TYPES OF BANK FINANCING

introduction
• Banking is dealing in money
• Investment to earn money
• Bulk of income derived by lending funds
• provide loans on security of some assets
• Risk in defaults of payments
• Sound lending policy
• Banks in India have the responsibility of
fulfilling social obligations
 Principles of lending
• Safety
1. Security offered by the borrower
2. Repaying capacity and willingness of the borrower to
repay the loan with interest.
3. Security offered is adequate and readily realizable
4. Good lending-safety
5. One must feel that the advance is safe
6. Right type of borrower
 Continued…
• Liquidity
1. Repay the depositors on demand
2. Funds in liquid form
3. Ability of an asset to convert Into cash in short time
4. Money should come back on demand or in accordance with
agreed terms of payment.
5. Payment within a reasonable time after demand for repayment is
made.
6. Source of repayment is definite
7. If a banker lends a large portion of its funds to borrowers from
whom repayment would be coming in but slowly the ability of
the banker to meet the demands made on him would be seriously
affected – no safety.
 Continued…
• Profitability:
1.Banks are commercial institutions.
2.They should earn profit to pay interest on
deposits, declare dividend to their shareholders,
meet administrative and operating expenses and
provide for depreciation, reserves etc.
3.Banks should earn profit for their survival
4.Invest in such a way that maximum returns can
be obtained.
 LOAN POLICY
• Lending is a crucial activity of banks.
• Amount of credit to be extended
• Industries to be focused on
• Geographic area
• Type of credit to offer
• Type of proposals to finance
• Amount and type of security
• Repayment schedule
• Top management sets standards
• A policy document which goes into all these areas is called as
loan policy of the bank.
• Loan Policy provides framework for bank lending.
 Loan pricing
• Deployment of loan should be at rate that covers the cost
of funds and leaves a margin to the lender after meeting
the expenses.
• Margins should also cover the risks a bank is exposed to.
• Objectives of loan pricing are:
1. Maintaining margins
2. Balancing risk reward profile
3. Ensuring market rates
• Margins ensure profits, the balanced risk reward profile
ensures sustenance and the market rate ensures the banks
presence in the market
 Continued…
• Cost plus, return on equity
• Rate of interest can be fixed or floating
• Floating rate of interest is applicable to housing or educational loans
etc.
• PLR( prime lending rate) (Prime Lending Rate / Board Rate is the
interest rate charged by the bank to its best and most credit-worthy
customers [usually large, conservatively financed businesses]. It is
usually used as a benchmark for loans.)
• Banks are free to fix Benchmark Prime Lending Rate (BPLR) for
credit limits over Rs.2 lakh with the approval of their respective
Boards.
• Loan pricing is used as a tool of risk management.
 Lending Function
• Lending is the main function of banking.
• Major component of the assets side of the balance
sheet of a bank is loans and advances.
• Balance should try to balance their spreads and the
risk levels.
• Loans can be secured or unsecured.
• For secured loans-pledge, hypothecation,
assignment etc.
• Priority sector lending
 Credit risk
• Most common risk is the credit risk.
• It is the risk of non payment of the loan by the
borrowers.
• Principles of credit risk management are:
1. Credit appraisal/ evaluation
2. Pricing of the credit
3. Monitoring of the credit
• Many other risks banks are exposed to
• Sound credit policy
 Fund Based Lending

• Banks lend money either on the personal security of

the borrower or on the security of some tangible
assets.
• Secured loan
• Unsecured loan
• Secured loan provide safety to bank by creating
charge on the assets in favor of the bank.
• The market value of the security should not be less
than the amount granted.
 Important modes of creating charge on secured
advances
• LEIN:
1. It is a right of creditor ( bank) to retain the properties
belonging to the debtor ( borrower) until the debt due is
repaid.
2. Only the right to retain the possession of the goods.
3. Retain all securities of the customer in respect of general
balance due to the customer.
4. Ownership is not transferred from the customer to the
banker.
5. The borrower submits declaration to the banker that his
assets mentioned are free from any charge.
 Continued…..
• Pledge:
1. It is the bailment of goods, a security for payment of debt.
2. A pledge occurs when goods ate delivered in the possession of
the bank and the goods will be returned to the borrower on
repayment of the loan.
3. A pledge is created when goods are delivered by one person to
another for securing debt.
