Banking Assets

o Banking Assets originate from Banking Regulations

Act

o Defines Banking as
accepting for the purpose of lending or investment of
deposits of money from public repayable on demand or
otherwise and withdrawable by cheque, drafts order or
otherwise

o Banks need to deploy Deposits gainfully in order to

o Pay the contracted interest at the end of period / time
o Repay the deposits on demand or otherwise
o After maintaining the statutory reserves

Banking Assets
Classification
o In a Banks Balance Sheet Assets are shown
as :
o Bills Purchased & Discounted
o Cash Credits, Overdrafts & Loans payable on Demand
o Term Loans

o These are re-stated as

o Secured by Tangible Assets ( incl Book debts )
o Secured by Bank/ Govt Guarantees
o Unsecured

o Re-stated again as
o Priority Sector & Public Sector
o Banks
o Others

Banking Assets In
practice
o Classified as :
o Fund Based Facilities / Products
o Non Fund Based Facilities / Products

o Above may be either :

o Secured by Tangible securities
o Unsecured

o By Segment
o Corporate Banking Products
o Large & Mid Corporates
o MSME

o Retail Banking Products

Fund Based Assets /

Products
o By Tenor
o Bills
o Purchased
o Discounted

o Cash Credit / Overdrafts

o Demand Loans - < One year
o Term Loans > One year
Above may be Secured or
Unsecured

Non Fund Based Products

o Letters of Credit ( LCs )
o Sight LCs
o Usance LCs

o Guarantees
o Financial Guarantees
o Performance Guarantees

o Deferred Payment Guarantees

Above may be Secured or Unsecured

CORPORATE BANKING
ASSETS
- FUND BASED

Fund Based -Traditional

Products
o Working Capital :
o Cash Credit against Stocks / Book debts
o Demand Loans
o Lock and Key Loans
o Bills Purchased & Discounted
o Regular
o Under L/C

o Term Loans :

Fund Based
Contemporary Products
o Channel Financing
o Factoring
o Future Receivables Discounting
o Credit card Receivables Securitisation
o Lease Rental Securitisation
o Loans Against Property ( LAP )

Cash Credit / Overdrafts

o Suits most businesses & segments
Universal acceptance
o Easy assessment, control and monitoring.
o Easy to operate.
o Running Account ( with a Debit Balance )
o By Cheques as a running account with
governing Limits & Operating Drawing Power
o Facility can be run on a in-and-out basis
Regular Deposit & Withdrawals

Cash Credit / Overdrafts

o Funding is done from cash-to-cash stage.
i.e RM purchase to sales realization
o Granted against security of
o Stocks ( all stages & kinds )
o Book Debts

o In India constitutes the prime source of

funding for Corporates
o Because of its flexibility and ease of operation

o Treated as short term & renewed every year

o Technically payable on Demand
o Can be a Hypothecation or Pledge

Demand Loans
o Payable on Demand after a fixed Term

o Usually less than & up to a Year

o Can be given for purposes similar to CC
o At times built out of Total Fund Based limits
o Is also given against other securities

o Like FDs, Securities etc

o
o
o
o

Can be Clean & Unsecured at times

Convenient for short term specified uses
Normally repayment : Bullet payment
Security charge can be a Hypothecation or
Lien

Bills Finance
o Bills Finance given to Finance Sales & Debtors

o Bills Purchased or
o Bills Discounted
o Normally given against Sales Bills of
Exchange
o
o
o
o
o

Drawn against Sales in course of business

On acceptable and known parties by the Bak
For period of Usance ( Credit ) upto 3-6 months
Facility gets rolled over on payment of Bills
When Given against Sight Bills is called Bills Purchased

o Preferred source of lending by Banks when parties

are known & acceptable

Bills Finance
o Is given as regular fund based limit
o Is a preferred source of financing in
International Trade
o When nomenclatured in FC are called
Foreign Bills

o Can also be given under LCs of reputed

Banks
o Big source of Export Finance in Banks
o Banks have a Hypothecation charge over
the underlying Debts/ dues

Term Loans
o Also called as Project Loans
o Are given for Asset creation
o As name suggests its give for a Term/ period
o Usually given for periods longer than 3
years
o Up to 10 years and longer

o These loans finance small & Large projects

o Considered Tricky loans as taking a credit
view over long periods is difficult and
changes in business environment rapid

Term Loans
o Normally payable in fixed instalments as per
repayment schedule agreed upfront
o Fixed Term, Fixed amount, Fixed Price
o Secured by the assets created by the loan.
o Charge on immovable financed is Mortgage
o Charge on Movable assets is Hypothecation
o In term loans usually charge is on a Pari
passu basis because there are more than one
lenders

FUND BASED
CONTEMPORARY
PRODUCTS

Channel Financing
Enables financing the whole supply chain of the anchor customers
dealers and

vendors.

