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Question 1.What are the different types of covers granted under Engineering Insurance? Discuss each of these policies in detail.
2.Which government securities are issued by RBI on behalf of central government as well as State governments to finance deficit budgets, social expenditures and economic activities in the public sector. Describe each of these securities in detail.
3.What is the role played by banks and other principal agencies providing housing finance in India. Prepare your answer with the help of relevant data
Answer KUSUMA,
HERE IS SOME USEFUL MATERIAL.
REGARDS
LEO LINGHAM
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Q1. What are the different types of covers granted under Engineering Insurance? Discuss each of these policies in detail.
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1.ERECTION ALL RISKS (EAR) INSURANCE
EAR insurance provides a very wide and comprehensive insurance cover to the client in respect of any sort of contingency from the moment the material is unloaded at the site of the project and continues during storage, physical erection commissioning, testing and maintenance (if covered). Since the duration of the cover can be as long as 36 months or even more, care must be taken while negotiating the proposal as well as assessing the moral hazard of the client.
SCOPE OF COVER
This is a comprehensive insurance cover that is available to the client in respect of any sort of contingency from the moment the materials are unloaded on the site of the project / works and continuous during storage, physical erection and till the test run is over which covers all physical losses or damage as under:
Fire, lightning, theft & burglary.
Impact from falling objects, collision, failure of changes or tackles.
Failure of safety devices, leakage of electricity, insulation failure, short circuit, explosion.
Carelessness, negligence, fault in erection, strike & riots.
Storm, tempest, flood, landslide, rockslide, earthquake.
EXTENSION OF COVER
While the standard policy include all Acts of God perils, it has to be noted that the earthquake peril is covered at an appropriate additional premium as per the erection tariff.
Extension of basic cover to provide for extension of the policy period itself can be given at additional premium per erection tariff.
Dismantling cover in case of already erected second hand plant can be given at an appropriate additional premium as per tariff.
Additional premium are also chargeable for the removal of debris, contractor’s plant and equipment, third party liability, if they are to be included in the sum insured.
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2.CONTRACTOR’S ALL RISKS (CAR)
Although a CAR policy may be taken by the principal or by the contractor, but usually, under the terms of the agreement between the contractor and the principal, it is obligatory on part of the contractor to effect a CAR insurance in their joint names before the commencement of the project.
The sum insured under the policy must not be less than the full value of the contract works at the completion of contract inclusive of all materials, wages, freight, custom duties, construction cost and material or items supplied by the principal.
TYPE OF PROJECTS
The CAR insurance policies generally issued for all types of Civil Engineering projects like dwellings, office building, commercial building, go downs and warehouses, hospitals, schools, silos, steel structure, roads, water supply lines, construction work, etc.
EXTENSION OF COVER
While the standard policy include all Acts of God perils, it has to be noted that the earthquake peril is covered at an appropriate additional premium as per the erection tariff.
Extension of basic cover to provide for extension of the policy period itself can be given at additional premium per erection tariff.
Dismantling cover in case of already erected second hand plant can be given at an appropriate additional premium as per tariff.
Additional premium are also chargeable for the removal of debris, contractor’s plant and equipment, third party liability, if they are to be included in the sum insured.
3.MATERIAL DAMAGE SECTION
The Scope of insurance is virtually the same as that of EAR insurance. Under this section the insurer agreed to indemnify for any loss or damage to the insured property by any cause other than those specifically given under the exclusions.
The various exclusions under the CAR policy:
General exclusions (applicable to Section I and Section II).
Exclusions applicable to Section II - Third Party liability.
Exclusions applicable to Section I - Material Damage
are exactly the same as under EAR Policy.
4.MACHINERY BREAKDOWN (MB)
Machinery Breakdown insurance was developed to grant industry effective insurance cover for expensive plant, machinery and mechanical equipment. This insurance is important for everyone who operates the machines. This policy should support our property insurance and hence this insurance must not be granted on a stand - alone basis.
SUBJECT MATTER INSURED
All types of machinery, plant, mechanical equipment and apparatus may be covered under MBD insurance, such as for example power generating units, power distributing plant as well as production machinery and auxiliary equipment, etc.
SCOPE OF COVER
By its nature, Machinery Breakdown Insurance is an “accident” insurance on machinery. Thus,
It covers unforeseen and sudden physical loss of or damage to the insured items.
Faulty design faults at workshop or in erection, defects in casting and material.
Faulty operations, failure of safety system / lubrication system / control system, lack of skill, negligence.
EXTENSION AVAILABLE UNDER THIS POLICY
Third party liability.
Expediting costs.
Additional customs duty.
CLAIM PROCEDURE
The policy condition clearly lays down the procedure to be followed by an insured in the event of damage to the insured machinery.
It would be desirable to obtain a claim from duly completed and signed and to check that both the item and the risk involved are insured under the policy. It is also essential at the outset to check whether there is any machinery Loss of Profits insurance in force covering the damaged machinery. If so, immediate action is necessary for minimizing the loss under the Machinery Breakdown policy.
A qualified engineer surveyor is generally deputed to assess the loss who will then scrutinize claims estimates, determine the cause of the accident and certify that the charges claimed for repairs are reasonable. An up - to - date copy of the policy should be made available to the Independent Surveyor, if engaged in the initial stage so that he is fully acquainted with the terms, conditions and excess under the policy.
