Loan Policy

LENDING POLICY FOR THE YEAR 2012-2013

Background

In the context of rapid growth of Urban Co-operative Banks, qualitative aspects of lending, such as adequacy of lending to meet credit requirements of their borrowers and effective supervision and monitoring of advances have assumed considerable importance. Previously working capital finance provided by the banks to trade and industry was regulated by the Reserve Bank of India through a series of guidelines / instructions issued. There were various quantitative and qualitative restrictions on bank's lending. The banks were also expected to ensure conformity with the basic financial disciplines prescribed by the RBI from time to time under Credit Authorisation Scheme (CAS). However, consistent with the policy of liberalisation and financial sector reforms, several indirect measures to regulate bank credit such as exposure norms for lending to individual / group borrowers, prudential norms for income recognition, asset classification and provisioning for advances, capital adequacy ratios, etc. were introduced by RBI and greater operational freedom has been provided to banks in dispensation of credit.

UCBs are expected to lay down, through their Boards, transparent policies and guidelines for credit dispensation, in respect of each broad category of economic activity, keeping in view the credit exposure norms and various other guidelines issued by the Reserve Bank of India from time to time. Some of the currently applicable guidelines are detailed in the following paragraphs. UCBs are now operating in a fairly deregulated environment and are required to determine their own interest rates on deposits (other than saving account) and interest rates on their advances. The interest rates on banks' investments in government and other permissible securities are also market related. Intense competition for business, involving both the assets and liabilities, together with increasing volatility in the domestic interest rates has brought pressure on the management of banks to maintain an optimal balance between spreads, profitability and long-term viability. The unscientific and ad-hoc pricing of deposits in the context of competition, and alternative avenues for the borrowers, results in inefficient deployment of resources. At the same time, imprudent liquidity management can put banks' earnings and reputation at great risk. These pressures call for a comprehensive approach towards management of banks' balance sheets not just ad hoc action. The managements of UCBs have to base their business decisions on sound risk management systems with the ultimate objective of protecting the interest of depositors and stakeholders. It is, therefore, important that UCBs scrupulously follow the Asset-Liability Management (ALM) guidelines issued by the Reserve Bank of India.

1. GENERAL GUIDING PRINCIPLES

(A) GENERAL

(i) Urban Co-operative Banks provide finance mainly for trade, commerce and industry, construction and repairs to houses, purchase of durable consumer goods and other consumption purposes such as vehicles etc. They are particularly, expected to cater to the credit needs of small artisans, self-employed persons, small traders, transport operators and other weaker sections of the society. While making advances, the banks should satisfy about the normal safeguards, such as, source and adequacy of the income of the borrower for prompt repayment, the nature of security offered and the standing of party. In the case of loans to artisans and entrepreneurs, they should satisfy about the economic viability and technical feasibility of the projects proposed to be financed.

(ii) The operations of an Urban Co-operative Bank call for competent management possessing qualities of leadership so as to guide the institution and ensure its growth on sound business lines. The bank should also have for the purpose well qualified and trained personnel.

(B) LENDING PRINCIPLES

While making advances, an Urban Co-operative Bank should keep in view the cardinal principles of banking such as, safety, liquidity and profitability of its investments. In order to ensure the observance of these cardinal principles, our Bank will follow the following guidelines:

(i) Safety

'Safety first' should be the first guiding principle of a banker, so far it's advances are concerned, because the very existence of a bank depends on the safety of its outstanding, which should never, therefore, be sacrificed to the profit earning capacity of its advances.

(ii) Security

The security accepted must be adequate, readily marketable, easy to handle and free from encumbrance. Whatever be the security, bank will realise that it is only a cushion to fall back upon in case of need and its adequacy alone will not form the sole consideration for judging the suitability of the loan.

(iii) Avoidance of Concentration of Advances

There will be no concentration of advances in the hands of a few borrowers or their families or the industries in which they or their families are interested, enabling them to corner a sizeable portion of the bank's advances. It is better for the bank to advance moderate sums to a large number of customers in preference to lending large sums to a few customers. Defaults by a few heavily indebted borrowers may lead the bank into serious difficulties. The advances will not also be concentrated in any particular trade, vocation or industry. These should be diversified for different purposes. The imprudence of putting one's eggs into one basket can not be too often reiterated.

(iv) Avoidance of Over-extended Position (Liquidity)

The advances portfolio of the bank will not be allowed to be unduly overextended lest it would lead to defaults in the maintenance of statutory liquid assets. It is, therefore, important to keep the advances of the bank within the loanable resources which generally comprise 75 per cent of the owned funds, 70 per cent of the deposits and 100 per cent of the borrowings, if any from the higher financing agency. The bank while making advances will see that the lending money is not going to be locked up for a long time which would make it's loans and advances less liquid. As far as possible, our Bank would be self-reliant in resources and only in exceptional cases and for financing productive purposes in the priority sector, Bank may resort to borrowings from the permitted higher financing agency.

(v) Medium-term Loans

Advances of a medium-term nature will remain within the medium-term resources of the bank. If this is not observed, a continuous diversion of short-term resources for medium term loans may affect the ability of the bank to meet the demands of its depositors as and when their claims arise.

(vi) Emphasis on Loans for Productive Purposes

No doubt, Urban Co-operative Banks are expected to provide consumption loans also to the low and middle income groups of urban population but the emphasis of the Bank will be more on loans for productive purposes, which would generate more income and lead to the gainful employment of more people. This can be achieved by putting a ceiling on loans for consumption and ceremonial purposes, both in terms of individual advances and aggregate of such advances in relation to the total advances or loanable resources. Also, the loans to individual parties meant for productive purposes will be related to the turnover in trade or output in a productive enterprise and these would be adequately secured by goods, i.e., raw materials, stocks in process and finished goods in a productive enterprise.

(vii) Documentation

Proper documentation is important in ensuring the safety of the Bank's advances. If the documents are defective or get lost or time-barred, the bank's security is in jeopardy. It is, therefore, important to obtain appropriate documents for each type of advance on the basis of legal advice. It is equally important that the documents are correctly executed.

2. MONITORING OF LOAN ACCOUNTS

(A) Diversion of Funds

When credit facilities extended by the Bank have been utilized for the purposes other than those for which these were sanctioned and also payments have been made from borrowal accounts to the parties unconnected with the business of the borrower, such diversion of funds results in depletion of working capital leading the account turning into NPA. Therefore, it will be ensured that loan facilities are utilized by borrowers for the purpose for which such facilities are sanctioned. Bank will, thus, have a mechanism for proper monitoring of the end use of funds. Wherever diversion is observed, Bank will take appropriate action against the borrowers concerned and the steps will be initiated to protect the bank's interest.

An illustrative list pertaining to instances where diversion of funds would be construed for monitoring and ensuring end-use of funds may be :

  1. utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanctions;
  2. deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;
  3. transferring funds to the subsidiaries / group companies or other corporates by whatever modalities;
  4. routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
  5. investment in other companies by way of acquiring equities / debt instruments without approval of lenders;
  6. short fall in deployment of funds vis-a-vis the amounts disbursed / drawn and the difference not being accounted for.

In case a borrower is found to have diverted finance for the purposes, other than those for which it was granted, bank will recall the amounts so diverted. In addition, bank may charge penal interest on the amount diverted. Where borrowers fail to repay the amounts diverted from cash credit accounts for uses other than for which the limit was sanctioned, bank may reduce the limits to the extent of amount diverted. The above aspects relating to safe guards are only illustrative in nature and not exhaustive.

Whenever stocks under hypothecation to cash credit and other loan accounts are found to have been sold but the proceeds thereof not credited to the loan account, such action will normally be treated as a fraud. In such cases, bank may take immediate steps to secure the remaining stock so as to prevent further erosion in the value of the available security as also other action as warranted.

Some of the bank clients are known to be making large cash withdrawals. It is quite possible that such cash withdrawals may be used by the account holders for undesirable or illegal activities. While cash withdrawals cannot be refused, bank will keep a proper vigil over requests of their clients for cash withdrawals from their accounts for large amounts.

(B) End-use of Funds

In cases of project financing, bank will seek to ensure end use of funds by, inter alia, obtaining certification from the Chartered Accountants for the purpose. In case of short-term corporate / clean loans, such an approach ought to be supplemented by 'due diligence' on the part of lenders themselves, and to the extent possible, such loans will be limited to only those borrowers whose integrity and reliability were above the board. Therefore, Bank will not depend entirely on the certificates issued by the Chartered Accountants but strengthen their internal controls and the credit risk management system to enhance the quality of their loan portfolio. Needless to say, ensuring end-use of funds, bank will form a part of their loan policy document for which appropriate measures will be put in place.

The following are the illustrative measures that could be taken by the Bank for monitoring and ensuring end-use of funds :

  1. Meaningful scrutiny of quarterly progress reports / operating statements / balance sheets of the borrowers;
  2. Regular inspection of borrowers' assets charged to the lenders as security;
  3. Periodical scrutiny of borrowers' books of accounts and the no-lien accounts maintained with other banks;
  4. Periodical visits to the assisted units;
  5. System of periodical stock audit, in case of working capital finance;
  6. Periodical comprehensive management audit of the 'Credit' function of the Bank, so as to identify the systemic weaknesses in the credit-administration.

(C) Post-Sanction Monitoring

(i) It is the primary responsibility of banks to be vigilant and ensure proper end use of bank funds / monitor the funds flow. It is, therefore, necessary for banks to evolve such arrangements as may be considered necessary to ensure that drawals from cash credit / overdraft accounts are strictly for the purpose for which the credit limits are sanctioned by them. There should be no diversion of working capital finance for acquisition of fixed assets, investments in associate companies / subsidiaries, and acquisition of shares, debentures, units of Unit Trust of India and other mutual funds, and other investments in the capital market. This has to be so, even if there is sufficient drawing power/undrawn limit for the purpose of effecting drawals from the cash credit account.

(ii) Post sanction follow-up of loans and advances will be effective so as to ensure that the security obtained from borrowers by way of hypothecation, pledge, etc. are not tampered with in any manner and are adequate.

(iii) Accounts showing sign of turning into NPAs: Bank will put in place more stringent safeguards, especially where accounts shows sign of turning into NPAs. In such cases bank may strengthen their monitoring system by resorting to more frequent inspections of borrowers' godowns, ensuring that sale proceeds are routed through the borrower's accounts maintained with the bank and insisting on pledge of the stock in place of hypothecation.

(iv) Drawals against clearing cheques will be sanctioned only in respect of first class customers and even in such cases the extent of limits and the need therefore will be subjected to thorough scrutiny and periodical reiew. Bank will not issue banker's cheques / pay orders / demand drafts against instruments presented for clearing, unless the proceeds thereof are collected and credited to the account of the party. Further, banker's cheques / pay orders/ demand drafts, will not be issued by debit to cash credit /over draft accounts which are already overdrawn or likely to be overdrawn with the issue of such instruments.

(v) Drawals against clearing instruments will be normally confined to bank drafts and government cheques and only to a limited extent against third party cheques.

(vi) Cheques against which drawals are allowed, will represent genuine trade transactions and strict vigilance will be observed against assisting kite-flying operations.

(vii) Drawals against cheques of allied/sister concerns will not be permitted and the facility of drawal against clearing cheques will normally be of temporary nature and will not be allowed on a regular basis without proper scrutiny and appraisal.

(viii) Bills of accommodation nature will never be purchased and the officials responsible for purchase of such bills will be punished suitably.

(D) Responsibility

(i) The primary responsibility for preventing misuse of funds rests with the management of the Bank. For the purpose, highest standards of integrity and efficiency are imperative in the Bank, which is the trustee of public money. The Bank will therefore, take appropriate steps to review and tighten it's internal administration and control measures so as to eliminate the scope for misuse/diversion of funds and malpractices.

(ii) Bank will take serious view of instances of misuse of power, corruption and other malpractices indulged by the members of staff and erring staff members will be given punishments befitting the seriousness of the irregularity. Light punishments such as issue of warning, stoppage of increments, transfer, etc. may not prove a deterrent in all cases. Quick disposal of enquiries by the banks and award of deterrent punishment would be necessary in all such cases. The Board will take more active interest in these matters.

(E) (a) Policy for Valuation of Properties

  1. Bank will have a Board approved policy in place for valuation of properties including collaterals accepted for their exposures.
  2. The valuation will be done by professionally qualified independent valuers i.e. the valuer should not have a direct or indirect interest.
  3. The bank will obtain minimum two Independent Valuation Reports for properties valued at Rs.50.00 crore or above.

(b) Policy for Empanelment of Independent Valuers

i) Bank will have a procedure for empanelment of professional valuers and maintain a register of 'approved list of valuers'.

ii) Bank will prescribe a minimum qualification for empanelment of valuers. Different qualifications may be prescribed for different classes of assets (e.g. land & building, plant & machinery, agricultural land, etc). While prescribing the qualification, bank may take into consideration the qualifications prescribed under Section 34 AB (Rule 8A) of the Wealth Tax Act, 1957. Bank may also be guided by the relevant Accounting Standard issued by the Institute of Chartered Accountants of India.

(F) Annual Review of Advances

For an effective monitoring of the advances, it is imperative for the bank to undertake an exercise for review of the advances on a regular basis. Apart from the usual objective of such a review

(i) A borrower may be an individual, a group of individuals, a partnership firm, a Hindu undivided family, or a limited company. The legal status of the borrower will be carefully ascertained and documents, appropriate to the status will be obtained. In this connection, the following points would be borne in mind –

(a) In the case of limited companies, a copy of the Memorandum and Articles of Association, duly certified by an authorized executive to be true and up-to-date, will be obtained. Appropriate resolution of the board of directors, certified under the signature of the authorised official of the company, will be obtained for authorising borrowings/operations on accounts.

(b) For partnership firms, the partnership deed or agreement will be obtained and a copy thereof retained for bank's record. The examination of partnership deed is necessary to ascertain the conditions which will guide the bank for conduct of the account. If there is no agreement of partnership between the partners, the signatures of all the partners (other than minors) will be obtained on all the documents signed on behalf of the firm. In the case of registered partnership firms, it would be in order if all the partners authorise some one amongst them to execute documents on behalf of the firm.

(c) In the case of advances to Hindu undivided families, a joint Hindu family letter, duly signed by the karta and all adult members of the family on behalf of themselves and minors, if any, in the family, will be obtained. The dates of the minors attaining majority will be duly recorded and fresh joint family letter will be obtained when anyone of them attains majority and the existing letter signed by them in ratification of the previous transactions.

(ii) Under no circumstances, the loan/cash credit and overdraft limit will be allowed to be drawn pending execution of the documents. Nor is it a healthy practice to send the documents to the borrower's office or residence for execution. All the documents will invariably be executed in the presence of a bank's official.

(iii) The documents obtained will be recorded in the documents register. The limitation dates will be properly diarised and the documents renewed well in advance of the limitation dates.

(iv) The documents will be kept separately in packets in the custody of a responsible official of the bank.

(v) In case there is a change in the terms of sanction of the limit, supplemental agreement may be taken in regard to the changes and held as part of original documentation.

4. TYPES OF ADVANCES

Advances made by the Bank may be broadly, categorised under loans, cash credits and overdrafts. Bank may also purchase and discount bills / hundies with due sanction / approval of the Board / Loan Sub Committee.

