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    Assets Assets Presentation Transcript

    • Deployment of funds
    • Avenues
      Cash
      Mandated – CRR
      Not Mandated
      Investments
      Mandated – SLR
      Not mandated
      Loans
      Mandated – Priority sector advances
      Not mandated
    • Mandated reserves
      Held as % of Net Demand and Time Liabilities (NDTL)
      Demand deposits + time deposits – ( paid up capital + reserves & surplus + amount of refinance availed from RBI, provision for income tax held in excess etc)
      Cash Reserve Ratio
      Amount held as cash / bank balance with RBI
      Provide liquidity comfort to depositor
      Means to control money supply
      No interest being paid by RBI ( post March 2007)
      RBI free to decide levels to be maintained
      Current requirement ?
    • Mandated reserves
      Statutory Liquidity Ratio
      Amount of money to be held in ‘eligible securities ( G-sec) , carrying only sovereign risk
      Provide liquidity comfort
      Also reduces overall risk of portfolio
      Tool for monetary policy , fiscal policy management
      RBI can decide on levels to be maintained (post March 2007)
      Current levels ?
      Narrow banking ….
    • Money to lend
      Amount that can be lent = capital + deposits + borrowings + provisions – investment in SLR investments - CRR holdings - fixed assets.
    • Cash
      Cash : though offers comfort of liquidity, is not a ‘productive asset’
      Vault cash – currency /coins in bank’s vault
      Predictable and manageable
      Demand deposits with RBI
      Demand deposits with banks offering CH services
      Cash under collection
      Emphasis on keeping just the required amount.
    • CD ratio
      Why should banks hold more money in SLR securities than mandated ?
    • Incremental CD ratio
      Can we infer something ?
    • CD ratio
      When CRR and SLR are to be maintained at 6% and 24% of NDTL how is that some banks have high CD ratio ?
    • Segmenting
      Retail
      Typically individuals
      Wholesale
      Group of individuals
      Small enterprises
      Typically proprietorship , partnership firms , Pvt Ltd companies in early stage of growth . Size up to approx INR 25 Cr
      Small Corporate segment
      Small Pvt Ltd companies , large & mature partnership firms , approx INR 100 Cr
      Mid / Emerging Corporate segment
      Large Pvt Ltd companies, Pub Ltd companies , approx INR 500 Cr
      Large Corporate segment
      Large Public and pvt Ltd companies, above INR 500 Cr or forming part of a group of companies , with a group turnover exceeding say INR 1000 – 1500 Cr
    • Segments
      Differences in
      Constitution of the borrower
      Risk in taking exposure
      Information available to decide
      Comfort available for an exposure
      Type of products to offer
      Income potential
    • Retail lending - characteristics
      +++++
      Good avenue for deployment
      Granular exposure
      Risk diversified among borrowers
      Demand driven – hence lower marketing expenses compared to corporate
      Cross selling possible
      Helpful in economic growth
      Origination is the key – servicing can be automated
      -----
      Template driven
      Manpower intensive
      Consumer loans tend to give higher nominal returns
      Highly sensitive to business cycles
      Thrives on rate and TAT
      Inadequate life cycle study
    • Success factors
      Highly rate and TAT dependant
      Access to cheap funds
      Strong origination capabilities – read selling skills
      Strong and dynamic risk control units ( credit , market reference units and compliance)
      Geographical spread is an advantage
      Technology vital for servicing
      Important to know when to exit
      Strong collections and recovery capabilities
    • Products
      • Secured loans
      • Housing loans
      • Auto loans
      • Consumer durable loans
      • Loan against shares
      • Unsecured Loans
      • Credit cards
      • Education loans
      • Other personal loans
      Installment Loans
      Housing loans
      Auto loans
      ‘Personal’ loans
      Consumer durable loans
      Educational loans
      Other personal loans
      Revolving Loans
      Credit cards
      Loan against shares
    • Housing loans
      Extended for
      Purchase / construction of a house
      Repair of a house
      Relatively lower risk & longest tenor
      Enjoys regulatory and fiscal support
      Regulatory
      Lower capital charge ( 50% for loans upto Rs 20 lakhs)
      Inclusion under Priority sector
      Fiscal
      Tax benefits for installment and interest payments
    • Retail Credit
      Judgmental
      Quantitative – credit scoring models
      Payment history
      Amount owed
      Length of credit history
      New credit
      Type of credit in use
    • Credit scoring
      Payment history
      Payment information on many types of accounts
      Public record and collection items
      Judgement / suits / collections made etc
      Details on late and missed payments
      Delay buckets , how recent , how frequent
      How many accounts show no late payments
    • Credit scoring
      Amounts owed
      Amount owed on all accounts
      Amount owed on different types of accounts
      Number of accounts that have balances
      Total credit line used on revolving lines
      Installments pending compared to original lines
    • Credit scoring
      Length of credit history
      How long the credit accounts have been established
      New credit
      How old is the relationship ?