Normally granted to associates of AAA / AA rated borrowers

With excellent payment record
e.g HLL, Maruti, ITC , Nokia, Hero Honda and more..
Anchor co may/ may not give some comfort to the lender.

Has become a useful tool

to acquire better quality & large volume Assets for Banks/NBFCs

Supplies to dealers are discounted

Take out from the dealers cash flow.

Vendors are paid by discounting their sales bills

Repayment are from anchor customers who will pay on due date

Leverages the credit quality of a better rated customer & lowers

risk

Factoring
o Factoring is financing of the Sales Ledger
o A Factor gets into the shoes of the seller
o Manages collections, recovery, sales ledger
keeping etc for the seller.
o Different from sales bills discounting.

o Its a Buy out

o Saves the hassle of hundis, due dates etc

o Can be with/ without recourse now

o In India usually with recourse to seller

o Export factoring is called

Forfaiting

Future Receivables
Discounting
o A very innovative product
o to finance Infrastructure projects

o Future cash flows discounted

o for certain fixed period
o Captured through an escrow account and
o discounted upfront.

o Repayment (Take-out ) is from the future cash

flows.
o Needs strict monitoring & control
o on the future cash flows.

o Suits projects like Toll roads, Bridges, Ports,

Rental Securitisation
o Future rentals from better rated borrowers are
securitised.
o Captures the booming business of BPOs and real
estate development
o Against a fixed term covering loan amount
o Premature exits not favored
o Classic case of Credit enhancement through Product
structuring
o Leverages the rating of the Tenant and his Cash flows
o Supported by mortgage as security

Loan against Property

( LAP )

CORPORATE BANKING
ASSETS

NON FUND BASED

Letters of Credit
o Letter of Credit
Is a document issued by a Bank to a Seller
Guaranteeing the payment to Seller for goods supplied to
a designated buyer
On presentation of the specified documents
LCs are issued as per provisions of UCPDC

Document serves as a guarantee to the seller

that it will be paid by the Bank regardless of
whether the buyer ultimately fails to pay.

Thus, the risk that the buyer will fail to pay is

transferred from the seller to the Bank.

Letters of Credit
o Letters of credit are used primarily

in international trade for large transactions

o There are 4 parties to a Letter of Credit

Issuing Bank
Applicant also The Buyer
Beneficiary also The Seller
Advising Bank

o All LCs issued are Irrevocable

Can be amended only at the request or consent of beneficiary

o Letters of Credit may be

For imports/domestic purchases and are
Sight
Usance

Bank Guarantees
o Another Non Fund Product Line in Banks
o Banks leverage their credibility and acceptability
to issue Guarantees to Third parties
o Guarantees are issued on behalf of their Clients
o Bank Guarantees are a good source of fee income
& deposits for Banks
o Huge demand by Infrastructure , Construction &
Project Companies for their business
o Enables clients to reduce funds outlay and save
costs

Bank Guarantees
Issued for variety of purposes for such
clients

Bid Bonds
Earnest money
Advance for projects
Release of retention money
Performance Guarantee
At times for Customs in lieu of customs duty
General & Miscellaneous

Bank Guarantees
There are 3 parties to a Bank Guarantee,
viz
Applicant or the Banks Client
Beneficiary
Issuing Bank

Bank Guarantees have a validity period

and cant be open n continuing
Unlike LCs they are issued in a free
format acceptable to the Beneficiary and
Bank

Buyers & Supplier Credit

Buyer's credit
o Enables local importers ( Buyers ) gain access
to cheaper foreign funds close to LIBOR rates
o Saves costs and gives longer tenors for
payment
o Tenor ( Duration ) of buyer's credit varies from
country to country, as per the local regulations.
Buyer's credit can be availed for one year in case the
import is for trade-able goods
Three years if the import is for capital goods
Interest on buyer's credit may get reset, every six
months.

