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Definitions of lending
Disposing of money or property with the expectation that the same thing (or an equivalent) will
be returned . Credit is the provision of resources (such as granting a loan) by one party to another
party where that second party does not reimburse the first party immediately, thereby generating
a debt, and instead arranges either to repay or return those resources (or material(s) of equal
value)
Lenders - A loan is a type of debt. Like all debt instruments, a loan entails the
redistribution of financial assets over time
To provide money temporarily on condition that the amount borrowed be returned,
usually with an interest fee.
Today ,the important types of banks, commercial and merchant banks, operating under the
regulation of the Central Bank. The commercial banks engage in retail banking services
through branch networks and operate with a broad deposit base consisting of demand and
time deposit – they provide short term lending. On the other hand, merchant banks are
licensed to provide wholesale banking, take deposit and arrange syndicated loan facilities for
long terms by pooling, sometimes, a consortium of banks, including other financial
institutions, to finance capital intensive projects. From the foregoing, it is realized that banks
are generally debtors; they borrow money in order to lend them out to make profit. No bank
can ever survive by just being a custodian of deposit, but they exist by lending from the
deposit on fixed interest charged. Money lent on interest is always supposed to be secured on
some guarantees or security.
Since banks depend largely on lending, the need to adhere to the basic principles of lending is
quite inevitable. The principles, if strictly followed, will guarantee depositors and shareholders’
funds, increase profitability and make a healthy turn over. Such advances in turn assist in the
transformation of rural environment, promote rapid expansion of banking habit and improve and
boost the nation’s economy.
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The basic considerations in bank lending are the character of the client seeking loan from the
bank. The client must be an honest, upright customer whose record of transaction with the
financial institution or in the society is remarkable. The information on the character of the
borrower could be obtained through a completed form of his guarantor or his statement of
account.
For effective credit administration, the bank must assign functioning lending officers, properly
trained on lending, to be responsible for evaluation of reports and collection and reporting
findings to relevant senior schedule officers, for further consideration and final approval or
rejection
The major business of banking company is to grant loans and advances to traders as well as
commercial and industrial institutes. The most important use of banks money is lending. Yet,
there are risks in lending. While lending loans or advances the banks usually keep such
securities and assets as a supports so that lending may be safe and secured. Suppose, any
particular state is hit by disasters but the bank shall get advantages from the lending to another
states units. Thus, the effect on the entire business of banking is reduced. So the banks follow
certain principles to minimize the risk. Following are the important areas to be taken care
while lending:
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Basic principles
The success of banks depends upon the basic principles. These are the prime principles in
lending as well as investment
Safety
Liquidity
Profitability
Safety
Normally the bank uses the money of depositors in granting loans and advances. Because of
that while granting loans the banker should think about the safety of depositor’s money. The
purpose behind the safety is to see the financial position of the borrower, whether he can pay
the debt as well as interest easily. Ensuring safety means reducing risk associated with lending.
The risk involved in lending money is the credit risk.ie the possibility of the borrower not
repaying the amount back on the due date. It is necessary for the banks to maintain expert staff
to appraise every credit proposal received by it. Market risk also there , it can be avoided by
preferring high – grade securities of short terns.
Liquidity
It is a legal duty of a banker to pay the total deposited money to the depositor on demand. So
the banker has to keep certain percent cash of the total deposits in hand. Moreover the bank
grants loan. It is also for the addition of short term or productive capital. Such type of lending
is recovered on demand. A bank must have sufficient liquid assets to meet the demands of the
depositors .The liquid assets must have posses certain characteristics.
SLR : The Banking regulation act of 1949 , section 24 . states that every commercial bank
have to maintain liquid assets in the form of cash , gold, and gilt edged securities – which is
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not less than 25 % and not more than 40 % of NDTL ( Net Demand and Time Liabilities )
Profitability
Commercial banks are profit earning institutes; nationalized banks are also not an exception.
They should have planning of deposits in a profitability way to pay more interest to the
depositors and more salary to the employees. Before taking any decision the banker should
make sure that it is profitable.
