LOANS & ADVANCES

Dr.Prashant S.Desai

Profit is the pivot on which the entire business

activity rotates. Banking essentially a business
dealing with money and credit. Like every
other business activity banks are profit
oriented. A bank invests its funds in many
ways to earn income. The bulk of its income is
derived from loans and advances.

PRINCIPLES OF SOUND LENDING

Safety
Liquidity
Profitability
Security
Purposeoftheloan
SocialResponsibility
Diversificationofrisks

SAFETY
The very existence of a bank depends on the safety of
its outstandings which should never be sacrificed to
the profit-earning capacity of its advances.
When a loan or investment is made, the banker will
have to ensure that the money advanced is returned
by the borrower along with interest within the
stipulated period. This is possible only when the
borrower does not face any risk & strictly adheres to
the terms & conditions of the loan. For this purpose,
the banker will have to chose such type of borrowers
who are prompt in repayment of the principal and
interest amount.

LIQUIDITY
The banker while making advances must see that the
money he is lending is not going to be locked up for a
long time, which should make his loans & advances
less liquid & more difficult to realize in cases of
emergency.
An asset is said to be liquid when it can be converted
into cash within a short notice, without loss. As the
bank is investing or lending the depositors money, it
has to take more precaution while doing so. The
depositor may demand his/her money at any time &
the bank must be in a position to repay the same.

PROFITABILITY
When a bank is undertaking lending or
investment, it has to earn a good return. The bank
has profit as its main business motive. So, while
lending or investing the depositors money, the
bank must earn higher interest or higher return. If
the bank is able to achieve this, it will be
deploying its funds in such ventures which give a
higher return.

SECURITY
The banker should ensure that the borrower has
the ability & will to repay the advances as per
agreement. Before granting a secured advance the
banker should carefully consider the margin of
safety offered by the security concerned &
possibilities of fluctuations in its value. If it is an
unsecured advance, its repayment depends on the
creditworthiness of the borrower, & that of the
guarantor, wherever applicable.

 The security & its adequacy alone should not

form the sole consideration for judging the
viability of a loan proposal.
The security accepted must be adequate & readily
marketable, easy to handle & free from
encumbrances.
It is the duty of the banker to check the nature of
the security & assess whether it is adequate for
the loan granted.
Apart from the collateral, the banker has also to
consider other factors such as capital of the
borrower, his character & capacity etc.

PURPOSE OF THE LOAN

The banker has to carefully examine the purpose for
which the advance has been applied for. In case the
advance is intended to be utilized for productive
purposes, it could be reasonably anticipated that cash
flows arising from productive activities will result in
prompt repayment.
The banker has to be careful to monitor the exact purpose
for which the advance is actually utilized. There is always
the possibility that the advance granted may be diverted
for purposes other than that indicated by the borrower at
the time of application. Thus, there should be proper
provisions for effective post credit supervision.

SOCIAL RESPONSIBILITY
The bank should not forget the fact that it is not
enough that only people of means are given bank
finance. Through productive effort bank finance
should make people creditworthy, & turn them
into people of means.
Technical competence of the borrower,
operational flexibility & economic viability of the
project, rather than the security which the
borrower can offer, should be considered in
evaluating a loan proposal.

 The identification of priority sectors in India for

the purpose of extending bank credit should be
considered as a positive development in the
banking system, aimed at effectively discharging
its responsibility towards society.
At the same time, this social responsibility should
not deter the banks from paying adequate
attention to the qualitative aspects of lending.
The credit needs of the priority sectors should not
be allowed to degenerate into irresponsible
lending.

DIVERSIFICATION OF RISKS
The banker should aim at spreading the advances
as widely as possible over different industries &
different localities. This would enable him to
compensate any losses which might arise as a
result of unanticipated factors adversely affecting
particular industries and/or particular localities.
It is also advisable for a banker to advance
moderate sums to a large number of borrowers
than advance large sums to a small number of
borrowers.

EVALUATION OF BORROWER
CHARACTER: The banker has to ensure that the
person is of integrity. He should assess the personal
characteristics
which include honesty, attitude,
willingness & commitment to repay debts.
CAPACITY: This includes the evaluation whether the
borrower has the potential to repay the loan from his
resources. It includes the borrowers success in
running in business or managing his cash flows.
Capacity of physical assets, plants & equipment, cash
flows etc. are usually taken into account in this
regard.

 CAPITAL: The financial strength of the borrower

represents the amount of equity capital that a firm
can liquidate for payment of debt in the
eventuality of call other means failing. The
amount of the borrowers capital in relation to
debt is relatively easy to compute.
CONDITIONS: The banker has to assess the
conditions in which the borrower is operating his
business. STEP analysis stands for Social,
Technological, economic & Political conditions.

 COLLATERAL: Banker has to ensure safety of

funds lent. He ensures this by retaining collateral
other than the primary security. The possibility
that the borrower may lose the collateral may in
fact act as an incentive for him to repay his debt.
COMPLIANCE: The loan advanced should be in
accordance with the rules & regulations as
stipulated by the government & regulatory
authorities in order to safeguard the interest of the
banker

TYPES OF SECURITIES
The securities may be immovable or movable
security, debts etc. The land and buildings,
machineries embedded to earth etc. come under
the category of immovable, whereas goods,
vehicles, furniture, machineries, gold ornaments
etc. come under the category of movable security.
Accounts receivables also known as book debts
are classified as intangible security.

