5th unit notes of Principles and Practices of Banking As per VTU syllabus

1. TYPES OF LOANS
OVERDRAFT FACILITIES
DISCOUNTING OF BILLS
FINANCING
BOOK DEBTS AND SUPPLY BILLS
CHARGING OF SECURITY BILLS
PLEDGE
MORTGAGE
ASSIGNMENT
BANKER AS LENDER
1
Concurrent Audit of Banks- Loans and Advances

2. CLASSIFICATION OF
ADVANCES
2

3. 3
Classification
of advances
Sector wise
Priority
Non priority
Security wise
Secured
Unsecured
Prudential
norms
Standard
NPA

4. SECTOR WISE CLASSIFICATION
4
Priority
• Agriculture
• Education
• Housing
• Export credits
• MSME
• Social Infrastructure
• Renewable energy
• Others
Non Priority
• Sectors other than
priority are covered
under non priority
sector
Priority Sector Housing
Loan :In Metropolitan Centres
(Population 10 lacs and
above)- Loans upto Rs. 28
lacs provided overall cost of
dwelling unit not to exceed Rs.
35 lacs In case of repairs,
amount restricted to Rs. 5
lacs
In Other Centres - Loans upto
Rs. 20 lacs provided overall
cost of dwelling unit not to
exceed Rs. 25 lacs In case of
repairs, amount restricted to
Rs. 5 lacs
Priority Sector
Education Loans – Upto
Rs 10 lacs
Present target for
priority sector lending –
40%

5. SECURITY WISE CLASSIFICATION
Security Wise
classification
Secured- by
tangible assets
Unsecured
5
IMPACT: Improper classification results in over /under provisioning . Also
effect the rating of the branch.

6. PRUDENTIAL NORMS CLASSIFICATION
Classification of
advances as per
Prudential Norms
Standard
Loans
Standard
Regular
Special
Mention
Account (SMA)
NPA Loans
Substandard Doubtful Loss
6
SMA 0 (Accounts showing
stress signals)
SMA 1 (Overdue between 31
to 60 days)
SMA 2 (Overdue between 61
days to 90 days)

7. Fund based advances are those where there is an actual
transfer of funds from the bank to the borrower. Examples :
Cash credit, term loans, overdraft, bill discounting, export
loans etc.
Non fund based advances are those where there is no
involvement of transfer of funds from the bank to the
borrower. Examples: Letter of credit , bank guarantees, co-
acceptance of bill.
Although in certain cases a non fund facility may
subsequently turn into a funded facility. E.g. where the bank
makes payment under a letter of credit issued by it due to
devolvement
7

8. FUND BASED FACILITIES
Cash Credit
Term Loan
Overdraft
Bill Discounting
Export Loan
8

9. FUND BASED FACILITIES
Cash Credit
9
To finance working capital requirements
Requires periodic renewal (usually yearly)
Requires monthly stock statement for calculation of drawing
power
Requires monitoring of end use of funds
CC accounts in Finacle- ACS+F6+CCA (Scheme code)

10. FUND BASED FACILITIES
Term Loan
10
Availed for acquiring fixed assets
Repayment in a fixed period
Term Loan accounts in Finacle- ACS+F6+LAA (Scheme
code)

11. FUND BASED FACILITIES
Overdraft
11
Normally against FDR or immovable property
Annual renewal if allowed against property
No requirement for submission of stock statements
End use of funds generally not ensured
OD accounts in Finacle- ACS+F6+ODA (Scheme code)

12. FUND BASED FACILITIES
Bill Discounting
12
LC or Non LC bills
Usance bills (payable after a fixed period of usance) or
sight bill (payable on presentation)
Accompanied by bills of exchange. Transporter’s GR
List of bills outstanding in Finacle- FBBR

13. CONCEPT – BILL OF
EXCHANGE
Bill of exchange, is an instrument in writing which is an
unconditional order to pay a certain amount of money to a
specified person.

