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PART2

LENDING ,
After maintaining the required C R R AND S L R , BANKS ARE
LEFT WITH FUNDS FOR THEIR LENDING ACTIVITIES.
Bank will use the lendable funds to lend various market segment
according to their requirements .
Banks are expected to evaluate the requirement of a client .
RBI has given clear guidelines on this which is known as
deployment of funds.creditfinancingvarious ac tivities.
THE PROCESS IS KNOWN AS CREDIT
APPRAISAL.
ALL THE CREDIT OFFICERS MUST BE WELL
VERSED IN THE APPRAISAL SYSTEM OF THE BANK
AND THE GUIDELINES GIVEN BY R.B.I. AND
CHANGES HAPPENING IN THE SYSTEM.
BANK WILL LOOK INTO THE PURPOSE OF
FUND REQUIREMENT
ENSURE END USE OF FUNDS
BANK AS AN INTERMEDIARY .WILL LOOK INTO
THE CONCEPT OF RISKWHILE TAKING UP
ANY CREDIT PROPOSAL.
WHAT BANK LOOKS AT.
TECHNICAL
MANAGERIAL
COMMERCIAL
ECONOMICAL

FINANCIAL..
ASPECTS OF THE PROPOSAL.
WHERE DO BANK STARTS UNDERSTANDING THE
PROPOSAL.
DISCUSSION APPLICATIONAPPRAISALSANCTION
DOCUMENTATIONDISBURSEMENTCREATION OF
ASSETS FOLLOWUPINSPECTION ENSURE END
USEMONITORING AND RISK MANAGEMENT.
TILL BANK REALISES THE FUNDS LENT WITH INTEREST.
FUND BASED ACTIVITIES
TERM LOAN
WORKING CAPITAL,
E P C.
BILLS DISCOUNTING
CHEQUES DISCOUNTING
THE ABOVE PRODUCTS WHEN USED BY THE CUSTOMERS
WILL LEAD TO RELEASE OF FUNDS BY THE BANK.
BANKS CREATES ASSETS BY LENDING .THEY DO NOT OWN
ITthey have a charge over the assets created till the currency of the
loan.
TYPES OF CHARGES.

HYPOTHECATION
PLEDGE
LIEN
MORTGAGE
CREATION OF CHARGES AT R.O.C.

NON FUND BASED ACTIVIITES


LETTER OF CREDIT

BANK GUARANTEES
The above products when used by customers will not lead the bank to
release funds

LENDING ACTIVITY
PRODUCTS
APPRAISAL..
FOLLOW UP
.
FUND BASED FACILITIES..
FOR ACQUISITION OF FIXED ASSETS

A.

TERM LOAN. IN RUPEE OR FOREIGN CURRENCY.


DEFERRED PAYMENT GUARANTEE. ( DPG)

TERM LOAN

Normally Loan given to acquire fixed assets ..land, building,


plant machinery, office equipments.
All market segment has this facility .INDUSTRY
AGRICULTURETRADINGCORPORATES.
INSTITUIONSRETAIL SEGMENT .
Loan is given for a period with fixed repayment
Not repayable on demand.

The borrower has to bring in his stake ( Margin).


Balance to be given by bank as term loan.
Term loan is to be repaid over a period.
Repayment is of Principle amount.

Normally interest will be applied once in a month/ once in


quarter/once in half year depending upon the activity. ( market
segment)
Bank normally gives time for the borrower to commence
repayment of principle amount .
The time given is known MORATORIUM.
Time is for the borrower to commence his activity and generate
surplus.
Principle is paid out of Cash accruals.
Cash accruals is.PAT + Depreciation.
Repayment capacity of the customer is worked by using a ratio

D S C R DEBT SERVICE COVERAGE RATIO..


DSCR..

CASH ACCRUALS.
-------------------------TOTAL TERM LOAN INSTALMENTS IN A YEAR.

DSCR. Must be Minimum 2


This can be calculated by adding interest portion of term loan to both
numerator and denominator to get the Net DSCR
The asset created out of Bank funds are considered as Primary
security.
Bank has a charge on the assets. ( Hypothecation)
Bank makes an appraisal before extending the loan.
Term loan will be extended to all the market segment. The
APPRAISAL DEPENDS UPON THE PURPOSE.
##########
DEFERRED PAYMENT GUARANTEE
This product can also be used to acquire fixed assets. One Bank gives
guarantee on behalf of his client to another Bank for availing loan
facilities.