 Classification of security may also be as personal and

tangible as well as primary and collateral. Personal
security refers to personal liability. The bank has a
right of action against the borrower, e.g. guarantee.
Tangible security is something that can be realised by
a sale or transfer, e.g. land, goods, stock etc.
Primary security is one that is registered as the main
cover for an advance; generally, assets against which
advance is made. For example, stock for cash credit,
machinery for term loans. Collateral security
is security other than the primary security lodged
by the borrower or by a third party.

BASIC PRINCIPLES
Adequacy of margin: In banking terminology, margin
refers to the difference between the market value of the
security and the amount of advance granted against it.
Banker needs to keep adequate margin because of the
following reasons:
i) The market value of the securities is liable to
fluctuations in the future with the result that the
bankers secured loans may turn into partly secured
ones.
ii) The liability of the borrower towards the banker
increases gradually as interest accrues and other
charges become payable by him.

 Marketability of security: If the borrower

defaults in making payment, the banker has to
liquidate the security to make good his funds. For
this, the security has to be marketable.
Documentation: Documents that are prepared
and signed by the borrower at the time of securing
the loan is of much significance as these
documents contain all the terms and conditions on
which a loan is sanctioned by the banker. Hence,
any misunderstanding or dispute later on may
easily be avoided or resolved.

METHODS OF GRANTING ADVANCES

1.CASHCREDITS
2.OVERDRAFTS
3.BILLSDISCOUNTING
4.ISSUEOFLETTERSOFCREDIT
5.LOANS

CASH CREDIT
A Cash Credit is an arrangement by which a banker
allows his customer to borrow money up to a certain
limit against the values of his stocks & book debts
from day to day. This is the most favourite mode of
borrowing by large commercial & industrial concerns
in India, on account of the advantage that a customer
need not borrow at once, the whole amount he is
likely to require, but can draw such amounts as &
when required. He can put back any surplus amount
which he may find with him for the time being.

OVERDRAFTS
When
a
customer
requires
temporary
accommodation, he may be allowed to overdraw
his current account, usually against collateral
securities. This arrangement like the cash credit is
advantageous as he is required to pay interest on
the amount actually used by him.
The main difference between cash credit &
overdraft is the latter is supposed to be a form of
bank credit to be made use of occasionally & the
former is used for long terms by commercial &
industrial concerns doing regular business.

 Indian Overseas Bank, Madras v. Naranprasad

Govindlal Patel, (1980)21 Cr LJ 132, The customer
was enjoying overdraft facility for about 4 years.
Merely because the client was not required to execute
any document or to furnish any security would not
make such an arrangement an act of grace on behalf
of the bank. Such an arrangement even though
temporary is not one which can be terminated
unilaterally & at the sweet will of the bank without
giving notice to its constituent. The bank had
wrongfully dishonoured a cheque though it could be
honoured within the limits of overdraft facility.

 The Gujarat High Court held that the overdraft

arrangement between bank & its customer is a
contract & it cannot be terminated by the bank
unilaterally even if it is a temporary one. The
court held the bank liable for damages.

 OVERDRAFT IS A LOAN, REPAYABLE

WITH INTEREST
No express, oral or written agreement is necessary
for overdraft. The agreement for grant of overdraft
facility can be implied from conduct of the parties.
Where a customer having a current account in a
bank, even without any express grant of an overdraft
facility, overdraws on his account & the cheques
issued by him are honoured, without there being
sufficient balance in the account, the transaction
amounts to a loan & the customer is bound to make
good the loan to the bank with reasonable interest.
-Pagets Law of Banking, 1972 edn., p.132.

Charging of interest on overdraft account

The bank can charge compound interest at monthly rate
on overdraft amounts, even without an agreement.
In Balakrishna v. Bhawanipur Banking Corporation,
AIR 1932 Cal 521, where the agreement between the
bank & the customer did not stipulate anything, the bank
charged compound interest at monthly rate & the same
was debited to the account for a long time, later on, when
the customer objected to charging interest, the court held
that the conduct of the customer by not raising objecting
charging of interest, show that had agreed & adopted or
ratified the rate of interest that was being charged.

 In Konakalla v. SBI, AIR 1975 AP 113, where

in an overdraft account, the bank was sending
periodical statement of account showing that
interest is being charged & debited at the
compound rate, the customer did not raise any
objection, it was held that agreement provided
for charging compound rate of interest & bank
is justified in charging interest at the
compound rate.

BILLS DISCOUNTING
The banker advances money on the security of
bills of exchange after deducting a certain
percentage, technically known as discount,
from the face value of the bill.
This method of providing financial
accommodation is heavily favoured by
conservative bankers according to whom the
earning assets of a commercial bank should
consist mainly of short term self-liquidating
productive loans.

