Banking1

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DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM, A.P., INDIA (Estd. Under A.P. Act no. 32 of 2008)

Project title: “Loans”

Subject: Banking Law

Faculty Name: Mr. Jogi Naidu

Submitted by: B.Vamsi Krishna, K. Sai Sreenadh, K. Siva Rama Raju & G. Mani Kumar Regd. No.’s :- 2015023, 2015042, 2015048 & 2015068 7th Semester.

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ACKNOWLEDGEMENT We would like to put forward my heartfelt appreciation to our respected faculty of Banking Laws, Mr P. Jogi Naidu for giving us a golden opportunity to take up this project regarding Loans. We have tried my best to collect information about the project in various possible ways to depict clear picture about the given project topic.

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1. LOANS:In case of loans, the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by credit in his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at the expiry of a certain period. The loan may be made with or without security. A loan once repaid in full or in part cannot be withdraw again by the customer. In case a borrower wants further loan, he has to arrange for a fresh loan. Loan may be a demand loan or a term loan. Demand loan is payable on demand. It is for a short period and usually granted to meet working capital needs of the borrower. Term loans may be medium term or long term loan. Medium term loans are granted for a period ranging from one year to five years for the purchased of vehicles, tractors, tools and equipment's. Long term loans are granted for capital expenditure such as purchase of land, construction of factory building, purchase of new machinery and modernization of plants etc.,

 ADVANTAGES OF LOAN SYSTEM: 1. Financial discipline on the Borrower :As the time of repayment of the loan or its installments is fixed in advances, this system ensures a greater degree of self-discipline on the borrower as compared to the cash credit system. 2. Periodic Review of Local Account: Whenever any loan is granted or its renewal is sanctioned the banker gets an opportunity of automatically reviewing the loan account. Unsatisfactory loan accounts may be discontinued at the discretion of the banker. 3. Profitability:The system is comparatively simple. Interest accrues to the bank on the entire amount lent to a customer.

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 Drawbacks/ Limitations: 1. Inflexibility: -Every time a loan is required, it is to be negotiated with the banker. To avoid it, borrowers may borrow in excess of their exact requirements to provide for any contingency. 2. Banks have not control over the use of funds borrowed by the customer. However, banks insist on hypothecation of the assets/ vehicle purchased with loan amount. 3. Though the loans are for fixed periods, but in practice they roll over, i.e., they are renewed frequently. 4. Loan documentation is more comprehensive as compared to each credit system. TYPES OF LOANS (B) TYPES OF LOANS: Banks grant loans for different periods- shorts, medium and long, for different propose. Broadly, the loans granted by banks are classified follows:-

BANK LOANS

Short Term Loans SHORT TERM LOANS: -

Medium& Long Terms Loans

Bridge Composite Loans

Consumption Loans

Short-term loans are granted to meet the working capital needs of the borrowers. These loans are granted against the security of tangible assets mainly the movable asset like goods and commodity shares, debentures etc. Since April 1995 RBI has made it mandatory for the banks to grant a portion of bank credit to big customers in the form of loans, which may be for various

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maturities. The reserve bank has also permitted the banks to roll over such loans, i.e. to extend the loan for another period at the expiry of the tenor of the first loan. TERM LOANS: Term loans are given for medical and loan periods, and loans are used for acquiring fixed assets or for modernization and expansion of existing units. They may also be used for working capital requirements. An important feature of term loans is the felt that they are repayable in yearly or half-yearly installments over a period of time. Payment is to be made according to a specified schedule, extending up to 15 years, which imposes a sort of financial discipline on the borrowing concern. The amortization gradually starts 2 to 3 years after the sanction of the loan. Together with the normal interest, a commitment charge of one per cent per annum is also levied on the utilized portion of loan. The basic point in term lending is that the borrower should utilize the amount in such a way as to repay the loan as well as the interest Accruing thereon from the anticipated income earned by the use of that loan itself. This is the reason why before allowing a term credit, the banker evaluates the technical and economics viability of the project for which the loan is sought and also the repaying capacity of the borrowing concern. BRIDGE LOANS: Bridge loans are essentially short-term loans, which are granted to industrial undertaking to meet their urgent and essential needs during the period when formalities for availing of the term loans sanctioned by financial institutions are being fulfilled or necessary steps are being taken to raise the capital market. These loans are granted by financial institutions themselves and are automatically repaid out of amount of the term loans or the funds raised in the capital market.

In April 1995 RBI banned bridge loans granted by banks and bank permitted the banks to sanction bridge loans/ interim finance against commitment mad by a financial institution faces temporary liquidity constraint subject to the following conditions:

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1. The prior consent of the other bank / financial institution which has sanctioned a term loan must be obtained. 2. The term lending bank / financial institution must give commitment to permit the amount of the term to the bank concerned. 3. The period of such bridge loans should not exceed four months. 4. No extension of time for repayment of bridge loan will be allowed. 5. To ensure that bridge loan sanctioned is utilized for the purpose for which the term loans has been sanctioned. COMPOSITE LOANS:When a loan is granted both for buying capital assets and for working capital purposes, it is called a composite loan. Such loans are usually granted to small borrowers, such as artisans, farmers, small industries etc. CONSUMPTION LOAN: Though normally banks provide loans for productive purposes only, but as an exception loans are also granted on a limited scale to meet the medical needs or the educational expenses or expenses relating to marriages and other social ceremonies etc. of the needy persons. Such loans are called consumption loans. CLASSIFICATION OF LOANS AND ADVANCES: SECURED LOAN A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security a lien on the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

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In some instances, a loan taken out to purchase a new or used car may be secured by the car; in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer. UNSECURED LOAN Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages: 

credit card debt



personal loans



bank overdrafts



credit facilities or lines of credit



corporate bonds

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. DEMAND Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured. CASH CREDIT SYSTEM: Cash credit is one of the most important methods of lending in India. Under this method, the banker fixes a limit for a customer, called the cash credit limit. The limit is generally specified after taking into account the important features of the borrowing concern, for

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example, production, sales, inventory, past credit limits etc. The customer is allowed to withdraw money from cash credit account according to his requirements. Similarly he may deposit money in the account as and when surplus funds are available with him. The cash credit account is, thus, an active and running account to which deposits and withdraws may be effected frequently. But the customer has to provide tangible assets as security for the amount borrowed from the banker. The interest is charged on the actual amount utilised by the customer and it is calculated only for the period of actual utilisation only. ADVANTAGES OF CASH CREDIT SYSTEM: 1) Flexibility: The borrower need not keep their surplus funds idle with themselves. They can recycle the funds quite efficiently and can minimise interest charges by depositing all cash accruals in the bank account and thus keeping the drawls at the minimum level. The system thus ensures lesser cost of funds to the borrowers and better turnover of mind for the banks. 2) Operative convenience: Banks have to maintain one account for all the transactions of a customer. The repetitive documentation can be avoided. WEAKNESS OF THE SYSTEM: Fixation of Credit limits: The cash credit limits are prescribed once in a year. Hence it gives rise to the practice of fixing large limits than is required for most part of the year. The borrowers misutilise the unutilized gap in times of credit restraint. Bank's inability to verify the end use of funds: Under this system the stress in on security aspect. Hence there is no conscious effort on the part of banks to verify the end use of funds. Funds are diverted, without banker's knowledge, to unapproved purposes.

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Lack of proper management of funds: Under this system the level of advances in a bank is determined not by how much the banker can lend at a particular time but by the borrower's decision to borrow at that time. The system therefore does not encourage proper management of the funds by banks. These weaknesses of the cash credit system were highlighted by a number of committees appointed for this purpose in India. Guidelines have been issued by the Reserve Bank for reforming the cash credit system on the basis of recommendations of the Tandon Committee and Chore Committee. OVERDRAFTS: Overdraft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account upto an agreed limit. This is only a temporary accommodation usually granted against securities. The borrower is permitted to draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only for the whole amount sanctioned. A cash credit differs from an overdraft in one respect. Businessman in doing regular business whereas overdraft is made occasionally and for short duration uses a cash credit for long term. TEMPORARY OVERDRAFT: Banks, sometimes, grant unsecured overdraft for small amount to customers having current account with them. Such customers may be government employees with fixed income or traders. Temporary overdrafts are permitted only where reliable source of funds is available to a borrower for repayment.

