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Banking Assets

o Banking Assets originate from Banking Regulations
Act

o Defines Banking as
– accepting for the purpose of lending or investment of
deposits of money from public repayable on demand or
otherwise and withdrawable by cheque, drafts order or
otherwise’

o Banks need to deploy Deposits gainfully in order to
o Pay the contracted interest at the end of period / time
o Repay the deposits on demand or otherwise
o After maintaining the statutory reserves

Banking Assets –
Classification
o In a Bank’s Balance Sheet Assets are shown
as :
o Bills Purchased & Discounted
o Cash Credits, Overdrafts & Loans payable on Demand
o Term Loans

o These are re-stated as
o Secured by Tangible Assets ( incl Book debts )
o Secured by Bank/ Govt Guarantees
o Unsecured

o Re-stated again as
o Priority Sector & Public Sector
o Banks
o Others

Banking Assets – In
practice
o Classified as :
o Fund Based Facilities / Products
o Non Fund Based Facilities / Products

o Above may be either :
o Secured by Tangible securities
o Unsecured

o By Segment
o Corporate Banking Products
o Large & Mid Corporates
o MSME

o Retail Banking Products

< One year o Term Loans > One year Above may be Secured or Unsecured .Fund Based Assets / Products o By Tenor o Bills o Purchased o Discounted o Cash Credit / Overdrafts o Demand Loans .

Non Fund Based Products o Letters of Credit ( LCs ) o Sight LCs o Usance LCs o Guarantees o Financial Guarantees o Performance Guarantees o Deferred Payment Guarantees Above may be Secured or Unsecured .

FUND BASED .CORPORATE BANKING ASSETS .

Fund Based -Traditional Products o Working Capital : o Cash Credit against Stocks / Book debts o Demand Loans o Lock and Key Loans o Bills Purchased & Discounted o Regular o Under L/C o Term Loans : .

Fund Based – Contemporary Products o Channel Financing o Factoring o Future Receivables Discounting o Credit card Receivables Securitisation o Lease Rental Securitisation o Loans Against Property ( LAP ) .

o Running Account ( with a Debit Balance ) o By Cheques as a running account with governing Limits & Operating Drawing Power o Facility can be run on a in-and-out basis – Regular Deposit & Withdrawals . control and monitoring. o Easy to operate.Cash Credit / Overdrafts o Suits most businesses & segments – Universal acceptance o Easy assessment.

Cash Credit / Overdrafts o Funding is done from cash-to-cash stage.e RM purchase to sales realization o Granted against security of o Stocks ( all stages & kinds ) o Book Debts o In India constitutes the prime source of funding for Corporates o Because of its flexibility and ease of operation o Treated as short term & renewed every year o Technically payable on Demand o Can be a Hypothecation or Pledge . i.

Demand Loans o Payable on Demand after a fixed Term o Usually less than & up to a Year o Can be given for purposes similar to CC o At times built out of Total Fund Based limits o Is also given against other securities o Like FDs. Securities etc o o o o Can be Clean & Unsecured at times Convenient for short term specified uses Normally repayment : Bullet payment Security charge can be a Hypothecation or Lien .

Bills Finance o Bills Finance given to Finance Sales & Debtors o Bills Purchased or o Bills Discounted o Normally given against ‘Sales’ Bills of Exchange o o o o o Drawn against Sales in course of business On acceptable and known parties by the Bak For period of Usance ( Credit ) upto 3-6 months Facility gets rolled over on payment of Bills When Given against ‘Sight Bills’ is called Bills Purchased o Preferred source of lending by Banks when parties are known & acceptable : .

Bills Finance o Is given as regular fund based limit o Is a preferred source of financing in International Trade o When nomenclatured in FC are called Foreign Bills o Can also be given under LCs of reputed Banks o Big source of Export Finance in Banks o Banks have a Hypothecation charge over the underlying Debts/ dues .

Term Loans o Also called as Project Loans o Are given for Asset creation o As name suggests its give for a Term/ period o Usually given for periods longer than 3 years o Up to 10 years and longer o These loans finance small & Large projects o Considered ‘Tricky ‘ loans as taking a credit view over long periods is difficult and changes in business environment rapid .

