Commercial Paper and Certificate of Deposit :

Commercial Paper and Certificate of Deposit :

CP AND CD are money market instruments for short term investments

based on the recommendations of Vaghul committee.

Commercial Paper :

Unsecured promissory note issued by a big corporate company with

a net worth of Rs.4.00 crores. The company should have been

sanctioned working capital limit by a bank and the account must

be a standard asset. Minimum period 15 days and maximum 1 year.

This is transferable.

Certificate of Deposit :

It is a document of title to term deposits issued by a commercial

bank with a minimum period of 15 days and a maximum of 1 year can

be issued in multiples of Rs.1.00 lac with a minimum of Rs.5.00

lacs. The rate of interest is negotiable depending upon the size

and period of deposit.

Lien and Negative Lien :

--> Lien is the right to retain the goods bailed as security for

a loan. The banker's lien is an implied pledge and is not barred

by limitation. Bank's have the power to sell the goods bailed

without filing the suit.

--> Negative Lien is a non possessary lien and the goods bailed

are in the possession of the borrower only. The borrower gives

an undertaking on a stamped paper stating that he will not create

any charge on the assets without the express consent of the bank.

Contingent Liability :

Is one which is not a liability as on a particular date but which

may become a liability at a later date on the happening of a

contingency.

1. Bank Guarantee

2. LC

3. Advances against partly paid up shares.

Banking Ombudsman :

The banking ombudsman has been instituted for their reddressal of

grievances and settlement of complaints in respect of services

extended at the counters of a bank. Any customer who does not

receive a satisfactory reply within two months of lodging a

complaint can seek redressal from banking ombudsman. Loan relat-

ed complaints resulting in non observance of RBI guidelines are

also entertain.

Cash Flow and Funds Flow :

Funds Flow statement depicts the moment in the relative positions

of various items of assets and liabilities between two dates.

The funds flow statement is based on a wider interpretation of

funds of not only cash but any economic source of value.

Cash Flow is used to mean a statement of cash disbursements and

cash availability in a specified period. A cash flow statement

does not take into account the changes arising out of non cash

expenses and revenues.

RIDF (Rural Infrastructure Development Fund) :

All schedule banks in India other than foreign banks are required

to deposit the amount equivalent to the short fall in their

achievement of the priority sector advances in the RIDF. This is

managed by NABARD. The deposits are made for 5 years and carry a

floating interest rate equivalent to one half of one percent

above the rate on fixed deposits.

Bancassurance :

Bancassurance is a term which refers to the selling of insurance

policies through a bank's establishment channels with a globali-

zation and intense competition banks are experiencing their

spreads coming down shortly. Banks have responded by trying to

use their reach and customer base to increase their fee based

income for which insurance in considered as an ideal option.

ALM :

RBI has issued broad guidelines for ALM system in banks. These

are intended to form the basis for initiating measures for col-

lection, compilation and analysis of data required to support the

ALM system. In normal course bank's are exposed to credit and

market risks in view of the asset liability alteration. The fast

change in financial environment has exposed Indian Banks to

interest rate risk, forex risk and liquidity risk. It is there-

fore important that banks introduced effective management systems

that address the issues related to all the above risks.

Securitisation :

Securitisation is the process of liquidizing the assets appearing

in the balance sheet of banks/financial institutions which repre-

sents long term receivables by issuing marketable securities

there against. This involves conversion of an illiquid, non

negotiable and high value financial assets into securities of

small value which are tradable and transferable.

Ex : The assets generally securitised or term loans to high rated

companies, receivables in government companies credit card re-

ceivables, vehicle loans etc.

Narasimham Committee Phase - I :

1. Allow banks to raise capital from public.

2. Giving autonomy to the banks in promotions and the internal

banking.

3. Restructuring the banking industry 3 to 4 international banks

and 8-10 national banks.

4. Introduction of capital adequacy ratio.

5. Irac norms.

6. Asset reconstruction funds to be set up to take over NPAs of

banks.

Phase - II :

1. Merges of strong banks with other strong banks for creation of

global banks.

2. Allow closure of weak banks.

3. Three tier banking structure to be introduced.

4. Revamping of bank functioning.

5. Strengthening of banks balance sheet.

Nayak Committee Recommendations :

1. Working capital assessment to all eligible units is 25% of

projected turnover with a 5% margin to be brought in by the unit.

2. A sick unit has been defined as one any borrowal account

remains overdue for a period exceeding two and half years and

erosion in the net worth due to accumulated cash losses to the

extent of 50% or more of it's peak net worth during the preceding

two years.

GDP - Gross Domestic Product :

The aggregate market value of all final goods and services pro-

duced during the given year is called GDP. The GDP is obtained

by adding the following :

1. The value of all consumption goods.

2. The value of all the capital goods.

3. The value of government services.

4. The value of net export.

BREAK EVEN POINT :

Break Even Point is that one at which the unit neither makes any

profit nor incur any loss. Any unit starts earning profit after

crossing the point only. This is arrived at on the following

basis.

Sales - Variables expenses is called contribution.

Contribution/fixed cost is the break even point.

DIR - Differencial Interest Rate : 4% maximum Rs.6,500/-.

for weaker sections, maximum 36 months.

Dorment Account : There is no withdrawals continuously for 6

months.

Inoperative Account : There is no transactions for 12 months.

Dormant Account : When there are no withdrawals for 6 months.

The maximum period allowed for realisation of proceeds of export

bills is 180 days.

Rate of interest on export finance - 8%.

The terms Softex - Declaration form for software export.

1. Offlate a downward trend is seen in CRR rate.

2. Interest provisioning on deposits accounts has to be made on

the last working day.

3. Bank is now paying great deal of attention to marketing of

service.

4. Executors and administrator cannot delegate authorities to

third party.

Yield to Maturity rate (YTM) :

It is the rate of discount which equates the sum of present value

of principle which is repayable at maturity and periodical inter-

est if any within the market value of security.

RBI has fixed YTM rate of 14% for government securities of ten

years and above.

Calculation of YTM :

Expected market price of the security is to be calculated first.

This is the sum total of Discounted value of maturity value of

the instrument and discounted value of future interest earnings.

Foreign Exchange Reserves :

Are these reserves with the country which are used to finance

imports/make payments to countries abroad in settlement of trans-

actions. In India Foreign Exchange Reserved include 1.Gold,

2.Foreign Currency, 3. SDR - Special Drawing Rights.

Special Drawing Rights :

SDRs are a type of commercial money to assist world trade. These

are lines of credit opened by IMF to help the member countries in

settling their overseas debts with the intent the temporary

difficulties from payment deficits may be bridged over.

NAV :

Net asset value of various units of investments is declared at

periodical intervals by the respective asset management compa-

nies. NAV represents the amount the unit of investment will

fetch on any particular day in case of liquidation. It is ar-

rived as under :

Market value of investments made from out of the funds less the

liabilities and expenses divided by the number of units.

NPA Concept :

Indian banks have adopted they accrual concept of accounting

convention without reckoning the amount actually realised. The

word realised is distinct from realizability. If a loan made by

the bank fails to fetch any return in the form of interest re-

alised from the borrower the bank has no right to debit the

account with the interest for the following periods. In such a

case the account is called non performing. This is the essence

of Irac norms (Income recognition and asset classification) based

on the recommendations of Narasimhan Committee adopted by the

banks from 1992-93. Based on the above principle any income from

loan account should not be booked until it is actually recovered.

