Master of Business Administration - MBA Semester 4 Subject Code MA0043 Subject Name Corporate Banking

Assignment

Q. What is reverse mortgage? Why reverse mortgage has not gained popularity? Ans. A reserve mortgage, also called a life-time mortgage, is the loan allowed to the sole owner of the house which he does not need to pay for the time that the borrower or the house which he does not need to pay for the time that the borrower or the co-owner stays there. Instead, the loan is repaid when the borrower/s die, or sells the house, or no longer lives there as their primary residence. Such mortgages help the poor home owners, to meet their financial needs while residing in their homes, by increasing the liquidity of their assets. The reverse mortgage essentially converts the home equity into cash, which can be put to varied usages without any requirement to make monthly repayments. Some salient features: a) The borrower/s is not evaluated on the basis of income criteria to qualify for the loan. b) The credit history of the borrower/s being not very relevant is not verified. c) The amount of the loan is determined on the basis of borrowers age, value of the property, rate of interest and lenders norms. d) No repayment of the loan is required till the borrower or any of the co-owner occupies the property. e) Borrower remains the owner of the property and is liable to pay all property taxes/insurance etc. during the subject matter of the mortgage is debt free. f) It is essential that the property which is the subject matter of the mortgage is debt free. g) The amount received as the proceeds of reverse mortgage is debt free.

h) Reverse mortgages in general should be the first mortgage on the property. So if the borrower/s owes any money on the property, the old debt must be paid off before getting into a reverse mortgage Some important points to be noted with regard to mortgages: y In a simple mortgage, the mortgage is by deposit of title deeds and in English mortgage, the possession of the mortgage properties is not given to the mortgagee. y In Usufructuary mortgage and in mortgage by conditional sale, possession of mortgage prosperities is normally given to the mortgaggeee. y In case of a simple mortgage and mortgage by deposit of title deeds, the mortgagee has a right to proceed against the property mortgaged and also personally against the mortgagor. y Mortgagee is to be created by way of a deed and requires to be registered under the Registration Act. y Mortgage by deposit of title deeds is not required to be created by way of a deed and need not be registered. y The rule of priority in case of successive mortgages is in order of time they were created. y Right of Foreclosure: On default by the mortgagor, the mortgagee in certain types of mortgages has the right to obtain a decree from a court to the effect that the former be debarred forever to get back the mortgaged property. Such a right is called right of Foreclosure. y Right of Redemption: On liquidation of the debt, the mortgager has the right to get back the document relating to mortgagor property, where possession has been transferred, to have the same transferred back. This right is known as the right of Redemption, which can be exercised anytime before the decree for sake or

foreclosure has been passed by the court. y Limitation period for mortgage is 12 years from the date mortgage money becomes due. For right of foreclosure and redemption it is 30 years from the date mortgage debt becomes due. y Enforcement of mortgage is governed by the code of Civil procedure, 1908. Suit for sale of mortgaged properties should be filed in the court, with in whose jurisdiction the mortgage property is situated. y In a suit for sale of mortgage properties, the Court first passes a preliminary decree and thereafter a final decree. y Enhancement of existing limits: The mortgagors would be required to execute mortgage deeds for the amount over and above the amount of limit before enhancement. In case of equitable mortgage, entry is made in the title deed register for the enhanced portion of the limit. Q. Explain different types of charges with examples. Ans. Creation of charges by the debtors on various kinds of securities/assets means creation of right in favour of the creditors, to get payment of the loan amount, out of the security charged. By creation of charge, the ownership is not transferred in favour of the creditor (except in few transactions such as an English mortgage). Fixed Charge: It is created on properties such as land and buildings, plant and machinery, whose identity does not change. The debtor has no right to dispose of the assets after creation of charge without the consent of the creditor. The debtor retains the ownership and possession of the assets and he can deal with them, subject to priority created by the charge. Floating Charge: It is created in assets which undergo change(stocks). It is also an equitable charge in the assets of a going concern e.g. cash credit against hypothecation of stocks. In such a charge, the security is allowed to be used in the ordinary course of business until the charge crystalises. Pari Passu Charge: It is created in favour of several creditors, with the condition that they have equal priority, subject to maximum of their share in the security linked to the amount of their loan. It is generally created in case of consortium accounts. Exclusive Charge: This refers to a case where only one creditor has the charge on the assets without intervention of any other creditor, e.g. stocks charged only to BCA Bank for cash credit