ISSUE OF LETTERS OF CREDIT

Trade between countries is financed mainly through
letters of credit.
The International Chamber of Commerce defines a letter
of credit as: any arrangement however named or
described whereby a bank (the issuing bank) acting at the
request & in accordance with the instructions of a
customer (the applicant of the credit) is to make payment
to or to the order of a third party (the beneficiary) or is to
pay accept or negotiate bills of exchange (drafts) drawn
by the beneficiary, or authorize such payments to be made
or such drafts to be paid, accepted or negotiated, by
another bank, against stipulated documents & compliance
with stipulated terms & conditions.

LOANS
In case of loan, the banker advances a lump sum for a
certain period at an agreed rate of interest. The entire
amount is paid on an occasion either in cash or by
credit in his current account which he can draw at any
time. The interest is charged for the full amount
sanctioned whether he withdraws the money from his
account or not. The loan may be repaid in instalments
or at the expiry of a certain period. The loan may be
made with or without security. A loan once repaid in
full or in part cannot be withdrawn again by the
customer. In case a borrower wants further loan, he has
to arrange for a fresh loan.

TERM LOAN
Where a loan is granted for a period exceeding
one year & is repayable according to a
schedule of repayment, as against on demand
& at a time is known as term loan.
Where the period exceeds one year but not, 5
to 7 years, it is known as medium term loan.
A loan with longer repayment schedule is
known as long term loan.

PARTICIPATION LOAN or CONSORTIUM

ADVANCE
Where single loan is granted by more than one
financing agency, it is termed as a participation
or consortium loan. Such participation
becomes necessary where either the risk
involved is too large for one or more of the
participating institutions to take individually or
there are administrative or other difficulties in
servicing & follow up of the loan.

PERSONAL LOANS
Personal loans, unlike industrial & commercial
loans, are extended to customer for meeting their
personal requirements mostly connected with
their standard of living & amenities for life such
as decorations & repairs to houses, purchase of
radio sets, motor cars, refrigerators, items of
furniture & even professional equipment.
These are unsecured loans repayable in easy
instalments extending up to a period of specified
years.

SELECTIVE CREDIT CONTROL IN INDIA

Selective credit control is exercised by the RBI
under the authority vested in it by virtue of the
provisions of Sections 21 & 35-A of the Banking
Regulation Act.
Under S. 21, the RBI has been empowered to
determine the policy in relation to advances to be
followed by all banks or by any particular bank,
when it considers it necessary to do so in the
public interest or in the interests of the depositors
or banking policy.

 RBI may give directions to banks on different aspects

of granting accommodation viz.,
a. The purposes for which advances may or may not be
made
b. The margins to be maintained in respect of secured
advances
c. The maximum amount of advances or other financial
accommodation which may be made by a bank to or
the maximum amount of guarantees which may be
given by a bank on behalf of, any one company, firm,
association of persons or individual, having regard to
that banks financial position such as paid-up capital,
reserves & deposits & other relevant considerations.

d. The rate of interest & other terms & conditions

subject to which advances or other financial
accommodation may be granted or guarantees may be
given.
Subsection (1) of section 35-A of BR Act also gives
power to RBI to issue directions to banks in the
public interest, in the interest of banking policy, to
prevent the affairs of any bank being conducted in a
manner detrimental to the interests of the depositors
or in a manner prejudicial to the interests of the bank,
or to secure the proper management of any bank
generally.
U/S 36(1)(a) RBI may also caution or prohibit banks
from entering into any particular transaction or class
of transactions, & generally give advice to any bank.

TOOLS OF SELECTIVE CREDIT CONTROL

The main instruments of selective credit control
in India are:
a. Minimum margins for lending against selected
commodities
b. Ceilings on the levels of credit and
c. Charging of minimum rate of interest on
advances against specified commodities.
These tools of control are operated & modified by
RBI from time to time in such manner as is
considered appropriate to meet particular
situations or to achieve the desired directional
flow of credit

PRIORITY SECTOR ADVANCES

Priority means to give preference & privilege.
The concept of Priority Sector Lending (PSL) is
mainly intended to ensure that assistance from the
banking system flows in an increasing manner to
those persons & sectors of the economy which,
through accounting for a significant proportion of
the national product, have not received adequate
support of the institutional finance in the past.
Under the new banking policy, stress is laid on the
weaker & under privilege groups & vital sector as
priority sectors.

 Priority sector lending scheme is a policy of providing

a specified portion of bank lending to the important
sectors of the economy.
It includes agriculture, small-scale industries, cottage
sector, tiny sector, export sector, and other small
business (service) firms.
The Reserve Bank of India was first to initiate priority
sector lending scheme in India.
The main purpose of this scheme was to see that timely
and sufficient credits (loans) are given (provided) to the
priority sector.
Previously, only public sector banks were asked to give
loans to this sector. However, now even private and
foreign banks have to give loans to this sector.

PSL & ECONOMIC DEVELOPMENT

1. It can reduce the chronic debt owing to noninstitutional sources and the financial hardships
caused by manmade and natural calamities.
2. It will enable the persons engaged in priority
sector to produce a marketable surplus and
thereby contribute to the development process.
3. Credit is viewed as productive input and policy
makers think that it is possible to promote
specific agricultural activities by delivering predetermined amounts of loans to farmers.