BILLS DISCOUNTED AND PURCHASED: -

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Banks grant advances to their customers by discounting bill of exchange or promote. The amount, after deducting the interest from the amount of the instrument, is created in the account of the customer. In this form of lending, the banker receives the interest in advance. Discounting of bill constitutes a clean advance and banks rely on the credit worthiness of the parties to the bill. Banks, sometimes, purchase the bills instead of discounting them. The bankers purchase bills, which are accompanied by documents of title to goods such as bills of landing or railway receipt. In such cases, the banker grants loans in the form of overdraft or cash credit against the security of the bills. The term 'Bills Purchased' seems to imply that the bank becomes the purchaser/ owner of such bills. But in almost all cases the bank holds the bill only as a security for the advances. ADVANTAGES OF DISCOUNTING OF BILLS: 1) Safety of bank funds: A banker is primarily concerned with the safety of the funds he lends. Through the banker does not get charge over any tangible assets in case of discounting of bills, legal instrument bearing signatures of two parties considered good for the amount of the bill. The banker can enforce his claim much more easily in the case of bills. If the acceptor of the bill fails to make payment on its due date, the drawer has the remedy to claim the whole amount from his customer, the drawer of the bill. In case the bill is dishonored, the banker debts amount to his customers by parties of standing and good reputation. 2) Certainty of payment: A Bill of Exchange is considered and ideal self-liquidating assets because it originates from an actual commercial transaction and the debtor meets the obligation to pay by disposing of the goods acquired from the creditor within a short period of time. As the Bill of Exchange matures within a 'short period of time' the banker recovers his money on the due date with certainty. The bills are therefore, called 'semi-liquid' assets. As the banker known in advance the dates on which the discounted bills will mature, he can invest his funds in such a way that the

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same are profitably utilized to the maximum extent, without unnecessarily maintaining large cash balances. Thus, a banker is able to maximize his profit without taking any undue risk. 3) Facility of Refinance: When a banker is in need of funds, he can secure accommodation from the central bank of country on the basis of eligible securities including the bills is counted. The bills can also be rediscounted with the central bank or any other bank/ financial institution and thus the need for cash balances can be met more easily and quickly. 4) Stability in the value of the bill: The value of the bills as a security does not fluctuate while the value of all-tangible goods and securities is liable to fluctuations. The amount payable on account of a bill is fixed and the acceptor or the drawer is liable to pay the same in full. As the bill is a legally enforceable instrument, neither of these parties can subsequently dispute the validity of the banker's claim. These parties may be summarily sued for the payment of the amount of the bill. 5) Profitability: While discounting the bills the banker deducts interest from the amount of the bill. In case of other types of loan and advances, interest is payable by the debtor quarterly or halfyearly. Thus, the yield from discounting of bills is a title higher, if the rate of interest or discount remains the same as in the case of other loans, for example, if a bill of exchange for Rs. 1,000/payable after 3 months is discounted @ 6 per cent per annum, the banker pays Rs. 985 (Rs. 1,000-Rs. 15). The actual yield thus comes to 6.38 percent per annum.

GENERAL LOAN PROCEDURE Normally various National and Co-operative banks adopt following procedure for loan sanctioning.

(1)

SUBMISSION OF LOAN APPLICATION: -

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The borrower may submit the application to any of the term lending institution .The borrower is required to fill out a common application form which seeks comprehensive information about the project the common application form covers the aspects like promoter’s background, particulars of the industrial concern, particulars of the project, cost of the project means of financing, marketing and selling arrangement, profitability and cash flow, economic consideration etc. (2)

INITIAL PROCESSING OF LOAN APPLICATION: When the application is received, an officer of the receipt institution reviews it to

ascertain whether it is incomplete the borrower is asked to provide the required additional information when the application is considered complete, the recipient institution prepares a “Flash Report”. It is evaluated at the senior executive meeting .for the conveniences of borrow, financial institution operates a scheme of participation for rupee term loans and underwriting assistance. (3)

ISSUE OF THE LETTER OF SANCTION: After the board of directors of the lead financial institution approves the proposal, a

financial letter of sanction is issued to the borrower this communication to the borrower the assistance sanctioned by the lead institution and the assistance sanctioned/to be sanctioned by other participating in the consortium arrangement Each of the participating institution would, after approval by its board of directors or other appropriate authority, convey sanction of its shares of assistance to the lead institution under a advice to the borrower. If a participating institution is not able to make available its shares of assistance, the same will be shared on prorates basis amongst the lead and other participating institutions. (4)

ACCEPTANCE OF THE TERMS AND CONDITION BY THE BORROWING UNITS: On receiving the letter of sanction from the lead financial institution, the borrowing unit

convenes its board meeting at which the term and condition associated with the letter of sanction are accepted and appropriates resolution is passed to that effect. The acceptance of the terms and condition has to be conveyed to the financial institution within thirty days.

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(5)

EXECUTION OF LOAN AGREEMENT: The lead financial institution after receiving the letter of acceptance form the borrower,

sends the drafts of the agreement to the borrower to be executed by authorized person and properly stamped as per the Indian stamp act, 1899.the agreement, properly executed and stamped, along with other document as required by the financial institution also sings the agreement, it becomes effective. (6)

DISBURSEMENT OF LOAN: Periodically, the borrower is required to submit information on the physical progress of

the project, financial status of the project, arrangement made for financing the project, contribution made by the promoters, projected funds flow statement, compliance with various statutory requirements and fulfillment of pre-disbursement conditions. Based on the information provided by the borrower, the lead financial institution will determine the amount of terms loans to be disbursed from time to time. Before the term loan is disbursed the borrower must fully comply with all the term and conditions of the loan agreement. (7)

CREATION OF SECURITY: The term loans and the differed payment guarantee assistance provided by the all India

financial institutions are secured through the first mortgage by way of deposit of title deeds of immovable property and hypothecation of movable properties. As the creation mortgage, particularly in the case of land, tends to be a time consuming progress, the institution permit interim disbursement against alternate security. The mortgage, however, has to be created within a year from the date of the first disbursement otherwise the borrower has to pay an additional charge of 1% interest. Customers account and send him intimation. Thus, the banker is fully confidence of recovering his money on the due date. To be on the safer side a banker should discount bills of exchange of. 1. HOUSE CONSTRUCTION LOAN Purpose: For the Construction of House

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Period of loan: The maximum duration of loan was 180 months (15 years) Objective: To provide financial assistance to the middle class people to build and own house Age criteria: A person must be an age of 18 years and more Procedure and documents 1. Applicant should fill up the form provide by bank. 2. Applicant should pay the service charge as prescribed by the bank. Documents 1. It is self owned with sale papers he should have the old owner’s papers which are favoring them. 2. If it is fore father’s property than he should hold the documents that he is owner. 3. Khatha papers. 4. Recent tax receipts. 5. Site/Construction plan. 6. Site photographs. 7. Address proof, Income conformation. Release of loan in 4 installments as follows: 1. 1st loan installments of 25% amount are given after the completion of foundation site. 2. 2nd loan installments of 25% amount are released during the completion of ceiling of the house. 3. 3rd loan installments of 25% amount are released after the ceiling during plastering time. 4. 4th loan Installments of last 25% amount are released after plastering and flooring.

2. INDUSTRIAL LOAN Purpose

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1. For starting of the industry. 2. For the purchase of machinery/building and other implements. Period of Loan The maximum duration of loan was 180 months (15 years) Objective To provide financial assistance to the people who willing to construct the industry Age Criteria A person must be an age of 18 years and more Documents for Classification: 1. If it is land then land papers. 2. Machine towers hypothecation. 3. If it is immovable property then its papers. Procedures and Conditions: 1. Details regarding the industry. 2. Environment suitable improvement of industry. 3. Raw materials in store in or supplier from the other than it should be explained. 4. Water and power supply ways details. 5. Technology skills: if technicians need then its explanation. 6. If self-employed industrial person his net worth and personal signature, property details, valuation loans details. 7. Market details things that happen market likes ups-down demands has some critics. 8. Industry capacity and maximum time for production. 9. Each advantage and each inflow and outflow. 10. Details regarding previous 5 years production, sales, expenditure. 3. IVP/LIC/BOND LOANS

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Amount of loan Maximum 70% on premium paid on IVP/NSC/LIC Bonds. Interest rate Interest up to 13.5%. Interest amount rate may change from period to period as per the directions of reserve bank and administrative board. Way of treating and transferring 1. IVP/NSC Bonds get loans on the market value 2. The person has to transfer bonds to the bank and register in the concerned department and get the letter or document showing the transfer to the bank LIC procedure 1. In common policy assignment letter related every policy holder’s signature with the written letter and the letter should be written to the insurance company by policy holder. 2. This should be enlisted in the in the insurance company. 3. A receipt regarding the last installment paid by the policy holder and gets the surrender value details from the policy company. 4. Surrender value is taken for evaluation of the policy. 4. OVERDRAFT ON CURRENT ACCOUNT Purpose:1. For urgent need of money for business. 2. To enhance the relationship between customers and bank. Eligibility:1. The account holder should have maximum amount and maximum times of transactions.

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2. The account holder has to be a person who has holding from many years. 3.

The person in past should have maintained good balance.

