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EXECUTIVE SUMMARY
Once a project opportunity is conceived and it is considered after the preliminary screening, a

detailed feasibility study has to be undertaken covering marketing, technical, and financial aspects of

the project. The study in the form of cases deal with calculations of MPBF (Maximum Permissible

Finance), along with going through the borrower’s information, general information of the proposal,

past record of borrower and details of security mortgaged. Financial records of the borrower audited,

provisional and projected such as Profit and loss account statements, Balance Sheet and Cash and

Fund Flow Statements needed to be considered. The ratios such as current Ratio, Debt Service

Coverage Ratio etc are also checked. The ultimate decision whether to grant the credit to borrower

for the application or not and how to go about it , is undertaken after this study which discloses

whether the borrower has good past record and information provided are true and fair.

My project concerns with the Calculations of MPBF i.e. Credit Appraisal and Renewal, in which I

need to asses if the borrower should be granted credit, and what should be the recommended loan

amount. This all is done after carefully evaluating the financials and securities provided by the

borrower.

Various financial ratios are calculated for the past and future data provided by the borrower after

checking the veracity of the same. The various ratios, which are frequently calculated include:
•

Current
ratio:
[(Receivables + material and finished good inventory)/ (creditors for goods and
expenses)]
•

Long
term
debt-equity
ratio
[Long Term Debt/ Net worth]
1
•

Interest
coverage
ratio
[(Profit Before Interest – Provision for Tax)]/(Interest payments due for the year]
•

Fixed
assets
coverage
ratio
[Fixed Assets/ (Term loan and other long term debt obligations)]
•

Debt-service
coverage
ratio
[{(Profit after tax + Interest on term loan + Depreciation} + Other non-cash
charges]/ [Interest on term loan + Principle Repayment ]
•

Profit after tax/sales

•

Debtors Velocity
[Average Receivables/Credit Sales* No. of days in a year.]
•

Creditors Velocity
[Average Payables/Credit Purchase* No. of days in a year.]
•

Stock Velocity
[Average Stocks/Cost of goods Sold* No. of days in a year.]
Two other important criterions are IRR and DSCR

Financial institutions calculate the Internal Rate of Return (IRR). The Internal Rate of Return refers

to the rate of return that the project is expected to generate based on its projected cash flows

accruing over its expected lifespan. Institutions have a threshold IRR that the project needs to

surpass to assess its viability.

DSCR refers to the ability of the project to generate sufficient cash flows to repay the debt taken to

finance the project. This includes the principal along with the interest component.

The above ratios are taken and matched with the standard, though a certain amount of flexibility is

exercised depending on the perception and personal judgment of the appraising officer. A rating is

assigned to the project based on the scores of the different ratios. A cut-off rating determines

financing decision (whether the project would financed

2
or not). Above the rating, the projects maybe categorized into excellent, good and average. Based

on this and the project characteristics, the final terms and conditions of financial assistance are

decided upon like:

•

Moratorium
•

Repayment period
•

Availability period
•

Security (like first charge, personal guarantee etc.)

•

Interest rate

All the expenses like service fee, processing fee, document fee and other expenses like inspection

of site, factory, etc. are charged to the applicant and are a source of income for the lending

institution.
3
The new identity for J&K Bank is a visual representation of the Bank’s philosophy and
business strategy. The three colored squares represent the regions of Jammu, Kashmir
and Ladakh. The counter-form created by the interaction of the squares is a falcon with
outstretched wings – a symbol of power and empowerment. The synergy between the
three regions propels the bank towards new horizons. Green signifies growth and
renewal, blue conveys stability and unity, and red represents energy and power. All these
attributes are integrated and assimilated in the white counter-form.
4

COMPANY PROFILE
Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and commenced its

business from 4th July, 1939 in Kashmir (India). The Bank was the first in the country as a State

owned bank. The Bank was established as a semi State Bank with participation in capital by State

and the public under the control of State Government.

The bank had to face serious problems at the time of independence when out of its total

of ten branches two branches of Muzaffarabad and Mirpur fell to the other side of the line

of control (now Pak Occupied Kashmir) along with cash and other assets.

According to the extended Central laws of the state, Jammu & Kashmir Bank was

defined as a govt. Company as per the provision of Indian company’s act 1956. In the

year 1971, the Bank received the status of scheduled bank. It was declared as "A" Class

Bank by RBI in 1976.

Today, Jammu & Kashmir Bank is one of the fastest growing banks in India with a network of more

than 500 branches/offices spread across the country offering world class banking products/services

to its customers. The Bank has a status of value driven organization and is always working towards

building trust with Shareholders, Employees, Customers, Borrowers, Regulators and other diverse

Stakeholders, for which it has adopted a strategy directed to developing a sound foundation of

relationship and trust aimed at achieving excellence, which of course, comes from the womb of good

Corporate Governance. Good Governance is a source of competitive advantage and a critical input

for achieving excellence in all pursuits. J&K Bank considers good Corporate Governance as the sine

qua non of a good banking system and has adopted a policy based on all the four pillars of good

governance – transparency, disclosures, accountability and value, enabling it to practice

trusteeship, transparency, fairness and control, leading to stakeholders delight, enhanced

shareholder value and ethical corporate citizenship. It also ensures that bank is managed by an

independent and highly qualified Board following

5

best globally accepted practices, transparent disclosures and empowerment of shareholders,

besides ensuring to meet shareholders aspirations and societal expectations following the principles
of management's executive freedom to drive the bank forward without undue restraints but within the

framework of effective accountability. The excellence achieved by the bank in its operations

stemming from the roots of voluntary good Governance has not gone unrecognized and Bank has

recently bagged three very prestigious awards for following fair business practices and commitment

to social obligations.
Key Developments
“The Bank should be an organ of public interest and not an instrument for the
government or the shareholders to achieve their own end”.

