Lending Functions Of BanksHimanshu Ahire 13

Executive Full Time PGDM  ( 2009-2010 )

Symbiosis Institute of Management Studies

Retail Banking

Banks as Financial Intermediary

‣ Reduce The Loan Default Risk

‣ Ensure Liquidity of Savings

‣ Lower Information Cost

Financial Institutions

Corporation/Government(Borrowers)

Households(Savers)

Cash Cash

Securities Securities

Deposits&

Insurance Loan Agreements

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Income & Risk

‣ Interest Spread

‣ Fee Base Income ( Off-Balance Sheet Lending)

‣ Default Risk / Credit Risk

‣ Interest Rate Risk

‣ Provision

‣ Contingent Liabilities

Types of Lending

‣ Fund-based Lending : Actual Outflow of Cash

Example : Short Term Loans, Long Term Loans , Revolving Credits.

‣ Non-fund based lending : Contingent Liabilities

Example : Letter of Credit, Bank Guarantee.

‣ Asset-based lending : Earning Capacity of Asset

Example : Securitization, Project Finance.

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Loan Policy - ‘Credit Culture’

‣ Objective : The Loan Policy Alignment of individual goals of credit officers to banks overall goals.

‣ Loan Objective : liquidity,profitability,, risk , asset quality

‣ Volume & mix of loans : Industry, Sectors, Geographical Area

‣ Loan Evaluation Procedure : Credit Appraisal Procedures

‣ Credit Administration : Credit Sanctioning Powers

‣ Credit Files : Mandatory Format

‣ Leading Rates :

Types of Loans

‣ Base of Classification : Purpose, Collateral, Repayment Period & Borrowers Profile.

‣ Loans For Working Capital

‣ Loan For Capital Expenditure & Industrial Credit

‣ Loan Syndication

‣ Loans for Agriculture

‣ Loan for Infrastructure - Project Finance

‣ Loans to Consumers or Retail Lending

‣ Non Fund Based Credit

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Loans for Working Capital

‣ Purpose Oriented Loan

‣ Close Working Capital Gap

‣ Short Term

‣ Loan Against Inventories

‣ Estimation of loan requirement extremely important

Loan for Capital Expenditure

‣ Term Loan

‣ Maturities 1 to 7 years

‣ Repayments in fully amortized equal periodic installments(Interest + Principle)

‣ Repayment of Principle in equal installments . Interest calculated separately

‣ “Bullet Loan” - Balloon Payment - Pay periodic interest but principle paid on maturity

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Loan Syndication

‣ Large Projects - Huge Capital & high Risk

‣ Group of Banks

‣ Lead bank - Fee based income

‣ Junior Banks - interest spread income

‣ High Risk

‣ Term Loans

‣ For Specific Project

‣ No Recourse

‣ Challenge in Credit Appraisal

Loans for Infrastructure - Project Finance

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Retail Lending

‣ Small Loans

‣ Repayment Period 1 to 5 years or more in housing loan

‣ Higher default risk

‣ Installment Loans

‣ Credit Cards

‣ Non Installment Loans

Unsecured vs Secured

‣ Unsecured : Not backed by tangible security. ‘creditworthiness of borrower’

‣ Secured Loans: Backed By tangible assets

• Floating Assets : Composition of asset keeps changing in short term e.g. Current Assets

• Fixed Assets : Composition of asset can not be changed in short term e.g. Plant & Machinery

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Security :Pledge

‣ Bailment of goods as a security for payment of debt.

‣ Movable Goods

‣ Goods are in Possession of Bank

‣ Bank Responsible to take care of goods.

Security :Hypothecation

‣ Movable Assets

‣ Charge on Movable Assets

‣ No transfer of possession of assets

‣ Riskier than Pledge

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Security :Assignment

‣ Borrowers ‘assign’ actionable claim to the bank

‣ Actionable claim - Claim to any debt

‣ Example : Money due from government department, Life insurance Policy

Security : Banker’s Lien

‣ Lien is the right of the bank to retain the securities given by the borrower until the debt due is fully paid.

‣ Banks right to sell goods & securities in case the borrower defaults.

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Security : Right of Set Off

‣ The Bank’s right of set off enables it to adjust the credit balance in one account of a customer with the debit balance in another account of the same customer.

‣ Account Must be same name

‣ Account must have same rights

Security : Mortgage

‣ Immovable Property

‣ Transferrer of property - Mortgagor

‣ To whom its transfered - Mortgagee

‣ Transfer of interest

‣ No actual Possession by Bank

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Security : Charge

‣ Any form of security for debt, whether the borrower is an individual, partnership firm, private or public limited company or the government.

‣ Fixed Charge : Specific Charge over designated property of the company- Right to sell asset

‣ Floating Charge : Not attached to any specific asset.

‣ Does not restrict company from selling assets under charge or assign them as security.

Non-Performing Assets

‣ An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

‣ ‘Overdue’ more than 90 days

‣ ‘out of order’ - over draft & cash credit

‣ Sub-standard Assets: NPA for <= 12 months

‣ Doubtful assets: Sub-standard for 12 months

‣ Loss Assets: Considered uncollectible or have very little value of backed asset

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Thank You

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