Retail Banking

Lending Functions Of Banks

Himanshu Ahire 13
Executive Full Time PGDM  ( 2009-2010 )
Symbiosis Institute of Management Studies

Banks as Financial Intermediary

‣ Reduce The Loan Default Risk
‣ Ensure Liquidity of Savings
‣ Lower Information Cost
Cash Cash

Securities Securities

Deposits Corporation/
Households & Financial
Government
(Savers) Insurance Institutions Loan Agreements
(Borrowers)

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 Income & Risk

‣ Interest Spread
‣ Fee Base Income ( Off-Balance Sheet Lending)
‣ Default Risk / Credit Risk
‣ Interest Rate Risk
‣ Provision
‣ Contingent Liabilities

Types of Lending

‣ Fund-based Lending : Actual Outflow of Cash

Example : Short Term Loans, Long Term Loans , Revolving
Credits.
‣ Non-fund based lending : Contingent Liabilities
Example : Letter of Credit, Bank Guarantee.
‣ Asset-based lending : Earning Capacity of Asset
Example : Securitization, Project Finance.

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 Loan Policy - ‘Credit Culture’

‣ Objective : The Loan Policy Alignment of individual goals of

credit officers to banks overall goals.
‣ Loan Objective : liquidity,profitability,, risk , asset quality
‣ Volume & mix of loans : Industry, Sectors, Geographical Area
‣ Loan Evaluation Procedure : Credit Appraisal Procedures
‣ Credit Administration : Credit Sanctioning Powers
‣ Credit Files : Mandatory Format
‣ Leading Rates :

Types of Loans

‣ Base of Classification : Purpose, Collateral, Repayment

Period & Borrowers Profile.
‣ Loans For Working Capital
‣ Loan For Capital Expenditure & Industrial Credit
‣ Loan Syndication
‣ Loans for Agriculture
‣ Loan for Infrastructure - Project Finance
‣ Loans to Consumers or Retail Lending
‣ Non Fund Based Credit
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 Loans for Working Capital

‣ Purpose Oriented Loan

‣ Close Working Capital Gap
‣ Short Term
‣ Loan Against Inventories
‣ Estimation of loan requirement extremely important

Loan for Capital Expenditure

‣ Term Loan
‣ Maturities 1 to 7 years
‣ Repayments in fully amortized equal periodic
installments(Interest + Principle)
‣ Repayment of Principle in equal installments . Interest
calculated separately
‣ “Bullet Loan” - Balloon Payment - Pay periodic interest
but principle paid on maturity

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 Loan Syndication

‣ Large Projects - Huge Capital & high Risk

‣ Group of Banks
‣ Lead bank - Fee based income
‣ Junior Banks - interest spread income

Loans for Infrastructure - Project Finance

‣ High Risk
‣ Term Loans
‣ For Specific Project
‣ No Recourse
‣ Challenge in Credit Appraisal

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 Retail Lending

‣ Small Loans
‣ Repayment Period 1 to 5 years or more in housing loan
‣ Higher default risk
‣ Installment Loans
‣ Credit Cards
‣ Non Installment Loans

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Unsecured vs Secured

‣ Unsecured : Not backed by tangible security.

‘creditworthiness of borrower’
‣ Secured Loans: Backed By tangible assets
• Floating Assets : Composition of asset keeps changing
in short term e.g. Current Assets
• Fixed Assets : Composition of asset can not be
changed in short term e.g. Plant & Machinery

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 Security :Pledge

‣ Bailment of goods as a security for payment of debt.

‣ Movable Goods
‣ Goods are in Possession of Bank
‣ Bank Responsible to take care of goods.

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Security :Hypothecation

‣ Movable Assets
‣ Charge on Movable Assets
‣ No transfer of possession of assets
‣ Riskier than Pledge

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 Security :Assignment

‣ Borrowers ‘assign’ actionable claim to the bank

‣ Actionable claim - Claim to any debt
‣ Example : Money due from government department, Life
insurance Policy

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Security : Banker’s Lien

‣ Lien is the right of the bank to retain the securities given

by the borrower until the debt due is fully paid.
‣ Banks right to sell goods & securities in case the
borrower defaults.

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 Security : Right of Set Off

‣ The Bank’s right of set off enables it to adjust the credit

balance in one account of a customer with the debit
balance in another account of the same customer.
‣ Account Must be same name
‣ Account must have same rights

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Security : Mortgage

‣ Immovable Property
‣ Transferrer of property - Mortgagor
‣ To whom its transfered - Mortgagee
‣ Transfer of interest
‣ No actual Possession by Bank

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 Security : Charge

‣ Any form of security for debt, whether the borrower is

an individual, partnership firm, private or public limited
company or the government.
‣ Fixed Charge : Specific Charge over designated property
of the company- Right to sell asset
‣ Floating Charge : Not attached to any specific asset.
‣ Does not restrict company from selling assets under
charge or assign them as security.

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Non-Performing Assets

‣ An asset, including a leased asset, becomes non-

performing when it ceases to generate income for the
bank.
‣ ‘Overdue’ more than 90 days
‣ ‘out of order’ - over draft & cash credit
‣ Sub-standard Assets: NPA for <= 12 months
‣ Doubtful assets: Sub-standard for 12 months
‣ Loss Assets: Considered uncollectible or have very little
value of backed asset

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Thank You

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