32753705 Bank Lending
Transcript of 32753705 Bank Lending
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Commercial Banking
Lending Policies of
Banks.
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Lending by Banks Commercial Banking 2
RBI as a regulator
Announces Credit Policy in April every year
Reviews Quarterly June, October and December
Monitors through various reports Helps GOI to formulate Budget and Policies
Advises Banks to follow its Guidelines
Controls money supply, credit, forex, etc
Prescribes certain exposure limits / rates of intt
Priority Sector Agriculture, SSI, Exporters etc
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Lending by Banks Commercial Banking 3
General Principles of Banks
1. Identification of Borrower
2. Purpose of the Loan
3. Quantum of Loan
4. Period of Loan
5. Source of Repayment
6. Collateral Security Offered7. Appraisal / Sanction / Acceptance of Terms
8. Documentation / Disbursement / Inspection
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Lending by Banks Commercial Banking 4
General Principles
01. Identification of Borrower
Track Record/Experience/
Educational or ProfessionalQualifications
Type of Business Organisation
Past performance3 Cs - Character, Capacity and
Credit Worthiness
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Lending by Banks Commercial Banking 5
General Principles ...
02. Purpose of the LoanIs it for productive purpose ?
Is it a legitimate activity ?
Is it new venture or existing ?
If existing - is it for expansion ordiversification ?
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Lending by Banks Commercial Banking 6
General Principles ...
03. Quantum of Loan Is it need based ?
It should be timely
It should be with borrowers stake/
margin (Varying between 5 to 25%)
It should neither be over financed nor
under-financed
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Lending by Banks Commercial Banking 7
General Principles ...
04. Period of Loan
Is it for short or long term ? Is it adequate by time ?
Is it a renewal/ revival/ enhancement ?
What are the chances of contingencies?
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Lending by Banks Commercial Banking 8
General Principles ...
05 Source of Repayment ? Out of business/salary income ?
Is it self-liquidating ie., a working capitalaccount ? Cash Credit Hypothecation or
Pledge (lock-n-key) facility?
Out of sale of asset(s) financed or disposal of
collateral security?Any other source of income like guarantor?
Is it a bridge loan ?
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Lending by Banks Commercial Banking 9
General Principles ...
06.What is the Security offered ?
Primary - stock, assets, etc(Hypothecation, Pledge, etc )
Secondary -3rd party guarantee or
charge on immoveable property ?(Type of Mortgage over Assets)
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Lending by Banks Commercial Banking 10
General Principles ...
07. Appraisal of Proposal / Sanction
08. Convey Terms & conditions in writing
09. Documentation
Proper Documents ProperStamps
Complete in all respects
Executed by all authorised signatories /Seal
Charge recorded with ROC within 30 days 10.Disbursement, Inspection, Insurance &
follow up asset verification, stockstatements, recovery, renewal ... ... ...
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Bank Lending Principles
5 Cs of good Lending
- Character
- Capital- Capacity
- Collateral
- Conditions
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Principles of good lending
Character :
- Market Report
- Credit history
- Bank Report
- Published Information: website, Stock Exchange,
Industry Sources, Annual Reports
- RBI website, Credit Information System- Credit Information Bureau (CIBIL)
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Principles of good lending
Capacity :
- Technical feasibility
- Economic viability- Past Track record
* Financials, Annual Report, Other docs
* Operation of the account
- Management team, in-house expertise
- Joint Venture partners
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Principles of good lending
Capital
- Owners stake in business
- Investors, JV partners
- Margin money
- Adequacy of capital: statutory requirements
- Ratios:
* Industry Norms on ROAA and ROE
* EPS & PE ratio
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Principles of good lending
Collateral (Security)
- Marketability
- Liquidity- Physical possession/ Storage
- Charging the security
* Mortgage
* Hypothecation/ Pledge
* Lien
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Principles of good lending
Conditions
- General conditions-follow up, supervision
& monitoring, Annual Review etc- Specific conditions, eg
* Raising capital with in given time
* Recruiting professionals/ technocratscapable to run the business
* Fulfilling any other area of deficiency
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Project Appraisal
Technical Feasibility
Financial Viability
Market potential & Clients strength in tapping
the mkt. potential
Managerial skills
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Analysis of Financial data
Balance Sheet
Profit & Loss account
Ratio analysis
Cash flow analysis
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Lending by Banks Commercial Banking 19
Types of Lending A. Fund based (Current & Fixed Assets)
1. Overdrafts
2. Cash Credits
3. Bills Finance Demand or Usance Bills
4. Demand Loans
5.Term Loans
6. Other Loans - Car Loans, Consumer Durables,
Educational Loans, Housing Loans, ProfessionalsPersonal Loans, Credit Cards and so on
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Lending by Banks Commercial Banking 20
Types of lendings ...
