Unit 4

Bank Deposits and lending

 Bank Deposits
• Bank deposits consist of money placed into
banking institutions for safekeeping.
• The account holder has the right to withdraw
deposited funds, as set forth in the terms and
conditions governing the account agreement.
• It is a major source of funds for Banks.
• There is a substantial growth in the deposits level
in India in all sectors banks except to Small
Finance Banks & Private sector banks where the
values are in decreasing trend. (Source: RBI)
 Types of Deposits
• Demand Deposits
• Time Deposits
 Demand Deposits
• It is a basic checking account. Consumers
deposit money which they can withdraw as
desired on demand.
• These accounts often allow the account holder
to withdraw funds using bank cards, checks or
over-the-counter withdrawal slips.
• Types:
– Current Account
– Savings Account
 Current Account
• Current Account: is a type of bank account
which allows the user to carry out a
significantly high number of transactions.
• This is usually operated by business
individuals, proprietary concerns, public and
private companies, associations, trusts, etc.
who have reasons to make frequent and high-
volume transactions with their banks.
 Savings Account
• A savings account is a like a bank vault in which you
store your hard-earned money. Unlike a current
account, a savings account does not allow
unlimited transactions and has no overdraft facility.
• There are different types of savings account that
can be opened depending on the customer’s need:
– Regular Savings Account
– Salary Based Savings Account
– Savings Accounts for Senior Citizens
– Savings Accounts for Children and Minors
– Zero Balance Savings Account
 2. Time Deposits
• A time deposit is an interest-bearing bank deposit
account that has a specified date of maturity.
• Also known as Term deposits or certificate of
deposits.
• The deposited funds must remain in the account
for the fixed term to receive the stated interest
rate.
• Time deposits are an alternative to the standard
savings account, and will usually pay a higher rate
of interest.
• Early withdrawals are allowed, however penalties
will be charged.
 Deposit Insurance
• Deposit Insurance and Credit Guarantee
Corporation (DICGC) is a subsidiary of RBI
established on 15 July 1978 under Deposit
Insurance and Credit Guarantee Corporation
Act, 1961
• The purpose is to provide insurance of deposits
and guarantee of credit facilities.
• DICGC insures all bank deposits, such as saving,
fixed, current, Recurring deposit for up to the
limit of Rs. 100,000 of each deposits in a bank.
 Loans
• A loan is money or material given to another party for
future repayment of the loan value or principal
amount, along with interest or finance charges.
• A loan may be for a specific, one-time amount or can
be available as an open-ended line of credit up to a
specified limit or ceiling amount.
• Loans allow for growth in the overall money supply in
an economy and open up competition by lending to
new businesses.
• The interest and fees from loans are a primary source
of revenue for many banks
 Types of Loans
• Secured vs. Unsecured Loan
– Loans can be secured or unsecured. Mortgages and car loans
are secured loans, as they are both backed or secured by
collateral. Personal loans and credit cards are unsecured
loans.
• Revolving vs. Term
– Revolving refers to a loan that can be spent, repaid and
spent again, while term loans refer to a loan paid off in equal
monthly installments over a set period.
– A credit card is an unsecured, revolving loan, while a home-
equity line of credit (HELOC) is a secured, revolving loan.
– In contrast, a car loan is a secured, term loan, and a personal
loan is an unsecured, term loan.
 Types of Loans
• home loans
• personal loans
• business loans
• bank overdraft limit
• Education loan
• gold loan
• vehicle loan
 Consortium advances
• Advancing loans to a borrower by two or more
Banks jointly by forming a Consortium.
• This will help the Banks to consolidate the
appraisal benefit of different Banks and reduce
the risks and also help the Banks to keep the
exposure within the permissible limit.
• Usually, a Bank with a higher share will lead the
consortium.
• Common purpose.
 Loan syndication
• While a loan syndication also involves multiple
lenders and a single borrower, the term is
generally reserved for loans involving international
transactions, different currencies, and a necessary
banking cooperation to guarantee payments and
reduce exposure.
• The managing bank in a loan syndication is not
necessarily the majority lender, or "lead" bank.
Any of the participating banks may act as lead or
assume the responsibilities of the managing bank
depending on how the credit agreement is drawn
up.
 Sound lending policy
• Bank performs different functions. Lending of
money to different kinds of borrowers is one
of the most important functions of
commercial bank. A major portion of its fund
is used for this purpose and this is also the
major sources of bank’s income. However,
lending is not without risk.
• Therefore, a banker must take proper
precaution in this process.
 Sound lending policy principles
• Safety
• Liquidity
• Purpose
• Profitability
• Security
• Diversification
• National Interest
 Credit management
• Credit management is the process of granting
credit, setting the terms it's granted on,
recovering this credit when it's due, and
ensuring compliance with company credit
policy, among other credit related functions.
 Non-performing assets
• A non performing asset (NPA) refers to a
classification for loans or advances that are in
default or are in arrears on scheduled
