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Retail Banking
A Retail Assets--Retail lending

Principle of Lending
The Six Basic Cs of Lending
Character Specific purpose of loan and serious intent to repay loan
Capacity Legal authority to sign binding contract
Cash Ability to generate enough cash to repay loan
Collateral Adequate assets to support the loan
Conditions Economic conditions faced by borrower
Control Does loan meet written loan policy and how would loan be affected by changing laws
and regulations

Types of Lending or Credit facilities

A. Funded Loans/Credit lines:
Where there is immediate outgo of bank cash or fund from the bank
Line of credit or a credit limit is a predetermined amount available to the firm upon request
(under established terms and conditions). Normally for working capital needs or temporary assets
for one year or less.
1. Overdraft: A customer is allowed to draw the cheques for amount in excess of credit balance in
the account. A limit is fixed say Rs.1 lakh. Then costumer can over draw upto this amount can
deposit in the account, any amount at his convenience & cash flows and also can redraw up-to Rs.1
lakh the limit fixed. The over draft may be granted against some security or without security.
2. Cash credit: A credit line or limit is granted to a borrower generally engaged in mfg or trading
activities against security of stock/inventories or receivables. Borrower has to invent money in
stocking of raw materials semi finished & finished goods, storage of goods receivable on sale as all
sales are not cash sales, selling & distribution expenses, salaries & general expenses.
Borrower can draw up-to the cash credit limit say, Rs.10 lakh in full, in parts, any time as per
needs. He can deposit sale proceeds, issue cheques to suppliers, workers, staff etc. as per his
needs. The interest is charged on daily balance (amount) of credit line outstanding in the account &
not on the full amount of line sanctioned.
3. Term loan is a single loan for a stated period of time, or a series of loans on specified dates.
Normally for permanent assets (e.g.,, machinery, building renovation, refinancing debt, etc.) and
can be for more than 5 years. Value of loan should be less than value of asset, as borrower

equity is positive (i.e., incentive to pay off the loan). Maturity of loan should not exceed the life of
the asset. The loan is repaid monthly/quarterly/half yearly installment as per cash generation
capacity of the borrower.
4. Bridge loan helps to finance working capital or other needs for a short period of time within
which the firm is seeking alternative financing (e.g., by way of a commercial paper issuance from
the market) or the need for working capital while the IPO is in the process of completion.
5. Asset-based lending is using the assets of the firm to secure a loan.
All secured loans can be classified as asset-based lending.
6. Bills purchased/discounted:
A bill of exchange B/E is an instrument/document called Negotiable instrument, drawn by the
seller of goods on the buyer of goods, instructing buyer to pay a certain sum (of Rs.5 lakh say) to
SBI on demand (or after 90 days from the presentation) for the value received (by seller from his
bank.
A B/E is used to settle payment on trade transaction and to facilitate for the seller getting
loan from the bank to convert credit sale to cash on payment of interest for the period of delay in
receipt of payment from the buyer for goods sold.
Format of bill of exchange
Rs.500,000.00

22.01.09

On demand / 90 days after presentation, pay a sum of Rs.five lakh only

to State Bank of India or order, for value received.
To
XYZ & Co.
A-4, GK- 2
New Delhi
(Buyer)

For AB enterprises
Sd/
Proprietor
(Seller)

Demand Bill: A bill on demand or on presentation to the drawee (buyer) is called demand bill. It is
payable within 48 hours after presentation through this banker.
Usance Bill: A B/E payable after a certain period (say 90 days) after presentation and acceptance
of the liability on the bill by the drawee, is called usance or time bill.

Documentary Bill: A B/E accompanied by some documents of title to goods sold e.g. Railway
Receipt/Goods Receipt Or Lorry/Transport Receipt (By Road) Or Airway Bill (shipment by air)
Or Bill Of Lading( shipment by sea) plus invoice , quality certificate, packing list as desired by
trade practices . Based on the documents of title to goods released from the bank, , the buyer can
release the goods from the carrier of goods.
Clean Bill: A B/E not accompanied by any documents of title to goods is called clean bill.
In such case, the documents of title to goods and other documents are sent directly to
buyer/drawee, when the seller has total faith on buyer about payment in time as agreed between
them or where advance payment has been received.
D/P Bill: It is a documentary bill where documents are to be released on payment (terms:
documents against payment only). Buyer will pay first the bill amount to presenting bank and
bank will release documents to buyer who will release the goods from carrier.
D/A Bill: It is a documentary bill where documents are released on acceptance of liability of
payment on the bill of exchange after certain period as mentioned on B/E. Control of goods is lost
by the bank as well the seller. The buyer will pay later to the presenting bank on the due date. Such
facilities are given by the bank to trusted borrowers (sellers) for buyer with good credit and
financial standing in the market whose satisfactory credit report has been obtained from their
bankers.
B/E mechanism