B. Non-Fund based (Fee based)
Issue of Guarantees
Issue of Letters of Credit
Deferred Payments Guarantees
C. Others
Lease Finance Hire Purchase Finance
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Lending by Banks Commercial Banking 21
01. Overdrafts Temporary facility
Allowed against Current or CC A/c - 5-
10% above available limit
Simple Application & formalities
High rate of Interest
Clean orSecured against stocks,shares, and other assets
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Lending by Banks Commercial Banking 22
02. Cash Credit A/c
For Working Capital purpose
Limit generally for 1 year
To submit periodic Stock statements Depends on Operating Cycle,
Turnover, Cash Budget or Projected
Balance Sheet
Simple Documentation - DP Note and
Hypothecation/Pledge Agreements
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Lending by Banks Commercial Banking 23
03.Bills Purchased
Bills of Exchange drawn for Credit
Demand Bills or Usance Bills D/A or D/P basis
Limit for Negotiation or Discount
Close monitoring required
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Lending by Banks Commercial Banking 24
04. Demand Loans
Repayable on Demand - secured loan
Against pledge of Gold, Fixed Deposit, Stocks etc.
Generally in installments - mly, qly, hly etc
Gradually liquidated over a period
DP Note and other documents obtained
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Lending by Banks Commercial Banking 25
05.Term Loans For acquiring Fixed Assets
Ascertain Project Report and Cost
Tech. Feasibility & Economic Viability Income to be generated with Project
Economic Life of the Asset
Cash Flows from the Project Charge on Assets, low Rate of Intt
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Lending by Banks Commercial Banking 26
Types of Bank Borrowers
1. Individuals Retail Banking
2. Sole Proprietor
3. Partnership firms4. Trust Accounts
5. HUFs, Clubs, Societies
6. Private Limited Companies7. Public Limited Companies
8. Public Sector Undertakings, MNCs
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Lending by Banks Commercial Banking 27
FORMS OF SECURITY FOR LOANS
1. BANKERS LIEN
2. PLEDGE
3. HYPOTHECATION
4. MORTGAGE
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Lending by Banks Commercial Banking 28
1. BANKERS LIEN
A RIGHT TO RETAIN PROPERTIES
BELONGING TO THE DEBTOR
UNTIL DUES ARE PAID FULLY
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Lending by Banks Commercial Banking 29
2. PLEDGE
IT IS BAILMENT OF GOODS
PURPOSE OF SECURITY
FOR PAYMENT OF A DEBT OR
PERFORMANCE OF A PROMISE
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Lending by Banks Commercial Banking 30
PLEDGE .contd..
IT IS NOT A RIGHT OF OWNERSHIP
LENDER CAN ONLY RETAIN POSSESSION
NOT A TRANSFER OF PROPERTY
PLEDGEE TO TAKE PRUDENT CARE OFASSETS
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Lending by Banks Commercial Banking 31
PLEDGE contd..
Exceptions
1. AGENT CAN ALSO CREATE A VALID
PLEDGE
2. SELLER IN POSSESSION MAY CREATE
3. BUYER IN POSSESSION BEFORE PAYMENT
4. PLEDGER WITH LIMITED INTEREST
5. ONE OF THE JOINT OWNERS INPOSSESSION
6. ANY PERSON WHO IS IN VALID
POSSESSION
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Lending by Banks Commercial Banking 32
PLEDGE .contd..
BANKERS RIGHTS AS PLEDGEE
1. CAN FILE A SUIT FOR RECOVERY OF DUES
2. CAN FILE A SUIT FOR SALE OF GOODS
PLEDGED
3. CAN SELL THE GOODS AFTER DUE NOTICE
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Lending by Banks Commercial Banking 33
PLEDGE .contd..
BANKERS OBLIGATIONS1. NOT ENTITLED TO ENJOY ANY
ACCRETIONS
2. GOVT AUTHORITIES MAY NOT SUPERSEDETHE PLEDGEES RIGHTS FOR RECOVERYOF DUES
3. REASONABLE NOTICE TO BE GIVENBEFORE SALE
4. TO RE-DELIVER THE GOODS ON RECEIPTOF DUES
5. PROPER REGISTRATION WITH REGISTRAR
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Lending by Banks Commercial Banking 35
MORTGAGE - PARTIES
MORTGAGOR - THE BORROWER
MORTGAGEE - THE LENDER/BANKER
REGISTRAR OF ASSURANCES (FOR ASSET)
REGISTRAR OF COMPANIES (FORCHARGES)
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Lending by Banks Commercial Banking 36
MORTGAGE ..contd..
