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EDUCATIONAL LOAN

Borrower’s Information

The case under study is related to Education Loan of Mr. Neal Rajput who was
pursuing Bachelor of Business Administration (BBA) from abhinav college in 2003.
Both, the borrower and his father had a joint account and were banking with GP since
the year 1998. The prospect had already completed the first year of his studies and
required financial assistance for completion of second and third year of the course. The
father of the prospect, Mr. Dharani Rajput also the guarantor in this case had total assets
sufficient enough to cover the loan amount.

Details/ Requisites of the proposal

The total pecuniary support needed to continue the course was Rs.52,000. However, the
bank after a thorough financial analysis of the proposal concluded that it could finance
just a part of it which amounted to Rs. 38,000. The same amount was sanctioned after
the completion of all the legal formalities pertaining to the loan and documentation of
the same.

The father signed as a guarantor. The particulars of total net worth of his assets are as
follows:

 The house property owned by guarantor was valued at Rs.600,000.

 The face value of shares held by him amounted to Rs. 8500 where as the market
value of the same as on the date of valuation was Rs. 34,900 approximately.

 The endowment policy, Life insurance Policy (worth Rs.6 lacs) proposed to mature
in the year 2029.

As per the guidelines laid down by RBI, bank cannot keep any security for any
education loans sanctioned to an extent of Rs 400,000 while in cases where the advance
exceeds this amount, guarantee of a third party and collateral are mandatory.
Bank Finance and Repayment Schedule

After a thorough analysis of the proposal, the bank decided to extend assistance up to
Rs. 38,000 at an interest rate of 11.5%. Thirty six equated monthly installments of Rs.
1253 were to be made.

Endowment policy of the guarantor was in custody of the bank as an assurance, creating
an obligation on the borrower to make prompt payment as per the agreement.

Further the agreement stated that the repayment of the amount mentioned above, would
start either immediately after the joining of the job by the student in any organization or
after a period of six months of completion of the course, whichever is earlier. In the
mean time the guarantor was supposed to make the interest payment monthly.

Default and Reasons

Irregular interest payment during the course of study led to accumulation of the
amount. Even after the immediate placement of the student subsequent to completion of
his course, the borrower did not start the repayment of the sanctioned amount. Despite
of innumerable notices sent by the bank no prompt payment was received, either from
the borrower or the guarantor.

Later on personal visit by the officials, Mr. Dharani Rajput informed bank about the
root cause of such a default. His son, Mr. Neal Rajput had eloped with his girl friend
and married her without the consent of his parents. The parents did not have any info
about his whereabouts. The guarantor was suffering from a cardio disease and had gone
through a major by pass surgery. Due to this he had also left his job and was under
complete bed rest. So, even he was not capable of repaying the total sum of money due.

Follow up by the bank

The bank incessantly tried communicating the borrower from the date the repayment
was due. Despite of continuous official notices, the bank could not solicit any response
from the other end. On personal visit to the guarantor, the bank got a clear view of the
reason of default.
Bank also made an attempt to contact the borrower in person. It communicated the
organization where he was initially inducted. The authorities came to know that he had
already left the organization two months ago. The account was finally slipped to NPA.

The mother of the borrower assured that they would be in a position to repay the
outstanding amount from December, once she started some household business
(knitting and weaving).

Since the outstanding amount is nominal and the guarantor‟s financial position is
unsound, so the bank on humanitarian grounds did not take any legal action against the
guarantor.

Future Course of Action

After repeated reminders by the bank to the guarantor, the account was classified as
NPA as per the recommendation of the Regional Office (RO). According to the
guidelines of the RBI, bank will not charge further interest on the payment due.
The account may be treated in the following way:

 Account may remain as NPA and written off in due course of time depending on
the discretion of the RO.

 Other alternative left with the bank is to wait for the endowment policy of the
guarantor that is proposed to mature in 2029 and then adjust the account
accordingly thereby remitting the balance left to his account.

 Bank may even try contacting the borrower through his own sources and if found,
try to recoup the amount through legal procedure.

CONCLUSION AND RECOMMENDATION AS PER THE


ANALYSIS

Though the borrower was customer of the bank, the interest payments were not regular.
The bank should have sent a written notice instead of verbal reminders. Further, the
reimbursement of the loan should have been stopped on account of breach of such an
agreement on the part of the borrower.
On the other hand, bank may have collaborated with the college authority to know
about the performance of the student in his college. Immediately after receiving the
information about his placement form the college, bank should have communicated to
his employer and suggested the borrower to opt for auto debit. This facility provided by
the bank enables the automatic transfer of the loan installment from his salary account
to the loan account on a monthly basis.

As far as the current situation is concerned, bank has taken a more humanistic
approach.

MISCELLANEOUS CASH CREDIT

PRATIBHA CONSTRUCTIONS

Borrower’s Information

Mr Debojeet Roy initially owned a utility store. He was banking with gp since the
inception of new bhayandar branch. The customer ventured into construction business
in 2003. He became a proprietor of a new business enterprise named Pratibha
Constructions.

Mr. Debojeet Roy, being the owner of one third of a property valued at Rs. 203.73 lakhs
came up with the proposal of constructing a commercial cum residential apartment.

DETAILS OF THE PROPOSAL

The proprietor required financial assistance of Rs 32 lacs to develop the property


owned by him. After due consideration bank sanctioned a cash credit of Rs 15,00,000 at
an interest rate of 15% for the building and construction purpose in September, 2003.