General principles
Banks are following certain general principles in order to make a safe lending along with the
basic principles . that are explained in detail in the following paragraphs.
Principle of Security
Purpose of loan
Banks never lend or advance for any type of purpose that will lead to loose of money. The
banks grant loans and advances for the safety of its wealth, and assurance of recovery of loan
and the bank lends only for productive purposes. Before giving a loan the bank has to make
sure that whether the purpose for which the loan has given is productive or not.
A bank should be very careful while lending loans because if the bank lends to a non credit
worthy customer, it will affect the survival of the bank. To diversify the lending risk they
should lend loans to customers from different sectors such as agriculture, housing, educational,
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etc. Concentrating on a particular set of customers will adversely affect the bank.
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PRIVATE SECTOR BANKS
Financing Priority Sector in the economy is not strictly on commercial basis as not only the
general approach is liberal but also the rate of interest charged on such loans is less. Export
finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian
corporates. Part of the cost of this concession is borne by RBI by means of refinancing such
loans at concessional rate. Indian Banks, therefore, contribute towards economic development of
the country by subsidizing the business activities undertaken by entrepreneurs in the areas which
are consider "priority sector" by RBI.
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Cardinal principles of lending are Safety and liquidity , Profitability and diversifications
of risks and Productive purpose and security
Liquidity with a banker means Cash on Hand, Cash and Bank balances and Short term
current assets to convert into cash
Customer profitability analysis means Assess the profitability of customer’s business
Banker can reduce risk in lending to a borrower by ensuring that there will be no default
on account of lack of liquidity and lack of willingness to pay on the part of the borrower
In banker’s parlance, credit risk in lending refers to default of repayment by a borrower
The targets and sub-targets set under priority sector lending for domestic and foreign banks
operating in India are furnished below :
Export credit Export credit does not form part of 12 percent of NBC
priority sector
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Net bank credit
The net bank credit should tally with the figure reported in the fortnightly return submitted
under section 42(2) of the Reserve Bank of India Act, 1934. However, outstanding deposits
under the FCNR(B) and NRNR Schemes are excluded from net bank credit for computation of
priority sector lending target/ sub-targets.
1. Agriculture
4. Small business (Original cost of equipment used for business not to exceed Rs 20
lakh)
6. Professional and self-employed persons (borrowing limit not exceeding Rs.10 lakh
of which not more than Rs.2 lakh for working capital; in the case of qualified medical
practitioners setting up practice in rural areas, the limits are Rs 15 lakh and Rs 3 lakh
respectively and purchase of one motor vehicle within these limits can be included under
priority sector)
9. Housing [both direct and indirect – loans upto Rs.5 lakhs (direct loans upto Rs 10
lakh in urban/ metropolitan areas), Loans upto Rs 1 lakh and Rs 2 lakh for repairing of
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houses in rural/ semi-urban and urban areas respectively].
10. Consumption loans (under the consumption credit scheme for weaker sections)
11. Micro-credit provided by banks either directly or through any intermediaty; Loans to
self help groups(SHGs) / Non Governmental Organisations (NGOs) for onlending to
SHGs
12. Loans to the software industry (having credit limit not exceeding Rs 1 crore from
the banking system)
13. Loans to specified industries in the food and agro-processing sector having
investment in plant and machinery up to Rs 5 crore.
Direct Agricultural advances denote advances given by banks directly to farmers for
agricultural purposes. These include short-term loans for raising crops i.e. for crop loans. In
addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural
produce (including warehouse receipts) for a period not exceeding 12 months, where the
farmers were given crop loans for raising the produce, provided the borrowers draw credit from
one bank.
Direct finance also includes medium and long-term loans (Provided directly to farmers for
financing production and development needs) such as Purchase of agricultural implements and
machinery, Development of irrigation potential, Reclamation and Land Development Schemes,
Construction of farm buildings and structures, etc. Other types of direct finance to farmers
includes loans to plantations, development of allied activities such as fishery, poultry etc and
also establishment of bio-gas plants, purchase of land for agricultural purposes by small and
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marginal farmers and loans to agri-clinics and agri-business centres.
Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other
agencies. Important items included under indirect finance to agriculture are as under :
(i) Credit for financing the distribution of fertilisers, pesticides, seeds, etc.
(ii) Loans upto Rs. 25 lakhs granted for financing distribution of inputs for the allied activities
such as, cattle feed, poultry feed, etc.
(iii) Loans to Electricity Boards for reimbursing the expenditure already incurred by them for
providing low tension connection from step-down point to individual farmers for energising
their wells.
(iv) Loans to State Electricity Boards for Systems Improvement Scheme under Special Project
Agriculture (SI-SPA).
(v) Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained
with NABARD.
(vi) Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for
financing pump-set energisation programme in rural and semi-urban areas and also for
financing System Improvement Programme (SI-SPA).
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(a) The dealer should be located in the rural/semi-urban areas.
(b) He should be dealing exclusively in such items or if dealing in other products, should
be maintaining separate and distinct records in respect of such items.
(ix) Loans to Arthias (commission agents in rural/semi-urban areas) for meeting their working
capital requirements on account of credit extended to farmers for supply of inputs.
(x) Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture.
Small scale industrial units are those engaged in the manufacture, processing or preservation of
goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore.
These would, inter alia, include units engaged in mining or quarrying, servicing and repairing
of machinery. In the case of ancillary units, the investment in plant and machinery (original
cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.
The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in
respect of certain specified items under hosiery and hand tools by the Government of India
‘Tiny Enterprises’
The status of ‘Tiny Enterprises’ is given to all small scale units whose investment in plant &
machinery is upto Rs. 25 lakhs, irrespective of the location of the unit.
Industry related service and business enterprises with investment upto Rs. 10 lakhs in fixed
assets, excluding land and building will be given benefits of small scale sector. For computation
of value of fixed assets, the original price paid by the original owner will be considered
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irrespective of the price paid by subsequent owners.
Investments made by the banks in special bonds issued by the specified institutions could be
reckoned as part of priority sector advances, subject to the following conditions:
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Subscription to bonds exclusively floated by SFCs & SIDCs for financing SSI units will
be eligible for inclusion under priority sector as indirect finance to SSI.
iii. NABARD
Subscriptions to bonds exclusively floated by SIDBI for financing of SSI units will be
eligible for inclusion under priority sector as indirect finance to SSIs.
Subscription to bonds issued by NSIC exclusively for financing of SSI units will be
eligible for inclusion under priority sector as indirect finance to SSIs.
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a. Subscription to bonds issued by HUDCO exclusively for financing of housing,
irrespective of the loan size per dwelling unit, will be eligible for inclusion under
priority sector advances as indirect housing finance.
b. Investment in special bonds issued by HUDCO for on-lending to artisans,
handloom weavers, etc. under tiny sector will be classified as indirect lending to
SSI (Tiny) sector.
1. Small and marginal farmers with land holding of 5 acres and less and landless labourers,
tenant farmers and share croppers.
2. Artisans, village and cottage industries where individual credit limits do not exceed Rs.
50,000/-
3. Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY)
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY)
7. Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavangers (SLRS).
8. Self Help Groups (SHGs)
Actions taken in the case of non-achievement of priority sector lending target by a bank
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deposited with SIDBI for one year at the interest rate of 8 percent per annum.
All loan applications upto a credit limit of Rs. 25,000/- should be disposed of within a fortnight
and those for over Rs. 25,000/- within 8 to 9 weeks.
As per the current interest rate policy, in the case of loans upto Rs 2 lakh, the interest rate
should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above Rs
2 lakh, banks are free to determine the interest rate
The scheme known as Differential Rate of Interest Scheme (DRI) is now being
implemented by all Scheduled Commercial Banks.