Seller

draws a B/E on buyer & gives to

Sellers Bank

Sends to

Buyers Bank

presents for the

payment/acceptance

Carrier

Gets documents from bank

Presents TR & gets goods

Buyer

B. Non Funded Credit or loan facilities

In such cases there is no immediate outgo of funds from bank to borrower or third party. Funds
may or may not have to be given at a later date e.g. bank guarantee for a borrower in favour of
some government department may or may not be invoked. At the time of issue of a bank guarantee,
there is no outgo of funds. In one out of 10 cases, if the beneficiary of bank guarantee calls for the
payment, at that time it becomes fund based facility & borrower account is debited after payment
is made by the bank.
1. Bank guarantee
Bid Bond guarantee: is a financial guarantee given by the bank at the request of the applicant
customer in favour of some company inviting bids and stipulating some minimum deposit towards
tenders or contracts. In lieu of deposit, a bank guarantee for the equivalent amount is also
accepted. The bank charges a commission of say 0.25% of the amount. The customer need not
block his funds for tender money.
Performance guarantee : this is given for satisfactory performance of some contract by the
customer of the bank. This is also a financial guarantee as the non performance is converted to
monetary sum for which the performance guarantee is given.
Deferred Payment Gurantees :
These are basically financial guarantees. These are given mostly when transactions of salepurchase of capital goods are involved. For example, a machinery manufacturer may agree to sell
a machinery on deferred payment terms to a buyer provided a banker issues a bank guarantee
guaranteeing such payment. Usually in such transactions, a down payment of around 15% of the
cost of machinery is made and the balance of 85% including interest thereon is agreed to be made
payable in installments spread over a period of time.
2. A letter of Credit
is a mechanism which helps a trade transaction to be put through between a seller and a buyer.
A Letter of Credit is an arrangement whereby a banker acting at the request of a customer,
undertakes to pay a third party, by a given date according to agreed stipulations and against
presentation of documents, the counter-value of the goods or services rendered or otherwise
3. Acceptances on behalf of Customers: For sale of heavy machinery etc, many a time, the seller
insists on substitution of credit standing a of a banker of the buyer to be sure of payment on the
liability of the bill. The B/E is drawn on the buyer of each installment amount and buyer as well as
banker accept the bill payable on due date of each installment.

Secured loan/credit facilities

Loan given on security of some asset (movable or immovable) charged to the banThe security or
asset created out of bank funds is called primary or principal security.
The security, other than principal security is called Collateral (additional) security.
Collateral is also referred to as any security in common parlance.
Does not reduce the risk of the loan per se (which is tied to ability of the borrower to repay a loan
and other factors).Reduces bank risk but increases costs of lending and monitoring.
Characteristics of good collateral:
Durability is the ability of the asset to withstand wear. Durable versus nondurable collateral.
Identification due to physical uniqueness or serial numbers.
Marketability of the property if resold.
Stability of value over the period of the loan.
Standardization by government or industry guidelines in grading quality of assets.
Unsecured loans: are called clean facilities without any asset charged.
Guaranteed Loans: Where guarantee of some third person /party has been obtained for repayment
of loan.
Charge on a security:
Charge on security or asset of borrower means a legal interest of the lender in the asset so that in
case of default, the lender can sell it and realize the loan amount. It is created by specific contract /
written document.
Charging of securities (assets) to bank by the borrower
Creating a charge on securities or charging a security (assets) means creating a legal interest in the
assets in favour of the lender on the asset so that lender can recover the money lent in the event of
default in repayment of loan.
Various types of securities & mode of charging them in lenders favor
The annexure 1 explains the type of security is movable or immovable, their nature/description,
the type of charge, related circumstances leading to particular kind of charge, type of borrowers or
loan where it is created .
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Borrowers Margin or Contribution or Equity : normally banks do not lend 100% of the cost
of assets to be financed or the borrowers requirements for funds. Banks want some contribution
from the borrower say, 20 to 30% so that he continues taking interest in the venture or business
activity. This is called margin. This margin helps in full recovery of loan in case the market value
(realizable valaue ) of the security goes down. Higher margin is kept where value of security
fluctuates more widely like shares and debentures of companies or where the nature of security is
perishable in nature or less realizable.
Marign will be higher say 30-40% against receivables than stocks (25%)
Drawing Power: DP It means the maximum amount that a customer can draw from his cash
credit overdraft limit. When cash credit limit is set up against stocks or raw material , the
drawing power is worked out every month based on stocks held at the end of the month. Total
value of stocks less margin stipulated is called the drawing power . It will be less than or equal to
the limit sanctioned. For an example, the borrower has a cash credit limit of Rs.10 lakh against
stocks. He submits a stock statement showing stocks worth Rs. 16 lakh at cost price. Margin
stipulated is 25%. Now drawing power will be Rs. 16 Lakh minus 25% Rs.4 lakh= Rs.12 Lakh
(but the limit is Rs.10 lakh so DP will be Rs.10 lakh maximum )
Insurance of assets charged to bank :
The assets charged to bank are to be insured against loss of usual kinds like fire, theft etc. The
insurance cost is born by the borrower. The bank gets the asset insurance policy and debits
customers account for the premium paid.
The important point to be noted here is the adequate amount of insurance on value of stocks
or other assets. In case a borrower maintains stocks of Rs. 20 lakh maximum in a year, he should
insure upto Rs.20 lakh. Insurance companies treat the under insured amount or the uninsured
stock as self insurance by the borrower. In case of loss, the insure will pay proportionate claim in
ratio of proportion of insured stocks to total stocks maintained usually. If stocks maintained are
Rs.20 lakh but insurance is obtained for Rs.15 lakh, in case of loss of goods worth Rs.4 lakh, claim
will be paid for 75% of the total loss as goods are insured upto 75% value only i.e, Rs.4 lakh x 15
lakh/ Rs 20 lakh or Rs 3 lakh .