Manual of Instructions

Volume - 5
Chapter- 5

Advances Against Goods

Contents
Para Topic Page
No No

1 Introductory 03
2 Pledge / Hypothecation 03
3 Types of Facilities 05
4 Suitability of Security 06
5 Goods to be of Recent Origin 06
6 License/Permits 07
7 Application and Annexures 07
8 Processing of Proposals 07
9 Assessment of Credit Requirements 08
10 Fixing of Limits and Sub-Limits 09
11 Sanction 10
12 Documentation 10
13 Verification of Borrower's Title 11
14 Valuation 11
15 Margins 12
16 Market Report Book 13
17 Drawing Power 13
18 Insurance 13
19 Key Loans, Loans to Retail Trade and Business Enterprises 14
19.8 Godowns 14
19.9 Manner of Storage 15
19.10 Godown Measurement Book 17
19.11 Physical Verification of Goods 17
19.12 Procedure for Accepting Goods under Bank's Pledge 20
19.12(ix) Godown Card 21
19.12 (x) Display of Bank's Signboards 21
19.12 (xi) Pad-locks and Keys 22
19.12(xii) Deposit on Pad-locks 23
19.12(xiii) Godown Keys-cum-Keys Movement Register 23
19.13 Godown Certificate 24
19.16 Maintaining the Loan Account in the system 25
19.17 Key Loan Liability Register 25
19.22 Releases 25
20 Key Cash Credits 27
20.9 Key Cash Credit Stock Register 29
20.11 Rotation of Stocks 29
21 Open Cash Credits 29
21.5 Display of Bank's Signboards: 30
21.6 Open Cash Credit Stock Register: 30
22 Common Guidelines on Cash Credit Accounts 31

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 22.1 Periodical Stock Statements 31
22.2 Preparation and Submission of Stock Statements 32
22.3 Periodicity of submission of Stock and Book Debts 33
Statements
22.4 Stock Statements - Scrutiny and Follow-up 34
22.4(viii) Calculation of Drawing Power 35
22.5 Delay in Submission of Stock Statements 40
22.6 Maintenance of Accounts: 40
22.7 Daily Balancing of Cash Credit Accounts 41
22.8 Balance Confirmation Letters 41
23 Advances against Warehouse Receipts (Certificates) 42
23.15 Guidelines for financing against warehouse receipts of 45
approved cold storages
24 Trust Letter Facility 48
25 Selective Credit Control 51
26 Emergency / Ad-hoc Limits 54
27 Interest 54
28 Review / Renewal of Limits 54
29 Follow-up and Supervision 54
30 Inspection 55
31 Enforcement of security 58
31.2 Pledged Goods 59
31.3 Hypothecated Goods 59
31.4 Sale of Goods 60
32 Scheme of Financing Fair Price Shops in Andhra Pradesh 61
33 General Aspects 64

ANNEXURES

I Trust Letter 65
II Proforma of Acknowledgement to be obtained from the Unit 67
Receiving Goods for Processing / Packaging etc.,
III Godown Certificate 68
IV Proforma of Notice 69
V Proforma of Reminder Notice 70
VI Proforma of Final Notice 71
VII Proforma of Auction Notice to be circulated among local 72
Merchandise / Member of Public

*****

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 CHAPTER - 5

ADVANCES AGAINST GOODS

1. Introductory

1.1 Advances against goods i.e., agricultural produce, industrial raw material, semi-
finished and finished goods and other items of merchandise are the most common
and conventional forms of lending and these advances generally constitute a major
portion of the Bank lending.

1.2 Advances against goods are short-term credit facilities in nature. They form part of
working capital finance allowed for industrial/trade/business purposes and are
intended to meet the credit requirements of the borrowers up to the stage of sales.
These advances enable the borrowers to hold the required level of inventory/stocks
and to meet the expenses connected with their industrial/business/trading activities.

1.3 Advances against goods are highly remunerative in nature. They are generally safe,
provided adequate precautions are taken against the risk of deterioration and the risk
of fraud.

1.4 Guidelines given in the chapter are supplementary to various chapters. In the case of
advances to large borrowers, branches should follow the relative guidelines/norms
regarding credit assessment methods stipulated in Policy Guidelines, in addition to
those given in this chapter.

1.5 Advances can be allowed against Pledge or Hypothecation of goods.

2. Pledge/Hypothecation

2.1 The concept of Pledge as well as the rights and duties of the Pledgor and Pledgee
are discussed in the chapter "Loans Against Gold Ornaments".

2.2 Hypothecation

As per Securitisation of Financial assets Act 2002, "Hypothecation" means a charge

in or upon any movable property, existing or future, created by a borrower in favour
of a secured creditor without delivery of possession of the movable property to such
creditor, as a security for financial assistance and includes floating charge and
crystallization of such charge into fixed charge on movable property

i) In the case of Hypothecation, the possession of the property offered as

security remains with the borrower and an equitable charge is created in
favour of the lender.

ii) The person hypothecating the security is called "Hypothecator", the person to
whom the security is hypothecated is called the "Hypothecatee" and the
hypothecated goods are called "Hypotheca". In the context of bank advance,
the borrower is the "Hypothecator" and the bank is the "Hypothecatee".

iii) Normally, movable properties in the nature of goods, machinery, livestock,

crops etc., are the subject matter of hypothecation. However, it is not
uncommon for banks to accept even hypothecation of book-debts
(receivables).

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iv) Generally, hypothecation is created by means of a written agreement
between the hypothecator and the hypothecatee.

v) The hypothecation agreement specifies the rights of hypothecatee and the

duties and responsibilities of the hypothecator. The hypothecation agreement
contains a clause whereby the hypothecator agrees to hand-over possession
of the security to the hypothecatee on demand.

vi) Existing as well as future securities may be brought under Hypothecation

Agreement.

vii) The charge "Hypothecation" hovers over and floats with the hypothecated
security until some event like default or breach of covenants by the
hypothecator causes it to settle on the security.

viii) In the case of hypothecation, the hypothecator not only has the possession of
the security, but also is free to deal with the security subject, however, to the
terms of the Hypothecation Agreement. For example, an industrial borrower
availing bank credit against hypothecation of his inventory can transfer,
process, sell and substitute the securities in the manner agreed upon in the
Hypothecation Agreement. This distinct advantage to the hypothecator
(borrower) makes the charge "Hypothecation" an ideal charge from the
borrower's point of view.

ix) A hypothecatee is a secured creditor in the event of insolvency/liquidation of

the hypothecator.

x) In terms of Sec.125 of Indian Companies Act, 1956, hypothecation of assets

of a limited company attracts registration with Registrar of Companies. The
subject of Registration of Charges is covered in the Chapter "Types of
Constituents" of the Manual of Instructions.

xi) The following are some of the risks to which the lender is generally exposed
to in the case of hypothecation.

a) The borrower may surreptitiously dispose off the security thereby

making the debt unsecured.

b) Borrower may manipulate the security or substitute a good security

with a sub-standard one.

c) Borrower may resort to multiple borrowing against the same security

from more than one lender.

d) Borrower may refuse to hand-over the security as and when

demanded and he may even create legal hurdles necessitating
incurring of avoidable legal expenses and wastage of time and labor.

xii) In spite of all the disadvantages involved in hypothecation, a lender,

especially a banker, cannot altogether avoid lending against hypothecation of
securities since in several cases "Pledging" of securities is not possible /
practicable / feasible. Further in facilities like term loans for machinery /
equipment / livestock / motor vehicles or working capital finance against
inventories, banks may have to allow the borrower to retain possession of the

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 securities charged. The following measures may, to a great extent, minimize
the risks in hypothecation.

a) Confining sanctioning of advances against hypothecation of securities

only to parties of high integrity.

b) Insisting (if the rules do not explicitly prohibit) suitable collateral

security in the form of third party guarantee/co-obligation and/or
tangible security of adequate value.

c) Subjecting the security to regular periodical inspections.

d) Displaying sign boards indicating Bank's interest over the security.

e) Calling for periodical information about the quantity, quality and value
of the security (when the composition of the security changes from
time to time eg, hypothecation of stock-in-trade) and cross checking
the relative details with the records maintained by the borrower in the
ordinary course of his business.

f) Keeping ‘close watch' on transactions/operations in the accounts and

market conditions.

g) Timely registration of charge and verification of the Register of

Charges with "Registrar of Companies" at periodical intervals in the
case 'of Corporate Borrowers.

3. Types of Facilities

3.1 Advances against goods can be granted by way of any of the following credit
facilities.
i Key Loans Demand Loans allowed against Pledge of Goods
(Also known as Loans Against Merchandise).
ii Open Loans Demand Loans allowed to Retail Trade and
Business Enterprise under Service Sector against
hypothecation of goods.
iii Key Cash Credits Cash Credits allowed against Pledge of Goods.
iv Open Cash Credits Cash Credits allowed against Hypothecation of
Goods and Book-debts.
v Documentary Bills Purchasing/Discounting of Bills accompanied by
Purchased / Discounted Document of Title to Goods.

3.2 Depending upon the need and desirability, granting of a combination of above
facilities to a single party may be considered.

3.3 Depending upon the necessity, suitable sub-limits may also be fixed under each limit
so as to regulate lending against any particular item of security.

3.4 Detailed guidelines on Documentary Bills Purchased/Discounted are given under the
chapter "Advances Against Bills" in this Volume of the Manual of Instructions.
Common guidelines applicable to other types of credit facilities against goods viz.,
Demand Loans, Key Cash Credits and Open Cash Credits are given in the following
paragraphs.

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4. Suitability of the Security

4.1 Goods, which satisfy the following four attributes, can be accepted as security.

i) Ready Marketability
ii) Easy ascertainment of Value
iii) Absence of wide fluctuations in Value
iv) Free from the risk of early deterioration

4.2 In the case of advances to industrial borrowers, raw materials that have industrial
use/economic value with reference to the activity of the borrower can be accepted as
security along with stock-in-process and finished goods. Similarly, stores and spares
that help the manufacturing process and packing material used in preservation/
protection of the finished products may also be accepted as security.

4.3 In the case of advances to borrowers under priority sectors, goods which possess the
attributes given under para no.4.1 above can be accepted as security.

4.4 In the case of non-industrial borrowers, other than those coming under priority
sectors, branches should ensure that the relative goods possess the basic attributes
as given under para no. 4.1 above.

4.5 Irrespective of the category of the borrower, the sanction terms should specify the
nature of items that can be accepted as security together with the amount of sub-
limits, if any, for such items.

5. Goods to be of Recent Origin

5.1 Turnover of goods is an indication to their ready marketability. Retention of goods

beyond a reasonable period may erode their quality and value and may eventually
make them unsaleable. Hence, branches should exercise great care to see that the
Bank finance is allowed only against goods of recent origin and that the goods held
as security are not retained for an unreasonably long period.

5.2 The period of retention should be decided depending upon factors like perishability,
marketability, seasonal availability etc.

5.3 While financing against agricultural produce, it must be ensured that the produce is of
current season and not of the previous season. Generally, advances against
agricultural produce should not be allowed to outstand after the subsequent season’s
crop comes into the market.

5.4 In the case of advances against manufactured items, it should be normally ensured
that the items are not more than six months old or are not retained for an
unreasonably long period

5.5 In the case of goods, the maximum period of retention can be taken as six months.
However, in such cases, the appraising/sanctioning authority should decide the
actual period of retention subject to the guidelines given in the above paragraphs and
specify the same in the relative credit proposal/sanction.

5.6 Goods which are held beyond the normal period of retention should be excluded for
the purpose of allowing Bank Finance.

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6. Licenses / Permits

6.1 Dealing, storing, transporting or handling in any manner of certain commodities /

goods such as Pharmaceuticals, drugs, chemicals, liquor, explosives and other
hazardous items, may require specific licenses/permits under the State or Central
Acts or rules framed by local bodies. Branches while considering advances against
such goods should ensure that the borrowers hold proper and valid licenses. In such
cases, copies of the permits/licenses should be enclosed to the relative application
forms. The originals should also be called for scrutiny and return. In case such
licenses / permits are subject to periodical renewals, copies of the renewed permits /
licenses should also be obtained and kept on record periodically.

6.2 Sometimes, as a measure of Quality Control or to ensure general safety, State or

Central Governments may, by notification, make certification of certain items by
Governmental/non-governmental agencies compulsory while banning dealing/trading
in items not .so certified. Branches should keep such notification in consideration
while dealing with advances against goods.

6.3 Where a ban on trading/dealing of any commodity exists either under Central/State
Act or under rules framed by local bodies, no advance should be made against that
particular commodity.

7. Application and Annexures

Standard Application Forms are available basing on amount of advance, type of

facility and the sector. Appropriate application form only should be used in each
case. For this purpose, branches may refer to the "Booklet on Loan Applications and
Process Notes" as well as its soft copy, which is already supplied to branches.
Branches should ensure that applicants submit required enclosures / annexures.

8. Processing of Proposals

8.1 Guidelines given on processing of proposals in the chapter "Processing and Sanction
of Credit Proposals" in Volume – 4 of the Manual of Instructions are applicable to
advances against goods also. Branches should follow those guidelines to the extent
they are relevant in each case. In addition to those guidelines, guidelines given in the
following paragraphs should also be followed in the context of processing proposals
for advances against goods. Advances are subject to Credit Investigation. Credit
Investigation report shall accompany such proposals for the sanctions to be made by
Branches and higher authorities at Zonal Offices/Head Office.

8.2 In respect of every proposal, branches should make thorough enquiries and satisfy
themselves about the applicant's trust-worthiness, prudence, capability, practical
experience/knowledge of the produce/goods in which he deals. It should also be
ensured that the applicant
i) does not over-trade/speculate,
ii) has enough resources to meet the margin requirements and
iii) can be thoroughly relied upon to repay the advance without the Bank
resorting to forced sale of Goods.

8.3 Advances can be allowed only against those goods in which the applicant normally
deals in.

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8.4 In case an applicant claims dealership/agency arrangements with reputed
manufacturers, the bonafides of such dealership/agency arrangements should be
verified.

8.5. In the absence of a formal consortium arrangement, an application received from a

party who enjoys credit facilities with other bank(s) against pledge/hypothecation of
goods, should be viewed with disfavour, except in the case of multiple Banking
arrangement.

Multiple Banking is an arrangement where more than one Bank disburses credit to a
borrower and the security is charged to all the Banks that have disbursed credit,
however, separate documents are obtained by each Bank.

8.6 Proposals of the following nature should generally be discouraged.

i) Proposals involving advances against goods whose quantity, quality and

value cannot be ascertained easily. Industrial and innovative proposals can,
however, be considered on their own merits, with the prior permission of
higher authorities, provided specialized facilities to ascertain the quality,
quantity and value of the goods proposed to be secured are available.

ii) Proposals involving advances against goods whose value is subject to violent
fluctuations.

iii) Proposals, involving advances, especially on pledge basis against goods,

which due to their inherent nature are highly perishable or highly inflammable.
Exceptions can be made only when there are modern scientific facilities of
preservation and satisfactory/adequate insurance cover against internal/
external risks are available.

8.7 When an applicant's nature of business involves dealings with his sister/allied/
associate concerns by way of purchases / sales / supplies etc., the need and
desirability of such transactions should be critically examined. As the scope for
defrauding the Bank in such transactions by manipulation of figures or by showing
fictitious purchases/ sales/supplies, is very high, extreme care should be taken while
dealing with such proposals. Where branches are convinced of the apparent need /
desirability of the transactions, a specific mention thereof should invariably be made
in the relative proposal as well as in the sanction.

9. Assessment of Credit Requirements

9.1 Assessment of credit requirements in the context of advances against goods broadly
involves the following steps.

i) Assessment of the aggregate working capital requirement of the borrower.

ii) Calculation of the maximum permissible Bank finance.

iii) Bifurcation of the maximum permissible Bank finance into "pre-sales finance"
and "post- sales finance". (While advances against goods generally represent
"pre-sales finance", advances against bills/receivables represent "post-sales
finance").

9.2 In the case of industrial concerns, the working capital requirement generally
comprises of funds required for acquisition/holding of raw-materials, consumables,

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 components, stores, packing material, stock-in-process, finished goods and to meet
manufacturing, administrative, selling and other miscellaneous expenses. In the case
of non-industrial concerns (i.e., trade or business concerns), the working capital
requirement generally comprises funds required for acquisition/holding of stocks,
packing material, receivables and to meet administrative, selling and other
miscellaneous expenses. Broadly, working capital can be defined as the funds
required for sustaining an "operating cycle" for industrial concerns and a "Trade
Cycle" for non-industrial concerns.

9.3 While computing working capital need, outlay involving for one "operating cycle" or
"trade cycle", as the case may be, should be taken into consideration. While doing so
the level of activity/production/sales as well as the possible delays in completion of
the operation/trade cycle should also be taken care of.

9.4 While computing the eligible bank finance, credit available to the applicant from his
trade creditors (on credit purchases), advance payments received from his clientele
(on sales), his margin etc., should be excluded from the aggregate credit
requirement.

9.5 Credit allowed should always be strictly need-based as over-financing or under-

financing is equally dangerous and may affect Bank's interests adversely.

9.6 Guidelines given on assessment of working capital requirements as per Policy

guidelines issued by Credit Monitoring & Review Department from time to time
should also be followed by the branches to the extent such guidelines are relevant in
each case.

9.7 Minimum Amount of Advance:

The minimum amount of advance should be Rs.25,000/-. This stipulation, however, is

not applicable for advances coming under the purview of "Priority Sectors". In the
case of priority sectors advances, proposals for limits less than Rs.25,000/- may also
be considered basing on factors like need, feasibility, viability and other guidelines
governing such lending.

10. Fixing of Limits and Sub-limits

10.1 After arriving at the maximum permissible bank finance and bifurcation of the same
into "pre-sales finance" and "post-sales finance", allocation of limits under various
types of facilities should be considered. The facilities recommended/sanctioned
should suit the needs of the applicant, should be convenient for handling/maintaining
and yet provide safety to the Bank's funds. In the case of applicants engaged in
seasonal business/activities, suitable limits may be fixed for "busy" and "slack"
seasons separately, as per need.

10.2 Limits on "Pledge Basis" may be considered against those goods which are not
required for quite sometime for day-to-day operations of the applicants. Limits on
"Hypothecation basis" may be considered in respect of the rest of the goods.

