Page 168 - DMGT303_BANKING_AND_INSURANCE

Unit 8: Negotiable Instruments

7. The hundi which is payable after a specified period of time is called 'Darshani Hundi'. Notes
8. A negotiable insrument is not freely transferable.
9. Stamping of promissory note is not mandatory.
10. The time of payment of a negotiable instrument need not be certain.

8.6 Loans and Advances

Efficient management of Loans and Advances portfolio has assumed greater significance as it is
the largest asset of the bank having direct impact on its profitability. In the wake of the continued
tightening of norms of income recognition, asset classification and provisioning, increased
competition and emergence of new types of risks in the financial sector, it has become imperative
that the credit functions are strengthened. RBI has also been emphasizing banks to evolve
suitable guidelines for effective management and control of credit risks.

With a view to ensuring a healthy loan portfolio, public sector banks have taken various steps
to bring their policies and procedures in line with changing scenario which also aim at effective
management and dispersal of credit risks, strengthening of pre-sanction appraisal and post-
sanction monitoring systems. Concurrent steps are being initiated by the banks to strengthen
their organizational set-up by opening specialized branches to meet the credit requirements of
specific types of borrowers, imparting intensive credit management training to staff and
deployment of the trained staff at branches/offices having potential for credit growth. Banks
have laid down detailed guidelines to be followed while considering credit proposals, some of
the important ones are listed as under:

All loan facilities are to be considered by the sanctioning authority after obtaining loan
application(s) from the borrower(s) and compilation of Confidential Report(s) on him/
them and the guarantor(s). The borrowers should have the desired background, experience/
expertise to run their business successfully.

The project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate enough surplus so as
to service the debts within a reasonable period of time.
The cost of the project and means of financing the same should be properly assessed and
tied up. Both under-financing and over-financing can have an adverse impact on the
successful implementation of the project.

Borrowers should be financially sound, enjoy good market reputation and must have
their stake in the business i.e., they should possess adequate liquid resources to contribute
to the margin requirements.
Loans should be sanctioned by the competent sanctioning authority as per the delegated
loaning powers and should be disbursed only after execution of all the required documents.

Projects financed must be closely monitored during implementation stage to avoid time
and cost overruns and thereafter till the adjustment of the bank's loan.

Banks extend loan facilities by way of fund-based facilities and/or non-fund based facilities. The
fund-based facilities are usually allowed by way of term loans, cash credit, bills discounted/
purchased, demand loans, overdrafts, etc. Further, the banks also provide non fund-based facilities
by way of issuance of inland and foreign letters of credit, issuance of guarantees, deferred
payment guarantees, bills acceptance facility under IDBI Rediscounting Scheme etc.

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