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Chapter H-3

CREDIT FACILITIES AGAINST VARIOUS SECURITIES

Section 1

General

Section 2

Advance Against Life Insurance Policies

Section 3

Advance Against Bank‟s Own Deposits

Section 4

Advance Against Govt of India and State Govt Securities

Section 5

Advance Against Debentures of Co-op Banks and Co-op Land

Mortgage Banks

Section 6

Advance Against Debentures and Shares of Ltd Liability Companies

Section 7

Advance Against Shares and Debentures of Public Corporation

Section 8

Advance Against Trust Receipt

Section 9

Advance Against Gold Ornaments

Section 10

Advance Against Warehouse Receipts

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CREDIT FACILITIES AGAINST VARIOUS SECURITIES

Section 1 : General

1.1 The instructions relating to some commonly accepted securities other than immovable

property and pledge/hypothecation of goods are contained in this chapter. These instructions

should be read with other instructions relating to credit facilities against securities other than

those mentioned in this chapter. All securities should ordinarily stand in the name of the

borrowers either in his sole name or jointly with others.

1.2 In personal accounts, advances may be granted to borrowers who are not the sole owners

of the security provided stamped letters of guarantee on the Bank‟s standard format are obtained

from the owners of the security. These letters of guarantee are:

i) Form A (SBP 539) ‑ to be taken when the person/persons furnishing the security is/are

also a holder/holders of the account.

ii) Form A1 (SBP 540) ‑ to be taken when only some of the persons furnishing the security

are holders of the account.

iii) Form A2 (SBP 541) ‑ to be taken when none of the persons furnishing the security are

holders of the account.

Where advance is given in a joint account, even though the securities or shares may be

deliverable to any one or more parties, the foregoing instructions must be observed.

1.3 In an overdraft in a joint account against securities, which is not operated by all the

account holders jointly, a stamped agreement on prescribed form, signed by all of them, must

ordinarily be taken; otherwise only the party or parties who sign the cheque creating the

overdraft will be liable.

1.4 All securities and shares must be kept in the custody of officer incharge handling

advances portfolio in strong room. Shares will ordinarily be kept in numerical order of the

accounts in one or more lots, irrespective of the company or class of shares. Government

securities and coupon-bearing debentures should be sorted into various lots corporation wise and

these should be arranged in numerical order of accounts. Securities and Shares held against

advances must be kept apart from those lodged in safe custody. No securities should be kept

endorsed in blank to minimize incidence of frauds.

1.5 Bank has prescribed charging of fee for usual safe custody of securities, articles etc. but

not for those securities against which loans are raised. However, after the loans are adjusted, very

often, the customer borrower does not take timely delivery of such securities, preferring to leave

them in the safe custody of the bank. Branches should note this and charge appropriate

applicable fee for such securities.

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Section 2 : Advance Against Life Insurance Policies

2.1 Loans by way of demand loan/overdraft may be granted to customers maintaining

satisfactorily conducted accounts against the security of life insurance policies issued by Life

Insurance Corporation of India, Posts & Telegraphs Dept. and SBI Life.

2.2 Overdrafts may be granted against an Endowment Policy, Anticipated Endowment Policy

or a Money Back Policy (In the case of endowment and money-back policies, the policy amount

or a part thereof is repaid after the expiry of stipulated period, or on the death of the assured,

whichever occurs earlier. Preferably such amounts should be got credited in the loan account, if

any). However, advances against whole life policies should be discouraged because of the

uncertainty of maturity attached with such policies.

2.3 No advance should be granted against an insurance policy of a married man to which the

provisions of Sec. 6 of the Married Women‟s Property Act are applicable. If an insurance policy

(on the life of a married man) carries the expression on its face that it is for the benefit of his

wife and/or children, it creates a trust in favour of his wife and/or children. Under the said Act,

the benefits of the Insurance Policy held in the name of the husband, upon his death or maturity,

accrue to the beneficiaries under the Trust. Thus such a Policy is not the property of the husband.

Further the trust funds are not assignable. Therefore such a policy should not be accepted as

security.

2.4 Loan Amount

The amount of loan/advance must not exceed 95% (latest % to be always checked) of the present

surrender value of the policy. Surrender Value is the amount payable by the insurance company

on premature payment of the policy. This value shall be ascertained in writing from the insurance

company. This amount should be entered in CBS as well as miscellaneous security register.

2.5 Pre-conditions for Accepting Insurance Policy

The insurance policy should be in full force, i.e. unencumbered and not already assigned and the

premia should have been paid upto date. Age of the insured should have been admitted in the

policy by the insurance company. If it is not admitted, generally it is stated on the policy itself. In

the absence of proof of admission of age, difficulties may arise in obtaining payment on maturity

date. The insurance company, therefore, should be requested to admit the age of the insured and

the company‟s relevant confirmation letter should be kept duly attached with the policy. The

policy should be properly got assigned on its face in the lending bank‟s favour before disbursal

of the loan.

2.6 Assignment of Insurance Policy

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2.6.1 Under the Transfer of Property Act, assignment would mean transfer of an actionable

claim. The person who assigns the right, property or debt is called the 'assignor' and the person to

whom the right, etc. is transferred is called the 'assignee'. All parties interested in the policy must

assign it to the Bank. A policy standing in joint names should be assigned by all the persons

either jointly or through a chain of assignments.

2.6.2 The signature of the nominee is not necessary on the assignment in the Bank‟s favour (as

the nominee acquires no interest in a policy during the lifetime of the assured, otherwise also he

cannot validly assign the policy whether before or after the death of the assured).

