Loans & Advances - Indian banking law

8/9/2019 Loans & Advances - Indian banking law

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LOANS & ADVANCES

Dr. Prashant S. Desai


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Profit is the pivot on which the entire business

activity rotates. Banking essentially a businessdealing with money and credit. Like every

other business activity banks are profit

oriented. A bank invests its funds in many

ways to earn income. The bulk of its income is

derived from loans and advances.


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PRINCIPLES OF SOUND LENDING

• Safety

• Liquidity

• Profitability

• Security

• Purpose of the loan

•

Social

Responsibility• Diversification of risks


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SAFETY

• The very existence of a bank depends on the safety of

its outstandings which should never be sacrificed to

the profit-earning capacity of its advances.

• When a loan or investment is made, the banker will

have to ensure that the money advanced is returned

by the borrower along with interest within thestipulated period. This is possible only when the

borrower does not face any risk & strictly adheres to

the terms & conditions of the loan. For this purpose,

the banker will have to chose such type of borrowers

who are prompt in repayment of the principal and

interest amount.


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LIQUIDITY• The banker while making advances must see that the

money he is lending is not going to be locked up for a

long time, which should make his loans & advances

less liquid & more difficult to realize in cases of

emergency.

• An asset is said to be liquid when it can be converted

into cash within a short notice, without loss. As the

bank is investing or lending the depositors’ money, it

has to take more precaution while doing so. The

depositor may demand his/her money at any time &

the bank must be in a position to repay the same.


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PROFITABILITY

• When a bank is undertaking lending or

investment, it has to earn a good return. The bank has profit as its main business motive. So, while

lending or investing the depositors’ money, the

bank must earn higher interest or higher return. If the bank is able to achieve this, it will be

deploying its funds in such ventures which give a

higher return.


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SECURITY• The banker should ensure that the borrower has

the ability & will to repay the advances as per

agreement. Before granting a secured advance the

banker should carefully consider the margin of

safety offered by the security concerned &

possibilities of fluctuations in its value. If it is an

unsecured advance, its repayment depends on the

creditworthiness of the borrower, & that of theguarantor, wherever applicable.


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• The security & its adequacy alone should notform the sole consideration for judging theviability of a loan proposal.

• The security accepted must be adequate & readilymarketable, easy to handle & free fromencumbrances.

•

It is the duty of the banker to check the nature of the security & assess whether it is adequate for the loan granted.

• Apart from the collateral, the banker has also to

consider other factors such as capital of the borrower, his character & capacity etc.


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PURPOSE OF THE LOAN

• The banker has to carefully examine the purpose for

which the advance has been applied for. In case the

advance is intended to be utilized for productive purposes, it could be reasonably anticipated that cash

flows arising from productive activities will result in

prompt repayment.

• The banker has to be careful to monitor the exact purpose

for which the advance is actually utilized. There is always

the possibility that the advance granted may be diverted

for purposes other than that indicated by the borrower atthe time of application. Thus, there should be proper

provisions for effective post credit supervision.


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• The identification of priority sectors in India for the purpose of extending bank credit should beconsidered as a positive development in the

banking system, aimed at effectively dischargingits responsibility towards society.

• At the same time, this social responsibility should

not deter the banks from paying adequateattention to the qualitative aspects of lending.

• The credit needs of the priority sectors should not

be allowed to degenerate into irresponsiblelending.


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DIVERSIFICATION OF RISKS

• The banker should aim at spreading the advances

as widely as possible over different industries &

different localities. This would enable him to

compensate any losses which might arise as a

result of unanticipated factors adversely affecting

particular industries and/or particular localities.

• It is also advisable for a banker to advance

moderate sums to a large number of borrowersthan advance large sums to a small number of

borrowers.


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EVALUATION OF BORROWER

• CHARACTER: The banker has to ensure that the

person is of integrity. He should assess the personal

characteristics which include honesty, attitude,willingness & commitment to repay debts.

• CAPACITY: This includes the evaluation whether the

borrower has the potential to repay the loan from hisresources. It includes the borrower’s success in

running in business or managing his cash flows.

Capacity of physical assets, plants & equipment, cashflows etc. are usually taken into account in this

regard.


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• CAPITAL: The financial strength of the borrower represents the amount of equity capital that a firm

can liquidate for payment of debt in the

eventuality of call other means failing. The

amount of the borrower’s capital in relation to

debt is relatively easy to compute.

• CONDITIONS: The banker has to assess the

conditions in which the borrower is operating his

business. STEP analysis stands for Social,Technological, economic & Political conditions.


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• COLLATERAL: Banker has to ensure safety of

funds lent. He ensures this by retaining collateral

other than the primary security. The possibility

that the borrower may lose the collateral may in

fact act as an incentive for him to repay his debt.

•

COMPLIANCE: The loan advanced should be inaccordance with the rules & regulations as

stipulated by the government & regulatory

authorities in order to safeguard the interest of the banker


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TYPES OF SECURITIES

• The securities may be immovable or movable

security, debts etc. The land and buildings,machineries embedded to earth etc. come under

the category of immovable, whereas goods,

vehicles, furniture, machineries, gold ornamentsetc. come under the category of movable security.

Accounts receivables also known as book debts

are classified as intangible security.