Classification of Assets :

1. Standard Assets :

A standard asset is not a NPA. It does not disclose any problem

and does not carry more than the normal risk.

2. Substandard Asset :

A substandard asset is one which carries more than the ordinary

risk. The account gives signals of irregularities. A NPA which

remains for a period of 18 months is called substandard asset.

Symptoms of substandard assets :

a) Frequent exceedings

b) Outstandings exceeding the limit for good number of times, non

submission of stock statements, non service of periodical inter-

est etc.

3. Doubtful Asset :

A doubtful asset is one which remains as NPA beyond 18 months. A

doubtful asset is classified into 3 categories :

a) Which is in the doubtful category for one year (D1 category)

b) A doubtful asset for more than one year and less than 3 years

(D2 category)

c) A doubt ful asset for more than 3 years (D3 category)

4. Loss Asset :

A loss asset is one where loss has been identified the bank or

internal/external/RBI Auditors and the salvage value of the

security is negligible and the amount has not been written off

wholly or partly.

Provisioning :

Each asset has to be provided for depending upon the risk and the

availability of security value. For standard assets no provision

need be made as it does not carry any risk. However keeping in

view the International standards banks are likely to provide for

standard assets also. Substandard assets have to be provided for

at the rate of 10% at the end of the year. The provision for

doubtful categories varies from the period of the account remain-

ing in that category.

a) For D1 category - the provision is 20%

b) For D2 category - the provision is 30%

c) For D3 category - the provision is 50%

The provision for loss assets is 100% considering the value of

availability of security. The 100% is calculated on the unse-

cured portion of the loan.

Drawing Power :

Drawing power is arrived at based on the stock level maintained

by a unit from the total value of stock the margin prescribed at

the time of sanction is deducted. From the available amount the

value of sundry creditors is reduced to get the amount of drawing

power available. Any unit is permitted to draw from the account

to the extent of DP available. The drawing power shall not be

more than the limit.

Mortgage :

Section 78 of the transfer of property act defines mortgage as

transfer of interest in a specific immovable property as security

for the monies advanced or to be advanced.

Equitable Mortgage :

Equitable mortgage is deposit of title deeds with an intention to

create charge over the property offered as security. EM is

created on the date of disbursement of the loan. However confir-

mation from the depositor of the title deeds is obtained subse-

quent to the date of creation of charge to avoid any legal com-

plications.

NI Act : 1881

Partnership Act : 1932

Contract Act : 1872

Companies Act : 1956

Income Tax Act : 1961

Pre-Sanction & Post Sanction :

Pre-sanction process comprises of appraisal and recommendations,

assessment and sanction. All items regarding the applicants

ability the market for the product and his capacity to repay are

all considered in the pre-sanction process.

Apparaisal includes examination, evaluation of the loan proposal

of a project to ensure that funds if lent can be recovered.

Post sanction process includes follow up, supervision, monitoring

and control. The aim of the post sanction process is to recover

the advance on time.

Analysis of Financial Statement :

All financial statements submitted by the unit either at the time

of sanction or at any later date have to be analised by the bank

to satisfy itself beyond doubt that they are acceptable to the

bank from the point of view of it's nature. The important state-

ments to be analised are P&L Account and balance sheet. It

discloses several important factors to the bank to take a mean-

ingful judgement while sanctioning credit facilities. Analysis

includes studying the relationship among several factors of

balancesheet and it's ratios.

Funds flow analysis :

Funds flow statement is a statement of sources and application of

funds. It is a technical device designed to highlight the chang-

es in the financial condition of an enterprise between two dates.

It is also called "where got" and "where gone". It has a wider

interpretation when compared to the other financial statements

like balancesheet. Balancesheet depicts the position as on a

particular date only and is silent on the events that have taken

place during the entire period. However funds flow statement

clearly explains the movements of funds between two dates in

respect of each item.

Cash management :

Cash is considered to the most liquid asset in the balance sheet.

while the proportion of assets held in an enterprise in the form

of cash is lessthan 3%, it's efficient management is crucial in

the solvency of the business. Cash management aims at the fol-

lowing :

a) To meet the needs of daily transactions

b) To protect the corporate against any unforeseen contingencies

c) To take advantage of investment opportunities

The methods adopted for cash management include cash budgeting,

monitoring in collection and disbursements and maintaining the

balance of liquidity.

Creation of Charge :

The following are the types of charges created on the assets in

favour of the bank by the companies.

1. Hypothecation

2. Pledge

3. Lien

4. Assignment

5. Mortgage

Project Appraisal :

Project appraisal is essential while assessing the total require-

ments of any unit including term loan and working capital. This

is mainly assessed on the two important points of technical

feasability and economic viability. This is done in case of

large advances. Under project appraisal the two important points

considered are

1. nature of the proposal, i.e.for granting a term loan/DPG

2. the purpose for which the loan is required

The points required for project appraisal are

a) Brief History

b) past performance

c) Present financial position

d) Viability of the project

Contribution analysis :

It is an important financial tool with the help of which the

management takes important decisions aimed at maximising profit

and projecting profit at different levels of production activity.

Profit in its simplified form can be defined as the difference

between the sales realisation and the costs incurred.

Profit = Sales - cost of sales

P&L account even though give some idea about the realisation and

the cost it has its own limitations. Profit does not necessarily

increase or decrease directly in proportion to the volume of

sales. This is because cost consist of various components all of

which do not vary proportionately. This gave rise to a system

called contribution analysis. It can be defined as sales -

variable cost. This formula of contribution analysis is more

applicable while arriving at the break even point.

Bank Guarantee :

Bank Guarantee is one of the profitable business without parting

funds. Bank Guarantee is as defined in the Indian Contract Act,

1872. Section, 128 of Indian Contract Act defines a contract of

guarantee as a contract to perform the promise or discharge the

liability of a third person in case of his default. The parties

in a bank guarantee are applicant, beneficiary and the guarantor.

Beneficiary is the person in whose favour the guarantee is given.

Applicant is the person on whose behalf guarantee is given. Bank

is the guarantor. The types of guarantees that are given are :

1. Financial guarantee and 2. Performance guarantee. No interest

is charged for issuing bank guarantee but only commission recov-

ered in advance.

Letter of Credit :

A LC is an arrangement by which a bank (issuing bank) acting at

the request and on the instructions of a customer (applicant or

importer) is to make payment to or to the order of the third

party (beneficiary or exporter) is to accept and pay bills of the

same drawn by the beneficiary. A LC may be a clean or documenta-

ry. No LC can be established for clean bills. Parties to LC are

applicant, issuing bank, advising bank, beneficiary and negotiat-

ing bank. LC may be a sight LC or usance LC. The important

types of LCs are the following :

1. Revokable LC

2. Irrevokable LC

3. Confirmed LC

4. Red clause LC

5. Back to Back LC

6. Revolving LC

Primary Security and Collateral Security :

While extending financial assistance to any unit banks to safe-

guard their interest insists on some tangable security either in

the form of primary security or in the form of collateral securi-

ty or both. Primary security is the asset created out of the

banks finance. Banks generally finance for business in which

case normally the stocks are considered as primary security. In

case of term loans the fixed assets acquired with the banks

finance is treated as primary security. Collateral security is

the one on which the banks can fall back in case of default by

the borrower. Collateral security will generally be the in the

form of immovable property and not easily liquid.

