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Commercial lending by banks

EXECUTIVE SUMMARY
The world of banking has assumed a new dimension at dawn of the 21stcentury with
the advent of tech banking, thereby lending the industry a stamp of universality. The
banking industry, one of the most important instruments of the national development
occupies a unique place in a nation’s economy.
Profit is the main reason for the continued existence of every commercial
organization and profitability depicts the relationship of the absolute amount of
profit with various other factors.
The main source of operating income of a commercial bank are interest and discount
earned, commission, brokerage, income from non-banking assets and profit from
sale of or dealing with such assets and other receipts.
The expenditure broadly consists of interest paid on deposits and borrowings and
non interest cost or charges incurred on staff salary, stationery, rent, law charges,
postage, telegram, telephone etc
In this context, some attempts have already been made at individual as well as at the
official level and various aspects of commercial banking profitability have been
discussed Banks play an active role in the economic development of a country.
Nationalized banks dominate the banking system in India. Initially all the banks in
India were private banks, which were founded in the pre-independence era to cater to
the banking needs of the people.
The State Bank of India, the country’s oldest Bank and a premier in terms of balance
sheet size, number of branches, market capitalization and profits is today going
through a momentous phase of change and Transformation the two hundred year old
Public sector behemoth is today stirring out of its Public Sector legacy and moving
with an ability to give the Private and Foreign Banks a run for their money.

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Commercial lending by banks

INTRODUCTION
What is a ‘Commercial Lending'
A commercial loan is a debt-based funding arrangement between a business and a
financial institution, typically used to fund major capital expenditure and cover
operational costs that the company may otherwise be unable to afford.
Business lending includes commercial mortgages (loans used to purchase buildings),
equipment lending, loans secured by account receivable and loans intended for
expansion and other corporate purposes.
In some instances, the loan may be extended to help the business meet more basic
operational needs, such as funding for payroll or to purchase smaller supplies that
are used in the production and manufacturing process.
FUNCTIONS OF COMMERCIAL BANKS
The functions of the commercial banks depending on their place and types of people
surrounding their bank.
These can be broadly divided into two categories:
(a) Primary functions (b) Secondary functions.
Primary Functions Primary banking functions of the commercial banks include:

1. Acceptance of deposits
2. Advancing loans
3. Creation of credit
4. Clearing of cheques
5. Financing foreign trade
6. Remittance of funds
OTHER FUNCTIONS OF THE BANKS
(a) Locker Facility:
Bank provides locker facility to their customers. The customers can keep their
valuables, such as gold and silver ornaments, important documents; shares and
debentures in these lockers for safe custody.

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(b) Traveller’s Cheques and Credit Cards:


Banks issue traveller’s cheques to help their customers to travel without the fear of
theft or loss of money.
With this facility, the customers need not take the risk of carrying cash with them
during their travels.
(c) Letter of Credit:
Letters of credit are issued by the banks to their customers certifying their credit
worthiness. Letters of credit are very useful in foreign trade.
(d) Collection of Statistics:
Banks collect statistics giving important information relating to trade, commerce,
industries, money and banking. They also publish valuable journals and bulletins
containing articles on economic and financial matters.
(e) Acting Referee:
Banks may act as referees with respect to the financial standing, business reputation
and respectability of customers.
(f) Underwriting Securities:
Banks underwrite the shares and debentures issued by the Government, public or
private companies.
(g) Gift Cheques
Some banks issue cheques of various denominations to be used on auspicious
occasion
(h) Accepting Bills of Exchange on Behalf of Customer
Sometimes, banks accept bills of exchange, internal as well as foreign, on behalf of
their customers. It enables customers to import goods.

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Commercial lending by banks

HISTORY OF LENDING
HISTORY &TECHNOLOGY OF COMMERCIAL LENDING BY
BANKS:
BANCA: The benches where money lenders did their business from, giving rise to
the word ‘bank.’ when a lender ceased trading he would smash his bench – ‘BANCA
RUPTA,’ hence ‘BANKRUPT’
1985 INTERNET AND E-COMMERCE
Opportunities grow for online lending specialists.
Detroit-based mortgage lender Quicken Loans launches with much of the application
and review process conducted online. In the first five months of 2015 it lent out
Rs24.3crore of the application and review process conducted online.
1999 First Internet Bank pioneered online-only banking, offering home mortgage
loans and banking services.
2015 Lenders compete to meet customer expectations of digital services. In 2015,
BBVA saw an increase in consumer loans through digital channels with mobile
users up 45%.
2016 The industry is rocked as Lending Club reveals a violation of the company’s
business practice and the resignation of its CEO. Commentators call into question
the future of the industry.
What is a 'Commercial Loan'
A commercial loan is a debt-based funding arrangement between a business and a
financial institution, typically used to fund major capital expenditure and or cover
operational costs that the company may otherwise be unable to afford.
Expensive upfront costs and regulatory hurdles often prevent small businesses from
having direct access to debt and equity markets for financing. Similar to consumer
credit smaller businesses must rely on other lending products, such as a line of credit
unsecured loans or term loans.

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Commercial lending by banks

Renewable Commercial Loans


While a commercial loan is most often thought of as a short-term source of funds for
a business, there are some banks or other financial institutions that offer a renewable
loan.
This allows the business to get the funds it needs to maintain operations and to repay
the loan within its specified time period. After this, the loan may then be rolled into
an additional or "renewed" loan period.
A business most often seeks a renewable commercial loan when it must obtain the
resources it needs to handle large seasonal orders from certain customers while still
being able to provide goods to additional clients.
Securing a Commercial Loan
As is true for nearly every type of loan, how creditworthy an applicant is plays a
starring role when a financial institution considers giving out a commercial loan.
In most cases, the business applying for the loan will be required to present
documentation, generally in the form of balance sheets and other similar documents
that prove the company has a favourable and consistent cash flow.
This assures the lender that the loan can and will be repaid according to the
established terms. If a company is approved for a commercial loan, it can expect to
pay a rate of interest that falls in line with the prime lending rate at the time the loan
is issued.
Banks typically require monthly financial statements from the company through the
duration of the loan, and often require the company to take out insurance on any
larger items purchased with funds from the loan

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Commercial lending by banks

LOAN
A loan is the act of giving money, property or other material goods to another party
in exchange for future repayment of the principal amount along with interest or other
finance charges.
A loan may be for a specific, one-time amount or can be available as an open-ended
line of credit up to a specified limit or ceiling amount.
The terms of a loan are agreed to by each party in the transaction before any money
or property changes hands. If the lender requires collateral, that is outlined in the
loan documents.
Most loans also have provisions regarding the maximum amount of interest, as well
as other covenants such as the length of time before repayment is required. A
common loan for American consumers is a mortgage.
The mortgage calculator below illustrates the various types of mortgages and their
different terms.
Loans can come from individuals, corporations, financial institutions, and
governments. They offer a way to grow the overall money supply in an economy as
well as open up competition and expand business operations.
The interest and fees from loans are a primary source of revenue for many financial
institutions such as banks, as well as some retailers through the use of credit
facilities.
The Difference between Secured Loans and Unsecured Loans
Loans can be secured or unsecured. Mortgages and car loans are secured loans, as
they are both backed or secured by collateral.
Loans such as credit cards and signature loans are unsecured or not backed by
collateral. Unsecured loans typically have higher interest rates than secured loans, as
they are riskier for the lender.
With a secured loan, the lender can repossess the collateral in the case of default.
However, interest rates vary wildly depending on multiple factors.

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Revolving vs. Term Loans


Loans can also be described as revolving or term. Revolving refers to a loan that can
be spent, repaid and spent again, while term refers to a loan paid off in equal
monthly instalments over a set period called a term.
A credit card is an unsecured, revolving loan, while a home equity line of credit is a
secured, revolving loan. In contrast, a car loan is a secured, term loan, and a
signature loan is an unsecured, term loan.
How Do Interest Rates Affect Loans?
Interest rates have a huge effect on loans. In short, loans with high interest rates have
higher monthly payments or take longer to pay off than loans with low interest rates.
For example, if a person borrows Rs5,000 on an instalment or term loan with a 4.5%
interest rate, he faces a monthly payment of Rs93.22 for the next five years. In
contrast, if the interest rate is 9%, the payments climb to Rs103.79.
Similarly, if a person owes Rs10,000 on a credit card with a 6% interest rate and he
pays Rs200 each month, it will take him 58 months or nearly five years to pay off
the balance.
With a 20% interest rate, the same balance and the same Rs200 monthly payments, it
will take 108 months or nine years to pay off the card.
The Different Loans You Can Get as a Business Owner
When you're looking for debt financing for your business, there are many sources
you can turn to, including banks, commercial lenders, and even your personal credit
cards. And you don’t need to pinpoint the exact type of loan you need before you
approach a lender; they will help you decide what type of financing is best for your
needs. However, you should have some general idea of the different types of loans
available so you'll understand what your lender is offering.
1. Line-of-credit loans.
The most useful type of loan for small-business owners is the line-of-credit loan. In
fact, it’s probably the one permanent loan arrangement every business owner should
have with their banker since it protects the business from emergencies and stalled
cash flow.