4. Two parties – bailor, bailee
5. The person who pledges the goods is called the bailor and the
person to whom the goods are pledged is known as bailee
6. Goods which are of movable in nature are pledged to the bank.
7. Transfer of possession is compulsory in case of pledge though
ownership continues to remain with pledgee.
 Continued…..
• Mortgage:
1. It is the transfer of an interest in specific immovable
property for the purpose of securing the loan.
2. Possession remains with the borrower and the ownership
is transferred to the bank.
3. The instrument by which the transfer is effected is called
mortgage deed.
4. If the mortgager is a limited company the charges of
mortgage must be registered with the registrar of
companies within 30 days from the date of creation.
5. Legal mortgage
6. Equitable mortgage.
 Continued…..
• Hypothecation:
• It is the mortgage of movable property for securing loan.
• In case of hypothecation a charge over the movable property is
created for an amount where neither ownership nor possession
is passed on the bank.
• The borrower undertakes to give possession of the goods when
requested by the bank.
• Hypothecation allows the borrower to retain, possess and sell
the goods.
• The borrower insures goods adequately.
• Right to inspect the goods
• There is a high risk of multiple financing
 Continued…..
• Assignment:
1.it is the transfer of any existing or future right,
property or debt by the borrower to the bank for
loan.
2.Normally assignments are made of actionable
claims such as book debt, insurance claims etc.
3.An actionable claim,
4.The debtor should also confirm that the
assignment is made
 Types Of loans
• Term Loans:
1. The bank advances a lump sum amount for a certain period of
an agreed rate of interest.
2. The entire amount is paid to the borrower or credited to his
current account.
3. The interest is charged for the full amount of loan at periodical
intervals.
4. Term loans may be medium term, long term.
5. The loam is repaid in installments together with interesrt.
 Short and medium term loan
1. Commercial banks in India provide only short term credit to the
business firms.
2. They have also started providing medium tem loans finance to the
businesses.
3. Short and medium term loans are advances made by banks with or
without security.
4. The loan once repaid in full or in part cannot be drawn again by
the borrower unless the banker sanctions a fresh loan.
5. The rate of interest charged by a bank in the case of loan is
normally lower than the interest on cash credits and overdrafts
because it involves the lower cost of maintenance on account of
not frequent operation of the account and the bank gets interest on
the total amount sanctioned whether the borrower withdraws the
whole amount of loan or not.
6. These are granted for meeting working capital requirements.
 Long term loans
• The loan policy in respect of each broad category of nature is to be laid
down by every bank with the approval of its board.
• There is always a time gap between the date of sanctioning and its
disbursement by the financial institutions to the concerned borrowing
company.
• BRIDGE FINANCE:
• It is loan taken by a company from commercial bank, pending
disbursement of term loan form the financial institution.
• In order to prevent delay in starting their projects companies arrange
from the commercial banks short term loan which are later on repaid as
and when term loan disbursements are received from the financial
institutions.
• It is secured against mortgage of fixed assets or hypothecation of
movable properties of the borrowing companies.
• Rate of interest is higher than term loans.
 LOAN SYNDICATIION
• It is a commitment for term loans from the financial
institutions and banks for financing a particular project.
• Two or more banks agree to finance a particular project.
• One of the bank or financial institutions may become a
lead institutions and bring about co-ordination in the
financing arrangements of different financial institutions
or banks.
• The borrower may directly make the loan application to
a lead financial institutions or bank which in turn gets in
touch with other financial institutions/ banks interested
in participating in the financial assistance to the
borrower.
 Cash Credit,Overdraft,Bill Discounting
• Cash Credit: It is an arrangement by which a borrower is
allowed to borrow money up to certain limit.
• It is an arrangement for long and medium term and the borrower
need not draw the sanctioned amount at once.
• He can draw the amount as and when required.
• Cash Credit is a running account to which deposits and
withdrawals can be made frequently.
• Interest is charged only for the amount withdrawn not for the
amount of loan sanctioned.
• This arrangement can be made by the bank against the pledge or
hypothecation of goods.
• This type of loan provides flexibility because the sanctioned
limit can be changed according to the needs of the borrower. It
is the most favorable form of loan.
 Continued….
• Overdraft:
1. overdraft is an arrangement between a bank and its customer by
which the customer is allowed to withdraw over and above his
credit balance in the current account.
