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SBI

MM Special Guide

For MM II Confirmation (Screening Test for POs / TOs / JMGs) /

MM III & Gr (A & B) / MM II - Ass. Banks.

G. Subraroanian

Jan 2017

J. S. INSTITUTE OF BANKING AND FINANCE PVT. LTD. BANGALORE

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© G. Subramanian JAN' 17 16th Edition (Revised and Updated)

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Published by :

J. S. Institute of Banking and Finance Pvt. Ltd. P. B. No. 4126 No-19, 3rd Floor, Sneha Centre, Opp BHS College, 12th Main, 30th Cross, Jayanagar, 4th Block, Bangalore - 560011. Phone : 080-41307114.

Emails:

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Printed at:

Raja Printers

Bangalore-560 027,

Ph.: 22234066

CONTENTS Pages   From PART -1 Rationale 1-1 PART - 2 Banking Problems 2-1 PART

CONTENTS

Pages

 

From

PART -1

Rationale

1-1

PART - 2

Banking Problems

2-1

PART - 3

Situational Analysis

3-1

PART - 4

Communication

4-1

PART - 5

Comprehension

5-1

PART - 6

Data Interpretation

6-1

PART - 7

For and Against Statements

7-1

PART - 8

Concept Briefs

8-1

PART - 9

Model Tests on Banking, Finance & Economy Areas (Jan 16 to Dec'16)

 

9-1

PART -10

Psychometric Tests

10-1

PART -11

Very Latest Developments

11-1

 

To

1-91

 

2-71

3-31

4-38

5-78

 

6-8

7-30

 

8-149

9-19

 

10-2

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11-3

  2-71 3-31 4-38 5-78   6-8 7-30   8-149 9-19   10-2 , 11-3
Foreword to the 16th Edition We are happy to publish the 16th edition of the

Foreword to the 16th Edition

We are happy to publish the 16th edition of the MM Special Guide

There has been a overwhelming response to the first 15 editions of the book. The book has been redesigned to suit the revised exam pattern for MMII Confirmation Test for POs/ TOs/JMGs and MM H and MM III exams of SBI. The book is also essential for Gr A/B and

MM II exams of Associate Banks and Gr A/B of Ass. Banks.

Under Concept Briefs, various topics of importance such as Sovereign Gold Bond Scheme, Small Payment Banks, Inflation Indexed Bonds, Virtual Currency, Rupay Card, Basel-III, FATCA, Framework for Revitalizing Distressed Assets, GST, etc., have been included.

Questions on Situational Analysis and Data Interpretation will be asked in MMIII exam, MM

II Confirmation exam and Gr A/B and Gr A & B and MMII exams of Associates Banks.

Needless to add, the Institute's Banking Guide is an essential reading primer for the exams.

This book is to be read as a supplement to the Banking Guide.

English Language Comprehension exercises have been devised to meet the requirements of

MM

II exams and MMII Confirmation exam for POs / TOs / JMGs of SBI & Ass. Banks as

also

MMII exam of SBI. Communication exercises have also been included.

A brief note on psychometric tests has been given in a separate section.

Also, model tests based on developments in banking and finance (Jan'16 to Dec'16) are included.

I trust and hope that my endeavour to make the book meet the requirements of the new pattern of exams would really help the aspirants.

I thank Mr. C. Paramasivan, Dean of the Institute, and Shri S. Gnanavinayagam for their

valuable contribution in the preparation of the book. I also thank Mr.K.Prabhu for the DTP support.

Wishing the readers success in the exam and progress in their career

Bangalore

Jan' 2017

G.

for the DTP support. Wishing the readers success in the exam and progress in their career

RATIONALE

A NEW SBI AND BPR

A NEW SBI AND BPR

I.

Profitability planning is more important than business planning.

R.

The profitability of operations has been dwindling gradually. In the changed environment in the country, the public/International Banks attach prime importance to profits. Hence the profitability of operations has to be carefully planned for and achieved. International banks/institutions will not place

business with our bank, accept our guarantees/LCs etc unless the profitability is high.

2.

The Bank's objective is "profit with growth".

R.

Mere groivth in business does not lead to growth in profit. The new motto will act as a lode-star for the managers to increase profitability by getting suitable deposit-advances mix, non-fund based business, fee based services etc. This acts as a right signal to the staff that in the present competitive, almost de-regulated environment, "Profit" should be the chief objective combined with growth.

3.

Importance is given for greater transparency in the operations of banks by RBI.

R.

a) This will put in place safe and sound banking practices and ensure against imprudent risk-taking by banks.

b)

To provide stability to the financial system by ensuring a systematic transparency of the

 

operations of banks. It helps the investors and depositors in taking appropriate investment decisions. Also, it enables the banks to take timely and corrective steps as and when required.

4.

Importance is given to the submission of 'P' Reports by branches.

R.

'P' form which shows both the budgeted and actual business levels, income, expenses and profit will enable the branch as well as the controlling authorities to ascertain whether the predetermined objectives in regard to profits, business etc are being achieved. It will also help the branch as well as controllers to initiate appropriate corrective steps in the event of negative variance.

5.

The comments on P Report are written by the AGM (Region).

R.

To provide ready and immediate comments/suggestions on the performance of the branch: this enables the BM to take prompt corrective action. The entire process will be fast so that quick action can be taken to tap business. Also, the BM will be happy that his performance has personally been seen

by his Controller.

6.

The branch has to budget for both "Operating result" and "Net result"

R.

Operating result is the actual profit earned by the branch through various business operations, whereas the net result is arrived at after adjustment of central office interest payable/receivable on advances/ deposits of the branch. Ideally the branch should make both operating profit and net profit. Hence,

 

both should be budgeted. TDRs / Term Loans are reported in P report Maturity-wise and Interest rate wise This will help the Bank ascertain the extent of mismatches and plan ahead through better Asset Liability Management for achieving the desired liquidity and profitability. Importance is given to Relationship Banking. We can have close rapport and understanding with the high value customers; this will enable us to anticipate their needs in advance and meet them satisfactorily. To meet competition effectively. RMs can c ross-sell and up-sell products and improve business and profitability. Operational Risk has been given importance by banks. As per Basel-II guidelines. Due to significant growth and complexity in the banking transactions 'there is increase in operational risk' eg: inadequate/failed intemal processes, people, systems, external event etc. To strengthen the soundness and stability of banking system. It is an important component of risk management system.

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MM Special Guide 10. The Bank has set up Asset Liability Management system. R. The

MM Special Guide

MM Special Guide 10. The Bank has set up Asset Liability Management system. R. The bank

10.

The Bank has set up Asset Liability Management system.

R.

The bank faces many risks in its operations such as mismatch of assets and liabilities, interest rate risk, transaction risk etc. Under the de-regulated environment there is an imperative need to manage these risks in an integrated manner at the corporate level and improve profitability.

11.

The Bank has entered credit card business. ( SBI through a subsidiry)

R.

Credit Card business offers considerable untapped potential which can be fully exploited with the help of the existing retail outlets. It will enhance customer satisfaction and coverage. It is highly profitable. To meet competition and provide essential services to high income earners.

12.

SBI is promoting SBI card in a big way.

R.

a) Credit Card business has considerable unexploited potential. Card spending is expected to grow substantially in the coming years.

b) With 22,000+ retail outlets in the State Bank Group to sell this product we are in an advantageous position vis-à-vis our competitors.

c) The card market will provide an exciting opportunity to our Bank to improve the bottom line.

13.

The bank has entered insurance sector.

R.

It is a profitable business in the long run. The Bank can leverage its brand equity and vast customer base to sell life and general insurance products. The skills/expertise of staff can be developed to cross- sell banking, insurance and other financial products. The customers' various needs can be satisfied.

14.

Banks have entered Insurance business as a joint venture with foreign insurance companies.

R.

i)

It is a profitable business diversification.

ii)

The wide net-work of their branches and their large clientele will place them in an advantageous position in marketing this product vis-à-vis their competitors.

iii)

Participation of foreign companies would provide not only equity but also latest technology coupled

 

with products designed to meet global standards.

15.

Cheque Drop Box facility has been introduced at branches.

R.

This facility is part of the BPR initiatives of the Bank. The customer can put the instruments to be credited to his account in the Drop Box even after the business hours; they will be processed without any loss of time. Also recommendation of the Committee on Procedures and Performance Audit on Public Services headed by SS Tarapore, former Dy Govemor, RBI.

16.

Credit Audit has been introduced.

R.

a) To introduce quality in the area of credit appraisal systems in the commercial credit portfolio and to ensure a favourable impact on profitability and NPA management.

b) To ensure a feed back mechanism in regard to compliances with RBI directives and Bank's loan policies.

c) To ensure that the health of the credit portfolio is good.

17.

Credit Committees have been set up on the recommendations of McKinsey & Co.

R.

Committee method of decision-making will be more objective; joint decision making will reduce the `pressure' on the individual executive; each can bring his experience/judgement to the process. The Local Board is relieved of this functional role so that it can concentrate on general superintendence over guidance of the circle executive management.

18.

The Bank has adopted a new Ambience Policy.

R.

A good Ambience (character and atmosphere of a place) attracts customers, generates enthusiasm, radiates energy, improves efficiency and enhances the professional image. The Ambience Policy of the Bank is aimed at having a system in place for excellent maintenance of premises and furniture with an uniformity of approach to issues related to ambience and thereby create awareness in this regard.

19.

Importance is given for Non fund based business.

R.

a) There is no outlay of funds except in cases where the customer fails to meet the commitment; also only a small percentage of such commitments may crystallise into liabilities over a period of time.

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Rationale

b) The income earned by banks from such businesses is sizeable resulting in increased profitability. The servicing costs are low.

c) On account of disintermediation, the rate of growth of fund-based business would be less com-

pared to the growth in the past.

20.

CAG branches have been set up.

R

CAG branches have been set up as an SBU for servicing very large corporates in the country through offering sophisticated services like Relationship Banking, Cash management Product, Remote Login facilities etc.,

21.

SBI attaches great importance to business from Mid-Corporates or MC Regions have been set up in the Bank.

R.

Mid corporates are large in number and about 25% of them only are banking with SBI. Thus mid-corporates offer immense potential to increase our market share taking advantage of our wide network of branches and skilled staff. With the setting up of separate Mid-Corporate structure the Turn Around Time for credit delivery is expected to improve and result in increase in our business, income and market share in this segment.

22.

The Bank has adopted Planning and Budgeting System.

R.

Planning and Budgeting system aims at scanning the environment and planning for a challenging growth in business taking into account the historical perspective and potential for business. It is the key to growth and enables focussed action for the improvement in business and profits.

23.

BPR has been introduced in the Bank

R.

There have been fundamental changes in competition, technology and customer expectations. Also there have been many changes in the delivery systems of products and services of the Bank. But the business processes (i.e., the tasks, procedures, documentation etc) have remained the same. BPR is the fundamental re-thinking and radical redesign of business processes to bring about dramatic improvement in performance.

24.

The Bank has set up Central Processing Centres (CPC)

R.

CPCs are proposed to do the processing work for the branches. The branches are front office for the various businesses; CPCs will do the back office work. Different CPCs will carry out back office work for different types of business/transactions/activities eg: deposit business, clearing/collection business, loan processing, govt pension payment, cash management and cash supply to branches, Govt business, documentation and stationery etc. This enables the branch to focus on sales, marketing and customer service.

25.

Branches have been redesigned post BPR.

R.

Branches have been relieved of credit appraisal and processing work. Processes have been set up to migrate large proportion of cash withdrawals to ATM, encourage use of cheque drop box for cheque deposits and to increase the usage of alternate channels of delivery by customers. The endeavour of the branch would be customer acquisition and customer retention through customer delight.

26.

The post of Grahak Mitra (GM) - also called Meeter-Greeter has been created.

R.

To project a positive image of the Bank, to help the walk-in customers to get personal attention, ensure response for their basic enquiries, facilitate migration to alternate channels and increased focus in cross selling.

