1. Banking - 5

2. 5. Lending activities
Topics: Principles of Lending, Fund based and Non Fund Based Limits, Corporate Lending, Financial Ratios, Credit Assessment, Loan Syndication, consortium advances, lending to Priority Sector, SME, Retail lending, Documentation, Law of Limitation.
Study Materials: Introduction to Banking- Vijayaragavan Iyengar Chapters, 15, 18, 19, 20

3. Principles of sound lending

4. Key factors of good credit – 5 C’s
Character
honesty and trustworthiness of borrower
Capital
Financial soundness and market standing.
Capacity
Borrowers legal standing and managements’ expertise.
Conditions
Economic environment or industry specific supply, production, and distribution factors.
Collateral
Secondary source of repayment or security in case of default.

5. The 5 C’s of Credit Analysis

6. CIBIL Credit Information bureau (I) Ltd.
a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of credit information reports.
RBI instructions to banks and financial institutions (FIs) to obtain the consent of all their borrowers to facilitate submission of details of all borrowal accounts to CIBIL for compilation of credit information data base
accessible to member banks to significantly improve the quality of credit appraisal and decisions.

7. Credit policy
RBI Guidelines on Loans and Advances

8. Types of Loans and Advances
FUND BASED
TERM LOANS
WORKING CAPITAL
CASH CREDIT
OVERDRAFT
EXPORT PACKING CREDIT
BILLS FINANCE
NON FUND BASED
GUARANTEE
LETTER OF CREDIT
BILLS CO ACCEPTANCE

9. Definition of Working Capital
  Working Capital refers to that part of the firm’s capital, which is required for financing short- term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.

10. Methods of Assessment of W. capital
Operating/ trade cycle
Drawing power Method
Tandon Committee Norms - Methods of Lending.
Turnover method
Cash Budget system

11. Loan Delivery System Objectives
Loan delivery system (FB W/C limits of Rs.10 crores & above from banking system)
Cash Credit - 20%
Demand Loan – 80%  
Domestic Credit portion to be bifurcated into loan component and Cash Credit
Relaxation.

12. Length of operating Cycle
a. Procurment of Raw Material
30 days
b. Conversion / Process time
15 days
c. Average time of holding of FG
d. Average Collection Period
e.Operating Cycle (a+b+c+d)
90 days
f. Operating Cycle in a year (365days/e)
4 cycle

13. Operating Cycle Method
B. Total Operating Expenses per
Annum
Rs lakhs
C. Total Turnover per Annum
Rs lakhs
D. Working Capital Requirement
= Total Operating Expenses (B)/ No. of operating Cycle
Rs 15 lakhs

14. Drawing Power Method Particulars Stock value Margin DP
for units with small limits
(Rs.in lacs)
Particulars
Stock value
Margin DP
Paid stocks (RM-Creditors) 4
25% 3
Semi Finished goods
50% 2
Finished goods
Book debts
Total 16 10

15. Turnover Method - originally suggested by Nayak Committee for SSI units
Sales Turnover B
25% of sales Turnover C
5% of Sales Turnover projected as margin D
Actual NWC existing as per Last Financial Statement E
B – C F
B – D G
MPBF (E or F whichever is less) H
Additional margin to be brought in (C-D)

16. MPBF Method Tandon’s II method of lending)
Current Assets B
Current Liab. other than Bank Borrowings C
Working Capital gap (A-B) D
Minimum Stipulated NWC
(25% of CA excluding export receivables) E
Actual/projected NWC F
C – D G
C – E H
MPBF (F or G whichever is less) I
Excess borrowings/short fall in NWC (D-E)

17. Justifications of the Performance Projection
(Inventory/Receivable Norms – Comparison)
Intra firm Comparison
Comparison of estimates with previous years actuals.
For New Units:
Comparison of estimates with similar units in the area of operation.
Higher projections shall be justified.

18. Important Aspects of MPBF method
Production/Sales estimates
Profitability estimates
Inventory/receivables norms
Build up of Net Working Capital

19. Peak deficit is financed and drawings regulated by monthly budgets
Cash Budget
Statement showing forecast of cash receipts, cash payments and net cash balance over a period of time
Months->
Cash Receipts
Cash Payments
Surplus/deficit
Cash credit – OB
Cash credit - CB
Peak deficit is financed and drawings regulated by monthly budgets

20. Cash Budget Advantages:
Suitable for seasonal industries, contractors, software
exporters etc.
Limitations:
Will not reflect changes in various current assets and
liabilities.
Will not give a clue whether a company is earning profit
Funds flow statement is required to detect any diversion of funds.

