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Banking Products - Assets

Jaikumar Laxminarayan
14th August 2006

Misys International Banking Systems


Recap -

What is Banking
• Banking Regulation Act, 1949, section 5 (b) -
“Accepting for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft order or otherwise”

• Encyclopedia of Banking & Finance - Charles J Woelfel


Receiving, collecting, transferring, paying, lending, investing, dealing,
exchanging and servicing (safe deposit, custodianship, agency,
trusteeship) money and claims to money both domestically and
internationally. *

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Recap -

What Are Liability Products - Banking


• Liabilities are sources of funds
• Deposits are the most important / single largest source of funds
• Liability Products are products designed by a bank to collect funds
• Savings Bank A/c, Current A/c, Fixed Deposits, Recurring Deposits,
Pigmy Deposit, Cash Certificates etc
• Banking Regulation Act, 1949, section 5 (b) -
“Accepting for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft order or otherwise” *

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Why - Liability Products

• Customers Perspective -
Return, Safety, Convenience, Record of Transactions

• Banks Perspective - (Banking Regulation Act, 1949, section 5 (b)) -


“Accepting for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft order or otherwise” *

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What - Asset Products

• Assets are created by use of funds


• Asset Products are products designed by a bank to lend funds
• Loans & Advances are the single largest use of funds in a Bank

• Banking Regulation Act, 1949, section 5 (b) -


“Accepting for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft order or otherwise” *

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Why - Asset Products

• Customers Perspective -
Meeting the requirement for funds

• Banks Perspective -
– Earn a profit to service the share capital
– Deploy funds mobilised through Liability products
– Earn a return to service the Liability Products
– Participate in building the economy - social banking etc *

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Source of Funds - Asset Products

• Funds mobilised through deposits

• Share Capital - (Owners Funds)


• Retained Earnings - (Profits ploughed back to business)
• Refinance - (From apex fin institutions - Central Bank etc)
• Float Funds - (From activities like merchant banking & collection)

Banking is a highly leveraged business


Operates huge assets with a very small capital *

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Types - Asset Products

• Land, Building, Premises


• Office Equipment - Computers, Typewriters, Xerox Machines etc
• Furniture & Fixtures - Electrical Fittings
• Vehicles - Motor Cycles, Cars, Vans, Jeeps etc
• Funds lent to borrowers - Loans, Advances, Overdrafts etc
• Loans & Advances are the single largest item on assets portfolio *

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Terminology - Loans & Advances

Overdrafts Working Capital Security

Cash Credit Credit Deposit Ratio Collateral

Personal Loan Refinance Hypothecation


Car Loan
Margin Pledge
Housing Loan
Guarantor Lien
Site Loan
Credit Rating Mortgage
Education Loan
Pre-Closure Assignment
Crop Loan Co-Obligant
Insurance
Machinery Loan Demand Loan
Bridge Loan Short-Term Loan Restructuring

Packing Credit Long-Term Loan Re-phasement

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Loans / Advances – Life Cycle

• Loan Origination • Recourse to Security


• Sanction/Rejection (Bank) • Recourse to Guarantor
• Acceptance / Rejection (Customer) • Compromise
• Documentation • Legal Recourse
• Disbursement (Single / Multiple / Limit) • Closure / Write-off
• Ensuring End Use • Releasing Security *
• Application of Interest
• Repayment (Single / Multiple / Renewal)
• Overdue / Arrears
• Penalty Interest
• Follow-up for Recovery
• Re-Phasement

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Properties - Loans / Advances

• Borrower • Repayment Holiday Months


• Guarantor • Planned Extra Payment
• Purpose • Repayment Schedule
• Limit / Amount • Pre-Closure / Redemption Quote
• Security - Nature, Value, LTV • Closure / Write-off
• Releasing Security
• Charges, Interest & Penalty
• Review Date
• Simple / Compound Interest
• Drawing Power
• Interest Balance
• Classification Code - MIS
• Interest in Arrears / Advance
• Classification Code - Quality
• Repayment Term
• Provisioning Details
• Repayment Frequency
• Legal Details
• Repayment Holiday - Initial
• Pre-EMI, Fixed / Floating *

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Classification of Advances

• Fully Secured, Partly Secured & Un-Secured


• Guaranteed, Not Guaranteed
• Demand Loan, Short Term Loan, Medium Term Loan & Long Term Loan
• Consumption Loans & Productive Loans
• Personal, Agricultural, SSI, M&LSI, Trade & Business
• Priority Sector Loans & Non-Priority Sector Loans
• Regular, Irregular, Doubtful, Bad & Suit-Filed
• Large, Medium, Small & Micro *

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Styles of Credit

• Cash Credit System


• Overdrafts
• Loan System
• Purchasing & Discounting of Bills & Cheques *

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Cash Credit System

• Targeted at Trade, Business& Industry


• Meet Planned Requirements / Shortfall in Funds
• Secured
• Based on Production, Sales, Inventory & Past Utilisations
• Limit & Drawing Power Based
• Operative Account - Deposit & Withdrawals - Checking A/c
• Repayable on Demand - Rolled Over (Yearly)
• Interest based on Utilisations & Period of Utilisation
• Elaborate Documentation *