(i) Loans

Loans are given in one lump sum for a fixed period and are repayable after the stipulated period of maturity either in one lump sum or in suitable instalments. Loans can be short-term, medium term or long-term depending upon the purpose for which the loan is required. While short-term loans are granted generally, for 12 months, the period of medium-term loan ranges from 15 months to 5 years. Loans beyond 5 years are termed as long-term loans. Term loans are granted for block capital purposes for acquiring new assets or improvement of existing assets in the case of an industry and in other cases for house constructions, purchase of durable consumer goods like refrigerators, sewing machines, etc. The period of maturity of loans will be fixed with reference to the date of acquiring the assets and the flow of income to the borrower as well as the life of assets acquired or created out of the loan. Instalments for repayment of loans by parties having income at regular intervals may be fixed on monthly, half-yearly or yearly basis, depending upon the flow of income.

(ii) Cash Credits

Cash credit is an arrangement by which a banker allows his customer to borrow money upto a certain limit. Operations in the cash credit account are allowed any number of times during the currency of the limit sanctioned. The cash credit is generally, operative for a period of one year which can be renewed or enhanced provided operations on the limit are satisfactory. Cash credits are suitable for working capital purposes for trade, industry, etc., and these will ordinarily be sanctioned against the security of raw materials, stocks-in-process finished goods in the case of an industry and against merchandise goods in case of traders, backed by proper collateral security.

(iii) Overdrafts

Overdraft is a temporary accommodation / sanctioned limit under which a customer is allowed to overdraw his current account up to the limit sanctioned / allowed usually against collateral security. Thus, unlike cash credit which is used for longer time by individuals / concerns doing business, overdraft is also a bank credit limit to be made use of occasionally for meeting unforeseen contingencies as well as for a certain sanctioned period against the prescribed security.

5. ADVANCES AND NATURE OF SECURITY

(i) Section 5 (n) of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) states that a secured loan or advance means a loan or advance made on the security of assets, the market value of which is not at any time less than the amount of such loan or advance and; unsecured loan or advance means a loan or advance not so secured.

(ii) The advances of Urban Co-operative Banks are generally given against personal security / sureties, pledge / hypothecation of goods in- trade, raw material in production, finished goods or mortgage of machinery and other fixed assets. The salient features of each type of advance according to security are :

(a) Personal Security

Loans and advances granted against the personal surety or sureties are known as unsecured or clean advances. In the case of such an advance, the bank relies upon the personal integrity of the borrower and his surety/sureties and upon the present or future prospects of the borrower's business.

(b) Hypothecation

Banks accept this type of security when advances are made against goods and it is difficult to obtain effective possession of the goods. Under hypothecation, the properties/goods remain in the effective possession of the borrower, who is free to deal with them in any manner he chooses. Hypothecation facility is extended to customers, primarily to manufacturers where goods undergo various processes before sale as finished products. The particulars of limit sanctioned will be properly recorded on the folio of cash credit account. The bank will always have the first charge on the hypothecated goods. The bank will generally not concede second charge to any other financial institutions. The stocks will be valued at cost price / invoice price or market price whichever is lower. Bank's name board will be displayed on the premises. Inspection of stocks will be done more frequently than in the case of pledged goods so as to keep the bank in close touch with the borrower and his stocks. The borrower will be directed to submit stock statements on monthly basis to determine the drawing power. In the case of advances to limited companies, the charge on good hypothecated to the bank will be registered with Registrar of Companies after verifying that there are no subsisting prior charges. It is advisable to obtain some collateral security in addition to hypothecation of goods as the hypothecated goods remain in the physical custody of the borrower.

The bank will obtain following documents :

  1. Demand Promissory Note
  2. Letter of waiver
  3. D.P.Note Delivery Letter
  4. Continuing Security Letter
  5. Hypothecation Deed / Agreement
  6. Guarantee Agreement
  7. Declaration of Ownership & Prior Encumbrance
  8. Letter of Lien and Set-off
  9. Equitable Mortgage Deed of Collateral Security.
  10. Letter of intent to create equitable mortgage of the immovable property

(c) Pledge

Section 172 of the Indian Contract Act, 1872 defines pledge as bailment of goods as security for payment of debt or performance of promise. Section 148 of the said Act, defines bailment as delivery of goods by one person to another for some specific purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. In all cases of bailment or pledge, the banker (pledgee) is bound to take as much care of the goods bailed to him as any man of ordinary prudence would, under similar circumstances, take care of his own goods of the same bulk and value. The banker has the right to retain the goods pledged till the payment of not only the debt but also interest on debt and all the necessary expenses incurred by him for storage and preservation of goods as security.

A borrower will be granted advances only against goods in which he normally deals. Turnover of goods is a significant indicator to judge the marketability of goods. The goods will not be overvalued or obsolete. A sign board indicating goods pledged in favour of the bank will be displayed on the godown. Keys are to be kept with the bank. At the time of lodgement of goods, the original invoices covering the goods will be verified. A record of the goods pledged has got to be maintained in a stock register. Monthly stock statement will be obtained from the borrower. Possession of pledged goods will be parted with only against proportionate repayment of debt. Regular inspection of the godowns is a must. The bank will obtain the following documents :

  1. Demand Promissory Note
  2. Letter of waiver
  3. D.P.Note Delivery Letter
  4. Continuing Security Letter
  5. Pledge Deed
  6. Guarantee Deed
  7. 7 Letter of Lien and Set-off
  8. Letter of Independent Access to the Godown.

(d) Mortgage

Mortgage gives the mortgagee (bank) only an equitable interest in the property and the loan can be realised only by enforcing the claim in a court of law. The application for advance will, inter alia, contain all the necessary information about the property offered as security such as name of the owner, description of the property, its location, measurements, approximate value, legal title, prior encumbrances. The bank will call for valuation report of experts such as architects and engineers. The bank will also examine whether the security is readily marketable. The bank will obtain original title deeds and sale deeds and pass them to its legal advisor for scrutiny and legal opinion as well as search report about title being good, clear, marketable and free from encumbrances or not. In the case of legal mortgage, the bank will get the mortgage deed registered with appropriate authorities while a valid equitable mortgage can be created by deposit of title deeds with the bank. The following documents are to be obtained :

  1. Demand / Time Pro-Note
  2. Mortgage Deed
  3. Guarantee Deed
  4. Memorandum of Deposit and Title Deed (in case of equitable mortgage)
  5. Original Lease Hold Deeds (in case of leasehold property)
  6. Stamped declaration regarding ownership of property
  7. Undertaking from borrower to pay rent, taxes etc.
  8. Letter of intent to create equitable mortgage of the immovable property

6. GENERAL SAFEGUARDS FOR PLEDGE/HYPOTHECATION

The general safeguards to be taken by banks while making advances against pledge/hypothecation of goods and mortgage of properties are:

(i) Margin

Bank will not advance an amount equal to the full market value of the goods offered as security as the prices of all kinds of securities are liable to fluctuate and the amount of debt secured by them is likely to increase by accrual of interest and other charges payable by the borrower. As a cushion for their advances, the banks prescribe certain percentage of margin to be deducted from the value of securities for calculating borrowing power. In the case of hypothecation advances, higher margin is prescribed as securities offered remain in the custody of the borrower and the bank has to rely solely on the integrity of the borrower to keep adequate stocks as cover for advances.

(ii) Insurance

The goods or property pledged/hypothecated/mortgaged to the bank will be fully insured against the risk of fire and/or riot and wherever necessary, against burglary. The cost of insurance is to be borne by the borrower. The policy will be taken in the joint names of the bank and the borrower with the usual banker's clause. If the policy is taken in the name of the borrower alone, it would be assigned in favour of the bank with the endorsement on the policy and the assignment registered with the insurance company. Where the goods pledged or hypothecated are stored in more than one godown, it should be ensured that the stocks in each godown are covered separately and fully by the insurance policies and the policies clearly indicate the address of each go down.

7. LOAN POLICY AND PROCEDURE

(i) Loan Rules

The Bank will frame suitable rules governing loans and advances to be granted for different purposes and get these approved by its Board. Loan rules will indicate the purposes for which the loans are sanctioned, type of security to be accepted, sanctioning authority of loans, the maximum limit, period of loans, margins to be maintained against the securities, interest to be charged, etc.

(ii) Prospective Borrower

Loans will be sanctioned strictly on merits after taking into account the purpose of credit, prospects of the project, estimated credit requirements, etc.

(iii) Loan Application Forms

The Bank will devise separate application forms for different categories of advances. The application will contain the requisite details to assess the viability of the proposal, genuineness and extent of loan/credit required for the purpose and the repaying capacity of the borrower so as to fix the instalments and repayment schedule. In the case of persons in trade or business particulars of trade, annual turnover of business, value of property, sales-tax and income-tax paid (duly supported by assessment orders), borrowings from other agencies are considered important. If the advance is required for working capital needs of an industry, additional details such as, type of goods produced, annual production, annual sales, profit earned, value of machinery will be necessary.

(iv) Scrutiny of Applications

The applications for financial accommodation should be complete with all essential details. The particulars furnished in the applications should be verified as far as possible, with reference to documentary evidence to be furnished by the borrower. The Branch Manager will carefully analyse the data and record his observations in regard to reasonableness of the need for loan, period of repayment, manner of recovery, the nature and adequacy of security offered, title to the security in the case of fixed assets, machinery, etc. before submitting the proposal to the Head Office.

(v) Communication of Sanction

The Bank will advise the party about the sanction of credit by a sanction letter and obtain his written acceptance on the copy of the sanction letter of the terms and conditions set out in the sanction letter before allowing drawals.

(vi) Utilisation of Loans

The Bank will have a suitable machinery to verify the end-use of credit and to ensure that the advances made, especially for identifiable purposes, are utilised for the purposes for which these are granted, Insistence on direct payments by banks to the suppliers of goods such as, dealers in machinery, scooters, cars, fans, refrigerators, is a good safeguard against misutilisation of loan.

8. MAXIMUM LIMIT OF ADVANCES (Prudential Exposure Norms)

The exposure limit is 15% of Capital Funds in case of individual borrower and 40% in case of group of borrowers.

(a) Credit Exposure

  1. Credit exposure shall include –
  2. funded and non-funded credit limits and underwriting and similar commitments,
  3. facilities extended by way of equipment leasing and hire purchase financing, and
  4. adhoc limits sanctioned to the borrowers to meet the contingencies.
  5. Credit exposure shall not include loans and advances granted against the security of bank's own term deposits
  6. The sanctioned limit or outstanding whichever is higher shall be reckoned for arriving at credit exposure limit. Further, in case of fully drawn term loans, where there is no scope of redrawal of any portion of the sanctioned limit, banks may reckon the outstanding for arriving at credit exposure limit.
  7. In respect of non-funded credit limit, 100 % of such limit or outstanding, whichever is higher, need be taken into account for the purpose.

The exercise of computing the exposure ceilings may be conducted every year after the finalisation and audit of balance sheet of the Bank and the exposure ceilings may be advised to the loan sanctioning authorities and the investment department in the Bank. In view of the linking of shareholding to lending, accretion to or reduction in the share capital after the balance sheet date, may be taken into account for determining exposure ceiling at half-yearly intervals, with the approval of Bank's Board of Directors. Accordingly Bank may, if so desire, fix a fresh exposure limit taking into account the amount of share capital available as on 30th September.

However, accretion to capital funds other than to share capital, such as half-yearly profit etc., will not be eligible for reckoning the exposure ceiling. Banks should also ensure that they do not take exposures in excess of ceiling prescribed in anticipation of infusion of capital on a future date.

(b) Capital Funds

'Capital Funds' for this purpose consist of both Tier I and Tier II Capital as defined in the following paragraph.

Tier I capital

Tier I would include the following items:

  1. Paid-up share capital collected from regular members having voting rights
  2. Contributions received from associate / nominal members where the bye-laws permit allotment of shares to them and provided there are restrictions on withdrawal of such shares, as applicable to regular members
  3. Contribution / non-refundable admission fees collected from the nominal and associate members which is held separately as 'reserves' under an appropriate head since these are not refundable.
  4. Perpetual Non-Cumulative Preference Shares (PNCPS).
  5. Free Reserves as per the audited accounts. Reserves, if any, created out of revaluation of fixed assets or those created to meet outside liabilities should not be included in the Tier I Capital. Free reserves shall exclude all reserves / provisions which are created to meet anticipated loan losses, losses on account of fraud etc., depreciation in investments and other assets and other outside liabilities. For example, while the amounts held under the head "Building Fund" will be eligible to be treated as part of free reserves, "Bad and Doubtful Reserves" shall be excluded.
  6. Capital Reserve representing surplus arising out of sale proceeds of assets.
  7. Innovative Perpetual Debt Instruments
  8. Any surplus (net) in Profit and Loss Account i.e. balance after appropriation towards dividend payable, education fund, other funds whose utilisation is defined, asset loss, if any, etc.

Note:
(i) Amount of intangible assets, losses in current year and those brought forward from previous periods, deficit in NPA provisions, income wrongly recognized on non performing assets , provision required for liability devolved on bank, etc. will be deducted from Tier I Capital.
(ii) For a Fund to be included in the Tier I Capital, the Fund should satisfy two criteria viz., the Fund should be created as an appropriation of net profit and should be a free reserve and not a specific reserve.
However, if the same has been created not by appropriation of profit but by a charge on the profit then this Fund is in effect a provision and hence will be eligible for being reckoned only as Tier II capital as defined below and subject to a limit of 1.25% of risk weight assets provided it is not attributed to any identified potential loss or diminution in value of an asset or a known liability.

Tier II Capital

Tier II capital would include the following items –

  1. Undisclosed Reserves
    These often have characteristics similar to equity and disclosed reserves. They have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulation of profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses.
  2. Revaluation Reserves
    These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as 'Core Capital'. Revaluation reserves arise from revaluation of assets that are undervalued in the bank's books. The typical example in this regard is bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market value of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation of those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 % when determining their value for inclusion in Tier II Capital i.e. only 45% of revaluation reserve should be taken for inclusion in Tier II Capital. Such reserves will have to be reflected on the face of the balance sheet as revaluation reserves.
  3. General Provisions and Loss Reserves
    These would include such provisions of general nature appearing in the books of the bank which are not attributed to any identified potential loss or a diminution in value of an asset or a known liability. Adequate care must be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier II capital as indicated above. To illustrate : General provision for Standard Assets, excess provision on sale of NPAs etc. could be considered for inclusion under this category. Such provisions which are considered for inclusion in Tier II capital will be admitted upto 1.25% of total weighted risk assets.

Note: Additional specific provisions for NPAs may be used by banks for netting off from Gross NPAs to arrive at the Net NPAs and such provisions cannot be reckoned for Tier II capital. Additional general provisions (floating provisions) for bad debts i.e., provisions not earmarked for any specific loan impairments (NPAs) may be used either for netting off of gross NPAs or for inclusion in Tier II capital but cannot be used on both counts.

