SUMMER PROJECT REPORT STUDY OF LENDING FUCTION OF BANK AND COMPARATIVE ANALYSIS OF LOANS OFFERED BY VARIOUS NATIONALIZED BANKS

Prepared for the Mumbai University in the partial fulfillment of the requirement for the award of the degree in...

MASTERS OF MANAGEMENT STUDIES Submitted By: MS.STEVINA S. CORREIA ROLL NO. 116

Under the guidance of DR. THOMAS MATHEW DIRECTOR SFIMAR

St Francis Institute Of Management And Research, Mt. Poinsur, S.V.P Road, Borivali (W) Mumbai. Batch- 2008-2010:
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Company Certificate

Borivli (West) Branch Mangal Kunj, S. V. Road, Borivli (W), Mumbai 400 092. Phone 2898 73 46/2898 16 34

Advances Department Office No.101 to 108,1st floor, Sai Leela Commercial Complex, S.V.Road, Near Indraprasth Shopping Centre, Borivli (West), Mumbai 400 092.

Date: 30/6/2009

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Stevina S. Correia has successfully completed his/her summer project on Study the Functioning of Advance (credit) Department in Bank for a period of two months. I.e. from 4th May to 30th June, 2009. During this period, we found her sincere, honest & hardworking. We wish her all the best for further assignments.

For Bank of India Name: S. S. Iyer Designation: Chief Manager Department: Advance Department, Borivali (west)

Acknowledgment
On behalf of St. Francis Institute of Management and Research Borivali (W.), I would like to express our deep Gratitude to Assistant General Manager Mr. Anil Bhalla and Chief Manager Mr. Shankar Iyer of Borivali (west) Branch for giving me unique opportunity, and for their guidance and encouragement. They have spared their valuable time for holding discussions on issues involved and thereby provided necessary guidance. Also I would like to thank Officer Mr. Puranik and Officer Mr. Akshikar for their valuable inputs and insight in the project. I will also like to keep on record the excellent support received from Mrs. Hansa, Mrs. Usha Nair and Mr. Shamkant Gaikwad. Finally, I would like to thank all the members of the Borivali (W) Branch of Bank of India for their valuable assistance.

Executive summary
Credit Department banking business primarily involves accepting deposits from the public and investing or lending the same and thereby making profit out of it. However, lending money is not without risk and therefore banks make loans and advances to farmers, traders, businessmen and industrialist against either tangible (land, building, stock etc.) or intangible security. Even then, the banks run the risk of default in repayment. Therefore, the banks follow cautious measures while lending money to others. This core function of a Bank is performed by the Credit Department of the bank. In this case, the relationship of bank and customer is that of the creditor and debtor. This study has conducted to understand the role played by banks in the business world by way of loans and advances and understand the bank credit policy in its lending activity. Comparative analysis was also done to fine out the growth of lending activity in Bank of India. A sample of 3 competitive nationalized banks was. These 3 banks are Bank of Baroda, Dena Bank and Corporative Bank.

TABLE OF CONTENTS Sr. No.

1 1.0 1.1 1.2 1.3 2 3 3.0 3.1 4 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7

Topic
Introduction to company Banks mission and vision & introduction Structure of Bank of India Borivali Br. Product of Bank of India Current highlights of Banks Objectives and need for the study Research Methodology Data collection Sampling design Collection and Analysis of Data Lending Function of Bank Introduction Utility of Loan and Advances Borrowing Rate and Lending Rate Ways of Lending Money Loan Term and Short Term Loan Nature and Security of Loan Procedure of Granting Loan

Page No.
7 8 11 12 14 16 17 17 17 18 18 18 19 19 20 25 26 27
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and Advances 4,8 4.2.0 5 6 7 8 9 Types of Borrowers Comparative analysis various nationalized bank Finding Recommendation Limitation Conclusion Bibliography of 28 30 40 42 42 43 44

INTRODUCTION TO COMPANY

BRANCH: BANK OF INDIA BORIVALI (WEST)

DEPARTMENT: LOAN AND ADVANCES

Banks Mission:
To provide superior, proactive banking services to niche markets globally, while providing cost effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders.

Banks Vision:
To become the bank of choice for corporate, medium businesses and up market retail customers and to provide cost effective developmental banking for small business, mass market and rural markets.

INTRODUCTION
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs. 50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks. The Bank has 3021 branches in India spread over all states/ union territories including 93 specialized branches. These branches are controlled through 48 Zonal Offices. There are 24 branches / offices (including three representatives offices) abroad. The Bank came out with its maiden public issue in 1997. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member for SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. The Banks association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. To extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 23 branches (including three representatives offices) at key banking and financial centers viz. London, New York, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 20.10% of Banks total business. The Banks corporate personality and philosophy are fully reflected in the emblem, which is a five-pronged Star a harmonious blend of traditional and the functional. The elongated prong pointing upwards conveys the Banks drive to achieve ascending goals. The Star is a beacon and guide to those in need of direction. The Bank has a strong position in financing foreign trade. Over 270 branches provide export credit. The Expertise in this area has enabled the Bank to achieve a leading position in providing export credit in certain areas like diamond export. The Bank has identified target groups to develop core advantage for future growth. The Bank has specialized branches comprising of Corporate Banking Branches to undertake very large credit business, Overseas Branches specializing in Foreign Exchange Business, NRI Branches which specially cater to the requirements of Non- Resident Indians, Capital Market Branches which undertake all activities relating to capital market such as collection of applications, processing of refund orders, Merchant Banking etc. Commercial and Personal Banking Branches cater to the
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requirements of high worth customers. Apart from this, the Bank also has specialized Branches for Asset Recovery, Small Scale Industries, Hi-tech Agriculture Finance, Lease Finance and Treasury. To effectively meet the ever-growing challenges and competition, the Bank has made a good headway in bringing about technological up gradation. MIS and critical functions of controlling offices have been computerized. At present, the operations at about 2618 branches are totally computerized. 26 branches operate in partially-computerized mode besides these 1019 and 31 extension counters are migrated to Core Banking Solution. New facilities such as, Telebanking, ATM and Signature Retrieval Systems have been introduced in a progressing manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote Access Terminals for Corporate Customers are now available at many branches. The Bank has installed ATMs in Mumbai and other centres in the country. The Bank is a member of the RBIs VSAT Network and had installed 39 VSATs linking strategic branches / offices. The Bank is making a paradigm shift from branch automation to bank automation and is in the process of implementing a Multi Branch Banking Project that facilitates City-wise Connectivity of Computerised Branches. The Bank is in the process of installing BOINET, a Wide Area Network for providing a inter and intra city connectivity, as a part of enhancing its decision support system.

