Lendings-8 , Banking Fundamentals to Know for Students.

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In States, where one of the minority communities notified is, in fact, in the majority, item (12) will cover only the other notified minorities. These States/ Union Territories are --
Jammu & Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep. 

Investments by banks in securitised assets :
(i) Investments by banks in securitised assets, representing loans to various categories of priority sector, except 'others' category, are eligible for classification under respective categories of priority sector depending on the underlying assets provided: 
(a) the securitised assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances prior to securitisation and fulfil the Reserve Bank of India guidelines on securitisation. 
(b) the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the Base Rate of the investing bank plus 8 per cent per annum. 
The investments in securitised assets originated by MFIs are exempted from interest cap as there are separate caps on margin and interest rate. 

(ii) Investments made by banks in securitised assets originated by NBFCs, where the underlying assets are loans against gold jewellery, are not eligible for priority sector status. 

(iii) Transfer of Assets through Direct Assignment /Outright purchases 

(iv) Assignments/Outright purchases of the pool of assets by banks representing loans under various categories of priority sector, except the 'others' category, will be eligible for classification under respective categories of priority sector provided: 
(a) the assets are originated by banks and financial institutions which are eligible to be classified as priority sector advances prior to the purchase and fulfil the Reserve Bank of India guidelines on outright purchase/assignment. 

(b) the eligible loan assets so purchased should not be disposed of other than by way of repayment. 

(c) the all inclusive interest charged to the ultimate borrower by the originating entity should not exceed the Base Rate of the purchasing bank plus 8 per cent per annum. 

The Assignments/Outright purchases of eligible priority sector loans from MFIs are exempted from this interest rate cap as there are separate caps on margin and interest rate. 

(v) When the banks undertake the outright purchase of loan assets from banks/ financial institutions to be classified under priority sector, they must report the nominal amount actually disbursed to end priority sector borrowers and not the premium embedded amount paid to the sellers. 

(vi) Purchase/ assignment/investment transactions undertaken by banks with NBFCs, where the underlying assets are loans against gold jewellery, are not eligible for priority sector status. 

(vii) Inter Bank Participation Certificates Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk-sharing basis, are eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorized under the respective categories of priority sector and the banks fulfil the Reserve Bank of India guidelines on IBPCs. 

(viii) Priority Sector Lending Certificates The outstanding priority sector lending certificates (after the guidelines are issued in this regard by the Reserve Bank of India) bought by the banks will be eligible for classification under respective categories of priority sector provided the assets are originated by banks and are eligible to be classified as priority sector advances and fulfil the Reserve Bank of India guidelines on priority sector lending certificates. 

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1. Housing

(i) Loans to individuals up to 28 lakh in metropolitan centres (with a population of ten lakh and above) and loans up to 20 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed 35 lakh and 25 lakh respectively. The housing loans to banks’ own employees will be excluded. As housing loans which are backed by long term bonds are exempted from ANBC, banks should either include such housing loans to individuals up to 28 lakh in metropolitan centres and ₹ 20 lakh in other centres under priority sector or take benefit of exemption from ANBC, but not both.

(ii) Loans for repairs to damaged dwelling units of families up to 5 lakh in metropolitan centres and up to 2 lakh in other centres.

(iii) Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of 10 lakh per dwelling unit.

(iv) The loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses for economically weaker sections and low-income groups, the total cost of which does not exceed 10 lakh per dwelling unit. For the purpose of identifying the economically weaker sections ₹ and low-income groups, the family income limit of 2 lakh per annum, irrespective of the location, is prescribed.

(v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of 10 lakh per borrower. The eligibility under priority sector loans to HFCs is restricted to five per cent of the individual bank’s total priority sector lending, on an on-going basis. The maturity of bank loans should be co-terminus with the average maturity of loans extended by HFCs.  Banks should maintain necessary borrower-wise details of the underlying portfolio.

(vi) Outstanding deposits with NHB on account of priority sector shortfall.

2. Social infrastructure Bank loans up to a limit of 5 crores per borrower for building social infrastructure for activities  namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres.

