Banking Assets originate from Banking Regulations Act 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 Bank’s 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 ü 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 ü 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 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 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 It’s 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 ü 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 Bank’s Client – Beneficiary – Issuing Bank • Bank Guarantees have a validity period and can’t 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 BANK’S 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 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 – Banker’s 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 bank’s 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 – LIC policies, book Debts, Supply bills o Assignment assigned Assignee gets absolute right over security – 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 o 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’ Bank note a Lien on the FD to the extent of the loan Zero risk product with Bank’s Right to set off. Borrower has the option of adjusting it on due date or repaying the loan as per his convenience Interest rate charged is normally 2 % higher than contracted rate of FD. No loans are granted against Other Bank FDs

Loans against FDs & Securities o Loans against Securities – Specified securities as per Bank’s 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 Bank’s 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 Bank’s 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 Bank’s extant policy o Bank’s 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 o Loans are given for short period Given as a Demand Loan with regular or bullet repayment Quite popular in South Indian branches of Banks 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 Bank’s 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 aplicant’s Net Income • Repayments are EMI based. • EMIs can be structured by lender based on Property, Builder, Applicant’s 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 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 Economy’s 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 Govt’s thrust – Hasn’t 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 Clean & Unsecured loans Seek to lend against short term needs Encourage consumption High Risk : Higher Return Small in Ticket size. Target specific customers, viz o Salaried , Reputed Companies o Track Record of payment o Parceled with existing auto / mortgage loans 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 ASSETS- ROLE 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 Housing Loans upto Rs 25 lacs Advances to weaker sections 10 % 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.