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PRINCIPLES OF BANK LENDING

TYPES OF ADVANCES

CASH CREDIT OVERDRAFT DISCOUNTING OF BILLS CLEAN LOAN LETTER OF CREDIT

LETTER OF CREDIT(LOC)

Normally given to customers who will be on travel and to business people. LOC is an undertaking given by an issue banker to pay the specified sum of money to the person or drawee bank Types

traveler's facility letter Letters for commercial credit

Travelers' facility letter

Issued to a person who will be traveling abroad for a specific period. the person who stays abroad for a given time period will have an arrangement with issuing bank to get money where ever he may be. Issuing bank will send the specimen signature of the customer on to the correspondent bank and request the bank to pay the customer on issue of cheque up to a specified amount.

When LOC is operated with only one correspondent bank direct letter of credit If he is traveling widely different parts circular notes along with circular note bank issues another instrument letter of indication It contains specimen signature of the customer.

Commercial letter of credit


Also called documentary letter of credit It issued to pay to the exporter the value of bill of exchange accompanied by shipping document which are submitted to the bank. LOC may be

revocable/irrevocable Confirmed and unconfirmed Documentary and clean letter of credit Fixed and revolving LOC With or without recourse to me Transferable and non transferable.

Differences between LOAN and O.D

loan are granted to a customer who holds any type of a/c If loan is obtained a new loan a/c is opened Is obtained for a long period of 2 to 3 years Interest is charged on the sanctioned amount every quarterly of half yearly More profitable for banker Banker do not charge any commitment charge

Is given only to current a/c holders No necessity of opening a new account Time period is one financial year Interest is charged only on the amount overdrawn Overdraft is more profitable for customer Banker charge commitment charge

How to assess the credit worthiness of a customer

Capital Character capacity

Credit information

To assess the creditworthiness of the customer, the banker should obtain the credit information.

Loan application Transaction with the bank Financial statement RBI credit information Bureau

SECURED AND UNSECURED ADVANCES

SEC 5(n)of the Banking Regulation Act, 1949 defines a secure loan or advance as A loan or advance made on the security of assets, the market value of which is not at anytime less than the amount of such loan or advances

Unsecured loans are those not covered by any security other than the personal security of the debtor himself and security of one or more persons.

DISCOUNTING OF BILL OF EXCHANGE

Discounting BOE is a process through which the right, title and interest in the bill will be transferred by holder or drawer to the banker to receive the value of the bill in advance. The banker charges some percent as discount for having parted his money to the person who transfer the bill in his favour.

Precautions to be taken in discounting bills


Banker should assess the financial standing of both the drawer and the acceptor He should examine whether the bill is properly drawn or not It is always better for the banker to discount only customers bill. Discounting the bill of noncustomers is not safe. Before discounting the bill, the banker should get an endorsement on the bill by the customer. As far as possible only bill of short period should be discounted If the discounted bill is dishonored the banker should debit customers account to the extent of the value of the bill.

TYPES OF SECURITIES AND METHODS OF CHARGING

The security may be primary or a collateral. Primary security is offered by the borrower himself, The collateral security is deposited by a third party to secure the advance made to the customer. Security may be tangible or personal Tangible security goods, documents real estate Personal security refers to the promise of the borrower himself to pay back the borrowed money.

Guidelines for acceptance of security as advance

Ready conversion No encumbrance Stable price Safety Yield or return Margin Valuation

CHARGES ON SECURITIES
The term charge refers to the legal hold on immovable properties. Forms Lien Pledge Hypothecation mortgage

LIEN

Is the right of a person to retain that which is in his possession and which belongs to another, until the demands of the person in possession are satisfied. It is provided by law no agreement is needed It gives only a right to retain possession and the power to sell unless it is expressly confirmed. The proceeds can be appropriated towards the dues

Types OF LIEN

Particular lien: attached to some specific goods. General lien: it entitles a person to retain possession of goods belonging to another for a general balance of account. Negative lien: in case of negative lien the bank neither has nor obtains possession of any of the asset of the borrower. It simply takes a declaration from the borrower

PLEDGE

The Indian contract Act 1872 defines as a bailment of goods as a security for payment of debt or performance of profit. The person who pledges the property pledger/ pawner The person in whose name the property is pledged is called pledgee or pawnee

Requisites of valid pledge

It is charge on movable asset There should be a written contract.

The physical delivery of the pledges property is essential The ownership of the goods will be retained with the pledger.

Precaution to be taken by the banker


It is better for the banker to have written agreement. The pledged property should have the title of the pledger. He should obtain a separate acknowledgement. The banker should have physical delivery of the goods The godown where pledged goods are kept should be insured. the periodical inspection by the bank should be made He should also see that pledged goods are in good condition and can be marketable. The banker should give notice before he sells the goods for non-payment of dues.

