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ROL E GU I D E CU M MANUAL-
CIRCLE BASED OFFICERS-2021
( For internal Circulation Only)
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FOREWORD

Dear Role Holder,

Banking Industry is witnessing changes at an unprecedented pace. It has, therefore become

imperative that we continuously update and upgrade our skills relating to our profession. Each
one of us should not only understand his/her role and responsibilities but also
continuously equip oneself with latest guidelines in related areas. This will improve
professional effectiveness and also lead to enhanced customer satisfaction.

With these objectives in mind, Bank has introduced role-based certification programs for
employees across all levels.

We, at STU, have made an effort in this direction by compiling a Role Guide cum Certification
Manual which will provide insight into the role you are currently performing. This booklet may
be referred to whenever you need clarity in your day to day working.

We are confident that this manual will provide you conceptual clarity and also help in
mitigating associated risks.

We wish you all the best for a successful and enriching journey in your current role.

With Best Wishes,

Chief General Manager (STU)
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S.No. Chapter Page No.
1 LOAN POLICY MATTERS 4-51
2 A PRE-SANCTION CREDIT PROCESS 52-78
LEGAL ASPECTS OF ADVANCES : TYPES OF BORROWERS, 79-100
2 B VALUATION OF ASSETS, TIR, SME DOCUMENTATION, CREATION OF
EQUITABLE MORTGAGE, CERSAI
2 C
SME DELIVERY SYSTEM 101-111
3 ANALYSIS OF FINANCIAL STATEMENTS 112-133
4 A OVERVIEW OF WORKING CAPITAL ASSESSMENT 134-151
LETTER OF CREDIT 152-165
B BANK GUARANTEE

EXPORT FINANCE 166-179

C IMPORT FINANCE
D PROJECT VIVEK
180-191
5 TERM LOAN AND PROJECT FINANCE 192-210
6 A CREDIT RISK ASSESSMENT 211-235
B PREPARATION OF PROPOSALS AND COMMON MISTAKES OBSERVED 236
IN PROPOSALS.
7 SME ASSET PRODUCTS 237-257
8 POST SANCTION PROCESS 258-268
9 IRREGULARITY : IDENTIFICATION AND REPORTING , SPECIAL 269-276
MENTION ACCOUNTS, RESTRUCTURING OF ADVANCES, NPA
POLICY, IRAC AND PROVISIONING NORMS
10 HARD RECOVERY: SALE OF PROPERTIES UNDER SARFAESI ACT, 277-295
RECOVERY OF BANK DUES THROUGH CIVIL COURTS, RECOVERY OF
BANK DUES THROUGH DRTs, SETTLEMENT OF DUES THROUGH LOK
ADALATS, COMPROMISE SETTLEMENT POLICY, INSOLVENCY AND
BANKRUPTCY CODE 2016
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BACK TO INDEX

Chapter -1

Loan Policy

LEARNING OBJECTIVES
1) To know and understand the organisation of business
2) To understand about the exposure norms and credit risk concentration.
3) The various types of due diligence is required while dealing loans and advances
4) To understand the take over norms
5) To know about the performance/financial analysis, Credit risk assessment, assessment of credit
facilities and pricing while dealing loans and advances.
6) Delegation of financial powers.
7) Various types of security associated with the loans and advances.
8) Follow up ,Supervision and maintenance of advances
9) IRAC norms and policy on defaulters/wilful defaulters

Preamble

1.1 The Loan policy, at a holistic level, is an embodiment of the Bank's approach to sanctioning of
loans, managing and monitoring credit risk, and aims at making the systems and controls effective.
It is guided by the highest standards of commercial prudence and ethical business practices. While
formulating the loan policy, the overall risk appetite of the Bank has been taken into consideration.

1.2 The loan policy provides a broad framework for management of the loan portfolio of the Bank
with emphasis on creating products and services as well as maintaining asset quality. It helps our
customers in achieving their goals and fulfilling the Bank’s vision ‘Be the Bank of Choice for A
Transforming India’.

1.3 The provisions of the loan policy are applicable to the domestic as well as international
operations of the Bank. Based on the Bank’s loan policy, the Foreign Offices (FOs) have their own
loan policies taking into account the regulations and lending practices of the host country.
Additionally, country-specific loan policy and manual of instructions have been documented in all
the FOs. Different procedural aspects relevant to their credit portfolio/environment are incorporated
in the Loan Policy of respective Foreign Offices. The provisions of Bank Loan Policy, particularly
in regard to prudential exposure norms, income recognition and asset classification, industry
concentration norms as well as external commercial borrowings of Indian corporate clients will also
apply to policies of Foreign Offices. It is the policy of the Bank that as far as regulatory guidelines
of the home and host country are concerned, the more stringent of the two will be applicable except
those countries where regulatory norms stipulate applicability of only local regulatory norms.
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1.4 The Loan Policy is reviewed once in a year by the Board. The changes made, if any, on account
of regulatory guidelines, annual policy guidelines issued by the Chairman and requests received
from business groups etc. and approved by CPPC form part of the policy and are all incorporated in
the annual review. The revised guidelines of the policy are made effective/enforceable from the date
of approval by the Central Board. All regulatory guidelines would be effective from the date advised
in the guidelines.

1.5 All loan products are to be reviewed Biennial. Business Units/Verticals shall put up review of the
products to sub-group of CPPC. In order to ensure compliance, Risk Management Committee of each
Business Vertical shall monitor progress of reviewed products of their vertical, at quarterly intervals.

1.6 To cater to the varied needs of customers in different segments, the Bank has created different
Business Verticals such as IBG, CAG, CCG, R&DB, FI & MM and also different business groups
under R&DB viz. Small & Medium Enterprises Business/ Personal Banking Business/ Real Estate
and Housing Business/ Agri Business Unit/ Financial Inclusion/ NBFC Alliances. In order to have a
focus on monitoring, management and resolution of NPAs & stressed assets (including SMA-2),
SARG is created.

1.7 The Bank has continuously been striving to maintain transparent and fair practices, and stand by
its commitments made to customers under the Fair Practices Code, as envisaged and overseen by the
Banking Codes and Standards Board of India, in respect of acknowledging receipt of loan
applications, their timely processing, appraisal and sanction, stipulation of terms and conditions,
post disbursement supervision, changes in terms and conditions, recovery efforts etc., The Bank has
also put in place a mechanism for redressal of grievances of borrowers. Annual review of
compliance with FPC for lenders and functioning of the grievance redressal mechanism is put up to
the Compliance RMC by Credit Policy & Procedures Department.

1.8 Given the challenges in SME financing, each Foreign Office would prepare a separate SME
Loan Policy or would include the provisions pertaining to SME financing in its Loan/Credit Policy
after taking into account the local regulatory/govt. guidelines and incentives/relaxations provided in
funding to SMEs as also the criteria/ cut off for identifying SME. The SME Loan/Credit Policy of
FOs should inter alia cover composition of SME sector, identification of thrust areas, Products and
Services, identification of risks in SME financing, Pricing & return and Follow up, monitoring and
supervision.

1.9 The policy is for internal circulation only

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2. EXPOSURE NORMS AND CREDIT RISK CONCENTRATION

While prudential guidelines for avoiding concentration of risk serve as broad indicators, continuous
evaluation of other elements such as market conditions, government policies, legal framework,
economic indicators, stock market movements, etc., is made to assess transaction risk intrinsic to a
single borrower, group of borrowers, segment of industry as well as to sectoral exposures in order to
formulate short term exposure restrictions where considered necessary. The Loan Policy recognises
the need for measures aimed at better risk management and avoidance of concentration of credit risk
at the whole-Bank level and at the FOs. To this end, limits have been prescribed for Bank’s
exposure to single borrower, borrower groups, specific industry/ sector etc. RBI has recently
released a framework on large exposure on single borrower and close related group of borrowers. It
recognizes that the off-balance sheet exposures should also be subject to normal credit appraisal and
discipline.

Definition of Single/ Groups of Connected Counterparties as per LEF

a. Single Counterparty: The exposures to a group of counterparties with specific relationships or
dependencies such that, were one of the counterparties to fail, all of the counterparties would very
likely fail. A group of this sort, referred to in this framework as a group of connected counterparties,
must be treated as a single counterparty.

b. Group of Connected Counterparties (GCC): Two or more natural or legal persons shall be
deemed to be a group of connected counterparties if at least one of the following criteria is satisfied.

a) Control relationship: One of the counterparties, directly or indirectly, has control over
the other(s) or the counterparties are directly or indirectly controlled by a third party.
b) Economic interdependence : If one of the counterparties were to experience financial
problems, in particular funding or repayment difficulties, the other (s) as a result, would
also be likely to encounter funding or repayment difficulties.

c. Regulatory Guidelines (on Exposures and Relaxations / Restrictions)

Exposure norms: The regulator has prescribed the following caps, which the Bank shall comply
with at all times:
Large Exposure Framework.
Nature of borrower Cap on Exposure (Prudential Norms)
Single Counterparty 20% of Bank’s Tier I Capital *
Group of Connected Counterparties. 25% of Bank’s Tier I Capital
Single NBFC 20% of Bank’s Tier I Capital
Group of Connected NBFCs 25% of Bank’s Tier I Capital
In exceptional cases, exposure upto additional 5% of the Tier I capital may be permitted to
single counterparty with the approval of Chairman.
Any breach of the above Large Exposure Limits shall be under exceptional conditions only
and shall be reported to RBI (DBS, CO) immediately and rapidly rectified.
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3. Large Borrower

In order to align the exposure norms with the BCBS standards, RBI has issued guidelines on Large
Exposure Framework (LEF) to be implemented with effect from 01.04.2019. Large borrower is
defined as the sum of all exposure values of the bank to a counterparty or a group of connected
counterparties being equal to or above 10% of the Bank’s Tier- I Capital (instead of total capital
funds as hitherto). The aggregate exposure to all “large borrowers” should not exceed 800 % of
Bank’s Tier I Capital. CRMD will monitor exposure under Large Exposure Framework and put up
review to RMCB at quarterly intervals.

The exposure to Large Borrower shall be reported by CRMD to RBI, Department of Banking
Supervision, Central Office (DBS, CO) as per the RBI guidelines.

Under LEF framework, an exposure to a counterparty will constitute both on balance sheet
(accounting value of exposure) and Off-Balance Sheet (by applying CCF with a floor of 10%)
exposure included in either the banking or trading book and instruments with counterparty credit
risks. The LEF norms are applicable from 01.04.2019.

3.1 Non-Centrally cleared derivatives exposures shall be applicable from 1st April 2020.

3.2 The exposures that are exempted from the LEF are listed below:
i. Exposures to GOI and State Governments which are eligible for zero percent Risk weight under
Basel III – Capital regulation
ii. Exposure to RBI
iii. Exposures where the principal and interest are fully guaranteed by the Government of India;
iv. Exposure secured by financial Instruments issued by GOI, to the extent that the eligibility
criteria for recognition of credit risk mitigation are met.
v. Intra-day interbank exposures
vi. Intra-group exposure as it will continue to be governed by the Master Circular on Exposure
Norms
vii. Borrowers, to whom limits are authorised for Food Credit
viii. Bank’s clearing related exposure to Qualifying Central Counter Parties (QCCPs)
ix. Deposits maintained with NABARD on account of shortfall in achievement of targets for
priority sector lending.
RBI guidelines on LEF issued from time to time to be complied with.

Enhancing Credit Supply for Large Borrowers through Market Mechanism:

1.The Bank has to keep future incremental exposure to large “specified borrowers” within a
“Normally Permitted Lending Limit) (NPLL).
2. Specified Borrower: Means a borrower having Aggregate Sanctioned Credit Limit (ASCL) of
more than:
a. Rs. 25,000 Cr at any time during FY 2017-18 b. Rs. 15,000 Cr at any time during FY 2018-19
c. Rs. 10,000 Cr at any time from April 1, 2019 onwards

The date on which the borrower becomes a specified borrower is termed as reference date.
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3.3 Aggregate Sanctioned Credit Limit (ASCL): Means the aggregate of Fund based credit
limits sanctioned or outstanding, whichever is higher, to a borrower by the Banking System. ASCL
also include:
a. Unlisted privately placed debt with the banking system
b. ECB, Trade Credit raised from overseas branches of Indian Banks
Banking System means all banks in India including RRBs and Co-operative Banks and branches of
Indian Banks abroad.

3.4 Provisioning implications for the Bank (Incremental provisions and risk weights):
incremental exposure of the B anking system to a specified borrower beyond NPLL would
be deemed to carry higher risk, which would be recognised by way of additional provisioning
and higher risk weights as under:
a. Additional provision of 3 percentage points on the incremental exposure of the banking
system in excess
of NPLL, which would be distributed in proportion to each bank’s funded exposure.
b. Additional risk weight of 75 percentage points for the incremental exposure to the specified
borrower. The resultant additional risk-weighted exposure, in terms of risk-weighted assets,
would be distributed in proportion to each bank’s funded exposure to the specified borrower.

Monitoring of the accounts shall be done by the BUs concerned. BUs shall provide the
detailed report to CRMD for consolidation and puting up review to RMCB at quarterly
intervals.

Guidelines in this regard have been put in place.

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4. DUE DILIGENCE, STATUTORY AND OTHER RESTRICTIONS ON LOANS

& ADVANCES

All credit proposals are subjected to due diligence processes in regard to the credentials of the
borrower, purpose of the loan, financial position of the borrower, need based requirement of credit
facilities for working capital and capital expenditure, capability to service the loans and security
offered. The loan proposals should normally be supported by a request letter/ application duly signed
by an authorised person of the borrowing unit. In case of renewal at existing level/reduced level, if
request letter is not available, arrangement letter/letter of continuity is to be exchanged with the
borrower(s) / guarantor(s).

Careful selection of borrowers is essential to maintain asset quality. Hence, scrutiny of past credit
history of all Borrowers/Promoters/Directors/Guarantors needs to be carried out with a view to being
satisfied about their credentials, and for ensuring compliance with the guidelines on KYC and AML
under Prevention of Money Laundering Act or similar such act of host country. Due diligence in
relation to promoters and management should also reckon/cover aspects like experience,
professionalism, integrity, vision, track record of meeting commitments to lenders, industry
experience, history of strategic initiatives, governance practices and record of adherence to
covenants. Bank's approach in granting credit facilities to companies whose directors are in the
Defaulters' List of RBI / Credit Information Companies/SEBI Banned list / CRILC/ NeSL
(Information Utility set up under IBC)/ IBBI/ NCLT Central Fraud Registry of RBI etc. is also to be
taken care of.

Financial Due Diligence

i) The financials of the main company and its major associate / sister concerns should be reviewed,
as far as possible, on the basis of audited financials of the concerns on a common date.
ii) Balance Sheet should be free from any material adverse remarks of the auditors. Any adverse
comments must be separately discussed in the evaluation / appraisal process.
iii) Verification of Income Tax, GST return etc. must also be ensured.
iv) Authenticity of the documents/ reports/ certificates etc. issued by Chartered Accountants is to be
verified from the link https://udin.icai.org with UDIN and key field provided by the certifying
Chartered Accountants.

Third Party Entities (TPEs)

Bank relies on reports or certificates of a number of professionals for due diligence or appraisal.
These professionals referred to Third Party Entities (TPEs) include Chartered Accountants, Lawyers
and Valuers etc. Bank has recently developed on-line Vendor Management System (VMS), outside
CBS, containing master database, centralized monitoring, allotment of work and tracking the
performance for evaluation of their services and renewal of contract of TPEs which includes
Chartered Accountants, Advocates/ Law Firms, Valuers, Investigating Agencies/ Agencies for
Specialised Monitoring (ASM)/ Resolution Professional (RP) and Debt Resolution/ Recovery Agents
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4.1 Policy on Sanction of Credit Facilities to Companies, the names of whose Directors
feature in Defaulters’ List or Defaulter in CIC Reports

Position of Director in Bank’s Approach

Defaulting company
(i) Promoter Director of a Existing Accounts:
defaulting company or Director of a. The renewal / continuation of the limit at the existing
a defaulting company and having levels may be considered by the sanctioning authority based
a role in the day-to-day affairs of on proper Justification/ mitigation/Corrective Action plan
its management. provided.
(ii) Promoter Director of a b. Normally, no additional (including ad-hoc / enhancement)
defaulting company or director of facilities are to be sanctioned to the applicant company till the
a defaulting company having a name is removed from the defaulters' list or irregularity/
role in day-to-day affairs of its default, if any, in CIC reports, paid and No overdues
management, but who resigned certificate obtained. However, enhancement/ additional
from the Board of defaulting facilities may be considered by the authority not below RCCC
company, to circumvent any for proposals below RCCC. For RCCC and above, it will be
obstacle in getting credit. the Sanctioning Authority. In such cases, the reasons for
default/ continuing nature of default during past 12 months
should be critically examined and based on justification/
mitigations provided, a view may be taken on a case to case
basis. The approval needs to be obtained as template item.
New Connections: Not to be considered till the name of the
unit is removed from the defaulters' list or irregularity/
default, if any, in CIC reports, paid and No overdues
certificate obtained. and the reasons for the default should be
ascertained and satisfied.
(iii) Director in a defaulting Proposal relating to the applicant company to be considered
company, but not connected in on merit. If the defaulting company is an associate/
any way with its day-to-day subsidiary of the applicant company or a group company,
management. approach mentioned in '(i)' & '(ii)' above may be followed.
(iv) Nominee / professional / Proposal relating to the applicant company is to be
Honorary / Independent director considered on merits as such Directors are on the Board in
of a defaulting company, their professional / honorary/ Independent capacities. As
(including associate / group / such, the approach stipulated under (i) and (ii) above does
subsidiary company). not apply in these cases. Accordingly, it is to be discussed in
the proposal and no specific template approval is required to
be sought in such cases.
(v) Promoter / nominee / The above approach as applicable may be adopted in such
professional / honorary / cases also, if information is available.
Independent director as in '(i)' to
'(iv)' above, but whose names are
yet to be included in defaulter's
list (as time lag in availability of
such list is usual).
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4.2 Bank’s approach towards extension of credit facilities to applicant companies, whose name
appears as defaulters in CICs reports or Defaulters’ list shall be as under:
Credit facilities to units Existing Accounts:
whose name appears as a. The renewal / continuation of the limit at the existing levels may be
considered by the sanctioning authority based on proper Justification/
defaulters in CICs
mitigation/Corrective Action plan provided.
b. Normally, no additional (including ad-hoc / enhancement) facilities
are to be sanctioned to the applicant company till the name is removed
from the defaulters' list or irregularity/ default, if any, in CIC reports,
paid and No Overdues Certificate obtained. However, enhancement/
additional facilities may be considered by the authority not below
RCCC for proposals below RCCC. For RCCC and above, it will be the
Sanctioning Authority. In such cases, the reasons for default/
continuing nature of default during past 12 months should be critically
examined and based on justification/ mitigations provided, a view may
be taken on a case to case basis. The approval needsto be obtained as
template item.
New Connections: Not to be considered till the name of the unit is
removed from the defaulters' list or irregularity/ default, if any, in CIC
reports, paid and No Overdues certificate obtained. The reasons for the
default should be ascertained and satisfied

Statutory and Other Restrictions

The regulator provides a framework of the rules/regulations/instructions on statutory and other
restrictions on loans and advances which need to be implemented, and adequate safeguards adopted
by the Bank/ FOs.

Advances against Bank's own shares

In terms of Section 20(1) of the Banking Regulation Act, 1949, the Bank cannot grant any loans and
advances on the security of its own shares.

Credit facilities are extended for financing genuine commercial activities. Any speculative purposes
and/or any unlawful activity shall not be considered for financing.

Restrictions on Holding Shares in Companies: While granting loans and advances against
shares, statutory provisions contained in Sections 19(2) and 19(3) of the Banking Regulation
Act, 1949 must be strictly observed.
19(2): The Bank shall not hold shares in any company, whether as pledgee, mortgagee or absolute
owner, of an amount exceeding thirty per cent of the paid-up share capital of that company or thirty
per cent of its own paid-up share capital and reserves, whichever is less.
19 (3): Bank shall not hold shares, whether as pledgee, mortgagee or absolute owner, in any
company in the management of which any Managing Director or Manager of Bank is in any manner
concerned or interested. Reporting mechanism for the above is put in place.

Restrictions on Credit to Companies for Buy-back of their Securities

Bank shall not provide loans to companies for buy-back of their shares / securities.
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Restrictions on Grant of Financial Assistance to Industries Producing / Consuming

Ozone Depleting Substances (ODS)
Bank shall not extend finance for setting up of new units consuming/producing Ozone Depleting
Substances (ODS) and to small/medium scale units engaged in the manufacture of
aerosol units using chlorofluorocarbons (CFC) and companies not complying with environmental
laws prevailing in the country/host country.

Restrictions on Advances against Sensitive Commodities (#) under Selective Credit

Control (SCC)
(i) Bank is free to fix prudential margins on advances against sensitive commodities. However, in
case of advance against Levy Sugar, a minimum margin of 10% will apply.
(ii) Valuation of sugar stocks
a. Unreleased stocks of the levy sugar charged as security shall be valued at levy
price fixed by Government.
b. The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the Bank as
security shall be valued at the average of the price realised in the preceding three months
(moving average) or the current market price, whichever is lower; the prices for this purpose shall
be exclusive of excise duty. (#) Commodities generally treated as sensitive in this context are: Food
grains (cereals and pulses), selected major oil seeds indigenously grown (groundnut, rapeseed
/mustard, cotton seed, linseed and castor seed, oils thereof, vanaspati and all imported oils and
vegetable oils.

Restriction on payment of commission to staff members including officers

The Bank shall not pay commission to staff members and officers for recovery of loans.

Restrictions on offering incentives on any banking products

Bank shall not offer any Banking Products, including online remittance schemes etc. with prizes/
lottery/ free trips (in India/ or abroad). Etc., or any other incentives having an element of chance,
except inexpensive gifts costing not more than Rupees two hundred fifty, as such products involve
non-transparency in the pricing mechanism and therefore go against the spirit of guidelines.

Restrictions on other loans and advances

Loans and Advances against Shares, Debentures and Bonds
Policy prescriptions covering Loans and Advances against Shares, Debentures and Bonds shall duly
reckon the regulatory general guidelines and specific restrictions in relation to Individuals, Share
and Stock Brokers, Commodity Brokers, Market Makers, Financing of IPOs, Financing of
employees to buy shares of their own companies, financing to meet promoters’ contribution to equity
of new companies, Advances against Units of Mutual Funds, Margin Trading, Acquisition of Equity
in Overseas Companies.

Arbitrage Operations
No credit facility directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges
shall be extended by the Bank.

Advances against shares to Individuals and other than individuals

Loans against security of shares, convertible bonds, convertible debentures and units of equity
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oriented mutual funds to individuals from the banking system should not exceed the limit of Rs.10
lacs per individual if the securities are held in physical form, and Rs. 20 lacs per individual if
the securities are held in dematerialized form. Such loans are meant for genuine individual
investors and the Bank shall not support collusive action by a large group of individuals belonging
to the same corporate or their inter- connected entities to take multiple loans in order to support
particular scrips or stock- broking activities of the concerned firms. Detailed operating guidelines
are provided in the Manual on Loans and Advances.

Prudential requirements: Assignment of risk weight for capital adequacy purposes

The Bank/FOs shall be guided by regulatory guidelines and directions on ‘Basel III Capital
Regulations’ as amended from time to time, in the matter of capital adequacy assessment.
Bridge Loans against receivables from Government
Bank shall not extend bridge loans against amounts receivable from Central/State Governments
by way of subsidies, refunds, reimbursements, capital contributions, etc. except the cases
specifically permitted by RBI.

Shell Companies: Bank shall not grant any advance to any company which is found to be a shell
company in terms of its features resembling to those as advised by AML CFT Department. The
guidelines with regard to treatment of shell companies issued by MCA/FIU/SEBI etc., from time to
time shall be complied with meticulously.

Restrictions on number of Layers of Subsidiaries:

The Guidelines issued by MCA on Companies (Restriction on number of layers) Rules 2017 which

states that on and from the date of commencement of these rules (20 th September 2017), no
company, barring those exempted under the guidelines, shall have more than two layers of
subsidiaries. The Borrowal company (existing & proposed) will submit an undertaking in this regard
confirming that they are in compliance with the guidelines.
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5. PERFORMANCE/FINANCIAL ANALYSIS AND CREDIT RISK ASSESSMENT

The primary objective of financial statement analysis is to understand and diagnose the information
contained in financial statements with a view to judge the profitability, financial soundness, and
operational efficiency of management of the firm to make forecast about its future prospects.

As part of Bank’s appraisal process, financial statements – profit and loss account, balance sheet and
cash flow statement of the borrowing units are analysed to determine its solvency, liquidity and
profitability as well as its sources and applications of funds. In addition, financial analysis involves
extrapolating the past performance of a borrowing entity so as to arrive at an estimate of its likely
future performance. Various ratios are calculated by studying past 2 years’ performance of the unit
and comparing them to analyse the trend. Inter firm comparison should also be done to determine
performance and financials of the unit vis-à- vis its peers.
Audited Financials
Audited financials along with Tax Audit Report (i.e. Form 3CA, Form 3CB or 3CD) and annual
reports covering Auditor’s Report (Companies Auditor Report Order, wherever applicable) are to be
obtained from the Borrowing units each year and analysed as part of due-diligence and monitoring.
For New Connections: The Audited Financial Statements should generally be not more than 12
months old from the date of close of the relative Financial Year.
In case the latest audited financials are more than 9 months old and upto 18 months, provisional
financial statements not more than 6 months old are to be obtained and analysed and to be satisfied
that the activity level, profitability, liquidity and solvency ratios are broadly in alignment with the
estimates/ projections.

No new connections are to be entertained if audited financials are more than 18 months old.
Detailed guidelines have been put in place.
For Existing Connections: In case of listed companies, review/ renewal shall be carried out based
on audited financials not more than 15 months old and unaudited financials not more than 6 months
old. In case of unlisted borrowers, review/ renewal shall be carried out based on audited financials
not more than 18 months old and provisional financials not more than 5/6 months old.

No review/ renewal is to be permitted if audited financials are more than 15 months old for listed
companies and 18 months old for unlisted borrowers as the case may be and only continuation of
working capital limits may be permitted. Detailed guidelines have been put in place.

In respect of exposures to unlisted PSUs/ Government undertakings review / renewal of limits can be
carried out based on the Financial statements certified by Internal Auditors and there is no need to
wait for the completion of Comptroller & Auditor General Audit, wherever applicable.
However, non obtention of Audited financials should be discussed as a part of the assessment with
proper justification along with the timeline for its obtention. No specific approval from Competent
Authority is required to be obtained.
In all such cases, Audited financials has to be obtained subsequently and CRA is to be worked out.
 Page 15

Ministry of Corporate Affairs, on 16.02.2015 notified the Companies (Indian Accounting Standards)
Rules, 2015 to converge the current Indian Accounting Standards (IAS) with the International
Financial Reporting Standards (IFRS) and Ind AS is made applicable to companies in a phased
manner as under:
a) All companies with net worth>= Rs. 500 Cr: FY 2016-17
b) All companies with net worth>= Rs. 250 Cr: FY 2017-18
c) Listed companies with net worth< Rs. 250 Cr: FY 2017-18
d) Unlisted companies with net worth < Rs. 250 Cr: Not applicable

Performance and Financial analysis

The Bank has a unified CRA System for different Industry/ Sector, which is used for assessing the
credit risk of borrowers as well as facilities. Each CRA Model has specified Ratio Band for each
Financial Parameter for assigning Score. The Ratio Band at which the highest Scores are awarded
shall be considered as Desirable level.
Desirable level is indicative level as there cannot be a definite benchmark, as desirable levels are case
specific, guided by the nature, size and scope of projects and activities. The operating functionaries
shall provide justification as part of the proposal for all the financial parameters where the unit has
not achieved the desirable level. The sanctioning authority shall consider variations, if any, from
these levels based on the justifications placed before them. No specific approval from the
Sanctioning Authority is required to be obtained in this regard.
In respect of eleven specific industries viz. Hydrocarbon, Power, Iron & Steel, Textiles, Electrical
Equipment, Telecom, Construction, Aluminium, Food Processing, Real Estate and Fertilisers where
the Bank has exposure of Rs. 10,000 crores (FB+NFB) and above, separate sets of benchmarks for
financial parameters have been set. In case there is any variation from the acceptable and the actual
levels, such deviation shall be discussed as part of proposal with proper justification. No specific
approval from the Sanctioning Authority is required to be obtained in this regard

The following have been implemented w.e.f 01.10.2019:

a. Investment in Associates/Subsidiaries normally to be permitted only upto the extent of TOL/Adj.
TNW does not breach the desired level of 4 in case of Manufacturing Sector and 5 in the case of
Trade and Services sector. Deviation, if any, needs approval from Sanctioning Authority as a
template item.
b. Further, 20% of the Corporate Guarantee extended by the Company in favour of
Associates/Subsidiaries or any other companies for securing credit facilities or otherwise to form
part of total outside liabilities for the purpose of calculating financial ratios.

Promoter’s shares in the borrowing entity (Listed Companies) should not be pledged to any
Bank/NBFC/Institution without prior consent of the Bank. This is a mandatory covenant and should
be tested Half Yearly. Any breach should trigger Dynamic Review of Rating.
In the wake of subsidiarisation, analysing financials of the Group at the consolidated level in
addition to the standalone entity is necessary. In the case of companies with subsidiaries, the adjusted
TNW could be lower for the parent company and the rating may suffer on account of the investment.
In all such cases where the Group consists of large number of companies the leverage should
be measured by Consolidated TOL/Consolidated TNW. In those cases, where the loan is being
taken in the books of Parent/Holding Company but subsidiary companies are the operating units, the
standalone financial statements of subsidiaries (if available) should also be analysed and commented
upon in the loan proposal.
 Page 16

Internal Credit Rating – Credit Risk Assessment (CRA)

For each credit proposal, a credit rating is assigned using the internal credit rating system. The Bank
as of now has a unified CRA System, which is used for assessing the credit risk of borrowers as
well as facilities (facility rating applicable for exposures beyond Rs.5 crores/ USD 1 Mio or its
equivalent) viz., working capital, term loan and non-fund based exposures etc., to C&I, SME and
AGL segments for total exposure of Rs.50 lacs/ US$ 100 K and above and scoring models for all
products with exposure of less than Rs.50 lacs/ US$ 100 K.
Based on the CRA score, risk rating (SB-1 to SB-15) is awarded to the entity. The SB-16 rating is
assigned to NPA accounts by default.

Credit Risk Assessment Model for Inter Bank Exposures Domestic Schedule Commercial
Banks (DSCBs):

Bank uses Bank Exposure Risk Index (BERI) model to assess the credit risk associated with lending to
Domestic Scheduled Commercial Banks (DSCBs), Development Finance Institutions (DFIs) & Small
Finance Banks (SFBs). BERI is used to assign Risk Rating & Fixing Global Bank Exposure Limits
(GBEL) (previously referred to as Permissible Global Exposure Limits). The BUs concerned have to
obtain necessary approval/ sanction from appropriate authority, for each deal/ loan/ investment, and
also need to ensure compliance with all extant due diligence instructions of the Bank relating to
sanction including legal documentation and its enforceability.
As GBELs are not advised to counterparty Financial institutions, these are not committed exposures
and therefore will not attract capital charge on unutilized limit. Capital Charge is calculated based on
actual exposures undertaken.

Foreign Banks: Global Bank Exposure Limit (GBEL), previously referred to as Permissible Global
Exposure Limit (PGEL), on Foreign Banks are set up using Bank Exposure Model (BEM). Exposure
can be taken up to the allocated limit and within the product wise sub limits.
Bank maintains a list of “Approved Foreign Banks” on whom exposures can be undertaken by FOs
as under:
Bills drawn under fully compliant LCs can be negotiated upto Bank Exposure Limit of the
Bank.

The limits are reviewed yearly by CRMD and put up to ECCB. BUs may assume interbank
exposure based on the business opportunities within the allocated limits for each segment including
Long Term, Short Term & Derivatives. The limit shall be monitored by BUs concerned and by
CRMD at the whole Bank level on monthly basis.
 Page 17

6. ASSESSMENT OF CREDIT FACILITIES

The Bank has in place a well-established process of credit appraisal that has developed and evolved
over a period of time. The fundamental purpose of credit appraisal in the Bank has been two fold.
First, to be able to take an informed decision as to the credit worthiness of any proposal; that is,
whether it is prudent, worthwhile and desirable for the Bank to take a credit exposure on the
applicant entity. Thereafter, where a positive decision is arrived at in this regard, to be able to assess
the extent and nature of such credit exposure, the conditions on which such exposures is acceptable
and the pricing at which it is considered prudent to operationalize such a credit relationship.

A decision as to the credit worthiness of a proposal is arrived at after considering a combination of

several factors including:
i) an assessment of the promoter, covering their background and relevant experience in the
area of the proposed entity,
ii) the previous experience of the bank with the promoters or their group,
iii) Complete information on Take Over/ New Management including regulatory compliance
and impact of Change in Management Control,
iv) the perceived prospects of the industry or activity proposed,
v) the already existing extent and quality of the exposure of the Bank to the industry or activity
on the one hand and to the promoters/ group on the other,
vi) policy relating to exposure levels and norms prescribed by the regulators and by the bank for
the proposed activity / industry,
vii) the perceived financial strength and the risk rating of the promoters, the borrowing entity
and / or the group,
viii) the extent and nature of credit risk mitigants proposed, etc.

Having decided that the proposal, as a reasonable and acceptable business risk, is a ‘bankable’
proposition, the next step involves assessing the nature and extent of the proposed exposure. The
Bank provides a range of debt instruments including all types of term and working capital facilities,
each of which can be structured either as fund based products or non-fund based products or a
combination of both. It is our effort to combine these with a range of ‘payment and collection
platforms’ that are off the shelf or tailor- made to meet individual requirements and seek to provide
our customers with a complete solution to all their financial requirements.

With a view to avoiding `Lenders’ Liability’, no branch/FO should give any verbal or in-principle
commitment to lend to a prospective borrower, FB or NFB facilities, unless detailed appraisal has
been made and proper sanction is in place. However, an in-principle quote/broad term sheet could be
given in deserving cases with the approval of DMD of the vertical.

Credit Review Department (CRD) has been set-up (at Circle level and Corporate Centre level) to
look at micro-level risks at an individual proposal level and strengthen role of credit risk by moving
from advisory to risk clearance (i.e. “Go/No-Go”) based on pre-defined metrics on risk appetite.
Methods of Assessment of Credit Facility (ies)
i) The assessment of working capital is done through a) Turnover Method
b) Projected Balance Sheet Method (PBS)
c) Cash Budget Method.
 Page 18

ii) Under the turnover method, working capital requirement is computed at a minimum of 25% of
turnover, of which, at least four-fifths is provided by the Bank and balance one-fifth represents the
borrower’s contribution towards margin for working capital. This method is applicable for sanction of
fund based working capital limit of up to Rs.5 crores or equivalent, as per recommendations of
Nayak Committee which had looked into issues relating to financing of Medium & Small
Enterprises.

iii) Under the PBS method, the fund requirement is computed on the basis of borrower’s projected
balance sheet, the funds flow planned for the current/ following year and examination of the
profitability and financial parameters etc. The key determinants for the limit can, inter-alia, be
the extent of financing support required by the borrower and the acceptability of the borrower’s
overall financial position including the projected level of liquidity. The projected Bank borrowing
thus arrived at, is termed ‘Assessed Bank Finance’ (ABF). This method is applicable for borrowers
who are engaged in manufacturing, services and trading activities and who require fund based
working capital (WC) finance of above Rs.5 crores or equivalent.

iv) Cash Budget method is used for assessing working capital finance for seasonal industries like
sugar, tea and construction activity. This method is also used for sanction of ad-hoc WC limits. In
these cases, the required finance is quantified from the projected cash flows, and not from the
projected values of current assets and current liabilities. Other aspects of assessment like
examination of funds flow, profitability, financial parameters etc., are also carried out.
Bank is considering making assessment of Fund Based Working Capital (FBWC) limits based on
Cash Budget mandatory for borrowers (irrespective of industry) with FBWC limits of certain
threshold to ensure need based financing.
 Page 19

7. TAKEOVER OF ADVANCES

In the competitive and liberalised financial environment, it has become important for the Bank to
aggressively market for good quality advances. One of the strategies for increasing good quality
assets in the Bank’s loan portfolio is to take over advances from other Banks/FIs.

Laying down of uniform take-over norms in an international environment where financial products,
systems and risks vary from centre to centre is neither desirable nor feasible. Each Foreign Office
would thus lay down certain broad parameters in respect of takeover of accounts in their Credit
Policy Document. While laying down Centre specific norms, the Offices may keep in mind the
guidelines mentioned in the Bank’s loan policy.

Norms for Takeover of Advance Accounts

1 Careful selection of borrowers is essential to maintain asset quality. All credit proposals are
subjected to due diligence processes in regard to the credentials of the borrower, financial soundness
of the borrower, ascertaining need based requirement of credit facilities, capability to service the
loans and security offered etc. Besides these usual due diligence, some additional safeguards are
prescribed for takeover of advances. Accordingly, a set of norms/ guidelines for C&I, SME and AGL
(Agro based industrial activities) segments have been laid down for takeover of loans. These are
being reviewed from time to time. The Broader guidelines in this regard are as under:

2 Rating criterion

i) For exposure upto Rs. 50 Cr from Banking System or its USD equivalent:
The CRA of the borrower should be SB-7 or better
ii) For exposures above Rs. 50 Cr its USD equivalent:
The CRA of the borrower should be SB-7 and ECR of the borrower for the existing exposure
should be BBB or better. The ECR for the enhanced exposure will have to be obtained within a
period of 6 months.
Note: Wherever Credit Rating Agency is changed, justification including compliance of
regulatory guidelines (i.e., SEBI etc.), if any, to be provided in the proposal.
3 Collateral Security: It must be ensured that the existing security with the Bank (from where the
account is being taken over) is maintained and no dilution in existing security coverage is permitted
for the amount taken over, by releasing the existing security charged to the existing banks. In
case Takeover is with enhancement/sanction of additional facilities, the collateral cover for
additional credit facilities sanctioned should be as per the norms prescribed by the Bank.
Substitution of existing security given to other Banks may be permitted for justifiable reasons by
the sanctioning authority, provided the realizable value of the security offered is not less than the
value of existing security with other banks. Specific approval of appropriate authority will need to be
obtained.

4 It must be ensured that the cushion is available as per industry exposure norms and the credit
rating hurdle rates specified, if any, for the industry segment are complied with.

5 Audited Balance Sheet (ABS) should generally be not more than 12 months old. If ABS is older than 9
months and upto 18 months old, provisional financials not older than 6 months are to be obtained
and analysed so as to be satisfied that the activity level and profitability, liquidity and solvency
 Page 20

ratios are broadly in alignment with the estimates / projections. The take over is not permitted if
ABS is more than 18 months old and no deviation shall be permitted in this regard. Detailed
guidelines in this regard have been put in place.

6 Ideally, only such accounts should be targeted for Takeover where the unit is in commercial
operations for at least two years (one year in case of Infrastructure projects) and no major green
field / brown field project is under implementation.

7 The unit should have been earning profits for at least 2 preceding years except Infrastructure
projects for which it will be 1 year after COD as per the last audited balance sheet and should not
be incurring losses during the year as per provisional financials (.6 above). The outlook for sales
and profitability should be positive and based on realistic estimates of capacity utilization and
EBIDTA margins as on the date of assessment.

8 Stock and Receivables Audit is to be conducted prior to disbursement of any credit facilities
above Rs. 5.00 Cr /USD 1 Mio or its equivalent except for units having ECR of “A-” and better.
(This is also applicable even for borrowers who are not covered by Mandatory External Rating).

9 Increase in exposure (working capital only) should not exceed 25% at the time of take over
from other Banks. However, this cap is not applicable for the companies externally rated “A-“
and better and above for the consecutive past two years.
Enhancement at the time of subsequent renewals will be based on guidelines issued by the Bank
from time to time. Deviation, if any, in this regard, authority structure is in place for approval.

10 Pricing improvement over the existing pricing of other banks should be offered only for
accounts meeting rating criterion for Takeover specified in .2 above.

11 Authority Structure for Waiver

Waiver in norms for takeover and authority structure for
approval:
i) Cases of past default / Caution List / OTS / restructuring / rehabilitation etc., subject to the
proposal otherwise being in compliance with RBI instructions regarding cooling period etc.: Waiver
to be approved by ECCB.
ii) Any other waiver Sanctioning Authority Waiver to be approved by
except item no. (i) above Credit Committees below RCCC/ upto RCCC/FOCC VII
[Rating criterion, CRA FOCC
and VII
other Takeover RCCC/ FOCC VII/ CCSC/ IBGCC-II/ Sanctioning Authority
norms] IBGCC and
CCCC
ECCB CCCC

12 A written communication should be obtained from existing bank indicating the up to date
dues on payment of which all the securities held ( including release of personal/corporate
guarantees) will be released in favour of our Bank.
13 Security should be Created and Perfected within 90 days of disbursement. Specific timeline in
this regard is to be appraised to the Sanctioning Authority as part of the proposal.
 Page 21

14 Consortium / Multiple Banking Arrangement (MBA):

a. The Following shall not be considered as Take over of Advances from Another Bank and as
such take over norms shall not be applicable:
i) when we join a consortium as an additional member or
ii) When we join a consortium and exposure of an existing member is taken over partly / wholly
or iii) When we join MBA to take additional exposure or
iv) Enhancement/ additional facility where we are already part of Consortium/ MBA
In all such cases, operating units should ascertain IRAC status of the borrower from the
existing bankers on the IBA specified format.
b. However, when we join or increase our share in MBA in order to replace an existing member
exposure either in whole or in part, all the norms relating to Takeover of advances will apply.
15 Takeover norms would apply even if borrower offers to liquidate existing credit
facilities before disbursement by our Bank. However, if there is a time gap of say 2 months
between liquidation of existing facilities and disbursement by our Bank, the Takeover norms
would not apply.
16 The above norms shall not be applicable in case there is a change of promoter under resolution
of stressed assets or substitution of existing promoter in respect of infrastructure projects. In
such cases, it has to be considered as a new connection and the credibility of new incoming
promoters as well as techno economic viability will be key considerations.

17 Validity of the sanction shall be 3 months from the date of conveying sanction.

18 The abovementioned Takeover norms are not applicable to AGL segment for which separate
norms have been prescribed as per para below. These norms are also not applicable in respect of:
i. Autonomous bodies promoted by Central Government/ Profit making Central PSUs
(Maharatna/Navratna/Miniratna)/ SPVs promoted by Profit making Central PSUs
(Maharatna/Navratna/Miniratna)/ PSUs guaranteed by Central Government/ State Government
institutions/ State PSUs guaranteed by State Governments.
ii. loans under PER segment
iii. schematic lending such as Lease Rental Discounting (LRD), ABL, ABL (CRE) and
Electronic Dealer Finance (e-DFS) etc.
19 First review of all taken over accounts beyond Rs. 5 Crores / USD 1 Mio or its equivalent is
required to be put up by the branch concerned, to the respective sanctioning authorities, as
the case may be, immediately after 6 months from the date of sanction. Full-fledged renewal of
working capital limits and annual review of term loan accounts should be done at annual intervals
from the date of sanction as usual.
 Page 22

8. PRICING OF LOANS

Pricing of Bank’s funds and services while being basically market driven, is also determined by two
important considerations, i.e., minimum desired profitability and risk inherent in the transaction. At
the Corporate /FO level, the applicable price for a particular advance or service is fixed taking into
account the actual/marginal cost of Bank’s/FOs funds and desired rate of return as calculated from
indices like profitability levels and return on capital employed. In case of corporate relationship
where the value of connections and overall potential for profitability from a particular account are
more important than a particular transaction, the price is fine-tuned even to breakeven level for the
transaction. For long term exposures, the factors that weigh are the rate charged by the financial
institutions / other banks, the period of exposure, the pattern of volatility in interest rates and
expected movement of the rates in the long-term perspective. The card rates for interest and service
charges are linked to External Credit Rating and internal risk rating whereby better rated companies
get cheaper rates. In select cases, the Bank may also use external Benchmark for fixing interest rates.

Pricing Tool: Bank is in the process of adopting an analytical tool for better pricing negotiations
with corporate customers. Once implemented, Branch should endeavor to price the loan within the
target band.

The Bank has also adopted an appropriate authority structure to facilitate competitive pricing of
loan products. The authority concerned while exercising the discretion takes into consideration the
risk rating of the loan asset, the trends in movement of interest rates, market competition and overall
business considerations. Various Credit Committees/ Sanctioning Authorities and other officials have
been vested with powers for approving competitive pricing within the respective areas of operation.
The quantum of delegation depends on factors such as degree of competition, market developments,
target group, purpose, value of connection, income from cross sell, accounts under
restructuring/corrective action plan etc. Benchmark ROCC / RAROC is the other consideration in
pricing of fund based and non-fund based credit facilities. All competitive/concessional pricing on
credit facilities need to be approved by the Appropriate Authority. The policy on competitive pricing
is reviewed from time to time based on changes in market conditions. Authority is delegated to
Credit Committees / BVs for extending concession in pricing / service charges for well rated
corporates which will be reviewed from time to time.

External Benchmark based Lending Rate (EBLR): To facilitate transmission of Monetary Policy
decisions, Bank has decided to use External Benchmark for pricing all its new floating rate Personal
or Retail loans and floating rate loans to MSMEs w.e.f 01.10.2019.

External Benchmark Rate has been linked with RBI’s Repo Rate. Spread is decided by the Bank.
However, Credit Risk Premium may undergo change only when borrower’s Credit Rating undergoes
a substantial change, as agreed upon in the loan product. Other components of spread including
operating cost may be altered once in three months.

1 Reset of Interest Rates under External Benchmark: The interest rate under external benchmark
shall be reset at least once in three months.
2 Transition to External Benchmark from MCLR/Base Rate/BPLR: Existing loans and credit
limits linked to the MCLR/Base Rate/BPLR shall continue till repayment or renewal, as the case
may be.
Provided that floating rate term loans sanctioned to borrowers which, in terms of extant
 Page 23

guidelines, are
eligible to prepay a floating rate loan without pre-payment charges, shall be eligible for switchover to
External Benchmark Lending Rate (EBLR) without any charges/fees, except reasonable
administrative/ legal costs. The final rate charged to this category of borrowers, post switchover to
external benchmark, shall be same as the rate charged for a new loan of the same category, type,
tenor and amount, at the time of origination of the loan.
Provided that other existing borrowers shall have the option to move to External Benchmark at
mutually acceptable terms.
Provided that the switch-over shall not be treated as a foreclosure of existing facility.

3 Bank also extends working Capital Demand Loan, Working Capital Loans (under Loan system of
delivery of Bank Credit) and LC bills discounting linking with T Bill rate with a minimum Floor
rate set periodically by the Bank.

Marginal Cost of Funds based Lending Rate (MCLR)

All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 are priced with reference to
the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark for such
purposes. Actual lending rates are determined by adding the components of spread to the MCLR.
Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked to
that benchmark.
1 Exemption
The following categories of loans shall be priced without being linked to MCLR as the
benchmark for determining interest rate:
i) Loans against Bank’s own Term Deposits.
ii) Loans to Bank’s own employees including retired employees.
iii) Loans granted to the Chief Executive Officer / Whole Time Directors.
iv) Loans linked to a market determined external benchmark.
v) Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted
as part of the rectification/restructuring package.
vi) In specified schemes, as advised by RBI/GoI/GoI’s undertakings, wherein Bank have to
charge interest rates as per the scheme.
vii) Fixed rate loans of tenor above 3 years.

2 The above list of exception is subject to review by the RBI from time to time. The existing
borrowal accounts {as on the said reference date of 01.04.2016, linked to Base Rate} may continue
till next Review/ Renewal / Reset / Maturity. On the date of renewal, the interest rate will
automatically shift and be linked to applicable MCLR. The existing borrowers have option to move
to MCLR based dispensation before full repayment/renewal, on mutually acceptable terms. Such
instances shall not be treated as foreclosure of the existing facility.

Computation of MCLR/Base Rate/SBAR

ALM Department is responsible for computation of the MCLR/ Base Rate/SBAR. Approval is
accorded by the Asset – Liability Management Committee of the Bank. Review of MCLR of
different maturities is done every month.
 Page 24

9. DELEGATION OF FINANCIAL POWERS

The Bank has a well-defined system of delegation of financial powers, duly approved by the Board
of the Bank, to sanction/approve credit facilities. The terms and conditions/covenants governing any
lending arrangement are also well defined. No credit facility can be extended to any borrower unless
duly sanctioned by the designated sanctioning authority/committee. All loans and advances in the
Bank are to be sanctioned by the designated sanctioning authority. In exercising the powers, the
authorities concerned are required to ensure compliance with the relevant provisions of the State
Bank of India Act and the State Bank of India General Regulations, regulatory guidelines of Reserve
Bank of India and any other regulations, and any rules/ regulations/ instructions/ orders issued from
time to time by the Bank.

The three significant principles around which the scheme of delegation of financial powers
revolves are:
i) powers are exercisable only in relation to the duties and responsibilities specially entrusted to a
functionary;
ii) all sanctions are subject to report to the next higher authority;
iii) No sanction/approval should be given beyond the delegated powers. In case of an emergency
situation, where it is not possible to obtain prior sanction/approval of the designated sanctioning
authority and a delay in taking decision may not be in the interest of the Bank, sanction/approval
beyond the delegated powers may be accorded judiciously, with prior administrative approval of
controlling authority. For sanctions/approval of ECCB, prior administrative approval of Chairman
has to be obtained. Post facto sanction/approval of the designated sanctioning authority should be
obtained along with confirmation of action, without any delay (within maximum 30 days). The
above enabler is to be used only in exceptional circumstances and should not be used
indiscriminately or frequently.
The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a
graded authority structure. The Executive Committee of the Central Board (ECCB) has full powers
for sanctioning credit facilities. The sanctioning powers have been delegated down the line to
‘Committees of officials’ viz. CLCC at Circle level, FOCC IV, FOCC V, FOCC VI, FOCC VII at
FO level, IBGCC II, IBGCC, RCCC, CCSC, CCCC at Corporate Centre. A committee viz.,
‘CCCCC’ is constituted at Corporate Centre for controlling all approvals of CCCC, except in the
matter of enhancement and fresh sanction of limits, which will continue to be put up to ECCB for
control.

The delegation of financial powers for sanctioning credit facilities by various authorities is based on
total exposure of the Bank to the borrower.

Higher discretionary powers have been made available in the case of top-rated borrowers (usually
AAA rated units whose industry outlook is positive and /or SB1 to SB5) and functionaries across the
hierarchy are vested with such dual powers depending on the risk rating of the borrower as detailed
below:
i) AAA rated units where Bank’s Industry Outlook is Positive (CRMD): Credit Committees shall
exercise 125% of the financial powers vested with them.
ii) AAA rated units/ Govt. of India guaranteed accounts/ GoI Departments/ GoI undertakings: The
 Page 25

financial powers of various Credit Committees as applicable to SB-I to SB-5 rated borrowers shall be
applicable to AAA rated units/ Govt. of India guaranteed accounts (only where the entire
exposure is guaranteed) /GoI Departments/ GoI undertakings of Maharatna category only,
irrespective of their CRA ratings.
Deviation/Waiver
Sanctions should normally be accorded as per Specific products/ Schemes. However,
deviations/waivers in general norms such as eligibility criteria, quantum of finance, tenor of the loan,
etc. (other than those to be approved by ECCB), albeit within the provisions of loan policy guidelines
are required to be permitted, at times on business or strategic considerations.
The schemes/ products normally specify the Authority Structure for approval of such
deviations/waivers. However, in respect of Deviations/Waivers, where authority structure has not
been specified, the authority for approving such deviations/ waivers shall be the Sanctioning
Authority not below CLCC.

Any deviation/ waiver should be only in highly deserving cases on a selective basis so as to keep it
at the minimum.

Organizational Planning and Systems & Procedures (OP & SP) Department will review the
delegation of financial powers from time to time, as necessary, to factor in the demands made on
account of organizational restructuring, emerging challenges, forces of competition, etc.
 Page 26

10. SECURITY, INSURANCE, COVENANTS AND DOCUMENTS

Primary Security
Primary security is the asset created out of the credit facility extended to the borrower and / or which
are directly associated with the business / project of the borrower for which the credit facility has been
extended. For example, hypothecation of stocks, book debts etc. Stocks include Raw Materials,
Stock in process, Finished Goods, Spares etc. Book debts are based on invoices and delivery
challans. Hypothecation is the established practice whereby a borrower offers to the lender charge on
an asset as security for a loan, while retaining ownership of the asset and enjoying the benefits
therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot
service the loan as stipulated by the terms in the loan agreement.

Collateral Security
Collateral security is any security, other than Primary Security, offered to additionally secure the
credit facilities sanctioned by the Bank. Collateral security is normally obtained as a risk mitigating
measure and to sustain the promoters’ interest in the venture.
Wherever, Collateral security from third party is obtained, personal/corporate guarantee of owner of
collateral security is desirable.
Further, if third party collateral is from Corporate (Non individual) entity, a detailed due diligence
should be done on the financial of the corporate to look for any financial stress/insolvency.

For MSE Sector (both Manufacturing and Services enterprises) no collateral security is to be
obtained for loans upto Rs. 10 lacs, and for loans above Rs. 10 lacs and up to Rs. 15 lacs the
sanctioning authority may consider waiving collateral security subject to compliance with certain
conditions. For this sector, the Bank has decided to cover all eligible SME advances upto Rs. 200
lacs (manufacturing and services) and upto Rs. 100 lacs (retail trade) under CGTMSE scheme. The
cost of guarantee i.e., Annual Guarantee Fee (AGF) shall be borne by the borrower for all loans (CC
&TL) sanctioned on or after 01.0017 (irrespective of the amount, including renewal of Cash Credit
facilities). The matter of recovery, or absorption, of guarantee fee by the Bank is reviewed from time
to time.

CGTMSE has introduced “Hybrid Security” product, wherein collateral security can be obtained for
a part of the credit facility whereas remaining part of credit facility, upto a maximum of Rs. 200 lacs
(manufacturing and service) and upto Rs. 100 lacs (retail trade) can be covered under CGTMSE
scheme. Guidelines in this regard have been put in place.

Advances to non farm enterprises in Manufacturing, Trading and Services with credit limits upto
Rs. 10 lacs are normally classified under Pradhan Mantri Mudra yojana (PMMY) and covered under
Credit Guarantee Fund for Micro Units (CGFMU). Guidelines in this regard have been put in place.
Other borrowers may be sanctioned credit facilities under Bank’s regular schemes.

As regards Agriculture segment, waiver is generally permitted for loans upto Rs. 1,60,000/- (Rupees
One Lac sixty thousand only) though there are scheme specific ceilings in this regard. In other
cases, with exception of specified categories like trade advances where obtention of collateral
 Page 27

security is prescribed as a part of the scheme, obtention/ waiver of collateral security is a discretion to
be exercised by the sanctioning authority. This decision is required to be taken on a case-to-case
basis. While doing so, the following points need to be kept in view:
i) Viability of the project per se will be the paramount requirement and available collateral may be
taken.
ii) A distinction may be made between new and existing connections while deciding/ insisting on
collateral / additional collateral security.

Pledge of Shares
Section 19 (2) of the Banking Regulation Act, 1949 states as under: -
“Save as provided in sub-section (1), no banking company shall hold shares in any company,
whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent of the
paid-up share capital of that company or thirty per cent of its own paid-up share capital and reserves,
whichever is less”. The detailed guidelines on cases requiring mandatory pledge of shares have
been put in place.

Section 19 (3) of the Banking Regulation Act, 1949 states as under: -

“Save as provided in sub-section (1) and notwithstanding anything contained in sub-section (2), a
banking company shall not, after the expiry of one year from the date of the commencement of this
Act, hold shares, whether as pledgee, mortgagee or absolute owner, in any company in the
management of which any managing director or manager of the banking company is in any manner
concerned or interested”. Reporting mechanism for the above has been put in place.

Assessment of Valuation of Multiple Properties dispersed over various locations- Discount to

assessed realizable value of the Collateral Security:
There are instances where the collateral offered is an aggregation of charge on several properties at
various locations. In such cases, where the number of properties is in excess of 10 (ten), a notional
discount @ 5% is to be applied on the aggregate “Realisable Value” of the properties and the
discounted value should be considered while calculating the security coverage in the credit proposal.
Discretion in regard to acceptance of larger numbers of property as well as the discount to be
notionally reckoned, has been vested with the Sanctioning Authority.

Security Creation/ Perfection

10.1. A valid and enforceable charge in respect of security for the credit facility (ies) as specified in
the terms of sanction must be perfected before disbursement – unless disbursement pending
completion of these formalities has been specifically permitted by the sanctioning authority / as per
delegated authority structure.

If sanctioned facilities are sought to be released on the basis of standalone documentation, pending
Consortium documentation, approval for such arrangement should be obtained from the sanctioning
authority.

Non adherence to the time given for perfection of security will invite penal provisions, which
should be clearly mentioned while conveying approval for extension in time. Waiver of penal
provisions should be avoided.

The registration of transactions of creation of security interest, securitization and asset

 Page 28

reconstruction (CERSAI) is made mandatory in respect of all mortgages across all business segments.
Security transactions secured by creation, modification or satisfaction of security interest in plant
and machinery, stocks, debts including book debts or receivables and intangible assets whether
existing or future, by way of hypothecation, shall be filed on CERSAI portal.

Ceding of Second Charge to other banks/financial institutions

Ceding of charge should not be viewed only from the point of dilution of security but also from the
angle of need / justification for the additional borrowing and the possible impact on the financials/
performance of the borrowing unit, and a decision taken based on normal business prudence. The
principle of sharing the available securities of the borrowers as between the t erm lending banks
and institutions should be that no bank/institution over-secures its position at the cost of the other
banks/ institutions.

Insurance cover of security charged to the Bank

Stocks/fixed assets under hypothecation/pledge to the Bank must be kept fully insured to the extent
of market value of the security unless the Bank has agreed to dispense with insurance. The cost of
insurance will be borne by the borrower. The Insurance policies are required to be obtained in the
joint names of the Bank and the Borrower or in the sole name of the Borrower if the policy contains
the Agreed Bank Clause where under any monies becoming payable under the policy shall be paid
to the Bank. Further, in terms of the security documents executed by the borrower, it is the primary
responsibility of a borrower to insure the assets and keep the policy alive and only if the borrowers
fail to do so, the Bank shall insure the movables and assets and debit the charges and premium to the
account of the Borrower. The expiry date of the respective insurance policies must be diarized in the
daily list in order that their renewal, when necessary, may not be overlooked.
In some of the geographies, either based on practice in the country or restrictions from the regulators,
above mentioned instructions relating to insurance cover on stocks/ fixed assets are not applicable.

Units handling hazardous substances, so notified by the Government from time to time, in quantity
equal to or exceeding a stipulated quantity of each substance should take out insurance as per the
provision of the Public Liability Insurance Act, 1991.

Insurance of mortgaged properties

The buildings, factories land & building, their fittings and fixtures, and machinery (which form part
and parcel of the mortgaged immovable property) must be kept fully covered by insurance against
the risks of fire as well as lightning (instead of fire alone, as the insurance companies do not admit
claims against damage caused to the buildings by fire due to lightning unless the risk is specifically
covered by the policy). The mortgaged properties should also be covered against riots, strikes, civil
commotion, cyclone, earthquake, and other natural calamities whenever such risks are apprehended
and insurance cover against them is deemed necessary by the Bank. (Terms and conditions of
sanction). All insurance policies should be taken out in the joint names of the Bank and the
borrower.

Bank’s interests may also be protected by instruments such as ‘key man’ insurance policy when the
borrowing entity is highly dependent on a few persons. Arrangements (e.g., assignment) should be
made so that the proceeds of insurance cover, when invoked, would be routed through the Bank.
 Page 29

Covenants
All sanctions of credit facilities are subject to certain covenants, including financial covenants, which
need to be adhered to by the Borrower/ Guarantor. The covenants are classified into two categories
keeping in view their nature viz. Mandatory Covenants and Mandatory Negative Covenants. The
exclusions/modifications, if any, to be approved by the MD of the vertical. Detailed guidelines in
this regard have been put in place.

The covenants applicable to the borrowing arrangement are articulated in the Arrangement Letter, as
are the penal provisions for non-compliance therewith.
Based on the above covenants, FOs shall formulate such types of covenants based on the host
country regulations/ law, legal advice and general applicability, which shall be part of their branch/
country specific loan policy for approval from DMD (IBG). In the absence of specific
covenants stipulated by the FO, Mandatory and Mandatory Negative covenants as above shall be
applicable.

These covenants, however, shall not be applicable for syndicated deals / India based loans and such
deals will be governed as per agreed terms and conditions.
Documentation Standards
The Bank/ FOs has in place well established systems and procedures for documentation covering all
types of credit facilities. These have been drawn up, and have evolved, over a period of time,
keeping in view the ultimate objective of documentation – which is to serve as primary evidence of
the debt owed by the borrower, or obligation guaranteed by the guarantor, to be relied upon in the
event of any subsequent dispute between the Bank and the borrower and/ or guarantor. Documents
also form the basis for enforcing the Bank’s right to effect recovery through legal recourse where all
other avenues have failed. Documents should cover the total exposure/dues to the borrower during
entire duration of advance. Operating units should ensure validity and enforceability of these
documents in the court of law till liquidation of debts by the borrower.

Documentation is a continuous and ongoing process covering the entire duration of an advance
comprising the following stages:

i) Pre-execution formalities:
These covers, mainly, searches at the Office of Registrar of Companies and search of the Register of
Charges (applicable to corporate borrowers), to ascertain the capacity of borrowers to borrow and
formalities, if any, to be completed by the borrowers in this regard. Searches at the office of the sub-
Registrar of Assurances or Land Registry and CERSAI records to check the existence or otherwise
of prior charge over the immovable property offered as security, etc., as also taking other necessary
precautions before creating equitable / registered mortgage, including obtention of the lawyer’s
opinion as to the clear, absolute and marketable title to the property based upon the genuineness,
completeness and adequacy of the title deeds provided.

ii) Execution of Documents

It covers obtention of proper documents, main and ancillary, appropriate stamping as required and
correct execution as well as recording thereof as per terms of sanction of the advance. This also
ensures compliance with requirements, if any, of corporate borrowers contained in the Memorandum
and Articles of Association, relevant resolution of the Board, etc. A copy of the loan agreement
 Page 30

along with all its enclosures will be delivered to the borrower (s) at the time of sanction/disbursal of
loans and acknowledgement of receipt thereof obtained.
iii) Post – execution formalities
This phase covers the completion of formalities in respect of mortgages, if any, registration with the
Registrar of Assurances, wherever applicable, and the registration of charges with the Registrar of
Companies within the stipulated period, etc. All existing mortgages and forthcoming mortgages
have to be registered, on an ongoing basis, with the Central Electronic Registry under SARFAESI
Act, 2002 – (CERSAI).

iv) Protection from Limitation / Safeguarding Securities

These measures aim at preventing documents from getting time-barred through limitation and at
protecting the securities charged to the Bank from being diluted by any subsequent charge that might
be created by the borrower to secure his other debts, if any. These objectives are sought to be
achieved by:
i) revival letters being obtained within the stipulated period, from borrower / guarantor;
ii) obtention of ‘Balance Confirmation’ from the borrower / guarantor at least at annual intervals;
iii) making periodic searches in the records of the Office of the Registrar of Companies /
Registrar of Assurances.
iv) insuring Assets charged – (unless specifically waived) to safeguard the Bank against the risk
of fire, other hazards, etc.;
v) carrying out periodical valuation of securities charged to the Bank;
vi) periodic inspection of charged assets.
Keeping the above broad objectives and the documentation process in view, Bank/ FOs has devised
standard documents in most cases, for various types of loans given to the borrowers, either by the
Bank alone or as part of a ‘Multiple Banking’ arrangement. Wherever standard specimens have not
been devised, these are suitably drafted on a case-to-case basis with the help of in-house legal experts,
on occasions, where warranted, through reputed law firms and approved by the competent authority.
Furthermore, changes in the documentation procedures and the implications involved are
circularised from time to time to all the branches/offices so that those who are responsible for
obtaining and safeguarding the documents are made fully conversant with requirements in this
regard. This is further strengthened through training imparted by the Bank from time to time.

In respect of consortium/ participation/ syndicated loans and advances, the documents are generally
executed in consultation with the other member banks in accordance with the guidelines laid down
by RBI /IBA in the matter. Similarly, where advances are extended jointly with the financial
institutions, documents are specially drafted in consultation with the solicitors / in-house legal
experts to ensure perfection of pari- passu charge and / or second charge, as applicable, of the
movable / immovable assets of the borrower to protect the banks’ interests.

Bank endeavors to standardize documents for all types of facilities. In cases where documents have
to be specially drafted for borrowers, Law officer at Local Head Offices / CAG/ CCG are authorized
to vet and approve such documents. However, the documents/ complexities in the documents, if any,
are to be vetted by the Law department at Corporate Centre, the same shall require the approval of
CGM Circle/ vertical.
Special loan schemes drawn up by BUs. For such schemes, specially drafted documents need to be
cleared by the Law Department at Corporate Centre only.
 Page 31

The sanctioned credit facility can only be disbursed on execution of standard loan documents in the
specified form, or as specially drafted by an approved law firm and duly veted and approved by the
Appropriate Authority as mentioned above.
Unconditional Cancellability
Unconditional Cancellability clause, which gives the Bank the right to cancel the sanctioned limit
without reference to the borrower at any time, needs to be accepted by borrowers. Effective from
April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the Borrowers
having aggregate fund based working capital limit of Rs. 150 Cr and above from the banking
system, irrespective of whether unconditionally cancellable or not, shall attract a credit conversion
factor of 20%.

10.6 Bank retains the rights to report the facilities/default and access the credit information in
respect of Loans availed by the borrower/company from NeSL (Information Utility). This shall be
made as standard clause in all documents, where ever applicable.
 Page 32

11. FOLLOW UP, SUPERVISION AND MONITORING OF ADVANCES

The Bank has in place comprehensive post-sanction processes aimed at enabling efficient and
effective credit management. Broadly, the objectives of post-sanction follow up, supervision and
monitoring, and some of the key areas that need to be kept sight of are:
i) Where sanctions are based on projections, periodic comparison of projections with actuals is most
important.
ii) Ensuring end use of funds for which sanction has been accorded. While requisite
instructions and procedures to this end have been laid down, it would be the primary responsibility of
the borrower to ensure that the funds borrowed have been utilized for the purpose for which they
have been lent by the Bank. To this end, the Bank may seek verification, by way of auditor’s
certificate, Board Resolution and by way of any other acceptable means.
iii) Comparing the account outstanding to the assets level on a continuing basis.
iv) Detecting non-compliance/ waivers, from terms and conditions of the sanction and taking
appropriate action to safeguard the Bank’s interest.
v) Ensuring recovery of instalments of the principal in case of term loans as per the scheduled
repayment programme.
vi) Examination of exception reports and reports in the nature of early warning signals.
vii) If the Early Warning Signals indicate possibility of any fraudulent transaction, such accounts
may be considered for classification as Red Flagged Accounts and reported as per RBI guidelines.
viii) Compliance with all internal and external reporting requirements for credit discipline.
ix) If irregularity in an account persists for longer period, or occurs repeatedly, the credit facilities
may need to be re-assessed and the issues appropriately addressed.
x) In case of Consortium/Multiple Banking Arrangements, there must be regular exchange of
information by and between the banks involved.
xi) Ensuring that the borrowing entity does not have un-authorized current account with other
banks.
The undernoted are a set of broad, general guidelines that have a bearing on the
monitoring, supervision and follow up aspects of credit administration, and thus need to be
complied with care:
i) Each and every sanction should be reported for control to the next higher authority/ designated
authority. Going forward, in order to have a more robust system which can help in Portfolio Level
Control, the existing format of individual control report shall be replaced with a consolidated system
generated “Sanction Analysis Report” covering details of sanctions/ approvals accorded by a credit
committee in a particular meeting. SAR shall be put up as one single agenda item to the next higher
committee (as in case of control report) for perusal and recording their observations/ suggestions to
the sanctioning committee concerned.
ii) Safe preservation of security documents and ensuring their validity and enforceability in a court
of law are areas that must not be lost sight of.
iii) Before disbursement of loans/credit facilities, a certificate regarding compliance with terms and
conditions of the sanction should be placed before the branch head, as per laid down instructions
without fail.
iv) Monitoring of large withdrawals with a view to ensuring that they are not unrelated to the unit’s
normal activity.
v) Follow up for timely submission of Statements of Stocks and Book Debts, and their careful
scrutiny, for correct computation of Drawing Power.
 Page 33

vi) Verification of assets

vii) Where Lender’s Independent Engineer (LIE) has been appointed, clarity in scope of work must
be ensured and reports are to be submitted directly to the Bank. Reports are to be examined
carefully and any developments / observations of note / material significance brought to the
attention of the borrowing unit, as well as of the branch head.
viii) Where limits have been allocated, allocatee branch must strictly adhere to the terms and
conditions advised by the home branch.
ix) Follow up for timely submission of FFRs/QRRs/ Management Information Reports and their
scrutiny and analysis to see that performance is in line with estimates / projections. If at significant
variance, appropriate corrective steps to be initiated.
x) Seeking cash flow statements on quarterly or more frequent basis and their careful analysis in
respect of units financed on cash budget method.
xi) Provisional Financials for the immediate preceding quarter to be obtained, analysed and
comments furnished in proposals.
xii) Adhering to the norms for conduct of Stock and Receivable Audit.
xiii) Engagement of agency for conduct of Forensic Audit in identified cases warranting such
measure. xiv) Review and Management of Stressed Assets
xv) Corrective Action Plan for Stressed Assets (CAPSA): Reporting irregularity for confirmation
and Review of SMAs.
xvi) Agencies for Specialised Monitoring (ASM): Applicable for large borrowers with total
exposure above Rs. 250 Cr exposures from Banking system. Detailed guidelines in this regard have
been put in place.
 Page 34

12. INCOME RECOGNITION, ASSET CLASSIFICATION. MEASUREMENT AND

IMPAIRMENT OF LOANS

The income recognition policy is objective and is based on the record of interest recovery rather
than on any subjective consideration. Likewise, the classification of a bank’s assets has to be done
on the basis of objective criteria which would ensure a uniform and consistent application of the
norms. Provisioning is also to be made based on the classification of assets, availability of security
and realizable value thereof. Food Credit advances are subject to the usual IRAC norms and Capital
Adequacy requirements.

DEFINITIONS
Non-Performing Assets: An asset becomes non-performing when it ceases to generate income.

An NPA is a loan or an advance where:

i) Term Loan: Interest and/or instalment of principal remain overdue for a period of more than
90 days.
ii) Overdraft/Cash Credit: Account remains ‘out of order’- if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power for a period of 90 days or outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power but there
are no credits for 90 days as on the date of Balance Sheet or credits are not enough to cover the
interest debited during the same period.
iii) In case of bills purchased / discounted – the bill remains overdue (any amount is overdue to
the Bank when not paid on the due date) for a period of more than 90 days.
iv) The instalment of principal or interest thereon remains overdue for two crop seasons for short
duration crops (Agriculture segment).
v) The instalment of principal or interest thereon remains overdue for one crop season for long
duration crops (Agriculture segment).
vi) The amount of liquidity facility remains outstanding for more than 90 days, in case of a
securitisation transaction undertaken.
vii) In case of derivative transactions the overdue receivables representing positive mark-to-market
value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due
date for payment.
viii) In case of interest payments, an account should be classified as NPA only if the interest due and
charged during any quarter is not serviced fully within 90 days from the end of the quarter.
ix) In addition, an account may also be classified as NPA in terms of paragraph 12.4.2
below.

INCOME RECOGNITION POLICY

The income recognition policy is based on the record of recovery. Income from NPAs is not
recognized on accrual basis but is booked only when actually received. Therefore, the Bank shall not
charge and take to income account interest on any NPA. This will apply to Government guaranteed
accounts also.

Interest on advances against Term Deposits, NSCs, IVPs, KVPs and Life Insurance policies may be
taken to income account on the due date, provided adequate margin is available in the accounts.

Fees and commissions earned by the Bank as a result of renegotiations or rescheduling of outstanding
 Page 35

debts should be recognized on an accrual basis over the period of time covered by the renegotiated
or rescheduled extension of credit.

Reversal of income
i) If any advance, including bills purchased and discounted, becomes NPA, the entire interest
accrued and credited to income account in the past periods, should be reversed if the same is not
realized. This will apply to Government guaranteed accounts also.
ii) In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed with respect to past periods, if uncollected.

