NEGOTIABLE INSTRUMENTS The Negotiable Instruments Act 1881 came into force w.e.f. March 01, 1882.

It has 147 sections and the Act is applicable to entire India. DEFINITION OF NEGOTIABLE INSTRUMENTS Negotiable Instrument (NI) has not been defined directly in the NI Act but as per Section 13, an NI means and include promissory note, bill of exchange and cheque payable to order or bearer.
REQUIREMENTS OF NEGOTIABILITY

All NIs have a special feature called' Negotiability', which means that the NI is: 1. freely transferable by delivery when it is bearer (Section 47) and by delivery and endorsement when it is an order instrument (Section 48). 2. the transferee taking the instrument for value and in good faith, gets better and absolute title despite any defect in the tide of the transferor (called endorser). Those instruments which do not fulfil the above two features, cannot be termed negotiable instruments. INSTRUMENTS MADE PAYABLE TO BEARER RBI Act 1934 Section 31 states that no person other than RBI or Central Govt. can draw, accept, make or issue any bill of exchange or promissory note payable to bearer on demand. Also Section 31(2) puts a restriction on making a promissory note payable to bearer by a person other than RBI/Central Govt. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS Section 118 provides certain presumptions as to NIs, until the contrary is proved: a: NI was made, drawn, accepted, endorsed and negotiated or transferred for consideration. b: It bears the date on which it was made or drawn c: It was accepted within a reasonable time after its date and before maturity. d: Every transfer of NIs was made before maturity. e: Endorsements appearing on NI were made in the order in which they appear thereon. f: It was duly stamped and stamp duly cancelled, when the NI stands lost g: Holder is holder in due course. The burden of proof that the instrument is contrary to all/any of the above presumptions is with the person, who challenges such presumption. PROMISSORY NOTE (Section 4) PN is an instrument (a) in writing, (b) containing an unconditional undertaking, (c) signed by the maker, (d) to pay a certain sum of money, (e) to or to the order of a certain person or to the bearer of the instrument. The PNs require to be stamped as per Indian Stamp Act and stamp duty is same for entire India. Types of Promissory Note There are two types of PNs, i.e. Demand Promissory Note (which is payable immediately on demand) and Usance Promissory Note (payable after a pre-decided definite period). PNs can be drawn payable in instalments also and a provision can be made that on default in payment in one instalment, entire amount becomes payable. Parties to a promissory note: There are basically two parties i.e. maker (who promises to pay - in case of bank loan, it is borrower) and payee (to whom it is payable - in case of a bank loan, the bank).

Currency notes and promissory notes - Currency notes being money, though fulfil a No. of conditions of PNs, are not promissory notes and have been excluded from PN as per Indian Currency Act (Sec 21). BILL OF EXCHANGE (Section 5) A bill of Exchange (BEO) is an instrument (a) in writing, (b) containing an unconditional order, (c) signed by the maker, (d) directing a certain person to pay (e) a certain sum of money only (f) to, or to the order of, a certain person or to the bearer of the instrument. Parties to a BOE: (u/s 7) Drawer - The person who orders to pay - may be seller of goods. He is also the creditor. Drawee - Who is directed to pay - may be a buyer of goods, He is also the debtor. A minor cannot be drawee as he cannot incur liability. . Payee - Who is authorised to obtain the payment, Acceptor - The drawee becomes acceptor on acceptance of BOE for payment. Lost Bill of Exchange - Where a bill is lost, the drawer is under obligation (Sec 45A) to issue a duplicate bill. CHEQUE (Section 6) IS per Section 6, a cheque is (a) a bill of exchange (b) drawn on a specified bank and (c) not expressed to be payable otherwise than on demand. Parties to a cheque are drawer (the account holder), drawee (the bank with whom the account is maintained), payee (the person named in the cheque). There are other parties also which Come into picture subsequently and include holder, holder in due course, endorser and endorsee. Electronic Cheques /Truncated Cheques After amendment to Negotiable Instrument Act during December ;2002,. the cheque also means a cheque in Electronic Form containing exact mirror image of a paper cheque with use of digital signatures and asymmetric crypto system. It also include a Truncated Cheque transacted during the clearing process. Cheque & Bill of Exchange It is different from a Bill of exchange because (a) it can be made payable to bearer on demand, (b) it is drawn on a bank. Drawee can be only a bank and no one else (c) does not require acceptance (d) grace period of 3 days for payment is not allowed (g) notice of dishonour is not necessary (f) it can be crossed and (g) cannot be made payable so many days after date. BANK DRAFT It is (a) a bill of exchange, (b) drawn by a bank on another or by itself on its other branch. It is very nearly allied to a cheque. However, it can be drawn by a bank only and not by an individual. It cannot be easily countermanded like a cheque and it cannot be made payable to bearer.

HOLDER (Section 8) The holder of a BOE, PN or Cheque means any person who is entitled in his own name to the possession thereof and to receive or recover the amount due thereon to the parties thereto. The definition given in Section 8 implies that: A: holder must be entitled to the possession of the NI in his own name. Mere legal right to possess is enough and actual possession is not essential. (say legal heirs of payee of a cheque who are entitled to possess the cheque) b : holder must be entitled to receive or recover the amount of NI from the parties to the same. Hence he should be a bearer or payee or endorsee. A thief cannot be holder as he is not entitled to receive the amount. A person who was entitled to receive payment of an instrument and the instrument has been lost, he will continue to be treated as holder. Person who finds the instrument lying somewhere will not become its holder by mere possession. Rights of a holder a he can obtain a duplicate of the lost instrument (Section 45-A). b he can cross the cheque if not already crossed, convert ~ general crossing to a special crossing and endorse and can negotiate, if the negotiation is not restricted. c he can sue in his own name in relation to the instrument. d. He can complete an inchoate instrument. e. He can give proper discharge to the person making the payment. HOLDER IN DUE COURSE (Section 9) A holder in due course is any person, who for consideration became the possessor of a promissory note, bill of exchange before the amount mentioned in it becomes payable, or cheque and without having sufficient cause to believe that any defect existed in the title of the person from who he derived his title. Conditions to become holder in due course a) person who claims to be holder in due course must have the negotiable instruments in his possession. He must be payee or endorsee and a bearer. b) he must obtain possession of it for real, valuable and lawful consideration (and not as a gift) before its maturity (in case of bill), as after maturity of a bill, subsequent holders cannot be the holders in due course, even though they acquire in good faith and for due consideration. c) he must obtain it in good faith without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it. Where holder in due course cannot be there? There cannot be holder in due course in case of not-negotiable crossing and for an instrument the title to which has been obtained through forged endorsement (Forgery does not convey any title as per Section 58). NEGOTIATION Negotiation means transferring an instrument from one person to another in such a manner as to convey title and to constitute the transferee the holder thereof. Bearer instruments - In case of bearer instruments, the negotiation is complete with delivery only. Order Instruments - The negotiation by endorsement and delivery would be required in case of NIs payable to order. Importance of Delivery with endorsement U/s 46 delivery is important to complete negotiation, which may be actual or constructive. Without delivery the property will not be considered to have been transferred. For instance, if a person endorses an instrument and expires without delivery to the endorsee and his legal heirs deliver him, the negotiation has not been completed.

ENDORSEMENTS As per Section 15, endorsing means signing on the face or backside of an instrument (or even on a piece of paper called Allonge), for the purpose of negotiating a negotiable instrument. As per Section 50, the endorsement followed by delivery has the effect of transfer of property therein with right of further negotiation. A person who signs and transfers the - property is called endorser and in whose favour it is transferred is called endorsee. Types of endorsements The endorsements may be blank or general, special, full, restrictive, partial, conditional or qualified. Blank endorsements If the endorser signs his name only, without adding any words or directions, the endorsement is said to be blank or general endorsement (Sec 16(1). An order cheque or bill becomes payable to bearer as per Section 54, if it bears a blank endorsement. Endorsement in full If an endorser signs his name and adds a direction to pay the amount mentioned in .the instrument to, or to order of, a specified person, the endorsement is said to be in full. Blank endorsements can be converted into full. Endorsement in full followed by endorsement in blank, makes the instrument payable to a bearer. Restrictive endorsement Where an endorsement prohibits and restricts the further negotiability of the negotiable instrument, it is called restricted endorsement. The endorser may, by express word, restrict or exclude further right of negotiation or may merely constitute the endorsee as an agent to endorse the instrument or to receive its contents for the endorser or for some other specified person. (Sec 50). Partial endorsement When an endorser transfers only a part of the amount of the NI to the endorsee, It is called partial endorsement. It is not treated as valid for purpose of negotiation (Sec 56). For instance, where a cheque of Rs.10000 is endorsed as 'Pay Ashok or orders Rs.5000', it will not be a valid endorsement. Conditional endorsement An endorsement, which stipulates some conditions, is called conditional endorsement (say Pay to Mr. A when he completes his post-graduation'). The paying bank is not bound to verify fulfilment of such conditions. The conditions are binding between endorser and endorsee only. Sans Recourse Endorsement If the holder endorses it in a manner that he does not incur any liability as an endorser (by writing the words like' Pay Sham or, order without recourse to me') Facultative Endorsement When endorser reduces rights or increases his liability by express word. Say by writing 'Pay S or order. Notice of dishonour waived', it becomes a facultative endorsement. Forged endorsement Where the endorsement is made by a person other than the holder, by signing the name, of holder, it is called forged endorsement. Endorsees (including a Holder in due Course or holder for value) subsequent to the forged endorsement do not derive any title to the instrument. However, in case of a forged endorsement, the paying bank gets protection u/s 85 (1) provided it is regular. Endorsement by minor - A minor can endorse u/s 26, but he will not be liable as an endorser.

Liability of endorser U/s 35, by endorsing an instrument, the endorser impliedly promises that on due presentment, the instrument will be accepted and paid, in case of dishonour of bill, he will compensate the holder, provided the notice of dishonour is given he will not deny to a holder in due course, the genuineness or regularity of a drawer's signature and endorsement and he will not deny the validly of endorsement and his title to the instrument to any subsequent endorsee. REGULARITY OF ENDORSEMENTS Section 85 (I) protects a paying banker in case of payment of an order cheque and Section 85-A in case of a bank draft, provided the endorsement is regular (which may be or may not be genuine) Bankers paying a cheque with irregular endorsement may be held liable for negligence and shall lose the statutory protection. ENDORSEMENT ON BEARER CHEQUES A paying bank gets protection u/s 85(2) in respect of a bearer cheque and he need not verify the endorsement, as once a bearer is considered always a bearer. For such endorsements the paying bank is not to take any cognisance. CROSSING Crossing of a cheque implies two parallel transverse lines on the face with or without words, such as '& Co, 'not-negotiable, 'payee's account only' etc. These words without lines will not constitute crossing. Such instruments should not be paid as drawer's mandate is not clear (with returning memo as 'crossing incomplete'). Crossing is applicable in case of cheques only and does not cover bill of exchange or promissory note. Important aspect in a crossing is two parallel transverse lines on the face of the cheque. As per NI Act (Section 123 to 131) the crossing is either general crossing or special crossing. GENERAL CROSSING As per Sec 123, general crossing is where a cheque bears across its face two parallel transverse lines (with or without words such as '& co" or any abbreviation. (Words are not important, lines are). A general crossing, as per Sec 126, is a direction to the paying bank not to pay a cheque across the counter and should be paid to a banker only. A general crossing can be converted to a special crossing by the drawer or by any holder. SPECIAL CROSSING As per Sec 124 where a cheque bears across its face, an addition of the name of the banker, either with or without the words not- negotiable (lines are not important, the writing of name of the bank is important), that addition shall be deemed as special crossing and the cheque shall be considered to be crossed specially to that banker. As per Sec 126, such cheques shall be paid to that banker to whom it is crossed specially or to his agent for collection. In other words a special crossing is a direction to the paying bank for paying to the bank whose name is there on the face of the cheque. A cheque crossed to two or more branches of the same bank, is considered to be crossed to one bank only.