The J&K Bank seems to have made some headway in getting there. The Bank has

changed the business model and made it relevant to the people of the state.

The further story explains it all…

In the last two years, the Bank has registered a 140 per cent increase in profits, a 108 per

cent increase in the rate of return on equity, thereby showing a vast improvement in the

Bank’s efficiency to generate profits from every invested rupee.

Similarly, the efficiency of using the assets of the Bank to generate earnings has increased

104 per cent in two years.

As far as safety is concerned, Bank has covered itself very well. The NPA coverage ratio

has been increased from 48 to 65 per cent

The stock price has more than doubled in the last two years. The Bank touched a high of

Rs 788 in the month of May, showing a 288 per cent increase. And above all, the Bank

has produced, for the second consecutive year, a completely transparent balance sheet,

which has no auditors' qualifications.

Outperforming the sector, as the bank has done in the last two years is the hallmark of
a
good company. For a company like J&K Bank, which operates in a region of low
6

development and poor financial intermediation, it is also important to see how these

numbers are generated. As it is, the J&K Bank is much more than a mere bank for the

people of the state. Not only is it the most successful company of and from the state, it is
a citadel of civil society. Going beyond that, it is a testimony of the competencies of the

people of the state in the building of a national institution.

Future Goals of the Bank

To build a global brand, the Bank feels a need to do two things – go global physically and

second, more importantly, have a unique business model, product offering and service

standards, all of which are globally recognized.

The bank has taken initial steps to achieve the first. As of today, after the state

government, the bank’s second largest shareholders are Foreign Institutional Investors,

with a combined stake of almost 36 per cent. Some of the biggest names in the world

figure in the sixty plus funds that have invested in the Bank. The list is truly international,

with funds from USA, Europe, Singapore, Japan, Sweden, Mexico and Spain, having

investments valued at more than $300 million in the Bank.

As a next step in this direction, the bank plans this year to raise money abroad. The bank will offer

Global Depository Receipts and list the Bank in international capital markets. This will be a landmark

in J&K bank illustrious history.

The second way to becoming a global brand is to have a unique business model, which is

a far more formidable task. The Bank has a wonderful brand in Pashmina.By and large

most global brands are products. What the bank is setting out to do is to create a global

brand in the financial services industry.

7

The BANK’S MISSION STATEMENT

The most important change is to move away from trying to govern to trying to serve.
The bank’s overriding mission as a corporation is to use its core competency to serve and

empower the people of the state in general and entrepreneurs in particular, rather than

serving them as an afterthought.

SERVICES OFFERED
8

Depository Services Scheme of J&K Bank

•

Dematerialization (Demat)
•

Stock Broking through INVESTMART an initiative of ILFS

•

Depository
•

Depository Participant
•

Market transaction
•

Off-market transactions
•

Pledge of securities
•

Rematerialisation (remat)
Insurance offered by J&K Bank
Insurance products of Jammu and Kashmir Bank are offered in association with Bajaj
Allianz General Insurance Co. Ltd.
•

Motor insurance
•

Hospital cash
•

Burglary
•

Shop keepers
In association with MetLife, the Bank is offering the following Life Insurance Policy to
its customers:
•

Met Bhavishya- A flexible money-back plan

•

Met Junior- Par Endowment

•

Met Mortgage Protector SP- Single Premium Mortgage Protection Plan

•

Met 100- Limited Pay Whole Life Insurance

9

Met 100 Gold- Par Whole Life

•

Met Platinum (Endowment)-Participating endowment assurance for face amount

above Rs. 3 lakh
•
Met Riders- Customization tools for policies.
Credit Card of J&K Bank
Initially there are three types of Credit Cards issued by Jammu and Kashmir Bank:
•

Gold Card
•

Silver Card
•

Blue Card

All the above cards are also available with photo along with a family address on Cards. The Card is

accepted by all those Merchant Establishment who honour MASTER cards. ATMs linked with

MASTER cards accept J&K Bank Credit Card.