Permission:1. The account holder can get this privilege by consulting respective manager. 2. Manager has to clarify with his senior authority. Rate of interest:The rate of interest is prescribed on amount over draft. The interest amount is balance of account. 5. JEWEL LOAN Quantum of loans:Maximum up to10 lakhs on gold ornaments as 1 gram gold amount to Rs.1300. Duration of loan:60 months. Interest Rate:12% annum Special features:1. These loans are especially given only in these types of co-operative banks. 2. There is no much of security needed. 6. SURETY LOAN Salary holders through banks get loan up to 50,000 Interest and duration

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50 months for the interest rate of 16% On the basis of Salary Quantum loan: 40,000 Rs Duration: 36 Months of 16% Interest Purpose: To meet personal causes of the people surety loans is taken behalf other persons. Special features 1. The surety loan means if original benefit or does not pays the loan then the surety holders has to pay the amount back. 2. The installment must not exceed the 40% of his actual salary. 3. One person as to give surety to only on borrower. Documents and necessary letters 1. Loan beneficiary and surety persons photographed membership cards duplicate has to be provided. 2. Loan beneficiary and surety persons salary address confirmations documents. 3. Reasons of loan and their letters. 4. Loan beneficiary and surety persons salary address conformations letters. 8. BUSINESS LOAN Quantum of loan:50 Months not exceeding more than that.

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Interest Rate:15.50% per annum Purpose Bank provides loans to its membership customer for their business transactions improvement. Special features 1. This loan is provided to small scale business. 2. This loan helps in self employment of the people. Documents from the applicants 1. Persons who request for business maintenance the bank has to get the registration and license duplication letters of business. 2. If business placed is rented one, then the applicant should get letter from the owner that he is paying his rent regularly. 3. Applicant should give the document which shows income coming from his business transactions. 9. VEHICLES LOAN Purpose Purchase of new vehicle (All types of vehicles) of reputed make for personal use only.

Amount of loan 70% of loan is given on the actual value of the vehicle. Repayment

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As maximum time of 60 Months (i.e. 5years for three and four wheeler) As maximum time of 36 Months (i.e. 3years for two wheeler) Interest rate Interest rate on two wheeler vehicle is 12.50%. Vehicle type

Maximum repayment period

1. Mopeds

24 onths 2.

Scooter/Bikes

3.

Car Loans

36 onths 72 Months

Documents and procedures: 1) Profoma invoice from the vehicle company. 2) Applicants driving license duplicate. 3) Declaration letter from the loan beneficiary. 4) ID card sowing customer of bank and address proof duplicate. 5) Proof of income from employer. Eligibility Employees of central/state government department’s public sector undertakings, corporation boards, private institution, business/trade professionals, agriculturists or engaged in allied activities who have income proof. 10. OVERDRAFT ON DEPOSITS Purpose:1. To meet the personal needs of customers. 2. To develop a good relation between customer a bank.

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Eligibility:1. An account holder should have maintained a good balance in the past. 2. He should have a good record of transactions and maintain the good balance. Permission:1. Account holder should approach the manager in respective department head. 2. The management will decide to allow or not. Amount on overdraft Overdraft will be up to the permitted level by the management. The interest rate is also decided by them. 11. FESTIVAL LOAN Purpose: A. To meet the expenses of the festival. B. To celebrate the festival and maintain the culture of different religion. Repayment: The amount is processed in their salaries. Interest: 15.50% per anum

PERSONAL LOANS V. GOLD LOANS Gold Loan

Personal Loan

Gold Loan is secured Loan

A Personal Loan is an Unsecured Loan

Eligibility Anyone at any Age with gold as Eligibility Salaried employees, pensioners of

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collateral is eligible.

Central, state Government, armed forces, selfemployed businessmen and professionals with a regular source of Income are eligible to avail of Personal Loan

Documentation Quick Loan approvals and Documentation Compared to Gold Loan it disbursals, with minimal documentation.

requires at least a 15 day period. After the proper documentation, depending upon the credit score the Loan is disbursed or cancelled

Loan to Value (LTV)

Multitude of Loan Loan to Value: Loan amount depends upon

options with higher LTVs.

ones payback capacity

Non-bankable customers are also served

Compulsory Bank customer.

Convenient hours of operation.

The process takes time for the operation.

Better operating cost structure vis-à-versa Includes proceeding charges and other charges Banks.

during the process

Flexibility in provision of very small and very Nor very small amounts are given as Loans or large Loan amounts.

nor are very huge amounts given. Depends upon the policy range of Loan, amount of every bank

EDUCATIONAL LOAN SCHEMES OF INDIAN BANKS ASSOCIATION Purpose:- Payment of course fees. Purchase of books, equipments, instruments, uniform, payment of hostel fees, examination fees, study tours for studies in India. The Eligible Courses are Professional courses: Engineering, Medical, Agriculture, Veterinary, Law, Dental, Computer, Management, etc. Quantum of Finance:- Need based finance for studies in India: Max. Rs.10.00 lacs

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 Margin Upto to Rs.4.00 lacs – Nil  Above Rs.4.00 lacs – for studies in India – 5% Security:- Loan is given jointly to the student and parent /guardian Assignment of future income of the student  Upto Rs.4.00 lacs- No security  Above Rs.4.00 lacs upto Rs. 7.50 lacs –Satisfactory third party guarantee (Note: If the proposed borrower prefers to offer collateral security of tangible assets (moveable or immoveable) instead of bringing collateral securities in the form of third party guarantee, the same may be accepted, at his request, provided the securities with stipulated margin covers 100% of the loan amount).  Above Rs. 7.50 lakhs: Collateral security equal to 100% of the loan amount. Processing fee:- No processing / upfront charges may be levied on loans sanctioned under the scheme. Repayment:- Commences two years after completion of the course or six months aftergetting employment, whichever is earlier. Loan with interest is repayable in equated monthly installments within: For loans Upto Rs.7.5 lacs – 10 years after commencement of repayment For loans above Rs.7.5 Lakhs - up to 15 years after commencement of repayment No prepayment penalty Credit Delivery:- Loan can be availed from the branch nearest to the place of permanent residence of the parent / guardian. Obtention of UID number (Aadhaar) of the student is compulsory. Rate of interest:• Interest to be charged at rates linked to the Base rate as decided by individual banks

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• Simple interest to be charged during the study period and up to commencement of repayment. Eligibility:• Should be an Indian National with no specific restriction for age of the student. • Should have secured admission on merit to professional/technical courses in India including management quota. Not eligible for interest subsidy:• Students admitted through management quota • Students pursuing studies abroad • Students pursuing courses which are not approved under IBA Scheme but approved by the Bank. • Students discontinuing the course in the mid-stream or who are expelled from the institution on disciplinary or academic grounds. However subsidy would be available for actual period of study only if discontinuation is due to medical grounds with necessary documentation. Interest Subsidy to Interest subsidy to Economical Weaker Section Students:• Interest subsidy during moratorium period is available to students who produce parent’s income certificate not exceeding Rs.4.50 lacs p.a. • The income certificate is to be issued by the authority viz. District Collector, Dy. Collector/ Asst. Collector/Prant Officer & Mamlatdar. THE EDUCATION LOAN BILL, 2016 :The respective bill is to provide for education loan to students and for matters connected therewith. As per the definitions, “bank” means any nationalized or commercial bank and includes a private or foreign bank and “student” means a person who is pursuing any course of study, including any professional or vocational course in any college or institution or university.

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As per the bill, The Central Government shall introduce the scheme, within six months of the commencement of this Act. An application for education loan shall be made by a student in the prescribed format to any branch of a bank and the same shall be disposed of within a period of one month from the date of its receipt. Further, The Bank shall make payment directly to the head of the college or institution or university where the student is studying or seeking admission. There are some ground that mentioned in the bill saying that no bank shall— (i) refuse an education loan to a student on any ground; (ii) insist on any sort of guarantee, mortgage or surety for the purpose of disbursement of loan; (iii) charge interest more than the rate prescribed; (iv) withhold degree/diploma certificates, mark sheets in original; and (v) initiate recovery process of the loan before the completion of one year of securing a job by a student who has taken an education loan. PUNISHMENTS: If any bank violates the provisions of section 6, the director or other officer of the bank responsible for the violation, unless he proves that such violation took place without his knowledge or that he exercised all due diligence to prevent, shall be deemed to be guilty of such violation and shall be punished with imprisonment for a term which may extend upto one year or a fine which shall be equal to the amount of loan sought by the student. This bill also says that The Central Government shall formulate a scheme for waiving off such loan, if a student, even after five years of completing his course, fails to secure any employment. Lastly, Repayment of an education loan is deductible under section 80E of the Income Tax Act. The yearly limit for deduction is Rs. 40,000 (for both the principal and the interest). LOANS TO ITS EMPLOLYEES STAFF VEHICLE LOAN Purpose

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1. For the transportation of its staff. 2. For their personal purpose. Repayment The loan amount is deducted in their salary with very low interest rate then other. Repayment period 36 months SPECIAL SALARY ADVANCE Purpose: 1. For the personal purpose of staff. 2. To expense before the salary date. Repayment: The advance amount is deducted in future salaries. There is no interest on their advance

STAFF HOUSE BUILDING LOAN Purpose: 1. Staff to own their house. 2. To secure themselves. Repayment The loan amount is deducted in their salaries. The interest amount is fixed by the administration which may be very low.

