Types of credit facilities

Types of Credit Facilities



1) Fund based lending

2) Non fund based lending



Fund based lending, where the lending bank commits the physical outflow of funds.

The various forms in which fund based lending may be made by banks.



The facilities like Overdrafts,Cash Credit A/c, Bills Finance, Demand Loans, Term Loans etc, wherein immediate flow of

funds available to borrowers, are called funds based facility. The non fund based facilities like issuance of letter of guarantee, letter of credit wherein banks get fee income and there is no immediate outfow of funds from bank.



Overdrafts: Overdraft means allowing the customer to draw cheques over and above credit balance in his account. Overdraft is normally allowed to Current Account

Customers and in exceptional case SB A/c holders are also allowed to overdraw their account. The high rate of interest is charged but only on daily debit balance. An

overdraft is repayable on demand. There are two types of overdraft prevalent in Banks i.e. (i) Temporary overdraft or clean overdraft (ii) Secured overdraft. Temporary

overdrafts are allowed purely on personal credit of the party and it is for party to meet some urgent commitments on rare occasions. Allowing a customer to draw against

his cheques sent in clearing also falls under this category. Secured overdraft is allowed up to a certain limit against some tangible security like bank deposits, LIC policies,

National Saving Certificates, shares and other similar assets. Secured overdraft is most popular with traders as lesser operating cost, simple application and document

formalities are involved in this facility.



Cash Credit Account (CC A/C): Cash credit account is a running account just like a current account where debit balance in the account up to a sanctioned limit or drawing



power �xed based on stock holding whichever is less. Sanction of Limit generally for 1 year. The limits are renewed or enhanced/reduced based on assessment ofcustomer’s actual requirement on the basis of working of the unit. Customer has to submit periodic Stock statements depending on Operating Cycle, Turnover, and Cash

Budget or Projected Balance Sheet. Cash Credit facility is o�ered normally against pledge (Key Cash Credit) or hypothecation of prime security such as, book debts

(receivables), stocks of raw materials, semi �nished goods and �nished goods. In some cases, customers, mainly traders �nd it di�cult to maintain stock register and

submitting periodic stock statements. For such customers also CC facility is provided by banks against pledge of gold jewellary, assignment of Life policies, or against security

of customer’s deposit in the same bank. When prime security is, jewels or life policies, NSC, bank deposits, there is no need to submit periodic stock statements. In case of

manufacturing units this facility is required for purchase of raw materials, processing and converting them into �nished goods. In case of traders, the limit is allowed for

purchase of goods which they deal.

Bills Finance: Bills finance is short term and self liquidating finance in nature. Demand Bill is purchasedand Usance bill is discounted by the banks. The bills drawn under

Letter of Credit (LC may be on sight draft or usance draft) are negotiated by the banks. The advantage of bills �nance is that the seller of goods (borrower) gets immediate

money from the bank for the goods sold by him irrespective of whether it is a purchase, discount or negotiation by the bank according to type of bills.Demand bills can be

documentary or clean. Usually banks accept only documentary bills for purchase. However purchase of clean bills from good parties also permitted by banks based on

sanction terms of the limit. Usance bills means bills maturing on a future date. Documentary usance bills may be on D/P (Delivery against payment) or D/A (Delivery against

Acceptance) terms. In case of D/P terms the documents of title to goods are delivered to the buyer of the goods (drawee) against payment of bill amount. In case of D/A bills,

the documents to the title of goods are to be delivered to the drawee (Buyer) against acceptance of bills. Hence a banker will take into consideration the credit worthiness

not only of the borrower but also of the drawee because bills become clean after it is delivered to drawee on acceptance.