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•

Classification of security may also be as personal andtangible as well as primary and collateral. Personal

security refers to personal liability. The bank has a

right of action against the borrower, e.g. guarantee.

Tangible security is something that can be realised by

a sale or transfer, e.g. land, goods, stock etc.

•

Primary security is one that is registered as the maincover for an advance; generally, assets against which

advance is made. For example, stock for cash credit,

machinery for term loans. Collateral security

is security other than the primary security lodged

by the borrower or by a third party.


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BASIC PRINCIPLES

• Adequacy of margin: In banking terminology, ‘margin’

refers to the difference between the market value of the

security and the amount of advance granted against it.Banker needs to keep adequate margin because of the

following reasons:

i) The market value of the securities is liable tofluctuations in the future with the result that the

banker’s secured loans may turn into partly secured

ones.

ii) The liability of the borrower towards the banker

increases gradually as interest accrues and other

charges become payable by him.


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• Marketability of security: If the borrower defaults in making payment, the banker has toliquidate the security to make good his funds. For this, the security has to be marketable.

• Documentation: Documents that are prepared and signed by the borrower at the time of securingthe loan is of much significance as thesedocuments contain all the terms and conditions onwhich a loan is sanctioned by the banker. Hence,

any misunderstanding or dispute later on mayeasily be avoided or resolved.


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METHODS OF GRANTING ADVANCES

1.

CASH

CREDITS2. OVERDRAFTS

3. BILLS DISCOUNTING

4. ISSUE OF LETTERS OF CREDIT

5. LOANS


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CASH CREDIT

• A Cash Credit is an arrangement by which a banker

allows his customer to borrow money up to a certain

limit against the values of his stocks & book debtsfrom day to day. This is the most favourite mode of

borrowing by large commercial & industrial concerns

in India, on account of the advantage that a customer need not borrow at once, the whole amount he is

likely to require, but can draw such amounts as &

when required. He can put back any surplus amount

which he may find with him for the time being.


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OVERDRAFTS

• When a customer requires temporaryaccommodation, he may be allowed to overdraw

his current account, usually against collateralsecurities. This arrangement like the cash credit isadvantageous as he is required to pay interest on

the amount actually used by him.• The main difference between cash credit &

overdraft is the latter is supposed to be a form of

bank credit to be made use of occasionally & theformer is used for long terms by commercial &industrial concerns doing regular business.


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•

Indian Overseas Bank, Madras v. Naranprasad Govindlal Patel, (1980)21 Cr LJ 132, The customer

was enjoying overdraft facility for about 4 years.

Merely because the client was not required to execute

any document or to furnish any security would not

make such an arrangement an act of grace on behalf

of the bank. Such an arrangement even though

temporary is not one which can be terminated

unilaterally & at the sweet will of the bank without

giving notice to its constituent. The bank had

wrongfully dishonoured a cheque though it could be

honoured within the limits of overdraft facility.


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• The Gujarat High Court held that the overdraft

arrangement between bank & its customer is acontract & it cannot be terminated by the bank

unilaterally even if it is a temporary one. The

court held the bank liable for damages.


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• OVERDRAFT IS A LOAN, REPAYABLE

WITH INTEREST No express, oral or written agreement is necessaryfor overdraft. The agreement for grant of overdraft

facility can be implied from conduct of the parties.Where a customer having a current account in a bank, even without any express grant of an overdraftfacility, overdraws on his account & the cheques

issued by him are honoured, without there beingsufficient balance in the account, the transactionamounts to a loan & the customer is bound to make

good the loan to the bank with reasonable interest.-Paget’s Law of Banking, 1972 edn., p.132.


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Charging of interest on overdraft account

• The bank can charge compound interest at monthly rate

on overdraft amounts, even without an agreement.

• In Balakrishna v. Bhawanipur Banking Corporation,

AIR 1932 Cal 521, where the agreement between the

bank & the customer did not stipulate anything, the bank

charged compound interest at monthly rate & the samewas debited to the account for a long time, later on, when

the customer objected to charging interest, the court held

that the conduct of the customer by not raising objectingcharging of interest, show that had agreed & adopted or

ratified the rate of interest that was being charged.


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• In Konakalla v. SBI, AIR 1975 AP 113, where

in an overdraft account, the bank was sending

periodical statement of account showing thatinterest is being charged & debited at the

compound rate, the customer did not raise any

objection, it was held that agreement provided

for charging compound rate of interest & bank

is justified in charging interest at thecompound rate.


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BILLS DISCOUNTING

• The banker advances money on the security of bills of exchange after deducting a certain

percentage, technically known as ‘discount’,from the face value of the bill.

• This method of providing financial

accommodation is heavily favoured byconservative bankers according to whom theearning assets of a commercial bank should

consist mainly of short term self-liquidating productive loans.


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ISSUE OF LETTERS OF CREDIT

• Trade between countries is financed mainly through

letters of credit.

• The International Chamber of Commerce defines a letter

of credit as: “any arrangement however named or

described whereby a bank (the issuing bank) acting at the

request & in accordance with the instructions of a

customer (the applicant of the credit) is to make paymentto or to the order of a third party (the beneficiary) or is to

pay accept or negotiate bills of exchange (drafts) drawn

by the beneficiary, or authorize such payments to be madeor such drafts to be paid, accepted or negotiated, by

another bank, against stipulated documents & compliance

with stipulated terms & conditions.”