LOSS SETTLEMENT PROCEDURE
Partial Loss Basis
In cases where the damage can be repaired, the basis of indemnification is the cost of restoration to working order based on the customary daily rates of wages together with normal freight and erection costs and other duties. Customs duties and dues, if any have been included in the sum insured. In such cases of repairable damage, no deduction is made for wear and tear, depreciation, etc.
For parts with limited life, depreciation factor has to be taken into consideration.
Total Loss Basis
If the cost of the repair as mentioned above equals or exceeds the actual value of the machinery insured immediately before the occurrence of the damage the settlement shall be made on Total Loss Basis.
Under total loss basis, the basis of indemnification is the market value of the item immediately before the accident plus the cost of removing the damaged machinery less the value of the salvage.
Any extra charges incurred towards repairs, such as Express Delivery, Overtime and holiday rates and wages, are payable only if special provision for these items has been made in the Policy in consideration of which an additional premium is charged.
All costs of alterations, additions, improvements and overhauls carried out on the occasion of a repair are to be borne by the insured. The Cost of provisional repairs will be borne by the insure if such repairs constitute part of the final repairs and do not increase total repair expenses. The insurer will make payments only after being satisfied by production of the necessary bills and documents, that the repairs have been effected or replacement have taken place as the case may be.
POSITION AFTER A CLAIM
The insured is not entitled to abandon any property to the insured whether taken possession of by the insurer or not.
From the day of the loss the sum insured for the remainder period of insurance is reduced by the amount of compensation. To prevent under insurance during the remaining period of insurance the sum insured must be reinstated. The premium will be calculated pro - rata from the day the repaired item is again put to work up to the date of expiry of the policy.
5.BOILER AND PRESSURE PLANT (BPP)
This policy covers explosion of boilers and pressure plants but does not cover rupture of tubes inside the boilers. Both these perils can be covered under MB policy and hence we should wherever possible include this in our MB portfolio since it would practically mean granting extra cover within the scope of tariff provisions.
TYPES OF EXPLOSIONS
It can be broadly classified under two categories for the purpose of insurance cover.
Chemical Explosions
It is a matter of common knowledge that gun powder, similar explosive compound could cause explosion under the influence of mechanical or thermal shocks. Highly inflammable fluids and dusts can cause explosions if their concentration in the atmosphere exceeds the explosive limits. From the insurance concept, these explosions are considered as very rapid form of combustion.
Physical Explosions
In respect of pressure vessels handling inert fluids such as steam, explosion can occur due to variation in fluid pressure. The variation being only in physical form and there no chemical reaction or changes responsible for such explosions as such these are classified as Physical Explosions.
SCOPE OF COVER
The policy covers pressure vessels both fired & unfired against the risk of explosion and collapse and indemnified the insured against:
Damage to the boilers & / or other pressure plant.
Damage to surrounding property of the insured or the property held by the insured in trust for which he is responsible.
Death or bodily injury to any person.
Damage to property not belonging to the insured or held in trust or on commission for which he is responsible.
EXCEPTIONS OF POLICY
Loss or damage raising from fire and allied perils which can be covered separately.
Damage by chemical explosion except in recovery boilers and waste heat boiler.
Contractual liability, manufacturer’s supplier’s liability.
Loss arising from an existing defect.
War group of perils, social group of perils.
Nuclear perils.
Loss due to gross negligence.
Failure of individual tubes.
6.WARRANTIES
Under the BPP insurance the following warranties will be incorporated during the currency of the policy:
The Boilers and Pressure Plants described in the schedule are annually inspected by inspectors appointed by the Government except where there is no statutory requirement for Government inspection; the inspections are to be carried out by independent competent persons.
The Boilers and pressure plant described in the schedule shall only be operated by attendants holding a valid certificate of competency issued under the appropriate Boiler Act.
The insured shall be in possession of the unqualified permission in writing of the competent inspecting authority to operate the said boilers and pressure plant. If the maximum pressure of load upon safety valve immediately prior to any explosion or collapse was in excess of that stipulated by the said authority the insured shall not be entitled to any compensation or indemnity under this policy in respect of such explosion or collapse.
OTHER EXTENSIONS AVAILABLE UNDER THIS POLICY
Steam Pipes
The portion of the steam pipe up to the safety valve alone is deemed to form integral part with boiler. The remaining portions of the steam pipes can be included under this extension.
Expediting Costs
Expenses towards overtime, night work, work on public holidays, express freight can be included under this extension. The same will be indemnified after a loss provided these expenses are incurred following a loss due to an insured peril under this policy.
Air Freight
Expenses towards air - lifting parts of the boiler following a loss can be included under this extension.
Policy Period
This policy is issued on annual basis.
CLAIM PROCEDURE
In the event of a loss the insured should comply with the following:
Immediately notify the insurer giving an indication as to the nature and extent of loss.
Take all reasonable loss minimization steps.
Preserve the salvage.
Furnish all information and documentary evidence as required by the insurer.
The insured may proceed with the repair of any minor damage not exceeding Rs.2500/-.
Claim form duly completed and signed should be sent to the insurer.
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7.CONTRACTOR’S PLANT & MACHINERY (CPM)
Whilst it is possible to have the Contractor’s plant and machinery covered under an EAR or CAR policy at specific project sites, CPM policy has been designed to provide a cover on an annual basis to a contractor who may be using his plant and machinery at different projects during the course of the year. The cover under a CPM policy is not limited to a specific project site and is operative at all sites wherever the plant and machinery is in use and even while the same is lying at the contractor’s own premises. We therefore have to ensure that all the sites where the insured items are being used are mentioned on the face of the policy.
