The fund based finance in banks is in different forms. 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 outflow of funds from bank. The process of appraisal of a credit proposal is not uniform; it varies according to nature of facilities required by the borrower and borrower’s type, viz. individuals, proprietorship, partnership firm, limited company etc. The types of fund based finances available at banks are as under.
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 fixed based on stock holding whichever is less. Sanction of Limit generally for 1 year. The limits are renewed or enhanced/reduced based on assessment of customer’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 offered normally against pledge (Key Cash Credit) or hypothecation of prime security such as, book debts (receivables), stocks of raw materials, semi finished goods and finished goods. In some cases, customers, mainly traders find it difficult 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 finished 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 finance 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, financial 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 different. 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 finance, break even point of sales are to be discussed. Working capital finance 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 first 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 five 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 finance: 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.