Module 3 Credit MBS

8/3/2019 Module 3 Credit MBS

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Credit Services

Module-3


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Principles of

Bank Lending Policies 1. Saf ety

2. Liquidity

3. Profitability 4. Purpose of loan

5. Principle ofdiversification ofrisks

6. Security


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Safety

Normally the bank uses the money ofdepositors in granting loans and

advances. Because of that while grantingloans the bankershould think about thesafety ofdepositors money. The purposebehind the safety is to see the financial

position of the borrower, whetherhe canpay the debt as well as interest easily.


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Liquidity

It is a legal duty ofabankerto pay the

total deposited money to the depositoron

demand.So the bankerhas to keepcertainpercent cash of the total deposits

in hand. Moreoverthe bank grants loan.It

is also for the addition ofshort term or

productive capital.Such type oflending isrecovered on demand.


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Profitability

Commercial banks are profit earning

institutes; nationalized banks are also not

an exception. They should have planningofdeposits inaprofitability way to pay

more interest to the depositors and more

salary to the employees. Before taking any

decision the bankershould make sure thatit is profitable.


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Purpose of loan

Banks never lend oradvance forany type

ofpurpose that will lead to loose ofmoney.

Theban

ks gran

t loan

san

da

dvanc

esfo

rthe safety ofits wealth,and assurance of

recovery of loanand the bank lends only

forproductive purposes. Before giving a

loan the bank has to make sure thatwhether the purpose forwhich the loan

has givenis productive ornot.


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Principle of diversification

of risks

Abank should be very carefulwhile lending loans because if the banklends to anoncredit worthy customer,it

will affect the survival of the bank. Todiversify the lending risk theyshould lend loans to customers fromdifferent sectors such as agriculture,housing, educational, etc.Concentratingonaparticularset ofcustomers willadversely affect the bank.


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Security

The security offered against the loanis big

like land, ornaments,building, shares etc.


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Working Capital & Term Loan

Working Capital management is about the

commercial and financial aspects of

Inventory,credit,purchasing,marketing,

and royalty and investment policy.


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Difference Working capital loans can helpcompany infinancing

inventories,managing internal cash flows, supportingsupply chains,funding productionand marketingoperations,providing cash support to business expansionand carrying current assets.

There are many types ofworking capital finance.It isnormally in the form ofFund Based Finance and NonFund Based Finance depending upon the requirement ofIndustry, Trade and Service Sector. Funded facilitiesinclude cash credit, demand loanand bill discounting.Demand loans are considered also under the FCNR (B)

scheme.Cash Credit facility is givenagainst stock, so ifany company is require to hold inventory involume and fora long period,Cash Credit facility helps in keeping theinventory position. Generally bank finance 75% of theinventory value held by company onaparticularday. Theothermode ofworking capital finance is in the form of

Book Debts, which is against Sundry Receivables


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Term Loan Finance

Termfacility is provided by the Bank and FinancialInstitution to various Business entities in order to carryout the capital expenditure. The various types ofCapital Expenditure includes Plant erecting,Purchaseofmachinery, Expansion ofexisting capacity oranyothercapital purpose.Some of the banks are alsoprovide term loanfacility forrepaying high cost debt,technology upgradation,R&D expenditure, leveragingspecificcash streams that accrue into company,implementing early retirement schemes andsupplementing working capital. Generally Term loanis givenforaperiod from 3 to 10 years dependingupon the size of the investment and repaymentcapability of the company. The rate ofinterest isgenerally depends project to project and bank primelending rate.


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What is Credit Appraisal?

ABILITY INCLINATION

OBJECTIVE SUBJECTIVE

KNOWLEDGE EXPERIENCE


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What is being Appraised?

PERSON:

Capacity - The ability to service the loanby

financial resources/ income streams.

Inclination - Willingness to pay.

PROPERTY

To check documents forcreation ofsecurity

To ensure end use


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Credit rating forSME


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NON-FUND BASED FACILITIES

The credit facilities givenby the banks where actualbank funds are not involved are termed as 'non-fundbased facilities'. These facilities are divided in threebroad categories as under:

Letters ofcredit

Guarantees

Co-acceptance of-bills/deferred payment guarantees.

