Justice K S Hegde Institute of Management,

NITTE

17-19 MBA BF 441

STRATEGIC CREDIT MANAGEMENT

Course Material

Prepared by:

H Ramdas PaI
M.com, CAIIB, AIIBF, DTIRM, DHLA, DIBF, DAWM,

Visiting Faculty
Mob No. 9448774665
Email: hramdaspai@gmail.com

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 Module – I
Introduction to Credit Management, Credit Policy of Banks, principles of Lending,
Appraisal, Credit Risk, Security and Guarantee norms of RBI, borrower specific
Credit Issues, KYC for credit facilities, CIBIL, General Prudential Norms, Credit
Rating, Mechanism of Monitoring, Credit sanctions at various Administrative
Level, Sanctioning Powers, Post Sanction Follow-up, Review and Renewals of CC
facility.

Introduction to credit management:

Banks accept deposits from the public and borrow funds to extend loans to those
who need funds for business or other activities or make investments. Thus banks
are financial intermediaries performing the role of resource allocation by moving
idle funds to productive users. Basically banks convert the resources collected
(deposits) into lending (bank money) and investments. The efficiency of the banks
depends upon how best the funds are deployed for credit and investments (market
operations). The funds deployed under investments are generally recovered in
time. Whereas funds used for credit (lending) are to be recycled at the proper time
for maximizing the profits. In fact, the banks which are concentrating on lending
and recovery are earning more profits compared to the banks choosing investment
route. The strength of the bank lies on the quantum of net interest income (NII)
(the difference between interest earned and interest paid). The depositor’s primary
concern is that he/she gets back the money when needed (safety). Secondly,
he/she would like to get some interest income from the funds placed with the
banker. Further all the depositors seek the convenience of being able to issue
cheques and have access to ATM Cards. Thus, safety, income and ability to make
payments and the liquidity requirements with the depositors, determine the type of
deposit and the period of placement with the Bank. Regulation and control of
Banks by RBI- the Central Bank of the country is one of the important reasons for
the flow of deposits to the banks. Control and Regulation results in high public
confidence and thus banks receive large amount of public money in the form of
deposits. As such, the Banker has a fiduciary relationship with the depositors and
must deploy the funds usefully and safely. The banker is under an obligation to
return the money when demanded by the depositors and pay interest for the use of
funds. So the banker must deploy the funds in activities that produce income while
at the same time the money is safe and liquid. Traditionally, loans and advances
account for a larger share of use of funds by the bank and the lending function is
the core function of a bank.
The credit management in modern day banking has become increasingly complex
and challenging. Better skills a Banker has does not remove the risks of lending.
Risks are not always the result of faulty appraisal or dishonesty or wilful default of
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the borrower, notwithstanding the fact that a borrower is a person of integrity, the
enterprise he runs/manages could fail on account of adverse business cycles,
changes in market conditions, volatility of input and output prices, products
becoming obsolete due to the arrival of new products, competition in the form of
better products priced lower and a host of other reasons. Banker has to factor the
above possibilities and arrive at terms of credit in such a way that the risks are not
avoided but are managed. Banker adopts many strategies such as margins, sub-
limits, pricing, diversification, product mix etc. so that the lending function is
viable. Banks have to balance themselves between the compelling lending and
deregulated lending taking into account the principles of safety, liquidity and
profitability. Banks have to have full-fledged and professional credit management
system in place. A better managed credit portfolio brings more revenue, better
yield besides keeping the level of non-performing assets (NPAs) at a very low
level.
Basic Principles of Lending:
Banks while granting loans have to follow certain basic principles of lending. These
can be segregated into two groups namely (a) conventional principles and (b)
contemporary principles.
(a) Conventional Principles: While sanctioning loans and advances to customers
banks have to follow the following basic principles:
1. Safety: Safety means reducing the risk of non-payment of the principal and
interest by the borrower (called the credit risk).
2. Liquidity: Banks have a legal duty as well as business obligation, to return the
deposits when these fall due, which is possible only when the borrowers return
the loans, on time. Hence the banks have also to ensure that their loan portfolio
mix is appropriate. i.e. a part is in the form of short term loans and a part is in
the form of long term loans, which helps a bank to meet its liquidity
requirements.
3. Profitability: Commercial Banking by nature is undertaken for the purpose of
earning profits and Indian Banks are no exception. In fact the profit is an index
of operational efficiency of banks. The deregulation approach adopted by the
Reserve Bank of India and Govt. of India has thrown open many new challenges
before the Indian Banks and one of these challenges is to maintain commercial
viability, by generation of profits.
4. Purpose of Loan: The purpose for which a loan is sanctioned has a direct bearing
on repayment of the loan. The activity for which loan is sanctioned ought to
generate profits, which enables the borrower to promptly repay the loan. Further
the purpose must be a lawful purpose also. If the loan is given for an activity
which is not permitted by Law of the land or by regulations of the Govt. or of
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 Reserve Bank of India, the bank lending would get into trouble and banks may
not be able to recover such loan.
5. Risk diversification: To mitigate the concentration risk in lending, banks have to
take care that their Credit Policy encourages lending by their branches to
different sectors, for various economic activities, to different types of borrowers
and lending across the geographical regions, so that the loss from down turn in
one or two activities or regions or sectors, is compensated by others.
6. Economic Viability of the activity/enterprise: The economic viability of the
activity/enterprise being financed is one of the most important principles of
bank lending. The incremental income from the activity/project being financed
builds repayment capacity of the borrower. In its absence, the borrower cannot
have enough interest and incentive to pursue the activity for a long time, which
is loss proposition for the bank.
(b) Contemporary Principles and policies :
To achieve the aforesaid objectives, the banks need a professional funds
management policy or asset liability management policy. While they have to make
efforts to keep the cost of funds mobilised low, more important will be the
deployment policy in the wake of deregulated regime where liquidity risk and
interest rate risk are real threats. In the present day context the following are the
principles or policies which banks have to take care of:
1. Funds deployment policy: The mobilisation of funds or resources at low cost
and its deployment in high earning assets that too which continue yielding
income, is the key for the bank to meet its repayment obligations towards the
depositors or borrowings and also to sustain itself. In case the funds are
deployed in such assets which yield inadequate earning or do not yield any
income at all, the average yield on total funds deployed would come down
without corresponding decline in the average cost of the funds mobilised.
2. Cost and yield pattern of advances: While going in for fresh advances, the cost
and yield aspect has to be properly understood to see whether such advances
are adding to net revenue or not. The Cost aspect involves:
(a) Capital Cost i.e., the interest to be paid for funds required to lend.
(b) Operational cost i.e. the cost which has to be incurred in servicing the
account such as staff cost, cost of follow-up and other operations.
(c) Risk cost i.e. cost of credit guarantee fee and also the amount of provision
which will have to be made on the poor quality loans getting converted into
non-performing loans.
The Yield on the other hand would be taking into account:
(a) The size of the advances in amount terms.

