Loans and Advances

NEWS
• Global Fintech Fest 2023: SBI unveils
‘nation first transit card’

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• These were handwritten, and one of the earliest
known still to be in existence was drawn on
Messrs Morris and Clayton, scriveners and
bankers based in the City of London, and dated
16 February 1659. In 1717, the Bank of England
pioneered the first use of a pre-printed form.
• Cheques were first used in India by the Bank of
Hindustan, the first joint stock bank established in
1770. In 1881, the Negotiable Instruments Act (NI
Act) was enacted in India, formalising the usage and
characteristics of instruments like the cheque, the bill
of exchange, and promissory note.
• State Bank of India on Thursday
launched its RuPay backed National
Common Mobility Card that would
facilitate payments for all kinds of
transport from road to rail to
waterways to parking across the
country. The card could also be used
for purchases at retail outlets.
INTRODUCTION
IMPORTANCE OF MANAGEMENT
OF LOANS AND ADVANCES
Agents of Indirect Production
• Bank loans are called the agent of indirect
production. The producers purchase raw
materials, machinery, hire labor, and other
means of production through these loans
advanced by the bank.
 Generates Employment
• Commercial banks have increased
employment opportunities. Through their
lending functions, they have contributed to
mass production, mass distribution, and
mass consumption.
•
 Improvement in Standard of
Living
• Bank loans and advances may be used to
increase production and employment. This
will result in higher income and improve
the living standard of the people.
 Contribution to Economic
Development
• The loans advanced by the banks promote
the economic development of the country.
Bank lending contributes to developing
infrastructural facilities to promote
production and distribution, and boosts
exports and imports.
 Raise the Level of
Consumption
• Banks also increase the level of
consumption through their consumer
loans. Banks provide consumer loans for
creating a constant demand for consumer
goods like houses, furniture, appliances,
fixtures, etc. in addition to the financing of
agricultural, commercial, and industrial
activities.
 Source of Bank’s Profit
• Banking lending also plays an important
role in the gross earnings and net profits of
commercial banks. It is the most profitable
as well as risky function performed by
commercial banks. Therefore, it must be
done efficiently, profitably, and safely.
Classification of loans in
Commercial banks
Methods of Granting Advancing
 Overdraft
• When a customer, who has a current
account, is allowed by the bank to draw
more than his deposits in the account,
such a facility is called an overdraft facility.
• In this facility, the customer is permitted to
withdraw the amount as and when he
needs it and to repay it by means of
deposits in his account as and when it is
convenient for him.
• Overdraft is generally granted against the
government or other securities, fully paid
shares, fixed deposits, etc. It may also be
allowed for short/temporary periods
without security in which case the same is
known as a clean overdraft
 Cash Credit
• cash credit account is a drawing account
against a fixed credit limit granted by the
bank and is operated exactly in the same
manner as a current account with an
overdraft facility. Cash credit limits are
granted by banks against
pledge/hypothecation of goods/ book debts/
documents of title to goods, etc., depending
upon the nature of the requirement of a
borrower.
• Under the system, the bank specifies a limit for the
customer, up to which the customer is permitted to
borrow against the security of assets after
compliance with prescribed terms and conditions
and keeping the prescribed margin against the
securities.
• The customer withdraws from his cash credit
account as and when he needs the funds and
deposits any amount of money that he finds surplus
with him on any day. The cash credit account is thus,
an active and running account to which deposits and
withdrawals may be effected frequently.
•
 Demand Loans
• A demand loan is an advance for a fixed
amount and no debts to the account may
be made subsequent to the initial advance
for the interest, insurance premium, and
other sundry charges. Generally, banks
provide the demand loan for periods not
longer than 12 months.
 Term Loan
• A term loan is an advance for a fixed
period to a person engaged in industries,
business, or trade for meeting their
requirements like the acquisition of fixed
assets like land, building, and machinery.
Such loans may also be allowed to
individuals for the purpose of purchasing
houses/ consumer durable in which cases
the same are termed as housing
loans/personal loans, etc.
• The repayment of term loans may be
made in installments which are fixed by
the bank taking into consideration the
repayment capacity f the borrower. A term
loan may be sanctioned for a medium
term, (i.e., 3 to 5 years) or for a long term
(i.e., up to 20 years.
Purchase or Discount of Bills