NOT NEGOTIABLE CROSSING As per Section 130, a person taking a cheque crossed generally or specially bearing in either case the words' not negotiable' shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it, had'. If payee of a cheque is Mr. Ramesh and he obtains the cheque without consideration his title is defective and endorsee for value even, shall also not be able to get a better title. There cannot not be holder in due course for a cheque having 'not-negotiable' crossing. Such crossing does not restrict further transfers but the endorsees do not get a better title than the endorsers. This crossing is also a direction to the collecting banker when its collection is for the account of an endorsee instead of - a payee. Failure to ensure genuineness of the endorsement, may amount to conversion. As regards the paying bank, such crossing does not put additional burden on the paying bank and it has to pay in due, course. ACCOUNT PAYEE CROSSING NI Act does not define Account Payee crossing. It is result of custom, use and practice and legal decision, i.e. child of banking practice. Account Payee crossing is a direction to the collecting bank that the NI should be collected only for the named payee. In case the collecting bank fails to take precaution, it loses the statutory protection. As regards the paying bank, it has special responsibility even where the collecting bank confirms that the amount is being credited to account of payee only. PROTECTION TO PAYING BANK FOR CROSSED CHEQUE Protection is available to a paying bank, u/s 128 of NI Act, according to which a bank is not liable in case of wrong payment when it can prove that the payment has been made in due course, as defined u/s 10. Section 129 states that the paying banker cannot debit the account of his customer while paying a crossed cheque other than to a bank. PAYMENT OF CHEQUES U/s 31 of NI Act, a bank is under statutory obligation to honour the customer's cheque subject to certain conditions. Accordingly the banker must make the payment if these conditions are satisfied (given below), as otherwise the bank has to compensate the drawer for any loss or damage, caused by non-payment: (a) there are sufficient funds of the drawer available with the bank, (b) these funds are meant for payment of such cheque, (c) there is proper demand to make the payment. PAYMENT IN DUE COURSE As per Sec 10, a payment would be considered in due course if: a: Payment is in accordance with the apparent tenor of the instrument. b: Payment must be made in good faith and without negligence c: Payment must be made to the person in possession of the instrument d: Payment must be made under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein e: Payment must be made in money only.

AMOUNT OF A CHEQUE Where amount of a cheque differs in words and figures, as per Section 18, amount written in words should be paid irrespective of the fact, which amount is less or more.' For instance, if amount in words is Rs. five lac and in figures it is RS.5000/-, the amount written in words only shall be paid. FORGED CHEQUES OR WHERE DRAWER'S SIGNATURES DIFFER Where a bank pays a forged cheque, it does not get a discharge, since a forged instrument is not considered a mandate of the customer. Where the bank debits such cheques, it has to restore the credit, even if the forgery is done very cleverly. The burden to prove forgery lies with the drawer. While the collecting bank gets protection u/s 131 in respect of a forged cheque, if collected for a customer as a crossed cheque, the paying bank does not get any protection except where it is proved that the drawer was a party to the forgery. In case the drawer's signature do not tally with the ones on bank record, the bank should obtain fresh set of sigm3tures and should not pay the cheques on which the signatures are different, from the ones on the records of the bank. MATERIAL ALTERATION Material alteration is an alteration of an NI which brings basic change in the operation/characteristic, of the instrument (i.e. In mandate) and liabilities of the parties thereto, whether the change be beneficial or detrimental. Material alterations - Alteration would be taken as material when it relates to date, sum payable; time of payment; place of payment; rate of interest; addition of new party; tearing material part of the NI; date of endorsement etc. Alterations which are not material - Certain alterations are not treated material which Include crossing an uncrossed cheque, filing the date, converting a general crossing to a special crossing etc. Who can correct? The drawer of a cheque only and no one else can correct material alterations. . Protection - Payment of a materially altered cheque Is not considered a payment In due course u/s 10 and bank will have to make good the loss if any. Section 89, protects a banker only if the material alteration is not apparent i.e. It is done in such a way that it cannot be detected with reasonable care, prudence and scrutiny. POST DATED CHEQUES The cheques which bear a date prior to the date on which it is drawn and the date has not fallen due till presentment, are called post dated cheques. Such cheques become effective on the date mentioned on the body of the cheque and the holder can sue the drawer of such cheque after the mentioned date only. (These cheques are valid cheques and are in the form of usance bill of exchange) The payment of such cheques is not payment in due course and additionally poses following risks to the paying banks: a) drawer can stop the payment before the given date, b) there may be death, insolvency or insanity of the drawer, c) a garnishee order may be served in respect of the balance in the account . d) another cheque of the customer may bounce due to insufficiency of the funds during the period and bank may be held liable for that.

VALIDITY OF CHEQUES AND STALE CHEQUES As per long established practices and the court decisions, the cheques used to be valid for six months from date of their issue. However u/s 138 of NI Act, it has been provided that to file a complaint in case of dishonoured cheque, for insufficiency of funds, the cheque must be presented within a period, not exceeding 6 month.. A cheque which is not presented for payment for a period of six months from date of its issue is considered to be a stale cheque. Its payment, without revalidation of the drawer, cannot be considered a payment in due course. The validity of the cheques can be reduced by the drawer by writing on the face of the cheque such words (say, cheque is valid for three months) but it can not be increased beyond 6 months even with express words. COLLECTION OF CHEQUES A collecting bank either collects a cheque' as agent (when he collects and credits customer's account) or as a holder for value or holder in due course (when he purchases the cheque from the customer and makes payment before realisation). Statutory protection Statutory protection to a collecting banker is available as per Section 131 for cheque and Section 131 (A) for bank drafts. This protection is available when bank acts as agent (and not as a holder for value). Conditions for protection Section 131 provides protection only if: Collection is in good faith and without negligence. Good faith means the bank should have acted bonafide and honestly. Without negligence means with reasonable care, where there was no doubt about the genuineness of the title of the customer to the instrument. In other words, the account should be properly introduced. Payment is received for a customer. Customer means having an account such as saving bank, current account or term deposit. Protection would not be available if collection is for a noncustomer. Cheque is generally or specially crossed before coming to the hands of the banker i.e. before these are collected. No protection would be available for an un-crossed cheque. Duties of collecting bankers a) to present cheque within a reasonable time (else liable for damages u/s 72 and 84 of NI Act, if customer is put to loss for the delayed presentation) b) to serve notice of dishonour on the customer, so that the customer can claim the amount from previous parties. If customer incurs loss due to non-receipt of notice from the collecting bank, it may be held liable. c) to hand over the proceeds after realisation without delay.

DISHONOUR OF CHEQUES The provision relating to bouncing of cheques have been inserted through Section 138 to 142 in the Negotiable Instrument Act 1881 with effect from April 01, 1989. Who is liable to be prosecuted? A drawer of cheque (which is returned unpaid because of insufficiency of funds or stopping the payment of the cheque), is deemed to have committed criminal liability under Section 138 to 142 of NI Act 188!. The pre-requisites for prosecution under the Act are: a) The cheque should have been issued in discharge of a liability. A cheque given in gift will not fall in the framework. b) The cheque should be presented timely i.e. within validity period (of 6 months u/s 138) c) The payee or holder in due course should give notice demanding payment within 15 days of his receiving information of dishonour which should be for no other reason than insufficiency of funds. d) The drawer can make payment within 15 days of the receipt of notice and only if he fails to do so prosecution could take place. e) Only the payee or holder can make the complaint in due course. f) The complaint is to be made within one month of the cause of action arising. g) No court inferior to that of Metropolitan Magistrate or Judicial Magistrate of 1st class will try the offence. Punishment An offence is punishable with imprisonment for a term which may extend to two year or with fine which may extend to twice the amount of cheque or both. GARNISHEE ORDER AND ATTACHMENT ORDER U/s 31 of -Negotiable Instrument Act, bank is under obligation to honour the cheques issued by the customer if stipulated conditions are fulfilled. This obligation however, is not applicable when the bank receives either a Garnishee Order or an Attachment Order. GARNISHEE ORDER Provision of issuance of Garnishee order has been made under Sec. 60 of the Code of Civil Procedure, 1908. The procedure is described in Rule 46 of order XXI of the schedule to the Code of Civil Procedure. What is Garnishee Order? This is an order issued by a court on the request of a creditor for attachment of funds of the judgement debtor available with his bank. The creditor at whose request order is issued, is called judgment creditor the debtor is called judgement debtor and the banker (judgement debtor's debtor) on whom this order is issued, is called Garnishee. Effects of Garnishee Order The relationship between the banker and customer is suspended temporarily and as long as Garnishee order is in force, banker is under no obligation to pay the cheques of judgement debtor up to the amount of the order. Stages of implementation Garnishee order is implemented in two stages i.e. Order Nisi and Order Absolute: Order Nisi - Through order Nisi, court seeks the bank to advise as to why the funds in the account of judgement debtor should not be attached for meeting the obligation towards the judgement creditor. On receipt of order Nisi, bank stops honouring customer's cheque and customer is advised about the order immediately to avoid dishonouring of cheques issued by him. At this stage, bank recovers its own dues first and subsequently informs the court about remaining balance available for attachment.

Order Absolute - After the bank submits its explanation, the court may issue the absolute order. This order attaches amount of judgement creditor deposited with the Garnishee bank. On receipt of this order, bank remits funds of judgemef1t debtor to the court, without production of any pass book or issuing any receipt. Capacity - These accounts should be held in the same capacity in which the order is issued. For instance, joint accounts are not attachable for an order in the name of one of the joint account holders. A proprietor's account and proprietorship account are considered one account for this purpose. Type of Deposit accounts - Garnishee order attaches all deposit accounts of the judgment creditor with credit balances (i.e. where relationship is of debtor/creditor) whether already due for

payment (SB/CA) or to become due for payment in future (FDRs, where amount is payable on maturity).

Cash credit / Overdraft account - It is not applicable on limits sanctioned irrespective of the fact whether the limits are partially or fully utilised, since relationship in this case is of creditor/debtor and not debtor/creditor. Cheques presented in clearing- If a cheque has been received through the clearing house but time for returning the clearing has expired, the order on that amount will not be made effective. Amount deposited after order - It is not available for amounts deposited into the account after the banker has received the order. Insolvents - Orders in the name of insolvent person do not attach his account, as the funds are vested in the receiver or official assignee. Single Partner - If the order is received in the name of an individual partner of firm, only his individual account will be attachable. Firm's account will not be attachable. Trust account -Account held in trust for order issued in the individual liability of the trustee. Funds in other capacities - funds, goods or money held by the bank, other than a debtor, such as in safe custody, safe deposit lockers, funds in trust, cheques or bills sent on collection, sale proceeds of shares/securities still to be received, notice deposit, uncleared balances in saving or current account, credits received after receipt of garnishee order. Right of Set off & garnishee order On receipt of the Garnishee order (Nisi), bank is entitled to recover its own dues first, by exercising its right of set off. INCOME TAX ATTACHMENT ORDER Income tax attachment order is issued by the Income Tax Authorities under Section 226 of the Income Tax Act, 1961. Attachment order can be issued under other Acts such as Wealth Tax Act, Sales Tax Acts of different states, DRT Act. Kinds of accounts -Sub - section 3 (I) of Section 226 of the Act authorises Income Tax Officer to attach any debts due which may be payable at the time of attachment order or afterwards and also any amount received subsequently. Hence it attaches present credit balances in all deposit accounts (in case of FDR subject to payment on maturity), proceeds of instruments in collection, when received (i.e. future credits also). Action on receipt - On receipt of such order, customer should be given notice and customer should be intimated about, payment made to Tax Authorities. Joint accounts - If income tax attachment is received on one of the joint account holders, the share of the joint account holders in such case shall be presumed to be equal, until contrary is proved. Thus in such a case amount lying in a joint account will be attachable pro-rata, subject to mention of the fact on the order that a copy there of has been sent to joint account holders. The fact, that the amount of joint account was payable to either or survivor or otherwise, will not matter. Failure of the bank - If bank fails to comply with the Income Tax attachment order, it shall be deemed to be an assess in default in respect of amount specified in the order.

