ECONOMICS

PROJECT WORK
INFLATION TYPES CAUSES AND
METHODS TO CONTROL
INFLATION

Submitted To Submitted By
Mr. Inderjeet Sir Maadhav Goyal
UILS Roll no. 37220
P.U. Chandigarh B.com L.L.B. (Hons.) Sec-E
UILS P.U. Chandigarh
 ACKNOWLEDGEMENT
The success and final outcome of this project required a lot
of guidance and assistance from many people and I am extremely
fortunate to have got this all along the completion of my project
report. Whatever I have done is only due to such guidance and I
would never forget to thank them

I take this opportunity to record deep sense of gratitude to my

teacher, Inderjeet Sir, University Institute of Legal studies,
Chandigarh for her incontestably perfect unmatched guidance
encouragement, valuable suggestions and efforts made during the
preparation of this project and during her lectures which enabled me
to complete this project successfully on the topic,

INFATION TYPES METHODS TO CONTROL AND CAUSES

I owe my regards to the entire faculty of the Department of Legal

Studies, from where I have learnt the basics of Law and whose
informal discussions, intellectual support helped me in the entire
duration of this work

Maadhav Goyal
2Nd sem, SEC-E (B.com+ L.L.B)
Roll No. 37220
 CONTENTS AND INDEX
S.NO PARTICULARS PAGE SIGN
NO.
What is management of advances
Lending or advancing loans is one of the two acid test functions of
commercial banks. Lending is not only one of the principal services of
the bank, but the very crux of the banking Of accepting deposits is
the function of one hand, lending is the function of the other hand
Without lending the process of earning revenue or profit does not
begin A major portion of the bank deposits gets blocked in cash
reserves and liquid assets to meet CRR and SLR requirement
(although the two ratios have been brought down considerably). The
residual funds or deployable funds have to be used for lending very
carefully; so that not only establishment and interest obligation etc
are met comfortably hut reasonable return on funds is also earned.
This is true for both public and private sector banks. Obviously, the
lending policy will always be under the monetary policy of the Reserve Bank of
India.

Basic principle of lending

SAFTEY LIQUIDITY PROFITABILTY

1.SAFTEY
(1) Safety
The safety of funds is the most important principle for a commercial
bank The Jean must be safe It requires that it should be granted to a
reliable borrower who can pay from reasonably sure sources within a
relatively short period. The liquidity of advances in the ordinary
course of business should be unquestionable and the safety
requirements should usually be supported by the deposit of
approved security as an insurance against unforeseen developments
Number of features can be examined under this head to decide
whether the proposal is sound enough. At times banks are under
pressure to lend aggressively, but they have to be

defensive at the same time, ensuring that they do not loose the
amount lent. They can take only calculated risk, This is the reason for
the banks to call for collaterals, margins and guarantees. However,
this may satisfy the criterion merely procedurally and legalistically.
Good documentation and inspection are absolute necessities
however that is not enough. Experience shows that this inculcates
some fear and Discipline. However, when things go wrong these are
reluctantly enforced and in courts Banks hardly benefit from them. It
turns out to be a last resort and only a partial protection. The safety
needs to be ensured through other measures, Greater importance
should be given to continuous follow ap net of security alone, but of
borrower's business as well Banks should develop reliable systems
designed in terms of signals d actions, for different stages of the
health of different categories of borrowers' business operation and
finance. It needs to be remembered that things never deteriorate
overnight, y weak and ineffective vigil leads to problems which
endanger safety of lending’s.