2.6.3 Since a separate document of assignment attracts stamp duty, the assignment should be

made on the policy itself on the following prescribed lines:

„I, the within named_______________________ for value consideration, hereby assign and

transfer all my rights, title, and interest in the within-written policy and in the moneys thereby

secured to the State Bank of Patiala and its successors and assignees and declare that the receipt

of the said bank or its successors or assignees shall be good and valid discharge for all moneys

payable under the policy.‟

Dated at __________ this __________ day of ___________ Two thousand ________

Signature of the Assignor(s)

Name:( )

Witness:

Signature:

Occupation:

Address:

2.6.4 The policy should be immediately sent by the Bank to the insurance company by

Registered Post for registration of its assignment in favour of the Bank.

2.6.5 Along with the assignment, a notice should be sent, in duplicate, signed by the assignor

and the Bank, with a request for one copy of it, bearing the insurance company's

acknowledgement, to be returned to the Bank. The acknowledgement copy of the notice should

be attached to the policy when received. At the time of notifying the company of the Bank's

interest in the policy, it shall be ascertained from the insurance company whether there are any

prior charges on the policy and whether the policy is in full force. If the age of the assured has

not been admitted by the insurance company, it shall be arranged without delay. The loan should

be disbursed only after the policies have been transferred to /assigned in Bank‟s name.

It should be ensured that policies tendered to the Bank as security are directly forwarded by the

Bank to the concerned issuing office for completion of the formalities such as transfer /

assignment in our favour. In other words, the borrowers should not be allowed to approach the

issuing offices direct in this connection.

2.7 The demand loan can be granted upto a maximum period of 3 years against insurance

policy and overdraft can be granted for one year.

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2.8 When the loan is repaid and the account is finally adjusted, the insurance policy should

be re-assigned in favour of the assured and it should be got registered with the insurance

company. The assignment should be made on the following prescribed lines:

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" Reassignment"

We, the State Bank of Patiala hereby reassign and transfer all our right title and interest in the

within written policy and in the money thereby security to Shri ____________ and declare that

the receipt of the Shri _______________ shall be a good and valid discharge for moneys payable

under the policy.

Dated at ______________ the _____ day of ________ 2011

Witness for State Bank of Patiala

Occupation

Address Branch Manager

2.9 The details of all such life insurance policies held as security for advances alongwith

surrender value will be entered in CBS and miscellaneous security register. These policies shall

be retained in the strong‑room.

Section 3 : Advance Against Bank’s Own Deposits

3.1 General: Advances by way of demand loans and overdrafts can be granted by the Bank

against its own deposits, i.e. recurring deposits (with a minimum balance of Rs. 100/-), term

deposits and NRE/FCNR(B)/RFC (Residents Foreign Currency) deposits. However, no loan

shall be given against TDR/STDR of other banks.

3.2 Loans against a deposit normally continue till the date of its maturity, i.e. even beyond 12

months. However, in terms of regulation No. 45 of the Subsidiary Bank's General Regulations,

1959, Bank cannot make a loan or advance for a period longer than 12 months except as

otherwise provided for in the Regulations. It is therefore necessary that such loans are

reviewed/renewed every year. There is no need to carry out a detailed appraisal. Sanctioning

Authority can examine the case and allow renewal. A rubber stamp reading "Renewed upto

_____________” shall be affixed on the Loan Application under the signatures of Branch

Manager/ Authorised Official.

3.3 Advance against TD/STD Receipts or Advices

Before introduction of CBS, Term Deposit/Special Term Deposits Receipts was being issued in a

physical form, each receipt being treated as a security. However, under CBS only Term

Deposit/Special Term Deposit Advices are issued in place of receipts. When receipts were issued

in a physical form, while granting loan there against, such receipts were required to be obtained,

duly discharged by the holder along with the application form SBP-246. Such discharge used to

be undated and over a revenue stamp. But in case of advices, the same is not required to be

discharged or signed over the revenue stamp. Therefore, while sanctioning loan against such

advices, revised instructions as given in HO circular no.PSB/PNS/15/11-12 dt 24.05.2011 should

be followed and additionally a letter of arrangement should be issued incorporating details as

regards the style and manner in which the deposit is held. However, in cases where loans are

given against the security of physical TD/STD receipts, the old procedure of getting the receipts

discharged would continue to be adopted along with other formalities. In both the cases i.e.

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where receipts are available and where only advices are available, the deposit shall be

necessarily entered in CBS as security for the advance.

3.4 Persons Eligible

(i) Individual depositors against the deposits held by them either in their sole name or jointly

with other person(s).

(ii) Guardian in his capacity as a natural/legal guardian against the deposits held by them jointly

with the minor or in the sole name of the minor provided it has been declared at the time of

placing deposit that the money belongs to the guardian. For detailed instructions, please refer to

Chapter on Different Types of Borrowers.

(iii) Third parties against the deposits of others.

3.5 Loan Amount, Interest Rate and Margin

3.5.1 Branches should refer to instructions issued by the Bank from time to time in this regard.

3.5.2 Cushion against Margin : Branches should note that in case of STDs interest is

compounded quarterly, whereas on loans it is compounded monthly. Therefore, if interest on

loans is not serviced, the effective margin gets eroded in case of loans against STDs. In such

cases, branches should work out the available cushion (the premature value of STD minus

outstanding loan) in case interest is not serviced for 3 or more months. If it is found that the

cushion is less than 2%, the loan account must be closed forthwith by premature encashment of

STD. To cover such eventuality, a simple letter of undertaking shall be taken while sanctioning

the loan. But in case of term deposits, interest earned should be credited to the loan account and

for this an undertaking along the following lines should be obtained while sanctioning the loan:-

“I (we) hereby authorise the Bank to credit the interest earned on my/our TD in the loan account

till the loan is liquidated”.