Right of Set off & attachment order On receipt of the order, bank is entitled to recover its own dues first, by exercising its right of set off, where the amount is due and action has been initiated. LIEN Lien has been defined as the right of a creditor to retain the possession of the goods and securities owned by the debtor until the debt has been paid. Lien does not include the right of sale of goods and securities, so retained by the creditor. Lien is available on goods and securities only (such as bills, cheques, promissory notes, share certificates, bonds, debentures). It is not available for deposits, since deposits are neither goods nor securities. Types of lien Particular lien - In case of a particular lien (Section 170 of Indian Contract Act) the creditor gets the right to retain possession only of goods or securities for which the dues have arisen and not for other dues. General lien - A general lien (Section 171), gives the right to the creditor to retain the possession till all amounts due from debtor are paid or discharged. This is available to bankers, factors,

wharfingers, attorneys of High Court and Policy brokers only.

Conditions for banker's right of lien Banker has right of general lien against his borrowers. To exercise the right of lien the possession of the property must be obtained lawfully in the capacity of the banker and not otherwise. A banker can sell the goods or securities after giving the debtor a reasonable notice. Features of banker's general lien Implied pledge and right of sale - To create general lien, no special contract is required. It is always implied unless there is contract to the contrary, if any. The right to sell is also available under bank's right of lien because a banker's general lien tantamount to an implied pledge. Limitation - The right of lien is not restricted or barred by Law of Limitation and the Act only bars the remedy through court and not discharges of debt. The banker, as such, has a right of lien against time barred debts also. WHERE RIGHT CAN BE EXERCISED

a) The right of general lien is available in case of all goods and securities, entrusted to bank in the capacity as a banker. b) The right is available in case of those goods and securities that are standing in the name of the borrower.
c) The right can be exercised by the bank for other dues of the same borrower, on the goods and securities remaining in its possession even after another loan taken against them, has been paid. WHERE RIGHT CANNOT BE EXERCISED a) Where there is any contract inconsistent with this right between banker and the customer. b) Where the goods and securities are entrusted to the bank as a trustee or as an agent. c) Where the goods and securities are entrusted for some specific purpose. d) Where the loan is granted to one person and the goods and securities are owned by more e) Where the goods or securities are handed over for safe custody. f) Where the bills of exchange or other documents have been handed over by the customer with specific instructions to utilise their proceeds for the specific purpose. g) Where some documents or valuables are left in bank's possession by the customer by mistake or negligence.

than one persons.

BANKER'S SET OFF RIGHT The right of set off means combining of two or more accounts (say overdraft and fixed deposit), one of which is in debit and the other in credit, (in the same branch or a in a different branch), subject to certain conditions. The right of set off is called a statutory right and it enables the debtor (bank) to take into account a debt owed to him (overdraft) by a creditor (customer) before the latter (customer) could recover the debt (deposit) due to him, from the debtor (bank). Such right can be exercised subject to fulfilment of certain conditions: Notice - The right can be exercised only after sending a prior notice expressing the intention to exercise the right. Same capacity- It is essential that the account must be in the same name and in the same capacity/right. Partners/partnership - Where a partner's account shows credit balance, the right can be exercised for the dues of the partnership firm. But where the firm's 'account shows credit balance, the bank cannot set off the credit balance against the debts due from the partner. Trust - The funds held by a person in trust account are to be treated in different rights from his liability as an individual. Joint accounts - If the account of a person shows debit balance, such dues cannot be recovered from his joint account with others. Where the joint account is payable to former or survivor, the former's debt can be set off during his life time against the balance of joint account. Debt due - The debt should be certain, determined, due & not a future debts and where no agreement to the contrary exists. It can, however, be exercised for time barred debts also. Guarantor - Against the guarantor, such right can be exercised only when demand is made on the guarantor and his liability has been determined. Garnishee order - The banker has right to exercise the right before the garnishee order is made effective. RULE IN CLAYTON'S CASE The rule in Clayton Case was laid down in Devayaney Vs Nobel. Where does the rule operate? It is applicable in case of accounts such as cash credit and overdraft where the customer deposits and withdraws money from the account frequently. As per this rule, the order in which the credit entry will set off the debit entry is the chronological order. This means that the first item on the debit side will be the item to be discharged or reduced by a subsequent item on the credit side. How the rule operates? In case of death, retirement or insolvency of a borrower, a partner in a firm or guarantors (or revocation of guarantee by the guarantor) in a loan account, the existing debt due from the borrower is adjusted if subsequent credit are allowed. If fresh debits are allowed, these are considered a fresh loan and the bank cannot recover such debt from the assets of the deceased, retired or insolvent partner and may ultimately suffer the loss if the debt cannot be recovered from the remaining partners. How to stop operation of the rule-To avoid the operation of the rule given in the Clayton's case, the banker stops the operations in the old account and opens a new account in the name' of the reconstituted firm. Thus the liability of the deceased, retired or insolvent partner, as the case may be, at the time of his death, retirement or insolvency is determined and he may be held liable for the same. Subsequent deposits made by surviving/solvent partners in a different account, will not be applicable to discharge the same.

MINORS A minor is a person who has not completed 18 years of age as per Section 3 of Indian Majority Act, 1875. Where the Court appoints a guardian (for minor's person or property or both) or where a Court of ward is appointed as guardian, the minor attains majority on completion of 18 years of age. Agreement with a minor As per Sec. 11 of Indian Contract Act, 1872 a minor is not competent to enter into a contract and all agreements with a minor are void ab-initio (no contract comes into existence), except for a contract for the supply of necessaries suitable to the life of a minor. Guardian of a minor A guardian can be a testamentary guardian, legal guardian, or a natural guardian and the

guardianship can be for the person, or for the property or for both.

A testamentary guardian is appointed by the will of the minor's father, who can act only after the death of the father & mother of the minor child. A legal guardian is appointed by a Court (as per the provisions of Guardian and Wards Act, 1890) where there is no natural guardian or testamentary guardian. Natural Guardian. - For a Hindu - Section 6 Hindu Minority & Guardianship Act, 1956 provides for a minor boy or unmarried girl, the father and after his death the mother shall be the guardian (both for the person and property). After their death a minor can be represented only through a Married minor girl - In case of a married minor girl, her major husband is the natural guardian. In case the husband is a minor, her husband's father (or mother, if the father is dead) will be a natural guardian. Widow minor girl - Where the minor married girl is a widow, her husband's father (mother, if father is dead) is to act as natural guardian. Muslim minor - In case of a Muslim minor, the father is the natural guardian (for property only) and after his death, the executor appointed by father's will and there after father's father and then the executor appointed by the will of father's father. Where none of these persons is alive, only a legal guardian can represent the minor. It may be noted that the mother cannot act as guardian except when appointed by Court or by will (of father or father's father). Deposit Account of minors. Banks can open different types of deposit accounts such as account operated by guardian, account operated by mother or account operated by himself. The guardian to be operated by him on behalf of the minor can open account in sole name of the minor. Such guardian can obtain pre-mature payment of the term deposit or avail loan against the same, for the benefit of the minor, till the minor attains majority. When the minor becomes a major, he has the sole right to operate the account (account should be conducted as per his instructions) and guardian's power ceases. Negotiable instruments and Minor According to section 26 of Negotiable Instruments Act, a minor can draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such cheque or bill. He cannot be sued in respect of a bill accepted by him during his minority.

legal guardian.

Self operated Account Minors who have completed 10 years of age, who is literate and can sign uniformly can open deposits account in their own name and operate the same in the light of Section 26 of NI Act. In such accounts, the chequebook can be issued but the drawls should be allowed only in cash to the minor himself. He is capable of giving proper discharge on receipt of payment. No nomination can be permitted, as minor is not competent for appointing an agent. No loan against the security of a term deposit should be allowed. Joint account of minors with third parties. Term Deposits can be opened in joint names of the minor and his close relatives subject to the conditions that the minor completed 10 years of age and is capable of signing consistently. Two minors can open a joint account to be operated by both jointly. But account in the style of "Either or Survivor" cannot be opened as minors. JOINT STOCK COMPANIES The Companies Act 1956, recognises a joint stock company as a legal person, due to which it is a separate legal entity and the bankers have to deal with such organisations more carefully, in terms of the said Act and like a legal person, which has no physical existence. Private limited companies must have minimum 2 and maximum 50 shareholders (excluding those who were or are at the time of allotment of shares in the employment of the company). Such companies must have minimum 2 directors and its name must end with the words 'private limited'. They can start business on receiving certificate of incorporation and need not wait for certificate of commencement of business. Public limited companies must have minimum 3 directors and minimum 7 share holders. There is no restriction on the maximum. Names of such companies must; end with the words 'Limited'. They can invite, transfer shares to or from the public and such shares are quoted in the stock market. They have to obtain certificate of incorporation and also certificate of commencement of business before starting any kind of business. Govt. companies mean a company with 51% or more of share capital, of Central or State Govt. Ultra Vires - The companies cannot go beyond the scope of their objects/activities and violation if any, in this regard is known as 'ultra-vires' of the company. Bank is .to take care and not go

beyond these limitations as these become un-enforceable in law and cannot be ratified by shareholders.

BANK ACCOUNTS OF COMPANIES While opening the accounts of joint stock companies, the bankers have to obtain the following: A true copy of the Memorandum of Association, A true copy of the Articles of Association, A true copy of certificate of incorporation. A true copy of certificate of commencement of business (in respect of public limited companies). A copy of resolution from the Board of Directors of the company certified by the Chairman of the meeting and one other official. This should normally cover name of the authorised person/s, scope of their authority, their designation, their signatures, operational instructions and details about any change in office - bearers etc. Operations in the accounts.

The companies are supposed to maintain a bank account and incoming proceeds or outgoing proceeds are to be routed through this account as per Section 362 of Companies Act 1956.

1. No introduction is required while opening accounts as the certificate of incorporation, memorandum and articles of association are public documents.