Demand Loans: Demand loans are secured loans repayable on demand. Demand loan is granted against marking lien on bank’s own fixed deposits (Not against deposits of

other banks), Assignment of Life Insurance Policies with adequate surrender value ( loan can not be granted against policies issued under married woman property act or

beneficiary is a minor etc) , National Saving Certificates and so on. Demand loans can be gradually liquidated over a period generally in monthly, quarterly, half yearly

installments or lump-sum payment at one shot or it can be closed from maturity proceeds of the security offered.



Term Loans: The nature of a term loan commitment is long term. Maximum maturity for a term loan including moratorium is normally 10 years and in exceptional cases 15

years. Repayment of loan is from the cash generation out of operation of the unit/company. Term Loan appraisal must cover appraisal of the borrower and appraisal of the

project. Appraisal of the borrower must cover integrity, standing of the borrower, business capacity, managerial competence, �nancial resources in relation to size of the

project. The sources of information for the above may be from Merchant reports, Bank reports, CIBIL report, declaration received from the promoters about their assets and

liabilities, internal and external Credit rating and so on. Assistance from venture capitalists like UTI venture, ICICI ventures etc. can also be solicited. Appraisal of a

project would cover market demand for the product, competition, quality and price sensitivity of the product, terms of sales and after sales services arrangements envisaged

by the company. Competition perception according to minds of customer and bankers can be di�erent. Technical feasibility like location that is proximity to raw material,

availability of infrastructure should be favorable to the unit/company. Production Process should be contemporary and spare parts whether easily be available lest there

would be stoppage of production due to non availability of spare parts. Issues like arrangement of working capital �nance, break even point of sales are to be discussed.

Working capital �nance has to be decided before sanctioning of term loan to the borrower. Regulatory issues: As per sec1 of the banking regulation act a bank can not lend

beyond 30% of paid up capital of the company or 30% of paid up reserve of the bank whichever is lower.

Retail Credit: Retail credits are Car Loans, Consumer Durables/, Educational Loans, Housing Loans, House improvement Loan, Professionals Personal Loans, Clean Loans,

Jewel Loan, Pensioners Loan, Credit Cards etc. KYC formalities like verification of proof of identity and proof of address etc, are important and �rst step to entertain loans

under retail schemes. SB pass book or statement of account is to be verified to match the details submitted by the applicant. In case of employed persons, normally loan will

be considered only to confirmed employees. Employer’s no objection certificate/salary certificates are other requirements for retail loans. In case of self employed, IT return

for past 2-3 years would be verified to asses the repayment capacity of the applicant. No due certificate from existing banker, CIBIL report is the other requirement to

consider retail loans.

Leasing Finance: A lease is a contract between the owner (lessor) and the user (lessee). There is various type of lease viz. operating lease, finance lease etc. In terms of lease

agreement the lessor pays money to the supplier who in turn delivers the article to the lessee. The lessee (hirer of the article) makes periodical payment to the lessor. At the

end of lease period the asset is restored to the lessor. Commercial banks in India have been financing the activities of leasing companies, by providing overdraft/Cash credit

account/Demand loan against fully paid new machineries or equipment by hypothecation of security. The repayment should be from rentals of machineries/ equipment

leased out. The maximum period of repayment is �ve years or economic life of the equipment which ever is lower. The bank is allowed to periodical inspection of the asset.

Lease contracts are only for productive purpose and not for consumer durables.

Hire-Purchase _nance: Hire-Purchase transactions are very similar to leasing transactions. In hire –purchase agreement, at the end of the stipulated period, the hirer(lessee)

has options either to return the asset to leasing company while terminating the agreement or purchase the asset upon terms set out in the agreement In terms of leasing

agreement the ownership continues to remains with the Leasing company(Lessor). Since hire-purchase finance takes place predominantly in automobile sector, banks have

started direct finance to transport operator as the nature of advance being classified as priority sector lending.





