Commercial Banking

Lending Policies
of
Banks and FIs
 Typical B/S of a Commercial Bank
 CAPITAL & LIABILITIES
 Paid up Capital
 Reserves & Surpluses
 Deposits (Demand & Time)
and Other a/cs
 Borrowings from other Banks,
Refinance from IDBI, SIDBI,
NABARD, EXIM Bank, etc
 Other Liabilities
 Profit and Loss a/c
 TOTAL
Lending by Banks Commercial Banking
 PROPERTY & ASSETS
 Cash / Bal with others
 Money at Call & at Short
Notice
 Investments (incl SLR)
 Advances (Short, Medium
and Long Term), BD, etc
 Premises, Furniture, Cars,
Vehicles, etc
 Profit and Loss (if any)
 TOTAL
2
Business Planning &
Performance Review System

 Growth plans and Business Levels

 Sector-wise sub-plans for next year
 Achievement of Targets like Priority Sector
(SSI and Agri), Export Finance, etc
 Bottom Up and Top Down Approaches
 Weekly, Monthly MIS and Review Reports
 Quarterly Analysis and Mid-course actions

Lending by Banks Commercial Banking 3

 RBI as a regulator…
 Announces Credit Policy in April every year
 Reviews Quarterly June, October and December
 Monitors through various reports
 Helps GOI to formulate Budget and Policies
 Advises Banks to follow its Guidelines
 Controls money supply, credit, forex, etc
 Prescribes certain exposure limits / rates of intt
 Priority Sector – Agriculture, SSI, Exporters etc

Lending by Banks Commercial Banking 4

 General Principles of Banks
1. Identification of Borrower
2. Purpose of the Loan
3. Quantum of Loan
4. Period of Loan
5. Source of Repayment
6. Collateral Security Offered
7. Appraisal / Sanction / Acceptance of Terms
8. Documentation / Disbursement / Inspection…
Lending by Banks Commercial Banking 5
General Principles
 01. Identification of Borrower
 Track Record/Experience/
Educational or Professional
Qualifications
 Type of Business Organisation
 Past performance
 3 Cs - Character, Capacity and
Credit Worthiness
Lending by Banks Commercial Banking 6
 General Principles ...
 02. Purpose of the Loan
 Is it for productive purpose ?
 Is it a legitimate activity ?
 Is it new venture or existing ?
 If existing - is it for expansion or
diversification ?

Lending by Banks Commercial Banking 7

General Principles ...
 03. Quantum of Loan
 Is it need based ?
 It should be timely
 It should be with borrower’s stake/
margin (Varying between 5 to 25%)
 It should neither be over – financed
nor under-financed

Lending by Banks Commercial Banking 8

General Principles ...
 04. Period of Loan
 Is it for short or long term ?
 Is it adequate by time ?
 Is it a renewal/ revival/
enhancement ?
 What are the chances of
contingencies ?
Lending by Banks Commercial Banking 9
General Principles ...
 05 Source of Repayment ?
 Out of business/salary income ?
 Is it self-liquidating ie., a working capital
account ? Cash Credit – Hypothecation or
Pledge (lock-n-key) facility?
 Out of sale of asset(s) financed or disposal of
collateral security?
 Any other source of income like guarantor?
 Is it a bridge loan ?
Lending by Banks Commercial Banking 10
General Principles ...
 06.What is the Security offered ?

 Primary - stock, assets, etc

(Hypothecation, Pledge, etc )
 Secondary -3rd party guarantee or
charge on immoveable property ?
 (Type of Mortgage over Assets)

Lending by Banks Commercial Banking 11

General Principles ...
 07. Appraisal of Proposal / Sanction
 08. Convey Terms & conditions in writing
 09. Documentation
 Proper Documents
 Proper Stamps
 Complete in all respects
 Executed by all authorised signatories / Seal
 Charge recorded with ROC within 30 days
 10.Disbursement, Inspection, Insurance &
follow up – asset verification, stock
statements, recovery, renewal ... ... ...
Lending by Banks Commercial Banking 12
Types of Lending
 A. Fund based (Current & Fixed Assets)
 1. Overdrafts
 2. Cash Credits
 3. Bills Finance – Demand or Usance Bills
 4. Demand Loans
 5.Term Loans
 6. Other Loans - Car Loans, Consumer Durables,
Educational Loans, Housing Loans, Professionals
Personal Loans, Credit Cards and so on ……