2. Cheques in favour of companies should be paid through bank accounts only even when they are bearer ones. 3. 3. Cheque signed by an authorised person including director can be paid even after his death or insolvency, which 4. don't affect operation of account, since he signs in representative capacity. 5. Cheques payable to the company should not be collected in personal account of any director, employee, official of the payee company or any other party as that would amount to conversion under NI Act 1881. 6. Cheques issued/drawn by the Co. in favour of 3rd parties should not be collected/credited to the personal accounts of the directors/official employees. 7. Insolvency of directors - If one of the 2 directors of Pvt. Ltd. Co. is adjudged insolvent, the operation in the company's account should be stopped till fresh director is appointed (as a company cannot have less than 2 directors). 8. Bankers must note the complete address of registered office as u/s 51 of Companies Act, legal notice or recall notice can only be served on Registered Office of the company. 9. In case of a newly formed public limited company, account can be opened for the purpose of collection of subscription money for its shares/debentures but permission to use the money to be allowed when certificate of commencement of business is produced. No chequebook can be issued in such account. Banks can transfer the amount or part thereof for investing in short term deposits. 10. In case of payment of dividend, a separate current account is opened in the name of the company for payment of dividends. On 50th day of issue of warrants the account is named as "Unpaid Dividend A/c" or "Unclaimed Dividend A/c." Balance held in Unpaid Dividend A/c is transferred after three years to General Revenue Account of Central Government. A bank as trustee for the dividend holders holds the amount. It cannot allow the company to transfer the amount for any other purpose. PARTNERSHIP FIRMS The law relating to Partnership firms is codified in Indian Partnership Act 1932.' U/s 4 of the Act, a partnership is the relationship between two or more persons who agree to share the profits of business carried on by all or any of them acting for all. To enter into a partnership, there has to be a contract, which may be oral, or in writing (called Partnership deed - required to be stamped as per State govt. notification). Being a legal contract, persons having legal capacity to contract (minors, insolvents, alien enemy excluded), only can enter into a partnership. Relationship of partners: The partners have the status of both the agents and the principal and as per Section 18, they act as, agent for each other. Liability of the partners: The liability of partners is unlimited (Section 25) and they are jointly and severally liable for all the debts of the firm. No. of partners: U/s 11 of Companies Act, a firm engaged in banking business can not have more than 10 partners while for other business, the number is not to exceed 20, failing which it will be illegal partnership (minor will not be counted as partner where he is admitted to enjoy the benefit of

the partnership).

Minor as partner: A minor can be admitted only for the benefits of an already existing partnership firm, as per Section 30. He cannot be personally liable for any acts as an agent of the firm or its partners. On attaining majority a minor can opt out of the firm but he should decide this within 6 months from date of attaining majority or from date when he first came to know about his interest in the firm, whichever is later. In case he fails to decide so, he will be deemed to be a partner from date of his admission to the firm for taking benefits.

Registration of the Firm: It is not mandatory (Section 69) but a registered firm can sue others to enforce a right arising out of a contract or from the Partnership Act. Suits filed by unregistered firm are not maintainable. A firm can get it self registered at any time with Registrar of Firms. Powers of partners: U/s 19 (1), the acts of a partner to carry on business of the firm in a usual way, bind the firm and a partner is an agent of the firm for the purpose of business of the firm (called implied authority). In order to bind the firm by his acts, a partner must sign for and on behalf of the firm (and not as an individual). It should be for the usual business of the firm, no restriction should have been imposed by the other partners/partnership deed and the firm should be in existence. All partners should sign in the event of a firm giving guarantee (unless giving the

guarantee is a normal business).

When implied authority cannot be exercised U/s 19 (2), the implied authority of a partner does not cover the following (in such circumstances, the acts have to be taken by all the partners jointly):

a) b) c) d) e) f) g) h)

submission of a dispute to arbitration, open an account in his own name for the firm's business promise or relinquish claim of the firm withdrawal of suit filed on behalf of the firm. admit any liability in a suit against the firm. acquire immovable property on behalf of the firm transfer immovable property belonging to the firm enter into a partnership on behalf of the firm.

BANK ACCOUNTS OF PARTNERSHIP FIRMS Accounts can be opened by banks by obtaining a copy of the partnership deed (or partnership declaration letter if no deed is available) which indicates formation of partnership, operating powers for the account and undertaking about any reconstitution of the firm), account opening form and specimen signatures. a. account should be in the name of the firm and not in the name of the partners and account opening form should be signed by all the partners (except the minor who is admitted for the benefits. Minor or his guardian need not sign the AOF). b. Account opening Form (AOF) should state as to who will operate the account and how it will be operated (jointly or singly). While operating the account, partners will sign for the firm and not as an individual (Sec. 22). In case the authority is not given to any particular partner/s to operate the account, all partners will jointly operate the account. Authority given to partner/s for operation, can be withdrawn by any partner singly, whether he has the authority to operate the account or not. Once this authority is withdrawn, it can be restored only when all of them sign again. A partner cannot delegate the authority given to him for operation of the account. c. Cheques payable to the firm or endorsed to the firm cannot be credited in the personal account of a partner as that would amount to conversion. But a cheque in the personal name of any partner can be credited to the firm's account. d. In case of death/retirement or insolvency of a partner, operations in the account should be stopped, if the balance is in debit and a fresh account be opened. Lunacy of a partner does not dissolve a firm unless ordered by court. e. Cheques signed by insane, insolvent and dead partner should not be paid.

HINDU UNDIVIDED FAMILY: (HUF) HUF property, business or estate is ancestral and its common possession, enjoyment and ownership is the basis of formation of HUF. As per Hindu Law, the Hindus, Sikhs, Jains are the communities who can form HUF. Joint owners of HUF are known as coparceners. 1. Only male members by birth or adoption get the right and become coparcener. 2. Senior most member is a Karta or Manager and he alone is empowered to handle the affairs of HUF. He has powers to incur debt, execute document, pledge securities on behalf of the family for family business, for which no consent of coparceners is required. Karats liability is unlimited. 3. When the Karta expires or is declared personally insolvent or becomes insane, the next senior male coparcener becomes the Karta. ' 4. HUF is different from partnership and is not governed by the Indian Partnership Act. HUF also cannot become partner in a firm. Operations in bank accounts 5. HUF declaration form or account opening form and the loan documents should be executed by the Karta in Karta's capacity and by all the other adult (major) coparceners in their personal capacity to make them personally liable. 6. Minor coparcener's signature is to be done by his guardian and upon attaining majority, his consent is to be obtained. Hence minor's birth date should be recorded. 7. When the documents are executed by the Karta alone and not by the coparceners, HUF security is liable and Karta is personally liable and coparceners' share in HUF is liable, but coparceners are not personally liable. 8. The Kana can compromise and refer to arbitration. He can give valid discharge of debt and can make part payment. He can enter into partnership and can delegate authority to operate the account to one or some of the coparceners or even to outsiders. He cannot revive a time-barred debt. 9. A coparcener cannot countermand a cheque legally unless he has authority to do so. 10. Wherever there is any change due to death, insolvency or insanity of either Karta or any coparceners, it is advisable to obtain fresh account opening from along with fresh HUF declaration. 11. The death of anyone of the coparceners does not dissolve HUF. CONSUMER PROTECTION ACT & BANKING BUSINESS Consumer Protection Act has been implemented w.e.f. April 15, 1987 to enable the consumers to enforce his rights as consumer through a simple legal procedure. Amendments have been implemented w.e.f. March 15, 2003. Who is a consumer? A person who buys goods or hires services for consideration for his/her use (and not for resale) is a consumer. Any user of such goods and services, with the permission of the buyer, is also a consumer. Coverage :AII goods and services including banking, insurance, transport, processing, electricity, physicians etc. in private, public and co-operative sector, are covered under the Act. Limitation period :Two years from the date of cause of action. Pecuniary (financial) jurisdiction of different authorities -is as under: District Forum Up to Rs. 20 lac (previously up to Rs. 5 lac) State Commission Up to Rs. 100 lac (previously up to Rs. 20 lac) National Commission Above Rs. 100 lac (previously above Rs. 20 lac)

Relief: Relief includes removal of defect from goods, removal of deficiencies in services, replacement by new goods free from defect, refund of .price/charges, award of compensation for loss of injury suffered, discontinuance/non-repetition of unfair and restrictive trade practices, prohibition of sale of goods of hazardous nature and providing for adequate cost to party. Penalty for frivolous nature or for non-compliance of orders : Imprisonment for not less than one month and up to three years or fine not less than Rs. 2000 and up to Rs. 10000 or both. Appeals - No appeal by a person (required to pay any amount in terms of order of District forum) shall be entertained by State Commission unless the appellant has deposited 50% of that amount or Rs. 25000, whichever is less. In case of appeal in National Commission against an order of State Commission the amount to be deposited should be 50% of that amount or Rs. 35000, whichever is less. In case of appeal in Supreme Court against an order of National Commission the amount to be deposited should be 50% of that amount or Rs. 50000, whichever is less. NOMINATION FACILITY Nomination provisions came into force by a notification dated 29th March 1985 as per new Sections 45Z A to 45Z F of the Banking Regulations Act, 1949. 1 Nomination is available for: a) Deposit accounts (Section 45ZA and ZB). b) Safe custody articles (Section 45ZC and ZD) and c) Lockers (Section 45ZE and

ZF).

Types of account - Nomination is available only for deposit accounts (including non-resident) in individual capacity (including joint accounts and proprietorship accounts) irrespective of their nomenclature (not available for representative capacity accounts including partnership, trust, limited company, club etc.) Minor accounts - Nomination is not to be accepted in minor operated account. But where the account is operated by guardian, nomination can be made. . Time for nomination - Nomination can be made at any time during which the deposit is held with the bank. It can also be made available for old accounts. Renewal of deposits - Nomination continues on renewal of term deposit unless it is cancelled or changed. Who can be nominee - Nominee has to be an individual only including a minor or NRI. A firm, club, company, trust, etc. cannot act as nominee. How to nominate - By getting form DA-I signed from the depositor. It is required to be witnessed by two, where depositor is illiterate. Minor as nominee - Nominee can be a minor where a third person can be appointed who will act on behalf of the minor for receiving money (till minor attains majority). More than one accounts - Separate nomination for each term deposit having separate account opening form should be taken. Change in style of accounts - Where the changes in the style of account is made due to addition/deletion etc., the nomination stands cancelled. Procedure on death of depositor - On death of a person, if six months lapse and no person turns up, the bank has to inform the nominee about nomination in case of deposit accounts. This information is to be given within three months in case of locker account. Safe custody - Nomination is available where articles are held in single name (not available for joint name) of individual accounts. Only one person can be appointed to receive the articles. Separate nomination form is to be obtained for each lodgement. Safe deposit lockers - There could be more than one person for joint locker accounts but not more than one person for one joint locker holder. Contents are deliverable to nominee along with the surviving joint hirer. Where there is either or survivor and former or survivor clause, the content can be delivered to survivor with consent of the nominee.

