BOOK OF INSTRUCTIONS

VOLUME 4

CREDIT MANAGEMENT - GENERAL

INDEX

CHAPTER SUBJECT PAGE NO

NO
I ADVANCES - INTRODUCTION/OVERVIEW 2

II TYPES OF BORROWERS 38

III TYPES OF CREDIT FACILITIES & SECURITIES 71

IV BILLS PURCHASED AND BILLS DISCOUNTED 170

V SELECTIVE CREDIT CONTROL 209

VI EXPORT FINANCE 220

VII BANK GUARANTEES & LETTERS OF CREDIT 244

VIII INTEREST RATE STRUCTURE & SERVICE 285

CHARGES
IX INSPECTION OF SECURITIES 313

X INSURANCE OF SECURITIES 343

ADDENDUM 351

1
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER I

ADVANCES - INTRODUCTION/OVERVIEW

SR. NO SUBJECT PAGE NO

1.1 IMPORTANCE OF LENDING FUNCTION 3
1.1.1 DEFINITION OF BANKING 3
1.1.2 WHAT IS LENDING 3
1.1.3 NEW AVENUES AVAILABLE 3
1.1.4 WHY LENDING 4
1.1.5 IMPORTANCE OF LENDING 4
1.2 LIQUIDITY AND CAPITAL ADEQUACY NORMS 5
1.3 GUIDELINES ON LENDING FROM RESERVE BANK 5
OF INDIA AND GOVERNMENT OF INDIA
1.4 BANK'S LOAN POLICY FOR OPERATIONS IN
INDIA 7
1.4.1 BACKGROUND 7
1.4.2 OBJECTIVES AND CONTENTS OF OUR LOAN
POLICY 8
1.5 CREDIT MANAGEMENT 9
1.5.1 HEALTH OF CREDIT PORTFOLIO 9
1.5.2 FOLLOW-UP 9
1.5.3 STAGES IN CREDIT DEPLOYMENT 9
1.6 REGULATORY RESTRICTIONS ON LENDING AS 10
PER LOAN POLICY GUIDELINES 2003
1.7 DISCRETIONARY LENDING POWERS 17
1.7.1 SCOPE OF POWERS 17
1.8 AGREEMENT-IN-PRINCIPLE FOR CREDIT
FACILITIES 33
1.9 LEAKAGE OF INCOME 33
1.10 INCOME RECOGNITION NORMS 34
1.11 HOUSE KEEPING 34
1.12 CUSTOMER SERVICE 34
1.13 KNOW YOUR CUSTOMER (KYC) NORMS 35
1.14 CONCLUSION 36

2
 ADVANCES - INTRODUCTION/OVERVIEW

1.1 IMPORTANCE OF LENDING FUNCTION :

1.1.1 DEFINITION OF BANKING :

The very definition of banking stresses the importance of lending function,

when it defines banking as 'Accepting deposits for the purpose of lending and
investment'. Hence the basic objective of bank is pre-supposed to be lending
and for that purpose, it is expected to mobiles resources by accepting deposits
from the public.

1.1.2 WHAT IS LENDING :

(i) When a bank agrees to place funds at the disposal of a borrower, either
against a tangible security or not, but against a promise to repay the
amount at a future date with interest for the amount used for the period,
bank is said to have lent the money.
(ii) The lending or placement of funds can be by way of 'Demand Loan',
repayable on demand or 'Term Loan', repayable over a period of time at
agreed intervals. It can also be by way of an overdraft where a 'credit limit'
upto the amount to be lent is set in the current account or a 'cash credit
account', where against security of stocks or receivables 'limit' upto
sanctioned level of lending is made available to the borrower in a form of
running account allowing withdrawals upto the limit as per his
requirements. Lending can also take form of 'bill discounting' when a bank
lends against a bill of exchange drawn in favour of the borrower, but
payable at a future date by immediately placing the amount of bill less
discount charges, at the disposal of the borrower by 'discounting' the bill.
(iii) All these lending transactions narrated above involve fund based credit
deployed.
(iv) There are certain types of advances which do not involve deployment of
funds at least in the initial stage. These are called 'Non-Fund Based Credit'.
A 'Performance Guarantee' issued by the bank on behalf of a customer to
third party for fulfillment of terms of contract, 'Letter of Credit' issued by
the Bank on behalf of its customer favouring the third party in India or
abroad are some of the examples of this type of finance which will be dealt
with separately at later stage. Even though funds are not involved at the
initial stage, bank is required to take risk, and on failure of its client to
fulfill terms of guarantee or letter of credit, banks will have to pay out
funds to the beneficiary on behalf of the customer and recover it later from
him. So this also is a form of lending.
1.1.3 NEW AVENUES AVAILABLE :

(i) Traditionally banking is associated with raising of resources from public to

lend them to needy and deserving borrowers. Hence lending used to
constitute major portion of resources deployment.
(ii) With the government/Reserve Bank of India using the two tools of credit
control, namely maintenance of Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR), a large share of deposits collected is 'preempted'.
The banks are required to maintain CRR presently 4.5% of Net Demand &
Time Liabilities (NDTL) and SLR presently 25% of NDTL by way of cash,

3
 balances with Reserve Bank of India or invest in government debt
securities. Hence out of the total funds collected roughly 29.5 % are
deployed in meeting statutory requirements.
(iii) Now banks are also permitted to invest in shares of corporates upto a
certain limit via primary market route i.e. by applying for new shares. This
has opened up a new avenue, since a judicious investment can earn the
bank very good returns on the funds deployed.
(iv) Besides meeting the statutory requirements, banks sometime invest in gilt
edged or government/government backed securities over and above
minimum requirement, when the yield on such securities is attractive.
(v) Leasing of assets is an activity which banks are now allowed to undertake.
In this case, bank earns lease rentals which are quite attractive, besides
getting tax incentives. Hence, there could be a demand on bank's
resources from this avenue.
(vi) It is, therefore, very essential to understand and appreciate the fact that in
today's context the amount raised by the bank, could be deployed in
various ways and it need not deploy its resources only by way of lending.
1.1.4 WHY LENDING :

(i) Having said that besides lending, there are other avenues available, fact
remains that lending or extending credit still remains the most important
source of deployment of funds or earning of revenue.
(ii) Lending by banking sector, especially by public sector/ nationalised banks
assumes greater importance, because only these banks can make credit
available to needy, small borrowers. Banks have to play an important role
in employment generation, poverty alleviation and nation building. Lending
by the banks has helped many small scale industrialists, assisted farmers
and encouraged small borrowers/artisans to sustain their small businesses.
(iii) With liberalisation and deregulation, government is steadily withdrawing
from many areas and is encouraging private enterprises. Infrastructure
projects are now being taken up by private corporate sector. Government
funding which was available in the oil, transport or telecom sector is being
reduced. With the new opportunities now available to private sector, there
is a challenge before them to raise resources to fund these projects.
Besides other avenues, there is a great demand from banking sector for
financing new projects. Hence lending function will continue to occupy a
prime position in any bank.
1.1.5 IMPORTANCE OF LENDING :

(i) It constitutes major part of bank's assets.

(ii) It earns substantial income to the bank by way of interest, discount and
commission.
(iii) The borrowers to whom banks finance, generally give deposit and other
remunerative business to the bank, like remittances, collection, foreign
exchange, merchant banking etc.
(iv) Banks also get non-fund based credit business from these customers like
guarantee, letters of credit etc. on which bank can earn handsome
commission.
(v) In the chapters to follow, the details about various types of borrowers,
various types of securities, preparation of proposals etc. have been

4
 discussed. It is very essential to note that credit is a very dynamic area
which undergoes many changes based on the various economic factors, but
the basic tenets of any lending like character/capacity/capital of the
borrower, security/safety of advance remain constant. Bank has to follow
them carefully to efficiently and profitably manage its credit portfolio and
maximise the yield.
1.2 LIQUIDITY AND CAPITAL ADEQUACY NORMS :

(i) Bank raises resources from public as deposits or obtains refinance from
institutions and such resources are deployed in maintaining statutory
CRR/SLR requirements, investments and mainly in lending to borrowers.
Hence bank has to ensure enough liquidity or availability of resources
before it can lend.
(ii) However, it is simply not enough that bank has sufficient funds. It has to
also ensure that the credit expansion proposed is within the set norms of
'Capital Adequacy'. The details about capital adequacy norms have been
given in Chapter III of Volume 8 on Management of NPA.
1.3 GUIDELINES ON LENDING FROM RESERVE BANK OF INDIA AND
GOVERNMENT OF INDIA :

(i) Reserve Bank of India issues guidelines from time to time relating to flow
of credit and various directives about credit discipline by the borrowers and
banks. Government of India/ Ministry of Finance too issue directives to the
banks about credit, keeping in view the economic conditions, fiscal deficit
position of the country. Based on these guidelines/directives, our Bank
issues circulars to the branches/offices for their reference and action.
(ii) While the guidelines from Reserve Bank of India/government keep on
changing due to changes in circumstances, they could be classified into
'Positive' and 'Restrictive'.
(A) Positive directives :
(a) Presently Reserve Bank of India has directed the bank about
sector-wise deployment of credit to ensure flow of credit to the
needy and weaker section.
(b) Accordingly, 40% of the net bank credit should be to the
priority sector of which, 18% of net bank credit should go to
agricultural sector, 10% of net bank credit or 25% of priority
sector advances should go to identified weaker sections of the
society, 1% of previous year’s total advances should be by way
of advances under DRI scheme and balance to the SSI/SB
sector.
(c) Export credit should constitute atleast 10% of total credit.
(d) Reserve Bank of India/State Governments also monitor credit
flow to the backward areas/States to have better credit/ deposit
ratio in these areas. This is done through Service Area
Approach, Lead Bank Scheme and/or State Level Bankers'
Committee.
(e) Government/Reserve Bank of India directs the banks to extend
credit to the borrowers identified under its various programmes
like Prime Minister Rojgar Yojana through District Industries
Centres and Swaran Jayanti Shahri Rojgar Yojna through local
bodies like Municipal Corporation. Banks have to extend credit

5
 for food procurement by government.
(f) Reserve Bank of India/Government issues directives to banks for
financing the sick but viable units, in their efforts for revival
under rehabilitation package.
(B) Restrictive directives :
Though considerable flexibility has been provided to banks by Reserve
Bank of India over the years, some restrictions/ regulatory guidelines
continue to hold good even now. Some of these are:
(a) As a measure of price control of sensitive commodities, Reserve
Bank of India now has put buffer and unreleased stock of sugar
only under selective credit control to avoid hoarding, with the help
of bank finance.
(b) Under the selective credit control, banks are advised to stipulate
margin requirements on finance against the selected commodities
besides different rates of interest are specified. The list of items
and margin requirements keep changing. Details of these controls
are given in Chapter V of this volume.
(c) To avoid excess speculation Reserve Bank of India has put
restrictions by way of stipulating maximum limit and minimum
margin on finance to brokers or individuals against shares and
securities.
(d) Certain restrictions are put by Reserve Bank of India on banks while
granting loans to its directors, directors of other banks, executives
of the banks and their relatives and the sanctioning powers are
vested in higher management/ Board.
(e) There are other restrictions like group exposure limits for lending to
single borrower and one group upto permissible percentage of the
bank's capital/net owned funds, necessity to follow capital
adequacy, norms for expansion of credit etc.
(f) Though Reserve Bank of India has permitted banks to sanction
bridge loans to companies, such loans are subject to certain
restrictions. Bank can sanction bridge loan to companies for a
period not exceeding one year against expected equity flows/issues.
Such loans would be included within the ceiling of 5% of the Bank’s
total outstanding advances . Banks can also extend bridge loans
against the expected proceeds of non-convertible debenture,
external commercial borrowings, global depository receipts and/or
fund in the nature of foreign direct investment, provided the banks
are satisfied that the borrowing company has already made firm
arrangements for raising the aforesaid resource/funds.
Keeping in view of the RBI guidelines, Bank has devised the
following guidelines:-
1. Such loans to be considered only at Corporate Centre, for
corporate who are banking with us with satisfactory track
records;
2. Bridge Loan cap at Rs 75 Crores (all types of facilities);
3. Such bridge lending should be used for which the issue
(debenture /ECB/ Equity etc.,) is proposed and not for any other
purpose.
4. The amount of individual bridge loan shall not exceed 75% of

6
 the amount called-up on the shares minus any other similar
bridge lending, interim finance availed or to be availed.
5. Repayment Period upto a maximum of one year
(g) Certain restrictions and controls on finance by banks to non-banking
financing companies are also in force at present.
(h) Details of relevant and current rules/directives of Reserve Bank of
India/Government of India are dealt with in various chapters
wherever applicable.

1.4 BANK'S LOAN POLICY FOR OPERATIONS IN INDIA :

1.4.1 BACKGROUND :

(i) Based on the broad guidelines issued by Reserve Bank of India from time
to time, every bank is required to formulate its own 'Loan Policy' for its
own operations in Indian branches. The policy makers are required to take
into account, besides Reserve Bank of India guidelines, banking scenario,
banks' priorities and above all most profitable deployment of resources by
way of lending before finalising the loan policy.
(ii) Our Bank has been formulating / revising its own policy and it is being
advised to operating units through communications via circulars / letters/
meetings / conferences/ business policy guidelines.
(iii) The Bank devised its first formal loan policy document for its domestic C &
I lending in the year 1994 and has its fountainhead in the memorandum of
understanding (MOU) with Reserve Bank of India covering various
performance obligations of the Bank then. The aforesaid lending policy
further continued to operate with requisite amendments through internal
circulars and communications from time to time till Ist April 2002. The Loan
Policy 2002, was made effective from 2nd April 2002 covering the
commercial and institutional ( C & I ) lending.
(iv) As per the suggestions of Reserve Bank of India, arising out of their annual
financial inspection 2002, the Domestic Loan Policy 2003 is prepared in all
inclusive manner covering the domestic C &I , Priority Sector and Retail
Lending.

7
1.4.2 OBJECTIVES AND CONTENTS OF OUR LOAN POLICY :

(A) OBJECTIVES :

(i) To optimize the credit risk assumed and the reward envisaged in order that
the economic value addition to share holders is maximized and the
interests of the stake holders are protected alongside ensuring corporate
growth and prosperity;
(ii) To regulate and streamline the financial resources of the Bank in an orderly
manner to enable the various channels to incline and achieve the common
goal and objectives of the Bank;
(iii) To comply with national priorities in the matter of deployment of
institutional finance to facilitate achieving planned growth in various
productive sectors of the economy;
(iv) To instill a sense of credit culture enterprise-wide and to assist the
operating staff;
(v) To provide need based and timely availability of credit to various borrower
segments;
(vi) To strength the credit management skills, namely pre-sanction,
post-sanction monitoring, supervision and follow up measures so as to
promote a healthy credit culture and maintain quality credit portfolio in the
Bank;
(vii) To deal with credit proposals more effectively with quality assessment,
speed and in full compliance with extant guidelines and
(viii) To comply with various regulatory requirements, more particularly on
exposure norms, priority sector norms, income recognition and asset
classification guidelines, capital adequacy, credit risk management
guidelines, etc., of Reserve Bank of India/ other authorities.

(B) CONTENTS :
The Domestic Loan Policy 2003 is designed to provide an overall dimension
about certain basics of lending, the pre-sanction appraisal, post-sanction
monitoring, and caps on exposure etc. In addition, the Bank’s thrust areas and
innovative products are also included. In order to improve the credit delivery
skills for priority sector, an exclusive section is included in the current policy.
The scope would act as a guide post for risk identification, measurement, risk
grading, risk reporting and risk control and also contain an overview of
documentation, legal issues and management of the loan portfolio of the Bank.

The Domestic Loan Policy 2003, effective from !st August 2003 for a period of
one year or upto the period as may be extended by the Board from time to
time, contains broad policy aspects as follows:

ƒ Target Market
ƒ Basics of Lending
ƒ Lender’s Liability Code
ƒ Credit Risk Management
ƒ Exposure Ceilings
ƒ Guidelines for Unsecured - Guarantees and Advances
ƒ Industry/Sectoral Limit - Regulatory Guidelines
ƒ Internal caps

8
 ƒ Pre-sanction appraisal and evaluation
ƒ Documentation
ƒ Insurance
ƒ Post Sanction Monitoring
ƒ Rejection of proposals
ƒ Time Frame for disposal of proposals
ƒ Management of Assets
ƒ Retail Credit
ƒ Project Finance
ƒ Line of Credit
ƒ MIBOR linked advances
ƒ Financing disinvestments and mergers & acquisitions
ƒ Film Financing
ƒ Real Estate Advances
ƒ Short Term Corporate Loans and Sub PLR advances
ƒ Small & Medium Enterprise (SME) Loan Products
ƒ Loan Take-over
ƒ Priority Sector including bank specific priority sector products
ƒ Some important definitions

Though the detailed guidelines of the domestic loan policy 2003 have been
provided to branches in the form of a Booklet, however this policy should not
be construed to cover in itself all the detailed instructions and guidelines
related to lending and should be read in consonance with the other operational
instructions, manual, circulars issued/amended by the Bank from time to time.

1.5 CREDIT MANAGEMENT :

1.5.1 HEALTH OF CREDIT PORTFOLIO :

Expansion of credit without looking to the aspect of health of the credit

portfolio will not prove to be profitable.

1.5.2 FOLLOW-UP :

It is very essential that not only fresh advances are granted judiciously, but
the existing advances already sanctioned / disbursed are also followed up /
reviewed at regular intervals.

1.5.3 STAGES IN CREDIT DEPLOYMENT :

Some stages can be distinguished in credit deployment. Pre- sanction

appraisal, sanction, completion of documentation, disbursal, post sanction
scrutiny, post sanction inspection and monitoring, timely review, noting of
signs of problems in the account and sorting them out looking for indications
of incipient sickness and taking steps for averting them, nursing and
rehabilitation of sick but viable units and recovery process are important steps
in any credit deployment. These are dealt with in detail in the ensuing
chapters.

9
1.6 REGULATORY RESTRICTIONS ON LENDING AS PER LOAN POLICY
GUIDELINES 2003

A) Single borrower / Group borrower Prudential (Exposure ceilings)

Rs in crore

1. Tier-1 capital 3178.13

2. Tier-2 capital 1783.97
3. Total Capital Funds 4962.10
4. Singe Borrower exposure limit (15% of 744.31
total capital funds-CF)
5. Singe Borrower exposure limit for 992.42
infrastructure advance (20% of CF)
6. Group Borrower Exposure Limit (40% of 1984.84
total capital funds)
7. Group Borrower Exposure Limit for 2481.05
infrastructure advance (50% of CF)
Notes:
1. CF or Capital Funds is -(Net Owned Funds + Tier-II Capital).
Net Owned Fund is - (Paid up capital + Free Reserves) -
(Intangible assets & Losses + Investments in Associates /
Subsidiaries). Revaluation reserve are not taken into account
for computation of CF.2. Exposure shall include FB & NFB,
investment, forward contracts in foreign exchange and other
derivative products like currency swaps, options etc at their
replace cost value;
3. NFB exposure to be reckoned at 100% of the limit or O/s,
whichever is higher, w.e.f. 1.4.2003.
4. The above ceilings would not be applicable in respect of the
following:
A) Existing / additional credit facilities (including funding of
interest and irregularities) granted to the weak / sick
industrial units under rehabilitation packages;
B) Borrowers to whom the limits are allocated directly by
RBI for food credit;
C) Loans & advances granted against the security of bank’s
own term deposits.
5. Defined by R.B.I., Infrastructure in a broad sense include
sea-ports, air-ports, waterways bridges, urban transport
system, housing, rail-system, power (generation,
transmission, distribution), roads, and telecom, water-supply,
irrigation, sanitation-system, sewerage-system and industrial
parks.

10
B) Substantial Exposure Limit (SEL)

In its guidelines on Risk Management Systems, Reserve Bank of India advised

the banks to lay down “Substantial Exposure Limits” i.e., the sum total of
exposures assumed in respect of those single borrowers enjoying credit
facilities in excess of a threshold limit say, 10% or 15% of capital funds. The
Substantial Exposure Limit may be fixed at 600% to 800% of capital funds
depending upon degree of concentration risk the bank is exposed to. Taking a
lead from the aforesaid guidance of RBI, the bank has set the following
Substantial Exposure Limit (SEL):

a. The Aggregate SEL shall be 600% of the bank’s capital funds as per
previous year Balance Sheet. (Rs.27212.52 crores)

b. For the purpose of aggregating single borrower exposure for SEL, 10% of
Capital Funds (Single Borrower Substantial Exposure Limit) shall continue
despite the fact Single Borrower Cap is 15% of capital funds as stated
above. The 10% threshold is considered appropriate by the bank for
keeping a tab on the quantum of exposure to such borrowers.

c. Bank may exceed the aforesaid 10% (Single Borrower SEL) upto the
mandatory ceiling of 15% prescribed by RBI, but shall not exceed the
overall SEL of 600%.

C) Exposure Ceilings and other restrictions on certain industries /

activities

No. Industry / Exposure Ceiling

Activity
1. Real Estate Every bank is to frame a comprehensive policy for
prudential norms relating to the ceiling on the total
amount of real estate loans, single/group exposure
limits for such loans, margins, security, repayment
schedule and availability of supplementary finance.
The bank’s Board should approve the policy. In our
bank, it is Rs 500 crore or 2% of the outstanding
domestic credit at the end of the previous year
whichever is higher.

2. Exposure to Banks should maintain a balanced portfolio of

Leasing, Hire equipment leasing, hire purchase and factoring
Purchase and services vis-à-vis the aggregate credit. Their
Factoring exposure to each of these activities should not
Services exceed 10 percent of total advances. In our bank, it
is fixed at Rs 400 crore which is far below the
statutorily permissible exposure limit.

3. Exposure to Subject to a limit of 5 percent of the unimpaired Tier

Indian Joint I capital and also to compliance of Section 25 of BRA
Ventures/Wholl (which says that aggregate assets outside India
y-owned should not exceed 25 percent of the bank's demand
Subsidiaries and time liabilities in India).
Abroad

11
4. Exposure to Banks have to limit their commitment by way of
unsecured unsecured guarantees in such a manner that 20
guarantees percent of the bank’s outstanding unsecured
and guarantees plus the total of outstanding unsecured
unsecured advances do not exceed 15 percent of total
advances outstanding advances. Guarantees,
counter-guaranteed by another bank, need not be
taken into account for the purpose of the norm.
5. Advances In terms of Section 20(1) of the Banking Regulation
against Act, 1949, a bank cannot grant any loans and
bank’s own advances on the security of its own shares
shares
6. Advances to Vide the Section 20(1) of the Banking Regulation
bank’s or Act, 1949 for details. Generally, all loans & advances
other bank’s to directors or to concerns in which they are
Directors, interested are prohibited except -
their A. Loans or advances against Government
relatives and securities, life insurance policies or fixed deposits
the concerns (any amount);
in which a B. Advances (any amount) to the director,
bank’s sanctioned to him as an employee of the bank
director is prior to his becoming director in the Bank;
interested as C. Advances less than Rs 25 lacs ( Advances of &
director, above Rs 25 Lacs may be sanctioned by the
partner, Management Committee of Board of the Bank)
managing
agent or
guarantor or
otherwise
'substantially
interested’
7. Advances to No officer or any Committee comprising, inter alia,
"Senior" an officer as member, shall, while exercising powers
officers (i.e. of sanction of any credit facility, sanction any credit
Scale-IV & facility to his/her relative. Such a facility shall
above) of the ordinarily be sanctioned only by the next higher
bank or their sanctioning authority. Credit facilities sanctioned to
relatives or senior officers of the financing bank should be
the concerns reported to the Board. However, the aforesaid does
in which they not apply to advances against Government
are Securities, LICI-policies, NSCs / IVPs and fixed
"substantially deposits, casual purchase of cheques up to Rs 5000
interested". and temporary overdrafts up to Rs 25,000 etc.

8. Financial Vide R.B.I.'s circular No. DBOD No. DIR.BC.

Assistance to 42/13.03.00/ 2000-01 dated November 1, 2000,
Industries such financial assistance are prohibited.
Producing
/Consuming
Ozone
Depleting
Substances
(ODS) and
activities for
prenatal tests.

12
9. Bank Finance Banks should not grant any finance to NBFCs for-
to - Bills discounted / rediscounted by NBFCs -
Non-Banking except for rediscounting of bills discounted by
Financial NBFCs arising from sale of commercial vehicles
Companies (including light commercial vehicles as well as
(NBFCs) two-wheelers and three-wheelers).
- Investments made by NBFCs in shares,
debentures, etc. of a current nature;
- Investments of NBFCs in and advances to
subsidiaries, group companies or other entities;
- Investments of NBFCs in other companies and
inter-corporate loans/deposits to/in other
companies.
- Bridge Loans or loans of a bridging nature in any
form to these companies, including against
capital/debenture issues.

10. Advances The banks are to desist from sanctioning advances

against Fixed against FDRs, or other term deposits of other
Deposit banks
Receipts
(FDRs)
Issued by
Other Banks

11. Loans Banks cannot grant loans against CDs.

against
Certificate of
Deposits
(CDs)

12. Bank Banks should desist from extending finance against

Finance for existing assets whether by way of term loans for
Purchase/Le purchase of such assets or by way of finance to
ase of leasing companies for purchase and re-lease of
Existing such assets.
Assets

13. Advances Banks should not grant any advance against gold
against bullion, silver bullion dealers, to finance 'Badla'
Gold/Silver transactions in silver (i.e. buying silver ready and
Bullion selling forward to earn interest).

14 Discounting/R Only bills covering purchase of raw

ediscounting material/inventory for production purpose and sale
of Bills by of goods should be discounted by banks. Bills
Banks covering payments of electricity charges, customs
duty, hire-purchase/lease rental installments, sale
of securities and other type of financial
accommodation should not be discounted by banks.
15 Advances 1. In terms of Section 19(2) of the Banking
against Regulation Act, 1949, no bank shall hold shares
Shares or in any company, whether as pledgee,
against mortgagee or absolute owner, of an amount
holding of exceeding 30 percent of the paid-up share
shares in capital of that company or 30 percent of its
limited own paid-up share capital and reserves,

13
companies or whichever is less.
against units
of UTI 2. A bank's aggregate exposure in shares,
including convertible debentures, bonds, etc. should not
US64. exceed 5 percent of its outstanding domestic
credit as on end of previous year.
The exposure
ceilings (for 3. Loans at all the offices of a bank, against the
bank's security of shares, debentures and PSU bonds
exposure by to individuals, (a) if held in physical form
way of should not exceed the limit of Rs. 10 lakhs per
advances borrower (individual) with margin of 50%; (b)
against / if held in demat form should not exceed Rs 20
investment in lakhs per borrower (individual) with margin of
Shares) 25%. These per borrower exposure ceilings and
excludes the margin requirement may be tightened by a
bank's bank through a policy approved by the bank's
exposure by Board. Accordingly, in our bank, advances
way of: against shares to individuals against demat or
physical security is not to exceed Rs 10 lac per
1.preference borrower / individual.
shares,
2.non-converti 4. A Bank may provide finance to employees of
ble companies to buy shares of their own
debentures/ companies. The advance may be granted upto
bonds of 90 percent of the purchase price of the shares
private but not exceeding Rs. 50,000/- or six months'
corporate salary of the employees, whichever is less.
bodies.
5. Bank should lay down a detailed loan policy for
3.equities/bon granting advances to Stock Brokers and Market
ds of Makers and also a policy for grant of
All-India guarantees on behalf of brokers which should
Financial keep in view the maximum exposure for
Institutions. individual credits within the prescribed
4. bonds prudential single borrower limit applicable for
issued by the bank. In our bank, proposals to advances
Public to stockbrokers are to be processed /
Sector sanctioned at Corporate Office level only.
Undertakin
gs, 6. Banks/their subsidiaries should refrain from
5. units of offering ‘Safety Net’ facility (viz., commitment
Mutual to buy-back of large exposure from original
Funds investors at any time at the pre-negotiated
under price irrespective of prevailing market price).
schemes
where 7. Advances to any company for buy-back of own
corpus is shares.
invested
exclusively 8. No advance against partly paid-up shares;
in debt
instrument 9. No advance to partnership / proprietorship
s, concerns against primary security of shares;
6.venture
capital 10. No financing of "Badla" Transactions.
including
units of In our bank, the total capital market exposure

14
 dedicated ceiling is set at Rs 250 crore.
venture
capital
funds
meant for
Informatio
n
Technology
, and,

7.Investments
in Certificate
of Deposits
(CDs) of
other banks/
financial.

16 Indian Joint Credit / non-credit facilities to Indian Joint Ventures

Ventures (JVs)/
(JVs)/ Wholly Owned Subsidiaries (WOSs) abroad and
Wholly Owned extension of buyer's credit and acceptance finance
Subsidiaries to overseas parties by banks in India is not to
(WOSs) exceed 10% of the banks' unimpaired capital funds
abroad by (Tier I and Tier II capital) provided -
banks in India A. Loan will be granted only to those joint
ventures where the holding by the Indian
company is more than 51%.
B. Proper systems for management of credit and
interest rate risks arising out of such cross
border lending are in place.
C. Section 25 of the Banking Regulation Act, 1949
is complied with.
D. The resource base for such lending should be
funds held in foreign currency accounts such as
FCNR(B), EEFC, RFC etc. in respect of which
banks have to manage exchange risk.
E. Maturity mismatches arising out of such
transactions are within the overall gap limits
approved by RBI.
F. All existing safeguards / prudential guidelines
relating to capital adequacy, exposure norms
etc. applicable to domestic credit / non-credit
exposures are adhered to.
G. Grant of such loans is based on proper
appraisal and commercial viability of the
projects and not merely on the reputation of
the promoters backing the project. Non-fund
based facilities should be subjected to the same
rigorous scrutiny as fund based limits.
H. The countries where the joint ventures / wholly
owned subsidiaries are located should have no
restrictions applicable to these companies in
regard to obtaining foreign currency loans or
for repatriation etc. and should permit
non-resident banks to have legal charge on
securities / assets abroad and the right of
disposal in case of need.

15
17. Working In the case of the borrowers with working capital
Capital limits of up to Rs 2 crore, assessment may be
Finance to made at 20 percent of the projected turnover.
Information However in other cases, the banks may consider
Technology assessment of MPBF on the basis of the monthly
and software cash budget system.
industry
18. Issue of Bank Guarantees in favour of Financial Institutions / banks
Banks are precluded from issuance of guarantees favouring
financial institutions, other banks and/or other lending agencies for
the loans extended by the latter except -
- Issuance of guarantee in favour of IDBI, in the case of import
of technical know-how by way of drawings and designs under
the Technical Development Scheme of the IDBI, under certain
circumstances and where no tangible security is available to
IDBI;
- Issuance of guarantees in favour of various Development
Agencies/Boards, like Indian Renewable Energy Development
Agency, National Horticulture Board, etc. for obtaining soft
loans and/or other forms of development assistance from such
Agencies/Boards with the objective of improving efficiency,
productivity, etc. provided feasibility & viability of such projects
is duly satisfied upon by the bank and the bank's exposure is
adequately secured.
- Issue of guarantees favouring HUDCO/ State Housing Boards
and similar bodies for loans granted by them to private
borrowers who are unable to offer clean or marketable title to
property, provided banks are otherwise satisfied about the
capacity of borrowers to adequately service such loans.
- Issuance of guarantees by consortium member banks unable to
participate in rehabilitation packages on account of temporary
liquidity constraints, in favour of the banks which take up their
share of the limit;
- Co-acceptance/ guarantee facilities under Buyers Lines of
Credit Schemes introduced by IDBI, SIDBI, Exim Bank, Power
Finance Corporation (PFC) or any other financial institution,
unless specifically permitted by the Reserve Bank of India.
- Issuance of Guarantees in favour of Financial Institutions /
banks for their exposure to any infrastructure projects provided
the guaranteeing bank has taken a funded exposure also in the
same project for an amount not less than five per cent of the
project cost and has undertaken normal credit appraisal,
monitoring and follow-up.
- Issuance of Guarantees in favour of Financial Institutions /
banks for their exposure to any commercial venture by their
borrower-constituents subject to the guaranteeing bank taking
funded exposure not less than 10 per cent of the exposure
guaranteed and subject to the compliance of the conditions laid
down by RBI vide its circular number IECD.No.17
/08.12.01/2002-03 dated April 05, 2003.

16
1.7 DISCRETIONARY LENDING POWERS

(A) Scope of powers:

(i) Our Bank has a well-defined lending powers structure. Branch heads
and Executives/Senior Managers posted in administrative offices have been
delegated discretionary lending powers appropriate to their respective grade/scale.
Branch Heads, Regional Managers/Assistant General Managers in charge of Regions,
Senior Managers (Credit) posted in Regional Offices, Zonal Heads, Chief Managers
(C&I) posted at Zonal Offices, General Managers in charge of Credit, Priority Sector and
International Division, Executive Director, Chairman & Managing Director and
Executive Management Committee (EMC) have been delegated discretionary lending
powers by the Board of Directors.

(ii) The discretionary lending powers are reviewed from time to time, by the Board
keeping in view, the changing needs and to bridge the gap between the decision
makers and the decision seekers. Central Office advises any change in the powers
through circulars.

(iii) The powers presently delegated to executives in the rank of Assistant General
Manager/Chief Manager/ Regional Manager and to Branch heads of Grade/Scale I, II
and III and Senior Managers working in Regional/Zonal offices have been circularized
by Central Office from time to time.

(iv) Powers given in the Lending Power charts cover advances to all categories of
borrowers including agriculturists, small scale industries and small borrowers, and
borrowings like educational loans, personal loans etc. subject to the condition that
purpose-wise limits and other aspects if any, specified under various schemes are
complied with and further that aggregate advances do not exceed the aggregate
group/per party limit fixed for each authority. While exercising the powers, the
concerned authorities must ensure that RBI guidelines and our Bank's
guidelines/instructions prevailing from time to time, if any, are also complied with.

(v) The powers do not cover advances to landlords of premises rented by or leased to
the Bank, for which separate guidelines have been given as per administrative
policies/norms.

(vi) The Chief Managers in charge of Branches and Chief Manager (Credit) in the
Zonal Offices are authorized to exercise lending powers ranking on par with Regional
Managers. Further, Senior Managers (Credit) in Regional/Zonal offices are
authorized to exercise lending powers on par with Senior Managers in charge of
branches, in respect of proposals etc. Emanating from branches headed by Branch
Managers in the grade/ scale MM II and JM I.

(vii) Branch Managers will exercise the delegated powers as per their grades.
Acting Branch Managers can exercise the powers of regular Branch Manager, if
specifically authorized by Zonal Head/Regional Manager. Where regular
arrangements are not made against casual absence, officer officiating as Branch
Manager in the casual vacancy will exercise powers based on his grade, except
where there is a specific direction by Zonal Head/Regional Manager to the contrary.
(viii) In case of one-man branches, Branch Manager will exercise the delegated
powers as per his grade.

(ix) Any lending decision involves an element of risk and, therefore, requires an
ability to assess a prospective borrower and evaluate his proposal apart from other
knowledge and skills, which are required in day to day banking. Discretionary lending
powers should be exercised judiciously and after ensuring that all laid down norms

17
and procedures have been adhered to.

(x) For details of discretionary powers in respect of compromise & write off
proposals, please refer to Volume 8 - "Management of NPA".

(B) Special provisions:

In certain areas of credit, the Bank/Reserve Bank of India has framed specific
guidelines. The important guidelines are detailed below for ready reference of the
sanctioning authorities

i Advance to Senior Officers Such advances may be sanctioned by

(Scale IV & above) and their appropriate sanctioning authority in
close relatives or concerns in terms of the powers delegated.
which such relatives are
interested as Proprietor. But all credit facilities sanctioned other
Partner/Director or than the following should be reported to
Guarantor. the Board of Directors:

(1) Advances against –

A) Govt. Securities
B) LIC Polices
C) Fixed and other deposits
D) National Savings Certificates
E) Units of UTI

(2) Temporary overdrafts for small

amounts i.e. upto Rs.25,000/-.

(3) Casual purchases of cheques upto Rs.

5000/- at a time.

(4) Loans and advances such as housing

loans, consumption loans etc.
granted to an Officer under any
scheme applicable generally to
Officers.

NOTE:

(i) Credit facilities against approved

shares & debentures to Senior Officers
and their relatives or concerns in which
such relatives are interested should be
sanctioned only by an authority atleast
one level higher than the officer
concerned and all such sanctions should
be reported to Board for information.

(ii) In respect of advances to all staff

members including Senior Officers,
Branches/ Regions/ Zones will be guided
by instructions issued by Personnel
Division/Credit Deptt. From time to time.

(iii) Following relatives will come under

the definition of close relatives:
a) Spouse

18
 b) Father
c) Mother
(Including Step-mother)
d) Son (including Step-son)
e) Son’s wife
f) Daughter (including
Step-Daughter)
g) Daughter’s husband
h) Brother/Sister (including step
brother/sister)
i) Brother’s wife
j) Sister (including step-sister) of
spouse
k) Sister’s husband
l) Brother (including step-brother) of
spouse.
ii Advances to – 1. Proposals for credit facilities for less
than Rs. 10/- lacs in the aggregate
(a) Relatives of Directors of may be sanctioned in terms of
our Bank or concerns in lending powers by the appropriate
which they hold sanctioning authority, but the
substantial interest or sanction should be reported to the
are interested as Board of Directors for information.
Proprietors, Partners,
Directors or Guarantors 2. Proposals for credit facilities for
aggregate amount of Rs.10 lacs &
(b) Directors of other banks above should be referred to the
(including Co-operative Board of Directors for sanction.
Banks) and their
relatives or concerns in 3. Notwithstanding the foregoing credit
which they or their facilities of the following types may
relatives are interested be granted to such persons or
as Proprietors Partners. concerns subject to the aggregate
Directors or Guarantors. group / per party limits fixed for
each authority and subject further to
the usual norm governing margin,
rate of interest etc.

I) Loans and advances again Govt.

Securities.

A) Govt. Securities
B) National Savings
Certificate
C) Life Insurance Policies
D) Fixed or other deposits
with our Bank
E) Units of UTI
F) Approved shares &
debentures (Subject to
RBI guidelines)

II) Temporary overdrafts for small

amount i.e. upto Rs.25000/-
III) Casual purchases of cheques
upto Rs.5000/- at a time.

19
 NOTE:

Grant of advances to any Director of our

Bank or to any individual or concern in
which a Director of our Bank is interested
is not permitted.

iii Advances to Leasing and
Hire Purchase companies
iv Advances against
hypothecation of book
debts.
v Financing by way of
acceptance of bills.
Vi Advances against pledge of
gold ornaments/jewelry
under Priority Sector
vii Advances to dealers in
jewelry against security of
gold and silver jewelry and
ornaments and silver-ware
All proposals for advances to Leasing and
Hire Purchase companies should be
referred to the Functional Head at
Central Office for consideration.
Powers are not exercisable by the
authorities below the level of Regional /
Manager / Chief Manager
Powers are not exercisable by the
authorities below the level of Regional
Manager /Chief manager.
Such advances may be granted by
Regional Manager / Chief manager on
merits of individual borrowers for
productive purposes only upto
Rs.25,000/- Powers to be exercised by
Branch Managers are given in booklet on
Discretionary Lending Powers.
Powers are not exercisable by the
authorities below the level of Regional
Manager/Chief Manager.
Regional Managers/ Chief Managers are
authorised to sanction a maximum limit
of Rs. 20 lacs per dealer of which upto
Rs.10 lacs for gold jewelry and
ornaments and upto Rs.10 lacs for silver
jewelry and ornaments subject to
stipulation regarding margin etc. laid
down from time to time being observed.

Powers of Zonal head in this respect are

Rs. 35/- lacs.
(viii) Credit proposals regretted by higher authorities should, in no
circumstances, be considered without referring back to the higher
authority even if the proposals fall within the sanctioning powers of
an official.

(ix) Where the Bank’s experience in respect of the borrower/ guarantor

in previous transactions/dealings or in respect of associate/group
concerns has been unsatisfactory, the delegate shall not exercise his
powers in favour of the same party without reference to higher
authorities.

20
(x) According to guidelines issued by the Reserve Bank of India, Bank's
aggregate exposure by way of funded and non-funded credit limits,
underwriting and similar commitments to individuals/business
concerns should not exceed 25% of the Bank's capital funds.
Further such aggregate exposure to group/associate concerns should
not exceed 50% of Bank's Capital funds. Capital funds, for this
purpose, will represent the paid up capital plus disclosed reserves
(other than Revaluation Reserves).

For arriving at the Bank's exposure to each party or group, the

sanctioned fund based/non-fund based limits or outstanding whichever
are higher under each type should be reckoned. However in respect of
non-funded credit limits, only 50% of such limits or outstanding should
be taken into account for the purpose.

(xi) All Officers and Executives below the level of General Manager retiring
in 3 months time should not exercise the discretionary ending powers
without specific approval of the next higher authority.

CLARIFICATIONS for the figures given in () above:

(1) "Annual Cap" on exercise of lending powers is to exclude the following:

1. Advances to staff members under the specific schemes for the bank's
staff only;
2. Advances against the Bank's own deposits and against the instruments
such as NSCs / KVPs / Relief Bonds / IVPs / LICI-policies etc.
3. Advances under various Government sponsored schemes and to weaker
sections;
4. Review (including review with decrease in limits) of advance accounts
at the existing level.
5. In case of Review with increase, the portion of the existing limits shall
be excluded and only fresh / increased portion in the existing limits
shall be included for reckoning the above said "Cap".
(2) "Group / Associate" terms – Definition (effective from 02.04.2002)

A. Two or more enterprises are the "Group" concerns if, at any time
during the reporting period or during the period under review, the
financial or operating decisions of the said enterprises are "controlled"
OR "significantly influenced" by the same enterprises / persons.
B. Two or more enterprises are deemed to be "controlled" or under
"significant influence" by the same enterprises / persons when:
1. 20% or more of the capital in the said enterprises are held by the
same person(s) and / or by their close relatives; and/or,
2. 50% or more of the directors / partners (excluding the nominated
ones) are same in the said enterprises and / or closely related to
those in another enterprise; and/or,
3. The said enterprises are governed by the common financial /
operational guidelines or employ common key management
personnel(s); and/or,

21
 4. One company is subsidiary company of another company either by
itself or through one or more subsidiaries, - here, the word
"subsidiary" denotes the same meaning as given under the
Companies Act, 1956; and/or,
5. If holding company of two or more companies is the same company.
C. Retail Loans – exception from the group concern concept:
All Retail Loans are exempted from the group concept for the purpose
of exercising lending powers by various authorities provided the credit
rating of the business concern, covered otherwise by our bank’s
definition of Group / Associate Concern, is “B” or higher. If the credit
rating is lower than “B”, then the concerned retain loan shall be
reckoned in group concept for the purpose of exercising lending powers
by various authorities. The retail loans, for the above said purpose,
include the following:
i. Loans to individuals for their personal needs only (excluding for
business needs and BoBVyapar Loans);
ii. Housing Loans to individuals;
iii. Car Loans;
iv. Loans for consumer durables, two-wheelers and Personal
Computers;
v. Baroda Family Loan;
vi. Overdraft against property;
vii. Baroda Property Loans;
viii. “AAA” (housing) Loans;
ix. Loans to pensioners;
x. Educational Loans;
xi. Baroda Kanya Vivah Loans;
xii. Loans for skill development
xiii. Baroda advances against securities;
xiv. Any new product developed by “Retail Banking Department” in
future unless specifically debarred.

(3) D. A. L/C credit facility is considered as clean facility for the purpose of
exercise of lending powers notwithstanding that it might have been fully
secured by tangible collaterals. However, if the market value of the goods,
covered by the transaction negotiated under the L/C, is earmarked and the
earmarked value fully covers the outstanding in the L/C and the stock
corresponding to such earmarked value is under the bank’s first charge
fully enforceable by the bank at its sole discretion, then, it may be
considered as secured
(4)
(A) Following facilities will be deemed to be secured advances for the
purpose of exercising lending powers:
Š Advance against pledge of goods (including shares, debentures,
Government Securities, Trust Receipts etc and assignment of LIC
policies)

22
 Š Advance against hypothecation of movable properties, stocks and book
debts
Š Advance against mortgage of immovable property.
Š Advance against earmarking of unencumbered deposit or borrowers /
third parties with our Bank,
Š Documentary Bill Purchased / Documentary Foreign Bill Purchased.
Š DA L/C against earmarking of market value of goods.
Š DA Bill drawn under L/C or DA Bills co-accepted / guaranteed by
another Bank / Financial Institutions.
Š Post-shipment Demand Loan (PSDL) against documents sent for
collection through our Bank and cash incentives / duty draw back.
Š Purchase of cheque drawn by Government Departments / Public Sector
Undertakings.
Š Purchase of Bank draft / Bankers cheque.
Š Facility covered by guarantee of another Bank / Govt. department or
indemnity of insurance company.
Š Advance against third party Fixed Deposit receipts.
Š Advance against Government / approved securities.
Š Advance covered by the guarantee of E.C.G.C.
Š Overdraft against Demand documentary bills sent for collection.

(B) Wherever facilities are sanctioned against extension of charge on

current and / or fixed assets or against second charge on fixed assets,
they will be treated as ‘Unsecured Advances’ for the purpose of lending
powers, except in cases where full security cover is available.
(C) Whenever facilities are sanctioned on partly secured/ partly unsecured
basis, for the purpose of lending powers, the respective portions should
be segregated.
(D) LABOD:
(a) This credit facility is to be excluded for reckoning Aggregate per
party / group limit for the purpose of exercise of lending powers.
(b) In case of LABOD to third parties by any of the above authorities in
the capacity of a branch head, the incumbent has to seek prior
approval of next higher authority irrespective of the amount of
LABOD to third party.

(5) Discounting of Bills under L/C: These powers are specific additional powers
of various functionaries. As per revised guidelines received from Reserve
Bank of India, Banks should purchase/discount/negotiate bills under L/Cs
in respect of genuine commercial transactions of their borrower
constituents who have been sanctioned regular credit facilities by the
banks. Banks should not, therefore, extend fund based (including bills
financing) or non-fund based facilities like opening of L/Cs, providing
guarantees and acceptances to non-constituent borrower or/and
non-constituent member of consortium/multiple banking arrangements.
(6) “Adverse Features” in context of exercise of DLP for review of accounts
include the following:

23
 (a) Health Code is 2 or worse or it has deteriorated from 1 to 2.
(b) Non-compliance with terms and conditions of sanction.
(c) Default in payment of any installment for more than –3-months /
Default in payment of quarterly interest on Term Loans / Demand
Loans.
(d) Deterioration in margin on stocks.
(e) Frequent excess drawings in working capital limits, frequent dishonour
of bills by non-acceptance / non-payment, undue delay in retirement of
bills under L/C, invocation of guarantees by beneficiaries. (Frequent
here means 3 or more instances in a year).
(f) Unjustifiably significant reduction in turnover or no turnover in the
accounts.
(g) Non-submission of QIS, Stock / Book debts statement within a
reasonable time from the stipulated date of submission.
(h) Account showing sticky and stagnant tendency.
(i) Unplanned expansion resulting in acquisition of fixed assets without
tying-up long-term resources and diversion of short-term working
capital funds for such acquisition.
(j) Diversion of funds for investment in sister/ associate concerns etc.
(k) Any feature covered by definition of “Willful Defaulter”.

Note: Non-submission of financial statements for annual review CMA-data,

Balance Sheet, P/L account etc. per se may not be considered as adverse
features for exercising powers for review provided conduct of the account
is otherwise satisfactory.

(7) L/C, Guarantee backed by counter guarantee:

(A) JMGS-I to SMGS-IV authorities may exercise the above powers for L/C
and Guarantee, backed by counter guarantees, only if the counter
guarantees offered are of the
(a) Nationalized Banks;
(b) Banks sponsored by AIFIs; and
(c) AIFIs. If it is not so, then, the proposals are to be referred to
Regional / Zonal Heads for consideration.
(B) If any onerous clause is added, the above powers are to be exercised
by Authorities up to MMGS-III subject to the approval of Regional
Manager / higher authorities.
(8) Ad-hoc facility / limit and / or excess in the existing limit:
(A) Secured / unsecured ad-hoc credit facility & limit and / or excess in the
limit of any existing credit facility and / or Temporary Overdraft may be
sanctioned to meet genuine emergent short term requirements of the
borrower up to the delegated powers and subject to the extant
guidelines. Such facility / limit may include:
(a) Adhoc Working Capital/Contingent limits.
(b) Increase in regular sanctioned limit.
(c) Temporary overdrafts for a period not exceeding –14- days

24
 (d) Drawing against uncleared effects (wherever no specific limits have
been sanctioned for the purpose)
(B) These powers may be exercised even in cases where the limits have
been sanctioned by a higher authority.
(C) Authorities permitting such ad-hoc facility / excesses in the existing
limits / ToDs / DAUEs should ensure that these facilities / limits are not
out of proportion to the original sanctioned limits and are not granted
too frequently.
(D) These powers should not be used for the purpose of granting ad-hocs /
excesses where the requirement of the borrower is of a regular nature
and / or the stipulations regarding per party limit etc are circumvented.

(E) All sanctioning authorities are expected to use these powers in a

judicious manner so as to avoid instances of circumventing the
delegated powers.
(F) There may be occasions when parties approach for sanction of ad-hoc
facility over and above the ceiling permitted for granting ad-hoc but the
total facilities including the ad-hoc facility asked for, falls within
aggregate per party limit of the sanctioning authority. In such cases,
sanction may be granted by exercising powers for regular limits
together with the power for ad-hoc facility / limit and/or excess in
existing limit(s). In such cases, no confirmation of higher authorities is
required, but sanction should be reported to immediate higher authority
for post sanction reporting in the usual manner.
(G) No ad-hoc / excesses should be allowed by Branch Managers in
accounts requiring prior approval of Reserve Bank of India under its
Selective Credit Control policies. Such requests should be referred to
the reporting authority who would be guided by RBI guidelines from
time to time. However, as per restrictions on granting certain credit
facilities, except where advances are completely exempted from
selective credit control directives, branches should not sanction the
following credit facilities to parties dealing in commodities falling under
SCC.
a. Advances against book debts/receivables.
b. Advances against collateral securities like life insurance policies,
shares and debentures and real estate.
c. Advances against Bank's FDRs except where fixed deposits are held
by the borrowers themselves and the branch is satisfied about the
genuineness of the borrower's need.
d. Discounting of usance bills arising out of sale of commodities
covered under selective credit control.
e. Opening of inland letters of credit, with provisions under which
another bank may discount usance bills covering sale of selective
credit control commodities.
f. Issuing of a guarantee on behalf of an importer guaranteeing
payment of customs duty, import duty and/or other levies payable
in respect of import of essential commodities without obtaining a
cash margin of 50% of the guaranteed amount. The term essential
commodities will cover commodities specified in this behalf by the
Reserve Bank of India from time to time. Presently the term covers

25
 all vegetable oils and oilseeds (whether edible or not) and sugar.
g. Clean credit (including temporary overdrafts) facilities other than
those specifically permitted.
(H) The powers for grant of ad-hoc facility / limit and / or excess in the
existing limit and / or Temporary Overdraft and /or Drawings Against
Uncleared Effects are restrained, as detailed hereunder:
a The authorities upto TMGS-VII may allow ad-hoc / excess etc. only
for a maximum period of 3 months at a stretch;
b TODs:
i) No ToD is to be allowed during first year of operation of the
account.
ii) No ToD is to be allowed at any rural branch in any account.
iii) No ToD is to be allowed in any account other than a current
account of the customer.
iv) ToD is not to be allowed in those accounts also where operations
are not satisfactory including return of cheques drawn by the
accountholders for financial reasons. These instructions are
applicable to those accounts where cheques deposited by the
customers are frequently returned.
v) ToD may be allowed only in case of genuine need but not more
than once in a month and not more than 5 times in a year.
vi) At Semi-urban, Urban and Metropolitan Branches, ToD may be
allowed up to a maximum of 25% of the average credit balance
in the account during last 6 months or up to the discretionary
lending powers, whichever is lower. The discretionary lending
power in this context refers to the DLP for per party F.B. regular
limit plus per party F.B. ad-hoc / excess.
vii) ToD must be got adjusted within 14 days of the drawing through
recovery only and ToDs should never be converted into Demand
Loan or any other credit facility.
c Ad-hoc facility / limit and / or excess in the existing limit:
i) Ad-hoc facility / limit should never be disproportionate with the
regular limits
ii) Ad-hoc facility / limit to be allowed exceptionally as a short term
measure to meet the liquidity mismatches;
iii) Ad-hoc facility / limit should not be adjusted with the increase in
the existing limit or sanction of a new facility / limit;
iv) No ad-hoc to be considered in any new account for a period of
12 months. Prior to this period, if genuine need arises, the
matter may be referred to the next higher authority for decision;
v) No ad-hoc facility / limit is to be granted where a regular credit
proposal is under consideration within own DLP or within DLP of
higher authority.
vi) Maximum amount of the ad-hoc limits in an account with credit
rating of “B+” & above by an authority upto SMGS-IV shall be
25% of the fund based Working Capital limits (excluding DA LC
limit) or DLP, whichever is lower. However, the authorities in the

26
 cadre of SMGS-V and above may allow ad-hoc / excess up to
their full respective DLPs. The DLP in this context refers to the
DLP for sanction of regular FB limits plus sanction of ad-hoc /
excess (vide the points number `3’ & `9’ in the above said
Discretionary Lending Power Chart).
vii) From the above, it is deduced that any authority may sanction
ad-hoc / excess in an advance account with a credit rating of
“B+” or above upto 25% of the FB Working Capital limits or up
to full extent of own DLPs, as the case may be, only if the
existing exposure PLUS the proposed exposure through ad-hoc /
excess, falls within one’s own DLPs (vide the points number `3’
& `9’ in the above said Discretionary Lending Power Chart).
viii) In all “C” and “B” rated reviewed accounts, the following
restrictions apply:
Particulars Maximum permissible
Amount Months
(Rs in Lacs)
The Branch Managers up to NIL NIL
the level of SMGS-IV
The Regional Managers at 12.50 2
the level of SMGS-IV
The Assistant General 50.00 3
Managers
The Deputy General 100.00 3
Managers
The General Managers 150.00 3

Where sanction of ad-hoc / excess becomes absolutely

necessary and it can not be done as per the above said
guidelines, then, the proposal can be referred to BCC for
consideration through proper channel or directly, as the
case may be.

(9) Advances against Shares / Debentures:

(A) List of approved shares and debentures for purpose of grant of
advances will be circulated periodically by the C&I Credit Department in
the BCC. Advances to be granted only against approved shares /
debentures.
(B) The shares / debentures, being considered for financing against, must
be in demat form.
(C) All fresh / increase in facilities are subject to activity clearance from
BCC unless otherwise specifically advised.
(D) Further, the Loan Policy-2003 has provided that all types of advances
to stockbrokers are to be processed / sanctioned at BCC only till further
instructions. Hence, de facto, advances to stockbrokers may be
considered by the functional head / ED / C&MD at BCC only
(E) All requests for inclusion of shares & debentures in the list must be
addressed to that department through Zonal Office. For identification of
shares for this purpose, the following criteria shall be followed:
(a) Shares must be quoted on the official list of major stock exchanges.

27
 (b) The company must have declared dividend for the past three years.
(c) Market price of the shares should not have fallen below the face
value at any time during the past –3- years.

(10) Advances against gold/silver:

Any credit facility to any dealer in jewelry (gold / silver) against security of
gold / silver may be granted by SMGS-IV and higher authorities up to a
maximum limit of Rs 20 lac per dealer out of which advance against gold
jewelry may be for up to Rs 10 lac. However these restrictions are not
applicable for exporters dealing in gold/silver, where each authority can
exercise his/her DLP.
(11) Powers for allowing minor variations
A. Normally, once regular credit limits have been sanctioned by the
appropriate authority, the account should be conducted strictly in
accordance with the terms and conditions of sanction and a lower
authority should not have any discretion to vary on a permanent
footing the terms and conditions stipulated by the higher authority.
B. As an exception, the following variations of a minor nature may be
permitted provided the original sanction was given by the immediate
higher authority:
a. Reduction up to one fifth of the existing margin for a specified
period.
b. Substitution of guarantor(s) by other guarantor (s) provided that
the aggregate net worth of the new set of guarantors is not reduced
consequent upon such substitution.
c. Substitution of equivalent value of security;
d. Making available advance to reconstituted firms provided net worth
of the firm and aggregate net worth of the firm and its
proprietor/partners are not reduced consequent upon, such
reconstitution and overall competence of the firm is not affected by
the reconstitution.
e. Ceding of second and/or subsequent charge (but not pari – passu
charge ) on assets charged to our Bank in favour of financial
institutions, banks and debenture trustees.
f. Rephasing of repayment schedule for Term Loan and Demand Loan
for a maximum period of –6- months.

C. Variations other than listed above, should be referred to the sanctioning

authority
D. The above powers are not exercisable by the Branch Managers in grade
MMGS-II and JMGS-I unless the entire proposal is falling within their
powers

(12) In-principle Sanction:

In-principle clearance is akin to activity clearance except that some amount
of decentralization is allowed on one tier above concept. The
industries/activities presently identified by the Bank for in-principle system

28
 are as under:
(A) Cinema Halls, Theatres/Auditoriums, Marriage Halls
(Kalyanamandapams)
(B) Hotels, Resorts, Restaurants
(C) Manufacturing & Trading in Liquor
(D) Hospitals, Nursing Homes and allied activities
(E) Plantation companies (excluding Tea, Coffee and Rubber Plantations)
(F) Food Processing and
(G) Vegetable Oil, Vanaspati

(13) Activity clearance:

For the following activity/ Industry, irrespective of quantum, any increase
or fresh exposure are first to be referred to BCC:
(A) Diamond Industry
(B) Leasing /Hire Purchase
(C) Non-Banking Finance Companies
(D) Capital Market Exposure
(E) Financing for film making
(F) Bridge Loan to Corporates
However, where ever a sub-limit has been allocated to zones, zonal heads
may authorize with in such limits.

(14) In context of the exercise of discretionary lending powers, the term “close
relatives” refer to:
(A) Spouse;
(B) Father;
(C) Mother including stepmother;
(D) Son including stepson;
(E) Son’s wife;
(F) Daughter (including step-daughter];
(G) Daughter’s husband;
(H) Brother/ sister (including step-brother & step-sister];
(I) Brother’s wife;
(J) Sister (including step-sister] of spouse;
(K) Sister’s husband;
(L) Brother including stepbrother of spouse.

Note: As deduced from the above, the definition of “close relatives”

does not tacitly cover the following important relationships:

i. Stepfather;

29
 ii. Parents of the spouse / divorced spouse;
iii. Grandparents of oneself or of spouse / divorced spouse;
iv. Brother / Sister of either parents;
v. Progenies of Brother / Sister of either parents;
vi. Progenies of own real / stepbrother or real / stepsister or real /
stepson or stepdaughter;
vii. Divorced spouse.
(15) Advances to Senior Officers (i.e., SMGS-IV & above); and / or their close
relatives:
All the advances by any delegated authority are subject to reporting to the
Board of Directors. However, the advances against the following or
following types of advances need not be reported: -
(A) Govt. Securities
(B) LIC Policies
(C) Fixed and other deposits
(D) National Saving Certificates
(E) Units of U.T.I.
(F) Temporary overdrafts for small amounts i.e. upto Rs. 25,000/-.
(G) Casual purchase of cheques upto Rs. 5000 at a time.
(H) Loans and advances such as housing loans, consumption loans etc.
granted to an Officer under any scheme applicable generally to Officers.
(16) Drawings Against Uncleared Effects (DAUE)
(A) Guidelines in respect of DAUE are as follows:
(i) This facility is to be allowed preferably on casual basis (ad-hoc)
ONLY to first class clients and where the Branch Manager is
confident of realizations of the instruments;
(ii) The purpose of the transactions should be thoroughly satisfied
upon;
(iii) The instruments, considered under the facility, should be the
cheques / drafts drawn by the Government or by FIRST class
parties where realization is certain;
(iv) Where drawings against third party cheques are to be allowed, the
names and other details of such parties should be ascertained and
their market standing verified to ensure that the cheques presented
represent genuine trade transactions and would be paid in the
normal course. This is to prevent the facility being misused for
kite-flying operations through the medium of accommodation
cheques;
(v) It should be ensured that the cheques are drawn on banks which
are members of the local clearinghouse and that no drawings are
allowed against cheques drawn on non-member banks, as their
cheques have to be presented for payment across the counter.
(vi) In all cases, it should be verified whether the clearing transactions
of the parties have a bearing on their sales turnover.

30
 Disproportionate turnover in clearing transactions could lead to the
possibility of kite-flying operations.
(vii) No banker's cheque against instruments presented in clearing
should be issued. Likewise, no cash payments should be made
against instruments sent in clearing, especially for large amounts,
until their fate can properly be ascertained and subject to the
transaction falling within the sanctioned limit/ discretionary lending
powers of the Branch Manager.
(viii) Drawings should be allowed only against cheques/instruments sent
to the clearinghouse and are in the process of realization.
(ix) The facility can also be extended, in exceptional circumstances,
against cheques and other instruments, which would be presented
for clearing on the next working day. In such cases, commercial
rate of interest should invariably be charged on the drawings
allowed.
(x) Where the cheques/ instruments against which drawings were
allowed are returned subsequently, interest at commercial rate
should be charged from the date of allowing the facility to the date
of recovery.
(xi) Cheques received for clearing on the following working day should
not be debited to G/L Clearing Adjustment Account for the purpose
of drawings there against. Similarly, cheques returned unpaid
should not be debited to the said account pending recovery of the
amount.
(xii) It should be ensured that the drawings are not allowed against
cheques returned unpaid for financial reasons and represented
subsequently.
(xiii) If the cheques against which drawings have been allowed are
returned in an account frequently, the reasons for return should be
carefully ascertained and the desirability of continuing/ extending
the facility to the party or otherwise should be reported to the
Regional Authority.
(B) No DAUE is to be allowed in newly opened account for first 6 months
except in a very well-conducted account subject to following proviso:
(i) In Current account – not more than 25% of the amount of the
instrument lodged in clearing or the discretionary lending power
whichever is lower;
(ii) In Cash Credit / Overdraft account – not more than 25% of the total
funded Working Capital (excluding DA L/C limit) or 25% of the
amount of the instrument lodged in clearing or the discretionary
lending power whichever is lower;
(iii) When the instruments are by way of the bankers’ cheques / drafts
drawn on Government Departments, Public Sector Undertakings,
reputed corporates, then, an amount, higher than the above, may
be considered provided it does not exceed the lower of DLP and the
amount of the instrument.
(C) While sanctioning / reviewing regular DAUE facility, proper justification
must be recorded and factors like value of the account, relationship,
yield, average credit balance maintained in the account, deposit
relationship with the group, ancillary business or other qualitative

31
 aspects must be stated.
(17) For export credit, TMGS VII can exercise his fund based power up
to 150% and others can exercise such powers up to 125%.
However, branches not authorised to transact foreign business should not
grant any export credit whether pre-shipment or post-shipment facilities.
Branch Managers of non-authorised branches are not delegated any
discretionary lending powers to consider export credit. Zonal
authorities may, however, consider in exceptional circumstances,
authorising specified branches in this category to grant only pre-shipment
credit facilities to their export customers. They should be guided by the
following requirements while granting such approval :

(i) The quantum of export business.

(ii) The potential volume of export business that may be lost, in case such
authorisation is not considered.
(iii) Existence of infrastructure at the branch. i.e. communication and
trained personnel.
(iv) Proximity of an authorised branch so as to minimise delay in
transmission of documents, applications etc.
The names of such branches authorised should be intimated to the
International Division. On such approval being granted, the Branch
Manager may exercise his discretionary lending powers for grant of only
pre-shipment credit facilities to export customers. If such facilities have
been granted, it will be incumbent on the part of export customers to lodge
all the export documents with the branch. While transmitting the
documents to the authorised branch, the non-authorised branch should
request the authorised branch, to remit the proceeds of the documents to
it so that the outstanding in the packing credit account can be adjusted.
The packing credit should be adjusted only after the proceeds have been
realised in the above manner. While forwarding export documents for
purchase/ negotiation/discount the non-authorised branch shall advise the
concerned authorised branch that the bill proceeds are to liquidate
pre-shipment finance.

Branches should not resort to a practice of handing over the documents to

the borrower himself for onward transmission to the concerned authorised
branch to which they are linked.

32
1.8 AGREEMENT-IN-PRINCIPLE FOR CREDIT FACILITIES

Under the discretionary lending powers , various functional authorities are

empowered to accord agreement-in-principle for credit facilities upto their
delegated powers. Accordingly, requests for agreement-in-principle are
disposed of at various levels in confirmity with the guidelines under
discretionary lending powers scheme. It has been the practice of the
Agreement-in-Principle operative for a period of three months and if within this
said period, the formal proposal is not submitted, the Agreement-in-Principle
accorded earlier is deemed to have lapsed and in case the customers still
require the facilities, revalidation of Agreement-in-Principle is first required to
be considered before finally processing the proposal. Moreover while according
Agreement-in-Principle, the concerned delegated authority should stipulate the
validity period of three months. In communicating Agreement-in-Principle to a
party (after obtaining approval from the concerned delegated authority)
branches should clearly specify that the Agreement-in-Principle is valid for
three months only and that within the period data/ information for processing
the proposal must be submitted to the Bank complete in all respects.

1.9 LEAKAGE OF INCOME

Leakage of income occurs when interest/exchange is not charged/recovered

at the appropriate rate or mistakes are committed in calculation. This results
in serious in-roads into the profits of the Bank.

This should, therefore, be prevented.

(i) Areas of leakage :

(a) Interest charged on advances Rate of interest not correctly

interpreted/arrived at Mistakes in calculation of product.
(b) Commission/exchange/interest on bills purchased, discounted, overdue
bills etc.
(c) Exchange/commission on DDs, MTs, TTs sold, bills etc.
(d) Commission on L/Cs, Guarantees and other ancillary business.
(e) Failure to obtain refinance from RBI, IDBI, NABARD etc.,
(f) Failure to charge overdue interest on BP/BD/AB etc.
(g) Failure to charge penal interest on advances, wherever applicable.
(h) Failure to collect service charges, processing charges, out-of-pocket
expenses etc.
(i) After recovery is made in NPA accounts, interest is not applied
(j) FBP/ABs are not crystallized within time frame
(k) When LC is opened by Lead Bank under consortium advance, the share
of commission is not claimed
(l) Recovery of foreign bank’s charges in respect of L/Cs are overlooked.
(m) Charges for amendment in L/C are not levied

(ii) Prevention of leakage :

(a) Interest on advances :

1 Products should be checked on daily basis by the officers concerned
and folio-wise totals of products should be carried forward correctly.
It is desirable to check the number of digits in each figure.

33
 2 Rate of interest applicable to each account should be ascertained by
classifying the advances accounts under correct categories and the
interest be applied on products for the month .
3 The amount of interest arrived at should be counter checked by
another officer and be compared with the interest figure for the
previous month which will indicate steep variations, if any.
4 Special care should be taken to avoid mistakes in totals, carried
forward figures and postings.
(b) Miscellaneous charges, such as service charges, ledger folio charges,
out-of-pocket expenses etc. should be recovered in full.
(c) Officers signing the vouchers should verify whether the commission,
exchange and interest, as applicable, is correctly recovered on bills and
collections at the time of purchase, discount and/or realisation.
(d) Officers signing the DD, MT or TT advices should be made responsible
for the correct levy of exchange, postages and other out-of-pocket
expenses. Telegram charges should also be recovered in respect of all
TTs sent.
(e) Commission should be charged on the amount of guarantee for the
entire period of the guarantee, including claim period, if any, provided
for lodging the claims.
(f) In the case of DP Guarantees, commission should be charged for the
entire period on the total amount, including interest component.
Officers signing the guarantees are responsible for recovering the
correct amount of commission.
(g) Commission on L/Cs and interest/overdue interest on Advance Bills
should be charged properly as per the guidelines issued by FEDAI and
in case of revolving Inland L/Cs, reinstatement commission should be
charged at each time of reinstatement.

1.10 INCOME RECOGNITION NORMS :

Now, due to stringent income recognition and provisioning norms (covered in

Chapter II of Volume 8) it has become very essential to monitor individual
accounts carefully to ensure the recovery of interest / installments / realisation
of bills. Branches have to take extra care to see that not only there is no
leakage of income but also whatever is charged / debited to the account is
recovered.

1.11 HOUSE KEEPING :

Aspect of good housekeeping in credit portfolio cannot be over emphasised.

Maintaining of up to date records, submission of statements in time, obtaining
stock statements, recording in various registers for determining drawing
power, inspection of securities, proper documentation, obtaining letter of
acknowledgement (LAD), balancing of books, maintaining various due date
diaries for timely action like recovery and renewal have to be given due
attention.

1.12 CUSTOMER SERVICE :

Customer service is the key word in banking. Even in advances, our aim
should be to give best possible service to credit clients. Majority of their

34
 complaints relate to delay in getting sanctions. Admittedly certain decisions
take time due to procedural aspects, where bank is in the process of
minimising layers and has already given wide powers at all levels to minimise
delay. What is essential is to maintain constant contact with the customer so
that he does not feel that papers are not moving. Decision once taken should
be promptly conveyed. Inability to consider any request of the customer which
prima facie itself appears not feasible, should be informed immediately to him.
While it is true that credit customers need banks to finance their business, it is
to be remembered that banks also do need these customers to have profitable
deployment of funds.

1.13 KNOW YOUR CUSTOMER (KYC) NORMS

Reserve Bank of India has issued instructions from time to time relating to
proper identification of account holders and the need for compliance of extant
system and procedures to help in preventing frauds. Branches have been
advised to comply with ‘Know Your Customer’ i.e. KYC norms so as to
prevent occurrence of frauds.

The detailed guidelines in respect of KYC norms have been given in Book Of
Instructions Volume 1, Chapter I, Para 1.26. However branches should
follow KYC norms not only in deposit accounts but also in all types of
accounts including advances whether fund based or non fund based
under the schemes of Agriculture, Retail Trade, or Commercial/ Institutional
Sector, Small Scale Industries etc.

In addition to “KYC” norms detailed in Book of Instructions Volume No. 1, the

branches should adhere to following guidelines in case of Advance accounts:

1. KNOW YOUR CUSTOMER

y Determine and document the true identity of the customer- whether

individual or firms or companies - who establish relationships, open
accounts or conduct significant business transactions. Obtain basic
background information on customers.
y Obtain and document any additional customer information, commensurate
with assessment of risk posed by customers’ expected use of bank’s
products and services like copy of trade licence, CST/ST registration papers
etc.,
y Protect the bank from the risks of doing business with any individual or
entity whose identity can not be determined or who refuse to provide
information, or who have provided information that contains significant
inconsistencies which can not be resolved after due investigation.

2. CUSTOMER IDENTIFICATION

Identification is the act of establishing who a person is. In the context of

KYC, identification means establishing who a person purports to be. This is
done by recording the information provided by the customer covering the
elements of his identity( i.e. Name and all other names used, and the
address at which they can be located). This is further followed up by proper
introduction.

35
 3. CUSTOMER VERIFICATION- PRE SANCTION/POST SANCTION

Verification of identity is the process of proving whether the person actually

is who he claims to be. In the context of KYC, verification is the process of
seeking satisfactory evidence of the identity of those with whom the bank
does business. This is done by carrying out checks about correctness of the
information provided by the customer and also the seller to whom
payments are being made- especially in case of our retail lending schemes.

4. DOCUMENT VERIFICATION

The documents tendered by the prospective customer should be subjected

to close scrutiny and due verification should be carried out by cross
referencing and linking with other and by other suitable methods so as to
establish the genuineness of the same.

5. CASH TRANSACTIONS

Cash transactions of Rs 10 lacs and above in any advance account are to

be recorded and reported to the concerned Regional Office on fortnightly
basis. Records of all such transactions are to be maintained in separate
register and made available to internal/external inspectors/
auditors/concurrent auditors for inspection/specific scrutiny.

Branches must obtain following, not only in case of applicant borrower but
also in respect of the guarantor, wherever proposed, and verify the same.

(a) Employment details, job specifications, name and address of the employer,
length of service.
(b) Proof of residence of the applicant borrower and the guarantor proposed.
(c) Source of income/ annual income.
(d) Details of assets owned e.g. House etc.
(e) Other personal details e.g. Qualifications, marital status etc., be obtained
(f) The applicant borrower be interviewed and detailed remarks of such an
interview be made in the application form itself by the officer concerned
who interviewed him/her under officer’s signatures and mentioning date of
interview and date of putting the remarks.
(g) Other extant guidelines, as under, for considering an application for
sanction of an advance, must also be followed without fail:
(i) Obtaining report on the applicant borrower in form 135 and verification
thereof
(ii) Legal opinion and scrutiny of documents/title deeds
(iii) Asset verification and verification of end use.
(iv) Obtaining report from existing bankers
(v) Gathering market information etc.
(vi) Creating equitable mortgage on the basis of deposit of original title
deeds etc.

1.14 CONCLUSION :

(i) Credit is a vast area. Hence the topics have been divided into six separate
volumes :-

Volume 4 Credit Management - General

Volume 5 Credit Management - C & I Credit
Volume 6 Credit Management - Agriculture

36
 Volume 7 Credit Management - SSI/SB
Volume 8 Credit Management - Non-Performing Assets
Volume 9 Credit = Documentation
Volume 16 Credit = Retail Lending

(ii) Branches may find it easier to refer to these volumes by reference to the
index. While care has been taken to incorporate changes upto 31.12.2003,
branches are advised to always refer to the circulars issued by various
authorities, instructions/clarifications conveyed by Regional / Zonal Offices
/ Corporate Office, business guidelines issued by the Bank and changes in
loan policy so that lending will be in tune with Bank's current policy.

Some important circulars issued between 01-01-2004 to

31-03-2004, pertaining to the subjects covered in this Volume, are
given as an Addendum at the last page of this volume.

37
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER II

TYPES OF BORROWERS

SR. NO SUBJECT PAGE NO

2.1 INTRODUCTION 40
2.2 TYPES OF BORROWERS 40
2.3 Individuals 40
2.4 Minors 40
2.5 Lunatics 40
2.6 Drunken persons 41
2.7 Insolvents 41
2.8 Married woman 41
2.9 Purdanashin woman 41
2.10 Blind persons and handicapped persons 41
2.11 Joint accountholders 41
2.12 Sole proprietorship firms 42
2.13 Partnership firms 42
2.14 Hindu undivided family 46
2.15 Limited companies 46
2.16 Group/Associate Concerns 53
2.17 Large Corporate 54
2.18 Medium Corporate 54
2.19 Small Corporate 54
2.20 Large Borrower 55
2.21 Medium Borrower 55
2.22 Small Borrower 55
2.23 Clubs, Associations and Societies 55
2.24 Trusts 55
2.25 Agents and Attorneys 56
2.26 Receivers and Liquidators 56
2.27 Executors and Administrators 56
2.28 Schools, Colleges and Educational Institutions 57
2.29 Local Authorities 57
2.30 Public sector undertakings and corporations 57
2.31 Staff members and Staff related advances 57
2.32 Directors of our Bank 60
2.33 Directors of other banks and relatives of 61
directors of our Bank
2.34 Pakistani nationals 63
2.35 Landlords of premises occupied by the branches 63
2.36 Call loans to banks 64
2.37 Non-banking financial companies 64
2.38 Builders and contractors engaged in building 64
construction activities
2.39 Army, Navy and Air Force personnel 64

38
 LIST OF APPENDICES

APPENDIX NO SUBJECT PAGE NO

I DRAFT RESOLUTION TO BE PASSED BY 65
THE TRUSTEES OF THE TRUST
II DRAFT INDEMNITY TO BE TAKEN FROM 67
ALL THE TRUSTEES AND OTHER
PARTNERS INDIVIDUALLY
III LOANS AND INVESTMENT UNDERTAKING 68
IV DECLARATION TO BE OBTAINED FROM 69
EVERY BORROWER
V PAYMENT AND ADVANCES TO PAKISTANI 70
NATIONALS

39
 TYPES OF BORROWERS

2.1 INTRODUCTION

Granting of an advance or a credit facility to a borrower necessitates the

parties i.e. the banker and the borrower, to enter into a contract. In
order to enter into such a contractual agreement both the parties must
be competent in law to enter into a valid contract. Branches should note
the broad guidelines given hereunder while considering proposals for
granting credit facilities to various types of borrowers.

2.2 TYPES OF BORROWERS

2.3 Individuals

There are various types of individuals to whom Bank grants various types
of credit facilities. As per law every individual to whom a credit facility is
sanctioned must be competent to contract. Minors, persons of unsound
mind and undischarged insolvents are incompetent to enter into a valid
contract. Given below are the broad guidelines to deal with various types
of individuals.

2.4 Minors

(i) According to Section 11 of Indian Contract Act, 1872, a minor is

incompetent to enter into a contract and any contract entered into by
a minor is VOID ab initio.

(ii) A minor's contract cannot be ratified even on his attaining majority.

Further the right to set off also cannot be exercised in such cases.

(iii) Personal assets if any of the minor offered by him as security for an
advance cannot be enforced by the Bank.

(iv) Even in case of an advance granted to a minor against a guarantee of

a third party, the bank cannot enforce such a guarantee and recover
the amount from the guarantor in case of default by the minor.

(v) No loans/overdrafts can be granted to a minor against any deposit

standing in his name.

(vi) Further even in cases where a minor obtains a loan by falsely

representing that he is a major, the bank will not be in a position,
legally to recover the loan from the minor after his attaining majority.

2.5 Lunatics

As per the Indian Contract Act (Section 11) a person of unsound mind
(insane) is incompetent to enter into a contract. As such any contract
entered into with such a person is void. The banker, however, should not
rely merely on hearsay information.

2.6 Drunken persons

40
 Any contract entered into by a person in a state of
intoxication/drunkenness is not a valid contract and can be declared
void. Branches should, therefore, exercise due care while entering into
agreements with such persons.

2.7 Insolvents

Bank cannot grant any advance with or without security to an

undischarged insolvent (a debtor adjudicated insolvent) or a person
against whom insolvency proceedings are pending.

2.8 Married woman

(i) In law, a married major woman is competent to enter into a valid

contract. As such, she is liable for the debts incurred to the extent of
her separate estate. Her husband is not responsible for the debts
incurred by her, unless they are for her necessities of life or he has
specifically undertaken to repay them.

(ii) There is no legal bar on the married major woman giving guarantee
on behalf of third parties.

2.9 Purdanashin woman

(i) While considering credit facilities to a purdanashin woman, it is

necessary to establish her identity beyond any doubt branches should
endeavour to obtain her latest photograph duly attested by a person
known to the Bank.

(ii) As the burden of proof that a purdanashin lady understood and

executed/carried out the transaction on her own free will lie with the
bank, branches should take adequate safeguards such as the
production of proper identification of the parties concerned, obtaining
sureties, obtaining photographs of sureties etc. to protect bank's
interests.

2.10 Blind persons and handicapped persons

Physically handicapped persons including blind persons, if they are not

minors, lunatics or insolvents, are competent to contract and bank
considers granting of credit facilities to them in normal course after
taking appropriate precautions. For further details refer to Book of
Instructions Point no 2.39 & 2.40 , CHAPTER II VOLUME 1.

2.11 Joint accountholders

(i) Advances can be granted to two or more individuals jointly provided

all the joint account holders are individually competent to contract.

(ii) All the joint accountholders should sign the application as well as the
documents for credit facilities. Unless all of them agree in writing,
authority to either or any one of the joint accountholders to operate
on credit balance in an account does not extend to the borrowings.

(iii) Even though according to Indian Contract Act, 1872, a creditor can,

41
 in the absence of an express agreement to the contrary, call upon
any one or more of the joint debtors to repay the debt, joint and
several liability of all the joint accountholders should expressly be
established, which would only give the Bank the right of action and
the right to set-off individual accounts of joint parties against
indebtedness in the joint account, subject, of course, to the right of a
reasonable notice or unless release is expressly made.

(iv) Where the share/securities are standing in joint names, the relative
transfer deeds/endorsements should be signed/made by all the
parties to the same. Clear and precise instructions should be obtained
as regards withdrawal/delivery of shares/securities, operations in the
account etc.

(v) In the event of death, lunacy or insolvency of one or more joint

borrowers, all operations in the account should be stopped and
instructions be sought from the Regional Authority either for recovery
of the dues or for continuance of the facility/ies to the remaining
accountholders. The estate of the deceased borrower is not released
from the charge in respect of borrowings prior to his death.

2.12 Sole proprietorship firms

(i) A sole proprietorship firm is one which carries on the business in the
sole name of the individual owner (proprietor) or in the trade name of
the firm.

(ii) In case of a sole proprietorship firm, branches should obtain a

declaration (LDOC-38) from the sole proprietor in his personal
capacity that he is the sole proprietor of the firm and that he is solely
responsible for its liabilities. Other documents should be executed by
him as the sole-proprietor of the firm and also in his personal
capacity.

2.13 Partnership firms

(i) A partnership firm has no independent existence from the partners

constituting the same.
(ii) The number of partners in a partnership firm should not exceed ten,
if it is engaged in banking business and twenty in other cases.
(iii) There are no restrictions on the borrowing powers of a partnership
firm. The firm need not be a registered one for granting advance
facilities.

(iv) No partner should be a lunatic or undischarged insolvent and no

other partnership firm should be a partner in another firm.

(v) A minor can be admitted to the benefits of a partnership with the

consent of all the partners. In such cases, minors date of birth/
attaining majority should be noted. The minor's liability is restricted
to the extent of his share in the partnership and the share of profits.
As such the minor should not be mentioned as a full fledged partner
and neither his nor his guardian's signature obtained on security
documents. For further details refer to Book of Instructions Para
No 2.46, Chapter-II Volume-1.

42
 (vi) Each partner has an authority to borrow and charge the assets of the
firm, provided the borrowing is done in the firm's name and for
carrying on the business of the firm in the usual course. However,
branches should obtain the signatures of all the partners in the
application for credit facilities and also in the relative documents. The
partners should also sign the documents in their individual capacity.

(vii) A hindu undivided family can be a partner in a firm. Even two HUFs
can join to form a partnership firm. In such cases, each HUF is
counted as one partner for determining the total number of partners
in a firm, irrespective of the number of coparceners in the HUF.
Further, while Karta is responsible to the creditors of the firm not
only to the extent of his coparcenary property in the HUF, but also
personal property, the other members of the coparcenary are liable
to the extent of their coparcenary property only.

(viii) Where a limited company is a partner in a firm, the company is liable

for the firm's debt to the extent of its assets and not its individual
shareholders.

(ix) Advance facilities to a partnership firm, where a trust is a partner,

should be considered only in exceptional cases provided the trustees
are well known to the branch and are of good standing. This is to
avoid the inherent risk of being a party, knowingly or negligently, to
a breach of trust by the trustees.

While considering such advances, branches should note the following:

(a) Trust deed should be examined thoroughly to ascertain whether

(i) the trust can become a partner in a business firm,
(ii) there is an express provision empowering the trustees to
borrow money on behalf of the trust and to create a
charge on the assets for such borrowings and
(iii) there is any provision as to the number of trustee/s and/or
their names who can represent the trust in the
partnership.
(b) Partnership deed should provide for the trust to become a partner
and should not contain anything which is inconsistent with the
provisions of the trust deed as regards borrowings.