A TRANSFER OF INTEREST IN IMMOVEABLE
ASSETS LIKE LAND, BUILDING, PLANT, M/c.,
IMMOVEABLE PROPERTY TO BE SPECIFIC
CONSIDERATION MAY BE MONEY
ADVANCED/ TO BE ADVANCED ORPERFORMING A PROMISE
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Lending by Banks Commercial Banking 37
TYPES OF MORTGAGES..
1. SIMPLE MORTGAGE
2. MORTGAGE BY CONDITIONAL SALE
3. USUFRUCTUARY MORTGAGE
4. ENGLISH MORTGAGE :(REGISTERED )
5. EQUITABLE MORTGAGE : BY
DEPOSIT OF TITLE DEEDS6. ANOMALOUS MORTGAGE
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Lending by Banks Commercial Banking 38
SIMPLE MORTGAGE
NO DELIVERY OF POSSESSION OF
ASSETS
MORTGAGOR BINDS PERSONALLYFOR DUES
AGREES TO LENDERS RIGHT TO
DISPOSE OFF THE MORTGAGED
PROPERTY FOR LIQUIDATING THE
DUES
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Lending by Banks Commercial Banking 39
MORTGAGE BY
CONDITIONAL SALE
MORTGAGOR SELLS THE PROPERTY TO
LENDER
CONDITIONS THAT ON DEFAULT, SALE
SHALL BECOME ABSOLUTE
ON PAYMENTS MADE, SALE SHALL BE VOID
ALSO, ON RECEIPT OF PAYMENT, BUYER
SHALL TRANSFER BACK THE PROPERTY TOTHE SELLER
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Lending by Banks Commercial Banking 40
USUFRUCTUARY MORTGAGE
POSSESSION IS DELIVERED TO
MORTGAGEE
MORTGAGOR IS ENTITLED TO RE-POSSESS
ON PAYMENT OF DUES OR DEBT ISDISCHARGED BY RENTS AND PROFITS
RECEIVED BY MGGEE
MGGEE IS ENTITLED TO ENJOY THE
PROPERTY TILL DEBT IS DISCHARGED
MORTGAGEE CANNOT SUE MORTGAGOR
FOR FORECLOSURE OR FOR SALE.
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Lending by Banks Commercial Banking 41
ENGLISH MORTGAGE -
(REGISTERED)
ITS A TRANSFER OF PROPERTY TO
MORTGAGEE
FOR A DEBT OR PROMISE TO BE
PERFORMED
MGGEE SHALL RE-TRANSFER THEPROPERTY UPON PAYMENT OF DUES OR
DISCHARGE OF PROMISE
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Lending by Banks Commercial Banking 42
ENGLISH MORTGAGE contd..
MORTGAGE DEED TO BE REGISTERED
WITH THE REGISTRAR OF ASSURANCES
INVOLVES HEAVY STAMP DUTY FOR THE
DEED
PRIOR ENCUMBERANCES TO BE
ASCERTAINED
LEGAL FORMALITIES TO BE COMPLIEDWITH
R.O.C. TO BE INFORMED WITHIN 30 DAYS
THRO FORM Nos. 8 AND 13 (AS PER
COMPANIES ACT)
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Lending by Banks Commercial Banking 43
EQUITABLE MORTGAGE
TRANSFER OF IMMOVEABLE PROPERTY
FOR A CONSIDERATION - DEBT ORPROMISE
BY DEPOSIT OF TITLE DEEDS ONLY WITH AN INTENT TO CREATE CHARGE ON
ASSETS
SIMPLE - NO REGISTRATION WITH
REGISTRAR OF ASSURANCES LEGAL STEPS TO BE PROPERLY OBSERVED
R.O.C. TO BE ADVISED AS IN ENGLISHMGGE
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Lending by Banks Commercial Banking 44
ANOMALOUS MORTGAGE
NOT ANY OF THE ABOVE 5 TYPES OF
MORTGAGES
A COMBINATION OF 2 OR MORE OFTHE ABOVE
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Lending by Banks Commercial Banking 45
MORTGAGES - Miscellaneous
Encumberances to be verfied properly
Stamping of Documents to be proper
Appropriate documents to be obtained
Authorised persons only to create
Record of Dates to be observed in case of
second charge, pari-passu charge
NOCs to be obtained properly
Valuation of Properties to be proper
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SECURITIES FOR ADVANCES -
Other issues
Records to be maintained properly
Stock Inspections to be done regularly
Indication Boards to be insisted upon
Insurance of Assets to be regular Renewal /Enhancement of limits to be done
periodically
Revival Letters to be obtained
Acknowledgement of Debts
Proper End-use and follow up to be done
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