Customer Service

The Jammu and Kashmir Bank has proved to be customer driven organization and the people in the

organization understand that innovation creates opportunity, quality creates demand and teamwork

makes it happen. The Bank, feeling the pulse of customers need that they demand more for less,

has endeavored to provide them better quality service, wider choice and above all innovative

products. The Bank is always ready to add value to its customers and takes every possible step to

improve quality of customer service. The Bank proves its promises to customer quality service by

establishing. ‘Customer Advisory Foray at its every major branch. The number of such foray has

been consistently rising. In monthly meetings of these forays, the branch managers and customers

interact to sort out issues relating to customer service or other related problems. The Bank has a

very efficient complaint redress mechanism. It handles the customer queries and complaints on

priority. One can find ‘Customer Suggestion Card’,

10

at all branches of the Bank and also on its website. Customers accessing the website of
the Bank have the option to send their queries through e-mail.
Bank on Information Technology

The bank has a constant focus on application and augmentation of the information technology in

order to modernize Bank’s operations and deliver value-added services to the customers. The Bank

covers more and more branches under the computerization programmes.The bank has extended

Anywhere Banking and Tele-Banking facilities to many new locations/branches, The number of

ATMs (both off-site and on-site) installed by the Bank has increased to 78 during the year under
report, of these 51 ATMs were networked through IST Switch. The Bank is in the process of setting

up its DATA centre at Delhi for which creation of infrastructure is in progress. With the commencing

of the said data centre the Bank will be able to introduce Internet Banking.
Customer Orientation

The Bank has come up with various value added products and services to suit customers’

expectations and requirement. Its Marketing and Research Cell has been functioning for three years

now. The market research is conducted on an ongoing basis to identify needs and expectations of

the customers and shape products / services accordingly. Even value addition to the extant

products/services is made to suit the growing needs/ demands of the customers. Bank provides

value to its customers by delivery of innovative products and services in an effective and efficient

manner. In order to reach extant and potential customers in an effective manner creative

promotional campaigns are being undertaken to create a strong "Brand Identity" for the Bank. With

multiple options available to customer in shopping their products, more focus was laid on retail

advertising during the year and extensive promotional campaign through print and electronic media

was undertaken which showed significant results in the form of increased demand for the Bank’s

products and customer base. As a part of the advertising strategy the Bank has sponsored weekly

radio programmes named "JK Bank Dairy" which is aired from the three stations of radio
11

Kashmir viz., Srinagar, Jammu and Leh. It is an innovative programme and is successfully running

for last 18 months. The programme is being produced by Bank’s own staff. The programme has

gained wide popularity among the people as it provides awareness and up-to-date information about

banking in general and products/services offered by the Bank in particular. People from all walks of

life with their responses have appreciated the usefulness of the programmes, which is evident from

hundreds of responses received every week from the listeners.

Bank’s web site is a powerful resource for customer education and information. The website provides

the visitors up-to-date information about all the products/services offered by the Bank and other

matters of interest relating to the Bank besides, providing some on-line services. The updating of the
site is done on daily basis so as to provide the visitors latest information about the Bank. The site

attracts on an average 700 visitors weekly.

Branch Expansion

With a view to increasing its reach to potential markets and extending banking facilities to un-banked

areas coupled with catching on new business opportunities Bank has been opening new branches

selectively at centers offering highest business potential. In keeping with this strategy the Bank

opened 15 new branches/extension counters during the period under report raising the total number

of offices to 454 at the end of March 2003.

12
J&K BANK
BRIEF FINANCIAL (IN RS. MN.)
Profit / Loss A/C
FY 2007-08
FY 2006-07
Net profit
360
274.49
Net Interest Margins
2.95%
2.97%
Operating Income
1055.45
928.06
Net interest income
810.44
767.85
Fee based income
245.01
160.21
Operating Profit
651.84
555.62
Deposits
28593
25194
Return on Assets (%)
1.1
0.96
Post Tax Return on Equity (%)
16.68
14.42
Earnings per Share
74.26
56.62
CRAR
12.80%
13.24%
Tier – I
12.14%
12.60%
Tier – II
0.66%
0.64%
13

J&K BANK AT A GLANCE

•

Incorporated in 1938 as a limited company.

•

Governed by the Companies Act and Banking Regulation Act of India.

•

Regulated by the Reserve Bank of India and SEBI.

•

Listed on the National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE)
•

53 per cent owned by the Government of J&K.

•

Rated "P1+" by Standard and Poor- CRISIL connoting highest degree of safety.
•

Four decades of uninterrupted profitability and dividends

Unique Characteristics: One of a Kind
•

Private sector Bank despite government holding 53 per cent of equity.

•

Sole banker and lender of last resort to the Government of J & K.

•

Plan and non -plan funds, taxes and non-tax revenues routed through the bank.
•

Salaries of Government officials disbursed by the Bank.

•

Only private sector bank designated as agent of RBI for banking.

•

Carries out banking business of the Central Government.

•

Collects taxes pertaining to Central Board of Direct Taxes in J & K

The J&K Bank identifies empowerment as the process of enhancing the capacity of

individuals or group to make choices and to transform those choices into desired actions

and outcomes. Central to this process are actions that build both individual and collective

assets, and improve the efficiency and fairness of the organizational and institutional

context that governs the use of these assets.

