the Base rate of the Bank with a minimum of ______________ % p.a. with monthly / quarterly / half yearly / yearly rests on over due / outstanding amount I /we also agree to pay an additional interest at the rate of _______________ % p.a. with monthly / quarterly / half yearly / yearly rest over and above the aforesaid rate of interest on outstanding amount (i.e. amount inclusive of interest) beyond _________ months till entire amount is actually paid. If for any reason., the Bank is prevented by any actions initiated by me/us from making payment to the beneficiary, of the guaranteed amount, I/ we will also be liable to pay the Bank, apart from other amounts payable to the Bank, guarantee commission for the period for such action, the payment or discharge of the guarantee. This counter indemnity will extend to any extension of the guarantee referred to herein for which I / we may apply from time to time and which the Bank may agree to grant at my / our request subject to the Bank's absolute right and discretion whether to extend the guarantee or not and without casting any obligation on the Bank for extending the said guarantee. Yours faithfully, (Signature) 870 - III

Annexure-17 to Chapter-61 LDOC 37 LETTER OF UNDERTAKING WITH NEGATIVE LIEN CLAUSE

Stamp as on agreement SC Bank ______________ Branch

Place: _______________ Date: ________________

Dear Sirs, Ref: Clean demand loan facility of Rs._________________________________ In consideration of your having agreed to grant me / us a _____________ facility up to a limit of Rs._________________ inter alia against a Demand Promissory Note for the like amount and on the faith of undertaking as appearing hereunder. I / We / Mr. / Mrs./ _______________________________________ place on record the fact that there is no mortgage or lien of any kind whatsoever created on my our properties and that I /we undertake not to create any mortgage or lien of whatsoever kind or nature over the same nor to sell or alienate, transfer, assign or deal with or dispose of any of my / our immovable properties or assets of a capital nature until all the debts due by me / us to you are fully paid. I / we understand that it is on the faith of this representation and undertaking that the Bank has agreed to grant me / us aforesaid clean demand loan facility. Yours faithfully Annexure-18 to Chapter-61 LDOC 38 LETTER OF SOLE PROPRIETORSHIP (Unstamped) Place: ___________ Date : ____________

SC BANK _______________ Branch Dear Sirs,

I , the undersigned, beg to inform you that I am the sole proprietor of the firm of __________________________________________ and am solely responsible for liabilities thereof. I shall advise you in writing of any charge that may take place in the constitution of the firm and I will be liable to you on any obligation which may be standing in the firm's name in your books on the date of the receipt of such notice and until all obligations shall have been liquidated. Yours faithfully, (Personal Signature of the Proprietor) Full name of the sole proprietor - __________________________

871 - III

Annexure-19 to Chapter-61 LDOC 39 LETTER OF PARTNERSHIP (Unstamped) SC Bank

Place: ____________

________________ Branch

Date: ____________

Gentlemen, st

We beg to inform you that the parties whose full names and addresses are set out in the 1 column at foot of this letter are carrying on business under the name and style of _____________. The said firm is desirous of having dealings in the name of the firm with your _______ branch. It is understood that in the event of the bank acceding to such desire then this present form of request will, if not already completed, be duly completed by all the partners and that the provisions hereinafter contained are to bind the firm and each of the partners and his personal representatives. The provisions are as follows:We hereby declare that we are the only partners of the said firm. In the event of any charge occurring in the said firm by the introduction of any new partner or the retirement, death expulsion or insolvency of any partner or the dissolution of the firm, notice shall forthwith be given in writing to the Bank's _______ ___________________________ branch. Pending receipt of such notice in writing as aforesaid of any retirement, death or expulsion the Bank shall be entitled to treat the partner affected by such retirement or expulsion or in the event of death his estate as if or his representatives as the case may be is still a partner to the intent that such partner or his estate shall be liable jointly and severally with the other partners for all indebtedness or obligation of the firm incurred after such retirement, expulsion or death down to the date of receipt of the notice aforesaid in addition to any liability which he may have incurred as partner to the Bank prior to such retirement, death or expulsion or insolvency notwithstanding that but for this present provision such partner or his estate might not be liable after such retirement, expulsion or death by reason of any statutory provision. Specimen signatures in the firm's name and the respective partner's personal signatures are appended in the second and third column hereunder. We and each of us confirm that. 1)

All the undersigned partners jointly and the survivors of them jointly and the survivor.

2) The undersigned _____________________________ _________________________________ jointly or any ______________________________ of them jointly. 3)

Each of undersigned ___________________________ singly and severally is / are authorised. A. To Borrow for and on behalf of the firm from time to time all sums, moneys from your Bank and as security for such borrowing to pledge, hypothecate, charge or mortgage such of the goods, and properties movable and immovable of the firm and to give such other securities as may be demanded by the Bank from time to time.

872 - III

B.

To sign promissory notes, documents of guarantee or indemnity and all other documents required by Bank in connection with such borrowing, and

C.

To sign the Firm's name for the Firm to any cheque promissory note or other document relating to any operation on the account of the firm (including any operation which involves an advance to the Firm) and that the Bank is entitled to act upon the faith of any cheque, promissory note or the other documents so signed in the firm's name over such joint or several signature or signatures as the case may be according as is herein above authorised. In the event of any new partner being introduced upon the Bank being duly notified and consenting to continue the account and new partner having signed this or any new form or request required by the Bank then for the purpose of operation on the account such new partner will be treated as a partner and shall be authorised to sign for the firm unless the Bank be expressly advised to the contrary and by his signature to this or any such new request such partner will be understood to have accepted and be beyond by the foregoing undertakings. Without prejudice to what is stated above, we hereby agree that notwithstanding anything contained in any agreement of partnership any borrowings made by any of the partners on behalf of the firm under a Cash Credit or Overdraft or any other facility pursuant to the letter of the partnership given to you, and all securities by way of pledge hypothecation, charge or mortgage of goods and / or properties movable and immovable given thereof shall be deemed to have been so made and given for the purposes of the firm under the express authority of partners of the firm conferred by all and each of them upon the others or other of them individually and all liabilities created / acknowledged by any of the partners on behalf of the firm shall be binding upon the firm and all the partners thereof, in their respective capacity as partner and in their respective individual capacities. It is understood that the above provision shall stand in full force notwithstanding that any Current, Loan or Overdraft Account of the firm may be balanced closed or reopened at any time or from time to time. Yours faithfully, (Personal signatures of the Partners)

873 - III

Annexure-20 to Chapter-61 LDOC 39 (A) LETTER OF AUTHORITY (IN PARTNERSHIP ACCOUNTS)

Not to be stamped

SC BANK……. Branch

Dear Sirs, Ref:

Our Cash Credit / Overdraft A/c./ Other A/cs. Up to limit of Rs.________________________

Owing to the change in the constitution of our firm, M/s. ___ consequent upon the retirement / sad demise / of ________ our _____________ we ________ the existing partners of the said firm have to request you to close our existing account and open a new account in the same name with Merssrs. _________ as partners of the reconstituted firm. Kindly transfer the existing facility to the new account. Kindly also transfer the balance in the existing account to the new account and securities held in the existing account may be transferred to the new account. Also note that the cheques drawn on the existing account and not yet presented for collection may be debited to the new account. Likewise, cheques lodged in the existing account and not yet realised may be credited to the new account. Yours faithfully, We agree

(Personal signatures of the existing partners)

(Personal Signatures of the New Partners). Annexure-21 to Chapter-61

LDOC 40

LETTER OF REQUEST (WHERE H.U.F. IS A PARTNER IN PARTNERSHIP FIRM.) SC BANK ________________ branch

Date: _____________

Dear Sir, I hereby declare that I am the Karta and Manager of the Joint Hindu family of _________________________ (composed of myself and my brothers / sons) and that all dealings and transactions entred into by me as Karta and Manager of the Joint Hindu Family composed of the persons mentioned below and that I have the authority and consent from all the other members mentioned below to enter into partnership on behalf of the H.U.F. with M/s. ______________ and that although I am fully entitled as such to enter into the said partnership as the profits of the said firm accruing to me as karta and Manger of the H.U.F will go for the benefit of the joint H.U.F I Have for your satisfaction got this letter duly signed by other adult members of the family. Yours faithfully, (Karta & manager) Signatures of other adult members of the family.

874 - III

Annexure-22 to Chapter-61 LDOC 48 LETTER OF APPROPRIATION RECURRING DEPOSITS.

Not to be stamped SC BANK ______________ Branch Date: _____________ Dear Sirs, In consideration of the advances already made and of those which you may, at your discretion, make to me / us from time, I / we hereby give you a lien on my / our Recurring Deposit Account No.__________ with your Bank for Rs.________ (Rupees _______) and I / we hand over to you Recurring Deposit, Pass-book to be held by you on my/our account for the outstanding balance of my / our loan with you irrevocable power to appropriate the amount standing to the credit of my / our said account with you without reference to me/us. I / we further agree that in respect of advance granted or that may be granted to me / us by you from time to time you shall be entitled to charge interest at the rate of ____________*per cent or such other rate may be fixed by you from time to time more than the rate of interest that you would allow me / us, in my / our Recurring Deposit Account, and additional penal interest, if any, at the rate of _________% per annum that may be fixed by you from time to time. I / we hereby declare that I / we have not encumbered, assigned or otherwise dealt with the said Recurring Deposit Account in any way and that it is free from all encumbrances. Yours faithfully, (Signature of the Depositor/s) This may vary from time to time as per Bank's instructions Annexure-23 to Chapter-61 LDOC 50

LETTER OF “RECORDING” (To be obtained from parties who enjoy the facility of “Temporary clean Overdraft”)

SC BANK _______________ Branch Date: _____________

Not to be stamped

Dear Sirs, Ref: Our Temporary over draft with you We confirm having requested you to allow temporary overdraft to M/s. ________ to the extent of Rs.____ (Rupees ____) against joint and several demand Promissory Note signed by us to-day. We further confirm that in the event the advance remaining outstanding for a longer period than ________________ at a time, we in view of our joint and several liability would be prepared to adjust the said over draft account in such situation immediately with interest and additional interest / penal interest, if any, fixed by you from time to time. We further confirm that this facility allowed to us as per our request by you under your absolute discretion and so may be discontinued by you at any time without any previous intimation to us. Yours faithfully, (Borrower)

875 - III

Annexure-24 to Chapter-61 LDOC 53 LETTER OF ATTESTATION

------SC Bank _______________ Branch

Not to be stamped

Date: ___________

Dear Sirs, I hereby declare that the signatures / left / right hand thumb impression of ____________placed on the following documents dated ______ is are that / those of _____ and is / are placed in my presence in witness whereof I subscribe my name. 1.

