Banking Finance

Again about investment financing of the banks. As practice shows, long-termed financing of programs doesn’t take place spontaneously, but it means analyzing and control of current activities of the enterprises. For satisfaction of such requests, unfortunately, not every enterprise appeared to be ready. There, where all these requests are satisfied, banks become active participants in processing plans of strategy and financial provision of investment activities of the enterprises.

A special attention is required by such direction of the activities of commercial banks, as project financing is, which, to our mind, requires administration and financial support from the government, we mean the condition, that for effective salvation of investment problems it is necessary to create finance-industrial groups, and holding unions, which, in its turn, represents initial form of forming thick financial capital at the market and confluence of bank capital to the industrial one.1 This will give rise to the growth of investment volume in the economy and growth of effectiveness of capital investments. Of course, creation of such unions will be actually supported by commercial banks, but this is interrupted by such condition, that groups created today provide this activity in unregistered form and nobody is interested in their registration. This is supported by incomplete logistic, slow development rates of the institute of private property, interruptions in realization of agrarian reforms, provision of accounting calculations of financial structures in incomplete form and existence of separate statements working opposite to the creation of holding unions in the low about industry. All mentioned above may be solved immediately, by processing special low about investment activity and on the basis of its setting by the parliament in a short period of time.

It must be mentioned, that there are enough conditions for widening financial investments in the economy from the bank side because of the existence of free cash means. It is important, that these financial resources were influxed and to create a system of rational organization of purposeful usage, which must be expressed by processing of the investment policy. Here an important meaning belongs to the investment policy and correct definition of tactics.

What problems are there in front of the banks? It is also to be mentioned, that commercial banks have numbers of problems while realization of their investment activities, which prevent their normal functioning. We mean the banks, working on financing investment projects, in fact, represent only one unit in the system of private institutions. We consider following to be preventing conditions of their activities:

· Existence of marketing center of the investment projects, a coordinating organ in the country scale, which would play a function of regulator in the financial provision of the investment projecting;

· Unacceptability o the information about position of a potential borrower or investment institution;

· Refusal of creation of deposit web;

· Low level of development of the investment funds existed today;

· Absence of state investment bank, total specific organ of financing investment activity and, consequently, spontaneous distribution of the functions of investment banks working abroad under the conditions of market economics among Georgian commercial banks.

It must be also mentioned, that there are many economical factors, which may influence negatively upon realization of investment processed by the banks and nobody can define beforehand nontransiency of expected risk danger of these factors. Herewith, widening of working sphere in the investment activity of commercial banks objectively requires: giving more independence and rights to the commercial banks, growth of effectiveness of long-term investments and growth of incomes, relatively with those received from short-term financial operations, fastening of this process, ll kinds of supports from the side of the government and finally, further statement of trustfulness and firmness of the activities of banking system.

About necessities of providing structure institutional reforms in the country. For guaranteeing firmness of banking activities structure-institutional reforms, min goal of which is preparation for new stage of development of banking field, come to the first place. Necessity of the mentioned reforms is conditioned by the position of financial market of the country. New institutions, as mentioned in the works of D. Nort – the laureate of Nobel Premium, are formed in the case when the society sees the possibility of making profit, which is impossible during active institutional system. Maximal investment activities of banks are possible during many-fielded system o a financial market. This is a result of logical development of competition, as it solves problems of optimal usage of financial resources. Exactly this many-fielded character reduces and stops crisis in the country.

Many-fielded character of the banking system is characteristic to the most part of developed countries (the USA, countries of western Europe, Japan) and also for the countries having transitional economics, which applied for firm economical growth in the last decimal (China, Poland, Brazil and others). Exactly this many fielded banking system gives possibilities for using various types and forms of financial service in economics by credit department.

In this system the state creates various mechanisms of artificial reduction of competition among financial organizations. An evident example of this is separation of credit institutions into commercial and investment-credit institutions in the USA, also reduction of the bans of countries in the sphere of realization of many year credit investments and separation of state bank into separate category.

About development of small-scale business in Georgia. Creation of advantage regime for small-scaled business, in the first place, regulates creation of competition able outer conditions of the investment activity, which must be definitely foreseen in the activities of the country’s banking system. It must also be mentioned, that according to the development and improvement of the economy in the future, perhaps, such activities may not be needed, but under the conditions of transitive economics their importance may not be specially noticed. It is natural, that many-fielded financial sector is formed only under the equal conditions of competition, as there is reason-resulted, reverse-influencing relation. Mentioned relation between many-fielded financial sector and competition is expressed by that it helps creation of advantage regime for the investment activity being in the position of an embryo and its further development.

Briefly about state regulation of the investment process. According to the many-fielded principle of the financial market, the state must work out such a system of regulating investment activity, which guarantees “peaceful” coexistence of various financial institutions notwithstanding their size and specialization. Banks of every category must “act” in their marketing “sphere”, while regulation of banks of different levels from the state is stated according to the rules of regulation. Privately, to our mind, it is important to point out and regulate activity spheres of those banks, which use a capital of governmental organs. Under the conditions of many-fielded system of a financial market competition carries “fair” character and this is why such system is much firmer. Privately, in case of many-fielded system, under the conditions of concrete fight, while financing concrete state programs by forming a system of specialized state banks usage of state resources is possible more effectively. In this case objective usage of lobbing of state resources from the side of commercial banks is not allowed. For example, in Germany realization of state projects of ecological, agrarian, building and other fields are provided by specialized commercial banks. There are specialized credits in the banking system of other developed countries (Japan, Italy, France and so on) too. Such practice significantly reduces danger of incorrect usage of state resources under the conditions of competition fight.

One of the most important factors, which degrade effective development of real sector of the economy, is the irrelevance of the needed financial capital for the regional services. Basic volume of financial resources from the enterprises is accumulated in the center. Such situation is in a way justified for the state, but it is absolutely insoluble in relation with the private companies.

According to the various estimations, regional banks control not more, than 20-30% of inflow of financial resources of the regional enterprise, and this seriously degrades development of the local banks and enterprises. Thus, for solving problems about lack of resources for crediting real sector of a small economics of regional banks, question related with it, must be discussed in relation with outflow of financial resources from the region. Solving of these problems by administrative activities is impossible, processing of appropriate economical activities is needed. We mean the condition, that together with the growth of the share of local budgetary tax income, it is important to define responsibilities of the budgets of municipal creations in the development of regional economics. Thus, financial federalism is that necessary condition, which guarantees, from one side, formation of balanced market of financial service, and, from nother, further development of the investment activities on the basis of appropriate legislative base.

What does a financial federalism bring to the financial market? Creation of equal conditions for the competition under the conditions of financial federalism will naturally lead us to the formation of many-fielded system of the financial market. Such process also gives rise to the creation of thick financial centers on the basis of the existed and newly formed banks. Thus, development of regional banks within the bounds of the conception of banking industry development, gives rise to the growth of financial potential o regional economics. At the modern stage conditions of development of bank branch sphere are being widened more and more. Today banks mostly provide sources of basic financial capital inflow in the way of “region-center”, after transition to the real federalism many-fielded banks transform into the banks providing sources for financial capital outflow among the regions.