27.

Retail Asset Central Processing Centres (RACPC) have been set up.

R.

RACPC will be responsible for appraisal of the loan , obtention of search/ valuation report centrally, sanctioning of 'P' segment loans (Home, Education and Car loans) and generation/obtention of docu- ments. Consequent upon establishment of RACPC, the activities at the branch will be focussed more on sourcing loan applications and ensuring compliance with KYC norms. SBI is installing Cash Deposit Machines (CDM). Ms will accept cash 24x7 and also check for quality and quantity of the notes deposited. The bank

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MM Special Guide

MM Special Guide also will be crowded with people visiting the branch for depositing small amounts.

also will be crowded with people visiting the branch for depositing small amounts. Installation of CDMs will reduce the footfalls in the branch thereby saving on the precious space and staff time involved in acceptance of such deposits. The quality of service to High Value/HNI/Affiunt customers can be enhanced. It will also attract SME customers because of the ease of depositing cash at a time of choice by customers.

29.

It is proposed to have a super regulator for the financial sector.

R.

There are many institutions who have their presence in many financial sectors-banking, Term Lending, Insurance, Capital Market etc. Different regulators are overseeing their respective areas and coordination and integration may not be efficient and focussed. It may result in regulatory arbitrage. Convergence in the financial sector would require a super — regulator having a tab on all the spheres of financial activities.

30.

Crisil has launched bank loan ratings for the first time.

R.

It could strengthen the banks' confidence in their borrowers. The ratings will provide uniform bench- marks for credit and pricing decisions in the bank loan market. They will also serve as an independent opinion on loan specific risk to the lending bank and can be used by banks for risk pricing, capital allocation and portfolio management. To meet Basel II requirements.

31.

The Bank has introduced revised In-branch cash handling process.

R.

There will be no delay in starting cash transactions at the beginning of the day. The process will reduce the time spent by CO/CIC/SWO/Asst (Cash) in handing over and receiving cash at the beginning / close of the day. Aimed to enhance customer service. It is one of the BPR initiatives.

32.

Activity budgets will have to be drawn up in addition to business budgets for each Business Group.

R.

Activity budget will spell out efforts/activities which will help in achieving the business budget. Suitable system of measurements of the efforts will have to be installed. The entire process will enable us to get a valuable insight and help in strategy building. It will also help in identifying personnel who put in best efforts even if budgets are not achieved due to external developments.

33.

The bank should focus on Net Interest Margin.

R.

The Business volume/mix will change from year to year but the efficiency of operations will be judged by the Net Interest Margin. Our efforts should be to optimize yield on advances and minimize cost of deposits for getting maximum margin. Presently, the economy is experiencing a downswing. When interest rates get softened there would be pressure on the margins.

34.

HR processes have been automated in the Bank.

R.

Automation will bring about efficiency, transparency and convenience in all the operations. Also, it will bring about uniformity in HR implementation. All HR processes like salary, pension, travel / medical reimbursements etc. take place on online real time basis.

35.

The Bank has developed a systems policy.

R.

'Systems' in the Bank is an important tool to do business in a customer friendly, secured and cost effective manner. It should impart the necessary sense of purpose and direction to translate vision and mission of the Bank into reality.

36.

The Bank has introduced many incentive/award schemes for staff.

R.

The Bank's Chairman has been giving utmost importance in building up the sense of belongingness and involvement of staff. Under the present policy, performers and staff who contribute to business are granted significant monetary and other incentives. Also, many awards and recognition schemes have been designed to introduce healthy competition among managers and others. Both individual and group incentives are given; also the branch and controllers are covered. This would result in im- proved performance and profits of the Bank. These have delivered good results in the last 2/3 years

and profits of the Bank. These have delivered good results in the last 2/3 years Iparlino

Iparlino to imnrnveri market char/.

1-4

Rationale

37.

Many banks publish quarterly operating results now-a-days.

R.

a)

As per the listing requirements of the stock exchange it is mandatory to publish the quarterly

results within one month from the end of the quarter. b) Shareholders, depositors etc are kept informed of the bank's performance so that the investors' interest in the bank's shares can be kept up.

38.

All major banks have adopted Core Banking Solutions.

R.

The customer will become the Bank-Customer from Branch-Customer. Highly cost-effective. The customer can access his a/c from any place / any time / any mode. Reconciliation will be automatic. Targeted marketing of customers can be done effectively . Has resulted in improved customer service and efficiency in transaction processing. Uniform adoption of CBS by banks has made Collections and Remittances between them very efficient, fast and cost-effective through electronic mode.

39.

Concurrent auditors are appointed at branches with large volume of business .

R.

As volume of work is heavy at large branches, mistakes, omissions etc, could be rectified then and there; it helps in accounting efficiency. Also, there is educative value for the staff.

40.

The deposits of bank should be invested and lent prudently.

R.

Bank lending is made out of the resources of deposits most of which are repayable on demand. Therefore a Bank is required to maintain liquidity at all times by prudent lending and investment practices. Also a bank is required to pay interest to depositors out of its interest earnings on advances which require to be safe and sound.

41.

Comprehensive banking service through mobile banking has been launched by the Bank.

R.

RBI had issued guidelines regarding Mobile Banking in Oct'08. SBI has introduced SBI Freedom-the mobile banking service of the Bank and has been improving its features regularly. SBI Freedom offers convenient, simple, secure, anytime and anywhere banking. Besides enabling the Bank to reduce cost of operations it also enables the Bank to concentate on business as the foot-fall of the customers is reduced.

42.

The Bank is not responsible for the transactions of the customers put through Internet Banking.

R.

The Bank has responsibility to safeguard the personal data of the customer by employing highest security features. However, it is the responsibility of the user to protect the user name and pass word and any attempt of attack to hijack the banking information by unscrupulous elements. Since all interne transactions are conducted through virtual banking (without direct involvement of bank staff) the responsibility for intemet transactions lies solely with the customers.

43.

SBI restructures its organizational structure periodically.

R.

Continuous changes are taking place in the economy due to reasons such as competition, changes in the needs and preferences of the customers, technology etc. These areas pose challenges to the Bank and warrant appropriate, effective and periodic restructuring to maintain its premier position.

44.

Small and Medium Enterprises Credit centre (SMEC) has been set up in all circles.

R.

It is set up as part of BPR initiatives. SMEC will report to DGM (B & 0) for control. The cell will process and sanction SME and Agri loan proposals received from identified branches. The identified branches would do the canvassing/marketing of these advances. The cell can acquire speed and efficiency in disposing of such cases due to specialisation.The Bank can acquire better risk perception of such advances at a centralized place in a region (originally named SMECCC).

45.

The bank has set up Swayam (self-kiosk) for printing of pass-books.

R

i) This will enable auto updation of pass books by the customers themselves with ease and without waiting at the counter for this purpose. It adds to good customer service and customer satisfaction. Bar Coding has made the process faster and simpler for customers.

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to good customer service and customer satisfaction. Bar Coding has made the process faster and simpler

MM Special Guide

ii) The staff who will be relieved of this work can be gainfully employed in development of business like cross-selling of various products to customers. 46. SBI has formulated Customer Rights Policy.

R It is based on the 'Charter of Customer Rights' framework of RBI.

Customer protection is an integral aspect of financial inclusion. [RBI's Charter of Customer Rights:

The Reserve Bank of India has released a Charter of Customer Rights, which enshrines broad, overarching principles for protection of bank customers and enunciates the 'five' basic rights of bank customers. These are: (i) Right to Fair Treatment; (ii) Right to Transparency; Fair and Honest Dealing; (iii) Right to Suitability; (iv) Right to Privacy;

and (v) Right to Grievance Redress and Compensation.]

Rationale

Rationale ADVANCES - GENERAL bank cannot sanction loan against its own shares. - e n d

ADVANCES - GENERAL

bank cannot sanction loan against its own shares. -ending against its own shares would amount to virtual reduction of the capital of the Bank. S 20 of 3R Act prohibits the same. 3anks do not grant advance against shares of a Private Limited Company. the shares of private limited companies are not listed in the Stock Exchange and hence cannot be :asily sold in the market; further, it will be very difficult to assess the value of such shares. Also, ransferability is restricted as the number of share-holders cannot exceed 200 (under companies Act

2013).

3.

Banks grant advances against shares of Public Limited Companies.

R.

There are no restrictions in regard to transferability. Further these shares are listed and quoted in the stock market. Hence, advance value can be easily determined. Sale of such shares will be easy. More over, banks lend against shares of only first class companies.

4.

Banks grant advance only against stock exchange quoted shares.

R.

In case the borrower defaults in repayment of the loan, the Bank would be able to easily sell the security and adjust the loan .The shares of private limited companies, partly paid shares, shares of companies which do not have steady trading are not quoted in the stock exchanges. Therefore, it is difficult to dispose of them in the stock market.

5.

Normally Banks do not advance against partly paid shares and private limited company shares.

R.

It is difficult to sell partly paid shares; also, the bank may have to pay the call money when called upon by the company in respect of such shares in case the borrower fails to pay the calls. Otherwise the shares will be forfeited by the company. The shares of private limited companies are not listed in the Stock Exchange and hence cannot be easily sold in the market; further, it will be very difficult to assess the value of such shares. Also, transferability is restricted as the number of share-holders cannot exceed 200. RBI has prohibited lending against partly paid shares.

6.

Before granting an advance against shares of a Company, a reference is made to the DGM (Compliance), Global Market Dept, Corporate Centre.

R.

Under S 19(2) of the Banking Regulation Act, the Bank cannot grant loans in excess of 30% of the paid up share capital of the company or 30% of its own paid up capital and reserves whichever is less. This department monitors advances (granted by all branches of the bank) against the shares of the company concemed to ensure that this stipulation is complied with.

7.

The ceiling for advances against dematerialised shares has been fixed at Rs. 20 lakhs.

R.

Risk in respect of physical shares is high (tampering, substitution etc); further, the noting of charge with the depository is a relatively simple process in respect of demat shares; further, no stamp duty is involved for transfer of shares. (Note: Now, practically all large companies have dematted their shares. Also, now branches do not have the power to grant loans against shares. OD against dematted shares is granted online keeping in mind the above aspects).

8.

No advance is granted against term Deposits of other Banks.

R.

The deposit is subject to the paramount lien of the issuing bank; also, it may refuse to register our lien. It will also act as a disincentive for public to have a deposit account with us. RBI has reiterated this instruction time and again in view of many frauds in this area.

9.

When overdrafts/demand loans are granted against TDR (issued in the security form) it should bear a stamped, undated discharge.

R.

This will enable the bank to prove against the legal representatives of the depositor that the depositor has given proper receipt for the amount and authority to the Bank to dispose of the proceeds. The loan

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MM Special G u i d e 10. R. 11. R. 12. R. 13. R.

MM Special Guide

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application letter together with the DPN/discharged TDR and the ledger account will constitute evi- dence of the loan. If it is dated, it may be contended that the bank had agreed to make premature payment. Also, RBI has advised that the discharge should be over a revenue stamp. It operates as an equitable assignment in favour of the bank.

A non-profit making association cannot be a partnership firm.

Sec 4 of Indian Partnership Act defines a partnership as the relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all. Profit is the essential purpose of a partnership.Hence a non-profit making association cannot be a partnership firm.

No advance is granted against Life Policies that are issued under Married Women's Property Act.

Such policies are taken for the benefit of the family and in such policies the policy-holder creates a Trust in favour of his wife and children; and hence he cannot encumber them for his benefit.

Insurable interest in an LIC policy is important.

In a contract of insurance, insurable interest must be present. Otherwise, the Insurance Company will repudiate its liability. This concept ensures that no life is insured for purposes of gambling, speculation etc. ( Note: Bank has insurable interest in the life of a debtor; employer in the life of employee)

Surrender Value is important in a Life policy

Surrender Value is the amount which the insurance company would pay in case the policy holder surrenders the policy to the insurance company before its maturity. This sum will be less than the aggregate value of the premiums paid. Hence the OD limit is linked to the surrender value.