D.P. note for Rs.___________________

2.

Instrument of pledge * / hypothecation of _________________

4.

General form of guarantee signed by Shri _______________________ and ___________

5. 6. . The contents of the aforesaid documents are translated into vernacular and explained to the said _____________________________ who understood and admits the same. Yours faithfully, *(Signature of the person in whose presence the documents were executed) LETTER OF INSTALMENT WITH ACCELERATION CLAUSE Annexure-25 to Chapter-61

LDOC 57 SC BANK______________

Branch

Date:

Dear Sirs, Ref: My / Our Demand Loan Account up to a limit of Rs. With reference to the above, I / we hereby agree and undertake to repay the sum in monthly / quarterly / half yearly / yearly instalments of Rs. _____each commencing from _____. I / We also agree that in the event of default in payment of any instalments and / or interest, I / we shall pay an additional interest at the rate of ______________% per annum on the amount of instalment and/ or interest in default for the period from the due date of instalment and / or interest in default for the period from the due date on which instalment and / or interest is actually paid. I / we, the undersigned, further agree that the Bank is entitled to recall the entire loan at any time at its pleasure and without assigning any reason. Yours faithfully, (Borrower)

876 - III

Annexure-26 to Chapter-61 LDOC 60 TAKE DELIVERY LETTER ------SC BANK______________ Branch Date: ________________ Dear Sirs, Please take delivery of and continue to hold the under mentioned Securities as security for the advances granted or to be granted to me / us from time to time. 1. I / We agree to maintain in Bank's favour stipulated margin on the current market values of the securities at all times and confirm that the balance at debit of my / our account is repayable on demand and will bear interest at _____% over the Base rate of the Bank with minimum of _____% per annum subject to a minimum interest of Rs._____ every quarter, and additional / penal interest at the rate of ______% p.a or such other rates of interest and additional / penal interest as may be stipulated by the Bank . from time to time. 2. The Securities lodged or that may be lodged from time to time are to be treated as a continuing security even if the account runs into credit, is reduced or extinguished at any time or from time to time. 3. The Securities are deliverable to _____________________ 4. The securities are deliverable to _________and the indebtedness caused by such drawings from time to time will be binding on me / us jointly and severally. Yours faithfully,

Annexure-27 to Chapter-61 LDOC 63 SC BANK_____________

LETTER OF COST (FOR TITLE OPINION) Branch

Date: _________________ Not to be stamped

Dear Sirs,

Ref: My/ Our ___________________________ advance facility Up to a limit of Rs._______________ inter alia against Equitable Mortgage. In consideration of your entertaining my / our application for an advance, I / we hereby undertake to pay you all cost, charges and expenses between attorney and client incidental to the valuation of the property offered as security, the investigation of my/our title thereto and preparation, execution and stamping of the mortgage thereof and all other documents required to complete the security including all our of pocket expenses or surveyor's fees and the like. This undertaking will hold good notwithstanding that the negotiations may fall through for any reason whatsoever. Yours faithfully. (Borrower)

877 - III

Annexure-28 to Chapter-61 LDOC 64 AN UNDERTAKING NOT TO WITHDRAW DEPOSITS BY THE PARTNERS/DIRECTORS TILL THE ADVANCE IS LIQUIDATED Stamp as on agreement SC BANK_________

Branch

Date: ____________

Dear Sirs, Ref: Our Cash Credit / other facility up to a limit of Rs._________ In consideration of your having agreed at our request to grant/granting us a CashCredit/___________ facility up to a limit of Rs.__________ (Rupees ___________ only) inter alia against our undertaking not to allow to withdraw amounts already deposited with us by all partners / directors and their family members without prior written consent of Bank, We M/s. _________do hereby agree and undertake not to allow to withdraw the amounts already deposited with us by all the Partners / Directors and their family members without the written consent of the Bank. We understand that it is on the faith of this undertaking that you have agreed to grant us the facility as aforesaid. Yours faithfully Personal Signatures of all the Partners ………………………. Firm's Signature

Partners.

*In case of limited companies, this undertaking letter should be executed as per the resolution passed by the Company.

Annexure-29 to Chapter-61 LDOC 72 LETTER OF AUTHORITY TO MAKE PAYMENT DIRECTLY TO THE DEALERS. (Personal Loan Scheme) SC Bank_________

Branch

Date : _______________

Dear Sir, I/We refer to the loan amount of Rs. ______ sanctioned to me/us by you being the ____ % of the cost price for the purchase of _______(description of article) and hereby irrevocably authorize you to make payment of Rs. _____ to the dealer of the article on my/our depositing an amount of Rs. _____ being the ______ % margin to ____ on production of an invoice bearing my/our signature/s as token of my/our having received the _______as mentioned in the invoice. (Description of article) Yours faithfully, (Borrower)

878 - III

Annexure-30 to Chapter-61 LDOC 81 DRAFT RESOLUTION REQUIRED TO BE PASSED BY A SOCIETY/CLUB, ETC. (When it obtains an advance from the bank by way of a Loan, Cash Credit or an Overdraft / Other Credit facilities) Not to be Stamped Certified true copy of the Resolution passed by the Managing Committee of ___________ (name of Society/Club etc.) at their meeting held on ____________________________________ . The Managing Committee of the Society/Club was informed ____________ (Details of sanction). RESOLVED that sanction be and is hereby given for _____________ (name of Society/Club etc.) to borrow from SC BANK by way of Cash Credit / Overdraft up to Rs. _____________ (Rupees _______________________________________) against hypothecation/pledge of and against Demand Promissory Note signed by the Society/Club etc. and that _______________ (name of Society/Club) do execute the relevant documents in this connection. RESOLVED FURTHER that the documents now placed before the Committee be and are hereby approved and the Demand Promissory Note , Instrument for Hypothecation/Pledge of goods or movable machinery or Letter of Pledge of shares or Government Securities, Letter of Continuing Security, etc., be executed by Shri. _________________________ Chairman/President _________ name of the Society/Club as the case may be) RESOLVED FURTHER that Cash Credit/Overdraft account with SC Bank be operated by any one/two of the following office-bearers jointly (or severally): 1. Shri. ___________________________ 2. Shri. ___________________________ 3. Shri. ___________________________ RESOLVED FURTHER that the said SC Bank be and is hereby authorized to honour all Cheques, Bills of Exchange, Promissory Notes drawn, endorsed, accepted or made on behalf of the Society by the above named officebearers as aforesaid and to act on any instructions so given by them relating to the account whether the same be overdrawn or not relating to the transactions of the Society. Certified to be true, Chairman of the Meeting 1. Name of the Branch. 2. Stocks to be specified 3. Execution of documents should be in terms of the Resolutions Note: i) In respect of loan account, paragraphs 1 and 2 should be amended by substituting the word “Loan” in place of “Cash Credit/Overdraft” and omitting words “Letter of Continuing Security” respectively. The entire paragraphs 3 and 4 are not applicable. ii) For clean facilities, security portion should be excluded from the resolution to be passed by the Society / Club etc.

879 - III

Annexure-31 to Chapter-61 LDOC 84 SPECIMEN OF ASSIGNMENT OF LIFE INSURANCE POLICY Not to be stamped I, ___________________ do hereby absolutely assign for valuable consideration, all my rights, title and interests in the Policy No. ______________ issued by the Life Insurance Corporation of India ____________________ of my life assuring the sum of Rs. ________ in favour of SC Bank, its successors and assigns, whose receipt will discharge the Life Insurance Corporation from all liabilities in respect of this policy for all intents and purposes as effectually as if such receipt was signed by myself, my executors or administrators. Signed and witnessed at _____ this ______ day of _________ and ____________________ Witness _______________ Signature ______________ Designation ____________ _______________ Signature of Assured Address:

Annexure-32 to Chapter-61 LDOC 85

NOTICE OF ASSIGNMENT TO LIFE INSURANCE CORPORATION OF INDIA Not to be stamped Place : Date :

To: LIC Office : Dear Sir, Re :

Policy No. ___________________ for Rs. ______________________ I hereby give you notice that I have assigned absolutely the above policy/policies to the SC Bank, __________ on __________. Please acknowledge receipt of this notice and forward the policy/policies SC BANK, ____________________ under advice to me/us after registering the absolute assignment thereon in your books.

Yours faithfully, Signature of Assignor.

880 - III

Annexure-33 to Chapter-61 LDOC 90 FORM OF MEMORANDUM OF DEPOSIT OF TITLE DEEDS TO BE RECORDED IN RESPECT OF ADVANCE SECURED BY EQUITABLE MORTGAGE OF IMMOVABLE PROPERTY Mr./Mrs./Ms _________ (borrower/guarantor/ authorized person) attended at the Bank's office at ____on ________ the day of ________at _______ a.m./p.m. and deposited the documents set out below in schedule I relating to the land & building, immovable plant & machinery belonging to the said Mr. /Mrs./Ms ___________ shortly described as follows in schedule II ________ with Mr. /Mrs./Ms _______ (manager's name) the Manager of the Bank's said ___________ office in the presence of Mr. ________of the Bank's said _______office as security for and with intent to create an equitable mortgage on the said land & buildings, immovable plant & machinery now or hereafter standing thereon to secure the balance due under the Loan/ Cash Credit account for Rs. ________ in the name of _______at SC Bank _____ and interest thereon and all costs, charges expenses incurred by and/or payable to the BANK. SCHEDULE I (List of documents) 1. 2. SCHEDULE II (Description of the Land) Dated this _______________ day of ___________________ ______________

Sd/ …………………….. ____________________ Officer

Manager of the branch.

Place & Date. Note : (1) The borrower depositing title deeds with the Bank, should not sign the memorandum. (2) To be stamped, if so required under local stamp Act.

881 - III

Annexure-34 to Chapter-61

LDOC 90(A)

MEMORANDUM OF ENTRY (IN CASE OF MORTAGE OF INDIVIDUAL'S PROPERTY) 1.