SCOPE AVAILABLE UNDER CPM POLICY
The Contractor's plant and machinery insurance comes under the policies available under the Project Insurance and like the EAR / CAR Policy offers a comprehensive cover as given below:
Fire, lightning, external explosion, earthquake, flood, inundation, subsidence, landslide and rockslide.
Storm, tempest, hurricane, typhoon and tornado.
Burglary, theft, riot and strike and malicious damage.
Accidental damage while at work due to faulty man - handling, dropping or falling, collapse, collision and impact.
Any willful act or gross negligence of the insured resulting in a loss.
Loss for which the supplier or the manufacturer is responsible.
Loss discovered only at the time of taking the inventory or during routine servicing.
Loss to plant and machinery mounted or operated on a floating vessel / barge.
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8.ELECTRONIC EQUIPMENT INSURANCE (EEI)
The Electronic Equipments such as computers, Micro - processors, Word - processors, Tele - communication equipments. Machine meant for medical use and other misc. Equipments like films, television studio equipments can be covered under this policy. This scope of this policy is ALL RISK.
SCOPE OF COVER
This insurance indemnifies the insured against any physical loss or damage due to following perils:
Location Perils
Fire, lighting, explosion, flood, storm, etc.
Break Down
Any electrical / mechanical breakdown.
Faults
Faulty design, faulty materials, faults in manufacturing / assembly erection.
Effect of Moisture
Damage due to moisture and humidity.
Carelessness
Damage due to faulty / careless / negligent operation by employees.
Riot & Strike
Riot & strike damage and malicious damage.
Burglary
Loss or damage due to theft or burglary / house breaking.
9.SUBJECT MATTER INSURED
This policy is recommended for the following instruments:
Electronic data processing equipment comprising central processor with flexible programmability.
Peripheral equipments such as readers, printers, tape or card punchers or sorters.
Tapes, and discs.
Auxiliary equipment such as air conditioning, heating and power conversion or main power control plant.
Electronic office equipments, material testing and research equipment.
Electro medical installations.
Telecommunication equipment, etc.
Computerized numerical control system used in connection with production machinery.
10.INSURED PARTIES
The insured can be either the owner or the hirer of the electronic equipment. The insurance protects, on the basis of the insurance conditions.
The Owner
As operator against material damage, for which the manufacturer is not responsible under a guarantee.
The Hirer
Against material damage for which, he is responsible either legally or through a leasing agreement.
GENERAL EXCLUSIONS
Inherent Vice
Wear & tear, loss due to defects known to the insured at the time of commencement of the policy. Manufacturers responsibility:
The loss / damage for which the suppliers are responsible under guarantee.
Willful Act
Due to any willful act or willful negligence of the insured or his representatives.
Cessation
Cessation of work whether total or partial.
Expected Perils
War, invasion and the like, nuclear reaction / radiation, loss or damage due to interruption caused by the failure of any gas, water or electricity service or supply.
Functional Failure
Maintenance costs.
Hired Equipments
For the equipment hired for which the owner is responsible.
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Renewable (annual) Covers
11.Contractors’ plant and machinery (CPM) insurance
This is an insurance of contractors’ plant and machinery on an annual basis. The cover, which is similar to the scope of machinery (M) insurance but excluding internal breakdown, applies at work, at rest or during maintenance operations and is not limited to a specific construction site. The sum insured is the new replacement value.
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12.Boiler and pressure vessel explosion (BPV) insurance
This is a traditional cover for insurance against all kinds of explosions, implosion or collapse specifically of vessels and boilers working under internal pressure or vacuum. This can normally be granted in addition to perils covered under a fire policy or in isolation, and it is designed to include damage to surrounding property of the insured and also liability of the insured for damage to property of third party and for fatal and non-fatal injuries to any third party person.
If Machinery insurance is agreed, the extent of cover provided by a BPV additionally to what is already insured by a Machinery policy can preferably be attached by way of a standard BPV endorsement to the Machinery policy.
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13.Machinery (M) insurance
It was developed to grant industry an effective insurance cover for plant, machinery and mechanical equipment at work, at rest or during maintenance operations.
By its very nature, machinery insurance is an all risks “accident” insurance for machinery supplementing the coverage afforded by fire insurance. Thus it covers unforeseen and sudden physical loss of or damage to the insured items, necessitating their repair or replacement. Loss or damage covered under machinery insurance is mainly due to one of the following causes:
Faulty design (calculations, plans, drawings and specifications)
Faults at workshop or in erection
Defects in casting and material
Faulty operation, lack of skill, negligence, malicious acts
Tearing apart on account of centrifugal force
Physical explosion, flue gas explosion in boilers
Electrical causes such as short circuit
Shortage of water in boilers
Storm, frost, drifting ice.
All types of machinery, plant, mechanical equipment and apparatus may be covered under machinery insurance. If possible, all the machines of a plant or workshop or of a separate plant section should be included in the insurance in order to ensure that the risk is adequately balanced.
Only those items having a short service life compared with the entire plant are normally excluded from machinery insurance, these are mainly:
All types of interchangeable tools
Belts, chains, ropes, sieves, engraved cylinders, stamps, dies
Parts made of glass, ceramic or wood, rubber tires
Operating media of any kind such as fuel, gas, refrigerants, catalysts, liquids, lubricants (oil in transformers and circuit breakers is, however, included since it is not only a coolant but also serves as an insulation agent).