(2) Liquidity
It has been stated earlier that the liabilities of commercial banks are
payable either on demand or on short notice Therefore, the bank
loans should also be liquid Liquidity refers to the readiness with
which bank can convert its assets into cash with no or nominal loss. A
loan will be liquid, if it has been given for a short period to finance
the trading transactions. The money will get realised when asset
financed inventory get sold.
Lending for longer period, while barrowing short, exposes to the risk
of failure to meet the demand of depositors, which can prove to be
fatal as banks thrive on public confidence. The principle of liquidity
deserves attention on another count. The cost of borrowings from
the Reserve Bank of India depends upon the net liquidity ratio i.e
the ratio between net liquid assets of the bank to its total demand
and time liabilities If ratio is below the prescribed limit, the rate of
interest charged by the Reserve Bank of India goes up
However, under the changed banking and lending practices, it is not
always easy satisfy the liquidity requirement. Once a bank goes
beyond the bill discounting business or financing against goods in
trade, the decision making becomes difficult. The lending beyond
this, is not self liquidating in nature and no proper and reliable norms
have been developed in relation to medium term lendings. Most
often, the tackling is on fire fighting basis.

(3) Profitability

It is obvious, that there is little point in a bank granting facilities

which do not produce directly on indirectly some profit to it.
However, in Indian banking it has been the most talked about but
least considered canon of commercial bank lending. In most of the
situations cost data relating to most of the activities is not worked
out, which makes it difficult to work out the profitability of individual
decisions The only objective which gets emphasis is to raise the
volume of business In the absence of functional cost data it becomes
impossible to work out profitability
In these days of ever increasing overheads, the margin of profit
which can be earned on advances is of paramount importance.
Interest on advances is the main revenues to meet interest on
deposits and other expenses and, although healthy competition
among banks ensures that the lending rates are kept to a minimum,
it would be foolish to advance any loan at a known overall loss. The
profit may be high where the risk a more, but profitability
consideration has to be moderated to ensure liquidity and safety.

FACTORS TO BE CONSIDERED WHILE MAKING

ADVANCES
(1) The Borrower:
The principle of safety demands that the advance must be given to a
borrower in whom the bank may have every confidence. The sound
approach to good lending is that never afford any facility to a
borrower on whom that bank cannot rely, however strong may be
the security A good bank should know his customer and be able to
judge not only his integrity but also his ability to use the loan
profitably and repay it within the agreed period of time.
(2) The Business
Next, attention must be paid to the business of the borrower and its
prospects with reference to prevailing economic conditions: It is
natural for a potential borrower to be enthusiatic and optimistic. The
bank should discount it and assess the real prospects in the light of
known conditions. The possibility of the success of venture for which
the finance from bank is sought must be assessed objectively. If the
project succeeds, sufficient funds from profits will be available to
liquidate the loan. Otherwise, the bank will have to fall back upon
security to recover the amount and advance will be fundamentally
unsound.
(3) Capital resources of the borrower
At times borrower has ideas but no capital resources and expects
bank to meet all his capital needs. It is definitely not a function of a
bank to find the capital or invest in business. Usually, the major stake
should be that of borrower or long term lenders An excessive stake
in the business will mean taking too much of a risk As a general rule,
a bank will rarely wish to lend more than the amount of the
proprietor's capital. However, there are exceptions to the rule like in
case of factors or brokers dealing in marketable produce.
(4) Amount of the loan
The amount demanded should be considered both in relation to the
capital resources of the barrower and the purpose for which it is
demanded. It will be foolish to advance a maximum, which is
inadequate to finance the project correctly speaking; a finance
budget should be prepared by the borrower which should be
critically analysed to decide that the amount asked for is sufficient
for the purpose. To decide whether the amount required efficient it
is necessary to explore fully the whole purpose of the advance and
the suitability of the project itself
(5) The Purpose
The purpose of the borrowing must command the support of the
bank. If the purpose itself is outside the banking policy, there is no
need to process the application eg, the loans which may be
prohibited by Reserve Bank of India. Secondly, it has to be examined
whether loan is desirable from the banking point of view There can
be neither hard and fast rules nor an unalterable list of sound
objects. Every application has to be considered on its own merit.
Sometime, an advance may have to be made for an unsuitable
project as it may be coming from a wealthy customer, whose security
margins are enough. A 'no to him may amount to losing his wealthy
account
6 The Source of Repayment
The borrower of the credit should have a good rated source of
repayment so the loan is paid on time and his debt is not conveted to
a NPA.
7. Security
The last factor to be considered is the security. Many persons believe
that the bank loans are made against security, which is absolutely
incorrect. If the other principles and factors of lending justify the
advance, then the security will be obtained as a form of insurance
against any unforeseen development. The best plans can fail, then
the security acts as final safeguard. If the proposal is not justified on
other grounds, no amount of security alone shall enable a customer
to borrow from the bank, but a greater risk can be accepted on the
strength of security.