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LOANS

• In case of loan, the banker advances a lump sum for acertain period at an agreed rate of interest. The entire

amount is paid on an occasion either in cash or bycredit in his current account which he can draw at anytime. The interest is charged for the full amountsanctioned whether he withdraws the money from his

account or not. The loan may be repaid in instalmentsor at the expiry of a certain period. The loan may bemade with or without security. A loan once repaid infull or in part cannot be withdrawn again by thecustomer. In case a borrower wants further loan, he hasto arrange for a fresh loan.


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TERM LOAN

• Where a loan is granted for a period exceeding

one year & is repayable according to aschedule of repayment, as against on demand

& at a time is known as ‘term loan’.

• Where the period exceeds one year but not, 5

to 7 years, it is known as ‘medium term loan’.

• A loan with longer repayment schedule isknown as ‘long term loan’.


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PARTICIPATION LOAN or CONSORTIUM

ADVANCE

• Where single loan is granted by more than one

financing agency, it is termed as a participationor consortium loan. Such participation

becomes necessary where either the risk

involved is too large for one or more of the participating institutions to take individually or

there are administrative or other difficulties in

servicing & follow up of the loan.


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PERSONAL LOANS

• Personal loans, unlike industrial & commercialloans, are extended to customer for meeting their

personal requirements mostly connected withtheir standard of living & amenities for life suchas decorations & repairs to houses, purchase of

radio sets, motor cars, refrigerators, items of furniture & even professional equipment.

• These are unsecured loans repayable in easy

instalments extending up to a period of specified years.


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SELECTIVE CREDIT CONTROL IN INDIA

• Selective credit control is exercised by the RBI

under the authority vested in it by virtue of the provisions of Sections 21 & 35-A of the BankingRegulation Act.

•

Under S. 21, the RBI has been empowered todetermine the policy in relation to advances to befollowed by all banks or by any particular bank,when it considers it necessary to do so in the

public interest or in the interests of the depositorsor banking policy.


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•

RBI may give directions to banks on different aspectsof granting accommodation viz.,

a. The purposes for which advances may or may not bemade

b. The margins to be maintained in respect of secured advances

c. The maximum amount of advances or other financial

accommodation which may be made by a bank to or the maximum amount of guarantees which may begiven by a bank on behalf of, any one company, firm,association of persons or individual, having regard tothat bank’s financial position such as paid-up capital,reserves & deposits & other relevant considerations.


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d. The rate of interest & other terms & conditions

subject to which advances or other financialaccommodation may be granted or guarantees may begiven.

• Subsection (1) of section 35-A of BR Act also gives power to RBI to issue directions to banks in the public interest, in the interest of banking policy, to prevent the affairs of any bank being conducted in amanner detrimental to the interests of the depositorsor in a manner prejudicial to the interests of the bank,or to secure the proper management of any bank generally.

•

U/S 36(1)(a) RBI may also caution or prohibit banksfrom entering into any particular transaction or classof transactions, & generally give advice to any bank.


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TOOLS OF SELECTIVE CREDIT CONTROL

• The main instruments of selective credit controlin India are:

a. Minimum margins for lending against selected commodities

b. Ceilings on the levels of credit and

c. Charging of minimum rate of interest onadvances against specified commodities.

• These tools of control are operated & modified byRBI from time to time in such manner as is

considered appropriate to meet particular situations or to achieve the desired directionalflow of credit


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PRIORITY SECTOR ADVANCES

• Priority means to give preference & privilege.

•

The concept of Priority Sector Lending (PSL) ismainly intended to ensure that assistance from the banking system flows in an increasing manner tothose persons & sectors of the economy which,

through accounting for a significant proportion of the national product, have not received adequatesupport of the institutional finance in the past.Under the new banking policy, stress is laid on theweaker & under privilege groups & vital sector as

priority sectors.


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• Priority sector lending scheme is a policy of providing

a specified portion of bank lending to the importantsectors of the economy.

• It includes agriculture, small-scale industries, cottagesector, tiny sector, export sector, and other small business (service) firms.

• The Reserve Bank of India was first to initiate prioritysector lending scheme in India.

• The main purpose of this scheme was to see that timelyand sufficient credits (loans) are given (provided) to the priority sector.

• Previously, only public sector banks were asked to giveloans to this sector. However, now even private and foreign banks have to give loans to this sector.


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PSL & ECONOMIC DEVELOPMENT

1. It can reduce the chronic debt owing to non-institutional sources and the financial hardships

caused by manmade and natural calamities.

2. It will enable the persons engaged in prioritysector to produce a marketable surplus and

thereby contribute to the development process.

3. Credit is viewed as productive input and policymakers think that it is possible to promote

specific agricultural activities by delivering pre-determined amounts of loans to farmers.


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4. In the agricultural segment, the credit enables the

farmers to expand areas under irrigation for remunerativecrops, increase the use of modern inputs and thereby

increase per acre and total yield of crops.

5. Credit for allied activities also helps the borrowers toincrease their income. The borrowers can witness

remarkable increase in his business turn over and income

in the post loan period. The increase in income can bringan improvement in the quality of life of the borrowers.

