CML11 - Loan against Produce/goods

Objective of the After perusing the write up, the reader is expected to understand
Topic  various loans against goods
 Various features like Margin, ROI, Documentation etc
 Procedure involved in sanction/disbursement of these loans

Contents 01. Introduction

02. Loans against Produce/goods
03. Pledge
04. Hypothecation
05. Margin for the Loans
06. Valuation of Goods
07. Insurance
08. Stock Statements
09. Inspection of Stocks:
10. Summary

01. Introduction:

Lending is the 'Dharma of the Bankers'. The very purpose of accepting deposits by a Banker is to
lend. Amongst various opportunities he has, loans provided against different types of securities
are most prevalent and popular. Bankers are expected to be conversant with these types of loans
since these loans are in much demand in any part of the country.Bank’s advances against the
security of goods are of different types such as agricultural goods (food grains, pulses, grains,
cereals etc.) and non-agricultural goods such as manufactured goods. Goods as security have
certain distinct advantages and provide a reliable source of repayment. Normally, there is a
regular turnover in the goods. With the result, the advances against them are liquid and safe. In
the case of industrial advances, raw materials used in the manufacture of commodities, stocks in
process and finished goods are also taken as security.

02.General Criteria for Advances Against Goods

Generally, advances against produce or goods should be granted to customers who –

1. are trustworthy,
2. are regular dealers in commodities
3. can be relied upon to adjust the advances without recourse to the security pledged /
hypothecated.
4. do not speculate or overtrade
5. have sufficient resources to repay the advances in case of fall in prices of goods pledged or
hypothecated.

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The goods offered as security should –

1. not be perishable or liable to fast deterioration in quality

2. be readily and easily marketable
3. be capable of easy handling and transport
4. be such that their prices can be easily ascertained
5. be acceptable to the insurance companies for coverage under insurance

Care should be taken to ensure that goods charged to the bank have been paid for and those
received on credit are not advanced against. No advance should be made for speculation or
hoarding purposes. In the case of advance against goods covered under Selective Credit Control,
the latest RBI guidelines in that regard should be followed meticulously.

Advances against goods are normally granted against pledge or hypothecation of goods.

03. Pledge:

Pledge is bailment of goods as security for payment of a debt or performance of a promise.

Bailment means the delivery of goods by one person to another for some purpose upon a contract
that they shall, when the purpose is accomplished be returned or otherwise disposed of according
to the directions of the persons delivering them.
The possession of goods may be either actual or constructive. Constructive possession of the
goods may arise in the following circumstances:

1. When the documents of title to goods are held by the bank duly endorsed in its favour.
2. When the borrower agrees to keep the goods with himself in trust for the bank.
3. When a third party holds the goods in terms of an agreement and the pledgor instructs the
third party to hold the goods in trust for the bank.

Under pledge the types of facilities granted by the bank are;

a) Produce Loan/Pledge Loan (PL)

b) Cash Credit Pledge Loan (CCPL)

03.1 Produce loan/Pledge Loan (PL):

Produce Loan is granted by way of separate loan each time when the goods are pledged.
However, delivery of goods shall be made in one or any number of times.

03.2 Cash Credit Pledge Loan (CCPL):

Cash Credit Pledge Loan is essentially a running account against pledge of goods where Drawing
Power is regulated on the basis of the value of the stocks pledged.

03.3 Godown Requirements

The goods against which the advances have been made should be stored in godowns of following
description:
1. It should be well built with all provisions for safety such as strong doors, windows and ceiling.
2. It should be protected from leakage, dampness, pests etc.

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3. Access should be available through only one door and extra doors if any should be closed from
within.
4. The godown should be accessible from road side without any hindrance from any one and in
case there is no such direct access, letter of access should be obtained.
5. Godown may be accepted only if it is situated at the same station and not too distant from the
branch. Godown in the neighbourhood of workshop, chemical factory, cutcha shed, petrol
bunk, a canal or river is not normally preferred.
6. If godowns are situated outside municipal limits previous permission of the sanctioning
authority is necessary.
7. Godown doors should be locked with bank's own padlocks.
8. Name boards of the bank should be displayed both inside and outside the godown.
9. Godown locks and keys should be held in joint custody.

04. Hypothecation:

Hypothecation is a charge against the property for an amount of debt where neither ownership
nor possession is passed on to the creditor. Therefore there is no transfer of interest or property
for the goods hypothecated.

