Employement of Banks Fund

8/6/2019 Employement of Banks Fund

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Loans and Advancesy The major portion of banks Fund is employed by way

of loans and advances.

y It can be fund base non fund base.y The business of lending has some inherent risk.

y Principle of sound lending must be followed


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Principle of sound lendingSafety :

y Capacity to pay

yWillingness to Pay( Honesty & Character)y Bank depends upon the tangible assets and success of

business.

Liquidity :

y Banks are intermediaries of short term funds

y Natures of assets owned by the borrower must be seen


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Cont.Profitability :

y All commercial Banks are profit earning institutions

y Funds must be employed to earn sufficient income.y The sound principle of lending is not to sacrifice safety

or liquidity for the sake of profit.


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Style ofCredit1. Cash credit

2. Overdrafts

3. Loan system4. Purchase and discounting of bills.


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Cash Credity Banker specifies a limit for each customer . Customer

can withdraw funds from its cc account when he needs

and deposits surplus with

h

im.y Customer is required to provide tangible assets as

security .

y Interest charged on the actual amount utilized.

Commitment Charges:y Commitment charges are the interest levied on

unutilized funds @1%pa subject to a tolerance level of15%.


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Cont.Advantage of CC:

y Flexibility

y OperativeConvenienceDisadvantage:

y Fixation of credit limit

y Banks Inability to Verify the end use of Funds

y Lack of management of Funds.


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Overdraftsy Current account Holder is permitted to draw more

than what stands to his credit

y Banker may take some collateral security or personalsecurity.

y Bank should obtain a letter or promissory note .


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Loansy Credit is given for definite purpose

y Repayable on installments

y Fresh request is required for renewal or new loan.Advantage :

y Financial Discipline of Borrower

y Periodic review of Loan account

y Profitability.


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Cont.Disadvantage:

y Inflexibility

y Comprehensive Documentation.


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Types Of Loans.

Loans

Short TermMedium/Long

TermBridge Loan

Composite

LoansConsumption


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Classificationy BroadlyClassified into :

1. Secured Advance

2. Unsecured Advance


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Compulsory Loan Component in

the Bank Credity Introduced by RBI to bring discipline in banks credit

with certain directive:

Applicable to all borrowings withworking capital ofRs 10 cr and above in the banking system

Uniform % of loans of 80% and cash credit of 20% hasbeen prescribed .( may be changed)

The minimum period of loan may be fixed by thebanks in consultation with borrower.


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Credit Exposure Normsy Prescribed by RBI to avoid excessive concentration of

credit amongst few borrowers

yInitially it was 25% of the Banks net worth in case ofindividual borrower and at 50% in case of groupborrowings. In 2001 former limit was reduced to 20 %.


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Loans Without Collateraly Limit is 25 Lacs for small scale industries.


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Credit Worthiness of Borrowers

Unsec re vances are is y andneeds

s ecial care

Banker has to make ro er inq iries on

Character Ca acity

Ca ital


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Collection Of credity Credit Information Bureau

y Borrower

y Bazar Reportsy Exchange ofCredit Information Amongst Bank.


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Advance Against CollateralSecuritiesy Banks strength largely depends upon the quality of

advance

y

Banks should not rely upon the obligation of borroweralone but should take a tangible security.

y Only Under exceptional cases unsecured overdraft canbe offered for short period.

y Several types of securities can be obtained to safeguard advace


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Classification of securities1. Personal security

2. Impersonal security

3. Direct Security4. Indirect or third party security

5. Continuing security


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Cont.Banker Usually secure his advance by:

Stock exchange securities

GoodsDocuments title of goods

Immovable property

Life policies.


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Stock Exchange securitiesy Includes gild-edged securities as Govt, securities, shares

and debentures of industrial and commercial companies.(Between share and debenture bank should prefer

debenture:)Advantage:

Reliability

Valuation

Ascertain of titleReliability

Transferability


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Advance against GoodsyApproximately two third of the secured advances of

the schedule banks are against Goods.

yVery broad category and may include:

Food articles

Industrial law materials

Plantation products

Manufacturers and Minerals.


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Advance against Document ofTitle

of goods.y If the document of title of goods is recognized by

law of business then it can b e taken as collateral .

Bills of LadingDock Warrant

Warehouse Keeper certificate

Delivery order

Railway receipt.


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Loan against Immovable Propertiesy Land and building can be taken as collateral

y It is for notvery popular for certain reasons.

Legal enactment have put some checkSuccession and transfer

Valuation is difficult.


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Life Policiesy Can be taken as security against advances on the basis

of surrender value.

y

Policyhas to be effected by person himself other wiseinsurable interest to be seen .


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Fixed DeposityAdvance against fixed deposit shall be given on its own

FD.

y

If FD is in joint name than letter of authority signed byall depositors shall be taken,

y Banker should not grant loan to minor against fixeddeposit.


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Secured Advance (Modes of

Creation ofCharges )y The method of creating charge depends upon the

nature of property.

y Banks Advances may be secured by:

Lien

PledgeMortgage

Hypothecation

Set- off


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Lieny The right of banker to retain goods until the debt due

from borrower is paid.

y

Bankers General lien confers upon a right to retainsecurities in respect of balance due from their owner

y Its pure possessory and does not transfer the propertyright of ownership to the bank.


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Hypothecationy Charge in or upon any movable propery existing or

future created by borrower in favour of secured

creditor.y Hypothecation differs from pledge because goods

remain in the possession of the borrower.

y It also differs from Mortgage.


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Pledgey Bailment of Goods for security for payment of a debt or

performance of promise.

y

The ownership remains with the pledgery Delivery is necessary.

In case of lien the propery though in possession of the

crediter is still in the full ownership of borrower. Incase of pledge not only the exclusive possession of theproperty is with the lender but the lender also acquiresthe right or power to sell.


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Mortgagey Mortgage is effected always in case of immovable

property.

y

This is transfer of interest in specific immovableproperty for the purpose of securing the payment ofadvance.

y It has to be effected by a registered deed signed bymortgagor and attested by at least two witnesses .


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Assignmenty Transfer of right

y Customer of bank may assign any of a right , property

or a debt existing or future.y Boorower may assign the book debt, money due from

govt dept, life insuranse policy.


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Set off


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Non Fund Base Business

Employement of Banks Fund

Documents

Transcript of Employement of Banks Fund