These instructions are applicable to all kinds of constituents, including Institutions, Trusts,

Partnership Firms, Companies etc.

3.5.3 In case of loans against TDs/STDs the rate charged on the loans is higher than the rate on

the corresponding deposit by 1-1.5%. Branches are required to ensure that this difference is

maintained at all times during the currency of the loan including when the TD/STD is

prematurely paid. This instruction is applicable when the borrower and the depositor are the

same i.e. the depositor himself has raised the loan against TD/STD in his own name. However,

against 3rd

party deposits, rate of interest would be linked to the activity under which the loan

falls.

3.5.4 In case the TD/STD against which loan has been raised is prematurely paid within a

period of 14 days counted from its date of issue, the rate applicable on such loan will be that of

clean overdraft.

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3.6 Advance Against TD/STD in more than one names

a) Where such deposit has been issued in the form of receipt, while availing loan, the same

will be required to be discharged by all the depositors along with a separate written authority

from them. However, if such a deposit is in the form of advice, only a written authority from all

of them will suffice.

b) Where the deposit is held in the form of „Former or Survivor‟/ „Later or Survivor‟, a

consent letter from „former‟ or „later‟, as applicable will be obtained while giving loan against

such a deposit.

3.7 Advance Against Recurring Deposit

Demand loan against recurring deposit can be granted against the installments deposited along

with interest accrued till that date. All other instructions as applicable to TD/STD shall be

applicable.

3.8 Advance Against NRE / FCNR(B) Deposit

RBI have, vide their letter No. BC. 66/13.03.00 / 2000/2001 dated 8th January, 2001, advised

that branches besides complying with the accounting procedure of all NRI deposit schemes,

inter-alia, must take the following additional precautions while accepting deposits from NRIs

and granting loans against security of such deposits:

a) Loans to third parties against NRE/FCNR (B) deposits should be granted only when the

depositor himself executes the loan documents in the presence of bank officials and a witness

that is acceptable to the Bank. Under no circumstances, any advance shall be granted on the basis

of Power of Attorney.

b) Since RBI prohibits the banks from granting fresh loans or renewing existing loans in excess

of Rs.100 lac against NR(E) and FCNR(B) deposits either to the depositors or third parties, no

branch shall circumvent the ceiling through artificial slicing of the loan amount.

3.9 Advance Against RFC Deposit

An NRI returning to India for permanent stay is eligible to open Resident Foreign Currency

(RFC) time deposit a/cs with banks in India out of foreign exchange earned by him from sources

approved by RBI. The account can be opened in single or joint names of eligible residents.

Though such time deposits are accepted only in US Dollars, loans will be granted in Rupee terms

retaining the stipulated margin of 10% on the rupee equivalent of the RFC deposit amount

calculated at the prevailing notional rate of exchange for US Dollar. Category B branches,

dealing in forex, can grant DLs/ ODs against these deposits to the depositors for their personal

purposes.

3.10 Repayment of Loans

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i) Suitable repayment schedule will be fixed depending upon the repayment capacity of the

borrower. However, the entire outstanding will have to be liquidated from maturity proceeds of

the deposits on maturity date. Loans against NRE deposits may be repaid either in foreign

currency or from domestic rupee resources.

ii) If the loan is liquidated before the maturity date of the deposit, in case of receipt, it must be

returned back to the depositor against his acknowledgement. The depositor‟s discharge at the

back of the TDR, noting regarding security account number, bank‟s lien, etc. should be

cancelled.

Section 4 : Advance Against Govt of India and State Govt Securities

4.1 Advances against Central and State Government securities may be in the form of

overdraft or demand loan.

4.2 Government promissory notes may be in name of one person or more. In case of one

person, it must ordinarily be endorsed to the Bank by him. In case of more than one person, all

others who are not parties to the advance shall endorse it in favour of the individual person to

whom the advance is granted. This person shall further endorse the Government security in

favour of the Bank and deliver it to the bank with a letter on the standard format SBP 288.

4.3 The occasion for endorsement by the borrower does not arise when the securities held on

his account have been issued in the name of the Bank (as in the case of a new government loan)

or have been purchased by the Bank under his instructions, whereas, securities delivered by

another Bank from the borrower's account with them may be endorsed by them direct to the

Bank.

4.4 All government promissory notes tendered as security for advances must invariably be

sent to the appropriate public debt office for examination with a view to ensure that the

endorsements are in order, that the notes are not estopped/stopped or confiscated, that none of

them is a duplicate and that no alteration has been made in the principal amount. If necessary,

this should at the same time be enfaced for payment of interest at the concerned treasury. When a

script bears several endorsements, Branch Managers should get it renewed, preferably before

endorsement to the bank, as subsequent renewal doesn't fully protect the bank from the

consequences of forged endorsements on the old note, if any. The fee charged by the Reserve

Bank of India for examination and endorsements or renewals etc. should invariably be recovered

from the constituents.