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Types of lendings ...
 B. Non-Fund based (Fee based)
 Issue of Guarantees
 Issue of Letters of Credit
 Deferred Payments Guarantees

 C. Others
 Lease Finance
 Hire Purchase Finance

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01. Overdrafts
 Temporary facility
 Allowed against Current or CC A/c -
5-10% above available limit
 Simple Application & formalities
 High rate of Interest
 Clean or Secured against stocks,
shares, and other assets

Lending by Banks Commercial Banking 15

02. Cash Credit A/c
 For Working Capital purpose
 Limit generally for 1 year
 To submit periodic Stock statements
 Depends on Operating Cycle, Turnover,
Cash Budget or Projected Balance
Sheet
 Simple Documentation - DP Note and
Hypothecation/Pledge Agreements

Lending by Banks Commercial Banking 16

03.Bills Purchased
 Bills of Exchange drawn for Credit

 Demand Bills or Usance Bills

 D/A or D/P basis

 Limit for Negotiation or Discount

 Close monitoring required

Lending by Banks Commercial Banking 17
04. Demand Loans
 Repayable on Demand - secured loan

 Against pledge of Gold, Fixed Deposit, Stocks etc.

 Generally in installments - mly, qly, hly etc

 Gradually liquidated over a period

 DP Note and other documents obtained

Lending by Banks Commercial Banking 18
05.Term Loans
 For acquiring Fixed Assets
 Ascertain Project Report and Cost
 Tech. Feasibility & Economic Viability
 Income to be generated with Project
 Economic Life of the Asset
 Cash Flows from the Project
 Charge on Assets, low Rate of Intt

Lending by Banks Commercial Banking 19

 Types of Bank Borrowers
1. Individuals – Retail Banking
2. Sole Proprietor
3. Partnership firms
4. Trust Accounts
5. HUFs, Clubs, Societies
6. Private Limited Companies
7. Public Limited Companies
8. Public Sector Undertakings, MNCs
Lending by Banks Commercial Banking 20
Types of Borrowers
 01. Individuals - Minors/Majors/Status
 Salary Slips/NOC/No Dues Certificate
 Proof of Residence/Tel or Electricity Bills
 Agreements / Signatures /Witnesses/Security

 02. Sole Proprietor

 Certified Business Accounts/ Income Tax or
Sales Tax Assessment Orders etc
Lending by Banks Commercial Banking 21
Types of Borrowers ...
 03. Partnership Firms
 Oral or Written Deed ?
 Registered or Unregistered Firm?
 Joint and Several responsibility of
Partners
 Certified Accounts
 Income Tax and Sales Tax assessments

Lending by Banks Commercial Banking 22

04.Trust A/cs
 Trust Deed - whether registered ?
 Capacity to raise loans ?
 Purpose of Loan ?
 Signatory to the Documents ?
 Legal Opinion on Transaction ?
 Resolution has been passed ?
 Creation of Charge on Assets ?
Lending by Banks Commercial Banking 23
 05. HUFs, Clubs, Societies,
Assns etc
 Karta of the Family & Co-parceners
 Clubs, Societies and Associations
 Office bearers
 Rules, Articles,
 Authorised persons
 Local Bodies : Panchayat or
Municipality
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06.Pvt Ltd Cos & PSUs
 Same set of terms and conditions as
Public Limited Companies.
 In case of PSUs, Guarantee may be
issued by the State or Central
Governments !
 In some cases, Margin Money and /or
State / Central Government Subsidy !
 In large accounts - Consortium ?

