Commercial Banking

Lending Policies of Banks and lead banking scheme

LEAD BANK SCHEME (LBS)

The national credit council has appointed a study group in 1969, Under the chairmanship of prof.D.R.Gadgil to suggest an appropriate organisational framework for effective implementation of social objectives. This group has recommended area approach for the development of financial structure through intensive efforts.

In the same year, RBI appointed sri SKF nariman committee to study the recommendations of prof.Gadgil. This committee endorsed the views and recommended formulation of lead bank scheme The RBI accepted the recommendations and the Lead Bank Scheme came into existence from the year 1969. Under the scheme, specific districts are allotted to each commercial bank.

Continu
The RBI accepted the recommendations and the lead bank scheme came into existence from the year 1969. Under the scheme, specific districts are allotted to each commercial bank.

FUNCTION
Survey the potential areas for development of banking the in the district. Identifying the business establishments and financing them so as to enable them to raise their resources. Examining the marketing facilities available for the disposal of agricultural and industrial commodities and linking credit with marketing. Assisting other lending agencies working in the district. Developing contacts and maintaining liaison with the Government and other agencies.

Continu
Preparing district credit plans well ahead of the crop season with the help of technical committee. The lead bank is expected to take the lead role in identifying the potential areas for banking and banking development and expanding credit facilities in the dt. The lead bank acts as a consortium leader for coordinating the efforts of all financing institutions operating in the District.

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Continu
Under the scheme in each district one of the commercial bank functions as a lead bank for providing branch network and credit under different areas of priority sector. Lbs covered all the 472 dts. In the country.

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Lead Banks in A.P.

Name of the Bank Lead District Vishakhapatnam Vijayanagaram State Bank of India Medak Warangal Mehabubnagar and Khammam

Hyderabad State Bank of Hyderabad Ranga Reddy Adilabad Nalgonda Karimnagar Nizamabad
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Prakasam Nellore

Syndicate Bank

Kadapa Kurnool Anantapur

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Krishna
Indian Bank Guntur Andhra Bank West Godavari East Godavari Srikakulam
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Chittoor

Role of Commercial Banks

Bank
A bank is a commercial or state institution that provides financial services including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.

Commercial Bank
A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional-reserve banking. Some banks (called banks of issue) issue banknotes as legal tender. A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank.

Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches. Currently in most jurisdictions commercial banks are regulated & require permission to operate. Operational authority is granted by bank regulatory authorities which provides rights to conduct the most fundamental banking services such as accepting deposits and making loans.

Purpose of a bank
Banks have influenced economies & politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold.

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Commercial Lending
For centuries, the banking industry only dealt with businesses, not consumers. Commercial lending today is a very intense activity, with banks carefully analyzing the financial condition of their business clients to determine the level of risk in each loan transaction.

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Banking Services
Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled.

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A Banks Profit
A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers.

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In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). However, lending activities still provide the bulk of a commercial bank's income.

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in the Babylonian times, and indeed a book about the history of banking is named : Banking, from Babylon to Wall Street.

Services Typically Offered by Banks

Although the basic type of services offered by a bank depends upon the type of bank and the country, services provided usually include: Taking deposits from their customers and issuing current (Pak) or checking (US) accounts and savings accounts to individuals and businesses. Extending loans to individuals and businesses. Cashing cheque Facilitating money transactions such as wire transfers and cashier's checks
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Issuing credit cards, ATM cards, and debit cards Storing valuables, particularly in a safe deposit box Consumer & commercial financial advisory services Pension & retirement planning

Financial transactions can be performed through many different channels:

1. A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face to face service to its customers. 2. ATM is a computerized telecommunications device that provides a financial institution's customers a method of financial transactions in a public space without the need for a human clerk or bank teller 3. Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world

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4.Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone 5.Online banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society's secure website

Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits. Central banks are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They generally provide liquidity to the banking system and act as Lender of last resort in event of a crisis.

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Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks werelimited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. Community Banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners

Community development banks: regulated banks that provide financial services and credit to underserved markets or populations. Postal savings banks: savings banks associated with national postal systems. Private banks: manage the assets of high net worth individuals. Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises.

Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreach and by their socially responsible approach to business and society. Building societies and Landesbanks: conduct retail banking. Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.

this is next slide nd check out

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Typical B/S of a Commercial Bank

CAPITAL & LIABILITIES Paid up Capital Reserves & Surpluses Deposits (Demand & Time) and Other a/cs Borrowings from other Banks, Refinance from IDBI, SIDBI, NABARD, EXIM Bank, etc Other Liabilities Profit and Loss a/c TOTAL
Lending by Banks

PROPERTY & ASSETS Cash / Bal with others Money at Call & at Short Notice Investments (incl SLR) Advances (Short, Medium and Long Term), BD, etc Premises, Furniture, Cars, Vehicles, etc Profit and Loss (if any) TOTAL
32

Commercial Banking

Business Planning & Performance Review System

Growth plans and Business Levels Sector-wise sub-plans for next year Achievement of Targets like Priority Sector (SSI and Agri), Export Finance, etc Bottom Up and Top Down Approaches Weekly, Monthly MIS and Review Reports Quarterly Analysis and Mid-course actions
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RBI as a regulator
Announces Credit Policy in April every year Reviews Quarterly June, October and December Monitors through various reports Helps GOI to formulate Budget and Policies Advises Banks to follow its Guidelines Controls money supply, credit, forex, etc Prescribes certain exposure limits / rates of intt Priority Sector Agriculture, SSI, Exporters etc
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General Principles of Banks

1. 2. 3. 4. 5. 6. 7. 8. Identification of Borrower Purpose of the Loan Quantum of Loan Period of Loan Source of Repayment Collateral Security Offered Appraisal / Sanction / Acceptance of Terms Documentation / Disbursement / Inspection
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General Principles
01. Identification of Borrower
Track Record/Experience/ Educational or Professional Qualifications Type of Business Organisation Past performance 3 Cs - Character, Capacity and Credit Worthiness
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General Principles ... 02. Purpose of the Loan

Is it for productive purpose ? Is it a legitimate activity ? Is it new venture or existing ? If existing - is it for expansion or diversification ?
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General Principles ...

03. Quantum of Loan

Is it need based ? It should be timely It should be with borrower s stake/ margin (Varying between 5 to 25%) It should neither be over financed nor under-financed
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General Principles ...

04. Period of Loan

Is it for short or long term ? Is it adequate by time ? Is it a renewal/ revival/ enhancement ? What are the chances of contingencies ?
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General Principles ...

05 Source of Repayment ?
Out of business/salary income ? Is it self-liquidating ie., a working capital account ? Cash Credit Hypothecation or Pledge (lock-n-key) facility? Out of sale of asset(s) financed or disposal of collateral security? Any other source of income like guarantor? Is it a bridge loan ?
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General Principles ...

06.What is the Security offered ?
Primary - stock, assets, etc (Hypothecation, Pledge, etc ) Secondary -3rd party guarantee or charge on immoveable property ?

(Type of Mortgage over Assets)

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General Principles ...

07. Appraisal of Proposal / Sanction 08. Convey Terms & conditions in writing 09. Documentation
Proper Documents Proper Stamps Complete in all respects Executed by all authorised signatories / Seal Charge recorded with ROC within 30 days

10.Disbursement, Inspection, Insurance & follow up asset verification, stock statements, recovery, renewal ... ... ...
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Types of Lending
A. Fund based (Current & Fixed Assets)
1. Overdrafts 2. Cash Credits 3. Bills Finance Demand or Usance Bills 4. Demand Loans 5.Term Loans 6. Other Loans - Car Loans, Consumer Durables, Educational Loans, Housing Loans, Professionals Personal Loans, Credit Cards and so on

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Types of lendings ...

B. Non-Fund based (Fee based)
Issue of Guarantees Issue of Letters of Credit Deferred Payments Guarantees

C. Others
Lease Finance Hire Purchase Finance
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01. Overdrafts
Temporary facility Allowed against Current or CC A/c 5-10% above available limit Simple Application & formalities High rate of Interest Clean or Secured against stocks, shares, and other assets
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02. Cash Credit A/c

For Working Capital purpose Limit generally for 1 year To submit periodic Stock statements Depends on Operating Cycle, Turnover, Cash Budget or Projected Balance Sheet Simple Documentation - DP Note and Hypothecation/Pledge Agreements
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03.Bills Purchased
Bills of Exchange drawn for Credit Demand Bills or Usance Bills
D/A or D/P basis

Limit for Negotiation or Discount Close monitoring required

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04. Demand Loans

Repayable on Demand - secured loan Against pledge of Gold, Fixed Deposit, Stocks etc. Generally in installments - mly, qly, hly etc Gradually liquidated over a period DP Note and other documents obtained
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05.Term Loans
For acquiring Fixed Assets Ascertain Project Report and Cost Tech. Feasibility & Economic Viability Income to be generated with Project Economic Life of the Asset Cash Flows from the Project Charge on Assets, low Rate of Intt
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Types of Bank Borrowers