9. CEILING ON UNSECURED ADVANCE

(a) The maximum limit on unsecured advances (with sureties) to a single party / connected group of borrowers will be as under:

Category of Advances Non scheduled primary (urban) co-operative bank whose DTL is Less than Rs. 10 crores Rs. 10 crores or more Classified as Grade I All types of unsecured advances including clean bills / multani hundis purchased / discounted and drawals allowed against cheques sent for collection Rs. 50,000/- Rs. 1,00,000/-
Classified as Grade II, III or IV Rs. 25,000/- Rs. 50,000/-

Grade Limit Grade Limit

Grade III & IV Rs.10,000/- Other than Grade III & IV Rs.20,000/-

(c) Aggregate ceiling on unsecured advances The total unsecured advances (with surety and without surety) granted by a Bank to its members should not exceed 15% of its demand and time liabilities (DTL) as against the earlier limit of 33.33%. However, banks were permitted to conform to the lower limit in a gradual manner, i.e. 20% of DTL by March 31, 2006 and further to 15% of DTL by March 31, 2007.

10. STATUTORY RESTRICTIONS

(a) Advances against Bank's Own Shares

In terms of Section 20(1) (a) of the Banking Regulation Act 1949 (As applicable to co-operative societies), Urban Co-operative Bank cannot grant loans and advances on the security of its own shares.

(b) Restrictions on Power to Remit Debts

Section 20-A (1) of the Banking Regulation Act, 1949 (As applicable to Co-operative Societies) stipulates that Urban Cooperative Banks shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by–

  1. any of its past or present directors, or
  2. any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
  3. any individual, if any of its directors is his partner or guarantor.

In terms of Section 20-A (2) of the said Act, any remission made in contravention of the provisions of sub-section (1) above shall be void and of no effect.

11. REGULATORY RESTRICTIONS

(a) Granting Loans and Advances to Directors and their Relatives

With effect from 1 October 2003, Urban Co-operative Banks have been prohibited to make, provide or renew either secured or unsecured loans and advances or any other financial accommodation to its directors or their relatives, and the firms / companies/concerns in which they are interested. The existing advances may be allowed to continue up to the date when these are due. The advances should not be renewed or extended further.

The following categories of director related loans are exempted from the purview of the above instructions.

  1. Regular employee-related loans to staff directors on the board of UCBs;
  2. Normal loans as applicable to members to the directors on the boards of salary earners' co-operative banks and
  3. Normal employee-related loans to managing directors of multi-state co-operative banks.
  4. Loans to directors and their relatives against Fixed Deposits and Life Insurance policies standing in their own name.

(b) The 'relative' of a director of the bank shall mean any relative of a director of the bank as indicated hereunder: A person shall be, deemed to be relative of another, if and only if, :

  1. they are members of a Hindu Undivided Family; or
  2. they are husband and wife; or
  3. the one is related to the other in the manner indicated below :
  4. the one is related to the other in the manner indicated below :
  5. Mother(including step-mother)
  6. Son (including step-son)
  7. Son's wife
  8. Daughter (including step-daughter)
  9. Daughter's husband
  10. Brother (including step-brother)
  11. Brother's wife
  12. Sister (including step-sister)
  13. Sister's husband

(c) In case of supersession of the Board of Directors of a bank, the concerned bank should submit the statement in respect of loans and advances availed by special officers/Administrators including their relatives

12. MAXIMUM CEILING ON ADVANCES TO NOMINAL MEMBERS

Banks may sanction loans to nominal members for short/temporary period and for purchase of consumer durables, subject to the following ceiling:

Banks Loan Amount Ceiling

  1. with deposits upto Rs. 50 crore Rs. 50,000/- per borrower
  2. with deposits above Rs. 50 crore Rs. 1,00,000/- per borrower

13. ADVANCES AGAINST FIXED DEPOSIT RECEIPTS (FDRS) ISSUED BY OTHER BANKS

Bank will desist from sanctioning advances against FDRs / term deposits of other banks.

14. BRIDGE LOANS/INTERIM FINANCE

The Urban Co-operative Banks, have been prohibited from entertaining any proposal for bridge loan / interim finance including that against capital / debentures issues and/or in the form of loans of a bridging nature, pending raising of long term funds from the market by way of capital, deposits etc. from all the categories of non-banking financial companies i.e. equipment leasing, hire-purchase, loan, investment and also residuary non-banking companies.

15. BANK FINANCE AGAINST SHARES, DEBENTURES & BONDS

(a) Bank Finance to Stock Brokers

  1. Banks are prohibited from extending any fund based or non fund based credit facilities, whether secured or unsecured , to stockbrokers against shares and debentures/bonds, or other securities, such as fixed deposits, LIC policies etc.
  2. Banks are not permitted to extend any facility to commodity brokers. This would include issue of guarantees on their behalf.
  3. Advances against units of mutual funds can be extended only to individuals as in the case of advances against the security of shares, debentures and bonds.
  4. Any credit facility presently in force, but not in consonance with the above instructions should be withdrawn /closed without any delay.
  5. Loans against the primary/collateral security of shares/debentures should be limited to Rs. 5 lakh if the security is in physical form and upto Rs. 10 lakh if the security is in demat form.
  6. Banks are required to submit information pertaining to loans and advances granted to their directors and relatives for each quarter end (i.e. 31 March, 30 June, 30 September and 31 December) in the prescribed proforma to the concerned Regional Office within fifteen days from the close of the respective quarter.
  7. A margin of 50 percent should be maintained on all such advances.
  8. Aggregate of all loans against the security of shares and debentures should be within the overall ceiling of 20 percent of the owned funds of the bank.
  9. Bank is required to report to the respective Regional Office of the Reserve Bank of India their outstanding, to individual borrowers and other entities against shares on quarterly basis in the prescribed format.
  10. It is essential that before accepting shares as security, bank should put in place appropriate risk management system.
  11. All the approved loan proposals will be placed before the Audit Committee of the Bank at least once in two months. The Management and Audit Committee will ensure that all loans against shares are made only to those individuals who are not in any way connected with any stock broking entity. Details of the loan sanctioned will be reported to the Board in its subsequent meeting.
  12. No advance can be made against Bank's own shares.

(b) Bank Finance against Preference Shares and Long Term Deposits

Bank will not invest in Perpetual Non cumulative Preference Shares (Tier I), other Preference shares (Tier II) such as Perpetual Cumulative Preference Shares, Redeemable Non Cumulative Preference Shares, Redeemable Cumulative Preference Shares and also in Long Term Deposits (Tier II) issued by other banks; nor will it grant advance against the security of the above instruments issued by him or other banks.

(c) Prohibition

Bank will not finance a borrower who is already enjoying credit facilities with another UCB without obtaining No Objection Certificate from such financing bank.

16. SHARE LINKING TO BORROWINGS

The Reserve Bank has prescribed the following share linking norms:

  1. 5% of the borrowings, if the borrowings are on unsecured basis.
  2. 2.5% of the borrowings, in case of secured borrowings.
  3. In case of secured borrowings by SSIs, 2.5% of the borrowings, of which 1% is to be collected initially and the balance of 1.5% is to be collected in the course of next 2 years.

The above share linking norm may be applicable for member's shareholdings upto the limit of 5% of the total paid up share capital of the Bank. Where a member is already holding 5% of the total paid up share capital of an UCB, it would not be necessary for him/her to subscribe to any additional share capital on account of the application of extant share linking norms. In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that 5% of the total paid up share capital of the bank, whichever is lower.

17. PRIORITY SECTOR LENDING

(A) CATEGORIES OF PRIORITY SECTOR

  1. Agriculture (Direct and Indirect Finance) :
    Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) directly to individual farmers without limit for taking up agriculture / allied activities. Direct finance may be limited to regular members. Indirect finance to agriculture shall include loans given for agriculture and allied activities.
  2. Small Enterprises (Direct and Indirect Finance) :
    Direct finance to small enterprises shall include all loans given to micro and small (manufacturing) enterprises engaged in manufacture / production, processing or preservation of goods, and micro and small (service) enterprises engaged in providing or rendering of services, and whose investment in plant and machinery and equipment (original cost excluding land and building and such items as mentioned therein) respectively, does not exceed the amounts prescribed. The micro and small (service) enterprises shall include small road and water transport operators, small business, professional & self-employed persons, and all other service enterprises. Indirect finance to small enterprises shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.
  3. Retail Trade :
    shall include retail traders/private retail traders dealing in essential commodities (fair price shops).
  4. Micro Credit :
    Provision of credit and other financial services and products of amounts not exceeding Rs. 50,000 per borrower or the maximum permissible limit on unsecured advances whichever is lower.
  5. Education Loans :
    Education loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those granted to institutions;
  6. Housing Loans :
    Loans up to Rs. 25.00 lac to individuals for purchase/construction of dwelling unit per family, (excluding loans granted by banks to their own employees) and loans given for repairs to the damaged dwelling units of families up to Rs. 1 lac in rural and semi-urban areas and up to Rs. 2 lac in urban and metropolitan areas.

* Family for this purpose means and includes the spouse of the member and the children, parents, brothers and sisters of the member who are dependent on such member, but shall not include legally separated spouse.

Assistance given to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs.5.00 lakh of loan amount per dwelling unit. Assistance given to a non-governmental agency approved by the NHB for the purpose of refinance for construction / reconstruction of dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of loan component of Rs.5 lakh per dwelling unit. Investments made by UCBs in bonds issued by NHB/HUDCO on or after April 1, 2007 shall not be eligible for classification under priority sector lending.

(B) TARGETS/SUB-TARGETS

The targets under priority sector lending would be linked to Adjusted Bank Credit (ABC) (total loans and advances plus investments made by UCBs in non-SLR bonds) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year. Existing investments, as on August 30, 2007, made by banks in non-SLR bonds held in HTM category will not be taken into account for calculation of ABC. However, fresh investments by banks in non- SLR bonds will be taken into account for the purpose. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method. Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets. The targets and sub-targets set under priority sector lending for UCBs are furnished below:

Targets and sub-targets set under priority sector lending, Total, Priority Sector, advances 40 per cent of Adjusted Bank Credit (ABC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Agriculture Advances No target.

Small Enterprise advances.
Advances to small enterprises sector will be reckoned in computing performance under the overall priority sector target of 40 per cent of ABC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Micro enterprises within Small Enterprises sector

(i) 40 per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs 5 lakh and micro (service) enterprises having investment in equipment up to Rs.2 lakh; (ii) 20 per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. (Thus, 60 per cent of small enterprises advances should go to the micro enterprises).

Advances to weaker sections

Of the stipulated target for priority sector advances, at least 25% (or 10% of the ABC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher) should be given to weaker sections.

Advances to Minorities

Within the overall target for priority sector lending and the sub- target of 25 per cent for the weaker sections, sufficient care may be taken to ensure that the minority communities also receive an equitable portion of the credit.

(C) Salary Earners' Banks

The stipulation regarding priority sector lending is not applicable to the Salary Earners' Banks.

(D) Credit Flow to Minorities

UCBs should initiate steps to enhance/augment flow of credit under priority sector to artisans and craftsmen as also to vegetable vendors, cart pullers, cobblers, etc. belonging to minority communities. The minority communities notified in this regard are Sikhs, Muslims, Christians, Zoroastrians and Buddhists. Within the overall target for priority sector lending and the sub- target of 25 per cent for the weaker sections, sufficient care may be taken to ensure that the minority communities also receive an equitable portion of the credit. Weaker sections include:

  1. Small and marginal farmers with land holding of 5 acres and less, and landless labourers, tenant farmers and share croppers;
  2. Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000;
  3. Scheduled Castes, Scheduled Tribes and Women;
  4. Loans to distressed poor to prepay their debt to informal sector, against appropriate collateral;
  5. Education loans to persons having monthly income not exceeding Rs 5000/-;
  6. Persons from minority communities as may be notified by Government of India from time to time.

(E) REPORTING / MONITORING UNDER PRIORITY SECTOR

Bank will take effective steps to achieve the above recommended targets and monitor the priority sector lending, keeping in view the quantitative as well as qualitative aspects. In order to ensure that due emphasis is given to lending under priority sector, it is considered desirable by the RBI that the performance is reviewed periodically. For this purpose, apart from the usual reviews, specific reviews by the Board of Directors of the bank may be made on half-yearly basis. Accordingly, a memorandum may be submitted to the Board of Directors at half-yearly intervals i.e. as on September 30 and March 31 of each year giving a detailed critical account of the performance of the Bank during the period showing increase/decrease over the previous half-year.

Further, annual review of the performance under priority sector advances as on March 31 will also be placed before the Board by 15th of the following financial year. A copy of the annual review complete in all respect as on March 31 may be forwarded to the concerned Regional Office of the Reserve Bank with the Board's observations, indicating the steps taken/proposed to be taken for improving the Bank's performance. The report should reach the Regional Office within a period 15 days from the end of the period to which it relates. Bank will submit statement as on March 31 within 15 days thereafter showing the position of direct loan and advances to agriculture and allied activities to the concerned Regional Office of RBI. The reporting formats and classification of different type of loans have been prescribed as given in the Master Circular on Priority Sector Lending No.7/09.09.001/2009-10 dated July 1, 2009.

18. LOAN AGAINST TERM DEPOSITS

Bank can grant advance against its own Term Deposit in the name of: borrower either simply or jointly; advance is made to the said firm; the advance is made to such a concern; and a ward where guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such capacity and subject to the declaration that the amount will be utilised for the benefit of the ward. The decision regarding maintenance of margin on any financial accommodation allowed by the bank against the security of term deposit, has been left to the individual bank, subject to their Board of Directors laying down a transparent policy in this regard.

Advances can be sanctioned against a fixed deposit receipt in the name of a third party subject to:

  1. The nature of relationship between the borrower and the depositor will be disclosed;
  2. A letter of consent signed by the depositor will also be obtained authorising the bank to hold the receipt as security for the advance and to utilise the amount of deposit on maturity towards liquidation.
  3. After making the advance, the bank's lien will be prominently noted on the face of the FDR.

19. ADVANCES AGAINST SECURITY OF NSC / KVP

1. PREAMBLE

Bank have been providing financial assistance to the individuals by way of advance facility against security of NSC/KVP. It is suggested that :

  1. Maximum assistance to be sanctioned at branch level will not exceed Rs. 1.00 Lac per borrower. Proposal exceeding Rs. 1.00 Lac will be sent to HO for sanction.
  2. Each advance shall not be lower than Rs. 5,000/-.
  3. The margin would be 25% on the present maturity value of completed years.
  4. These margins will also apply to staff members.

2. APPRAISAL REQUIREMENT

Financial assistance against security of NSC/KVP is considered safe and secure since these are Government Securities and repayment is assured. Thus, the appraisal does not require examining the viability of the proposal or assessing the needs of the borrower. The only aspect that is considered is that the certificates must be genuine and there should be adequate margin to cover the interest leviable during the period till date of encashment. The National Saving Certificates / KVP have to be marked for lien with the issuing Post Office. The practice of getting the lien marked is an important activity and the branches must ensure that our own employee gets the lien marked from the Post Office. The borrower will not be allowed or given possession of the certificates, to get the lien marked from the Post Office. This may lead to risk of fake certificates being given to the Bank as security.