10.3 Sub-Limits:

i) Sometimes, goods offered as security may comprise different varieties /

qualities, each having different prospects of marketability/salability. For
example, in the case of industrial concerns, the security offered consists of
industrial raw materials, semi-finished goods and finished goods, packing

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 material etc. While raw material and finished goods command ready
marketability, it is not so with semi-finished goods and packing material. Even
under raw material and finished goods, there can be several varieties of items
with varied marketability/saleability. In such cases, it would be prudent to limit
Bank's exposure by way of credit against the items by fixing small limits (sub-
limits) within the over-all limit considered/granted.

ii) Nature of business/activity of the applicant, rate of turn-over, marketability,

general business practice, desirability, risk element etc., are some of the
factors which are to be taken into consideration for the purpose of fixing sub-
limits.

11. Sanction

Discretionary Powers for granting of various facilities against the security of goods
are Fixed by Head Office and communicated to branches from time to time. Subject
to the powers so delegated and other guidelines on exercising of discretionary
powers, the competent authority may grant advances to the deserving applicants.

12. Documentation

12.1 The documentation for advances against goods should be as under:

i) Demand Loans (Key Loans, Loans to Retail Trade & Business Enterprises)

a) Appropriate Application for the Advance

b) Demand Promissory Note Comp No. 40222 & 40221
(RF 210 or 211)
c) Composite Loan agreement Comp No.40150
d) Rent Letter (Refer guidelines given under Comp No.41105 (RF 232)
para no.19.8(viii)) and Letter of Access -
(where necessary for Key Loans)
e) Godown Certificate – For Key Loans RF 277 – Comp No: 411011
f) Any other specific document(s) as
applicable to the category / constitution of
the borrower (such as Joint Hindu Family
letter, Partnership letter etc.)

ii) Cash Credit Facilities: (Key Cash Credits and Open Cash Credits)

a) Appropriate Application for the Advances

b) Demand Promissory Note Comp No. 40222 & 40221
(RF 210 or 211)
c) Composite Loan Agreement Comp No.40150.
d) Rent Letter (See guidelines given under Comp No.41105 (RF 232)
para no.19.8, viii), Letter of Access -
(where necessary for Key Cash Credits)
e) Godown Certificate (for Key Cash Credit RF 277 – Comp No: 411011
facilities only)
f) Current Account Opening Forms as
applicable to the constitution of the
borrower (for new applicants).
g) Any other specific document/s as
applicable to the category/constitution of
the borrower.

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 The procedural guidelines given in the chapter “Guidelines on Documentation” in
Volume – 4 of the Manual of Instructions should be followed scrupulously, while
obtaining/handling/ preserving of documents relating to advances against goods.

13. Verification of Borrower's Title

13.1 Generally advances can be allowed against goods fully paid for and owned by the
borrowers. In deserving cases advances may also be allowed for purchasing of
goods proposed to be secured to the Bank.

13.2 While accepting pledge of goods, branches should call for original invoices/bills
relating to the goods proposed to be pledged and make a careful scrutiny of the
same so as to establish the title of the borrower. The copies of invoices relating to the
goods pledged should be held on record by branches. In case of advances against
agricultural produce, submission of invoices may be waived if the relative produce is
directly purchased from the farmers and the practice of issuing invoices for such
purchases is not in vogue. In so far as Hypothecation advances are concerned, the
title of the borrower to the goods charged to the Bank can be verified during the
course of periodical inspections with reference to the relative original invoice held by
the borrowers.

13.3 The fact of payment of value of the goods can be cross checked with reference to the
ledger account of the borrower with the Bank. Wherever necessary, a reference may
also be made to the Books of Accounts and Inventory maintenance procedures of the
Borrower.

13.4 Where the invoice/bill tendered bears an indication that the goods covered therein
are purchased on "Credit Basis" or that the documents covering supply of the goods
are handled/negotiated through some other branch/bank, appropriate enquiries
should be made and the proof of payment should be carefully verified.

14. Valuation

Goods held/offered as security should be valued as per the guidelines given

hereunder.

i) Agricultural Produce:

Agricultural Produce should be valued at invoice price or market price

whichever is less. However, where invoice price is not available /
ascertainable, the market price may be taken as basis for valuation. In such
cases, branches should ascertain the market value at frequent intervals and
maintain a record of the same. (Refer guidelines given under para no.16
below). In the case of financing against levy stocks, valuation may be done at
levy prices fixed by the Government.

ii) Industrial Raw Materials, Semi-Finished and Finished Goods:

a) Raw Materials

Raw Materials should be valued at invoice value or market value

whichever is less. In the case of imported raw materials, valuation
should be done as per the guidelines given under (iii) or (iv) below.

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 b) Semi-Finished Goods (Stock-in-process)

Semi-Finished goods (stock-in-process) should be valued at cost of

production.

There is a possibility of having a number of products in semi-finished

form and/or at different stages. Under these circumstances, as a
general practice, the value of semi-finished goods may be taken as
under, assuming that the raw materials have under gone half the
processing.

Value of Semi-Finished = Cost of Raw Material lying under

Goods (Stock-in-Process) process + (value added/2)
Value Added = Sale Price - (Profit + Cost of Raw
Material)

c) Finished Goods:

Finished Goods are to be valued at cost of sales (manufacturing cost)

or market price, whichever is less.

iii) Goods imported from abroad through our Bank:

Goods should be valued at landed cost or market price whichever is less.

Landed cost is the cost incurred for procurement of goods from the place of
shipment to the place of delivery and storage and includes invoice value of
the goods, insurance, freight, loading, unloading, clearing charges, import
duties etc.

iv) Goods imported from abroad through other Banks:

Normally, the Bank does not finance goods imported through other Banks.
However, where such goods are financed with specific permission from the
controlling authority, valuation should be done as given under (iii) above.

v) Manufactured Goods and other items of merchandise offered as security by

Traders/Merchants/Business men:

Goods should be valued at invoice price or market price whichever is less.

This norm should also be followed in case of imported goods purchased from
open market within the country.

15. Margins

15.1 Margins in case of advances against goods depend upon a variety of factors such as
nature of the goods, their durability, saleability and stability in value. Goods like
consumable spares, stock-in-process etc., usually carry higher margins in view of
their limited marketability. The applicable minimum margins on various credit facilities
are given in the Loan Policy Guidelines issued by Credit Monitoring & Review
Department.

15.2 The guidelines issued by Reserve Bank of India thorough Selective Credit Control
Directives are covered under the para No: 25 below. The guidelines should be kept in
view while dealing with the proposals for sanction of credit facilities against goods.

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15.3 Head Office will prescribe the minimum margins in the case of goods / commodities
not covered under the Selective Credit Control Directives of RBI. The prescribed
margins may be either at a flat rate or at variable rates within a given range.
Depending upon the need, branches may consider higher margins. However, where
certain relaxations / concessions in the prescribed margins are felt necessary in a
particular case, prior approval from Head Office should be obtained. The reasons for
seeking the relaxations / concessions in the margins should be properly explained in
such a proposal.

15.4 Branches should ensure that the prescribed margins are always maintained on the
goods offered/held as security.

15.5 Additional margin has to be maintained where there is a clause in the warehouse
certificate that the warehouse has lien over the goods covered by the certificate for
expenses of storage and freight etc.

16. Market Report Book

16.1 Branches should maintain a "Market Report Book" to record the market prices of
goods (other than manufactured goods) held under Bank's charge. The market prices
of the goods are to be recorded in the Book at least once in a week by the staff
looking after advances. A plain ruled register with the following columns may be used
as the "Market Report Book"

Sl. Name of the Item Variety Unit Market Rate for Initials
No. Wt./Qty. The week ending
1 2 3 4 5 6

Market Rate for Initials Market Rate for Initials Market Rate for Initials
the week the week the week
ending _______ ending ______ ending ______
7 8 9 10 11 12

16.2 Branch Managers should look into the Book at frequent intervals and watch the price
fluctuations. Wherever there is a steep fall in the market prices necessitating
collection of short-fall in margins, a notice in RF-274 should be issued to the
borrower and the deficit should be collected immediately. The capacity of the
borrower to bring in the additional margins as and when required by the Bank should
be examined critically at the time of appraising the proposal itself.

17. Drawing Power

17.1 Drawing Power is to be arrived at by deducting the stipulated margin from the value
of goods held/offered as security. A borrower is entitled to draw funds up to the limit
or the drawing power whichever is less. It should always be ensured that the liability
is well within the limit and the drawing power. The method of calculation of Drawing
Power is given under para No: 22.4.

18. Insurance

18.1 All stocks pledged/hypothecated to the bank should be insured for their full market
value.

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18.2 Depending upon the specific extra risks involved in individual cases, separate en-
dorsements/policies should also be obtained.

18.3 In case the goods pledged/hypothecated fall under the category of "hazardous items"
as notified under the "Public Liability Insurance Act", separate policy under the said
Act should also be obtained.

18.4 Detailed guidelines on obtention, scrutiny; preservation, holding and renewal of

insurance policies and preferring/settlement of claims there under are given in the
chapter "Insurance" in Volume – 4 of the Manual of Instructions. Branches should
follow those guidelines to the extent they are relevant in individual cases.

19. Key Loans , Loans to Retail Trade and Business Enterprises

19.1 Key Loan facility can be allowed against pledge of goods. Key Loans are in the
nature of demand loans and all the guidelines that are applicable to demand loans
are also applicable to Key Loans in general.

Key Loans are also known as Loans against Merchandise. Such loans should be
disbursed through the GL Code: 2160

Loans to Retail Trade and Business Enterprises are allowed against hypothecation of
stocks. The loans are disbursed through GL Codes: 2250 and 2260 respectively.

19.2 Key Loan facility is best suitable to those parties who deal in seasonal goods and
whose credit requirements are purely seasonal/temporary in nature.

19.3 Depending upon the need, desirability and practicability more than one key loan can
be granted to the same party within the sanctioned limit

19.4 Parties, who offer business frequently, may be granted regular key loan limits so as
to save time and labour involved in processing and sanction of credit every time a
loan is to be allowed.

19.5 Normally, there can be a single transaction of pledge in a key loan account. More
than one pledge can be permitted under the same account only when there is
deterioration in the quality/quantity of the goods already pledged or where there is a
sudden fall in their market value and the borrower expresses his inability to reduce
the liability correspondingly, but offers pledge of goods of adequate value to
supplement the security. In other words, further pledge(s) into the account can be
accepted only by way of additional security and no further drawals can be permitted
against such further pledge(s).

19.6 There can be a single or series of releases under a Key Loan.

19.7 Guidelines on selection of godowns, manner of storage, verification of quality/

quantity of goods offered as security etc., are given in the following paragraphs:

19.8 Godowns:

Proper care should be exercised in selection of godowns as the safety of goods

pledged to the Bank largely depends upon the godowns in which they are stored.
The below mentioned guidelines should be kept in consideration while selecting a
Godown.

14
 i) The Godown should be pucca built and should be located in a safe locality,
with easy accessibility.

ii) Particular attention should be paid to the roof, walls. and flooring of the
godown, to avoid damage to the goods stored therein from sun light, rain and
dampness.

iii) Doors, windows and ventilators of the godown should be strong enough to
afford reasonable protection to the goods stored in the godown. All doors
(except the entrance door) and windows/ventilators should be capable of
being closed securely from inside. Windows/Ventilators should have strong
iron bars or iron wire mesh for extra protection.

iv) All the four walls of the godown should be upto the roof so that no person
could gain access to the goods stored in the godown without opening the
main door.

v) Electric wiring, if any, inside the godown should be in good condition so as to

prevent any short-circuit resulting in fire. Electric Meters or other main switch
connection should not be inside the godown.

vi) Water or sewerage pipes should not run through the godown.

vii) The godown should be either owned by the borrower or taken by him in his
name on lease basis. Godowns hired in the names of third parties should
never be accepted unless specifically permitted by higher authorities.

viii) Where a godown does not belong to the borrower, a Rent Letter (Comp No:
41105 - RF 232) should be obtained from the concerned owner and kept
along with the relative documents. Apart from this, .the position with regard to
payment of rent should be enquired periodically. A copy of the lease
agreement (if available in writing) should also be obtained and kept on record.
This procedure should be followed in the case of Pledge as well as
Hypothecation advances.

19.9 Manner of Storage:

i) As per convention, trade practices, convenience and actual requirements for

preservation, goods are stored either loosely (in bulk) or in bags / boxes /
packages / other containers. The usual form of storage for certain varieties of
goods is given hereunder'

Item Common form of Storage

i) Agricultural Produce In loose or in bags
ii) Oils/Fluids Pouches / Tins / Barrels / Storage
Tanks / Containers
iii) Manufactured Items Packages / Bags / Boxes / Bales
iv) Industrial Raw Material like In Loose
Ores, Metals, Minerals

ii) Whatever may be the form of storage, the same should provide adequate
security to the goods from risks such as pilferage, theft, damage by insects,
weevils, rats, dampness, dust and other changes in atmosphere, losses

15
 through deterioration in quantity, quality etc., It should also facilitate
convenient handling and easy inspection of quality and quantity of the goods.

iii) Where goods of different types/qualities/quantities are stored at the same

place, the under mentioned guidelines should be followed with regard to their
storage.

a) Goods of different types/qualities/quantities should be segregated

according to their nature, quality and quantity and kept in separate lots
to facilitate easy identification and inspection.

b) Bags/Packets/Packages/Other containers containing goods of the

same quality and quantity may be kept in rows of uniform height with
sufficient space in between the rows to facilitate inspection.

c) Where goods pledged under more than one account but belonging to
the same borrower are stored at the same place, goods relating to
each account should be segregated and demarcated.

d) Goods ineligible for bank finance should be kept in separate lots so

that their quantity and value can be easily ascertained and excluded
for the purpose of calculating Drawing Power.

e) Goods that are not charged to the Bank should not be allowed to be
mingled with those goods charged to the Bank, especially in the case
of Pledge advances. An exception can be made in highly deserving
cases provided the goods not charged to the Bank are also
adequately covered under Insurance.

f) It is desirable to keep wooden planks on the floor to protect the goods

from dampness.

g) As a matter of rule, loose storage of goods like agricultural produce,

offered as security on Pledge basis, should take place in the presence
of Bank's staff. In case the produce offered as security is stored loose
in a godown, it must be ensured that:

(i) entire produce is of uniform quality,

(ii) the produce is evenly spread from the bottom to the top,

(iii) adequate space is left at the top for one to climb-up and
inspect the stock and that

(iv) there is no stacking near the entrance door so that the door
can be opened and closed freely without any obstruction, so as
to have access to the goods.

In the case of godowns having a trap door at the top, produce may,
however, be filled up to the level of trap door leaving enough space at
the top for verification.

h) In view of the practical difficulties involved in securing and

preservation of goods stored in pits, no advance should be allowed
against goods stored in pits.

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 i) Stocks stored in “PURIS” should not be accepted for pledge unless
specifically permitted by Head Office, in view of insecure nature of
such storages.

However, the Branches can allow finance against the produce stored
in “PURI” under the Kisan Sampathi scheme for providing Agricultural
Produce (marketing) Loans

19.10 Godown Measurement Book:

This book is intended for out-door use of the bank’s representative who should be a
confirmed staff member not being sub staff.. Along with specific details of the
godowns and the storage measurements (in case of loose storage), particulars such
as name and address of the borrower, details (quantity, quality etc.) of the stocks
stored should be recorded in the book at the time of locking the godowns for the first
time. Entries in the Book should be made godown-wise. This book forms the basis for
preparation of the Godown Certificate under Key Loans and Key Cash Credits and
also for effecting insurance of the goods pledged to the Bank.

19.11 Physical Verification of Goods:

i) Before granting any advance against goods, the goods offered as security
should be verified physically so as to ascertain their quality and quantity.
Branches should not solely rely on the particulars furnished by the borrowers
on the quantity and quality of goods offered as security. .

ii) Thorough product knowledge and experience help immensely in ascertaining

quality of the goods. Verification of bills/invoices, markings, borrowers' books
of accounts and taking-out samples for detailed examination are some of the
means to ascertain quality of the goods. Goods, which, are certified as to their
quality by Government Departments/Agencies and other institutions of repute
(bearing marking such as "Ag Mark", "ISI" Mark, "ECO-Mark") are preferable.
Wherever necessary, samples can be taken to reputed dealers in the market
so as to ascertain the quality. In the case of goods where ascertainment of
quality involves intricate tests/analysis, services of reputed outside agencies
may be availed of after obtaining prior permission from Head Office and the
costs thereof may be recovered from the concerned borrowers.

iii) In the case of manufactured items stored in packages, the details of the
product are generally noted on the packages. The markings on the packages
in such cases may be verified with the relative invoices/bills, provided the
original packing made by the manufacturer is intact. Manufactured goods
repacked by the borrower for the purpose of sale should not generally be
accepted as security without detailed verification of their quality and quantity.

iv) Guidelines as to verification of quality and quantity of certain selected items

are given in the following paragraphs.

a) Jute:

If jute is stored loose, the quantity thereof cannot be estimated

accurately.' As such no advance should be made against jute stored
loose. If advances are to be made against jute, the stock should be
compressed into bales of uniform size. At the time of physical

17
 verification of stocks, the number of bales should be counted and a
few bales should be weighed by way of test check.

b) Cotton:

(i) If cotton is stored loose, the quantity thereof cannot be

estimated correctly. As such, no advance should be allowed
against cotton stored loose.

(ii) If advances are to be allowed against cotton, the stock should

be compressed into bales or filled in borahs. (Borahs are long
bags especially made with gunny cloth for holding ginned
cotton).

(iii) Where cotton is compressed into bales, the quantity thereof

can be easily estimated by counting the number of bales and
weighing a few bales by way of test check.

(iv) If cotton is stored in borahs, each borah should be weighed in

the presence of the Bank's representative and the weight
should be marked prominently on the borah itself to facilitate
subsequent inspections. In such cases, all the borahs may not
be of the same weight as the quantity stored in the borahs
depend not merely on the size of the borah but also on the
degree of pressure applied at the time of storage.

c) Mill Cloth:

(i) Advances against Mill Cloth should be restricted to mill-packed

bales and should not be extended to cloth pieces obtained by
opening a bale. The marks and numbers appearing on the
bales should be carefully verified with those appearing in the
relative invoices before an advance is made.

(ii) The value of a bale depends on what it contains. A bale of

towels naturally costs less than that of fine cloth. Care should
therefore be exercised to see that each bale is properly
identified. The number of the bales in particular, should be
carefully verified.