• Banks may allow bill purchasing/discounting
facilities to customers by either purchasing
demand bills or discounting usance bills.
After purchasing/discounting bills, the
banker may send the bill for the collection of
proceeds from the drawee of the bill, and on
receipt of proceeds, the bills are adjusted.
•
• In case the bills are not paid by the
drawee, the banker recovers the amount
of the bill and interest thereon from the
borrower.
Principles of good lending
Principles of good lending
 Principle of Safety
• Safety First’ is the most important principle of
good lending. As the bank lends funds entrusted
to it by the depositors, the first and foremost
principle of lending is to ensure the safety of the
funds lent. Safety is meant that the borrower is
in a position to repay the loan along with
interest, according to the terms of the loan
contract, which depends upon the borrower’s
capacity and willingness to pay.
• While the capacity of the borrower
depends upon his tangible assets/financial
strength and the success of his
business/earning of profit from the
business to repay the loan, the willingness
to repay depends upon the honesty and
character of the borrower.
 Principle of Liquidity
• Liquidity refers to the readiness with which
a bank can convert its assets into cash
with no or nominal loss. A loan will be
liquid. It is not enough that the money will
ultimately come back; it is necessary that it
must come back more or less on demand
or within the settled schedule of the
repayment program under which the loan
was granted.
 Principle of Profitability
• Equally important is the principle of ‘profitability’
in bank advances. Commercial institutions and
banks must make profits. Firstly, they have to
pay interest on the deposits received by them.
They have to incur expenses on the
establishment, rent stationary, etc. They have to
make provisions for the depreciation of their
fixed assets and also for any possible bad or
doubtful debts.
• After meeting all these items of expenditure
which enter the running cost of banks, a
reasonable profit must be made to carry to the
reserves and payment of dividends to the
shareholders. Banks, therefore, grant
advances for those transactions which are on
the whole secured and profitable for the bank.
•
 Spread of Risks
Diversification
• Another important principle of good
lending is the diversification of advances.
An element of risk is always present in
every advance, however, secure it might
appear to be. To safeguard the bank’s
interests, a banker follows the principle of
‘spread of risks’ based upon the maxim
‘Do not keep all the eggs in one basket’.
• It means that a banker should not grant
advances to a few big units only and
should spread the risks involved in lending
over a large number of borrowers, over a
large number of industries and areas, and
over different types of securities.
 Principle of Purpose
• While granting loans, a banker must ensure that
the purpose of the loan should be productive so
that the money not only remains safe but also
provide a definite source of repayment. The
banker must closely scrutinize the purpose for
which the money is required, and ensure that
the money borrowed for a particular purpose is
applied by the borrower accordingly.
•
 Principle of Security
• While granting advances, banks consider the
availability of security as one of the important
guiding principles. Security is considered as
insurance or a cushion to fall back upon in case
of an emergency.
• Since banks deal in public money, it is very
important to pay proper attention to the security
offered against the loan/advance. Good security
must have qualities (MAST characteristics) such
as marketability, ascertain ability, stability, and
transferability.
 Classification of Secured
Advances
• Personal Securities
• Tangible Securities
• Primary Securities
• Collateral Securities
Modes of Creating Charges
• Lien
• Pledge
• Hypothecation
• Assignment
• Mortgage
 Pre appraisal of Loan
application
• Purpose of Advance
• Borrower- Character, Capacity, Standing
and Means
• Nature of Business
• Security
• Location of Business
• Diversification of Risks
• Safe Margin
Factors to be considered
while making advances
 Marginal Cost of funds based
Lending rate (MCLR)
• The marginal cost of funds based lending rate (MCLR)
refers to the minimum interest rate of a bank below which it
cannot lend, except in some cases allowed by the RBI. It is
an internal benchmark or reference rate for the bank.
MCLR actually describes the method by which the
minimum interest rate for loans is determined by a bank.
Process
Web-link:---- http://www.managementparadise.com/forums/financial-
management/205497-procedure-loan-appraisal.html
Source:--- managementparadise.com
 Post-Appraisal of Loans
• During the operational stage, the project is
monitored with the help of:

(i) Quarterly progress report on the project

(ii) Site inspection
(iii) Reports of nominee
(iv) Comparison of performance with promise.
Loan Policy
 THANK YOU

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