4.5 In cases of urgency, Branch Managers must use their discretion to grant an advance

pending examination of the securities by the Public Debt Office. Before doing so, they must

however fully satisfy themselves as to the character, integrity and standing of the borrower and

must see that the script(s) is/are prima facie in order.

4.6 Stock certificates are not considered good security for advances unless these are

transferred in the Bank's name. Such certificates, along with transfer forms, duly signed and

completed by both the holders and the bank, should be forwarded to the appropriate Public Debt

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Office for issue of new certificates in the name of the Bank. Alternatively, intending borrowers

should be asked to convert their inscribed stock into endorsable government paper. Margin of 10

percent should be maintained on the market value of the security.

4.7 Demand loan/overdraft can be granted against NSCs, KVPs to individuals, firms,

companies and other institutions. Third party loans against these securities can be considered on

merits of the case.

4.7.1 Loan upto 65% of face value of NSCs/KVPs together with accrued interest can be given.

Since these are considered as specified securities, there is no ceiling prescribed as to the

maximum amount of such loan. However, branches must ensure that adequate margin is kept.

4.7.2 Before sanctioning loans against NSCs/KVPs these should be sent to the concerned Post

Office along with duly completed forms for transfer of the same in bank‟s name. For this

purpose, either an officer should be deputed or the certificates should be sent through registered

post. Under no circumstances, the certificates are to be sent through the borrower/holder nor any

loan be sanctioned before these are transferred in bank‟s name.

4.7.3 On the date of maturity, the NSCs/KVPs should be sent to the Post Office under

appropriate covering letter and out of the proceeds received, outstanding loan, if any, should be

adjusted and residual amount released to the holder. In case the loan account is adjusted before

the maturity date, after such adjustment, the NSCs/KVPs will be delivered back to the holder

against his acknowledgement and with a letter on due format addressed to the concerned Post

Office for cancellation of bank‟s charge.

4.7.4 The details of all Govt. Securities/NSCs/KVPs shall be entered in CBS and misc. security

register. These shall remain in the custody of the officer handling advances portfolio in strong

room.

Section 5 : Advance Against Debentures of Co-op Banks and Co-op Land Mortgage Banks

5.1 Overdrafts and demand loans may be granted against debentures of Co‑operative and

Land Mortgage Banks where debentures are guaranteed by State Governments for payment of

principal and interest. The transfer of these debentures in some cases is affected by means of

endorsement and in other cases by transfer deed and registration. Branch Managers must

therefore ensure that the correct procedure is followed in each case. Where the debentures are not

quoted on the stock exchange, the margin stipulated by Head Offices should be calculated on the

face value of the debentures.

Section 6 : Advance Against Debentures and Shares of Limited Liability Companies

6.1 (a) Overdrafts and demand loans may be granted against the primary security of fully paid

debentures of a limited liability company. The debentures must have been rated AA+ or higher

by CRISIL or equivalent rating by any other reputed rating agency like ICRA etc. But such

debentures should ordinarily be accepted as collateral where the advances are for large amounts

and are otherwise secured.

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(b) As per Section 46(a) of Bank's General Regulations, shares of a limited liability company are

not an authorized security and can therefore be accepted as primary security only for overdrafts.

But such shares can be accepted as collateral where advances are primarily secured by other

authorized securities.

(c) The acceptance of shares of limited liability company is subject to provision of Section 19(2)

of the Banking Regulation Act, 1949, which states that no banking company may hold shares in

any company, as pledgee, mortgagee or absolute owner, for an amount exceeding 30% of the

paid up share capital of the company or 30% of its own paid up share capital and reserves,

whichever is less. For considering such loan, prior administrative clearance is a must.

(d) Before sanctioning loan, such shares should be got pledged to the bank through our Treasury

Branch, Mumbai by following necessary procedure in this regard. Necessary confirmation in this

regard from the Treasury Branch should be obtained and placed on record with the loan

documents. Shares/debentures must be transferred in the name of the Bank in case of a default or

if the outstanding is over Rs.20 lacs.

6.2 Loan against shares/debentures to individuals

6.2.1 Persons eligible: Loans/advances against shares and debentures can be granted to existing

individual customers with good past relationship either singly or as jointly with spouse (in „either

or survivor‟ /former or survivor mode). Such debentures should be fully paid. Since the shares

are subject to market fluctuations, the borrower should be in a position to pay shortfall in margin

without delay in case of fall in market price of the shares. Further, a declaration should be

obtained from the borrower indicating details of loans availed from other banks / branches for

acquiring shares / debentures as well as against security of shares/debentures. This is to ensure

that bank‟s exposure in securities of a single company or against a single borrower is within

prescribed limits.

6.2.2 Purpose of loan: (i) For meeting contingencies and needs of personal nature, (ii) For

subscribing to rights or new issue of shares / debentures (max. Rs 10 lacs for subscribing to

IPOs). However, no loan shall be granted for speculation / inter-corporate investments/acquiring

controlling interest in companies.

6.2.3 Nature of facility: Loan can be given by way of overdraft or demand loan.

6.2.4 Margin : Margin @ 50% of the prevailing market price of shares / non-convertible

debentures in the Stock Exchanges (as reported in the Economic Times) shall be maintained. To

ensure that the margin is not eroded, drawing power should be monitored on weekly basis. As

regards shares having high fluctuations, the borrower should be requested to replace them

immediately by an acceptable security.

