Bank Lending: Bank credit is provided to households, retail traders, smalland medium enterprises (SMEs), corporate, the Government undertakingsetc. in the economy.Principles of lending•SafetyThe security must be adequate, readily marketable and free ofencumbrances.•Liquidity•Profitability•Risk diversification•Level of credit-deposit ratio• Targeted portfolio mix• Hurdle ratings• Loan pricing• Collateral security
RBI guidelines on loan creditDirected credit stipulations: minimum advances to be madefor priority sector advances, export credit finance•Capital adequacy•Credit Exposure LimitsIndividual BorrowersGroup BorrowersAggregate exposure to capital market•Lending Rates•
Individual Borrowers: A banks credit exposure to individual borrowers mustnot exceed 15 % of the Banks capital funds. Credit exposure to individualborrowers may exceed the exposure norm of 15 % of capital funds by anadditional 5 % (i.e. up to 20 %) provided the additional credit exposure is onaccount of infrastructure financing.• Group Borrowers: A banks exposure to a group of companies under the samemanagement control must not exceed 40% of the Banks capital funds unless theexposure is in respect of an infrastructure project. In that case, the exposure to agroup of companies under the same management control may be up to 50% ofthen Banks capital funds.• Aggregate exposure to capital market: A banks aggregate exposure to thecapital market, including both fund based and non-fund based exposure to capitalmarket, in all forms should not exceed 40 percent of its net worth as on March 31of the previous year.
Regulations relating to providing loansThe provisions of the Banking Regulation Act, 1949 (BR Act) govern themaking of loans by banks in India. RBI issues directions covering the loanactivities of banks.Major guidelines of RBI, which are now in effect, are as follows:• Advances against banks own shares: a bank cannot grant any loansand advances against the security of its own shares.• Advances to banks Directors: The BR Act lays down the restrictionson loans and advances to the directors and the firms in which they holdsubstantial interest.Restrictions on Holding Shares in Companies:Banks should not hold shares in any company except as provided in sub-section(1) whether as pledgee, mortgagee or absolute owner, of an amountexceeding 30% of the paid-up share capital of that company(2) or 30% of its own paid-up share capital and reserves, whichever isless.
Basics of Loan Appraisal, Credit decision-making and ReviewCredit approval authoritiesThe usual structure for approving credit proposals is as follows:• Credit approving authority: multi-tier credit approving system with aproper scheme of delegation of powers.• In some banks, high valued credit proposals are cleared through aCredit Committee approach consisting of, say 3/ 4 officers. The CreditCommittee should invariably have a representative from the CRMD, whohas no volume or profit targets.Credit appraisal and credit decision-makingMonitoring and Review of Loan Portfolio
Types of Advances•Fund based lending•Non-fund based lending•Working Capital Finance•Project Finance•Loans to Small and Medium Enterprises•Rural and Agricultural Loans•Directed LendingPriority sector lending: 40 % of ANBC or CEOBSE, whichever ishigherTotal agricultural advances: 18 % of ANBC orCEOBSE, whichever is higherExport CreditANBC: Adjusted Net Bank CreditCEOBSE: Credit Equivalent of Off-Balance Sheet Exposure
•Retail LoanHome FinancePersonal Loans•International Loans Extended by Banks