6. Besides making available finance for development,

banks can play a catalytic role in developinginfrastructure, transferring technology and know-how,

offering guidance and above all educating the rural people

of varied target groups.


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7.The PSL can also help to bring high rates of adoption of new technology.

8. PSL may encourage entrepreneur ability which

contributes to economic growth in two ways:i. By providing timely and adequate amount

of credit to those with technical skills and

entrepreneur talents who are not coming forward ona higher economic terrain for want of sufficientcapital, and

ii. By attenuating uncertainty and absorbingrisk in arranging capital needed for their plans to beimplemented.


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WEAKER SECTIONS UNDER PSL

• Small & marginal farmers with land holding of 5acres & less.

• Landless labourers.• Tenant farmers & share croppers.

• Artisans, village & small industries.

• Beneficiaries of the integrated rural development program (IRDP).

• SCs & STs

• Beneficiaries under differential rates of interestscheme (DRI)


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DIRECTIVES ISSUED BY RBI

• Priority sector lending should constitute 40%

aggregate bank credit

• Out of

the

priority

sector

advances,

at

least

40%

should be provided to agriculture.

• Direct advances to the weaker sections in agriculture

& allied

activities

in

rural

sector

should

form

at

least

50% of the total direct lending to agriculture.

• The advances to rural artisans, village craftsmen &

cottage industries

should

be

at

least

12.5%

of

the

total advances to the small scale industries.

VITAL SECTORS OF THE ECONOMY GETTING


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VITAL SECTORS OF THE ECONOMY GETTING

PRIORITY UNDER THE SCHEME OF PSL1. Agriculture sector

2. Micro & Small scale industries

3. Small road & water transport operators4. Professional & self-employed persons

5. Retail Trade loan

6. Educational loan7. State-sponsored corporations for SC/ST

8. Housing loans

9. Consumption loans10. Other recommended priority sectors


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AGRICULTURE SECTOR

• In India, nearly one-third of its national incomecomes from the agriculture sector. Its economic

and social development directly depends on theexpansion of the agriculture sector. Therefore, it istreated as primary priority sector lending in India.

•

Agricultural loans are given to the farmers ontheir need-based credit.

• These loans are classified into following two

categories: 1. Direct Agricultural Loans2. Indirect Agricultural Loans


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Direct Agricultural Loans

• Under this category, loans are directly given to thefarmers in form of tractor loan, dairy loan, crop

loan, etc. These loans are given either for a short-term period (which is not more than 12 months)or for a medium and long-term period (which isnot more than 36 months).

• Short-term loans are given to meet agriculturalexpenses and maintenance of assets such as atractor, pumping machine, bore well, etc.

• Medium and long-term loans are given for agricultural activities like land reclamation, farm building, farm mechanization, and so on.


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Indirect Agricultural Loans

• Here, farmers are provided loans at

concessional rates of interest. Indirectagricultural loans benefit the farmers in the

long run. These loans are given for cattle feed,

warehouse, seeds, pesticides, ruralelectrification, subscription of bonds issued by

NABARD, boring equipment, etc.


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SMALL‐SCALE INDUSTRIAL LOANS

• Loans given to small-scale and ancillary

industries are treated as priority sector lending.

SMALL ROAD AND WATER TRANSPORT


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SMALL ROAD AND WATER TRANSPORT

OPERATORS


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• This category of borrowers includes owners of taxis,

trucks, buses, auto-rickshaws, cars, bullock-carts, camel,etc. Under priority sector lending, small road and transport operators get loans based on the conditionsmentioned in the notification issued by the Government

of India.• The repayment period of loan is communicated to the

borrower at the time of disbursement of loan.

• Borrowing is done for the purchase of vehicles and their

parts. Bank mainly provides loans for the following purposes:

a. Purchase of vehicles.

b. Purchase of spare parts.

c. Carrying out major repairs.

d. Working capital requirements.

f i l d lf l d


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Professional and self ‐employed


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• Bank also provided loans to self ‐employed

persons like:

a. Freelance journalists,

b. Owners of health care centres,

c. Beauty

parlours,

d. Photographers,

e. Fashion designers, and so on.

• The borrowing

limit

will

be

an

aggregate

of fixed

capital and working capital requirements of a professional and self ‐employed person.

• Doctors and

other

self

‐employed

professionals

who start practicing in rural or semi‐urban areas are also eligible to borrow loans.

RETAIL TRADE LOAN


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RETAIL TRADE LOAN

EDUCATIONAL LOAN


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EDUCATIONAL LOAN

HOUSING LOAN


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HOUSING LOAN

CONSUMPTION LOAN


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CONSUMPTION LOAN

STATE-SPONSORED CORPORATIONS


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FOR SC/ST

Other recommended priority sectors


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Other recommended priority sectors

VARIOUS CREDIT SCHEMES UNDER


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PRIORITY SECTOR• Differential Rates of Interest Scheme (DRI)

•

Swarnjayanti Gram Swarozgar Yojana (SGSY)• Prime Minister’s Rozgar Yojana (PMRY)

• Swarnajayanthi Shahari Rozgar Yojana (SJSRY)

• Programme for Adi-Dravidars (PAD)• Programme for Backward Class People and

Minorities (BC Welfare)

• Rural Employment Generation Programme(REGP)

Differential Rates Of Interest Scheme (DRI)


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Differential Rates Of Interest Scheme (DRI)

• This scheme was launched in India in 1972 for publicsector banks to extend bank credit to the weaker sectionat concessional rate of interest at 4% p.a.