Selective Credit Control :

In respect of advances covering sensitive commodities RBI issues

credit control directives in respect of the quantum of loan and

other guidelines.

1. It fixes the base period

2. The credit ceilings (as a percentage of the peak level credit

maintained, the maximum margin, the level of credit stipulations

in certain commodities)

3. Although SCC directives act as a constraint in financing

freely to traders in these commodities.

4. As a general rule banks should keep themselves informed of the

commodity places covered under SCC - Selective Credit Control.

Pledge & Hypothecation :

1. In pledge the goods are in the banks position where as in the

hypothecation the possession will be with the borrower.

2. Actual delivery of goods is apparent in pledge where as in

hypothecation it is only a charge in favour of the bank.

3. In both the cases bank has the right to sell and recover the

dues after giving a reasonable notice.

Law of Limitation :

Each charge has a limitation period. the law of limitation

defines the validity period of each document where by the charge

has been created in favour of the creditor. Each loan document

and other relevant documents are considered "time barred" if they

are not revived before the limitation period.

Ex: A DPN gets time barred in three years from the date of

execution. With a view to extend the life of the document there

should be revived by obtaining suitable documents like revival

letters.

ALM :

ALM is a concept that gained currency in the wake of financial

set of reform, particularly reforms relating to interest rate

deregulation. The technique of managing both assets & liabili-

ties together has come into being as a strategic response to

infrationery pressures.

ALM can be simply defined as "the management of total bal-

ancesheet dynamics with regards to its size and quality". It

involves only two concepts.

1. Quantification of risk

2. Conscious decision making with regard to asset liability

structure in order to maximum interest earning.

Credit Syndication :

CS is an agreement between two or more lending institutions to

provide a borrower the credit facility used common loan documen-

tation. Syndicated loans are arranged by a person called 'synd-

icator', who brings together all the lenders. It is a convenient

mode of raising long term funds. They commonly carry a common

interest rate being charged by all the lenders with an option to

charge floating rate of interest.

UCPDC 500 (Uniform Customs Practices for Documentary Credit) :

It is the latest document designed by the International Chamber

of Commerce, Paris replacing the old document UCPDC 300. The

important features of UCPDC 500 are :

1. Banks can issue credits (LC) on their behalf.

2. Branches of a bank in other countries are treated as another

bank.

3. Irrevocability of LC is presumed.

4. Reasonable time is considered as 7 days.

5. Refusal communication must list out all discrepancies.

6. Exhaustive instructions regarding various types of transport

documents are given.

FORFEITING :

It is a mechanism of financing exports by discounting export

receivables evidenced by bill of exchange. Without recourse to

the seller on a fixed rate basis upto 100% of the value.

RELATIONSHIP BANKING :

The banking relationship is a mutually acknowledged commitment

between customer and the bank to do the business over a sustained

period of time. All consumers may not wish to buy on a relation-

ship basis preferring on a transaction basis. Transaction and

product customers focus more on tangible products, its price and

other value added services. Relationship banking is a very

powerful tool to extend business opportunities to the existing

customers. It aims at optimum exploitation of existing potential

by capturing major share of the customer business.

INTERNET :

Internet is the working of computer network, around the world

facilitating communication among all computers connected to these

networks. Data can be conveniently transferred to and from any

computer any where in the world at the click of a mouse. It also

facilitates documents being simultaneously shared and read by

people scattered around the globe.

CONVERTIBILITY :

Convertibility means a free and market based transformation of

domestic currency into foreign currency and vise versa as

and when desired without any controls or restrictions. In such a

situation market forces alone determine the flow of any currency

through price mechanism. A currency is convertible on a trade

account. All trade transactions can be freely converted at a

market determined exchange rate.

DEEMED EXPORTS :

These are those transactions in which case the goods and services

supplied do not leave the country, but the payment is received in

foreign exchange. The benefits available for any export units

are available to these deemed exports also.

Ex : Supply of goods to foreign ships and airlines or supply of

capital goods by any Indian supplier under competitive bidding.

CRYSTALLIZATION :

When a import bill is received by bank under LC, it shall be

retired at the earliest in any case before the due date. If it

is not retired by importer, on the 10th day from the date of

receipt the liability (amount of the bill) shall be arrived at

converting the foreign currency amount into Indian rupees at the

banks selling rate prevailing on the date of conversion. This

process is called "crystallization".

Corporate Governance :

Corporate Governance is doing everything better to improve rela-

tions between companies and their members/share holders to im-

prove the quality and to encourage people to think in terms of

longer perspectives to ensure that information needs of all the

persons concerned are met. It is nothing but the traditional

responsibility the corporate managers and their board of direc-

tors have in enhancing the share holder value.

It should go beyond profit maximisation and the effects of the

companies operations on the customers/employees. This aspect of

corporate governance is applicable to all banks and NBFC (non

banking finance companies) just like any other coporate.

Difference between safe custody and safe deposit :

Scrips are accepted under safe custody, where as articles are

accepted under safe deposit.

RECITAL :

The immovable property offered as security under equitable mort-

gage the fact of the same is recorded in the books of the bank as

an evidence at a later date in case of necessity. Such recording

is called Recital.

The confirmation of deposit of title deeds by the title holder is

not obtained on the date of execution of the documents but on a

subsequent date to avoid any Legal complications.

1. It is sent on the next day as an evidence that the title deeds

were deposited with an intention to create charge over the prop-

erty mentioned therein and

2. If obtained on the same date it becomes a part of the document

and attracts stamp duty.

Clean and Documentary Bills :

A clean bill is one which is not accompanied by document of title

to goods.

Ex : LRs and RRs.

The bill of exchange is not a document of title to goods.

A documentary is one which is accompanied by document of title to

goods. Generally banks accept only documentary bills.

Sight Bill and Usance bill :

A sight bill is one which is payable on demand or on presenta-

tion. There is no time given for the drawee of the bill to

retire the bills.

A usance bill is one which is payable after some time as

mentioned in the bill itself. The drawee after accepting the

bill can retire the bill on any day before expiry of the time

given in the bill.

Registered Mortgage :

The ownership of the property is transferred in favour of the

creditor by executing the document which is registered with the

registrar of assurances by paying the necessary stamp duty.

Banks generally do not insist on registered mortgage eventhough

it is more safe as it is expensive and time consuming.

September 27, 2003

Bank do not insist on registration of a firm as a non registra-

tion , as non registration does not bar the rights of third

parties including banks from suing the firm.

In short " firm cannot sue the bank, but bank can sue the firm".

Formalities for opening of a new a/c in the name of a company.

1. Memorandum of Association

2. Articles of Association

3. Certificate of Incorporation

4. Certificate of commencement of Business ( only for Public

Ltd.,)

5. Resolution to open an a/c in the bank

Any a/c other than in the name of proprietor, partner ship firm

and joint HUF is a CORPORATE A/C.