The few individual exclusions from the cover mainly comprise loss or damage caused by:
Fire, lightning stroke, chemical explosion, burglary and theft, i.e. perils covered or coverable under other standard policies
Inundation, flood, earthquake, subsidence, landslide, impact of land-borne, waterborne or airborne craft (perils coverable under a fire policy)
War or warlike operations, civil commotion of any kind as well as acts on the part of strikers and locked out persons
Willful acts or gross negligence on the part of the insured or of his representatives
Faults or defects existing at the time of commencement of the insurance which ought to have been or were known to the insured
Faults or defects for which the supplier is responsible either by law or under contract (losses covered by warranty)
Nuclear reaction, nuclear radiation or radioactive contamination
Also excluded is consequential loss or liability of any kind or description and wear and tear as a consequence of ordinary use or operation as well as cavitation, erosion, corrosion (e.g. rust) or boiler scale (this exclusion relates, however, only to the parts immediately affected).
The sum insured should always be equal to the costs of replacement of the insured machinery by new machinery of the same kind at the same place (value of the new item plus customs duties plus transportation and installation charges).
Risk assessment and premium calculation for the items to be insured should consider the following factors:
Age, specification
Present condition, maintenance standard
Operating environment
Past loss experience
The premium rates charged are calculated separately for each type of machine on the basis of statistics kept over a period of many years.
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14.Machinery loss of profits (MLOP) insurance
MLOP insurance indemnifies the actual loss of gross profit sustained as a result of a business interruption caused by an accident covered under machinery insurance.
MLOP insurance compensates for:
The continuing business expenses (standing charges) including the salaries and wages paid to employees
The net profit
The increase in cost of working, i.e. the additional expenditure necessarily and reasonably incurred for avoiding or diminishing a reduction in turnover.
The sum insured is, for normal cases, the gross profit obtained from the turnover of goods produced or handled in the course of the insured’s business for a period of twelve successive calendar months (i.e. normally for the business year).
Increase in costs of working may also be covered under MLOP insurance, for instance the additional expenditure incurred for the use of external power if the insured’s own power supply breaks down (additional cost of consumption of kilowatt hours and maximum demand charges for kilowatts in excess of normal requirements).
The period for which the insurance will indemnify losses is defined as the indemnity period. This period – normally 3 to 12 months – is determined by the insured depending upon the replacement period for the machinery to be insured. Instead of a monetary deductible, this type of insurance is usually subject to a time excess of normally 2 to 14 days. Losses made during the period corresponding to the time excess are not indemnified under this insurance.
MLOP insurance is of special interest for all “bottleneck” equipment on which the business operation depends such as boilers, steam turbines, generators, transformers, and important process machinery such as paper machines, printing machines, presses, rolling mill equipment, refiners, crushers, compressors, pumps, etc., including their drives.
The premium is calculated in consideration of the following data:
The amount of the sum insured
The time excess and the indemnity period
The size, number, type and age of the machinery insured
The general and the special technical risk of the machinery to be insured
The moral and technical hazards relating to each individual user and his employees
The effect that a breakdown of the insured machinery would have on the gross profit (relative importance)
The reserve facilities and spare parts available
The effect of local conditions
The possibilities of loss minimization
The prevailing general economic and political conditions.
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15. Deterioration of stock (DOS) insurance
The insurance of “deterioration of stock in cold storage” is designed to meet the requirements of those who want to insure themselves against deterioration of goods in cold storage due to a breakdown of refrigerating machinery.
There are basically two different methods of preservation: Cold storage under freezing conditions and cold storage under cooling conditions.
In the case of cold storage under cooling conditions, a distinction must be made between two types of cold storage: storage in a normal atmosphere and storage in a controlled atmosphere (CA storage). The storage atmosphere in CA storage rooms is different to that of normal atmospheric air and contains approximately 22% carbon dioxide, 4% oxygen and 74% nitrogen.
The insurance of stock in cold storage is important, for example, for
owners of cold-storage houses,
users (tenants) of cold-storage houses,
firms in which agricultural products are manufactured or processed,
meat and fish processing industries,
food preservation industry,
chemical and pharmaceutical industries (finished and semi-finished products).
All goods suitable for storage in cold-storage houses may be covered, the largest category being food. Deterioration of stock insurance is a complementary cover to machinery insurance and may only be taken out in connection with the latter.
Causes of an indemnifiable claim for deterioration of stock may be
a rise or fall in cooling temperature,
the unforeseen and sudden escape of refrigerants into the cold-storage rooms,
in the case of CA storage, an incorrect composition of the storage atmosphere directly resulting from any material damage to the refrigeration plant which is indemnifiable under machinery insurance.
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16.Electronic equipment (EE) insurance
The term “electronic equipment” comprises, in the context of this insurance, all electrical and electronic systems such as:
Electronic data processing (EDP) equipment
Electrical equipment for medical use
Communication facilities
Lighting and navigation facilities
Equipment for research and materials testing.
The insurance protects:
The owner as the operator, the lessor, or the maintenance contractor
The hirer.
Material damage cover
Electronic equipment insurance is an “accident” insurance on an all risks basis covering sudden and unforeseen losses which physically affect the subject matter insured. Losses due to the following causes give rise to the vast majority of all claims:
Fire, lightning, explosion, failing aircraft
Smoke, soot, corrosive gases
Water and humidity
Failure of air conditioning
Short circuit and other electrical causes
Design, manufacturing, assembly and erection faults, defects in casting and material, workshop errors, bad workmanship
Faulty operation, lack of skill, gross negligence
Malicious acts of workmen, employees, third parties
Burglary
Hail, frost.
