Principles of Lending:
The lending process in any banking institution is based on some core
principles such as safety, liquidity, diversity, stability and profitability.
1.Safety
While giving out loans, the lender, i.e, banks look at the capacity of the
borrower to repay the loan. Hence, they do a thorough check on them to
determine whether they will be able to repay loan and interest in time at
regular intervals or not. If homebuyers have thin financial health, it becomes
difficult for them to secure loans.
2.Liquidity
Before providing loans to the borrowers, banks ensure that they have sufficient
liquid funds available. Therefore, they choose securities that can be sold off
without impacting their market price to meet urgent needs of their customers.
The securities usually belong to government, state and local government
bonds.
3.Diversification
Banks follow the principle of diversity when giving out loans. As far as
commercial real estate goes, the banks prefer to provide loan facilities to
different types of builders, projects and developers across the country.
4.Stability
Along with providing its customers with safety and security, the banks have to
ensure stability into its system. Hence they prefer investing in government
bonds and debentures to minimize risks and maintain a stable stance when
there is a need for cash in the middle of a financial crisis. The government
debentures provide stability for the market rate and interest rates are less
likely to change in them.
5.Profits
Just like real estate investment is based on profit making principle, similarly
banks look after profitability. Interest income is one of the major sources of
banks’ income.
Credit policy by bank:
Credit policy of a bank is the document determining the approaches and
methods accepted by management of a bank for risk management, arising
when crediting, and providing management and bank staff of instructions for
effective management of the portfolio of the credits.
1.Credit policy shall determine and describe the purposes of credit activities of
the bank clearly.
2 Credit policy of commercial banks is developed in the form of a separate
document and affirms the Council of the bank.
3 Each bank shall develop and enact its own credit policy. Responsibility for
development and execution of credit policy is assigned to members of council
and Bank boards, other officials of the bank.
4 Nature of credit policy is determined by the structure of the credit portfolio,
economy of that region in which activities of the bank are performed. During
the forming of credit strategy and preparation of the corresponding credit
policy, the bank shall consider these factors.
5 Credit policy of the bank shall be reviewed by the Council of the bank at least
once a year till February 1 of the corresponding year.
6.Credit policy of the bank, changes and additions made to it or its new edition
shall be provided to the Central bank within 15 days from the date of approval
by Council of the bank.
7. Credit policy shall contain procedure for transparent registration and
consideration of credit requests with indication of the step-by-step procedure
of decision making and procedure for the notification about issue or motivated
refusal in issuance of credit (microloan).
Regulation of credit:
The banking system in India is regulated by the Reserve Bank of India (RBI), through
the provisions of the Banking Regulation Act, 1949. Some important aspects of the
regulations that govern banking in this country, as well as RBI circulars that relate to
banking in India, will be explored below.
1.Exposure limits
Lending to a single borrower is limited to 15% of the bank’s capital funds (tier 1
and tier 2 capital), which may be extended to 20% in the case of infrastructure
projects. For group borrowers, lending is limited to 30% of the bank’s capital
funds, with an option to extend it to 40% for infrastructure projects. The
lending limits can be extended by a further 5% with the approval of the bank's
board of directors.
2.Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
Banks in India are required to keep a minimum of 4% of their net demand and
time liabilities (NDTL) in the form of cash with the RBI. These currently earn
no interest. The CRR needs to be maintained on a fortnightly basis, while the
daily maintenance needs to be at least 95% of the required reserves.
3.Provisioning
Non-performing assets (NPA) are classified under 3 categories: substandard,
doubtful and loss. An asset becomes non-performing if there have been no
interest or principal payments for more than 90 days in the case of a term loan.
Substandard assets are those assets with NPA status for less than 12 months, at
the end of which they are categorized as doubtful assets. A loss asset is one for
which the bank or auditor expects no repayment or recovery and is generally
written off the books.
Additional provisioning over and above the standard provisioning is required
for loans given to companies that have unhedged foreign exchange exposure.