The facility granted by the bank against hypothecation of goods isOpen Cash Credit [ O C C ]or
Cash Credit Hypothecation (CC Hyp)

Special Precautions in hypothecation of goods ;

1. Before taking up the proposal, it should be ascertained whether the borrower has similar
facilities with other banks.
2. In case he is availing facility from other banks, it should be ensured that the stocks
hypothecated to us are clearly segregated or demarcated in different godowns/shops.
3. No clean facility such as overdraft, demand loan etc., should be granted to a borrower having
open CC limit with the bank as it would result in nullifying or dilution of margin requirements.

05. Margin for the Loans

The margin as stipulated by Head Office from time to time ranging from 15% to 50%, depending on
the commodity should be maintained. It should be noted that generally advances could be
granted only against the approved list of commodities. Margin in respect of goods within the
purview of Selective Credit Control shall be in accordance with the directives of RBI from time to
time.

06. Valuation of Goods:

Margin stipulated for advances against goods is to be calculated on the basis of cost price or
market price whichever is lower. In the case of goods imported by the borrower, cost price would
mean the landed cost including customs duty. In the case of imported goods bought by the
borrower in the open market as well as in the case of indigenous goods, the invoice price shall be
taken as the cost price. In all cases where invoices form the basis of valuation they should be of
recent dates and issued by the manufacturers or their authorised selling agents or wholesalers.
Invoices of one branch of a firm on another branch should not be generally accepted unless the
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branch manager is satisfied about the valuation.In case of goods such as agricultural produce
where invoices are not available purchase price as per the books of the dealer would be the basis
of valuation. A market rate register should be maintained at each branch and the market
quotation of all goods against which the advances have been made should be entered weekly by
enquiry at the market and on the basis of this register valuation of goods charged to the bank
should be done.

Valuation of stock is the most important aspect where the stock is hypothecation for the working
capital limits. To arrive at the value of the stock, latest stock statement should be obtained. The
stock statement so obtained should be properly examined and the Drawing Power (DP) as per the
terms and conditions of sanction should be calculated. The guidelines on exclusion of slow-
moving and stale stock from the value of the stock, taking in to account only paid stock by
excluding the unpaid stock are to be followed while arriving at the DP after deducting the
proportionate margin applicable for the stock.

In the case of hypothecation of stock such as chemicals, drugs etc., it has to be ensured that the
stock held / hypothecated to the bank is still useable and the same is not beyond the expiry date
stipulated. It should also be ensured that the DP is reckoned knocking-off stocks which have
crossed the expiry period and have no market value.

07. Insurance:

Goods/commodities hypothecated/pledged should be insured comprehensively for their full

market value against the following risks:

1. Fire
2. Theft
3. Strike and Riot (including malicious damage)
4. Burglary
5. Risk against self-combustion (In respect of commodities which are self combustible)
6. Earth Quake
7. Floods, etc,.

Further,

1. Insurance must be for the full marketable value of the goods pledged/hypothecated to the
bank in view of the average clause normally stated in the policy.
2. The insurance cover should be obtained concurrently with the grant of advance.
3. The policy shall be in joint names of the bank and the borrower. However, in case where the
borrower has already taken a policy it has to be assigned to the bank.
4. Insurance policy should have "Bank clause" indicating the bank’s interest in the goods.
5. It is necessary to scrutinise the terms of the policy regarding the method of storage of goods
so that there may not be breach of warranties.
6. The due dates of premia and expiry dates of the policies should be diarised and timely steps
should be taken for renewal of the policies during the currency of credit limits.
7. In case any fire accident takes place and the goods hypothecated or pledged are partially or
fully damaged or destroyed a telegraphic intimation should be sent by the branch to the
insurance company as well as to the sanctioning authority followed by a letter.
8. Insurance should be taken for the full value, not the part value which has been financed by
the bank.
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08. Stock Statements

Borrowers are required to submit stock statements at periodical intervals, say once in a month
(during the period of first seven days preferrably)or as specified by the sanctioning authority.
Stock statement should not include stocks which are not in borrower's possession. It should be
ensured that goods on consignment basis, goods released and held under acceptance allowed at
the instance of the buyer of goods covered by trust receipts are not included in the stock
statement. Similarly unsaleable or unusable goods should not be included in the stock statement.
Drawing power has to be regulated on the basis of the stock statements. Please refer to cir no
178/2015 to calculate DP on the basis of stock statement as per IBA guidelines.