Reserve Bank of India on 10th April 2008 has notified that borrowers with annual
family income of Rs.18000 in rural areas and Rs.24000 in urban areas will now be
eligible to avail of the facility as against the earlier annual income criteria of
Rs.6400 in rural areas and Rs.7200 in urban areas, fixed by the Government of
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India in 1986.
The other terms and conditions of the DRI scheme remain unchanged. The target
for lending under the DRI scheme will continue to be 1 per cent of the previous
years’ total advances
Purpose
This scheme offers need based financial assistance to those who intend taking up any
productive activity and has been tailored for persons whose income is very low. This scheme is
meant for :
Eligibility
Loans are granted to any person whose :
a. Family income from all sources is not more than Rs.7,200/- p.a. in metropolitan/ urban/
semi-urban areas or Rs.6,400/- p.a. in rural areas.
b. Land holding does not exceed 1.25 acres of irrigated land or 2.5 acres of dry land. Land
holding criteria does not apply to SC/ST borrowers.
Security
Hypothecation of assets created out of the loan only. Collateral security or third party guarantee
should not be taken.
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Amount of Loan
Composite loan upto Rs. 15,000/- & housing loan upto Rs.20,000/- .
Rate of Interest
4.00% p.a
Margin
No margin money is required to be provided by the borrower
Repayment
Repayment period for term loan is up to 5 years
Target Under the Scheme
1% of the previous years advances should be granted under the scheme.
Out of total DRI advance 40% should be granted to SC/ST beneficiaries and not less than
66.66% Of the DRI advances should be routed through Rural and Semi-urban branches.
DRI Beneficiaries
DRI Advances :
DRI beneficiaries are those who are given loans and advances @ 4% p.a. for individuals
engaged in cottage and rural industries viz. Basket makers, blacksmiths, broom makers,
carpenters, cobblers, cycle repairers, fire wood sellers, fish vendors, glass bangle sellers,
handicrafts, hawkers, leather farmers, mat makers, pan shops and tobacco merchants, papad
makers, potters, roadside tea stall cum eating houses, rope makers, sellers of eatable's, tailors,
teri-makers, vegetable vendors, home delivery service or article and commodities of daily use,
driving one's own manual rickshaw or cycle rickshaw etc. and Persons belonging to SC/ST
engaged on a very modest scale in agriculture and/or allied agricultural activities like dairy,
poultry, goat rearing, bee keeping etc. Further, persons physically engaged in the field of
cottage and rural industries and vocation such as spraying of pesticides and poor and needy
students of merit going for higher education who do not get scholarships/maintenance grants
from Government or educational authorities, physically handicapped persons pursuing gainful
employment could also be financed under the scheme.
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2. Institutions for physically handicapped/mentally retarded
3. Co-operative Societies where the amount is lent on the same terms and conditions as are
applicable to State owned Corporations for the Welfare of SC/ST.
4. State Corporations for SCs/STs.
GEOGRAPHICAL DIVERSIFICATION
Vertical Integration – integrating business along your value chain, both upstream and
downstream, so that one efficiently feeds the other
Horizontal Diversification – moving into more than one industry; the new business
usually somehow relates to the existing one, although a few conglomerates instead
pursue a strategy of unrelated diversification
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Geographical Diversification – moving into new geographical area to overcome
limited growth opportunities in the local market and/or to gain global leadership
positions
BIBLIOGRAPHY
1. E. Gup Benton & W . Kolari James, Commercial Banking 3rd Edition,Singapore ,John
Wiley &sons (Asia) ,2005 .
2. Shekher K C & Shekher Lekshmy , Banking theory and practice 19th Edition,
NewDelhi, Vikas Publishing House ,2007 .
3. Natarajan S & Parameswaran, Indian Banking 5th Edition ,NewDelhi, Sulthan Chand
&Co ltd ,2007 .
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4. Maheswari S. N & Paul R R,Banking theory &practice 3rd Edition ,NewDelhi, Kalyani
publishers,2006 .
5. Venugopalan , Banking theory and practice, Calicut , Feroke publishers , 2007
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