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STAFF CONSUMPTION LOAN Purpose: 1. Staff to meet their personal needs. 2. To secure themselves. Repayment The loan amount is deducted in their salaries. The interest amount is fixed by the administration which may be very low. BORROWING RATE AND LENDING RATE People make their funds available to the banks by depositing their ‘savings’ in various types of accounts. In other words, bank funds mainly consist of deposits from the public, though banks may also borrow money from other institutions and the Reserve Bank of India. Banks, thus mobilises funds through its deposits. On public deposits the banks pay interest at and the rate of interest vary according to the type of deposit. The borrowing rate refers to the rate of interest paid by a bank on its deposits. The rates which the banks allow depend upon the nature of deposit account and the period for which the deposit is made with the bank. No interest is generally paid on current account deposits. The rate is relatively lower on savings account deposits. Higher rates ranging from 6% to 12% per annum are paid on Fixed deposit accounts according to the period of deposit. Banks also borrow from other institutions as well as from the Reserve Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as ‘Bank Rate’. The rate at which commercial banks make funds available to people is known as ‘Lending-rate’. The lending rates also vary depending upon the nature of loans and advances. The rates also vary according to the purpose in view. For example if the loan is sanctioned for the purpose of activities for the development of backward areas, the rate of interest is relatively lower as against loans and advances for commercial/business purposes. Similarly for smaller amounts of loan the rate of interest is higher as compared to larger amounts. Again lending rates

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for consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators, etc. are relatively higher than for commercial borrowings. However, the Reserve Bank of India from time to time announces changes in the interestrate structure to regulate the lending of funds by banks. Different rates of interest are prescribed for various categories of advances, such as advances to agriculture, small scale industries, road transport, etc. Graded rates of interest are prescribed for backward areas. Lower rate is normally charged from agencies selling food-grains at fixed price through Govt. approved outlets. Lastly, lower rate of interest is charged for loans granted to persons belonging to ‘weaker sections of the society’. FLOATING RATE OF INTEREST For all Loans except Loans against Banks own Time Deposit Interest on the Loan will be charged at prevailing floating Rate of Interest on a daily reducing balance at monthly basis. The Rate of Interest is subject to revision from time to time due to Changes in Base Rate or Revision even without a change in Base Rate and the Bank has the option to reduce or increase the EMI or extend the repayment period or both consequent upon a revision in the interest rate. FIXED RATE OF INTEREST For the fixed Rate of Interest only for Loan against Banks own Time Deposit Calculation of the Rate of Interest, therefore the interest on the amount of the Loan will be applied at the prevailing rate per annum on daily reducing balance on a monthly basis. CLASSIFICATION OF LOANS WITH RESPECT TO LENDING WAYS You have noted in the earlier lessons that commercial banks lend money in four different ways: (a) direct loans, (b) cash credit, (c) overdraft, and (d) discounting of bills. These are briefly discussed below: Loan is the amount borrowed from bank. The nature of borrowing is that the money is disbursed and recovery is made in installments. While lending money by way of loan, credit is given for a definite purpose and for a pre-determined period. Depending upon the purpose and period of loan, each bank has its own procedure for granting loan. However the bank is at liberty

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to grant the loan requested or refuse it depending upon its own cash position and lending policy. There are two types of loan available from banks: (a) Demand loan, and (b) Term loan DEMAND

LOAN:

A Demand Loan is a loan which is repayable on demand by the bank.

In other words, it is repayable at short-notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lump sum (one time) or as agreed with the bank. For example, if it is so agreed the amount of loan may be repaid in suitable installments. Such loans are normally granted by banks against security. The security may include materials or goods in stock, shares of companies or any other asset. Demand loans are raised normally for working capital purposes, like purchase of raw materials, making payment of short-term liabilities TERM LOANS: Medium and long term loans are called term loans. Term loans are granted for more than a year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of a fixed amount. Term loan is required for the purpose of starting a new business activity, renovation, modernization, expansion/ extension of existing units, purchase of plant and machinery, purchase of land for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like. CASH CREDIT Cash credit is a flexible system of lending under which the borrower has the option to withdraw the funds as and when required and to the extent of his needs. Under this arrangement the banker specifies a limit of loan for the customer (known as cash credit limit) up to which the customer is allowed to draw. The cash credit limit is based on the borrower’s need and as agreed with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as and when he needs money subject to the limit sanctioned. It is normally sanctioned for a period of one year and secured by the security of some tangible assets or personal guarantee. If the account is running satisfactorily, the limit of cash credit may be renewed by the bank at the end of year. The interest is calculated and charged to the customer’s account. Cash credit, is one of the types of bank lending against security by way of pledge or /hypothetication of goods. ‘Pledge’ means bailment of goods as security for payment of debt. Its primary purpose is to put the goods

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pledged in the possession of the lender. It ensures recovery of loan in case of failure of the borrower to repay the borrowed amount. In ‘Hypothetication’, goods remain in the possession of the borrower, who binds himself under the agreement to give possession of goods to the banker whenever the banker requires him to do so. So hypothetication is a device to create a charge over the asset under circumstances in which transfer of possession is either inconvenient or impracticable. CLASSIFICATION OF LOANS WITH RESPECT TO TIME PERIOD Commercial banks grant loans for different periods-long, short and medium term for different purposes SHORT-TERM LOANS Short term loans are granted by banks to meet the working capital needs of business. The working capital needs refer to financial needs for such purposes as, purchase of raw materials, payment of wages, electricity bill, taxes etc. Such loans are granted by banks to its borrowers to be repaid within a short period of time not exceeding 15 months. Short term loans are normally granted against the security of tangible assets like goods in stock, shares, debentures, etc. The rate of interest charged on short term loans ranges from 12% to 18% p.a. TERM LOANS Medium and long term loans are generally known as ‘term loans’. These loans are granted for more than 15 months. In case of medium term loan, the period ranges from 15 months to less than 5 years. Medium term loans are generally granted for heavy repairs, expansion of existing units, modernisation/renovation etc. Such loans are sanctioned against the security of immovable assets. The normal rate of interest ranges between 12% to 18% depending upon the period, purpose, nature and amount of the loan. Though banks may grant long term loans, they avoid granting loan for more than 5 years. (A) OVERDRAFT: ‘Overdraft’ means allowing the customer to overdraw his account. It is allowed only to current account holders. But some banks allow casual overdraft in savings accounts of Government

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servants etc. in which regular credits for salary payments are credit each month, against such expected credits. Unlike loan accounts, an overdraft is a running account wherein the balance goes on fluctuating from debit to credit or vice versa. Under an overdraft arrangement, a customer is allowed to draw cheques upto an agreed limit over and above the credit balance in the account. The bank provides overdraft facility to its customers to earn interest, and its customer enjoy the overdraft facility in order to develop their business. As a general rule, the overdraft is ideal to cover short term requirements tag. for working capital where considerable fluctuation due to factors such as production cycle or seasonable changes may be expected, whilst the loan account is more appropriate to provide funds for investment projects where repayment can be amortised at pre-determined intervals or made in full at the end of an agreed period. The interest on overdraft is calculated on the amount actually utilised by the debtorcustomer at regular intervals. Therefore, it is cheaper than the other loans. In a current account cheques are honoured by a bank only upto the credit balance available in the account, the overdraft limit enables the party to draw cheques over and above his credit balance (but within the limit sanctioned). There is no restriction on Operations in the account and Withdrawals and deposits may be upto any number of times. The interest is charged on the daily debit balance only. Operations in the account are effected through cheques though an overdraft is repayable on demand, the facility cannot he suddenly cut off, unless the customer's position has lhanged materially to the detriment of the bankers, compared with circumstances obtaining and expressed to continue when the overdraft was arranged. If a bank has agreed to give an overdraft, it cannot refuse to honour cheques or draft within the limit of that overdraft which have been drawn and put in circulation. If the bank desires, as it deems it necessary, to cancel the limit it should give its customer a notice of its intention giving him a reasonable time. The general practice of the banks is that they get an application from the customer and a promissory note signed by him. But written transaction are not necessary in all cases. In some cases overdraft facility may be inferred by past relations and transactions of the bank and the customer, However, it is safe course for the banks that they should obtain a letter and a promissory note from the customer in which terms and conditions 0f the facility including the rate of interest chargeable respecting the' overdrafts should be expressly given. '

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The period of overdraft is seven years at maximum. But in practice, the banker grants an overdraft for one year, and renews it every year, if the terms between the customer and the banker are satisfactory. There are two categories of overdrafts which are prevalent amongst bankers. They are: (i)

Clean Overdraft: It is usual for bankers to allow unsecured overdrafts for small amounts to their current account holders in the form of temporary accommodation to meet the party's sudden requirement for which no arrangement has been made in advance. Since such overdrats are not backed up by any security, they are called clean or temporary overdrafts. Clean overdrafts are allowed purely on the personal credit of the party.