Registered Office
Corporate Headquarters
M A Road
M A Road
Srinagar 190 001
Srinagar 190 001
Jammu & Kashmir
Jammu & Kashmir
www.jkbank.net
14

TASK ASSIGNED
I was assigned a project in J&K Bank that deals with evaluating and providing credit assistance to

applicants and consumers from business establishment to consumable requirements, taking the

prescribed norms of the RBI and J&K Bank into consideration. The task starts with the application

from the borrower. Then a checklist is created to confirm the presence of all relevant documents and

guarantees duly certified and to the satisfaction of JK bank. These documents contain the Detailed

Project Report (DPR) in case of term loan, the stock reports and company’s financials along with

guarantee in case of cash credit, the salary slips in case of consumable loans to salaried persons

and securities in every case. The DPR contains the financial outlook, projections and the

assumptions in accordance to the company applying for the loan. After initial scrutiny the borrower is

requested to submit any further documents, if required and/or for clarification and queries. For a

complex and large project, agency may also be asked to make a presentation to the team of

appraisers, where the queries and clarification are addressed to obtain the complete documents and

clarification. The Team prepares a final appraisal note in form of Report. We start with institutional

financial viability assessment first, which contains the assessment of the net worth of the main
promoters (both individuals and corporate according to the share holding pattern), the net worth of

companies giving corporate guarantee along with the main company asking for loan. The relevant

information from the audited reports of all is taken into account for this assessment. This is how we

come across to a fine picture of financial position of the company requesting for financial aid.

Confidential reports from existing bankers and lenders to the agency are also sought to ascertain the

borrower/promoter's track record. For our regular borrowing agencies, the past record with JK Bank

is also checked for any default.

From here on the financial appraisal takes up examining the projected future Cash Flows and

Balance Sheet. The main criterions used by JK Bank are DSCR (Debt Service Coverage Ratio) and

DER (Debt Equity Ratio). The guidelines issued by JK Bank govern the required criterion.
I was required to assess the working capital requirements of various firms applying to JK
bank for Cash Credits (Working Capital Loans). We were required to estimate MPBF for
15
the same. Maximum Permissible Bank Finance is the maximum limit of credit that Bank
can lend. It is calculated as follows:
Maximum Permissible Bank Finance (MPBF)
Current Assets ( All Current Assets)
Less: Current Liabilities ( Crs. + Other Current Liabilities)
Working Capital Gap
Less: 25% of the Total Current Assets or NWC whichever is
higher of the two amounts
MPBF
Assessment Of Working Capital Fund Based : under Mortgage
Loan Scheme
Sales for last financial year

Projected Sales for next financial year

Accepted Sales

(Maximum 125% of the achieved turnover)

Permissible Limit
(20% of the acce
pted sales)
A
Forced Sale value of Property
Permissible Limit
(75% of the forced Sale Value)
B
Maximum Permissible Limit
(Lower of A or B)
C
Available Limit
Limit Recommended by the branch
FORMS OF BANK FINANCE
A firm can draw funds from its bank within the maximum credit limit sanctioned. It can
draw fund in the following forms:
16

Overdraft

Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the

balance in his current account up to a certain specified limit during a stipulated period.

Though overdrawn amount is repayable on demand, they generally continue for a long

period by annual renewals of the limits. It is a very flexible arrangement from the

borrower’s point of view since he can withdraw and repay funds whenever h desires

within the overall stipulations. Interest is charged on daily balances- on the amount

withdrawn-subject to some minimum charges. The borrower operates the account through

cheques.
Cash Credit

It is the most popular method of bank finance for working capital in India. Under this

method a borrower is allowed to withdraw funds from the bank up to the sanctioned
credit limit. Borrower is not required to borrow the entire sanctioned credit once, rather,

he can draw periodically to the extent of his requirements and repay by depositing surplus

funds in his cash credit account. There is no commitment charge; therefore, interest is

payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned

against the security of current assets. Though funds borrowed are repayable on demand,

banks usually do not recall such advances unless they are compelled by adverse

circumstances. Cash credit is the most flexible arrangement from borrower’s point of

view. It is more often than not is used for working capital.

Purchase of Discounting Bills
Under the purchase or discounting of bills, a borrower can obtain credit from bank
against its bills. The bank purchases or discounts the borrower’s bills. The provided
under
17

this agreement is covered within the overall cash credit or overdraft limit. Before

purchasing or discounting the bills, the bank satisfies itself as to the creditworthiness of

the drawer. Though the term bills purchased implies that the bank becomes owner of the

bills, in practice, bank holds bills as security for the credit. When a bill is discounted, the

borrower is paid the discounted amount of the bill.

Letter of Credit

Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that his

bank will make the payment if he fails to honor its obligation. This is ensured through a

letter of credit arrangement. A Bank opens a Letter of Credit in favor of a customer to

facilitate his purchase goods. If the customer does not pay to the supplier within the credit

period, the bank makes the payment under the L/C arrangements. This arrangement

passes the risk of the supplier to the bank. Bank charges the customer for opening the

L/C. The Bank extends such facility to the financially sound customers. Unlike cash

credit or overdraft facility, the L/C arrangement is an indirect financing; the bank makes

payment to the suppliers on behalf of the customer only when he fails to meet the

obligation.
There are two banks involved in L/C arrangements. The L/C opener Bank on behalf of

the applicant or purchaser and the advisory bank on behalf of the beneficiary or supplier.