Advances against LIC Policies are treated as unsecured advances.

It is not one of the specified securities under the SBI Regulations. If the policy holder has mis- represented his age, illness etc, LIC can avoid the policy. Hence, the Bank does not make advances against LIC Policy as a primary security.

While advancing against LIC policy, the signature of the nominee is not obtained.

The nominee does not acquire any right over the policy till the death of the policy holder. During the life-time of the policy holder, only he has the right over the policy. Further the nominee can be changed any time. Also, when a policy is assigned, the nomination is cancelled automatically.

Assignment of LIC Policy is done on the Policy itself.

If it is done on a separate paper, it will attract stamp duty. Moreover, it is convenient to obtain the assignment on the policy itself.

When a life insurance policy is reassigned after the advance has been repaid, the policyholder is advised to make a fresh nomination.

Under S 39 (4) of the Insurance Act the nomination would stand automatically cancelled if the policy is assigned to third party. But, cancellation of an assignment does not revive earlier nomination. Hence, as a measure of good customer service such a letter is sent.

Before granting an advance against LIC Policy the latest premium receipt should be obtained.

If the policy has lapsed for non-payment of the premium, the policy is of no use as security. LIC will not pay any moneys under a lapsed policy. This ensures that all premiums have been paid up to date and that the policy is in force.

Assignment of LIC policy is to be registered with LIC.

In terms of S 3 of Transfer of Property Act, an Assignment of an Actionable claim should be in writing and the notice of assignment should be given to the debtor. Only then the Assignment can be enforced against the debtor. The benefits under an LIC policy is an actionable claim and hence notice should be given to LIC for registration.

Overdraft against SBI Cap's Magnum is to be treated as a secured advance.

The General Regulations (R61) under the SBI Act specifically details the securities against which the

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Rationale

Bank can grant overdraft. The SBI Cap's Magnum has been included in the Regulations as a specified security.

Advances against Gold ornaments can be granted only to customers for whom KYC has been done and who have minimum capacity to service the interest.

KYC due diligence exercise is necessary as the bank should deal with only bona-fide/honest individu- als. Also, to obviate the risk of dealing with any unscrupulous person who may pledge stolen orna- ments / spurious ornaments. The advance value is fixed with adequate margin; hence capacity to pay interest is now taken as a criterion for the loan with a view to make the scheme more customer- friendly.

The advance value of gold is shown in the SBI Times by Precious Metals Dept. Coporate Centre.

The value of gold has become volatile. Hence, frequent changes in the advance value have to be made, and excess finance has to be recovered. The advice helps in prompt adjustment of clean drawings.

Also, it enables the branch to relate the advance value to the market value while sanctioning fresh advances. Instant posting of the advance value in SBI Times enables swift/uniform action by all branches of the Bank without loss of time.

Interest on demand loans and gold loans is applied at every calendar month-end irrespective of the date of granting the loan.

This has eliminated maintenance of daily list, carry over of entries and other associated tasks; it has minimised income leakage also.

Normally Banks do not grant advance to Trust accounts.

Trustees have to act as per the Trust deed and for the sole benefit of the beneficiary of the Trust. The Bank has to ensure that it does not even inadvertently become a party in the misapplication of funds. The Trust deed must provide for the borrowings. (Hence, advances to Trusts are granted only in very exceptional cases and only if the trustees are respectable persons of good means and against their personal guarantees).

Banks have to exercise care while granting advances to Trusts.

The Trustee has to manage the funds of the Trust with utmost good faith and as per the Trust Deed. The Bank should not become a party in any misuse /misapplication .The Bank will be held liable for negligence or connivance, in case of misapplication of trust funds.

No overdraft is now sanctioned against gold ornaments.

If the DP comes down due to fall in value of gold etc, the a/c will become technically irregular and an NPA. Already the NPAs of the Bank are high. (Note: Very recently SBI Personal Liquid Gold Loan Scheme has been launched in 3 Circles as overdraft with bullet repayment after 36 months).

In general no concessionary rates of interest are extended to units in all segments for limits above Rs. 2 lakhs.

The units require adequate and timely credit and other services and not cheap credit. The Bank's operational costs have been mounting up and profitability has been decreasing steadily. Moreover interest rate for limits of Rs.25.00 lac and above are fixed based on Credit rating of the unit.

COS 57 is taken when overdraft is sanctioned on a joint a/c (E or S).

COS 57 provides for the several and joint liability of both the account holders. Otherwise, only the person who signed the cheque (which created the overdraft) would be liable.

Advances are not granted against the security of National Savings Scheme.

There is no provision to pledge the savings pass-book under the scheme and hence the bank cannot get enforceable right against the deposit.

Generally, advances against clearing cheques are not permitted.

The cheques may be returned unpaid which will result in overdraft in the account. It may be difficult

to recover the same.

0

1-9

MM Special Guide 3 1 . No loan will be sanctioned to a company against

MM Special Guide

31.

No loan will be sanctioned to a company against the company's fixed deposit in the Bank.

R.

Advances against TDR are essentially for personal segment customers to meet their emergency needs.

These advances are not cost-effective for banks. Hence such advances are not extended to companies.

32.

"Mr. Ramu I owe you Rs. 100/-" SDI- (XYZ). This is not a promissory note.

R.

'I owe you' is merely an acknowledgement of money received. It does not show any intention or promise to pay the money. As per NI Act, Sec 4(a) Promissory Note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or

to the order of certain person or to the bearer of the instrument.

MISCELLANEOUS:

1.

No overdraft should be granted to a Minor even by mistake OR An account of a minor should not be allowed to go into debit.

R.

Minor is incapable of entering into a contract and a contract entered with a minor is void ab initio.(S11 Indian Contract Act). Minor is not liable for any borrowings from the Bank. If an overdraft is created, the Bank will not have legal recourse to recover the same. (Note: Hence no current account is opened in the name of the minor).

2.

Utmost Caution has to be exercised while granting loans against minor's deposits.

R.

The guardian can borrow only for the 'benefit' of the minor. If there is misapplication of funds by the Guardian and if the bank is deemed to have knowledge of the same, the bank may be obliged to pay the amount to the minor.

3.

Banks do not sanction advances to a minor, even though a major person is agreeable to guar- antee the loan.

R.

A contract entered into by a minor is void ab initio as per Section I 1 of the Indian Contract Act. As the primary contract is void, the guarantee is also void.

4.

Banks prefer to make advances against debentures than against equity shares. Debentures are debt instruments. The issuing company is bound to repay the principal and interest as embodied in the instrument. The value is not subject to change. The price of equity shares undergoes frequent changes and may even go below the advance value endangering the safety of the advance.

5.

Assignment is not a very good security for a bank advance.

R.

Assignment is subject to the right of set off etc by the original debtor; also the safety depends upon his financial soundness; procedure of completing the security is also cumbersome. (Note: However, As- signment is better than Hypothecation as it provides for notice to the debtor and his acknowledgement).

6.

The Bank prefers premature repayment of a fixed deposit rather than sanctioning of an ad- vance if the deposit has not run for at least 50% of its maturity period.

R.

Generally, the loans against fixed deposits are repaid out of the proceeds on the maturity date. It is uneconomical for the Bank to lend against TDR as the cost of funds is high after taking into account CRR/SLR requirements and compulsory PS credit/ food credit. Further, it will be advantageous for the depositor to take premature payment rather than pay interest on a loan for a long period. Compounding

of interest on loan ales takes place monthly whereas in TDR compounding takes place quarterly.

7.

The Law of Limitation has to be scrapped to help banks recover their dues.

R.

In agricultural advances/small value advances, often banks are not able to get revival letters from borrowers/guarantors in time. Hence, they are not able to proceed against them based on DPN. Also,

avoidable heavy cost is incurred and valuable time is spent in obtaining revival letters. Banks can proceed against borrowers/guarantors legally any time after sufficient time is given to them for repay-

ment, in case the law of limitation is abolished.

1-10

4 ,

Rationale

8.

TDR is not a negotiable instrument.

R.

It is a Receipt undertaking to pay a sum of money to a certain person on a future date. A Negotiable Instrument is an unconditional undertaking / order to pay a certain sum of money to a certain person or his order. Hence, TDR is not transferable by endorsement and delivery.

, 10. In case of gold loans, DPN is obtained in addition to pledge of ornaments.

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R.

In case the loan amount is not fully recovered from the sale of the ornaments or if the ornaments turn

out to be spurious or stolen, the Bank can proceed against the borrower on the DPN. DPN ensures personal liability of the borrower.

spurious or stolen, the Bank can proceed against the borrower on the DPN. DPN ensures personal

MM Special Guide

C & I SEGMENT

RATIONALE

SYSTEMS AND PROCEDURES:

1.

No consent letter should be given to a prospective borrower agreeing to finance him before the proposal is appraised and formal sanction given.

R.

The courts have held that the borrower gets a legal right for getting finance from the bank in such cases based on the principle of Estoppel; in such a case, if the project is not found acceptable on

appraisal, the bank cannot refuse the advance. To prevent dispute and litigation. (Principle of Estoppel:

Law will stop you from denying your statement / commitment).

2.

Memorandum of Association and Articles of Association are obtained for sanctioning company advances.

R.

A Company acquires legal status once it obtains the Certificate of Incorporation. Scrutiny of the MA and the AA. will show whether the company is authorised to open an account. The Resolution of the Board of Directors empowers the company to open the account. Loans can be given only for purposes listed in the MA; AA contains the borrowing powers of the directors.

3.

FFR 1 and FFR II are obtained for follow up of advances.

R.

i) This system enables the Bank to verify the end use of bank finance. It ensures that the overall financial management of the borrower's operations is in order.

ii) To verify whether operations are in line with the estimates made at the time of sanction of the credit facilities.lf there are variations the bank can initiate follow up measures for corrective action.

iii) Enables the Bank to know the liquidity and profitability of the units.

4.

Advances against book debts are not granted on pledge basis.

R.

A book debt is merely an entry made by the seller in his books regarding a credit sale. Book debt is an actionable claim which can only be assigned or hypothecated as security. It is not a 'physical commodity'. As per law, only movable goods can be secured by pledge.

5.

WCDL system has been introduced OR Loan system of credit has to be adopted for financing borrowers with assessed maximum permissible bank finance of Rs.10 cr. and above along with cash credit system.

R.

a) This system can bring about better discipline in the utilisation of bank credit.

b) It enables the bank to gain better control over the flow of credit.

c) It is easier and cost effective to manage bank's funds position.

[Note: Cash Credit system of advance poses cash management problems to the banks, as they do not have the mechanism to regulate the drawings of the borrowers. Under the loan system, major portion of the advance is committed for a definite period. It will enable the bank to earn interest and review at the time of maturity of WCDL whether roll-over of the loan for the next period is justified or not].

6.

Break even level of sales is an important concept in appraising term loans.

R.

A unit will make profit only if it operates above the break even level; it will make loss if it operates below this level. Hence, it is necessary to ensure that projections are based on operations at a viable level above the break even point. The unit cannot repay the instalment if it works at or below the BE level. The Working Capital limit will become irregular.

7.

Funds flow statement is scrutinised before sanction of term loans.

R.

Term loan is repaid out of cash accruals. The funds flow statement would indicate whether adequate funds would be available to meet the maturing term loan instalments.

8.

Appraisal for issue of a DPG is done on the same basis as that of a Term Loan.

R.

Deferred Payment Guarantees carry the same risks as a term loan even though there is no outlay of

1-12

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funds except when there is failure on the part of the customer to meet the commitment. The borrower

can repay the instalments under DPG from cash accruals only. Hence, they are treated on the same footing as a term loan for the purpose of appraisal. The bank's credit risk extends for a long term.

9.

R. The

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ability tomeet the commitments under the LC. The

payment of bills drawn under the LC

when they are received for payment. Opening of LC is considered a credit decision. The unit has to meet the bills under L.C. in due course. If it fails to do so, the bank has to meet the commitment and recover the same from the customer. Hence, it is treated as a credit decision.