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Line-of-credit loans are intended for purchases of inventory and payment of


operating costs for working capital and business cycle needs. They're not intended
for purchases of equipment or real estate.
A line-of-credit loan is a short-term loan that extends the cash available in your
business’s checking account to the upper limit of the loan contract.
Every bank has its own method of funding, but, essentially, an amount is transferred
to the business’s checking account to cover checks. The business pays interest on the
actual amount advanced, from the time it's advanced until it's paid back.
Line-of-credit loans usually carry the lowest interest rate a bank offers since they're
seen as fairly low-risk. Some banks even include a clause that gives them the right to
cancel the loan if they think your business is in jeopardy.
Interest payments are made monthly, and the principal is paid off at your
convenience, though it's wise to make payments on the principal often.
Most line-of-credit loans are written for periods of one year and may be renewed
almost automatically for an annual fee.
Some banks require that your credit line be fully paid off for seven to 30 days each
contract year. This period is probably the best time to negotiate. Even if you don’t
need a line-of-credit loan now, talk to your banker about how to get one.
To negotiate a credit line, your banker will want to see current financial statements,
the latest tax returns, and a projected cash-flow statement.
2. Instalment loans
These loans are paid back with equal monthly payments covering both principal and
interest. Instalment loans may be written to meet all types of business needs.
You receive the full amount when the contract is signed, and interest is calculated
from that date to the final day of the loan. If you repay an instalment loan before its
final date, there will be no penalty and an appropriate adjustment of interest.
The term of an instalment loan will always be correlated to its use. A business cycle
loan may be written as a four-month instalment loan from, say, September 1 until
December 31 and would carry the low interest rate since the risk to the lender is
under one year. Business cycle loans may be written from one to seven years, while
real estate and renovation loans may be written for up to 21 years.

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An instalment loan is occasionally written with quarterly, half-yearly or annual


payments when monthly payments are inappropriate.
3. Balloon loans
Though these loans are usually written under another name, you can identify them
by the fact that the full amount is received when the contract is signed, but only the
interest is paid off during the life of the loan, with a “balloon” payment of the
principal due on the final day.
Occasionally, a lender will offer a loan in which both interest and principal are paid
with a single “balloon” payment.
Balloon loans are usually reserved for situations when a business has to wait until a
specific date before receiving payment from a client for its product or services. In all
other ways, they're the same as instalment loans.
4. Interim loans
When considering interim loans, bankers are concerned with who will be paying off
the loan and whether that commitment is reliable.
Interim loans are used to make periodic payments to the contractors building new
facilities when a mortgage on the building will be used to pay off the interim loan.
5. Secured and unsecured loans
Loans can come in one of two forms: secured or unsecured. When your lender
knows you well and is convinced your business is sound and the loan will be repaid
on time, they may be willing to write an unsecured loan.
Such a loan, in any of the aforementioned forms, has no collateral pledged as a
secondary payment source should you default on the loan. The lender provides you
with an unsecured loan because it considers you a low risk.
As a new business, you're highly unlikely to qualify for an unsecured loan; it
generally requires a track record of profitability and success.
A secured loan, on the other hand, requires some kind of collateral but generally has
a lower interest rate than an unsecured loan. When a loan is written for more than 12
months, is used to purchase equipment, or does not seem risk-free, the lender will
ask that the loan be secured by collateral.

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The collateral used, whether real estate or inventory, is expected to outlast the loan
and is usually related to the purpose of the loan.
Since lenders expect to use the collateral to pay off the loan if the borrower defaults,
they'll value it appropriately. ARs20000 piece of new equipment will probably
secure a loan of up to Rs15000; receivables are valued for loans up to 75 percent of
the amount due; and inventory is usually valued at up to 50 percent of its sale price.
6. Letter of credit
Typically used in international trade, this document allows entrepreneurs to
guarantee payment to suppliers in other countries.
The document substitutes the bank’s credit for the entrepreneur’s up to a set amount
for a specified period of time.
7. Other loans
Banks all over the country write loans, especially instalment and balloon loans,
under a myriad of names.
They include:
 Term loans, both short- and long-term, according to the number of years
they're written for
 Second mortgages where real estate is used to secure a loan; usually long-term,
they’re also known as equity loans
 Inventory loans and equipment loans for the purchase of, and secured by, either
equipment or inventory
 Accounts receivable loans secured by your outstanding accounts
 Personal loans where your signature and personal collateral guarantee the loan,
which you, in turn, lend to your business

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Classifications of loans
Another way to classify the loans is through the activity being financed. Banks loans
are bifurcated into
 Alternative lending companies almost took over the lending business by storm,
leaving few options to major players.
 Realizing the possible loss in a race for the profitable service, banks have
joined hands with alternative lenders and even saw a great opportunity in financially
fuelling the loans originated by competitors.
 While we look at the alternative lending as a whole segment, it actually is a
complex ecosystem consisting of eight types of alternative lending businesses.
P2P lending
The best-known type so far is P2P lending. There is a wide range of companies
successfully operating in a sub segment to democratize lending.
P2P lending is built as a marketplace where individual borrowers take unsecured
loans from other individuals.
The model allows individuals to access low-cost quick loans at a rate they can
afford.
Examples of companies offering P2P loans: Zopa, Funding Circle, Money
Place, Harmony, Prosper, Rate Setter, Lending Works and many others.
Reward-based crowd funding
Reward-based crowd funding offers businesses and individuals an opportunity to
score early-stage investment, presell products, obtain market validation and social
proof, crowd source creative ideas, engage customers, secure partnerships and build
loyal communities.
Reward-based crowd funding originated in Europe but went much further and got
adopted across continents.

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B2B lending
B2B lending is similar to P2P lending but aimed for businesses. It enables SMEs to
receive the necessary funding for growth directly from a set of online investors (both
individual and institutional).
The advantage of this model is that it allows businesses to cut the intermediaries like
banks with complex and time-consuming paperwork time. In addition, just like P2P
lending for individuals, B2B lending offers competitive rates and terms of financing
along with transparency and ease of use. Among companies offering business loans
are Lending Club, Prosper, Fund era, On Deck and others.
Equity-based crowd funding
Equity-based crowd funding is a fast-growing sub segment. The model
enables entrepreneurs and start-ups to raise early-stage capital in an online
marketplace directly from individual investors, angel investors and VCs in barter for
equity in the company.
Equity-based crowd funding has a positive effect on cross-border relationships
between companies as investors can get access to the businesses abroad and oversee
foreign business operations from the inside.
Some examples include Circle up, Early shares, funded by me, micro ventures, Our
crowd, and others
Community shares and Microfinance
This type of alternative lending entities focuses on empowering SMEs through the
participation of local communities. Social enterprises and community-based
organizations can leverage local social networks for a “good cause” or to fuel a local
business or sometimes for supporting a specific community (like women
entrepreneurs).
Microfinance entities are usually focused on supporting small businesses in their
communities that don’t qualify for a bank loan. Some examples of non-profit
microfinance organizations are Action, Bentley Microfinance Group, Garmin
America, Justine Petersen, Opportunity Fund, etc.

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Donation-based crowd funding


Donation-based crowd funding, which is also a fast growing sub segment, allows
donors to support charitable or social causes or civic projects for no financial or
material returns. Some examples are Give Forward, Pit World, Fundraisers,
Rally, Indiegogo, etc.
Invoice trading
Invoice trading is a relatively fresh area that has been enabling small businesses to
sell their invoices or receivables to many individual or institutional investors at a
discount for working capital. Supply chain financing platforms can also be included
in the category.
Though this sub segment is still in its early days, there are already a few companies
operating with the model. Examples: Platform Black, Market Invoice, Invoice air,
etc.
Debt-based securities
This model enables long-term investments focused mostly on renewable energy
firms (for example, to finance wind farms or solar panel installations). With growing
concern over natural resources and increased interest towards renewable energy
technologies, this category has a great potential to be among some of the hottest ones
globally. “Green” tech companies are gaining attention and momentum and will
require significant resource allocation to have an impact on countries across the
globe in the near future. Some examples include Mosaic, Windcentrale, Abundance,
Re-voile, collective sun,
sun funder etc.
The list of models and companies is certainly not exhaustive; imaginative innovators
are always coming up with fresh ideas on the ways to finance businesses,
communities or support individual aspirations. In the near future, we may see a rapid
growth of other alternative lending models with very promising representatives as
the lending business is constantly evolving and attracting significant attending and
investments.

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Commercial lending by banks

Characteristics of Lending
THE FIVE “C”s OF LENDING
(1) Character
(2) Capacity
(3) Conditions
(4) Capital
(5) Collateral
CHARACTER
Character is a combination of your credit history, your training and work history,
and any proven experiences you have at a running business. Most banks look
primarily at how the loan will be secure.
We will also want to know about the industry skills and management experiences of
your leadership teams because even the best business ideas don’t succeed without
strong management. It’s all part of ensuring that you are set up for success in
business and not just loan repayment
CAPACITY
Capacity refers to your ability to take on and repay debt based on the earning
potential and cash flow of the business. It is therefore very important that you take
the time to carefully research and thoroughly test your business concept.
We also want to make sure there will be adequate cash flow, to ensure that you can
realistically afford the loan.
CONDITIONS
When assessing a loan request, we take great care to understand the market and
conditions in which you are planning to operate your business.
Is the industry mature, or emerging? What are the current political, environmental,
social, and technological issues affecting the industry?