All the partners should sign in their individual capacity as

guarantors in the guarantee agreement. Whereas in the case of

company a/c only the directors will sign as guarantors in the

guarantee agreement.

No.of partners in a firm is determined by companies act,1956 but

not partnership act, 1932 .

When the property offered as security, stands in the name of the

firm and not in the name of a partner the document should be

signed by all the partners concerned with it unless there is a

mandate signed by all the partners.

HUF :

All transactions that have taken place during the period of

minority of a coparcener must be ratified after attaining the

majority.

Documents tobe taken while opening a/c in the names of

society/club :

1.By laws of the society/club.

2.Persons authorised to operate the a/c on their behalf.

Trust:

Any fund created for a specific purpose or activity by means of a

deed called "trust deed" is TRUST. Operations in the trust a/c

are very difficult to maintain and monitor. Any small violation

will render the bank liable. Banks should go through the trust

deed carefully before opening an a/c in the name of the trust. A

trustee cannot delegate his powers to third party. Generally

Bearer cheques are not issued for trust a/c.

Minors:

1. Any minor of 10 years and above can open an a/c in his sole

name.

2. No cheque book is normally issued as he does not know the

complications of a cheque

3. There are restrictions in the max.amount of deposit that can

be accepted in the sole name of the minor.

4. Minor can be a partner in a firm also , however he is not

liable for the debts of the firm.

5. No Loan documents need be signed by the Minor.

Foreign Exchange:

1. L.C Definition (lc shold be opened for only customer)

2. Parties in L.C (Min 3)

3. Types of Banks

4. Types of LC.s (Revocable, Irrevocable, Revolving, Red clause)

5. Duties and obligations of parties in L.Cs

6. Devolvement of LCs (if the commitment under lc is not met

under due date the lc is said to have devolved. In such a case

the amount of lc is debited to the Borrowel account of the party)

7. Important clauses in UCPDC 500

8. Negotiation of bills under LC

9. Retirement of bills under LC

10.Crystallisation.

11. Reliasation of export proceeds.

12. Export finance.

Preshipment finance (packing credit)

Post shipment finance (discounting or negotion of bills)

Characterstics of Negotiable Instrument :

1.Transferability

2.Negotiability

Transferability is by endorsement and delivery and

Negotiablity doesnot restrict its transferability.

Not Negotiable Crossing :

A cheque crossed not negotiable can be transferred by endorsement

and delievery however, the transferee will not get a better title

than a transferor. Any defective title with the transferor is

passed on to all the subsequent transferees.

A/c Payee crossing :

A/c payee crossing is a direction to the collecting banker only.

The paying banker is absolved of his responsibility in case of

a/c payee cheque received either through clearing or otherwise.

However when a cheque is presented across the counter to ensure

safety of the proceeds it is credited to the a/c of the person

whose name is mentioned there in.

Mandate :

Mandate is an authority given by either the principal or the a/c

holder advising the banker to act upon the instructions there in.

A mandate given by a firm or a Joint A/c authorising one person

to operate the a/c is binding on the bank to whom it is ad-

dressed. Mandate need not be stamped. A mandate can be revoked

at any point of time by the person issuing the mandate. Mandate

is not registered.

Power of Attorney :

A Power of Attorney is addressed to the public at large and not

to a specific person or bank. A power of attorney is always

stamped. The instructions in a power of attorney are binding on

all the parties including banks. The PA holder or the person who

is generally called agent is empowered to carry out all the

transactions unless barred in the power of attorney. A power of

attorney may be conditional or unconditional. Banks do not

accept conditional power of attorney because the bank may not be

aware of the actual date on which the condition is fullfilled.

BG/LC :

Both are examples non fund based business. Where bank doesnot

part with its funds. BG can be issued to any person and need not

be a customer however LC must be opened only for customers. In

BG bank is the guarantor and is liable to pay incase of default

by the applicant. Under LC there is a commitment on the part of

the issuing bank to make payment on the due date. A LC on dev-

loving becomes a fund based advance. In both the cases bank

charges commission and no interest is recovered. BG is governed

by Indian Contract Act where as LC is governed by FEMA and provi-

sion of UCPDC 500.

ILC/FLC :

Inland Letter of Credit is opened at the request of the applicant

for procuring raw material/product from the supplier. Instead of

cash the supplier may accept a LC opened by a scheduled bank.

ILC is not subjected to any foriegn exchange regulations. FLC is

opened for importing material from abroad. All FLCs are gover-

ened by the provisions of FEMA/Exim Policy and UCPDC. IE code is

necessary in case of all FLCs, issued by DGFT.

UBD :

Usance Bills Discounted is a credit facility granted to an ap-

plicant along with other fund based limits. Under this scheme

the supplier(borrower) supplies materials to the buyer either

under LC(ilc) or without LC which is accepted by the buyer

payable before the due date. Such bills are discounted by the

bank under this facility. The amount is adjusted on the receipt

of the proceeds on the due date.

CCBD/AABD (Book debts limits) :

This is also a fundbased limit. This is a limit sanctioned to

the borrower to meet shortfall in working capital along with SOD

or OCC limit. This limit is granted to those units whose pay-

ments are blocked with sundry debtors. As it is difficult for

the unit to continue the business till the debts are realised,

this facility is sanctioned to enable him to carry on the opera-

tions. Under this limit the borrower submits a list of debtors

with age wise break up. Bank fixes a margin of 50 % for book

debts and drawing power is arrived at accordingly.

Balance Sheet :

It is a statement of assents and liabilites as on a particular

date. It indicates the balances of all assets and all liablities

on that day. It does not explain the events that have taken

place during that period. There are certain limitations to the

Balance Sheet. Banks however not only depend upon the Balance

Sheet for taking the credit decision but also go through other

financial statements like funds flow, P&L a/c etc.,

Financial Statements :

The following are the financial statements that a banker has to

necessarily verify before extending any credit facilties.

1. P & L account

2. Balance Sheet

3. CMA Data (Credit Monitoring Arrangement)

4. Funds Flow Statement

5. Cash Flow Statement

Analysis of Ratios :

On a perusal of the financial statements submitted by the applic-

ant bank draws certain conclusions based on the data available.

These are the vital points for taking any credit decision. These

ratios can be classified broadly into three categories.

1. Liquidity Ratios (Short term ratios)

under liquidty ratios banks examine

current ratio, quick ratio, debtors & creditors turnover ratio

2. Profitablity Ratios

all ratios under this head are related to sales and profit.

For this purpose the profit is divided into gross profit, operat-

ing profit and net profit. Ex: Gross Proft Ratio, Net Profit

Ratio etc.,

3. Leverage Ratios (Long term ratios)

These ratios are mostly studied while granting term loan. The

important under this head are debt equity ratio, TOL / TNW and

DSCR.

Non Resident Indian

A person of Indian origin who stays in abroad either in

vocation, business or for any other purpose indicating his inten-

tion to stay outside India permanently or for an uncertain peri-

od. The specific features of such accounts relate to whether the

account holders are residents or non residents whether a/cs in

Indian rupees or foreign currency whether repatriation or

non repatriation.

Repatriation means repayment of the amount in foreign curren-

cy of his choice. (only accepted currencies).