09. Inspection of Stocks:

Inspection of hypothecated goods is to be done at irregular intervals without any notice to the
borrower, irrespective of the position regarding submission of stock statements. Borrower's
records such as purchase register, sales register, stock register, sales tax records etc., may be
verified on a random basis and discrete enquiries should be made whenever unusual transactions
are noticed. The quality, quantity and the value appearing in the borrower's register should agree
with the stock statements and any variation must be enquired into.

09.1Checklist while Verifying Stock in Respect of Pledge Loan:

1. Ensure that the godown keys are safely preserved inside the double lock.
2. Before going for either release or pledge ensure that the concerned papers are properly signed
by the borrower/s and also by branch officials.
3. Before opening the keys of the godown ensure that the locks are not tampered with.
4. Ensure that there are no changes in the outlay of godown.
5. After entering the godown verify for any goods/items other than the ones which are pledged
to us.
6. Verify the items inside the godown with the entries in the godown card and satisfy yourself
with the entries.
7. Ensure that there are no over writings in the godown cards.
8. Ensure that the building is comprehensively insured against all risks.
9. Ensure that the contents inside the godown tally with the entries in the godown card.
10. If release, ensure that the contents inside the godown tally with that available in the card
after release.
11. Ensure proper locking and note to seal the lock after your work is over.
12. Note to preserve the keys (both) inside the double lock after properly recording in the key
movement register.
13.Bank board must be there at the front gate with our hypothecation clause.

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09.2 Checklist for Verification of Stock Statements and Godowns in respect of Hypothecation
Loans:

1. Ensure that the borrower submits the stock statements well within the time frame stipulated
in the terms of sanction.
2. Soon after the receipt of stock statements from the borrower, note to affix date seal on it as a
record of date of submission by the borrower.
3. Ensure that the opening stock furnished in the stock statements tallies with the closing stock
furnished in the last statement.
4. Ensure that the figures furnished in the stock statement tally with the books of accounts
maintained by the borrower/s.
5. Ensure that the figures furnished in the stock statement tally with other related statement/s
such as Select Operational Data (SOD), Quarterly Information System (QIS) etc.
6. During the course of godown inspection ensure that there are no obsolete or non-moving
stock. If you find any, ensure that it will not form a part of stock holding.
7. Ensure that all the columns are properly filled in, in the Drawing Power (DP) Register based
on the sanction copy and stock statements.
8. Calculate Drawing Power based on the stock statements and ensure that creditors is excluded
from the stock holding and prescribed margin as per the sanction terms is applied while
doing so.
9. Do not forget to record the actual DP in the loan ledger orComputer before allowing any
further operations in the account.
10. Note to file the stock statement in the respective party file.
11. Note to send notices/reminders if the borrower is irregular in submission of stock statements.
12. Note to obtain the stock statements in the revised formats only. i.e. either in ID 987 or 988

Policy for Collateral Management and Exit of poorly rated accounts

The credit risk of the Bank is mitigated by adopting various risk mitigation techniques. One of the
means of mitigation is by way of accepting security - primary and/or collateral to the satisfaction
of the sanctioning authority which could be liquidated in case of default or failure to fulfil the
repayment/ contractual obligations. Though repayment capacity of the borrower shall be the
prime consideration while evaluating the proposal, Security/Guarantee offered by the borrower
shall be considered as secondary source of repayment.

The credit exposure either fund based or non-fund based shall be covered in whole or in part by
the collateral offered by the borrower or a third party on behalf of the borrower. Bank has
specific/ general lien, as the case may be, on the collateral securities charged to the Bank. As
part of Bank’s Voluntary Compliance Action (BVCA) submitted to RBI, Bank has committed to put
in place a collateral management policy. Though the related guidelines are already in place in the
Group Credit Policy of the Bank, in compliance of the BVCA commitment, a separate framework
for collateral management has been framed with the approval of the Board .

10. Summary :

Thus bankers have ample opportunities in deploying their funds by way of loans against
Produce/goods as discussed above, which are not only popular among the borrowers but are also
profitable and safer for the bankers. Moreover these opportunities are available throughout the
country. Thus it is very important for any person joining a bank to be well conversant with these
opportunities of business.

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