1. 2. 3. 4. 5. 6. 7. 8. Individuals Retail Banking Sole Proprietor Partnership firms Trust Accounts HUFs, Clubs, Societies Private Limited Companies Public Limited Companies Public Sector Undertakings, MNCs
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Types of Borrowers
01. Individuals - Minors/Majors/Status
Salary Slips/NOC/No Dues Certificate Proof of Residence/Tel or Electricity Bills Agreements / Signatures /Witnesses/Security

02. Sole Proprietor

Certified Business Accounts/ Income Tax or Sales Tax Assessment Orders etc
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Types of Borrowers ...

03. Partnership Firms
Oral or Written Deed ? Registered or Unregistered Firm? Joint and Several responsibility of Partners Certified Accounts Income Tax and Sales Tax assessments
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04.Trust A/cs
Trust Deed - whether registered ? Capacity to raise loans ? Purpose of Loan ? Signatory to the Documents ? Legal Opinion on Transaction ? Resolution has been passed ? Creation of Charge on Assets ?
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05. HUFs, Clubs, Societies, Assns etc

Karta of the Family & Co-parceners Clubs, Societies and Associations
Office bearers Rules, Articles, Authorised persons

Local Bodies : Panchayat or Municipality

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06.Pvt Ltd Cos & PSUs

Same set of terms and conditions as Public Limited Companies. In case of PSUs, Guarantee may be issued by the State or Central Governments ! In some cases, Margin Money and /or State / Central Government Subsidy ! In large accounts - Consortium ?
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07. Public Limited Cos

Cert of Incorporation by ROC : Cos. Act Memorandum of Association : Objectives Articles of Association : Working of Co. Cert for Commencement of Business List of Directors, Share Holding pattern Powers of Directors, Common Seal etc Resolution by the Board for Loan Signatory to Documents,Charge on Assets
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Securities for Bank Advances

Creation of various types of charges

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FORMS OF SECURITY FOR LOANS

1. BANKERS LIEN 2. PLEDGE 3. HYPOTHECATION 4. MORTGAGE

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1. BANKERS LIEN

A RIGHT TO RETAIN PROPERTIES BELONGING TO THE DEBTOR UNTIL DUES ARE PAID FULLY

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2. PLEDGE
IT IS BAILMENT OF GOODS PURPOSE OF SECURITY FOR PAYMENT OF A DEBT OR PERFORMANCE OF A PROMISE

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PLEDGE

.contd..

IT IS NOT A RIGHT OF OWNERSHIP LENDER CAN ONLY RETAIN POSSESSION NOT A TRANSFER OF PROPERTY PLEDGEE TO TAKE PRUDENT CARE OF ASSETS

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PLEDGE contd..

Exceptions
1. 2. 3. 4. 5. 6. AGENT CAN ALSO CREATE A VALID PLEDGE SELLER IN POSSESSION MAY CREATE BUYER IN POSSESSION BEFORE PAYMENT PLEDGER WITH LIMITED INTEREST ONE OF THE JOINT OWNERS IN POSSESSION ANY PERSON WHO IS IN VALID POSSESSION

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PLEDGE .contd..
BANKER S RIGHTS AS PLEDGEE
1. CAN FILE A SUIT FOR RECOVERY OF DUES 2. CAN FILE A SUIT FOR SALE OF GOODS PLEDGED 3. CAN SELL THE GOODS AFTER DUE NOTICE

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PLEDGE .contd..
BANKER S OBLIGATIONS
1. NOT ENTITLED TO ENJOY ANY ACCRETIONS 2. GOVT AUTHORITIES MAY NOT SUPERSEDE THE PLEDGEE S RIGHTS FOR RECOVERY OF DUES 3. REASONABLE NOTICE TO BE GIVEN BEFORE SALE 4. TO RE-DELIVER THE GOODS ON RECEIPT OF DUES 5. PROPER REGISTRATION WITH REGISTRAR
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3. HYPOTHECATION

IT S A MORTGAGE OF MOVEABLE ASSETS A TEMPORARY TRANSFER OF PROPERTY NO TRANSFER OF POSSESSION BY THE HYPOTHECATOR TO HYPOTHECATEE PROPER RECORD OF CHARGE CREATION TO BE DONE WITH REGISTRAR OF COMPANIES HYPOTHECATOR FREE TO USE THE ASSETS

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MORTGAGE - PARTIES
MORTGAGOR - THE BORROWER MORTGAGEE - THE LENDER/BANKER REGISTRAR OF ASSURANCES (FOR ASSET) REGISTRAR OF COMPANIES (FOR CHARGES)

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MORTGAGE ..contd..