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CAPITAL
Capital includes your personal and corporate net worth, the “sweat” and real equity
you have invested in the business and your ability to access other financial reserves
We want to make sure you have adequate capital to grow your business and to
weather any unexpected emergencies or setbacks.
Having insufficient capital is a common mistake for too many businesses, and we
want to ensure it doesn’t happen to you.

Collateral
Because Community Futures organizations are developmental lenders, we place a
greater focus on the management team, business capacity, market conditions, and
cash flow of a business.
However, we do have a responsibility to lend money responsibly, and therefore must
take adequate security.

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Different Types of Loans Available in India


There are various types of loans you can take in India. However, a lot of people
despite having different kind of assets go for personal loan even if they have other
options where they can mortgage an existing asset and take a loan at lower interest
rate.
This happens because majority of us don’t know about different loan options.
Loan is a certain amount of money which a borrower takes from the lender with the
promise of returning it back within a fixed period of time.
A certain amount of interest rate is fixed by the banks for different types of loans as
applied by the borrower. The borrower pays back the interest and the money in
instalments according to the agreement between the two.
Banks in India provide many types of loans to help.

Process of applying for a loan:


Taking a loan is not as complicated as most people think. The only thing which
should be paid attention to is that genuine documents should be submitted to the
bank on time.
Different types of loans in India require different types of documents.
Few steps involved while applying for a loan are:

Loan Application Form: An application form for loan is provided by the banks
which should be filled correctly and the type of loan you need should be mentioned
clearly.

CIBIL Check: CIBIL Check is done in order to count the scores of your credit
cards. CIBIL collects and maintains the records about the loans you have to pay
apart from the loan you are applying for. If the score of your credit card is higher,
loan can be sanctioned to you easily.

Submission of Required Documents: The customers need to produce their


identity proofs and other certificates to that bank so that they can trust you for
providing loan. Hence, submission of the required documents is a very important
procedure involved in the sanction of a loan.

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Approval of Loan: Now, it’s the banks’ job to go through the documents and
details properly and then sanction you the loan. Once the documents are approved by
the banks they approve their customers for the loan.

The common loan types available in India:


Home loan
Everyone dreams of having their own home. But buying a property requires lot of
money and is not possible for people of lower class to collect that much money at
once. Banks are now providing home loans which can be helpful to you in buying a
property. Home loans can be of many types:
 Loan for Land Purchase
 Loans for repairing and extension of your home
 Loan for building a home
These different types of home loans can be useful to you in buying a property or a
home of your own.

Personal loan
Personal loans are meant to meet the personal needs of an individual. People can use
this money for anything they want. They can but some expensive gadgets or can also
keep this money for going on a holiday with family. The rate of interest of this type
of loan although is comparatively higher but it still feels great to have the money in
advance.

Vehicle loan
Vehicle loan or to be more specific car loans fulfils your dream of having a car or a
bike. This loan is offered by almost all the banks in India. This loan is a secured loan
hence if the instalments are not paid on time the lender has the right to take back the
vehicle. If you get the loan on time the instalments should also be paid regularly.

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Education loan
Banks also provide education loans to their customers. These loans provide better
study opportunities for the students who are financially backward. Students who
want to pursue higher studies from a reputed institution can apply for loan in any
bank in India. Once the students get placed, they themselves can pay back the money
from their payment. Hence, now students who are poor can also opt for higher
degrees.

Gold loan
Among all types of loans in India, the easiest and fastest one to get is a gold loan.
Earlier when gold rates were increasing at an exponential rate, this loan was the most
popular. Although now, when the rates are decreasing the gold loan companies are
facing huge losses.

Agricultural loan
India is a land of farmers. Most of the people in India till date are dependent on
agriculture. Therefore, it is very important to pay attention to the farmers also. There
are different types of loans offered by banks for the farmers which can help them in
their agriculture practices. They can buy the seeds, insecticides, tractors and other
equipment needed for agriculture from the money they get from the loan and can pay
the money back once their crops are sold.

Loans against Insurance policies


If you own an insurance policy you can apply for loan. The policies which have
completed its 3 years are only eligible for loan. The insurer can himself provide you
loan on that policy you don’t need to go after banks for a loan. But you can also
choose banks for giving you loan. You can pledge the documents of your policy with
the bank for a loan.

Loans against banks FDs


If you have a Fixed Deposit in bank you can also apply for loan against Fixed
Deposit. If your FD is of around 100,000 you can apply for loan of around 80,000.
The rate of interest you pay for this amount is a bit higher than the interest paid by
the bank for the fixed deposit. Still it is the best way to have a loan.

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Overdraft
Over Draft is a procedure of requesting for loans from banks. This means the
customers withdraws more money than he has deposited from any particular bank.

Cash credit
Cash credit is the payment done by the bank to the customers in advance. This
facility allows the borrowers to borrow a certain amount of money from bank. Few
securities and are provided by the borrower to the bank. This can be renewed every
year. And the borrowers can complete their pending work by the money they get
from the banks.

Loans against shares or mutual funds


Most of the people also present their shares and mutual funds to the banks for having
loan. The banks provide loans of amount lesser that the total amount in the share
lesser amount is given by the lender as loan since the rate of interest can also be
added. Once the borrower is unable to pay back Loans although are beneficial but if
you have to pay more than 70% of your salary as an instalment of loan you may face
financial problems.
Therefore, if you are taking loan against mutual funds or shares you should be smart
enough to utilize the money in the best way and be able to pay back the amount
within the given time.
Loans have fulfilled the dreams of many people. The people who were not that rich
are also preparing their children for exams of reputed colleges.
Loans have provided study, home and other facilities to the people.
Loan types vary because each loan has a specific intended use. They can vary by
length of time, by how interest rates are calculated, by when payments are due and
by a number of other variables.

Student loan
Student loans are offered to college students and their families to help cover the cost
of higher education. There are two main types: federal student loans and private
student loans. Federally funded loans are better, as they typically come with lower
interest rates and more borrower-friendly repayment terms.

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Mortgages
Mortgages are loans distributed by banks to allow consumers to buy homes they
can’t pay for upfront. A mortgage is tied to your home, meaning you risk foreclosure
if you fall behind on payments. Mortgages have among the lowest interest rates of
all loans.

Auto loans
Like mortgages, auto loans are tied to your property. They can help you afford a
vehicle, but you risk losing the car if you miss payments. This type of loan may be
distributed by a bank or by the car dealership directly but you should understand that
while loans from the dealership may be more convenient, they often carry higher
interest rates and ultimately cost more overall.

Loans for veteran


The Department of Veterans Affairs (VA) has lending programs available to
veterans and their families. With a VA-backed home loan, money does not come
directly from the administration. Instead, the VA acts as a co-signer and effectively
vouches for you, helping you earn higher loan amounts with lower interest rates.

Small business loan


Small business loans are granted to entrepreneurs and aspiring entrepreneurs to help
them start or expand a business. The best source of small business loans is the U.S.
Small Business Administration (SBA), which offers a variety of options depending
on each business’s needs.ng

Revolving business lines of credit


A flexible solution for your short-term borrowing needs, such as alleviating cash
flow shortages, finances receivables, purchasing inventory or taking advantage of
seasonal opportunities. Useful for accommodating growth and improving cash flow.

Treasury Management services


Centre State Bank’s Treasury Management Services are designed to create value for
your company with products that improve your efficiencies and controls while
helping you reduce expenses and enhance earnings

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Letter of credit
A letter of credit provides assurance to your trading partner that your obligations will
be paid using the bank’s credit as long as documents called for in the letter of credit
meet the terms stated. There are many different letter of credit options, so it is
important to talk to one of our relationship managers to learn from.

Term loans
A term loan from Centre State provides you flexibility and resources you need to
finance expansion, add inventory, invest in new equipment or otherwise help your
company grow. Our team can help you structure a deal with competitive rates and
appropriate maturity.

Payday loans
Payday loans are short-term, high-interest loans designed to bridge the gap from one
pay check to the next, used predominantly by repeat borrowers living pay check to
pay check. The government strongly discourages consumers from taking out payday
loans because of their high costs and interest rates.

Teaser loans
A Teaser loan is nothing, but, a special loan that is offered for a fixed duration and
could then be withdrawn. It generally offers a low interest rate in the initial years or
some special offer and then gets back to the normal interest rates In India the State
Bank of India had two Teaser home Loans including the SBI Easy Home Loan and
SBI Advantage Home Loan, but, they were later withdrawn.
The Reserve Bank of India had insisted that there be a higher provisioning for such
loans as they carry a higher risk of default.
However, banks have been insisting that these loans are given based on thorough
scrutiny and the risk remains just as with other loans.
A few years ago HDFC, Chairman Deepak Parekh had highlighted the risks involved
with these types of loans.