(ii)

Secured overdraft:-When a party is allowed regular limits against some tangible security which may be in the form of bank's own time deposits, shares, debentures, Government securities, life insurance policies, NSCS, Units of the UTI etc., it is known as secured overdraft. In Indian Overseas Bank, Madras & Another v; Messrs Naranprasad Govindlal Patel, Ahmedabad, (AIR 1980 Guj. 158), it was held that the overdraft arrangement between the bank and its customer, although called a facility, is nothing but a contract and cannot be terminated by the bank unilaterally even though it is a temporary one.

If the banker has agreed to allow his customer an overdraft, with of without security, he cannot, without due notice to his customer, refuse cheques within the limit of the overdraft, and issued prior to receipt of his notice. If he refuse any cheque it becomes 'wrongful dishonour' and he will be liable for damages. The bank can charge compound interest at monthly rate on overdraft 1ount, even without agreement. (B) CASH CREDIT:Cash credit is a running account wherein a limit is sanctioned to the customer against pledge or hypothecation of stocks. It is meant to provide working capital funds to the customer for meeting his day to day expenses for purchase of raw-materials, processing and converting them into finished goods. In the case of traders, the limit in cash credit account is allowed for purchase of goods in which they deal. N0 sooner the sales take place, the customer deposits the proceeds in the account and whenever he needs the money again for stocking the gods, he draws upon the account. Cash credit accounts are opened only by traders, industrial units and other business

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concerns. Sometimes cash credit limit may also be granted against personal security but such cases are very rare. A cash credit is just like a current account with the only addition that the party is sanctioned a limit upto which he may draw cheques over and above his own credit balance, if any. Thus the account may be brought in debit up to the limit sanctioned. The customer may route all his money transactions through the cash credit account and there is no restriction on the number of transactions. The difference between overdraft and a cash credit account is that of the securities against which the limits are sanctioned while an overdraft limit is generally sanctioned against paper security (i.e. shares, life insurance policies, units, bonds and other Government securities) cash credit are essentially sanctioned against merchandise/work-in-process. Interest is charged on the running debit balance on day to day basis and not on the limit sanctioned. No interest is paid by the bank for credit baiance in a cash credit account. The cash credit account has the following advantages: (1) A cash credit account enables the borrower to recycle the funds Quickly, efficiently and he does not have to keep surplus fund idle. (2) The limit is utilised by him only in case of need and to the extent re(Wired. This helps him to minimise interest charges. This ensures lesser Cost of funds for borrower, and facilitates a better turnover of funds for the bank (3) The flexibility of the system takes care of temporary requirements of 1Funds by borrowers without undue delay, without detailed negotiation and without creating any problem of documentation and security charging. If in spite of above mentioned advantages, the cash credit system suffers to the following drawbacks: (1) The quantum 0f advance, at one time, is determined not by how much the banker can lend, but by the borrower's decision to borrow that time. (2) Because of the importance attached in nature and value of SCCU'ity Under the system, it accentuates, to some extent, inflationary and dcllationan, DTCSSUres. (3) The limit under the cash credit account are normally reviewed 0“ an annual basis WhiCh, in itself, is a long period for review having regard to the short term nature of the advance. (4) The system is not conducive to the borrower making any conscious Effort to manage his cash resources.

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(5) When the borrower wants larger amounts than fixed limit under the cash credit system suffers with credit restraint. (6) On account of the stress on security aspect, there is no conscious effort on the part of the bank to verify the end use of funds. This facilitates diversion of funds for unapproved purposes, and the lending banker becomes aware of it only after a considerable lapse of time. (C) BILLS PURCHASED/DISCOUNTED:Purchase and discounting of bills an easy and normal mode of getting loan facility. Such advances are shorttenn and self-liquidating in nature. The following three methods of financing against bills are adopted by banks: (i) Bills purchased:Demand bills, whether they are clean or documentary are purchased by banks. Usually banks accept only documentary demand bills. However, limits for purchase of clean bills are sometimes granted to good parties. The advantage of purchasing a bill is that the banker becomes a holder for value of such a bill. Since, he becomes the owner of the bill, he can exercise his right as a pledgee over the goods covered by the bill, in case it is dishonoured. (ii) Bills discounted:Usance bills i.e. bills maturing on a future date are discounted by banks for approved parties. Usually bills having maturity period of 90 days or so are accepted for this purpose. A holder of such bill has to wait till the maturity of the bill to realise the amount of the bill. But, if he is in urgent need of money, he can take the bill to his banker and discount it. It means, the banker will credit the account of the customer, who brings the bill for discount, after deducting charges and they constitute an income to the banker. It is a kind of clean advance, since, the banker has no other security except the bills. (D) OVERDRAFT AGAINST OUTWARD BILLS FOR COLLECTLON:~ Sometimes mics are allowed overdraft against bills sent for collection, in such cases gamble margin is maintained. So far as the borrowers are concerned, the terms ‘purchase’ and ‘discount’ have more or less the same meaning inasmuch as they get money immediately in both the cases. However, usually ‘purchase’ refers to granting ”advance against demand bills and 'discount' against usance bills. When a bill is submitted by the party and suflicient limit is available it the account, the banker should look into the following points:

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a. The bill should be complete in all respects and the document attached to the bill should be consistent with one another. b. The railway receipt, if accompanied with the bill, should not be a stale one. c. if the bill is accompanied by lorry receipt (MTR), it should be ensured that the same is that of a transport company approved by the Indian Banks’ Association. d. The bill should represent a genuine trade transaction and it should cover the approved commodities in which the party is dealing. e. The bill of exchange should be properly drawn. The name of the bank should appear as payee. f. The invoice should be tallied with the railway receipt so as to ensure that the description of the goods, weight and other particulars match each other. g. The bank's name should appear as consignee in the RR/MTR etc. in case the goods have been consigned to ’self‘, the RR/MTR should be endorsed in favour of the bank. h. The prices charged in the invoice should be in reasonable conformity with the market prices of the commodities concerned. This is necessary to check overinvoicing. i. There should be no reason to suspect the genuineness of the documents. In other words, the documents should not be forged ones. j. The railway receipt/lorry receipt and other documents presented earlier and returned unpaid should not be accepted. After the bill is found to be in order on the basis of the above points, drawers account is credited with the amount. The bill is then forwarded to the drawee's banker either on the same day or latest by the next day. The bank may be held liable for damages if there is any unreasonable dd!) 3 in forwarding the bill. The bank should keep in constant touch with (M collecting bank. , (e) Loan system:A loan is a kind of advance made with or without 4 Security. Under the loan system, credit is given for a definite purpose and for a predetermined period. After sanctioning the loan, bank makes t lumpsum payment to the borrower or credits his deposit account with the money advanced .it is given for a fixed period at an agreed rate of interesr Repayments may be made in instalments or at the expiry of certain period‘ The customer has to pay interest on the total amounts advanced whetherhe withdraws the money from his account or not. A loan once

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repaid in full or in part cannot be drawn again by the borrower unless the banker sanctions a fresh loan. No cheque book is issued in a loan account. Loan may be a demand loan or term loan or bridge loan. Demand loan: A demand loan is a one time advance for a fixed amount and no debits to the account may be made subsequent to the initial advance except for interest, insurance premium and other sundry charges. Demand loans are sanctioned against goods and documents of title thereto, bank's own fixed deposits, gold ornaments etc. The distinction between cash credit and a demand loan lies in the continuing nature of the cash credit which is not in the case of demand loan. A demand loan once repaid in full or in part cannot be drawn against by the borrower unless the bank sanctions a fresh loan. Term loan: Where a loan is granted for a fixed period exceeding one year and is repayable according to a schedule of repayment, as against on demand and at a time, it is known as a 'term loan'. A term loan is granted for fixed capital requirements e.g. investment in plant and equipment or permanent addition to current assets. These may be required for setting up new projects or expansion or modernization of the plant and equipment. A term loan for longer repayment schedule e.g. for more than 5-7 years, is known as long term loan whereas a term loan in which the period exceeds 1 year but does not exceed 5-7 years is known as medium term loan. Bridge loan: As per RBI directives, a bridge loan can be sanctioned by banks for the following purposes: a) against public issue of equity in India for which SEBI approval has been obtained; b) againa term loans connnitments of financial institutions and other banks which are facing temporary liquidity constraints. Bridge loan should be within 5 per cent of bank’s incremental deposits of previous year. A bridge loan will be against the amount covered by underwriting. The issue should be fully underwritten. it should be wad that 75 per cent of' the issue is underwritten by banks, financial “unions, merchant bankers brokers of good outstanding. Leasing license:Commercial banks had been financing the activities of leasing companies by way of allowing cash credit (hypothecation) limits against the security of machinery and equipment leased out to

