Credit Services

Module-3

Principles of Bank Lending Policies

1. 2. 3. 4. 5. 6. Safety Liquidity Profitability Purpose of loan Principle of diversification of risks Security

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 depositors 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.

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 oflending is recovered on demand.

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.

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.

Principle of diversification of risks

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, etc. Concentrating on a particular set of customers will adversely affect the bank.

Security
The security offered against the loan is big like land, ornaments, building, shares etc.

Working Capital & Term Loan

Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy.

Difference
Working capital loans can help company in financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets. There are many types of working capital finance. It is normally in the form of Fund Based Finance and Non Fund Based Finance depending upon the requirement of Industry, Trade and Service Sector. Funded facilities include cash credit, demand loan and bill discounting. Demand loans are considered also under the FCNR (B) scheme. Cash Credit facility is given against stock, so if any company is require to hold inventory in volume and for a long period, Cash Credit facility helps in keeping the inventory position. Generally bank finance 75% of the inventory value held by company on a particular day. The other mode of working capital finance is in the form of Book Debts, which is against Sundry Receivables

 Term Loan Finance Term facility is provided by the Bank and Financial Institution to various Business entities in order to carry out the capital expenditure. The various types of Capital Expenditure includes Plant erecting, Purchase of machinery, Expansion of existing capacity or any other capital purpose. Some of the banks are also provide term loan facility for repaying high cost debt, technology upgradation, R&D expenditure, leveraging specific cash streams that accrue into company, implementing early retirement schemes and supplementing working capital. Generally Term loan is given for a period from 3 to 10 years depending upon the size of the investment and repayment capability of the company. The rate of interest is generally depends project to project and bank prime lending rate.

What is Credit Appraisal?

ABILITY OBJECTIVE KNOWLEDGE INCLINATION SUBJECTIVE EXPERIENCE

What is being Appraised?

PERSON: Capacity - The ability to service the loan by financial resources/ income streams. Inclination - Willingness to pay. PROPERTY To check documents for creation of security To ensure end use

Credit rating for SME

CATEGORIES OF PRIORITY SECTOR

Agriculture (Direct and Indirect finance): Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and to others (such as corporates, partnership firms and institutions) up to Rs. 20 lakh, for taking up agriculture/allied activities. Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in Section I, appended. (ii) Small Scale Industries (Direct and Indirect Finance): Direct finance to small scale industries (SSI) shall include all loans given to SSI units which are engaged in manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) excluding land and building. Indirect finance to SSI shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.
(i)

 (iii) Small Business / Service Enterprises shall include small business, retail trade, professional & self employed persons, small road & water transport operators and other service enterprises as per the definition given in Section I and other enterprises that are engaged in providing or rendering of services, and whose investment in equipment does not exceed the amount specified in Section I, appended. (iv) Micro Credit : Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards, will constitute micro credit. (v) Education loans: Education loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those granted to institutions; (vi) Housing loans: Loans up to Rs. 15 lakh for construction of houses by individuals, (excluding loans granted by banks to their own employees) and loans given for repairs to the damaged houses of individuals up to Rs.1 lakh in rural and semi-urban areas and up to Rs.2 lakh in urban areas.

NON-FUND BASED FACILITIES

The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three broad categories as under: Letters of credit Guarantees Co-acceptance of-bills/deferred payment guarantees. Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits.

Letters of Credit

Bank should normally open letters of credit for their own customers who enjoy credit facilities with them Customers maintaining current account only and not enjoying any credit limits should not be granted L/C facilities except in cases where no other credit facility is needed by the customer. The request of such customer for sanctioning and opening of letter of credit should be properly scrutinised to establish the genuine need of the customer. The customer may be, required to submit a complete loan proposal Including financial statements to satisfy the bank about his, needs and also his financial resources, to mire the bills drawn under Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such customer should invariably make a reference to the, existing banker of the customer. In all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the bills drawn under L/C as per the financial arrangement already finalised.

Guarantees
The conditions relating to obligant being a customer of the bank enjoying credit facilities as discussed in case of letters of credit are equally applicable for guarantees also. In fact, guarantee facilities also cannot be sanctioned in isolation. Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and the bank is required to make the payment in terms of guarantee. Performance guarantee will be issued by the banks only on behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary experience and means to perform the obligations under the contract and is not likely to commit any default. As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years. Banks should not normally issue guarantees on behalf of those customer's who enjoy credit facilities with other banks.

Co-acceptance of Bills
1. Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal of customer's requirement is completed and the bank is fully satisfied about the genuineness of the need of the customer. Further customers who enjoy other limits with the bank should be extended such limits. 2. Only genuine trade bills shall be co-accepted and the banks should ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers. The valuation of goods as mentioned in the accompanying invoice should be verified to see that there is no overvaluation of stocks. 3. The banks shall not extend their co-acceptance to house bills/ accommodation bills drawn by group concerns on one another. 4. Before discounting/purchasing bills co-accepted by other banks for Rs.2 lakh and above from a single party, the bank should obtain written confirmation of the concerned controlling office of the accepting bank.

5. When the value of total bills discounted/purchased (which have been co-accpeted by other banks) exceed Rs.20 lakh for a single borrower/ group of borrowers prior approval of the Head Office of the co-accepting bank shall be obtained by the discounting bank in writing. 6. Banks are precluded from co-accepting bills drawn under Buyer's Line of Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarlybanks should not co-accept bills drawn by NBFCs. Further, banks should not extend co-acceptance on behalf of their buyers/constituents under the SIDBI scheme. 7. However, banks may co-accept bills drawn, under Seller's Line of Credit schemes for Bill Discounting operated by the financial institutions like IDBI, SIDBI, PFC etc. without any limit subject to buyer's capacity to pay and the compliance with exposure norms applicable to the borrower. 8. Where banks open L/C and also co-accept bills drawn under such L/C, the discounting banks, before discounting such co-accepted bills, must ascertain the reason for co-acceptance of bills and satisfy themselves about the genuineness of the transaction. 9. Co-acceptance facilities will normally not be sanctioned to customers enjoying credit limit with other banks.