COLLEGE OF AGRICULTURAL BANKING

RESERVE BANK OF INDIA

GANESHKHIND ROAD , PUNE 411016

ADVANCES AGAINST BOOK DEBTS



1. Need
Book Debts of account receivables arise out of sale of goods or service on credit . Because of
credit sales, the sellers available working funds become inadequate to support the scale of
operation necessitating bank finance. The system o financing credit sales or receivables by
bill finance i.e purchase or discount of bills is quite common. Another mode of financing
credit sales is by way of cash credits against book debts. Under this system the bank allows
the borrower to draw to the extent of the limit sanctioned to him provided the drawings are
backed by adequate receivables.
2. Disadvantages
The main disadvantages in this type of financing are that
(i) control over the account by the banker becomes difficult
(ii) the bank cannot enforce its claim on the borrower's debtors viz. the purchasers in
the event of a default by him. Thus this type of advance is more or less on par with
clean advance.
3. As composite security
Advances solely against book debts are not common as such transactions carry many risks.
The banks generally accept book debts as a collateral security or as a part of a composite
security.
4. Scrutiny of application
The application for advance has to be carefully examined taking into consideration the
following points about the borrower and his business.
(a) Credit Worthiness and capacity of the borrower and his debtors.

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(b) The size of the receivable amount. While it is convenient to handle few accounts of large
sizes than many small sizes accounts, any concentration of the receivable amounts is also
not desirable.
(c) Age of book debts
Normally debts which are more than 3 months old should not be accepted.
5. Creation of Charge
Banks should create on Book debts either by means of hypothecation or assignment.
Hypothecation deed will attract stamp duty. The deed should embody all the terms and
conditions including authority to the bank to act as an attorney of the borrower and collect
book debts on behalf of the borrower. Banker as an assignee stands only in the shoes of the
assignor and cannot have better rights than those which the assignee possesses. If the debtor
has a counter claim against the assignee, the assignee will be entitled to only the balance. If
there is a breach of terms of contract between the assignee and his debtor, it may result in
repudiation of debt, the bank should therefore take due care of such facts before accepting
assignment of book debts. If the advance is given to a limited company, the banks charge is
to be registered with the Registrar of Companies within a period of 30 days of creating a
charge.
6. Guarantee
It is advisable to insist on personal guarantees of the proprietors, partners or directors of the
firm/company to ensure their cooperation in the matter of realisation of book debts.
7. Type of credit
Advance against book debts is made by way of cash credit or overdraft. The margin for
advances should not be less than 30-40% of the book debts accepted as security.
The limit sanctioned should be noted in the relevant ledger folio.





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8. Notification basis and non-notification basis
Advances on book debts may be on a non-notification basis or notification basis. In case of
non-notification, the borrower is under obligation to pass onto the banks the amount received
from his debtors. In case of notification basis, the bank has to notify each debtor and direct
him to make payment to the bank. For this purpose, letters of authority for payment of book
debts direct to the bank should be obtained from the borrower in duplicate and the original
letter sent to the concerned debtors. The concerned debtors may also indicate their
willingness to abide by the bankers/borrowers request. As regards future debts the borrower
undertakes to submit the relative invoices together with proof of delivery of goods in
duplicate, with an endorsement in the original authorising payment to the bank. The original
may be forwarded by the bank to the concerned debtor with a request to make payments
directly to it.
9. Periodical Statement
The borrower should submit monthly statements showing the outstanding book debts party-
wise. The statements should be scrutinized with reference to the age of the book debts and the
drawing power reviewed and revised, if necessary. Where considered necessary duplicate
copies of sales invoices may also be obtained. The statement should also be verified with the
published Balance -Sheet whenever the period of the statement coincides with that of the
Balance-Sheet. Clarification if any should be called for. Care should be taken to ensure that
bad /doubtful debts, old debts (beyond 90 days), debts already realised, debts in respect of
which bill finance has been given are excluded. Receivables from affiliated or allied
companies or concerns should be considered as ineligible for advances. Goods sent to
branches of the borrowers concern or those sent on a consignment basis should not also be
included under book debts. The borrower should also submit a schedule of Goods Returned
every month.
10. Periodical Inspection
Periodical surprise inspection of the books of account of the borrower should be carried out
to ensure that there are no fraudulent acts or transactions or manipulations, in compiling book

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debts and that the debts are due to general credit sale of goods. Enquiries should also be made
periodically in respect of the financial position of debtors.
11. Miscellaneous
Wherever possible, steps should be taken to convert cash credit against book debts into bill
limits.
12. Documentation
i. Demand Promisory Note
ii. Letter of continuation of Security
iii. Personal Guarantee of proprietor / partner / director
iv. Letter of authority to pay debts directly to the bank
v. Undertaking to submit invoices in duplicate in respect of future debts.
vi. Monthly schedule of goods returned
vii. Monthly statement of book debts with age-wise classification.

13. Books, registers
viii. Advance Ledger
ix. Drawing power register
x. Inspection register
References:
1. Bill Finance & Bankers U.S Sachdeva
2. Manual for Urban Co-operative Banks RBI. Bombay
3. Practical Banking Advances H. L. Bedi, V. K. Hardikar
4. Guidelines for inspection of Primary Urban Co-operative Banks under Banking
Regulation Act 1949 ( as applicable to cooperative Societies ) ACD, RBI, Bombay
5. Guidelines for Internal Bank Inspection BTC. Bombay
6. Inspection Manual of DBOD, RBI, Bombay





Prepared by Smt. Sujatha Elizabeth Prasad, Member of Faculty (1997)
Updated by A K Chowdhury, Member of Faculty, CAB, Pune, August (2007)