• According to new guidelines issued by RBI, banks haveto deploy 1% of their total advances to the weaker section of society and further to set aside 40% of their advances meant under DRI scheme for beneficiaries

belonging to the scheduled castes and scheduled tribes.• The eligibility for assistance under this scheme is now

Rs.6400 annual family income in rural areas and Rs.7200 per annum per family in urban areas.

• The private sector banks can also participate in thisscheme on a voluntary basis.


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•

Under the DRI scheme, the banks are directed by theReserve bank to finance:

a. Scheduled castes and scheduled tribes and other engaged on the modest scale in agriculture and allied

activities. b. The physically-handicapped people on the modest

scale by offering loans for cottage and rural industriesand vocations like sewing garments, making

reasonably cheap edibles, running way side tea stalls, basket-making etc.

c. People engaged in elementary processing of forest products.

d. Village artisans in the decentralized sector.

Swarnjayanti Gram Swarozgar Yojana (SGSY)


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j y g j ( )

• This is a modified scheme, replacing IRDP and other sub-schemes viz.,

1. Integrated Rural Development Programme (IRDP)

2. Training of Rural Youth for Self Employment(TRYSEM)

3. Development of Women and Children in Rural Areas

(DWCRA)

4. Supply of Improved Toolkits to Rural Artisans (SITRA)

5. Ganga Kalyan Yojana (GKY)

6. Million Wells Scheme (MWS)

• It came into existence during the Golden Jubilee year of Indian

Independence, and the scheme derives its name to mark the

occasion.

Objective of the Scheme


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Objective of the Scheme

• The Scheme aims at establishing a large number

of micro enterprises in the rural areas. The list of

Below Poverty Line (BPL) households identified through BPL census duly approved by Gram

Sabha will form the basis for identification of

families for assistance under SGSY.• The objective of SGSY is to bring the assisted

poor families (Swarozgaris) above the poverty

line by ensuring appreciable sustained incomeover period of time.


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• This objective is to be achieved by inter alia

organising the rural poor into Self Help Groups(SHGs) through the process of social

mobilisation, their training and capacity

building and provision of income generatingassets. The rural poor such as those with land,

landless labour, educated unemployed, rural

artisans and disabled are covered under the

Scheme.

Salient features of this scheme


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• It is a redesigned antipoverty programme, for generationof employment

• There would be shift from individual beneficiaryapproach to a cluster/group approach. To facilitate this process, Self-Help Groups (SHG) are formed.

• SHGs, which have demonstrated the potential of viablegroup, will be considered for revolving fund assistanceinitially after first grading and assistance for economicactivities will be considered once the identified groupssustain its viability and pass through the second grading.

• The Group approach will focus on identification of a fewspecified viable key activities based on available localendowments and occupational skills of the members of the group.


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•

The credit flows and average level of investment per family will be enhanced.

• The programme will have greater participation of Gram

Panchayats.

• For group of Swarozgaris (SHGs) the subsidy would be at

50 % of the cost the scheme subject a ceiling of Rs.1.25

lakhs. There will be no monitory limit on subsidy for

irrigation Projects.

• Group Life Insurance for Swarozgaris is also ensured

under the scheme.

• Scheme provides for creation of risk fund for the

consumption credit requirement of the Swarozgaris.

Prime Minister’s Rozgar Yojana (PMRY)


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• The Prime Minister's Rozgar Yojana (PMRY) has been designed to provide employment to educated unemployed youth by setting up of micro enterprises

by the educated unemployed poor. It relates to thesetting up of the self-employment ventures for industries, services and business in Rural and urban

areas.• The scheme covers all educated youth with the

minimum qualification of VIII Standard (passed).Preference will be given to those who have beentrained for any trade in Govt. recognized/ approved institutions for a duration of at least 6 months.


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• All educated unemployed youth between theage of 18 and 35 years on the date of receipt of application by the concerned DIC will be

eligible for loan under the scheme in generalwith a 10 years relaxation for SC/ST/ Exservicemen /physically handicapped and

women i.e. up to the age of 45.• The Income of the beneficiary along with the

spouse or the income of parents of the

beneficiaries shall not exceed Rs.100,000/- per annum


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•

All projects up to an outlay of Rs.2.00 lakh for business/service sector and Rs.5.00 lakhs for industry sector, loan to be of composite nature.Partnerships are also considered for projects up toRs.10.00 lakhs subject to the maximum allowed up to the individual ceiling limits.

• Self Help Groups can be considered for assistanceunder the scheme provided 1)Educated Unemployed Youth satisfy the eligibility criterialaid down under the scheme to volunteer to form

SHG to set up self- employed ventures(CommonEconomic Activity)


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1. No upper ceiling on project cost2. The subsidy ceiling for Self Help Group isRs.15000/- per beneficiary subject to a maximum of

Rs.1.25 lakh per SHG3. The exemption from collateral is limited toRs.5.00 lakh per member of SHG to projects. Under

Industry sector and Rs.2.00 lakh per member of SHG under service and business Sectors.