Fixed Price o Secured by the assets created by the loan. o Charge on immovable financed is ‘Mortgage’ o Charge on Movable assets is Hypothecation o In term loans usually charge is on a ‘ Pari passu’ basis because there are more than one lenders . Fixed amount.Term Loans o Normally payable in fixed instalments as per repayment schedule agreed upfront o Fixed Term.

FUND BASED – CONTEMPORARY PRODUCTS .

 Vendors are paid by discounting their sales bills  Repayment are from anchor customers who will pay on due date  Leverages the credit quality of a better rated customer & lowers risk .  Anchor co may/ may not give some comfort to the lender.  Has become a useful tool  to acquire better quality & large volume Assets for Banks/NBFCs  Supplies to dealers are discounted  Take out from the dealers’ cash flow.Channel Financing  Enables financing the whole supply chain of the anchor customers  dealers and  vendors.  Normally granted to associates of AAA / AA rated borrowers  With excellent payment record  e. Nokia. Maruti. Hero Honda and more….g HLL. ITC ..

sales ledger keeping etc for the seller. o Different from sales bills discounting. o It’s a Buy out o Saves the hassle of hundis. recovery. due dates etc o Can be with/ without recourse now o In India usually with recourse to seller o Export factoring is called Forfaiting .Factoring o Factoring is financing of the ‘Sales Ledger’ o A ‘Factor’ gets into the shoes of the seller o Manages collections.

Future Receivables Discounting o A very innovative product o to finance Infrastructure projects o Future cash flows discounted o for certain fixed period o Captured through an escrow account and o discounted upfront. o Needs strict monitoring & control o on the future cash flows. o Suits projects like Toll roads. . o Repayment (Take-out ) is from the future cash flows. Bridges. Ports.

o Captures the booming business of BPOs and real estate development o Against a fixed term covering loan amount o Premature exits not favored o Classic case of Credit enhancement through Product structuring o Leverages the rating of the Tenant and his Cash flows o Supported by mortgage as security .Rental Securitisation o Future rentals from better rated borrowers are securitised.

Loan against Property ( LAP ) .

CORPORATE BANKING ASSETS NON FUND BASED .

the risk that the buyer will fail to pay is transferred from the seller to the Bank. • Thus.Letters of Credit o Letter of Credit – Is a document issued by a Bank to a Seller – Guaranteeing the payment to Seller for goods supplied to a designated buyer – On presentation of the specified documents – LCs are issued as per provisions of UCPDC • Document serves as a guarantee to the seller – that it will be paid by the Bank regardless of – whether the buyer ultimately fails to pay. .

Letters of Credit o Letters of credit are used primarily – in international trade for large transactions o There are 4 parties to a Letter of Credit – – – – Issuing Bank Applicant also ‘The Buyer’ Beneficiary also ‘The Seller’ Advising Bank o All LCs issued are ‘Irrevocable’ – Can be amended only at the request or consent of beneficiary o Letters of Credit may be – For imports/domestic purchases and are • Sight • Usance .

Bank Guarantees o Another Non Fund Product Line in Banks o Banks leverage their credibility and acceptability to issue Guarantees to Third parties o Guarantees are issued on behalf of their Clients o Bank Guarantees are a good source of fee income & deposits for Banks o Huge demand by Infrastructure . Construction & Project Companies for their business o Enables clients to reduce funds outlay and save costs .

Bank Guarantees  Issued for variety of purposes for such clients – – – – – – – Bid Bonds Earnest money Advance for projects Release of retention money Performance Guarantee At times for Customs in lieu of customs duty General & Miscellaneous .

Bank Guarantees • There are 3 parties to a Bank Guarantee. viz – Applicant or the Bank’s Client – Beneficiary – Issuing Bank • Bank Guarantees have a validity period and can’t be open n continuing • Unlike LCs they are issued in a free format acceptable to the Beneficiary and Bank .

every six months. . – Buyer's credit can be availed for one year in case the import is for trade-able goods – Three years if the import is for capital goods – Interest on buyer's credit may get reset.Buyers & Supplier Credit Buyer's credit o Enables local importers ( Buyers ) gain access to cheaper foreign funds close to LIBOR rates o Saves costs and gives longer tenors for payment o Tenor ( Duration ) of buyer's credit varies from country to country. as per the local regulations.