It also must be mentioned, that it is important to grow the importance of banking business, which must be expressed by forming town and country credit relations, mutual crediting and insurance societies, and loan-constructing associations. All these must be foreseen in Georgia in the process of banking system development and, accordingly, an adequate logistic must be prepared for advantage conditions for development of small and middle banking businesses, because formation of effective financial system in the regional scale is absolutely impossible. Therewith, if we take into account the fact, that the investment portfolio in the structure of joint assets of Georgian commercial banks did not overcome 1% for the first of January of 1999, and 4% for the first of January of 2005, this speaks for the tendencies of growing portfolio investments.

Attraction of foreign investments. Globalization and internationalization of the world’s industrial relations gives rise to the growth of the role of foreign investments, as financing investment activities.

Essence and types of foreign investments. Foreign investments are hose capital resources, which are taken out of one country and invest abroad in this or that industrial activity, for the purpose of making industrial profit or receiving percents. Foreign investments may be realized in various forms. While analyzing this form we can use distinguished methods of approach for classification of the investments, which men their separation from each-other according to the objects, purposes, terms of investments, forms of property on the investment resources, risks and other signs. Herewith, the necessity of specific of foreign investments defines statement of number of classification features for the investments of this type.

For example, foreign investments may be state, private and combined according to the property forms on the investment resources.

State investments are those resources of state budget, which are directed abroad by decision of the government or inter governmental organizations. These resources may have the face of state resources, credits, grants ot support.

Private (nongovernmental) investments are resources of private investors placed into those objects, which are placed out of the bounds of given country.

They call combined investments joint placement abroad of the resources of the private investors and the government.

According to the character of usage, foreign investments may be industrial and loan.

Industrial investments are direct or indirect ones placed into the business of this or that type for taking some rights for making profit of dividend kind. Loan investments are related with the distribution of resources under the loan condition, for the purpose of receiving percent.

While analyzing foreign investments, apportioning of straight, portfolio and other investments is of a great importance. Movement of foreign investments according to the international currency funds and methodology of the countries’ taxation balances are reflected in this section.

Briefly about legislative situation of the foreign investments in Georgia.  As shown in the chapters above, “investments” conceptually express long-term placement of the capital of solid quantity for the purpose of making profit. According to the Georgian low “about support and guarantees of the investment activities” investment is considered to be the valuable of every property and intellectual kind or the right, which is invested for the purpose of making possible profit and is used in the industrial activities provided on the Georgian territory. It may lean upon as inner (inside country), so outer (foreign) sources.

Here a great attention is paid to the investment surrounding (climate), which means real conditions existed in the country for the investments. It defines intensive attraction or declining foreign capital for the long-term investments. I.e. according to the concrete condition, investment surrounding may be as advantage, so in advantage, which is foreseen by every investor before making concrete step. Fundamental analyzing of the investment climate existed in the country and foreseeing risk factors are the basic goal f every investor.

Thus, it is definitely difficult to say, is present situation in Georgia good or bad. It would be more correct if we say that there are as advantage (stimulating), so preventing conditions in the country.

Foreign investments in Georgia are prevented by constitution, by the low “about support and guarantees of the investment activities” and by two-side agreement about investment encouragement and protection. Today Georgia has signed agreements with more then 23 countries about mutual support and protection and with 111 countries – about avoiding two-side taxation.

Legislative foundations and guarantees of their protection of realization of local and foreign investments in Georgia are defined by the low about guarantees and support of the investment activities, according to which foreign and local investors use equal rights. Privately, while realization of investment and industrial activities rights and guarantees of the foreign investors must not be less then those of the local juridical and physical persons.

According to the same low, physical and juridical person, also international organization, which provide investments in Georgia are considered to be the subject of the investment activity.

It must be mentioned, that after paying taxation and compulsory payments, a foreign investor gains right for unreduced repatriation abroad of the profit received from investments and other cash resources, and this may reduced only on the basis of the low – according to the court decision in case of bankrupting, crime or not fulfillment of civil obligations. Herewith, foreign investor has right to take abroad the property being under his/her property.

Georgian low “about supporting and guarantees of the investment activity”. Positive and negative sides. Georgian low “about supporting and guarantees of the investment activity” foresees as preventing and reductions in the sphere of providing investments, also the guarantee of protecting them, which means untouchable character of the investments and compensation in case of taking away investments within the bounds of the mentioned low. The compensation, which is given to the investor in case of taking investments off him/her, must conform to the real market value of the taken investments for that moment, when the taken off takes place. The compensation must be granted without any hamper and it must concern that loss of the investor from the moment of taking off till paying of the compensation mount.

It must be mentioned, that a new legislative act, which somehow worsens conditions of investments stated by this low, isn’t spread on already realized investments, ten years after its setting. In such case the investor realizes his/her activity according to the actual low until the new one is put down to the action.

A quarrel between foreign investor and state organ, if the method of its decision is not defined by dual agreement, is solved at Georgian court or in the international center of the investment quarrel. In the case, if the quarrel is not discussed in the international center of investment quarrel, the foreign investors have right to apply for the additional institute of the center or any other international arbitrageur organ, which is founded according to the rules set by the arbitrageur and international agreements of the commission of international trade low of the United Nations. Arbitrageur court of international trade palate in Georgia functions from December 11, in 2000.

According to the statistical showing, the most attractive sectors for the foreign investors were production of oil and gas, energetic, telecommunications and food industry according to the statistic showings during last years. Among largest investors there are such companies as Frontera Resources Corporation (USA), which has invested more then 30 million US dollars into Georgian oil production; Metromedia international – 40 million US dollars of investments in telecommunication; Pernod Ricard (France) – with the investments in alcohol production; AES (USA) – investments in distribution and generation of electro power.

By comparing showings we learn, that according to the hydro energetic potential, Georgia significantly overcomes such countries rich in the so-called “White Coal”, as France, Italy, Spain, Sweden, Romania and others. Though practically, less then 15% of real possibilities are used, and this gives large perspectives to the foreign investments in Georgia.

The fact is to be mentioned, that the foreign companies are interested in the process of privatization of state property, which is one of the most important part of the realized economical reform in Georgia. The fact, that foreign capital is invested in more then 100 Georgian companies proves this.

For influxing foreign capital into Georgia a positive surrounding is created by the existence of advantage conditions for development of such reduced fields, as oil production, black and colored metallurgy, separate kinds of mechanical engineering, mountain chemical industry, bottling of fresh and mineral water, production of building and decorating materials, tea, wine, fruit, citrus, wool, tobacco, industry of their refining and others.