The L/C opener Bank issues L/C after taking required security. The beneficiary or

supplier gives the goods invoice & bill of exchange to the advisory bank. The advisory

bank sends the same to the Opener Bank for acceptance, the opener bank take an

acceptance from the applicant and sends back the same to the advisory bank. Now the

L/C opener Bank makes payment to the beneficiary or supplier in case of purchaser

default. The bank charges the customer for opening the L/C.
Bank Guarantee
A Bank Guarantee is a guarantee made by a bank on behalf of a customer (usually an
established corporate customer) should it fail to deliver the payment, essentially
making
18

the bank a co-signer for one of its customer's purchases.

A bank guarantee is more risky for the merchant and less risky for the bank.

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on

time and for the correct amount. In the event that the buyer is unable to make payment on

the purchase, the bank will be required to cover the full or remaining amount of the

purchase.

With a bank guarantee, a client can default and the bank assumes the liability.

Thus it can be said that Bank Guarantee is a commitment made by a bank to a foreign

buyer that the bank will pay an exporter for goods shipped if the buyer defaults.
Housing Loan
The Bank provides facility of housing loan to consumers fork purchase, construction,
renovations or for repairs of the house. The eligibility criterion of the bank is as follows:
•

Employees of Govt., Semi-Govt. Dept., Civic Bodies, PSU's with minimum 5

years service.
•

Reputed Businessmen with minimum 5 years standing.

•

Professionals & Self employed like Doctors, Engineers , CA's , Advocates with
minimum 5 years standing
The quantum of loan that can be sanctioned to the consumer is:
•

For Construction /Purchase 60 months net salary or 75.00 Lacs whichever is

lower.
•

For repairs/renovation 20 months net salary, subject to a maximum of Rs.10.00

Lacs.
•

For purchase of land: 20 months net salary/income subject to maximum of Rs.5

Lacs within J&K and Rs10.00 Lacs outside J&K.
•

Also as an incentive for small borrowers, the loans up to Rs. 1.5 Lacs granted for

repairs/renovations of existing houses would now be secured by third party

guarantee of two persons or such other security as is deemed appropriate by the

Bank.
19
The Bank as against the loan amount asks for security from the borrower, the conditions
for which are as follows:
•

Primary: Mortgage of the house Property to be purchased / constructed.

•

Collateral: Third party Guarantee of one person, or assignment of LIC Policies,

pledge of Govt. securities etc.
•

Negative lien on the property to be repaired/renovated without mortgaging the

same to the Bank.

In the view of above conditions bank sanctions the loan to the borrower. The bank asks a

margin of 15% for construction/purchase of built flat and 20% for renovation/purchase of

land. The J&K Bank charges a processing fee @0.25% of loan amount.

Following is the table for rate of interest that bank charges against housing loan amount.

They are subject to change.

Rate of Interest (Subject to change)
Floating
Fixed
Up to Rs.15
lacs
Above Rs.15
lacs
Up to Rs.15 lacs
Above
Rs.15 lacs
Repayable up to 5
years
10.00%
11.75%
10.75% 12.75%
Above 5 years up to
10 years
10.50%
12.75%
11.75%
13.50%
Above 10 years up to
15 years
11.50%
12.75%
Above 15 years up to
20 years
11.75%
13.25%
Education loan

The J&K Bank also provide assistance to gain education to the Indian Nationals, who

have secured admission to professional/technical courses through entrance test/selection

process or have secured admission to foreign universities/institutions or have passed the

20
qualifying examination for admission to the courses or to employed person intending to

improve their educational qualification and/or receive training in modern technology in

India or abroad provided training offers prospects of better placement. The quantum of

finance is Rs. 7.50 Lacs for studies in India and Rs. 15.00 Lacs for studies abroad. The

courses that are finances ranges from Graduate/P.G. Courses in: Medicine, Surgery,

Engineering, Hotel Management, Design, Architecture, Bio-chemistry, Agriculture,

Veterinary etc. to Graduate / P.G Courses in : Business Management, Chartered or Cost

Accounting , Company Secretary ship.

The security against finance amount is Personal guarantee of borrower and Collateral security equal

to amount of loan. The margin that J&K Bank asks for is nil to the loan amount of Rs. 4 lacs and for
loans above Rs. 4 lacs, 5% in case studies pursued in India and 15% in case studies pursued

abroad..
.

Rate of Interest (Subject to change)

Loan Amount
Interest Rate
Up to Rs.25,000
9% p.a
Rs.25,001 to Rs.5.00 Lacs
10.50% p.a
Above Rs.5.00 Lacs
11.50%
p.a

Apart from above said assistance bank also provide special education loans such as Term

loan for B.Ed/M.Ed. Courses. The purpose of this loan is to provide loan to students or

employed persons who want to pursue B.Ed/M.Ed courses and for meeting admission/

tuition/ examination/ library/ lab Fee. The nature of this type of loan is not called

educational loan but term loan. It is offered to Indian Nationals, who have completed

their graduation in any discipline from any recognized university, should have secured

admission to the recognized Institution/College imparting the B.Ed/M.Ed Course. The

loan application should be forwarded by the principal of the college. The quantum of
21
bank finance is maximum Rs. 25000 with 10% margin and a processing fee 0.05% or minimum Rs.

