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Banking Assets

Banking Assets. Banking Assets originate from Banking Regulations Act 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’

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Banking Assets

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  1. Banking Assets • Banking Assets originate from Banking Regulations Act • Defines Banking as • accepting for the purpose of lending or investmentof deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise’ • Banks need to deploy Deposits gainfully in order to • Pay the contracted interest at the end of period / time • Repay the deposits on demand or otherwise • After maintaining the statutory reserves

  2. Banking Assets – Classification • In a Bank’s Balance Sheet Assets are shown as : • Bills Purchased & Discounted • Cash Credits, Overdrafts & Loans payable on Demand • Term Loans • These are re-stated as • Secured by Tangible Assets ( incl Book debts ) • Secured by Bank/ Govt Guarantees • Unsecured • Re-stated again as • Priority Sector & Public Sector • Banks • Others

  3. Banking Assets – In practice • Classified as : • Fund Based Facilities / Products • Non Fund Based Facilities / Products • Above may be either : • Secured by Tangible securities • Unsecured • By Segment • Corporate Banking Products • Large & Mid Corporates • MSME • Retail Banking Products

  4. Fund Based Assets / Products • By Tenor • Bills • Purchased • Discounted • Cash Credit / Overdrafts • Demand Loans - < One year • Term Loans - > One year • Above may be Secured or Unsecured

  5. Non Fund Based Products • Letters of Credit ( LCs ) • Sight LCs • Usance LCs • Guarantees • Financial Guarantees • Performance Guarantees • Deferred Payment Guarantees • Above may be Secured or Unsecured

  6. - FUND BASED Corporate Banking Assets

  7. Fund Based -Traditional Products • Working Capital : • Cash Credit against Stocks / Book debts • Demand Loans • Lock and Key Loans • Bills Purchased & Discounted • Regular • Under L/C • Term Loans :

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

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

  10. Cash Credit / Overdrafts • Funding is done from cash-to-cash stage. i.e RM purchase to sales realization • Granted against security of • Stocks ( all stages & kinds ) • Book Debts • In India constitutes the prime source of funding for Corporates • Because of its flexibility and ease of operation • Treated as short term & renewed every year • Technically payable on Demand • Can be a Hypothecation or Pledge

  11. Demand Loans • Payable on Demand after a fixed Term • Usually less than & up to a Year • Can be given for purposes similar to CC • At times built out of Total Fund Based limits • Is also given against other securities • Like FDs, Securities etc • Can be Clean & Unsecured at times • Convenient for short term specified uses • Normally repayment : Bullet payment • Security charge can be a Hypothecation or Lien

  12. Bills Finance • Bills Finance given to Finance Sales & Debtors : • Bills Purchased or • Bills Discounted • Normally given against ‘Sales’ Bills of Exchange • 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 • Preferred source of lending by Banks when parties are known & acceptable

  13. Bills Finance • Is given as regular fund based limit • Is a preferred source of financing in International Trade • When nomenclatured in FC are called Foreign Bills • Can also be given under LCs of reputed Banks • Big source of Export Finance in Banks • Banks have a Hypothecation charge over the underlying Debts/ dues

  14. Term Loans • Also called as Project Loans • Are given for Asset creation • As name suggests its give for a Term/ period • Usually given for periods longer than 3 years • Up to 10 years and longer • These loans finance small & Large projects • Considered ‘Tricky ‘ loans as taking a credit view over long periods is difficult and changes in business environment rapid

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

  16. Fund Based – Contemporary Products

  17. 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

  18. Factoring • Factoring is financing of the ‘Sales Ledger’ • A ‘Factor’ gets into the shoes of the seller • Manages collections, recovery, sales ledger keeping etc for the seller. • Different from sales bills discounting. • It’s a Buy out • Saves the hassle of hundis, due dates etc • Can be with/ without recourse now • In India usually with recourse to seller • Export factoring is called Forfaiting

  19. Future Receivables Discounting • A very innovative product • to finance Infrastructure projects • Future cash flows discounted • for certain fixed period • Captured through an escrow account and • discounted upfront. • Repayment (Take-out ) is from the future cash flows. • Needs strict monitoring & control • on the future cash flows. • Suits projects like Toll roads, Bridges, Ports,

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

  21. Loan against Property ( LAP )

  22. NON FUND BASED Corporate Banking Assets

  23. Letters of Credit • 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.

  24. Letters of Credit • Letters of credit are used primarily • in international trade for large transactions • There are 4 parties to a Letter of Credit • Issuing Bank • Applicant also ‘The Buyer’ • Beneficiary also ‘The Seller’ • Advising Bank • All LCs issued are ‘Irrevocable’ • Can be amended only at the request or consent of beneficiary • Letters of Credit may be • For imports/domestic purchases and are • Sight • Usance

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

  26. 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

  27. 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

  28. Buyers & Supplier Credit Buyer's credit • Enables local importers ( Buyers ) gain access to cheaper foreign funds close to LIBOR rates • Saves costs and gives longer tenors for payment • 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.