Units for the above facilities are also simultaneouslysanctioned by banks while sanctioning otherfund basedcredit limits.


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Letters of Credit Bank should normally open letters ofcredit fortheirowncustomers

who enjoy credit facilities with themCustomers maintaining currentaccount only and not enjoying any credit limits should not be grantedL/Cfacilities except incases where no othercredit facility is neededby the customer.

The request ofsuch customerforsanctioning and opening of letterofcredit should be properly scrutinised to establish the genuineneed ofthe customer. The customermay be,required to submit acomplete loanproposal Including financial statements to satisfy thebank about his,needs and also his financial resources, to mire thebills drawn under

Where acustomerenjoys credit facilities with some otherbank, thereasons forhis approaching the bank forsanctioning L/C limits haveto be clearly stated. The bank opening L/C onbehalfofsuch

customershould invariably make areference to the, existing bankerofthe customer.

Inall cases ofopening of letters ofcredit, the bank has to ensurethat the customeris able to retire the bills drawn underL/Cas perthe financial arrangement already finalised.


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Guarantees

The conditions relating to obligant being acustomerofthe bankenjoying credit facilities as discussed incase of letters ofcreditare equally applicable forguarantees also.Infact, guaranteefacilities also cannot be sanctioned inisolation.

Financial guarantees will be issued by the banks only iftheyare satisfied that the customerwill be inaposition to reimbursethe bank incase the guarantee is invoked and the bank isrequired to make the payment in terms ofguarantee.

Performance guarantee will be issued by the banks only onbehalfofthose customers with whom the bank has sufficientexperience and is satisfied that the customerhas the necessaryexperience and means to perform the obligations underthecontract and is not likely to commit any default.

As arule,banks will guarantee shortermaturities and leavelongermaturities to be guaranteed by otherinstitutions.Accordingly,no bank guarantee will normally have amaturity ofmore than10 years.

Banks should not normally issue guarantees on behalfofthosecustomer's who enjoy credit facilities with otherbanks.


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Co-acceptance of Bills

1.Limits forco-acceptance ofbills will be sanctioned by the banksafterdetailed appraisal ofcustomer's requirement is completedand the bank is fully satisfied about the genuineness ofthe needofthe customer. Furthercustomers who enjoy other limits withthe bank should be extended such limits.

2. Only genuine trade bills shall be co-accepted and the banksshould ensure that the goods covered by bills co-accepted areactually received in the stock accounts ofthe borrowers. Thevaluation ofgoods as mentioned in the accompanying invoiceshould be verified to see that there is no overvaluation ofstocks.

3. The banks shall not extend theirco-acceptance to house bills/accommodationbills drawnby groupconcerns on one another.

4. Before discounting/purchasing bills co-accepted by otherbanksforRs.2 lakh and above froma single party, the bank shouldobtain writtenconfirmation ofthe concerned controlling office ofthe accepting bank.


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5. When the value oftotal bills discounted/purchased (whichhave beenco-accpeted by otherbanks) exceed Rs.20 lakhfora single borrower/ group ofborrowers priorapproval ofthe Head Office ofthe co-accepting bank shall be obtainedby the discounting bank in writing.

6. Banks are precluded fromco-accepting bills drawn underBuyer's Line ofCredit schemes offinancial institutions likeIDBI,SIDBI, PFC etc.Similarlybanks should not co-acceptbills drawnby NBFCs. Further,banks should not extendco-acceptance onbehalfoftheirbuyers/constituents underthe SIDBI scheme.

7. However,banks may co-accept bills drawn, underSeller'sLine ofCredit schemes forBill Discounting operated by thefinancial institutions like IDBI,SIDBI,PFC etc. without anylimit subject to buyer's capacity to pay and the compliancewith exposure norms applicable to the borrower.

8. Where banks openL/Cand also co-accept bills drawnundersuch L/C, the discounting banks,before discountingsuch co-accepted bills,must ascertain the reasonforco-acceptance ofbills and satisfy themselves about thegenuineness ofthe transaction.

9. Co-acceptance facilities will normally not be sanctioned tocustomers enjoying credit limit with otherbanks.

Documents

Module 3 Credit MBS