2. There is a agreed limit of overdraft.
3. This is temporary facility usually provided to the current
account holders.
4. The borrower is permitted to withdraw and repay and withdraw
any number of times up to the sanctioned limit.
 Continued….
• Bill Discounting:
1. Banks Usually grant loans to their customers by
discounting bills of exchanges.
2. The amount of the bill after deducting the discount is
credited to the account of the customer.
3. The bank receives the interest in advance at the time
of discounting.
4. The bank collects the full amount of bill on maturity
from the drawee of the bill.
5. Some banks purchase the bill
6. Loans can be granted against it.
NON FUND BASED
ACTIVITIES AND
SERVICES OF THE
BANKS
 NON FUND BASED SERVICES
PROVIDED BY THE INDIAN BANKS

1) Collection of cheque, bills and promissory

notes
2) Collection of dividend and interest
3) Execution of standing orders
4) Remittance of funds
 Methods Of transfer of funds
4 (1) Bank Draft:
• A bank draft is an order from one branch to another branch of
the same bank to pay a specifies sum of money to a person
named therein or to his order.
• A draft is always payable on demand.
• Banks issues drafts at the request of the customers on their
branches at the place of destination for remitting money from
one place to another place.
• Purchase a draft
• Bank charges some commission
• Commission amount depends on the amount of the draft
• Bank draft is like a bill of exchange payable on demand.
 Continued….
• Loss of the draft
• Valid title holder should only be made payment
• Draft may be cancelled by the bank if it is not delivered to the
payee.
• When a bank draft is delivered to the payee he acquires a right in
the instrument which cannot be set aside by the stop payment
order issued by the purchaser.
• The validity of the draft that is the period may be clearly
indicated on the draft form.
4 (2) Mail Transfer:
• Sending money through the post to any person at any place
where the bank has a branch and the person receiving the amount
has an account in other branch of the same bank.
• Bank charges commission.
 Continued….
4 (3) Telegraphic Transfer:
• If the customer wants to send the money urgently he can request
the banker for telegraphic transfer on payment of nominal
charges to cover the telegram charges.
• Facility is available at selected branches only.
• The cost of telegraphic transfer is higher than the cost of mail
transfer.
• However the money is transferred quickly.
 5. Safe deposit value
• A bank undertakes the safe custody of the customer
valuables and documents by providing a safe deposit value.
• These are kept in specially constructed strong rooms.
• There are lockers available to the customer on a nominal
charge.
• There are two keys
• Opened by both keys
• Valuables like jewellery and documents etc.
• A register is maintained by the bank
• Lockers are provided on hire basis.
 6. Issue of letter of credits
• A letter of credit is a commercial instrument of assured
payment.
• It is widely used by the businessmen for various purposes
• The bank undertakes to make payment to a seller on
introduction of documents stipulated in the letter of credit.
• It specifies as to when payment is to be made which may be
either on presentation of documents by paying bank or at some
future date.
• Many parties are involved:
a) Buyer of the goods ( he makes an application to the banks)
( banks who issues the LOC is known as the issuing bank)
b) Seller of the goods
 7) ATM ( automated teller machine)

• ATM is a channel of banking services to its customers.

• Its traditional and primary use is to dispense cash upon insertion
of a plastic card and its unique PIN i.e. Personal Identification
Number.
• The bank issues ATM cards to their customers having current or
savings account holding a certain minimum balance in their
accounts.
• ATM card is a plastic card with a magnetic strip with the account
number of the individuals .
• When the card is inserted in the machine the sensing equipment
of the machine identifies the account holder and asks the PIN.
• It is a secret number which is only known to the account holder.
• ATM can be accessed round the clock .
 8) Tele Banking
• Tele banking is a service offered by banks to enable
customers to access their accounts for information or
transactions.
• The customer can call the exclusive tele banking numbers
and provide the details to identify himself to the automated
voice.
• A telephone PIN ( T- PIN) is provided to each account
holder which is similar to ATM PIN.
• The customer is given access to his account upon matching
the account number and the T –PIN.
• Though cash withdrawals and deposits are not available
through this service banks have started offering a cash
delivery or collection service to certain classes of
customers.
 9) Internet Banking
• Internet is a channel of service to banking customers.
• The access to account information as well as transaction is
offered through the world wide web network of computers on
the internet.