4.Priority sector lending
The priority sector broadly consists of micro and small enterprises, and
initiatives related to agriculture, education, housing and lending to
low-earning or less privileged groups (classified as "weaker sections").
5.New bank license norms
The new guidelines state that the groups applying for a license should have a
successful track record of at least 10 years and the bank should be operated
through a non-operative financial holding company (NOFHC) wholly owned by
the promoters.
6.Willful defaulters
A willful default takes place when a loan isn’t repaid even though resources are
available, or if the money lent is used for purposes other than the designated
purpose, or if a property secured for a loan is sold off without the bank's
knowledge or approval. In case a company within a group defaults and the
other group companies that have given guarantees fail to honor their
guarantees, the entire group can be termed as a willful defaulter.
Types of borrowers
1. Individual
if the banker length money to an individual who is not competent to contract
then the London Money cannot be recovered under following cases if
individual is minor who has not attained the age of 18 years under the Indian
majority act and 20 years if he is awarded under Guardian and wards act if an
individual is not a sound mind then he is incompetent to enter into a contract
is statutory disqualification imposed on certain person in respect of they are to
contract
2.Partnership firms
Legal position of partnership under Indian partnership Act 1932 which
provides for partnership so if it is necessary that a Banker dealing with a
partnership firm should verify whether the form is registered or not
a.Authority of partner
A Banker taking a mortgage security of forms movable property should ensure
that the partner who is creating a mortgage is expressly authorised and if not
then bankers should ensure all partner jointly create the mortgage.
b.insolvency of partner at the time of insolvency of one of the partner of the
firm account is in credit than the other partner can operate the same but the
banker should obtain a fresh mandate and all previous cheque issued by
insolvent partner may be paid provided the partner confirm the same.
c.Death of partner as the death of partner dissolve the partnership firm upon
receipt of such information Bank are required to stop the transaction of firm in
a running credit facility like cash credit, bank allow the transaction in a
separate account so that the business of firm is not adversely affected .
3.Hindu undivided family a Banker dealing with Hindu undivided family should
know the Karter who is the senior most member of family banker should
ensure that Karta of the family deals with the bank and borrowers only for the
benefit of family business the application to open an account must be signed by
all members and all adult member should be made jointly.
4.Companies
Under section 12 of Companies Act of 1956 provides that any seven or more
persons or their Company formed is a private company by subscribing to the
memorandum of association requirement of forming company rules and
regulations governing by two documents called Memorandum of association
and Article of association.
5.Statutory corporation
companies registered under companies act 1956 this may be corporation
established by inside of parliament the diesel called statutory corporation for
example State bank of India is established under the state bank of 1955.
6.Trust and cooperative society
Club, societies, schools and other non trading association such bodies if not
incorporated under the laws governing them cannot enter into any
transaction.These words are usually governed by companies Act or cooperative
societies Act.
Types of credit facilities
1. Loan
A loan is a type of Fund-Based Credit where the Borrower has to repay the
Credit within the pre-agreed time & interest. Loans are given to the business to
meet their various running expenses such as production, distribution,
expansion etc. A huge amount of loan can be given to the companies depending
on their requirements. Although, to ensure the safety of returning of the funds,
Credit Monitoring Arrangement Data reports are carefully monitored in
funding cases that involve a large amount of principal.
A) Demand Loans & Term Loans
Demand loan:
Demand Loans, sometimes known as working capital loans, are offered by the
lender to the Borrower for the short-term.
As the name suggests, the Borrower has to repay the loan on the demand of the
lender. There is no fixed tenure for the repayment. The Borrower can repay the
loan in advance without paying any prepayment charges. These loans are
generally offered against tangible assets or similar securities.
Term Loan:
These loans come with a predefined repayment schedule and tenure. As the
tenure is fixed, the Borrower will have to pay some pre-payment charges in
early payments. They are generally offered for the large funding requirements.