The a/cs can be classified as

1. Non-Resident Rupee accounts

2. Non-Resident Foreign currency accounts

3. Resident Foreign currency accounts

Foreign firms, Companies and foreign nationals and who are perma-

nent residents in India can open bank a/cs such a/cs can be

opened only with banks authorised to handle foreign exchange.

Such accounts are called QA22 accounts. No prior permission from

RBI is required for this a/cs.

NRE Accounts:

These accounts as a name indicates are in the name of Non-

resident Indian and are maintained in Indian rupees.

DOCUMENTAION - LEGAL ASPECTS

QA 22 ACCOUNTS :

Any foreign orgn functioning in India either as permanent basis

or for a specific period can open a/c with authorised dealers.

Those are called QA 22 ACCOUNTS.

Role of Advocate in examining the documents.

Documents to be handover to the Advocate :

1. Title deeds of the property.

2. Parent documents or link documents.

3. Encumbrance certificate for 13/30 years.

4. Tax receipt.

Incase whether the property is ancestral and no title deeds are

available :

1. Chitta Extract - Adangal .

2. Pattadar passbook.

3. Tax receipt.

4. A certificate from the village authority confirming the pos-

session and enjoyment of the property.

The legal opinion submitted by the advocate should be :

1. In the bank's prescribed format.

2. Name of the title holder with brief description of the proper-

ty and the nature of property.

3. List of documents studied.

4. Tracing of title in seriatum (in the order of possession or

enjoyment).

5. Powers conferred on the title holder for creation of charge.

6. Encumberances.

7. Final and unqualified opinion (clear, valid and marketable).

If the property stands in the name of company the opinion should

cover the following :

Position Advocate's reply

1. In case of limited company He should scrutinise the

who are the persons authorised resolution passed by the Co.

to create charge.

2. If the company property is to The memorandum and articles

be given as security by way of should be verified to ensure

guarantee whether such a provision

exists.

3. Whether the search report Search report duly certified

from the registrar reveals any should be perused before

prior charges. giving the opinion.

4. Whether the memorandum The memorandum should be

provides a clause in the thoroughly scrutinised.

objects clause entitling the

company to do a particular

business.

5. Whether the company has passed A copy of the resolution duly

any resolution authorising one or certified should be obtained.

more directors to create charge.

Mortgage : (Section-58 TOP Act)

Types of Mortgage :

Mortgager, Mortgagee, Mortgage money and Mortgage deed.

1. Simple Mortgage :

Without delivering possession of the mortgaged property the

mortgager binds himself to pay the mortgage money and the mort-

gagee shall have a right to sell the property in case of default.

2. Mortgage by conditional sale :

The mortgagor undertakes that if he fails to pay the mortgaged

money on a certain date, the mortgagee shall have the absolute

right on the property.

3. English Mortgage :

Where the mortgagor binds himself to repay the money on a certain

date and transfers the property absolutely to the mortgagee but

subject to a provision that he will re-transfer the same upon

payment of the money as agreed.

4. Mortgage by deposit of title deeds :

The mortgagor deposits the title deeds of the property with an

intention to create charge against the same for the monies ad-

vanced or to be advanced. This shall take place only notified

centres.

Requirements for creation of EM :

1. the mortgagor signs the security document on the date of

disbursement of loan except the confirmation of deposit of title

deeds.

2. The title deeds in original are deposited with the mortgagee.

3. A confirmation to the effect that such deposit has been made

with an intention to create a charge over the property.

4. The confirmation of deposit should take place on a date subse-

quent to the creation of charge.

5. If sent on the same date which attracts advolarum stamp date.

6. EM shall be created only at notified centres.

7. The place where EM is created the branch shall make a "reci-

tal" of the same, which shall be signed by two staff members.

8. If EM is created at a centre otherthan the place of disburse-

ment EM shall be created at the notified centre and the copy of

the same sent to the disbursement branch.

October 8, 2003

Creation of charge by various constituents :

1. Individual or Proprietor

The property can be charged to bank by executing the documents in

his individual capacity. This is applicable for property stand-

ing in the names of Individual or proprietor concerns.

2. HUF

If the property stands in the name of the HUF. The charge can be

created by the karta and all the coparceners jointly.

3. Partnership

There must be a provision in the partnership deed for creating

charge over the properties standing the name of the firm. The

deed should also specify as to who should create or who is au-

thorised to create a charge. In the absence of any such provi-

sion all the partners should execute the documents for creating

charge. If the all the partners are not available on the date of

creating charge they can execute a letter authorising one or more

partners to create charge.

4. Trust

In respect of properties standing in the name of the trust, the

trust deed should specify whether any charge can be created

against such properties. It should also specify as to who are

the authorised trustees to create charge. In the absence of

either of the provisions no property standing in the name of the

trust can be accepted as security.

5. Company

The memorandum should specify whether properties standing in the

name of the co., can be charged to any Fin.Instit., as security .

A resolution must be passed for creating charge against such

properties. The resolution must also authorise one or more

directors to create charge in favour of bank.

6. Society / Club

The bylaws of the society / club should specify whether the

properties acquired by the society can be mortgaged as security

for the purpose of raising loans. If such a provision is there,

the property can be accepted and the charge can be created by all

the office bearers of society / club.

Deposit of title deeds in a notified center:

As per the provisions of Transfer of property Act, 1882 an E.M

can be created only in the notified centers which are notified by

the state governments in the gazzette. On the date of disburse-

ment of loan/execution of document, the title holders of the

property should goto the notified center along with title deeds

and deposits the same with an intention to create a security of

the loan. Under no circumstances the branch should take the title

deeds to the notified center where charge is to be created. They

should depoist the title deeds and the same is entered into

title deed register (recital), under the authentication of two

officers of the bank. A copy of the recital is sent to the

branch where the applicant avails the loan for their record.

Lease hold property as a security :

There is no bar in offering lease hold property as security by

the lessee. Bank can accept such lease hold property and a

charge can be created against the same provided

(i) The lease deed provides for mortgaging the property

(ii) The lessor should give letter in writing expressing

his consent to offer the same as security.

(iii) The lessor and lessee should create a charge in

favor of the bank.

(iv) The unexpired lease period must be more than the

repayable period of the loan.

(v) The super structure on the leased land should have

been constructed at the cost of lessee.

Procedure to be adopted if the mortgagor is deceased :

In case of death of mortgagor during the currency of the loan the

following procedure shall be followed :

(i) The death certificate issued by the competent authority

shall be obtained and the legal heirs of the property must

be ascertained and contacted.

(ii) A declaration signed by all the legal heirs shall be

obtained.

(iii)It should be ascertained whether he died intestate or

executed any will.

(iv) In case he has executed any will the executor must be

contacted for further action.

(v) The original will should be collected and kept along with

the documents.

(vi) It should be ensured that it was the last will, executed by

the person.

Substitution of Property:

At times the mortgagor or borrower may approach the borrower with

the request to release the title deeds of the property already

charged to bank by way of bank for his own convenience and offers

some other property in place of the existing one. Bank can

accept such request provided the value of the property now of-

fered fully covers the existing credit facilites the same can be

accepted and charge created in normal course by accepting deposit

of title deeds and obtaining the confirmation by the depositor.