Appropriation of recovery in NPAs

i) Interest realized on NPAs may be taken to income account provided the credits in the accounts
towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower
concerned.
ii) Appropriation of recoveries in NPAs (i.e. towards principal or interest due), as per the
Bank’s extant instructions is done in accordance with following priority.
a. Charges
b. Unrealized Interest
c. Interest
d. Principal

Interest Application
On an account turning NPA, Bank shall reverse the interest already charged and not collected by
debiting to Profit and Loss account, and stop further application of interest. However, it may
continue to record such accrued interest in a Memorandum account in Bank’s books.

ASSET CLASSIFICATION
Categories of NPAs: NPAs are to be classified into the following three categories based on the
period for which the asset has remained non-performing and the realisability of the dues:
i) Substandard Asset: An asset which has remained NPA for a period less than or equal to 12
months.
ii) Doubtful Asset: An asset which has remained in the substandard category for a period of 12
months.
iii) Loss Asset: A loss asset is one where loss has been identified by the Bank or internal or
external auditors or the RBI inspection team but the amount has not been written off wholly.

Accounts with Temporary Deficiencies: An account should not be classified as NPA merely due to
the existence of some deficiencies which are temporary in nature such as non-availability of
adequate Drawing Power based on the latest available stock statement, balance outstanding
exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on
the due date etc. subject to compliance of the following guidelines:
i) Drawings in the working capital accounts are to be covered by adequate value of current assets.
DP is to be arrived at based on the current stock statement, not to be older than three months. DP
computed based on the stock statements older than three months, would be deemed irregular.
ii) A working capital account will become NPA in case of irregular drawings for a continuous period
of 90 days even though the borrowing unit is working or the borrower’s financial position is
 Page 36

satisfactory.
iii) Regular and Adhoc credit limits need to be reviewed/ regularised not later than three months
from the due date/ date of ad-hoc sanction. In any case, an account where the regular / Adhoc credit
limits have not been reviewed/ renewed within 180 days from the due date/ date of Adhoc sanction
will be treated as NPA.

Up-gradation of loan accounts classified as NPAs: If arrears of interest and principal are paid by
the borrower in case of loan accounts classified as NPAs, the accounts should no longer be treated
as non- performing and may be classified as standard.
Standard accounts that are classified as NPA, and NPA accounts that are retained in the same
category on restructuring, will be upgraded only when all the outstanding loan / facilities in the
account perform satisfactorily during the specified period (@) i.e. principal and interest on all
facilities in the account are serviced as per terms of payment during that period.

(@) {Specified Period shall mean a period of one year from the commencement of the first payment
of interest or principal, whichever is later, on the credit facility with longest period of moratorium
under the terms of the restructuring package}.

Any additional finance may be treated as “Standard Asset” during the specified period under the
approved restructuring package. However, in case of accounts where the pre-restructuring
facilities were classified as ‘Sub- standard’ and ‘Doubtful’, interest income on the additional finance
should be recognised only on cash basis. If restructured asset does not qualify for upgradation at
the end of the above specified period, the additional finance, too, shall be placed in the same asset
classification category as the restructured debt.

Asset classification shall be borrower-wise and not facility-wise.

Advances under Consortium Arrangements: Classification shall be done based on the record of
recovery of the individual member banks and other aspects having a bearing on the recoverability of
the advances.

Accounts where there is erosion in the value of security/ frauds committed by borrowers: In
cases of such serious credit impairment, asset should be straightaway classified as doubtful or loss
asset as appropriate:
i) erosion in the value of the security- if realisable value of security is less than 50% of the value
assessed by the Bank or accepted by RBI at the time of last inspection, it may be classified under
Doubtful category,
ii) if realizable value of the security as assessed by the Bank/ approved valuers/ RBI, is less than
10% of the outstanding in the borrowal accounts, the asset shall be straightaway classified as Loss
asset.

Advances against Bank’s own Term Deposits, NSCs, KVPs, IVPs, surrender value of Life
Insurance Policy etc.: Such accounts would not be classified as NPAs provided adequate margin is
available. However, advances granted against gold ornaments, government securities and all other
securities shall not be covered by this exemption.
 Page 37

Loans with moratorium for payment of interest: Payment of interest becomes ‘due’ only after
the moratorium or gestation period is over.

Agricultural advances: An account will turn non-performing when the instalment of principal or
interest thereon remains overdue for two crop seasons, for short duration crops, and one crop season
for long duration crops. These norms shall be applicable only to Farm Credit. In regard to
agricultural loans to other than the above category of borrowers or term loans given to non-
agriculturists, identification of NPAs will be done on the basis of 90 days delinquency norm.

In case of natural calamities impairing the repaying capacity of agricultural borrowers, Bank may
convert short term production loan into a term loan or reschedule the repayment period subject to
RBI guidelines issued from time to time in the matter. Such loan accounts shall be treated as current
dues and need not be classified as NPA and would be governed by the revised terms and conditions.
Thereafter, IRAC norms will apply to those accounts as well.

Government guaranteed accounts: Central Government guaranteed credit facilities may be treated
as NPA only when the Government repudiates its guarantee when invoked. However, this
exemption shall not be available for the purpose of recognition of income. State Government
guaranteed advances and investments in State Government guaranteed securities would attract asset
classification and provisioning norms if interest and/or principal or any other amount due to the
Bank remains overdue for more than 90 days.

Project under implementation: For all project loans the ‘Date of Completion’ and the ‘Date of
Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at
the time of financial closure of the project. These should also be documented in the Bank’s appraisal
note during sanction of the loan.

Extension of DCCO: Project Loans

Projects where implementation has been stalled primarily due to inadequacies of the existing
promoters and where subsequent change in ownership of the borrowing entity has been effected – in
such cases, banks may permit extension of DCCO up to a further period of two years in addition to
the existing regulations on DCCO, without any change in asset classification of the account.
Detailed guidelines on DCCO of project loans are put in place.

Provisioning Norms
In case a bank fails to report SMA status of an account to CRILC or resorts to methods with the
intent to conceal the actual status of the account or evergreens the account, it will be
subjected to, inter alia, accelerated provisioning for that account. The n o r m a l provisioning
requirement, and the accelerated provisioning in respect of such non-performing accounts are as
under:

Loss Assets
Generally, loss assets are to be taken off Balance Sheet and to be parked in Advances Under Collection
Account (AUCA). In case loss assets are permitted to remain in the Bank’s books for any reason, a
provision equivalent to the outstanding (100 percent of outstanding) in the account shall be made.
 Page 38

Standard assets
Bank shall make general provision for Standard assets at the following rates for the funded
outstanding on global loan portfolio basis:
i) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25
per cent;
ii) Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
iii) Advances to Commercial Real Estate – Residential Housing Sector (CRE-RH) at 0.75 per cent;
iv) All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.
v) With regard to FOs, some of the local regulatory norms on provisioning and NPAs are more
stringent than RBI norms. Accordingly, these branches will follow the stricter of the two
regulatory norms (RBI/local) as applicable.

Provisioning in respect of Exposure to Wilful Defaulters

The provisioning in respect of existing loans/exposures of t h e B a n k to companies having
director/s (other than nominee directors of government/financial institutions brought on board at
the time of distress), whose name/s appear more than once in the list of willful defaulters, will
be (a) 5% in cases of Standard accounts and (b) in case of NPA account accelerated provisioning
shall apply.

Provisioning in respect of fresh exposure to Non-cooperative borrowers

Any fresh exposure to Non-Cooperative borrower will by implication entail greater risk
necessitating higher provisioning. Therefore, we have to make higher provisioning as
applicable to substandard assets in respect of new loans sanctioned to such borrowers as also
new loans sanctioned to any other company that has on its board of directors any of the whole time
directors/promoters of a non-cooperative borrowing company or any firm in which such a non-
cooperative borrower is in charge of management of the affairs. However, for the purpose of
asset classification and income recognition, the new loans would be treated as Standard assets.

Provisioning in respect of exposures of fraudulent borrowers

In case of accounts classified as ‘fraud’, the Bank will normally make provisions to the full extent
immediately. The provision may also be spread over four quarters, normally within the same
Financial Year i.e. up to 31 st March of the Financial Year in which the account is identified as fraud,
provided there is no delay in reporting. The option of providing fully for fraud accounts over a period
not exceeding four quarters will not be available to accounts classified as “loss accounts”. In case of
delays, the Banks under Multiple Banking Arrangement (MBA) or member Banks in the Consortium
Arrangement are required to make the provision in one go. Delay for the purpose would mean that the
fraud was not flashed to CFMC, RBI or reported on the CRILC platform, RBI within a period of one
week from its (i) classification as a fraud through the RFA route which has a maximum time period
of six months or (ii) detection/declaration as fraud ab initio by the bank as hitherto.

Valuation of security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of
security, in cases of NPAs with balance of Rs. 5 crores and above, stock and receivable audit at
annual intervals by empanelled Stock and Receivable Auditors is to be got done in order to
enhance the reliability on stock valuation. Collaterals such as immovable properties charged in
 Page 39

favour of the Bank should be got valued once in three years by Bank’s empanelled valuers.

Restructuring of Assets

With assets continuing to be under stress, there are several instances that require critical examination
from the point of view of possible viability pursuant to restructuring of facilities. Accordingly,
detailed guidelines are in place for restructuring loan accounts that are under stress.

General Principles and Prudential Norms for Restructured Advances

The principles and prudential norms laid down are applicable to all advances.

Eligibility criteria for restructuring of advances

While the Bank/ FOs may restructure accounts classified under ‘Standard’, ‘Sub- standard’ and
‘Doubtful’ categories, we are precluded from rescheduling / restructuring / renegotiating borrowal
accounts with retrospective effect. While a restructuring proposal is under consideration, the usual
asset classification norms would continue to apply. The process of re-classification of an asset shall
not stop because restructuring proposal is under consideration. Some illustrative criterions for
restructuring are i) No account will be taken up for restructuring unless the financial viability is
established. i i) Borrowers indulging in fraud and malfeasance will continue to remain ineligible for
restructuring.

Asset classification norms

Restructuring of advances could take place in the following stages:
i) before commencement of commercial production / operation;
ii) after commencement of commercial production / operation but before the asset has been classified
as ‘sub- standard’;
iii) after commencement of commercial production / operation and the asset has been classified
as ‘sub- standard’ or ‘doubtful’.

The accounts classified as ‘Standard assets’ should be immediately re-classified as ‘sub-standard

assets’ upon restructuring. The NPAs, upon restructuring, would continue to have the same asset
classification as prior to restructuring and slip into further lower asset classification categories as per
extant asset classification norms with reference to the pre-restructuring repayment schedule.

Provision on restructured advances

i) We are required to hold provision against restructured advances as per the extant provisioning
norms. ii) Restructured accounts classified as Standard advances will attract a higher provision
(as prescribed from time to time) in the first two years from the date of restructuring. In
cases of moratorium on payment of interest/principal after restructuring, such advances will
attract the prescribed higher provision for the period covering moratorium and two years
thereafter.
iii) Restructured accounts classified as non-performing assets, when upgraded to Standard
category will attract a higher provision (as prescribed from time to time) in the first year from the
date of upgradation.
 Page 40

Prudential framework for Resolution of Stressed Assets

i) The framework is applicable to borrowers with aggregate exposure of Rs. 2000 Cr and
above from 07.06.2019 and for aggregate exposure of Rs. 1500 Cr and above from 01.01.2020.
ii) Default means non payment of debts when whole or any part or instalment of debt has become
due and payable and is not paid on due date by the debtor or the corporate debtor, as the case may
be.
For Revolving facility like cash credit, default would also mean without prejudice to the above, the
outstanding balance remaining continuously in excess of the sanctioned limit or drawing power,
whichever is lower, for more than 30 days.
iii) A review of the stressed account is to be carried out within 30 days of default (Review period).
A timeline of 180 days after the review period is provided for implementation of resolution plan.
iv) Disincentive for delay in implementation of Resolution plan (RP): Where a viable Resolution
plan is not implemented within the timeline given below, additional provision is to be made as
under:
Timeline for implementation of viable RP Additional provisions to be made as % of
outstanding,
180 days from end of review period if
20%RP is not implemented within time -line
365 days from the commencement of 15% (i.e., total additional provision of 35%)
review
period to total provisions held at being capped at 100% of total outstanding, the additional
Subject
provisions shall be made over and above provision already held or provision required to be made
as per asset classification status.
v) The additional provisions may be reversed as under:
a. Where the RP involves only payment of over-dues by the borrower – the additional
provisions may be reversed only if the borrower is not in default for a period of 6 months from the
date of clearing of the over-dues with all the lenders.
b. Where RP involves Restructuring / Change in Ownership outside IBC – the additional
provisions may be reversed upon implementation of the RP
c. Where resolution is pursued under IBC – half of the additional provisions made may be
reversed on filing of insolvency application and the remaining additional provisions may be
reversed upon admission of the borrower under Corporate Insolvency Resolution Process (CIRP),
d. Where assignment of debt / recovery proceedings is initiated – the additional provisions
may be reversed upon completion of the assignment of debt / recovery.

Detailed guidelines in this regard have been put in place.

Insolvency and Bankruptcy Code-2016 (IBC)

With a view to enhance credit availability, promote entrepreneurship, balance the interest of all
stakeholders and reduce the time of resolution for maximizing the value of assets, need of an
efficient insolvency regime was felt. Hence, the Insolvency and Bankruptcy Code (IBC), 2016 was
introduced (notified in the official Gazette in May 2016) to consolidate the existing frameworks and
create a new institutional structure.
The IBC brings a paradigm shift from ‘debtors’ in possession to ‘creditors in control’ and creates
time bound processes for insolvency resolution of companies and individuals. It moves from
“Erosion of Net-Worth” to “Payment Default”. The minimum default amount to initiate the
procedure is Rs.1.00 lac. Insolvency Professional will take over management and control of the
Corporate Debtor (Borrowing Company). Government dues would rank below the claims of other
creditors. It also has provisions to deal with concealment, fraud and/or manipulation leading to fine
 Page 41

and/or imprisonment. The application under the provision can be filed anyone of: i) Financial
creditors, ii) Operational creditors, (including Government & employees/workmen), and iii)
Corporate debtor.

The IBC framework is regulated by ‘the Insolvency and Bankruptcy Board of India (IBBI)’. It has
constituted two following Adjudicating Authorities to handle the cases:
i) National Company Law Tribunal (NCLT) – to deal with Corporate Persons (including LLP).
ii) Debt Recovery Tribunal (DRT) – to deal with Individuals and Partnership Firms.

All appeals from NCLT and DRT shall lie with NCLAT and DRAT respectively. However, the
Supreme Court of India shall have Appellate jurisdiction over NCLAT and DRAT.

NPA Management Policy

The Bank has adopted well defined measures for controlling fresh NPA accretion and resolution of
existing NPAs. Policies on different aspects of NPA management are being drawn up by SARG and
is reviewed periodically. Necessary guidelines are issued to operating units from time to time.

Review of NPAs / AUCAs

The Bank has formed various committees headed by Chairman/ Managing Directors/ Deputy
Managing Directors/ Chief General Managers/ General Managers/ Deputy General Managers to
periodically review SMAs/NPAs/AUCAs and suggest resolution and turn around strategies.

e-Auction

All auctions through DRTs and SARFAESI should be conducted electronically to help break
cartelization in auctions, by using the following modules:

i) Receipt of online technical bids

ii) Reverse e Auction – to be used for procurements
iii) Forward e Auction – to be used for disposal of assets by the Bank including those under DRT and
SARFAESI.
 Page 42

13. PROJECT FINANCE AND STRUCTURING STRATEGIC BUSINESS UNIT

Project term loans are more complicated in nature and require different skill sets. Recognizing the
complexities involved, project loans above a certain cut off value are handled by Project Finance &
Structuring Strategic Business Unit (PF&S SBU), specifically set up for this purpose.

Considering the various complexities involved, threshold limits for appraisal of proposals of
Infrastructure & Non – Infrastructure projects and criteria for reference of projects to PF&S SBU are
set as under:

Sectors Threshold limit – Project

Infrastructure Cost
Above Rs 250 cr
Non-Infrastructure Above Rs 750 cr

Proposals below the above thresholds may be referred to PF&S SBU for vetting both in respect of
Infrastructure & Non-Infrastructure Projects, required if any, with the approval of the CGM of the
Circle / CGM of the Business Verticals / Sanctioning Authority.

Corporate finance in the nature of balance sheet funding for Green field / Brown field expansion to
the existing clients is to be appraised by concerned branches as no separate TRA / Escrow
accounts are maintained to monitor the cashflows / revenue. Also, loan proposals relating to
Commercial Real Estate (CRE) are to be appraised by the branches concerned.

Project Finance & Structuring Strategic Business Unit (PF&S SBU) normally monitors and controls
of sanctioned project loans up to 2 years after DCCO for infrastructure projects and 9 months after
DCCO for renewable projects like Wind and Solar projects. In case of non-infrastructure projects/
commercial projects, control of such accounts continues to vest with PF&S SBU for a period of six
months after DCCO or upto stabilisation of the project, whichever is later.
 Page 43

14. EXIT POLICY

Exit Policy for Standard Assets indicating Signs of Stress

Eligible Accounts: All Standard accounts (including SMA–0, SMA-1 and SMA-2) irrespective of
External rating

Threshold Limit: The Policy shall be applicable to accounts with exposure of Rs.5 Crs and above
across all Business Verticals.

Indicative signs of stress in the accounts: The warning signals enumerated below are to be
reckoned in order to identify an exposure for an exit option.
a. Drastic fall in the performance of the Company.
b. Non-adherence to financial parameters / covenants of sanctions.
c. Critical observations in RFIA / Credit Audit / Stock & Receivable Audit etc.
d. Adverse market reports / disputes amongst Promotors / lack of commitment on the part of
Management.
e. Industry / Sector (in which the Unit is engaged), is on a declining trend, and RMD approach
paper/ norms too indicate accordingly.
f. Borrower declared as Wilful Defaulter / Non-Cooperative Borrower by our Bank or any other
Bank.
g. Group accounts declared as fraud or RFA by our Bank or any other Bank / Group accounts
which are in distress or are NPA / Cross Default / Any of the associates or group account declared
as Wilful Defaulter by our Bank or any other Bank / Exposure to an individual entity of a Group is
high risk.

The above is an indicative list but not exhaustive. Apart from the above, guidelines on Early
Warning Signals / Financial difficulty / Incipient Sickness and a combination of any such signals,
may be considered as triggers for examining the exit option.

Budgeting for exit option: Each Operating unit have to identify accounts for exit based on EWS
alerts, Red Flags and other triggers mentioned as above. Each Business Unit is to have an exit
budget which is to be allocated to Operating units at the time of budget allocation extending up to
Branch level. A mid-year review of budget allocated to Operating units may be done.

In CAG / CCG, at the beginning of the financial year, ‘Exit Budgeting’ is to be carried out along
with the annual budget exercise by the controllers.

In R&DB, list of accounts identified to be exited are to be submitted by the Branches through the
Controllers to GM network and once finalised, the approved list is to be provided to the Branches.

The aggregate of accounts identified for exit approved by the Competent Authority (i.e.,
Controllers for the CAG/CCG branches and GM network for Circle) will form the Exit budget for
that Operating unit. Accordingly, budgets for Relationship Manager/ Branch/ RBO/ B&O/ Circle/
BU are to be finalized using a bottom up approach.

Review Frequency: The status / review of accounts identified for Exit should be put up to
the Controllers not below the rank of GM, every month from the date of approval for Exit.

Dropping accounts from exit list: In case, the stress in any of the approved accounts eases, CGM
(Circle) / Business Vertical may approve removal of the account from the Exit list and also
approve easing/removing the remedial measures by restoring the normal terms and conditions.
 Page 44

Detailed guidelines for identification of accounts showing sign of weakness for remedial measures
or exit have been put in place.
POLICY ON TAKING/ RETAINING/ EXITING EXPOSURE ON UNITS HAVING
ECR OF “D” RATING

The Branch should examine and explore the option of exiting from “D” Rated accounts as the
possibility of such accounts turning into NPAs is high.
The action to be initiated for taking/ retaining/ exiting from D rated units (Sole, Multiple or
Consortium
Banking arrangement) are as under:
i. Continuation of limits can be done at the existing level for a period of 6 months and after that a
review has to be done. Enhancement, if any, may be permitted only selectively. “if limits are
renewed at the existing / reduced level, no specific template approval is required to be obtained. The
same may be discussed in the proposal with proper justification for continuation of the limits”.
ii. Advise the Company to improve financials within 6 months, as reflected by improvement in rating
or other financial parameters, failing which it should be made clear to the Company that the Bank
would exit from the exposure.
iii. Wherever possible, the Promoters should be advised to infuse fresh capital to improve the
financials.
iv. The concessions in pricing, L/C, B/G etc. would stand withdrawn during this intervening period.
If the Company’s ECR improves at least by one notch, i.e. to “C”, concessions, if any, in pricing,
L/C, B/G etc. could again be considered apart from renewal with enhancement in limits by the
Sanctioning Authority.
If the Company’s position does not improve but the Company belongs to a group whose accounts
are satisfactorily conducted, renewal with enhancement can be considered selectively by the
Sanctioning Authority.
Otherwise, the Bank can start the process of exiting from the account.
v. Sanction of additional exposures to D rated borrowers shall be approved by the authority as
detailed at para.vi below.
vi. Bank may assume fresh exposures on entities belonging of the group whose accounts are
satisfactorily conducted, with the approval of the authority as mentioned below.
Sanctioning Authority Approval by
Up to RCCC CCSC
CCSC & CCCC Sanctioning Authority
ECCB CCCC

vi. Restructured Accounts, accounts covered by resolution mechanism and NPA would be exempt
from this policy.

*****
 Page 45

15. POLICY ON WILFUL DEFAULTER/ NON-CO-OPERATIVE BORROWER/

FRAUD/ DEFAULT IN GROUP COMPANIES

Dealing with Wilful defaulters

Cut-off Limits for Identification of Wilful Defaulter
While the penal measures would normally be attracted by all borrowers identified as wilful defaulters
or the promoters involved in diversion / siphoning of funds, keeping in view the present limit of
Rs.25 lacs or its equivalent fixed by the Central Vigilance Commission for reporting of cases of
wilful default by the banks / FIs to CICs, any wilful defaulter with an outstanding balance of Rs.25
lacs or its equivalent or above, would attract the penal measures stipulated as under.

Penal Measures:
The penal measures are applicable without any exception to all wilful defaulters, with an outstanding
balance of Rs.25 lacs or its equivalent and above. Details of the penal provisions are as under:
i) No additional credit facilities to be granted to the listed wilful defaulters. In addition, such
companies (including their entrepreneurs / promoters) where banks / FIs have identified siphoning /
diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions is
debarred from the Bank finance for floating new ventures for a period of 5 years from the date of
removal of their name from the list of Wilful defaulters as published/disseminated by CICs.
ii) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of
recovery of dues shall be initiated expeditiously. The Bank shall initiate criminal proceedings
against wilful defaulters, wherever necessary.
iii) Wherever possible, the Bank shall adopt a proactive approach for identification of wilful
defaulter (including live loan accounts) and change of management of the wilfully defaulting
borrowing unit.

Guarantees furnished by individuals, group companies & non-group companies

i) In cases where guarantees furnished by the companies within the Group on behalf of the wilfully
defaulting units are not honored when invoked by the banks / FIs, such Group companies should also
be reckoned as wilful defaulters.
ii) In connection with the guarantors, in terms of Section 128 of the Indian Contract Act, 1872, the
liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided
by the contract. Therefore, when a default is made in making repayment by the principal debtor, the
Bank can proceed against the guarantor / surety even without exhausting the remedies against the
principal debtor. As such, where Bank has made a claim on the guarantor on account of the default
made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor
refuses to comply with the demand made by the operating unit, despite having sufficient means to
make payment of the dues, such guarantor would also be treated as a wilful defaulter.This provision
should be advised to all guarantors at the time of accepting guarantees.

Non-Cooperative Borrowers
Definition: A Non-Cooperative Borrower is one who does not engage constructively with the Bank,
defaulting in timely repayment of dues while having ability to pay, thwarting Bank’s efforts for
recovery of their dues by not providing necessary information sought, denying access to assets
 Page 46

financed/collateral securities, obstructing sale of securities, etc. In effect, a Non-Cooperative

Borrower is a defaulter who deliberately stone walls legitimate efforts of the Bank to recover their
dues.

15.1 Frauds
Banks are vulnerable to frauds which take place when the safeguards/ procedural checks are either
inadequate or not adhered to. Perpetrators of frauds in the Bank can be both insiders and outsiders,
either individually or in collusion. As fraudsters resort to careful planning before striking the system
at its most vulnerable point, Bank has to continuously strengthen its operational practices,
procedures, controls and review mechanism so that fraud prone areas are sanitized against both
internal and external breaches.

Bank has also put in place detailed guidelines on various aspects for detection and early reporting of
frauds and taking timely actions like reporting to investigating agencies so that fraudsters are quickly
brought to book, examining staff accountability and effective fraud risk management.

15.2 Penal measures for fraudulent borrowers

The penal provisions as applicable to wilful defaulters would also apply to the fraudulent borrowers
including the promoter director(s) and other whole-time directors of the company insofar as raising
of funds from the banking system or from the capital markets by companies with which they are
associated with is concerned, etc. In particular, borrowers who have defaulted and have also
committed a fraud in the account would be debarred from availing bank finance from Scheduled
Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment
Institutions, etc., for a period of five years from the date of full payment of the defrauded amount.
The penal provisions would apply to non whole-time directors (like nominee directors and
independent directors) only in rarest cases based on conclusive proof of their complicity.

15.3 Issue of Look Out Circulars (LOC)

The recourse under LOC shall be taken in all cases of fraud where the amount involved is Rs.50 Crore
& above with SBI and where the conditions stipulated hereunder are fulfilled:
a. Fraud alleged to have been committed / perpetrated against the Bank by the said borrower /
promoter/ whole-time directors / proprietor / partners / guarantors / whole-time director of
Corporate guarantor has been prima facie established during the investigation conducted by the
Bank;
b. Declared as fraud by the Fraud Identification Committee of the concerned Circle/
Vertical (Circles/Business Groups); and
c. Complaint has been filed with CBI against the said borrower / promoter/ whole-time
directors / proprietor / partners / guarantors / promotor / whole-time director of Corporate
guarantor about the commission of the cognizable offence (fraud) under IPC or other penal laws.
In respect of the cases which have been declared as fraud more than 5 years ago, as CBI would have
initiated investigation, such cases may be exempted from taking recourse under LOC. Further, cases
of fraud where compromise with the borrowers/guarantors for settlement has already been sanctioned
 Page 47

by the Bank and the settlement terms are being duly complied with by the them as also cases where
borrowers/guarantors have already paid/settled the dues to the satisfaction of the Bank may be
exempted. In all such cases, criminal proceedings pending against the accused persons would
continue till the logical conclusion.

KEY LEARNING
1) Understand the organisation of business and importance of loan policy
2) Understand about the exposure norms and credit risk concentration.
3) The various types of due diligence is required while dealing loans and advances
4) Take over norms
5) The importance performance/financial analysis, Credit risk assessment, assessment of
credit facilities and pricing while dealing loans and advances.
6) Delegation of financial powers.
7) Various types of security associated with the loans and advances.
8) Follow up ,Supervision and maintenance of advances
9) IRAC norms and policy on defaulters/wilful defaulters
 Page 48

Apply your learnings: Multiple Choice questions:

1 Large borrower is defined as the sum of all exposure values of the bank to a counterparty or
a group of connected counterparties is equal to or above _____ of the Bank’s Tier- I Capital.
The aggregate exposure to all “large borrowers” should not exceed _____ of Bank’s Tier I
Capital.
A 20%, 100%
B 10%, 400%
C 10%, 800%
D 20% , 200%
2 As per Bank’s Loan Policy, Investment in Associates/Subsidiaries normally to be permitted
only upto the extent of TOL/Adj.TNW does not breach the desired level of ______in case of
manufacturing entity.
A 3
B 4
C 3.33
D 5
3 Which of the undernoted situation/(s) is/are not considered as take over?
A Increasing our share either in Consortium or MBA of which we are already a part.
B Where we join a consortium either as a additional member or when another bank exits
C Only A
D Both A & B
4 Non-Fund Based facilities should not exceed ______ % of Bank’s total fund based
exposure.
A 150 %
B 200%
C 100%
D 50%
5 Under RBI guidelines on enhancing Credit Supply for Large Borrowers through Market
Mechanism, the Bank has to keep future incremental exposure to large “specified
borrowers” __________ a “Normally Permitted Lending Limit) (NPLL).
A within
B Above
C Below
D Equal to
 Page 49

Apply your learnings:

Case let -1
ABC Pvt. Limited needs finance for setting up of a unit for manufacturing of leather shoes. The
company was incorporated on 01.01.2019 and has been maintaining a current account with our
Branch. The promoters have approached the Branch for sanction of a term loan of Rs.4.00 Crores and
working capital of Rs. 0.50 Crores for their new unit. The company has procured land and almost
completed the construction of the factory building. The loan required by the unit is for purchase of
machinery. Mr. Meticulous obtained the relevant documents along with the detailed project report
from the applicant. As per the project report, the date of commencement of commercial operation of
the unit shall be 30.09.2020. Mr. Meticulous has prepared the CMA and is now pondering over certain
questions with plausible answers. Please help him in arriving at the correct answer.
1 Which of the following modules shall not be reckoned for arriving at the CUE rating?
A Financial Module
B Current Account Module
C Customer Information
D Bureau Module

2 What type of ratings is/ are required to be done?

A Borrower rating
B 1 Borrower rating & 1 Facility rating
C 1 Borrower rating & 2 Facility rating
D 1 and 3 are correct

3 The company proposes to export 30% of goods to a high risk country. What can be the
possible risk mitigations?
A LC from a first class Bank
B Export to be made against advance payment
C ECGC cover
D All the above

4 Which rating shall form the basis for CAR?

A CRA rating
B CUE rating
C Both 1 & 2
D None of the above
5 What is the best CRA rating that can be assigned to the borrower?
A SB-4
B SB-5
C SB-6
D SB-7
 Page 50

Caselet -2
One of our branches financed a car purchased by Mr.X. The documentation was done and the loan
was disbursed to the dealer from whom the quotation was obtained. The Relationship Manager
inspected the vehicle after the delivery was taken by Mr.X and the same was recorded in the
Customer’s file.

The RM was aware that the Bank’s charge on the vehicle is to be noted with the Motor Vehicles
Department. Due procedures were followed and the Bank’s charge was registered with vahan.nic.in
portal and the certificate of registration of charge was generated evidencing creation of charge.

The RM was not aware that the charge of Hypothecation was also to be registered with CERSAI
Portal. In the audit of the branch that took place subsequently, the auditor pointed out to the fact that
the charge on the vehicle was not registered on CERSAI Portal.

The RM was at a loss as to how the irregularity could be rectified, as preliminary enquires with
colleagues revealed that any charge on to be registered with the CERSAI portal has to be done within
30 days of creation of charge. He was obviously getting worried over the matter.

Let us find out if there is a way to deliver the RM from his predicament.
1 Is a hypothecation charge created on a vehicle financed by the Bank, required to be
registered on the CERSAI Portal?
A No, it is not required to be registered on CERSAI Portal
B Yes, it is required to be registered on CERSAI Portal
C It is not required to separately register the charge on CERSAI Portal
provided the charge has been registered on Vahan National Portal
D The charge is required to be registered on Vahan National Portal and then CERSAI
Portal, separately, as non-registration of charge on CERSAI Portal vitiates the right
of the Bank to enforce security interest under SARFAESI Act, 2002

2 Has the Relationship Manager Committed an act of omission in not registering the
Bank’s security interest on the vehicle with the CERSAI Portal?
A Yes, the charge should have been noted with CERSAI Portal
B RBI has clarified that any vehicle registered with VAHAN registry shall be
deemed to be registered with CERSAI for the purposes of SARFAESI Act,
2002.
C There is no requirement of noting charge on CERSAI Portal for enforcement of
security interest under SARFAESI Act, 2002
D The charge should have been noted with CERSAI Portal and then Vahan National
Portal in sequence.

3 What is the time period for registering a charge with CERSAI Portal, once a charge is
created?
A A charge created has to be registered with CERSAI Portal, immediately in
order to retain priority of charge
 Page 51

B A charge created has to be registered with CERSAI Portal within a period of 30

days of creation of Charge
C A charge created must be registered with CERSAI Portal within a period of 60
days of creation of Charge and thereafter within 30 days with penalty
D None of the above statements are correct.
4 What is the effect of amendment of sections 17 to 19 of SARFAESI Act, 2002 with
respect to enforcement of security interest under the Act?
A As per section 18, Chapter IV A, 26-B (3), a Secured Creditor filing particulars of
transactions of creation, modification and satisfaction of Security Interest over
properties created in its favor shall not be able to exercise any right of enforcement
of Securities under SARFAESI act.
B As per Section 18, Chapter IV A, no secured creditor will be entitled to
exercise the rights of enforcement of securities available to it under by the
SARFAESI Act, unless the security interest created in its favor by the
borrower, has been registered with CERSAI
C As per Section 18, Chapter IV A, 26-E, the debt due to any Secured Creditor shall
not be paid in priority over all other debts / revenues / Taxes / Cesses and other
rates payable to the Central Government or State Government or local authority.
D None of the above statements are correct
5 What is the priority of charge with respect to registration of Security Interest on CERSAI
Portal?
A The “priority” shall be with the secured creditor, who has registered his
security interest with CERSAI first, notwithstanding the prior ‘creation’ of
the security interest.
B The “priority” shall be with the secured creditor (subject to Registration with
CERSAI) who has created his security interest first, notwithstanding the
subsequent registration of the security interest.
C The “Priority” shall vest with the secured creditor who has created and registered
the security interest prior to any other security interest created or registered on
the Portal
D None of the above statements are correct

References :

Loan Policy for 2020-21 Loan Policy for 2020-21

 Page 52
BACK TO INDEX
CHAPTER 2A

Pre-Sanction Credit Process

LEARNING OBJECTIVES

i. Banks collect the financial savings of the people and invest the funds in industry &
trade, Retail advances to individuals and Governments (i.e. Credit Risk).
ii. Credit risk is the possibility of the borrower reneging on his commitment to the
bank.
iii. So careful selection of borrowers is essential to maintain asset quality.
iv. In this chapter, we will learn the importance of due diligence and various steps
under due diligence

All credit proposals are subjected to due diligence processes in regard to the credentials of
the borrower, purpose of the loan, financial position of the borrower, need based
requirement of credit facilities for working capital and capital expenditure, capability to
service the loans and security offered. So careful selection of borrowers is important and
essential to maintain asset quality. Hence, scrutiny of past credit history of all
Borrowers/Promoters/Directors/Guarantors needs to be carried out with a view to being
satisfied about their credentials, and for ensuring compliance with the guidelines on KYC
and AML under Prevention of Money Laundering Act or similar such act of host country.

The credit process for providing any credit facility offered by the bank can be bifurcated
into broadly two processing stages i.e.,
- Pre- sanction credit process and
- Post sanction and Follow up.
As the name envisages the Pre-Sanction credit process means, the process involved up to
sanction- right from enquiry of loan till the sanction of the proposal.

The pre-sanction credit process comprises three stages viz., APPRAISAL &
RECOMMENDATION, ASSESSMENT and SANCTION.
This chapter covers the following aspects related to pre sanction credit process:
- Know Your Customer
- Preliminary Appraisal and Due Diligence
- Compilation of Opinion Report

1.1 Know Your Customer:

KYC is the process of a business verifying the identity of its clients and assessing their
suitability, along with the potential risks of illegal intentions towards the business
relationship. KYC is also important to identify the Beneficial Owners and Shell
Companies.
 Page 53
As per KYC guidelines, the details viz. Customer Information, Photograph, Signature, KYC
Documents in respect of all account-based relationships established by the Bank are required to be
obtained. Account based relationship includes all types of loan accounts, non-fund based accounts
like Bank Guarantee, Letter of Credit etc. and all type of deposits accounts. The KYC details of
entity as well as persons behind the entity are required to be obtained. PAN Number of all
Borrowers under MSME / C& I is also required to be obtained and verified with Income Tax Portal.
PAN Number of Guarantor / Director / Partner / Proprietor may also be obtained wherever required
and verified with income tax portal for its genuineness. Wherever proof of address varies from the
identification details submitted by the Borrower / Guarantor / Director / Partner / Proprietor,
separate proof of address should be obtained. Document accepted for proof of identity and address
of individual / Non individual should be verified through internet on related website wherever such
information is available online to ascertain its genuineness.

Central KYC Registry: As per CKYCR guidelines, the data (Customer Information,
Photograph, Signature, KYC Documents) in respect of all account-based relationships
established by the Bank are required to be uploaded on CKYCR portal within T+2 days of
such establishment of relationship.

Legal Entity Identifier (LEI)

- Legal Entity Identifier (LEI) has been introduced as a key measure to improve the quality
and accuracy of financial data systems for better risk management.
- The list of entities eligible to apply for LEI codes are Sole Proprietorships, LLPs,
Partnership Firms, Trusts, Pvt. Ltd. Co. Public Ltd. Co., Govt. Companies, OPC, Insurance
companies, HFCs, NBFCs, Non-profit companies etc.
- Obtention of Legal Entity Identifier (LEI) has been made mandatory by RBI for the
Borrowers having total fund based and non fund-based exposure of Rs. 50 Cr and above. For
exposure above Rs. 5 Cr and upto Rs. 50 Cr, LEI will be implemented whenever RBI’s
instructions are issued.

1.2 Preliminary Appraisal and Due Diligence:

When a branch/ AMT/ CPC/ RM (SME) receives a loan proposal, it should find out
whether it is prima facie acceptable.
In order to establish the prima facie acceptability of the proposal, the branch/ AMT/ CPC/
RM (SME) should examine the following aspects in the light of the instructions in force:
• Bank’s lending policy and other relevant guidelines/RBI guidelines:
• Prudential Exposure norms
• Advisories of CRMD in respect of approach towards lending.
• Industry Exposure restrictions
• Group Exposure restrictions
• Industry related risk factors
• Credit risk rating
• Whether the activity being performed by the company is legal and profitable
 Page 54
• Profile of the promoters/senior management personnel of the project,
• List of defaulters, (RBI list of defaulters/wilful defaulters, CICs)

1.2.1: Illustrative list of steps under due diligence of borrower

i. CICs Defaulters’ List/Wilful Defaulters’ List (suit filed as well as nonsuit filed) as well
as verify Credit History by means of Credit History Reports provided by them.
ii. For all loan accounts above Rs. 5 crores, banks are required to report particulars of
account and account classification including SMAs to Reserve Bank of India through the
reporting system commonly known as CRILC (Central Repository of Information on
Large Credits). These details must be checked at the time of appraising prospective new
connections, as well as at the time of processing renewal/enhancement proposals.
iii. Employees PF Organisation Site for defaulting companies/units - this will provide an
indication of the health of the establishment/firm. The Provident Fund contribution deducted
from the employees of an establishment/ firm during a particular month are normally
remitted to the EPFO by the 20th day of the following month.

iv. ECGC caution list / Specific Approval List etc.

v. Banned List of Promoters of SEBI.
vi. Loan Rejections / CRA Slippages in CPPD site
vii. List of Disqualified Directors available on the website of Ministry of Corporate
Affairs (MCA) i.e. http://www.mca.gov.in.
viii. Credit Information Companies
ix. List of Non-Cooperative borrowers.
x. IBG defaulters list.
xi. Audited financials submitted by the unit should be independently verified as under:
- For Corporate Borrowers, independent verification with website of MCA.
- For Non-Corporate borrowers with respective Statutory Auditor/Chartered
Accountant.
- Turnover of the Units as mentioned in the ABS need to be verified with GST
returns and Income Tax returns of the customer for the respective financial year.
- Moreover, along with the audited balance sheet, the borrowing Units need to
submit usual KYC documents in respect of the auditor firm or alternatively, a copy
of GSTN Invoice, issued by the Auditor which he would have submitted for payment
of the bills to the customer. This will ensure genuineness of the Auditor.
xii. Reasons for change in the accounting year as well as in auditors, if any, should be
ascertained.
xiii. ROC Search.
xiv. There are many established groups having multiple companies/SPVs/JVs dealing with
the Bank - CIR on group companies from the existing bankers in IBA format.
In cases where Obtention of CIR is waived, CIR may be compiled by the Credit Analyst
on the basis of information sourced from CRILC/MCA/ CIBIL/Other public forums.
 Page 55
xv. In case of prospective new connections:
- Scrutiny of bank account statements, covering loan accounts and current accounts. For
the purpose, transactions over a period of one year should be reckoned.
- Obtention of declaration, duly certified by a Chartered Accountant, that (a) there are no
other credit facilities in any Bank/ FI/ NBFC which is irregular, and that (b) there are no
overdue statutory payment obligations.
- Obtention of declaration regarding credit facilities availed by its Associates and
Subsidiaries from the banking system, confirming also that there are no irregular features in
conduct of their account(s).
- Verification of credentials of all groups/ connected companies as well as joint ventures
from various sources.
- Financial support for setting up of new ventures or expansion of existing ventures
should not be extended in case the concerned unit belongs to a group which comes under
either of the following categories:
a. Any company within the group has been declared as Wilful Defaulter;
b. Any company in the group is not co-operating with the Bank in finalising settlement of
the Bank’s dues.
- In case of split in a group, the splinter groups will be regarded as separate groups.
xvi. Prescreening of prospective new connections by making a reference to the borrower
profiling reports from M/s Cubictree Technology Solutions Pvt. Ltd (CTSPL) has been
made mandatory in the Bank, in all cases where our estimated exposure is Rs. 5 crore
and above (aggregate of fund based and non-fund-based exposures).
xvii. Market reputation report from agencies like Cogencis.
xviii. Central Fraud Registry of RBI.
xix. Acceptability of the promoter and his ability to bring his margin/promoter’s stake.
xx. Compliance regarding transfer of borrower accounts from one bank to another, if
applicable.
xxi. Government regulations/legislation impacting on the industry; e.g., ban on financing of
industries producing/ consuming Ozone depleting substances.
xxii. Applicant’s status vis-à-vis other units in the industry
xxiii. Financial status in broad terms and whether it is acceptable.
xxiv. Scrutinise carefully the borrowers Memorandum and Articles of Association /
Partnership Deed/ Trust Deed/ Society Byelaws/ etc. to (i) ensure that there are no
clauses prejudicial to the Bank’s interests, (ii) ascertain whether any limitations have
been placed on the Company’s borrowing powers and operations and (iii) the scope of
activity of the company.
xxv. For Project Finance/Term Loan, branch should additionally examine the following:

- Whether project cost is prima facie acceptable

- Debt/equity gearing proposed and whether acceptable

- Promoters’ ability to access capital market for debt/equity support

 Page 56

- Whether critical aspects of project demand, cost of production, profit-

ability, etc. are correct

After undertaking the above preliminary examination of the proposal, the branch will arrive at a
decision as to whether to support the request or not. If the branch finds the proposal is
acceptable, it will call from the applicant(s), a fully comprehensive application in the prescribed
performa, along with a copy of the proposal/project report, covering specific credit requirement
of the company and other essential data/information. The information, among other things,
should include:
(a) Organisational set up.
(b) Demand and supply projections based on the overall market prospects together with
a copy of the market survey report.
(c) Current practices for the particular product/service especially relating to terms of
credit sales, probability of bad debts, etc.
(d) Estimates of sales, cost of production, and profitability.
(e) Projected profit and loss account and balance sheet for the operating years during
the currency of the Bank assistance.
(f) No objection certificate from the existing lenders, if any, for ceding pari-passu
charge/second charge.
Borrower may engage services of Chartered Accountants/Cost Accountants/Financial
Consultants/Merchant Bankers etc. for preparation of financial statements, CMA data etc. for
submission to the Bank for availing loan facilities. Operating units are required to obtain the
mandate, duly filled in and signed, along with the application form and other requisite details at
the time of pre-sanction/appraisal/engagement of intermediaries by borrowers.
In addition to the above:-
a) Audited profit loss account and balance sheet for the past three years (existing units).
The audited financials should generally be not more than 12 months old.
b) For non-corporate borrowers, irrespective of market segment, enjoying credit limits
more than Rs.25 lacs from the banking system, audited balance sheet in the IBA
approved formats should be submitted by the borrowers.

Financial Due diligence (Both for existing and new connections)

a) The financials of the main company/unit and its major associate/sister concerns
should be reviewed, as far as possible, on a common date.
b) Balance Sheet should be free from any material adverse remarks of the auditors. Any
adverse comments must be separately discussed in the evaluation/appraisal process.
c) Verification of Income Tax, GST, Sales Tax, Excise Returns, etc. (for the years as
applicable) must also be ensured.
d) Frequent changes in management structure.
e) Searches in the books of the ROC with regard to charges created and satisfied on the
assets of the unit, change in directors, capital structure and major shareholders etc. along
with verification of audited financial statements should be carried out.
f) Searches in the books of the Sub-Registrar of Assurances should be carried out.
 Page 57
▪ The Institute of Chartered Accountants of India (ICAI) has implemented the system of
Unique Document Identification Number (UDIN) to secure the certificates/documents
attested/ certified by practicing Chartered Accountants. This measure help in detecting
forged documents and misrepresentations, as only Chartered Accountants are authorized to
generate UDIN. The facility of UDIN is to be utilized as part of due diligence.
▪ An indicative list of the important items in Profit and Loss Account and Balance Sheet
which are to be verified/cross checked with the statutory returns mentioned there against
are mentioned below:-
S. Item in P&L Returns filed by the unit, with which the figures
No. Account/Balance Sheet have to be cross checked.
i Capital Balance sheet available with Registrar of
Companies (ROC)
ii. Increase in Authorised E form SH-7 (Return as per Companies Act,
Capital 2013)
iii. Allotment of shares E form PAS-3 (Return as per Companies Act,
2013)
iv Domestic Sales GST/VAT return (for the years as applicable)
v Export Sales GR Form/Softex Declaration Form (SDG)
vi Purchases Credit claimed in GST/VAT returns
vii Receivables As detailed in Circular No. CCO/CPPD-
ADV/59/2013-14 dated 28/08/2013
viii Quantitative details of Tax Audit Report 3CA (Auditor’s Certification
Raw Materials/ Finished of 3 CD)
Goods/ Bye products/
Goods traded
ix Salary and wages Quarterly statement of TDS on Salary
expenses (Form No.24Q) filed with IT Department. b)
PF/ESI/Professional Tax Registers/Returns
x Interest payment to Quarterly statement of TDS (Form No.26Q)
outside borrowings filed with IT Department, under Section
194-A – tax deducted at source from interest
other than interest on securities.
xi Payment to Contractors Quarterly statement of TDS other than Salary
filed under Section 194-C (Form No.26Q) with
IT Department
xii Net Profit Income tax return and other related documents
submitted to IT Authorities
xiii Income received by a ST-3/GST return filed with Service Tax
service provider (services authorities.
industry)
▪ While the above list is illustrative, the operating officials must undertake the due
diligence exercise as warranted and considered relevant, ensuring to guard against entry of
marginal assets on to our books.
 Page 58

Concurrent borrowing: Before sanctioning any credit limit, the Branch should ensure that the
applicant is not enjoying similar or ANY other credit facilities with other banks. Normally,
multiple borrowing/multiple facilities to the same borrower from two or more banks should not
be allowed. If the applicant is found having any credit facility from any other bank or financial
institution, detailed information should be called from the concerned bank/FI. The applicant
should submit along with the loan application a declaration regarding the existing credit
arrangements and an undertaking that stocks financed by us will not be hypothecated to any
other bank without prior approval of the Bank. Such multiple borrowings by persons / firms,
without the Bank’s written consent, should be viewed as financial indiscipline. The advances
will be recalled immediately, if the borrower makes a false statement in this regard. As far as
possible, parties should be advised to restrict their borrowings to one bank only.
Applicants seeking credit facilities of Rs.25 lacs and above should furnish in the loan
application information about all pending litigations, which have been initiated by another
financier including banks against applicants, their partners, directors, etc. for recovery of dues.

1.2.2 Credit Information Company’s (CIC) reports:

i. As per Credit Information Companies (Regulation) Act, 2005, collection of information
on borrowers of all Banks and Financial Institutions and its dissemination in the form of
Credit Information Reports is being done by four Credit Information Companies (CICs)
registered with RBI. The four CICs are:
a. TransUnion CIBIL Limited (TCL)
b. Equifax Credit Information Services Private Limited (ECISPL).
c. CRIF High Mark Credit Information Services Private Limited (CHMISPL)
d. Experian Credit Information Company of India Private Limited (ECICIPL)
ii. CICs are providing Consumer Report for individuals and Commercial Reports for
Non-Individual entities. Whereas TCL, ECICIPL, and CHMISPL are offering CIRs under
Consumer and Commercial, ECISPL is offering only Consumer related CIRs and not
Commercial CIRs. CIBIL and CRIF High Mark have been identified as preferred CICs for
obtaining report for proposal pertaining to MSME / C&I segment and obtaining report from
one or two CICs for these segments will be decided as per following parameters:

Type of Advances Report from one CIC Report from two CICs

Unsecured Loan Limit upto Rs.2 lacs Limit > Rs.2 lacs

Secured Loan* Limit upto Rs.10 lacs Limit > Rs.10 lacs
(* Not applicable for Loans against Specified Securities)
iii. No fresh limit / enhancement may be sanctioned to units in the 'Wilful defaulters' list
of RBI/CIBIL and other Credit Information Companies (CICs). However, an authority not
below CCCC may approve renewal/ continuation of earlier sanctioned limits.

1.2.3 Due diligence on guarantors

i. Individual as Guarantor:
Apart from obtaining proof of identification and address as per KYC norms, the details of
 Page 59
income, assets, liabilities, etc. is also required to be obtained as per following indicative
list:
a) Bank Account Statement – last 6 months
b) Credit Card Statement -- not more than 3 months old
c) Salary Slip (Recent date)
d) Income Tax Returns
e) Income/Wealth Tax Assessment Order
f) Details of movable and immovable properties
g) Details of liabilities with its terms and conditions

In case of Non-Resident Indian (NRI) - Passport and Residence Visa Copies, Copy of
PIO/OCI Card issued by Govt. of India is required.
a. Where face to face interaction is not possible with the guarantor, branches must insist on
certification of documents for photo ID and proof of residence by any one of the following:
i) Banker (our branches/Offices overseas)
ii) Notary Public
iii) Indian Embassy
b. Further, branches may also accept verification of documents by officers of
correspondent banks whose signatures are verifiable through an authorized (A/B category
Forex handling branch) branch of the Bank.
- Where the third-party guarantor –individual or non-individual - offers charge on
property standing in their name as collateral, carrying out of Search, Title
Investigation and Valuation, just as applicable to property of promoters and
promoter directors, must be ensured by operating units.
- A photograph of the guarantor should be pasted on the relevant guarantee agreement.
- If the individual furnishing the guarantee is not already covered in course of search /
due diligence carried out for the borrowing entity, separate search for the
guaranteeing individual in RBI Defaulters’ List / ECGC Caution List / Credit
Information Company etc. is to be ensured.
- Separate CIF is to be created for guarantors and linkage to Borrower CIF in CBS is
to be ensured.
- In cases where mortgage of property is created/extended at the time of initial grant of
facilities and/or at the time of enhancement of limits, “Income Tax Act– Guidelines
for obtaining Prior Permission under Section 281 to create a charge on the assets of
Business” are to be complied with.
ii. Corporate as Guarantor
a. Memorandum and Articles of Association (MAA), Certificate of Incorporation,
Certificate of commencement of business, CIN Number, Copy of PAN of Company, Proof
of Current Address etc. to be obtained.
b. If the guaranteeing corporate has borrowing arrangements, “No Objection”
certificate(s) from the lending banks.
 Page 60
c. Search, as is carried out in RBI Defaulters’ List / ECGC Caution List / MCA Site/
Credit Information Company etc. for a borrowing entity and its Promoters / Directors is to
be ensured, mutatis mutandis.
d. The provision of the Companies Act, 2013 regarding providing guarantee or security by
companies should be considered before accepting the guarantee and to be ensured that the
same is valid and enforceable under law.
e. All foreign entities are governed by the laws of their respective countries. As such,
constitutional documents for such entities may differ from country to country. In such
instances, D&B report on the entity is to be obtained. Further, in case of complexities,
legal opinion on individual cases is to be sought – covering, inter alia, opinion on
constitution of the entity, its powers and authority in law to stand guarantee, to what extent
jurisdiction of Indian Courts may hold and related other issues.
Note: In case NRI/PIO/OCI/Non-Individual foreign entity stands guarantor to an advance,
the following clause is to be incorporated in the Guarantee Agreement,
“Courts in India will have exclusive jurisdiction to t ry suit or any other claim arising
out of this guarantee.”

iii. The legal standing as well as precautions to be taken before accepting

guarantee of the following category of guarantors is furnished below
a. Proprietorship Firm: In a proprietorship, one person / individual conducts the business
in the trade name and owns all the assets of the business. A sole proprietorship is not a
separate and independent legal entity. The proprietor and the proprietorship business are a
single entity in the eye of law. As such, the individual who is the proprietor may execute
the guarantee for a loan sanctioned by the Bank to any person or entity in his separate /
individual name.
b. Partnership Firm: A partnership does not have a separate legal existence distinct
from its partners. Hence, all the partners, or one or more partners of the firm may, with the
specific and definite authority of the remaining partners, execute a guarantee agreement in
the name of the firm. The partnership deed is to be perused/examined to ascertain the
authority of the partners to execute the guarantee. In the case of death, insolvency or
retirement of a partner or admission of a new partner to the firm, to prevent the operation of
Clayton’s Rule, the liability of the partners should be determined and a fresh guarantee
should be obtained from the re-constituted firm, with the approval of the competent
authority.
c. Limited Liability Partnership (LLP) Firm: An LLP is a body corporate formed and
registered under LLP Act, 2008, and is a separate legal entity distinct from its partners.
Therefore, an LLP may provide guarantee for the loan granted by the Bank to a person/
entity. The incorporation document/LLP agreement is to be examined to verify that the
execution of the guarantee is authorised and in accordance therewith. The designated
partners/other partners empowered/authorised in the LLP Agreement may execute the
guarantee. The LLP shall pass a Resolution for the execution of the Guarantee as may
be provided in the LLP Agreement. A copy of the Resolution is to be obtained and kept
on record as part of security documents.
d. Hindu Undivided Family (HUF): Members of a joint Hindu family constitute the
HUF. Debt can be contracted on behalf of the HUF for the purpose of family business, and
the properties of HUF can be charged only for the beneficial interest / necessity of the
family. A guarantee executed on behalf of the HUF can be challenged on the ground that it
 Page 61
is not for the beneficial interest of the family. Therefore, it is not advisable to obtain the
guarantee of HUF for a loan granted to third party. However, individual members of the
HUF may execute guarantees in their personal capacity, which will bind them in their
respective individual capacities.
e. Trust: Public Trusts are usually constituted for social and charitable purposes, and
Trust property cannot be used for the private advantage of individuals/ trustees or for a
purpose in which trustees have personal interest. Hence, it is generally not advisable to
obtain the guarantee of a public trust for any loan granted to a person/ entity. In a specific
case where the guarantee of a trust is sought to be provided, the purpose of the loan and the
trust deed should be examined, and legal opinion should be obtained for considering such
proposal.
f. Society: A Society registered under the Societies Registration Act is a separate entity
capable of entering into agreements and contracts. However, as a Society is normally
constituted for welfare activities, the bye laws of the Society and purpose of the loan
should be examined before considering the proposal for guarantee of a Society. Specific
legal opinion should be obtained on a case to case basis where a Trust or a Society
proposes to provide a guarantee for an advance.
g. Associations/ Clubs: If the Association or Club is not registered under the Societies
Registration Act or any other law, it will be treated as un- incorporated body. Hence, it is
not advisable to obtain guarantee from such un-incorporated bodies as the individual
members of such institutions cannot be made liable in their personal capacity.

1.2.4 Opinion Reports on Borrower / Guarantor

i. Opinion Reports should invariably be compiled and updated annually for borrowers in
CAG, CCG, SME and before migration of accounts to SARG. In case of loans under
PBBU and REHBU, Opinion Reports would be compiled once at the time of sanction.
ii. Compilation of detailed opinion report has been exempted in following cases:
- On constituents with personal loans /overdrafts against Bank’s own Fixed Deposits,
government securities, company debentures or shares, units of mutual funds, life
insurance policies, etc.
- Borrowers availing loans against pledge of Gold, Auto Loans upto Rs. 20 lacs, Xpress
Credit, Pension Loans, Education Loans upto Rs. 7.5 lacs
- Borrowers availing loans upto Rs.3.00 Lacs in case of AGL and SME segments.
- On petty co-obligants to bills whose liabilities to the Bank do not exceed Rs.2, 500 or,
such other figure as the Bank may decide.
- On co-obligants to usance bills discounted.
- In cases where the Bank so advise, on borrowers against pledge of produce for small
amounts not aggregating Rs.5,000 per party
iii. Form of Opinion Report: Opinion reports are divided into two parts viz. i) loans upto
Rs.25 lacs ii) loans above Rs.25 lacs. It consists of basic information on the borrowers/
guarantors, description and value of immovable property(ies), other assets – (movable)
including cars etc., liabilities, self-certification of borrower/guarantor, etc. It also
consists of information on the proprietor / partner / Director / Guarantor of the firm /
company with their PAN / DIN / TAN numbers. Details of family members also
required to be provided in the opinion report. This report also provides the information
 Page 62
on immovable properties (specifying share of applicant in case of joint property &
details of owners), Movable Assets, borrowings other than discussed under Immovable /
Movable tables, details of guarantees given to cover liabilities of others, Means
(Tangible Net Worth) of the firm/company which is offering guarantee/ corporate
guarantee. It also includes the estimate of the Branch Manager/ Manager of the
Division/Relationship Manager/ Unit Head about the total Net Worth of borrower and
guarantor. Bank’s official is also supposed to write his name, PF number and put his
signature with date.
iv. Periodic revision of opinions: In respect of a firm dissolved and subsequently
reconstituted, or constituents whose position has suffered deterioration, opinions should be
revised as soon as the facts are known. All other opinions should be revised at least once a
year. Wherever the position of the proprietors/partners also undergoes substantial changes,
a fresh opinion report is to be compiled.
v. Periodic verification of the government gazette: In order to ensure that the position of
parties under liability to the Bank is not adversely affected without the Bank’s knowledge,
in addition to the precautions related above, the local Government gazette must be
regularly perused for notices of insolvency, changes in the constitution of partnership
firms, etc.
vi. Opinions to constituents and others: Opinions on local parties who are not
constituents of the Bank should not be furnished to other banks established locally.
a. As a rule, opinions should be given orally except to Banks, Central and State
Governments and government sponsored institutions and to parties approved by the
Controlling Authority for this purpose. In this connection, when a Branch Manager is asked
by Government or by the local Chamber of Commerce or other public body for a report or
opinion on any matter of public importance or any subject affecting the Bank, he should
submit a draft of his proposed reply, with connected papers, to his controlling authority for
approval. Parties who are not constituents of the Bank should be directed to make their
enquiries through their bankers.
b. The estimated means, details of the property, etc. of the party reported on should not
be stated in absolute term. For this purpose, the following code should be adopted by the
branches / operating units / processing cells.
When a party’s means are estimated at He should be reported as having

Upto Rs.1.00 lac Very small means

Above Rs.1.00 lac to Rs.4.00 lacs Small means
Above Rs.4.00 lacs to Rs.10.00 lacs Moderate means
Above Rs.10.00 lacs to Rs.25.00 lacs Fair means
Above Rs.25.00 lacs to Rs.1.00 crore Good means
Above Rs.1.00 crore to Rs.10.00 crores. Very good means
Above Rs.10.00 crore to Rs.25.00 crores Large means
Above Rs.25.00 crores Very large means

c. The above mentioned “Rating” is to be recorded in the Opinion Reports under the
Column “We estimate the net means (including/excluding investment in Borrowing
Company) of Shri. /Smt. ------ at Rs. ------- and therefore his/her rating is --------.
d. For sharing of information amongst Banks on Net Means, credit worthiness and asset
classification of any Borrower/Firm/Company, the Credit Information Report (CIR) format
 Page 63
which is designed by Indian Banks’ Association (IBA) should be used invariably. Net
Means of proprietor /firm /company should be shared by way of rating (excluding in
investment in Borrowing Company) only and not disclosed in absolute terms.
e. Branches / operating units / processing cells should ensure that the reports issued by
them about their customers to other banks depict true state of affairs. Statements that are
likely to mislead the other banks should be avoided. Any deviation in this regard will be
viewed seriously and appropriate action would be taken against the official(s) responsible.
f. Credit information on the borrowers is customarily shared by banks on a specific request
received from another bank. Branches / operating units / processing cells should use the
format prescribed by the Indian Banks’ Association (IBA) for sharing credit information
with other banks. The report should not be signed but forwarded under cover of a letter and
acknowledgement sought. Credit information received from other banks should be
acknowledged.
vii. Confidentiality of information regarding defaulting borrowers: Branches/ operating
units / processing cells should ensure that such information is treated as “Strictly Private
& Confidential” and that under no circumstances the information should be shared,
and the source disclosed to outsiders. Any further enquiries in this regard should be
made with the reporting Banks/FIs and not with the defaulters or any other persons.
viii. Obtaining Separate Assets & Liabilities Statement: For all loans of above Rs.25 lacs,
branches / operating units / processing cells should obtain statement of assets and
liabilities with following documents:
- Copies of Documentary evidence in respect of assets of Borrowers/ Guarantors
- Copy of IT return filed along with a copy of latest available IT assessment order
- Self-Certification will be the basis for the Opinion Report (if not an IT Assesses)
- Bank account statement with all the Banks for the past one year to be obtained.
- Other assets to include cars, jet, yachts etc
- Detail term and conditions of liabilities reported including sanction letter, if any.
ix. The statement of assets and liabilities is required to be obtained in the form of
notarised affidavit in case of the following types of loans:

New loans For all loans rated (SB-9) and worse.

Existing loans - renewal / enhancement For all loans rated (SB-9) and worse.

Existing loans - rehabilitation / In all cases

restructuring

After filling in the affidavit format with all particulars and after duly stamping at the rate in
force in each state for affidavit as well as for an agreement and with additional stamp duty
for notarial act, the affidavit may be got sworn before a notary public. At places where
notary public is not available, the affidavit may be sworn before a Magistrate duly
authorised for the purpose.
x. Other Instruction related to compilation of Opinion Report:
a. The Branch Managers / Managers (Division) / RM (SME) should scrutinise each such
report before compiling the final opinion sheet to ensure that the statements made therein
 Page 64
are correct.
b. The estimates of the worth arrived at by the Cash Officer/CSO/Field Officer should be
conservative and lower than the assessment of the outside parties.
c. All opinion reports should contain a signed summary of the Branch Manager’s /
Manager’s (Division) / RM (SME) own estimate of the borrower’s standing, total means
and the break-up worth of his immovable properties.
d. The names of partners or the family members, as the case may be, should be furnished
at the place provided in the opinion sheet.
e. The total value of both the immovable properties and liquid assets of each partner
should be given separately.
f. In estimating means, separate conservative estimates of immovable and movable
properties should be made, and the total worth arrived at by adding both figures. In the case
of the latter, investments, stocks, cash, etc., should be detailed as at the date of the opinion.
Investments in units on account of land and machinery or working capital should be
specified and names of the particular unit recorded.
g. In computing the liquid assets of firms, the value of shares in limited companies held
by the partners, proprietors, etc., of these firms should not be included at face value,
particularly if the scrip is not quoted on the stock exchange and/or is not readily
marketable. The full face value of shares can be taken into account in assessing the
holder’s means only if the companies, whose capital these shares represent, are first class
running concerns which have been continuously making good profits in the past and whose
outside liabilities do not outweigh their easily releasable assets.
h. While compiling opinion on a company director, whose guarantees are obtained for an
advance granted to a company, his investments in the company should be ignored as such
investments will form part of the company’s tangible net worth.
i. Full details of the movable and immovable properties, in whose names the properties
stand, status of ownership, municipal survey numbers of buildings (where available), very
conservative estimates of their value and realisable value, whether they are free from
encumbrance, etc. should be given for proper identification and assessment of the estimated
net worth.
j. The location of the immovable properties and in the case of land, the acreage should
be stated.
k. Particular care should be taken in evaluating properties owned by parties jointly with
others; as a rule, such properties should be disregarded in arriving at the net means. In the
case of partnership firms, it should be ascertained and recorded with properties, if any, are
the personal properties of the individual partners
l. In respect of agricultural land, the nature of land i.e., wet, garden and dry agricultural
lands should be mentioned and conservatively valued.
m. Valuation of house properties should be given by the Field Officer/CSO/Cash Officer
separately for each building. Where valuation of property by the bank officials is difficult,
it may be got done by a Government approved valuer / Banks empanelled valuer at
borrower’s cost which should be reasonable.
n. For loans above Rs. 1.00 Cr, wherein primary/collateral offered as security is value
above Rs. 50.00 lacs, valuation reports (not older than 3 months for new connection)
from 2 empaneled valuers are to be obtained and in case value of property is below Rs.
50 lacs, single valuation is to be obtained and the current market value and realizable
 Page 65
value, whichever is lower, is to be considered for arriving at the value of the property
o. Where valuations of properties have been increased as compared with the previous
report, the reasons therefore should invariably be given.
p. Joint Hindu Families
▪ The names of all members, including those of minors with their dates of birth and the
dates of joint Hindu family letters (in the Bank’s standard form) should be entered in the
opinion sheet. In the event of death of any member, his share in the family property should
be deducted in order to arrive at the fresh net means of the family.
▪ The dates of birth of the minor members should be diarised and when a minor member
attains majority his signature should be obtained on the existing joint Hindu family letter
and a fresh Joint Hindu family letter should also be taken. Relevant noting should be made
on the relative opinion sheet.
▪ Self-acquired properties of individual coparceners should not be taken into account in
arriving at the net means of a joint Hindu family firm.
▪ As per judgment of the Supreme Court, it was held that an HUF directly or indirectly
cannot become a partner of a firm, because the firm is an association of individuals. The
matter of financing HUF has been referred to Law Department at Corporate Centre. The
Law Dept has opined as under:
- HUF cannot become a partner of the firm directly or indirectly. As such Karta in his
representative capacity cannot bind the HUF property. Bank cannot enforce the security of
HUF against the loan availed by the above firm as the property of the HUF is not at all
liable for the acts of the firm.
- Karta can act in his individual /personal capacity and become a member of a
partnership. In this case Karta’s rights and obligations are determined by Partnership Act
and not by Hindu Law. Karta will be personally liable for all acts done by the firm in the
above case. Karta’s personal property is liable for all the acts of the firm.

q. Firms
▪ The names of all partners of firms and the extent of their respective interests i.e., each
partner’s share in capital and profit, etc. should be entered in the opinion report. The names
and particulars of associate firms, i.e., firms having one or more common partners whether
partnership or joint Hindu family-together with their places of business, must be stated with
their respective index numbers.
▪ If a firm has a lady as a partner, it must be stated whether she is literate and not
purdanashin. It should also be indicated whether or not the lady is in a position to
understand the implications of the Partnership Letter signed by her and the business
transactions the firm is likely to enter into with the Bank.
▪ Minors cannot be partners in a firm; they can only be admitted to the benefit a
partnership already in existence. The investments of minor partners should, therefore, be
deducted in arriving at the net means of partnership firm; the partners’ investment in
associate firms will also have to be accounted for in a similar manner.
▪ Whenever ancestral properties of any partner acquired by him on division of the Joint
Hindu Family to which he belonged are included in the means of the partnership firm, a
letter should be taken from the other coparceners of the partner’s family – which as a result
of the division would constitute a separate Joint Hindu Family – authorising the partner to
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represent the family as its nominee and a note to that effect should be made in the relative
opinion sheet. In the case of registered partnership firms, the details of the partnership are
on record at the Registrar’s office. Short particulars of the partnership deeds, if available,
and the dates of the partnership letters should be recorded.
r. Associate concerns
▪ Associate and identical firms, if any, must be indicated in red ink at the top of the
opinion sheet with relative index numbers.
▪ For the purpose of compilation of opinion reports on the proprietor/partner, investments
in associate firms should be ignored in order to avoid double counting.
▪ When compiling opinions on firms associated with one another, it is essential to show
details giving the full worth of the firm reported on, less the amounts allocated as their
investments in other associate firms.
▪ The full worth will ordinarily consist of the total worth of all locally resident partners
together with the amount invested in the firm by outside partners. A deduction must be
made (and shown in the opinion sheet) of all amounts invested in other firms and allocated
to the worth of these firms. The allocation may be in the form of cash or properties and the
deduction under these categories should be shown separately.
▪ The same property, cash or other assets should not be included in the worth of more
than one firm.
s. Independent Parties’ Reports
▪ Branch Managers/ Managers (Division) / RM (SME) need not rely solely on the reports
submitted by their Cash Officers/Field Officers. They may obtain independent
confirmation of the information gathered by the concerned officers when advancing
the Bank’s money.

1.2.5 Security for Advances:

i. Obtaining security against sanction of advances is one of most common risk mitigation
practices of the bank. Normally, there are following two types of assets available to the
bank as security in case of financing an activity under SME
Primary Security: Security of those assets which will be created out of the proposed bank
finance (part or full value of assets).
Collateral Security: Security of those assets which will not be created out of the proposed
bank finance.
Apart from security, we are also obtaining personal guarantee of proprietor / partners /
directors / etc. of the entity or third-party guarantee as risk mitigation practices.
Wherever, Collateral security from third party is obtained, personal/corporate guarantee of
owner of collateral security is desirable.
Further, if third party collateral is from Corporate (Non individual) entity, a detailed due
diligence should be done on the financial of the corporate to look for any financial
stress/insolvency.
For MSE Sector (both Manufacturing and Services enterprises) no collateral security is to
be obtained for loans upto Rs. 10 lacs, and for loans above Rs. 10 lacs and up to Rs. 15 lacs
the sanctioning authority may consider waiving collateral security subject to compliance
with certain conditions. For this sector, the Bank has decided to cover all eligible SME
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advances upto Rs. 200 lacs (manufacturing and services) and upto Rs.100 lacs (retail trade)
under CGTMSE scheme. The cost of guarantee i.e., Annual Guarantee Fee (AGF) shall be
borne by the borrower for all loans (CC &TL) sanctioned on or after 01.07.2017
(irrespective of the amount, including renewal of Cash Credit facilities). The matter of
recovery, or absorption, of guarantee fee by the Bank is reviewed from time to time.
CGTMSE has introduced “Hybrid Security” product, wherein collateral security can be
obtained for a part of the credit facility whereas remaining part of credit facility, upto a
maximum of Rs. 200 lacs (manufacturing and service) and upto Rs. 100 lacs (retail trade)
can be covered under CGTMSE scheme.
Guidelines in this regard have been put in place.
Advances to non farm enterprises in Manufacturing, Trading and Services with credit limits
upto Rs. 10 lacs are normally classified under Pradhan Mantri Mudra yojana (PMMY) and
covered under Credit Guarantee Fund for Micro Units (CGFMU). Guidelines in this regard
have been put in place.
Other borrowers may be sanctioned credit facilities under Bank’s regular schemes.
Though primary security is required to be charged in favour of almost in all the cases,
obtaining collateral its value depends on activity proposed to be financed, scheme under
which it is being financed and risk perceived in the proposed finance. The collateral
security norms for trade and services sector are as under:
- Collateral Security norms are linked to the Internal CRA/CUE rating of the borrower
instead of ECR Rating as under:

Loans upto Rs. 1 Crore:

Aggregate Minimum Collateral Security
Exposure (% of aggregate exposure)
Upto Rs. 10 lakhs Nil. Accounts to be mandatorily covered under
CGFMU/CGTMSE
>Rs. 10 lakhs and i. For Accounts covered under CGTMSE: NIL
upto Rs. 1 Crore ii. For Accounts not covered under CGTMSE: 50%

Loans above Rs. 1 Crore:

CRA/CUE Minimum Collateral Security
(% of aggregate exposure)
SB-7/CUE-7 & better 25%
SB-8,9/CUE-8,9 50%
SB-10/CUE-10 or worse 100%

Authority for approving relaxation in Collateral Security Coverage:

a. CGM (Circle)/CGM (BU) may permit relaxation upto 25% in collateral security
coverage for existing units having internal rating SB-9/CUE-9 and better on case-to-case
basis.
b. ECR of the borrower shall be reckoned for this purpose
c. No discretion for units rated SB-10/CUE-10 and worse

- For existing units, in case of shortfall in Collateral security coverage on account of

proposed norms, limits to be renewed at existing level only. A period of one year may be
permitted by the Sanctioning Authority to enable the borrowing unit to bring in the
required collateral.
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ii. Personal Guarantee should be mandatory for all units. Any deviation is to be permitted
by an authority one step higher than the Sanctioning Authority.
iii. . In case of Term Loans, if Fixed Asset Coverage Ratio (FACR) is 1.25 or more, no
additional collateral security should be insisted upon, otherwise 25% collateral
should be taken.
iv. A cap of Rs. 3.00 Crs for Term Loan is stipulated where there is no asset creation.
v. 100% Cash flow should be routed through the account maintained with our Bank.
vi. The above collateral security stipulations shall not be applicable to credit facilities
which are sanctioned under product-specific Schemes or covered under CGTMSE.

