1) Safety: depends upon the security offered by the borrower and their capacity and willingness to repay. So the banker should ensure that the securities offered by the borrower are adequate and readily realizable. 2) Liquidity: liquidity refers to the ability of an asset to convert into ash within a short period of time. Money advanced for long term loans such as land building machinery et cannot be easily converted into ash. 3) Profitability: profit is essential to pay interest on deposit, salary to staff, to meet other establishment charges and to pay dividend to shareholders. The main sources of profit of bank come from the difference between the lending and borrowing rate. 4) Purpose: the banker should enquire the purpose of the loan. A banker should grant loans only for productive purposes. 5) Security; customers may offer different kinds of securities such as goods land building etc to get advances from the bank. In the event of failure to repay the loan, the banker can recover the money by disposing these securities 6) Repaying capacity: before granting loan, the repaying capacity of the borrower should be considered. 7) Diversification of loans; banker should try to diversify their loans so as to minimize the risk of lending. Banker should diversify his loans over a large number of borrowers. 8) Public or national interest: a banker should design his lending policy to suit the interest of the nation. Priority in lending should be given to backward areas.
Secured and unsecured loan
1) Secured loan It means loans made on the security of tangible assets like building, machinery, goods and documents of these goods. 2) Unsecured loan Section 5(1) (n) of banking regulation at 1949, defines “unsecured loan means a loan or advances not secured”. Therefore, unsecured advances mean advance granted to borrower without any security, such loans are generally given to honest and reputed borrower.
Forms of advances Banks provide different kinds of advances to their customers. They are, 1) Loans 2) over draft 3) cash credit 4) discounting of bill of exchange 1) Loan:- A loan is a type of advances in which banker grants a lump sum to the borrower for a certain period at an agreed rate of interest. A separate loan amount is open in the name of the borrower and the entire amount of the loan is debited to that amount. The repayment of the loan can be made either in lump sum or by installment. The interest is charged on the full amount sanctioned. Loan can be classified in to 4, a) Demand loan; - it is payable on demand such loan are generally granted for short period mainly to meet the working capital requirement of the borrower. b) Term loan: - it may be medium term or long term. Loan granted for a period of ranging from 1 year to 5 year. Loan granted for a period of more than 5 years is called long term loans. c) Bridge loan: - these are the short term loans which are granted to industrial establishment to meet their urgent needs while processing of sanctioning of a term loan is in progressions. d) Composite loan: - when a loan is extended by banks and financial institutions for the purpose of purchasing a plot or constructing a house in it a given time (loan granted for buying both capital assets and working capital.
Advantages of loan
1) A banker can charge interest even on the unutilized part of the loan sanctioned. Hence this system of advances is more profitable. 2) The clerical and amounting work connected with loan is very little. 3) Periodic review of loan is possible and unsatisfactory loan can be discontinued. 4) The date of repayment of loan is fixed in advance.
2) Overdraft
An overdraft is an arrangement between the banker and customer by which the banker is allowed to withdraw over and above the credit balance in the current account up to an agreed limit. It is only a temporary financial accommodation allowed to customers occasionally.
Advantages of overdraft
1) The procedure involved in the sanctioning of overdraft is quite simple.
2) The repayment of an overdraft is guaranteed sine it is sanctioned only to the existing current account holders who are well known to the bank. 3) The scheme is beneficial to customer’s sine they are required to pay interest only on the amount withdrawn.
3) Cash credit
A cash credit is an arrangement by which the customer is allowed to borrow money
up to an agreed limit. The borrower can withdraw money as and when he needs it. A separate amount namely ash credit account is opened into which the borrower. Interest is charged only for the amount withdrawn and not for the whole amount is sanctioned.
Advantages of as credit 1) The customer can withdraw money as and when they actually required it. 2) The interest is charged only on the amount actually withdrawn by the customer. 3) The interest burden of customer can be minimized. 4) Discounting of bill of exchange Banks also grant advances to their customers by discounting bill of exchange which will mature within a short period.
Advantages of discounting of bill of exchange
1) Certainty of payment Advances granting by way of discounting bills is one of the safest method of lending. If the bill is not met by the acceptor on the due date, the banker can recover the amount from the customer. 2) Liquidity Advances against bill of exchange are generally for a short period. 3) Refinance Bills are considered to be the most liquid type of asset. When a banker is in need of funds he can raise it by rediscounting the bill with the central bank. 4) Profitability The income to the banker on this type of advance is guaranteed sine the discount charges are collected at the time of discounting the bill. 5) Simplicity Procedure involved in discounting bills is simple.
Consortium advances (1 mark)
Commercial banks in India have started granting credit on a consortium basis to various private and public companies. This type of advance is also known as participation financing or joint financing. Huge amount is met by two or more banks jointly in proportion to their capacities. Each bank bears a part of the risk involved in a large advance.
