Banking Assets

o Banking Assets originate from Banking Regulations Acto Defines Banking as

– accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise’

o Banks need to deploy Deposits gainfully in order too Pay the contracted interest at the end of period / timeo Repay the deposits on demand or otherwiseo After maintaining the statutory reserves

Banking Assets – Classification o In a Bank’s Balance Sheet Assets are shown as :

o Bills Purchased & Discountedo Cash Credits, Overdrafts & Loans payable on Demando Term Loans

o These are re-stated as o Secured by Tangible Assets ( incl Book debts )o Secured by Bank/ Govt Guaranteeso Unsecured

o Re-stated again aso Priority Sector & Public Sectoro Bankso Others

Banking Assets – In practice

o Classified as :o Fund Based Facilities / Productso Non Fund Based Facilities / Products

o Above may be either :o Secured by Tangible securitieso Unsecured

o By Segmento Corporate Banking Products

o Large & Mid Corporateso MSME

o Retail Banking Products

Fund Based Assets / Products

o By Tenoro Bills

o Purchasedo Discounted

o Cash Credit / Overdraftso Demand Loans - < One yearo Term Loans - > One yearAbove may be Secured or Unsecured

Non Fund Based Products

o Letters of Credit ( LCs )o Sight LCso Usance LCs

o Guaranteeso Financial Guaranteeso Performance Guarantees

o Deferred Payment GuaranteesAbove may be Secured or Unsecured

CORPORATE BANKING ASSETS

- FUND BASED

Fund Based -Traditional Products

o Working Capital :o Cash Credit against Stocks / Book debtso Demand Loanso Lock and Key Loanso Bills Purchased & Discounted

o Regularo Under L/C

o Term Loans :

Fund Based – Contemporary Products

o Channel Financing

o Factoring

o Future Receivables Discounting

o Credit card Receivables Securitisation

o Lease Rental Securitisation

o Loans Against Property ( LAP )

Cash Credit / Overdrafts

o Suits most businesses & segments –Universal acceptance

o Easy assessment, control and monitoring.

o Easy to operate.

o Running Account ( with a Debit Balance )

o By Cheques as a running account with governing Limits & Operating Drawing Power

o Facility can be run on a in-and-out basis – Regular Deposit & Withdrawals

Cash Credit / Overdrafts

o Funding is done from cash-to-cash stage. i.e RM purchase to sales realization

o Granted against security ofo Stocks ( all stages & kinds )o Book Debts

o In India constitutes the prime source of funding for Corporateso Because of its flexibility and ease of operation

o Treated as short term & renewed every yearo Technically payable on Demando Can be a Hypothecation or Pledge

Demand Loans

o Payable on Demand after a fixed Termo Usually less than & up to a Year

o Can be given for purposes similar to CCo At times built out of Total Fund Based limitso Is also given against other securities

o Like FDs, Securities etco Can be Clean & Unsecured at timeso Convenient for short term specified useso Normally repayment : Bullet paymento Security charge can be a Hypothecation or Lien

Bills Finance

o Bills Finance given to Finance Sales & Debtors :o Bills Purchased oro Bills Discounted

o Normally given against ‘Sales’ Bills of Exchangeo Drawn against Sales in course of businesso On acceptable and known parties by the Bako For period of Usance ( Credit ) upto 3-6 monthso Facility gets rolled over on payment of Billso When Given against ‘Sight Bills’ is called Bills Purchased

o Preferred source of lending by Banks when parties are known & acceptable

Bills Finance

o Is given as regular fund based limit o Is a preferred source of financing in International

Tradeo When nomenclatured in FC are called Foreign Bills

o Can also be given under LCs of reputed Bankso Big source of Export Finance in Bankso Banks have a Hypothecation charge over the

underlying Debts/ dues

Term Loans

o Also called as Project Loanso Are given for Asset creation o As name suggests its give for a Term/ periodo Usually given for periods longer than 3 years

o Up to 10 years and longero These loans finance small & Large projectso Considered ‘Tricky ‘ loans as taking a credit

view over long periods is difficult and changes in business environment rapid

Term Loans

o Normally payable in fixed instalments as per repayment schedule agreed upfront

o Fixed Term, Fixed amount, Fixed Priceo Secured by the assets created by the loan.o Charge on immovable financed is ‘Mortgage’ o Charge on Movable assets is Hypothecationo In term loans usually charge is on a ‘ Pari passu’

basis because there are more than one lenders

FUND BASED – CONTEMPORARY PRODUCTS

Channel Financing Enables financing the whole supply chain of the anchor customers

dealers and

vendors.