1.2.6 Time norms and other guidelines for monitoring disposal of credit
proposals:
The detailed guidelines on time norms as applicable to the MSME & C&I are as under.

Particulars Timeline for Loan

Application Disposal

All loans upto Rs.25 lac 14 days

Loans of Rs.25 lac and above upto Rs.50 lac 14 days

Sanction in case of takeover 14 days

Time norms for RM (SME)

Limits above Rs.50 lac upto Rs.5 Crore 22 days

Time norms for RM (SME)

Limits above Rs.5 Crore 22 days

For monitoring disposal of credit proposals within the above time frame, branches
should adopt the following procedure:
i) Loan applications received from units should be acknowledged by branches
immediately on receipt of the application and entered in the “Loan Applications Received
and Disposal Register” care being taken to ensure that a segment-wise serial number (i.e.,
C&I–1, C&I–2, …,SSI-1,.. etc.) given in the acknowledgement is also recorded on the
main application.
ii) After receipt of the loan application, an indicative check-list of data/ papers, etc.
required to be furnished may be given to the applicants. Further, in the context of
discussions held on the project during the initial meetings, the data/ information
requirements of the Bank should also be specified to the prospective borrowers so that they
submit applications complete in all respects. The credit appraisal officers may ask, as far as
possible, all relevant information in one installment and avoid piecemeal queries at various
stages. A definite date may be indicated for discussion, clarification, etc., if considered
necessary. The period for the purpose of the timeframe would be reckoned from the date
the application is received complete in all respects till the credit decision is finally
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communicated to the applicant. The decision of the Branch regarding credit assistance
should be communicated to the applicant within the stipulated time period even though the
unit might go into production after some time.
iii) Every meeting/ interface with the applicants should be used to emphasis the need for
submission of complete particulars/data to facilitate quick and timely disposal of loan
proposals.
iv) The Branch Manager/ Manager of the Division should verify the ‘Loan Applications
Received and Disposal Register’ at periodic intervals to monitor disposal of proposals
received/ pending at the Branch. Date and status of disposal of applications by way of
sanction/ rejection, if rejected the reasons, therefore, should be recorded in the register.
This register should be scrutinised by the controlling authorities during their visits to the
branches.
v) Each branch will submit to its controlling authority a monthly status report on pending
loan applications indicating the reasons for the delay. The controller, in turn, will advise the
LHO the consolidated position each month.
vi) Branches should not indulge in any act such as verbal promise or issue any consent
letter to sanction loans pending formal sanction, etc., which may give false hopes to the
prospective borrowers.
vii) If credit facilities applied for are wholly or partially rejected, the reasons there for
should be briefly mentioned in the “Loan Applications Received and Disposal Register”.
The sanctioning authority may take decision to reject a loan proposal or curtail the existing
credit facilities and seek from the controlling authority confirmation of his action. Reasons
for rejection could include project not considered feasible, party’s experience in business
does not inspire confidence, credit risk rating is below acceptable grade, unsatisfactory past
dealings with the Bank or any other reason to be specified.
viii) Third Party Agencies such as surveyors, engineers, financial analysts, and other
verification agencies, etc. play a critical role in assuring financial information, proposals, work
completion status, application of funds, etc. Lenders rely significantly on the inputs issued by
such third parties. Reports are made as a routine, with little scrutiny. In some situations, the
reports may be drafted under the influence of unscrupulous borrowers. It is therefore important
that the selection of such third parties is independent, done in a transparent manner and based
on their capability and credentials

1.2.7 Our Bank has issued stage wise Standard Operating Procedure for the
sanction of Credit Facilities as under:
Stage-I: - Lead Generation, Preliminary KYC, Market Reputation, customer contact,
customer meeting, obtention of Application form/KYC documents, Sanction letter of
existing bank(s) in case of take of loan, ECR letter, if applicable, Obtention of statement of
accounts for past 12 months, Securities details.
Stage-2:- Obtention of financials, ownership documents, profile of the unit, Associate
concerns details, All statutory approvals, in case of Term loan (Project report), other
borrowing details, IT returns, GST/VAT returns, premises lease agreement (in case of
rented premises), Assets and liabilities statements of promoters and guarantors, details of
share holding pattern, Processing fee.
On the basis of above documents operating functionaries an perform following
activities:
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Discreet enquiries should be made, financial verification, Credit Information report from
the existing bankers, do the CRA/CUE, pricing negotiation with the customer, Pre sanction
survey of unit and collaterals etc.
Stage-3:- Obtain the following documents from the customer-
If TL availed from other lender – copy of sanction letter, Title documents, evidence for
investment made so far, Other relevant approvals and operating functionaries can arrange
for TIR of the securities, valuation of securities, TEV study if deemed necessary.
Stage-4: (if the proposal is sanctioned) – Advise the sanction to the unit, documentation,
Disbursement and charge creation.

Stagewise TAT:
Stage Days
Stage-I 7 days
Stage-II 8-10 days
Stage-III 10-12 days
Stage-IV 5-7 days
TAT prescribed under project Vivek is 25 days.

1.2.9 Illustrative check list of documents to be obtained from the customer; the list will be
handed over to the customer at stage-I and documents will be collected at Stage-2:
Sr. No. Documents to be obtained
1 Proof of identity
2 Proof of residence
3 Applicant should not be defaulter in any Bank/FI
4 Complete set of Audited financials with CARO and Tax audit report for the last 3
years, Provisional Balance sheet if last audited balance sheet is older than 6 months
5 CMA (I, II, III, IV & V) data duly signed by the promoters / directors, partners,
proprietor etc. Provisional Balance sheet wherever required.
6 Ownership documents
7 Brief profile of the unit, management, key persons, Industry etc.
8 Details of associates
9 Copies of statutory approvals
10 Assets and liabilities statement of promoters and guarantors along with latest income
tax returns
11 A confirmation that the statutory dues are regularly paid
12 A declaration from the unit about the existing banking arrangements
13 IT returns, acknowledged copy of ITR must be obtained
14 GST/VAT return
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15 Projected balance sheets for the next two years in case of WC limits and for the
period of loan in case of TL (for all case of Rs. 2 lakh and above)
16 If TL is required – Project report
17 In case of rented premises, copy of lease agreement
18 Details of shareholding patterns
19 The customer be advised that 30% of processing fee will be obtained as advance
20 Applicant’s declaration in respect of relationship with the Director/relative of director
of the out and other Banks.
21 In case of takeover of advances, sanction letters of facilities being availed from
existing banker/FI along with detailed terms and conditions
22 Position of account from the existing bankers and confirmation about the assets being
standard with them (in case of takeover)
23 Photocopies of Lease Deed/title deeds of all the properties being offered as primary
and collateral securities
24 Review of account containing month wise sales, production, raw material, SIP FG,
debtors, creditors, Bank’s outstanding for WC limits, TL limits, bills discounted.
25 Manufacturing process, if applicable, SWOT

Illustrative check list of documents to be obtained from the customer; the list will be handed
over to the customer at stage-2 and documents will be collected at Stage-3:
Sr. No. Documents to be obtained
1 If TL has been tied up with any FI/other lender, details thereof along with a copy of
the sanction letter.
2 Obtain original title deeds/certified copies (in case of takeover of limits), prior deeds,
Land Tax receipt, Building Tax receipt, possession certificate, location sketch and
other relevant papers for TIR of the properties.
3 If some portion of expenditure has already been incurred, obtain the necessary proof.
4 Obtain letter of allocation of power supply, certificates of utilities availability, any
other documents required to process the proposal, etc.

1.2.9 Illustrative list of Questions that may be asked while interacting with borrower
during pre-sanction credit process:

01. Is finance required for a unit which is yet to be established? Or has it

already been established earlier?

02. If it has been established earlier when is the unit established?

03. Where is the registered office of the unit located?

04. Are there any branches elsewhere? If yes, where are they located and what
is the activity being conducted at those places?
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05. With whom the unit has been banking with previously? Why is the unit
seeking fresh finance from our Bank?

07. What is the line of activity?

08. Who are the promoters/partners/directors?

09. What is the qualification and experience of the management?

10. Whether the unit is involved in manufacturing or is it only trading?

11. How is the promoter/entrepreneur satisfied that the project is technically

feasible and economically viable?

12. What are the other similar units operating in the area?

13. Whether required infrastructure is available in the place of establishment of

the unit?

14. What arrangement has been made to meet the requirement of

professionals/technical and skilled labour?

15. From where is the raw material procured? What are the tie-up
arrangements?

16. Is any subsidy/margin money/support of any type available either from

Government or any other agencies?

17. Does the activity fall under priority sector?

18. How is margin to be met by the borrower?

19. What are other requirements for the project? Are all approvals for the
project in place?

20. What is the length of operating cycle?

21. What is the arrangement for marketing the products?

22. Are the goods sold within the country? Or exported? If exports involved,
which are the countries to which exported?

23. What is the credit available on procurement of raw material?

24. What is the experience of recovery from Sundry debtors?

25. What is the industry profile and prospects?

26. Has the unit reached break-even? If not, what is the estimated time frame?

27. Are audited financials available?

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28. Is there any change in the Directors/partners of the firm? If yes, what are the
reasons for the change?

29. Is there any change of Auditors of the Company/Firm? If yes, what are the
reasons for the change?

30. Is the unit maintaining a Current Account? If yes, with which bank?

31. What would be the end use of funds? What is the finance required for?

32. What is the amount of finance required?

33. What is the basis/justification of the proposed expansion/modernization, if

any?

34. What is the security offered for the Bank finance?

35. Does the unit belong to any group of Companies? If yes, what are the other
Companies in the group?

36. Whether any of the other Companies has/have availed finance from our
Bank?

37. Are there any intra-group obligations/transactions?

The above list is illustrative only, however, AMT/RM (SME) may request additional
documents, if feel necessitated, as per the nature of activity/business model of the unit.

Key Learnings:
1) KYC- KYC is must. You must first identify the customer. It is better to approach the
customer rather customer approaches you. Sometimes borrower is not selected properly, he
is either new customer or introduced by another stranger or middlemen. Normally, do not
involve middlemen, talk to customers directly. Avoid giving multiple loans to single party/
family or a group, to minors, lunatics or insolvents. It is compulsory to complete all the
KYC norms before even thinking of giving loan.
2) Understanding Credit Cycle
3) Verification of RBI’s Defaulter List/ Wilful Default list
4) CIC reports – search the CIC reports of the borrower and guarantors in all loan cases and
commercial CIC report in case of firms/ companies.
5) Search CERSAI site- if mortgage of property is involved in the loan then before
proceeding further search should be made on CERSAI site to ascertain that there is no
mortgage outstanding against the property in any other bank/ FI.
6) Loan safety- safety of loan is directly related on the basis on which decision was taken,
type and quantum of credit to be given and terms and conditions of the loan.
7) Pre-sanction Visit- next step is to visit the residence place of borrower, place of unit and
property to be mortgaged. Pre-sanction visit is basically to determine the “bank-ability” and
access related riskiness of the proposal. Identification of borrower and site must be
 Page 74
ascertained beyond doubt by inquiring from neighbors and other surrounding people. The
whole observations must be noted down and to be placed on the record.
8) Assets and liabilities Reports- assets and liabilities statements of all borrowers/
guarantors must be prepared on prescribed format mentioning full detail of assets &
liabilities duly signed by borrower/ guarantor and Relationship Manager/ Branch Head and
to take necessary proof of asset and liabilities.
9) Balance Sheets – in case of working capital limits 3 years’ balance sheets of the unit
along with income tax/ GST/ Sale tax returns etc., Estimated/ projected balance
sheets/CMA of next 2 years in cases of working capital limits and for the period of loan in
case of term loan. The balance sheets must be thoroughly analyzed and sanction-able limits
be assessed.
10) Project report- project report (for the proposed project if term lending is required)
containing details of the COP including machinery to be acquired, price, name of suppliers,
capacity utilization assumed, production, sales, projected profit and loss and balance sheets
for the period till the proposed loan is to be paid. Project report should be analyzed and
feasibility be ascertained.
11) Credit Rating/CUE rating- credit rating must be done in all the loan cases as per bank’s
guidelines. Rate of interest should be fixed as per credit rating. Credit rating should be done
judiciously based on analyzing balance sheets. Avoid sanctioning loan below Hurdle Rate.
12) Legal opinion- verification of title deed of property to be mortgaged is utmost
necessary. It must be ascertained that it is original not fake, scanned copy or duplicate one.
In respect of TIR, Empaneled Advocate should personally verify that title deed to be
mortgaged tally with the one kept with revenue records. Must get certified copy of the title
deed and tally it with original Title deed. Also, take certificate from advocate that certified
copy tallies with the original one. Thoroughly read the TIR given by the advocate and
observe that there is no objectionable clause which goes against the bank’s interest. Also
obtain all the documents mentioned in the TIR. Here it is also important to personally
verify that submitted title deed belongs to the property you visited earlier. Also make sure
that SARFAESI act 2002 is applicable on the property. Certificate of change of land must
be taken in case unit to be financed is to be built on agriculture land.
13) Any additional limit sanctioned against same securities already charged to the bank
ensure-
a) To extend charge to such limits too.
b) All concerned should be kept informed.
c) Acknowledge debt/ balance conformation with the borrower.
14) Valuation- valuation of property to be mortgaged is to be done from valuer on banks
panel. Considered value is as per circle rate or realizable value, whichever is lower. After
that realizable value can be considered. Valuation report of the valuer must be thoroughly
analyzed that it should not contain any comment which may harm the bank’s interest on
later stage. The title deed, revenue numbers, area of the land must tally with deed/ legal
opinion and valuation report.
15) Filling of Appraisal note- after verifying all the documents the appraisal note should be
filled. Care must be taken that all details are incorporated and the note is complete in all
respects. Appraisal should reveal whether proposal is fair banking risk.
 Page 75
16) Repayment- detail of repayment mentioning number/amount of instalments, duration in
months must be mentioned. If moratorium period allowed, then it must be mentioned and
also mention date of first installment and last instalment.

CHECK YOUR PROGRESS

MCQ-1 A borrower can engage the services of intermediaries for preparation of

financial statements, CMA data etc. for submission to the Bank for availing
loan facilities. The intermediaries can be a ____?

a Chartered Accountants

b Cost Accountants

c Financial Consultants

d Any of the above

MCQ-2 A shell company is an entity that has _____

a No active business

b Usually exists only as a vehicle for another company

c Both a & b above

d None of the above

MCQ-3 At the time of sanction of credit facilities, Valuation report should not be
older than _____ months.

a 3

b 6

c 9

d 12

MCQ-4 In case of Minor, less than 10 years, whose ID is required for KYC.

a Father of the Minor

b Mother of the Minor

c Minor

d The person who will operate the account (Natural Guardian or Legal
Guardian)

MCQ-5 A company has approached us for sanction of credit facilities. What

 Page 76
declaration we should obtain from them before considering the request?

a Declaration regarding whether any credit facilities in any bank / FI /

NBFC and their status.

b Declaration regarding overdue statutory payment obligations

c Declaration regarding credit facilities availed by its associates and

subsidiaries from banking system

d All the above

KEY:

1 D 2 C 3 A 4 D 5 D

Apply your learning:

Case Let -1 (Pre Sanction Credit Process)
Mr. Jagjit Singh has been maintaining a SB account with you since 2018. He is also having
one proprietorship concern M/s XYZ which is engaged in trading of AC, TV, Fridge,
washing machines of Samsung, IFB. Mr. Jagjit singh has approached us for sanction of
WC limits of Rs. 2.50 crores. The turnover of the said units as on 31.03.2021 is Rs. 47
crores. He has advised that audited financials will be available after June 2021 as his
auditor is not in the town, but keeping in view the ensuing summer season, he is in urgent
needs of funds.

He has also offered immovable property as collateral security having realizable value of
Rs. 2.25 crore in the name of Sh. Jaswant Singh, brother in law of Mr. Jaspreet Singh. The
Relationship Manager in the branch is new one, having only 4 months’ experience. He has
approached his Branch Manager to proceed further in the matter. Please help him to find
out the answer of following questions:

Question 1: As per Banks extant guidelines we have to complete KYC formalities of

_______?

a. Mr. Jagjit Singh only

b. Mr. Jaswant Singh only as he is offering the property.
c. Both Jagjit Singh and Jaswant Singh
d. There is no need of KYC formalities as limits will be secured by Collateral
security of Rs. 2.25 crore

Option (c) Both Jagjit Singh and Jaswant Singh

 Page 77

Question 2: Whether the limits can be assessed without obtention of Audited balance sheet
as on 31.03.2021?

a. No
b. Yes
c. Can’t Say
d. Yes, after obtaining provisional balance sheet as on 31.03.21 also

Option (d) Yes, after obtaining provisional balance sheet as on 31.03.21 also

Question 3: Who can sign the provisional balance sheet in this case?

a. Proprietor of the unit

b. Statutory Auditor/Chartered Accountants
c. By Proprietor & Statutory Auditor/Chartered Accountant
d. Obtention of provisional balance may be waived by Sanctioning Authority

Option (a) Proprietor of the unit

Question 4: How many TIRs are required in the instant case?

a. One
b. Two
c. Three
d. As per discretion of Branch Head

Option (b) Two

Question 5: TIR in this case is required for how many years?

a. Thirteen years
b. Twenty-Three years
c. Thirty Years
d. Thirty-Three years
 Page 78
Option (c) Thirty Years

Circular References:
For further details, please refer the following:
1. RBI Master Direction on Know Your Customer (KYC) updated as on 09.01.2020
2. Manuals on Loans and Advances, Part-I, Chapter-5: Pre-Sanction Credit Process
3. Manuals on Loans and Advances, Part-2, Chapter-17: Opinion Report
4. CPPD E-Circular S. No. 1176/2019-20 dated 19.11.2019: Credit Information Report
(CIR) on Group Companies
5. CPPD E-Circular S. No. 296/2019-20 dated 07.06.2019: Legal Entity Identifier (LEI)
6. CPPD E-Circular S. No. 179/2019-20 dated 10.05.2019: Obtention of Financial
Statements
7. SMEBU E-Circular S. No. 1577/2018-19 dated 22.02.2019: Collateral Security Norms
for Trade & Service Sector
8. CPPD E-Circular S. No. 1264/2018-19 dated 18.12.2018: ICAI’s Unique Document
Identification Number (UDIN)
9. CPPD E-Circular S. No. 1172/2018-19 dated 29.11.2018: Opinion Report Format
10. SMEBU E-Circular S. No. 1157/2020-21 dated 21.12.2020: SOP for Sanction of Loans
11. CPPD E-Circular S. No. 860/2015-16 dated 07.10.2015: Handbook on Pre-sanction and
Post Sanction – Due Diligence in Advances
12. CPPD E-circular S. No. 993/2015-16 dated 07.11.2015: End to End Credit Process
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BACK TO INDEX

CHAPTER 2B

LEGAL ASPECTS OF ADVANCES

OBJECTIVES
i. The chapter gives an overview of the legal implications involved in dealing with different
types of customer constitutions like Proprietorships, Partnerships, Societies etc. and to LLP,
Private & Public limited companies generally referred to as Non-corporate and Corporate
Segments.
ii. Title Investigation for establishing the chain of title in favour of the owner of property is an
exhaustive and a very important function for the Bankers. Similarly, valuation of property
is a crucial activity. Bank has prescribed detailed guidelines for these activities, which can
be learnt from this chapter.
iii. SME Documentation scheme is detailed in the chapter. Documentation, basically, consists
of Formation of Lender – Borrower Contracts, Various agreements with the Borrower and
Guarantor in fulfilment of the contract and creation of various charges like Hypothecation,
Mortgage etc. Apart from the said initial documents, supplemental documents are used
for extension of charges (in order to retain priority of charges) and complimentary
documents for revival of documents and linking documents etc. You will find details of
these, in this chapter.
iv. Mortgages form a major part of charges created in Bank's favour. While there are several
types of mortgages as per law, equitable mortgage and registered mortgage are the
common types of mortgages preferred by the Bank. Details are given in the chapter.
v. Charge Creation & Perfection is an important function in lending. The creation of various
types of security interest in favour of the Bank and registering those security interest at
appropriate forums / portals is also mandated by law. Procedures, prescriptions for
Creation of Charges and perfection of charges, viz., Registration of charges with Registrar
of Companies, CERSAI portal etc. and the implications of non-registration of charges are
dealt with in the chapter.

A TYPES OF BORROWERS
The following are the types of borrowers who approach the Bank for credit facilities.

a) Proprietor Ship
b) Partnership firms
c) Private & Public Limited Companies
d) Limited Liability Partnership
e) Trust
f) Hindu Undivided family
g) Societies

Proprietorship firm as Borrower:

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Proprietorship is perhaps the simplest form of a borrowing entity. As far as the legal status is
concerned, both the proprietorship and proprietor in individual capacity are considered the same,
though for accounting purposes a proprietorship has to prepare the financial statements, viz.,
balance sheet and profit and loss account for an understanding of the financial health of the
concern.

While sanctioning credit facilities to proprietorship firms, it is not necessary to obtain personal
guarantee of the proprietor, as the proprietor is personally liable for any debt of the proprietorship.

Advances to Limited Liability Companies

In dealing with a Limited Liability Company, the foremost requirement is the company’s
Memorandum and Articles of Association and Certificate of corporation. From a scrutiny of the
Memorandum & Articles of Association, it would be revealed whether the purpose of borrowing
is consistent with the stated objectives and whether the advance is within the borrowing powers of
the company. It must be ensured that no prior charge exists over any of the assets being offered
as security and that the persons executing the security documents and operating the account(s) are
duly authorized.

A company’s borrowing powers are usually specified in the Articles of Association, but they may
not always be limited to a fixed amount. When no mention of borrowing is made, a trading
company may generally be presumed to have power to borrow for the purpose of its ordinary
business, but no advance should be sanctioned in such circumstances without prior reference to
the controlling office.

The powers of a company (public or private) to borrow may be exercised by its Board of Directors
by means of resolutions passed at a meeting (and not by circulation). All advances granted to
companies must, therefore, be supported by resolutions so passed.

Types of Companies

Public & Private Company: Based on number of members and capital, companies may be
classified into (i) Public Companies & (ii) Private Companies. As per the Companies Act, 2013 a
private company must have a minimum paid-up capital of Rs.1.00 lakh, minimum of 2 members
and a maximum of 200 members. One Person Company is a private company with only one
member. The Companies Act restricts the rights of members of a private company to transfer its
shares and also prohibits an invitation to the public to subscribe to any shares or the debentures of
the company.

A public company means a company, which is not a private company and has a minimum paid up
capital of Rs. 5.00 lacs. A private company which is a subsidiary of a public company is deemed
to be a public company. A public company must have a minimum of 7 members. A public
company can issue shares to the general public and the transferability of shares and related issues
etc. are controlled by SEBI. As per the Act, both the Private as well as Public companies can start
its operations only after obtaining Certificate of Incorporation and Certificate of Commencement
of Business.
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The Companies Amendment Bill, 2014 (passed by the parliament in 2015) waives the conditions
relating to the minimum amount of capital in respect of both categories of companies i.e. private
as well as public companies.

Government company: A Government company is one in which not less than 51% of paid up share
capital is held by the Government (Central / State). A subsidiary of a Government company is also
a Government company.

Advances to non-corporate clients e.g., partnership firms

It is preferable to finance partnership firms which are registered with the Registrar of Firms of the
local area. The loan account should be opened in the name of the firm and not in the name of the
individual partners irrespective of the fact that one or more of the partners may be authorized to
operate the account. Apart from collateral security, if any, by way of personal guarantee of a third
party, personal guarantee of the partners should be obtained especially when the firm is not
registered as per the Partnership Act.

Whenever changes take place in the constitution of the firm either by death, retirement, insolvency,
expulsion or inclusion of partner, a new partnership is formed. In such cases, the limits granted to
the old firm should be cancelled and credit facilities extended to the reconstituted partnership firm
after examining afresh the creditworthiness of the partners of the firm and other relevant factors
for taking a credit decision. Till the formalities concerning reconstitution of the partnership of new
firm are completed and necessary loan documents are executed, as interim measure for the sake of
continuity of business activity, operations in the existing Bank account may be permitted only after
obtaining a stamped continuing letter of guarantee signed by all the outgoing partners as well as
the incoming partners. Where personal guarantee of third party has been obtained, confirmation
from the guarantor must also be obtained before allowing operations in the existing account. It
should be ensured that the necessary formalities are completed within a period of two months.

Where reconstitution takes place in case of a partnership firm, which has created equitable
mortgage of immovable property of the partnership firm in favour of the Bank for collaterally
securing the loans, an agreement on prescribed proforma should be obtained without disturbing
the existing mortgage.

A minor can be a partner of a partnership firm, however he cannot be held liable personally
for any debt of the firm, so this aspect has to be kept in mind while granting credit facilities to
partnership firms.

Limited Liability Partnership (LLP)

LLP is a new corporate form designed to provide an alternative to the traditional partnership (with
unlimited liability on part of the partners) and the corporate statute (statute based governance with
limited liability on part of the shareholders). The LLP form of business is a hybrid structure
between the two, which provides the benefits of limited liability but allows the partners the
flexibility of organizing their internal structure as a partnership based on a mutually arrived
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agreement. The Limited Liability Act, 2008 allows two or more persons associating for carrying
on a lawful business ‘with a view to profit’ to set up an LLP.

Hindu Undivided Family (HUF)

An HUF is represented by the head of the family, known as Karta, and the members of the HUF
are known as coparceners. Karta represents the HUF and is authorized to transact on behalf of the
HUF by virtue of age-old practice sanctified by law.

With the introduction of Hindu Succession (Amendment) Act 2005, from September 6, 2005,
daughters are also given the status of a coparcener.

Karta manages the HUF property on behalf of his family members. However, his powers are
limited and a charge created by him is binding on the family property only when the loan taken by
him is:

• For the purposes of the necessity of the family or,

• For the benefit of the family or,
• For repayment of a lawful antecedent debt due from the family.

Trusts

The Indian Trusts Act, 1882 defines a Trust as an obligation annexed to the ownership of property
and arising out of a confidence reposed in an accepted by the owner, or declared and accepted by
him, for the benefit of another, or of another and the owner.
A Trust is formed for the benefit of certain person(s) or purpose. The Trust Deed contains the aims
and objectives of the trust. It lays down the duties and responsibilities of the Trustees and also the
restrictions/ limitations imposed on them.

Operations of Trust accounts have to be very strictly according to provisions of the Trust deed.

Cooperative Society

While considering credit facility to a co-operative society, it is necessary to examine the rules or
bye-laws of the society, especially the terms on which it can borrow under the relevant section of
the State Co-operative Societies Act, 2002. The lending bank should obtain a certificate from the
society stating that the credit facility sought is within the overall borrowing limit authorized by the
Registrar of Co-operative Societies.

B Valuation of Assets
The following is the gist of the guidelines on valuation of assets:
(CCO/CPPD- ADV/85/2018-19 dated 1st October, 2018 & CCO/CPPD-ADV/101/2019-20 dated
1.10.2019)
 Page 83

For loans above Rs.1.00 Crore wherein primary/collateral offered as security is valued above
Rs.50.00 lacs, valuation reports (not older than 3 months for new connection) from 2 empanelled
valuers are to be obtained and in case value of the property is below Rs.50.00 lacs, single valuation
is to be obtained. Both the valuations to be conducted simultaneously and time gap between these
two valuation reports shall not be more than a month.

Further, The Valuation Report to be submitted by the valuers invariably contains the Fair Market
Value, Book Value, Realizable Value and the Distress Sale Value of the property being valued.
However, for the purpose of determining the present value of the property mortgaged/ to be
mortgaged, the Realizable value should be taken into consideration. Also in the case of Plant &
Machinery, Realizable Value to be accepted for valuation purposes.

2. If the difference between market value and realizable value quoted by two valuers is more than
5% and reckoning the lower of the two valuations is not acceptable to the borrower, a third
valuation may be obtained. The lowest of the valuations is to be reckoned in such cases.

3. Where the number of properties offered as security exceeds 10 (ten) and are located at
diverse locations, a notional discount of 5% is to be applied on the realizable value of the properties
and the discounted value should be considered while arriving at the security coverage.
4. In case of variation of 20% or more between the market and realizable values as per the
valuation and the guideline value provided in the State Government notification, Income Tax
Gazette, justification on the variation has to be provided by the Valuer.

5. Property values reported in leading newspapers as well as property portals such as

magicbricks.com, 99acres.com, housing.com etc. wherever available, are to be referred and
quoted.

6. Details of the last two transactions in the locality are to be furnished in the valuation report,
wherever available.
7. The values quoted by the valuers should be cross-checked by making independent
enquiries, property inspection, comparison with recent sales of similar properties in the
neighbourhood and enquiries from parties having good knowledge of the local property value for
ensuring that only realistic realizable values are accepted.

8. For properties purchased on a recent date, for a period of one year from the date of
registration of the property, the lower of registration value or realizable value shall be reckoned
for arriving at the value of the property.

9. Fresh Valuations are to be obtained every three years.

Valuers are to be provided with precise details of the property to be valued. A copy of the TIR
obtained from the Empaneled Advocate for the property to be valued should be given to the
Valuers.

Policy for valuation of securities in respect of NPA accounts

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Validity of Valuation Report for fixing Reserve Price and considering compromise settlement
proposals.The valuation report should be less than 1 year old for sale of properties under Private
Treaty / SARFAESI Act, 2002 and Settlement of dues through compromise.
Second Valuation The second valuation report should be obtained only if the value of property
is Rs 1.00crore and above in case of compromise settlement & fixation of Reserve Price under
SARFAESI Act, 2002.

The formats for obtaining valuation reports have been standardized and are given in Circular No.
CCO/CPPD-ADV/159/2014-15 dated 17th January, 2015

C TITLE INVESTIGATION REPORT (TIR)

Master Circular on Title Investigation Report- Revision Cir. No. CCO/CPPD-ADV/70/2017-18
dated 25th Sept., 2017

Procedure for obtaining Title Investigation Report and creation of Equitable Mortgage

1. Introduction

1.1 Title investigation is to be conducted in respect of all types of immovable properties that are
to be accepted as mortgage security. Title investigation has the following aspects:

i. Getting the documents of title in respect of the property examined by a panel advocate;
ii. Scrutiny of the TIR report issued by the Panel Advocate by the Bank’s dealing officials to
decide the acceptability of the panel advocate’s report; and
iii. Physical verification of the property to ensure the factual correctness of the statements in
the document/ reports.

1.2.1 TIR is to be obtained only from the Bank’s Empanelled Advocate [Advocate is to be
identified through the Vendor Management System (VMS)] which has a Master Database of
TPEs regarding centralised monitoring, work order allotment, tracking the status of work orders,
performance tracking and evaluation of services offered before payment/renewal of contract of
TPEs.

In House Legal Teams have also been formed at certain places by the Bank. Wherever, the word
“Advocate” is used in this SOP, it indicates “Empanelled Advocate / In House Legal Team.

1.2.2 Obtaining two TIRs

If our exposure is collaterally secured by the following types of properties, a satisfactory Title
Investigation Report (TIR) from two different empanelled advocates should be obtained,
irrespective of amount in all segments (including Housing Loans):-

i. Properties offered by third party guarantors whether individual or non-individual. ii.

Properties acquired through Gift deed.
iii. Properties sold by Power of Attorney holders to our borrower/guarantor.
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1.2.3 In case of Housing Loans where properties do not fall into the abovementioned categories, a
satisfactory Title Investigation Report (TIR) from two different empanelled advocates (**) should
be obtained in the following cases:

In respect of Housing Loans where the RERA registration is available and Loan amount
is above Rs.5 crores. Satisfactory TIR from Two different empanelled advocates (**) should be
obtained.
In respect of Housing Loans where RERA registration is not available and Loan amount is Rs.1
crore and above. Second Sales and Loan amount is Rs.1 crore and above.

** Wherever In House Legal Team has been created one TIR shall be obtained from them and one
TIR shall be obtained from the empanelled Advocate.

1.2.2 Branches have to collect all details of the property including all the title documents from the
customer under proper acknowledgment (As per format enclosed) and forward to the advocate
from whom it has been decided to obtain the Tile investigation Report (TIR).
Branches to correspond directly with the advocate and the direct correspondence between the
advocate and the borrower/ mortgagor should be avoided.

Advocate must submit the TIR in the prescribed format to the Bank directly.

1.3 In respect of all cases where the loan amount is less than Rs.1.00 crore, the advocate must
make search of the title of the property for not less than 13 years if it establishes clear and
marketable title.

However, if the flow of title is not clear or in the event of any ambiguity about the title after search
for 13 years, the Advocate may make search for not less than 30 years.

In respect of all cases where the loan amount is Rs.1.00 crore and above, the advocate has to make
search of the title of the property for not less than 30 years irrespective of the fact that clear and
marketable title is established by a shorter search of 13 years.

In case of Builder Tie Ups (in case of Home Loans), for approval of the project search of the title
for not less than 30 years is mandatory.

1.4. Where TIR is to be obtained from two different Advocates and there is any divergence in
opinion of both the Advocates in TIR, regarding mortgage of a property, matter is to be referred
to Law Officer/ In house Legal Team, for their directions.

1.5 Selfie of the Inspecting Official at the site, with or without the borrower should be taken as an
integral part of inspection and the same should be kept along with the security documents. This
exemption (with or without the borrower) will apply in respect of all Loans (including Housing
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Loans), as the inspection is required to be conducted independently. Digital date should be

imprinted on the photograph.

Advocate has to submit the TIR in the prescribed format only. Similarly professional fees/expenses
charged by the advocate should be paid by the Bank directly to them and recovered from the
concerned customer.

1.6 The procedure for creating EM of leased properties such as MIDCO, CIDCO, HUDA,
HSIDC and DDA etc. should also be discussed in the TIR by the Advocate. Law Department at
respective LHO/MCG-MCRO/CAG branch would give clear guidelines to branches / operating
units prevailing as on the date as a onetime measure and keep them updated on an ongoing basis.

1.7 Hindu Undivided Family (HUF):- Similarly, in view of the legal implications involved,
operating units should exercise greater care in mortgaging properties of HUFs. Wherever
considered necessary, branches should consult the Law Officer in the Circle/Business Vertical
concerned, in this regard.

1.8 Special care should be taken while scrutinizing title deeds which involve Power of Attorney,
Gift deed etc, as per Bank’s extant instructions.

1.9 If the title deeds are in a vernacular language, full particulars of the title deeds in English signed
by the Bank’s empanelled advocates/solicitors should be obtained. A complete record must
be kept of all such investigations and searches carried out and the reports received from the local
advocates / Bank solicitors.

1.10 Wherever Cooperative Housing society is yet to be formed, an undertaking from borrower
should be obtained stating that he/she would inform Bank and submit share certificate along with
NOC as and when the society is formed.

1.11 Branches will adhere to instructions/guidelines issued by respective business units

specifically about delivery process viz. SME Delivery model etc.

D SME Documentation
The SME documentation scheme has been set out in Circular No.: NBG/SMEBU-
SMEDOC/7/2005 -06 dated July 23, 2005. The set of security documents and operating guidelines
has been introduced in the Bank with effect from 1st August 2005.

The set of documents has 12 documents which are grouped under 6 categories:

1. Initial Documents
SME -1 Letter of Arrangement
SME -2 Agreement of Loan cum Hypothecation
SME -2A Letter furnishing the particulars of assets acquired after the execution of SME-2
SME-3 Guarantee Agreement
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2. Supplemental Document
SME-4 Supplemental Agreement of Loan-cum-Hypothecation

3. Documents / Recital for creation of Equitable Mortgage

SME-5 Memorandum for recording creation of mortgage by deposit of title deeds
SME-6 Letter of confirmation for creation of mortgage by deposit of title deeds

4. Documents / Recital for Extension of Equitable Mortgage

SME-7 Memorandum for recording extension of mortgage by deposit of title deeds
SME-8 Letter of confirmation for extension of mortgage by deposit of title deeds

5. Documents for creation / Extension of Regd. Mortgage

SME- 9 Deed of Mortgage
SME-10 Deed of further charge

6. Complementary Documents
SME - 11 Revival Letter SME - 12 Link Letter Initial Documents

SME-1 Letter of Arrangement

The Letter of Arrangement is divided into two parts, i.e. Annexure A, which contains the Terms
and Conditions of sanction of particular facilities / limits to a Borrower, while Annexure B contains
the Bank’s standard Terms and Conditions of sanction.

The modified format in respect of the Letter of arrangement has been given by the bank vide
Circular number CCO/CPPD-ADV/52/2017 – 18 dated 10 Aug 2017.
Further, a clause for Disclosure of nationality of borrower/ guarantor must be added as per
instructions contained in Circular number CCO/CPPD-ADV/75/2016 – 17 dated September 17,
2016.

SME-2 Agreement of Loan cum Hypothecation

Under the SME documentation, all the credit facilities (Fund Based & Non-Fund Based) granted
to the Borrower(s) are to be totalled into an aggregate limit and covered by a single set of
documents. It is clarified that credit facilities like Pre-Shipment / Post- Shipment Credit, Rupee
Term Loans, Foreign Currency Loans and Deferred Payment Guarantees are also to be included
for arriving at the aggregate limit.

SME-2A Letter furnishing the particulars of assets acquired

This letter provides for furnishing the particulars of all types of assets acquired out of the Bank's
finance after the execution of SME-2 for the purpose of covering such assets under the
hypothecation charge created under SME-2 and also to provide for clear identification of
such assets.
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SME-3 Guarantee Agreement

The agreement is to be executed by the guarantors. Under the simplified SME Documentation,
Supplemental Guarantee Agreement is not provided.

Supplemental Document

SME-4 Supplemental Agreement of Loan-cum-Hypothecation

This document is supplemental to the Agreement of Loan-cum-Hypothecation
(SME-2)
Documents / Recital for creation of Equitable Mortgage

SME-5 Memorandum for recording creation of mortgage by deposit of title deeds This
Memorandum provides for creation of Equitable Mortgage by all types of mortgagors,
namely, Borrower(s) or Guarantor(s) or Third Party Mortgagor(s) who have not joined as
Guarantor(s).

SME-6 Letter of confirmation for creation of mortgage by deposit of title deeds

This letter of confirmation is to be sent by the Mortgagor(s) for confirming the deposit of title
deeds and intention to create Equitable Mortgage in favour of the Bank.

Documents / Recital for Extension of Equitable Mortgage

SME-7 Memorandum for recording extension of mortgage by deposit of title deeds

This Memorandum provides for:

(a) Extension of the earlier mortgage to cover additional facilities / limits beyond the mortgage
debt.

(b) Creation of mortgage on the additional properties offered for Securing the existing facilities /
limits and additional facilities beyond the mortgage debt.
SME-8 Letter of confirmation for extension of mortgage by deposit of title deeds

This letter of confirmation to be sent by the Mortgagor(s) for confirming;

(a) The extension of the Equitable Mortgage on the existing property (ies) for securing additional
facilities / limits beyond the mortgage debt.

(b) The creation of Equitable Mortgage on the additional property (ies) for securing the existing
limits within the mortgage debt, and also for additional Facilities / limits beyond the mortgage
debt.

The formats of SME 6 & SME 8 stands modified in terms of Circular number NBG/SMEBU-
SMEDOC/88/2016 – 17 dated February 10, 2017.
 Page 89

Documents for creation / Extension of Regd. Mortgage

SME-9 Deed of Mortgage

The Deed of Mortgage provides for creation of Registered Mortgage by all types of mortgagors,
namely, Borrower(s) or Guarantor(s) or third party mortgagor(s) who have not joined as
Guarantor(s).

SME-10 Deed of further charge

The Deed of Further Charge provides for extension of the earlier mortgage to cover additional
facilities / limits beyond the mortgage debt.

Complementary Documents

SME-11 Revival Letter

The Revival Letter provides for extending the limitation period under The Limitation Act,
1963, for a further period of 3 years in respect of Agreement of Loan-cum- Hypothecation (SME-
2) and Supplemental Agreement of Loan cum-Hypothecation (SME-4), if any, executed till
that date and Guarantee Agreement (SME-3).

SME-12 Link Letter

The Link Letter is to be obtained whenever a fresh set of documents is obtained (For example,
SME documents) in addition to the earlier set of documents (For example, SSI / C&I documents).
This letter provides for migration from earlier segmental security documents to SME
Documentation.

4E Creation of Equitable Mortgage

Mortgage / Equitable Mortgage (EM) : Guidelines for Creation of Equitable Mortgage

1. Once the TIR is received from the advocate, the same should be scrutinized as per checklist
given vide Annexure-E of Circular CCO/CPPD-ADV/70/2017-18 dated 25th Sept., 2017.

2.Obtain all the title deeds in original from the borrower as per the chain of title. Where all the
originals are not available, minimum previous two transactions / sale / title deeds should be
obtained from the borrower along with a declaration explaining the non availability of the original
title deeds in respect of past transactions to the satisfaction of Bank.

(a) EM created on the basis of Certified Copies of Title Deeds, where the Original Title Deeds
are lost, destroyed etc.:

(CCO/CPPD-ADV/101/2018-19 dated 25.10.2018)

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For creation of equitable mortgage (EM), the original registered Title Deeds should invariably be
deposited along with other documents. If the original registered Title Deeds are lost / misplaced/
destroyed and the mortgage is proposed to be created on the basis of Certified Copies of the Title
Deeds, the certified copy of the title deed should be accepted only in exceptional cases i.e., where
the original is conclusively proved to have been lost or destroyed and after obtaining prior approval
from the controlling authorities. The Branches should satisfy themselves in this regard as creation
of Mortgage by deposit of certified copies of the title deeds is fraught with risk. Cases where the
Original title deeds are not available, should receive greater caution.

The process to be followed in such a scenario shall be as under:

i. It may be confirmed that the First Information Report (FIR) has been lodged in respect of the
lost title deed (s). If on account of any facts & circumstances or any reasons whatsoever, an FIR
recording the factum of lost title deeds has not been recorded by the Police Authorities, a duly
recorded & acknowledged Diary Report (DR), Daily Diary Report (DDR), or a Report (recording
the factum of lost title deeds) filed in any other book with the Police Authorities, specially
prescribed by the respective State Government in this regard, may be acceptable.

The latter should however be done only in specific cases/on account of specific reasons, which
have to be specified in writing by the intending mortgager(s) in the Affidavit-cum-Declaration
mentioned below at point no. (iii) and the same should be acceptable to the Bank.

Accordingly, proof of filling of FIR/DDR/DR with the Police Department explaining the reasons
as to when and under what circumstances the Original Title Deeds were lost, should be obtained.

ii. The intending party (borrower/ guarantor) must give notice to the public at large (Public
Advertisement) in one leading National and in one Regional Newspaper, clearly stating that the
Original Title Deeds have been lost, giving full details of the property(ies), and further stating that
he/she wishes to create charge viz, mortgage or otherwise, on the said property(ies) for a
loan/credit facility from State Bank of India, Branch---------, Branch Code-------.

Along with the aforesaid details, the fact that an FIR/DDR/DR etc. has been filed with the Police
in respect of the above subject, should also be stated in the Advertisements.

iii. A duly stamped affidavit-cum-declaration from the borrower/ guarantor is to be taken declaring
that the title deed(s) has been lost. The affidavit should also contain;

a) Full particulars of the property(ies),

b) Reference of the FIR/DDR/DR lodged. If an FIR could not be lodged and accordingly a
DR/DDR etc. was filed stating specific reasons for the same, and

c) The details of advertisements published in the National and Regional Newspapers.

 Page 91

iv. Independent verification/ identification of the property and the mortgagor must be ensured by
the Branches.

(b) Equitable Mortgage based on Original Laminated Title Deeds

Laminated original title deeds would also attract greater caution as EM created by deposit of
laminated original title deeds also is fraught with higher risk. The following procedure
/ precautions are to be adopted:

i. The intending mortgagor must give a public notice in one leading national and in one regional
newspaper stating:

a) Intention to create a charge on the basis of laminated original title deeds

b) Complete details of the properties
c) That the charge is being created for securing loan / credit facility from State Bank of India,
_______________(Branch), ____________ (Code)

d) That in case any party has any claim towards the properties, the same should be lodged
with the intending party and also with the stated branch of SBI, within 15 days of publication
of the notice.

ii. A duly stamped affidavit-cum-declaration of the mortgagor should be taken declaring that:

a) The title deeds in question are the original and the only title deeds of the property
b) The same has been laminated (for reasons)
c) Full particulars of the property
d) Details and copies of public notice stated above
e) Details / Copies of any claims / objections received in response to the public notice and any
replies given.

iii. Independent verification and identification of property / mortgagor is to be done, as usual.

The option of Registered Mortgage may be explored in the above cases and the relative merits may
be advised to controlling office while seeking approval.

3. All the original title deeds should be deposited in a notified area and a Memorandum of
Entry as per prescribed format should be recorded for the purpose of creation of mortgage.

4. Other than partition or family settlement deeds, wherever the documents are registered in
counterparts, all such counterparts available with the mortgagor should be deposited along with
the original documents to avoid mis-utilisation of such counterparts.

5. For creating Equitable Mortgage of a flat / independent house by a member of Co-

operative Housing Society, No Objection Certificate is necessary to ensure that no dues of the
society are outstanding against such member, and a declaration that the society has not created any
prior charge over the property which is subsisting.
 Page 92

6. A Search Report / (Non) Encumbrance Certificate for the intervening period, i.e., from the
date of TIR to the date of deposit of original Title Deeds / creation of EM should be obtained and
held on record, as part of equitable mortgage documents.

7. Confirmation letter regarding the Equitable Mortgage created by the mortgagor is to be

obtained and kept on records.

8. Timely execution of Sale Deed in favour of the purchaser / borrower and completion of
equitable mortgage formalities to be done without delay. Bank’s charge on the property should be
noted and possession of the property is taken by the borrower wherever applicable are to be
complied.

9. Building Plan approved by the Competent Authority should be obtained and perused and
evidence of Independent Site Verification should be recorded.

10. A declaration-cum-affidavit should be obtained from the borrower / guarantor / 3rd party
offering his / her / their property as security declaring that the property belongs to them, that the
title deeds are original, that no prior mortgage has been created and that there are no tax dues and
should be kept along with mortgage documents.

11. The particulars of the deposit must be recorded in the title deeds register and the entries must
be verified by the Branch Manager/ Divisional Manager and signed by him and also signed by the
two witnesses who may be Bank employees.

12. The mortgagor must not initial / sign / attest the register and/or the Memorandum of Deposit
recorded in the register; as otherwise, the mortgage would be construed as simple mortgage which
may fail for want of stamping and registering.

13. Further, no writing whatsoever must be taken from the mortgagor(s) at the time of deposit of
the title deeds. However, to safeguard the interest of the Bank, a letter (contents printed in an
Inland Letter) confirming the deposit of the title deeds with intent to create the mortgage in favour
of the Bank as security for the advances should be obtained from the mortgagor(s). This Inland
letter should be obtained only after the deposit of title deeds, say a day or two after the mortgage
is created. It would be preferable to arrange with the borrower to have this letter (Inland letter)
sent by Registered Post. This letter should be kept along with the title deeds. The Bank’s date
stamp should be affixed on this letter without fail, so that there would be no difficulty in proving
at a later date, if the need arises, that the letter was received subsequent to the deposit of the title
deeds.

13.1 However, where the mortgagor is a limited company, this confirmatory letter need not be
obtained. This is because in the case of limited companies, the mortgage will be supported by a
resolution passed by the Board of Directors authorizing the company’s representative to make the
deposit of title deeds. Further, the particulars of the mortgage / charge will also be filed with the
Registrar of Companies.
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13.2 Particulars like the names of the borrower / guarantor, the date of deposit and the documents
deposited are entered on the left hand side of the register, while the right hand side contains the
recital of the deposit and the signatures of the two witnesses. The recital in the register should be
on the lines of the Bank’s standard format that should include a list of the title deeds deposited as
well as a detailed description of the mortgaged property.

14. In case of a simple deposit of title deeds, to further secure an already existing advance, Standard
Documents prescribed should be obtained.

15. When the mortgagor, who has already created an equitable mortgage in favour of the Bank as
security for existing advance, is granted additional / fresh advance sought to be secured by
extension of the existing mortgage, the following procedure should be followed:

i. A supplementary recital on the lines of the Bank’s standard format should be recorded in the
title deeds register; and
ii. Supplementary confirmatory letter should be obtained from the mortgagor confirming
the deposit of title deeds pertaining to the properties made earlier which shall continue as security
for the enhanced / additional / fresh loan granted to the borrower.

16. Ensure the payment of stamp duty and registration of equitable mortgage wherever applicable
as per the relevant State laws.

17. Ensure the registration of equitable mortgages with the CERSAI under SARFAESI Act.

4F CENTRAL REGISTRY FOR SECURITIZATION, ASSET

RECONSTRUCTION & SECURITY INTEREST OF INDIA
(CERSAI)
Central Registry of Securitization Asset Reconstruction and Security Interest of India is a
Government of India Company licensed under section 8 of the Companies Act, 2013 with Govt.
of India having a shareholding of 51% by the Central Government and select Public Sector
Banks and the National Housing Bank also being shareholders of the Company.

The object of the Company is to maintain and operate a Registration System for the purpose of
registration of transactions of securitization, asset reconstruction of financial assets and creation
of security interest over property, as contemplated under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). CERSAI is
providing the platform for filing registrations of transactions of securitisation, asset reconstruction
and security interest by the Banks and Financial Institutions. At present the portal provides facility
to file security interest in immovable created through all types of mortgages and in units under
constructions. Besides, filing of Security Interests in movables, intangibles and factoring
transactions is also available on the portal.
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More than a statutory obligation CERSAI is a risk mitigation tool for the Banks / Housing
Finance companies, FIs and public at large to prevent multiple financing against the same
property.

Online search is available to public to enable them to search and inspect the records maintained by
the Registry on payment of fees prescribed under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011. The search
can be made on the basis of both Asset details as well as on the basis of Debtor's details.

Verification of the records of Central Registry

Before creation of any mortgage the branches have to verify the records of the Ce ntral Registry
of Securitization, Asset Reconstruction and Security Interest of India (CERSAI)
(www.cersai.org.in) to see that there is no pre-existing charge registered with Central Registry.
Such exercise is also to be conducted at the time of renewal / sanction of additional limits. Further,
a copy of the screen shot of search report / search report of CERSAI to be attached with the loan
proposal and subsequently preserved with the security documents.

Registration of charges with CERSAI

Immediately after creation of mortgages, the security interest has to be registered with the Central
Registry within 30 days.

The Central Government has notified amendments to the Securitization and Reconstruction of
Financial Assets and Enforcements of Security Interests (Central Registry) Rules, 2011
vide gazette notification dated January 22, 2016.

The following types of Security interests are also required to be registered now on the CERSAI
Portal:

a. Particulars of creation, modification or satisfaction of security interest in immovable property

by mortgage other than mortgage by deposit of title deeds shall be filed in Form I or Form II, as
the case may be, and shall be authenticated by a person specified in the Form for such purpose by
use of a valid digital signature.

b. Particulars of creation, modification or satisfaction of security interest in hypothecation of

plant and machinery, stocks, debt including book debt or receivables, whether existing or future
shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a
person specified in the Form for such purpose by use of a valid digital signature.

c. Particulars of creation, modification or satisfaction of security interest in intangible assets,

being knowhow, patent, copyright, trade mark, license, franchise or any other business or
commercial right of similar nature, shall be filed in Form I or Form II, as the case may be,
and shall be authenticated by a person specified in the Form for such purpose by use of a valid
digital signature.
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d. Particulars of creation, modification or satisfaction of security interest in any under

construction residential or commercial building or a part thereof by an agreement or instrument
other than by mortgage, shall be filed in Form I or Form II, as the case may be, and shall be
authenticated by a person specified in the Form for such purpose by use of a valid digital
signature.

4G Registration of Charge with Registrar of Companies

Types of Charges to be Registered

1. A charge on book Debts of Company

2. A charge not being pledge, on any movable property of the Company
3. A floating charge on the undertaking or any property of the Company
4. A charge on any immovable property
5. A charge on Goodwill, Patent, Trade mark, copy right, License etc

Purpose

1. For Creation of Charge

2. Modification of Charge
3. Satisfaction of Charge

Timelines

1. All Charges to be registered within 30 days of creation

2. Maximum within 300 days with permission from ROC along with justification
3. Charges created within 30 days are having priority from the date of creation
4. Charges created after 30 days may loose priority and may be reckoned from date of filing
5. Bank can file charge on its own if Company fails to file charge within 30 days.
6. After 300 days, condonation of delay can be allowed by central government only

Periodicity of Search

1. Pre Sanction stage

2. At the time of filing Bank`s charge with ROC after documentation /disbursement
3. At every Review/Renewal stage and position should be commented in the proposal

4. For Stressed accounts search should be done at enhanced frequency, as deemed necessary.

Exemptions

1. Pledge Advances (However filing is advisable under the head “Others”)

2. Corporate Guarantee
3. However if a company creates charge on any of its assets for performance of the guarantee
obligation under Corporate Guarantee, then charge is required to be filed.
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Types of Forms

There are eleven types of forms being used for different purposes

CHG 1 For filing registration and modification of charge (for other than Debentures)
CHG 2 Certificate of Registration of charge issued by the Registrar
CHG 3 Certificate of Modification of charge issued by the Registrar
CHG 4 For filing Satisfaction of charge
CHG 5 Certificate of registration of Satisfaction of charge issued by the Registrar
CHG 6 For Intimation of appointment of Receiver or Manager
CHG 7 Company’s register of charges
CHG 8 The application for condoning delay to be filed with Central Government if the date of
creation of charge exceeds 300 days.
CHG 9 For filing registration and modification of charge (for debentures including
rectification)
CHG 10 Request for condoning delay to be filed before registrar if the date of creation of
charge exceeds 30 days.
INC.28 The order for condoning delay passed by the Central Government shall be required
to be filed with the Registrar in Form No.INC.28

KEY LEARNINGS
i. Legal aspects influence every step of lending activity of the Bank. Right from identification
of borrowers, establishing their credentials, assessment of credit requirement, appraisal,
sanction, documentation, disbursement – all of these legs of the lending activity involve
legal implications.
ii. Bank has prescribed / standardised documents for establishing various lending contracts
and creation of security interest. Further, services of legal experts (empanelled lawyers
and in-house law officers) are available to operating units for legal services.
iii. Lending involves creation of assets corresponding to the debt raised. Hence valuation of
assets created is of paramount importance.
iv. Charges on assets are created after establishing the position of ownership / possession
through a process called Title Investigation. Reports of Title Investigation are provided by
empanelled advocates.
v. Establishing the Lender – Borrower contract / Creation of security interest / execution of
documents are done according to the legal requirements and vetted by legal experts.
vi. Perfection of charges by registering security interests created in favour of the Bank by the
Borrowers / Guarantors are undertaken – Registrations are required to be done with
Registrar of Companies, Registrar of Assurances (Land Registry) and CERSAI
CHECK YOUR PROGRESS
MCQ-1 Bank's dealing with different types of customers (different constitution of business
entities) are governed by different Laws. For e.g., Companies Act, Limited Liability
Act, Partnership Act govern Companies, Limited Liability Partnerships, Partnership
 Page 97

etc. What are the implications of these laws for Bankers dealing with such
customers?
A There are no implications of the various Acts in the normal banking
arrangements. Hence these Acts are of no significance to the Bankers
b The Acts assume significance in case of a dispute with the Customer and
the dispute resolution mechanism shall be governed by the relevant Acts
c The relevant act for a particular type of customer defines the overall legal
framework for the dealings between the Bank and the customer, the
procedures and compliances to be observed in entering into contractual
obligations and defines the liabilities, rights and obligations of each party.
d The different Acts are significant for formation of the business entity and
hence of no significance to the Bankers
MCQ-2 What are the types of charges that needs to be registered with the Registrar of
Companies?
a A charge on book Debts of Company
b A floating charge on the undertaking or any property of the Company
c A charge on Goodwill, Patent, Trademark, copy right, License etc
d All of the above
MCQ-3 If the original title deeds are not available, equitable mortgage can be created by
depositing certified copies of title deeds. The statement is;
a True, equitable mortgage can be created by certified copies as the original
copies are to be in the safe custody of the owner of the property
b No, equitable mortgage cannot be created by certified copies of title
deeds
c Yes, equitable mortgage can be created by deposit of certified copies of
title deeds in rare and exceptional situations, like lost title deeds, with
sufficient precautions
d If there are no original documents to title to property mortgage cannot be
done
MCQ-4 The validity of an Agreement of Hypothecation is;
a 3 years
b 2 years and 3 months
c 5 years
d 12 Years
MCQ-5 Revival Letter is obtained for the purpose of:
a Continuing with the same original documents even after renewal of limits
b To ensure enforceability of documents under the Law of Limitation
c To revive limits on lapsed sanction
d To revive an NPA Account and make it standard asset.
KEY:
1 c 2 d 3 c 4 a 5 b
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APPLY YOUR LEARNING

CASE-1 A borrower was granted certain credit limits on collateral security of his
residence which was to be mortgaged with the Bank (A). The loan was for
business purpose i.e., for the Proprietorship firm of the Borrower. The title
deeds were deposited with the Bank before disbursement of the loan.

Some time after granting of the loan, the Bank / Branch (A) observed a
notice in the newspapers from another Bank (B) regarding auction of
properties taken possession of by Bank B amongst which, the residential
property mortgaged to Bank A was also listed. The property was taken
possession by Bank B under SARFAESI Act.

The officials of Bank A were baffled as to what had gone wrong.

Q1 What is the prima facie conclusion in this case?
a The property mortgaged with Bank A had already been mortgaged
with Bank B
b Bank A failed to verify existing charges on the property before they
created a mortgage
c Bank B will share the sale proceeds of auction to Bank A who have
also given a finance
d Both (a) and (b)
Q2 Can Multiple mortgages be created on the same property?
a Yes, multiple mortgages can be created on the same property
b No, multiple mortgages cannot be created on the same property
c All the Banks who have created the mortgage get equal share of
sale proceeds when the property is sold
d None of the above
Q3 Are there lapses on the part of Bank A in creating an equitable mortgage.
a No, equitable mortgage is created by deposit of title deeds which
has been done.
b Yes, there are lapses in not verifying whether prior charge exists
on the property
c Bank A has not verified genuineness of title deeds
d Both (b) and (c)
Q4 What are some of the precautions Bank A should have taken before
accepting the mortgage?
a They should have obtained Title Investigation Report on the
property
b Independent verifications should have been done, including
inspection of property and market reports
c CERSAI portal should have been verified for existence of prior
charges
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d All of the above

Q5 What are the different types of mortgage created by Banks in the normal
course
a Simple Mortgage
b Equitable Mortgage
c Reverse Mortgage
d Usufructuary Mortgage
CASE-2 A new borrower was granted a cash credit limit of Rs.1.50 crore for which
as per one of the terms and conditions, collateral security to the tune of
Rs.75 lacs was stipulated.

The borrower accepting the terms and conditions of sanction agreed to

mortgage 2 properties (1) His residential property valued at Rs.60 lacs and
(2) His shop (a room on the ground floor of a commercial property) valued
at Rs.18 lacs.

Attempt the below questions in the backdrop of guidelines on valuation of

property.
Q1 How many valuation reports should the bank obtain for the properties
offered as collateral security?
a For loans above Rs.1 crore and properties valued above Rs.50 lacs
Bank must obtain two valuation reports
b For loans above Rs.50 lacs and properties valued above Rs.1.00
crore the Bank must obtain two valuation reports
c Only one valuation report is to be obtained.
d If the Bank is not satisfied with the valuation done by a valuer a
second report may be obtained.
Q2 Valuation reports of valuations done at the time of acquisition of
properties was produced by the borrower. Can the Bank rely on the same?
a Yes, the Bank can rely on the same as the value of the property
would have increased by the time the loan was granted
b The Bank may obtain fresh valuations if the borrower is ready to
pay for the valuation exercise. Fresh valuation is not mandatory
c No, the Bank must invariably obtain fresh valuations
d It is left to the discretion of the controller of the branch
Q3 How recent should be the valuation reports for new connections being
onboarded?
a Valuation reports should not be older than 6 months
b Valuation reports should not be older than a year
c Valuation reports should not be older than a month
d Valuation reports should not be older than 3 months
Q4 What are the different types of values one can find in a typical valuation
report?
a Value of the property and rate per unit stated in Indian Rupees
b Fair Market Value
c Distress Value
d Realisable Value, Fair Market Value, Book Value, Distress Value
 Page 100

Q5 Suitable justification for variation has to be given by the Valuer in case the
Fair Market Value or the Realisable Value stated in the valuation report
varies by a certain percentage with the guideline value provided in the
State Government notification, Income Tax Gazette for a particular
property. What is the percentage variation beyond which suitable
justification should be there?
a 25%
b 12%
c 15%
d 20%
KEY:
Case- 1 d 2 b 3 d 4 d 5 b
1
Case- 1 a 2 c 3 d 4 d 5 d
2

FOR FURTHER READING, REFER TO:

i. Circular No. CCO/CPPD-ADV/101/2018-19 dated 25.10.2018 Equitable mortgage created
on the basis of certified copies of title deeds where the original title deeds are lost etc.
ii. Circular No. CCO/CPPD-ADV/70/2017-18 dated 25th Sept., 2017. – Title Investigation
Report
iii. Circular No. NBG/SMEBU-SMEDOC/88/2016 – 17 dated February 10, 2017. – Modification
in formats of SME 6 and SME 8
iv. Circular No. CCO/CPPD-ADV/75/2016 – 17 dated September 17, 2016. – Disclosure of
Nationality of Borrower / Guarantor
v. Circular number CCO/CPPD-ADV/52/2017 – 18 dated 10 Aug 2017. Modified Format of
Letter of Arrangement
vi. Circular No.: NBG/SMEBU- SMEDOC/7/2005 -06 dated July 23, 2005. SME documentation
Scheme
vii. Circular No. CCO/CPPD-ADV/159/2014-15 dated 17th January, 2015 Formats for Valuation
Reports
viii. Circular No. CCO/CPPD- ADV/85/2018-19 dated 1st October, 2018 & CCO/CPPD-
ADV/101/2019-20 dated 1.10.2019 – Guidelines on Valuation
 Page 101

BACK TO INDEX

CHAPTER 2 C
SME DELIVERY MODEL

LEARNING OBJECTIVES
i. Definition of Micro Small & Medium Enterprises
ii. Guidelines of Bank to handle MSMEs in R&DBG Branches
iii. In this chapter, we will learn the importance of SME and different platform to
serve the customers.

Our Bank recognizes the need for a differentiated approach to marketing, risk management and
service delivery to different categories of borrowers. Taking this into account, different business
verticals have been created:
a) R&DBG Branches normally handle all Retail loans including
i) All Personal Segment, e.g. Housing Loans, Auto Loans etc.
ii) Exposures pertaining to Agri/SME upto Rs. 50 Cr except schematic lending where
specific approval is in place.
b) All exposures above Rs. 50 Cr normally come under Commercial Clients Group (CCG)
and Corporate Accounts Group (CAG).
1.2.1 Micro, Small & Medium Enterprises
Government of India (GoI), vide Gazette Notification S.O.2119 (E) dated 26.06.2020 has notified
new criteria for classifying the enterprises as Micro, Small & Medium Enterprises, w.e.f. 1st July
2020 as under:

i) Micro enterprise, where the investment in plant and machinery or equipment does not
exceed one crore rupees and turnover does not exceed five crore rupees;

ii) Small enterprises, where the investment in plant and machinery or equipment does not
exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

iii) Medium enterprises, where the investment in plant and machinery or equipment does not
exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

For the purpose of aforementioned classification, export of goods or services shall be excluded
from the turnover.

1.2.2 SME Delivery Model in our Bank

The SME portfolio of the bank, especially upto Rs.50 Cr. segment has been degrowing in the last
few years and to arrest this falling trend, the Boston Consulting Group (BCG), a Management
 Page 102

Consultancy Firm, was engaged by Bank for carrying out a review and advising remedial
measures.

They were mandated to come out with a model that ensures business ownership for enhanced
customer engagement and have quality credit portfolio through risk mitigation.

The present SME Delivery Model was rolled out pan India in 2015.

The guidelines have been further modified in the year 2016, 2017, 2019, 2020 and 2021.

This model is applicable only to the Retail & Digital Banking (R&DB) Group viz. Circles and
Branches under their control.

The SME delivery model has been revised keeping in view the exposure and location of branches
(i.e. BPR/ non-BPR locations).

Location Models
BPR Centre SME Centre: Exposure upto Rs. 50 lacs
RASMEC: SME Exposure upto Rs. 50 lacs
RM (SME): Exposure above Rs. 50 lacs
Non BPR Centre Branch/RACC: SME Exposure upto Rs. 50 lacs
RM (SME): Exposure above Rs. 50 lacs

1.2.3 SME Delivery Structure at AO

1. To improve the connect with the Customers and to develop SME Business, a new position of
AGM (SME) has been created at the identified AOs.

2. The AGM (SME) reports to DGM (B&O), will be responsible for all SME related matters of
AO including achievement of budgeted business, improvement in market share, monitoring quality
of SME business, etc.

3. AGM (SME) will be the key support to DGM module for growth of SME Business in these
AOs.

4. The AGM (SME) will be first ports of call along with DGM (B&O) for SME business in AO.

1.2.4 SME Centre (SMEC)

The structure of SME Centre for handling SME loans proposal upto Rs.50 lacs is as under:

1. At BPR Centres, having multiple RBOs, SMEC will be headed by AGM and will report to
DGM (B&O).
 Page 103

AGM will be supported by Chief Manager (Sanction) and Chief Manager (Loans &
Administration).

2. At BPR Centres, having single RBO, SMEC will be headed by Chief Manager and will
report to Regional Manager of RBO.

Chief Manager will be supported by Manager (Sanction) and Manager (Loans & Administration).

3. At SME Centre, two types of Asset Management Teams (AMTs) have been created, who
are handling SME Loans proposals upto Rs. 50 lacs as under:

i) Government Sponsored Schemes Asset Management Team (GSS-AMT): It will handle all
Govt. Sponsored Scheme loan proposals including MUDRA loans (end to end relationship). AMT
will consist of one Scale-II officer, one Scale-I officer and one customer assistant and will handle
1000-1200 CIFs.

ii) Small Loans Asset Management Team (SL-AMT): SL-AMT to handle loans upto Rs. 50
Lacs for Bank’s regular scheme. AMT will consist of one Scale-II officer, one Scale-I officer and
one customer assistant. AMT will handle 200-250 CIFs.

4. AMTs need to have budgetary targets and should provide end to end solution i.e. sourcing, pre-
sanction, appraisal, sanction, documentation, disbursement and post sanction activities.

The renewal/ review of accounts will be responsibility of respective AMT (end to end
relationship). The officials will work as a team and each officer will be responsible for appraisal
and assessment of the proposal. There will be no separate responsibility of ‘appraised by’ and
‘assessed by’.

5. The accounts are parked in the branches, for providing day to day services to the customers.

6. Sourcing of loan proposals upto Rs. 50 lacs will be the responsibility of SME
Centre/MPST/Branch.

7. All new loans will be entered in CRM/ CBS/ LOS.

Risk Rating validation: CRA/CUE (if applicable) to be done by respective AMT. CUE validation
upto Rs. 50 lacs proposal is done by Sanctioning Authority.

Sanction of proposals: By CM (Sanction)/ Manager (Sanction) at SMEC.

Control reports for loans sanctioned by CM (Sanction) shall be put up to AGM SME Centre and
loan sanctioned by Manager (Sanction) shall be put up to Chief Manager at SMEC. In respect of
SMEC headed by Chief Manager, the proposal sanctioned by Manager (Sanction) will be
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controlled by Chief Manager, SMEC & proposal sanctioned by Chief Manager, SMEC will be
controlled by Regional Manager of RBO concerned.

Documentation, Disbursement & Maintenance: Document creation, Document execution,

Disbursement of loans, Charge creation, account opening, maintenance & monitoring etc. to be
done by respective AMT under the control of CM (Loans & Administration).

NPA Management: Collection Team performs hard recovery for loans below Rs. 20 lacs. NPA
accounts of Rs.20 lacs and above will be migrated to SARB.

1.2.5 Retail Assets and Small & Medium Enterprise Centre (RASMEC):
The structure of RASMEC for handling SME loans proposal upto Rs. 50 lacs is as under:

1. Incumbency of the RASMEC will be decided by REHBU on the basis of combined business of
SME & Retail.

2. As opposed to two different types of AMTs to be formed at SME Centres, only a single type of
AMT will be formed in RASMEC, for SME loans with limits upto Rs. 50 lacs.

3. The team will handle upto 400 accounts. If the number of accounts exceeds 400, additional
AMT will be placed/ posted for SME Business.

4. AMTs to provide end to end solutions from sourcing, pre-sanction, appraisal, sanction,
documentation, disbursement, renewal, review and post sanction activities (except custody of
documents).

5. AMTs to have budgetary targets.

6. Sourcing to be done by the AMTs created at RASMECs/Branches/MPSTs.

7. CRA/ CUE Validation (if applicable) will be done by Sanctioning Authority.

Maintenance/ Collection Cell: Maintenance/ Collection Cell of RASME Centre will be headed
by Chief Manager (Maintenance). The cell will be responsible for custody of SME documents,
attending to audit, furnishing replies and also follow up of NPA, AUCA accounts.

NPA Management: In case of SME NPA accounts are more than 100, each RASMEC will
identify one separate officer for SME Segment who will work under RASMEC Head.

Maintenance/ Collection Cell will perform hard recovery for loans below Rs. 20 lacs. NPA
Accounts of Rs. 20 lacs and above will be migrated to SARB.

RASMEC Head will also be responsible for SME NPA portfolio.

 Page 105

1.2.6 Relationship Manager – SME (RM-SME)

- RM (SME) AMT will handle SME loans above Rs.50 Lacs in BPR Centre.

In Circles, where adequate number of units in the range of above Rs. 50 lacs are not available, the
CMC of the Circle may take a call for reduction in the lower cut-off of Rs. 50 lacs, but not below
Rs. 25 lacs.

- RM (SME) may be preferably of scale II to IV with CSO/s of Scale I/II.

- Circle can take a view to preferably assign lower ticket size portfolio to junior RM (SME)
and higher ticket size portfolio to senior RM (SME).

- The RM (SME) team will be stationed at branch under both the models viz. Branch Model
and Sales Hub Model.

- Branch Model means sitting at a branch and handling accounts of that branch only. Sales
Hub Model means sitting at a branch and handling more than one branch’s accounts.

- RM (SME) should operate under direct supervision of BM (Branch Manager/Branch Head)

where they are placed.

The Branch Manager will be the joint signatory (1st additional assessment) of the proposals of RM
(SMEs). The Branch Manager will also be responsible for pre-sanction/post sanction
processes/approval for disbursement etc. with joint ownership of Customers/accounts with
RMSMEs.

All RM (SME) accounts will be migrated to one branch wherein RMSME has maximum number
of accounts. However, for the convenience of the customer, a part of limit may be allocated to
branch of customer’s choice/ near to his workplace/ office, etc. and no allocation charges will be
levied for the said allocation.

- Each RM (SME) team will handle maximum 25 CIFs. In case of the number of CIFs
exceeds, the additional teams should be created.

- All SME intensive branches/ MSME branches need to be covered by posting of RM (SME).

Sourcing & proposal writing - Sourcing to be done by the RM (SME) AMT/ Branches.
Appraisal/ Assessment to be done by RM (SME) AMT and the 1st additional assessment will be
done by the concerned Branch Manager.

2nd additional assessment for proposals falling within the Financial powers of ZCC & CLCC will
be done by Chief Manager (Credit & Business Development) at B&O.
 Page 106

In other cases (within financial powers of RCCC and above committees), 2nd additional
assessment will be done by Branch Head/ RM/ DGM (B&O)/ Branch depending upon exposure/
Branch incumbency of the respective RM (SME).

Validation of Credit Rating: Official of the rank of Manager identified as Risk Rater at RBO,
will carry out the credit rating validation for the RCC proposals. Risk Rater based at LHO shall
carry out the validation for other committees (i.e. ZCC, CLCC, RCCC and above).

Review by the Circle Credit Review Department (CCRD)/Credit Review Department

(CRD): The proposals falling within the Financial powers of ZCC and above committees shall be
referred to CCRD/ CRD where it will be reviewed based on pre-defined risk matrix. CRD/ CCRD
will evaluate the proposal from the angle of risk and will sign-off with “Go/ No-Go” decision
before submission of the proposal to respective committee

Sanction by: RCC/ZCC/CLCC/ RCCC/ CCSC/ CCCC/ ECCB depending upon the exposure/
financial powers/ constitution/ facility(ies) of the borrower.