HYPOTHECATION

Is a charge against property for an amount of debt where in neither ownership nor possession is passed to the creditor. Hypothecation is a charge against movable property but the goods will retained with the borrower. The borrower give only a letter stating that the goods are hypothecated to the banker as security.

LETTER OF HYPOTHECATION It is an agreement between the banker and the borrower. It contains some rights

Property hypothecated is free form encumbrance. It accompanies a statement containing description of the goods It contains an undertaking that borrowers are the absolute owner of the property and interested to hypothecate. Any sale proceeds of the hypothecated property becomes the banks property The borrower should allow the banker to inspect the property any time he wants.

features
No transfer of possession No transfer of ownership Obligation to repay a debt Right of sale through court

DRAWBACKS
least control over the security False stock statement Double financing No right of sale

precautions

Letter of hypothecation Undertaking Stock statement Inspection Guarantees Insurance of goods Name board

MORTGAGE

According to sec 58 of the transfer property act defines the term mortgage as the transfer of the interest in a specific immovable property by one person to another for the purpose of securing an advance money Owner of the property mortgagor The person to whom transferred mortgagee mortgage money Document through which the interest of the property is transferred is called mortgage deed

Types of mortgage

Simple mortgage Equitable mortgage/mortgage by Deposit of Title Deeds English mortgage Mortgage by conditional sale Anomalous mortgate

Simple mortgage

Features

The mortgage cannot get any rent or any other income out of it. The property is question will not be given possession The property shall be registered irrespective of the money involved The mortgage can sell the property when the borrowers is at default. Only with the intervention of court.

English mortgage

The mortgagor transfers the property absolutely in favour of the mortgagee. This transfer is subject to a condition that the property will be retransferred to the mortgagor on repayment of the mortgage money. The mortgagor binds himself personally liable to repay the mortgage money

Equitable mortgage

Sec 58(f) where a person in any of the following towns, namely the towns of Calcutta, madras and Bombay and in any other town which the state govt concerned may, by notification in the official gazette, specifying this behalf, delivers to a creditor or his agent documents of title to immovable property with intent to create security thereon, the transaction is called mortgage by deposit of title deeds.

Features

Can be created only when there is a debt The deed executed should be a security for debt There should be a deposit of title deeds Mortgage deed will not be executed Mortgage cannot sell the mortgaged property without recourse to court.

MORTGAGE BY CONDITIONAL SALE

Sec 58(c) of T.P Act the mortgagor ostensibly sells the mortgaged property on condition that

On default of payment of mortgaged money on a certain date, the sale shall become absolute. On such payment being made, the sale shall become void On such payment being made, the buyer shall transfer the property to the seller

Anomalous mortgage

Sec 58(g) mortgage which is not a simple mortgage, a mortgage by conditional sale, an English mortgage or mortgage by deposit of title deed with in the meaning of this section is called anomalous mortgage. Feature:

It is combination of any two mortgages This type of is generally not preferred by the banker

Trust receipts

This is a document which makes the goods or documents of a customer as a trust for the bank against the advances made. the acknowledgement he gives to the bank in writing to hold his own goods in trust for the bank against advance is called trust receipt/

ASSIGNMENT

This is another type of charging Assignment is a transfer of right, property or debt (due or occurring due) by one person to another person. The person who transfers the title - Assignor The person who receives the legal title assignee.

TYPES OF SECURITIES

IMMOVABLE PROPERTIES MOVABLE PROPERTIES


GOODS DOCUMENTATION OF TITLE TO THE GOODS STOCK EXCHANGE SECURITIES LIFE INSURANCE POLICIES FIXED DEPOSIT RECEIPTS SUPPLY BILLS BOOK DEBT

ADVANCES AGAINST GOODS

GOODS food products, raw materials, agricultural products and manufactured products including minerals. Advantages

Tangible security Easy realisability Easy ascertainment No price fluctuation Easy to create a charge

Drawbacks

Risk of storage and verification Risk of fraud Risk of deterioration Risk of price fluctuation Heavy transport cost

Precautions

Character of the borrower Experience in the business Purpose of loan Title of the borrower Nature of goods Proper valuation of goods Prices in different market Proper storage Care in a rented go down Banks name board Adequate insurance Periodical inspection strict supervision Take delivery of goods Short term advance RBIs directives

ADVANCES AGAINST DOCUMENTS OF TITLE TO GOODS

Sale of Goods Act 1930 defines documents of title to goods under sec 2(4) as a document used in the ordinary course of business, as a proof of possession or control of goods authorising either by endorsement or delivery, the processor of documents to transfer or receive the goods thereby represented

Documents of title to goods

Bill of lading Railway receipt/ lorry receipt Warehouse receipt Delivery orders

Advantages Reliable security Convenient security Less formalities Disadvantages Risk of fraud Risk of dishonesty Forgery endorsement Partly negotiable instrument Right of unpaid vendor to stop goods in transit Bogus documents

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