GBP.Buyers & Supplier Credit o Exporter or Supplier gets paid on due date. o The funding can be in any Foreign currency – (USD.) as per choice of Buyer o Buyer can use this financing for any form of trade viz. – whereas importer gets extended date for making an import payment as per his cash flows o Buyer can deal with exporter(seller) on sight basis – negotiate a better discount and – use the buyers credit route to avail financing. which enables importers to take a favourable view of a particular currency . open account. EURO.or LCs o Currency of imports can be different from the funding currency. collections. JPY etc.

NATURE OF SECURITIES NATURE & KIND OF BANK’S CHARGE .

Securities o Banks mostly lend against Securities o Unsecured loans are often backed by Personal Guarantees o Borrower must have clear title to securities and capable of charging them to the Bank o Securities can be o o o o Movable Immovable Tangible Intangible o Must be marketable .

Kinds of Securities o Securities for Bank Loans – – – – – Fixed Deposits Debt instruments of rated Companies LIC Policies Shares of listed Companies Gold o Corporate Loans – Stocks & Book Debts – Plant & Machinery – Land & Building .

Charges & Modes of Creation o Charge on security – Means making a security legally available to the lending banker – Creditor ( Bank ) gets definite & defined rights on assets till loan is repaid / liquidated – Absolute ownership remains with the borrower in most cases .

Types of Charges o Lien – Negative Lien o Assignment o Pledge o Hypothecation o Mortgage o Right of Set Off .

LIEN : Modes of Creation o Right to retain the goods/securities until debt due is paid – Banker’s lien is more than possessary and is implied pledge • Banker has a general lien – Does not require a separate agreement – Applicable to goods & securities and not to Monies deposited with bank – Possession of goods/securities must be obtained in usual course of business – Right of General lien not affected by Limitation for amounts covered by security value .

LIEN… o Negative lien : – Securities do not lie in bank’s possession – Debtor undertakes not to create a charge on unencumbered security – Does not require registration in case of Companies .

book Debts. Supply bills o Assignee gets absolute right over security assigned – Other creditors do not get priority over Assignee – Assignee does not get a better title than the assignor . Right / property in favour of the Bank Assignment – LIC policies.o Transfer of Debt.

actual or constructive with pledgee • Fixed charge in favor of the Bank – Does not require registration with ROC – Not subject to priority claims of other creditors • Pledgee not bound to sell goods by Public auction in case of default at his absolute discretion – After giving reasonable notice to borrower – Sale of pledged goods does not extend Limitation • Bank can sell & recover his dues even after Limitation .Pledge o Pledge is a bailment or legal delivery of goods by a debtor with an intent to create a charge as security for Loans – Legal ownership remain with pledgor • Possession.

– Needs registration with ROC in case of companies – Most used method to lend by Banks. despite weakness in security and its enforcement .Hypothecation o Not clearly defined under law – It is considered an equitable pledge governed by the terms of hypothecation deed – Applicable on moveable goods – Neither transfers ownership or possession to lender • Borrower holds possession as agent of the Bank with constructive possession with Bank.

o Equitable mortgage can be done at only notified centres o Registered can be done at any centre .Mortgages o Transfers interest in specific immoveable property in favor of bank o Forms of mortgages used by banks – Mortgage by deposit of title deeds – Simple or Registered Mortgage o Charges registered with ROC in case of companies o Registered mortgage needs to be registered with Sub registrar of assurance within 120 days of creation.

RETAIL LOAN PRODUCTS .

Retail Loans o Retail Loans have seen a recent focus by Banks o Was restricted to loans against FDs & Gold and few others on ‘Customer need’ basis o Initially started with o Housing or Mortgage loans as a Priority Sector o Broad based to other assets to meet Retail customer aspiration o Align with Global Banks o Steady rise in portfolios of Retail loans in Banks YOY o Additional avenue has enabled spreading of risk o Better pricing and higher NIMs to boost profitability .