4. Required margin money contribution (ie. Subsidy

and margin to be equal to 20% of the project cost)should be brought in by the SHG collectively.


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• 5% to 16.25% of the project cost to be brought asown contribution by the beneficiary.

• 15% subsidy on the project cost with a ceiling of

Rs.12500/- per beneficiary.• All projects under Industries, Services, Business

and Agriculture are eligible excepting direct

agricultural activities like raising crop, purchaseof manure etc.

• Beneficiaries are to undergo compulsory trainingorganized by DIC.

• Reservation for SC/ST and OBC at 22.50% and 27% respectively.


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• No collateral security is required under Industry Sector with project cost up to Rs.5.00 lakh or partnership

projects under Industries sector the exemption limit for

abstention of collateral security will be Rs.5.00 lakhs per borrower account. For units in Service and business

sector no collateral for projects up to Rs.2.00 lakh.

Exemption from collateral in case of partnership

projects will also be limited to an amount of Rs.2.00

lakh per person participating in project.

• The exemption from collateral in respect of partnership

projects in Industry sector will be Rs.10 lakh per

Borrowable account in Tiny sector.

Swarnajayanthi Shahari Rozgar Yojana (SJSRY)


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• It was launched on 01.12.1997.

• Addressing urban poverty alleviation through

gainful employment to the urban unemployed or underemployed poor by encouraging them to setup self employment ventures (individual or

group), with support for their sustainability; or undertake wage employment;

• Supporting skill development and training

programmes to enable the urban poor have accessto employment opportunities opened up by themarket or undertake self-employment;

•


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•

Empowering the community to tackle the issuesof urban poverty through suitable self- managed community structures like Neighborhood Groups(NHGs), Neighborhood Committees (NHC),

Community Development Society (CDS), etc.• The delivery of inputs under the Scheme shall be

through the medium of urban local bodies and

community structures.• Thus, Swarna Jayanti Shahari Rozgar Yojana

seeks to strengthen these local bodies and community organizations to enable them address

the issues of employment and income generationfacing the urban poor.

Five Major Components


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j p

(i) Urban Self Employment Programme (USEP)

(ii) Urban Women Self-help Programme(UWSP)

(iii) Skill Training for Employment Promotion

amongst Urban Poor (STEP-UP)(iv) Urban Wage Employment Programme(UWEP)

(v) Urban Community Development Network (UCDN)

Programme for Adi-Dravidars (PAD)


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• Under this scheme, the Adi-dravidar

Community people living below the poverty

line are identified every year and are assisted

with the loan-cum-subsidy and Margin money

scheme for viable Trades/Business/Professionsand other economical activities under Self-

employment scheme, so as to raise their

economical standard of living.

Criteria for the assistance under the scheme


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• 25% of the unit cost or Rs 10,000 which ever is less will bedeposited with the concerned banks as margin money for a period of 3 years or till the recovery of the loan whichever is earlier and is refundable by the banks after maturity to theCorporation. The interest earned on the deposit is to beshared by the Corporation and the beneficiary on 50:50 basis

• 50% of the unit cost or Rs.10,000 whichever is less will bereleased from the Special Central Assistance as subsidywhich is not refundable by the beneficiaries

• The remaining portion 50% of the unit cost or the entire balance amount of the unit cost will be released by the banks as loan at nominal rate of interest as prescribed byRBI from time to time.

Programme for Backward Class People and


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Minorities (BC Welfare)

• The scheme envisages Margin Money

Assistance/subsidy for the Backward Classes

and minorities & training programme in

various trades like Typewriting, Shorthand,Computer orientation, Two-Wheeler

Mechanism, etc.

Rural Employment Generation Programme


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(REGP)• REGP (Margin Money Scheme) is applicable for new village

industries only and the total project cost should not exceed Rs

25 lakhs.

• 25% of the project cost for the projects up to Rs.10 lakhs will

be provided as margin money.

• For projects above Rs 10.00 lakhs and upto Rs.25.00 lakhs rate

of margin money will be 25% of Rs.10 lakhs plus 10% of theremaining cost of the project

• Margin money grant will be at the rate of 30 % of the project

cost up to Rs 10.00 lakhs and above this amount up to Rs.25

Lakhs, it will be 10% of the remaining cost of the project

• Only one person from one family is eligible for obtaining

finance under the REGP

• All viable village industry products i.e. an industry located in

rural area which produces any goods or renders any service


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with or without the use of power involving per capita fixed

capital investment not exceeding Rs.50000/-. Areas outside the

municipal limits with population not exceeding 20000 are

deemed to be rural areas.• Maximum amount of Margin Money admissible would be

Rs.2.50 lacs for General Category entrepreneurs and Rs. 3.00

lacs for weaker section entrepreneurs irrespective of the cost of

the project.

• For General Category the borrower’s contribution has to be

10% and for SC/ST & other weaker sections the borrower’s

contribution has to be 5% of the project cost. For generalcategory borrowers the quantum of loan is 90% and for SC/ST

& other weaker sections the quantum is 95% of the project

cost.

Women Entrepreneurs


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• Banks in India is keen on supporting women from allthe sectors of the Society by way of schemes to give

assistance to Rural Women in Non-farm Development

(ARWIND) and Development of Women and Children in Rural Areas (DWCRA).