The land that was proposed to be developed was mortgaged as security with the bank.
Details of the property were furnished by the owner. The loan request was sanctioned,
keeping 80% as margin and the proprietor started with his construction work.
Later in April 2004, client requested for a further sanction of two term loans, one of Rs.
250,000 and the other of Rs 500,000. The two term loans were required for lift
construction and for flooring, sanitary and sewage pipes respectively. He also
requested for enhancement of cash credit limit from Rs. 15,00,000 to Rs 30,00,000 for
carrying on the remaining construction work. The client promised to pay back the term
loan by September, 2004 and the cash credit limit availed by December, 2004. The
payment was supposed to be made out of the sale proceeds of the flats that were being
constructed.

PROPOSED PROJECT/ PROJECT PROFILE: Mr. Debojeet Roy

Number of Residential Flats 10


Number of Business Shops 8
Number of Garage 4
Total Investment Rs. 61,50,000
Already Invested Rs. 29,40,000
Loan Required Rs. 32,10,000

BANK FINANCE AND REPAYMENT SCHEDULE

After an in depth analysis bank decided to grant him a cash credit limit of Rs 15 lacs in
October 2003. Land and property of the borrower was charged as security. The
property was valued at Rs 203.73 lacs where 80% was kept as margin.

In April 2004, as per the request of the client bank sanctioned the following:

 Enhancement of credit limit from Rs. 1500,000 to Rs. 2500,000

 Approval of a term loan of Rs. 250,000 for construction of lift (costing Rs.
390,000) Another term loan of Rs 500,000 for flooring, sewage, sanitary etc (
costing Rs 15 lacs).

All loans and limits were sanctioned at an interest rate of BPLR + 3.5%. The
repayment schedule of the term loans as follows:

 Twelve EMIs of Rs 20834 against the term loan of Rs 2.5 lacs.


 Twelve EMIs of Rs 41667 against the term loan of Rs 5 lacs.
 Miscellaneous cash credit limits to be adjusted in full latest within 12 months.

 The entire property of the client was mortgaged with the bank as security.

DEFAULT

Where the term loans should have been repaid in full, the bank in May 2005 observed
that the account had turned irregular. The total amount outstanding as on May 2005 was
as follows:

Rs 2313533 against cash credit account including the interest.


Rs 132665 against term loan of Rs 2.5 lacs.
Rs 219137 against term loan of Rs 5 lacs.

FOLLOW UP BY BANK

As soon as the account was classified as irregular, bank sent a notice to the borrower
stating that the period of repayment has lapsed and the conditions stipulated by regional
office had not been met. No response was received from the borrower either for further
extension of credit limit or request for renewal of the same.

Request from borrower for extension of repayment period was received in July 2005
along with the reason of non compliance with the terms. He agreed to repay the entire
amount with interest by December 2005. The same was forwarded by the branch to
regional office with the recommendation to exceed the time frame to march 2006 by
which he shall be able to clear the entire amount and renew the limit. The request was
considered and sanctioned by the Regional office.

Despite of extension of repayment period, the borrower was still not able to regularize
his account till March 2006. Since May 2006, the account was always on the verge of
slipping into NPA but each time borrower either credited a part of the amount due or
renewed the account by submission of relevant financial documents. The following
steps were taken by the client to save his account from being NPA:
 A payment of Rs 6 lacs was made in September
2006 Renewal of account in March 2007
 A sum of Rs 4 lacs paid in November
2007 A part payment of Rs 3 lacs in
March 2008

 The last amount credited to the loan account in October 2008 was Rs 7 lacs.

After October 2008, the borrower neither made any payment to adjust his account nor
renewed it. The bank tried to contact the borrower through notices and in person but
failed to solicit any response. So in March 2009 the account was finally categorized as
substandard asset.

COURSE OF ACTION

The bank issued the securitization and reconstruction of financial assets and
enforcement of security interest (SARFAESI) notice. As per the guidelines of
SARFAESI, the borrower is given 60 days to clear the amount due else the bank would
have all the legal rights to liquidate the security to realize the unpaid amount. The
borrower contacted the bank after receiving the notice and promised to repay the
amount in full before the lapse of the period, through the sale proceeds of the flats that
were unsold.

SOME PROBLEMS OBSERVED DURING PRE & POST


SANCTION OF ADVANCES

Certain issues relating to prior and post advances are identified. These issues may be
addressed to ease the sanction procedure of loans and facilitate the consumers to
comply with the legal formalities. The problems are discussed as under:

Problems associated with pre sanction of loans:

 The overall procedure is a lengthy one thereby taking long duration in final
sanction. This not only a time consuming process but also lacks single window
service.
 This involves too much of paper work, making the process tedious.

 A number of verifications are required that discourages the borrower to avail the
credit facility offered by the bank.
 The terns of agreement might sound ambiguous to the borrower leading to further
misconception regarding the conditions stated in the loan agreement.

 There is a fixed limit on the amount of loans that can be sanctioned by the branch.
For limits exceeding such an amount, the approval of Regional Office needs to be
taken. This again consumes a lot of time.

 There are a number of instances where there remain certain discrepancies


regarding the terms and conditions of loans between bank branch and regional
office.

Problems associated with post sanction of loans:

 Despite of regular monitoring of the accounts, certain accounts result


in NPA. Recovery of NPA is a major cause of concern.