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Structure of Bank of India Borivali (west) Branch

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PRODUCTS OF BANK OF INDIA

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Insurance Tie up with Star Union Dai-chi for life insurance and with National insurance for general insurance. Star Flier Scheme for Individual Diamond SB Customer s. Star Domestic Travel Insurance . Family Floater Mediclai m Policy. Star Education Loan Insurance Scheme Home Loan Insurance .

Credit Schemes Bullion Banking Kisan card credit

Deposit Scheme Star Flexi Recurring Deposit Star Sunidhi Tax Saving Deposit Scheme NRI Scheme deposit

Services ATM BOI STAR ePAY PAYMENT of Utility bills. Internet Banking. E Payment of Direct & Indirect Taxes. Online Funds Transfer. Star Cash Management Service Depository service Safe Vault Deposit

Agricultural Loan Bill Finance Bank Guarantee Export Finance Interest rates Channel credit Corporate Loan Retail Banking

Star power salary account BOI saving plus scheme Star Savings Plus (Privileged Customers) Star Current Deposit Plus Star Diamond Customers Deposit Scheme for global Investors/NRIs/P IOs Star Supreme Floating Rate Deposit scheme.

Safe Custody Service. Telebanking & SMS Banking.

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HIGHLIGHTS FOR THE YEAR ENDED 31st MARCH 2009

Business Mix reaches Rs.334440 crores - robust rise of 26.30%. Net Profit shoots up by 49.68% from Rs.2009 crores to Rs.3007crores. Operating Profit up by 47.45% (Rs. 5457Crore) supported by growth in net interest income as well as other income. Core Operating Profit (net of Treasury) up by 41.26% (Rs. 4711Crore) from Rs. 3335 Crore in Mar08. Net Interest Income rises by 30.03% to Rs. 5499Cr from Rs. 4229Cr, despite challenging conditions. Net Interest Margin improves from 2.95% to 2.97%. Non Interest Income smartly rises by 44.17% from Rs 2117 crores to Rs 3052 crores. Gross NPA ratio at 1.71%. Net NPA ratio drops to 0.44% from 0.52% as on March 2008. Provision coverage maintained at 74.58%. Cost to Income Ratio has improved substantially from 41.68% to 36.18%. Return on Assets jumped from 1.25% to 1.49 %. Total Income for the Quarter rose to Rs.5278 Crore from Rs.4155 Crore, showing a growth of 27.03%. Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs. 384.60 Cr estimated and provided. CASA amounted to Rs. 48637 crores constituting 31% of Total Deposits. Earnings per share for 12 months goes up sharply from Rs. 40.83 to Rs.57.26. Book value per share rises from Rs. 164.05 to Rs.211.89. Capital Adequacy Ratio rises to 13.01%from 12.04%as per Basel II.
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Deposits grew by 26.46% on YoY basis to Rs.1,89,708 crores. Advances rose by 26.08% to reach Rs.1,44,732 crores. Total no of branches are 3021. 2593 branches are functioning on CBS platform covering above 97% of the business, spanning over 700 cities & towns. Agricultural Debt Waiver & Debt Relief Scheme, 2008 fully implemented. Net worth of the Bank surpasses Rs.11100 crores.

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OBJECTIVES OF THE STUDY

Study the functioning of the credit department of bank To understand the role played by banks in the business world by way of loans and advances To make comparative analysis of loan procedures between bank of India and other banks

NEED FOR THE STUDY

The face of Indian consumer is changing, this is reflected in a change in the urban household income & standard of living is also changing at the rapid pace. The demand for consumer durables (white goods like washing mashing, machinery etc.) and luxury are increases which are satisfied by the banks through their various financial products. Therefore granting loan and advances is an important activity for a bank.

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RESEARCH METHODOLOGY
Data Collection
Type of research: Exploratory Research
Research methodology to be used is based on both primary & secondary data 1. Primary data will be collected from the interaction with the bank manager, staff and employees. 2. Secondary data would be collected through means such as Banking books, BOI magazines, websites etc.

Sampling Design
A Sample Size of three banks has been selected for the study. The selected banks are one of the major players in retail lending business in India. The following banks have been selected for the study: 1) Dena Bank 2) Bank of Baroda 3) Corporation Bank

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COLLECTION AND ANALYSIS OF DATA

LENDING FUNCTION OF BANK
Introduction Lending money is one of the two major activities of any Bank. In a way, the Bank acts as an intermediary between the people who have the money to lend and those who have the need for money to carry out business transactions. This activity places its own requirements on the resources of the Bank. For effective functioning of this, a bank must possess: Sufficient deposits. Skills to appraise the potential borrowers and the activity. Legal skills for documentation. Legal skills for documentation. Legal skills for recovery of its dues through the courts. Skills to follow up and monitor the end-use of money lent by it. An effective credit delivery system. Review of credit portfolio. Lending money to the public Banks accept deposit from public for safe- keeping and pay interest to them. They then lend this money to earn interest on this money. In a way, the Banks act as intermediaries between the people who have the money to carry out business transactions. The difference between the rate at which the interest is paid on deposits and is charged on loans is called the spread. Banks lend money in various forms and they lend for practically every activity. From the point of view of security, Loans are given against or in exchange of the ownership (physical or constructive) of various types of tangible items. Some of the securities against which the Banks lend are:

1. 2. 3. 4. 5. 6.