21
Commercial lending by banks

Medical loans
Healthcare in these times is expensive and not everyone can afford to have a solid
health insurance plan that protects them from all the medical uncertainties in life. It
is at times like this medical personal loans come to rescue. Personal medical loans
are Personal loans that aim at offering cover for unseen medical expenses. These
medical loans can be used to pay for medical expenses including hospitalisation
bills, medical prescription bills, surgeries such as angioplasty, bypass surgery,
chemotherapy and others similar treatments.
Though health insurance is more popular than medical loans, not everyone can
afford it. Medical loans can be used to pay up for any medical expenses while
the cover offered by health insurance is limited. Another advantage of medical
loan is that there is no need to pay collateral or deposit. A personal medical loan
ensures that you get quality medical care with no delay.
Medical loan eligibility criteria
The general eligibility criteria for a medical loan are listed below.
 Any salaried and self-employed individual Indian citizen
 A pensioner who has taken voluntary retirement is also eligible
 Most of the banks don’t require the individual to have a minimum salary.
 No deposit
 No collateral

Documentation required for medical loans


Listed below are the documents that need to be submitted to avail a medical personal
loan.
 Identification proof- Passport copy/Driving license/Pan card copy
 Address proof- Passport/Voter Id/Ration card/Driving license/Recent
electricity or telephone bills
 Date of birth proof- Birth certificate
 Passport size photograph
 3 latest salary pay slips
 Form 16

22
Commercial lending by banks

 Company appointment letter


 Recent 3 months bank statements
 Valid income documents (for self-employed individuals)
 Proof of qualification

Medical loan interest rates


Medical personal loans offer two types of interest rates for the loans provided.
1. Fixed interest rate- The fixed interest rate remains constant and doesn’t
fluctuate over the tenure period. This is suitable for people with fixed budgets as it
makes it easier for the loan repayment.
2. Floating interest rate- The floating interest rate depends on the market
economics. Floating interest rate fluctuates with the inflation and deficit in the
market rate. Floating interest rate is usually lesser than the fixed interest rate given
that it fluctuates.

Features and benefits of Medical loans


Listed below are the features and benefits of Medical loans
 Affordable medical care
 Quick loan approval
 No security
 No collateral
 Loan can be repaid in instalments
 Loans are available for both salaried and self-employed individuals
 Simple and minimal documentation
 The loan money can be used for any sort of medical expense
 Flexible tenures
 Flexible interest rates- The loan offers Fixed and Floating interest rates
 Loans up to Rs.25 lakhs
 Most of the medical loans can be bought online

23
Commercial lending by banks

Diagrams and Graphs of commercial lending by bank


As the economy emerges from its economic winter, concerns remain about the
fragility and robustness of the recovery, in part because of anecdotal evidence that
credit flows have yet to return to normal. The most recent data from one of the most
important credit channels, commercial bank lending, adds credence to these
concerns.
In terms of commercial banks’ total assets, the U.S. banking system grew at an
average rate of 9 percent from 2000 through 2008, with yearly growth ranging from
just over 5 percent in 2001 to nearly 13 percent in both 2006 and 2007. Banking
system growth slowed in 2008 to just over 7 percent, before turning negative in
2009, as the industry shrank by over 4 percent.

The trend in commercial bank assets tells only part of the story. Over the past
decade, lending has accounted for only 52 percent of bank assets on average (lending

24
Commercial lending by banks

consists of net loans and leases). This means that changes in bank assets may not
provide an accurate picture of what is happening with bank credit.
This is especially true in 2008 and 2009, as Federal Reserve actions to contain the
financial crisis and restore credit flows more than doubled the level of bank
reserves—bank reserves rose from an average of 5 percent of assets from 1998
through 2007 to over 8 percent of assets in 2008 and 2009.
The growth of net loans and leases mirrors that of bank assets through 2007. (Net
loans and leases are total loans and leases less reserves set aside for loan losses.)
Loan growth is much weaker than asset growth after 2007, as bank loan growth in
2008 fell to under 3 percent in 2008 and shrank at a rate of 6 percent in 2009.

From the standpoint of an economic recovery, two forms of bank lending are
especially important, commercial and industrial (C&I) lending and commercial real
estate (CRE) lending. These represent a major source of credit for businesses of all
sizes, but particularly small and medium-sized firms. Commercial and industrial
loans contracted at a rate of 20 percent in 2009. Commercial real estate loans have
fared slightly better that net loans and leases and much better than commercial and
industrial loans, as this category of lending shrank only 4 percent in 2009. By all
measures discussed so far—from total assets to commercial real estate loans—bank
credit declined in 2009.

25
Commercial lending by banks

These measures reflect assets that are on banks’ balance sheets. Increasingly, on-
balance-sheet measures of credit tell an incomplete story about the bank lending
channel. Some types of credit don’t appear on balance sheets, and some loans have
been taken off.
Bank lines of credit are commonly used by business customers for backup credit.
Businesses that regularly fund themselves in the commercial paper market, for
example, often have bank credit lines as backup sources of funding as a hedge
against a disruption in their ability to borrow in the commercial paper market.
In addition, a number of businesses use credit lines as liquidity facilities “drawing
them down temporarily to cover unexpected expenses or to take advantage of an
unforeseen investment opportunity. Letters of credit allow customers to get credit
from other sources, such as a business getting trade credit from a supplier.
Both undrawn lines of credit and letters of credit represent an off-balance-sheet form
of credit availability, but neither result in an on-balance-sheet asset when it is
created. Credit lines become an on-balance-sheet asset only after it is drawn on and a
letter of credit only if a bank takes over the loan backed by the letter.
Banks also sell or securitize a number of loans they make, causing on-balance-sheet
loans to understate the amount of credit being intermediated.

26
Commercial lending by banks

While all of these components of the bank credit channel showed increasing
weakness after the financial crisis of 2007, comprehensive measures of bank credit
have also contracted. The figures below show two such measures.
Commercial credit facilitated by the banking system measures on-balance-sheet
business loans and off-balance-sheet credit facilities. Total bank credit activities are
a measure of on-balance-sheet net loans and leases plus total off-balance-sheet credit
facilities. Both commercial credits facilitated and total credit facilitated by banks
peaked in 2007 and have declined subsequently.
Commercial credit facilities fell by 2 percent and 10 percent in 2008 and 2009,
while total credit facilities shrank by 2 percent and 9 percent over the same time
period.

27
Commercial lending by banks

28
Commercial lending by banks

5 Important Principles Followed by the Banks for Lending


Money
Banks follow the following principles of lending:
1. Liquidity:
Liquidity is an important principle of bank lending. Bank lend for short periods only
because they lend public money which can be withdrawn at any time by depositors.
They, therefore, advance loans on the security of such assets which are easily
marketable and convertible into cash at a short notice. A bank chooses such
securities in its investment portfolio which possess sufficient liquidity. It is essential
because if the bank needs cash to meet the urgent requirements of its customers, it
should be in a position to sell some of the securities at a very short notice without
disturbing their market prices much. There are certain securities such as central, state
and local government bonds which are easily saleable without affecting their market
prices.
The shares and debentures of large industrial concerns also fall in this category. But
the shares and debentures of ordinary firms are not easily marketable without
bringing down their market prices. So the banks should make investments in
government securities and shares and debentures of reputed industrial houses

2. Safety:
The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular intervals
without default. The repayment of the loan depends upon the nature of security, the
character of the borrower, his capacity to repay and his financial standing
. Like other investments, bank investments involve risk. But the degree of risk varies
with the type of security. Securities of the central government are safer than those of
the state governments and local bodies. And the securities of state government and
local bodies are safer than those of the industrial concerns. This is because the
resources of the central government are much higher than the state and local
governments and of the latter higher than the industrial concerns.
In fact, the share and debentures of industrial concerns are tied to their earnings
which may fluctuate with the business activity in the country. The bank should also

29
Commercial lending by banks

take into consideration the debt repaying ability of the governments while investing
in their securities. Political stability and peace and security are the prerequisites for
this.
It is very safe to invest in the securities of a government having large tax revenue
and high borrowing capacity. The same is the case with the securities of a rich
municipality or local body and state government of a prosperous region. So in
making investments the bank should choose securities, shares and debentures of
such governments, local bodies and industrial concerns which satisfy the principle of
safety.
Thus from the bank’s viewpoint, the nature of security is the most important consideration
while giving a loan. Even then, it has to take into consideration the creditworthiness of the
borrower which is governed by his character, capacity to repay, and his financial standing.

3. Diversity:
In choosing its investment portfolio, a commercial bank should follow the principle
of diversity. It should not invest its surplus funds in a particular type of security but
in different types of securities. It should choose the shares and debentures of
different types of industries situated in different regions of the country. The same
principle should be followed in the case of state governments and local bodies.
Diversification aims at minimising risk of the investment portfolio of a bank.
The principle of diversity also applies to the advancing of loans to varied types of firms,
industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in
one basket.” It should spread it risks by giving loans to various trades and industries in
different parts of the country.

4. Stability:
Another important principle of a bank’s investment policy should be to invest in
those stocks and securities which possess a high degree of stability in their prices.
The bank cannot afford any loss on the value of its securities. It should, therefore,
invest it funds in the shares of reputed companies where the possibility of decline in
their prices is remote.

30
Commercial lending by banks

Government bonds and debentures of companies carry fixed rates of interest. Their
value changes with changes in the market rate of interest. But the bank is forced to
liquidate a portion of them to meet its requirements of cash in cash of financial crisis.
Otherwise, they run to their full term of 10 years or more and changes in the market
rate of interest do not affect them much. Thus bank investments in debentures and
bonds are more stable than in the shares of companies.

5. Profitability:
This is the cardinal principle for making investment by a bank. It must earn
sufficient profits. It should, therefore, invest in such securities which was sure a fair
and stable return on the funds invested. The earning capacity of securities and shares
depends upon the interest rate and the dividend rate and the tax benefits they carry.
It is largely the government securities of the centre, state and local bodies that
largely carry the exemption of their interest from taxes. The bank should invest more
in such securities rather than in the shares of new companies which also carry tax
exemption. This is because shares of new companies are not safe investments.