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 (b) The quality of loan assets from record of recovery aspect i.e whether it
continues to be a performing asset or becomes a non-performing loan.
(c) Ancillary business (including non-fund based business) income available as a
result of such lending.
3. Quality of loan assets, profitability and capital adequacy requirements: With
the prudent guidelines on capital adequacy and asset classification and provision
in place, the banks have to examine the level and quality of their risk weighted
loan assets. For each general increase in the risk weighted assets of Rs. 100 by way
of loan or otherwise, the banks need increase in capital funds of, at least Rs. 9. If
the Banks want to achieve and maintain the capital adequacy on a continuous
basis, they will have to improve the quality of their assets with the objective of not
allowing those advances to become non-performing.
4. Impact of Prudential guidelines on the advances portfolio: Implementation of
RBI’s prudent guidelines on income recognition with effect from 01.04.1992, have
changed the entire outlook and prospects of earning income from advances. Long
back the health code system was adopted to determine the recognition of income.
At present the record of recovery and not the security or health code, is the
criteria. In case a loan account becomes non-performing due to non-recovery of
instalment or interest bank cannot recognise the interest debited to the account as
income.
Credit management in the Banks consists of the following:
 Proper and systematic identification of borrowers.
 Objective pre-sanction appraisal.
 Adoption of credit rating models.
 Proper interpretation of financial statements of the customers (B.S, P&L,
Trading A/c etc.)
 Sound and meaningful Credit Policy.
 Timely guidance & surveillance systems.
 Collection of market information.
 Legal help and guidance to branches.
 Standardized documentation and systems and procedures.
 Follow-up of credit at every stage.
 Post-sanction follow up and monitoring.
 Branches to report the irregularities in time.
 Use of recovery mechanism and forums.
 Robust Inspection and Audit system.
 Annual review of loan accounts.