(iii) Mill Cloth is sometimes marked "Second" or "Reject". These

are technical terms used to denote that the cloth has suffered
some damage in the process of manufacture. The damage
would not be so serious as to render the entire cloth useless,
but portions of it here and there, may have to be condemned.
In the case of "Seconds" and "Rejects", the dealer is usually
allowed a rebate by the manufacturer. When advancing
against such stock, the Bank has to take into consideration not
the original invoice value but the net invoice value after
deducting the rebate.

d) Oils:

Oils are generally stored in tins or barrels. A few tins selected at

random should be weighed and their contents examined. If the tins are

18
 already sealed, the seals should be broken open in a few cases for
the purpose of test check. Barrels or drums also should be similarly
examined.

e) Jaggery :

Jaggery is normally stored in lumps/blocks. The lumps/blocks may not

be of uniform size. As such borrowers should be advised to segregate
the lumps / blocks as per their weight and arrange the same in rows of
uniform weight. Then the quantity can be arrived at by counting the
number of lumps/blocks and test weighing a few of them at random.

f) Drugs, Pharmaceutical products, Chemicals, Pesticides etc.

(i) In view of their special nature, drugs, pharmaceutical products,

chemicals and pesticides need extra care and attention. These
goods generally require special type of preservation.

(ii) Most of the drugs and pharmaceutical products will have

specified expiry dates beyond which they become Useless/not
salable. Dates of expiry and the relative batch numbers are
invariably marked on the vials/bottles/cartons. On the original
cases, only batch numbers are marked. In the invoice, batch
numbers are invariably marked and sometimes expiry dates
are also given, Wherever the invoices do not reveal expiry
dates, the borrowers may be requested to produce for
verification a vial/bottle/carton covered by the same batch
number, out of the stocks lying with him and the date of expiry
should be ascertained.

(iii) Expired stock can neither be accepted nor allowed to continue

as security.

v) Volumetric Formula:

a) Volumetric Formula can be used for ascertainment of quantity of

goods like agricultural produce stored in loose. For this purpose, the
cubic content of the produce is to be found-out. If the cubic content of
the produce is divided by the "Standard Factor", the gross weight of
the produce can be obtained. The "Standard Factor" for different types
of goods is informed to branches by Head Office from time to time. To
guard against minor aberrations in computing the quantity under this
method, it is always advisable to take the produce offered as security
in a box of ONE cubic foot capacity i.e., having dimensions of length,
breadth and height of one foot each and then weigh the same. The
weight so ascertained should be compared with the Standard Factor.

b) Volumetric Formula may be used for estimating quantity of produce,

stored in loose, especially during the course of periodical inspection of
stocks.

c) As there is every possibility for an ingenious borrower to manipulate

the dimensions of the produce by resorting to malpractices such as
leaving hollow place in the midst of the produce, placing an artificial
platform at the bottom portion, filling in sub-standard / inferior /

19
 damaged stocks in the bottom / middle, placing extraneous matter in
the produce, branches should be extremely cautious and careful in
ascertaining the quantity through "Volumetric Formula".

19.12 Procedure for Accepting Goods under Bank's Pledge:

i) A borrower, who is desirous of availing a Key Loan under a sanctioned limit,

should submit an Application, duly furnishing therein the full details of goods
proposed to be pledged. In the case of manufactured goods accepted as
security, relative original invoices (together with copies thereof) should be
enclosed to the Application.

ii) The Application and the original invoices/bills (where submitted) should be
carefully verified by branches so as to ensure that

a) the goods offered as security are those approved for lending,

b) the goods are fully paid for and are standing in the name of the
borrower.

iii) After making a preliminary verification of the Application, the Bank’s

representative should be deputed to accept pledge of the goods and lock the
godown(s).

iv) Before accepting the goods under Pledge, the Bank’s representative should
physically verify the quantity and quality of the goods and ensure that they are
in sound condition and stored properly. He should compare the details of the
goods offered as security with the details available on the Application and the
enclosed invoices/bills and ensure that the goods mentioned in the
Application and the enclosed invoices/bills form the actual security offered.
He should also verify and satisfy himself about the suitability of the Godown
(s) where the goods are stored.

v) Great care should be exercised by the Bank’s representative in estimating the

quantity and examining the quality of goods offered as security as any
negligence in this respect may lead to financial losses. It should be borne in
mind that physical verification of stock is the most important part of duties of
Bank’s representative

vi) While examining the suitability of the godown(s), the Bank’s representative
should go round the godown(s) and take note of its (their) surroundings and
boundaries. If kutcha sheds/hay stacks/hazardous installations or goods exist
in the neighborhood/vicinity of the godown(s), the same should be recorded
and appropriate insurance cover is to be obtained for the extra risk involved. It
must also be ensured that the guidelines on insuring the properties given in
the chapter "Insurance" in Volume – 4 of the Manual of Instructions are also
duly complied with.

vii) If the stock like agricultural produce is proposed to be stored in loose, the
storing should take place in the presence of the Bank’s representative. In
such cases, the Bank’s representative should take the inner measurements of
length and breadth of the empty godown and note down the relative details in
the Godown Measurement Book. Thereafter, the stock should be filled in the
godown. After the stock is filled in, the Bank’s representative should take the
height of the produce and obtain quantity of the stock by using "Volumetric

20
 Formula" The weight so obtained through "Volumetric Formula" should be
cross-checked with the weight declared by the borrower in the Application.
Discrepancies, if any, should be enquired into.

viii) Goods like agricultural produce already stored in loose should never be
accepted under Pledge. Failure to comply with this stipulation may result in
perpetration of frauds.

ix) Godown Card:

a) After verification of the quantity and quality of goods offered as

security, the Bank’s representative should enter the description and
quantity of the goods pledged on a Godown Card (RF 49) and keep
the same inside the godown at a conspicuous place so that it is visible
immediately after entering into the godown.

b) Where the pledged goods consist of different varieties, separate

godown cards for each variety of goods are to be prepared.

c) The purpose of maintaining the godown card is to have description

and quantity of goods lying in the godown at a glance. To serve the
purpose, the details noted in the godown card are to be updated
whenever there is change in the position of stock in the godown on
account of further pledges or releases.

d) Entries made in the godown card are to be initialed by the Bank’s

representative and also by the staff conducting subsequent inspection
of stocks.

x) Display of Bank's Signboards:

a) Bank's sign boards reading "Goods Under Pledge to Andhra Bank"

should be displayed prominently both inside and outside the godowns
where the pledged goods are stored. Such display of Bank's
signboards not only serves as a public notice but also helps the Bank
in proving its charge over the goods. It may also prevent some other
creditor/Bank from financing against the same goods.

b) The signboards displayed outside a godown should be at the entrance

door of the godown so as to catch the attention of anybody entering
the godown.

c) The signboards should be fixed in such a manner that they cannot be

removed easily. To pre-empt attempts of unscrupulous borrowers to
remove/replace the sign boards with fraudulent motives, branches
may, wherever found necessary, think of more enduring methods like
getting the words indicating Bank's charge over the goods painted
prominently at the place where the pledged goods are stored.

d) Display of Bank's sign boards should be verified not only at the time of
allowing the advance, but also even during the subsequent visits to
the borrowal units.

e) There may be some resistance, particularly from large borrowers, for

complying with Bank's stipulation regarding display of signboards.

21
 Branches should tactfully deal with such borrowers and see that the
Bank's stipulations are duly complied with.

f) Display of Bank's signboards cannot be waived except with prior

permission from Head Office.

xi) Pad-locks and Keys:

Special locks with the Bank's name and serial number engraved thereon are
supplied to branches. These locks alone should be used for the purpose of
locking godowns. As regards use of pad-locks and handling of relative keys
the under given guidelines should be followed.

a) Original Keys:- Original Keys of all outstanding godowns under

Bank's charge should be kept under joint custody after noting the
relative details in the Godown Keys-cum-Keys Movement Register
(Refer guidelines given under para no. 19.12(xiii)). Every key should
bear a tag wherein details such as account number, godown number,
address of the godown should be noted.

b) Duplicate Keys:- Duplicate Keys of all outstanding godowns under

Bank's charge should be kept in a separate box and lodged under joint
custody. Every key should bear a tag, wherein details such as account
number, godown number, address of the godown should be noted.

c) Movement of Keys:- No key (original or duplicate) can be taken out

from joint custody except with proper authorization and making an
entry in the Godown Keys-cum-Keys Movement Register regarding its
movement.

d) Keys of outstanding godowns under Bank's charge should never be

allowed to lie unattended on counters/drawers. They should not be
allowed to remain with any staff member overnight.

e) If permanent locks are fitted to the door-ways of the godowns, the

keys thereof (both original and duplicate) should also be collected
from the borrowers and kept under Bank's custody till clearance of the
liabilities due to the Bank.

f) Pad-locks owned/supplied by borrowers should not be used for

locking godowns.

g) Joint or dual possession of godowns should never be permitted. The

practice of allowing the godowns to be locked by two separate locks,
one belonging to the borrower and the other to the Bank, is most
objectionable and cannot be allowed. Such practice renders it difficult
for the Bank to establish the fact of its actual possession in the case of
borrower becoming insolvent.

h) Under no circumstances, borrowers should be allowed to handle

godown keys. Even at the time of ultimate release of godowns, it is
advisable to depute Bank's staff to get the pad-locks and keys.

22
 i) Once a godown is closed and the relative lock is returned, the same
lock should not, as far as possible, be used again for locking any
godown of the same borrower.

j) Pad-locks not in use together with their original and duplicate keys
should be held under the custody of an officer.

k) Branch Managers may permit use of duplicate keys of pad-locks of

outstanding godowns only when the relative original keys are
lost/misplaced. In such cases, the relative pad-locks should be
immediately replaced after duly recording the fact in the Godown
Keys-cum-Keys Movement Register. Before putting the new pad-
locks, the stocks lying in the concerned godowns should be thoroughly
verified with reference to Bank's records.

l) A pad-lock whose original/duplicate key is lost/misplaced, should

never be used for locking godowns.

xii) Deposit on Pad-locks:

Whenever a pad-lock is used, a security deposit covering purchase cost of

the lock with a minimum of Rs.200/- (per lock) should be collected from the
concerned borrower and kept under "Sundry Suspense A/c (GL 1540) -
Deposit on Pad-locks (Sub Code 020)", duly recording the full details of the
advance account. This amount can be refunded on clearance of the liability in
the advance account and return of the relative pad-lock.

xiii) Godown Keys-cum-Keys Movement Register:

A plain ruled register with the following columns may be used as Godown
Keys-cum-Keys Movement Register.

PART - A:

Date Nature of Facility Name of the Address and No. (if any) of
And A/c. No. Borrower the godown
1 2 3 4

No. of Distinctive No. Initials of Joint Date & Time on which keys are
Keys of Keys Custodians delivered from Joint Custody
(on release of the godown)
5 6 7 8

Initials of Joint Custodians Remarks

9 10

PART - B

SI. Nature of facility Name of the Purpose of Particulars of Deli-

No. and A/c No. Borrower delivering the very Order No & Date
keys
1 2 3 4 5

23
 Address and Distinctive no. of To whom Date & Receiving
No. (if any) of keys delivered delivered Time of Staff Member's
the godown delivery Name, Signature
6 7 8 9 10

Initials of Joint Date & Time Initials of Joint Remarks

Custodians of re-lodgment Custodians
11 12 13 14

Maintenance of the Register should be as under:

a) This is a safe register and like other safe registers, should be kept
under joint custody. .

b) Part-A of the Register should give information about the keys of the
godowns held under lock and key of the Bank and kept under Joint
Custody. Part-B should give information about movement of such keys
from joint custody either to facilitate subsequent pledges/releases or
for the purpose of periodical stock inspections.

c) Whenever a godown key is taken-out, the reasons for taking-out the

key from joint custody should be recorded in Part-B of the Register
against the relative entry and the recipient staff member's signature in
token of having received the key should be obtained.

When such a key is lodged under safe custody, the date and time of
re-lodgment should also be recorded against the relative entry. Both
the joint custodians should check and initial the entries made in the
Register. No godown key from the joint custody can be parted with,
without making an entry in the Register. Similarly, no godown key can
be lodged under joint custody without entering the relative details in
this Register.

xiv) After complying with the guidelines given in the above paragraphs, the Bank’s
representative should lock the godown. Before locking the godown, the
Bank’s representative should ensure that all the doors (except the entrance
door) and the windows/ventilators of the godown are securely closed from
inside. Certain types of goods may, due to their inherent nature, require
proper air circulation for their storage/preservation. In such cases, doors of
the ventilators may be kept open provided the ventilators are covered with
strong iron grills/mesh to ensure adequate protection to the goods stored.

19.13 Godown Certificate:

After a godown is locked, a Godown Certificate (Annexure No: III Comp No: 41101)
should be prepared in duplicate and signed by the Bank’s representative and the
borrower. In the case of loose storage of goods like agricultural produce, the Bank’s
representative should confirm the fact of storing the produce in his presence by
adding a suitable remark on the Godown Certificate under his signature. The two
copies of the Godown Certificate are to be used as under.

Original Copy -- To be kept along with the relative documents.

Duplicate Copy -- To be sent to the Controlling authority after disbursement of
the loan amount.

24
19.14 The Godown Certificate (in duplicate) and the keys (both original and duplicate)
should be handed over by the Bank’s representative to the concerned officer /
manager for further action.

19.15 On receipt of the godown certificate, the concerned officer/manager should arrive at
the quantum of credit that can be allowed and ensure that the required documents,
as given under para no.12 are obtained. The concerned officer/manager should sign
the godown certificate and keep the original copy along with the relative documents.

19.16 Maintaining the Loan Account in the system:

The Key Loan account should be opened in the system under GL Code: 2160 duly
entering all details in the respective fields. The loan account should be linked to the
Party Master of the borrower. The security and insurance details should be entered in
the system and linked to the loan account. A loan to Retail Trade and Business
Enterprise should also be opened similarly in the system under GL Codes 2250 and
2260 respectively. For a Key Loan release of stocks, from time to time, should also
be recorded in the system.

19.17 Key Loan Liability Register:

Wherever multiple Key Loans are allowed under a single sanction, branches should
always ensure that the total amount of such loans does not exceed the sanctioned
limit at any time. For this purpose branches should maintain Key Loan Liability
Register.

This Register should be maintained party-wise so that the liability of any party can be
known at a glance. Each party should be allotted a separate folio and the limit
sanctioned to him should be noted at the top of the folio, preferably in red ink, as also
the date and number of sanction letter under the signature of the concerned officer.

19.18 As a matter of abundant caution, especially in the case of new borrowers. the
concerned officer/manager may inspect the goods pledged before disbursing the
credit. The visit to the borrower's place of business in this connection may also be
utilised to familiarize the borrower with Bank rules and also to inculcate credit
discipline in him.

19.19 It must be ensured before allowing the credit, that the goods offered as security are
insured as per rules for their full market value. The copy of the relative insurance
cover note should be kept enclosed to the relative credit documents.

19.20 Disbursement of amount under a key loan may be made by way of credit to the
borrower's account.

19.21 Copies of invoices/bills obtained from the borrowers should be kept enclosed to the
relative documents and the originals may be returned.

19.22 Releases

i) Goods pledged to the Bank can be released in full against payment of entire
liability in the loan account together with up-to-date interest and other bank
charges.

25
ii) Partial delivery of goods against proportionate adjustment of liability may also
be considered in deserving cases. However, no request for partial delivery of
goods should be entertained in case the goods are stored in loose.

iii) A borrower desirous of obtaining full/partial delivery of goods pledged to the

Bank Should submit a formal letter of request detailing therein the full
description of the goods to be delivered together with their invoice and latest
market value. He should also state the advance value of the goods.

iv) On receipt of the letter of request for delivery of the goods, the amount
payable by the borrower for effecting the required delivery should be
computed by the Bank’s representative. In the case of partial deliveries, the
amount payable by the borrower should include proportionate amount of
advance and amount of interest and other bank charges already debited to
the account. Further it must be ensured that the drawing power available on
the remaining goods (after partial delivery) is adequate to cover the balance
of liability in the account.

v) After collecting the required amount from the party, a Delivery Order should
be prepared by the Bank’s representative and placed before the officer /
manager for authorization. Goods under Bank's Pledge should not be
delivered except against a regular Delivery Order (RF-236) under the
authorization of the concerned officer/manager.

vi) Delivery Orders are to be serially numbered. Every Delivery Order should
contain details such as loan number, godown number, name of the borrower,
distinctive number of keys, particulars of goods to be delivered. While
preparing the Delivery Orders, the under given guidelines should be complied
with,

a) The quantity of goods to be delivered should be stated both in figures

and words. In the case of bags/packages/other containers, the
number as well as quantity to be delivered together with other
specifications, if any, should be stated.

b) Where different varieties of goods are to be delivered from the same

godown of a single account. One delivery order giving details of each
variety of goods to be delivered can be made-out.

c) Where releases are to be made from different godowns/accounts of

the same borrower, as many Delivery Orders as the number of
godowns/accounts should be prepared.

vii) Officers/Managers while authorizing releases should ensure that the Delivery
Orders are correctly prepared and the required amount is collected and
credited to the loan account of the borrowers.

viii) After a Delivery Order' is signed by the concerned officer/manager, the same
should be handed-over to the Bank’s representative together with the relative
godown keys. The fact of delivering godown keys should be recorded in the
Godown Keys-cum-Keys Movement Register and the acknowledgement of
Bank’s representative should be obtained under the appropriate column of the
Register.

26
 ix) The Bank’s representative should effect deliveries strictly as per the Delivery'
Order handed-over to him. After delivering the goods, acknowledgement of
the borrower in token of having received the goods should be obtained on the
reverse of the Delivery Order in the place earmarked for the purpose.

x) In the case of partial deliveries, the details of the goods delivered should be
noted in the Godown Card by the Bank’s representative. In such cases, the
Bank’s representative should also take care to see that the stocking is not
disturbed (because of partial delivery) in such a manner as to render checking
of remaining stocks difficult. After effecting the delivery and before locking the
godown securely, the Bank’s representative should verify the balance of
stocks remaining in the godown. The Bank’s representative should initial the
godown card in confirmation thereof.

xi) In the case of partial releases, the Bank’s representative should hand-over
the relative godown keys and the delivery order bearing acknowledgement of
the borrower, to the concerned officer/manager. The returned keys should
then be lodged under joint custody, after making the required entry in the
Godown Keys-cum-Keys Movement Register.

xii) In the case of full delivery of goods, the Bank’s representative should hand-
over the relative pad-locks together with the keys and the delivery order
bearing acknowledgement of the borrower to the concerned officer/manager.
The pad-locks and the keys should be kept under the custody of the
concerned officer.

xiii) On receipt of the Delivery Order, bearing acknowledgement of the borrower,

the concerned officer/manager should verify the same. The signature of the
borrower on the Delivery Order should be verified with the specimen available
on Bank records. After the scrutiny, the Delivery Order should be filed
separately. In token of having received the pad-locks, keys and also verifying
the Delivery Order, the concerned officer/manager should sign on the reverse
of the Delivery Order in the space earmarked for the purpose.