• Each account holder is provided with a PIN similar to that of
ATM or phone banking
• Matching Of PIN –ACCESS
• A higher level of security may be reached by an electronic
fingerprint.
• Transactions such as e business, Railway-Air Reservation,
Payment of Bills, Transfer Of money can be carried out while
sitting in the house with the help of an internet.
 10 ) Credit Cards
• A credit card is an instrument of payment.
• It is a source of revolving credit
• The cards are plastic cards issued by the banks to their
customers.
• The name of the customer, card number and expiry date
are printed on the plastic cards.
• Some banks also use the photographs
• Purchase goods or services
• The card issuing bank makes the payment to the supplier
or seller.
• The outstanding on account of use of the credit card is
payable by the card holder to the bank over a specific
period which carries a fixed amount of interest.
 11) MERCHANT BANKING
• Banks are also providing various services relating to capital
market and finance to companies which are known as
Merchant Banking services.
• Includes arranging funds from outside the country.
• MB are the bankers who are engaged in the business of issue
management, consulting and rendering corporate advisory
services in relation to such issues.
• Services offered:
1) Project consulting
2) Mutual funds
3) Portfolio management
4) Raising funds from the capital market
5) M&A
 FOREIGN EXCHANGE
• Foreign exchange means the foreign currency and it includes
deposits, credits and balance payable in any foreign currency.
• Foreign exchange is also used to denotes the process or system
by which the currency of one country is converted into that of
another country.
• Foreign exchange transactions arise mainly from trade
transactions among residents of different countries.
• The foreign exchange market is the clearing house through
which the purchase and sale of foreign exchange are offset
against each other.
• The main link between the buyers and sellers of foreign
exchange in the foreign exchange in the foreign exchange market
is the bank.
 FOREIGN EXCHANGE MARKET
• A market for the purchase and sale of foreign currencies is
known as “Foreign Exchange Market”
• Facilitate international trade and investments.
• There are multiple currencies
• There is a need for foreign exchange market.
• It does not have a physical place.
• It takes place through the electronically linked network of banks,
foreign exchange brokers and dealers.
• FEM aims at permitting the transfer of purchasing power
denominated in one currency to another whereby one currency is
traded for another currency.
 Participants in the foreign exchange market

1) Foreign Exchange Dealers:

• Banks and non-bank agencies are important participants in the
foreign exchange market.
• They play the role of market making.
• They actively deal in foreign exchange for their own accounts.
• These participants buy and sell major foreign currencies on a
continuous basis.
• They trade with other banks in their own monetary centers and
in other centers of the in order to maintain the inventory of
foreign currencies within the trading limits.
• They earn profit from buying foreign exchange at a bid price
and reselling it at a slightly higher price.
 Continued…..
2) Individuals and Firms:
• Firms who operate internationally have to pay suppliers and
employees in the local currency of the country in which they operate
and may recive payments form customers in different countries.
• These firms are the exporters , importers, international portfolio
investors, multinationals, tourists and others who have to use foreign
currency in order to facilitate the execution of commercial or
investment transaction.
3) Foreign Exchange brokers:
• They are the commission agents who bring together suppliers and
buyers of foreign currency.
• They are specialized in certain currencies
• They provide the services of giving information on the prevailing
anf future rates of exchange .
 Continued…..
4. Central bank and treasuries:
• They use the foreign exchange market for the purpose of
buying and selling of country’s foreign exchange reserve.
5. Speculators and Arbitragers:
• Speculators buy and sell currencies in order to earn profit from
anticipated changes in exchange rates.
• Currency speculations is combined with speculation in short
tem financial instruments like treasury bills.
• Speculators and arbitragers trade in the foreign exchange
market in their own way trying to make profits through normal
and speculative operations.
• A large portion of the speculation and arbitrage take place on
behalf of major banks.
 TYPES OF TRANSACTION
• Different types of transaction carried out in a foreign exchange
market by the various participants.
• Spot transaction- purchase of foreign exchange delivery and
payment for the same take place between banks usually on the
following second business day.
• The rate quoted in such a transaction is called a ‘Spot Rate’. The
date of settlement is known as “ value date’.
• Forward Transaction it is a transaction where a specifies amount
of one currency is exchanged for s specifies amount of another
currency at a future value date.