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17.Civil engineering completed risks (CECR) insurance
CECR insurance is designed to grant comprehensive cover for civil engineering structures after their completion if they are exposed to a negligible fire hazard, whereas the elementary hazards, hazards emanating from the local geological conditions or arising out of the technical design of the structure or in connection with the operation and use of the structure predominate.
A corresponding coverage achieved on the basis of a fire policy would require numerous special endorsements and would thus deviate considerably from the basic fire cover.
The CECR policy is a named-perils policy on an annual basis covering:
Fire, lightning, explosion, impact of land borne or waterborne vehicles
Impact of aircraft and other aerial devices or articles dropped there from
Earthquake, volcanism, tsunami
Storm (air movements stronger than grade 8 on the Beaufort scale)
Flood or inundation, wave action or water
Subsidence, landslide, rockslide or any other earth movement
Frost, avalanche, ice
Vandalism by individuals.
The main exclusions are:
Political risks
Nuclear reactions, nuclear radiation or radioactive contamination
Willful act or willful negligence
Wear and tear, inherent defects
Lack of maintenance
Consequential loss.
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18.Comprehensive machinery (CM) insurance
Comprehensive machinery insurance offers, in addition to the cover under the above described machinery insurance, wide and comprehensive protection against property damage and loss of profits for an entire plant and machinery in operation including other property like buildings, stock, goods in process, etc.
This new policy is designed to grant cover for entire plants where engineering risks are prevailing, in contrast to industrial all risks covers where the fire exposure and extended perils are of more importance.
Therefore, the following property is regarded as excluded under the cover:
land including topsoil, backfill, drainage and culverts, roads, runways, railway lines, dams, reservoirs, water, canals, drilling rigs, wells, pipelines, transmission and distribution lines, tunnels, bridges, docks, piers, wharves, any underground property, offshore property
all property on the premises of a nuclear power station, nuclear reactors, reactor buildings with equipment therein on any premises other than nuclear power stations, and property on any premises if used or having been used for generating nuclear energy or production, use or storage of nuclear material
property of the insured transferred to or in the possession of customers, or under leasing or rental agreements, hire, purchase, credit or other suspense sale agreements.
CMI is an all risks accident and loss of profits insurance covering any unforeseen and sudden physical loss or damage to the insured plant, necessitating its repair or replacement.
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2.Which government securities are issued by RBI on behalf of central government as well as State governments to finance deficit budgets, social expenditures and economic activities in the public sector. Describe each of these securities in detail.
A Government security is a tradable security issued by the Central
Government or the State Governments, acknowledging the Government’s debt
obligation. Such securities can be short term (usually called Treasury Bills, with
original maturities of less than 1 year) or long term (usually called Government
bonds or dated securities with original maturity of one year or more). In India, the
Central Government issues both Treasury Bills and bonds or dated securities while
the State Governments issue only bonds or dated securities, which are called the
State Development Loans (SDLs). Government securities carry practically no risk
of default and, hence, are called risk-free instruments. Government of India also
issue savings instruments (Savings Bonds, National Saving Certificates (NSCs),
etc.) or special securities (Oil bonds, FCI bonds, fertiliser bonds, power bonds,
etc.) but they are usually not fully tradable and are not eligible for meeting the SLR
requirement.
a. Treasury Bills (T-Bills)
Treasury Bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three
tenors, viz., 91 day, 182 day and 364 day. Treasury Bills are zero coupon
securities and pay no coupon. They are issued at a discount and redeemed at the
face value at maturity. For example, a 91 day Treasury Bill of Rs.100/- (face value)
may be issued at a discount of say, Rs.1.80, that is Rs.98.20 and redeemed at the
face value of Rs.100/-. The return to the investors is, therefore, the difference
between the maturity value or face value (i.e., Rs.100) and the issue price (please
see answer to Question No. 21 on calculation of yield on Treasury Bills). Treasury
Bills are issued through auctions conducted by the Reserve Bank of India usually
every Wednesday and payments for the Treasury Bills purchased have to be made
on the following Friday. The Treasury Bills of 182 days and 364 days' tenure are
issued on alternate Wednesdays, that is, Treasury Bills of 364 day tenure are
issued on the Wednesday preceding the reporting Friday while Treasury Bills of
182 days tenure are issued on the Wednesday prior to a non-reporting Friday.
Currently, the notified amount for issuance of 91 day and 182 day Treasury Bills is
Rs.500 crore each whereas the notified amount for issuance of 364 day Bill is
higher at Rs.1000 crore. Government, at its discretion, can also decide to issue
additional amounts of the Treasury Bills by giving prior notice. An annual calendar
of T-Bill issuances for the following financial year is released by the Reserve Bank
of India in the last week of March. The Reserve Bank of India also announces the
issue details of Treasury bills by way of press release every week.
b. Dated Government Securities
Dated Government securities are longer term securities and carry a fixed or
floating coupon (interest rate) paid on the face value, payable at fixed time periods
(usually half-yearly). The tenor of dated securities can be up to 30 years. The
Public Debt Office (PDO) of the RBI acts as the registry / depository of
Government securities and deals with the issue, interest payment and repayment
of principal at maturity. Most of the dated securities are fixed coupon securities.