WORKING CAPITAL FINANCE WORKING CAPITAL For an uninterrupted functioning of a firm at a given capacity (to achieve a particular turnover level to remain viable and operate much above the break-even level to earn profits, it requires a specified minimum level of current assets. Working capital means the total amount of these circulating funds or current assets and comprises: a: Amount of raw material of various kinds in store or in transportation; . b: Amount of consumable stores and other material required for production purposes; c: Value of stock in process; d: Value of all finished goods including in transit; e: Amount of receivables or sundry debtors f: Monthly expenses generally reflected through the current assets other than those at (a) to (e) such as cash, advances allowed, pre-paid expenses etc. The means to finance working capital are: a: Credit available from suppliers on purchases; b: Other current liabilities c: Surplus of long term funds over the long term uses (i.e. net working capital) d: Short term bank borrowing. Working capital and Net working Capital Working capital (or gross working capital) requirement refers to the funds required for financing the minimum total current assets. Liquid surplus or net working capital refers to the surplus of long term sources over long term uses as per RBI prescription (also calculated by banks as difference between current assets and current liabilities). How working capital is to be calculated under Nayak Committee? For instance if an 551 units estimates a sales turnover of Rs.80 lac and the bank, based on the past performance, installed capacity, available market and other factors, satisfies itself about achievement of the estimated turnover of Rs.80 lac, the working capital assessment would be done as under: Estimated sale turnover Minimum Working Capital @ 25% of estimated sales (which represent's 3 months' sales) Contribution of borrower @ 5% Minimum Bank credit for working capital @ 20% PROJECT APPRAISAL Rs.80 lac Rs.20 lac Rs. 4 lac Rs.16 lac Project appraisal The project appraisal is a comprehensive and systematic review of all the related aspects of a given project with a v!ew to ascertain as to what extent the project or activity can be conducted viably in the long run. Viability Viability is ability to pay principal and interest of all long liabilities. including term loans as per pre-determined time schedule. Besides there - should be appropriate amount of return on owned funds (dividend or drawings) so as to keep entrepreneur's interest intact in continuation of the enterprise. Components of appraisal

For a detailed andpowers, skills, product mix, meaningful appraisal of project, the study is undertaken in four aspects; namely, 1 Technical appraisal, which determines the feasibility of setting up a project to achieve particular level of operations (in terms quantity, quality and timely delivery) and takes)nto account all technical details such as suitability of machinery or equipment, inputs, implementation etc. 2 Financial appraisal takes into account the aspects such as the profitability and the cash generation based on which the project will be able to reward the entrepreneur and also service its financial commitments. 3 Market appraisal looks into the availability or creation of the market to achieve the sales targets. It takes into consideration the demand forecasting based on overall demand and supply position, including global scenario, product promotion measures, selling strategies, pricing, competition, export potential, product life cycle etc. 4 Management appraisal studies the adequacy and suitability of management structure for the successful implementation and running of the project and achieve the objectives for which the project has been promoted. Debt Service Coverage Ratio (DSCR) The relationship between the repaying capacity and the repayment commitment is expressed in the form of Debt Service Coverage Ratio (DSCR) which indicates the coverage of liability of the concern. Generally the following formula for/ working out DSCR, is followed: .. (Net profit + interest on TL + depreciation) / (Interest on term loan + instalment of DIFFERENT KINDS OF FUND BASED LOAN ACCOUNTS Banks sanction credit facilities to the borrower according to their use and requirement. According to use, the bank facilities can be working capital limits for maintenance of current assets and limits for acquisition of fixed assets. It is essential for the banks that the nature of credit facilities to be sanctioned is the one which takes care of the requirement of the borrower. For instance, sanction of a cash credit limit for financing fixed assets or sanction of cash credit stock limit for financing bookdebts or receivables of the borrower, may actually not be of any use to the borrower. The various kinds of credit facilities may be as under: OVERDRAFTS Purpose - These are allowed by the banks to such customers who maintain accounts in the nature of current accounts with frequent operations. In this kind of account, a limit is fixed up

term loan)"

to which the customer can overdraw his account. Security - The overdrafts are generally granted against the security of bank deposits, life policies, documents of title, saving certificates, shares and debentures etc. At times the overdrafts are also allowed without any security which are of a very temporary nature and are called clean overdrafts. Interest -On such accounts interest is charged on the amount drawn on day to day basis. . Period- It may be noted that the overdraft facility cannot be withdrawn suddenly and unilaterally by the bank and shall require prior intimation to the customer. CASH CREDIT HYPOTHECATION

Hypothecation is not defined in any Act. A cash credit account like an overdraft account, is a running account but with a fixed drawing limit within the sanctioned limit. Drawing limit is fixed periodically, on the basis of value of the security. The ownership and possession of security remains with the borrower. In such advances the ownership as well as possession of the security remains with the borrower. A cash credit account is very convenient for the borrowers. Advantages a the customer can. deposit and withdraw money as per his convenience unlike a demand loan account, where money can be withdrawn only once. b being a running account, documents are obtained only once, unlike a demand loan where on adjustment of the account, fresh documents have to be taken if the loan is to raised again. c interest in the account is charged on the actual debit balance on day to day basis and is debited on a quarterly basis which becomes payable immediately. Banks are also entitled to charge commitment charge for unutilized amount of cash credit limits. Securities Cash credit accounts may be against: a hypothecation of stocks of raw material, stoc!< in process or fi nished goods or stores, spares etc. b hypothecation of book debts or receivables. These loahs are sanctioned by the banks generally to those customer who are actually involved in some economic activity of a continuous basis, such as traders, manufacturers etc. Stock statement and margins The borrowers are required to submit to the bank a statement of stocks and other securities charged to the bank on pre-fixed intervals, say fortnightly or monthly. . The banks maintain margin on the security which differs from case to case depending upon the nature of security and other considerations. Documents In order to secure themselves, the banks obtain cash credit agreement which create charge on the goods and other securities against which the loans are granted. Renewals Cash credit limits are sanctioned by the banks for a period of one year where after it can be extended for further period also on review. CASH CREDIT PLEDGE A cash credit pledge account is like a Cash credit hypothecation account. In such accounts, the legal rights are different as the possession of the securities remains with the bank while the ownership remains with the borrower. Delivery of goods pledged by the pledger to the pledgee is essential for creating a pledge, which may be actual or constructive What is pledge U/s 172 of Indian Contracts Act, Pledge is bailment or delivery of goods as security for payment of a debt or performance of a promise. Who can pledge? The owner of goods, the agent of the owner, the joint owner with the consent of other co-owner and a person having limited interest in the goods (to the extent of his interest), can pledge the securities. Rights of pledgee The pledgee has certain rights such as (which are not limited by Law of Limitation):

a he may retain the goods until the payment of the debt or performance of the promise is fulfilled.

b to sell the goods by giving a due notice to the pledger in case the pledger fails to make the payment of the debt. c pledgee steps in the shoes of the pledger.
d to recover charges incurred for preservation of the goods pledged.

Duties of the pledgee a to return the goods (along with accretion to goods if any) once the money is paid back by the pledger. b to take that much care of the goods, which he would have been taking, had the goods belonged to him. Bailment It may be noted that pledge is different from bailment. Bailment is delivery of goods by one person to another for some purpose while the purpose in pledge is performance of a specific promise or security" for debt. The pledgee can sell the goods pledged after giving notice to the pledger while in bailment the goods can be retained or bailer can be sued for charges. BILLS PURCHASE OR DISCOUNTING Depending upon the place where drawn, period for which drawn and their natures, the bills may be of varying types such as: a documentary bills (accompanied by documents of title to goods). These bills may be demand bills, payable on demand or time/usance bills, payable after a fixed time from date of acceptance. The banks have to deliver document of title to goods in respect of usance bills b clean bills are those which are not accompanied by any documents and these may not arise out of genuine trade transactions and are accommodation bills normally. c Accommodation bills - Banks do not permit advance against accommodation bills. Accommodation bills can be detected by presence of characteristics such as these are clean bills drawn on associate or group concerns, addresses are common or in the form of 'care of, line of activity of drawee is different, drawer presents another bill for discount on or around the date on which the previous bills fall due for payment, bills relate to items in which they do not deal, bills drawn by retail traders having no outstation business. Advances against bills - Banks allow advances by purchasing the demand documentary bills or discounting the usance documentary bills and negotiating the bills drawn under letters of credit, covering genuine sale of commodities (other than capital goods) in trade and movement thereof. Similarly banks allow advance against the security of bills under collection. The advances allowed by banks against the bills drawn on govt. departments are called Supply Bills. . Negotiable instruments - The bills are negotiable instruments under NI Act and advance there against is of self liquidating nature, since the payment .is received either on demand or after fixed time period. Security - The advances against demand bills are considered to be relatively safe, since the document of title to goods remain with the bank till the payment is received. Not only this, the banks facing liquidity constraints can also approach RBI for allowing refinance against the bills discounted. DEMAND LOANS Purpose- Demand loans are the loans for a fixed amount (unlike cash credit) where no further

immediately on acceptance while the document of title to goods is released on payment in respect of demand bills.

debits (except for interest) are permitted once the initially fixed advance is availed. Demand loans are allowed for short term durations say, one year and are required to be repaid on falling due. Any amount deposited in the account is ap.propriated on a permanent basis without allowing it to be drawn again. Hence, whenever the borrower need fresh drawings, a fresh demand loan account shall be opened and fresh documents shall be obtained. Interest -In demand loans also, the interest is charged on the amount outstanding on the close of each day and debited. The repayment in demand loan is normally as per the convenience of the borrower, which may be in lump sum (bullet payment) or by way of instalment. Working Capital Demand Loans - As per RBI's guidelines on loan system of delivery of bank credit, the bank sanction working capital demand loans repayable over a period of one year by bifurcating the working capital limits into cash credit and demand loans. Such loans generally carry same rate of interest which is charged to cash credit advance. The security for such advances is also common security with cash credit accounts. (The details are available under Credit Delivery System section of this chapter). TERM LOANs Purpose - As the name indicates, these loans are a given for fixed period of time with the provision that its repayment shall also come in regular pre-fixed periodical instalments which may be equated or graduated. These loans are generally sanctioned for acquiring fixed assets by the persons engaged in business and trade or in manufacturing or servicing etc. Repayment - The time period for which such loans are sanctioned varies from case to case depending upon the repayment capacity of the borrower concerned, which in turn depends upon the cash generation capacity of the financed activity or assets. Interest - Interest on these accounts is charged on the daily products and is debited on a monthly basis, except in case of agriculture related activities and small scale industrial activities, where the interest is debited, generally on halfyearly basis. Term loans are generally sanctioned for a period of more than 3 years and less than 10 years by the banks. Term loans up to 7 years' repayment are called medium term loans ansl beyond that, long term loans. / Margin - The banks maintain margin on the security which differs from case to case depending upon the nature of security and other considerations. VARIOUS KINDS OF CHARGES OVER SECURITIES ASSIGNMENT Assignment is transfer of a right of actionable claim, which may be existing or future. The transferor of such claim is called the assignor and the transferee is called the assignee. Actionable claim Actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be in existence, accruing, conditional or contingent. Major features a assignment must be in writing and signed by the assignor. b no particular form is prescribed. ' c no consideration is essential for validity of an assignment. d the interest of the assignor to the assignee must be clear. e due notice of assignment is to be given to the debtor, for making the debtor liable to the assignee. f assignor cannot give a better title than that what he has, as

the transferee shall. take the. actionable claim subject to all the liabilities and equities to which the transferor was subject in respect thereof at the date of the transfer. , Who cannot accept assignment As per section 130 of TPA, no assignments are acceptable from a judge, a legal practitioner or an officer of the court of justice. Kinds of assignments The assignments are of two kinds i.e. legal assignment and equitable assignment. A legal assignment means an absolute transfer of actionable claim and must be in writing, signed by the assignor and should be informed to the debtor. An equitable assignment means handing over the possession of the document representing actionable claim without observing the above formalities. MORTGAGE What is a mortgage As per section 58 of Transfer of Property Act 1882, mortgage is transfer of interest in specific

Interest in the property The mortgagor only parts with the interest in the property and not the ownership. Mortgage is not merely a contract but it is conveyance of interest in the mortgaged property. Mortgagor and Mortgagee The transferor is called a mortgagor and the transferee a mortgagee. Mortgage money and Mortgage deed The principal money and the interest of which payment is secured are called the mortgage money and instrument if any by which the transfer is affected, is called the mortgage deed. Essential features of mortgages a Mortgages can be created to cover general balances, existing b there must be a creditor and debt relationship (or contract of guarantee) between the bank and the mortgagor at the time of deposit. c actual existence of the debit is not necessary but even an application for debt and its acceptance establishes -this relationship. d a partner cannot mortgage the property of the firm without other partners joining him in doing so. Who to create The owner/s or his agent. Duplicate title documents Where an original title deed in equitable mortgage is not available, a true copy certified by the Sub-registrar can be deposited where it is proved that original is either not in existence or has been lost. A public notice of creation of mortgage is also desirable in such circumstances. Kinds of Mortgages There are six forms/kinds of mortgages: a: Simple mortgage - Sec 58(b): When mortgagor undertakes personal liability and agrees that in the event of his failure to pay the mortgage money, the mortgagee shall have a right to cause the property to be applied so far as may be necessary by means of a decree for sale of property. Features are: . Mortgagee has no power to sell the property without court

immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an engagement which' may give rise topecuniary liability.

