CREDIT CONTROL-4

It also leads to making credit costlier to the end-users, since the lending rates of banks are linked as a percentage over the Bank Rate (say, 4% over the Bank Rate): A downward revision on the other hand tends to make credit cheaper both to bank (by way of refinance) and to customer (by way of a lower lending rate.) In sum, variations in the Bank Rate serve to dissuade banks and customers from further borrowing in times of decelerating industrial and/or agricultural output and rising process, but encourage borrowings when the economic growth rates are showing an upward trend and prices are relatively stable.

Changes in the CRR and SLR also affect bank credit. These two measures lead to impounding or pre-emption of the resources (in the from of DTL) of commercial banks. An upward variation leads to pre-emption of a larger portion of the DTL of banks; a downward revision releases the resources of banks for credit expansion. People are expecting that changes in CRR going to help instant life insurance rates company. There are many companies who are providing life insurance quotes online. They are going to get benefit of such changes.

Within the policy prescription of the Reserve Bank of India framed in accordance with the requirements of the Banking Regulation Act and the Reserve Bank of India Act, individual banks define their own policies, strategies and directions for the flow of credit to the various sectors.

CREDIT CONTROL-3

Section 42(1) of the RBI Act makes it obligatory on scheduled commercial banks to maintain a specified percentage of their demand and time liabilities (DTL) with the Reserve Bank of India in cash as minimum Cash Reserve Ration. The present CRR as a percentage of a bank’s DTL is 15%.

 

Section 24(2A) of the Banking Regulation Act imposes an obligation on scheduled commercial banks to maintain a minimum holding of liquid assets as a Statutory Liquidity Ratio equal to a specified percentage of their DTL, exclusive of the balances maintained under the CRR with the RBI. The investments made by banks in Central Government and State Government securities comprise the bulk of the liquid assets under the SLR. Currently, the SLR has been fixed at 38%. 

The RBI on the basis of an ongoing study of the trends in economic growth, monetary developments, prices, and credit expansion, decides from time to time, the levels (in terms of percentages) of the Bank Rate, CRR and SLR. An upward revision of the Bank Rare raises the cost of refinance in the form of rediscounting of bills of exchange etc. from the RBI.

CREDIT CONTROL-2

The monetary policy and the measures taken under it from time to time, assist in controlling expansion of money supply in ensuring price stability both of which are necessary conditions for planned economic development. Right now in majority countries government is cutting the basic rate so, that market can have more money. I was talking with owner of roman shades, vertical blinds and blinds trading company owner, he says that with the rate of interest government is expecting market to back to track. Everyone is expecting positive output of such actions from government. 

 

The three major instruments of credit control available with the RBI are the Bank Rate, Open Market Operations and Variable Reserve Requirements or Ratios. The first two instruments can be operated by the RBI under the Reserve Bank of India Act. Of the two variable reserve ratios, the Cash Reserve Ratio (CRR) is subject to the Reserve Bank of Regulation Act, 1949.

 

Section 49 of the Reserve Bank of India Act defines the Bank Rate as the standard rate at which the RBI is prepared to buy or rediscount bills exchange or other commercial paper eligible for purchase under the Act. 

Section 17 of the Reserve Bank of India Act authorize the Reserve Bank of India to engage in the purchase and sale of securities of the Central Government or a State Government of any maturity or of such securities of a local authority as may be approved by the Central Government on the recommendations of the Central Board of the Bank (currently, the RBI deals with Central Government securities only).

CREDIT CONTROL-1

The specific authority vested in the Reserve Bank of India includes the powers to issue directions either generally to all banks or to a bank in particular as to: 

a)      The purpose for which advances may or may not be made;

b)      The margins to be margins to be maintained in respect of secured advances;

c)      The maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company to any other relevant considerations, may be given by a banking company to any one company, firm, association of persons or individual;

d)      The maximum amount upto which, having regard to the considerations reterred at c) above, guarantees may be given by a banking company on behalf of any one company, firm, association or persons or individual; and

e)      The rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

 

The credit control measures are framed by the Reserve Bank of India (RBI) in line with the monetary policy of the country. The objectives of the monetary policy are two-fold: 

1.      To facilitate flow of adequate volume of bank credit to the various sectors with specific reference to the weaker sectors, and

2.      To keep a control on inflationary pressures by ensuring restraint on credit expansion and proper end-use of bank credit.

CREDIT CONTROL

All the functions of scheduled commercial banks are governed by the Banking Regulation Act, 1949 as amended from time to time. The Banking Regulation Act defines “banking”, “banking company” and “banking policy”. In terms of the Act “Banking” means accepting, for the purpose of lending or investment, of deposits of money form the public, repayable on demand or otherwise, and withdrawals by cheque, draft, order or otherwise.

 

“Banking Company” means any company which transacts the business of banking in India. “Banking policy” means any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regards to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.

 

The Banking Regulation Act, 1979 has provide vast powers to the Reserve Bank of India to control the patters, direction and extent of bank credit. We will discuss on the specific authority vested in the Reserve Bank of India includes the powers to issue directions either generally to all banks or to a bank in particular in our next post.

 

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BANK CREDIT-1

INTRODUCTION OF BANK CREDIT: THE FRAMEWORK 

In view of the state of Indian money and capital markets as described in unit 5, it is no wonder that bank credit constitutes one of the major sources of working capital finance for trade and industry. Equally, it should be a matter of no wonder that bank credit has been highly regulated in India. We shall, therefore, in this unit first of all like to acquaint ourselves with the framework of credit control operating in India. We shall then discuss the principles of bank lending, the forms of credit extended and the types of security required by banks. This unit also covers credit investigation and post-lending control aspects of bank credit. Let us now discuss credit control. 