The nomenclature of a typical dated fixed coupon Government security has the
following features - coupon, name of the issuer, maturity and face value. For
example, 7.49% GOI 2017 would have the following features.
Date of Issue
: April 16, 2007
Date of Maturity
: April 16, 2017
Coupon
: 7.49% paid on face value
Coupon Payment Dates
: Half-yearly (October16 and April 16) every year
Minimum Amount of issue/ sale : Rs.10,000
Just as in the case of Treasury Bills, dated securities
of both Government of India and State Governments are issued by RBI through
auctions which are announced by the RBI a week in advance through Press
Releases and paid advertisements in major dailies (for dated securities). The
investors are thus given adequate time to plan for the purchase of government
securities through such auctions.
Dated securities may be of the following types:
i) Fixed Rate Bonds – These are bonds on which the coupon rate is fixed
for the entire life of the bond. Most Government bonds are issued as
fixed rate bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of
10 years maturing on April 22, 2018. Coupon on this security will be paid
half-yearly at 4.12% (half yearly payment being the half of the annual
coupon 8.24%) of the face value on October 22 and April 22 of each
year.
ii) Floating Rate Bonds – Floating Rate bonds are securities which do not
have a fixed coupon rate and the coupon is re-set at pre-announced
intervals based on a specified methodology. The coupon is re-set at pre-
determined intervals (say, every six months or one year) by adding a
spread over a base rate. In the case of most floating rate bonds issued
by the Government of India, the base rate is the weighted average cut-
off yields of the last three 364 day Treasury Bill auction preceding the
coupon re-set date. Floating Rate Bonds were first issued in September
1995 in India.
For example, a Floating Rate Bond was issued on July 2, 2002 for a
tenor of 15 years, maturing on July 2, 2017. The base rate on the bond
for the coupon payments was fixed at 6.50% being the weighted
average rate of implicit yield on 364 day Treasury Bills during the
preceding six auctions. Further, in the bond auction, a cut-off spread
(markup over the benchmark rate) of 34 basis points (0.34%) was
decided. Hence the coupon for the first six months was fixed at 6.84%.
At the next reset date after six months, assuming that the average cut-
off yield in the preceding six auctions of 364 day Treasury Bill is 6.60%,
coupon applicable for the next half year would be 6.94%.
iii) Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon
payments. Like Treasury Bills, they are issued at a discount to face
value. Such securities were issued by the Government of India in the
1990s, but no issue was made thereafter.
iv) Capital Indexed Bonds – These are bonds, the principal of which is linked
to an accepted index of inflation with a view to protecting the holder from
inflation. A capital indexed bond, with the principal hedged against
inflation, was issued in December 1997. These bonds matured in 2002.
Steps are now being taken to revive the issuance of the Inflation Indexed
Bonds wherein payment of both the coupon and principal payments on
the bonds will be linked to an Inflation Index (Wholesale Price Index).
v) Bonds with Call/ Put Options – Bonds can also be issued with features of
optionality wherein the issuer can have the option to buyback (call
option) or the investor can have the option to sell the bond (put option) to
the issuer during the currency of the bond. A bond (viz., 6.72%GS2012)
with call / put option was issued in India in the year 2002 which will
mature in 2012. 6.72%GS2012 was issued on July 18, 2002 for a
maturity of 10 years maturing on July 18, 2012. The optionality on the
bond could be exercised after completion of five years tenure from the
date of issuance on any coupon date falling thereafter. The Government
has the right to buyback the bond (call option) at par value (equal to the
face value) while the investor has the right to sell the bond (put option) to
the Government at par value at the time of any of the half-yearly coupon
dates starting from July 18, 2007.
vi) Special Securities - In addition to Treasury Bills and dated securities
issued by the Government of India under the market borrowing
programme, the Government of India also issues, from time to time,
special securities to entities like Oil Marketing Companies, Fertilizer
Companies, the Food Corporation of India, etc. as compensation to
these companies in lieu of cash subsidies. These securities are usually
long dated securities carrying coupon with a spread of about 20-25 basis
points over the yield of the dated securities of comparable maturity.
These securities are, however, not eligible SLR securities but are
approved securities and are eligible as collateral for market repo
transactions. The beneficiary oil marketing companies may divest these
securities in the secondary market to banks, insurance companies /
Primary Dealers, etc., for raising cash.
vii) Steps are being taken to introduce new types of instruments like STRIPS
(Separate Trading of Registered Interest and Principal of Securities).
STRIPS are instruments wherein each cash flow of the fixed coupon
security is converted into a separate tradable Zero Coupon Bond and
traded. For example, when Rs.100 of the 8.24%GS2018 is stripped,
each cash flow of coupon (Rs.4.12 each half year) will become coupon
STRIP and the principal payment (Rs.100 at maturity) will become a
principal STRIP. These cash flows are traded separately as independent
securities in the secondary market.
c. State Development Loans (SDLs)
State Governments also raise loans from the market. SDLs are dated
securities issued through an auction similar to the auctions conducted for dated
securities issued by the Central Government (see question 3 below). Interest is
serviced at half-yearly intervals and the principal is repaid on the maturity date.
Like dated securities issued by the Central Government, SDLs issued by the State
Governments qualify for SLR. They are also eligible as collaterals for borrowing
through market repo as well as borrowing by eligible entities from the RBI under
the Liquidity Adjustment Facility (LAF).