Non Fund Business



Bank Guarantee: As a part of Banking Business, Bank Guarantee (BG) Limits are

sanctioned and guarantees are issued on behalf of our customers for various

purposes. Broadly, the BGs are classified into two categories:

i) Financial Guarantees are direct credit substitutes wherein a bank irrevocably

undertakes to guarantee the payment of a contractual financial obligation. These

guarantees essentially carry the same credit risk as a direct extension of credit i.e.

the risk of loss is directly linked to the creditworthiness of the counter-party against

whom a potential claim is acquired. Example – Guarantees in lieu of repayment of

financial securities/margin requirements of exchanges, Mobilization advance,

Guarantees towards revenue dues, taxes, duties in favour of tax/customs/port/excise

authorities, liquidity facilities for securitization transactions and deferred payment

guarantees.



ii) Performance Guarantees are essentially transaction-related contingencies that

involve an irrevocable undertaking to pay a third party in the event the counterparty

fails to fulfill or perform a contractual obligation. In such transactions, the risk of loss

depends on the event which need not necessarily be related to the creditworthiness

of the counterparty involved. Example – Bid bonds, performance bonds, export

performance guarantees, Guarantees in lieu of security deposits/EMD for

participating in tenders, Warranties, indemnities and standby letters of credit related

to particular transaction.

Though, BG facility is a Non-fund Facility, it is a firm commitment on the part of the

Bank to meet the obligation in case of invocation of BG. Hence, monitoring of Bank

Guarantee portfolio has attained utmost importance. The purpose of the guarantee is

to be examined and it is to be spelt out clearly if it is Performance Guarantee or



Financial Guarantee. Due diligence of client shall be done, regarding their experience

in that line of activity, their rating/grading by the departments, where they are

registered. In case of Performance Guarantees, banks shall exercise due caution to

satisfy that the customer has the necessary experience, capacity and means to

perform the obligations under the contract and is not likely to commit default. The

position of receivables and delays if any, are to be examined critically, to understand

payments position of that particular activity. The financial position of counter party,

type of Project, value of Project, likely date of completion of Project as per

agreement are also to be examined. The Maturity period, Security Position, Margin

etc. are also to be as per Policy prescriptions and are important to take a view on

charging BG Commissions.

Branches shall use Model Form of Bank Guarantee Bond, while issuing Bank

Guarantees in favour of Central Govt. Departments/Public Sector Undertakings. Any

deviation is to be approved by Zonal Office. It is essential to have the information

relating to each contract/project, for which BG has been issued, to know the present

stage of work/project and to assess the risk of invocation and to exercise proper

control on the performance of the Borrower. It is to be ensured that the operating

accounts of borrowers enjoying BG facilities route all operations through our Bank

accounts. To safeguard the interest of the bank, Branches need to follow up with the

Borrowers and obtain information and analyze the same to notice the present stage

of work/project, position of Receivables, Litigations/Problems if any leading to

temporary cessation of work etc.

The Financial Indicators/Ratios as per Banks Loan Policy guidelines are to be

satisfactory. Banks are required to be arrived Gearing Ratio (Total outside

liabilities+proposed non-fund based limits / Tangible Networth - Non Current Assets)

of the client and ideally it should be below 10.

In case where the guarantees issued are not returned by the beneficiary even after

expiry of guarantee period, banks are required to reverse the entries by issuing

notice (if the beneficiary is Govt. Department 3 months and one month for others) to

avert additional provisioning. Banks should stop charging commission on expired

Bank Guarantees with effect from the date of expiry of the validity period even if the

original Bank Guarantee bond duly discharged is not received back.

Letter of Credit: A Letter of Credit is an arrangement by means of which a Bank

(Issuing Bank) acting at the request of a customer (Applicant), undertakes to pay to

a third party (Beneficiary) a predetermined amount by a given date according to

agreed stipulations and against presentation of stipulated documents. The

documentary Credit are akin to Bank Guarantees except that normally Bank

Guarantees are issued on behalf of Bank’s clients to cover situations of their non

performance whereas, documentary credits are issued on behalf of clients to cover

situation of performance. However, there are certain documentary credits like

standby Letter of Credit which are issued to cover the situations of non performance.