Though foreign companies provide capital investments into these fields, for example, in agrarian and food industries, but it is provided in a very little quantity.

Factors of disadvantage surrounding in Georgia. Among those factors, which give rise to the disadvantage climate for influxing foreign investments in Georgia following are to be mentioned:

· Political strain and not quite seldom facts of lobbing business with unacceptable methods by the representatives of executive and legislative government, this takes away the basis of healthy competition as in common, so among the investors;

· Violation of the territorial integrity of the country, ethno conflicts, Not controlling of Abkhazia and South Alania (Smachablo), difficulties with protecting state boards, which spreads widely the door to contraband and prevents growth of risk factors of  influxing of as native, so foreign investments;

· From the beginning of 90s of last year, analogue to the countries of post soviet space, sharp economical, financial, energetic, food, ecological and other crises developed in Georgia for not ordinal conditions, gave rise to the backwardness of our country’s economy for some decimals. It would be enough to say, that a level of whole European product consisted only 36.8% in 1999, compared with 1991. This was the lowest showing in whole post Soviet space. Such destroying of economical functioning, evidently, reduces requests on foreign investments and significantly restricted their influxing;

For the purpose of statement of the level of spreading negative occasions mentioned above and processing appropriate recommendations World Bank and European bank of reconstruction and development provided joint research, where they learned 22 countries having transitional economics. According to these researches they made a conclusion, that a showing of “state obedience” (of corrupting, taking into hands) in these countries consists average 21%. It must be mentioned, that same showing consists 24% in Georgia. What about average level of administrative corruption, it reaches up to 3%, while in Georgia – 4.3%.Iit is natural, that created situation fears foreign investors and prevents influxing of their capital in a large quantity in our countries.

According to the experience of last years, giving state guarantees to the foreign investments is more difficult. Though, if it were easy to achieve, it would not be enough for the foundation, as Georgian state doesn’t stand on the firm positions, for making n investor sure in stability of the country. For comparing let’s discuss investment surrounding of Czech Republic, privately, that part, according to which investment logistic of the country foresees from April 1998 such scheme of advantages, which concerns taxation, custom and those of definite regions, also, grants for creation working places and so on . According to the mentioned analyze following is cleared out, that equal priorities in using advantages are given as to the foreign investors, so to the local ones. At the same time, if we pay attention to the showing of inflow of straight foreign investments into Czech Republic by years, we’ll see, that after the quantity of straight foreign investments had been reduced in 1997 (1300 billion USD) relatively to 1996 (1428 billion USD), in 1998 it was doubled and consisted 2720 billion USD, and in 1999 equaled to 5108 billion USD. One of the stimulating factors of the mentioned progress must be considered involving a system of advantages activated in Czech Republic from 1998.

Unfortunately, there is not a firm system of foreign investments and insurance yet in Georgia, which would significantly help the process of making investment surrounding healthy and inflow of a large amount of investments from abroad.

Factors preventing development of the country economy – significantly wide scales of shadow economics and corruption, so-called distribution of influence spheres by clans, setting of a barrier in this or that spheres of business especially prevent, from one side, development of local business and, from another – influxing of large-scale international investments.

How to use international legislative norms in the Georgian investment activities. Thus, a lot of problems (complex of problems) are formed in the process of attracting and using of foreign investments, and they are regulated by legislative norms.

Whole logistic regulating foreign investments may be grouped in the following way:

1.  special norms;

2.  total civil norms;

3.  norms of international agreement.

To special logistic in the first place belong special logistic and its following acts of quite large quantity.

Civil logistic regulates and conditions relations of foreign capital and enterprises participating with numerous counteragents. We mean various kinds of agreements, questions of representation, researching questions and so on. Thus, civil logistic is used in the case, when regulation of the activities of foreign investors is not provided with the special one, for its tight direction.

Norms of international agreements is the part of the country’s legislative system. International agreement gains special importance during international economical relations. Activation of the mentioned norm is basically spread on attracting and usage of foreign investments; following legislative acts belong to this sphere:

1. International dual agreement of mutual protection and encouragement of the investments. Dual agreements of foreign investments are discussed in this sphere as additional guarantees of the norms foreseen in national lows. Capital exporting countries and their investors consider that protection of foreign investment is more effectively solved in the way of inter-protection and encouragement of investments.

2.  International two-sided agreement for avoiding double taxation. Such agreement usually defines sources of income – profit and property, which is taxed in the country without any reduction. It is being set, which incomes (profit) and property may be taxed in the country – with some reductions and what source of incomes may be set free from taxations;

3. Many-sided conventions. From those international conventions, which regulate relations related with the investments, two are important – Seoul Convention about stating many-sided agencies of protecting investment guaranties (1985) and Washington Convention about solving quarrels (1965).

Involving of many-sided system of investment guarantees was outrun by creation and development of state system of insuring capital export in the developed countries.

Before making decision about placement of sources by the foreign investor, one of the important conditions is – guarantees of security and protection of capital investments in that country, where investments are inflown, the state takes obligations – to guarantee protecting of foreign property, guarantee of rights and interests of the foreign investor, guarantee privacy of realization of investment activity of the country territory. Thus, under the conditions of strict competition, state forms as much liberal regime for foreign investors as possible.

What difficulties are there in Georgia from the point of attracting foreign investments? Difficulties of definite kind are expressed today in the developing countries and, accordingly, in Georgia in the affair of attracting foreign capital and its effective usage. We my name following reasons for this:

· Regulation of the activities of foreign investors is getting difficult with the absence of stabile legislative base;

· Worsening of material position of the most part of the country population gives rise o the growth of social tension;

· There still are criminal and corruption in some sectors of industrial activities;

· Inappropriate level of infrastructure development; also of transport, communications, system of telecommunication, hotel services, roads and so on;

· High level of unsteadiness of total politics, privately, instability of logistic and court system;

· Absence of joint state investment policy in the business of attracting foreign investments;

Herewith, notwithstanding the difficulties named above, the country owns great potential, what may be the subject for interesting foreign investors. Privately:

· Rich and comparatively cheap resort and tourist resources;

· A large inner undeveloped market;

· Richest reserves of mineral and curing waters;

· Comparatively cheap qualified labor  force;

· Quite high staff of marketing development, which can master new technologies of production successfully and fast;

· Absence of serious competition by Georgian producers;

· Current process of privatization and possibilities of foreign investors in it;

· Possibility for making high profit very fast.

Thus, we can make a conclusion that, compared with the countries of Western Europe, notwithstanding large economical backwardness, Georgia can develop total investment activity comparatively faster, with the help of correct and effective usage of native and foreign investments.

 

Lamara Qoqiauri

Real member of the Academy of Economical Sciences of Georgia and New-York Academy of Science, Doctor of Economics, Professor

A Review of Priority Sector Lending by Commercial Banks in India  Introduction To The Study

            Availability of cheap and adequate credit is a boon for the Economic Development of a country.  By providing credit to farmers, industries, traders and businessmen the economic progress can be achieved.  The banking system can influence economic growth by enhancing resources in the direction of national objectives and priorities.