Formulation of loan policy

What is formulating loan policy?
Basically, loan portfolios have the biggest impact on the aggregate
risk profile and profit execution. This acquiring execution involves
different components like premium salary, charges, arrangements,
and different variables of commercial banks.
The loan portfolio checks roughly 62.5 percent of aggregate
customized resources for banking associations with under $1 billion
in all out resources and 64.9 percent of aggregate unified resources
for banking associations with under $10 billion in complete
resources.
Keeping in mind the end goal to restrain credit chance, it is
obligatory that appropriate and viable arrangements, methodology,
and practices are created and executed. Loan strategies should
organize with the objective and destination of the bank,
notwithstanding supporting sheltered and sound lending movement.
Policies and procedures sought to be introduced as a design for all
real credit choices and activities, encasing every material part of
credit chance, and reflecting the many-sided quality of the exercises
in which a bank is lengaged.

Policy Development

As we probably am aware risks are inescapable, banks can help

credit chance by advancement of and attachment to productive and
viable loan arrangements and techniques. A very much archived and
graphic loan policy turns out to be the development of any stable
lending capacity.
Eventually, a bank's directorate is responsible for excoriating out the
structure of the loan approaches to address the innate and leftover
risks. Leftover risks are those risks that stay even after sound inner
controls have been executed in the lending commercial lines.
In the wake of planning the policy, senior management is considered
responsible for its execution and continuous checking, joined by the
support of techniques to guarantee they are avant-garde and good
to the present risk profile.

Policy Objectives
The loan policy ought to plainly impart the vital objectives and
destination of the bank, and in addition characterize the kinds of
loan exposures worthy to the establishment, loan endorsement
specialist, loan limits, loan guaranteeing criteria, and a few different
rules.
Note that a policy contrasts from techniques in which it puts forward
the arrangement, managing standards, and system for choices.
 Methodology, then again, build up techniques and investments to
perform errands. Banks that offer a more extensive assortment of
loan items or potentially more intricate items ought to consider
creating separate policy and technique manuals for loan products.

Policy Elements
The administrative organizations' examination manuals and policy
statements can be considered as the best place to start when
choosing the key components to be fused into the loan policy.
To diagram loan policy components, the bank ought to have a steady
lending procedure, recognizing the sorts of loans that are allowable
and those that are impermissible. Alongside distinguishing the sorts
of loans, the bank will and won't guarantee paying little respect to
permissibility. The policy components ought to likewise plot other
regular loan writes found in commercial banks.
The real policy components for a bank are −
 An announcement featuring the highlights of a decent loan
portfolio as far as sorts, developments, sizes, and nature of loans.
To put it plainly, an objective proclamation for whole loan
portfolio.
 Stipulation of lending specialist recommended to each loan
officer and loan advisory group. The primary errand of loan officers
and loan advisory group is to gauge the most extreme sum and
kinds of loan endorsed by every representative and board of
trustees and what marks of endorsement are required.
 Limits of obligation in making assignments and announcing
data.
 Working strategies for requesting, looking at, getting to and
settling on choices on customer loan applications.
 The reports required for each loan application and all the
fundamental papers and records to be kept in the bank's
 documents like financial explanations, pass book points of interest,
security agreements, and so forth.
 Lines of expert and responsibility for looking after, observing,
refreshing and auditing the establishment's credit documents.
Loan policies differ essentially starting with one bank then onto the
next. It is totally in view of the intricacy of the exercises they are
occupied with. The policy components of a private bank may
somewhat contrast from the administration bank. At any rate, a
general loan policy consolidates particular fundamental lending
principles.