      How many inquiries have been made to credit reporting agencies ?
      Length of time since lenders made inquiries ?
      Type of credit
    • Wholesale banking
      Based on type
      Fund / Non Fund
      Based on purpose
      Project finance / working capital
      Domestic / export credit
      Based on tenor
      Short term / long term
      Based on comfort
      Secured / unsecured
    • Fund based facilities
      Revolving facilities
      Cash credit
      Overdraft
      Repayable facilities
      Short term
      Bills / invoice finance
      Short term loans / working capital demand loans
      Long term
      Project term loans
      Working capital term loans
    • Working capital cycle
      Cash
      Raw materials
      Receivables
      Work in process
      Finished Goods
    • WC facility - fund
      Cash
      Raw materials
      Receivables
      Finance for the entire working cycle – against stock and book debts . If revolving facility : Cash credit (OCC /KCC) If repayable : WCDL
      Work in process
      Finished Goods
    • WC facility - fund
      Supplier raises an invoice / bill – which can be discounted. Customer pays the bank – Purchase bill finance
      Cash
      Raw materials
      Receivables
      Work in process
      Finished Goods
    • WC facility - fund
      Customer raises an invoice / bill on buyer , which buyer accepts to pay after a usance – which can be discounted. Customer pays the bank. Sales invoice / bill discounting
      Cash
      Raw materials
      Receivables
      Work in process
      Finished Goods
    • WC facility - fund
      Cash
      Revolving facility against receivables - Overdraft
      Raw materials
      Receivables
      Work in process
      Finished Goods
    • WC Cycle - export
      Buyer places an order
      Buyer remits the amount
      Raw materials
      Export done – shipping docs and bill prepared
      Work in process
      Finished Goods
    • WC facility - export
      Buyer remits the amount
      Buyer places an order
      Bills raised are discounted. Post Shipment credit / Foreign bill discounting. Proceeds used to close PCL
      Raw materials
      Finance against the order for purchase of RM and manufacture – Packing credit / Pre-shipment credit
      Export done – shipping docs and bill prepared
      Work in process
      Finished Goods
    • Term debt
      Short term ( for cash flow mismatches)
      Long term
      For incurring capital expenditure
      For funding margin for working capital (WCTL)
      For ‘general corporate purposes’ – acquisition etc.,
    • LC transaction
      Buyer
      applicant
      Seller
      beneficiary
      1. Places order
      5.Sends Materials
      Reimbursing bank
      2.Request to issue LC
      6.Sends Dox
      Negotiating bank
      9.beneficiary is paid
      Pays the bank
      Confirming bank
      4.Advises LC
      Buyer’s bank
      Issuing bank
      8. Bank is paid
      Advising bank
      7.Dox forwarded
      3. LC issued
    • Parties to the transaction
      Applicant
      Issuing bank
      Advising bank
      Confirming bank can be the same
      Negotiating bank
      Reimbursing bank
      Beneficiary
      Governed by ICC’s UCPDC 600
    • Types of LCs
      Revocable (?) and Irrevocable LC
      Confirmed LC
      Sight and Usance LC
      Revolving LC
      Transferable LC
      Back to back LC
      Red Clause LC – advising bank gives PSL
      Green Clause LC – in addition provides for cost of storage (in the name of the issuing bank)
      SBLC
    • Buyer’s credit
      Way to provide extended credit to the buyer for purchases made ( RM , capital equipment)
      Rides on an LC transaction ( sight / usance)
      Buyer’s bank sends LOU to a bank providing the BC
      Seller is paid off.