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10.

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11. Pro-forma entries are passed when letters of credit are issued by the bank.

R. Accounting control has been introduced over the letters of credit transactions with a view to ensure that the contingent liability in respect of LCs is correctly recorded and followed up. Exact figures are required to keep control over the contingent liability. The bank has to meet capital adequacy on off-balance sheet items like BGs, LCs etc. RBI has laid down broad parameters for contingent liability

of Banks. 12. Bank guarantees are not issued for an indefinite period.

R.

a) These are contingent liabilities which may crystallise into actual liabilities. The risk of crystallisation is very high when guarantees are issued for long/indefinite period.

b) The bank has to provide for Capital Adequacy.

c) There are also restrictions by RBI in this regard.

13.

Counter guarantee is obtained from customers on whose behalf guarantee is given by the

R.

bank. In the counter guarantee the applicant undertakes to indemify the Bank against any costs /damages if the guarantee is invoked by the beneficiary. Counter guarantee is the legal basis for proceeding against the customer. The Bank's claim in a court can be proved easily in case the guarantee is invoked.

14.

If a guarantee is invoked, the commitment under the guarantee has to be met immediately by

R.,

the bank. If the guarantee is invoked, the beneficiary need not satisfy the bank regarding default or quantum of actual loss suffered by him. The Bank's obligation is absolute and therefore it should pay without delay or demur as otherwise it would reflect adversely on the image of the bank. RBI directions; Court judgements.

15.

Commitment charge has been selectively introduced.

R.

a)

Levy of commitment charge is an internationally accepted cost for the borrowers.

b)

This will be a disincentive for the borrowers to inflate their requirements.

c)

It will be a notional compensation for committing bank funds towards sanctioned limits.

16.

All guarantees issued by the Bank must have a limitation clause at the end.

R.

But for the limitation clause, the normal limitation period under the Limitation Act (which is rather long) will apply necessitating higher capital adequacy ratio. Further, the bank should try to keep its

liability not longer than it is absolutely essential. The limitation clause puts a cap on the amount of

i liability and the period of the liability.

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PRODUCTS

1.

Banks are financing film production.

R.

Film making has been declared as an industry. Films are major source of entertainment and education

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for poor/rural population. Will help film-producers to get away from the clutches of the Underworld.

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Kalman (former Chairman, BOB) committee recommendations.

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1-13

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MM Special Guide

MISCELLANEOUS

1.

Credit appraisal is carried out even for non-fund based business.

R.

Non-fund based liabilities always have the inherent risk of crystallizing into fund based liabilities. Hence, it becomes necessary for the bank to examine in detail the ability of the borrower to meet such commitments and his competence to perform the contract. There should also be a reasonable correla- tion between fund based and non fund based facilities.

2.

What is the present Credit delivery Process?

R.

The Working Capital loan for Rs. 10 cr and above is now sanctioned as cash credit and WC Demand Loan. This has enabled better funds management for the bank. Also, there is better credit discipline on

r

the part of corporates in availing cash credit component. Flexibility in fixing the limits has enabled the Bank to fix the proportion between C/C and WCDL to suit the needs of units.

3.

RBI changes its instructions regarding selective credit control measures periodically.

R.

S.C.C. measures relate to sensitive commodities like sugar, oil and oilseeds, cotton and kapas, foodgrains etc. Depending upon the quantum of buffer stock, production prospects, price level etc., RBI varies its instructions periodically with a view to stabilise prices and prevent hoarding and black-marketing. [Note: As agricultural production has improved / stabilised in the recent years, and also as liberal / timely imports are allowed, RBI has removed the controls on all commodities except sugar).

4.

Non-fund based business such as issue of Bank guarantees, Letters of credit etc are encour- aged by banks.

R.

a) There is no outlay of funds; also only a small percentage of such commitments may crystallise into liabilities over a period of time.

b) The income earned by banks from such businesses is sizeable resulting in increased profit ability. The servicing costs are low.

c) On account of disintermediation, the rate of growth of fund-based business would be less

compared to the growth in the past.

5.

RBI has prescribed 'exposure norms' for Banks.

R.

The concentration of credit risk is avoided. Failure of a single advance or advance to a single group will not affect the capital stability of the Bank. It will enable availability of credit for all sectors of the economy. It is a prudential control measure aimed at minimising credit risk for banks.

6.

Board for Bank Supervision has been set up by RBI.

R.

To enable RBI to concentrate on supervision and control of Banks, Fls and NBFCs; will enable it to identify emerging symptoms of malfunctioning of banks, pressure on financial system etc and initiate quick and decisive actions. Narasimham committee recommendations.

7.

Now the Annual Policy Statement is reviewed by RBI every 2 months.

R.

Indian economy has grown very fast since 1990s. The services and manufacturing sectors now dominate the economy. The impact of external factors is also high and continuous. Hence RBI has

-

0

decided to review the economy / monetary policy very frequently. International practice. RBI can control money supply based on data on monsoon/growth-needs of the economy, inflation, capital flows etc.

8.

Leasing is preferable to Term Loan from the angle of the borrower.

R.

a) Leasing is 100% finance without any margin amount. Hence, there is no capital outlay of funds.

Also, leasing being an off balance sheet item, the borrower can present a better Debt/Equity ratio.

b) Lessee secures tax advantages for the lease rentals, repairs, maintenance charges etc.

c) There is no risk of obsolescence for the borrower as he is not the owner of the asset.

9.

CRA model has been introduced for loan A/Cs.

R.

Credit rating system enables the bank to assess the credit quality / risk of various loans and provide for appropriate risk-mitigation covenants. The bank can also avoid financing units with unacceptable risk. Also, it enables the bank to fix appropriate rate of interest for the borrowings by large borrow-

1-14

Rationale
Rationale

ers. The ratings are arrived based on various risks such as business risk, industry risk, financial and

management risks associated with lending.

10.

Take out finance is gaining importance.

R.

This will help the banks to ensure a better asset liability management. Also, it is an incentive for banks

to participate in funding infrastructure projects. The outstandings can be transferred by effecting sale of such assets, when there is an asset liability mismatch.

11.

The system of 'Syndication Loans' has been introduced.

R.

Customer gets the freedom to choose a bank; the participating banks can quote different terms to the

borrower; it need not be uniform for all banks. Further, consortium advances have been found to be not in favour due to delay, need for same terms by all banks, different approaches of banks etc.

12.

Credit exposure norms are progressively tightened by RBI.

R.

The banks have to develop proper 'Risk perception' in their lendings and provide adequate capital for the credit risks assumed by //them. Indian banks will have to achieve international standards in view of the rapid globalisation of financial services sector. Requirements under Basel norms are being tightened.

13.

Security documents for consortium advances are obtained by the Lead Bank only.

R.

This will speed up the documentation process and credit delivery. Completion of legal formalities like registration of charges will be faster. The companies need execute only one document. Mahadevan (former MD,SBI) committee recommendations.

14.

At the time of issue of Bank Guarantees, Bank Guarantees Issued a/c is debited with the amount of the guarantee.

R.

The outstandings in this account show the bank's exposure on account of guarantees issued. The procedure enables us to have an accounting control over the Guarantee transactions; also it is neces- sary to conform to the statutory format of the balance sheet. The contingent liability of the Bank in respect of Deferred Payment Guarantee is also reflected in the account now.

15.

Expired Guarantees should be reversed from the Guarantees Issued Account after 7 days and after giving notice to the beneficiaries.

R.

The letter is sent to the beneficiary to make it clear that he is no longer entitled to invoke the guarantee. It is necessary to keep the contingent liability to the barest minimum, as capital adequacy norms are applicable for the same.

16.

RBI has prescribed ceilings for Capital market exposure of banks.

R.

Banks are permitted to invest in capital market securities like shares, bonds etc with a view to enable them to broaden their income-stream. However, capital market is volatile and therefore RBI has pre- scribed prudential limit on such exposure linked to bank's capital.

17.

Stock audit should be conducted for large advances.

R

Stock-Audit will throw out facts such as

a) Whether the quantity / quality, value declared in the stock-Statement is correct and that proper and

consistent valuation method is followed by the enterprise.

b) There are no obsolete / slow moving / rejected / returned stocks with the enterprise and stocks

received for job work etc are not included in the stock statement. Stocks have been insured for full market value against all major risks and the policies are current and in order in all respects.

c) Any adverse features coming to light through stock audit can be taken up with the enterprise and

rectified early to prevent the account becoming irregular / NPA.

MM Special Guide

MM Special Guide ADVANCES - SME RATIONALE
MM Special Guide ADVANCES - SME RATIONALE

ADVANCES - SME RATIONALE

Systems and Procedures: 1. Nayak Committee recommendations for working capital advances for SSI (up to
Systems and Procedures:
1.
Nayak Committee recommendations for working capital advances for SSI (up to Rs.5 crore)
have been implemented.
R.
It is simple to calculate the working capital requirements based on projected turnover. It is transparent
and easy for customer to understand. it is uniform throughout the Banking System. RBI Instructions.
2.
Banks offer concessional interest rates for export credit advances (pre shipment and post
shipment).
R.
Exports enable the country to earn foreign exchange which can be used for meeting heavy imports like
oil
etc besides servicing huge foreign debt. Export credit guarantee from ECGC provides safety for
banks in providing export finance.
3.
Additional credit facilities are not extended by the bank to wilful defaulters.
R.
Wilful defaulters are those who have not repaid the loans despite generating profits. They divert funds.
They do not follow the terms and conditions of the advance and are not desirable / dependable custom-
ers. RBI has also advised that the borrower whose name appears in the list of wilful defaulters released
by them should not be financed for at least 5 years from the date of the list.
4.
Advances to export-oriented Small (manufacturing) enterprises are covered under the guar-
antees of ECGC.
R.
There is no ceiling on the claims under ECGC guarantees. (For eg: If an S.S.I. unit enjoying a packing
credit of Rs.40 lakh failed, the entire amount of the advance can be claimed from ECGC subject to the
prescribed percentage).
5.
In the preamble to security documents the name of the Branch where documents have been
executed is not mentioned.
R.
The effect is that the advance is availed from the Bank and not from any specific branch. For admin-
istrative reasons, the loan accounts of a borrower may be transferred from one branch of the Bank to
another. If the branch name is mentioned we will not be able to transfer the a/c to another branch or
file a suit in another branch name. Fresh documentation would be needed.
6.
Even though bills are accompanied by documents of title to goods banks extend bill financing
facilities only to customers well known to them.
R.
S 131 of NI Act
does not provide protection for collection of bills. Hence the Bank collects bills only
for well
known customers so that in case of any dispute / liability the bank can recover the amount
from the customer.
7.
No separate opinion report is compiled on small (manufacturing) enterprise borrowers.
R.
The
details of the assets of the proprietors, partners etc., as also their honesty and integrity are
incorporated in the application/appraisal form and commented upon.
Advances to Partnership Firms:
1.
The Bank does not insist on registration of the partnership firm while opening an account
(SBI).
R.
Registration is optional and not compulsory under the Partnership Act. The bank can always sue a firm
whether registered or unregistered to realise its dues and claims. (Note: Many banks insist on registra-
tion; so also many government depts).
2.
The partnership deed is obtained while financing a partnership.
R
Partnership deed contains the details of partners, share-capital, the objectives, borrowing powers, and
mutual rights and duties of partners. It will enable us to ensure that it does not contain any provisions
affecting the interest of the bank. It is obtained in addition to the partnership letter
.,
1-16
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Rationale
Rationale

3.

A partner cannot give guarantee to a third party on behalf of the firm. (unless the business of the firm is that of giving guarantees).

R.

The partner's implied powers to bind the firm does not include the power to give guarantees on behalf

4:

of the firm, unless specially provided for in the partnership deed. Guarantees are contingent liabilities and if they crystallise, they will become actual liabilities for the firm. Even though a partner has delegated his powers to other partners, signature of all the part- ners will be obtained on security documents while sanctioning an advance.

