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Management of Advances

Management of Advances. Dr. Ajit Kumar AGM & MoF CAB, PUNE. Introduction. What is Banking? Loan Policy Bank’s own Guidelines + RBI Guideline =Loan Policy {each broad category of economic activity} + Manual on Loans and advances Loan Policy of Commercial Bank vis-à-vis Cooperative Bank.

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Management of Advances

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  1. Management of Advances Dr. Ajit Kumar AGM & MoF CAB, PUNE College of Agricultural Banking, RBI, PUNE

  2. Introduction • What is Banking? • Loan Policy • Bank’s own Guidelines + RBI Guideline =Loan Policy {each broad category of economic activity} + Manual on Loans and advances • Loan Policy of Commercial Bank vis-à-vis Cooperative Bank College of Agricultural Banking, RBI, PUNE

  3. Types of Loan • Term Loan • Cash Credit • Book Debt • Bill Limit – Bill purchase/ discounting • WCDL • Export Credit-Pre shipment (Packing Credit) & Post shipment Credit • Retail Loan- Housing, Education etc. • Overdraft College of Agricultural Banking, RBI, PUNE

  4. Term Loan • Long Term Stake; Careful Appraisal • Project Viability: techno-economic viability, market, competitors • Management’s Competence • Regulatory Clearances • Credit Opinion Report • Repayment Capability: DSCR • Collateral

  5. Working Capital Requirement • Less stringent appraisal requirement but greater/ higher post credit supervision/ surveillance required. • Under loaning and excess loaning both are dangerous • Need based credit • Periodic stress testing required College of Agricultural Banking, RBI, PUNE

  6. Working Capital Requirement • Assessment of working capital requirement: • Traditional methods • Turnover method-upto Rs.1.0 cr. for non SSI and upto Rs.5.0 cr. for SSI -Gross sales including excise duty -for others UCBs may adopt any method • Cash Budget method- products of seasonal nature College of Agricultural Banking, RBI, PUNE

  7. Traditional Method Current LiabilityCurrent Asset Creditors - 300 Current assets – 740 Bank borrowing-330 1st method: Current assets – creditors = 740-300=440 25% margin to be deducted= 440-110=330 Current ratio= current asset/ current liability 740/630 = 1.17 College of Agricultural Banking, RBI, PUNE

  8. Traditional Method Current LiabilityCurrent Asset Creditors - 300 Current assets – 740 Bank borrowing-330 2nd method: (Current asset – margin 25%)- less creditors 740-185=555-300 =255 Excess borrowing- 75 Current ratio= current asset/ current liability 740/555=1.33 College of Agricultural Banking, RBI, PUNE

  9. Turnover Method (Nayak Committee) Current LiabilityCurrent Asset Creditors - 300 Current assets – 740 Bank borrowing-330 NWC-740-660=80 Projected Sales- 2000 25%of sales=500 less 5%margin i.e. 500-100=400 Now margin(100) or NWC(80) whichever is higher to be deducted from 25% of sales 500-100=400 is the permissible finance Or simplistically 20% of projected turnover i.e.400 College of Agricultural Banking, RBI, PUNE

  10. Working Capital Requirements • Actual drawals to be allowed on the basis of DP after excluding unpaid stock • Banks to ensure regular and timely submission of monthly statements of stocks, receivables etc. • Periodical verification of stock • Incentive for Loan system • Banks to laydown policy guidelines for periodical review of the WC limit and the same to scrupulously adhered to College of Agricultural Banking, RBI, PUNE

  11. Interest Rate • Banks are free to determine lending rates but it should not be exorbitant • Interest rate charged by banks should incoporate risk premium having regard to the internal rating of the boprrower • Interest spread to be rational. College of Agricultural Banking, RBI, PUNE

  12. Transparent Pricing of loan • Banks are required to publish the minimum and maximum interest rates charged on advances and display the information in every branch{Base Rate} • A Board approved Policy for charging of Penal Interest • No Penal Intt. for loans upto Rs 25000/-for priority sector borrowers. College of Agricultural Banking, RBI, PUNE

  13. Pricing of loan • Banks should ensure that the total interest debited to an account should not exceed the principal in respect of short term advances granted to small and marginal farmers. SMF= land holding of five acres and less. • An appropriate ceiling of interest+ processing and other charges to be decided and publicised.