Transfer of Advance :

Transfer of advance from one branch to another branch is permit-

ted. This is considered at the request of the borrower in excep-

tional cases only. The account so transfered shall be a standard

asset at the transefering branch. All the original terms and

conditions at the time of sanction shall continue at the trans-

fered branch also.

TAKE OVER OF ADVANCES:

Takeover of advance is permitted by RBI without any prior permis-

sion but the takeover code prescribed by RBI is applicable to all

the banks. It should be ensured that no NPA account is takenover

by any bank. The following procedure is adopted for takeover of

advances by one bank from another.

(i) The opinion report in the IBA prescribed format shall be

obtained from the existing banker. It shall contain interalia

the following :-

a) The balance in the account

b) Whether it is regular or not

c) classifaction of asset

d) No Objection Certificate

e) All the terms and conditions of sanction have been

adhered by the unit.

(ii) The existing banker should give an undertaking to handover

the documents after the total dues are paid.

(iii) The list of documents submitted by the borrower with the

present borrower shall be listed out.

(iv) The total amount payable with interest as on the date of

takeover shall be ascertained from the existing banker.

(v) A Pay Order for the actual amount payable shall be handed

over to the bankers against their acknowledgement.

(vi) An undertaking shall be obtained from the borrower on a

stamped paper that he will create an EM charge at a later date by

depositing the title deeds it should be ensured that all the

title deeds and other relevant documents including the insurance

policies in respect of the property with their existing bankers

shall be collected on the same day on which the payorder is

delivered. However all loan documents shall be executed by the

borrower on the date of disbursement and EM charge created on the

date of depositing the title deeds.

NRO Accounts :

Status of the account : The a/c of the resident in India

who went abroad (other than Nepal & Bhutan) and became an NRI,

his a/c can be designated as NRO account similarly, when a non

resident Indian returns to India for good his a/c may be redesig-

nated as Resident a/c only.

All rupee accounts other than NRE accounts and blocked accounts

maintain with authorised dealers by individuals,firms and compa-

nies who are residing in India are referred to as NRO accounts.

Non Resident Indian :

1) Indian citizen holding Indian passport who has gone abroad for

employment or vocation or for any other purpose indicating an

indefinite period of stay.

2) Persons working abroad on foreign assignments - persons

employed by IMF, UNESCO etc.

3) Persons employed in central, state government undertakings

and deputed abroad on assignment foreign government.

Person of Indian Origin :

1) A person of Indian origin is defined as who held Indian pass

port at any point of time

2) Whose parents or grand parents were citizens of India

3) Spouse of Non resident Indian

Exchange Earners Foreign Currency Account :

Any exporter of goods and services and recepiant of Inward remit-

tances are permitted to open EEFC account. This is maintained

for keeping certain portion of the convertible foreign exchange

earned by exporting either goods or services. Exporters from

export processing zones and units in software technology park are

permitted to retain their 70% of their export proceeds in this

account in all other cases the ceiling is 50%

RBI has permitted business related payments in India in foreign

exchange out of EEFC account however, in such a case the bene-

ficiary is not permitted to open a EEFC account.

Currency :

These acccounts can be opened only in the following currencies

USD, GBP & EURO.

Type of Account :

EEFC a/c can be opened in the form of current account or term

deposit account. Cheque can be issued for the current account

holders but payment has to be changed using each cheque leaves.

Minimum balance of USD 10000 has to be maintained.

Term deposits can be accepted with maturity period of 1 month,

3 months & 6 months only. The rate of interest is payable on

TD'S Under this scheme is linked to LIBOR and the amount of

deposit. The minimum amount for opening the account under this

category has been fixed for each currency.

The funds held in the EEFC a/c may be utilised by the a/c holder

for all bonafide payments in foreign exchange connected with

their trade. The balance kept in EEFC account is also considered

for CRR & SLR ratios. The balance in EEFC accounts can be accept-

ed as security for any loan sanctioned to the unit. The balance

in the account can be freely converted in to Indian rupees by

applying TT buying rate.

KVB Loan Products :

KVB Flexi Mobile :

Procedure for financing a second hand car :

The prospective buyer shall produce the following documents

1) Consent letter from the seller indicating his intention to

sell vehicle at a specific price.

2) Condition of the vehicle and its value shall be certified by

any authorised dealer or workshop

3) The vehicle shall not be more than 5 years old

4) Photostat copy of registration shall be obtained

5) the copy of the insurance policy shall be obtained to ensure

that the insurance cover is available as on the date.

6) Payment shall be made to the seller direct.

7) And all other terms eligible for brand new car.

KVB Rent Fin Scheme :

Rent fin scheme can be considered against the rents receivables

by the land lord against properties leased out to central/state

government/corporates/psus/profit making undertakings. All land

lords either individuals or corporates are eligible under this

scheme, the amount of loan is restricted to 60 months rents

receivables - Tds and other taxes payable. A margin of 25% is

fixed while arriving the eligible loan amount. The loan is repay-

able in 60 EMIs at 13% ROI. There shall be a tripatriate agree-

ment among the lessor, lessee and the banker. To the effect that

the monthly rent shall be paid directly to the bank for the

credit of loan account. Under no circumstances the EMI shall be

less than the rent receivable per month.

Educational Loan :

Elgible courses : All courses where the student has secured

admission in a college or university including all professional

courses and technical courses and certain specified courses in

computers for studies in abroad, for job oriented courses, post

graduation courses and all other courses conducted by CMA(UK) and

CPA (USA)

Eligible applicants : Any student of Indian origin who has se-

cured admission to professional/ technical courses through en-

trance tests/Selection process and students seeking admission in

foreign universities.

Expenses considered for loan : All expenses of fee payable,

purchase of books and equipment, any deposits payable, travel

expenses & equipment considered for the course.

Maximum loan amount is restricted to Rs.7.50 lacs for courses in

India and Rs.15.00 lacs for courses in abroad. No margin upto

Rs.4.00 lacs. For above 4 lakhs loan amount the margin is 5%

and in abroad margin is 15%

Security : Upto Rs.4.00 lacs no security is insisted, for loans

above 4 lacs colleteral security equal to 100% of the loan amount

shall be obtained. Rate of interest for loans upto 4.00 lacs PLR

above Rs.4.00 lacs is PLR+1%

loan is repayable in 5 to 7 years after completion of course +

one year or six months after getting job which ever is earlier.

KVB Happy Home Loan Scheme :

All Individuals either self employed or salaried class business-

men and professionals are eligible under this scheme. The loan

can be considered for purchasing a independent house, a new flat

constructed by a reputed builders, construction of a house in

existing land, purchase of land and construction of house thereon

or purchase of an old house provided it is not more than 10 years

old.

The quantum of loan is based on the cost of construction, by

income and repaying capacity of the applicant. A margin of 25%

shall be fixed on the project cost which can be reduced to 15% in

certain eligible places. The loan shall be released in a phased

manner linked to the progressing construction work. The loan is

repayable in 10 to 15 years with a holiday period (Moratorium

Period) of 12 months.

The rate of interest may be a fixed or floating at the request of

the applicant the fixed rate is slightly higher than the floating

rate which 10% upto 10 years and 10.25% above 10 years. The

property proposed to be purchased shall be adequately insured,

incase of purchase of existing house or flat the valuation of the

property shall be done by the approved valuer of the bank, in

case of non salaried people the IT assessment order or auditors

certificate for the last 3 years shall be verified for income

proof.