(c) All the trustees must pass a resolution to the effect that the trust
do become a partner in the firm and one or more trustees (as
provided in the trust deed) do represent the trust as the partner
in the firm. The draft resolution is given in APPENDIX-I.

(d) The documents should be executed as under : If the name of the

partnership firm is, say X and Co., having A and B as individual
partners and the Trust 'T' as the third partner with power to 'C' to
sign on behalf of the trust, the mode of execution by the firm will
be:
For X and Co. For X and co., For T Trust,
Sd/- A Sd/- B Sd/- C Trustee
Partner Partner Partner

43
 (e) The trust should sign all documents, including partnership letter,
as any other partner.

(f) All the trustees to the trust should guarantee the facilities (Form
No. LDOC-33) sanctioned to the partnership firm in their
individual capacity and not only as Trustees.

(g) Apart from the above, all the trustees of the trust as well as the
individual partners of the firm should execute an indemnity as per
APPENDIX-II. The indemnity should not be witnessed so that it
can be stamped as an agreement.

(x) Where the guarantee of a firm is taken to secure the debts of a third
party, it should be executed by all the partners on behalf of the firm
and also in their individual capacity, provided the issuance of a
guarantee is permitted in the partnership deed.

(xi) On receipt of notice of retirement of a partner, branches should stop

operations in the account to determine the liability of the retiring
partner. Where the partnership assets charged to the Bank are
sufficient to cover the outstanding dues without the necessity of
looking to the retiring partner, the account may be continued pending
new arrangements. When the account of the reconstituted firm is
opened, fresh documents should be obtained and thereafter the
outstanding balance in the old account be adjusted by a cheque
drawn on the new account and signed jointly by all the partners of
the reconstituted firm or by obtaining a letter of authority signed by
all the partners.

(xii) Death of a partner dissolves the firm and the surviving partners can
act only for winding up of the firm in the absence of an arrangement
to the contrary. Estate of the deceased partner is not liable for the
debts contracted subsequent to the date of the death.

(xiii) Change in the constitution of the firm should invariably be brought to

the notice of the sanctioning authority and instructions sought for the
continuance of the facilities to the reconstituted firm alongwith full
details and the position of the firm consequent to the
death/retirement of a partner. Impact of reconstitution of the firm on
its capital structure and management should be studied carefully.

(xiv) On receipt of notice of death, retirement or insolvency, exclusion or

inclusion of a partner the branches should treat the limit granted to
the old firm as cancelled and extension of credit facilities to the new
(reconstituted) firm be considered afresh after reviewing the credit
worthiness of the reconstituted partners and all other relevant factors
having a bearing on the grant of advances.

(xv) However, with a view to ensuring that the activities of the firm, are
not affected and that they continue to have dealings with the bank till
all the formalities are completed, the firm may be allowed to operate
on their existing accounts after obtaining a stamped indemnity signed
by all the partners including the partners who has/have joined/
retired. In cases where the facility is secured by way of a third party
guarantee, the concerned, guarantor should be advised of the Bank's
action in the matter as indicated above and their confirmations
obtained before operations are allowed on the accounts.
44
 (xvi) When such a reconstitution takes place in a partnership firm which
has created an equitable mortgage of a property belonging to the
partnership firm as collateral security, for the bank's advances, an
agreement may be obtained from all the incoming partners for
continuation of the mortgage.

(xvii) In case such a firm has been granted a term loan, a supplementary
agreement should be obtained.

(xviii) Conversion of partnership firm into private limited company :

In respect of conversion of partnership firm into a private limited

company, following procedure should be followed :

(a) The branch should request the party to furnish certificate of

incorporation from the Registrar of Companies (RoC). Relevant
Memorandum and Articles of association should also be obtained.
(b) Branches should obtain a reconstitution letter whereby outgoing
partners and the private limited company confirm that the
documents in respect of various facilities executed by the
partnership form would be binding and enforceable and also they
confirm the balance outstanding in various accounts of the
partnership firm as of a particular date.

(c) It is also advisable to take a fresh LAD/confirmation letter from

the company as well as guarantor/s in respect of outstandings.

(d) If the equitable mortgage by deposit of title deeds is created in

respect of the property belonging to the partnership firm, the
same will continue to hold good so as to confirm and establish
that the proposed limited company has acquired the assets and
liabilities attached to the partnership firm. In such case, a
confirmation from the limited company that the equitable
mortgage created in respect of the property belonging to the
partnership firm shall continue to be the security for the limits
permitted to be utilised by the limited company and, therefore,
need not be disturbed, should be obtained.

(e) If the mortgage by deposit of title deeds (equitable mortgage) is

created by the guarantor or a third party to secure the advances
granted to the partnership firm, in that event, the guarantor must
also confirm the acceptance of conversion of the partnership firm
into limited company and agree to the arrangement of limited
company being allowed to continue to avail the facilities granted
to the partnership firm in which case, the guarantor should
execute a fresh guarantee and a letter should be obtained
confirming the creation of mortgage by him and requesting
further to the effect that equitable mortgage created by the
guarantor/s will be subsisting and enforceable and binding upon
the guarantor/s and shall not be disputed by the guarantor/s or
by the limited company merely on the ground of change of
constitution. In such event, a resolution by the limited company
requesting continuation of facility upon security of mortgage of
guarantor's property and requesting guarantee to continue and if
required, to execute fresh guarantee favouring Bank should be
obtained.
45
2.14 Hindu undivided family

(i) The borrowal accounts of hindu undivided family or joint hindu family
are coupled with various legal complexities. As such branches should
take all precautions enumerated in Book of Instructions Para no.
2.53 Chapter-II Volume-1 while dealing with such accounts.

(ii) Following precautions are also to be taken :

(a)The advance can be granted for the ordinary purposes of family

business. If any advance is granted for purpose other than that in
the interest of hindu undivided family business, other
co-parceners will not be liable.

(b)Security documents should be executed by Karta (the eldest male

member of the family) on behalf of the family and other major
co-parceners.

(c)In case of a minor coparcener the guardian of the minor

coparcener must sign the security documents. As soon as the
minor coparcener attains majority, he should sign the security
documents signifying his assent to the undertaking given by the
major coparceners.

2.15 Limited companies

(i) At the time of entertaining a proposal for advance facilities from a

limited company, branches should call for all the credentials as are
required for opening a current account duly certified by the
authorised officer of the company. Further, they should scrutinise its
Memorandum and Articles of Association which should specifically
empower the company to borrow money and also charge its assets.
It should also be ensured that there are no restrictive clauses in this
regard. If a company borrows without a specific provision in the
Memorandum of Association, such borrowing cannot be ratified by the
general body nor can the bank utilise the security held against such
advance towards its adjustment.

In the case of a company engaged in trading, powers to borrow are

implied. The Articles of Association of the company should be
scrutinised to ascertain the mode of exercising the borrowing powers
and executing the documents. Further, it must be ensured that the
purpose for which credit facility is sought is consistent with the
objects of the company.

(ii) In addition to what is stated above, branches should obtain the

following:

(a) Copy of the resolution (LDOC-75 to 79, 100 and/or 131, as the
case may be) duly certified by the chairman of the meeting in
which it was passed. It should be ensured that the resolution has
been passed at a duly convened meeting of the board of directors
and not by way of a circular resolution.

(b) A certificate (LDOC-80) signed by the chairman confirming the

46
 compliance of the provision of the Companies Act.

(iii) Under Section 293(1) of the Companies Act, 1956, the board of
directors of a public limited company and of a private limited
company, which is a subsidiary of a public limited company, cannot
borrow in excess of the paid-up capital and free reserves without the
consent of the company in general meeting. Temporary loans
obtained by the company from its bankers in the ordinary course of
business are excluded from the purview of this section.

Loan may be considered to be temporary for the purpose of this

section if it is

(i) not granted for a period exceeding six months and

(ii) not given for financing expenditure of a capital nature.

Apart from these negative provisions, affirmatively a loan is a

temporary one, if it is repayable on demand or within six months.
Such a loan may be continued from year to year, but if it is made
repayable on demand, the requirement of the law is satisfied. The
temporary loan may be short term cash credit facility, overdraft
arrangement, discounting of bills (which are not in the nature of
accommodation bills) and other short term loans of a seasonal
character. The words "Company's bankers" would ordinarily mean the
bankers shown in the annual or six monthly report of the company.

In view of the above , a certificate (LDOC-80) should be obtained

from the company that its total borrowings together with the limit
fixed by the Bank are not in excess of the limit prescribed under
Section 293(1) (d) of the Companies Act, 1956 for borrowings by the
board of directors and that the board of directors will ensure that
such limit is not exceeded at any time. Similar certificate should be
obtained annually signed by the chairman of the company.

(iv) Where a company borrows in excess of the paid-up capital and free
reserves with the consent of the general meeting, a certified true
copy of the resolution passed at the meeting should be obtained.

(v) Branches should ensure that the borrowing limits authorised by the
board of directors of the company are not exceeded except for a very
short period and in such cases, the accounts should be brought to
order at the earliest. If the company frequently approaches for
excesses beyond the authorised limits, it should be requested to
approach either the board or the general body, as the case may be,
for enhancement of the borrowing limits.

(vi) Branches should further ensure that any borrowing in excess of the
provisions under Section 293(1) (d) of Companies Act is immediately
adjusted or concurrence of the general body is obtained.

(vii) While submitting the review proposal annually, a copy of the latest
balance sheet should be obtained and scrutinised with a view to have
upto date information about the working and financial position of the
company.

(viii) Before granting credit facilities to a limited company, branches should

make a search in the books of the Registrar of Companies to
47
 ascertain that there are no subsisting charges on the assets of the
company proposed to be charged to the Bank. Search should also be
made at the time of review of the facilities. If any new or additional
charge has been registered by the borrowing company without the
knowledge of the branch, the details thereof, should be reported to
the Regional Authority.
After the search has been carried out, a report has to be prepared
and kept on the records of the branch. Branches may entrust this
work to the Bank's local advocates or some other outside agency,
but subject to the approval of Zonal Authority, as obtaining a search
report requires expertise. A fee of Rs. 100/- per transaction/search
report, to be recovered from borrower may be paid. However, taking
action as necessary based on the report will be the responsibility of
the branch concerned.
(ix)
(a) The charge created by the company or any modification to the
existing charge should be registered with the concerned Registrar
of Companies within -30- days of the creation or modification of
the charge, as the case may be. Any omission to register the
charge will make it void as against the liquidator and any creditor
of the company and make the charge holder an unsecured
creditor.

Further, the company has to seek the condonation for the delay
from the Company Law Board which would involve considerable
time and expense for the company. If the Company Law Board
condones the delay and extends the period for filing, the charge
takes effect from the date of the documents, but the order of the
company Law Board shall not prejudice any rights acquired in
respect of the property before the charge is permitted to be
registered by the Company Law Board.

The Registrar of Companies may, at his discretion, condone the

delay upto -30- days, provided he is satisfied that the delay is
genuine. The charge should be registered with the Registrar of
Companies having jurisdiction over the place, where the company
has its registered office irrespective of the place where the
property is situated or advance is granted.

(b) The Department of Company Affairs, Ministry of Law, Justice and

Company Affairs have issued an amendment to existing rules for
registration vide their notification dated 21.03.95 bearing No. GSR
No. 283(E).

Certain important changes arising out of the said notification are

as follows :

(1) All forms to be filed with the registrar of companies henceforth

under Form No. 8 or Form No. 10, or Form No. 17 alongwith
Form No. 13 shall be filed in triplicate together with copy of
the instrument creating the charge or modifying the charge or
satisfying the charge with appropriate fees for the purpose.

(2) All forms shall bear the signatures of the authorised official of
the company as also the signature of charge-holder.

48
(3) The accompanying copy of the instrument or deed relating to
property situate in India wholly or in part creating the
charge/modifying the charge or satisfying the charge, shall be
verified by a certificate of a responsible officer of the company
stating that it is a true copy of the original instrument or deed
or by a certificate of a public officer given under and in
accordance with provisions of Section 76 of the Indian
Evidence Act, 1872.

(4) Where the instrument/deed relates solely to any property

situate outside India, a copy of the instrument/deed shall be
verified by certificate under the seal of the company or the
certificate of authorised officer of the company or under the
hand of some person interested in the mortgage or charge on
behalf of such person other than company, stating that it is a
true copy.

(5) The Registrar shall affix a stamp on the relative forms and
accompanying instruments with the word `Registered' under
his signature with date and a copy thereof be delivered to the
company and the charge-holder.

(6) The register of charge shall be kept open at the office of the
Registrar of Companies for inspection by any person on
payment of a fee of Rs. 10/- for each inspection. Thus the new
procedure envisages filing of the prescribed form together
with the instrument evidencing the charge under signatures of
both the borrower company as well as the charge-holder.
Once the form and instrument evidencing charge are filed in
triplicate and requisite fee paid, the Registrar of Companies
will affix on all the three copies and the accompanying
instrument (by a rubber stamp) the impression "Registered"
and sign the same. The first copy shall be taken on the record
of Registrar and duplicate and triplicate copies of the form
alongwith copy of instrument evidencing
creation/modification/satisfaction of charge will be returned to
the company and the charge-holder concerned. Under this
procedure there would be no necessity of issuing any separate
certificate of registration of charge as the endorsed document
itself will constitute such a certification.

Simplified procedure, as stated above, will ensure that

documents are registered on the same day and are returned
to the company/creditor across the table. Branches should,
therefore, obtain registration of charge/s over assets of
borrower companies, by signing the appropriate form
alongwith a true copy of the instrument evidencing creation/
modification/ satisfaction of charge as the case may be. It
may be added that while filing the particulars of charge jointly
with the company the details as are required to be filled-in in
the forms such as name and registration no. of the company
and the essential terms and conditions of the security and the
extent of operation of charge etc. will have to be mentioned in
the form to be filed. This will ensure that no delay occurs
when the forms are presented for registration and would
facilitate obtaining the registration certificate forthwith upon
filing of the charge. Forms are to be filed within 30 days from

49
 the date of creation/modification/satisfaction of the charge as
required under the provisions of the Companies Act, 1956.

We may also emphasise It is also emphasized that, as

required under the provisions of the Companies Act, when any
property is acquired by virtue of take
over/amalgamation/merger, etc. by a company and such
property is subject to existing charge/s then the acquiring
company is required to file the particulars of property acquired
subject to charge within 30 days from the date of such
acquisition/orders of court relating to merger, amalgamation
etc. Similar provisions would also apply when assets acquired
under a decree of any court are subject to charge of a creditor
and the charge continues to survive till satisfaction thereof.
Hence even in such cases particulars of charge are required to
be filed within 30 days from the date of issue of the certified
copy of decree.

(c) Branches should note that the period of limitation will commence
from the date of creation of the charge (i.e. date of the
documents) and not from the date of signing the Form No. 8
(LDOC-93). In case the office of Registrar of Companies is located
at a different centre, branches should send the relevant
forms/documents to our branch at the centre well within time, so
as to give the latter atleast -10- days time for filing them. Though
the company will have to sign the Form No. 8, in emergent
circumstances the branch may file the form duly signed by the
Branch Manager and completed in all respects.

(d) It should be noted that as per Section 125 of the Companies Act,
the following charges should be registered:

(i) A charge for the purpose of securing any issue of debentures.

(ii) A charge on uncalled share capital of the company.
(iii) A charge on any immovable properly, wherever situated, or
any interest therein.
(iv) A charge on book-debts of the company.
(v) A charge not being a pledge, on any movable property of the
company.
(vi) A floating charge on the undertaking or any property of the
company including stock-in-trade.
(vii) A charge on calls made but not paid.
(viii) A charge on ship or any share in ship.
(ix) A charge on goodwill, on a patent or licence under a patent,
on a trade mark or on a copyright or a licence under
copyright.
(e) Advance granted to any company against pledge of goods will not
be registered as the same is a fixed charge and not a floating
charge.

(f) It should be noted that supplementary agreements for increase in

hypothecation limit, additional security etc. should also be
registered.
(x) Fresh documents should not be obtained without the approval of the
Regional Authority if there is/are any intervening charge/s.

50
 Branches should note the following :

(a) If no subsequent charge has been created/registered in favour of

another creditor or bank, fresh charges should be registered after
obtaining renewal documents. The old charge in favour of the
Bank should be satisfied after making another search and
ensuring that the fresh charge has been registered in the books of
Registrar of Companies.

(b) Where a subsequent charge in favour of another bank or creditor

is created on the same security, fresh documents should not be
obtained, provided there is no change in the limit or the terms of
sanction. In such cases letter of acknowledgement of debt (LAD)
should be obtained once in two years.

(c) Where there is a subsequent charge in favour of another

bank/creditor and the limits are also enhanced, branches should
obtain (i) LAD for the old limit and (ii) fresh documents only for
the enhanced portion. Fresh charge should be registered only for
the enhanced portion of the limit and the subsisting charge for
the old limit should not be disturbed.

In case of (c) above, endeavour should be made to obtain a

consent letter from the subsequent charge holder to enable the
Bank to have a prior charge in respect of the increased limit. If
the consent letter is not obtained, our charge for the increased
limit would rank subsequent to the intervening charge created in
favour of the other bank/creditor. However, in both the cases our
charge to the extent of the increased limit should be submitted as
modification of our previous charge covering the old limit.

(xi) For the purpose of registration of charge, plant and machinery should
be considered as immovable property, when they are fixed to or
embedded in the earth, with a view to using them permanently. In
such cases, hypothecation should not be taken and it should be by
way of a charge on any immovable property including equitable or
legal mortgage. A charge created by debenture on such plant and
machinery also requires registration.

(xii) Where companies incorporated outside India are sanctioned credit

facilities in India, charge created over the property located in India or
abroad should be registered as detailed hereunder :

(a) Charges should be registered with the Registrar of Companies,

New Delhi by paying the necessary filing fees.
(b) In addition, charges should also be registered with the Registrar
of Companies of the concerned state, where the principal office of
the company is situated in India. Fees are not payable in this
case.
(c) Such charges should also be registered with appropriate authority
of the country where the company is incorporated, if such
registration is warranted under the laws of the country.
(d) Where the documents are executed by the company abroad, the
documents should bear the required stamp according to the law
of the country and the charge should be registered with the

51
 Registrar of Companies or any other authority in that country as
applicable. The documents should be notarially certified for the
execution thereof by a duly authorised official of the company and
the amount of stamp duty paid/payable. On receipt of the
executed documents in India, they should be restamped
according to the provisions of the Stamp Act of the State, in
which the principal office of the company is located.

A period of one month after the date of receipt of the documents

in the country is available for the purpose. Thereafter, the
charges should be registered as mentioned in (a) and (b) above.

(xiii) When the advance is repaid in full, satisfaction of charge should be

filed in Form No. 17 (LDOC-95) with the Registrar of Companies
within a period of -30- days.

(xiv) A company cannot give guarantees on its own behalf or on behalf of

third parties unless specifically authorised to do so under its
Memorandum of Association.

(xv) Branches should not cede second charge on the assets charged to the
Bank except for valid reasons. Necessary permission should be
obtained from the sanctioning authority.

(xvi) While sanctioning a term loan to a company, Bank often stipulates

equitable mortgage of company's fixed assets as security. Where the
company is also sanctioned other credit facilities, the charge on the
fixed assets should be extended to other securities obtained to
collaterally secure the said facilities

(xvii) While granting or renewing advance facilities to a joint stock

company, branches should stipulate that it should not, without the
Bank's consent, grant any loan or advance to any company or firm
except in the normal course of business or invest any money in
shares or debentures of any other company. In such cases, it is also
essential to provide that such permission granted by the Bank would
not make it liable for breach of any of the legal provisions by the
company. For this purpose, branches should obtain an undertaking as
APPENDIX III. This undertaking should be stamped as an
agreement.

(xviii) Conversion of a private limited company into a public limited

company:

Whenever a private limited company to whom credit facilities are

sanctioned converts itself into a public limited company, following
procedure should be followed :

(a) The branch should request the company to furnish a fresh

modified certificate of incorporation from the Registrar of
Companies (RoC), and a certified true copy of the said certificate
deleting the word `Private' by RoC should be kept on record
alongwith a true copy of the resolution submitted to RoC.

(b) It should be ensured that alteration in the name as per sub-

section (2) of Section 43-A is effected in the Memorandum of
Association, Common Seal and Name Board etc. also besides
52
 certificate of incorporation.

(c) A certified true copy of the board resolution passed by the

company confirming that the documents executed by the private
limited company in favour of the Bank are in full force and effect
and would continue to bind the public limited company as if said
documents were originally executed by the public limited
company itself.

(d) It is also advisable to take a fresh LAD/confirmation letter from

the company as well as guarantor/s in respect of outstandings.

(e) A copy of the revised papers should be clubbed with the relative
security documents.

2.16 Group/Associate Concerns

Two or more enterprises is said to belong to the same Group, if at any

time during the reporting period or during the period under review, the
financial or operating decisions of the said enterprise are controlled or
significantly influenced by the same enterprises/persons.

Two or more enterprises are deemed to be controlled by the

same enterprise/person when:-

y Controlling/substantial interest, i.e., holding of shares, conferring

voting rights of 20% and above, if by the same enterprise or by the
same individual himself or jointly with his/her close relative and/or;

y More than 50% of the directors/partners (excluding the ones

nominated by the Government of India/ Reserve Bank of
India/Financial Institutions/ Banks/ Debenture Trustees) in one
enterprise are the same and/or closely related to each other to those
in another enterprise(s); and/or

y Two or more enterprises have a contractual arrangements to share

the power to govern the financial and/or operating policies of the said
enterprises; and/or

y One company is subsidiary company( as defined under companies

act) of another company either by itself or through one or more
subsidiaries.

y If holding company or two or more company is the same company

Two or more enterprises are said to be under significant

influence by the same enterprise/person when:-

y Substantial interest i.e., holding of shares, conferring voting rights of

20% and above, if by the same enterprise or by the same individual
himself or jointly with his/her close relatives;

y Two or more enterprises employ the same key management,

personnel/s or their close relatives having authority and responsibility
for planning, directing and controlling the operational and financial
activities of the said enterprises; and/or

53
 y Two or more enterprises have entered into a joint venture to
undertake a common economic activity subject to joint
control/planning.

Bank would be very cautious in respect of taking up additional exposure

where one or more concern/s of a Group/associate concern has failed /
defaulted in meeting its financial obligation with our Bank and/or with
other banks/financial institutions. The following policy frame work shall
be observed in such cases:-
y No additional/new exposure and also the Bank shall endeavour to exit
from the existing exposures from all the concerned account/s of the
Group, providing the default is on account of internal reasons such
as lack of resourcefulness, inexperience of promoters/directors,
mismanagement, diversion of funds, major diversification/expansion
without adequate financial closure etc.
y If the default is due to external reasons, i.e., reasons beyond the
control of the enterprise/its promoters-directors, such as unforeseen
changes in government policies or natural calamities or act of God or
unforeseen sovereign risk, unforeseeable changes in the rupee parity
with hard currencies etc., provided the said default has materially
threatened the financial health of the Group as a whole and/or
feasibility and viability of the enterprise in respect of which a credit
decision is to be taken by the Bank, then
a. Not to take any additional/new exposure to the existing/new
enterprises of the same Group
b. Endeavour to exit from the concerned account of the Group in
case the Bank is already having any exposure.
y However, if there is no threat to the Group as a whole due to
external reason stated above, the Bank may consider to continue/ to
take additional or new exposure to the existing/new Group concerns
on merits of individual case.
y The decision as to the reasons for default and its materiality and
impact on the Group/individual enterprise, their feasibility and
viability shall be taken by the Zonal Head in respect of all accounts
falling within the powers of Regional Manager and by Chairman &
Managing Director or Executive Director in all other cases.
2.17 Large Corporate

Any Company, incorporated under the Companies Act, 1956 or under

any other statutory Law/Act, for the purpose of carrying out a business
activity, whose size of balance sheet is not below Rs 50 Crores.

2.18 Medium Corporate

Any Company, incorporated under the Companies Act, 1956 or under

any other statutory Law/Act, for the purpose of carrying out a business
activity, whose size of balance sheet is below Rs 50 Crores but is or
above Rs 10 Crores.

2.19 Small Corporate

Any Company, incorporated under the Companies Act, 1956 or under

54
 any other statutory Law/Act, for the purpose of carrying out a business
activity, whose size of balance sheet is below Rs 10 Crores.

Note : Balance Sheet Size - Sum of net owned liabilities and total
outside( on balance sheet) liabilities.

2.20 Large Borrower

Any borrower, not being necessarily a corporate borrower, having the

bank’s funded and non-funded exposure of and above Rs 10 Crores.

2.21 Medium Borrower

Any borrower, not being necessarily a corporate borrower, having the

bank’s funded and non-funded exposure below Rs 10 Crores but above
Rs 2 Lacs.

2.22 Small Borrower

Any borrower having the bank’s funded and non-funded exposure of Rs 2

lacs and below

2.23 Clubs, Associations and Societies

(i) As unregistered societies cannot be sued in law, credit facilities

should be considered only to clubs, and societies which are registered
under the Societies Registration Act, 1860 or the Companies Act,
1956 or the State Co-operatives Act.

(ii) Clean advances to clubs and associations should not be considered

and the secured facilities may be considered in special cases after
obtaining the approval of the Regional Authority.

(iii) The committee members, both existing and future, should guarantee
the facility sanctioned in their personal capacity. This is to ensure
that the committee members take personal interest in liquidating the
advances granted.

(iv) The clubs and associations should pass a resolution (as per LDOC-
81) and submit a certified true copy to the branch. However,
branches should ensure that the borrowings and charging of
securities are in conformity with the provisions contained in the
bye-laws.

2.24 Trusts

(i) Advances should be considered only for registered trusts.

(ii) Trust deed should confer specific powers to the trustees to borrow for
the purpose of the trust and also to charge its assets.

(iii) Advances to the trust should be guaranteed by all the trustees in

their personal capacity. Permission of the Charity Commissioner
should be obtained wherever necessary. The trust should pass a

55
 resolution (as per LDOC-82) and submit a certified copy to the
branch.

(iv) Advances to trusts should be considered only after obtaining prior

approval of the Regional Authority.

2.25 Agents and Attorneys

(i) Normally branches should insist on getting all documents signed by

the principal, even if advances are granted to agents/attorneys on
behalf of the principal. However, in exceptional cases branches may
consider granting credit facilities to agents and attorneys and get the
documents executed by them on the basis of power of attorney in
their favour.

(ii) In all such cases, branches should ensure that the power of attorney
granted by the principal in favour of the agents/ attorney is
unconditional, duly stamped and is in force as on date. It must have
been executed in the presence of magistrate/ notary public and
authenticated.

(iii) The attorney/agent should also be a major and of sound mind.

(iv) In case of a power of attorney granted by a partnership firm, it

should have been signed by all the partners.

(v) The power to open and operate an account does not ipso facto imply
the power to overdraw the account. Similarly, the powers to execute
documents, do not automatically imply the powers to borrow or
charge / pledge / hypothecate / mortgage / assign the securities/
assets belonging to the principal.

(vi) For further details refer to BOOK OF INSTRUCTIONS, PARA 3.11

CHAPTER-III OF VOLUME-1.

2.26 Receivers and Liquidators

Advances to receivers and liquidators can be considered only with the

prior approval of the Regional Authority and after ensuring that they
have the necessary powers to borrow by reference to the Court's order.
It would be in the Bank's interest to bind them personally.

2.27 Executors and Administrators

(i) An advance to an executor can be considered before obtaining the

letter of probate from a competent court for payment of estate duty
etc. However, such facilities should be granted on his personal
security only, as an executor does not acquire any power until and
unless the probate is granted in his favour. In case of joint executors,
they should be made jointly and severally liable for such advances.

(ii) In case of administrators, letter of administration should be obtained

before considering such request.

(iii) No advance as above can be considered by the branches without

56
 prior permission of Regional Authorities.

2.28 Schools, Colleges and Educational Institutions

(i) Normally all such institutions would be incorporated as a trust,

society or associations. In such cases, all the guidelines applicable to
financing a trust, society or Association as enumerated above are to
be made applicable.

(ii) The registration of the institution with the State/Central Education

Department as a recognised institution, must be a precondition for
considering such proposals.

(iii) Normally such facilities are granted for acquiring fixed assets like
building, buses etc. All precautions to be taken while financing such
assets should be adhered to in such cases also.

2.29 Local Authorities

(i) Local authorities like municipal corporation etc. are the corporate
bodies constituted/created by special statute of the Parliament or the
State legislation. Their capital is wholly subscribed by the
Central/State Government. These are artificial persons.

(ii) While considering granting of credit facilities to such bodies the

relative statutes and borrowing powers etc. should be carefully
studied and a resolution for borrowings from the bank duly passed by
the local body in accordance with its constitution should be obtained.

(iii) For further details refer to BOOK OF INSTRUCTIONS PARA 2.97

CHAPTER-II OF VOLUME-1.

2.30 Public sector undertakings and corporations

(i) Public sector undertakings and corporations are also constituted/

created by special acts of the Parliament/State Legislatures. As such
all guidelines applicable to local authorities are applicable to them.

(ii) Further, if they are incorporated as companies under Companies Act,

all guidelines applicable to granting of credit facilities to companies
are also to be made applicable.

2.31 Staff members and Staff related advances

(i) Branches are authorised to sanction credit facilities to staff members,

relatives of staff members and concerns in which relatives of staff
members are interested against Bank's time deposits, National
Savings Certificates, units of the Unit Trust of India, policies issued
by the LIC and government securities, provided they are held in their
names.

(ii) In all other cases, the proposals should be referred to the appropriate
authorities as per discretionary lending powers.

57
 (iii) Branch Managers should not sanction advances in their own cases
even against bank's own time deposits, but should refer the
proposals to the next higher authority.

(iv) Overdraft facility, other than the facility sanctioned under bank’s
specific scheme of ‘Staff Overdraft’ , should not normally be granted
to the members of staff. However, if it is granted at the specific
request of the staff member, branches should ensure that the facility
is not misused for trading or speculative purposes.

(v) Guarantee of a staff member for securing advances granted to

his/her relatives or third parties should not be accepted unless
otherwise stipulated by the sanctioning authority.

(vi) Loans should not be granted to third parties against securities in

which staff members have a share or interest.

(vii) Drought/flood relief loans should not be sanctioned to the staff

members unless permitted by the Corporate office /Head Office.

(viii) Under the Banking Regulation Act, 1949, particulars of maximum

total advances (secured and unsecured ) made at any time during
the year to the officers of the Bank or any of them severally or jointly
with any other person should be mentioned in the balance sheet.
Maximum refers to the maximum aggregate of any day of all the
accounts taken together. For this purpose, a register should be
maintained in the advances department of the branch wherein
balances of each account should be entered and the total for each
day should be advised to Head Office on half-yearly basis.

(ix) While extending credit facilities to officers and the relatives of senior
officers of banks, following guidelines issued by RBI should be
followed :

(a) Loans and advances to officers of banks :

No officer or any committee comprising, inter alia, an officer as

member, shall, while exercising lending powers, sanction any
credit facility to his/her relative. Such a facility shall ordinarily be
sanctioned, only by the next higher sanctioning authority. Credit
facilities sanctioned to senior officers of (Scale IV and above) the
Bank should be reported to the Management Committee of the
Board.

(b) Loans and advances and award of contracts to relatives of

senior officers of banks :

Any loan or advance granted to or any contract awarded to the

following should be reported to the Management Committee of
the Board by the sanctioning authority.

(i) Any relative of the senior officer of the Bank or

(ii) Any firm in which the relative of any senior officer of the bank
holds substantial interest or is interested as a partner or
guarantor or

58
 (iii) Any company in which the relative of any senior officer of the
bank holds substantial interest or is interested as a director or
guarantor.

(c) In the case of consortium arrangements, the above norms

relating to grant of credit facilities to relatives of senior officers of
the bank will apply to the relatives of senior officers of all the
participating banks.

(d) The following points should be carefully noted :

(i) The term Senior Officer refers to

(a) Any officer in senior management in Grade IV and above in

nationalised banks and

(b) Any officer in equivalent scale, in

1) State Bank of India and associate banks and
2) in any banking company incorporated in India.

(ii) The term 'relative' will have the same meaning as given under
2.33 - Advances to Directors of other Banks and
relatives of Directors of Banks-in this Chapter.

(iii) The term 'Substantial Interest' shall have the same meaning
as assigned to it in Section (5) (ne) of the Banking Regulation
Act, 1949.

(iv) The term 'credit facility' will not include loans or advances
against
1) Government securities.
2) Life insurance policies.
3) Fixed and other deposits, National Savings Certificates,
units of U.T.I.
4) Temporary overdrafts for small amount i.e. upto Rs.
25,000/- and
5) Casual purchase of cheque upto Rs. 5,000/- at a time. The
term 'Credit facility' will not also include loans and
advances such as housing loans, car advances,
consumption loans etc. granted to an officer of the bank
under any scheme applicable generally to all officers.

(e) In view of the above guidelines, branches should obtain a

declaration (as per APPENDIX-IV with necessary modifications)
from every borrower as under :

(i) If he is an individual, that he is not a specified near relation of

any senior officer of the bank.

(ii) If it is a partnership or H.U.F. firm, that none of the partners

or none of the members of the H.U.F. is a specified near
relation of any senior officer of the bank.

(iii) If it is a joint stock company, that none of its directors is a

relative of any senior officer of the bank. The declaration

59
 should also give details of the relationship, if any of the
borrower to any senior officer of the bank and it shall be made
a condition of the grant of any credit facility that if the
declaration made by a borrower as above is found to be false,
the bank will be entitled to revoke and/or recall the credit
facility.

2.32 Directors of our Bank

(i) Section 20(1) of the Banking Regulation Act, 1949 provides that no
banking company shall enter into any commitment for granting any
loan or advance to or on behalf of :

(a) any of its directors;

(b) any firm in which any of its directors is interested as partner,

manager, employee or guarantor;

(c) any company (not being a subsidiary of a banking company or a

company registered under Section 25 of the Companies Act, 1956
or a Government company) of which any of the directors of the
banking company is a director, managing director, managing
agent, manager, employee or guarantor or in which he holds
substantial interest;

(d) any company which is a subsidiary of a company described in (c)

above; or

(e) any individual in respect of which any of its directors is a partner

or guarantor. In short, the effect of the above provision is that
the Bank cannot enter into commitment for granting any loan or
advance to any individual, firm or company (including its
subsidiaries) in which our director is interested.

(ii) In exercise of its powers under clause (a) of the explanation to

sub-section (4) of Section 20 of the Banking Regulation Act, 1949,
the Reserve Bank of India has, however, stated that in the following
cases, provisions of Section 20(1) would not apply :

(a) Discounting or purchasing of any bill, which is not in the nature of

an accommodation bill;

(b) Granting of non-fund based facilities, such as guarantees;

(c) Loans or advances against government securities, life insurance

policies or fixed deposits of our Bank;

(d) Loans or advances to the NABARD.

(e) Loans or advances to a co-operative bank, the chairman or

director of which is also the director of the Bank;

(f) Loans or advances to educational institutions wherein directors of

the Bank are interested as members, provided such educational
institutions are not partnership firms; or

60
 (g) Loans or advances to any of its directors, who immediately prior
to becoming a director was an employee of the Bank and could be
granted such loan or advance in his capacity as an employee of
the Bank had he not become a director of the Bank.

(iii) Branches should note that a loan or advance granted to the trustee of
a trust, who is the director of a Bank will also be regarded as a loan
or advance granted to the director.

(iv) Branches should not, therefore, grant any advances to any of the
directors of our Bank or to any individual, firm or company in which
any of our directors is interested except advances against
government securities, life insurance policies or fixed deposits of our
Bank. As regards granting of non-fund based facilities, the cases
should be referred to the higher authorities, provided branches are
satisfied that:

(a) the parties have adequate and effective arrangements to meet

their commitments out of their own resources. In such cases,
branches should give full particulars of the sources from which the
commitment would be met by the parties.

(b) the Bank would not be called upon to grant any loan or advance
to meet the liability consequent upon the invocation of guarantee.
(c) no liability would devolve on the Bank on account of issue of
letter of credit or guarantee or co-acceptance of the bill by the
Bank.

(v) As and when any change in the board of directors takes place,
branches are advised about the details of concerns in which the
directors are interested, which should carefully be noted for
compliance. In case any of the directors of the Bank or any of the
parties in which our director is interested was/were sanctioned credit
facilities covered by Section 20(1) of the Banking Regulation Act,
1949 before his appointment, the facilities already sanctioned can be
continued till they are due for review, but under no circumstances the
parties should be granted any excesses over the sanctioned limits.
Such parties cannot be granted even adhoc loans or advances. Once
the initial period for which such facilities were granted expires, Bank
cannot review the loans or advances and the concerned parties
should make alternate arrangements.

(vi) According to Section 20A of the Banking Regulation Act, 1949, a

banking company cannot, except with the prior approval of the
Reserve Bank of India, remit in whole or in part any debt due to it by
its directors or the parties in which such directors are interested.
2.33 Directors of other banks and relatives of directors of our
Bank

(I) Reserve Bank of India guidelines in respect of granting of loans and

advances and awarding of contracts to directors of banks and their
relatives are given below :

(a) Unless sanctioned by the Management Committee (Board), banks

should not grant loans and advances aggregating Rs. 25/- lacs
and above to

61
 (ii) Directors (including the Chairman & Managing Director) of
other banks,

(iii) any firm in which any of the directors of other banks is

interested as a partner or guarantor and

(iv) any company in which any of the directors of other banks

holds substantial interest or is interested as a director or as a
guarantor.

(b) Unless sanctioned by Management Committee (Board) of

Directors, banks should also not grant loans and advances
aggregating Rs. 25/- lacs and above to

(i) any relative of their chairman & managing director or other

directors;

(ii) any relatives of the chairman & managing director or the

directors of other banks.

(iii) any firm in which any of the relatives as mentioned in (i) and
(ii) above is interested as a partner or guarantor; and

(iv) any company in which any of the relatives as mentioned in (i)

and (ii) above holds 'Substantial interest' or is interested as a
director or as a guarantor.

(II) Proposals for credit facilities for less than Rs. 25/- lacs, whenever
sanctioned by the authorities other than the Management Committee
(Board) should be reported to the latter.

(III) The following points should be noted by the branches :

(a) The term relative will include :

(i) Spouse,
(ii) Father,
(iii) mother (including step-mother),
(iv) son (including step-son),
(v) son's wife,
(vi) daughter (including step- daughter),
(vii) daughter's husband,
(viii) brother (including step-brother),
(ix) brother's wife,
(x) sister (including step-sister),
(xi) sister's husband,
(xii) brother (including step-brother) of the spouse,
(xiii) sister (including step-sister) of the spouse.

(b) The term 'Loans and advances' will not include loans or advances
against
(i) Government securities,
(ii) Life insurance policies,
(iii) Fixed deposits
(iv) Stocks and shares,

62
 (v) Temporary overdrafts for small amounts i.e. upto Rs. 25,000/-
and
(vi) Casual purchase of cheques upto Rs. 5,000/- at any one time.
(c) Loans and advances will not include housing loans, advances etc.
granted to an employee of the Bank under any scheme applicable
generally to employees.

(d) The term 'Substantial interest' shall have the same meaning as
assigned to it under Banking Regulation Act, 1949.

(e) The norms relating to grant of loans and advances are equally
applicable to awarding of contracts. In view of the above,
branches should :

(i) Incorporate in all loan applications a question as under :

(a) "Whether the applicant / any partner /director/ guarantor

is a director in a Bank or is related to a director of a
banking company.

(b) If yes, please state nature of relationship to the director

and the name of the bank in which he is a director."

(ii) Incorporate the information obtained vide (i) above in all

credit proposals.

(iii) Obtain a declaration, as per APPENDIX-IV, from every

borrower.

2.34 Pakistani nationals

Restrictions imposed by RBI as regards payment and advances to

Pakistani nationals are given in APPENDIX - V.

2.35 Landlords of premises occupied by the branches

(i) Where an advance is granted to the landlord for construction/

renovation of the branch premises, the terms and conditions thereof
should mutually be settled and incorporated in the relative lease
deed. Reserve Bank of India has given certain guidelines in this
regard as detailed hereunder :

(a) Interest on such advances should be charged as prescribed by

Corporate Office from time to time. The rate of interest charged
at the time of sanction should not be periodically revised as it has
a direct bearing on the rent mutually agreed for a lease period.
(b) The lease should be for a minimum period of 10 years, however
increase in rent may be considered after 5 years as prescribed in
Bank’s Premises Policy guidelines 2003-05
Branches should consider such advances against equitable mortgage
of the land and building and the proposal to that effect should be
submitted to Regional Authority.

(ii) Where the request of the landlord for granting of interest free deposit
is acceded to by the Bank, the following guidelines should strictly be

63
 adhered to

(a) Amount of deposit should not exceed the rent (net of income tax
to be deducted at source) for the premises for -3- months and in
special cases upto -6- months.

(b) Advance rent should be disbursed only after taking possession of

the premises.

(iii) Powers for sanctioning loans to landlords and sanctioning interest

free deposits of rent are vested with the authority under whose
powers the proposal to acquire premises falls viz. Zonal Committee
(Premises), Internal Committee of Premises, Management Committee
of Board .

(iv) The account should be reviewed yearly by Zonal Authorities.

(v) For detailed guidelines on above, please refer to Book of

Instructions, Volume 3.

2.36 Call loans to banks

Branches are not authorised to lend money to other banks or participate

in the local call money market unless specifically authorised. This does
not apply to discounting of TTs when the branches have surplus funds.

2.37 Non-banking financial companies

All proposals for financing to non-banking financial companies,

companies engaged in leasing and hire purchase activities irrespective of
the amount are to be forwarded to Corporate Office for prior approval.
(Refer Book of Instruction Volume - 5 - Chapter - XI)

2.38 Builders and contractors engaged in building construction

activities

(i) Branches should not sanction any facilities, whether fund based or
non-fund based, to builders and contractors of private buildings and
such proposals, if any, should be referred to the Corporate Office
through the Regional Authority. This restriction does not apply for
consideration of non-fund based limits secured by full cash margin.

(ii) As regards builders and contractors engaged in building activities

overseas and those engaged in construction of Government and
public buildings, credit facilities may be considered on merits as per
norms and procedures.

For detail guidelines on Real Estate Advances, refer to Book of

Instruction, Volume 5.

2.39 Army, Navy and Air Force personnel

While opening loan accounts of Army personnel, the branches should

obtain full particulars of the person, including the service number, rank,
arm of service and the unit to which he is attached. It is further
suggested that in case of default on the part of any officer to repay the
64
dues, the branches may address a communication to the Commanding
Officer of the unit in which the officer is working (or to any superior
authority if the concerned officer himself is the Commanding Officer).
The branches should approach the Army Headquarters only if the
Commanding Officer is unable to resolve the matter.

It may, however, be mentioned that there is no legal provision under

which the Army authorities can effect recovery of Banks' dues.

The above instructions will also be applicable mutatis mutandis in respect

of the accounts of personnel working in Navy and Air Force.”

65
 APPENDIX-I

DRAFT RESOLUTION TO BE PASSED BY THE TRUSTEES OF

THE TRUST

RESOLVED that pursuant to Clause ____________ of the Trust Deed

dated _______ the ______ (Name of the Trust) do become a partner in
the firm of M/s _____________________ wherein _________________
are also the partner, for the purpose of carrying on business of
__________________.

FURTHER RESOLVED that Mr. _________ M/s ___________ and

_________ the Trustee/s represent the Trust in the said partnership firm
and he/they is/are hereby authorised and empowered to sign all the
documents relating to any advance the firm may take from any Bank.
(Copy of this Resolution should be signed by all the Trustees and kept on
the Bank's record with other documents)

*.*.*

66
 APPENDIX-II

DRAFT INDEMNITY TO BE TAKEN FROM ALL THE TRUSTEES

AND OTHER PARTNERS INDIVIDUALLY

To,

Bank of Baroda,
______________
________________

Dear Sir,

Re : Advances granted to M/s .......... a firm wherein ............

Trust is a Partner.

You have granted an advance by way of loan/cash credit

facility/........../........../........./ (type of advance to be mentioned here)
to M/s .............. a partnership firm consisting of Mr.......... Mr......... and
............ Trust as the partners.

In consideration of your granting the above advance, we, so as to bind

ourselves jointly and severally and our respective heirs, executors,
administrators, estates and effects jointly and severally agree to
indemnify you and keep you indemnified against all claims, demands,
actions, proceedings, losses, costs, charges and expenses which may be
brought against you or may be incurred or suffered by you as a
consequence direct or indirect of your granting the aforesaid advance
AND to pay to you on demand the amount of any such claim, loss, costs,
charges and expenses with interest at ..... % # per annum and
additional interest at the rate of may be fixed by you or Reserve Bank of
India from time to time from the date of payment by you until the
reimbursement by us.

Yours faithfully,

(to be signed by all the Trustees and partners in their individual

capacities without mentioning that they are Trustees and partners.)

(# the rate to be as on/or an unsecured advance)

*.*.*

67
 APPENDIX-III

LOANS AND INVESTMENT UNDERTAKING

To,

Bank of Baroda,
________________
__________________

Dear Sir,

Re : Our Advance Account/s with you.

In consideration of your granting/continuing the advance facilities to us

and/or agreeing to give us certain accommodation in our advance
account/s and facilities, we, so as to bind ourselves and our successors
and assigns, agree with and undertake to you and your successors and
assigns that we shall not, without the prior permission in writing from the
Bank, grant any loan or advance to any company or firm, except in the
normal course of business or invest any money in shares or debentures
of any other company.

We also confirm that any such permission, if granted by the Bank at its
absolute discretion, shall be subject to our complying with the provisions
of all relevant Laws, Acts, Articles, rules and Regulations applicable to
such loans or advances or investments, and the Bank shall not be
responsible or liable for any breach thereof by the company.

Yours faithfully,

(This undertaking should be stamped as an agreement and executed by

the company in the same manner as other documents are to be executed
by it.)

*.*.*

68
 APPENDIX-IV

DECLARATION TO BE OBTAINED FROM EVERY BORROWER

I/We ............... carrying on the business in the name of ........... having

registered office at ............ hereby declare as under :

In case of Individual

= I am not a director or specified near relation of a director in a banking

company.

= I am a specified near relation (state nature of relationship) of

Mr............ who is the Chairman & Managing Director/Executive Director
/ Director of .......... Bank.

In case of a partnership firm :

= None of our partners is a director or near specified relation of a

director in banking company/

= Our partner Mr. ........... is a specified near relation (state nature of

relationship) of Mr. ............ who is the Chairman & Managing Director /
Executive Director/Director of ............. Bank.

In case of a Joint Stock company :

= None of the Directors is a director or specified near relations of a

director of a banking company.

= Our Director Mr. ........... is a specified near relation (state nature of

relationship) of Mr. ......... who is the Chairman & Managing Director /
Executive Director/Director of ........... Bank.

I/We agree that in case the above declaration transpires to be false, the
Bank shall have the right to recall the advance forthwith.

Date :

= Delete whichever is not applicable.

(Signature of Borrower)

*.*.*

69

PAYMENT AND ADVANCES TO PAKISTANI NATIONALS
Restrictions Imposed
EVERY BANK (including the State
Bank and its subsidiaries) SHALL
NOT in respect of accounts of any
individuals being a national of
Pakistan or any firm or association
of persons, any of partners or
members of which is a national of
Pakistan or any company the
registered office of which is
situated in Pakistan:
i. Make any payment to or by
order of or on behalf of such
person.
ii. Grant any loan, advance or
overdraft to such persons.
Instructions: Every bank should
ensure that the directive is
implemented in a manner which
would cause no trouble or
inconvenience to Muslims who are
nationals of India or nationals of
countries other than Pakistan.
All enemy properties movable or
immovable vest in the custodian
of enemy properties in India.
Branches are not to allow any
operation on the account/s and/or
deal with and/or part with any
property
*.*.*
70
APPENDIX-V
Remarks
EXEMPTIONS :
The following payments are
exempted from the restrictive
provisions as stated in Column 1:
i. Any payment to an
individual being a national of
Pakistan residing in India
provided the amount of such
payment together with
amount of any
previous payment to the
same persons made on or
after the 8th September,
1965 is not in excess of Rs
3000/-
ii. Any payment to a diplomatic
or consular office or mission
of Pakistan in India or any
diplomatic or consular officer
employed by such office or
mission
iii. Any transactions specifically
permitted or authorised in
writing by the Reserve Bank
of India
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER III

TYPES OF CREDIT FACILITIES AND SECURITIES

SECTION I

TYPES OF CREDIT FACILITIES

SR. NO SUBJECT
PAGE NO
3.1.1 GENERAL: 73
3.1.2 OVERDRAFT : 73
3.1.3 CASH-CREDIT : 74
3.1.4 DEMAND LOAN: 76
3.1.5 TERM LOAN: 77
3.1.6 BILLS PURCHASE/DISCOUNTING : 77

SECTION II

UNSECURED ADVANCES

SR. NO SUBJECT
PAGE NO
3.2.1 3.2.1 GENERAL 78
3.2.2 3.2.2 CLEAN/UNSECURED ADVANCES 78
3.2.3 3.2.3 TYPES OF UNSECURED ADVANCES 79
3.2.4 3.2.4 GUARANTEES BY THIRD PARTIES 82

SECTION III

TYPES AND CHARGING OF SECURITIES

SR. NO SUBJECT
PAGE NO
3.3.1 3.3.1 SECURITIES - PRIMARY & COLLATERAL: 86
3.3.2 3.3.2 TYPES OF SECURITIES: 86
3.3.3 3.3.3 MODE OF CHARGING OF SECURITIES: 87

71
 SECTION IV

VARIOUS FACILITIES AGAINST DIFFERENT TYPES OF

SECURITIES

SR. NO SUBJECT
PAGE NO
3.4.1 ADVANCES AGAINST GOODS 98
3.4.2 ADVANCES AGAINST DOCUMENTS OF TITLE TO
GOODS 110
3.4.3 ADVANCES TO DEALERS IN JEWELRY AGAINST
GOLD AND SILVER 111
3.4.4 ADVANCES AGAINST BOOK DEBTS 111
3.4.5 ADVANCES AGAINST SUPPLY BILLS 113
3.4.6 ADVANCES AGAINST HIRE-PURCHASE
TRANSACTIONS 116
3.4.7 ADVANCES AGAINST FIXED ASSETS 120
3.4.8 ADVANCES AGAINST MOTOR VEHICLES 136
3.4.9 ADVANCES AGAINST BANK’S OWN DEPOSIT 139
3.4.10 ADVANCES AGAINST SHARES AND
DEBENTURES 143
3.4.11 ADVANCES AGAINST GOVERNMENT
SECURITIES 154
3.4.12 ADVANCES AGAINST UNIT 64 OF UNIT TRUST
OF INDIA 157
3.4.13 ADVANCES AGAINST UNITS OF OTHER MUTUAL
FUNDS 157

LIST OF APPENDICES

APPENDIX NO SUBJECT PAGE NO

I SPECIMEN OF THE LETTER TO BE
ADDRESSED TO THE GOVERNMENT
DEPARTMENTS ETC. ON WHICH THE
SUPPLY BILLS ARE DRAWN 159
II PROFORMA OF SUPPLY BILL REGISTER
(PARTY-WISE) 160
III VALUATION REPORT ON IMMOVABLE
PROPERTY 161
IV MEMORANDUM FOR ADVANCES FOR
OVERDRAFT/DEMAND LOAN AGAINST
BANK'S OWN TIME DEPOSIT
RECEIPTS/RECURRING DEPOSITS 162
V FORWARDING LETTER - ADVANCES
AGAINST UNITS OF UNIT TRUST OF INDIA 164
VI DRAFT LETTER OF AGENCY 165
VII EXTENSION OF EQUITABLE MORTGAGE BY
WAY OF SECOND CHARGE 167
VIII LETTER OF UNDERTAKING 169

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 SECTION I

TYPES OF CREDIT FACILITIES :

3.1.1 GENERAL:

(a) Various credit facilities extended by bank can be classified into two
categories viz. fund based and non-fund based. When bank places
certain funds at the disposal of borrowers and borrowers avail these
funds, such types of credit facilities are known as fund based.
However, there are certain types of advances which do not involve
deployment of funds at least at the initial stage though in
contingencies funds are also involved. These are called non-fund
based advances.
(b) Fund based credit facilities are extended in any one of the following
manner :-
1) Overdraft
2) Cash-credit
3) Demand loan
4) Term loan
5) Purchasing/Discounting of bills
(c) While the above types of accounts are covered hereunder, non-fund
based facilities are covered in a separate Chapter.

3.1.2 OVERDRAFT :

When a customer maintaining a current account is allowed by the bank

to draw more than the credit balance in the account, such facility is
called an 'overdraft' facility. At the request and requirement of
customers temporary overdrafts are also allowed. However, against
certain securities, regular overdraft limits are sanctioned.

Salient features of this type of account are as under

(i) Overdraft accounts are maintained in current account ledgers.

Depending upon business requirements, for regular overdraft limits
either some folios in current account ledger are reserved or separate
ledger is maintained. Current account cheque book is issued to the
constituents.
(ii) All rules applicable to current account are applicable to overdraft
accounts mutatis mutandis.
Overdraft is a running account and hence debits and credits are freely
allowed.
(iii) Interest is applied on daily product basis and debited to the account
on monthly basis. In case of temporary overdraft, interest should be
applied as and when temporary overdraft is adjusted or at the end of
the month, whichever is earlier.
(iv) Overdrafts are generally granted against the security of government
securities, shares & debentures, National Savings Certificates, LIC
policies and bank's own deposits etc. and also on unsecured basis.

73
 (v) Temporary overdrafts should be allowed only on written request of
the customer as per guidelines mentioned hereunder:
(a) No ToD is to be allowed during first year of operation of
the account.
(b) No ToD is to be allowed at any rural branch in any
account.
(c) No ToD is to be allowed in any account other than a
current account of the customer.
(d) ToD is not to be allowed in those accounts also where
operations are not satisfactory including return of cheques
drawn by the accountholders for financial reasons. These
instructions are applicable to those accounts where
cheques deposited by the customers are frequently
returned.
(e) ToD may be allowed only in case of genuine need but not
more than once in a month and not more than 5 times in a
year.
(f) Limit At Semi-urban, Urban and Metropolitan Branches,
ToD may be allowed up to a maximum of 25% of the
average credit balance in the account during last 6 months
or up to the discretionary lending powers, whichever is
lower. The discretionary lending power in this context
refers to the DLP for per party F.B. regular plus per party
F.B. ad-hoc / excess.
(g) ToD must be got adjusted within 14 days of the drawing
through recovery only and ToDs should never be converted
into Demand Loan or any other credit facility.
A letter of recording should be obtained from a customer
when a temporary overdraft is granted to him. In case it is
decided to withdraw/reduce overdraft facility to the
customer, sufficient notice of the same should be given to
the customer.

3.1.3 CASH-CREDIT :

A cash-credit is an arrangement to extend short term working capital

facility under which the bank establishes a credit limit and allows the
customers to borrow money upto a certain limit. Under the system, bank
sanctions a limit called the cash-credit limit to each borrower upto which
he is allowed to borrow against the security of stipulated tangible assets
i.e. stocks, book debts etc. The customer need not draw at once the
whole of the credit limit sanctioned but can withdraw from his cash-credit
account as and when he needs the funds and deposit the surplus
cash/funds proceeds of sale etc., into the account.

Besides this, the facility of frequent and unrestricted transactions is

available.

Salient features of cash-credit system are as under :

(i) Sanction of limit : Bank sanctions the cash-credit limit after taking
into account several features as detailed in the foregoing chapters.
This limit is to be written in red ink on the ledger folio of cash- credit

74
 account. The drawings are restricted upto the sanctioned limits.
(ii) Sub-limits : Within overall cash-credit limit, sometimes sub-limits
against a particular commodity / raw material / stocks-in-process,
packing material and spares and consumables is also sanctioned.
While calculating overall drawing power the sub-limits sanctioned for
specific item should be taken into consideration.
(iii) Running account : A cash-credit account is an active running
account. There are no restrictions as regards number of debit and/or
credit transactions in the account. It is expected that all sales/
purchase/other transactions of the borrower should be routed
through this account. The account may also be permitted to go into
credit, without the facility being terminated.
(iv) Repayment : Cash-credit facility is technically repayable on demand
and there is no specific date of repayment. However, an annual
review of the account determines whether the facility is to be
continued or not.
(v) Opening of cash-credit account and operations thereon : The
operational guidelines applicable to current account will also apply to
cash-credit accounts as far as day-to-day operations of cash-credit
account are concerned. However, cash- credit accounts should be
maintained in a separate cash-credit ledger.
(vi) Application of interest and service charges :
(a) Interest is calculated on daily product basis, applied on monthly
basis and credited to P/L Interest Earned A/c.
(b) For credit balance lying in cash-credit account, no interest is
payable as cash-credit account is in nature of current account.
However minimum interest of Rs 10/- per month is to be charged.
(c) Service charges as per current account rules are to be levied.
(vii) Types of cash-credit limits : Depending upon the type of security
against which cash-credit limit is sanctioned, following types of
cash-credit limits are sanctioned :-
(a) Cash-Credit (Pledge) against pledge of goods
(b) Cash-Credit Combo- Limit against hypothecation of stocks
cum book debts
(c) Cash-Credit (Hypothecation) against hypothecation of stocks
(d) Cash-Credit (Book Debts) against hypothecation of receivables

(e) Cash-Credit (Government Supply Bills) against Hypothecation

of government supply bills
(f) Cash-Credit (Imports) against hypothecation of imported
goods
(g) Cash-Credit (Clean) against trust receipts.
NOTE : In terms of the bank’s guidelines , all the authorities are now
required to sanction a combo-limit of Cash Credit
(Hypothecation of stock-cum-book debt) even if the borrower
requests for only Cash Credit (Hypothecation of stock) facility or
Cash Credit (Hypothecation of Book-debts) facility. Thus, an
authority in JMGS-I to MMGS-III can sanction a

75
 combo-limit even if there is insufficient tangible
collaterals.
(viii) Calculation of drawing power :
Based on the value of security charged to the bank, the stipulated
margin is reduced and the advance value is calculated subject to
overall limits. Branches should not allow drawings in cash-credit
accounts beyond the drawing power. However, interest and other
charges may be debited exceeding drawing power. Drawing power is
calculated on monthly basis in case of cash-credit Combo-limit
against hypothecation and book debts and in other cases, as and
when there is change in the value of stocks.

3.1.4 DEMAND LOAN:

A demand loan is a loan sanctioned for a period of less than 3 years

repayable on demand. The loan is disbursed by way of single debit to the
account. The amount may be allowed to be repaid in lump sum or in
suitable installments, as per terms of sanction.

(i) Further debits : Demand loan is not a running account and as such
no further debits to an account is made subsequent to the initial
advance except for interest, insurance premia and other sundry/
incidental charges.
(ii) Credits in the account : There are no restrictions as regards to the
number of credit entries, as an amount credited to a loan account is
in reduction of the borrower's liability to the bank.
(iii) Repayment : Although all demand loans are payable on demand and
in theory generally repayable in lump sum, in practice, repayment
schedule is fixed by way of monthly/ quarterly/half-yearly
installments. Loan repayable within a period of less than 3 years are
known as demand loan, in our Bank.
(iv) Interest : Interest is calculated on debit products on daily product
basis and applied on monthly basis (except in the case of agricultural
advances) and credited to P/L Interest Earned Account.
(v) Accounting procedure :
(a) For each demand loan, a separate account is maintained in
Demand Loan Ledger (R-92).
(b) Full particulars of the borrower, limit sanctioned, securities, rate
of interest, repayment schedule and segment etc. are written in
ledger account. Every account is to be properly indexed.
(c) No cheque book is issued in loan accounts. However, while
allowing drawings/disbursements a loose leaf cheque is got signed
by the borrower and posted in the ledger account.
(d) Depending upon volume of business, branches should either
maintain separate ledgers or allocate separate folios to each
segment viz. Agriculture, SSI, RTO, Business Enterprises, Retail
Traders Professionals, Non-priority Sector, Miscellaneous, etc.
(vi) Granting of additional loan :

76
 (a) fresh loan account should be opened for every new advance
sanctioned and a new DP Note be taken.
(b) When the branch sanctions further loan against the same
security, existing account must be liquidated and a fresh loan
account should be opened.
3.1.5 TERM LOAN:

(i) Definition :A term loan is an advance allowed for a fixed period

either in lump sum or in installments and which is repayable
according to a schedule of repayment as against on demand and at a
time.
(ii) Period : A term loan is granted for a period of 3 years and above
but not exceeding 15 years except in case of scheme specific advance
e.g. Housing Loan, where repayment period of more than 15 years is
permitted.. However, generally a repayment period of 3 to 7 years is
considered taking into account repayment capacity of the borrower,
cash generation etc.
(iii) Purpose : Term loans are generally granted to meet the need of
capital expenditure i.e. acquiring of fixed assets like land, building,
plant & machinery etc. for the purpose of setting up of new units or
expansion, modernisation, renovation, replacement of existing units
or rehabilitation of sick units.
(iv) Repayment : A suitable repayment schedule is fixed and accordingly
loan is repaid in installments.
(v) Accounting procedure :
(a) A separate account of each borrower is maintained in Term Loan
Ledger.
(b) No cheque book is issued.
(c) Other things as applicable to demand loan
(vi) Interest : Interest is applied on daily product basis, debited to the
account on monthly basis and credited to P/L Interest Earned
Account.
(vii) Security : Generally term loans are granted against the security of
immovable properties, plant & machinery, vehicles etc.

3.1.6 BILLS PURCHASE/DISCOUNTING :

These represent advances against bills of exchange drawn by the

customers on their clients. Bills are either purchased or discounted by
banks. Demand bills are purchased and usance bills are discounted. Bills
may be either clean or documentary. Bills accompanied by title to goods
i.e. R/R, MTR, etc. are called documentary bills. Bills without such
documents are known as clean bills.

Documents under bills are either deliverable against acceptance or

against payment.

Detailed guidelines about this type of financing are given in Chapter IV

on 'Bills Purchasing and Discounting' of this volume.

77
 SECTION - II

UNSECURED ADVANCES :

3.2.1 GENERAL:
Advances can be granted to the borrowers either on secured basis or
unsecured basis. When a tangible asset of the borrower is taken as a
security by the bank for lending him, the advance could be called
'Secured Advance'. When the amount is lent to the borrower only on the
basis of his own creditworthiness without insisting on tangible security
like land, building, plant or stocks the advance is called 'Unsecured or
Clean'.
We will deal first with unsecured advance and later on cover different
types of securities and secured advance facilities.
3.2.2 CLEAN/UNSECURED ADVANCES:
(A) 'Clean' or 'Unsecured' advances are granted only to the well known
clients with utmost integrity. Bank generally discourages granting of
clean advances, however branches are permitted to sanction clean
loan under retail lending schemes formulated for the purpose. The
details of such schemes are available in Book of Instruction Volume
16 on Retail Lending” They are granted only in very deserving cases
and mainly are short term finance in nature. In cases of small
borrowers bank considers granting of purpose oriented loans of
smaller amount on clean basis considering their inability to provide
any security. Many a times bank insists upon providing of a personal
guarantee by a third party for clean advance to the borrower.
(B) Following facts should be taken into account while considering clean
advances :
(a) The borrower should have established place of business in the
locality/town where he is operating.
(b) He should have good reputation in the market and no adverse
features about his business are commented upon.
(c) He should have sufficient source of income to repay the advance
together with interest.
(d) The limit considered should be need based and should not be
large vis-a-vis the means and the level of activity. In no case it
should be disproportionate to the known means of the borrower.
(e) The facility should generally be considered for a short period and
for a specific purpose or for meeting unforeseen contingencies
and not as a regular arrangement.
(f) Borrowers dealing in commodities covered under selective credit
control directives of Reserve Bank of India should not be granted
clean facilities except to the extent and of the nature permitted
under the provisions of those directives. Granting of clean
facilities should not defeat the purpose of any of the directives
issued by Reserve Bank of India and the Bank.
(g) Salaried persons should not be granted clean advances except
under special schemes formulated by the Bank.
(h) Clean advances should not be granted to any person against the

78
 personal guarantee of a staff members.
(i) While granting clean facilities, the borrower's commitments to
outsiders, if any, should be studied in detail and it should be
ensured that they are reasonable in relation to the business and
of the borrower. Clean facilities should not be granted to
borrowers who are indulging in over trading, speculative activities
and/or living beyond their means.
(j) Before granting clean facilities, borrower's requirements should be
assessed as in the case of a secured advance.

3.2.3 TYPES OF UNSECURED ADVANCES:

Clean advances can be granted by way of loan or overdraft or by way of
financial accommodation of temporary nature.
(i) Temporary overdraft : Bank does not encourage its customers to
issue cheques on their current accounts beyond the balance
available. Only in very special circumstances branches may consider
allowing temporary overdraft in the current accounts of their
customers as per guidelines issued by the Bank from time to time.
The existing guidelines are mentioned below:.
(a) No ToD is to be allowed during first year of operation of
the account.
(b) No ToD is to be allowed at any rural branch in any
account.
(c) No ToD is to be allowed in any account other than a
current account of the customer.
(d) ToD is not to be allowed in those accounts also where
operations are not satisfactory including return of cheques
drawn by the accountholders for financial reasons. These
instructions are applicable to those accounts where
cheques deposited by the customers are frequently
returned.
(e) ToD may be allowed only in case of genuine need but not
more than once in a month and not more than 5 times in a
year.
(f) At Semi-urban, Urban and Metropolitan Branches, ToD
may be allowed up to a maximum of 25% of the average
credit balance in the account during last 6 months or up to
the discretionary lending powers, whichever is lower. The
discretionary lending power in this context refers to the
DLP for per party F.B. regular limit plus per party F.B.
ad-hoc / excess.
(g) ToD must be got adjusted within 14 days of the drawing
through recovery only and ToDs should never be converted
into Demand Loan or any other credit facility.
The overdraft granted beyond discretionary powers should be reported to next
higher authority for confirmation on fortnightly basis. Branch should follow up
for recovery of the amount. Interest at commercial rate as advised from time to
time should invariably be recovered. A letter of recording in Form No. LDOC 50
should invariably be obtained when temporary overdraft is sanctioned with
pre-arrangement. Branches may also refer to the Para 3.94 Chapter no II on
"Current Account" in Book of Instructions Volume 1 .

79
If the customer requests for frequent temporary overdrafts branch may consider
sanctioning him regular overdraft limit on merits instead of allowing temporary
overdrafts.
(ii) Drawing against uncleared effects :
(A) When a customer wishes to draw cheques against unclear balance i.e.
against the cheques deposited in his current account, sent for clearing but
not yet realised, branches in exceptional cases, may allow payment of such
cheques. This facility of drawing against uncleared effects is allowed only to
first class parties who maintain satisfactory and well conducted current
accounts at the branch. The facility may be sanctioned on a regular basis
with proper assessment. Allowing such facility on casual basis should be
done only when the Branch Manager is confident of recovery of paid amount
if the cheques drawn against are returned unpaid. Following additional
conditions should be considered before allowing the facility :
(a) Drawing against instruments in clearing should be allowed within
the discretionary powers vested with the Branch Manager.
Proposals falling beyond the powers should be submitted to
higher authorities for necessary sanction. Any drawing allowed
beyond the sanctioned limit/discretionary powers requires specific
confirmation.
(b) Drawings against clearing cheques even when sanctioned to first
class customers, the extent of the limits and the need therefor
should be subjected to a thorough scrutiny and periodical review.
The Branch Manager should exercise his discretionary powers
very sparingly.
(c) Such drawings should, as far as possible, be confined to bank
drafts and government cheques and where absolutely necessary,
drawings against cheques drawn by first class parties may be
allowed to a limited extent.
(d) Where drawings against third party cheques are to be allowed,
the names and other details of such parties should be ascertained
and their market-standing verified to ensure that the cheques
presented represent genuine trade transactions and would be paid
in the normal course. This is to prevent the facility being misused
for kite-flying operations through the medium of accommodation
cheques.
(e) Drawings against cheques drawn by the customers themselves or
by their associate concern should not be permitted unless the
sanction provides for such drawings.
(f) The facility should normally be of a temporary nature and
sanctioning of the facility on a regular basis should not be
encouraged. This is because the party's requirements of funds can
be considered by way of overdraft/cash credit after proper
appraisal and monitoring and such facilities are generally secured.

(g) It should be ensured that the cheques are drawn on banks which
are members of the local clearing house and that no drawings are
allowed against cheques drawn on non-member banks as their
cheques have to be presented for payment across the counter.
(h) In all cases, it should be verified whether the clearing transactions
of the parties have a bearing on their salesturnover.
Disproportionate turnover in clearing transactions could lead to

80
 the possibility of kite-flying operations.
(i) No banker's cheque against instruments presented in clearing
should be issued. Likewise, no cash payments should be made
against instruments sent in clearing, especially for large amounts,
until their fate can properly be ascertained and subject to the
transaction falling within the sanctioned limit/ discretionary
lending powers of the Branch Manager.
(j) Drawings should be allowed only against cheques/instruments
sent to the clearing house and are in the process of realisation.
(k) The facility can also be extended, in exceptional circumstances,
against cheques and other instruments which would be presented
for clearing on the next working day. In such cases, commercial
rate of interest should invariably be charged on the drawings
allowed.
Where the cheques/ instruments against which drawings were
allowed are returned subsequently, interest at commercial rate
should be charged from the date of allowing the facility to the
date of recovery.
Cheques received for clearing on the following working day should
not be debited to G/L Clearing Adjustment Account for the
purpose of drawings there against. Similarly, cheques returned
unpaid should not be debited to the said account pending
recovery of the amount.
(l) It should be ensured that the drawings are not allowed against
cheques returned unpaid for financial reasons and represented
subsequently.
(m) If the cheques against which drawings have been allowed are
returned in an account frequently, the reasons for return should
be carefully ascertained and the desirability of continuing/
extending the facility to the party or otherwise should be reported
to the Regional Authority.
(n) All safeguards applicable to clean advances would apply mutatis
mutandis to drawings against uncleared effects. The
guidelines/bank policy in regard to sanction/allowing of this
facility issued from time to time should invariably be followed.
(B) No DAUE is to be allowed in newly opened account for first 6 months
except in a very well-conducted account subject to following proviso:
(i) In Current/Savings Bank account – not more than 25% of the
amount of the instrument lodged in clearing or the discretionary
lending power whichever is lower;
(ii) In Cash Credit / Overdraft account – not more than 25% of the
total funded Working Capital (excluding DA L/C limit) or 25% of
the amount of the instrument lodged in clearing or the
discretionary lending power whichever is lower;
(iii) When the instruments are by way of the bankers’ cheques / drafts
drawn on Government Departments, Public Sector Undertakings,
reputed corporates, then, an amount, higher than the above, may
be considered provided it does not exceed the lower of DLP and
the amount of the instrument. However, no DUE to be considered
against Bankers’ Cheques/ Demand Drafts issued by Co-Operative

81
 Banks.
(C) While sanctioning / reviewing regular DAUE facility, proper
justification must be recorded and factors like value of the account,
relationship, yield, average credit balance maintained in the account,
deposit relationship with the group, ancillary business or other
qualitative aspects must be stated.
(iii) Clean cash credit or clean overdraft or clean loan :
(a) When bank considers granting of credit facility for the purpose of
carrying on trade/manufacturing activity without insisting on
primary security taking into account the inability of the borrower
to offer tangible primary security and considering the
creditworthiness of the borrower, for meeting his day-to-day
requirements by way of running account a clean cash credit limit
can be sanctioned.
(b) Similarly, clean overdraft limits to the individuals/others may be
sanctioned in exceptional circumstances to meet the needs of the
borrowers.
(c) Clean loan facility is generally sanctioned to small borrowers who
have no security to offer and with the help of bank loan would
create self employment and pay back bank dues from their
earnings.
(d) In all such cases, bank should look for collateral security
(discussed later) if primary security is not available.
(e) Wherever possible, guarantee from a guarantor with sufficient
means be insisted.
(f) All other conditions applicable for clean advance will be applicable
to these types of facilities also.
(iv) Clean bills purchased/bills discounted : As stated above, for
customers with good standing bank considers certain credit limits on
regular basis or casual basis, facilities of purchase of cheques or
clean bills and discounting of clean bills are also considered.
Detailed guidelines on these are given in Chapter on 'Bills
Purchased/Bills Discounted' later in this volume.
3.2.4 GUARANTEES BY THIRD PARTIES:
(i) Personal guarantees :
We have seen earlier that advances sanctioned without tangible
securities can be clean advances. Here we may add one more
dimension to security concept. Basically a 'security' is an asset to fall
back upon when the borrower does not pay/is unable to pay the loan
amount. Similarly, a guarantee issued by a third party called
guarantor, to the bank undertakes to repay the loan amount
generally on failure of repayment by the borrower. Such a guarantee
though allows bank to fall back upon a guarantor for recovery of loan
amount, still such advance is considered an unsecured advance for
the purpose of classification and is to be treated as unsecured but
guaranteed advance.
Personal guarantees are also obtained when the position of the
borrower is weakened or collateral security obtained from the
borrower depreciates in value, the worth of the borrower may have
eroded and value of the asset given as a security would have

82
 depreciated. In the cases of private limited companies, bank would
insist upon personal guarantee of its directors for the advance to
strengthen its own position.
In addition to studying the overall net worth of the guarantor (total
assets minus total liabilities), as per the practice of the Bank, it may
be necessary to look into the various financial obligations, if any,
undertaken by the guarantor which, however, may not have devolved
on him as a liability as on the date of preparation of credit report.
While net worth of the guarantor is expected to have a reasonable
proportion with the overall financial obligations undertaken/ proposed
to be undertaken by a guarantor, the underlying tenet of insisting
guarantee of promoter/third party is to ensure their continued
interest in borrower's project/business and in the process to provide
a cushion to Bank for the credit facilities to the borrower. Hence, the
guarantor's overall net worth is to be viewed from that angle also.
In view of the above, following points may be kept in view :
(a) Credit report on the guarantor may be prepared as per existing
guidelines.
(b) However, in the relative credit proposal, while mentioning net worth
of the guarantor, branch may also state separately the aggregate
amount of obligations including proposed fresh/increase of liabilities
of the guarantor to our Bank/other banks and Financial Institutions
as guarantor. This information will indicate an overall position of the
guarantor's existing/proposed financial obligations from
banks/financial institutions.
(c) A statement as per format appended below be obtained from
guarantor covering details of guarantees given and outstanding as on
the relevant date (i.e. date of submission of information).
(d) Two copies of following documents should also be obtained from the
guarantors.
(1) Latest income tax assessment order/return/tax paid challans.
(2) Latest wealth tax assessment order/return/tax paid challans.
(3) Latest personal balance sheet/capital account/statement of
income computation.
(4) If in service, certificate from present employer, stating nature of
employment, gross and net emoluments per month.
(5) Details of firm etc. with details of advance facilities available to
the firms, other than at this branch.
(ii) Government guarantees :
Reserve Bank of India has advised that while considering proposals for credit
facilities for financing various schemes formulated by the State Governments,
the commercial viability of the projects should be examined instead of merely
relying on Government guarantee. Even after the advance is granted, effective
follow-up should be made as in the case of other industrial advances with a view
to ensuring that the funds are used for the purpose for which they were
granted, that the project for which the advance was made is working profitably
and that the financial position of the undertaking itself is satisfactory. If
necessary, the Bank should jointly with the concerned State Government,
impress on the borrowers the need to strictly observe the Bank's requirements.

83
(iii) Operational guidelines :
According to the Indian Contract Act, a contract of guarantee is a
contract to perform the promise or discharge the liability of a third
person in case of his default. The guarantor should execute the General
Form of Guarantee (LDOC-33). Signatures on guarantee bonds should
not be attested.
There are two opinions about as to when the period of limitation starts
running as against a guarantor. One is that it starts from the date of the
guarantee and the other is that it starts from the date on which the first
demand is made on the guarantor (and not on the borrower). The safest
course would be to obtain LAD signed by the borrower and the guarantor
on expiry of every two years from the date of original documents.
Further, care should be taken that no demand is made on the guarantor
unless the Bank proposes to file a suit for recovery of advance against
the borrower and the guarantor. Otherwise, as and when any letter
demanding payment of dues is addressed to the borrower, branches
should simply endorse a copy of the letter to the guarantor with a
remark that 'it is for his information' or the branch requests him to
persuade the borrower to repay the dues 'or 'in case the borrower does
not repay the dues, the branch will be making a demand on him'.
A guarantee can be determined in the following circumstances :
(a) On a demand made by the Bank on the guarantor;
(b) On expiry of the notice given by the guarantor;
(c) On the failure or lunacy of the guarantor; and
(d) If the guarantor is a firm, on notice of failure or retirement of one
of its partners.
If a guarantor writes determining the guarantee from a certain date, the
account should be stopped immediately. The borrower should be called
upon to adjust the advance, failing which the balance should be
recovered from the guarantor. If the guarantee is by a firm, a fresh
guarantee letter should be obtained duly got signed by all the partners
individually and for the firm whenever there is a change in the
constitution of the firm.
Whenever an advance, which is guaranteed (by third parties), is renewed
or the terms of the advance are altered in any manner, the guarantor
should be advised of the same and his consent obtained thereto in
writing giving a reference to the guarantee letter signed by him.
Variation in the margin, rephasing of repayment schedule, granting any
reduction or increase in the rate of interest, release or substitution of
existing securities/guarantors etc. are few examples of alterations in the
terms of the advance facility. Any variance in the terms of the advance
made without the guarantor's consent would discharge the guarantor as
to the transactions subsequent to the variance.
Likewise, a contract between the Bank and the borrower making
compromise with him or promising to give him time for payment would
also discharge the guarantor even though he agrees to forgo his rights
by an agreement, either express or otherwise.

Before granting/recommending any waiver or substitution of personal

guarantee, branches should take the following factors into

84
 consideration:
(a) In case of waiver of guarantee, reasons why the guarantee was
stipulated earlier;
(b) Reasons why waiver or substitution of guarantee has been
sought;
(c) Worth of the guarantor and in case the borrower is a joint stock
company, interest of the guarantor in the company by way of
share holding;
(d) In case of substitution of guarantee, worth of the proposed
guarantor and his interest in the company in case the borrower is
a joint stock company.
(e) Financial position of the borrower (For this purpose balance sheet
for the last three years should be studied);
(f) Experience of the branch in regard to the accounts of the
borrower.
(g) Availability of collateral security.

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 SECTION - III
TYPES AND CHARGING OF SECURITIES
3.3.1 SECURITIES - PRIMARY & COLLATERAL:
(i) Assets of tangible nature when offered as a security for any bank
finance by the borrower could be either a 'Primary Security' or
'Collateral Security'.
(ii) A primary security is an asset which is offered by the borrower
against which bank grants finance or an asset which is acquired out
of the bank finance and is given as security to the bank for the said
finance.
(iii) Security obtained from the borrower to additionally secure the loan
sanctioned to him which may be a clean loan or loan secured by
primary security, could be called collateral security.
Here what is important is not the type of security which is offered but
the purpose for which it is offered. Hence in case of an advance to a
limited company security of land & building to be acquired out of
bank finance and then offered to bank as security, the land & building
will be primary security. If the same land & building is purchased by
the company from its own sources and bank grants cash credit
facility for working capital against stocks/debtors as primary security
but still asks security of land & building to additionally cover the cash
credit facility then the fixed asset of land & building will be called as
collateral security for working capital finance to the company.