  14. Credit facility to a new borrower • UCBs should not finance a borrower already availing credit facility from another bank without obtaining a ‘No objection Certificate’ from the existing financing bank (as per declaration of the borrower/financial statement) – Credit opinion report. College of Agricultural Banking, RBI, PUNE

  15. Opening of Current Accounts • A declaration that the borrower is not having any credit facility with any other bank. • If yes, NoC required from that bank • If no response to the request for NoC is received, account may be opened after a minimum waiting period of a fortnight. College of Agricultural Banking, RBI, PUNE

  16. Certification of accounts of non corporate borrowers – Income tax Act 1961 • UCBs to ensure that borrowers do not default of payment of statutory dues like PF etc. College of Agricultural Banking, RBI, PUNE

  17. Loan Appraisal • Proper Appraisal of Loan • No oral sanction • Deviation to be recorded- sanction within discretionery powers • Adhoc sanction only when original limit utilised fully and supported by proper documents

  18. Monitoring of accounts • Ensure end use of fund • Ensure that security hypothecated/ pledged to the bank is not tempered with • Early warning system: Recognition of potential NPA College of Agricultural Banking, RBI, PUNE

  19. Monitoring operations in loan account • Monitoring end use of fund/fund flow to and fro- no loan for FD/KVP • The primary responsibility for preventing misuse of funds rests with the management of banks. UCBs to take appropriate steps to review and tighten control measures.

  20. Annual Review of Advances

  21. Valuation of properties – empanelment of valuers

  22. Exchange of credit information • UCBs required to take membership of at least one credit information company and provide credit data (positive as well as negative) to the credit information company. • - to incorporate suitable clauses in the loan agreement for the purpose. College of Agricultural Banking, RBI, PUNE

  23. Disclosure of defaulting borrowers • Scheduled UCBs are required to submit to RBI at the end of Sept and March every year data on defaulting doubtful, loss and suit filed borrowers with outstanding limit of Rs.1.0 cr. and above • Data on suit filed case of Rs.1.0 cr & above and willful defaulters of Rs.25.0 lakh and above is availbale on CIBIL site- www.cibil.com • Scheduled UCBs to report to CIBIL all cases of willful default Rs.25.0 lakh and above College of Agricultural Banking, RBI, PUNE

  24. Loan Restructuring • There will not be any asset class degradation upon restructuring in following cases: • (i)Project Financing (ii) borrowers engaged in important business activities (iii) housing loan • This exceptional treatment is not available to • (i) consumer and personal advances • (ii) Advances to traders College of Agricultural Banking, RBI, PUNE

  25. Loan Restructuring • In case of default in payment of agricultural loans due to natural calamities UCBs on their own may decide to • convert the short term production loan into a long term loan or reschedule the repayment period and • sanction fresh short term loans • these fresh/ restructured loans will not be treated as NPAs and will be governed by fresh terms and conditions College of Agricultural Banking, RBI, PUNE

  26. Loan Restructuring • PRECONDITIONS: (i)Provision for diminution in the fair value of restructured Advances • Interest sacrifice to be calculated on the basis of discounting present value of cash flow with both pre and post restructuring rate of bank’s BPLR+ appropriate term premium +credit risk premium • Simpler method:5% of the exposure (ii)The dues of the bank are fully secured with certain exceptions College of Agricultural Banking, RBI, PUNE

  27. Loan Restructuring • Exceptions of (ii) • (a) SSI borrowers where outstanding is up to Rs.25.0 lakh • (b) Infrastructure projects with an escrow account with valid legal claim and where the cash flows generated form the project are adequate for repayment of the advance College of Agricultural Banking, RBI, PUNE

  28. Gold Loan up to Rs.1.0 lakh College of Agricultural Banking, RBI, PUNE

  29. Advances to Real Estate • UCBs should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/aggregate limit for such loans, margins, security, repayment schedule etc • Policy should be approved by the Board • While framing the policy the banks may also consider for inclusion the National Building Code framed by Bureau of Indian Standards (BIS) College of Agricultural Banking, RBI, PUNE

  30. Bill Discounting • Banks to have Board approved policy on bill discounting-proper appraisal • Banks should not extend bill discounting facility or other non fund based facilities to non-constituent borrower. • No accommodation bills; onus on bank to ensure genuineness of trade transactions- any violation Penal Action College of Agricultural Banking, RBI, PUNE

  31. THANK YOU College of Agricultural Banking, RBI, PUNE

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