In the event of margin shortfall on account of market price and consequent irregularity, if any,

the borrower will be required to regularize the position immediately. A suitable consent letter

shall be obtained from the borrower, agreeing to regularize the account/replenish the margin

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shortfall. Failure to do so would result in the branch initiating necessary action in getting the

securities transferred in its own name and thereafter arrange for its sale without any reference to

the borrower. In case there are holders of securities, other than the borrower, a suitable consent

letter should also be taken from such holders agreeing to bank transferring the securities in its

own name and thereafter selling them in the above mentioned eventuality.

6.2.5 Repayment : Repayment should be fixed depending upon the purpose of the loan and the

source of repayment etc. There shall be a fixed repayment programme for demand loans. For

overdrafts there shall be a programme for reducing drawing power.

6.2.6 Security: The shares/debentures accepted as security should be got pledged in favour of

the bank. Since as per current instructions, all shares and debentures are required to be held in

demat form, wherever still securities are held in physical form, the borrower should be asked to

get them converted into demat form.

6.2.7 Essential parameters for acceptance of shares as security are as under:-

i) Shares should be fully paid.

ii) Preference shares are not acceptable as security.

iii) The shares must be in demat form.

iv) The shares should be of a company listed in BSE 100 Index, except those of SBI. The list of

BSE 100 companies is available on www.bseindia.com.

v) The market price of the security should not have fallen below par for preceding 52 weeks.

vi) The market price of the security should not be at variance with the arithmetical average of

preceding 52 weeks high and low by more than 25% in downward direction.

vii) P/E ratio of the company should not exceed 40 as published in Economic Times. In case P/E

ratio is not available the shares should not be accepted as security.

viii) The total number of shares of the company traded on the NSE and BSE should exceed

25000 on the day of financing as also on each of the preceding 2 days.

ix) Security where the market price of 52 week high is 4 times that of the 52 week low should

not be accepted.

x) Information related to 52 weeks high & low, P/E ratio and traded volumes in NSE and BSE is

available in Economic Times.

Section 7 : Advance Against Shares and Debentures of Public Corporation

Overdrafts and demand loans may be granted against the primary security of shares and

debentures of public corporations. These securities are authorised security under the Bank's

General Regulations. Advances against these will be conducted in manner similar for advances

against shares and debentures of limited liability companies as mentioned in the foregoing paras.

Section 8 : Advance Against Trust Receipt

Advance against trust receipt is provided to the borrower to take delivery of the goods pledged to

the Bank for processing or sale, without payment of their value. This is a sub‑limit of pledge

limit. The borrower undertakes to submit the bills for the value of goods. No drawings are

permitted when such bills are presented. Proceed should be credited to the account. When goods

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are sent for processing, the borrower is allowed to pledge the processed goods when received

back. A letter should be obtained from the processing house that the relative stocks will be stored

separately and that they will have no lien on such goods for the unpaid amount of processing

charges. A letter should be obtained from their banker also that these goods will not be charged

to them.

Section 9 : Advance Against Gold Ornaments

9.1 General: Loan against the gold can be given only against security of gold ornaments and not

against gold bullion in any form. Likewise, while giving gold loan against gold ornaments, it

should be ensured that the loan is not used for bullion trade. Further no loan should be sanctioned

to jewellers or traders against their stocks of gold ornaments.

In this regard, the branches should refer to HO instructions under “Gold Loan Scheme” under

different segments as under:-

i) Per. Segment - PSB/PNS/94/11-12 dt 23rd

Feb. 2012

ii) Agri. Segment - AGR/58/11-12 dt 23rd

Feb. 2012

iii) MSME Segment - ADV/SME/8/12-13 dt 11th

Jun. 2012

9.2 Eligibility criteria

i) Loans are granted by the bank against pledge of gold ornaments having purity of 22 carat and

above. Such loans can be granted in Personal and Agri segments against gold ornaments

belonging to the borrower and his declaration of its bonafide ownership. In MSME segment,

such loans can be granted against Gold ornaments belonging to family members/close relatives

of prop./ partner/director, however in such cases, the owners of Gold/Gold ornaments shall stand

as guarantors and execute necessary documents in this regard. Under all circumstances, KYC

compliance of the borrowers shall be ensured. It shall also be ensured that the intending

borrowers are either known to the Bank or satisfactorily introduced by a person known to the

bank.

ii) Eligibility criterion is segment specific.

9.3 Security

Pledge of gold ornaments/hallmarked jewellery having purity of 22 Carat and above. Gold

ornaments of below 22 Carat purity are ineligible for loan.

9.4 Purity and Weight of Gold ornaments

The weight of all extraneous matters such as wax, string, fastening etc. as well as precious stones

must be entirely ignored. Actual gold weight and purity shall be arrived at and certified by the

goldsmith/appraisers.

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Ornaments made of brass or other base metal with a coating of gold should not be accepted and

caution must be observed that such ornaments are not passed off as made of solid gold.

For appraising the gold, the fee shall be recovered from the borrower and paid to the appraisers

by the Bank.

9.5 Quantum of Loan

Loan can be granted upto a maximum of Rs.10.00 lacs in Per & Agri segments and a maximum

of Rs.20.00 lacs in MSME segment. It is linked to advance value of Gold per gram which is

given at bank‟s Infonet site and shall be calculated as under:-

Gross Weight of Jewellery - As certified by the Gold Appraiser

Less: Weight of stones - As certified by the Gold Appraiser

Actual Gold Weight & Purity - As certified by the Gold Appraiser

Loan Amount = Actual Gold Weight x Advance value of Gold

Branches are advised to take a printout of the Gold rates and place the same in concerned loan

file at the time of sanction.

