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Commercial Banking
Lending Policies
of
Banks and FIs
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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
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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
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General Principles of Banks
1. Identification of Borrower
2. Purpose of the Loan
3. Quantum of Loan4. Period of Loan
5. Source of Repayment
6. Collateral Security Offered7. Appraisal / Sanction / Acceptance of Terms
8. Documentation / Disbursement / Inspection
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General Principles
01. Identification of BorrowerTrack Record/Experience/
Educational or ProfessionalQualifications
Type of Business Organisation
Past performance3 Cs - Character, Capacity and
Credit Worthiness
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General Principles ...
02. Purpose of the LoanIs it for productive purpose ?
Is it a legitimate activity ?
Is it new venture or existing ?
If existing - is it for expansion ordiversification ?
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General Principles ...
03. Quantum of Loan Is it need based ?
It should be timely
It should be with borrowers stake/margin (Varying between 5 to 25%)
It should neither be over financednor under-financed
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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 ?
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General Principles ...
05 Source of Repayment ? Out of business/salary income ?
Is it self-liquidating ie., a working capitalaccount ? Cash Credit Hypothecation orPledge (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 ?
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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 ofMortgage overAssets)
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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, stockstatements, recovery, renewal .........
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Types of LendingA. 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, ProfessionalsPersonal 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
Highrate ofInterest
CleanorSecured againststocks,shares,and otherassets
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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 ProjectedBalance Sheet
Simple Documentation - DP Note andHypothecation/Pledge Agreements
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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
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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
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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
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Types of Bank Borrowers
1. Individuals Retail Banking
2. Sole Proprietor
3. Partnership firms4. Trust Accounts
5. HUFs, Clubs, Societies
6. Private Limited Companies7. Public Limited Companies
8. Public Sector Undertakings, MNCs
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Types of Borrowers
01. Individuals - Minors/Majors/Status
SalarySlips/NOC/NoDuesCertificate
ProofofResidence/TelorElectricityBills
Agreements/ Signatures/Witnesses/Security
02. Sole Proprietor CertifiedBusinessAccounts/ Income Tax orSalesTax AssessmentOrdersetc
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Types of Borrowers ...
03. Partnership FirmsOralor Written Deed?
Registeredor UnregisteredFirm?
Joint andSeveralresponsibility ofPartners
CertifiedAccounts
Income Tax andSales Taxassessments
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04.Trust A/cs
TrustDeed- whetherregistered?
Capacitytoraise loans?
Purpose ofLoan?
Signatorytothe Documents?
LegalOpiniononTransaction?
Resolutionhasbeenpassed?
CreationofCharge onAssets?
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05. HUFs, Clubs, Societies,
Assns etc
Kartaofthe Family& Co-parceners
Clubs,SocietiesandAssociations
Office bearers
Rules, Articles,
Authorisedpersons
LocalBodies: PanchayatorMunicipality
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06.Pvt Ltd Cos & PSUs
Same setoftermsandconditionsasPublicLimitedCompanies.
Incase ofPSUs, Guarantee maybeissuedbythe State orCentralGovernments!
Insome cases, MarginMoneyand/or
State / CentralGovernmentSubsidy! Inlarge accounts- Consortium ?
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07. Public Limited Cos
CertofIncorporationbyROC: Cos.Act
MemorandumofAssociation : Objectives
ArticlesofAssociation : WorkingofCo. CertforCommencementofBusiness
ListofDirectors,Share Holdingpattern
PowersofDirectors,CommonSealetc Resolutionbythe BoardforLoan
SignatorytoDocuments,Charge onAssets
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Securities for Bank Advances
Creation of various types of charges
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FORMS OF SECURITY FOR
LOANS
1. BANKERS LIEN
2. PLEDGE
3. HYPOTHECATION
4. MORTGAGE
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1. BANKERS 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 ORPERFORMANCE OF A PROMISE
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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 POSSESSION6. ANY PERSON WHO IS IN VALID POSSESSION
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PLEDGE .contd..
BANKERS RIGHTS AS PLEDGEE
1. CAN FILE A SUIT FOR RECOVERY OF DUES
2. CAN FILE A SUIT FOR SALE OF GOODSPLEDGED
3. CAN SELL THE GOODS AFTER DUE NOTICE
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PLEDGE .contd..