4. In the agricultural segment, the credit enables the

farmers to expand areas under irrigation for remunerative
crops, increase the use of modern inputs and thereby
increase per acre and total yield of crops.
5. Credit for allied activities also helps the borrowers to
increase their income. The borrowers can witness
remarkable increase in his business turn over and income
in the post loan period. The increase in income can bring
an improvement in the quality of life of the borrowers.
6. Besides making available finance for development,
banks can play a catalytic role in developing
infrastructure, transferring technology and know-how,
offering guidance and above all educating the rural people
of varied target groups.

7.The PSL can also help to bring high rates of

adoption of new technology.
8. PSL may encourage entrepreneur ability which
contributes to economic growth in two ways:
i. By providing timely and adequate amount
of credit to those with technical skills and
entrepreneur talents who are not coming forward on
a higher economic terrain for want of sufficient
capital, and
ii. By attenuating uncertainty and absorbing
risk in arranging capital needed for their plans to be
implemented.

WEAKER SECTIONS UNDER PSL

Small & marginal farmers with land holding of 5
acres & less.
Landless labourers.
Tenant farmers & share croppers.
Artisans, village & small industries.
Beneficiaries of the integrated rural development
program (IRDP).
SCs & STs
Beneficiaries under differential rates of interest
scheme (DRI)

DIRECTIVES ISSUED BY RBI

Prioritysectorlendingshouldconstitute40%
aggregatebankcredit
Outoftheprioritysectoradvances,atleast40%
shouldbeprovidedtoagriculture.
Directadvancestotheweakersectionsinagriculture
&alliedactivitiesinruralsectorshouldformatleast
50%ofthetotaldirectlendingtoagriculture.
Theadvancestoruralartisans,villagecraftsmen&
cottageindustriesshouldbeatleast12.5%ofthe
totaladvancestothesmallscaleindustries.

VITAL SECTORS OF THE ECONOMY GETTING

PRIORITY UNDER THE SCHEME OF PSL
1. Agriculture sector
2. Micro & Small scale industries
3. Small road & water transport operators
4. Professional & self-employed persons
5. Retail Trade loan
6. Educational loan
7. State-sponsored corporations for SC/ST
8. Housing loans
9. Consumption loans
10. Other recommended priority sectors

AGRICULTURE SECTOR
In India, nearly one-third of its national income
comes from the agriculture sector. Its economic
and social development directly depends on the
expansion of the agriculture sector. Therefore, it is
treated as primary priority sector lending in India.
Agricultural loans are given to the farmers on
their need-based credit.
These loans are classified into following two
categories: 1. Direct Agricultural Loans
2. Indirect Agricultural Loans

Direct Agricultural Loans

Under this category, loans are directly given to the
farmers in form of tractor loan, dairy loan, crop
loan, etc. These loans are given either for a shortterm period (which is not more than 12 months)
or for a medium and long-term period (which is
not more than 36 months).
Short-term loans are given to meet agricultural
expenses and maintenance of assets such as a
tractor, pumping machine, bore well, etc.
Medium and long-term loans are given for
agricultural activities like land reclamation, farm
building, farm mechanization, and so on.

Indirect Agricultural Loans

Here, farmers are provided loans at
concessional rates of interest. Indirect
agricultural loans benefit the farmers in the
long run. These loans are given for cattle feed,
warehouse,
seeds,
pesticides,
rural
electrification, subscription of bonds issued by
NABARD, boring equipment, etc.

SMALLSCALEINDUSTRIALLOANS
Loans given to small-scale and ancillary
industries are treated as priority sector lending.

SMALL ROAD AND WATER TRANSPORT

OPERATORS

 This category of borrowers includes owners of taxis,

trucks, buses, auto-rickshaws, cars, bullock-carts, camel,
etc. Under priority sector lending, small road and
transport operators get loans based on the conditions
mentioned in the notification issued by the Government
of India.
The repayment period of loan is communicated to the
borrower at the time of disbursement of loan.
Borrowing is done for the purchase of vehicles and their
parts. Bank mainly provides loans for the following
purposes:
a. Purchase of vehicles.
b. Purchase of spare parts.
c. Carrying out major repairs.
d. Working capital requirements.

Professionalandselfemployed

 Bankalsoprovidedloanstoselfemployed
personslike:
a.Freelancejournalists,
b.Ownersofhealthcarecentres,
c.Beautyparlours,
d.Photographers,
e.Fashiondesigners,andsoon.
Theborrowinglimitwillbeanaggregateof fixed
capital andworkingcapitalrequirementsofa
professionalandselfemployedperson.
Doctorsandotherselfemployedprofessionals
whostartpracticinginruralorsemiurbanareas
arealsoeligibletoborrowloans.

RETAIL TRADE LOAN

EDUCATIONAL LOAN

HOUSING LOAN

CONSUMPTION LOAN

STATE-SPONSORED CORPORATIONS
FOR SC/ST

Other recommended priority sectors

VARIOUS CREDIT SCHEMES UNDER

PRIORITY SECTOR

Differential Rates of Interest Scheme (DRI)

Swarnjayanti Gram Swarozgar Yojana (SGSY)
Prime Ministers Rozgar Yojana (PMRY)
Swarnajayanthi Shahari Rozgar Yojana (SJSRY)
Programme for Adi-Dravidars (PAD)
Programme for Backward Class People and
Minorities (BC Welfare)
Rural Employment Generation Programme
(REGP)

Differential Rates Of Interest Scheme (DRI)

This scheme was launched in India in 1972 for public
sector banks to extend bank credit to the weaker section
at concessional rate of interest at 4% p.a.
According to new guidelines issued by RBI, banks have
to deploy 1% of their total advances to the weaker
section of society and further to set aside 40% of their
advances meant under DRI scheme for beneficiaries
belonging to the scheduled castes and scheduled tribes.
The eligibility for assistance under this scheme is now
Rs.6400 annual family income in rural areas and
Rs.7200 per annum per family in urban areas.
The private sector banks can also participate in this
scheme on a voluntary basis.