Documentation & Disbursement: RM (SME) will be responsible for completion of documents,

creation of mortgage, registration of charges with ROC, Disbursement, creation and registration
of Pari-passu charges, custody of documents, obtention of revival letter.

Maintenance by Operations & Assets Quality Team: 1/2 officer may be posted as per
requirement. Each member of the team may be mapped to at least one or two RM (SME)s with
25 CIFs of above Rs. 50 lacs.

This team will ensure compliance with customer requests in a dedicated manner with full
ownership. The Team leader will be the overall in charge.

Each team to handle max. 50 CIFs. In case the number of accounts exceeds, the additional teams
should be created.

The team will also follow up accounts from SMA 0 to NPA and take efforts for upgradation and
will continue to handle the same till transfer to SARG.

- In case of Sales Hub Model, the responsibilities for maintenance would be shared between
the RM (SME) AMT and linked Branch Manager. RM (SME) will be responsible for all customer
interfacing activities.

1.2.7 Exposure upto Rs. 50 lacs at Non BPR Centres:

- Retail Asset Credit Centre (RACC) will handle SME loans upto Rs. 50 lacs including Govt.
Sponsored Schemes. If the branch is not mapped with RACC, SME loans upto Rs. 50 lacs will be
handled by Branches.
 Page 107

- RM (SME) will handle SME Loans > Rs. 50 lacs (End to End) and will obtain sanction
from appropriate authority as applicable, as per delegation of financial powers.

- In respect of Non-BPR Centres, in case RM (SME) is not posted in the Centre/ locality,
RACC should handle all SME Loan Proposals and obtain necessary approvals/ sanctions from
appropriate authority and also monitor the accounts.

- In RACC model, branches are categorized as under:-

1. Spoke Branch- spoke branches are non-BPR branches upto Scale IV linked with RACCs
for sanctioning/ maintenance of their loans.

2. Hub Branch – Hub branch is the branch where RACC is functioning. Hub branch will be
treated like any of Spoke branch for RACC.

3. RACC – RACC will be the centralized processing/ sanctioning/ maintenance centre for its
linked (spoke) branches.

- The RACC will be headed by the Chief Manager (Scale IV) of the Hub branch, (in addition
to his role as the Branch Head).

- Processing & Sanctioning Team will be led by Manager (Sanctions), to handle processing
& sanction of New loans as well as renewal/enhancement of existing limits.

- Monitoring & Maintenance Team will be led by Manager (Credit Monitoring), who will
take care of maintenance & follow up of the existing loans.

- A dedicated field visit team for Pre/Post Sanction Inspections, compilation of opinion
reports etc.

- The spoke will conduct Pre-sanction survey of only templated loans viz. Personal Loans,
Pension Loan, Loans against Bank Deposit and all Gold Loans.

- Accounts to be sourced at the Branches by FO/ BM, BC/ BF

- Sanction by Branch Head/RACC

- Documentation: Document preparation (by Branch/RACC), execution and charge creation

at the branches/ RACC. The loan documents can be executed at either place – RACCs or Spoke
branches as per the convenience of the customers. However, as soon as the execution of documents
and disbursement of loan is completed, migration of eligible loans documents should be ensured
to RACCs at the earliest.
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1.2.8 Exposure > Rs. 50 lacs at NON BPR Centres:

- RM (SME) will handle SME Loans > Rs. 50 lacs (End to End) and will obtain sanction
from appropriate authority as applicable, as per delegation of financial powers.

- Circles may lower the minimum threshold of Rs. 50 lacs to Rs. 25 lacs for non BPR RM
(SME), based on the potential of business and number of CIFs that can be handled by a RM (SME).

- SME business will be handled through limited number of branches and CMC to ensure that
such type of business is looked after by RM (SME).

- In respect of Non-BPR Centres, in case RM (SME) is not posted in the Centre/locality,

RACC should handle all SME Loan Proposals and obtain necessary approvals/sanctions from
appropriate authority and also monitor the accounts.

- The structure/model of RM (SME) AMT, roles & responsibilities, are same as per BPR
Model.

1.2.9 MIGRATION OF ACCOUNTS BETWEEN VARIOUS SALES CHANNELS

I. Redistribution/migration of accounts among SME Centre/ RASMEC AMTs, RMSMEs,

and Branches may be necessitated in accordance with the cut-off prescribed for them, due to
changes in exposure of the accounts as a result of reduction/ enhancement in limits.
II. Distribution/migration of accounts will take place once in a year at the beginning of the
Financial Year and cut-off date for exposure will be 31st March of the previous Financial Year.
III. All eligible accounts will be distributed/ migrated at the earliest but not later than 31st of
May of every year.

Key Learning Points:

➢ Rolled out pan India during 2015
➢ Designed on the recommendations of BCG
➢ Applicable only to R&DB Group – Circles & Branches under their control
➢ As per locations of Branches – BPR/Non BPR
➢ At BPR Centres:
➢ SME Centre – Exposure upto Rs. 50 lacs – Two types of AMT (GSS-AMT & SLAMT)
➢ RASMEC – Exposure upto Rs. 50 lacs – One type of AMT
➢ RM (SME) – Exposure above Rs. 50 lacs –
Two Models – Branch Model and Sales Hub Model. Branch Model means sitting at a branch and
handling accounts of that branch only. Sales Hub Model means sitting at a branch and handling
more than one branch’s accounts.
➢ RM (SME) Operates under direct control of Branch Manager, where he has been placed.
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The Branch Manager will be the joint signatory (1st additional assessment) of the proposals of
RMSMEs. The Branch Manager will also be responsible for pre- sanction/post sanction
processes/approval for disbursement etc with joint ownership of Customers/accounts with
RMSMEs.
➢ At Non BPR Centre:
➢ Branches / RACC – Exposure upto Rs. 50 lacs – RACC are Headed by CM of the Hub branch
(in addition to his/her role as the Branch Head), Processing & Sanctioning Team led by Manager
(Sanction), Monitoring & Maintenance Team led Manager (Credit Monitoring), Dedicated field
visit team for Pre/Post sanction
➢ RM (SME) – Exposure above Rs. 50 lacs

Check Your Progress:

1.MUDRA loans are processed by _____ at SMEC ?
a SLAMT b GSSAMT c Chief Manager d Chief Manager
(Sanction) (L&A)
2. Who is responsible for sourcing of proposal upto Rs.50 lacs at BPR Centre?
a Collection Cell b Maintenance Cell c AMT at SME d RBO
Centre/MPST/
Branch
3. At RASME Centre, who will process the SME Advances proposal for Rs.10 lacs?
a GSSAMT b Chief Manager c Branch d AMT at
(Sanction) RASMEC
4. The documentation/collateral creation and its archival of RMSME account is done by
_______.
a SMEC b RASMEC c RBO d RM (SME)
5. RMSME to handle advances accounts with limit above Rs.______ crore at BPR Centre.
a Rs. 5 Crore b Rs. 1 Crore c Rs. 3 Crore d Rs. 50 lac

ANSWERS OF OBJECTIVE QUESTIONS:

1-B 3-D 5-D

2-C 4-D
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Case Let:

Mr. Ritesh Kumar, proprietor of M/s. Ritesh Hardwares, has been maintaining current account
with our XYZ branch (BPR Centre) since 2016. The unit is engaged in trading of Hardware items
since 2015. Presently, he is running the business without any credit facilities. This branch is
linked with SME Centre. With the increase in the turnover, he has decided to avail some credit
facilities from your branch and requested you for a loan of Rs. 10 lacs for purchase of furniture
and fixture and Rs. 25 lacs for purchase of stocks and extending credit to his buyers.

XYZ branch is headed by Chief Manager and branch is also having one RM(SME) Team. Mr.
Ritesh Kumar contacted the RM (SME) posted at the branch who has shown his inability to process
the request of the borrower and advised him to meet Branch Head.

Question 1: Who will process the proposal?

a. RM (SME) Team
b. Branch Head
c. SME Centre
d. Regional Business Office.

Option (c) SME Centre

Question 2: Who will sanction the proposal?

a. Chief Manager Branch

b. Chief Manager (Sanction) at SME Centre
c. Chief Manager (L&A) at SME Centre
d. Chief Manager (Rural) at RBO.

Option (b) Chief Manager (Sanction) at SME Centre

Question 3: Who will be responsible for documentation and charge creation after sanction of
loan?

a. GSS-AMT at SME Centre

b. SL-AMT at SME Centre
c. Chief Manager (L&A) at SME Centre
d. RM (SME) Team at branch

Option (b) SL-AMT at SME Centre

Question 4: Who will be responsible for post sanction activities related to the account?

a. Branch
b. RM (SME) at Branch
c. SME Centre
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d. RASMEC

Option (c) SME Centre

Question 5: After sanction of loan, which of the following activity will be performed by the
Branch?

a. DP Calculation/feeding
b. Renewal of limits at existing level
c. Enhancement in limits
d. None of the above

Option (d) None of the above

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BACK TO INDEX

CHAPTER - 3
ANALYSIS OF FINANCIAL STATEMENT

INTRODUCTION: Financial Statements (FS) are the backbone for any credit proposal. The
premise of any credit proposal is built upon the financial statements. These statements are the
formal records of the financial activities of a business / entity / person etc. and provide an
overview of the financial condition in short, medium and long term. Financial statements give
an accurate picture, to a great extent, about the financial health of the entity in a condensed
form and are used as a tool to assess the overall position and operating results of the business.
Ratio analysis shows whether the business entity is improving or deteriorating in past years.
Moreover, comparison of different aspects of all the entities can be done effectively with the
help of trend / ratio analysis.

Analysis and interpretation of the financial indicators does not always prove to be an easy
task as it requires multiple calculations and combined approaches. The knowledge and
understanding about the business is essential for proper analysis / interpretation of the
financial statements. It helps in determining the liquidity position, long term solvency,
financial viability and profitability etc. of the business entity. It also helps to decide in which
entity, the risk is less or in which entity one should invest to reap the maximum benefits.
Thus, the conclusions of the analysis carried out in a professional manner will enable to
correctly describe about the status of the entity and finally helps in taking an informed
decisions.

Financial statements are prepared by the management to cater to the needs of the various
users / stakeholders viz. Shareholders, Government Departments, Employee, Customers,
Lenders / Financial Institution etc. Each stakeholder has its own requirements / perspective
for understanding the financial statement. Analysis of the financial statements is very crucial
from the lenders’ perspective as their credit decision is broadly based on the financial
statements. After reading the chapter, you will be able to understand the following,
i. Importance of financial statements.
ii. Overview of Accounting Standards
iii. Contents of financial statement and need for analysis
iv. Directors’ Report, Independent / Statutory Auditor’s Report, CARO
v. Classification of various items of Financial Statements
vi. Preparation of Credit Monitoring Arrangement (CMA)
vii. Fund Flow Statement, Cash Flow Statement
viii. Related Party Transactions
ix. Creative Accounting and Beyond Balance Sheet
x. Various Ratios, calculation and interpretation thereof and much more…..

Accounting Standards (AS) are formulated by the Accounting Standards Board (ASB),
constituted by the Institute of Chartered Accountants of India (ICAI) in 1977 with a view to
synchronize the diverse accounting policies and practices prevailing in the country. While
formulating AS, the ASB takes into consideration the applicable laws, customs, usages and
business environment prevailing in the country. The ASB also take due consideration of
International Financial Reporting Standards (IFRSs) / International Accounting Standards
(IASs) issued by International Accounting Standards Board (IASB) and tries to integrate
them, to the extent possible, in the light of conditions and practices prevailing in India. The
objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the
 Page 113

preparation of financial statements within the bounds of rationality, thereby ensuring

comparability of financial statements of different enterprises, to provide meaningful
information to various users of financial statements and to enable them to take informed
economic decisions. Accounting Standards are the written policy documents covering the
aspects of recognition, measurement, classification, presentation and disclosure of accounting
transactions, conditions and events in the financial statements. Accounting Policies are the
specific principles, bases, conventions, rules and practices applied by an entity in preparing
and presenting financial statements.

Need for analysis of Financial Statement: The fundamental question is what is the need of
analysis of financial statements which have been prepared in terms of the relevant statutes
and also audited by the qualified auditors who have scrutinized the transactions and also
pointed out the discrepancies (if any) in the statements. An analysis of financial statements
seems to be duplication of work. The answer is that the responsibility of preparation of
financial statements lies with the management and the Auditor’s role is only to opine on the
financial statements. Financial statements are prepared for the use of various stakeholders viz.
Shareholders/Investors, Government Departments, Employee, Customers and
Lender/Financial Institution etc. The stakeholders use/understand these financial statements
as per their need/requirement.

The format for preparation of financial statements for the Companies is standard as per
Companies Act 2013. For other type of constituents viz. proprietorship / partnership etc., the
format for preparation of financial statements are being used more or less on the similar lines.
Thus, it is necessary for each stakeholder to analyze the financial statements from his own
perspective as per their requirement.

Contents of Financial Statements: The Companies Act, 2013 defines the term
“FINANCIAL STATEMENTS” to include:
i. A Balance sheet as at the end of the financial year,
ii. A profit and loss account, or in the case of a Company carrying on any activity
not for profit, an income and expenditure account for the financial year,
iii. Cash flow statement for the financial year,
iv. A statement of changes in equity, if applicable; and
v. any explanatory note annexed to, or forming part of, any document referred to
in (i) to (iv) above,
Provided that the financial statement, with respect to One Person Company, Small Company
and Dormant Company, may not include the cash flow statement.

As per Section 129(3) of the Companies Act 2013, where a Company has one or more
subsidiaries, associate Company, joint venture, it shall, in addition to financial statements,
prepare a consolidated financial statement of the Company and of all the subsidiaries in the
same form and manner as that of its own.

Requirement of Audited Financials: As per Bank’s extant instructions, audited financials

are required for all the credit proposals with exposure of Rs. 25 lakh or above. As per Manual
on Loans & Advances (updated upto 30.09.2020), Part-2, Chapter-20, Para 3-20-4 “For
aggregate limits upto Rs.5 lakh, audited balance sheet need not be insisted upon. For non-
corporate borrowers, enjoying aggregate credit limit of Rs.10 lakh and above from the
Banking system, audited balance sheet in the IBA approved format (Annexure REVIEW-1 of
the Manual) should be obtained”.
 Page 114

Genuineness of Financial Statements: On receipt of the Audited Financials, first of all, the
credit officer should check the genuineness of the same and ensure verification at the time of
fresh sanction/renewal/review of the account, with those available on the website of Ministry
of Corporate Affairs (www.mca.gov.in). In respect of those Companies whose audited
financials are not available on the website for any reason, an independent confirmation
should be obtained from the Chartered Accountant firms directly by e-mail/fax to ensure
genuineness of their certification and the fact of receipt of such independent confirmation
should be recorded in the proposals. Ensure verification and cross checking of major items of
Profit & Loss account and Balance Sheet with the various statutory / regulatory returns.

Apart from the above, in case of Non-Corporate borrowers, turnover of the units as
mentioned in the audited balance sheet need to be verified with GST returns and Income Tax
returns of the customer for the respective financial year. Moreover, along with the audited
balance sheet, the borrowing units need to submit usual KYC documents in respect of the
auditor firm viz. copy of address proof and identity proof like PAN card, Driving license,
Aadhar Card etc. or alternatively, a copy of GSTN Invoice, issued by the Auditor which he
would have submitted for payment of the bills to the customer. This will ensure genuineness
of the Auditor. Proper evidence of having verified the audited financials are to be ensured and
kept on record for verification by internal/ external Auditors.

For a true and complete understanding of financial statements, it is imperative and

prerequisite that the financial statements should not be read in isolation but should be read in
conjunction with the Independent / Statutory Auditors’ Report along with any explanatory
note annexed to or forming part of Auditors’ Report, which comments on the compliance
with various laws / regulations etc. and the quality of figures, shown in the financial
statements.

Directors’ Report: Directors’ Report is very important document. It is applicable in the case
of Companies. In case of other types of constituents, we have to collect the similar types of
information separately. Directors’ Report provides the following information,
i. Financial Results highlights
ii. Future plan of the Company
iii. Dividend
iv. Directors’ responsibility statement
v. Accounting Standards followed
vi. True & Fair view of Financial Statements
vii. Proper maintenance of books, safeguards toward assets/fraud
viii. Going Concern
ix. Adequate Internal Financial Control
x. Compliance of all applicable laws

Independent / Statutory Auditors’ Report: The Auditor’ report is the Auditor’s opinion on
the financial statement, based on their audit. The auditor makes his opinion on the true & fair
representation of the material facts and also opine on the material aspects of the units. There
are various types of Auditors’ Report. Clean reports do not contain any adverse remarks /
comments of the Auditors. Qualified reports are those reports where the Auditors qualify
their opinion / furnish adverse comments in case of any non-compliance with any of the law /
rules / Acts / Accounting Standards or material departure from the accounting principles etc.
and these non compliances are having material impact on the financial statements.
 Page 115

Companies (Auditor's Report) Order, 2016 (CARO): CARO Report is the Report on other
Legal and Regulatory Requirements as required by the Companies (Auditor's Report) order,
2016 ("the order") issued by the Central Government of India in terms of subsection (11) of
section 143 of the Act. The Auditor gives his report on the matters specified in paragraphs 3
and 4 of the order, to the extent applicable. CARO is not applicable in case of,
i. Banking and Insurance Companies
ii. Company licensed to operate U/s 8 of the Companies Act
iii. Small Companies,
iv. One Person Companies,
v. Private Company, means a Company whose Capital and Reserves or
borrowings from Banks and Financial Institutions is not exceeding Rs. 1 crore
or Turnover not exceeding Rs. 10 crore.
There are 16 items in the CARO.
(i) Fixed Assets: Comments on maintenance of proper records, verification of all
major assets at reasonable intervals, the title deeds of immovable properties are
held in the name of the Company.
(ii) Inventories: Comments on physical verification, frequency of verification,
discrepancies.
(iii) Unsecured Loans: Comments on whether the Company has granted unsecured
loan, the terms & conditions of such loan, repayment terms and whether regular
or irregular.
(iv) Loans, investment, guarantees and security Related Party: Compliance of
the provisions of Section 186 of the Companies Act, 2013
(v) Deposits from Public: whether the Company has accepted deposit or not.
(vi) Maintenance of cost records: Compliance of the rules made by the Central
Government for the maintenance of cost records under Section 148(1) of the
Companies Act 2013.
(vii) Statutory Dues: Whether paid regularly, is there any overdue, is there any
disputed tax liabilities.
(viii) Default in repayment to lenders / financial institutions: Is there any
default in repayment.
(ix) Funds through IPO/FPO, use of funds availed on long term basis:
Whether the Company has raised any moneys by way of initial public offer,
further public offer (including debt instruments). Whether the term loans have
been used for the purpose for which the loans were obtained.
(x) Fraud: Whether any fraud by the Company or on the Company by its officers or
employees has been noticed.
(xi) Managerial Remuneration: Compliance of provisions of Section 197 read with
Schedule-V of the Companies Act 2013 with regard to managerial remuneration.
(xii) Whether the Company is a Nidhi Company, if yes, whether the Nidhi Rules,
2014 are applicable.
(xiii) Transactions with Related Party: Whether the Company has entered into
transactions with related parties in compliance with the provisions of Section 177
and 188 of the Act.
(xiv) Whether the Company has made any preferential allotment or private placement
of shares or fully or partly convertible debentures.
(xv) Whether the Company has entered into any non-cash transactions as referred in
Section 192 of the Act with its directors or persons connected with him.
(xvi) Whether the Company is required to be registered under Section 45-IA of the
 Page 116

Reserve Bank of India Act, 1934.

Amendment in the above order was issued on 25.02.2020 (CARO-2020) by the Government
of India and was applicable w.e.f. 01.04.2019 (FY 2019-20) but has been deferred due to
COVID-19 and now it will be applicable w.e.f. 01.04.2021.

Notes Forming Part of Accounts: Notes to accounts contain explanatory material, which is
quite useful in understanding the factual position as well as impact of accounting treatment of
certain significant items. It provides the details for the individual items of the financial
statements. It is imperative that notes on accounts should be carefully understood and their
impact should be broadly and minutely examined. Some of the vital information, available in
the notes to accounts are,
i. Comments on / changes in accounting policies during the year.
ii. Details of Contingent liability
iii. Detailed breakups of sales, raw material consumption etc.
iv. Details of Related party transactions as per Accounting Standards (AS)-18
v. Segment wise reporting, details of transactions in foreign currency
vi. Details of Deferred Tax Liability / Assets
vii. Details and comments on revaluation reserve, if any

Related Party Transactions: As per Accounting Standard (AS)-18, related party transaction
means ‘A transfer of resources or obligations between related parties, regardless of whether
or not a price is charged’ and Related Party means ‘One party has the ability to control the
other party or exercise significant influence over the other party in making financial and/or
operating decisions’.

Control means(a) ownership, directly or indirectly, of more than one half of the voting
power of an enterprise, (b) control of the composition of the board of directors in the case of
a Company or of the composition of the corresponding governing body in case of any other
enterprise, (c) a substantial interest in voting power and the power to direct, by statute or
agreement, the financial and /or operating policies of the enterprise. Control also includes
right to appoint a majority of directors or to control the management or policy decisions
including by virtue of their shareholding or managements or share holder agreement or voting
agreement

Significant influence means Participation in the financial and / or operating policy decisions
of an enterprise, but not control of those policies.

Associate Company: As per Companies Act 2013 Section 2(6), a Company in which that
other Company has a significant influence, but which is not a subsidiary Company of the
Company having such influence and includes a joint venture Company. For the purposes of
this clause, “significant influence” means control of, at least 20% of total share capital or of
business decisions under an agreement.

Holding Company: As per Companies Act 2013 Section 2 (46), Holding Company in
relation to one or more other Companies, means a Company of which such Companies are
subsidiary Companies.

Subsidiary Company: As per Companies Act Section 2 (87), subsidiary is defined as a

Company in which holding Company holds more than 50% of share capital directly or
indirectly or controls composition of the board of directors.
 Page 117

Person/Entity not considered as Related Party: Following are not considered to be related
party:
➢ Financiers do not become related parties simply by virtue of their dealings with an
entity
➢ The customers, supplies, distributors etc. with whom unit has normal business
dealings only
➢ Government department and agencies, Public utilities, Trade Unions

Related party transactions may be the normal feature of business as some units are having
associate, subsidiaries, joint ventures, sister concerns to carry out various activities either as
backward or forward integration for the main unit. Every business entity is required to make
certain disclosures regarding its dealings with related parties. There is nothing wrong as such
in the related party transactions, if these are being carried out to meet out the genuine
business requirement and on the same terms and conditions as these transactions would have
been carried out with any other party that is not a related party. However, preferential
treatment given to the related parties gives reasons to doubt such transactions as the ultimate
objective behind such transactions may not be genuine. Related party relationship can have
an effect on the Profit & Loss or Financial Position of the reporting entity. Chances are that
transactions between related parties may not be done on the same terms and conditions or
price (Arm’s Length basis) as in case of other parties with the ultimate objective of diverting /
siphoning the funds or profits.

Related party transactions are of significant importance for lenders in evaluating a borrower
customer and its dealings. Lenders are required to analyse the related party transactions with
due care. An enterprise is supposed to transact with its related party at arm’s length price.
However, if a Company wants to siphon off its profit, it may sell at a lower price or purchase
at a higher price to / from its related parties. Hence the lenders should satisfy themselves
about the transactions carried out with a related party with regard to the genuineness. In other
words, whether these transactions are genuine business needs? If the answer is positive and
the pricing is proper i.e. at Arm’s Length basis, it is OK but if the answer is negative and
there are doubts on the pricing, the reasons and the ultimate objectives for such transactions
must be ascertained and critically examined.

Credit Monitoring Arrangement (CMA)

In our Bank, we are using the CMA format for analyzing of financial statements. There were
6 forms in the CMA format. Later on, in 1997, when the Projected Balance Sheet Method or
Assessed Bank Finance Method of Working Capital Finance were introduced by the Reserve
Bank of India (RBI), form-V, which was used to calculate Maximum Permissible Bank
Finance (MPBF) under Tandon Committee norms, made optional / discontinued. Thus form-
VI became the form-V. Though some Banks are still using 6 forms CMA format but in our
Bank, the CMA format contains 5 forms viz,
i. Form-I Details of borrower and credit facilities (existing & proposed)
along with the details of Associate / Subsidiary concern
ii. Form-II Operating Statement
iii. Form-III Analysis of Balance Sheet (Liabilities and Assets)
iv. Form-IV Comparative statement of Current Assets & Current Liabilities
v. Form-V Fund Flow Statement
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The CMA is being prepared for 4 years data i.e. last two years actual audited data, current
year estimates and projections for the next year. Generally, we are using excel sheets for
preparation of CMA. For preparation of CMA, the various items of the financial statements
are regrouped / rearranged in such a manner, which can provide the desired information /
ratios / results to the lender according to its requirement. The various steps involved in
preparation of CMA are as under,

Form-I, Details of borrower and credit facilities (existing & proposed) along with the details
of Associate / subsidiary concern is to be submitted by the unit.

Form-II, Operating Statement is being filled / prepared on the basis of Profit & Loss
account. In other words, the Profit and Loss account is to be converted into Operating
Statement as lenders’ focus is to find out the profitability from the operations i.e. the key
activity of the unit and also to know about the cost of production / cost of sales. Hence, the
items not pertaining to operating activity e.g. interest income from the investment made (if it
is not an investment Company), income / loss from sale of fixed assets etc. are to be
segregated and should not be reckoned as operating income. Each and every item of Profit
and Loss account is to be analysed independently as well as with correlation with other items.
Any extra ordinary change during the relevant financial year over the previous year should be
examined in depth to ascertain the reasons and resultant consequences thereof. The purpose
of this analysis is to find out the trends of the business, future prospects, various ratios etc.

Sales: Sales / turnover is the most important and first item in the Profit and Loss Account.
The entire analysis of financial statements and assessment of estimates / projection moves
around sales figure. While analysing sales, following factors should be kept in mind,
i. Reasons for lower / excess achievement
ii. Changes in business model / market scenario
iii. Composition of sales from manufacturing and trading
iv. Analysis in terms of quantity
v. Break up between core and non-core activity
vi. Trends over 3-4 years
vii. Sale from scrap, goods sent for processing shown as sale
The above list is only illustrative and exhaustive. Detailed and deeper analysis of sales is to
be carried out wherever there is any abnormal / exceptional changes are observed in the trend.

Raw Material Consumption: Cost of Raw material consumption is one of the major
components in the cost of production. The relation of cost of raw material consumption is to
be checked with the cost of production as there is a direct relation between the two. Any
drastic change in percentage terms should be analyzed minutely and the reasons for the
change is to be ascertained. Practically, it is very difficult to reduce the cost of raw material
consumption in manufacturing unit unless the steps like, changes in technology, changes in
product mix, change in the use of imported raw material instead of indigenous and other cost
cutting measures etc. are taken by the unit to reduce the cost.

Depreciation and useful life: As per Companies Act 2013 (Schedule-II Para-1), an asset can
be used over a number of years for the benefit of the business and depreciation is the
systematic allocation of the depreciable amount of an asset over its useful life. The
depreciable amount of an asset is the cost of an asset or other amount substituted for cost less
its residual value. In simple terms, we can say that depreciation is the amount by which the
value of an asset declined because of its use and wear & tear over a certain period. The useful
 Page 119

life of an asset is the period over which an asset is expected to be available for use by an
entity or the number of production or similar units expected to be obtained from the asset by
the entity. The useful life of a depreciable asset should be estimated after considering the
expected physical wear and tear, obsolescence and legal or other limits on the use of the
asset. Assessment of depreciation and the amount to be charged in respect thereof in an
accounting period are usually based on the following three factors:
(i) historical cost or other amount substituted for the historical cost of the depreciable
asset when the asset has been revalued;
(ii) expected useful life of the depreciable asset; and
(iii)estimated residual value of the depreciable asset.

Cost of Production: Cost of production is the sum total of all direct expenses related to
production process i.e. cost of raw material consumed, stores & spares, power & fuel
expenses, direct labor, other manufacturing expenses like repair & maintenance, depreciation
and any other cost (which is a direct factory of production). Then, we have to make
adjustments for opening and closing stocks of Stock in Process (SIP) or Semi Finished
Goods. This adjustment of SIP stocks is required because expenses on opening SIP has
already been incurred in the year before the accounting year but these SIP are converted into
finished goods in the accounting year. Similarly, the expenses on closing SIP has been
incurred in the accounting year but the same are not yet converted into finished goods during
the accounting year. Hence to find out the actual cost of production for the units,
manufactured during the accounting year, this adjustment is required.

Cost of Sales or Goods Sold: Cost of sales is the total of cost of production and adjustments
for opening &closing stocks of Finished Goods (FG). This adjustment of FG stocks is
required because the stocks of opening FG have been sold in the accounting year and the
stocks of closing FG have not been sold during the accounting year. It is not always possible
to sell exact number of unit produced so the units produced may be higher or lesser than the
units sold. The ultimate purpose of preparing operating statement is to find out the
profitability from the operations. We have taken the revenue from operations (i.e. units sold
multiplied by the rate per unit) and as we know that the apples cannot be compared with
oranges, we have to find out the actual cost of units sold. Hence this adjustment is required.

Deferred Tax Liability (DTL) and Deferred Tax Assets (DTA): Statement of Profit &
Loss contains number of items, one of them being taxes on income. The management
accounts for various items of revenue and expenses in the profit and loss statement and the
profit before tax is net off revenue and expenses. However, sometimes the Income Tax
authorities differ from the management as far as considering certain items as revenue or
expense for the relevant period. Under the circumstances the profit arrived at by the
management differs from the profit arrived at by the tax authorities. This results in taxable
income being different from the accounting income. Consequently the taxes paid in an
accounting period to the Income Tax authorities differ from the taxes provided on the
accounting income.

The issue is how to account for this difference. This difference is accounted for in the books
by way of DTL or DTA. Until the notification of the Accounting Standard (AS)-22, every
enterprise was forced to keep two sets of financial statements. One set for the income tax
authorities and the other set for information for Management, Bankers, shareholders and
other stakeholders. However with the implementation of AS-22, this problem has been
resolved and now the differential tax is accounted for by way of DTL or DTA.
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The DTL or DTA can be created only when there is timing difference for payment of taxes, if
it is permanent difference then it has to be booked as an expense in the Profit & Loss account
for the year. The definition of the timing difference as per AS-22 is “Timing differences are
the differences between taxable income and accounting income for a period that originate in
one period and are capable of reversal in one or more subsequent periods.” The definition of
the permanent difference as per AS-22 is “Permanent differences are the differences between
taxable income and accounting income for a period that originate in one period and do not
reverse subsequently.” For example, if for the purpose of computing taxable income, the tax
laws do not allow or allow only a part of an item of expenditure as business expense, the
disallowed amount would result in a permanent difference.

Treatment of Deferred Tax Liability (DTL) and Deferred Tax Assets (DTA) in our
analysis: Deferred Tax Liabilities/Assets are shown under non-current liabilities/assets in the
annual financial statements. All the DTLs are not necessarily be non-current in nature. We
should apply the logic given under Schedule-III of the Companies Act 2013. The portion of
DTLs that are likely to be adjusted next year must be classified as current liabilities and rest
as non-current liability. DTA is created on account of advance payment of taxes with the
assumption that there will be sufficient profits in future (with certainty), against which it will
be adjusted, hence it should be treated as Intangible Assets as there is only a claim and no
tangible assets is being created. As per Bank’s extant instructions, DTL is to be treated as
liability (current or term, as the case may be) and not to be treated as part of Net Worth.
Similarly, DTA is to be treated as Intangible Assets and to be deducted from Net Worth while
calculated Tangible Net Worth.

Form-III, Analysis of Liabilities and Assets: Lenders want to check the liquidity and
solvency position of the entity. Lenders have to analysis/study each and every item of the
Balance Sheet to get the insight of it. The various items of the Balance Sheet should be
regrouped / reclassified / rearranged for classification under various heads.The liabilities
should be classified into 3 parts i.e. (i) current liabilities (ii) term liabilities and (iii) net
worth. Similarly, the assets should be classified into 4 parts i.e. (i) current assets (ii)fixed
assets (iii)non-current assets and (iv) Intangible assets.

Current Liabilities: As per Companies Act 2013, the Current Liabilities are defined as,“ A
liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the Company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the Company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date. Terms of a liability that
could, at the option of the counterparty, result in its settlement by the issue of equity
instruments do not affect its classification.”
All other liabilities shall be classified as non-current.

Examples of Current Liabilities: Short term borrowings from Banks, Public

Deposits (maturing within next 1 year), Share Application Money, Advance /
Deposits from Dealers, Trade Payables, Installments of Term Loans etc. (becoming
due within next 1 year), Statutory Liabilities, Expenses Payables, Provisions etc.
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Term Liabilities: Term liabilities are the liabilities, which are payable / become due for
payment after one year from the report date i.e. the date of financial statement.
Examples of Term Liabilities: Term Loans, Unsecured Loans or loans from friends
& relatives, Public Deposits (maturing after 1 year), Debentures, Bonds, Deferred
Tax Liabilities etc. As per our Bank’s extant instructions, If the remaining maturity
of Preference shares is less than 12 years, then it should be classified as Term
Liabilities instead of part of Net Worth.

Net Worth: Net worth consists of Paid-up Capital and Reserves &Surpluses including share
premium. Capital reflects the amount brought in by the promoters whereas the reserves &
surplus represents the capital, which is earned by the unit. Reserves & Surplus are created out
of profits. The fundamental rule for classifying anything under the head Net Worth is that the
fund should belong to the promoters and these funds should remain in the business on
perpetual basis. If the promoters of the unit bring funds on long term basis in any form (may
be own or pertaining to friends & relatives) other than capital and submit an undertaking to
the effect that these funds will not be withdrawn during the currency of loan, it cannot be
considered as part of net worth because these funds are not brought in on perpetual basis and
can be withdrawn any time despite the undertaking. Hence, unsecured loans or loans from
friends & relatives cannot be considered as part of net worth. Revaluation reserve arises on
account of revaluation of fixed assets, and classified as part of reserves. It arises only on
account of book entry without any actual transaction. Hence it should not be considered as
part of Net Worth despite the fact that this is permanent reserve.

Tangible Net Worth: Tangible Net Worth (Adj. TNW) represents the tangible funds,
available in the business to support the operations. For calculating Tangible Net Worth
(TNW), we have to deduct the total Intangibles assets from the Net Worth. Intangibles assets
are those assets, which are being created from the funds deployed in the business but do not
have any physical existence like, Preliminary Expenses, Patents and Goodwill etc. Thus as a
lender, we want to calculate the actual tangible funds, available in the business to support the
operations, that is why we calculate TNW.

Adjusted Tangible Net Worth: Adjusted Tangible Net Worth (Adj. TNW) is calculated to
find out the availability of the actual funds in the business to support the operations. If the
management has made investments or given loans / advances in/or to any other business
entity (associate / subsidiary / joint venture etc.) then these investments, loans & advances are
not actually available to support the main activity. Therefore, all the investments, loans &
advances to associate / subsidiaries / joint ventures should be deducted from the TNW to
arrive at Adj. TNW.

Treatment of Unsecured Loans (USLs) as part of Net Worth or Quasi Equity: Quasi
means apparently but not really or seemingly or being partly or almost. It is clear from the
meaning that any USL with undertaking is neither equity nor loan but falls in between. Hence
for classification purpose in CMA and for carrying out CRA, USLs should not be treated as
part of equity or net worth because if we consider these USLs as part of equity or net worth,
the solvency ratios and other balance sheet related ratios will get affected either adversely or
favorably. However, for justification purpose, USLs may be considered as quasi equity if
these USLs are supported with subordination letters.
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Revaluation Reserve: In a Balance sheet, fixed assets are shown on a historical basis i.e.
after netting off the accumulated depreciation from the original cost of acquisition.
Sometimes, business enterprises revalue the fixed assets in order to bring the reporting value
of these assets at par with the current market values. Technically, revaluation means both
upward and downward adjustment in the book value of the fixed assets. In the normal
business scenario, the depreciation takes care of the downward adjustment of the fixed assets
values. Therefore when we talk about the revaluation, we usually mean upward valuation of
fixed assets. Revaluation creates profit, which is directly shown in the liability side of balance
sheet under the head Net Worth in the form of revaluation reserve, which is balanced by
increase in the value of fixed assets on the asset side of the balance sheet. The revaluation
reserve is created by passing an entry in the books of account, thus represents book entry
only, hence no actual funds are infused by the owners or available for the normal operations
of the business enterprise. Therefore, while analysing the financial statements, the amount of
revaluation reserve should not be considered at all and to be knocked off from both the side
of the balance sheet. Otherwise, many ratios like TOL/TNW, TOL/Adjusted TNW, Return on
Assets, Return on Capital Employed and similarly other balance sheet related ratios get
affected. The Companies Act and Accounting Standards require compulsory disclosure about
the revaluation reserve, if any. The Companies Act further suggests that the revaluation, if
required, should be done for a group of assets instead of individual item (s) of fixed assets.

Share Premium: Share premium amount represents the amount, paid by the investors over
and above the face value of the share. This generally happens in case of reputed Companies,
having strong financial position and commands good market perception in the views of the
investors. The presence of share premium in the balance sheet of any entity indicates that the
entity is doing well and the investors are ready to pay the premium for buying the shares of
the entity. The share premium amount can be utilised for any purposes except for declaring
any dividend out of it. The entity does not have any obligation for repayment of this amount
in future and no dividend is declared on this amount. Share premium is long term funds on
perpetual basis. The share premium amount is treated as part of Net Worth of the entity.

Contingent Liabilities: An entity may carry contingent liabilities apart from fund based
liabilities in its financial statements. The difference between contingent liabilities and fund
based liabilities, lies in the probability of occurrence and measuring the respective liability in
quantitative terms. Fund based liabilities are those liabilities, which have already been
crystallized / fixed and due for payment. Whereas, in case of contingent liabilities, it is not
sure when it will be crystallized and in case it happens, it may not be possible to forecast the
amount of liability, which may occur in future. A very common example of contingent
liability is a Bank Guarantee, issued by the Bank on behalf of its client. If the beneficiary
decides to invoke the guarantee, the Bank has to pay the amount without any delay and to
recover the amount from the client. The other examples of contingent liabilities are disputed
tax liabilities, claims lodged against the entity but not acknowledged by the entity, guarantee
offered by the entity for the security of loans taken by its associates / subsidiaries etc. It is
prudent that necessary provisions have to be made by the entity in the financial statements,
wherever the actual probability of occurrence is high. The probability of crystallization and
the amount of liability, which may occur in future, should be ascertained and to be taken into
consideration while, analyzing the financial statements.

Current Assets: As per Companies Act 2013, the Current Assets are defined as,“An asset
shall be classified as current when it satisfies any of the following criteria:
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(a) it is expected to be realized in, or is intended for sale or consumption in, the
Company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.”
All other assets shall be classified as non-current.
Examples of Current Assets: Cash &Bank balances, Trade Receivables (Other than
Deferred Trade Receivables), Raw Materials, Stores, Spares, Consumables, Stock in
Process, Finished Goods, Advance for purchase of Raw Material, Advance Payment of
Tax, prepaid expenses etc.

The operating cycle means the average time taken by an enterprise from procurement of
goods to realizing the proceeds to enable it to deploy the funds for starting another cycle. In
other words, the operating cycle commences when cash is initially injected into the system.
The system completes one cycle when cash is realized from the sale proceeds of finished
goods. The operating cycle is measured in terms of days / months. As per Schedule-III to the
Companies Act 2013, Operating Cycle is defined as “An operating cycle is the time between
the acquisition of assets for processing and their realization in cash and cash equivalents.
Where the normal operating cycle cannot be identified, it is assumed to have duration of 12
months”.

As per Bank’s extant instructions, if the trade receivables are more than 6 months old from
the date of invoice, it is treated as deferred trade receivables (unless otherwise specifically
approved in the sanctioned proposal) contrary to the provisions of Companies Act and to be
classified as Non-current Assets. There may be some cases where, Bank has allowed cover
period (the average period of realization) of more than 6 months.It happens generally in case
of receivables pertaining to the Government Departments. In such cases these may be
considered as current assets and the fact should be furnished in the proposal. Similarly if the
inventories are converted into slow moving/old/obsolete inventories and seems to be
unusable, are not considered as current assets (unless otherwise specifically approved in the
sanctioned proposal) and to be classified as Non-current Assets.

Fixed Assets: Fixed assets are those assets, which are of long term nature and can be used
during a period of more than one year. These assets generally supports the operating activities
and very well required for day to day functioning of the unit. The examples of fixed assets
are, land & building, plant & machineries, vehicles, furniture & fixtures etc. However,
revaluation reserve arises on account of revaluation of fixed assets should not be considered
as part of fixed assets.

Gross Block and Net Block: Gross Block is the total of original value i.e. the total cost of
acquisition of fixed assets viz. Land & Building, Plant & machineries, Furniture & Fixtures,
Vehicles etc. Net Block is the total of fixed assets value after deducting the accumulated
depreciation (i.e. the total of depreciation applied from the date of acquisition of asset till the
closure of financial year, for which the financial statement are prepared) from the total value
of gross block.

Capital Work in Progress (CWIP): Capital Work in Progress represents the expenses
incurred for acquiring fixed assets and is under construction, till such period these assets are
ready to be used for commercial production. These expenses cannot be considered as part of
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fixed assets under Gross Block because the moment, we consider anything under Gross
Block, it attracts depreciation and as per law, the depreciation is applicable from the date, the
asset put to use. Therefore, the expenses are classified as a separate item in the financial
statements as ‘Capital Work in Progress’. From the lenders’ perspective, we should treat
these expenses as part of fixed assets separately on the premise that the same will certainly go
to the fixed assets on completion. The CWIP is a part of assets side of the Balance Sheet and
shown below Gross Block.

Non-Current Assets: Non-current Assets are those assets, which are not directly supporting
the operating activities generally but required for the operations. The examples of non-current
assets are security deposits, investment in associate/subsidiary concerns, long term
investments with a lock in period, deferred receivables / slow moving / old / obsolete
inventories (as discussed above).

Intangible Assets: Intangible assets are those assets which are invisible / cannot be touched
but having monetary value therefore considered as an asset. The examples of intangible assets
are, Preliminary Goodwill, Patent, Licenses, Research & Development Expenses, Licenses,
Mining Rights, Brands, Trademarks, Deferred Tax Assets, etc.

Form-IV, Comparative statement of Current Assets (CA) & Current Liabilities (CL)contains
the data for movement of CA and CL and also indicates / calculates the holding level for
various items of CA and CL. The formulas for calculating holding level will be discussed in
other chapters.

Form-V, Fund Flow Statement is not an integral part of financial statements. The lenders will
have to prepare this statement on their own. The Fund flow Statement is prepared to check
the movement of long term funds between two Balance Sheet dates and the availability of
Long Term Surplus / Deficit, which must be equal to the difference in Net Working Capital
(NWC) during two Balance Sheet dates. Liabilities are the sources for the business and assets
represent the uses of funds for the business. The funds raised on short term basis i.e. current
liabilities are of short term nature whereas the funds raised on long terms basis i.e. term
liabilities and net worth are of long term nature. Similarly, the funds deployed in the current
assets are considered as short term uses of funds and the funds deployed in fixed assets, non-
current assets and intangibles are considered as long term uses. While preparing the fund
flow statement, the movement of long term sources and uses is to be calculated. The purpose
of this exercise is to know that whether the unit is able to generate sufficient long term funds
to meet out its long term requirement or not. If not then from where the funds have been
arranged to meet out its long term requirement. If the Long Term Sources is more than the
Long Term uses, there will be Long Term Surplus and if the Long Term Sources is Less than
the Long Term uses, there will be Long Term Deficit.

SNAPSHOPT OF A BALANCE SHEET (TRADITIONAL FORM)

LIABILITIES (SOURCES) ASSETS (USES)
SHORT
Current Liabilities SHORT
TERM Current Assets
TERM
This portion represents NWC
Term Liabilities
LONG Fixed Assets
LONG
TERM
Net Worth Non-Current Assets TERM
Intangibles Assets
TOTAL LIABILITES TOTAL ASSETS
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Net working Capital (NWC) means the difference between current assets and current
liabilities, in other words, the long term funds available to support short term uses. More the
long term funds available to support short term uses, more the unit will be comfortable in
honoring its short term sources. As we have already discussed that the current liabilities are
the short term sources and current assets are the short term uses, hence the difference between
Long Term Sources and Long Term Uses must be equal to difference between short term
uses and short term sources. As the fund flow statement is prepared for the movement of
figures between two balance sheet dates, hence only the difference between two balance sheet
date figures should be taken into consideration while preparing fund flow statement.The Fund
Flow Statement can be prepared through following steps,
i. Capture all the long term sources from the Operating Statement e.g. Profit After Tax,
Depreciation, Amortizations, Non Cash Charges etc.
ii. Capture all the long term uses from the Operating Statement e.g. Net Loss, dividend
payments, withdrawals etc.
iii. Capture all the long term sources / uses from the Balance Sheet as under,
a. All the liabilities are sources of fund for the business. There are two types of
liabilities i.e. Current and Non-current. Current liabilities are short term sources of
fund whereas non-current liabilities are long term sources of fund. Any increase in
non-current liabilities (Term Liabilities & Net Worth excluding surplus in P&L
account) will be the long term source and any decrease in non-current liabilities
will be the long term uses.
b. Similarly, all the assets are uses of funds in the business. There are two types of
assets i.e. Current and Non-current. Current assets are short term uses of fund
whereas non-current assets are long term uses of fund. Any increase in Fixed
Assets (change in gross block is to be considered as we have already taken the
depreciation as long term source from the operating statement), non-current assets
and Intangibles will be the long term uses and any decrease in non-current assets
will be the long term sources.
c. While considering the movement in Intangible Assets, it is to be kept in mind that
any reduction on account of amortization is not to be considered as the same has
already been considered from the operating statement. Hence, movement on
account of acquisition/disposal of intangibles will be considered as long term
uses/source.
iv. Now sum up the total long term sources and uses and find out the difference. If the
long term sources are more than long term uses, it will result in long term surplus and
vice versa.

It is expected that the long term funds generated should be sufficient to meet out the long
term requirements of the unit. Apart from meeting the requirement of long term nature, there
should be sufficient long term surplus left to meet out the net working capital requirement.
Sometimes, it is found from the analysis of fund flow statement that there is long term deficit.
Long term deficit should not be treated as a negative sign always, rather the reasons for
deficit are to be analyzed critically. The deficit can be acceptable if the short term funds
(surplus liquidity) have been utilized for long term purposes to meet out the genuine business
requirement and the resultant liquidity of the unit has not suffered adversely, meaning
thereof, the current ratio and the position of absolute net working capital is comfortable and
in acceptable zone. Normally, it happens with the units, having conservative approach and do
not want to be over leveraged. These types of unit first accumulate the funds and keep them
in the liquid form and whenever the requirement arises, they use the funds as per the needs of
the business. If, the long term deficit is found in any unit, the reasons for the same are to be
 Page 126

critically analyzed and commented upon otherwise it will result into the liquidity crunch for
the unit.

The reasons for long term deficit or reduction in the Net Working Capital could be as
follows,
i. Losses: Leading to reduction in reserves, which is forming part of Net Worth,
resulting decline in generation of long term funds resulting decline in NWC.
ii. Conversion: Some of the Current Asset becoming Non Current (Book Debts
stretched, stocks become obsolete, etc.), resulting increase in non-current
assets i.e. long term uses.
iii. Diversion: Short term funds are used for long term purposes but the funds
remains within the business, resulting increase in non-current assets or decline
in the gap between current assets i.e. short term uses and current liabilities i.e.
short term sources.
iv. Siphoning-off: The funds are used for unrelated activities or the long term
funds are withdrawn/taken out from the business, resulting decline in the long
term sources.
In all the above scenarios, the Siphoning off of funds is to be considered as most dangerous
sign because it is very difficult to bring back the funds in the system, which has already been
withdrawn/taken out from the business. In all other scenarios, position can be improved over
the period by initiating corrective steps.

Ratio Analysis
After analyzing the financial statements and classification of items in the CMA data, next
step is to calculate various ratios. There are number of methods being used for analysis of
financial statements. One of the traditional methods is to study the change in percentage
terms on any items of the financial statements but this method has its own limitations. The
most commonly used method for analysing the financial statements is computation of various
ratios.
Let us discuss about the important ratios, method of calculation and interpretation.
Categ Ratio Formula Interpretation
ory
This ratio has a direct bearing on the
profitability of the unit. The increasing trend
Raw Material
RM Consumption of the ratio should be examined critically
consumed
/ Cost of and the reasons should be identified along
during the year /
Production (%) with the steps taken by the unit to maintain
PROFI cost of
the profitability. A slight increase or
TABI production
decrease in the ratio will have the multiplier
LITY
effects on the profitability of the unit.
PAT + This represents the cash profit generated by
Depreciation + the unit on accrual basis as the depreciation
Cash Accruals
All non cash is a non cash charge to the Profit & Loss
expenses Account. Higher the level, better it is.
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This represents the actual margins generated

from the operations to serve the various
stakeholders. This is very useful to compare
similar type of units and their margin
PAT + Interest
generating capacities. The variables used in
expenses +
calculation could be different in two similar
EBIDTA Deprecation +
types of units because of variance in debts,
Income Taxes +
investment in fixed assets and the level of
Amortization
intangibles, resulting change in PBT and
accordingly tax expenses. For comparing the
profitability of two units, this is the most
important and reliable item.
This ratio gives the clue about the
PBT / Net sales
Self explanatory profitability of the unit. Higher level, better
(%)
profitability.
This ratio gives the clue about the
PAT / Net Sales
Self explanatory profitability of the unit. Higher level, better
(%)
profitability.
Operating profit means the profit before
considering non-operating incomes &
Operating Profit /
Self explanatory expenses. This ratio gives the clue about the
Net Sale (%)
profitability of the unit from the operations.
Higher the ratio, better profitability.
In the Return on Capital Employed ratio,
return is considered as EBIDTA and Capital
Employed means total liabilities of the unit.
The liabilities are the sources of funds and
the unit has to service all the investors, who
EBIDTA / Total
ROCE (%) have invested in the business. ROCE
Assets
represents the capacity of the unit to serve
the various stakeholders e.g. short term
lenders, term lenders, investors etc. Higher
the level, higher the capacity of the unit to
serve the stakeholders.
The repayment of current liabilities is
envisaged from the realization of current
assets. This ratio represents the liquidity
Current Assets /
position of the unit. Higher the ratio, more
Current Ratio Current
the liquidity is available with the unit to
Liabilities
serve its current liabilities. The current ratio
should be read along with the movement in
LIQUI NWC.
DITY The quick conversion of current assets into
cash and cash equivalents provides the real
Current Assets liquidity. Conversion of inventories into
– Inventories / cash remained a challenge. Hence, quick
Quick Ratio
Current ratio is being calculated to judge the ability
Liabilities of the unit to honor its current liabilities
without depending on the inventories.
Higher the ratio, better it is.
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NWC means, the absolute surplus of long

Current Assets -
term funds to support the short term
NWC Current
requirement of the unit. Higher the level,
Liabilities
higher the comfort.
This ratio represents the promoter’s stake in
the business in tangible form. Lower the
TOL/TNW Self explanatory
ratio, more the stake of the promoters, which
gives comfort to the lenders.
This ratio represents the promoter’s stake in
the business in real terms i.e. the actual
TOL / Adjusted
Self explanatory funds available for business. Lower the
SOLV TNW
ratio, more stake of the promoters, which
ENCY
gives absolute comfort to the lenders.
The importance of Debt / Equity Ratio
(DER) arises at the time of financing to a
project. DER denotes the Promoters’
Debt Equity Ratio Debt / Equity
contribution in the project. More the
contribution more the sustainability of the
project.
EBIDTA / This ratio shows the capacity of the unit to
Interest (Interest Self explanatory serve the interest on borrowings. Higher the
coverage Ratio) ratio, better it is.
Total Long term This ratio gives the indication for the ability
loans including of the unit to service its long term debt. This
installments due ratio represents the time period i.e. no. of
Long Term Debt / within next 12 years to be taken by the unit to repay its
EBIDTA months) / ( entire long term debt, which can be
EBIDTA compared with the remaining maturity of the
excluding long term debts.
COVE
Interest on WC
RAGE
DSCR tells about the capacity of the unit to
Cash Accruals serve the repayment obligation on Term
+ Interest on borrowings i.e. principal and interest.
Gross Debt Term Loans / Cash accruals to the extent of utilized in the
Service Coverage Installments of Project as margin, if any, is to be factored
Ratio (GDSCR) Term Loans + while calculating DSCR, meaning thereof,
Interest on these should not be considered as available
Term Loans servicing debt.

The indicative benchmarks for various ratios are given in the Loan Policy Document of the
Bank, which should be referred as and when required. Ratios are a statistical benchmark to
measure the relationship between two items of financial data. The ratio is the quotient
obtained by dividing the value of one variable of the financial statements by another variable.
The selection of variable is the most important, it is therefore extremely important that the
ratios are calculated in respect of variables, which are directly related, are interdependent and
gives meaningful information. Proper interpretation of the ratios is an important key for
decision making. The movement of one ratio should preferably be read with the movement of
another related ratio/financial parameter.
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Creative Accounting: There are many definitions of Creative Accounting but in a common
man’s language, the technique by which financial statements are made to reveal a better
picture than what they really are is called creative accounting or window dressing. The
people involved in such type of accounting practices are called Creative Accountants. These
accountants do not break any rule but only play with it in a favorable manner. They present
the transaction in an imaginative manner. In real terms, they do not create any wealth. In
most of the cases, what is highlighted as current year’s performance was either achieved
during last year or would materialize during the next year or might not happen at all in the
foreseeable future. The financial statements, notes to the accounts, auditors’ report contain
the clues / indications to the most of the creations. A credit officer, having knowledge of the
accounting principles and relevant legal frame-work can understand the Creative or Window
Dressed financial statements. There are various areas like, sales, valuation of inventories,
receivables, profits, provisions, classification of items etc., where scope of creative
accounting cannot be obviated.

Cash Flow Statement: Manual on Loans and Advances, Part-2, Chapter-20 deals with the
analysis of cash flow statement. Currently almost the entire emphasis in the appraisal/
assessment in a credit proposal are oriented towards the Balance Sheet and the P&L account
(for analyzing the financial standing of the enterprise) and Cash Flow Statements (CFS) are
seldom analysed /commented upon. In order to have a holistic and more analytical approach
to credit assessment process, it is equally critical to evaluate the ability of an enterprise to
generate cash and cash equivalents along with the timing and certainty of their generation. It
is in this context that a need has been felt to reiterate the insights which can be derived from
proper analysis of CFS in our credit assessment process. While the salient features of CFS &
its utility in credit assessment/monitoring have been furnished below as a guidance note, the
operating officials need to pay attention to the following critical aspects in particular to make
a more meaningful analysis of financials:

❖ The operating officials have to make a clear distinction between declared profits and
cash available and suitably factor it in credit assessment.
❖ While estimating free cash available with any entity, it is necessary to look into cash
needed for its own current requirements and its margins for further growth before it
utilises cash for investments.
❖ Where cash inflows are locked up in large non-cash items, quality of WC & other
assets created with the cash flows need to be carefully looked into, not withstanding
profits reported. This aspect has to be kept in mind in follow up/ supervision of the
account as well.
❖ Investment and financing cash flows are to be analysed in the context of their overall
impact on the entity’s current and future operations.
❖ Accordingly, it is suggested that analysis and comments on Cash Flow statement
should form an integral part of any credit assessment proposals in all large/ mid size
credit proposals being put up before the Credit Committees.

Guidance Note: Cash Flow Statement (CFS) Use in Processing of Loan Proposals
a) Cash Flow:
• Cash Flow is the movement of cash and cash equivalents, into or out of, a business
over a given period of time.
• Cash comprises cash on hand and demand deposits with the Banks.
• Cash equivalents are short term and highly liquid instruments readily convertible into
cash at any time, without any significant erosion in value.
 Page 130

b) Components of Cash Flow:

(i) Operating Cash Flows: These comprise of cash received or expended as a
result of Company’s internal business activities, and include cash earnings in business
activities (principal revenue generating activities) plus changes in working capital.
Examples of operating cash flow are cash receipts from sale of goods & services, cash
payments made to suppliers of goods & services, employees, statutory dues paid etc;
The net operating cash flow must be positive if the Company is to remain solvent,
at-least over the medium term.
(ii) Investment Cash Flows: These comprise of the cash received from the sale of
long-life assets, or cash spent on capital expenditure and investment in Associates/
Subsidiaries or other investments of a long term nature. Interest and dividend received
on investments also form part of this cash flow for a business entity not in financing
business.
(iii) Financing cash flows: These are cash received by way of equity and long
term loans raised or cash paid out towards repayment of long term loans, share
repurchases and dividend paid.

c) Use of Cash Flow Statement (CFS)

● CFS examines the relationship between profitability and net cash flow.
● CFS presents a fair idea on cash available with the entity to meet its various
current & incremental future needs and for investment needs.
● CFS checks the accuracy of past assessment of future cash flows in terms of the
amount, timing and certainty of future cash flows. Thus, it offers insights into
operational efficiency of the enterprise during the relevant period in comparison to
that of the preceding year;
● CFS evaluates the ‘quality’ of income generated as per accrual accounting.
● For any ad-hoc loan requirement or while opening a usance LC, cash flow
statement for the loan/LC tenor is an important tool for assessment/monitoring.
● CFS evaluates the risks associated with a financial product.

d) Cash Flow and Cash Accruals

(i) Cash flow is movement of cash and cash equivalents into and out of business,
Cash Accruals are net profit of the enterprise plus non cash items charged to
Profit & Loss Account not representing cash out flow such as depreciation,
preliminary & pre-operative expenses written off, amortisation expenditure
written off etc;
(ii) Cash flow is an alternative measure of a business’s profits as profits & cash
accruals reported on accrual accounting basis may not in all cases represent an
entity’s current reality. Cash Accruals measures profit reported on accrual
basis and is used to find out repayment capacity and ability to service debt of
an entity.

Thus, Cash Flow is the measure of the entity’s ability to convert reported profits into cash
available to meet its current requirements as also for further investments. Being profitable
does not necessarily mean being liquid. A Company may experience severe cash shortage
even while profitable. Clarity on this will emerge after carrying out a detailed scrutiny of
CFS along with other financial statements, as brought out in a subsequent para.
 Page 131

e) Important points to be kept in view: While taking a holistic view on the financial
statements, the following points relating to cash flows need a special mention, from a lender’s
perspective:
• Operating Officials need to critically evaluate available cash with the promoter group
units by testing their cash flows while accepting source of promoters’ margins for
their other commitments/projects.
• In cases where Companies report profits but are experiencing cash flow problems
despite activity levels remaining the same, it calls for proper diagnosis.
• If net cash flow from operating activity is negative, it means that profits reported as
per accrual accounting system are not converting in to cash at the right pace for
meeting demands on the entity. Quality of working capital assets needs to be
validated in such cases.
• If net cash flow from operating activity is positive and the entity is still experiencing
liquidity strain, the appraisal should take note of diversion of cash for repayment of
loans or for investment beyond acceptable level. The proposal should compare
actuals with the estimates made earlier and initiate appropriate remedial measures.
• Projects with long gestation periods will have negative operating cash flows in the
initial few years. This may be accepted if the actual cash flows are in line with the
original project assumptions.
• If investment cash flow is positive, the reasons should be ascertained as to why the
Company is selling the investments, apart from ascertaining utilisation of the cash
received.
• If the investment cash flow is negative, the appraising official may scrutinize the
investments made and its acceptability having regard to its impact on future cash
flows.
• If the financing activity cash flow is positive, the appraising official is expected to
look at the uses of such positive cash flow in the context of its impact on overall
future cash flows having regard to repayment terms.
• If the financing cash flow is negative, whether repayment of loans and withdrawal of
long term funds earlier mobilized by the promoters was in line with our last sanction
terms or not and its consequent impact on movement in NWC (and adequacy of
NWC) may be critically examined.

f) Enterprises having the mandatory AS-3 Disclosure With the introduction of Accounting
Standards by the Council of Chartered Accountants of India (ICAI), Accounting Standard
(AS)-3 which relates to Cash Flow Statements has come into effect, w.e.f. 01.04.1997.
Presently, AS 3 is mandatory to the following categories:
• Enterprises whose equity or debt securities are listed or in the process of being listed
whether in India or outside India.
• All business enterprises with a turnover of over Rs.50 crore, as per last audited
financial statements.
• All enterprises having borrowings, including public deposits, in excess of Rs.10 crore
at any time during the accounting period.
• Financial Institutions, Banks including co-operative Banks and Insurance Companies,
and
• Holding and subsidiary enterprises of any one of the above The operating
functionaries, depending on the size of the exposure of the Bank and the financial
position of the borrower, may ask for a Cash Flow Statement on the lines of AS-3,
 Page 132

even though the borrowal account may not fall in any of the categories, mandated by
ICAI under AS-3, in view of the aforesaid.

Key Learnings

➢ Importance of financial statements

➢ Overview of Accounting Standards, Ind AS, IFRS
➢ Contents of financial statement
➢ Need of analysis
➢ Independent / Statutory Auditor’s Report, CARO
➢ Classification of various items of Financial Statements
➢ Credit Monitoring Arrangement (CMA)
➢ Fund Flow Statement
➢ Cash Flow Statement
➢ Related Party Transactions
➢ Creative Accounting and Beyond Balance Sheet
➢ Various Ratios, calculation and interpretation thereof

List of Important Circulars

➢ e-Circular Sl. No. 215/2019 – 20 (Circular No. CCO/CPPD-ADV/27/2019 – 20) dated

22.05.2019 for considering 20% of corporate guarantee as TOL
 Page 133

C H E C K Y O U R L E A R N I N G

MCQ SAMPLE

Q.
Question Choice A Choice B Choice C Choice D
Sr.
1 Reasons for reduction Losses in Conversion Use of short Any of the
in Net Working business of current term funds above
Capital could be? assets into for long term
non-current purposes
assets
2 The Raw Materials Months' Months' Cost Months' Cost Months'
holding level is Purchase of Production of Sales Consumption
compared in terms of?
3 The long term surplus Profitability Excess Change in None of the
/ deficit in a funds of the unit Money Net Working above
flow statement available at Capital
depicts? Management
disposal
4 A Company has forgot Earnings will Earnings are Earnings will Depreciation
to record the not be inflated be decreased is only an
depreciation in the its changes as book entry,
books. What could be the therefore will
the effects on the Depreciation not impact at
earnings of the is a non cash all on
Company? charge earnings
5 As on 31.03.2019, Rs. 264 lakh Rs. 314 lakh Rs. 307 lakh Rs. 200 lakh
Adjusted TNW was
Rs. 257 lakh, Deferred
Tax Assets
outstanding was Rs. 7
lakh, Investment in
associates was Rs. 50
lakh. Work out the Net
Worth of the unit?

Correct Answer
D D C B B

Question No.
1 2 3 4 5

~~!!!~~
 Page 134
BACK TO INDEX

CHAPTER 4A

OVERVIEW OF WORKING CAPITAL

INTRODUCTION: Financial needs of business enterprise may be classified into two

categories i.e. Fixed capital and Working capital. Fixed capital is required for acquisition of
long term assets viz., land, building, plant, machineries, furniture & fixtures, vehicles etc.
whereas the working capital is required for carrying out day to day operations of the
business. Working capital is the amount of funds necessary to cover the cost of operating the
business cycle of the entrepreneur. This refers to the investment of the business unit in short
term assets, cash, short term securities, account receivables and inventories. It is the level of
fund which a company must possess to finance its day to day operation. Working Capital, in
banking perspective is:

❖ Funds required for build up Current Assets generally for a period of one operating
cycle.
❖ Funds required for financing short term assets or Current Assets such as Cash,
receivables, Inventories, advance payments to the suppliers etc. to enable
business/industry to operate at the expected level.
❖ Funds required for meeting day-to-day operations like purchase of raw materials,
spares & stores, meeting manufacturing expenses like wages, power & fuel and
storage & selling expenses of finished goods etc. These expenses generally form part
of Working capital or that capital of fund which is required for keeping the wheels of
production going on.
❖ Thus working capital represents the total funds required for running the operating
cycle and finance manufacturing, production and sales. Therefore, it is also called
operating Capital or Short term capital.
❖ Financed as Cash Credit, Overdraft, Short Term Working Capital Loan etc.
❖ Assessed for one year and renewed annually.

Basic Concepts
Gross Working capital: In practice, the term Working Capital refers to the Total
Current Assets (TCA), which is also called the Gross Working Capital.

Net Working Capital (NWC): The Term Net Working capital mathematically refers to
the excess of Current Assets over Current Liabilities. NWC is a qualitative concept
which indicates the liquidity position of an entity and the extent to which working capital
needs may be financed by long term sources of funds. As a concept, however, NWC
represents the portion of Current assets that has been funded from the Long-Term
Sources (such as Capital, reserves and Long Term Borrowings).

NWC= Current Assets – Current Liabilities or

Short Term Uses – Short Term Sources or
Long Term Sources (LTS) - Long Term Uses (LTU)
(LTS represents the Long-Term Liabilities and LTU represents Long Term Assets
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Balance Sheet Perspective

LIABILITIES (Sources) ASSETS (Uses)

Current Liabilities
Current Assets

NET WORKING CAPITAL

Fixed Assets
Term Liabilities
Non-Current Assets
Net Worth Intangibles Assets
Total Liabilities Total Assets

Example: Rs in Lacs

LIABILITIES (SOURCES) ASSETS (USES)

Current Liabilities 100.00 Current Assets 130.00
Long Term Liabilities 50.00 Non-Current Assets 30.00
Net Worth 50.00 Fixed Assets 40.00
Total Liabilities 200.00 Total Assets 200.00

GWC (Total Current Assets) 130.00

NWC = (Current Assets – Current Liabilities) 30.00 (130-100)
or
(Long Term Sources-Long Term Uses) 30.0 (100-70)
Long Term Sources = Long Term Liabilities+ Net Worth
Long Term Uses = Non-Current Assets + Fixed Assets

Working Capital Gap (WCG): Working Capital Gap (WCG) is the difference
between total Current Assets and Other Current Liabilities (OCL). OCL are Current
Liabilities excluding Bank Borrowings. The WCG represents the working capital
required to be funded by Bank Borrowings and Net Working Capital.

Working Capital Gap (WCG) = Total Current Assets – OCL

The concept of Working capital Gap is based on the fact that ‘Other Current Liabilities are
the first source of financing Current assets. The residual part of “Current Assets” is the
Working Capital Gap, which is to be financed by way of NWC and Bank Borrowing
(Assessed Bank Finance).

Factors determining need for Working capital: The working capital requirements
of a business unit depends upon many factors such as the nature and size of business, the
character of their operations, the length of the production cycle etc. Commercial Banks have
traditionally been assessing the working capital requirements on the basis of the various
components of chargeable current assets held by a unit i.e. raw material, stocks in process,
finished goods, receivables, other current assets etc.

Operating Cycle Concept of Working Capital: The operating cycle concept of

working capital envisages measurement of the average time taken by an enterprise in
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manufacturing the goods and selling them for cash so that the funds can be deployed for
starting another batch of production. In other words, the operating cycle commences when
cash is initially injected into the system for purchase of the basic raw material components
required for production. The system completes one cycle when cash is realized out of the sale
proceeds of finished goods. Operating Cycle has been defined in the Companies Act, 2013,
Schedule III as “An operating cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. Where the normal operating
cycle cannot be identified, it is assumed to have duration of 12 months”. The process of
manufacturing unit has to pass through the following stages to complete its operating cycle.

Conversion of cash into raw material – Manufacturing enterprises have to procure

raw material either by payment in cash or on credit. The Unit has to ensure a
optimum of stock of raw material on the basis of holding period for smooth operation
of the manufacturing activity. This refers to the period of Acquisition and storage of
Raw Material

Conversion of raw material into stock in process and to finished goods. The
processing time largely depends on the nature and specification of the final product.
In the course of processing, the manufacturing unit may generate stock of semi
finished goods in different stages of completion. We may call this as a pipeline stock
or SIP. This relates to the period and process of Converting RM into Finished Goods.

Conversion of finished goods into receivables/debtors or cash. When the finished

goods finally roll out after processing, these have to be stored. The enterprises have to
store an optimum level of finished goods so as to have the availability to meet the
demand and to ensure supply as per the delivery schedule. This refers to the average
period for which the Finished Goods are stored and kept before sale.

Realization of Receivables into Cash: In most of the cases, not all the supplies are
paid immediately and thus a portion of sale proceeds may remain locked for
sometime in the form of receivables/Debtors. The receivables are realized by the
business enterprise on due date as per the credit period allowed to the customers as
per the market trends. This reflects the average collection period of receivables.

Thus, every rupee invested in current assets at the beginning of the cycle comes back to the
promoter with the profit element added, after a lapse of a specific period of time. This length
of time is popularly known as the Operating Cycle or the working capital cycle. The cycle
may be diagrammatically represented in the following manner.

OPERATING CYCLE
Trade
CASH
Credit

Profit
RAW MATERIAL
RECEIVABLES

FINISHED GOODS STOCKS-IN-PROCESS

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Measuring Operating Cycle: The operating cycle is measured in terms of days of average
inventory need to be held for every major category of working capital components. Holding
periods of Working capital components can be expressed in term of number of days / months
and can be computed in the following manner,

Holding period (in days) Formula for calculation

1 Raw material Stock of Raw Material * 365

Annual Consumption of Raw material

2 Stock in Process Stock in Process Level * 365

Cost of Production

3 Finished goods Finished Goods Level * 365

Cost of Sales or Goods sold

4 Receivables Receivables Level * 365

Annual Gross Sales

5 Trade Payables Trade Payables Level * 365

Annual Purchases

6 Advance Paid to suppliers Advances Paid to suppliers * 365

Annual Purchases

7 Advance received from buyers Advances received from buyers * 365

Annual Gross sales

NOTE: To calculate the holding periods in month, multiply by 12 instead of 365.

Annual Consumption of Raw Material = Annual Purchases of Raw Material + Opening

Stock of Raw Material- Closing Stock of Raw Material.

Cost of production = Consumption of Raw Material (Imported & Indigenous) +

Consumables Spares & Stores + Power & Fuel + Direct Labor + Repairs & Maintenance +
Other manufacturing Expenses + Depreciation + Opening stock of SIP - Closing Stock of
SIP. This is taken as the denominator in computing the Holding Period in respect of stock in
process, while assessing working capital requirements of a manufacturing unit.

Cost of Sales (Cost of Goods Sold during an accounting year ) = Cost of production +
Opening Stock of Finished Goods - Closing Stock of Finished Goods. This is taken as
denominator in the computation of holding level of Finished Goods.

The total of the components of current assets will give the Operating Cycle in time / period
(months/days). It will be the period from purchase of raw materials, creation of stock in
process, conversion into finished goods, holding them till sale, converting them into trade
receivables and realization thereof in cash. This calculates the total time required to complete
the operating cycle.
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Sometimes, a question is raised whether the period of credit allowed to an enterprise by the
suppliers of raw materials and consumables should be subtracted from the above operating
cycle. i.e. Whether the Holding period of Trade Payables should be deducted from the overall
aggregate of all the Holding periods of current assets to work out a Net Operating Cycle. The
answer to this is in negative. The availability of trade credit does not reduce the total
operating cycle of an enterprise. Trade Credit is a source of finance which impacts the
working capital credit requirements from Bank and doesn’t impact the total time involved,
which is the basis of the operating cycle theory.

This concept of the operating cycle is used in the PBS and Traditional Method of Assessment
of WC limit. It is pertinent to mention here that for assuming the estimated / projected level
of holding period of every component of working capital, we should rely on the averages (as
stage wise monitoring may not be possible) so as to arrive at a realistic situation, as far as
possible, for calculating working capital for future.

There are various factors that need to be considered while accepting the estimated / projected
Holding levels of the various components of Working capital, which are as under (indicative
only).

Raw Material: Average Consumption / Holding, Lead Time, Minimum or Economic Order
Quantity, Suppliers’ profile, Seasonality, Perishability, Credit available, Cost of holding,
Criticality, Transport cost, Storage capacity etc.

Stock in Process: Process / Processing Time, Technology, Product Range, Capacity

mismatch / Bottlenecks, Production Cycle, No. of shifts worked, etc.

Finished Goods: Firm orders or anticipated orders (Order pattern), Minimum Dispatch
Quantity, Buyers’ profile, Supply terms, Availability of Transport, Seasonality, Marketing
arrangements, Demand / Supply scenario, storage costs, availability at short notice, storage
arrangements etc.

Trade Receivables: Trade / Industry / Market practices, marketing arrangements,

Customers’ profile (Old / New / Govt. / Local / Foreign), Market conditions / positioning,
Credit Policy of the Unit, Bulk orders, Seasonality, Competition, terms offered by
competitors etc.