A TRANSFER OF INTEREST IN IMMOVEABLE ASSETS LIKE LAND, BUILDING, PLANT, M/c., IMMOVEABLE PROPERTY TO BE SPECIFIC CONSIDERATION MAY BE MONEY ADVANCED/ TO BE ADVANCED OR PERFORMING A PROMISE

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TYPES OF MORTGAGES..

1. 2. 3. 4.

SIMPLE MORTGAGE MORTGAGE BY CONDITIONAL SALE USUFRUCTUARY MORTGAGE ENGLISH MORTGAGE : (REGISTERED ) 5. EQUITABLE MORTGAGE : BY DEPOSIT OF TITLE DEEDS 6. ANOMALOUS MORTGAGE
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SIMPLE MORTGAGE

NO DELIVERY OF POSSESSION OF ASSETS MORTGAGOR BINDS PERSONALLY FOR DUES AGREES TO LENDER S RIGHT TO DISPOSE OFF THE MORTGAGED PROPERTY FOR LIQUIDATING THE DUES
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MORTGAGE BY CONDITIONAL SALE

MORTGAGOR SELLS THE PROPERTY TO LENDER CONDITIONS THAT ON DEFAULT, SALE SHALL BECOME ABSOLUTE ON PAYMENTS MADE, SALE SHALL BE VOID ALSO, ON RECEIPT OF PAYMENT, BUYER SHALL TRANSFER BACK THE PROPERTY TO THE SELLER
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USUFRUCTUARY MORTGAGE
POSSESSION IS DELIVERED TO MORTGAGEE MORTGAGOR IS ENTITLED TO RE-POSSESS ON PAYMENT OF DUES OR DEBT IS DISCHARGED BY RENTS AND PROFITS RECEIVED BY MG GEE MG GEE IS ENTITLED TO ENJOY THE PROPERTY TILL DEBT IS DISCHARGED MORTGAGEE CANNOT SUE MORTGAGOR FOR FORECLOSURE OR FOR SALE.
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ENGLISH MORTGAGE (REGISTERED)

IT S A TRANSFER OF PROPERTY TO MORTGAGEE FOR A DEBT OR PROMISE TO BE PERFORMED MG GEE SHALL RE-TRANSFER THE PROPERTY UPON PAYMENT OF DUES OR DISCHARGE OF PROMISE
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ENGLISH MORTGAGE contd..

MORTGAGE DEED TO BE REGISTERED WITH THE REGISTRAR OF ASSURANCES INVOLVES HEAVY STAMP DUTY FOR THE DEED PRIOR ENCUMBERANCES TO BE ASCERTAINED LEGAL FORMALITIES TO BE COMPLIED WITH R.O.C. TO BE INFORMED WITHIN 30 DAYS THRO FORM Nos. 8 AND 13 (AS PER COMPANIES ACT)
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EQUITABLE MORTGAGE

TRANSFER OF IMMOVEABLE PROPERTY FOR A CONSIDERATION - DEBT OR PROMISE BY DEPOSIT OF TITLE DEEDS ONLY WITH AN INTENT TO CREATE CHARGE ON ASSETS SIMPLE - NO REGISTRATION WITH REGISTRAR OF ASSURANCES LEGAL STEPS TO BE PROPERLY OBSERVED R.O.C. TO BE ADVISED AS IN ENGLISH MGGE
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ANOMALOUS MORTGAGE
NOT ANY OF THE ABOVE 5 TYPES OF MORTGAGES A COMBINATION OF 2 OR MORE OF THE ABOVE

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MORTGAGES Miscellaneous
Encumberances to be verfied properly Stamping of Documents to be proper Appropriate documents to be obtained Authorised persons only to create Record of Dates to be observed in case of second charge, pari-passu charge NOCs to be obtained properly Valuation of Properties to be proper
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SECURITIES FOR ADVANCES Other issues

Records to be maintained properly Stock Inspections to be done regularly Indication Boards to be insisted upon Insurance of Assets to be regular Renewal /Enhancement of limits to be done periodically Revival Letters to be obtained Acknowledgement of Debts Proper End-use and follow up to be done
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