 Under the DRI scheme, the banks are directed by the

Reserve bank to finance:
a. Scheduled castes and scheduled tribes and other
engaged on the modest scale in agriculture and allied
activities.
b. The physically-handicapped people on the modest
scale by offering loans for cottage and rural industries
and vocations like sewing garments, making
reasonably cheap edibles, running way side tea stalls,
basket-making etc.
c. People engaged in elementary processing of forest
products.
d. Village artisans in the decentralized sector.

Swarnjayanti Gram Swarozgar Yojana (SGSY)

This is a modified scheme, replacing IRDP and other subschemes viz.,
1. Integrated Rural Development Programme (IRDP)
2. Training of Rural Youth for Self Employment
(TRYSEM)
3. Development of Women and Children in Rural Areas
(DWCRA)
4. Supply of Improved Toolkits to Rural Artisans (SITRA)
5. Ganga Kalyan Yojana (GKY)
6. Million Wells Scheme (MWS)
It came into existence during the Golden Jubilee year of Indian
Independence, and the scheme derives its name to mark the
occasion.

Objective of the Scheme

The Scheme aims at establishing a large number
of micro enterprises in the rural areas. The list of
Below Poverty Line (BPL) households identified
through BPL census duly approved by Gram
Sabha will form the basis for identification of
families for assistance under SGSY.
The objective of SGSY is to bring the assisted
poor families (Swarozgaris) above the poverty
line by ensuring appreciable sustained income
over period of time.

 This objective is to be achieved by inter alia

organising the rural poor into Self Help Groups
(SHGs) through the process of social
mobilisation, their training and capacity
building and provision of income generating
assets. The rural poor such as those with land,
landless labour, educated unemployed, rural
artisans and disabled are covered under the
Scheme.

Salient features of this scheme

It is a redesigned antipoverty programme, for generation
of employment
There would be shift from individual beneficiary
approach to a cluster/group approach. To facilitate this
process, Self-Help Groups (SHG) are formed.
SHGs, which have demonstrated the potential of viable
group, will be considered for revolving fund assistance
initially after first grading and assistance for economic
activities will be considered once the identified groups
sustain its viability and pass through the second grading.
The Group approach will focus on identification of a few
specified viable key activities based on available local
endowments and occupational skills of the members of
the group.

 The credit flows and average level of investment per

family will be enhanced.
The programme will have greater participation of Gram
Panchayats.
For group of Swarozgaris (SHGs) the subsidy would be at
50 % of the cost the scheme subject a ceiling of Rs.1.25
lakhs. There will be no monitory limit on subsidy for
irrigation Projects.
Group Life Insurance for Swarozgaris is also ensured
under the scheme.
Scheme provides for creation of risk fund for the
consumption credit requirement of the Swarozgaris.

Prime Ministers Rozgar Yojana (PMRY)

The Prime Minister's Rozgar Yojana (PMRY) has
been designed to provide employment to educated
unemployed youth by setting up of micro enterprises
by the educated unemployed poor. It relates to the
setting up of the self-employment ventures for
industries, services and business in Rural and urban
areas.
The scheme covers all educated youth with the
minimum qualification of VIII Standard (passed).
Preference will be given to those who have been
trained for any trade in Govt. recognized/ approved
institutions for a duration of at least 6 months.

 All educated unemployed youth between the

age of 18 and 35 years on the date of receipt of
application by the concerned DIC will be
eligible for loan under the scheme in general
with a 10 years relaxation for SC/ST/ Ex
servicemen /physically handicapped and
women i.e. up to the age of 45.
The Income of the beneficiary along with the
spouse or the income of parents of the
beneficiaries shall not exceed Rs.100,000/- per
annum

 All projects up to an outlay of Rs.2.00 lakh for

business/service sector and Rs.5.00 lakhs for
industry sector, loan to be of composite nature.
Partnerships are also considered for projects up to
Rs.10.00 lakhs subject to the maximum allowed
up to the individual ceiling limits.
Self Help Groups can be considered for assistance
under the scheme provided 1)Educated
Unemployed Youth satisfy the eligibility criteria
laid down under the scheme to volunteer to form
SHG to set up self- employed ventures(Common
Economic Activity)

1. No upper ceiling on project cost

2. The subsidy ceiling for Self Help Group is
Rs.15000/- per beneficiary subject to a maximum of
Rs.1.25 lakh per SHG
3. The exemption from collateral is limited to
Rs.5.00 lakh per member of SHG to projects. Under
Industry sector and Rs.2.00 lakh per member of
SHG under service and business Sectors.
4. Required margin money contribution (ie. Subsidy
and margin to be equal to 20% of the project cost)
should be brought in by the SHG collectively.