3. GENERAL PRECAUTIONS REQUIRED

(A) The Branch Manager should take the following precautions while considering loans against NSC.
a) The borrower seeking the advance / loan should be genuine. b) The certificates which are kept as security must be examined and be subject to thorough scrutiny from various angles. c) The Bank's staff must be given the responsibility of getting the lien marked. d) The quantum of loan should be within the stipulated limit and in no case margins be reduced. The suggested margin is :

MATURITY MARGIN

5 years and above 35%
4 years but less than 5 years 25%
3 years but less than 4 years 15%
2 years but less than 3 years 10%
Less than 2 years NIL

(B) Grant of loans for acquisition of / investing in small savings instruments including Kisan Vikas Patras :

Grant of loans for acquiring/investing in KVPs does not promote fresh savings and, rather, channelise the existing savings in the form of bank deposits to small savings instruments and thereby defeat the very purpose of such schemes. Banks may therefore ensure that no loans are sanctioned for acquisition of/investing in small savings instruments including Kisan Vikas Patras.

20. ADVANCES AGAINST LIFE INSURANCE POLICY

The policy should be scrutinised. There are certain policies which can not be legally assigned. The policy which is operative at least for three years be accepted. A policy already assigned should not be accepted. Age of the insured should have been admitted. The borrower should be advised to produce a letter from the insurer indicating surrender value of the policy. Quantum of loan should not exceed 90 to 95% of the surrender value. An absolute assignment in favour of the bank should be obtained in a prescribed form.

21. ADVANCES TO BUILDERS / CONTRACTORS

  1. The builders/contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, may not normally require bank finance for the purpose. Any financial assistance extended to them by banks may result in dual financing. Bank will, therefore, normally refrain from sanctioning loans and advances to this category of borrowers.
  2. However, where contractors undertake comparatively small construction work on their own, (i.e. when no advance payments are received by them for the purpose), Bank may consider extending financial assistance to them against the hypothecation of construction materials, provided such loans and advances are in accordance with the by-laws of the Bank.
  3. Bank will frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/aggregate exposure limit for such loans, margins, security, repayment schedule and availability of supplementary finance taking into account guidelines issued by RBI and the policy will be approved by the Bank's Board.
  4. Exposure to builders and contractor for commercial real estate will include fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels etc). Further while framing the policy, Bank may also consider for inclusion the National Building Code framed by Bureau of Indian Standards (BIS). For detailed information the website of Bureau of Indian Standards (www.bis.org.in) will be accessed.
  5. Bank will undertake a proper scrutiny of the relevant loan applications, and satisfy themselves, among other things, about the genuineness of the purpose, the quantum of financial assistance required, creditworthiness of the borrower, his repayment capacity, etc. and also observe the usual safeguards, such as, obtaining periodical stock statements, carrying out periodical inspections, determining drawing power strictly on the basis of the stock held, maintaining a margin of not less than 40 to 50 per cent, etc. Bank staff will also ensure that material used up in the construction work is not included in the stock statements for the purpose of determining the drawing power.
  6. Bank will also take collateral security as prescribed. As the construction work progresses the contractors will get paid and such payments will be applied to reduce the balance in the borrowal accounts. If possible, Bank will perhaps enter into a tripartite agreement with the borrower and his clients, particularly when no collateral securities are available for such advances. Thus, Bank will ensure that bank credit is used for productive construction activity and not for activity connected with speculation in real estate.
  7. Bank will not extend fund based / non-fund based facilities to builders / contractors for acquisition of land even as a part of a housing project. Further, wherever land is accepted as collateral, valuation of such land should be at the current market price only.

22. FINANCE FOR HOUSING SCHEMES

(A) Eligible Category of Borrowers

Bank may grant loans to the following categories of borrowers:

  1. Individuals and co-operative/group housing societies.
  2. Housing boards undertaking housing projects or schemes for economically weaker sections (EWS), low income groups (LIG) and middle income groups (MIG).
  3. Owners of houses/flats for extension and up-gradation, including major repairs.

(B) Eligible Housing Schemes

The borrowers in the above categories will be eligible for finance for the following types of housing schemes:

  1. Construction/purchase of houses/flats by individuals;
  2. Repairs, alterations and additions to houses/flats by individuals;
  3. Schemes for housing and hostels for scheduled castes and scheduled tribes;
  4. Under slum clearance schemes –
    1. directly to the slum dwellers on the guarantee of the Government, or
    2. indirectly through Statutory Boards established for this purpose;
  5. Education, health, social, cultural or other institutions/ centres which are part of a housing project and considered necessary for the development of settlements or townships;
  6. Shopping centres, markets and such other centres catering to the day-today needs of the residents of the housing colonies and forming part of a housing project;
  7. Education, health, social, cultural or other institutions/ centres which are part of a housing project and considered necessary for the development of settlements or townships;
  8. Shopping centres, markets and such other centres catering to the day-today needs of the residents of the housing colonies and forming part of a housing project;

(C) Terms and Conditions for Housing Loans

Finance provided by the UCBs to the eligible categories of borrowers for eligible housing schemes will be subject to the following terms and conditions:

Maximum Loan Amount & Margins

  1. Bank on the basis of its commercial judgment and other prudential business considerations, with the approval of their Board of Directors, are free to identify the eligible borrowers, decide margins and grant housing loans depending upon repaying capacity of the borrowers.
  2. The bank may grant housing loan up to a maximum of Rs.25.00 lakh per beneficiary of a dwelling unit. However, Tier II UCBs (all other UCB which is not a Tier I UCB) may extend individual housing loans up to a maximum of Rs.50.00 lakh per beneficiary of a dwelling unit subject to extant prudential exposure limits.
  3. The maximum loan will not exceed 15 percent of capital funds of the bank in case of individual borrowers and 40 per cent of the capital funds in case of group of borrowers. The capital funds for the purpose shall include both Tier I Capital and Tier II capital.

Tier I UCBs are categorised as under :

  • Bank having deposit below Rs. 100 crore operating in a single district.
  • Bank with deposits below Rs. 100 crore operating in more than one district will be treated as Tier I provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank, and
  • Bank with deposits below Rs. 100 crore, whose branches were originally in a single district but subsequently, became multidistrict due to reorganization of the district. Deposits and advances as referred to in the above definition may be reckoned as on 31st March of the immediate preceding financial year.

(D) Interest

Bank may, with the approval of the Board, determine the rate of interest, keeping in view the size of accommodation, degree of risk and other relevant considerations.

(E) Charging of Penal Interest

Bank may formulate, with the approval of the Board, transparent policy for charging penal interest rates to be levied for reasons such as default in repayment, non-submission of financial statements, etc. The policy should be governed by well accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers.

(F) Security

i. Bank may secure housing loans either

  1. by mortgage of property, or
  2. by government guarantee where forthcoming, or
  3. by both.

ii. Where this is not feasible, bank may accept security of adequate value in the form of LIC policies, Government Promissory Notes, shares/debentures, gold ornaments or such other security as they deem appropriate.

(G) Period of Loan

i. Housing loans will be repayable within a maximum period of 15 years, including moratorium or repayment holiday.

ii. The moratorium or repayment holiday may be granted –

  1. at the option of the beneficiary, or
  2. till completion of constructions, or 18 months from the date of disbursement of first instalment of the loan, whichever is earlier.

(H) Graduated Instalments

i. The instalments will be fixed on a realistic basis taking into account the repaying capacity of the borrower.

ii. In order to make housing finance affordable, bank may consider fixing the instalments on a graduated basis, if there is reasonable expectation of growth in the income of the borrower in the coming years. Graduated basis means fixing lower repayment instalments in the initial years and gradually increasing the instalment amount in subsequent years coinciding with expected increase in income in the subsequent years.

(I) Aggregate Limit For Housing Finance

(i) Bank may utilise up to 15 per cent of their total deposit resources to provide housing loans and other block capital loans.

(ii) However, the above limit may be exceeded to the extent of funds obtained for the purpose from higher financing agencies and refinance from the National Housing Bank.

23. ADVANCES TO SALARIED BORROWERS

In view of Section 41 of the Rajasthan Cooperative Society Act, 2001, advances granted to salaried employees against personal security are not treated as unsecured advances provided the bank has taken advantage of this provision and has entered into arrangements with the employee and employer for the recovery of the loans through deductions out of salary. However, these advances will not exceed the various purpose-wise maximum limits of unsecured advances as stipulated by RBI. RBI has also cautioned against fake salary certificates.

24. BRIDGE LOAN TO NON-BANKING INSTITUTIONS

Under no circumstances, any such proposal is to be entertained.

25. BRIDGE LOANS/INTERIM FINANCE

(i) The grant of bridge loan / interim finance by the Bank to any company (including finance companies) is totally prohibited.

(ii) The ban on sanction of bridge loans/interim finance is also applicable in respect of Euro issues.

(iii) The bank will not circumvent these instructions by purport and /or intent by sanction of credit under a different nomenclature like unsecured negotiable notes, floating rate interest bonds, etc. as also short-term loans, the repayment of which is proposed/expected to be made out of funds to be or likely to be mobilised from external/other sources and not out of the surplus generated by the use of the asset(s).

(iv) These instructions are issued by the Reserve Bank of India in exercise of powers conferred by the Sections 21 and 35A read with Section 56 of the Banking Regulation Act, 1949.

26. DRAWLS AGAINST CHEQUES SENT FOR CLEARING

RBI suggests following safeguards in this regard:
  1. The facility should be allowed only to the established and reputed customers of the bank.
  2. The facility should normally be allowed against bank drafts, Government cheques and to a limited extent third party cheques.
  3. Where necessary, in respect of the third parties, against whose cheques the facility is allowed, enquiries may be made in regard to their status etc. It should also be ensured that the cheques presented, represent genuine trade transactions.
  4. Drawing against cheques of allied/sister concerns should not be permitted.
  5. Specific powers may be given to Branch Managers, in regard to allowing of this facility.
  6. Head Office may keep a close watch over this and may obtain periodical statement from the branches.
    Kite flying operations have got to be stopped. Branches will be allowed to purchase cheques at their level upto a certain limit say Rs.50,000/-. Such advances fall within the category of unsecured advances and therefore RBI directions of maximum limit on unsecured advances to single borrower/connected group will scrupulously followed. This may attract Section 46/47 of the BR Act, 1949.

27. DISCOUNTING / REDISCOUNTING OF BILLS BY BANKS

Bank will adhere to the following guidelines while purchasing / discounting / negotiating / rediscounting of genuine commercial / trade bills:
  1. Since Bank has already been given freedom to decide it's own guidelines for assessing / sanctioning working capital limits of borrowers, they may sanction working capital limit as also bills limit to borrowers after proper appraisal of their credit needs and in accordance with the loan policy as approved by their Board of Directors.
  2. Bank will clearly lay down a bills discounting policy approved by their Board of Directors, which would be consistent with their policy of sanctioning of working capital limits. In this case, the procedure for Board approval will include banks' core operating process from the time the bills are tendered till these are realised. Bank may review their core operating process and simplify the procedure in respect of bills financing. In order to address the oft-cited problem of delay in realisation of bills, bank will take advantage of improved computer / communication network like Structured Financial Messaging System (SFMS), wherever available, and adopt the system of 'value dating' of their clients' accounts.
  3. Bank will open letters of credit (LCs) and purchase / discount / negotiate bills under LCs only in respect of genuine commercial and trade transactions of their borrower constituents who have been sanctioned regular credit facilities by the bank. Bank will not, therefore, extend fund based (including bills financing) or non-fund based facilities like opening of LCs, providing guarantees and acceptances to non-constituent borrower or / and non-constituent member of a consortium / multiple banking arrangement.
  4. For the purpose of credit exposure, bills purchased / discounted / negotiated under LC (where the payment to the beneficiary is not made 'under reserve') will be treated as an exposure on the LC issuing bank and not on the borrower. All clean negotiations as indicated above, will be assigned the risk weight as is normally applicable to inter-bank exposures, for capital adequacy purposes. In the case of negotiations 'under reserve' the exposure will be treated as on the borrower and risk weight assigned accordingly.
  5. While purchasing / discounting / negotiating bills under LCs or otherwise, bank will establish genuineness of underlying transactions / documents.
  6. Bank will ensure that blank LC forms are kept in safe custody as in case of security items like blank cheques, demand drafts etc. and verified / balanced on daily basis. LC forms will be issued to customers under joint signatures of the bank's authorized officials.
  7. The practice of drawing bills of exchange claused 'without recourse' and issuing letters of credit bearing the legend 'without recourse' will be discouraged because such notations deprive the negotiating bank of the right of recourse it has against the drawer under the Negotiable Instruments Act. Banks will not, therefore, open LCs and purchase / discount / negotiate bills bearing the 'without recourse' clause.
  8. Accommodation bills will not be purchased / discounted / negotiated by the Bank. The underlying trade transactions will be clearly identified and a proper record thereof maintained at the branches conducting the bills business.
  9. Bank will circumspect while discounting bills drawn by front finance companies set up by large industrial groups on other group companies.
  10. Bills rediscounting will be restricted to usance bills held by other banks. Bank will not rediscount bills earlier discounted by non banking financial companies (NBFCs) except in respect of bills rising from sale of light commercial vehicles and two / three wheelers.
  11. Bank may exercise their commercial judgment in discounting of bills of services sector. However, while discounting such bills, bank will ensure that actual services are rendered and accommodation bills are not discounted. Services sector bills will not be eligible for rediscounting. Further, providing finance gains discounting of services sector bills will be treated as unsecured advance and therefore, will be within the limits prescribed by RBI for sanction of unsecured advances.
  12. In order to promote payment discipline which would to a certain extent encourage acceptance of bills, all corporate and other constituent borrowers having turnover above threshold level as axed by the bank's Board of Directors will be mandated to disclose 'aging schedule' of their overdue payables in their periodical returns submitted to Bank.
  13. Bank will not enter into Repo transactions using bills discounted / rediscounted as collateral.
    Any violation of these instructions will be viewed seriously and invite penal action from RBI.

28. ADVANCES AGAINST PLEDGE OF GOLD / SILVER ORNAMENTS

In order to mitigate the inherent risks attached to sanction of loans and advances against Gold / Silver ornaments, Bank will observe the safeguards as detailed below :

(i) Ownership of Ornaments

It is advisable that the advances are made to persons properly introduced to the Bank. The Bank must satisfy itself about the ownership of the gold ornaments etc. before accepting them for pledge. The Bank will obtain a declaration from the borrower that the ornaments are his own property and that he has the fullest right to pledge them to the bank. Taking of ornaments for pledge and release thereof to the parties concerned after repayment of the bank's dues will be done strictly in the authorised official's room to avoid any risk.

(ii) Appraiser

Bank will appoint an approved jeweller or shroff as an appraiser for valuation of the gold ornaments proposed to be pledged to the bank and obtain adequate security from him in the form of cash and indemnity bond. Valuation and appraisal of the ornaments in the bank's premises itself would be ideal but when these are not possible, the bank must take suitable precautions against their loss while in transit. Bank will send the ornaments to the appraiser in a locked box, one key of which would be kept with the appraiser and the other with the bank. The box would be sent through a responsible member of the staff along with the prospective borrower. The placing of ornaments in the box at both the ends will be done in the presence of the employee carrying the ornaments to the appraiser and the borrower. The bank will take a suitable insurance cover for loss of the ornaments while in transit.

(iii) Valuation Report

The valuation certificate of the appraiser would clearly indicate the description of the ornaments, their fitness, gross weight of the ornaments, net weight of the gold content exclusive of stones, lac, alloy, strings, fastenings and the value of the gold at the prevailing market price. The valuation report will be duly signed by the appraiser and kept along with the loan documents by the bank.