On the ___ of ____ Shri/Smt./Kum. ______ son/daughter of Shri_________Indian inhabitant residing at __________ (hereinafter called “MORTGAGOR”) attended the branch office of SCBANK, at ____________(hereinafter called “BANK”) and delivered to and deposited with Shri _________of BANK, acting for BANK the documents of title, evidences, deeds and writings more particularly described in the First Schedule hereunder written (hereinafter called “the said title deeds”) in respect of immovable properties belonging to him and , situated at _________ and more particularly described in the Second Schedule hereunder written both present & future (hereinafter referred to as “the said immovable properties “) to secure on a first charge basis the due repayment and discharge to Bank for their below mentioned financial assistance to Nature of facility

LIMIT (Rs.in lacs)

i) ii) iii) TOTAL Together with interest, additional interest, compound interest, further interest by way of liquidated damages, commitment charges, premia on prepayment or on redemption, costs , charges, expense and other monies payable under their Heads of Agreement/ Loan Agreements/Letter of Sanction/ Memorandum of Terms and Conditions amended from time to time. 2.

THE MORTGAGOR further stated that the said title deeds so deposited were the only documents of title relating to the said immovable properties in his possession, power and control and that he had a clear and that he had a clear and marketable title to the said immovable properties.

3.

The aforesaid deposit of title deeds was made by Shri/Smt./Kum. _____________ the Mortgagor in the presence of Shri/Smt./Kum. ______________________ of Bank.

FIRST SCHEDULE (list of documents of title, evidence, deeds and writings) SECOND SCHEDULE (Description of the entire immovable properties) Dated this _____________________day of ______________________ (Signature) Note: To be stamped, if so required under the local stamp Act.

882 - III

Annexure-35 to Chapter-61 LDOC 90(C ) IN THE MATTER OF MORTGAGE BY DEPOSIT OF TITLE DEEDS IN RESPECT OF INDIVIDUAL'S IMMOVABLE PROPERTY Not to be stamped

DECLARATION

I,__________________ Son of Shri ________________, Indian inhabitant, at present residing at __________________ do hereby declare and say as follows: 1.

I say that I am seized and possessed of or otherwise well and sufficiently entitled to the lands and other immovable properties, more particularly described in the schedule hereunder written, together with all buildings and structures thereon, both present and future (hereinafter referred to as the “said immovable properties”).

2.

I say that the said immovable properties are at present not mortgaged or charged to any one.

3.

I further say that the said immovable properties, both present and future are now proposed to be mortgaged and charged to …….. SC Bank to secure the outstanding balances of Rs. _________ as of __________ in the Cash Credit Limit of Rs.________ availed by M/s ____________ together with interest, additional interest, further interest by way of liquidated damages, compound interest, commitment charge, premia on prepayment or on redemption, guarantee commission, commission for Letters of Credit, cost charge, expenses and other monies payable M/s ___________________ to SC Bank under their Heads of agreement /Loan agreements/Letters and sanction /Memorandum of terms and conditions, amended from time to time. The said SC Bank is hereinafter referred to as the “Lenders”.

4.

I say that the Provisions of the Urban Land(Ceiling & Regulation) Act,1976 are not applicable to the said property or I say that I have obtained necessary permission from the Competent Authority for mortgaging the said immovable properties.

5.

I say that the said immovable properties are fee from all encumbrances or charge (statutory or otherwise), claims and demands and that the same or any of them or any part thereof are/is not subject to any Lien/ Lispendens, attachment or any other process issued by any Court or Authority and that I have not created any Trust in respect thereof and that the said immovable properties are in my exclusive uninterrupted and undisturbed possession and enjoyment since the date of purchase/ acquisition thereof and no adverse claims have been made against me in respect of the said immovable properties or any of them or any part thereof and the same are not affected by any notices of acquisition or requisition, and that no proceedings are pending or initiated against me under the Income-Tax Act,1961, Public Debts/ Money Recovery Act, or under any other law in force in India for the time being and that no notice has been received by or served on me under Rules 2, 16,21 and 51 of the Second Schedule to the IncomeTax Act, 1961 and/or under any other law and there is no pending attachment whatsoever issued or initiated against the said immovable properties or any of them or any part thereof.

6.

I say I have duly paid all rents, royalties and all public demands including Income-Tax, Corporation Tax 883 - III

and all other taxes and revenue payable to the Government of India or to the Government of any state or to any local authority and that at present there are no arrears of such dues, rents, royalties, takes, and revenue dues and outstanding and that no attachments or warrants have been served on me of Income Tax Government revenue and other taxes. 7.

I also agree and undertake to give such declarations, undertakings and other writings as may be required by the Lenders or their Solicitors and satisfactorily comply with all other requirements and requisitions submitted by or on behalf of the Lenders.

8.

I say that I have obtained the requisite consent from the Income-Tax authorities pursuant to the provisions contained in Section 281 of the Income-Tax Act,1961 for the alienation of my properties in favour of the Lenders.

9.

I assure, agree and declare that the security to be created in favour of the Lenders shall ensure in respect of my immovable properties, both present and future and that the documents of title, evidences, deeds, and writing in relation to the said immovable properties which are to be deposited with the Lenders for creating a mortgage by deposit of title deeds in their favour are the only documents of title relating to the said immovable properties.

10. I hereby agree and undertake that I will within a period of three months from the date hereof or such extended date as may be permitted by the Lenders in writinga)

Perfectly assure the title to the properties comprised in the mortgage security and to comply with all requisition, that may be made from time to time by on behalf of the Lenders in that behalf.

b) Give such declarations, undertakings and other writings as may be required by the Lenders and satisfactorily comply with all other requirements and requisitions submitted by or on behalf of the Lenders; c)

Pay all rents, rates, taxes, cesses, fees, revenues, assessments, duties and other outgoings and pay other amounts due in respect of the said immovable properties and shall observe and perform all the rules and regulations pertaining to the same and will not do or omit to do or suffer to be done anything whereby the mortgaged security as proposed to be created in favour of the Leaders be affected or prejudiced in any manner whatsoever.

11. I further undertake that no mortgage, charge, lien or other encumbrance whatsoever will be created on the properties comprised in the mortgage security save and except with the permission of the lenders. 12. I am not aware of any act, deeds, matter or thing or circumstances, which prevents me from charging/further charging in favour of the Lenders the said immovable properties. AND I make the aforesaid declaration solemnly and sincerely believing the same to be true and knowing fully well that on the faith thereof the Lenders have agreed to complete the said transaction of mortgage by deposit of title deeds in respect of the said immovable properties as aforesaid. SCHEDULE (Description of Immovable Property)

884 - III

Annexure-36 to Chapter-61

LDOC 90(D)

LETTER OF CONFIRMATION OF EQUITABLE MORTGAGE IN RESPECT OF PERSONAL PROPERTY Dt._____________ Place ___________ SC Bank, _____________ Branch

Dear Sirs, Re: ______________- facility of Rs. _____________lacs I confirm that as already agreed upon, I have on ___________ called at the Office of ...SC Bank ,______ and deposited the documents of title, deeds, evidences, papers and writings in respect of my immovable properties together with buildings and structures thereon and fixtures and fittings both present and future (more fully described in Schedule hereunder), with an intent to create a security by way of mortgage by deposit of title deeds on a First Charge Basis over the said immovable properties for the advances granted and or to be granted and for the due repayment, discharge and redemption by me to ...SC Bank of its ______ facility of Rs. ________ lacs, together with interest, costs, charges, expenses and other monies payable thereon. SEHEDULE (Description of Immovable Properties)

(Signature)

885 - III

Annexure-37 to Chapter-61 LDOC 90(E) IN THE MATTER OF MORTGAGE BY DEPOSIT OF TITLE DEEDS IN RESPECT OF IMMOVABLES AND HYPOTHECATION OF MOVABLES (IN CASE OF PARTNERSHIP FIRM/COMPANY) (DECLARATION) 1.______________________ son/daughter of ________________________________ Indian inhabitant, at present residing at _________________________________________________________ _____________________________ do hereby solemnly declare and say as follows : 1. I a m a P a r t n e r / D i r e c t o r o f M / s __________________________________________________________ __________a partnership firm/a company having its principal Place of business/Registered office at _______________________________________________________________________ ________________________________ (hereinafter called the “firm”/ “Company”) with Shri/Smt./Kum. _____________________________________________________ Shri/Smt./Kum. _____________________________________ Shri/Smt./Kum. __________________________ ____________________ ________, Shri/Smt./Kum. _______________________ ________________ and Shri/Smt./Kum. _______________________ ______ as partners of the firm and I am duly authorised by the said firm and the partners of the firm in their capacity as partners and in their respective individual capacities company to make this declaration. (for and on behalf of the firm/company). 2. I say that I am/the firm is/the company is seized and possessed of or otherwise well and sufficiently entitled as absolute owner to the lands and other immovable properties situate at _________________________________ _________, more particularly described in the schedule hereunder written together with all buildings and structures thereon and all plant and machinery attached to the earth, or permanently fastened to anything attached to the earth both present and future (hereinafter referred to as the “said immovable properties”) 3. I say that the said immovable properties are at present mortgaged and charged to ...SC Bank __________ branch for securing the following facilities : a) _________________________________ b) ______________________________ c) _________________________________ d) ______________________________ 4. I further say that the said immovable properties, both present and future, are now proposed to be mortgaged and charged to SC Bank ___________________ branch for securing the following additional/increase in the following facilities, viz. Nam of the facility _______________________ ___________ ____ Total (Limit Rs. in lacs) (in lacs) a) b) c) 886 - III