CREDIT CONTROL 

All the functions of scheduled commercial banks are governed by the Banking Regulation Act, 1949 as amended from time to time. The Banking Regulation Act defines “banking”, “banking company” and “banking policy”. In terms of the Act “Banking” means accepting, for the purpose of lending or investment, of deposits of money form the public, repayable on demand or otherwise, and withdrawals by cheque, draft, order or otherwise.

FACTORING

Factoring is a financial service designed to help firms in managing their receivables better. It involves an outright sale of the receivables of a manufacturing or trading firm to a financial institution called the ‘factor’ who specialized in the management of trade credit. A factor collects the accounts on the due dates, effects payments to the firm on these dates, irrespective of whether the customers have paid or not; and also assumes the credit risks associated with the collection of accounts. For rendering these services, the fee or commission charged is usually a percentage of the value of receivable factored. 

Apart from the regular invoice discounting being provided by the banks factoring is a new concept in Indian financial system. The market potential is considerable. In the present context where industrial sickness is spreading like an epidemic, the reason for which particularly is SSI sector being delayed payment from suppliers, there is a clear-cut rationale for introduction of this system. There has been some progress on this front. The recommendations of the Study Group to examine the feasibility of setting up of factoring organizations in the country, under the Chairmanship of Shri C.S. Kalyanasudaram have been accepted by Government of India. A summary of these recommendations is set out in Appendix-5.1. The modalities in this regard are being finalized and in near future some of the Indian banks or their subsidiaries will launch their factoring operations.

 

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REFINANCE

In the previous section it was indicated that there is a pre-emption of the resources (Demand and Time Liabilities or DTL) of the banks by the Reserve Bank of India in the form of the Statutory Liquidity Ratio and the Cash Reserve Ratio. In fact, currently, 53% if the bank resources are pre-empted under SLR (38%) and CRR (15%). Of the balance, in terms of the policies of the Government, 40% of the resources have to be extended to what is known as the Priority Sector which includes agriculture and allied activities, small scale industry, government sponsored schemes and the Differential Rate of Interest (DRI) advances.

 

As banks are required to subscribe under the SLR and CRR statutorily and also extend credit at concessional rates to various sectors, they often face a shortfall of resources in financing the residual sectors. In order to ensure that they are in a position to meet the requirements of the residual sectors and also to maintain their working funds and profitability, various schemes of refinance have been evolved from time to time. Refinance implies that against certain outstanding credit (especially usance bills financed by banks), certain agencies refinance the banks. These agencies include the Reserve Bank of India, Industrial Development Bank of India, National Bank for Agriculture and Rural Development and The Export-Import Bank of India (EXIM Bank). The refinance or rediscounting is mainly available on eligible bills finance by banks, export credit, term loans to selected industries, credit to selected priority sector activities and a discretionary refinance quota with the Reserve Bank of India. Depending upon the conditions on which the rediscounting ore refinance is allowed, the banks are able to reinvest the funds, so made available, to generate additional income.

CERTIFICATES OF DEPOSIT

With a view to further widening the range of money market instruments And to give investors great flexibility in the deployment of their short-term surplus funds, Certificates of Deposit (CDs) were introduced recently.  

 

As per the detailed guidelines issued by the Reserve Bank in June 1989, CDs can be issued only by Scheduled Commercial banks excluding Regional Rural Banks. CDs issued by a bank and outstanding at any point of time should not exceed two per cent of the fortnightly average outstanding aggregate deposits of the bank during the financial year 1989-90. 

 

The minimum amount of CDs issued to a single subscriber should not be less than Rs.50 lakhs and CDs above Rs.50 lakhs should be in multiples of Rs.10 lakhs. CDs can be issued individuals, Corporations, Companies, Trusts, Funds, and Associations etc. Non-Resident Indians (NRIs) may subscribe to CDs only on a non-repairable basis and such CDs cannot be endorsed to another NRI in the secondary market. The maturity period of CDs should not be less than 3 months and not more than one year. CDs should be issued at a discount on face value and the issuing bank is free to fix the discount rate. Banks will have to maintain, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on the total issue price of CDs. CDs are freely transferable by endorsement and delivery only after 45 days of the date of issue. Furthermore, banks cannot grant loans against CDs nor buy back their own CDs before maturity.

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INTER-BANK PARTICIPATIONS-2

With a view to providing an additional instrument for evening out short-term liquidity within the banking system, two types of Inter-Bank Participations (IBPs) were introduced, one on risk sharing basis and the other without risk sharing. These are strictly inter-bank instruments confined to scheduled commercial banks excluding regional rural banks. The IBP with risk sharing can be issued for 91-180 days and only in respect of advances classified under Health Code No. 1 Status. Under the uniform grading system introduced by Reserve Bank for application by banks to measure the health of bank advances portfolio, a borrower account considered satisfactory or assigned Health Code No. 1 is the one in which the conduct of account is satisfactory, the safety of advance is not in doubt, all the terms and conditions are complied with, and all the accounts of the borrower are in order. The IBP risk sharing provides flexibility in the credit portfolio of banks. The rate of interest is left free to be determined between the issuing bank and the participating bank subject to a minimum 14.0 per cent per annum. The aggregate amount of such IBPs under any loan account at the time of issue is not to exceed 40 per cent of the outstanding in the account.

 

The IBP without risk sharing is a money market instrument with a tenure not exceeding 90 days and the interest rate on such IBPs is left to be determined by the two concerned banks without any ceiling on interest rate.