            The banks play a very crucial role in the process of economic development and so the availability of banking infrastructure is considered as one of the prerequisites for rapid and balanced development of the country.  The banks in India have an important responsibility of chanalizing the funds with most important sectors to fulfill the predetermined objectives.  There is a rapid expansion in banking, deposit mobilization and credit development due to which there is change in the scope of banking operations.

Lending To Priority Sectors By Commercial Banks

            The concept of priority sector was evolved in the late sixties in order to focus attention on the need to ensure adequate credit facilities to certain neglected sectors of the economy particularly in the rural areas.  The involvement of banks in priority sector lending has grown considerably with special emphasis on opening branches in un-banked areas.

With a view to ensure flow of credit to the neglected sectors like agriculture and small scale industries, the concept of priority sector lending was evolved and commercial banks were advised to grant at least 40 percent of their total advances to priority sector comprising of agriculture, small scale industries, small road and transport operators, retail trade, small business, professional and self employed persons, education which stood at 14 percent of the total advances in 1969, increased to 46 percent as at the end of 1988.  And the percentage of advances to priority sector was 35 during 1997.

Side by side with the expansion of bank deposits, there has been continued expansion of bank credit reflecting the rapid expansion of industrial and agricultural output.  The banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before, just as bank deposits have expanded, bank credit too has expanded tremendously particularly since July 1969, from about Rs.4,700 crorers in 1970-71 to Rs.7,25,370 crorers during 2002-2003.

In recent years, bank credit has picked up smartly by around 20 to 21 percent per year and many factors have contributed to this:

1. Increase in credit facilities by  commercial banks  results in large reduction in reserve     requirements (CRR/SLR); 2. Release of impounded cash balances under incremental cash reserve ration (ICRR); 3.Sharp increase in food credit mainly due to increased food procurement operation; 4.Increased demand for credit from public undertakings and the large increase in export credit; and  5.Fall in the interest due to RBI’s cheap money policy – rapid expansion in bank lending for industry, for housing, for buying of cars etc,.

In the sphere of bank credit, however, some of the old abuses regarding bank lending are still to be met with.  For instance, bank credit is freely available to well established houses of industry and trade without much difficulty while the tiny and small businessmen really find it difficult to get credit from banks; even now, some powerful but unscrupulous speculators are able to use bank funds to corner shares and acquire control over companies.

            Before 1969 commercial banks had largely neglected agriculture on the ground that rural credit was to be undertaken by cooperative credit societies and banks.  Accordingly, they remained largely indifferent to the credit needs of framers for agricultural operations and for land improvement.  This was regarded as a basic reason for the failure of planning in the agricultural sector and consequently for the failure of general planning.  At the same time, as the banks were owned and controlled by big industrialists before nationalization, small industrial concerns and business units were ignored by banks.

            Soon after nationalization, the commercial banks were asked to be specially concerned with the financing of priority sector of agriculture, small scale industry and business and small transport operators, In course of time, other priority sectors were also added, such as retail trade, professional and self-employed persons, education, housing loans for weaker sections and consumption loans.

The rationale of priority sector lending was one of the causes for nationalization of the top 14 banks in 1969.  However, it was the Working Group on the Priority Sector Lending and the 20 Point Economic Programme chaired by Dr.K.S.Krishnaswami which clearly spelt out the concept:

            The concept of Priority Sector Lending is mainly intended to ensure that assistance from banking system should flows in an increasing manner to those sectors of the economy which though accounting for a significant proportion of the national product have not received adequate support of institutional finance in the past”.

The different segments of the priority sector are as follows:

1.      Agriculture

2.      Small Scale Industries

3.      Small Road and Water Transport Operators

4.      Retail Trade

5.      Small Business

6.      Professional and Self-employed persons

7.      Education

8.      Housing Finance

 

 

 

The Reserve Bank of India issued certain directives to the commercial banks regarding Priority Sector Lending.  Priority Sector Advances should constitute 40 percent of aggregate bank credit.  Out of priority sector advances at least 40 percent should be allocated to agriculture.  Direct advances to the weaker sections in agriculture and allied activities in rural area should form at least 50 percent of the total direct lending to agriculture.  Bank credit to rural artisans village and cottage industries should at least be 12.5 percent of the total advances to small-scale industries.  About 12 percent of bank credit should go to exporters.  The commercial banking system and particularly the public sector banks under the influence of the finance ministry and the ruling party politicians took to priority lending enthusiastically.

The total credit extended by the public sector banks to agriculture, small-scale industry and other priority sectors went up from Rs.440 crores in June, 1969 to Rs.1.71,190 crores in March 2002.  As a result, advances to priority sectors as percentage of total credit increased from 15 percent in June 1969 to 43 percent in March 2002.  The rate of progress was quite rapid soon after nationalization but later progress was more modest.  The relatively slow progress of advances to the priority sectors was due to the fact that the bank officials from top to bottom were not imbued with the new objectives of banking.  At the same time banks were also worried at the poor and unsatisfactory recovery performance of the agricultural and small sectors.

 

Table

PUBLIC SECTOR BANKS’ ADVANCES TO PRIORITY SECTORS:

AMOUNT OUTSTANDING     (Rupees in Crores)

Priority Sector

June 1960

June 1971

June 2002

March 2004

Agriculture

160

340

63,080

90,540

S.S.I

260

440

49,740

65,850

Other Priority Sector

20

130

53,710

1,07,440

Total P.S Advances

440

910

1,71,190

2,63,830

Total bank credit

3,020

4,080

3,96,950

7,64,380

Percentage of Priority Sector Advances to total bank credit

12

25

43

34

 

Source :-  RBI Annual Report 2003 – 04

The priority sector advances include small transport operators, self-employed persons, rural artisans etc., inclusive of funds provided by RRBs by their sponsoring banks, loans to software industry, food and agro-processing sector.  The initial enthusiasm in favor of priority sector lending gradually wanted because of certain concrete problems faced by the banking sector.

In their anxiety to reach the target of 40 percent, the banks went in for indiscriminate lending.  In many cases, there was external pressure too on the banking sector to lend to weaker sections.

As priority sector loans were small accounts, public sector banks were not able to monitor the distribution, follow-up and recovery of tiny loans.  This increased their costs on the one side and aversely affected their profitability, on the other.  The commercial banks were squeezed in both ways.  On the other hand, they were forced to keep a high proportion of their deposits as much as 53.3 to 55 percent in liquid reserves till 1992 under CRR (15%) and SLR provisions (38.5%).  They had, therefore, only about 45 percent of the deposit resources for loans and advances.

            Even out of these limited 45 percent deposit resources, banks were to allocate 40 percent of their available resources, as loan to the priority sector.  What was still worse was that much of the priority sector lending has to be at a low concessional rate of interest.  The result was that the banking sector was unable to satisfy the credit requirements of other sectors.  At the same time, their profitability was squeezed badly and most of the banks incurred huge losses.