d) e) together with interest, additional interest, further interest by way of liquidated damages compound interest, commitment charges, premia on prepayment or on redemption guarantee commission, costs, charges, expenses and other monies payable by the firm to the Bank, under their Hands of agreements / Loan agreements / Letters of sanction / Memorandum of terms and conditions, amended from time to time. 5. I say that I have/the firm has/company has obtained necessary permission from the Competent Authority appointed under the Urban Land (ceiling & Regulation) Act 1976 (hereinafter referred to as “the said Act”) for mortgaging and charging the said immovable properties in favour of the Bank as aforesaid. 6. I say that the said immovable properties are (save and expect for the mortgages and charges mentioned herein above) free from all encumbrances or charges (statutory or otherwise), claims and demands and that the same or any of them or any part thereof are/is not subject to any lein/lispendens, attachment or any other process issued by any Court or Authority and that the firm/the company has not created any Trust in respect thereof and that the said immovable properties are in the exclusive uninterrupted and undisturbed possession and enjoyment of myself/the firm/the company since the date or purchase/acquisition thereof and no adverse claims has been made against me/the firm/the company in respect of the said immovable properties or any of them or any part thereof and the same are not affected by any notice of acquisition or requisition, and that no proceedings are pending or initiated against the firm under the Income - Tax Act, 1961, Public Demands Recovery Act, or under any other law in force in India for the time being and that no notices has been received or served on the owner under Rules 2,16, 21 and 51 of the second Schedule to the Income Tax Act, 1961 and/or under any other law and there is no pending attachment whatsoever issued or initiated against the said immovable properties or any of them or any part thereof. 7. I say that (save and except for the mortgage and charges mentioned hereinabove) I am/the company is absolutely entitled to the movable plant and machinery and all the movable assets and the same or any of them are not (save as aforesaid) hypothecated or charged in favour of any person whatsoever except such movables over which hypothecation/charge has been created/to be created in favour of his/its bankers as security for borrowings for working capital requirements, in the ordinary course of business. 8. I have/the firm has/the company has duly paid all rents, royalties and all public demands including Provident Fund dues, gratuity dues, Employees State insurance dues, Income Tax, Sales Tax, Corporation Tax and all other taxes and revenue payable to the Government of India or to the Government of any state or to any local authority and that at present there are no arrears of such dues, rents, royalties, taxes and revenue due and outstanding and that no attachments or warrants have been served on myself/the firm/the company in respect of sales Tax, Income Tax , government revenues and other taxes. 9. I also agree and undertake/on behalf of the firm/on behalf of the company to give such declarations, undertakings and other writings as may be required by the Lender or their solicitors and satisfactorily comply with all other requirements and requisitions submitted by or on behalf of the Lender. 10. I say that have/the firm has/the company has obtained the requisite consent from the Income-Tax authorities pursuant to the provision contained in section 281 of the Income-Tax Act, 1961 for the 887 - III

mortgage of the said immovable properties in favour of the mortgages. 11. I/we on behalf of the firm and its partners/on behalf of the company assure, agree and declare that the security to be created in favour of the Lender shall enure in respect of the said immovable properties both present and future and that the documents of title, evidences, deeds and writings in relation to the said immovable properties which are to be deposited with the Lender for creating a mortgage by deposit of title deeds in their favour are the only documents of title relating to the said immovable properties. 12. I/on behalf of the firm/on behalf of the company hereby agree and undertake that I/the firm/the company will within a period of three months from the date hereof or such extended date as may be permitted by the Lender in writing: a) Perfectly assure the title to the properties comprised in the mortgage security and to comply with all requisition that may be made from time to time by or on behalf of the Lender in that behalf. b) give such declarations, undertakings and other writings as may be required by the Lender and satisfactorily comply with all other requirements and requisitions submitted by or on behalf of the Lender; c) pay all rents, rates, taxes, cesses, fees, revenues, assessments, duties and other outgoings and pay other amounts due in respect of the said immovable properties and shall observe and perform all the rules and regulations pertaining to the same and will not do or omit to do or suffer to be done anything whereby the mortgaged security as proposed to be created in favour of the Lender be affected or prejudiced in any manner whatsoever. d) obtain necessary letters of consent/modified letters of consent from its bankers for the creation of charge on the current assets belonging to me/the firm/the company in favour of the Lender subject to the prior charges/created/to be created by me/the firm/the company in favour of the banker on specified movables for securing borrowings for working capital requirements in the ordinary course of business in such form as may be required by the Lender; 13. I further undertake on my behalf/on behalf of the firm/on behalf of the company that no mortgage, charge, lien or other encumbrance whatsoever will be created on the properties comprised in the mortgages security save and except with the permission of the Lender. 14. I am not aware of any act, deed, matter or thing or circumstance which prevents me/the firm/the company from charging/further charging in favour of the Lender the said immovable properties and the unfixed plant and machinery and all other movable assets as aforesaid. AND I make the aforesaid declaration for and on behalf of myself/the firm/the company and its partners solemnly and sincerely believing the same to be true and knowing full well that on the faith thereof the Lender has agreed to complete the said transaction of mortgage by deposit of title deeds in respect of the said immovable properties as aforesaid. SCHEDULE (Description of the entire immovable properties) Solemnly declared at ____________________ as aforesaid this ____________________day of _________________________________ BEFORE ME 888 - III

Annexure-38 to Chapter-61

LDOC 90(F)

MEMORANDUM OF ENTRY WHERE COMPANY'S PROPERTY IS EQUITABLY MORTGAGED

On the…….. day of……………. Shri/Smt./Kum a Director of ________a company within the meaning of the companies Act, 1956 (I of 1956) and having its Registered Office at _____ (hereinafter referred to as 'the Company') attended the office of SC Bank at its ______ Branch ______ (hereinafter called 'the Bank') and delivered to and deposited with Shri/Smt./Kum. _______acting for the Bank, the documents of title, evidences deeds and writings more particularly described in the First Schedule hereunder written (hereinafter called 'the said title deeds') in respect of the company's immovable properties situated at _____ in the state of ______ and more particularly described in the Second Schedule hereunder written. While making the deposit, Shri/Smt./Kum. _____________ stated that he/she was doing so on behalf of the Company and in his/her capacity as a director of the company with intent to create a security by way of mortgage by deposit of title deeds, on the Company's immovable properties together with all buildings and structures thereon more particularly described in the Second Schedule hereunder written and all plant and machinery attached to the earth or permanently fastened to anything attached to the earth (hereinafter collectively referred to as the said immovable properties) to secure due repayment discharge and redemption by the Company to the Bank of its : NATURE OF FACILITY LIMIT 1. 2. 3. in all aggregating Rs. ___________ (Rupees __________________________) together with interest, additional interest, further interest by way of liquidated damages, interest tax, commitment charges, premia on prepayment or on redemption, guarantee commission, costs, charges and expenses and other moneys payable under their respective Loan Agreement / Letters of Sanction / Memorandum of Terms and Conditions, amended from time to time. Shri/Smt./Kum._____further stated that he/she was authorised to create a mortgage by deposit of the deeds as aforesaid pursuant to the Resolutions passed by the Board of Directors of the Company at their meeting held on _______and he/she furnished a certified copy of the said resolution to Shri/Smt./Kum. _____ and further stated that the said resolutions were in full force and effect. Shri.________ stated that the said title deeds so deposited were the only documents of title relating to the said immovable properties in the possession. Power and control of the Company and that the Company has a clear and marketable title to the said properties. The aforesaid deposit of title deeds was made by Shri. __________________ on behalf of the Company in the presence of Shri. ________________________ an Officer of the Bank. 889 - III

FIRST SCHEDULE (List of documents of the evidences, deeds and writing) SECOND SCHEDULE (Description of the immovable property) All that piece and parcel of Non Agricultural Land bearing at No._________________________ situated within the Village limits of _______________ Taluka ___________________ District and Registration Sub-District _____________ in the state of ___________________ containing by admeasurements _____________ square meters or there about and bounded as follows, that is to say On or towards the North by On or towards the South by On or towards the East by On or towards the West by Together with all buildings and structures now standing thereon or to be erected hereafter and the plant and machinery attached to the earth or permanently fastened to anything attached to the earth, both present and future. Dated at this ___________ day of ________________ For ……..SC Bank CHIEF OFFICER / SR.BRANCH/BRANCH MANAGER Note : To be stamped, if so required under the local stamp Act.

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Annexure-39 to Chapter-61 LDOC 90(G) SUPPLEMENTAL MEMORANDUM OF ENTRY (COMPANY'S PROPERTY) Creation of equitable mortgage by deposit of title deeds by constructive delivery, to secure various loans and working capital facilities granted by Bank of …SC Bank -_________Branch to M/s. __________________On ___________ day of _____________ at ______________ a.m. / p.m./ Mr._______________ of M/s._______________________ a company incorporated and registered under the Indian Companies Act, 1956 and having its registered Office a ___________________________________(hereinafter called “the company”) attended the Office of ……..SC Bank ____________________ Branch at _______________________________________ ____________________ (hereinafter called “the Bank”) and Shri/Smt./Kum. ____________________ ______ Manager of the said Bank and orally confirmed to him that the documents of Title, evidences and deeds, more particularly described in the Second Schedule hereunder written (hereinafter referred to as “the said title Deeds”) in respect of the Company's immovable properties situated at _______________________ in the State of _________________ more particularly described in the first Schedule hereunder written, were deposited with the Bank on _________________________ by way of mortgage by deposit of title deeds with an intent to create a security in favour of the Bank on the company's immovable properties together with buildings and structures thereon (hereinafter collectively referred to as “the said immovable properties”) in order to secure due repayment, discharge and redemption by the Company to the Bank of its. (Rs. in lacs) NATURE OF FACILITY LIMIT 1. 2. 3. 4. aggregating Rs.____________ together with interest, compound interest and/or additional/interest in case of default, penal interest, liquidated damages, commitment charges, premia on prepayment or on redemption, costs, charges, expenses and other monies payable by the Company to the Bank under its Heads of Agreements / Loan Agreements, sanctions and terms and conditions as amended from time to time. Mr __________________________ on the same day, further orally confirmed to the said Shri/Smt./Kum. ______________________ Manager of the Bank, that the equitable mortgage created by the Company on __________________ by deposit of title deeds in respect of the said immovable properties shall be extended as and by way of further equitable mortgage by deposit of title deeds by constructive delivery so as to be a continuing security for the due repayment of the increase in Cash Credit (Hypothecation of stocks) limit of Rs.________________________ (limit increased from Rs. ________ to Rs. ______________________ ) Cash Credit (Hypothecation of Book Debts) limit of Rs. _________________ ) Bill Discounting (Company as a drawee) limit of Rs. _________________ (limit increased from Rs. ______________ to Rs. _________ ) and _____________________________ _______________ aggregating Rs. __________ together with interest, compound interest and / or additional interest, costs, charges and expenses and the original equitable mortgage and the present charge created hereunder shall henceforth be a continuing security to the Bank for due repayment, discharge and redemption by the Company to the Bank for its :

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(STATE ALL THE REVISED LIMITS) (RS. IN LACS) 1. 2. 3. 4. aggregating Rs. ______________ lacs together with interest, compound interest and or additional interest in case of default, penal interest, liquidated damages, commitment charges, premia on prepayment or on redemption, guarantee commission, costs, charges, expenses and other monies including any increase as a result of devaluation / revaluation / fluctuation in the rates of exchange of foreign currencies involved, payable by the Company to the Bank under its Heads of Agreements/ Loan Agreements, sanctions and terms and conditions as amended from time to time. On the same day, Shri/Smt./Kum. ________________________ further deposited with Shri/Smt./Kum. __________________ Manager of the Bank, acting for the Bank, further documents, evidences, consents and permissions, more particularly described in the Third Schedule hereunder written in respect of the said immovable properties. Shri/Smt./Kum. ___________________________ stated that he/she was authorized to create further equitable mortgages by deposit of title deeds by constructive delivery and to deposit the further documents, evidences, consent and permission with the Bank as security in favour of the Bank as aforesaid pursuant to the Resolutions passed by Board of Directors of the Company in their meeting held on _________________ and he handed over certified true copies of the said Resolution to Shri/Smt./Kum. _________________ of the Bank and further stated that the said Resolutions are still valid and have not been modified or rescinded and that the same are in full force and effect. Shri/Smt./Kum. ______________________ Manager of the Bank, acting for the Bank , accepted the deposit of the said title deeds, when Shri/Smt./Kum. _______________________ an Officer of the Bank, was also present. THE FIRST SCHEDULE ABOVE REFERRED TO (Description of the immovable property) SECOND SCHEDULE ABOVE REFERRED TO (List of documents of title, evidences and deeds lying deposited with the Bank) THIRD SCHEDULE ABOVE REFERRED TO (List of documents, evidences, consents, and permissions now deposited with the Bank) 1.