3.3.2 TYPES OF SECURITIES:

(i) Fixed assets :
Assets like land, building, plant & machinery which are called fixed
assets, are taken as security by the bank. Bank finances the
borrowers to acquire these fixed assets and takes such acquired
assets as primary security or it can grant working capital limits
against stocks/debtors as primary security and take fixed assets
acquired by the company as collateral security.
(ii) Current assets :
(a) Stocks : Stocks are generally goods in trade. A manufacturing
unit purchases raw material, processes it and produces final
product. In this process, stocks of raw material, semi- finished
goods, finished products are lying with the unit. These stocks are
offered as security for the working capital limits. In case of
manufacturing unit besides the security of raw material,
work-in-process, finished goods the security of stores and spares,
packing material and goods in transit also can be accepted. The
details of such facilities are given later in this Chapter.
(b) Debtors : Any trading/manufacturing concern in its business will
have to sell some of its products on credit to its customers. In this
process debtors are created. Funds of the company get locked up
in these unrealised debtors and its cash flow gets affected.
However, these trade debtors are current assets and could be
taken as security. Bank lends against the security of debtors by
way of cash credit (hypothecation) against book debts. When the
company draws and holds bills of exchange, it can offer these bills
with or without title to goods to the bank as security and bank

86
 can finance by way of bills purchase (in case of demand bills) and
bill discounting (in case of usance bills). Detailed guidelines on
financing against debtors and bill finance is given later Chapter
IV of this Volume.
(iii) Bank's own deposits :
Bank grants credit to its customers against its own time deposits.
Demand loan/overdraft facilities can be sanctioned to the depositors
holding short/fixed/recurring deposits and other types of term
deposits by following Bank's usual norms details of which are already
covered in the Chapter V on 'Time Deposits' in Book of
Instructions Volume 1.
The advance can also be granted in exceptional cases against
security of third party deposit. However, no advance can be
sanctioned against deposit held at another branch even in case of the
depositor himself.
(iv) Other types of securities :
Bank finances against various other types of securities in the nature
of movable assets like government bonds, postal / national saving
certificates, shares & debentures of the companies, units of Unit Trust
of India and other mutual funds, LIC policies, public sector
undertakings' bonds or gold/silver and jewelry. Loan facilities are
granted against these types of securities which are covered
separately.
3.3.3 MODE OF CHARGING OF SECURITIES:
(i)Charging of securities means making it available as a cover for an
advance. This means the bank's right over the security is ensured by
legal procedures.
(ii)Selection of security should be appropriate depending upon the type
of credit facility, type of borrower and purpose.
(iii)Once the appropriate security is selected bank's charge on the
security should be ensured by observing necessary formalities, so
that in case of default by a borrower, the security will be available to
the bank to recover its dues.
(iv)However, it should be noted that whatever may be the mode of
charge, bank does not become the absolute or exclusive owner of the
property, but has only certain defined rights in it, until the debt due
is repaid.
(v)The important modes of charging of securities are given below with
brief explanation. Operational details of charging of specific securities
are dealt with in Section IV of this Chapter.
(A) Pledge
(B) Hypothecation
(C) Mortgage
(D) Assignment
(E) Lien
(F) Set-off
(A) Pledge :

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 (i) Definition :
Section 172 of the Indian Contract Act, 1872 defines the term
'Pledge' as under :
'The bailment of goods as security for payment of debt or
performance of a promise is called 'pledge'. The bailor is, in this
case, called the 'pledger' and the bailee is called the 'pledgee'.
Above definition reveals that :
(a) Pledge means bailment of goods,
(b) Its purpose is to secure payment of a debt or
(c) To secure performance of a promise. Any movable property
can be pledged. Delivery (actual or constructive) is necessary
to complete a pledge.
In case of Bank's advance against the pledge of goods, customer
is called the 'pledger' and the bank is called the 'pledgee'.
(ii) In case of default :
In case of default by the pledger to repay the debt the pledgee
may, after giving notice to the pledger, sell the goods pledged
with him.
(iii) Right of use of goods :
The pledger has no right to use the goods pledged.
(iv) Who can pledge the goods :
Any of the following may pledge the goods if they have the legal
possession of the same :
(a) The owner of the goods,
(b) The agent of the owner,
(c) The joint owner with the consent of other co-owner,
(d) A person can pledge the goods in which he has limited
interest. The pledge is valid to the extent of his interest.
(e) Pledge by seller in possession of goods after sale, may
constitute a valid pledge provided the pledgee acts in good
faith and has no notice of the previous sale of goods to the
buyer.
(v) Rights of pledgee :
(a) Pledgee may retain the goods pledged until the payment of
the debt or the performance of the promise is not fulfilled. He
may also retain the same for interest due on debt, or for
necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
(b) If the pledger fails to make the payment of the debt, the
pledgee has the right
Š to sell the goods pledged after giving the pledger
reasonable notice of sale.
Š to retain the goods as a collateral security,
Š to file a civil suit against the pledger for due amount, The
right to retain the article pledged and the right to sell it,
are alternative and not concurrent rights.
(c) If the pledger has obtained the possession of the pledged

88
 goods under a voidable contract i.e. by certain fraud etc. and
due to that pledgee suffers any losses, such losses may be
recovered from the pledger, only when the pledgee has
received the goods in good faith and without notice of the
pledger's defect of title.
(d) Once goods are pledged, pledgee steps into the shoes of the
pledger. It means the pledgee's rights are not limited only to
his interest in the pledged goods, but in case of depreciation
of goods and injury, the rights are extended upto legal
remedy against third party as if he is the owner of the goods.
(e) If the pledgee has incurred any extraordinary expenses for
preservation of the goods, he may recover the same from the
pledger. For recovering such expenses, pledgee has no right
to retain the goods, but he can sue the pledger for the same.
(f) At the time of contract of pledge, pledger must inform to the
pledgee about the defect of goods pledged. If pledger fails to
disclose the facts, pledgee will be free from his liability in case
of any loss in goods pledged.
(g) Pledgee's right of sale is not barred by the law of limitation.
(vi) Duties of pledgee : (As also rights of the pledger)
(a) If the pledger has performed his promise or has repaid the
loan and interest (if any) the pledger has right to get back his
goods pledged. It is called the right of redemption.
(b) If the pledger fails to pay the debts or in performance of his
promise within the time, he has right to get back the same
property on his performance or payment provided the same is
not already sold by the pledgee.
(c) The pledger has right to recover the losses, if any, in the
goods pledged due to negligence of the pledgee. Pledger has
also right to receive the compensation, if the pledgee has used
the goods pledged contrary to the contract of the pledge.
(d) The pledger has right to receive any increase in the goods
pledged in the absence of an agreement to the contrary.
(e) The pledgee is responsible to take as much care of goods
pledged as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk,
quantity and value as the pledged goods.
(f) The pledger has, in addition to the above rights, of an
ordinary debtor which are provided to him by the money
lending acts.
(vii) In case of pledge of a limited company, there is no need to
register charge with the Registrar of Companies under Sec. 125 of
the Indian Companies Act, 1956.
(viii) Where pledged securities or goods are indivisible, the pledgee can
sell the securities or goods only of that much quantity by which
the loan amount will be satisfied.
(ix) In case of reconstitution of partnership firm, the pledged goods
cannot be released without the notice to the erstwhile partners,
otherwise bank will be held liable to the extent of the value of the

89
 pledged goods.
(x) If the pledger fails to fulfill his performance or to repay the debts,
the salaries of workers in arrears (if any) should be paid first.
Thereafter, the dues of the pledgee will be recovered from goods
pledged.
(xi) If the pledger has failed to repay the debts of other creditors also,
and they want to sell the pledged goods, they will not get any
amount from the sale proceeds until dues of the pledgee are not
satisfied.
(xii) Government has right to recover the income tax on priority, but it
will not be applicable in case of any charge i.e. pledge, lien or
mortgage because pledgee (or mortgagee etc.) is a secured
creditor.
(B) Hypothecation :
(i) Definition : In hypothecation, the possession of the property in
the goods and other movables offered as security remains with
the borrower and an equitable charge is created in favour of the
lender.
The term 'hypothecation' is described as under :
"Charge against property for an amount of debt where neither
ownership nor possession is passed on to the creditor."
Hypothecation is defined in none of the acts.
(ii) In case of pledge, the borrower's goods are placed in the bank's
possession under its own locks whereas in the case of
hypothecation, goods remain in the possession of the borrower.
(iii) If the borrower fails to liquidate the advance granted to him
against hypothecated goods, under agreement, he has to give the
possession of the goods to hypothecatee (bank). At this stage,
hypothecation converts into pledge and the banker as
hypothecatee enjoys the powers and rights of a pledgee. In case
of a default by the borrower, if the possession of goods
hypothecated to the Bank is not handed over to the Bank, the
hypothecation may be converted to pledge after giving due notice
to the borrower, in consultation with legal department / Bank's
advocate.
(iv) On borrower's default in repayment of advance, if the banker,
instead of making a claim over the goods hypothecated to him,
prefers to file a civil suit, it is held that the banker ranks as an
unsecured creditor, at par with other unsecured creditors, of the
borrower.
(C) Mortgage :
(i) Definition : Mortgage is the transfer of an interest in specific
immovable property for the purpose of securing the payment of
money advanced or to be advanced by way of loan, an existing or
future debt or the performance of the agreement which may lead
to a pecuniary liability. The borrower is called the 'mortgagor' and
the lender the 'mortgagee'.
(ii) Forms of mortgage : As per Sec. 58 of the Transfer of Property
Act, there are six types of mortgages :

90
 (a) Simple mortgage : The mortgagor, without delivering
possession of the mortgaged property, binds himself
personally and undertakes to pay the mortgage money and
agree, expressly or impliedly, that in the event of his failing to
pay according to contract, the mortgagee shall have a right to
cause the mortgaged property to be sold and the proceeds of
sale to be applied so far as may be necessary in payment of
the mortgage money, the transaction is called a simple
mortgage and the mortgagee is a simple mortgagee.
(b) Mortgage by conditional sale : Where the mortgagor
ostensibly sells the mortgaged property on condition that on
default on the mortgage-money on a certain date, the sale
shall become absolute, or on condition that on such payment
being made, the sale shall become void, or on condition that
on such payment being made the buyer shall transfer the
property to the seller. The transaction is called a mortgage by
conditional sale and the mortgagee a mortgagee by
conditional sale. Provided that no such transaction shall be
deemed to be mortgage, unless the condition is embodied in
the document which effects or purports to effect the sale.
(c) Usufructuary mortgage : Where the mortgagor delivers
possession or expressly or by implication binds himself to
deliver possession until payment of the mortgage-money and
to receive the rents and profits accruing from the property or
any part of such rents and profit and to appropriate the same
in lieu of interest, or in payment of the mortgage-money,
partly in lieu of interest or partly in payment of the
mortgage-money, the transaction is called usufructuary
mortgage and the mortgagee a usufructuary mortgagee.
(d) English mortgage : Where the mortgagor binds himself to
repay the mortgage money on a certain date and transfer the
mortgaged property absolutely to the mortgagee but subject
to a proviso that he will re-transfer it to the mortgagor upon
payment of the mortgage-money as agreed, the transaction is
called an English Mortgage.
(e) Anomalous mortgage : A mortgage which is not a simple
mortgage, a mortgage by conditional sale, a usufructuary
mortgage, an English mortgage or a mortgage by deposit of
title deeds within the meaning of this section is called an
anomalous mortgage.
(f) Mortgage by deposit of title deeds/equitable mortgage
: In law an equitable mortgage is valid so long as the title
deeds are deposited by the mortgagor with the mortgagee
with the intention to create a charge there-against in any of
the town mentioned in Sec. 58 (b) of the Transfer of Property
Act or in any other town which the State Government
concerned has specified / may specify in this regard, by
notification in the official gazette.
(iii) The essential requisites of a mortgage by deposit of title
deeds:
(a) A mortgage can be created to cover payment as well as future
advances or a general balances that might be due in an
account.

91
 (b) There must be creditor-debtor relationship between the bank
and the mortgagor at the time of deposit.
(c) Actual existence of the debt is not necessary but even an
application for debt and its acceptance establishes this
relationship.
(d) A guarantor can also offer his property as security for the
advances to the principal debtor.
(e) A partner can mortgage his personal property for the
advances to the firm, but the firm's property can only be
mortgaged by all partners jointly.
(f) As far as possible, the depositor should deposit all the title
deeds which are in his possession.
(g) The delivery of the title deeds to the bank must be made by
the owner or owners of property jointly or by his/their agent
(attorney).
(h) Property may be situated anywhere in India but title deeds
can be deposited in any of the Presidency Towns viz. Calcutta,
Madras and Mumbai or in any of the cities/towns notified by
the State Governments.
(i) The deposit of documents of title must be made with the
creditor i.e. the bank.
(j) The documents of title must be deposited with an intention to
create mortgage of the property covered by it.
(iv) Rights & liabilities of mortgagor in an equitable mortgage :

(1) Right to foreclosure or sale.

(2) Mortgage when bound to bring one suit on several mortgages.

(3) Right to sue for mortgage money.

(4) Power of sale wherever valid.
(5) Accession to mortgagee in possession
(v) Release/Reconveyance of mortgaged property :
The immovable property mortgaged to the bank may be released
from the charge, on payment of mortgage debt in full by the
mortgagor, by any of the following three methods :-
(1) By an endorsement on mortgage deed itself,
acknowledging the payment of the whole or any part of
the mortgage money,
(2) By a simple receipt for the payment of the money due
under the mortgage,
(3) By the reconveyance of the mortgaged property to the
mortgagor.
(D) Assignment :
(i) Definition : Assignment means transfer of a right of an
actionable claim, existing or future.

92
 'Actionable claim' means a claim to any debt, other than a debt
secured by mortgage of immovable property, by hypothecation or
pledge of movable property, or to any beneficial interest in
movable property in possession, either actual or constructive, of
the claimant, which the Civil Courts recognise as affording
grounds for relief, whether such debt or beneficial interest be
existent, accruing, conditional or contingent.
(ii) 'A person is said to have notice' of a fact when he actually
knows that fact, or when, but for willful abstention from an
enquiry or search which he ought to have made, or gross
negligence, he would have known it.
(iii) Section 130 describes the manner in which an actionable claims
can be transferred, as follows :
The transfer of an actionable claim, whether with or without
consideration, shall be effected only by the execution of an
instrument in writing signed by the transfer or his duly authorised
agent, shall be complete and effectual upon the execution of such
instrument, and thereupon all the rights and remedies of the
transfer, whether by way of damages or otherwise shall vest in
the transferee, whether such notice of the transfer is hereinafter
provided be given or not.
Example : 'A' effects a policy on his own life with LIC and assigns
it to a bank for securing the payment of an existing or future
debt. If 'A' dies, the bank is entitled to receive the amount of the
policy and to sue on it without the concurrence of 'A's' executor.
The Transferor of actionable claim is called the 'assignor' and the
transferee is called the 'assignee'.
(iv) The main features of 'assignment' are as under :-
(a) An assignment must be in writing and signed by the assignor.
(Sec. 131)
(b) The interest of the assignor to the assignee must be clear.
(c) No particular form is necessary.
(d) No consideration is essential for validity of an assignment. In
order to make the debtor liable to the assignee, it is essential
that due notice of assignment be given to the debtor.
(v) Types of assignment :
There are two types of assignments :-
(a) A legal assignment : A legal assignment means an absolute
transfer of actionable claim which must be in writing and
signed by the assignor. The same must be informed to the
debtor.
(b) An equitable assignment : An equitable assignment means
handing over the possession of document(s) representing
actionable claim without observing formalities as described in
case of legal assignment.
(vi) The assignee enjoys absolute right over the debts assigned and
other creditor of assignor cannot get priority over the assignee.
The transferee of an actionable claim shall take it subject to all
the liabilities and equities to which the transferor was subject in
respect thereof at the date of transfer. It means the assignee

93
 cannot get a better title than that of the assignor.
(vii) Banks obtain the assignment from the borrower of book debts,
supply bills (representing money due from government
department) and LIC policies etc. No assignments are acceptable
from a judge, a legal practitioner or an officer of the court of
justice. (Section 130 of Transfer of Property Act, 1882).
(E) Lien :
(i) Definition : Lien is the right of a creditor to retain in his
possession the goods and securities owned by the debtor until the
debt has been discharged, but has no right to sell the goods and
securities so retained.
(ii) Types of lien :
Lien is of two types, particular and general.
A particular lien gives the right to retain possession only of
goods in respect of which the dues have arisen.
For example a carpenter can withhold the delivery of furniture
until his charges of manufacturing the furniture are not paid to
him.
A general lien gives the right to retain possession until the whole
amount is paid. It is acceptable in respect of all amounts due from
debtor to the creditor.
(iii) Banker's right of lien : Banker has a right of general lien
against his borrowers. Section 171 of the Indian Contract Act,
1872 confers the right of general lien on the bankers as follows :
"Banker .... may, in the absence of a contract to the contrary,
retain as a security for a general balance of account, any goods
bailed to them."
There are certain unique features about bank's right of general
lien, these are :
(1) No special contract to include general lien is required. it is
always implied unless there is any contract to the contrary.
(2) Right of sale is also available under bank's right of lien.
Therefore, it is said that banker's lien tantamounts to an
implied pledge.
(3) The banker's right of lien is not barred by law of limitation.
The Limitation Act only bars the remedy and does not
discharge debt. As such, banker has a right of lien against
time barred debt also.
(4) When banker exercises this right, property of goods remains
with owner even though the same is in possession with the
bank.
(5) Banker's right of general lien will convert into particular lien, if
bank indicates that a particular security was obtained for a
particular debt only. (For example - In case of advance
against fixed deposit receipt, if bank marks on the receipt the
word 'under bank's lien for demand loan account No. 150'.
In this case, such deposit receipt cannot be retained for a loan
other than demand loan No. 150).

94
 (6) If banker exercises its right of general lien under the rules, no
criminal procedure for offences under Sections 409 or 420 of
IPC can lie against it, because there is no criminal intention
behind it.
(iv) Cases in which right of lien can be exercised by the banker
(1) The banker possesses the right of general lien in case of all
the goods and securities entrusted to him in his capacity as a
banker.
(2) Right of lien is available in case of goods and securities
remaining in the possession of the banker after loan taken
against them has been paid. These securities can be retained
for the other dues of the same borrower.
(3) If the banker is unaware of the fact that securities offered by
the customer against personal loan, are in possession of the
customer in the capacity of a trustee, right of lien can be
exercised on these securities.
(4) The banker's right of lien is applicable on goods and securities.
Money deposited in the bank and the credit balance of the
account do not fall in the category of goods and securities. For
credit balances right of set off is available.
(5) Cheques deposited by a customer for collection could be
subject to banker's lien.
(v) Right of lien cannot be exercised in following cases :
(1) Where the goods and securities are owned by more than one
person, right of lien cannot be exercised for the loan granted
to any one of them.
(2) Right of lien will not apply on the bills of exchange or other
documents sent by the customer with the specific instructions
to utilise its proceeds for specific purpose.
(3) Where there is any contract inconsistent with the right
between banker and the customer.
(4) The goods and securities have been entrusted to the banker
as a trustee or as an agent of the customer.
(5) Where the goods and securities are entrusted to the banker
for some specific purpose.
(6) Right of lien is not applicable in case of safe custody of
articles.
(7) Where bonds are deposited with a banker, who is authorised
to cut off the coupons and collect them, the lien attaches to
the bonds as well as the coupons, because they come into his
hands as a collecting banker. In case the bonds are deposited
merely for safe custody, and the customer cuts off the
coupons and hands them over to the banker for collection, the
lien can be exercised only on the coupons and their
proceeds which come into his hands as a collecting banker.
(8) No right of lien can be exercised on the securities lodged to
secure a loan which is yet to be granted.
(9) To exercise the right of lien the possession of the property

95
 must be obtained lawfully in the capacity of the banker and
not otherwise.
(10) Banker has no right of lien on documents or valuables left in
his possession by the customer by mistake or negligence.
(11) A bank has no lien upon the deposits of partnership firm for
the balance due by one of the partners.
(12) Where shares are given in the bank for selling it on a future
date and to apply sale proceeds for specific purpose, the right
of lien will not apply.
(F) Right of set-off :
(i) Banker has right of set-off between two or more accounts
maintained by a customer, if one of them is in debit and their
relationship in both the accounts is of debtor and creditor.
For example, 'A' has taken an overdraft of Rs. 10,000/- in his
current account. He also has a savings bank account which shows
a credit balance of Rs. 12,000/-. Bank can combine these
accounts and can set-off the dues of current account from
customer's savings bank account.
(ii) The right of set-off is a statutory right which enables bank to
combine several accounts of a customer in his own right unless
there is any agreement expressed or implied to the contrary.
(iii) Before exercising the right of set-off a reasonable notice should
be given to a customer to avoid dishonouring of cheques drawn
by the customer being unaware of the situation.
(iv) Though the right of set-off is available to a banker as his legal
right banks take letter of set-off from customer. It helps the bank
to overcome future legal complications and it dispenses with the
need for notice.
(v) Application of right of set-off :
(1) Banker may exercise his right of set-off against customer's
two or more accounts provided both/all the accounts are in
the same name and must prima facie belong to the customer.
(2) Two or more accounts, though in different names, belong to
one person, right of set-off will apply. Example : A customer's
personal account and the account of proprietorship concern in
which customer is proprietor.
(3) Right of set-off can be applied to recover the firms debts from
partner's individual account, provided there is joint and
several liability of the partner. Same will apply in case of joint
accounts.
(4) Though the right of set-off is not applicable on future debts
but in case of insolvency of a person or liquidation of a
company, all future debts/contingent liabilities become due
immediately. In this case, banker will have right of set-off.
(5) In case of joint account with the instructions 'Former or
Survivor', funds are presumed to be owned by the former. In
such cases, debit balances of former's individual account can
be recovered from the joint account and vice-versa.

96
 (6) Banker may exercise right of set-off after the garnishee order
(nisi) is served and before the order absolute is received and
made effective.
(7) In case of the accounts of two firms with same set of partners
(identical firms) right of set-off will apply.
(8) Right of set-off is available in case of time barred debts also.
(9) Banker's right of set-off is a legal one. Therefore, it cannot be
treated as criminal breach of trust.
(10) There are certain circumstances in which banker is bound to
combine two accounts e.g. where a customer has a loan
account and a current account with credit balance and banker
holds security for the loan, on the insolvency of the customer,
banker is bound to combine these accounts and appropriate
the security for the consolidated balances of these accounts.
(vi) Non-application of the right of set-off :
(1) Banker cannot combine the accounts if by agreement these
are required to be kept separately.
(2) Banker cannot set-off the credit balance of customer's
personal account for a joint account of the customer with
another person.
(3) Right of set-off is available for existing debts and not for any
contingent or future debts.
(4) Right of set-off will not apply if a customer owns two
accounts, one in his personal name and another as a trustee,
administrator, executor or agent.
(5) If a lawyer has two accounts, one in his own name and
another marked as client's account, the two accounts cannot
be combined to set-off the dues of personal account.
(6) If a customer has two accounts, one in individual capacity and
another in the capacity of a guardian of a minor, these two
accounts cannot be combined to set-off the dues of customer's
individual account.
(7) In case where bank has sanctioned a loan against mortgage of
an immovable property and the bank receives notice of a
second charge on that property, the banker need not exercise
the right of set-off with the credit balance in another account
of the same customer. Because the second mortgage may
claim priority only for the amounts advanced by the banker
after receipt of the notice of second charge. Amount advanced
prior to that date, will not be subject to the second charge. In
such case, it would be preferable for the bank to stop the
account on receipt of the notice of second charge, to retain
the right of first charge and a new account may be opened for
further transactions. It will also avoid application of Clayton's
rule in this case.

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 SECTION - IV
VARIOUS FACILITIES AGAINST DIFFERENT TYPES OF SECURITIES
3.4.1 ADVANCES AGAINST GOODS:
(i) General :
Advances against goods i.e. produce, commodities and merchandise
are considered to trading as well as manufacturing concerns and be
granted only to parties;
(a) who are entirely trustworthy as the risks of fraud are particularly
great in this type of business;
(b) who are regular dealers in the goods against which advances are
granted;
(c) who do not over trade or speculate.
(d) who have adequate resources to pay shortfall in margin without
difficulty if prices of goods tend to fall; and
(e) who can thoroughly be relied upon to repay the advances without
recourse to a forced sale of goods by the Bank.
Goods which are not owned by the borrowers should not be
accepted as security. In other words, the goods should have been
fully paid for by the borrowers to the sellers.
The possession of goods is the vital factor in determining whether
the seller can have any lien on the goods which have not been
fully paid for by the buyer. The seller cannot have any lien on the
goods which are not in his possession. In the case of pledge, the
goods are in possession of the Bank or in the possession of the
Bank's approved clearing agents and as such the seller cannot
have any lien on such goods. In regard to hypothecation facility,
branches should grant advances only if the goods are lying in the
borrower's premises.
Goods are accepted as security in respect of credit facilities
sanctioned to trading as well as manufacturing concerns. The
following precautions should be taken in respect of such advances

(a) The goods pledged or hypothecated to the Bank should be

durable and not perishable new and marketable and should
not be old. Their quality and value should be easily
ascertainable. Manufactured goods should be in the standard
or original packing of the manufacturers. Goods repacked
should not generally be accepted.

(b) The permissible level of stock required to be held by each

borrower, should be assessed properly taking into account the
past trends, the expected level of operations, his share in the
business and other relevant factors. The borrower should have
a minimum stake of not less than 25% of the total value of
stocks. Excessive stock of any commodity should not be
permitted. Hoarding should be totally discouraged. There are
certain industry specific norms suggested by RBI for inventory
holding which should be adhered to.

98
 (c) Goods should be readily marketable. They should not be
subject to violent fluctuations in prices and/or rapid
deterioration in quality. Perishable goods or goods of
inflammable character should not be accepted for pledge.
(d) The stipulated margin should be retained at all times to
provide for any possible shortage in storage which might not
be noticed during inspection and fall in prices.
(e) Clean advances should not be sanctioned for the purpose of
providing margin stipulated by the Bank.
(f) In the case of advances against medicines, chemicals etc., it
should be ensured that the stocks are within the expiry date.
A declaration to that effect should be made by the borrower
while submitting monthly stock statements.
(g) Goods received by the borrower on consignment basis should
not be reckoned for arriving at the drawing power.
(h) Where there is a fall in the market price, the stock should be
re-valued and the borrower be advised to make good the
deficit in the account either by cash or by lodging additional
stocks. Under no circumstances, goods pledged should be
revalued upwards and drawings allowed.
(i) In the case of advances for manufacturing activities, the
goods would fall under various categories such as raw
materials, stores and spares, work in progress and finished
goods. The quantity of each item permissible and the period of
storage should be determined as explained in the Chapter on
'Working Capital Finance' in Volume 5. Raw materials
remaining in stock for an unreasonable period might mean
that the materials are defective or obsolete. Finished goods
lying for unduly long period may be due to unsaleability. In
the case of Work-in-progress, undue accumulation may be
due to problems connected with manufacture, defect in
materials/ process or any other reason.
The reasons should be identified and steps taken to ensure
that there is a proper movement of the materials or advance
is withdrawn against such items. The materials in stock should
be good and could be utilised for current/proposed
manufacturing operations. Materials which cannot be used
should not be accepted as security.
(j) Finished goods should be valued at the cost-price or market
price, whichever is lower. Stock-in-process should be valued
as per accepted norms. Care should be taken to verify the
elements of cost that go into for determining the cost- price.
(ii) Advances against pledge of goods :
Branches should scrupulously follow the guidelines given hereunder :
(1) Godown premises :
(a) It is preferable to select first class safe and secure godowns with
independent access. In case of storage of pledged stocks in
godowns without direct access :
(i) The facility should be allowed only after ascertaining that the
godowns with direct access are not available in that area and

99
 the parties have no alternative arrangements.
(ii) A letter of confirmation in the prescribed form is to be
obtained from the borrowers to the effect that the Bank is not
responsible for any loss or damage to goods stored in the
godowns and that the Bank will have no responsibility if
access to the godown is denied.
(iii) A letter of access in the prescribed form must also be obtained
from third parties from whom right of access to the godown is
required to be secured.
(iv) As per present structure of discretionary lending powers,
Branch Managers of the grade/scale II and above are
authorised to allow storage of pledged stocks in godown
without direct access. Branch Managers in grade/scale I
should seek prior approval of Regional Authorities.
(b) The flooring of the godowns should be cemented or so built that
the goods do not get damaged by dampness or water seeping
through. They should be pucca built with secured roofing and
strong doors and should be acceptable for insurance. The partition
walls dividing godowns from other rooms should be built upto the
roof.
(c) Preferably the godowns should be located in the market area.
Godowns situated at out-of-the way places, at a long distance
from the market place or the branch should be avoided.
(d) Where goods are stored in a rented premises, a declaration as per
LDOC 43 should be obtained from the owner of the premises that
he has no charge or lien over the goods and that the goods are
stored by the borrowers for the purpose of taking advance from
the Bank. He should also undertake to hold the goods free of any
future dues whatsoever owing to him by the borrowers and to
give the Bank free access to the godown at all times.
As per present administrative powers Branch Managers of
grade/scale I are not empowered to authorise storage of pledged
stocks in premises/godown belonging to parties other than
borrowers.
(e) Branches should obtain an authority from the borrower to pay the
rent of the godown hired by him directly to the debit of his
account.
(f) Care should be taken to protect the pledged goods from theft,
pilferage, sun, rains, damage by rats, insects, white ants, fungus,
dampness, etc.
(2) Name boards :
The Bank's name board should be prominently displayed outside the
godown unless the display of the same inside the godown is
permitted or it is waived altogether. The board may be displayed
inside the godown, if so permitted, very near the entrance in a
manner so as to attract the eyes when the godown is opened.

(3) Locking arrangements :

(a) All doors to godowns should be secured by padlocks with the
Bank's name engraved, the main door securely locked from

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 outside and the other doors locked from inside. The padlocks
should additionally be wrapped with cloth and sealed with the
Bank's seal in respect of godowns situated outside town limits.
(b) The padlocks should be changed periodically so that they are not
tampered with or duplicate keys prepared by unscrupulous
borrowers.
(4) Godown keys :
(a) The keys of the padlocks put on godowns should be retained in a
locked box, which should be kept with the Branch Manager /
Senior Manager / Joint Manager/ officer-in-charge of advances
department.
(b) The keys should be made available to godown keepers and other
authorised employees only, when the relative godowns are
required to be opened. Godown-keepers should not be allowed to
hold the keys overnight.
(c) Under no circumstances should the keys of godowns be delivered
to the borrowers nor the supervision of giving and taking delivery
of stocks be entrusted to peons.
(d) Delivery of keys to the godown-keeper and subsequent return by
him should be duly recorded in Godown Key Register.
(e) Godown locks and keys, which are not in use, should be held in
the joint custody in strong room and proper record be kept in key
register. Similarly, duplicate keys of the godown locks should be
kept in the strong room or cash safe under joint control.
(f) When the key of the godown is lost, the locks should be replaced
immediately.
(5) Suitable storage :
(a) Goods should be stored in a manner which will facilitate
verification, including marks and numbers on the packages at all
times. Goods should not be stored near the entrance door.
(b) In case stocks belonging to different borrowers are stored in one
godown, either owned or rented by one of the borrowers, a letter
of consent as per LDOC-44 should be obtained from the borrower
in whose name the godown stands or the rent receipt is issued.
This facility should be extended only to highly respectable
borrowers. Separate insurance policies should, however, be taken
out for the stocks belonging to different borrowers stored in the
same godown.
Branch Managers of grade/scale I are not empowered to authorise
for such storage.
(c) Whenever the branch has an occasion to advance against security
of produce stored loose in godowns prior to the date of taking
possession, the Manager should satisfy himself as to the quantity
of stocks by taking measurements of the cubic area covered by
the stocks and calculating the weight of the commodity for a
given cubic unit, besides verifying the details from the stock
register of the borrower. Special care should be taken to ensure
that the stocks so stored do not deteriorate in quality owing to
defective flooring or other storage conditions or due to openings
in the room. Godowns filled in prior to taking possession should

101
 not be accepted except from borrowers of long standing and
integrity. As far as possible, storage should be done in the
presence of the Bank's representative. Partial deliveries should
not be allowed in such cases.
(d) Borrowers should not generally be allowed to store goods which
are not pledged to the Bank. Where permitted specifically by the
Branch Manager the following conditions should be complied with
:
(i) Unpledged goods should be completely segregated from the
pledged goods. Records of the storage and delivery of
unpledged goods should also be maintained separately.
(ii) The borrower should give an undertaking to remove
unpledged goods whenever called upon to do so.
(iii) Unpledged goods should also be insured to the extent of their
full value.
(iv) Borrower should be made to understand that with regard to
unpledged goods, the godown-keeper will act upon the
instructions from the Bank.
(v) Borrower should agree that the unpledged goods will remain
at his sole risk and responsibility and that he will indemnify
the bank against any loss arising thereof.
(6) Bin cards :
The details of the stocks stored/delivered in the godown should be
recorded in the bin cards. Bin cards should be maintained by the
godown-keepers for each commodity or type of goods separately.
Card/s should be prominently displayed in the godown and updated.
The details recorded in the bin card/s and the stock registers
maintained at the branch should be identical. The physical stock must
tally with the balance of stock as per bin card.
(7) Salary of the godown-keeper :
When godown-keeper/watchman is posted exclusively for a single
borrower to look after his godown's day-to-day operations, his salary
and allowances should be recovered in full, from the concerned
borrower. The salary etc. recovered should be credited to P/L
Temporary Staff Recovery from Bank's Constituents A/c. However,
payment of salary etc. should be made to the debit of P/L Salary A/c
and other respective accounts.
(8) Procedure for pledge and delivery of goods :
(a) Instructions to godown-keepers or clerks regarding delivery or
acceptance of goods must be given in writing and such
instructions should be filed date-wise for any future reference.
(b) Where the borrowers intend to pledge the goods, following
procedure should be followed :
(i) They should submit godown storage memo or take delivery
memo duly filled in and signed. The original invoice or cash
memo in respect of the goods offered for pledge should
accompany the storage memo to verify the value and also to
ascertain that the payment for the goods is made by the
borrower. After the goods are stored in the godown,
godown-keeper should sign the memo in token of having

102
 accepted the storage and enter the particulars in the Stock
Register (R-41).
(ii) Stocks pledged earlier and subsequently delivered to the
borrower, should not generally be re-pledged.
(iii) Stocks not covered under the terms of sanction should not be
pledged.
(c) The procedure outlined hereunder should be followed in respect of
delivery of goods pledged to the Bank :
(i) A requisition for delivery of goods, duly signed by the
borrower/s should be obtained for each delivery.
(ii) A separate delivery order (Form No. 95) instructing the
godown-keeper to deliver the goods to the borrower/s or
his/their authorised representative (and not to third parties)
should be issued. Particulars from delivery orders should be
posted in the Stock Register. It should be ensured that the
outstanding balance in the cash credit account is invariably
covered by the advance value (drawing power) after delivery
of goods.
(iii) The godown-keeper should obtain the signature of the
borrower/s or his/their authorised representative on the
reverse of delivery order in token of having received the
goods.
(iv) The receipted delivery order should be held by the branch in a
separate file for any future reference and record
(v) Delivery of stocks should generally be supported by
corresponding credits in the accounts and the borrowers
should not resort to substitution of stocks on a regular basis.
(9) Calculation of advance value :
(a) For calculation of advance value of goods pledged, the cost price,
purchase price or market value, whichever is less should be taken
into consideration. In case of products manufactured by the
borrowers themselves, care should be taken that drawings are not
allowed against profit component. The stipulated margin be
thereafter reduced from the value of goods pledged.
(b) With a view to facilitate valuation at regular intervals, branches
should maintain a market rate register, especially in respect of
seasonal commodities, such as cotton, jute, foodgrains etc. to
show the weekly market price of all commodities against which
advances have been granted. The register should be kept
upto-date.
(c) In case the price of commodities pledged to the bank has gone
down subsequently, the advance value should be accordingly
adjusted/reduced.
(d) In case of advances to sugar mills, levy sugar should be valued at
the levy price fixed by the Government and free sale sugar
(including buffer stocks) at the average price realised in the
preceding three months' moving average or the current market
price, whichever is lower. The prices for this purpose will be
exclusive of excise duty.

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(10) Pledge in open compound :
(a) Stocks pledged as security (in the actual possession of the Bank)
are normally to be stored in a godown under Bank's lock and key.
In the case of very heavy items which cannot be kept in a
godown, the borrowers may, however, be permitted to store
goods in an open compound. Branch Managers in grade/scale I
are not empowered to authorise pledge in open compound. They
should seek prior permission of Regional Authority.
(b) Suitable precautions must be taken in such cases to ensure that
the goods stored in open compound are not removed without
prior permission from the bank.
(c) Quality of stocks stored in open compound must be such that
they would not deteriorate in weight, quality, form or other
properties de to exposure to open air, sun and rain.
(d) The storage arrangements are to be acceptable to the insurance
company, which would cover them against all risks including theft
and pilferage risks, as per bank's requirements.
(e) The open compound is to be secured by a wall or a barbed wire
fencing and bank's name board is to be fixed at the entrance or
within the compound at a conspicuous place. The compound must
also be properly guarded.
(11) Requirement of licences :
(a) A separate non-dealers possession licences should be obtained
when drugs are pledged.
(b) In the case of advances made to rubber dealers, our Cochin office
has obtained a licence in the name of the bank in terms of Section
14 of the Rubber Act. However, the concerned branches should
get their names registered with the Rubber Board. They should
also submit monthly returns in forms H and L to the Rubber
Board. These forms can be obtained directly from the Secretary,
Rubber Board, Kottayam 668 009 (Kerala State).
(c) Branches should ensure that in the case of sea foods packed and
ready for export, M.P.L.D.A. certificate is obtained and the same
is valid.
(12) Turnover of stocks :
(a) The stocks pledged should have healthy turnover. Old stocks and
slow moving stocks should be taken out by the borrowers. The
question as to which are old stocks should be carefully decided by
the branches having regard to nature and life of the goods.
However, generally stocks pledged for more than six months may
be treated as old.
(b) Commodities of perishable nature should have more frequent
turnover to ensure that their quality is not deteriorated.
(c) It should be ensured that the facility is not enjoyed by the
borrowers for hoarding/speculative purpose.
(13) Care during continuance of pledge :
The law provides that pledgee should take reasonable care of the
charged movables in his possession. There are cases where
negligence is alleged against the Bank, and the borrowers have

104
 claimed damages or reduction in the amount due from them. In some
cases the guarantors have claimed discharge to the extent of the loss
or damage to the goods alleged to have occurred as a direct
consequence of Bank's negligence. It is, therefore, necessary that
some steps are taken to indicate that the Bank has taken reasonable
care of the goods. Bank's own lock and the appointment of a
watchman are the normal steps, which, if not adopted, may lead to
the allegation of negligence.

(iii) Advances against hypothecation of goods :

Hypothecation denotes an agreement to give floating charge over the
goods without conferring the possession thereof and an undertaking
to give pledge of goods whenever demanded.
In legal proceedings relating to hypothecation of goods by firms and
individuals, the Bank's rights may be postponed to those of -
(a) A pledgee or purchaser in possession who has no notice of the
Bank's hypothecation (charge);
(b) an assignee in insolvency or an execution creditor;
(c) a prior and in some circumstances a subsequent hypothecatee.
Therefore, hypothecation of goods by firms and individuals, is of a
very doubtful value. In the case of joint stock companies, the bank's
position is more satisfactory as hypothecation by a company of its
movable property has to be registered under Sec. 125 of the
Companies Act, as a floating charge on the assets of the company.
This protects the bank against a liquidator in insolvency and provides
constructive notice to subsequent encumbrances.
In view of the great risk involved while considering advances against
hypothecation of stocks branches should endeavour to obtain some
collateral security except in the case of parties of undoubted
character and worth, who can be trusted even on personal security.
Such advances should be further restricted to cases where goods are
required for processing as in the case of manufacturing concerns etc.,
whose stocks of raw materials and finished goods are constantly
fluctuating and cannot be kept under lock and key.
The following points should be taken note of while granting advances
against hypothecation of goods :-
(a) It should be made clear to the borrowers that the bank reserves
the right of inspecting the stocks at any time and of taking
possession thereof at its discretion and that the bank's
representatives should have full and unfettered access to their
books.
(b) The hypothecated goods should be stored separately and should
not be mixed up with other stocks. In other words, there should
be an indisputable identity of the goods and the ownership of the
borrower should be clearly established.
(c) The Bank's name board should be displayed at the place of
business/storage of goods of the borrower. Wherever this
condition is sought to be waived, recommendation to that effect
should be specifically mentioned in the relevant proposal with
cogent reasons for consideration of the sanctioning authority.

105
(d) The borrower should submit stock statements as per revised
format (Appendix 2 of Chapter IX of this Volume) monthly or as
stipulated by the bank. The statements must be certified as
correct and should show the opening balance, deposits and
withdrawal of stocks during the intervening period, the closing
balance of stocks, their value as per market rates or purchase
prices or cost prices, whichever is lower. These should be checked
by physical verification of stocks at the time of periodical
inspection. Stock statements should also be obtained at the end
of the accounting period of the borrowers duly got certified by
their auditors both as regards quantity and valuation.
In cash credit (Hypothecation of stocks) accounts, for calculating
drawing power/advance value following guidelines may be
followed :
(1) In case of Sole banking/Multiple banking/Consortium
– (where we are the leader) :

(a) It may be noted that hitherto the practice has been to

compute the drawing power without deducting trade
creditors as per guidelines. If this system is to be
discontinued and trade creditors are to be deducted from
the value of stocks as per stock statement then the
off-setting effect of sundry debtors will have to be
incorporated to correctly arrive at the drawing power.

(b) Sundry Creditors for goods (i.e. Trade Creditors) are to be

deducted from Raw Material at first instance. If the
amount of total sundry creditors exceeds the value of raw
material, the excess shall be adjusted against
stores-spares, stock-in-process, finished goods etc., in the
same order upto their individual value, progressively. That
is to mean that no negative value be taken and such
negative value (excess) should be adjusted against the
next columns viz. Stores-spares, stock-in-process, finished
goods and so on.

(c) Alternatively, if the borrower is in a position to submit the

stock statement giving break up of sundry creditors for
raw material and sundry creditors for stores-spares etc.,
then, at first instance deduct from the respective value of
raw material and value of stocks spares etc., the
respective sundry creditors to the extent of value of
respective stock. If sundry creditors in both or either cases
is/are in excess of value of respective stock (negative
value), the excess value (both or either) shall be adjusted
against stock-in-process, finished goods and so on
progressively.

(d) From the value so arrived after deducting the sundry

creditors (Trade), the margin (as stipulated) has to be
deducted to arrive at the total drawing power.

(e) Sundry creditors under DALC/Co-acceptance/Guarantees

are to be netted off against the cash margin, if any,
provided by the borrower.

106
 (f) An illustration of computation of drawing power format is
given in Appendix V of Chapter IX of this volume

(2) Consortium accounts (where we are a member):

In respect of consortium accounts where we are a member,

the method followed by the Lead Bank may be accepted by
the branch, since in almost all cases it is the consortium
leader who calculates and allocates the drawing power to each
Member Bank as per sharing ratio.

(e) Parties with speculative tendencies should not be considered

hypothecation facilities. These should be sanctioned only to those
parties who by reason of the daily turnover are unable to give
possession of the stocks to the bank by way of pledge.
(f) Before granting advances to limited companies against
hypothecation of goods, search should be made in the books of
the Registrar of Companies to ascertain whether any charge on
the goods has already been created and outstanding.
(g) Drawings in the account should not exceed the advance value
(drawing power) calculated in accordance with the latest stock
statement received from the borrower. The value of stocks
mentioned in the stock statements should be carefully verified. If
in the interim period, the borrower wishes to draw in excess of
the drawing power on account of increase in the value of stocks
he must submit a fresh stock statement in support of the excess
drawing required.
(h) In order to prevent the borrower from hypothecating the same
stock to different banks, following precautions should be taken :
1) Before sanctioning any credit facility, branches should ensure
that the applicant does not enjoy credit facilities with any
other bank. In case it is found that the party is having credit
facilities, full information such as limit, balance, security,
margin etc., should be obtained from the concerned bank/s.
The reasons as to why the party prefers to have credit
facilities from different banks should be examined. Multiple
banking should be discouraged unless facilities are considered
on consortium basis.
2) Along with the application, a declaration should be obtained
regarding the existing credit facilities, and also an undertaking
that the stock will not be hypothecated to any other bank
without the prior approval of our bank in writing.
3) While inspecting stocks before granting the facilities and
during the currency of the facilities, branches should ensure
that the same stocks are not hypothecated to other banks.
There should be a specific demarcation/segregation of stocks
hypothecated to us and to other banks. Separate stocks
registers should be maintained so as to facilitate verification
by the Bank's officials. There should also be exchange of
information between the financing banks.
(i) The balance in the cash credit account should come down when
the goods are sold/delivered and vice-versa. Although the stock

107
 statements are received only at periodical intervals, branches
should ensure that the borrower so operates that the outstanding
balance in the cash credit account at any time remains fully
covered by the stocks with stipulated margins. This can be done
by broadly matching the incoming and outgoing stocks with the
debits and credits in the cash credit account.
(j) A seasonal cash credit facility should not be allowed to continue to
the next season.
(k) All monetary dealings of the borrower, particularly the sale
proceeds of goods hypothecated, should pass through the cash
credit account. The turnover of the goods should be watched with
a view to ensure that no stock remains stagnant. Surprise
inspections should be carried out occasionally to ensure that the
advances are fully covered by stocks with the desired margins
and that the quantities mentioned in the stock register/bin cards
physically tally with the stocks.
(l) The borrowers should maintain stock register.
(m) When the financial position of the borrower turns out to be
doubtful or has deteriorated, prompt steps should be taken to
obtain possession of the goods under hypothecation; if possible
with the written consent of the borrower. Similar action should be
taken if suits are filed by other creditors.
(n) Stocks are held by the borrowers in trust for the bank as security
for the advances granted and they should not be removed without
the advances being adjusted or without substitution of acceptable
stocks, nor should they be sold on credit resulting in a shortage of
cover for the bank's advance. Ordinarily, goods purchased should
be paid for by cheques drawn on the account and all sale
proceeds must likewise be routed through the account. Sufficient
stocks should always be maintained to cover the overdrawn
balance, if any, plus the prescribed margins.
(iv) Advance against trust receipt :
(a) A trust receipt is borrower's acknowledgment for documents of title
to goods. Goods/stocks pledged with the bank when they are
delivered to him without repayment of the corresponding debt a trust
receipt is obtained. In the trust receipt the borrower declares that the
documents to title to goods are held by him as trustee for the bank.
(b) This facility is granted to take care of the following situations :
(1) Where the goods financed by the bank, such as raw material,
stock-in-process are sent to another unit for job
work/sub-contract,
(2) Where finished goods have to be removed from godowns to be
kept in showrooms and exhibitions etc., and
(3) Where advance payments are to be made for purchases. In such
cases, the goods on receipt, are taken in regular
pledge/hypothecation.
(c) Under this facility, the borrower is permitted to take delivery of the
goods pledged/hypothecated to the bank for sale or processing,
and/or title to goods without payment of their value.
(d) This facility is extended as sub-limit of the cash credit

108
 (pledge/hypothecation) limit.

(e) In case the goods are released for undertaking job work/processing,
the goods are to be repledged/ hypothecated by the borrower, when
the goods are received back after processing. A 'no-lien letter' is
required to be obtained from the firm doing job-work/ processing,
undertaking that they have not taken/will not take any bank advance
against the security of such goods and resultant stocks of goods after
taking delivery thereafter.
(f) The goods released for sale are adjusted either out of sale proceeds
of goods, proceeds of the bills or bills should be
purchased/discounted by the bank and credited to cash credit
pledge/hypothecation account.
(g) In case drawings for advance payment for purchases against trust
receipts are allowed the proceeds be remitted by draft/TT in favour of
the supplier stating that bank holds the charge on the goods to be
supplied. If the supplier is at outstation, he should also be advised to
despatch the goods by railway/ approved motor transport operator
and bank's name should appear in RRs/MTRs as consignee.
(h) Every trust receipt should be redeemed within a stipulated period
(maximum period is to be stipulated in the sanction). Generally it
should not be more than 90 days.
(i) Advances against trust receipt are treated unsecured advances for
the purpose of exercising discretionary lending powers and other
classification purposes. This facility should be made available only to
credit worthy parties of repute and preferably where collateral
security is available.
(j) The goods released against trust receipt should be kept properly and
fully insured.
(B) Advances against commodities covered under selective credit
control :
Selective Credit Control is meant to prevent speculative hoarding of
certain essential commodities generally referred to as sensitive
commodities. At present the commodities covered are buffer stock &
unreleased stock of sugar to sugar mills Selective Credit Control is
effected through the medium of margin, ceiling on level of credit. .
These controls are administered by Reserve Bank of India.
Detailed guidelines in this respect are given in Chapter V titled
'Selective Credit Control'.
(C) Advances against rationed commodities and controlled items :
(i) Branches should not accept rationed commodities as security
because under the Food and Rationing Control Order,
hypothecation /pledge of rationed commodities has been held as
illegal. However, branches may consider advances to the fair price
shop owners on clean basis or against some other security.
(ii) If there are any restrictions by state governments in respect of
maximum holding of stocks, these should be kept in mind while
assessing the credit limits.
(D) Advances against goods stored with clearing agents :

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 Where goods are stored with approved clearing agents, an overall
limit and a sub-limit for storages with the clearing agents should be
got approved from the Regional Authority. Before advancing against
goods stored with the clearing agents, the branch should get a
storage certificate from them and their undertaking that they will
effect delivery of the goods only under instructions from the Bank.
A special undertaking will be necessary in cases where the Bank has
not entered into a general agreement with the clearing agent. In
respect of inspection of stocks which may have either been imported
through the Bank and cleared and stored with the Bank's approved
clearing agents or have been taken possession by the clearing agents
direct from well-known manufacturing units, the under-mentioned
procedure should be followed :-
(1) Goods imported through us and cleared and stored by our
clearing agents may not be inspected for the first four months,
thereafter goods should be inspected to ascertain whether they
are deteriorated or why they are not sold out.
(2) For goods taken possession directly from well-known
manufacturing units, the same procedure for inspection as stated
in (1) above should be followed.
(3) For goods taken delivery by the Bank from other third parties, the
clearing agents should inspect them to check the contents and
verify the correctness of quantity and quality given in the relative
invoice of packing list. While proposing the names of clearing
agents to the Regional Authorities for approval, branches should
furnish information regarding their standing, integrity, worth,
experience etc. and whether they render this service to any other
bank.

3.4.2 ADVANCES AGAINST DOCUMENTS OF TITLE TO GOODS:

Documents of title to goods include railway receipt, motor transport
receipt, bills of lading, delivery order , warehouse receipt/certificate and
port trust warrant.
(i) As regards advances against RRs/MTRs, bills of lading, precautions
should be taken as outlined in Chapters on 'Bills for Collection', 'Bills
Purchased' and 'Foreign Bills and Remittances'.
(ii) The Central Warehousing Corporation has advised all banks that the
Government of India have specified grades for all commodities stored
with them, viz. grades I to IV to fall in line with the international
grade designations. Accordingly, grade I represents 'good quality',
whereas grades II and II represent 'Fair' and 'average' qualities
respectively. Grade IV is a poor quality which is not accepted by
warehousing corporations. While making advances against stocks
stored in such warehouses, the following points should be borne in
mind :
(a) To accept Grade I goods freely as security with usual margin.
(b) When goods under Grades II and III are offered as security,
branches should make enquiries about the ready marketability of
the commodities before accepting them as security for advances.
(c) For goods under Grade III, a minimum margin of 50% should be
stipulated. Goods covered by warehouse receipts must be
inspected once in a quarter. A letter of authority to pay future

110
 rent etc., to the debit of his account should be obtained from the
borrower.
(iii) Branches should obtain an additional certificate as per LDOC-116, in
duplicate, from the borrower addressed to the ware-housekeeper for
safe custody and negotiability of warehouse receipts. A copy of the
certificate duly signed by the Superintendent, Central Warehousing
Corporation will be returned to the branch concerned. He will also
acknowledge the bank's lien on the goods in a letter as per
LDOC-117.
Branches can accept from the clients warehouse receipts of the
Central and State Warehousing Corporations evidencing storage of
the goods under pledge limits. Such warehouse receipts are
negotiable by endorsement. Goods deposited in a warehouse are
generally insured by the warehousing corporation.
In that event, no separate insurance need to be taken out but a letter
stating the amount of cover earmarked for the goods pledged to the
bank must be obtained from the warehousing corporation. The letter
must also contain an undertaking that in the event of any claim
arising, the amount will be paid to the bank subject to any of their
legitimate charges.
3.4.3 ADVANCES TO DEALERS IN JEWELRY AGAINST GOLD AND
SILVER:
Regional Heads and Chief Managers of branches can consider sanction
within their discretionary lending powers credit facilities to dealers in
jewelry against security of gold and silver jewelry, ornaments and
silverware upto a maximum limit of Rs. 20/- lacs per dealer inter alia on
following terms and conditions on the merits of the case and if the
proposal is otherwise in order:-
(i) Aggregate borrower-wise limit is restricted to a maximum of Rs. 20/-
lacs as follows :
(a) Maximum upto Rs. 10/- lacs against gold jewelry and ornaments.
(b) Maximum upto Rs. 10/- lacs against silver jewelry/ silverware and
ornaments.
(ii) Minimum 50% margin is maintained.
(iii) Proper insurance cover is taken.
(iv) All such dealers are duly approved, registered and licensed under the
relevant rules/laws.
(v) Endeavour should be made to secure the facility further by mortgage
of property.
(vi) Procedures and all the other terms and conditions as applicable and
issued from time to time in connection with the advance against gold
and silver jewelry and ornaments should be observed.
(vii) Sanctioning authority should explore possibilities of getting collateral
security by way of equitable mortgage of properties/pledge of
NSC/FDRs, etc. However, at present the powers of Zonal heads for
such type of advance are Rs. 35 lacs per dealer.
3.4.4 ADVANCES AGAINST BOOK DEBTS:
To meet the post-sale requirement of borrowers, cash credit facility

111
 against hypothecation of book debts and/or bills purchased/bills
discounted are considered. Bank generally discourages advances against
book debts and, therefore, in terms of the bank’s guidelines , all the
authorities are now required to sanction a combo-limit of Cash
Credit (Hypothecation of stock-cum-book debt) even if the
borrower requests for only Cash Credit (Hypothecation of stock)
facility or Cash Credit (Hypothecation of Book-debts) facility.
Thus, an authority in JMGS-I to MMGS-III can sanction a
combo-limit even if there is insufficient tangible collaterals.
However, while considering facility against book debts, following
guidelines should be followed :
(i) Advances against hypothecation of book debts, if the same is
necessitated by the nature of business, may be considered on
selective basis to parties having very satisfactory dealings.
(ii) Generally advances to be granted against book debts which are not
more than 90 days old. However, in genuine cases Zonal heads may
consider such facilities against book debts beyond 90 days upto a
maximum of 180 days provided the requirements are need based and
justified.
(iii) Branches should obtain statement of book debts in revised format
as given in Appendix III, Chapter IX of this volume, indicating
inter alia age of each book debt, from the borrower every month.
Quarterly statement to be certified by practising Chartered
Accountants without fail.
(iv) The borrowers should be advised to submit the break-up of book
debts (receivables) age-wise, i.e. upto less than 90 (upto 45/60
days) days if stipulated in sanction, upto 90 days, 90 days to 180
days and more than 180 days. It is to be ensured that the book debts
hypothecated to the bank as security are good and recoverable, and
bad debts or debts doubtful of recovery are not included in the book
debts statement submitted to the bank. The book debts whose age is
strictly in accordance with terms of sanction only should be
considered for the purpose of allowing drawings in the account.
(v) Branches should obtain copies of invoices also along with the
statement of book debts from the borrowers.
(vi) The book debts (receivables) should be examined to ensure its
reasonableness as to its quantum and period of credit keeping in
mind market conditions. Generally, a credit period above 90 days is
not accepted in respect of domestic sales for financing the same,
unless higher (or lower) period is allowed as per term of sanction,
with proper justification.
(vii) Branch should obtain declaration with the following clauses from the
borrowers along with the statement of book debts :
(a) that each of these debts is entered into proper books of accounts
maintained by us in the ordinary course of business.
(b) that each of these debts arose out of bonafide transactions in the
ordinary course of business.
(c) that each of these debts is good and recoverable in full in the
usual and ordinary course of business.
(d) that the list does not include any debts which are doubtful of

112
 recovery or for recovery of which there is any decree of any court
or dispute or cause of action pending against debtors.
(e) that the amount of each of these debts is the net balance i.e.
balance after deducting all advances, discounts, commissions,
claims, set-off etc. due to us from the debtor.
(f) that each of these debts is free from any lien, encumbrance,
claim, assignments, charges etc. except the charge created in
favour of the bank.
(g) that the aggregate realisable value of the book debts listed above
in the ordinary course of business is at least equal to the total
amount at which they are stated in the statement.
(h) We are aware and acknowledge that it is on the faith and strength
of this declaration of ours and other similar declarations made/to
be made from time to time this advance is granted and will be
continued by the bank.
(i) In order to verify our statement of particulars of book debts, the
bank is at liberty to inspect our books of accounts and/or make
extract copies thereof at any time at our expenses and we do
hereby agree to accept as conclusive proof the result of such
inspection as certified by any officer of the bank.
(viii) Branches should carry out inspection at periodical intervals and also
obtain confirmation every quarter from at least 10% of the debtors
selected at random, in order to ensure genuineness of the existence
of book debts.
(ix) Branches should obtain power of attorney for collection of book debts
directly from the debtors and also an undertaking from the borrowers
to deposit the amount received from their debtors directly into the
account. These powers of attorney should be registered with the
debtors wherever possible.
(x) Branches should ensure that borrowers do not include in the
statement those debtors on which they raise bills and give the same
for purchase/discounting to avoid double finance.
(xi) Book debts of associate concerns should not be included in the
statement and undertaking to the effect to be obtained from the
borrowers.
(xii) Branches should obtain periodical credit reports on the debtors.
(xiii) Borrower should not have factored against receivable included in the
statement of book debts.
(xiv) As per the existing guidelines of RBI, in respect of borrowers enjoying
fund based working capital credit limits of Rs. 5/- Crores and more
from the banking system, ratio of 75:25 between book debts
financing and bills finance is to be adhered to for financing inland
credit sale.

3.4.5 ADVANCES AGAINST SUPPLY BILLS:

(i) Supply bills represent invoices and other documents evidencing
despatch/supply of some goods/services as mentioned in the invoices
and claim for payment of the invoiced amount. However, supply bills
are not bills of exchange. These are also not negotiable instruments.
Therefore, the provisions of Negotiable Instruments Act are not

113
 applicable to them.
(ii) Supply bills are generally drawn on central/state/union territories,
government departments, corporations, autonomous bodies, public
and semi-public sector undertakings and leading reputed limited
companies.
(iii) In case of supply bills, no documents of title to goods accompany the
bill. The supply of the goods/products is made directly to the
purchasing department by sending the RR/MTR etc. directly to the
department (and not through the financing branch).
(iv) Advances against supply bills should be granted by way of cash credit
facility secured by hypothecation of book debts. A separate account
should be opened in the cash credit ledger and credits and debits to
the said account should only be related to advance against supply
bills, realisation thereof and bank's charges and interest.
(v) Advance against supply bills should not be granted by way of bills
purchase or bills discounting facility.
(vi) Such advances should be granted only to first class parties and
efforts should be made to collaterally secure such advances.
(vii) Following procedure should be followed by branches :-
(1)
(a) Bills should be accompanied by inspection notes, invoices,
RR/MTR/receipted challans and contract acceptance notes.
(b) Inspection notes are also known as 'Acceptance Note or
Test/ Passing Certificate'. The inspection note is issued to
the contractors/suppliers by an authorised representative
of the concerned government department. The
genuineness of signature of inspecting authority on the
inspection certificate should be ascertained beyond doubt.
The inspection notes should contain full description of the
goods.
(c) The rates charged in the invoice/bills should be verified
from contract acceptances.
(d) In the case of excisable goods and when the supply is
directly from the manufacturer's factory premises, the
excise gate pass should also be enclosed with the bill.
(e) Bills should also be accompanied by a letter of authority
from the drawer addressed to the government department
to pay the amount of the bill to the bank.
(f) Branches should obtain a certificate, as per the proforma
given below, on the reverse of the bill duly signed by the
drawer of the bill :
"I have personally examined and verified and do hereby
certify that the goods in respect of which the payment is
being claimed have been actually despatched by me/us
under R/R No./ BL No./Air consignment Note No./Postal
Receipt No....................... dated............... duly drawn in
favour of the consignee which is genuine and mentioned in
the bill and that I hold myself personally responsible for
the correctness of this statement. I further certify that the

114
 above mentioned RR/BL/Air Consignment Note
No....................... dated............... has been forwarded
to the consignee mentioned in the contract under
registered post acknowledgement due on................."
(2)
(a) A stamped irrevocable power of attorney from the
borrower to recover the amount of the supply bills directly
be obtained (LDOC 86).
(b) A power of attorney constitutes an equitable assignment in
favour of the lending bank.
(c) The execution of power of attorney should be duly
authenticated and attested by either a notary or a
Magistrate.
(d) The power of attorney should be registered with the
concerned departments of the government/corporations/
purchaser's departments.
(e) Generally, the power of attorney executed by the
borrowers is accepted/registered by the purchasing
department with the condition 'acceptance of power of
attorney does not affect the
_____________(department's) rights and interests in
recovering its dues from the bills, etc., moreover, the
power of attorney does not create any liability on the
administration.
(f) Some departments do not have practice of registering
power of attorneys. However, power of attorney should
invariably be sent to such departments for registration by
registered post A.D. and acknowledgement be kept on
record.
(3) The borrower should be asked to submit his bills to the
department/corporation directly or to their bankers, as the
case may be. Notice of bank's lien over the amounts of supply
bills should invariably be given to the concerned government
departments etc.
A specimen of the letter to be addressed to the government
departments etc. is given in APPENDIX - I.
(4) A definite period, not exceeding 90 days, should be stipulated
for the realisation of bills after taking into account the
circumstances of each case and in consultation with the
constituents (normally such bills should be realised within 90
days from the date of advance). If the payment is not
forthcoming within the stipulated period, the amount should
be recovered immediately from the constituents.
Care should be taken to ensure that the time gap between the
date of inspection note and the date of advance is not unduly
long. The facility should not be extended against stale bills
and against bills drawn on parties who delay payment.
(5) A register should be maintained by the branches to keep a
complete record of Supply Bills advanced from time to time.
proforma of the Register (party-wise) is given in

115
 APPENDIX-II.
(6) While forwarding the bills, they should be treated as
"OUTWARD BILLS FOR COLLECTION" for the purpose of
passing the contra entries. In the OBC Register, lien of the
Bank on the bill should be noted conspicuously in red ink
under authentication of the concerned officer. The proceeds of
the bill on realisation, must invariably be credited to
cash-credit (against government supply bills) account of the
borrower.
(7) In terms of Clause 3 of the Agreement of Hypothecation of
Book Debts (LDOC-21), the Bank gets a charge on all the
book-debts of the borrowers. In cases where the Bank's
charge is to be restricted to those book-debts represented by
supply bills, the first para of the clause should be substituted
by the following :
"The borrower doth hereby hypothecate and charge to Bank
as and by way of first charge the book-debts in respect of
supplies made to various Government Departments or Limited
Companies etc. as evidenced by Supply Bills/Receipted
Challans/Receipted Invoices deposited with the Bank from
time to time (all of which hereinafter collectively referred to as
"the said debts") as security for the due repayment to Bank at
any time on demand at .............".
(8) In the case of advances to Limited Companies, the charge
created by the Agreement of Hypothecation of book-debts
should be registered with the Registrar of Companies. While
registering the charge, it should be ensured that the existing
charges, if any, created in favour of other Banks/financial
institutions do not embrace Supply Bills.
(9) Supply Bills accompanied by receipted challans/inspection
notes are sometimes drawn on reputed limited companies,
Public and Semi-Public Undertakings. The procedure outlined
in the foregoing paragraphs is also applicable for advances
against Supply Bills drawn on such companies/undertakings.
(10) All consignments sent by lorry, should be fully insured against
transit risks.
(11) Unpaid bills, if any, should not be returned to the borrowers
unless the amount advanced there-against is recovered and
satisfactory explanation offered for the return of bills.
(12) Except with the specific approval of the bank, the borrower is
not allowed to accept and use direct payment of bills/invoices
lodged with the bank for collection. Any breach of this
condition is construed as a criminal breach of trust and the
borrower renders himself liable for criminal action under Sec.
405 of Indian Penal Code.
(13) The bills tendered under the arrangement should represent
genuine movement of the company's/firm's own finished
products on outright sale basis. Accommodation bills should
not be financed.
(14) Service charges as applicable to bills for collection should be
levied in addition to usual interest.

116
3.4.6 ADVANCES AGAINST HIRE-PURCHASE TRANSACTIONS:
(A) In special cases, advances are granted against hire-purchase
transactions in respect of new motor cars, lorries, buses,
autorickshaws, delivery vans etc. Credit facilities should be extended
only to those who can be depended upon to repay the dues from
their own resources.
Branch Managers should make thorough enquiries about the status,
standing and means of the applicants for advances and satisfy
themselves beyond doubt that the prospective borrowers :-
(i) are respectable, trustworthy, enjoy good reputation in the market
and considered good for business dealings.
(ii) are financially well placed and that the value of their liquid assets
i.e. cash, book debt etc. are considered good and easily
realisable.
(iii) are well experienced in the line of business for which financial
assistance is sought and are not prone to over trading and
speculation.
(iv) will maintain proper and regular accounts.
(B) The procedure to be followed in respect of such advances, apart from
the usual formalities is as under:-
(i) The audited balance sheets and profit and loss accounts of the
borrower for the last three years should be obtained and
examined critically. The books of the borrower should also be
verified with a view to ensure that the hire-purchase finance
transactions are conducted on sound lines and that the
installments overdue from hirers are not substantial.
(ii) The borrower should furnish credit reports on each hirer and
guarantor. These should be verified by the branch wherever
possible.
(iii) Specimen signatures of hirers and guarantors, duly attested by
their bankers or by persons known to the Bank, should be
obtained.
(iv) Advances should be made only against new vehicles. Advances
against second hand vehicles of not more than 5 years old may
be considered after obtaining specific sanction and valuation of
vehicles.
(v) Documents obtained by the borrower from the hirers and
deposited with the Bank should be examined to ensure that they
are drawn properly and that there is nothing, adversely affecting
the interests of the Bank.
(vi) Branches should ensure that the interest of the financiers (i.e.
borrowers) in respect of vehicles covered by hire purchase
agreements are registered with RTO before the advance is
granted. They should also verify Registration Certificates and the
original invoices in respect of the vehicles and keep Photostat
copies of the same on record.
(vii) The hirer must have paid to the borrower the initial down
payment and the balance should be repayable in monthly
installments (not exceeding, say 24).

117
(viii) The initial payment and finance charges should be excluded from
the cost price and the advance value arrived at after retaining the
stipulated margin. The borrower (hire purchase financier) should
have a minimum stake of 25% and the Bank not more than 75%.
(ix) It must be ensured that every contract of hire-purchase is
guaranteed.

(x) As soon as the hire-purchase agreements are lodged with the

branch, notices intimating the Bank's charge over the vehicles
should invariably be sent to the hirers, guarantors and the
Registering Authority by Registered Post Acknowledgement Due.
The fact of a notice having been sent should be recorded in the
books of the branch.
It is possible that the Registering Authorities may advise the
branches that they do not recognise such notices. Many State
Governments register interest or charge of the banks in respect of
advances against hypothecation of motor vehicles, both under
direct financing and financing through hire purchase financiers.
(xi) Agreement form for cash credit/overdraft against hire- purchase
agreements should be obtained from the borrowers in favour of
the Bank for the overall limit sanctioned which should also provide
for comprehensive insurance of the vehicles including strike and
riot risks.
(xii) All vehicles should be insured for the full value for comprehensive
risks (including third party risks). The policies will be held in the
joint names of the hirer and the financier and should contain a
special endorsement stating that the vehicle is hypothecated to
the Bank and that any claim payable thereon shall be paid to the
Bank whose receipt will constitute sufficient discharge to the
Insurance Company.
(xiii) As far as possible, installments should be paid to the Bank directly
by the hirers and for this purpose the financiers should give a
notice to hirers about the assignment of their right, title and
interest in the vehicle to the Bank and requesting them to pay the
installments directly to the Bank.
(xiv) It is the Bank's policy to obtain an indemnity policy of an
insurance company atleast to the extent of 80% of the sanctioned
limit and to have the draft of the indemnity policy approved by
the Legal Department. Since such indemnity policies contain
various terms and conditions and due observance and fulfillment
of such terms and conditions and the endorsements on the policy
in so far as they relate to anything to be done or complied with by
the Bank are conditions precedent to any liability of the insurance
company to make payment under the policy, it is essential that
the branches should strictly comply with the terms and conditions
of the policy to safeguard the interest of the Bank. It is also
necessary to ensure that each hire purchase agreement is drawn
up in conformity with the terms and conditions of the policy. In
order to ensure strict compliance of such terms and conditions, it
is desirable to record in the appropriate register the gist of the
terms and conditions of the policy. Due dates of such policies
should be diarised.

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 (xv) The dates and amounts of installments should also be diarised
properly and it must be ensured that the installments are paid on
due dates and the borrower should be requested to confirm that
he has actually received the relative installment from the hirer. In
no case the installments should be allowed to be adjusted against
deposit of fresh hire-purchase documents.
(xvi) On the due date, the amount of installment should be deducted
from the total value and the advance value worked out afresh and
the borrower should be advised to make good the shortfall, if any,
immediately.
(xvii) At the end of each month, the borrower should furnish a
statement showing the amount advanced, installments paid,
installments due and the installments overdue from the hirers.
The hire-purchase agreements, where defaults are continuous,
should be excluded for the purpose of advance.
(xviii) If the advance is made to a limited company, the relative charge
by way of instrument of hypothecation should be registered with
the Registrar of Companies.
(C) It should be ensured that the forms prescribed in the Bank's
hire-purchase financing compilation set (LDOC-25) are used for
hire-purchase transactions.
The following documents should be obtained from the borrower
(1) Joint and several demand promissory note signed by the borrower
and by all the partners personally for the full amount of the limit
sanctioned.
(2) General form of guarantee where applicable
(3) Deed of hypothecation (LDOC-24) over the vehicles under
hire-purchase agreements.
(4) Indemnity insurance policy (LDOC-103) of an insurance company
covering usually 8O% of the limit sanctioned.
(5) Letter of continuing security.
(6) Letter of partnership signed by all the partners in case of
partnership concerns.
(7) General power of attorney (LDOC-88) in favour of the Bank to
enable the Bank to act as the borrower's attorney under the
hire-purchase agreements entered into by the borrower with the
hirer.
(8) Certified copy of resolution passed by the board of directors (in
case of a limited company) authorising the borrowing and
execution of documents.
(9) Original or certified copy of the invoice issued by the
dealer/manufacturer.
(10) Certified copy of the registration certificate of vehicles.
(11) Insurance policies of vehicles duly assigned in favour of the Bank
along with premium receipts.
(12) Proposal form signed by the hirer and guarantor.
(13) Hire purchase agreement signed by the hirer, guarantor and the

119
 borrower.
(14) Joint and several demand promissory note signed by the hirer and
guarantor in favour of the borrower and endorsed by the borrower
in favour of the Bank.
(15) Receipt for the vehicle signed by the hirer.
(16) Blank letter of authority addressed to the registering authority
signed by the hirer and countersigned by the borrower for the
transfer of ownership of the vehicle in the name of the Bank.
(17) TTO form intimating the transfer of ownership of the motor
vehicle signed by the hirer as transferor in case the vehicle is
required to be sold for recovery of dues at a later date.
(18) A sheet showing how the amount of promissory note is arrived at
and a sheet showing the due dates and amount of installments to
be obtained from the borrower.
(19) An application in form 'E' for registration of motor vehicle under
the Motor Vehicles Act, 1939.
(20) A declaration made in form 'AT,' under the Motor Vehicles Tax
Act, 1935.
Apart from the usual books and registers maintained for such cash
credit accounts, branches should maintain a separate register with
the following columns (Separate Folio for each hirer).
File No. Name of the Hirer:
Address
Name of the Guarantor :
Address :

Cost of Initial Amount Instalment Whether Margin Amount

the Payment to be due paid or advance
Vehicle made by paid by not d by the
hirer the Date Amt. Bank
hirer
1 2 3 4 5 6 7

Instalment due Date of Initial Particulars of Vehicle Remarks

to Bank Receipt of Registration No.,
Due Amount Instalment Insurance Policy No
Date & Date of Expiry
8 9 10 11 12

This subject is also covered in Chapter XI in Volume 5 to which

branches may refer.

3.4.7 ADVANCES AGAINST FIXED ASSETS:

(A) Advances against immovable properties :
Mortgages of immovable properties are taken as primary security to

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 secure term loans and as collateral security to secure other types of
fund based and/or non-fund based facilities. They are also taken as
an additional security for advances which have become insecure
owing to a fall in the value of security originally taken or an adverse
change in the financial position of the borrowers.
Different types of mortgages are already discussed earlier in the
Chapter while discussing modes of charging of securities. However,
mainly due to convenience and to some extent because of saving on
stamp duty, equitable mortgage is more popular and prevalent mode
of charging of fixed assets.
The following procedure should be followed while creating an
equitable mortgage by deposit of title deeds as security for an
advance :-
(1) Title deeds :
(i) For creation of an equitable mortgage original documents of
title like sale deed, lease deed, etc. only be deposited.
Agreement to Sell or Municipal Order directing handing over
land are not title deeds. The equitable mortgage in case of
Flats, developed by the developers, can be created. For
detailed guidelines in this respect, Refer to Book of
Instructions Volume no. 16 on retail lending. The chain of title
deeds should be unbroken/complete. As far as possible,
mortgagor should deposit all the title deeds which are in his
possession.
(ii) True copies/photocopies of title deeds should not be accepted
for creation of equitable mortgage. However, where an original
title deed is not in existence, but its copy duly certified to be
true copy by the sub-registrar, if it is a registered document,
is available, the branches should refer the matter to their
controlling authority after seeking advocate's opinion.
(iii) In case the original title deeds are lost or destroyed due to
fire, earthquake, flood and such other natural calamities or
otherwise, certified copies of title deeds, where the originals
are registered, duly certified by the Sub- Registrar of
Assurances or photo/xerox copies of title deeds which are
unregistered documents may be accepted in deposit along
with an affidavit/declaration duly executed by the owner on
oath before Notary Public explaining the circumstances under
which the original title deeds were lost or destroyed and
further declaring that the said original title deeds have not
been deposited with any other person/party as security for
any advance or consideration and that the immovable
property covered under the said title deeds is free from all
charges, lien, attachment, acquisition proceedings or any
other charges or encumbrances and that the mortgagor shall
deposit the said original title deeds with the mortgagee if the
original title deeds are traced/restored.
(2) Possession :
Before creation of equitable mortgage, wherever it is possible,
necessary enquiries as to the possession of the property be made,
and, physical verification should be made.
(3) Scrutiny of title by advocate and search report :

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 (i) Before creation of equitable mortgage a full report on the title
should be obtained from the advocate, on the approved
empanelled list of advocates.
(ii) The branch should collect all documents of title required for
scrutiny and send the same to one of the advocates on the
panel. Borrowers should not directly approach the advocate
for obtaining the title verification report, as it may influence
the advocate to give an opinion favourable to him.
(iii) The advocate should be requested to carry out search at least
for the past 12 years and preferably for 30 years before
creation of mortgage in our favour in the records of
Registrar's/Sub-Registrar's office to ensure that no prior
charge on the property exists and his opinion should be
obtained on the following points :-
(a) Whether the documents produced for mortgage are
complete and sufficient to convey a clear and marketable
title.
(b) Whether the owner of the property has a clear and
marketable title thereto and is legally capable of creating
the charge thereon in favour of the bank.
(c) Whether the properties are unencumbered.
(d) The position with regard to tenancy laws, if any, which
might affect the banks in eventually taking possession of
or selling the properties or otherwise exercising its rights
as mortgagor.
(e) Whether any consent or permission of any antecedent
owner/lessor/Statutory Authority is necessary to create
equitable mortgage in Bank's favour and if so, whether it
has been obtained.
(f) Whether the exemption/permission/consent of the
Competent Authority under the Urban Land (Ceiling &
Regulation Act) 1976 is required for creation of mortgage
in our favour and if so, whether it has been obtained.
(g) Whether the title deeds are properly and adequately
stamped. Before submitting any title deeds for scrutiny to
advocates, a letter (LDOC-63) should be taken from the
mortgagors agreeing to pay all costs involved in
investigating the title, valuation of property etc.
irrespective of whether transaction for the advance
materialises or not.
(iv) If any objections/defects are pointed out by the
solicitors/advocates, the same should be rectified by the
mortgagors at their cost before creation of mortgage.
(v) The advocate must, in his report addressed to the Bank, (i)
mention that he has taken search in the Land Records for a
particular number of years, (ii) set out how the property has
come to belong to the borrower and (iii) certify that the
borrower's title is clear and marketable. The advocate should
also certify that the property can be charged by way of
equitable mortgage under the relevant Law of the State, as
the creation of equitable mortgage of certain kind of

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 properties is prohibited in some States. In some cases, there
may be a minor defect in the title and it may take some time
to rectify such defect. Such defect should normally be rectified
before the creation of the mortgage. However, where the
borrowers need is genuinely urgent, an undertaking may be
taken from him stating that he would rectify the defect within
a short time and then create the mortgage.
In such cases, the advocate must state in his certificate
(a) whether the defect is minor,
(b) whether it can be rectified and
(c) the mode and the manner of rectifying it.
In case of doubt or difficulty, reference should be made to the
higher authorities. Further, there should be reasonable or
atleast workable evidence to show that the mortgagor is the
owner of the property. Specific approval of the sanctioning
authority to disburse the facilities against an undertaking as
above is necessary.
(vi) The receipt of fee deposited by the advocate in the Sub-
Registrar's office for carrying out search should be obtained.
(vii) If search is undertaken by outside agency such as Search
Clerk or other Advocates etc. the search report based on
which the title opinion is given by our Advocate should be
obtained.
(viii) The Branch concerned should study all the papers submitted
by our Advocate along with his title opinion/certificate and
also verify the title certificate, search report of charges
registered with Registrar of Companies and ascertain whether
they are in order. In addition, it is necessary that the
branches should adhere to the precautions/requirements of
local laws of the respective state, if any, suggested by
empanelled advocates in their title search reports while
accepting properties as equitable mortgage. If necessary,
reference may be made to Legal Department at
Regional/Zonal Level to get the same verified by Legal
Department.
(4) Provisions of Urban Land (Ceiling & Regulation) Act, 1976 :

Before the mortgage is created, branches should also ascertain

whether the Urban Land (Ceiling & Regulation) Act, 1976 is
applicable to the property and whether the permission of the
competent authority under the Act is necessary. If so, the
borrower should apply and obtain the permission and the
branches should ensure of the same before the mortgage is
created by the borrower.
However, as per Section 27 (4) of the said Act, if the permission
to create a mortgage on the property consisting of land and
building is applied for and nothing is heard from the competent
authority within 60 days of the receipt of the application by such
authority, permission is deemed to have been granted.
However, to avoid any future doubt or dispute or a dishonest
defence, branches should insist upon the borrower to follow up his

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 application and obtain necessary permission rather than relying
on the silence of the authority. If permission is not forthcoming
despite all efforts, steps to create the mortgage should be taken
without any delay after the expiry of the said period. Further, in
rare and genuine cases, disbursement may be made, with the
specific approval of the sanctioning authority, even before
obtaining the permission or before the expiry of 60 days, after
taking an undertaking from the borrower that he will obtain the
permission and thereafter create the mortgage.
The Urban Land (Ceiling and Regulation) Act, 1976 is a Central
enactment which is applicable to Union Territories and is also
adopted by the States of Andhra Pradesh, Gujarat, Haryana,
Himachal Pradesh, Karnataka, Maharashtra, Orissa, Punjab,
Tripura, Uttar Pradesh and West Bengal. This is provided in the
Act itself. The Act also provides that the other States may adopt it
by resolutions. The advocate should be able to advise the
branches whether the Act is in force in a State, which is other
than the one stated above. The State of Tamil Nadu has a
separate Land Ceiling Act, the provisions whereof are different
from the above Act. Branches in Tamil Nadu should, therefore,
make specific inquiries with the advocate about the steps, if any,
required to be taken pursuant to that Act before creating a
mortgage.
In case of properties situated in any of the Union Territories of
India, specially at Daman, the permission of
Collector/Administration is required to be obtained for creation of
equitable mortgage as these properties are owned by the
Government and only occupancy rights are assigned to its holder.
(5) Valuation of property :
(i) The value of immovable property to be mortgaged should be
estimated to arrive at the value of the security offered for the
purpose of risk analysis and classification of advance.
Valuation reports should be kept with the documents.
(ii)
(a) Valuation of the immovable properties where the
sanctioned limit is less than Rs. 1 lac, should be done by
the Branch Manager/in-charge of advances department of
the branch.
(b) While valuing a building for the purpose of an advance, the
points to be taken into consideration are :-
(1) the nature of construction
(2) nature of title, (freehold or leasehold)
(3) the age of the building and its present strength
(4) the rental yield
(5) tax payment
(6) area of the land and area of the building
(7) value of the site
(8) cost of construction

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 (9) its location
In the case of lands situated in rural areas, valuation
should be made on the following basis :-
(1) Comparison with recent sales of similar properties in
the neighbourhood
(2) At eight times the net post development income from
the land
(3) Valuation certificate given by the village officer
(4) Personal inspection, where practicable
(5) Enquiries from parties having good knowledge of local
land values
(6) Value prescribed by registering authorities to be given
by Sub-Registrar of Assurances
(c) Allowance must always be made to the fact that the price
realised under a forced sale often falls short of the real
worth of the property and it usually takes considerable
time to sell landed property even at a reasonable amount.
The standard form of valuation report is given as
APPENDIX-III. Enquiries should be made regarding the
persons occupying the property and if they are not the
owners, the terms on which they have the possession. A
plan of the property signed by the borrower(s) should be
obtained and sent to the Regional Authority along with the
proposal.
(d) Valuation of agricultural land should be done by the bank's
officers only on the lines discussed in Volume 6 on
Financing to Agriculture and Allied Activities.
(iii) In other cases, job of valuation should be entrusted to only
those consultants/valuers who are on the approved list of the
Ministry of Finance, Government of India.
(iv) Valuation of immovable property mortgaged to the bank
should be done once in every three years. Subsequent
valuation should not be entrusted to the same
consultant/valuer who had valued it earlier.
(6) Where can equitable mortgage be created ?
(i) An equitable mortgage can only be created at notified centres.
Equitable mortgage taken at any place other than a notified town
is ab-initio bad and unenforceable against the mortgagor.
Branches located at other centres should arrange for creation of
equitable mortgage by the borrower at any of the branches
located in the notified centres.
(ii) For creation of equitable mortgage at a branch located in a
cantonment area, specific enquiry should be made with the legal
advisor/law officer to ascertain whether the said cantonment area
is notified for the purpose of creating equitable mortgage.
(iii) Equitable mortgage of properties situated any where in India can
be created at any place notified for the purpose. However, this
should not be done to evade stamp duty. Moreover, for enforcing
the security, mortgage suit should be filed in the competent court

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 under whose jurisdiction the property is situated.
(7) Stamp duty :
Though creation of equitable mortgage of properties does not
attract stamp duty in many states, it attracts stamp duty in
certain states like Gujarat, Maharashtra Madhya Pradesh etc..
Further, equitable mortgage of a property situated in a state
where stamp duty is payable if created any where outside that
state will also attract stamp duty when the document evidencing
creation of equitable mortgage is brought into the former State
and the document has to be stamped within a particular time limit
as prescribed in the Stamp Act applicable to that State.
(8) How to create an equitable mortgage :
After getting advocate's report about clear and marketable title,
unencumbrance of property for creation of equitable mortgage
following procedure should be adopted :
(i) While creating an equitable mortgage, an affidavit should be
obtained from the borrower/mortgagor/guarantor that the
property to be equitably mortgaged to the bank is free from
encumbrances of any sort and that no suit is pending and that
there is no attachment of any type of the said property. Such
declaration/affidavit may be made by the borrower before a
Magistrate/Notary Public in the presence of our advocate.
(ii) Branches should insist on opening of bank account, (with
photograph, introduction, confirmation of address through
registered letter etc., ) by owners of properties who offer the
same as collateral security against loan given to third parties.
Copies of House tax receipts/electricity bills/voter’s identity
card etc., are some other documents which are helpful in
confirming proof of possession/residence. The complete set of
original title deeds should be deposited by the debtor i.e.
borrower/guarantor owning the immovable property with the
creditor i.e. the bank branch. It should be carefully noted that
the copies of title deeds or extract of revenue record/property
card do not constitute the title deed nor an agreement for sale
or a municipal order directing handing over the land are title
deeds for the purpose of creation of valid equitable mortgage.
(iii) All the persons interested in the property as owners or their
duly authorised attorney(s) must attend the branch in person
and should deposit the documents with the Branch Manager in
presence of one official of the bank. Wherever mortgage
security is created by a person on the strength of power of
attorney, before creation of mortgage, the power of attorney
should be got scrutinised by Bank’s advocate/legal department
to ensure that the requisite powers are contained therein.
(iv) Particulars of the deposit of title deeds must be recorded in
the form of a recital in usual memorandum (LDOC-90) which
should be read out to mortgagor. The mortgagor should not
be made to sign the memorandum nor should any receipt be
given to him. However, it should be signed by the Branch
Manager duly attested by one senior officer in charge of credit
portfolio.
(v) Nothing in writing should be obtained from the mortgagors at

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 the time of creating an equitable mortgage, but only a record
of deposit should be maintained with the branch by way of
memorandum of deposit. No receipt should be issued by the
branch for the title deeds deposited, but if subsequently the
mortgagors ask for confirmation of deposit of title deeds,
branches may confirm the same.
(vi) Should there be more than one owner or should the property
belong to a partner or to a firm or to a company, in the first
case all the owners should execute an authority in favour of
one of them for depositing, in the second case all the partners
must execute an authority in favour of one of them for
depositing and lastly, in the case of a company a resolution by
the company's Board of Directors must be passed authorising
one of the directors or other officer of the company to deposit
the title deeds with intent to create a security. Whenever the
property belongs to a Company who may either be a borrower
or a guarantor, charge on property should be recorded in the
records of Registrar of Companies in whose jurisdiction the
registered office of the Company is situated. Moreover if a
company acquire a property which is already subject to charge
of any other Bank/Institution then such charge should first be
registered within 30 days of date of acquisition of such
property which is subject to existing charge. In case of Hindu
Undivided family, the Karta or Manager of the family should
deposit the title deeds and should designate himself as Karta
and deposit the title deeds as Karta of the joint family
consisting of himself and other member/ members of the
family. This authority should be kept with the title deeds.
The form of the authority is given in Volume -9 (LDOC-92)
(vii) One of the main ingredients of Equitable Mortgage to ensure
enforcement of Bank's right against such property is the
intention of the owner of the property. In order to prove such
intentions, Bank should ensure to create sufficient
documentary evidence of creation of mortgage with such
intent by the owner of the property. To ensure the above,
branches are advised to take following steps :
(a) While creating equitable mortgage by deposit of title
deeds, a photograph of the borrower/his representative
who is authorised to deposit title deeds and particularly the
guarantor who is the owner of the property depositing title
deeds, duly signed by him across the photograph should
be obtained and affixed on the Memorandum recording of
deposit of title deeds. If the equitable mortgage is created
by more than one person, photographs of all
persons/owners creating such mortgage duly signed across
such photographs should be obtained and affixed to the
Memorandum of Entry recorded in our books.
(b) Branch should have the Attendance Register, or prepare a
separate attendance note recording names of persons
having attended Bank's Branch and having created
mortgage by deposit of title deeds or extension of such
mortgage, which should be signed by the depositor/s and
Bank's Officials present at such time.