CREDIT PROCEDURES
1. Application Form
There is a general complaint from small borrowers that banks ask too
much information from them and the application form is usually
complicated and lengthy r which they find difficult to fill in. For the
convenience of such borrowers, the form may be bifurcated into two
parts (application form to be filled in and signed by the borrower
containing essential information of a simple nature relating to
himself and his credit requirements, and (i interview form in which
additional information obtained by questioning the applicant and
perusing his books of account and other relevant papers may be
recorded by the bank's officer. While the application form may be
common for all mall advances, separate interview forms may be
prescribed for different types of borrowers such as small. scale
industries, agriculturists, road transport operators, service unit
owners, retail traders, etc.
2. Credit Reports the grant of credit is a business which involves a
risk of incurring bad debits if proper care is not taken. Banks,
therefore, ascertain the creditworthiness of borrower: from time to
time and maintain credit reports on them. Before making the finance
available, they are also expected to ensure that the borrowers are
properly introduced and satisfy themselves regarding the purpose of
the advance. Considering the large increase in the number of
borrowers during recent years, the work of maintaining credit
reports on each and every borrower has become laborious and
costly. To reduce this work to some extent a Commission was made
3. Credit rating or Credit Intelligence

In countries like the UK and the USA, Commercial banks rely to large
extent on the reports and data supplied by reputed credit
investigating agencies. These agencies specialize in collecting and
disseminating credit information on individuals, partnerships and
corporations Even the Indian bunks favor such credit intelligence
bureau In India, credit rating agencies have come up, which give
rating to debt instruments Some of them have offered to provide
services to commercial banks in this regard However, anything
concrete is yet to emerge. Names of same agencies are CRISIL ICRA
etc
4. Scrutiny of Advances Proposals
Applications for advances for large amounts, which are in excess of
the discretionary power of branch agents, are referred to head
office/regional office by sending the proposal in the prescribed form
Quite often, the branches do not furnish adequate information in the
proposals which results in protracted correspondence and
consequently delays the sanction of the advances. In order to
eliminate such delays, the proposal form should, where necessary,
be so revised as to contain adequate information regarding the
volume and turnover the borrower’s bus sales and purchases on cash
and credit basis, current assets and liabilities, extent of own
resources, seasonal trends and other relevant details justifying the
credit limits applied for under the different facilities
5. Supervision of Advances The usual follow up action at the branch
level consists of the periodical scrutiny of operations in the account,
verification of the security, its valuation, insurance cover, etc and the
examination of stock statements submitted by the borrowers. In
addition the Agent and/or other senior officials at the branch should
pay frequent visits to the place of business of the borrowers
accommodated for manufacturing, production or trading activities,
for discussion with them on matters such as trend of business,
difficulties encountered and devising measures to solve them. In
order to ascertain the end use of funds, the officials, during their
visits, should try to test check (i) whether large drawings made from
the accounts were for genuine business purposes, fill whether the
inflow of cash in the business was regularly deposited in the account
and (in) whether the production and marketing activities of the
concern have been running smoothly

6. MANAGEMENT OF DIFFICULT ACCOUNTS

Stagnating, difficult and sick accounts cannot be eliminated in the

business of lending. The bank has to decide its policy regarding such
accounts and implement it. It has been emphases earlier that the
aunts de not be had overnight Number of problems can be solved
through an early action.
The action can be either to call up or support further Calling up
advances from borrowers has its consequences. The call may hasten
the process of failure of the unit hurting the interest of bank and
other lending institutions May be the problem a arising out of lack of
funds which can be overcome by giving further support if the things
have gone bad completely it will be worthwhile to call up and
enforce securities Narasimham Committee al system made certain
recommendations regarding such accounts taking steps through a
separates agency, however the recommendations are yet to be
implemented. Regarding nonperforming assets (NPA) prudential
norms have to be observed. This aspect has been discussed in the
Chapter an Banking Problems in India Govt. has set up tribunals for
recovery of NPA
 BIBLOGRAPHY
Websites referred
1.www.iedunote.com
2.www.cleartax.com
3. www.wisdomjobs.com
Books referred
1. Banking and Insurance by Kalyani publishers