(iv) Record of Security

The full name of the borrower alongwith his father / husband' name, his residential address, date of advance, amount and description of the ornaments in detail will be recorded in the gold ornaments register which would be checked / initialed by the Manager.

(v) Custody of Ornaments

The ornaments belonging to each borrower(or articles of each loan) together with a list indicating the description of ornaments, gold loan account number, name of party, etc. will be kept separately in small cloth bags. A tag indicating loan account number and name of the party will be tied to the bag to facilitate identification. The bags will be arranged in trays according to loan account numbers and kept in the strong room or fire proof safes under joint custody.

(vi) Period

The period of advance against gold ornaments will be generally restricted to six months or one year.

(vii) Margin

Adequate margin on the market value would be maintained. Bank will collect interest on advances promptly. In no circumstances would it allow to water down the margin by debiting the interest accrued to the loan account.

(viii) Return of Ornaments

On repayment of the loan together with the interest payable in the account, the ornaments will be returned to the borrower and his receipt obtained in token of having received the ornaments.

(ix) Part Release

While allowing part release of the ornaments against part repayment of the loan, care will be taken to ensure that the value of the left-over ornaments is sufficient to cover outstanding balance with the margin prescribed in the account.

(x) Delivery to third Parties

When the ornaments are delivered to third parties, a letter of authority from the borrower and subsequent confirmation of the borrower will be obtained. The letter of authority will contain an undertaking by the borrower, absolving the bank of any responsibility in the event of dispute or loss arising from the delivery of the ornaments to the party named therein. The receipt of the third party will be obtained on the letter of authority as well as in the gold loan ledger.

(xi) Default

When the borrower fails to repay the loan on the due date, a notice calling upon him to repay the loan within a specified time will be given and if no response is received, a reminder will be sent by registered post informing the borrower that the ornaments would be auctioned and after adjusting the sale proceeds against the outstanding dues to the bank, the balance, if any, would be paid to the borrower against his receipt.

(xii) Re-pledge of Ornaments

Bank will not make advances against repledge of ornaments as this facility is likely to be misused for financing moneylenders, which is not a desirable activity.

(xiii) Insurance

The jewels pledged to the bank will be insured for the appraised value against the risk of burglary. If bank stores the pledged jewels in fire-proof strong rooms, insuring them against fire may not be necessary. Bank will take blanket insurance policy covering cash, jewels and other valuables and also covering all types of risks.

(xiv) Verification

Surprise verification of the packets containing gold / silver ornaments by an officer other than the joint custodian will be undertaken and recorded in a separate register with necessary details.

29. BULLET REPAYMENT

Bank with the approval of their Board may permit bullet repayment of gold loans up to Rs 1.00 lakh as an additional option subject to the following guidelines :
  1. The amount of gold loan sanctioned will not exceed Rs 1.00 lakh at any point of time.
  2. The period of the loan shall not exceed 12 months from the date of sanction.
  3. Interest will be charged to the account at monthly rests but will become due for payment along with principal only at the end of 12 months from the date of sanction.
  4. The bank will prescribe a minimum margin to be maintained in case of such loans and accordingly, fix the loan limit taking into account the market value of the security (gold / gold ornaments), expected price fluctuations, interest that will accrue during the tenure of the loan etc.
  5. Such loans shall be governed by the extant income recognition, asset classification and provisioning norms which shall be applicable once the principal and interest become overdue.
  6. The account would also be classified as NPA (sub standard category) even before the due date of repayment, if the prescribed margin is not maintained.

30. LENDING TO MSME SECTOR

(A) Definition of Micro, Small and Medium Enterprises

Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
  1. A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;
  2. A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and
  3. A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

(B) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006). These will include small road and water transport operators (owning a fleet of vehicles not exceeding ten vehicles), retail trade (with credit limits not exceeding Rs.10 lakh), small business (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lakh) and professional and self employed persons (whose borrowing limits do not exceed Rs.10.00 lakh of which not more than Rs. 2.00 lakh should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lakh with a sub-ceiling of Rs.3 lakh for working capital requirements).

  1. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;
  2. A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and
  3. A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore. Bank's lending to medium enterprises will not be included for the purpose of reckoning under the priority sector. Please refer latest circular of RBI No.50/09.09.001/2009-10 dated March 25, 2010.

(C) Khadi and Village Industries Sector (KVI)

All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery will be covered under priority sector advances and will be eligible for consideration under the sub-target (60 per cent) of the small enterprises segment within the priority sector.

31. CREDIT ADMINISTRATION

(A) Rate of Interest

(a) Bank is permitted to determine their lending rates taking into account their cost of funds, transaction costs etc with the approval of their Board. However, bank has to ensure that the interest rates charged by them are transparent and known to all customers. Bank is also required to publish the minimum and maximum interest rates charged on advances and display the information in every branch.

(b) Though interest rates have been deregulated, rates of interest beyond a certain level will be seen to be usurious and can neither be sustainable nor be conforming to normal banking practice.

(c) Board of the Bank will lay out appropriate internal principles and procedures so that usurious interest, including processing and other charges, are not levied by them on loans and advances. In laying down such principles and procedures in respect of small value loans, particularly, personal loans and such other loans of similar nature, bank may take into account, inter-alia, the following broad guidelines:

  1. An appropriate prior-approval process will be prescribed for sanctioning such loans, which will take into account, among others, the cash flows of the prospective borrower.
  2. Interest rates charged by banks, inter-alia, will incorporate risk premium as considered reasonable and justified having regard to the internal rating of the borrower. Further, in considering the question of risk, the presence or absence of security and the value thereof will be taken into account.
  3. The total cost to the borrower, including interest and all other charges levied on a loan, will be justifiable having regard to the total cost incurred by the bank in extending the loan, which is sought to be defrayed and the extent of return that could be reasonably expected from the transaction.
  4. In the case of loans to borrowers under priority sector, no penal interest will be charged for loans up to Rs.25,000. Penal interest will be levied for reasons such as default in repayment, non-submission of financial statements, etc. However, the policy on penal interest will be governed by well-accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers.
  5. Bank will ensure that the total interest debited to an account will not exceed the principal amount in respect of short term advances granted to small and marginal farmers. The small and marginal farmers for the purpose shall include those with land holding of 5 acres and less.
  6. An appropriate ceiling will be fixed on the interest, including processing and other charges that could be levied on such loans, which may be suitably publicised.

(B) No Objection Certificate

Bank will not finance a borrower already availing credit facility from another bank without obtaining a 'No Objection Certificate' from the existing financing bank and where the aggregate of the credit facilities enjoyed by borrower exceeds the ceiling stipulated in the directive of RBI for a single party, prior approval of RBI shall be obtained.

(C) Opening of Current Accounts

Keeping in view the importance of credit discipline for reduction in NPA levels at the time of opening of current accounts bank will:

  1. insist on a declaration from the account holder to the effect that he is not enjoying any credit facility with any other commercial bank or obtain a declaration giving particulars of credit facilities enjoyed by him with any other commercial bank/s.
  2. ascertain whether he/she is a member of any other cooperative society / bank; if so, the full details thereof such as name of the society / bank, number of shares held, details of credit facilities, such as nature, quantum, outstanding, due dates etc should be obtained.

(D) Further, in case he / she is already enjoying any credit facility from any other commercial / co-operative bank, the bank opening a current account will duly inform the concerned lending bank (s) and also specifically insist on obtaining a "No Objection Certificate" from them. In case of a prospective customer who is a corporate or large borrower enjoying credit facilities from more than one bank, the bank will inform the consortium leader, if under consortium, and the concerned banks, if under multiple banking arrangement. In case a facility has been availed from a cooperative bank / society, it is essential for the bank to comply with the requirements of the Co-operative Societies Act / Rules of the state concerned in regard to membership and borrowings.

(E) Bank will open current accounts of prospective customers in case no response is received from the existing bankers after a minimum waiting period of a fortnight. If a response is received within a fortnight, bank will assess the situation with reference to information provided on the prospective customer by the bank concerned and is not required to solicit a formal no objection, consistent with true freedom to the customer of bank as well as needed due diligence on the customer by the bank.

OTHER GUIDELINES

(a) Guidelines on Relief Measures to be Extended by Bank in Areas Affected by Natural Calamities

Bank is expected to provide relief and rehabilitation assistance, in their area of operation to people affected by natural calamities such as droughts, floods, cyclones, etc. RBI has from time to time issued guidelines / instructions to banks in regard to relief measures to be provided in areas affected by natural calamities. These guidelines have been consolidated and are given in Master Circular on Management of Advances dated July 1, 2009.

(b) Prudential Guidelines on Restructuring of Advances

Prudential guidelines on restructuring of advances by Urban Co-operative Banks are given in Master Circular on Management of Advances dated July 1, 2009. Bank may restructure the accounts classified under 'standard', 'sub-standard' and 'doubtful' categories. The basic objective of restructuring is to preserve economic value of units, not ever greening of problem accounts. This can be achieved by the Bank and the borrowers only by careful assessment of the viability, quick detection of weaknesses in accounts and a time bound implementation of restructuring packages.

32. CREDIT APPRAISAL

Urban Cooperative Banks have recorded an impressive growth in the matter of deposit mobilization and dispensation of credit. The involvement of banks in financing small and medium sized industries and other larger borrowers has shown an increasing trend. In the context of this rapid growth, qualitative aspects of lending such as proper and scientific assessment of credit requirements of their borrowers and effective supervision and follow up of advances have assumed considerable importance.

(A) The prescriptions for assessment or appraisal of loan proposals are to be evolved by the Bank itself. The general guidelines are :

PROMOTERS

(1) The appraisal of the promoter is a very important area. The best judge is the Branch Manager. He will judge:
  1. the business experience;
  2. investment of sufficient capital;
  3. being an income tax payer; Income Tax returns also indicate the credit worthiness of he borrower;
  4. operation of account is of adequate value minimum six months)
  5. the past experience of promoter and his family
  6. past loans availed and its repayment. A man of character is more credit worthy than man of property.

BUSINESS

(2) The business of the unit should be encouraging. The unit must have office/shop in which there should be adequate infrastructure looking to the nature of business and quantum of loan. The location should offer good market potential for success of the venture. The nature of stocks should not be such which may become obsolete, evaporate or perishable in nature. The borrower should have insight into the business. The safety of the funds of the bank depends upon the successful running of the unit.

TYPE OF TRANSACTIONS

(3) It is for the bank to take a conscious decision whether assistance is to be given to cash generating Accounts. Bank will have to take PAN where cash Deposits exceed Rs.50,000.

GUARANTORS

(4) The guarantors for the loan should be third party guarantors and not members of the same family. They should be income tax payers and must have the immovable properties in their own name. We have to check up if any other guarantees are given by them.

SECURITY

(5) The property, duly valued by a valuer, should be of adequate value and situated at place offering ready market for sale. Normally loan to the extent of 75% of the value of property is considered. If the promoter is considered weak or business is considered risks, then only 50% of the value of the property can be considered as loan.

TITLE DEEDS

(6) The title deeds should be registered documents having a legal owner. The chain of title documents can be called for. The RBI has cautioned against Fake Title Deeds of property in their Circular No.30/09.22.01/2003-04 dated 16 January 2004.

CAPITAL

(7) With the impersonal relationship that has come to exist these days, the importance of capacity and capital has increased to a great extent. The promoter should put in adequate capital of his own whether it is sole proprietorship, partnership or company. The bank should insist for at least 35% contribution by way of his capital which should not be reduced below this level. The bank should finance the borrowers to a maximum of 75% of their working capital gap to be calculated as below.

Example :
Less : Current Liabilities
(other than bank borrowings) 150
Working capital gap 220
25% from long-term resources 55
Maximum permissible bank borrowings 165

The Current Assets would include those which are expected to be realised within one year :
  1. Stocks both in process and finished
  2. Receivables (including bills discounted)
  3. Advances to suppliers
  4. Other current assets including cash and bank balances
The Current Liabilities would include items payable or expected to be turned over within one year from the date of balance sheet.
  1. Short term bank borrowings including bills discounted with banks
  2. Creditors
  3. Advances from customers
  4. Accrued expenses
  5. Statutory liabilities
  6. Other current liabilities

PRE SANCTION INSPECTIONS

(8) Visit to the unit before sanction of loan is a must. The Branch Manager should also visit and see the collateral security being offered.

CONFIRMATION OF KEY FACTS

(9) The appraisal of the credit proposal should not be a form filling exercise. Every statement made by the promoter to show that the business is good must be verified or supported from documents that will need to be obtained by the Branches. The calling of evidence or supportive documents is a key activity, which has to be done with great care. The Branch Manager has to use his wisdom to ensure that he obtains documents or supporting evidence.

33. WORKING CAPITAL FINANCE APPRAISAL

INTRODUCTION

The successful operation of any unit / concern depends on timely and adequate availability of working capital finance. The working capital finance is required to maintain the level of current assets required for operation of the plant / trading business and to meet the day-to-day expenses.

ASSESSMENT OF WORKING CAPITAL REQUIREMENT

The assessment of working capital requirement borrowers other than SSI units, fund based working capital limits upto Rs. 100 lac and SSI units required funds based working capital limit upto Rs. 500 lac, may be made on the basis of their turnover/projected annual turn-over. In according to the existing guidelines, the total working requirement is to be assessed at 25% of the turnover. Out of this, borrower has to contribute 5% of the turnover and bank may provide finance to the extent of 20% of the turnover/projected turnover. In short, the bank may provide working capital finance to the extent of 20% of the turnover/projected turnover. Requirement of working capital finance above Rs. 100 lacs and in case of SSI unit above Rs. 500 lacs may be provided based on prudential norms for lending as prescribed by the RBI regarding maximum permissible bank finance (MPBF), maintaining minimum current ratio of 1.33:1.

POINTS TO BE CONSIDERED/EXAMINED WHILE APPRAISING THE PROPOSAL FOR WORKING CAPITAL FINANCE

I) If the borrower is new to the business / trade and new customers of the Bank:

  1. To examine the past track record/progress of the business/industry obtaining and analyzing audited Balance Sheet of last 3 years.
  2. The Bank should not finance to the borrower availing credit facility from another bank without obtaining NOC from other bank/institution.
  3. Examine the operation in the account thoroughly.
  4. The bank should also ensure that the concern is not in default in payment of PF, ESI and other statutory dues.
  5. The concern should not be in a default in repayments of installments of term loans availed from bank or any other bank/institution.
  6. The concern has not availed settlement of loan/limit from any other bank/institution.

NORMS FOR INVENTORY/RECEIVABLES

The credit requirement of borrower will be assessed based on total study of borrower's business operations, taking into account production/ processing cycle of the industry/trade as well as financial & other relevant parameter of the borrower. For this, the bank will assess Inventory turnover ratio & Debtors turnover ratio & compare it to the average to the similar trade/industry.

CLASSIFICATION OF CURRENT ASSETS/CURRENT LIABILITIES

The bank will decide on their own as to which items included for consideration as current assets or current liabilities. While sanctioning the limit against stock, old, obsolete & dormant stock will be excluded and while sanctioning the limit against debtors, debtors beyond 6 months will be excluded. Reasons for debtors outstanding beyond six months will be analyzed to ascertain whether these are bad debts.