 5% to 16.25% of the project cost to be brought as

own contribution by the beneficiary.
15% subsidy on the project cost with a ceiling of
Rs.12500/- per beneficiary.
All projects under Industries, Services, Business
and Agriculture are eligible excepting direct
agricultural activities like raising crop, purchase
of manure etc.
Beneficiaries are to undergo compulsory training
organized by DIC.
Reservation for SC/ST and OBC at 22.50% and
27% respectively.

 No collateral security is required under Industry Sector

with project cost up to Rs.5.00 lakh or partnership
projects under Industries sector the exemption limit for
abstention of collateral security will be Rs.5.00 lakhs
per borrower account. For units in Service and business
sector no collateral for projects up to Rs.2.00 lakh.
Exemption from collateral in case of partnership
projects will also be limited to an amount of Rs.2.00
lakh per person participating in project.
The exemption from collateral in respect of partnership
projects in Industry sector will be Rs.10 lakh per
Borrowable account in Tiny sector.

Swarnajayanthi Shahari Rozgar Yojana (SJSRY)

It was launched on 01.12.1997.
Addressing urban poverty alleviation through
gainful employment to the urban unemployed or
underemployed poor by encouraging them to set
up self employment ventures (individual or
group), with support for their sustainability; or
undertake wage employment;
Supporting skill development and training
programmes to enable the urban poor have access
to employment opportunities opened up by the
market or undertake self-employment;

 Empowering the community to tackle the issues

of urban poverty through suitable self- managed
community structures like Neighborhood Groups
(NHGs), Neighborhood Committees (NHC),
Community Development Society (CDS), etc.
The delivery of inputs under the Scheme shall be
through the medium of urban local bodies and
community structures.
Thus, Swarna Jayanti Shahari Rozgar Yojana
seeks to strengthen these local bodies and
community organizations to enable them address
the issues of employment and income generation
facing the urban poor.

FiveMajorComponents
(i) Urban Self Employment Programme (USEP)
(ii) Urban Women Self-help Programme
(UWSP)
(iii) Skill Training for Employment Promotion
amongst Urban Poor (STEP-UP)
(iv) Urban Wage Employment Programme
(UWEP)
(v) Urban Community Development Network
(UCDN)

Programme for Adi-Dravidars (PAD)

Under this scheme, the Adi-dravidar
Community people living below the poverty
line are identified every year and are assisted
with the loan-cum-subsidy and Margin money
scheme for viable Trades/Business/Professions
and other economical activities under Selfemployment scheme, so as to raise their
economical standard of living.

Criteria for the assistance under the scheme

25% of the unit cost or Rs 10,000 which ever is less will be
deposited with the concerned banks as margin money for a
period of 3 years or till the recovery of the loan whichever
is earlier and is refundable by the banks after maturity to the
Corporation. The interest earned on the deposit is to be
shared by the Corporation and the beneficiary on 50:50
basis
50% of the unit cost or Rs.10,000 whichever is less will be
released from the Special Central Assistance as subsidy
which is not refundable by the beneficiaries
The remaining portion 50% of the unit cost or the entire
balance amount of the unit cost will be released by the
banks as loan at nominal rate of interest as prescribed by
RBI from time to time.

Programme for Backward Class People and

Minorities (BC Welfare)
The scheme envisages Margin Money
Assistance/subsidy for the Backward Classes
and minorities & training programme in
various trades like Typewriting, Shorthand,
Computer
orientation,
Two-Wheeler
Mechanism, etc.

Rural Employment Generation Programme

(REGP)
REGP (Margin Money Scheme) is applicable for new village
industries only and the total project cost should not exceed Rs
25 lakhs.
25% of the project cost for the projects up to Rs.10 lakhs will
be provided as margin money.
For projects above Rs 10.00 lakhs and upto Rs.25.00 lakhs rate
of margin money will be 25% of Rs.10 lakhs plus 10% of the
remaining cost of the project
Margin money grant will be at the rate of 30 % of the project
cost up to Rs 10.00 lakhs and above this amount up to Rs.25
Lakhs, it will be 10% of the remaining cost of the project
Only one person from one family is eligible for obtaining
finance under the REGP

 All viable village industry products i.e. an industry located in

rural area which produces any goods or renders any service
with or without the use of power involving per capita fixed
capital investment not exceeding Rs.50000/-. Areas outside the
municipal limits with population not exceeding 20000 are
deemed to be rural areas.
Maximum amount of Margin Money admissible would be
Rs.2.50 lacs for General Category entrepreneurs and Rs. 3.00
lacs for weaker section entrepreneurs irrespective of the cost of
the project.
For General Category the borrowers contribution has to be
10% and for SC/ST & other weaker sections the borrowers
contribution has to be 5% of the project cost. For general
category borrowers the quantum of loan is 90% and for SC/ST
& other weaker sections the quantum is 95% of the project
cost.