The bank lending to priority sector was not uniform in all states.  Actually, it was quite low in many backward states like UP, Bihar, Rajasthan etc.  In order to attain 40 percent of the target for the country as a whole, the banks were stepping up their loans to the priority sector in the more advanced states.  This further worsened the regional imbalance in the country. 

The Narasimhan Committee on the financial system, 1991 was against the continuance of the priority sector lending.  The Committee recommended to redefine the priority sector as follows.  It should be fixed at 10 percent of the aggregate bank credit.  It should be reviewed after a period of three years.  It should be completely phased out gradually.  The government of India did not accept this recommendation.  How ere, the panel of bankers constituted by the Indian Banks’ Association suggested to the Narasimhan Committee on Banking Sector Reforms (1998) that the present priority sector credit limit of 40 percent of the net bank credit should be slashed to 10 percent primarily for three reasons.   Operating expense for small loans was very high due to deployment of large number of field staff.  Success of recovery process was very low in agriculture and small scale sector, and Quality of assets was bad as there were too many risk factors.

The government extending subsidies directly to the banks instead of routing them through intermediaries.

The bankers’ panel also suggested that the interest rate on priority sector lending should be deregulated and the banks be allowed to fix their own rate of interest depending on the cost of funds, risk cost, administration and transaction costs and profit margin.  The panel argued that the identified priority sectors would not be starved of credit as banks would service them according to their expertise by lending at market-related interest rates.

In order to speed up recovery from the priority sector borrowers, the panel suggested that the disbursement target for various branches at the state and district levels should be linked to the percentage of recovery.  The panel has called for setting up a debt recovery tribunal for small loans and adequate legal support for recovery of assets.  Banks should also be empowered to take over assets in case of default.

         Side by side with the expansion of bank deposits, there has been continued expansion of bank credit reflecting the rapid expansion of industrial and agricultural output.  The banks are also meeting the credit requirements of industry, trade and agriculture on a much large scale than before, just as bank deposits have expanded, bank credit too has expanded tremendously particularly sine July 1969, from about Rs.4,700 corers in 1970-71 to 10,92,890 corers during 2004 – 05.An Analysis Of Trends In Priority Sector Lending By Banks In India

            Here, the trends in advances to priority sector and its various segments, bank-group wise achievements in priority sectors, activity-wise credit to various segments and its sub-segments, credit to weaker sections and credit extended under differential rate of interest scheme has been presented.  Further, the performance of banks in lending to priority sector and the targets set for them also have been analyzed.

 

Growth of Priority Sector Advances of Commercial Banks Excluding RRBs.

 

The details relating to growth rates of priority sector advances and bank credit are given in the following table.        

 

Chart

Growth Rate of Outstanding advances to priority sector and Bank credit and share of  PS  advances to Bank Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A segment – wise analysis of credit extended by scheduled commercial banks to various segments of priority sector is presented hereunder.

Credit to Agriculture

 

            The number of accounts covered under agriculture in priority sector declined from 2.03 crore in 1995 to 1.99 crore in 2004.  However, outstanding advances to agriculture had increased substantially during the period from Rs,24,200 crore to Rs.99,302 crore, registering an average annual growth rate of 16.6 per cent.  Out standing advances to agriculture as a percentage of Net Bank Credit had recorded a negligible increase from 11.4 per cent as at the end of 1995 to 11.5 as at the end of 2004.

 

            The average annual growth of direct finance to agriculture was lower at 13.9 per cent during 1995-2004.  The share of direct finance to agriculture in total agricultural credit declined from 88.2 per cent in 1995 to 71.3 per cent in 2004.  Direct finance to agriculture as a percentage of NBC had also declined from 10.1 per cent to 8.2 per cent during  the above period.

          The share of credit for distribution of fertilizers and other inputs which was at 2.2 per cent in 1995 increased to 4.2 per cent in 2004.  The shares of other types of indirect finance to agriculture to total agriculture credit increased significantly from 4.8 per cent to 21.0 per cent during the said period.  As a percentage of NBC, other types of indirect finance to agriculture increased from 0.6 per cent to 2.4 per cent.

            Indirect credit to agriculture provided by banks, comprising of finance for distribution of fertilizers and other inputs and other types of indirect finance, grew at a rate of 30.8 per cent during the corresponding period[1].

 

It would be observed that the share of indirect credit to agriculture in total agriculture credit increased from 11.8 per cent in March 1995 to 28.7 per cent in March 2004 despite the fact that indirect agriculture advances are reckoned only to the extent of 4.5 per cent while measuring the performance of banks in achieving the target of 18 per cent of NBC in agriculture.  As a percentage of NBC, indirect credit to agriculture increased from 1.4 per cent to 3.3 percent during the above said period.

Chart

Percentage Share of Constituents of Agriculture Credit to

Total Agricultural Credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit to Small-Scale Industries, Setting up of Industrial Estates and Small Road and Water Transport Operators.

Such loans as a percentage of NBC were at a negligible level.

The average annual growth rate of advances to Road and Water Transport operators was at 12.7 per cent during 1995-2004 with per account outstanding amount at Rs.0.41 lakhs in 1995 visa-vis Rs.1.40 lakh in 2004 Loans to Road and Water Transport Operators as a percentage of NBC declined marginally from 1.4 per cent to 1.0 per cent.  The significant feature observed in this regard is the decline in the number of accounts in SSI and other sub sectors over the period, while the amount outstanding increased.  This shows that enhanced credit limits were granted to such units to meet their requirements.

 

Bank Group –wise Credit to Priority Sector

Public Sector Banks (PSBs)

 

The outstanding priority sector advances of PSBs increased by 21 percent in 2003-04 as against an increase of 18.6 per cent during 2002-03 .  During the period 1995-2004, the average annual growth rate of advances to priority sector by public sector banks was 17.6 per cent as compared to average growth rate of NBC at 16.7 per cent in the same period.  The higher growth in priority sector advances of PSBs during the above period was primarily due to 28.8 per cent average growth rate recorded by other priority sectors which compensated for the low average growth rate in credit to SSI (9.3 per cent) and direct agriculture credit (15.7 per cent).  The share of priority sector advances in NBC of PSBs increased to 44 per cent in 2003-04 from 42.5 per cent in 2002-03.  The growth in priority sector advances of PSBs was fuelled by the surge in the loans and advances to various other priority sectors and robust growth of credit to the agriculture sector (Chart 3).  Advances to agriculture constituted 15.4 per cent of NBC of PSBs as on the last reporting Friday of March 2003.  The share of advances to other priority sectors in NBC of PSBs increased to 17.0 percent in 2003-04 from 15 per cent in 2002-03.  The number of accounts covered under various major segments of priority sector declined over the period.