payments of principal or interest. In most
cases, debt is classified as non
performing when loan payments have not
been made for a period of 90 days.
 Types of Non-Performing Assets (NPA)
1. Term Loans - A term loan i.e. plain vanilla debt
facility will be treated as an NPA when the
principal or the interest installment of the loan
has been due for more than 90 days.
2. Cash Credit and Overdraft - A cash credit or an
overdraft when remaining past due for more than
90 days it can be treated as an NPA.
3. Agricultural Advances - Agricultural advances that
have been past due for more than two crop
seasons for short crop duration or one crop
duration for long duration crops.
 Classification of NPA for Banks
1. Standard Assets - Standard assets are those remained
non-performing assets for a period of less than 12
months and the risk is normal
2. Sub- Standard Assets - For a period of more than 12
months, such advances possess more than normal risk
and the creditworthiness of the borrower is quite weak.
3. Doubtful Debts - For a period which is exceeding 18
months. The collection of such kind of advances is highly
questionable and there is the least probability that the
loan amount can be recovered from the party.
4. Loss Assets - The loan has been identified either by the
bank itself or an external auditor or internal auditor that
the loan amount collection is not possible. The Bank, in
this case, has to write off the entire loan amount
outstanding or need to make a provision for full amount
which needs to write off in future
 Credit Rating
• A credit rating is a quantified assessment of
the creditworthiness of a borrower in general
terms or with respect to a particular debt or
financial obligation.
• A credit rating can be assigned to any entity
that seeks to borrow money—an individual,
corporation, state or provincial authority, or
sovereign government.
 Credit Rating in India
• CRISIL - Credit Rating Information Services of India Limited. It was the
first credit rating agency set up in India in 1987. Today, CRISIL has
become a global analytical company that rates companies, researches
the markets and provides risk and policy advisory services to its clients.
• CARE - Credit Analysis and Research limited. CARE has the primary
function to perform rating of debt instruments, credit analysis rating,
loan rating, corporate governance rating, claims-paying ability of
insurance companies, etc.
• ICRA - Investment Information and Credit Rating Agency. It was a joint
venture of Moody’s and Indian financial and banking service
organisations. assigns corporate governance rating, performance ratings,
grading and provides ranking to mutual funds, hospitals and
construction and real estate companies.
• SMERA - Small and Medium Enterprises Rating Agency of India. SMERA
rates bank loans under Base II guidelines. Grading of various instruments
like IPO, bonds, commercial papers, NCDs, fixed deposits, security
receipts, etc. is done by SMERA which can be used by all banks for
capital adequacy requirements calculation as authorised by the RBI.
 Credit Rating Scale - CRISIL
Rating Description
CRISIL AAA Instruments with this rating are considered to have the highest
(Highest Safety) degree of safety regarding timely servicing of financial obligations.
Such instruments carry lowest credit risk.
CRISIL AA High degree of safety regarding timely servicing of financial
(High Safety) obligations. Such instruments carry very low credit risk.
CRISIL A Adequate degree of safety regarding timely servicing of financial
(Adequate Safety) obligations. Such instruments carry low credit risk.
CRISIL BBB Moderate degree of safety regarding timely servicing of financial
(Moderate Safety) obligations. Such instruments carry moderate credit risk.
CRISIL BB Moderate risk of default regarding timely servicing of financial
(Moderate Risk) obligations.
CRISIL B High risk of default regarding timely servicing of financial
(High Risk) obligations.
CRISIL C Default regarding timely servicing of financial obligations.
(Very High Risk)
CRISIL D
Instruments with this rating are in default or are expected to be in
(Default)
default soon.
Insolvency and Bankruptcy code 2016
• The Insolvency and Bankruptcy Code, 2016 (IBC)
is the bankruptcy law of India which seeks to
consolidate the existing framework by creating a
single law for insolvency and bankruptcy.
• The bankruptcy code is a one stop solution for
resolving insolvencies which previously was a
long process that did not offer an economically
viable arrangement.
• The code aims to protect the interests of small
investors and make the process of doing business
less cumbersome.
 Features of Insolvency and
Bankruptcy code 2016
• Insolvency Resolution - A maximum time limit, for completion of
the insolvency resolution process, Companies 180 days, for start ups
within 90 days of initiation of request.
• Insolvency regulator - oversee the insolvency proceedings in
the country and regulate the entities registered under it
• Insolvency professionals - insolvency process will be
managed by licensed professionals. These professionals will
also control the assets of the debtor during the insolvency
process.
• Bankruptcy and Insolvency Adjudicator - The Code proposes
two separate tribunals to oversee the process of insolvency
resolution, for individuals and companies:
– (i) the National Company Law Tribunal for Companies and Limited
Liability Partnership firms
– (ii) the Debt Recovery Tribunal for individuals and partnerships.
 RBI referred following Large NPAs for resolution to NCLT
Company Debt Date of referral to NCLT
Essar Steel ₹490 billion (US$7.1 billion) June 2017