19.23 Goods once pledged and released should not be accepted under pledge again
unless the reasons for their non-disposal are convincing.

19.24 The work relating to acceptance of pledges and effecting deliveries should never be
entrusted to subordinate staff.

19.25 It must be ensured that the goods held under pledge are not allowed to remain
beyond the prescribed duration. Key Loans allowed against seasonal goods should
not be allowed to remain/outstand after expiry of the season.

20. Key Cash Credits

20.1 Key Cash Credit facility is granted by way of a running account facility against pledge
of goods. Under the facility, there can be series of pledges and releases. The
drawals under the facility are to be regulated in accordance with the Limit and the
Drawing Power available on the goods held as security. The KCC facility should be
allowed through GL Code: 2400.

20.2 The system of Key Cash Credit facility obviates the need for obtaining fresh
documents every time goods are pledged and credit is allowed. It facilitates partial
deliveries and substitution of goods as and when required by the borrower. The

27
 borrower' can enjoy cheque facility. He will have more flexibility under the facility and
can save interest costs through intelligent planning of his drawals from the account.

20.3 Advances by way of Key Loans and Key Cash Credits are broadly similar in nature
except that the former is a demand loan facility and the latter is a running/operative
facility.

20.4 Guidelines on manner of storage, selection of godowns, physical verification of

goods, handling of pad-locks and keys, display of Bank's sign boards etc., given in
the context of Key Loans are applicable to Key Cash Credit facilities also.

20.5 Apart from the guidelines given under para no.19.12, the following guidelines should
also be complied with while dealing with pledges under Key Cash Credits.

i) Borrowers should give separate Application-cum-Take Delivery Letter (Comp

No.41104 - RF 224-A) for each pledge under the facility.

ii) Suitability/Acceptability of the godown should be examined at the time of

locking the godown for the first time.

iii) The Bank’s representative should physically verify the goods offered as
security before accepting the same under Bank's pledge.'

iv) It is enough if the godown certificate (Comp No: 41101) is prepared (in
duplicate) at the time of accepting first pledge under the facility into the
godown. The godown certificate need not be prepared for subsequent
pledges into the same godown. However, in token of having accepted the
goods under pledge, the Bank’s representative should add a certificate under
his signature on the relative Application-in the following manner.

Verified the quantity and quality of goods detailed above and accepted the
same under Bank's Pledge in Godown No ________ on _______________
at __________ AM/PM.

Signature

As regards preparation and disposal of the two copies of the Godown

Certificate, guidelines given under para no.19.13 should be followed.

20.6 Releases:

i) Releases under Key Cash Credits may be made either against cash payment
or against deposit of goods of adequate value acceptable to the Bank as per
sanction.

ii) Procedural guidelines given under para no.19.22 on allowing full/partial

deliveries in key loan accounts are applicable for full/partial releases under
key cash credits.

20.7 Details of all pledges and releases should be noted in the relative godown cards
under the initials of the Bank’s representative.

20.8 Wherever keys are taken out for the purpose of accepting pledges or effecting
deliveries, suitable entries should be made in the Godown Keys-cum-Keys
Movement Register.

28
20.9 Key Cash Credit Stock Register:

i) Branches should maintain a Stock Register for every Key Cash Credit
account wherein full particulars of the goods held as security, their value,
drawing power available, balance in the KCC account etc., are noted from
time to time.

Apart from maintaining the Stock Register the security details should be
entered in the system through “Security & Insurance Maintenance" option in
Officer Menu to arrive at Drawing Power for the account. Appropriate Security
Code, Security Type, HO Code should be entered and the details of securities
and godown should be entered.

ii) The Stock Register and the entries in the system should reflect details of all
pledges and releases of goods, and latest position of goods held by the bank
as security and also the Drawing Power available against them.

iii) Where goods held under pledge for an account are stored in more than one
godown, details of such goods should be entered godown-wise in the Stock
Register, duly reflecting the consolidated position of stocks on a separate
page in the Register.

In the system the stocks held in different godowns should be entered as

separate securities and linked to the same account.

iv) The date and number of invoices/bills, obtained at the time of accepting the
goods under Bank's pledge, should be recorded against the relative entries in
the Stock Register.

v) The Stock Register should be maintained by the Bank’s representative and all
entries made therein should be checked and authenticated by the concerned
officer. Branch Manager should also go through the entries made in the
Register periodically so as to have first hand information about rotation /
movement of stocks and the relative entries made in the Register.

20.10 Other procedural guidelines on maintenance of accounts, obtention of stock

statements etc., are given under para no.22.

20.11 Rotation of Stocks:

Branches should take care to see that the goods held as security are not allowed to
remain beyond the prescribed duration. Though the key cash credit limits are valid for
one/two years, depending on sanction, goods accepted as security under the
accounts cannot be allowed to remain under Bank's pledge for the full duration of
one/two year(s). As soon as the goods complete the normal period of retention,
borrowers should be advised, to take delivery of the same against payment or
substitution of fresh stocks. In other words, the goods should not be allowed to'
stagnate and there should be proper rotation of stocks.

21. Open Cash Credits

21.1 Open Cash Credit facility is granted by way of a running account facility against
hypothecation of goods. The drawals in the accounts are to be regulated in
accordance with the limit and the drawing power available: on hypothecated goods,

29
 the details of which are to be supplied by the borrowers through periodical stock
statements / Book Debt Statements. The OCC facility should be allowed through GL
Code: 2410.

21.2 Open Cash Credits involve greater risks than Key Loans or Key Cash Credits as the
security remains in the hands of the borrower. Care should, therefore, be taken to
see that the open cash credit facilities are allowed only to first class parties of good
reputation and undoubted standing and credit worthiness and in whose cases
facilities by way of key loans or key cash credits are not feasible/convenient. It is
always desirable to take additional securities of lands, buildings etc., to cover the
extra risks involved in OCC accounts.

21.3 While processing proposals for OCC limits, it must be ensured that the concerned
applicants maintain up-to-date and proper books of accounts with invoices for
purchases and credit/cash memos for sales. As the Bank largely relies on the books
of accounts and stock registers maintained by the borrowers for the purpose of
verification of the correctness of the stock statements, unless these conditions are
satisfied, the Bank may not entertain any proposals for OCC limits. In the case of
new units, the concerned applicants should be educated about the need for
maintaining up-to-date and proper books of accounts with invoices for purchases and
credit/cash memos for sales.

21.4 Guidelines given on manner of storage and physical verification of goods in the
context of Key Loans are applicable by and large to Open Cash Credits also.

21.5 Display of Bank's Signboards:

i) Bank's signboards reading "Goods under Hypothecation to Andhra Bank"

should be displayed prominently at the factory / shop / godown / business
premises etc., where the hypothecated goods are stored. Such display of
signboards not only serves as a public notice but also helps the Bank in
proving its charge over the goods. It also prevents other creditors/banks from
extending credit against the same goods.

ii) Other guidelines given under para no.19.12 (x)(a) to (f) are also applicable to
Open Cash Credits.

21.6 Open Cash Credit Stock Register:

i) Branches should maintain a Stock Register for every Open Cash Credit
Account. The details of stocks should be recorded in the Stock Register as
per the periodical Stock Statements received from the borrowers.

Periodical entries of Stock / Book Debts Statements are to be made in the

system as per frequency flag available in “Security Linking Details” as per
Sanction Terms.

ii) The entries made in the Stock Register should be checked by the concerned
officer. Branch Managers should also go through the entries made in the
register periodically so as to have first hand information about rotation /
movement of stocks.

21.7 Other guidelines on maintenance of accounts, obtention of Stock Statements etc.,

are given in the following paragraphs.

30
21.8 Our Policy guidelines specify the norms for sanction of cash credit facilities against
the hypothecation of stocks and eligible book debts.

For the purpose of considering credit facilities against book debts, the borrowers can
be classified in to three broad categories

Manufacturing concerns
Traders and
Service industry, contractors.

For granting working capital credit facilities against book debts, the following
guidelines may be followed.

Verify sales and purchases of the company to ascertain the correct position of he
Sundry debtors/creditors.

The auditor should certify that the book debts declared by the borrower are
recoverable and none of them are considered as bad/doubtful of realization. He
should also check up and report whether bank finance is extended against such bad
/doubtful debts.

The auditor is also expected to study the composition of book debts, like age wise
classification, whether all such debts are of by a single debtor or of different debtors
and whether such debts are arising out of normal trade transaction of the borrower
clients and nature of book debts from sister concerns.

Sundry debtors may also be segregated on the basis of their realizability, i.e. Sound
(100% realizable) and Unsound (not 100% realizable)

Verify whether the transactions are related to the activity of the firm/company.

Branches may refer to the guidelines issued from time to time in this regard under
Bank’ Loan Policy.

Book debts are not acceptable as security for cash credit limits below Rs. 5.00 lakhs.

22. Common Guidelines on Cash Credit Accounts

22.1 Periodical Stock Statements

i) Borrowers availing Key Cash Credit and Open Cash Credit limits should
submit either abridged Stock Statements or detailed Stock Statements or
both, in the prescribed format periodically as explained in the following
paragraphs and also as on 31st March every year promptly. Where a
borrower is sanctioned a number of KCC/OCC limits, one separate Stock
Statement should be submitted for every such KCC/OCC limit.

ii) The Stock Statements should contain full details of the stocks pledged /
hypothecated together with their value and the drawing power available.

iii) In the case of Open Cash Credits, stock statements should be submitted by
the borrowers so long the OCC limits continue notwithstanding the fact
whether the accounts show debit or credit balance

31
 iv) In the case of Key Cash Credits, stock statements should be submitted so
long as there are stocks under Pledge to the Bank.

v) In the case of Open Cash Credits, the withdrawals/payments in the accounts

should be regulated in accordance with the Drawing Power available as per
the latest stock statements. Borrowers should not be allowed to draw in
excess of such drawing power. If in the interim period between two stock
statements, a borrower wishes to draw in excess of the drawing power based
on the latest stock statement, against stocks subsequently received by him,
he should send a fresh stock statement in support of the excess drawing
required. This stock statement is in addition to the stock statements to be
submitted at periodical intervals. If there is reduction in drawing power,
borrowers have to correspondingly bring down the liability.

22.2 Preparation and Submission of Stock Statements:

The under-given guidelines should be followed in respect of preparation and

submission of stock statements by the borrowers.

i) Stocks Statements should be submitted as per the standard proforma

prescribed by the Bank.

ii) All the columns in Stock Statements should be appropriately and accurately
filled in.

iii) Borrowers should submit stock statements periodically, in duplicate, as on

last Friday and in quadruplicate at the year end to the Bank. They may be
advised to prepare the stock statements in three/five copies so that they can
retain one copy with them.

iv) Stock Statements should contain details of paid-stocks commodity-wise.

v) In case there are any items of the following type, held by the borrower, the
same are to be reported separately in the stock statements.

a) Goods that are not approved for lending.

b) Goods acquired on credit basis.

c) Goods received under Bank Guarantee Limits / Letters of Credit Limits

(on D/A basis) /against co-acceptance of bills.

d) Goods received for job-work or those held under Trust capacity.

e) Goods sold but not delivered.

f) Goods received on consignment/agency basis.

g) Goods held beyond the normal period of retention.

vi) Where the goods pledged/hypothecated are stored in different godowns or

lying at different places, the stock statements should be prepared Godown /
place-wise, duly giving consolidated stock position.

32
 vii) Stocks reported in the stock statements should be valued as per guidelines
given under para no.14.

viii) In case the borrower is sanctioned sub-limits commodity/item-wise, the

commodities/items should be grouped accordingly in the stock statement so
as to facilitate calculation of drawing power under each sub-limit.

ix) The borrower should sign every stock statement.

22.3 Periodicity of submission of Stock and Book Debts Statements:

i) Borrowers enjoying different levels of credit limits should submit the Stock /
Book Debt Statements as explained below.

a) Borrowers enjoying credit limits up to Rs. 1 lakh should submit the

abridged stock statement as on the last Friday of every month.

b) Borrowers enjoying cash credit limits of more than Rs. 1 lac and up to
Rs. 5 lacs should submit abridged stock statement as on the last
Friday of every month and detailed Stock Statement as on the last
Friday of every Quarter.

c) Borrowers enjoying cash credit limits (including Book Debts limits) of

above Rs.5 lakhs should submit Stock Statements and Book Debts
Statements as on the last Friday of every month. The Book Debts
statement is to be certified by auditor every quarter.

In all the above cases the statement(s) should be submitted on or before 10th
day of the succeeding month and penal interest at the rate of 1% p.a. on the
working capital outstandings should be charged for the period of default in
submission of the Statement(s). However, the overall penal interest
chargeable in an account for any reason shall not exceed 2%.

All the above types of borrowers should submit the relative Statements as on
31st March every year.

ii) Format of the abridged Stock Statement.

As at the close of Business on: ____________ Account No.___________

Name and Address of the Borrower

i. Value of Stocks as at the end of last Friday of

previous statement
ii. Add: Purchases during the intervening period
Sub-Total
iii. Less: Sales during the intervening period
Closing Stock
Drawing Power @ _______ % Rs.______________

I/We hereby certify that the above statement of stock is a true and correct
statement under minimum market value/invoice value held by me l us
under Hypothecation to Andhra Bank and that all stocks are at any and all

33
 times under exclusive lien to Andhra Bank for any or all advances
outstanding on my/our account and I/We also certify that all stocks in the
premises are my/our own bonafide property and are fully insured against
fire, I/We am/are aware that on the strength of this declaration, the
advance is made by the Bank. Should the Bank wish at any time to carry
out detailed weighment and/or valuation of the goods, it is at liberty to do at
our expenses and I/We agree to accept the result of such weighment
and/or valuation.

Date : _____________ Signature of the Borrower

iii) Detailed Stock Statement should be in the Form RF 228-A

iv) Other guidelines regarding scrutiny etc., of stock statements are applicable
even to abridged stock statements.

22.4 Stock Statements - Scrutiny and Follow-up:

i) In the case of advances against goods. Stock statements are considered

important tools of credit management. Apart from giving latest information
about the quantity and value of stocks charged to the Bank, the stock
statements help the Bank in assessing the level/turn-over of the activity /
business of the borrower. A careful and intelligent scrutiny of stock
statements received over a period of time would enable the Bank to assess
over-all health of the advance and to locate danger signals, if any.

ii) Immediately on receipt of a stock statement, the date stamp should be

affixed. Thereafter, the same should be verified so as to ensure that:

a) It is prepared as per the prescribed proforma and all the columns are
appropriately filled in,

b) The guidelines given on preparation and submission of stock

statements are duly complied with

c) The opening balance is taken correctly (to be examined with reference

to the last stock statement/stock register)

d) The valuation is done as per the guidelines given under para No: 14

e) The drawing power is calculated correctly applying the stipulated

margin norms.

f) The calculations/totals are arithmetically correct.

g) The stock statement is duly signed by the borrower.

iii) Great care should be exercised with regard to valuation of stocks since any
over-valuation would adversely affect Bank's interest, It should be ensured
that the market rates furnished in the stock statements are correct. Where
landed cost is given, various components of the same should be carefully
examined.

34
iv) In the case of stock statements relating to KCC accounts, the details of stock
furnished by the borrower should be cross checked with the details of stock
position available on Bank's record. Where the goods are valued at invoice
value, the valuation should be verified with the help of copies of invoices/bills
held on record. The stock statements should be counter-signed by the Bank’s
representative.

v) In the case of OCC accounts, the details of stock statements should be

entered in the relative stock register / related menu in the system.

vi) Where a borrower enjoys sub-limits and reports details of stock under such
sub-limits, the same are to be verified with reference to the original terms of
sanction.

vii) The number of units placed and taken-out as indicated in the stock statement
should be studied in relation to the previous statement(s) to watch the
movement of stocks and to locate any items which tend to stagnate for want
of demand or any other reason such as depression in the market/industry,
high cost, poor quality, stocks having become obsolete/out-moded.

viii) Calculation of Drawing Power:

As regards calculation of Drawing Power, the under-given guidelines should

be followed:

a) The entitlement of a borrower to draw money under a credit limit

depends upon the value of primary security less the margin stipulated.
This entitlement is called Drawing Power of the borrower. If, however,
the drawing power so arrived at is more than the limit, the borrower
can draw up to the limit only. Thus the borrower can draw up to the
drawing power or limit whichever is less. In other words the liability in
an advance account should be within the limit as well as drawing
power. Banks follow different methods while calculating drawing
power e.g.

(A) reckoning paid stocks alone to avoid double finance.

(B) paid stocks plus sundry debtors both being current assets.

(C) paid plus unpaid stocks (since the buyer of goods even on
credit terms can create valid charge in favour of banks) and
excluding Sundry Debtors etc.

b) The under mentioned system has to be followed for computing the

drawing power uniformly in both corporate and non corporate borrowal
accounts irrespective of sector of advance (industry, trade etc.),
quantum of credit limits and constitution (other than trade advances
with fund based working capital credit limits of Rs 5 lakh and below):

(i) In case of accounts where other banks are consortium leaders,

the method followed by the leader bank shall be adopted.

(ii) Where our Bank is leader / sole banker/under multiple banking

arrangement, drawing power will be arrived at taking into
account value of paid stocks (less margin) plus drawings

35
 against eligible sundry debtors other than bills discounted (not
older than 90 days unless specifically permitted by appropriate
authorities) with requisite margin to be decided on a case to
case basis. Further, drawing power against sundry debtors is
not to exceed 50% of the cash credit limit. The minimum cash
credit limit to accept Book Debts as security is above Rs.5
lakhs.

(iii) In case of accounts, which are subject to Selective Credit

Control, RBI guidelines shall be followed. The guidelines are
given under para no: 25.

(iv) If a borrower does not prefer the above modified system, with
the prior approval of General Manager (Credit) at HO, in case
of sanctions made by various authorities up to the level of
General Manager and with the prior approval of other higher
sanctioning authorities, the drawing power may be computed
by reducing Sundry Creditors, in excess of projected level
provided the projected levels of inventory are maintained.
Wherever levels of inventory actually maintained are less than
the projected levels, the projected Sundry Creditors shall also
be reduced proportionately. It shall be permitted only in case of
MSME / Large Industrial borrowers.

We give hereunder some examples showing the methods of arriving

at the drawing power. This method of calculation of drawing power
shall be applicable to all our borrowers with the exception of traders
enjoying fund based working capital credit limits of Rs 5 lakh and
below.

Example no.1.

