Types of borrowers

 To establish contractual liability, banks lend to borrowers who

are competent to contract under
Indian contract Act, 1972

 Single Individual

 Joint individuals

 Non-individuals
Individuals

 Woman borrowers
 Having independent income
 Husband and legal heirs cannot be made liable
 Contract is voidable in the case of pardanashin woman

 Minor
 Not a natural person who has not attained the age of 18
years
 Contract with a minor is void ab initio ( null and void from
the very beginning)
Non-individuals

 Sole proprietorship form

 Business is not separate from the owner

 Lender can proceed against the assets of the firm and

personal assets

 To be registered under shops and establishment act, 1953

Hindu Undivided Family (HUF)

 Unique to Hindus and the law applicable codified under

Hindu law, 1956

 Corpus of the family is inherited ancestral property

 Eldest surviving male member acts as Karta (manager) of the

family

 Documents are executed by Karta and other co-parceners

Partnership Firms

 Governed by the provisions of Indian partnership Act, 1932

 Essentials of a partnership
 Association of two or more persons
 Agreement
 Business
 Sharing of profits
 Association of two or more persons
 Joint and several liability
 Registration with Registrar of firms not compulsory
Limited Liability Partnership Firm(LLP)

 LLP is a legal entity formed under The Limited Liability

Partnership Act, 2008

 Registered with the Registrar of Companies

 Separate legal entity

 Limited liabilities, unlike the unlimited liabilities of a

Partnership firm

 Number of partners: minimum 2, maximum no limit

Limited Companies

 A company is an artificial person with perpetual succession

and a common seal

 Registered under the provisions of Indian Companies Act,

2013

 A company can be a private limited company or a public

limited company
Documents to be obtained

 Memorandum of Association

 Articles of association

 Certificate of Incorporation

 Certificate of commencement of Business

 Latest list of Board of Directors

Creation of Charge

 Charge means an interest or lien created on the property or

assets of a company as security and includes a mortgage

 A charge can be a fixed one or floating one

 A charge should be registered within 30 days of its creation

with ROC (Registrar of companies)

 Modification of charge is done when the same asset is taken

as collateral by way of second charge, when additional limits
are granted etc
Creation of charge

 When the company fully adjusts the total dues to the

creditor(bank), satisfaction of charge should be submitted to
the Registrar of companies

 As per MCA 21, e-filing of charges is introduced

 Bank officials, borrowing company officials and practicing

professionals have to sign digitally
Trusts

 Trust is not a juristic person, unless registered

as a public trust under section 8 of the companies Act, 2013

 No suit can be filed against it

 Practical difficulties in recovering advances given to trustees

from the trust assets

 All trustees must agree for availing the advance

Societies, associations and Clubs

 Usually these bodies are unincorporated or unregistered

 Banks cannot enforce in a court of law

 Due to this legal deficiency, banks usually do not lend to these

entities

 Individual members of these entities are liable in their

personal capacity
Non-financial risk

 Promoter's back ground

 Qualification, technical expertise and industry exposure

 Integrity and market standing

 Credit history – CIBIL scores

 References from bankers, suppliers, employees, competitors

etc
Credit appraisal

 Appraisal has become more objective than subjective

 Emphasis on appraising the risk inherent in the proposal

 “ The beginning is the most important part of the work”, said

Plato

 Beginning means getting all the facts, information and data

Credit appraisal

 Credit risk
 It is the possibility of borrower/ counterparty default

 Default can occur because of business failure or because of

borrower’s willful actions

 A default event can be triggered by external, internal or a

combination of both
Cardinal principles of lending

 Credit worthiness of the borrower

 Purpose of the loan

 Assess the security/ collateral

 Verify cash flows and source of repayment

What is cash flow?

 Cash flow = net profit + non cash expenses

 Cash flow = sales revenue (-) cost of goods sold (-) selling,
general and administrative expenses (-) taxes paid in cash

OR

 Cash flow = profit after tax (+) non cash expenses

(depreciation, provisions etc)