USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
INTERNAL ASSESSMENT TEST – 2
Date
: 28/9/15
Subject & Code : STRATEGIC CREDIT MANAGEMENT-14MBAFM306
Name of faculty : Divya Mathur
Max Marks: 50
Section: A
Time: 8:30 AM – 10:00 AM
Note: Answer all questions
1 (a)
What is Hypothecation?
(3 marks)
ANS- Hypothecation is the practice where (usually through a letter of hypothecation) a
debtor pledges collateral to secure a debt or as a condition precedent to the debt, or a
third party pledges collateral for the debtor.
(b)
Explain in detail NABARD initiatives for Agricultural finances?
(7 marks)
ANS1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
(c)
Refinance to state government & co-op. banks
Development of Rural Infrastructure Development Fund
Promotion of Micro-finance
Bulk Lending Support to NGOs
Tribal Development Project in Gujarat (wadi project)
Kisan Credit Card Scheme
Gender Development through Credit: Assistance to Rural Women
in Non-Farm Activities (ARWIND)
Refinance under Swarnajayanti Gram Swarojgar Yojna
Supervising body
Farm Income Insurance Scheme ( FIIS) 2003-04
Differntial Rate of Interest (DRI) 1972
Discuss in detail legal and practical aspects of Mortgages.
ANS- Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a
number of different legal structures, the availability of which will depend on the
jurisdiction under which the mortgage is made. Common law jurisdictions have evolved
two main forms of mortgage: the mortgage by demise and the mortgage by legal
charge.
MBA III SEMESTER -FINANCE
(10 marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
Mortgage by demise[edit]
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the
mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full,
a process known as "redemption". This kind of mortgage takes the form of a
conveyance of the property to the creditor, with a condition that the property will be
returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be used in
many jurisdictions, and in a small minority of states in the United States. Many other
common law jurisdictions have either abolished or minimised the use of the mortgage
by demise. For example, in England and Wales this type of mortgage is no longer
available in relation to registered interests in land, by virtue of section 23 of the Land
Registration Act 2002 (though it continues to be available for unregistered interests).
Mortgage by legal charge[edit]
In a mortgage by legal charge or technically "a charge by deed expressed to be by way
of legal mortgage",[11] the debtor remains the legal owner of the property, but the
creditor gains sufficient rights over it to enable them to enforce their security, such as a
right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public
register. Since mortgage debt is often the largest debt owed by the debtor, banks and
other mortgage lenders run title searches of the real estate property to make certain
that there are no mortgages already registered on the debtor's property which might
have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this
reason, if a borrower has delinquent property taxes, the bank will often pay them to
prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of
Property Act 1925,[11] it has been the usual form of mortgage in England and Wales (it
is now the only form for registered interests in land – see above).
MBA III SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
In Scotland, the mortgage by legal charge is also known as Standard Security.[12]
In Pakistan, the mortgage by legal charge is most common way used by banks to secure
the financing.[citation needed] It is also known as registered mortgage. After
registration of legal charge, the bank's lien is recorded in the land register stating that
the property is under mortgage and cannot be sold without obtaining an NOC (No
Objection Certificate) from the bank.
Equitable mortgage[edit]
See also: Security interest § Types of security
Equitable mortgages don't fit the criteria for a legal mortgage, but are considered
mortgages under equity (in the interests of justice) because money was lent and
security was promised. This could arise because of procedural or paperwork issues.
Based on this definition, there are numerous situations which could lead to an equitable
mortgage.[13] As of 1961, English law required the consent of the court before the
equitable mortgagee was allowed to sell.[14] When the borrower deposits a title deed
with the lender, it has historically created an equitable mortgage in England, but the
creation of an equitable mortgage by such a process has been less certain in the United
States.[15]
In an equitable mortgage the lender is secured by taking possession of all the original
title documents of the property and by borrower's signing a Memorandum of Deposit of
Title Deed (MODTD). This document is an undertaking by the borrower that he/she has
deposited the title documents with the bank with his own wish and will, in order to
secure the financing obtained from the bank.[citation needed] Certain transactions are
recognized therefore as mortgages by equity, which are not so recognized by common
law.
2 (a)
What do you mean by Kissan credit cards?
ANS- Kisan Credit Card SchemeCrop loans are generally disbursed by the banks through
the mode of Kisan Credit Card (KCC). The Kisan Credit Card Scheme is in operation
MBA III SEMESTER -FINANCE
(3 marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
throughout the country and is implemented by Commercial Banks, Cooperative Banks
and RRBs. All farmers including small farmers, marginal farmers, share croppers, oral
lessees and tenant farmers are eligible for issuance of KCC. KCC holders are also
covered under Personal Accident Insurance Scheme (PAIS) against accidental
death/permanent disability. Bank assesses farmer’s eligibility on the basis of land
available for cultivation and the scale of finance fixed by the District Level Technical
Committee in that district and the credit history of the farmer. The scope of the KCC has
recently been broad-based to include term credit and consumption needs. Government
has advised the banks to convert Kisan Credit Card into a Smart Card cum Debit Card.
