11 Banking Terms All Corporate Lawyers In India Must Know

Given the nature and scope of financing their businesses, corporates often get involved in financial disputes involving banks and other financial institutions. Banks, on the other hand, have their own issues. In such situations, all top corporate lawyers in India representing them, both borrowers and lenders, should be well versed with all the important banking terms. Discussed below are some of the most important terms that are specific to the banking sector.

Return on Assets or ROA

ROA is a profitability ratio that is used to gauze the performance of companies. It is a performance indicator which measures a company’s profit in terms of its total assets. It gives an indication of how well a company utilizes its assets to generate income. It gives all stake holders an idea about the efficiency of a company’s management at utilizing the assets to generate returns. It is calculated by dividing the net income in a given period of time by its total assets. Higher ROA indicates better efficiency.

Non- Performing Assets or NPA

Banks lend money out of the assets they own to generate income in the form of interests. If for some reason, interest and/or the principal are not paid back to the banks on time, it is categorized as a non performing asset. It is so called because it has failed to generate any income, that is, it is not performing.  Typically, if a loan is overdue for 90 days, that asset is termed as non-performing asset.

Prompt Corrective Action or PCA

The prompt corrective action (PCA) is a corrective measure put in place by the RBI to ensure that weak and troubled banks don’t go bust. The RBI has put in place some trigger points to assess, monitor, control and take necessary corrective actions on banks which are troubled and weak. It is intended to intervene early and take corrective measures in a timely manner to restore and protect the financial health of banks that are at serious risk of capital erosion.  The PCA is triggered when banks fail to meet certain regulatory requirements like minimum capital, return on assets and the percentage of non-performing assets. If the PCA is triggered, certain restrictions are imposed on the faltering banks. These may include restrictions on renewing or accessing costly deposits, borrowing from interbank market or taking steps to enhance their fee based income. Banks are also required to take urgent steps to reduce NPAs and contain generation of fresh NPAs. They are also not allowed to enter into new lines of business. Banks rope in the best corporate law firms to recover NPAs.

Strategic Debt Restructuring

Strategic Debt Restructuring, introduced in 2015, is a tool that allows banks to recover their loans from distressed companies that have failed to repay their loans. It allows the lenders, either singly or jointly, to convert their debt into equity and take a stake in the company. With the introduction of SDR, almost all previous restructuring schemes have been abolished. The Joint Lenders Forum meant to resolve potential bad debts has also been dissolved.

External Commercial Borrowing or ECB

External commercial borrowings or ECBs are loans taken from foreign institutions.  In an attempt to encourage foreign capital inflows, the RBI has simplified the overseas borrowing norms. It allows companies a uniform borrowing limit of $750 million per year across tenors. All entities eligible for foreign direct investment can borrow through the external commercial borrowing route. 

The current system of two categories, Track I medium term- 3 to 5 years and Track II long term- up to ten years, have been merged into one as ‘foreign currency denominated ECB’.  Track III which includes NBFCs and micro finance institutions, rupee denominated borrowings are combined as Rupee Denominated ECB. These are complex issues and companies engage top corporate law firms in India to deal with the ECB processes.

Bridge Loans

A bridge loan is type of loan which is meant to fill the gap between short term cash requirements and long term loans. These loans are typically of a tenor less than a year and have to be backed by some security, either equity or debentures.  The stake holders have to follow some strict RBI guidelines to avail them. If a company raises funds from the capital market after taking a bridge loan, it is automatically repaid from the funds raised.

Revolving Credit

Revolving credit facility is one where the borrower is given access to a credit limit which can be used as and when required.  Generally, companies that have huge cash flow fluctuations avail this facility. The borrower can use any amount up to the credit limit granted and has to pay interest only on the amount actually borrowed. Once the loan is repaid, the original limit is restored. It is also referred to as cash credit.

Letter of Credit or LOC

A letter of credit is a common feature in the export-import business. It basically is a letter issued by banks on behalf of the importer to the exporter that assures the seller that the buyer will fulfil the financial obligations. Banks require some form of collateral to issue a letter of credit. This instrument is meant to avoid default in payments by importers and to facilitate smooth trade activities.

Debt Financing

When a firm raises money to meet working capital or capital expenditures needs by selling debt instruments to individuals and/or institutional investors, it is called debt financing. These instruments are fixed income products and could be in the form of bonds, bills, or notes. The individuals and/or institutions become creditors with a promise that principal and interest will be repaid on time. In case of bankruptcy, the debtors have the first right to the liquidated assets of the company. Services of top corporate lawyers in India would be needed to realise this right.

Syndicate loans and Consortium Lending

In such an arrangement, two or more lenders join hands to lend money to the borrower. It generally happens when the loan amount is huge and a single lender is unable to provide the loan or is apprehensive of exposing itself to the risk. When a group of lenders come together, the risk gets distributed.

Letter of Commitment

A letter of commitment is binding agreement between the lender and the borrower. It is issued by the lender outlining the terms and conditions of the loan and that the loan is approved subject to the borrower meeting the pre specified conditions.

There are some other important banking terms, besides those mentioned above, which commercial law firms or a commercial litigation lawyer should be well aware of as well if they want to represent corporates involved in financial disputes.

Author Bio

Amy Jones is the lead legal expert at Ahlawat & Associates-best law firms in India. She is a passionate writer and loves to help people in all aspects of banking law. You can follow her onTwitter,Linkedin.

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