payment as well as future loans or advances.

intervention. . Mortgagee has no right to get any payments out of the rents and produce of the mortgage property. . Mortgagee is not put in possession of the property. . Registration of the mortgage is compulsory. b: Mortgage by conditional sale: Sec 58( c) In this, the mortgagor ostensibly sells the mortgaged property on conditions that on default of payment of the mortgage money, the sale shall become absolute or on such payment being made, the sale shall become void on such payment being made the buyer shall transfer the property to the seller. Features are: . Sale is ostensible and not real. . If money remains unpaid as per agreement, the sale becomes absolute. The mortgagee by applying to court can get decree in his favour where after the mortgagor loses the right of redemption. . Mortgagee can sue for foreclosure but not for sale of property. . No personal liability for repayment of the loan. c: Usufructuary mortgage: See 58 (d) Where the mortgagor delivers the possession and authorises the mortgagee to retain possession until payment of the mortgage money and to receive the rents and profits accruing from property or any part of such property to appropriate the same in lieu of interest. Features are: . Mortgagee in legal possession of the property, till dues are repaid. . . Mortgagee has the right to receive rents and profits accruing from the property. . No personal liability of the mortgager. . No time limit specified . d: English mortgage: Sec 58 (e) Where the mortgagor binds himself to repay the mortgage money on a certain date and transfer the mortgaged property absolutely to the mortgagee, but subject to the condition that he will retransfer it to the mortgagor upon payment of the mortgage money, as agreed. Important features are: . Personal liability to pay on a specified date . Absolute transfer of property to the mortgagee, subject to re conveying the property if the debt is repaid. e: Equitable mortgage: (U/s 58 (f) Where the mortgagor delivers to the mortgagee, the documents of title to immovable property with intention to create a security thereon to secure a loan. The transaction need not be reduced to writing. In case of non-payment, the mortgagee can sue for sale but he cannot foreclose the mortgaged property. According to Section 58 (f) of Transfer of Property Act 1882, where a person delivers to a creditor or his agent documents of title to immovable property, with the intent to create a security thereon, the transaction is called a mortgage by deposit of title deed. However the Act makes the provisions of this Section applicable only to Bombay, Calcutta, Madras and such other towns as may be notified by the State Govts by notification in the Official Gazette. Important features are: . Can be created in places notified by State govt. only. . This territorial restriction does not affect the location of the property. . There should be deposit of title deed of the property with intention to secure a debt.

f: Anomalous mortgage: A mortgage which is not of any of the above five kinds, is called an anomalous mortgage (Sec 58(g).

Precautions in creation of mortgage While accepting mortgage of immovable property, the mortgagee should take following steps/precautions: a estimate the value of property realistically by personal inspection, comparison of value with recent sales of properties in the neighbourhood, inquiry from parties having a good knowledge of local land values and wherever necessary, valuation by an expert valuer or assessor. b a report on the title should ordinarily be obtained from a local lawyer of good repute and standing, based on a search of revenue records by him for the past 12 years at least. The opinion of the lawyer should take care that the documents produced for deposit/mortgage are complete and sufficient to convey a clear and marketable title, that the persons seeking to secure the property to the bank have a clear and marketable title there to and are legally capable of creating the charge thereon in favour of the bank and that the properties are unencumbered and position with regard to tenancy laws, if any. c Receipt for payment of house-tax for buildings located in Municipal limits, certified copies of revenue records in case of agricultural land should be obtained. Right of foreclosure On default by the mortgagor, the mortgagee in certain types of mortgages, has right to obtain a decree from a court to the effect that the former be debarred for ever to get back the mortgage property. Such a right is called the Right of Foreclosure. A suit for foreclosure must be filed within 30 years from date of mortgage money becomes dues. Right of redemption On liquidation of the debt, the mortgagor has the right to get back (redeem) the mortg('!ged property. This right is known as right of redemption, which can be exercised at any time before the decree for sale or foreclosure has been passed by the court. NON-FUND BASED CREDIT FACILITIES GUARANTEES During the course of business, banks are often required to furnish guarantees on behalf of their own customers in lieu of their obligations, performance or other requirements. Section 126 of Indian Contract Act, 1872, defines guarantees as a contract to perform the promise or discharge the liability of a third person in case of his default. Types of guarantees a: Financial Guarantee: b: Performance guarantee: c: Deferred payment guarantee; , Invocation The amount claimed under the guarantee should be immediately paid to the beneficiary if invocation is in accordance with the terms and conditions of the guarantee. Withholding payment merely at the instance of the customer should not be done as it results .in nonfulfillment of the obligation undertaken by the bank and also affects bank's image. If the amount of demand as a result of payment by the bank to beneficiary in not paid by the customer within a reasonable period, the recovery process is to be~initiated. LETTER OF CREDIT A letter of credit is a commercial instrument of assured payment and widely used by the business community for its various advantages. It is an instrument by which a bank undertakes to make payment to a seller on production of documents stipulated in the credit. The credit specifies as to

when payment is to be made which may be either when the documents are presented to the paying bank or at some future date, depending upon the terms stipulated in the credit. PARTIES TO LCs a: Applicant- The buyer or importer of the goods. b: Issuing bank - Importer's or buyer's bank who lends its name or credit. c: Advising bank - Issuing bank's branch (or correspondent in exporter's country) to whom the letter of credit is sent for onward transmission to the seller or beneficiary, after authentication of genuineness of the credit. d: Beneficiary - The party to whom the credit is addressed i.e. seller or supplier or exporter. e: Negotiating bank - The bank to whom the beneficiary presents his documents for negotiation or acceptance under the credit. f: Reimbursing bank- Third bank which repays, settles or funds the negotiating bank at the request of its principal, the issuing bank. g: Confirming bank - The bank adding confirmation to the credit, which undertakes the responsibility of payment by the issuing bank and on his failure to make the pay. TYPES OF CREDITS DA (usance) and DP Credits DA LCs are those, where the payment is to be made on the maturity date in terms of the credit. The documents of title to goods are delivered to applicant merely on acceptance of documents for payment. The beneficiary draws usance bills for a particular tenor. DP LCs are those where the payment is made against documents on presentation. Irrevocable credits The irrevocable credit is the most widely used credit and under it the issuing bank gives its irrevocable undertaking to pay, if all the terms of the credit are met. The issuing bank can only amend or cancel its undertaking if all other parties to the credit consent to the change. With or without recourse Whe~e the beneficiary does not hold himself liable, the credit is said to be without-recourse. The without- recourse credits due to their various advantages, are popular. As per RBI directive dated Jan 23, 2003, banks should not open LCs and purchase / discount / negotiate bills bearing Confirmed Credits A confirmed irrevocable credit is a credit to which the advising bank at the request of the issuing bank adds confirmation that payment will be made. The advising bank thus confirms that it will honour drawings, which conform to the terms of credit. By such additions, the confirming bank steps into the shoes of the issuing bank and thus the confirming bank negotiates documents if tendered by the beneficiary in strict conformity with the terms of the credit, without recourse to him. Transferable Credits Under a transferable credit the beneficiary is entitled to request the paying, accepting or negotiating bank to make available in whole or part, the credit to one or more other parties. For partial transfer to one or more second beneficiary/ies the credit must provide for partial shipment. A credit is transferred only on the. terms and conditions specified in the original credit with the exception of the amount of credit or any unit price stated therein and of the period of validity, reduced or curtailed. The name of the first beneficiary can be substituted for that of the applicant for the credit, but if the name of the applicant for credit is specifically required in the original credit to appear in any document other than the invoice, such requirement should be fulfilled.

the 'without recourse' clause.

Back to back credits A back to back credit is one where an exporter received a documentary credit opened by a buyer in his favour. He tenders the same to the bank in his country as a cover for opening a credit in favour of his local suppliers. The terms of such credit would be identical except that the price may be lower and validity earlier. Such credit keeps the identity of theultimate buyer secret. The exchange risk however is borne by the beneficiary of the credit in this case. Red Clause Credits A red clause credit also referred to a packing or anticipatory credit has a clause printed in red permitting the correspondent bank in the exporter's country to grant advance to beneficiary at issuing bank's responsibility. Such advances intended to enable the seller/exporter to obtain raw material, transportation etc. These advances are adjusted from proceeds of the bills negotiated. Revolving Credits These are one, which provide that the amount of drawings made thereunder would be reinstated and made available to the beneficiary again and again for further drawings during the currency of credit subject to certain conditions specified therein.

NON-PERFORMING ADVANCES Reserve Bank started implementing the prudential guidelines on asset classification, income recognition and provisioning on loan assets based on the recommendations of Narasimham Committee, in a phased manner commencing with the accounting year beginning from 1.4.1992 and modified the original guidelines on a number of occasions. Past due - The basis for treating a credit facility as nonpErforming was 'past due' (the due amount remaining unpaid for a period of 30 days from due date) The concept of past due has now been

dispensed with wef the year ending March 2001.

What is an NPA ? A Non-performing Asset (NPA) is an advance where: a Term loans - interest and/or instalment of principal remain overdue for a period of more than 90 days* in respect of a Term Loan,

Out of Order for Cash Credit/Overdraft Accounts: A When outstanding balance is more than drawing power or sanctioned limit. B When credits in the account are not there at all or are less than the interest debited, even though o/s balance is within the .sanctioned limit/drawing power. C When the stock statement is delayed for 3 months or renewal of limits does not take place is delayed for 3 months even though o/s balance is within the sanctioned limit/drawing power. Implications of accounts becoming NPAs A Banks cannot credit income to their profit and loss account to the debit of loan account unless recovery thereof takes place. B Interest or other charges already debited but not recovered have to be provided for. Provision for outstanding balance also will have to be made. C All loan accounts of the borrower would be treated as NPA if one account is NPA. ASSETS CLASSIFICATION r Standard Assets Standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Sub-standard Assets Sub-standard asset is one which has been classified as NPA for a period not exceeding 18 months wef the year ended March2001 (12 months wef the year ending March 31, 2005). Where the terms of the loan agreement regarding are renegotiated or rescheduled after commencement of production, these are to continued as sub-standard at least for one year (reduced from two years wef the year ended March 31, 1999) of satisfactory performance under the renegotiated or rescheduled terms. Doubtful asset A doubtful asset is one which has remained NPA for a period exceeding 18 months wef 01.04,2000 (12 months wef y.e. March 31, 2005). Loss Asset A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors, but the amount has not been written off, wholly or partly. Only those advanoes would be classified here, where no security is available. Accounts where any security/ECGC/DlCGC cover is available are not to be reported under loss category.

b Cash credit/Overdraft accounts - the account remains out ot order for a period of more than 90 days*, in respect of an Overdraft/Cash Credit (OO/CC), c Bills accounts - the bill remains overdue for a period of more than 90 days* in the case of bills purchased and discounted, d Agricultural advances - interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted fDr agricultural purposes, e Other accounts -and any amount to be received remains overdue for a period of more than 90 days* in respect of other accounts. *The period of 90 days was 180 days till the year ended 31.03.03.For the year ending 31.03.04 and onward, it is 90 days.

a Upto one year b One to three yrs c More than three yrs

PROVISIONING FOR LOANS I ADVANCES Loss assets: If the assets are intended to remain in the books for any reasons, 100% of the outstanding should be provided for. Doubtful assets: a: 100% of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. b: Over and above item (a) above, depending upon the period for which the loan asset has remained doubtful, 20% to 50% of the secured portion on the following basis: If considered doubtful:

:30% :50%

:20%

Sub-standard A general provision of 10% of total outstanding and while calculating provisions, DICGC/ECGC cover is to be deducted from the outstanding balance. Standard A general provision of a minimum of 0.25% of total outstanding to be made from the year ending 31.03.2000. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and LIC policies are exempted from provision requirements, provided outstanding is covered by value of security . TREATMENT TO SPECIFIC CATEGORY OF ACCOUNTS Loans against readily encashable securities: Advances against term deposits, NSCs eligible for surrender, Indira Vikas Patras, Kisan Vikas Patras and LIC policies, need not be treated as NPAs as long as the balqnce is within value of security. Consortium advances Each bank can classify the borrowal account according to its own record of recovery and other aspects having a bearing on the recoverability of the advances, as in the case of multiple banking. Rehabilitation cases As regards the advances granted under rehabilitation packages finalised by BIFR and/or term lending institutions, banks should not make any provision on the additional facility for a period of one year from date of disbursement. However, for original advance, provision be made according to the classification viz. substandard or doubtful, as the case may be. GROSS NPAs - Gross NPAs is the amount outstanding in the borrowal account, in books of the bank other than the one which has been recorded and not debited to borrowal account. NET NPAs - Net NPAs is the amount of Gross NPAs less (a) interest debited to borrowal and not

recovered and not recognised as income and kept in interest suspense, (b) amount of provisions held in respect of NPAs and (c) amOUf1t of claim/recovery received and not appropriated.

