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Deployment of funds
Avenues Cash
Mandated – CRR Not Mandated
Investments Mandated – SLR Not mandated
Loans Mandated – Priority sector advances Not mandated
Mandated reserves
Held as % of Net Demand and Time Liabilities (NDTL) Demand deposits + time deposits – ( paid up capital +
reserves & surplus + amount of refinance availed from RBI, provision for income tax held in excess etc)
Cash Reserve Ratio Amount held as cash / bank balance with RBI Provide liquidity comfort to depositor Means to control money supply No interest being paid by RBI ( post March 2007) RBI free to decide levels to be maintained Current requirement ?
Mandated reserves Statutory Liquidity Ratio
Amount of money to be held in ‘eligible securities ( G-sec) , carrying only sovereign risk
Provide liquidity comfort Also reduces overall risk of portfolio Tool for monetary policy , fiscal policy
management RBI can decide on levels to be maintained (post
March 2007) Current levels ? Narrow banking ….
Money to lend
Amount that can be lent = capital + deposits + borrowings + provisions – investment in SLR investments - CRR holdings - fixed assets.
Cash
Cash : though offers comfort of liquidity, is not a ‘productive asset’ Vault cash – currency /coins in bank’s vault
Predictable and manageable Demand deposits with RBI Demand deposits with banks offering CH
services Cash under collection
Emphasis on keeping just the required amount.
CD ratio
Why should banks hold more money in SLR securities than mandated ?
Incremental CD ratio
Can we infer something ?
CD ratio
When CRR and SLR are to be maintained at 6% and 24% of NDTL how is that some banks have high CD ratio ?
SegmentingRetailTypically individuals
WholesaleGroup of individuals
Small enterprisesTypically proprietorship , partnership firms , Pvt Ltd companies in early stage of growth . Size up to approx INR 25 CrSmall Corporate segment Small Pvt Ltd companies , large & mature partnership firms , approx INR 100 Cr
Mid / Emerging Corporate segment Large Pvt Ltd companies, Pub Ltd companies , approx INR 500 Cr Large Corporate segment Large Public and pvt Ltd companies, above INR 500 Cr or forming part of a group of companies , with a group turnover exceeding say INR 1000 – 1500 Cr
Segments
Differences in Constitution of the borrowerRisk in taking exposure Information available to decide Comfort available for an exposure Type of products to offer Income potential
Retail lending - characteristics
+++++ Good avenue for deployment Granular exposure Risk diversified among borrowers Demand driven – hence lower marketing expenses
compared to corporate Cross selling possible Helpful in economic growth Origination is the key – servicing can be automated
----- Template driven Manpower intensive Consumer loans tend to give higher nominal returns Highly sensitive to business cycles Thrives on rate and TAT Inadequate life cycle study
Success factors
Highly rate and TAT dependant Access to cheap funds Strong origination capabilities – read selling skills Strong and dynamic risk control units ( credit ,
market reference units and compliance) Geographical spread is an advantage Technology vital for servicing Important to know when to exit Strong collections and recovery capabilities
Products Installment Loans
Housing loans Auto loans ‘Personal’ loans
Consumer durable loans
Educational loans Other personal loans
Revolving Loans Credit cards Loan against shares
Secured loans Housing loans Auto loans Consumer durable
loans Loan against shares
Unsecured Loans Credit cards Education loans Other personal loans
Housing loans
Extended for Purchase / construction of a house Repair of a house
Relatively lower risk & longest tenor Enjoys regulatory and fiscal support
Regulatory Lower capital charge ( 50% for loans upto Rs 20
lakhs) Inclusion under Priority sector
Fiscal Tax benefits for installment and interest payments
Retail Credit
Judgmental Quantitative – credit scoring models
Payment history Amount owed Length of credit history New credit Type of credit in use
Credit scoring
Payment history Payment information on many types of
accounts Public record and collection items
Judgement / suits / collections made etc Details on late and missed payments
Delay buckets , how recent , how frequent How many accounts show no late