BANKERS OBLIGATIONS1. NOT ENTITLED TO ENJOY ANY ACCRETIONS
2. G
OVT AUTHORITIES MAY NOT SUPERSEDETHE PLEDGEES RIGHTS FOR RECOVERY OFDUES
3. REASONABLE NOTICE TO BE GIVEN BEFORESALE
4. TO RE-DELIVER THE GOODS ON RECEIPT OFDUES
5. PROPER REGISTRATION WITH REGISTRAR
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3. HYPOTHECATION
ITS A MORTGAGE OF MOVEABLE ASSETS
A TEMPORARY TRANSFER OF PROPERTY
NO TRANSFER OF POSSESSION BY THEHYPOTHECATOR TO HYPOTHECATEE
PROPER RECORD OF CHARGE CREATION TO BEDONE WITH REGISTRAR OF COMPANIES
HYPOTHECATOR FREE TO USE THE ASSETS
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MORTGAGE - PARTIES
MORTGAGOR - THE BORROWER
MORTGAGEE - THE LENDER/BANKER
REGISTRAR OF ASSURANCES (FOR ASSET)
REGISTRAR OF COMPANIES (FOR CHARGES)
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MORTGAGE ..contd..
A TRANSFER OF INTEREST IN IMMOVEABLEASSETS LIKE LAND, BUILDING, PLANT, M/c.,
IMMOVEABLE PROPERTY TO BE SPECIFIC
CONSIDERATION MAY BE MONEY ADVANCED/TO BE ADVANCED OR PERFORMING A PROMISE
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TYPES OF MORTGAGES..
1. SIMPLE MORTGAGE
2. MORTGAGE BY CONDITIONAL SALE
3. USUFRUCTUARY MORTGAGE4. ENGLISH MORTGAGE :
(REGISTERED )
5. EQUITABLE MORTGAGE : BYDEPOSIT OF TITLE DEEDS
6. ANOMALOUS MORTGAGE
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SIMPLE MORTGAGE
NO DELIVERY OF POSSESSION OFASSETS
MORTGAGOR BINDS PERSONALLY FORDUES
AGREES TO LENDERS RIGHT TO
DISPOSE OFF THE MORTGAGEDPROPERTY FOR LIQUIDATING THE DUES
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MORTGAGE BY
CONDITIONAL SALE
MORTGAGOR SELLS THE PROPERTY TOLENDER
CONDITIONS THAT ON DEFAULT, SALE SHALLBECOME ABSOLUTE
ON PAYMENTS MADE, SALE SHALL BE VOID
ALSO, ON RECEIPT OF PAYMENT, BUYER SHALL
TRANSFER BACK THE PROPERTY TO THESELLER
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USUFRUCTUARY MORTGAGE
POSSESSION IS DELIVERED TO MORTGAGEE
MORTGAGOR IS ENTITLED TO RE-POSSESS ON
PAYMENT OF DUES OR DEBT IS DISCHARGEDBY RENTS AND PROFITS RECEIVED BY MGGEE
MGGEE IS ENTITLED TO ENJOY THEPROPERTY TILL DEBT IS DISCHARGED
MORTGAGEE CANNOT SUE MORTGAGOR FORFORECLOSURE OR FOR SALE.
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ENGLISH MORTGAGE -
(REGISTERED)
ITS A TRANSFER OF PROPERTY TOMORTGAGEE
FOR A DEBT OR PROMISE TO BE PERFORMED
MGGEE SHALL RE-TRANSFER THE PROPERTYUPON PAYMENT OF DUES OR DISCHARGE OFPROMISE
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ENGLISH MORTGAGE contd..
MORTGAGE DEED TO BE REGISTERED WITHTHE 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 DAYSTHRO FORM Nos. 8 AND 13 (AS PERCOMPANIES ACT)
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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 OFMORTGAGES
A COMBINATION OF 2 OR MORE OF THEABOVE
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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 doneperiodically
Revival Letters to be obtained Acknowledgement of Debts
Proper End-use and follow up to be done