PRIORITY SECTOR LENDING At present, priority sector broadly comprises the agriculture, Small Scale Industries and other activities / borrowers. Detailed classificatipn containing the list of items in different segments of priority sector advances is given below. (Based on RBI's Master circular dated Nov 12, 2002, as amended subsequently) AGRICULTURE

1.1 Direct Finance to Farmers for Agricultural Purposes 1 Short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank. 2 Medium and long-term loans (Provided directly to farmers for financing production and development needs). i Purchase of agricultural implements and machinery I; ii Development of irrigation potential through. Iii Reclamation and Land Development Schemes. iv Construction of farm buildings and structures. v Construction and running of storage facilities vi Production and processing of hybrid seeds for crops. vii Payment of irrigation charges. viii Other types of direct finance to farmers a Short-term loans b Medium and long term loans Indirect Finance to Agriculture i Credit for financing the distribution of fertilisers, pes ticides, seeds, etc. ii Loans up to Rs. 25 lakhs granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc. 2 i Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energising their wells. . ii Loans to SEBs for Systems Improvement Scheme under Special Project Agriculture (SI-SPA). 3 Loans to farmers through PACS, FSS and LAMPS. 4 Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained with NABARD. 5 Deposits held by private sector banks with NABARD in fulfil ment of shortfall in attaining priority sector target in March 1996. 6 Subscription to bonds issued by Rural EI~ctrification Corporation (REC) exclusively for financing pump set energisation programme in rural and semi-urban areas and also for financing System Improvement Programme (SI-SPA). 7 Subscriptions to bonds issued by NABARD with the objective of finc;lncing exclusively agriculture/allied activities. 8 Other types of indirect finance such as, i Finance for hire-purchase schemes for distribution of agricul tural machinery and implements. ii Loans for constructions and running of storage facilities (warehouse, market yards, godowns, silos and cold storages) in the producing areas. iii Advances to Customs Service Units managed by individuals, institutions or organisations who maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., anq undertake work from farmers on contract basis. If these advances are covered by the guarantee of DICGC, they should be classified under SSI advances. iv Loans to individuals, institutions or organisations who under take spraying operations.

v Loans to co-operative marketing societies, co-operative banks for re-Iending to co-operative marketing societies (provided a certificate from the State Co-operative Bank in favour of such loans is produced) fc,r disposing of the produce of members. vi Loans to co-operative banks of producers (e.g. Aarey Milk Colony Co-operative Bank, consisting of licensed cattle owners) . vii Financing the farmers indirectly through the co-operative system (otherwise than by subscription to bonds and debenture issues), provided a certificate from the State Cooperative Bank in favour of such loans is produced. viii Advances to State-sponsored Corporations for onward lending to weaker sections. ix Finance extended to dealers in drip irrigation/sprinkler irrigation system/ agricultural machinery, subject to the conditions that he should be dealing exclusively in such items or if dealing in other products, should be maintaining separate and distinct records in j-espect of such items with a ceiling of upto Rs. 20 lakhs per dealer should be observed. x Loans to National Co-operative Development Corporation (NCDC) for on-lending to the co-operative sector for purposes coming under the priority sector. xi Loans to farmers for purchase of shares in Co-operative Sugar Mills and Sugar Mills set up as Joint Stock Companies and other agro-based processing units. xii Loans to Arthias (commission agents in rural/semiurban areas functioning in markets/mandies) for meeting their working capital requirements on account of credit extended to farmers for supply of inputs. xiii Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture. SMALL SCALE INDUSTRIES 1. Small Scale & Ancillary Industries Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. 2 Tiny.Enterprises The status of Tiny Enterprises may be given to all small scale units whose investment in plant & machinery is upto Rs. 25 lakhs, irrespective of the location of the unit. 3. Small Scale Service & Business Enterprises (SSSBEs) 3.1 Industry related service and business enterprises with in vestment upto Rs. 10 lakhs in fixed assets, excluding land and building will be given benefits of small scale sector. For computation of value of fixed assets, the original price paid by the original owner will be considered irrespective of the price paid by subsequent owners. Indirect finance in the small-scale industrial . Agencies involved in assisting the decentralised sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries. . Government sponsored Corporation/ organizations providing funds to the weaker sections in the priority sector. . Advances to handloom co-operatives. . Term finance/loans in the form of lines of credit made availa ble to State Industrial Development Corporation/State Financial Corporations for financing SSIs. . Credit provided by banks to KVIC under the scheme for provi

sion of credit to KVIC by consortium of banks for lending to viable Khadi and Village Industrial Units. . Funds provided by banks to SIDBI/SFCs by way of rediscounting of bills of SSl earlier discounted by the SIDBI/SFCs. . Subscription to bonds floated by SIDBI, SFCS, SIDCS and NSIC exclusively for financing SSI units. . Subscription to bonds issued by NABARD with the objective of financing exclusively non-farm sector. . Financing of NBFCS or other intermediaries for on-lending to the SSI sector. . Deposits placed with SIDBI by Foreign Banks in fulfilment of shortfall in attaining priority sector targets. . Deposits placed with SIDBI by Private Sector Banks in fulfil ment of shortfall in attaining priority sector targets. . Bank finance to HUDCO either as a line of credit or by way of investment in special bonds issued by HUDCO for on-lending to artisans, hand loom weavers, etc. under tiny sector may be treated as indirect lending to SSI (Tiny) Sector. Industrial Estates - Loans for setting up industrial estates. KVI Sector: All advances to KVI sector, irrespective of their size of operations, location and investment in plant and machinery, will be covered under priority sector advances and will also be eligible for consideration under the sub-target (60 percent) of the 55I segment within the priority sector. Manufacture of common salt through any process including manual operation (involving solar evaporation). Units engaged in ship breaking/dismantling which are composite ones (i.e. also undertake the processing of scrap obtained). Bank loans to bought leaf factories manufacturing tea. Water mills (Gharat) has been recognised as an industrial activity and shall be eligible for registration as small scale industry. OTHER PRIORITY SECTOR ACTIVITIES/ BORROWERS 3.1 Small road & Water Transp~rt Operators (SRWTO) 1 Advances to small road and water transport operators owning a fleet of vehiclj:!s not exceeding 10 vehicles, including the one proposed to be financed. 2 Advances to NBFCs for on-lending to truck operators and SRWTOs other than truck operators satisfying the eligibility criteria. Also, portfolio purchases (purchases of hire purchase receivables) from NBFCs made after 31.07.98 would also qualify for inclusion under priority sector lending, provided the portfolio purchases relate to SRWTOs satisfying priority sector norms. 3.2 Retail Trade Advances granted to: 1 retail traders dealing in essential commodities (fair price shops) and consumer co-operative stores, and 2 private retail traders with credit limits not exceeding Rs. 10 lakhs. (Retail traders in fertilisers .will form part of indirect finance for agriculture and those to retail traders of mineral oils under small business). 3.3 Small Business Small Business would include individuals and firms managing

a business enterprise established mainly for the purpose of providing any service other than professional services whose original cost price of the equipment used for the purpose of business does not exceed Rs. 20 lakhs with working capital limits of Rs. 20 lakhs or less. Further, the ag.gregate of term loan and working capital limits sanctioned to a small business unit should not exceed Rs. 20 lakhs. Advances for acquisition, construction, renovation of houseboats and other tourist accommodation will be included here. Distribution of mineral oils shall be included under 'small business.' Advances to judicial stamp vendors and lottery ticket agents may also be classified under this category. Professional & Self-Employed Persons Loans to professional and self-employed persons include loans for the purpose of purchasing equipment, repairing or renovating existing equipment and/or acquiring and repairing business premises or for purchasing tools and/or for working capital requirements to medical practitioners including Dentists, Chartered Accountants, Cost Accountants, Practising Company Secretary, Lawyers or Solicitors, Engineers, Architects, Surveyors, Construction contractors or Mdnagement Consultants or to a person trained in any other art or craft who holds either a degree or diploma from any institutions established, aided, or recognised by Government or to a person who is considered by the bank as technically qualified or skilled in the field in which he is employed. The undernoted specific categories of advances will also be eligible for classification under this item: Advances to accredited Journalists and Cameramen who are freelancers, i.e., not employed by a particular newspaper/magazine for acquisition of equipment by such borrowers for their professional use. Financial assistance for running 'Health Centre' by an individual who is not a doctor, but has received some formal training about the use of various instruments of physical exercises. Advances for setting up beauty parlours where the borrower holds qualification in the particular profession and undertakes the activity as the sole means of living/earning his/her livelihood. Only such professional and self-employed persons whose borrowings (limits) do not exceed Rs. 10 lakhs of which not more than Rs. 2 lakh should be for working capital requirements, should be cov8red under this category. However, in the case of professionally qualified medical practitioners, setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs. 15 lakhs with a sub-ceiling of. Rs. 3 lakhs for working capital requirements. Advances granted for purchase of one motor vehicle to professional and self-employed persons other than qualified medical practitioners (within RS.l0 or RS.15 lac) will not be included under the priority sector. Advances granted by banks to professional and self-employed persons for acquiring personal computers for their professional use, maybe classified in this category, provided the ceiling of total borrowings of Rs. 10 lakhs of which working capital should not be more than Rs. 2 lakh per borrower, is complied with in each case for the entire credit inclusive of credit provided for purchase of personal computer. State Sponsored Organisations for Scheduled Castes! Scheduled Tribes Advances sancticned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations. Education Educational loans should include only loans and advances granted to individuals for educational purposes and not those granted to institutions and will include all advances granted by banks under special schemes, if any, introduced for the purpose. Housing - Direct Finance Loans upto Rs. 10 lakh in rural! semi-urban areas and upto Rs 10 lakhs in urban and metropolitan areas for construction of houses by individuals, excluding loans granted by banks to their own employees.