R.

Signatures of all partners are obtained on loan documents as borrowers even if one partner is authorised to borrow, as a measure of abundant caution. Further, it will be easy to prove the personal liability of each of the partners for the loan. The guarantee of all the partners will also be obtained.

5.

While granting advances to partnership firms, the personal guarantee of partners is also obtained.

R.

In the event of the insolvency of the firm and its partners, the Bank could rank as a first creditor along with the personal creditors in respect of the personal assets of the partners, if personal guarantee is obtained. Otherwise, it will be an unsecured creditor and may not be able to get any amount from the personal assets.

6.

When a partner dies, the operations on the cash credit account of the partnership firm is stopped forthwith.

R.

If the operations are continued, the credits will reduce the liability of the partners; subsequent debits will not bind the estate of the deceased on account of operation of Clayton's Rule. [According to S.42 of Partnership Act, the death of a partner dissolves the partnership. Hence opera- tions on the a/c are stopped in order to retain claim over the estate of the deceased partner. Otherwise Clayton's rule will apply as per S59 to S61 of the Indian Contract Act].

7.

We take recourse to partners' personal assets for the dues of partnership firm.

R.

Partners have unlimited liability for the payment of the partnership debt; i.e. the partners' personal assets are liable to meet the partnership debt. Hence, if partnership assets are not adequate to meet the partnership liabilities, the personal assets of the partners will be liable, in proportion to their capital in the firm.

Advances to Corporates:

1.

R.

No opinion is compiled on a limited company.

A company is a legal entity deriving its powers and limitations from the Memorandum and Articles. The capital base, the address, the details of directors etc. are available in these documents. The identity, bona-fides etc of the company can be established through these documents and market enquiries. Hence, no opinion is compiled on limited companies.

No 'CertVcAte to commence business' has been prescribed under the Companies Act, 2013 for Public and Private Ltd Companies.

S 11 of the Act provid. :s - that a declaration has to be filed by a director with ROC that every subscriber to the memorandum has paid the value of shares agreed to be taken by him and the paid up capital is not less than Rs.1 lakh and Rs.5 lakh in respect of private and public limited companies respectively. If the declaration is not made within 180 days of the incorporation of the company, and the Registrar reasonably believes that the company is not carrying on any business he may initiate action to delete the name of the company from the Register of companies.

Before making an advance to a company, e search should be made at the web site of the Registrar of companies for prior charges.

To check that the assets proposed to be charged to the Bank have not been already charged to any other creditor. If a charge exists, the Bank's charge will not rank in priority to the existing charge.

E-search of charges is to be made before and after the registration of our charge.

a) The first Search is made before creation of charge to ensure that no charge exists on the assets

2.

R.

3.

R.

4.

R.

1-17

MM Special Guide

MM Special G u i d e

5.

R.

6.

R.

7.

R.

8.

R.

9.

R.

10.

R.

11.

R.

of the company.

b) The second Search is made to ensure that no charge is registered by any third party on the assets

of the company after sanction of the loan by us; and to satisfy ourselves that the Bank's charge has been registered.

While advancing to a company the directors' personal guarantee is obtained but partners' guarantee is not obtained in the case of partnership firm. (IBPS rationale).

The company is an independent legal entity. Hence, unless the promoter-directors guarantee the advance, they will not be liable. Under the Partnership Act, all partners are liable, jointly and severally, for the partnership debt; also, the personal assets of the partners are also liable to meet the partnership debt after meeting the personal debts. (Note: SBI instruction is that guarantee of partners must be obtained for advances to partnership firms in order to rank as secured creditors in respect of partners' personal assets).

A floating charge which the Bank has over the goods of a company is to be registered with the Registrar of Companies.

Otherwise, the charge will become void against the liquidator or any creditor of the company. Also, it serves as a notice to the subsequent creditors. The Bank's prior charge will be protected. (Note: It is to be noted that the debt is valid against the company but becomes unsecured).

COS 245 is obtained from a Company (while granting advances to it).

This is obtained as a matter of safeguard. The company undertakes not to create any mortgage, lien or charge over its assets including uncalled capital. (This information is also included in the 'Particulars of charges registered with the Registrar of Companies so as to prevent any subsequent charge having priority over the Bank's Hypothecation charge.)

It is preferable to grant advances to companies against hypothecation of stocks rather than pledge.

S 77 of the Companies Act 2013 provides for registration of the hypothecation charge; it serves as an automatic notice to third parties as also to the subsequent creditors; As regareds registration of pledge charge, the Companies Act 2013 is silent. However SBI is of the opinion that pledge charge may also

be registered.

Banks prefer to grant advances to limited companies rather than to partnerships. (IBPS ratio- nale)

The charge (such as hypothecation, mortgage etc.) can be registered with the Registrar of Companies under S77 of the Companies Act, 2013 which serves as a notice to third parties about our charge. Bank's rights would be protected as a first charge over the assets. A similar provision is not available for advances to partnership. Further, death of a partner etc, will dissolve the partnership whereas, the company is a legal entity with perpetual existence.

A Company cannot mortgage its immovable properties for obtaining a loan in excess of its PC (Paid-up capital) and reserves without the approval of the shareholders in the General Body Meeting by way of special resolution.

If a public Ltd Company or a private Ltd Co which is a subsidiary of Public Ltd company proposes to borrow against mortgage of its assets in excess of its own paid up capital plus reserves, it can only do so under the authority of a special resolution passed by the shareholders in a meeting as per section 180 of the Companies Act, 2013 (The Board has powers to borrow up to a maximum of paid up capital and reserves).

A board resolution is obtained by the Bank from a company ratifying the excess drawings permitted to the company, in case drawings in excess of the limit are permitted.

As per Section 179 of the Companies Act, 2013 the power to borrow is vested with the Board of Directors. They should exercise this power by means of resolutions passed at meetings of the Board. Any excess drawings have to be authorised by a board resolution. Otherwise, it will not be binding on

1-18

of the Board. Any excess drawings have to be authorised by a board resolution. Otherwise, it

Rationale
Rationale

the company; also it may not bind the company even if the excess drawings have been liquidated subsequently. Documentation, Mortgage etc:

1.

Security documents for advances shall be completely filled up before obtaining signatures of borrowers/guarantors.

R.

The borrowers/guarantors will be able to repudiate their liability on incomplete/blank documents at the

time of execution on the ground that they were not aware of/did not agree to the terms and conditions of the advance. It is also a correct/transparent practice as the Borrower will be aware of the details of the terms and conditions of the bank's advances.

2.

The words 'value received' are incorporated in the DP note.

R.

These words explicitly state that the consideration for the DPN has been received by the borrower. Proving the DPN in a Court will be easier, as the burden of proof will be on the borrower if he disputes it. It also contains a promise to pay, on demand, the value received with interest.

3.

Two signatures of the executant are obtained on a DP note, one on the revenue stamp and another by the side of it.

R.

Though very rare, the stamp may fall off from the DP note due to defective gumming etc. In such

cases, the additional signature can be relied upon as ready evidence for proving the execution of the DPN (It is a widespread practice to obtain the additional signature).

4.

Provision has been made in the DP Note and the DPN TDL to show the place of execution.

R.

The place of execution will determine the place where the 'cause of action' has arisen and the court in

which the cases have to be filed in respect of the DPN. To ensure that this important information is not omitted to be entered in the DPN leading to protracted litigation.

5.

A Promissory Note can be cured even if it is under-stamped.

R.

The Stamp Act has been amended some time ago. Now the court may permit payment of penalty and

affixing of appropriate value of stamp in case of BE/PN, if it is under-stamped due to genuine reasons.

6.

No DPN is obtained for a Term Loan.

R.

The borrower agrees to repay a term loan over a period of time. It is not repayable on demand. It is not

appropriate to obtain DPN as such a loan is not repayable on demand.

7.

In a demand loan a/c secured by a DPN, no debits are permitted after the initial advance (except for periodical interest, insurance premia and sundry charges).

R.

It is an advance for a fixed amount repayable on demand. The disbursement of the loan is also in one

lump-sum. If debits are raised in the account subsequently, the borrower may contend that there has been no consideration for the subsequent debits. Also, credits will wipe off the debits; subsequent debits will not be covered by the DPN. (Note : A cash credit account is a running and open a/c. The cash credit documents provide for this).

8.

Standard Revival letter is not obtained for a time-barred DPN.

R.

The standard revival letter does not contain a fresh promise to pay a time barred debt, which is

essential under S 25(3) of the Contract Act to revive a time-barred debt. Mere acknowledgement of debt is not sufficient.

 

(Note 1: Hence revival letters on Forms 157, 158 and 159 should be obtained within the limitation period. To allow a reasonable time for obtaining the revival letters from the borrowers/guarantors, a diary note is made 2 years and 3 months from the date of the DPN. Note 2: In case the revival letter could not be obtained before the limitation period, a fresh promise to pay the time-barred debt has to be obtained. (Under S 25 (3) of the Contract Act, such an agreement is valid.)

9.

Balance confirmation of borrowalloverdraft accounts has to be obtained annually.

R.

It acts as an acknowledgement of debt by the customer and extends the limitation period. If he

disputes the balance thereafter, the onus of proof is shifted to him. The customer would scrutinize his

,!'

-,,,,,

149

 

MM Special Guide

 

account before he signs the confirmation form; hence, any omission/mistake can be rectified. (Note! Now, no balance confirmation need be obtained for standard accounts in all segments.)

10.

Confirmation of debit balances in cash credit accounts on COS 48 must be obtained over a revenue stamp.

R.
R.

Confirmation of debit balances which is an effective revival of the advance, is legally an

acknowledgement of debt attracting stamp duty. Also, borrowers tend to go through the accounts

before confirming the balance and point out any discrepancies.

Non - stamping is treated as an

offence under the Stamp Act.

11.

The balance confirmation format in respect of cash credit a/c has been revised some time ago.

R.

Now the borrower agrees to be liable for interest due but not applied to the account in addition to the outstanding balance.

12.

Even though DPN is obtained for borrowal accounts, revival letters are obtained periodically for non-standard a/cs.

R.

In terms of Limitation Act, the limitation period for a DPN is 3 years from the date of the DPN. If the account is not revived by credit to the account, by acknowledgement of debt etc. before limitation sets in, the bank cannot proceed against the borrower in a court. Similarly, if revival letter is not obtained, the bank cannot proceed against the DPN as it will get time-barred.

13.

Revival letters are obtained even in respect of cash credit accounts without guarantee.

R.

In order to keep alive the liability of borrowers under the cash credit documents.

14.

Revival letters are obtained for Term loans, if they are not standard accounts.

R.

So long as the term loan instalments are regularly repaid, the limitation does not commence; but, if default takes place, the entire amount becomes due, as per document and limitation starts to run immediately. By obtaining revival letters for all term loans (other than standard a/cs), it will be ensured that no account will become time-barred through default of instalments.

15.

While obtaining the thumb impression of a borrower on security documents a separate certifi- cate is taken signed by an independent witness that the borrower has understood the contents of the documents and that he has executed the documents on his own volition.

R.

This extraordinary precaution enables the Bank to prove that the borrower had understood the trans- action and acted on his free will without any pressure or coercion from the Bank. If the certificate is taken on the document itself, it may attract higher stamp duty on account of attestation.

16.

Registered letters sent to customers but returned to the Bank undelivered should not be opened by us, but preserved as it is carefully.

R.

Quite often, these have to be produced in the court as evidence of our having served due notice on the borrowers/guarantors; as also of our having followed the normal business practice. If opened, he may contend that the notice was not enclosed in the cover.

17.

Title Deeds register should not be signed by the mortgagor while effecting equitable mortgage.

R.

If the register is signed by the mortgagor he may contend later in the court that the mortgage is a registered mortgage, that no proper stamp duty has been paid and hence the document is inadmissible in evidence.

18.