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the ‘essces and of lease rentals receivable with a margin requirement of 25 her cent to 30 per cent. Some banks have been financing these companies y allowing an overdraft limit, or some others even by way of a demand Dan. On such limits, banks generally charge interest at the maximum lending He. The usual conditions that are stipulated in financing leasing companies banks are: i.

original invoices relating to leased machines and equipments purchased are kept by the bank on its record;

ii.

the rentals should be Paid by the lessee to the bank; (iii) machinery and equipments have to be new and fully paid for;

iii.

the maximum period of finance is five years and in no case the repayment period should exceed the period of lease or economic life of the equipment;

iv.

the bank is allowed to inspect the asset at all times;

v.

the lease contracts are only in respect of productive assets and not consumer durables, etc.

HIRE-PURCHASE FINANCE:Hire-purchase is an agreement in writing under which an owner lets a chattel (i.e. equipment, machinery, consumer durables etc.) on hire and agree that the hirer may either return those goods and terminate the hiring or alternatively purchase the goods upon terms set out in the agreement. It is not a contract of sale but a contract of hire. The hirer will have a right to possess after purchasing the goods. A contract of hire-purchase is distinguishable from a contract of credit sale (price is paid in instalments). In the case of instalment credit the buyer becomes the absolute owner of the goods and possesses the right of disposal even if the instalments are in arrears. In a hire-purchase transaction, the goods belong to the owner and are given to the other party only on hire. The hirer does not have the right of disposal of the goods 'until he has paid all the hire money and the title has been conveyed to him. Hire-purchase transactions cover a wide range of articles of durable goods like T.V. Sets, refrigerators, air-conditioners etc., but the majority of such transactions are done for automobiles. Companies those engaged in financing of cars and trucks, have specialised in hire-purchase business. Quite often, banks are approached by these financiers to grant them cash credit facility against hypothecation of the vehicles by way of first charge in their (Bank's) favour and

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assignment of usance hundies/demand promissory 4 notes executed by the hirers in favour of financiers. In many a case, these advances are further backed up by an indemnity policy of an approved insurance company to cover any loss on the advance. The original hirepurchase agreements executed by the hirers in favour of the financiers are deposited with the bank and they form the basis of the advance. A margin of 25 per cent to 30 per cent on the instalments due from the hirers to the financiers under the respective hire-purchase agreement, is stipulated. While sanctioning limits to the financiers, the banks should ensure dial the borrowers are of undoubted integrity, have reasonable stake in the busian and are quite experienced in their line of activity and having good financial backing. (viii) Consortium Financing (Participation Financing or Joint financing)» Consortium may be defined as an arrangement whereby a up of banks (or financial institutions) agrees, for joint action and mutual issigrance, to finance a project which is considered t00'big for the resources of any individual banks. The term 'consortium financing‘ refers to the joint gnancing of a project by more than one bank against common security. such financing is also known as 'participation loans. In a consortium ,dvance, the entire security is charged to all the participating banks for total advance on a pari passu basis (a pari passu charge is one which ,anks equally in priority). There are basically two reasons which necessitate participation of banks on a consortium basis: first, one bank alone may not be able to finance the project on account of its limited resources, and secondly, such an arrangement. assists in diversifying risks of the participating banks. One of the banks participating in consortium acts as a consortium leader which, normally, has the largest share in financing the borrower. The consortium leader is responsible for negotiating/corresponding with the borrower, arranging/cooperating the meetings of the consortium members etc. The member banks of the consortium have inter se agreement for sharing the loans and advances, deferred payment guarantees, letters of credit and ancillary benefits like sharing of deposits, commission, etc. Consortium financing or joint financing is different from multiple banking. In the multiple banking system, a borrower is lent money by many .banks under different agreements and require securities separately according to the size of the loans given. But in case of consortium advance one lump sum security is given to all participant banks.

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In case of financing large or big working capital to a concern, a particular bank is not in a position to‘ involve its whole or bigger portion of capital or deposits, resources of various banks are accumulated on Participation basis, and the required advance is made. Accordingly, commercial banks have begun granting credit on a consortium basis to public food procurement agencies and to various public and private companies as well. The credit needs of public food procurement and distribution agencies like the Food Corporation of India, Civil Supplies Departments or Corporations of States and Cooperative Marketing Federations. The Reserve Bank of India (RBI) has issued in December 1973 the following directives to the banks on consortium/participation advances: (1) Large credit limit by a bank to a single borrower in private or public sector including Electricity Boards in excess of 1.5 per cent of in deposits should normally be extended on a participation basis. This norm is to be adopted with flexibility and exceptions can be made in reasonable circumstances. (2) Where it is decided to finance a borrower on consortium basis the arrangement should normally take care of the entire financial requirements of the borrower. (3) Food credit consortium advances should be forged between the banks themselves and the total business of the Food Corporation of India should be shared between the participating banks. (4) In case of sick units, a reliable assessment as to possibility of revival rehabilitation should be taken up by the banks already lending to the sick mills. Banks should then proceed to find the financial requirements for revival along with specialised agencies like the Industrial Reconstruction Bank of India. (5) In case where the working capital requirement of a borrower are financed by a number of banks without consortium arrangements a proper procedure for co-ordination amongst the financing banks should be evolved by (i) periodical exchange of essential information; (ii) review of borrower's position through periodical inter-institutional meetings; and (iii) joint review of credit requirements of the borrower at the time of renewal or extension of credit limits or when the borrower's performance shows signs of deterioration. In November, 1978 the RBI issued the following guidelines to the banks of lending of working capital under consortium arrangements.

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(1) While it was desirable to form a consortium wherever there were multiple banking arrangements, the formation of a consortium was obligatory where the aggregate credit limits sanctioned by several banks to a single party amounted to Rs. 5 crore or more, where the total requirements of the borrower exceed 1.5 per cent of the bank's total deposits. (2) The share of each member bank in the consortium should not normally be less than 10 per cent of the aggregate working capital limits sanctioned to the borrower. (3) For the sake of operational convenience, the number of member mi in a consortium should be kept as low as possible and it should not Wally exceed five, except in the case of very large credit limits, such ,sihose exceeding Rs. 50 crore where the number could be increased ralsortably. (4) (4) The bank selected as the leader of the consortium and one or two other members of the consortium as agreed upon, should be entrusted with me work of appraisal of the borrower's credit requirements. The terms and conditions of the advance should be finalised by the consortium committee so formed and be uniform for all the member banks. ln August, 1988, the RBI has recommended ’single window approach’ for documentation and first disbursement only. In such cases, the lending banks have been given authority from other banks to make available their share of the credit limit if the latter do not convey their decision to the lending bank within time. The threshold limit for obligatory formation of consortium in respect of working capital finance was raised from Rs. 5 crore to Rs. 50 crore in October, 1993. The banks were also then given option to organise, at their discretion, syndication for extending credit for highly rated borrowers enjoying working capital facilities of Rs. 50 crore and above. Ground rules in respect of consortium arrangement for flexibility in Smdit delivery system were left to the judgment of the participating banks “1 October, 1996. In order to introduce further flexibility in the credit delivery system, the RBI, in April, 1997, gave complete freedom to banks from the mandatory I“illirements for consortium lending. Accordingly, it is now not obligatory 0n the part of the banks to form a consortium even if the credit limit per borrower exceeds Rs. 50 crore. The need based finance acquired by the

