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Advances Against Deposits

Advances Against Deposits , By: A.K.Chow dhury

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ADVANCES AGAINST DEPOSITS INTRODUCTION Advances against fixed/term deposits are one of the most convenient methods of obtaining / providing financial accommodation from the point of view of the borrower and the banker respectively. It enables the depositor meet immediate requirement of funds without losing interest consequent on premature withdrawal of the deposit. It enables the banker on the order hand to adjust the advance out of the maturity proceeds of the deposit as and when necessary. 2.SAFEGUARDS Like any other advance the banker needs to take certain safeguards while sanctioning advances against fixed/term deposits. Advances should normally be sanctioned to the person/persons in whose name the receipt/receipts are issued. In case loan is sought by one of the deposit account holders against an deposit held jointly, all the depositors must sign a letter of authority, authorizing the bank to sanction the loan. Advances against deposits held in the names of minor can be allowed only as a special case, provided the guardian furnishes a declaration stating inter alias that he/she is the guardian of the account holder; that the loan amount will be utilized for the benefit of the minor; that he/she will indemnify the bank against any loss that the bank may incur by reason of any claim by or on behalf of the minor against the bank, on account of the bank having granted the loans. Further the loan papers should be signed both in the capacity of the guardian of the minor and in his/her own individual capacity. iii) In the case of institutions and companies and any other legal entity resolution authorising such borrowing is to be obtained.

iv) In the case of advances against third party deposits, a consent letter must be obtained from the account holder authorising the bank to hold the receipt as security for the advance and to utilize the amount of deposit on maturity towards liquidation of borrower's dues; further the nature of relationship between the borrower and the depositor should be disclosed. v) The deposit receipt against which loan is being given should be duly discharged by the holder/holders who must sign across a revenue stamp and also sign the memorandum of pledge. The banker is thus authorized by the depositors to appropriate the amount of the fixed/term deposit towards repayment of the advance.

memorandum of pledge. The banker is thus authorized by the depositors to appropriate the amount of the fixed/term deposit towards repayment of the advance. vi) vii) viii) 3. All signatures made for discharging the receipt and other loan documents must be tallied with specimen signatures on record. Lien on the fixed deposit receipt and the fixed deposit register must be noted in red ink under signature of an authorized officer. In the case of advances against recurring deposits the pass book should be obtained alongwith the discharge form provided by the bank. Closure of loan account

As the time of granting the loan, written instruction is to be obtained regarding manner of disposal of the deposit on maturity. If the loan is repaid before the due date of the deposit the receipt should be returned to the account holder after canceling the lien. If the loan is not repaid before the date of maturity of the deposit, on the date of the maturity of the receipt the banker should adjust the loan amount by appropriating the required amount from out of the maturity proceeds of the deposit. The balance, if any, is to be credited to the deposit account of the account holder if there is one, or is to be held in the Sundry Deposit/Unclaimed Deposit Account pending refund to the account holder. 4. Loans against deposit receipt of another branch

In case loans are to be sanctioned deposit receipts issued by another branch of the same bank, the lending branch should ascertain from the issuing branch whether the latter has marked lien on the relevant receipt/register or not; get the signatures discharging the receipt verified by the deposit receipt issuing branch; obtain letter from the borrower addressed to the issuing branch requesting the latter to send the amount of fixed deposit to the lending branch on maturity. 5. Margin Primary Cooperative Banks have been allowed to determine the rate of margin to be maintained on advances granted by them against term/fixed deposits. It would do well to remember here that the margin to be stipulated should be adequate to take care of accrued interest. 6. Interest Rate