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 Settlement and out of court settlement as a last resort taking into account the
opportunity cost of funds.
 Internal exposure norms to be followed.

Credit Policy:
 The Credit Policy also referred to as Loan Policy of a Bank is generally aimed at
accomplishing its mission commitment to excellence in customer service and
shareholders’/stakeholders’ and employee satisfaction. Bank’s Board is
generally the apex authority in formulating Credit Policy of a Bank.
 Credit function of a Bank encompasses all activities like sanctioning, issuing and
collecting various types of loans and advances. Within the bank, a number of
officials may handle the credit functions. In order that all the officers and
departments/branches follow appropriate guidelines and take correct decisions
such that the bank is able to comply with (a) regulatory standards, (b) internally
set risk profiles, (c) maintain the quality of the credit portfolio, and (d) be
profitable, banks must have a well-orchestrated and written Credit Policy.
 Credit Policy or Loan Policy of the bank is the annual document that highlights
the conscious stand of the bank in various matters pertaining to credit portfolio.
 It is a document which contains specific guidelines for all types of credit
decisions and determines the composition of its overall credit portfolio.
 It is the source of information, guidance and reference to all the policy makers,
functionaries and field workers.
 RBI expects every bank to have in place a well-articulated credit policy that
would guide the credit expansion, credit delivery, credit administration and
prompt recovery during the year.
 The main objective of the credit policy is to maintain a Healthy Balance between
Credit Volumes, Earnings & Asset Quality within the framework of Regulatory
prescriptions (regulatory targets fixed by GOI and RBI), corporate goals and
social responsibilities. The policy will thus aim that the credit expansion should
be steady, sustained and prudent. The policy should enable good earnings and a
steady rise in profits while maintaining a close watch on Quality Assets.
 Credit policy in quint essence is a Bank’s approach to sanctioning, managing
and monitoring Credit Risks aimed at effective systems and control. It will
elaborate on the organisation of the credit function within the bank and indicate
the authorities and responsibilities attached to each functionary in the credit
departments/branches.
 The Policy should specify the procedure and responsibility if the credit/loan
officer wants to entertain a proposal outside the specified risk levels and how to

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 seek specific approvals of such deviations/departures from the Credit Risk
Committee/Sanctioning/Approving Authority.
What does Credit Policy contain?
 Purpose and contents.
 Guidelines pertaining to various types of facilities.
 Securities/collaterals to be taken
 Margin to be maintained
 Maximum exposure individual and group wise.
 All about inland credit facilities and foreign exchange credit facilities.
 Specific norms in the matter of export and import finance.
 Fund based and non-fund based credit facilities.
 Policy on corporate lending, retail lending and priority sector lending.
 Credit rating model in detail
 Management policy in regard to various types of risks such as broadly credit
risk, market risk and operational risk.
 Guidelines in the matter of risk based supervision and risk based internal audit.
 Guidelines on internal loan review mechanism.
 Guidelines on pre-sanction appraisal of various types of credit facilities.
 Guidelines pertaining to post sanction review, follow-up and monitoring.
 Lending policy on focus sectors such as infrastructure, agril, MSME, Tiny sector,
mid- corporate, housing, education, trade, services, weaker section credit,
export etc.
 Banks policy in the matter of recovery of advances.
 Policy decisions on filing of suits in civil courts, Lok Adalats, referring to
Arbitration and other modes of recovery of dues.
 Bank’s policy on settlement of loans.
 Staff accountability policy.
 Policy on writing off of debts and granting concession of interest.
 System of reporting at various levels of the management – credit monitoring of
sanctions at various levels.
 Guidelines on KYC (Know Your Customers) while extending various credit
facilities.
 Sectors that are specifically encouraged for credit expansion.
 Sectors where the Bank has to go slow
 Sectors that are banned from further financing
 Matters on loan documentation
 Matters on service charges
 Allocation/delegation of sanctioning powers to various functionaries.
 Any other matter related to credit management.