Women Entrepreneurs
Banks in India is keen on supporting women from all
the sectors of the Society by way of schemes to give
assistance to Rural Women in Non-farm Development
(ARWIND) and Development of Women and
Children in Rural Areas (DWCRA).
These schemes include small scale industrial
undertakings, artisans, village & cottage industries,
small road transport operators, small businesses,
professionals and self employed, retail traders,
agriculture & allied activities Swarnajayanti Gram
Swarojgar Yojana (SGSY) and Self Help Groups
(SHGs)

SecuredandUnsecuredAdvances
Securedadvancesarethoseadvances,which
provideabsolutesafetytothebankerby
meansofachargecreatedonthetangible
assetsoftheborrowerinfavour ofthebanker.
Insuchcases,thebankergetscertainrightsin
thetangibleassetsoverwhichachargeis
created.
Unsecuredadvancesarethoseadvancesmade
onthepersonalsecurityoftheborrower.

ModesofcreatingaCharge
Lien: Section117ofIndianContractAct,the
bankerisempoweredtoretainallsecuritiesof
thecustomer,inrespectofthegeneralbalance
duefromhim.
Theownershipofsuchsecuritiesisnot
transferredfromthecustomertothebanker.
Thebankergetstherighttoretainthesecurities
handedovertohiminhiscapacityasabanker.
Abankerslienisconsideredtantamounttoan
impliedpledge&hegetstherighttosellthe
securitiesincertaincircumstances.

 Pledge:Sec.172ICAct,itisabailmentof
goodsassecurityforpaymentofadebtor
performanceofapromise.Thus,incaseof
pledge
i. thereshouldbebailmentofgoods
ii. Theobjectiveofsuchbailmentshouldbeto
holdthegoodsassecurityforthepayment
ofadebtortheperformanceofapromise.
iii. Onthepawners repayingthedebtor
performinghispromisethegoodsmustbe
returnedtohim.

 Hypothecation: Under hypothecation neither

ownership nor possession of goods is
transferred to the creditor but an equitable
charge is created in favour of the creditor. The
goods remain in the possession of the
borrower, who binds himself, under an
agreement, to give the possession of the
goods to the banker, whenever the banker
requires him to do so.

 Mortgage: Sec. 58 of Transfer of Property Act

The transfer of an interest in specific
immovable property for the purpose of
securing the payment of money, advanced or
to be advanced by way of loan, an existing or
future debt, or the performance of an
engagement which may give rise to a
pecuniary liability.

ADVANCES AGAINST GOODS:

1. Better security Goods and commodities are tangible
assets and provide better security to the banker as
compared to the unsecured advances, including
guaranteed advances and discounting of bills.
2. Prices of necessary goods are stable The prices of the
goods which are necessaries of life are relatively
stable over a short period, though not necessarily
over a long period. But wide variations in the prices of
luxury goods take place due to changes in demand,
fashions and tastes of the people. Bankers are
generally reluctant to accept the commodities the
prices of which are uncertain and fluctuate too widely
and frequently.

3. Goods and commodities can be liquidated more

easily. Some commodities like wheat, sugar and
cotton enjoy ready market while the demand for
manufactured articles of seasonal utility or of
durable consumer goods is not constant
throughout the year. The banker is naturally
inclined to accept the commodities having
regular and steady demand and wide market.
4. Bankers Lend Shorter duration of advances
against goods Because the goods and
commodities decay or deteriorate in quality over
a period of time, bankers lend against them for
shorter periods only.

 ADVANCES AGAINST DOCUMENTS OF TITLE TO

GOODS: A document of title to goods represents
actual goods in the possession of somebody else. It
confers on the purchaser the right to receive the
goods and to transfer such right to any other person
by mere delivery or by endorsement and delivery.
A document of title to goods is a document used in
the ordinary course of business as a proof of the
possession or control of goods. Bill of Lading, Dock
Warrants, Warehousekeepers or wharfingers
certificate, railway receipts and delivery orders are
the instances of the documents of title to goods.

Bill of lading A bill of lading is a document

issued by a shipping company acknowledging the

receipt of goods for carrying to a specified port.
It also contains the conditions for such
transportation of goods and full description of
the goods, i.e., their markings and contents as
declared by the consignor.
It is to be noted that a Bill of Lading is prima facie
evidence of the fact that the packages, as
specified therein, were put on board the ship but
the shipping company is not responsible for the
contents of the bags or the bales entrusted to it
for transportation.

Warehouse receipts
An
important
objective
of
promoting
warehousing in the country has been a enable
the owners of commodities agriculturists and
tradersto acquire a convenient security in the
form of warehouse receipt, which can be
accepted as security by the banks.
To popularise the warehouse receipts as security
for loans from banks, the Reserve Bank granted
some concessions in respect of such advances in
its selective credit control directives in the past.

Railway receipt
Railway receipt is a document acknowledging the
receipt of goods specified therein for
transportation to a place mentioned therein.
It is transferable but not a negotiable instrument.
It can be transferred by endorsement and
delivery.
As the receipt is to be produced before the
railway authorities to clear the goods at the
destination, advances sought against such receipt
are for very short periods.

Trustreceipts
The goods or the documents of title to goods pledged
with a banker as security for an advance are usually
released by the banker on the repayment of the
borrowed amount. Sometimes the borrower wishes to
get the security released before he actually repays the
loan. In such cases, the banker may, at his discretion,
allow the customer to get back the goods or
documents and ask the latter to execute a Trust
Receipt.
By signing such receipt, the customer undertakes to
receive the goods or the documents of title to goods in
trust for the lender. The borrower promises to hold the
goods or their sale proceeds as trustee for the banker
and to pay the same to the latter as and when
received.