3. Renewable Energy Bank loans up to a limit of 15 crores to borrowers for purposes like solar-based power generators, biomass-based power generators, windmills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual households, the loan limit will be 10 lakh per borrower.  

4. Others

4.1.  Loans not exceeding 50,000/- per borrower provided directly by banks to individuals  and their  SHG/JLG, provided the individual borrower’s household annual income in rural areas does not exceed 100,000/- and for non-rural areas it does not exceed 1,60,000/-.

4.2. Loans to distressed persons [other than farmers already included under III (1.1) A (v)] not exceeding 100,000/- per borrower to prepay their debt to non-institutional lenders.  

4.3. Overdrafts extended by banks up to 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts provided the borrowers household annual income does not exceed 100,000/- for rural areas and 1,60,000/- for non-rural areas.

4.4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the beneficiaries of these organisations.

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Bank loans to Micro, Small and Medium Enterprises, for both manufacturing and service sectors are eligible to be classified under the priority sector as per the following norms:   

a) Manufacturing Enterprises - The Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. Manufacturing Enterprises are defined in terms of investment in plant and machinery.

b) Service Enterprises - Bank loans up to 5 crores per unit to Micro and Small Enterprises and 10 crores to Medium ₹ ₹ Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

c) Khadi and Village Industries Sector (KVI)  - All loans to units in the KVI sector will be eligible for classification under the sub-target of 7 percent /7.5 percent prescribed for Micro Enterprises under the priority sector.

d) Other Finance to MSMEs

(i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions specified in paragraph IX of this circular.

(iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to the non-farm entrepreneurial credit needs of individuals).

(v) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.

e) Considering that the MSMED Act, 2006 does not provide for any sub-categorization within the definition of micro-enterprises and that the sub-target for lending to micro-enterprises has been fixed, the current sub-categorization within the definition of micro-enterprises in the existing guidelines are dispensed with.

f) To ensure that MSMEs do not remain small and medium units merely to remain eligible for priority sector status, the MSME units will continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned.

Loans to individuals for educational purposes including vocational courses up to 10 lakh, irrespective ₹ of the sanctioned the amount will be considered as eligible for the priority sector.

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PRIORITY SECTOR LENDING-TARGETS AND CLASSIFICATION                                       

Categories under priority sector

(i)   Agriculture

(ii)  Micro, Small and Medium Enterprises

(iii)  Export Credit

(iv)  Education

(v)   Housing

(vi)  Social Infrastructure

(vii)  Renewable Energy

(viii)  Others 

Categories  i)Domestic scheduled commercial banks and Foreign banks with 20 branches and above.

ii)Foreign banks with less than 20 branches.

Total Priority Sector

40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Foreign banks with 20 branches and above have to achieve the Total Priority Sector Target within the maximum period of five years starting from April 1, 2013, and ending on March 31, 2018 as per the action plans submitted by them and approved by RBI.

40 percent of Adjusted Net Bank or Credit Equivalent Amount of OffBalance Sheet Exposure, whichever is higher; to be achieved in a phased manner by 2020.

Agriculture- 18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Within the 18 percent target for agriculture, the target of 8 percent of ANBC or Credit Equivalent Amount of OffBalance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 percent by March 2016 and 8 per cent by March 2017.

Foreign banks with 20 branches and above have to achieve the Agriculture Target within a maximum period of five years starting from April 1, 2013, and ending on March 31, 2018, as per the action plans submitted by them and approved by RBI. The sub-target for Small and Marginal farmers would be made applicable post-2018 after a review in 2017.

Micro Enterprises

7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher to be achieved in a phased manner i.e. 7 percent by March 2016 and 7.5 percent by March 2017.

The sub-target for Micro Enterprises for foreign banks with 20 branches and above would be made applicable post-2018 after a review in 2017.

Advances to Weaker Sections

10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Foreign banks with 20 branches and above have to achieve the Weaker Sections Target within a maximum period of five years starting from April 1, 2013, and ending on March 31, 2018, as per the action plans submitted by them and approved by RBI.