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 A specimen format of such attendance record is as under
“The following persons attended the office of Bank of
Baroda, ________________ Branch, at
__________________ on ________________ at the time
of Creation of mortgage by deposit of title deeds/by
constructive delivery to secure __________________
sanctioned to _______________ by the Bank of Baroda.
-----------------------------------------------------------------
Sr.No. Name and Designation Signature
1.------------------------------------------------------------
2.------------------------------------------------------------
3.------------------------------------------------------------
(c) A Draft of letter of confirmation (as per LDOC 90 P) by the
depositor/ owner is to be obtained after the mortgage is
created or extended, as given hereunder. This draft should
be suitably worded depending upon individuals or Firm or
company and while creating fresh or extension of Equitable
Mortgage.
I/We Mr.____________________, Mr.
__________________ and Mr. _________________ on
my/our behalf or on behalf of ____________________ as
partner for and on behalf of M/s. ________________ a
Partnership Firm/ as director for and on behalf of M/s
___________________ hereby confirm and declare that
I/we had called at your _____________ branch at ____
AM/PM on ________ and deposited the title deeds,
document evidences and writings in relation to the
immovable properties situated at ____________ together
with buildings and structures, immovable plant and
machinery, fixtures and fittings more particularly described
in the schedule hereunder written with an intention to
create security thereon as and by way of equitable
mortgage by deposit of title deeds as and by way of
first/second charge in your favour for the due repayment
discharge or redemption by me/us/by M/s.
___________/by M/s. ___________________ to Bank of
Baroda of its various credit facilities aggregating to Rs.
________ together with interest, additional interest, penal
interest, , Trustee's Remuneration, costs, charges and
expenses payable thereon.
Schedule referred to above.
I hereby further declare that I/we am/are entitled to
create the aforesaid equitable mortgage in my personal
capacity/jointly/as attorney of Mr. ________________/
partner of M/s ________________/as Director of M/s.
________________.
Date :
(d) Branch should also write a letter to the depositor/ owner
confirming equitable mortgage having been created by the
owner on specified day. This letter should be sent by
Registered Post A.D. and acknowledgement when received

128
 should be preserved and kept with the Memorandum of
Entry or other original security documents.
(e) As per the existing guidelines, the letter of costs is to be
obtained from borrower. If the mortgage is created by
third party (guarantor) his signature also may be obtained
on letter of costs.
(f) Section 67 A of the Transfer of Property Act, stipulates
that if the mortgagee holds different mortgages of
different properties or successive mortgages of the same
property from the same mortgagor, he must enforce all or
none, unless there is a contract to the contrary.
In view of the above said provision, a consolidated claim
should be made if the same properties were mortgaged by
the same mortgagors (borrower/guarantor) to the Bank.
Due to this, there may be instances where even in case of
a Standard Account, Bank may be forced to recall the
advance merely because of the availability of common
security by way of Mortgage, when the other
advance/account covered by the same security is being
recalled.
In order to avoid such a situation, an Undertaking, as per
format given in APPENDIX VIII should be taken from all
the Mortgagors. On obtention of such an undertaking,
Bank is vested with discretion of proceeding with litigation
in one account, without affecting the status of other
account /s.
(viii) If an equitable mortgage sought to be created is of a
leasehold property, the lease must be carefully scrutinised for
power to the lessee to create a mortgage thereon and, if the
same is permitted subject to the consent in writing of the
lessor, the said consent should first be obtained before
accepting the title deeds as security and lease period should
not be less than 30 years. It should be ascertained that the
balance period of the lease is sufficiently long to cover the
repayment period.
(ix) In the following case Deed of Conveyance should be executed
and registered :
(a) Where the property relates to Co-operative Society
registered under Gujarat Co-Operative Society Act 1961;
sale by such society in favour of its member, even where
member is first allottee or in resale by members inter-se.
(b) Where the property is allotted by Guajrat Housing Board or
Gujarat Rural Housing Board.
(x) An equitable mortgage cannot be created in respect of
monthly tenancy of a property as there is no document, and
only a legal mortgage of the same can be created, after taking
the consent in writing of the landlord, in order to obviate
attracting the mischief of the bar under Section 15 of the
Bombay Rent Control Act, or the similar Act prevailing.
(xi) It often happens that the mortgaged premises consists of
land, building and machinery. In such a case, unless the land

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 is also equitably mortgaged, it is not possible to mortgage the
building or the fixed machinery i.e. machinery embedded in
the soil. While movable machinery can be hypothecated, fixed
machinery cannot be hypothecated, but must be equitably
mortgaged along with the land and building.
(xii) Consent under Section 281 of the Income Tax Act, 1961
should be obtained before creation of mortgage from the
concerned Income Tax Authorities. If such consent is not forth
coming from Income Tax Authorities for any reason
whatsoever, the party/borrower(s) should get his/their
auditor's certificate that as on that date at the time of creation
of mortgage, there are no tax demands/arrears pending for
payment.
(9) Notice to Sub-Registrar :
A notice should be addressed to the Talati / Mamlatdar / Sub-
Registrar / City Survey Officer of the Village/Taluka/City/Area
concerned, as the case may be, informing him of the creation of
equitable mortgage in Bank's favour and requesting him to record
the Bank's charge on the property mortgaged and to send copy of
the record of right to the branch thereafter. Copy of the record of
right, when received, should be kept along with the relative
documents.
(10) While it is not necessary to register an equitable mortgage with
the Sub-Registrar of Assurances, if the mortgagor is a company
such mortgage is required to be registered with the Registrar of
Companies within 30 days of its creation.
(11) Where an advance is granted against equitable mortgage,
branches should obtain an irrevocable power of attorney as per
LDOC-96 to convert equitable mortgage into legal mortgage, if so
stipulated in the sanction.
(12) Purchase of immovable properties by the Government :
Income tax officers have been vested with powers to purchase
immovable properties of the value exceeding the specified area-
wise limits, under certain circumstances. Similarly, for registration
of a property exceeding Rs. 10/- lacs, income tax clearance
certificate is required.
Therefore, while dealing with any property of the value exceeding
Rs. 10/- lacs the relative provisions of the Income Tax Act (as
amended) should be strictly complied with.
(13) Payment of taxes etc. : It should be ensured that the mortgagor
makes timely payment of all taxes (property tax/municipal tax)
and dues (e.g. lease, rent etc.) on the property charged to the
bank.
(14) Insurance :
Except where insurance is specifically waived, all buildings,
including fittings and fixtures, mortgaged to the Bank must be
adequately insured for full market values irrespective of the
quantum of advances against fire, strikes, riot and civil
commotion risks. Insurance policies must be in the joint names of
the Bank and mortgagor with Bank clause attached.

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(15) Sanction of increased facilities :
(i) If an existing equitable mortgage is to be extended to some
additional facilities sanctioned to the borrower, a
Supplemental Memorandum of Entry should be recorded at
the place or branch where original Memorandum of Entry has
been recorded. The mortgagor should personally or through
an authorised agent call at the branch and orally confirm that
the equitable mortgage on the Mortgagor's property created
earlier shall be extended and shall also be security for the
additional facilities sanctioned by the bank to the borrower.
Such oral confirmation is recorded by the person in whose
presence the said oral confirmation was given by the
mortgagor in the form of Supplemental Memorandum of Entry
as per draft LDOC-91. Such oral confirmation shall also be
made at a notified place.
(ii) The Supplemental Memorandum of Entry will also attract
stamp duty when it is created in a notified place where stamp
duty is payable on Memorandum of Entry relating to deposit of
title deeds. While the equitable mortgage is extended
subsequently for securing additional facilities even though
there is no deposit of title deeds with the bank, there is a
deposit of title deeds by constructive delivery. Hence the
Memorandum of Entry relating to constructive delivery of title
deeds will attract stamp duty for the amount of loan facility for
which the mortgage or charge is extended.
(16) Formalities and procedure for creation of second charge by
equitable mortgage in favour of our bank where first
charge is held by another financial institution/Bank :
In such cases, following procedure should be followed :
(i) Whenever terms of sanction of our Bank stipulate creation of
second charge over immovable and moveable assets of the
borrower, details of the properties charged and copies of
documents executed by borrower favouring first charge holder
alongwith copies of forms filed with Registrar of Companies (in
case of advance to a company incorporated under the
Companies Act, 1956) should be called for and obtained from
borrower for our perusal and records.
(ii) Take searches with the assistance of advocate of the Bank at
the office of Sub Registrar of Assurances as also at the office
of Registrar of Companies (in case of public limited
companies) and verify title of the borrower to the assets
proposed to be charged.
(iii) Request borrower to obtain consent of the financial
institutions/bank permitting second charge in favour of our
Bank over the assets already charged in their favour.
(iv) On receipt of letter from the First charge holder agreeing in
principle for creation of a second charge, scrutinise the same
and advise the first charge holder about our Bank's agreeing
to the stipulations such as :
(a) Our Bank will restrict the charge over immovable and
moveable assets to the extent of limit stipulated for in the
letter of sanction of our Bank.

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 (b) Our bank agrees to waive the rights vested in favour of
2nd charge holder restraining first charge holder to sell or
dispose of the assets charged to us by way of second
charge and insist that first charge holder should take steps
to realise its dues from other assets of the borrower which
may have been charged exclusively to such first charge
holder (Section 81 of the Transfer of Property Act, 1882
provides for such right in favour of second charge holder
which is subject to a contract to the contrary as may be
agreed by second charge holder with the first charge
holder).

(c) Our bank will authorise, by way of a special letter, the first
charge holder to act as agent for our Bank for creation of
second charge over immovable properties in our favour
and record the fact of such agency in the Memorandum of
Entry extending the mortgage and charge in our favour.
(d) Our Bank will obtain separately the document of
hypothecation of moveable assets from the borrower to
secure facilities granted by our Bank. Such hypothecation
will rank in favour of our Bank as second and subservient
to the charge created in favour of first charge holder by
virtue of time of execution and as will be specified therein.
(e) Our Bank will agree to execute other deeds and documents
including Inter-se Tripartite Agreement by and between
the borrower, the first charge holder and our Bank as
second charge holder to set out the terms of
understanding inter-se between parties.
(v) On the financial institution/Bank agreeing and accepting the
letter as aforesaid, our Bank will have to proceed to obtain
hypothecation of moveable plant and machinery present and
future, preferably specifying the major items thereof for
identification, at a future date.
(vi) All other documents as stipulated in the letter of sanction such
as demand promissory note, general form of guarantee, letter
of undertaking, power of attorney, hypothecation of book
debts etc. be obtained from the borrower. In case of borrower
being a company incorporated under the Companies Act,
1956, formalities of obtaining board resolution as also filing of
forms for registration of charge with Registrar of Companies
should be complied with.
(vii) It should be noted that under Section 125 and other applicable
provisions of Companies Act, 1956 even a creditor having
interest in the assets of the company by virtue of creation of
charge in his favour, can fill in and file particulars of charge
with Registrar of Companies. For this purpose, the registration
number of the company should be obtained in advance from
the company. If need be professional assistance of company
secretaries having independent practice of their own can be
availed for the purpose.
It has been held by courts that a charge is not void merely
because it is not registered, if the charge holder has sent
particulars of charge alongwith relevant instruments (copies).

132
 In such case, all the charges shall be deemed to have been
registered though they have not in fact been entered in the
register [SBI v/s. Depro Foods Ltd. 1988-64-Comp.Cases
375,384 (P&H)].
(viii) Follow-up with the financial institution/bank which is first
charge holder be initiated and specific letter of agency signed
by concerned Branch Manager be delivered with a request to
fix up a date and time to record Memorandum of Entry in their
books for creation of second charge in favour of our Bank (A
draft of Letter of Agency is given in APPENDIX - VI ).
(ix) The draft of Memorandum of Entry for creation of second
charge by way of extension of first charge as has been settled
by financial institution and bank should be sent to the first
charge holders after filling up necessary details of loans to be
secured by way of second charge with a request to finalise the
same within a week or so. (A copy of such draft is given in
APPENDIX - VII ).
(x) Before recording Memorandum of Entry by way of second
charge in our favour, proper stamp duty on such
Memorandum of Entry as applicable in accordance with Stamp
Act provisions of the State should be affixed. In the event of
exemption from stamp duty being available on account of
industry in backward area or due to any other reason, a copy
of the order of exemption be obtained and kept on our record.
It should be noted that exemption from stamp duty is
generally permissible for an industry in Backward Area for
acquisition of or expansion of fixed assets but not for securing
working capital finance.
(xi) In case of charge over immovable assets of public limited
companies, ensure that formalities of registration of our
Bank's charge over immovable properties are complied with by
the company forthwith. If after a lapse of about 15 days, the
form for registration of charge is not filed, then our Bank as
secured creditor should proceed to fill in the form and file the
same within stipulated period of 30 days from the date of
creation of mortgage in our favour.
(xii) On completion of mortgage formalities inter-se agreement
between the borrower, the financial institution/bank holding
first charge and our Bank holding second charge be executed
by and between the parties. It should be ensured that the
onerous clauses such as sharing insurance cost of the
insurance obtained and share in the payment of rent etc.
should not be agreed to without reference and approval of
higher authorities.
(17) Renewal of documents :
(i) While obtaining renewal documents, re-deposit of title deeds
should be avoided. In such case, a mere letter of
acknowledgement of debt should be taken reciting therein
inter alia that the equitable mortgage holds good.
Form of acknowledgement of debt for an advance
against equitable mortgage should be as under :-
I/We hereby admit and acknowledge my/our indebtedness in a

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 sum of Rs.________ under the _______ facility of Rs. ______
together with interest at _____% per annum over Bank's
Prime Lending Rate minimum ________% per annum or at
such other rate or rates as may be decided by the bank from
time to time from __________ till date of payment and
further acknowledge that the debt is secured in the manner
stated above and that the aforesaid documents of security and
the equitable mortgage created on _________ by deposit of
title deeds in respect of the property described above and/or
the extension of equitable mortgage by constructive delivery
or deposit of title deeds made on _______ and on
___________ are in full force and effect and that the security
created thereunder is in full force and effect.
(ii) Where the borrower is granted more than one facility against
equitable mortgage, the letter of acknowledgement of debt
should mention all the documents executed by the borrower in
respect of various facilities and the respective debit balances
and state that all these documents still hold good. In respect
of other facilities granted to the same borrower to which the
security created by an equitable mortgage is extended later,
the documents obtained in respect of the additional facilities
should be dealt with as under :-
(a) If the borrower is a limited company, the charge in respect
of the equitable mortgage is to be modified and the Bank's
usual Letter of Acknowledgement of Debt should be
obtained. The usual set of documents for the portion of
increase in the limit should also be obtained. The pronote
in this case should refer to the previous promissory note.
Along with the said documents letter of acknowledgement
of debt should be taken mentioning all documents.
(b)
(i) If the borrower is a partnership firm/proprietary
concern/individual etc. other than a limited company, if
the facilities are secured by equitable mortgage, usual
set of documents for the portion of increase in the limit
should be obtained and the equitable mortgage should
also be extended to secure the said portion of increase
in the limit. Along with the said documents, a letter of
acknowledgement of debt should also be obtained
mentioning all the original documents and documents
taken for the portion of increase in the limits. In no
case, the equitable mortgage created earlier should be
disturbed. In the documents taken for the portion of
increase as aforesaid, a reference to the earlier
promissory note and other documents should be made
in the respective documents.
(ii) If the facilities are not secured by equitable mortgage,
fresh documents may be taken and fresh securities
may be created for the total increase limits. All old
documents may be kept and preserved separately as
obsolete documents.
(18) General :
(i) Wherever disbursements are made on the strength of an

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 undertaking to create a mortgage which in any case should be in
exceptional cases and with prior permission of the sanctioning
Authority, branches should take care that the borrower complies
with the undertaking and creates mortgage maximum within a
period of three months or six months. He must be persuaded or
even pressurised to fulfill his undertaking and thereafter the
mortgage should be duly and properly created. Further, in such
cases, actual position in regard to the creation of the mortgage
should invariably be indicated in the next review proposal.
(ii) In respect of advances against buildings under construction, the
buildings should be valued by a qualified architect at different
stages of construction for the purpose of insurance and for
arriving at the advance value. Insurance cover should be
increased corresponding to the progress of construction of the
building.
(iii) In some states provision has been made for creation of equitable
mortgage by means of a declaration in a prescribed format duly
filed with the Sub-Registrar of Assurances in whose jurisdiction
the property is situated. Such declarations are permitted in case
of loans to small farmers and does not require to be stamped as
they are exempted from stamp duty.
(iv) Where immovable property is taken as a collateral security,
branches can sanction the approved facilities under the
discretionary powers vested. In such cases, drawings in the
account should strictly be regulated on the basis of the advance
value of the main security i.e. the value of the collateral security
should not be reckoned while computing the advance value as
well as exercising discretionary powers. For the purpose of
half-yearly returns, the outstanding balance should be treated as
secured, if it is fully covered by the total value of the main and
collateral securities irrespective of the value of the main security.
(v) Where immovable properties held as security by the Bank are
brought to sale by liquidators, the proceeds should ordinarily go
to adjust the borrower's liability to the Bank. If there are other
claims or unsatisfied charges against the property because of
which the liquidator, under orders of the Court, agrees to keep
the proceeds safe with the Bank as substituted security pending
the Court's decision on the claim issue, a separate General Ledger
account should be opened on the liabilities side "Substituted
Security A/c............... wherein the money received from the
Liquidator should be retained.
(19) Redemption :
The immovable property mortgaged to the bank may be released
from the charge on liquidation of the advance in full. The title
deeds should be delivered to the mortgagor against his proper
acknowledgement. In case of limited companies, a memorandum
of satisfaction of charge should be filed with the concerned
Registrar of Companies.
(B) Advances against plant & machinery :
Generally term loans/demand loans are considered for purchase of
plant and machinery under the bank's specific lending schemes.
Machinery to be financed should be of good quality and the
manufacturers should be of repute. Quotations/proforma invoices

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 should be obtained to ascertain the value of the machinery. The
suitability of the machinery to the proposed activity be studied. List
of other users of machinery supplied by the manufacturers / vendors
be obtained to satisfy its quality. Manufacturer's warranty available
should also be ascertained. It should also be ensured that adequate
technical expertise is available for installation of the plant &
machinery. The disbursement of loan should be made directly to the
manufacturer / dealer/ supplier. Purchase of second hand plant and
machinery should not be financed except in case of imported second
hand machinery.
Where plant and machinery are embedded to the land, they should
be mortgaged and the other machinery should be hypothecated. In
the case of advance to a joint stock company, charge on plant and
machinery should be got registered with the registrar of joint stock
companies.
Inspection of plant and machinery should be carried out once in six
months. In case of advances to industrial units, inspection report
should be submitted in the prescribed format.
Branches should maintain a register showing borrower-wise record of
valuation of plant and machinery hypothecated to the Bank. The
register should have columns, such as
(i) Date of purchase,
(ii) Details of machinery with identification numbers (serial number,
chasis number, engine number, make, year of manufacture, horse
power etc.),
(iii) Name of the supplier with the address
(iv) Date and the number of invoice along with the purchase price
(v) Condition
(vi) Depreciated value of the machinery showing the basis of
calculating depreciation and the rate of depreciation.

Initial valuation of the machinery should be based, in the case of new

machinery, on the purchase price as shown by the invoices and in the
case of second hand machinery on the cost of acquisition. In the case
of old machinery, valuation should be done by the Bank's approved
valuer and the amount arrived at by him should also be mentioned in
the register. The valuation report should be preserved for any future
reference. Depreciation should be worked out at the rates prescribed
by the Income Tax Act, 1961.
For calculating depreciation, written down value method should be
followed. If any other method is followed, it should be clearly
indicated in the register. The method of depreciation once decided
should be consistently followed from year to year. Any departure
therefrom should be justifiable and suitable mention should be made
in the register.
In order to ascertain the veracity of this, branch should examine the
declaration made to the Income-tax department and study the
income tax officer's findings thereon on completion of the borrower's
assessment. In no case should the borrower be allowed to revalue
the machinery on an ad hoc basis to cover any deficit in the account.
Any accretion/sale of machinery should also be reflected in the
register and the drawing power should be adjusted accordingly.

3.4.8 ADVANCES AGAINST MOTOR VEHICLES:

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 Advances, generally term loan and demand loan, against hypothecation
of motor vehicles should be considered under the Bank's specific lending
schemes. Whenever advances are considered, the following guidelines
should strictly be adhered to :
(i) Where the borrower is financed for plying the vehicle as a public
carrier, the applicant should procure the necessary permit within a
reasonable time and such vehicles should be registered as 'Public
Carrier' and not as 'Private Carrier'.
(ii) Where the lending scheme stipulates that the vehicle should be
owner driven, the applicant should have a licence for driving that
category of the vehicle which is proposed to be financed. It should
not be a learner's driving licence.
(iii) Disbursement of loan towards purchase price of the vehicle should be
made directly to the dealer/ supplier subject to the condition that the
vehicle would be registered in the name of the borrower and that the
Bank's lien on the vehicle would be noted in the registration
certificate. In such cases, the supplier/dealer should send the
manufacturer's form F, letter of sale and form 'E' signed by the
purchaser directly to the branch, which should ensure that the vehicle
is registered and the Bank's lien is noted in the registration
certificate. Form E should be signed by the borrower as well as by the
Bank. Disbursement for fabrication of body should be made in phased
manner depending upon the progress of work. The draft drawn in
favour of vendor/ supplier representing cost of vehicle should not be
handed over to borrower or his representative, but should invariably
be sent to the dealer by registered post / courier, along with a
forwarding letter stating the details of loan and our lien on the vehicle
etc.
Branches should clearly indicate in the form HPA or form E, as
prescribed under the Motor Vehicles Act, that the vehicle in question
is hypothecated or is the subject of hire-purchase agreement. In case
the vehicle is hypothecated, the amount of loan should also be
indicated. Accordingly endorsement would be made in the registration
certificate Book by the Regional Transport Office.
(iv) Bank's lien on the vehicle should be noted with the regional transport
authority and a photostat/certified copy of the registration certificate
should be kept along with the documents.
(v) Borrower should execute an irrevocable power of attorney in favour
of the Bank as per LDOC-101. The power of attorney need not be
taken in case of vehicles financed under Personal Loan Scheme.
(vi) Borrower should execute a blank "Transfer of Ownership Form"
(LDOC-67), in duplicate.
(vii) In case of advances to joint stock companies, charge should be
registered with the Registrar of joint stock companies.
(viii) Vehicle should be insured for comprehensive and SRA risks with Bank
interest clause and relative insurance policy be kept on record.
(ix) The vehicle (except the one financed under Personal Loan Scheme)
should be inspected every six months. If there is any prima facie
defect in the vehicle or doubt about it, it should be examined by an
experienced mechanic to assess its roadworthiness. It should be
ascertained whether (a) all taxes are duly paid (b) certificate of
fitness and route permit are valid in case of a public carrier and (c)

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 borrower's driving licence, where applicable, is valid.
(x) A record of the depreciated value of the vehicle should be maintained
in the Plant & Machinery Register on the lines applicable to plant and
machinery.
(xi) In terms of the Motor Vehicles (Amendment) Act, 1978, the Regional
Transport Officer requires 'no objection certificate' from the financier
in case the owner of the vehicle applies for a fresh registration mark,
transfer of ownership of the vehicle, change in the state of
registration, renewal of permit etc. In case the borrower has not been
prompt in repaying the installment amounts stipulated, branches
should take advantage of the provisions of the said Act to discipline
the borrower.
(xii) Advance facility against second hand motor vehicle should be
considered only where permitted under the bank's specific lending
scheme. In such cases, branches should note the following points
(a) The vehicle should not be older than the period permitted under
the concerned lending scheme.
(b) The vehicle should be in good condition and should not have been
seriously damaged earlier.
(c) The second hand motor vehicle should be assessed by a qualified
automobile engineer approved by an insurance company and who
has experience of over five years. Margin should be maintained on
the value assessed. The valuation report should generally contain
the following particulars, in addition to any other information that
may be relevant :
(i) Make & description of the vehicle,
(ii) Year of manufacture,
(iii) Date of registration,
(iv) Engine number,
(v) Chassis number
(vi) Condition of the engine,
(vii) Condition of rear axle,
(viii) Condition of gear box,
(ix) General condition of the vehicle.
The report should further indicate :
(1) Whether immediate repairs are necessary, and if so,
estimated cost of repairs to make the vehicle road worthy.
(2) Condition of the body and whether it needs repairs and, if
so, approximate repair charges.
(3) Estimated market value of the vehicle excluding tyres.
(4) If no repairs are necessary, the estimated economic span
of life, provided the vehicle is properly maintained.
(5) If the repairs are carried out as suggested, the estimated
span of life, provided the vehicle is maintained properly
after the repairs.
(d) Fresh comprehensive (including SRCC) risk insurance policy
should be taken with Bank Interest Clause.
(e) If the vehicle is registered in another state, 'No Objection

138
 Certificate' from the concerned Regional Transport Officer should
be obtained before disbursement.
(f) Payment should be made to the transferor of the vehicle only
after it is transferred in the name of the borrower and the Bank's
lien is noted in the registration certificate. In case the transferor
raises any objection, branches should give an undertaking that
the money would be paid to him directly after the registration of
the vehicle in the name of the borrower with bank's lien noted
with the RTO.
(g) No advance should normally be made if the transferor has only
duplicate registration certificate book. Thorough enquiries should
be made in such cases.

(xiii) If an applicant wants to repay the loan taken from a private financier,
branches should consider the request keeping in view the guidelines
given. In addition, branches should obtain a letter from the financier
stating the total amount borrowed and the present outstanding
balance and also whether the applicant has been regular in making
payment of monthly installments and interest. The reasons for
approaching the Bank at this stage should be ascertained. If the
installments have not been paid regularly, it is desirable to refuse the
advance. Where considered, advance should be sanctioned only to
the extent of the balance outstanding with the financier or the
advance value based on the assessed value less margin thereon,
whichever is lower.
(xiv) Advance should not be granted against a vehicle to reimburse the
applicant with the funds earlier invested by him.
(xv) Market value of hypothecated vehicles should be arrived at after
taking into account the normal depreciation per year. For this
purpose, part of the year which is more than six months should be
treated as a full year and depreciation calculated accordingly. If it is
less than six months, depreciation for the year may be ignored. The
advance should be classified as "secured" to the extent of such
depreciated value and the balance as 'unsecured'.

3.4.9 ADVANCES AGAINST BANK’S OWN DEPOSIT:

Advances against bank's own fixed and short term deposits can be
considered by Branch Managers under their discretionary lending powers.
Bank's norms, in this respect are summarised hereunder :
(1) Advances may be considered by way of overdrafts or demand loans.
(2) Margin :
(i) Branch Heads are authorised to consider loans and overdrafts
against bank’s fixed deposit receipts at a reduced margin of 5% (
as against the present margin of 15%) against deposit of duly
discharged fixed/short deposit receipts of all tenors, subject to
following terms and conditions:-
(a) The interest charged to the advance account is to be
deposited by the borrower, within a period of seven days from
the day the interest is applied.
(b) In case the interest applied is not deposited for more than two

139
 quarters, branches to appropriate term deposit.
(ii) In case of RIRD receipts margin will be retained on the amount of
deposit plus accrued interest credited in the account.
(iii) Advances to staff members may be considered at a minimum
margin of 5%.
(iv) No excess over the advance value (value of TDR minus stipulated
margin) be allowed.
(3) Securities :
(i) Pledge of deposit receipt which should be discharged by the
depositor on the reverse at the space provided on a revenue
stamp. His/her signature should be verified.
(ii) Letter of deposit of FDR/SDR (LDOC-16) duly signed by the
depositor. In case of third party deposit, the said letter should
also be signed by the third party.
(iii) Bank's lien should be noted on the deposit receipt as well as in
the respective term deposit ledger folio and term deposit register.

(iv) In case of deposit in joint names, the deposit receipt should be

discharged and other documents signed by all the joint
depositors. However, where the joint depositors have already
given a letter of consent authorising the Bank to allow advance
against discharge given by one or more of them, advance can be
granted against the discharge given in terms of the said letter. A
proforma of the said letter of consent by joint depositors is given
as APPENDIX - II to the Chapter - V on `Term Deposits' in
VOLUME - 1.
(4) Repayment schedule :
(i) No repayment schedule is to be stipulated. The borrower may
repay the loan as per his convenience. In case, the loan is not
adjusted before maturity of TDR it should be adjusted out of TDR
proceeds.
(ii) The interest applied in the account should however, be recovered
within a period of 7 days of from the date the interest is applied.
(5) Rate of interest :
Branches should be guided by the instructions conveyed through
circulars from time to time. However, present instructions effective
from 01-01-2003 for all fresh as well as existing accounts for Loan to
Depositor Borrower and with effect from 01-10-2003 for Loan to
Third Parties :
Category of Deposit Schedule of Interest Rate
Loan to Depositor Loan to Third Parties
Borrower
Domestic/NRE/NRNR 1% over the deposit 2.0% over the deposit rate or
Deposits including rate with monthly 1.5% below the bank’s
deposits from Staff rests relevant PLR ( as per tenure
of advance), whichever is
higher, with monthly rests.

(ii) Where deposit receipts bearing different rates of interest are

140
 lodged, branches should open separate loan accounts for each lot
of deposit receipts bearing the same rate of interest.
Alternatively, branches should calculate weighted average rate of
interest payable on the deposit receipts and add the stipulated
differential of 1% for advance to depositor borrower/ 2% over
deposit rate or 1.5% below reference PLR (which ever is higher)
for advance to third party , , to find out the rate of interest
chargeable on the advance against such deposit receipts. The rate
of interest so worked out should be rounded up (not down) in
multiple of 0.25%.
(iii) Where the interest payable to the depositor on premature
withdrawal is reduced, the interest charged on the advance
thereagainst should also be reduced to keep the differential of 1%
for advance to depositor borrower/ 2% over deposit rate or 1.5%
below reference PLR (which ever is higher) for advance to third
party , .
(iv) In case of loan against deposits prematurely withdrawn before
completion of 30 days, branches should charge the normal rate of
interest on such advances.
(6) Advances against third party deposits :
(i) With the substantial reduction in margin and in rate of interest,
the branches will be able to increase this portfolio substantially.
For granting advances against third party, the branch will have to
obtain approval from the next higher authority.
(ii) For deposits standing in the name of depositor in another branch,
no advance can be granted thereagainst in any other branch till
the deposit is transferred to the lending branch.
(iii) The following are not considered `third parties' for advances as
above :
(a) Where advance is granted against the deposit in the name of
the borrower jointly with another person.
(b) Where advance is granted to a sole proprietory firm against a
deposit in the name of its sole proprietor singly or jointly with
another person who may or may not be related to him.
(c) Where advance is granted to a partnership firm against a
deposit in the name of one of the partners singly or jointly
with another person who may or may not be partner in the
firm and may or may not be related to him.
(d) Where advance is granted to a guardian against a deposit in
the name of his ward and such guardian is competent to
borrow on behalf of the ward. (This is stated only for
information of the branches as advances are not sanctioned
against deposits held in the sole name of the minor).
(e) Where advance is granted to a Hindu Undivided Family against
the deposit in the name of a coparcener of the HUF, provided
the deposit belongs to the HUF. For this purpose, branches
should obtain factual confirmation by acceptable evidence, i.e.
declaration by all coparceners including the Karta of the HUF
as to how that deposit is treated for tax purpose.
(7) Advances against deposits kept with other branches :

141
 (i) For deposits standing in the name of depositor in a branch within
the same city, no advances can be granted thereagainst in
another branch in the same city till the deposit is transferred to
the lending branch.
(ii) As regards deposits standing in the name of the depositor in an
outstation branch, before granting advances thereagainst in
another branch, concerned deposit will have to be first transferred
to the branch where advances are sought to be availed.
(iii) Similarly, for deposits in the name of third party at an outstation
branch, before granting advances there against at another
branch, besides obtaining approval of next higher authority the
concerned deposit has also to be transferred to the name of the
branch where advance is to be availed.
(8) Advances against time deposits in the names of minors jointly
with guardians :
Branches may grant, in special cases and to valuable clients,
advances against fixed/short deposits receipts standing in the names
of minors, including minor ward of a staff member, jointly with
guardians. While considering such advances, the following points
should be noted :
(i) Advances against fixed deposit receipts standing solely in the
names of minors should not be considered.
(ii) Such advances per party should not exceed Rs. 10,000/-.
Advances above Rs. 10,000/- can be granted with prior
approval/sanction of the Regional Manager.
(iii) A declaration as per APPENDIX - III Chapter - V of VOLUME 1
should be obtained in addition to our usual security documents.
(9) Bank's lien :
(i) The Bank's lien on deposits, against which advances have been
granted or guarantees etc. executed by the branch, should be
noted in the registers and the ledgers as also on the receipts.
(ii) Should any person or another bank write to the branch to register
a lien on any deposit, a reply should be sent that the deposit is
not transferable and that payment can be made only on maturity
to the depositor or under his authority on production of the
receipt duly discharged by him and subject to the Bank's lien or
set-off, if any, on the deposit at the time of payment.
(10) Other conditions/guidelines :
(i) A sanction memo (APPENDIX - IV) should be prepared by the
branch containing terms & conditions of advance and details of
TDR's pledged to the bank duly signed by the Branch head and
kept with the documents.
(ii) Such credit decisions need not be reported to controlling authority
in the fortnightly statements, unlike other advances.
(iii) No advance should be granted against a term deposit on the
same day on which it is issued.
(iv) Letter of Acknowledgement of Debt need not be obtained as long
as the advance is covered by the term deposit. Fresh documents
need not be obtained at the end of the fourth year. The facility

142
 need not be reviewed periodically. On maturity of the term
deposit, advance facility should not be renewed by renewing the
term deposit receipt.
(v) Standing instructions as per LDOC-47 should be obtained from
the depositor to credit accrued interest on the deposit to the
loan/overdraft account during the currency of the advance. If the
advance has been granted against a third party deposit and the
third party is not willing to give such standing instructions, the
advance account must be watched carefully and it should be
ensured that the outstanding advance does not exceed the
prepayment value of the deposit.

For this purpose branches should calculate prepayment value

every September and March and note it at the top of the ledger
folio. Where the outstanding balance including interest is
expected to exceed the prepayment value of the deposit, action
must be initiated to put the account in order. If there is no
positive response from the concerned parties within a month, the
deposit receipt should be prepaid after giving due notices to the
concerned parties.
(vi) The due date of the deposit receipt should be noted in the diary.
On maturity, the proceeds of the deposit should be appropriated
to liquidate the advance. The balance amount of deposit, if any,
should be prepaid to the depositor by issuing a banker's cheque
or crediting to savings/current account. In case of third party
deposit, care should be taken not to repay the balance amount to
the borrower.
(vii) Where a term deposit receipt is offered as a collateral security by
a guarantor to an advance facility, the proceeds should not be
appropriated on its maturity towards repayment of the advance.
In such cases, the term deposit can be renewed and the renewed
deposit receipt duly discharged by the depositor should be held by
the branch. Proceeds of term deposit should be appropriated only
in case of default by the borrower.
(viii) Where a term deposit receipt is reported lost, the branch should
first arrange to issue a duplicate receipt after completing
necessary formalities and thereafter grant the advance against
the duplicate term deposit receipt.
(ix) Advances against recurring deposits :
Loans may be considered against the balances in the recurring
deposit accounts with 15% margin. Minimum loan amount should
be Rs 500/- in Semi-urban & rural branches and Rs 1000/- in
Urban & Metro branches . ( No advance should be granted
against the accounts of third parties.
Branches should obtain the Recurring deposit Account pass book
duly discharged by the depositor on a revenue stamp along with
an unstamped letter of appropriation (LDOC-48). Advance to the
guardian against a recurring deposit account held by him jointly
with his ward should not be considered unless the account has
run for atleast one year.
All other rules as applicable to advances against Bank's fixed
deposit receipts will apply mutatis mutandis to advances against

143
 recurring deposit accounts.
(x) Advances against balances in savings bank/current
accounts :
Branches are authorised to grant advances, under the
discretionary powers vested, against earmarking of balances in
saving bank/current accounts subject to the following conditions :
(a) A letter of undertaking (LDOC-49) should be obtained from
the constituents. The letter of undertaking should be treated
as an agreement for the purpose of stamp duty.
(b) Facility can be granted against earmarking of balance in the
current/savings bank account of the borrower or the third
party.
(c) Interest rate and margin on such advances should be
stipulated after making a reference to the Regional Authority.
(d) No countervailing interest on balance in savings bank account
should be paid even if the advance has been granted against
earmarking the balance in such account.

3.4.10 ADVANCES AGAINST SHARES AND DEBENTURES:

(A) Statutory Limit - Share Holding in Companies
In terms of Section 19(2) of the Banking Regulation Act, 1949, no
banking company shall generally hold shares in any company,
whether as pledgee, mortgagee or absolute owner of an amount
exceeding 30% of the paid-up share capital of that company or 30%
of its own paid-up share capital and reserves, whichever is less.
Shares held in demat form should also be included for the purpose of
determining the exposure limit. This is an aggregate holding limit for
each company. While granting any advance against shares,
underwriting an issue of shares, or acquiring any shares on
investment account in lieu of debt of any company, these statutory
provisions should be strictly observed.
(B) Regulatory Limit - Share Holding in Companies
As per RBI guidelines, the bank’s aggregate exposure to capital
markets shall not exceed 5% of total outstanding advances (including
Commercial Paper) as on 31st March of previous year. Within this
overall ceiling, banks investment in shares, convertible bonds and
debentures and units of equity-oriented mutual funds should not
exceed 20% of its net worth.
This ceiling of 5% prescribed apply to total exposure including both
fund based and non-fund based to capital market in all forms,
Aggregate Exposure for the purpose would mean the following:
y Direct Investment in equity shares, convertible bonds and
debentures and units of equity-oriented mutual funds.
y Bank finance for financing promoter's contribution towards equity
capital of new companies
y Bridge loans to companies
y Advances against shares to individuals for investment in equity
shares (including IPOs), bonds and debentures, units of

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 equity-oriented mutual funds etc.,
y Secured and Unsecured advances to stock brokers and
guarantees issued on behalf of stock brokers and market makers.
Note:
For computing the ceiling on exposure to capital market, direct
investment in shares by banks will be calculated at cost price of
the shares.
The said ceiling shall not include:-
y Collateral of equity shares/bonds and debentures offered to the
Bank by corporate other than NFBCs for availing secured lending
for Working Capital or other productive purposes which do not
involve stock broking or investment in capital markets.
y Advances made by banks to individual for personal purpose like
education, housing, consumption etc.
(C) Margin Requirements - Capital Market Exposure
Margin requirements in advances resulting in exposure to capital
market are as under:-
Š Minimum margin of 60% on physical shares/securities and
50% on dematerialized shares/securities
Š Minimum Cash Margin of 40% ( and balance to be 100%
secured by first charge on tangible collateral securities), in
respect of guarantees issued by the Bank. Branch are advised
to comply with the regulatory restrictions , inter-alia, on loans
and advances against share and debentures and should also
ensure that
(i) The party should be well known, of good standing and should have
capacity to pay the additional margin immediately, if required.
(ii) Share prices are very volatile and hence branches should keep careful
watch on the movement of prices of the shares taken as security.
(iii) Drawing power in the overdraft account is to be set and monitored at
frequent intervals at the time of high volatility in the market or of at
least once in a month. A security register/ valuation register with
details of valuation and calculation of drawing power be maintained.
(iv) Branches should, therefore, ensure genuineness of the scrips lodged
with them as security as there have been reports of fake and benami
share certificates circulating in the stock market.
(v) Specific powers are given to various authorities for sanctioning
advance against shares by Board from time to time which should be
strictly adhered to.
(vi) While accepting shares as a security blank transfer deed should be
got signed by the transferor/borrower and his signature thereon
should be witnessed.
(vii) Original share certificate should be obtained along with the blank
transfer deeds. The genuineness of the certificates needs to be
verified. It should have common seal of the company, certificate
number, distinctive numbers and ledger folio etc.
(viii) Shares of different companies should be accepted as security to

145
 diversify the risk. Shares accepted should be on the approved list of
the Bank.
(ix) Large block of any one company shares should not be accepted as
security instead smaller lots of more companies should be preferred.
(x) Shares tendered as security should be in the name of the borrower
and no third party shares should be accepted.
(xi) Prior permission of Regional Authority be obtained before making an
advance to a director or a person interested in a company against the
shares of said company.
(xii) Only fully paid shares should be accepted. In no case partly paid
shares should be accepted.
(xiii) Shares should be in marketable lots. Shares of private limited and
unlisted companies should not be accepted.
(xiv) While getting shares transferred in the bank's name it should be
ensured that same shares are received back which were lodged for
transfer.
(xv) Bank may accept instructions for collection of dividends for those
shares taken as security.
(xvi) Proper noting of lodgement and withdrawal of shares should be kept
in Lodgement Register (R-47) and Withdrawal Register (R-48)
respectively. Acknowledgement of customers for delivery should be
obtained and lodgement should accompany the delivery letters. The
shares should be kept in proper custody.
(xvii) Advances against shares need careful monitoring. Considering the
nature of security like transferable share certificates with blank
signed transfer deed, proper care for safety needs to be taken.
(xviii) Where the shares are not transferred in Bank's name, notice of
bank's lien on the shares should be sent, in duplicate, to the
company by registered post A.D. with a request to retransmit the
duplicate confirming thereon that the Bank's lien has been noted in
their records.
A copy of the notice, postal acknowledgement and the company's
acceptance or refusal of the notice should be filed along with other
relative documents. Notice should be sent even to those companies
which are not in the habit of noting the Bank's lien. This would
indirectly enable the Bank to ascertain the genuineness of the
certificates lodged.
(xix) Change in policy about margin, rate of interest etc. announced by
Reserve Bank of India and communicated by Corporate Office from
time to time should be followed scrupulously.
(xx) No loans shall be granted to partnership/ proprietorship concerns
against the primary security of shares and debentures.
(xxi) Bank has formulated lending schemes for advances against approved
shares/debentures, details thereof are mentioned below :
(1) Lending scheme for advances against approved shares and
debentures for individual borrower :
(i) Eligibility :
(a) Any adult individual engaged in any gainful activity having

146
 regular sources of income or is otherwise considered
creditworthy.
(b) Two or more individuals in whose names shares/debentures
stand may also be eligible under the above category.
(ii) Purpose :
(a) For meeting contingencies and personal purposes like
education, housing consumption (Will not form part of ceiling
on exposure to capital market).
(b) subscribing to Right/new issue of shares, debentures and also
for purchase of shares/debentures in the secondary market
against security of existing shares/debentures. (will form part
of ceiling on exposure to capital market.)
(iii) Nature of facility :Overdraft/Demand Loan.
(iv) Maximum limit :
Rs. 10/- lacs. (In both cases, whether shares are held in physical
or demat form)
(v) Security :
Pledge of shares and debentures which are on the approved list of
the Bank.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares/debentures.
(vii) Interest : PLR + 2%
(viii) Repayment :
(a) Demand Loan facility may usually be for a period of three
years repayable in monthly/quarterly/half yearly installments
subject to annual review. Longer repayment period may be
considered on case to case basis.
(b) Overdraft facility to be continued subject to annual review.
(ix) Documents to be executed :
(a) D P Note.
(b) Letter of continuing security (for O/D facility).
(c) Stamped document of pledge of securities as per Bank's
prescribed format together with pledge of relative
shares/debentures.
(d) Take delivery letter.
(x) Transfer of shares :
As per RBI's guidelines for credit limit less than Rs. 10/- lacs per
party transfer of shares/debentures in Bank's name is not
mandatory. However, if credit limit is Rs. 10/- lacs,
shares/debentures must be transferred in Bank's name.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :

147
 (a) Advances should not be granted for speculative activity.
(b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,
credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing/proposed source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
(2) Lending scheme for advances against approved shares and
debenture for investment companies :
(i) Eligibility :
(a) Public/Private Limited Companies with a diversified portfolio of
investment/not confirmed to a company or group of
companies and having regular sources of income.
(b) Total outside liabilities of the borrowing companies (including
proposed bank borrowings) not to exceed ten times of
company's owned funds.

(ii) Purpose :
Advances of a bridging nature to cover the gap between resources
currently available and existing and proposed investment in
shares and debentures of other companies, pending their
mobilisation of long term funds through capital, resources
deposits etc.
(iii) Nature of facility : Overdraft / Demand Loan.
(iv) Maximum limit :
Amount required to cover the gap between resources currently
available and their proposed investment in shares and debentures
subject to a condition that the total (including proposed bank
borrowings) not to exceed ten times of borrower's owned funds.
(v) Security :
Pledge of shares and debentures which are on the approved list of
the bank. In case of credit limit over Rs. 25/- lacs, bank to
endeavour for tangible collateral security such as mortgage of
properties etc.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares / debentures.
(vii) Interest : PLR + 2%
(viii) Repayment :
Overdraft/Demand Loan facility will be for a maximum period of
nine months repayable at monthly/quarterly intervals.
(ix) Documents to be executed :

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 (a) DP Note.
(b) Letter of continuing security (for O/D facility).
(c) Stamped document of pledge of securities as per Bank's
prescribed format together with pledge of relative shares /
debentures.
(d) Take delivery letter.
(x) Transfer of shares in Bank's name : Not mandatory.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :
(a) Advances should not be granted for speculative activity.
(b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,
credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing/proposed source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
(3) Lending scheme for advances against approved shares and
debentures for shares and stock brokers :
As per Reserve Bank of India’s guidelines, depending on the
commercial judgement Bank is free to provide credit facilities to stock
brokers and market makers within the policy framework approved by
their Boards. However, in order to avoid any nexus emerging
between interconnected stock broking entities and banks, RBI desires
that the Board of each bank should fix, within the overall ceiling of
5% of their total outstanding advances (including commercial paper)
as on March 31st of the previous year a sub-ceiling for total advances
to :-
y All the stock brokers and market makers (both fund based and
on-fund based, i.e. Guarantees); and
y To any single stock broking entity, including its associates/inter
connected companies.
Therefore, Bank has framed policy fixing a cap of Rs 50 Crores for the
Bank as a whole, as the limit to advances to all the stock brokers and
market makers (both fund based and non-fund bases). Any advance
facility to stock brokers and market makers would require Activity
Clearance from the Corporate Office.
(i) Eligibility :
(a) Individual share broker, proprietory/partnership firms and
limited companies.
(b) Borrowers should be registered with any stock exchange

149
 authority/SEBI.
(ii) Purpose :
(a) For meeting working capital requirements against shares and
debentures held by them as stock-in-trade.
(b) Large scale investment in shares and debentures on own
account with bank finance should not be encouraged.
(iii) Nature of facility : Overdraft / Demand Loan
(iv) Maximum limit :
Need based requirements of the borrower subject to a condition
that large scale investment in shares and debentures on own
account should not be encouraged.
(v) Security :
Pledge of shares and debentures which are on the approved list of
the bank. In case of credit limit over Rs. 50/- lacs bank to
endeavour for tangible collateral security such as mortgage of
property etc.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares / debentures.
(vii) Interest : PLR + 2%
(viii) Repayment :
(a) Demand Loan facility may be for a maximum period of three
years repayable in monthly/quarterly/half yearly installments
subject to annual review. Longer repayment period may be
considered on case to case basis.
(b) Overdraft facility to be continued subject to annual review.
(ix) Documents to be executed :
(a) DP Note.
(b) Letter of continuing security (for O/D facility).
(c) Stamped document of pledge of securities as per bank's
prescribed format together with pledge of relative
shares/debentures.
(d) Take delivery letter.
(x) Transfer of shares in bank's name :
If shares and debentures are held by the borrower beyond -9-
months, the same may be transferred in bank's name.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :
(a) Advances should not be granted for speculative activity.
(b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,

150
 credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing/proposes source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
(4) Lending scheme for advances against approved shares and
debentures for trust and endowment :
(i) Eligibility :
(a) Trusts and endowments to be registered with appropriate
authority.
(b) Trust deed/endowment deed to provide appropriate clause for
borrowing from bank against pledge of shares and debentures
in the name of the trust/endowment.
(ii) Purpose :
Bridge Loans for the purpose of fresh investment / subscription to
right issue.
(iii) Nature of facility : Overdraft / Demand Loan.
(iv) Maximum limit : Rs. 5/- lacs.
(v) Security :
Pledge of shares and debentures which are on the approved list of
the bank.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares/debentures.
(vii) Interest : PLR + 2%
(viii) Repayment :
(a) Demand Loan facility will be for a maximum period of -9-
months repayable at monthly/quarterly intervals.
(b) Overdraft facility to be allowed for -9- months.
(ix) Documents to be executed :
DP Note.
(a) Letter of continuing security (for O/D facility).
(b) Stamped document of pledge of securities as per bank's
prescribed format together with pledge of relative
shares/debentures.
(c) Take delivery letter.
(x) Transfer of shares in bank's name : Not mandatory.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :
(a) Advances should not be granted for speculative activity.

151
 (b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,
credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing/proposed source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
(5) Lending scheme for advances against approved share and
debentures for market makers :
(i) Eligibility :
The borrowers should be engaged in buying and selling of
securities by offering two way quotations. The borrower is to be
on the approved list of SEBI as market maker.
(ii) Purpose :
To meet working capital requirements for carrying out business
operations as market maker.
(iii) Nature of facility : Overdraft / Demand Loan.
(iv) Maximum limit :
Need based working capital requirements without any ceiling
limit.
(v) Security :
Pledge of shares and debentures which are on the approved list of
the bank. In case of credit limit over Rs. 50/- lacs, bank to
endeavour for tangible collateral security such as mortgage of
property etc.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares / debentures.
(vii) Interest : PLR + 2% .
(viii) Repayment :
(a) Demand Loan facility may be for a maximum period of three
years repayable in monthly/quarterly/half yearly installments
subject to annual review. Longer repayment period may be
considered on case to case basis.
(b) Overdraft facility to be continued subject to annual review.
(ix) Documents to be executed :
(a) DP Note.
(b) Letter of continuing security (for O/D facility).
(c) Stamped document of pledge of securities as per bank's
prescribed format together with pledge of relative
shares/debentures.
(d) Take delivery letter.

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 (x) Transfer of shares in bank's name :
If shares and debentures are held by the borrower beyond -9-
months, the same may be transferred in bank's name.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :
(a) Advances should not be granted for speculative activity.
(b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,
credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing/proposed source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
NOTES :
(1) Bank's exposure by way of advances against approved shares and
debentures to market makers be kept within a cap of Rs 50
Crores for the Bank as a whole, as the limit to advances to all the
stock brokers and market makers (both fund based and non-fund
bases). Any advance facility to stock brokers and market makers
would require Activity Clearance from the Corporate Office.
(2) Valuation of securities accepted as security should be based on
prevailing market price of relative shares/debentures.
(6) Lending scheme for advances against approved shares and
debentures for primary dealers :
(i) Eligibility :
Primary Dealers (PDs) as approved by Reserve Bank of India,
which presently are the following :
(a) Discount and Finance House of India Ltd.
(b) Securities Trading Corporation of India Ltd.
(c) SBI Gilts Ltd.
(d) PNB Gilts Ltd.
(ii) Purpose : For meeting need based working capital requirements.
(iii) Nature of facility : Overdraft / Demand Loan
(iv) Maximum limit :
No ceiling limit - Need based working capital requirements may be
considered.
(v) Security :
Pledge of shares and debentures which are on the approved list of

153
 the bank.
(vi) Margin : 60% of market value of shares/debentures if held in
physical form and 50% on market value of shares / debentures.
(vii) Interest : PLR + 2% +
(viii) Repayment :
(a) Demand Loan facility may be for a maximum period of three
years repayable in monthly/quarterly/half yearly installments
subject to annual review. Longer repayment period may be
considered on case to case basis.
(b) Overdraft facility to be continued subject to annual review.
(ix) Documents to be executed : D P Note.
(a) Letter of continuing security (for O/D facility).
(b) Stamped document of pledge of securities as per bank's
prescribed format together with pledge of relative
shares/debentures.
(c) Take delivery letter.
(x) Transfer of shares in bank's name :
If shares and debentures are held by the borrower beyond -9-
months, the same may be transferred in bank's name.
(xi) Sanctioning authority :
Various delegated authorities upto the discretionary powers fixed
by the Board from time to time.
(xii) Other conditions :
(a) Advances should not be granted for speculative activity.
(b) Borrowers should preferably avail advances from one bank
only unless there are cogent reasons for availing facilities from
other banks.
(c) If the borrower is having account relationship with other bank,
credit report from the concerned bank is to be obtained. Only
if the report is satisfactory, credit facility can be considered.
(d) In case of Demand Loan facility, borrower has to specifically
satisfy the bank about the repayment capacity out of his
existing proposed source of income of a regular nature.
(e) All other laid down norms/guidelines/safeguards as prescribed
by the RBI/Bank's internal guidelines are to be complied with.
NOTES :
(1) Bank's exposure by way of advances against approved shares
and debentures to primary dealers be kept 2% of our bank's
net credit at any point of time.
(2) Valuation of securities accepted as security should be based
on prevailing market price of relative shares/debentures.

3.4.11 ADVANCES AGAINST GOVERNMENT SECURITIES:

Advances against Central and State Government securities should be

154
 made in the form of overdraft or demand loan depending on the
convenience of the borrowers.

Branches should note the following while accepting Government

Securities for the purpose of advance:
(i) Government Promissory Notes etc. should be in the name of the
borrower as the original holder or endorsed to him by a commercial
bank. In all other cases, the borrowers should be advised to have the
securities renewed in their names before acceptance unless the
branch has taken delivery of the securities directly from another bank
under instructions from the borrower.
(ii) Government securities should be endorsed in favour of the Bank by
the party to whom the advance is granted and should be delivered by
him to the Bank along with other documents. If the securities stand
in the names of more than one person, they must, unless all are
parties to the advance, be endorsed in the name of the pledger
before being endorsed by him to the Bank. This will not arise if the
securities held on his account have been issued in the name of the
Bank (as in the case of a new government loan) or have been
purchased by the Bank under his instructions, whereas securities
delivered by another bank from the borrowers account with them
may be endorsed by them direct to the Bank.
(iii) In the case of large limits, securities should be in lots of Rs. 25,000/-.

(iv) The securities should be examined in order to ascertain that the

previous endorsements thereon are in order and complete and the
chain of endorsements is unbroken. If the interest remains
uncollected, it should normally be viewed with suspicion and great
care should be exercised before making an advance thereagainst and
arrears of interest collected.
(v) Securities should not be in the "Stopped" list.
(vi) At least one endorsement cage and one renewal cage should be blank
after the borrower's endorsement. On no account securities bearing
cross endorsements should be accepted. However, renewal should be
allowed to be done by the borrowers themselves, as according to our
solicitors opinion, it is not advisable for the Bank to present G.P.
Notes on behalf of the borrowers for renewal, sub-division,
conversion or consolidation.
(vii) Securities should be prima facie in order and the upper and lower
halves should have been properly matched. They must invariably be
sent to the appropriate Public Debt Office for examination with a view
to ensuring that the endorsements are in order, they are not stopped
or confiscated, that none of them is a duplicate and that no
alterations have been made in the principal amounts. They should at
the same time be got enfaced for payment of interest at the local
treasury / State Bank of India /Reserve Bank of India.
(viii) Where a scrip bears several endorsements, branches should generally
request the holder to have it renewed preferably before endorsement
to the Bank as the subsequent renewal does not protect the Bank
from the consequences of a forged endorsement on the old note. Any
charges levied by Public Debt Office should be recovered from the
party.

155
 (ix) A mutilated or damaged note should be renewed in the name of the
borrower before it is accepted as security. Such a renewal is also
necessary in the case of a Note with cross endorsements or several
endorsements or without atleast one endorsement cage left blank.
(x) If securities with prior endorsements are accepted in special cases, as
for example in brokers' accounts, all prior endorsements should be
scrutinised and those on behalf of firms and companies should be got
certified by the Public-Debt Office before the advance is granted.
(xi) Government securities are transferable by endorsement and delivery
and, therefore, care should be taken that advances are made only to
known or well introduced persons against such securities.
(xii) Where a firm offers government securities standing in its name, the
form of constitution of the firm as prescribed by the Public Debt
Office should be obtained duly got signed by the partners (with their
signatures verified) and registered with the Public Debt Office.
(xiii) Powers of attorney of persons pledging government securities on
behalf of their principals should be first got registered with the Public
Debt Office.
(xiv) Advances should not be made against inscribed stock certificates
unless they are first transferred in the Bank's name in the books of
the Public Debt Office. The transfer forms on the reverse of the
certificates duly got completed by the holders should be forwarded to
the respective Public Debt Office and new certificates obtained in the
name of the Bank. Alternatively, the borrower should be asked to
have the stock certificates converted into Government Promissory
Notes and thereafter endorse them in favour of the Bank. When
interest warrants are received from the Reserve Bank of India, the
proceeds less tax should be credited to the borrowers' accounts
under advice to them forwarding the relative income-tax deduction
certificates.
(xv) No advance should be made against Zamindari Abolition or
Compensation Bonds issued by any State Government without the
prior permission of the Regional Authority. Zamindari Abolition or
Compensation Bonds are issued in a manner that the entire amount
payable under the Bond is repaid with interest within a stipulated
number of installments i.e. with payment of each installment due, the
face value of the bond stands reduced. When advances are granted
against such bonds, branches should take due care to revise the
advance value in the accounts as and when installments are received.

(xvi) Advances against bearer debenture bonds should be made only to

highly respectable and known persons after satisfying that the bearer
bonds have been purchased by them and belong to them. In such
cases, it should be ensured that the interest coupons are intact with
the relative bonds. Before making advances against bearer debenture
bonds, prior approval of the Regional Authority should be obtained.
The foregoing instructions are also applicable to other types of gilt edged
securities which in their wider sense include Municipal Bonds, Port Trust
Debentures and similar quasi- government securities, which carry the
'impress' of government guarantee and are very often backed by the
specific revenue of the State.
Margin on the market value of securities, as stipulated by Corporate

156
 Office from time to time, should be maintained. Daily price fluctuations
should be watched and securities revalued whenever there is a large
fluctuation to ensure that adequate margin is maintained at all times.
Any short fall should be recovered immediately from the borrowers.
When an advance is allowed to another bank, a declaration from the
borrowing bank that the securities lodged belong absolutely to it and that
no other person has any claim, title or interest therein or thereto should
be obtained.
Maintenance of registers etc., as detailed under "advances against
shares" are applicable to the advances against government securities.
Branches should carefully note the following:
(a) They should not make advances against National Development Bonds
issued under the National Development Bond Rules, 1977.
(b) They should not accept Special Bearer Bonds even as collateral
security against advances.
(c) They should not grant any advance against the security of National
Rural Development Bonds for a period of three years from the date of
subscription or purchase of such bonds by the borrowers.

3.4.12 ADVANCES AGAINST UNIT 64 OF UNIT TRUST OF INDIA:

Advances may be granted against transferable units issued under Unit
Scheme 1964 of Unit Trust of India. Branches should ensure that units
marked "Not transferable" are not accepted for advances.
Units should be deposited with the branch along with a blank transfer
form (specially meant for units) duly executed by the holder and a letter
of authority (LDOC-45) with a copy endorsed to the Unit Trust of India.
Branches should ascertain the purpose of the credit facility and it should
be considered only to the holders of the units. Our lien on the Units
should be got recorded with UTI before the amount is disbursed. For this
purpose, a copy of the aforesaid letter of authority should be sent to UTI
with a covering letter in Form 'A' (APPENDIX-IV). The letter of
authority given by the borrower cannot be unilaterally revoked during
the subsistence of the Bank's interest.
Although UTI will make a note of the Bank's lien in their books (stop
recording), they do not accept any responsibility. In case the Units are
presented to UTI by the holder for encashment, it will be permitted
ignoring the stop recording. Hence, branches should not part with the
units during the pendency of the advance.
Advances against units should not be treated at par with advances
against government securities and advances against units of mutual
funds including units of UNIT-64 scheme would attract the quantum and
margin requirements as applicable to advances against shares and
debentures wherever stipulated. In case the borrower defaults in
repaying the advance, the Units should be got transferred into the Bank's
name and then offered to TI for repurchase.
Dividend should be collected from TI and credited to the borrowal
account. TI will pay dividend by cheque in favour of the Bank, on account
of the borrower, in terms of the letter of authority.
Units standing in the name of a minor should not be considered for

157
 advance. Advances should not be granted against units standing in the
names of third parties.
In respect of such advances, a minimum margin of 60% in case units are
held in physical form and of 50% in case units are held in demat form is
to be stipulated.

3.4.13 ADVANCES AGAINST UNITS OF OTHER MUTUAL FUNDS:

Loan can be sanctioned against those units of mutual funds which are
approved by the bank for lending purpose. Terms and conditions :
(1) Units should be quoted on stock exchange.
(2) Units should pertain to close-ended scheme only.
(3) Loans/overdrafts against security of units may be granted by our
branches after completion of stipulated lock-in-period for each
scheme, if any.
(4) Registering the bank's lien on the unit certificate for the purpose of
granting advances is a must.
(5) Adherence of RBI guidelines/directives issued from time to time.
(6) Recovery of loan should be in maximum 35 installments. Interest to
be charged and recovered quarterly.
(7) Minimum margin of 60% in case units are in physical form and 50%
in case units are held in demat form should be kept at NAV or face
value or market value, whichever is less, or in other words, maximum
permissible limit/drawing power would be 40% or 50% of face value,
market value or NAV, whichever is lower.
(8) The advance should be purpose-oriented as in case of advances
against shares/debentures. Advances should not be granted for
subscription to or boosting the sales of another scheme of mutual
fund or for purchase of shares/debentures/ bonds.
(9) Units of our Bank's mutual fund 'BOB GROWTH-95' are eligible for
granting of loan on above conditions.

*.*.*

158
 APPENDIX - I

SPECIMEN OF THE LETTER TO BE ADDRESSED TO THE

GOVERNMENT DEPARTMENTS ETC. ON WHICH THE SUPPLY
BILLS ARE DRAWN

Dear Sirs,

We send herewith Supply Bill No........... dated the ....... for Rs...........
along with the Receipted Challan/Inspection Report covering supplies
made to you by Messers ...................... and also a Power of Attorney
executed by the said M/s ...................... in our favour authorising us to
obtain payment of the amount of the Supply Bills. We have to request
you to register the enclosed Power of Attorney in your books. Please note
that we have granted advance to the suppliers against the enclosed
documents and we have a charge over the said documents. Hence, you
should make payment of the amount of the Supply Bills directly to us
and not to Messers ...............

Yours faithfully,

BANK OF BARODA

Branch Manager

NOTE : If the power of attorney is already registered with the

department / company, the first paragraph of the letter may be suitably
amended.

*.*.*

159
 APPENDIX - II

PROFORMA OF SUPPLY BILL REGISTER (PARTY-WISE)

----------------------------------------------------------------------

Name of Constituent :

Address :

Limit : Margin : Sanctioning:

Authority

Date No. & Bill Drawn Particulars of Amount of Amount of

Date of on document bill sent bill
Bill accompanying for realised
the bill collection
1 2 3 4 5 6

Total Margin Average Date of OBC No Remarks

amount of value realisation
bill under
collection
7 8 9 10 11 12

*.*.*

160
 APPENDIX - III
VALUATION REPORT ON IMMOVABLE PROPERTY
Valuation Report on the property belonging to Shri _________
1. Valuation done by :
2. Date of valuation :
3. Name of person/s in whose name/s the property stands registered:
A.
B.
4. Survey/Municipal No........... of the property :
5. Situation of the property :
6. Whether leasehold or freehold :
7. Municipal valuation for tax purposes (if available) :
8. Area of land ........... sq.ft.
9. Rate per sq.ft. in the locality : Rs. :
10. Value of land : Rs. :
11. Built-up area of the : Ground floor : ......... sq.ft.
Building 1st floor : ......... sq.ft.
2nd floor : ......... sq.ft.
Total built-up area : ......... sq.ft.
12. Valuation of the built up area : Rs..........
Note : While arriving at the approximate cost of the built up area,
the rate of current cost of construction to cubical content of the
building may be taken into consideration.
13. Please state the nature of construction, viz. whether it is built up
with RCC or stones and bricks. Please also give some idea about
the kind of fittings used in the building, whether the flooring is of
ordinary stones or tiles and whether the electrical fittings are of
ordinary kind or whether there are any special or costly fittings.
Also whether there is an independent water supply, other amenities
etc. :
14. Year in which the building was constructed :
15. Total value of property : Value of land Rs.........
Value of built up area Rs.........
Total value Rs.........
16. From the above, please deduct depreciation : (it should be arrived
at after taking into account the age and life of the building)
Net Value Rs.........
17. Please state whether the entire property is used by owners
themselves or hired out to tenants :

Signed by :
*.*.*

161
 APPENDIX - IV
F. No. 117 C

BANKOFBARODA
( HEAD OFFICE : MANDVI : BARODA )

________________ BRANCH

+---------------------------------------------------------------------------+
MEMORANDUM FOR ADVANCES FOR OVERDRAFT/DEMAND LOAN
AGAINST BANK'S OWN TIME DEPOSIT RECEIPTS/RECURRING
DEPOSITS
+---------------------------------------------------------------------------+
1 Name of the Borrower :
2. Nature of facility : Overdraft/Demand Loan (LABOD)
3. Purpose :
4. Limit sanctioned : Rs.
5. Security : TDR/RD/YSJY standing in the name of
i)
ii)
iii)
-----------------------------------------------------------------------------

A) Against Bank's TDR

(I) LDOC No. 16 duly signed by depositor/s and borrower.
(II) Pledge of duly discharged following TDR/s issued by the
branch :

No. Of Date of Amount Rate of Due Depositors

TDR Issue in Rs. Interest Date Name
----- ------- ------ -------- ---- ----------

(III) Lien to be noted on TDR as also in the ledger account.

(IV) Stamped declaration cum indemnity (in case the deposit is in
the name of minor jointly with guardian/s).

B) Against Recurring Deposit/Yatha Shakti Jama Yojana :

(i) Letter of appropriation (LDOC 48) duly signed by depositor/
borrower.
(ii) Pledge of RD/YSJY Pass Book No. _______ of Mr.
____________ duly discharged.
(iii) Lien to be noted on RD/YSJY pass book as also in the ledger
a/c.
(iv) Stamped declaration cum indemnity (in case the deposit is in
the name of minor jointly with guardian/s).

6. (a) Value of TDR (In case of RIRD A/c balance :

in the ledger account inclusive of interest credited
till the preceeding half year)

(b) Balance in RD/YSJY A/c. :

7. Margin : % of value of TDR/RD/YSJY

8. Rate of interest on loan/overdraft :

162
9. Repayment schedule, if any :
Interest
Principal

10. Whether borrower is a staff member : Yes/No.

SANCTIONED

Date :
BRANCH MANAGER

163
 APPENDIX - V

FORWARDING LETTER - ADVANCES AGAINST UNITS OF

UNIT TRUST OF INDIA

FORM 'A'

The Unit Trust of India

__________________________

Dear Sirs,

Re: Advances against the security of units

We forward herewith a letter(s) dated _______________ from the unit

holder(s) mentioned hereunder, who has/have executed blank and
dated/ undated transfer deeds. The income warrants issued by you
relating to the units may be forwarded to us till the authority is revoked
by the unit holder(s) and confirmed by us.

Please also note to inform us in case you receive any request for issue of
duplicates of the units covered by the mandate letter(s) enclosed.

Please acknowledge receipt.

Name of the holder(s)

1.
2.
3.

Yours faithfully,

Branch Manager

Encl:As above

*.*.*

*.*.*

164
 APPENDIX - VI

DRAFT LETTER OF AGENCY

M/s ..............
Banks/Institution
Address ...........

Dear Sir,

Re : A/c M/s ...................

(1) We, Bank of Baroda, as Bankers to the above Company, hereby

authorise you M/s (Financial Institution/Banks holding the first charge
over the immovable property) to act as Agent for and on behalf of
Bank of Baroda and in such capacity authorise you as our Agent to
hold and retain with you the title deeds already deposited with you by
the Company by way of mortgage and charge created on ....... day of
.......... 199.. and relating to the immovable properties of the
company situated at ...... and to accept and hold the deposit of title
deeds, evidences and writings of the said immovable properties to be
made by Board of Directors of the company as and by way of
mortgage by deposit of title deeds by constructive delivery for
securing the loans and advances granted by Bank of Baroda together
with interest, additional interest, liquidated damages and costs,
charges and expenses and all other moneys payable by the company
in respect of the loans and advances granted by Bank of Baroda to
the company as enumerated herein :
(a) Term Loan Rs. ...........
(b) Working Capital etc. Rs. ......
(2) We, Bank of Baroda, agree and assure that the mortgage and charge
created/to be created in favour of Bank of Baroda over the
immovable properties of the company as above by holding of the title
deeds deposited with you by constructive delivery on ....... day of
....... 19.. in respect of the said immovable properties of the company
for securing the above said facilities granted by our Bank, shall be
subject to and shall rank next after the mortgage and charge created,
by the company in your favour.
(3) We also agree and confirm that as second chargeholder, we will not
exercise our rights u/s 81 of the Transfer of Property Act and shall
not call upon you to first enforce your mortgage and charge in
respect of the assets specifically mortgaged to you and will permit
exercise of your right as first chargeholder, over the assets
mortgaged and charged in favour of Bank of Baroda as well which
subject to the mortgage and charge created in your favour.

165
(4) We also request that in the event of repayment by the company and
satisfaction of the mortgage and charge created in your favour the
documents and title deeds and writings in respect of the said
immovable properties of the company/be furnished to us directly for
the same would then continue to be our security in respect of
mortgage and charge created by the company in our favour.

Your faithfully,

BRANCH MANAGER

166
 APPENDIX - VII

EXTENSION OF EQUITABLE MORTGAGE BY WAY OF SECOND

CHARGE

(1) On the_______day of__________ 200__ Shri __________________

__________a Director of M/s __________________________ a
Company Incorporated under the Companies Act ( 1956) and having
its Registered Office at ___________________________________
(hereinafter called "the Company") attended the office of
_____________________________ (hereinafter called
____________)
at_________________________________________________ and
saw Shri_____________________ of _____________ acting on
behalf of ________ and ________ acting on behalf of Bank of Baroda
(hereinafter called "the Bank") and stated that documents of titles,
evidences, deeds and writing more particularly described in the First
Schedule hereunder written (hereinafter called "the said title deeds")
in respect of Company's land and other immovable properties
situated and lying at Plot No./Block No./S. No. ________ in _______
Tal __________________ District __________ in the State of
______________ particulars of said immovable property is given in
the Second Schedule hereunder written have already been deposited
by the Company with _________ on __________ with intent to
create a security on the said land and other immovable properties
together with the building and super structures, fixed plant and
machinery, fixtures and fitting (hereinafter collectively referred to as
the "Said Immovable Properties") for securing by way of first charge
the due repayment and discharge by the Company to __________ of
its term loan and all other monies payable by the Company to
________ under its Loan Agreement and other documents with
_______.
(2) Shri ____________ on __________ day of ________ 199__
accorded and gave oral assent and consent on behalf of the Company
to Shri __________________ acting for _______ and ________
acting as agent of the Bank to hold and continue to hold and retain
the said title deeds as and by way of Equitable Mortgage by way of
Second Charge by constructive delivery of the said title deeds of the
said Immovable property as security also for the due repayment and
discharge by the Company to the Bank for its working capital loan of
Rs. _________ (Rupees _____________________ only) together
with interest, compound interest, additional interest, etc. payable by
the Company to the Bank under its Loan Agreement with the Bank.
(3) While giving such oral assent and consent on behalf of the Company
he stated that he has given such oral assent and consent on behalf of
the Company and in his capacity as a Director of the Company with
intent to create a security on the said immovable properties in favour
of ___________ and the Bank for due repayment and discharge by
the Company to __________________ and the Bank of their term
loan and working capital facilities respectively.
(4) While giving such oral assent and consent he stated that he was
authorised to do so by a Resolution passed by the Board of Directors
of the Company at its Meeting held on _____ day of ________ 199__
and he furnished a certified copy of the said resolution to Shri
_________ and further stated that said resolution has not been

167
 modified or rescinded and that the same is in full force and effect.
(5) Shri ___________________ accepted consent and constructive
delivery of the said title deeds in the presence of Shri
______________________ of ___________ and Shri
__________________________ of the Bank of Baroda.

For ____________________

(________)
__________________

FIRST SCHEDULE

1. ____________________ (List of Documents & Titles, Evidences,

Deeds & Writings)
2. ____________________
3. ____________________

SECOND SCHEDULE

Description of Immovable Property :

All that piece and parcel of land together with building admeasuring
_________ situate at ________________.

*.*.*

168
 APPENDIX VIII

LETTER OF UNDERTAKING
(To be obtained from all mortgagors)

(UNSTAMPED)

I/ We, Mr./Ms. ____________________,Mr./Ms.___________________

and Mr./Ms.________________________ on my /our behalf or on behalf
of ________________________________as partner for and on behalf of
M/s.__________________________, a partnership firm/ a director for
and on behalf of M/s _____________________ hereby declare that I/We
had created/extended by execution of Mortgage Deed/ Indenture of
mortgage/ constructive delivery, deposited the title deeds, documents,
evidences and writing in relation to the immovable properties situate at
__________________________ together with buildings and structures,
immovable plant and machinery, fixtures and fittings more particularly
described in the schedule hereunder written with intention to create
security thereon as and by way of English/Equitable mortgage/ mortgage
by deposit of title deeds and by way of first/second charge in your favour
for the due repayment/discharge or redemption by me/us/by
M/s_________________/ by M/s______________________to Bank of
Baroda of its various credit facilities increased/additional facilities
aggregating to Rs_________ together with interest, penal interest,
interest tax as and if applicable, Trustee’s Remuneration, costs, charges
and expenses payable thereon.

I/We hereby further declare that I/We am/are entitled to create/extend

the aforesaid equitable mortgage in my personal capacity/jointly/as
attorney of Mr___________________ /as partner of
M/s_______________/ as director of
M/s.____________________________.

I/We hereby further agree and declare that the provisions of Sec 67 A of
the Transfer of Property Act, 1882 shall not apply to these presents and
the creditor/ Debenture Trustee/Security Trustee/ notwithstanding that
the creditor/ Debenture Trustee/Security Trustee may hold two or more
mortgages created by the one and the same Mortgagor, including these
presents, in respect of which the Creditor/Debenture Trustee/Security
Trustee has the right to obtain the kinds of decrees under Sec 67 A of
Transfer of Property Act, 1882 and shall be entitled to sue and obtain
such decree on any of such mortgages without being bound to sue on all
such Mortgages in respect of which the Mortgage Moneys shall have
become due.

Date: (Signatures)

SCHEDULE

169
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER IV

BILLS PURCHASE AND BILLS DISCOUNTING

SR. NO SUBJECT PAGE NO

4.1 GENERAL 172
4.2 POSITION OF A BANKER IN CASE OF BP/BD 173
4.3 BILL PURCHASED (CLEAN BILLS/CHEQUES
ETC.) 173
4.4 BILLS PURCHASED (DEMAND DOCUMENTARY
BILLS) 176
4.5 SENDING OF BILLS FOR COLLECTION 180
4.6 LIEN NOTICE TO RAILWAYS 181
4.7 ACTIONS AT THE BRANCHES TO WHOM BPs
HAVE BEEN SENT FOR COLLECTION 181
4.8 FREE DELIVERY OF DOCUMENTS PURCHASED
UNDER BP 182
4.9 FOLLOW-UP OF BILLS 182
4.10 BILLS RETURNED UNPAID 183
4.11 MAINTENANCE OF BOOKS AND ACCOUNTING
PROCEDURE 187
4.12 BP LETTER OF UNDERTAKING 188
4.13 BILLS DISCOUNTING (USANCE BILL) 188
4.14 SANCTIONING OF BILLS PURCHASED/BILLS
DISCOUNTING FACILITIES 192
4.15 REVIEW OF BILLS PURCHASED/BILLS
DISCOUNTING FACILITIES 193
4.16 PURCHASING
/DISCOUNTING/NEGOTIATING/RE-
DISCOUNTING OF GENUINE
COMMERCIAL/TRADE BILLS 194
4.17 SUBMISSION OF STATEMENTS 195
4.18 BALANCING 195
4.19 RECOVERY OF SERVICE CHARGES 195
4.20 CHARGES WHEN FULL AMOUNT OF BILLS IS
NOT ADVANCED 196
4.21 CHARGES WHEN TO BE RECOVERED 197
4.22 ACCOUNTING PROCEDURE 197
4.23 G/L INTER BRANCH BILLS PURCHASED
ACCOUNT 197
4.24 NON-PERFORMING ASSETS - BILLS
PURCHASED/ DISCOUNTED 197

170
 LIST OF APPENDICES

APPENDIX NO SUBJECT PAGE NO

I DAILY STATEMENT OF CHEQUES
PURCHASED ABOVE RS. 2/- LACS PER
CHEQUE 199
II STATEMENT OF CHEQUES PURCHASED
ABOVE RS. 2/- LACS PER CHEQUE BUT
RETURNED UNPAID FOR FINANCIAL
REASONS 199
III MONTHLY STATEMENT OF CHEQUES
PURCHASED ABOVE RS. 2/-LACS PER
CHEQUE 200
IV IRREVOCABLE LETTER OF
AUTHORITY/UNDERTAKING/ INDEMNITY
TO BE OBTAINED FROM CUSTOMERS WHO
TENDER BILLS ACCOMPANIED BY
RAILWAY RECEIPTS FOR
PURCHASE/DISCOUNT. 201
V FORM OF LETTER TO BE ADDRESSED BY
BANKS TO TRANSPORT OPERATORS
WHILE ASKING FOR RE-BOOKING 202
VI INFORMATION TO BE FURNISHED AT THE
TIME OF LODGING A COMPLAINT AGAINST
A RECOMMENDED TRANSPORT OPERATOR 203
VII SALIENT FEATURES OF IBA SCHEME FOR
RECOMMENDING ROAD TRANSPORT
OPERATORS 205

171
 CHAPTER - IV

BILLS PURCHASE & BILLS DISCOUNTING

4.1 GENERAL

A seller of goods draws a bill of exchange (draft) on buyer (drawee), as

per payment terms for the goods supplied. Such bills can be routed
through the banker of the seller to the banker of the buyer for effective
control. The procedure for handling of bills sent for collection through the
bank is given in Chapter V on Bills for Collection in Volume-2 of Book of
Instructions.

(i) Clean & Documentary bill :

a. When documents to title to goods are not enclosed with the bill,
such a bill is called Clean Bill. When documents to title to goods
alongwith other documents are attached to the bill, such a bill is
called 'Documentary Bill'.
b. Documents, the due possession of which give title to the goods
covered by them such as RR/MTR, bill of lading, delivery orders
etc. are called documents to title to goods.
c. Cheques and drafts are also examples of clean bills.
(ii) Demand & Usance bill :
When the bill of exchange either clean or documentary is made
payable on demand or sight, such a bill is called Demand Bill. The
buyer is expected to pay the amount of such bill immediately at
sight. If such a demand bill is a documentary bill, then the
documents including document to title to goods are delivered to the
buyer only against payment of the bill. (Documents against payment
- DP Bills). When a bill, either clean or documentary is drawn payable
after certain period or on a specified date, the bill is called Usance
Bill. Such bill is presented to the buyer once for Acceptance, when he
accepts to pay the bill on due date and on due date the bill is
presented again for Payment. In case of documentary usance bill, the
documents are delivered to the buyer (drawee/acceptor) against his
acceptance of bill (Documents against acceptance - DA Bills).
(iii) Finance against bills of exchange :
Banks consider working capital finance to meet the post sale
requirements of borrowers through Bill finance either by 'Purchasing'
bills or 'Discounting' them.
a. Bill Purchase facility is extended against clean demand bills like
cheques/drafts/bills of exchange/hundies and demand
documentary bills, whereby the bank lends money to the payee of
the cheque/draft and to the drawer of the bills by purchasing the
same against tendering of such bills by the payee/drawer. The
bank in turn sends the bills for collection, preferably to it's own
branch at the place of drawee or to its correspondent bank or to
the buyers (drawee's) bank.
b. Bills discounting facility is extended against usance bills. In such
cases, the seller tenders the usance bill drawn by him usually
alongwith documents to title to goods, to his banker who

172
 discounts the bill i.e. levies discount charges for the unexpired
portion of the duration of the bill and credits the balance amount
to the seller's account. Thereafter the drawer's bank sends the bill
to collecting bank at the centre of drawee either to it's own
branch or drawee's bank, with instructions to release the
documents to title against acceptance and thereafter, to recover
the bill amount on due date. Sometimes the accepted usance bills
are also tendered and discounted by the bank.

4.2 POSITION OF A BANKER IN CASE OF BP/BD :

(i) Clean or documentary bills should be purchased or discounted on

account of first class customers and other constituents, who are
sanctioned regular limits.
(ii) Although the term 'Bills Purchased' may imply that the Bank becomes
the purchaser/owner of such bills, the bank primarily holds the bills
as security for the advances i.e. advances against documents of title
to goods.
(iii) Bank is a holder for value and as such a holder in due course in
respect of bills purchased and discounted and, therefore, required to
perform all the duties and responsibilities imposed on it as a holder in
due course. There is a distinction between collecting cheques solely
as an agent for the customer acquiring no interest in them and
collecting cheques as a holder for value, as in the latter case the
bank collects the cheque not for the customer but for itself. It may be
emphasised here that as compared to a mere holder for value, a
holder in due course gets better rights and privileges under
Negotiable Instruments Act. A holder for value, although he may not
be a holder in due course, has nevertheless complete right on the
bills, unless there is a defect in his title, in which case he obtains no
benefit from the mere fact that he has himself given value or that he
takes through one who has given value. Therefore, it is essential that
the bank should become a holder in due course and not simply a
holder for value so that any defect in the title of any previous holder
or any omission on the part of any previous holder to carry out his
duties will not affect the right of the bank.
(iv) Bank should fulfill the following requirements to become a holder in
due course and to avail of the consequent rights and privileges.
a. That the bank gives value for the cheque in good faith;
b. That the cheque was not tainted with forgery;
c. That the bank had no notice of any previous dishonour or any
defect in the title of the customer;
d. That the cheque was not crossed "Not Negotiable" when it is
purchased from an endorsee.
e. That it was not overdue for the purpose of negotiation; and
f. That it was prima facie regular in all respects.