Trade Payables: Reputation of the Unit in the market, Cost of credit, Trade / Market
practices; Market positioning, Credit Policy, Liquidity etc.
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Various Methods for Assessment of Working capital

Traditional method

As Bankers, we provide working capital finance for holding an optimum / acceptable level of
current assets for achieving a estimated / projected level of production and sales.
Quantification of the funds, required to build up of desired level of current assets at any point
of time will provide a measure of the working capital requirement (WCR). Let us discuss
each of the components of Estimated / Projected level of Current Assets which constitutes the
Working Capital Requirement.

Raw Material (RM): An Industrial unit has to necessarily stock a minimum quantum of
materials used in production to ensure uninterrupted production.

Stock in Process (SIP): Barring a few exceptional types of industries, where the raw
materials get converted into finished products within a few hours, there is normally a time lag
or delay or period of processing, only after which the raw materials get converted into
finished product. The period depends upon production process. Lesser time is required in the
simple process and more time is required in complicated process.

Finished Goods (FG): In manufacturing units, the holding of FG is required for sales and to
meet out the demands of the buyers. Nature of FG, types of buyers, storage capacity etc. are
the major determinants of computing estimated level of Finished goods as a part of Current
Assets. In respect of Trading Unit, there will be only Finished Goods instead of Raw
Material and Stock in Process.

Trade Receivables: The gap between sale to realisation of funds should to be reckoned to
quantify the funds blocked in Trade Receivables. The working capital requirement against
Trade Receivables is to be computed against the gross sales.

Expenses: It is customary in assessing the working capital requirement of industries, to

provide for expenses also. A question might be raised as to why expenses should be taken
separately, whereas at every stage the funds required to be blocked had been taken into
account. This amount is provided merely as a cushion, to take care of temporary bottlenecks
and to enable the unit to meet expenses when they fall due. Normally one month total
expenses, direct and indirect, salaries etc. are taken into account. In cases where the operating
cycle is very short say one month or 2 months the provision for expenses can be reduced.
Similarly, where the operating cycle is very long, say 12 months or more, the provision for
expenses may have to be increased, to take care of contingencies.

While computing the working capital requirements of a unit, it will be necessary to take into
account two other factors, one is the credit received on purchases. Trade Credit is a normal
practice in trading circles. The period of such credit will vary from place to place, material to
material and person to person. Secondly, industries often receive advance against orders
placed for their products. The buyers, in certain cases, have to necessarily give advance to
producers e.g. Custom-made machinery. Such funds are used for the working capital of an
industry.

Let us have a look at the working capital funds required by a unit and the source to finance
them.
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Working Capital Requirement for Sources of Financing Working capital

1. Raw Materials, Stores & Spares 1. Trade Payables including advance
2. Stock in Process payment received from customers.
3. Finished Goods 2. Outstanding expenses / provisions
4. Trade Receivables 3. Net Working Capital or Long Term
5. Other current assets Sources
4. Short Term Bank Finance

While granting working capital advances to a unit, it will be necessary to ensure that a
reasonable portion of the working capital is met from the long-term sources viz. NWC.
Normally, the liquid surplus or net working capital should be at least 25% of the working
capital requirement (corresponding to the benchmark current ratio of 1.33), though this may
vary depending on the nature of industry / trade and business conditions.

Projected Annual Turnover Method (Nayak Committee)

Projected Turnover Method (PAT), popularly known as Nayak Committee Method, is

applicable for Assessment of Working Capital Requirement for the WC Limits up to Rs. 5
crores for units, engaged in manufacturing. Nayak committee Guidelines correspond to
working capital limits as per the Operating Cycle method, where the average production /
processing cycle assumed to be taken of 3 months (i.e. working capital would be turned over
4 times in a year). Under this method, originally, working capital requirement is computed at
a minimum 25% of the projected annual turnover, out which, at least four-fifth (80%) should
be provided by the Bank and the balance one-fifth (20%), representing the borrower’s
contribution towards margin for the working capital, should be financed by the borrowers. In
other words, the working capital requirement will be assessed at 25% of Projected Annual
Turnover (PAT), of which 5% should be borne by borrower as margin and 20% would be
allowed as Bank Drawings. While accepting projected turnover a cap of 25% over its
immediately preceding year may be set except where production capacity has been
substantially increased.

PAT method shall be used for sanction of fund-based Working Capital limit up to Rs. 5 crore
and it should be computed at a minimum of 20% of the Projected Annual Turnover while
assessing fund based working capital limits in favor of SSI borrowers, MSME borrowers and
all industrial borrowers under C&I segment. For limits upto Rs. 5 crores, (i.e. turnover upto
Rs. 25 crore) this norm should be generally followed. Only where the borrower is able to
establish that his need is higher, should the other method of assessment (traditional /
operating cycle method) be resorted to. In other words, calculation of both methods need not
be mandatory in all cases merely to find out which one is higher.

In view of the demonetization and to encourage the MSME Units to shift to digital mode or
cashless transactions, it has been decided the Working capital Limits of MSME units
(availing Fund Based Working capital requirements up to Rs 5 Crores ) will be assesses at
31.25% of the Projected Annual Turnover and unit will be sanctioned limit to a minimum
25% of the projected annual turnover and an amount equivalent to minimum 6.25% will be
brought in by the borrower as margin or as per actual need, based on the production /
processing cycle.

Later, revised that WC limits of such MSME units (availing Fund Based Working Capital
limits upto Rs. 5 crores) be assessed at 37.50% of the projected annual turnover and
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the unit be sanctioned a limit of a minimum 30% of the projected annual turnover after
stipulating a margin of 7.50% of the turnover, to be brought in by the borrower. Such units
should have a minimum 25% of the sales transactions through digital modes (other than
cash and paper based instruments such as cheques, DDs, Pos, etc).

Important Guidelines and Clarifications: The Bank finance is only intended to support the
genuine requirement of a borrower, if the available NWC is more than 5 % of the turnover,
the whole amount of NWC should be reckoned for assessing the extent of Bank finance. The
assessment of WC limits should be done both as per projected turnover method and the
Traditional Method, wherever applicable, and the higher of the two is to be sanctioned as
credit limit. If the credit requirement based on production/processing cycle or Projected
Balance Sheet Method is higher than the one assessed under Nayak Committee Method, the
same may be sanctioned, as Nayak Committee guidelines stipulate bank finance at a
minimum of 20% of the projected turnover. On the other hand, if the assessed credit
requirement is lower than the one assessed under Nayak Committee method, while the credit
limit can be sanctioned at 20% of the turnover, actual drawals may be allowed on the basis of
drawing power to be determined by the banks after excluding unpaid stocks.

PAT Method for Business Enterprises in Trade & Services Sector: The Trading
enterprises have a higher assets turnover ratio compared to that in respect of enterprises in
the manufacturing sector. For Trade & Services (T & S) sector, the assessment of credit limit
should be based upon annual turnover, rather than on build up of inventory and receivables.
Thus, an across the board credit limit equal to 15% of projected annual turnover should be
offered to Business Enterprises in the T&S sector. It would be available for utilization
generally as a cash credit limit. However, where needed an LC limit (as a sub-limit of total),
may also be allowed.

Maximum Permissible Bank Finance Method (Tandon Committee)

The Tandon Committee has prescribed three Alternative method of computation of

Maximum Permissible Bank Finance (MPBF). All the three methods recognized that banks
would lend only a portion of the working capital Gap (WCG), which is the value of the
acceptable level of current assets after netting off the other sources of funding (other than
NWC and Bank Finance) WC requirements. Let’s discuss three methods.

FIRST METHOD: The difference between the acceptable level of Current Assets and the
projected quantum of Other Current Liabilities will be computed and designated as Working
Capital Gap. Net Working Capital (NWC) of the Company should be at least equal to 25% of
Working Capital Gap and the bank could finance upto 75% of the Working Capital Gap.

SECOND METHOD: NWC should be at least equal to 25% of the total value of acceptable
Current Assets. The remaining 75% would be met by Current Liabilities, including Bank
Finance.

THIRD METHOD: Under this method, the concept of Core Current Assets (CCA) was
introduced. CCA, represent the bare minimum level of current assets, without which, it will
be difficult to run the unit. Thus, the fund required to meet CCA are of long term nature.
Therefore, the CCA should be financed by the borrower. Under this method, the NWC
should be at least 25% of the Current Assets excluding CCA plus equivalent to CCA. The
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remaining need should be financed by the Bank. As this method was more stringent with
regard to the promoters’ contribution, the same was not made mandatory by the regulator.

The three methods of lending may be tabulated in the following manner:

(Rs. in lacs)
Assumption
Acceptable level of Total Current Assets (TCA) 800
Projected level of Current Liabilities other then Bank Finance 120

FIRST METHOD
Total Current Assets 800
Less: Other Current Liabilities 120
Working Capital Gap (WCG) 680
Less: Minimum NWC at 25% of WCG 170
Assessed Bank Finance (ABF) 510

SECOND METHOD
Total Current Assets (TCA) 800
Less: Other Current Liabilities (OCL) 120
Working Capital Gap (WCG) 680
Less: Minimum NWC @ 25% of TCA 200
Assessed Bank Finance (ABF) 480

THIRD METHOD
Total Current Assets (TCA) 800
Less: Other Current Liabilities (OCL) 120
Working Capital Gap (WCG) 680
Less: Core Current Assets (CCA) 100
Less: Minimum NWC @ 25% of (TCA-CCA) 175
Assessed Bank Finance (ABF) 405

Rigidities in the MPBF method (Tandon Committee)

1. The stipulation for Current ratio of 1.33 with minimum NWC of 25% of TCA by the
promoter (under Second Method).
2. Mandatorily compliance of Prescribed Holding norms stipulated by RBI.

The lenders were facing difficulties in complying with MPBF prescriptions, more so because
they had to compete with other banks for quality lending business. RBI in 1997, made it
optional to use MPBF method, prescribed by Tandon committee and asked individual banks
to develop and devise their own policy for working capital financing. In September, 1997
SBI came up with Projected Balance Sheet (PBS) Method, by retaining the basic structure of
MPBF method of financing working capital requirements.
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Projected Balance Sheet (PBS) Method

The assessment in PBS method is carried out keeping in view the requirements of borrowers.
The projected Bank borrowing thus arrived at is termed as ‘Assessed Bank Finance’ (ABF).
This method is applicable for borrowers who are engaged in manufacturing, services and
trading activities and who require fund based working capital (WC) finance of above Rs. 5
Crores. The guidelines and assessment procedures under the PBS method are as under:

➢ In the PBS method, the borrower’s total business operations, financial position,
management capabilities etc. are analyzed in detail to assess the Working capital
finance required and to evaluate the overall risk of the exposure. Detailed scrutiny and
validation of the projected income and expense in the business, and projected changes
in the financial position (sources and uses of funds) are carried out to examine if these
are acceptable from the angle of liquidity, overall gearing, efficiency of operations etc.

➢ There will not be a prescription like mandatory minimum current ratio or maximum
level of a current asset (inventory and receivables holding level norms) under PBS
method. Under the PBS method, assessment of WC requirement will be carried out in
respect of each borrower with proper examination of all parameters relevant to the
borrower and their acceptability. The assessment procedure is as follows:
- Collection of financial information from the borrower
- Classification of current assets(CA) / current liabilities (CL)
- Verification of projected levels of inventory / receivables / sundry creditors
- Evaluation of liquidity in the business operation
- Validation of bank finance sought

➢ For working capital assessment, the required financial data is to be obtained from the
borrower in the following forms:
Form-I : Particulars of existing / proposed limits from the banking system
Form-II : Operating statement
Form-III : Analysis of balance sheet
Form-IV : Comparative Statement of Current Assets and Current Liabilities
Form-V : Funds flow statement.

The above forms are called Credit Monitoring Arrangement (CMA) form. Information
provided in the Forms II, III. IV, and V serves the detailed financial analysis. In Form I, in
addition to information relating to working capital and term loan borrowings (existing and
proposed) information regarding borrowings from NBFCs, borrowings from term leading
institutions for WC purposes, Inter Corporate Deposits taken, lease finance availed, details of
associate / subsidiaries concerns will also be collected.

➢ Peak and Non Peak Limits Separate limits, wherever feasible and necessary, may
have to be fixed for the normal non-peak level as also for the peak level credit
requirements along with the expected period of utilization.. For the purpose, the past
trends in the utilization of the facilities should be gone into. The projections furnished
by the borrowers, obtained separately for peak and non-peak periods are to be
scrutinized along with industry characteristics.

➢ CLASSIFICATION OF CURRENT ASSETS (CA) AND CURRENT

LIABILITIES (CL) (Form Ill – Analysis of Balance Sheet):
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From the data presented in a published balance sheet of a borrower, their CA and CL
are now analyzed as per the classification given in Form III of CMA. The
classification is done to arrive at the current ratio and net working capital of the
borrower to evaluate their liquidity. Broadly speaking, current liabilities would
include items payable or expected to be turned over within one year from the date of
balance sheet. The term current assets is used to designate cash and other assets or
resources commonly identified as those which are reasonably expected to be realized
in cash or sold or consumed or turned over during the operating cycle of the business
usually not exceeding one year. Cash margin for LCs and Guarantees: Margins
deposited for LCs and Guarantees relating to working capital will be included in the
CA. However, LC Margin for Project LC/LC for Import of fixed assets must be
classified as NCA.

Verification of levels of Inventory/ Receivables/ Sundry Creditors:

i) The projected levels of inventory and receivables should be examined in the

assessment exercise in relation to trend of past levels of the unit and inter-firm
comparison of the levels.

ii) The levels should also be examined with reference to the borrowers’ specific
operational strengths and weaknesses, their need to hold the current assets at the
levels projected, and their ability to absorb cost of carrying inventory/ receivables at
the levels proposed. However, the levels of inventory and receivables prescribed for
the industry will not in any manner be treated as ceiling levels to be imposed on strict
terms; these will merely serve as historic reference levels. For verification of the level
of sundry creditors, past trend and inter firm comparison will serve as the basis.

iii) Branches should discern and guard against financing excessive current assets.

iv) The current assets should further be scrutinized to identify instances of slow-
moving or accumulated old stocks as also long standing receivables, say outstanding
for more than six months. These cases should be discussed with the borrower and
unless fully justified such assets should be excluded from current assets for the
purpose of computation of assessed bank finance.

Evaluation of Liquidity :

Under Tandon Committee Regime, in the assessment of WC finance, the projected

level of liquidity in a borrower’s business was accepted as normal, if the Current
Ratio projected was 1.33 or more; further, in a case where, slippage of CR was
planned, the projected level is accepted only if various guidelines of RBI in this
regard were complied with. However, under PBS method, the CR of 1.33 is
considered as a bench mark level of liquidity instead of the minimum acceptable
level. In cases where the CR is projected at a level lower than the bench mark or a
slippage in the CR is proposed, it alone is not a reason for rejection of the loan
proposal or for sanction of the loan at a lower level. In each such case, the reasons for
low CR or slippage should be carefully examined and in deserving cases the CR as
projected may be accepted. In the cases where projected CR is found acceptable, WC
finance as requested may be sanctioned. In specific cases where warranted, such
sanction can be with a condition that the borrower should bring in additional long
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term funds to a specified extent by a given future date. Where it is felt that the
projected CR is not acceptable but the borrower deserves assistance subject to certain
conditions, suitable written commitment should be obtained from the borrower.
Alternatively, where necessary, a lower amount may be sanctioned in these cases
subject to revision of the business and financial plans. In line, under PBS method, the
Bank’s perception will be built up regarding a borrower’s ability to operate in future
without any liquidity constraint, based on financial information as well as quality of
the financial management of the borrower.

➢ Validation of Bank Finance Sought

• Under Tandon Committee method based on the MPBF concept, the amount of WC
finance is arrived at as a residual source after netting off the available NWC or the
required minimum of NWC, whichever is higher, from the working capital gap. A
different approach is adopted under the PBS method for validating the quantum of
WC finance sought by a borrower.

• Working capital finance will not be computed using any rigid formula. The projected
bank borrowing, which reflects the finance sought by the borrower, will be validated
with reference to the
✓ Operating cycle of the borrower,
✓ projected level of operations,
✓ Nature of projected build up of CA / CL, profitability, liquidity etc.

Where these parameters are acceptable, the projected bank borrowing will stand
validated for sanction. This amount will be termed as ‘Assessed Bank Finance’
(ABF).

• The assessment exercise should be carried out with due focus on the specific nature
and needs of each borrower. Under PBS method, in certain cases it may become
necessary to revise the business / financial plan of the borrower, if in the opinion of
the Bank these require changes e.g. planned levels of CA or CL are not realistic, a
higher level of NWC is necessary etc. In these cases, the operating officials should
discuss in detail these aspects with the borrower to facilitate revision of the business
plan and financial projections.

Margin: While assessing the Working Limit, margin for each item of current assets has to be
computed. Once the level of Total Current Assets is assessed, the next step involves
computation of the margin requirements against the individual items of Current asset. The
margin percentage is usually a function of the probability of recovery of cash from the sale
proceeds of the individual items of current assets. For example, selling raw material and
finished goods at reasonable prices may be possibly easy as against the selling of the stock of
semi finished goods. Stock in process may not fetch a good amount, as it may not be possible
to readily use the stocks. Thus, while raw material and finished goods generally attract a
lower margin (say 25%), banks usually stipulate a higher margin against semi finished gods
(say 30%). Margin requirement against receivables also tend to be on the higher side because
of two reasons. First receivables are generated out of gross sales made by the unit, which
includes profit. Since Banks finance against cost and not profit, a higher margin is stipulated
to avoid lending against profit. Secondly, if receivables are in the form of book debts, and not
documentary bills, recovery by selling book debts may become quite challenging. Banks
therefore stipulates higher level of promoters’ margin against book debts limits which may
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go beyond 50% at times. This stipulation of margin requirement against each individual item
of current assets is to be considered at the time of Computation of Drawing Power (DP)
based on Stock Statement of the unit. The margin stipulated should come from NWC
available.

Fixing of sub-limits: Usually sub-limits for inventory and receivables within the overall
fund-based WC credit limits are fixed for operational convenience. In cases where large
build-up of any item of inventory or receivables is required and the reasons therefore are
acceptable, sub-limits should be fixed in a flexible manner. The fixing of sublimit between
CC (Stocks) and Book Debts provides important tools in post sanction process for
monitoring purpose. D.P against individual items of RM, SIP, Finished Goods and Book
Debts should be restricted to the level as per the estimated / projected taken at the time of
appraisal for effective monitoring.

Cash Budget Method

Cash Budget is usually the forecast of receipts and payments of an enterprise, drawn at small
intervals of time, say monthly, weekly etc. A cash Budget is therefore a projection of future
cash flows as against the cash flow statement, which is historical in nature. The Cash
budgeting technique helps a decision maker in situations especially where borrower need
short term credit. A few examples are (i) Opening of letter of credit. (ii) Providing adhoc /
contingent working capital facility, (ii) bill financing, (iv) financing construction activities,
and (V) financing activities with seasonal fluctuations etc.

CASH BUDGET CALCULATION

• In Cash Budget method, only cash transactions occurred (both inflows and outflows)
during the period are considered and not expenses/ revenues for the period.
• All cash items regardless of their classification (expense, asset, fixed cost, variable cost)
are accounted for in a cash budget. Non-cash items do not appear in a cash budget.
• In Cash Budget method, the quantum of finance required is determined from the projected
cash flows.
• Projected values of Current Assets & Current Liabilities are not used.

PREPARATION OF CASH BUDGET

1. Identify all receipts (cash inflows). These include inflows from Financing Activities
like Bank Loans & Infusion of Capital, Operating Activities like Debtor realization
and Investment Activities like Interest & Dividend received.
2. Identify all payments (cash outflows). These include Financing Activities like
Repayment of Term Loan, Operating Activities like Interest paid and Investment
Activities like Fixed Asset acquisition.
3. Actual receipts and payments during the months should be shown separately.
4. The position of cash surplus / deficit is then computed at monthly intervals. A surplus
is generated if receipts exceed payment and a cash deficit occurs if payment is more
than receipt during the month.
5. The opening cash balance for the starting month is then adjusted with the cash surplus
/ deficit generated during the month which will be the closing balance of the month.
6. A cash surplus generated during a month results in a higher closing cash balance vis-
à-vis the opening balance of the month.
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7. If an enterprise is enjoying Cash Credit facility from a bank, then cash surplus
generated during the month will result in reduction of outstanding in CC account at
the end of the month. Similarly, if cash deficit situation arises during the month, then
it will increase the outstanding in CC account at the end of the month.

CASH BUDGET METHOD-- POINTS TO REMEMBER

• If underlying assumptions undergo a change in tune with the market/production

realities, enterprises may have liquidity scenario totally different from projections.
• With the help of a suitable cash budget drawn, an enterprise can track its liquidity
position in a better way.
• Outstanding balance of Bank loan at the end of each month of the cash budget should
be covered by the value of the primary security less margin stipulated.

Project Vivek

Under Project Vivek, the following steps are required before arriving at the working capital
assessment (for exposures above Rs.50 lacs uptoRs.50 crores):
a) Consolidated turnover based on the cash flow in the units’ bank account statements
of past 12 months to be computed;
b) Redraw profit & loss account and balance sheet after arriving at the consolidated
turnover, to be triangulated with the historic CMA and Industry Ratios.
c) Based on the redrawn financials, the estimated profit & loss account and the
balance sheet to be casted for the next 12 months.
d) Working Capital limit is then calculated based on the four Loan Policy Ratios,
which will be calculated as per the following formula:

1. Current ratio Working Capital limit = (Total Current Assets / Current

Ratio) - (Total Current Liabilities - Short Term Borrowing
from banks)
ii. Interest Coverage ratio Working Capital limit = [((EBIT Operating +
Depreciation) / Interest Coverage Ratio) - (Interest Rate *
(Term Liability + (Current portion of Long Term Debt / 2)]
/ Interest Rate
(*Interest Rate above is calculated as Interest expense /
(Short Term borrowing from banks+ Current portion of
long term debt / 2 + term liability)
iii. Tol/TNW ratio Working Capital limit = (Adjusted TNW * (TOL/Adjusted
TNW)) - (Total Outside Liabilities - Short Term
Borrowings from bank)
(*Adjusted TNW above is calculated as NW – Revaluation
Reserve - Intangibles – Investment in Subsidiaries)
iv. margin on inventory, Working Capital limit = ((Inventory + Receivables) * 80%
receivables less creditors - Trade Payables)
(Minimum Margin on Inventory and Receivables will be
20%)

Minimum of the working capital limits arrived on the basis of the above ratios will be ideally
recommended to the Sanctioning Committee. For FBWC limits upto Rs. 5.00 Crores, the
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Nayak Committee guidelines must be adhered to. For limits above Rs. 5.00 Crores upto 50
crore, Assessed Bank Finance as per Project Vivek to be taken into consideration. In case the
assessed limits are not recommended as per the aforementioned method, credit official is
advised to select “Other method” (with the approval of competent authority) and provide
proper justification for the same in addition to the proposed Mitigation plan (as applicable).
The value of proposed loan amount by selected “Other method” will be automatically fetched
from the estimated redrawn B/S and P&L for next 12 months.

Guidelines to Arrest / Reduce Instances of Frequent and Large

Enhancements in Limits
With a view to ensuring optimum level of credit limit, realistic estimation based on past
performance and industry scenario is essential. Estimated / Projected sales that are
considered for assessment should be in sync with Industry / Sector / Subsector growth and in
case of variance by more than 20%, deeper analysis needs to be carried out. Similarly, the
relative Estimated / Projected Cash flows submitted by the customers need to be in sync with
past sales and are to be cross checked with the credit summations in the account. In view of
above, the guidelines for frequent and large enhancements in working capital limits were
issued.

The additional parameters, as detailed in the annexure of the Circular, need to be complied
with by the units while requesting for enhancement in working capital beyond 15% of the
existing limits within 12 months from last sanction or during next renewal. However,
repeated enhancements between two renewals (within 12 months) need to be avoided.

The broad principles underlying each of the aspects listed under “Parameter” apply to all
working capital limits where enhancement is sought beyond 15% of the existing limits. If the
unit complies with all the parameters mentioned in the annexure, the enhancement in
working capital may be considered by the sanctioning authority based on the merits of the
proposal. However, if the unit is not complying with any one or more of the parameters but
still requires enhancement beyond 15%, the appropriate authority may accord approval for
such deviation in deserving cases.

Reference: e-Circular Sl. No. 759/2018-19 (Circular No.: CCO/CPPD-ADV/70/2018 – 19)

dated 07.09.2018

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KEY LEARNINGS

➢ Importance of working capital financing

➢ Factors determining need for Working capital

➢ Significant Features of Working Capital Finance

➢ Advantages of financing of adequate Working Capital

➢ Disadvantages of Inadequate working capital

➢ Various methods of working capital financing

LIST OF IMPORTANT CIRCULARS

• Guidelines to arrest reduce instances of frequent and large enhancements In Limits :

e-Circular Sl. No. 759/2018-19 (CPPD-ADV/70) dated 07-09-2018

• Interchangeability between limits : e-Cir Sl. No. 789 (CPPD/74) dated 17.09.2018
 Page 150

CHECK YOUR KNOWLEDGE

Multiple Choice Questions

1 Gross Working Capital is better known as

A Funds required for setting up of plant
B Total of Balance Sheet
C Current Asset – Net Working Capital
D Total funds required to complete an operating cycle

2 Net Working Capital represents

A Long Term Funds, available to support the short term requirement of the
unit
B Promoters’ Margin
C Short Term Funds arranged by the unit from market
D Total Working Capital less Bank Finance

3 For a manufacturing unit, the major source for financing the current assets are:
A Trade Creditors only
B Trade Creditors and working capital limits from Bank only
C Trade Creditors, working capital limits from Bank and Net Working capital
D Trade Creditors, working capital limits from Bank, Net Working capital and cash.

4 For Trade & Services (T&S) Sector in C&I segment the assessment of credit limit be
based upon Annual Turnover, rather than on build up of Inventory and receivables.
Which one of the following statement is correct in context of financing working capital
to Trade & Services Sector in C & I Segment
A Across the board Credit limit equal to 15% of projected annual turnover
should be offered to business enterprises in the T&S
B The business enterprises should be established one and at least 2 years old.
C CRA of the unit must be SB-7
D The upper cap of Working Capital Limit should be Rs 1.00 crore

5 The relationship between Working capital Gap(WCG), Bank Borrowing and NWC is as
under
A WCG = NWC+ Bank Borrowing
B WCG = Bank Borrowing - NWC
C Bank Borrowing = WCG + NWC
D NWC = Bank Borrowing – WCG

6 Raw Materials holding level is compared in terms of :

A Months' cost of Production
B Months' Cost of Sales
C Months' Purchase
D Months' Consumption.
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7 Advance Paid to Suppliers of Raw Materials holding level is compared in terms of :

A Months' cost of Production
B Months' Cost of Sales
C Months' Purchase
D Months' Gross Sales

8 While assessing the working capital limit, it was observed that level of receivables is
estimated to go up from existing Rs 6 Lacs to Rs 9 Lacs, whereas gross turnover of the
unit is also estimated to go up from existing level of Rs 36 Lacs to Rs.48 Lacs What is
the likely impact on approximate holding periods of receivables?
A It is estimated to decline from current 90 days to 75 days
B It is estimated to decline from current 80 days to 65 days
C It is estimated to increase from current 61 days to 75 days
D It is estimated to increase from current 61 days to 68 days

9 Which of the following is NOT a component of the working capital cycle?

A Finished goods
B Trade Receivables
C Trade Payables
D Raw Materials

10 Which of the following factor does not affect the amount of working capital in a
business?
A Increase in Sales Turnover
B Seasonality in business
C The composition of sources to finance working capital
D Uneven pattern of sales

Correct
D A C A A D C D C C
Answer
Question No. 1 2 3 4 5 6 7 8 9 10

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BACK TO INDEX

CHAPTER 4 B

NFB - BANK GUARANTEE AND LETTER OF CREDIT

Bank Guarantee
A contract of guarantee is defined as ‘a contract to perform the promise or discharge the liability
of a third person in case of default’. The parties to the contract of guarantee are:

(a) Applicant: The principal debtor – person at whose request the guarantee is executed,
so a customer on whose behalf Bank Guarantee is issued.
(b) Beneficiary: Person to whom the guarantee is given and who can enforce it in case of
default.
(c) Guarantor: The person who undertakes to discharge the obligations of the applicant in
case of his default. So bank is playing the role of guarantor in case of BG is issued by it.
Thus, the Bank guarantee (BG) is a collateral contract or secondary contract between bank &
beneficiary which is based on a primary contract between Beneficiary and applicant. Thus before
opening of a bank guarantee bank must try to understand the nature of the primary contract
between Beneficiary and applicant, by obtaining documents like copy of agreement, Tender
document etc. Bank Guarantee is a part of Non Fund Based limits(NFB limits) where immediate
outlay of fund is not involved, however outlay of fund may be involved subsequently in case of
invocation(demand of payment by the beneficiary) of Guarantee. Thus the B G limits
assessment should be done properly and necessary risk mitigating measures must be taken as in
case of FB limits.

Purpose:
BGs are issued generally for the following purposes:
(a) In lieu of security deposit/earnest money deposits for participating in tenders;
(b) Mobilization of advance or advance money before commencement of the project by
the contractor and for money to be received in various stages like plant layout,
design/drawings in project finance;
(c) In respect of raw material supplies or for advances by the buyers;
(d) In respect of due performance of specific contracts by the borrowers and for obtaining
full payment of the bills;
(e) Performance guarantee for warranty period on completion of contract which would
enable the supplier to realize the proceeds without waiting for warranty period to be over;
(f) To allow units to draw funds from time to time from the concerned indentors against
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part execution of contracts, etc.

(g) Bid bonds on behalf of exporters,
(h) Export performance guarantees on behalf of exporters favouring the Customs
Department under EPCG scheme.

Classification of Bank Guarantees:

All the bank guarantees issued by bank are classified under two categories
a. Financial Guarantee
b. Performance Guarantee

The classification of Bank Guarantees into Financial or Performance is done based on the
purpose for which bank guarantee is being issued. The definition of two types of guarantees and
examples thereof is as under.

(a) Financial guarantees are direct credit substitutes wherein a bank irrevocably undertakes to
guarantee the repayment of a contractual financial obligation. Financial guarantees essentially
carry the same credit risk as a direct extension of credit i.e., the risk of loss is directly linked to
the creditworthiness of the counterparty against whom a potential claim is acquired.

Financial Guarantees attract CCF of 100% for the purposes of capital charge. An
indicative list of financial guarantees is as under:
i. Guarantees for credit facilities;
ii. Guarantees in lieu of repayment of financial securities;
iii. Guarantees in lieu of margin requirements of exchanges;
iv. Guarantees for mobilization of advance, advance money before the commencement of a
project and for money to be received in various stages of project implementation;
v. Guarantees towards revenue dues, taxes, duties, levies etc. in favour of Tax/ Customs/ Port /
Excise Authorities and for disputed liabilities for litigation pending at courts;
vi. Guarantees for Credit Enhancements;
vii. Liquidity facilities for securitization transactions;
viii. Acceptances (including endorsements with the character of acceptance);
ix. Deferred payment guarantees.
x Guarantees in lieu of advance payment for procurement of raw material by the buyers.

The most commonly used Financial bank guarantees are Guarantees for mobilization of
advance ,Guarantees in respect of raw material supply

(b) Performance guarantees are essentially transaction-related contingencies that involve an

irrevocable undertaking to pay a third party in the event the counterparty fails to fulfill or
perform a contractual non-financial obligation. In such transactions, the risk of loss depends on
the event which need not necessarily be related to the creditworthiness of the counter party
 Page 154

involved

Performance Guarantees attract CCF of 50% for the purpose of capital charge. An indicative
list of performance guarantees is as under:
i. Bid bonds;
ii. Performance bonds and export performance guarantees;
iii. Guarantees in lieu of security deposits / earnest money deposits (EMD) for
participating in tenders;
iv. Retention money guarantees;

v. Warranties, indemnities and standby letters of credit related to particular transaction.

The most commonly used performance guarantees are EMD, Bid Bonds & Retention money
Guarantee.

It is essential that the Bank Guarantees issued are properly categorized. Incorrect
classification would result in incorrect applicability of credit conversion factor(CCF),
the factor used to convert the non fund based limit to funded limit, on which the bank
provides applicable capital charge. Higher the conversion factor, higher is provision of
capital charge. Thus capital requirement for a financial guarantee will be two times that
required for performance guarantee. It is therefore essential that the classification is error free.

PERIOD OF BANK GUARANTEE

No Bank Guarantee should be issued for a validity period more than 18 months
without obtaining prior administrative clearance from the appropriate authority through
their respective controlling authorities. The period of 18 months does not include the
period of lodgement of claim.
Period Angle Clearance (PAC) need not be obtained in case of BGs (maximum period upto
10 years) where 100% or more cash margins are available (Revised instructions vide Cir
CPPD 149 dated 31 Dec, 2019) except in case of Foreign BGs.

As per revised guidelines a two-level authority structure for administrative approval is in place
, as under: -
1. For BG with validity period beyond 18 months and upto 60 months (DGM)
2. For BG with validity period beyond 60 months and upto 120 months (GM)

No Bank Guarantee should, normally, have a maturity of more than ten years. Bank
Guarantee beyond maturity of 10 Years may be considered against 100% cash margin
with prior approval of the competent authority specified in this regard.
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Appraisal of Bank Guarantee Limit

The appraisal of the proposals for guarantees should be done with the same diligence as in
the case of fund-based limits. Adequate cover by way of margin and security must be
obtained so as to prevent default on payments when guarantees are invoked

Margins Requirement
Margin is defined as the amount to be kept by the applicant with the issuing bank in
liquid form, which is some defined percentage of the BG amount as per sanction terms and
conditions as mutually decided between bank & applicant. 100% margin should
ordinarily be retained in respect of guarantees issued in connection with disputed
customs/central excise duties, unless otherwise specified in the sanction.
As per revised guidelines vide Cir CPPD 149 dated 31 Dec, 2019 marking of lien on the
Drawing
Power (DP) i.e. on unutilised portion of constituent’s cash credit account should not be
permitted.
As per revised guidelines some of the mutual fund units ( SBI MF only) can also be
accepted as cash margin/Collateral security. SBI mutual funds have been identified for this
purpose.
The face value of units accepted as the equivalent of cash margin for NFB exposures should
be equal to 125% of the cash margin stipulated.

Further where margin money is tendered by way of MF instruments, the pricing

should be suitably increased by 25 bps.

Security

Apart from the margin, bank guarantees are usually secured by an extension of the charge on
current assets obtained to cover working capital facilities. Adequate collateral security by way of
equitable mortgage/extension of charge on current/fixed assets or third party guarantee should be
taken depending on the merits of each case

Documents

Whenever a guarantee is issued on behalf of a constituent, suitable Counter Guarantee should be

obtained from the constituent. For each ad hoc bank guarantee issued, a separate d u l y
stamped Counter Guarantee is necessary. In the case of a regular bank guarantee limit duly
sanctioned, a stamped Omnibus Counter Guarantee for the bank guarantee limit need to be
obtained. An Omnibus Counter Guarantee, can be executed one time by the borrower to whom a
limit for issuance of guarantees up to a specific amount is sanctioned. Where such a limit is
sanctioned, guarantees can be issued within the limit favouring various beneficiaries
 Page 156

FORMAT
Bank guarantees should normally be issued on the format standardised by Indian Banks
Association (IBA). When it is required to be issued on a format different from the IBA format, as
may be demanded by some of the beneficiary Government departments, it should be ensured that
the bank guarantee is,
(a) for a definite period,
(b) for a definite objective enforceable on the happening of a definite event,
(c) for a specific amount
(d) in respect of bona fide trade /commercial transactions,
(e) contains the Bank’s standard limitation clause
(f) not stipulating any onerous clause, and
(g) not containing any clause for automatic renewal of the bank guarantee on its expiry

In all the guarantees issued by the Bank, the limitation clause suggested by IBA, quoted below,
should invariably be incorporated at the end of the text as concluding paragraph of the bank
guarantee. (This clause should be included in addition to the text appearing on the printed page
one.)

With the amendment in section 28 of the Indian contract Act, 1872

a) The claim period of a minimum of 1 year from the date of expiry of validity period
of BG is to be specified invariably, irrespective of the type, original tenure and/or
lower required claim period by beneficiary in its request of BG.

b). Any further extension of the existing BG is to be made with a minimum claim period
of 1 year from the date of expiry of validity period of BG.

Now, In all the guarantees issued by the Bank, the limitation clause as given below
(suggested by IBA), should invariably be incorporated at the end of the text as concluding
paragraph of the bank guarantee

Notwithstanding anything to the contrary contained herein-

i. Our liability under this Guarantee shall not exceed Rs. [ ]/-
ii. This Bank Guarantee shall be valid up to [ ] (being the date of expiry of the
guarantee
iii. The beneficiary’s right as well the Bank’s liability under this Guarantee shall
stand extinguished unless a written claim or demand is made under this Guarantee
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on or before [ ] (being the date of expiry of claim period which in no case

should be less than 1 year from the date of expiry of validity period of BG as per
clause. ii above)

Extension/Renewal of Bank Guarantee

Request from the applicants for extension/renewal of guarantee to be entertained provided there
is no change in the amount and other terms and conditions of the guarantee. The forms
prescribed for the purpose (Extension Guarantee) will be used.
Expired bank guarantee may also be renewed with retrospective effect subject to the condition
that the Bank remains indemnified as against the contingent liabilities etc. which may arise under
the said guarantee i.e., the counter guarantee covers such liabilities retrospectively so it should be
amended as per requirement. Normally, requests for extension should emanate from the
applicants only.

Amendment
Bank Guarantee is a contract whereby the Bank agrees to pay the beneficiary the amount
guaranteed in the Letter of Guarantee, if the guaranteed obligations are not fulfilled by the
applicant. It can be amended as in the case of any other contract, with the consent of all the
parties concerned and there is no restriction under law or guidelines of RBI for such amendment.

Termination/Cancellation of Bank Guarantees

After the expiry of each bank guarantee (including the time limit stipulated for preferring cla im,
if any), a registered letter with A.D. should be sent to the beneficiary advising that the guarantee
has expired and requesting the beneficiary to return the original guarantee document. It should be
made clear in the letter that the beneficiary is no longer entitled to invoke the guarantee. After 7
days of expiry period /claim period of BG, liability in branch books should be marked off(removed)
in the system.
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Invocation of Bank Guarantee

The beneficiary of the bank guarantee can invoke in writing, the guarantee any time before the
expiry of the claim period. Invocation can be done by Telex/Telegram/hand delivery also
followed by mail confirmation. It should be ensured that all valid claims received are
settled promptly. In the case of any dispute, such honouring, on invocation, will be done under
protest and the matters of dispute should be pursued separately. Only when the Bank has
received an order of restraint/injunction from a competent/ appropriate court, the Bank can
withhold payment under the bank guarantee. Till the court case is decided, the liability of the
Bank under bank guarantee will continue

Issue of Bank Guarantees in favour of other banks/financial institutions

No Bank Guarantee should be issued favouring financial institutions, other banks and/or other
lending agencies for the loans extended by the latter, as it is intended that the primary lender
should appraise and assume the risk associated with sanction of credit and not pass on the risk
by securing itself with a guarantee ,however some exceptions has been allowed RBI in some
selected cases.

SPECIAL TYPE OF BANK GUARANTEES:

There are some special types of BGs ,which are issued from time to time on the request of
the customer like Deferred Payment Guarantee(DPG).Advance Payment Guarantee (APG).
Export Promotion Capital Goods(EPCG), Bid Bond etc. Special care is required to be
taken before issuing such types of guarantees.

-x-
 Page 159

Letter of Credit
Letter of credit (LC) is a trade settlement method where LC issuing bank guarantees payment to
the beneficiary (seller of the goods) provided beneficiary submits documents which are
complying presentation. So under LC risk of non-payment is shifted from buyer to the LC
issuing bank. Undertaking of making payment by LC issuing bank is conditional and it is
subject to presentation of the documents which are complying presentation. The set of
documents can be complying only if they are as per:--

(i) Letter of credit terms,

(ii) UCPDC 600 guidelines issued by ICC Paris
(iii) As per international standard banking practices terms (ISBP compiled by ICC
Paris).

Both issuance of LC for importing goods or exporting goods under LC has to be comply with
FEMA guidelines and DGFT guidelines as well. Importer (Buyer) is called applicant while
Seller(Exporter) is called beneficiary under letter of credit mechanism. LC issuing bank
issues LC while advising bank advises LC to exporter, indicating its genuineness. Nominated
bank receives the presentation of the documents from seller while negotiating bank can give
advance against the export bill. Nominated bank or negotiating bank can be same or different.

A proper LC bill discounting limit for the exporter/seller should be sanctioned which is
outside ABF. When export bill (under export LC) or inland bills (under domestic LC) is
presented for negotiation, standard operating procedure for bill discounting under letter of credit
should be followed. While taking decision to discount/purchase/negotiate bills under LC, we
must ensure that LC must be issued by Correspondent banks (as Global Market guidelines) or
first class bank (as per Loan manual) only. Discounting/purchase/ negotiation of the bills under
LC are outside ABF as LC issued by first class or correspondent bank is a specified security.
LC bill discounting limit is available only at the specified branches only which are selected
by the appropriate authority. Non specified branches providing such facility have to do so only
within ABF.
 Page 160

For issuing LC, the creditworthiness of importer/buyer should be ascertained and importer/buyer
must be sanctioned LC limit commensurate with importer’s/buyer’s turnover. Separate LC limit
should be sanctioned for Sight (delivery against payment) and Usance bill (delivery against
acceptance) . While issuing LC on importer's behalf, care needs to be taken about arrangement
of fund for retiring the bills under LC on due date ; importability of goods; insurance (FOB
LC importer has to purchase insurance). Opening of LC should not be allowed normally for
related parties to avoid kite flying ( results in no actual movement of goods) . Extra precaution
need to taken while issuing LC for non customers i.e not availing any fund based limits.
Bank’s instructions need to be complied with for sanctioning
l i m i t o f L C t o n o n - c o n s t i t u e n t b o r r o w e r s . W hile issuing LC, Bank’s
interest has to be taken care of and hence LC should not have any onerous clauses. LC
normally is required for import of raw material or finished goods but capex LC also can opened
for import of machinery where normally term loan should be sanctioned as a back up to support
payment under LC.

If importer/buyer is not able to pay the bill under LC, then it is called devolvement of the
letter of credit. To avoid devolvement of bills under LC, branch has to ensure that separate
limit for sight and usance LC has to be sanctioned, usance period should not exceed the
production cycle of the importer/buyer. Retirement of bills received under LC issued by us
cannot be withheld because of unavailability of funds with buyer/importer (applicant of
LC). If payment of bills under LC is allowed by permitting irregularity in cash credit then
irregularity in cash credit should be regularized on urgent basis. Persistent devolvement of LC
bills may be considered a reason for cancellation of LC issuance limit.
 Page 161

Appraisal Issues of LC

❖ LC limits should be commensurate with borrower’s (applicant) turnover and working

capital limits.
❖ Assess separate limits for usance and sight LC
❖ LC for genuine trade and manufacturing activity.
❖ The usance period of LC should ordinarily have relation to the working capital cycle.
❖ LC for purchase of machinery / capital goods should be backed by borrower’s own funds or
a term loan sanctioned for the purpose.

Illustration s of Assessment of LC Limit

Let us assume as follows: (Rs in lacs)

i) Annual purchase of RM: 3200
ii) RM purchase under LC(50%): 1600
iii) Purchase under sight LC : 800
iv) Purchase under usance LC: 800

Assessment of Sight LC Limit

Time gap from opening till shipment: 1m
Transit period from date of shipment till date of retirement: 0.5 m
Sight LC Limit: 800 x 1.5/12 = Rs 100 lacs

Assessment of Usance LC Limit

Lead Time, i.e from opening LC till shipment: 1 month
Transit Period, i.e. from date of shipment till date of receipt of documents by importer : 0.5
months
Average usance period : 3 months
Usance LC Limit: 800 x 4.5/12 = Rs 299.99 lacs
The usance period of LC should ordinarily have relation to the working capital cycle.

Precautions for Devolvement of LC Bill

❖ Frequent Devolvement: Warning signal!

The limits for demand LCs and usance LCs should be assessed separately with ample
justifications.

The usance period should not, generally, exceed the production cycle.

Cash Budget should be examined thoroughly so as to verify the commensurate cash flows.

In case of bulk imports, establishment of LCs for longer usance period

may be considered selectively.

When liability under LC is met by creating an irregularity in the Cash Credit

account, the relative LC limit should not be released for opening further LCs till
the account is adjusted.
 Page 162

Assessment of LC Bill Discounting Limit

For Bank’s existing customers :
The limit should be fixed based on volume of sales , which is expected to be backed by LCs and
terms thereof.
Fix the limits as far as possible , to coincide with sanction/renewal of Assessed Bank Finance
(ABF) limits
Whenever limit is required to be sanctioned or enhanced , subsequent to sanction of regular (ABF)
limits, assumptions regarding level of receivables should be reviewed and if required , ABF to be
reassessed to ensure that there is no over financing.

Illustration of LC Bill Discounting limit

Estimated Gross Sales for next 12 months A Rs. 120 crore

Out of A above , LC backed sales (say 50% of A) B Rs. 60 crore
Average usance period allowed under LC (in months) C 3 months
Eligible LC Bill Discounting limit = (B x C / 12) D Rs. 15 crore
LC Bill Discounting limit recommended E Rs. 15 crore
 Page 163

Precautions in sanction of LC Bill discounting limit

➢ Due caution to be exercised regarding bills covering sales within a city or locality
and between group/associate concerns and those drawn by front companies of
industrial groups (to avoid mis use of facility for accommodation/ kite flying
purposes)
➢ The standing and credit worthiness of the borrower as well as the drawee of the bills
to be carefully looked into.

KEY LEARNINGS
i. Use of LC for trade purposes
ii. Key areas in appraisal and assessment of LC limit. Operational issues in LC facility
iii. Discrepancies in LC. SOP in case of devolvement of LCs.
iv. Approach/ Assessment for Negotiation/ Discount of bills under LC
v. Usage and different purposes of Bank Guarantee
vi Appraisal and assessment of BGs
vii. SOP in case of invocation of BGs
CHECK YOUR PROGRESS
MCQ-1 BG issued in lieu of advance payment for purchase of raw material falls under ..
a Performance Guarantee
b Either Performance or Financial Guarantee depending upon deal
c Financial Guarantee
d None of the above
MCQ-2 Performance BGs attract Credit Conversion Factor (CCF) of
a 0%
b 150%
c 100%
d 50%
MCQ-3 Maximum period for which BG can be issued without prior administration period
a 24 months
b 18 months
c 36 months
d Any period
MCQ-4 EPCG bank guarantee is issued on behalf of those customers considering their
capacity to meet
a Import target
b Domestic sales
c Export sales
d Intra Group sales
MCQ-5 Importer receives goods of inferior quality under LC transaction. However,
there is no discrepancy in the documents submitted. Which among the
following is applicable
a Importer can refuse payment on grounds of inferior quality of goods
b LC issuing bank can refuse payment
c Payment cannot refused as documents are complying with terms of LC
d Negotiating bank should seek recourse from exporter
KEY:
1 c 2 d 3 b 4 c 5 c
 Page 164

APPLY YOUR LEARNING

CASE-1 ABC Contractors is enjoying BG limit of Rs. 175 lac. Present outstandings in BG
limit is Rs. 160 lac. Out of current outstandings, BGs amounting to Rs. 110 lac are
to mature during one year.
ABC Contractors will bid for tenders for Rs. 1500 lacs (during one year) for which
bid bond guarantees would be required for 5% of the tenders bid. Validity period
of these bid bond guarantees shall be of 4 months. ABC Contractors are hopeful
of being awarded contracts to the tune of Rs. 200 lacs for which 50% performance
guarantees would be required. On same amount , 15% BG would be needed for
mobilising advance payment as well as 5% for retention money guarantees. In
addition, Rs. 15 lacs would be needed for miscellaneous purposes BGs during the
year. Answer the following to assess total BG limit. Claim period of one year is to
be ignored in the calculation for this exercise.
Q1 Bank guarantee limit assessed in bidding for tenders
a Rs. 25 lacs
b Rs. 50 lacs
c Rs. 75 lacs
d Rs. 100 lacs
Q2 BG limit assessed for Performance guarantees on award of projects/ tenders
a Rs. 50 lacs
b Rs. 750 lacs
c Rs. 100 lacs
d Rs. 200 lacs
Q3 BG limit assessed for mobilising advance payment
a Rs. 45 lacs
b Rs. 30 lacs
c Rs. 90 lacs
d Rs. 60 lacs
Q4 BG limit assessed for retention money purposes
a Rs. 40 lacs
b Rs. 30 lacs
c Rs. 20 lacs
d Rs. 10 lacs
Q5 Total BG limit assessed / required
a Rs. 230 lacs
b Rs. 175 lacs
c Rs. 155 lacs
d Rs. 300 lacs

CASE-2 EPZ Electricals is likely to purchase material from domestic sources worth Rs.
1000 lacs and from imports worth Rs. 800 lacs during next one year. Out of
above, purchase against Inland LC and Foreign LC would be 25% and 20%
respectively. Lead Time including transit period involved in domestic purchase
against LC is 0.50 months and in case of imports against LC it would be around 1
month. In addition, EPZ would get credit of 2 months in domestic purchase against
LC and 3 months in case of imports against LC. In order to assess Total LC limit
(ILC and FLC separately) , following need to be answered.
Q1 Amount of total purchase of material from domestic source and Imports against
LCs , respectively during the year
a Rs. 250 lacs and Rs.160 lacs
b Rs. 300 lacs and Rs. 200 lacs
c Rs. 350 lacs and Rs. 250 lacs
d Rs. 400 lacs and Rs. 160 lacs
Q2 Average per month purchase against LC from domestic and imports respectively
a Rs. 30 .80 lacs/ Rs.20 .80 lacs
 Page 165

b Rs. 20.83 lac/ Rs. 13.33 lac

c Rs. 40 lacs/ Rs. 25 lacs
d Rs. 33.50 lacs/ Rs. 15.50 lacs
Q3 Total cycle (lead time + usance period) in case of ILC and FLC respectively
a 2 months / 3 months
b 3 months/ 5 months
c 2.50 months / 4 months
d 3.50 months / 4.50 months
Q4 Total approx. Inland LC limit assessed/ required
a Rs. 42 lacs
b Rs. 62 lacs
c Rs. 52 lacs
d Rs. 72 lacs
Q5 Total approx. FLC limit assessed/ required
a Rs. 43 lacs
b Rs. 63 lacs
c Rs. 73 lacs
d Rs. 53 lacs
KEY:
Case- 1 a 2 c 3 b 4 d 5 a
1
Case- 1 a 2 b 3 c 4 c 5 d
2

FOR FURTHER READING, REFER TO:

1. E manual Loans & Advances (part 2) updated 30 Sept 2020
2. CPPD 60 dated 31-07-2015
3. CPPD 63 dated 05-09-2018
4. CPPD 74 dated 17-09-2018 * (*) Interchangeability of limits
5. CPPD 125 dtd 19-11-2019 *
6. CPPD 51 dated 02-07-2020 *
7. CPPD 162 dated 01-02-2019
8. CPPD 71 dated 01-08-2019
9. CPPD 132 dated 27-11-2019
10. CPPD 142 dated 26-12-2019
11. CPPD 149 dated 31-12-2019
12. CPPD 160 dated 07-01-2020 (Period Angle Clearance- Modified)
13. CPPD 178 dated 12-02-2020
14. CPPD 194 dated 21-03-2020 (Non Constituent Borrowers)
15. CPPD 133 dated 08-01-2021 (Related Parties)

Negotiation/ Discount of Bills under LC

1. CPPD 104 dated 25-10-2018

2. CPPD 164 dated 01-02-2019
3. CPPD 118 dated 18-11-2019
4. CPPD 122 dated 19-11-2019
5. CPPD 5 dated 09-04-2020
6. CPPD 38 dt 12-06-2020 and CPPD 123 dtd 23-12-2020
 Page 166

BACK TO INDEX

CHAPTER 4C

EXPORT FINANCE AND IMPORT FINANCE

LEARNING OBJECTIVES

OBJECTIVES
i. Pre and Post shipment Credit
ii. Buyer’s & Supplier’s Credit
iii. Monitoring and Follow-up

A. EXPORT FINANCE
India is a trade deficit country. We need to promote exports to contain the deficit. Ministry of
Commerce through DGFT regulates Foreign Trade Policy and takes other initiatives to boost
India’s exports. RBI also comes up with various guidelines for boosting exports.

Accordingly, Export finance has been included in Priority sector lending, subject to
incremental export credit of up to two percent of Adjusted Net bank Credit (ANBC) or credit
equivalent amount of off-balance sheet exposure, whichever is higher, w.e.f 1st April 2015.
Only sanctioned limit of up to Rs 25 Crore per borrower having turnover of up to Rs 100 Crore
is to be treated as priority sector.

Export finance can be broadly classified into

Pre Shipment Finance Post Shipment Finance

Pre Shipment credit or Packing Credit in INR- Post Shipment Rupee Export Credit – PSC
PC
Pre Shipment Export Credit in Foreign Post Shipment Export credit in Foreign
Currency- PCFC Currency – Export Bill Rediscounted
(EBR)

'Pre-shipment/Packing Credit' means any loan or advance granted or any other credit provided
by a bank to an exporter for financing the purchase, processing, manufacturing or packing of
goods prior to shipment/working capital expenses towards rendering of services.

Packing credit advance is generally available to the eligible exporter against lodgment of
irrevocable LC established/transferred in his favor by the foreign buyer through the medium of
a First-Class bank or confirmed order/contract placed by the buyer for export of goods from
India. However, branches may grant advances without insisting on lodgment of LC or
confirmed order/contract at initial stage in case of exporters with good track record and if the
reasons for delayed submission of LC/orders are genuine.
 Page 167

Packing credit is normally granted to the following categories of exporters:

Manufacturer Exporter i.e.an exporter who actually manufactures the goods and exports in
his own name.

Merchant Exporter i.e.an exporter who is a trader(intermediary), and who does not
manufacture the goods himself but buys the same from another supplier (domestic or foreign)
who is the actual manufacturer, and exports the same in his name. The exporter in such cases
is also called the Export Order Holder (EOH).

Export House i.e. a Manufacturer Exporter or a Merchant Exporter with minimum export
turnover prescribed under the prevailing Foreign Trade Policy.

Quantum and period of Finance

There is no fixed formula for determining the quantum of finance to be granted to an exporter
against specific orders/LCs. The guiding principle to be applied in all such cases is the concept
of need based finance.

The period for which the Bank gives packing credit depends upon the manufacturing / trade
cycle or specific requirements of the individual export, normally not exceeding 180days,
extendable by another 90 days i.e., 270 days so that the period is sufficient to enable the
exporter to ship the goods / render the services.

The percentage of margin is determined depending on the nature of order, commodity,

capability of exporter etc. keeping in view the spirit behind RBI guidelines for liberal finance
to export sector.

EPC loans are usually restricted to the lower of 90% of FOB value of the contract or the
domestic cost of production.

In exceptional cases, packing credit can be made available to the extent of domestic market
value of the goods even though such value is higher that the FOB value of the goods, provided
the goods are covered by Export Incentive Scheme of Government of India / Duty Drawback
Scheme. In such cases, such advance should be liquidated from the Cash Incentive / Duty
Drawback received.

Procedure for disbursement of EPC and other related formalities

Export orders / Letters of credit should be deposited with the Bank prior to the disbursal of the
packing credit advance except when the advance is sanctioned on “running account “basis.
Branch will affix on the export order / Letter of credit lodged with them a rubber stamp reading
‘Export Finance Granted’.
 Page 168

Where it is not possible for the exporters to lodge the letter of credit or firm orders initially,
statements of export orders / LCs in hand may be obtained at monthly intervals in lieu of
submission of individual export orders / LCs under Running Account Facility.

While disbursing the Packing Credit, following guidelines of RBI need to be meticulously
followed.

Ordinarily, each packing credit sanctioned should be maintained as separate account for the
purpose of monitoring the period of sanction and end use of funds.

Branch may release the packing credit in one lumpsum or in stages as per the requirement for
executing the orders / LC along with ensuring end use

Running Account Facility

On account of difficulties being faced by the exporters in availing of adequate Pre Shipment
credit in eligible cases, branches have been authorized to extend Pre Shipment credit ‘Running
Account’ facility in respect of any commodity, without insisting on prior lodgment of LCs /
firm export orders, depending on the branch’s judgment regarding the need to extend such a
facility and subject to the following conditions:

(a) Branches may extend the ‘Running Account’ facility only to those exporters whose track
record has been satisfactory as also to Export Oriented Units (EOUs)/ Units in Free Trade Zones
/ Export Processing Zones (EPZs) and Special Economic Zones (SEZs).

(b)In all cases where Pre-shipment Credit ‘Running Account’ facility has been extended, Letters
of credit / firm orders should be produced within a reasonable period of time to be decided by
the banks.

(c)Branches should mark off individual export bills, as and when they are received for
negotiation / collection, against the earliest outstanding Pre- shipment credit on ‘First in First
Out’(FIFO) basis ensuring that export credit available in respect of individual Pre-shipment
credit does not go beyond the period of sanction.

(d) Packing credit can also be marked-off with proceeds of export documents against which no
packing credit has been drawn by the exporter.

(g) Running account facility should be granted to sub-suppliers.

h) All amounts disbursed as packing credit advances should be debited to the relative packing
credit account and credited to the borrower’s operative account. Operations on the packing
credit accounts by cheques should not be permitted

If the advance is given on order to order basis, the amount advanced should be recorded in the
relative order/letter of credit under the signature of authorized official. The particulars of each
order/Letter of credit must be entered in the packing credit (orders) register at the time the
advance is granted.
 Page 169

Branches should maintain a packing credit drawing power register wherein the drawing power
available to each borrower should be recorded under the signature of an authorized official.
Amounts of orders /Letters of credit lodged and repayments of the advance granted there-
against should be recorded in this register.

Monitoring and Control

Since packing credit loans are at concessional rates of interest and specific purpose-oriented
advances, it is the responsibility of branches to ensure proper end use of the amounts disbursed
by the exporters. Amounts may be released in one lump sum or in stages as per the requirement
for executing the orders / LC.

As far as possible, to ensure the end-use of funds, loan amount should be disbursed directly by
the branches by issue of pay orders / drafts in the name of suppliers, for which necessary
authorization letter is to be taken from the borrower. Where direct disbursals are not possible,
the proceeds may be credited to borrower’s account and disbursals there from should be
supervised. If loan proceeds are credited to the current account or cash credit account, cash
withdrawals for small payments / labor payments may be allowed. Barring this, all payments
should normal be made by pay orders / drafts drawn in favor of suppliers except in cases where
trade practice (as in some agricultural or marine products) demands that cash payments be
made usually. In such cases, the sanction accorded by the Sanctioning Authority should provide
for it.

Packing credit advances may be granted upto the full value of export orders, but in stages
corresponding to the actual requirements of finance for the execution of the orders. When
disbursement is to be made in stages (depending upon the needs of the exporter), the schedule
of disbursement may be called for before granting the advance.

Adjustment of Pre-shipment credit when exports do not materialize

Concessionary rate of interest linked to MCLR on the basis of credit rating of the account will
be charged up to 270 days. If shipment takes place after 270 days from the date of advance, the
advance will cease to qualify for concessional rate of interest ab-initio and interest rate
applicable to domestic lending cash credit rate as applicable for their CRA rating
from date of crystallization. In case, however, exports do not materialize at all, branches
should charge on the relative packing credit, domestic lending Cash Credit rate as applicable
for their CRA rating plus penal interest not exceeding 2 percent per annum, from the date of
advance.

The Internal Audit Department at Hyderabad have advised that the various Credit
Audit Reports have pointed out instances wherever pre-shipment credit facilities
have been availed by the borrower and bills are sent on collection basis or directly by
the borrower to the foreign buyer, the EPC/ PCFC outstanding are allowed to
continue till realisation of proceeds/ crystallisation of bills. Continuation of EPC/ PCFC
facility even after shipment of goods will entail wrong drawing power (DP) calculation and
also rejection of claim by ECGC in case of default, even though the bank has paid the
premium under WTPC cover. Further, in order to avoid rejection of claims by ECGC on
 Page 170

technical grounds, once export is completed and bills are submitted, the preshipment liability
should be converted into post shipment liability. Hence,branches shall ensure:

i. Sanction of comprehensive export credit to the borrower (pre-shipment and

post-shipment) shall include suitable bill limits for availing “Advance against
bills sent on collection” also, so that the pre-shipment credit facilities does not
remain outstanding beyond permissible / assessed time lines. In all the cases where running
account facility is permitted, bills pertaining to shipments have to be purchased/ discounted/
negotiated or debited to ‘Advances against Export Bills sent on Collection’.

ii. While marking off the Pre-shipment credit, it is to be ensured that export credit
available in respect of individual Pre-shipment credit does not go beyond the
period of sanction or as per RBI guidelines from time to time, whichever is
earlier.
iii In the case of packing credit advances secured by pledge/ hypothecation of
stocks, drawing power on the relative packing credit account should be
determined on the basis of the aggregate value of firm orders/ letters of credit
lodged and outstanding or the advance value of stocks pledged/ hypothecated
to the Bank, whichever is lower.

Post shipment Rupee Export Credit

As the name suggests it is extended by the banks after the shipment of goods till the date of
realization of export proceeds.

Post shipment credit can be in the form of

a) Export Bills purchased / discounted /negotiated.

b) Advances against bills for collection

c)Advance against duty drawback receivable from Government

Liquidation of post shipment credit has to be done from the proceeds of export bills received
from abroad in respect of goods exported or services rendered. This can also be prepaid/ repaid
out of balance in EEFC (Exchange earners Foreign currency) Account or from proceeds of any
unfinanced bill. However, the export bill will be continued to be followed up for realization of
export proceeds.

Goods and services moving from Domestic Tariff area (DTA) to Special Economic Zone (SEZ)
area are treated as deemed export and are eligible for export credit facility.

In case of Deemed Exports, packing credit should be adjusted from free foreign exchange
representing payment for suppliers, out of balance in EEFC account or from rupee resources
of exporter to the extent supplies actually made.

Export credit in Foreign Currency

 Page 171

Reserve Bank of India introduced the PCFC scheme to avail packing credit in foreign
currency and EBR ( E x p o r t B i l l s R e d i s c o u n t i n g ) a s post- shipment credit
at international rates of interest through A u t h o r i z e d Dealer.

PCFC

Authorized Dealers have been permitted to extend pre-shipment Credit in Foreign

Currency (PCFC) to exporters for domestic and imported inputs of exported goods at
LIBOR/EURO LIBOR/EURIBOR related rates of interest. All exporters, having firm
export orders/confirmed letter of credit is eligible for PCFC, subject to satisfying other credit
norms. PCFC can be carved out of the EPC limits available to them subject to the
outstanding under both the Rupee and foreign currency facilities not exceeding the limit
sanctioned. There is no need for sanction of a separate sub-limit for PCFC. The
instructions regarding rupee export credit as discussed above also apply to PCFC
mutatis mutandis unless otherwise specified.

EBR

All Export Bills, demand and usance (maximum period of 180 days including grace and
transit periods) c a n b e d i s c o u n t e d under the EBR. All exporters are eligible to
cover their Bills drawn under L/Cs, open b i l l & c o l l e c t i o n b i l l wi t hi n t he
sanctioned Post shipment limits.

To avail export finance either in rupee or foreign currency, the following options are available
to exporter –

Avail pre-shipment credit in foreign currency and discount export bills in foreign currency
under EBR scheme.

Avail pre shipment credit in rupees and post shipment credit either in rupee or discount export
bills under EBR scheme.

FORWARD CONTRACTS

Forward contracts can be booked in respect of future PCFC drawals. Forward contracts
can also be booked in respect of the Exports Bills to be submitted under the EBR scheme
except for the portion to be credited to PCFC a/c in foreign currency.

Cross Currency Forward Contracts can also be availed in any of the permitted currencies
against the invoiced currency in which PCFC is availed.
 Page 172

B. IMPORT FINANCE

India is a trade deficit country. Boosting Export is a priority area for Government. Unlike many
other competing countries in international trade landscape, Indian export is hugely dependent
on imports. Both raw material and capital goods need to be imported for processing and
manufacturing. To make Indian export competitive it is imperative to make imports cost
effective. Import finance helps importers get fund at globally competitive rates.

Import finance products can be Non-Fund based constituting Letter of Credit and Guarantee or
Fund Based mainly in Foreign Currency constituting Suppliers credit and Buyers credit.

Buyers Credit and Suppliers credit together are called Trade credits. As per RBI, Trade Credits
are credits extended by overseas suppliers, Bank and financial institutions for maturity upto
three years for imports into India.

BUYERS CREDIT (BC)

Buyers’ credits are trade credits and availed for import of raw materials/ capital goods from a
Bank/FI outside India with maturity up to three years. In terms of regulatory guidelines of
External Commercial borrowings, Banks may approve BCs up to USD 50 million per import
transaction with a maturity period up to one year (not exceeding operating cycle) for importing
raw material and upto three years for import of capital goods. For amounts above USD 50
million per transaction, Borrower can seek approval of RBI. No roll-over/ extension is to be
permitted beyond the permissible period.

Benefits of Buyer’s credit

 The exporter gets paid on due date; whereas importers gets extended date for making
an import payment as per the cash flows.

 The importer can deal with an exporter on sight basis, negotiate a better discount and
use the buyer’s credit route to avail financing

 The importer can use this financing for any form of trade viz open account, collections
or LCs

 The currency of import can be different from the funding currency which enables
importers to take advantage of the lesser interest rate available.

At SBI, we are arranging Buyers credit using two methods

➢ Issuance of Standby LC
 Page 173

➢ Non –LC Reimbursement Finance (NLRF)

The purpose of trade credit is to make Indian importer access import funding at a rate lower
than domestic rate. Hence RBI has put an upper cap or ceiling on all in cost of such funding.
Presently the all-in cost ceiling that can be charged by the foreign bank offering the credit is
capped at applicable Libor plus 250 basis points. (LIBOR plus 2.5 percent) including the cost
of arrangement and other fees. However, this does not include the charges of domestic branch
arranging the credit for the importer.

If an importer decides to pay on sight or due date, its account is debited for Rupee equivalent
of FC import bill at the exchange rate prevailing on that date. But when it decides to go for
Buyers credit, the repayment including interest will happen on a future date. This entails a
movement of currency rate that can be adverse, i.e., the importer may have to pay more rupee
for the same amount of Foreign currency. To avoid such situation, it is normally expected that
the customer hedges its import liabilities through Forward contract or other available
instruments. Of course, the requirement of hedging can be waived by appropriate sanctioning
authority based on certain considerations including availability of natural hedging.

A decision regarding whether to avail Buyers credit or not will be based on comparison
between rupee interest rate charged to the customer and buyers credit interest rate charged by
foreign bank plus domestic banks charges plus hedging cost (say forward premium in
percentage term).

BUYERS CREDIT UNDER STANDBY LC ROUTE (SBLC)

This product is available for imports into India, to the customers banking with SBI
Domestic Branches (DBs) and other Indian Banks.

II. The Foreign Offices approved to undertake business under this product are New
York, Los Angeles, Chicago, London, Hong Kong, Singapore, WBB Bahrain, Tokyo,
Frankfurt, Chicago, Shanghai, DIFC Dubai, Antwerp, Sydney, Osaka, Seoul, Tel-Aviv,
Johannesburg, Muscat and IBU Gift City branch.

III.In the cases of Buyers Credit extended against SBLCs issued by Domestic Branches, the
account at FO has to be maintained in the name of the Corporate as the exposure is on the
Corporate. The CIF need to be opened in the name of the corporate/customer and the account
may be opened in the following way: “SBI a/c XXX (where XXX is name of underlying
corporate/importer availing the Buyers Credit and banking with our DB).

V. In cases of other Domestic Branches (other than CAG & CCG), a Bipartite agreement
between the funding FO and Importer need to be executed as per the standard format for the
transaction amount. Any changes/addition in the standard format may be carried out by the FO
in view of the host Country Regulatory requirements after getting legal vetting done locally.
Buyers Credit extended against SBLCs issued by other Indian Banks would be treated as
exposure on the SBLC Issuing Bank.
 Page 174

VI. Domestic Branch (DB) to sanction the Non-Fund Limits for issuance of SBLC for
the Importer Corporate, who requires the Buyers Credit facility through our
Foreign Offices. The SBLC Limit should be within the overall working capital
limits, if it is for import of raw materials.
B. Only Documentary Bills (includes documents under LC and Collection Bills)
routed through the DB are to be considered for SBLC funding.

Exceptions
1. Direct Handling of import documents by the importer may be permitted subject to
conditions given below:
a. Maharatnas, Navratnas, Miniratnas and other public sector undertakings may be
permitted to handle the import documents directly.
b. For all other corporates, approval for handling the import documents directly by
the importer may be accorded by Branch Head/Controller not below the rank of
DGM based on the business considerations.

The Transactions will be reported to RBI as hitherto done under the LOU/LOC
transactions vide TC I and TC II.

NON-LC REIMBURSEMENT FINANCE (NLRF)

This product is exclusively for corporate rated AA/AAA banking with us. This product is
similar to SBLC with a slight variation in approach, i.e. instead of issuing SBLC the domestic
Branch would allocate the Fund based Limit (NLRF Limit) carved out of the total FBWC
limits, transaction-wise to the funding FO.

As the NLRF limits are carved out of WCFB limits, the product is not available for import of
Capital goods. NLRF Limits are to be assessed as sub-limit to the overall working capital limits
at the time of sanction of credit limits. Only sight Documentary Bills routed through the Branch
are to be considered for funding

The Transactions will be reported to RBI as hitherto done under the LOU/LOC
transactions vide TC I and TC II.

Suppliers Credit

Suppliers credit is an offer of credit extended to a buyer by a seller or supplier. This allows the
buyer to receive the product now and pay for it later in accordance with the terms and
conditions agreed upon with the seller.

Process of Suppliers Credit

➢ Bank in India (Importers country) ascertains from a bank in suppliers’ country the rate at which
the usance bills for specific period would be discounted by them.
➢ Underlying contract between Exporter and Importer provides for a usance draft.
➢ L/ C to be opened strictly in accordance with payment terms of underlying contract and to be
restricted for negotiation at concerned bank abroad.
 Page 175

➢ L/ C provides for reimbursing bank abroad to claim reimbursement on due date of the bill.
➢ Rate of interest negotiated and kept at reasonable level considering market condition,
competition and overall RBI prescribed ceiling.

Difference between Suppliers’ Credit and Buyers’ Credit

CRITERIA SUPPLIERS’ CREDIT BUYERS’ CREDIT

Mode of Can be used only in case of LC Can be used for payment
Payment transactions mode like LC, DA, DP &
Documents received directly
LC Clauses At the time of opening LC or No additional clauses or
amending LC clauses given by Amendment is required in
Suppliers Credit bank needs to be LC
changed. Like Negotiation
Clause, Confirmation Clause,
Reimbursement Clause
Arrangement Has to be arranged at the time of Can be arranged after
opening LC or before shipment of goods documents have reached the
bank or documents are
received by importer directly
Costs LC Advising Cost, LC Amendment Interest Cost
Charges, Document Processing
Charges, Courier Charges,
Conformation Cost and Interest Cost
 Page 176

KEY LEARNINGS
i. The RBI first introduced the scheme of Export Financing in 1967.
ii. The scheme is intended to make short-term working capital finance available to
exporters at internationally comparable interest rates.
iii. Export credit is available both in rupee as well as in foreign currency.
iv. Export Finance is included in priority sector lending considering its importance in
boosting of exports.
v. Export finance is classified into Preshipment and Post shipment Finance
vi. Export Finance is assessed as a need based finance and period and margin etc depends
upon Exporters manufacturing cycle and surplus availble.
vii. SBI has opted for the Whole turnover cover of ECGC for both the Pre and Post
Shipment export finance
viii. ECGC provides credit risk insurance cover to banks in India with the nomenclature
ECIB i.e. Export Credit Insurance for Banks
ix. Import Finance constitutes various funding options available to Importers for purchase
of Import of Goods.
x. Import finance products are categorized into a) Non Fund based constituting Letter of
Credit and Guarantee or b) Fund Based mainly in Foreign Currency constituting
Suppliers credit and Buyers credit.
xi. Buyers Credit and suppliers credit together are called Trade credits.
xii. At SBI, we are arranging Buyers credit using two methods : Issuance of Standby LC
and Non –LC Reimbursement Finance(NLRF).