MARGIN

Limits against stock are normally sanctioned at 30% security margin whereas against debtors margin is kept to the extent of 50%.

RENEWAL OF THE LIMITS

Normally, the limit is sanctioned for one year. In exceptional cases, the same will also be considered for shorter period, based on requirement. The limit is required to be renewed annually based on progress. While considering the renewal, actual achievements will be compared with the projections. Overall progress including turnover and profitability of the concern to be kept in view. While considering the renewal, the party will be asked to furnish the following details/information :

  1. Copies of Audited Balance Sheet and P & L A/c.
  2. Copies of tax return filed with Income-Tax Authority.
  3. Copy of Insurance Policy for insurance the stock/goods.
  4. Copies of license, if any required.

Renewal will be considered well before the expiry date/validity period for which limit sanctioned.

CREDIT RATING

In order to retain valued/good customers, a concession in interest rates may be granted. Interest rate to the borrower availing the CC Limit over and above Rs. 10.00 lac will be flexible and charged on their rating. A system for credit rating will be developed based on various parameters and borrowers, who score points over and above specific level will be charged differential rates of interest.

GRANT OF ADHOC LIMITS

To meet the contingencies, bank will decide on the quantum and period for granting ad-hoc limits to the borrowers based on their commercial judgement and merits of individual cases. While granting the adhoc limits, the bank will ensure that the aggregate credit limits (inclusive of ad hoc limits) do not exceed the prescribed exposure ceiling. The release of adhoc/additional credit for meeting temporary requirements will be considered by the financing bank only after the borrower has fully utilized/exhausted the existing limit.

SECURITY

i) Primary Security : The credit limits sanctioned to the concern will be fully secured with the primary security against which limit has been sanctioned i.e. all type of stock/goods including raw material, semi-finished goods, finished goods & packing material etc. If limit is sanctioned against debtors then hypothecation of debtors will also be ensured.

ii) Collateral Security : The credit limit sanctioned to the borrower is mainly against the security of movable assets, which may deteriorate in value, and any adverse impact on business would immediately erode the security of movable assets therefore it would be better to have additional security of immovable property as collateral security having value not less than total credit limit extended to the borrower. The security must be marketable and mortgagable.

MONITORING OF THE OPERATIONS IN THE ACCOUNT Diversion of Funds

Some of the clients may make large cash withdrawals. While cash withdrawals cannot be refused, Bank will keep a proper vigil over request of their clients for cash withdrawals from their account for large amount.

PERMISSION FOR OPENING CURRENT ACCOUNT

Borrower will not be permitted to open current account in any other bank, permission may be granted, on requesting by them, only in specific circumstances or for the facilities which is not available with our bank.

POST SANCTIONING MONITORING

I) Bank will ensure that drawls from CC/OD limits are strictly for the purposes for which the limits are sanctioned. There should be no diversion of working capital finance for acquisition of fixed assets, investment in associated companies, acquisition of shares, debentures, mutual funds etc.

II) To ensure that security obtained from borrowers by way of hypothecation pledged etc. are not tampered with any manner and are adequate.

III) Drawls will be based on Drawing Power after keeping adequate margin.

IV) Drawls against clearing instrument will be normally confined to Bank drafts and govt. cheques which too after seeking specific approval of the Competent Authority.

V) Drawls against cheques of sister/family concern will not be permitted.

VI) All the remittances of the trade/business will be through the limit account.

VII) Periodical inspection of borrower's site/unit to verify the stock/security will be carried out by the bank officials regularly and recorded in a register.

34. COMPUTATION OF WORKING CAPITAL

  1. On Turn Over Basis Sales/Turnover as per last audited B/S Rs. 25 lakhs Net Working Capital Required 25% of the turn over (To be shared by borrower 5% and bank 20%) Rs. 6.25 lakhs 20% of Turnover minimum for sanction Rs. 5 lakhs 5% to be promoters contribution Rs. 1.25 lakhs
  2. On Margin Basis Stocks as per last audited B/S Rs. 10 lakhs 70% of Value of Stock (maximum permissible working capital) Rs. 7 lakhs
  3. On Security Available Collateral Security Value Rs. 10 lakhs 70% of Value (maximum permissible working capital) Rs. 7 lakhs
  4. Working Capital Computation
    A. Current Assets
    Stocks Rs. 10 lakhs
    Debtors Rs. 5 lakhs
    Others cash in hand etc. Rs. 1 lakhs Rs. 16 lakhs
  5. B. Current Liabilities
    Sundry Creditors Rs. 7 lakhs
    Others Rs. - Rs. 7 lakhs
    Working Capital Gap (A-B) Rs. 9 lakhs 25% of Working Capital Gap to be raised from long term resources.

    Rs. 2.25 lakhs Maximum Permissible Bank Borrowings Rs. 6.75 lakhs
    Thus various ratios indicate the C/C limit which can be sanctioned:
    As per (1) above Rs. 5.00 lakhs
    As per (2) above Rs. 7.00 lakhs
    As per (3) above Rs. 7.00 lakhs
    As per (4) above Rs. 6.75 lakhs
    Based on this, sanctioning authority can take decision to sanction between Rs.5 to 7 lakhs.

35. WORKING CAPITAL REQUIREMENTS (RBI DIRECTIVES)

  1. The assessment of working capital requirement of borrowers, other than SSI units, requiring fund based working capital limits upto Rs.1.00 crore and SSI units requiring fund based working capital limits upto Rs.5.00 crore from the banking system will be made on the basis of their projected annual turnover.
  2. In accordance with these guidelines, the working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as net working capital (NWC) and bank providing finance at a minimum of 20% of the turnover.
  3. Bank will at their discretion, carry out the assessment based on projected turnover basis or the traditional method. If the credit requirement based on traditional production / processing cycle is higher than the one assessed on projected turnover basis, the same will be sanctioned, as borrower must be financed upto the extent of minimum 20 per cent of their projected annual turnover.
  4. Bank will satisfy itself about the reasonableness of the projected annual turnover of the applicants, both for new as well as existing units, on the basis of annual statements of accounts or other documents such as returns filed with sales-tax / revenue authorities and also ensure that the estimated growth during the year is realistic.
  5. The borrowers would be required to bring in 5 per cent of their annual turnover as margin money. In other words, 25 per cent of the output value will be computed as working capital requirement, of which at least four-fifth will be provided by the banking sector, the balance one-fifth representing the borrower's contribution towards margin for the working capital. In cases, where output exceeds the projections or where the initial assessment of working capital is found inadequate, suitable enhancement in the working capital limits will be considered by the competent authority as and when deemed necessary. For example, in case, annual turnover of a borrower is projected at Rs. 60.00 lakh, the working capital requirement will be computed at Rs. 15.00 lakh (i.e. 25%) of which Rs. 12 lakh (i.e. 20%) may be provided by the banking system, while Rs. 3.00 lakh (i.e. 5%) should be borrower's contribution towards margin money.
  6. Drawals against the limits will however, be allowed against the usual safeguards so as to ensure that the same are used for the purpose intended. Banks will have to ensure regular and timely submission of monthly statements of stocks, receivables, etc., by the borrowers and also periodical verification of such statements vis-à-vis physical stocks by their officials.

36. COMMITMENT CHARGE

The levy of commitment charge is not mandatory and it is left to the discretion of the financing banks/ consortium/syndicate. Accordingly, bank is free to evolve it's own guidelines in regard to commitment charge for ensuring credit discipline.

37. LOAN COMPONENT AND CASH CREDIT COMPONENT

  1. Bank may change the composition of working capital by increasing the cash credit component beyond 20 per cent or increase the loan component beyond 80 per cent, as the case may be, if they so desire.
  2. Bank is expected to appropriately price each of the two components of working capital finance, taking into account the impact of such decisions on their cash and liquidity management.
  3. If a borrower so desires, higher loan component can be granted by the bank; this would entail corresponding pro-rata reduction in the cash credit component of the limit.
  4. In the case of borrowers with working capital (fund based) credit limit of less than Rs. 10 crore, bank may persuade them to go in for the Loan System by offering an incentive in the form of lower rate of interest on the 'loan component' as compared to the 'cash credit component' The actual percentage of 'loan component' in these cases may be settled by the bank with its borrower clients.
  5. In respect of certain business activities which are cyclical and seasonal in nature or have inherent volatility, the strict application of loan system may create difficulties for the borrowers. Bank, may with the approval of it's Board, identify such business activities which may be exempted from the loan system of credit delivery.

(b) Rate of Interest

Bank is allowed to fix separate lending rates for 'loan component' and 'cash credit component'.

(c) Period of Loan

The minimum period of the loan for working capital purposes will be fixed by the Bank in consultation with borrowers. Bank may decide to split the loan component according to the need of the borrower with different maturity bases for each segment and allow roll over.

38. IMPORTANT PARAMETERS & RATIO ANALYSIS

In case of big loans say more than Rs.1 crore, then Balance Sheet can be studied on ratio basis.

(i) Debt Equity Ratio

This is a very important solvency test ratio. In case of any business, it is an essential requirement that at least certain per cent of the total funds requirements should come by way of equity. This ratio establishes relationship between outside liability (both long term as well as short term) and the owners capital. The owners capital consists of the Capital & Reserves. The formula for calculation of debt equity ratio is as under :

Current and Long Term Debts Share Capital and Free Reserves + Interest Free Unsecured Loans. The normal principal is that in case of small projects the debt equity ratio should not exceed 3:1. However this depends upon the nature of business and general economic conditions. The financial institutions normally prefer a higher component of equity whereas the borrower may prefer a higher component of debt. The normal level of ideal debt equity ratio which the bank have to see is 2:1.

(ii) Current Ratio

This ratio is also known as Working Capital Ratio. The ratio establishes relationship between current assets and current liabilities. The ratio gives a measure of the liquidity of the borrower and also its ability to overcome short term problems. The ratio is calculated as under :
Current Assets
Current Liabilities
While computing the above ratio, nature of the Current Assets and Current Liabilities should be kept in mind. It will be ensured that the assets and liabilities are properly valued. A company with higher cash component would be more liquid than the other even though the ratio may be the same. This ratio should always be greater than one. This is so since at least part of the current assets should be financed from long term funds. If ratio is 2 to 1, it is considered to be an ideal ratio. If it is 1 to 1, it is satisfactory. If it is below that it is considered to be unsatisfactory.

(iii) Inventory Turnover Ratio

This ratio gives the speed with which inventories are converted into sales. In simple terms it reflects the degree of liquidity of inventories and their relationship with turnover. The ratio is normally calculated as under : Sales Average inventory The average inventory is calculated by adding the opening and closing stock and dividing by 2. The lower the ratio, the more efficient is the inventory management.

(iv) Debtors Ratio

This ratio gives the speed with which debtors are realised. This indicates the credit and collection policy of the company. The ratio is calculated as under :

Sundry Debtors & Bills Receivable x 100
Average Credit Sales
The ratio is reflected as a %.
The ratio should not be too high as it means slackness in collection or that large portion of the sale proceeds are locked up in debtors and the borrower would thus be short of cash resources to pay its own creditors.

(v) Profitability Ratios

Some of the key profitability ratio are :
G.P. Ratio = Gross Profit x 100
Sales
N.P. Ratio = Net Profit x 100
Sales
The G.P. ratio is indication regarding the operating profit of the business. This ratio gives the profitability of the unit with reference to its direct cost and business income. Any expenditure which is not a part of prime cost (direct expenditure) on business income is not considered for the purpose of calculation of this ratio. The N.P. Ratio also considers the induct expenses as well as the non operating income.
The study of these ratios will enable the bank of decide whether the proposal for an advance should be considered on merit or not if other factors are otherwise favourable. Promoter's Contribution
Capital + Interest-free Unsecured Loan x 100
Total Cost of Project
Minimum Promoter's contribution should be 30% of the Project Cost.

39. PROPOSED PROJECT APPRAISAL

The applications received from the applicants for setting up of a project are required to be examined thoroughly with reference to managerial competency, technical feasibility and financial viability.

1. RECEIPT OF LOAN APPLICATION

The applications for loans are to be accepted in the prescribed format at the branch level along with all the requisite information and details. The Branch Manager will check and ensure that all the papers/documents and information required to be furnished as per the check list have been furnished with the loan application. The following papers/information are required to be furnished along with the loan application :

  1. Bio-data of the promoters/directors and guarantors along with copies of ITRs and details of net worth.
  2. Copy of registration of the firm and partnership deed.
  3. In case of company - Copies of Memorandum & Article of Association and Registration Certificate issued by the Registrar of Companies.
    Product os to be well covered in the objects clause.
    A copy of Board resolution for availing loan/limit from the bank.
  4. Copies of license, if any required for specific industry/trade.
  5. Copies of title Documents of the land allotted by the Industry Deptt./RIICO.
  6. Conversion letter, if the land use has been converted from agriculture to industry purpose.
  7. Building plans along with estimated cost of construction, duly verified/certified by a Chartered Engineer.
  8. Details of plant machinery & equipment to be obtained along with quotation from at least two suppliers.
  9. A project report showing estimated total cost of project and sources of finance, including the following -
    Details about the availability of row material, electricity and water supply arrangements
    Scope for marketing of product
    Managerial competency along with list of qualified/ experienced and skilled persons required to be appointed for the unit.
    Short description of manufacturing process.
  10. In case of an existing concern/company, copies of Balance Sheet and P&L Account for last three years.
  11. Details of loan(s), earlier availed from any other institutions/banks and repayment behavior of the same.
  12. Information so furnished will be verified/examined by the Branch Manager. After verifying/examining the information so received, the application will be forwarded to H.O. along with site inspection report / recommendations and credit report of the promoter and guarantors.