The Total Priority Sector target of 40 percent for foreign banks with less than 20 branches has to be achieved in a phased manner as under: Financial Year The Total Priority Sector as percentage of ANBC or Credit Equivalent Amount of OffBalance Sheet Exposure, whichever is higher 2015-16: 32% ; 2016-17 :34% ;2017-18-36% ;2018-19-38% ;2019-20- 40%.

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Loans against Term deposit : 

Banks often lend against their term deposits, such as fixed deposits, cumulative deposits, recurring deposits, etc. The nature of the facility granted against the security of term deposits may either be a loan or an overdraft. The nature of charge is a pledge in this case.   

Margin and rate of Interest: 

Normally banks lend up to ninety percent of the deposit amount. The rate of interest charged is above the interest rate offered on the deposit.  

Deposit in the name of a minor:  

No loan can be granted against the security of deposit receipt standing in the name of a minor.  

Loan against Gold Ornaments : 

1. The amount of loan on ornaments depends upon the market value and purity of the gold. Normally banks keep a margin of around 30 % on the market value of ornaments. 

2. The rate of interest varies with the purpose of the loan. 

3. The repayment period depends upon the purpose of the loan. If the loan is for agricultural purposes, the repayment period normally coincides with the harvest and marketing of the produce.  

4. On the closure of the loan, the ornaments should be returned to the pledger or his / her representative (authorized).

5. Even after the closure of the loan the banker can hold the ornaments in case other loans are due under the same name.         

6. Normally banks appoint appraisers for the purpose of appraising the purity of Gold ornaments.  

7. The loan granted under this category is also subject to NP.

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Documents to be taken from Mortgager : 

a) All material documents of a title like a sale deed/gift deed/will/partition deed that conveys the title in his or her favor. 

b) Parent documents for the prescribed period to ascertain the flow of title. 

c) Encumbrance certificated) Tax receipt of the property 

e) Search report 

f) Authenticity of the documents has to be checked by a panel of advocates Valuation of property.

When an advance is allowed against the security of an immovable property, it is necessary to get approved by an approved valuer.

 

While valuating the property following may be taken into consideration: 

a) Location of land and the consequent location value  b) Age of the building 

c) The nature of its construction 

d) Taxes paid 

e) The extent of the land and the building area 

f) The cost incurred for building construction   

Leasehold properties: 

If the land is leasehold, it is necessary to ascertain whether the terms of the lease permit the borrower to assign or transfer by the way of mortgage, the leasehold rights in the land.  

Standing Crops and other agricultural produce: 

Banks advance loans routinely against the security of the standing crops, agricultural produces, agricultural inputs like fertilizers, pesticides etc. It remains in the form of a pledge. One of the most essential requirements of a pledge is the actual or constructive delivery of goods pledged to the pledgee.  

The term ‘constructive ‘delivery means that there is no need for physical transfer of goods from the custody of the pledger to the pledgee.  

When the possession of goods is not transferred, The nature of charge created is hypothecation.

Hypothecation differs from a mortgage in two respects. a) Firstly mortgage relates to the immovable property where is hypothecation relates to movables.

b) Secondly, In a mortgage, there is a transfer of an interest in the property to the creditor but in hypothecation, there is only an obligation to repay the money and no transfer of interest.  

In the case of pledge and hypothecation, the title in goods is not transferred to the bank.  

Precautions to be taken against the advance of goods.  

1. No advance should be made for speculation

2. The goods charged to the bank should have been fully paid

3. The age of stock should be reasonable

4. The ownership should be ensured by verifying the original invoices

5. As the price of goods or raw material pledged may vary from time to time the bank should stipulate an appropriate margin at all times. 

6. If the borrower has own goods apart from pledged goods then he \ she should segregate the goods while storing in the godown. 

7. The goods should be adequately insured.

   

Points to be taken into consideration: 

The policy must be in force and the premium paid up to date. The latest premium receipt must be kept on record by the bank. 

The policy should be an original, duly stamped and signed by the issuing authority.      The policy should be free from restrictive clauses.

Following documents usually not accepted by the bank as security

a) Children endowment policy

b) The policy is taken out specifically for purposes like estate duty

c) Children deferred policy

d) Policies with nominations under section 6 of married woman property cat