LOANS & ADVANCES

PROCEDURE & SANCTION OF

LOAN
Loaning is the main function of the Bank.
Major portion of a Banks fund is deployed in
loans and advances.
Loans and Advances are major source of
income for banks, (by income of interest).
Certain risk always exists in loans and
advances.
Banker advance loans on the basis of
Principles of Sound Lending, to minimize the
risk.
PRINCIPLES OF
SOUND LENDING
1. Safety
2. Liquidity
3. Profitability.
(1) SAFETY
Bank has to ensure the safety of the funds
lent. Mainly the funds are depositors money,
therefore, its safety is to be ensured first.

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

Repayment of the loan depends upon the
borrowers
Capacity to pay and (ii) willingness to pay.
The willingness to pay depends upon the Honesty
and
Character of the borrower.
Borrower should be a person of
Integrity, Good Character and
Reputation.
Banker should also see the Security
of tangible assets owned by the
borrower.
(2) LIQUIDITY
Bankers are essentially intermediaries for Short
Term funds. Therefore, they lend funds for short
periods i.e. mainly for Working Capital purposes.
(Depositors---BankerLoanee/Borrower)

Loans are payable on demand.

It depends upon the nature of assets owned by
the Borrower, and pledged to the Banker.
Loan should be given for such goods and
commodities which are easily marketable.
Thus, the Banker gives importance to
liquidity as Safety of the funds and grants
loans on the security of assets, which are
easily marketable without much loss.
(marketable securities may be Land &
Building, Gold/Silver, FD, KVP, LIC
Policy etc.).
(3) PROFITABILITY
Banks are profit-earning institutions.

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

Rate of interest to be charged were as per the
directives of RBI but now banks are free to
determine their own rates of interest on
advances of above Rs. 2 lakhs.
The variations in the rates of interest charged
from different customers depend upon the
degree of risk involved in lending to them (More
risk- more rate of interest).

The purpose of the loan should only be
Productive.

Bank should follow the Principle of
Diversification of Risks. Bank should not
finance in one industry or for one type of activity.
Variety of finance should be done by the
bank so as to save the risk of failure of one type
of industry or recession in that industry to
safeguard the repayment.
TYPES OF LOANS
The following types of Loan are given by
Banks:-
Short Term (upto one year or 12 months)
Medium Term ( >1 year to 5/7 yeaars)
Long Term ( >5 year upto 20 years)
Bridge Loans (Short period -Max. 3 month)
Composite Loans (WC + Investment)
Consumption Loans.
CLASSIFICATION OF LOANS
Secured Loans (with collateral)
Unsecured Loans. (without collateral)
The loan must be made on the security of
tangible assets like goods and
commodities, land and buildings, gold and
silver, Govt. securities etc.
The market value of such security must not
be less than the amount of the loan at any
time till the loan is repaid.
CREDITWORTHINESS OF
BORROWERS
Creditworthiness of a person means that
he deserves a certain amount of credit,
which may safely be granted to him. Such
creditworthiness is judged by the banker
on the basis of his:-
Character
Capacity, and
Capital. (Also known as 3Cs of Credit)
CHARACTER includes following:
His honesty
Integrity
Regularity
Promptness in paying dues
Sense of responsibility
Good habits and
Reputation and Goodwill which he enjoys in
the eyes of others i.e. Public.

CAPACITY includes following:-
Technical skill
Managerial ability
Experience to run an industry or trade
Success in the business.
Soundness of Project with competent
persons: (Technicians, Professionals) .
CAPITAL includes following:-
Adequacy of capital of borrower( own
contribution)
In case of failure in business, adequacy
of capital will be able to realize his
money, if the borrowers own capital is
sufficient.
Now ability and competence of the
borrower is judged in place of Capital.
FACTORS LIMITING THE LEVEL OF A
BANKS ADVANCES:
(i) The Size and maturity-wise pattern of Deposits
(S.B/C.D/R.D/F.D etc.)
(ii) Credit Control by Reserve Bank. (as per
resources of Bank Cash resources: and to
maintain CRR/SLR. In general a bank
advance loan 50 to 60% of its deposits only
and rest is based on borrowings. CD Ratio to
be maintained by Bank 60:100 is ideal ratio.
Seasonal Variations in Bank Credit.
a. Busy season
b. Slack season.
Busy season means November to April
whereas, Slack season means May to
October.
There is higher demand for bank credit
largely to finance the MARKETING AND
DISTRIBUTION OF AGRICULTURAL
CROPS
THE DEMAND FOR CREDIT
The demand depends upon :-
The level of production, both agricultural and
Industrial.
The level of inventories held by business and
Industrial houses.
The price level of goods and commodities in the
Country.
The procurement policy of Food Corporation of
India and other State Agencies.
Sanction Letter &
Terms and Conditions
1. Name & Complete Address.
2. Subject matter (for business/Personal)
3. Purpose of Loan
4. Amount of Loan
5. Rate of Interest & Penal Interest
6. Period of Loan
7. Equal Monthly Instalments (EMI)
8. Moratorium Period/Gestation period.
9. Names & Addresses of two Guarantors
10. Collateral Security.
11. Separate sanction for Cash Credit,
Working Capital and Investment Credit
12. Identification documents with Photo,
Mobile/Telephone Number
13. Insurance of Assets
Risk coverage like Fire, Theft, Flood,
Thunder, Short-circuit (Electric), Robbery,
Accident etc. should be mentioned.
Insurance should be for entire period of
Loan.
14. Deposit of Title Deeds (original
documents of Collateral Security)
15. Acceptance on Terms & Conditions by
borrower.
16. Various Documents required after
issue of sanction letter (some documents
are taken before issue of sanction letter).
17. Advance Cheques of other Bank
18. Bank Account Statement of two years
19. Details of Assets, Policies &
Investments made by borrower.
20. Details of Members of family &
income. ------
PROJECT PREPARATION
1. PROJECT PREPARATION
2. PROJECT APPRAISAL,
3. ASSESSMENT OF CREDIT
REQUIREMENT.