4.3 BILL PURCHASED (CLEAN BILLS/CHEQUES ETC.)

(i) Scrutiny of clean bills :

173
 The following points should be noted while scrutinising clean bills or
cheques for purchase :
a. They should be purchased only from accountholders who are
holders in due course and not from parties in a fiduciary or
representative capacity for credit of their personal accounts.
b. Cheques, drafts etc. should be crossed before they are tendered
and accepted.
c. Cheques drawn only on scheduled and other first class banks
should be purchased.
d. Utmost caution should be exercised while purchasing drafts drawn
on other banks. The identification and integrity of the beneficiary
should be established clearly.
e. Out of date and post-dated cheques should not be purchased.
Cheques drawn by the borrowers themselves, their branches and
associated concerns and/or their close relatives also should not be
purchased.
f. Demand Drafts, Banker's Cheques, Dividend Warrants etc. drawn
on other branches should be negotiated by branches on a
restricted basis and that too only in accounts of first class parties
who are considered good for the amount involved. This is
suggested as the details of loss of all such instruments are not
being circulated amongst the branches.
g. Where clean bills are drawn in respect of goods already supplied,
the Branch should satisfy about the bonafides of the transaction.
h. Clean demand bills which are required to be detained for more
than three days after presentation should not be purchased but
taken for collection.
i. Clean bills do not always represent movement of goods, but may
be drawn for mere settlement of accounts. When such bills drawn
on the same party are offered at frequent intervals or in chain,
branches should make proper investigation to ascertain the true
nature of the drawings.
(ii) Purchase of cheques marked 'Not Negotiable' :

An endorsee in respect of a cheque marked "Not Negotiable" gets

only the title of the endorser and is, therefore, accountable to the
true owner thereof if it is subsequently proved that the endorser had
a defective title to it. In such cases, the endorsee becomes only a
holder and not a holder in due course. When a cheque marked "Not
Negotiable" is purchased for a customer, who is not the payee and
whose title to it is not valid, the Bank gets the same defective title as
that of the customer from whom it was purchased. If the bank
purchases such a cheque and collects from another bank, it would
lose the protection afforded to it under Section 131 of the Negotiable
Instruments Act and would be liable to the true owner thereof on the
ground that being a holder for value it must stand or fall by the
transferor's title. Therefore, cheques with "Not Negotiable" crossing
should be purchased only from the payee and not from any
subsequent endorsee.

(iii) Purchase of cheques from staff members :

174
 Members of staff should not be extended bills purchase facility in lieu
of IR facility which has already been discontinued. Cheques drawn by
members of staff temporarily transferred from other branches, staff
members on deputation (other than those sent for training) and
inspecting officers on duty may be purchased against their salaries,
allowances etc. payable at the base branches as a very special case
and the same should be reported to the Regional Authority. Drawee
branches must ensure that there were sufficient funds in the
accounts of the concerned staff members on the dates the cheques
were purchased, else the matter should be reported to Regional
Authority.

(iv) Immediate credit of cheques upto Rs. 15000/-:

Guidelines in this respect are given in Chapter-V "Bills for

Collection" in Volume - 2.

(v) Purchase within limits :

All purchases should be made within the specified sanctioned limit of

clean BP. Adhoc purchase of bills should be minimised and should be
done within the delegated discretionary lending powers to the Branch
Manager and bank's guidelines as in vogue from time to time. The
limits sanctioned for documentary BP should not be used for
negotiation of clean/usance bills.

(vi) Discretionary powers :

For purchase of clean BP, authorities should exercise powers

delegated to them for considering 'unsecured/clean advances.
However, purchase of cheques drawn by government departments/
public sector undertakings and drafts/Banker's cheques will be
deemed to be secured advances for the purpose of exercising lending
powers.

(vii) Special procedure in respect of cheques of over Rs. 2/- lacs:

With a view to avoid misuse of cheque purchase facility, branches

should be extremely careful to ensure that the facility is not extended
for accommodation or kite flying operations. Branches are advised to
note the following operational guidelines prescribed by RBI in respect
of purchase of cheques of over Rs. 2/- lacs.
a. Purchase of any cheque (even if it is within the sanctioned cheque
purchase limit) beyond Rs. 2/- lacs, should have approval of two
authorised officers of the branch out of which one should be
Branch Manager and other accountant or incharge of credit
department.
b. Any cheque purchased beyond the amount of Rs. 2/- lacs
(excluding those purchased under properly sanctioned cheque
purchase limit) should be reported to the controlling office in the
prescribed proforma on day-to- day basis. (APPENDIX-I) (c) In
addition to the report, a monthly statement in the prescribed
proforma (As per APPENDIX-II) should be submitted to the
controlling office regarding all cheques purchased beyond Rs. 2/-
lacs (excluding those purchased under properly sanctioned

175
 cheque purchase limit) by the branch. This statement should be
made available for inspection to the statutory auditors/Inspecting
Officers.

4.4 BILLS PURCHASED (DEMAND DOCUMENTARY BILLS):

(I) Scrutiny of documentary bills :

As the advances against bills are susceptible to frauds, it calls for

careful scrutiny of documents. These documents should be
scrutinised properly in respect of the following points :

(a) Bill of exchange :

(i) The drawee of the bill of exchange should be same in whose
favour the invoice is made out.
(ii) The amount of the bill should not be more than the amount
of invoice.
(iii) It should bear a date and it should not be post dated.
(iv) It should be drawn in favour of the Bank.
(v) It should be signed by authorised person only.

(b) Invoice :
(i) The invoice should contain serial number, date, name of the
buyer, description of goods, quantity, weight, rate, total
value, taxes, amount of advance received, particulars of
R/R/MTRs and packing details etc. It should be signed by
authorised person.
(ii) The commodities sold should generally be one which are
manufactured by the borrower or generally traded in by
him.
(iii) The invoices should not indicate any signs of over valuation
of goods covered.

(c) RR/MTR :

In respect of MTR. :

(i) The motor transport receipt should be that of approved

transport operators unless the sanction specifically
authorises acceptance of unapproved MTRs.
(ii) The MTR should
1. be in the special format laid down by IBA.
2. contain the code number allotted by IBA.
3. contain the caution, notice and endorsement clauses.
4. have, on the reverse, the prescribed terms and
conditions of carriage.
5. show the name and address of the discounting bank as
the consignee.

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 6. contain the address of delivery office at destination of the
transport operator.
7. should be dated and duly signed.

(iii) In addition to the bank's name appearing as consignee, the

consignor-customer should be required to sign an
endorsement in blank or a specific endorsement in favour of
bank on the reverse of the Special Lorry receipt. As a
consignee, the bank has control over delivery of the
consignment and is in a position to regulate it. But as a
consignee, the bank has no contractual relationship with the
transport operator and there are no contractual obligations
on the transport operator. By obtaining an endorsement of
the consignor in favour of the bank on the reverse of the
special lorry receipt, and by virtue of the working of the
letter of undertaking and the bank clause in the conditions of
carriage, the bank gets the same contractual rights as the
consignor and will get the benefit of the contract of carriage
between the transport operator and the consignor. It is,
therefore, very necessary that branches should get such an
endorsement.

(iv) Only consignee copy of MTR should be accepted as other rest

of the copies are not negotiable.

(v) If the value of the goods consigned is very large, branches

should check directly with the transport company about
authenticity of the lorry receipts and existence of goods.

In respect of RR :

(a) Railway receipts should be properly filled up, duly signed and
marked 'freight paid'.
(b) The RR should be made out in the name of the bank as the
consignee or where permitted, to the order of self or the
consignor and endorsed either in blank or to the order of the
bank. This would restrain the consignee from taking delivery
of goods against an indemnity with a fraudulent motive.

Common points for MTR/RR :

(a) The quantity, weight and description of goods in the

documents of title should correspond to the details
mentioned in the relative invoices.
(b) RRs/MTRs should be examined to ascertain that the numbers
printed on them are not tampered with.
(c) RRs/MTRs should not contain any adverse remarks or
clauses as regards to defective packing, open delivery of
goods at destination etc., and also should not provide for
door delivery of goods at the destination.
(d) The documents should be presented within a reasonable time
from the date of RR/MTR or despatch of goods.
(e) Railway Receipts, Motor Lorry Receipts etc. returned unpaid

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 earlier should be accepted only on collection basis and should
not be purchased again.
(f) The freight should be generally 'Pre-paid' and not 'Topay'.
(g) No third party RR/MTR should be purchased. In other words,
the consignor of MTR/RR should invariably be our borrower.

(d) Excise gate pass :

In case of manufacturing units, if the goods consigned are

excisable commodity, the relevant excise gate pass should also
accompany documents, evidencing payment of excise before
despatch of goods out of factory premises.

(e) Insurance :

Transit Insurance need not be insisted upon except in following

cases :

(i) Where in case of MTR/RR, the goods are consigned at

'owner's risk’.
(ii) When cotton piece goods are consigned.
(iii) Where specifically stipulated in the sanction.
(iv) The insurance should not merely cover the risk of transit
of goods, but also cover storage at the booking station,
the transit and storage at the destination.
(f) General :

(i) All bills should be properly signed discharged/endorsed in

favour of the bank by authorised person.
(ii) All bills (other than cheques/drafts), whether clean or
documentary, should be drawn by the constituents, unless
the sanction provides purchase/discount of third party bills
endorsed in favour of constituents. Third party bills not
properly endorsed in favour of constituents should not be
accepted either for purchase or collection. However, the said
restrictions do not apply to purchase of cheques and drafts
endorsed by third parties and also bills tendered for
purchase directly by a limited company, Government or
semi-public corporation, provided the other usual
safeguards are taken.
(iii) Branches should obtain a stamped letter of indemnity, as
per APPENDIX-III, from all customers who tender bills
accompanied by railway receipts for purchase/discount
under the sanctioned limits to safeguard Bank's interest in
the event of auction of goods by railway authorities at the
notified stations.
(iv) While purchasing bills drawn by agents, branches should
ensure that the Agents have proper authority to draw bills
on behalf of their principals and that they execute the bills
in a representative capacity indicating the names of their
principals.

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 (II) Bills covering despatch of tobacco :

Tobacco is a licensed item and dealing in this commodity, therefore,

requires a licence from the excise authorities. They do not grant
permission for storing tobacco by bank's clearing agents in case
where bills covering consignments of tobacco remain unpaid. To
safeguard the interest of the bank in such cases, branches should
adhere to the following instructions :

(a) Branches should purchase bills only from first class parties. They
should be certain that the parties will honour their commitments.
(b) Branches should not purchase third party bills covering despatch
of tobacco drawn or endorsed in favour of their clients.
(c) By way of abundant caution, branches should discount bills
covering consignments of tobacco, only if they are accepted by
the drawees for payment on due dates. This will enable the bank
to file a summary proceedings against the drawees for
non-payment of bills on due dates.
(d) The usance of the bills should be for a shorter period.

NOTE:

Keeping in view of problems faced by Tobacco Industry, Reserve Bank of

India had advised banks to restructure the debts as per schemes to all
borrowers dealing in Tobacco and who apply for debt restructuring on or
before 30-06-2003. For further details refer to Chapter XII of Book of
Instructions Volume 8 - Management of NPA.
(III) Bills covering despatch of commodities covered under
selective credit control :

Branches should scrupulously follow the selective credit control

directives issued by Reserve Bank of India from time to time where
the bills to be purchased/discounted cover movement of commodities
governed by the said provisions.
Branches should strictly ensure that the facilities are sanctioned only
for genuine supply and movement of goods, bills are realised
promptly and the facilities are not misutilised. While the detailed
guidelines in respect of advance against commodities covered under
selective credit control are given in a separate Chapter, directives of
Reserve Bank of India pertaining to purchase/ discount of
bills/cheques are given below :

(a) Selective credit control directives are not applicable in the

following cases :

(i) Purchase of outstation cheques (outstanding not to exceed Rs.

5,000/- at any one time) and bank drafts (no restriction on
outstanding from customers dealing in commodities covered by
the said directives.
(ii) Purchase of demand documentary bill : It should be ensured that
the bills are promptly paid by the drawees on arrival of goods at
the destination. Reserve Bank of India have advised that utmost
caution should be exercised while extending the benefit of transit
period for retirement of bills to preclude the possibility of this

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 facility being misutilised.
(iii) Purchase of clean demand bills arising out of movement of goods:
Branches should ensure that the relative bills have arisen out of
actual movement of goods by verifying the relative invoices as
also the receipts issued by transport operators (need not be
approved operators.

(iv) Purchase of clean demand bills covering local sale of goods,

provided the bills are not drawn on parties connected with the
borrower or his selling agent. Outstanding under (a) (c) & (d)
above should not exceed Rs. 5,000/- at any one time.

(b) Usance bills arising out of the sale of commodities covered by the
selective credit control should not be discounted.

(IV) Margin on bills purchased :

Wherever parties are sanctioned BP limits with margin, they should

be allowed to draw only the amounts of bills less the applicable
margin. Bills purchased account should be debited only with the
amounts of the bill less margin i.e. the amount advanced to the
party. As and when the bills are realised, the margin amount should
be credited to the party's account.

Branches should note the following :

(a) The full amount of the bill should be shown in Col. 11 in the Bills
Purchase Register (R-62) while the actual amount advanced
against the bill should be shown in Col. 12 (i.e. the amount of the
bill less margin). The amount of margin held should be noted in
Column-17 against the relative entry.
(b) Like-wise only the amount advanced against the bill should be
noted in the debit column in the Bills Purchase Ledger R-63). The
margin held should be noted in the remarks column. When the bill
is paid, the entry should be reversed and the margin shown in the
remarks column be refunded to the party after deducting interest
and other charges, if any.
(c) When the bill is paid, the amount advanced as well as the margin
amount refunded should be marked off in the BP Register.
(d) No entry should be passed in the books of the branch in respect
of margin amount.
(e) Whenever bills are tendered for purchase/discount in excess of
the available limit, bills purchased account should be debited to
the extent of actual advance i.e. upto the limit. The excess
amount (over the limit) should be treated as margin and noted
accordingly in the remarks column.

4.5 SENDING OF BILLS FOR COLLECTION

(i) Bills purchased by the branches are required to be presented to

drawees for payment and as such these are sent for collection to our
branches and other banks where we do not have branches. The

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 detailed guidelines in this respect are given in the Chapter V on “Bills
for Collection" in Volume - 2.
(ii) The bills/cheques purchased should be promptly despatched on the
same day or latest by next day and should not be held deliberately
for unreasonably long time.
(iii) While forwarding BPs accompanied by motor transport receipts to
other branches/banks for collection, the detention period advised to
the collecting branch/bank should not exceed the period mentioned
hereunder :
(a) Where destination of the consignment is 500 kms. or less - 7 days
(b) Where destination of the consignment is more than 500 kms, but
not more than 1000 kms. - 10 days.
(c) Where destination of the consignment is more than 1000 kms. -
15 days.
(iv) Bills collected through other banks :
Branches should afford credits to the bills purchased/discounted
accounts in respect of bills collected through other banks only after
the relative credit advices are received from our account maintaining
branches in terms of the Agency arrangements. In case of good
clients whose bills are normally paid by the drawees promptly,
branches may, subject to the prior approval of the Regional
Authority, purchase further bills strictly on the basis and upto the
amount of the realisation advices received from other banks.
Necessary remarks should be made in the partywise BP ledger.
However, entries in G/L Bills Purchased Accounts of the parties
should be reversed only on receipt of the relative realisation advices
from our account maintaining branches.

4.6 LIEN NOTICE TO RAILWAYS

Wherever documents accompanied with railway receipts are purchased, a

lien notice to the station master of the station of destination be sent on
Form No. 65 by registered A.D. post by the purchasing branch
immediately.

4.7 ACTIONS AT THE BRANCHES TO WHOM BPs HAVE BEEN

SENT FOR COLLECTION

While the detailed procedure to be followed in this respect has been

explained in Chapter V on 'Bills for Collection' in Volume - 2 following
special care should be taken :

(i) Acknowledgment of bills :

Branches receiving bills, which were purchased by bank's other
branches, should invariably acknowledge their receipt without delay.
Such acknowledgments should carefully be preserved by the sending
branches.

(ii) Payment advices :

All BP realisation advices should be promptly despatched.

(iii) Non-payment advices :

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 Non-payment of bills should promptly be advised by fastest means of
communication to the sending branches. On receipt of such advices,
the drawers' accounts should be debited with the amounts of such
bills provided no overdraft or excess results. Instructions of the
drawers should be sought and in the meantime bills should be taken
on collection basis.

4.8 FREE DELIVERY OF DOCUMENTS PURCHASED UNDER BP

Whenever any request from the borrower to deliver the documents

purchased under BP to the drawees is received, the reasons for free
delivery should be ascertained and after fully satisfying about
genuineness, the amount of bill purchased alongwith charges and upto
date interest should be recovered from the borrower. Thereafter the
collecting branch/bank should be advised to deliver the documents free
of charges to the drawees against proper acknowledgment. Frequent
requests for free delivery of documents and/or change of drawees, from
a particular branch should be seen with an eye of suspicion by collecting
branches and such matters should be brought to the notice of concerned
Regional Authority as a measure of preventive vigilance.

4.9 FOLLOW-UP OF BILLS

(i) All bills purchased and sent to branches/other banks should be

followed up by branches by way of sending reminders/telegrams
/telex/fax/telephones for prompt realisation.
(ii) The borrowers should be immediately informed in writing of the bills
remaining unpaid for a long time with a request to facilitate early
retirement of bills and to make necessary arrangements for the funds
if sufficient room is not available in the account.
(iii) When the bills remain unpaid beyond due date, branches should
verify the genuineness thereof.
(iv) The Branch Manager/Officer incharge of credit/bills portfolio should
scan through the BP Register periodically to ensure follow-up action
of old bills remaining outstanding/unpaid.
(v) In case bills are already realised, but the relative advices are not
received follow-up should be done to get duplicate advices to realise
the BPs.

4.10 BILLS RETURNED UNPAID

(A) Recovery of dues :

(i) Where a bill purchased/discounted by the Bank is returned unpaid,

the amount together with interest and other charges should be
recovered from the drawer without delay. In case it is found that
there is in-sufficient balance in the account to meet the funds
requirement of a dishonoured bill, the amount should not be debited
to the account so as to keep alive the bank's recourse to the other
parties to the bill, but only a lien should be noted on the available
balance in the account. This would apply even to the cheques
purchased which are returned unpaid subsequently.

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 (ii) The amount of the returned bill should not be adjusted by the
following means :
(a) by repurchase of the same bill with or without fresh invoice.
(b) by purchase of fresh bill drawn on the same drawee.
(c) by creating an overdraft.
(d) by debiting to the cash credit account resulting in excess over the
limit, advance value and/or market value.
(e) by crediting bills purchase account directly with the cash tendered
by the party without routing through the account.
(f) by granting overdraft or excesses in the accounts of associate
concerns.
(g) by purchasing bill on adhoc basis for adjusting a bill purchased on
adhoc basis and returned unpaid.
(iv) Where the amounts of bills purchased/discounted are recovered from
the customers before the actual receipt of the relative documents
from the collecting branch/bank, the bills should be transferred to the
collection portfolio for keeping a track over such bills.
(v) Where there is a drawee in case-of-need, the bill should be presented
to him for acceptance/payment, as the case may be, only when the
bill is not accepted or paid by the drawee. A bill is not deemed to
have been dishonoured until the drawee in case-of-need refuses to
accept or pay the bill, as the case may be. A drawee in case-of-need
is not to be regarded as a guarantor and in case of his refusal, the
bank cannot proceed against him legally while proceeding against the
other parties to the bill.

(B) Dishonour of bills :

(i) Where bills purchased/discounted by the branch remain unaccepted

or unpaid on presentation/due date, a notice of dishonour should be
served on all the parties to the bill by registered post A.D. particularly
when the branch has information that the concerned parties are in
the financial difficulties. Such notice should not be given on our usual
printed form, but should be typed or neatly written on the Bank's
letterhead. The postal receipt should carefully be preserved.
Thereafter, the bills should also be protested for non-acceptance or
non-payment, as the case may be, at the request of the customer or
where required by law. The procedure for noting and protest of bills is
detailed in the Chapter V on "Bills for Collection" (Volume - 2).
(ii) However, noting and protest of dishonoured bills are optional and not
compulsory in case of inland bills, whilst in case of foreign bills, their
noting and protest depend upon the requirements of the law of the
land where bills are drawn. The advantages of noting and protest are
only of evidential value and constitute presentation and dishonour of
the bills on the due date by non-payment of the same. The fact that
the bills are not noted and protested, even though they are not paid
on due date, will not affect the bank's rights as holder of the bills and
it can file a suit against the acceptors/other parties within three years
from the due date.
(iii) For recovery of bank's dues vigorous follow-up should be made. In
case of difficulty, usual recovery proceeding including rebooking of

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 goods etc. be initiated in consultation with Regional Office.
(iv) Where the drawer or an endorser of an unpaid bill has subsequently
become a bankrupt as per the information available to the Bank, it is
necessary that intimation should be given to the debtor's assignee, if
appointed, or to the insolvent himself to preserve recourse against
his estate. Whenever extension of time for payment, reduction of bill
amount etc. are acceded to by the branch as a holder for value, due
notice should be given to all parties to the unpaid bill and also to the
guarantor, if any.

C) Clearance of goods in respect of bills remaining unpaid :

Where documentary bills purchased by other branches and received

for collection remain unpaid even after the arrival of goods,
necessary arrangements should be made to clear and store the goods
in consultation with the forwarding branches/banks. The goods
should be insured till they are taken delivery by the drawees or
otherwise disposed off. Clearance, storage and insurance charges
should be recovered from the drawees or deducted from the proceeds
of the bills as per instructions of the forwarding branches/banks.
If the delivery is not taken within the stipulated period after the
arrival of goods as prescribed in the Indian Railways Act, the
responsibility of the railway administration would cease and in certain
cases, the goods are liable to be auctioned. To safeguard the
interests of the bank in respect of bills purchased, arrangements
should be made by the branches to clear and store the goods after
seeking instructions from the forwarding branches. The work should
be entrusted only to approved clearing agents.

D) Rebooking of consignments :

For rebooking of consignments, consigned through motor transport,

the undermentioned procedure should be followed as advised by
Indian Bank's Association.

(i) When a consignment under a special lorry receipt under the

scheme is required to be rebooked either to the originating
station or to any other station, branches should write a letter
to the concerned transport operator, as per APPENDIX-IV,
requesting them to rebook the consignment to the required
destination.
(ii) The Branch should surrender the consignee copy of the
original Lorry Receipt to the operator.
(iii) When such instructions are given, the freight charges should
initially be borne by the bank and subsequently recovered
from the customers.
(E) Storage and demurrage charges :

For recovery of storage and demurrage charges, the following clause,

as approved by Indian Banks' Association, is printed by
recommended transport operators on special lorry receipt forms :

“Demurrage chargeable after .............. days from today @ Rs..........

per day per Qtl. on weight charged."

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 Branches should ensure while purchasing bills accompanied by lorry
receipts of recommended transport operators, that the above clause
appears on the face of the lorry receipts and the blank columns are
duly filled in under authentication. Branches should not accept special
lorry receipts which do not contain the above clause.

(F) Endorsement of MTR in case of unpaid bills :

While returning the documents to the consignors/customers on

account of non-payment of bills by the drawees, after recovering
bank's dues, branches should endorse the lorry receipts in their
favour by affixing a rubber stamp reading as under :

Not honoured Hence returned.

All our stamps cancelled.
Please deliver to the order of
-----------------------------------

For Bank of Baroda

Date :
Branch : MANAGER

(G) Insolvency of the drawee or collecting bank

When it comes to the bank's knowledge that the drawee or the

collecting bank has gone into liquidation, the amount should be
recovered from the drawer immediately without waiting for any
advice from the drawee or collecting bank as to the fate of the
cheque. Even when the cheque has been realised by the collecting
bank and the proceeds have been remitted by them by a draft, the
draft cannot be encashed once the bank goes into liquidation.

(H) Inspection of goods covered under motor transport receipts :

The transport operators recommended by Indian Banks' Association

have agreed to allow the banks to inspect the relative consignments
in their godowns. Whenever such inspections are carried out,
branches should write to the concerned transport operator and place
on record the inspection so carried out and the observations of the
inspecting officer with a view to preclude the transport operator from
denying such inspection at a later date.

Branches should take note of the circulars issued from time to time
by the Head Office in respect of alert signals/cautions or deletions of
names of transport operators from the approved list.

(I) Complaints against recommended transport operators :

Whenever complaints are to be preferred against approved transport

operators for valid reasons, such as

(i) detention of consignments in transit,

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 (ii) deliberate diversion of consignments to another destination,
(iii) refusal to deliver the consignments to the Bank or its authorised
agent, buyer or consignor,
(iv) refusal to rebook the consignments,
(v) delivery of consignments without producing consignee copies or
Bank's letters of authority
(vi) non-traceability of goods etc.,

such complaints should be addressed to the Indian Bank's

Association, as per the proforma given in APPENDIX-V, and be
forwarded to the Customer Services and Government Business
Department at Head Office, Baroda through the Regional Authority.

The salient features of IBA scheme for recommending road transport

operators are given in APPENDIX - VI.

(J) Bills past due :

Bills purchased/discounted which are not realised within a reasonable

time after presentation or maturity should be transferred to GL Bills
Past Due Account from the respective accounts after referring the
matter to the Regional Authority.

Separate vouchers should be passed for each bill and entered directly
in the fair cash book. Bills Past Due Register should be checked from
the fair cash book.

Outstandings in Bills Past Due Register should be taken down in a

register and balanced every month.
(K) Accommodation bills :

Branches should not purchase/discount any bill which is in the nature

of an accommodation bill. The following circumstances should
generally put the branches on enquiry and the genuineness of bills
tendered for purchase/discount should be thoroughly ascertained.

It should be ensured that clean bills purchased represent movement

of goods etc. and the branch should negotiate bills which are prima
facie not in the nature of accommodation bills.

Some of the feature suggestive of bills being in the nature of

accommodation bills are indicated below :

(a) Bills, particularly clean bills, drawn on sister/associate firms, or

agencies, i.e. house bills.
(b) Bills wherein the address of the drawee is the same as that of
another person or firm, or where the address is care of a hotel, a
lodging house, a Postmaster or only a post box.
(c) The address of the drawee is not at a locality where
traders/dealers in similar line of business are established.
(d) The lines of business of the drawer and the drawee are totally
different.

186
 (e) Around the date on which a bill discounted by the branch falls due
for payment, the drawer discounts another bill for similar amount
(in such cases, proceeds are sometimes remitted to the drawee
directly or indirectly through the same bank or another bank.
(f) Instances wherein the customer accepts/becomes the drawee of
bills drawn by persons on whom he himself draws bills, such bills
being purchased/discounted at either end for both drawer and
drawee customer e.g. 'A' accepting/becoming drawee of bills
drawn by 'B', 'C', 'D' etc., on whom 'A' himself draws bills.
(g) Bills relating to movement of goods which are not those in which
the party normally deals.
(h) Bills drawn in respect of commodities which are not normally
consigned from centres at which the bills have been drawn.
(i) Bills relating to movement of goods to centres to which such
goods are not normally consigned.
(j) Self cheques tendered by drawers for purchase.
(k) Bills drawn by parties whose business is transacted entirely on
cash basis, e.g. passenger bus service.
(l) Bills drawn by retail traders who do not have any outstation
business.
4.11 MAINTENANCE OF BOOKS AND ACCOUNTING PROCEDURE

Branches should maintain following registers/ledgers :

(i) Bills Purchased Register - R-62 (separate sections should be

maintained for clean and documentary demand bills).
(ii) Bills Discounted Register - R-62.
(iii) Bills Purchased Ledger - R-63 (separate sections should be
maintained where parties have been sanctioned sub-limits for
purchase of clean bills under the overall limit).
(iv) Bills Discounted Ledger - R-63 (where drawee-wise limits have been
fixed, separate subsidiary accounts should also be maintained in this
ledger.
(v) Due Date Diary.
(vi) Bills Purchased and discounted Realisation Registers - R-61.
(vii) Balance book for taking down outstandings in Bills Purchased and
Discounted Accounts.

Branches should adhere to the following procedure :

(a) All particulars of bills purchased and discounted should be entered in

the respective registers date-wise and each bill is to be given a serial
number.
(b) Bills should also be posted in Bills Purchased and Discounted Ledgers
in the accounts of respective parties. It should be ensured that the
limits sanctioned to various parties are not exceeded.
(c) Separate vouchers should be passed for bills purchased and
discounted to the debit of the respective accounts in the general

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 ledger and directly entered in the fair cash book.
(d) Bills realised should be entered in the respective realisation registers.
Total credit should be given to the general ledger account concerned
while individual bills should be duly marked off in the respective
registers and posted in the ledgers duly authenticated. Separate
vouchers should be passed for exchange, discount, commission,
interest earned etc.

Where a customer tenders large number of bills for purchase on a

regular basis, branches may seek permission from the Regional Authority
to post the ledger account of the concerned customer with daily
aggregate of bills purchased and realised instead of posting the items
individually. Regional Authorities may accede to the request on merits,
provided they are satisfied that the branch will be able to follow up
realisation of the bills and charge applicable overdue interest without any
difficulty.

While considering such cases, Regional Authorities should take into

account the number of bills tendered for purchase regularly by the
concerned customers and should not merely be guided by the amount of
the limit sanctioned or the total value of bills purchased over a period.
Wherever such permission is obtained, branches should enter all bills in
B.P. Register and in Realisation Register party-wise every day and
sub-totals of bills party-wise should be posted in the BP Ledger. The date
of realisation of each bill should be marked off in B.P. Register.

4.12 BP LETTER OF UNDERTAKING

When bills purchase facilities are granted to the constituents, the usual
stamped letter of undertaking (LDOC-30) should be obtained from them
before the facilities are allowed. If the facility is allowed against a third
party guarantee, the stamped general form of guarantee (LDOC-33)
should also contain the following clause :

"I/We shall not be released from my/our liability in respect of the B.P.
Limits of Rs. ...... covered by this guarantee in the event of any
omission, delay or default in presentation of bills or in the issue of notice
of dishonour on the part of the Bank."

It was held by the High Court of Judicature, Mysore that lorry receipts
through which goods are pledged to banks are not documents of title to
goods. The consequence of this judgement is that lorry receipts should
not be used as instruments for pledging the goods to the banks, unless
the carriers are properly notified by the concerned banks and they agree
to hold the goods as bailees. In view of the said judgement, when bills
accompanied by Motor Transport Receipts are purchased, branches
should invariable take a letter of pledge of securities (LDOC-11) which
contains a specific mention of Motor/Lorry receipts endorsed in favour of
the Bank or made out in the name of the Bank. In such cases, LDOC-11
should be taken in addition to the BP letter of undertaking.

However, for detailed instructions about documentation please refer the

Volume No. 9 on 'Credit Documentation'.

4.13 BILLS DISCOUNTING (USANCE BILL)

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Usance bill is a bill of exchange which is payable by the drawee at the
end of the specified period. When bank wants to grant to finance against
the usance bills, such bills are discounted by the bank.

This slightly differs from BP. While all procedures of BP are applicable in
case of BD also and all the safeguards to be observed in case of BP are
also to be adhered to in case of BD, following additional guidelines are to
be followed :

(i) Types of usance bills discounted :

(a) Unaccepted usance bill accompanied with documents to title to

goods, to be delivered against acceptance.
(b) Accepted usance bill (without any documents).
(c) Usance bills co-accepted by other banks.
(d) Bills discounted under other Bank’s L/Cs

(ii) Special care to be exercised in respect of above types of

usance bills are as under :

(a) i) When unaccepted usance bills accompanied with documents to

title to goods, are discounted, these should be sent for
collection with the instruction to deliver the documents against
acceptance.
ii) After delivery of documents the advance becomes clean as the
bank is left with no security except the personal liability of
drawer and the drawees, unless any collateral security is
obtained. Therefore, the facility should be extended only to
first class parties.
(b) When the usance bills duly accepted by drawees are presented,
the signatures of drawees should be verified. For this purpose
specimen signatures of drawees duly got verified by their bankers
if they are not customers of the branch, should be kept on record.
(c) By acceptance, we mean assent of the drawee of a usance bill to
pay the amount thereof on the due date. The assent is indicated
by the signature of the drawee on the face or reverse of the bill.
Acceptance should be unconditional. It is preferable to have the
date of acceptance and place of payment indicated by the drawee
at the time of his acceptance.
(d) While discounting of bills which are co-accepted by other banks,
branches should follow the precautions and procedure given
hereunder :
(i) Branches should ensure that the bills co-accepted by other
banks are not accommodation bills and that the co-accepting
bank has a capacity to redeem the obligation in case of need.
(ii) Bank-wise limits should be fixed, taking into consideration the
size of each bank, for discounting of bills co-accepted by other
banks and the powers of their officials should be registered
with the branches. Care should be taken to ensure that
co-acceptance liability of any bank is not disproportionate to
its known resources position.

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 (iii) Before discounting/purchasing bills of the value exceeding Rs.
2/- Lacs for a single party) co-accepted by other banks,
branches should obtain the written confirmation of acceptance
from the concerned Regional/Zonal Office of the accepting
bank and a record of the same should properly be maintained.
When the value of total bills purchased/discounted (which
have been co-accepted by other banks) exceeds Rs. 20/- lacs
for a single borrower, prior written confirmation of the Head
Office of the co-accepting bank must be obtained in writing.
(Instructions contained in this paragraph are not applicable to
co-accepted bills eligible for rediscounting by IDBI).
(iv) Branches should obtain periodical confirmation of the liability
of the co-accepting bank in regard to the bills discounted and
outstanding.
(v) Branches should periodically submit to their Regional Authority
the following information :
(a) Details of credit facilities sanctioned against guarantees of
other nationalised banks.
(b) Particulars of co-acceptance commitments entered into by
the branches on behalf of their customers.
(c) Particulars of bills purchased/discounted which are
co-accepted by other banks.
(e) Discounting of bills under other bank’s L/Cs (with recourse to the
borrower) may be considered by the Branch Managers/Authorities
in the MMG/S III and above. Presently, the following are the
specific additional powers of various functionaries in the bank with
regard to discounting/purchase of bills under other Prime Bank’s
LC’s:

By Branch Manager in MMG/S III Upto Rs 25 Lacs

Branch/Dy. Regional Manager/Regional Head in Upto Rs 100 Lacs
SMG/S - IV
By Branch/Regional Head in TEG/S - V Upto Rs 350 Lacs
By Branch/Regional Head in TEG/S - VI Upto Rs 750
Lacs
By Zonal Heads in TEG-VI & TEG/S-VII and Upto Rs 1000
functional heads in TEG/S - VII lacs
By MCB/CMD/ED Any amount

Note : As per revised guidelines received from Reserve Bank of

India, Banks should purchase/discount/negotiate bills
under L/Cs in respect of genuine commercial transactions
of their borrower constituents who have been sanctioned
regular credit facilities by the banks. Banks should not,
therefore, extend fund based (including bills financing) or
non-fund based facilities like opening of L/Cs, providing
guarantees and acceptances to non-constituent borrower
or/and non-constituent member of consortium/multiple
banking arrangements.

However, branches are advised to take adequate safeguards in

this regard and should also insist on receiving payment through
cheques/drafts drawn in favour of “ Bank of Baroda A/c (the

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 concerned bill no. and date)” :
(1) The branches, seeking discounting of bills under any bank’s
L/Cs, must satisfy through independent enquiries (without
taking assistance of any third party) about genuineness of (a)
Letter of Credit itself; (b) the bill being discounted; (c) the
advice of acceptance; (d) confirmation of due date and (e)
genuineness of trade transactions covered by the bills and the
L/Cs.
(2) The branches must obtain an irrevocable confirmation that the
bill, as tendered, has been accepted under the L/C, its due
date is confirmed and the L/C issuing bank- branch shall,
without demand, remit the proceeds of the bill to our Bank on
the said due date.
(3) All other norms, precautions and guidelines are to be
scrupulously complied with.
(4) In addition to the officer attending the transaction, it may be
advisable that the transaction and related procedure etc., are
verified by another officer at the branch.
(5) Senior officials from the respective regional offices should
periodically visit the concerned branches to satisfy upon due
observance of the above said instructions.

iii) Approval of drawees :

(a) All the drawees of the bills discounted should be approved.

Branch Managers are empowered to approve drawees for DA bills
in respect of facilities sanctioned under their own powers.
Executives in the level of Grade/Scale-IV and above may approve
drawees for DA bills even in respect of facilities sanctioned by
higher authorities unless and otherwise provided in the sanction.
For this purpose, branches should obtain names and addresses of
their bankers from the constituents and credit reports from the
formers' bankers be obtained. Only drawees on whom satisfactory
credit reports are received should be approved.
(b) Reports on drawees should be kept upto date by obtaining credit
reports at regular intervals.
(c) If bills drawn on a drawee are not promptly realised or returned
unpaid frequently further purchase of bills drawn on the same
drawee is not to be permitted and his name is to be deleted from
the approved list of drawees.

iv) Drawee-wise sub-limits :

a) Wherever considered necessary suitable sub-limits may be fixed

for the bills drawn on each drawee, depending upon the business
needs, means of the drawee, credit report thereon and past
experience.
b) The aggregate amount of bills discounted on a particular drawee
and outstanding should not exceed the sub-limit fixed, if any. In
other cases, it should not be disproportionate to the known
means of the drawees.

v) Due date :

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 (a) Due dates of all bills discounted, should be correctly arrived at
and diarised in due-date diary and the bills be followed up on due
date for payment. When documents remain outstanding beyond
the due date, branches should verify the genuineness thereof.
(b) Care should be exercised in calculating the due dates of bills
discounted. For further details, branches may refer to the Chapter
V on "Bills for Collection" in Volume - 2. The due dates should
be checked by an officer. In case a bill falls due on a holiday or on
a Sunday, the payment of the same should be made on the
preceding working day. Due date of a bill should be properly
recorded in the due date diary under authentication.

vi) Recovery of discount :

The amount of discount as per applicable rate is to be calculated for the

usance period and recovered while discounting a bill, and only net
discounted value of the bill should be credited to party's account. To
facilitate calculation of discounted value of bills for varying usance
periods, RBI has evolved a procedure, reproduced hereunder, which
should be scrupulously followed by branches :

Formula for deriving the discounted value of Bill corresponding to an

effective rate of interest :

D = __________F____________
1 + (__i_x_n__)
(100 X 365)
Where :

D : Discounted value of the bill (Rs.)

F : Face value of the bill (Rs.)
i : Effective interest rate percent per annum.
n : Usance period i.e. number of days.

General

1. The unavailed portion in documentary bills purchase limit should not

be utilised for discounting of D.A. bills, except with the specific prior
approval of the sanctioning authority.
2. Branches are strictly forbidden from discounting any bill which is in
the nature of an accommodation bill. Where bills are drawn on
associate firms, the sanction should specifically provide for
discounting of such bills. While it is necessary in all cases to verify
the invoices etc. and to satisfy the genuineness of bills, it is of
paramount importance to satisfy that the amounts of bills are not
inflated and that there is no hidden accommodation in respect of bills
drawn on associate firms. In all cases, the prices mentioned in the
invoices should compare favourably with the general market rates.
3. Where BD limit is sanctioned to a party alongwith a co-obligant or to
a partnership firm, a guarantee letter signed by the co-obligant or the
partners of the firm in their individual capacity should be taken.
4. Fresh bills should not be discounted to adjust overdue bills.

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 5. Regarding stamping of usance bill, please refer to the Chapter V on
"Bills for Collection" (Volume - 2).
6. Government supply bills are not to be purchased/discounted. A cash
credit facility is to be sanctioned against Government supply bills.

4.14 SANCTIONING OF BILLS PURCHASED/BILLS DISCOUNTING

FACILITIES

Bills purchase/bills discounting limits to a customer constitute post-sale

working capital finance. All the norms/guidelines applicable for assessing
post sale working capital finance should be taken into account while
considering BP/BD limits to a constituent.

In addition, the following points should be taken note of :

(i) The proportion of credit sales to the total sales, mode of sales,
normal period of credit extended by the customer and also the
prevalent practice in the trade etc. should be considered in detail.
(ii) Branches should not sanction BP/BD limits to a constituent who has
been sanctioned pre-sale working capital limits by other banks except
with their consent and for very valid reasons. The limits enjoyed by a
constituent, both pre-sale and post sale, should be taken into account
while considering BP/BD facility.
(iii) The means, standing and credit worthiness of a customer should
thoroughly be enquired into as in the case of any other advance.
(iv) Except for genuine reasons, clean bills purchase facility (other than
cheque purchase facility) should not be considered.
(v) In case, following relaxations are permitted the relative sanction
should specifically provide for purchase/discount of the same :
(a) Bills drawn by third parties and endorsed in favour of the
constituents.
(b) Bills drawn on associate firms/branches.
(c) Clean/DA bills under the overall BP limit.
(d) Documentary bills accompanied by a Tindall's receipt covering
goods shipped by a country boat of bills of lading of chartered
steamers.
(e) Acceptance of unapproved transport operators motor transport
receipt.
(f) Drawee-wise sub-limits, if any.
(vi) While communicating the sanction of BP/BD facilities, constituents
should be advised, interalia, that the bills will be
purchased/discounted purely at the discretion of the bank. This is
necessary to protect the interest of the bank, in case the
constituent's financial position deteriorates and also to impose cuts in
case the bank's credit is overextended.

4.15 REVIEW OF BILLS PURCHASED/BILLS DISCOUNTING

FACILITIES

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 While considering/ recommending review of bills purchased/bills
discounting limits, the following points should be taken note of

(i) Whether the utilisation of the sanctioned limit has been satisfactory
to justify its renewal or its enhancement.
(ii) Whether the retirement of bills has been prompt.
(iii) The number and amount of bills returned unpaid in relation to the
total number and amount of bills purchased. The branch should in the
review proposals, incorporate all the relevant information, including
the number and amount of bills returned unpaid, reasons for the
return, whether continuance of sub-limits for purchase/discount of
bills drawn on particular drawees requires reconsideration, whether
the returned bills represented genuine trade transactions and the
mode of recovery of returned bills.
(iv) Whether the clean bills purchased represented genuine trade
transactions. (Where the clean bills purchased are for round sums
and are returned frequently, the genuineness of the bills should
thoroughly be enquired into.)
(v) The total amount of bills purchased/discounted should have relation
to the total sales less cash sales at the counters or the like.
(vi) Whether the drawees of the bills are well spread.

4.16 PURCHASING /DISCOUNTING/NEGOTIATING/RE-

DISCOUNTING OF GENUINE COMMERCIAL/TRADE BILLS

(1) Branches should open letters of credit (LCs) and purchase/

discount/negotiate bills under LCs only in respect of genuine
commercial and trade transactions of their borrower constituents who
have been sanctioned regular credit facilities by the banks. Branches
should not, therefore, extend fund based (including bills financing) or
non-fund based facilities like opening of LCs, providing guarantees
and acceptances to non-constituent borrower or/and non-constituent
member of a consortium/multiple banking arrangement.
(2) For the purpose of credit exposure, bills purchased/discounted/
negotiated under LCs or otherwise should be reckoned on the bank’s
borrower constituent. Accordingly, the exposure should attract a risk
weight appropriate to the borrower constituent (viz; 100% for firms,
individuals, corporate etc) for capital adequacy purposes.
(3) While purchasing/discounting/negotiating bills under Lc or otherwise,
branches should establish genuineness of underlying transactions/
documents.
(4) The practice of drawing bills of exchange claused ‘without recourse’
and issuing letters of credit bearing the legend ‘without recourse’
should be discouraged because such notations deprive the
negotiating bank of the right of recourse it has against the drawer
under the Negotiable Instruments Act. Branches should not therefore
open LCs and purchase/ discount/negotiate bills bearing the ‘without
recourse’ clause.
(5) Accommodation bills should not be purchased/discounted/negotiated
by branches. The underlying trade transactions should be clearly
identified and a proper record thereof maintained at the branches

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 conducting the bills business.
(6) Branches should be circumspect while discounting bills drawn by front
finance companies set up by large industrial groups on other group
Companies.
(7) Bills rediscount should be restricted to usance bills held by other
banks. Branches should not rediscount bills earlier discounted by
non-bank financial companies (NBFCs) except in respect of bills
arising from sale of light commercial vehicles and two/three wheelers.
(8) Banks may exercise their commercial judgment in discounting of bills
of services sector. However, while discounting such bills, branches
should ensure that actual services are rendered and accommodation
bills are not discounted. Services sector bills should not be eligible for
rediscounting. Further, providing finance against discounting of
services sector bills may be treated as unsecured advance.

4.17 SUBMISSION OF STATEMENTS

Branches should submit a statement of Bills Purchased/Discounted

remaining outstanding for more than a month from the date of purchase
and/or from the due date to the Regional Authority every fortnight.

4.18 BALANCING

(i) Balances of all BP's/BD's outstanding should be taken down and

tallied on monthly basis.
(ii) The balancing of BP/BD ledger showing party-wise liability should also
be done on monthly basis. The total of party-wise liability should tally
with the outstanding in G/L Bills Purchased /G/L Bills Discounted.

4.19 RECOVERY OF SERVICE CHARGES

Various service charges by way of exchange, commission (collection

charges) discount and overdue interest are levied when bills are
purchased/discounted. The types of charges, when to be debited and its
accounting procedure are given hereunder :

Types of charges :

For Cheques/Bills:
(a) Exchange :
i. For cheques/bills/instruments drawn on our branches/ other
banks where we have branches : @ 35 paise %.
ii. For instruments drawn on other banks where we don’t have
branches : @ 70 paise %
(b) Commission : i.e. collection charges as applicable for the respective
slab and as outlined in bank's publication No. 123.
(c) Interest : The exchange mentioned above covers interest for 10
days for a(i) and 14 days for a (ii)

195
 On cheques/bills returned unpaid penal interest @ 2% + (PLR
+4%) per annum be recovered from 11th day/15th day of purchase,
as the case may, till date of reimbursement.

Overdue interest @ 2% + (PLR +4%) per annum be recovered

from 11th day/15th day, as the case may be, till the date of
realisation.

Notes :

(a) While the collection charges for the amounts of Bills/cheques will be
subject to a maximum of Rs. 5,000/-, the interest component @ 35
paise % and @ 70 paise % as the case may be ,shall be calculated
for the actual amount advanced.

(b) Postages, telegram charges and other out-of-pocket expenses, if any,

should be recovered in full separately.
(c) When the bills are tendered for purchase/discount, under the Bills
Rediscounting Scheme, besides collecting the discount at the
prevailing rates, normal service charges like actual conveyance and
actual out-of-pocket expenses reimbursed etc., in sending the bill to
IDBI/SIDBI also to be recovered.
(d) "Date of actual reimbursement" means :
(i) Where a bill is sent to our branch, the date on which funds are
actually received at the Drawee Centre. i.e. the date of 'C'
Schedule.
(ii) Where bills are sent to other banks or where instruments are
returned unpaid, the date of reversal of the BP entry at the
purchasing branch.
(f)For calculating interest, the amount of the bill should be rounded off
to the nearest rupee. Interest should also be rounded to the nearest
rupee. Interest should be calculated on the actual products.
(g)For collection of Supply Bills, commission is to be charged as per the
schedule as given in Bank’s Publication no. 123.

4.20 CHARGES WHEN FULL AMOUNT OF BILLS IS NOT

ADVANCED

The procedure to be followed for charging exchange, discount and/or

overdue interest on bills purchased/discounted wherein the full amount
of the bills is not allowed to be drawn by the borrower, either because of
stipulation of margin or for want of limit, is given hereunder :

(i) In the case of bills purchased/discounted accounts wherein margins

have been stipulated.
(a) exchange on bills purchased and discount on bills discounted
should be charged on the full amount of bills irrespective of the
drawings actually allowed.
(b) overdue interest should be charged only on the net amount of
drawings actually allowed and not on the full amount of the bills.

196
 However, overdue interest should not be charged on purchase of
cheques, drafts, dividend warrants etc., unless they are returned
unpaid.
(ii) In cases where the full amount of the bill is not allowed to be drawn
by the borrower for want of limit in his bills purchased/bills
discounted account,
(a) If the excess amount of the bill is held by the branch till its
realisation, exchange, discount and/or overdue interest may be
charged only on the actual amount of drawing.
(b) In case the excess amount is allowed to be drawn either in full or
in part after the limit falls vacant (due to realisation of earlier
bills) but before the realisation of the concerned bill, exchange
discount and/or overdue interest should be charged on the full
amount of the bill.

4.21 CHARGES WHEN TO BE RECOVERED

(i) Exchange, discount and collection charges are to recovered at the

time of purchasing/discounting the bill.
(ii) Interest including overdue interest is to be recovered when
realisation is received/amount is recovered from the borrower.

4.22 ACCOUNTING PROCEDURE

(i) Bills purchased :

In case of BP, the client's account should be credited with the full
amount of the bill. Exchange, commission charges and interest is to
be debited to his account separately.

(ii) Bills discounted :

(a) In the case of 'after sight' usance bills discounted, discount at the
stipulated rate for the usance period of the bill should be
deducted first from the amount of the bill and the balance amount
should be credited to the client's account. After the exact due
date is known, necessary adjustments may be made.
(b) In the case of 'after date' usance bills discounted, the amount of
discount at the stipulated rate for the actual period of usance
should be deducted first from the amount of the bill and the
balance amount be credited to the client's account.

Which heads of P&L are to be credited :

Types of charges P/L Head to be credited

Exchange P/L Exchange (on BP/BD)

Collection charges P/L Commission
Discount P/L Discount
Interest/Overdue interest P/L Interest Received (on BP/BD)

4.23 G/L INTER BRANCH BILLS PURCHASED ACCOUNT

Following types of transactions should be debited to G/L Inter Branch

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 Bills Purchased Account and not to G/L Bills Purchased Account :

(i) Cheques drawn by constituents of other branches and which are

payable at par at some of the branches as per arrangements.
(ii) Similarly drafts and Bankers Cheques received from other banks
towards proceeds of bill sent to them and payable at outstation
centres where we are established should also be debited to this
account.
(iii) Cheques drawn by staff members and presented for encashment
alongwith a letter of authority.

4.24 NON-PERFORMING ASSETS - BILLS PURCHASED/

DISCOUNTED

As per prudential norms, a bill purchased/discounted, if remains unpaid

for 90 days after it becomes due for payment, is to be treated as
sub-standard. A demand documentary bill becomes due for payment on
8th day of purchase and usance bill on the due date of bill of exchange.
It may be further noted that even if a single BP/BD in an account
remains unpaid all facilities sanctioned to that particular borrower will
become sub-standard. Therefore, branches should make vigorous
follow-up for timely retirement of bills. In case BP/BDs are adjusted to
the debit of party's account, care should be taken to adjust old bills first.
Detailed guidelines in this respect are given in Volume - 8 on
Management of NPA.

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 APPENDIX-I

DAILY STATEMENT OF CHEQUES PURCHASED ABOVE RS. 2/- LACS

PER CHEQUE

Date of From Name of Name of Place on Amount

whom which
Purchase received Drawer Drawee drawn (Rs.)

APPENDIX-II

STATEMENT OF CHEQUES PURCHASED ABOVE RS. 2/- LACS PER

CHEQUE BUT RETURNED UNPAID FOR FINANCIAL REASONS

Date of From Name of Drawee Place on Amount Date of Date of

purchase whom Drawer which (Rs) return Recovery
received drawn Of
principal
amount +
interest

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 APPENDIX-III

MONTHLY STATEMENT OF CHEQUES PURCHASED ABOVE RS.

2/-LACS PER CHEQUE

BRANCH :________________
REGION :________________
MONTH :________________

Date From Name Drawee Place Amount Date Date Date of

of whom of on (RS.) of Of recover
purc- recei- drawer which realisa- return y of
hase ved drawn tion unpaid princ-
for fin- pal
ancial amount
reasons +
interest

NOTE : Cheques which are not realised/returned unpaid should be

included in the next month/s statement till such time they are
realised/returned unpaid.

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 APPENDIX-IV (ON STAMP PAPER)

IRREVOCABLE LETTER OF AUTHORITY/UNDERTAKING/

INDEMNITY TO BE OBTAINED FROM CUSTOMERS WHO TENDER
BILLS ACCOMPANIED BY RAILWAY RECEIPTS FOR
PURCHASE/DISCOUNT.

The Branch Manager,

Bank of Baroda,
______________
________________

Dear Sir,

Re : Irrevocable letter of authority/undertaking/indemnity in your

favour in respect of B.P. facility of Rs. ...... granted to us.

Bank of Baroda (hereinafter referred to as the Bank) at our request has granted
to us a Bills Purchase facility to the extent of Rs. ....... inter alia against an
irrevocable letter of authority/undertaking/indemnity to be given by us as
hereinafter appearing:
NOW IN CONSIDERATION of the Bank having agreed to grant and granting us
a Bills Purchase facility to the extent of Rs. ...... we hereby irrevocably authorise
the Bank :

1. to take delivery, if necessary, of the goods from the Railway authorities

covered by the bills purchased by the bank.
2. to store the said goods after taking delivery thereof in an approved godown
or with some warehouse on such terms and conditions that may be agreed by
the bank and to pay the insurance premia, demurrage, rent and to incur at
our costs any other expenses arising in whatsoever and howsoever manner in
the premises.
3. to pledge, sell, alienate or transfer the said goods if and when necessary in
order to realise the Bank's dues and appropriate the entire sale proceeds
towards the B.P. outstandings or any other outstandings of the borrower with
the Bank including costs, charges and expenses incurred by the Bank in that
connection.

We, hereby, undertake that all the charges and expenses incurred by the Bank in
the above connection will be paid by us on being called upon to do so by the
Bank and also undertake to pay all moneys due and payable by us to the Bank
even though the goods covered by the Bills Purchased by the Bank are
confiscated by the Railway authorities.

In further consideration of the premises, we also, hereby, agree from time to

time and at all times, hereafter to indemnify and keep the Bank indemnified from
and against all losses, damages, claims, costs, and/or demands which the Bank
may incur, sustain or bear or put to by reason and on account of the drawees of
the bills failing to retire the bills in due time and for confiscation/auction of the
goods by the railway authorities for not clearing the goods covered by the bills by
the drawees or their authorised agents in due time or for any reason whatsoever
in the premises.

We understand that it is on the faith of this irrevocable letter of

authority/undertaking/indemnity that the bank has sanctioned the Bills Purchase
facility to us as aforesaid.

Yours faithfully,

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 APPENDIX-V

FORM OF LETTER TO BE ADDRESSED BY BANKS TO TRANSPORT

OPERATORS WHILE ASKING FOR RE-BOOKING
(ON THE BANK'S LETTER HEAD)

No. Date :

The Name of the Operator

(Addressed to the originating point)
(Address)

Dear Sir,

We had purchased/discounted documentary bills accompanied by your

Lorry Receipts, details of which are given hereunder and, therefore, the
relative goods form our security.

1. Name of the Drawer :

2. Name of the Drawee :

3. Lorry Receipt No. :

4. Date of Lorry Receipt :

5. Invoice No. and Date :

6. Particulars of consignment/s : (as given in the LR)

7. Value as per Invoice :

The above bill/s still remain unpaid by the drawees and we, therefore,
request you to rebook the consignment/s (details as given above)
immediately to ......... . The freight charges in this regard will be borne
by us.

Kindly, note that our bank should be intimated immediately about the
arrival of the consignments at ..........

Yours faithfully,

BRANCH MANAGER

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 APPENDIX-VI

INFORMATION TO BE FURNISHED AT THE TIME OF LODGING A

COMPLAINT AGAINST A RECOMMENDED TRANSPORT OPERATOR

Information in respect of all points listed below, in detail, is required in

case of every complaint which a bank may make against any transport
operator.

1 Name of Transport Operator :

2 IBA Code Number :
3 Particulars of Lorry Receipts i.e. Lorry Receipt Numbers & Dates :
4 Whether the Lorry Receipt accepted by the Bank was under the scope
of the IBA Scheme, viz.
(a) was in the special form and layout.
(b) had the Special notice on it.
(c) had the Special Endorsement on it.
(d) was the IBA code number on it.
(e) was the consignee copy of the set of lorry receipt.
(f) was made out with the bank as consignee.
(g) carried an endorsement in favour of the bank or a blank
endorsement on the reverse.
5 Name of the Consignor.
6 Goods Booked from ....... to .......
7
a. Date on which the Bills accompanied by the above Lorry Receipts
were accepted by the Bank.
b. Were the bills accepted under the Bills Discounting or Bills
Purchased.
8 Nature and value of the goods ..........
9 Details of the Complaint :
(a) Issue of Lorry Receipt without receiving consignments.
(b) Issue of more than one set of Lorry Receipt with the same
number,
date and another details.
(c) Detention of consignments in transit.
(d) Deliberate diversion of consignments to another route or delivery
at
another destination.
(e) Refusal to deliver consignments to Bank/buyer/consignor.
(f) Refusal to rebook the consignments as desired by the consignee
Bank.
(g) Delivery of the consignments without consignee copy.
(h) Delivery of consignments without Bank's authority.
(i) Delivery of consignments at another destination.
(j) Re-booking of consignments to another destination.
(k) Refusal to allow inspection of godowns by Banks.
(l) Non-traceability of goods.
(m) Any other (give details)
10 In case of delivery of consignments without production of consignee
copies of the lorry receipts :
(a) The date of delivery of consignment by the transport operator.
(b) The date of Inspection by the Bank Officials.
(c) The date of retirement of documents by the drawee and release
of

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 the documents by the collecting bank.
(d) Where documents are not retired at the destination, the date of
return of documents to the discounting bank by the collecting
bank.
(e) The date of return of documents by the discounting bank to the
consignor.
11 Where the bank had asked the operator to rebook the goods covered
by the Lorry Receipt.
(a) the date on which rebooking was asked for.
(b) to which office of the operator request for rebooking was
addressed.
(c) the response of the operator to the request.
(d) the present position.
12 Was open delivery demanded by the Bank. If so, when and the
response of the operator.
13 Was inspection of the goods demanded by the Bank ? If so, when and
the response of the operator.
14 The Bank's estimate of the liability of the transport operator to the
Bank - Rs.
15 Full details regarding losses, if any sustained by the Bank.
16 The amount advanced to the customer.
17 The amount recovered from the customer.
18 The amount remaining outstanding.
19 The chances of its recovery.
20 Whether a suit has been filed on the customer for recovery ? If not,
what steps the Bank has taken for recovering the advance.
21 Whether in the Bank's view, the customer was in any way in collusion
with the Transport Operator.
22 Full details of credit facilities and terms and conditions on which they
are available to the customer.
23 Whether the Bank proposes to withdraw or curtail credit facilities to
the customer.
24 Whether the Transport Operator enjoys any credit facilities with our
Bank.
25 What recommendations the Bank would like to make in the matter.

204
 APPENDIX-VII

SALIENT FEATURES OF IBA SCHEME FOR

RECOMMENDING ROAD TRANSPORT OPERATORS

I PROTECTION AND OBLIGATIONS UNDER THE SCHEME :

1. The transport operators approved by the IBA, will have to issue lorry
receipts only after receiving the consignment and deliver the same
only against the consignee copies duly discharged by the Bank.
2. The Bankers and their customers will get protection only if
a. the lorry receipts are in the special form with the endorsement,
notice and caution.
b. the discounting Bank's name and address is shown as the named
consignee on the lorry receipt.
c. immediate delivery is claimed, the moment retirement of
documents is unduly delayed by the buyer.

As a result of this, the discounting Bank gets virtually complete control

over the consignment.

Before accepting a lorry receipt for negotiation or discounting, the bank

should ensure that :
a. the lorry receipt is that of an operator recommended by IBA.
b. the operator is placed and continues to be on the approved list of the
Bank.
c. the lorry receipt falls within the scope of the scheme of
Recommendation as under :
i. lorry receipt should be in special format.
ii. contains the Caution, Notice and Endorsement (they act as a
notice to the transport operator at the destination that a bank is
interested in the consignment and, therefore, delivery not be
made without the authority of the Bank).
iii. should have on the reverse the prescribed terms and conditions.
(They are conditions of carriage, contain the Bank Clause, which
gives to the discounting bank control over the goods consigned
under the lorry receipt).
iv. should contain the Code number allotted by IBA.
v. should show the name and address of the discounting bank as the
consignee (The name and address of the bank named as the
consignee, should be that of the bank discounting the bills
accompanied by such lorry receipts and not the bank at the
destination, which is likely to act as the collecting agent of the
discounting bank).
vi. in the set of the lorry receipt, there should be a consignee copy
which is the only negotiable copy and the rest of the copies in the
set are not negotiable. (If the Bank accepts any of the other
copies, it runs the risk that the consignee copy may be discounted
with another bank. If so, the former bank will not have any
security for the advance, which it has made on the strength of the
lorry receipt).

205
 II LORRY RECEIPTS OUTSIDE THE PURVIEW OF THE SCHEME :

i) Lorry receipt of an operator not placed on the approved list of the

member bank.
ii) Ordinary lorry receipts used by the operators for their non-banking
business.
iii) Lorry receipt issued under old scheme of IBA.
iv) Lorry receipt not issued as per format and conditions laid down by
IBA-1(2) per above para.
v) Lorry receipt issued under new scheme, but Bank is not stated as
named consignee or named self as consignee.
vi) Lorry receipt made out in the name of consignee of self and marked
for 'Direct Delivery' of 'Home Delivery'. vii) Copies of Lorry receipt
other than the 'Consignee copy.'

III LETTER OF INDEMNITY :

The customers select the Transport Operators. However they should

execute the letter of indemnity prescribed under the scheme. (Under this
letter, the customer (consignor-borrower) agrees to treat the bank as his
agent and to indemnify it in case any liability attaches to the bank
merely by reason of allowing its name to be used as the consignee in the
lorry receipt. The customer (consignor-borrower) further undertakes that
he shall bear the risk, responsibility, costs and consequences of any
breach of this undertaking).

IV ENDORSEMENT :

Although the name of the Bank is appearing as the consignee, the Bank
should require the consignor to endorse lorry receipt in its favour on the
reverse thereof. The endorsement is required in order to

a. create a contractual relationship between the bank and the transport

operator, so that the bank gets the benefit of the contract of carriage
between transport operator and the consignor, and
b. establish beyond doubt that the customer had retained to himself the
right to disposal of the goods, as required under Section 25 of the
Sale of Goods Act. If this is not done, the customer would not have
the legal right to give the bank's charge over those goods.

V CARRIER'S RISK LORRY RECEIPT :

The Bank should insist for the above type of lorry receipt, because not
only the operator himself is responsible for negligence but his agents,
associates, servants etc., are also responsible.

VI INSURANCE :

Under the scheme, insurance (for whatever risks the bank may consider
necessary) is to be taken out by the customer. The operator merely
reports the fact whether the consignor has insured the goods or not. The
insurance should not merely cover the risk of transit of goods, but also

206
 cover storage at the booking station, the transit and storage at the
destination.

VII LIEN :

The bank should send a notice of lien immediately on the day of

discounting to the destination office of the transport operator. Such
notice will be in addition to the notice contained on the lorry receipt itself
and not in lieu thereof.

VIII ADDITIONAL SAFE-GUARDS :

(a) If before accepting for negotiation or discounting a lorry receipt, the

value of goods covered thereunder is found very large, it is advisable
that Bank should check directly with the authenticity of the lorry
receipt and the existence of the goods.
(b) There should not be any delay between the date of booking and the
date of discounting and where the inordinate delay is observed, such
lorry receipt should not be accepted for negotiation/discounting.
(c) Where documents are not retired in time, it is essential that the bank
should immediately take delivery of the consignment covered under
lorry receipt within 15 to 21 days from the date of booking as
otherwise the goods are likely to be delivered without lorry receipt as
the transport operator has right to dispose of the consignment after
30 days of arrival, after giving due notice to the consignor and the
bank.
(d) Bank can demand open delivery under the circumstances that the
goods received are not in the condition in which they were originally
packed as also in cases of inordinate delay in delivery of the goods
(apprehension goods offered may be substituted). While taking open
delivery, the signature of the operator should be taken as witness.
(e) Ordinarily, carrier does not accept any packet for carriage without
recording its weight on lorry receipt. Hence, weight at the time of
taking delivery of goods should be compared with that mentioned on
lorry receipt.
(f) When goods reach earlier than the documents and the operator
notifies the Bank about arrival of goods, the bank may take delivery
of the goods and store them in Bank's own godown or in buyer's
godown under bank's lock and key or authorise the operator to
deliver the goods to the consignee.
(g) When the goods are required to be rebooked, the original lorry
receipt should be surrendered to the transport operator and fresh
contract under a fresh lorry receipt for rebooking should be made.
NOTE :
Branches need not treat IBA recommendation in favour of transport
operator a guarantee. The recommendations of IBA are not obligatory
but recommendatory. Hence, branches must scrutinise
creditworthiness/net worth of the customer borrower as per our
guidelines. All complaints against recommended transport operators
should be made to Customer Services and Government Business
Department, Head Office for necessary action.

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 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER V

SELECTIVE CREDIT CONTROL

SR NO SUBJECT PAGE NO
5.1 INTRODUCTION 210
5.2 OBJECTIVE 210
5.3 OPERATING TOOLS 210
5.4 POWER CHART 210
5.5 EXEMPTION FROM SELECTIVE CREDIT
CONTROL 211
5.6 WITHDRAWAL OF CERTAIN COMMODITIES
FROM THE PURVIEW OF SELECTIVE CREDIT
CONTROL 211

LIST OF APPENDICES

APPENDIX SUBJECT
NO PAGE NO
I THE STRUCTURE OF MINIMUM MARGINS
AND LEVEL OF CREDIT CEILINGS ON BANK
ADVANCES AGAINST COMMODITIES
SUBJECT TO SELECTIVE CREDIT CONTROLS 217
II VARIOUS TERMS USED IN THE RBI
DIRECTIVES ON SELECTIVE CREDIT
CONTROL 218

208
 SELECTIVE CREDIT CONTROL

5.1 INTRODUCTION

Selective Credit Control refers to the directives issued by RBI under

Section 21 of the Banking Regulation Act, 1949 to regulate the flow of
bank credit against the security of selected commodities. These sensitive
commodities include :
i. Pulses and other foodgrains (viz. Coarse grains)
ii. Oilseeds indigenous viz. groundnut, rapeseed/mustard seed, cotton
seed, castor seed, linseed and all imported oil seeds
iii. Vegetable oils (indigenous oil viz. groundnut oil, rapeseed oil,
mustard oil, castor oil, linseed oil, cotton seed oil, and all imported
oils and vanaspati.
iv. Sugar gur and khandsari.
v. Cotton & kapas. (Advances granted to cotton textile mills/ processing
units are exempt from SCC measures).
vi. Paddy & Rice
vii. Wheat

5.2 OBJECTIVE

All these commodities are of mass consumption and government makes

all efforts to ensure adequate supply of these commodities in the free
market. To achieve this objective, hoarding capacities of traders of these
commodities is reduced by restricting flow of credit against such
commodities, through the mechanism of Selective Credit Control.

5.3 OPERATING TOOLS

Under selective credit control, RBI mainly uses three tools viz.

i. Prescribing minimum margin for lending against security of specified

commodities.
ii. Fixing ceiling on the level of credit, and
iii. Prescribing minimum rate of interest on advances against such
commodities. While the first two steps restrict the overall lending by
the banks against these commodities, the third aspect has a bearing
on the cost of credit. All such advances will be subject to guidelines
issued by RBI from time to time keeping in view the market position
and overall availability of these commodities in the country.

5.4 POWER CHART

a Authority :
Branch Managers/Regional Heads/Zonal Heads to exercise their
existing full lending powers for sanctioning proposals falling under
this category. However, there are certain restrictions in
granting advances under Selective Credit Control. For further
details refer to Para No. 5.6 (v) of this Chapter.

209
 b Reporting to Reserve Bank of India
Reserve Bank of India, (vide its circular letter no. DBOD. NO.
Dir.BC.52/13.08.01/00-01 dated 23-11-2000) has advised that, with
immediate effect, the existing practice of Bank’s submitting credit
proposals above Rs 1 Crore to Reserve Bank of India for its prior
approval, under Selective Credit Control Guidelines, shall be
discontinued and the banks will have freedom to sanction such credit
proposals in terms of their individual loan policies (CO:BR:93/06
dated 10-01-2001)

5.5 EXEMPTION FROM SELECTIVE CREDIT CONTROL

(i) All advances upto an aggregate limit of Rs. 1/- lac per borrower in
respect of all commodities are exempted from all the provisions of
the control, provided the borrower deals with only one bank.

(ii) Advances against rationed foodgrains granted to wholesale and retail

dealers appointed/licensed by government and/or operating under
statutory rationing/fair price distribution system in all the states and
union territories.

(iii) Advances against selective credit control commodities to all parties in

the States of Assam, Arunachal Pradesh, Himachal Pradesh, Jammu &
Kashmir, Manipur, Meghalaya, Mizoram, Nagaland,Orissa, Tripura &
Sikkim are exempted from minimum margin, level of credit and rate
of interest prescribed under Selective Credit Control. However, such
advances will continue to be governed by other instructions viz. not
to discount usance bills, and consider facilities against book debts
and clean facilities etc.

(iv) Term loan and demand documentary bills purchase limits.

5.6 WITHDRAWAL OF CERTAIN COMMODITIES FROM THE

PURVIEW OF SELECTIVE CREDIT CONTROL:

i. Considering the favourable supply situation, it has been decided by

RBI) that w.e.f. 21.10.96, bank advances against the following
commodities will be exempted from all the stipulations of selective
credit controls:
a. Pulses
b. Other foodgrains (viz. Coarse grain)
c. Oilseed (viz. Groundnut-seed, rapeseed, mustard seed,
cottonseed, linseed, castorseed)
d. Oils (viz. Groundnut oil, rapeseed oil, mustard oil, cottonseed
oil,linseed oil, castorseed oil,) including vanaspati
e. All imported oilseeds and oils
f. Sugar except buffer stock and unreleased stock of sugar to sugar
mills.
g. Gur and Khandsari
h. Cotton and Kapas

210
 i. Paddy and rice, and
j. Wheat

ii While allowing the above relaxation, RBI has also advised that banks
are free to fix prudential margins on advances against sensitive
commodities.

iii Branches should adopt following strategy for advances against

sensitive commodities keeping in view the exemptions since advised
by RBI :

a. Due weightage to be accorded to profitability and avoidance of

lending to speculative/hoarding purposes.
b. Need-based advances against clean bills/usance bills as well as
advances against hypothecation of book debts may be allowed on
merits. Where any borrower requires advance against clean
bills/book debts on associate concern, the same may be
considered on merits by fixing a separate sub-limit.
c. Working capital requirements of the borrowers would continue to
be computed as per existing guidelines of RBI. Need based
requirements of the borrower would be met without any ceiling
restrictions after detailed credit appraisal, study of borrowers'
track record and in conformity with Bank's Loan Policy.
All other existing precautions/norms and guidelines as per the
Bank's Loan Policy/guidelines issued by RBI/other authorities
continued to be followed.
d. Margin :
Margin on various commodities to be stipulated are given in
APPENDIX - I. Since paddy, rice and wheat were earlier
exempted from all the provisions of Selective Credit Control,
including stipulations of minimum margin, Bank would prefer to
stipulate margin as applicable for other foodgrains sanctioned in
aforesaid APPENDIX. In deserving cases, suitable reduction of
margin upto 1/5th of stipulated level (except in case of
unreleased stock of levy and free sale sugar where prescribed
margin as stipulated in 5.6(iv) must be maintained) may be
considered by the concerned delegated authority under whose
discretionary lending powers the relative credit proposal falls. In
view of competition amongst peer banks to quote lesser margin
on advances granted against stocks of oil seed and vegetable oils,
it was decided by the Bank to delegate authority to
Zonal/Regional Heads to consider reduction in margin from
existing 45% upto 25% on advances against all types of oil seeds
and vegetable oils to processing units, on case to case basis, on
merit and subject to following:
1. Long standing relationship of the party with the Bank;
2. Good conduct of the party’s account
3. Credit rating of the account should be atleast B+
f Rate of interest :
2.5% / 3% over PLR subject to Credit Rating. This will continue
for the present and may be reviewed by CMD/EMC/ED from time

211
 to time.
g Securities :
Branches should continue to follow the existing guidelines of
obtaining pledge/hypothecation of stocks, other chargeable
current assets as principal securities. Wherever borrower/
guarantor is willing to offer collateral securities by way of
mortgage of landed property/other tangible securities, the same
will be obtained. Third party guarantee wherever available, will
also be obtained as per existing guidelines.
h Reporting to Reserve Bank of India
Reserve Bank of India, (vide its circular letter no. DBOD. NO.
Dir.BC.52/13.08.01/00-01 dated 23-11-2000) has advised that,
with immediate effect, the existing practice of Bank’s submitting
credit proposals above Rs 1 Crore to Reserve Bank of India for its
prior approval, under Selective Credit Control Guidelines, shall be
discontinued and the banks will have freedom to sanction such
credit proposals in terms of their individual loan policies
iv Advances against sugar, khandsari etc. :

Though with effect from 21st October 1996 RBI has exempted
financing of Sugar (except buffer and unreleased stock of Sugar) and
Gur & Khandsari, Bank's overall policy guidelines on financing against
sugar, khandsari to sugar mills and traders are as under :

a. All credit applications of Sugar Mill Borrowers are to be

brought under our Fast Track System in terms of which
concerned Zonal Head should directly process the credit
applications of concerned borrowers if the same fall beyond
the discretionary powers of Regional Head.
b. RBI vide its circular BP:BC:31/21/04/048/00.01 dated
10-10-2000 has advised that margin on levy stock of sugar
should be maintained at 10% and on buffer stock NIL margin
shall continue. However, banks have been given the freedom
to take commercial judgment while fixing margin on free sale
of Sugar. Bank has decided to continue to maintain margin of
15% on free sale sugar for the period upto 31/03/2001. For
further period margin @ 25% is required to be maintained. In
eligible cases lower margin can also be considered provided:-

1) Proposals falling upto the discretionary lending power of

Deputy General Manager - With the consent of immediate
higher authority;
2) For other proposals (i.e. Proposals falling under the
discretionary lending power of General Manager and
above)- by the sanctioning authority
c Margin against sugar and khandsari in other cases will be
minimum 25%.
d Advance against sugar/khandsari to be allowed with following
rate of interest subject to credit ratings : - To Sugar Mills :
PLR + 2.5% p.a. - To Traders : PLR + 3.0% p.a.
e PBF may continue to be worked out as per RBI's existing

212
 guidelines. Current Ratio for Sugar Mills may be allowed to be
1:1As per policy guidelines prevailing from time to time.
f Clean Demand Loan (maximum period -6- months) to Sugar
Mills for off season repairs may be allowed as per RBI's
guidelines. Bank may finance generally upto 75% of need
based requirements. Rate of interest to be minimum PLR +
2.5% subject to Credit Rating.
g Working capital facilities are to be secured by first/pari- passu
(in case of consortium) charge on Raw Materials, Work-
in-Progress, Finished Goods and Book-debts as per existing
guidelines. Tangible Collateral Securities wherever available is
to be stipulated. If the borrower is willing to arrange for third
party guarantee, same may be obtained.
h Need-based advances against clean bills/usance bills (90
days) as well as advances against hypothecation of book debts
(90 days) may be allowed on merits. Where any borrower
requires advance against Clean Bills/Book-debts on associate
concern, the same may be considered on merits by fixing a
separate sub-limit.
i L/C facilities should generally be on Documentary Sight basis.
However, need-based requirement for usance L/C generally
upto maximum of -180- days usance may be considered on
merits. Guarantee facility may be considered if justified on
merits with suitable cash margin, wherever possible.
j Sugar Mill Borrowers will have to satisfy Bank about their
compliance of Pollution Control guidelines of concerned
authorities.
k All other existing laid down norms/guidelines/ safeguards are
to be fully adhered to.

v Restrictions on granting certain credit facilities :

Except where advances are completely exempted from selective
credit control directives, branches should not sanction the following
credit facilities to parties dealing in commodities falling under SCC.

a. Advances against book debts/receivables.

b. Advances against collateral securities like life insurance policies,
shares and debentures and real estate.
c. Advances against Bank's FDRs except where fixed deposits are
held by the borrowers themselves and the branch is satisfied
about the genuineness of the borrower's need.
d. Discounting of usance bills arising out of sale of commodities
covered under selective credit control.
e. Opening of inland letters of credit, with provisions under which
another bank may discount usance bills covering sale of selective
credit control commodities.
f. Issuing of a guarantee on behalf of an importer guaranteeing
payment of customs duty, import duty and/or other levies
payable in respect of import of essential commodities without
obtaining a cash margin of 50% of the guaranteed amount. The

213
 term essential commodities will cover commodities specified in
this behalf by the Reserve Bank of India from time to time.
Presently the term covers all vegetable oils and oilseeds (whether
edible or not) and sugar.
g. Clean credit (including temporary overdrafts) facilities other than
those specifically permitted as detailed in next para.
vi Branches may consider sanctioning the following clean facilities,
irrespective of the quantum of total limits against the stocks falling
under selective credit control, provided they are satisfied about the
genuineness of the need of the borrower :

a Purchase of bank drafts.

b Purchase of third party cheques, provided the maximum credit
limit does not exceed Rs. 5,000/- per borrower and the
cheques are in favour of the borrower.
c Advances against supply bills arising out of sale of goods to
government and quasi government bodies accompanied by
challans, inspection notes etc., covering the commodities.
d Purchase of clean demand bills arising out of movement of
goods, provided the maximum credit limit does not exceed Rs.
5,000/- per borrower. In such cases, branches should ensure
that the bills offered for purchase have arisen out of actual
movement of goods and for this purpose should verify the
relative invoices as also the receipts issued by transport
operators.
e Purchase of clean demand bills covering local sale of goods,
where the bills are not drawn on parties connected with the
borrower or his selling agents, provided the maximum credit
limit does not exceed Rs. 5,000/- per borrower.

vii Branches should further note the following :

a Advances by way of purchase of demand documentary bills

covering sale of commodities covered under selective credit
control are completely exempted from the directives. However,
branches should ensure that the bills are paid by the drawees on
presentation for payment or immediately after the arrival of goods
at the destination.
b Priority sector advances are also subject to selective credit control
directives, unless specific concessional treatment or exemption is
provided for in the directives.
c Where credit limits have been sanctioned against the security of
more than one commodity and/or against any other type of
security (i.e. composite credit limits), the credit limit against each
commodity should be segregated and the restrictions contained in
the directive, shall be made applicable to each such segregated
limit.
d Branches should keep a close watch on all advances covered by
the directives, those with limits exceeding Rs. 1/- lac, to ensure
that there is a proper turnover and that the bank credit is not
used to hold excessive stocks.

214
e Oil cakes of indigenous oilseeds (viz. groundnut, rapeseed,
mustard seeds, castor seed, cotton seed and linseed) and all
imported oilseeds including deoiled cakes not meant for exports
are also subject to Selective Credit Control except specific
exemptions advised by RBI from time to time.
f Various terms used by Reserve Bank of India in its directives are
explained in APPENDIX-II.

215
 APPENDIX - I

THE STRUCTURE OF MINIMUM MARGINS AND LEVEL

OF CREDIT CEILINGS ON BANK ADVANCES AGAINST
COMMODITIES SUBJECT TO SELECTIVE CREDIT
CONTROLS
Percentage
-----------------------------------------------------------------------------
Commodities Minimum Margins Level of Credit
--------------------- ---------------
Mills/ Other Ware- Base years three
Proce house years ending
ssing receipts 1994-95
Units (Nov. - Oct.)
-----------------------------------------------------------------------------
1. Pulses 45 60 45 100
2. Other foodgrains (other
than paddy/rice, wheat
and pulses) 30 45 30 100
3. Oilseeds (viz. groundnut,
rapeseed/mustard, cotton-
seed, lineseed, castor-
seed and all imported
Oilseeds) 45$ 60 45 100
4. Vegetable oils
(viz. groundnut oil,
rapeseed/mustard oil,
cottonseed oil,
linseed oil, vanaspati
and all imported oils) 45 60 45@ 100
5. Sugar
(a) Buffer 0 - - -
(b) Unreleased Stocks - - -
(i) Levy Sugar 10
(ii) Free Sale # 25
(c) Released 25 25 25 -
6. Gur and Khandsari 25 25 25 -
7. Cotton and Kapas X 30 30 100+
--------------------------------------------------------------------------------------
@ Applicable to registered oil mills and vanaspati manufacturers.
- Not applicable.
X Exempt from the stipulations.
+ Applicable to other than cotton mills including spinning mills.
$ Discretion given to Regional/Zonal Heads to consider reduction in
margin from exisiting 45% upto 25% as detailed in para 5.6 (iii) (g)
# Lower margin may be considered as detailed in para 5.6 (iv) b

216
 APPENDIX-II

VARIOUS TERMS USED IN THE RBI DIRECTIVES ON

SELECTIVE CREDIT CONTROL

The various terms used in the RBI directives on Selective Credit Control
are explained below :

Cotton and Kapas :

Cotton wastes of all types are also included.

Cotton Mills :

They do not cover ginning and pressing units. Such units come under the
category "Parties other than Cotton Mills" mentioned in the relative
directive.

Cotton Textiles :

They are cotton yarn, cotton fabrics, man-made fibers and yarn and
fabrics made out of man-made fiber or partly out of cotton yarn and
partly out of man-made fibers. Art silk and silk goods are also included.

Credit or Credit Limit :

Credit provided by way of loan, cash credit, overdraft, purchase or

discount of bills other than the advances against the security of, or by
way of, purchase of demand documentary bills drawn in connection with
the movement of commodities.

Essential Commodities :

The term includes all vegetable oils (whether edible or not), sugar and
such other commodities as may be specified by the RBI from time to
time.

Peak Level of Credit :

The highest level of credit reached on any day during the relevant
period. Whenever 'Level of Credit' Control has been stipulated, it will not
be based on the peak level of such credit actually maintained by the
borrower during the three year period viz. 1992-93, 1993-94, 1994-95
(November-October).

Registered Oil Mills :

All mills registered under the Factories Act, 1948 or licensed under the
Industries (Development and Regulation) Act, 1951 or registered with
the State Department of Industries and Commerce or any other
Government Authority.

Warehouse Receipts :

They are those issued by Central/State Warehousing Corporations or

rural godowns set up under the Government Scheme and godowns set
up by Regulated Market Yards.