All documentary credits have to be issued by Banks subject to rules of Uniform

Customs and Practice for Documentary Credits (UCPDC). It is a set of standard rules

governing LCs and their implications and practical effects on handling credits in

various capacities must be possessed by all bankers. A documentary credit has the

seven parties viz., Applicant (Opener), Issuing Bank (Opening of LC Bank),

Beneficiary, Advising Bank (advises the credit to beneficiary), Confirming Bank –

Bank which adds guarantee to the credit opened by another Bank thereby

undertaking the responsibility of payment/negotiation/acceptance under the credit in

addition to Issuing Bank), Nominated Bank – Bank which is nominated by Issuing

Bank to pay/to accept draft or to negotiate, Reimbursing Bank – Bank which is

authorized by the Issuing Bank to pay to honour the reimbursement claim in

settlement of negotiation/acceptance/payment lodged with it by the paying /

negotiating or accepting Bank. The various types of LCs are as under:

i) Revocable Letter of Credit is a credit which can be revoked or cancelled or

amended by the Bank issuing the credit, without notice to the beneficiary. If a credit

does not indicate specifically it is a revocable credit the credit will be deemed as

irrevocable in terms of provisions of UCPDC terms.

ii) Irrevocable Letter of credit is a firm undertaking on the part of the Issuing

Bank and cannot be cancelled or amended without the consent of the parties to letter

of credit, particularly the beneficiary.

iii) Payment Credit is a sight credit which will be paid at sight basis against

presentation of requisite documents as per LC terms to the designated paying Bank.

iv) Deferred Payment Credit is a usance credit where payment will be made by

designated Bank on respective due dates determined in accordance with stipulations

of the credit without the drawing of drafts.

v) Acceptance Credit is similar to deferred credit except for the fact that in this

credit drawing of a usance draft is a must.

vi) Negotiation Credit can be a sight or a usance credit. A draft is usually drawn in

negotiation credit. Under this, the negotiation can be restricted to a specific Bank or

it may allow free negotiation whereby any Bank who is willing to negotiate can do so.

However, the responsibility of the issuing Bank is to pay and it cannot say that it is

of the negotiating Bank.

vii) Confirmed Letter of Credit is a letter of credit to which another Bank (Bank

other than Issuing Bank) has added its confirmation or guarantee. Under this, the

beneficiary will have the firm undertaking of not only the Bank issuing the LC, but

also of another Bank. Confirmation can be added only to irrevocable and not

revocable Credits.

the amount is revived or reinstated without requiring specific amendment to the

credit. The basic principle of a revolving credit is that after a drawing is made, the

credit reverts to its original amount for re-use by beneficiary. There are two types of

revolving credit viz., credit gets reinstated immediately after a drawing is made and

credit reverts to original amount only after it is confirmed by the Issuing Bank.

ix) Installment Credit calls for full value of goods to be shipped but stipulates that

the shipment be made in specific quantities at stated periods or intervals.

x) Transit Credit – When the issuing Bank has no correspondent relations in

beneficiary country the services of a Bank in third country would be utilized. This

type of LC may also be opened by small countries where credits may not be readily

acceptable in another country.

xi) Reimbursement Credit – Generally credits opened are denominated in the

currency of the applicant or beneficiary. But when a credit is opened in the currency

of a third country, it is referred to as reimbursement credit.

xii) Transferable Credit – Credit which can be transferred by the original

beneficiary in favour of second or several second beneficiaries. The purpose of these

credits is that the first beneficiary who is a middleman can earn his commission and

can hide the name of supplier.

xiii) Back to Back Credit/Countervailing credit – Under this the credit is opened

with security of another credit. Thus, it is basically a credit opened by middlemen in

favour of the actual manufacturer/supplier.

xiv) Red Clause Credit – It contains a clause providing for payment in advance for

purchasing raw materials, etc.

xv) Anticipatory Credit – Under this payment is made to beneficiary at preshipment

stage in anticipation of his actual shipment and submission of bills at a

future date. But if no presentation is made the recovery will be made from the

opening Bank.

xvi) Green Clause Credit is an extended version of Red Clause Credit in the sense

that it not only provides for advance towards purchase, processing and packaging

but also for warehousing & insurance charges. Generally money under this credit is

advanced after the goods are put in bonded warehouses etc., up to the period of

shipment.