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 Prudential norms and Regulatory exposures:
 Prudential norms are the precautions that the banks have to observe in their
significant banking operations.
 Prudential norms are those which a prudent organization must observe in their
dealings without sacrificing the quality.
 Banks basically are the custodian of public funds. They owe a special duty to
safeguard the resources entrusted to their care.
 RBI is the banker’s bank and conscience keeper to GOI.
 Prudential norms are like stars to banking system. They may not give sufficient
light but then they show the directions to the committed organizations.
Prudential norms in general may pertain broadly to the following areas:
 Per individual/group exposure limits.
 Norms pertaining to income recognition, asset classification, provisioning (NPA
norms)
 Norms pertaining to lending through syndication system.
 Norms in the matter of securities, margin, documentation.
 Norms in the matter of dealing with money market, securities market and FX
markets.
 Norms pertaining to CRR and SLR (reserve requirements)
 Norms for dealing rooms as a part of treasury of a bank.
 Norms for settlement of debt through arbitration, Lok Adalats etc.
 Norms in the matter of filing suits, filing of EPs etc.
 Norms pertaining to risk management, asset – liability management.
 Norms pertaining to capital adequacy and related matters.
Credit policy of Banks – General Policy guidelines may be enumerated as follows:
Sl No. Sector/purpose Bank’s policy
1 Loans for NRIs Prohibited beyond 100 lakhs against NRE
(Repatriable and FCNR B account holders)
2 Corporate lending Selective approach- focus on mid corporate
with turnover of 25 to 50 crores
3 Pricing to corporate lending According to risk perception/Base
Rate/MCLR
4 Retail lending Increased thrust with emphasis on asset
quality, Tie ups with organizations, stronger
due diligence prevent impairment of loan
assets. CPU
5 Priority Sector Lending Continued focus, issuance of KCC, SHG, JLGs
More sanctions at Branch level
6 Focus sector Agril, MSME, mid Corporate, Jewel loans,
exports etc

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7 Commercial real estate, capital Low priority
market, NBFC
8 New Business proposals Needs to obtain prior clearance from the
controlling offices for Non Priority Advances,
Real Estate, NBFC etc.
9 Takeover proposals Cautious approach
Real estate not permitted
Housing loans permitted
Take over after proper scrutiny.
10 Loan syndication Corporate office will take care of this sector.
Scouting will be done at higher level.
11 Green field projects Only for “AAA” rated parties
12 Assignment/buy outs Permitted
13 Appraisal
1.Rating chart Compulsory for loans of 10 lakhs and above
2. Joint appraisal For 20 crores and above
3. Financial Statements Unaudited statements up to 25 lakhs
Audited statements where limit is over 25
4. National Account Concept lakhs.
All big ticket loans falling under corporate
office power will be through one branch at a
centre.
14 Time norms for disposal 15 days for loans up to 25,000/-
8 weeks for other loans.
25 days for exporters
15 Rejection of the proposals At the respective sanctioning authorities and
subsequent confirmation by higher level.
Loans to SC/ST cannot be rejected at lower
level. To be rejected by the next higher
authority.
16 Valuation of properties Two Valuations for properties valued more
than 10 crores and above. Lower of the two
shall be accepted. For others single valuation.
Branch Managers to verify the valuation
17 Submission of Financial Compulsory audited statement for limits above
statements 25 lakhs. Non-corporate borrowers FS are
not compulsory for 10 lakhs to 25 lakhs.
Audited statements not compulsory for less
than Rs 25 lakhs.
18 Loan system WC shall be in the form of loan and CC at 80:20
proportions.