9.6 Appraisers

i) Special care should be taken to ensure beyond doubt genuineness and purity of gold. The

branches, therefore, shall utilize the services of approved goldsmith to verify the genuineness of

the gold ornaments in the presence of the Bank officials & the borrower.

ii) The prescribed letter of undertaking should be obtained from the appraisers.

iii) The License number with complete address of the appraisers and residence proof shall be

kept on record. In places where Jewelers Association is available, an opinion on the appraisers

may be obtained.

iv) Branches should make independent enquiry on the experience, integrity and respectability of

the appraisers.

v) Branches should maintain a panel of appraisers, wherever possible.

vi) Branches should not grant gold loans to an appraiser, his relatives, or parties introduced by

him without getting the relative gold appraised by another totally unconnected appraiser.

vii) Under no circumstances the services of appraisers should be utilized for filling up any

portion in the loan application other than the certificate portion.

9.7 Delegation of financial powers

Delegations of financial powers of respective officials will be as per Head Office Circular

No.OPD/ONP/9/08-09 dated 21st March, 2009 as applicable to term „Goods‟.

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9.8 Procedure for accepting Gold ornaments

i) The prescribed application, duly filled shall be submitted by the applicant along with purity

and weight certificate from the appraiser. Each ornament or a group of ornaments of similar type

/ fineness must be mentioned in the application as well as appraiser‟s certificate separately.

ii) In case of an illiterate borrower, prescribed witness letter shall be obtained from the witnesses

who were present while the illiterate borrower executed the various loan documents.

iii) The borrower shall be issued an acknowledgement for the ornaments offered as security for

the loan.

iv) Particulars (including details/ descriptions of the gold ornaments) of every loan granted,

should be entered in the prescribed Gold Loan Ledger under the initials of two authorized

officials in whose joint custody the ornaments are to be held. The accounts shall be serially

numbered. The number of each account along with customer number shall be recorded on the

demand promissory note and other relative documents.

9.9 Ornaments bearing names/initials

When accepting gold ornaments bearing names, initials or other marks, which are, prima-facie,

not those of a borrower, the branch shall satisfy itself through discreet enquiries that the

borrower has full title to the ornaments despite the existence of initials or marks thereon. In

addition, letters confirming the ownership of the borrowers and furnishing reasons for such

inscription should be obtained from them and a note to this effect made against the relative

accounts in the gold loan ledgers. Requests for loans should be tactfully declined if there is even

the slightest doubt regarding the ownership of the ornaments.

9.10 Custody of Gold ornaments pledged

The gold ornaments must be placed in the strong room/fire proof safe under the double lock of

the Joint Custodians of cash. The ornaments relating to each loan account should be held in a

separate bag marked with the loan account number and name of the borrower. The prescribed

slip shall be affixed on the bag and a copy of it shall be kept inside the bag. Adequate

arrangements must, in all cases, be made to protect the bags against surreptitious removal when

the strong room is open. In order to maintain a proper record of the gold loans in the branch, the

prescribed Pledged Gold Ornaments In Out Register shall be maintained. It should be verified

with the number of gold loan bags in custody at the time of taking charge, including temporary,

by joint custodians. Necessary certification to this effect shall be ensured.

9.11 Release of Gold ornaments

i) On repayment of loan/ closure of the account, the ornaments held as security together with the

demand promissory note duly discharged shall be returned to the borrower(s) against his/their

acknowledgement for receipt of the ornaments in the Gold Loan Ledger. The acknowledgement

should state that the ornaments received by him /them are „complete and in order’.

ii) Where it becomes necessary to retain the ornaments pertaining to a closed account, these

should be kept in the custody of the officials in charge of gold ornaments and the Head

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Cashier/Cash Officer as an article in Safe Deposit. The full particulars of the relative loan

account should be entered and authenticated by both the officials in the Safe Deposit Register.

The borrower‟s acknowledgement for subsequent delivery of the ornaments should be obtained

in the Gold loan Ledger and the fact noted in the Safe Deposit Register.

9.12 Part release of ornaments

On written request of the borrower(s), part release of ornaments may be allowed against part

repayment of the loan, provided the advance value of the ornaments, remaining in the Bank‟s

possession, fully covers the outstanding in the account. The borrower‟s acknowledgement for

receipt of ornaments delivered to him / them should be obtained in the Gold Loan Ledger.

9.13 Release of ornaments to a third party

Prior approval from controlling authority is to be obtained for releasing the ornaments to a third

party.

9.14 Death of gold loan borrower

i) Interest in the account of the deceased borrower should be charged as per the contracted rate in

the usual manner.

ii) If the legal heir(s)/near relatives wish to liquidate the outstandings in the gold loan account,

they may do so, but it should be made clear to them that the ornaments would be released to the

legal heirs on production of the legal representation. Also the amount so deposited would not be

refunded to them in case they fail to obtain legal representation in their favour. A letter of

undertaking to this effect must be obtained and kept on record.

iii) In case when advance value of Gold is up to Rs.1.00 lac, the ornaments can also be released

on completion of the Bank‟s formalities as per Instructions relating to “Payment of balance held

in deceased constituent‟s account” of deceased depositors. However in the instant case, the

person(s) liquidating the loan account should be made to sign the letter of Indemnity as one of

the sureties.

iv) Pending completion of the formalities/production of the legal representation and delivery, the

gold ornaments should be held as safe deposit article as mentioned in foregoing paras.