In case of a borrower enjoying an OCC limit of Rs 125 lakhs, with 25%

margin against Raw Materials (RM), 40% margin against Semi
Finished Goods (SFG) and 30% margin against Finished Goods
(FG), and a margin of 60% against sundry debtors.

a) Raw Material holding of goods = Rs 60 lakhs

b) Semi Finished Goods = Rs 30 lakhs
c) Finished Goods = Rs 28 lakhs
d) Total inventory (stocks) = Rs 118 lakhs
e) Sundry Creditors = Rs 40 lakhs
f) Sundry Debtors = Rs 200 lakhs
(Out of Rs 200 lakhs Sundry Debtors, borrower has discounted Bills
for Rs 15 lakhs, Debtors above 90 days is Rs 10 lakhs and Bad
Debts is Rs 3 lakhs). In the above case, the Drawing Power (DP)
will be as follows:
Raw Material (a) = Rs 60 lakhs
Less: Sundry Creditors (e) = Rs 40 lakhs
Paid Raw Material = Rs 20 lakhs
DP against RM @ 25% Margin = Rs 15 lakhs
(75% of Rs. 20 lakhs)
DP against SFG @ 40% Margin = Rs 18 lakhs
(60% of Rs. 30 laks)

36
 DP against FG @30% Margin = Rs 19.6 lakhs
(70% of Rs. 28 lakhs)
DP against inventory = Rs 52.6 lakhs
DP against Sundry Debtors @ = 40% (200-15-10-3)
60% Margin
= Rs 68.8 lakhs, restricted to
Rs 62.5 lakhs
(i.e.50% of Cash Credit Limit) = Rs 62.5 lakhs
Total Drawing Power (DP) = Rs 115.1 lakhs

Example no. 2:

In example no.1, if the margin is stipulated @ 30% uniformly against

Raw Materials, Semi Finished Goods and Finished Goods, then the
drawing power will be:

Total inventory (d) = Rs 118 lakhs

Less - Sundry Creditors (e) = Rs 40 lakhs
Paid inventory = Rs 78 lakhs
DP against inventory @30% = Rs 54.6 lakhs
Margin (70% of Rs. 78 lakhs )
DP against Sundry Debtors = Rs 62.5 lakhs
Total Drawing Power (DP) = Rs 117.1 lakhs

Example no.3

In example no.1, if the Sundry Creditors figure is Rs 130 lakhs (i.e.

above the figure of total inventory of Rs 118 lakhs) then the calculation
of DP will be as follows:

Total inventory (d) = Rs 118 lakhs

Less – Sundry Creditors = Rs 130 lakhs
Paid inventory nil
DP against inventory nil
DP against Sundry Debtors = Rs 62.5 lakhs.
Total Drawing Power = Rs 62.5 lakhs

Example No.4:

Projected level of Raw Materials. = Rs 100 lakhs

Projected level of Sundry = Rs 20 lakhs
Creditors.
Actual level of Raw Materials. = Rs 125 lakhs
Actual level of Sundry Creditors. = Rs 30 lakhs
DP in the account.
Inventory = Rs 125 lakhs
Less: Sundry Creditors in excess = Rs 10 lakhs
of projected level
115.00 lakhs less margin

37
 Example No.5:

Projected level of inventory = Rs 100 lakhs

Projected level of Sundry = Rs 20 lakhs
Creditors
Actual level of inventory = Rs 50 lakhs
Actual level of Sundry Creditors = Rs 15 lakhs
DP in the account

Since the actual level of inventory maintained is less than the

projected level, the projected level of Sundry Creditors is to be
reduced proportionately. The projected Sundry Creditors level shall
be reduced to Rs. 10.00 lakhs for computing Drawing Power.

Inventory = Rs 50 lakhs
Less: Sundry Creditors in excess = Rs 5 lakhs
of Projected level (Rs.15.00 lakhs
- Rs.10.00 lakhs)
Rs.45.00 lakhs less margin

c) For the purpose of calculating drawing power, value of paid stocks

should only be taken into consideration.

d) Items of the nature mentioned under para no.22.2 (v) should not be
taken into consideration for the purpose of arriving at the drawing
power.

e) Goods purchased but in transit should generally be excluded for the

purpose of arriving at the drawing power. However, in the case of
industrial borrowers with satisfactory track record, the value of such
goods may be taken into consideration for arriving at the drawing
power subject to the following conditions:

(i) There should be a separate sub-limit within the over-all OCC

limit to consider such transactions. The appraising /
sanctioning authority should carefully examine the need and
desirability of allowing such transactions while fixing the sub-
limit.

(ii) Before allowing drawing power for such transactions, branches

should make reasonable enquiries to establish genuineness of
the transactions and also to determine the quantum of Bank
finance that can be allowed there under.

(iii) Borrowers should report details of such stocks separately in

the periodical stock statements, duly giving full particulars of
the transactions thereof.

f) No request of a borrower to allow bank credit against goods

purchased, but lying with the seller / supplier thereof, should be
entertained.

g) Value of stocks, which are sent out for processing, packing etc., can
be taken into consideration for the purpose of calculating drawing

38
 power provided the party enjoys a separate "Trust Letter Facility" limit
to cover such transactions (refer guidelines in para no.24).

h) Sometimes, the drawing power available on goods/items for which

separate sub-limits are fixed may far exceed the sub-limits and
borrowers may like to draw against such surplus drawing power under
the general limit. As the very purpose of fixing sub-limits against
particular goods/items is to limit Bank finance against the goods/items,
no such request of the borrower should be entertained.

i) Where the sanction letter does not specifically permit, branches

should not take into consideration, the transactions involving
purchases / sales / supplies from or to the sister / allied / associate
concerns of the borrower for the purpose of allowing bank credit.

ix) After verifying the stock statements, the balance in the Cash Credit account
should be noted on the stock statement. In case the liability in the account
exceeds the drawing power available, the amount overdrawn should be
noted, preferably in red ink, on the stock statement. In such cases, immediate
steps should be taken to regularize the account either by collecting the short-
fall to reduce the liability or by replenishment of fresh stocks to enhance the
drawing power, subject, however, to the overall limit.

x) Where any major irregularities / inconsistencies are observed, suitable

corrective / follow-up action should be taken.

xi) The original copy of stock statement should be preserved carefully by the
branches on record.

xii) Duplicate copies of stock statements received should be submitted to the

controlling authority on monthly basis along with the Shuttle Statement.

xiii) The veracity of particulars furnished by the borrower in the stock statements /
book debts should be compared with the particulars available in books of
accounts and other statutory registers maintained by the borrowers as
frequently as possible. Periodical visits conducted for the purpose of
inspection of security may also be used for this purpose.

xiv) Whenever the Balance Sheet of the borrower is received/obtained, closing

stock value furnished therein should be verified with that of the stock value
furnished in the stock statement as on the date of the Balance Sheet. To
facilitate such comparison, branches may advise the borrowers to submit a
stock statement as on the date of the Balance Sheet (if it does not coincide
with the date on which the normal stock statement is furnished). If any
difference in the value of stocks is observed between the Balance Sheet and
the Stock Statement, the matter should be taken up with the borrower and the
reasons for the discrepancy should be ascertained. If the figure furnished in
the stock statement is considerably higher than the Balance Sheet figure and
the borrower is found to have resorted to over-valuation/manipulation of
stocks for the purpose of inflating drawing power, the matter should be
reported to the controlling authority. Wherever necessary, immediate steps
should be taken to regularize the account. Branches should be cautious in
their approach with regard to future dealings with such a borrower.

39
22.5 Delay in Submission of Stock Statements

i) Timely submission of periodical stock statements itself is one of the healthy

signs that indicate soundness of the credit. As per asset classification norms,
drawings allowed against Drawing Power arrived at on stock statements of
more than 3 months old are treated as irregular drawings and accounts in
which such irregular drawings are allowed beyond 90 days are treated as
NPA. Hence, Branches should constantly pursue with the borrower and
obtain stock statements regularly.

Branch should also enter the date of stock Statement, date of receipt of Stock
Statement and Drawing Power in the system through appropriate Menu.

ii) In view of the importance attached to stock statements in monitoring credit

under advances against goods, branches should motivate / persuade
borrowers to submit stock statements in time. Technically, the drawing power
for any account secured by hypothecation of stock would be "NIL" if the
relative stock statements are not submitted in time.

iii) Where a stock statement is not received in time, the concerned borrower
should be contacted and the reasons for the delay should be ascertained.
The borrower should be explained about the need and importance of
submitting statements in time and the consequences of non or delayed
submission of statements.

iv) Where a borrower is habitually late in submitting stock statements, penal

interest, as per rules should be levied for the period of such default.

v) In the case of chronic defaulters, measures such as freezing of operations in

the account (for OCC accounts only) may also be contemplated. However,
before resorting to such an extreme step, borrowers should be given suitable
advance notice in writing.

vi) In every review report/renewal proposals, branches should invariably

incorporate comments with regard to submission of periodical stock
statements by the party.

22.6 Maintenance of Accounts:

i) Cash Credit accounts are in the nature of Current Accounts. Consequently,

guidelines applicable to opening, conducting, issue/payment/collection of
cheques etc., of current accounts are applicable to cash credit accounts in
general. Further branches should also follow guidelines given in Part-A of the
chapter "General Instructions on Advances & Credit Follow up Mechanism” in
Volume – 4 of the Manual of Instructions to the extent such guidelines are
applicable to Cash Credit Accounts.

ii) Payments / debits from Cash Credit accounts are to be allowed within the
limit or drawing power, whichever is less. To facilitate allowing of payments /
debits in accordance with the drawing power, DP is to be calculated through
DRAWING POWER CALC.USING SEC program. Whenever there is a
change in the drawing power, the changed drawing power should also be
marked in the system. The drawing power should be updated in the system.

40
 Officials authorizing payment of cheques and other debits from the Cash
Credit account should, among others, ensure that the resulting liability is well
within the limit and drawing power available, more particularly in view of the
stringent Asset Classification norms. According to RBI guidelines on Asset
Classification norms an account shall be treated as out order if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power for a period of 90 days. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit /
drawing power, but there are no credits continuously for 90 days as on the
date of balance sheet or credits are not enough to cover the interest debited
during the same period these accounts should be treated as out of order.

iii) Cash Credit accounts should reasonably reflect the turnover of the business
of the borrowers concerned. As such, branches should persuade borrowers to
route all their industrial/trade/business transactions through cash credit
accounts. Compliance with these guidelines help Branches, in avoiding Cash
Credit accounts from becoming Non-Performing Assets (NPA).

iv) It is not advisable to route transactions of personal nature (such as payment

of club membership fee, personal insurance premium) through the Cash
Credit accounts of borrowers.

v) In the case of large cash withdrawals from cash credit accounts, branches
should ascertain the reasons so as to guard against diversion of funds.
Similarly, care should be exercised while allowing payments in favour of the
sister/associate/allied concerns of the borrowers.

vi) Scanty operations or sudden drop in the level of operations in the account
may itself be an indication that all is not well with the borrower's activity /
business. It may also indicate that the borrower is diverting his business to
some other bank(s)/activities. In view of this, branches should make thorough
enquiries in such cases.

vii) In the case of cash credits allowed to parties dealing in seasonal goods /
commodities, the account should come into credit at least once during the
slack season.

22.7 Daily Balancing of Cash Credit Accounts:

i) In the Computerized Branches, OD / CC Account Jotting Report as part of

EOD Reports, showing total of Debit & Credit balances separately along with
the Jot-check Report does the balancing on a daily basis. The Jotting Report
contains fields like limit, due date, last Stock Statement / Book Debt
Statement Dates etc., which facilitates easy monitoring to some extent.

ii) Daily jottings reports of Overdrafts and Cash Credits accounts should be
verified by the concerned/ Branch Head/Manager. In token of having verified
the jottings and also the balancing, the concerned Branch Head/Manager
should sign the reports.

22.8 Balance Confirmation Letters:

Balance Confirmation Letters should be obtained, on half-yearly basis, in respect of

all cash credit accounts (whether such accounts show debit balance or credit
balance). The procedural guidelines on obtention of Balance Confirmation Letters

41
 given in the chapter “Current Deposit Accounts” in Volume - 3 of the Manual of
Instructions should be followed by branches in this regard.

Provision is made to generate and print the confirmation Letters from the system.
Branches should print the letters from the computer and obtain confirmation thereon
from the customers.

23. Advances against Warehouse Receipts (Certificates)

23.1 It is not uncommon for branches to receive requests from the borrowers, especially
those who do not have proper/adequate storage facilities, to allow advances against
goods stored with warehouses.

23.2 Warehousing is a specialized arrangement under which goods, pending clearance or

sale, are stored.

23.3 Warehouses are run by Central / State Warehousing Corporations, Agricultural

Produce Market Yards and other private individuals/bodies. The concept of issuing
licenses to private warehouses is in vogue in certain States.

23.4 Advances by way of Key Loan facilities can be allowed against warehouse receipts
issued by warehouses approved by Head Office. The list of approved warehouses is
being circulated among branches from time to time. Such loans should be allowed
through the GL Code: 2160.

23.5 A Warehouse Receipt is issued by a warehouse keeper i.e., the person in-charge of
a warehouse, certifying that certain goods specified in the warehouse receipt are
held in his warehouse at the disposal of the person named therein.

23.6 Warehouse receipts issued by government warehousing corporations and licensed

warehouses are generally in the prescribed format as laid down under the Act/Rules
governing their functioning.

23.7 Generally, warehouse receipts issued by Government Warehouses and licensed

warehouses are in “Negotiable Form” (in the absence of mention to the contrary on
the face of the receipt). Warehouse receipts issued by un-licensed private
warehouses can be either in “Negotiable Form” or in “Non-negotiable Form”,
depending upon the state legislation/rules governing their functioning.

23.8 Though a warehouse receipt issued in negotiable form is transferable by

endorsement and delivery and the endorsee can obtain delivery of the goods by
surrendering the receipt, it cannot be equated with a negotiable instrument as the
rights of a transferee to a warehouse receipt are subject to that of the transferor. In
other words, the transferee cannot get a better title than the transferor.

23.9 For the purpose of allowing Bank finance, the warehouse receipt should be as under:

i If issued by Government The warehouse receipt should have been

Warehousing Corporations issued in the name of our borrower and
duly endorsed by him in favour of the Bank.
ii If issued by private Warehouses The warehouse receipt should have been
issued in the name of the Bank.

42
23.10 Goods stored in government warehouses are generally classified into 3 grades viz.,
Good, Fair; Average, and the grading of the goods is marked on the relative
warehouse receipt.

23.11 A warehouse receipt may attract stamp duty as per the State Stamp Act/Rules.

23.12 A warehouse receipt generally contains the following information.

i) Name of the depositor and his address.

ii) General description of the goods.

iii) Quality of the goods.

iv) Quantity of the goods by weight or number, as the case may be.

v) Value of the goods.

vi) Period for which the goods are stored.

vii) Quantum of storage and other charges payable.

viii) Terms and conditions subject to which the goods are held in the warehouse,
and whether the receipt is negotiable.

23.13 Surrender of the warehouse receipt is generally a pre-condition for obtaining delivery
of goods stored in the warehouse. In the case of loss/misplacement of a warehouse
receipt, the warehouse keeper may issue a duplicate at the request of the holder /
depositor.

23.14 Procedural Guidelines.

i) Borrowers desirous of availing credit against warehouse receipts should

obtain a separate “Key Loan” limit for the purpose. Among others, the
application forms as well as proposal forms, in such cases, should contain the
names of the warehouses with which the applicants/borrowers propose to
store their goods. The proposals should be subjected to normal scrutiny and
appraisal.

ii) As and when a warehouse receipt is tendered for availing Bank credit under a
sanctioned limit, the same should be carefully scrutinized so as to ensure that

a) it is issued by a warehouse approved by the Bank,

b) it is in the standard format and prima facie in order,
c) it is duly stamped (if the concerned state law prescribes so),
d) it is issued in the name of the borrower and duly endorsed by him in
favour of the Bank (if issued by a Government Warehouse)
or
it is issued in the name of the Bank (if issued by a private warehouse),

e) it clearly indicates that the quality of the goods covered by it are of

good quality and that
f) it does not contain terms and conditions which are likely to affect
Bank’s interest adversely.

43
iii) Before disbursing the advance, documents, as applicable to Key Loan
facilities should be obtained from the borrowers. The Application-cum- Take
Delivery Letter should, among others, contain full details of the Warehouse
Receipt. Apart from the usual documents, a separate letter requesting the
Bank to recover all charges, including the rent payable to the warehouse
keeper, should be obtained from the borrowers and kept on record. The
details of the goods furnished in the Application-cum-Take Delivery Letter (RF
224-A) should be cross checked with the details available on the warehouse
receipt and also with those available on the invoices/bills (for manufactured
items). The warehouse receipt tendered for Bank finance should be kept
enclosed to the relative credit documents and held under joint custody. ‘

iv) Branches should, as a rule, inspect the goods before disbursing the advance.
This would help to establish the genuineness of the receipt.

v) In the case of warehouse receipts of Government Warehousing Corporations,

issued in the name of the borrower and endorsed in favor of the Bank, a
notice of Bank’s lien over the goods should be served on the warehouse
keeper. In such cases, the advance should not be disbursed till receipt of the
acknowledgement of the notice from the warehouse keeper. Serving of
“Notice of Lien” and obtaining “Acknowledgement of the Notice” from the
warehouse keeper are considered very important in such cases, as they
prevent the warehouse keeper from issuing duplicate receipts at the request
of the depositors (borrowers), which may eventually lead to release of goods
without Bank’s knowledge. Issuance of acknowledgement by the warehouse
keeper also makes it obligatory on his part to serve a specific notice to the
Bank in case of any deterioration/damage to the goods for any reason. To
save delay and to ensure compliance of these guidelines, serving of notice of
lien and obtaining of acknowledgement from the warehouse keeper may be
done during the course of first inspection i.e., at the pre-disbursement stage.

vi) Branches should confine their lending only to such receipts issued ‘by
warehouses situated locally in the command area of the branch. This would
facilitate initial as well as subsequent periodical inspections without much
inconvenience/difficulty.

vii) As a matter of abundant caution, branches should keep specimen signatures

of the Warehouse keepers on their record and use the same for verification of
signatures on the Warehouse receipts tendered for Bank lending.

viii) Where the Warehouse keepers insist on having a clause in the certificate
giving them lien on the goods covered by the certificate for expenses of
storage, shipping freight etc., additional margin as per rules in force has to be
maintained. The additional margin is intended to cover the charges of the
warehouse keeper.

ix) The dates of expiry of the warehouse receipts should be diarised and the
borrowers should be advised well in advance to get the receipts renewed. If
there is no positive response from the borrowers, branches should
themselves get the receipts renewed for a further period, and recover the
relative charges from the borrowers. In such cases, it must, however, be
ensured that the goods are in sound condition and are not held beyond the
stipulated period of retention.