Commodities Debts Financial Instruments Real Estate Automobiles Consumer Durable goods
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7. Documents of Title Apart from the above category, the Banks also lend to people on the basis of their perceived personal worth. Such loans are called Clean and the Banks are understandably cautious about extending such loans. The credit card arms of the various Banks, however, fill up this void. Utility of Loans and Advances Loans and advances granted by banks are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through bank financing. Loans and advances granted by banks help in meeting short-term and long term financial needs of business enterprises. We can discuss the role played by banks in the business world by way of loans and advances as follows:(a) Loans and advances can be arranged from banks in keeping with the flexibility in business operations. Traders may borrow money for day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements. (b) Loans and advances are utilized for making payment of current liabilities, wage and salaries of employees, and also the tax liability of business. (c) Loans and advances from banks are found to be economical for traders and businessmen, because banks charge a reasonable rate of interest on such loans/advances. For loans from money lenders, the rate of interest charged is very high. The interest charged by commercial banks is regulated by the Reserve Bank of India. (d) Banks generally do not interfere with the use, management and control of the borrowed money. But it takes care to ensure that the money lent is used only for business purposes. (e) Bank loans and advances are found to be convenient as far as its repayment is concerned. This facilitates planning for future and timely repayment of loans. Otherwise business activities would have come to a halt. (f) Loans and advances by banks generally carry element of secrecy with it. Banks are dutybound to maintain secrecy of their transactions with the customers. This enhances peoples faith in the Banking system.

Borrowing Rate and Lending Rate People make their funds available to the banks by depositing their savings in various types of accounts. In other words, bank funds mainly consist of deposits from the public, though banks may also borrow money from other institutions and the Reserve Bank of India. Banks thus

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mobilizes funds through its deposits. On public deposits the banks pay interest at and the rates of interest vary according to the type of deposit. The borrowing rate refers to the rate of interest paid by a bank on its deposits. The rates which the banks allow depend upon the nature of deposit account and the period for which the deposit is made with the bank. No interest is generally paid on current account deposits. The rate is relatively lower on savings account deposits. Higher rates ranging from 6% to 12% per annum are paid on fixed deposit accounts according to the period of deposit. Banks also borrow from other institutions as well as from the Reserve Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as Bank Rate. The rate at which commercial banks make funds available to people is known as Lending-rate. The lending rates also vary depending upon the nature of loans and advances. The rates also vary according to the purpose in view. For example if the loan is sanctioned for the purpose of activities for the development of backward areas, the rate of interest is relatively lower as against loans and advances for commercial/business purposes. Similarly for smaller amounts of loan the rate of interest is higher as compared to larger amounts. Again lending rates for consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators, etc. are relatively higher than for commercial borrowings. However, the Reserve Bank of India from time to time announces changes in the interest-rate structure to regulate the lending of funds by banks. Different rates of interest are prescribed for various categories of advances, such as advances to agriculture, small scale industries, road transport, etc. Graded rates of interest are prescribed for backward areas. Lower rate is normally charged from agencies selling food-grains at fixed price through Govt. approved outlets. Lastly, lower rate of interest is charged for loans granted to persons belonging to weaker sections of the society. Lending Banks lend money in four different ways: (a) Direct loans, (b) cash credit, (c) overdraft, (d) Discounting of bills. (I) Loans Loan is the amount borrowed from bank. The nature of borrowing is that the money is disbursed and recovery is made in installments. While lending money by way of loan, credit is given for a definite purpose and for a pre-determined period. Depending upon the purpose and period of loan, each bank has its own procedure for granting loan. However the bank is at liberty to grant the Loan requested or refuse it depending upon its own cash position and lending policy. There are two types of loan available from banks: (a) Demand loan, and (b) Term loan (a) A Demand Loan is a loan which is repayable on demand by the bank. In other words, it is repayable at short-notice. The entire amount of demand loan is disbursed at one time and the
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of

Money

borrower has to pay interest on it. The borrower can repay the loan either in lump sum (one time) or as agreed with the bank. For example, if it is so agreed the amount of loan may be repaid in suitable installments. Such loans are normally granted by banks against security. The security may include materials or goods in stock, shares of companies or any other asset. Demand loans are raised normally for working capital purposes, like purchase of raw materials, making payment of short-term liabilities. (B) Term Loans: Medium and long term loans are called term loans. Term loans are granted for more than a year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable installments of a fixed amount. Term loan is required for the purpose of starting a new business activity, renovation, modernization, expansion/ extension of existing units, purchase of plant and machinery, purchase of land for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like. (II) Cash credit Cash credit is a flexible system of lending under which the borrower has the option to withdraw the funds as and when required and to the extent of his needs. Under this arrangement the banker specifies a limit of loan for the customer (known as cash credit limit) up to which the customer is allowed to draw. The cash credit limit is based on the borrowers need and as agreed with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as and when he needs money subject to the limit sanctioned. It is normally sanctioned for a period of one year and secured by the security of some tangible assets or personal guarantee. If the account is running satisfactorily, the limit of cash credit may be renewed by the bank at the end of year. The interest is calculated and charged to the customers account. Cash credit, is one of the types of bank lending against security by way of pledge or /hypothecation of goods. Pledge means bailment of goods as security for payment of debt. Its primary purpose is to put the goods pledged in the possession of the lender. It ensures recovery of loan in case of failure of the borrower to repay the borrowed amount. In Hypothecation, goods remain in the possession of the borrower, who binds himself under the agreement to give possession of goods to the banker whenever the banker requires him to do so. So hypothecation is a device to create a charge over the asset under circumstances in which transfer of possession is either inconvenient or impracticable. (III) Overdraft Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to draw over and above the credit balance in his/her account. It is a short-period facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount of overdraft allowed as and when he/she needs it and to repay it through deposits in the account as and when it is convenient to him/her. Overdraft facility is generally granted by a bank on the basis of a written request by the customer. Sometimes the bank also insists on either a promissory note from the borrower or personal security of the borrower to
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ensure safety of amount withdrawn by the customer. The interest rate on overdraft is higher than is charged on loan. The following are some of the benefits of cash credits and overdraft:(i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of the borrower. (ii) There is no necessity of providing security and documentation again and again for borrowing funds. (iii) This mode of borrowing is simple and elastic and meets the short term financial needs of the business.