ADVANCESAGAINSTSTOCKEXCHANGE
SECURITIES
Features
Security Though the stock exchange securities
are paper documents, they are treated as
tangible assets because of their easy
marketability.
Liquidity The stock exchanges provide a ready
market for these securities. They can be
disposed of more quickly and conveniently as
compared to any other security.

 Accrualofincome Thesecuritiesyieldincome
bywayofinterestanddividend.Theincome
receivedbythebankeronsuchsecuritiesis
adjustedtowardstheduestoberecovered
fromthecustomerandtothatextentthe
lattersliabilitytowardsthebankerisreduced.
Convenience Itisconvenientforthebanker
toacceptstockexchangesecuritiesbecause
hecaneasilyexaminethetitleoftheholder.

GovernmentSecurities:
Government securities are the safest and easily
realizable securities for bank advances. Government
securities may be issued as (i) inscribed stock, or (ii)
promissory notes. Government promissory notes
contain a promise on behalf of the President of India,
in case of Central Government Securities, or the
Governor of the State concerned, in case of State
Government Securities, to pay the specified sum of
money to the holder of the Note (i.e., either the
payee or the last endorsee whose name appears on
the back) on a specified date or after a certain
notice, subject to the terms and conditions of issue.

Nationalsavingcertificates
The Central Bank has permitted the banks in
India to grant advances against National
Saving Certificates.
Banks are directed to prescribe a margin of
25% on the original investment in these
certificates, without taking into account
accrued interest.
Thus, advance may be granted to the extent of
75% of the value of such certificates.

Kisan Vikas Patras

The Reserve Bank of India has permitted the
Commercial banks to grant loans against the
security of Kisan Vikas Patras.
Banks should take account the purpose of the
loan and should follow the RBIs direction on
interest rates.
The maturity period of such Patras is five and half
years. A certificate can be prematurely encashed
(i) on the death of the holder or any of the
holders in case of joint holders, (ii) on forfeiture
by a pledgee, being a gazetted Government
officer or (iii) when ordered by a court of law.

Indira Vikas Patras

Advancesagainstthesepatras canbegranted
afterconsideringthepurpose.Premature
encashmentofthesepatras isnotallowed.
Hencemarginmaybedeterminedbythebanks
dependingupontheresidualperiodforwhichthe
certificateistorun.
Thepatras canbepledgedinfavour ofthebanks.
Noliencanberegisteredasthecertificatesare
issuedwithoutregisteringthenameofthe
purchaser.
Banksshouldtakeutmostcarefortheirsafe
custody,astheyarefreelytransferable.

Corporatesecurities:
Preferenceshares&Debentures
Precautionstobetakenbythebanker
1) Selectionofshares
2) Valuationofsecurities
3) Creationofchargeoversecurities
Reservebanksguidelinesregardingadvances
againstshares sections19(2)and(3)and
20(1)(a)oftheBankingRegulationAct,1949

ADVANCESAGAINSTLIFEINSURANCEPOLICIES
The policy can legally be assigned to the banker
According to the terms and privileges of the Life
Insurance Policy, it can be assigned to anybody
including a banker and such assignment is duly
registered by the life insurance companies.
As the Life Insurance policy is handed over to the
banker after its assignment is registered in the books of
the L.I.C. the banker need not worry about the
supervision of the security.
It is an easily realizable asset. Its value can be easily
realized by the banker on the death of the customer.
The formalities required to be undertaken by the
banker are few and not difficult.

ADVANCESAGAINSTFIXEDDEPOSITRECEIPTS
Afixeddepositreceiptissuedbythesamebankis
thesafestsecurityforgrantinganadvance,
becausethereceiptrepresentsadebtduefrom
thebankerhimself.
Recentlythereservebankhas,therefore,advised
thebanksthatadvancesagainstthesecurityof
theirowndepositsmaybeexcludedfromthe
purviewofexposureceiling.
Abankershouldnotgrantanadvanceonthe
securityofafixeddepositreceiptissuedby
anotherbankbecausethelatterpossessesits
paramountlienoverthereceipt.

ADVANCESAGAINSTBOOKDEBTS
Section130oftheTransferofPropertyAct.1882,
permitstheassignmentofanactionableclaimto
anyoneexcepttoajudge,alegalpractitioneror
anofficerofaCourtofJustice.
AccordingtoSection3,actionableclaimmeans
aclaimtoanydebtoranybeneficialinterestin
movablepropertynotinthepossessionofthe
claimantwhichthecivilcourtsrecognizeas
affordinggroundsforrelief,whethersuchdebtor
beneficialinterestbeexistent,accruing,
conditionalorcontingent.

ADVANCESAGAINSTGOLDORNAMENTSAND
JEWELLERY
TheReserveBankhaspermittedbanksto
acceptgoldornamentsforenablingthe
borrowerstomeettheirurgentmedical
expensesandotherunforeseenliabilities.
RBIguidelinestobefollowedfromtimeto
time.