Lending money to public


Lending money is one of the two major activities of any Bank. Banks accept deposit
from public for safe-keeping and pay interest to them. They then lend this money to
earn interest on this money. In a way, the Banks act as intermediaries between the
people who have the money to lend and those who have the need for money to carry
out business transactions.
The difference between the rate at which the interest is paid on deposits and is
charged on loans, is called the "spread".
Banks lend money in various forms and they lend for practically every activity. Let
us first look at the lending activity from the point of view of security.

31
Commercial lending by banks

Base Rate – How Banks Set Interest rates on Loans


In 2010, RBI introduced the ‘Base Rate’ which is the minimum interest rate at which
a bank
Allowed to lend. Banks determine their actual lending rates on the basis of this base
rate.
Current Base Rate (March 13,2015) is 10.00/10.25%(i.e. base rate for lending is
between 10% and 10.25%).Simply put what this means is that commercial banks
must select a base rate between 10% --10.25%and add whatever percentage point the
y wish on top of this base rate. So for example axis bank which has decided to keep
its base rate could lend at 10.15%.
All categories of the bank loans are required to be priced only with reference to the
base rate. In keeping with the objective of making lending rates more transparent
banks are directed to announce their base rates on their websites.

32
Commercial lending by banks

Interest rate on Bank loans (updated-march 2017)

33
Commercial lending by banks

PROCESSING FEES IN LOAN AND PENALTIES


Customers may revile bank service fees, but they are a large part of how many banks
make money. Banks can charge fees for simply allowing a customer to have an
account open, typically if, or when, the account balance is below a certain break-
point, as well as fees for using ATMs or overdrawing accounts.
Banks also frequently attach a host of fees and charges when they make loans.
While banks gamely try to defend these fees as important to defraying the costs of
paperwork and so forth, in practice they're a honey pot of profits for the bank.

Banks Processing fees Prepayment Late payment


charges charges

Axis bank 1.50%-


2.00%+ Nil 2% per month
Service Tax

ICICI Bank Up to 2.50%+ 5% of principal 2% per month


Service tax outstanding

HDFC Up to 2.50% of No prepayment


the loan amount permitted until
with minimum repayment of 12 24 % per annum
of Rs 1000/-& EMIs
maximum of
Rs25000/-

Kotak Up to 3% of loan After 12 months, Rs.750.00 per


Mahindra amount 5% of principal dishonour
outstanding + instance
service tax

State Bank of No pre-payment


India – charges. _

Punjab National 2% of principal 2 % per month


Bank _ outstanding

34
Commercial lending by banks

Bank of Baroda 2% (Minimum No pre-payment


Rs.500/, No charges. 2% per month
Maximum limit)

UNDERSTAND THE CURRENT COMMERCIAL


LENDING ENVIRONMENT
On completion of the thorough review of existing processes, an action team should
examine each workflow and process closely, looking for opportunities for
improvement.
Introducing new technology to support commercial lending processes can initiate the
change needed to reach productivity improvements in commercial lending.
Origination systems are available to handle the nuances of commercial lending.
Substituting technology for manual inputs improves productivity. The application of
emerging technologies and the optimization of technology platforms – such as
origination, imaging and servicing – remain important for the improvement of
productivity and reduction of paper processing.
Additionally, vendor solutions in commercial lending can help spread the mounting
compliance investment across multiple financial institutions.

MCLR Base Rate


Current MCLR Base Rate of All Banks in India
MCLR (Marginal Cost of Fund based Lending Rate) is the internal benchmark rate
for banks used for benchmarking floating rate loans effective from 1st April
MCLR is based on cost of funds for banks and is derived as sum of marginal cost
of funds, negative carry on account of CRR, operating costs of banks and tenor
premium
As MCLR is closely linked to repo rate, it will improve the transmission of RBI’s
repo rate cut to the end borrower

35
Commercial lending by banks

Banks publish MCLR for at least five durations which are overnight MCLR, 1
month MCLR, 3 month MCLR, 6 month MCLR and 1 year MCLR. However banks
may publish MCLR base rates for more than five periods.
MCLR, Base Rate Trend, PLR Trend of All Banks in India

Bank MCLR, Current Base Rate Latest Update


Past Trend MCLR Rate –
27th Aug 2017

SBI MCLR Base 7.75% - 8.15% 9.00% 01st Aug 17


Rate

HDFC PLR _ 16.15% 19th Jan 17

ICICI Bank 7.85% - 8.20% 9.10% 01st Aug 17


MCLR Base
Rate

Axis Bank 7.80% - 8.35% 9.05% 18th Aug 17


MCLR Base
Rate

State Bank of 7.95% - 8.55% 9.95% 01st Mar 17


Travancore

MCLR Base Rate

Bank of India
8.00% - 8.40% 9.55% 10th Aug 17
MCLR Base Rate

Bank of
Maharashtra 8.15% - 8.70% 9.70% 07th Aug 17
MCLR Base Rate

Canara Bank
8.05% - 8.40% 9.40% 07th Aug 17
MCLR Base Rate

Central Bank of
India MCLR Base 7.90% - 8.40% 9.70% 01st Aug 17
Rate

36
Commercial lending by banks

Dena Bank
8.30% - 8.55% 9.70% 01st Aug 17
MCLR Base Rate

State Bank of
Hyderabad 8.30% - 8.75% 9.75% 01st Mar 17
MCLR Base Rate

State Bank of
8.30% - 8.90% 9.65% 01st Mar 17
Mysore MCLR

State Bank of
Patiala MCLR 8.05% - 8.45% 9.65% 15th Mar 17
Base Rate

Bajaj Fiserv
- 20.16% 01st May 14
PLR

Punjab and
Sind Bank
8.60% - 9.10% 9.70% 07th Aug 17
MCLR Base
Rate

MCLR Base Rate

Allahabad Bank
8.00% - 8.75% 9.70% 01st Aug 17
MCLR Base Rate

Nainital Bank
8.10% - 9.05% 9.75% 07th Aug 17
MCLR Base Rate

Corporation Bank
8.15% - 8.75% 9.65% 15th Aug 17
MCLR Base Rate

Bank of Baroda
8.10% - 8.65% 9.60% 07th Aug 17
MCLR Base Rate

Bank MCLR, Past Current Latest


Base Rate
Trend MCLR Rate – Update

37
Commercial lending by banks

27th Aug 2017

Reliance Capital
8.00% - 8.75% 9.70% 01st Aug 17
PLR

GIC Housing
8.10% - 9.05% 9.75% 07th Aug 17
Finance PLR

Edelweiss PLR - 17.50% 30th Nov 15

HSBC Bank
MCLR Base 7.80% - 8.10% 9.00% 01st Aug 17
Rate

Deutsche Bank
MCLR Base 7.75% - 9.25% 8.95% 07th Aug 17
Rate

BNP MCLR
7.55% - 8.55% 8.90% 01st Aug 17
Base Rate

Yes Bank MCLR Base Rate 7.85% - 8.85% 10.25% 01st Aug 17

RBL Bank MCLR Base Rate 9.20% - 9.70% 10.40% 22nd Aug 17

Kotak Bank MCLR Base


7.75% - 8.65% 9.20% 01st Aug 17
Rate

KarurVysya Bank MCLR


8.75% - 9.10% 10.10% 07th Aug 17
Base Rate

IndusInd Bank MCLR Base


8.40% - 9.30% 10.55% 17th Jun 17
Rate

Repo Home Finance PLR - 16.00% 30th Nov -1

IDBI Bank MCLR Base


8.05% - 8.75% 9.50% 07th May 17
Rate

38
Commercial lending by banks

Indian Overseas
Bank MCLR 8.35% - 8.75% 9.45% 05th Jul 17
Base Rate

Lakshmi Vilas
Bank MCLR 9.45% - 9.50% 10.50% 01st Aug 17
Base Rate

Jammu And
Kashmir Bank 7.75% - 9.15% 9.50% 10th Aug 17
MCLR Base Rate

Federal Bank
8.60% - 8.90% 9.63% 16th Aug 17
MCLR Base Rate

Tamilnadu
Mercantile Bank 9.15% - 9.40% 10.30% 01st Aug 17
MCLR Base Rate

City Union Bank


9.00% - 9.25% 9.75% 01st May 17
MCLR Base Rate

Indian Overseas 8.35% - 05th Jul


Bank MCLR 9.45%
Base Rate 8.75% 17

Lakshmi Vilas
Bank MCLR 9.45% - 9.50% 10.50% 01st Aug 17
Base Rate

Jammu And
Kashmir Bank 7.75% - 9.15% 9.50% 10th Aug 17
MCLR Base Rate

Federal Bank
8.60% - 8.90% 9.63% 16th Aug 17
MCLR Base Rate

39
Commercial lending by banks

Tamilnadu
Mercantile Bank 9.15% - 9.40% 10.30% 01st Aug 17
MCLR Base Rate

City Union Bank


9.00% - 9.25% 9.75% 01st May 17
MCLR Base Rate

Catholic Syrian
Bank MCLR Base 8.10% - 9.80% 10.25% 01st Aug 17
Rate

India bulls PLR - 16.90% 01st Feb 17

HDFC Bank
7.85% - 8.45% 8.90% 07th Aug 17
MCLR Base Rate

Current
Bank MCLR, Past
MCLR Rate – Base Rate Latest Update
Trend
27th Aug 2017

Syndicate Bank
8.05% - 8.50% 9.50% 10th Aug 17
MCLR Base Rate

SBBJ MCLR Base


8.20% - 8.80% 9.70% 01st Mar 17
Rate

PNB MCLR Base


8.00% - 8.65% 9.35% 01st Aug 17
Rate

OBC MCLR Base


8.10% - 8.45% 9.65% 11th Aug 17
Rate

LT Housing
- 17.35% 30th Nov -1
Finance PLR

40
Commercial lending by banks

DIFFERENT LENDING RATES IN VARIOUS SECTORS

Terms & Conditions Applied on personal loans

Maximum Annual 11.89% to 22.4%


Percentage Rate (APR)