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Overdrafts

• Targeted at Trade, Business, Industry (Sometimes Individuals)


• Meet Unforeseen Requirements
• Normally Not Secured (May take Collateral Securities)
• Normally No Limits (Limits may be fixed)
• Comes in to Existence When Withdrawals Exceed Balance
• Operative Account - Deposit & Withdrawals - Checking A/c
• Gets Repaid by Credits to the Account
• Interest based on Utilisations & Period of Utilisation *

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Loan System

• Targeted at Trade, Business, Industry & Individuals


• Meet Financial Requirements for Acquiring Fixed Assets
• Always Secured by the Asset Procured
• Definite Purpose & Term
• Repayable in Installments
• Not a Checking A/c (Exception Home Saver A/c)
• End Use is Ensured
• Elaborate Documentation *

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Purchase & Discount of Bills

Purchase is normally in respect of bills which are Not Future Dated


Discount is in respect of bills which are Future Dated

• Targeted at Trade, Business & Industry


Clean Bills
• Not for Acquiring Fixed Assets Documentary Bills

• Secured by Documents of Title to Goods


• Definite Purpose & Term
• Repaid on Realisation of Proceeds
• Limit & Drawing Power Based
• End Use is Ensured
• Elaborate Documentation **

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Purchase & Discount of Cheques

Purchase is in respect of Cheques which are Not Future Dated


Discount is in respect of Cheques which are Future Dated

• Targeted at Trade, Business & Industry


• Not for Acquiring Fixed Assets Cheques are
Bills Drawn on Banks
• Secured by Documents of Title to Goods
• Definite Purpose & Term
• Repaid on Realisation of Proceeds
• Limit & Drawing Power Based
• End Use is Ensured
• Elaborate Documentation **

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Personal Loans

• Cash loans directly to individual borrowers


• Personal purposes as to
– Pay medical bills, taxes, insurance premiums etc
– Provide cash for transactions which will permit cost savings
– Consolidation of consumer debts; payment of medical,
educational, or travel expenses, taxes or insurance premiums **

Personal loans used for the purchase


of consumer goods are
not secured by the goods purchased.

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Consumer Loans

• Loans given to individuals for purchase of goods and services


not including real estate mortgages & automobiles. **

Consumer loans are secured by


the goods procured by the loan amount

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How Much Can a Bank Lend (Total)

• Capital
• Retained Earnings
Credit - Deposit Ratio
• Deposits - Its Nature
• Refinance
• Credit Control by Central Bank (RBI)
• Demand for Credit & Seasonal Variations
• Risk Taking Capacity / Risk Perceptions of the Bank ***

Tendency To Avoid Lending


&
Focus on Safe Investments

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How Much Can a Bank Lend -
(Individual)

Required as Against Available

Financial Ratios

Past Utilisations & Projections

Lending Norms

Margin Requirements

Account Limits / Client Limits / Group Limits *

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Securities - Characteristics

• Safety
• Price Stability
• Easy Marketability
• Convenience
• Easy Valuation
• No Additional Responsibility
• Easy to Ascertain the Title to Property *

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Securities - Different Types

• Assets Procured Using Loan


• Deposits - Self / Others - Same Bank / Other Banks
• Shares & Debentures
• Life Insurance Policies
• Stock in Trade
• Plant & Machinery
• Land & Building
• Receivables / Debtors
• Title to Goods - LR / RR / WR / WB / BL *

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Securities - Crating a Charge

• Lien
• Pledge
• Hypothecation
• Mortgage
• Assignment *

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Insurance

• The lender has an interest in ensuring the safety of the security

• The lender has an interest in ensuring that the borrower is alive

Fire, Theft, Riots, Floods, Earth Quake etc


Accidents etc

Comprehensive / Third-Party Insurance


Automobiles *

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Debt Restructuring

• Modifying the terms of the loan - term, type, security, guarantor,


interest rate etc to enable the borrower to be able to better
service the loan
• This is normally done when there is a likely hood of the loan
going bad
• This is also termed as Ever-greening of loans *

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Credit Insurance & Credit Guarantee

• Deposit Insurance & Credit Guarantee Corporation (DICGC)


• Export Credit Guarantee Corporation (ECGC) *

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Loans / Advances – Documentation

• Obtaining signatures on the documents which contain the terms


of the loan
• Binding the borrower legally
• Binding the guarantor legally
• Creating a charge against the security
• DPN
• Loan Agreement, Hypothecation / Pledge / Lien / Assignment
papers
• Letter of Guarantee
• Some documents require stamping, registration, witness etc *

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Limits

• Limit is the extent to which a lender is ready to lend at any given


point of time
• Limits can be fixed at Account level, Client level, Group level
• Limits can also be fixed at Facility level for each client or a
group
• Inter-changeable limits are also possible (OD / BD)
• Once limits are fixed they get validated at the time of account
creation
• Limits help in managing the risk effectively
• Must be careful in fixing limits (Risk & Liquidity) *

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Question & Answers

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For Attempting To Become A Smart Lender
Or is it

“Smart Borrowers” ???