Normally granted to associates of AAA / AA rated borrowers With excellent payment record

e.g HLL, Maruti, ITC , Nokia, Hero Honda and more…..

Anchor co may/ may not give some comfort to the lender.

Has become a useful tool to acquire better quality & large volume Assets for Banks/NBFCs

Supplies to dealers are discounted Take out from the dealers’ cash flow.

Vendors are paid by discounting their sales bills Repayment are from anchor customers who will pay on due date

Leverages the credit quality of a better rated customer & lowers risk

Factoring

o Factoring is financing of the ‘Sales Ledger’o A ‘Factor’ gets into the shoes of the seller

o Manages collections, recovery, sales ledger keeping etc for the seller.

o Different from sales bills discounting. o It’s a Buy out

o Saves the hassle of hundis, due dates etc

o Can be with/ without recourse nowo In India usually with recourse to seller

o Export factoring is called Forfaiting

Future Receivables Discounting

o A very innovative producto to finance Infrastructure projects

o Future cash flows discountedo for certain fixed period o Captured through an escrow account and o discounted upfront.

o Repayment (Take-out ) is from the future cash flows.o Needs strict monitoring & control

o on the future cash flows.

o Suits projects like Toll roads, Bridges, Ports,

Rental Securitisation

o Future rentals from better rated borrowers are securitised.o Captures the booming business of BPOs and real estate

developmento Against a fixed term covering loan amounto Premature exits not favoredo Classic case of Credit enhancement through Product structuring

o Leverages the rating of the Tenant and his Cash flowso Supported by mortgage as security

Loan against Property ( LAP )

CORPORATE BANKING ASSETS

NON FUND BASED

Letters of Credit

o Letter of Credit– Is a document issued by a Bank to a Seller– Guaranteeing the payment to Seller for goods supplied to a

designated buyer – On presentation of the specified documents– LCs are issued as per provisions of UCPDC

• Document serves as a guarantee to the seller– that it will be paid by the Bank regardless of– whether the buyer ultimately fails to pay.

• Thus, the risk that the buyer will fail to pay is transferred from the seller to the Bank.

Letters of Credito Letters of credit are used primarily

– in international trade for large transactions

o There are 4 parties to a Letter of Credit– Issuing Bank– Applicant also ‘The Buyer’– Beneficiary also ‘The Seller’– Advising Bank

o All LCs issued are ‘Irrevocable’ – Can be amended only at the request or consent of beneficiary

o Letters of Credit may be – For imports/domestic purchases and are

• Sight• Usance

Bank Guarantees

o Another Non Fund Product Line in Bankso Banks leverage their credibility and acceptability to

issue Guarantees to Third partieso Guarantees are issued on behalf of their Clientso Bank Guarantees are a good source of fee income &

deposits for Bankso Huge demand by Infrastructure , Construction &

Project Companies for their businesso Enables clients to reduce funds outlay and save costs

Bank Guarantees

Issued for variety of purposes for such clients– Bid Bonds– Earnest money– Advance for projects– Release of retention money– Performance Guarantee– At times for Customs in lieu of customs duty– General & Miscellaneous

Bank Guarantees

• There are 3 parties to a Bank Guarantee, viz– Applicant or the Bank’s Client– Beneficiary – Issuing Bank

• Bank Guarantees have a validity period and can’t be open n continuing

• Unlike LCs they are issued in a free format acceptable to the Beneficiary and Bank

Buyers & Supplier Credit

Buyer's credit o Enables local importers ( Buyers ) gain access to cheaper

foreign funds close to LIBOR rateso Saves costs and gives longer tenors for payment o Tenor ( Duration ) of buyer's credit varies from country to

country, as per the local regulations.– Buyer's credit can be availed for one year in case the import is

for trade-able goods – Three years if the import is for capital goods– Interest on buyer's credit may get reset, every six months.

