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Liquid Term Loan (A product designed to reduced many problems of Indian Banking Industry) Having Term Loan with Running Account Facility and Working Capital Loan Repayable in Installment Facility

This is an entirely new innovative credit product, or a new method or procedure of granting loans which offers a solution to reduce most of the problems faced by Indian Banking Industry generally, and thus has a potential to revolutionize the way loans are now granted in India. The product has been named by its originator as “Liquid Term Loan” which is a Term Loan with Running Account Facility as also a Working Capital Loan Repayable in Installments.

Background- 1.	Presently Banks in India are granting working capital funds for various purposes to meet short term working capital requirements by way of Cash Credit and / or Overdraft, which gives borrowers running account facility – i.e. the customers are allowed to deposit and/or withdraw any amount from their CC/OD accounts provided the balance outstanding remains within the Sanctioned Limit, and Drawing Power calculated on the basis of Stock-cum-book debt statement submitted by them. Although such working capital facilities are generally sanctioned for a year (in some cases up to three years with yearly review and renewal) and are repayable on demand, actually such facilities are hardly repaid after one year. Even in cases where turnover is not satisfactory to justify the limit, bank finds it practically impossible to recall the facility, and the limit is rolled over year after year - forever. While sanctioning such CC or OD limits, it is not even considered that after the lapse of the period for which facility is sanctioned, how the payment will be made by the borrower, and to meet this obligation, from where he will get the funds. In fact such a system is based on the concept of bifurcation of ownership of the business entity from the management who is responsible to run it. The business is valued on the basis of its capitalization, and takes into consideration only the capital and long term funds owed by the business and fixed assets owned by it. Rests of the things are supposed to be managed by top management, who is responsible to run the business successfully and profitably. On the one hand it makes asset and liability management difficult for the bank, on other business never become self dependent, thus polluting/vitiating the credit environment of the country/economy. As many businesses have working capital cycle of more than 90 days (e.g. in case of civil contractors etc.), there are frequent instances when the account remains out of order for more than 90 days (i.e. over limit, or within limit but over DP, or there is no credit turnover, or the credit turnover is insufficient to repay the interest charged during the period) and thus turns NPA. Further, similarly, banks are also granting term loans for purchasing/developing Capital Goods e.g. for purchasing and construction of Residential and Commercial Buildings, purchasing of Plants, Machineries & Equipments and Vehicles etc. Such term loans are repayable in monthly/quarterly/Half yearly/yearly or other suitable installments - either equitable, variable or graded. If the borrower has surplus funds only for a few days, he cannot deposit such surplus funds in his term loan account, because any such deposit is treated as repayment of term loan and cannot be withdrawn afterwards. To obviate this difficulty, system of escrow account has been devised, wherein all revenue of the borrowers are deposited and installments are debited there from as and when due. For keeping such idle funds, the customer has to open separate accounts, either SB or Current or Escrow, which unnecessarily increases the number of accounts, thus multiplying the workload on CBS system, and also on the branch officials in up keeping of related files and documents etc. The cost of up keeping of additional accounts and related files and documents etc., and the cost of providing account statements, balance or other certificates etc. also shoots up overall cost to the bank substantially, causing drain to bank’s resources and profitability. A major portion of Bank’s infrastructure is thus wasted in extra-workload, not proportionately remunerative to the bank.

This also costs to the customer – by way of interest loss on keeping cash idle, by increased risk of loss of cash, and by increased hassles in satisfying Tax and other law enforcement agencies by justifying transactions in multiple accounts.

It also results in low credit turn-over in customer’s loan accounts thus increasing risk of accounts turning time barred and/or NPA due to reduced customer interaction.

It is evident that the present system is a unnecessary cost and threat to the economy, the whole banking system and the society. Proposal - To remove all above problems I propose for sanction of all future Term Loans and Working Capital Loans in a entirely new style - under which all Term Loans and Working Capital Loans will have running account facility as well as installment repayment facility- along with all related traditional/customary and modern IT and e-products like – Cheque Book, Multicity Cheque book, Internet Banking, Mobile & SMS Banking, ATM cum-debit Card, e-statement, e-payment of taxes etc. etc.

The scheme may be named as “Liquid Term Loan“. The basic features of the scheme are proposed to be as under, which may be refined and improved in consultation with RBI, IBA, Ministry of Finance, Govt. of India and other suitable regulatory authorities and stake holders. 1.	 In future - all fund based Term Loans and Working Capital Loans be opened only in proposed new format of “Liquid Term Loan”. So all accounts opened under “Liquid Term Loan” are proposed to be finally closed by repayment, whether they are granted for supporting Capital Goods or for meeting working capital requirements. 2.	In all cases repayment schedule is proposed to be drawn and monthly/quarterly/Half Yearly/yearly or other suitable installments – either equitable, variable or graded - be fixed keeping in mind DSCR and cash generation cycle of the business concerned. 3.	In case of working capital finance, repayment schedule from 3 to 5 years may be drawn while in case of Term Financing (for financing capital goods) repayment schedule from 3 to 9 years may be fixed. 4.	Monthly installment should be fixed only in cases where monthly income is assured like in cases of income by way of salary, rent or interest etc. In all other cases longer duration installments are proposed to be fixed. 5.	Based upon the repayment schedule fixed and entered into the system, the system will automatically fix the operative limit for the account on reduction basis, from the due date of each installment. 6.	Till debit balance outstanding in the account remains within the operative limit fixed by the system, and in case of working capital finance also within the DP calculated on the basis of Stock-cum-book debt statement submitted by the customer, the customer will be allowed to deposit or withdraw any amount into or from his “Liquid Term Loan Account”.