Buyers & Supplier Credit

o Exporter or Supplier gets paid on due date;
whereas importer gets extended date for making an
import payment as per his cash flows

o Buyer can deal with exporter(seller) on sight basis

negotiate a better discount and
use the buyers credit route to avail financing.

o The funding can be in any Foreign currency

(USD, GBP, EURO, JPY etc.) as per choice of Buyer

o Buyer can use this financing for any form of trade

viz. open account, collections,or LCs
o Currency of imports can be different from the
funding currency,
which enables importers to take a favourable view of a
particular currency

NATURE OF SECURITIES
NATURE & KIND OF BANKS
CHARGE

Securities
o Banks mostly lend against Securities
o Unsecured loans are often backed by
Personal Guarantees
o Borrower must have clear title to securities
and capable of charging them to the Bank
o Securities can be
o
o
o
o

Movable
Immovable
Tangible
Intangible

o Must be marketable

Kinds of Securities
o Securities for Bank Loans

Fixed Deposits
Debt instruments of rated Companies
LIC Policies
Shares of listed Companies
Gold

o Corporate Loans
Stocks & Book Debts
Plant & Machinery
Land & Building

Charges & Modes of

Creation
o Charge on security
Means making a security legally available
to the lending banker
Creditor ( Bank ) gets definite & defined
rights on assets till loan is repaid /
liquidated
Absolute ownership remains with the
borrower in most cases

Types of Charges
o Lien
Negative Lien

o Assignment
o Pledge
o Hypothecation
o Mortgage
o Right of Set Off

LIEN : Modes of Creation

o Right to retain the goods/securities until debt
due is paid
Bankers lien is more than possessary and is
implied pledge
Banker has a general lien

Does not require a separate agreement

Applicable to goods & securities and not to
Monies deposited with bank
Possession of goods/securities must be obtained
in usual course of business
Right of General lien not affected by Limitation
for amounts covered by security value

LIEN
o Negative lien :
Securities do not lie in banks possession
Debtor undertakes not to create a charge on
unencumbered security
Does not require registration in case of
Companies

o Transfer of Debt, Right / property in favour of the

Bank

Assignment

LIC policies, book Debts, Supply bills

o Assignee gets absolute right over security

assigned
Other creditors do not get priority over Assignee
Assignee does not get a better title than the
assignor

Pledge
o Pledge is a bailment or legal delivery of goods by a
debtor with an intent to create a charge as security
for Loans
Legal ownership remain with pledgor
Possession, actual or constructive with pledgee
Fixed charge in favor of the Bank

Does not require registration with ROC

Not subject to priority claims of other creditors
Pledgee not bound to sell goods by Public auction in
case of default at his absolute discretion

After giving reasonable notice to borrower

Sale of pledged goods does not extend Limitation
Bank can sell & recover his dues even after Limitation

Hypothecation
o Not clearly defined under law
It is considered an equitable pledge governed by the
terms of hypothecation deed
Applicable on moveable goods
Neither transfers ownership or possession to lender
Borrower holds possession as agent of the Bank with
constructive possession with Bank.

Needs registration with ROC in case of companies

Most used method to lend by Banks, despite
weakness in security and its enforcement

Mortgages
o Transfers interest in specific immoveable
property in favor of bank
o Forms of mortgages used by banks
Mortgage by deposit of title deeds
Simple or Registered Mortgage

o Charges registered with ROC in case of

companies
o Registered mortgage needs to be registered
with Sub registrar of assurance within 120 days
of creation.
o Equitable mortgage can be done at only notified
centres
o Registered can be done at any centre

RETAIL LOAN PRODUCTS

Retail Loans
o Retail Loans have seen a recent focus by Banks
o Was restricted to loans against FDs & Gold and
few others on Customer need basis
o Initially started with
o Housing or Mortgage loans as a Priority Sector
o Broad based to other assets to meet Retail customer
aspiration
o Align with Global Banks
o Steady rise in portfolios of Retail loans in Banks YOY

o Additional avenue has enabled spreading of risk

o Better pricing and higher NIMs to boost profitability

Retail Loans- Kinds

o Loans against FDs & Securities
o Loans against shares
o Gold Loans
o Car & Two wheeler loans
o Mortgage Loans & Loans against
Property
o Education Loans
o Personal Loans
o Credit Cards