Lending by Banks Commercial Banking 25

07. Public Limited Cos
 Cert of Incorporation by ROC : Cos. Act
 Memorandum of Association : Objectives
 Articles of Association : Working of Co.
 Cert for Commencement of Business
 List of Directors, Share Holding pattern
 Powers of Directors, Common Seal etc
 Resolution by the Board for Loan
 Signatory to Documents,Charge on Assets

Lending by Banks Commercial Banking 26

Securities for Bank Advances

Creation of various types of charges

Lending by Banks Commercial Banking 27

 FORMS OF SECURITY FOR
LOANS

1. BANKERS’ LIEN

2. PLEDGE

3. HYPOTHECATION

4. MORTGAGE
Lending by Banks Commercial Banking 28
 1. BANKER’S LIEN

 A RIGHT TO RETAIN PROPERTIES

 BELONGING TO THE DEBTOR

 UNTIL DUES ARE PAID FULLY

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 2. PLEDGE

 IT IS BAILMENT OF GOODS

 PURPOSE OF SECURITY

 FOR PAYMENT OF A DEBT OR

PERFORMANCE OF A PROMISE

Lending by Banks Commercial Banking 30

PLEDGE …………….contd…..

 IT IS NOT A RIGHT OF OWNERSHIP

 LENDER CAN ONLY RETAIN POSSESSION

 NOT A TRANSFER OF PROPERTY

 PLEDGEE TO TAKE PRUDENT CARE OF ASSETS

Lending by Banks Commercial Banking 31

PLEDGE ………………… contd..

 Exceptions
1. AGENT CAN ALSO CREATE A VALID PLEDGE
2. SELLER IN POSSESSION MAY CREATE
3. BUYER IN POSSESSION BEFORE PAYMENT
4. PLEDGER WITH LIMITED INTEREST
5. ONE OF THE JOINT OWNERS IN POSSESSION
6. ANY PERSON WHO IS IN VALID POSSESSION

Lending by Banks Commercial Banking 32

PLEDGE …………….contd..

 BANKER’S RIGHTS AS PLEDGEE

1. CAN FILE A SUIT FOR RECOVERY OF DUES

2. CAN FILE A SUIT FOR SALE OF GOODS

PLEDGED

3. CAN SELL THE GOODS AFTER DUE NOTICE

Lending by Banks Commercial Banking 33

PLEDGE …………….contd..
 BANKER’S OBLIGATIONS
1. NOT ENTITLED TO ENJOY ANY ACCRETIONS
2. GOVT AUTHORITIES MAY NOT SUPERSEDE
THE PLEDGEE’S RIGHTS FOR RECOVERY OF
DUES
3. REASONABLE NOTICE TO BE GIVEN BEFORE
SALE
4. TO RE-DELIVER THE GOODS ON RECEIPT OF
DUES
5. PROPER REGISTRATION WITH REGISTRAR

Lending by Banks Commercial Banking 34

 3. HYPOTHECATION

 IT’S A MORTGAGE OF MOVEABLE ASSETS

 A TEMPORARY TRANSFER OF PROPERTY
 NO TRANSFER OF POSSESSION BY THE
HYPOTHECATOR TO HYPOTHECATEE
 PROPER RECORD OF CHARGE CREATION TO BE
DONE WITH REGISTRAR OF COMPANIES
 HYPOTHECATOR FREE TO USE THE ASSETS

Lending by Banks Commercial Banking 35

MORTGAGE - PARTIES
 MORTGAGOR - THE BORROWER

 MORTGAGEE - THE LENDER/BANKER

 REGISTRAR OF ASSURANCES (FOR ASSET)

 REGISTRAR OF COMPANIES (FOR CHARGES)

Lending by Banks Commercial Banking 36

MORTGAGE ……..contd..

 A TRANSFER OF INTEREST IN IMMOVEABLE

ASSETS LIKE LAND, BUILDING, PLANT, M/c.,

 IMMOVEABLE PROPERTY TO BE SPECIFIC

 CONSIDERATION MAY BE MONEY ADVANCED/

TO BE ADVANCED OR PERFORMING A PROMISE

Lending by Banks Commercial Banking 37

TYPES OF MORTGAGES…..

