Chapter 6

Borrowing Causes for

Customers and Related
Financing Products

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 Borrowing Causes
• As part of the preliminary analysis of a loan request, you
will need to highlight the purpose of borrowing in the
credit proposal. Some of the basic causes of customer’s
borrowing from a bank can be:
1. Rapid Sales growth (as sales increase, debtors and stocks
also increase proportionally)
2. Slowdown in the Operating Cycle (CCC -Cash Collection
Cycle)
3. Purchase of fixed assets i.e. for capital investment
4. Restructuring of liabilities (customer might want to repay
one lender or consolidate its debt)

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Sources of Ascertaining other Bank
Borrowing
1. CIB Report
2. Audited Financials
3. Search Report (Search Report is a report
extracted from the record of SECP where all
banks financing to companies register their
respective amount of charges. A proprietorship
concern will have no Search Report)

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 The 5 Basic Principles of Lending
• There are 5 basic principles to be observed while
advancing money to borrowers.
1. Safety
2. Liquidity
3. Dispersal
4. Remuneration
5. Suitability

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1. SAFETY: whatever money banks hold is of the
depositors who have entrusted the banker. Therefore
banker must ensure that the money is lent to creditworthy
borrowers where the risk of loss does not exist.
• Elements of 3C comes here: Character of the customer,
his Capacity (managerial expertise), Capital (owners
equity)

2. LIQUIDITY: possibilities of recovering the advances in

emergency. Banker must ensure that the money lent is not
blocked for an undue long time. It is thus very important
to analyze the borrowers’ asset position (working capital
requirement)

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• DISPERSAL: Equal focus should be given to all sectors
and not just the textile or engineering sector. Dispersal is
necessary because it reduces the risk of recovery when
something goes wrong in one particular sector.

• REMUNERATION: refers to sufficient earnings to be able

to pay the interest on deposits, salaries to staff, overhead
expenses, provision for losses, payment of dividends.

• SUITABILITY: means that advances should be allowed

only to carefully selected and suitable borrowers. The
Central bank allocates priorities for giving loans in a
particular sector and regulates the minimum/maximum rate
of interest to be charges.

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 Financing Products
Broad categories:

[Link] Based

[Link] Fund Based

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 Financing Products
• Fund Based Facilities: Bank’s funds are
involved
• Non Fund Facilities /Contingent Liability:
Bank’s funds are not involved. In these
finances, only bank’s name is used. Non
fund based finances convert into fund based
if the customer fails to perform the actions
on his part.
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 Fund Based Products
• Running Finance – works like an OD line
• Cash Finance
• Demand Finance
• Project Finance /Syndicate loan – for long term projects
• Inland or Foreign Bills Purchase (IBP & FBP)
• Export Refinance (Pre & Post)
• Seasonal Finance
• Consumer Finance (Personal Loans, Auto/house loans)
• Leasing
• Financing against shares
• Foreign currency export financing (FCEF)
• Foreign currency import financing (FCIF)

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Running Finance:
• It is a multi transaction facility in which
funds are placed on the disposal of the
customer by allowing him a limit and are
not credited in his current account. He is
allowed to withdraw funds from his account
in excess of the available funds.

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Cash Finance:
• This facility is provided against pledge of
inventory. The basic purpose is to enable
the customers to purchase seasonal raw
material eg cotton bales, sugar. Customer
can utilize this facility only when the goods
are pledged and the bank’s caretaker (called
muccudum) verifies the quantity of pledged
goods. Depends on the operational cycle of
the customer.
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Demand Finance:
• This facility is provided to meet long term
requirements like BMR (balancing,
Modernization & Replacement,
establishment of new unit, etc. these
finances need bulk funds.

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Seasonal Finance:
• It’s like working capital finance for cotton
ginners, textile mills, sugar mills, rice mills,
financing against wheat to private sector
etc.

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 Non - Fund Based Products

• Types:

[Link] of Credit (LC)

[Link] of Guarantees (LG)

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 Letter of credit
• A written undertaking by the bank (issuing
bank) given to the seller at the request of
the buyer to pay at sight or at a future date,
a stated sum of money against the required
documents.
• Types: - Sight (immediate payment)
– Usance (Purchase on credit)

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 Bank Guarantee
• An irrevocable (permanent/binding)
undertaking of bank (guarantor) to effect
payment against presentation of written
statement of the guarantee holder to the
effect that the given contractually agreed
obligation has not been fulfilled.
• Types: bid bond, shipping guarantees,
performance guarantee
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Types of Securities Against Financing

1. Pledge: defined as physical possession of

goods of customer under the custody of the
bank
2. Hypothecation: goods available as security
for debt without transferring the property of
possession to the bank
3. Mortgage: against charge over property.

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 Testing Exercise
• Which security works with which financing line?
1. Cash Finance – Against mortgage, hypothecation or
pledge?
2. Seasonal Finance – Against mortgage, hypothecation or
pledge?
3. Running Finance – Against mortgage, hypothecation or
pledge?
4. Project Finance - Against mortgage, hypothecation or
pledge?

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