9.15 Recalling of advance

Advance will be called up, (i) when the market value of the gold is less than the outstanding or

(ii) when the account becomes NPA. If the account is irregular, a letter should be sent to the

borrower on the prescribed proforma requesting him/her to deposit the amount / regularize the

account. If the borrower fails to regularize the account and it continues to be irregular, a notice

on the prescribed lines should be sent advising that the ornaments will be sold by public auction,

if the loan and interest are not paid within 30 days from the date of notice. This notice must be

dispatched to the borrower under Registered Post with acknowledgement due. Whenever any of

the notices described above is sent, the date of dispatch should be noted in the relative ledger

account under the initials of the official signing the notice.

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9.16 Sale of Gold Ornaments

i) When an advance has been called up and repayment is still not forthcoming, the Bank has the

right to sell the gold ornaments pledged, after giving reasonable notice to the Borrowers (vide

section 176 of the Indian Contract Act). If the account is not put in order within the time stated in

the above notice, the ornaments should be put up for auction with the prior approval of the

Controlling Authority in accordance with the procedure described below.

ii) A final notice must be sent by 'Registered Post with acknowledgement due' to the borrower or

if he is dead to all the likely claimants at the last known address calling up the loan and stating,

inter alia, that the relative ornaments will be sold by public auction without further reference if

the loan account is not closed within 30 days from the date of the notice. The date, time and

place of the proposed auction should be stated in the notice.

iii) The branch should satisfy itself before sending the final notice that in the event of a forced

sale, it is possible to realize the amount outstanding in the loan account plus interest. The gold

ornaments to be auctioned should be examined by a reliable local goldsmith and his valuation of

each ornament ascertained in writing.

iv) In the event of the registered letter being refused, it must be kept unopened preferably on a

separate file after making appropriate remark in the ledger account.

v) The proposed auction and the auction date should be publicized by „tom-tom‟ in the local

bazaar on three consecutive days prior to the date of auction. However, while doing so the

borrower‟s name should not be divulged. The Cash Officer may arrange for some of the local

merchants to witness the proceedings and, if they choose, take part in the bidding.

vi) The auction should be held in the Bank‟s premises.

vii) Every effort should be made to realize the full market value of the security pledged. A

reasonable minimum price must be fixed for each ornament depending on the valuer‟s report and

the current market price and the bidding must start from this amount.

viii) While conducting the auction, each item of the ornaments must be auctioned separately.

When the total amount realized is sufficient to liquidate the outstanding plus interest in full, the

auction should be stopped. A Banker's cheque in the name of the borrower should be issued for

the amount, if any, remaining surplus after liquidating the loan account. The cheque should be

held in Safe Custody, pending disposal of the claim from the borrower or his accredited legal

representatives.

ix) The unsold items of the gold ornaments, if any, must be held as Safe Deposit article in the

name of the borrower and held in the joint custody of the Branch Manager / Accountant and the

Cash Officer.

x) A brief summary of the circumstances leading to the sale, details of the auction proceedings,

the name of the highest bidder, the amount realized and the manner in which it has been disposed

of, should be recorded in duplicate and witnessed by as many of the disinterested persons present

at the auction as possible. A copy of the recorded note should be forwarded to the Controlling

Authority for information.

xi) A receipt for the ornaments sold should be obtained from the successful bidder in the Gold

Loan Ledger as also on a separate sheet of paper and preserved along with other

documents/papers of the account.

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Section 10 : Advance Against Warehouse Receipts

10.1 i) Warehouse Receipts are documents issued by Warehouses to depositors against the

commodities deposited in the warehouses. Warehouse receipt thus provides proof of ownership

of commodities that are stored in the warehouse, vault or depository for safe keeping. The

depositor of commodities becomes the bailor and the warehouse/vault/cold storage becomes the

bailee.

(Indian Contract Act 1872 defines bailment as, “delivery of goods from one person to another

for some purpose upon the contract that the goods be returned back when the purpose is

accomplished or otherwise disposed of according to the instructions of the bailor.” Bailment has

two distinctive features (i) delivery of goods and (ii) return of goods. Absence of one or the other

shall not constitute a bailment).

ii) Warehouse Receipt (WHR) is not a negotiable instrument under Negotiable Instruments Act

and hence the transferee i.e. Banker cannot acquire a title better than that of the transferor.

However these documents are transferrable by endorsement and delivery and either the original

depositor or the holder in due course (transferee) can claim the commodities from the warehouse.

To that extent, WHR is a quasi negotiable instrument. It should be noted that WHRs in physical

form suffer from all the disadvantages of the paper form of documents to title and therefore

handling of WHRs calls for adequate precautions.

Central Warehousing Corporation was established in 1957 and State Warehousing Corporations

during 1959-60. Since then substantial progress has been made in the field of warehousing with

the establishment of Private Warehouses/Cold Storages and more recently, Collateral

Management Agencies like NBHC etc. An important objective of promoting warehousing is to

enable the owners of commodities – mainly agriculturists and traders – to acquire a convenient

security in the form of WHR which can be pledged for obtaining loans from the Bank. WHR

thus not only creates liquidity but also allows for extension of sales period of products well

beyond the harvesting season.

iii) Bank provides loans against WHRs by way of cash credit and/or demand loan. Such WHRs

can be issued by CWCs, SWCs, Godowns set up under a Govt. Scheme or Godowns set up by

Regulated Market Yards, Godowns/Cold Storages of Pvt Parties as also by Collateral

Management Agencies like NBHC, NCMSL, Staragri etc., some of which can be privately held

and promoted (like Sohanlal Commodities Pvt Ltd).