Equitable mortgage can be created only at notified centres.

R.

Under the Transfer of Property Act, equitable mortgage can be created at Mumbai, Kolkata and Chennai and at such other centres which have been notified for this purpose under S 58(0 of the Transfer of

Property Act by the State Govemments in the official gazette. Equitable mortgages created at centres which are not so notified are not valid.

19.

While creating equitable mortgage, nothing in writing should be obtained from the person creating the mortgage.

R.

If any instrument is signed by the mortgagor while he creates an equitable mortgage, it may be contended later that the mortgage is a registered mortgage and that it is inadmissible as evidence, as no

1-20

Rationale stamp duty has been paid on it; and also that the document has not

Rationale

stamp duty has been paid on it; and also that the document has not been registered with Registrar of Assurances. Later date will show that the letter was not signed at the time of creating the mortgage.

20.

In case of equitable mortgage, a confirmation letter dated subsquent to the date of the EM is obtained from the borrower.

R.

In this letter the borrower confirms, as on a later date, that he has created equitable mortgage in favour of the Bank. The letter will bear a date later than the date on which the equitable mortgage was created. It is an independent and extra evidence that the mortgage has been created by him without any coer- cion from the Bank and out of free will.

21.

The title deeds deposited at a notified centre in respect of an advance sanctioned at a non- notified centre are returned back to the non-notified centre.

R.

This enables the sanctioning branch to have an effective control over the title deeds. Also Inspecting Officials/officials taking over the advance can verify the title deeds effectively and satisfy themselves about the security offered for the advance. (eg: present condition, makret value etc).

22.

In the absence of original title deeds, EM cannot be created but English Mortgage (Registered Mortgage) can be created.

R.

a) Deposit of title deeds with intent to create a mortgage is an essential ingredient of Equitable mort- gage. Equitable mortgage created by deposit of duplicate copy of the title deed is not without risk in the absence of conclusive proof that the original title deed has been lost. b) In an English mortgage the mortgagor transfers the property absolutely to the mortgagee. It is in writing, stamped and registered with the Registrar of Assurances which acts as notice to subsequent creditors.(Note: In exceptional cases, CA may permit EM).

23.

The Bank's Guarantee Agreements contain both guarantee and indemnity clauses.

R.

Thereby the guarantor is made to be primarily liable for the advances along with the principal debtor (i.e., borrower). Such a clause enables the bank to file a suit against the borrower and guarantor simultaneously for the recovery of the dues. The "Guarantor" will be liable to the bank on account of the "indemnity" clause even if principal debtor escapes liability for some reason or other.

24.

Most of the interest rates quoted in the bank are not expressed in absolute terms but ex- pressed in relation to SBI Base Rate (now MCLR).

R.

This mode of quoting the interest rate enables the bank to automatically increase the rate when the SBI Base Rate goes up; also, the fixing of the 'minimum' ensures that the effective rate does not go down when the Advance Rate goes down. Further, if the interest rate is expressed in absolute terms, the consent of the borrower would be required every time the rate of interest is changed.

25.

Eraz-ex ink is not used in correcting documents.

R.

Any such alteration will make it difficult for the Bank to prove any unauthorized alteration. The Registrar of Assurances may not permit registration of such documents. The court may reject the documents with alterations as evidence. To protect the Bank's interest.

26.

Minimum interest clause is not incorporated in the interest clause in cash credit agreements.

R.

The interest rates are now fixed based on the credit rating of borrowers. There will be an automatic increase/decrease in the effective interest rate with the change in the SBI Base Rate.

27.

Bank is now obtaining letters of indemnity in all cases on stamped documents only.

R.

Payment of stamp duty is a fiscal matter. Hence it will not be in order to waive stamp duty even for small value indemnities. Further, these are of small value and hence will not be a heavy burden on customers. Documents executed by staff should also be stamped.

Ratio Analysis:

1.

While sanctioning an advance to a company, the balance sheet and the various ratios are studied.

R.

Ratios represent the relationship between any two items in the balance sheet/profit and loss a/c. Eg:

Current ratio, Equity/Debt, NP/Sales etc. These ratios will be compared with the same ratios of the

MM Special Guide

firm in the past 2/3 years as well as with the industry norm. Deviations will have to be carefully studied. These ratios are studied to find out the profitability, level of indebtedness vis a vis capital, liquidity etc of the company.

2.

Liquidity ratio, mainly current ratio is considered as one of the important ratios.

R.

The unit's ability to meet its commitments as and when they arise depends on the liquidity of the unit. Hence a comfortable liquidity position of the unit provides a safe cushion to the Bank's working capital advances. A comfortable current ratio indicates sufficient current assets with the unit; the unit can carry on its commercial production smoothly in such a case; a reasonably high current ratio is a good safety cushion for the working capital advance.

3.

A very high current ratio is not a welcome sign.

R.

Current Ratio is the index of the borrower's liquidity. If the ratio is very high it will put the bank on the alert as it may be due to inefficient working capital management, manipulation in the quantity/valuation of stocks, large concentration of unsold goods/unrealized book debts, etc. Also, when a business is being wound up, current ratio will be high.

4.

Quick ratio is more reliable than current ratio.

R.

Cash and items which can immediately be converted into cash are taken into account for the purpose of arriving at the quick ratio. Hence this ratio is of relevance for assessing the capacity of the unit to meet the immediate liabilities. The reliability of the current ratio depends upon the quality of stocks and debtors and their valuation. (Usually current assets minus inventory is taken as Quick Assets).

5.

Debt equity ratio is given importance and not the Current ratio for sanction of Term Loans.

R.

Current ratio compares the current assets with current liabilities and therefore measures the liquidity or availability of immediate funds to meet the working capital requirements. Debt Equity ratio which is a solvency ratio, compares the outside liability of the unit vis a vis its capital and indicates over-borrow- ings as also the unit's ability to service the proposed term loan.

6.

Debt Equity Ratio is a Solvency Ratio and not a current ratio.

R.

Current ratio compares the current assets with current liabilities and therefore measures the liquidity or immediate funds availability to meet the working capital requirements. Debt Equity ratio compares the outside liability of the unit vis a vis its capital and hence, throws light on the solvency of the unit.

7.

Depreciation is added to Net Profit to arrive at cash accruals for fixing the repayment instal- ment of a Term Loan.

R.

Depreciation is a non-cash expenditure and as such a notional expense. The cash remains in the business and hence the 'cash accruals' is arrived at by adding all non-cash expenses (eg.: depreciation, Investment Allowance etc.) to the Net profit. Repayment instalments are linked to the cash accruals.

8.

Net DSCR of less than 1 is not considered good for sanction of Term loans (generally the norm is 2:1)

R.

Net DSCR is the ratio of annual cash accruals to the amount of term loan instalments and DPG instalments payable in the year. Cash accruals are arrived at by adding depreciation to net profit. Cash accruals should be adequate to provide for fluctuations in business, increased margin for working capital etc. If it is less than 1, the cash accruals are not sufficient to meet term loan instalments. If DSCR ratio is not adequate, repayment will be affected and the account may turn into NPA.

Stressed Assets Management:

1.

IRAC norms have been introduced.

R.

RBI has introduced IRAC norms with a view to increase the quality of balance sheet of banks in line with international standards/Basel requirements. NPAs can be identified early and action taken. Ad- equate provision can be made. Income recognition is done only on actual realization basis avoiding artificially inflated profits and tax — payment thereon.

2.

Interest is not applied in case of NPA a/c. It is reckoned only on realisation basis.

R.

Once an account is identified as an NM, it ceases to generate income for the bank. The principal itself

1-22

3.

R.

4.

R.

5.

R.

6.

R.

7.

R.

8.

R.

9.

R.

10.

R.

11.

R.

Rationale

is doubtful of recovery in these cases. Hence, interest is not applied on accrual basis, as it would inflate bank's profit. This results in the Bank paying taxes on the artificial profit. Hence it is reckoned only on realization basis. As per RBI directives on IRAC norms.

Stressed Assets Review is an important exercise.

NPAs have been increasing affecting profitability. Also higher risk-weight has to be assigned for stressed assets for capital adequacy. Further, provision for NPAs is also high. Hence, resolution of stressed assets has to be made without delay.

Importance is given to compromise proposals.

a) Compromise proposals are based on mutual consent of parties, and hence can be settled fast.

b) Court cases are time consuming, costly and cumbersome.

c) Recovery of NPAs would increase profits and enable recycling of blocked funds.

d) Managers can use their time productively.

OTS has been introduced by the Bank.

NPAs have assumed alarming proportions in the Bank. OTS provides for settlement of dues in a quick and painless manner. It is a non-discretionary and non-discriminatory method of settlement of NPAs. The Bank's capital adequacy ratio will improve. Will enable us to cleanse the balance sheet. Can concentrate on getting good borrowal a/cs. RBI directives.

Compromise/OTS proposals are encouraged.

These are hassle-free settlements in deserving cases / specially identified cases entered into on a voluntary basis to pay an agreed amount in respact of bad loans. Will help reduce the huge backlog of NPAs which in turn will improve the CAR of the Bank. RBI directions.

Although there is a good demand, the bank does not sanction term loans for financing OTS entered into with other banks.

OTS accounts are bad debts. As these loans are not for productive purposes, such loans might be- come NPA. It will not be a wise business decision. RBI guidelines.

`Debt Asset Swap' can be effected in the case of NPA accounts.

A number of borrowing units whose accounts have become NPAs have valuable landed properties lying idle. If they are not able to make cash payment under an OTS arrangement, Debt Asset Swap is agreed to. Under Debt Asset Swap, the Bank may take over the properties in lieu of settlement amount and then can either use them for own purposes or dispose of the same when market conditions improve. This will have the double advantage of reducing our NPA and disposing off the properties later at attractive prices.

The Bank refers cases of bad advances up to Rs 20 lakhs to Lok Adalat for recovery.

Judgements are fast as the procedure is based on principles of natural justice; The recovery processes will be fast so that the funds can be recycled. The judgement is based on the mutual consent of the parties. Time/effort of staff can be saved; RBI instructions to Banks to refer such cases to Lok Adalat.

Debt Recovery Tribunals have been established.

The legal suits are costly, time-consuming and vexatious; the procedures in the Tribunals are based on natural justice. Also, Recovery Officers are attached to the DRT: hence recovery process is fast. Appeal system also provides for quick disposal. Narasimham committee recommendations.

Statement of Accounts, ledger extracts and other documents used in the ordinary course of business of the Bank are to be certified properly before their production in the Court as evidence.

In terms of S 4 of the Bankers Books Evidence Act, only a Certified Copy of such records/books will be accepted. If the copy is not properly certified, the Court will not admit it as evidence. If the Bank has to file the original documents, the smooth functioning of the bank will be affected. Also it may lead to breach of secrecy of other a/cs etc.

1-23

MM Special Guide 12. No entries other than proforma entries are passed through Advances under

MM Special Guide

12. No entries other than proforma entries are passed through Advances under Collection Ac-

.,

, ,

count (AUCA):

R.

Now all suit filed accounts (with outstandings above Rs.50,000/- and with the realisable N. alue of security in the accounts more than 20% of the outstanding) which are written off are parked in AUCA

so that these may be followed up for recovery. These are proforma accounts and hence no direct

debits/credits are routed through this account except proforma entries.

13.

High value written off accounts against which suits have been filed are parked in AUCA.

R.

a) To ensure that the outstandings are not lost sight of once they are written off. b) To keep the borrowers' liability and the bank's right to recover alive. By this method the bank can initiate an effective recovery process and cleanse the balance sheet.

14.

The balance in LNCA is reversed when the loan amount is written off.

R.

INCA balance represents the unrealised interest on account of NPAs. An account is written off only

when a decision is taken that it is irrecoverable. When the principal itself is regarded as irrecoverable, the interest will also be irrecoverable. (Hence INCA balance is reversed when the account is written

off)

15.

'Interest Not Collected A/C' (INCA) has been opened in the General Ledger.