14. DISCOUNTING OF B/E
The seller who is the holder of a accepted B/E has two
options :
1. Hold on the B/E till maturity and then take the payment
from buyer.
2. Discount the B/E with discounting agency.
Note : However the option (2) is much more attractive as seller
gets ready cash

15. DISCOUNT :
• Seller can take the accepted B/E to a discounting agency and
obtain ready cash.
• The act of giving accepted B/E for ready money is call
discounting the B/E.
• The difference between ready money paid and the face value
of the bill is called the discount.

16. TYPES OF BILLS
1. Demand Bill : Payable immediately
2. Usance Bill : Time bill
3. Documentary Bill : Accompanied by documents
4. Clean Bill : Not accompanied by any documents

17. ADVANTAGES : TO
BANKS
Safety of Funds : Bearing signatures of two parties
Profitability : Discount is front-ended, so as yield is much
higher than loans
Even out Inter-bank Liquidity Problems :
• Stabilized the fluctuations in the call money market

18. PROCESSING - CREDIT
ASSESSMENT
Discounting agencies will do the appraisal of the customer.
Credit limit will fix up by discounting agencies
The credit limits are based on following considerations :
1. Credit worthiness of drawer (client)
2. Credit worthiness of drawee and dishonour if any
3. Nature of Customer’s industry.

19. Once discounting agencies, gives approval for bill
discounting, following documents are submitted:-
• Invoice
• Challan
• Receipt of goods (acknowledge by buyer)
• Promissory Note
• Railway Receipt/ Truck Receipt
• Post dated cheque for interest amount

20. PRECAUTIONS – BY
BANKS, NBFCS
Goods covered by documents are those in which the
company is dealing
The amount of bill should match with business turnover of
the company.
Where discounting agencies is operating or have a branch
office.
The credit report on the drawee is satisfactory
The goods covered under the bill are not of
perishable in nature.

21. BOOK DEBTS
Book debts is the term used for sums of money owed to the bankrupt,
partnership or company at the date of the insolvency order, usually for
goods or services supplied or work carried out. Sums due under loans
may also be treated as book debts as can sums due from partners or
directors under any loan accounts they may have had with the
partnership business or company, although detailed information must
be available regarding the loan etc for it to be collectable.
The fact that an insolvency order has been made does not mean that
the sums are no longer due and the official receiver is therefore entitled
to claim the amount owed from the book debtor for the estate.
Where the book debts have a realizable value, the official receiver
should not seek the appointment of an insolvency practitioner unless
requested to do so by creditors. If, however, there are other assets of a
complex nature in the estate, the official receiver may consider seeking
the appointment of an insolvency practitioner

22. SUPPLY BILL
A money bill or supply bill is a bill that solely concerns taxation or government
spending (also known as appropriation of money)
• 1. Money Bills can be introduced only in Lok Sabha (the directly elected 'people's
house' of the Indian Parliament).
• 2. Money bills passed by the Lok Sabha are sent to the Rajya Sabha (the upper
house of parliament, elected by the state and territorial legislatures or appointed by
the president). The Rajya Sabha may not amend money bills but can recommend
amendments. To make sure that Rajya Sabha doesn't amend the bill by adding
some non-money matters (known as Financial Bill), the Lok Sabha Speaker
certifies the bill as a money bill before sending it to the upper house, and the
decision of the Speaker is binding on both the Houses.[2] A money bill must be
returned to the Lok Sabha within 14 days or the bill is deemed to have passed both
houses in the form it was originally passed by the Lok Sabha.
• 3. When a Money Bill is returned to the Lok Sabha with the recommended
amendments of the Rajya Sabha it is open to Lok Sabha to accept or reject any or
all of the recommendations.
• 4. A money bill is deemed to have passed both houses with any recommended
amendments the Lok Sabha chooses to accept, (and without any that it chooses to
decline).
• 5. The definition of "Money Bill" is given in the Article 110 of the Constitution of
India. A financial bill is not a Money Bill unless it fulfills the requirements of the
Article 110.
• 6. The Speaker of the Lok Sabha certifies if a Finance bill is a Money Bill or not.