25. The security in this case is third party guarantee of one person. The interest rate is PLR with

quarterly rests.
The J&K Bank also provide opportunity to children to have good quality primary
education for which it provides term loan assistance under the special tagBudshah
Primary Education Finance. This facility is to finance the entire cost of education of a

child including school fee, uniform, books, etc. The finance is granted in the name of

Guardian who has an independent regular source of income, for all children above the

age of 3 years, on producing a Certificate from the concerned recognized/ registered

school where the child has been granted admission and the loan application should be

forwarded by the principal of the school. The bank asks for personal guarantee of the

parent/guardian and third party guarantee of one person as the security (However third

party guarantee does not apply in case of Government employees drawing salary through

J&K Bank Branches). The bank also asks for a margin of 10% and a processing fee @

0.05% of the amount sanctioned with a minimum cap of Rs. 25 to be paid upfront. The

interest rate is charged with quarterly rests. The Quantum of Finance is given ahead:
Quantum of Finance
Class
School
Maximum Amount (Rs)
22
Pry.Edu.
Private
30,000.00
Pry.Edu
Govt.
2,000.00
Sec.Edu
Private
25,000.00
Sec.Edu.
Govt.
5,000.00
Car Loan

The J&K Bank provide car loan facility to the employees of Government/Semi

Government, Civic Bodies PSU's / Individual / Proprietorship Concerns / Firms / Limited

Companies known to the Bank. The eligibility criterion for Employees of Government /

Semi Government., Civic Bodies is: their Net annual income should not be less than Rs.

60000 per annum. Spouse’s income can also be included for calculating the eligibility for

quantum of finance. The applicant (individuals) should have a valid driving license in

his/her own name. The employees of the State Govt/Semi Govt. Departments/Other

Organizations should have a minimum of 5 years active service in the

organization/department. The security is as follows: Primary: Hypothecation of vehicle

Financed. Collateral: Third party guarantee of one person.

However, no Third Party Guarantee is required in respect of government employees

drawing salary through the bank and maintaining account with us or where drawing and

disbursing authorities undertake deduction of required monthly installments from their

salaries.

In respect of others like professionals, businessmen etc. guarantee of one person good for the

amount is obtained along with an affidavit to the effect that the prospective borrower is not defaulter

with any bank/ branch of the bank.

The quantum of loan is calculated on the basis of 24 months net monthly income/salary

which is subject to maximum finance of Rs. 10.00 lacs with a margin @ 20%. There are

no processing charges as such however the bank charges interest @ 11.50% (Fixed.)

Amount of loan is to be repaid within 7 years.

Apart from the above car loan facility the J&K Bank provides loan facility for used cars.
The purpose of such a finance is to let borrower buy an old car/jeep (not more than 5
23

years old) any model. This loan facility is available for Permanent employees of

Government/Semi-Government Undertakings, Autonomous bodies, Public Sector

Undertakings, Private Companies or reputed establishments. Professionals or self

employed individuals, Proprietorship Concerns. Partnership Firms, Private /Public Ltd

Co.

There is age criteria attached with this loan facility which is as follows: in case of a

salaried individual the applicant should be at least 21 years old at the time of application,

and below 58 years of age at the time of maturity of the loan but in case of institutions,

where retirement age is 60 years, the upper age limit shall be 60 years. In case of Self-

Employed Individual, any Proprietor, Partner, Professional or director above 21 years of

age but below 65 at the time of the loan's maturity. The bank asks for a margin @ 25%

for vehicles having age less than 3 years and 30% for vehicles having age of 3 years and

above up to 5 years. The maximum loan amount that the bank can finance is 2.5 times of
the net annual income or 15 lacs, whichever is lower. If married, the spouse's income also

considered provided the spouse guarantees the loan. Loan amount for used vehicles shall

be subject to a maximum limit of Rs. 15 lacs.

The security for the same is as follows: Primary: Hypothecation of vehicle to be

purchased. Collateral: No third party guarantee required in respect of employees drawing

salary through our branches & where letter of undertaking from employer is available.

Third Party Guarantee of two persons for all other applicants. Third Party Guarantee may

be waived off in case of existing account holders having good reputation. Instead Post

Dated Cheques may be accepted.

The rate of interest is fixed considering repayment period. If the repayment period is up

to 4 years then rate of interest would be PLR+ 0.25% p.a. and if the repayment period is

above 4 years and up to 6 years the rate of interest would be PLR+0.75% p.a. In case

cheques drawn for repayment of the loan gets bounced the bank charge Rs. 200 as

penalty.
The value of the vehicle is ascertained on the basis of present market value of the new
car
of same variety & configuration less than depreciation
24

Consumer Loan
The J&K Bank grants Consumer Loan for purchase of durable consumer goods like:
•

Desktop Computer ( P.C )/ Laptop

•

Motor Cycle / Scooter / Air Conditioner

•

Color TV / DVD Player/ VCR / Generator/ Washing Machine (automatic) /

cooking range.
•

Refrigerator / Dish Antenna/DTH Equipment/ Kerosene Room Heater/ Washing

machine
•

Vacuum cleaner
•

Water Filter cum purifier / CD Players /Cassette Players / Geyser / Cooler, etc.
The scale of finance range from Rs. 3000 to Rs. 40000 per article however maximum
finance is Rs. 75000 subject to 12 times net monthly Salary.
The borrower must be one out of the following: Employees of Govt., Semi-Govt., Civic
Bodies, Self employed (with assured income).
The Security is as follows: Primary: Hypothecation of article financed. Collateral: Third

party Guarantee of one person. Rate of interest keep changing however current rate of

interest is 14% with no processing charges. The margin is 25%.