44
 x) Procedural guidelines given in the context of Key Loans are applicable in
general to advances allowed against warehouse receipts.

xi) When an advance is repaid, the warehouse receipt should be endorsed in

favor of the borrower and delivered to him against proper acknowledgement.
Where Bank’s lien over the goods is got registered in the records of the
warehouse keeper, a notice intimating waiver of Bank’s lien over the goods
should also be sent to the warehouse keeper.

xii) As far as possible, requests for partial deliveries should not be entertained.
Where they are to be allowed, the relative receipt together with a letter
authorizing partial delivery should be sent to the warehouse keeper through
the Bank’s representative, after collecting the required amount of dues from
the borrower. The fact of partial deliveries should be got noted on the receipt
by the warehouse keeper and the same is to be re-lodged under Bank’s
custody. In some areas, private warehouse keepers submit statement of,
stocks held by them in Bank’s name on a monthly basis and do not insist on
surrender of the receipt as a pre-condition for effecting partial deliveries. In
such cases, branches need not send warehouse receipts for the purpose of
partial deliveries.

23.15 Guidelines for financing against warehouse receipts of approved cold storages

i) ELIGIBILITY:

Farmers and Traders having Jeevan Abhaya accounts/lnsured Current

Deposit Accounts with proper identification (Identification shall be by other
than owners of Cold Storage)

The branch shall follow KYC guidelines for identification of the customer and
monitoring transactions.

The Cold Storage shall be in the approved list of Head Office to finance
against their warehouse receipts.

Other criteria is as under:

Farmers:

The commodity pledged shall be an agriculture produce in the land holding of

the farmer. For this purpose a copy of Pattadar passbook, land holding
declaration/certificate shall be obtained and kept on record.

Traders:

Copies of invoices/bills be obtained from borrowers, wherever possible and

be kept along with the relative documents.

ii) PERlOD:

Period of advance shall not exceed six months from the date of cold storage
receipt or the expected normal life of the product whichever is earlier.

45
iii) VERIFICATION OF WAREHOUSE RECEIPT

Warehouse receipt tendered by borrower for availing the Iimit should be

carefully scrutinized so as to ensure that it is issued by a warehouse
approved by the bank and is in the standard approved format and prima-facie
is in order.

The warehouse receipt shall be in the name of the Bank A/c borrower.

The warehouse receipt shall be duly stamped if the state Iaws so prescribe.

iv) DISBURSEMENT:

The Limit sanctioned against warehouse receipt shall be disbursed by way of

credit through Jeevan Abhaya account/ Insured Current Account of the
Farmers/Traders.

v) CO-OBLIGATION/GUARANTEE

Third Party Guarantee besides Personal Guarantee of directors / partners /

proprietor of cold storage.

vi) INSPECTION: Pre Sanction:

Branch to conduct pre-sanction inspection of stocks before disbursing the

loan to ensure proper storage of goods, its quality and quantity. Further it
shall be ensured that the borrowers i.e farmers/traders are ultimate end users
of advance against warehouse receipt.

Wherever necessary, samples can be taken to reputed dealers in the market

to ascertain the quality. In case of goods where ascertainment of quality
involves intricate tests/analysis, services of reputed outside agencies may be
availed after obtaining permission from Zonal Office and costs thereof may be
recovered from the concerned borrower.

vii) PRECAUTIONS:

a) Branch to satisfy regarding availability of Required Iicenses \ permits \

plans \ approvals etc. for the cold storage unit

b) The unit should have Un-interrupted power supply backed by

generators.

c) Branch to satisfy that Commodities/stocks pledged to bank are stored

separately with account wise segregation and demarcation for easy
identification and inspection.

d) Stocks under Pledge to Bank are kept in good condition by doing

fumigation at regular intervals and preventive steps are taken to avoid
spoiling/damage of stocks.

e) Bin cards are displayed for each lot with full details of stocks under
pledgelien.

f) The loan sanctions are to farmers/Traders only.

46
 g) Commodity against which they sought loan is actually stored in the
cold storage.

h) Cold storage receipts/bonds are actually issued by authorized person.

i) Under no circumstances duplicate cold storage receipt should be

accepted as a security.

j) With regard to insurance, Branches may contact the Insurance

company with regard to availability of specific insurance policy to
cover the risk of malicious damage to the stocks kept in cold storage
i.e. Deterioration of Stocks(in cold storage godowns) insurance.

viii) DELIVERY:

On repayment of the loan:

If warehouse receipt is in negotiable form, the same shall be endorsed in

favour of the borrower and delivered to him against acknowledgement.

If warehouse receipt is in Non-negotiable Form, the branch may issue

delivery instructions to the cold storage unit.

As far as possible requests for partial deliveries should not be entertained.

ix) FOLLOW UP:

Branch to note the due date of the loan from the computer system and follow
up with the borrower for its closure.

If there is no positive response from borrowers, branches should themselves

get the receipts renewed for a further period and recover the relative charges
from borrower. In such cases, it should be ensured that goods are in good
condition and are not held beyond the stipulated period of retention.

x) Other Guidelines:

a) The cold Storage unit should not deliver the goods to the borrower
unless the cold storage receipt duly discharged by the Branch
Manager is surrendered to the unit.

b) The cold storage unit should specify the name of the person
authorized to sign the warehouse receipts issued by the cold storage
and his specimen signature duly attested by the competent authority
should be made available / held by the branch for verification before
financing against such warehouse receipts.

c) Cold Storage unit shall certify the quantity, quality of goods and its
value and furnish full particulars of insurance on stocks placed by the
borrower in the warehouse receipt.

d) The cold storage unit shall submit details of stocks under pledge to the
Bank on a monthly basis.

47
 xi) Branches and Controlling Offices are advised to be cautious while financing
against warehouse receipts.

xii) The specific guidelines regarding approval of Private Cold Storages and
financing against Warehouse Receipts issued from time to time by Head
Office are to be followed for considering any Credit Facilities under this
category.

24. Trust Letter Facility

24.1 Trust Letter Facility can be granted as a sub-limit under Key Loan / Key Cash Credit /
Open Cash Credit facilities for the following purposes.

i) To deliver stocks held under Bank’s charge against trust for the purpose of
processing, packing etc.
ii) To deliver stocks held under Bank’s charge against trust for production of
document of title to goods.
iii) To deliver stocks held under Bank’s charge against trust for payment of the
value.
iv) To deliver documents of title to goods held under Bank’s charge against trust
for receipt of goods or value.

24.2 Trust Letter Facility may also be allowed as a sub-limit under Key Loan / KCC / OCC
facilities for retiring document of title to goods received for collection so as to facilitate
clearing and lodgment of relative goods as security to the Bank.

24.3 As lending or delivery of goods/documents of title to goods against trust would in

effect render secured limits as clean limits during the period of trust, utmost care /
caution should be exercised while extending the facility. Branches should be highly
selective in their approach and ensure that the facility is made available to meet
genuine requirements of long standing clientele whose integrity and credit worthiness
are beyond doubt.

24.4 While processing proposals involving granting of “Trust Letter Facility” thorough
enquiries should be made to establish the genuineness of the need for granting the
facility. Reasons justifying the sanction of the facility should be mentioned in the
relative proposals / appraisals. In such cases, the sanction should, among others,
specify the sub-limit for Trust Letter Facility, purposes and duration for which it can
be allowed, etc.

24.5 The duration of the trust letter should be just adequate to meet the actual
requirement of the Party. Zonal Managers and Head Office functionaries are
delegated powers to consider sanction of Trust Letter facility as sub limit under Key
Loan / Key Cash Credit / Open Cash Credit for a period of one month depending
upon the requirement to the extent of lending powers delegated to them for
unsecured/partly secured fund based limits.

24.6 Borrowers who are sanctioned Trust Letter Facility should execute Trust Letter
Agreement as per Annexure No.I (to be stamped as per State Stamp Act/Rules).
Trust Letter Agreement is the principal document for Trust Letter Facility and it is
enough if this agreement is obtained once during the currency of the limit. The Trust
Letter Agreement obtained should be kept along with other credit documents
pertaining to the Key Loan/Key Cash Credit/Open Cash Credit facilities of the party.

48
24.7 As and when a borrower wants to obtain release of funds/goods/documents of title to
goods against trust under the sanctioned limit, the under given procedure should be
followed.

i) The borrower should submit a separate letter of request duly furnishing his
requirement, purpose, duration for which the facility is required etc. The letter
should also bear a reference to the Trust Letter Agreement executed by the
borrower.

ii) On receipt of the letter of request, the concerned officer should verify the
genuineness of the need and the reasonableness of the duration for which
the facility is sought to be availed. The decision to allow/disallow the facility
should be recorded on the letter of request under the signature of the
concerned officer with date.

iii) Where the facility is sought to be utilized for clearing goods covered under
documents received for collection/payment, the borrower should pay his
margin as per rules and the same should be kept under “Sundry Suspense
A/c”. The margin so collected together with advance value of the goods (to
the debit of the Key Loan/Key Cash Credit/Open Cash Credit Account) should
be used for retiring the bill(s) received for collection/payment. In such cases,
the borrower should also pay Bank charges, interest (where necessary) etc.,
separately.

iv) Before releasing the goods/documents of title to goods to the borrower, a

Trust Receipt, as per the following proforma, should be obtained from him.

TRUST RECEIPT
To
The Manager,
Andhra Bank,
_____________________ Branch

I/We confirm having received from you the under mentioned goods /
documents of title to the under mentioned goods which have been charged to
you as security and are to be held and dealt with by me/us under and subject
to the terms and conditions of the Trust Letter Agreement dated __________
executed by me/us in your favor.

Particulars of Documents & Goods:

S Description Quantity Rate Value

No

Place: Yours faithfully,

Date:

Name of the Borrower:

Key Loan / KCC / OCC Alc No.___________

(In the case of Partnership firms, it is enough if the authorized Partner signs
the receipt on behalf of the firm.)

49
v) All releases of goods/documents of title to goods under Trust Letter Facility
should be recorded borrower-wise in a separate register titled as “Register of
Releases under Trust Letter Facilities”. A plain ruled book with the following
columns may be used for this purpose’

Andhra Bank
_________________________ Branch

Register of Releases under Trust Letter Facilities

Name & Address of the Borrower:

Trust Letter Facility Limit Rs.

_______ days
Duration of Trust:

Key Loan/KCC/OCC No.

Limit: Rs.

Particulars of Sanction:

Due Date:

Special conditions, if any:

Officer/Manager

Particulars of Goods Value

S No Date Purpose Quantity
/ Documents Rs.
1 2 3 4 5

Amount
Initials Remarks
Allowed Adjusted Balance
6 7 8 9 10

vi) The fact of lending/allowing delivery of goods or document of title to goods

against trust should be recorded in the above register in serial order in the
folio related to the concerned borrower. The officer should verify the entry and
initial in the register. This entry should be rounded off on the day when the
Trust liability is adjusted. Te balance under trust letter facility should always
be within the limit stipulated for the facility.

vii) In the case of Key Loan/Key Cash Credit facilities, a usual “Delivery Order”
with the superscription “Delivery under Trust Letter Limit” should be prepared
for the purpose of effecting deliveries and the goods are to be delivered as
per the usual procedure. At the time of re-lodgement of goods as security,
usual procedure for accepting goods as security should be followed.

50
 However, extreme care should be exercised to ensure that no fresh drawls
are allowed against the goods so lodged and that the limit, liability and
drawing power are in order at all times.

viii) In the case of goods sent to outside agencies/parties for processing, packing
etc., an acknowledgement as per proforma given in Annexure No.II should be
obtained and kept on record. The particulars of such goods should be
furnished separately by the borrower in the periodical stock statements
submitted to the Bank.

ix) Borrower’s liability under the Trust Letter Agreement continues to exist till he
re-lodges the goods/documents of title to goods obtained by him against trust
or credits the relative sale proceeds to the advance account (as per the terms
of the understanding at the time of extending the facility). The letter of request
and the Trust Receipt should be held under the custody of the concerned
officer during the currency of borrower’s liability to the bank under the said
transaction. Thereafter, the same may be preserved in the file of the
concerned borrower.

x) Branch Managers should personally monitor drawals/deliveries made under

Trust Letter Facility and ensure that the same are adjusted on time. For this
purpose, they should review the entries made in the Register of Releases
under Trust Letter Facilities at least once in a week. Any delay in
regularization of the accounts should be thoroughly enquired into and
appropriate follow-up action should be taken.

25. Selective Credit Control

25.1 Sec.21 and 35A of the Banking Regulation Act, 1949, empower Reserve Bank of
India to regulate flow of bank credit against essential commodities. Reserve Bank of
India is so empowered with a view to preventing speculative holding of such
commodities with the help of bank credit and to control the resultant rise in their
prices.

Reserve bank of India being satisfied that it is necessary and expedient in the public
interest to do so, issues from time to time directives to all commercial banks,
stipulating specific restrictions on bank advances against specified sensitive
commodities.

The restrictions would generally be in respect of quantum of advance, type of

advance, period of advance, margin to be maintained, rate of interest, sanctioning
clean advances to those borrowers who deal in sensitive commodities etc.,

The directives of Reserve Bank of India also stipulate the Reports/Returns to be

submitted by the banks to RBI in respect of such advances and their periodicity.

As and when the position improves, Reserve Bank of India may modify/withdraw the
restrictions communicated previously in respect of flow of bank credit against such
commodities.

The commercial banks should observe the restrictions imposed by Reserve Bank of
India.

This statutory control exercised by Reserve Bank of India is known as Selective

Credit Control.

51
25.2 Reserve Bank of India shall from time to time specify the commodities, which come
within the purview of the term “Sensitive Commodities”. The following commodities
are generally treated as sensitive commodities.

i) food grains i.e., cereals and pulses,

ii) selected major oil seeds indigenously grown, viz., groundnut, rapeseed
/mustered, cottonseed, linseed, and castorseed, oils thereof, vanaspati and
all imported oils and vegetable oils,

iii) raw cotton and kapas,

iv) sugar/gur/khandasari,

v) cotton textiles which include cotton yarn, man-made fibers and yarn and
fabrics made out of man-made fibers and partly out of cotton yarn and partly
out of man-made fibers.

25.3 Presently the following commodities are exempted from all the stipulations Selective
Credit Control.

Sr. Commodity Exemption

No. w.e.f.
1. Pulses 21.10.1996
2. Other food grains (viz. course grains) 21.10.1996
3. Oilseeds (viz. groundnut, rapeseed/mustard, cotton seed, 21.10.1996
linseed, castorseed)
4. Oils (viz. groundnut oil, rapeseed oil, mustard oil, 21.10.1996
cottonseed oil, linseed oil, castor oil) including vanaspati
5. All imported oil seeds and oils 21.10.1996
6. Sugar, including imported sugar, excepting buffer stocks 21.10.1996
and unreleased stock of sugar with Sugar Mills
7. Gur and Khandsari 21.10.1996
8. Cotton and Kapas 21.10.1996
9. Paddy/Rice 18.10.1994
10. Wheat * 12.10.1993
* Temporarily covered under SCC w.e.f. 8.4.97 to 7.7.97.

Banks are free to fix prudential margins on advances against the above listed
sensitive commodities.

25.4 Presently the following commodities are covered under the stipulation of Selective
Credit Control

i) Buffer stock of sugar

52
 ii) Unreleased stocks of sugar with Sugar Mills representing levy sugar and free
sale sugar.

25.5 Stipulations of Selective Credit Control:

i) Margin on sugar

Commodity Minimum With effect

Margin from
(a) Buffer stocks of sugar 0% 01.04.1987
(b) Unreleased stocks of sugar with Sugar Mills
representing -
levy sugar 10% 22.10.1997
free sale sugar @ 10.10.2000

@ Margins on credit for free sale sugar will be decided by banks including
RRBs and ABs based on their commercial judgement.

ii) Valuation of sugar stocks

a) The unreleased stocks of levy sugar charged to Banks as security by

the sugar mills shall be valued at levy price fixed by Government.

b) The unreleased stocks of free sale sugar including buffer stocks of

sugar charged to the bank as security by the sugar mills, shall be
valued at the average of the price realised in the preceding three
months (moving average) or the current market price, whichever is
lower; the prices for this purpose shall be exclusive of excise duty.

iii) Interest rates

With effect from 18.10.1994, the banks have the freedom to fix lending rates
for the commodities coming within the purview of Selective Credit Control.

iv) Other operational stipulations

The other operational stipulations vary with the commodities. These

stipulations are advised whenever Selective Credit Control is reintroduced for
any specific sensitive commodities.

(v) Delegation of powers

The matter relating to delegation of powers with regard to approval of credit

proposals relating to sensitive commodities coming under Selective Credit
Control has been reviewed and it has been decided that with effect from 23
November 2000 the existing practice of banks submitting credit proposals
above Rs. 1 Crore to Reserve Bank of India for its prior approval under
Selective Credit Control shall be discontinued and banks will have the
freedom to sanction such credit proposals in terms of their individual Loan
Policies. Accordingly, banks need not forward the credit proposals above Rs.
1 Crore in respect of borrowers dealing in sensitive commodities to Reserve
Bank of India for its prior approval.

53
25.6 As and when Reserve Bank of India reintroduces restrictions on advances against
the sensitive commodities, guidelines would be issued by the bank, which should be
followed by the branches scrupulously.

26 Emergency/Ad-hoc Limits

Where a borrower seeks additional limits (temporary/permanent) due to a sudden

rise in his business/activity, he should be advised to submit a regular proposal.
Pending granting of such limits, branches may allow additional limit(s), in deserving
cases, by exercising the powers for sanction of "Adhoc/Emergency Credit Limits",
after duly assessing the need for such Ad-hoc Limits, in accordance with the
guidelines given by Head Office from time to time in this regard and contained under
para No: 33 of the Chapter "Processing and Sanction of Credit Proposals" in Volume
– 4 of the Manual of Instructions.

27. Interest

27.1 Interest should be calculated and applied as per the guidelines given under para No:
15 of Part – A of the chapter "General Instructions on Advances and Credit Follow-up
Mechanism” in Volume – 4 of the Manual of Instructions.

27.2 In the case of accounts, which are drawn up-to the full limit/drawing power, borrowers
should be advised sufficiently in advance to remit necessary funds into their accounts
so that the accounts may not become irregular after debiting the interest.

27.3 Where debiting of interest results in overdrawals beyond the limit/drawing power, the
parties should be contacted and requested to regularize the accounts. If a borrower
fails to regularize an account within 7 days from the date of debiting the interest,
penal interest, as per rules should be levied from the date of debiting interest till
regularization of the account.