21. Secured and Unsecured Loans/Advances
Section 5(n) of Banking Regulation Act:
“Secured loan or advances" means a loan or advance made
on the security of assets the market value of which is not at any time less than the amount of such loan or advance; and
"unsecured loan or advance" means a loan or advance not so secured;

22. Securities Prime and Collateral
Characteristics of a good security – M.A.S.T
Marketability
Ascertainability - value, title
Stability – of value, durability
Transferability
Margin on security.
Acceptable securities:
Tangible assets - plant and machinery, motor-vehicles, etc.
Documents of title to goods
Financial Securities (Shares and Debentures)
Life-Insurance Policy
Real estates (Land, building, etc).
Fixed Deposit Receipt (FDR)
Gold ornaments, Jewellery etc.

23. Mode of charging the securities.
Assignment:
transfer of a right, property or debt
Lien:
the right to retain the goods or securities.
Set off:
the right of combining of accounts
Pledge:
bailment of goods as security for the debt.
Hypothecation
Implied pledge, equitable charge - fixed or floating.
Mortgage

24. Hypothecation
A charge on a property for a debt where neither ownership nor possession is passed on to the creditor.
Hypothecation agreements of banks generally have a clause under which hypothecation can be converted into a pledge at, a later date. Can be enforced only with the consent of the owner.
Can be created as a fixed charge or a floating charge.
Fixed charge is on particular Machinery, Vehicle etc.
Floating charge covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc.. Owner can sell the goods in the ordinary course of business without the consent of the Bank.
A floating charge crystallises and becomes a fixed Charge if there is a default or similar event

25. Assignment
A is a debtor to B and B is a debtor to C. If B asks A to make payment to C, and A accepts, it will be an assignment of B’s right to C.B is the assignor and C, the assignee.
The transfer of the right, title and interest in a contract by a party to the contract to another person is called an assignment.
Benefit of a contract is assignable, but not the burden.
Future benefits can also be assigned.
As per TP Act, transfer of ‘actionable claim’ is to be in writing.
If notice of assignment is not given, the debtor get a valid discharge by payment to the assignor himself.

26. Mortgage Transfer of an interest in specific immovable property
for the purpose of securing payment of money advanced or to be advanced
by way of loan, an existing or future debt
or performance of an engagement which may give rise to a pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee;
the principal money and interest of which payment is secured for the time being are called the mortgage-money, and
the instrument (if any) by which the transfer is effected is called a mortgage-deed.
- Section 58 of 'Transfer of Property Act, 1882

27. Mortgage by conditional sale
Types of mortgage
Equitable
Mortgage
Simple
Anomalous
Usufructuary
English Mortgage
Mortgage by conditional sale
MORTGAGE
Layer the same object to create pulsing effect

28. Simple Mortgage
Where, without delivering possession of the mortgaged property,
the mortgagor binds himself personally to pay the mortgage-money,
and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money,
the transaction is called a simple mortgage and the mortgagee a simple mortgagee.

29. Mortgage by deposit of Title deeds.
Where a person
in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf,
delivers to a creditor or his agent
documents of title to immovable property, with intent to create a security thereon,
the transaction is called a mortgage by deposit of title-deeds.
-Section 58(f) of T P Act, 1882
Also called Equitable Mortgage

30. Other types of mortgages
Mortgage by conditional Sale:
Ostensible sale of the Mortgaged property.
Usufructuary mortgage:
Delivery of possession of the mortgaged property. Mortgage to retain the possession until payment and to receive rents and profits towards the mortgage money.
English mortgage:
Absolute transfer of mortgaged property subject to the condition that the property will be re- transferred upon payment of mortgage money.
Anomalous mortgage:
A mortgage which is other than the above 5 types of mortgage .

31. Registration of documents
Banks normally obtain Simple mortgage or Equitable Mortgage.
Simple mortgage attracts stamp duty and registration under Registration Act.
Documents other than will should be presented for registration within four months form the date of registration.
No document required to be registered shall affect any immovable property comprised therein or be received as evidence of any transaction affecting such property unless it has been registered

32. Compulsory and Optional Registration
Instruments of gift of immovable property must be registered.
Other non testamentary instruments relating to certain rights of value exceeding Rs.100/- in immovable property to be registered.
Lease of immovable property from year to year or for any term exceeding one year or reserving an yearly rent.
Registration of Wills and all other documents are optional.
OPTIONAL

33. Shares and Debentures
A bank cannot hold shares in any company whether as pledgee mortgagee or absolute owner of an amount not exceeding 30% of the PUC of the company or 30% of paid up capital of and reserves of the Bank, whichever is less. (S.19(2) B.R. Act.)
Also bank cannot hold shares in a company in which the any managing director of Manger of the Bank is in any manner concerned or interested.
Bank cannot grant any loans or advances on the security of its own shares.