(IV) Discounting of Bills Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realize his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution. Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period. In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted is retained by the bank till its due date and is presented to the drawee on the date of maturity. In case the bill is dishonored on due date the amount due on bill together with interest and other charges is debited by the bank to the customers account. Classification of loan Another way to classify the loan (A) Priority sector Lending (B) Commercial Lending (A) Priority sector Lending: The Government of India through the instrument of Reserve Bank of India (RBI) mandates certain type of lending on the banks operating in India irrespective of their origin. RBI sets targets in terms of percentage (of total money lent by banks ) to be lent to certain sectors, which in RBIs perception would not have had access to organized lending market or could not afford to pay the interest at the commercial rate. This type of lending is called priority sector lending. Finding Priority Sector in the economy is not strictly on commercial basis and not only the general approach is liberal but also the rate of interest charged on such loans is less. Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian corporate. Part of the cost of these concession is borne by RBI by means of refinancing such loans at concessional rate.
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Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are considered priority sector by RBI. Categories of Priority Sector Lending : i. Direct Finance: financing of Small Scale Industry, Small Business, Agricultural Activities and Export activities fall under this category. Is also called as directed credit in Indian Banking System. ii. Indirect Finance: indirect finance to small industry include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to co-operative product in this sector. Financing priority sector in the economy is not strictly on commercial basis and not only the general approach is liberal but also rate of interest charged on such loan is less. Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian corporate. Part of the cost of this concession is borne by RBI by means of refinancing such loans at concessional rate. Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are considered as priority Sector by RBI

The Priority Sector comprises the following: 1. 2. 3. 4. 5. 6. Agriculture Small Scale Industries (including setting up of industrial estate) Small Road & Water Transport Operators (owning up to 10 vehicles). Small Business (Original cost of equipment used for business not to exceed Rs. 20 lakh). Retail Trade(Advance to private retail traders up to Rs.10 lakh) Professional & Self-employed Persons (Borrowing limiot not exceeding Rs.10 lakh of which not more then Rs.2 lakh for working capital, in the case of qualified medical practitioners setting up practice in rural areas, the limits are Rs 15 lakh and Rs 3 lakh respectively and purchase of one motor vehicle within these limits can be included under priority sector). 7. State sponsored organizations for Scheduled Castes/Schedule Tribes 8. Educations (educational loan granted to individuals by banks) 9. Housing (both direct and indirect- loans up to Rs 5 lakhs [direct loan up to Rs 10 lakh in urban/metropolitan areas], Loans up to Rs 1 lakh & 2 lakh for repairing of houses in rural/semi urban & urban areas respectively) 10. Consumption loans (under the consumption credit scheme for weaker section 11. Micro -Credit provided by banks either directly or through any intermediary; Loans to self help groups (SHGs)/ Non Governmental Organizations (NGOs) for on lending to SHGs 12. Loans to the Software Industry (having credit limit not existing Rs 1 core from the banking system)
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13. Loans to specified industries in the food and agro- processing sector having investment in plant and machinery up to Rs 5 crore. 14. Investment by banks in venture capital ( venture capital funds/ companies registered with SEBI) Rate of interest charged for loan under priority sector As per the current interest rate policy, in the case of loan upto Rs 2 lakh, the interest rate should not exceed the prime lending rate (PLR) of the bank, while in case of loans above Rs 2 lakh, banks are free to determine the interest rate. Action taken in the case of non- achievement of priority sector lending targeted by a bank 1. Domestic schedule commercial banks having shortfall in lending to priority sector / agriculture are allocated amounts for contributing on the Rural Infrastructure Development Fund (RLDF) established in NABARD. Details regarding operationalization of the RIDF such as the amounts to be deposited by banks, interest rates announcement in the Union Budget about setting up of RIDF. 2. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub targets, an amount equivalent to the to the shortfall is require to be deposited with SIDBI for one year at the interest rate of 8% per annum. Monitoring Priority Sector Lending Priority Sector lending by commercial banks is monitored by Reserve Bank of India through periodical Returns received from them. Performance of banks is also reviewed in the various for set up under the Lead Bank Scheme