27.4 Where overdrawals resulting out of debiting interest remain outstanding even after 15
days from the date of debiting the interest, the overdrawals should be regarded as
exercising of Ad-hoc/Emergency Powers and be dealt with as per the guidelines
given in the chapter "Processing and Sanction of Credit Proposals" of Volume – 4 of
the Manual of Instructions.

28. Review/Renewal of Limits

Advances against goods should be subjected to periodical review/renewal as per the

guidelines given under para Nos: 24 to 27 of Part – A of the chapter “General
Instructions on Advances and Credit Follow-up Mechanism” in Volume – 4 of the
Manual of Instructions. Branches should ensure the timely renewal of the credit
facilities in view of the stringent asset classification norms.

29. Follow-up and Supervision

29.1 The following are the areas where frauds are generally perpetrated by unscrupulous
borrowers in respect of advances against goods.

i) Clandestine removal of goods pledged/hypothecated.

ii) Pledging/Hypothecating of spurious goods.

54
 iii) Over-valuing the stocks in the stock Statements submitted to the Bank

iv) Obtaining multiple finance against the same stocks from different banks.

Any laxity in observing the usual safeguards, perfunctory scrutiny of stock state-
ments/bills/invoices and unsatisfactory inspection of stocks etc., will help and even
embolden an unscrupulous borrower to defraud the Bank. As such branches should
carefully adhere to the laid-down systems and procedures. Every effort should be
made by them to detect the weakness and undesirable traits of borrowers. They must
be ever vigilant and initiate suitable and prompt action in case of need, to protect
Bank’s interest.

29.2 All instances of malpractices/irregularities noticed should immediately be reported to

the Controlling authority. The follow up action initiated by the branch should also be
informed to the controlling authority.

29.3 Whenever branches report irregularities in the cash credit accounts showing "NIL” or
"Deficit" drawing power, it is their responsibility to furnish details such as when and
how the irregularity occurred; when it was detected and what follow-up action was
taken. Casual reporting of lack of drawing power will not absolve them of their
responsibility.

29.4 In the case of Open Cash Credit facilities sanctioned to Limited Company Borrowers,
branches should ensure due compliance with the procedure laid down for registration
of the charge with Registrar of Companies. Guidelines given under Para no.12.32 to
12.36 of the chapter "Types of Constituents" in the Manual of Instructions should be
scrupulously followed for such advances.

29.5 The staff handling Advances should make periodical enquiries regarding the financial
position and credit worthiness of the borrowers. Should the financial position of any
borrower appear to be shaky, the same should immediately be reported to the
Branch Manager for necessary follow-up action.

29.6 Other guidelines given under para Nos: 20 to 22 of Part – A of the Chapter "General
Instructions on Advances and Credit Follow up Mechanism” in Volume-4 of the
Manual of Instructions should be followed for advances against goods.

30. Inspection

30.1 Periodical Inspections are considered yet another important tool in supervision and
follow-up of credit allowed under advances against goods.

30.2 Apart from giving latest first hand information of the security charged to the Bank,
periodical inspections enable branches to know about borrower's business/activity,
his compliance with bank norms/credit discipline. They also help branches in
detecting danger signals, incipient sickness etc., in the accounts. Periodical
inspections, if conducted in an intelligent and effective manner, would expose
fraudulent acts of unscrupulous borrowers, thereby enabling the Bank to take timely
action to safeguard its interests.

30.3 General guidelines on "Inspection" given under para No: 23 of Part – A of the chapter
"General Instructions on Advances and Credit Follow up Mechanism" in volume-4 of
in the Manual of Instructions are applicable to periodical inspections conducted in the
context of advances against goods. In addition to those guidelines, guidelines given
in the following paragraphs should also be complied with.

55
30.4 The periodical inspections should be conducted regularly (as per the stipulated
frequency) at irregular intervals. Depending upon the need in individual cases,
inspections may also be conducted at shorter intervals.

30.5 Periodical inspections should be conducted in a planned manner so as to detect

deficiencies, deviations from norms etc., in an effective way and facilitate prompt
corrective action to protect Bank's interests.

30.6 Periodical inspections should invariably include physical verification of the stocks
charged to the Bank, The physical verification of stocks should be systematic and
thorough with regard to all the three vital aspects of the security viz., Quantity,
Quality and Value.

30.7 In the case of pledged stocks, the inspecting staff should see whether the physical
quantity and quality of goods pledged tally with the particulars noted in Bank's
records, Godown Card and the books of accounts, stock registers etc., maintained by
the borrower. The inspecting staff should also closely examine the quality of the
goods and satisfy themselves that the goods are not spoiled due to exposure to wind,
dampness etc., or for any other reason whatsoever. Aspects such as suitability of the
godown, manner of storage, use of Bank pad-locks, securely locking of godowns
from inside and outside, maintenance of godown cards, compliance with other
procedural formalities, should also be examined.

30.8 As the stocks under hypothecation fluctuate from day-to-day, the inspecting staff
should verify the stocks on hand with reference to the stock registers and books of
accounts maintained by the borrower. The inventory systems and procedures
followed by the borrower may also be studied so as to have a clear idea about
movement of stocks, valuation etc.

In the case of advances against warehouse receipts, the details of physical stocks
should be verified with reference to the relative warehouse receipt, Bank records and
also the Stock Registers maintained by the concerned Warehouse Keepers.

30.9 Scrutiny of Books of Accounts of the Borrower:

i) During the course of periodical inspections, the inspecting staff should verify
the stock registers, books of accounts, other documents and other statutory
registers (such as B-Register for essential commodities and D-Register for
excisable items) maintained by the borrower in the ordinary course of his
business and ascertain:

a) the age, composition, quality, quantity and value of the stocks held by
the borrower,

b) the manner in which the stocks have been acquired. (ie., whether on
purchase or on consignment/agency basis),

c) whether the stocks have been paid for,

d) whether the rotation of stocks is satisfactory (if not, reasons to be

ascertained),

e) the total turn-over of the borrower and the extent to which the same is
reflected in Bank account(s), and

56
 f) the performance of the borrower vis-à-vis the estimates / projections /
targets

ii) The inspecting staff should compare the details furnished by the borrower in
the periodical statements with those available in his books of accounts, Stock
Registers and Statutory registers. In case of any discrepancies, suitable
enquiries should be made. The explanation given by the borrower and the
comments of inspecting staff should find place in the Field Inspection Book /
Inspection Register and the relative inspection Report in such cases.

30.10 Where there are large number of items to be checked under OCC accounts, !t may
not be possible to check all the items. In such cases. unless the situation warrants
otherwise, an ABC analysis approach may be followed. As per the ABC analysis
approach, all the items of stocks are to be grouped under A, B, C categories
according to their value. While items that constitute largest percentage of value come
under Category A, items that represent least value should come under Category C. it
is desirable to check items, which come under category A in detail and among the
rest, selection for checking may be made at random.

30.11 Quite often, detailed verification of items such as Stock-in-Process, miscellaneous

stores etc., is difficult. Even in these cases, there are ordinarily a number of items
which can be verified with the borrower's books and the purpose is served if a few of
these items are selected at random for checking in other cases, an intelligent scrutiny
of borrower's books would in itself provide adequate information.

30.12 Great care should be exercised in choosing samples for checking at random. Items
selected for random checking should bear reasonable percentage to total quantity
and should reasonably cover all varieties of goods charged to the Bank. It is not
advisable to confine such random checking to items stored in the top/first rows only.

30.13 In the case of commodities like agricultural produce stored in loose, quantity can be
ascertained through "Volumetric Formula". However, care should be taken to see
that the produce stored is of uniform quality/variety and no extraneous matter is
placed inside to elevate/inflate the size of the produce. Similar care should be
exercised while inspecting liquids stored in tanks/barrels/tins and other containers.

30.14 For the purpose of checking quality, samples may be taken-out. In the case of
manufactured items kept in original packing, details may be checked with the relative
invoices. Where the goods charged to the bank are stored in bags / packages /
packets / other containers, a few of the bags / packages / packets / other containers
may be opened to check the contents. While conducting physical verification of
stocks, guidelines given under para no.19.11 should also be followed to the extent
such guidelines are relevant in individual cases.

30.15 Inspecting staff. should also verify whether

i) the borrower is availing finance only against .goods approved for lending as
per sanction;

ii) the basis of valuation of stocks is as per rules;

iii) the items ineligible for Bank finance [as given under para no.22.2(v)] are
being excluded while calculating the drawing power.

57
 iv) the drawing power is arrived at after applying the stipulated margins and as
per rules.

v) the Bank sign boards displayed are intact;

vi) the insurance cover is in force, proper and adequate and the conditions of the
policy are properly complied with (in case any deviations are found, the same
should immediately be notified to the Insurance Company and necessary
amendments in the policy should be obtained) and

vii) the borrower's general compliance with Bank norms is satisfactory.

30.16 Inspecting staff should make suitable enquiries and satisfy themselves that the
stocks charged to the Bank are not offered as security to any other Bank(s).

30.17 After physical verification of stocks, a stock statement (RF 228 A) in duplicate should
be obtained from the borrower. The stock statement should give details of stock held
as at the time of inspection. The inspecting staff should compare the details furnished
in the stock statement with those noted by them and also with the position as per
borrower's records. In the case of pledged stocks, the details of the stock position
should also be verified with reference to the position as per stock register and
godown card maintained by the branch. The drawing power available on the stocks
should be checked with the outstanding liability in the account. Over drawings, if any,
should immediately be recovered and the account be brought into order under advice
to the controlling authority. All other deficiencies / irregularities noticed should also be
rectified immediately under advice to controlling authority.

In cases where it is not possible to bring the account into order or in extreme cases
of irregularities, the controlling authority may advise branches to recall the advance.
In such cases a Demand Notice in the format given as Annexure No: IV should be
sent to the borrower and to the co-obligant and guarantor under Registered Post with
acknowledgement due.

30.18 In token of inspection, the inspecting staff should initial with date, the godown card
(for pledged stocks) and the stock registers (OCC/KCC). Irregularities noticed, if any,
should also be noted therein.

30.19 Entry regarding periodical inspection should be made in the Field Inspection Book/In-
spection Register. Inspection Report (where applicable) should also be prepared and
submitted to the branch. The fact of verifying the stocks in detail/at random should be
clearly noted in the relative Inspection Report/Inspection Register. Refer to para No:
23 of Part – A of the chapter "General Instructions on Advances and Credit
Monitoring Mechanism" in Volume – 4 of the Manual of Instructions.

30.20 As regards recovery of inspection charges, guidelines given under para no 23.19 in
Part – A of the chapter “General Instructions on Advances and Credit Follow up
Mechanism” in Volume-4 of the Manual of Instructions should be followed.

31. Enforcement of Security

31.1 If a borrower is called upon to repay the advance and if he is unable to do so within a
reasonable time, it may, sometimes, become necessary to sell away the goods
charged to the Bank to adjust the dues. However, such an action is considered an
extreme step and should not be resorted to unless and until all other remedies are
exhausted.

58
31.2 Pledged Goods:

In the case of pledged goods, the Bank as Pledgee can exercise the Right of Sale
after giving a reasonable notice to the borrower i.e., Pledgor.

31.3 Hypothecated Goods:

i) In the case of Hypothecation, the possession of hypothecated goods lies with

the borrower and the Bank holds only an equitable charge on the
hypothecated goods. Consequently obtention of possession of goods is
imperative for realizing the same so as to adjust the dues.

ii) Bank's Composite Loan agreement (Comp No: 40150) contains a clause
whereby the borrower agrees to deliver possession of hypothecated goods
peacefully to the Bank as and when the Bank makes a demand for the same.
In view of this, branches should make a demand, preferably in writing, on the
borrower to obtain possession of the hypothecated goods, in case of need,
after obtaining permission from the controlling authority. As far as possible,
borrowers should be persuaded to comply with the terms of the agreement
and surrender the hypothecated goods peacefully.

iii) While considering obtaining possession of the goods, factors such as the
nature, size and the mobility of the hypothecated goods, availability of proper
storage facilities should be kept in consideration. Branches should endeavor
to tackle the situation tactfully according to the prevailing circumstances in
each case. Wherever it is decided to obtain possession of the hypothecated
goods, the follow-up action should be as swift as possible.

iv) Where the borrower resists/refuses to part with possession of the goods as
per the terms of the Hypothecation Agreement, it is not desirable for the Bank
to obtain possession of the goods forcibly.

v) Locking of the factory/shop/business premises of the borrower in a bid to

obtain possession of the hypothecated goods is irregular and would lead to
legal complications as no such right is available to the Bank either under law
or under the contract. Even in cases, where the factory/shop/business
premises of the borrower are mortgaged to the Bank, in addition to the
hypothecation of goods lying therein, the Bank has no right to lock the factory
/shop/business premises of the borrower and on the other hand, such locking
may lead to counter-claims by the workers, other creditors and the land-lord
of the premises (in case of leased premises). In view of this, in case of
refusal/resistance from the borrower to part with possession of the
hypothecated goods, legal action through courts would have to be initiated for
attaching the hypothecated goods and suitable steps in that direction should
be taken by branches, after obtaining permission to file suit from the
competent Authority.

vi) Possession of hypothecated goods should be obtained in the presence of the

Branch Manager, two other staff members of the Bank (not below the rank of
clerks) and at least two outside witnesses, respectable and known to the
Bank. The borrower should also be requested to be present at the time of
obtaining possession of the hypothecated goods. While taking possession, an
inventory of all the goods should be prepared in triplicate, and got signed by
the witnesses, Bank staff and the borrower. Apart from description, quantity

59
 and quality of the goods taken into possession, the inventory should also
include the date, time and place and .the names of the persons present. The
three copies of the inventory are to be used as under.

1 st Copy - To be retained by the branch on its record.

2nd Copy - To be submitted to the controlling authority.

3rd Copy - To be handed over to the borrower against his

acknowledgement obtained on the first copy of the inventory.

vii) Full details of goods taken into possession should also be recorded in a
separate folio in the Stock Register pertaining to the relative OCC account.
The details noted in the register should be checked and authenticated by the
concerned officer and the Branch Manager, under their full signatures, with
date. Approximate value of the goods should also be noted in the Register.

viii) Immediately after obtaining possession of the goods, a notice should be

served on the borrower and also the co-obligant/guarantor, demanding full
settlement of the dues within the given time (to be stipulated in the notice).
The notice should also state that in case of failure on the part of the borrower
to adjust the dues as demanded, the Bank would dispose of the goods and/or
initiate legal proceedings to recover the dues. The notice should be as per
Annexure No: V and it should sent under Registered Post Acknowledgement
Due.

ix) The goods taken into possession should not be allowed to deteriorate.
Special care should be taken in respect of perishable goods and those whose
utility/value deteriorates rapidly with passage of time as any delay in
disposing of such goods would not only result in losing the security but also
may render the Bank accountable to the borrower for the consequential loss.
The goods should be stored securely under Bank's lock and key or with an
approved warehouse keeper and the insurance cover should be kept in force.

31.4 Sale of Goods:

i) Depending upon the necessity, goods lying under Bank's custody may be
disposed of to recover the dues after giving a reasonable notice to the
borrower.

ii) Even though, the goods can be disposed of in private sale or by public
auction, disposal by way of public auction is generally preferable.

iii) Before resorting to sale, the realizable value of the goods should be
ascertained through local market enquiries. Wherever found necessary,
valuation by competent outside agency/person should be obtained. At this
stage, if the borrower wants to take delivery of stocks, he may do so by
clearing the entire liability under the account together with up-to-date interest
and other bank charges. If the borrower wants part release of stocks,
branches may permit such partial deliveries after collecting the full market
value of the goods (proposed to be released) or the proportionate liability in
the account, as on date, whichever is higher.

iv) Sale of goods requires prior permission of the controlling authority. Branches,
while seeking permission, should submit the following.

60
 a) Brief history of the case.

b) Reasons for the proposed sale.

c) Approximate realizable value,

d) Recommended mode of sale i.e., whether by public auction or by

private sale.

e) Availability of buyers locally.

f) The need, if any, for giving publication of "Auction Notice" in

newspapers. If so, the approximate cost involved and the name of the
newspaper in which the publication is proposed to be given.

g) The need, if any, for calling quotations. (This can be considered where
the value of the goods is very high and the goods are in high
demand).

h) Any other relevant information.

i) Specific recommendations of the Branch Manager.

v) After obtaining permission from the controlling authority, a final notice as per
Annexure No: VI should be served on the borrower and the co-obligant /
guarantor, if any. The auction notice should conform to the proforma given in
Annexure No. VII . The notice should be sent under Registered Post
Acknowledgement Due.

vi) Detailed guidelines are given on the manner of conducting auction under para
No: 34 of the Chapter "Loans Against Gold Ornaments" in this volume of the
Manual of Instructions. Branches should follow those guidelines in the context
of sale of goods also.

vii) In case where the branches have invited tenders/quotations, the same should
be sent to the controlling authority and necessary approval sought before
affecting the sale. The tender approved by the controlling authority may be
accepted.

viii) Depending upon the need, branches may, with prior approval from Head
Office, consider auctioning of goods through outside reputed auctioning
agencies.

ix) Guidelines given on realization and appropriation of sale proceeds, disposal

of the surplus, recovery of the short-fall, if any, in the chapter "Loans Against
Gold Ornaments" in this volume of the Manual of Instructions should be
followed for sale of goods also.

32. Scheme of Financing Fair Price shops in Andhra Pradesh

32.1 A special scheme for Financing Fair Price Shops is in operation in the State of
Andhra Pradesh. The details of the scheme are given in the following paragraphs.

61
32.2 Fair Price Shop Dealers having valid licenses to deal in commodities under Public
Distribution System are eligible to avail Bank finance under the scheme.

32.3 Advances by way of open cash credit facility can be allowed against hypothecation of
Rice, Sugar, Wheat, Palmolive Oil etc., stored in the shops/godowns of the dealers.

32.4 The allotment of shops to various banks operating in a district will be done by the
District Collector at the District Consultative Committee Meeting. Service/Command
Area of the branches of various banks is generally kept in consideration while making
the allotments.

32.5 The approach to lending should be strictly need-based and every proposal should be
subjected to normal scrutiny and appraisal. The number of ration cards entrusted to
the applicant and the turn-over should be kept in consideration while fixing the limit.

32.6 Documents as applicable to open cash credit limits are to be obtained for all
advances allowed under the scheme. Along with the usual documents, every
borrower should furnish an undertaking letter stating therein that in case of his failure
to remit the sale proceeds into his OCC account the dues can be recovered by the
EC COM/Collector directly under relevant powers.