Retail Loans.Kinds o Loans against FDs & Securities o Loans against shares o Gold Loans o Car & Two wheeler loans o Mortgage Loans & Loans against Property o Education Loans o Personal Loans o Credit Cards .

get ‘x’% of the value of FD as loan from the Bank. o Borrower has the option of adjusting it on due date or repaying the loan as per his convenience o Interest rate charged is normally 2 % higher than contracted rate of FD.Loans against FDs & Securities o Basic & simplest Retail Loan Product o Depositor can .on request. o No loans are granted against Other Bank FDs . o Instant & automatic at times o Certain Banks allow drawals on ‘as & when basis’ o Bank note a Lien on the FD to the extent of the loan o Zero risk product with Bank’s Right to set off.

Loans against FDs & Securities o Loans against Securities – Specified securities as per Bank’s Credit policy • These could be Kisan Vikas Patra. • Repayment can be fixed as per mutually agreed terms for 6-36 months • Can be given as Demand Loan or Overdraft • Interest charged is as per Bank’s interest rate policy • Bank notes its lien / assignment / charge on security . • Loan is for an ‘x’% of Face value/ market value/ maturity value / surrender value • Borrower needs to service interest on the loan. LIC policy ( surrender Value ). Mutual fund units.

as per Bank’s Policy o Given normally as an overdraft for approved uses o Bank holds a Pledge on shares o Loan Limit & DP is calculated as per market value of shares on date of sanction o Value of security is normally checked at weekly intervals o In case of fall in value . o ROI is as per Bank’s extant policy o Bank’s overall exposure under this product falls under ‘ Capital Market’ exposure limit set by RBI .Loans against Shares o Given against pre approved list of Listed companies shares. Borrower must pay the difference o Margin Call o Margin money for limit calculation is 50 % on MV .

Gold Loans o One of the most traditional Loan products o Because of ease of availability of security o Security is easily marketable and has stable value o Quality & Quantity can be easily checked o Valuation/ Price is available in public domain o Bank holds a Pledge on the Gold o Loans are given for short period o Given as a Demand Loan with regular or bullet repayment o Quite popular in South Indian branches of Banks o Assignment .

Auto Loans
o Car & Two wheeler loans
o Big push in the past 10 years

o Erstwhile dominated by Foreign Banks &
NBFCs
o Thrust has led to the growth of the auto industry

o Prior to 2000, only 10 -15 % vehicles were
financed
o Currently 90% vehicles are financed
o Huge impact on Bank’s Balance Sheet
o Add-on avenue to deploy funds and improve NIIs
o Risk mitigated as large number of clients

Auto Loans
o Special structured loans to meet customer needs
o Products may differ Client wise- model wise



Products for salaried may be of long tenor
SEP + SENP may have differently designed products
Credit view is taken on asset as well as Client profile
Market Value curve is also a determining factor

o Loans vary from 70-90 % of Asset value ( LTV )
o Varies with Brand & Models

o Seek to capture existing Free Cash Flows
o Credit Decision is a mix of Credit view + Asset view

Auto Loans
o Could be EMI oriented
o Tenors vary from 3-7 years

o Short end typically for 2 wheelers
o Banks have a hypothecation charge over asset
o Auto loans adopt novel channel for sales
o Banks tie up with Auto companies to bring new
structured products for their models
o To increase sales of vehicles +loans

o Also tie up with Auto dealers to improve
penetration

o Assignments

30 years Has enabled preponment of the acquisition date of ‘owned house’ by individuals – Helped in meeting the growing need of housing – Also provided a big fillip to ‘Core Industries’ in the Economy • Cement.Mortgage Loans o As the names suggests these are – Loans against Mortgage of Property • Acquisition of Land and/or House & Flat – – – – Quite Popular with Banks to build stable Retail Loans Have a demonstrated low delinquency rate historically Loans are Long Term – Tenors 5. – A growing source of employment and GDP growth . and Steel.

residual service. • EMIs can be structured by lender based on Property. Applicant’s requirement • Loan may be disbursed during the construction period – Interest rates can be fixed or floating – Prepayments are allowed by the Banks • Now without penalty – Qualifies for Priority Sector Lending – upto 25 lacs .Mortgage Loans – Value of the loan is determined by Value of property • Assessment of loan eligibility depends upon Age. Builder. Income etc of the applicant • Normally EMIs should not exceed 35 % of aplicant’s Net Income • Repayments are EMI based.

flexible • End use being different. loans are priced higher than Mortgage loans • Do not qualify for Priority Sector lending – As Loans are for Business purposes assessment is made differently based on ‘purpose of loan’ .Loans against Property o As distinguished from Mortgage loans – These are Loans against Ready / existing Property • Property can be either Residential or Commercial • Already owned by the applicant • Purpose of the loan is normally ‘Business purposes’ • Tenors are short between 3-7 years .