Consumption Loan
The main features of Consumption loan provided at J&K Bank are as follows:
•

Disbursed in cash
•

No questions asked about its end-use.

25

Revolving type facility, as full limit can be restored on request of the borrower
subject to the following:-
•

Outstanding balance reduced to below 40% of the loan amount.

•

At the time of reinstatement of the limit, applicant must have sufficient remaining

years of service so that loan is repaid within the borrowers remaining years of

service.
•

Fresh D.P Note for full amount of loan.

•

Borrower has not had more than two installments in arrears on any point of time
during currency of loan .

Borrower shall have to furnish an undertaking from drawing and disbursing

officer for intimating the bank about their transfer and noting that outstanding

from the bank and the monthly installment obligation in their LPC forwarded to

the next drawing and disbursing authority.

The borrower must be Permanent employees of State, Central Government, autonomous

bodies, corporates, public & private sector undertakings having minimum of 3 years

confirmed service. The quantum of loan is 30 months gross salary or Rs 7.00 lacs

whichever is less. There is no margin asked and rate of interest is 14% subject to change.
Working Capital Loan/Term Loan or Mortgage loan for Trade & Service Sector

Banks are the main institutional sources of working capital finance in India. After trade

credit, bank credit is the most important source of financing working capital

requirements. A bank considers a firm’s sales and production plans and the desirable
levels of current assets in determining its working capital requirements. The amount

approved by the bank for the firm’s working capital requirements is called credit limit.

Credit limit is the maximum funds which a firm can obtain from the banking system.

In case of firms with seasonal businesses, banks may fix separate limits for the peak level

credit requirements indicating the periods during which the separate limits will be utilized

by the borrower. In practice, banks do not lend 100% of the credit limit; they deduct

margin money. A margin requirement is based on the principle of conservatism and is

26

meant to ensure security. If the margin requirement is 30%, bank will lend only up to

70% of the value of the asset. This implies that security of bank’s lending should be

maintained even if the asset’s value falls by 30%.

A borrower may sometimes require ad hoc or temporary accommodation in excess of

sanctioned credit limit to meet unforeseen contingencies. Banks provide such

accommodation through a demand loan account or a separate non operable cash credit

account. The borrower is required to pay a higher rate of interest above the normal rate of

interest on such additional credit.

The purpose of such loan is to provide hassle free working capital finance to the
borrower. The nature of this loan can be cash credit, overdraft or a term loan. The

borrower should have a good track record of 3 years.

The security in this case goes as follows: Primary Hypothecation of stocks and book-

debts Collateral Mortgage of Unencumbered residential house/flat, commercial or

industrial property with a clear marketable title in the name and possession of the

borrower/Proprietor/ Partner/s/Director/s either self occupied or vacant.

The Rate of interest is PLR+1% with monthly rests. The term loan (against mortgage of

immovable property) from a minimum Rs. 0.50 lacs to maximum Rs. 50 lacs or 30 times

net monthly income whichever is lower. The security is the Mortgage of the

unencumbered residential house/flat, commercial or Industrial property with a clear

marketable title in the name and possession of borrower/proprietor or partner/s/Director/s

either self occupied or vacant with a security cover of 1.5 times the amount of loan. The

Rate of Interest is PLR+2.5% with a repayment period of 60 months.

Factors to be taken into consideration while determining
requirements for working capital:
Production Policies
27

A sugar factory which belongs to a seasonal industry would obviously have its working

capital need affected by the length of the crushing season. The production schedule i.e.

the plan for production, has great influence on the level of inventories. In some cases raw

material can be procured only in a particular season and have to be stocked for the

production of the whole year. In many others, the production cycle is limited to a part of

the year and raw materials have to be accumulated throughout the year. In all such cases

the need for working capital will vary according to the production plans. Similarly, the

decision of the management regarding automation, etc, also affects working capital

requirements. In a labor- intensive process, the requirements of working capital will be

higher. In the case of highly automatic plant, the requirements of long-term funds would

be greater.
Nature of the business

The shorter the manufacturing process, the lower is the requirements of working capital. This is

because, in such a case, inventories have to be maintained at a low level. Longer the manufacturing

process, higher will be the requirements of working capital. This is the reason why highly capital-

intensive industries require large amount of working capital to run their sophisticated and long

production process. Similarly, a trading concern requires lower working capital than a manufacturing

concern.
Credit policy

The credit policy of the company also determines the requirements of working capital. A

company, which allows liberal credit to its customers, may have higher sales but

consequently will have large amount of funds tied up in sundry debtors. Similarly a

company, which has very efficient debt collection machinery and offers strict credit

terms, may require lesser amount of working capital than the one where debt collection

system is not so efficient or where the credit terms are liberal. The credibility of a

company in the market also has an effect on the working capital requirements. Reputed

and established concerns can purchase raw material on credit and enjoy many other
28

services also like door delivery, after sales service etc. This would mean that they could

easily have large current liabilities; therefore the required working capital may not be

very high.
Inventory policy

The inventory policy of a company also has an impact on the working capital

requirements since a large amount of funds is normally locked up in inventories. An

efficient firm may stock material for a smaller period and may, therefore, require lesser

amount of working capital.