This can happen in a situation when an Indian, imports the machinery


at a cheaper cost than that of Domestic borrowing. The facility will be
given by foreign bank against the Bank guarantee of Indian bank.
The purpose is to acquire fixed assets and the appraisal is same as Term
loan.
o

WORKING CAPITAL
Any activity requires working funds .
It may be manufacturing, trading or any other services where
funds are required on a day to day basis.
Banks funds such activity under Working capital.
The product is known as Cash credit.
Banks funds this activity to create Current assets
IN A MANUFACTURING ACTIVITY.
They can be identified as.
Raw materials,
Consumables or spares,
Semi finished goods,
Finished goods,( Inventory)
Receivables. ( Payment to be received against sales)
Current assets built up depends on a concept of a Working
capital cycle.
Working capital GAP has to be funded BY THE BANK..
The borrower has to bring in his margin .

Normally current assets are built up of ..


o Promoters contribution,
o Bank finance and

o Market credit.
A limit will be sanctioned for a period of 12 months . Based on
the current assets built up, turn over is also considered.
As an operating account Bank fixes a Drawing power based on
the built up of current assets .
Borrower submits a Stock statement to the bank every month
indicating the built up of current assets.
This will be done normally once in a month.
In a working capital finance it is important to understand the
LIMIT.
DRAWING POWER
OUTSTANDING
IRREGULARITY..

Working capital funding is bifurcated as


Pre shipment and
Post shipment finances.
WORKING CAPITAL WILL ALSO BE EXTENDED TO ALL
MARKET SEGMENT DEPENDS UPON THE NEED OF THE
ACTIVITY.
MANUFACTURING .CURRENT ASSETS BUILT UP
TRADING .DO.
SOFT WARE CASH BUDGET
UPTO 10.00 CRS TURN OVER..NAYAK COMMITTEE
GUIDELINES.
AGRICULTURE SCALE OF FINANCE .AS DEFINED.

E P C or Export Packing credit.pre shipment finance for


export oriented finance at a lower rate on interest.
This is as an incentive for the exporters .

Non fund based facilities


AS AND WHEN THESE FACILITIES ARE SANCTIONED
BANKS WILL NOT RELEASE ANY FUNDS .
THEY BECOME FUND BASED ON HAPPENING OF EVENT
Two products are in the Banking system offered by Commercial
banks only.
Letter of Credit..Bank guarantee.

NON FUND BASED FACILITIES


LETTER OF CREDIT.
A LETTER OF CREDIT IS A WRITTEN INSTRUMENT ISSUED BY
A BANKER
( OPENING BANK ) AT THE REQUEST OF THE BUYER
( APPLICANT ) IN FAVOUR OF A SELLER ( BENEFICIARY)
UNDERTAKING TO HONOUR DRAFTS DRAWN BY THE SELLER
IN ACCORDANCE WITH THE TERMS AND CONDITIONS
SPECIFIED IN THE LETTER OF CREDIT

Inland Letter of credit...domestic transactions


Foreign letter of credit.,,..,import transactions.
Four parties for the transactions.applicant.opening
Bank.Advising Bank.Beneficiary.
Applicant stipulates the conditions in the application to be incorporated
in the Letter of credit.
These are to followed by the Beneficiary while preparing the documents.
Terms and conditions.normally..
Type of documentary credit
Specification of documents
Name and address of the beneficiary.
Currency.Designated..
Draftsdemand.usance.
Tenor of the instrument.
Advising /Negotiating Bankers.
Port of origin(Place)
Port of destination..(Place)
Latest shipment date.
Partial shipment ....transshipment
Description of Goods. ( FOB< CIF. C&F etc)
List of documents required.
Charges to whose account.
Expiry date of L/C.
Terms of negotiation.
Last date for negotiation.

NORMALLY THE LETTER OF CREDIT WILL BE


IRREVOCABLE..
CANNOT BE REVOKED OR AMENDED UNILATERALLY.

CONFIRMATION CAN BE ADDED TO THE L/C BY ANOTHER


BANK.
AMENDMENTS CAN BE AT THE REQUEST OF THE APPLICANT
WITH THE CONSENT OF THE BENEFICIARY..
LETTER OF CREDIT FACILITY WILL NORMALLY BE USED BY
MANUFACTURERS /TRADERS WHO REGULARLY MAKES
PURCHASES.
ONE TIME L/C FACILITY CAN ALSO BE USED.
NORMALLY AN APPRASIAL IS A MUST CONSIDERING THE
FOLLOWING FACTORS WHEN IT IS SUPPORTING WORKING
CAPITAL FUNDING
Existing C.C. Hyp limit
Estimated consumption per year
Stocks bought on LC basis.
Lead time involved.
Usance time
Bank stipulates margin for the L/C kept as deposit.
Bank charges commission up to a maximum of 3 %
This is a non fund based facility
On happening of an event the facility becomes ..fund based ..
Event will be ..DEVOLVEMENTBANK MEETS THE
COMMITMENT WHEN THE APPLICANT FAILS TO HONOUR
THE PAYMENT .
BANK DEALS ONLY WITH DOCUMENTS ..DOCUMENTS MUST
BE IN ORDER TO HONOUR IN CASE OF CLIENT`S DEFAULT.