 Total amount borrowed: Rs. 100,000


 Time period: 12 months to 60 months
 Interest Rate: 11.49% to 22%
 Processing Fee payable to: Up to Rs.2,000
 Fee payable to My Loan Care: NIL
 Total Monthly Cost –
Representative example of
From Rs.2,199 for 60 months Rs100,000 loan at
the total cost of the loan,
11.49% (lowest rate, longest time period) to Rs9,359
including all applicable
for a 12 months Rs.100,000 loan at 22% (highest rate,
fees
shortest time period). This is inclusive of principal
repayment.
 Annual Percentage Rate (APR) of charge
including all applicable fees: 11.89% to 22.4%
 Total cost payable over loan tenure: Rs.14,313
for 12 months loan to Rs33,926 for 60 months loan

41
Commercial lending by banks

Terms and conditions applied for Gold Loan Online

Maximum Annual
11.5% to 14.5%
Percentage Rate (APR)

Here is an illustration of the total cost of the loan:


 Total amount borrowed: Rs100,000
 Time period: 6 months to 4 years
 Interest Rate: 11.0% to 14.0%
 Processing Fee payable to: Up to Rs.2,000
 Fee payable to My Loan Care : NIL
Representative example
 Total Monthly Cost – From Rs2,585 for a 48
of the total cost of the
months Rs.100,000 loan at 11.00% (lowest rate, longest
loan, including all
time period) to Rs17,354 for a 6 months Rs100,000 loan
applicable fees
at 14.00% (highest rate, shortest time period). This is
inclusive of principal repayment.
 Annual Percentage Rate (APR) of charge including
all applicable fees: 11.5% to 14.5%
 Total cost payable over loan tenure: Rs.6,123 for 6
months loan to Rs26,058 for 48 months loan

How does MCLR base rate works?


You need to consider two parameters while taking floating rate home loan or
business loan

 Reset Frequency: The applicable MCLR rate will be the rate


corresponding to the interest rate reset frequency of the loan. So, a home loan with a
reset frequency every one year will be priced with the 1 year MCLR as the
benchmark and a home loan with a 3 month reset will be price with the 3 month
MCLR as the benchmark.

 Spread: You need to consider the spread (margin that you pay over the banks
MCLR) for the particular loan type of the bank. The margin charged would be fixed

42
Commercial lending by banks

at time of sanction and can be changed only if there is change in customers’ credit
profile. For instance, Bank A has 1 year MCLR of 9.1% and spread of 0.2 % for
home loan. The interest rate that you will be charged in this case would be 9.3%.

MCLR Rate
 Borrowers who have taken loan from banks before 1st April 2016, their loan
will be priced at base rate, instead of MCLR
 If you check the MCLR and base rate of banks shown above, you will notice
that MCLR rates are mostly 5 - 50 bps lower compared to base rate. The reason for
this is MCLR is closely linked to repo rate, and hence it has improved the
transmission of RBI’s repo rate cut to the end borrower
 In the current economic scenario where interest rate and bonds yields are
falling, and hence banks are compelled to reduce the MCLR, it would be wise to
switch from base rate to MCLR rate regime. All existing borrowers have the option
of shifting to MCLR regime by paying a conversion fee of 0.5-1% of the loan
amounts

Impact of MCLR on Interest rate, loan tenure and EMI’s


 As MCLR is closely linked to cost of funds of banks and the repo rate, hence
any change in the repo rate will impact your floating interest rate on home loan or
business loan
 When a bank reduces the MCLR, your interest rate on floating home loan will
be reduced. Generally this will not have any impact on EMI paid but it will impact
the loan tenure

Bank of Baroda MCLR Rate – Current Rate, Past Trend


Current MCLR of Bank of Baroda ranges from 8.10% to 8.65% depending on the
reset frequency of the loan. Rates are revised every month.

Bank of Baroda MCLR, Base Rate Tenure


SBI MCLR, Base
Tenure
Rate

7.75% Overnight

7.85% 1 Month

43
Commercial lending by banks

7.90% 3 Month

7.95% 6 Month

8.00% 1 Year

8.10% 2 Year

8.15% 3 Year

SBI MCLR Rate – Current Rate, Past Trend


Current MCLR of SBI ranges from 7.75% to 8.15% depending on the reset
frequency of the loan. Rates are revised every month.

HDFC Bank MCLR Rate – Current Rate, Past Trend


Current MCLR of HDFC Bank ranges from 7.85% to 8.45% depending on the reset
frequency of the loan. Rates are revised every month.

HDFC Bank
Tenure
MCLR, Base Rate

7.85% Overnight

7.85% 1 Month
Axis Bank MCLR Rate –
Current Rate, Past Trend
7.90% 3 Month
Current MCLR of Axis Bank
7.95% 6 Month
ranges from 7.80% to 8.35%
8.15% 1 Year
depending on the reset frequency
8.25% 2 Year of the loan. Rates are revised
8.45% 3 Year every month.

44
Commercial lending by banks

COMMERCIAL BANKS PRIME LENDING RATES


GRAPH

45
Commercial lending by banks

BANKS LENDING GRAPH TO BUSINESS PURPOSE

BANKS AGRICULTURAL LOAN AND THEIR RATES

46
Commercial lending by banks

Agricultural Loan
Agricultural loans are any loans that are availed by a farmer to fund seasonal
agricultural operations or related activities like animal farming, pisci-culture or
purchase of land or agricultural tools. While seasonal agricultural operations routine
activities like include preparing and ploughing land for sowing, weeding, and
transplantation where necessary, buying inputs such as fertilizers, seeds, insecticides
etc. and engaging labour for cultivating and harvesting the crops.
In addition purchasing of land, or purchasing of agricultural tools, storage of
produce and transport also are included under purview of agricultural loans.
The agricultural policy of the Government of India also envisages substantial credit
flow to increase agricultural production and productivity. Banks provide agricultural
term loans to farmers for investment purposes and Short Term Loans for production
purposes. There is a need to finance farmers for purchasing land not only to expand
their activities but also to make existing small and marginal units economically
viable, diversify their present activities and to bring fallow lands and waste lands
under cultivation.
In India, agriculture has been marked as priority sector because farmers constitute a
large part of the population. As such agriculture sector qualifies for priority sector

47
Commercial lending by banks

lending at lower interest rates by banks. In India, most of the commercial banks, co-
op societies and rural banks provide agricultural loans to farmers.

Documentation Required for Agricultural Loan


Banks sanction agricultural loans, both long-term and short-term to farmers for
agricultural activity. Keeping in view the illiteracy of farmers, the documentation
requirement is few. However banks insist on the following documentation for
agricultural loans:
 ID proof-Voter ID, Photo ration card. Adhere etc
 Residence proof-Ration card
 Land ownership proof-records of rights, revenue receipt etc
 Kisan Credit Card-This is a card issued to all farmers including small and
marginal farmers, tenant farmer, share croppers and oral lessees
Please note that required documents may vary from bank to bank.

Agricultural Loan Eligibility


Agricultural loans are extended to all types of farmers such as small and marginal
farmers, tenant farmer, share croppers and oral lessees.

Agricultural Loan Interest Rate


As per government notification, for crop loans the rate of interest and collateral
requirement is as follows:

On crop loans: For 2013-14, as per Govt of India notification, crop loans worth
Rs.3lakh or below would carry an interest rate of 7% p.a. For those farmers promptly
repaying loans, Govt. Of India also provide allows interest subvention of 3% P.A.-
effectively bringing down interest rate to 4% p.a.
Crop Loans beyond Rs.3 Lakh, banks charge interest rate as approved by RBI and
other conditions as approved by their Board of Directors.
As per RBI directive, crop loans till an amount of Rs.1lakh require no security.
Loans over `s
Post-harvest: Post-harvest loan is available to farmers at a concessional rate of 7%
with interest rate subvention. For farmers availing post-harvest loan against the
negotiable warehouse receipts, the banks may charge interest at commercial rates.