Certified true copy of the Resolution passed by the Board of Directors at their meeting held on____________ ____________ 2. Certificate bearing No. ___________ issued u/s. 281 (1) (ii) of Income Tax Act. 1961.\ 3. Declaration dt. ________ of ________Directors of M/s. ________________________ Date this ___________ day of _________________ OFFICER

MANAGER ...SC BANK

Note : To be stamped, If so required under the local stamp Act.

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Annexure-40 to Chapter-61 LDO 90(H) CONFIRMATION OF CREATION OF EQUITABLE MORTGAGE RELATING TO COMPANY`S PROPERTY (IN CONSORTIUM ACCOUNTS) Not to be SC Bank_____________Branch. stamped Dear Sirs, Re: Various credit facilities aggregating Rs. ______availed M/s. ______ We confirm that as already agreed upon, We have on ___________called at the office of __________SC Bank _________Branch and deposited the documents of title, deeds, evidences, paper and writings in respect of company`s immovable properties together with buildings and structures thereon and plant and machinery, fixtures and fittings both present and future (more fully described in the Schedule hereunder), with an intent to create a security by way of mortgage by deposit of title deeds on a First Charge Basis over the said immovable properties for the due repayment, discharge and redemption by the company to ...SC Bank Consortium of its various credit facilities aggregating Rs.___________ ,together with interest, cost, charges, expenses and other moneys payable thereon.

SCHEDULE (Description of Immovable Properties) For _________________________ Ltd Managing Director / Director

Annexure-41 to Chapter-61 LDOC 90(J) CONFIRMATION OF EXTENSION OF MORTGAGE BY JOINT OWNERS SC Bank, ………………. Branch Dear Sirs, Re: Various credit facilities aggregating to Rs. _________________ availed by We Mr./Mrs./Ms. __ Mr. /Mrs./Ms. ______ and Mr. /Mrs./Ms.___Joint Owners of the Schedule mentioned properties confirm that as already agreed upon, we have on ______extended the mortgage created by us on ________ by deposit of title deeds as and by way of constructive delivery by giving an oral consent / assent to the bank to continue to hold the said title deeds, evidences, papers and writings in respect of our immovable properties together with buildings and structures thereon and fixtures and fittings both present and future (more fully described in the Schedule hereunder) with an intent to create a security by way of mortgage by deposit of title deeds on a First Charge Basis over the said immovable properties for the due repayment, redemption and discharge by us ___________ to …… SC Bank of its various credit facilities aggregating to Rs. ____________ together with interest cost charges, expenses and other moneys payable thereon. SCHEDULE (Description of immovable properties) (To be signed by all the joint Owners)

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Annexure-42 to Chapter-61 LDOC 90(K)

CONFIRMATION OF EXTENSION OF MORTGAGE BY COMPANY (To be obtained on Company's Letterhead)

Not to be Stamped

SC Bank, ………………. Branch Dear Sirs, Re: Various credit facilities aggregating to Rs._____________________ availed by M/s. _________________________ We confirm that as already agreed upon, we have on ___________ extended the mortgage created by the company on _____ by deposit of title deeds as and by way of constructive delivery by giving an oral consent / assent to the bank to continue to hold the said title deeds, evidences, papers and writings in respect of the company's immovable properties together with buildings and structures thereon and plant machinery, fixtures and fittings both present and future (more fully described in the Schedule hereunder) with an intent to create a security by way of mortgage by deposit of title deeds on a First Charge Basis over the said immovable properties for the due repayment, redemption and discharge by the company to ...SC Bank of its various credit facilities aggregating to Rs. ____________________ together with interest cost, charges, expenses and other monies payable thereto by the company to the Bank SCHEDULE (Description of immovable properties) for ____________ Ltd. Managing Director / Directors

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Annexure-43 to Chapter-61 LDOC 90(L) SECOND EXTENSION OF MORTGAGE BY DEPOSIT OF TITLE DEEDS (Individual's property for advances to company) 1.

On the _________ day of _________________ Shri/Smt./Ms. ________________________. Indian inhabitant residing at __________________________ (hereinafter called “the Mortgagor”) attended the branch office of ……. SC Bank at ____________ (hereinafter called “Bank”) and Shri/Smt./Ms. _____________ of Bank

2.

The said Shri/Smt./Ms. _______________ stated that the documents of title, evidences, deeds and writings more particularly described in the First Schedule hereunder written (hereinafter called the “said title deeds”) in respect of his immovable properties situated at _____________________________ more particularly described in the Second Schedule hereunder written together with all buildings and structures thereon both present and future (hereinafter collectively referred to as the “said immovable properties”) were deposited on _____ day of ________ and further deposited by constructive delivery on ______________ by the Mortgagor with SC Bank with an intent to create a security by way of mortgage by deposit of title deeds on his said immovable properties more particularly described in the Second Schedule hereunder written for securing the due repayment, discharge and redemption by M/s. ________________ Limited, a company within the meaning of the Companies Act, 1956 and having its Registered Office at _______________ to …….. Bank for their below mentioned financial assistance to the said company. Nature of facility Limit /Rs. i) ii) iii) together with interest, additional interest, compound interest, further interest by way of liquidated damages, commitment charges, premia on prepayment or on redemption, guarantee commission, commission for Letter of Credit, costs, charges, expenses and other monies payable under their heads of Agreement / Loan Agreements / Letters of Sanction / Memorandum or Terms and Conditions amended from time to time.

3.

The said Shri/Smt./Ms. _________ on the same day accorded and gave oral consent to Shri/Smt./Ms. __________ acting for SC Bank to hold and retain the said title deeds as and by way of mortgage by deposit of title deeds by constructive delivery on his said immovable properties as security on a first charge basis also for the due repayment and discharge by the company to SC Bank for the following increase in the limits of the credit aggregating to Rs. ________ lacs granted/to be granted by SC Bank to the company being: NATURE OF FACILITY LIMIT / Rs. (in lacks) i) ii) 895 - III

iii) together with interest, additional interest, compound interest, further interest by way of liquidated damages, commitment charges premia on prepayment or on redemption, guarantee commission, commission for Letter of Credit. Costs, charges, expenses and other monies payable under their heads of Agreement / Loan Agreements / Letters of Sanction / Memorandum of Terms and Conditions amended from time to time. 4.

Whilst giving such oral consent Shri/Smt./Ms. _________ stated that he was doing so in his capacity as owner / guarantor with intent to create security on the immovable properties as aforesaid. 670 - III5. Shri/Smt./Ms. ____________________________ further stated that the said title deeds so deposited were the only documents of title relating to the said immovable properties in his possession, power and control and that he/she continue to have a clear and marketable title to the said immovable properties.

6.

Shri/Smt./Ms. ________________________further stated that the aggregate amount secured by the mortgage was Rs. ____________ lacs plus interest, costs, charges and expenses.

7.

The aforesaid oral consent was given by Shri/Smt./Ms. _________________________ in the presence of Shri/Smt./Ms. ___________________________ of Bank.

FIRST SCHEDULE (List of documents of title, evidences, deeds and writings) SECOND SCHEDULE (Description of the entire immovable properties)

Dated this _________________________ day of ____________________ (Signature )

(Signature)

Sr. Manager / Manager Chief Manager / Sr. Manager Note : To be stamped, If so required under the local stamp Act.

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Annexure-44 to Chapter-61 LDOC 90 (P) LETTER OF CONFIRMATION OF MORTGAGE CREATION / EXTENSION

Not to be stamped I / We Mr./Mrs./Ms. …Mr./Mrs./Ms.………..and Mr./Mrs./Ms. ……… On my/our behalf or on behalf of ……… as partner for and on behalf of M/s. …………A partnership Firm/a Director for an on behalf of M/s. ………… hereby confirm and declare that I/We had called at you …… branch at … AM / PM on ………and extended the mortgage by constructive delivery/ deposited the title deeds, documents, evidences and writings / extended the mortgage by constructive delivery in relation to the immovable properties situated at … together with buildings and structures, immovable plant and machinery fixtures and fittings more particularly described in the schedule hereunder written with an intention to create security thereon as and by the way of equitable mortgage / mortgage by deposit of title deeds as and by way of first / second charge in your favour for the due repayment / discharge or redemption by me/us/by/M/s……… / by M/s………to SC Bank of its various credit facilities/increased / additional facilities aggregating to Rs ________ together with interest, penal interest, Trustee's Remuneration, Costs, charges and expenses payable thereon. I/We hereby further declare that I/We/am/are entitled to create/extend the aforesaid equitable mortgage in my personal capacity / jointly / as attorney of Mr…… / as partner of M/……/ as Director of M/s…… Date : SCHEDULE Signature Annexure-45 to Chapter-61

LETTER OF AUTHORITY FOR CREATION OF EQUITABLE MORTGAGE / EXTENSION OF MORTGAGE Ref: Credit facilities sanctioned to __________________________________

Not to be stamped

We, Mr. /Mrs./Ms. ________ and Mr. /Mrs./Ms. ____________________ joint borrower/s/partners of Messer's _________________________ (Firms' Name) do hereby jointly and severally authorise Mr./Mrs./Ms.________________________________ to call at the ___________________________ branch of ………….SC Bank, and deliver and deposit the title deeds / extend the equitable mortgage by deposit of title deeds by constructive delivery in respect of immovable properties belonging to us jointly/the firm and situated at _____________________ as security for the facilities/additional facilities aggregating to Rs. ______________ sanctioned to ____________________ repayable together with interest, costs, charges and expenses payable thereon. Managing Director / Director 897 - III