Other concepts

i)Bill of Lading: It should be in complete set and be clean and should generally be

to order and blank endorsed. It must also specify that the goods have been shipped

on board and whether the freight is prepaid or is payable at destination. The name of

the opening bank and applicant should be indicated in the B/L.

ii) Airway Bill: Airway bills/Air Consignment notes should always be made out to

the order of Issuing Bank duly mentioning the name of the applicant.

iii)Insurance Policy or Certificate: Where the terms of sale are CIF the insurance

is to be arranged by the supplier and they are required to submit insurance policy

along with the documents.

iv) Invoice: Detailed invoices duly signed by the supplier made out in the name of

the applicant should be called for and the invoice should contain full description of

goods, quantity, price, terms of shipment, licence number and LC number and date.

v) Certificate of Origin: Certificate of origin of the goods is to be called for. Method

of payment is determined basing on the country of origin.

vi) Inspection Certificate: Inspection certificate is to be called for from an

independent inspecting agency (name should be stipulated) to ensure quality and

quantity of goods. Inspection certificate from the supplier is not acceptable





Multiple Banking / Consortium / JLA



Large banks do have the capability to meet the credit needs of most of their business

clients. However, when the amount involved is huge, the bank may ask the borrower

to approach other banks for the part of the credit requirements as they may not wish

to take up the risk of lending the entire amount. Multiple banks may finance the

borrower under two arrangements viz., Consortium arrangement and multiple

banking arrangements.

i) Consortium of Banks – Under this the banks come together and collaborate with

each other in assessing the credit requirements of the borrower duly sharing the

credit facilities as well as sharing securities with “Pari Pasu” charge. Normally, the

bank which has larger exposure act as leader who conduct meetings, assess the

credit requirements of the borrower and share all the information with member

banks from time to time. However, the decisions taken at the consortium meetings

are not binding on the individual banks and the management of each bank has to

approve in its respective boards.

ii) Multiple Banking – Under this, the borrower approaches various banks and

avails credit facilities across banks. Each bank undertakes their own assessment of

risk, decide the mix of credit facilities and stipulate their own terms and conditions.

Each of the banks takes the security and gets the charges registered with the ROC in

their favour. Practically there is no co-ordination between the banks and they

compete with each other to protect their business and interests. This is giving scope

to the borrowers to take undue advantage from the banking system i.e. excess

borrowings and interest concessions. In order to ensure financial discipline RBI

issued guidelines on sharing of information between banks and making the lead bank

responsible for ensuring proper assessment of credit requirements of the borrower so

that over financing can be averted.

Joint Lending Arrangement (JLA) – Under the existing system of Credit Delivery,

it is observed that high value borrowers have been availing credit limits through

Multiple Banking over the years which has led to dilution of asset quality as well as

control on the borrowers. In order to address the challenges associated with Multiple