217
Wheat :

Besides the grain, wheat products, viz., Suji (rawa), Flour (atta) and
Maida are also included.
*.*.*

218
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER VI

EXPORT FINANCE

SR NO SUBJECT PAGE NO
6.1 EXPORTS 221
6.2 EXPORT CREDIT 221
6.3 CLASSIFICATION 221
6.4 GENERAL GUIDELINES 222
6.5 APPRAISAL GENERAL 223
6.6 RATES OF INTEREST AND COMMISSION 228
6.7 TYPES OF PACKING CREDIT FINANCE 229
6.8 PRE SHIPMENT CREDIT TO SUPPORTING
MANUFACTURERS 230
6.9 LETTERS OF CREDIT RESTRICTED FOR
NEGOTIATIONS WITH OTHER BANKS/OTHER
CENTERS IN INDIA 231
6.10 APPLICATION 231
6.11 SCRUTINY 231
6.12 DISBURSAL OF PACKING CREDIT FACILITIES 233
6.13 FOLLOW UP AND MONITORING 235
6.14 LIQUIDATION OF PACKING CREDIT ADVANCES 235
6.15 POST-SHIPMENT CREDIT 236
6.16 POST SHIPMENT CREDIT IN RUPEES 238
6.17 FOREIGN CURRENCY BILLS
PURCHASED/DISCOUNTED 238
6.18 FOREIGN BILLS PURCHASED/DISCOUNTED/
NEGOTIATED 238
6.19 POST-SHIPMENT DEMAND LOAN 240
6.20 MISCELLANEOUS 240
6.21 EXPORT CREDIT AT NON-AUTHORISED
BRANCHES 241
6.22 ECGC COVER 242
6.23 DISCRETIONARY LENDING POWERS FOR GRANT
OF EXPORT CREDIT FACILITIES 243

219
 CHAPTER - VI

EXPORT FINANCE

6.1 EXPORTS :

Instructions for export transactions are dealt with separately, in details in

Chapter XII of Book of Instructions Volume - 10 on "Foreign
Exchange Business". However, some of the important aspects mainly
from the credit angle are briefly discussed in this Chapter. In a
developing country like India exports play important role. Exports are
awarded top priority in the foreign trade policy and export finance is
considered as the vital ingredient. Though, export credit is not formally a
priority sector credit, banks have to achieve a minimum floor level. For
compensating the banks for extending export finance, at lower rate of
interest and encouraging them to extend liberal finance, various
measures are taken viz. export refinance by Reserve Bank of India (RBI)
and Export Import Bank of India (EXIM Bank) and credit guarantee
coverage extended by Export Credit Guarantee Corporation of India Ltd.
(ECGC) etc. Bank's ability to scrutinise various factors consciously and
exercising judicious control will result in a safe lending and an increased
return to the bank. The most remunerative type of export credit is one
where import and export are both combined with a reasonable quantum
of pre-shipment finance.

6.2 EXPORT CREDIT:

The Bank gives high priority to financing of exports, as export credit has
certain distinct advantages as mentioned hereunder for bank as
compared to advances for domestic operations.

(a) Pre-shipment finance is disbursed against firm order or letter of

credit. This ensures ready availability of the market and implies to
some extent that the borrower will be in a position to liquidate the
advance on execution of the orders.
(b) Advances are covered under ECGC policies/guarantees. (i.e.
insurance cover to exporters against financial losses and to the
financing banks for the credit limits granted is available.)
(c) Export credit leads to foreign exchange business on which the bank
earns exchange remuneration.
(d) Bank gets refinance from Reserve Bank of India at concessional rate.

6.3 CLASSIFICATION:

Export finance is broadly classified into :

1. Pre-shipment finance and

2. Post-shipment finance

Financial assistance extended prior to the shipment of goods shall fall

under pre-shipment finance whereas, financial assistance extended
subsequent to the shipment of goods shall fall under the purview of
Post-shipment Finance. Export finance is governed, by and large, by RBI

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 directives, FEDAI rules, Exim-Policy etc. and, therefore, knowledge of the
Exchange Control, Trade Policy, procedures and directives of trade
control authorities, international trade practices, particularly those of
International Chamber of Commerce (ICC), Paris, etc. is very much
essential.

It is an additional responsibility on the part of lending banker to keep in

mind all such rules and regulations, over and above the usual practices,
procedures and principles of lending.

The export of consultancy services, software exports, rediscounting of

export bills abroad, finance to export houses, trading houses, star
trading houses, exports by 100% export oriented units (100% EOUs),
units in free trade zones (FTZs), export processing zones (EPZs),
software development parks, export incentives, duty draw back,
undrawn balances, deemed exports, issue of guarantees like bid bond
guarantees, performance guarantees, etc. are also covered under the
Chapter XII "Exports" in the Volume 10 on Foreign Exchange
Business.

6.4 GENERAL GUIDELINES:

In case of export finance, following should be noted by the branches :

I. Proposals are to be processed within following time frame :

a. Sanction of fresh/enhanced credit limits 45 days
b. Renewal of existing limits 30 days
c. Sanction of ad hoc limits 15 days

II. No proposal for export finance be rejected without reference to next

higher authority. All cases of rejections are to be brought to the
notice of Chairman & Managing Director through Corporate Office
with reason(s) for rejection.
III. Both types of credit needs (i.e. domestic and export) of borrowers
should be considered simultaneously with a view to have a correct
perspective of his business
IV. Past performance and future potential of exporters is to be kept in
view. In case of new exporters their experience of dealing in the
particular commodities in domestic market and other background
factors be kept in mind.
V. A close watch is to be kept on the end use of finance and timely
fulfillment of export order.
VI. Packing credit accounts are opened separately in the form of demand
loan accounts. Separate account must be opened for different
orders/commodities disbursement-wise in packing credit ledger. The
details such as export order number/LC No. commodities, period
stipulated, final date of concessive rate of interest etc. should be
noted on the relative ledger page. The interest is to be debited to
packing credit demand loan accounts on quarterly basis and also on
full liquidation of each disbursement and recovered from borrower's
domestic account simultaneously at each time.
VII. Under the PCFC, and FCBP interest is calculated and recovered in

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 relative Foreign Currency. In the event of recovery of interest and/or
service charges in Indian Rupees the amount of interest and/or
service charges in foreign currency is converted into Indian Rupees at
ruling TT selling rate and recovered. For the purpose of charging of
interest on all advances in Foreign Currency, 360 days make a year.

6.5 APPRAISAL GENERAL :

(i) Eligibility :

Pre-shipment finance is defined as any loan or advance granted or

any other credit provided by an institution (bank) to an exporter for
financing purchase of raw materials etc., manufacturing, processing
and packing of the goods on the basis of LCs opened in his favour by
an importer of goods outside India, or a confirmed and irrevocable
order for the export of goods from India. Firm orders, interalia, state
price of the goods contracted for, delivery period, destination etc.
Sometimes the firm export order may indicate that the payment is to
be made under letter of credit. In such cases granting of advances
within the terms of sanction may be considered against the (original)
firm orders received by the exporter. It should be ensured that the
relative (original) Letters of Credit are received and lodged with the
branch within a reasonable time. This is necessary in preventing
exporter from lodging the Letters of Credit, when received, with some
other bank and obtaining double finance against the same
transactions.

(a) Packing credit is a short term working capital finance made

available to exporters at the pre-shipment stage.
(b) The exporter borrower must have obtained/applied for exporter's
code number.
(c) The supporting manufacturers need not have exporter's code
number. However, the prescribed formalities to avoid double
finance are to be observed.
(d) Possession of export order/LCs on hand/under negotiation etc.
may be taken into account while considering the limit.

(ii) There are no special methods for appraisal of export credit facilities.
The credit requirements are appraised as per the normal method for
any working capital appraisal. Appraisal part in general is discussed in
Book of Instructions Volume V
(iii) In the case of all Non-SSI borrowers with fund based working capital
facility of above Rs 2 Lacs and upto Rs 2 Crores and in case of SSI
borrowers with fund based working capital facility of upto Rs 5
Crores, assessment of working capital should be done under
Permissible Bank Finance (PBF) I method.
(iv) In the case of Non- SSI borrowers with fund based working capital
facility of and above Rs.2 crores and upto Rs 5 Crores the
assessment should be done under PBF IInd method.
(v) All borrowers requiring working capital finance of and above Rs 5
Crores but upto Rs 10 Crores from the banking system, assessment
should be done under PBF IIIrd method.
(vi) All borrowers requiring working capital finance of and above Rs 10

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 Crores, assessment should be done under PBF IV method or PBF III
method as per choice of the borrower.

Note: For detailed guidelines on assessment of working capital as per

PBF method, please refer Book of Instruction Volume 5,

(vii) However, the following specific exemptions/guidelines have been

issued by RBI for financing exports :-

(a) For computing the permissible bank finance/overall working

capital gap, the amount of export receivables should be excluded
from the current assets and margin worked out thereafter. In
other words, in respect of export receivables included in current
assets, borrower need not bring a margin.
(b) Whenever additional export credit facilities are required for
meeting specific export credit transaction, bank may consider
granting additional facilities, without insisting on additional
margin, if the borrowers are not able to bring in such additional
margin. Such requests have to be considered on a case-to-case
basis and on merits of each case.
(c) Additional credit needs of exporters arising out of firm
orders/confirmed letters of credit (which are not taken into
account while fixing the regular limits) may be met in full, even if
sanction of such additional credit limits exceed PBF.
(d) In case of borrowers with PBF of Rs.10 crores and above and if
the export credit limits (both pre-shipment and post shipment)
granted to a borrower are in excess of the permissible level of
cash credit component, it may be allowed to continue.
(viii) The borrower should maintain a current ratio as per PBF guidelines.
(ix) Once the PBF is computed, the export credit limits should be carved
out of the pre-sale and post-sale limits. The pre- shipment packing
credit limit is to be carved out of pre-sale limits and post-shipment
credits out of post-sale limits.
(x) In case of a borrower enjoying domestic as well as export credit
facilities, the level of pre-shipment credit to be granted will depend
on the level of export sales out of total sales and the average level of
inventory meant for producing products meant for exports. For this,
segregation of raw material, stock-in-process and finished goods
should be done for deciding the pre-shipment export credit and
pre-sale domestic credit.
(xi) Similarly, the level of post-shipment credit to be granted will be
dependent on the level of export receivables likely to be outstanding
out of the total receivables. At the same time it should be linked to
the level of pre-shipment credit also.
(xii) The pre-shipment finance is of a self liquidating nature to be
liquidated out of purchase/discount/ negotiation of export bill(s) i.e.
post shipment finance. Therefore, the pre-shipment and
post-shipment facilities are to be considered simultaneously.

(xiii) Running account facilities :

Proposal to grant limits for pre-shipment advances, without insisting

on prior lodgement of letters of credit/firm export orders under

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 "Running Account Facility" may be considered in the case of
exporters whose track record has been good. However, following
should be noted :

(a) The need for running account facility should have been
established to the satisfaction of the bank.
(b) The facility could be extended only to the exporters with good
track record.
(c) In all cases where packing credit 'Running Account' facility has
been extended, letters of credit/ firm orders should be produced
within a reasonable period of time; i.e within a period of
maximum one month from the date of disbursement. ("Running
Account" facility is also available for items produced in Free Trade
Zones [FTZ]/Export Processing Zones [EPZ]/Special Economic
Zone[SEZ] 100% Export Oriented Units [EOU] also).
(d) Packing Credit can also be marked off with proceeds of export
documents against which no packing credit has been drawn by
the exporter.
(e) If it is noticed that the exporter is found to be abusing the facility,
the facility should be withdrawn forthwith.
(f) In case where exporters have not complied with the terms and
conditions the advance will attract, commercial lending rates
ab-initio. In such cases Bank will be required to pay higher rate of
interest on the portion of refinance availed of by them from RBI in
respect of the relative pre-shipment credit. All such cases should
be reported to the Monetary Policy Department, Reserve Bank of
India, Central Office, Mumbai 400 001, which will decide the rate
of interest to be charged on the refinance amount.
(g) Running Account facility should not be granted to sub-suppliers.
(xiv) Proposal to grant limits for liquidation of pre-shipment loans on
First-In-First-Out (FIFO) basis or Last-In-First-Out (LIFO) basis (i.e
pre-shipment disbursement permitted against a particular
contract/LC, may be adjusted by an export bill under another LC
submitted) also may be considered. However, it should be ensured
that an individual pre-shipment loan does not remain outstanding for
more than stipulated period or 360 days from the date of advance
which ever is earlier.

(xv) Quantum of finance :

In determining the quantum of finance to be granted to an exporter

against a specific order/LC or an expected order, the nature of
order/type of LC, commodity, capability of exporter to bring in the
requisite contribution etc., various relaxations suggested by RBI for
export finance may be taken into account.

Margins are stipulated mainly to :

- Make the exporter have his own stake in the business, so that he
will be more business conscious.
- Take care of erosion in the value of securities charged to the bank.
- Ensure that bank finance is not extended to cover profit portion.
The finance may be disbursed in stages depending upon the length
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 of production cycle, time taken for procurement operations etc.,
corresponding to export shipment schedules. Normally, the
pre-shipment advance should not exceed the FOB value of the
goods or domestic market value of the goods whichever is lower.
However,

(a) The pre-shipment advance can be made available to the extent of

domestic cost of production of the goods, even though such value
is higher than the FOB value of the goods, when the goods are
covered by the Export Production Finance Guarantee of ECGC. In
such cases, excess advance should be liquidated from
government receivables.

(b) Packing credit advances to exporters of HPS groundnuts, deoiled

and defatted cakes against the security of oilseeds, groundnut,
rice bran etc., may be granted to the extent of the domestic value
of raw-materials required, even though the value thereof exceeds
the value of the export order. The advance in excess of export
order is required to be adjusted either in cash or by sale of
residual by-product, as soon as the extraction of oil is completed,
but within a period not exceeding 30 days from the date of
disbursement. The balance in the packing credit advance shall be
adjusted by the proceeds of the relative export bills. Such
facilities are to be extended judiciously for the genuine credit
requirements, after making a credit assessment, taking into
account the genuine raw-material needs for executing the export
order, the production schedule etc. Such advance will be eligible
for concessive rate of interest provided the excess advance is
adjusted within 30 days from the date of advance.

(xvi) Period of finance :

As the packing credit is granted for procurement of material,

processing and manufacture etc. for the purpose of exporting a
consignment, the packing credit should be generally adjusted when
the goods are exported and the operating cycle is over. Thus the
period of pre-shipment credit not exceeding 180 days is to be decided
taking into consideration the production cycle/ acquiring period,
shipment schedule etc.

The maximum period of 180 days permitted by RBI is an outer limit.

In deserving cases, where the bank is satisfied with the borrower's
specific request, this period may be extended upto an aggregate
period upto 270 days by bank itself, without reference to RBI.
Approvals on case to case basis, for such extensions should normally
be granted in the cases of genuine hardship due to factors beyond
the control of the exporters such as transport bottlenecks, power
shortage, non-availability of shipping space etc. Pre- shipment credit
may also be extended upto 270 days, ab-initio, in the case of
commodities, which would need a longer cycle of production. The
period may further be extended upto 360 days without RBI
permission from the date of drawal, where the bank is satisfied about
the genuine needs of the borrower's request as stated above.

(xvii) The sanction for pre-shipment finance should specifically contain

following conditions/stipulations :

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 (a) Margin (if any)
(b) Basis of disbursement i.e. FOB/C&F/CIF value of contract/LC.
(c) Lodgement of firm export order and/or prime bank irrevocable LC.
Generally, LCs restricted to other banks for negotiation, are not
considered. Disbursements on running account basis, should be
authorised by the sanctioning authority.
(d) Charging of rate of interest, commission etc.
(e) All pre-shipment advances are to be covered under WTPCG and
the premium is to be recovered from borrowers.
(f) As ECGC Shipment (Comprehensive Risks) policy opted by
borrower shall provide additional security to bank, the need for
such a policy to be properly studied and stipulated in the sanction
where considered suitable. In the cases where the sanction
stipulates that the borrower to have the Shipment Comprehensive
Risk Policy of ECGC, certified copy of the policy should be
obtained and kept on record. The details of the policy, like
number and date, amount, validity, terms and conditions etc.
should be noted carefully and the renewal etc. should be followed
up. It would be in bank's own interest to satisfy itself that the
exporter submits the monthly declarations in a prescribed format
to ECGC, alongwith due premium and declares all shipments to
ECGC during the period. The expiry date of ECGC policy should be
diarised and policy be got renewed in time.
(xviii) Preferably, pre-shipment finance is to be sanctioned on a secured
(hypothecation/pledge) basis and the sanctioning authorities are to
exercise discretionary lending powers applicable to such advances. As
the assets are created from the amounts disbursed only, care should
be exercised to convert the clean advance into secured within a
reasonable period, not exceeding 15 days from the date of
disbursement. Normal precautions and procedures prescribed by the
bank for registration of charge, pledge, hypothecation, godown,
inspection, insurance etc. shall also have to be taken care of.

(xix) Required precautions are to be taken in case of goods coming under

selective credit control. (Selective Credit Control guidelines are
mentioned in Chapter V of this volume,)

(xx) Processing of application for financing exports on deferred terms of

payments :

(a) It should be the Bank's endeavour to persuade the exporter to take

the bank into confidence before an export contract is signed. This will
enable the bank to prevent a lot of ambiguity that some times creeps
into export contracts. It will also enable the bank to safeguard the
exporter's interest. The Exim Bank, Exchange Control, ECGC (working
group) formalities may also be taken care.
(b) The export contract, especially the terms of payment clause should
be studied carefully. Deferred payment terms usually imply payments
by installments. There should be a clear understanding as to when
the payments are to begin.
(c) What will be the net foreign exchange inflow to the country as a
result of execution of the particular export order, should be one of

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 the considerations.
(d) Capacity of the exporter to complete the export order on time-quality
control.
(e) Economic viability of the export project with reference to cost and
profitability as per estimates furnished by the exporters.
(f) Arrangements for imports of essential items/arrangements with
sub-suppliers/arrangements for third country imports - co-ordination.

(g) It is the general experience of the banks that many times the
exporters do not know their requirements and/or there is a tendency
on the part of the exporter to ask for smaller limits/less number of
limits than actually needed. The bank should, therefore,
independently assess the exporters' requirements in totality and
process the proposal instead of considering the same on piecemeal
basis.
(h) Security :

In deferred payment export, this is usually in the form of prime

bank's export LCs/guarantees or demand promissory notes signed by
the government of the importing country - Political risks.

(i) The security - credit report on the importer/general economic

situation of the importing country should be studied.

(j) If the export contract is not in home currency, there is element of

exchange risk. The same should be covered by either booking
forward contracts or under exchange fluctuation risk cover offered by
ECGC. Various covers like export performance guarantee, export
finance (overseas lending) guarantee, overseas investment
insurance, etc. offered by ECGC as applicable may also be resorted
to. It may be mentioned here that the exchange fluctuation risk is the
most important risk run by the exporter.

(k) Exim Bank participates with banks/provides them with refinance to

enable the commercial banks to finance export transactions on
deferred terms of payment.

(l) Turn-key orders - facilities that may be required abroad - profile of

the country.

6.6 RATES OF INTEREST AND COMMISSION:

(i) Rate of interest :

(a) At present interest rates on pre-shipment export finance and on

post-shipment finance upto a specified period are regulated by
RBI except rate of interest to be charged on Deferred Credit
beyond 180 days and on ECNOS (Export Credit Not Otherwise
Specified) keeping in view the PLR and spread guidelines. The
interest rates beyond the subject period are deregulated and the
same are prescribed by the bank. Concessional rates of interest
on packing credit loans apply, only if the actual exports take place
within a reasonable period from the date of advance i.e. 180
days, which may be extended in stages not exceeding 360 days if

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 the bank is satisfied about the borrower's specific request on case
to case basis. If exports do not take place within the time frame
as above (360 days), commercial rate of interest shall be charged
from the first date of disbursement. If no export takes place,
branches to charge penal interest rate.
(b) Pre-shipment and Post-Shipment finance for overdue period the
rate of interest applicable will be 'Export Credit not otherwise
specified' (ECNOS).
(c) Interest on pre-shipment finance is to be charged and debited to
the respective loan account on a monthly basis and also for the
broken period at the time of liquidation of loan amount. Waiting to
charge such an interest for a broken period on a monthly basis
will result loss of interest over interest, which is not permitted.
Also, the interest debited to the pre- shipment loan account shall
be simultaneously recovered on the same day from the borrower's
local source, (current account) as ECGC is not extending its risk
cover to the interest amount debited to packing credit loans
remaining unrecovered under its guarantees.

(ii) Commission :

The commission and charges on export transaction are regulated by

Foreign Exchange Dealers' Association of India (FEDAI). For most of
the services, the FEDAI prescribes the minimum charges and the
bank is free to stipulate higher charges. Accordingly, branches should
be guided by service charges as per circulars issued by the Bank from
time to time.

6.7 TYPES OF PACKING CREDIT FINANCE :

(i) Packing credit in Indian rupees :

In case of packing credit in rupees, the amount arrived at after

observance of usual margin etc. and notionally arriving at rupee
equivalent by applying exchange rate prevailing on the day, is
credited to customer's export current account. Branches must
segregate and maintain separately the accounts in respect of each
pre-shipment advance disbursement-wise. Branches must maintain
accounts separate from domestic accounts as well as
disbursement-wise separate interest is to be charged. The exchange
rate applied, is only to roughly arrive at the disbursable amount and
the transaction still remains to be in Indian Rupees only.

(ii) Packing credit in foreign currency (PCFC) :

(a) The bank may extend pre-shipment credit in all convertible

foreign currencies (PCFC). This facility is an additional window
alongwith the existing method of rupee pre-shipment credit.
(b) PCFC can be made available to cover both the domestic as well as
imported inputs for the exports. Bank may source funds either by
using balances available under Exchange Earners Foreign
Currency Accounts (EEFC), Resident Foreign Currency Accounts
(RFC), ESCROW Accounts, Exporters' Foreign Currency Accounts
and Foreign Currency (Non-Resident) (Banks) Scheme (FCNR)
balances and lines of credit arranged abroad. The PCFC should be

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 made available to the exporters at a cost not exceeding 0.75%
over the appropriate LIBOR/EURO LIBOR/ EURIBOR excluding
withholding tax. Once the exporter avails of PCFC, he will not be
eligible for post-shipment credit in rupees. Such pre-shipment
credits (PCFC) are liquidated by FCBP as discussed under para
6.17.
(c) PCFC could be made available both to the supplier EOU/EPZ Units
and the receiver EOU/EPZ Units. PCFC for supplier EOU/EPZ Units
will be for supply of raw material/component of goods for further
processing and exports by the receiver unit. The PCFC extended
to the supplier Unit will be liquidated from the PCFC granted to
the receiver unit who will be the exporter. The question of
negotiation of document and realisation of foreign exchange by
the supplier unit will not arise. The PCFC to receiver EOU/EPZ
Unit, will have to be liquidated by purchasing/discounting of
export bills under FCBP/FUBP only.
Facility can be extended in one of the convertible currencies viz.
US Dollar, Pound Sterling, Japanese Yen, and EURO. Presently it
is available in US Dollar in our Bank.
(d) Exchange rate is applied at the time of disbursement of PCFC
advance (TT buying rate) and thereafter, borrower is not exposed
to exchange rate fluctuation risk from date of availing PCFC
advance.
(e) Normally, the pre-shipment credit may be extended for a
maximum period not exceeding 180 days. For extension beyond
180 days, bank should charge additional interest as stipulated by
the Bank, above the rate for the initial period of 180 days
prevailing at the time of extension. Any extension will be subject
to the terms and conditions as decided by the bank and if no
exports take place within 360 days, the PCFC will be adjusted at
TT selling rate of currency concerned. In such cases, bank is
allowed to remit foreign exchange to repay the loans raised
abroad, if any, alongwith the interest without permission of RBI.
In case of liquidation of PCFC either on cancellation of the export
order or expiry of 360 days period, the interest will be charged on
the rupee equivalent of the principal amount at the interest rate
of 'Export Credit Not Otherwise Specified' (ECNOS) applicable
from time to time plus a penal rate of 2% from the date of
advance after adjustment of interest of PCFC already recovered.
As per present guidelines of RBI, PCFC can also be extended in
one convertible currency in respect of an export order invoiced in
another convertible currency. In such cases, the risk and cost of
cross currency transaction will be that of the exporter. Bank may
charge the exporters the funding cost, if any, involved in
absorbing mismatches in respect of any early delivery beyond one
month period. In view of the separate method of payment, PCFC
Scheme is not applicable for deemed exports.
6.8 PRE SHIPMENT CREDIT TO SUPPORTING MANUFACTURERS :
Where the merchant exporter or an export house receives an export
order/LC and the goods meant for export is required to be
processed/manufactured by another supplier/manufacturer, a bank credit
disbursed to such a supplier/manufacturer is considered to be a credit to
supporting manufacturer and is eligible for concessional rate of interest
etc. In such cases the financing bank obtains a letter from the merchant

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 exporter/ export house that they have not obtained and will not ask for
pre-shipment facility in respect of such portion of the order and such a
letter should also state the particulars of the contract/LC.

Bank should also obtain a confirmation from the exporter's bank that
sharing of finance shall not lead to double financing against the same
export order/LC. As far as possible, the bank should insist for the
merchant exporter to open an inland letter of credit/back-to-back letter
of credit giving relevant particulars of the export letters of credit / orders
for such supplies. Where the inland letters of credit / back to back letters
of credit as above are opened, the packing credit advance should be
liquidated by negotiation of bills.

In case the bills drawn are not accompanied by bills of lading or other
export documents, the bank should obtain through the supplier a
certificate from the exporter / export house at the end of every quarter
that the goods supplied under this arrangement have in fact been
exported. The certificate should give particulars of the relative bills such
as date, amount and the name of the bank through which the bills have
been negotiated. The bank should obtain an undertaking from the
supplier that the advance payment, if any, received from the exporter /
export house against the export order would be credited to the packing
credit account.

6.9 LETTERS OF CREDIT RESTRICTED FOR NEGOTIATIONS WITH OTHER

BANKS/OTHER CENTRES IN INDIA:

Such letters of credit are not considered good for disbursement of

pre-shipment finance. However, in terms of specific authorisation/
sanction, if a pre-shipment advance has been disbursed against such a
letter of credit, after shipment the branch has to liquidate packing credit
by purchasing a bill under post-shipment limit and send the documents
to the concerned negotiating bank in India.

The post-shipment advance so granted, may be adjusted by the branch

by the negotiation proceeds received from the negotiating bank. The
branch has to charge the concessional rate of interest as applicable on
such bill(s) purchased and cover the same under WTPCG as well as
under WTPSG of ECGC Ltd.
6.10 APPLICATION :
(i) Borrowal should make a request in writing duly signed for
granting/release of packing credit loan, on the prescribed format.
Underlying export order/contract/letter of credit etc., in original, be
kept on record.
(ii) If there is no firm order/LC, but only cable/telex messages are
exchanged, such messages in original accompanied by undertaking
that he would submit the original contract/LC as and when it is
available/received by him. (Refer 6.5 (xiii) above).

(iii) Export licence/export quota certificate etc., if applicable, be obtained.

6.11 SCRUTINY :
(iv) While scrutinising packing credit applications, it should be,
inter-alia, ensured that it complies with Export Trade and Exchange
Control Regulations. Some of the check points are :
(a) Application is signed by authorised signatory and is complete in all
respects.

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 (b) Contract/purchase order/letter of credit is valid, operative and
contains all essential details and is devoid of ambiguities (not
expired for shipment and negotiations)
(c) Commodity to be exported is allowed for export or applicant has
licence, quota, export endorsement etc., wherever necessary.
(d) The description of goods covered under contract/order/LC should
conform to that covered by the terms of sanction.
(e) No clause of the credit/contract should conflict with the sanction
terms.
(f) Precautions should be taken in case of commodities covered by
the selective credit control, quota licence, floor price stipulations
etc.
(g) Exporter is not in the Caution List of Reserve Bank of India /
Trade Control Authorities.
(h) Exporter is not in the Specific Approval List (SAL) of ECGC.
(i) Proposed shipment date under export order/letter of credit is
within 180 days or the maximum days, allowed for availing of
packing credit loan by bank as per sanction terms, whichever is
earlier.
(j) Other aspects of application are in accordance with terms of
bank's sanction (such as amount, period of availment etc.) and
the terms of export orders/letter of credit match with the terms of
post shipment facilities sanctioned (e.g. if payment terms of
shipment are 120 days, customer must have 120 days usance
export bills facility or other matching post shipment facility
sanctioned to him.)
(k) Whether the entire amount of packing credit is needed in one
lump-sum or the same could be released in stages depending
upon work-in-progress.
(l) Whether an import licence has been duly obtained in case a
particular component or part is required to be imported for
executing a specific export order.
(m) Whether a letter of credit has been opened/guarantee issued,
where the export contracts provide for opening of letter of
credit/issue of guarantee.
(ii) In all packing credit advances, it is advisable to obtain a confirmation
from the exporters that they confirm having not taken packing credit
advances from any other bank/branch against the shipment(s) under
reference nor they will seek any such advance from any other
bank/branch against the shipment(s) under reference.
(iii) The original letters of credit lodged with the bank either for
pre-shipment finance or post-shipment finance, should bear the
proper stamp duty as per the Stamp Act. (At present it attracts
revenue stamp of Rs. 2/-). Such stamps should be duly pasted on the
letter of credit and defaced to avoid its re-use.
(iv) Proper care should be taken while scrutinising the contract/ letter of
credit. The branch should be satisfied that the borrower will be able
to deliver the stocks in time as security as per the sanction and
shipping documents in time and the liquidation of advance will not be
hampered.
(v) After the application is found in order, eligible loan amount against

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 that particular order/letter of credit has to be determined. Since
normally loan is given for FOB value of order/letter of credit or
domestic cost of production, whichever is less (irrespective of sales
contract terms) amount of eligible loan against the particular
order/letter of credit has to be carefully determined.
In case, contract is on CIF basis and actual freight and insurance
amounts payable are not known, approximate freight/insurance
amounts need to be deducted to arrive at FOB value of contract (The
pre-shipment credit for meeting freight and insurance expenditure
however, may be disbursed as per the sanction terms at the
appropriate stage).

For this purpose, normally an amount of 1 to 2 percent of the value is

deducted towards insurance depending upon the nature of
commodity, its volume etc. and approximately 10 to 15 per cent is
deducted for sea freight or if it is air freight, 20 to 30 per cent is
deducted. After FOB value and probable domestic cost of production
are known, the lower of the two values is taken and then from such
amount the stipulated percentage towards margin is deducted.

(vi) Depending upon the schedule of shipment, production/procurement

time taken etc., the amount so determined would be disbursed in
phased manner.

(vii) The present status of the earlier disbursements, their age, overdues
etc. should be taken care while considering further disbursements.
For each disbursement under pre-shipment finance, regular
"Sanction-memo" should be prepared and permission of the
appropriate authority obtained.

(viii) Separate demand loan packing credit account is to be opened for

each disbursement and contract number and due date for liquidating
advances should be noted down in the packing credit ledger.
6.12 DISBURSAL OF PACKING CREDIT FACILITIES :
(i) Since packing credit loans are concessive and specific purpose
oriented, it is the responsibility of branch to ensure proper end-use of
the amounts disbursed.
(ii) The securities and accounting under export credit should be kept
separate from domestic business.
(iii) Advances may not be disbursed in lump-sum amounts, instead they
may be disbursed in a phased manner taking into account specific
purpose and needs of the exporter, shipment schedules, production
cycle and other aspects. As far as possible, amounts should be
directly disbursed to suppliers of raw materials, services etc. taking
necessary instructions from the borrower. Where direct disbursals are
not possible, the proceeds can be credited to the export current
account of the customer and disbursals therefrom to be supervised to
ensure proper end-use.
(iv) Borrowers who have been sanctioned packing credit facilities should
open separate current accounts styled as "Export Current Accounts"
and the cheque books issued in such accounts should also be marked
accordingly. Credits to these accounts should emanate only from the
packing credit accounts and no other credits should be permitted and
debits from such accounts to be vouched to establish the end use of
funds.
(v) Documentation : While detailed guidelines in this respect as given in
Volume - 9, are to be followed by the branches, generally following

232
 documents are obtained:
(a) Demand promissory note signed by the borrower.
(b) Letter of continuing security signed by the borrower.
(c) Lodgement of firm export orders and/or irrevocable letters of
credit, as per the stipulation in the sanction.
(d) Export trust receipt.
(e) Letter of undertaking to adjust packing credit drawings by
negotiation of export documents within the stipulated period.
(f) Letter of undertaking to pay penal interest.
(g) Extension of charge on securities like instrument of hypothecation
or a letter of pledge, equitable mortgage of property etc. as per
stipulations of the sanction.
(h) ECGC policy where stipulated.
(vi) Letter for collecting margin (to be disbursed alongwith bank's loan
amount) is stipulated in the sanction.
(vii) Since the loan is disbursed for acquiring raw materials/ finished
foods, a period should be fixed for submission of relative stock
statement in case the limit is sanctioned against the hypothecation.
(viii) Suitable sub-limits for T/R facilities under packing credit limits may
be fixed to enable the borrower to obtain the raw materials for
processing/manufacturing, etc., substitute the finished goods within
the period allowed by the sanction for the redemption of the relative
T/R or tender the relative bills of lading. Due dates of such T/Rs
should be diarised.
(ix) Goods pledged to the Bank may also be released to approved clearing
agents for shipment and the relative BL, airway bill etc. should be
forwarded direct to the Bank by the clearing agents. Prior to releasing
the goods, it should be ensured that the value of the goods being
shipped is covered by a valid irrevocable letter of credit and/or firm
contract. In case goods are to be purchased and pledged to the Bank,
payment should be made direct to the seller or to his bankers and the
goods stored either in Bank's godown or with approved clearing
agents

6.13 FOLLOW UP AND MONITORING :

As soon as the loan is disbursed, due date of shipment/loan liquidation should be
diarised. If follow up is required for obtaining original letter of credit or firm orders,
etc. should also be diarised.
(i) The stocks under packing credit should be duly insured against the
risks of fire & SRCC and such other risks as bank may prescribe from
time to time and the policy kept on record. Necessary notings should
also be made in the insurance register.
(ii) If the loan is initially sanctioned as clean loan to be converted as
secured loan at a later stage, necessary documentation and other
requisite formalities should be completed to secure the advance as
per sanction terms.
(iii) Periodical stock statements should be obtained and regular inspection
of stocks and securities should be carried out at periodical intervals
as per guidelines.
(iv) Prescribed monthly declaration along with remittance of premium at
the prescribed rate calculated on daily average product of the loan

233
 should be submitted, to the concerned Regional/Branch Office of
ECGC directly, within one month under intimation to bank's Regional
Office.
(v) If the exporter has not effected the shipment/submitted the relative
export documents to bank on or before the due date the advance will
become overdue and necessary follow-up should be made.
(vi) If export is delayed beyond stipulated time and packing credit
advance is not liquidated in time for any reason beyond the control of
exporter and he seeks extension of time for repayment of loan
sanctioning authority permission should be obtained. Simultaneously
approval of ECGC should also be obtained where necessary by
making an application in prescribed form.
(vii) If no response is forthcoming from exporter, effective follow up
should be done and simultaneous steps to take possession of
securities should be taken, and the matter be reported to Regional
Authorities as well as to ECGC.
(viii) If the overdue position of loan persists, branch should take necessary
steps to realise dues by observing the procedure prescribed by ECGC,
in addition to its usual recovery procedure. Payment of ECGC
premium should be stopped after the month in which default is
reported to ECGC (or after the month in which insolvency of exporter
occurs).
(ix) Branch should, recover the money by liquidating securities or other
persuasive methods, chalk out suitable nursing programme etc. with
the consent of Regional Office and ECGC.
(x) If the export takes place and bill is purchased/discounted/ negotiated
or any advance is granted against such export or any advance
remittance is received covering the relative export order, proceeds
may be adjusted to the packing credit account and the same is
closed.
(xi) For detailed procedures for ECGC guarantees and policies, separate
Bank's publication may be referred to.
6.14 LIQUIDATION OF PACKING CREDIT ADVANCES :
(i) Packing credit advances, must be repaid by the borrower from
following sources:

(a) Proceeds of export bills negotiated/purchased/ discounted.

(b) Proceeds in the form of duty drawback or the Market
Development Fund (MDF) of the Central Government etc.
(c) Proceeds of undrawn balances.
(ii) If export of goods does not take place within the period stipulated
and/or the amount is repaid out of proceeds other than those
referred to above, branch should levy higher rate of interest as
prescribed by the bank from time to time from the first day of
advance.
Packing credit should not remain outstanding, once the relative
export documents are tendered to the branch. In case the branch is
not able to purchase, discount or negotiate export bill tendered for
any reason, it should liquidate the debit balance in the packing credit
account by converting the advance into post-shipment credit. The
shipping documents tendered under reference to form a main

234
 security for such an advance. Also, it shall be required to get such an
excess/deviation regularised by way of sanction/
confirmation/considering under a limit/by earmarking relative existing
limit etc. This conversion of pre-shipment loan into a post-shipment
loan is essential, as on tender of documents, the ECGC cover for
pre-shipment finance comes to an end and it can only be continued
to be covered under ECGC post-shipment cover, if the advance is
under post-shipment finance.

(iii) Operational Flexibility:

Banks have, however, operational flexibility to extend the following

relaxations to their exporter clients who have a good track record:

(a) Repayment/Liquidation of packing credit with proceeds of export

document will continue, however, this could be with export
document relating to any other order covering the same or any
other commodity exported by the exporter. While allowing
substitution of contract in this way banks should ensure that it is
commercially necessary and unavoidable. Bank should also satisfy
about the valid reasons as to why packing credit extended for
shipment of a particular commodity can not be liquidated in the
normal method. As far as possible, the substitution of contract
should be allowed if the exporter maintains account with the same
Bank or it has approval of the members of the consortium, if any.
(b) The existing packing credit may also be marked off with proceeds
of export documents against which no packing credit has been
drawn by the exporter. However, it is possible that the export
might avail of EPC with one bank and submit the document to
another bank. In view of this possibility, banks may extend such
facility after ensuring that the exporter has not availed of packing
credit from another bank against the documents submitted.
(c) These relaxations should not be extended to transactions of
sister/associate /group concerns.

6.15 POST-SHIPMENT CREDIT :

This topic is discussed in details in the Chapter XII of Book of

Instructions Volume - 10 on "Foreign Exchange Business". Similarly,
appraisal part is thoroughly discussed in other chapters of this volume.

However, to get brief idea about post-shipment credit under export

finance, few points are enumerated below.

Post-shipment finance may be defined as any loan or advance provided

by Bank to an exporter in India, after shipment of consignment upto the
date of realisation of export proceeds.

For easy understanding, the comparative characteristics of pre- shipment

and post-shipment finances are given below :-

Pre-Shipment Finance Post-Shipment Finance

1 Finance extended before Finance extended after

shipment of goods. shipment of goods.
2 Finance may be extended Finance extended to
235
 to exporters or supporting
manufacturers.
3 Finance extended only to
Indian clients i.e. Seller/
exporter of goods.
4 Basically it is a short term
finance
5 It is a working capital
finance, granted against
Inventory
6 Finance extended against
evidence of an existing or
anticipated export order or
letter of credit goods.
7 Finance extended for the
purpose of procurement,
processing, manufacturing,
packing, warehousing,
transporting and shipping the
export cargo.
exporters themselves
Finance extended either to
Indian clients or overseas
clients i.e. exporter or
foreign importer of goods.
In other words, it can be
to seller of the goods
(seller's credit) or buyer
of the goods (buyer's
credit). (The buyer's
credit is considered only
with the prior consent of
Corporate Office Mumbai
and RBI
permission is obtained
where required)
It can be a short term
finance or a long term
finance depending upon the
nature of export. (viz.
cash or deferred export).
(Usually, the bank grants
short term credits only)
It is a working capital
finance granted against
receivables.
Finance extended against
Shipping documents
evidencing
shipment of export
Credit extended to finance
export after date of
shipment
upto date of realisation
of export proceeds.

6.16 POST SHIPMENT CREDIT IN RUPEES :

In this case, the export bills are purchased/discounted/ negotiated by
converting the foreign currency amount into Indian rupees at the
appropriate, prevailing bill buying rate or forward contract rate, as the
case may be and thereafter the interest is recovered on upfront basis, at
the prevailing rate as applicable to post- shipment rupee finance. The full
bill proceeds are credited to exporter's current/packing credit account
and interest and charges etc. are to be simultaneously recovered
separately.

6.17 FOREIGN CURRENCY BILLS PURCHASED (FCBP)/ DISCOUNTED

(FCBD):
This is an extension of PCFC as discussed under para 6.7 above. When
the export documents tendered are under a contract/letter of credit
against which the bank has disbursed PCFC, the negotiation/purchase
/discount proceeds of such documents shall be first applied to liquidate
the PCFC outstandings. As the exchange rate has already been applied
236
 while disbursing PCFC, the question of exchange rate application does
not arise. The ongoing, appropriate bill buying/forward contract rate, as
the case may be shall be applied only for the residue foreign currency
amount after liquidating pre-shipment finance, interest thereon,
transaction charges and interest on post-shipment finance in foreign
currency.

6.18 FOREIGN BILLS PURCHASED/DISCOUNTED/NEGOTIATED:

Branches should note carefully the following while purchasing/
discounting export documents :
(i) Party approaching for any export finance must be a customer of the
branch. He should have a sanctioned limit for post- shipment finance.
If there is no limit sanctioned, while purchasing/discounting of bills
for exports, branches should take extra care. If the documents
presented are drawn under irrevocable letter of credit, branches
should, besides taking normal care, verify the documents thoroughly
to confirm that they are in conformity with all terms and conditions of
the letter of credit and also all conditions stipulated in para 6.14
above are complied with.

(ii) All post-shipment facilities are to be made available at the 'B'/'A'

category branches only. For 'C' category branch, the post-shipment
finance shall be disbursed by B/A category branch as per limits
sanctioned at the recommendations of the "C" category branch. The
credit risk will be that of 'C' category branch and as such the 'C'
category branch is expected to take a judicious view while
recommending the purchase/discount/negotiation. They shall also be
required to monitor the limits, excesses, deviations, realisations etc.

(iii) Branches should obtain credit report on the overseas buyer i.e.
importer, as stipulated in the sanction.

(iv) When the export documents are presented to the branch for
negotiation, it should undertake a thorough check of the letter of
credit and the scrutiny of the documents submitted thereunder. A
bank negotiating unclean documents i.e. documents not in conformity
with LC terms, without prior and specific authority from the issuing
bank, carries the risk of non- payment. Careful examinations of
export documents when presented for negotiation is, therefore, very
important. Following points should be kept in view :
(a) Branch should ascertain genuineness of letter of credit. It should
not have any unusual/onerous condition for
negotiation/reimbursement. The bank while advising the credit,
shall take reasonable care to check the apparent authenticity of
the credit which it advises. [ Article 7(a) UCP 500) ]
(b) Letter of credit should not contain any clause which is contrary to
our country's exchange control/trade control policy. It should not
have any such clause which would not be suitable for safety of
our bank finance.
(c) Merely, by virtue of advising letter of credit to the beneficiary, the
bank does not undertake to negotiate the export documents
drawn thereunder. Unless the letter of credit is confirmed by the
Bank, Bank is free to refuse negotiation and not to extend
finance, irrespective of whether the letter of credit is advised by
Bank or the same is restricted for negotiation to Bank. Even in
case of confirmed letter of credit, the undertaking of the

237
 confirming bank is to negotiate the bill only if, the documents
tendered fully comply with the terms and conditions of the letter
of credit. (The discretionary powers and procedure for adding the
confirmation to the letters of credit are discussed in the Chapter
XII of Book of Instructions Volume - 10 - on Foreign Exchange
Business).
(d) No branch is permitted to negotiate documents under reserve/
guarantee/indemnity.
(v) Branches should go through all the documents in detail. Bill of
exchange, invoice, bill of lading or airway bill (transport document)
and the insurance are the main documents. Apparently, they should
be in order. Essential particulars like description, quantity, value of
goods, unit price, country of destination etc., declared in GR/PP form
and export documents should agree with details as per the sale
contract/letter of credit etc. Inter-se consistency of export documents
should also be seen.
(vi) The post-shipment finance against documentary bills means the
finance against full set of transport document made out/ endorsed in
favour of the bank and the goods are properly insured for the bank's
interest.
(vii) Branches should vigorously follow up the payment of export bills on
respective due dates. They should also ask the exporter to follow up
with importer. As per present RBI rules, all export bills must be
realised on due date or within 180 days from shipment date which
ever is earlier.
(viii) For the procedure to scrutinise export bill with LC terms, application
of exchange rates, charging of interest, charges, crystalisation of the
unpaid bills, reporting to controlling offices/RBI etc., the reference
may be made to the Volume - 10 - on Foreign Exchange
Business.
6.19 POST-SHIPMENT DEMAND LOAN (PSDL):
Where a PSDL facility is sanctioned to the exporter, the demand loan
against the export documents sent on collection basis may be disbursed
within the limits sanctioned. Such limits are generally granted against
the security of export bills sent in collection on a 'SALE' basis and only to
selected few borrowers against export on consignment basis. Such
advances are disbursed in rupees, with a suitable margin as per the
nature of goods, country of destination etc., upto notional due date not
exceeding 180 days from the date of shipment. The exchange rate is
determined on the realisation. The normal precautions about security of
advance has to be taken care of in such advances.
6.20 MISCELLANEOUS :
Branches must keep following in mind :-
(i) Party (exporter) must be our customer.
(ii) He should have exporter's code number allotted by RBI in his own
name.
(iii) Exporter's manufacturing/trading line is to be seen.
(iv) Branches should always see underlined sale contract or order of
overseas buyer along with confirmation of exporter or proforma
invoice of exporter, confirmed by the buyer.
(v) It should be ensured that the exporter is not in the caution list of
RBI/ Specific Approval List (SAL) of ECGC. ECGC publishes the details
of exporters under SAL in a computer floppy form and keeps the
same updated by periodical revisions. The same should be referred to

238
 while sanctioning/reviewing as well as operating on the limits.
(vi) Foreign Exchange Department should obtain a copy of sanction from
the Credit Department and keep on record for due compliance of
terms and conditions of the sanction.
(vii) In case of pre-shipment finance end use of finance is to be ensured.
(viii) Borrower should submit stock statement regularly and branches
should ensure usual inspection of stocks/securities as per the bank's
laid down procedure.
(ix) Sanctioning of suitable sub-limits against trust receipt may be
considered for release of materials for processing/ manufacturing etc.
In such cases branch should ensure that the borrower substitutes the
finished goods within the period allowed in the sanction for
redemption of the relative trust receipt or tender of documents. Due
dates of such trust receipts should be diarised.
(x) Generally, bank does not finance freight and insurance. Packing
credit is usually sanctioned on FOB terms.
(xi) The stocks pledged/hypothecated under export finance should be
properly insured as per procedure of the bank.
(xii) Normally, transit insurance for goods should be covered from the
place of manufacture to the ultimate destination at the buyer's
warehouse/ factory.
(xiii) Insurance policy/certificate must be dated not later than the date of
shipment/air freight etc. Where the insurance policy/certificate is
dated subsequent to the date of transport document, the cover
should be effective at the latest from the date of transport document.

(xiv) Chronological order of the documents preparation should be noted.

i.e. Evidence of sale - Invoice Evidence of despatch - Bill of
Lading/Airway Bill/ (Transport document) MTR/RR/PPR etc. Evidence
of payment - Bill of Exchange
(xv) Transport document dated earlier to letter of credit/invoice date may
cause a problem and the same may not be considered in its due
perspectives. [Unless otherwise stipulated in the credit, banks will
accept a document bearing a date of issuance prior to that of the
credit, subject to such document being presented within the time
limit set out in the credit and in these articles. (Article 22 of UCP
500)]
(xvi) If exporter has received an advance payment, branches should get
foreign inward remittance certificate as well as declaration from
remitter as well as from beneficiary about it.
(xvii) Export documents are generally sent in two sets by two different
modes of mails/on different dates by fastest way.
(xviii) It is advisable not to purchase any bill, wherein title to the goods is
made out in the name of the importer or where "Full set" is not
tendered.Before extending post-shipment finance, it is advisable to
ensure that the bill of lading bears "shipped on board" notation.
(xix) All export finance transactions should be covered under respective
whole turnover guarantees of ECGC.
(xx) At present, all exports on deferred payment basis, exports towards
equity participation in the overseas joint venture, projects and
239
 exports involving buyer's credit require prior approval of RBI.
(xxi) While booking the forward contract, for any foreign exchange
transaction, care should be taken to see that the same is within the
discretionary powers vested and proper record of all such sanction
and power utilisation should be kept.

6.21 EXPORT CREDIT AT NON-AUTHORISED BRANCHES :

The banks authorised by RBI to deal in foreign exchange are called

authorised dealers.

(i) Bank of Baroda is an authorised dealer. Similarly bank further

authorises branches to deal in foreign exchange business. Such
branches are divided into following three categories :

(a) Category 'A' - Treasury branch Mumbai maintains position in

foreign currency and nostro accounts and can directly handle all
types of foreign exchange transactions.
(b) Category 'B' - Such branches neither maintain position in foreign
currency nor nostro accounts, but are authorised to handle all
types of foreign exchange business directly by operating on the
nostro accounts maintained by 'A' category branch and reporting
transactions to 'A' category branch for position purposes.
(c) Category 'C' - Such branches cannot undertake foreign exchange
transactions except payment of foreign currency traveller’s
cheques and foreign currency notes upto specified limits and
maintenance of non-resident accounts.
(ii) No export credit facility at non-authorised branches should be
considered, without specific authority from the Zonal / Regional
Authorities.
(iii) Branches not authorised to deal in foreign exchange business
directly, (category 'C' branches) have to approach their identified 'B''
category branch for catering to the foreign business needs of their
customers. They should advise 'B'' category branch about the details
of sanction while routing the foreign business transaction.
(iv) 'C' category branches should scrutinise the documents as per laid
down procedure and forward the same to 'B'' category branch with
recommendations alongwith due authorisation.
(v) 'B' category branch should further scrutinise/process the documents
for 'C' category branches keeping in view the exchange control/trade
control guidelines and pass on the credit to them.
(vi) In the case of pre-shipment finance, all the ECGC formalities shall be
the responsibilities of the branch where the facilities are availed. In
the case of post-shipment finance, all the ECGC formalities shall be
the responsibilities of a 'B'/'A' category branch which has processed
documents for its own customer and at the request of a 'C' category
branch.

6.22 ECGC COVER :

Bank has opted for the following two whole turn over guarantees of
Export Credit Guarantee Corporation of India Ltd. :

(i) Whole Turnover Packing Credit Guarantee. (WTPCG)

(ii) Whole Turnover Post-shipment Guarantee. (WTPSG)

Under these guarantees all the advances at pre-shipment stage and

240
 post-shipment stage are automatically covered. The branch has to ensure
the prompt remittance of monthly premium within the stipulated time, at the
stipulated rate on daily product basis for advances outstanding under
pre-shipment and post-shipment heads, to the debit of borrower's account.

(iii) The WTPSG opted by the bank also covers the shipments under
letters of credit.
(iv) The claim if any, shall be considered by ECGC only if all the
stipulations under the whole turn over guarantees are fulfilled like :
(a) All the sanctions/review/deviations etc. are to be reported to
ECGC in the prescribed format in a prescribed time limit.
(b) The terms of the sanction should be fulfilled and for deviations if
any, proper confirmation from competent authority should have
been obtained.
(c) The due reporting and payment of premium is made in time. The
procedure for ECGC premium calculations, reporting procedures,
notice of default and claim procedures, prescribed formats etc.
are , to be followed scrupulously, as discussed in detail in a
separate publication of the bank.
6.23 DISCRETIONARY LENDING POWERS FOR GRANT OF
EXPORT CREDIT FACILITIES.
For extending post shipment facility by ways of negotiation of bills under
LC at authorised branches, reference be made to Volume 10.

Non-authorised branches
Branches not authorised to transact foreign business should not grant
any export credit whether pre-shipment or post-shipment facilities.
Branch Managers of non-authorised branches are not delegated any
discretionary lending powers to consider export credit. Zonal authorities
may, however, consider in exceptional circumstances, authorising
specified branches in this category to grant only pre-shipment credit
facilities to their export customers. They should be guided by the
following requirements while granting such approval :
(i) The quantum of export business.
(ii) The potential volume of export business that may be lost, in case
such authorisation is not considered.
(iii) Existence of infrastructure at the branch. i.e. communication and
trained personnel.
(iv) Proximity of an authorised branch so as to minimise delay in
transmission of documents, applications etc.
The names of such branches authorised should be intimated to the
International Division. On such approval being granted, the Branch
Manager may exercise his discretionary lending powers for grant of only
pre-shipment credit facilities to export customers. If such facilities have
been granted, it will be incumbent on the part of export customers to
lodge all the export documents with the branch. While transmitting the
documents to the authorised branch, the non-authorised branch should
request the authorised branch, to remit the proceeds of the documents
to it so that the outstanding in the packing credit account can be
adjusted. The packing credit should be adjusted only after the proceeds
have been realised in the above manner. While forwarding export
documents for purchase/ negotiation/discount the non-authorised branch
shall advise the concerned authorised branch that the bill proceeds are to

241
liquidate pre-shipment finance.

Branches should not resort to a practice of handing over the documents

to the borrower himself for onward transmission to the concerned
authorised branch to which they are linked.

242
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER VII

BANK GUARANTEES AND LETTERS OF CREDIT

SECTION I
BANK GUARANTEES

SR NO SUBJECT PAGE NO
7.1.0 BANK GUARANTEES 246
7.1.1 DEFINITION 246
7.1.2 BENEFICIARIES OF GUARANTEES 246
7.1.3 TYPES OF GUARANTEES 247
7.1.4 APPRAISAL/SANCTION OF BANK GUARANTEE
LIMITS 250
7.1.5 GUARANTEE BOND 252
7.1.6 DOCUMENTATION 256
7.1.7 ACCOUNTING PROCEDURE 256
7.1.8 CERTAIN TYPES OF GUARANTEES 257
7.1.9 BID BOND GUARANTEES 260
7.1.10 COMMISSION OF BANK GUARANTEE 261
7.1.11 EXTENSION/RENEWAL OF BANK GUARANTEES 262
7.1.12 AMENDMENT OF BANK GUARANTEES 263
7.1.13 CANCELLATION OF GUARANTEES 263
7.1.14 INVOCATION OF BANK GUARANTEES 264
7.1.15 PAYMENT OF INVOKED GUARANTEES 266
7.1.16 NEGATIVE LIST 266
7.1.17 BALANCING 267

SECTION II
LETTERS OF CREDIT

7.2.0 LETTERS OF CREDIT 268

7.2.1 PARTIES TO A LETTER OF CREDIT 268
7.2.2 KINDS OF CREDITS 269
7.2.3 OPERATIONAL ASPECTS OF INLAND LC 269
7.2.4 OPENING OF INLAND L/C 270
7.2.5 FORWARDING OF LC 272
7.2.6 ADVISING BRANCH 273
7.2.7 NEGOTIATION OF DOCUMENTS UNDER LC 273
7.2.8 RETIREMENT OF DOCUMENTS NEGOTIATED 273
7.2.9 INTEREST ON ADVANCE BILLS 274
7.2.10 MONITORING OF ADVANCE BILLS ACCOUNT 274
7.2.11 REFUSAL TO ACCEPT DOCUMENTS BY DRAWEE/
BORROWER 275
7.2.12 REVOLVING LCs
275

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 LIST OF APPENDICES

APPENDIX NO SUBJECT PAGE NO

I DRAFT OF STAMPED COUNTER-INDEMNITY 277
II DRAFT UNDERTAKING 279
III DRAFT GUARANTEE BOND 280
IV MODEL FORM OF BANK GUARANTEE BOND 282
V CONFIRMING CANCELLATION OF
GUARANTEE 284
VI NOTICE FOR CANCELLATION OF
GUARANTEE 285
VII REGISTER OF DEFERRED PAYMENT
GUARANTEES 286

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 CHAPTER - VII

SECTION - I

BANK GUARANTEES

7.1.1 DEFINITION :

(i) A "Contract of Guarantee" under the Indian Contract Act is a contract

to perform the promise or discharge the liability of a third person in
case of his default.
(ii) A "Contract of Guarantee" should be distinguished from "Contract of
Indemnity", in the latter case, party promises to save another person
from loss caused to him by the conduct of the promisor himself or by
any other person.
(iii) Banks come across a 'Guarantee' in two capacities. One as a
beneficiary when somebody guarantees the payment of debt of
bank's borrower in case of default. The other as a guarantor, when
the bank itself promises to pay the dues or discharge the liabilities of
its customers in favour of a third party. While in the former case, the
Bank is the creditor, in the latter case, Bank's liability is co-extensive
with that of the debtor.
(iv) The need for such guarantees to be issued by banks arises due to the
business and financial requirement of Bank's constituents. There are
many situations wherein, the constituent is required to provide a
guarantee from his banker in lieu of some money owed by the
constituent to others or likely loss/damage that may be caused by
constituents performing/ non-performing of specified task. Thus, the
Bank by issuing such guarantees steps into the shoes of the
constituent and assumes the financial risk and responsibility attached
to it.

7.1.2 BENEFICIARIES OF GUARANTEES :

Guarantees are generally executed by the bank favouring :

(a) Central and State Government Departments including railways.

(b) Autonomous bodies, public sector undertakings.
(c) Overseas suppliers of goods/machinery on deferred payment terms
(and for obtaining rupee or foreign currency loans).
(d) Steamship companies for clearance of goods in the absence of the
relative bills of lading.
(e) Foreign governments for imports under loans sanctioned or under
aid.
(f) Joint stock companies for issue of duplicate shares etc.
(g) Reputed institutions/limited companies/firms.
(h) Tax/Customs/Court authorities.

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7.1.3 TYPES OF GUARANTEES :

The guarantees issued by the bank can be broadly classified into three
categories viz. Financial, Performance and Deferred Payment
Guarantees. It is sometimes difficult to differentiate between the
financial and performance guarantees, as in both cases, the ultimate
liability of the bank gets converted in monetary terms.

(A) Financial guarantees :

In case of financial guarantees, the bank guarantees the customer's
financial worth, credit worthiness and his capacity to take up financial
risks. Therefore, guarantees issued in respect of constituents liability,
such as guarantees favouring tax/ customs/excise/court authorities in
respect of disputed claims, payment of taxes, customs and excise etc.
will come under the classification of financial guarantees. While issuing
such guarantees the branches should be satisfied about the financial
strength/liquidity of the party.

(B) Performance guarantees :

(i) Performance guarantees are issued on behalf of constituents

guaranteeing their performance as per the contracts entered into,
performance of machineries supplied, due discharge of other
contractual obligations undertaken etc. In such guarantees, Bank
does not undertake to perform the obligations undertaken by the
customer under the contract, in the event of his failure/default as
they may be of a highly technical nature. The purpose of the
performance guarantee is only to fix the financial responsibility in the
event of default or failure on the part of the customer to perform the
obligations undertaken by him. Hence, in the event of default of the
customer and on being notified to that effect, the Bank will make
payment under the guarantee.
(ii) Guarantees covering security deposit/earnest money/advance
payment/ mobilisation advance etc. would come under this category.
Similarly, guarantees covering payment for supplies to be lifted by
parties will also be treated as performance guarantees.
(iii) The performance bank guarantee stands on a footing similar to an
irrevocable letter of credit and hence is also known as 'standby letter
of credit'.
(C) Deferred payment guarantees :
(I) What is deferred payment guarantee?
(1) Deferred payment guarantee, which is a financial guarantee, is a way
of raising long term resources for acquiring fixed assets/capital goods
by securing guarantee of repayment of principal and interest from his
banker to the supplier of capital goods for suppliers credit. This also
helps the supplier to improve his cash flow by discounting these bills
from his bankers.

(2)

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 a. In case of capital goods/machinery/heavy vehicles/tractors/
trailers, the purchasers have to raise large amount of resources to
buy these items. For this the intending purchaser may approach
his bank for term loan repayable over a medium/long term in
installments. It is possible that due to various constraints like
mismatch in resources/deployment period, funds crunch etc. bank
may not be able to sanction term loans.
b. Under such circumstances, the borrower/intending purchaser may
request the supplier to extend him long term credit. The supplier
of such capital goods etc. may agree to extend such credit
repayable over a period of say 3/5/7 years at say half yearly
installments. The supplier will also charge interest on the credit
extended and such interest may also be recovered in installments
along with principal.
c. However, the supplier may not agree to extend such credit,
unless he is satisfied about the capacity of the purchaser to pay
the installments on due date. For this, he may insist on the
purchaser's bank guaranteeing the repayments.
d. The purchaser (borrower) may then approach his bankers to
guarantee the repayment on due dates. The bank may consider
his request and will extend the guarantee which covers an
extended repayment period or 'Deferred Payment' by the
borrower/purchaser to the supplier/beneficiary. Hence such a
guarantee is called 'Deferred Payment Guarantee'.
3 The DPG can be issued -
(i) in a form of a regular guarantee, undertaking to repay the
installments due (principal + interest) on their respective due
dates on failure of repayment by the borrower
(ii)
(a) The more popular way is that the supplier draws bills of
exchange payable on respective due dates for principal +
interest amounts, and the purchaser accepts the bills. Such
bills are then co-accepted by the purchaser's bank which
ensures repayment on due dates.
(b) This facility of drawing bills and co-accepting it by the bank is
also called 'Co-acceptance of Bills facility.
(c) This form of DPG/co-acceptance facility is also helpful to the
supplier/beneficiary. Since such bills are co-accepted by a
bank, supplier's bank may be willing to finance him by way of
'discounting' such bills. The bank can in turn obtain refinance
in certain cases and subject to certain conditions, from IDBI
by way of rediscounting.
(II) Appraisal/Sanction of DPG facility :
1. Since the Bank's commitment under a deferred payment
guarantee is usually for a longer period, security to be taken,
terms and conditions to be stipulated and appraisal should be
similar to those for medium or long term loans. Particular care
should be exercised while evaluating the viability of the project
and estimating the generation of surplus cash to meet the
commitments. In the case of new projects, it should be ensured
that there would be sufficient generation of funds even during the

247
 initial period for honouring the bills on the due dates. For
considering sanction of deferred payment guarantee facility
powers delegated for fund based facilities are to be exercised.
2. The assets to be purchased against deferred payment guarantees
should be charged to the bank. Branches should also endeavour
to secure the DPG by obtaining additional collateral security by
way of mortgage of immovable property and/or hypothecation of
other unencumbered movable machinery etc. In the case of
valued clients, if the amount involved is small and the period of
deferred payment is not very long, the margin may be reduced at
the discretion of the sanctioning authority.
3. In all cases, branches should take the counter-indemnity and also
obtain third party guarantee, if need be, so that our liability under
the deferred payment guarantee is comprehensively covered. In
the case of guarantees issued in foreign currencies, branches
should advise the constituents that they should cover exchange
fluctuations as permitted by Reserve Bank of India and the
respective counter-indemnities must contain suitable clauses
indemnifying the Bank against any loss that may arise out of
exchange fluctuations.
4. Where deferred payment guarantees are to be issued in foreign
currencies or on behalf of non-resident customers, approval of the
Reserve Bank of India wherever required, should be obtained.
Branches may obtain necessary guidance from the International
Division, Corporate Office, Mumbai through the Regional
Authority. Where bills/promissory notes have to be
accepted/guaranteed by the Bank, which are to be rediscounted
with Industrial Development Bank of India/SIDBI, branches
should ensure that the bills/ promissory notes are drawn in the
prescribed form and are adequately stamped wherever necessary
and other formalities are complied with to avoid inconvenience to
the sellers and their bankers at a later date.
(III) Documentation : After the facility is sanctioned, documentation
should be initiated without any delay. Branches should obtain a
counter-indemnity from the customer as per APPENDIX I or as
per the draft approved by the Regional Authority. The usual
procedure such as obtaining a resolution from the company,
execution of documents, filing of charge with the Registrar of
Companies etc., should be followed as in the case of term loans.
In cases where the assets are already mortgaged to the bank
along with other banks or financial institutions, the constituents
should be advised to obtain the written consent from the other
banks before the guarantee is issued. The draft form of the
guarantee should be approved by the Regional Authority if a
separate guarantee is given instead of co-acceptance of bills.
(IV) Inspection and follow-up : A periodical inspection of industrial
concerns on whose behalf deferred payment guarantees were
issued should be carried out by an officer who should submit a
detailed report as in the case of term loans. Branches should
diarise the due dates on which the installments of the principal
amount and interest fall due. The branch should notify the client
well in advance of the due date (say, a fortnight) and obtain his
instructions for making the payment. Since commitment of the
bank under deferred payment guarantees is for a fairly long

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 period, branches should obtain periodical progress reports from
the constituents as in the case of term loans. It should be ensured
that the restrictive convenants stipulated in the sanction are
complied with by the constituents. Where any adverse features
are observed either in the progress report or during the
inspection, Regional Authority should be apprised and his
advice/instructions sought.
(V) Lending powers : For financing by way of co-acceptance of bills,
discretionary lending powers are not exercisable by the
authorities below the level of Regional Manager/Chief Manager.
(VI) Payments under DPG : As stated earlier, customers should be
reminded of due dates and their instructions obtained in advance
for payment of installments on due date. If the customers do not
make arrangements for payment on due dates bank as a
guarantor/co-acceptor of the bills is duty bound to pay the
beneficiary on due date. Such payment should be made to the
debit of "G/L Bills Past Due A/c". The amount be recovered from
the customers and the entry in bills past due be reversed as early
as possible. Interest at commercial rate should be recovered for
the period.
(VII) Commission : Commission on DPG should be recovered at the
rates prescribed during the first year itself on issue of DPG. Since
the amount involved in DPG is generally large and for a longer
period the commission amount may be large. If such commission
is more than Rs.1 lac the amount of commission may be
recovered in installments after obtaining approval of Regional
Authority. However, the first installment should not be less than
Rs.25,000/-.

7.1.4 APPRAISAL/SANCTION OF BANK GUARANTEE LIMITS :

(i) General :
(a) An assessment of creditworthiness of the applicant, his past
performance and his capability to discharge the conditions of the
guarantee based on the analysis of financial statements of the
borrower/guarantor, as also detailed opinion and credit report on
proprietor/partners/ directors/guarantors etc. be obtained.
(b) While entertaining any request for the issuance of the
performance guarantees, the branch should exercise due care and
caution and should have sufficient knowledge of the customer as
regards his means, experience and capacity to perform the
obligations undertaken and that he is not likely to commit any
default. It should particularly be ensured that the customer has
sufficient experience and exposure in the particular line of activity
so that the contractual obligations can be fulfilled by him without
any difficulty. Reasonable cash margin and charge on collateral
securities should be obtained while considering such guarantees.
However, exceptions may be made by the sanctioning authority at
his discretion on merits of each case.
(c) The financial status of the constituent should be properly
evaluated by scrutinising financial statements and/or income tax/
wealth tax returns to ensure that he has necessary resources. In
case he requires any credit facility for undertaking the contract, it

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 may be considered on merits along with the proposal for the
guarantee limit. It should be ensured that the constituents do not
approach the Bank for ad hoc credit facilities at a later date for
completing the contract.
(d) The appraisal of deferred payment guarantee limit should be done
in the similar way as the appraisal of term loan.
(ii) Linkage of bank guarantee limit with other working capital
limits:
If the guarantee is issued for procurement of material, on credit, this
would have a bearing on the assessment of working capital. However,
bank guarantee limit must be linked to the borrower's installed
capacity/financial capacity/technical and managerial resources/sales
turnover, etc. As stated earlier, necessary working capital facilities
will have to be considered at the time of sanction of guarantee limit
to ensure honouring of commitments under the guarantees.
(iii) Quantum :
The bank guarantee limit should be based on the nature of business,
the purpose, the frequency at which guarantees are required to be
issued, the amount and terms of contract, validity period of
guarantee and average amount of guarantee etc.
(iv) Security :
Besides cash margin, every effort should be made to get adequate
security by way of charge on borrower's fixed/current assets and/or
immovable properties of proprietor/partners/directors/ guarantors
and/or third party guarantee/ECGC guarantees etc. The subsisting
charge on the available primary security/ collateral security available
to the bank in respect of other credit facilities should be extended to
cover bank guarantee facility also.
(v) Cash margin :
(a) Guarantees in respect of disputed duty/taxes and disputed
litigations like in family disputes, compensation money etc. should
be secured by 100% cash margin without exception, particularly
in all cases where the party has preferred an appeal against the
judgement of a court or tribunal.
(b) In respect of other types of guarantees, though no fixed norms in
respect of cash margin are prescribed, based on the age and
value of the relationship, financial standing of the borrower, other
securities available, etc. cash margin may be stipulated. However,
a cash margin of 10% to 30% in case of first class parties and
upto 100% in other cases may be stipulated. In case of ad-hoc
requests, and requests from non-borrowers higher margin may be
stipulated.
(c) Margin money may be held either in "G/L Margin Money" or in G/L
Fixed Deposit Account. No deposit receipt should be issued,
instead a mere acknowledgement should be given to the client. A
remark in bold letters should be written on the top of the
concerned deposit ledger folio to the effect that the deposit is held
as margin against a particular guarantee.
(d) If a customer is not immediately able to pay the full cash margin
and if the liability under the guarantee accrues over a period of
time, then cash margin may be provided in stages matching with

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 the accruing liability.
(e) If existing FDR is given as a cash margin, the relevant FDR duly
discharged and a letter depositing FDR should be obtained and
kept with counter indemnity and other documents.
(f) Margin held in cash as well as in the form of fixed deposits should
be balanced periodically.
(vi) Sanction of limits :
(a) Bank guarantees should be generally issued only to those parties
who are having regular sanctioned limits.
(b) A regular proposal should be prepared for sanctioning regular
bank guarantee facility.
(c) After due appraisal, regular bank guarantee limits should be
sanctioned to the parties. The sanction should specifically
stipulate whether the limit is for performance guarantees or
financial guarantees. It should also contain purpose and nature of
guarantee, cash margin, securities etc.
(d) However, where bank guarantees are issued on ad hoc basis
within the discretionary lending powers of the Branch Manager,
regular proposal should be prepared and facility sanctioned before
issuance of bank guarantee. This should also be reported to
controlling authority, in the fortnightly statement of advances
sanctioned by Branch Manager.
(e) When the bank guarantee limits are sanctioned by higher
authorities, the sanctioning authority should specifically authorise
the Branch Manager to execute guarantees as sanctioned, if the
Branch Manager is not having power of attorney to execute the
guarantees.
(vii) Review :
Guarantee facilities sanctioned to constituents should be reviewed
annually. Even though deferred payment guarantees are issued for a
period of five years or so, the validity should, however, be reviewed
annually. While submitting review proposals, the following details
should be furnished apart from other particulars.
(a) Date of issuance of guarantee and the expiry date.
(b) Whether installments are being paid regularly in case of deferred
payment guarantees.
(c) Whether the applicant is fulfilling the terms and conditions of the
agreement entered into by him with the beneficiary.
(d) Compliance of terms and conditions stipulated in the sanction.

7.1.5 GUARANTEE BOND :

(i) Guarantees should be generally issued only as per standard format

(APPENDIX III) and in case of guarantee to be issued in favour of
government department, the same should be issued as per standard
format (APPENDIX IV).
(ii) If for any special reason or circumstances, deviation from the
standard format is warranted, the draft form of the guarantee should

251
 be approved by Regional Authority/Chief Managers, before execution,
even if the issuance of the guarantee falls within the discretionary
powers of the Branch Manager.

(iii) It may please be noted that Indian Banks' Association (IBA) has
advised the banks that all government departments have been
advised to accept guarantees as per the bank's standard format only
as very often some of the government departments were found to
insist guarantees in their format which may not be in the interest of
the bank. Hence deviations should be desisted by the bank.
(iv) Specimen of financial guarantee to be executed should be approved
by Regional Authority.
(v) The guarantee format should not contain onerous clauses.
(vi) The liability amount, expiry date and the time limit within which
claim, if any, is to be lodged should be specified in clear terms in
bank guarantee, avoiding ambiguity.
(vii) Bank's usual limitation clause, as under, should be included in all the
guarantees, if it is requested by the beneficiary. .
Notwithstanding any thing to the contrary contained herein :-

(1) Our liability under this Bank Guarantee shall not exceed Rs______
________( Rupees _______________________ only)
(2) This Bank Guarantee shall be valid upto _____________ and,
(3) We are liable to pay the guarantee amount or any part thereof
under this Bank Guarantee only and only if you serve upon us a
written claim or demand on or before ________( the date of
expiry of Guarantee).
(viii) No guarantee should be issued for unlimited amount and/or for
unlimited period. Guarantees should not cover any clause, which
undertakes automatic renewal of the guarantees.
(ix) The guarantee should be issued on a non-judicial stamp paper of
adequate value. The name of the client/our Bank should have been
written on the back of stamp paper as purchaser. It should be of a
recent date and should be used within validity period wherever
applicable.
(x) Guarantee deed should be signed by the officers holding appropriate
and valid power of attorneys. When a guarantee facility is sanctioned
by Branch Manager within his discretionary powers, it will be
advisable for higher authority to vest Branch Manager with power to
sign/execute the guarantee unless he holds valid power of attorney.
However, where the facility is sanctioned by higher authorities, while
sanctioning such limits the Branch Managers should be specifically
authorised to execute guarantees as sanctioned.
(xi) With a view to ensure that unscrupulous persons do not defraud the
Bank/others by forging our guarantee documents, the following
procedure should invariably be complied with by the branches :
(a) Original stamped guarantee/s should be sent by the branches
directly to the beneficiary by Registered Post with a request to
acknowledge receipt of the same and an unstamped copy thereof

252
 should be given/forwarded to the constituent also.
(b) Where customers of undoubted integrity and standing insist on
handing over the original guarantees to them, the branch, at its
discretion, may accede to their request.
(c) Even in respect of existing guarantees, acknowledgements from
beneficiaries should be obtained and kept with the relevant
papers.
(d) Whenever a guarantee is issued in favour of Central/State
Government, government department or public sector
undertaking, branches should send a copy of the guarantee to the
Regional Authority, who would confirm the issuance of the
guarantee and retransmit the same to the beneficiary.
(xii) Copy of guarantees issued should be kept on record.
(xiii) Whenever guarantees are issued in favour of the Governor or the
President of India, branches should note the correct name and
address of the concerned beneficiary department and also the
purpose for which guarantee is issued in their books. This is
necessary to facilitate prompt identification of the guarantees with
the concerned departments. In regard to guarantees furnished by
the banks in favour of Government Departments in the name of
the President of India, any correspondence thereon should be
exchanged with the concerned ministries/ departments and not
with the President of India.
(xiv) The guarantee should be signed in full and on all the pages, under
bank's stamp.
(xv) In order to speed up the process of verification of the
genuineness of the bank guarantee, the name, designation and
specimen signature numbers of the officer/officers signing the
guarantees should be invariably mentioned . The beneficiaries of
bank guarantee should also be advised to invariably obtain the
confirmation of the concerned branch about the genuineness of
the guarantee issued by them as a measure of safety.
(xvi) A claim period not exceeding six months may be allowed for
submitting the claims under the guarantee. It will be pertinent to
note that the claims arising during the period of the guarantee
only will be admitted and claims arising during the claim period
i.e. after the date of expiry of the period of the guarantee will not
be admitted.
Branches should not issue financial guarantee under the
performance guarantee limit sanctioned.
(xvii) In respect of guarantees issued in favour of Directorate General of
Supplies and Disposal, the following additional aspects should be
kept in mind:-
(a) The initial period of the bank guarantee issued by banks by
way of security in Directorate General of Supplies & Disposals
contract administration would be for a period of six months
beyond the original delivery period. Branches may incorporate
a suitable clause in their bank guarantee providing automatic
extension of the validity period of the guarantee by 6 months,
and also obtain suitable undertaking from the customer at the
time of establishing the guarantee to avoid any possible

253
 complication later.
(b) A clause would be incorporated by Directorate General of
Supplies and Disposals in the tender forms of Directorate
General of Supplies and Disposal 229 ( instruction to the
tenderers) to the effect that whenever a firm fails to supply
the stores within the delivery period of the contract wherein
bank guarantee has been furnished, the request for extension
for delivery period will automatically be taken as an
agreement for getting the bank guarantee extended. Banks
should make similar provisions in the bank guarantees for
automatic extension of the guarantee period.
(xix) Branches are supposed to pay the amount of guarantee to the
beneficiary on demand, without demur and merely on a statement
made by the beneficiary to the effect that the loss or damage has
been suffered by the beneficiary. In the Standard Guarantee Bond
formats, there is no clause stating that after the bank pays the
amount in terms of invocation of the guarantee by the beneficiary.
The beneficiary shall assess and finally quantify the loss/damage so
that the residual dues/amount finalized by the beneficiary during
settlement of account of the contractor/supplier and payable to
borrower shall be paid directly to our Bank, having issued the
guarantee and having already paid the amount in terms of the
Guarantee to the beneficiary and shall not be paid in any event
directly to the Contractor/Supplier.
There may be possibilities that amount of the guarantee paid may not
be recovered in full. In the circumstances branches would be paying
the difference amount to the debit of their G/L Bills Past Due A/c. If
the beneficiary pays the residual amount (after settlement) if any,
directly to the contractor/supplier, Bank’s dues may not be fully
adjusted.
In order to protect the Bank in such situation the following clause in
all guarantees to be issued by Bank, be included:-
“The beneficiary shall, as far as possible, assess and quantify the
actual loss/damage suffered before invocation and invoke the
guarantee accordingly. If it is/was not possible for the beneficiary to
furnish the actual loss/damage suffered at the time of invocation,
then, the Bank shall pay the amount in terms of invocation by the
beneficiary. The beneficiary shall, nevertheless, at least after receipt
of the guarantee money from the Bank, assess and finally quantify
the actual loss/damage and while settling the accounts of the
contractor/supplier viz., ______________ (mention constituent’s
name) shall pay the residual dues payable to the contractor/supplier
(all relating to the contract in respect of which the guarantee has
been issued and atleast to the extent of payment/s made by the
Bank) to/through the Bank and shall not pay the dues, in any event,
directly to the contractor/supplier.”
In case beneficiary is not agreeable for inclusion of the clause as
stipulated above in the guarantee to be issued by the Bank, then,
branches may atleast at the time of making payment of guarantee
(which is unconditional) to the beneficiary pursuant to their
invocation advise them of such obligation being cast on them in this
behalf and request them to make payment to our Bank directly of
any residual dues/excess remaining subsequent to final quantification

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 of loss/damages.

7.1.6 DOCUMENTATION :

(i) Before executing guarantees, branches should ensure that all the
terms and conditions stipulated in the sanction are complied with.
(ii) A counter indemnity (as per APPENDIX I ) and a undertaking as
per APPENDIX II duly executed by the applicant should be obtained.
The counter indemnity and undertaking should be stamped as an
agreement (and not as a bond) as these represent contract of
indemnity. By executing the counter indemnity and undertaking, the
applicant undertakes to make good the amount or reimburse it to the
bank on demand if the bank guarantee is invoked.
(iii) The limitation period in respect of counter indemnity starts from the
date the guarantee is invoked.
(iv) In case of joint stock companies, a board resolution should be got
passed by the company before executing the counter indemnity.
Further the bank's charge in respect of securities covering the
guarantees should also be filed for registration with the concerned
registrar within the stipulated period of 30 days, as required u/s 125
of Companies Act.

7.1.7 ACCOUNTING PROCEDURE:

(i) All guarantees issued by the branch should be serially numbered and
entered in the Guarantee Register (R-103). Register for recording
Deferred Payment Guarantee issued should be maintained as per
APPENDIX- VII. The entries in the register should be authenticated
by those officials who have executed the guarantee. Guarantee
register should be properly maintained and due dates of guarantees
should be diarised.
(ii) Branches should maintain following accounts in general ledger :
(a) Asset G/L Constituents' liability for Acceptance
(Debit Side) etc.

In India A/c

(i) Alive Performance Guarantee

(ii) Alive Financial Guarantee

Outside India A/c

(iii) Alive Performance Guarantee
(iv) Alive Financial Guarantee

(b) Liability G/L Acceptances, Guarantees etc.

(Credit Side)

In India A/c

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 (i) Alive Performance Guarantee
(ii) Alive Financial Guarantee

Outside India A/c

(iii) Alive Performance Guarantee

(iv) Alive Financial Guarantee

(iii) Whenever guarantees are issued, the following entries should be

passed:
Dr. G/L Constituents' Liability for acceptance etc. in India A/c Alive
Performance Guarantees or Alive Financial Guarantees (as the case
may be)

Cr. G/L Acceptances, Guarantees etc. in India A/c Alive Performance

Guarantees or Alive Financial Guarantees (as the case may be)

The relative vouchers should contain full details of bank guarantee

viz. name of the applicant, name of the beneficiary, guarantee
number etc., and must be authenticated by the Branch Manager/Joint
Manager.
(iv) Whenever guarantees issued are returned duly cancelled or
guarantees are cancelled by us after following the prescribed
procedure, suitable remarks should be made in the Guarantee
Register and the following entries be passed :
Dr. G/L Acceptances, Guarantees etc. in India A/c Alive Performance
Guarantees or Alive Financial Guarantees (as the case may be)
Cr. G/L Constituents' Liability for acceptance etc. in India A/c Alive
Performance Guarantees or Alive Financial Guarantees (as the case
may be)
(v) Bank guarantee liability register for the purpose of recording in detail
the liability of various applicants to the Bank, should also be
maintained by the branches. In this register, individual accounts
enjoying sanctioned limits are maintained. Also, a consolidated
account styled 'Sundry Parties' is to be opened in the register to
record guarantees issued on behalf of applicants not enjoying regular
guarantee limits.

7.1.8 CERTAIN TYPES OF GUARANTEES :

(i) Guarantees favouring government departments/courts in

respect of disputed amounts :
Requests are received from the constituents for issuing guarantees
favouring government departments/courts in regard to disputed
amounts in respect of excise duty, custom duty, etc. It should be
noted that these are money guarantees whereby a client seeks to
defer payment of a particular sum of money pending
clarification/judgement. In case of guarantees for disputed amounts
of excise duty, the liability relates to sales already effected and the
client would have collected the necessary amount or his cost of
operations would have absorbed the additional burden.
Similarly, in respect of disputed amounts of custom duty, the client
would initially be paying only a part of the amount and submits a

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 bank guarantee for the balance amount. Since the purpose of the
guarantee is only to help the client in deferring the payment, unless
the decision is in their favour, prudence would require that they
should set apart sufficient amount to provide for the eventuality and
their cost of operations should take into account the probable liability.