Loans upto Rs.l lac in rural!semi urban and Rs.2 lac in urban given for repairs to the damaged houses of individuals. Loans granted by banks upto Rs. 5 lakhs to individuals desirous of acquiring or constructing new dwelling units and upto Rs. 50,000/- for upgradation or major repairs to the existing units in rural areas under Special Rural Housing Scheme of NHB. Housing - Indirect Finance Assistance given to any governmental agency for construction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakhs of loan amount per housing unit. Assistance given to a non-governmental agency approved by the NHB for the purpose of refinance for reconstruction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of loan component of Rs. 5 lakhs per housing unit. All the investment in bonds issued by NHB/HUDCO exclusively for financing of housing, irrespective of the loan size per dwelling unit, will be reckoned for inclusion. Consumption Loans Pure consumption loans granted under the Consumption Credit Scheme should be included in this item. The loans can be given for marriage ceremonies Rs.500, medical expenses Rs.500, birth or funeral or religious or general consumption Rs.150, educational needs RS.200. Maximum loan per family RS.l000. Loans to Self-Help Groups (SHGs)/NGOs . Loans provided by banks to SHGs/NGOs for on-lending to SHG/members of SHGs/discreet individuals or small groups which are in the process of forming into SHGs will be reckoned as priority sector lending. . Lending to SHGs is to be included as a part of banks lending to weaker sections. Micro-credit provided by banks either directly or through any intermediary. . Food and Agro-based Processing Sector Credit to food and agro based processing sector should be included under this item. , Software Industry Loans to software industry with credit limit upto Rs. 1 crore from the banking industry to be included under this item. , Venture Capital Investment in Venture Capital will be eligible for inclusion in priority sector, subject to the condition that the venture capital funds/companies are registered with SEBI. PRIORITY SECTOR TARGETS Overall credit to priority sector (% to net bank Credit Aqriculture (% to NBC) Within agriculture - Maximum for indirect as % of aqriculture advances Weaker section (% of NBC) Differential Rates of I:1terest Within DRI to SC/ST beneficiaries Within DRI through rural/semi urban. Branches of Banks Of ols credit to SSI to units with investment in Dlant & machinerv up to Rs.5 lac SSI units with investment in plant & machinery

40 % 18% 25% 10% 10/0** 40% 2/3,d 40% 20%

above 5 lac but up to Rs.25 lac SSI units having investment in plant and machinery 40% above RS.25 lac Export Credit - not a priority sector credit for 12% Indian banks (of ols credit) Credit women beneficiaries 3% * Housing finance allocation 3% + Priority Sector - overall for Foreign banks 32% SSI Credit within PS for foreiqn banks 10% EXDort credit within PS for foreiqn banks 12% WEAKER SECTIONS The concept of weaker sections under priority sector was introduced as per recommendations of Krishnaswami Committee (1980). It comprises: 1 Small and marginal farmers with land holding of 5 acres and less and landless labourers, tenant farmers and share croppers. 2 Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,0001 3 Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY) 4 Scheduled Castes and Scheduled Tribes 5 Beneficiaries of Differential Rate of Interest (DRI) scheme 6 Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY) 7 Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavengers (SLRS). 8 Advances to Self Help Groups SELF-HELP GROUPs (MICRO CREDIT) SHGs are registered or unregistered small economically homogeneous and affinity groups of rural poor, voluntarily coming together for mutual benefits. Important features of an SHG . the no. of members can be between 10-20 but for irrigation pro jects, there is no ceiling on no. of members. . the members are the persons below poverty line. . there can be one person from one family in one SHG. . one person cannot be member of more than one SHG. . there have be to regular weekly or fortnightly meetings . the members are to save regularly out of their earning. . saved funds are meant for lending to members on which decision is to be taken by all members. . group has to have a bank account . there should be proper record/book keeping. Banking system assistance to SHGs I The scheme of linkage of SHGs with banks was launched in 1992 under the aegis of NABARD. Kalia Committee set up by RBI had recommended financing SHGs. Bank Loans to SHGs Revolving Fund . SHGs can be sanctioned Revolving Fund (where they are in existence for 6 months and meet the above criteria) in the form of overdraft or cash credit up to Rs.25000, which includes Rs.10000 as subsidy from DRDA. Additional subsidy of RS.10000 is

available as 2nd dose. . This amount has no linkage with the amount of savings or no. of members in a group. . Cash credit or overdraft continues with the co-existence of SHG. . Such overdraft or cash credit is unsecured loan in nature but for the purpose of computation of exposure of the bank in unsecured advances (which is fixed at 20% of outstanding in unsecured guarantee plus total outstanding in unsecured advances and not to exceed 15% of total outstanding advances), it is to be excluded Direct Assistance SHGs can be financed directly (where the group is active for at least 6 months and meets the above criteria). . Maximum loan - Banks allowed advance to SHG in th.= ratio of 1: 1 (accumulated saving: bank loan) to 1 :4, with repayment with in 3-10 years. . Margin & security - The savings are considered as margin and there is no rt=quirement of collateral security. Rate of Interest - To be decided by the bank, under the scheme under which loan is given. Repayment - Generally 3-10 years but generally 3 years. Other aspects - Criteria for giving loans includes registration of SHG as a society, good track record of savings by and recovery from the members, adequate financial management capability for successfully running projects, adequate trained and motivated filed staff. FINANCE TO SMALL SCALE INDUSTRIES Small Scale Industries A working definition of Small Scale Unit was first evolved in the year 1955 where after review was undertaken from time to time and presently the investment ceiling for SSIs (including export oriented units and ancillary units) is Rs.l00 lac wef Dec 1999 Units which had obtained perma.lent registration (i.e. investment up to Rs.3 cr) prior to December 1999 notification would continue to be regarded as SSIs. Govt. increased the investment ceiling limit applicable for food and agro based processing units,

manufacture of specified hosiery, hand tool items drugs, pharmaceuticals and stationery by SSIs/ancillary industrial undertakings from Rs.l cr to Rs.5 cr.

Tiny Units The small scale units engaged in manufacturing, processing, preservation of goods, mining, quarrying, servicing and repairing of specified type of machinery and equipment, agro service units, where the investment in plant and machinery does not exceed Rs.25 lac (wef December 1997), irrespective of location. Small Scale Service & Business Enterprises All industry related service and business enterprises with investment upto Rs.l0 in fixed assets, excluding land and building would be categorised as small scale service establishments (SSSBE) and such units can be set up in any village/town irrespective of its population. Only industry related small scale service/business enterprise (SSSBE) will be eligible for benefit/concessions available to SSIs. ARTISANS, VILLAGE AND COTTAGE INDUSTRY It is defined as Artisans (irrespective of location) or small industrial activities in villages and small towns with a population not exceeding 50000, involving utilisation of locally available natural resources and / or human skills where individual credit requirements do not exceed Rs.50000. ANCILLARY UNITS An undertaking which is engaged or is proposed to be engaged in the manufacturing of production of parts, components, subassemblies, tooling or intermediates or the rendering of services and undertaking supplies or proposes to supply or renders not more than 50% of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery, whether held on ownership terms or on lease or on hire purchase,

does not exceed Rs.100 lac (wef Dec 1999). WOMEN ENTERPRISES FOR SSIs An SSI unit related service or business enterprise, managed by one or more women entrepreneurs in the proprietary concerns or in which she/they individually or jointly have a share capital of not less than 51% as partners/shareholders/directors of private limited Company/Members of Co-operative society would be known as Women Entrepreneurs' Enterprise. Security norms . Normal security exemption is for loans up to Rs.5 lac. For units having good track record, the exemption limit raised to Rs.25 lac during Nov 2003. Above these levels, the banks are free to determine on the merits of each case. CERTIFICATE OF DEPOSIT Objective - This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest. The major features are: 1. Can be issued only by the scheduled commercial banks (except RRBs), to any extent and banks have to maintain SLR and CRR on the "issue price. 2. Individuals, corporations, companies, trusts, funds, associations etc. can subscribe to the CDs 3. Maturity period of not less than 15 days to not more than 12 months. 4. It is transferable by endorsement and delivery any time. 5. Minimum size of one CD is Rs. 1 lacs and it could be in the multiples of Rs. 1 lac on face value. 6. No loan can be granted against the security of the CDs and banks cannot buy-back their own CDs before maturity. 7. A CD is to be issued in the form of a usance promissory note (without any grace period for payment) and attracts stamp duty to be borne by the banks. After June 30, 2002, CDs can be issued 8. Payment of face value is to be made by a crossed cheque on the date of maturity (in case of the maturity date being a holiday, the payment will fall due on the preceding day). 9. Interest rate - Market determined. It can be floated rate of interest also. COMMERCIAL PAPER Commercial Paper (CP) introduced during 1990, is a short term money market instrument issued as a usance promissory note (unsecured) . It is privately placed. . The objective is to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and FI have also been permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Who can issue Commercial Paper (CP) . Companies, primary dealers (PDs) and all-India financial institutions (FIs). (for PDsjFIs, no eligibility criteria except that their borrowing should be within their overall borrowing limit) Eligibility for a Company . A company is eligible to issue CP if (a) its tangible net worth, as per latest audited balance sheet, is not less than Rs. 4 crore;

in demat form only.

company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal accounts of the company are classified as a Standard Asset by the financing bank/sf institutian/s and (d) minimum credit rating from either CRISIL,

(b)

ICRA, CARE or FITCH Ratings India Pvt. Ltd is P-2 of CRISIL or such equivalent rating by other agertcies, which should not be old than 2 months.

Maturity . Mininium 15 days & maximum upto one year. Denominations . Rs.5 lakh or multiples thereof. Time period ceilings . The total amount should be raised within a period of 2 weeks from the date on which the issue opens. Each CP shall have the same maturity date. Every issue of CP, including renewal,should be Investors in CP . Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional wvestors (for FIls within the limits set for their investments by SEBI. Mode of Issuance . CP can be issued either in the form of a promissory note (in a dematerialised form) through any of the depositories approved by and registered with SEBI. Wef 01.07.2001 PDs/FIs/Banks shall hold CPs in de mat form only. Acceptance and payment of CP amount . The investor in CP pay the discounted value of the CP and on maturity, the payment of face value shall be made. Stand-by Facility . Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of stand-by assistance/credit backstop facility, etc., based on their commercial judgement and as per terms prescribed by them. Other features: . CP will be issued at a discount to face value as may be determined by the issuer. . No issuer shall have the issue of Commercial Paper underwritten or co-accepted. SECURITISATION Securitisation of assets is an additional source for recycling of funds in addition to the existing channels. What is securitisation ?: Securitisation is a process under which a no. of individual long term loans are packed together and then distributed or liquidated to various investors having liquid funds, in the form of coupons, pass-

treated as a fresh issue.

through-certificates (PTCs) or through organisations' special purpose vehicles (SPVs i.e. by issuing marketable securities) with the provision that the inflow of cash in the shape of recoveries will be distributed pro-rata to coupon holders.

Process of Securitisation: . The lender sells various types of loans to borrowers; . Out of these loans, he selects certain loans, for selling to issuer for the purpose of securitisation; . The issuer (called special purpose vehicle- SPV) makes payment to lender for the loans purchased; . These loans are converted into a pool of securities by the issuer for the purpose of issuing passthrough-certificates. . These PTCs are then sold to individual investors, who are willing to make investments; . The originator or lender keeps on getting recoveries from original borrowers; . He passes on these recoveries to the issuer. . The issuer in turn passes on these recoveries to the individual investors. Types of securitisation Securitisation can be against moveable assets which is known as 'backed by assets' and against

immovable assets which is 'backed by mortgage'. Loans to be picked should preferably be of an optimum mix for marketability of the instrument i.e. coupon or PTC. Instrument PTC represents the sale of consolidated or undivided interest in the aggregate amount of loans to the extent of face value of PTC. A PTC may be with recourse or without recourse. In respect of without recourse PTC, the originator is not liable to make pC!yment to PTC holder except for receipts of repayment of loans. In the case of with recourse PTC, the PTC holder does not suffer loss and it is borne by the originator or issuer i.e. the SPV, which affects pricing of PTC.