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19 Delivery channels Specialized branches like HFB, MSME, CPC,
Overseas Branches, Corporate finance
Branches etc.
20 Working capital limit – method of  Simplified method up to 25 lakhs
assessment  Nayak committee/ Turn over method
up to 200 lakhs
 EWCL method above 2 crores to 20
crores
 Cash budget method for limits over 20
crores
Credit policy-Internal Exposure Norms:
Sl. No. Working capital Norms
1 Current ratio 1.10 to 1.33 under EWCL/cash Budget method
for general category. 1.25 to 1.33 for SME with
turnover method.
1.05 for MSME- EWCL method
2 TOL/TNW Below 5:1
3 Security Coverage 1.25 for MSME and 1.30 for other borrower
4 Profitability Net profit shall be positive
5 Term loans
DER Not more than 2.5:2 (3:1 for MSME)
Average DSCR Not less than 1.5 (1.25 for MSME)
Security Coverage Not less than 1.30 (1.25 for MSME)
Debt Equity ratio Long term borrowing (present and proposed)
Tangible net worth
DSCR Net profit after tax + depreciation + Interest on
TL and DPG
DPG & TL instalment + Interest on T L and DPG
6 Method of Financial Discount cash flow and IRR should be >15% for
appraisal project loans
7 Loan for second hand Allowed in exceptional cases and should not be
machinery/ vehicles more than 5 years old and left over life should be
7 years.
8 Ceiling on exposure Real estate 18% of Gross credit
NBFCS and MFI 8% of Gross credit
Commodity sector 2% of Gross credit
Film industry 0.5% Gross credit
9 Issuance of B.G. limit 10% of the Tier I capital
10 Short term corporate 15% of the gross credit
lending

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11 Lending to borrowers Not encouraged, but in exceptional cases by
where the earlier dealings obtaining prior clearance from higher authority
are unsatisfactory
12 Wilful defaulters No
13 Takeover proposal Very selective where the bank has definite
business advantage
14  Per party exposure 15% of capital funds of the Bank
Single borrower
 Group borrowers 40% of capital funds
 Single borrower –
infrastructure loans 40% of the Capital funds of the Banks.
 Group borrowers – 50% of the capital fund
infrastructure
 Oil companies 20% of the capital fund
15  Monetary ceiling for Single 25 crores, group 40 crores
exposure limit HUF
 Trust/co-operatives Single – 40 crores, group 50 crores
 Housing finance 3 times of NOF of borrower
institutions
 Sick/ SSI (units) Exposure limit not applicable
 Real estates Not more than two times of TNW.
 NBFC – single Not more than 10% of capital funds.
 NBFC – AFC Not more than 15% of capital funds
 Unsecured loan Not more than 15% of the banks gross credit
16 Stock audit Compulsory for loans for 5 crores and above.
17 Sensitive sectors 1 crores to 10 crores quarterly review
Above 10 crores monthly review
18 Concurrent Audit Every month for 1 crore and above. Report
forwarded to controlling office
19 Desirable maturity profile Less than 3 years – not less than 35% of the gross
advances.
3 years and up to 5 years not exceeding 65%
Over 5 years – not exceeding 40%
20 Provision coverage ratio 70% of NPAs
21 Charging of monthly All loans and CC limits except loans for
interest Agriculture and allied activities
22 Capital market exposure 40% of net worth of the Bank
23 Exposure to NBFC 4% of NOF of Bank
24 Unsecured advances 15% of total loans outstanding.
(FB + NFB)
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Statutory & Other Restrictions on Loans and Advances :
Statutory Restrictions:
 A Bank cannot grant any loans and advances on the security of its own shares.
–Sec. 20 (1) of Banking Reg. Act. 1949).
 Banks are prohibited from entering into any commitment for granting any
loans or advances to or on behalf of any of its directors, or any company/firm
in which any of its directors is interested as partner, manager, employee or
guarantor. Sec. 20 (1) of B R Act. 1949.
 A Banking company shall not, except with the prior approval of the RBI, remit
in whole or in part any debt due to it by any of its directors or any firm or
company in which the directors are having interest as partner or guarantor.
An remission made in contravention of the provisions shall be void and have
no effect. (Sec. 20 A of B R Act 1949) .
 Banks shall not provide loans to companies for buy-back of their
shares/securities.
 Banks should not hold shares in any company except as provided in sub-
section (1) whether as pledgee, mortgagee or absolute owner of an amount
exceeding 30% of the paid-up capital of that company or 30% of its own paid-
up share capital and reserves, whichever is less. (Sec. 19 (2) of BR Act.