Table

PRIORITY SECTOR ADVANCES        

(Rupees in crores)

Month and Year

Public Sector Banks

Private Sector Banks

Foreign Banks

March 1998

91,319

(41.9)

11,614

(40.9)

6,940

(34.3)

March 1999

1,07,200

(43.5)

14,295

(41.3)

8,270

(37.1)

March 2000

1,27,807

(43.6)

18,348

(39.4)

9,699

(34.5)

March 2001

1,46,546

(43.0)

21,550

(38.1)

11,835

(34.1)

March 2002

1,71,185

(43.1)

21,530

(38.8)

13,414

(34.2)

 

Source: Report on currency and Finance, 2002.

 

Note: 1. Figure  in brackets are percentage shares in net bank credit in the  respective  groups.

          2. The target for aggregate advances to the priority sector is 40 per cent of the net  bank credit for domestic banks and 32    

              percent of net bank credit  for the foreign  banks.

Chart

Share of Advances of Priority Sector

Advances and its Segments (Public Sector Banks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Sector Banks

            Private sector banks’ lending to priority sector as a percentage of their NBC has been showing an increasing trend.  The share of their advances to priority sector in NBC had increased from 44.4 per cent in 2002-03 to 47.4 percent in 2003-04.  During the period from 1997 to 2004, average annual growth rate of priority sector advances of private sector banks was 29.5 per cent which was mainly contributed by the growth in lending to other priority sectors (44.7 per cent) and agriculture (37.4 per cent).  In comparison, the average annual growth rate for advances to SSI was at 8.4 per cent.  In absolute terms, credit to agriculture, SSI and other priority sectors had increased.

The share of credit to other priority sector category was the highest at 23.1 per cent of NBC, followed by advances to agriculture and SSI.  The lending of private sector banks to agriculture sector had increased to 12.3 per cent of their net bank credit in 2003-04, higher by 1.1 per cent over that in 2002-03.  The respective shares of credit to agriculture, SSI and other priority sectors in total priority sector advances of private sector banks over the period from 1996 to 2004 are presented in chart I.4.

 

 Chart

Share of Advances to Priority Sector and its Segments

(Private Sector Banks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances to Weaker Sections

        As against the target of 10 per cent of NBC, achievement in purveying credit to weaker sections by PSBs was to the extent of around 7 per cent during 2001 to 2004.  In the case of private sector banks, the achievement, which varied between 1.70 per cent in the year 2001 and 1.34 per cent in 2004, had fallen short of the target considerably.

Table

 

Advances to Weaker Sections

 

 

As on Last Friday of March

Public Sector Banks

Private Sector Banks

 

Amount

(Rs. Crore)

% of NBC

% NPA

Amount (Rs. Crore)

% of NBC

% NPA

1

2

3

4

5

6

7

2001

24805.33

7.28

22.51

958.94

1.70

19.72

2002

28974.90

7.30

21.71

1142.06

1.82

10.30

2003

32303.75

6.76

19.39

1223.40

1.48

16.78

2004

41588.64

7.44

18.90

1495.49

1.34

12.15

 

Source: Report on Trend and Progress of Banking In India

 

Advances Under Differential Rate of Interest (DRI) Scheme

 

       The scheduled commercial banks are  required to extend advance under DRI Scheme to the weakest of the weaker sections at a rate of interest of 4.0 per cent.  A target of 1.00 per cent of outstanding amount of bank credit as at the end of Matrch of previous year has been fixed under DRI scheme.  As against this, the public sector banks had attained a level of only 0.07 per cent as at the end the year 2004.  The achievement, in percentage terms, had been declining persistently over the period.   The number of beneficiaries and outstanding amount of loans have also declined over the years.  However, the amount outstanding increased marginally in 2004.

 

 

 

 

 

 

 

 

Table

Advances of Public Sector Banks under DRI Scheme

As on Last Friday of March

No.of Accounts in Lakhs

Amounts outstanding (Rs. In Crore)

Total Bank Credit (Rs. In Crore)

DRI Advances as a % of Total Bank Credit

1

2

3

4

5

1995

19.47

683

138648

0.49

1996

15.52

678

165377

0.41

1997

14.30

655

193963

0.34

1998

9.05

544

197186

0.28

1999

7.29

485

233852

0.21

2000

5.90

422

265554

0.16

2001

5.14

358

316446

0.11

2002

NA

NA

341292

NA

2003

3.70

299

396953

0.08

2004

3.68

315

477899

0.07

 

Source: Statistical Tables Relating to Banks in India

 

 

 

Bank –wise Frequency Distribution of Targets and Achievements

 

        The frequency distribution in various ranges of achieving the target for priority sector advances as a percentage to NBC as on March 2004 is given in the following table.  Out of 27 public sector banks, only nine banks achieved the target of 18 per cent relating to credit to agriculture.  Among private sector banks, only 11 out of 30 banks had attained the target.  As regards the achievement of target in respect of credit to weaker section (10 per cent) seven public sector banks achieved the target as compared to 4 banks in the private sector.

 

 

 

 

 

 

 

 

 

 

 

Table 1.5

Frequency Distribution of lending of Indian Scheduled

Commercial Banks to Agriculture, Weaker Sections and

Priority Sector Advances as a Percentage to NBC

Agriculture as % NBC – 2004

 

<12%

12-15%

15-18%

>18

Total Banks

% NBC

Public sector Banks

3

6

9

9

27

 

% Share of Agriculture Credit

4.2

36.4

26.2

33.3

100

15.41

Private Sector Banks

15

3

1

11

30

 

% Share of Agriculture Credit

16.2

5.2

1.3

77.1

100

15.81

 

Weaker Sections as % NBC

 

<5%

5-7%

7-10%

>10

Total Banks

%NBC

Public sector Banks

8

7

5

7

27

 

% Share of Weaker Sections

9.6

16.9

41.4

30.1

100

7.44

Private Sector Banks

25

0

1

4

30

 

% Share of Weaker Sections

50.3

0

1401

35.6

100

1.34

 

Priority Sector Advances

 

<40%

40-44%

44-48%

>48

Total Banks

%NBC

Public Sector Banks

2

9

10

6

27

 

% Share of Priority Sector

22.3

24.5

29.2

24

100

43.94

Private Sector Banks

12

2

2

14

30

 

% Share of Priority Sector

10.7

8.8

8.3

72.1

100

47.35

 

Source: Statistical Tables Relating to Banks in India

 

 

 

[1]. M.Narasimhan, “Working Group on Rural Banks”, RBI, Mumbai, pp 117-118     

 