• In case of this transaction only the delivery and payment take
place at a future date, the exchange rate being determined at the
time of agreement.
• The rate quoted in such a transaction is called forward rate.
 Continued…
• SWAP transaction is the simultaneous purchase and sale of a
given amount of exchange for different values dates.
• Both the purchase and sale are with the same counter party.
• The dealers incurs no unexpected foreign exchange risk since
the transaction executed within a single counter party.
Foreign Exchange Rates:
• the price of one currency expressed in terms of another
currency is called as ‘ Foreign Exchange rate’
• A statement of willingness to buy or sell at a specifies rate and
a specific value date is called as foreign exchange quotation.
1) American terms
2) European Terms
 Continued…
• Direct quote :
• It is one in which the amount of the domestic currency (i.e.,
dollars and cents if you are in the United States) is given per
unit of the foreign currency.
• An indirect quotation
• is quoted in the amount of the foreign currency per unit of
domestic currency. For example, in the United States, a direct
quote for the euro would be 1.25 USD = 1 EUR. An indirect
quote would be 0.80 EUR = 1 USD.
• Bid rate
• Ask rate
 Role of commercial banks in foreign
Exchange
• Active part in financing foreign trade.
• Maintain accounts in foreign countries to meet the requirements
of foreign exchange of the public.
• All the sales and purchases of foreign exchange are routed
through the accounts they maintain with banks in important
financial centers in the foreign countries.
• They quote rates at which they buy and sell foreign exchange in
accordance with the rules and regulations of the RBI and
Foreign Exchange dealers Association of India.
• The rates quoted depends upon the rates prevailing in the
international markets.
• The RBI has allowed banks to offer foreign currency
 Export/ Import Financing
• Every business requires finance.
• Export finance refers to the finance of the goods from the home
country to the importer’s port.
• The export financing begins with as soon as an export order is
received and accepted.
• The manufacturing activity or assembling starts with the
confirmation of export order.
• The exporter needs finance for transportation, taxes, documentation,
insurance, packing, clearing & forwarding and payment of freight.
• Most of the export trade is carried out on credit basis.
• It takes 3 to 6 months to realize the export bills.
• Further orders has to be executed.
• Payments for imports are made on shipment of goods.
 Continued…
• Importer also needs finance for importing capital goods, raw
material, technology etc.
• Importers have to approach their bankers for credit facilities.
• Support is required.
• The various agencies involved in the provision of finance are the
RBI, EXIM bank, ECGC and other financial institutions.
• Credit may be short term or medium term
• The credit policy may depend upon sales volume, type of
organization, pricing policy and product policy. Overall
financial strength of the company.
• Short term credit facility is extended is extended for a period
from 30 days to 180 days.
• Long term credit is extended for a period from 5 years to 20
years.
 Pre Shipment Finance
• Pre shipment finance defined by the RBI “ Any loan to an exporter for
financing the purchase, processing, manufacturing or packaging of
goods”
• It is an interim advance provided by the bank for helping the exporter to
purchase process, packing and shipment of the goods for exports.
• It is also known as PACKING CREDIT.
• It is provided by any bank or financial institution.
1. Purchase of raw materials, components, machinery, equipment, and
technology
2. Pay for transportation and warehouse expenses
3. For specialized export packing of goods
4. Pay insurance premium on shipment of goods
5. Pay commission to overseas agent
6. Pay freight for shipment of goods
7. Provide additional working capital form time to time.
 Features of pre shipment finance
1) Purpose
2) Eligibility:
• Exporter who produces a confirmed export order and/or letter of
credit received in his own name.
• Indirect exporters are also eligible
3) Form of finance
4) Amount of finance
• % of exporter’s Profit
• Nature of goods
• Ability to repay
5) Period of loan ( max 180 days extra 90 days RBI)
6) Rate of Interest
7) Documentary evidence
8) Security and loan agreement 9) Maintenance of accounts
 POST SHIPMENT FINANCE
• When the exporter needs an advance after completing the process
of shipment of goods is called as ‘ post shipment finance’.
• Exporter needs post shipment finance for the following purposes:
1) To pay premium
2) To pay freight and other shipment expenses
3) To participate in the fairs and exhibitions
4) To pay to overseas agents
5) To pay to various authorities such as custom, port and inspection
etc.
6) To pay regular expenses between the shipment of goods and
realisation of export bill.