10.2 Bank has tie-up arrangements with some Collateral Management Agencies such as NBHC,

NCMSL, STARAGRI and SOHAN LAL COMMODITIES PVT LTD, for financing against

their Warehouse Receipts (WHR). As regards the tie-up arrangements, the detailed procedure has

been circulated by the Bank from time to time, latest being cir. ADV/SME/33 dt. 20th

Sept 2013.

Branches are advised to be guided by these instructions as well as other relevant instructions

issued by the Bank from time to time.

10.3 The following general instructions apply to advances against WHRs issued by warehouses

run by private licensed warehousemen (with whom there is no tie-up arrangement). The Branch

Managers should be particularly cautious while dealing with these WHRs

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i) The warehouse/cold storage units must be of outstanding repute.

ii) The borrower should be of high integrity.

iii) The period of loan should be dependent on the shelf life of the commodity stored. Finance

against perishable commodities should be avoided

iv) Opinion reports on the borrowers should be compiled and recorded in accordance with the

instructions laid down. (please refer Sec 21 of Ch H-1)

v) Interest should be charged at rates prescribed by the Bank from time to time.

vi) A minimum margin of 25% of the market value/ minimum support price of agricultural

produce, whichever is lower, should be retained while lending against WHRs representing

produce stored in warehouse/ cold storage. The margin norm for finance granted to farmers

under „Produce Marketing Loan Scheme‟, will be as per RBI directives in force.

vii) As the WHRs issued by warehouses run by private licensed warehousemen or cold storage

companies alone do not give any right to the Bank to seize and sell the stored goods belonging to

the borrower, a tripartite agreement among the Bank, the borrower and the warehouse

keeper/cold storage company should be executed providing for the undernoted safeguards:

viii) In the event of default by the borrower, the Bank should have direct recourse against the

goods of the borrower stored in the warehouse/cold store. On a demand being made by the Bank,

the warehouse keeper/ cold storage company should deliver the stored goods to the Bank

allowing it to sell and realise their dues, notwithstanding the dues of the warehouse/cold store

due from the borrower.

ix) The warehouse keeper/cold storage company should indemnify the Bank against any loss or

damage/injury caused to the goods during the period when such goods are stored with the

warehouse/cold store.

x) Advances against WHRs issued by privately run warehouse/cold storage units would be

treated as clean (except where Bank has entered into tie up arrangement as above).

xi) A notice of pledge must be given to the warehouseman in the following form, in duplicate,

one copy of which should be obtained with his acknowledgement :

To

M/s XYZ

Dear Sir,

NOTICE OF PLEDGE

Please take notice that _ _ _ _ _ _ _ _ _ _ _ (name of the borrower) has/ have assigned to and

deposited with this Bank as security for advances granted to him/them Warehouse Receipt No. _

_ _ _ _ _ _ _ _dated _ _ _ _ _ _ _ issued by you covering _ _ _ _ _ _ _ _ _ _ _ _ (goods)

originally deposited with you by _ _ _ _ _ _ _ _ _ _ _ _ _. The aforesaid goods or any part

thereof shall not at any time be delivered by you except on the production of your receipt

mentioned above, duly discharged by this Bank or with the consent of, or due notice to, this

Bank.

This notice is sent to you in duplicate and we shall be glad if you will please return to us one

copy thereof duly signed by you, in token of your having received it, and to your agreement (a)

to hold such goods in future as bailee for the State Bank of Patiala and to continue to hold the

same notwithstanding that the period up to which the goods have been accepted for deposit has

expired and (b) not to sell/ hypothecate/charge or otherwise deal with or dispose of the said

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goods except where, in the case of goods of a perishable nature it is apprehended that by

continued storage they will deteriorate greatly in value or injure other property, in which event

you shall, apart from giving due notice to the depositor, give such notice as is reasonable and

possible under the circumstances to the State Bank of Patiala, being lawful holder of the

warehouse receipt, requiring the goods to be removed from the warehouse and upon their failing

to do so, you may proceed to dispose of the goods by public sale at the cost and risk of the

depositor/State Bank of Patiala, when the sale proceeds less any costs incurred and charges due

to you shall be held by you on account of the State Bank of Patiala.

Yours faithfully

Branch Manager

xii) Where the entire stocks covered by a warehouse receipt are released, the relative receipt

should be discharged and returned to the borrower and the warehouseman advised of the

withdrawal of the Bank‟s lien on the stocks. No delivery order need be issued but the borrower‟s

acknowledgement for the warehouse receipt should be obtained and filed separately. In case of a

part delivery, a letter should be addressed to the warehouseman and sent to him along with the

relative receipt, through a responsible employee of the Bank, and the warehouseman will either

issue a fresh receipt for the balance of stocks or suitably endorse the old receipt before effecting

delivery. A delivery order should be issued and, after being receipted by the borrower, kept on

record in the usual manner.

xiii) A letter of authority to pay future rent etc. to the debit of the Current or Cash Credit

account, where maintained, should be obtained from the borrower and recorded.

xiv) Insurance : The goods/produce stored in the godown/cold storage and pledged to the Bank

vide WHR, must be insured at the cost of the borrower. The insurance policy should be either in

the joint names of the Bank as pledgee or endorsed in favour of the Bank. (please also refer Sec

16 of Ch H-1)

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