Guarantees in respect of disputed duty, taxes and the like should be

secured by 100% cash margin. Where it is not possible for the client
to pay the full amount immediately and if the liability under the
guarantee accrues over a period of time, then the cash margin may
be provided in stages matching with the accruing liability.
For example, if imported goods are pledged to the Bank and delivery
is taken in stages, cash margin representing the disputed amount of
import duty could be paid at the time of part delivery. Where the
liability has already accrued, full cash margin should be insisted
upon. Where the guarantee amount is substantial and the clients
represent that locking up of large amount by way of cash margin
would adversely affect their day to day working and force them to
borrow by way of cash credit, the sanctioning authority may consider
reducing the cash margin, provided the balance amount of the
guarantee is earmarked both in advance value and the limit.
As per RBI directives, banks should not issue guarantees for payment
of custom/import duty on essential commodities without recovering a
cash margin equivalent to atleast one half of the amount of the
guarantee irrespective of the amount earmarked in advance value
and the limit. The term essential commodities means and includes
vegetable oils, edible oils, sugar and such other commodities as may
be advised by the Reserve Bank of India from time to time. It should
be noted that in respect of disputed amounts in litigation matters like
family disputes, compensation money etc., the guarantees should be
backed by 100% cash margin.
(ii) Shipping guarantees :
Shipping guarantees are executed favouring shipping companies for
delivery of consignments in the absence of the relative bills of lading.
The solicitors have opined that the shipping guarantees can be issued
for an amount covering the CIF value plus legal charges with a
validity period of three months plus an additional one month for
submitting the claims.
(iii) Guarantees for mobilisation of advance (Advance Payment
Guarantee) :
When a contractor is given a contract, say to build a road, the
government department, PWD etc. makes an advance payment to
the contractor for mobilising machinery, materials etc. with a proviso
to adjust this amount against bills to be submitted by the contractor
for performance of the contract in due course. If for any reason, the
contractor does not perform the contract, the government
department would like to recover the advance payment made by
them as above.
However, the financial position of the contractor may be such that he
may not be in a position to repay. To safeguard against this, the
government department insist on a guarantee from a bank that they

257
 will pay the specified amount in case of default by the contractor.
(iv) Guarantees issued under advance licence scheme :
The Directorate General of International Trade issues a import licence
to eligible parties to import specified - raw material etc. without
customs duty/ reduced customs duty with a condition that certain
percentage of value of such goods to be imported shall be exported
within a given time frame. Failure to achieve the export obligation will
entitle the customs authorities to recover the full import custom duty
which was waived originally. Thus the Bank's guarantee acts as an
assurance to the customs authorities for performance of this
obligation.
(v) Guarantee under export capital goods scheme :
Under this scheme eligible exporters are allowed to import capital
goods / machinery at a reduced rate of import duty of say 15% to
25% as against 65% or more, normally on a condition that the
exporter shall export a specified value of goods within a given time
frame. Non-performance of this obligation will entitle the custom
authorities to recover the full import duty. For this facility, a bank
guarantee for the difference of duty as above is insisted by the
customs authorities. Such guarantees should be covered under ECGC
Policy.
(vi) Bank guarantee in favour of financial institutions :
In terms of Reserve Bank of India guidelines, banks are precluded
from issuance of guarantee favouring financial institutions, other
banks and /or other lending agencies for the loans extended by the
latter, except in case of - Issuance of guarantee in favour of IDBI, in
the case of import of technical know-how by way of drawings and
designs under the Technical Development Scheme of the IDBI, under
certain circumstances and where no tangible security is available to
IDBI;
1. Issuance of guarantees in favour of various Development
Agencies/Boards, like Indian Renewable Energy Development
Agency, National Horticulture Board, etc. for obtaining soft loans
and/or other forms of development assistance from such
Agencies/Boards with the objective of improving efficiency,
productivity, etc., provided feasibility & viability of such projects is
duly satisfied upon by the bank and the bank's exposure is
adequately secured.
2. Issue of guarantees favouring HUDCO/ State Housing Boards and
similar bodies for loans granted by them to private borrowers who
are unable to offer clean or marketable title to property, provided
banks are otherwise satisfied about the capacity of borrowers to
adequately service such loans.
3. Issuance of guarantees by consortium member banks unable to
participate in rehabilitation packages on account of temporary
liquidity constraints, in favour of the banks which take up their
share of the limit;
4. Co-acceptance/ guarantee facilities under Buyers Lines of Credit
Schemes introduced by IDBI, SIDBI, Exim Bank, Power Finance
Corporation (PFC) or any other financial institution, unless
specifically permitted by the Reserve Bank of India.

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 5. Issuance of Guarantees in favour of Financial Institutions / banks
for their exposure to any infrastructure projects provided the
guaranteeing bank has taken a funded exposure also in the same
project for an amount not less than five per cent of the project
cost and has undertaken normal credit appraisal, monitoring and
follow-up.
6. Issuance of Guarantees in favour of Financial Institutions / banks
for their exposure to any commercial venture by their
borrower-constituents subject to the guaranteeing bank taking
funded exposure not less than 10 per cent of the exposure
guaranteed and subject to the compliance of the conditions laid
down by RBI vide its circular number IECD.No. 17
/08.12.01/2002-03 dated April 05, 2003.

Reserve Bank of India has advised that banks may issue

guarantees on behalf of their constituents, subject to the
following conditions :-

(a) Banks should satisfy themselves on the basis of credit

appraisal, regarding the technical feasibility, financial viability
and bankability of individual projects and/or loan proposals,
i.e., the standard of such appraisal should be the same, as is
done in the case of a loan proposal seeking sanction of term
finance/loan.
(b) Banks should conform to the prudential exposure norms
prescribed from time to time for an individual borrower/ group
of borrowers.
(c) Banks should conform to the ceilings prescribed from time to
time for sanction of term finance/loans from the banking
system.
(d) Banks should suitably secure themselves before extending
such guarantees.

7.1.9 BID BOND GUARANTEES :

Whenever a constituent participates in an international tender/ bid, he

would be required to furnish a bid bond guarantee. Such tenders would
be of large magnitude and the completion may involve considerable time.
Therefore, requests for bid bonds should be examined in totality as in the
case of financing of large projects/contracts.
Besides the viability of the project/ contract, the technical and financial
capability of the party to complete the project/contract successfully
should carefully be analysed and branches should satisfy themselves
thoroughly about all these aspects. It should be noted that once the bid
is accepted, the party would require various facilities such as
performance guarantee for earnest money deposit, guarantee in respect
of advance payments received, etc.
Further, working capital facilities would also be required for completion of
the contract/project on time. In other words, we may have to consider
sanctioning of several other facilities which might not have been
envisaged at the time of issuing the Bid Bond Guarantee. Further, the
amount of the Bid Bond Guarantee would be relatively small compared to
other facilities that the Bank may be constrained to sanction at a later

259
 stage. Therefore, branches should submit a comprehensive proposal,
which should also indicate, inter alia, the working capital and other
guarantee facilities that may be required and a regular sanction or a
sanction in principle for other facilities should be obtained before issuing
the Bid Bond Guarantee. It should be ensured that the facilities,
wherever applicable, are covered under the guarantee scheme of ECGC.

7.1.10 COMMISSION OF BANK GUARANTEE :

(i) Commission on guarantee should be recovered as under :

(a) Performance guarantee : Rs. 150/- + 2% p.a., or
part thereof ( the charges
applicable to -6- months
minimum)

(b) Other than performance :Rs. 150/- + 3% p.a., or

guarantee part thereof ( the charges
applicable to -6- months
minimum)

(ii) Guarantee commission be recovered taking into account the

following :

(a) If the period of guarantee (including claim period, if any) is more

than 6 months, commission should be charged in steps of 0.5%
(performance guarantee) or 0.75% (financial guarantee) per
quarter as the case may be. Part of the quarter should be treated
as a full quarter.
(b) In a specific situation when a period of original guarantee (
including claim period, if any) is less than 6 months say 3
months and commission is recovered for minimum period of -6-
months as per above guidelines and subsequently the customer
requests extension of guarantee for only 1 month , so that total
period of guarantee is less than 6 months i.e. , it is clarified that
once a Guarantee is issued with a specific validity period and
commission is charged as per above guidelines, the transaction in
the Books of the Bank is complete at that stage. Hence, if
subsequently further extension is requested, the customer will
have to pay Guarantee commission for the period for which
extension is required as per above rules.
(iii) Guarantees secured by 100% cash margin :
(a) Performance guarantee : Rs. 150/- + 25% of amount of
commission applicable to guarantee of similar amount not
secured by 100% cash margin
(b) Other than performance : Rs. 150/- + 25% of amount of
guarantee commission applicable to guarantee of similar
amount not secured by 100% cash margin
Branches should always refer to the circulars issued by Corporate
Office/Head Office from time to time for any revision in charging
of commission and other service charges.

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 (iv) Commission on following guarantees shall be levied as per
FEDAI rules:
(a) Guarantees given to public authorities for export of goods
ex-bonded warehouse without payment of excise duty.
(b) For counter signing of Llyods General Average Bond and
Guarantee.
(c) Guarantee in favour of shipping companies/agencies for
clearance of goods pending production of bill of lading relating
to imports under LCs opened by the guarantor bank.
(d) Guarantees covering missing bills of lading relating to imports
not covered by (c) above.
(e) Export performance guarantees.
(iii) Renewal of guarantees :
The charges be the same as those applicable for issuance of fresh
guarantees, except that the claim period be not charged if the
renewal is effected before the expiry date of the original
guarantee.
(iv) Refund of commission :
(a) In case a guarantee is tendered for cancellation before the
expiry date an amount computed at half the original rate for
the unexpired period of guarantee less three months, may be
refunded.
(b) No commission would be refundable if the guarantee bond is
released after fulfilment of its condition in a short period than
covered by the guarantee.
(c) In case of guarantees issued for export obligations, the
provisions laid down in FEDAI rules, which permit pro-rata
refund of guarantee commission for the unexpired period even
though the purpose for which the guarantee has been issued
is fulfilled, will be applicable and in such cases, appropriate
refund of guarantee commission would be permissible.
(d) However, for imports or for any other purposes, the existing
guidelines be followed and no refund be permitted, if the
purpose for which the guarantee is issued, is fulfilled.
(v) For extended period of validity of guarantee due to restraints
imposed by court orders at the instance of constituents from
meeting their obligations to beneficiaries, when guarantees are
invoked, additional commission at applicable rate be charged.
(vi) Commission should be charged for the liability period and also the
additional claim period, if any.
(vii) Commission should be recovered at the time of issuing the
guarantee and credited to P/L Commission on Guarantees A/c.
(viii) In the case of a deferred payment guarantee with a duration of
more than two years and other guarantees where the total
commission recoverable is Rs.1 lac and above, the amount of
commission may be collected in installments after obtaining the
approval of the Regional Authority. The first installment should
not be less than Rs.25,000/- and the balance should be collected

261
 in equal installments payable at the commencement of each year.

7.1.11 EXTENSION/RENEWAL OF BANK GUARANTEES :

(i) If a request is received from the applicant (our client) only for
extension in the period of guarantee already issued, such requests
may be entertained, subject to satisfactory conduct of the account,
provided there is no change in the amount and other terms and
conditions of the guarantees. For this purpose, an extension
guarantee be issued on non-judicial stamp paper, quoting reference
of existing guarantee and the extended/validity date and claim
period.
(ii) Extension of validity period of a bank guarantee should never be
advised on letter head/plain paper but always on non-judicial stamp
paper.
(iii) The extended due date be noted in the Guarantee Register and
liability ledger and due commission be charged.
(iv) In case the beneficiary of the guarantee requests the issuing branch
either to renew or to pay the guarantee amount, the branch should
acknowledge such letters to the beneficiary. Thereafter, the applicant
should be requested to renew the guarantee before it expires or
deposit the guarantee amount for honouring the commitment. In
case no request for renewal is received, the guarantee invoked
should be honoured and amount be recovered in the usual manner
from the applicant.

7.1.12 AMENDMENT OF BANK GUARANTEES

There is no provision as such for amendment to bank guarantee.

Wherever any amendment is required, fresh bank guarantee should be
issued, cancelling the earlier guarantee.

7.1.13 CANCELLATION OF GUARANTEES :

(i) A guarantee can be cancelled only in following two instances : (a)

Prior to expiry period with the consent of all the parties to the
contract, and (b) On expiry of the claim period.
(ii) Treatment of Expired Bank Guarantees :
a. When the guarantee expires, the beneficiary cannot lodge claim
after the expiry of guarantee period. His holding on to the
guarantee document also does not confer any better right on him.
b. Once the Guarantee expires, and no claim was received by Bank,
the guarantor’s liability also expires, and the fact that expired
guarantee documents are not returned by the beneficiary does
not alter the legal position of the Bank
Certain government departments do not return the cancelled
guarantees and instead they give a letter to the bank stating
therein that the guarantees stand cancelled in their books. In
such cases, the entries should be reversed on receipt of the letter.
After reversing the entry, a letter as per APPENDIX- V should be
sent to the concerned department by registered post A.D.
confirming the cancellation of guarantee in question.

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(iii) PRACTICE TO BE FOLLOWED IN THE EVENT OF NON-RETURN
OF EXPIRED GUARANTEE.
a. A register of Guarantee issued by Bank be maintained and in
respect of guarantees which have expired, the guarantee liability
in the Register maintained be marked off.
b. Before marking off the guarantee liability in the said register,
branch should intimate the beneficiary, by Registered Post with
Acknowledgement due:-
1) Through a Letter/ Notice to the effect that the bank’s
guarantee has expired and request the beneficiary to return
the original Bank Guarantee document.
2) The letter/notice addressed to beneficiary by branch should
clearly specify that the period of guarantee had already
expired and therefore, beneficiary was not anymore entitled to
invoke the guarantee from the date of expiry of the valid
period of guarantee.
3) If inspite of said letter/notice the expired guarantee document
is not returned by the beneficiary, the branch may reverse the
relative entries and mark off the guarantee liability in the
Register, in respect of such guarantees indicating that the
guarantee claim period had expired.
(1) The securities held against bank guarantee may be released
when:
(a) the original guarantee is returned by the beneficiary for
cancellation,
(b) the beneficiary being a government department, though has
not returned the original bank guarantee but has written a
letter relieving the bank of its liability under the guarantee.
(c) the original guarantee issued and containing usual limitation
clause is not returned to our bank by beneficiary duly
cancelled, but where the guarantee liability is reversed after
giving due notice as mentioned hereinabove, and after
obtaining prior sanction from regional authority.
(2) Provided -
(a) the conduct of the account is otherwise in order and there are
no irregularities in the account, and
(b) the same security is not extended to cover any other facility
(3) The above instructions will not apply in respect of guarantees
issued in favour of government bodies/ departments/corporations
without our usual limitation clause in the past, if any because in
that event the government will have a right of action under the
guarantee for a period of 30 years. In such cases, letter of
cancellation from beneficiary/return of original guarantee is
indispensable.
(v) Government Departments/ PSUs etc., have been advised by Ministry
of Finance, Government of India to refrain from asking banks to give
guarantees for indefinite periods or unduly long periods and should
return the expired guarantee within a reasonable period of three
months, after the fulfilment/completion of the contract or expiry of

263
 the guarantee period as Bank Guarantees are contingent liabilities for
Bank, therefore guarantee document are to be returned to Bank
within three months of expiry of validity period of Bank Guarantee or
date of fulfilment/completion of contract, as the case may be.

7.1.14 INVOCATION OF BANK GUARANTEES :

(i) The beneficiary of a bank guarantee has the right to invoke the
guarantee any time during the currency of the guarantee and before
the expiry of the claim period, if any, and lodge the claim.
(ii) When a demand for payment on guarantee as per terms and
conditions of the guarantee bond is made within the validity period of
the guarantee by the beneficiary, it is deemed to be an invocation.
The demand should be made in writing. Guarantees are sometimes
invoked by telex/ telegrams also.
(iii) For invoking a guarantee it is not essential, for the beneficiary to
satisfy the bank regarding the default or the quantum of actual loss
suffered by him. The bank's obligation under the guarantee is
absolute and independent of any contract entered into by the
applicant customer. However, if the Guarantee Bond contains a
clause as mentioned in para 7.1.5 (xix) above, branches should
invariably act accordingly.
(iv) When a guarantee is invoked by the beneficiary within the validity
period of the relative guarantee bond, it is incumbent on the bank to
meet such demand irrespective of whether the customer requests us
not to pay the amount owing to his dispute with the beneficiary or for
any other reason and also whether the bank is holding any security
or cash margin for the guarantee or not.
(v) Under no circumstances, branches should act on the instructions of
the clients not to make payment under the guarantee. To meet
commitments under the guarantee is an exclusive concern and
obligation of the Bank. If there is a dispute between the client and
the beneficiary, the same has to be settled outside the Bank and
branches should not take cognizance of their disputes.
(vi) The payments to the beneficiaries should be made promptly giving no
opportunity to the parties to take recourse to courts and obtain
injunction against enforcement of guarantees. Needless to mention
that the delay in making payments under guarantees under any
pretext creates a wrong impression that bank officials are in collusion
with the parties which tarnishes the image of the banking system and
the Bank is put in a very embarrassing position. Any lapse in this
regard is viewed seriously by the Bank.
(vii) Branches should carefully note that whenever a guarantee is invoked,
steps are immediately taken to honour the same. In case any such
claim is not honoured for any reasons, within 3 days from the date of
receipt of the demand, the branch may immediately put up the
matter to its Regional/Zonal Authority under advice to Corporate
Office. In any case, it has to be ensured that guarantee liability is
met immediately on demand subject, however, to such claim being
within the validity period of the guarantee as per terms of guarantee
bond.
(viii) Where the guarantee appears to have been invoked for extraneous

264
 reasons or by a junior officer of the concerned government
department, the branch may point out to the senior officials of the
department detailing the circumstances under which the guarantee
amount will be paid. This should be done only after obtaining prior
approval of the Regional Authority over telephone.
(ix) Ministry of Finance, Government of India have impressed as under on
all government departments and public sector undertakings :
Bank guarantees should be invoked only when there is a specific
breach on the part of the contractor and strictly in accordance with
the terms and conditions of the relative agreement and that the
decision to invoke the guarantees should be taken, as far as possible,
by an officer higher in rank than the officer who accepted the
guarantee.
(x) It has been held that in case a guaranteeing bank pays the amount of
the bank guarantee in the absence of legal and proper invocation by
the beneficiary, then the applicant is not liable to reimburse the
amount in terms of counter indemnity executed by him in favour of
the bank. Therefore it must be ensured that invocation is proper.
(xi) The bank can withhold payment only if a restraining/injunction order
is received from an appropriate court.

7.1.15 PAYMENT OF INVOKED GUARANTEES :

Payments in respect of valid claims under the guarantees issued should

be made to the debit of 'G/L Bills Past Due Account' under usual advice
to all concerned. The entry in 'G/L Bills Past Due A/c' should be reversed
by recovering the amount from the constituent and/or by appropriating
the margin money. Interest at the commercial rate should be recovered.

If clause mentioned in para 7.1.5 (xix) is not incorporated in the

Guarantee Bond, branches may atleast at the time of making payment of
guarantee (which is unconditional) to the beneficiary pursuant to their
invocation advise them of such obligation being cast on them in this
behalf and request them to make payment to our Bank directly of any
residual dues/excess remaining subsequent to final quantification of
loss/damages.

When the branches are not in a position to recover the amount from the
clients, either fully or partly, they should furnish details, including the
following, to the Regional Authority :

(i) Details of the guarantee invoked.

(ii) Position of all accounts of the constituent.
(iii) Details and value of security and margin money held.
(iv) Details of working and latest financial position of the constituent.
(v) Prospects of recovery and the amount considered as bad or doubtful
of recovery.
(vi) Comments and recommendations of the branch.
No exchange and charges are to be recovered for effecting payment of
invoked guarantee by the bank as these remittances are in respect of
Bank's obligations.

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7.1.16 NEGATIVE LIST :

(i) As per the RBI guidelines, banks are precluded from issuing
guarantees favouring the financial institutions or other banks or
lending agencies for the latter's loan/s as these institutions should do
their own assessment of the credit risk and take the risk themselves
(if justified) and not seek a bank guarantee; the only exception to
this is where a bank cannot take its additional share in a consortium
account, due to liquidity strain, and temporarily transfers the share to
another bank in consortium, along with issuing a guarantee in its
favour.
However, such guarantees may be issued in favour of IDBI under
technical development fund scheme/development agencies like Indian
Renewable Energy Development Agencies, National Horticulture
Board, etc., subject to conditions mentioned in para 7.1.8 (vi) of
this Chapter.
(ii) Guarantee should not be issued for the purpose other than the usual
and regular business/vocation of the constituent.
(iii) Branches should refrain from issuing guarantees which are in
contravention of the monetary and credit policies of the Reserve Bank
of India.
(iv) Branches should not issue any letter, either on letter head or
otherwise, to any person guaranteeing any action of the customer or
agreeing to pay any sum on behalf of the customer, as this can be
construed as a guarantee at a later date in case of a dispute.
(v) Branches should refrain from issuing guarantees on behalf of
customers who enjoy credit facilities with other banks and not with
us.
(vi) Branches should not agree to the request that a guarantee issued by
us favouring the beneficiary abroad should be confirmed by a foreign
bank as it not only undermines the value of our guarantee, but also
results in unnecessary outflow of foreign exchange.
(vii) For adding confirmation to Letters of Credit, issue of guarantees on
behalf of foreign correspondents etc., a reference may be made to
Chapter XII on "Exports" in Book of Instructions Volume - 10 of
Foreign Exchange Business.
(viii) All proposals for guarantee limits to builders and contractors engaged
in building construction activities should be referred to the Corporate
Office, Mumbai through the Regional Authority. This restriction does
not apply to government and municipal contractors of public buildings
and works etc. and overseas contractors and also to guarantees
which are issued against full cash margin.

7.1.17 BALANCING :

Balances of all outstanding bank guarantees should be taken down and

tallied with concerned G/L head on monthly basis.

*.*.*

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 SECTION-II

LETTERS OF CREDIT

Ideally any seller of goods/services would like to receive payment

before the delivery of goods/services to a buyer. Similarly the buyer
would also like to ensure that the goods/services bought are as per
his specifications and deliveries are effected in time, before parting
with the money. If the buyer and seller are at two different, far away
stations, both the factors can not be satisfied simultaneously.
As a compromise, services of third party as an intermediary are
utilised. This intermediary is usually a bank who issues a letter of
assurance to a seller at the request of a buyer for payment of cost of
goods / services sold on certain terms and conditions. Such an
assurance letter is named as a "Letter of Credit".
A letter of credit is a written instrument issued by a banker at the
request of a buyer (applicant) in favour of the seller (beneficiary)
undertaking to honour the documents or drafts drawn by the seller in
accordance with the terms and conditions specified in the credit,
within a specified time.
Thus the credit is made available to the seller against delivery of
certain specified documents. When the credit stipulates payment of
money when the documents are presented to the paying bank, the
L/C is called a Documents against Payment L/C (D/P/ L/C). If the
credit stipulates the delivery of documents by the seller against
acceptance and that the payment will be made on the due date, the
L/C is called a usance L/C or D/A L/C.

7.2.1 PARTIES TO A LETTER OF CREDIT

Following are the parties to a letter of credit :

(i) Applicant : The buyer of the goods/services (borrower)

(ii) Opening Bank : The Bank/Branch which lends its name/credit.

(iii) Advising Bank : Opening bank's branch or another bank at

beneficiary's place to whom the Letter of
Credit is sent for onward transmission to the
beneficiary.
(iv) Seller/Beneficiary : The party to whom the credit is addressed
(seller or supplier of the goods/services)
(v) Negotiating Bank : Opening bank's branch or another bank who
negotiates the documents.
(vi) Confirming Bank : The bank adding confirmation to the letter of
credit.

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7.2.2 KINDS OF CREDITS

The different types of letters of credits which banks generally issue are :

(i) Inland L/C : An L/C where all the parties to an L/C are located
within the country.
(ii) Foreign L/C : An L/C where either the opener or the beneficiary is
located outside the country of issue and arising out of
export or import of goods/services out of/into the
country of issue.
(iii) Revocable : A credit that can be cancelled or amended at any time
without the prior knowledge of the beneficiary.
(iv) Irrevocable : It is a definite undertaking of the issuing bank to
honour documents strictly drawn as per terms and
conditions of credit which cannot be amended or
cancelled without the agreement of all the parties to
the credit, in particular the beneficiary.
(v) Confirmed : Where credits carry the confirmation of the
advising bank. It constitutes a definite undertaking of
such confirming bank in addition to that of the opening
bank.
(vi) Transferable : A transferable credit is a credit under which the
beneficiary (first beneficiary) may request the bank
authorised to pay, incur a deferred payment
undertaking, accept or negotiate (the "Transferring
Bank"), or in the case of a freely negotiable credit, the
bank specifically authorised in the credit as
transferring bank, to make the credit available in
whole or in part to beneficiary(ies) second
beneficiary/beneficiaries
(vii) Acceptance : Where the payment is to be made on the maturity
date calculated on/after in terms of the credit.
(viii) Revolving : Which provide that the amount of drawings made
thereunder would be reinstated and made available to
the beneficiary again and again for further drawings
during the currency of credit, upto a certain sum
subject to certain conditions specified therein.

7.2.3 OPERATIONAL ASPECTS OF INLAND LC

(i) For detailed operational guidelines and accounting procedure etc. on

opening and negotiation of documents under LC refer to Book of
Instructions VOLUME - 10 - Chapter - X.
(ii) In case of inland LC in tune with the suggestions given by the Indian
Bank's Association, Bank has prescribed LC application and format for
opening the L/C which is given in Chapter - X - of Book of
Instructions Volume - 10. Pre printed forms are supplied by Central
Stationery and Security Forms Division, Head Office, Baroda.
(iii) All Letters of Credit/amendments advising forms are printed on
sensitised papers and should be treated as Security Forms like

268
 DDs, Cheque Books and all instructions in respect of safekeeping,
record keeping, physical verification etc., as applicable to other
Security forms be followed ‘mutatis mutandis’ in respect of these
forms also.
(iv) Unless the LC forms are pre-printed with the name and address of
the issuing branch, the blank LC forms received by the branches
should be immediately stamped with the name and address of the
branch.
(v) Provisions of Uniform Customs and Practices for Documentary Credits
- ICC Publication No. 500 are also applicable to Inland LCs.
(vi) In the case of inland L/Cs the railway receipts, MTRs of approved
transport company etc, and bill of lading/airway bill in the case of
import LC will constitute shipping documents.
(vii) Goods consigned under LC should be properly insured.
(viii) Branches may stipulate reasonable margin while sanctioning L/C
limits, depending upon past track record, financial strength, and age
of relationship etc. of the party.
(ix) While opening the L/C, branches should ensure that the applicant will
be able to release the goods either from his own sources or to the
debit of his cash-credit account.
(x) Care should be taken to ensure that no finance is allowed against the
stocks received under a usance LC, which is yet outstanding or under
AB. Such goods should however, be charged/hypothecated to the
bank and shown in the periodical stock statements being submitted
by the borrower. However, the value of stocks under LC should be
separately shown by way of footnote, and these stocks should be
excluded for the purpose of calculating advance value/drawing power.
(xi) For the purpose of lending powers DA LC is treated as clean fund
based facility.
(xii) Limits sanctioned under DP basis cannot be converted to DA basis
without the permission of sanctioning authority However, conversion
of DA Limits to DP LC limits can be done subject to guidelines issued
from time to time.
(xiii) In the normal inland LCs, the documents like bill of lading, certificate
of origin etc. may not be required. Also, the need of insurance
policy/certificate may depend on the mode of shipment/ despatch.
However, it should be well remembered that these documents may
be required in the cases of back to back LCs opened to finance export
transactions, transactions favouring 100% export oriented units/high
sea sale etc.

7.2.4 OPENING OF INLAND L/C

(i) Application for opening an inland L/C has to be obtained in prescribed

format which is to be stamped as applicable in the State of the
opening branch. It should be signed by the authorised signatory of
the applicant.
(ii) All instructions in the LC application should be neatly typed out and
should be legible and unambiguous. Onerous clauses should not be
accepted. Nature of documents required under the LC, their content
and details of issuing authority should be clearly specified. Nature of

269
 Drafts (Bills of Exchange) required under the L/C should also be
specified.
(iii) On having satisfied that the application is in order, the commodity to
be purchased is required/traded as per his line of business/activity,
the terms and conditions are complied with, and limit is available,
branch should open the LC by using the prescribed format. It should
be ensured that all details as given in LC application form are
incorporated verbatim in LC.
(iv) Prescribed margin amount is to be recovered and kept under G/L
Margin Deposit on LC, SDR/FDR or by way of earmarking of drawing
power/limit in cash credit account, as per the sanction terms. Where
the margin amount is kept as a short deposit/ fixed deposit, no
SD/FD receipt is to be issued and proper noting of bank's lien should
be made in the respective ledger and Register etc. If margin is kept
in short/fixed deposit, its period should be decided by the opener, not
withstanding validity of LC.
(v) In the case of purchase/import of raw material, it is to be ensured
that :
(a) LC facility sought is to meet the party's genuine need and that the
same has a reasonable bearing on the operations of party.
(b) The raw material imported by a manufacturing unit is essentially
meant for its production only and not for trading purpose, unless
specific sanction of higher authorities is obtained.
(c) Party is not, as far as possible, maintaining unduly high level of
inventory of raw materials in relation to the applicable norms/past
trend.
(d) Where LCs are opened on DA basis, the quantum and period of
credit available on the relative purchases are duly taken into
account for the purpose of assessment of working capital as also
for working out the operating limits as per the quarterly
statements. It is a pre- sale credit facility.
(e) Double financing against goods obtained on credit under DA LCs
and/or goods covered under advance bills is avoided, for which
purpose the value of such goods should be earmarked in the
market value or advance value of stocks, as the case may be.
(f) Before opening LCs for import of raw materials for
processing/converting to finished goods and exporting the same,
it should be ensured that LCs favouring the party should have
sufficient validity period to fulfill his export obligation, after taking
into consideration the lead time involved in importing/procuring
the raw material and process time needed for its conversion and
shipment.
(g) Similarly, while establishing back-to-back LCs, the validity of
inland LCs should be well within the validity period for shipment
under the LC opened by the foreign importer.
(vi) Following accounting entries are to be passed while opening LC :
Credit : G/L Acceptances, guarantees etc. Account outstanding
L/Cs. (Inland Lcs)

Debit : G/L constituents liability for acceptances, guarantees

270
 etc. for outstanding LCs. (Inland Lcs)
(vii) The details of LC opened should be entered in LC register with full
particulars noted like LC no., date beneficiary name and address,
amount, validity period, tenor of LC, advising bank, documents
required, commission charged, margin held etc. Alternatively, the last
copy of the LC advice i.e. LOCKFILE copy, may be used as a register
copy. Care should be taken to record all details as stated above in
such LOCKFILE copy. Since, the LC register is to be maintained for a
longer period and it remains in a continuous use, proper care should
be taken for its binding, preserving etc.
(viii) The contra vouchers are to be passed on a day to day basis.
(ix) The LC should be signed by two authorised officials (having proper
“Power of Attorney” issued by the Bank’s competent authority) of
the bank, who should also append their specimen signature numbers.

(x) The commission charges and margin money is to be recovered

concurrently while opening the LC.
(xi) The commission on inland LC is to be charged as per details given in
Bank's booklet on service charges, whereas the commission on
foreign LC is to be charged as per FEDAI guidelines.
(xii) No concession in commission and interest is to be allowed even if
100% cash margin is available.
(xiii) Complete details of all amendments, extensions, etc. and charges
recovered thereon should be recorded in the LC register.
(xiv) The negotiation of all inland letters of credit are to be restricted to
the opening branch or one of our branches in order to increase
income by way of negotiation charges.
(xv) Opening branch shall not give reimbursement instructions through
our branches in respect of inland letters of credit.

7.2.5 FORWARDING OF LC

(i) The LC should not be directly forwarded to the beneficiary.

(ii) As far as possible, it should be forwarded to the nearest branch of
our bank with a request to advise the LC to the beneficiary. In case
of L/Cs over Rs 1,00,000/- advised through our branch, the L/C
issuing branch should prefix test cypher using ‘B’ Code. The test
cypher should be mentioned only on the covering letter of L/C meant
for advising branch and not on original L/C meant for beneficiary,
this, being confidential. The test cypher should also be prefixed while
advising amendments/ reinstatement of amount of revolving L/C, if
the value of L/C exceeds Rs 1/- Lac, in the covering letter of
communication.
(iii) Letter of Credit should be typed on the pin-point type writer,
wherever available
(iv) The amount of L/C in figure mentioned in L/C should be covered with
Cello Tape.
(v) Each LC must be issued on prescribed form only ( Form No. LC 1A for
Inland L/Cs and LC 1 BR for foreign L/Cs.) No L/C should be issued

271
 on the Letter Head of the Branch/Bank or any paper other than the
sensitized security paper.

(vi) If the beneficiary wants the LC to be advised through his bankers,

the same may be agreed to.
(vii) With effect from 05/07/2001 the negotiation of Inland L/Cs, opened
by our Bank, is allowed with any bank. Therefore negotiation of
Inland Letter of Credit should not be restricted to the opening branch
or one of our branches.
7.2.6 ADVISING BRANCH

On receipt of the LC from the opening branch, the advising branch

should forward the same to the beneficiary after verifying the signatures
of the officers on the L/C. The advising bank shall take reasonable care
to check the apparent authenticity of the Credit which it advises (Article -
7 - UCP 500).
Details of LC so advised, should be entered in the Inward LC Register.

7.2.7 NEGOTIATION OF DOCUMENTS UNDER LC

(i) After despatching the goods the beneficiary would present the
documents to the advising branch/bank for negotiation with a written
request.
(ii) Branches, while negotiating under a Letter of Credit issued by
another branch, should verify the authenticity of the L/C, when
warranted, even by contacting LC issuing branch. While checking
such authenticity, outsiders such as representatives of the
beneficiaries / openers should not be involved at all.
(iii) If it is presented to our branch who has advised the LC, the branch
should scrutinise the documents carefully and ensure that they are
strictly in conformity with the terms of LC. If so, the branch may
negotiate the documents and make the payment to the beneficiary by
debiting the G/L Special Debits Account using "M" Schedule under the
heading "Payment/ negotiation of bills drawn under Inland LC".
(iv) If documents are presented through the beneficiary's bank to
advising branch for further negotiation, the payment will be made to
them by following the same procedure.
(v) The documents so negotiated should be sent to the opening branch
after proper bill stamping and endorsements etc., under registered
AD post on the same day alongwith the "M" Schedule.

7.2.8 RETIREMENT OF DOCUMENTS NEGOTIATED

(i) When the documents under L/C are received at the L/C opening
branch, it should be first acknowledged after ensuring that all
enclosures and original documents said to be enclosed are in tact and
the "M" Schedule is attached.
(ii) The branch should scrutinise the documents within a "Reasonable
Time", carefully to see if there are any discrepancies. If there are no
discrepancies it can be accepted. If yes, the negotiating branch
should be informed by expeditious means quoting the discrepancies

272
 and that the documents are not acceptable and the same are held at
their risk and responsibility.
(iii) If the documents are in order, the branch may debit the amount of
documents to G/L Advance Bills a/c and credit the negotiating branch
through "M" Schedule.
(iv) The details of documents received are to be entered in the LC as well
as in Advance Bill/FIBC Register.
(v) If arrangements are made to retire the documents to the debit of
party's account, the same may be debited and amount credited to
G/L Advance bills a/c immediately on receipt of the bill.
(vi) If no such arrangements are made, the drawee should be intimated
and advised to make arrangements to retire the documents
immediately.
(vii) It is possible that the drawee may refuse to accept the documents
due to some discrepancies. For all such cases reference should be
made to provisions of UCP 500 and matter resolved, within
"Reasonable Time" as defined under UCP 500 .
(viii) At the time of retirement of bills drawn under L/C, the entries
indicated in point 7.2.4 (vi) should be reversed.
(ix) The contra voucher for LC liability should be passed on the date of
opening the LC. The same should be reversed on taking the bill in AB
(for sight bills) or on due date (for usance bills).
(x) The partywise ledger for LC liability is to be maintained and liability
for the LCs opened shall be reversed on taking the bill under
AB/cancellation of LC i.e. on reversal of LC liability.
(xi) The partywise ledger for AB liability is also to be maintained and the
liability to be reversed on retirement of AB.
(xii) The LC and AB balances are to be taken and tallied on a monthly
basis.
(xiii) As defined by the Article 13(b) of UCP 500, the "Reasonable Time" for
the issuing bank, the confirming bank, the nominated bank, the
opening bank, as stated in para marked (ii) and (v) above, shall not
be exceeding seven banking days following the day of receipt of the
documents.

7.2.9 INTEREST ON ADVANCE BILLS

(i) The LC opening branch should recover interest on amount debited to

G/L Advance Bills from the date of negotiation by negotiating branch
till the date of retirement.
(ii) The bill becomes overdue on expiry of 10 days from the date of
taking the bill in AB.
(iii) The interest is to be charged as per the interest rates advised by the
Corporate Office from time to time. (Refer Chapter XII of Book of
Instructions - VOLUME - 10).
(iv) The commission on inland LCs and bills thereunder shall be recovered
as per IBA guidelines. (Chapter - IX - VOLUME - 10)

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7.2.10 MONITORING OF ADVANCE BILLS ACCOUNT :

(i) Normally no balance should remain outstanding in Advance Bills

account as the borrower is under obligation to make proper
arrangements for retiring the sight bills on presentation and usance
bills on due dates. However, due to unforeseen circumstances, the
borrower may take some time to retire the bills. Such delays should
not be a regular feature and in any case it should not be more than
10 days.
(ii) It must be clearly understood that advance bills is a non- sanctioned
fund based facility arising out of a sanctioned non-fund based facility.
As such, it should be ensured that ABs are adjusted promptly.
(iii) The total outstandings under Outstanding L/Cs and ABs should not
exceed the LC limit sanctioned. In case, if generally ABs are not
retired promptly by the party, fresh LCs though may be within the
overall sanctioned limit, should not be opened in a routine way, but
after due examination of all aspects including reason for delayed/
non-retirement of ABs, intention of the party, his liquidity position
and urgency of the material proposed to be acquired under LC.
(iv) Excesses in cash credit a/c should not be granted to adjust ABs.
Similarly no ad-hoc credit limits should be sanctioned for adjusting
Abs.
(v) Advance bills statement should be submitted to Regional Office by
the branches on a monthly basis.

7.2.11 REFUSAL TO ACCEPT DOCUMENTS BY DRAWEE/BORROWER

(i) When the borrower refuses to accept documents due to

discrepancies, the branch should immediately take up the matter with
the negotiating branch within a "Reasonable Time", as defined in
Article 13 of UCP Brochure No. 500. The procedure to be adopted
should be as prescribed in Chapter X of Volume 10. .
(ii) Sometimes, the borrower/drawee may be willing to accept the
documents despite the discrepancies. In such cases, the branch
should obtain a letter in writing from the opener of the LC duly signed
by the authorised signatories and then the documents may be
allowed to be retired. However, the matter must be sorted out and all
formalities should be completed within "Reasonable Time" as
prescribed under UCP.

7.2.12 REVOLVING LCs

(i) Revolving LC is a mechanism by which the importer/buyer can

import/buy goods under the same LC many times by reinstating the
amount of credit available after each retirement of the bill. The above
facility enables the buyer to arrange regular supply of material
without resorting to opening of fresh LC each time.
(ii) While opening Revolving LC, care should be taken to incorporate a
"Total Drawing Clause" and also a "Final Validity Clause" in the LC, if
an annual requirement of a particular goods is Rs. 12/- lacs and a
delivery period is two months, an opener may resort to opening of
Revolving LC for Rs. 2/- lacs, with "Total Drawing Clause" of Rs. 12/-
lacs and "Final Validity Clause" of one year. This may facilitate the

274
 regular supply of goods by blocking his limits only upto Rs. 2/- lacs
and without frequently approaching to the bank for opening of fresh
LCs. Similarly a suitable limit for a single transaction should be
specified in conformity with the volume of business projected.
(iii) Such a limit will be fixed keeping in mind the quantum and value of
such purchases required in a year, level of holding of such stocks and
lead time etc.
(iv) Normally the validity period of such revolving LCs should not exceed
1 year.
(v) Reinstatement of the limits under LC should be allowed only if the
earlier documents have been retired and full amount recovered.
Necessary commission should be charged at the time of each
reinstatement.
(vi) Every time a bill drawn under a revolving LC is retired the original L/C
liability entries should be reversed and when the amount is reinstated
a fresh liability entry for the reinstated amount should be passed.
(vii) The revolving LCs with "Reinstatement Clause" can be opened only
after obtaining specific sanction and approval of draft of the LC from
the Regional Authorities. In the case of revolving LCs "Without
Reinstatement Clause", the draft shall have to be approved by the
Corporate Office.
(viii) Branches are not authorised to open inland revolving DA. LCs without
sanction of higher authorities. In such cases, subject to necessary
sanction from higher authorities, it should be stipulated that the
aggregate amount of outstanding bills and advance bills, if any,
together with the unutilised portion of the LC, do not exceed the
sanctioned LC limit unless the terms of sanction specifically provided
otherwise.

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 APPENDIX - I

DRAFT OF STAMPED COUNTER-INDEMNITY

To be stamped as an Agreement

Bank of Baroda

Dear Sirs,

In consideration of the Bank of Baroda agreeing at my/our request to

execute a guarantee and executing guarantees
favouring___________________________________________________
for/upto a limit of Rs..................
(Rupees...................................................), on our behalf. I/We do
hereby agree and undertake to indemnify and keep indemnified the Bank
of Baroda of, from and against all losses, actions, costs, consequences,
charges, expenses, claims and demands which Bank of Baroda may incur
or sustain by any reason or on account of its agreeing as above or
howsoever in the premises.

This counter-indemnity will extend to any number of extensions of the

guarantee/s referred to herein for which I/we may apply from time to
time and which the bank may agree to grant at my/our request and/or ,
without reference to me/us, at the request of the beneficiary, from time
to time subject to the Bank's absolute right and discretion whether to
extend the said guarantee/s and without casting any obligation on the
Bank for extending the said guarantee/s.

I/We, hereby agree and undertake that this indemnity shall be treated as
continuing security for any number of guarantee/s that the Bank may
have executed/may execute at my/our request and for the extensions
thereof within the aforesaid limit and shall not be considered as
exhausted by reason of any number of guarantee/s so executed and
extension made thereof by the Bank having expired after its /their
validity period/s whether or not brought back by me/us duly
cancelled/discharged and/or whether or not any of them is/are
outstanding.

Further, I/We irrevocably authorize the bank to recover guarantee

commission by debiting my/our account with you at a rate stipulated by
the bank from time to time until the guarantee/s issued/extended by the
Bank is/are finally cancelled and returned to the Bank by the
beneficiary/ies irrespective of the time taken by the beneficiary/ies in
this regard or until the expiry of a period of three years ( 30 years in
case beneficiary is Government/Government Department) from the date
of expiry of the validity period mentioned in the guarantee, whichever is
later.

I/We also agree that I/We shall not insist upon release or margin money
or any other security/ies furnished to and/or held by the Bank in this
regard and irrevocably authorised the Bank to retain the same till the
guarantee/s duly cancelled by the beneficiary/ies is/are returned to the
Bank as mentioned otherwise.
I/We do/shall deposit and keep deposited with you an amount of Rs

276
_________ (Rupees _____________________________) which you
may hold with you as deposit without issuing any deposit receipt and
I/we hereby irrevocably authorise you to appropriate without reference
to me/us from out of the said deposit in case you are called upon to pay
under the liability undertaken by you under the said guarantee/s. This
authority is irrevocable till the said guarantee/s is/are received by you
duly cancelled and the deposit may be refunded me/us only on receipt of
the said guarantee/s duly cancelled by the beneficiaries or at an earlier
date at your discretion or in case there is a surplus after appropriating
the dues.

I/We authorise you to earmark a sum of Rs__________

(Rupees_______ __________________________) in my/our
_________ account with you and we further authorise you to appropriate
from/out of the said amount so earmarked towards any payment made
by you if you are called upon to pay under the said guarantee/s. The
same can be done without any further reference to me/us. This authority
is irrevocable till the said guarantee/s is/are received by you duly
cancelled and you may release the amount so earmarked on receipt of
the guarantee/s duly cancelled by the beneficiaries or at an earlier date
at your discretion.

I/We further irrevocably authorise you to make the payment to the

beneficiary without reference to me/us, at your discretion, to the debit of
my/our _______ account, or any other account/s or appropriate any
other sum/s lying with you as and when the beneficiary/ies make/s
demand on the said guarantee/s issued by you on our behalf.

I/We hereby agree to pay interest at the rate of _________% over the
prime lending rate of the Bank with a minimum of _____% p.a., with
monthly/quarterly/half yearly/yearly rests on overdue/outstanding
amount. I/We also agree to pay an additional interest at the rate of
____% p.a., with monthly/quarterly/half yearly/yearly rests over and
above the aforesaid rate of interest on outstanding amount (i.e., amount
inclusive of interest) beyond ________ months till entire amount is
actually paid.

That if for the reason, the Bank is prevented by any action initiated by
me/us from making payment to the beneficiary/ies of the guaranteed
amount, I/we will also be liable to pay to the Bank, apart from other
amounts payable to the Bank, guarantee commission for the period of
such delay, by such action, till payment or discharge of the guarantee.

That, in the likelihood of beneficiary refunding/re paying any balance/

excess money directly to me/us out of the payment/s received from you
on their invocation of the said guarantee(s) subsequent to their final
quantification of loss/damages incurred/suffered by them, I/We agreeing
to recompense/repay you immediately such money/dues repaid/refunded
to me/us and in default thereof, you are entitled to charge penal interest
at the rate of ____ % p.a.,over and above the normal and additional
interest for such amount received by me/us and not paid to you and/or a
right to claim damages/compensation from me/us against any such
action/ appropriation/misuse.

We understand that it is on the faith of this Undertaking-cum-indemnity

that you have agreed to execute/renew the guarantee/s as aforesaid.

277
Yours faithfully, *.*.*

APPENDIX II

DRAFT UNDERTAKING

(to be stamped as an Agreement)

To,
Bank of Baroda,

Dear Sirs,

Re: Guarantee Facilities sanctioned by the Bank to us.

In consideration of your Bank sanctioning guarantee facilities upto the

limit of RS_________ and issuing bank guarantee at my/our request
favouring M/s__________________________ , I/We do hereby agree,
declare and undertake as follows:

I/We irrevocably authorize the bank to recover guarantee commission by

debiting my/our account with you at a rate stipulated by the bank from
time to time until the guarantee/s issued/extended by the Bank is/are
finally cancelled and returned to the Bank by the beneficiary/ies
irrespective of the time taken by the beneficiary/ies in this regard or until
the expiry of a period of three years ( 30 years in case beneficiary is
Government/Government Department) from the date of expiry of the
validity period mentioned in the guarantee, whichever is later.

I/We also agree that I/We shall not insist upon release or margin money
or any other security/ies furnished to and/or held by the Bank in this
regard and irrevocably authorised the Bank to retain the same till the
guarantee/s duly cancelled by the beneficiary/ies is/are returned to the
Bank as mentioned otherwise.

I/We lastly agree and declare that it is on the faith of this Undertaking
that you have agreed to execute/renew the guarantee/s as request for
by me/us.

Dated this ___________ day of _____________

Yours faithfully,

278
 APPENDIX III

DRAFT GUARANTEE BOND

(Proforma of Security Deposit exemption Guarantee)

In consideration of _________________ (“the beneficiary”) having

agreed to exempt _________ ( hereinafter called “ the said
Contractor(s)” ) from the demand, under the terms and conditions of an
Agreement dated__________ made between ___________________
and __________ ________________________ for _________
(hereinafter called ” the said Agreement”) , of security deposit for the
due fulfilment by the said Contractor(s) of the terms and conditions in
the said Agreement, on production of a bank guarantee for
Rs___________ ( Rupees _____________________only) , we Bank of
Baroda (hereinafter referred to as “ the Bank”) do hereby undertake to
pay to the beneficiary an amount not exceeding Rs ______________
against any loss or damage caused to or suffered or would be caused or
suffered by the beneficiary by reason of a breach by the said
Contractor(s) of any of the terms or conditions contained in the said
Agreement.

2. We, Bank of Baroda, do hereby undertake to pay the amounts due

and payable under this guarantee without any demur, merely on a
demand from the beneficiary stating that the amount claimed is due by
way of loss or damage caused to or would be caused to or suffered by
the beneficiary by reason of any breach by the said Contractor(s) of any
of the terms or conditions contained in the said Agreement or by reason
of the Contractor’s (s’) failure to perform the said Agreement. Any such
demand on the Bank shall be conclusive as regards the amount due and
payable by the Bank under this guarantee. However, our liability under
this guarantee shall be restricted to an amount not exceeding
Rs.______________ (Rupees __________________________________
only).

3. We, Bank of Baroda, further agree that the guarantee herein

contained shall remain in full force and except during the period that
would be taken for the performance of the said Agreement and that it
shall continue to be enforceable till all the dues of the beneficiary under
or by virtue of the said Agreement have been fully paid and its claim
satisfied or discharged or till _____________________ beneficiary
_____________________ certifies that the terms and conditions of the
said Agreement have been fully and properly carried out by the said
Contractor(s) and accordingly discharges the guarantee.

4. This contract of Bank Guarantee shall remain in operation for a period

of ____________ (period for which guarantee is required to be
mentioned here) only after the date on which this contract is signed by
the parties. The demand if any for payment under the terms of this
contract shall be made by the beneficiary within the said period of
____________ only. The beneficiary may enforce the right pursuant to
such demand in any Court or Tribunal in accordance with Law.

5. We, Bank of Baroda, further agree with the beneficiary that the
beneficiary shall have the fullest liberty without our consent and without
accepting in any manner our obligation hereunder to vary any of the
terms and conditions of the said Agreement or to extend time of
performance by the said Contractor(s) from time to time or to postpone

279
for any time or from time to any of the power exercisable by the
beneficiary against the said Contractor(s) and to forbear or enforce any
of the terms and conditions relating to the said agreement and we shall
not be relieved from our liability by reason of any such variation or
extension being granted to the said Contractor(s) or for any forbearance,
act or omission on the part of beneficiary or any indulgence by the
beneficiary to the said Contractor(s) or by any such matter or thing
whatsoever which under the Law relating to sureties which would but for
this provision have affect of so relieving us.

6. The beneficiary shall, as far as possible, assess and quantify the actual
loss/damage suffered before invocation and invoke the guarantee
accordingly. If it is/was not possible for the beneficiary to furnish the
actual loss/damage suffered at the time of invocation, then, the Bank
shall pay the amount in terms of invocation by the beneficiary. The
beneficiary shall, nevertheless, at least after receipt of the guarantee
money from the Bank, assess and finally quantify the actual loss/damage
and while settling the accounts of the contractor/supplier viz.,
______________ (mention constituent’s name) shall pay the residual
dues payable to the contractor/supplier (all relating to the contract in
respect of which the guarantee has been issued and atleast to the extent
of payment/s made by the Bank) to/through the Bank and shall not pay
the dues, in any event, directly to the contractor/supplier.(***)
7. We, Bank of Baroda, lastly undertake not to revoke this guarantee
during its currency except with the previous consent of the beneficiary in
writing.

8. Notwithstanding any thing to the contrary contained herein :-

(1) Our liability under this Bank Guarantee shall not exceed
Rs______ ________( Rupees
_______________________ only)
(2) This Bank Guarantee shall be valid upto _____________
and,
(3) We are liable to pay the guarantee amount or any part
thereof under this Bank Guarantee only and
only if you serve upon us a written claim
or demand on or before ( the date of expiry of
Guarantee).
Dated the ________ day of ________ 20___.

For Bank of Baroda

Note: In the event of Bank Guarantee being offered relates to a contract

other than for Security Deposit, the recital in para 1 of the draft
hereinabove will have to be suitably modified and adopted for such
guarantee, in consultation with Bank’s advocate/Legal Department.

*** If beneficiary is not agreeable for inclusion of clause no 6, then

branches may act as per guidelines given in 7.1.5 (xix) of this Chapter.

280
APPENDIX-IV

MODEL FORM OF BANK GUARANTEE BOND

1. In consideration of the President of India (hereinafter called "the

Government") having agreed to exempt ............ (hereinafter called
"the said Contractor(s)") from the demand, under the terms and
conditions of an Agreement dated .......... made between ........ and
........... [hereinafter called "the said Agreement"), of security deposit
for the due fulfilment by the said Contractor(s)] of the terms and
conditions contained in the said Agreement, on production of a bank
guarantee for Rs............ (Rupees .................. only), We, Bank of
Baroda (hereinafter referred to as "the Bank") at the request of
............[contractor(s)] do hereby undertake to pay to the
Government an amount not exceeding Rs............ against any loss or
damage caused to or suffered or would be caused to or suffered by
the Government by reason of any breach by the said contractor(s) of
any of the terms or conditions contained in the said Agreement.
2. We, Bank of Baroda, do hereby undertake to pay the amounts due
and payable under this guarantee without any demur, merely on a
demand from the Government stating that the amount claimed is due
by way of loss or damage caused to or would be caused to or
suffered by the Government by reason of breach by the said
contractor(s) of any of the terms and conditions contained in the said
Agreement or by reason of the contractor(s) failure to perform the
said Agreement. Any such demand made on the bank shall be
conclusive as regards the amount due and payable by the bank under
the guarantee. However, our liability under guarantee shall be
restricted to any amount not exceeding Rs..........
3. We undertake to pay to the Government any money so demanded
notwithstanding any dispute or disputes raised by the contractor(s)/
supplier(s) in any suit or proceeding pending before any Court or
Tribunal relating thereto our liability under this present being
absolute and unequivocal.
The payments so made by us under this bond shall be a valid
discharge of our liability for payment thereunder and the
contractor(s)/ supplier(s) shall have no claim against us for making
such payment.
4. We, Bank of Baroda further agree that the guarantee herein
contained shall remain in full force and effect during the period that
would be taken for the performance of the said Agreement and that it
shall continue to be enforceable till all the dues of the Government
under or by virtue of the said Agreement have been fully paid and its
claims satisfied or discharged or till ..........
Office/Department/Ministry of ................ certifies that the terms
and conditions of the said Agreement have been fully and properly
carried out by the said contractor(s) and accordingly discharges this
guarantee. Unless a demand or claim under this guarantee is made
on us in writing on or before the ................... we shall be
discharged from all liability under this guarantee thereafter.
5. We, Bank of Baroda further agree with the Government that the
Government shall have the fullest liberty without our consent and
without affecting in any manner our obligations hereunder to vary
any of the terms and conditions of the said Agreement or to extend

281
 time of performance by the said contractor(s) from time to time or to
postpone for any time or from time to time any of the powers
exercisable by the Government against the said Contractor(s) and to
forbear or enforce any of the terms and conditions relating to the said
agreement and we shall not be relieved from our liability by reason of
any such variation, or extension being granted to the said
contractor(s) or for any forbearance, act or omission on the part of
the Government or any indulgence by the Government to the said
contractor(s) by any such matter or thing whatsoever which under
the law relating to sureties would, but for this provision, have effect
of so relieving us.
6. This guarantee will not be discharged due to the change in the
constitution of the Bank or the contractor(s)/supplier(s).
7. The beneficiary shall, as far as possible, assess and quantify the
actual loss/damage suffered before invocation and invoke the
guarantee accordingly. If it is/was not possible for the beneficiary to
furnish the actual loss/damage suffered at the time of invocation,
then, the Bank shall pay the amount in terms of invocation by the
beneficiary. The beneficiary shall, nevertheless, at least after receipt
of the guarantee money from the Bank, assess and finally quantify
the actual loss/damage and while settling the accounts of the
contractor/supplier viz., ______________ (mention constituent’s
name) shall pay the residual dues payable to the contractor/supplier
(all relating to the contract in respect of which the guarantee has
been issued and atleast to the extent of payment/s made by the
Bank) to/through the Bank and shall not pay the dues, in any event,
directly to the contractor/supplier .(***)
8. We, Bank of Baroda lastly undertake not to revoke this guarantee
during its currency except with the previous consent of the
Government in writing.

Dated the ............ day of .........20___.

For Bank of Baroda,

Jt. Manager Branch Manager

Note:*** If beneficiary is not agreeable for inclusion of clause no 7, then

branches may act as per guidelines given in 7.1.5 (xix) of this chapter.

*.*.*

282
 APPENDIX - V

CONFIRMING CANCELLATION OF GUARANTEE

REGISTERED A.D.

____________________
____________________
____________________

Dear Sir/s,

Re. : Cancellation of Bank Guarantee No.________________

dated ______ for Rs.________________ favouring
_____________

With reference to your letter no.__________ dated ______________

confirming the cancellation of the captioned guarantee which expired on
___________ we hereby advise you that we have cancelled the said
guarantee in our books and hence no claim against the said guarantee
shall be entertained, which please note.

Yours faithfully,

*.*.*

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 APPENDIX - VI

NOTICE FOR CANCELLATION OF GUARANTEE

To the Government Department Concerned :

Re : Cancellation of Guarantee No............ dated ........... issued by

us on behalf of M/s ...................... in your favour

With reference to the above mentioned guarantee issued by us in your

favour, we find that no claim has been made within the stipulated period
and we are now informed by our customers that they have fulfilled their
part of the contract and that the said guarantee has come to an end. In
the circumstances, we expected to get back the guarantee duly
cancelled.

However, we observe that you have so far not sent us the guarantee
duly cancelled. Under the circumstances, we have to request you to
confirm to us that the said guarantee stands cancelled at your earliest.

In any case, if we do not hear from you within a period of fortnight, we

shall treat the matter as closed which please note.

Yours faithfully,

*.*.*

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 APPENDIX - VII

REGISTER OF DEFERRED PAYMENT GUARANTEES

Paid-up Capital Rs.________________

Names of Partners/Directors.________
Sr. No. of Guarantee :
Name of Client :
Full Postal Address :
Tel. No. :
Tel. Address :
Date of Guarantee : Nature of Guarantee :
In favour of :
Amount of Guarantee :
Principal Amount Rs. :
Interest Rs. :
Total Rs. :
Purpose: Date of passing liability entries: Date of
expiry :
B.R. No. Dated :

Repayment Principal Due Paid Interest Due Paid Date of

of installment Rs. on on Rs. on on Payment

I Instalment
II Instalment

SECURITIES

Particulars of Changes, if any Receipt of Remarks

Security Annual B/S

COMMISSION ON GUARANTEE
Rate of Commission

Due Date Amount Paid on Remarks

*.*.*

285
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER VIII

INTEREST RATE STRUCTURE AND SERVICE CHARGES

SR NO SUBJECT
PAGE NO
8.1 PRIME LENDING RATE (PLR) 288
8.2 CREDIT RATING SYSTEM (OLD) 288
8.3 NEW CREDIT RATING SYSTEM 295
8.4 INTEREST RATE STRUCTURE 296
8.5 ADDITIONAL/PENAL INTEREST 302
8.6 SERVICE CHARGES ON BORROWAL ACCOUNTS 305

LIST OF APPENDICES

APPENDIX NO SUBJECT
PAGE NO
I WORKSHEET FOR COMPUTING YIELD ON 308
CREDIT FACILITIES EXTENDED

286
 INTEREST RATE, STRUCTURE AND SERVICE CHARGES

8.1 PRIME LENDING RATE (PLR) :

(i) Background :

Traditionally rates of interest on advances were regulated by Reserve

Bank of India. It used to prescribe the rates to be charged by banks on
various types of credit facilities depending upon the sector and size of
the limits. ‘Bank Rate’ - rate at which Reserve Bank of India discounts
first class bills of exchange from commercial banks - was the reference
rate or benchmark. Banks used to quote the rates either as specific rate
or with reference to bank rate e.g. 4% Over Bank Rate (OBR).

(ii) Deregulation :

With onset of economic liberalisation and increasing deregulation in

banking sector, Reserve Bank of India gave freedom to banks to decide
their own rates of interest for credit limits over Rs. 2 lacs. However,
these rates should have a reference to bank’s own ‘Prime Lending Rate’.

(iii) Prime lending rate :

Prime lending rate (PLR) is a rate at which a bank will lend to its prime
borrowers. This will depend upon the bank’s resource position, its cost of
deposit and resources, minimum spread it expects from lending
operations to ensure profitability and also market forces of competition
and demand/supply position of funds.

Accordingly, each bank decides its PLR which is required to be approved

by its Board of Directors. The PLR is flexible and can change with
changing market conditions.

NOTE: As per guidelines of Reserve Bank of India, Bank has introduced the
concept of Benchmark PLR (BPLR), with effect from 01-01-2004.

8.2 CREDIT RATING SYSTEM (OLD):

The banks are allowed to charge its own rates of interest to the
borrowers with limits over Rs.2 lacs (except in certain specified
categories listed later) with reference to its PLR. However, the bank will
not lend to all the borrowers at PLR. It will further add percentage points
over PLR based on the strength, discipline and value of the borrower
account. To decide this, credit rating system is devised which classifies
the borrowers into 5 categories viz. A+, A, B+ B and C based on credit
scores The rate of interest to be charged on the accounts with the limits
of and above Rs 25 lacs will depend upon the category in which borrower
is classified.
For the accounts with funded exposure over Rs 2 lacs but less than Rs 25
lacs, rate of interest to be charged has been delinked from Credit Rating.
These accounts shall, however, continue to be credit rated as per the
guidelines, prevailing from time to time, for credit risk perception.
To make the credit rating customer focused, various parameters are
considered. The system of computing credit rating is known as ‘Credit
Rating System’ (CRS).

287
(i) Effective date :

The old Credit Rating System as detailed hereunder is effective from

01.01.1997, Bank has recently introduced New Credit Rating System, the
details of which are given later.

(ii) Old Credit Rating System :

The system will have aggregate maximum score of 100 on the following
overall parameters :

Particulars Mark
1 Conduct of the account 45
2 Financial Parameters 25
3 Performance of borrower 25
4 Adequacy of collateral security 05

TOTAL MARKS 100

I. Conduct of the account : (Total Marks 45)

(A) Repayment obligations : (Marks 15)

(To include both interest and installments)
Score
1. Timely repayment (within -7- days from due date) 15
2. Repaid within one month from due date 10
3. Repaid within one quarter from due date 05
4. Repaid within two quarters from due date 00
5. Repaid beyond two quarters -10

(B) Irregularities in the conduct of the Account : (Total Marks

10)
NO YES
1. Cheque return (for financial reasons) 2 0
2. Excess drawings 2 0
3. BP/BD returns (exceeding 5% of total number
of bills purchased/discounted) 2 0
4. Non-retirement of bills under L/C (Beyond 10 days) 2
0
5. Guarantee invocation 2 0

(C) Compliance of terms & conditions : (Total Marks 5)

(This includes compliance of all terms & conditions
including creation of mortgage, second
charge and others as stipulated in the sanction).

1. Compliance at the time of rating exercise 5

2. Partial compliance/non-compliance 0

(D) Submission of control statements : (Total Marks 10)

QIS, Stock/BookDebt (S/BD) Statements
QIS S/BD
1. Timely submission throughout the rating period 5 5
2. Delayed/irregular submission 0 0

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3. Non-submission -5 -5

(E) Renewal date : (Total Marks 5)

1. Submission of financial statement/CMA data -3-

months before due date of review 5
2. Submission before one month of due date 2
3. Submission between one month and due date 0
4. Delayed submission beyond due date/non-submission -5

II Financial parameters : (Total

Marks 25)

(A) Current ratio : (Total Marks 10)

1. 1.33 and above (For sugar industry 1:1

as allowed by RBI) 10
2. 1.32 - 1.18 (For sugar industry 0.99 - 0.90) 5
3. < 1.18 (For sugar industry below 0.90) 0

(B) Debt-equity ratio : (Total Marks 10)

1. 2.00 and below 10

2. > 2 upto 3 8
3. > 3 upto 4 5
4. > 4 upto 6 2
5. Above 6 0

(C) Debt service coverage ratio (DSCR): (Total Marks 5)

This parameter is applicable only where our Bank

has term loan / DPG commitment.
(Average DSCR taking into account all the term
commitments including lease and hire-purchase)

1. If 2 and above 5
2. 1.80 to 1.99 4
3. 1.60 to 1.79 3
4. 1.50 to 1.59 2
5. < 1.50 0

III Performance of the borrower : (Total Marks 25)

(A) Profit after tax to net sales : (Total Marks 10)

(As compared to the estimates/accepted levels)
1. If achieved 10
2. Upto 10% negative variance 6
3. 11% to 15% negative variance 3
4. > 15% negative variance 0

(B) Projected Inven/Receivables holding levels :(Total Marks 10)

Within 20% Beyond 20%
of Norms/ of Norms/
Accepted Accepted
Levels Levels
---------- ----------
1. Raw Materials - Imported 2 0

289
2. Raw materials - indigenous 2 0
3. Stock-in-process 2 0
4. Finished goods 2 0
5. Receivables 2 0

(C) Variance in net sales : (Total Marks 5)

1. Within 10% below target/accepted level 5

2. 10% to 20% below target/accepted level 2
3. Below 20% of target/accepted level 0

(D) Adequacy of collateral security : (Total Marks 5)

(Adequacy of collateral security to cover the
entire advance including non-fund based advances).
1. If sufficient to cover 100% of outstanding/limit 5
2. More than 50% 3
3. Less than 50% (but presence of collaterals) 1
4. No collateral 0

IV Negative scoring :
(Applicable to borrowers with credit limits of above Rs. 1/- crore).

(A) Decline in current ratio as compared to previous

period or accepted level whichever is lower :
(even if it is over the benchmark level of 1.33)
1. If decline is upto 0.10 -1
2. If decline is over 0.10 -2

(B) Increase in debt-equity ratio as compared to

previous period :
1. If ratio goes up upto 0.20 -1
2. If ratio goes up more than 0.20 -2

(C) Group accounts NPA :

(Position of groups/associate concerns enjoying
credit facilities from our Bank)
1. If any of them is sub-standard -2
2. If any of them is doubtful/loss -4

(D) Routing of non-fund based business :

(Where borrower is enjoying non-fund based
facility from the banking system).
1. Where pro-rata share of non-fund No
based business (in case of con- Negative
sortium or multiple banking Score
account) with 5% variance and
full share in case of sole
banking account with 5% variance
is routed through our Bank

2. If not given as above -5

(E) Merchant banking business : (Where applicable)

1. If our Bank has been offered lead No
Managership/co-managership Negative
Score
2. If our Bank is a leader in the

290
 consortium but has not been offered
lead managership/co-managership -5

3. If our Bank is not a leader but is

a member in the consortium and still
our Bank has not been offered even
the co-managership/collection business -2

(F) Diversion of funds :

[Investment of funds outside the business (except
the investment required to be made under statutory
obligations) without obtaining specific permission
even where current ratio and debt-equity ratios
are as per norms] :

1. Upto 5% of the tangible net worth of the borrower -2

2. Between 5% and 10% of the tangible
net worth of the borrower -4
3. Over 10% of the tangible net worth of the borrower -5

V Bonus marks :
(Applicable to borrowers with credit limits of above Rs. 1/- crore)

1. If ISO Certification/Any other International Certification has

been obtained +2
2. If the unit is export oriented
i.e. export turnover above 50% +2
3. Project completed without time/
cost overrun +2
4. If any National Level Award like Export Performance
Award, Best Managed Company Award for innovations
made, import substitutions etc. in preceeding year +2

NOTES :
1. Wherever, any parameter is not applicable to any borrowal account,
no score is to be awarded against such parameter. The aggregate
score in such cases should be divided by the total applicable marks
and then should be grossed to 100.
2. Credit Rating exercise is to be carried out in all the accounts,
including export credit accounts, falling under Standard Category and
Sub-standard Accounts where interest application has not ceased.
However, for export credit facilities specific interest rates as per
RBI/Bank’s guidelines are to be charged/levied.
3. Consortium accounts : In the case of consortium accounts, the
following procedure is to be followed :
i. In accounts where our Bank is the leader of consortium, we
should continue to work out the credit rating of the account as
per our Bank’s guidelines.
ii. In case of accounts where our Bank is the leader or not the
leader, we should charge interest rate as per our credit rating
only.
iii. Wherever any deviation is required to be made in what is stated
in (ii) above, the decision thereof is to be taken by the following

291
 sanctioning authorities taking into account the value of account
and other business considerations :
a. If facilities sanctioned by Regional Managers /and Branches,
competent authority would be Zonal Manager.
b. If facilities are sanctioned by Zonal Manager and above, the
competent authority will be Executive Director/Chairman &
Managing Director.
4. In the case of all new accounts, initially `A’ rating is to be given and
interest applicable to this category should be charged.
5. In respect of export credit where rate of interest are specified by RBI,
the existing guidelines will continue.
6. All fresh Term Loans/Demand Loans for fixed assets over Rs. 1/-
crore will attract 1% higher rate than the rate chargeable on Working
Capital facilities. This is done keeping in view the interest rate
structure of the Financial Institutions which is markedly higher than
that of the Banks. This revision in Term Loan/Demand Loan rates will
be applicable to Term Loans/Demand Loans to be sanctioned
henceforth. Further, where our Bank’s exposure is restricted to only
Term Loan/Demand Loan, the rate to be applied in such cases will be
2.0% higher than the rate which would have been applicable to
working capital facility for such a borrower. However, the rate of
interest stipulated for such facility should not exceed the maximum
band over PLR of the Bank. (At present maximum band is 3%).
7. Further, Front-end Fee @ 1.05% is to be levied on all Term Loans,
Demand Loans for fixed assets and Deferred Payment Guarantees
over Rs. 1/- crore in line with the practices followed by the Financial
Institutions and some Banks.
Wherever any deviation is required to be made in what is stated in
-6- and -7- above, the decision thereof is to be taken by the following
sanctioning authorities taking into account the value of account and
other business considerations :
i. If facilities sanctioned by Regional Managers/and Branches,
competent authority would be Zonal Manager.
ii. If facilities are sanctioned by Zonal Manager and above, the
competent authority will be Executive Director/Chairman &
Managing Director.
8. Other clarifications :
In respect of the following advances, interest should be charged as
advised by the Bank from time to time. The rates are not linked to
the credit rating.
i. Advances against pledge of shares and debentures and bonds.
ii. Loans for durable consumer goods and other non priority personal
loans.
iii. Advances for construction activities.
iv. Advances to staff members.
v. Advances against gold bonds.
vi. Housing loan.
vii. DRI Advances.
viii. Loan against National Savings Certificate.
ix. Loan against Bank’s own deposits.
x. All retail loans
xi. Other category of advances as advised from time to time

292
Note: Rating System for retail loans are discussed in Book of
Instructions Volume no 16.

293
(iii) RATING PATTERN :

Rating pattern of the accounts has also been revised as under :

---------------------------------------------------------------------------------
Revised Rating Pattern
---------------------------------------------------------------------------------
Aggregate Scores Rating
---------------------------------------------------------------------------------
91 - 100 A+
81 - 90 A
71 - 80 B+
56 - 70 B
55 and below* C
---------------------------------------------------------------------------------
(*) For such accounts , our exposure should not be increased in these
accounts. If at all any increase is to be considered, then the
proposals may be referred to next higher authorities. This is
applicable upto the level of General Manager.

(iv) PERIODICITY OF THE RATING EXERCISE

1. Existing rating exercise for accounts with limits above Rs. 5/- crores
on half-yearly basis and lower limits on annual basis is to be
continued.
2. The rating exercise is not to be linked with the review of the account
and it is to be carried out in specified fixed periodicity (half
yearly/annual) based on accounting year of the borrower.
Assuming that the financial year end of a borrower is March, the date of
effect of the interest rate arrived at based on credit rating will be 1st
October, where the exercise is annual. However, the same will be 1st
October and 1st April, where the exercise is half-yearly.

Where the financial year end is other than March, the periodicity of rating
exercise and the date of effect of the revised interest rate will get shifted
suitably, keeping the time gap constant.

(v) COMPUTATION OF YIELD

Keeping in view the constraints faced by the branches in computing the

yield of borrowal accounts as per the existing yield sheet as also the
need to arrive at a realistic yield position, the following modifications are
suggested :

1. Separate computation of yield on fund based and non-fund based

facilities is to be reported.
2. The penal interest in each facility is required to be reported as a
means of knowing the conduct of the account.
3. Net notional earnings on deposits are to be included as at present in
the yield computation.
4. The earnings /concessions on other services, share of foreign
exchange business, etc. are called for as additional information,
forming part of the yield sheet.
5. The yield for the previous -2- rating periods is also required to be

294
 furnished in the yield sheet. Format for computation of yield sheet is
as per APPENDIX - I.
“Minimum Expected Yield “: For each Rating Category, the minimum
expected yield should be 1.00% over the minimum chargeable rate in
the respective category.

If the actual yield is equal to or in excess of the minimum expected yield,

the lowest rate within the relevant band will be charged to the borrowal
account. If the actual yield is less than the minimum expected yield, the
borrower will be charged the highest rate within the band shown above.

As per the revised system, PLR will be quoted to only those borrowers,
whose credit rating is A+ and actual yield from whose account is equal to
the minimum expected yield in A+ category
The discretion for quoting any concession in rate of interest to any type
of borrower will vest with a competent authority as under :

i. If facilities sanctioned by Regional Managers and Branches,

competent authority would be Zonal Manager.
ii. If facilities are sanctioned by Zonal Manager and above, the
competent authority will be Executive Director/Chairman & Managing
Director.
(vi) OTHER RELATED MATTERS

The credit rating and yield computation made by the branch are to be
verified by the Concurrent Auditors/Inspecting Officers especially in all
large borrowal accounts with exposure of above Rs. 1/- crore.

8.3 NEW CREDIT RATING SYSTEM

(i) Rating Models : There are -2- rating models under the new credit
rating system

1. Comprehensive Credit Rating Model is applicable to C&I and SSI

borrowal accounts enjoying credit facilities (both fund based +
non-fund based) over Rs.10 crores except those borrowers
engaged in Trading Activities.

2. The Smaller Credit Rating Model is applicable to C&I and SSI borrowal
accounts enjoying credit facilities (both fund based and non-fund
based) of Rs.25 lacs upto Rs.10 crores including borrower engaged in
Trading Activities.
The Comprehensive and Smaller rating models have been tested and are
under implementation at CBB/IFB branches from 01-11-2002. These
models are also to be implemented at all other branches with effect from
01-01-2004.

The detail guidelines regarding these credit rating models have been
circulated to the branches vide circular no. CO:BR:93/232 dated
10-10-2001 and subsequently in the form of Booklet on “ New Credit
Rating Model” under the cover of circular no. BCC:BR:96/20 dated
16-01-2004. Branches are advised to adhere to the guidelines as
suggested in the booklet and as amended by the Bank from time to time.

295
 (ii) Rating Pattern
Scale of Score Grade
AAA 85-100
AA 75-84
A 70-74
BBB 65-69
BB 60-64
B 50-59
C 35-49
D 0-34

(iii) Periodicity of the Rating Exercise:

1. Existing rating exercise for accounts with limits above Rs. 5/- crores
on half-yearly basis and lower limits on annual basis is to be
continued.
2. The rating exercise is not to be linked with the review of the account
and it is to be carried out in specified fixed periodicity (half
yearly/annual) based on accounting year of the borrower.
Assuming that the financial year end of a borrower is March, the date of
effect of the interest rate arrived at based on credit rating will be 1st
October, where the exercise is annual. The same will be 1st October and
1st April, where the exercise is half-yearly.
Where the financial year end is other than March, the periodicity of rating
exercise and the date of effect of the revised interest rate will get shifted
suitably, keeping the time gap constant.
However, in instances where full financials are not available for half
yearly rating, it is proposed to give effect on the key ratios, figures based
on the unaudited half yearly financials, taking into account the other
developments in the company/ environment affecting the company, so
as to arrive at a meaningful half yearly rating.

8.4 INTEREST RATE STRUCTURE

Till February 2001, Bank was having the Single Prime Lending Rate.
However as per guidelines issued by Reserve Bank of India banks have
been permitted to offer different PLR for different maturities, provided
transparency and uniformity are maintained, the Board of Directors has
approved the introduction of tenor based PLR (prime lending rate)
structure with effect from 01-03-2001.
The tenor based Prime Lending Rate structure with effect from
01-06-2003 is as under.
Short Term Prime Lending Rate-I Maturity up to 180 days @ 10.00%
(BoBSTPLR-I) p.a.##

Short Term Prime Lending Maturity more than 180 @ 10.75%

Rate-II (BoBSTPLR-II) days but up to 1 year p.a.##

## The BoBSTPLRs will be more market oriented and, hence, subject to

more frequent changes.

Term Prime Lending Rate Maturity more than 1 @ 11.50%

(BoBTPLR) year p.a

296
Based on the above, the new PLRs are as under

BoBSTPLR /
BoBTPLR
No. NATURE OF CREDIT FACILITY
@ per cent
per annum
1) All advances / loans up to Rs 25,000/- \
A) Having a contractual maturity up to 180 days; 10.00
B) Having a contractual maturity more than 180
days but up to 1 year; 10.75
C) Having a contractual maturity more than 1 year.
11.50
\ Excluding those mentioned in the "General Guidelines" No. 2.3.1
TO 2.3.5 hereunder.

2) All advances / loans more than Rs 25,000/- but up

to Rs 2.00 lac \ :-
A) Having a contractual maturity up to 180 days; 10.00
B) Having a contractual maturity more than 180
days but up to 1 year; 10.75
C) Having a contractual maturity more than 1 year.
11.50
\ Excluding those mentioned in the "General Guidelines" No. 2.3.1
TO 2.3.5 hereunder.

No. NATURE OF CREDIT FACILITY BoBSTPLR /

BoBTPLR

@ per cent
per annum
3) All fund based Working Capital facilities (over Rs
2.00 lac)* such as, Cash Credit, Overdraft, Working 10.75 $
Capital Demand Loan under Loan Delivery System of
R.B.I.
* Excluding Export Credit facilities for which interest
rates shall be applicable as per extant guidelines.
$ Vide "Explanations" point no I

NOTE: It may carefully be noted that for the Working Capital

Demand Loans under Loan Delivery System of Reserve Bank
of India, the reference PLR will be 10.75% irrespective of the
fact whether the period of WCDL is up to 1 year or a lesser
period.

4) Purchase / Discounting of Bills :-

1. Customers with regular / ad-hoc sanctioned Bills
Purchase / Bills Discounted Limit:-
A) When Bills are NOT under L/C of our bank or
other prime bank:

a) when contractual maturity is up to 180 10.00 $

days;
b) when contractual maturity is more 10.75 $
than 180 days but up to 1 year;
c) when contractual maturity is more 11.50 $
than 1 year.

297
 B) When Bills are under L/C of our bank or other
prime bank:-

a) when contractual maturity is up to 180 10.00 ##

days;
b) when contractual maturity is more 10.75 ##
than 180 days but up to 1 year;
c) when contractual maturity is more 11.50 ##
than 1 year.

2. When customers do not have any sanctioned B.P.

/ B.D. limits, but, requesting for Bills Purchase /
Bills Discounting under the L/C of our bank or
other prime bank: 10.00 ##
A) when contractual maturity is up to 180 days;
B) when contractual maturity is more than 180 10.75 ##
days but up to 1 year;
C) when contractual maturity is more than 1 11.50 ##
year

##These interest rates will be offered irrespective of the borrower’s

credit rating and notwithstanding the fact that whether the
borrower is our bank’s existing borrower or a new borrower.
However, full care is to be exercised to ensure there is no
discrepancy in the L/C and in the Bills and usual banking norms /
guidelines are complied with .
$ Vide Explanations on next page.

5) All Short-term Loans, viz., :-

A) Short-term Loans with a contracted maturity
up to 180 days ; 10.00 $
B) Short-term Loans with a contracted maturity
more than 180 days but up to 1 year;
$ Vide "Explanations" on next page. 10.75 $
(For detailed guidelines on Short Term Loans, refer to
Chapter XI and XII of Book of Instructions Volume no
5)
6) All other Loans / advances, (excluding those 11.50 $
mentioned in the "General Guidelines" No. 2.3.1 TO
2.3.5 hereunder)
$ Vide "Explanations" hereunder

298
 EXPLANATIONS pertaining to the $ mark (given for the above said
points `3', `4', `5' & `6')

I. These PLRs are reference PLRs, i.e., these PLRs may be offered
only to `A+’ rated borrowers subject to observance of "Minimum
Expected Yield" as mentioned hereunder.

For borrowers with lower credit rating, these PLRs should be

appropriately marked up (i.e., increased) according to the interest
band relating to the credit rating of the borrower in pursuance of
our extant guidelines on credit rating.

In other words, the present interest band of 4% is to continue.

Within this interest band, the appropriate rate of interest shall be
fixed considering the credit rating of the borrower after keeping in
view, inter-alia, the extant guidelines, - the most important of
them include the following:

a) for each Rating-category, the minimum expected yield should

be 01.00 % over the minimum chargeable rate in the
respective category;

b) if the actual yield is equal to or in excess of the minimum

expected yield, the lowest rate within the relevant band may
be charged;

c) if the actual yield is less than the minimum expected yield, the
borrower may be charged up to the highest rate within the
relevant band;

II. For any new borrower, the present instruction is to credit-rate him
as `A’ and, accordingly, the instruction, to charge interest @ 1% to
2% over the reference PLR, after reckoning the "Minimum
Expected Yield Factor", shall continue to be in force.

III. The appropriate PLR shall be fixed depending upon the contractual
maturity and, any pre-payment shall not impact lowering the rate
of interest though the pre-payment shall not invite any penalty or
pre-payment charges / fee.

However, wherever the borrower has drawn / utilized the limit

beyond the contractual maturity, i.e., has postponed the
contracted date of payment / liquidation of the dues, then, the
additional interest (@ 1% p.a.) / penal interest (@ 2% p.a.) shall
be levied as per the extant guidelines. Such additional / penal
interest shall be levied on the interest rate applicable with
reference to the tenor / period for which the facility has actually
been availed / utilized.

For example:

a) if a "A+" rated borrower has taken a loan for 5 months and the
rate of interest stipulated is 10.00% (i.e., at reference PLR);
b) the borrower continues to avail the loan beyond 5 months for
another 4 months so that total period of availment of the loan

299
 is 9 months;

c) Therefore, now , the applicable rate of interest is @ 10.75%;

d) The additional / penal interest is to be levied:-

i) over 10.75%, (i.e. the rate applicable for the tenor of more
than 180 days but up to 1 year) and not over the originally
stipulated rate of 10.00% for a tenor of up to 180 days;

ii) w.e.f. the date of expiry of originally stipulated period of

5 months till recovery of the dues;

iii) on the amount in default, i.e., the amount which was, as

per the stipulation, was supposed to be liquidated within a
specified time, but, has remained outstanding in violation
of terms of the sanction.

IV. Only in case of new / fresh loans (i.e., not in case of the existing
loans) to existing / new borrowers, , after arriving at the "Scores"
in pursuance of the credit rating guidelines, the obtained scores
shall be multiplied with the following multiplication factors:

Period/tenor of the loan Multiplication Factor (MF)

/advance

Above 1 year up to 3 years 0.95

Above 3 years up to 5 years 0.90

Above 5 years 0.85

The appropriate credit rating shall be determined with reference to

the multiplied value of the "Scores", and, accordingly, the relevant
interest band shall be determined.

Example:
a) A borrower's credit rating, as per normal credit rating
exercise, is `A" with 82 scores;
b) He applies for a fresh loan for 5 years;
c) Now, for the purpose of credit rating and fixing the interest
rate on the fresh loan, his above said obtained score of 82
shall be multiplied by '0.90';
d) This multiplication gives a resultant multiplied score of 73.80;
e) This multiplied score of 73.80 puts credit rating of his loan as
`B+' ;
f) Therefore, interest rate on the said fresh loan shall be @
11.50% (being the reference PLR) + 2% to 3% (being the
relevant interest band for `B+' credit rating) depending upon
the factor of minimum expected yield.

V. In respect of all the excess drawings / ad-hoc sanctions, the

extant guidelines of levying additional interest @ 1% and / or
penal interest @ 1% to 2% over the interest rate applicable for
the regular Working Capital limits, shall continue to be in force. It
may please be noted that levy of penalty does not come under the
purview of maximum spread of 4.00% OPLR.

300
 VI. In respect of Temporary Overdrafts in current accounts, the
interest rate shall be chargeable @ 15.00% p.a. (i.e., 4% over
BoBSTPLR-II) irrespective of the period / tenor of the temporary
overdraft. If the account holder has defaulted in liquidation of the
temporary overdraft within the stipulated time / schedule, penal
interest @ 2% p.a. / additional interest @ 1% p.a. shall also be
charged as per the extant guidelines
2.3 GENERAL CLARIFICATIONS RELATING TO THE NEW
GUIDELINES:

2.3.1 Advances against the bank's own deposits shall be governed by the
guidelines as advised from time to time. However, in case of third
party loan against the Bank's own FDR / government securities,
the reference PLR shall be:-
A) 10.00% p.a. if the period of the advance / loan is up
to 180 days;
B) 10.75% p.a. if the period of the advance / loan is
more than 180 days but up to 1 year; and,
C) 11.50% p.a. if the period of the advance / loan is
more than 1 year.
The interest rate chargeable shall be equal to bank's PLR or less.
However, in cases, where deposit rates are equal to or more than
PLR or less than one percentage point below PLR, banks will have
freedom to charge suitable rates of interest on advances against
such deposits without reference to the ceiling PLR.