payments
Credit scoring
Amounts owed Amount owed on all accounts Amount owed on different types of
accounts Number of accounts that have balances Total credit line used on revolving lines Installments pending compared to original
lines
Credit scoring
Length of credit history How long the credit accounts have been
established New credit How old is the relationship ? How many inquiries have been made to credit
reporting agencies ? Length of time since lenders made inquiries ?Type of credit
Wholesale banking Based on type
Fund / Non Fund Based on purpose
Project finance / working capital Domestic / export credit
Based on tenor Short term / long term
Based on comfort Secured / unsecured
Fund based facilities Revolving facilities
Cash credit Overdraft
Repayable facilities Short term
Bills / invoice finance Short term loans / working capital demand loans
Long term Project term loans Working capital term loans
Working capital cycle
Raw materials
Cash
Work in process
Receivables
Finished Goods
WC facility - fund
Raw materials
Cash
Work in process
Receivables
Finished Goods
Finance for the entire working cycle – against stock and book debts . If revolving facility : Cash credit (OCC /KCC) If repayable : WCDL
WC facility - fund
Raw materials
Cash
Work in process
Receivables
Finished Goods
Supplier raises an invoice / bill – which can be discounted. Customer pays the bank – Purchase bill finance
WC facility - fund
Raw materials
Cash
Work in process
Receivables
Finished Goods
Customer raises an invoice / bill on buyer , which buyer accepts to pay after a usance – which can be discounted. Customer pays the bank. Sales invoice / bill discounting
WC facility - fund
Raw materials
Cash
Work in process
Receivables
Finished Goods
Revolving facility against receivables - Overdraft
WC Cycle - export
Raw materials
Buyer places an order
Work in process
Export done – shipping docs and bill prepared
Finished Goods
Buyer remits the amount
WC facility - export
Raw materials
Buyer places an order
Work in process
Export done – shipping docs and bill prepared
Finished Goods
Finance against the order for purchase of RM and manufacture – Packing credit / Pre-shipment credit
Bills raised are discounted. Post Shipment credit / Foreign bill discounting. Proceeds used to close PCL
Buyer remits the amount
Term debt
Short term ( for cash flow mismatches)
Long termFor incurring capital expenditure For funding margin for working capital
(WCTL)For ‘general corporate purposes’ –
acquisition etc.,
LC transaction
Buyer applicant
Buyer’s bank Issuing bank
Sellerbeneficiary
Advising bank
1. Places order
3. LC issued
Pays the bank
2.Request to issue LC
Confirming bank
Negotiating bank
Reimbursing bank
5.Sends Materials
4.Advises LC
6.Sends Dox
9.beneficiary is paid
8. Bank is paid
7.Dox forwarded
Parties to the transaction
Applicant Issuing bank Advising bank Confirming bank can be the same
Negotiating bank Reimbursing bank Beneficiary Governed by ICC’s UCPDC 600
Types of LCs Revocable (?) and Irrevocable LC Confirmed LC Sight and Usance LC Revolving LC Transferable LC Back to back LC Red Clause LC – advising bank gives PSL Green Clause LC – in addition provides for cost
of storage (in the name of the issuing bank) SBLC
Buyer’s credit
Way to provide extended credit to the buyer for purchases made ( RM , capital equipment)
Rides on an LC transaction ( sight / usance)
Buyer’s bank sends LOU to a bank providing the BC
Seller is paid off. BC providing bank is paid off on maturity /
is rolled over ( if permitted )
Other fund instruments
Long term Plain debt
NCDsConvertible into equity
FCCBs Preference shares
Short term Commercial paper
Bank guarantees
Financial guarantee Bid bond BG Advance payment BG Retention money BG Deferred payment guarantee BG favoring customs , ST etc
Performance guarantee Export Promotion Credit Guarantee
W/c assessment
How much to fund ? Assessment methods
Operating cycle method Traditional methodProjected turnover method MPBF method(s)Cash flow method
Operating cycle method
Time lapse between cash outlay and cash realization
Components Acquisition and holding of RM Process time for conversion Holding time for FG Average collection time
WCR = Operating expenses / no of cycles p.a