R.

RBI guidelines require that accounts in which interest has not been paid for 90 days should be treated

asNPA; interest on such accounts should not be treated as income until it is actually realised. Hence, interest debited to the account is reversed by credit to Interest Not Collected account. This amount is reckoned as part of provision available for the NPA account. General:

1. Only one operating account is maintained in respect of working capital advances to SSI.

R. This enables us to know at a glance the over-all liability of the unit as well as the available security/ drawing power; also, it has operational simplicity.

2. Financial statements alone are not sufficient to take credit decisions.

R. The basic parameters in a credit decision are honesty and integrity; the other vital parameters are need for the advance, over all viability, reasonable stake etc. Also credit needs have to be assessed bearing in mind the future prospects for the business.

3. Sanction of credit facilities should, by and large, be based on performance prospects of the industry and not merely on the performance of the concerned unit.

R. It is necessary to have an overall perspective of the industry which includes its growth prospects and challenges while examining a proposal. This will enable the bank to gain better appreciation of the inherent risk factors and take a suitable credit decision while appraising the proposals.

4. Opinion reports are compiled on borrowers.

R. Integrity and honesty and means of borrowers are the basic factors on which credit decisions are

taken. These are recorded in the opinion reports. Also, the total means / break-up worth of the borrow- ers would show their financial status. If the unit's assets are not adequate to repay the Bank's dues, the Bank has to fall back on these assets.

Opinion Report on the guarantor is also being compiled along with that on the borrower, while preparing the credit appraisal report.

i) This is to ascertain the total means of the guarantor, his track record and other relevant informa- tion; also to ensure that the advance would be backed by the guarantee of a third party with adequate means and good standing and no bad credit history.

.- 5.

IR.

ii) To enable the bank to take suitable credit decisions.

6.

Normally, the BUW (Break Up Worth) of assets of borrowers is estimated to be about 50% of the value (while compiling opinions or completing appraisal forms).

R.

In the case of a forced sale (i.e., in emergencies) the movable assets invariably vanish and the immov- able property suffers steep deterioration in value. Hence, BUW is estimated conservatively.

1-24

Rationale

7.

A minor's share is deducted from gross net worth of a firm, while arriving at the net worth of the firm, in the opinion report.

R.

While minor can be admitted to the benefits of the partnership firm, he is not liable for the debts of the

firm. Hence, for arriving at the net worth of the firm, a minor's share is deducted.

8.

The credit limits sanctioned to units must be renewed annually.

R.

The Bank can know the financial health of the unit, desirability of continuing the advance, utilisation of the limit, conduct of account etc. The limit can be reduced/enhanced depending upon the projected sales/ operations. Security available can be reviewed and the Bank's exposure protected. If the limit is not renewed within 180 days from the due date, the account will be classified as NPA.

9.

In respect of group-firms enjoying credit facilities, renewal should be undertaken for the whole group and not piece-meaL

R.

This procedure will enable us to know the total picture of the group-firms, their activity-levels, inter-

'

dealings especially investments in associate firms and the stake of the group in the business. (Note: The balance-sheets must be obtained as on a common date; only then we will know the nature / extent of inter-locking of funds).

10.

Debit and credit summations in the cash credit account are reviewed while renewing the limits sanctioned to borrowers.

R.

This will show the extent of utilisation of the limits, whether the sale proceeds/bills have been routed through the account and whether the account has been conducted properly (eg: return of cheques, excess drawings availed, retum of bills, etc.). Adequate facilities commensurate with the current level of operations can be extended.

11.

Control returns are sent by the Branch Managers to their controllers.

R.

i) These forms are subjected to scrutiny by the controllers to ensure that the Branch Manager has exercised his powers within the discretionary powers vested in him.

ii) To ensure that the sanction of advances conform to the laid-down policies, terms and stipula- tions of the bank and are in order.

iii) This is an administrtive tool to ensure that delegated powers are exercised properly.

12.

CRA rating may now be shared informally with the borrower.

R.

It will add to the transparency in our dealings with the borrower. The borrower can himself assess his

financials and take steps to improve them. A better Credit risk rating would get him the benefit of finer interest rate. (Note: informally shared orally).

13.

Break even level of sales is an important concept in appraising term loans.

R.

A unit will make profit only if it operates above the break-even level; it will make loss if it operates below this level; Hence, it is necessary to ensure that projections are based on operations at a viable level above the break even point.

14.

Projects with high Break Even Point are viewed with disfavour by banks.

R.

In such cases, if the fixed cost of the project goes up, the unit's profitability will be jeopardised; if the variable cost goes up, the contribution will be less. Hence, the repayment of the TL will be affected. The margin of safety is less.

15.

Moratorium period is given to Term Loan borrowers in respect of repayment of instalments.

R.

A unit requires adequate time for acquisition of land, construction of factory building, erection of machinery and trial production. It will work above the BEL only when it achieves commercial produc- tion. Hence, during the construction period, no repayment should be stipulated. Otherwise, the unit's working capital a/c will become irregular. The projects require generally 12 to 24 months for achieving commercial level of operations. At this level only, it can make profit and commence repayment.

16. Stock statement has to be subjected to scrutiny before allowing drawing power in the cash

credit account.

R. Stock statement is scrutinised in order to ensure that it reflects the correct position in regard to

1-25

  MM Special Guide     quantity, valuation etc of the goods offered as security
 

MM Special Guide

 
 

quantity, valuation etc of the goods offered as security to the bank. It is also to ensure that the stocks are not inflated/over-valued and that obsolete stocks are not included.

17.

Physical inspection of borrowing units is done periodically.

R.

To verify the adequacy, value and general condition of assets charged to the Bank as well as to acquaint ourselves with the general functioning of the unit. It enables us to maintain better rapport with the unit/owners as also understand general market conditions.

18.

'No lien' letters are obtained from owners of godowns in which stocks pledged to the Bank are kept. [Note: In SBI, no pledge advance is sanctioned to SME (manufacturing units)].

R.

The owners agree that their right of lien over the goods for the unpaid rent is postponed to the Bank's claims. Thus, the Bank gets first charge over the goods for payment of its dues.

19.

Bank's name-boards are exhibited in the factories/godowns in which stocks pledged to the Bank are stored.

R.

This serves as a notice of the Bank's charge over the goods to the outside world and of the advance made by the Bank. Thus, the Bank's first charge over the assets is protected.

20.

Stock Registers kept by a borrowing unit/other records of the unit should not be signed/ initialled by officials who inspect the units.

R.

Otherwise, it may be contended later on by the borrowers/guarantors that the Bank was aware of or admitted the correctness of the contents of such records. The Bank's interest will be affected.

21.

While issuing a Letter of Credit or Bank Guarantee, instead of marking a lien on the DP in the CC a/c we should insist on cash margin.

R.

It will ensure that the unit provides additional security as deposit for the contingent liability. There will not be any possibility of payment of the deposit to the customer, as the amount will be adjusted against the claim under the Letter of Credit/Guarantee. In case a lien is marked against undrawn DP there is a risk of DP coming down.

22.

Banks register their charge with RTO in SRTO advances.

R.

This will serve as a notice to third parties that the vehicle is hypothecated to the bank. Acts as a preventive measure against illegal sale of vehicles and protects bank's interests in the event of such contingencies. (Note : Recently, The Ministry of Road Transport and Highways has launched a website Vahan.nic.in in which our hyp. charge can be viewed).

23.

While granting loans against motor vehicles (including tractors/power tillers) the vehicles are insured only in the sole name of the borrower.

R.

If the insurance is done in the joint-names of the Bank and the borrower, third party claims may be made against the Bank as a co-owner in case of accidents. Also, the Bank's Interest clause noted in the policy is sufficient to protect the interest of the Bank.

24.

Excess Drawing reports are submitted to controlling authority.

R.

The excess drawings in a borrowal account above the branch manager's powers have to be confirmed by the appropriate authority with the requisite powers. This is to be done as per the Administrative Orders under SBI Regulations of the Bank. The authority will examine the need for the same before confirming it.

25.

The consent of the guarantor is necessary to rephase term loan instalments.

R.

Rephasement of term loan instalments, if it is detrimental to the interests of the guarantor, is a material change in the contract and as such requires the consent of the guarantor (S133 of Contract Act). Otherwise, the guarantor will be relieved of his liability.

 

26.

The Bank cannot sell the goods pledged to it without serving a notice of sale on the borrower, even though the advance has been called up.

R.

A notice of sale giving reasonable time for payment is a statutory requirement (Under S. 176 of Indian

Contract Act. It is also called a statutory notice). If it is not served, the sale would not be valid and will

1-26

Rationale
Rationale
   

be set aside by the Court. (Note: In such cases, the bank has to serve a notice and conduct a fresh sale).

27.

Goods charged to the Bank as security are preferably insured for the full market value

R.

If the goods are insured for a lesser amount than the full market value of the entire stock, in case of loss, 'Average clause' would operate. The borrower would get only a proportionately lesser amount. To protect bank's interest.

 
 

28.

Insurance of stocks pledged/hypothecated to the Bank must be done in the joint names of the borrower and the Bank.

 

R.

This enables the Bank to make a claim on the insurance company in case of loss. Also, the insurance company will not settle the claim with the borrower ignoring our right. Further, the bank has insurable interest in the goods as it is a creditor.

29.

When a claim under a fire policy is settled, the insurance company must be advised to enhance the value to the original extent.

   

R.

The value of the policy is automatically reduced when a claim is settled (Hence, it has to be raised to

1 ,
1 ,

.K

the original limit by paying additional insurance premium). If it is not done, it will result in under- insurance of stocks.

30.

Margins are to be maintained on the stocks/assets charged to the Bank.

R.

Margin is a cushion against deterioration in value and obsolescence of stocks. If no margin is main- tained, the bank's advance would not be covered by market value in case of decrease in price. It also indirectly ensures owner's stake.

31.

Lesser margins are stipulated for imported materials compared to local materials.

R.

The imported materials generally command a premium in the market on account of better quality. Also, the unit has to import in bulk due to shipping, licensing, minimum quantity purchase and such other constraints, which necessitates locking up of more funds as margin.

a.

32.

Margin on Raw Materials is less than that on Semi-finished goods.

 

R.

Raw Materials can easily be disposed of by the Bank, as at this stage they can be utilised for manufac- turing a variety of goods. Also, the value of raw materials will not fall as steeply as that of SFGs in a forced sale for the same reason.

   

33.

Inspection charges are recovered from assisted units.

' - -? i

.

 
   

R.

In view of the decline in the profitability of the Bank, as a matter of policy, the out-of-pocket expenses/ cost of operations are recovered from the assisted units. In the long run various services/activities have to be self-sustaining in terms of revenue.

   

34.

Banks should take more than ordinary care in the case of pledged goods.

 

-,„

R.

As a pledgee, the Bank has to exercise the standard of care of a bailee-i.e. as an ordinary prudent man taking care of his goods of a similar nature. The bank would be liable for any loss/damage to the goods arising out of its negligence.

35.

Every effort is made to get the deposit slips signed by the borrowers in respect of credits into NPA accounts (or accounts in which there are no operations for say 2 years).

R.

Often it is difficult to get the revival letter signed by the borrower in time. In NPA accounts Signature on the deposit slip will extend the limitation period; also, a debt which is binding on the debtor will be binding on the guarantor, in terms of Supreme Court judgement.

36.

Advance against bills is preferable to advance against book- debts.

R.

The drawee would be obliged to meet the commitment under a bill (usance bill) on the due date lest the bill should be protested for non-payment. Thus the fate of bill will be known for necessary action by the Bank. This may be difficult in case of book debts. Also, the debtor of our borrower may set off any claims by him against the debt and refuse to pay the debt.

MM Special Guide

37.

The list of Transport Operators recommended by IBA is furnished to the branches every month.

R.

Branches can grant advance against MTRs/Lony Receipts of only IBA approved Transport Opera- tors. These Receipts are issued in a special format prescribed by IBA. The transit insurance is to be effected by the consignors and the goods are carried at the carrier's risk. Advances agent goods covered by such LRs only are considered as secured loans.