(B))Commercial Lending: This is the Mainstay of Indian Banking- Its bread & butter activity. Although historically, this activity had been regulated to a secondary position as banks were driven by the desire to excel themselves in what is known as priority sector banking yet it is this part of their loan portfolio which has keep them afloat and meet the costs. This activity survived despite a number of restrictions imposed on it in the past. With financial sec tor reforms, the focus has shifted from priority sector banking and commercial lending has been reinstated to its rightful place. Today many banks focus on this activity for improving their bottom lines. Fresh and innovative products are being launched to facilitate the corporate customer who forms the core of this business. There is big competition among to secure bigger share of this business. At present, commercial loans are available for practically and kind of activity and also for both long and short tenures. Based on customer profile, these loans are of two types: Corporate loans Retail Loans Corporate loans:
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These loans are meant for corporate bodies (and bigger ones among other entities like proprietorships, Partnerships and HUFs) engaged in any legal activity with the object of making profit. Bank lend to such entities on the strength of their balance sheet, the length of cash cycle and depending upon the products available with individual banks. Retail Loans: This type of lending is meant for very small entrepreneurs as well as individuals who are engaged in gainful commercial activity and have the capacity to repay the loan. Loans are given on the strength of the means of the borrower with an eye on the repaying capacity. The latter is judged through the cash streams (income) available with the borrower for repayment of the loan. Loans for purchase of automobiles/consumer durables items Most banks nowadays have a product for financing the purchase of automobiles and other consumer durable items. The quantum of loan is generally determined by the repayment capacity of the prospective borrower. This in turn, depends upon the monthly income. Most banks have their own method to calculate the maximum monthly repayment capacity of a person. Therefore, a loan for which Equated Monthly Installment (EMI) is within this capacity is considered the outer limit for a person. The bank will be glad to finance to this extent for the purchase of an automobile or any other consumer durable item. Most Banks judge the monthly income with reference to either the latest salary certificate from the employer (in case of employees) or last years income tax return (in case of self employed persons). Other methods are also employed to appraise the maximum limit considered desirable for a person.

Long-term and Short-term Loans Commercial banks grant loans for different periods-long, short and medium term for different purposes. (1) Short-term loans Short term loans are granted by banks to meet the working capital needs of business. The working capital needs refer to financial needs for such purposes as, purchase of raw materials, payment of wages, electricity bill, taxes etc. Such loans are granted by banks to its borrowers to be repaid within a short period of time not exceeding 15 months. Short term loans are normally granted against the security of tangible assets like goods in stock, shares, debentures, etc. The rate of interest charged on short term loans ranges from 12% to 18% p.a. (2) Term Loans

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Medium and long term loans are generally known as term loans. These loans are granted for more than 15 months. In case of medium term loan, the period ranges from 15 months to less than 5 years. Medium term loans are generally granted for heavy repairs, expansion of existing units, modernization/renovation etc. Such loans are sanctioned against the security of immovable assets. The normal rate of interest ranges between 12% to 18% depending upon the period, purpose, nature and amount of the loan. Though banks may grant long term loans, they avoid granting loan for more than 5 years.

Nature and Security of Loans To ensure the safety of funds lent, the first and most important factor considered by a bank is the capacity of borrowers to repay the amount of loan. The bank therefore, relies primarily on the character, capacity and financial soundness of the borrower. But the bank can hardly afford to take any risk in this regard and hence it also has the security of tangible assets owned by the borrower. In case the borrower fails to repay the loan, the bank can recover the amount by attaching the assets. It can sell the assets offered as security and realize the amount. Thus from the view point of security of loans, loans are divided into two categories: (a) secured, and (b) unsecured. Unsecured loans are those loans which are not covered by the security of tangible assets. Such loans are granted to firms/institutions against the personal security of the owner, manager or director. On the other hand, Secured loans are those which are granted against the security of tangible assets, like stock in trade and immovable property. Thus, while granting loan against the security of some assets, a charge is created over the assets of the borrower in favour of the bank. This enables the bank to recover the dues from the customer out of the sale proceeds of the assets in case the borrower fails to repay the loan. There are various types of securities which may be offered against loans granted, but all of those are not acceptable to the banks. The types of securities generally accepted by the bank are the following: Tangible assets such as plant and machinery, motor-van, etc. Documents of title to goods, like Railway Receipt (R/R), Bills of exchange, etc. Financial Securities (Shares and Debentures) Life-Insurance Policy Real estate (Land, building, etc). Fixed Deposit Receipt (FDR) Gold ornaments, Jewellery etc.

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Procedure of Granting Loan and Advances The procedure of applying for and sanction of loans and advances differs from bank to bank. However, the steps which are generally to be taken in all cases are as follow:

1. Filling up of loan application form: Each bank has separate loan application forms for different categories of borrowers. When you want to borrow money from a bank, you will have to fill up a loan application form available with the bank free of cost. The loan application form contains different columns to be filled in by the applicant. It includes all information required about the borrower, purpose of loan, nature of facility (cash-credit, overdraft etc) required, period of repayment, nature of security offered, and the financial status of the borrower. A running business limit may be required to furnish additional information in respect of: Assets and liabilities Profit and loss for the last 2 to 3 years. The names and addresses of borrowers, suppliers, customers and Bankers) for reference purposes.

2. Sanctioning of loan: The bank scrutinizes the documents submitted and determines the credit worthiness of the applicant. If it is found to be feasible, the loan is sanctioned. The application is considered at regional, zonal or head office level, depending on the amount of loan. 3. Executing the Agreement:

When the loan is sanctioned by the bank and the borrower is informed about it, he will have to execute an agreement with the bank regarding terms and condition for the amount of loan raised.

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4.

Arrangement of Security for Loan:

The borrower then arranges for security against the loan. These securities may be immovable properties, shares, debentures, fixed deposit receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per agreement. When the borrower completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as sanctioned by the bank. In case of discounting of bills, the bank credits the amount of bill to the customers account before the realization of the bill and thus, makes available the fund. In case, the bill is dishonored on due date, the amount due on the bill together with interest and other charges are payable by the party whose bill is discounted.