Annexure-46 to Chapter-61 LDOC 96 POWER OF ATTORNEY FOR CONVERTING EQUITABLE MORTGAGE INTO A LEGAL MORTGAGE Stamp appropriately Place : TO ALL TO WHOM THESE PRESENTS SHALL COME, WE ______________ a Company incorporated in India/a partnership/proprietorship firm and having its registered/business office at ________________ (hereinafter called 'the Company/firm') SEND GREETINGS: WHEREAS SC BANK ____________ has agreed to grant to the borrower Acceptance/Guarantee bills/promotes facility up to a limit of Rs. ____________ (Rupees ______________________ ) plus interest inter alia against the extension of equitable mortgage already created by the Company in respect of its Term Loan Account of Rs. _______________ of the Borrowers' land, building, plant and machinery situated at _____ are hereinafter collectively called as 'the said premises' and against the Borrower at the same time agreeing to execute at Company's own costs whenever called upon a proper English Mortgage of the said premises to secure the said Acceptance/Guarantee bills/Promissory note facility up to a limit of Rs. ____________________ plus interest and at the same time also agreeing to execute an irrevocable Power of Attorney in favour of SC Bank, ________________________ for executing the said English Mortgage in favour of SC Bank, ______________________________. NOW KNOW YE AND THESE PRESENTS WITNESS that the Borrower doth hereby nominate, constitute and appoint SC Bank, _______________ (hereinafter called 'the Attorney') to be the true and lawful attorney in fact and at law of the Borrower, for the Borrower, in the name and on behalf of the Company, and as the act and deed of the Borrower to sign, seal, execute deliver, complete perfect and record and Indenture of Mortgage expressed to be made between the Borrower of the One part and SC Bank of the other part in respect of the said premises in such form and containing such covenants and conditions as the Attorney may deem fit including the power to sell and the power to appoint receiver of the said premises and all other powers, provisions, and conditions as are usual in an English Mortgage for securing payment of the said Acceptance/Guarantee bills/Promissory notes facility up to a limit of Rs. _____________ (plus interest) to SC Bank, _______________ or of the moneys which shall then be due and owing to SC Bank, in respect of the said Acceptance/Guarantee Bills facility. The Bank being an incorporated body through its person or persons authorized by the Bank may exercise all or any of the powers, authorities and discretions conferred hereby upon the Bank and may delegate all or any of such powers authorities and discretion's to such of the officers or other persons and on such terms and conditions, as the said Bank or any constituted attorney or any other person appointed by it with power to delegate as it may see fit and accordingly all deeds and documents executed and acts performed by any such person shall be binding on the company. AND GENERALLY to execute, do and perform all such deeds, instruments, acts, matters and things in relation to the premises as the said Attorney shall think necessary or expedient as fully and effectively in all respects as the Borrower could have done if personally present AND the Borrower doth hereby agree to ratify and confirm and covenant for itself its successors and assigns to ratify and confirm all and whatsoever the said Attorney shall lawfully do or cause to be done in or about premises by virtue of these presents. AND the borrower doth declare that this Power of Attorney shall be irrevocable so long as the said equitable mortgage to be extended by the Borrower as aforesaid in favour of SC Bank, _______________ subsists and until the said Acceptance / Guarantee bills / Pronotes facility up to a limit of Rs.___________ (plus interest) shall be repaid to SC Bank, _____________________. In witness hereof the company hath here unto affixed its Common seal this __ day of __20….. .

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Annexure-47 to Chapter-61 LDOC 101 IRREVOCABLE POWER OF ATTORNEY (For financing Road Transport Operators; Purchase of tractors, trailers etc.)

Stamp appropriately

KNOW ALL MEN BY THESE PRESENTS THAT, I Mr. /Mrs./Ms. ________________________ of _________________ inhabitant residing at _________________________ hereinafter called “the Principal” (which expression shall include my heirs, executors administrators and assigns) do hereby irrevocably constitute, nominate and appoint SC BANK having its Head Office at and Branch Office at ______________________________________________________ (hereinafter called “the Bank”) to be my true and lawful Attorney for me, in my name and on my behalf to do and execute all or any of the following acts and things namely:1.

To sell, mortgage, transfer in its name or otherwise dispose of the vehicle manufactured by ________________________________ make / model ___________________________________ bearing chassis No. ____________ and Engine No._____________________ (hereinafter called “the said vehicle”) which is hypothecated by me in favour of the Bank.

2

To execute any deed of transfer in favour of the purchaser or mortgagee.

3

To sign all papers concerning the registration, transfer, sale or mortgage of the above vehicle and conduct all necessary correspondence with the Transport Department or other authorities and to sign the transfer form needed to transfer the vehicle in the record of the Transport Department or other authorities.

4

To ply the said vehicle and take all necessary actions for plying the same and to recover any moneys due as hire charges or fare due regarding the said vehicle.

5

To appoint and / or to remove any driver, cleaner agent or any other employee working on the said vehicle.

6

Until the said vehicle is sold and / or transferred as herein before provided, to insure and keep insured with any general insurance company, the said vehicle against all party risk and to pay the premia therefor and further to incur the required expenses over the repairs and maintenance of the said vehicle so as to keep the said vehicle in good and serviceable condition.

7

The Borrower hereby appoints and constitutes the Bank as its Agents to act, through any office or offices for the purpose of safeguarding, furthering, bettering its security including doing all requisite acts, deeds and things and executing all deeds and documents as may be necessary including documents for filing / registering particulars of charge / s with the concerned Registrar of Company's and obtaining certificate / s of Registration of charge / s, issuing advertisements, declarations of sale etc in relation to the security created here under. 899 - III

8

The Bank / its attorney may at its discretion exercise any or all of the power hereby vested in it and it is hereby empowered generally to do all such acts and things as the Bank / its attorney things expedient for the purposes aforesaid as fully and effectually in all respects as I would do my self.

9

This power attorney shall be irrevocable until cancelled in writing by the Bank / its attorney and / here by confirm and ratify all that the Bank / its attorney does or causes to be done an my behalf by virtue of these presents. In witness whereof ______________________ have set my hand to this power of attorney in the presents of witness at ___________________ this ________________ day of ______________. Witnesses 1) 2) NB to be executed before a Presidency Magistrate or Notary Public.

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Annexure-48 to Chapter-61 LDOC 104 LETTER OF INSTALMENTS AGAINST PROVIDENT FUND Stamp as on agreement SC BANK_______________

Branch

Date :___________

Ref: Loan against Provident Fund I have been granted a Loan of Rs.________(Rupees _______________) against the amount of Provident Fund in the hands of the Trustees of the fund. Please deduct from my salary each month a sum of Rs.__________(and last instalment of Rs.____________) for _________ months and pay the amount in reduction of the Loan until the Loan and interest are fully paid off. Yours faithfully, (Signature)

Annexure-49 to Chapter-61

LDOC 105

Stamp as on agreement Date : The Trustees …………. SC Bank ,Provident Fund Ref: Staff Loan due to the Bank Adjustment out of P.F I have taken a Loan of Rs _______________ from the ………… SC Bank. In the event my death or ceasing to be in the service of SC Bank, whatever amount is due under the loan may be adjusted from the balance standing to my credit Provident Fund Account. This authority supersedes any nomination I have made in respect of my Provident Fund balance to the extent of indebtedness to ……. SC Bank Yours faithfully, (Signature)

901 - III

Annexure-50 to Chapter-61 LDOC 106 LETTER OF AUTHORITY CUM INTENT TO GUARANTEE ANOTHER STAFF MEMBER'S LOAN (IF STIPULATED) ADDRESSED TO TRUSTEES OF PROVIDENT FUND Date: The Trustees, SC Bank, Provident Fund. Dear sir, In consideration of SC Bank, granting a loan of Rs.__________only to Mr./Mrs./Ms.___________ against the accumulation of his/her Provident Fund balance, I stand as a guarantor to the advance up to Rs._________. For this purpose I authorise SC Bank to earmark the sum of Rs.________ against the balance of Provident Fund standing at my credit and to appropriate the sum in default of the loan by Mr/Mrs./Ms. _________. In the event of my death or ceasing to be in the service of SC Bank before the loan together with interest is repaid. I authorise you to pay SC Bank whatever amount is due under the loan to Mr. /Mrs./Ms. _____________________ from the balance standing to my credit in the Provident Fund. This authority supersedes any nomination I have made in respect of my provident fund balance to the extent of my indebtedness to SC Bank. Yours faithfully, (Specimen signature of the guarantor who guarantees the loan.) Note:- A separate Guarantee Letter should also be obtained from the Guarantor on a stamped paper. Annexure-51 to Chapter-61 LDOC 107

UNDERTAKING TO MAINTAIN VEHICLE FOR FIVE YEARS

SC Bank, ______________ branch.