38.

The opinion on Borrowers/Guarantors has to be revised every year.

R.

This will alert the manager about any erosion of net worth of the borrower/guarantor. The manager can take additional security or other appropriate action to safeguard the Bank's interest. The Bank has lost many legal cases as it was not able to identify/furnish details of assets of borrowers/guarantors to the Court Officials for attachment, execution etc.

39.

Credit risk rating of borrowers is done by the Bank.

R.

This enables charging of different rates of interest based on the credit risk. Advances with very high risk can be declined. Indirectly, this promotes efficiency in the borrowers to earn finer pricing.

PRODUCTS

1.

SME Credit Plus has been introduced.

R.

This product helps SME units with excellent track record and borrowers of highest standing and integrity to meet unforeseen expenditure. The c/c a/c will be regular. It is a cost-effective arrange- ment, as there is no need to process frequent requests for adhoc excess drawings.

2.

A General Purpose Term Loan scheme for SME (mfg) units has been introduced.

R.

The financial requirements of SME units have been growing; also flexibility is required for SMEs to survive in today's highly competitive environment. Hence, the loan is granted for any long term needs and is repayable out of cash generation by the unit.

3.

The Bank has introduced 'SBI Shoppe'

R.

Financing for purchase of shops and offices in the emerging market scenario offers good business potential. Loan is also given for modemisation, renewals/repairs, face-lifting etc. Quality business can be tapped; also fully secured with immovable property, which will not undergo depletion in value generally.

4.

SME Smart Score has been introduced.

R.

Credit Approval Process is simplified under the scheme; delay in credit approval will be reduced. The criticism that there is lack of consistency in getting information, and delay in decision process will be met.

5.

The Working Capital limit under SME Smart Score is now sanctioned for 2 years with annual review.

R.

Speedier reviews are possible; backlog of renewals at branches / SMECs can be cleared. The time spent by credit officers on renewals will be reduced.

6.

The Concessions / freebies under Power Gain and Power Pack a/cs for SMEs have been further liberalised.

R.

Private sector banks and foreign banks have introduced innovative products to tap float funds of SME businesses. A number of our borrower-customers have opened current a/c with these banks. To wean away these customers to our Bank as well as to retain our existing customers and meet competition.

7.

Bank Guarantees have to be classified properly.

R.

a) The Bank has to provide for capital adequacy for all types of guarantees.

.•

b) The credit conversion factor (CCF) applicable for performance guarantee is 50% & for financial

guarantee is 100%.

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Rationale
Rationale

c) RBI has issued directives for proper classification for the purpose of having effective control over the guarantee transations.

8.

SME Asset Backed Loan has been introduced.

R.

It is a modification of SME Easy Loan Against Property. Drop-line overdraft (combined OD & DL) facility is provided. The scheme provides loans for those who are unable to furnish detailed financial data, but are in a position to offer property as collateral. LTV ratio is 60% up to loan of Rs.10 Cr; and 50% for loans above Rs.10 Cr. Earlier the loan was meant only for trading units and now it also covers units under Manufacturing & Services sector.

9.

BPR branches must submit ECS mandate in respect of auto loans to the concerned RACPC immediately on disbursement and not wait for migration of the documents.

R.

Corporate Centre has observed that there is a strong correlation among NPAs, frauds, non-migration of auto loan documents and timely activation of ECS mandate at BPR branches. Prompt submission of ECS mandate will enable RACPC to activate the mandate and follow up recovery.

Note:

No pledge advance is sanctioned to SME (manufacturing) units in SBI. The new SME documents do not have any pledge documents. Further, action under SARFAESI can be taken only against hypothecation advances; pledge advances are excluded from the SARFAESI Act. Rationale pertaining to pledge advances are retained for general understanding. Pledge is applicable to advances against gold omaments, warehouse receipts, shares and govt securities.

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MM Special G u i d e ADVANCES - AGRICULTURE Agricultural Cash Credit I .

MM Special Guide

MM Special G u i d e ADVANCES - AGRICULTURE
MM Special G u i d e ADVANCES - AGRICULTURE

ADVANCES - AGRICULTURE

Agricultural Cash Credit

I.

Banks are focussing on agricultural lending/rural lending.

R.

Food security for the nation is a critical factor in the development/security of the Nation. Investment in agriculture has come down to 1.3% of GDP from 1.6%. India's population is set to rise slowly but steadily in the next 20 years. A number of farmers had committed suicide as they were not able to repay the loans taken from money lenders. Also, there is an urgent need to give an export-thrust to the agricultural economy in the context of WTO imperatives.

2.

Agricultural credit is a supervised credit.

R.

The small and marginal farmers are indebted and are under pressure to divert the advance. The banker would know the progress of the investment /crop cultivation; and subsequent instalments need only be given if the farm had the benefit of earlier instalments. Further, a number of factors like support price, availability of power, other inputs, environmental factors affect the fortunes of agricultural activities and the banker should have an understanding of these. (Hence, it is a supervised credit).

3.

A term loan borrower should be encouraged to avail crop loan from us.

R.

Cultivation of crops on modem scientific basis will increase the incremental income of the farmer; it will enable him to repay the term loan instalments. Agricultural credit will go up.

4.

Share of agriculture in GDP is very low and has been declining over the years. Therefore the target for agriculture finance is kept on the higher side.

R.

Declining share of agriculture in GDP can not be accepted as a valid reason for prescibing lower target, as agriculture is an important sector in the economy, 2/3 rd of the population depends on it for its livelihood. It is also critical for ensuring food security and poverty elimination. Agriculture sector does not have recourse to other sources of finance like equity, CP etc. The Co-operative structure is weak and its role has become restricted.

5.

Crop loans are disbursed in stages and not in one lump sum.

R.

This ensures the end-use of funds and eliminates the propensity of the farmer to divert the funds for unproductive purposes; also, the farmer needs to pay less interest; In this way it is easy to establish the link between credit and benefits eamed by the farm.

6.

Crop loan is disbursed in both cash and kind components.

R.

Disbursal of kind component (seeds, fertilisers etc.) ensures the proper end - use of credit and appli- cation of right inputs for maximum yield; cash component (labour, water, etc.) enables the farmer to promptly carry out farming operations. Tendency/pressure for diversion of funds is avoided. Credit is made available at the appropriate time as seasonality and timeliness are important in agri, fmance.

7.

Pre-sanction / Post sanction inspection of farms is essential while granting agricultural advances.

R.

Pre-sanction inspection will enable us to judge the bona-fides of the applicants, suitability of the farm, present conditions of the farm, water source etc. Immediate post sanction inspection will enable us to ascertain that the farmer has taken up the work as per plan and commenced farming operations.

8.

Inspection should be farmer-oriented rather than farm oriented.

R.

We are able to establish good rapport with the farmer which is essential for good repayment culture. We will also know about the condition of his farm as well as other farms/farmers' affairs. General condition of the farms, crops etc are indicative of the situation in the entire village. The business potential of the borrower can be exploited.

9.

Interest on crop loans is applied at the time of harvest while it is applied on cash credits (for business units) on monthly basis.

R.

The agriculturist gets his income only after harvest and sale of the produce; in an industrial advance

1-30

Rationale

 

the unit is able to generate cash on an on-going basis.

 

10.

 

Repayment for agricultural advances is based on the cropping pattern.

R.

 

The farmer will select the cropping pattern based on soil, water conditions etc. Thus, different crops would be raised during a year at different seasons. The crop loan can be repaid by the farmer only out of sale proceeds of the crops. Also reasonable time say 2 months after harvest should be given for sale of crops at a reasonable price. The farmer does not have other periodical income.

 
11. R.
11.
R.

Repayment period for crop loans for raising different crops differs.

Some crops like rice, wheat, cotton etc are short duration crops and hence they can be repaid within 6-8 months; long duration crops like sugarcane, grapes, pine-apple etc require longer periods. Hence the repayment period differs for the various crops.

12. R.
12.
R.

Even if the borrower is literate, photograph is taken in Agl advance a/cs.

The farmer can be easily identified for operations at the branch during inspection; aids quick transac- tions. It is a uniform practice throughout the banking system. Now, a must under KYC.

13.

Collateral norms have been liberalised for Agriculture loans up to Rs. 1 lac.

R.

Insistence on collateral security hinders the growth of agricultural advances; will enable us to compete with other banks that have relaxed the norm. To facilitate credit off take in agriculture sector. RBI directives.

 

Agricultural Term Loan

 

1.

While financing farmers for agricultural equipments etc finance is given for the purchase/ acquisition of economic units/size.

R. So that the activity will be viable; otherwise their earnings will be low and unremunerative; they will be obliged to sell the assets. The purpose of the advance would be defeated; also, the Bank's loan would not be repaid.

2.

Gestation period is fixed for term loans granted to farmers under the various schemes of NABARD.

R.

After carrying out many technical studies NABARD has prescribed repayment period, gestation pe- riod, economic units for an activity etc. It is essential to conform to these. Otherwise, NABARD refinance will not be available; also, the advances will be in jeopardy.

Loans for cultivation of horticulture/plantation crops are given as Term Loans whereas loans for growing paddy and grains are granted as cash credit.

3.

R.

Horticultural plants/plantations are long duration plants; during the years till they come to fruition, no

incom e short duratio be n

as crop loans (cash credi tfr tshoe)y. m

can

te d d

ene s ra an

c

g ro

theseri lan

are mar k

et ts ed .

tthtn l it /2 is tn g iv n e t nhsafteras a term loan.

Hence,

w

n

harvest. Ti He le nc p e a , d th dy ey an a d re gr fi a n i a n n s c ar ed e

4.

In many states priorclearance r water - be obtained before sanc-

tioning an advance for minor irrigation.

 

R.

This ensures that the water resources in a particular area are not over- exploited. (In many States the ground-water level has gone down on account of over-exploitation of water resources by the digging of wells. Hence, State Govts. have set up Ground Water Directorate whose prior clearance (feasibility report) is essential for grant of loans for digging /deepening of wells.

5.

The Government has prescribed minimum spacing between two wells.

R. With a view to ensure that the water table in the area does not go down steeply making the cost of

 

pumping uneconomic. Also, indiscriminate well-digging in an area will make all the wells dry making the agricultural activity a risky one.

6.

For a 'Dairy Unit', a minimum of 2 milch animals are financed. To ensure continuity in milk production, income generation and repayment of loan. The scheme will be viable and NABARD Refinance will be available.

R.

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MM Special Guide

 

7.

Loans sanctioned to the farmers for purchase of farm equipments should be paid direct to the dealer.

R.

This ensures that the farmer is able to acquire the equipments of reputed make from reliable dealers as provided in the scheme. Thus misuse/diversion of funds is avoided; reasonableness of price is also assured.

8.

Now, the tractor-borrower is given the option of taking either Comprehensive insurance or only third party insurance (TPI) in respect of the tractor.

R.

The borrower gives an undertaking that he assumes the risk of not taking Comprehensive policy in case he opts for TPI only.This will reduce the burden of insurance premium on the farmers. The chances of total damage in case of a slow-moving vehicle like tractor are very low.

9.

In the case of tractor advance, insurance policy in respect of the tractor is not taken in the Bank's name or in the joint names of the Bank and the Borrower. or Insurance policy in respect of a tractor is taken in the name of the borrower and the Bank's

 

interest is noted in the policy.

 

R.

To avoid any possible claim on the bank by a third party, in case of accident, as a co-owner of the tractor. (The bank's interest is protected by taking the policy in the single name of the borrower and noting its interest in the policy by the insurance company).

10.

Signed undated blank transfer form in the prescribed format (In duplicate) has to be obtained from the borrowers in case of tractor advances.

R.

This will expedite transfer formalities with R.T.O. in case the borrower defaults in payment. The forms can be dated and details filled up later and the tractor transferred to the Bank's name or sold.

11.