REGULATORY RESTRICTIONS:
 Without prior approval of the Board or without the knowledge of the Board,
no loans and advances aggregating to Rs. 25 lakhs and above should be
granted to relatives of the bank’s Directors including CMD /ED etc.
 No officer or an Committee comprising, inter alia, an officer as member
shall sanction any credit facility to his/her relative but only by the next
higher sanctioning authority,
 Banks should not extend finance for setting-up of new units consuming
/producing the Ozone Depleting Substance (ODS) (Montreal Protocol).
 Specific restrictions on finance against specified Sensitive Commodities.
 No Bank shall grant any loan/advance for subscription to Indian Depository
Receipts (IDRs) and shall not grant any loan/advance against
security/collateral of IDRs issued in India.
 Banks should not grant an advance for purchase of gold in any form
including primary gold, gold bullion, gold jewellery, gold coins, units of
Gold Exchange Traded Funds (ETF) and units of Gold Mutual Funds.

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PRUDENTIAL GUIDELINES:
 Working Capital finance to MSME and Information Technology and Software
Industry. (Turnover Method upto Rs. 5 crore and upto Rs. 2 crore respectively.
 Credit Exposure/Basel III norms.
 Banks should ensure that no loans are sanctioned for acquisition of/ investing
in Small Savings Instruments including Kisan Vikas Patra.
 Infrastructure Financing; Financing Promoters’ Equity; Engaging of Recovery
Agents/Training etc;

EXPOSURE NORMS (AS PRESCRIBED BY RBI)

Description Limits/ceilings
Single Borrower 15% of Capital funds of Bank/FI.
Additional 5% exposure (i.e. up to 20%) for extension of
credit to Infrastructure sector.
Further 5% of Capital Funds (i.e. 25% of Capital Funds) for
Infrastructure Projects and (i.e. 20%) for other Projects
Borrower Group 40% of Capital Funds of Bank/FI.
Additional 10% exposure (i.e. up to 50%) for extension of
credit to Infrastructure Sector. Further 5% of Capital Funds
(i.e. up to 55 %) for Infrastructure Projects and (i.e. upto
45% ) for other projects.

Bridge Loans/Interim At the discretion of the Bank/FI

Finance
NBFC/NBFC-AFC (Asset 10/15% of Capital funds
Financing Cos.) Can be increased by 5% to 15/20% for on lending to
infrastructure sector
Capital Market Exposure Not to exceed 40% of Net worth/Consolidated Net worth
st
as on the 31 March of previous year.
Advances against Shares Physical Form- Not to exceed Rs. 10 Lakhs
to Individuals (shares, Demat Form - Not to exceed Rs. 20 lakhs
convertible bonds,
convertible debentures
and nits of equity -
oriented Mutual Funds

Financing of Initial Public Exposure ceiling in respect of unsecured advances,

Offerings (IPOs) to including unsecured non-funded credit.
individuals (shares,
convertible bonds/
debentures, units of
equity oriented Mutual
Funds

