Banking Assets
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
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
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
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
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
o
o
o
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
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
 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
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
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
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 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’
o Bank note a Lien on the FD to the extent of the loan
o Zero risk product with Bank’s Right to set off.
o Borrower has the option of adjusting it on due date or
repaying the loan as per his convenience
o Interest rate charged is normally 2 % higher than
contracted rate of FD.
o 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
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
•
•
•
•
•
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
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 ASSETSROLE 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
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.