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.