CHECK YOUR PROGRESS

MCQ-1 PCFC is an export finance extended for------------ in----------------------
a Pre shipment, Foreign Currency
b Post shipment, Foreign Currency
c Any of the above
d None of the above
MCQ-2 Running Account facility is permitted to
a Exporters with satisfactory track record
b Overdue Bills should be within 5% of average of last three calendar
year realizations
c Both of the above
d None of the above
MCQ-3 Interest equalization is applicable on
a Pre and post shipment Rupee credit only
 Page 177

b Pre and post shipment credit in any currency

c Pre shipment Rupee credit only
d Post shipment Rupee credit only
MCQ-4 Tenor of SBLC for obtaining buyers credit is to be equal to total permissible
credit period i.e. the buyers credit tenor plus ------ days
a 30
b 60
c 7
d 15
MCQ-5 After issuance of NLRF and transmission of MT 799 to the FO, clearance to
be obtained from
a RACC
b RCC
c RAAC
d RAC
KEY:
1 a 2 c 3 a 4 d 5 b

APPLY YOUR LEARNING

CASE-1 M/s datamatic Exports is providing online maintenance services to a
big enterprise in Europe. The customer has been dealing with the
branch since last five years and its track record is satisfactory. Earlier,
their invoices were paid within a month and they were not availing any
finance. Due to sluggish markets, their payment terms have increased
to 90 days leading in enhanced fund requirements. The firm has
requested for packing credit against their outstanding service export
invoices.
Q1 Can packing credit be granted to the customer as per request?
a Yes
b No
c Information insufficient to answer question
d Can’t say
Q2 Packing credit in this case will be subject to norms of
a Export of goods
b Export of services
c No packing credit
d Export of software
Q3 Exporters of services qualify for working capital export credit (pre and
post shipment) for consumables, wages, supplies etc. subject to
a The item of service export is covered under Appendix 10 of
HBPv1.
b the exporter is registered with the Electronic and software EPC
or Services EPC or FIEO as applicable
c There is a valid Working Capital gap i.e. service is provided
first while the payment is received some time after an invoice
is raised
d All of the above
 Page 178

Q4 The period of packing credit sanctioned in this case will be

a It will depend on the operating cycle of the firm as per
assessment
b Maximum period can be 270 days only
c Both of the above
d None of the above
Q5 The packing credit will be disbursed after deducting a margin of
a 25%
b 10%
c Margin is need based
d None of the above
CASE-2 M/s Chromex Pvt Ltd has received 60 days months usance import
documents for payment. As the due date of documents was
approaching, he has requested the branch for availing of Buyer’s credit
for payment of import documents. He had already been sanctioned
SBLC limit for Buyer’s credit. As he is importing Raw material, he has
requested for a period of six months for Buyer’s credit. As per
sanctioned terms, his operating cycle is five months.

Q1 Is the importer eligible for buyer’s credit in this case?

a Yes
b No
c -
d -
Q2 What are the prerequisites for availing Buyer’s credit through SBLC
route
a Customer should have been sanctioned Non fund limit for
SBLC for Buyer’s credit
b Import docunments should have been received directly by the
branch
c Buyer’s credit shall be availed through our Foreign offices
only
d All of the above
Q3 What is the maximum permissible period of Buyer’s credit in case of
working capital purpose?
a Operating cycle
b One year
c Lower of the above
d Higher of the above
Q4 What is the maximum permissible period of Buyer’s credit in this case?
a As per customer’s request
b Three months only as he has already availed usance period of
three months in import documents considering total operating
cycle of five months
c five months
d six months
 Page 179

Q5 What is the due diligence to be completed by the branch with respect

to period of Buyer’s credit?
a DB to perform due-diligence with respect to the maximum
credit period permissible, in line with working capital cycle /
Capex requirements and confirm the same to FO
b No such due diligence is required
c BC period is agreed as per customer’s request
d None of the above
KEY:
Case- 1 a 2 b 3 d 4 c 5 c
1
Case- 1 a 2 d 3 c 4 c 5 a
2

FOR FURTHER READING, REFER TO:

i. RBI/2015-16/47
ii. DBR No.DIR.BC.14/04.02.002/2015-16 July 1, 2015
iii. IBG/IBG- Domestic (IBD)/15/2019 - 20 Date: Sat 29 Jun 2019
iv. CCO/CPPD-ADV/15/2020-21 dated 19.05.2020.
v. Circular No.: IBG/IBG-GTD/20/2018 – 19 Date: Mon 13 Aug 2018
vi. Circular No.: IBG/IBG-GTD/34/2018 – 19 Date: Fri 19 Oct 2018
vii. RBI/FED/2018-19/67 FED Master Direction No.5/2018-19 March
viii. Interest rate circulars updated time to time
 Page 180

BACK TO INDEX

CHAPTER 4 D

PROJECT VIVEK

With a view to arrest the Bank’s declining share in SME portfolio, the high NPA rate and
instances of quick mortality in the SME portfolio, it was felt necessary to revisit the existing
SME credit underwriting and appraisal process in the Bank.

In May 2016, the Bank embarked on a large scale SME transformation program called
Project Vivek to develop and operationalise a contemporary credit rating and appraisal
engine. Under this project, the credit underwriting methodology for SME units has been
redesigned with two pronged objectives of reducing NPA rates in SME portfolio as
well as reducing turnaround time for sanction of SME loan proposals. This is being
driven through 3 fundamental shifts There were following changes in the process.

1. Balance sheet based working capital financing has been changed to cash flow-based financing.
2. Subjective assessment to objective assessment of businesses and their individual promoters.
3. Streamlined credit processes for sanction of SME proposals with appropriate risk mitigations in
place.

The Bank accounts statements consolidation tool has been developed in SME LOS platform.
Therefore, soft copies of bank account statements of the applicant /borrower, in respect of all SME
loan proposals to be processed under Project Vivek, needs to be uploaded in LOS for processing.

Under Project Vivek, the assessment of FBWC limit and risk rating of SME units are enabled
through 2 tools.
i) PACE (Package for Accurate, Convenient and Efficient Re-casting)
ii) CUE (Credit Underwriting Engine)

DETAILS OF INDUSTRY STANDARD BENCHMARKS AND RE-DRAWING

OFBALANCE SHEET/PROFIT AND LOSS STATEMENT UNDER PROJECT VIVEK

A. Ratios used to redraw Profit and Loss statement / Balance sheet

The historical ratios are calculated and displayed based on the historical financial values keyed
in the CMA from the audited / provisional financials of last three years, wherever available.
Industry specific ratios are populated (the database is developed from Bank’s own data base
and PROWESS Data from CMIE), based on the selected Activity /Industry combination. When a
activity field is not available from the list, the activity will be selected as “Others” and the Industry
standard ratios will not be fetched and the fields will remain blank.
Balance sheet is re-drawn using the cash-flow based turnover and industry ratios, where the
cash-flow based turnover of the customer is estimated from bank statements using the PACE tool.
 Page 181

The actual financials as on latest date as well as estimates are cast based on the unit’s latest
audited/provisional ratios or Industry ratios, whichever is lower, using the following formulae

Financial Ratios Formulae

Gross profit margin (%) Gross profit/ Net Sales * 100
EBIT margin (%) EBIT/ Net Sales * 100
Turnover growth rate (%) (Net Sales of current year/ Net sales of
previous year - 1) * 100
(Account receivables + Inventory - Accounts receivable to sales (days) +
Account payables) / Sales (days) Inventory to Sales (days) – Accounts
payable to sales (days)
Accounts receivable to sales days (Accounts receivable/ Net sales) * 365
Accounts payable to sales days (Accounts payable/ Net sales) * 365
Inventory to sales days (Inventory/ Net sales) * 365

B. Caps on value of ratios

For EBIT Margin and (Account receivables + Inventory - Account payables) / Sales(days)
ratios, the user is allowed a limited flexibility to enter a value based on the unit’s last year ratios
and the industry average ratios.
Value to be entered for above two ratios should be within the minimum and maximum values
which is computed as follows:

Financial Minimum value Maximum value Data

ratio validation
EBIT In cases where: I. Historical EBIT margin is positive: Between
margin I. Historical EBIT lower of (industry Minimum
(%) margin is positive: ratio or unit’s latest and
lower of (industry historical) *120% Maximum
ratio or unit’s latest II. Historical EBIT margin is nil or values
historical) *80% negative:
II. Historical EBIT Cases with a nil or negative EBIT
margin is nil or margin are risky and, in many cases,
negative: will be stressed accounts.
No restriction on Case to case analysis to be
entering any done in such cases and exit option to be
negative value exercised until
unless there are compelling and
justifying reasons to
continue with such accounts. However,
in such cases also the estimate debit
margin must not be
more than 1% and the limits be worked
out accordingly
 Page 182

(Account If (min (industry, If (min (industry, latest historical)>0, Between

receivables + latest historical)>0, min (industry, Minimum
Inventory min (industry, latest latest historical) *120%, and
- Account historical) *80%, Else min (industry, latest historical) Maximum
payables) Else min (industry, *80%) values
/ Sales latest historical)
(days) *120%)

Accounts receivable to sales days and Inventory to sales days are user inputs and
Account payable to sales will be auto computed using the below formula:

Financial ratio Formula

Accounts payable to [FBWC (days) +NWC (days) – [Accounts receivable to
sales (days) sales (days) + Inventory to sales (days)]

C. Auto computed elements in re-drawn financial statement

The auto calculated elements on the re-drawn financials are as follows:

S. No Field Year Formula

1 Net Sales (12 Re-drawn (for latest 12 months Auto populated: cash
months ending as of ending the last date of month flow based turnover
last date of previous previous to the month of computed from bank
month) processing the proposal) – (A) statements

2 Net Sales (Next 12 Estimated on the redrawn (for Net Sales for last 12
months from the next 12 months) – (B) months* (1 + Turnover
above date) Growth rate)
3 Gross profit Redrawn years (Both- A & B Net Sales * Gross profit
above) margin
4 EBIT Redrawn years (Both- A & B Net Sales * EBIT Margin
(Operating) above)
5 Inventory Redrawn years (Both- A & B Net Sales * Inventory to
above) sales days/365
6 Account Payables Redrawn years (Both- A & B Net Sales * Accounts
above) Payable to sales
days/365
7 Account Redrawn years (Both- A & B Net Sales * Account
Receivables above) Receivable (days) /365

As the values entered in financials re-drawn for the latest 12 months (period ended the last date of
previous month) and financials re-drawn for the period of next 12months are based on cash flows
and other critical ratios triangulated with industry ratios (with restrictions on value of inventory,
receivables holding etc.), the assets and liabilities sides for these two periods may not tally and
may show a recasting balance. Further processing will be allowed even if assets and liabilities in
respective columns do not tally.
 Page 183

D. Computation of key financial parameters/ratios

The key financial parameters / ratios are computed as on a latest date / estimated for next 12 months
period, as follows:

Financial Parameter / Formula

ratio
Net working capital Total current assets – Total current liabilities
Bank finance Short term borrowings from banks
Other Current Liability Total current liabilities - bank finance
(OCL)
Adjusted TNW Total Net worth - Revaluation reserve - Total
Intangibles - Investment in Subsidiaries / associates
Interest coverage (EBIT + Depreciation)/Interest
(EBITDA/ Interest)
Interest to sales (%) Interest/ Net sales *100
Profit margin (PAT to Profit after tax/ Net sales *100
Sales) (%)
Current asset cycle (Accounts receivables + Inventory)/Net sales *365
(Days)
Working capital to sales FBWC / Net sales *100
(%)
1 - Current assets to [1- (Total current assets/ Total assets)]*100
total assets (PP&E ratio)
(%)
LT Debt/ EBITDA Total term liabilities/ (EBIT + Depreciation)
Equity ratio (%) Total net worth / Total assets*100

A. ASSESSMENT OF FBWC LIMITS

Assessment of Fund Based Working Capital (FBWC) Limits under Project Vivek is asunder:
1. As per Turnover Method (Nayak Committee) for FBWC Limits up toRs.5.00 Crores

a) For Trade Units: 15% of the projected annual turnover

b) For SME Units: To encourage the SME units to shift to digital mode or cashless transactions,
units will be sanctioned limit of a minimum 25% of the projected annual turnover as also need-
based on the production / processing cycle of the relative units. However, higher of the two
assessed limits will be sanctioned to the SME units (e-Circular No.NBG/SMEBU-MSME
CREDI/78/2016-17 dated09.01.2017).
However, the projected annual turnover to be considered should be the one arrived using
the PACE tool
 Page 184

2. Under Project Vivek, the following steps are required before arriving at the working capital
assessment (for exposures above Rs.50 lac uptoRs.50 Crores):
a) Consolidated turnover based on the cash flow in the units’ bank account statements of past 12
months to be computed.
b) Redraw profit & loss account and balance sheet after arriving at the consolidated turnover, to
be triangulated with the historic CMA and Industry Ratios.
c) Based on the redrawn financials, the estimated profit & loss account and the balance sheet to be
casted for the next 12 months.
d) Working Capital limit is then calculated based on the four Loan Policy Ratios, which will be
calculated as per the following formula:

Current Ratio Working Capital limit= (Total Current Assets/Current Ratio) -

(Total Current Liabilities - Short Term Borrowing from banks)
Interest Working Capital limit = [((EBIT Operating +
Coverage Ratio Depreciation)/Interest Coverage Ratio) - (Interest Rate *
(Term Liability + (Current portion of Long Term
Debt/2)]/Interest Rate
Interest Rate above is calculated as Interest expense/(Short
Term borrowing from banks+ Current portion of long term
debt/2 + term liability)
TOL/TNW Working Capital limit = (Adjusted TNW * (TOL/Adjusted
Ratio TNW)) - (Total Outside Liabilities - Short Term Borrowings
from bank)
Adjusted TNW above is calculated as TNW - Revaluation
Reserve - Intangibles –Investment in Subsidiaries
Margin on Working Capital limit = ((Inventory + Receivables) *80% -
Inventory, Sundry Creditors)
Receivables Minimum Margin on Inventory and Receivables will be 20%
less Creditors

Minimum of the working capital limits arrived based on the above ratios will be ideally
recommended to the Sanctioning Committee.
For FBWC limits uptoRs.5.00 Crores, the Nayak Committee guidelines must be adhered to. For
limits above Rs.5.00 Crores, Assessed Bank Finance as per Loan Policy method to be taken into
consideration.

In case the assessed limits are not recommended as per the methods,
RM (SME) is advised to select “Other method” and provide proper justification for the same in
addition to the proposed Mitigation plan (as applicable). The value of proposed loan amount by
selected “Other method” will be automatically fetched from the estimated redrawn B/S and P&L
for next 12 months.

As per CPPD guidelines and Loan Policy, if audited financials are not available for latest
completed financial year, processing of loan proposal can be done on the basis of Provisional
Balance Sheet of latest completed financial year. However, for processing of proposals under
 Page 185

Project Vivek, provisional financials are not mandatorily required to be certified by Chartered
Accountant. In absence of certification of provisional financials by CA, the same may be duly
signed by the Proprietor/Karta/Partners/Director(s)/ authorised Signatory, as the case may be. In
all such cases, Audited Balance Sheet for the previous completed financial year must be obtained
and it should be ensured that CRA has been validated. An undertaking will also have to provisional
be obtained from the unit that the audited financials will not have variance of more than 5% from
the provisional financials..

Renewal of Credit Limit: In case the computed limits are less than the limits being availed
presently, then as per the Project Vivek, the following three options may be explored:

a) For customers with CUE Rating of CUE1 to CUE6, the limits not be reduced immediately when
the account is assessed for the first time under CUE model and the customer be advised to match
his account turnover with B/S turnover and/or also bring his various ratios in tune with the industry
averages. However, if on subsequent renewal under CUE model, the sanctioned limits still work
out tube more than what is calculated under CUE, then the excess limits to be reduced over a period
of two years.

b) For customers with CUE Rating of CUE7 to CUE10, the excess limits to be reduced over a
period of two years as and when the account is assessed for the first time under CUE model. The
customer be advised to match his account turnover with B/S turnover and/or also bring his various
ratios in tune with the industry averages.

c) For Customers with CUE rating of worse than CUE 10, exit option be considered and offered
to the borrower. However, for such cases some of the options to be examined and implemented
immediately are –

I. Withdrawal of all concessions

II. Increase in pricing
III. Infusion of requisite additional capital
IV. Additional collateral

B. ASSESSMENT OF LIMITS OTHER THAN FBWC

In case of assessment of limits other than FBWC on a standalone basis e.g., standalone TL (for
products/ schemes applicable under Project Vivek), existing methodology of limit assessment will
continue. However, for cases (products/schemes applicable under Project Vivek) where other
facilities like term loans, NFB etc. are also part of the same proposal as FBWC, the proposal will
be processed under the CUE model. In such cases, RM (SME) will need to take cognizance of the
estimated redrawn B/S and P&L for next 12 months while preparing the estimates and projections
for the entire period of the term loan as per the extant guidelines. Assessment of Term Loan, Letter
of Credit, Bank Guarantee limits will continue asper the existing assessment methods.
 Page 186

A. CUE AND ITS SALIENT FEATURES

Under Project Vivek, the credit rating and appraisal process for the SME portfolio of the Bank has
been redesigned (applicable for exposures up to Rs.50.00 Crores in NBG).One of the key elements
of the redesign is the development of new rating engine for credit decision, which is named as
Credit Underwriting Engine (CUE). A highly predictive credit-underwriting engine has been
developed based on customer’s cash flows and other verifiable information sources such as
demographic information, past account behavior (both internal as well as external) and objective
analysis of borrower’s qualitative parameters.

CUE rating is a customer centric rating to be used for credit decisions for SMEs across all the
exposure segments up toRs.50 Crores in R&DBG.
(a) Exposures up toRs.50 Lac,
(b) Exceeding Rs.50 Lac to Rs.5 Crores
(c) Exceeding Rs.5 Crores to Rs.50 Crores.
CUE has been developed statistically using the historical data of our Bank from various data
sources viz. customer information, credit bureau (both commercial and consumer),existing current
account or cash credit account behavior , financial ratios, and qualitative questionnaire for general
and industry specific activities.

The Salient features of the new Credit Underwriting Engine (CUE)

1. Critical information from Credit Bureau is factored into CUE rating

The new Credit Underwriting Engine takes into consideration extra raw information from Credit
Bureau, both commercial and consumer CIBIL, in its rating methodology.
Bureau module assesses customer’s behavior on loan facilities across all banks, which is evaluated
not only for the borrower but also for borrower’s group companies and its directors / promoters.
2. On-us cash credit/ current account deposit module evaluates customers based on conduct of
Cash Credit/ current account facilities as the case maybe, with our bank
3. Cash flow-based information captured
i. CUE relies upon the cash-flow based turnover of the customer established by applying advanced
logic to customer’s bank account statements (both ‘on-us ‘and ‘off us’ bank statements) using the
PACE (Package for Accurate, Convenient and Efficient recasting) tool.
ii. In the CUE, Balance sheet is redrawn using the cash flow based turnover and industry ratios.
Thus, financials of the applicant/borrower for the latest completed 12 months based on cash flows
and industry standards are used in CUE instead of Audited / Provisional Balance Sheets for the
financial year, which may be historical.

Qualitative Credit Assessment (QCA) Module evaluates qualitative information of the borrower
across 7 categories through some objective and exhaustive multiple-choice questions. The number
of qualitative questions varies on the basis of customer type (new connection vs. renewal) as well
as exposure segment.
 Page 187

5. Modular Structure
CUE has 7 independent modules (described below in detail) and applicability of each module
varies as per exposure segment / type of borrower. These modules are normalized (switched-on
and switched-off) as per the applicability and availability of information in each module,
depending upon type of customer and exposure. The weightage of each module has been
determined statistically depending upon the exposure segment to which the borrower belongs.

B. INDIVIDUAL MODULES OF CREDIT UNDERWRITING ENGINE (CUE)

The new CUE has seven modules, which are briefly discussed hereunder:
1. Customer information: The Customer information module quantifies key profile factors
pertaining to borrower’s demographic information such as constitution, region and length of
relationship with our Bank. This module is applicable for all the three exposure segments, i.e. the
PD (Probability of Default) of this module will be factored into the borrower rating in all cases.
2. Commercial credit bureau (CIBIL): Information on borrower’s conduct of accounts across
all Banks, as per bureau report is used to determine the bureau score. Borrower’s commercial
related parties are also analyzed using the commercial credit bureau module. The applicability of
this module depends upon availability of sufficient bureau data in respect of the entity for which
the bureau data is being fetched.
3. Consumer credit bureau (CIBIL): Borrower’s related parties that are consumers. partners,
proprietor, directors and guarantors are analyzed using the Consumer credit bureau module. Both,
the consumer and commercial credit bureau data are independently taken into consideration to
determine the overall bureau PD in threating mechanism.
4. On-us deposit/ current account behavior: For origination/ takeover cases, if the borrower has
an existing current account with us, its behavior information is captured in the borrower rating.
5. On-us / internal account behavior of cash credit account: For renewal cases, the information
on behavior of existing cash credit account (which will be called as cash credit module), is used to
determine the PD. For the customers who have multiple cash credit facilities with the bank, all the
parameters are analyzed at their level by rolling up the behavior of all the cash credit accounts at
the customer level.
6. Financial information: Some of the key financial ratios, as per the latest redrawn financials
from the PACE tool, are used to determine the PD of financial module.
Financial Information is extracted from the redrawn balance sheet based on
a) The turnover of the customer computed from cash flow statements using the PACE tool
b) Industry specific ratios of Gross Margin, EBIT Margin, Accounts Receivables, Accounts
Payables, and Inventory.
c) Predictive financial ratios varying across different exposure segments that have been derived
from a statistical back-testing analysis conducted on historical data of the Bank’s SME portfolio.

7. Qualitative Credit Assessment (QCA) module- The QCA captures qualitative information
of the customer in the form of multiple-choice questions ranging from 9to 31 questions, depending
on the exposure segment, spanning across the following 7 categories:
a) Owner / Management
 Page 188

b) Business Plan
c) Business Operations
d) Supplier / Buyer
e) Industry
f) Credit History
g) Relationship with Bank

Important Points of CUE:

Topic Point to note

CUE rating date ➢ For proposals with exposures exceeding Rs.50 Lac for which the
financial analysis (PACE) is mandatory, the CUE rating date
would be the end date of last month up to which the bank
statement has been collected and analyzed through PACE tool.

➢ For proposals <=50 Lac, the CUE rating date would be the end
date of the previous month of processing commencement date in
LOS.
Validity of CUE The CUE rating shall be valid for a period of 12 month from the date
rating of validation by the Risk Rater.
The CUE rating may be reviewed Andre-computed in case the
customer comes for an early renewal/ enhancement after 6 months.
The CUE rating once validated should not be reviewed /revised within
6 months from validation.
Greenfield units For Greenfield units, or the units which do not have cash flow for
minimum required period (one full financial year), the PACE tool
analysis will not be carried out. Hence, the financial module under the
CUE will also not be applicable (it will be switched off automatically)
and the weight of the Financial module will get redistributed amongst
the other applicable modules in CUE.

Hurdle rate – CUE rating scale (CUE1 to CUE15) has been mapped to existing CRA rating scale
(SB1 to SB15) one-to-one. Hurdle rating for credit decision or deviations from Loan Policy
guidelines under CRA regime will now be applicable to the equivalent CUE Rating, e.g. in cases
where as per the extant guidelines, if hurdle rating for a particular industry is SB-5, the hurdle
CUE rating will be CUE-5.

It has been decided by the competent authority that CRA rating will also have to be worked out
for borrowing units, in respect of whom loan proposals are processed under the new credit
underwriting method. The CRA rating shall be used as per RBI directives for complying with the
requirements for IRB approach.
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PACE CONSOLIDATOR-DEBIT MODULE

The PACE Debit Module has been designed to utilize the existing workflow upto the stage of bank
statement consolidation and is a separate module alongside Credit analysis module. Analysis done
through Debit Module is broadly classified underfollowing three categories, the details of which
are explained in the subsequent sections
of this annexure:
A. Analysis of Transaction Categories
B. Analysis of Modes of Payments
C. Analysis of the most frequent beneficiaries

A. ANALYSIS OF TRANSACTION CATEGORIES:

The PACE Debit module filters the debit transactions into the following categories on the basis of
type of transactions:

SL.No. Categories Description and Algorithm

1 Own Account Transfers between own accounts
Transfers Amount debited from one account and credited in other
account of the borrower
Permissible number of days between the transfers =
2 days
Permissible difference in amounts = - 100
2 Statutory Debits such as Service tax, Excise Duty, Wealth tax, VAT,
Payments CST, Income Tax, Goods and Services Tax etc.
A dictionary of words for text search in the narration field of
debit transactions is built into the tool to identify statutory
payments e.g. Tax, VAT, GST, Customs etc.
3 Bank Charges Debits pertaining to charges levied by the bank like Cheque
return charges, Interest, Penalty etc.
A dictionary of words for text search in the narration field of
debit transactions is built into the tool to identify bank charges
Example: Interest, Charges, Penalty etc.
4 Related Party Transfer of funds to directors/ promoters
Transfers Fuzzy logic to match names of related parties provided by the
user in the interface with fields in Narration
5 Transfers to Transfers to sister concerns, Associate or Group
Associates Companies
Fuzzy logic to match names of sister concerns, associate or
group concerns provided by the user in the interface with fields
in Narration
6 Supplier Transfers to existing suppliers of the company
Payments Fuzzy logic to match names of suppliers provided by the user in
the interface with fields in Narration
7 High Value Debit transactions of very high value compared to average
Transfers value of Debit transactions
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a. Average monthly Debit = Sum of the amounts for all Debit

transactions in a month / number of transactions
b. Standard deviation = deviation from the average monthly
Debit.
c. Final filter criteria for the month =Average monthly Debit +
(2 * Standard deviation)
8 Rounded Value Transactions rounded off to a certain value based on average
Transactions value of Debit transaction in a month
a. Total monthly Debit for a month =Sum of the amounts of all
Debit transactions in a month
b. Filter criteria for the month: If total monthly Debits are:
1. < 50,00,000 (minimum at 1,00,000; multiples of 1,00,000)
2. >= 50,00,000 but < 5,00,00,000, (minimum at 5,00,000;
multiples of 1,00,000)
3. >= 5,00,00,000 (minimum at 10,00,000; multiples of 1,00,000)
9 Utilities Transfers for telephone, electricity, water and building/land/
equipment rental bills etc.
A dictionary of words for text search in the narration field of
debit transactions is built into the tool to identify all utility
payments, e.g. MSEDCL, TRANSCO, MPWRD etc.
10 Investments and Transactions made for the purpose of investments and to
Insurance insurance companies
A dictionary of words for text search in the narration field of
debit transactions is built into the tool to identify all investments
and insurance payments, e.g. AIG, AXA, CIGNA, RELIGARE
etc.
11 Periodic Debit transactions that repeat periodically
Transfers Debit transactions that recur over a certain period
1. Number of days to ascertain periodicity = 25 to 35 days
2. Allowed difference in transaction value = 100
3. Lower limit of transaction value for Periodic transfer tag –
Based on user input

The categorized transactions will be displayed to the user at two levels

a. Summary table
(i) Category wise, Month wise sum of Debit Transactions by value
(ii) Category wise, Month wise count of Debit Transactions
(iii) Category wise, Month wise sum of Debit Transactions as a percentage of total debits for the
month
b. Individual transaction level
(i) List of all individual transactions filtered in a category
(ii) Bank Name, Account Number, Date, Narration, Amount, Transaction type,
Balance at the end of transaction

B. ANALYSIS OF MODES OF PAYMENT:

The PACE Debit module categorizes Debit Transactions based on modes of payment as follows:
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The categorized output will be shown to the user at an aggregated level

a. Category wise, Month wise mode of payments by value
b. Category wise, Month wise mode of payments by count
c. Category wise, Month wise mode of payments as a percentage of total debits for the month

C. ANALYSIS OF MOST FREQUENT BENEFICIARIES

The algorithm to analyze most frequent beneficiaries is as follows:
a. Only those transactions which have not been identified as a part of the Debit categories will be
taken as input to analyze most frequent beneficiaries.
b. The narration fields of such transactions are analyzed for frequency of their occurrence.
(i) The algorithm dynamically checks for phrases up to 5 words in length
(ii) Frequency of occurrence is aggregated across different bank statements and different account
numbers of the same bank

Integration of Debit Module with Current Workflow

Currently, the Bank statement consolidation and advanced analytics logic to categorize credit
transactions is done in LOS by using PACE Consolidator Tool. The user subsequently downloads
the categorizations in the form of *. Csv file and uploads it iLMS for analysis of transactions and
turnover computation.
A similar facility is now available in PACE Tool for the Debit Module. Upto the consolidation of
bank statement, the workflow is same. However, for Debit Module, the User shall have to click
the icon for “Run R Tool for debit transaction analysis”. The *. Csv file for Debit Transactions
will be generated giving the analysis of transactions and turnover computation. The user will also
be required to upload the *. Csv file in LLMS for analysis.

LOS and LLMS teams are also working on integrating the LOS and LLMS platforms, so that, the
downloading and uploading of *.csv files is not required. The user shall be required to key in the
LLMS Proposal ID in LOS and the *. Csv file will be directly transferred from LOS to LLMS in
the backend. Nevertheless, the users can still download the *.csv for reference purposes.

Frequency of Operating the PACE Debit Tool:

Performing analysis of Debit transactions and keying in comments based on the analysis is
mandatory for origination and renewal of limits. However, the analysis of debit transactions can
be carried out at any time for monitoring purposes or as per the requirements/needs of the users.

The PACE Debit module analysis will be provided and must be performed for all proposals
(including limits upto Rs.50 lakhs), except for green field proposals. A credit proposal cannot be
submitted without completion of PACE Debit analysis for eligible units.

The interpretation of the results from analysis of debit transactions or the comments entered
therein will not have any direct implication on the computation of CUE rating.

Debit module will help Bank watching the transactions in the Account which can restrict the
customer from diversion and siphoning of funds.
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BACK TO INDEX

CHAPTER – 5

TERM LOAN

LEARNING OBJECTIVES
1) Fundamentals of a term loan.
2) Term loan appraisal viz Economic Viability, Technical Feasibility, Financial
Feasibility and Commercial Viability.
3) Calculation of various critical ratios viz DSCR, Break Even Point, Internal
rate of Return, sensitivity analysis and asset coverage/security margin ratios.
4) Disbursement and review of term loans.
5) Some aspects of term loan documentation.

1. Introduction

A term loan is an advance, usually for purchase of fixed assets, for a fixed period to a
business or an industrial undertaking whether a proprietorship, firm, company or co-
operative society and may be drawn by the borrower either in a lump sum or in
installments.

The tenor for scheme specific term loans should be as per the approved schemes. In
other cases, it will be 20 years or project life whichever is lower (with a minimum tail
period of 15%). The tenor is to be considered from the date of first drawdown.

Average maturity should invariably be calculated for all the term loans individually. It is
not applicable for term loans having EMI based repayment programmes. The average
maturity of any term loan, including moratorium, normally should not exceed 10 years,
except loans under Rehabilitation/Core Industry/ Infrastructure/Renewable Energy
projects/Securitization of Rent and Toll Receivables.

Generally, the term loan is granted for the purpose of:

(i) acquisition of fixed assets required for new project or expansion/diversification of
existing project,
(ii) acquisition of balancing equipment,
(iii) replacement of high cost debt (for the residual period only),
(iv) merger and acquisition, etc.

2. Appraisal of Term Loans

While appraising a term loan, its prima facie acceptability otherwise should be
examined extensively on the same lines as applicable for any other appraisal. It should
inter-alia; focus on Promoter /Management Appraisal and Industry/Activity Outlook.

The purpose of term loan appraisal is to ascertain whether the project is sound -
Technically, Economically, Financially, Managerially and is ultimately viable as a
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Commercial Proposition. Thus, the appraisal of a project thus, involves the examination
of:

2a. Economic Viability:

• To determine the conduciveness of economic parameters for setting up the
project and their impact on the scale of operations.
• Relates to the earning capacity of the project, which depends on the volume of
sales.
• It is necessary to determine how much output of the unit or additional
production from an established unit the market is likely to absorb at given
prices.
Factors to be considered in Economic Viability are:
• Thorough market analysis
• Future trends in volume and patterns of Supply & Demand
• Demand forecast, Supply position, Gap
• Intermediate product
• Ancillary industry

MARKETING: This constitutes a crucial aspect of project appraisal as the basic

viability of the project and consequently the repayment of the Bank’s term loan depends
upon the marketability of its products. This aspect should, therefore, be studied in depth.
Wherever required, a specific study by an external consultant may be got carried out.

2b. Technical Feasibility:

• To determine the suitability of the technology selected and the adequacy of the
technical investigation and design.
• It consists of an assessment of the various requirements of the actual
production process.
• It is in short a study of the availability, cost, quality and accessibility of all the
factors required for production.
• To be vetted by the credit officer. If required, second opinion from the Bank’s
Technical Consultancy Cell / Bank’s empaneled Consultant/ SBI Caps may be
sought.

Factors to be considered in the Technical Feasibility are:

• Location of plant & accessibility to critical inputs
• Size of the plant
• Type of technology
• Production factors (power, water, utilities, transport etc.)
• Availability of Labor (Skilled / Unskilled)

If the project involves a new process or new technology, a technical feasibility report by
a competent outside agency, acceptable to the Bank will be essential. In case of a
project involving only expansion or modernization, a technical feasibility report by
an outside agency may not be insisted upon, provided that the technical expertise
available within the company is considered adequate for the purpose. The technical
feasibility of a new project should be examined from the following angles:

- Suitability of the technology having regard to the local conditions and availability
of resources of men and materials. The borrower should opt for already proven
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technology keeping in mind the performance of the already used technology. In

this regard, study of the performance of the existing units should be done. It should
be also be ensured that the both skilled & unskilled manpower is available in the
area of operation and there should not be additional cost to hire the manpower. The
availability material should also be taken into consideration viz. source of raw
material, distance from the plant site, logistic arrangements, optimum order
quantity etc. along with the market for finished goods.
- Optimal size of the plant.
- Location of the plant and accessibility to critical inputs and utilities.
- Arrangements made for obtaining the technical know-how, design and detailed
engineering of plant, and selection of suppliers of machinery/equipment.
- Manufacturing process.

Thus, technical report should consist about feasibility of project, profitability,

sufficiency of machinery, extent of competition, marketability and other factors etc.).

Production Factors:
Manufacturing Process: Describe briefly the manufacturing process to be adopted by
the company and furnish a simplified process flow chart wherever considered necessary.

Availability of components of production: Comment on the availability of raw

material, stores &spares, other utilities, essential services, cost thereof and the system for
inventory management. Examine the requirements of power, fuel, water, transport, any
railway siding and comment on the adequacy of the arrangements made by the company
to meet such requirements. Documentary evidence, wherever applicable, should be
called for and scrutinized.

Effluent Treatment: Examine arrangements made for treatment and disposal of

effluents and state whether they are adequate having regard to the manufacturing process
involved especially in respect of chemical units in compliance with environment and
pollution control stipulations.

Staff / Labor Position: Indicate the requirements of staff and skilled/unskilled labour
and comment whether the arrangements made by the company for recruitment and
training of these personnel are adequate.

2c. Financial Feasibility:

• To determine the reasonableness and accuracy of cost estimates, suitability of
the envisaged pattern of financing and general soundness of the capital
structure.
• Estimated project cost is reasonable and complete and has a fair chance of
materializing as per anticipations.
• Tie-up of Funds: Financial arrangement is complete, without any gaps, and
ensures cash is available as and when needed (Financial Closure).
• Estimates of earnings and operating costs are as realistic as possible.

Under financial feasibility, we should examine and comment on the basically two
parameters viz. Cost of Project and Means of Finances. The detailed features are
furnished below;
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Cost of the project: Accurate estimate of the total cost of the project is an important
part of the appraisal as it has a bearing on the means of financing and profitability. The
cost estimates should be scrutinized, item by item (wherever possible, by a comparative
analysis of the cost estimates of similar projects in the same industry), with a view to
ensuring that they have been arrived at realistically after taking into account all relevant
cost optimization factors. It is also essential that comments on the various components of
the total cost of project be given, as follows:

Land (including site development):

In case of leasehold land, examine the lease deed to ascertain whether the terms of the
lease provide for the lease rights being assigned/mortgaged to the Bank, whether the
residual lease period is sufficient(i.e., at least longer than the proposed repayment period
of the Bank’s term loan) and whether there are any clauses prejudicial to the Bank’s
interests. If the lease deed does not contain the clauses, which enable the lenders to
create its charge, it will not be possible to realize the proceeds in case of default of the
loan.

In the case of other items, branch should be satisfied that the cost estimates are
reasonable and acceptable.

Buildings: The items to be included under this head will broadly be (i) main factory
buildings, (ii) ancillary factory buildings, (iii) godowns/warehouses, (iv) canteen, guest
house, etc., (v) quarters for essential staff, (vi) compound walls/roads, (vii) silos, tanks,
wells etc., (viii) garages, van/truck sheds etc., (ix) sewers and drainages etc. Examine
whether the proposed buildings will be sufficient having regard to the nature/lay out, size
of the plant and the proposed scale of operations. The detailed cost estimates of the
proposed construction are to be obtained and examined for the reasonableness.

Plant and machinery: Furnish a list of the items of plant and machinery, which should
be classified in broad groups under two heads viz., imported items and indigenous items,
together with the names of the suppliers.

Technical know-how, engineering and consultancy fees: Examine the basis of

selection of the technical consultants for providing technical know-how/design
engineering. It should be ensured that there would be no diversion of funds from the
company to the promoters indirectly through selection of an associate/subsidiary concern
of the promoters as technical consultants.

Miscellaneous fixed assets: These will include items electrical installations, laboratory
equipment, workshop equipment, fire-fighting equipment, furniture, fixtures and fittings,
office equipment, effluent disposal plant, vehicles, railway siding and other assets not
directly involved in the manufacturing process but very much required for functioning of
the plant.

Preliminary, capital issue and pre-operative expenses:

❖ Preliminary expenses are those expenses, which are incurred before the
incorporation of the company.
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❖ Capital issue expenses are those expenses, which are incurred to raise capital from
the market.
❖ Pre-operative expenses are those expenses, which are incurred during the period
between incorporation of the company and commencement of commercial
production, which is after the trial run. Thus, the expenses during trial run can also
be considered under this head.

Provision for contingencies: This are required to take care of the following:
❖ Escalation in the cost of the items because of increase in prices, import duty, excise
duty, sales tax, transportation charges, and fluctuations in foreign exchange rates
etc.
❖ Delay in the implementation of the project owing to technical or other factors.
❖ Sundry items/expenses initially omitted, as they could not be envisaged at the time
of project formulation.
❖ Any other unforeseen expenses cropping up during project implementation, which
are necessarily required for completion of the project.

The cushion built into the cost of the project by way of contingency provision could be
in range of 5% to 15% of the cost of non-firm items in the project cost. The firm items
are those items, which has fixed price on the basis of quotations with all the terms &
conditions. Whereas, the non firm items are those items, where the price cannot be
ascertained at the time of appraisal and the tentative price is considered based on the past
experience, hence the chances of increase in cost could not be avoided. To take care of
any unforeseen increase in project cost, the provision for contingencies should be made.

Working capital margin: This represents the provision required to be built into the cost
of a project for meeting the working capital margin requirements at the peak level (i.e.,
when the level of gross current assets is at the peak) during the first year of operations
after commencement of commercial production.

Means of finance: Examine the proportion of debt and equity components, which is
called the project Debt/Equity ratio, envisaged in the tie-up of the means of financing of
the project. There is no standard project Debt/Equity ratios prescribed for any project.
The stipulation of this ratio for a particular project will be based on a number of factors
such as the nature and size of the project, location, capital intensity, gestation period,
promoters’ capacity, importance to the national economy, government policy etc.
Nevertheless, while appraising project financing proposals, the Bank’s loan policy
guidelines on Debt/Equity gearing should be kept in mind.

Where a project is being financed by a consortium of term lending institutions and the
Bank, the project debt/equity ratio is stipulated by the lead institution in consultation
with other lenders. Though there are no rigid norms for the project debt/equity ratios,
one of the deciding factors of the D/E ratio could be the debt servicing ability of the
project.

In the appraisal memorandum of Term Loan, furnish the break-up of the means of
financing after examining the suitability of the various sources of finance with due
regard to the financial leverage envisaged for the project on the following lines.
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Equity Component:
Share Capital: Indicate the composition of the share capital (the proportion of equity
shares and preference shares, if any, in the total share capital). In respect of the equity
shares, break-up of the extent of subscription by the promoters and the public is to be
mentioned. In case of preference shares, comment on the nature and type of the shares
and the special rights, if any, carried by them. Furnish detailed comment on the sources
of equity, time horizon for equity infusion (upfront or pro-rata), acceptability of the same
etc. Examination of equity visibility is very essential.

Internal Cash Accruals: The scope for utilizing internal cash accruals as one of the
sources of finance for a project, undertaken by an existing company, is limited because
of the following factors,
(i) The uncertainty involved in the cash generation/distribution by the existing units
upto the expected level during the construction period of the proposed project and
(ii) the pre-empting demands thereon such as payment of dividends to shareholders,
repayment of maturing term obligations and ploughing back of accruals to meet the
increased margin requirement arising from the increased scale of operations of the
existing units.

Further, the net working capital of a borrower in relation to the working capital gap
(current assets minus current liabilities other than short-term bank borrowings) should
not be allowed to deteriorate but should improve over a period of time. Accordingly,
borrowers who have built up their net working capital by ploughing back profits or by
infusion of long-term funds should not ordinarily be allowed to dilute the position.

Debt Component
Debentures: Examine the terms of the proposed issue of debentures such as nature, rate
of interest, date of redemption, security offered, any special rights to the debenture
holders etc.

Term Loans: While granting term loans/DPGs to companies, it should be ensured that
the same are within the upper ceiling of term borrowing as per the Companies Act.

Where the Bank is not the sole lender for the proposed project, comment on the
consortium arrangement indicating the amount of individual term loans extended by the
participating lenders. Obtain copies of arrangement/sanction letters issued by all the
participating lenders and scrutinize them with a view to ensure that the company will
have no difficulty in complying with them and that they are also in line with the terms
and conditions stipulated by our Bank.

Unsecured loans/deposits: The sources of the unsecured loans/deposits, rate of interest

payable, terms of repayment and the firm arrangement made for obtaining these funds
etc. must be verified.

General comments:
Debt/equity gearing: The dealing should furnish detailed justifications on the
acceptability of pattern of the means of financing along with comments on the
acceptability of the project debt/equity ratio. The pattern of both means of finance and
debt equity ratio may vary in case to case basis. The acceptability of the same depends
 Page 198

on the many other factors like, collateral coverage, track record, management, long
relationship, capabilities to complete projects etc.

Promoter’s contribution to meet overrun: Comment whether the promoters have the
capacity to bring in proportionate or higher additional contribution to meet any possible
overrun in the cost of the project; an undertaking to that effect should be obtained from
the promoters and should be kept along with the application/documents.

2d. Commercial Viability – To determine the extent of profitability of the project and
its sufficiency in relation to the repayment obligations pertaining to term assistance. The
commercial viability parameters are discussed in details in the chapter.

Debt Service Coverage Ratio (DSCR): The ultimate purpose of project appraisal is to
ascertain the viability of the project, which has a direct bearing on the repayment period
and the quantum of installments. While the repayment programme will depend on the
profitability of a project, the quantum of annual installments has to be related to the size
of annual cash flows. The repayment schedule should, therefore, be fixed after
ascertaining the annual servicing capacity of the project, during the entire repayment
period, which is indicated by the debt service coverage ratio.

The debt service coverage ratio is the ‘core test’ ratio in project financing. This ratio
indicates the degree of viability of project and is a determining factor in fixing the
repayment period and the quantum of annual installments. ‘Debt’ in this context means
maturing term obligation viz., installment repayable during a year under all the term
loans/deferred payment guarantees and ‘service’ means cash accruals comprising net
profit plus depreciation and non-cash write-off. The debt service coverage ratio measures
the extent of cash accruals (service) available to cover the maturing term obligations
(debt) during each year.

Average Gross DSCR also needs to be calculated.

Calculation of Internal Rate of return (IRR)

Internal rate of return (IRR) has to be ascertained when we assess the term loan proposal.

The ‘Internal Rate of Return’ (IRR) is that rate at which the sum of the discounted cash
flows is equal to the investment outlay. In other words, IRR is that rate which makes the
present value of the benefits equal to the present value of costs or reduces the net present
value to zero. This ‘Internal Rate of Return Method’ gives the promoters a fair idea
about the rate of return that a project is likely to earn over its useful life.

Components of cash outflow: The total funds invested in a project are used for
acquisition of fixed assets as well as working capital assets. Cash outflow will, therefore,
comprise (a) capital expenditure of the project (total cost of the project minus margin for
working capital and interest during construction period), (b) yearly normal capital
expenditure (expenditure on capital replacement and/or addition to fixed assets) and (c)
working capital requirement (increase in inventory and receivables).

Components of cash inflow: All the benefits received during the life of a project will
constitute the cash inflow. Cash inflow will comprise the following: (a) profit before tax
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with interest added back, (b) depreciation, and(c) preliminary and pre-operative expenses
written off. The amount of interest and corporate tax depend on the project debt equity
gearing. If the debt: equity ratio is high, the amount of interest will also be high and,
consequently, as interest is a deductible item of expenditure for purpose of taxation, the
corporate tax will be low and vice versa. Thus, the amount of interest and corporate tax
vary with the pattern of debt equity gearing. Therefore, while calculating IRR for
purpose of comparative study of the income generating capacities of various projects,
profit before tax with interest (on long term and short term borrowings) added back is
taken into account. Similarly, as the amount of depreciation charged and preliminary/
pre-operative expenses written off remain within the unit, they are also added back to
arrive at the total cash inflow.

Terminal value of the project: The terminal value of a project is the residual or salvage
value of the assets at the end of the estimated life of the project. This terminal value of
the project is added to the cash inflow of the last year of the project life. For this
purpose, the value of land may be taken at its input cost less amortisation, if any. The
salvage value of the other fixed assets may be taken at 5% of the cash outflow shown on
account of them. The total cash outflow for inventory and receivable may be taken as the
terminal value of the working capital assets.

Net cash inflow: The net cash inflow will be the difference between cash outflow and
cash inflow for each year. In some projects, the net cash inflow may be negative in the
initial years owing to high cash outflow on investment in fixed assets and working
capital assets. With increased level of production and profitability, the net cash inflow
will become positive in the succeeding years.

Break Even Analysis

In a manufacturing unit, if at a particular level of production, the total fixed cost equals
the contribution (total sales revenue minus total variable cost), this point is known as
Break Even Point (BEP).

BEA is to be carried out for (i) the first full year of production and (ii) the year of
maximum capacity utilization.

The formula to calculate the Break Even Point is as under,

Fixed Costs / Contribution per unit * 100

(Where contribution is “Net Revenue – Variable Costs”)

However, as a general rule, it can be said that the lower the break-even level, the higher
will be the profitability. In respect of break-even sales, the level should be considerably
low in relation to the projected sales as to leave a satisfactory margin of safety.

As a broad guideline the break-even at installed capacity, the level between 51% and
65% will be in the ‘low risk’ range, the level between 66% and 70% will be in the
medium risk range, the level between 71% and 85%in the ‘high risk’ range. The level
beyond 85% will represent ‘very high risk’ range.
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The cash break-even (i.e. without considering ‘Depreciation’ as fixed cost) at installed
capacity should normally be below 50%. Break-even range for different industries/
sectors may be different. A peer analysis may be carried out to compare the break-even
level of a project with that of similar projects in the industry.

The formula to calculate the Cash Break Even Point is as under,

(Fixed Costs – Depreciation) / Contribution * 100

Cost-Volume Price or Sensitivity Analysis:

The purpose of the Sensitivity analysis is to study the cushion available in the
profitability of a project to withstand shortfalls in the expected results owing to
uncertainties i.e., the sensitivity of the project and the degree of resilience available to
withstand the adverse impact arising from minor/major changes/uncertainties in the
profitability parameters. The uncertainties could have a threefold impact on the
profitability of a project – by way of changes in the cost of production, volume of
production and change in selling price. The CVP analysis will reveal the ‘span of
resiliency’ of a project by testing the sensitivity of its profitability to a range of changes
in cost, volume and price. Sensitivity analysis is to be carried out for the year with
operating profit nearest to the average operating profit (total of the operating profits for
all the years divided by the number of years).

Security margin Ratios

Adequate and satisfactory security coverage should be maintained. SMCR is computed
to verify that the minimum margin stipulated is maintained.

Security Margin Coverage Ratio (SMCR)is represented in % terms and to be

calculated as under,
SMCR = WDV of Fixed Assets - Term Loan outstanding

WDV of Fixed Assets

Fixed Asset Coverage Ratio (FACR) is represented in ratio terms and to be calculated
as under,
FACR = WDV of Fixed Assets
Term Loan outstanding

Other important point(s) to be kept in mind and should be furnished in the

appraisal memorandum are as follows:

Repayment programme: While fixing the repayment programme, the annual cash
accruals should be taken into consideration. If an initial moratorium (start-up) period is
required, reasoned recommendations should be incorporated indicating the basis on
which the period of moratorium has been determined. Repayment programme should be
furnished clearly mentioning the date of start of repayment, number of installments,
frequency of installments etc. preferably in tabular form.

Project Implementation Schedule: Examination of the project implementation

schedule is very important aspect. A cushion of reasonable period say 1-3 months could
also be considered on merits to counter any unforeseen delays in the implementation.
 Page 201

Managerial Competency: In a dynamic environment, the capacity of an enterprise, to

forge ahead of its competitors depends to a large extent, in the relative strength of its
management. Hence, to ascertain that competent men are behind the project to ensure its
successful implementation and efficient management after commencement of
commercial production, credit officer should critically examine the integrity, track
record, credit worthiness, initiative, competence and experience of the management.

Environmental, statutory and other concerns – To ascertain whether the project is in

compliance with various environmental statutory and other provisions in force. Branches
should carefully examine the aspects such as clearances required, their obtention status
and compliance to start the project and maintenance over the life of the loans.

3. Disbursement of term loans

After loans have been sanctioned, the dealing officials must ensure that all
security/documentation formalities are completed before any part loan is disbursed.

The dealing officials should check the sources of funds for margin and ensure the
genuineness before disbursement in lumpsum in general and state wise sources of funds
for margin at different stages if it is in tranches.

The dealing officials should check the invoices, submitted with the request for
disbursement, with the quotations submitted at the time of appraisal. The payment terms
of the quotations should also be checked and it is to be ensured that the disbursements
are being made as per payment terms of the quotations.

Ensure compliances of pre disbursement conditions and obtain approval before

disbursement.

Ensure direct payment to suppliers through Online Payment.

Disbursement of term loans in installments: On being satisfied about the capital

expenditure already incurred and/or to be incurred as per the budgeted capital
expenditure programme, term loans may be disbursed in installment in a phased manner
according to the requirements of the physical implementation of the project and having
regard to the progress made by the borrower in the mobilization of the means of
financing tied up there for. A suitable disbursement schedule is usually drawn up at the
time of sanction of the term loan taking in to account the phased requirements of funds at
various stages in implementation of the project. Where the disbursements are required to
be made to the borrower to be utilized by him in conjunction with the disbursements to
be made by other participating banks/financial institutions, or otherwise, the dealing
officials should satisfy themselves that the funds so disbursed will be utilized by the
borrower only for the approved purpose. For large projects, support of technical and
legal consultants for carrying out the due diligence processes, TRA mechanism, etc. will
be in place.

FSMTL-1,2 & 3 formats must be used extensively to monitor progress of project and
link TL disbursement to it.
 Page 202

Disbursement of term loan in lump sum: Disbursement of a term loan in lump sum
may be permissible only in the case of a project/scheme involving onetime acquisition of
isolated plant or machinery not forming part of a composite project subject to the
borrower also bringing in his contribution simultaneously at the time of purchase of the
fixed asset. The disbursement should preferably be made direct to the machinery
suppliers. In case advance payment is to be made, credentials of the supplier should be
carefully examined and risk mitigants like counter guarantee, etc explored to ensure
timely supply.

Disbursement of term loan on reimbursement basis: In the normal course, term loans
are intended to finance capital expenditure to be incurred. However, in special cases, the
appraising official may consider granting of term loans subject to the usual margin
requirements, for reimbursement of capital expenditure incurred by a unit from its own
resources (reserves, fresh infusion etc.) during the preceding period in accordance with
the Bank’s instructions in this regard from time to time, more particularly after seeking
approval from sanctioning authority. In this scenario it is very necessary to ensure the
source of funds from which the capital expenditure was done and the where the funds
(after reimbursement) will be utilized. Exceptionally due care is to be taken while
dealing such type of requests.

Key Learnings:
1. Importance of checking source of equity.
2. End use of funds.
3. Monitoring through FSM formats.
4. Disbursement options.
Check your Progress:
1. FSMTL-4 is an important format for monitoring of project: A. True B. False.
2. Pre Disbursement condition means the terms/conditions which the borrower needs
to comply with before execution of documents: A. True B. False
References:
1. Loan Manual Part 2; Chapter 11.
2. Loan Manual Part 1; Chapter 6.
3.
Circular date Topic
23.07.19 Monitoring of End Use of Funds.
15.12.18 Spl Monitoring of advances
04.09.19 TEV Consultant - Assessing the capacity of promoters to
bring Equity.
22.05.19 Term Loans >50cr – Testing of financial covenants

4. Miscellaneous:
Review of Term Loan:
• In cases where term loans as well as working capital credit facilities sanctioned to
a borrower, review of TL should form part of the review /renewal of working
capital facilities. Stand alone TLs also need to be reviewed annually.
• Term Loans which are irregular are required to be reviewed once in six months.
Such review of irregular Term Loans is to be included in the periodical review of
“Special Mention Accounts” (SMAs).
• FSMTL-1,2 & 3 formats must be used extensively to monitor progress of
project and link TL disbursement to it.
 Page 203

Authority structure for review of irregular term loans at half yearly intervals is as per
Banks extant instructions.

Ongoing maintenance of project debt/equity ratio: Where a term loan is disbursed in

installments or in lump sum, the dealing officials must ensure that the project debt/equity
ratio stipulated for the project is maintained at all times while disbursements are being
made. In the case of disbursement of a term loan in installments, the borrower must
bring in his contribution in phases in accordance with the project implementation
schedule and the dealing officials should disburse the term loan in proportion to the
equity brought in so that all the while the project debt/equity ratio stipulated for the
purpose is maintained.

Utilization of term loans:

The proceeds of a term loan must be utilized for the purpose approved by the Bank while
sanctioning the loan. The funds should be credited to an account opened in the
borrower’s name, withdrawals there from being permitted for payment of expenses
incurred for the specific purpose of the loan. Wherever possible, payments may be made
direct to the suppliers/contractors by debit to the term loan account on obtaining the
borrower’s authority therefor. Borrowers should be requested to maintain a separate
register for the purpose, the entries wherein should be verified with the relative vouchers
on the occasion of the periodical inspection of the borrower’s factory/books of account.

The borrower is expected to keep the Machinery register for this.

TERM LOANS: STANDARD ASSETS DISPENSING WITH OBTENTION OF

REVIVAL LETTERS
(i) Remedy available to the Bank for taking legal action for recovery of the loan amount
(debt) due is limited as per the Limitation Act. Limitation periods for different types of
loans are furnished in the table below:
Type of loan Limitation Date of commencement of limitation
Period period
TL 3 years Default in the payment of any of the
instalments or from the date of
acknowledgement of debt/ liability in
writing by the borrowers and the
guarantors or his/her authorised agents.
Equitable Mortgage 12 years From the date when the mortgage debt
falls due, i.e. when a default takes place
and the Bank makes a demand on the
borrower
Personal Liability of the 3 years From the date of default of each instalment
mortgagor (other than of
mortgage security) mortgage loan as mentioned above.
Guarantor, under 3 years From the date of demand and refusal /
continuing guarantee breach on the part of the guarantor to carry
out the obligation.
 Page 204

KEY LEARNINGS :

a) Tenor of term loan.

b) Concept of Project Life / Useful Life of machinery.
c) Concept of Tail period.
d) Concept and utility of Average Maturity.
e) Purposes for which term loans can be given.
f) Important parts of term loan appraisal viz Economic Feasibility, Technical
Feasibility, Financial Feasibility, Commercial Feasibility and Managerial
Competency.
g) Economic feasibility is about the marketability of the product, realistic
expectations of price realization and volume that can be sold.
h) Technical feasibility is about vetting the suitability of technology and tie-ups
of various production factors/linkages.
i) Financial feasibility is about vetting of project cost/capex and means of
finance including vetting of sources of equity.
j) Commercial viability is about verifying if the projected cash flows/accruals
are sufficient enough to meet the repayment obligations.
k) There are seven ratios which need to be calculated under commercial
viability; the most salient ones are DSCR, BEP and IRR.
l) Important parts of term loan appraisal viz Economic Feasibility, Technical
Feasibility, Financial Feasibility, Commercial Feasibility and Managerial
Competency.
m) Economic feasibility is about the marketability of the product, realistic
expectations of price realization and volume that can be sold.
n) Technical feasibility is about vetting the suitability of technology and tie-ups
of various production factors/linkages.
o) Financial feasibility is about vetting of project cost/capex and means of
finance including vetting of sources of equity.
p) Commercial viability is about verifying if the projected cash flows/accruals
are sufficient enough to meet the repayment obligations.
q) There are seven ratios which need to be calculated under commercial
viability; the most salient ones are DSCR, BEP and IRR.
 Page 205

Check your progress: Multiple Choice Questions

Q 1 What the maximum permissible door to door tenure of any term loan?

a. 8 years or project life whichever is lower.

b. 10 years or project life whichever is lower .
c. 20 years or project life whichever is lower.
d. 15 Years or project life which ever is lower

Q 2 We can give term loan for replacement of high cost :

a. True
b. False .

Q 3 : Tail period is the time period between the last scheduled date of repayment and the
last date of project life/useful life.
a. True.
b. False.

Q 4: Economic Feasibility is about the marketability of the product which the borrower
proposes to produce/sell.
a. True
b. False.
Q 5: Economic Feasibility is all about vetting the projected sales :
a. True
b. False.

Q 6: Technical feasibility involves preparing projected cash flow statement :

a. True
b. False.

Q 7 : Financial Feasibility involves preparation of projected financial statements ;

a. True
b. False.

Q 8 : Commercial Viability includes finalization of Debt/Equity ratio.

a. Maybe true
b. Sometimes
c. False
d. True.

Correct answers: 1 ( c ) 2 True. 3 True 4. True 5 True 6. False 7. True 8 (D) .

 Page 206

Check Your Progress

Case let -1

Suri Ltd (SL) is the flagship company of the Suri Group. The group has diversified
presence across sectors like construction, water purification systems, electrical
contracting. The long term credit facilities availed by SL has been assigned a credit
rating of ICRA+. The company as strong, proven and successful track record in the
construction, infrastructure and real estate industry. The flagship company reported Sales
of Rs 5423 crores, PAT Rs 62.33 crores, adj TNW of Rs 1715 crores, TOL/Adj TNW of
5.07 for FY 2015. The company has now approached us for financing 100MW solar
power project in Telengana. Total cost of the project is Rs 773 crores ; project debt at
Rs 580 crores and equity is Rs 193 crores. RMD outlook is moderately positive. The
loan is proposed to be repayed in 40 structured quarterly instalments after moratorium
period of 6 months after DCCO . The repayment schedule would be as follows:

Sr no Quarter nos Quarterly instalment

1 1-5 1.20%
2 6-13 2.00%
3 14-25 2.50%
5 26-40 3.20%
The projected financials after DCCO is as follows:

2017- 2018- 2019- 2020- 2021- 2022- 2023- 2024- 2025- 2026- 2027-
18 19 20 21 22 23 24 25 26 27 28
Gross 176.57 191.72 191.31 191.07 190.78 190.41 189.96 89.34 88.61 87.87 87.14
Sales
Cash 123.95 125.35 130.15 130.82 130.92 132.87 132.25 137.11 139.31 141.21 143.10
accruals
Interest 44.83 57.58 56.19 54.75 52.09 49.25 46.35 43.09 39.46 35.84 32.22

Questions:

1. Calculate Average Gross DSCR for the entire repayment perod?

a. 1.81 b. 1.76 c. 2.87 d All of the above .

2. The nomenclature for the practice/procedure of the lenders stipulating extraction

of excess cash accruals above certain levels for repayments or DSRA is called:
a. Premature withdrawal
b. Foreclosure of account
c. Cash Sweep
d. Escrow arrangement
 Page 207

3. What is the DSCR for the year 2027-28 ?

a. 1.65 b. 2.52 c. 2.085 d . None of the above

4. If a portion of the means of finance consist of Optionally Convertible

Debentures , will it impact the DSCR ? Tick the correct answer with the most
appropriate reasoning.
a. Yes , since it is convertible it becomes part of promoter contribution , thereby
bringing down the repayment obligations and thereby increasing the DSCR.
b. No. Since Debenture is also debt, there would be no change in calculation of
DSCR.
c. Debenture is debt ; the impact on DSCR would depend on the terms of the
Debenture Issue , particularly with regards to interest/coupon payments and
repayment terms.
d. None of the above.

5. If the company proposes that a portion of promoters’ contribution were to come

by way of capital subsidy from the government , whether it can be accepted as
means of finance ; if so, as Debt or Equity?
a. Yes it can be accepted as means of finance under Debt portion.
b. No it can never be accepted as a means of finance.
c. Yes It can be accepted as promoters’ contribution,
d. None of the above.
 Page 208

Caselet -2

Junagadh Inds was planning capex of Rs 2650 lacs and the details of which are as
follows:

A. Means of finance : Ordy Shares Rs 700 lacs, USL ( non interest bearing, payable
after repayment of term loan) Rs 300 lacs , Govt Subsidy Rs 250 lacs , Term
Loan Rs 1400.
B. Govt subsidy is available after commercial production begins.
C. Installed capacity is 20000 MT of finished goods.
D. SP is Rs 40000 per MT , Variable Cost is Rs 30000 per MT, Fixed Cost is Rs 500
lac p.a. IT at 40% (Losses are carried over) .
E. TL repayments is Rs 400 lacs in Y1; subsequently Rs 250 lacs per year.
F. The projections are as under :

(amount Rs in lacs)
Y1 Y2 Y3 Y4 Y5 Y6
1 Capacity 60% 70% 70% 80% 80% 80%
utilisation
Oper.Capacity 12000 14000 14000 16000 16000 16000
Sales 4800 5600 5600 6400 6400 6400
Raw materials 2300 2600 2600 2900 2900 2900
Power 400 500 500 650 650 650
Factory 250 350 350 450 450 450
Labour
Stores & 400 475 475 525 525 525
spares,
consumables
Repairs & 250 275 275 275 275 275
Maintenance
Depreciation 542 410 311 236 179 136
Other Fixed 500 500 500 500 500 500
expenses
Interest 336 335 297 281 243 206
expenses
Other finance 30 30 30 30 30 30
charges
Write off of 5 5 5 5 5 5
preliminary
expenses
PBT -213 120 191 329 386 437
 Page 209

1. Which of the following is not a variable cost, while calculating BEP :

A. Factory Labour
B. Repairs and Maintenance
C. Income Tax
D. Interest expenses .

2. Which of the following is not a fixed cost:

a) Depreciation
b) Amortisation expenses
c) Power
d) None of the above

3. Calculate BEP for Y3 .

a) 118%
b) 66%
c) 82%
d) All of the above

4. What is the breakeven capacity in Y3.

a) 14126
b) 12799
c) 11480
d) None of the above
5. What is DSCR in Y1 ?
a) Negative since losses projected
b) 1.51
c) -0.98
d) DSCR cannot be calculated due to losses projected.

KEY:
Case let-1 1 b 2 c 3 a 4 c 5 c
Case let-2 1 d 2 c 3 c 4 c 5 c
 Page 210

CIRCULAR REFERENCES:

Loan Manual Part 2 Chapter 11(Term Laon ) and Part 1 Chapter 6 ( Post Sanction
Process) and Part 4 Chapter 30 (DCCO Guidelines for Project Loans).
Circular Gist of circular
Topic
date
Project Loans: DCCO Detailed guidelines and important aspects
22.03.17 Guidelines. to be considered while finalizing DCCO
are given in the annexures to the circular.
Moratorium Period in Loans Different set of guidelines for Retail,
20.04.18 SME, Project Loans etc have been given
in this circular.
Verification of Source of Comprehensive guidelines for verifying
06.07.18 Funding of Equity. the source of funding of equity
enumerated in this circular.
Spl Monitoring of Advances Performance of large borrowers having
credit exposures of above Rs 250 crores
and exposures of special nature under
15.12.18
Consortium to be monitored by Lenders
on common engagement basis through
Special Monitoring Agencies.
Term Loans >50cr – Testing Covenant testing for TL in respect of
22.05.19 of Financial Covenants DSCR, ICR, FACR, Debt/EBIDTA
discussed in this circular.
Monitoring of End Use of This circular reiterates some of the salient
Funds. features of Monitoring of Advances
23.07.19
which include Inspection of Fixed Assets
charged to the bank.
SOP-Consultancy Cells at SOPs ,KRAs , Reporting & Monitoring of
06.08.19 LHOs. Consultancy Service Cells at LHOs
discussed in this circular.
TEV Consultant - Assessing Assessing the capacity of promoters to
the Capacity of Promoters to bring equity and ability to arrange funds
04.09.19
Bring Equity. for cost overruns could be made part of
TEV report.
Simplified Formats for TL There are two annexures . One for TL to
and Investment Limits meet shortfall in cash flows resulting in
12.05.2020 Working Capital Gap and the second one
is for Assessment of Investment Limits in
NBFCs.
Review of guidelines on Revised guidelines for financing
04.02.2021 Financing of Second Hand acquisition of second hand machinery
Machinery (including imported machinery)
 Page 211

BACK TO INDEX

CHAPTER- 6

6 A- TYPE OF RISKS, CREDIT RISK MEASUREMENT ASSESSMENT & CREDIT

RISK MITIGATION

LEARNING OBJECTIVES
1) To understand various risks faced by the Bank
2) Brief Overview of Basel
3) To understand measurement of risk
4) To learn various models of risk rating
5) To Understand Dynamic Review of rating
6) To understand CUE rating

Risk is inherent in banking business, therefore it is important to define and identify the types
of risks faced by the banks.
Risk can be defined as the likelihood of an adverse deviation of the actual result from an
expected result. Banks that run on the principle of avoiding risks cannot meet the legitimate
credit requirements of the economy or the shareholders’ expectations of reasonable, normal
and adequate profits. On the other hand, a bank that takes excessive risks is likely to run into
difficulty. So a balanced approach of taking calculative risk is required.
Types of Risks faced by Banks
Banks face a number of risks in different areas of their operations, some of the prominent
risks faced by them are Credit Risk, Market Risk, Operational Risk, Liquidity Risk etc. One
by one we will discuss some of the prominent risks faced by the banks.
Credit Risk has been defined as “The possibility of losses associated with diminution in the
credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright
default due to inability or unwillingness of a customer or counterparty to meet commitments
in relation to lending, trading, settlement and other financial transactions. Alternatively,
losses result from reduction in portfolio value arising from actual or perceived deterioration
in credit quality.”

The adjoining line diagram

explains the relationship
between a borrower and the
lender
Credit risk is the most
common & predominant risk
 Page 212

in banking and possibly the most important in terms of potential losses. This risk relates to
the possibility that loans will not be paid or that investments will deteriorate in quality or go
into default resulting into potential loss for the bank. Credit risk is not confined to the risk
that borrowers are unable to pay; it also includes the risk of payments of the bills being
delayed beyond the maturity time, which can also cause problems for the bank. Some of the
related risks to credit risk are

• Counterparty Default Risk: This refers to the possibility that the other party in an
agreement will default.
• Securitization Risk: Securitization is a process of distributing risk by aggregating
debt instruments in a pool and then issuing new securities backed by the pool.
There are two types of securities, viz. traditional and synthetic securitizations. A
traditional securitization is one in which an originating bank transfers a pool of
assets that it owns to an arm’s length special purpose vehicle. A synthetic
securitization is one in which an originating bank transfers only the credit risk
associated with the underlying pool of assets through the use of credit-linked notes
or credit derivatives while retaining legal ownership of the pool of assets.
• Concentration Risk: A concentration risk is any single exposure or group of
exposures with the potential to produce losses large enough (relative to a bank’s
capital, total assets, or overall risk level) to threaten a bank’s health or ability to
maintain its core operations.
Basel Committee on Banking Supervision (BCBS) in their Basel II accord has elaborated
three types of risks viz. Credit Risk, Operational Risk and Market Risk, under Pillar 1
(component on Minimum Capital Requirements). However, their Pillar 2 (component on
Supervisory Review Process) involves bank management to develop systems that support the
internal capital assessment process and it should also allow for setting targets for capital that
are commensurate with the Bank’s particular risk profile and control environment.

As under Basel II, the revised credit risk framework provides two main approaches for
calculating credit RWAs:

Standardised approach (SA) - Under the SA, banks use a prescribed risk weight schedule
for calculating RWAs. Similarly to Basel II, the risk weights depend on asset class and are
generally linked to external ratings, but enhancements have been introduced.

Internal ratings-based (IRB) approach - Under the IRB approach, banks can use their
internal rating systems for credit risk, subject to the explicit approval of their respective
supervisors. Similarly to Basel II, banks can use either the advanced IRB approach (ie use
their internal estimates of risk parameters such as probability of default (PD), loss-given-
default (LGD) and exposure-at-default (EAD)) or the foundation IRB approach (ie use only
their internal estimates of PD).
 Page 213

Risk Management today is more than Compliance of Regulatory Guidelines. It is about

building value by optimizing, rather than minimizing risk. Risk management is not about
avoiding risk. It helps banks to be aware of the risks inherent in the business and take
advantage of this knowledge to gain a competitive edge and enhance shareholders value.
Risk creates opportunity >>> Opportunity creates value >>> Value creates stakeholders’
wealth.
MEASUREMENT OF CREDIT RISK
As we discussed above credit risk is the predominant risk faced by the banks, as the most
traditional & widespread work a bank undertake is Lending. Once this credit risk has been
identified, the next step involved is to measure the Credit Risk. Traditionally bank was
assessing the Credit Risk through a process which was subjective in nature and the same was
being done by the credit Officials involved in the process.
However, with increased complexity in lending, judging the entire credit involved in a
particular proposal subjectively became more and more difficult. To overcome this problem,
some models were designed by the banks to capture the underlying risk in any proposal. The
below diagram gives the mathematical measurement of credit risk and the drivers of each
variable.

Our bank has developed a model to measure credit risk called Credit Risk Assessment
(CRA) Model.
The Credit Risk Assessment (CRA) is central to the credit appraisal drill and pricing of
the credit. Assets classified as ‘Standard Assets’ only are expected to be risk rated.

It is reiterated that the CRA Model is mandatory for all accounts with Aggregate Exposure
(Fund Based + Non Fund Based) above Rs. 5.00 Crores for both Non-Trading Sector (C&I,
SSI and AGL segments), Trading Sector, Services and Construction Sector, which includes
lending under various schemes of the Bank. Simplified model of CRA rating for
 Page 214

exposures of Rs 50.00 lakh and upto Rs. 5.00 Crore is now dispensed with vide
CRO/CPPD-ADV/76/2020 – 21 dated 27.08.2020. Exposures upto Rs. 5.00 Crore shall be
subjected to CUE ratings only. For exposures above Rs 5.00 Crore and upto Rs 50.00 Crore
both CRA and CUE ratings (detail guidelines of which will be covered subsequently in the
chapter) shall be done. However, CRA simplified models shall continue to be applicable in
respect of products/Loans that are not covered by CUE model Bank has been developing
scoring models for all products with exposure of less than Rs.50 lacs.

However for measuring of Risk for the proposal which are governed by `Project Vivek`
(Only applicable for exposures up to Rs 50 crores in NBG) apart from CRA , Risk will also
be captured through `CUE` (Credit underwriting Engine),detail guidelines of which will be
covered subsequently in the chapter.

The exposure considered for CRA/ CUE rating is the total exposure from the Banking
system.

Different Models for Risk Rating:

We have developed different risk rating models depending upon the special nature of our
different assets, some of the models are as under:
(a) Credit Risk Assessment Models for Trade, Non-Trade, Services and
Construction Sectors
(b) CRA Models for NBFCs/HFCs
(c) Rating Model for Infrastructure Projects (RAMIP)
(d) CRA for Residential Real Estate
Further depending upon the exposure, the following risk rating models are used to assess
credit risk under the CRA System,

S. No. Exposure Level (FB + NFB Limits) Model

(i) Over Rs.5.00 crore Regular Model
(ii) Rs.0.50 crore to Rs.5.00 crore Simplified Model (applicable in
respect of products/Loans that are
not covered by CUE model)

Type of Ratings:

S. No. Model Type of Rating

(i) Regular Model Borrower Rating
Facility Rating
(ii) Simplified Model Borrower Rating

Thus the main difference between Regular Model and Simplified model is computation of
facility rating applicable in Regular rating, where apart from Borrower rating , different
facilities enjoyed by the borrower like Cash Credit, Term Loan , LC,BG etc are also being
rated separately under facility rating exercise. For example, suppose a customer has been
 Page 215

sanctioned a Cash credit limit, Term Loan limit, LC limit and a bank Guarantee limit and
total exposure is Rs10 Crores, then this customer will be having one borrower rating and four
facility rating for each of the facilities(CC,TL,LC,BG) sanctioned to it.