Bank reviews the status and renew the limits along with Working
capital.
CONTINGENT LIABILITY CRYSTALISES ON HAPPENING OF
AN EVENT ..PERFORMANCE.

BANK GUARANTEE
Sec 126 of the Indian contract act 1872 defines.a guarantee as.
a contarct to perform the promise or discharge the liability of a third person in
case of his default.
A guarantee is a collateral contract which is consequential to the main contract
between two parties.
FINANCIAL GUARANTEE..
Financial ability or worth of its client to meet certain financial obligations. Involves
general credit appraisal.
PERFORMANCE GUARANTEE.
This forms part of assessing Technical competency of the applicant about the
performance ..This will not fall under the bank norms. Bank cannot complete the
task not completed by the applicant . It only amounts to compensate the Monetary
loss.
Bank issues Guarantees on behalf of the customers.
Purpose for which guarantee is issued is important.
Issued against a bonafide trade and commercial trasactions.
Only financial guarantees.not performance guarantees.
Guarantee will be issued for specific amount and purpose.only.
Will not be issued for more than 10 years.
Guarantees containing onerous clauses will not be issued.
Amendments and extensions are acceptable.
Cannot be renewed automatically
Bank assumes monetary obligation in the event of failure on the part of the
Principle debtor.
Should honour the obligation whenever guarantee is invoked by the beneficiary.
Bank charges a commission on the outstanding guarantees.
Certain margin has to be kept for issue of B G .

This is non fund based facility.


On happening of an event .invoking the BG becomes fund based.
Event is NON PERFORMANCE.
Normally for a period of 12 months will be reviewed
Date of expiry and date of claim is important
Can also be given as an independent facility.

************
.

.PROPOSAL TO BE DONE IN CLASS.

BANK PROPOSAL
REALISTIC ASSUMPTIONS FOR PROJECTED PROFITABILITY
PURPOSE OF LOANSET UP A MANUFACTURING UNIT ..TO
PRODUCE SILK FABRICS.
NEED..TERM LOAN TO ACQUIRE MACHINERY AND ADEQUATE WORKING
CAPITAL AND NON FUND BASED FACILITIES.
UNITSILK INDIA PVT TLD.
PROMOTERS..ABC..
TECHNOLOGY.FROM ITALY
MARKET.EXPORT.100% EOU
LOCATIONOWN BUILDING IN INDUSTRIAL AREA.
MACHINERY..IMPORTED FROM ITALY
RAW MATERIALS..SILK YARNFROM CHINA
Term loanrs 900.00 lakhs .machinery worth..rs1200.00 lakhs
WORKING CAPITALAS PER INVENTORY AND RECEIVABLES.
LETTER OF CREDIT, BANK GUARANTEE NEED BASED
FINANCIALS, TECHNICAL, COMMERCIAL, ASSUMPTIONS
CAPACITY.6,00,000 MTRS P.A.
CAPACITY UTILISATION
1 YEAR...50%
2 YEAR...60%
3 YEAR...70%
4 YEAR80%
SELLING PRICE OF THE FABRIC.RS.600/- MTR
PURCHASE PRICE OF YARN.RS.1500/- TON

ONE TON OF YARN WILL GIVE 5 MTRS.


CONSUMABLES2% OF R.M. CONSUMPTION.
POWER..10 UNITS REQUIRED FOR A METER PRODUCTION.
POWER TARIFF..RS.4.50 PER UNIT.
DEPRECIATION25% SLM.
TERM LOAN MARGIN.255
WORKING CAPITAL MARGIN25%
TERM LOAN INTEREST.12%.P.A.
WORKING CAPITAL INT .10% ( EPC)
DATE OF APPLN.1.2.10
DATE OF SANCTION.1.4.10
TERM LOAN WITHDRAWAL.1.4.10.30.9.10
COMMERCIAL PRODUCTION COMMENCES 1.1.11
REPAYMENT OF TERM LOAN COMMENCES FROM.1.4.2011
50 MONTHLY INSTALMENTS OF RS 18.00 LAKHS
WORKING CAPITAL NORMS.
RM60 DAYS
SFG10 DAYS
FG15 DAYS
RECEIVABLES.60 DAYS
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