Buyers & Supplier Credit

o Exporter or Supplier gets paid on due date;– whereas importer gets extended date for making an import

payment as per his cash flowso Buyer can deal with exporter(seller) on sight basis

– negotiate a better discount and– use the buyers credit route to avail financing.

o The funding can be in any Foreign currency – (USD, GBP, EURO, JPY etc.) as per choice of Buyer

o Buyer can use this financing for any form of trade viz. open account, collections,or LCs

o Currency of imports can be different from the funding currency,

which enables importers to take a favourable view of a particular currency

NATURE & KIND OF BANK’S CHARGE

NATURE OF SECURITIES

Securities

o Banks mostly lend against Securitieso Unsecured loans are often backed by Personal

Guaranteeso Borrower must have clear title to securities and

capable of charging them to the Banko Securities can be

o Movableo Immovableo Tangibleo Intangible

o Must be marketable

Kinds of Securities

o Securities for Bank Loans– Fixed Deposits– Debt instruments of rated Companies– LIC Policies– Shares of listed Companies– Gold

o Corporate Loans– Stocks & Book Debts– Plant & Machinery– Land & Building

Charges & Modes of Creation

o Charge on security

– Means making a security legally available to the

lending banker

– Creditor ( Bank ) gets definite & defined rights

on assets till loan is repaid / liquidated

– Absolute ownership remains with the borrower

in most cases

Types of Charges

o Lien– Negative Lien

o Assignmento Pledgeo Hypothecationo Mortgageo Right of Set Off

LIEN : Modes of Creation

o Right to retain the goods/securities until debt due is paid– Banker’s lien is more than possessary and is implied pledge

• Banker has a general lien– Does not require a separate agreement– Applicable to goods & securities and not to Monies deposited

with bank– Possession of goods/securities must be obtained in usual

course of business– Right of General lien not affected by Limitation for amounts

covered by security value

LIEN…

o Negative lien :

– Securities do not lie in bank’s possession

– Debtor undertakes not to create a charge on

unencumbered security

– Does not require registration in case of Companies

Assignment

o Transfer of Debt, Right / property in favour of the Bank

– LIC policies, book Debts, Supply bills

o Assignee gets absolute right over security assigned

– Other creditors do not get priority over Assignee

– Assignee does not get a better title than the assignor

Pledge

o Pledge is a bailment or legal delivery of goods by a debtor with an intent to create a charge as security for Loans– Legal ownership remain with pledgor

• Possession, actual or constructive with pledgee

• Fixed charge in favor of the Bank

– Does not require registration with ROC– Not subject to priority claims of other creditors

• Pledgee not bound to sell goods by Public auction in case of default at his absolute discretion

– After giving reasonable notice to borrower– Sale of pledged goods does not extend Limitation

• Bank can sell & recover his dues even after Limitation

Hypothecation

o Not clearly defined under law– It is considered an equitable pledge governed by the terms of

hypothecation deed– Applicable on moveable goods– Neither transfers ownership or possession to lender

• Borrower holds possession as agent of the Bank with constructive possession with Bank.

– Needs registration with ROC in case of companies– Most used method to lend by Banks, despite weakness in security

and its enforcement

Mortgages

o Transfers interest in specific immoveable property in favor of bank

o Forms of mortgages used by banks– Mortgage by deposit of title deeds– Simple or Registered Mortgage

o Charges registered with ROC in case of companieso Registered mortgage needs to be registered with Sub

registrar of assurance within 120 days of creation.o Equitable mortgage can be done at only notified centreso Registered can be done at any centre

RETAIL LOAN PRODUCTS

Retail Loans

o Retail Loans have seen a recent focus by Banks o Was restricted to loans against FDs & Gold and few

others on ‘Customer need’ basiso Initially started with

o Housing or Mortgage loans as a Priority Sectoro Broad based to other assets to meet Retail customer

aspirationo Align with Global Bankso Steady rise in portfolios of Retail loans in Banks YOY

o Additional avenue has enabled spreading of risko Better pricing and higher NIMs to boost profitability

Retail Loans- Kinds

o Loans against FDs & Securitieso Loans against shareso Gold Loanso Car & Two wheeler loanso Mortgage Loans & Loans against Propertyo Education Loanso Personal Loanso Credit Cards