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3.What is the role played by banks and other principal agencies providing housing finance in India. Prepare your answer with the help of relevant data
In pursuance of National Housing Policy of Central Government, Reserve Bank of India has been facilitating the flow of credit to housing sector. During recent period the housing has emerged as one of the sectors attracting a large quantum of bank finance. Therefore, the current focus of RBI's regulation is to ensure orderly growth of housing loan portfolios of banks.
1.1 National Housing Policy
1.1.1 As a part of the strategy to overcome the colossal housing shortage, the Central Government adopted a comprehensive National Housing Policy which, among other things, envisaged.
(i) development of a viable and accessible institutional system for the provision of housing finance;
(ii) establishing a system where housing boards and development authorities would concentrate on acquisition and development of land and infrastructure; and
(iii) creation of conditions in which access to institutional finance is made easier and affordable for individuals for construction/buying of houses/flats. This may include outright purchase of houses/flats constructed by or under the aegis of public agencies.
Banks with their vast branch network throughout the length and breadth of the country, occupy a very strategic position in the financial system and were required to play an important role in providing credit to the housing sector in consonance with the National Housing Policy.
1.1.2 Housing Finance Allocation
Keeping in view the objectives of National Housing Finance Policy, RBI was announcing minimum housing finance allocation annually on the basis of the growth of deposits recorded during the previous year till the year 2002-03. Banks could deploy their funds under the housing finance allocation in any of the three categories, i.e.
(i) direct finance,
(ii) indirect finance,
(iii) investment in bonds of NHB/HUDCO, or combination thereof.
2. DIRECT HOUSING FINANCE
2.1 Direct Housing Finance refers to the finance provided to individuals or groups of individuals including co-operative societies.
2.2 Banks are free to evolve their own guidelines with the approval of their Boards on aspects such as security, margin, age of dwelling units, repayment schedule, etc.
2.3 Other Guidelines
The following types of bank finance may be included under Direct Housing Finance:
(i) Bank finance extended to a person who is already owning a house in town/village where he resides, for buying/ constructing a second house in the same or other town/ village for the purpose of self occupation.
(ii) Bank finance extended for purchase of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
(iii) Bank finance extended to a person who proposes to buy an old house where he is presently residing as a tenant.
(iv) Bank finance granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves
(v) Supplementary finance
(a) Banks may consider requests for additional finance within the overall ceiling for carrying out alterations/ additions/repairs to the house/flat already financed by them.
(b) In the case of individuals who might have raised funds for construction/ acquisition of accommodation from other sources and need supplementary finance, banks may extend such finance after obtaining pari passu or second mortgage charge over the property mortgaged in favour of other lenders and/or against such other security, as they may deem appropriate.
3. INDIRECT HOUSING FINANCE
3.1 General
Banks should ensure that their indirect housing finance is channeled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc., primarily for augmenting the supply of serviced land and constructed units. It should also be ensured that the supply of plots/houses is time bound and public agencies do not utilise the bank loans merely for acquisition of land. Similarly, serviced plots should be sold by these agencies to co-operative societies, professional developers and individuals with a stipulation that the houses should be constructed thereon within a reasonable time, not exceeding three years. For this purpose, the banks may take advantage of various guidelines issued by NHB for augmenting the supply of serviced land and constructed units.
3.2 Lending to Housing Intermediary Agencies
3.2.1 Lending to Housing Finance Institutions
(i) Banks may grant term loans to housing finance institutions taking in to account (long-term) debt-equity ratio, track record, recovery performance and other relevant factors.
(ii) In terms of NHB guidelines, housing finance companies’ total borrowings, whether by way of deposits, issue of debentures/ bonds, loans and advances from banks or from financial institutions including any loans obtained from NHB, should not exceed 16 times of their net owned funds (i.e. paid-up capital and free reserves less accumulated balance of loss, deferred revenue expenditure and intangible assets).
(iii) All housing finance companies registered with NHB are eligible to apply for refinance from NHB and will be eligible subject to the refinance policy. The quantum of term loan to be sanctioned to them will not be linked to net owned fund as NHB has already prescribed the above referred ceiling on total borrowing of housing finance companies. A list of housing finance companies registered with NHB may be obtained by the banks directly from NHB or downloaded from www.nhb.org.in.
3.2.2 Lending to Housing Boards and Other Agencies
Banks may extend term loans to state level housing boards and other public agencies. However, in order to develop a healthy housing finance system, while doing so, the banks must not only keep in view the past performance of these agencies in the matter of recovery from the beneficiaries but they should also stipulate that the Boards will ensure prompt and regular recovery of loan installments from the beneficiaries.
3.2.3 Financing of Land Acquisition
In view of the need to increase the availability of land and house sites for increasing the housing stock in the country, banks may extend finance to public agencies and not private builders for acquisition and development of land, provided it is a part of the complete project, including development of infrastructure such as water systems, drainage, roads, provision of electricity, etc. Such credit may be extended by way of term loans. The project should be completed as early as possible and, in any case, within three years, so as to ensure quick re-cycling of bank funds for optimum results. If the project covers construction of houses, credit extended therefore in respect of individual beneficiaries should be on the same terms and conditions as stipulated for direct finance.