Types of Borrowers The essential functions of a Bank are: i. To accept deposits from the society and ii. To lend or invest the same for earning profit Transactions relating to these functions are invariably routed through accounts maintained by customers who may be individuals, joint account holders, HUFs, Trust, Executors and Administrators, agent, Attorney, firms, Clubs and Associations, Limited Companies. While establishing relationship with a customer, a Bank ha to ensure that the prospective customer (a) is legally capable of entering into a valid contract and (b) applied to the bank in the proper form the above holds good for both deposits as well as borrowers accounts. In respect of borrowers accounts here a bank lends, he has to be not only more cautious but also conversant with the legal provision of various Acts as applicable to respective cases. Legal requirement will differ from those relating to Trusts or Limited Companies. A good transaction with defective legal formalities may turn out to be bad as rights there under become legally unenforceable for non compliance of legal requirements. Therefore, on receipt of a loan application and upon its scrutiny, certain fundamental legal enquire the purposed of the borrowing whether it is legal, legal capacity of the borrower to borrow, the authority of the borrower to deal with the property or asset offered as security for the advances, relevant provision of law to the advance. Therefore, a borrower dealing in explosive has to comply with certain additional formalities than the one an iron and steel materials. In any contract, two essential wings are: a) Capacity to enter into contract and b) Enforcement of the contract One without the other is legally useless. Section 11 of the Indian Contract Act 1872 stipulates a person is competent (to enter into a contract) provided he has attained the
28

age of maturity according to law to which he is subject, he is of sound mind and he is not otherwise disqualified by any law to which he is subject. That is how capacity is explained. The other one enforcement empowers either of or more of the parties to the contract to get legal redressed or relief on the basis of the document/s in case of necessary. It affords enough legal remedy for recovery of dues and that is how each party to the contract looks as it. Various Types of Borrowers are as follows: o Individuals o Joint Borrowers o Hindu Joint Family o Proprietary Firms o Partnership Firms o Limited companies

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Comparative Analysis of Educational Loan offered by various Nationalized Banks

The education loan scheme offered by most nationalized banks in India is on the guidelines of IBA. They have contents almost similar features which are explained below. 1. ELIGIBILITY CRITERIA: a) STUDENT'S ELIGIBILITY: Should be an Indian National; Secured admission to professional/technical courses in India or Abroad through Entrance Test/Merit based selection process. Good academic career. The student should not have outstanding education loan from any other Institution. Father/Mother should be co-borrower. Branch nearest to the permanent residence of student will consider the loan. b) ELIGIBLE COURSE: (i) Studies in India: Graduation courses: BA, B.Com., B.Sc., etc. Post Graduation courses: Masters & Phd. Professional courses : Engineering, Medical, Agriculture, Veterinary, Law, Dental, Management, Computer, etc Computer certificate courses of reputed institutes accredited to Department of Electronics or institutes affiliated to university. Courses like ICWA, CA, CFA, etc. Courses conducted by IIM, IIT, IISc, XLRI, NIFT, NID and other Institutes set up by Central/State Govt. Evening courses of approved institutes. Other courses leading to diploma/degree, etc. conducted by colleges/universities approved by UGC/Govt./AICTE/AIBMS/ ICMR, etc. Courses offered by National Institutes and other reputed private institutions with prior approval of Head Office. Courses offered in India by reputed foreign universities with prior approval of Head Office.

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(ii) Studies abroad: Graduation: For job oriented professional/technical courses offered by reputed universities. Post Graduation: MCA, MBA, MS, etc. Courses conducted by CIMA - London, CPA in USA, etc. 2. EXPENSES CONSIDERED FOR LOAN: Fee payable to college/school/hostel* Examination/Library/Laboratory fee. Purchase of books/equipments/instruments/uniforms. Caution deposit/building fund/refundable deposit supported by Institution bills/receipts. Travel expenses/passage money for studies abroad. Purchase of computers - essential for completion of the course. Insurance cover for the student. Any other expense required to complete the course - like study tours, project work, thesis, etc. 3.Minimum Loan Amount: Nil 4. Maximum Loan Amount: India: Rs. 1000000 Abroad: Rs. 2000000 5.margin: Below 4 Lacs: Nil Above 4 Lacs: India: 5% Abroad: 15% 6.Repayment period: Maximum: 7 years Minimum: 5 years 7.Documentation fee: Nil
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8. processing Fees: Nil 9. Guarantors: parent/ third Party 10. security: Up to 4 Lacs: Nil Above 4 Lacs & up to 7.50 Lacs: Collateral in the form of a suitable third party guarantee along with assignment of future income Above 7.50 Lacs: Tangible collateral amount along with assignment of future income security equal to 100% of the loan

The only differences in the education loan are the interest rate charge by banks. 11. Interest Rate: Bank of India Up to Rs. 4 Lacs: 2.50% below BPLR. Min. 9.50% p.a. Above Rs. 4 Lacs & Up to Rs. 7.50 Lacs: 2.00% below BPLR, Min. 10.00% p.a. Above Rs.7.50 Lacs: 1.25% below BPLR, Min. 10.75% p.a. Bank of Baroda Loans up to Rs. 4.00: 2.00% below BPLR i.e. 10.00% Loans above Rs. 4.00: at BPLR i.e. 12.00% Corporation Bank Up to Rs. 4 Lacs: 11.50% Above Rs. 4 Lacs & Up to Rs. 7.50 Lacs: 13.00% Above Rs.7.50 Lacs: a] Secured: 11.50% b] Unsecured: 13.00% Dena Bank Up to Rs. 4.00 Lacs: Repayable in 3 years 9% & Repayable in > 3 yrs. 9.50% Above Rs. 4.00 Lacs: Repayable in 3 years 12% & Repayable in > 3 yrs. 12.50%

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Comparative Analysis Nationalized Banks

Bank of India Eligibility

of

Housing

Loan

offered

by

various

Bank of Baroda Salaried persons Professionals Self employed having regular source of income NRIs

Salaried persons Professionals Self employed having regular source of income NRIs Staff Members Farmers / Agriculturists

Corporation Bank Salaried persons with 2 years of confirmed service. Residents NRIs holding Indian Passport

Dena Bank Individual, resident or non-resident, having a regular source of income.