Loans against FDs & Securitieso Basic & simplest Retail Loan Product

o Depositor can ,on request, get ‘x’% of the value of FD as loan from the Bank.

o Instant & automatic at timeso Certain Banks allow drawals on ‘as & when basis’

o Bank note a Lien on the FD to the extent of the loano Zero risk product with Bank’s Right to set off.o Borrower has the option of adjusting it on due date or

repaying the loan as per his convenienceo Interest rate charged is normally 2 % higher than

contracted rate of FD. o No loans are granted against Other Bank FDs

Loans against FDs & Securitieso Loans against Securities– Specified securities as per Bank’s Credit policy• These could be Kisan Vikas Patra, Mutual fund

units, LIC policy ( surrender Value ), • Loan is for an ‘x’% of Face value/ market value/

maturity value / surrender value• Borrower needs to service interest on the loan.• Repayment can be fixed as per mutually agreed

terms for 6-36 months• Can be given as Demand Loan or Overdraft• Interest charged is as per Bank’s interest rate policy • Bank notes its lien / assignment / charge on

security

Loans against Shareso Given against pre approved list of Listed companies

shares, as per Bank’s Policyo Given normally as an overdraft for approved useso Bank holds a Pledge on shareso Loan Limit & DP is calculated as per market value of

shares on date of sanctiono Value of security is normally checked at weekly intervalso In case of fall in value , Borrower must pay the difference

o Margin Callo Margin money for limit calculation is 50 % on MV .

o ROI is as per Bank’s extant policyo Bank’s overall exposure under this product falls under ‘

Capital Market’ exposure limit set by RBI

Gold Loanso One of the most traditional Loan products

o Because of ease of availability of securityo Security is easily marketable and has stable valueo Quality & Quantity can be easily checkedo Valuation/ Price is available in public domaino Bank holds a Pledge on the Gold

o Loans are given for short periodo Given as a Demand Loan with regular or bullet repaymento Quite popular in South Indian branches of Bankso Assignment

Auto Loanso Car & Two wheeler loanso Big push in the past 10 years

o Erstwhile dominated by Foreign Banks & NBFCso Thrust has led to the growth of the auto industry

o Prior to 2000, only 10 -15 % vehicles were financed

o Currently 90% vehicles are financedo Huge impact on Bank’s Balance Sheeto Add-on avenue to deploy funds and improve NIIso Risk mitigated as large number of clients

Auto Loanso Special structured loans to meet customer needso Products may differ Client wise- model wise

– Products for salaried may be of long tenor– SEP + SENP may have differently designed products– Credit view is taken on asset as well as Client profile– Market Value curve is also a determining factor

o Loans vary from 70-90 % of Asset value ( LTV )o Varies with Brand & Models

o Seek to capture existing Free Cash Flowso Credit Decision is a mix of Credit view + Asset view

Auto Loans

o Could be EMI orientedo Tenors vary from 3-7 years

o Short end typically for 2 wheelerso Banks have a hypothecation charge over asseto Auto loans adopt novel channel for sales

o Banks tie up with Auto companies to bring new structured products for their modelso To increase sales of vehicles +loans

o Also tie up with Auto dealers to improve penetrationo Assignments

Mortgage Loans

o As the names suggests these are– Loans against Mortgage of Property

• Acquisition of Land and/or House & Flat– Quite Popular with Banks to build stable Retail Loans– Have a demonstrated low delinquency rate historically– Loans are Long Term – Tenors 5- 30 years– Has enabled preponment of the acquisition date of ‘owned

house’ by individuals– Helped in meeting the growing need of housing– Also provided a big fillip to ‘Core Industries’ in the Economy

• Cement, and Steel, – A growing source of employment and GDP growth

Mortgage Loans

– Value of the loan is determined by Value of property• Assessment of loan eligibility depends upon Age, residual

service, Income etc of the applicant• Normally EMIs should not exceed 35 % of aplicant’s Net

Income• Repayments are EMI based.• EMIs can be structured by lender based on Property,

Builder, Applicant’s requirement• Loan may be disbursed during the construction period

– Interest rates can be fixed or floating– Prepayments are allowed by the Banks• Now without penalty