1. SIMPLE MORTGAGE
2. MORTGAGE BY CONDITIONAL SALE
3. USUFRUCTUARY MORTGAGE
4. ENGLISH MORTGAGE :
(REGISTERED )
5. EQUITABLE MORTGAGE : BY
DEPOSIT OF TITLE DEEDS
6. ANOMALOUS MORTGAGE
Lending by Banks Commercial Banking 38
SIMPLE MORTGAGE

 NO DELIVERY OF POSSESSION OF
ASSETS
 MORTGAGOR BINDS PERSONALLY FOR
DUES
 AGREES TO LENDER’S RIGHT TO
DISPOSE OFF THE MORTGAGED
PROPERTY FOR LIQUIDATING THE DUES

Lending by Banks Commercial Banking 39

 MORTGAGE BY
CONDITIONAL SALE

 MORTGAGOR SELLS THE PROPERTY TO

LENDER
 CONDITIONS THAT ON DEFAULT, SALE SHALL
BECOME ABSOLUTE
 ON PAYMENTS MADE, SALE SHALL BE VOID
 ALSO, ON RECEIPT OF PAYMENT, BUYER SHALL
TRANSFER BACK THE PROPERTY TO THE
SELLER

Lending by Banks Commercial Banking 40

 USUFRUCTUARY MORTGAGE

 POSSESSION IS DELIVERED TO MORTGAGEE

 MORTGAGOR IS ENTITLED TO RE-POSSESS ON
PAYMENT OF DUES OR DEBT IS DISCHARGED
BY RENTS AND PROFITS RECEIVED BY MG’GEE
 MG’GEE IS ENTITLED TO ENJOY THE
PROPERTY TILL DEBT IS DISCHARGED
 MORTGAGEE CANNOT SUE MORTGAGOR FOR
FORECLOSURE OR FOR SALE.

Lending by Banks Commercial Banking 41

 ENGLISH MORTGAGE -
(REGISTERED)

 IT’S A TRANSFER OF PROPERTY TO

MORTGAGEE

 FOR A DEBT OR PROMISE TO BE PERFORMED

 MG’GEE SHALL RE-TRANSFER THE PROPERTY

UPON PAYMENT OF DUES OR DISCHARGE OF
PROMISE

Lending by Banks Commercial Banking 42

ENGLISH MORTGAGE contd..

 MORTGAGE DEED TO BE REGISTERED WITH

THE REGISTRAR OF ASSURANCES
 INVOLVES HEAVY STAMP DUTY FOR THE DEED
 PRIOR ENCUMBERANCES TO BE ASCERTAINED
 LEGAL FORMALITIES TO BE COMPLIED WITH
 R.O.C. TO BE INFORMED WITHIN 30 DAYS
THRO FORM Nos. 8 AND 13 (AS PER
COMPANIES ACT)

Lending by Banks Commercial Banking 43

 EQUITABLE MORTGAGE

 TRANSFER OF IMMOVEABLE PROPERTY

 FOR A CONSIDERATION - DEBT OR PROMISE
 BY DEPOSIT OF TITLE DEEDS ONLY
 WITH AN INTENT TO CREATE CHARGE ON
ASSETS
 SIMPLE - NO REGISTRATION WITH REGISTRAR
OF ASSURANCES
 LEGAL STEPS TO BE PROPERLY OBSERVED
 R.O.C. TO BE ADVISED AS IN ENGLISH MGGE’

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 ANOMALOUS MORTGAGE

 NOT ANY OF THE ABOVE 5 TYPES OF

MORTGAGES
 A COMBINATION OF 2 OR MORE OF THE
ABOVE

Lending by Banks Commercial Banking 45

 MORTGAGES -
Miscellaneous…
 Encumberances to be verfied properly
 Stamping of Documents to be proper
 Appropriate documents to be obtained
 Authorised persons only to create
 Record of Dates to be observed in case of
second charge, pari-passu charge
 NOCs to be obtained properly
 Valuation of Properties to be proper

Lending by Banks Commercial Banking 46

SECURITIES FOR ADVANCES -
Other issues

 Records to be maintained properly

 Stock Inspections to be done regularly
 Indication Boards to be insisted upon
 Insurance of Assets to be regular
 Renewal /Enhancement of limits to be done
periodically
 Revival Letters to be obtained
 Acknowledgement of Debts
 Proper End-use and follow up to be done

Lending by Banks Commercial Banking 47