23. BILLS OF EXCHANGE
Definition:
A bill as defined in sec.5 of Negotiable Instrument Act, 1881
is “an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person, to pay
a certain sum of money to, or to the order of a person named
therein”.
A bill of exchange thus requires in its inception three parties-
the drawer, the drawee, and the payee

24. CHARACTERISTICS OF
A BILL OF EXCHANGE
Must be written
Must by signed
Parties must be certain
It must be stamped
It must contain an order to pay
It must be accepted by the party

25. TAKEN IN CASE OF
ADVANCES AGAINST
SUPPLY BILLS
1.The bank should have on record credit reports of all the parties
tendering bills of this nature
2.The accommodation granted should not be disproportionate to
the business turnover of the party concerned
3.The bills when submitted to the bank should be subjected to the
following checks:
a)That the goods covered by the inspection note and the bills
must tally with each other and the inspection note should be
signed by the authorized official of the concerned government
department semi-government bodies/company etc

26. b)That the bill is accompanied by receipted challan/transport
receipt/railway receipt or some other proof of dispatch of goods
acceptable to the bank as per terms of sanction
c)That the bill is duly endorsed in favour of the bank
4.Collection charges and amount of out of pocket expenses
should be recovered from the borrower
5.The prescribed margin should be maintained
6.The amount of bills, if any, received directly by the party should
be promptly remitted to the bank.

27. TYPES OF CHARGES OR VARIOUS MODES OF
CREATING CHARGE
27
Hypothecation
• Goods not in
physical
control of
bank
• Creation of
charge in
favour of bank
through
execution of
hypothecation
deed
Pledge
• Security
under
physical
possessio
n of bank
• E.g.
Pledge of
FDR,
Gold
Assignment
• Transfer of
right of
property in
favour of the
bank
• E.g.
Assignment
of LIC policy
Set off
• Statutory
right of
the Bank
to adjust
balance
lying in
any
deposit
account
of the
borrower
with the
loan
balance.
Mortgage
• Involves
mortgage
of
immovabl
e property

28. PLEDGE
Pledge is bailment of goods by the debtors to the creditor with an
intention to create a charge thereon as security for the debt.
The person delivering the goods as security is called pledger or
pawner. The to whom the goods are delivered is called
pledgee/pawnee. Pledge may be in respect of goods, stocks,
shares or any other moveable property
Actual transfer of possession/delivery takes place in the
transaction. Ex: if a banker allows advances against goods under
pledge, the effective possession of the goods shall be in the down
under the lock, key and custody of the bank

29. In order to constitute a valid pledge the following conditions
should be complied with:
i)Delivery of goods:-there should be bailment of goods which
implies that goods must be delivered by the debtor to the creditor
ii)Bailment to secure payment of debt:-the delivery of goods must
be with an intention of the parties to create security for the debt
iii)Return of goods:-the same goods are required to be returned
after the debt is repaid by the borrower.
In pledge the ownership remains with the borrower, while the
physical control over the goods will be exercised by the bank. In
case of default, the bank can sell the goods after giving a
reasonable notice to the borrower under the section 176 of the
Indian Contract Act 1872

30. MORTGAGE
Definition
Section 58(2) of Transfer of Property Act, 1882 defines the
term, ‘Mortgage’ as “a transfer of an interest in a specific
immovable property for the purpose of securing payment of
money advanced by way of loan, an existing or future debt,
or the performance of an engagement which may give rise to
a pecuniary liability”.
The transferor is called mortgager, the transferee is a
mortgagee and the principal money and interest of which
payment is secured for the time being is called the mortgage
money and the instrument which effects the transfer is called
a mortgage deed

31. CONDITIONS UNDER
WHICH A MORTGAGE
BECOME VALID
Mortgage deed must convey that there is an intention to
create a mortgage
Consideration must be an existing or future debt
There must be transfer of interest in specific immovable
property which includes land, benefits arising out of land like
trees, walls buildings etc
Transfer of interest must be a security for a debt
Transfer must be to a living person(s) including a company
or an association or body of individuals incorporated or not

32. WHO CAN
MORTGAGE?
An absolute owner of property
One of the several co-owners can mortgage his share
The manager(karta) of a joint Hindu family firm
Guardian of a minor’s property
An executor or administrator