2. PROCESSING OF LOAN APPLICATION AT H.O.

On receipt of application at H.O. from Branch Office, the loan officer shall examine the application and process the same. Based on the information so furnished by the applicants and the facts & details furnished by the Branch Manager in the site inspection and credit-reports, the loan officer shall prepare an agenda note, to be placed before the Loan Sub Committee. The loan officer would examine the proposal and assess the technical feasibility and financial viability of the project in detail. Loan officer should examine the following in detail :

a) Capability of the Promoters

Success of the project mainly depends upon the capability of the promoters and their experience in the line/trade/industry. The loan officer will satisfy himself about capability of the promoters to implement and run the project successfully. He will also satisfy himself about their credentials based on the report received from the branch manager and also satisfy that the promoters would be capable to invest the required contribution for the project.

b) Credentials of the Promoters

It is utmost necessary that the credentials of the promoters are examined thoroughly. He should not be defaulter to any other institutions/banks. The credentials & reputation of the promoter in the market and society will also be verified/ ascertained. In no case the promoters, who are in default to any other institution/bank, be considered for finance.

c) Technical Feasibility

The project should be technically feasible and therefore the loan officer should ascertain/examine the followings :
  1. Suitability of the site of the project.
  2. Availability of the required quality and quantity of raw material(s) from sources, which are near the site of the unit proposed to be set up.
  3. Availability of power.
  4. Availability of other infrastructure facilities like - water supply, transportation etc.
  5. Manufacturing process should be well defined.
  6. Selection of the machinery and its supplier along with delivery schedule.
  7. Appointment of technically qualified/skilled persons required for running the plant.

d) Financial Viability

  1. Assess the correct cost of project with adequate provision for contingencies.
  2. Examine the sources of finance and also to ensure that required promoter contribution would be arranged by the promoters.
  3. Requirement/assessment of working capital finance.
  4. The promoters contribution proposed is not less then 30% of the total cost of project and Debt Equity Ration does not exceed 3 : 1.
  5. Interest-free unsecured loan if any proposed, should not be more than 25% of the promoter's contribution required for the project.
  6. Viability projection including projected Fund Flow Statement and Balance Sheet to be prepared.
  7. Repayment period should not exceed 10 years.
  8. Viability to be examined with an average DSCR of not below 1.6:1.

e) Implementation Schedule

Success of a project, to a large extent, depends on its timely implementation. A project is implemented in different stages. Completion of each stage within the scheduled period deserves constant watch and due-attention. Project implementation period commences with the sanction of loan and continues upto creation of all assets as contemplated in the project, trial production and commencement of commercial production. The different stages of implementation of a project to be watched are as under :

  1. Execution of loan documents.
  2. Acquisition of land.
  3. Construction of building.
  4. Acquisition of plant & machinery and equipments.
  5. Power connection.
  6. Trial Production.
  7. Commencement of commercial production.

f) Scope and Marketing of the Product

The loan officer will thoroughly examine and satisfy about the scope-demand of the product and ensure that the promoters/their technical staff would able to manufacture the quality product so as to compete in the market. He will feel satisfied that the product being manufactured by the unit would be easily marketable.

g) Security

The loan officer will satisfy that the term loan / CC limit proposed to be sanctioned is fully secured. Besides primary security, if considered appropriate, an additional/collateral security of marketable immovable property be insisted upon.

h) Other Approvals

  1. If industry is producing hazardous waste, the NOC from Pollution Control Board is required to be obtained.
  2. For specific industry like pharma, chemical etc., license/approvals is required to be obtained from the concerned authority.

40. HOUSE LOAN APPRAISAL

  1. Eligible Category of Finance
    Individual (Borrower and Co-borrowers) – Salaried person/self employed person in business or profession/HUF/Association of Persons.
  2. Age Limit
    Maximum age limit 60 years. If age is above 60 years, then co-borrower be insisted upon.
  3. Purpose
    i) Purchase of Land.
    ii) Construction/Purchase of house/flats by individuals.
    iii) Repair, alternation and additions to houses/flats by individuals.

4. Maximum Limit of Assistance/Finance

a) Maximum up to Rs. 25.00 Lac (Tier 1 UCBs) Rs.50 lacs (Tier II UCBs) *Housing Loan sanctioned above Rs. 25 Lac shall be out of Advances to Priority Sector

  • 75% of the cost of purchase of house (including registry changes)
  • 75% of estimated cost of construction
  • 70% of cost of purchase of land
  • 90% of the conversion and regularization charges paid to Govt. Authority to get registered lease deed/patta.
  • 50% of the wooden work. OR

b) 48 times of monthly income or 4 times of yearly income. In genuine cases loan limit up to 5 times of annual income can be considered.

c) The maximum loan should not exceed 15% of the capital fund in case of individuals and 40% of the capital funds for group of borrower. The capital fund for the purpose shall include both Tier I and Tier II capital.

5. Disbursement

Disbursement of the loan will be made as per guidelines suggested as below :

a) Execution of loan documents & obtaining of original title documents : Disbursement of sanctioned House Loan would be made only after execution of loan documents and obtaining of original title documents of land/property proposed to be mortgaged to the bank, as mentioned in sanction letter & PDC's and Insurance policy etc.

b) The sanctioned loan may be released in instalments as detailed below :
a. If house loan is sanctioned only for ground floor, disbursement should be made as under :

  1. 1st Instalment : 25% disbursement of sanctioned loan at the time of construction reaches to plinth level.
  2. 2nd Instalment : 25% of sanctioned at the time of laying of roof, after shuttering is completed and verifying that iron for laying of roof is lying at the site.
  3. 3rd Instalment : Next 25% of sanctioned loan after completion of plaster.
  4. 4th & Last Instalment : Last 25% of sanctioned loan at the time of completion of flooring wood work of doors etc. in progress.

b. If loan is sanctioned against land and construction of house for ground floor :

  1. Disbursement of loan against land : It may be released in one instalment only after obtaining registered title documents of property as mentioned in the proposal/sanction letter, verification of payments, PDC's Insurance policy etc.
  2. Loan against Construction of Building : It may be disbursed in four instalments as mentioned above para (I) (a to d).

c. If loan is sanctioned against land and also for construction of ground and first floor :

  1. Disbursement of Loan against land : It may be released in one instalment only after obtaining registered title documents of property as mentioned in the proposal/sanction letter, verification of payments, PDC's & Insurance Policy etc.
  2. Disbursement of Loan against Construction :
    1st Instalment : 15% of sanctioned loan at the time of construction reaches to plinth level.
    2nd Instalment : Next 20% of sanctioned at the time of laying of roof of first floor after shuttering is completed and after verifying that Iron for laying of roof is lying at site.
    3rd Instalment : Next 25% of sanctioned loan at the time of laying of roof of second floor and after verifying that steel is lying at site for laying of roof of second floor.
    4th Instalment : Next 20% of sanctioned loan after completion of plaster of both floor's construction.
    5th & Last Instalment : Last 20% of sanctioned loan at the time of completion of floors and wood work of doors etc. in progress.

Note :

  1. In case construction progress is already in advance stage i.e. roof has already been laid or finishing work in progress then after recording of these facts on file, 1st & 2nd Instalments of sanctioned loan may be released simultaneously at one time.
  2. Site Inspection will be got carried out by the Branch Manager himself or second officer of the Branch. However, 1st and last site inspection should be got carried out by the Branch Manager himself. Branch Managers will strictly follow the procedure of disbursement of House Loan in instalments as above, after physical inspection of site and reporting of the progress of the construction on file.

6. Interest Rate

Interest rate on floating basis is charged on reducing method on monthly basis at the rate prevailing time to time as per Bank's Policy. On default on EMI panel interest may be charged at prevailing rate time to time as per Bank's Policy. The prepayment/advance payment may be accepted only after prior permission/approval of the bank for which bank shall have right to make good of the financial loss by way of charging pre payment premium at the rate as may be decided from time to time by the Bank.

7. Security

Primary/Main Security
By mortgage of residential plot/house/flat/immovable property belonging to borrower and co-borrower.

Note : Legal opinion & non encumbrance certificate shall be obtained from bank's panel advocate on acceptance of title documents of property.

8. Personal Guarantee

A personal guarantee of two persons having adequate net worth shall be provided as per the sanction letter.

9. Repayment Period

a) The housing loan will be repayable with in maximum period of 15 years including moratorium period or repayment holiday.

b) The normal policy is that moratorium period is six months from the date of first disbursement or after two months of last disbursement which ever is earlier is allowed. Bank will decide the moratorium period depending upon the individual case, but it will not be more than 18 months from the date of construction. Repayment of the loan shall be done as follow –

  1. On part disbursement, applicant to pay Pre-EMI Interest (i.e. interest on the amount disbursed) until Final Disbursement.
  2. On Full disbursement, applicant has to pay EMI (Equated Monthly Installment) combining both interest and principal.

10. Fees

The Processing and Administrative Fees shall be applicable as per the Bank's norms specified time to time (as applicable), which will be : 1% of the Loan amount subject to minimum of Rs. 500/-.

11. Other general terms and conditions of the Bank including Insurance Coverage of Property shall also be made applicable

Sanction & Disbursement of House Loan

a) Housing Loan for Building Construction

  1. A copy of approved/sanctioned plan issued by the competent authority in the name of a person applying for such loan must be obtained along with the application.
  2. An affidavit-cum-undertaking must be obtained from the person applying for such credit facility that he shall not violate the sanctioned plan, construction shall be made strictly as per the sanctioned plan & shall furnish completion certificate within 3 months of completion of construction.
  3. An architect approved by the Bank shall certify at various stages of construction of building that the construction is strictly as per sanctioned plan and shall also certify at a particular point of time that completion of construction/building is as per site plan approved by the competent authority. In case plot size is more than 500 sq. mtrs. Then a certificate of completion of construction issued by the competent authority/local authority shall have to be obtained by the applicant and which shall be further certified by the approved chartered architect/engineer of the Bank.

b) Housing Loan for Purchase of Constructed Property / Built up Property

  • An Affidavit/undertaking shall be furnished by the applicant that the build up property has been constructed as per the sanctioned plan and/or building bye-laws along with completion certificate.
  • An Architect/approved chartered valuer shall certify before disbursement of the loan that the build up property is strictly as per sanctioned plan and/or building bye laws.
  • No loan would be granted in respect of those properties which fall in the category of unauthorized colonies unless and until the same has been regularized and developed by the competent authority.
  • No loan would be granted in respect of properties meant for residential use but which the applicant intends to use for commercial purposes and declaring so while applying for the loan.

41. MORTGAGE LOAN APPRAISAL

1. Purpose/Object

It is a general purpose loan scheme to meet the requirement of the individuals/self-employed persons or professionals and businessman/ others who are income tax payee. Sometimes funds are needed to meet the various need/requirements to individuals, self employed persons and businessman/others who are income tax payee and raising of various type of the small loans from the institutions / banks may not be practically possible/feasible. The salient features of the scheme are detailed below.

2. Eligibility

Individuals, (it may include co-borrower) who are-
  1. Salaried Person
  2. Professionals
  3. Businessman/Others who are income tax payee.
    Others - HUF, Trust, firm including partnership firm, group, association of persons, Pvt./Ltd. company.
    Net monthly income for salaried persons is not less than Rs. 5000/- p.m. or net annual income is not less than Rs. 60,000/- in case of self employed and others.

3. Age Limit

Maximum age limit 60 years. If age is above 60 years then co-borrower be insisted upon.

4. Loan Amount

(1) Term Loan
a. Individual, HUF, Trust & Professionals : 4 to 5 times of income as per Income Tax Return.

b. Commercial/Industrial entity (Proprietorship/ Partnership, Company Pvt./Ltd., and Association of persons : 4 to 5 times of Cash Profit.

(2) Overdraft Limits

4 to 5 times of Cash Profits or 20/25% of annual actual or estimated sale whichever is higher.

Note :

  1. Maximum Admissible Loan/Limit shall be 50% of MRV of property with power of relaxation to 60% of MRV by the LSC.
  2. Minimum amount Rs. 1.00 lac and maximum amount Rs. 50.00 lac.

5. Margin

50% of market value of property.. The market value of the property shall be got assessed form the approved valuer of the Bank.

Note : Relaxation in margin up to 10% be considered by the Loan sub-committee. (i.e. 40% of marked value of property).

6. Security

Equitable mortgage of legally acceptable title documents of non-encumbered residential house/flat/Urban property/Commercial/ Industrial Property in the name of borrower co-borrower which is either self occupied or vacant or let out which is not mortgaged to any institution/bank for any purpose. The mortgage Loan or O.D. facility may also be granted against the security of third person property means other than borrower /co-borrower's property. In such case the third person shall be mortgagor guarantor.

Note : The loan my be considered/granted as a special case in respect of properties already mortgaged to our bank against some other credit facilities granted to the applicant subject to the conditions that overall security margin to 50% is available/maintained for the proposed loan/limit against this scheme.

7. Disbursement of Loan

Term Loan : In one & two instalments as per applicant's/ borrowers need.

O.D. Limit
a) Borrower would withdraw the required amount up to sanctioned loan/limit which would be gradually reduced every six months i.e. as on 30th September and 31st March. First reduction would be last day of next half year. For example; if disbursement is made in June than first reduction would be on 31st March and then further reduction would be at every half year interval.

OR
b) The borrower can withdraw the loan amount up to sanctioned loan/limit which may not be reduced during the currency of loan/limit repayable at the end of the repayment period. In such case the O.D. limit has to be renewed by the Bank every year.

8. Interest Rate

As per interest rates prevailing from time to time, In case of O.D. limit interest would be charged on monthly basis as charged/ calculated on CC/Hyp accounts.

9. Personal Guarantee

Besides primary security as detailed above Third party personal guarantee of two persons having good credentials and adequate net worth shall required to be furnished for the security of the loan.

10. Repayment Period

Term Loan : Maximum of 10 years (120 months) to be recovered in monthly instalments through PDC. O.D. Limit : It would be reduced on half yearly basis so that O.D. Limit under mortgage loan scheme is finally paid with last day of repayment. In case O.D. Limit is not to be reduced half yearly than it requires renewal every year.

11. Processing Fees

a) Term Loan & O.D. Limit repayable in monthly/half yearly instalment as per rates/charges prevailing from time to time, say it is 0.8% of the loan amount.

b) In case of O.D. Limit, without monthly/half yearly reduction/repayment & renewal yearly would require to pay processing fee every year say @ 0.25% as applicable in case of CC/ Hyp. limit besides processing fee applicable/payable under mortgage loan scheme i.e. say 0.8% of the sanctioned loan/limit.

Other general terms and conditions of the Bank including insurance coverage of property shall also be made applicable.

42. VEHICLE LOAN APPRAISAL

OBJECT

ELIGIBILITY
  • Individual/firm - for personal use.
  • Individual/firm - for professionals.
  • Individual/firm - for taxi purposes.

AGE LIMIT

Individual having age between 21 years to 60 years. If age is above 60 years, then co-borrower is insisted upon.

PURPOSES

Vehicle Loan will be granted for purchase of vehicle including car/ jeep/motorcycle for personal use, business use and also for taxi purposes.

FINANCIAL ASSISTANCE

70% of the cost of vehicle including registration charges or 30 times of monthly income whichever is maximum.

MARGIN

25-30% margin be kept on the cost of vehicle including registration charges.

DISBURSEMENT

After execution of loan documents and obtaining request from the borrower, sanctioned loan amount plus margin money, if any, will be disbursed directly to the dealer/seller. A cheque/DD of the disbursable amount will be issued in the dealer's name with forwarding letter stating that the hypothecation of the vehicle in favour of the bank should be endorsed on the registration of the vehicle to be issued from R.T.O. Similarly, an endorsement of hypothecation will be made on the Insurance Policy. While releasing the sanctioned loan, Branch Manager will ascertain that the borrower has paid some contribution to the dealer/seller as advance money and receipt of the same is furnished or his contribution will be got deposited with the bank and a DD/cheque of the total payment of sanctioned loan so as to ensure that full amount of the vehicle is paid to the dealer/seller. However, Branch Manager will release DD/Bankers Cheque of the loan amount to the dealer after obtaining the prescribed loan documents.

After receiving the vehicle from the dealer borrower will deposit the original bills in the Bank. Branch Manager will thereafter verify the particulars of the vehicle from the bills and will get the signature of the borrower/s on the bills in token of having received the vehicle for which he/ they availed the loan. Branch Manager will also undertake the following acts:-

  1. Photocopy of the invoice to be verified by the Branch Manager with original & seal of the bank to be affixed on original specifying hypothecation in favour of the bank.
  2. Receipts of the payments made by the party and the bank to the dealer.
  3. Photocopy of the Registration Certificate of the vehicle issued by the RTO, verifying an endorsement in favour of the Bank.
  4. Photocopy of the Insurance Policy/Cover Note after verifying an endorsement in favour of the Bank.
  5. The chasis no./engine no., mentioned on the Registration Certificate be verified from the vehicle at the time of carrying-out the physical inspection of the vehicle.