Education Loans o Have been on the Banking product suite for long – Is a Priority Sector Lending for Banks – Govt has been giving high thrust to improve product penetration – Enables skill building to meet Economy’s growing Skill / Talent needs – Loans given for pursuing higher education/ professional courses – Both at Indian & Foreign Universities – More popular with Public Sector Banks on account of Govt’s thrust – Hasn’t seen much growth in Private sector Banks • Because of high defaults in the product portfolio .

Education Loans o Past few years has seen higher growth in Banks o Loans are given in 2 slabs o Maximum limit : Domestic 10 lacs Foreign studies 20 lacs o Upto 4 lacs – unsecured and o beyond 4 lacs up to 10 & 20 lacs against Collateral & Guarantees. – Had seen a high default rate in Banks – Prevented Banks from giving the thrust intended – Govt planning to have a Credit Guarantee Scheme to reduce default ratios of Banks .

Education Loans o Loans are assessed for “Cost of Education ’ o Add on like Books. Expenses etc for period of course are also permitted o Repayment are flexible o Normally linked to duration of course with a moratorium of 6 months from end of course o Collateral insisted by Banks if loan value > 4 lacs o Normally mortgage of Property o Interest rates are floating and Base Rate linked o Repayment are spread over maximum 84 months .

Personal Loans o o o o o o Clean & Unsecured loans Seek to lend against short term needs Encourage consumption High Risk : Higher Return Small in Ticket size. Target specific customers. viz Salaried . Reputed Companies o Track Record of payment o Parceled with existing auto / mortgage loans o o Banks seek to leverage their Collection systems o Provides higher revenues .

Personal Loans o Simple assessment – At times pre approved to improve marketing – More popular in times of economic buoyancy o Loan Limit is based on Certain times monthly Salary o Banks have prudential limits for this loan portfolio o Assignment .

track record etc o Facilitates approved transactions – – – – At approved merchant establishment ( ME ) Currently covers a wide range o such outlets Retail.Credit Cards o Credit Cards are like pre approved Overdraft limits o Limits are set based on variety of parameters – Income. Company. Chemists. years of service . Hospitals. Travel. Utility Bills etc Cash Drawals are also permitted upto a sub limit o Benefits both the Card holder and the ME o Card holder gets a credit period while ME larger clientele o Nowadays transaction approval is online .

a o Easy credit….difficult to manage if no discipline is maintained .Credit Cards o Cards allow a credit period of 50-57 days o Monthly debits ( purchases ) need to be paid at the end of the credit period fully o Rollover of monthly outstandings is permitted @ interest o Card holder must pay between 5-10% of outstandings to enjoy rollover facility o Interest is chargeable only if not paid by due date o Subsequent purchases carry interest from due date till amount due cleared o Limit ( Loan ) is Clean & Unsecured o Interest rate vary between 24-42 % p.

REGULATION OF ASSETSROLE OF RESERVE BANK OF INDIA .

5 % maximum Advances to MSME sector : Reckoned without min/ max Education Loans upto Rs 10 lacs – India.1 % of ANBC . 20 lacs abroad o Housing Loans upto Rs 25 lacs o Advances to weaker sections 10 % o DIR -.18 % Indirect -.4.Priority Sector Lending ( PSL ) o Banks have to lend 40 % of their “ ANBC” under “PSL’ o Thresholds “ o o o o Agriculture -.

o Finance to corporates. fishery.Agriculture o Crop Loans to farmers o Loans against Ware house Receipts upto Rs 10 lacs o Working capital and term loans. bee-keeping. partnership firms and institutions for Agriculture and Allied Activities -dairy. . poultry. etc . – including credit sanctioned under Kisan Credit Card – for financing production and investment requirements – for agriculture and allied activities.PSL. piggery.