33. WHO CAN’T
MORTGAGE?
A minor can hold property but can’t mortgage as he lacks
capacity to contract
A partner in a partnership firm does not have the implied
authority to mortgage the firm’s property
A trust can mortgage the property of a trust if the Trust Deed
empowers his to do so but he can’t be mortgagee of trust
property

34. TYPES OF
MORTGAGES
There are six types of mortgages recognized by the section
58 of transfer of Property Act,1882
1)Simple mortgage: where, without delivering possession of
the mortgaged property, the mortgagor binds himself/herself
personally to pay the mortgage money, and agrees, expressly
or impliedly, that in the event of his failing to pay according
to his contract, the mortgagee shall have a right to sell the
mortgaged property in payment of mortgage-money. Such
transaction is called a simple mortgage and in which
registration is compulsory so it is also called registered
mortgage

35. 2.Mortgage by conditional sale:
in this case, the mortgagor purportedly sells the mortgaged
property on the condition that on default of payment of the
mortgaged money on a certain date the sale shall become
absolute, or on condition that on such payment being made
the buyer shall transfer the property to the seller or on
condition that on such payment being made the sale shall
become void, the transaction is called a mortgage by
conditional sale

36. 3.Usufructuary mortgage: where the mortgagor delivers
possession or expressly or by implication binds himself to
deliver possession of the mortgaged property to the
mortgagee, and authorizes him to retain such possession
until payment of the mortgage-money, and to receive the
rents and profits accruing from the property or any part of
such rents and profits to appropriate the same in lieu of
interest or in payment of the mortgage-money or party in lieu
of interest or partly in payment of the mortgage-money, such
a transaction is called usufructuary mortgage

37. 4.English mortgage: where mortgagor binds himself/herself to repay
the mortgage-money on a certain date and transfers the mortgaged
property absolutely to the mortgagee, but subject to a provision that
will retransfer to the mortgagor upon payment of the mortgage-
money as agreed, the transaction is called an English mortgage
5.Mortgage by deposit of title-deeds/equitable mortgage: when a
person in any of the following town, namely Kolkata, Chennai and
Mumbai and in any other town which the State Government
concerned may, by notification in the official gazette, specify in this
behalf, delivers to a creditor or his/her agent documents of title to
immovable property with intent to create a security thereon, the
transaction is called a mortgage by deposit or equitable mortgage
6.Anomalous mortgage: a mortgage which is not any of the above is
called anomalous mortgage

38. TS TO BE TAKEN BEFORE
CREATION OF
MORTGAGES
1.Validity certificate: obtain this given by a lawyer that
certifies the original title deeds tendered by the mortgagor
are correct and are marketable
2.Approved plan: approved plan in case of built-up property
and completion certificate be obtained
3.Municipal tax receipts: receipts of house tax be obtained by
the bank in property is situated in municipal limits
4.Copies of revenue records: obtain latest revenue records
incase of mortgage of land
5.Government dues: obtain the latest receipts of land
revenue or any other government due paid by him

39. 6. Valuation certificate: obtain an estimate of the value of
property from an architect, engineer, and special surveyor(in
case of machinery embedded in earth). Value can be
crosschecked by way of personal inspection and market
inquiries through brokers etc
7. Income-tax officer’s permission: obtain undertaking that
no arrears of tax including interest leviable under various
provisions is outstanding against him/her

40. 8.Notified place: state governments notify place where
equitable mortgage can be created. It must be verified that
place where equitable mortgage is proposed to be created
has been notified by the state government. The bank offices
located at places which are not notified, must create
equitable mortgage at nearest branch located in the notified
area
9.Land acquired under Land Acquisition Act: it is essential to
enquire land being mortgaged whether it is acquired by the
government under land acquisition act or not

41. 2.ASSIGNMENT
Assignment means transfer of a right, property or debt
existing or future other than a debt secured by mortgage by
immovable property or hypothecation/pledge of movable
property
The person transferring the right is known as assignor and
the person to whom the right is transferred is known as
assignee. The assignment may be legal in which the assignor
must a give a written notice stating the name and address of
assignee to the debtor
This form of charge is generally adopted for charging book
debts, money due from government(supply bills), life
insurance policies etc
Banks insist on obtaining an acknowledge of assignment
from the debtor