A major part of bank advances are granted only for productive purposes
and banks normally do not grant any advance for consumption purpose. Advances
against miscellaneous securities such as bank's own fixed deposits receipts,
national savings certificates, life policies, shares etc. are still granted on
a restricted scale. The policies in this regard may differ from bank to bank.
It may also not be possible to specify the exact terms and conditions on which the
advances will be granted but at the same time it may be stated that the conditions will not be materially different than those
discussed in this chapter.
Deposits of the bank may be broadly divided in two categories as under:
§
Demand Deposits.
§
Term Deposits.
Demand deposits are payable on demand and as such no advance against
such a deposit may normally be required. ,
Term deposits are payable after a fixed period and may generally be
accepted under three different schemes:
1. Fixed
deposits where a fixed amount is accepted for an agreed term and the interest
is payable, every quarter.
2. Reinvestment
plan where a fixed amount is accepted for an agreed term and interest accrued
every quarter is further invested. The depositor is paid a lump‑sum amount after expiry of the agreed term.
3. Monthly recurring deposit where a monthly instalment is accepted for an agreed term and a lump‑sum amount is paid to the depositor after its expiry.
Different bank might have given different nomenclature for these
deposits but the essential features of all term deposits remain the same as
discussed in earlier paragraph. Banks are called upon to grant advances against
these tern] deposits very frequently. Advances against bank's own deposits are
governed by the directives of Reserve Bank of India in this, regard which are
uniformly applicable to all banks. The terms and conditions for such advances
inter‑alia depend on whether the advance is sanctioned to the depositor
himself or to a third person other than depositor. The detailed terms and
conditions of such advances
·
For First Party Advances i.e. when Advance is Granted
to the Depositor himself :
Maximum amount : Reasonable margin should be
maintained on advances
of advance granted
against deposits. Banks are free to determine
the
margin on a case to case basis. Most of the banks
are
now prescribing a margin ranging from 5% to
25%
on the value of deposit.
Rate of interest : Banks are free to charge interest
rates without reference
to
the Prime Lending Rate.
Form of documents : The facility may be availed either as
a demand loan
or as
an overdraft limit.
Security & documents : The original term deposit receipt or
pass book as
Required the
case may be duly discharged across a revenue
stamp
and a lien letter will have to be deposited with
the
bank. Few banks also obtain other documents
including
a demand promissory note for such advances.
Other terms and
conditions :
1. Advances
granted to individuals against deposits in joint name where the loanee is also
one of the depositor or advances to a partnership firm against the deposit in
the name of a partner and other such cases shall be considered as first party
advances for this purpose and will be governed as per the terms and conditions
stated above.
2. Necessary
instructions to the bank to transfer quarterly interest on deposit to loan
account must invariably be given in
case of fixed deposits.
·
For Third Party Advances I.e. when Advance is granted
to a Person other than Depositor:
Maximum amount of advance : There is now no
stipulation from Reserve Bank and
banks are free to determine the quantum of advance
against their own deposit.
Rate of interest : Banks shall be free to charge
interest rates without reference
to the PLR.
Form of advance : The facility may be permitted either
as a demand loan or as an
overdraft limit.
Security and documents : Same as in case of first party
advances.
required
Banks do not grant any credit facilities against deposit receipts of
other banks. The repayment of loan/advances granted against deposits must be
done before the maturity of deposit otherwise banks are required to apply the
proceeds of deposits on maturity for liquidation of outstanding in the loan
account. The banks have now been permitted to renew the deposit and advance
there against on the date of maturity of pledged deposit.
Life insurance policies are considered as one of best securities
available for bank advances and are readily accepted as collateral security.
Need based advance is also granted against life insurance policies on a
restricted basis. A life insurance policy has three different values attached
to it as under:
1.Insured value : The face value of the policy
equivalent to the sum assured.
2. Paid- value : The value which has been already paid
by the assured against the policy.
3. Surrender value : The value which Life Insurance
Corporation will be prepared to pay
should the policy be surrendered to it and the
contract of insurance under
the policy is cancelled.
The surrender value may thus be considered as the market value of a life
policy and it usually depends on the period for which the policy has already
run and is fixed as a percentage of paid up value. Life Insurance Corporation
has issued priced manual giving detailed instructions for calculation of
surrender value under its different schemes. The general terms and conditions
of advances against life policies are as under
Maximum Amount of Advance : 90%
of the surrender value. Rate of interest
Rate of interest : Rate of interest differs from bank to
bank.
Form of advance : Demand loan or overdraft.
Securities and documents : 1. Life
insurance policies are to be assigned in favour
of the bank granting the
advance. The assignment is in
the form of legal assignment for which a notice in the prescribed form will be
given to LIC by the assured. The original policy along with the notice of
assignment will be sent by the bank to LIC for registration of assignment. The
original policy after necessary assignment will be retained by the bank.
2. Other documents as per bank's policy.
Other terms and conditions : 1. Life
policies issued under Section 6 of the Married
Women's Property Act, 1874 are not acceptable as
security.
2. In
case of default the bank may surrender the policy to LIC after giving
reasonable notice to the assured.
3. On
repayment of loan the policy should be reassigned by the bank in favour of the
assured and notice of reassignment must also be got issued from the bank.
Government securities are generally issued in two forms as under:
• Stocks.
• Promissory notes.
For securities which are held in the form of stocks, the owner is only
given a certificate to the effect that his name has been registered as an owner
of certain amount of stock in a specified loan in the Public Debt Office. These
stocks are transferable only by submitting a special transfer form obtainable
from a public debt office. Public Debt Office will transfer the stock and issue
a fresh certificate in favour of the transferee.
The security issued in the form of promissory notes are transferable by
endorsement and delivery just like any other negotiable instrument and are not
required to be sent to Public Debt Office at the time of each transfer unlike
stocks. These securities have a stable value and are easily marketable and
constitute good security for bank advances.
National Saying Certificates are freely acceptable as security for bank
advances. Premature encashment of these certificates before three years has now
been stopped by post office and any short‑term requirement of funds
against the certificates will be met by banks only. The general terms and
conditions of advances against Govt. securities, National Saying Certificates
etc. are given below:
(i) The
bank should satisfy themselves as to the acceptability of the credit needs of
the borrower and end use of funds lent and they should not be guided solely by availability of the
security.
(ii) The interest rate
should be as per the directives on interest rate issued by the Reserve Bank of
India.
(iii) Adequate margin should
be maintained to cover the defaults, if any, in repayment of the principal and
interest.
(iv) They
should ascertain and follow the procedure prescribed by the Public Debt Office
of the RBI, postal authorities, etc., when advances against Government
securities, postal certificates, etc. are granted.
Relief Bonds issued in different series in demat form are‑eligible
for sanction of loans against them subject to the following terms:
(i) The
banks will satisfy themselves as to the acceptability of the purpose,
genuineness of the credit, need of the borrower and end use of funds lent.
(ii) The
rate of interest will be in accordance with the directives on interest rates
issued by the RBI from time to time.
(iii) Adequate
margin will be kept to cover defaults, if any, in repayment of the principal
and interest at the appropriate rate.