Staff Members

Age on the maturity of the loan is less than retirement Applicant age if should be in the age group salaried 18 50 years. employee and below 65 years incase of businessmen.

Max. Amount

Rs.300lakhs

Rs. 200lakhs

Rs. 100Lakhs

Rs. 100Lakhs

Margin Repayments

15%-20% Max.20 Years

10% - 15% Max. 25 year

20% - 25% Max.25 years

15% Max.20 years

Processing Charges

For Loans upto Rs. 30 lakh : 0.55% For Loans over Rs. 30 lakh upto Rs. 50 lakh: One time flat 15,000/For Loans over 50 Lakh

Loans upto Rs. 20/lakh : 0.35%

Loans above Rs. 20/- lakh : 0.40%

Loans above Rs.15 20lakhs: 0.50% of loan subject to min. Rs.7,500/- & max.

0.50 % of the sanctioned loan amount.

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upto 1.00 Crore: One time flat Rs. 20,000/For Loans over Rs.1.00 core: One time flat Rs.25,000 Loans over Rs.3.00 crores: One time flat Rs.50,000

Maximum : Rs. 15000/-

Rs.10,000/Loans above 20 lakh : 0.50% of loan subject to min. Rs.10,000/& max. Rs.50,000/-

Security

Equitable Mortgage

Equitable Mortgage

Equitable Mortgage

Equitable Mortgage

Interest Rate:
Floating Rate:

Limit up to Rs. 30 Lacs: Bank of India Bank of Baroda Corporation Bank Dena bank Up to Rs. 15 Above 30 Lacs & up to Rs. 50 Lacs : Bank of India Bank of Baroda Corporation Bank

Up to 5 Years

>5-10 years

>10-15years

>15-20 years

8.75% 8.50% 8.75%

9.00% 8.75% 9.50%

9.25% 8.75%% 9.50%

9.25% 9% 9.75%

9.00%

9.50%

9.75%

9.50% 9.25% 9.50%

9.75% 9.50% 10.00%

10.00% 9.50% 10.00%

10.25% 9.75% 10.50%

Above Rs. 50 Lacs: Bank of India

10.25%

10.50%

10.75%

11.00%
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Bank of Baroda Corporation Bank

9.75% 10.00%

10.25% 10.50%

10.25% 10.50%

10.50% 10.75%

Fixed Rate: Limit up to Rs. 30 Lacs: Bank of India Bank of Baroda Corporation Bank Dena bank Above 30 Lacs & up to Rs. 50 Lacs : Bank of India Bank of Baroda Corporation Bank Dena bank Up to Rs. 15 Lacs Above Rs.15 Lacs & up to Rs.20 Lacs Up to 5 Years >5-10 years >10-15years >15-20 years

9.50% 11.00% 9.75%

9.75% 11.00% 10.25%

10.00% 11.00% 10.25%

11.00% 10.25%

10.25% 11.50%

10.50% 11.50%

10.75% 11.50%

11.50%

9.75% 10.25%

10.25% 10.75%

10.25% 10.75%

10.75% 10.75%

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Comparative Analysis Nationalized Banks

Bank of India personal Loan

of

personal

Loan

offered

by

various

BOI Star Personal Loan Scheme provides funds to meet all personal requirements of you and your family 1.Purpose: Bank offers loans for marriage expenses, tour and excursions, purchase of all types of consumer durables, purchase of cars etc. 2.Quantum of advance: Unsecured/clean: maximum Rs. 200000/ Secured: maximum Rs. 1000000/ 3.Eligibility: Salaried employees, professionals and individuals with high net worth. 4.Eligibility Amount: Unsecured/clean: o 10 times of monthly Net Emoluments (take home salary) in case of Salaried Employees. o 50% of Gross Annual Income as per last Income Tax Return for Professionals / Individuals of high net worth Secured: o 20 times of monthly Gross Emoluments in case of Salaried Employees. o 100% of Gross Average Annual Income as per last three Income Tax Returns for professions / individuals of high net worth. 5 Rate of Interest: Fully secured: 11.50% Clean/unsecured: 12.25% 6.Repayment: Clean / Unsecured Advances: Repayment in 36 equated monthly instalments (EMIs) w.e.f. one month after first disbursement. Sanctioning Authority may consider longer repayment period upto 60 months at its discretion. Secured Advances: Maximum 60 EMIs w.e.f. one month after first disbursement.
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Security: Equitable/ Legal Mortgage of commercial or residential properties. Hypothecation charge on assets required. Collateral Security in the form of Pledge of Gold / Gold Ornaments, NSCs / Indira Vikas Patra, Bonds, Assignments of LIC policies, Relief Bonds, etc 7.Processing and Handling charges: As Advised by Bank from time to time.(1% of Loan amount)

Bank of Baroda Personal Loan

1.Purpose: To meet personal expenses / exigencies eg: medical , educational, marriage, family / social functions, travel expenses, payment of tax, honey moon , etc., or any other family needs (excluding for speculative purpose). 2.Amount Of Loan: Minimum : Maximum of Rs. 2,00,000 Rs. 20000 and

3.Repayment: Up to 36 months (maximum) in Equated Monthly No pre-payment charges. However, penalty of 2% on overdue amount

Installments.

