LOANS & ADVANCESPROCEDURE & SANCTION OF

LOAN

• Loaning is the main function of the Bank.• Major portion of a Bank’s fund is deployed in

loans and advances.• Loans and Advances are major source of

income for banks, (by income of interest).• Certain risk always exists in loans and

advances.• Banker advance loans on the basis of

Principles of Sound Lending, to minimize the risk.

PRINCIPLES OF SOUND LENDING

1. Safety2. Liquidity3. Profitability.

(1) SAFETY• Bank has to ensure the safety of the funds

lent. Mainly the funds are depositors money, therefore, its safety is to be ensured first.

• Safety means borrower must be in position to repay the loan along with interest according to the terms of contract.

• Repayment of the loan depends upon the borrower’s

– Capacity to pay and (ii) willingness to pay.– The willingness to pay depends upon the Honesty

and – Character of the borrower.

• Borrower should be a person of Integrity, Good Character and Reputation.

• Banker should also see the Security of tangible assets owned by the borrower.

(2) LIQUIDITY• Bankers are essentially intermediaries for Short

Term funds. Therefore, they lend funds for short periods i.e. mainly for Working Capital purposes.

• (Depositors---Banker—Loanee/Borrower)

• Loans are payable on demand.

• It depends upon the nature of assets owned by the Borrower, and pledged to the Banker.

• Loan should be given for such goods and commodities which are easily marketable.

• Thus, the Banker gives importance to liquidity as Safety of the funds and grants loans on the security of assets, which are easily marketable without much loss. (marketable securities may be Land & Building, Gold/Silver, FD, KVP, LIC Policy etc.).

(3) PROFITABILITY• Banks are profit-earning institutions.

• Bank should employee their funds to earn sufficient income out of which they have to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses and distribute dividends to the share holders.

• Rate of interest to be charged were as per the directives of RBI but now banks are free to determine their own rates of interest on advances of above Rs. 2 lakhs.

• The variations in the rates of interest charged from different customers depend upon the degree of risk involved in lending to them (More risk- more rate of interest).

• The purpose of the loan should only be Productive.

• Bank should follow the Principle of Diversification of Risks. Bank should not finance in one industry or for one type of activity. Variety of finance should be done by the bank so as to save the risk of failure of one type of industry or recession in that industry to safeguard the repayment.

TYPES OF LOANS

The following types of Loan are given by Banks:-

• Short Term (upto one year or 12 months)• Medium Term ( >1 year to 5/7 yeaars)• Long Term ( >5 year upto 20 years)• Bridge Loans (Short period -Max. 3 month)• Composite Loans (WC + Investment)• Consumption Loans.

CLASSIFICATION OF LOANS

• Secured Loans (with collateral)• Unsecured Loans. (without collateral)

– The loan must be made on the security of tangible assets like goods and commodities, land and buildings, gold and silver, Govt. securities etc.

– The market value of such security must not be less than the amount of the loan at any time till the loan is repaid.

CREDITWORTHINESS OF BORROWERS

• Creditworthiness of a person means that he deserves a certain amount of credit, which may safely be granted to him. Such creditworthiness is judged by the banker on the basis of his:-

• Character• Capacity, and • Capital. (Also known as 3C’s of Credit)

CHARACTER includes following:• His honesty• Integrity• Regularity• Promptness in paying dues• Sense of responsibility• Good habits and • Reputation and Goodwill which he enjoys in

the eyes of others i.e. Public.

CAPACITY includes following:-• Technical skill• Managerial ability• Experience to run an industry or trade• Success in the business.• Soundness of Project with competent

persons: (Technicians, Professionals) .

CAPITAL includes following:-• Adequacy of capital of borrower( own

contribution) • In case of failure in business, adequacy

of capital will be able to realize his money, if the borrower’s own capital is sufficient.

• Now ability and competence of the borrower is judged in place of Capital.

FACTORS LIMITING THE LEVEL OF A BANK’S ADVANCES:

(i) The Size and maturity-wise pattern of Deposits (S.B/C.D/R.D/F.D etc.)

(ii) Credit Control by Reserve Bank. (as per resources of Bank – Cash resources: and to maintain CRR/SLR. In general a bank advance loan 50 to 60% of its deposits only and rest is based on borrowings. CD Ratio to be maintained by Bank – 60:100 is ideal ratio.

Seasonal Variations in Bank Credit.a. Busy season b. Slack season.• Busy season means November to April

whereas, Slack season means May to October.

• There is higher demand for bank credit largely to finance the MARKETING AND DISTRIBUTION OF AGRICULTURAL CROPS

THE DEMAND FOR CREDITThe demand depends upon :-

• The level of production, both agricultural and • Industrial.• The level of inventories held by business and • Industrial houses.• The price level of goods and commodities in the • Country.• The procurement policy of Food Corporation of India and other State Agencies.

Sanction Letter & Terms and Conditions

• 1. Name & Complete Address.• 2. Subject matter (for business/Personal)• 3. Purpose of Loan• 4. Amount of Loan• 5. Rate of Interest & Penal Interest• 6. Period of Loan• 7. Equal Monthly Instalments (EMI)

• 8. Moratorium Period/Gestation period.• 9. Names & Addresses of two Guarantors• 10. Collateral Security.• 11. Separate sanction for Cash Credit, • Working Capital and Investment Credit• 12. Identification documents with Photo,• Mobile/Telephone Number• 13. Insurance of Assets

• Risk coverage like – Fire, Theft, Flood,• Thunder, Short-circuit (Electric), Robbery,

Accident etc. should be mentioned.• Insurance should be for entire period of

Loan.• 14. Deposit of Title Deeds (original

documents of Collateral Security)• 15. Acceptance on Terms & Conditions by

borrower.

• 16. Various Documents required after issue of sanction letter (some documents are taken before issue of sanction letter).

• 17. Advance Cheques of other Bank• 18. Bank Account Statement of two years• 19. Details of Assets, Policies &

Investments made by borrower.• 20. Details of Members of family &

income. ------

PROJECT PREPARATION

• 1. PROJECT PREPARATION• 2. PROJECT APPRAISAL,• 3. ASSESSMENT OF CREDIT

REQUIREMENT.