Stamp as on agreement

Dear Sir, Ref: Loan granted to me for purchase of scooter / car

I thank you for granting me a loan of Rs._____________ for purchase of scooter / car I have the vehicle of the year _____________________ the cost price of which is Rs.________________. I undertake to maintain this vehicle at least for a period of five years and will not dispose of my vehicle during this period. After a period of five years, if my loan for vehicle remains outstanding I will seek bank's prior written permission before disposing it of. I will not also apply for a fresh loan for vehicle for a period of five years or till such time the out standing loan is fully settled, whichever is later. Yours faithfully, (Signature) 902 - III

Annexure-52 to Chapter-61 LDOC 108 IRREVOCABLE POWER OF ATTORNEY EMPOWERING THE BANK TO EXECUTE IN ITS FAVOUR A LEGAL MORTGAGE OF THE RIGHT, TITLE AND INTEREST IN THE FLAT / PLOT Stamp Appropriately Date: TO A L L TO W H O M T H E S E P R E S E N T S S H A L L C O M E I , _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _______________________ (hereinafter called “the Borrower”) SEND GREETINGS:WHEREAS SC Bank has agreed to advance to the Borrower a Demand Loan of Rs._______________________ inter alia against mortgage of the right, title and interest of the Borrower in the plot of land / flat in a building belonging to the ______________ _____________________________ _____________ Housing Society Limited, and more particularly described in the schedule hereunder written which said plot of land / flat in buildings are hereinafter called as the said premises and against the Borrower at the same time agreeing to undertake to execute at Borrower's own costs whenever called upon a proper _______________________________ Mortgage of the right, tittle and interest in the said plot of land / flat of the Borrower, to secure the demand loan with interest at the rate of _______________ % p.a and at the same time also agreeing to execute an irrevocable power of Attorney in favour of the SC Bank for executing the said ___ _______________Mortgage in favour of SC Bank. NOW KNOW YE AND THESE PRESENTS WITNESS that the Borrower doth hereby nominate constitute and appoint SC Bank (hereinafter called 'the Attorney') to the true and lawful attorney in fact and at law of the Borrower in the name and on behalf of the Borrower and as the act and deed of the Borrower: 1. To sign, seal, execute. Deliver. Complete, perfect and record any entry relating to creation of Equitable Mortgage an indenture of Mortgage to be made between the Borrower of the One part and SC Bank of the Other part in respect of the said premises in such form and containing such covenants and conditions as the attorney may deem fit including the power to sell and the power to appoint Receiver of the said premises and all other powers, provisions and conditions as are usual in a mortgage for securing payment of the said Demand Loan at SC Bank with interest at the rate of __________% per annum or of the money which shall when due and owing to SC Bank in respect of the said demand loan and lodge such deeds, documents and writings for registration with the Sub-Registrar of Assurance and admit execution thereof and deposit title deeds with the Bank. 2. To apply for registration of the said flat / plot under the provisions of any applicable act for the time being in force in the state Ownership and for the purpose to sign all letters, applications and documents as may be necessary. 3 To apply to the Co-operative Housing Society where the aforesaid flat No._________ is situated and of which the Borrower is the member for its consent to mortgage the said flat in favour of the Bank and for the purpose to sign all letters, applications, communications and documents necessary to obtain such consent. 903 - III

4 To incur and reimburse all costs charges and expenses that may have been spent to give effect to the provisions of this Power of Attorney. The Bank being a Body Corporate any person or 677 - IIIpersons authorised by the Bank may exercise all or any of the powers, authorities and discretion's conferred hereby upon the Bank and may delegate all or any of such powers, authorities and discretion's to such of the Officers or other persons and on such terms and conditions as the said Bank or such executives / officers or any constituted attorney or other person appointed by it with power to delegates as it may see fit and accordingly all deeds and documents executed and acts performed by any such persons shall be binding on the Borrower/ Guarantor AND GENERRALLY to execute, do and perform all such deeds, instruments, acts, matters and things in relation to the premises as the said attorney shall think necessary or expedient as fully, and effectually in all respects as the Borrower / guarantor would have done if personally present AND the Borrower/guarantor doth hereby agree to ratify and confirm and covenant for himself his heirs, executors, administrators and assigns to ratify and confirm all and whatsoever the said attorney shall lawfully do or cause to be done in or about the premises by virtue of these presents. AND THE BORROWER / GUARANTOR doth declare that this Power of Attorney shall be irrevocable until the said loan of Rs. ______________ with interest / cost, charges and expenses thereon shall be repaid in full to SC Bank. IN WITNESS WHEREOF the Borrower / Guarantor has hereunto set and subscribed his hand at ______________ this ___________ day of _______________. THE SCHEDULE ABOVEREFERRED TO SIGNED AND DELIVERED BY the Withinnamed borrower / Guarantor ________________ ________________________________ in the presence of ___________________________________________

904 - III

Annexure-53 to Chapter-61 LDOC 109 LETTER OF AUTHORITY TO DEDUCT INSTALMENT FROM THE SALARY EVERY MONTH

Place: Date:

Stamp as on agreement

SC Bank ____________________ 1. ____________________________ am an employee of SC Bank, at present stationed at ________________________ branch. 2. You have, at my request granted me a loan payable on demand of Rs. __________ (Rupees ________________________________) for specific purposes of purchase and acquistion of a flat / h o u s e f o r m y r e s i d e n c e s i t u a t e d a t __________________________________________________________ the said loan shall bear interest at the rate of _________________ per cent per annum. 3. The said loan together with interest at the aforesaid rate is repayable by me on demand by you, However, you have, for my convenience and without prejudice to the demand payment nature of the advance, granted me a facility to repay the said loan by monthly instalment of Rs._________________ each. 4. In consideration of the grant of the said loan to me and the continuance of the said facility for such time as you may, in your absolute discretion deem fit, I do hereby irrevocably agree, authorise and undertake so as to bind myself, my heirs, executors, administrators, estate and effect as follows: a) You shall be entitled to deduct every month from the salary, allowances and other remuneration payable to me the said instalments of Rs._______ and the interest at the above mentioned rate and to appropriate the same in repayment of the said loan and I shall not raise any objection of any kind whatsoever in that behalf. b) To deduct the said monthly instalment of Rs.______________ or any one or more of them or any part thereof which may be in arrears and also the amount of interest payable by me on the said loan or any part thereof which may be in arrears from bonus or any other payment whether ex-gratia or otherwise may be payable or become payable to me by you and I shall not raise objection of any kind whatsoever in that behalf. c) In the event of my ceasing to be in your service whether by retirement, death or operation of law or for any other reason or cause whatsoever, you shall be entitled to appropriate and set off the amount or part of amounts due to me from the gratuity which may be payable to me or to my heirs or legal representatives as also the amount that may be standing to my credit in the Provident Fund (self and bank's contributions) irrespective of any nomination made by me or that may be made by me hereinafter, towards the repayment of the entire balance of the said loan and the interest then remaining due and payable by me and the surplus, if any, shall alone be payable to me or to my heirs 905 - III

5.

or to my legal representative, as the case may be and I shall not raise objection of any kind whatsoever in that behalf. Further such appropriation made by you shall be valid and binding on me, my heirs and my legal representatives and my nominees of the Provident Fund in respect of my account. d) During the pendency of this loan and until its full repayment together with interest thereon, I shall not create any kind whatsoever on the salary, gratuity, bonus or other allowances, nor shall I allow the same to be attached by any creditor of mine. e) During the pendency of this loan and until its full repayment together with interest thereon, you shall have first lien on my salary, allowances and other remuneration including bonus, gratuity, or any ex-gratia payment or otherwise whatsoever that may be payable to me in respect of the said loan or the balance thereof for the time being due together with interest thereon as aforesaid. f) During the pendency of this loan and until its full repayment together with interest thereon, I shall not, without previous permission in writing of the Bank, sell, assign, mortgage, charge or in any way encumber or alienate the said flat / house or any part thereof to any one. g) During the pendency of this loan and until its full repayment together with interest thereon, I shall utilise the said flat/house only for the bonafide residential use and occupation of myself and my family members i.e. my wife / husband and dependant children and / or parents. h) During the pendency of this loan and until its full repayment to you together with interest thereon, I will not let or sub-let, sub-lease the said flat / house or any part thereof or give it or any part thereof on leave and license basis or otherwise part with the possession thereof or any part thereof to any other person except in the circumstance hereinafter mentioned. i) During the pendency of this loan and until its full repayment together with interest thereon, in the event of my being transferred to any other branch, or office, you will permit me to give the said flat/ house or any part thereof on leave and license basis on reasonable terms subject however to your prior approval in writing being obtained by me. j) During the pendency of this loan and until its full repayment together with interest thereon, I shall nominate you in respect of the said flat / house in the register maintained by the Society. k) During the pendency of this loan and until its full repayment together with interest thereon I shall not allow the instalments or interest thereon to fall in arrears and I shall punctually pay the Municipal taxes assessments, outgoings etc, to the said Society and also shall not allow the same to fall in arrears. I further undertake that I shall abide by all the rules and bye-laws of the said society and shall not do anything by which my membership in this said society shall be jeopardised or removed. The undertaking the authority and the agreement herein contained shall be irrevocable. Yours faithfully, (Signature)

906 - III

Annexure-54 to Chapter-61 LDOC 112 UNDERTAKING TO CREATE A LEGAL MORTGATE IN BANK'S FAVOUR (WHERE SOCIETY IS FORMED) Stamp as on agreement Date: SC BANK ____________________ Dear Sirs, In consideration of SC Bank at my request agreeing to grant and / or granting me a Demand Loan of Rs._________to enable me to purchase the flat No.____. In hereby undertake to create a legal mortgage in favour of the Bank of right, title and interest in the said flat when called upon to do so, and to deposit the Share Certificate and / or loan bonds or stocks when issued to me by the said Society, together with the blank transfer form duly signed by me and also the letter of consent from the said Society authorising me to mortgage my right, title and interest as herein above stated. Yours faithfully, (Signature) Annexure-55 to Chapter-61 LDOC 115 UNDERTAKING TO REPAY LOAN IN STIPULATED INSTALMENTS (Under Personal Loan Scheme) SC BANK

Not to be stamped

______________ Branch. Dear Sir, Ref: My personal loan Account up to a limit of Rs.____ for purchase of car etc.

With reference to the above, I hereby agree and undertake to repay the sum in ____ monthly instalments of Rs.____ last instalments of Rs. _____ only commencing from _______. I hereby authorise the Bank to deduct from my salary each month a sum of Rs. ___ for _____ months and pay the amount in reduction of the loan until the loan together with interest is paid off. I however, understand and agree that the Bank is entitled to recall the entire loan at any time at its pleasure and without assigning any reason. Yours faithfully, (Signature) 907 - III

Annexure-56 to Chapter-61 LDOC 136 GENERAL UNDERTAKING Stamp as on agreement Place: Date:

SC BANK ______________________ Branch Dear Sirs, Ref:Various Credit facilities, Viz. 1. Cash Credit (Hypn./ of stocks & book debts facility with a limit of Rs._____) 2. Team Loan of Rs.___________ lacs. 3. Guarantee limit up to Rs.________ lacs. 4. Documentary letter of Credit up to the limit of Rs._________ lacs 5. ___________________________________ WHEREAS SC BANK ___________ Branch ________________ (hereinafter referred to as “the Bank” has at our request granted to us the above mentioned Credit facilities secured inter alia by hypothecation of stocks, book debts, machinery etc. NOW IN CONSIDERATION of the Bank at our request continuing and having continued above mentioned facilities we __________ Limited, agree confirm and undertake. 1.

To deal exclusively with your bank.

2.

Not to incur capital expenditure for major expansion / diversification / modernisation without Bank's prior written consent.

3.

To appoint you as the Manager to the issue in case the Company enters the capital market for issue of shares / debentures / bonds

4.