 Features of post shipment finance
• Purpose ( meeting working capital requirements).
• Eligibility: ( exporters who have actually shipped the goods)
• Form of advance: ( discounting the export bills)
• Amount of advance ( extended upto100% of the invoice bill)
• Period of advance
1. Short term ( upto 90 days)
2. Medium term ( upto 5 years)
3. Long term ( 5 – 12 years)
• Rate of interest
• Documents ( shipping bill, receipt, export bill etc)
• Loan agreement
 Rural Financing/ Farm lending
• Agriculture is the backbone of Indian economy.
• The financial requirements of the Indian farmers is known as rural credit.
• Pre-independence ( Money lenders)
• Charged exorbitant rates of interest
• Manipulated accounts to their benefit
• Forced farmers to sell the agricultural produce to them at very low prices.
• Expansion of institutional credit to agriculture.
• Co-operatives came into picture
• Nationalization of 14 major commercial banks in 1969 and 6 more banks
in 1980.
• Objective was expansion of rural credit
• In 1975 Regional rural Banks were established
• National Bank Of Agriculture And Rural Development ( NABARD) In
1982
 RURAL CREDIT
• Rural Credit means credit to farmers.
• It is also known as agricultural credit
• Credit needs:
A. Short term ( less than 15 months) ( moneylenders, co-operative
scarcities)
B. Medium term ( 15 months -5 years) (moneylenders, co-operative
scarcities, relatives and commercial banks)
C. Long term ( More than 5 years) ( Land development banks or
commercial banks)
• Rural needs can be even classified in the following terms:
1. Productive
2. Consumption
3. Unproductive needs
• Indian farmers often borrow money from moneylenders.
 National Policy On Rural Credit
• After independence the Government and RBI framed a national policy
on rural credit and multi agency approach consisting of co-operatives,
commercial banks, RRb.
• Provide adequate and cheaper loans to farmers.
• Basic objective of this policy were:
1. To ensure timely and increased flow of credit to the farm sector.
2. To reduce and eliminate the role of moneylenders from the rural credit.
3. To make available credit facilities to all the regions of the country.
4. To provide larger credit support to areas covered by special
programmes.
• Private credit was defective, expensive and inadequate.
• Private credit was based on profit motive
• Institutional credit is fully integrated
• Farmers should be taught improved farming methods.
Institutional Structure of Rural Credit

Institutional structure of
Rural Credit

Co-operative
Commercial Regional Rural
Credit NABARD
Banks Banks
Societies
 A)Co-operative Credit Societies
• Provide funds to the farmers for agricultural operations at low
rates.
• The short term credit structure is based on three tier structure:
I) PRIMARY AGRICULTURE CREDIT SOCIETIES ( PACS):
1. Co-operative movement -1904
2. Providing rural credit
3. PACS the lowest tier in co-operative credit sector
4. Ten or more persons
5. Value of each share was generally nominal ( 10-100)
6. President, Secretary, Treasurer
7. Loans to farmers- short term period – upto 1 year
8. Rate of interest was also low ( 10-12%)
9. Profits were distributed among members in form of dividend
 Continued…..
• Surplus was used for the welfare of the people.
• PACS are the weakest in the entire co-operative structure.
• PACS have failed miserably
• PACS plagued by the problem of high level of overdue.
• Staff is inefficient and static.
• Regional imbalances
II) CENTRAL CO-OPERATIVE BANKS:
• Second tier of the rural co-operative credit structure.
• Chief Task: Advance loans to PACS in times of need so that
they can fulfill the requirements of the farmers.
• Few private individuals as shareholders who provide finance as
well as well as management
• Attract deposits from general public.
 Continued…..
• Most of these banks are in the hands of political leaders.
• Problems of over staffing, inefficiency, losses, heavy overdues
etc.
• RBI & NABARD formulates schemes for the rehabilitation of
weak DCCB’s
• Liberal assistance to the state government for contributing to
share capital for contributing to the share capital of the weak
banks selected for rehabilitation.
III) STATE CO-OPERATIVES BANKS:
• 3rd tier in the rural co-operation credit structure.
• Form apex of the co-operative credit structure.
• Advance loans to DCCB’s ( in turn loans to PACS)
• Co-ordinate and regulate the working of DCCB’s
 Continued…..
• Link between NABARD, DCCB’s and PACS.