6.1. When an advance is granted against a term deposit and the deposit stands in the name of (i) the borrower, either singly or jointly, (ii) one of the partners of a partnership firm and the advance is made to the said firm, (iii) the proprietor of a proprietary concern and the advance is made to such a concern, (iv)a ward whose guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such a capacity the bank would be free to charge interest rate without reference to its Benchmark Prime Lending Rate (BPLR). 6.2. If the term deposit against which an advance was granted is withdrawn before completion of the prescribed minimum maturity period, such an advance should not be treated as advance against the term deposit for the purpose of charging interest and the bank should charge interest at the rate prescribed in terms of Reserve Bank of Indias directive relating to interest rates on advances issued from time to time. 6.3. When an advance is granted against a term deposit which is not in the nature of those at items (i) to (iv) in para 6.1 above, a bank would be free to charge interest rate without reference to the BPLR, provided the advance is upto Rs.2 lakh. In case the advance exceeds Rs. 2 lakh, bank should charge interest at the rate prescribed in terms of Reserve Bank of Indias directive relating to interest rates on advances issued from time to time. 6.4 A bank has the discretion not to apply rate of interest as stipulated at 6.1 above in the case of advances up to Rs.3 lakh granted to a member / retired member of the banks staff or the spouse of a deceased member / retired member of the banks staff against their term deposits. 7. There have been cases of frauds where certain parties obtained large amounts of loans / overdrafts against the pledge of third-party (institutional) deposit receipts which turned out to be fake. Such criminal acts of the outsiders to cheat the banks were possibly facilitated with the connivance, negligence of branch officials. The modus operandi of frauds which have taken place in some banks is given below

Some persons claiming to be financial consultants approached the branch managers with the offer of securing high institutional deposits conditional upon the branch agreeing to grant loans / advances against these third party deposits. In their eagerness to mobilise deposits, the Branch Managers accepted the deposits brought in by the intermediaries and allowed overdrafts to them against these deposits. It later transpired that the intermediaries printed counterfeit deposit receipts with the same numbers and filled up the details, as per the originals issued by the branch, including signatures of branch officials and pledged these fake receipts with the branches as security. The bank came to know later that the intermediaries were not traceable and the original receipts issued by the branches were in the custody of the actual depositors, who were not aware of any borrowings purportedly made against their deposits. The bank had not ensured before granting the advances whether the intermediaries were properly authorised by the concerned institutions to borrow against their deposits. Banks should therefore be on alert to prevent frauds of such types while accepting huge institutional deposits through intermediaries, conditional upon the branches agreeing to grant loans / advances against these third party deposits. 8. Observance of IRAC and Provisioning norms

Advances against term/fixed deposit receipts are exempted from provisioning requirements. Such accounts need not, therefore, be treated as non-performing asset although interest might not have been paid for more than two quarters as on the balance-sheet date. Such interest may be taken to bank's income account provided adequate margin is available in the loan account. 8. Limit on Credit Exposure

Loans and advances granted against the security of bank's own term deposits may be excluded from the purview of exposure ceiling'. 9. Advances against fixed deposits receipts issued by other banks -

Banks have been prohibited from sanctioning advances against FDRs or term deposits of other banks. In case any such advance was allowed prior to imposition of the restriction and are still outstanding all such cases must be scrutinized to ensure that all such advances have been granted against genuine FDRs/genuine TDRs of other banks and necessary precautions have been observed. If any irregularities are noticed these are to be reported to the RBI. 10. Documentation - The documents to be obtained in respect of advances against fixed deposits are as follows :

Loan application signed by all parties in whose name receipt stands Demand promissory note Letter of continuity (in the case of OD and CC accounts) Letter of lien and set off Deposit receipt duly discharged Authority to adjust the principal and interest towards the loan on maturity Letter of consent or renunciation (in the case of third party deposits) Guardian's declaration (in the case of advances against deposits held in the name of minors.) References 1. 2. 3. 4. Manual for Urban Cooperative Banks Relevant circulars issued by the RBI Banking Law and practice by P.M.Varshney Handbook of Banking Information by N S Toor

Prepared by Smt. M.Sarkar Deb, Faculty member

Prepared by Smt. M.Sarkar Deb, Faculty member Updated by Shri Arnab Kumar Chowdhury, Member of Faculty, CAB, Pune (March 2007)

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