Some of the main features of KCC scheme are :
Assessment of crop loan component based on the scale of finance for the crop plus
insurance premium x Extent of area cultivated + 10% of the limit towards post-harvest /
household/consumption requirements + 20% of limit towards maintenance expenses of
farm assets.
Flexi KCC with simple assessment prescribed for marginal farmers.Validity of KCC for 5
years.For crop loans, no separate margin need to be insisted as the margin is in-built in
scale of finance.
No withdrawal in the account to remain outstanding for more than 12 months; no need
to bring the debit balance in the account to zero at any point of time.
Interest subvention /incentive for prompt repayment to be available as per the
Government of India and / or State Government norms.
No processing fee up to a limit of Rs. 3.00 lakh.One time documentation at the time of
first availment and thereafter simple declaration (about crops raised/ proposed) by
farmer.
KCC cum SB account instead of farmers having two separate accounts. The credit
balance in KCC cum SB account to be allowed to fetch interest at saving bank rate.
Disbursement through various delivery channels, including ICT driven channels like
ATM/ PoS/ Mobile handsets.
(b)
Write a short note on (i) Crop loans (ii) Crop insurance schemes
ANS- Crop Loans Crop Loans are also called short term loans for “Seasonal Agricultural
Operations.” The Seasonal Agricultural Operations connote such activities as are
undertaken in the process of raising various crops and are seasonally recurring in
MBA III SEMESTER -FINANCE
(7 marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
nature. The activities include, among others, ploughing and preparing land for sowing,
weeding, transplantation where necessary, acquiring and applying inputs such as seeds,
fertilizers, insecticides etc. and labour for all operations in the field for raising &
harvesting the crops.
Bio-fuel Tree/Plant Insurance Policy Named-peril insurance covering six different
species of plants/trees, available for commercial production of Bio-diesel, with optional
cover against drought risk.
Cardamom Plant & Yield Insurance The scheme is designed in consultation with Spices
board to provide conventional cover against death/loss of plant bushes. Cover available
for small and large cardamom varieties.
Potato Crop Insurance Parametric named-peril insurance linked to plant population,
available for potato growers under contract farming.
PulpWood Tree Insurance Policy The policy covers against pecuniary loss suffered on
account of total loss or damage to the trees occasioned by specific perils/risks like fire,
flood, cyclone, storm, frost, pests and diseases.
RainFall Insurance Scheme For Coffee (RISC) Failure of Blossom shovers, Backing
showers and Excess rainfall during monsoon and post monsoon seasons affect the crop
yield. Scheme offers cover and is implement in all coffee growing zones of Andhra
pradesh, Assam, Karnataka, Kerala, Mizoram, Odisha and Tamil nadu with subsidy
support from Government.
Rubber Plantation Insurance Covers death/loss of rubber trees against natural
calamities and other non preventable perils, applicable to both mature and immature
plants, based on establishment cost and loss of future returns.
Varsha Bima / RainFall Insurance Covers anticipated shortfall in crop yield on account of
deficit and excess rainfall, consecutive dry and wet days, etc. It is voluntary for all
classes of cultivators who stand to loose financially upon adverse incidence of rainfall
and they can take insurance under the scheme. It is available for many of the seasonal
field crops.
Coconut Palm Insurance Scheme Named peril insurance designed in consultation with
Coconut Development Board (CDB), covering coconut palms in the age groups of 4-15
years and 16-60 years, against death due to Fire, Lightening, Cyclone, Storm, Flood,
Pests, and Widespread diseases, Earthquake, Severe Draught, etc. The pilot is available
in specified districts of Andhra Pradesh, Goa, Karnataka, Kerala, Maharashtra, Odisha
MBA III SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
and Tamil Nadu. CDB would provide 50% subsidy on premium, and the concerned State
to the extent of 25%, leaving the grower to pay the balance 25%.
Weather Insurance (RABI) It is a mechanism for providing effective risk management aid
to those individuals and institutions likely to be impacted by adverse weather
incidences.
(c)
Short note on Policy for lending against shares.
ANS- All Banks have framed their own lending policies for granting advances against the
security of shares, debentures, bonds etc. keeping in view the RBI guidelines and follow
normal procedures for the sanction, appraisal and post sanction follow‑up.
Banks usually obtain a declaration from the borrower indicating the extent of loans
availed from other banks as input for credit evaluation. Banks may grant advances
against the security of shares, debentures or bonds to individuals subject to the
following conditions:
(i) Purpose of the loan : Loans against shares, debentures and bonds of public sector
undertakings (PSUs) may be granted to individuals to meet contingencies and personal
needs or for subscribing to rights or new issues of shares/debentures/bonds or for
purchase in the secondary market against the security of shares/debentures/bonds held
by the individual.
(ii) Amount of advance: Loans against the security of shares, debentures and PSU bonds
if held in physical form should not exceed the limit of Rs. 10 lakhs per borrower. The
limit of Rs. 10 lakhs has been enhanced to Rs. 20 lakhs if the securities are held in
dematerialised form.