• These schemes include small scale industrial

undertakings, artisans, village & cottage industries,small road transport operators, small businesses,

professionals and self employed, retail traders,

agriculture & allied activities Swarnajayanti GramSwarojgar Yojana (SGSY) and Self Help Groups

(SHGs)

Secured and Unsecured Advances


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• Secured advances are those advances, which provide absolute safety to the banker by

means of

a charge

created

on

the

tangible

assets of the borrower in favour of the banker.

• In such cases, the banker gets certain rights in the tangible assets over which a charge is created.

•

Unsecured advances

are

those

advances

made

on the personal security of the borrower.

Modes of creating a Charge


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• Lien: Section 117

of

Indian

Contract

Act,

the

banker is empowered to retain all securities of the customer, in respect of the general balance

due from

him.

• The ownership of such securities is not transferred from the customer to the banker.

• The banker

gets

the

right

to

retain

the

securities

handed over to him in his capacity as a banker.

• A banker’s lien is considered tantamount to an implied

pledge

&

he

gets

the

right

to

sell

the

securities in certain circumstances.

• Pledge: Sec. 172 IC Act, it is a bailment of


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goods as

security

for

payment

of

a debt

or

performance of a promise. Thus, in case of pledge‐

i. there should be bailment of goods

ii. The objective of such bailment should be to

hold the

goods

as

security

for

the

payment

of a debt or the performance of a promise.

iii. On the pawner’s repaying the debt or

performing his

promise

the

goods

must

be

returned to him.


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• Hypothecation: Under hypothecation neitherownership nor possession of goods is

transferred to the creditor but an equitable

charge is created in favour of the creditor. The

goods remain in the possession of the

borrower, who binds himself, under anagreement, to give the possession of the

goods to the banker, whenever the banker

requires him to do so.


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• Mortgage: Sec. 58 of Transfer of Property Act

• The transfer of an interest in specific

immovable property for the purpose of

securing the payment of money, advanced or

to be advanced by way of loan, an existing or

future debt, or the performance of an

engagement which may give rise to a

pecuniary liability.

ADVANCES AGAINST GOODS:

1 B i G d d di i ibl


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1. Better security‐

Goods and commodities are tangibleassets and provide better security to the banker ascompared to the unsecured advances, includingguaranteed advances and discounting of bills.

2. Prices of necessary goods are stable‐ The prices of the

goods which are necessaries of life are relativelystable over a short period, though not necessarily

over a long period. But wide variations in the prices of luxury goods take place due to changes in demand,fashions and tastes of the people. Bankers aregenerally reluctant to accept the commodities the

prices of which are uncertain and fluctuate too widelyand frequently.

3. Goods and commodities can be liquidated moreil S diti lik h t d


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easily. Some commodities like wheat, sugar andcotton enjoy ready market while the demand formanufactured articles of seasonal utility or of

durable consumer goods is not constantthroughout the year. The banker is naturallyinclined to accept the commodities havingregular and steady demand and wide market.

4. Bankers Lend Shorter duration of advancesagainst goods‐ Because the goods andcommodities decay or deteriorate in quality over

a period of time, bankers lend against them forshorter periods only.

•

ADVANCES AGAINST DOCUMENTS OF TITLE TO


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ADVANCES AGAINST DOCUMENTS OF TITLE TOGOODS: A document of title to goods representsactual goods in the possession of somebody else. Itconfers on the purchaser the right to receive the

goods and to transfer such right to any other personby mere delivery or by endorsement and delivery.

• A document of title to goods is a document used in

the ordinary course of business as a proof of thepossession or control of goods. Bill of Lading, DockWarrants, Warehouse‐keeper’s or wharfinger’s

certificate, railway receipts and delivery orders arethe instances of the documents of title to goods.

Bill f l di‐

A bill f l di i d t


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Bill of lading A bill of lading is a documentissued by a shipping company acknowledging thereceipt of goods for carrying to a specified port.

• It also contains the conditions for suchtransportation of goods and full description of the goods, i.e., their markings and contents asdeclared by the consignor.

• It is to be noted that a Bill of Lading is prima facie

evidence of the fact that the packages, asspecified therein, were put on board the ship butthe shipping company is not responsible for thecontents of the bags or the bales entrusted to itfor transportation.

Warehouse receipts‐


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• An important objective of promoting

warehousing in the country has been a enable

the owners of commodities‐

agriculturists andtraders‐to acquire a convenient security in the

form of warehouse receipt, which can be

accepted as security by the banks.• To popularise the warehouse receipts as security

for loans from banks, the Reserve Bank granted

some concessions in respect of such advances inits selective credit control directives in the past.

Railway receipt‐


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Railway receipt• Railway receipt is a document acknowledging the

receipt of goods specified therein for

transportation to a place mentioned therein.• It is transferable but not a negotiable instrument.

• It can be transferred by endorsement and

delivery.• As the receipt is to be produced before the

railway authorities to clear the goods at the

destination, advances sought against such receiptare for very short periods.