INTEREST RATE

As applicable from time to time.

REPAYMENT OF LOAN

In 3-5 years (30-60months), depending upon the quantum of loan and repaying capacity of the applicant. PDCs must be obtained for monthly instalments.

SECURITY

Hypothecation of the vehicles i.e. car/jeep/motorcycle etc. which is being financed by the bank. An accidental/LIC Policy of the borrower can also be insisted upon.

ADDITIONAL SECURITY

If loan to be considered for the vehicle to be used for taxi purposes then an additional security of immovable property may be insisted upon.

GUARANTEE

The third party personal guarantee of two persons having adequate net worth will be insisted upon.

PROCESSING FEE

As per norms may be charged. (1% of the loan amount)

43. ADVANCE FOR PURCHASE/CONSTRUCTION OF COMMERCIAL BUILDING/SHOP APPRAISAL

1. Purpose/Object

The main object of the scheme to provide financial assistance to meet the various needs/requirement of the individuals/selfemployed persons or Professionals/Business persons for purchase/ construction of commercial building/shop loan.

2. Eligibility

a) Individuals (it may include co-borrower) who are -
  • Self employed persons
  • Professionals
  • Businessman

b) Other - HUF, Trust, Firm including partnership firm, Group, Association of persons & Pvt./Ltd. Company.

3. Age Limit

Maximum age limit 60 years. If age is above 60 years than co-borrower be insisted upon.

4. Loan Amount

Admissibility of loan be assessed based on the following -
  1. 48 times of monthly income or 4 times of yearly income. OR
  2. 75% of registered value *(including registry expenses). OR
  3. On the basis of project report. OR
  4. Maximum amount/up to Rs. 50 lacs.

Relaxation

  • In genuine cases loan limit up to 5 times of annual income may be considered.
  • Relaxation in margin up to 5% be considered (i.e. up 80% of registered value including registry charges).

5. Security

Equitable mortgage of legally acceptable title documents of no encumbered shop/commercial building/Urban property which is either self occupied or vacant, which is not mortgaged to any institution/bank for any purpose. In case of shop being purchased from builder in a commercial building/trade centre, the following documents would be required :

  • Original stamped agreement executed with the builder on Rs. 100/- stamp paper.
  • Receipts of the payment made to the builder.
  • Certified copy of permission letter granted by the competent authority to the builder.
  • Certified copy of approved plan of building/commercial complex.
  • Any other document, if required.

6. Disbursement of Loan

Term Loan : After execution of loan documents & furnishing of title documents of the property, the sanctioned loan amount of loan can be disbursed in one or two instalments as per applicant's/borrowers need.

7. Interest Rate

As per interest rates prevailing from time to time, In case O.D. limit, interest would be charged on monthly basis as charged/ calculated on CC/Hyp. accounts.

8. Personal Guarantee

Besides primary security as detailed above : Third party personal guarantee of two persons having good credentials and adequate net worth shall required to be furnished for the security of the loan.

9. Repayment Period

Term Loan : Maximum of 10 years (120 months) to be recovered in monthly installments through PDCs.

10. Processing Fees

As per rates/charges prevailing from time to time. Normally it is 1% of loan amount.

44. EDUCATION LOAN APPRAISAL

1. Purpose/Object

The scheme aims at providing financial assistance to deserving/ meritorious students pursuing higher education (full time studies) in India. Viz., Post Graduation courses-Master & Ph.D.; Professional Courses, Engineering, Medical, Agriculture, Veterinary, Law, Dental, Management, Computer etc., Computer Certificate Courses of reputed Institutes accredited to Department of Electronics or institutes affiliated to University; Courses like ICWA, C.A., CFA etc., courses conducted by IIM, IIT, IISc, XLRI, NIFT etc., Regular Diploma/Degree courses like Aeronautical, Pilot Training, Shipping etc. approved by DGCA etc., Courses offered by National Institutes and other reputed Private Institutes.

  • Free payable to Colleges/Schools/Hostel.
  • Examination/Library/Laboratory fees.
  • Purchase of Books, Equipment, Instruments.
  • Purchase of Computer/Laptop needed to complete the course.
  • Any other expenses to complete the course like study tours, project work, thesis etc.

2. Eligibility

Applicant should be an Indian National and secured admission to professional/technical courses in India through entrance test/merit based selection process.
OR

Indian nationals not above 45 years of age those who secured admission in a recognized courses of an approved university (AICTE approved institutions) OR institutes recognized by statutory body.

3. Age Limit

Maximum age limit 45 years.

4. Loan Amount

Education in India – Maximum Amount Rs. 10.00 lac
Education Abroad – Maximum Amount Rs. 20.00 lac

5. Margin

25% margin shall be kept on admissible expenses considered for loan.

Note:

  1. Maximum Admissible Loan/Limit shall be 50% of MRV of property with power of relaxation to 60% of MRV by the LSC.
  2. Minimum amount Rs. 1.00 lac and maximum amount Rs. 10.00 lac.

6. Valuation of Property

The market value of the property shall be got assessed form the approved/chartered valuer of the Bank.

7. Security

Equitable mortgage of legally acceptable title documents of unencumbered residential house/flat/Urban property/Commercial/ Industrial Property in the name of father/parents/guardian of applicant who will be co-borrower which is either self occupied or vacant or let out and not mortgaged to any institution/bank for any purpose.
The Education Loan may also be granted against the security of third person property means other than borrower/co-borrower's property. In such case the third person shall be mortgagor guarantor.

Note:

  1. The loan may be considered/granted as a special case in respect of properties already mortgaged to our bank against some other credit facilities granted to the applicant subject to the conditions that overall security margin to 50% is available/ maintained for the proposed loan.
  2. Legal opinion & non encumbrance certificate shall be obtained from bank's panel advocate on acceptance of title documents of property.

8. Disbursement of Loan

Disbursement of sanctioned Education Loan would be made only after execution of loan documents and obtaining of original title documents of land/property proposed to be mortgaged to the bank, as mentioned in sanction letter & PDCs and Insurance policy etc. The loan amount shall be disbursed to the borrower on producing requisition letter for fee payable to College/School/ Hostel/Examination/Library/Laboratory fee, Purchase of Books/ Equipments/Instruments/Purchase of Computer-essential for completion of the course. And any other expenses required completing the course-like study tours, project report, thesis etc.

9. Interest Rate

Generally interest rate on floating basis is charged on reducing method on monthly basis at the rate prevailing time to time. On default of EMI penalties/follow-up/recovery charges as per norms of bank shall be charged at prevailing rate from time to time as per bank's policy. The prepayment/advance payment charges are exempted on prepayment/advance payment of education loan.

10. Personal Guarantee

Besides primary security as detailed above Third party personal guarantee of two persons having good credentials and adequate net worth shall required to be furnished for the security of the loan.

11. Repayment Period

The Education Loan will be repayable with in maximum period of 8 years including moratorium period or repayment holiday. Moratorium period will be twelve months from the date of first disbursement or after two months of last disbursement which ever is earlier. Bank will decide the moratorium period depending upon the individual case. Repayment of the loan shall be done as follow –

  • On Part Disbursement, Co-borrower to pay Pre-EMI Interest (i.e. interest on the amount disbursed) until Final Disbursement.
  • In case of pre termination/non complication of course, the borrower shall have to deposit/cleared/adjust entire loan amount along with interest immediately.
  • On Full Disbursement, Applicants has to pay EMI (Equated Monthly Installment) Installment) combining both interest and principal, after 6 months of completion of course, till such time to father/parents of the borrower/co-borrower shall continue to pay interest.

12. Processing Fees

The Processing and Administrative Fees shall be applicable as per the Bank's norms specified time to time (as applicable). Say 1% of the Loan amount, Maximum to Rs. 10,000/-.

13. Insurance

The Bank can tie up with a Life Insurance Company to provide protector plan cover for loan amount and Life Insurance cover for student borrowers. 14. Other general terms and conditions of the Bank including insurance coverage of property shall also be made applicable.

45. GUARANTEES

(a) Broad Guidelines
In view of the risks involved in the business of issuance of guarantees, the Urban Co-operative Banks should extend guarantees within restricted limits so that their financial position is not impaired. Bank will follow certain broad guidelines in respect of their guarantee business as indicated in the following paragraphs.

(b) Purpose
As a general rule, bank will provide only financial guarantees and not performance guarantees.

(c) Maturity
It would be desirable for the Bank to confine their guarantees to relatively short-term maturities. Guarantees will not be issued for periods exceeding ten years in any case.

(d) Volume
The total volume of guarantee obligations outstanding at any time will not exceed 10 per cent of the total owned resources of the bank comprising paid up capital, reserves and deposits. Within the overall ceiling, proportion of unsecured guarantees outstanding at any time will be limited to an amount equivalent to 25% of the owned funds (paid up capital + reserves) of the bank or 25% of the total amount of guarantees, whichever is less.

(e) Secured Guarantees
Banks will preferably issue secured guarantees. A secured guarantee means a guarantee made on the security of assets (including cash margin), the market value of which will not at any time be less than the amount of the contingent liability on the guarantee, or a guarantee fully covered by counter guarantee/s of the Central Government, State Governments, public sector financial institutions and/or insurance companies. Banks should generally provide deferred payment guarantees backed by adequate tangible securities or by counter guarantees of the Central or the State Government or public sector financial institutions or of insurance companies and other banks.

(f) Unsecured Guarantees
Bank will avoid undue concentration of unsecured guarantee commitments to particular groups of customers and/or trades. Banks' Board of Directors will fix suitable proportions for issuance of unsecured guarantees on behalf of any individual constituent so that these guarantees do not exceed a - (a) reasonable proportion of the total obligations in respect of unsecured guarantees provided by the bank to all such constituents at any time, and (b) reasonable multiple of the shareholdings in the bank.

(g) Deferred Guarantees

  1. In case Bank intends for issuing deferred payment guarantees in respect of their borrowers for acquisition of capital assets will ensure that the total credit facilities including the proposed deferred payment guarantees do not exceed the prescribed exposure ceilings.
  2. The proposals for deferred payment guarantees will be examined having regard to the profitability / cash flows of the project to ensure that sufficient surpluses are generated by the borrowing unit to meet the commitments as the Bank has to meet the liability at regular intervals in respect of the instalments due. The criteria generally followed for appraising a term loan proposal for acquisition of capital assets will also be applied while issuing deferred payment guarantees.

(h) Guarantees in respect of Commodities covered under Selective Credit Controls
Bank will not issue, either to a Court or to Government, or any other person, a guarantee on behalf of or on account of any importers guaranteeing payment of customs duty and/or import duty, or other levies, payable in respect of import of essential commodities without taking, as security for issue of such guarantees, a cash margin equivalent to at least one half of the amount payable under the guarantee. The term "essential commodities" shall mean such commodities as may be specified by the Reserve Bank of India from time to time.

(i) Safeguards in Issuance of Guarantees
While issuing the financial guarantees, Bank will observe the following safe guards :

  1. The bank guarantees will be issued in security forms serially numbered to prevent issuance of fake guarantees. ii. Guarantees above a particular cut off point, as decided by the Bank, will be issued under two signatures in triplicate, one copy each for the branch, beneficiary and Head Office. It will be binding on the part of the beneficiary to seek confirmation of the Head Office as well for which a specific stipulation be incorporated in the guarantee itself.
  2. The guarantees will not normally be allowed to the customers who do not enjoy credit facilities with the bank but only maintain current accounts. If any request is received from such customers, the bank will subject the proposals to thorough scrutiny and satisfy themselves about the genuine need of the customers. The bank will be satisfied that the customers would be in a position to meet the claims under the guarantees, when received, and not approach the bank for credit facility in this regard. For this purpose the bank will enquire into the financial position of the customers, the source of funds from which they would be in a position to meet the liability and prescribe a suitable margin and obtain other security, as necessary. Bank will also call for the detailed financial statements and Wealth-tax / Income-tax returns of the customer to satisfy themselves of their financial status. The observations of the banks in respect of all these points will be recorded in banks' books.
  3. Where the customers enjoy credit facilities with other banks, the reasons for their approaching the bank for extending the guarantees will be ascertained and invariably, a reference will be made to their existing bankers with whom they are enjoying credit facilities.
  4. Bank, when approached to issue guarantees in favour of other banks for grant of credit facilities by another bank, would examine thoroughly the reasons for approaching another bank for grant of credit facilities and satisfy themselves of the need for doing so. This would be recorded in bank's books.
  5. When it is considered necessary to issue such guarantees, Bank will ensure that the relative guarantee document, beyond a stipulated amount, will not be signed singly but by two authorised officials jointly after obtaining proper sanction and authority and proper record of such guarantee issued being maintained. The credit proposal will be subjected to usual scrutiny by the lending bank ensuring that the proposals conform to the prescribed norms and guidelines and credit facilities are allowed only if the bank is satisfied about the merits of the proposal and the availability of another bank's guarantee will not result in a dilution of the standards of evaluation of the proposal and financial discipline in lending.

(j) Payment under Bank Guarantees - Immediate Settlement of Cases

  1. Probably reluctance on the part of banks to honour their commitment in respect of invoked guarantees stems from their fear of difficulty in realising the amount due from their constituents on account of such guarantees. It is possible that in their anxiety to boost up their profitability, Banks go out of the way to issue bank guarantees on behalf of constituents without subjecting the proposals to proper scrutiny and assessing the capacity and creditworthiness of their constituents to pay the amounts to the banks in case the guarantees are invoked. Dilution of security (i.e., non-obtention of adequate margin) may be another factor responsible for banks not receiving the dues in respect of invoked guarantees from their clients.
  2. The above aspects may inhibit bank to pay the beneficiaries promptly when guarantees are invoked and they adopt delatory tactics in respect of invoked guarantees. It is absolutely essential for Bank to appraise the proposals for guarantees also with the same diligence as in the case of fund based limits and obtain adequate cover by way of margin so as to prevent the constituents to develop a tendency of defaulting in payments when invoked guarantees are honoured by the banks.
  3. The bank guarantee is a commitment made by the issuing bank to make payment to the beneficiary (albeit at the behest of the bank's constituent). Failure on the part of the bank to honour the claim legitimately made on it projects distorted picture of its functioning.
  4. In fact some strictures were passed by Courts in the past against banks for not honouring the guarantee commitments promptly. The Supreme Court observation are :
    "We are therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in case where irretrievable injustice would be done, if bank guarantee is allowed to be encashed, the court should interfere."
  5. Bank will, therefore, honour bank guarantees issued by them promptly on their invocation as reluctance on their part to honour commitments in respect of invoked guarantees tend to bring the banking system into disrepute.

46. DELEGATION OF POWERS

The Board of Directors of the Bank will decide about the delegation of powers relating to loans and advances. At present all the loan proposals above Rs. 50,000/- are being sanctioned by the Loan Sub Committee.

47. FAIR PRACTICES CODE FOR LENDERS

Bank has to adopt a Fair Practices Code for Lenders as conveyed by RBI in their letter No.1531/15.01.02/2006-07 dated 10th May 2007, and a copy thereof is to be sent to the Reserve Bank of India. This code must be got adopted by the Bank's Board.