(iii) Margin : Banks should maintain a minimum margin of 50 per cent of the market
value of equity shares/convertible debentures held in physical form. In the case of
shares/convertible debentures held in dematerialised form, a minimum margin of 25
per cent should be maintained. These are minimum margin stipulations and banks may
stipulate higher margins for shares whether held in, physical form or dematerialised
form. The margin requirements for advances against preference shares/non
‑convertible debentures and bonds may be determined by the Banks themselves.
(iv) Lending policy: Each bank should formulate with the approval of the Board a
Lending Policy for grant of advances to individuals against shares/debentures/bonds
keeping in view the general guidelines given in the Appendix as applicable to such
advances. Banks should obtain a declaration from the borrower indicating the extent of
MBA III SEMESTER -FINANCE
(10marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
loans availed of by him from other banks as input for credit evaluation. It would also be
necessary to ensure that such accommodation from different banks is not obtained
against shares of a single company or a group of companies. As a prudential measure,
each bank may also consider laying down an aggregate limit of such advances.
Banks and their subsidiaries should not undertake financing of 'Badla' transactions.
Share and stock brokers may be provided need‑based overdraft facilities/line of credit
against shares and debentures held by them as stock-in‑trade. A careful assessment of
need‑based requirements for such finance should be made taking into account the
financial position of the borrower, operations on his own account and on behalf of
clients, income earned, the average turnover, period of stocks and shares and the
extent to which the broker's funds are required to be involved in his business
operations. Large scale investment in shares and debentures on own account by stock
and share brokers with bank finance, should not be encouraged. The securities lodged
as collateral should be easily marketable.
The ceiling of Rs. 10 lakhs/Rs. 20 lakhs for advances against shares/ debentures to
individuals will not be applicable in the case of share and stock brokers and the
advances would be need‑based.
Banks may grant working capital facilities to stock brokers registered with SEBI and who
have complied with capital adequacy norms prescribed by SEBI/Stock Exchanges to
meet the cash flow gap between delivery and payment for DVP transactions undertaken
on behalf of institutional clients viz., FIs, FIIs, mutual funds and banks. The duration of
such a facility will be short and would be based on an assessment of the financing
requirements keeping in view the cash flow gaps, the broker's funds required to he
deployed for the transaction and the overall financial position of the broker. The
utilisation will be monitored on the basis of individual transactions. Margins may he
determined by the banks themselves and banks may institute adequate safeguards and
monitoring mechanisms.
Banks may provide need‑based finance to meet the genuine credit requirements of
approved Market Makers. For this purpose, they should lay down appropriate norms for
financing them including exposure limits, method of valuation, etc. They should also
follow the guidelines given below :
(a) Market Makers approved by stock exchange would be eligible for grant of advances
by scheduled commercial banks.
MBA III SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
(b) Market Making may not only be for equity but also for debt securities including
State and Central Government securities.
(c) Banks should exercise their commercial judgment in determining the need‑based
working capital requirements of Market Makers by taking into account the Market
Making operations.
(d) Banks may prescribe normal prudential margin based on their commercial judgment
while extending advances to Market Makers.
(e) Banks may accept, as collateral for the advances to the Market scripts other than the
scripts in which the Market Making opera undertaken.
(f)Securities offered as collateral may include shares/debenture units of mutual funds
including UTI as well as securities of Central and State Governments.
(g)Banks should ensure that advances provided for Market Making, diverted for
investment in shares other than the scrip earning Market Making purpose. For this
purpose, a suitable follow monitoring mechanism must be evolved.
(h)The ceiling of Rs. 10 lakhs/Rs. 20 lakhs for advances against debentures to individuals
will not be applicable in the case of Makers.
3
From the following figures of M/s. ABC Company Ltd., you are to calculate the Debt Equity (10 marks)
Ratio, Leverage Ratio, Current Ratio and turnover Ratio (Inventory, Creditors and
Debtors) with your interpretation /views.
Capital
Term Loan
Unsecured Loan
Term Liabilities
Fixed Assets
(-)Depreciation
Net Block
Current Assets
Cash and Bank Balance
Sundry Debtors
Inventory
Other Current Assets
Current Liabilities
Bank Borrowings
Sundry Creditors
Other Current Liability
Total Assets
Total Liabilities
MBA III SEMESTER -FINANCE
31.3.10
59.26
2.92
10.88
13.80
20.74
3.01
17.73
357.19
15.88
177.28
130.93
33.10
337.45
40.84
254.17
42.44
410.51
410.51
31.3.11
66.81
0.00
25.80
25.80
19.59
2.75
16.84
280.67
2.50
150.00
130.00
1.17
227.90
150.00
50.00
27.90
320.51
320.51
31.3.12
81.06
0.00
25.80
25.80
16.84
2.25
14.59
301.22
1.59
162.00
135.00
2.63
238.00
162.00
80.00
8.00
344.86
344.86
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
********
MBA III SEMESTER -FINANCE