32.7 While allowing advances, branch round stamp should invariably be affixed on the
original licence/authorisation of the Fair Price Shop. The affixing of Bank's stamp in
this manner is intended to prevent the borrower from approaching any other
branch/bank for availing finance against the same stocks. A copy of the licence
/authorisation should also be held on record by the financing branch. The fact of
allowing the credit facility should be intimated to the concerned Mandal Revenue
Officer / Asst. Supply Officer.

32.8 Every dealer availing Bank finance under the scheme, should display a name board
at his shop/godown premises, indicating Bank's interest over the stocks. The board
may read as under

"We Bank with Andhra Bank"

or
"Stocks are under Hypothecation to Andhra Bank"

32.9 Withdrawals from the account may be allowed for the purpose of issuing Demand
Drafts in favour of the Mandal Revenue Officer/Asst. Supply Officer to cover the
value of stocks allotted from time to time.

32.10 Borrowers under the scheme should remit the sale proceeds into their OCC accounts
as frequently as possible, in any case at least once in a week.

32.11 Borrowers should submit abridged stock statements as per guidelines given under
para no.22.3

32.12 The other aspects of the scheme are as under:

i) The Mandal Revenue Officer/Asst. Supply Officer shall furnish to the lending
branch, a copy of the allotment orders of the commodities viz., Rice, Wheat,
Sugar, Palmolive Oil etc. (Branches may make use of the copies of allotment
orders received to assess turn-over/stock position under OCC accounts).

62
 ii) Collectors have been instructed vide D.O. Lr. No. PDS/3/2953/87 dt. 24.8.87
by the Commissioner of Civil Supplies to see that the essential commodities
are released to the Fair Price Shop Dealers only on Demand Drafts issued by
the same bank branch with which the Fair Price Dealer is enjoying OCC limit.

iii) The Mandal Revenue Officer/Asst. Supply Officers have been instructed vide
Lr.No.PDS/3/1251/86 dt.25.11.86 to obtain half-yearly certificates from the
Banks to ensure that the accounts of all the Fair Price Shop Dealers financed
by them are properly being operated.

iv) The Collectors were instructed by the Government vide Div. Civil Supplies
D.O.Lr.No. PDS/3/3045/85 dt.14.3.86 that in all cases where the licence /
authorisation of a Fair Price Shop Dealer, who is availing OCC limit under the
scheme with any Bank, is to be cancelled, the fact may be intimated to the
concerned Bank in advance so that the Bank can take necessary action to
recover the dues, if any.

v) As regards renewal of licences/authorisation of Fair Price Shop Dealers, who

are availing OCC limits under the scheme with any Bank, the renewal shall be
subject to the provisions of Sec.7 (A) of EC Act, which reads as under.

"(10) The holder of this authorization shall regularly repay any loan taken from
any Bank for the purpose of running the Fair Price Shop".

Banks were advised to send the lists of those Fair Price Shop Dealers, who
fail to repay their loans, regularly to the concerned licensing authority viz.,
Asst. Civil Supplies Officer in twin cities of Hyderabad and Secunderabad and
R.D.Os. in other places during the month of March/April every year so that
necessary action can be taken by the concerned licensing authority at the
time of renewal of licences/authorisations of the Dealers.

vi) State Government has issued instructions to the District Collectors vide lr.No.
PDS/32953/87 dt.24.8.87 and 25.8.87 that prompt action should be taken to
help the bankers to recover dues whenever such cases are brought to the
notice of the Collectors.

vii) State Government has issued instructions through memo no. 34343/CS
11/84-1 dt.31.7.84 that amounts recoverable from Fair Price Shop Dealers
may be recovered as arrears of land Revenue under Revenue Recoveries
Act.

viii) Trade Deposits collected will be kept within the same bank (90% of the trade
deposit or 10% of the loan as long term deposit and the balance as short term
deposit). For the purpose of refunding the Trade Deposits, clearance from
financing bank will be insisted upon.

32.13 Inspection

The Revenue Inspector / Dy. Tahsildar of Civil Supplies or Mandal Revenue

Officer/District Supply Officer will be inspecting the Fair Price Shops periodically.
Branches should also conduct inspections as per rules.

32.14 In hard cases, where the recovery is not forthcoming in spite of regular follow-up by
the branches, the matter may be brought to the notice of Mandal Revenue Officer or

63
 Asst. Supply Officer. Further the matter may be referred to the DCC/State level
Bankers Committee (SLBC) who in turn will appraise the position to the A. P. Civil
Supplies Corporation so as to see that proper action is initiated from Govt. side to
help recovery.

33. General Aspects

33.1 Advances may be made against goods stored locally or within a reasonable distance,
but not against goods stored at far off places. If advances are to be made against
goods stored at distant places, prior permission of Head Office should be obtained.
One branch should not enter the area of operation of another branch.

33.2 Apart from the periodical Stock Statements, borrowers enjoying aggregate fund-
based working capital limits of Rs.10 lacs or more should submit Monthly Select
Operational Data (MSOD). Similarly, borrowers enjoying aggregate fund based
working capital limits of Rs.300 lacs or more should submit QIS (Quarterly
Information System) forms. A careful scrutiny of these forms would reveal the actual
performance of the borrowers’ vis-à-vis the projections/estimates given by them at
the time of processing the proposals.

33.3 Sanction of clean advances to borrowers availing advances against goods should
generally be viewed with disfavor as allowing of such advances may result in dilution
of the prescribed margin norms for advances against goods. However, where
granting of clean advances is considered inevitable, care should be taken to see that
the funds provided under clean advances are not utilised to meet margin
requirements under advances against goods and that they are repaid within a short
period.

33.4 It is to be ensured that the borrowers do not misutilise bank credit for speculative
hoarding of goods.

33.5 Business Turnover of borrowers should not be judged merely by referring to the
ledger accounts, since the ledger accounts can provide only financial turnover. The
real indicator for turnover is the movement of goods.

33.6 Frequent seeking of ad-hoc enhancement/enhancement in the limit/modification in

the limits before the expiry of limits sanctioned, should be avoided as far as possible.
Seeking temporary enhancement/modification of limits frequently, results in
additional work at administrative levels and also lead to complacent attitude on the
part of the parties to approach the Bank any number of times for credit facilities
without planning their commitments in advance for a reasonable period. This will also
result in upsetting the credit budget of the Bank as a whole. While entertaining the
limits/renewing the limits, the requirement of the party should be carefully studied so
as to avoid frequent enhancements/modifications in the limits.

33.7 Along with interest, branches should also recover Bank charges, out-of-pocket
expenses etc., from the borrowers.

33.8 Returns, as prescribed by Head Office and controlling authorities, should be

submitted from time to time.

*****

64
 Annexure No: I
(Para No: 24.6)

TRUST LETTER

(To be stamped as an agreement as per State Stamp Laws)

To
Andhra Bank,
_______________________ Branch.

In consideration of your agreeing to deliver to us from time to time, goods or

documents of title to goods charged to your Bank as security under KCC/OCC/Key
Loan No.------------------ for moneys advanced or' to be advanced and other banking
facilities granted or to be granted and interest thereon we undertake and agree jointly
and severally so as to bind ourselves and our respective heirs, executors and
administrators, estates and effects as follows, viz.:

a) to receive and hold the said goods and/or documents and to receive, land,
store and hold the goods covered by such documents and any other goods
delivered by you to us as agents for the Bank until sale and as such agents to
sell the said goods (if .so required by the Bank at such price or prices as the
Bank may approve) and upon sale and as long as money remain due to the
Bank or we are liable to the Bank on any account or in any manner to hold the
sale proceeds for the Bank and immediately upon receipt thereof to pay the
said proceeds to the Bank without any deduction and at the same time
advising the Bank of the account and the transaction in respect of which such
payment is made.

b) to re-lodge the goods delivered for processing/packing etc., within a

reasonable time and to bear all the related expenses/charges.

c) that you shall have full authority to demand and receive from any person or
persons the goods/documents of title to goods or the purchase money of such
goods or any part thereof,

d) . that we undertake at our cost to insure and keep the goods insured for their
full value against such risks and with such insurers as you may require and to
hold the policies on your behalf and if required to assign and deliver the
policies to you and to pay you all sums payable by the insurers under or in
respect of such policies,

e) that all sales shall be for cash and not on credit without your previous consent
in writing.

f) to keep each such transaction separate from any other.

g) that you/your officers/servants and agents shall be at liberty at all times

without notice to inspect the said goods and retake possession or to demand
re-delivery to you (which we hereby undertake on demand to give) and to
remove and sell the same in such manner and upon such terms and
conditions as to price and otherwise as you may in your absolute discretion
think fit and to take whatever steps you may consider expedient for the
protection of your interest therein and enforcement and realisation of your
security.

65
h) that the goods shall be a security to the Bank for the payment at __________
on demand of all money now or at any time hereafter become due to the
Bank from us whether on current account or for money advanced to us or
paid on our behalf in any account whatsoever or in respect of bills, notes or
drafts accepted, paid or discounted, on our behalf and for any our obligation
or liability to the Bank and for interest, commission or any other or lawful
charges or on any other account whatsoever or manner howsoever together
with all costs charges and expenses (the legal costs being between attorney
and client) paid, incurred or suffered by the Bank for enforcement of its
security and realisation of its dues.

Dated at _____________________ this ______________ day of 20 ________.

(Not to be attested) (SIGNATURE OF THE BORROWER)

66
 Annexure No: II
(Para No: 24.7 (viii))

PROFORMA OF ACKNOWLEDGEMENT TO BE OBTAINED FROM THE UNIT

RECEIVING GOODS FOR PROCESSING/PACKING ETC.
ACKNOWLEDGEMENT

1. I/We hereby acknowledge receipt of the goods described in the undergiven

schedule from M/s ______________________________________________
(Mention here the name of the party) for the purpose of processing / packing /
_________________.

2. I/We am/are aware that the above goods are under Pledge/Hypothecation to
Andhra Bank, ________________ (Branch) and I/we have no objection and
shall have no objection whatsoever to Andhra Bank having access to the
goods whenever necessary for the purpose of inspection or otherwise.

3. I/We shall keep the goods separately and distinctly from other goods.

4. I/We shall maintain proper books of record for the goods and make them
available for inspection by Andhra Bank.

5. I/We hereby affirm that Andhra Bank shall have the exclusive charge over the
goods and I/we shall have no lien over the goods for recovery of my/our
godown charges/processing charges or any other dues.

6. I/We note to submit statements giving full details of the stocks as and when
required by Andhra Bank.

7. I/We shall keep the goods safely and securely and adequately insure them
against fire and other risks for their full value.

8. I/We note to deliver back the goods after processing/packing to M/s

______________________________________________________________
in the ordinary course of business within a reasonable time. However, I/we
shall delivery the goods to Andhra Bank or their representatives only in case
a demand to that effect is received from them at any time.

Schedule of Goods

SI No Description Quality Quantity Value Remarks

Place: Signature:

Date: Name:

Address:

67
 Annexure No: III
(Para No:19.13)

Comp No: 41101

ANDHRA BANK
_______________________

GODOWN CERTIFICATE DATE OF SEALING

Loan No. Godown NO.

Ledger No. Lock no. used

Name of the party ***Worth

Full Address

North East South West

Boundaries
of godown

Godown belonging to Municipal no.

Situated at 1. Date of advance

Inside measurements – Length Ft. inch 2. Amount advanced
of stocks(it is - Breadth Ft. inch Rs. @ %p.a.
Loose storage) - Height Ft. inch 3. Insured for Rs.
4. Name of the company
Goods stored 5. Cover note/policy no

Quantity stored of (unit wt.)

Market rate Rs. per value Rs. 6. Agency

Rate advanced Rs. per value Rs. 7. Limit
8. Liability
* Risk (whether pucca or kutcha built godown)
** Remarks

The produce is as stated, and the Bank’s Borrower’s version

lock and seal are placed on the godown

Borrower Officer Sub-Manager Manager

*Kutcha means timer or bamboo frame work, with wall of cadjan matting, split
bamboo or Lath and plaster and roof of tiles, iron or combustible materials.

** 1. Whether any thatched sheds, haystacks of fuel depots are near the godown;
if so, the distances.
2. Whether situated in any factory, rice or ginning: if so, the distance from the
boiler or Press house.
3. Construction of walls and roofing to be given in detail.

*** to be specified in case the advance is to a sundry party.

Note: This certificate is to be prepared in duplicate. 1st copy to be kept with the
branch. 2nd copy to be sent to ZO for their review.

68
 Annexure No: IV
(Para No:30.17)

PROFORMA OF NOTICE

Andhra Bank
____________________Branch

(Under Registered Post with Acknowledgement due)

Letter No: _____________ Date: ____________

____________________

____________________

____________________

NOTICE

Dear Sir/Madam,

Reg: Your (Nature of facility) Account No. ___________ dated _________

For Rs. __________________ against (Nature of security) _________.

We hereby request you to immediately repay the outstanding balance in your above
stated facility together with interest.

We demand repayment of the amount due to the following reason(s)

* The credit facility has fallen due for full repayment on (date) _ and is not
repaid till date.

* The credit facility has fallen due on (date) _ for renewal and there is
no request from you till date for renewal of the facility.

* It is observed that there is deficiency in the drawing power due to insufficiency of

the security for the facility. The value of security as on (date) _ is only
Rs. __________________________.

As per rules, we are levying a penal interest at the rate of _____% p.a. on the
outstanding balance in the facility from (due date / date of irregularity) _.

Manager

Copy to : Coobligant(s) / Guarantor(s)

* strike out whichever is not applicable.

69
 Annexure No: V
(Para No:31.3 (viii))

PROFORMA OF REMINDER NOTICE

Andhra Bank
______________________Branch

(Under Registered Post with Acknowledgement due)

Letter No: _____________ Date: ____________

____________________

____________________

____________________

REMINDER NOTICE

Dear Sir/Madam,

Reg: Your (Nature of facility) Account No. __________ dated ________

For Rs. __________________ against _ (Nature of security) .

Ref:- Our Demand Notice letter No: _____________ dated ______________.

We demanded full repayment of the outstanding balance in your above mentioned

account together with interest thereon vide dour above mentioned Notice.

We still observe that your above referred credit facility is not repaid / repaid fully till
date.

We hereby once again request you to repay forthwith the outstanding balance of Rs.
_________________ (with interest @ ______% p.a., from ___________), failing
which we will be constrained to sell away/realize the hypothecated/pledged movable
properties

* held as security and taken possession by us on __________ as per the terms of

the OCC agreement

* already in our possession by way of pledge as per terms of KCC agreement

and initiate such other action as deemed necessary to recover balance amount of
dues.

Manager
Copy to: Coobligant(s) / Guarantor(s)

* strike out whichever is not applicable.

70
 Annexure No: VI
(Para No:31.4(v))

PROFORMA OF FINAL NOTICE

Andhra Bank
_______________________Branch

(Under Registered Post with Acknowledgement due)

Letter No: _____________ Date: ____________

____________________

____________________

____________________

FINAL NOTICE

Dear Sir/Madam,

Reg: Your ________________________ (Nature of facility) Account No. _____

dated _______ For Rs _________against____________(Nature of Security).

Ref:- (1) Our Demand Notice No: _____________ dated ______________.

(2) Our Reminder Notice No: ____________ dated ______________.

We demanded full repayment of the outstanding balance in your above mentioned

account together with interest thereon vide our above mentioned Notice and
Reminder Notice.

We still observe that your above referred credit facility is not repaid / repaid fully till
date.

You are hereby Finally requested to adjust the outstanding balance of Rs.
_______________ (with interest @ _______ % p.a. from _____________) within 30
days from the date of this letter, i.e., on or before ____________, failing which the
securities held by us on the above account will be auctioned by us on (date) __
at _______ (a.m./p.m.) in the branch premises/at the premises that would be notified
in the auction notice and the sale proceeds thereof will be appropriated towards your
dues. The shortfall, if any, on adjustment of sale proceeds will also be recovered
from you through a decree/Recover Certificate of the competent Court/Tribunal.

Manager

Copy to: Coobligant(s) / Guarantor(s)

71
 Annexure No: VII
(Para No:31.4(v))

Proforma of Auction Notice to be circulated among local Merchants/Members of

public.

Andhra Bank
_________________Branch

(Under Registered Post with Acknowledgement due)

Letter No: _____________ Date: ____________

________________________

________________________

________________________

AUCTION NOTICE

Reg: Your (Nature of facility) Account No. ___________ dated __________

For Rs ____________________against (Nature of security) __ .

Ref:- (1) Our Demand Notice No: ____________ dated ______________.

(2) Our Reminder Notice No: ___________ dated ______________.
(3) Our Final Notice No: _______________ dated _______________.

The sale by public auction of hypothecated/pledged movable properties lying as

security with the Bank in the following advance accounts will be held at the above
branch premises or at the premises _____________________(please give complete
description of the premises) on _________at __________AM/PM. The details of the
hypothecated/ pledged movable properties lying as security proposed to be
auctioned are given below:

Sl. Advance Description of the Approximate Approximate

No. account hypothecated/pledged quantity value
Number movable properties lying (Rs.)
as security
1
2
3
4

The said auction shall be subject to the following terms and conditions.

1. It is on ‘as is where is’ condition.

2. Persons interested in participating auction should pay an amount of Rs.

______ (Rupees _____________________) as security deposit. The security

72
 deposit will be refunded to the unsuccessful bidders at the conclusion of the
auction by the Bank.

3. Bidders may verify the quality, quantity etc., of the hypothecated/pledged

movable properties lying as security before bidding. The bank will not
entertain any claim/complaint regarding quality, quantity of the hypothecated /
pledged movable properties lying as security, once the bid is concluded.

4. The successful bidder should pay the entire bid amount (less security deposit)
atonce and take delivery of the hypothecated/pledged movable properties
lying as security, at his/her absolute risk and responsibility and the said bidder
shall not have any recourse to bank for any reason whatsoever.

5. The bank at its absolute discretion reserves the right to put to auction all or
any of the hypothecated/pledged movable properties lying as security as
considered necessary or stop auction at any time without any prior notice.

The bank has absolute discretion to either reject or accept any bid without assigning
any reason whatsoever.

The bank has right to adjourn/postpone the auction sale at any stage to any future
date at the convenience of the bank without any Notice.

If the successful bidder does not clear the bid amount and/or does anything which
may give rise to a necessity of adjourning/postponing/holding fresh auction sale,
he/she shall be liable to indemnify the bank to the extent of loss, if any, caused on
account of his/her lapse(s) which may come in the way of completing the auction.

Date____________ Manager

Note:- To serve the notice in regional language, a vernacular translation of the

aforesaid notice may be prepared locally.

*****

73