Abnormal factors

Abnormal factors like strikes and lockouts also require additional working capital.

Recessionary conditions necessitate a higher amount of stock of finished goods

remaining in stock. Similarly, inflationary conditions necessitate more funds for working

capital to maintain same amount of current assets.

Market conditions

Working capital requirements are also affected by market conditions like degree of

competition. Large inventory is essential as delivery has to be off the shelf or credit has to

be extended on liberal terms when market competition is fierce or market is not very

strong is a buyer’s market.

Conditions of supply

If prompt and adequate supply of raw materials, spares, stores etc. is available it is

possible to manage with small investments in inventory or work on the just in time (JIT)

principle. However if the supply is erratic, scant seasonal, channel zed through
29

government agencies etc., it is essential to keep large stocks increasing working capital
requirements.
Business Cycle
Business fluctuations lead to cyclical and seasonal changes in production and sales and
affect the working capital requirements.
Growth and expansion

The growth in volume and growth in working capital go hand in hand. However, the

change may not be proportionate and the increased need for working capital is felt right

from the initial stages of growth.

Level of taxes

The amount of taxes paid depends on taxation laws. These amount usually have to be paid in

advance. Thus need for working capital varies with tax rates and advance tax provisions.
Dividend policy
Payment of dividend utilizes cash while retaining profits acts as a source of working
capital. Thus working capital gets affected by dividend policies.
Price level changes
Inflationary trends in the economy necessitate more working capital to maintain the
same
level of activity.
30
Operating efficiency
Efficient and coordinated utilization of capital reduces the amount required to be
invested
in working capital
Securities Required in bank finance
Banks generally do not provide working capital without adequate security. The following
are the modes of security which a bank may require:
31

Hypothecation

Under hypothecation, the borrower is provided with working capital finance by the bank

against the security of movable property, generally inventories. The borrower does not

transfer the property to the bank; he remains in the possession of property made available

as security for the debt. Thus hypothecation is a charge against property for an amount of

debt where neither ownership nor possession is passed to his creditor. Banks generally

grant credit hypothecation only to first class customers with highest integrity. They do not

usually grant hypothecation facility to new borrowers.

Pledge

Under this arrangement, the borrower is required to transfer the physical possession of

the property for the payment of debt. In case of mortgage, the possession of the property

may remain with the borrower, with the lender getting the full legal title. The transferor

of interest (borrower) is called mortgager, the transferee (bank) is called mortgagee, and

the instrument of transfer is called the mortgage deed.

The credit granted against immovable property has some difficulties. They are not self

liquidating. Also, there are difficulties in ascertaining the title and assessing the value of
the property. There is limited marketability and therefore security may often b difficult to

realize. Also, without the court’s decree the property can not be sold. Usually, for

working capital finance, the mode of security is either hypothecation or pledge.

Mortgages may be taken as additional security.

Lien

Lien means right of the lender to retain property belonging to the borrower until he

repays credit. It can be either a particular lien or general lien. Particular lien is a right to

retain property until the claim associated with the property is fully paid. General lien, on
32

the other hand, is applicable till all dues of the lender are paid. Banks usually enjoy
general lien.
33
Assessment of Working Capital /Cash Credit
Facility/Term Loan
M/S Quality Crafts Store
M/S Quality Crafts Store Proprietor Mr. Shah Alam Mateen 256-D 1st floor, Green

Towers, established in the year 2002, is engaged in retail business of Kashmiri shawls

particularly trading ofPashmina and woolen shawls and allied items. The party has been
34

Case
Studies
in connection with and dealing with the J&K Bank Lajpat Nagar branch since year 2006

with satisfactory dealings and good conduct. The turnover of account is encouraging. The

party has established good trade connections and is involved in related trade. No negative

complaints has been registered or found against the party ever since the opening of

account with the bank branch. The amount is frequently routed through the account and

the performance of account is good.

Borrower’s Information
Name of Applicant Borrower
:
Mr. Shah Alam Mateen
Address of the Head/Regd. Office
:
256-D 1st floor, Green Towers
Constitution
:
Individual
Date of Establishment
:
Year 2002
Period since dealing with branch
:
Year 2006
Net worth as on 31.10.2007
:
Rs. 9.00 lacs
General Information of the Proposal
Existing Banking Arrangements
:
Sole Banking
Proposed Banking Arrangements
:
Sole Banking
Sanction Comes Under Powers of
:
Branch Head
Activity
:
Trading of Pashmina, woolen
shawls etc.
Sector
:
Trading
Present Facilities by the Applicant
:
Nil
Facility Requested by the Applicant
:
Cash Credit
Purpose of Borrowing
:
For Expansion of Existing Business
Amount Requested
:
Rs. 5.00 Lacs.
Securities Proposed for the Facility
35

Credit Appraisal & Renewal

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