TYPE OF RISK WHICH IS CAPTURED IN RATING MODELS:

In both the models the main types of risk which are captured are as under
i. Financial Risk: Mostly different type of financial ratio being used to evaluate
financial Risk
ii. Business & Industry Risk: Factors related to Business & Industry (both Systemic&
Non systemic)
iii. Management Risk: Factors related to Promoters are captured in management Risk

Different weights have been assigned to the above three factors depending upon the exposure
and activity (Trade, Non-Trade, Services & Construction, however construction model is
applicable only in case of Regular model, which is meant for EPC contractors)
On the line of CRA, risk involved in financing to a borrower is also captured by way of
External Credit rating (ECR), which is mandatory in case of exposures of above Rs50 Crores
(Below cutoff it can also be obtained but not mandatory as per extant instructions of bank).
To give incentive to customers having better ECR, provision for giving additional scores for
better ECRs is also made in our internal models.

SALIENT FEATURES OF OUR RATING MODELS:

In all CRA models (Regular / Simplified and Trade/Services/ Construction

Sectors), all proposals are required to be rated first under the parameters
of entry barrier as below:

1. Compliance of Environmental Regulations & Local Laws,

2. Integrity and
3. Integrity: Group Approach.
A new connection (a unit which at present does not have any credit relationship with
SBI) that does not clear any of the entry barriers would not be processed further and
would be declined. No deviation is envisaged in the Entry Barrier. For existing
connections, in case of non-compliance, a separate treatment of downgrade to below
the hurdle rate or actual rating whichever is lower will be done. In case, the units’
assessment in first two entry barriers falls under the ‘No further processing of proposal”
category, the rating will get downgraded to the worse of actual CRA rating or SB11 and
if item (3) Integrity: Group Approach alone is triggered, then the CRA shall be
downgraded by 3 notches. If the borrower breaches either of first two entry barriers (1) &
(2) and also third entry barrier (3), then the rating would undergo two impacts, first to SB
11 or worse and then further 3 notches down grade, with the lowest downgrade to SB15.

Qualitative Parameter (External Rating) :

As discussed above, the additional scores for better ECR will be given under Qualitative
parameter of our Internal models (CRA).

Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to

 Page 216

additional Score (Long Term Bank Loan Ratings given by the External Rating Agencies
would qualify). Following ECRAs recognized by RBI are considered for this purpose:

S. Type ECRA
No.
1 Domestic (a) CARE Limited ;
(b) CRISIL Limited;
(c) India Ratings and Research Private Limited (India Ratings)
(d) ICRA Limited.
(e) Brickwork Ratings India Pvt. Ltd. (Brickwork)
(f) SME Rating Agency of India Limited (SMERA)
(g) Infomerics
2 International (a) FITCH (b) Moody’s (c) Standard & Poor’s
External Credit Rating Agencies (ECRAs) assign Bank Loan Ratings (BLRs) on long-term
and short-term rating scales for various credit facilities. Cash Credit exposures should be
reckoned as long term exposures and accordingly the long-term rating awarded by ECRAs
will be relevant. The BLR for Cash Credit facility should be reckoned for borrowers enjoying
Cash Credit facility and other facilities such as Term Loan, Bank Guarantee, Letter of Credit
facilities. If a borrower is enjoying long term facilities (other than Cash Credit) as well as
short term facility, BLR for long term facility be considered. However, if a borrower has
availed only a short-term facility which has been rated by an ECRA, BLR for the same may
be considered. The Scoring Bands for factoring Bank Loan Ratings of ECRAs (Long
term/Short Term) are as under:
Long Short Standardized Additional Score Under New
Term Term Approach Risk CRA Models
Rating Ratin Weight
AAA A1+ g 20% 5
AA A1 30% 3.5
A A2 50% 2
BBB A3 100% 1
BB & below A4 & D 150% -1

Applicability of Issue Rating:

In circumstances where BLR in respect of a borrower is not available but a debt-issue
of the borrower has been rated by an ECRA, such issue rating can be considered for
awarding score if the Bank’s claim in respect of credit facilities ranks pari passu or senior to
the rated debt issue.

Multiple Ratings:
In case of borrowers having multiple ratings from recognized ECRAs, following procedure
is to be followed:
i)If there is only one ECRA rating for a particular claim, that rating would be used to
determine scoring;
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ii)If there are two ratings accorded by ECRAs which map into different risk weights, the
rating corresponding to the higher risk weight would be taken cognizance of for scoring;
iii)If there are three or more ratings accorded by ECRAs, with different risk weights, the
ratings corresponding to the two lowest risk weights should be referred to and the rating
corresponding to the higher of the two risk weights should be taken cognizance of for
scoring.

Once score under the above mentioned risk factors (Financial, B& I, Management &
Qualitative parameter) is computed based on the overall score a rating is assigned to the unit.
Depending upon the overall score obtained by the unit, one borrower rating is assigned
against which can be from SB-1 to SB-15 for standard accounts (SB-16 is default ratings for
all NPA accounts). Similarly facility rating is assigned to all the facilities enjoyed/proposed
for the borrower which is again rated on a scale of total 16 grades starting from FR-1 to FR-
16. (The scores applicable for each grade both for borrower & facility ratings is attached as
Annexure I)

Downgrading the account consequent to turning NPA: In terms of circular vide

CCO/CPPD-ADV/123/2019 – 20 dated 18.11.2019

i. Downgrade the CRA rating of the Borrower to SB-16 upon account (s) becoming NPA
ii. Concession extended, if any, should be withdrawn and card rate shall be made applicable.
iii. Reset interest rate to the rate applicable to SB-15.
iv. The operating functionaries should ensure that the following clause is included in the
arrangement letter cum sanction letter to be exchanged with borrowers and guarantors:-

“The Borrower agrees that upon the account of the Borrower being categorised as Non
Performing Asset (NPA) as per the extant Income Recognition and Asset Classification
(IRAC) norms of RBI, the Borrower shall pay interest at the default rate per month on the
entire outstanding amount of the loan for the period that the account shall remain NPA.
Default rate shall mean the rate of interest over and above the MCLR or others as shall be
applicable in case the Credit Risk Assessment (CRA) for an account is the highest
(presently interest rate applicable to SB-15) as per norms of CRA linked interest rate
applicable in the Bank.”

Country Risk:
Country risk is the risk that a borrower will not be able to service its obligations to pay
because of cross border restrictions on the convertibility or availability of a given currency.
It is also an assessment of the political and economic risk of a country. Country Risk is
assumed to exist when 25% or more of the borrower’s cash flow or assets are located
outside India. Country Risk Ratings are circulated by IBG.
Country Risk Assessment Applicability/Clarifications
i) Country Risk would be applicable to units having 25% or more of Cash flows
/Assets to countries starting from Medium Risk but under caution.
ii) In case of Unit having aggregate exports of 25% or more (of sales) to various
countries (under 4 categories of ‘Medium’ to ‘Higher Risk’ i.e. Medium Risk/High Risk &
under Caution/Very High Risk & under Caution/ Off Credit, Restricted & under Caution),
 Page 218

two categories would be identified which contribute maximum of such exports and rating
would be arrived for those two categories based on the table provided below. In such
case the lower of the two ratings as arrived above would be the Final Borrower Rating of
the Company. However, for a country to be included in the above calculation, a minimum
5% export criteria would be applied. For example, if a unit has a total of 26% exports to
risky countries, comprising of 23% to “High Risk & Under Caution” and 3% to “Off Credit,
Restricted & Under Caution“, then as per lower of the two rating rule, downgrade
corresponding to “Off Credit, Restricted & Under Caution” should be applied. However,
since export to this category is 3 % i.e. less than 5%, this would be ignored and downgrade
corresponding to “High Risk & Under Caution” would be applicable.
iv) Exports against advance payment would not be taken into consideration for Country
Risk Rating. Further, in cases where risk arising out of exports to ‘Medium Risk’ to ‘Higher
Risk’ category countries is mitigated by a L/C from a first class Bank recognized by SBI
or by ECGC cover, the Country Risk Rating would not be applicable. However, such
details of exposure along with the type of risk mitigation available will have to be explicitly
indicated in the CRA assessment sheet for validation by the CRA validation Committee or the
equivalent authority as the case may be.

Change in Rating based on Risk Category of Country*

Country Rating/s Change in Rating

Insignificant Risk, Very low Risk, Low Risk, Low NIL
Medium Risk, Medium Risk

Medium Risk But Under Caution Down by 1 stage

High Risk & Under Caution Down by 2 stage
Very High Risk & Under Caution Down by 3 stage
Off Credit/Restricted & Under Caution Down by 4-stage
* Country Ratings are circulated by IBG from time to time for latest category of countries ,
please refer the latest available circular.

The downgrade in rating on account of country risk is not applicable in simplified model of
CRA rating.

v) If the borrower rating undergoes a downgrade of 2 or more stages on account of

country risk, the sanction of credit facilities (not deviation) would be required to be obtained
from a higher authority in the following manner:
Sanctioning Authority Sanction Required from higher authority
CLCC & below RCCC
RCCC CCSC
CCSC CCCC
CCCC ECCB
 Page 219

Basis of Risk Assessment:

CRA rating of the unit is always one based on audited/Projected financials depending upon
the activity status, which is as under.
Activity Status Basis of Risk
Assessment
Newly incorporated unit where the production/ commercial production is Projected
yet to begin Financials

Newly incorporated unit where the audited financials relate to less Projected
than 12 months of commercial production. Financials

Newly incorporated unit where the audited financials reflect minimum 12 Audited
months of working after the start of commercial production. Financials
For rating purpose, a new unit refers to a newly incorporated Firm/Company which may
continue to be regarded as new for a period of three years after the start of commercial
production. However, in the case of Companies/Firms promoted by an established Group, a
view regarding their status as new or otherwise would be taken by the CGM of the
Circle/CAG/Mid- Corporate after one year’s performance

OTHER IMPORTANT GUIDELINES RELATED TO CRA RATING

I. In case of Advances given in consortium arrangement, it is our share alone that would
determine the CRA model to be used.
II.CRA Models are applicable across the Bank for all exposures above Rs. 5.00 Crores and
above. These models do not provide for any exemptions (including that for schematic
lending’s) unless the exemption is specifically approved by CPPC.
III. For units engaged in both ‘Industrial’ & ‘Trading’ activities, the Risk Rating will be
done based on the predominant activity financed by the Bank and the relevant model used,
predominant activity being more than 50%.
IV. In a Multi Division Company, the thrust of scoring under ‘Industry Outlook’ would be
limited to the industry being financed by the Bank.
V. Wherever a parameter is not applicable, the score would be normalized.
VI. For a new unit, where value statements for some of the parameters appear to be out of
place for scoring, the Credit Analyst would assess whether the unit has any plans to measure
upto the levels indicated under those value statements and then score accordingly.
VII. While Borrower Rating of a unit will remain unchanged (unless dynamic review of
internal rating is not done) for a period up to one year, the different facilities would be rated
simultaneously with Borrower Rating or as and when the facility is sanctioned/reappraised.
A unit would carry several different Facility Ratings e.g. if a unit is enjoying one Working
Capital facility & two (say) Term Loan facilities, it will have one Borrower Rating & 3
Facility Ratings.
VIII. Borrower Rating would not be assessed each time a new facility is sanctioned to the
unit within the year.
IX. While working out the Facility Rating, the share of total security against that facility
will be worked out to score under Total Security (Primary + Collateral).

X. For bill discounting limits under Letters of Credit sanctioned outside the total
 Page 220

indebtedness at specified branches, risk rating under CRA system is not necessary. However,
such rating would be necessary for BD limits granted at non-specified branches in as much
as these limits would form part of the Assessed Bank Finance (ABF) and within the total
indebtedness ceilings.
XI. In case of loan proposals having Corporate Guarantor, CRA rating of the such
corporate guarantor will also be carried out and furnished in the appraisal
memorandum.
XII. CRA rating to be done annually, however for borrowers rated SB11 and below would
be rated at half-yearly intervals due to the risk severity of the loan for cases below total
exposure of Rs10 Crores.
XIII: While aggregating Score for Risk Grading, Score up to 0.4 to be ignored, Score of 0.5
or more to be rounded off to the next number
XIII. The rating of any new unit will be capped at SB-06 under CRA simplified model.
Similarly for regular model, for trading and non trading model the same has been capped at
SB-5.

XIV. To capture the risk of new units and reduce the incidents of subsequent downgrades, in
case the unit is not able to achieve hurdle score in Financial Risk, the score in Management

and Business & Industry risk will also be capped at the hurdle for CRA rating Regular- Trade
& Non Trade. For Example

- If the financial risk score of new unit is 9 out of 25, Business and Industry risk score is 18
out of 30 and Management risk score is 36 out of 45. The aggregate score is 63 (9+18+36)
and borrower is rated at SB-9 (This is not correct)

- Since, the financial risk score is below the hurdle score of 10, the Business & Industry Risk
score and management risk score will be capped at 16 and 22 respectively. The aggregate
score will be 47 (9+16+22) and the borrower will be rated at SB-11.

XV. Gross DSCR has been replaced with Minimum DSCR for CRA Regular trade & Non
Trade models.

Forex Risk: Foreign exchange risk is a financial risk that exists when a financial transaction
is denominated in a currency other than the domestic currency of the company. The exchange
risk arises when there is a risk of an unfavourable change in exchange rate between the
domestic currency and the denominated currency before the date when the transaction is
completed. The borrower is required to hedge the forex business.

Unhedged Foreign Currency Exposure (UFCE): UFCE pertains to total unhedged exposure
of the corporate and is not limited to unhedged portion of bank’s exposure to the
corporate. UFCE in currencies other than USD may be converted to USD at market rates
and total amount of UFCE may be computed in USD. For the purpose of UFCE, any natural
hedge (foreign currency exposure may be treated as naturally hedged if the corporate is
having uncovered receivables to cover its foreign currency exposure) available to the
 Page 221

corporate should be excluded. The amount UFCE will represent the portion of foreign
currency exposure which is not hedged using derivatives.

CRA rating models take into account Likely loss on account unhedged foreign currency
exposure as a percentage of EBID. Likely loss contained within 15% of EBID is considered
fetches full marks under this head. 15% is considered using annual INRUSD volatility.

Group Risk: The borrowing entity may be subjected to financial loss on account of any of
its group, sister or associate entity. Thus group risk arises on account of activities of group,
sister or associate entity. CRA rating model assesses group risk and assigns marks to it. The
extent of risk is measured as a percentage of TNW of the borrowing entity. One of the
barometer of assessing this risk is the conduct of the account of the group/ associate/ sister
company with its lender. The risk is obviously higher if any or all of the group/ associate/
sister company’s account is classified as SMA1 or SMA2. The impact on the borrowing
company can be assessed based on the size, net worth and liabilities of the group/ associate/
sister company. Group Risk has been dropped from the financial risk in regular model for
trade and non trade and is instead now part of management risk.

Financial Statement Quality:

The credit analyst is to comment on the quality, adequacy and reliability of financial
statements/information irrespective of the Risk Rating. This includes consideration of the
size and capabilities of the accounting firm, compared to the complexities of the borrower
and its financial statements. The comments on the quality of financial statements should
include the quality of information provided to the Bank. The Quality is to be indicated as
Excellent/Good/ Satisfactory/Poor. This step is not instrumental in improvement of rating
but is helpful in defining the best possible Borrower Rating.
Risk Score/Rating Transition Matrix:
A major fluctuation in scores resulting in up gradation or deterioration in Rating by more
than one stage is to be commented upon. Up gradation in Rating only on account of higher
score in parameters other than Financial Risk, is to be examined and commented upon. This
provides an additional risk awareness tool for the Credit Ana

under all the three risk areas (Financial, B & I ,Management) as well as hurdle rating
(Minimum required rating) has been prescribed, which is given hereunder in the tabular form.
For borrowers rated below SB-10 (hurdle rating) no fresh/enhancement in existing exposure
is proposed without obtaining approval from appropriate authority. But for scores below
hurdle in Financials, B&I and management risk there is no bar on fresh/enhanced exposure
but after proper justification of the scores below hurdle rate is required to be given in the
proposal.
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REGULAR MODEL HURDLE SCORE & RATINGS

Risk Types Non Trading Trading Services Construction

Existi New Existing New Existing New Existin New
ng Unit Unit Unit g Unit
Financial Risk 22/55 10/25 20/50 10/25 24/50 12/25 34/60 14/25
Business & 10/20 16/30 9/15 16/30 10/20 15/30 9/15 22/40
Industry Risk
Management 13/25 22/45 18/35 22/45 15/30 22/45 13/25 20/35
Risk
Aggregate 49/100 49/100 53/100 53/100 49/100 49/100 56/100 56/100
Hurdle Score
Overall Hurdle SB 10 SB 10 SB 10 SB 10 SB 10 SB 10 SB 10 SB 10
Grade
For further guidelines on CRA regular model, please refer Circular no CRO/RMD-
CRMD/5/2020-21 and CRO/RMD-CRMD/6/2020-21 Date : Friday-6th August 2020;
CRO/RMD-CRMD/13/2020-21 & CRO/RMD-CRMD/12/2020-21 dated 16.09.2020)
Simplified Model

Non Trading Trading Services

Risk Types Existi New Existin New Existing New
ng Unit g Unit Unit
Financial Risk 24/55 10/25 24/55 10/25 24/55 10/25
Business & Industry 8/15 17/30 8/15 17/30 8/15 17/30
Risk
Management Risk 15/30 22/45 15/30 22/45 15/30 22/45
Aggregate Hurdle 47/100 49/100 47/100 49/100 47/100 49/100
Score
Overall Hurdle SB 10 SB 10 SB 10 SB 10 SB 10 SB 10
Grade
# Score Range 45-49 corresponds to SB10. Hence as per New CRA Models SB10 is the
new Hurdle Grade.

Framework for Dynamic Review of internal Ratings:

As per Bank’s Risk Rating Policy, higher risk borrowers or problem exposures, must be
subject to more frequent review. To implement the policy, framework for dynamic review of
internal ratings has been introduced. The salient features of Dynamic review are as under:
(a The frame work will be applicable for total exposure of Rs.10 Crores & above in all
Business Groups including IBG with triggers.
(b)Total exposures of Rs.500 Crs & above (half yearly dynamic review, without triggers)
(c) Dynamic Review of CRA is “purely subjective”, based on both qualitative and
quantitative information.
 Page 223

(d) Only downgrades as part of dynamic review. Upgrades will be based on full review of
annual audited financials

Scope of Review & Rating Downgrade:

a. All material information available internally or externally which have significant

adverse effect on credit profile of the borrower to be considered. Factors / triggers that
have “significant adverse impact” on credit profile of the borrowers are only
considered for dynamic review of rating. An illustrative list of key triggers for dynamic
review is given in circular in detail. Any other scenarios /triggers which may have
significant negative impact on operations of the units and repayment of credit
extended by the Bank, may be used for downgrade.

b. Further, these identified triggers are classified into four categories viz, Financial
Risk, Business & Industry risk, Management Risk and other Risk. Rating downgrade
framework is designed to assess the impact of such triggers. The minimum likely
notches to be downgraded in the internal rating are mentioned in the framework.
The rating downgrade framework is given in detail in the circular.

c. These minimum notches based on unit specific triggers, will be captured in

“Dynamic Review of CRA” format as per Annexure III to arrive at the resultant revised
CRA rating.

d. Only downgrades in internal rating should be done as part of dynamic review.

Upgrades in internal rating should only be done based on regular / full CRA review
based on annual audited financials.

E. Applicability:

There are two types of review under this framework namely trigger based review and
non-trigger based review.

a. Trigger based review: In case of borrowers with exposure of Rs. 10 Crores

& above, Dynamic Review of the rating to be conducted as and when
triggers are observed. This framework will also be applicable to borrowers
rated under CUE model.

b. Non-trigger based review: For borrowers enjoying aggregate limits of

Rs.500 Crores & above, Dynamic Review of the rating is to be conducted at half
yearly intervals even if there is no trigger.

PSUs with Maharatna or Navratna status, will be exempt from the

purview of non-trigger based dynamic review provided there is no
change in their status.
 Page 224

Triggers: A detailed list of triggers is given the circular CRO/RMD-CRMD/7/2019

- 20 dated 04.10.2019. Triggers given in the list are illustrative. Operating unit may choose
any other triggers, which may adversely impact the credit worthiness of the borrower.
There is no limitation on number of Dynamic Reviews for trigger based review and it should
be assessed on “as and when basis”.

Corrective Steps required to be undertaken:

In all cases of trigger based Dynamic review, the future course of action and
roadmap for improving the performance of the borrower has to invariably be
analysed and recorded. An illustrative list of corrective steps is detailed hereunder:
a. In line with increase in risk perception as reflected by rating downgrade,
pricing to be reviewed.
b. Risk Mitigants such as such as escrow of cash flows (if not already done)
additional collaterals / guarantees/ increase in margins commensurate with the
increased risk level may be called for.
c. Option of cancelling unavailed limits may be examined.

d. Exit option, in case of high risk borrowers, may be exercised.

(For further detailed guidelines ,please refer the latest Circular No. : CRO/RMD- CRMD/7/
2019 - 20 dated 04.10.2019.

MAPPING OF INTERNAL & EXTERNAL RATINGS:

Where ever both internal (CRA) &external rating (ECR) are available ,a mapping exercise is
required to be carried out to check whether both internal & external ratings are mapped(in
simple terms in line or not) or not.

The following approach has to be adopted with respect to the mapping exercise at the
time of Credit Risk Assessment as well as review of External Rating:

i. Internal Rating and External Rating match or External Rating is better than
the mapped Internal Rating: No action required.
ii. External Rating is worse than the mapped Internal Rating: Operating Units
have to review the internal rating, considering the additional information factored by
external rating agency as triggers, which may have an adverse impact on the rating of
the unit / borrower, and take a decision either to downgrade or retain the internal
 Page 225

rating.
In case it is decided to retain the rating, justification along with the parameters
identified, has to be provided.
(For further guidelines, please refer Circular no CRO/RMD-CRMD/14/2020 - 21. Date :
Friday - 28th September 2020)

Features of Facility Rating:

i) Facility Rating Design

A Borrowing Company may be availing either one or more of Fund Based (FB) Facilities
such as Working Capital (WC)/Term Loan (TL) or/ and Non- Fund Based (NFB) Facilities
like, Letters of Credit (L C)/Bank Guarantee (BG). All the facilities are to be rated separately
viz., if a Borrowing Company has both WC & TL & two Bank Guarantee Facilities & three
different L/C Facilities; in total, the Company would have one Borrower Rating & seven (i.
e, 1+1+2 + 3 = 7) Facility Ratings.
The pricing of loans, in future, will be linked to Facility Rating after building up adequate
Loss Given Default (LGD) data base. For the present, pricing will continue to be linked to
Borrower rating only.

ii) Facility Hurdle Rate

All facilities are expected to meet the Facility Hurdle Rate of FR10. Reasons for not crossing
this Hurdle Rate would need to be commented upon by the Credit Analyst. Under Facility
Rating, if the score goes below the hurdle rate of FR10, the reasons for low score are to be
given.

iii) Loss Given Default (LGD)

Facility Rating would reflect the degree of severity of loss in the event of default on the
obligation. Facility Rating Grade will thus translate to a LGD Scale, indicating loss
percentage. The present Facility Rating Grades/ Scales are empirically designed to reflect
LGD levels.

iv) Collateral
The Collaterals are an important ingredient of Facility Rating design; their quality and depth
affects the severity of LGD for any facility and hence the Facility Rating itself. As an
element of risk (uncertainty) is involved, prudence is required in assessing the value of the
collateral offered for obtaining credit facility. The security is to be valued as per the extant
instructions of the Bank.
Basel-II does not differentiate between Primary & Collateral Securities and all securities
charged for a loan are designated as “Collaterals”. Thus, while for monitoring of
Drawing Power (DP) or DP related issues in borrowal accounts, the securities charged would
continue to be segregated into Primary and Collateral securities, however, for the purpose of
risk assessment, all securities will be treated as collateral securities.
 Page 226

v) Scoring under Facility Rating

Scoring under ‘Total Security ‘Parameter under Facility Rating requires an in-depth look
into types of Collaterals and their recognition and valuation as per Basel-II/RBI Document
as discussed in Bank’s Collateral Management Policy. This would necessitate detailed
analysis of Collaterals to facilitate scoring.

Note on scoring:
(i) Calculation under ‘Average of last 3 years’ includes latest year.
(ii) In order to qualify for scoring under ‘Average of Last 3 years’ sub-parameter , minimum data
for last two years including the latest year would be required.
(iii) In the event of non-availability of the minimum data as indicated in sub- para (ii) above,
ratio-wise normalization will be done.

(iv) Gross DSCR to be calculated for each year from rating date till the end of term loan. The
minimum of the Gross DSCR ratios across the residual years is to consider for computation
of the ratio of minimum DSCR.
(v) For existing companies seeking additional Term Loan Facilities, Minimum DSCR (for all
loans) would be calculated taking into account the proposed TL Facilities.

SALIENT FEATURES OF CREDIT UNDERWRITING ENGINE (CUE):

Under Project Vivek (New SME delivery model), the credit rating and appraisal process for
the SME portfolio of the Bank has been redesigned (applicable for exposures upto
Rs.50.00 Crores in NBG). One of the key elements of the redesign is the development of
new rating engine for credit decision, which is named as Credit Underwriting Engine
(CUE). A highly predictive credit-underwriting engine has been developed on the basis
of customer’s cash flows and other verifiable information sources such as demographic
information, past account behaviour (both internal as well as external) and objective
analysis of borrower’s qualitative parameters.
CUE rating is a customer centric rating to be used for credit decisions for SMEs across all
the exposure segments upto Rs.50 Crores in NBG i.e. (a) Exposures upto Rs.50 Lacs, (b)
Exceeding Rs.50 Lacs to Rs.5 Crores and (c) Exceeding Rs.5 Crores to Rs.50 Crores.

CUE has been developed statistically using the historical data of our Bank from various
data sources viz. customer information, credit bureau (both commercial and consumer),
existing current account or cash credit account behaviour, financial ratios, and
qualitative questionnaire for general and industry specific activities.

Modular Structure
i. CUE has 7 independent modules (described below in detail) and applicability of
each module varies as per exposure segment / type of borrower
ii. These modules are normalized (switched-on and switched-off) as per the
 Page 227

applicability and availability of information in each module, depending upon type of

customer and exposure
These are the following 7 modules in the CUE (On the lines of Financial Risk, B&I Risk,
Management Risk in CRA exercise),

1. Customer information: The Customer information module quantifies key profile

factors pertaining to borrower’s demographic information such as constitution,
region and length of relationship with our Bank. This module is applicable for all the
three exposure segments, i.e. the PD of this module will be factored into the
borrower rating in all cases.
2. Commercial credit bureau (CIBIL): Information on borrower’s conduct of
accounts across all Banks, as per bureau report is used to determine the bureau
score. Borrower’s commercial related parties are also analyzed using the
commercial credit bureau module.

3. Consumer credit bureau (CIBIL): Borrower’s related parties that are consumers,
e.g. partners, proprietor, directors and guarantors are analyzed using the Consumer
credit bureau module.

4. On-us deposit/ current account behavior: For origination/ takeover cases, if the
borrower has an existing current account with us, its behavior information is
captured in the borrower rating.

5. On-us / internal account behavior of cash credit account: For renewal cases,
the information on behavior of existing cash credit account (which will be called as
cash credit module), is used to determine the PD

6. Financial information: Some of the key financial ratios, as per the latest
redrawn financials from the PACE tool, are used to determine the PD of financial
module.

7. Qualitative Credit Assessment (QCA) module- The QCA captures qualitative

information of the customer in the form of multiple choice questions ranging from 9 to
31 questions, depending on the exposure segment, spanning across the
following 7 categories:
a) Owner / Management
b) Business Plan
c) Business Operations
d) Supplier / Buyer
e) Industry
f) Credit History
g) Relationship with Bank
 Page 228

OTHER IMPORTANT POINTS REGARDING CUE

1) For proposals with exposures exceeding Rs.50 Lacs for which the financial analysis
(PACE) is mandatory, the CUE rating date would be the end date of last month
upto which the bank statement has been collected and analysed through PACE
tool.
2) For proposals <=50 Lacs, the CUE rating date would be the end date of the previous
month of processing commencement date in LOS.
3) CUE rating may be reviewed and re-computed in case the customer comes for
an early renewal/ enhancement after 6 months
4) The CUE rating once validated should not be reviewed /revised within 6 months
from validation
5) For Greenfield units, since the PACE tool is not applicable, hence the financial
module under the CUE will also not be applicable (it will be switched off
automatically) and the weight of the Financial module will get redistributed amongst
the other applicable modules in CUE
6) Risk Rater is authorized to adjust / over-ride bureau delinquency variable based on
justification / documentary evidence provided by RM (SME) in CUE rating
proposal. However Specific approval for the above deviation is required to be
obtained from the sanctioning authority by including the deviation in the template of
the proposal
7) In future all the pricing, deviations, hurdle etc norms as applicable to CRA rating will
be linked to CUE rating, however CRA rating will continue on account of IRB
requirements.
 Page 229

ANNEXURE I:

Scoring range for ratings in Regular Model-Non-Trade

Borrower
Score range Risk Level Comfort Level
Rating
Virtually Absolute
SB01 95 – 100 Virtually Zero Risk
Safety
SB02 91 – 94 Lowest Risk Highest Safety
SB03 87 – 90 Lower Risk Higher Safety
SB04 83 – 86 Low Risk High Safety
Moderate risk with
SB05 78 – 82 Adequate Safety
Adequate Cushion
SB06 73 – 77
Moderate Risk Moderate safety
SB07 67 – 72
SB08 61 – 66 Above Safety
Average Risk
SB09 55 – 60 Threshold
Acceptable Risk
SB10 49 – 54 (Risk Tolerance Inadequate Safety
Threshold)
SB11 43 – 48 Borderline Risk Low Safety
SB12 37 – 42 High Risk Lower Safety
SB13 31 – 36 Higher Risk Lowest Safety
SB14 25 – 30 Substantial Risk
NIL
SB15 <=24 Pre-Default Risk

Scoring range for ratings in Regular Model-Trade

Borrower
Score range Risk Level Comfort Level
Rating
Virtually Absolute
SB01 95 - 100 Virtually Zero Risk
Safety
SB02 91 - 94 Lowest Risk Highest Safety
SB03 87 – 90 Lower Risk Higher Safety
SB04 83 - 86 Low Risk High Safety
Moderate risk with
SB05 79 - 82 Adequate Safety
Adequate Cushion
SB06 75 - 78
Moderate Risk Moderate safety
SB07 70 - 74
SB08 65 - 69 Above Safety
Average Risk
SB09 60 – 64 Threshold
Acceptable Risk
SB10 53 - 59 (Risk Tolerance Inadequate Safety
Threshold)
SB11 46 – 52 Borderline Risk Low Safety
 Page 230

SB12 39 – 45 High Risk Lower Safety

SB13 32 – 38 Higher Risk Lowest Safety
SB14 25 – 31 Substantial Risk NIL
SB15 <=24 Pre-Default risk

Scoring range for ratings in Regular Model-Services

Borrower
Score range Risk Level Comfort Level
Rating
Virtually Absolute
SB01 95 – 100 Virtually Zero Risk
Safety
SB02 90 – 94 Lowest Risk Highest Safety
SB03 84 – 89 Lower Risk Higher Safety
SB04 79 – 83 Low Risk High Safety
Moderate risk with
SB05 74 – 78 Adequate Safety
Adequate Cushion
SB06 69 – 73
Moderate Risk Moderate safety
SB07 64 – 68
SB08 59 – 63 Above Safety
Average Risk
SB09 54 – 58 Threshold
Acceptable Risk
SB10 49 – 53 (Risk Tolerance Inadequate Safety
Threshold)
SB11 43 – 48 Borderline Risk Low Safety
SB12 37 – 42 High Risk Lower Safety
SB13 31 – 36 Higher Risk Lowest Safety
SB14 25 – 30 Substantial Risk
NIL
SB15 <=24 Pre-Default Risk
 Page 231

Key Learning Points:

- Understanding risk vis-à-vis the business of banking along with various types of risk
faced by the Bank.
- A brief over overview of BASEL II norms along with its risk framework
- Risk measurement and the need to measure it.
- Various models adopted by the Bank to measure credit risk. The relationship of
CRA ratings with PD, EAD and LGD.
- Applicability of various models of CRA rating based on the exposure and activity.
- Discussing each components of risk measurement under CRA rating and weightage
assigned to it based on the model adopted.
- Significant sub components viz. forex risk, country risk, qualitative parameters,
treatment of contingent liabilities along with relevant bank’s instructions.
- External Credit Ratings and their relevance in the CRA rating framework along with
bank’s instruction.
- The applicability of facility ratings and its components.
- Understanding the need and objectives of dynamic review framework.
- Applicability of dynamic review framework
- Process of dynamic review along with authority structure
 Page 232

Check your progress: Multiple Choice Questions

1 In case an existing units enjoying credit facilities from us, fails to pass entry barrier,
what course of action is required
A Exit from the exposure
B Neither renewal nor enhancement is possible
C Rating should be downgraded to worse of actual CRA rating or SB- 11
D Penal interest of 2% is to be applied

2 Under Credit Risk assessment exercise(CRA),Units are not assessed under which of
the following Risk
A Financial Risk
B Operational Risk
C Business & Industry Risk
D Management Risk

3 A proposal for sanction of various limits of ABC Pvt Ltd is being undertaken by
appraising Officer in December 2020.The unit will be involved in manufacturing of
moulds. The project is likely to start commercial operation by 31/05/2021.The CRA of
the unit will be based on which of the following Financial Statements
A Projected 31.03.2022
B Projected 31.03.2023
C Projected 31.03.2024
D Audited 31.03.2025

4 A customer is enjoying One cash credit limit, two term loan, one BG limit & one LC
limit, which of the following option is correct regarding facility rating
A One borrower rating & one facility rating
B One borrower rating & two facility rating
C One borrower rating & three facility rating
D One borrower rating & five facility rating

5 Credit Risk Assessment Models are applicable to all the following segments except

A C&I
B Personal
C SSI
D SBF

1-C 2-B 3-B 4-D 5-B

 Page 233

Apply Your Knowledge

Caselet -1

ABC Pvt. Limited is enjoying a cash credit limit of Rs. 12.00 crores from our SME Nagar
Branch. The promoters of the company have recently floated a new company viz. PQR Pvt.
Ltd. for setting up of a unit for manufacturing of Dye. The new company was incorporated on
01.01.2020 and has been maintaining a current account with our Branch. The promoters have
approached the Branch for sanction of a term loan of Rs. 5.00 Crores and working capital of
Rs. 12.00 Crores for their new unit. The company has procured land and almost completed
the construction of the factory building. The loan required by the unit is for purchase of
machinery. Mr. Meticulous obtained the relevant documents along with the detailed project
report from the applicant. As per the project report, the date of commencement of commercial
operation of the unit shall be 30.09.2021.

1 Which of the following modules shall not be reckoned for arriving at the CUE rating?
A Financial Module
B Current Account Module
C Customer Information
D QCA

2 The CRA of the unit will be based on which of the following Financial Statements?
A Projected 31.03.2023
B Projected 31.03.2022
C Projected 31.03.2021
D Audited 31.03.2020

3 The CRA rating of the unit arrived at by Mr. Meticulous is SB-4. What is the final rating
acceptable for the unit?
A SB-4
B SB-5
C SB-6
D Depends on the value of collateral

4 The CUE rating of the unit arrived at by Mr. Meticulous is CUE-8. He is now confused
as to which rating he should consider for arriving at the pricing of the proposed credit
facility?
A CUE Rating
B CRA Rating
C Worse of A & B
D Better of A & B

5 The collateral being offered by the unit is 25%. This will result in downgrade of CRA
rating by how many notches?
A Downgrade by one notch
B Downgrade by two notches
C Downgrade by three notches
D There will not be any downgrade as CRA is not linked to collateral value.
 Page 234

Caselet -2

ABC Pvt. Limited is presently enjoying a working loan facility of Rs. 3.00 Crore from HDFC
Bank for their garments manufacturing business. The company is also enjoying Term Loan
facility of Rs. 4.00 Crore (present outstanding) from SIDBI. The company is also engaged in
export of garments to high-risk countries. The share of exports in the total revenues of the
company is 25.9%. The promoters, on 04.11.2020 have applied for takeover of facility at
HDFC Bank.

6 What type of rating/s are required to be done by the branch for takeover of facilities?
A Only CRA rating
B Only CUE Rating
C Both CRA and CUE Rating
D Data is insufficient for answering

7 What can be the possible risk mitigations against export to high risk country?
A LC from a first class Bank
B Export to be made against advance payment
C ECGC cover
D All the above

8 If CRA rating is at all required to be done, which model of CRA rating should be
adopted for measuring credit risk?
A CRA Simplified Trade
B CRA Simplified Non Trade
C CRA Regular Trade
D CRA Regular Non Trade

9 Which type of rating shall be reckoned for the purpose of compliance of take over
norms?
A CRA rating
B CUE Rating
C Worse of CRA and CUE Rating
D Best of CRA and CUE Rating

1 0 The CUE rating of the unit should be calculated as on______________

A 31.03.2020
B 30.09.2020
C 31.10.2020
D 30.11.2020

ANSWERS

1-A 2-A 3-B 4-A 5-D

6-C 7-D 8-D 9-A 10-C
 Page 235

Circular References: The chapter has incorporated the instructions of the undernoted
circulars:

CRO/RMD- CRMD/7/2019 - 20 dated 04.10.2019

CRO/RMD-CRMD/4/2020-21 dated 06.08.2020
CRO/RMD-CRMD/5/2020-21 dated 06.08.2020
CRO/RMD-CRMD/6/2020-21 dated 06.08.2020
CRO/RMD-CRMD/7/2020-21 dated 20.08.2020
CRO/RMD-CRMD/12/2020-21 dated 16.09.2020
CRO/RMD-CRMD/13/2020-21 dated 16.09.2020
CRO/RMD-CRMD/14/2020 – 21 dated 28.09.2020
 Page 236

BACK TO INDEX

CHAPTER 6B

PREPARATION OF PROPOSAL

For detailed appraisal & assessment of proposal and furnishing all the relevant
information required for taking a credit decision in a proper sequence, bank has designed
standard formats, where all the information related to the unit is provided and the same
is presented to the appropriate sanctioning authority.

Depending upon the exposure and purpose for which the sanctioning authority is being
approached, under noted formats have been prescribed.

Sr No Format name Detail Purpose

1 Format S2 For Exposure from Rs. 25 lacs up to Rs 1 Cr
2 Form DDS For total exposure above Rs 1 crore up to Rs 50 crore from the
banking system
3 Form DD (For total exposure of above Rs 50 crore, from the banking
system) Loan Proposal Due Diligence Format, a detailed appraisal
memorandum, which will remain with the recommending offices
4 Form S (For total exposure of above Rs 50 crore from the banking system)
(Extracted from form DD by LLMS Loan Proposal Sanction Format,
which will be put up to the Sanctioning / Approving Authority
5 From M Loan Proposal Modification Format, is used for Modifications
etc., (i.e. Change in terms and conditions (Pricing / Security / Margin /
Covenants and other matters), Sanction of Adhoc limits and
Interchangeability of limits)

However for R&DBG branches only, after the introduction of Project Vivek to simplify
the entire process the following formats have been used, which will be used only for those
proposals which are eligible to be processed under Project Vivek. Following formats have
been prescribed under Project Vivek for all exposures above Rs 50 lacs (Up to 50 lacs
existing formats being used will continue to be used). TEV stands for Techno Economic
Viability has to be done wherever needed

Sr No 1 2 3
Name of Loan Simplified Automated Quick Renewal format Thorough
the formats Origination renewal formats
formats
For new loan Renewal of WC limit (at existing level) of all For thorough
proposal eligible accounts having exposure more than Rs. /comprehensive
50 lacs and upto Rs.50 cr, can be done without renewal
approaching the Sanctioning Authority
 Page 237
BACK TO INDEX

CHAPTER- 7

SME ASSET PRODUCTS

NEW DEFINITION OF MICRO, SMALL AND MEDIUM ENTERPRISES

Government of India (GoI), vide Gazette Notification S.O. 2119 (E) dated 26.06.2020 has
notified new criteria for classifying the enterprises as Micro, Small & Medium Enterprises,
w.e.f. 1st July 2020.
2. Subsequently, the Reserve Bank of India (RBI) has issued instructions vide its
Circular no. RBI/2020-2021/10; FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated
02.07.2020 and clarifications vide its Circular no. RBI/2020-2021/26; FIDD.MSME &
NFS.BC.No.4/06.02.31/2020-21 dated 21.08.2020.

3. The details of revised criteria for classifying an enterprise as Micro, Small and
Medium are as under:
3.1 Classification of Enterprises as per new definition
An enterprise shall be classified as a Micro, Small or Medium enterprise on the basis of the
following criteria, namely:
(i) a micro enterprise, where the investment in plant and machinery or equipment does not
exceed one crore rupees and turnover does not exceed five crore rupees;
(ii) a small enterprise, where the investment in plant and machinery or equipment does not
exceed ten crore rupees and turnover does not exceed fifty crore rupees; and
(iii) a medium enterprise, where the investment in plant and machinery or equipment does
not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
MSMED Act, 2006. As per para 2 of the said Gazette notification all enterprises are
required to register online and obtain ‘Udyam Registration Certificate ’.
Operating units should, therefore, obtain ‘Udyam Registration Certificate (URC) ’from the
MSME entrepreneurs.
 Page 238

CREDIT GUARANTEE SCHEME (CGS) OF CREDIT GUARANTEE FUND TRUST FOR MICRO AND
SMALL ENTERPRISES (CGTMSE)
1. Credit Facilities eligible under the Scheme:
Any collateral / third party guarantee free credit facility (both fund as well as non-fund
based) extended by the Bank to new as well as existing Micro and Small Enterprise,
including Service Enterprises, with a maximum credit cap of Rs.2 crore (Rupees two
crore only) and for retail trade Rs 1 crores per borrower are eligible under the scheme.
Credit facilities above Rs.50 lacs must be internally rated and should be eligible for Bank
finance.
Following credit facilities are eligible for coverage under Credit Guarantee Scheme of
CGTMSE.
a) Credit facilities to all new and existing Micro and Small Enterprises (both in the
manufacturing sector as well as in the service sector).
b) Both Fund & Non -fund based Credit facilities viz. Term loan, working capital,
composite credit, LCs, BGs etc. can be covered.
2. Conditions for coverage under the scheme:
a) No collateral security and / or third party guarantee is taken by the Bank. Under the
scheme, “Primary Security” shall mean the assets created out of the credit facility so
extended and/or existing unencumbered assets which are directly associated with the
project or business for which the credit facility has been extended.
b) Partial Collateral Security under CGS: w.e.f 01.04.2018: CGTMSE has now
introduced a new “Hybrid Security” product allowing guarantee cover for the portion of
credit facility not covered by collateral security. In the partial collateral security model,
the CGTMSE has allowed to obtain collateral security for a part of the credit facility,
whereas the remaining part of the credit facility, up to a maximum of Rs.200 lakh, can
be covered under Credit Guarantee Scheme of CGTMSE. CGTMSE will, however, have
pari-passu charge on the primary security as well as on the collateral security provided
by the borrower for the credit facility. All other covenants of the current CGS would
apply mutatis mutandis to such credit proposals with regard to other operational
modalities, etc. as modified from time to time.

There are two types of primary securities available for the Bank under the broad head
‘Primary Security’ on which the Bank can take a charge for the said credit facility to
qualify for CGTMSE guarantee. These are:
i) Tier-I: Assets created out of the credit facility so extended.
ii) Tier-II: Existing unencumbered assets which are directly associated with the project/
business for which the credit facility is extended i.e. Land & Building of factory office/
godown which pertains to the unit and associated with the project/business.
A charge on assets acquired out of the loan sanctioned i.e. Tier-I assets is
necessary for invoking guarantee.
 Page 239

Extent of Guarantee Cover available: (w.e.f. 01.04.2018).

Category Maximum extent of Guarantee where credit facility
is

Up to Rs.5 lakh Above Rs.5 Above Rs. 50

lakh & up to lakh & up to
Rs. 50 lakh Rs. 200 lakh

Micro Enterprises 85% of the amount 75% of the 75% of the

in default subject to amount in amount in
a maximum of Rs. default subject default
4.25 lakh to a maximum
of Rs.37.50
lakh

Women entrepreneurs/ Units 80% of the amount in default subject to

located in North East Region a maximum of Rs.40 lakh
(incl. Sikkim) (other than
credit facility up to 5 lakh
to micro enterprises)

All other category of 75% of the amount in default subject to

borrowers a maximum of Rs.37.50 lakh

Retail Traders up to Rs.100 50% of the amount in default subject to

lakh to MSE borrower a maximum of Rs.50.00 lakh

Salient Features:
a) Credit granted to Educational/ Training institutions and SHGs are not eligible for
coverage.
b) All fund/non-fund based facilities are covered.
The following are changes in Credit Guarantee Scheme of CGTMSE since 20/02/2018.
i. Charging Annual guarantee fees (AGF) on outstanding loan amount rather
than sanctioned limit.
ii. Expanding the Coverage of the Credit Guarantee Scheme to cover MSE
retail Trade segment upto Rs.1 Crore
iii. Allowing loans with partial collateral security under credit guarantee
scheme.
c) The main objective of the scheme is to give importance to project viability and secure the
credit facility purely on the primary security of the assets financed.
d) Absorption of Guarantee Fee (GF)/ Annual Guarantee Fee (AGF) by the Bank
for Credit Guarantee Coverage: It has now been decided that the Annual Guarantee Fee
(AGF) for all loans (CC & TL) sanctioned on or after 01.07.2017 (irrespective of the
 Page 240

amount, including renewal of Cash Credit facilities) must be borne by the borrower. (e-
Circular SMEBU-CGTMSE/17/17-18 dated 05.07.2017)
e) Time norm for lodging of application for guarantee cover: Application for
guarantee cover can be lodged with the Trust for credit facilities sanctioned in a
particular calendar quarter, latest by the end of the next calendar quarter.
f) Time norm for payment of Annual Guarantee Fee (AGF):
i) Annual Guarantee Fee (AGF):
a) Date of payment of First Annual Guarantee Fee (AGF) is linked to
Disbursement/Demand Advise date, whereas subsequent payment of AGF is linked to
close of the financial year.
b) While taking a guarantee cover, Annual Guarantee Fee (GF) at specified rate is to
be paid to the Trust within 30 days from the date of Demand Advice Notice (DAN)
generated by CGTMSE or from the date of first disbursement of credit extended by the
Bank to a borrower whichever is later but within 30 days from the date of DAN. In case
of working capital, the payment is to be made within one month from the date of demand
advice.
g) Annual Guarantee Fee (AGF) : Payment of Annual Guarantee Fee (AGF) is
linked to close of the financial year.
h) Method of payment of Annual guarantee fee: All payment of Guarantee fee has to be
made through the NEFT/RTGS payment module.
i) Tenure of the guarantee: The guarantee cover commences from the date of payment of
guarantee fee and runs through the agreed tenure of guarantee.
j) Enhancements / Additional Credit Facilities and Renewal of Guarantee Cover for
working capital limits: All the enhancements/ additional credit facilities and renewal of
Guarantee Cover have to be notified in CGTMSE Site and AGF is required to be paid for
the enhanced portion.

(For details please refer to Circular No. NBG/SMEBU-CGTMSE/37/2019-20 dated

08/08/2019. )
 Page 241

PRADHAN MANTRI MUDRA YOJANA (PMMY)

The detailed features of the PMMY scheme and guidelines are:

Features of the scheme:

S. No. Parameters
1. Category of Shishu - Loan upto Rs. 50,000
Loan Kishore - Loan from 50,001 to Rs. 5 lakh
Tarun - Loan above Rs. 5 lakh to Rs 10 lakh
2 Margin Margin Upto Rs. 50,000 NIL
Rs. 50,001 to Rs. 10 lacs 20%
3 Repayment TL/Dropline OD - below Rs. 5 lakh : Max. 5 years including maximum
moratorium period of upto 6 months
TL/Dropline OD - from Rs. 5 lakh to Rs. 10 lakh : Max. 7 years including
maximum moratorium period of upto 12 months

Repayment of TL to be made in EMI only

CC : On Demand
4. Processing Up to Rs 5 Lacs /- Nil
Fees
Above Rs 5 Lacs to Rs 10.00 Lakhs –0.50% of Loan amount (in addition GST
as per applicable rates to be recovered)
5. Eligibility Micro and Small Enterprise, including small retail traders are eligible to be
covered.
6 Primary TL : Hypothecation of Plant and machinery to be purchased out of Bank finance
Security CC : Hypothecation of all Stocks and Receivables.
7. Collateral No collateral security to be obtained for all loans up to Rs.10 lacs. To be covered
the borrowers
8. Repayment WC : Kishore and Tarun loans (for loans above Rs. 50,000 to Rs. 10 lacs,
covered under PMMY) will either be payable on demand (subject to review /
renewal at the periodicity applicable to the product / scheme) or may have a
repayment schedule for 3 – 5 years including a moratorium of upto 6 months.
depending on the activity/ income generation of the borrower. However,
Shishu loans will be sanctioned only on repayment basis for a period of 3-5
years including a moratorium of upto 6 months depending on the activity /
income generation of the borrower.

TL : In 3 - 5 years including a moratorium of upto 6 months depending

 Page 242

SME e-SMART SCORE UNDER CONTACTLESS LENDING PLATFORM (CLP) LOAN ( > Rs.10.00
LACS TO Rs.100.00 LACS AND SOURCED FROM CLP )
Parameter Description
Facility Cash credit and Term loan

a. 3-year ITR and Non-composite GST Return.

b. Presumptive tax: where borrowers have filled either ITR4 or ITR
4S return.
c. 1 Year ITR: Where borrower is having at least one year ITR
Target All MSME Units including Proprietorship Firm/ Partnership Firm/
Group Closely held public & private limited company in Small & Medium
industrial manufacturing, trading and service sector under SSI, C & l
and SBF Segment having an in-principle sanction through
Contactless lending platform; currently at: URL for branch user login:
www.psbloansin59minutes.com/sidbi
Bank Specific URL for data entry:
www.psbloansin59minutes.com/sbi
Market URL for data entry: www.psbloansin59minutes.com/
Purpose To provide hassle free finance for financing their multiple requirements
including normal working capital/ Term loan related to their business
activity.
Eligibility a) Corporate Borrowers: Age criteria is waived.
b) Non Corporate Borrowers :The chief promoter /chief executive should
be 18 to 65 years of age.
c) All the deviations in financial parameters will be approved by
sanctioning authority. However, if the deviations fall within the
purview of the Circular No. CCO/CPPD-ADV/125/2019 – 20
dated 19.11.2019, leads to be rejected
d) The applicant must obtain a minimum overall score of 60% with
a minimum of 50% under each sub-head like Personal Details,
Business Details, Collateral Details of our internal scoring model.
Loan Amount Minimum: > Rs. 10.00 lacs
Maximum: Rs. 100.00 lacs
Interest Rate Linked with EBR (CMR score would be applicable for interest
rate calculation for loans upto Rs.100.00 lacs)
Security Primary Security:
• Working capital: Hypothecation/Pledge of stocks, book debts and
other current assets.
• Term Loan: Charge by way of hypothecation / pledge
/ mortgage of entire assets created out of bank finance..
 Page 243

Collateral Security:

In eligible cases, Collateral Security n e e d not be i n s i s t e d as the

loans are to be covered under CGTMSE.

If the borrower chooses to opt of CGTMSE(not willing to bear the

guarantee fee & premium), then a written communication to be
obtained and kept on record and collateral security as per Bank's
norms need to be obtained.

Personal Guarantee:
Personal guarantee of all the promoters, directors, partners.
Third party guarantee in case property offered is in the name of a
person other than promoters / directors / Partners wherever
applicable.

Go/No Go SME e-SMART scoring model on CLP ( CMR based go/no go

criteria criteria would not be applicable for Go/No-Go exercise)
Takeover Not Applicable
Norms
Staff As the data is validated and pre- fetched from GST site,
accountability Income tax site, staff accountability will not be carried out for the
following points:
a. Verification of IT returns
b. Verification of GST returns
c. Verification of Balance Sheet
d. Assessment of the loan amount
 Page 244

SME e-SMART SCORE UNDER CONTACTLESS LENDING PLATFORM (CLP) LOAN ( > Rs.100.00
LACS TO Rs.500.00 LACS AND SOURCED FROM CLP )
Parameter Description
Facility Cash credit and Term loan

a. 3-year ITR and Non-composite GST Return.

b. Presumptive tax: where borrowers have filled either ITR4 or ITR
4S return.
c. 1 Year ITR: Where borrower is having at least one year ITR
Target All MSME Units including Proprietorship Firm/ Partnership Firm/
Group Closely held public & private limited company in Small & Medium
industrial manufacturing, trading and service sector under SSI, C & l
and SBF Segment having an in-principle sanction through
Contactless lending platform; currently at: URL for branch user login:
www.psbloansin59minutes.com/sidbi
Bank Specific URL for data entry:
www.psbloansin59minutes.com/sbi
Market URL for data entry: www.psbloansin59minutes.com/
Purpose To provide hassle free finance for financing their multiple requirements
including normal working capital/ Term loan related to their business
activity.
Eligibility e) Corporate Borrowers: Age criteria is waived.
f) Non Corporate Borrowers :The chief promoter /chief executive should
be 18 to 65 years of age.
g) All the deviations in financial parameters will be approved by
sanctioning authority. However, if the deviations fall within the
purview of the Circular No. CCO/CPPD-ADV/125/2019 – 20
dated 19.11.2019, leads to be rejected
h) The applicant must obtain a minimum overall score of 60% with
a minimum of 50% under each sub-head like Personal Details,
Business Details, Collateral Details of our internal scoring model.
Loan Amount Minimum: > Rs. 100.00 lacs
Maximum: Rs. 500.00 lacs
Interest Rate CUE based interest rate as per circular no. CCO/CPPD-ADV/202/2018-19
dated 30.03.2019 for Cash Credit and Circular No. CCO-CPPD-
INT/123/2017-18 dated 01.03.2018 for term loan.
Security Primary Security:
• Working capital: Hypothecation/Pledge of stocks, book debts and
other current assets.
• Term Loan: Charge by way of hypothecation / pledge
/ mortgage of entire assets created out of bank finance..

Collateral Security:

In eligible cases, Collateral Security n e e d not be i n s i s t e d as the

 Page 245

loans are to be covered under CGTMSE.

If the borrower chooses to opt of CGTMSE(not willing to bear the

guarantee fee & premium), then a written communication to be
obtained and kept on record and collateral security as per Bank's
norms need to be obtained.

Personal Guarantee:
Personal guarantee of all the promoters, directors, partners.
Third party guarantee in case property offered is in the name of a
person other than promoters / directors / Partners wherever
applicable.

CUE Rating To be carried out

Takeover Applicable
Norms
Staff As the data is validated and pre- fetched from GST site,
accountability Income tax site, staff accountability will not be carried out for the
following points:
a. Verification of IT returns
b. Verification of GST returns
c. Verification of Balance Sheet
d. Assessment of the loan amount
 Page 246

STAND UP INDIA (SUI) SCHEME

The Stand up India scheme was launched by the Prime Minister on 05.04.2016. The
scheme endeavors to create an eco system for SC, ST and women entrepreneurs, which
facilitates and continues to provide a supportive environment for doing business.
The objective of Stand Up India scheme is to facilitate sanction of bank loans between
Rs. 10 lakhs and Rs. 1 crore to atleast one Scheduled Caste (SC) or Scheduled Tribe
(ST) borrower and at least one women borrower per Bank branch for setting up
a Greenfield enterprise in FY 2016-17. The enterprise may be in manufacturing,
services or the trading sector. In case of non-individual enterprises atleast 51% of the
shareholding and controlling stake should be held by SC / ST or Women entrepreneur.
The scheme, which covers all branches of Scheduled Commercial Banks, can be accessed
in three potential ways:
• Directly at the branch
• Through SIDBI’s interactive Stand up India portal called www.standupmitra.in
(accessible at home / branch / through LDM / Common Service Centres (CSCs)).
The Bank’s guidelines of the Stand Up India scheme based on GOI’s guidelines are as
under:
S. Parameters Proposed Terms
No.
1. Target Group SC/ST and Women entrepreneurs
2. Purpose To meet all kinds of credit requirement for setting up
Greenfield Projects under manufacturing, services or
the trading sector.
3 Type of facilities Composite Loan (Working Capital facilities / Term
Loan)
4. Quantum of Minimum – More than Rs. 10 lakhs
Finance Maximum – Rs. 1 crore
5 Repayment for Maximum of 7 years
Term Loans (including moratorium period upto 18 months)
 Page 247

ASSET BACK LOAN SCHEMES: ABL , ABL CRE-CP AND ABL - RH

SCHEME ASSET BACK LOAN ASSET BACK LOAN CRE ASSET BACK LOAN
CP RH
Target All Business Units mfg Proprietorship/Partnership/Company
Group and services activities
along with self-employed
and professional
individuals covered by
MSMED Act 2006,
wholesale / retail trade.
Purpose For build-up of current Creation/acquisition of real Creation / Acquisition
assets and fixed assets estate such as office of Residential Real
needed for buildings, retail space, Estate.
business purpose, capacity industrial or warehouse
expansion, modernization, space, multiplex, hotels,
short term working capital restaurants, gymnasium,
(including shoring up of amusement parks, cold
Net Working Capital, etc). storage etc. where the
prospect for repayment
would generally be lease or
rental payment or sale of
asset.
Nature Fund Based (FB) and Non Fund based (NFB)
of
facility
Type of loan Drop-line OD/Cash Credit / Drop-line Overdraft Term Loan
NFB facility/NFB
Eligible Existing Customer already availing credit facilities from us.
Customers • New units with marketable assets to offer as security.
• Take-over of existing units from other Banks/ FIs with satisfactory track
record.
Take over Take-over of existing units from other Banks/ FIs Normal Take over
Criteria with satisfactory track record. (Credit Information Report norms applied.
to be obtained)
LTV% Immovable property: 60% of Immovable property: 50% of Immovable property:
the realisable value the realizable value 60% of the realizable
value
 Page 248

Loan Minimum loan amount: > Minimum loan amount: Rs.10 Minimum: Rs 50
Amount Rs 10 lacs lacs. lakhs.

• Maximum loan amount: Maximum loan amount: Metro Maximum : up to Rs

Rs. 20 crores & Urban Centers: Rs.50 Crs 100 crores*

Semi-Urban Centers: Rs.20

Crs

Rural Centers: Nil

Repayment 12 Months to 240 Months 12 Months to 72 Months 12 months to 84

months
Cash Credit: On demand. If the repayment is coming
from rental income, based on
cash flows the loan can be
sanctioned upto 120 months

Renewal / Drop line Overdraft: No renewal of limit. Review has to be No renewal of limit.
Review carried out annually Restitution of limit is allowed/fresh
(Restitution) sanction under ABL. Review has to be
carried out annually
Cash Credit (Under ABL only): To be renewed once in two and Restitution
years with yearly review for all satisfactorily conducted /enhancement in
accounts which are not in SMA category during the last 12 limits not permitted.
months.

Stock Quarterly Operational Data Cash Flow statement for Cash flow statement on
Statement / cum status of working capital Builder Finance on Quarterly
Cash Flow funds statement on Quarterly basis in the month May/ Quarterly basis. (May /
basis. (May/Aug/Nov/Feb) Aug/Nov/Feb. Aug / Nov / Feb).

Circular No NBG/SMEBU-SBI ABL/78/2018-19 dated 20 March 2019

Circular No.: NBG/SMEBU-SBI ABL/34/2020 - 21 Date: Fri 7 Aug 2020

Circular No.: NBG/RE,H^HD-BF/3/2020 – 21 Date: Tue 28 Apr 2020

 Page 249

e- DFS (ELECTRONIC DEALER FINANCE SCHEME)

SBI introduced e-DFS in 2009 to extend loans to dealers/distributors of Industry Majors, with whom
Bank has entered into tie-up for financing their dealers under various terms and conditions, for the
purchase of finished goods from Industry Majors.
The newly developed Dealer Financing system aims to automate the loan disbursal and interest
recovery process, and provide a repayment model through the Internet banking (INB) system of the
Bank. This system provides facilities like online access to dealers account, online remittance to the
Industry Major from Dealers account for the invoices, online tracking, repayment & monitoring.
The scheme offers loans under concessionary rate of interest and liberalized terms and conditions on
the strength of Industry Major's comfort in stopping further supplies to the dealer in case of non-
payment within due date. Bank has tie up with Industry Majors in all major Sectors like Auto (Tata
Motors, Maruti Suzuki, Hyundai Motors, Honda Cars), FMCG, Consumer Durables (Hindustan
Unilever, ITC, LG, Philips, Videocon), Oil (BPCL, HPCL, IOCL), Steel (Steel Authority of India
Limited, Tata Steel, Jindal Steel) to name a few.
Key Features
✓ Robust & secure electronic platform for financing.
✓ 100% invoice financing.
✓ Minimum Collateral/Nil collateral facility also available.
✓ Flow of transactions is on real time basis.
✓ Need based financing based on projected sales.
✓ Competitive pricing linked to MCLR/EBLR.
✓ No financial recourse to Industry Major.
✓ Pre-approved Stand by Line of Credit (for seasonal requirements).
✓ User Friendly and customizable MIS reports.
✓ Reduced Intervention of Branches for transactions.
✓ Provision of grace period for repayment.
✓ Dedicated customer support over call and e-mail.
✓ Eligibility Criteria
✓ New /Existing dealers of Industry Majors with whom bank has a tie up.
✓ Comfort Letter to be provided by the Industry Major.
 Page 250

✓ 100% Hypothecation of stock financed by SBI and receivables related to such stocks including
advance remittance made to Industry Major.
✓ Personal guarantee of all partners/directors.
✓ Comfort from Industry Majors
✓ Company will recommend/introduce the Dealers after completing due diligence on the dealer
through the Comfort Letter/Introduction Letter, providing sales (actual & estimates), Indicative
limit & ad-hoc limit, Credit Period etc. recommended.
✓ Stop supply of goods from all the channels in case of default to Bank / FI.
✓ In case of default, company will support the bank in recovery of dues on best effort basis.
✓ Company will arrange to divert the stocks of the defaulted Dealers/Distributors, to other
Dealer/Distributor for eventual sale and recovery on best effort basis as per the prevailing market
price.
✓ Any dues to the Dealer will be passed on to the Bank by Company in case of default by the
Dealer after satisfying the dues to them.

Parameters Latest Instructions

Limits sanctioned For New Dealers: Nil Collateral Security to be extended to New Oil dealers
to Petroleum fulfilling undernoted criteria
Dealers of 3 Oil ✓ Dealership of 5 years or more with respective IM.
PSUs (IOCL, ✓ Conduct of the account with SBI / other bank is satisfactory.
BPCL & HPCL) (These instructions are for new dealers on boarded).
Vide approved For Existing dealers which are on boarded, An additional incremental
note dated portion of enhancement may be extended at Nil Collateral for the existing
19.05.2017 by dealers also.
MD (R & DB) For existing dealers where enhancement is not sought, Collateral Security
which has been obtained will not be released.
Rate of Interest applicable for existing limit with collateral will continue for
the enhanced limit also.
Coverage of e- Limits upto Rs.1.00 crores, can be covered under CGTMSE as per
DFS as per e-Circular: NBG/SMEBU-CGTMSE/70/ 2017-18 dated 31.03.2018.
CGTMSE norms Annual Guarantee Fee to be borne by the dealers.
CGTMSE coverage will be deemed to be collateral backed and ROI with
Collateral will be applicable in such cases.
Stock Statement Monthly in all the cases.
Inspection Monthly in all the cases

However, immediate inspection to be carried out on account becoming

inactive and monthly till account becomes active.
 Page 251

SME OPEN TERM LOAN (SME-OTL)

Product Consolidated
Parameters
Nature Pre-approved term loan facility with option of multiple
of disbursements for multiple purposes
Product
Target • All units under manufacturing sector and;
Group
• Under Service Sector: Healthcare Industry )Hospitals, Doctors, Pathological Labs
and Nursing Home(, Hospitality Industry )Hotels, Restaurants, etc(, and Transport
operators with minimum 25 vehicles
Purpose Any genuine commercial purposes in the same line of activity, with
regular business, of the customer. These would include:

• Expansion and modernization

• Substitution of high cost debts/high cost term debts of other banks/FIs
• Design and introduction of new-layouts in the factory to enhance productivity
• Up gradation of technology & energy conservation schemes/ machinery
• Acquisition of software, hardware, consumable tools, jigs, fixtures, vehicles,
equipment, furniture upholstery, etc.
• Acquisitions of ISO & other similar certifications
• Visits abroad for acquiring technology, finalizing business deals, participating in
exhibitions/fairs for market promotion, etc.
• R&D activities of the units in overall business development objective

• The above list is only illustrative. The spirit of the guidelines should be followed and
loans for any legitimate requirement connected with the business activity of the
applicant borrower )s( should be considered.
Quantum • Both manufacturing and services enterprises: 20% of total limit sanctioned with
of loan a maximum of Rs. 8 crores
For expansion, modernization, technology up-gradation purposes:
i( For the purpose of creation of tangible assets: 20% of total limit sanctioned with
a maximum of Rs. 8 crores.

ii( For business development expenditure incurred for creation of intangible assets
applicable to both manufacturing and services sector:
20% of total limit sanctioned with a maximum of Rs. 2 crores
 Page 252

AAROGYAM HEALTHCARE BUSINESS LOAN

Parameters Consolidated Features

Target Group · Hospitals/ Nursing Homes/Clinics/Medical Colleges
· Manufacturers (both Medical professionals as well as non-
medical professionals) of healthcare products.
· Manufacturers and suppliers of medical oxygen, Oxygen
cylinders, Oxygen concentrators, Pulse Oximeters.
· Manufacturers of permitted drugs (including Covid-19 drugs),
Vaccines, Ventilators, PPEs, Inhalation masks, ICU Beds etc.
· Importers of vaccines and Covid related drugs.
· Logistic firms engaged in critical healthcare supply.
· Diagnostic Centres and Pathology Laboratories
· Eye Centres, ENT Centres, Small and Medium size specialty clients
like skin clinics, dental clinics, dialysis centres, endoscopy
centres, IVF centres, poly clinics, X-ray labs etc.
Purpose • To finance qualified medical practitioners having experience of 2
years for setting up Clinics/ Nursing homes/ Hospitals/ Pathology Labs/
Diagnostic Centre.
• For purchase of medical equipment including ancillary equipment
• For Expansion/ renovation/ modernization of existing hospitals/
nursing homes/ clinics.
• To provide finance to manufacturers of healthcare products for
meeting working capital requirement and acquisition of fixed assets.
• To set up Oxygen plant along with power back up for medical use.
• To manufacture permitted drugs (including Covid-19 drugs),
Vaccines, Ventilators, PPEs, Inhalation masks, ICU Beds etc.
• To import Vaccines and Covid related drugs.
• To finance logistic firms engaged in healthcare activities.
• Financing of Receivables of hospitals empanelled under AB PM- JAY
• Build-up of current assets like stocking of vaccines, medicines,
consumables etc.
• For Capex LC (front ended): For import of Capital Goods, to be
liquidated on due date by debit to Term Loan account.
• The import cost and duties on a stand alone may also be
considered for finance.
Eligibility · Individuals/ Proprietorship Firms/ Partnership Firms/ Corporates/
Criteria Trusts/LLPs (with powers to borrow)
· Applicant should have minimum 2 years of experience in operating the
diagnostic centre, pathological lab, hospital, nursing home, etc. irrespective of
constitution.
 Page 253

· In case of financing to Hospitals/ Nursing Homes, the promoter

should be preferably having professional qualification in the relevant discipline;
like MBBS, BDS, BHMS etc.
· However, in cases of existing Hospitals, where the
promoters/Owners may not be having professional qualification such as MBBS,
such cases can be considered on the merit basis. However, in such
cases professional qualified doctors should be a part of management of the
hospital
· In case of manufacturers of healthcare products, the said
qualifications may not be available, hence it should be ensured that the
promoters have required regulatory approvals for manufacturing the healthcare
products. (medicines, equipment, PPE kit, nursing kits etc).
· Promoters must be aware and should have the required approvals/
registrations from the statutory/ regulatory authority for setting up/running
Hospitals/Clinics/Nursing Homes/Medical Colleges.
· Should have the required approvals/ registrations from the statutory/
regulatory authority.
· ITR is mandatory in case of all existing units operating for more than one
Financial Year.
· MSMEs must be registered in Udyam portal and should possess
Udyam Registration Certificate.
· Average Gross DSCR of 1.50 in case of TL.

· FACR >1.25 ICR > 2

Nature of Term Loan, Cash Credit, Bank Guarantee, Letter of Credit (Import/
Facility Domestic).
Quantum of · Minimum: Rs. 10 lakhs
loan · Maximum: Metro Centres: Up to Rs. 100 Crores
Tier-I and Urban Centres: up to Rs.20 Crores.

Tier-II to Tier-VI Centres: Rs.10 Crores.