Although recent discussions using the colorful terms “Dead Banks Walking” and “Zombie Banks” contain some humor and have entertainment value, there is also a more serious and practical aspect. For most business finance funding situations, it is not likely to be in the best interest of prudent business owners to be involved with a bank which can be accurately described as a zombie bank or dead bank walking. The impact for commercial financing can be extensive because the descriptions increasingly appear to apply to a significant number of banks. If they are dealing with a dead bank walking, it should be helpful for commercial borrowers to discover their practical options for eliminating zombie banks from their working capital loan review process. For any business owner currently needing a commercial loan or working capital financing, the concept of “Dead Banks Walking” is likely to be an essential part of their decision. With a similar reference point of banks which have already gone broke, this description has been used by several sources recently. This critical but apparently accurate assessment is largely derived from a straightforward net worth approach. Such an analysis recognizes that many banks have substantial assets which are either worthless or at least worth well below the values reflected on their books, with the resulting real current value being less than the current debts of many banks. Based on the evaluation of many observers who have realistically reviewed current asset values, most of the largest banks in the United States been shown to be worth even less than Lehman Brothers (which is already in bankruptcy). Many banks have compounded their public relations nightmare by demonstrating very little common sense in how they make commercial loans and spend money. If a bank is already worthless, it certainly calls into question how businesses and commercial borrowers will benefit by the government throwing money at these “zombie banks” in the first place. The failure of most banks to increase their commercial lending to business owners after receiving government bailout funds has fueled the controversy involving bank survival. Banks who have received bailout funds appear to be determined to hoard the money in order to preserve their own solvency rather than providing commercial finance funding to commercial borrowers. This raises several questions. The emerging consensus is that giving otherwise bankrupt companies (the dead banks walking) more cash does little more than cover the internal operating expenses for the zombie banks. First, should we really believe that a bank should be “saved” simply because it is so large? There appears to be a growing majority of the public which would suggest that these banks have already lost too much good faith to ever recover in response to some arguments that the largest banks cannot be taken over even if they are already insolvent. Second, is there a better way to solve the problem than giving insolvent banks more money? George Soros and others have recently described in detail how other banking systems have successfully handled mortgage financing. Even though residential and commercial real estate loans are thought to be at the heart of the current crisis, there is no real effort underway to revise this approach. Third, how long will it take the government to solve the problem and can business owners afford to wait? Although waiting a few weeks or even several months might be viable for a practical solution which results in needed commercial loans, the current logjam impacting business finance funding shows little evidence of subsiding that quickly. Prudent commercial borrowers should seek alternative sources for essential working capital financing such as business cash advances. In case it is not obvious from the discussion above, dead banks walking and zombie banks can be avoided when seeking new commercial financing.

There have been some disappointing and unexpected actions taken by commercial lenders in response to recent financial events. This changing environment for business finance funding is likely to produce several new problems for commercial borrowers. To assist small business owners in their efforts to keep up with these imposing challenges, The Working Capital Journal is one of several commercial financing information resources which should be reviewed regularly. The working capital finance industry has primarily been operating on a regional and local basis for many years. In response to cost-cutting that has permeated many industries, there has been a consolidation that has resulted in fewer effective commercial lenders throughout the United States. Most business owners have been understandably confused about what this might mean for the future of their commercial financing efforts, especially because this has happened in a relatively short period of time. Of course, for some time there have been ongoing complex problems for commercial borrowers to avoid when seeking commercial loans. But what has produced a new set of business finance funding problems is that we appear to be entering a period which will be characterized by even more uncertainties in the economy. Previous rules and standards for commercial financing and working capital finance are likely to increasingly change quickly, with little advance notice by business lenders. Business owners should make an extended effort to understand what is happening and what to do about it due to this realization that substantial changes are likely throughout the United States in the near future for commercial finance funding. At the forefront of these efforts should be a review of what actions commercial lenders have already taken in recent months. The Working Capital Journal is one prominent example of a free public resource that will facilitate a better understanding of the responses by business lenders to recent economic circumstances. By publicizing actions taken by commercial lenders, this will contribute to these two goals, both of which are likely to be helpful to typical business owners: (1) To highlight controversial bank-lender tactics with a view toward reducing or eliminating questionable lending practices. (2) To help business owners prepare for commercial finance funding changes. Sources that currently include The Working Capital Journal are actively encouraging business owners to describe and report their financing experiences so that they can be shared with a broader audience to assist in this effort. Some of the most significant commercial financing changes reported so far by commercial borrowers involve working capital loans, commercial construction financing and credit card financing. A notable situation of concern is that predatory lending practices by credit card issuers have been reported by many business owners. Some specific businesses such as restaurants are having an especially difficult time in surviving recently because they have been excluded from obtaining any new business financing by many banks. One of the few recent bright spots in business finance funding, as noted in The Working Capital Journal, has been the continuing ability of business owners to obtain working capital quickly by business cash advance programs. For most businesses accepting credit cards, this commercial financing approach should be actively considered. Business cash advances are literally saving the day for many small business owners because most banks appear to be doing a terrible job of providing commercial loans and other working capital finance help in the midst of recent financial and economic uncertainties. For example, as noted above, restaurants are virtually unable to currently obtain commercial finance funding from most banks. However, if a restaurant accepts credit cards in their business operations, they are likely to be able to obtain needed cash from merchant cash advances and credit card factoring.

The U.S. Export-Import Bank is committed to providing financing for American exports to many countries in Africa. There are substantial opportunities for American companies to sell to the South African countries that in 2006 purchased over 12 Billion dollars of U.S. exports.

The market opportunities in Africa are ginormous. With a total market size of over 400 billion dollars and a population of over 680 million people, the continent is hungry for food, housing, energy, transportation products, health products and services, and sanitation facilities.

In the health care market there is an enormous need for quality pharmaceuticals. Fake drugs are a problem in Africa. Similarly, quality health care services are lacking. The large African health market is in need of companies to distribute medicines and other health related consumer products and essential prevention and treatment products.

In the telecommunications market there is a great need for increased mobile phone services. There is also a need for pre-paid test messaging services; eventually, Africa will catch up to the internet/computer revolution.

The water market presents new opportunities as cities grow faster than the water infrastructure can expand. There is an urgent need for devices to abate pollution caused by industrialization, agricultural runoff and lack of sanitation services. In these areas, high tech inventions that are relatively inexpensive to sanitize water will create social and health benefits for millions of people.

In national energy markets Africa is a century behind the times. Kerosene is the main fuel source for lighting. Firewood is the primary fuel source for cooking in urban and rural markets. There is a tremendous need for solar powered LED lighting, high tech home cook stoves and alternative cleantech energy sources.

The Export-Import Bank of the United States is the official export credit agency of the United States. Their mission is to assist in financing the export of U.S. goods and services to international markets. They provide working capital guarantees to U.S. companies in the form of pre-export financing. They also provide export credit insurance and loan guarantees to facilitate transactions. They also provide buyer financing. A select number of U.S Banks partner with the Ex-Im Bank to provide working capital loans, accounts receivable financing, bridge loans and long term financing. For more information regarding the Ex-Im Bank visit their website.

The bottom line: With a willing U.S. seller and a credit-worthy African buyer, the United States Export-Import Bank is anxious to help facilitate exports to the vast Sub-Saharan African marketplace.