Selection of securities
A banker is running at a great risk while granting loans and
advances to the borrower. A banker should get adequate securities from borrower in order to safeguard his funds. He can safeguard his interest by granting loans and advances against tangible asset such as goods, documents, and immovable property. Requisites or qualities of a good banking security.(3mark)
1) validity of title The banker must ascertain the validity of the title of the borrower. 2) marketability If there is any default in the repayment of loan, the banker must be able to sell the security in the market without much difficulty. 3) durability Goods offered as a security must be durable. perishable items like fruits vegetables fish meat etc which require special storage facilities are not suitable securities for bank advances. 4) storability The goods or other items offered as security must be capable of being stored in godown, so that they can be kept under the safe custody of the banker. 5) stability of price The value of security offered by the borrower must be reasonably stable. 6) easily transferable title The title of the security should be easily transferable. 7) Easy ascertainment of value The amount of loan that can be given by the banker depends on the value of the security. 8) Yield(income) A security which provides a steady income is most suitable to the banker to accept as a security. Margin Margin is the difference between the market value of security and the loan granted. A banker grants a loan of rs 50000 against the security of building worth rs 75000, the margin will be rs 25000.
Methods (modes) of creating charge on securities(3,8 mark)
The different kinds of securities are offered by the borrowers against the loan granted to him. Various methods are available for the banker to create a charge on securities. 1) Lien 2) Pledge 3) Mortgage 4) Hypothecation 5) Assignment 1) Lien This is one of the important rights enjoyed by a banker. Lien means the right of the creditor to retain the property belonging to the debtor until the debt is repaid.it gives the right to the creditor to retain the security of the debtor and not the right to sell it. There are 2 types of lien, a) particular lien: - it gives right to retain only such goods in respect of which charges due remain unpaid. This lien may be enjoyed by the craftsman or a person who has spent his time, labor and money on the goods retained. b) General lien: - it is the right enjoyed by the creditor to retain any property belonging to the debtor until all the debts are repaid.
2) Pledge Pledge is a contract whereby a borrower offers his movable property to his lender as a security for the amount borrowed on the understanding that the property pledged will be returned to the borrower when the debt is repaid. Essentials of pledge 1) Delivery of goods: - delivery of goods is essential to complete the contract of pledge. delivery may be either physical delivery or contractual delivery. 2) Transfer of ownership: - The ownership of the goods remains with the pledger. However, the possession of goods is given to the pledgee till the loan is repaid. 3) Right in the case of failure to repay: - If the pledger fails to repay the debt within the stipulated period pledgee(banker) can sell the goods.
3)mortgage
Mortgage is an another important method of creating charge over securities
while granting loans and advances to borrower.it is the method of creating charges charge on immovable property like land and building.
a) Simple mortgage (registered mortgage)
Without transferring possession Personal liability to pay In case of default, bank should have the right to sell the property through court action b) Mortgage by way of conditional sale If he fails to pay the amount the sale should become absolute sale. If repays the money, buyer should re transfer the property.
c) Usufructuary mortgage There is no personal liability Debt recovered by rent or profit from property d) English mortgage Personal liability Transfer the property to mortgagee with condition retransfer the same after the repayment. In case of default – sell the property without seeking information of the court. e) Equitable mortgage Mortgage by deposit of title deed Original title deeds only. f) Anomalous mortgage Right and liabilities determined by local customers or by contract between them. 4) Hypothecation The mortgage of movable property to secure loan is called hypothecation.it may be defined as transaction whereby money is borrowed by the debtor on the security of the movable property without transferring either property or the possession of the creditor. 5) Assignment An assignment is an agreement by which the right, interest or title in a property or debt is transferred by one person to another. The person who assign the property is called assignor and the person to whom it is transferred is called assignee. Guarantees A guarantee is a promise made by a third person to the lender for the present or future debt of the borrower.
Advances against documents of title to goods
Bill of lading: - it is an important document used in foreign trade. This document is issued by a shipping company stating that the goods mentioned therein have been duly received on board the ship. Warehouse receipt: - when the goods are deposited in a public warehouse, warehouse keeper issues a certificates stating that the goods mentioned in it are kept in warehouse. Such a certificate is a mere deposit receipt and hence nontransferable. Railway receipt: - it is issued by a railway company acknowledging the receipt of goods and undertaking to carry goods from one place to another. Delivery order: - it is an order sent by the owner of goods to the custodian of such goods, to deliver the goods to a person named in the instrument. Dock warrant: - it is a document issued by dock company stating that the goods mentioned there in have been received by it and they would be delivered to the person named therein or to his order.
pledge hypothecation mortgage
Type of security movable movable immovable
Possession of Remains with Remains with Usually remains