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borrowers may be extended by banks either entirely on their own, subject ‘9 Observance of exposure limits, or in association with other banks. PARTICIPATION CERTIFICATES A participation certificate is an ‘nStrument through which a bank which has granted credit to its borrowers, San share with other institutions a part or whole of the credit given by it to its borrowers. Thus this scheme facilities inter-bank HOW 0f funds for ihort periods. Banks issue Participation Certificates against the working i3apital advance (i.e. cash credit, secured overdraft and advances against book tlebts, etc.) granted to industrial concerns. While there was no restriction regarding maturity period for the certificates sold to banks, maturity period bf Participation Certificates issued to in stitutions other than banks was restricted to be within 30 days to l80 days. The Participation Certificates could be issued only on such terms and conditions as may be prescribed by the RBI. Besides the Scheduled Commercial Banks, Participation Certificates could be issued only to financial institutions such as LlC, Unit Trust of lndia, General Insurance Corporation of India, the IClCl etc. approved by the RBI from time to time. The scheme of participation certificate was started in I970. It became popular and evolved during the decade of nineteen eighties. It is a scheme of inter-bank participation in order to provide an additional instrument to even out short term liquidity in the banking system. The rate of interest is determined by issuing and participation banks themselves. But the rate of interest shall not be less than 14 per cent per annum with effect from 12th October, 1993 or as fixed by the RBI from time to time. I The participating banks are obliged to subscribe to the 'Unifonn Code of Participants' which contains the mutual rights and obligations of participating banks relating to the securities obtained from the borrowers. On the date of maturity of such certificate, the issuing bank will pay the amount of participation with interest to the participating banks, irrespective of the default, if any, in the concerned advance? The RBI has approved 39 banks under the scheme to issue Participating Certificates. The Participating Certificate Scheme was envisaged as a means of evening out liquidity imbalances within the financial system. It was intended to provide temporary avenue of investment for short term floating funds. The Participating Certificates are of two types; a) Inter-bank participation with risk-sharing; and

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b) Inter-bank participation without risk sharing. (a) Inter-bank participation with risk-sharing:This scheme is confined to scheduled commercial banks. The participations are strictly interbank. The minimum period of such a Inter-Bank Participation will be 91 days, while the maximum period will be 180 days. The rate of interest on Inter-Bank Participations would be free to be determined between the issuing bank and the participating bank. The Inter-Bank Participations are not transferable. The risk would be deemed to have crystallised when the issuing bank recalls the advances and stops operations; in the relative want. in such a case the issuing bank would give due notice to the palmrpattng bank intimating the default. (b) Inter-Bank Participation without risk sharing:The primary objgctlvc of this type of participation is to even out short term liquidity. The participation should be backed by the cash credit account of the wmwers. The tenure of such participation will not exceed 90 days. The f‘“ of interest would be detennined by the two concerned banks subject ,0 . ceiling of l2.5 per cent per annum or as prescribed by the RBI from pm: to time. The other terms and conditions as are applicable to With Risk glaring Participation equally apply to without Risk Sharing Participation Classification of Loans and Advances (Secured and Unsecured wush The loans and advances granted by banks are broadly classified ,nro (i) secured; and (ii) unsecured advances. According to Section 5(4) of the Banking Regulation Act, l949. «secured loan or advances' means a loan or advance made on the security of assets the market value of which is not at any time less than the amount of such loan or advance; and "unsecured loan or advance" means a loan or advance not so secured. In the case of a secured loan, the security is of tangible assets or property whereas in the case of unsecured loan the security happens to be the personal obligation of the borrower which is sometimes supported by aguarantee given by a third person or party regarding repayment of the loan amount. Parties enjoying high reputation and sound financial position are granted clean advances without any security; whereas in case of secured loans it is the assets and property and not the personal position of the borrower is material.

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In case of secured .loan the banker is on a sound and solid footing. more is no probability of his money .to be lost. But in case of unsecured loan the banker is always in a dubious position. Even a man of high esteem may turn dishonest and the banker may fall in troubles. 1 "rum In case of secured loans there is no question of granting any installments for repayment, bill in case of unsecured loans installments are generally allowed for repayment of the loan as that becomes a state of affairs under timpelled circumstances and it would be better to get the loan amount repaid installments than to have lost or evaded unduly. The distinguishing features of a secured loan or advance are as follows; i.

The loan must be made on the security of tangible assets likg goods and commodities, land and buildings, gold and silver. corporate and Government securities, etc. A charge on any such assets offered as security must be created in favour of the banker,

ii.

The market value of such security must not be less than the amount of the loan at any time till the loan is repaid.

A charge is created over the assets of the borrower in favour of thc bank. The bank recovers its dues from the customer out of the sale proceeds of the assets charged. There is an element of protection and safety of the bank which lends money through such securities fumished by the borrower, In granting loans on the basis of securities, a banker should take the following precautions: 1) There should be an adequate margin i.e. the difference between the market value of the security and the amount of the advance granted against it. 2) Necessary documents which are agreement of pledge or mortgage etc. should be prepared and signed by the borrower while securing the loan. 3) A bank should advance for short term only because its deposit resources are payable on demand or at short notice. 4) In case of default of the borrower in repayment, the banker should realise the dues from the sale proceeds of the securities pledged. Unsecured advances are made on the goodwill and reputation of the customer. These are generally made by way of overdraft facilities. Such advances are made at the discretion of the

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concerned bank manager himself. The banker should know the details of borrowings of the customer from other banks. While fixing a limit to the customer, the banker has to see many things for viability of granting such facility. The integrity of the customer is a must to be taken note of the usual habits of the customers must be known to the banker. His honesty and past business career are relevant factors for granting limit facility to the customer. The quantum of limit must be rational in comparison to the trade or business of the customer. The banker should carefully assess the liquidity ratios of the customers assets. His profit and loss account should be carefully analysed while granting unsecured advances. CREDIT WORTHINESS OF BORROWER Creditworthiness of borrowers is judged or assessed by their character. capacity and capital. They are called three C's of unsecured advances. A. Character: For deciding creditworthiness of A borrower the first tiling or factor to be seen in his character. Character implies personal qualities like honesty. Integrity, promptness, business reputation etc. Generally, man of 800d character Wi" be very prompt "1 settling his account. Thus repayment is assured. A prudent banker can study the character of I customer. by 80ng through his past transactions in loan matters. B. Capacity: The success of business depends upon the borrower's capacity to run the business successfully. This in turn depends upon his technical competence, managerial skill and his experience in that trade or industry. If the bon'ower is incapable of managing things. business will suffer loss. Thus, the repayment of the loan is affected due to his incompetency to manage an enterprise successfully. The ability, competence and personal cxperience of the entrepreneur reflects upon the consequences of his business aansactions and such person may be judged befitting granting a loan on his personal capacity. C. Capital: The borrower must have adequate funds of his own. He must have worthwhile capital amount to run the industry. Generally, the bank provides finance for the working capital requirements of the business. A banker is interested in granting loans to persons who have employed worthwhile

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amount in the business which may be taken as guarantee for repayment of loan if granted to such person. But the loan amount may be totally lost or squandered away by a borrower having not invested worthwhile amount or capital in the business or industry for which he requires loan. Thus character, capacity and capital play a very dynamic role in unsecured advances. Dr. C.B. Memoria has evolved a formula in this respect, which may be of much use to bankers. (1) Character + Capacity + Capital = Safe Credit (2) Character + Capacity + Insufficient Capital = Fair Credit Risk (3) Character + Capacity Capital = Limited Success. (4) Capital + impaired Capacity Character = Doubtful Credit Risk (5) Capital + Capacity "' Character == Dangerous Risk (6) Character + Capacity -Insufficient Capital Fair Credit Risk (7) Character 4Capital «Capacity a inferior Credit Risk (8) Character Capital Capacity -* Fraudulent One. Factors which limit the level of a Banker's Advances:The level of advances sanctioned by a banker depends upon the following factors: A. Deposits made by depositors Deposits made by depositors are the primary source of funds of a bank. Their size and maturity wise pattern has its effects on the advances to be made by a bank with the addition: and accumulation of funds made by deposits, the bank may increase in advances. But, however, the banker has to repay the deposits with interest; due thereon or the stipulated amount. on demand and for that purpose the banker has to keep and maintain sufficient cash deposits, the banker comes in a position to lessen its cash reserves and even advance loans for a short period, shorter than the time of repayment of deposits. B. Reserve Bank's control over credits of banks: The capacity of banks to provide loans and advances depends on their cash resources. The resources increase through rise in the deposits or by their borrowing from the RBI or by sale of their investments. The RBI regulates the quantum of cash resources of the banks by exercising the powers conferred upon it. If it feels the necessity of expansion of credit, measures are adopted to increase bank's cash resources and vice versa. ‘The Bank Rate Policy, Open Market

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Operations Policy and varied reserve requirements are the methods of credit control by the RBI, affecting the bank's cash resources. C. Seasonal alterations in Bank Credit: The quantum of credit to be granted by a bank depends on seasonal variations in agricultural countries. There are busy season and the slack season. The busy season (November to April) is characterised by higher demand for bank credit largely to finance the marketing and distribution of agricultural crops. The bank credit reaches its peak during the busy season. During the next six months (May to October) of the slack season bank credit contacts because of larger flow of funds to the banking system as a result of liquidation of stocks of agricultural produce. Now, there are no such seasonal changes due to larger expansion of bank credit against non-seasonal commodities, small scale industries and craftsman, and similar other such reasons. D. Demand for credit: Demand for bank credit depends upon the level of production resulted by business, industrial or agricultural sectors; level of inventories retained by business and industrial houses; the price level of goods and commodities in the country; and the procurement policy of Food Corporation of India and other State departments. (9) RECALLING OF ADVANCES Recalling of Advances sanctioned by banks may be done under the following circumstances: i.