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Commercial lending by banks

For land purchase: Banks extend credit for purchase of land within 5 km of the
farmers residence at interest rate as determined from time to time. There is no
margin for such loans up to Rs50000 and amounts higher than this require a margin
of 10%. The land is supposed to mortgage in favour of the Bank and is considered
the security

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Commercial lending by banks

Bad loans of Indian banks cross Rs8lakh crore: Banking


Mess
Total bad loans of India's 38 listed commercial banks have crossed Rs8lakhcrore at the
end of June quarter. This chunk now accounts for nearly 11% of total loans given by
banking industry
Over 90 percent of these sticky assets are on the books of government-owned banks.
These banks constitute about 70 percent of the total banking industry, in terms of
assets, meaning the government will have to bear the burden of massive capital
requirements of crisis-ridden industry. Higher bad loans require banks to set aside
more money in terms of provisions. The provision amount varies on a case to case
basis.
In recent years, Non-performing assets (NPAs) have emerged as a major headache for
the government and the Reserve Bank of India (RBI). Clearly, both the RBI and
government woke up to the problem too late. The government has so far failed to
infuse the required capital for state-run banks.
The actual bad loan scenario in the sector could be even worse if one accounts for the
amount of loans that are being restructured under various schemes and are technically
retained as standard on the books of banks. If the economic cycle doesn't pick up as
expected, a significant chunk of such loans too may turn bad. Former RBI officials
have warned about this hidden problem.

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Commercial lending by banks

"I’ll put the figure around Rs20lakhcrore... One should include all troubled loans
including reported bad loans, restructured assets, written off loans and bad loans that
are not yet recognised.
The Modi government has time and again blamed the previous UPA-regime for the
bad loan mess, saying NPAs are a legacy issue. It is not yet clear whether the
government is seized of the enormity of the problem. Indeed, the government has
taken steps to address the bad loan problem like the NPA ordinance giving the
central bank more power to direct banks to take action against loan defaulters and
passage of Insolvency and Bankruptcy Code (IBC).
While these steps are welcome, these are unlikely to help overcome the bad loan
problem in the immediate future. It will take years before banks can get rid of NPAs
accumulated over the years on account of multiple factors. The following seven
charts give us various aspects of India's bad loan crisis:
The Asset Quality Review (AQR) initiated by RBI under former governor Raghu
ram Rajah and implemented from Q3 of FY16 resulted in a massive jump in gross

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Commercial lending by banks

NPAs. The figure more than doubled to Rs8.29lakhcrore in June 2017 compared
with Rs3.51lakhcrore in September 2015, an addition of Rs4.78lakhcrore in just
seven quarters. In the first two quarters of implementation of these guidelines, the
sector has seen Rs2.45lakhcrore jumps in gross NPAs. While in December 2015
quarter, gross NPAs surged by Rs1lakhcrore, in March 2016 quarter this portion
went up by another Rs1.44lakhcrore. The RBI bad loan clean-up process cannot be
blamed for the escalation of NPAs, as it only forced banks to report the actual NPAs
that were so far hidden in their balance sheets. At some point, this process had to be
started.
Public sector banks (PSBs), which accounted for 90 percent of the total gross NPAs
of the banking sector, has seen their gross NPAs jumping past Rs7lakhcrore in June
2017 quarter. In the past seven quarters, it jumped by Rs4.18lakhcrore or 133
percent to Rs7.33lakhcrore in June 2017 quarter from Rs3.14lakhcrore in September
2015 quarter.
Gross NPAs of 17 private banks soared by 161 percent to Rs96, 201crore in June
2017 quarter from Rs36, 878crore in September 2015. The bad loan scenario of
private banks as compared to their counterparts in public sector is much better. But,
even there, there isn't immunity to the problem.
State Bank of India (SBI), India's largest lender by assets, tops the bad loan chart.
The bank has Rs1.88lakhcrore of gross NPAs as on 30 June 2017. The figures now
include NPAs of five of its associates after the merger. SBI's combine gross NPAs
surged by 150 percent or Rs1.13lakhcrore to Rs1.88lakhcrore in the June
quarter from Rs75, 068crore in September 2015.
Punjab National Bank (PNB) comes second in the list with Rs57, 721crore gross
NPAs, followed by Bank of India (Rs51, 019crore), IDBI Bank (Rs50, 173crore)
and Bank of Baroda (Rs46, 173crore .ICICI Bank with Rs43, 148crore gross NPAs
tops the list. Its bad loans soared by 172 percent or Rs27, 290crore in the past 7
quarters from Rs15, 858crore in September 2015 to Rs43, 148crore in June 2017.
Axis Bank stood at second position with Rs22, 031crore bad loans. HDFC Bank was
the distant third with Rs7, 243crore of gross NPAs.
As mentioned earlier, state-run banks are the primary victims in the bad loan story.
IDBI Bank with 24.11 percent tops the list. That means every Rs24 out of Rs100 lent

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Commercial lending by banks

by the bank has not come back. Indian Overseas Bank follows with 23.6 percent
gross NPAs and UCO Bank with 19.87 percent. Out of 21 state-run banks, 17
lenders recorded over 10 percent gross NPAs as percentage of their advances as of
30 June 2017. Another two had gross NPAs close to 10 percent each, while eight
PSBs have gross NPAs of over 15 percent.
Among 17 private banks, Jammu & Kashmir Bank tops the bad loan table with gross
NPAs of 10.79 percent of its total advances as of 30 June 2017. ICICI Bank figures
second in the list with 7.99 percent bad loans and Kerala-based Dhanalaxmi Bank
follows next recording 5.62 percent of its loans as bad in the June quarter.

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Commercial lending by banks

India Bank Loan Growth


Indian banks' loans rose 6.3 percent in the two weeks to August 18th 2017 from a
year earlier. Loan Growth in India averaged 11.82 percent from 2012 until 2017,
reaching an all-time high of 18.70 percent in April of 2012 and a record low of 4.10
percent in March of 2017.

In India, bank loan growth refers to the year-over-year change of the overall commercial
banks
Credit to the economy, including food credit, non-food credit and loans, cash credit and
overdrafts. This page provides the latest reported value for –Indian bank loan Growth –
plus

Previous releases, historical high and low, short term forecast and long term prediction

Economic calendar, survey consensus and news. Indian bank loan growth –actual data,

Historical chart and calendar of releases –was last updated on September of 2017-09-30

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Commercial lending by banks

Percentage of change in loans

Quarter-on-quarter
Bank Year-on-year
loan growth

Bank of
America
0.57 -0.05
Total loans
and leases

Citi Total
- 1
loans

JPMorgan
8 0
Chase

Bank Year on Year Quarter on quarter loan


growth

Chase
Commercial & 2 15.75
Industrial loan
balance

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Commercial lending by banks

SURVEY OF COMMERCIAL BANKING


Commercial Banking SOURCES OF BANK’S INCOME
A bank is a business organisation engaged in the business of borrowing and lending
money. A bank can earn income only if it borrows at a lower rate and lends at a
higher rate. The difference between the two rates will represent the costs incurred by
the bank and the profit. Bank also provides a number of services to its customers for
which it charges commission. This is also an important source of income. The
followings are the various sources of a bank’s profit:

1. Interest on Loans:
The main function of a commercial bank is to borrow money for the purpose of
lending at a higher rate of interest. Bank grants various types of loans to the
industrialists and traders. The yields from loans constitute the major portion of the
income of a bank. The banks grant loans generally for short periods. But now the
banks also advance call loans which can be called at a very short notice. Such loans
are granted to share brokers and other banks. These assets are highly liquid because
they can be called at any time. Moreover, they are source of income to the bank.

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Commercial lending by banks

2. Interest on Investments:
Banks also invest an important portion of their resources in government and other
first class industrial securities. The interest and dividend received from time to time
on these investments is a source of income for the banks. Bank also earns some
income when the market prices of these securities rise.

3. Discounts:
Commercial banks invest a part of their funds in bills of exchange by discounting
them. Banks discount both foreign and inland bills of exchange, or in other words,
they purchase the bills at discount and receive the full amount at the date of
maturity. For instance, if a bill of Rs.1000 is discounted for Rs.975, the bank earns a
discount of Rs.25 because bank pays Rs975 today, but will get Rs.1000 on the due
date. Discount, as a matter of fact, is the interest on the amount paid for the
remaining period of the bill. The rate of discount on bills of exchange is slightly
lower than the interest rate charged on loans and advances because bills are
considered to be highly liquid assets.
4. Commission, Brokerage, etc.:
Banks perform numerous services to their customers and charge commission, etc.,
for such services. Banks collect cheques, rents, dividends, etc., accept bills of
exchange, issue drafts and letters of credit and collect pensions and salaries on behalf
of their customers. They pay insurance premiums, rents, taxes etc., on behalf of
their customers. For all these services banks charge their commission. They also
earn locker rents for providing safety vaults to their customers. Recently the banks
have also started underwriting the shares and debentures issued by the joint stock
companies for which they receive underwriting commission. Commercial banks also
deal in foreign exchange. They sell demand drafts, issue letters of credit and help
remittance of funds in foreign countries. They also act as brokers in foreign
exchange. Banks earn income out of these operations.

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Commercial lending by banks

CURRENT SCENARIO
UNDERSTAND THE CURRENT COMMERCIAL
LENDING ENVIRONMENT

When it comes to process design and automation, the commercial lending workflow has
received less attention than other simpler workflows because of the complexities of
commercial lending process.
Further, commercial lenders tend to be change-averse. Very likely, the bank has not
optimized its commercial lending business processes. Experts in lending, with the unbiased
eyes of neutral observers, are often in the best position to assess a bank’s commercial
lending operation.
These outside experts first must fully understand the commercial lending processes
and then document relevant workflows. Consideration should be given to workflow
variations due to relationship size, size of the request, complexity, and collateral and
whether or not the loan is made to an officer or board member. This understanding
creates a fact and knowledge-based foundation from which to lay the groundwork
for meaningful change and improvement.