• SCB obtain working funds from share capital, reserves,
deposits from general public and loans & advances from
NABARD.
B) COMMERCIAL BANKS:
• Important role in rural credit.
• Initially nationalized banks concentrated their attention on
large cultivators.
• Term loans for varying periods for purchasing pump set,
tractors, agricultural machinery etc.
• CB extend loans for activities as dairying, poultry etc.
• Integrated Rural Development Programme ( IRDP)
• CB to finance IRDP
• CB are financing co-operatives ( indirect finance)
 Continued…..
• Finance co-operatives engaged in the marketing and processing
of agricultural produce.
• SBI is playing an active role.
• CB extend credit to manufacturing or distribution firms.
• Small Farmers Development Agencies ( SFDA’s)
• Identify small farmers
RBI GUIDELINES FOR FINANCING OF AGRICULTURE
BY COMMERCIAL BANKS:
1. CREDIT NORMS AND SCALE OF FINANCE
2. MARGIN OF SECURITY
3. SECURITY AGAINST LOANS TO CULTIVATORS
4. RECOVERY OF DEFAULTS
5. NEED FOR CO-ORDINATION
 Continued…..
C) REGIONAL RURAL BANKS ( RRB’S):
• Main objective of the RRB’s was to provide credit and other
facilities particularly to the small and marginal farmers etc.
• In 1971 5 RRB’s were established.
• Such RRB had an authorized capital of Rs 1 crore and paid up
capital of 25 lakhs.
• RRB is different form commercial banks:
1. The area of RRB’s was limited to a specific region comprising
one or more districts.
2. The RRB’s granted direct loans and advances only to small and
marginal farmers, rural artisans and agricultural laborers for
productive purposes.
3. The lending rates of RRB’s were equal to the prevailing lending
rates of co-operative societies in the particular state.
 Continued…..
4. The sponsoring bank and the reserve bank of India provide many
subsidies and concessions to the RRB’s to enable them to
function effectively.
5. The RRB’s were allowed to maintain cash reserve ratio at 3% and
statutory liquidity ratio at 25%
6. RRB’s were provided refinance facilities through NABARD.
• Main aim of opening RRB is opening the rural economy by
providing credit for the development of agriculture trade,
commerce and industry as well as other productive activity in the
rural areas were fulfilled.
 NABARD
• Was set up to take over the agricultural credit functions of RBI
as well as refinance functions.
• Set up in July 1982 by an act of parliament.
• Bank was linked organically with the RBI.
• RBI contributed half and other half was contributed was by
GOI.
• NABARD draws funds from the Government of India, the
World bank and other agencies.
• It also borrows from RBI.
 Functions Of NABARD
• Looks after the credit requirements of the rural sector.
• Supervise the functioning of the co-operative sector
• Inspect RRB DCCB’s etc.
• Provide short and medium tem credit to state co-operative
bank and RRB’s
• Provide long term credit for investments,
• Co-ordinate the activities central and state governments and
planning commission.
• Maintain R&D Fund to promote research in agriculture and
rural development.
 BANK GUARANTEE
• It is defined as a contract to perform the promise or discharge
the liability of a third person in case of his default.
• The person who gives the guarantee is called the surety.
• Principle Debtor
• To whom the guarantee is given is called creditor.
• Guarantee may be oral or written
• Banks extend guarantee on behalf of their clients
TYPES OF GUARANTEE:
1. FINANCIAL GUARANTEE
2. PERFORMANCE GUARANTEE
3. DEFERRED PAYMENT GUARANTEE
4. SHIPPPING AND RAILWAY GUARANTEE
 NON PERFORMING ASSETS
• What are a non performing assets?
• Any loan facility which is overdue for interest or installment for a
period of 180 days is considered as NPA.
• This period applies for term loan, overdraft and other advances
• For agricultural loans overdue for two harvest seasons is considered
as NPA
• W.E.F march 2004 banks have to classify their assts as NPA if they
fail to recover either a portion of principle or interest within 90 days
instead of 180 days applicable earlier.
CLASSIFICATION OF ADVANCES:
1. STANDARD ASSETS
2. SUB-STANDARD ASSETS ( NOT EXCEEDING 18 MONTHS)
3. DOUBTFUL ASSETS ( EXCEEDING 18 MONTHS) ( WEAK)
4. LOSS ASSET