Loans against FDs &

Securities
o Basic & simplest Retail Loan Product
o Depositor can ,on request, get x% of the value
of FD as loan from the Bank.
o Instant & automatic at times
o Certain Banks allow drawals on as & when basis

o Bank note a Lien on the FD to the extent of the

loan
o Zero risk product with Banks Right to set off.
o Borrower has the option of adjusting it on due
date or repaying the loan as per his convenience
o Interest rate charged is normally 2 % higher than
contracted rate of FD.
o No loans are granted against Other Bank FDs

Loans against FDs &

Securities
o Loans against Securities
Specified securities as per Banks Credit
policy
These could be Kisan Vikas Patra, Mutual fund
units, LIC policy ( surrender Value ),
Loan is for an x% of Face value/ market value/
maturity value / surrender value
Borrower needs to service interest on the loan.
Repayment can be fixed as per mutually agreed
terms for 6-36 months
Can be given as Demand Loan or Overdraft
Interest charged is as per Banks interest rate
policy
Bank notes its lien / assignment / charge on
security

Loans against Shares

o Given against pre approved list of Listed
companies shares, as per Banks Policy
o Given normally as an overdraft for approved uses
o Bank holds a Pledge on shares
o Loan Limit & DP is calculated as per market value
of shares on date of sanction
o Value of security is normally checked at weekly
intervals
o In case of fall in value , Borrower must pay the
difference
o Margin Call

o Margin money for limit calculation is 50 % on MV .

o ROI is as per Banks extant policy

o Banks overall exposure under this product falls
under Capital Market exposure limit set by RBI

Gold Loans
o One of the most traditional Loan products

o Because of ease of availability of security

o Security is easily marketable and has stable value
o Quality & Quantity can be easily checked
o Valuation/ Price is available in public domain
o Bank holds a Pledge on the Gold
o Loans are given for short period
o Given as a Demand Loan with regular or bullet
repayment
o Quite popular in South Indian branches of Banks
o Assignment

Auto Loans
o Car & Two wheeler loans
o Big push in the past 10 years

o Erstwhile dominated by Foreign Banks &

NBFCs
o Thrust has led to the growth of the auto industry

o Prior to 2000, only 10 -15 % vehicles were

financed
o Currently 90% vehicles are financed
o Huge impact on Banks Balance Sheet
o Add-on avenue to deploy funds and improve NIIs
o Risk mitigated as large number of clients

Auto Loans
o Special structured loans to meet customer needs
o Products may differ Client wise- model wise

Products for salaried may be of long tenor

SEP + SENP may have differently designed products
Credit view is taken on asset as well as Client profile
Market Value curve is also a determining factor

o Loans vary from 70-90 % of Asset value ( LTV )

o Varies with Brand & Models

o Seek to capture existing Free Cash Flows

o Credit Decision is a mix of Credit view + Asset view

Auto Loans
o Could be EMI oriented
o Tenors vary from 3-7 years

o Short end typically for 2 wheelers

o Banks have a hypothecation charge over asset
o Auto loans adopt novel channel for sales
o Banks tie up with Auto companies to bring new
structured products for their models
o To increase sales of vehicles +loans

o Also tie up with Auto dealers to improve

penetration

o Assignments

Mortgage Loans
o As the names suggests these are
Loans against Mortgage of Property
Acquisition of Land and/or House & Flat

Quite Popular with Banks to build stable Retail Loans

Have a demonstrated low delinquency rate historically
Loans are Long Term Tenors 5- 30 years
Has enabled preponment of the acquisition date of
owned house by individuals
Helped in meeting the growing need of housing
Also provided a big fillip to Core Industries in the
Economy
Cement, and Steel,

A growing source of employment and GDP growth

Mortgage Loans
Value of the loan is determined by Value of property
Assessment of loan eligibility depends upon Age,
residual service, Income etc of the applicant
Normally EMIs should not exceed 35 % of aplicants
Net Income
Repayments are EMI based.
EMIs can be structured by lender based on Property,
Builder, Applicants requirement
Loan may be disbursed during the construction period

Interest rates can be fixed or floating

Prepayments are allowed by the Banks

Now without penalty

Qualifies for Priority Sector Lending upto 25 lacs

Loans against Property

o As distinguished from Mortgage loans
These are Loans against Ready / existing Property