It has been observed that while financing real estate developers, certain banks were found to be valuing the land for the purpose of security, on the basis of the discounted value of the property after it is developed, less the cost of development. This is not in conformity with established norms. In this connection it is advised that banks should have a Board approved policy in place for valuation of properties including collaterals accepted for their exposures and that valuation should be done by professionally qualified independent valuers. As regards the valuation of land for the purpose of financing of land acquisition as also land secured as collateral, banks may be guided as under:
(a) Banks may extend finance to public agencies and not to private builders for acquisition and development of land, provided it is a part of the complete project, including development of infrastructure such as water systems, drainage, roads, provision of electricity, etc. In such limited cases where land acquisition can be financed, the finance is to be limited to the acquisition price (current price) plus development cost. The valuation of such land as prime security should be limited to the current market price.
(b) Wherever land is accepted as collateral, valuation of such land should be at the current market price only.
3.2.4 Terms and Conditions for Lending to Housing Intermediary Agencies
(i) In order to enhance the flow of resources to housing sector, term loans may be granted by banks to housing intermediary agencies against the direct loans sanctioned/ proposed to be sanctioned by the latter, irrespective of the per borrower size of the loan extended by these agencies and such term loans would be reckoned for the purpose of achievement of their housing finance allocation.
(ii) Banks can grant term loans to housing intermediary agencies against the direct loans sanctioned/proposed to be sanctioned by them to Non-Resident Indians also. However, banks should ensure that housing finance intermediary agencies being financed by them, are authorised by RBI to grant housing loans to NRIs as all housing finance intermediaries are not authorised by RBI to provide housing finance to NRIs. Further, such finance granted by banks to housing finance intermediary agencies against the latters’ on-lending to NRIs will not be treated as housing finance for the purpose of scheme of yearly allocation of housing finance applicable to banks.
(iii) Banks have freedom to charge interest rates to housing intermediary agencies without reference to Benchmark Prime Lending Rates (BPLR).
3.3 Term Loans to Private Builders
3.3.1 In view of the important role played by professional builders as providers of construction services in the housing field, especially where land is acquired and developed by State Housing Boards and other public agencies, commercial banks may extend credit to private builders on commercial terms by way of loans linked to each specific project. However, the banks are not permitted to extend fund based or non-fund based facilities to private builders for acquisition of land even as part of a housing project. The period of credit for loans extended by banks to private builders may be decided by banks themselves based on their commercial judgement subject to usual safeguards and after obtaining such security, as banks may deem appropriate. Such credit may be extended to builders of repute, employing professionally qualified personnel. It should be ensured, through close monitoring, that no part of such funds is used for any speculation in land.
Care should also be taken to see that prices charged from the ultimate beneficiaries do not include any speculative element, that is, prices should be based only on the documented price of land, the actual cost of construction and a reasonable profit margin.
3.3.2 It is advised that banks adhere to the National Building Code (NBC) formulated by the Bureau of Indian Standards (BIS) in view of the importance of safety of buildings especially against natural disasters. Banks’ may consider this aspect for incorporation in their loan policies.
4. HOUSING LOANS UNDER PRIORITY SECTOR
Banks may refer to the Master Circular on Lending to Priority Sectors issued by Rural Planning and Credit Department.
5. RBI REFINANCE
Finance provided by the banks would not be eligible for refinance from Reserve Bank.
6. CONSTRUCTION ACTIVITIES ELIGIBLE FOR BANK CREDIT AS HOUSING FINANCE
The following types of bank credit will be eligible for being treated as housing finance.
(i) Loans to individuals for purchase/construction of dwelling unit per family and loans given for repairs to the damaged dwelling units of families
(ii) Finance provided for construction of residential houses to be constructed by public housing agencies like HUDCO, Housing Boards, local bodies, individuals, co-operative societies, employers, priority being accorded for financing construction of houses meant for economically weaker sections, low income group and middle income group.
(iii) Finance for construction of educational, health, social, cultural or other institutions/centers, which are part of a housing project and which are necessary for the development of settlements or townships;
(iv) Finance for shopping complexes, markets and such other centers catering to the day to day needs of the residents of the housing colonies and forming part of a housing project and
(v) Finance for construction meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the Government, or indirectly to them through the State Governments.
(vi) Bank credit given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies;
(vii) Finance provided to –
(a) the bodies constituted for undertaking repairs to houses, and
(b) the owners of building/house/flat, whether occupied by themselves or by tenants, to meet the need-based requirements for their repairs/additions, after satisfying themselves regarding the estimated cost (for which requisite certificate should be obtained from an Engineer/Architect, wherever necessary) and obtaining such security as deemed appropriate;
(viii) Housing finance provided by banks for which refinance is availed of from National Housing Bank (NHB);
(ix) Investment in the guarantee/non-guaranteed bonds and debentures of NHB/HUDCO in the primary market, provided investment in non-guaranteed bonds is made only if guaranteed bonds are not available.
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PERFORMANCE AT A GLANCE
(Amount in Rs. Million)
Year ended 30th June 2004 2005 2006 2007 2008
Capital 4,500 4,500 4,500 4,500 4,500
Reserves 12,061 12,013 12,877 13,891 15,578
Net Owned Fund 16,568 16,443 17,295 18,292 19,988
Disbursements 32,974 80,894 59,970 56,716 90,364
Loans & Advances 82,840 124,758 162,410 195,719 176,712
Total Assets 131,075 186,966 195,888 212,234 198,979
Gross NPAs 289 277 274 271 Nil
Net NPAs Nil Nil Nil Nil Nil
Profit After Tax 1,181 440 864 1,143 1,697
CRAR (%) 30.1 22.5 22.3 22.6 24.5
