Non-Fund Based Advances And Various Chagres

                              NON-FUND BASED FACILITY

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The non-fund based facilities should be granted in line with the borrower’s business requirements in form of both building & supporting current assets (working capital) and non-current assets(business infrastructure)

• The borrowers in course of their business participate in tenders, give guarantees in support of their capacity & commitment to perform contracts, avail concessions in duty on imports when linked to some export obligations apart from procuring raw materials and plant & machinery
• Most common types of guarantees are financial, performance, deferred payment/performance, mobilization, bid bond, retention money, repayment guarantees
• Financial guarantees are those guarantees which involve repayment of debt. This involves actual parting of money by the creditor to the debtor with the condition that the same will be paid with or without interest

  Performance guarantees are mostly commitments to perform in line with business agreement and as such, non-performance may be a contingent happening which probability is less than financial guarantee. The rate of margin & commission therefore are quite less than the financial guarantees. Here, the beneficiary is the Buyer of goods/services

 A deferred payment guarantee mostly referred as DPGL is in fact a non-funded term loan. In such cases, banks undertake to pay installments due as per deferred payment schedule of the buyer of capital goods

 Bid bond guarantees are issued when the applicant participates in local/global tender/bid

Expired bank guarantees outstanding in bank’s books attract capital adequacy norms and hence needs to be reversed promptly on expiry date by putting the beneficiary on notice to discharge & surrender the original document

 Letter of credit is a commercial instrument of assured payment for acquiring fixed & current assets and widely used by the global business community for its merits

  The sanction of a L/C facility should be definite & precise with regard to quantum, type of credit like DA or DP, revolving or specific, purpose of credit(purchase of fixed assets/current assets/merchandise), type of documents to accompany the bills for negotiation i.e. RR/MLR/Bill of lading/Shipping bill/Airways bill/receipted challans /insurance/other documents etc.

 The letter of credit (LC) is a confirmed, efficient & clear channel for stock-in-trade & capital goods to pass through in a business deal in form of document of title to goods

 The LC must be established through IBA approved standard format subject to UCPDC guidelines and DGFT instructions from time to time

Ø  Uniform customs & practices for documentary credit(UCPDC) is the Bible for all LC transactions along with FEDAI rules and RBI policies

  ASSET SECURITISATION

1.            It is a process through which the future income or receivables (the money that is to become due in future) of an organisation, are transformed and sold as debt instruments (such as bonds with a fixed rate of return).

1.            In respect of banks, a part of their loan portfolio can be packed together and off-loaded in the form the debt instruments (called pass-through certificate) to the prospective investors with the provision that the inflow of cash in the form of recoveries shall be distributed amongt the investors.

2.            Intermediaries in the securitisation transaction-There are various entities involved in the securitisation transaction which include : Originator (the party/bank which has a pool of assets which it can offer for securitisation and is in need of immediate cash).

3.            Special Purpose Vehicle (SPV) - the entity that will own the assets once they are securitised), usually, in the form of a trust. It is necessary that the assets should be held by the SPV as this would ensure that the investors’ interest is secure even if the originator goes bankrupt.

4.             The servicer is an entity that manages the asset portfolio and ensures that payments are made in time.

5.            The credit enhancer can be any party which provides a reassurance to the investors that it will pay in the event of a default. This could take the form of a bank guarantee also.

6.            The other parties include are credit rating agencies, the credit enhancement providers and the investors.

7.            Process:
 Original lender (bank or FI) selects and then sells various types of loans to another institution (which may promote a subsidiary for this purpose called Special Purpose Vehicle, which is a sort of Trust);
• The special purpose vehicle- SPV (called issuer also) makes the payment to the original lender or the loans purchased under the arrangement;
• These loans are converted into a pool of securities like debentures (called Pass Through Certificates) by SPV.
• These PTCs are then sold to individual or institutional investors, who are willing to make investments;
• The original lender may keep on getting recoveries from the original borrowers;
• He passes on these recoveries to the SPV.
• The issuer in turn passes on these recoveries to the individual/institutional investors as per the arrangement made.

Ø  TAKE-OUT FINANCING

1.            Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by banks by sanctioning medium term loans (say 5-7 years).

1.            Under this process, the institutions engaged in long term financing such as IDFC, agree to take out the loan from books of the banks financing such projects after the fixed time period, say of 5 years, when the project reaches certain previously defined milestones.

2.            On the basis of such understanding, the bank concerned agrees to provide a medium term loan with phased redemption beginning after, say 5 years. At the end of five years, the bank could sell the loans to the institution and get it off its books.

Process:  The original lender participates in a long term project (say 15-20      years) by granting a medium term loan (of say 5-7).
On completion of the pre-decided period, this loan is taken over by another institution subject to fulfillment of the conditions stipulated in the original arrangement
Original lender receives the payment from the 2nd lender who has taken over the loan

MORTGAGE

What is Mortgage?

1.            As per section 58 of transfer of property act 1882 mortgage is defined as

2.            “The transfer of an interest in specific immovable property

3.            for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt,

4.            Or the performance of an engagement which may give rise to a pecuniary liability."

Mortgage

5.            The mortgager only parts with the interest in the property

6.            BUT NOT the ownership

7.            Possession of the property remains with the borrower, except in the case of Usufructuary mortgage

Types of mortgages

8.            Simple mortgage

9.            Equitable mortgage

10.         Mortgage by conditional sales

11.         Usufructuary mortgages

12.         English mortgage

13.         Anomalous mortgage

14.         Normally SM / EM is used by Banks

Simple mortgage-As per section 58(b) of TP act Where, without delivering the possession of mortgaged property, the mortgagor by creating a deed Binds himself personally to pay the mortgagee money and agrees, Expressly or impliedly.