Bhushan Steel ₹440 billion (US$6.4 billion) 26 July 2017

Electrosteel Steels ₹130 billion (US$1.9 billion) July 2017

₹127.22
Amtek Auto July 2017
billion (US$1.8 billion)
Bhushan Power & Steel ₹492 billion (US$7.1 billion) June 2017

Alok Industries ₹290 billion (US$4.2 billion) June 2017

₹102.37
Monnet Ispat June 2017
billion (US$1.5 billion)
Lanco Infra ₹450 billion (US$6.5 billion) August 2017
Jet Airways ₹1 billion (US$14 million) June 2019
 MCLR - Marginal Cost of funds-based
Lending Rate
• MCLR is a tenor-linked internal benchmark, which means the
rate is determined internally by the bank depending on the
period left for the repayment of a loan. It is the minimum
interest rate that a bank can lend at.
• The RBI introduced the MCLR methodology for fixing interest
rates from 1 April 2016. It replaced the base rate structure,
which had been in place since July 2010.
• Under the MCLR regime, banks are free to offer all categories of
loans on fixed or floating interest rates.
• The actual lending rates for loans of different categories and
tenors are determined by adding the components of spread to
MCLR.
• Therefore, the bank cannot lend at a rate lower than MCLR of a
particular maturity, for all loans linked to that benchmark.
• Banks review and publish MCLR of different maturities, every
month.
 SBI - Tenor-wise MCLR Pubished:
10th September, 2019
Tenor Existing MCLR (In %) Revised MCLR (In %)

Over night 7.90 7.80

One Month 7.90 7.80

Three Month 7.95 7.85

Six Month 8.10 8.00

One Year 8.25 8.15

Two Years 8.35 8.25

Three Years 8.45 8.35

 Securitisation
• It is a financing technique that consists of transferring assets,
including commercial outstandings (unsettled invoices, etc.) or
loans receivable to investors.
• It is the financial practice of pooling various types of contractual
debt such as residential mortgages, commercial mortgages, auto
loans or credit card debt obligations (or other non-debt assets
which generate receivables) and selling their related cash flows
to third party investors as securities, which may be described as
bonds, pass-through securities, or collateralized debt obligations
(CDOs).
• Investors are repaid from the principal and interest cash flows
collected from the underlying debt and redistributed through
the capital structure of the new financing.
• Securities backed by mortgage receivables are called mortgage-
backed securities (MBS), while those backed by other types of
receivables are asset-backed securities (ABS).
 References
• https://www.rbi.org.in/scripts/BS_ViewMasCir
culardetails.aspx%3FId%3D449
• https://www.jb.com.bd/includes/pdf/study_m
aterial/Principles_of_sound_lending.pdf
Thank You