Copyright © 2007 Gregg Financial Services

www.greggfinancialservices.com

Despite efforts by the federal government and commercial lenders to suggest that there is ample business funding, confusion seems to be increasing about small business loans and working capital loans. As a result, the actual availability of basic business finance services such as commercial real estate financing and business cash advance programs is not clear to many commercial borrowers.

It seems apparent that there have been many reports suggesting that normal commercial finance channels are either frozen or extremely sluggish. After reviewing other funding sources, it is possible to find more commercial loan financing options than such reports might suggest. Uncertainties in credit and financial markets have produced misleading and often conflicting information about commercial financing availability. For most business owners, it is probably not clear if business finance funding is realistically available to them or not.

In spite of some admittedly bad news, there continue to be to reliable funding sources for commercial real estate loans, working capital loans and especially for business cash advances. At the same time, the current negative economic conditions will prove to be difficult for most businesses. Commercial borrowers should expect that extra efforts will be required to successfully arrange commercial financing. An especially harsh reality for business financing is that many banks have discontinued all or most of their business lending activities, often with very little advance notice.

To use an example, commercial finance reports might not accurately reflect that some specialized kinds of commercial financing have been disproportionately disrupted. Commercial borrowers might be unnecessarily confused by reports that do not refer to all commercial loan situations but rather primarily apply to a very specialized form of business financing. To illustrate with a key example, commercial construction loans are currently in short supply by most accounts. Such specialized business loans are not as easily available as they were just a few months ago, and a more accurate accounting would reflect that the number of commercial lenders currently active in construction financing has shrunk dramatically. At the same time, most commercial real estate loans without new construction have not been as severely impacted as funding requests which do involve construction financing.

Several publications have reported that most new business financing requests are on hold or have simply been rejected due to recent financial market uncertainties, and this is another example of how business finance funding reports might confuse small business owners. While the sources for this information might have been honestly told by one or more lending institutions that they are in fact deferring new commercial loan funding, this does not mean that is the case for the entire country. If the discussion involved automobile sales, it would be comparable to concluding that nobody is selling cars anywhere after learning that several major dealers and two manufacturers announced that they were going out of business due to lack of adequate sales. Just because one or more banks fail or stop making business loans, it does not mean that there are not commercial loans available from other sources.

Because the banking industry has been involved in financial disruptions of epic proportions, commercial borrowers should maintain a cautious perspective in determining how to obtain and refinance small business loans. Many banks are sounding and acting like they have been through the equivalent of a train wreck. In such a natural disaster, it might not be prudent for business owners to seek the advice of banks which effectively caused the train to derail in the first place.

Despite reports about limited availability of business financing, some commercial lending activities such as business cash advance programs are actually as active as they have ever been. In the current commercial funding crisis, small business owners should seek a commercial loans expert for a realistic assessment and candid discussion about working capital loans and business finance programs.

This business financing strategy article will describe the importance of avoiding “problem commercial lenders”. The article will NOT name specific lenders to avoid, but key examples will be provided to illustrate why prudent commercial borrowers should be prepared to avoid a wide variety of existing commercial lenders in their search for viable business financing strategies.

I have been advising business owners for over 25 years, and I have encountered many business financing situations which have involved commercial lenders that I would not recommend as a result. These problematic situations have especially involved commercial mortgage loans, business cash advance situations and unsecured working capital loans. As a direct result of these experiences and daily conversations with other commercial loan professionals, I do in fact believe that there are a number of commercial lenders that should be avoided. This conclusion is typically based on more than one negative experience or an obvious pattern of lending abuses.

I have published many commercial loan articles which are designed to assist commercial borrowers in avoiding business loan problems. One of the most serious business financing situations is a commercial lender that causes business loan problems for their commercial borrowers on a recurring basis. It is particularly this type of commercial lender which prudent commercial borrowers should be prepared to avoid unless viable alternative business financing options do not realistically exist.

Here are a few examples of why certain commercial lenders should be avoided.

BUSINESS FINANCING STRATEGIES AND COMMERCIAL LENDERS TO AVOID EXAMPLE NUMBER 1 – Yes or No?

I have published an article which discusses the tendency of many banks to say “YES” when they mean “NO”. Such banks will typically attach onerous business financing conditions to commercial loans instead of simply declining the loan. Business owners should explore other commercial loan alternatives before accepting business financing terms that put them at a competitive disadvantage.

BUSINESS FINANCING STRATEGIES AND COMMERCIAL LENDERS TO AVOID EXAMPLE NUMBER 2 – The Commercial Appraisal Process

For commercial real estate loans, commercial appraisals are an unavoidable part of the commercial loan underwriting process. The commercial appraisal process is lengthy and expensive, so avoiding commercial lenders which have displayed a pattern of problems and abuses in this area will benefit the commercial borrower by saving them both time and money.

BUSINESS FINANCING STRATEGIES AND COMMERCIAL LENDERS TO AVOID EXAMPLE NUMBER 3 – Think Outside the Bank

In smaller metropolitan markets, it is not unusual for a dominant commercial lender to impose harsher commercial loan terms than would typically be seen in a more competitive commercial financing market. Such commercial lenders routinely take advantage of a relative lack of other commercial lenders in their local market. An appropriate response by commercial borrowers is to seek out non-bank business financing options. It is neither necessary nor wise for commercial borrowers to depend only upon local traditional banks for working capital and business cash advance solutions. For most business financing situations, a non-local and non-bank commercial lender is likely to provide improved commercial financing terms because they are accustomed to competing aggressively with other commercial lenders.

BUSINESS FINANCING STRATEGIES AND COMMERCIAL LENDERS TO AVOID EXAMPLE NUMBER 4 – Meaningless Pre-approvals

Commercial borrowers frequently want a commercial lender to approve their commercial loan at the earliest possible point. The assumed benefit to this early business loan approval is that it will enable the commercial borrower to make other business plans which depend on the business financing being finalized.

Because an ethical commercial lender will treat any form of an approval very seriously, commercial borrowers should expect that a meaningful version of such an approval will not be realistically possible in just two or three days. Nevertheless there are commercial lenders who provide their own special version of a pre-approval within just a few days of receiving preliminary application information. Because this abbreviated approach to pre-approvals almost always produces unexpected surprises for the commercial borrower as the business financing process goes forward, commercial borrowers need to be extremely wary of any commercial lenders that take this approach.

Why do some commercial lenders provide such meaningless pre-approvals? There are two likely reasons. (1) To motivate the commercial borrower to stop considering other potential commercial lenders. (2) To provide a pre-approval that is similar to a structure prevalent with residential mortgage loans. Since many business loans are arranged by residential mortgage brokers who are frequently unfamiliar with common business financing procedures, this reason will be especially applicable when dealing with commercial lenders that specialize in dealing with residential mortgage brokers.

Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.