EXAMINEPROCESSESCLOSELY, LOOKING
IMPROVEMENT OPPORTUNITIES
On completion of the thorough review of existing processes, an action team should examine
each workflow and process closely, looking for opportunities for improvement.
Introducing new technology to support commercial lending processes can initiate the change
needed to reach productivity improvements in commercial lending. Origination systems are
available to handle the nuances of commercial lending.
Substituting technology for manual inputs improves productivity.
The application of emerging technologies and the optimization of technology
platforms – such as origination, imaging and servicing – remain important for the
improvement of productivity and reduction of paper processing.
Additionally, vendor solutions in commercial lending can help spread the mounting
compliance investment across multiple financial institutions.

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Commercial lending by banks

Indians, traditionally have inherited a conservative philosophy that is at odds with


that propounded by global conglomerates fired by the self-serving urge of super-
profits as defining their reasons for existence untouched by the real economic
niceties.
The new bank lending channel
During the last decade the banking industry has experienced a period of intensive
financial deregulation. This increased competition in the banking sector, lowering in
turn the market power of banks and thereby depressing their charter value.
The decline in banks’ charter values coupled with their limited liability and the
existence of ‘quasi’ flat-rate deposit insurance encouraged banks to expand and take
on new risks.
As a result, there has been intense growth in lending together with an expansion of
the range of financial products usually offered by financial institutions.
For instance, banks expanded their activities towards more volatile non-interest
sources of income.
In parallel, financial innovation contributed to the development of the “Originate to
Distribute” (OTD) model, an intermediation approach in which banks originate,
repackage and then sell on their loans (or other assets such bonds or credit risk
exposures) to the financial markets. In principle, these innovations allowed a broader
range of investors to access a class of assets hitherto limited to banks (i.e. loans)
thereby distributing the risks to financial markets.
The spectacular increase in size of institutional investors has also meant that banks
could rely much more on market sources of funding contributing to the

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Commercial lending by banks

RBI-RESERVE BANK OF INDIA


Banking
In the good old days, when times were good, banking then was a cakewalk. Both the
householders and businessmen wanted someone known to them to take care of their
monies and it was a friendly neighbourhood banker who was considered trustworthy
to discharge this sacred duty.
The hallmark remained the inbuilt safety and security on the credibility of the
founders.
The banks began with small capital and collected deposits small and large. Syndicate
Bank were pioneers in ‘pygmy deposits’ collected by highly mobile deposit
collectors roaming from door to door of individuals and cash counters of Udipi
hotels to collect amounts as small as an Anna each day.
The recent electronic media string operations on tape have shown how banks across
the both in the public and private sectors, have thrown caution to the winds in trying
to mobilise deposits including carrying electronic note counters to depositors’ homes
to cart high denomination currency notes for deposits.
The RBI has levied massive penalties that each bank coughed up without demur!
Now the depositors have woken up to the fact that they are being taken for a jolly
good ride for the perceived ‘safety’ – realizing that deposits don’t offer interest rates
that manage to beat inflation.
The ‘wise’ from among the depositing turned to seek better ‘real’ rates of return by
switching to other investment destinations in the form of investments in shares,
debentures, bonds, gold, real estate, chit funds and even Ponzi schemes.

60
Commercial lending by banks

Banking Today
The banks that initially advanced the monies to individuals at much higher market
rates, initially to trade and business later graduated to lending to corporate for
industrial finance against tangible collaterals.
They then moved into higher interest lending for housing, automobile, education and
personal loans. While the personal loans are generally small in numbers and values,
it is the larger trade and industrial borrowers who call the shots when they encounter
serious erosion in their debt-servicing capabilities due to down slide in sales, rising
input costs, sluggish profits, delayed recoveries, build-up of inventories and hiccups
in delayed project start-ups—in trying to cut back on debt end up in taking on more
loans just to keep going and this result in greater borrowings and interest burdens
forcing the lending bankers to jump through the loop just to recover their advances.
It is rightly said that if you borrow a few thousands from the bank and fail to repay
you are in serious trouble, but if you borrow in cores, the bank comes in trouble, it
will then keep chasing you to implore you to settle by agreeing to reschedule your
instalments, by deferring payments, waive interest and the like, adopting the choice
between devil and the deep stenches been in the red from day one
The promoters go on with their high profile life despite defaulting in their dues to
employers, vendors, suppliers, bankers and tax authorities
With the worsening conditions in the West, like the sub-prime crisis and the
bankruptcy up of big name banks making it difficult to lend to their domestic
borrowers banks there have turned to lending abroad at lower rates.
Indians now find it cheaper to raise funds overseas by way of external commercial
borrowings (ECBs). But there is the inherent exchange fluctuation risk involved.
In the good old days the RBI played the role of a sombre silent ‘Big Daddy’, as a
supervisor maintaining monetary oversight by acting as ‘Banker to the Banks’. It is
rightly now said: “If collecting deposits and loaning it to the credit-worthy has
become a tricky endeavour, the RBI as regulator has not been making bankers’ lives
easier either, it has co-opted the banking system as its unwilling partner in trying to
fix everything that is wrong with the Indian economy.”

61
Commercial lending by banks

The RBI ought not to have permitted the commercial banks to hawk third party
products like marketing insurance and mutual fund products as well as gold that the
banks are simply not sufficiently geared for that and staff are not qualified to do.
RBI by allowing them to move away from their core banking activity of collecting
deposits and making advances has compounded the issue.
This has brought about a serious fall in monitoring of advance leading to mounting
stressed borrowings.
Today, it is noticed that there is a shoddy mix up of RBI’s role with that of the
central government in drawing lines as to what is fiscal and what is monetary and
who has to do what! In an attempt, to arrest the depreciation of the rupee, believing
bank money is fuelling currency fluctuations, RBI sought to squeeze every drop of
perceived ‘excess liquidity’ from the banking system bringing about a sudden spurt
in overnight rates to escalate their costs and aggravate the bad loans.

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Commercial lending by banks

Banking INVESTMENT POLICY OF BANKS


The financial position of a commercial bank is reflected in its balance sheet. The
balance sheet is a statement of the assets and liabilities of the bank. The assets of the
bank are distributed in accordance with certain guiding principles. These principles
underline the investment policy of the bank.
They are discussed below:

Liquidity: In the context of the balance sheet of a bank the term liquidity has two
interpretations. First, it refers to the ability of the bank to honour the claims of the
depositors. Second, it connotes the ability of the bank to convert its non-cash assets
into cash easily and without loss.
It is a well-known fact that a bank deals in funds belonging to the public. Hence, the
bank should always be on its guard in handling these funds. The bank should always
have enough cash to meet the demands of the depositors. In fact, the success of a
bank depends to a considerable extent upon the degree of confidence it can instil in
the minds of its depositors. If the depositors lose confidence in the integrity of their
bank, the very existence of the bank will be at stake .So, the bank should always be
prepared to meet the claims of the depositors by having enough cash. Among the
various items on the assets side of the balance sheet, cash on hand represents the
most liquid asset. Next comes cash with other banks and the central bank. The order
of liquidity goes on descending.
Liquidity also means the ability of the bank to convert its non-cash assets into cash
easily and without loss.

2. Profitability: A commercial bank by definition is a profit hunting institution.


The bank has to earn profit to earn income to pay salaries to the staff, interest to the
depositors, dividend to the shareholders and to meet the day-to-day expenditure.
Since cash is the least profitable asset to the bank, there is no point in keeping all the
assets in the form of cash on hand. The bank has got to earn income. Hence, some of
the items on the assets side are profit yielding assets.

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Commercial lending by banks

CONCLUSION
Banking systems have been with us for as long as people have been using money.
Banks and other financial institutions provide security for individuals, businesses
and governments, alike. Let's recap what has been learned with this tutorial:
In general, what banks do is pretty easy to figure out. For the average person banks
accept deposits, make loans, provide a safe place for money and valuables, and act
as payment Agents between merchants and banks. Banks are quite important to the
economy and are involved in such economic activities as issuing money, settling
payments, credit intermediation, maturity transformation and money creation
In addition to fees and loans, banks are also involved in various other types of
lending and operations including, buy/hold securities, non-interest income, insurance
and leasing and Payment treasury services.
History has proven banks to be vulnerable to many risks, however, including credit,
liquidity, market, operating, interesting rate and legal risks. Many global crises have
been the result of such vulnerabilities and this has led to the strict regulation of state
and national banks.
However, other financial institutions exist that are not restricted by such regulations.
Such institutions include: savings and loans, credit unions, investment and merchant
banks, shadow banks, Islamic banks and industrial banks.

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Commercial lending by banks

Bibliography
Referred books:
o Vipul Prakashan
o Kothari C R and Gaurav Garg (2008) Research Methodology
(Methods and Techniques) Third Edition, New Age International
Publishers.

Webliography
 www.google.com
 www.wikipedia.com
 www.Investopedia.com
 www.BankBazzar.com
 www.commercialbankofindia.com
 www.banknetindia.com
 www.rbi.org.in
 www.vinodkothari.com

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