The repayment period incase of salaried class shall be fixed in

such a way but it does not exceed beyond the age of retirement.

In case of others repayment period can be extended upto the age

of 60.

Principles of Lending :

The basic principles of lending for a banker are generally the

Following:

1) Identification of the Applicant beyond doubt

2) The project or venture to be taken up by Applicant

3) Acceptability of the product in domestic as well as

International market.

4) Capacity of the borrower

Project Finance :

1) Financial Feasibility

2) Technical Competence

3) Economical Viability

Hire Purchase & Leasing :

Hire purchase is a method of finance for purchasing consumer

durables or vehicles payable in instalments. Under hire purchase

system, the seller retains the ownership of the goods until the

last instalment is paid. The Hirer has no right to dispose of

the goods during the currency of the agreement and must take

reasonable care of the goods. It is a form of financial arrange-

ment where by the owner(seller) provides the asset to the custom-

er on a hire for consideration of payments by instalments for a

specified period. The salient features of the scheme are the

following :-

1) The possession of the asset is delievered by the owner to

the hirer immediately.

2) The ownership of the asset is passed on to the hirer on

payment of last instalment.

3) The hirer has got a right to terminate the agreement at any

time before the property changes hands.

Leasing is a contract between Lessor(owner) and the Lessee(ten-

ant) where by the lessor acquires the equipment as required and

specified by the Lesse and passes on the same to the lessee for

use for a specified period on payment of rent as agreed upon.

The sailent features of Lease as under :-

1) It is essentially a contract with only two parties i.e.,

Lessor and Lessee.

2) The equipment is purchased by the lessor at the request of

the lessee.

3) The lease contract must specify the currency(period ) of the

contract.

4) The lessee has got the right to make use of the equipment

or property.

5) The lessor is the absolute owner and is entitled to the

benefits of depreciation.

Types of Lease :

1) Financial Lease 2) Operating Lease and 3) Leavarge Lease

Letter Of Credit :

A Letter of credit is an arrangement by which a bank (issuing

bank) acting upon the request and instructions of a customer

(importer / applicant) is to make payment to or to the order of

third party (exporter/beneficiary) is to accept and pay bills

drawn by the beneficiary.

A LC may be clean or documentary bill. No LC can be established

for clean bills. Minimum number of parties to LC are three,

applicant,LC opening bank,beneficary.

LC is not a substitute for Bank Gurantee and LC is more advante-

geous to the applicant and beneficary also. The purpose of BG is

specific and restricted where as a LC is opened for commercial

transactions alone. Under LC the applicant has the advantage of

taking possession of goods without making any payment and it is a

committment on the part of the bank to make payment on due date-

where as the BG is covered by the provisions of conduct of guar-

antee under the section 124 of Indian Contract Act.FLC is gover-

ened by UCPDC 500 as on date. A LC may ILC or FLC. The other

parties in the LC in addition to above three are advising bank

which advises credit to beneficary, negotiating bank negotiate

the bills drawn by the exporter.

Types of LC:

1)Irrecovable

2)Recovable

3)Revolving

4)Red Clause

5)Green Clause

LC may be DA (documents against accepatance) or DP(documents

againts payment) basis. In case of LCs under DP terms the pay-

ment is due within 24 hours of presentation of documents. In

case of LCs on DA terms the payment falls due on the Last day of

usance as per LC terms. In this case the documents along with RRs

and LRs shall be delivered to the party against acceptance.

Procedure for opening Letter of Credit :

1)The applicant desires of opening a LC shall be a customer of

the bank.

2) He should give a written request which shall contain the

following :-

a)Name and Address of the Consignor in whose favor the LC is to

be established.

b)The amount for which LC is to be established.

c)Documents expected with the bill and the transit insurance

policty.

d)Terms of credit i.e., the period for which it is opened.

e)Description of goods and price as agreed upon.

f)Deatils of the security is going to offer.

3) An application in the bank's prescribed format shall be ob-

tained and LC established accordingly.

4) Commission shall be collected in advance.

5) The presecribed margin shall be met by the applicant and kept

with the bank in a form of term deposit. The margin may be

released only when all the bills under LC are paid and no further

bills are forthcoming under LC. The period of LC shall not

normally exceed 180 days.

6) The LC when opened shall sent to exporter and all documents in

confirmty with LC shall be submitted by the exporter.

The LC opening branch shall diarise the due dates of LC. The

amount shall be recovered from the importer and remitted to the

negotiating bank. In case there is no balance in the party's

account or if the party is not in a position to meet the LC

committments the LC opening branch shall make payment to the

negotiating bank by debiting Advance Bills Purchaed A/c.

Procedure at the negotiating branch:

After getting credit advice from the LC opening branch on the due

date the same shall be endorsed on the LC and returned to the

branch which has opened the LC.

Entries to be passed by the opening branch :

The entries to be passed on the date of LC ae

Debit : Customer's Liability on LC

Credit : Bank's Liability on LC

Bank Guarantee :

A contract of Guarantee is a contract to perform the promise or

discharge the liability of a third person incase of default

(Section 124 of Indian Contract Act, 1872). The parties to a

gurantee are three. The person (bank) giving the gurantee is

called the gurantor. The person in respect of whose default the

gurantee is given is called the Principal and the person to whom

the gurantee is called Benficiary (creditor).

Types of Bank Gurantee :

1) Financial Gurantee

These are the gurantees given in lieu of monetary obligations

i.e., the obligation of a contractor to make Earnest Money Depos-

it. These gurantees are issued generally for short period. These

gurantees are risk free and banks prefer to issue financial

gurantees when compared to other types. In case the applicant

fails to meet his obligation the beneficary of the BG can demand

the payment before the expiry of BG from the bank in which case

the bank shall make payment by cancelling the deposit already

with us.

2) Performance Gurantee

These are issued in respect of performance of the contract or

fulfillment of certain obligations. In the event of non perfor-

mance or short performance of the obligation the bank will be

called upon to make good the monetary loss arising out of such

non performance. Even though these are for performance the

quantum of pecuniry (monetary) obligation is reduced to money

terms and the gurantee is called for. These gurantees are more

vonerous than financial gurantees. As such requires to be care-

fully scrutinised.

Defereed Payment Gurantee:

DPG are issued for purchase of heavy machinery or capital equip-

ment for industries. Under this case generally an advance of 10

to 15% of the cost of equipment is paid to and the gurantee is

issued for the remaining amount. These gurantees will include

the amount of principal and interest for the remaining amount and

these are spread about for a period of 3 to 5 years. The due

date of each instalment has to be diarised and paid by the ap-

plicant. In case the applicant fails to meet the committment on

the due date the bank has to make payment and recover the same

from the applicant.

Guarantee & Idemnity :

In the case of Indemnity, the person who indemnifice is primarily

responsible in case the loss of occurs. In the case of guaran-

tee, the liability of the guarantor arises only if the principal

debtor makes a default.

Parties to contract of Indemnity is Idemnifier and Indemnified

Parties to contract of Guarantee is Prinicipal debtor, Judegement

creditor and Guarantor

In the case of indemnity there are only two parties whereas in

the case of Guarantee there are three parties.