To submit stock statements / quarterly statements within the stipulated time and in the prescribed manner and in case of delay or default in submission to pay penal rate of interest as per Reserve Bank of India / Bank's guidelines.

5.

Not to allow promoters to disinvest / transfer their shareholdings without the prior written consent of the Bank.

6.

To execute proper documents for each type of facility as detailed in the sanction and registration of charges with the Registrar of Companies, wherever necessary within the stipulated time, before disbursement / release of the sanctioned facilities.

908 - III

7.

To keep hypothecated security fully insured against fire and such other risks as may be required by the Bank and to submit the respective insurance policies to the Bank.

8.

To allow Bank to carry out inspection of the hypothecated securities at periodical intervals and to bear the inspection charges and other incidental charges incurred by the Bank in connection therewith.

9.

To allow Bank to charge penal interest @ ______ % above the rate applicable to Cash Credit Account on the entire outstandings in working capital facilities under the following circumstances:a)

Default in repayment of loan instalments

b) Non/delayed submission of quarterly operative statement and / or half yearly fund flow statement c)

Non/delayed submission of monthly stock / book debts statements and other financial data

d) Excess borrowing in the Cash Credit Account. e)Default in borrowing covenants. 10. To obtain the Bank's prior written consent in respect of the following matters:a)

Entering into any borrowing arrangements with other banks, Financial Institutions and/or any other parties.

b) Taking up a new project on large scale expansion c)

Making investment in or giving loans to subsidiaries, associate concerns individuals or other parties.

d) Effecting merges and acquisitions. e)

Paying dividend other than out of current year's earnings after making due provisions.

f)

Giving guarantee on behalf of third parties.

g) Premature repayment of loans and discharge of other liabilities. 11. Not to create without Bank's prior written consent, charges on all or any of the assets and / or properties of the Company, other than the existing / proposed charges in favour of other Financial Institutions / Banks. 12. That all the monies advanced or to be advanced by the Bank under the facilities mentioned hereinabove shall be utilised exclusively for the purpose set forth in our proposal and for no other purpose and if the said loan / advance is utilised or attempted to be utilised for any other purpose or if the Bank apprehends or has reasons to believe that the said loan / advance is being utilised for any other purpose, the Bank shall have the right to forthwith recall the entire or any part of the loan / advance without assigning any reason therefor.

909 - III

13. That notwithstanding anything to the contrary contained in any of the documents/agreements executed/to be executed by us as also in the Letter of Sanction by the Bank, the Bank shall be entitled to charge the contractual rate of interest at its own discretion without any intimation to us to bring it in conformity with the rate of interest prescribed by the Reserve Bank of India or any other eventuality such as re introduction of interest Tax. etc. from time to time and the same shall be binding on us as if such change were already incorporated in the documents executed by us. 14. That in the event of any irregularity, the Bank at its discretion shall be entitled to charge on the entire outstandings or any portion thereof interest at such enhanced rates as it may fix during the continuance of such irregularity. We understand that it is on the faith of the aforesaid representations and express undertakings that the Bank has consented to entertain our proposal for the said facilities. Yours faithfully, (Signature)

910 - III

Annexure-57 to Chapter-61 “SC” BANK Project Finance Advances / Borrowings CCB Ledger Sheet Separately maintained for Advances & Borrowings Loan No. Name of Scheme File No. Name of CCB

Code / FCLB - 1 Rate of Interest

PRINCIPAL Date

PRODUCTS

PARTICULARS DEBIT Rs.

CREDIT Rs.

BALANCE Rs.

Annexure-58 to Chapter-61 “SC” BANK Total Liability Register

Date

CENTRAL CO-OP BANK

Dr. Rs.

Cr. Rs.

BALANCE Rs.

This Total Liability Register is maintained separately (i) Interest rate wise (ii) Scheme wise

INITIALS

No. of DAYS

PRODUCTS

Annexure-59 to Chapter-61 REPAYMENT SCHEDULE “SC” BANK NAME OF THE SCHEME Date

CENTRAL CO-OP BANK

Dr. Rs.

Cr. Rs.

BALANCE Rs.

911 - III

INITIALS

No. of DAYS

PRODUCTS

Annexure-60 to Chapter-61

.NO. /ACS/OPR Date:…….. DRAWAL UNDER CASH CREDIT ACCOUNT NO.I OF THE TAMILNADU HANDLOOM WEAVERS' COOPERATIVE SOCIETY LTD. (CO-OPTEX) DRAWAL SCRUTINY SHEET Amount of Drawal : Rs. 1.

i)

Date of drawal application

:

ii) Date of receipt of application

:

iii) Date of putting up the application

:

LIMIT: 2.

Limit sanctioned by NABARD for the year 2011 - 2012

:

Normal

:

Festival

:

Total

:

Limit and outstanding to be reduced to

3.

Rs.

Lakhs on

Rs.

Lakhs on

Rs.

Lakhs on

Drawing Power (valid from ……..to…….)

:

4.

Borrowings of Co-optex from us as on

:

5.

Rediscounted with NABARD

:

6.

Eligibility for drawal i)

With reference to limit (2-4)

:

ii) With reference to Drawing Power (3-4) : iii) Drawal eligibility (6 (i) or 6 (ii) 7.

whichever is lower)

:

Amount of drawal applied

:

a)Primaries payment : Rs. b) Imprest payment : Rs. c) Total : Rs.

912 - III

8.

Amount of drawal recommended

9.

Certificates and Hundi required to be

:

enclosed to the drawal application

:

i)

:

Stock-in-trade

Furnished / Not furnished

In order / Not in order ii) Reserve Borrowing Power

: Furnished / Not furnished In order / Not in order

iii) Hundi and schedule

:

Furnished / Not furnished In order / Not in order

10.

Observation & Recommendations

: MANAGER

CHIEF MANAGER: Observations/ Orders of ASST. GENERAL MANAGER :

913 - III

Annexure-61 to Chapter-61 ST-SAO

The Tamil Nadu State Apex Cooperative Bank Ltd., Drawal Application Scrutiny Sheet Date:

dd/mm/yyyy (Rs. in lakh)

C.No. / ACS(OPR)/2010-11 SAO

NODP

OTHER CROPS

OIL SEEDS

Amount of drawal Name of the Central Coop. Bank 1

i.

Date of Drawal application

2

ii.

Date of receipt of application

iii.

Date of Putting up the application LIMIT SANCTIONED BY

3 a.

NABARD

b.

TNSC BANK

c.

Total Credit Limit (a + b) LIMIT

4 a.

Limit

b.

Outstanding (Normal)

c.

Balance

d.

Outstanding (Interim)

e.

Unavailed limit NON-OVERDUE COVER

5

2009-10

NODC as on Outstanding (Normal) NODC available for further drawal 6

i.

ELIGIBILITY FOR DRAWAL

iii

With reference to limit With reference to NODC Amount of drawal applied for

7

914 - III

a.

Loans issued from

b.

Of which loans issued to small farmers

1

c.

% of (b) to (a)

2

d.

Small farmer condition imposed by NABARD

e.

Has the bank complied with the condition

f.

Of which loans issued to TENANT farmers

g

% of (f) to (a) Whether the CCB has adequate share holdings for the drawals applied for

8 9

10

a)

Demand falling due within next 30 days

b)

Surplus in NODC

c)

Will the CCB be able to maintain NODC as on last Friday

a)

Reserve Borrowing Power of CCB

11

Receipts of Returns Name of the Return i.

Revolving Credit Return

ii.

Non-overdue cover Return

iii.

Crop Verification Report

For the month of

Cash Reserve and Liquid Assets:

12 i.

Position enclosed as on

ii. iii.

Is the position given is not prior to 13 days from the date of drawal application Cash Reserve required to be maintained (3%)

vi.

Cash reserve actually maintained

a.

Excess Cash Reserve over and above

( 6%)

b.

Reasons, if any, indicated by the CCB for excess cash reserve maintained

c.

Whether the same is adjusted

840

Liquidity required to be maintained

vi.

Liquidity maintained

0

Surplus (+) / (-)

viii.

Comments, if any

915 - III

Due on

Received on

ix.

13

Defects if any, pointed out while allowing the previous drawal

Observations and recommendations The 0 CCB is eligible for the drawal of Rs. as applied for. For Instructions please, whether we may Allow the drawal of Rs to the dccb as requested by them, if approved.

CM:

MANAGER

AGM:

916 - III

Annexure-62 to Chapter-61 THE TAMIL NADU STATE APEX COOP. BANK LTD., CHENNAI-1. ST WEAVERS - SCRUTINY SHEET C.NO 16 /ACS/OPR/2003-2004

DATE: (Rs. In lakhs)

I Name of the DCCB

Date of the Drawal Application

Received on

Handloom

Powerloom

Addl

Power-loom

Addl

II. Eligibility for drawal applied for a.

Limit sanctioned by NABARD

b.

Outstanding

c.

Unutilised

Normal

NODC AS ON 26/06/04 f.

Outstanding

g.

Eligibility

Less: Primaries Payment on ELIGIBILITY NODC Production Basis Achi under Spl. Programme Total Outstanding h.

ELIGIBILITY

Less: Primaries Payment on ELIGIBILITY ELIGIBILITY for Drawal whichever is lower Amount of drawal applied for Amount recommended for disbursement 917 - III

Eligibility for drawal applied for

Normal

Power-loom

IV CASH RESERVES AND LIQUID ASSETS: i.

(a) Position Enclosed as on (b) Is the position given not earlier than 13 days from the date of drawal application

ii. Cash Reserve required to be maintained 3% iii. Cash Reserve maintained iv. % of Cash Reserve over and above 6% (a) Reasons, if any, indicated by the DCCB for excess cash reserve maintained (b) Whether the same is justified vi. Liquidity required to be maintained vii. Liquidity maintained viii. Surplus (+) / Deficit (-) V.

IS THE DCCB PROMPT IN SENDING THE RETURNS PRESCRIBED BY US

Name of the Return

For the month of

Due on

Revolving Credit Non-overdue cover VII. RECEIPT OF DOCUMENTS (TO BE ENCLOSED) Revolving Credit Non-overdue cover III. Whether the DCCB has adequate Reserve Borrowing Power to sustain the drawal applied for SUMMARY OF OBSERVATIONS AND RECOMMENDATIONS The ------ CCB is eligible for the drawal of Rs. applied for. If approved we may allow the drawal as requested by the CCB For instructions please. Manager :

Chief Manager:

Asst. General Manager: 918 - III

Received on

Addl