Lending, Govt. of India has introduced ground rules governing Joint Lending

Arrangements. The scheme shall be applicable to all lending arrangements, with a

single borrower with aggregate credit limits (both fund and non-fund based) of `150

crore and above involving more than one Public Sector Bank. Further, all borrowers

with external rating of below BBB or equivalent, are to be brought under JLA

irrespective of the amount of exposure. Borrowers having multiple banking

arrangements below `150 crore may also be encouraged to come under JLA, so that

the wholesome view of the assessment of credit requirement as well as the entire

operations of the customers can be taken by banks. The Bank from which the

borrower has sought the maximum credit will be the designated Lead Bank for the

JLA. If a member-bank is unable to take up its enhanced share, such enhanced share

in full or in part could be reallocated among the other existing willing members. In

case of any contentious issue, the decision will be taken by member banks having

more than 50% share in the exposure to the borrower. An existing member-bank

may be permitted to withdraw from the JLA after two years provided other existing

member-banks and/or a new bank is willing to take its share by joining the JLA. It is

necessary that lead bank and member bank(s)/institution(s) ensure that formal JLA

does not result in delay in credit delivery. The Lead Lender will make all efforts to tie

up the Joint Lending Arrangement within 90 days of taking a credit decision

regarding the proposal. Lead bank will be responsible for preparation of appraisal

note, its circulation, and arrangements for convening meetings, documentation, etc.

In case of any contentious issue, the decision will be taken by the member banks

having more than 50% share in the exposure to the borrower.

Takeover of accounts from other Banks

Corporates seeking better facilities/higher credit from Banks often approach different

lenders for sanction of credit facilities. Central Vigilance Commissioner observed that

sometimes existing accounts with one bank already showing signs of sickness are

taken over by another bank and such accounts predictably turn NPA within a short

time. To arrest unethical/unjustified practice of takeover of accounts, Department of

Financial Services, Govt. of India has issued the following guidelines to all Banks.

_ For taking over of any accounts, Banks must put in place, a Board approved

Policy with regard to take over of accounts from another Bank and the same

should be incorporated in the credit policy of the Bank.

_ Normally, the accounts having ratings above the level approved by the Board

should only be taken over and the concessionary facilities should be extended

only in extremely deserving cases with specific reasons recorded in writing.

_ In all cases of takeover of accounts, it is necessary to do proper due diligence

including visit to the premises of the customer, if needed, before the account

is considered for takeover by the bank.

_ The guidelines of joint lending should be strictly applied in all cases where the

borrower seeks to have additional exposure from the bank after taking over

the account.

_ No cases should be taken over by a Bank from any Bank where any of its ED

or CMD had worked earlier. In case, any such cases need to be taken over,

the proposal will need to be put up to the Board with specific reasons

justifying the need for taking over the accounts.

The operational guidelines with regard to Take over of accounts are as under:

_ The account should be a Standard Asset with Positive Net Worth & profit

record. P & C Report is mandatory preferably before sanction, if not, at least

before disbursement.

_ Obtain credit information in prescribed format, which enables the transferee

bank to be fully aware of irregularities, if any, existing in the borrower’s

account with the transferor bank.

_ Account Statement – The account copies of all the borrowal accounts with

the present bankers/financial institution shall be obtained at least for the last

12 months and ensure that the conduct of the a/c is satisfactory and no

adverse features are noticed.

_ Existence & Previous profit track record - i) In existence for a minimum

of 3 years with Audited B/S ii) Profit making in preceding 2 years & iii)

Availing Credit facilities with the previous Banker at least for 3 years.

_ Enhancement on Existing Limits with the present Banker: i)

Enhancement not beyond 50% ii) No further Enhancement/Additional Limits

till one year or next ABS, whichever is earlier.

_ TOL/TNW should not exceed 4:1 in case of takeover accounts.

_ Group Accounts – In case of having Sister / Associate concerns, Groups

consolidated position has to be examined.

Branches should ensure that Assessment is to be made independently as per our

Loan Policy guidelines. Administrative clearance is to be obtained from Zonal Office /

Head Office. To take all existing securities and to complete the documentation

expeditiously duly complying with our loan policy guidelines on takeover norms,

compliance, legal audit, permission for release of limit etc. While other bank is taking

over our borrowal account, Branches are advised to inform adverse features if any,

in the conduct of the accounts to the transferee bank duly obtaining permission from

competent authority for issuing P & C Report.