y y

1st Charge: Where the asset is charged to a creditor on first basis, that creditor has the 1st Charge. 2nd Charge: Where asset is already charged to a creditor to a creditor on first basis and subsequently charge is created in favour of another creditor, the 2nd creditor is called to have the 2nd Charge. The rights of the 2nd charge holder are subject to the rights of the 1st charge holder.

Bank charge over properties confines itself to one or more of the following six types of charges. Q. State Vyas Committee recommendations on flow of credit to agriculture sector Ans. The Reserve Bank had constituted an Advisory Committee on flow of credit to agriculture and related activities from the banking system under the chairmanship of noted economist, Prof. V.S. Vyas. The Terms of reference of the Committee were as under: y To assess the progress made in implementation of the recommendations of the Expert Committee on Rural Credit appointed by NABARD in August 2000. y To suggest measures to reduce the rate of interest on agriculture credit given by Commercial, Cooperative and Regional Rural Banks; y To examine the role of NABARD as the apex institution for providing and regulating credit for the promotion and development of agricultural and the role of Regional Rural Banks in purveying agricultural credit and suggest measures for improving the same without sacrificing overall viability considerations; y To study the role and effectiveness of the RIDF mechanism and suggest alternatives, with a view to increase direct agriculture lending; y To identify the impediments in the flow of credit to the disadvantaged sections such as small and marginal farmers, tenant farmers, oral lessees and landless labourers and suggest measures to be taken by banks for providing financial assistance to them; y To suggest short-term and medium-term measures to improve the flow of credit to agriculture, with particular emphases on direct financing of farmers based on linkages for supply of inputs and sale of outputs and institutional and procedural arrangements required there for; y Scope for involving innovative location-specific catalytic agents to bridge the gap between the demand and supply of timely credit in rural arenas; y The problems faced by banks in extending their outreach; y The need to modify the service area approach; y Feasibility for harnessing new technological developments in smoothening the process of credit delivery to the rural and agricultural sector; y To study the role of micro finance in poverty alleviation and adoption of the self help group approach in extending banks outreach to the disadvantaged sectors; y To examine the need to regulate micro finance institutions and to suggest appropriate regulatory model; y To examine the norms relating to NPAs in cases of crop failure where seasonality and uncertainty are not capture.

Q. What are the measures to be taken for monitoring a term loan? Ans. A) Term loan would normally be disbursed only in stages in conformity with the terms of sanction, after completion of documentation and pre-release audit. B) Pre-disbursal inspection should be conducted before release of each stage. C) A record of such inspection observations/findings should be maintained at the branch. At every stage

of release, branch should ensure/verify that the end use of the loan released earlier has been met. D) Disbursal towards machinery should be made after ensuring that civil construction is complete. E) Normally disbursals are made by directly remitting the amount to the suppliers of machinery, bona fide builders or contractors etc. It should be ensured that party has brought in required margin for each stage from his own source and that there is no division from working capital funds. In case of need, auditors certificate should be insisted. F) Statement of progress report covering physical and financial progress should be obtained at periodical intervals and verified. G) Wherever necessary, licences/approvals from the government agencies/departments/pollution control boards, which are critical for project implementation, should have been obtained. Branch should scrutinize them and satisfy that project implementation conforms to these clearances. H) Satisfactory utilization of earlier disbursements should be ensured before considering further disbursements. I) If there is a likelihood of cost over run, the overrun portion is to be tied up before disbursal of further sum. J) In respect of project loans, time schedule as per PERT/CPM chart should be critically reviewed and it should be understood that any time overrun, if not made up, may result in a cost overrun as well. K) Adequate insurance cover should be taken during construction period and risk associated with construction should be covered under the insurance policy.