4.Rate of interest: BARODA PERSONAL LOAN (Realigned on 01.04.09) sanctioned on or after 01.04.09: 2.50% Above BPLR i.e. 14.50% Loan to Pensioners: 1.25% Above BPLR i.e. 13.25% Loan to Defence Pensioners: 1.25% Above BPLR i.e. 13.25% Loan for Earnest Money Deposit: 0.75% below BPLR i.e. 11.25%

5.Processing charges: 2% 0n Loan

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Corporation Bank Personal Loan

1.Eligibilty: Permanent employees of Central / State Government Offices, Profit making Public Sector Undertakings and Public Limited Companies, Schools, Colleges, Universities and Research Institutions, Pensioners drawing pension through our Bank and individuals with income other than salary/pension. 2.Purpose: To meet any genuine personal expenses relating to family functions, education, travel, marriage, medical etc 3.Loan Amount: For salaried persons the maximum loan amount shall be 12 times the take-home pay, where an undertaking letter has been obtained from the employer. For salaried persons whose salary is routed through our Bank, but where no undertaking letter from employer is not available, the maximum loan amount shall be restricted to 6 times the take-home pay. In case of pensioners drawing pension through our Bank, the maximum loan amount shall be restricted to 6 months' pension. In case of individuals with income other than salary/pension, the maximum amount of the loan shall be 25% of the gross annual income. 3.Rate of Interest: 14.50% p.a. w. e. f 04.5.09 4.Security: Nil 5.Guarantee: Suitable Third Party Guarantee to be obtained in all cases. 6.Repayment: Within a maximum period of 60 months in Equated Monthly instalments. Total deductions [including the deduction towards the proposed Loan ] not to exceed 50% of the takehome pay. 7.Service Charges: 1.50% of the loan amount subject to a minimum of Rs.500/-

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Dena Bank personal Loan

1.Purpose: To meet genuine credit requirements for personal purpose I.e. for meeting expenses for marriage / travel/ medical/ family functions/ educational expenses / celebration of festivals/ unforeseen events etc. 2.Eligibility: Application should be a permanent employee between 24 to 55 years having worked for at least 2 years in a Govt. or PSU/ reputed organization. Applicants should have gross monthly income of at least Rs. 5,000/-. Income of any other earning member ( co-applicants) can be clubbed for enhanced eligibility. Applicants should have a salary disbursement arrangement with us or provide an undertaking form your employer. 3.Loan Amount: Minimum- Rs. 15,000/Upto- Rs. 1 lakh or 9 times the net monthly income whichever is less. 4.Margin : Nil 5.Rate of interest: 5.00% 6.No prepayment charges 7.Process Fee: 1% of loan amount. 8.Repayment : Upto 36 EMIs starting from the month following the month in which the loan is disbursed. 9.Mode of disbursement: By credit to account of the borr

39

Findings
Educational loan: All the policies and procedure for Education Loan of the various Banks taken for the study are almost same except the different rate of interest charged by these Banks. The interest rates of Bank of India are very competitive and are offering the some of the very good features to the customers. As loan is long term and repayment starts after the students gainfully employed, the selection of borrower is very important aspects taken into consideration. The monitoring of loan will also be important. These risk factors are not to be taken as obstacles in implementation of the education loan, and there is no prime security availed. Our approach should be different while dealing education loan proposal.

Housing loan: Compare to other banks taken for study, Bank of India does not offer fixed rate of interest w.e.f. 01/7/2007. Maximum repayment limit for housing loan should increase till 25 years. Tie up arrangement with reputed builders is to made and single search report for entire project can be obtained. This will reduce the burden on customers. The existing customer base can be effectively utilized for marketing of Housing loan product. In view of social security, the Bank should prepare and distribute the list of negative areas, builders professions, other details to the various branches from time to time.

Personal loan: As compared to other banks taken for study, Bank of India offers more amount of loan to the customers. The Bank should be very selective while offering its personal Loan schemes as the rate is very competitive in the market. As NPA percentage is very high in this segment, Bank of India has to increase the credit base by adding a new good-rated advance. The personal loan is granted to existing customer only. Selection of borrower is very important steps.

40

Direct tie-up arrangements with the employer for a repayment of the loan by deducting the salary of the borrower.

41

RECOMMENDATIONS
Constant product innovation & Customer service - Customer service is perhaps the most important dimension of banking. Bank of India needs to have an efficient customer service system to provide better services to the customer. Modify product as per customers needs, Lots of care taken when identify customer. Quality service and quickness in delivery- the quality of service that banks offer and the experience that clients have, matter the most. Hence, to retain the customers, banks have to come out with competitive products satisfying the desire of the customers at click of a Dutton. Technological development- For effective lending function there is need to provide instantaneous service to the customer large, faster processing, maintaining database, etc. Detail market research- banks may go for detail market research, which will help them in knowing what their competitors are offering to their clients. This will enable to have an edge over their competitors and increase their share in retail banking pie by offering better products and services.

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LIMITATION
Time constraints Data will be selected might not be complete, accurate Data of the current year was not available.

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CONCLUSION
Banking industry is the fastest growing sector with the key success by attending directly the needs of the end customers is having glorious future in coming years. Retail banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business. Banks therefore, are now competing for increasing their retail Advance business. There is a need for constant innovation in retail Advance banking. This requires product development and differentiation, micro-planning, marketing, prudent pricing, customization, technological up gradation, home / electronic / mobile banking, effective risk management and asset liability management techniques. While Banking offers phenomenal opportunities for growth, the challenges are equally discouraging. How far the retail banking is able to lead growth of banking industry in future would depend upon the capacity building of banks to meet the challenges and make use of opportunities profitably. However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in retail advance banking business. Furthermore, in all these customer interest is of chief importance. The banking sector in India is representing this and I do hope they would continue to succeed in this traded path.

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BIBLIOGRAPHY AND WEBSITES

Books Manual of Instructions (Advances) volume 3, Part 1 Bank of India Handbook of Banking Information By N. S. Toor Websites Referred www.bankofindia.com www.denabank.com www.bankofbaroda.com www.corporationbank.com www.rbi.org.in

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