If the borrower fails to renew the documents sufficiently before the expiry of the period of limitation.

ii.

If the borrower is guilty of misconduct of fraud causing serious damage to his credibility.

iii.

If the borrower refuses to lodge with the banker additional security to cover the amount withdrawn in excess of the limit.

iv.

lf there is a material deterioration in the value of the security or the quantum of turnover.

v.

If the borrower fails to maintain adequate margin with the bank in spite of persistent requests.

vi.

If there is a change in the policy of bank, RBI and Government making necessary the recalling of advance.

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vii.

If the borrower violates the clause prohibiting diversion of loan funds in the loan agreements by using the loan funds for the purposes other than those for which they were sanctioned.

INTEREST RATES ON ADVANCES Under Sections 21 and 35-A of the Banking Regulation Act, 1949, the RBI possesses statutory authority to regulate the interest rates charged by the banks. Hence at present the RBI prescribes the rates of interest to be charged by the commercial banks on their loans and advances and makes changes therein from time to time. The RBI has not prescribed a single rate for all the advances; a schedule of interest rates has been prescribed incorporating interest rates for different categories of borrowers. For each category of borrowers, different rates are prescribed keeping in view the amount of the advance, the purpose and period of loan, the status and place of borrower. In order to overcome the difficulty experienced by the banks in implementing such interest rates, the bankers usually get the following provrsion inserted in the loan agreement as regards interest rates: “........... provided that the interest payable by the borrower shall be subject to the changes in the interest rates made by the RBI from time tO time.” The effect of such clause is that whenever the RBI revises the interest rates, they are automatically applicable with effect'from the date to revise to all existing loan agreements. Thus the revised rates become applicable, b‘v‘Sides the new loans, to the existing loans also. The term “interest payable half-yearly and with half-yearly rests” in the loan agreement implies that the interest is to be charged to the account at the end of each six months and the interest becomes payable by the borrower on half-yearly basis. The rates of interest charged by banking companies are not to be subjected to scrutiny by Courts. According to Section 2lA of the Banking Regulation Act, I949, which is inserted by the Banking Laws (Amendment) Act of 1983: “Notwithstanding anything contained in the Usurious Loans Act, 1938 (10 of 1918) or any other law relating to indebtedness in force in any State, I transaction between a banking company and its debtor shall not be "Opened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.”

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By virtue of this provision, Courts are not permitted to reopen transaction between banking company and its debtor on the ground of rate of interest being excessive. In State Bank of lindembad v. Advath Sakru1 it has been held that the Section 21A of the Act prohibits the Court from reopening the transactions between the bank and its borrowers. INTEREST TAX: The Government of India has reintroduced interest tax on income from interest accruing to financial institutions with effect from October I, 1991. Such tax was lirst introduced in 1974 which was discontinued in 1978. Then it was reintroduced in 1980 and 1985 respectively. It is a revenue raising measure for the exchequer rather than an anti~ inflationary measure. This tax is made payable by banks, cooperative societies engaged in business of banking, public financial institutions, State Financial Corporations and financial companies. The interest tax would be chargeable on commitment charges and discount on promissory notes as well as bills of exchange. Interest on deposits made by banks with RBI and statutory reserves, discount on treasury bills and interest earned by a credit institution on loans and advances made to other credit institution are exempt from interest tax. THE SMALL LOAN GUARANTEE SCHEME: The Credit Guarantee Scheme was introduced on July I, 1960 under the administration of the RBI to share the risk of credit institutions involved in financing small scale industries. After nationalization of the commercial banks, another guarantee scheme covering several other categories of borrowers such as transport operators, small traders etc. was promoted on lst April, 1971. Since July 15, I978, both these schemes have been managed by Deposit Insurance and Credit Guarantee Corporation of India Ltd. The banks who extend credit facilities to small scale industries, are granted a guarantee cover. Commercial banks, regional rural banks, cooperative bunks. State Financial Corporation and State Industrial Development ”munitions are eligible to get such guarantee cover from the Deposit ‘iislll‘tlllcc and Credit Guarantee Corporation of India Ltd. (DICGC). On l" April. 1981. it formulated a new scheme called "Small Loans (SSI) (guarantee Scheme, l98l. after cancelling the old Credit Guarantee organization Scheme with immediate effect. Now the DICGC is providing (protection to all the financial institutions which extend credit to borrowers of small means in certain needful sections including 88] under the above mentioned scheme. The 1

(AIR 1994 AP 170)

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Corporation guarantees principal amount as well’ ,5 interest overdue and other recoverable charges for all types of credit milities which are working capital, term loans, bill facility, deferred payment guarantees etc. Thus the liquidity situation of such financial institution is ot adversely affected due to non-payment by their borrowers. DEFAULT AND RECOVERY OF ADVANCES DEFAULT. The beneficiaries should repay their bank advance dues promptly and should be linked with the efforts of the lending banks to waver the dues. But there are defaults of repayments of loans and advances due to the following reasons: a) diversion of borrowed bank money; b) loss of investment; c) negative attitude towards prompt repayment; d) defective bank policy and procedure in respect of— i.

inadequate scale of finance;

ii.

providing untimely finance;

iii.

lending to a member of defaults joint family;

e) lack of proper guidance and managerial efficiency; (v) effecting political approach by defaulters; f) inability to repay the dues; g) natural calamities like.drought, floods, insecticides etc h) wilful default. RECOVERY:Low recovery performance is not only restricting the penehciaries of the benefit of low cost capital but also jeopardizing the Interests of the bankers (lenders). Recovery efforts are being done at the selection of good borrowers ind be solved 50 per cent of recovery problem. Proper follow up during the entire currency of loan coupled with a helping attitude, market intelligence, data supply, etc. can create a conducive atmosphere for improving the recovery. The following are the steps which have to be followed by every bank. a) Recovery through persuasion Recovery efforts are being done i at the banker's level by personal contract and sending advance reminders i before the due date, reminders, after the due date, personal meeting with borrowers

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to find out the reasons for delay in repayment of loan instalment. All these efforts can create a conducive atmosphere for improving the recovery. b) Recovery without Court's intervention:The bank can enforce .security without legal action in the following cases: i.

Where the goods are in the bank's possession as pledgee/bailee or where the bank has taken possession of the hypothecated property;

ii.

where the bank holds deposits of the borrower, it can exercise right of set-off;

iii.

where the bank holds assignments on life insurance policies and other actionable claims which can be realised without legal action;

iv.

where the bank holds any property of the borrower, it can exercise its right of general lien;

v.

where the bank is a mortgagee, it has the right of private sale. c) Compromise with borrowers:

A compromise may be called a negotiated settlement in whichthe borrower agrees to pay a certain amount. A large number of compromise proposals are being approved by banks with a view to reducing the NPAs and recycling of funds instead of resorting to expensive recovery proceedings spread over a long-period. The compromise proposals have to be done with great care after taking into consideration the various factors. As no formula can be prescribed for entering into a compromise proposal, banks should consider the conditions ' of the borrower. As per NABARD Circle No. PCD 07/2001, dated 26.4.2001, 'one time settlement scheme‘, popularly known as OTS has been implemented by various banks to reduce their non-performing assets/over dues which are pending since long. d) Efforts of Legal Action: if it is not possible to enter into a reasonable settlement with the borrower, it is better to recall the advance at an early stage. Further, it is not possible to sell the security 'without obtaining Court's order, suits may be filed against such borrowers. c) Debts Recovery Tribunal The Government of India enacted "The Recovery of Debts due to Banks and Financial Institutions Act, 1993" for setting up Debts Recovery Tribunals for expeditious adjudication and

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recovery of debts due to banks. The provisions of the Act are applicable where the amount of debt due to any bank or financial institution is not toss than Rs. 10 lakhs. The Central Government has been empowered to reduce the lower limit of Rs. 10 lakhs but not below Rs. 1 lakhs by issuing y notification. The ‘Debts Recovery Tribunals’ are being set up in various States and the Appellate Tribunal has been set up at Mumbai to hear the appeals against {he decisions of the Debts Recovery Tribunals. The amendments made in the year 2000 to the Debts Recovery Tribunal Act removed many of the lacunae in the original Act. It empowered Debts Recovery Tribunals to attach the property on the filing of a complaint of defaulters by the borrower. It also empowers the Presiding Officer to execute the decree of the official receiver based .on certificate issued by the 06th Recovery Tribunal. The banks should take hill advantage of the Tribunals by taking necessary steps without wasting time by filing affidavits giving complete details of the case along with all relevant documents and information at one time so that time is not' wasted.