Penal Interest 5% p.a. over and above the existing rate of interest on overdue amount for the period
of default (as per CPPD e-Circular issued from time to time)

Circular No.: Circular No.: CCO/CPPD-ADV/29/2021 – 22 Date: Thu 17 Jun 2021

 Page 254

SME Car Loan

Parameter Feature
Target Group Existing MSME/ Non-MSME Units only, having borrowing arrangements
with us. Loan shall be in Unit’s Name only.
Purpose To provide car loan in the name of MSME/ Non-MSME units,
having borrowing arrangements with the Bank for purchase of only new cars viz.
passenger cars, jeeps, multi utility vehicles (MUVs) and sports utility vehicles (SUVs)
etc. for use by its promoters / partners / directors / employees.
Financing of Demo Cars in not permitted under the product.
Nature of Term Loan
Facility
Eligibility All MSME/ Non-MSME units, having borrowing arrangements with us, are eligible
under the product, subject to account not being in SMA 1 & worse category during last
12 months.
It has to be ensured that the eligible units, wherever applicable, have obtained Legal
Entity Identifier (LEI) number as per RBI’s extant instructions (vide
RBI/2017-18/82 DBR.No.BP.BC.92/21.04.048/2017-18 dt. 02.11.2017)

Hurdle Rate:
• CRA/CUE Hurdle Rate is SB/CUE-10, for units having existing aggregate limits of
> Rs. 50 lacs.
• For units with existing aggregate exposure of Rs. 50 lacs and below, the criteria of
CUE-Lite may be applicable with hurdle rate of CUE-10. However, if CUE-Lite is
not available, then the SME Car Loan may be extended based on satisfactory
conduct of account.
Loan Amount 10% of the existing Sanctioned Limits of the unit (both Fund Based & Non-Fund
Based), subject to maximum loan amount of Rs. 3.00 Cr
Note:
• There is no cap on number of vehicles to be financed, as long as the above
criteria is met.
• Vehicle should be registered in the name of unit only.
• Under the product, each car loan amount shall not exceed Rs. 1 Cr. However,
the overall cap under the product shall continue to be Rs. 3 Cr.
Assessment Loan amount to be assessed at maximum 10% of existing Sanctioned Limits of
 Page 255

the unit (both Fund Based & Non-Fund Based Limits), subject to maximum loan of Rs.
3.00 Cr, as per edibility criteria
Security Primary Security:
Only hypothecation of the vehicle(s) purchased will be taken as a security.
• This hypothecation charge must be mentioned in the books of the RTO.
• No additional security including the charge on the existing collateral will be
stipulated from borrowing units.
• Vehicle should be registered in the name of unit only.
• Operating units should obtain and keep the following with loan documents after
making necessary entry regarding vehicle particulars in
LOS/LLMS/CBS/Appraisal Format:
i. Copy of vehicle registration certificate with Bank‘s
charge noted therein
OR
ii. Extract from vahan.nic.in for the same
OR
iii. Form B extract from R.T.O. for the same
• Further, the verification of vehicle registration details from the website
‘vahan.nic.in‘ should be made in all car loans after 30 days from the date of
disbursement. The information sheet printed from the site duly verified by Bank
official with full signature should be kept along with loan documents
• Personal Guarantee of the promoter/ partners/ directors to be obtained, as applicable
to regular exposure
Collateral Security: Nil
Repayment Maximum Repayment Period of 7 years through monthly/
quarterly instalments.
EMI will be determined on the basis of current rate of interest, and shall be fixed till
tenor of the loan.
Instalment shall be debited on due date from Cash Credit account/ Current account
(where unit does not have working capital account or it is export oriented unit) by way
of Standing Instruction / Mandate.
 Page 256

SME Smart Score

Parameters Details
Target Group All MSME Units including Proprietorship Firm/ Partnership Firm/
Closely held public & private limited company in Small & Medium industrial,
trading and service sector under SSI, C&I and SBF Segments.
Eligibility · The chief promoter /chief executive should be 18 to 65 years of
age
· The applicant must obtain a minimum overall score of 60% with a minimum
of 50% under each sub-head like Personal Details, Business Details, Collateral
Details (except in cases where collateral is not applicable, the minimum marks
will be nil)
Purpose To meet any kind of credit requirements including purchase of fixed
assets
Type of facility Dropline Overdraft / Cash Credit / Term Loan
OR Combination of these facilities (depending upon customer’s
need)
· For Fund Based & Non-Fund based, single exposure limits may be sanctioned
to the units. NFB facilities can be sanctioned on the best judgment basis
within the discretionary powers delegated to sanctioning authority.
· In case of Dropline OD, Drawing Power (DP) as per Stock Statement
OR DP as per original Dropline level, whichever is lower, will be applicable.
The DP can be reduced or restored to the actual level upon availability of
adequate DP as per Stocks
& Book Debt Statement
Quantum of Manufacturing, Trade & Services Units:
Finance · Minimum: above Rs. 10 lacs
· Maximum: below Rs. 50 lacs
Assessment of Working Capital for MSME Units
Limit · Minimum 25% of the annual projected turnover
· Minimum 30% of the annual turnover for units with min. 25% of sales
through digital mode
(as per e-Cir No. NBG/SMEBU-WCDL/98/2016-17, dt. 31.03.2017) For
Trading Units: Minimum 15% of the annual projected turnover
Term Loan: 67% of project cost for all units
Margin · Working Capital: 20%
· Term Loan: 33%
Repayment & Cash Credit
 Page 257

Validity Loan to be renewed every 2 years with annual review of

performance.
Term Loan/ Dropline OD:
Not more than 7 years including moratorium not exceeding 6 months.
Annual review to be done for all loans.
CUE Not Applicable. (Scoring Model to serve as eligibility criteria)
However, CUE-Lite rating is to be done for all accounts as per e- Circular No.
NBG/SMEBU-SPLPROJ/7/2018-19; dt. 24.05.2018.
Eligibility of loan will be as per Scoring Model only as provided in the scheme.
Primary Hypothecation of Stocks, Machinery, Movable Assets acquired out
Security of Bank's finance
Collateral Collateral Security not be insisted as the loans are to be covered
Security under CGTMSE.
However, if the borrower is not willing to bear the guarantee fee & premium for
CGTMSE, then collateral security as per Bank’s norms need to be obtained.
Personal Personal Guarantee of all the Promoters, Directors, Partners.
Guarantee Third party guarantee in case the property offered is in the name of a person
other than promoters/partners/proprietor
Stock To be obtained monthly
Statement
Inspection Half Yearly for standard accounts.
Monthly for SMA 0/1/2 accounts till the account turns standard.
CIC Report Both Commercial & Consumer CIC Reports should be satisfactory
 Page 258

BACK TO INDEX

CHAPTER 8

POST SANCTION PROCESS

LEARNING OBJECTIVES
(a) Follow up function
1) To ensure the end-use of funds.
2) To relate the outstanding to the assets level on a continuous basis.
3) To correlate the activity level to the projections made at the time of the sanction
renewal of the credit facilities.
4) To detect deviation from terms of sanction.
5) To make periodic assessment of the health of the advances by noting some of the
key indicators of performance like profitability, activity level, and management
of the unit and ensure that that the assets created are effectively utilised for
productive purposes and are well maintained.
6) To ensure recovery of the installments of the principal in case of term loan as per
the scheduled repayment programme and all interest.
7) To identify early warning signals, undertake SMA/SAR review and reporting, if
any, and initiate remedial measures thereby averting the incidence of incipient
sickness.
8) To ensure compliance with all internal and external reporting requirements
covering the credit area.
(b) Supervision function
1) To ensure that effective follow up of advances is in place and asset quality of good
order is maintained.
2) To look for early warning signals, identify ‘incipient sickness’ and initiate
proactive remedial measures.
(c) Monitoring function
1) To ensure that effective supervision is maintained on loans/advances and
appropriate responses are initiated wherever early warning signals are seen.
2) To monitor on an ongoing basis the asset portfolio by tracking changes from time
to time;
3) Chalking-out and arranging for carrying out specific actions to ensure high
percentage of ‘Standard Assets’.

The basic objective of any follow up system is to ensure safety of advances granted by the
bank. This is so because the funds lent by banks belong to the depositors and the credit
official have a tremendous responsibility in safeguarding the interests of the millions of
depositors. The real challenge before a credit official after accredit facility is sanctioned and
disbursed-the challenge of maintaining the quality of the loan asset. This is possible only by
ensuring a meaningful supervision and monitoring of the credit facilities in a planned and
structured manner.
A Strong and vibrant Post Sanction Follow up process, when implemented in planned and
structured manner, it results in making a weak proposal a big success. On the other hand, A
weak and Lackluster Post Sanction Follow up process can leads towards a disaster, as it
may leads towards making a strong and good proposal go in a bad way. The Bank has in
place comprehensive post-sanction processes aimed at enabling efficient and effective credit
 Page 259

management.
Post sanction process starts after sanction of loan. The entire post sanction process
comprises of three stages
1. Follow up Function (to be undertaken by RMSME/CSO/AMT/Branch Head)
2. Supervision (to be undertaken by controllers like RM(RBO)/DGM(B&O))
3. Monitoring (to be undertaken by GM’s assisted by DGM & CCO)
All the three stages together facilitate ensuring efficient and effective Credit Management
and maintaining High Level of Standard Assets
Indicative list of activities involved in Follow-up, Supervision & Monitoring (FSM)
▪ After sanction of loan, advise the sanction to borrower & guarantor detailing the terms and
conditions and obtaining acceptance thereof. (Arrangement letter is required to be
exchanged with the borrowers and guarantors as per format advised circular No.
CCO/CPPD-ADV/52/2017-18 dated 10.08.2017).
▪ Submission of Control Return of sanction.
▪ Documentation and maintain its validity & upkeep in custody (ensure that documents have
been properly executed by authorized person and adequately stamped as per Stamp Act of
the State).
▪ Creation of Charge over security, Equitable Mortgage, Registration of charge with
ROC, CERSAI (immovable property, plant & machinery, stock, book debts, intangible
assets, any under construction residential or commercial building) within stipulated time
period of 30 days.
▪ Compliance of all pre disbursal formalities as per the Sanction terms & condition and
conducting Pre disbursal Inspections and verification of ROC Charges and securities before
disbursement.
 Page 260

COMPLIANCE OF OBSERVATIONS / CONDITIONS OF SANCTION (Circular No.

CCO/CPPD-ADV/172/2019 – 20 Dated 01.02.2020)
Loans in our Bank are sanctioned many a time with conditions/ observations of Sanctioning
Authority. Some of the conditions /observations are temporary in nature and applicable till
happening of certain events or compliance of other terms of sanction. Once these events
happen or terms of sanction are complied with, these conditions cease to be applicable. In
certain cases, it is observed that the operating functionaries approach the Sanctioning
Authority again for withdrawing such conditions, although it can be decided at Branch Head
level.
Similarly, if the condition / observation is to initiate/fulfil certain actions on completion of a
specific event, upon completion of that event, it is observed that the operating functionaries
again approach the Sanctioning Authority for initiating such actions, although it can be
decided at Branch Head level.
Follow up function with various tools is given below:

Follow up Function Tools

Ensure end use of Funds Direct disbursement to suppliers. End Use Certificate Performance
of the unit as reflected in the Financial statements, Stock Audit /
Inspection of the unit Obtaining End use certificate
Computation of D.P. On the basis of account statement. Build up
To relate the outstanding to
of current assets/Fixed assets. Account Statements tallying with
the assets level on a
corresponding assets created out of bank’s finance. Reports of
continuous basis.
Stock Audit & Physical Inspection.
Analyzing the performance of the unit in terms of production,
To correlate the activity sales, profit, and tracking it with FFR I & FFRII and with
level to the Projections made Balance Sheet at the time of review and renewal
at the time of the sanction
/renewal of the credit facilities. Physical Inspection of the unit/ Stock Audit Report
Ensure that the assets Inspection of the unit & Certificate from Chartered Engineer/LIE
created are utilized for Report
productive purposes and are
well maintained.
To detect deviation from Completion of Pre disbursement Compliance Certificate before
terms of sanction. release of funds.
 Page 261

OBTENTION OF GST RETURN:

(e-Circular No. CCO/CPPD-ADV/15/2019-20 dated 07.05.2019 and CO/CPPD-
ADV/23/2019-20 dated 17.05.2019)
With the introduction of GST regime, all Business entities, except exempted category
of Units having annual turnover up to a cut off amount (presently, Rs.20 lacs for North
Eastern and hilly States and Rs.40 lacs for others), are required to submit GST returns at
monthly/ quarterly intervals to Government Authorities which contain detailed
information on Sales/ Purchases, Sellers/ Buyers with their GST Nos. etc. Operating
units were advised to verify the turnover of the borrowing Units, as stated in the
Audited Balance Sheet, with the GST returns submitted by the Borrower.

GST
S RETURN PURPOSE (details contained)
.1
GSTR 1 Monthly Return that summarizes all Sales (outward supplies).
GSTR
2N 2 Monthly Return that summarizes the details of Purchases of taxable goods
o and/ or services.
.
GSTR
3 3 Monthly Summary of sales and purchases along with tax liability.
GSTR
4 9/ GSTR 9A Annual Returns

Follow up systems consist of financial follow up & physical follow up.

I. Financial follow up lays stress on monitoring of the unit's performance based on the level of
production, sales and profitability. Various tools of financial follow up are:

a) Scrutiny of transactions: Regular scrutiny of transactions in the account with us. No

borrower can maintain current account with any other Bank without obtaining NOC from
us(Circular No. CCO/CPPD- ADV/175/2019-20 Dated 10.02.2020). If the customer is
maintaining any current account with any other bank, then on regular basis the statement of
that account to be obtained and checked for any diversion.

b) Stock Statement (Format FSM-3) to be submitted monthly by unit or as per frequency

prescribed in relevant scheme (within 20 days of the succeeding month) duly signed by
authorized person. Stock Statements received from the Borrower need to be analyzed and
scrutinized properly. The position of movement of stocks with the information about the
level opening of stock, level of stock in and stock out with the closing stock will have to
analyze to arrive to the facts that there are no slow moving or obsolete stocks against which
allowing Drawing Power can be restricted.
Where cash credit limits are granted against book debts, a statement of book debts with
age-wise break-up should be obtained along with the stock statement. While allowing
drawings in accounts based on stock statements it is to be ensured that DP is not given
against such assets which have not been considered as current assets at the time of
assessment& there is no double financing involved (eg. No DP against stocks purchased
 Page 262

under Usance LCs)

Drawing power should be allowed only on such book-debts as are within the norms accepted
at the time of sanction. As long as NWC is not diluted and there is no slip back in the
current ration and drawings are within the working capital bank finance limit, the unpaid
stock need not to be deducted (except that acquired through Usance LC).Instruction related
to treatment of Sundry Creditors have since been updated vide Circular No.CCO/CPPD-
ADV/63/2019 – 20 Dated 30 Jul 2019.
For the purpose of arriving at the DP, different component of stocks should be valued as under:
Item To be valued at
Imported raw material Landed cost (i.e., invoice value plus customs duty but excluding
sales-tax and demurrage, if any.) or market price whichever is
Indigenous raw materials, lower. price or market price or Govt. Controlled price, whichever
Invoice
packing materials, is the lowest
consumable stores and
spares
Semi-finished goods Cost of production or selling price or market price or
Govt. controlled rates, whichever is the lowest
Finished goods Cost of production or selling price or market price or
Govt. controlled rates, whichever is the lowest

DP Computation Sheet along with example and format for Monthly Statement of Stock &
Book Debt, are placed at Annexure I & II to Circular No. CCO/CPPD- ADV/63/2019 – 20
Dated 30 Jul 2019.
c) FFRs/QRRs(applicable for borrowers having Fund Based Working Capital exposure
of Rs 10 crore & above)- FFR-I (Performance in terms of Production, Net sales, Status of
Working capital funds/Inventory & Receivables details/Sundry Creditors) part I to be
submitted by unit quarterly. FFR-II (Half yearly operating statements and Fund Flow
Statements) part I to be submitted by unit half yearly. Review / analysis will be conducted in
Part II of FFR I & FFR II by the branch functionaries. Now feeding of data and analysis of
FFR will be carried out through LLMS by CSO / Credit Analysts.
d) Audited Financials

II. Physical Follow up consists of physical verification of Assets and ensuring End use of funds.
Physical Inspection is not only necessary to ensure that the assets remain performing, this is
also a necessity prescribed by RBI .Periodic Inspection and Follow up would afford an
opportunity to not merely assess the quantity, quality and value of stocks, but

▪ Know the tempo of Activity

▪ Have a look at the books of the accounts and other relevant records

▪ Hold discussion with the borrower.

▪ Satisfy himself that the borrower is alive to his responsibilities.

 Page 263

▪ Supplement and constantly update the bank's knowledge about operations of the borrower in
particular and the industry in general.

▪ Ensure that all the fixed assets charged to the bank are pot only intact and well maintained
but also put to optimum use and that the unit's profitability is maintained, at least, at the
level projected at the time of sanction of advance.

▪ Ensure that the security coverage is not diluted at any time for any reason., and

▪ The servicing of the loan does not suffer under any circumstances.

Inspecting officials may carry with them a list of the fixed assets charged to the Bank & a
copy of the latest monthly stock statement. After inspection branch official to ensure entry
of Inspection in CBS (&generate Inspection Reports in LLMS/LOS as applicable) and
compiling and submitting Inspection Report (FSM-6) to higher Authority and noting their
observations for meticulous compliance. Inspection Register FSM-7 has been
discontinued.
Three important characteristics of the Borrowing Unit, to taken into account for adapting
the styles of inspection: The Market Performance, The Management Strength, &
Reliability of its Information System. The rigor of Inspection and follow up may be
varied depending on the general health of the unit and the conduct of advances.
Frequency of Inspection: Inspection should be carried out as per stipulated periodicity. In
respect of working capital credit facilities, the inspection should be conducted as under:
Considering the proposal in totality, sanctioning authority may decide on the periodicity
based on the specific recommendation made by the operating units. This is to be mentioned
in the proposal under terms and conditions and specific template approval is not required to
be obtained.
It is to be ensured that all collateral securities are inspected at least once in a year. The
existing scheme specific guidelines on periodicity of inspection shall remain unchanged.
(Ref : Circular No: CCO/CPPD-ADV/67/2018-19 DATED 07/09/2018)
Follow Up of Term Loan

It is essential that project is monitored, supervised and followed up on an ongoing basis

throughout the currency of the term loan. Term loan is repayable out of cash accruals
generated over a period of time. Performance evaluation of the borrowing unit to ensure
that the projected sales and profit are achieved, and the loan is repaid as scheduled. In case
of term loans Post Sanction Follow up can be divided into two stages:
a) Follow-up during implementation stage begins soon after sanction of the Bank’s term
loan is communicated
to the borrower. During the implementation of the project, branches should obtain progress
reports as per Annexure-FSMTL-1 at quarterly intervals from the borrower.
TL indebtedness of Rs.5.00 Cr and above: Important Guidelines
 Page 264

Verification of assets to be conducted within 15 days of creation of assets. On completion

of the site inspection on each occasion, the inspecting officials should set out their
observations in inspection reports as per Annexure- FSM-TL-2. If any adverse
developments are noticed during implementation of project, matter to be reported to
controlling authority with the recommendation for future actions to protect Bank’s
interest.
b) Follow-up after commencement of commercial production begins once the
commercial production commences, the unit would be required to submit half-yearly
progress reports as per format given in Annexure- FSM-TL-3.
Important Guidelines to be kept in mind by the Inspecting officials.
The Inspecting official must check the correctness of the production and sales information
supplied to him.

▪ Stocks of raw materials etc, with the unit should be verified with the latest stock
statements.

▪ Inspecting official must assess the level of activity from various sources, such as the
order book, Electricity Bill, the work on the shop floor, number of shifts of working,
accumulation of finished products and the general tempo activity of the plant.

▪When there is decline in sales, production and profitability, the reason therefore should be
ascertained and issue should be discussed with the borrower.

▪Frequent visits to the same unit will automatically give him enough experience to get a
quick feel of the tempo of activity.

▪Inspecting officials must check if the books of accounts e.g., cash book. Sales, purchase and
stock registers are being maintained properly and kept up to date.

Various Types of FORMATS need in Post sanction Follow up Process.

Formats Purpose
FSM-1 Indicative List of Activities involved in Follow up supervision and
Monitoring
FSM-2 ----------------
FSM-3 Stock statements Format
FSM-4 Follow up Register for monitoring timely receipt of FFRs /statements
FSM-5 Monthly Statement of Select Operational data (MSOD)
FSM-6 Inspection Report Format
FSM-7 Format of Inspection Register ( Inspection at a glance Register )
 Page 265

CORRECTIVE ACTION PLAN FOR STRESSED ASSETS (CAPSA): REPORTING OF

IRREGULARITY / DEFAULT THROUGH CAPSA FORMAT AND REVIEW
OFAUTHORITY STRUCTURE.(e-Circular CCO/CPPD-ADV/204/2018 – 19 dated
30.03.2019)

With a view to consolidating and bringing uniformity, and to have a focused approach for
handling of Irregular Accounts / SMAs, appropriate authority has approved introduction of a
comprehensive common report format ‘CAPSA’ (Annexure-II) replacing existing formats for i.
reporting of irregularity / default and ii. review for SMAs. CAPSA report format is to be
mandatorily utilized for both reporting of irregularity / default for taking on record, and review of
SMAs to the respective competent authorities, w.e.f. 01.04.2019.

For limits up to Rs.1.00 crore, reporting of irregularity / default is to be made by way of simple

listing to the AGMs of Credit CPCs / Controller, not below the rank of AGM (in case of CPC with
Scale- IV incumbency) at BPR Centres, and RMs/AGMs at non-BPR Centres (as the case may be),
irrespective of category of default SMA-0/1/2 and/or Sanctioning Authority.
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Case let -1

CASELET:
M/s Anjuman Syringe Pvt Limited is a unit enjoying a FBWC Limit of Rs.50.00 Lacs . Margin stipulated
against Stocks is 25% and for Book debts is 50% as per the sanctioned terms and Condition. The Stock
statement dated 31.01.2020 is received on 15.02.2020. As per the Stock statement , Value of Stocks is showing
Rs.40.00 Lacs and value of Book Debts is 30.00 Lacs. Value of Sundry Creditors is Rs 10.00 lacs against
projected level of Rs.15 lacs in CMA. The Borrower has also advised outstanding LC Backed Bills discounted
of Rs.10 lacs . Based on these facts, please select the most suitable answer of the following questions.

Q.1 What will be the Drawing Power for the company as per the given stock statement?

a) 20 Lacs b) 25 Lacs c) 30 Lacs d) 40 Lacs

Q 2 By what date Stock Statement should have been received

a) 10.02.2020 b) 15.02.2020 c) 20.02.2020 d) 25.02.2020

Q 3 What will be the Treatment of Sundry Creditors as per the existing guidelines of the bank

a) Excess amount of Rs 5 lacs will not be deducted from the vale of Stocks irrespective of adverse
changes in CR and NWC
b) Full value of Sundry Creditor will be deducted from the Market value of Stocks
c) Full value of Sundry Creditor will be deducted from the Advance value of the Stocks
d) As the actual level of Sundry Creditors, as per stock statement, is lower than the projected level in
CMA, it is normally not required to be deducted from Market value of the Stocks provided CR does not
declines and NWC do not deteriorate.

Q 4 What is the Net value of book debts that will be eligible for D P calculation

a) 40 Lacs b) 20 Lacs c) 22.50 Lacs d) 25 Lacs

Q 5 What is the Advance Value of Security?

a) 20 Lacs b) 40 Lacs c) 30 Lacs d) 25 Lacs

ANSWER

CASELET
1 2 3 4 5
D C D B B
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Case let 2

M/s Guru Nanak Steel Rolling enterprises (partnership Concern) credit facilities have been taken over from
XYZ Bank. The sanctioned total credit limits Rs.50 Lacs from your branch on 30.09.2020 as under:-
Cash Credit (Stocks & BD) Rs.38 Lacs
Inland LC Rs.4 Lacs
Term Loan Rs.4 Lacs
It is stipulated that the working Capital Limits will be released only after the commencement of
commercial production. The limits are secured by Collateral property in the name of Shri Ramesh &
Naresh valued Rs.45 Lacs.
You are Relationship Manager and the Promoter of the Unit has approached you for release of the limit and
submitted copy of resolution for execution of documents. Please answer the following questions: -

Q 1: What will be various steps in chronological order will be taken after sanction?
a) Documentation 2. Disbursement 3. Follow up Supervision and Monitoring
b) Conveying Sanction 2. Documentation 2. Disbursement 3. Follow up Supervision and Monitoring
c) Conveying Sanction and getting accepted acknowledgement 2. Documentation 3. Disbursement 4.
Follow up Supervision and Monitoring
d) Conveying Sanction and getting accepted acknowledgement 2. Documentation 3. Ensuring
Pre Disbursement conditions. 3. Disbursement 5. Follow up Supervision and Monitoring

Q 2: Which series of document applicable in this case?

a) SME series of Documents
b) C&I series of documents
c) CF series of documents
d) Any of the above

Q 3: It was advised by the director of the company that they are maintaining Current Account with XYZ
Bank and want to continue the same for operational convenience. No approval for maintaining current
account elsewhere is on record. What will be appropriate step?
a) We will convince the Company to close the Current Account with XYZ Bank before release of
limit. If, the company is not agreed to we will seek approval from Sanctioning Authority for
permission to continue account with other non-lending Bank after satisfying ourself.
 Page 268

b) We will ask the Company to close the Current Account with XYZ Bank before release of limit
otherwise we will not disburse the limit.
c) We will convince the Company to close the Current Account with XYZ Bank and other accounts if
any before release of limit. If, the company is not agreed to we will seek approval from Sanctioning
Authority for permission to continue account with other non-lending Bank after satisfying yourself.
d) The enterprise have to closed all the exiting current accounts. They are not allowed to have
any current account.

Q 4: Noting of charge with the CERSAI will be done _________

a) Security Interests are filed with CERSAI immediately after creation of charge.
b) Security Interests are filed with CERSAI within 30 days
c) Security Interests are filed with CERSAI within 60 days
d) Security Interests are filed with CERSAI within 90 days

Q 5: How many TIR should have been required in the present case?
a) One
b) Three
c) Two
d) Any Number
 Page 269

BACK TO INDEX

CHAPTER 9

IRREGULARITY, SMA, IRAC NORMS, PROVISIOING,

PRUDENTIAL FRAMEWORK, RESTRUCTURING and EXIT POLICY

IRREGULARITY IN THE ACCOUNT:

1. How to allow excess drawings:

i. To meet contingencies, the units may be sanctioned facilities like Standby Line of
Credit. If no such facilities are available, sanction of ad-hoc limits / temporary
overdrawing may be resorted to after taking usual precautions.

ii. Excess drawing can be permitted only against the written request of the borrowing
unit, citing the reasons for such excess drawings and the time frame for regularising
it, along with an appropriate board resolution wherever applicable and in the absence
of it, a ratificatory resolution must be obtained.

iii. Branches should take adequate care to protect the Bank’s interests and t o obtain
appropriate documents.

iv. A suitable exchange of letters should take place with the unit to make it clear that
the documentation does not entitle the unit to the enhanced level of drawings.

v. While confirming the irregularity by the appropriate authority, suitable directions

should be clearly stated.

vi. The irregularity that occurred due to technical reasons such as connectivity
problems will required only to be reported to the Controller of the Branch for
information.

vii. Where irregularity persists for more than a month, sanction of standby line of
credit/ ad-hoc limit should be resorted to, if permissible.

viii. If the need/ requests for overdrawing persist for a period exceeding six months,
borrower will be advised to submit proforma balance sheet and the limits should be
re-assessed afresh and sanctions obtained, immediately.

2. Objectives of reporting

The objectives of the system of reporting irregularity are as below:

i. To report for control / monitoring.
ii. To seek confirmation,
iii. To put forth/ evolve plan of action for regularizing irregularity in loan account.
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3. System of reporting of irregularities

i. It is necessary to report irregularities in working capital limits, Term Loans, non- fund
based limits (included), occurring during a month in the subsequent month and at
monthly intervals thereafter, till the account is regularised.
ii. Branches should invariably report irregularities in Borrowal accounts to the
appropriate authorities before 10th day of succeeding month.

4. Authority Structure for reporting/confirmation of irregularities:

Irregularity reporting to be done in Corrective Action Plan for Stressed Assets

(CAPSA) format as circulated vide CPPD Circular No.204 dated 30th March, 2019.

5. Reporting of Irregularity in NPA Accounts:

i. Irregularity reports in case of NPAs will be submitted to sanctioning

authorities competent to approve such exposure (as per delegation of financial
power for advances) within 10th of succeeding month and yearly thereafter:

ii. The accounts which become due for annual review during the reporting quarter
will be reported at the end of the quarter.

iii. For permitting holding on operations in respect of potentially viable SMA

category or substandard accounts no administrative clearance / approval /
sanction is required and would need only to be reported to the reviewing
authority. If holding on operations continued beyond the initial period of 3
months, the same has to be approved by the sanctioning authority. In cases
where holding on operations are proposed as part of restructuring package,
along with other terms, prior approval should be taken from the authority that
approves the Restructuring package before implementing holding on
operations. Subsequent extensions, if considered necessary, also require prior
approval of the sanctioning authority.

iv. To decide the authority as per the ‘Scheme of Delegation of Financial Powers,
including for NPAs, the balance outstanding should be taken together with the
amount of interest accrued till the date of the report but not applied.

SPECIAL MENTION ACCOUNTS

1. SMAs- Definition and Classification

i. Early Warning System is an integral part of a bank’s Risk Management process as it

provides an opportunity for early identification of potential NPAs, review and reporting
of problem loans and initiation of time-bound corrective action including
rehabilitation/restructuring. Keeping the above in view, RBI introduced an asset
category viz., Special Mention Accounts (SMAs), between ‘standard’ and ‘sub-
 Page 271

standard’ categories of assets, for the accounts which show tendencies for possible
default or delinquency or ‘signs of incipient stresses. Some of these early warning
signals or sign of incipient stress in conduct of the loan accounts may have impact on
the asset quality of the account. We have to identify incipient stress in term loan
accounts, immediately on ‘default’, by classifying stressed assets as special mention
accounts (SMA).
ii. Default means : Structured Obligations: Non-Payment
Revolving Credit: Irregularity in excess of 30 days

2. Management of SMAs:

i. The management of SMAs essentially involves the following critical steps:

- Timely identification of SMAs at initial stage where account is either regular or
temporary irregular but showing the signs of incipient stress or early warning
signals.
- Evolving a detailed action plan and preventive measures well in time to prevent
slippage of such SMAs to NPAs.
- Initiating Holding-on operations
- Reporting and monitoring of the progress made

ii. Branch should take immediate steps to analyse the problems based on facts and
circumstances by means of a review at the Branch as per CAPSA Format and submit
the same to the appropriate reviewing authority.

3. Resolution Plan for SMAs:

The following are the three options for Resolution Plan for stress:
i. Rectification
ii. Restructuring
iii. Recovery

4. Holding on Operation:

After taking a view on the viability of the unit / feasibility of rectification / restructuring, the
Branch should also decide on the need to implement holding on operations. If the branch is
satisfied that the unit needs to be put on holding on operations, pending finalisation and
implementation of the rectification / restructuring package, the branch may extend the same
immediately. The details about of Holding On Operation (HOO)

5. Monitoring of SMA account on cash budget basis

If the irregularity in the account is of temporary nature and operating unit is a prima facie
viable, the first remedial action should be put the account under holding on operation and
conduct of account during this period has to be regulated through the system of cash budget.
 Page 272

6. SMA – Review and Reporting:

SMA reporting to be done in Corrective Action Plan for Stressed Assets (CAPSA) format.

BANK’S POLICY ON NPA, IRAC AND PROVISIONING NORMS

1. Bank’s Policy on NPA: The Bank’s policy is to ensure containment of NPAs to the least in
conformity with international standards.

2. NPA Management Policy of the Bank: The Bank has a separate NPA Management Policy
which seeks to lay down the Policy on management and recovery of NPAs and proactive
initiatives to contain net NPAs in conformity with the international standards.

3. RBI Guidelines on NPA pertaining to Loans and Advances including IRAC and
Provision Norms:
The primary guiding factor for recognising an NPA will be the Prudential Norms on Income
Recognition and Asset Classification (IRAC) implemented by Reserve Bank of India (RBI).

(a) Performing Assets or Standard Assets i.e. where the advances are earning interest income
on an actual realization basis. This includes regular and temporarily irregular accounts, as
specified from time to time by the RBI.

(b) Non-Performing Assets (NPA) i.e. where advances are not earning interest on an actual
realisation basis. An asset, including a leased asset, is considered as non-performing when it
ceases to generate income for the bank. This includes irregular accounts and sticky accounts
with deep-seated irregularities. A loan or an advance account will be considered as NPA where:

i. interest and/ or installment of principal remains overdue for a period of more

than 90 days in respect of a term loan.
ii. the account remains ‘out of order’ in respect of an Overdraft/Cash Credit
(OD/CC).
iii. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. the installment of principal or interest thereon remains overdue for two crop
seasons for short duration crops in respect of agriculture loan and advances,
v. the installment of principal or interest thereon remains overdue for one crop
season for long duration crops in respect of agriculture loan and advances,
 Page 273

Out of Order
An account should be treated as 'out of order' if the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power for 90 days. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts should be treated
as 'out of order'.

4. Categories of NPAs: Banks are required to classify non-performing assets further into the
following three categories based on the period for which the asset has remained non-performing
and the realizability of the dues:

i. Substandard Assets
ii. Doubtful Assets
iii. Loss Assets

5. Restructuring: The accounts classified as 'standard assets' should be immediately re-

classified as 'sub-standard assets', except those allowed otherwise detailed later in this chapter.

6. Upgradation of loan accounts classified as NPAs: If an NPA account which have not been
restructured and the arrears of interest and principal are paid by the borrower, the account may
be re-classified as ‘standard’ accounts. A restructured / rescheduled NPA account should be
upgraded only on demonstration of ‘satisfactory performance’ of the outstanding loan /
facilities accounts during the ‘specified period’ as defined in RBI circular dated 1st January
2019 in case of exposure from lenders is up to Rs.25 crore and if the exposure exceeds Rs.25
crore during the ‘monitoring period’ as defined in RBI circular dated 7th June 2019.

7. Income Recognisation Policy: An asset, which ceases to yield income for the bank, should
be treated as NPA, and any income from such loan asset should not be booked as income until
it is actually recovered.

RESTRUCTURING OF ADVANCES

A restructured account is one where the bank, for economic or legal reasons relating to the
borrower's financial difficulty, grants to the borrower concessions that the bank would not
otherwise consider. Restructuring would normally involve modification of terms of the
advances / securities, which would generally include, among others, alteration of repayment
period / repayable amount/ the amount of instalments / rate of interest (due to reasons other
than competitive reasons) / roll-over of credit facilities / sanction of additional credit facility /
enhancement of existing credit limits. However, extension in repayment tenor of a floating rate
loan on reset of interest rate, so as to keep the EMI unchanged provided it is applied to a class
of accounts uniformly will not render the account to be classified as ‘Restructured account’. In
 Page 274

other words, extension or deferment of EMIs to individual borrowers as against to an entire

class, would render the accounts to be classified as 'restructured accounts’.

E1. Other than MSME exposures up to Rs.25 crore eligible under forbearance scheme

1. Eligibility criteria for restructuring of advances: Banks may restructure the accounts
classified under 'standard', 'sub- standard' and 'doubtful' categories. Banks cannot reschedule /
restructure / renegotiate borrower’s accounts with retrospective effect. No account will be taken
up for restructuring by the bank unless the financial viability is established and there is a
reasonable certainty of repayment from the borrower, as per the terms of restructuring package.
While the borrowers indulging in frauds / malfeasance / willful default will continue to remain
ineligible for restructuring, with specific exceptions. MSME exposures up to Rs.25 crore have
different dispensation, if eligible under forbearance scheme.

2. Asset classification norms: The accounts classified as 'standard assets' should be

immediately re- classified as 'sub-standard assets' upon restructuring except MSME advances
of Rs.25 crore and below, which were stressed but standard assets as on 01-01-2019 subject to
certain conditions as stipulated in the above referred to SMEBU circular as amended from time
to time. Any additional finance may be treated as 'standard asset' during the monitoring period.

3. Banks’ Right of recompense: The Bank’s right to exercise recompense should be

included in the sanction letter to the borrower. When the Bank’s ROR is exercised, the total
recompense amount should be debited to the “Advances Under Collection Account” with the
corresponding credit to “Constituents Liability for Advances Under Collection Account”.

4.3.5 MSME RESTRUCTURING

1. Framework for Revival and Rehabilitation of Micro, Small and Medium

Enterprises: RBI has designed a framework in order to provide a simpler and faster
mechanism to address the stress in MSME accounts up to Rs.25 crore and to facilitate
promotion and development of MSMEs. For resolution, a Committee headed by AGM (SMEC)
in respect of accounts handled by SMEC and the Regional Manager (RBO) in respect of
accounts handled by RASMEC and accounts outside the purview of SMEC will be formed.
The other members of the committee shall be (1) an independent expert in MSME ( to be
nominated by the RM (RBO) / AGM (SME), (2) a representative from the concerned State
Government and (3) Member(s) from the Consortium / MBA, in case of consortium / MBA
advances. In the absence of State Government nomination, RM (RBO) /AGM (SMEC) can
induct an independent expert in the Committee, namely a retired executive of another bank
of the rank of CM and above.

2. Special Restructuring for MSME and other Small business enterprises: B a n k

a p p r o v e d a scheme for Restructuring of stressed MSME accounts having
aggregate exposure (FB+NFB Limit) not exceeding Rs. 25.00 crore. The scheme will
cover all Stressed MSME units having aggregate exposure (FB + NFB limits) not
exceeding Rs. 25.00 crore as on 01.01.2019 / 2020 and banking with us under Sole
Banking / Consortium / Multiple Banking arrangement. The unit must be MSME as
per MSMED Act 2006 and shall not be downgraded to NPA on restructuring,
 Page 275

provided eligibility conditions are fulfilled. The scheme is operative from 01.01.2019
till 30.09.2021.

EXIT POLICY FOR STANDARD ASSETS INCLUDING SMAs

In the light of the broadened scope of Early Warning Signals (EWS) and proactively
capturing other signals of stress, a comprehensive Exit Policy for Standard Assets indicating
signs of stress has been formulated for accounts. The Policy aims at providing
a defined structure and timeline for identification of accounts where “Exit” option is to
be exercised. The policy is applicable to Standard Assets indicating signs of stress of total
exposure (FB+NFB) of Rs. 5 crs. and above. Controllers of the Branch will be
the Authority for approving “Exit” from an exposure. The Business Units have to
plan and prepare an ‘Exit Budget’ at the beginning of the financial year. Various
warning signals are to be reckoned in order to identify an exposure for an exit
option. The Approving Authority may prescribe remedial measures to be undertaken by
the Borrower/ Promotor(s) / Guarantor(s) immediately. While recommending an
exposure for exit, the Branch may consider the following additional remedial
measures, if necessary:

- Freezing the limit at its existing level.

- Withdrawal of the concessions in pricing.
- Higher margins for non-fund based facilities.
- Increasing the margins on Stocks and Receivables.
- Recovery of penalties, if any.
- Withdrawal of Corporate INB, if provided to the Borrowing Unit.
- Withdrawal of the allocated limits, if any.
- Appointment of Nominee Directors in the Board of the Company.
- Examination of conduct of Forensic Audit.
On receipt of approval for Exit, the Branch has to immediately initiate steps as advised
by the Controllers and the Borrower(s)/ Guarantors are to be advised accordingly with
t h e requisite timeline. If no positive result emerges out of the above mentioned
remedial measures, the following steps are to be considered:
- Borrower Credit limits may be frozen at the existing level.
- Suitable Holding-on-operations to be imposed and transactions/ drawings be
allowed with cut-back from the overall proceeds.
- Further, considering the assessed potential loss in future, loans may be sold with an
appropriate haircut provided sale is at a higher price than assessed NPV (based on
loss expectations in future).
- If a suitable buyer is not found or the Borrower fails to shift to another Bank
within the above period, usual steps to recover the Bank’s dues shall be taken
 Page 276

by calling up of the account.

If the account is due for renewal / review, usual due diligence of account and detailed
assessment of the limits is to be carried out and the renewal /review
memorandum should contain recommendations for exit. In case Renewal is not due,
Operating units to seek approval for exiting the exposure. The Sanctioning Authority may
also consider exploring the “Exit” option while review / renewal of accounts put up by
Branch. Wherever the branch is exiting an exposure, no pre-payment charges are to be
levied. After approval of Exit, if the stress in the account eases, the Operating
unit may approach the CGM of the Circles / Business Verticals for easing / removing
the remedial measures and restoring the normal terms and conditions.
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BACK TO INDEX

CHAPTER – 10

RECOVERY THROUGH LEGAL ACTIONS

LEARNING OBJECTIVES
i. Post NPA, the value from the account needs to be taken out. How?
ii.What are the various process through which we can resolve a NPA account?
iii.Which process is best suited to resolve a specific NPA account?
iv.How the new Code, IBC’2016, is evolving with time?
v.Do Compromise settlement have other benefits too, rather than recovery only?
vi. How do you decode SARFAESI in easiest way?

Sale of properties under SARFAESI Act, 2002

ELIGIBILITY CRITERIA:

Action under SARFAESI Act, 2002 can be initiated in the following cases:

The account should be an NPA as per RBI guidelines.

The claim amount (including accrued interest) should be for an amount not less than
Rs.1.00 lac.
The amount due (including interest) should be more than 20% of the principal amount and
interest thereon.

ACTION REQUIRED BEFORE ISSUING NOTICE :

In NPA accounts identified for SARFAESI action, the loan documents including EM
documents pertaining to securities held should be legally enforceable and within the
period of limitation.
Assets charged to the bank should be inspected and identified.
Approval for issuing notice under section 13(2) of SARFAESI Act, 2002 to be obtained
from the Competent Authority.
Also, before initiating action under Section 13(4) of SARFAESI Act, the Branch should
invariably obtain approval of the appropriate authority.
 Page 278

Authorised Officer has the authority to initiate action under the Act and issue notices. As
per the Security Interest (Enforcement) Rules, 2002 (the Rules), ‘Authorised officer’ means
an officer not less than a Chief Manager of a public sector bank or equivalent.

PROCESS AND PRECAUTIONS FOR ISSUANCE OF NOTICE:

I. Preparation of Notice
Postal addresses of all Borrower(s) and Guarantor(s) to be verified and correctly mentioned
in the notice.
Notice should contain full details of the amount payable by the Borrower(s) and the
secured assets to be enforced. Interest calculation to be done correctly as per contracted rate
of interest.
Particulars of loan documents executed by the Borrower(s) should be mentioned in the
notice.
The date on which the account was classified as Non Performing Asset (NPA) should be
correctly mentioned in the 13(2) notice.
The demand notice under Section 13(2) must include a paragraph or clause on borrower’s
right of redemption.

II. Mode of Dispatch of Notice

Service of Demand Notice under Sec.13(2) shall be made by by Registered Post with
Acknowledgment Due addressed to the Borrower or his Agent empowered to accept the
service or by Speed Post or by Courier or any means of transmission of documents like
fax message or electronic mail service. Acknowledgment card received should be kept
on record carefully to be used as evidence when required.

III. Return of Notice

If Demand Notices could not be served on the Borrower(s)/Guarantor(s), as per the
SARFAESI Rules, the

service should be effected by affixing a copy of the demand notice on the outer door/other
conspicuous place where the Borrower(s) /Guarantor(s) reside, photographs of the same
should be taken and kept on record to be used as an evidence in case of need.

Contents of the notice to be published in two leading newspapers, one in English and one
vernacular, having sufficient circulation in that locality.

IV. Handling of Objections Raised by the Borrower

If the Borrower makes any representation or raises any objection on receipt of the demand
notice, Authorized Officer shall consider such representation or objection carefully and if
he comes to the conclusion that such representation or objection is not acceptable or
tenable, he shall communicate the reasons for non- acceptance within 15 days of receipt of
 Page 279

such representation or objection.

TAKING POSSESSION AFTER EXPIRY OF 60 DAYS OF NOTICE UNDER

SECTION 13(2) OF THE ACT

a. Action Under section 13(4) of the Act:

If the amount mentioned in the demand notice is not paid within the time specified i.e. 60
days from the date of notice under section 13 (2), the Authorized Officer may take
possession of the secured assets of the borrower including the right to transfer by way of
lease, assignment or sale for realizing the secured asset.
Consent in Case of Consortium / Multiple Banking Accounts

When security which is held by more than one Secured Creditor or jointly financed by
Secured Creditors, action under section 13(4) can be taken if exercise of rights under the
Act is agreed upon by the Secured Creditors, representing not less than 60 % in value of
the amount outstanding as on a record date.
b. Filing of Caveat:

When action under Section 13(4) of the Act is taken by the Bank, the
Borrower(s)/Guarantor(s) may file a Securitisation Application before the DRT u/s 17 of
the SARFAESI Act within 45 days challenging such action. Therefore, a Caveat may be
filed before the DRT to avoid passing of any interim order/injunction order restraining
further action, without hearing the Bank.
c. Possession of Movable/Immovable Properties :
After expiry of 60 days from the date of notice u/s 13(2), action should be initiated for
taking possession of the property:

i. Immovable Properties

The Authorised Officer shall take possession of such property in the presence of two
independent witnesses by delivering a possession notice to the Borrower(s) and affixing the
possession notice under section 13(4) of the Act on the outer door or at such conspicuous
place of the property, take photograph thereof and keep the same on record.
Notice regarding possession of the immovable property with full details of the property and
name of Borrower(s) / Guarantor(s) should be published within 7 days of taking possession
in two leading news papers, of which one should be in vernacular language having
sufficient circulation in that locality.

ii. Movable Properties

Where the possession of the movable property in possession of the Borrower(s) is to be

taken by the Bank, the Authorized Officer shall take possession of such movable property
in the presence of two independent witnesses after Panchnama is drawn and duly signed by
 Page 280

the witnesses.
After taking possession, the Authorised Officer should prepare the inventory of the
property and deliver a copy of such inventory to the Borrower(s)/Guarantor(s) or any person
authorised to receive on their behalf.
Rule 4 has been amended by incorporating Rule 2A to provide that after possession of the
secured movable property is taken by the secured creditor, the borrower shall be intimated
by a notice enclosing the Panchanama drawn in Appendix I to the Rules and the inventory
made in Appendix II to the Rules.
If any problem is foreseen in taking physical possession, the Authorized Officer should
approach CMM/DM for obtaining order u/s 14 of the Act.

POST POSSESSION PROCESS AND SALE OF PROPERTY THROUGH e-

AUCTION

a. Valuation of the Movable and Immovable Assets :

The Authorised Officer should arrange for valuation of the assets by an approved valuer
immediately after taking possession and in any case before sale.

The branch should always use services of empanelled SARFAESI valuer for taking
Valuation Report for fixing Reserve Price.

b. Fixation of Reserve Price:

Reserve Price of the assets to be sold should be determined on the basis of valuation report
obtained. Sanction for Reserve Price has to be obtained from the appropriate Committee at
Zonal Office/ Local Head Office/Corporate Centre.

Sale Procedure for Movable/ Immovable Property through e-auction :

Property to be sold through e-Auction and Agency for conducting e- Auction to be

identified.

The Borrower(s) / Guarantor(s) should be served 30 days notice for sale of movable and
immovable secured assets.

The sale can be conducted only after expiry of 30 days notice given to Borrower(s)/
Guarantor(s)/legal heirs of Borrower(s)/Guarantor(s).

A public sale notice should be published in two leading newspapers, one in vernacular
language having sufficient circulation in the locality.

On confirmation of sale by the secured creditor and compliance of the terms of payment,
the Authorized Officer shall issue a Certificate of Sale for the properties in favor of the
purchaser for movable assets and for immovable Assets.

The Authorized Officer shall deliver the property to the purchaser free from encumbrances
 Page 281

known to the secured creditor and the same to be mentioned in the Certificate of Sale. The
Authorized Officer should also obtain receipt of possession and original Title deeds.

The Authorized Officer shall ensure registration of Sale Certificate on making payment as
per stamp Act, and charges as applicable in the respective State, cost of which will be borne
by the purchaser. In sub-Rule (2), a second proviso has been incorporated after the existing
proviso to provide that if the sale of immovable property by any one of the methods
specified under sub-rule
fails and the property is required to be sold again, the authorised officer shall serve, affix
and publish notice of sale not less than 15 days to the borrower for any subsequent sale.

(Important to note that after failure of the first sale of the immovable property, only 15
days’ notice
is required to be served for any subsequent sales).
Chapter IV A of the SARFAESI Act, 2002, notified w.e.f. 24.01.2020, contains the
following important provisions:
Section 26 B: Attachment orders issued by any Government authority for recovery of
Govt. dues may be filed with CERSAI.
Section 26 C: Security interest or attachment orders filed with CERSAI shall have
priority over any subsequent security interest created upon such property. Filing of
security interest with CERSAI shall be deemed to constitute a Public notice from the date
& time of filing with CERSAI.

Section 26 D: Secured Creditors shall be entitled to enforce securities under

SARFAESI Act only if the security interest is filed with CERSAI.
Section 26E: After registration of security interest with CERSAI bySecured
Creditors, their dues will be paid in priority over Govt. dues.Section 26 E empowers the
Bank to claim priority over the debts due to Central Government, State Government and
local authorities by way of revenue, taxes, cesses and rates from the borrows / guarantors.
The above said Authorities cannot claim any priority over the amounts recovered by
bank by sale of secured properties of the borrower/guarantor under SARFAESI Act
provided charge (mortgage & Hypothecation) created over the said properties in favour of
the Bank is filed/registered before CERSAI.
d. Private Treaty
It is a sale process which is outside public auction and is resorted to only when public
auction fails.
Sub-rule (3) which deals with sale by private treaty has been amended to provide that such
sale shall be on such terms as may be settled between the secured creditors and the
proposed purchaser in writing.
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2. Recovery of Bank ’s Dues Through Civil Courts

1. Steps prior to filing a Civil Suit: Ascertaining facts and arranging

documents

The amount of total debt due from the borrowers should be less than Rs.20 lacs.
Documents should not be time barred and should be in order.
A brief history of case after examining files of the borrower should be prepared. Copies
of relevant records/documents have to be kept ready.
Latest addresses and details of properties of the Borrowers/Guarantors, including the
legal heirs of the deceased Borrower/ guarantor(s), if any, have to be ascertained and kept
on record.
Permission for filing of suit and transfer of outstandings to Recalled Asset account from
the Competent Authority to be obtained.

Issue of Notice

The branch should arrange to issue notices by registered post with AD through
theAdvocate to the borrowers/guarantors recalling the advances and claiming dues, costs,
charges etc .as the first step for a civil suit for recovery of Bank’s dues.

Entrusting the Matter to the Advocate

Branch should engage an advocate who is in the panel of the Bank and who practices in
the Civil Court.

The Branch has to hand over the case history and copies of documents to the Advocate
for his study.
Time line for filing of suit(s)

Civil suit is to be filed immediately on approval but in any case within a maximum period
of 3 months from the date of approval.

Drafting and Vetting of Plaint: Format, Parties, Claims, Reliefs

Facts contained in the draft plaint are to be verified by the Branch official concerned.
Legal aspects have to be verified by the Bank’s Law Officer.

Filing of the Plaint

Plaint is to be signed by the authorized Branch official. Demand Draft for court fees,
process fees and copying fees has to be prepared. Affidavit of Branch official has also to
be filed along with the plaint, in duplicate.
Service of Summons
Adequate number of copies of the plaint as directed by the Court have to be made
 Page 283

available. Service of Summons is to be effected to each defendant through Court by the

Bank as per
Court’s orders.
Action to be taken on the Date of First Hearing
Attendance of the Branch official on each date of hearing with the advocate has to be
ensured.

Written statement filed by the Borrower(s)/Guarantor(s) and the documents relied upon
have to be examined.

If any claim for set off or counter claim is made in the written statement, a counter
affidavit has to be filed.

Subsequent Steps for pursuing the Case

i) Documents relied upon by the Borrower(s)/Guarantor(s) are required

to be
inspected or discovered and steps are to be taken for the same.

ii) Whether any document relied upon by the Borrower(s) needs to be denied.

List of Documents and witnesses to be relied upon by the Branch have to be provided.
Issues have to be framed by the Court in terms of the judgement required.
In case of death of defendant Borrower(s)/ Guarantor(s), steps have to be taken for
making legal representatives of the deceased as a party.

Decree has to be obtained after the judgement has been pronounced. In case of any
apparent mistake in judgement/ decree, the matter has to be discussed with the

Advocate, as to whether a rectification petition needs to be filed for correcting the

errors.

9. Filing of Execution Petition

Application for execution of decree has to be filed with the help of the
Advocate.
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Recovery of Bank ’s Dues Through Debt Recovery Tribunals (DRT s)

Before filing Original Application (OA)

i) Jurisdiction
a) Pecuniary jurisdiction: Original Application (O.A.) in DRT is to be filed where the
total amount of debt due to the Bank is Rs. 20.00 lacs & above.
Territorial jurisdiction: Branches should make an application to the Tribunal within
whose local limits of jurisdiction, the cause of action wholly or partly.

Verification of enforceability of documents: Documents should not be time barred.

Physical verification of security: Properties held as Security should be physically

verified by the Branch Officials.
Contact details: Branch officials to update the addresses and other contact details of
borrowers/guarantors.

Death of Borrower(s)/Guarantor(s): In case of death of Borrower(s) / Guarantor(s),

Branch officials to identify the legal heirs of the deceased.

Service of call up notice: Call up notice is to be served on the Borrower(s)/Guarantor(s)

through
Bank’s empanelled Advocate demanding payment of the Bank’s dues within 30 days.

Transfer of outstandings to Recalled Assets Account (RAA): The outstandings in

borrower’s various accounts have to be transferred to Recalled Assets account after
obtaining approval from the Appropriate authority as per the Scheme of Delegation of
Financial Powers in force.

Timeline for filing of OA:

Original Application (OA) is to be filed in DRT immediately on approval but in any case
within a maximum period of 3 months from the date of approval.

Where documents are getting time barred, Original Application (OA) in DRT is to be
filed 2 months before expiry of documents.

Procedure for filing of Original Application (OA) in DRT: Preparation of Original

Application (OA):
An Original Application in the prescribed format is to be drafted by the Bank’s
empaneled
Advocate based on the facts/figures/documents provided by the branch.
Interim Reliefs which can be prayed in Original Application (OA) :
In the Original Application, following interim reliefs can be prayed, supported by the
Affidavit, incorporating the appropriate reasons for these: -
 Page 285

Seeking injunction restraining the defendants from transferring, alienating or dealing with
their movable and immoveable assets in any manner without prior permission of the
Hon’ble Tribunal.
Attachment Before Judgment (ABJ) of assets in the name of Borrowers / Guarantors. Sale
before judgment in case assets charged are of perishable nature & the value of the
assets is going to diminish.
Seeking direction to the defendants for filing statement of assets on oath by them.
Impounding of Passports where Branch officials fear that Borrower(s) / Guarantor(s)
may proceed abroad.

Issuance of Partial Recovery Certificate based on the admission of debt by the Borrower
(s)/Guarantor (s) on the basis of latest Audited Balance Sheet or any other written
communication to the Bank.

Vetting of Original Application (OA) by the Bank’s Law Officer:

Original Application (OA) prepared by the Bank’s empanelled Advocate is to be vetted

by the Bank’s Law Officer and any suggested modifications are to be carried out.

Enclosures with the Original Application:

The Original Application (OA) is to be filed in DRT alongwith the copy of documents
and requisite court fee.

After Filing of Original Application (OA) In DRT: Registration of Original

Application in DRT:

On receipt of the Original Application (OA) at DRT, Registrar of the DRT will scrutinize and
if found in order, it will be registered and given a Serial Number.

If any defect in the Original Application (OA) is brought to the notice of the Branch by
the
Registrar of the DRT, it is to be rectified immediately.

ii. Issuance and Service of Summons by DRT:

On receipt of the application, the DRT shall issue summons requiring the Defendant (s)
to show cause, within 30 days, of the service of the summons as to why the reliefs prayed
for in the Original Application (OA) should not be granted

Registrar of DRT will send Summons by Registered Post and if it is undelivered twice,
service of
Summons can also be made by publication in newspaper having wide circulation.
 Page 286

iii. Interim order during first Hearing in DRT:

During the first hearing in DRT, empanelled Advocate should argue for granting the
Interim Relief
(s) prayed for and obtain the same.
iv. Filing of Written Statements by the Defendants:
The defendant (s) on service of summons are required to file their reply within one month
from the date of service of Summons.
v. Hearings in DRT:
Bank’s advocate should remain present on the dates of hearing and should arrange for
proper reply to all the issues raised by the Defendant’s counsel.
vi. Issuance of Order by DRT:
After giving the Applicant and Defendant (s) an opportunity of being heard, DRT shall
pass such Interim or Final Order directing payment of the amount with interest which is
found due upto the date of realisation or actual payment.

The Presiding Officer, DRT shall issue a Recovery Certificate under his Signature to the
Recovery Officer for recovery of the amount of debts specified in the Certificate
containing :-

No. of Original Application (O.A.) Name & Designation of Parties.

Particulars of claim.
Terms of payment of Decreed amount.

Execution of Recovery Certificate by Recovery Officer, DRT:

The Recovery Officer, DRT shall proceed to recover the amount of debt specified in the
Recovery Certificate by one or more of the following modes: -

By attachment and sale of movable / immovable properties of the Certificate Debtor (s) /
Borrowers, and / or Guarantors. Recovery Officer will issue sale proclamation notice and
will arrange for e- auction on the scheduled date.

By arrest / detention of the Judgment Debtor (s) in Civil Prison where they have sufficient
means to repay the Bank’s dues but deliberately avoiding the same.

Appointing a Receiver for the management of the movable or immovable properties of

the Certificate Debtor (s) / Borrower(s), and / or Guarantors.
 Page 287

Settlement of Bank’s Dues through LOK ADALAT

Introduction:

Lok Adalat is a forum where the disputes pending in the court of law or at pre-litigation
stage are settled amicably. Lok Adalat has been given statutory status under the Legal
Services Authority Act, 1987. An award made by the Lok Adalat is deemed to be a
decree of a civil court and is final and binding on all parties.

Cases which can be referred to Lok Adalat

Cases pending before courts and cases likely to be filed before any court where borrowers
are willing to settle Bank’s dues to avoid lengthy court procedures.

Monetary ceiling of cases to be referred to the Lok Adalat organized by Civil Courts is Rs.
20 lacs. Further, our branches can participate in Lok Adalats to be organised by
DRTs/DRATs irrespective of the amounts involved in the cases.

Where the account is NPA and there is no suit or proceeding initiated but there is a
likelihood of a settlement, then the Bank or the Borrower may make an application to the
Lok Adalat for taking up the matter before the Lok Adalat.

A list of identified accounts, with relevant details, is to be submitted to the Lok Adalat for
sending notices to borrowers for appearing before Lok Adalat.

5. The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (“Code”) seeks to significantly overhaul the
existing state of legal regime in relation to insolvency and bankruptcy processes in India.
The Code is being viewed as one of the most significant legislative reform towards “ease
of doing business in India” – one of the main objectives of legislative and policy reforms
by the central government.

Until now the law relating to insolvency and bankruptcy in India has been scattered over
several statutes with each of such statute having its own distinct objects and purpose, as
well as procedures and mechanisms resulting is a dispersed approach of recovery. The
Code however, seeks to bring uniformity in the jurisprudential approach and also
standardise the processes for the treatment of bankrupt or insolvent borrowers. The Code
has been formulated with the broad objective to consolidate all existing laws relating to
insolvency and bankruptcy for companies and individual under one umbrella.

Multiplicity of adjudicating forums, overlapping insolvency and restructuring laws, lower

monetisation of liquidated assets and the absence of a time-bound insolvency process are
some of the key challenges that the Indian economy faces today. The Code has been
enacted at a time when stress in the Indian banking sector has become evident. To ensure
 Page 288

stability and economic efficiency of the Indian credit market, it is critical that these issues
be addressed. It comes with an objective to enhance credit availability, promote
entrepreneurship, balance the interest of all stakeholders in an entity and reduce the time
of resolution for maximizing the value of assets.

The Code brings a paradigm shift from ‘debtors’ in possession to ‘creditors in

control’ which creates time bound processes for insolvency resolution of companies and
individuals. It moves from “Erosion of Net-Worth” to “Payment Default”. Insolvency
Professional will take over management and control of the Corporate Debtor (Borrowing
Company). Government dues would rank below the claims of other creditors. It also has
provisions to deal with concealment, fraud and/or manipulation leading to fine and/or
imprisonment. It also provides confidence to lenders and investors in the debt market.
Insolvency- is a situation where liabilities of a person/firm exceed its assets and isunable
to pay debt obligations as assets may be illiquid and cash flows are not sufficient to pay
debts.

Bankruptcy- occurs when a court recognises the insolvency which is beyond resolution.
A bankrupt entity is a debtor who has been adjudged as bankrupt by an Adjudicating
Authority by passing a bankruptcy order. The court appoints a trustee who will be
responsible for selling the property and discharge obligations to the creditors. It has
primarily to give relief to the debtor from the harassment by his creditors whose claims
are not paid.
The law has been implemented for Corporates w.e.f. 01.12.2016.
The IBC is divided into two stages. In the first stage, revival plan of the corporate is
explored and if not feasible, as second stage, the Company shall go into liquidation.

6. Compromise settlement policy

Compromise settlement refers to a negotiated settlement where a borrower offers to pay
and the Bank agrees to accept in full and final settlement of its dues an amount less than the
total amount due to the Bank under the relative loan account. Thus, the compromise
settlement invariably involves certain sacrifice by the Bank (by way of write off and/or
waiver) of a portion of its dues.

Basic principles for Compromise Settlement proposals

Bank’s Approach: The compromise will be a negotiated settlement under which the
Bank will endeavour to recover its dues to the maximum extent possible with minimum
sacrifice.

Realisable Value of Securities and NPV of compromise amount and Securities: The
realisable value of security charged to the Bank as also the Bank’s ability to dispose the
security will be the basic factors which would decide the compromise amount. While
assessing the realizable value of security, proper weightage would have to be given to its
location, condition and marketability.
 Page 289

The Net Present Value (NPV) of settlement amount should generally not be less than
NPV of the realizable value of the available securities. In case of lower value, the same
has to be justified with valid and sufficient reasons. For calculation of NPV, the rate of
discount should be taken as the prevailing Base Rate with annual rests and the maximum
estimated time to realize the securities may be taken as 5 years from the date of notice
under section 13(2) in case of SARFAESI action and 7 years from the date of filing suits
in case of DRT / Court cases.

Influence of Group Companies: In case the borrower has other group

companies,influence of these companies or the parent company may be used for a better
settlement.

Initial Deposit: Normally along with the compromise offer letter, an initial depositof at
least 5% of the offer amount may be taken from the borrower under no lien account as an
evidence of the borrower's bonafide intention to pursue the compromise settlement with
the Bank.

Terms of Payment : Time Period for Payment & Charging of Interest on

Compromise Settlement amount : It will be the endeavour of the Bank to get the entire
compromise amount paid up in lump sum. In cases where the amount is agreed to be
recovered in instalments, normally at least 15% of the approved settlement amount
(inclusive of initial deposit) would be payable upfront with the balance instalments spread
over a maximum period of 12 months. In case, the compromise amount is not paid as per
terms of sanction, the Bank will be entitled to treat the compromise settlement as
cancelled.

Cases of willful defaulters: In the matter of settling compromise amount, distinction will
need to be made between wilful defaulters and the borrowers defaulting for reasons
beyond their control. In case of the former, a tough stand has to be taken and the proposal
should be put up after obtaining in-principle approval of the GM
(NW/MCG/CAG/SAMG) based on a review of such cases.

Default Clause: Compromise settlement will be arrived at with borrowers

/guarantors subject to the condition that in the event of any failure to honour any of the
terms of the compromise settlement, the Bank will be entitled to
exercise againstthe borrowers / guarantors all the rights and remedies
available prior to the compromise settlement.

Consent Decree: An application for obtaining Consent Decree from the appropriate
Court/DRT should be filed immediately on sanction of the compromise proposal
incorporating therein a clause that in the event, the borrowers / guarantors fail to adhere
to the terms of compromise, the compromise settlement shall stand automatically
cancelled and the Bank will be entitled to recover the entire outstanding amount together
with interest at the contractual rate.
Position of other recovery action: The sanctioning authority must satisfy itself that all
possible steps to recover the dues have been explored and that compromise settlement is
 Page 290

in the larger interest of the Bank.

Opportunity cost analysis : While arriving at a negotiated settlement, the advantage

available to the Bank from prompt recycling of funds should be considered in
comparison to the likely recovery by following legal or other protracted course of action
i.e. opportunity cost analysis to be made.

Uncharged assets of the borrowers / guarantors: Before entering into any compromise
settlement, details of uncharged assets of the borrowers and guarantors should be
collected by either engaging the services of investigative agencies or otherwise.

Compromise settlement proposals from Guarantors: Compromise Settlement

proposals from guarantors should be treated on par with proposals from borrowers.

KEY LEARNINGS
1. Understanding of the entire process for taking action under the provisions of
SARFAESI Act, 2002.
2. Precautions before issuance of demand notice under Section 13(2) of the Act.
3. Precautions to be taken before taking possession under section 13(4) of the Act.
4. Sale of assets via e Auction.
5. Private treaty as a medium for disposal of assets under SARFAESI.
6. Understanding the process for filing of suit before Civil Court.
7. Precautions to be taken while entrusting the task of filing of suit to Bank advocate.
8. Interim reliefs which may be sought.
9. Monitoring of the suit.
10. Filing of Execution Petition.
11. Understanding the process for filing of suit before DRT.
12. Precautions to be taken while entrusting the task of filing of suit to Bank advocate.
13. Interim reliefs which may be sought.
14. Monitoring of the suit.
15. Handling of matters before the Recovery Officer.

16. Type of cases which can be settled under Lok Adalat.

17. Preparations to be done for Lok Adalat.
18. Process for settlement under Lok Adalat.
19. Importance of follow up after settlement.
20. Key elements of Bank’s Compromise Settlement Policy.
21. IBC’2016- introductory
 Page 291

CHECK YOUR PROGRESS

MCQ-1 A notice under Section 13(2) of SARFAESI Act may be given in which of the
following cases?
a After account is classified as NPA.
b The remaining dues exceed 15% of principal plus interest accrued
thereon.
c If the dues exceed Rs. 1 lac.
d Both 1 & 3 are correct.
MCQ-2 As per the provisions of IBC 2016, which of the undernoted statements are
correct with respect to Corporate Insolvency Resolution Process (CIRP) &
Liquidation ?
a CIRP to precede Liquidation.
b Liquidation can be ordered by NCLT without initiation of CIRP.
c Timeline available for CIRP is 180 days which may be extended by
NCLT by further 90 days.
d Both 1 & 3 are correct.
MCQ-3 What are the timelines prescribed by the Bank for filing of Original
Application before the DRT?
a Original Application (OA) is to be filed in DRT immediately on
approval but in any case within a maximum period of 3 months from
the date of approval. Where documents are getting time barred,
Original Application (OA) in DRT is to be filed 2 months before
expiry of documents.
b No timeline is prescribed by the Bank.
c Original Application (OA) is to be filed in DRT immediately on
approval but in any case within a maximum period of 2 months from
the date of approval. Where documents are getting time barred,
Original Application (OA) in DRT is to be filed 3 months before
expiry of documents.
d Original Application (OA) is to be filed in DRT immediately on
approval but in any case within a maximum period of 6 months from
the date of approval.
MCQ-4 Monetary ceiling of cases to be referred to the Lok Adalat organized by Civil
Courts is Rs. __________.
a 10 lacs
b 15 lacs
c 20 lacs
d 25 lacs
MCQ-5 Sale under 'Private Treaty' is also one of the options available under the
provisions of SARFAESI Act. Which of the statement/(s) is/ are true in
respect of sale resorted to by the Bank under 'Private Treaty' ?
a It is one of the methods for sale of Assets under SARFAESI Act,
2002.
b It is a sale process which is outside public auction and is resorted to
only when public auction fails.
c Both 1 & 2 are correct.
 Page 292

d Neither 1 nor 2 are correct.

KEY:
1 d 2 d 3 a 4 c 5 c

APPLY YOUR LEARNING

CASE-1 M/s XYZ and Company Pvt. Limited was involved in the business of
manufacturing of newsprint and was sanctioned credit facilities to the tune
of Rs. 75 crores (Working Capital: Rs. 27.50 crores, Term loan: Rs. 45
crores, LC Limit: Rs. 2.50 crores) in June 2016. The facilities were
subsequently enhanced to Rs. 82.50 crores in September 2018. Although
the key promoters Mr. A and Mr. B had experience of more than 15 years
in newsprint manufacturing business, on account of business slowdown,
loss to company due to non-realization of some large receivables and
possible diversion of funds, the credit facilities sanctioned to the company
were classified as NPA on 30.06.2019. The aggregate fund based
outstanding in the account is Rs. 84.50 crores while the non-fund based
outstanding is Nil as on 31.01.2020.
The activity is still running but at a very low level. The position of securities
available in the account is as under:
Primary (Stocks and receivables as per Statement dated 31.01.2020); Rs.
13.50 crores
Primary (Hypothecation of Plant & Machinery WDV as on 31.03.2019); Rs.
37.25 crores
Collateral (EM of 7 properties, aggregate value as per latest Valuation
Report dated 15.05.2019): Rs. 10.25 crores.

Action under the provisions of SARFAESI Act has already been initiated in
the account. However, as the activity is continuing, physical possession is
yet to be initiated at the bank level. The handling branch is preparing the
proposal for classifying the Company and its promoters as Wilful
Defaulters.

During the month of February 2020 Mr A visited the branch and has
indicated his intention to settle the bank’s dues under a compromise
settlement.

Q1 In case the Company M/s XYZ and Company Pvt. Ltd. and its
promoter directors are classified as Wilful Defaulters by the Bank,
can the compromise proposal received from the borrower still be
considered ?
a No, compromise settlements cannot be done with Wilful
Defaulters.
b May be considered with the approval of CCCC in the instant
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case.
c In case of Wilful Defaulters, a tough stand must be taken and
the proposal for compromise settlement should be put up after
obtaining in-principle approval of the GM
(NW/CCG/CAG/SARG) based on a review of such cases.
d Compromise settlement with Wilful Defaulters can be
considered like any other such proposal without seeking any
special approvals.
Q2 In case suit is filed before DRT against M/s XYZ and Company Pvt.
Ltd. for recovery of bank’s dues, and compromise settlement proposal
is considered subsequently, what additional step is required to be
undertaken by the branch?
a Compromise settlement cannot be considered after filing of
DRT suit.
b An application for obtaining Consent Decree from DRT should be
filed immediately on sanction of the compromise proposal.
c Consent decree may be obtained from DRT in case stipulated by
the sanctioning authority, otherwise it is not mandatory.
d The recovery suit filed before DRT must be withdrawn after
sanction of compromise settlement proposal.
Q3 Aggregate Collateral security available for the credit facilities to the
Company is at Rs. 10.25 crores. Considering a discount rate of 10%
and estimated realization time of 2 years through SARFAESI route,
calculate the present value of collateral security available in the
account.
a Rs. 9.32 crores
b Rs. 8.68 crores
c Rs. 8.93 crores
d Rs. 8.47 crores
Q4 Compromise proposal of Rs. 55.20 crores is received from the
Company alongwith an initial deposit of Rs. 3.50 crores. Assuming
that the Company and its promoters are yet to be classified as Wilful
Defaulters, which of the undernoted statement is not correct in this
situation?
a Initial deposit along with the offer is in line with the bank’s
compromise settlement policy.
b Initial deposit along with the offer is not in line with the
bank’s compromise settlement policy.
c Initial deposit is to be kept in a no-lien account and to be
appropriated in the loan account only after the settlement
proposal as proposed by the borrower is sanctioned by
competent authority
d Initial deposit of any amount exceeding Rs. 2.76 crores
shall be acceptable in the instant case.
Q5 The said Company offers a compromise settlement proposal of Rs.
 Page 294

55.20 crores for settlement of bank’s dues with initial deposit in line
with the compromise settlement policy. However, the company has
proposed payment of this settlement amount within 2 years. Which of
the undernoted statement is correct in this situation?
a Repayment period for any compromise settlement shall not be
extended beyond a period of 18 months without obtaining
administrative approval from an official not below the rank
of Chief General Manager.
b Repayment beyond 12 months cannot be considered in any
scenario as per Bank’s policy.
c Compromise settlement amount must be paid within 6 months
of sanction of settlement.
d Compromise settlement amount may be paid beyond 12
months without any specific administrative clearance from
any higher authority.
CASE-2 ABC Pvt. Ltd. had availed credit facilities (working capital Rs. 4.50 crores,
Term loan; Rs. 1.00 crore) to the tune of Rs. 5.50 crores which was
sanctioned by the Bank on 12.08.2013. The unit was into manufacturing of
plywood, ply board, doors etc. The account was taken over from Bank of
Baroda. However, due to dispute among the directors the account was
classified as NPA on 14.03.2019. The documents are valid upto 15.01.2020.
The unit has been issued notices under Section 13(2) of SARFAESI Act on
12.04.2019. The activity of the unit has also stopped subsequent to
account being classified as NPA. After initiating SARFAESI Action, the
promoters have offered to settle the Bank’s dues under compromise and
have offered Rs. 3.40 crores towards final settlement. The aggregate
realisable value of security available in the account is Rs. 3.90 crores as
per Valuation Report dated 10.02.2019. The total dues as on 30.11.2019 is
Rs. 6.48 crores. Suit is yet to be filed before DRT for recovery of Bank’s
dues.
There was a series of negotiations with the key promoter of the unit Mr. X.
Ultimately, Mr. X agreed to increase the offer to Rs. 3.60 crores. Mr. X has
expressed his inability to increase this offer further.
Mr. X has submitted his offer and has proposed to pay Rs. 3.60 crores as
per the undernoted schedule.
Rs. 16.00 lacs as upfront along with the offer letter.
Rs. 44.00 lacs immediately on acceptance of the compromise offer by the
Bank.
Remaining Rs. 3.00 crores in two equal annual instalments of Rs. 150.00
lacs, first such installment payable after one year from the date of Bank’s
conveying acceptance of the compromise offer. Answer the questions
based on the information provided.
Q1 Is the upfront amount of Rs. 20.00 lacs in line with the bank’s compromise
settlement policy?
a No, it should be minimum 10% of the offer amount of Rs. 3.60
crores.
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b No, it should be minimum 7.5 % of the offer amount of Rs. 3.60

crores.
c No, it should be minimum 15% of the offer amount of Rs. 3.60
crores.
d Normally, it should be at least 5% of the offer amount. Therefore
it is not in line with the Bank’s compromise settlement policy.
Q2 What shall be the treatment of upfront amount received by the Bank
before approval of the compromise settlement offer?
a It should immediately be appropriated in the loan account.
b It should be held in the form of a Banker’s Cheque.
c Initial deposit of upfront amount to be kept in a no-lien account.
d None of the above is correct.
Q3 Calculate the NPV of OTS amount taking into account that repayments
shall come as proposed by the borrower. (NPV to be calculated taking a
discounting factor of 9.0% at annual rests.)
a Rs.3.18 crs
b Rs. 3.24 crs
c Rs. 3.32 crs
d Rs. 3.06 crs
Q4 Calculate the NPV of the Realisable value of security assuming that if Bank
does not accept this offer, it may take the Bank two years to dispose the
the mortgaged property through SARFAESI route. (NPV to be calculated
taking a discounting factor of 9.0% at annual rests.)
a Rs. 3.28 crs
b Rs.3.37 crs
c Rs. 3.19 crs
d Rs. 3.21 crs
Q5 Apart from value of security, what are the other points that should be
considered while negotiating a compromise offer?
a Time period of payment or charging of interest on balance
amount.
b Distinction will need to be made between wilful defaulters and the
borrowers defaulting for reasons beyond their control.
c Sources of payment to be assured to the satisfaction of the Bank.
d All the above points to be considered during negotiation.
KEY:
Case- 1 c 2 b 3 d 4 b 5 a
1
Case- 1 d 2 c 3 b 4 a 5 d
2