Types of Guarantee :

Specific Guarantee : Specific guarantee is one which is issued

for specific purpose and covering only single transaction.

Ex: Guarantee issued in lieu of deposit

Continuing Guarantee : A continuing guarantee is one which is

given normally to enable the applicant to procure goods from the

supplier any number of times within a specified period.

Extension of Bank Guarantee :

At the request of the applicant a Bank Guarantee extended any

number of times before the expiry of the Bank Guarantee, by

issuing a letter to that effect to the beneficiary.

Documents obtaining for BG :

1. Request Letter from the applicant in the prescribed format.

2. Counter Guarantee from applicant.

3. Securities duly discharged by applicant.

4. Guarantee letter if there is a guarantee.

At the time of issuing guarantee debit customers liability on

Bank Guarantees and credit Banks liability and Bank Guarantees.

Solvency Certificate :

Public sector undertakings at times insist for solvency certifi-

cate from the bank to qualify for tenders or contract works.

These certificates are issued based on the customers dealings

with the bank in case, the applicant is enjoying the credit

facilities his worth as arrived it may be taken as basis for

issuing solvency certificate, in other cases they will be issued

based on the wealth tax assessment orders of the applicant.

Service charges will be recovered for issuing solvency certifi-

cate.

Priority Sector Advances :

SSI : Any unit is engaged in manufacturing, Processing or preser-

vation of goods with original investment in plant and machinery

not exceeding 100.00 lakhs.

A ancillary industry is one which uses the finished products of

small scale industries as its raw material.

Segments of Priority Sector Lending :

1. Agriculture :

a) Direct Lending

Finance extended direct to the farming community is direct

finance.

Ex: Crop Loans and Tractor loans

b) Indirect Lending :

Finance extended to farmers through intermediaries or govt.

agencies.

Ex: Finance to farmers co.op socities and State electricity

board.

2. SSI

3. Road and water transport operators (Not owning more than 10

Vehicles).

4. Retail Traders : (Trading in essential comodities)

5. Small Business : (Traders in other than essential comodities)

6. Business enterprises :

Any unit engaged in servicing activity other than the services

redered by professionals and self employed.

Finance to Professionals and Self employed

7. Bank credit to Software Industry : (Limit upto 1 crore)

8. Education loans

9. Housing loans

10. Loans to SHGs

11. Loans to Weaker sections and govt.spondered schemes.

KVB Green Card Scheme :

In order to make available timely credit to the farmers enabling

them to undertake farming activity RBI has instructed all banks

to introduce a suitable credit card scheme. The scheme is desig-

nated in our bank as KVB Green Card.

Salient Features :

1. This is meant for making any short term credit requirements of

farmers

2. This is issued only to individual farmers and who are owner

cultivators with good track record.

3. The scheme applicable in all areas.

Issue of Card :

The beneficiary under this scheme will be issued a credit card

and a pass book incorporating name, adress, land holding and

borower limit etc. Which would serve as identity card also.

Limit : The limit is based on the actual land holdings, Cropping

pattern for the full year and the credit requirements of the

farmer. There is no minimum or maximum limit. The validity

period of the card will be three years.

The issuing branch will maintain a separate ledger for the card

holders and all the operations will be routed through the ac-

count.

Self Help Groups :

SHG is a homogeneous group of rural poor voluntarily formed to

save small amounts out of their earnings to farm a common fund of

the group to be lent to the members for meeting their production

as well as emergent credit needs.

This may be organised in a village or a cluster of villages

either by reputed voluntary agencies, non govt.organisations or

at the initiative of banks. The members in the group shall be

normally 10 to 20.

The members should have a common interest, the group should be in

existence minimum period 6 months. The group should function in

a democratic way. The group should maintain records of their

activities.

Opening of SB Account:

These may be permitted to open sb accounts with the branches to

whom they are linked.

Quantum of Loan :

The quantum of loan is linked to savings collected by the group.

The savings to loan ratio generally varies from 1:4 to 1:10.

Purpose of the Loan :

The purpose of the loan will be determined by the group members

themselves. However, they may be advised to utilise the loan for

productive purposes.

Documents:

The normal documents prescribed are not applicable a SHGs. The

interself agreement executed by the members is to be obtained.

Sponsorship from NGOs. Application in the prescribed format

SHGs.

Repayment :

The repayment period varies from 24 to 60 months.

Types of Letter of Credits :

1. Irrecovable Lc :

A Lc which cannot be amended or cancelled or without the consent

of all the parties concerned. Banks generally insist on opening

Irrevocable Letter of Credit.

2. Confirmed Lc :

When a lc is opened, the same is advised to exporter by either

issuing or another bank called advising bank. There may be

another intermediary bank preferrably from the country of the

exporter which adds its confirmation at the request of the ex-

porter. The confirming bank charges for adding its confiramation

which borne by the exporter.

3. With out Recourse Lc :

When the lc is opened and bills drawn under the lc are accepted

by the drawer under DA LCs, the same is negotiated by the drawer

(exporter) with his bank is called negotiating bank. Under this

lc the drawers liability ends when the bill is negotiated and he

is not liable to reimburse the negotiating bank.

4. Revolving Lc :

Under this method a limit is fixed and any number of lcs opened

with in the stipulated period. The lc is reinstated automatical-

ly for the amount of bills retired.

5. Redclause Lc :

It is an indication to the exporters bank to provide preshipment

advance to the beneficiary at risk and responsibility of the lc

opening bank. Exporters of good repute insist on red clause lc

to be opened for making use of credit facility.

6 Greenclause Lc:

This is an extension of redclause lc it envisages payment to the

beneficiary for storage facilities also at the port inaddition to

preshipment advance.

PLR :

It constitutes cost of funds, interest on borrowings, staff &

administrative expenses.

Letter of Credit :

Advising Bank :

Bank which advises the credit (LC) to the exporter is advising

bank. Generally the advising bank will be at the exporters

country.

Confirming Bank :

The bank which adds confirmation to the LC is a confirming bank.

Negotiating Bank :

Bank which negotiates the bills drawn by the exporter and import-

er and accepted by the latter (Importer).

When usance bills are discounted, that is called 'negotiation'.

BG governed by Indian Contract Act.

LC governed by articles of UCPDC 500 and FEMA.

Priority Sector Advances (40% of NBC) :

It is sum total of credit facilities sanctioned to certain speci-

fied categories as per government guidelines is called PSA.

1. Agricuture (18% of total net bank credit)

2. S.S.I

3. Small business : Trading in essential commodities or retail

trader. ex: SOD,OCC.

4. Business Enterprises : Unit engaged in rendering services

otherthan professional services. ex: Type Institute, Xerox

5. Professional and Self employed : Who is pocessing certain

qualifications recognised as professional/technical qualifica-

tions.

6. SR & WTO (Small Road & Water Transport Operators)

7. All government sponsored schemes and loans to weaker sections.

8. Housing loans

9. DIR

Term Loans : Term loan is sanctioned for acquiring fixed assets

repayable over a period of time in agreed instalments.

ex : HAPY home, HPMA, HPLV

Working Capital Advances : It is sanction