  29. Buyers & Supplier Credit • Exporter or Supplier gets paid on due date; • whereas importer gets extended date for making an import payment as per his cash flows • Buyer can deal with exporter(seller) on sight basis • negotiate a better discount and • use the buyers credit route to avail financing. • The funding can be in any Foreign currency • (USD, GBP, EURO, JPY etc.) as per choice of Buyer • Buyer can use this financing for any form of trade viz. open account, collections,or LCs • Currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency

  30. NATURE OF SECURITIES Nature & Kind of Bank’s charge

  31. Securities • Banks mostly lend against Securities • Unsecured loans are often backed by Personal Guarantees • Borrower must have clear title to securities and capable of charging them to the Bank • Securities can be • Movable • Immovable • Tangible • Intangible • Must be marketable

  32. Kinds of Securities • Securities for Bank Loans • Fixed Deposits • Debt instruments of rated Companies • LIC Policies • Shares of listed Companies • Gold • Corporate Loans • Stocks & Book Debts • Plant & Machinery • Land & Building

  33. Charges & Modes of Creation • 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

  34. Types of Charges • Lien • Negative Lien • Assignment • Pledge • Hypothecation • Mortgage • Right of Set Off

  35. LIEN : Modes of Creation • 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

  36. LIEN… • 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

  37. Assignment • Transfer of Debt, Right / property in favour of the Bank • LIC policies, book Debts, Supply bills • 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

  38. Pledge • 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

  39. Hypothecation • 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

  40. Mortgages • Transfers interest in specific immoveable property in favor of bank • Forms of mortgages used by banks • Mortgage by deposit of title deeds • Simple or Registered Mortgage • Charges registered with ROC in case of companies • Registered mortgage needs to be registered with Sub registrar of assurance within 120 days of creation. • Equitable mortgage can be done at only notified centres • Registered can be done at any centre

  41. Retail loan products

  42. Retail Loans • Retail Loans have seen a recent focus by Banks • Was restricted to loans against FDs & Gold and few others on ‘Customer need’ basis • Initially started with • Housing or Mortgage loans as a Priority Sector • Broad based to other assets to meet Retail customer aspiration • Align with Global Banks • Steady rise in portfolios of Retail loans in Banks YOY • Additional avenue has enabled spreading of risk • Better pricing and higher NIMs to boost profitability

  43. Retail Loans- Kinds • Loans against FDs & Securities • Loans against shares • Gold Loans • Car & Two wheeler loans • Mortgage Loans & Loans against Property • Education Loans • Personal Loans • Credit Cards

  44. Loans against FDs & Securities • Basic & simplest Retail Loan Product • Depositor can ,on request, get ‘x’% of the value of FD as loan from the Bank. • Instant & automatic at times • 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

  45. Loans against FDs & Securities • 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

  46. Loans against Shares • Given against pre approved list of Listed companies shares, as per Bank’s Policy • Given normally as an overdraft for approved uses • Bank holds a Pledge on shares • Loan Limit & DP is calculated as per market value of shares on date of sanction • Value of security is normally checked at weekly intervals • In case of fall in value , Borrower must pay the difference • Margin Call • Margin money for limit calculation is 50 % on MV . • ROI is as per Bank’s extant policy • Bank’s overall exposure under this product falls under ‘ Capital Market’ exposure limit set by RBI

  47. Gold Loans • One of the most traditional Loan products • Because of ease of availability of security • Security is easily marketable and has stable value • Quality & Quantity can be easily checked • Valuation/ Price is available in public domain • Bank holds a Pledge on the Gold • 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

  48. Auto Loans • Car & Two wheeler loans • Big push in the past 10 years • Erstwhile dominated by Foreign Banks & NBFCs • Thrust has led to the growth of the auto industry • Prior to 2000, only 10 -15 % vehicles were financed • Currently 90% vehicles are financed • Huge impact on Bank’s Balance Sheet • Add-on avenue to deploy funds and improve NIIs • Risk mitigated as large number of clients

  49. Auto Loans • Special structured loans to meet customer needs • 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 • Loans vary from 70-90 % of Asset value ( LTV ) • Varies with Brand & Models • Seek to capture existing Free Cash Flows • Credit Decision is a mix of Credit view + Asset view

  50. Auto Loans • Could be EMI oriented • Tenors vary from 3-7 years • Short end typically for 2 wheelers • Banks have a hypothecation charge over asset • Auto loans adopt novel channel for sales • Banks tie up with Auto companies to bring new structured products for their models • To increase sales of vehicles +loans • Also tie up with Auto dealers to improve penetration • Assignments

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