Benefit to the customer – 1.	Running account facility even in cases where Term Loan is presently sanctioned for financing of capital goods. 2.	Benefits of all related customary/traditional and modern/new IT and e-products like – Cheque Book, Multicity Cheque book, Internet Banking, Mobile & SMS Banking, ATM cum-debit Card, e-statement, e-payment of taxes etc. etc. 3.	Relief from having multiple accounts like SB/CA/Escrow account etc. 4.	Better fund management as funds which are surplus for a few days only, can be immediately deposited, and can be withdrawn afterwards whenever need arises. 5.	Lesser interest burden as cash will not be kept idle. 6.	Lesser tax burden - as presently no deduction of interest charged on loans is available for loans other than education loan, housing loans and loans taken for business purposes, but interest income in chargeable for income tax in all cases. Under the proposed scheme, as interest income will automatically be set off against the interest paid, tax on such income will not be charged. 7.	Fewer documentation and file maintenance hassles etc. 8.	Reduced risk of loss of cash, and reduced hassles in satisfying Tax and other law enforcement agencies by obviating transactions in multiple accounts.

Benefit to the Bank – 1.	Better marketability/sale ability of its credit products due to Running Account Facility granted to the customers even in cases where Term Loan is presently sanctioned for financing of Capital Goods, and all related benefits like – Cheque Book, Multicity Cheque book, Internet Banking, Mobile & SMS Banking, ATM cum-debit Card, e-statement, e-payment of taxes etc. etc.

2.	Reduced costs and hassles in opening and up-keeping of multiple accounts like SB/CA/Escrow account etc., and reduced cost of providing account statements, balance or other certificates etc., thus reducing work load on CBS system and on Bank officials. 3.	Fewer documentation and file maintenance hassles etc. 4.	Funds granted even for financing Working Capital will be finally liquidated and there will not be perpetual rollover of such facilities. 5.	Working Capital Loan Accounts of those businesses which have working capital cycle of more than 90 days (e.g. in case of civil contractors etc.), will not turn NPA for not having any credit turn over in the account for more than 90 days - as concept of account remaining out of order for more than 90 days will not be applicable on “Liquid Term Loan Accounts” - because being Term Loans repayable in installments, they will turn NPA only if Installment or interest are not repaid for more than 90 days; and installments fixed by the bank may be of longer periods (Even Quarterly, Half Yearly or Yearly), that too in consonance, and in alignment with cash generation period of the customer. 6.	Also, being Running Accounts, extended limitation period will be available to “Liquid Term Loan Accounts”, and they will turn Time Barred only after 3 years from the close of financial year in which last transaction is made on behalf of the customer. 7.	Improved credit turn-over in customer’s loan accounts and increased customer interaction, thus reducing risk of accounts turning time barred or NPA. 8.	As deposits will not be kept in separate accounts, need for maintaining CRR & SLR will not arise. DICGC commission will also not be required to be paid in such cases. ECGC/CGTMSE commission will also be applicable at reduced amount. 9.	Similarly, due to the fact that idle cash will be deposited in loan account, outstanding balance will show a reduced amount thus reducing total risk weighted assets thus reduced Capital Reserve requirements. 10.	To cover the loss of interest to the bank – two variants of the scheme are proposed – a.	Either 2% to 3% extra interest over the normal TL/CC/OD account (keeping in mind the Purpose, Risk Grading, Security etc. of the facility ) may be charged on “Liquid Term Loan Accounts” OR b.	4% to 6% interest may be paid to the customer on the difference amount by which operational limit exceeds the outstanding debit balance. The operational modality in this case will be as follows – i.	Full interest will be first calculated on the operational limit at the applicable rate for the period ii. Then and it will be reduced by 4% to 6% of interest (as decided by our Bank’s Board) for the period, on the difference amount by which operational limit exceeds the outstanding debit balance. iii. Such reduced interest will be debited to the customers’ “Liquid Term Loan Account” on monthly basis.

Benefit to the Regulators – 1.	No yearend window dressing may take place by putting un-availed credit limits as deposits. 2.	Fewer number of accounts will result in low burden on the banking system thus resulting into better monitoring and follow-up and in due course better compliances 3.	Lesser NPA in the banking system To obviate any future confusion and resultant litigation, copy of the full text of the scheme with customer’s signature on the notation- “I/We have read full text of the scheme, understood it, and willingly and unequivocally subscribe to it” may be kept with documentation file as a measure of International Best Practices, and to meet complete disclosure requirements, including under RTI Act. The proposed scheme may revolutionize the way loan are sanctioned in the Banking Industry.

Details of Originator of “Liquid Term Loan”:

Sudesh Kumar, HI-151, Harmu Housing Colony, Ranchi – 834002 (Jharkhand) Phone No, 9973866688 / 0651-2340764 Sudesh_kagrawal@yahoo.co.in