Advance against domestic / NRE/NRNR deposits to third party:

Interest rates on such advances shall be @ 2.00% over deposit

rate or 1.5% below the Bank’s relevant PLR ( as per tanure of
advance) whichever is higher, with monthly rests

2.3.2 For housing finance, wherever the "PLR" is referred to, it will
henceforth be 0.50 per cent lower than the PLR quoted hitherto,
i.e., before 01.03.2001. In other words, the PLR, quoted prior to
01.03.2001, was @ 12% p.a., and, now, w.e.f. 01.03.2001, it shall
be @ 11.50% p.a.
2.3.3 Rate of interest on export credits shall continue to be governed by
extant guidelines. However, wherever the PLR is referred to, it
shall be @ 10.75% p.a.
2.3.4 For (a) Consumer Loans / Vehicle loans under specific scheme
formulated by our bank; (b) Real Estate Advances; (c) TV-serial
finance; (d) Loans against shares / debentures etc.; (e) Loans
against government securities; (f) Loans to co-operative banks,
other banks, Financial Institutions etc.; (g) Other non-priority and
/ or non-preferred sector loans; (h) Loans to staff members under
specific scheme formulated by the bank, etc., where a reference is
made for "PLR" :
i) the reference PLR will be @ 11.50% if the contractual
maturity is above 1 year, and,
ii) the reference PLR will be @ 10.75% if the contractual
maturity is more than 180 days but up to 1 year;
and,
iii) the reference PLR will be @ 10.00% if the contractual

301
 maturity is up to 180 days.
2.3.5 For all term / demand loans, including WCTLs (Working Capital
Term Loans) / FITLs (Funded Interest Term Loans), which are
considered under any specific scheme of rehabilitation / nursing in
pursuance of the separate guidelines of Reserve Bank of India and
/ or of our bank, the rate of interest shall be in accordance with the
relevant scheme of rehabilitation / nursing.

2.3.6 In respect of all credit facilities, whether on regular basis or on

ad-hoc / excess / short term loans, the processing charges,
documentation & legal charges, front-end fee have to be recovered
as per the extant guidelines.

NOTES :

a. DRI finance : Present rate of 4% p.a. will continue.

b. Application of Interest on MONTHLY RESTS shall be applicable in all
running accounts e.g., Cash Credit, Overdraft, Export Credit
Accounts, including all LOAN accounts etc., excluding Agriculture
Advances where Branches shall continue to follow the existing
practice of charging/compounding of interest.
c. The minimum interest should be charged @ Rs 10/- per month in
respect of all types of overdraft and cash credit accounts ( including
overdraft to Staff members).

8.5 ADDITIONAL/PENAL INTEREST :

(A) Additional interest :

1. In addition to the stipulated rate of interest, additional interest @

upto 2% p.a. is to be charged from the borrowers under the
following circumstances :
i. Disbursement pending compliance : Where credit facilities are
disbursed pending compliance of the terms and conditions (but
only after obtaining approval from the sanctioning authority)
additional interest rate of upto 2% p.a. (over and above the rate
stipulated for sanctioned credit facilities) should be charged.
ii. Post disbursement - Non-compliance : Penal interest to be
charged for default on payment of installments in loan accounts,
overdues, non-submission/ delayed submission of QIS statements
(wherever applicable), stock statements etc. as is being charged
presently. As these are post disbursement requirements, an
additional interest of upto 2% p.a. to be charged for accounts,
where all terms and conditions at post disbursement stage are yet
to be complied with
iii. Non-compliance at the time of review : In case the borrower
does not submit required information for processing the review
proposal on time, additional interest of upto 2% p.a. from the
due date of review of existing facilities till the borrower submits
the required information for review such as balance sheet, CMA
data and other particulars, will have to be charged even when

302
 facilities are technically reviewed by the Bank.
iv. Ad hoc facility : Additional rate of interest for ad hoc credit
limits @ upto 2% over the existing rate of interest as may be
decided by the sanctioning authority taking into account overall
yield in the account, should be charged for ad hoc facility.
2. Exceptions :

The said additional interest of upto 2% may not be levied on the

following categories of borrowers :
i. Borrower enjoying aggregate credit limit upto Rs.2 lacs.
ii. Borrowers enjoying export credit limits - however, when the
export customer enjoys both export credit facilities as also
domestic credit facilities, as regards domestic credit facilities
additional interest upto @ 2% will apply but not for export credit
limits. If the borrower enjoys entire credit limit by way of export
credit limit, additional interest upto 2% is not to be charged.
iii. Borrowal accounts under the category of sub-standard, doubtful
or loss assets. Only for accounts under the category of standard
assets, additional interest upto 2% will apply.

3. Zonal heads are authorised to consider waiver/reduction of such

additional interest, on merits for borrowal accounts falling within
zone’s powers.

4. The objective of levying additional interest is to ensure that

borrowers take vigorous steps for compliance of all terms and
conditions. It is not a mere revenue generating exercise of the bank.
However, charging of additional interest should not be construed as
waiving of concerned terms and conditions by the bank.

5. As soon as the terms and conditions are all complied with, from the
date of such compliance, additional interest will be withdrawn.

6. As the above mentioned eventualities are required to be taken care of

and covered under the documents being obtained an undertaking as
per LDOC 134 given in Book of Instruction Volume 9 is to be
obtained from all the borrowers.

(B) Penal interest :

1. Penal interest @ upto 2% p.a. in addition to the stipulated rate of

interest is to be levied under following circumstances :
i. Late/non-submission of stock statements/statement of book debts
(for the period of default).
ii. Excess drawings in the account over sanctioned limit/drawing
power.
However, the overall penal interest to be charged in the account in
respect of circumstances (i) and (ii) mentioned above should not
exceed 2% p.a.

2. However, penal interest in respect of point no.(i) to (ii) listed below

is to be charged extra even when penal interest is levied on account
of default on other parameters :

303
 i. For overdues in loan/BP/BD/DPG etc.
ii. Late/non-submission of any of the statements under QIS for
borrowers enjoying working capital limits over Rs.1 crore from
the banking system (minimum to be charged for one quarter) on
the outstanding under all the working capital facilities.
3. Branches shall charge OVERALL PENAL AND ADDITIONAL
INTEREST upto 2% p.a., over the applicable/regular interest rate.
(inclusive of maximum of 2%) .

4. Banks are to charge penal interest upto 2% on the amount, if any,

diverted from working capital finance granted to the borrower for
investment in Inter Corporate Deposits (ICD), associate concerns,
real estate investment etc. In such cases, branches may bring same
to the notice of zonal head through regional head with their
comments who will on case to case basis, will advise branches
regarding levy of penal interest and/or recalling the amount diverted.

5. Exemptions :
Penal interest is not to be charged in respect of the following :
i. Priority sector advances upto Rs. 25,000/-.
ii. Sick industrial units which remain closed.
iii. Cases where QIS statements could not be submitted in time on
account of political disturbances, riots, natural calamities etc.
However, this needs prior approval of Corporate Office ,
Mumbai.
iv. In respect of ad hoc/temporary credit limits granted to exporters
by way of pre-shipment/post shipment credit facilities

304
8.6 SERVICE CHARGES ON BORROWAL ACCOUNTS :

In addition to the interest various types of other service charges are

also to be levied on advances accounts. The details of such service
charges are given hereunder :

(i) Processing charges

For all kind Upto Priority NIL
advances at the Rs.25,000/- Sector
time of initial Advances
processing as well
as at each renewal
All other Rs 250/-
Advances
Above Government Nil
Rs.25,000/- Sponsored
upto Rs 2 Schemes
lacs

Other 0.5 %
Advances minimum
Rs 250/-
Above Rs.2 0.25%
lacs and minimum
upto Rs 1 Rs 1000/-
Crore
Above Rs.1 0.20%
crore minimum
Rs
25,000/-
and
maximum
Rs
1,00,000/-
Lacs

Notes :

1. Charges to be levied on sanctioned amount.

2. No processing charges for non fund advances (except deferred
payment guarantees and DA L/C) and advances against bank’s own
deposits. . Advance under Bill re-discount scheme is treated as fund
based limit.
3. In case of agricultural advances, except under IRDP, irrespective of
whether NABARD refinance is available or not, processing charges be
recovered on all fresh sanction and renewals
a. No processing charges will be levied on loans granted under PRMY
scheme.
4. Advances on consortium : Processing charges to be levied as per
consortium agreement.
5. Loan against Government Securities, UTI, Mutual Fund units, NSCs,
KVPs, IVPs, : Rs 100/- Flat Charges.

305
 6. No charges on review/renewal in case of loans to individual
7. Processing Charges, documentation charges under BOB Vyapar
scheme to be recovered as per charges given in this chapter.
8. Processing Charges are on per annum basis, i.e., if a proposal is
reviewed after six months from the due date for a further period of
12 months, processing charges are to be levied for 18 months.
9. 50% of the processing charges (non refundable) be recovered in
advance in new accounts.
10. For allowing drawing against un-cleared effects (adhoc), a charge of
Rs 25/- per lac or part thereof with minimum Rs 25/- and maximum
Rs 500/- be levied.
11. Processing Charges are applicable in case of ADHOC facilities also.
12. Front end fees @ 1.05% is to be levied on all term loans, demand
loans for fixed assets and deferred payment guarantee over Rs 1
Crores.
NOTE: Service and Documentation Charges are to be levied on all Retail
Loans as applicable to the specific scheme. For further details refer to
Book of Instruction Volume No. 16.
(ii) Consortium leader bank charges :

For various services rendered, lead bank may charge a suitable fee (say
0.25% of the limits) per annum to be borne by the borrowers.

(iii) Documentation Upto Rs 25000/- NIL

charges
(Fund Based only) :
Above Rs 25000/- Upto Rs
Rs.2/- lacs 150/-

Above Rs.2/- lacs upto Rs

Rs 5/- lacs 1000/-

Above Rs.5/- lacs and Rs

upto Rs 20/- lacs 1500/-

Above Rs.20/- lacs upto Rs

Rs 50/- lacs 2500/-
Above Rs 50 Lacs upto Rs
Rs 5 Crores 4000/-

Above Rs 5 Crores Rs
10000/-
NOTE: When to be charged

New Sanctions (Entire fund based At the time of obtaining the set
limits including DPG, Usance LC of documents before
and Financial Guarantees) disbursement

Review of Accounts with existing No charge if no fresh/additional

limits documents are obtained

Review with increased limits For the entire amount of

reviewed limit.

306
 Adhoc Limit At the time of taking documents
for adhoc limit
Obtaining LAD 10% of the normal
documentation charges minimum
Rs 50/-
Other Conditions: I. In respect of fresh sanction/
new account branches
should invariably recover
the charges as above in
cash or debiting account. If
the party does not maintain
any current/savings bank
account or for any other
reason it is recovered
through the debit of party’s
loan/cash credit account,
branches should ensure that
the amount so debited is
recovered immediately and
credited to the said
loan/cash credit account.
II Documentation Charges are
to be credited to P/L
Commission Account (other
Code 5760)
c. For issuance of No Objection Rs 5000/- per occasion (No levy
Certificate for C. P. where Bank recovers issuing &
paying Agent Charges as IPA)

d Wherever sub limit are parked 0.25% p.a. be charges, on the

at other centres at the sub limit where it is parked,
instance of customer: additionally, as rate of interest.
(iv) Commitment Charges on There will not be any
unutilised limits commitment charges on
unutilised credit limits. However,
on persistent default in utilizing
the sanctioned limit, appropriate
corrective steps are to be
initiated by the
sanctioning/branch authorities.

Notes :

(1) In case of cash credit accounts, service charges in respect of its

operation and conduct are to be levied as per current account rules.
(2) Charges for BP/BD and bank guarantees are given in the respective
chapters.
(3) Branches should refer to the circulars issued from time to time and
booklet on service charges (Publication No. 123) and update the
service charges.
(4) Branches should also refer to 7.19 of Chapter - VII of Volume - 5
and 3.3.15 of Chapter - III of Volume - 5.

307
308
 APPENDIX - I

WORKSHEET FOR COMPUTING YIELD ON CREDIT

FACILITIES EXTENDED

BRANCH :_______________ REGION : __________ ZONE :

___________

NAME OF BORROWER :

PERIOD FOR WHICH YIELD IS COMPUTED : ____20__ TO ___20__

RATE OF INTEREST APPLICABLE AT THE :

END OF ABOVE PERIOD ____%P.A.
DATE FROM WHICH THE RATE IS APPLICABLE :
(Rs. in lacs)
---------------------------------------------------------------------------------
Facility Limit Ave- Total Int. Int- Of which
Sanc- rage Earned(As erest penal
tioned bal- applied interest
ance in account) if any
(1) (2) (3) (4) (5)
---------------------------------------------------------------------------------

FUND BASED LIMITS

I Term Finance

1. Term Loan I

2. Term Loan II

3. Term Loan III

4. Term Loan under

IDBI Refinance
5. Term Loan for
import of
capital goods

6. Bridge Loan

7. Any other Loan

(Specify)
----------------------------------------------------------------------TOTAL
(I)
----------------------------------------------------------------------

309
 WORKSHEET FOR COMPUTING YIELD ON CREDIT
FACILITIES EXTENDED

BRANCH :__________ REGION : ____________ ZONE :

______________

NAME OF BORROWER :

PERIOD FOR WHICH YIELD IS COMPUTED : _____20__ TO _____20__

(Rs. in lacs)
----------------------------------------------------------------------Facility
Limit Ave- Total Int. Int- Of which
Sanc- rage Earned(As erest penal
tioned bal- applied interest
ance in account) if any
(1) (2) (3) (4) (5)
----------------------------------------------------------------------FUND
BASED LIMITS

II WORKING CAPITAL FINANCE

1. Cash Credit
(Pledge)

2. Cash credit (Hypn.

of stock)

3. Cash credit (Hypn.

of book debts)

4. Packing credit

5. Doc. Bill Pur-

chased
(a) Exchange
(b) Interest
(c) Commission

6. Bills Discounted
(a) Discount
(b) Interest
(overdue)
(c) Commission

7. Bills Dis. under

IDBI Scheme

8. Foreign Bills
purchased

9. Ch./Clean Bills
purchased
(a) Advance Bills
(b) Bills past due
(c) Postshipment
credit other
than above (specify)

310
 (d) Demand loan
under loan
delivery system
(e) Other (PL specify)
----------------------------------------------------------------------TOTAL II
----------------------------------------------------------------------Aggregate
average funds used (I+II) : (Total of Col. 2) __________(A)

Total income earned (Total of Col 3) __________(B)

----------------------------------------------------------------------
WORKSHEET FOR COMPUTING YIELD ON CONTINGENT
FACILITIES EXTENDED
(Rs. in lacs)
----------------------------------------------------------------------Facility
Limit No. of G’tee/ Amount Total comm. Remarks
Sanc- L/C / DPG earned (For
tioned the period
----to-----
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------Continge
nt Limit :

1. Letter of credit
(Inland/Foreign)

2. Guarantees

3. Acceptances

4. D.P. Guarantees

5. Bid bonds/
Tender Bonds

6. Any other faci-

lity (Specify)
----------------------------------------------------------------------TOTAL
----------------------------------------------------------------------
Total income/commission earned on contingent facilities _____
(C)

----------------------------------------------------------------------
INTEREST BENEFIT ON DEPOSITS
----------------------------------------------------------------------Average
Notional Interest Paid Net Notional Interest
Amount Interest on Deposits Earned by the
Bank
Rs. Rs. Rs. Rs.
----------------------------------------------------------------------
DEPOSITS

1. Current
2. Fixed/Short

---------------------------------------------------------------------- TOTAL
(D)

311
----------------------------------------------------------------------(Notional
interest benefit to be calculated as follows @____ on the 50% of the
average deposits as per existing guidelines)

Example :
AVERAGE DEPOSITS 50% OF THE DEPOSITS INTEREST ON 50%
IN COLUMN I AMOUNT AS SHOWN IN
COLUMN II

Rs. 1,00,000/- Rs. 50,000/-

----------------------------------------------------------------------
INTEREST BENEFIT ON DEPOSITS _________ (D)

ANNEXURE TO WORKSHEET FOR COMPUTING YIELD ON CREDIT

FACILITIES EXTENDED
----------------------------------------------------------------------
BRANCH : REGION : ZONE :

PERIOD OF REPORTING : __20__ TO __20__

OTHER SERVICES :
(Please give details of concession extended on other services rendered
like waiver / reduction of service charges / commission on remittances
and collections on behalf of the party.)
----------------------------------------------------------------------Nature of
Service Actual Earnings Concession Remarks
(What is charged) (Specify amount
of commission)
----------------------------------------------------------------------1. O.B.C
2. I.B.C
3. Remittance
4. Incidental Charges
5. Processing Charges
6. Merchant Banking
Service Charges
7. Project appraisal Fees
8. Others (PL. Specify)
----------------------------------------------------------------------TOTAL
COMMISSION/EXCHANGE (E)
----------------------------------------------------------------------
CHARGES INCURRED WITHOUT RECOVERING FROM PARTY :
---------------------------------------------------------------------- Details
Amount Remarks
----------------------------------------------------------------------E.C.G.C.
Commission
Any other item (Specify)
----------------------------------------------------------------------TOTAL
(F)
----------------------------------------------------------------------
TOTAL INCOME IN THE ACCOUNT AND PERCENTAGE OF THE SAME
ON FUNDS UTILISED

FUNDS UTILISED IN THE ACCOUNT (A)

INCOME

312
1. Interest/Discount Earned (B)
2. Commission/Exchange Earned (C)
on contingent facilities
3. Interest (Notional) on deposits (D)
4. Commission/Exchange on other (E)
business
5. Total earnings (B+C+D+E)
Less : Charges incurred not to (F)
be recovered
6. Net earnings (5 - F)
% Return in the account = ________________
(% of (6) to (A)

Yield for previous two years AMOUNT PERCENTAGE

Y.E. _________
Y.E. _________

PLACE :
DATE :
(SIGNATURE OF BRANCH MANAGER)

313
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER IX

INSPECTION OF SECURITIES

SR NO SUBJECT
PAGE NO
9.1 INTRODUCTION 314
9.2 OBJECTIVES OF INSPECTION OF SECURITIES 314
9.3 INSPECTION GENERAL 314
9.4 CONTENTS OF INSPECTION 314
9.5 ASPECTS OF INSPECTION 315
9.6 INSPECTION OF STOCKS 316
9.7 INSPECTION OF BOOK-DEBTS 326
9.8 INSPECTION OF FIXED ASSETS 327
9.9 SUBMISSION OF INSPECTION REPORT &
RECTIFICATION OF IRREGULARITIES 328
9.10 PERIODICITY OF INSPECTION 328
9.11 WHO SHOULD CARRY OUT THE INSPECTION 330
9.12 RECOVERY OF INSPECTION CHARGES 330
9.13 ACCOUNTABILITY 331

LIST OF APPENDICES

APPENDIX NO SUBJECT
PAGE NO
I INSPECTION REPORT 332
II FORMAT FOR STOCK STATEMENT 333
III FORMAT FOR BOOK DEBTS STATEMENT 335
IV COMPUTATION OF DRAWING POWERS 336
V ILLUSTRATION 338
V (1) COMPUTATION OF DRAWING POWERS
(FOR ALTERNATIVE 1) 339
V (2) COMPUTATION OF DRAWING POWERS
(FOR ALTERNATIVE 2) 341

314
 INSPECTION OF SECURITIES

9.1 INTRODUCTION :

Inspection of securities is an integral part of follow-up and supervision of

advances and forms one of the important functions. It is the verification
of securities charged against which Bank has committed its resources.
Verification encompasses ascertaining the correctness of quantity, quality
and the value of securities. In certain cases, inspections are carried out
to confirm the existence of securities charged to the Bank.

9.2 OBJECTIVES OF INSPECTION OF SECURITIES :

Inspection of securities serves various objectives like :

(i) ensuring existence, quantity and quality of assets (fixed and current)
charged to the bank.
(ii) checking end use of the funds.
(iii) ensuring movements of stocks charged to the bank.
(iv) preventing frauds, fraudulent dealings and transfer of securities
charged to the bank.

9.3 INSPECTION GENERAL :

(i) Inspections are carried out at various stages in case of borrowal
accounts.
a. Pre-sanction inspection
b. Post-sanction inspection.
c. Periodical inspection thereafter during continuation of advance
(ii) The detailed procedure in respect of pre-sanction and post-sanction
inspection is given in Volume - 5.

(iii) This chapter deals with various aspects of inspection in general and
particularly about periodical Inspection of following securities.
a. Inspection of stocks
b. Inspection of book debts
c. Inspection of fixed assets

9.4 CONTENTS OF INSPECTION :

A physical verification system includes the following :

(a) The condition of the factory/godown/shop being satisfactory,

ensuring safety of the assets.
(b) Assets charged to the bank being present in quantity and value as
declared.
(c) Sufficient movement of stocks.
(d) Insurance cover being adequate and in force.
(e) Suitable board being displayed to convey the Bank's charge over the

315
 assets.
(f) Stocks being present as declared in the stock statements; material
received from customers for job work not being included in the stock
statements presented to the bank for the purposes of drawing
money, the cost of raw material/stocks-in- process/finished goods
being verified through a sample check of invoices of purchase/sales;
being no stagnancy in stocks.
(g) Book debts/ receivables being checked by a scrutiny of the books
maintained, the tenor of receivables being confirmed (i.e. ensuring
that the sale was a genuine trade transaction as evidenced by the
communication/acceptance of order, entries in the register relating to
finished goods, delivery notes, entry in the debtors' registers etc.)
and
(h) Having a feel of other areas like labour relationship, credit obtained
on purchases etc.

9.5 ASPECTS OF INSPECTION

The work of inspection of stock or book debt can be divided into three
parts viz. :

(A) Verification of records at the branch before going for inspection

(B) Physical inspection of stocks.
(C) Submission of inspection reports, and rectification of irregularities
observed during the inspection.

Verification of records at branch level :

(i) Party's file :

The borrowers' files should be studied to ascertain the types of
facilities and limits sanctioned, terms and conditions of sanction
including margin, location and address of the godown, details of
securities stipulated and charged, names of officials to be
contacted etc.

(ii) Stock statements :

(A) The periodical stock statements submitted by the borrower
should be verified with reference to items reported vis-a-vis
those stipulated in the sanction, quantity of stocks, place of
storage, weight and value of stocks etc.
(B) Composition of stocks and its relative proportion of raw
material, work-in-process and finished goods should also be
verified.
(C) It should be ascertained that the stock statements are signed
by the authorized signatories and accompanied by required
certificate as per banks' standard form.

(iii) Stock register :

In the case of pledge accounts, godown stock register should be
verified to ascertain the nature and quantity of stock pledged in
each godown, age and turnover in the stocks.

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 (iv) Insurance register :
The insurance register and the policy should be verified to
ascertain whether the insurance policy is in order and in force
and whether it covers the full value of stocks, including specific
cover for sub-limits, the place of storage mentioned in the policy
is in conformity with the place mentioned in the stock statement
and whether it covers all attendant risks and contains Bank
clause.

If there are different places of storage/godowns, insurance policy

should cover each place of storage/godown and the value of
stocks stored. If third party stocks are also stored along with
borrower's goods, the policy should cover total value of stocks
lest average clause will be applicable. It should be verified
whether the policy is in the name of the borrower and whether
bank clause is attached to it.

(v) Ledger account :

Ledger account of the borrower should be studied to see the
operations and utilisation of funds and whether turnover is
satisfactory. It must also be verified whether the drawings are
permitted within the advance value and stipulations if any,
regarding sub-limits and earmarking are complied with.

(vi) Previous stock inspection reports :

The previous stock inspection reports as well as the branch
inspection report should be referred, to find out the observations
of the inspecting officers and the steps initiated by the branch to
set right the irregularities etc.

(vii) Letter of credit/I.B.C portfolio :

Unpaid usance inward bills for collection/usance bills under letter
of credit drawn on the concerned borrower should be verified to
ascertain whether the drawings have been permitted against the
goods covered by these unpaid bills.
(viii) Godown Key Register :
It gives an idea of the various locks in use in various godowns. It
should be verified that the same lock is not used for a very long
time on one godown. While inspecting a pledge account the
godown-keeper must accompany the officer, who should have
also signed the key register before taking the keys. Lock
numbers should be noted for verification at the site.

9.6 INSPECTION OF STOCKS

(a) In case of pledge accounts :

i. Address and location of the godown should be verified. There

should be free access to the godowns. The borrower's name
board and the Bank's name plate should prominently be
displayed at the entrance and within the godown .It should be
verified that the stocks pledged are of the same description
as declared by the borrower, description of goods and

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 quantity mentioned in the bin cards tally with the particulars
shown in the godown register. Thereafter, the stock should
physically be verified by actual counting. The stocks stored in
loose may be verified by measuring the cubical volume and
by estimating approximate weight from the formula of
volume and density i.e. weight = volume X density.

ii. The inspecting officer should also verify the following aspects
:

(a) The godown locks are engraved with the Bank's name.
(b) There is no other gate or entrance to the godown. If there
is one, it is securely locked from inside.
(c) Ventilators are properly covered by grills.
(d) The godown is of a pucca construction and the partition
walls are built upto the roof.
(e) There is a free and unhindered passage for visiting the
godown.
(f) No hazardous goods are stored near the godown. If so, it
should specifically be mentioned in the insurance policy. If
any godown containing hazardous goods has come up
nearby, the insurance company may refuse to settle the
claim since their risk has increased due to such storage.
(g) The godown is in good condition without any leakage or
seepage of water and dampness.
(h) The godown is located at the address given to the Bank
and as mentioned in the insurance policy and other
documents.
(i) The bin cards are signed by the godown keeper and by all
the inspecting officers.
(j) No stock other than those pledged to the Bank is stored in
the godown without the specific prior authority and where
so permitted, such stocks are also adequately insured.
(k) There is a proper stacking of goods. Where goods are
stored in bags, sufficient space is left between the rows
and the walls to facilitate easy verification. The goods are
stored lot-wise or quality-wise as far as possible
(l) Deteriorated stocks are not kept in the godown.
(m) Manufactured goods are stored in original packing.
(n) The stocks are stored and taken delivery of only in the
presence of Bank's representative.
(o) Turnover of the stocks is satisfactory and that there is no
old stock. Turnover should not be merely by substitution
of goods, but deliveries should be effected against
payment.
(p) Repledge of goods is not allowed.

iii. Additional care :

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 Inspecting officer should be very vigilant about the security
measures affecting the godowns as the Bank is responsible
for the safety of goods pledged. He should be cautious about
the following likely acts of borrowers, which may jeopardise
the Bank's interest.

(a) Declaring wrong capacity of the storage place. Before

making an advance by way of pledge of goods, the
godown keeper should inspect the empty godown and
ascertain the length, breadth and the height of the
godown.
(b) Erecting a false platform particularly when the goods are
stored in loose.
(c) Making a hollow square in the middle of stocks. It is
advisable for the Inspecting officials to climb over the
storage to find out hollow squares, if any. Godown should
not be filled upto the beams, but sufficient and uniform
space from the roof should be left for a person to climb up
and inspect the stocks.
(d) Putting pipes inside the tanks used for storing oil - This
fraud can be detected by thrusting an iron rod into the
storage tank to find out obstructions, if any. If the oil is
stored in more than one tanks, it is advisable to inspect
the contents of all the tanks simultaneously. The cards
maintained in the Stores and the Accounts Departments
should be counter-checked.
(e) Mixing inferior quality of stocks with good stocks -
Inspecting official should draw out samples not only from
the bags in the upper and front rows, but also from the
lower and the back rows. In the case of bales, packets
etc., some of them should be opened to verify the
contents.
(f) Mixing inferior liquids or water with good liquids - Where a
branch has accepted ghee or oil in tins as a security, the
inspecting official should not content himself by counting
the number of cans or taking their weight, but should
examine the contents also by getting some of them
opened.
(g) Storing the goods in a haphazard manner - The storage of
stocks should be done in such a way that verification of
the quantity and quality becomes easier. There should be
no stacking near the doors giving access to the godown to
facilitate opening and closing of doors.
(h) Pledging poor quality of stocks different from the quality
of stocks declared - The godown keeper should not only
verify the quantity of stocks, but also the quality by taking
out samples for ascertaining the age, condition, quality
and market rate.
(i) Taking delivery of good stocks by replacing poor quality
goods/stocks.

The following should put the inspecting official on guard :

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 (i) where the invoices bear the consecutive numbers over a
period of time.
(ii) where katcha/provisional receipts are produced.
(iii) where payments to the seller have not been made through
the bank and the bills/documents are not routed through the
bank; In case of suspicion, the inspecting official should
probe into the purchases made by contacting the sellers.

(b) In case of hypothecation accounts :

(i) In the case of hypothecation accounts, there will always be

some difference between the stocks shown in the stock
statement and the actual stock on the date of inspection due
to the time lag involved. Hence, the figures appearing in the
stock statement and the borrower's books should be
reconciled by making necessary adjustments for sales,
purchases, production and consumption since the date of the
stock statement. Stock inspection should be conducted by
physical counting, weighting, measuring etc. Where the
inventory is large, material control system employed by the
borrower should be studied right from the receipt of the
materials, quality inspection, storage, consumption etc. For
better control over materials, ABC Analysis may be used.
Borrower may be having large quantity of different items of
stock which are comparatively of lesser value and few other
items whose value may be significant. The inspection should
be planned in such a way that the stocks which are valuable,
though small in quantity, are inspected in detail. Test
checking of other items of lesser value may be done.

(ii) The inspecting officer should also devote his time and
attention on the following aspects particularly in case of
medium/large units, to have more useful insight into the
functioning of the concern :

(a) The record-keeping of the concern should be proper and

up-to-date and there should not be any indications of
dishonest or inefficient management.
(b) There should be adequate internal controls and
procedures commensurate with the size of the concern.
The concern should also have an established procedure
for determining unserviceable or damaged stores and raw
materials and defective finished goods
(c) The nature of the reporting systems in operation in
different departments.
(d) Whether consistent and accepted accounting principles
are adopted for valuation of inventory.
(e) Identification of loss during production, method of
disposing wastes and defective products.
(f) Costing system in operation to assess the cost of each
item produced.
(g) Adoption of security measures for prevention of theft,

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 pilferage etc.
(h) Adequacy of insurance and risks covered.
(i) Internal audit and control systems in the concern.
(j) Average time taken for invoicing after despatch of goods.
(k) Adoption of quality control systems. Stocks stored in
tanks like petrol, acids etc., should be assessed by putting
the measuring rod inside the tank which is known as
dipping. After dipping, the quantity of stock should be
ascertained on the basis of volumetric method. In the
case of highly inflammable or explosive materials where
containers cannot be opened for inspection, there should
be some system like side-rod for measuring the quantity
of stocks at any one time.

(iii) Records of the borrower :

Apart from verification of stocks, it is also necessary to verify

the ownership and correctness of stocks as per the records of
the concern by perusing the following books.

(a) Excise records, where the goods are subject to excise

duty.
(b) Raw materials consumption, process, production,
godown-wise stocks, purchases and sales records.
(c) Purchase and sale invoices.
(d) Cost records and order books.

(iv) Valuation of stocks :

The value of stock-in-process can only be estimated from the

records maintained by the concern. For verification of the
value of stock-in-process, the method of production, stages
of production, time lag for conversion at each stage, capacity
utilisation of various machines etc. should be enquired during
the informal talks.
It should be ensured that the value of stock-in-process is
reasonable and does not exceed the amount stipulated in the
sanction. Value of raw materials can be verified from the
invoices and other expenses vouchers like freight, octroi etc.
Average cost system can be employed if there is a variation
in prices of raw materials. Stock-in-process can be valued at
cost of raw materials plus proportionate manufacturing
expenses.
Finished goods should be valued at cost only. Where excise
payment is involved, valuation by excise authorities should be
accepted. If market price is less than the cost, market price
exclusive of taxes and other dues which are not paid should
be applied. Where proper records are not available (in the
case of small concerns), a simple system can be employed,
viz. sale price less an agreed percentage to take care of profit
element, selling and distribution cost etc. Age, quality and
marketability of the materials should also be examined.

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(v) Treatment of Sundry Creditors
(1) Sole banking/Multiple banking/Consortium –
(where we are the leader) :

It may be noted that hitherto the practice has been to

compute the drawing power without deducting trade
creditors as per guidelines. If this system is to be
discontinued and trade creditors are to be deducted from
the value of stocks as per stock statement then the
off-setting effect of sundry debtors will have to be
incorporated to correctly arrive at the drawing power.

Sundry Creditors for goods (i.e. Trade Creditors) are to be

deducted from Raw Material at first instance. If the
amount of total sundry creditors exceeds the value of raw
material, the excess shall be adjusted against
stores-spares, stock-in-process, finished goods etc., in the
same order upto their individual value, progressively. That
is to mean that no negative value be taken and such
negative value (excess) should be adjusted against the
next columns viz. Stores-spares, stock-in-process, finished
goods and so on.

Alternatively, if the borrower is in a position to submit the

stock statement giving break up of sundry creditors for
raw material and sundry creditors for stores-spares etc.,
then, at first instance deduct from the respective value of
raw material (Column 1 in drawing power (DP) format -
Appendix V) and value of stocks spares etc., (Column 2 in
DP format) the respective sundry creditors to the extent
of value of respective stock. If sundry creditors in both or
either columns (Column 1,2 in DP format) is/are in excess
of value of respective stock (negative value), the excess
value (both or either) shall be adjusted against
stock-in-process, finished goods and so on progressively.

From the value so arrived after deducting the sundry

creditors (Trade), the margin (as stipulated) has to be
deducted to arrive at the total drawing power.

Sundry creditors under DALC/Co-acceptance/Guarantees

are to netted off against the cash margin, if any, provided
by the borrower.

An illustration of computation of drawing power format is

given in Appendix V.

(2) Consortium accounts (where we are a member):

In respect of consortium accounts where we are a

member, the method followed by the Lead Bank may be
accepted by the branch, since in almost all cases it is the
consortium leader who calculates and allocates the

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 drawing power to each Member Bank as per sharing ratio.

(c) Inspection of stocks at retail outlets :

Inspecting officers should note, inter-alia, the following while

carrying out inspection of stocks at retail outlets :

(i) Provision stores :

Where number of items are stored making a regular

inspection difficult, comparatively costlier items may be
grouped into the following categories and their value
ascertained. (1) foodgrains (2) pulses (3) oils and vanaspati
(4) soaps and toiletries (5) washing soaps, detergents etc. As
majority of stocks will be falling under the above categories,
inspection may be concentrated on these items.

(ii) Stationery stores :

The above method may also be applied in this case.

(iii) Textile and piece goods shop :

In the case of show room items, attention should be paid to

inspection of high cost items like silks, synthetic dress
material, suitings etc. The number of bundles and the
respective bills/invoices should be verified. Some of the
bundles may be opened and verified on test check basis.

(iv) Medical stores :

Goods lying in original cartons should be verified with special

reference to the packing, specifications, quality, quantity and
the value from the price list. In the case of stocks in show
cases, high cost items like antibiotics, injections, vitamins and
tonic formulations be first inspected. Expiry dates, drug
licence and the borrower's undertaking regarding saleability
and expiry dates of the goods in stock should be examined.

(v) Small stores without a proper stock register and

records :

Inspecting officer should make independent study, group the

items as in the case of provision stores and check whether
approximate value so ascertained, covers the advance
outstanding after providing for the requisite margin.

(vi) Other establishments :

In case of other establishments where large number of items

are involved like mill stores etc., materials control systems
may be followed and goods verified by test checks.

(d) Miscellaneous :

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 (i) Rent and/or land tax/municipal tax receipts pertaining to
godowns should be verified.
(ii) Value of drugs and pharmaceuticals whose expiry dates are
over should not be reckoned for arriving at the drawing
power.
(iii) The stocks of chemicals and dyes etc. may be got examined
at laboratories.
(iv) Inspection reports should be exchanged between participating
banks in respect of consortium advances/joint inspection
should be carried out.
(v) In case the distance between the branch and the
place/godown, where the securities are kept, is quite far off,
the following procedure should be adopted :
(a) The possibility of transferring the advance to the branch
nearer to the place where securities are kept/stored
should be explored.
(b) If the account cannot be transferred, the inspection of
securities should be entrusted to the nearby branch and
copies of inspection of report be called for and
irregularities pointed out therein be rectified. The branch,
where the account is operated, should also carry out the
inspection once in 6 months.
(vi) Inspection of stocks and periodical evaluation of securities
and other appropriate measures should be carried out even in
accounts which are classified as substandard, doubtful of
recovery, sticky and stagnant as well as suit filed accounts
and loss assets to ensure that the stocks pledged/
hypothecated are in order and that there is no danger of
deterioration in the quality of stocks by efflux of time. In case
of suit filed accounts where Bank deems it necessary to
dispose off the stocks, branch should approach the competent
court for permission to sell the stocks and also to appoint a
receiver.
(vii) Inspection should be carried out regularly and at irregular
intervals. No advance notice or information should be given to
the borrower, particularly in respect of outstation
godowns/factories, to preserve an element of surprise. There
should be periodical rotation of officers for inspection of
securities.
(viii) Inspections should not be postponed for want of stock
statements/non-availability of borrower/ shortage of staff etc.
(ix) The records of the borrower must be written up atleast upto
the date of stock statement. Otherwise, the inspecting officer
should enquire the basis on which the stock statement was
prepared and submitted.
(x) Stocks received by the borrower for the job work and the like
should not be included in the stock statement.
(xi) Where goods have been sent out for job work, finishing or
machining, supporting Challans / receipts must be verified
and such arrangement should have been permitted by the

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 bank. Wherever deemed necessary, such goods should also
be inspected.
(xii) Where goods-in-transit are included in the stock statement,
the relative bills/challans/invoices should be verified. Sanction
should provide for inclusion of such goods and the value
thereof should not be disproportionate.
(xiii) Where goods are stored with the clearing agents/ warehouse
keepers, the following should be noted :
(xiv) The sanction should specifically provide for such storage.
(xv) If any sub-limits are fixed for this purpose, they should not
be exceeded.
(xvi) The clearing agents/warehouse keepers must be on the
Bank's approved list and the limits fixed to them, if any,
should not be exceeded.
(xvii) The receipts, invoices etc. should be verified to ascertain the
value of goods.
(xviii) Such stocks should also be inspected and adequately insured.
(xix) Clearing agents' charges and other dues should be paid upto
date.
(xx) In some of the large branches, concurrent auditors are
appointed who also verify stocks and book debts wherever
necessary.
(xxi) In case of sick/weak accounts and whenever some
irregularities are noticed, the stocks audit is done by
appointing external agency. However, such auditors are
appointed on case to case basis after taking specific
permission from the higher authorities In certain cases, help
of our Project Finance Department is also taken on case to
case basis.
(xxii) Stock Audit: The revised guidelines for conducting the stock
audit are:
1. The existing practice of conducting stock inspection and
book debts verification by branch officials and random
inspection by concurrent auditors to continue as per
guidelines.
2. Annual stock audit to be conducted compulsorily in all
accounts having fund based working capital limit plus DA
LC limit of over Rs 5 Crores. ( Stock Audit includes
verification of Book Debts, wherever applicable). To start
with, the audit will restricted to Sole Banking, Multiple
Banking and Consortium accounts lead by our bank.
3. Panel of chartered accountants/C. A., firms for entrusting
stock audit to be finalized by Zonal Authorities.
4. The maximum number of stock audit per C A firm not to
exceed three per annum. Wherever possible, the stock
auditor may be given assignment from the place which is
near to the site of borrower’s factory/godown. Subsequent
stock audit should not be entrusted to the same external
auditor, who has carried out stock audit earlier. The

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 regional head to monitor the allotment of stock audit work
in this regard.
5. The stock audit report has to be comprehensive in nature
and should contain the following details:-
i. Full details of the stocks audited, i.e., quantity,
quality, value and physical verification, age of stocks,
movement of stock etc. ,
ii. The full details of the book debts audited, i.e., the
name of the debtor, amount due, age of the debt,
verification of the invoices/ vouchers etc.,
iii. Calculation of the advance value/drawing power, after
considering the sundry creditors, as per Bank’s revised
guidelines.
iv. Intelligence analysis by the stock auditor on the
movement of the stocks/book-debts, their realizable
values, level of holdings and their justification.
v. Whether the sales of the company are in tune with the
past trends/projections, whether the turnover is
routed through Bank of Baroda/consortium
banks/other banks.
vi. Whether there is a tendency to show higher sales at
year end for booking profits.
vii. Whether inter-firm sales/ purchases (within the group)
are valued as per standard accounting norms.
viii. Observations and comments to include:
a. Accounting practices adopted by the company
b. Pricing policies of the company with respect to
procurement of raw materials, semi finished goods,
trading items etc., and sale/disposal of semi
finished, finished, trading items.
c. System of maintenance of stocks, movement of
stock/goods, procurement policy and management
of stocks.
d. Whether proper record of stocks, including
in-transit stocks, are kept at all stages and whether
the company has a clear title to such goods.
e. The inventory holding level pursued by the
company,
f. The inventory management system of the company
is adequate and proper in view of the nature of the
business and size of the company
g. Statutory dues and obligations of the company in
relation to the stock
6. The Zonal Head to ensure that the annual stock audit
report is received, and to thoroughly pursue the same,
and take timely action, as deemed necessary. The
observations in the stock audit report/and the action
taken to be included in the monthly monitoring reports, as

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 also in the review proposal of the borrowers.
7. The stock audit may be conducted at more frequent
intervals (i.e., more than once a year) if deemed
necessary by the Bank.
8. Stipulations of the stock audit, as above, is to form part of
the sanction terms and conditions and to be advise to the
borrower.
9. Schedule of Charges for conducting Stock Audit:

Category of Account Charges

For accounts having funded fund based Maximum Rs 10000/-
working capital limits (including DA L/C
limits) over Rs 5 Crores and upto Rs 10
Crores
For accounts having funded fund based Maximum Rs 20000/-
working capital limits (including DA L/C
limits) over Rs 10 Crores and upto Rs
30 Crores
For accounts having funded fund based Maximum Rs 30000/-
working capital limits (including DA L/C
limits) over Rs 30 Crores and upto Rs
50 Crores
For accounts having funded fund based Maximum Rs 40000/-
working capital limits (including DA L/C
limits) over Rs 50 Crores

ƒ Out of pocket expenses, including cost of travel, stay etc.,

to be reimbursed to the stock auditor, on actual basis
ƒ The actual charges to be decided jointly by the borrower,
Bank and the stock auditor, depending on the limits
sanctioned, and the nature of the stocks/book debts to be
audited
ƒ The agreed charges to be paid directly by the Bank to the
stock auditor to the debit of the borrowers account (after
obtaining their written authorization.

9.7 INSPECTION OF BOOK-DEBTS

Hypothecation of book debts really speaking is more like clean advances.
Their safety will depend upon the quality of check the branch exercises
over the book debts statements submitted by the borrowers from time to
time. The precaution to be borne in mind whenever these statements are
taken up for checking are :

(i) The debts shown as outstanding in the statements should appear as

such in the respective ledger account in the books of the borrower.
(ii) Few invoices/excise gate passes etc. should be checked to ensure
actual movement of goods.
(iii) Age of the book debts should not be more than stipulated in the
sanction.
(iv) Receivables already advanced by way of BP/BD should not be

327
 included again in the statement of book debts.
(v) The debt should represent sales/service transactions only.
(vi) In case of units engaged in doing job work, the debt should represent
only job charges and the value of the goods should not be included
therein.
(vii) Ledger of sundry debtors and sales-register etc. should be perused/
scrutinized.
(viii) Book Debts statements should mention the addresses of the debtors
and should be certified by chartered accountant.

9.8 INSPECTION OF FIXED ASSETS

While carrying out periodical inspection of fixed assets (land & building,
plant & machinery, vehicles etc.) following additional precautions should
be taken :

(i) Borrowers should submit a statement of machinery /equipments

charged to the bank, every half year, which should contain full details
of the items like name of machine/equipment, make, size, identifying
numbers, date of purchase original value, depreciation provided,
written down value etc. These details should be verified from the
'Register of Plant & Machinery' maintained borrower-wise.
(ii) During the course of inspection, every item of the machinery should
be verified with the statement/register, with specific reference to the
make, horsepower, identifying number etc.
(iii) Conditions of the machines, whether they are in good working
condition/well maintained or not be examined.
(iv) It should be verified that all the machinery/ equipment's are in
existence. No item should be disposed off or removed without the
specific permission of the bank.
(v) It should also be seen whether all machines are engaged in
production and property utilised or not.
(vi) It should be verified whether proper and adequate insurance has
been obtained.
(vii) It should be ensured that maintenance and upkeep of building is
proper and the building is used by the borrower.
(viii) Signboards indicating bank's charge on the assets should be verified.
(ix) The Inspection report be submitted in the proforma given in
APPENDIX-I.
(x) In case of physical verification of vehicle following should be verified:
(a) Registration number, make, chassis number and engine number.
(b) Position of insurance and its validity.
(c) Position of payment of taxes.
(d) Position of permit and its renewal.
(e) Driving licence and its validity.

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 (f) Whether Bank's name is painted on the vehicle.
(g) Whether Bank's name is entered in the registration certificate of
RTO.
(h) General condition of the vehicle.

9.9 SUBMISSION OF INSPECTION REPORT &

RECTIFICATION OF IRREGULARITIES :
(i) Branch Managers should personally ensure that the officers submit
inspection reports immediately after the inspections. Inspection
report should be precise, in simple language and to the point with
clear observations and suggestions. Ambiguous remarks should be
avoided. Areas/points warranting immediate attention/action should
promptly be reported to the Branch Manager/Regional Authority.

(ii) Copies of reports are forwarded to the Regional Authority. The report
should be submitted in Form No. 121 & 261 as the case may be.
Branch Manager should also submit a certificate to controlling
authority that stock inspections have been carried out in all the
accounts and report submitted. Irregularities pointed out in Stock
Inspection Report should be rectified immediately. The concerned
officer of Credit Department and Branch Manager should take keen
interest in following up such matters, and ensure rectification.

9.10 PERIODICITY OF INSPECTION :

i. The inspection should be carried out as per following intervals :

(a)
(1) In case of stocks hypothecated/: Bi-monthly (i.e. as of end of
pledged to the bank January, March, May, July,
September & November).
(2) In case of seasonal commodities : Monthly.
(3) In case the goods are covered : Quarterly
by warehouse receipts

(b)In case of book-debts : Bi-monthly.

(c)In case of fixed assets (Charged : Half yearly
against demand/term loan/ (i.e. as of March and September)
DPG accounts).

(ii) In case our Bank is sole bank or the borrower is having multiple
banking arrangement

A For the advance account credit

rated as ‘A+’ or ‘A’ during all the
last three exercises of the credit
rating, and

(a If the bank’s exposure to the Once in every four months

advance account is upto Rs 5
Crore, then Once in every three
months
(b) If the bank’s exposure is more

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 than Rs 5 Crore, then,

B For BOB Vyapar Accounts Stock Statement to be

obtained ONCE in a year
i.e. for February by 10th
of March and inspection to
be carried once in a year
and inspection report be
kept on record.

C For All other advance accounts As mentioned in point (i)

above

With a provision that there shall be at least one

inspection/verification in every calendar quarter, however, if the
account is causing concern, then, monthly inspection/verification of
the stock and book debt may also be ensured.

(iii) In case where the borrower is financed under the consortium

arrangement; as per the periodicity fixed by the consortium decision.

Proviso to the above said (ii) and (iii)

(1) The branch/higher authority may consider inspection /verification

with higher periodicity wherever warranted.

(2) In addition to the aforesaid periodical inspection/verification, the

branch manager/regional manager /Zonal manager shall ensure
visits to the borrower as per periodicity mentioned below:

(a) In case of advance accounts By the Branch Manager

falling under the powers of the preferably ONCE in a
branch managers year

(b) In case of advance accounts By the Regional

falling under the powers of Manager/ or by an
Regional Managers executive / officer
designated by him
preferably ONCE in a
year

(c) In case of advance accounts By the Zonal Heads or

falling beyond powers of by an executive/
Regional Managers officer designated by
him preferably ONCE
in a year

(3) There will not be any relaxation in off site surveillance in advance
account, i.e., the stock and book debt statement and QIS/QMRs,
review /renewal data etc., shall continue to be obtained in all
advance accounts as per extant guidelines/sanction terms.

(4) In case of consortium accounts, the branch/higher authorities

should ensure to carry out the bank’s own inspection/verification
of the stock and book debts as per the periodicity mentioned
under point 9.9 (ii) above, if the account is causing concern
and/or the ‘security aspect’ of the stock and book debt are

330
 substantially erode, e.g.,
i) Obsolete/unmarketable stock forming substantial portion of
the total inventory.
ii) Accumulation of the inventory and book debts beyond
reasonable level.
iii) Poor turnover in inventory and book debts
iv) Book debts of older age forming major percentage of the total
amount of the book debts
(iv) Inspection at above intervals must be conducted without exception
irrespective of other intervening inspection i.e. by internal inspecting
officers, by statutory auditors or by RBI Inspecting Officers etc.

9.11 WHO SHOULD CARRY OUT THE INSPECTION :

The inspection should be conducted by rotation amongst all the officers

of the branch. However, it will be the sole responsibility of the Branch
Manager to ensure strict adherence to the schedule and its compliance.
At the beginning of the month, the work of carrying of inspection of
stocks should be allotted to the officers working in the branch.

9.12 RECOVERY OF INSPECTION CHARGES :

(i)
(a) Inspection charges for carrying out inspection of securities i.e.
Inspection of stocks/ verification of book-debts charged to the
bank should be levied as detailed hereunder and be credited to
P/L Inspection Charges Account :

Accounts with limits Present Charges

Upto Rs 25000/- NIL

Above Rs 25000/- upto Rs 2/- lacs
Above Rs 2/- lacs upto Rs 20/- lacs
Above Rs 20/- lacs upto Rs 1/- crore
Above Rs 1/- crore upto Rs 5/- crore
Above Rs 5/- crore
Rs 150/- per inspection
Rs 250/- per inspection
Rs 750/- per inspection
Rs 3000/- per inspection
Rs 5000/- per inspection

(b) In addition to the above, actual conveyance expenses, transport

and conveyance expenses incurred/paid by the bank to the
officers who have carried out inspection should also be recovered.

(c) Inspection charges in respect of suit filed/decreed accounts

should not be debited to borrower's accounts.

(ii) Reimbursement of expenses to officers :

(a) Local inspections :

No conveyance expenses should be reimbursed if officers are

being reimbursed fuel expenses or for a distance within 8 kms in

331
 same city, if the officer is reimbursed fixed amount of
conveyance expenses on monthly basis under a separate
scheme.

(b) Outstation inspections :

Transport, conveyance charges and applicable diem allowance

should be recovered from the borrower and the amount be
reimbursed to the inspecting officer as per his entitlement by
routing the entries through P/L Inspection Charges A/c as stated
above.

9.13 ACCOUNTABILITY :

(i) Branches should strictly adhere to the instructions and carry out the
inspection of securities. Any violation of these instructions and
guidelines resulting in financial loss to the bank is viewed very
seriously by the bank and the concerned officials inspecting the units
will be personally accountable for any laxity in inspection.

(ii) Regional Managers should ensure that all the branches under their
control carry out periodical inspections of the securities charged to
the bank as per the Bank's instructions and confirm to them once in
two months that all the borrowal accounts have been inspected as
per bank's rules and procedures.
*.*.*

332
 APPENDIX-I

INSPECTION REPORT

NAME OF THE BRANCH : PURPOSE OF INSPECTION

DATE OF INSPECTION : (specify whether routine or for
special purpose)

I GENERAL :
(a) Name of the industrial unit :
(b) Address : Office/Factory :
(c) Constitution :
(d) Date of establishment and commencement :
of production
(e) Products manufactured/to be manufactured :
(f) Progress of the project :
(g) At what capacity the unit is working :
and when it will reach installed
capacity ?
(h) Raw materials needed in quantity and :
value. Mention difficulties, if any,
in obtaining raw materials.
(i) Labour :
1. Skilled :
2. Unskilled :
3. Others :

Labour trouble, if any :

(j) Whether water, power, fuel, etc. are :

available as required

II PRODUCTION AND SALES :

(a) Production :
Previous Year Current Year
------------------------------- ---------------------
Item Quantity Value Item Quantity Value
i)
ii)
iii)

(b) Sales :
Previous Year Current Year
------------------------------ -----------------------
Item Quantity Value Item Quantity Value
i)
ii)
iii)
*.*.*

333
 FORMAT FOR STOCK STATEMENT
STOCK STATEMENT FOR THE MONTH OF APPENDIX II
NAME OF THE ACCOUNT: VALUE OF STOCK AS ON :
MONTHLY STATEMENT OF STOCK IN GODOWN/COMPOUND SITUATED AT belonging to us

Rs. In )
SR. PARTICULARS MEASUREMENT LAST RECEIPT DELIVERED/ BALANCE/ METHOD OF RATE PER VALUE OF ITEM
NO OF STOCK/ITEM UNIT BALANCE (Qty) ISSUED NO OF INVENTORY UNIT
(Kgs/Bags etc) (Qty) (Qty) UNITS VALUATION
AVAILABLE (LIFO/
FIFO/WT
AVG ETC.)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)=(vii * ix)
A RAW MATERIAL

SUB TOTAL (XI)

B STOCK IN PROCESS

SUB TOTAL (XII)

C FINISHED GOODS

SUB TOTAL (XIII)

D STORES, SPARES/ OTHER INVENTORY ETC.

SUB TOTAL (XIV)

TOTAL VALUE OF STOCKS (XI+XII+XIII+XIV (XV)

PAGE 1 OF 2
334
 OTHER INFORMATION AMOUNT We solemnly declare that the quality, quantity and rates of the
XVI VALUE OF RAW MATERIAL, STORES, stock noted above and hypothecated to the Bank are true and
SPARE ETC., UNDER DA Lcs correct and are either our own absolute property or that we have
/CO-ACCEPTANCES/ GUARANTEES such an interest in the same as entitles us to hypothecate /
(NET OF CASH MARGIN) pledge the same with the Bank to the full extent of the Bank’s
advances to us against these goods and that they are not subject
XVII TRADE CREDITORS (EXCLUDING DA to any claim or charges of any sought and on the strength of this
Lcs) FOR RAW MATERIAL, STORES, declaration of ours the advance has been taken. In order to verify
SPARES ETC. our above statement the Bank is at liberty to get goods vetted
and/or valued at any time at our expense and we hereby agree to
accept as conclusive proof the result of such weighment and/or
XVII TOTAL VALUE OF RAW MATERIAL/
valuation as certified by a duly authorised officer of the Bank.
I STORES-SPARES ETC., PROCURED AND
OUTSTANDING UNDER TRADE
CREDIT/ PROCURED UNDER DA LC/
BANK GUARANTEE ETC. (XVI + XVII)

Details of Insurance

Policy No Risk Covered Asset Insured Sum Insured Valid upto Issued Bank Clause
By (Yes/N0)

Verified Godown Keeper For Company

Branch Manager Signature Authorised Signatory

Page 2 of 2
335
 FORMAT FOR BOOK DEBTS STATEMENT
BOOK DEBT STATEMENT FOR THE MONTH OF APPENDIX III

NAME OF THE ACCOUNT: VALUE OF BOOK DEBTS AS ON :

HYPOTHECATED TO bANK OF BARODA________________ BRANCH by virtue of Book Debt Agreement \

executed on ________ _____by the Company
TERMS OF SANCTION : BOOK DEBTS UPTO _____ DAYS ONLY ARE TO BE TAKEN AS PER SANCTION

Rs. In ) )
SR. NAME OF THE ADDRESS GROSS AMOUNT ADVANCE NET OF WHICH OF WHICH TOTAL ELIGIBLE BOOK
NO PARTY ( INCLU- RECEIVED AMOUNT LESS MORE BILLS DEBTS
DING THAN___* DISCOUNT/
BILLS DAYS THAN____* FACTORED
DISC/FACTORED) DAYS
(A) (B) (C) (D) (E) (F=D-E) (G) (H) (I) (J=G-I)

* as per terms of sanction or 90 days TOTAL 0

We solemnly declare that the details of book debts noted above and hypothecated to the Bank are true and correct, or either our own
absolute property or that we have such an interest in the same as entitles us to hypothecate the same with the Bank to the full extent
of Bank’s advances to us against these debts and that they are not subject to any lien, claim or charges of any sought and on the
strength of this declaration of ours, the advance has been granted. In order to verify our above statement, the Bank is at liberty to get
book-debt verified at any time at our expenses and we hereby agree to accept as conclusive, the proof of the result of such valuation
as certified by a duly authorised officer of the Bank. We also hold ourself for breach of trust in case any deliberate wrong reporting is
done by us.
We certify that we have verified the list of debtors as on _______ and confirm correctness of statement

BRANCH MANAGER CHARTERED ACCOUNTANT FOR COMPANY

SIGNATURE SIGNATURE AUTHORISED SIGNATORY

PLACE: DATE:
336
 COMPUTATION OF DRAWING POWERS
FOR THE MONTH OF_____________ APPENDIX IV

NAME OF THE ACCOUNT:

S. PARTICULARS RAW MATERIAL STORES/ STOCK IN FINISHED ELIGIBLE TOTAL
NO SPARES PROCESS GOODS BOOK DEBTS
A B C D E F G
1 Value of Stock ss(xi) ss ss ss bds
/Book-debts as (xiv) (xii) (xiii) (J)
per statement
2 Less- Sundry
Creditors [see
note (A)
below]
3 Value of Stock
/ Book Debts
(net of
creditors) 1-2

4 Less-
Stipulated
margin
(calculated as
%age on 3)

5 TOTAL DRAWING POWER (3-4)

6 DRAWING POWER - OUR SHARE (_____%

7 LIMIT SANCTIONED

337
 PAGE 1 OF 2

APPENDIX IV PAGE 2

a) Sundry Creditors is to be deducted from Raw Material at first instance.

If the Sundry Creditors is in excess of value of Raw Material, the excess shall be adjusted
against Store-Spares, Stock-in-Process, Finished Goods progressively

That is, at first instance Sundry Creditors would be deducted from value of raw material
upto the maximum value of raw material only and any excess, in sundry creditors over
value of raw material should be reduced next from Stores-spares and if there is further
excess over value of Stores-spares, next from Stock-in-process, finished goods and so on.

b) However, if sundry creditors for raw materials and sundry creditors for stores spares etc., can be submitted by
borrower and determine separately, then at first instance deduct from the respective columns of raw material
Column (A), Stores-Spares etc., Column (B), the value of sundry creditors of raw material and sundry creditors of
stores, spares etc., to be extent of value of individual stock.

If the sundry creditors in both or either (raw material and stores, spares etc., ) is/are in excess of value of
respective stock, the excess values (both or either) shall be adjusted against stock-in-process, finished goods and
so on progressively.

c) ss denotes Stock Statement and bds denotes Book-Debt Statement. Adjacent alphabets / numerals are item
reference in the relevant statement.

d) Stipulated margin ( item 4) to be as per sanction terms

338
 APPENDIX V

ILLUSTRATION

ABC LTD has submitted Stock and Book-Debt Statements, the required figures, for computing drawing power, are as under:-

PARTICULARS AMOUNT
( RS IN LACS)
1 VALUE OF RAW MATERIAL [ss (xi)] 8.00
2 VALUE OF STORES - SPARE etc., [ss (xiv)] 2.25
3 VALUE OF STOCK IN PROCESS [ss (xii)] 2.00
4 VALUE OF FINISHED GOODS [ss (xiii)] 25.00
5 ELIGIBLE BOOK DEBTS ( as per sanction 90 days) [bds (J)] 50.00
ALTERNATIVE - 1: IF BORROWER IS NOT IN A POSITION TO GIVE BREAK UP OF
SUNDRY CREDITORS FOR RAW MATERIAL AND AMOUNT OF SUNDRY CREDITORS
FOR STORES-SPARES ETC., SEPARATELY;
TOTAL VALUE OF RAW MATERIAL, STORE-SPARES UNDER DA LC/CO-ACCEPTANCE/
6 GUARANTEE (NET OF CASH MARGIN) VALUE RS 20.00 LACS; CASH MARGIN- RS 6.75
LACS 13.25
ALTERNATIVE - 2: IF BORROWER IS IN A POSITION OF SUBMIT AMOUNT OF
SUNDRY CREDITORS FOR RAW MATERIAL AND AMOUNT OF SUNDRY CREDITORS
FOR STORES-SPARES ETC., SEPARATELY ;
VALUE OF RAW MATERIAL UNDER DA LC/ CO- ACCEPTANCE/GUARANTEES (NET OF CASH 11.25
7 MARGIN). VALUE- RS 15.00 LACS; CASH MARGIN - RS 3.75 LACS
VALUE OF STORES-SPARES ETC., UNDER DA LC/CO ACCEPTANCE/GUARANTEES (NET OF 2.00
CASH MARGIN). VALUE - RS 5.00 LACS; CASH MARGIN - RS 3.00 LACS
8 TRADE CREDITORS (EXCLUDING DA LC/CO ACCEPTANCE/GUARANTEES) FOR RAW
MATERIAL, STORE-SPARES ETC. (ENTIRE AMOUNT FOR RAW MATERIAL) 10.00
9 TOTAL VALUE OF RAW MATERIAL, STORES-SPARES ETC., PROCURED AND OUTSTANDING
UNDER TRADE CREDIT AND PROCURED UNDER DA LC/BANK GUARANTEE ETC. [ss (xviii)] 23.25

DP COMPUTATION GIVEN FOR ALTERNATIVE- I IN APPENDIX V (1) AND FOR ALTERNATIVE 2 IN APPENDIX V (2)
COMPUTATION OF DRAWING POWERS (FOR ALTERNATIVE 1)

339
 FOR THE MONTH OF_____________ APPENDIX V (1)

NAME OF THE ACCOUNT: ABC LTD

S. NO PARTICULARS RAW MATERIAL STORES/ STOCK IN FINISHED ELIGIBLE TOTAL
SPARES PROCESS GOODS BOOK DEBTS
A B C D E F G
1 Value of Stock ss(xi) 8.00 ss 2.25 ss 2.00 ss 25.00 bds 50.00 87.25
/Book-debts as (xiv) (xii) (xiii) (J)
per statement
2 Less- Sundry 8.00 2.25 2.00 11.00 0.00 23.25
Creditors [see
note (A)
below]
3 Value of Stock 0.00 0.00 0.00 14.00 50.00 64.00
/ Book Debts
(net of
creditors) 1-2

4 Less- 25% 0.00 40% 0.00 25% 0.00 25% 3.50 40% 20.00 23.50
Stipulated
margin
(calculated as
%age on 3)

5 TOTAL DRAWING POWER (3-4) 40.50

6 DRAWING POWER - OUR SHARE (_25_%) 10.13

7 LIMIT SANCTIONED 10.00

PAGE 1 OF 2
APPENDIX V (1)

340
a) Sundry Creditors is to be deducted from Raw Material at first instance.
If the Sundry Creditors is in excess of value of Raw Material, the excess shall be adjusted
against Store-Spares, Stock-in-Process, Finished Goods progressively

That is, at first instance Sundry Creditors would be deducted from value of raw material
upto the maximum value of raw material only and any excess, in sundry creditors over
value of raw material should be reduced next from Stores-spares and if there is further
excess over value of Stores-spares, next from Stock-in-process, finished goods and so on.

b) However, if sundry creditors for raw materials and sundry creditors for stores spares etc., can be submitted by
borrower and determine separately, then at first instance deduct from the respective columns of raw material
Column (A), Stores-Spares etc., Column (B), the value of sundry creditors of raw material and sundry creditors of
stores, spares etc., to be extent of value of individual stock.

If the sundry creditors in both or either (raw material and stores, spares etc., ) is/are in excess of value of
respective stock, the excess values (both or either) shall be adjusted against stock-in-process, finished goods and
so on progressively.

c) ss denotes Stock Statement and bds denotes Book-Debt Statement. Adjacent alphabates / numerals are item
reference in the relevant statement.

d) Stipulated margin ( item 4) to be as per sanction terms

341
 COMPUTATION OF DRAWING POWERS (FOR ALTERNATIVE 2)
FOR THE MONTH OF_____________ APPENDIX V (2)

NAME OF THE ACCOUNT: ABC LTD

S. NO PARTICULARS RAW MATERIAL STORES/ STOCK IN FINISHED ELIGIBLE TOTAL
SPARES PROCESS GOODS BOOK DEBTS
A B C D E F G
1 Value of Stock ss(xi) 8.00 ss 2.25 ss 2.00 ss 25.00 bds 50.00 87.25
/Book-debts as (xiv) (xii) (xiii) (J)
per statement
2 Less- Sundry 8.00 2.00 2.00 11.25 0 23.25
Creditors [see
note (A)
below]
3 Value of Stock 0.00 0.25 0.00 13.75 50.00 64.00
/ Book Debts
(net of
creditors) 1-2

4 Less- 25% 0.00 40% 0.10 25% 0.00 25% 3.44 40% 20.00 23.54
Stipulated
margin
(calculated as
%age on 3)

5 TOTAL DRAWING POWER (3-4) 40.46

6 DRAWING POWER - OUR SHARE (__25%) 10.12

7 LIMIT SANCTIONED 10.00

PAGE 1 OF 2

342
 APPENDIX V (2)

a) Sundry Creditors is to be deducted from Raw Material at first instance.

If the Sundry Creditors is in excess of value of Raw Material, the excess shall be adjusted
against Store-Spares, Stock-in-Process, Finished Goods progressively

That is, at first instance Sundry Creditors would be deducted from value of raw material
upto the maximum value of raw material only and any excess, in sundry creditors over
value of raw material should be reduced next from Stores-spares and if there is further
excess over value of Stores-spares, next from Stock-in-process, finished goods and so on.

b) However, if sundry creditors for raw materials and sundry creditors for stores spares etc., can be submitted by
borrower and determine separately, then at first instance deduct from the respective columns of raw material
Column (A), Stores-Spares etc., Column (B), the value of sundry creditors of raw material and sundry creditors of
stores, spares etc., to be extent of value of individual stock.

If the sundry creditors in both or either (raw material and stores, spares etc., ) is/are in excess of value of
respective stock, the excess values (both or either) shall be adjusted against stock-in-process, finished goods and
so on progressively.

c) ss denotes Stock Statement and bds denotes Book-Debt Statement. Adjacent alphabates / numerals are item
reference in the relevant statement.

d) Stipulated margin ( item 4) to be as per sanction terms

343
 VOLUME 4 - CREDIT MANAGEMENT- GENERAL

CHAPTER X

INSURANCE OF SECURITIES

SR NO SUBJECT PAGE NO
10.1 GENERAL 344
10.2 INSURANCE OF SECURITIES OTHER THAN
VEHICLES 344
10.3 INSURANCE OF TRANSPORT VEHICLES 346
10.4 CROP INSURANCE/INSURANCE OF LIVE
STOCK/ INSURANCE UNDER IRDP etc. 346
10.5 EXEMPTIONS 347
10.6 ESSENTIALS OF A CONTRACT OF INSURANCE 347
10.7 MISCELLANEOUS 348
10.8 RECORD-KEEPING 348
10.9 RENEWAL OF INSURANCE COVER/POLICIES 349
10.10 DAMAGE TO INSURED ASSETS 349

LIST OF APPENDICES

APPENDIX SUBJECT
NO PAGE NO
I LETTER OF UNDERTAKING TO BE OBTAINED
FROM THE BORROWER IN RESPECT OF WAIVER
OF INSURANCE 350

344
 CHAPTER - X

INSURANCE OF SECURITIES

10.1 GENERAL :

All assets (stocks/fixed assets) charged to the Bank as security for

advances are to be fully insured against the risk of fire & SRMD, with an
insurance company, in the name of borrower, with Bank Clause, at the
borrower's expenses, unless insurance is specifically waived or not
required to be taken as per provisions relevant to lending scheme.
10.2 INSURANCE OF SECURITIES OTHER THAN VEHICLES :

(i) Amount of cover :

Insurance should be obtained for purchase value/depreciated value in

case of building and plant and machinery and for the full value of stocks
kept by the borrower. It is not sufficient to get the insurance equal to the
value of bank advance plus margin.
In case of plant & machinery, value of electrical installation should also
be included. If in a godown, stocks other than those pledged to the bank
are also stored, value of such stocks should also be added for the
purpose of insurance.

(ii) Average clause :

If the securities charged to the bank are under insured, the 'average
clause' of the policy operates and the Bank gets only pro-rata
(proportionate) claim, in case of any loss. For example, if goods worth
Rs. 40,000/- are insured for Rs. 30,000/- only and if the goods worth Rs.
20,000/- are destroyed, then a sum of Rs. 15,000/- only (i.e. 75% of the
actual loss) can be recovered from the insurers, because only 3/4 of the
value of goods was insured. Thus, the borrower will have to suffer a loss
of Rs. 5,000/- which in turn will also affect the lending bank.

(iii) Bank clause :

The insurance policy should be taken in the single name of the borrower
with "Bank clause" added i.e. policy endorsed in Bank's favour. Bank
clause adequately protects the interests of the Bank.

(iv) Risks covered :

Generally insurance cover against the risks of fire and SRMD should be
taken. However, bank has the right to ask the borrower to get the
insurance against such other risks, as may be deemed necessary and
stipulated by the Bank. However, immovable properties (buildings)
mortgaged to the Bank either as a primary security or collateral security
should be insured against the risk of fire, lightening and earthquake risks
also.

(v) Insurance companies :

The insurance cover can be obtained from any subsidiary of the General
Insurance Corporation of India i.e. New India Insurance, United India

345
 Insurance, National Insurance, Oriental Insurance.

Bank has authorized acceptance of insurance policies ( Life and Non-life)

of private insurance players also in addition to the policies of public
sector players on the usual terms and conditions. Branches may however
accept such policies of private players based on the written request of
the borrower constituent.

Branches should bring to the notice of their Regional Office of serious

complaints, if any, from the borrower about non-payment of claims etc.,
by the private insurance companies, who in turn will advise Risk
Management Department BCC Mumbai, for necessary action/re-look in
the matter of accepting the policies of such players.

(vi) Cost of insurance :

Primarily, it is borrower's responsibility to get an insurance cover.

However, since the assets are charged to the bank, the bank should
ensure that adequate insurance is obtained. Whenever, insurance is
taken by the bank, the insurance premium should be paid to the debit of
borrower's accounts.
In case of term loan accounts, if insurance charges are debited to term
loan account it should be immediately recovered. However, in case of
suit filed & decreed accounts wherever securities are available and
borrowers are not getting the securities insured, the branch should get
the insurance cover to the debit of its P/L Insurance account and a note
of the same may be made along with the expenses incurred in respect of
that particular suit filed account.

In case of Housing Loan schemes viz., Direct Housing Finance Scheme,

BOB Rural Housing Finance Scheme and Golden Jubliee Rural Housing
Finance Scheme, branches should get the Insurance Cover under
‘UNIHome Scheme’ to the debit of P/L Insurance Account. For risk
coverage and other details refer to Book of Instructions on Retail
Lending.

(vii) Expiry date :

Generally the insurance policy should be taken for a period of 12 months

or expiry period of advance whichever is early. However, under no
circumstances, the insurable securities should remain uninsured, at any
time, during the currency of the Bank's advance due to expiry/maturity
of the insurance policy.

(viii) Waiver of insurance :

(a) Generally insurance should be obtained against all stocks

pledged/hypothecated and other securities charged to the bank.
However, at the specific written request of the borrower sanctioning
authorities may waive insurance against non-hazardous stocks (which
are not susceptible to fire) such as :

-Iron, iron products, M.S. Plates.

-Steel and stainless steel products, rods, springs, pipes.
-Cement and cement products, clay.
-Other metals viz. copper, brass, aluminium and their products.
-Stones, granite, bricks etc.

346
 (b) In cases where the bank initially decides to waive insurance of one or
more risk, if at a later date, on account of changed situation, the
insurance is considered necessary, the borrower is bound to such a
covenant, and an undertaking to this effect be, therefore, taken from
borrowers.

(c) Wherever insurance is waived, an undertaking as per APPENDIX-I

should be obtained from the borrowers.

10.3 INSURANCE OF TRANSPORT VEHICLES :

(i) Risks covered :

(a) The vehicle/tractor-trolley should be comprehensively, including

S.R.C.C risks, insured with any of the insurance companies as
mentioned in para 10.2 (v) above.

(b) As per Motor Vehicle Act third party insurance of the vehicle is
compulsory. This insurance is meant to cover the third party who is
on the road and therefore, exposed to the risk of accident by the
vehicle. However, our bank seeks insurance policy covering
comprehensive risks.

(ii) Bank clause :

The insurance policy should be in the single name of borrower/s. It

should not be issued in the joint names of borrowers and the bank.
Insurance policy invariably should have bank clause endorsed. It means
that hypothecation charge on the vehicle in bank's favour should be
endorsed on the policy, as this empowers the bank to settle the claim
with the insurance company without reference to the borrower.

(iii) Geographical limits :

Insurance policy lays down the geographical limits, only within which the
vehicle should ply to be eligible for the insurance coverage. Generally
insurance company stipulates 'India' as the geographical limit. Therefore,
borrower should be advised to confine his vehicle within the
circumscribed geographical limits laid down in the policy. It should also
be ensured. Vehicles plying to Nepal should have specific mention of this
in the policy.

(iv) Borrower's duty :

In terms of instrument of hypothecation of vehicle/term loan agreement,

it is obligatory on the part of the borrower to keep the insurance of
vehicle alive. In case he fails to do so, the policy should be got renewed
by the bank by debiting borrower's deposit/term loan accounts.

10.4 CROP INSURANCE/INSURANCE OF LIVE STOCK/INSURANCE

UNDER IRDP etc. :

Please refer to Book of Instructions VOLUME - 6.

347
10.5 EXEMPTIONS :

(i) Bank shall continue to exempt constituents from obtaining insurance

for the assets financed out of Bank Loan in following cases:-

(a) All categories of priority sector advances upto and inclusive of Rs

10000/- granted for equipment and current assets for fire and
other risks.

(b) For advances to SSI sector upto and inclusive of Rs 25000/- by

way of composite loan to artisans, village & cottage industries for
equipments and current assets, all term loans for equipments and
working capital granted against non-hazardous goods for fire risk.

However, in the interest of borrower and the Bank, insurance in

respect of following cases would be continued to be obtained by the
bank.

(a) In the states/areas where Rashtriya Krishi Bima Yojna (RKBY) is

under implementation, the insurance for the notified crops
financed by the bank.

(b) The vehicles or machineries or other equipments/assets where

insurance is compulsory under the provisions of any law or such
requirement is stipulated in the refinance scheme of any
refinancing agency or as part of Government sponsored
programme such as SGSY. Insurance shall not be waived even if
relative credit facility does not exceed Rs 10000/- or Rs 25000/-
as the case may be

(ii) In case of non hazardous goods like iron & steel etc. wherever
specifically waived by the sanctioning authority as mentioned in point
No. 10.2 (viii) In case, obtaining of insurance is mandatory under
law, insurance can not be waived.

10.6 ESSENTIALS OF A CONTRACT OF INSURANCE :

(i) Insurable interest :

It means an insurable (pecuniary/monetary) interest in the life of a
person (e.g. borrower) or things (e.g. Stocks/ machinery/ equipments
etc.) proposed to be insured. If the insured does not have insurable
interest at the time of commencement of policy, the policy is void. Thus,
it is to be ensured that the insurance is taken in the name of the person,
in whose name the asset stands.

(ii) Indemnity :
A contract of insurance is a contract of indemnity uberrime fidei i.e. it is
based on utmost good faith on the part of the insured.

(iii) Concealment etc. :

The insured must disclose to the insurers all the relevant
particulars/information/material facts (in respect of risks) within his
knowledge, truly and honestly Concealment/non-disclosure of material

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 facts, misrepresentation and misdescription make the policy invalid and
then assured is deprived of its benefits.

10.7 MISCELLANEOUS :

(i) Correct particulars of premises/godowns/assets :

Full and correct details of property i.e. address of Godown/factory/
shop/building, description of property, survey no., type of construction,
godown no. vehicle registration No., chassis no. & engine no., particulars
of machineries etc. should be correctly mentioned in the policy. If any
hazardous goods are stored nearby the godown/factory/shop, this fact
also should be declared to insurance company and the insurance policy
should have specific mention of it. If there are different places of
storage/godowns, insurance policy should cover each place of
storage/godown and the value of stocks stored.

(ii) Insurance of second hand vehicle/machinery :

In the case of purchase of second hand machinery, where insurance
policy is in seller's name, the purchaser i.e. bank's borrower, should
make an application to the insurance company for transfer of the policy
in his name with 'Bank Clause' added thereon. As per provisions of the
Motor Vehicles Act, there is automatic transfer of insurance on transfer of
ownership of the vehicle.

(iii) Cover notes/policies :

Insurance companies are issuing temporary/provisional cover notes
pending preparation/issuance of policies. Branches should ensure that
these cover notes are replaced by insurance policies within the stipulated
period. Payment of the insurance premium should be made immediately
as the coverage of risk will start only after making payment.

(iv) Transit insurance :

Wherever goods/machines are frequently taken out for job work etc.
outside factory premises, the transit insurance cover should be obtained.

(v) Hazardous substances :

If the borrower deals in hazardous substances/chemicals, he is required

to take 'Public Liability Insurance Act' policy also.

(vi) Warranties :
Warranties are the set of conditions or stipulations to be invariably
observed or strictly complied with by the insured. Sufficient care should
be bestowed on the description of rating of risks, as any error may give
ample reasons to the insurance company to dispute the claims. The
borrower should undertake to observe the terms and conditions spelt out
in the warranties. For example, if the driver of vehicle does not hold a
valid driving licence, no claim is payable by the general insurance
company, in case of an accident.

10.8 RECORD-KEEPING :

All insurance cover notes/policies taken should be properly recorded in

Insurance Register. The due dates of policies should be properly diarised

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 to ensure timely renewals thereof.

10.9 RENEWAL OF INSURANCE COVER/POLICIES :

(i) With a view to reduce work load/facilitate timely renewal and ensure
compliance, bank has evolved an uniform period i.e. July to June,
every calendar year, for renewal of insurance policies covering
securities charged to the bank in advances accounts. It will facilitate
follow-up for renewal of insurance cover as renewal is synchronized.
(ii) The revised system will not be applicable in the following cases:

(a) Borrowers with credit limit upto Rs. 2/- lacs :

Borrowers with Credit Limit upto Rs. 2/- lacs will be exempt from
the revised system and existing procedure will continue to be
followed in these cases.

(b) Seasonal industries:

In the case of seasonal industries such as Rice Mills, Sugar Mills,
etc. the insurance cover is obtained for stocks for the season only
and hence the existing system will continue to remain in force.
Similar practice is to be followed in case where peak
level/non-peak level credit limits are sanctioned.
(iii) In consortium advance accounts, where our bank is the leader of
consortium, this procedure is to be followed. In accounts wherein
lead role is played by other bank, the said bank, may be advised of
our bank's revised guidelines suitably in consortium meeting and
their co-operation be sought to synchronize renewal of insurance
policy from July/June every year.
(iv) In the case of loan for purchase of vehicles etc. wherein insurance
companies insure the assets for initial period of one year from the
date of acquisition, the renewal for uniform period (July/June) to be
got accomplished from the date of next renewal.
(v) At the initial stage of sanction and/or at the time of requirement for
increased insurance cover due to enhancement in credit facilities or in
value of securities or otherwise, the insurance cover may be obtained
for a period upto next June and thereafter for one year from July to
June. The borrowers are to be advised accordingly regarding
proposed/revised system for renewal of insurance cover and a
suitable mention thereof may also be made in terms and conditions
of sanction conveyed to them.
10.10 DAMAGE TO INSURED ASSETS :

In case of damage to the insured assets, the insurance company must be

immediately contacted preferably over the telephone or by
telegram/telex/fax. They should also be advised of the date and time of
fire/accident and the relative policy number. Photographs of debris and
the actual place of fire/accident should be taken. Insurance claim should
be lodged promptly.

Regional Authorities should be promptly informed of the incident and

further developments from time to time. The amount of claim settled by

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Insurance Company must be credited only to the loan/cash credit
account of the borrower to which the claim relates.

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 APPENDIX-I

LETTER OF UNDERTAKING TO BE OBTAINED FROM THE

BORROWER IN RESPECT OF WAIVER OF INSURANCE

The Branch Manager,

Bank of Baroda,

Dear Sir,

You have granted us at our request credit facilities to the extent of Rs.
.... for purchase of ...... (equipment) against hypothecation / pledge of
.......... and according to the terms and conditions of sanction, we are
required to obtain an insurance cover against fire and other risks in
respect of the equipment/goods.

You have, however, agreed at our request to waive the requirements of

the insurance cover against fire and other risks on the said
equipment/goods and we are aware that you will not be responsible for
any consequences by reason of the non-insurance of the said
equipment/goods or for any claim or loss arising in respect thereof.

We further agree and undertake that in the event of any loss or

destruction of the said equipment/goods or any part thereof, we will
replace stock/equipment of equal value, so as to ensure that you will not
be deprived of your security and your security for the said facility/ies will
be maintained by us as before the occurrence of the loss or destruction.

Yours faithfully,

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 addendum

LIST OF IMPORTANT CIRCULARS ISSUED BETWEEN

01-01-2004 TO 31-03-2004 PERTAINING TO THIS VOLUME

CIRCULAR NO DATE OF REFERENCE PERTAINS

ISSUE TO
CHAPTER
BCC : BR : 96/03 05-Jan-2004 Rate of Interest on VIII
advances against NRE
terms deposits -
review
BCC : BR : 96/04 05-Jan-2004 Preventing Vigilance- III
Advance against third
party deposit
BCC : BR: 96/07 08-Jan-2004 Charging of pre VIII
payment premium for
the term loans to C & I
sector
BCC : BR : 96/08 08-Jan-2004 Rates of Interest on VIII
Loans and Advances -
Consequent upon
introduction of Bench
Mark Prime Lending
Rate (BPLR) w.e.f.
01/01/04
BCC : BR: 96/20 16-Jan-2004 Implementation of IX
Credit Rating Models
across all branches
BCC : BR :96/24 09-Jan-2004 Appointment of IX
Concurrent Auditors
for Large Borrowal
Accounts
BCC : BR: 96/38 13-Jan-2004 Adoption of Lender's I
Fair Practices Code
BCC : BR: 96/101 01-Mar-2004 Bills Purchase/ IV
discounted under LCs/
Outside LCs - Special
Rate of Interest
BCC : BR: 96/106 04-Mar-2004 Revision in Lead Bank VIII
Fees
BCC : BR: 96/113 11-Mar-2004 Credit Ratings of IX
Advances accounts - C
& I Sector
BCC: BR: 96/121 13-Mar-2004 Levy of Commitment VIII
Charges for under
utilisation/non
utilisation of working
capital credit facilities
by the borrower
HO: BR: 96/56 03-Mar-2004 Discounting/Purchase IV
Negotiation of bills
under LC on ADHOC
basis

353