B) Unsecured Loan & Secured Loan
Unsecured Loan
These loans are offered to the Borrower without any collateral but generally
carry a high interest rate. This means, if the Borrower defaults on the
repayment of loan, there is no way for the lenders to acquire any asset of the
Borrower whether it is tangible or non-tangible. These loans include Personal
loans and student loans as well.
Secured Loan
The lenders offer these loans against any tangible or non-tangible asset like
home, piece of land, vehicle etc. If the Borrower defaults on the payment,
his/her assets can be acquired by the lender. Loans such as home loans and
loans against property are a few types of secured loans.
2. Cash Credit
Cash credit is provided to the business owners to carry out their regular
business expenses. In Cash credit, the borrower is given access to a current
account from which they can withdraw money within a predefined limit for an
agreed amount of time. The interest is charged on the daily closing balance of
the account rather than the borrowing limit.
3. OverDraft
This Credit Facility is offered to Current Account holders in a particular bank,
to borrow the fund more than their existing balance for a specific period. These
credits are secured by the physical assets, pledge of FDs, Securities or
Mortgage of some immovable property in some cases.
4. Credit Card
Under this facility, a Credit Cardholder can spend a fixed amount of money
using the card offered to him/her by the Bank. The user has to pay the credits
used within the stipulated time regularly. Any failure to pay the outstanding
bills on time attracts a penalty from the Bank.
5. Export Finance
Export finance is the financing facility which is provided by the banks to fund
exporters to meet their production and export needs. The different type of
export finance are
A) Packing Credit Advances
These types of credits are offered to exporters to meet the expenses for
manufacturing and packing the goods for export as per the buyer’s need. The
credit is offered against hypothecation of goods stock, and any other assets of
the Borrower.
B) Post Shipment Finance
These type of credits are offered to the exporters once they export their
product to the buyers.These credits are offered to meet the interim cash
requirement of the exporter. It is offered based on the document and invoices
suggesting that the export is made.
6. Hire Purchase Finance
This type of finance is offered to the buyer when he/she is looking to buy some
expensive product. Under this Credit, it is agreed that the buyer will pay some
down payment initially and the rest of the amount will be paid in installments.
7. Bill Finance
In bill finance, a Bank draws a bill of exchange from another bank to transfer
the funds due to Credit offered to the Borrower.
The different types of bill finance are
A) Bill Discounted
This Credit allows the seller to borrow money from the Bank in advance
against the payment that will be received by the seller in the future. The Bank
deducts some charges as the fees from the payment, once the buyer deposits it
B) Bill Purchased
This Credit allows the seller to borrow funding based on a sales document not
drawn under the Letter of Credit. The lending bank submits these documents
to the buyer’s bank for the payments.
8. Leasing Finance
Under this credit facility, the owner of an asset gives the right to use that asset
to the Borrower against the payment of a specific amount. It is one of the most
important forms of medium and long-term finance. As the owner leases
his/her property, he/she is known as the lessor, and the one who takes the
property on lease is called the lessee.
9. Retail Credit
The banks offer Credit or loan to the Borrower to purchase certain moveable or
immovable properties, durables, vehicles or similar products. This Credit is
offered to the Borrower based on his/her credit history. This facility is offered
on Business to Business transactions as well as Business to Customer
transactions.
Loan Syndication
A loan syndication also involves multiple lenders and a single borrower, the
term is generally reserved for loans involving international transactions,
different currencies, and a necessary banking cooperation to guarantee
payments and reduce exposure. A loan syndication is headed by a managing
bank that is approached by the borrower to arrange credit. The managing bank
is generally responsible for negotiating conditions and arranging the
syndicate. In return, the borrower generally pays the bank a fee.
Consortium
It is like loan syndication, consortium financing occurs for transactions that
might not take place with a single lender. Several banks agree to jointly
supervise a single borrower with a common appraisal, documentation, and
follow-up and own equal shares in the transaction. Unlike in a loan
syndication, there is not one lead bank that manages the financing project; all
of the banks play an equal role in managing the project.