Trust receipts‐•

The goods or the documents of title to goods pledged


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The goods or the documents of title to goods pledgedwith a banker as security for an advance are usuallyreleased by the banker on the repayment of theborrowed amount. Sometimes the borrower wishes to

get the security released before he actually repays theloan. In such cases, the banker may, at his discretion,allow the customer to get back the goods ordocuments and ask the latter to execute a Trust

Receipt.• By signing such receipt, the customer undertakes to

receive the goods or the documents of title to goods intrust for the lender. The borrower promises to hold the

goods or their sale proceeds as trustee for the bankerand to pay the same to the latter as and whenreceived.

ADVANCES AGAINST STOCK EXCHANGE

SECURITIES


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SECURITIESFeatures

• Security‐ Though the stock exchange securitiesare paper documents, they are treated astangible assets because of their easymarketability.

• Liquidity‐ The stock exchanges provide a readymarket for these securities. They can be

disposed of more quickly and conveniently ascompared to any other security.

• Accrual of income The securities yield income


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Accrual of

income

‐ The

securities

yield

income

by way of interest and dividend. The income

received by the banker on such securities is

adjusted towards

the

dues

to

be

recovered

from the customer and to that extent the

latter’s liability towards the banker is reduced.

• Convenience‐ It is convenient for the banker

to accept stock exchange securities because

he can

easily

examine

the

title

of

the

holder.

Government Securities:

• Government securities are the safest and easily


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Government securities are the safest and easilyrealizable securities for bank advances. Government

securities may be issued as (i) inscribed stock, or (ii)

promissory notes. Government promissory notescontain a promise on behalf of the President of India,

in case of Central Government Securities, or the

Governor of the State concerned, in case of StateGovernment Securities, to pay the specified sum of

money to the holder of the Note (i.e., either the

payee or the last endorsee whose name appears onthe back) on a specified date or after a certain

notice, subject to the terms and conditions of issue.

National

saving

certificates


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National saving certificates• The Central Bank has permitted the banks in

India to grant advances against National

Saving Certificates.• Banks are directed to prescribe a margin of

25% on the original investment in these

certificates, without taking into accountaccrued interest.

• Thus, advance may be granted to the extent of

75% of the value of such certificates.

Kisan Vikas Patras• The Reserve Bank of India has permitted the


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• The Reserve Bank of India has permitted theCommercial banks to grant loans against thesecurity of ‘Kisan Vikas Patras’.

• Banks should take account the purpose of theloan and should follow the RBI’s direction oninterest rates.

•

The maturity period of such Patras is five and half years. A certificate can be prematurely encashed(i) on the death of the holder or any of theholders in case of joint holders, (ii) on forfeiture

by a pledgee, being a gazetted Governmentofficer or (iii) when ordered by a court of law.

Indira Vikas Patras

• Advances against these patras can be granted


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Advances against

these

patras can

be

granted

after considering the purpose. Premature encashment of these patras is not allowed.

•

Hence margin

may

be

determined

by

the

banks

depending upon the residual period for which the certificate is to run.

• The patras can be pledged in favour of the banks.

• No lien can be registered as the certificates are issued without registering the name of the purchaser.

• Banks should

take

utmost

care

for

their

safe

custody, as they are freely transferable.

Corporate

securities:


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Corporate securities:• Preference shares & Debentures

• Precautions to be taken by the banker

1) Selection of shares

2) Valuation of securities

3) Creation of

charge

over

securities

• Reserve bank’s guidelines regarding advances

against

shares ‐

sections

19(2)

and

(3)

and

20(1) (a) of the Banking Regulation Act, 1949

ADVANCES AGAINST LIFE INSURANCE POLICIES

• The policy can legally be assigned to the banker‐


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p y g y g‐

According to the terms and privileges of the LifeInsurance Policy, it can be assigned to anybodyincluding a banker and such assignment is duly

registered by the life insurance companies.• As the Life Insurance policy is handed over to the

banker after its assignment is registered in the books of the L.I.C. the banker need not worry about thesupervision of the security.

• It is an easily realizable asset. Its value can be easilyrealized by the banker on the death of the customer.

The formalities required to be undertaken by thebanker are few and not difficult.

ADVANCES AGAINST FIXED DEPOSIT RECEIPTS

• A fixed deposit receipt issued by the same bank is


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• A fixed deposit receipt issued by the same bank is the safest security for granting an advance, because the receipt represents a debt due from

the banker

himself.

• Recently the reserve bank has, therefore, advised the banks that advances against the security of

their own

deposits

may

be

excluded

from

the

purview of “exposure ceiling.”

• A banker should not grant an advance on the security of a fixed deposit receipt issued by another

bank

because

the

latter

possesses

its

paramount lien over the receipt.

ADVANCES AGAINST BOOK DEBTS


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• Section 130 of the Transfer of Property Act. 1882, permits the assignment of an actionable claim to

anyone except

to

a judge,

a legal

practitioner

or

an officer of a Court of Justice.

• According to Section 3, “actionable claim” means a claim to any debt or any beneficial interest in movable

property

not

in

the

possession

of

the

claimant which the civil courts recognize as affording grounds for relief, whether such debt or

beneficial interest

be

existent,

accruing,

conditional or contingent.

ADVANCES AGAINST GOLD ORNAMENTS AND

JEWELLERY


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• The Reserve Bank has permitted banks to

accept gold ornaments for enabling the

borrowers to meet their urgent medical expenses and other unforeseen liabilities.

• RBI guidelines

to

be

followed

from

time

to

time.

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