7 Banking Terms All Corporate Lawyers In India Must Know
General 395

7 Banking Terms All Corporate Lawyers In India Must Know

7 Banking Terms All Corporate Lawyers In India Must Know

Corporates often borrow money to finance their business. They borrow money from banks and other financial institutions. Many times they get involved in disputes with these institutions. Banks, on the other hand, have their own problems. It is, therefore, necessary for the corporate lawyers representing their clients, both corporates and various financial institutions, to be aware of the major banking terms. Some major banking terms that all best corporate law firms in India should know are discussed below.

1.Non-Performing Assets (NPA)

Banks give loans to individuals and companies. The loan is supposed to be returned in time bound manner. If the loan is not returned to the banks on time, it is categorized as non-performing asset. It is so called because the funds that banks provide to the borrowers are the banks’ assets. If the principal or the interest is not returned by the borrower it is termed as non-performing asset. It is called non-performing as it stops to generate income for the banks. The benchmark to declare a loan as non-performing is when a loan or the interest is not paid back for more than 90 days.

2.Return on Assets (ROA)

Return on asset is a phrase used to indicate the performance of companies and banks. It is a profitability ratio that measures the efficiency of a company, including banks. It is a profitability ratio that measures how efficiently a bank uses its assets to generate income. It is measured by dividing the net income by the total asset of a company. A higher ROA indicates better efficiency.

It is basically a performance indicator of banks. ROA is profitability ratio and shows how profitable a company is. ROA = net income/average total assets. It indicates how well a bank utilizes its assets.

3.External Commercial Borrowing or ECB

External commercial borrowings or ECBs are funds borrowed from foreign financial institutions. In order to attract more capital inflows the RBI has considerably eased the international borrowing rules. Companies are now allowed to borrow up to $750 million per year from foreign institutions. All business organizations that are qualified to get foreign investment can use the external commercial borrowing route to borrow money. The current system of two classification of Track 1 (3-5 years tenor) and track 2 (up to ten years tenor) have been merged into one to form the foreign currency denominated ECB.

4.Strategic Debt Restructuring (SDR)

Strategic Debt Restructuring is a process that allows banks to recover their money from defaulting companies. This tool allows banks to recover their money from companies that fail to repay their loans on time. The mechanism allows the lenders, either singly or in consortium, to convert their debt into equity and take a stake in the company. After the introduction of the of SDR scheme almost all previous restructuring schemes have been abolished. The Joint Lenders Forum has been replaced by consortium of lenders to resolve potential bad debt. The consortium of lenders can hold their stake in the ailing companies for a maximum period of 18 months, after which they have to find a new player to take their stake in the company. Strategic Debt Restructuring is a complex process, and top corporate law firms in India  and Mergers and acquisitions lawyers in India are often involved in the entire process.

5.Prompt Corrective Action (PCA)

The prompt corrective action (PCA) is a corrective measure introduced by the RBI to make sure that weak and troubled banks don’t fail. It is a mechanism to intervene early so that investors’ money is not lost. The RBI constantly monitors the performance of banks, and immediately intervenes if it notices any wrongdoing or weakness in a bank. It has some trigger points to assess, monitor, control and take necessary corrective actions on banks which are troubled and weak. The RBI intervenes early whenever it feels a bank is engaging in financial mismanagement, and is troubled, to restore the financial health of the bank by taking measures to avoid capital erosion. These measures may include imposing certain restrictions, such as restrictions on accepting fresh deposits, borrowing from the inter-bank market, etc.

PCA is triggered when banks fall to fulfil any of the three parameters – capital to risk-weighted ratio; non-performing assets; and return on assets.

6.Bridge Loans

Bridge loans are meant to fill the gap between the short term funds requirement and long term loans. Generally these loans are granted for period of less than 12 months. This are secured loans and are backed by some security, either equity or debentures. There is an interesting condition attached to availing bridge loan, that is, if the company raises funds from the capital, the bridge loan automatically gets repaid.

7.Revolving Credit

In revolving credit, the borrower is provided a credit limit which can be used whenever required. Companies that have cash flow fluctuation generally avail of this facility. The borrower is allowed to use an amount up to the credit limit sanctioned. Once the borrower repays the used amount, the original limit is restored. However, the interest rate is quite high, but the borrower has to pay interest only on the amount actually used.

The above mentioned banking terms are only few of the important banking terms all corporate lawyers in India or lawyers in India must know. There are few other terms that corporate law firms in India should be aware of to improve their efficiency.

You must be logged in to post a comment Login

Leave a Reply

General 395

Amy Jones is the expert lawyer at Ahlawat & Associates-top law firms for setting up business in India.