Features of Simple mortgage

15.         Bank can sell the property only through court intervention

16.         However under SARFAESI, Bank can sell the property by giving due notice to borrower

17.         Bank has no right to get any rent payments from the mortgaged property

18.         Possession will be with the borrower

19.         Registration of mortgage is compulsory

20.        Borrower is personally liable ALSO

21.         Simple mortgage is always in writing and it attracts stamp duty as per the state law.

22.         Investigate the title, search report / legal opinion.

23.         The stamped mortgage deed duly executed by the mortgager in favour of the bank & attested by 02 witnesses is to be registered with the registrar of assurance.

24.         SM to be registered in the jurisdiction of the SRO where property is located

25.         The mortgage deed executed by the owner of the property should be lodged with the sub registrar within 4 months (120 days) of execution and followed up to ensure that the same is registered. (u/s 23 of Indian registration act)

26.         In case of companies , mortgage has to be registered with ROC within 30 days (u/s 125 of companies act)

27.         It is advantageous to the bank for the reason that bank's charge on property gets registered in the books of registrar of assurance, which itself is a public notice.

28.         SM created once cannot be extended to new loans

29.         However if limits are enhanced in the same account, supplementary deed to be executed,

30.         In such case payment of stamp duty for the difference amount and registration is necessary

Equitable Mortgage

31.        Equitable mortgage (IC 3072 dated  13.06.1985, and IC 3570 dated 02.11.1987)

32.         Definition of Equitable Mortgage [as per section 58(f) of TP act]

33.         “Where a person in any one of following towns, namely the towns of Kolkata, Chennai and Mumbai and in any other town in which the state government concerned, may by notification in the official gazette, specify in this behalf

Features of Equitable mortgage

34.         Delivers to a creditors or his agent,

35.         document (s) of title to immovable property with

36.         intent to create a security there on,

37.         In a notified place, the transaction is called a mortgage by deposit of title deeds".

What are title deeds?

38.         Sale deed

39.         Lease deed

40.         Partition deed

41.         Gift deed

42.         Deed of assignment

43.         Deed of relinquishment

44.         Probated will

45.         Or such documents

Limitation for Equitable Mortgage

46.         12 years from the date of execution

47.         extension of limitation  period can be done by

48.         by obtaining a security confirmation letter/ DBC from mortgager/ guarantor as per IC 3005 dated 19.02.1985 and IC3733 dated 13.07.1988  (SD-23)

49.         SD 23A  to be taken with usual DBC (IC 8688 dt.29.06.2010)

50.         Fresh EM can be created for a time barred debt

Mode of creating charges

1.            Lien

2.            Right of set off

3.            Right of appropriation

4.            Pledge

5.            Hypothecation

6.            Mortgage

7.            Assignment

 LIEN

8.            Right of creditor to retain the possession of goods and securities of borrower / guarantor till loan is adjusted (Ex. Bills, cheques, share certificates)

9.            Banker’s lien is a General lien (u/s 171 of ICA)

10.         Tailor withholding clothes till payment is made – Particular lien u/s 170 of ICA)

11.         Negative lien – when borrower does not create any charge on assets, but gives an undertaking to bank stating that-

12.         He is the owner of the assets and is free from encumbrances

13.         He will not dispose of the asset OR create any other charge without permission from the Bank

14.         It has no legal enforceability in the court of law

Right of setoff

15.         Adjustment  of credit balance to debit balance

16.         Prior notice to be issued to the depositor

17.         Loan should be due, cannot be exercised for future debts

18.         Can be exercised for time barred debts

19.         Loan and deposits should be in same name

20.         Guarantors funds can be attached after giving due notice

21.         Though right can be made on term deposit, it can be made only after the term deposit matures

Right of appropriation

22.         When the borrower has more than one loan in the bank

23.         Express instructions by debtor - As per instructions of the borrower (u/s 59 of Indian contract Act)

24.         To be appropriated to the particular loan as instructed by borrower

25.         Omission by debtor to intimate - In the absence of instructions (u/s 60 of ICA)

26.         Can be appropriated by Bank to any loan which is due at its discretion (may be even time barred debt)

27.         Non appropriation – (u/s 61 of ICA)

28.         When the borrower does not indicates or the Bank appropriates, the payment shall be applied in order of time (Whether loan is in time or time barred)

29.         If debts are of equal standing, the payment shall be applied proportionately

Pledge

30.         Section 172 of the Indian contract act,1872,defines the term pledge as under :

31.         The bailment of goods as security for payment of a debt or performance of a promise is called pledge.

32.         Ex. Pledge of Gold

33.         Ownership is with borrower, while the possession is with the bank

34.         Only goods {u/s 2(7) of sales of goods act} can be pledged

35.         Bank to take care of goods pledged to it including insurance

36.         Can be sold/ auctioned only after giving notice to borrower

Hypothecation

37.          In hypothecation, the possession of the property offered as security remains with the borrower and an equitable charge is created in favour of the lender.

38.          “It is a charge against property to secure a debt -where neither ownership nor possession is passed to the creditor”.

39.         Ex. Hypothecation of stocks, vehicles

40.         Defined in SAFAESI act (U/S 2-n)

41.         Hypothecated goods can be taken to possession only after giving due notice to the borrower

Assignment

42.         Assignment is the process by which one can transfer his right/ interest/ title over his actionable claims (existing or future) to another. (section 130 of transfer of property act) Eg. life policies

43.          Loan amount to be decided on the basis of surrender value of the policy