Traditional methodKey dataExpected monthly salesCost of production - pm Cost of RM - pmSurplus from previous year X
Item Time WCR Margin Amount Permissible limitper month in INR %
Raw materialWork in processFinished goods ReceivablesExpenses Total A
Less Advance recdCredit for purchase BWorking capital requirement (A-B) CSource
Surplus from previous year XLimits from bank ATotal DSurplus / deficit C - D
Projected turnover method
Recommended by the ‘Nayak Committee’ Generally used for limits upto Rs 5 Cr
Anticipated turnover Aworking capital requirementat 25% of A BLess - liquid surplus or 5% of Awhichever is less C
Maximum permissible bank finance B - C
MPBF methods
Based on the recommendations of Tandon and Chore committees
Three methods were suggested
1st Method
MPBF = ( Current Assets - Other current liabilities) * 0.75
2 nd Method
MPBF = ( Current Assets * 0.75 ) - other current liabilities
3rd Method
MPBF = ( Current Assets - Core current assets) * 0.75 - other current liabilities
Assessments
Fund : cash flow method LC assessment BG assessment
What if a single bank cant fund ?
Consortium banking arrangements Lead bank and member banks Common assessment, documentation (inter se
agreement, joint deed ), security and agreed share of business.
Multiple banking arrangements No Leader Increases flexibility for customer Also requires dealing with several banks
What if a single bank cant fund ? Loan syndication Arranger / Lead manager
Co-arranger Prepares the Information memorandum Responsible for administering the loan Underwriting Facility manager Prepares, negotiates and gets the loan agreement
executed. + borrower gets to deal with single bank , easy to
raise , useful if a large quantum of money is to be raised
+ lead manager gets to retain relationship , earn a good fee , advantageous for the participating banks as well
Security
Essential features Credible deterrent against default Fall back in case assumptions go wrong Should be as liquid and as easily marketable as
possible Security creation formalities vary with
Type of security Moveable Immoveable
Constitution of borrower
Mortgage
Transfer of an interest in a specific immovable property for the purpose of securing Existing debt Future debt Performance of an engagement , which may give
rise to a pecuniary liability Mortgager Mortgagee Mortgage money Mortgage deed
Types of mortgage Simple mortgage
Bank not in possession of the property , but registration is mandatory.
Bank needs to approach court to sell and recovery money
Proceeds from property remain with mortgagor Mortgage by conditional sale
‘ostensible sale’ to the bank If debt is not serviced, bank can cause foreclosure –
borrower loses right to redeem property Not preferred
Types of mortgage
Usufructuary mortgage Bank is in legal possession of property +
income proceeds If borrower fails to redeem ( within 30 yrs),
bank becomes owner English mortgage
There is an absolute transfer of property – if the due is paid , property is transferred back to borrower
In case of shortfall, bank can look to other assets
Types of mortgage
Equitable mortgage Most preferred form – less costly and easy Mortgage by deposit of title deeds – with an
intent to create mortgage Precautions to be taken Registration of EM ( in TN and few other states)
Anomalous mortgage ?
Pledge and hypothecation Pledge
‘bailment of goods as security for payment of debts or performance of a promise’
Possession is with the bank ( pledgee) Used for movable fixed assets of high value
Hypothecation Charge on movable assets Possession given on demand Precautions
Audit and inspection needed Should be fully paid stock Should be adequately insured – bank as first loss
payee
Charge Used specifically for ‘charges’ under Companies
Act, 1956 Fixed charge
Over designated fixed assets of the company Floating charge
Floats over present and future assets of the company
Assets can be sold Crystallizes into a fixed charge in case of default
First charge , second charge , subservient charge Pari – passu charge
Registered with ROC within 30 days of signing loan dox
Assignment
‘Actionable claims’ can be assigned by borrower to a bank Book debts (usually specific ) Money from govt / other agencies / companies Life insurance policies etc
Takes precedence over other creditors (if they do not have prior / superior charge)