– Qualifies for Priority Sector Lending – upto 25 lacs

Loans against Property

o As distinguished from Mortgage loans – These are Loans against Ready / existing Property• Property can be either Residential or Commercial• Already owned by the applicant• Purpose of the loan is normally ‘Business purposes’• Tenors are short between 3-7 years - flexible• End use being different, loans are priced higher than

Mortgage loans• Do not qualify for Priority Sector lending

– As Loans are for Business purposes assessment is made differently based on ‘purpose of loan’

Education Loanso Have been on the Banking product suite for long

– Is a Priority Sector Lending for Banks– Govt has been giving high thrust to improve product

penetration– Enables skill building to meet Economy’s growing Skill / Talent

needs– Loans given for pursuing higher education/ professional

courses– Both at Indian & Foreign Universities– More popular with Public Sector Banks on account of Govt’s

thrust– Hasn’t seen much growth in Private sector Banks

• Because of high defaults in the product portfolio

Education Loans

o Past few years has seen higher growth in Bankso Loans are given in 2 slabs

o Maximum limit : Domestic 10 lacs Foreign studies 20 lacso Upto 4 lacs – unsecured and o beyond 4 lacs up to 10 & 20 lacs against Collateral & Guarantees.

– Had seen a high default rate in Banks– Prevented Banks from giving the thrust intended– Govt planning to have a Credit Guarantee Scheme to reduce

default ratios of Banks

Education Loans

o Loans are assessed for “Cost of Education’o Add on like Books, Expenses etc for period of course are

also permittedo Repayment are flexible

o Normally linked to duration of course with a moratorium of 6 months from end of course

o Collateral insisted by Banks if loan value > 4 lacso Normally mortgage of Property

o Interest rates are floating and Base Rate linkedo Repayment are spread over maximum 84 months

Personal Loans

o Clean & Unsecured loanso Seek to lend against short term needso Encourage consumptiono High Risk : Higher Returno Small in Ticket size.o Target specific customers, viz

o Salaried , Reputed Companieso Track Record of paymento Parceled with existing auto / mortgage loans

o Banks seek to leverage their Collection systemso Provides higher revenues

Personal Loans

o Simple assessment– At times pre approved to improve marketing– More popular in times of economic buoyancy

o Loan Limit is based on Certain times monthly Salaryo Banks have prudential limits for this loan portfolioo Assignment

Credit Cardso Credit Cards are like pre approved Overdraft limitso Limits are set based on variety of parameters

– Income, Company, years of service , track record etco Facilitates approved transactions

– At approved merchant establishment ( ME )– Currently covers a wide range o such outlets– Retail, Travel, Hospitals, Chemists, Utility Bills etc– Cash Drawals are also permitted upto a sub limit

o Benefits both the Card holder and the MEo Card holder gets a credit period while ME larger clienteleo Nowadays transaction approval is online

Credit Cards

o Cards allow a credit period of 50-57 dayso Monthly debits ( purchases ) need to be paid at the end of the

credit period fullyo Rollover of monthly outstandings is permitted @ interesto Card holder must pay between 5-10% of outstandings to enjoy rollover

facilityo Interest is chargeable only if not paid by due dateo Subsequent purchases carry interest from due date till amount due

clearedo Limit ( Loan ) is Clean & Unsecuredo Interest rate vary between 24-42 % p.ao Easy credit….difficult to manage if no discipline is maintained

REGULATION OF ASSETS-ROLE OF RESERVE BANK OF INDIA

Priority Sector Lending ( PSL )

o Banks have to lend 40 % of their “ ANBC” under “PSL’o Thresholds “

o Agriculture -- 18 %o Indirect -- 4.5 % maximumo Advances to MSME sector : Reckoned without min/ maxo Education Loans upto Rs 10 lacs – India, 20 lacs - abroado Housing Loans upto Rs 25 lacso Advances to weaker sections 10 %o DIR -- 1 % of ANBC

PSL- Agriculture

o Crop Loans to farmerso Loans against Ware house Receipts upto Rs 10 lacso Working capital and term loans,

– including credit sanctioned under Kisan Credit Card– for financing production and investment requirements – for agriculture and allied activities.

o Finance to corporates, partnership firms and institutions for Agriculture and Allied Activities -dairy, fishery, piggery, poultry, bee-keeping, etc.