      BC providing bank is paid off on maturity / is rolled over ( if permitted )
    • Other fund instruments
      Long term
      Plain debt
      NCDs
      Convertible into equity
      FCCBs
      Preference shares
      Short term
      Commercial paper
    • Bank guarantees
      Financial guarantee
      Bid bond BG
      Advance payment BG
      Retention money BG
      Deferred payment guarantee
      BG favoring customs , ST etc
      Performance guarantee
      Export Promotion Credit Guarantee
    • W/c assessment
      How much to fund ?
      Assessment methods
      Operating cycle method
      Traditional method
      Projected turnover method
      MPBF method(s)
      Cash flow method
    • Operating cycle method
      Time lapse between cash outlay and cash realization
      Components
      Acquisition and holding of RM
      Process time for conversion
      Holding time for FG
      Average collection time
      WCR = Operating expenses / no of cycles p.a
    • Traditional method
    • Projected turnover method
      Recommended by the ‘Nayak Committee’
      Generally used for limits upto Rs 5 Cr
    • MPBF methods
      Based on the recommendations of Tandon and Chore committees
      Three methods were suggested
    • Assessments
      Fund : cash flow method
      LC assessment
      BG assessment
    • What if a single bank cant fund ?
      Consortium banking arrangements
      Lead bank and member banks
      Common assessment, documentation (inter se agreement, joint deed ), security and agreed share of business.
      Multiple banking arrangements
      No Leader
      Increases flexibility for customer
      Also requires dealing with several banks
    • What if a single bank cant fund ?
      Loan syndication
      Arranger / Lead manager
      Co-arranger
      Prepares the Information memorandum
      Responsible for administering the loan
      Underwriting
      Facility manager
      Prepares, negotiates and gets the loan agreement executed.
      + borrower gets to deal with single bank , easy to raise , useful if a large quantum of money is to be raised
      + lead manager gets to retain relationship , earn a good fee , advantageous for the participating banks as well
    • Security
      Essential features
      Credible deterrent against default
      Fall back in case assumptions go wrong
      Should be as liquid and as easily marketable as possible
      Security creation formalities vary with
      Type of security
      Moveable
      Immoveable
      Constitution of borrower
    • Mortgage
      Transfer of an interest in a specific immovable property for the purpose of securing
      Existing debt
      Future debt
      Performance of an engagement , which may give rise to a pecuniary liability
      Mortgager
      Mortgagee
      Mortgage money
      Mortgage deed
    • Types of mortgage
      Simple mortgage
      Bank not in possession of the property , but registration is mandatory.
      Bank needs to approach court to sell and recovery money
      Proceeds from property remain with mortgagor
      Mortgage by conditional sale
      ‘ostensible sale’ to the bank
      If debt is not serviced, bank can cause foreclosure – borrower loses right to redeem property
      Not preferred
    • Types of mortgage
      Usufructuary mortgage
      Bank is in legal possession of property + income proceeds
      If borrower fails to redeem ( within 30 yrs), bank becomes owner
      English mortgage
      There is an absolute transfer of property – if the due is paid , property is transferred back to borrower
      In case of shortfall, bank can look to other assets
    • Types of mortgage
      Equitable mortgage
      Most preferred form – less costly and easy
      Mortgage by deposit of title deeds – with an intent to create mortgage
      Precautions to be taken
      Registration of EM ( in TN and few other states)
      Anomalous mortgage ?
    • Pledge and hypothecation
      Pledge
      ‘bailment of goods as security for payment of debts or performance of a promise’
      Possession is with the bank ( pledgee)
      Used for movable fixed assets of high value
      Hypothecation
      Charge on movable assets
      Possession given on demand
      Precautions
      Audit and inspection needed
      Should be fully paid stock
      Should be adequately insured – bank as first loss payee
    • Charge
      Used specifically for ‘charges’ under Companies Act, 1956
      Fixed charge
      Over designated fixed assets of the company
      Floating charge
      Floats over present and future assets of the company
      Assets can be sold
      Crystallizes into a fixed charge in case of default
      First charge , second charge , subservient charge
      Pari – passu charge
      Registered with ROC within 30 days of signing loan dox
    • Assignment
      ‘Actionable claims’ can be assigned by borrower to a bank
      Book debts (usually specific )
      Money from govt / other agencies / companies
      Life insurance policies etc
      Takes precedence over other creditors (if they do not have prior / superior charge)