Property can be either Residential or Commercial

Already owned by the applicant
Purpose of the loan is normally Business
purposes
Tenors are short between 3-7 years - flexible
End use being different, loans are priced higher
than Mortgage loans
Do not qualify for Priority Sector lending

As Loans are for Business purposes

assessment is made differently based on
purpose of loan

Education Loans
o Have been on the Banking product suite for long
Is a Priority Sector Lending for Banks
Govt has been giving high thrust to improve
product penetration
Enables skill building to meet Economys growing
Skill / Talent needs
Loans given for pursuing higher education/
professional courses
Both at Indian & Foreign Universities
More popular with Public Sector Banks on account
of Govts thrust
Hasnt seen much growth in Private sector Banks
Because of high defaults in the product portfolio

Education Loans
o Past few years has seen higher growth in Banks
o Loans are given in 2 slabs
o Maximum limit : Domestic 10 lacs Foreign studies 20
lacs
o Upto 4 lacs unsecured and
o beyond 4 lacs up to 10 & 20 lacs against Collateral &
Guarantees.

Had seen a high default rate in Banks

Prevented Banks from giving the thrust intended
Govt planning to have a Credit Guarantee Scheme
to reduce default ratios of Banks

Education Loans
o Loans are assessed for Cost of Education
o Add on like Books, Expenses etc for period of
course are also permitted
o Repayment are flexible
o Normally linked to duration of course with a
moratorium of 6 months from end of course

o Collateral insisted by Banks if loan value > 4 lacs

o Normally mortgage of Property

o Interest rates are floating and Base Rate linked

o Repayment are spread over maximum 84
months

Personal Loans
o
o
o
o
o
o

Clean & Unsecured loans

Seek to lend against short term needs
Encourage consumption
High Risk : Higher Return
Small in Ticket size.
Target specific customers, viz
Salaried , Reputed Companies
o Track Record of payment
o Parceled with existing auto / mortgage loans
o

o Banks seek to leverage their Collection systems

o Provides higher revenues

Personal Loans
o Simple assessment
At times pre approved to improve marketing
More popular in times of economic buoyancy
o Loan Limit is based on Certain times monthly
Salary
o Banks have prudential limits for this loan
portfolio
o Assignment

Credit Cards
o Credit Cards are like pre approved Overdraft limits
o Limits are set based on variety of parameters
Income, Company, years of service , track record
etc

o Facilitates approved transactions

At approved merchant establishment ( ME )

Currently covers a wide range o such outlets
Retail, Travel, Hospitals, Chemists, Utility Bills etc
Cash Drawals are also permitted upto a sub limit

o Benefits both the Card holder and the ME

o Card holder gets a credit period while ME larger
clientele
o Nowadays transaction approval is online

Credit Cards
o Cards allow a credit period of 50-57 days
o Monthly debits ( purchases ) need to be paid at the
end of the credit period fully
o Rollover of monthly outstandings is permitted @ interest
o Card holder must pay between 5-10% of outstandings to
enjoy rollover facility
o Interest is chargeable only if not paid by due date
o Subsequent purchases carry interest from due date till
amount due cleared

o Limit ( Loan ) is Clean & Unsecured

o Interest rate vary between 24-42 % p.a
o Easy credit.difficult to manage if no discipline is
maintained

REGULATION OF ASSETSROLE OF RESERVE BANK OF

INDIA

Priority Sector Lending ( PSL

)
o Banks have to lend 40 % of their ANBC under
PSL
o Thresholds
o
o
o
o

Agriculture -- 18 %
Indirect
-- 4.5 % maximum
Advances to MSME sector : Reckoned without min/ max
Education Loans upto Rs 10 lacs India, 20 lacs abroad
o Housing Loans upto Rs 25 lacs
o Advances to weaker sections 10 %
o DIR
-- 1 % of ANBC

PSL- Agriculture
o Crop Loans to farmers
o Loans against Ware house Receipts upto Rs 10
lacs
o Working capital and term loans,
including credit sanctioned under Kisan Credit Card
for financing production and investment requirements
for agriculture and allied activities.

o Finance to corporates, partnership firms and

institutions for Agriculture and Allied Activities
-dairy, fishery, piggery, poultry, bee-keeping, etc .