34. Post Sales Finance
Demand Bill Purchase Limits : Bills of Exchange accompanied with ; i) Invoice and
ii) Documents of title of the Goods - LRS/RRS
Bills Discounting : Invoice /LRS / RRS – Maximum Tenor (Usance) 180 days
Clean Bills Discounting : Bill of Exchange / Promissory Notes.
Export Bills : Foreign Bills of exchange or foreign Demand bills
Book Debts Finance : against receivables

35. Deferred Payment Guarantee
Non Fund Based Limits
Letter of credit
ILC/FLC
Usance/Sight
Bank Guarantee
Performance
Financial – Bid Bonds/Security Deposits/
Advance payment/ Performance
Deferred Payment Guarantee

36. Assessment of requiement of LC1
Annual purchase/import 2
Average Monthly Purchases 3
Credit purchases per month 4
Purchase on DA basis 5
Purchase on DP basis (3-4) 6
Usance period (months) 7
Transit Period (months) 8
DA LC requirement [4*(6+7)] 9
DP LC requirement (5*7)

37. FORECASTING / ESTIMATION OF WORKING CAPITAL REQUIREMENTS
Factors to be considered
Total costs incurred on materials, wages and overheads
The length of time for which raw materials remain in stores before they are issued to production.
The length of the production cycle or WIP, i.e., the time taken for conversion of RM into FG.
The length of the Sales Cycle during which FG are to be kept waiting for sales.
The average period of credit allowed to customers.
The amount of cash required to pay day-to-day expenses of the business.
The amount of cash required for advance payments if any.
The average period of credit to be allowed by suppliers.
Time – lag in the payment of wages and other overheads

38. TOPICS FOR MID TERM EXAM
PPTs Banking 1 &2
PPT Banking 4 & 5
FOREX PPT
Chapter 2: Various departments of RBI and its functions.
Chapters 4 to 7
Chapter 8 (except NI Act)
Chapter 9: Garnishee Order, Attachment Order, Registration Act, Charge Registration for Companies, Stamp Act
Chapter 15
Chapter 18
Chapter 22: Letter of Credit, UCPDC, Non Resident Indian, OCB, Deposit scheme to NRIs, EEFC, Packing Credit.

39. Company - Charge registration
A charge on the assets of the company , if required to be registered as per Sn.125 are to be registered with the Registrar of Companies.
If not registered, the security created by such charge is void against the official liquidator and other creditors of the company.

40. Charges requiring Registration
For securing issue of debentures.
on uncalled share capital.
on immovable property or any interest therein
charge, not being a pledge on movables
on book debts.
on calls made but not paid.
Floating charge on the undertaking or any property including stock in trade.
on a ship or share in a ship
On goodwill , patent, or a license under a patent on a trade mark or on a copy right or a license under a copy right

41. Stamp Duty
All documents chargeable with duty to be stamped before or at the time of execution
Special adhesive stamp , embossing or Non- Judicial stamp paper are generally stamped before execution.
Promissory notes, Bills of exchange ,transfer of shares, debentures, proxy, insurance policy, letter of credit, bill of lading and receipts come under Central Act and duty is uniform in India.
For other documents, duty varies from state to state.

42. Cancellation of stamps
Stamps are to be cancelled in such a way that it appears that it is used and cannot be re-used.
Methods of cancellation differs for different types of stamps.
Non- judicial stamp paper is cancelled by writing part of the document in the stamp paper.

43. Effect of Non-Stamping/Under stamping
The document cannot be admitted as evidence in a Court of Law.
Demand Promissory Notes and Bills of Exchange and documents which attract a stamp duty of 10 ps or less cannot be rectified at all.
Other documents can be got adjudicated within one month from the date of execution. If not , can be rectified by paying the deficit with a penalty of Rs. 5/- or 10 times the deficient stamp duty, whichever is higher.

44. Limitation
Every suit filed, application filed, appeal preferred after the prescribed period will be dismissed even though the limitation has not been set up as defense.
Law of Limitation only bars the remedy and not the right
Period of limitation for various cause of action in furnished in the Act.
The period of limitation can be extended by execution of an acknowledgement of debt, before the expiry of period of limitation.

45. Period of Limitation for selected transactions
Category
Period of Limitation
Time from which the period
of limitation commences. 1.
Demand Promissory Note
3 years
Date of execution of Note
2..
Agreement by which the amount is payable on demand
Date of the agreement 3.
On the basis of an agreement where the amount is payable in installments
Due date e of each installment
4..
Bill of exchange/promissory note payable at sight
From the date of presentation of the bill 5.
Bill of exchange/ Promissory note payable at a fixed time after date
From the due date of the bill/ note 6.
Mortgage where mortgage money is payable on demand
12 years
From the date of mortgage deed. 7.
Mortgages - Personal liability of the Mortgagor money
When mortgage money is due and become payable 8.
Execution of the decree 12
years from the date of
decree becoming enforceable