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 Exposure ceiling in Unsecured exposure is defined as an exposure where
respect of unsecured the realizable value of the security as assessed by the
advances, including FI approved valuers/RBI’s Inspecting officials is not
unsecured non-funded more than10% abinitio, of the outstanding exposure.
credit Banks/FIs can formulate their own policies on the
extent of un-secured Exposure.
Cross holding of Capital Not to exceed 10% of capital funds of Investing Bank.
among banks/FIs
Bank’s exposure in the following category is exempted from compliance of the
exposure norms:
 Rehabilitation of Sick/Weak Industrial Units.
 Food Credit
 Guaranteed by the Central Government of India.
 Loans against own Term Deposits.
 Exposure on NABARD.
Items excluded from Capital Market Exposure:
 Bank’s investments in own subsidiaries, joint ventures, sponsored RRBs
and investment in shares and convertible debentures, convertible bonds
issued by institutions forming crucial financial infrastructure as listed out
in the RBI circular. .
 Tier I and Tier II debt instruments issued by other banks;
 Investment in Certificate of Deposits (CDs) of other Banks.
Preference Shares, Non-convertible debentures and Non-convertible bonds.
 Units of Mutual Funds under schemes where the corpus is invested
exclusively in debt instruments.
 Shares acquired by banks as a result of conversion of debt/overdue interest
into equity under Corporate Debt Restructuring (CDR) mechanism.
 Term loans sanctioned to Indian Promoters for acquisition of equity in
overseas joint ventures/wholly owned subsidiaries under the refinance
scheme of Export Import Bank of India (EXIM Bank).
 Own underwriting commitments, as also the underwriting commitments of
their subsidiaries, through the book running process.
 Promoters’ shares in SPV of an infrastructure project pledged to the lending
bank for infrastructure project lending.

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PRINCIPLES OF LENDING:
Banks are the custodians of the public money. Banks have the responsibilities of
extending credit as per the RBI monetary policy and credit policy and also to
achieve mandatory targets. However, the banks shall have to look into the
following aspects of the borrowers while sanctioning the loans.
- Character – Capacity – Capital- Collateral and Case history. (5Cs).
Further a bank has to take care of the following sectors while granting loans within
the available funds as per GOI/RBI guidelines:
- Priority sectors.
- Small and medium enterprises.
- Education.
- Housing.
- Weaker section.
- Exports.
- Government sponsored purposes.
- Retail sector.
- Manufacturing sector.
- Large industries etc.
CREDIT APPRAISAL:
Credit Appraisal is a process of critical evaluation of a loan request by a
prospective borrower. The primary objective of the evaluation is safety and
liquidity of funds lent and profitability from the credit extended. The essence of the
credit appraisal is that it measures the risk inherent in the proposal and comes to
judgment to sanction or reject the proposal based on the assessment of the
information, the applicant and the project. Banks use objective measures like credit
rating, analysis of financial statements, obtaining credit information from credit
rating agencies, working capital assessment etc. while appraising a credit proposal.

PROCESS OF CREDIT APPRAISAL:

- Interview with the applicant.
- Visit to the borrower’s workplace.
- Collection of market information.
- Confidential opinion, verification of RBI defaulter list, CIBIL, ECGC etc.
- Verification of sale tax, wealth tax and income tax returns.
- Verification of property statement.
- Payment of municipal tax, house tax etc.
- Verification of balance sheet, P&L account, receipts and payments.
- Observance of KYC norms.
- Obtaining project report and its scrutiny.

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- Obtaining documents required for creation of mortgage such as original sale
deed, partition deed, court sale certificate, land grant order, lease agreement,
gift deed, encumbrance certificate, and land revenue paid receipts.
- Verification of records by the Banks advocate for establishing the clear
marketable title.
- Verification of licence to start the business.
- Verification of documents pertaining to power supply, water supply etc.
- Verification of various clearances from the government.

Once the above documents are collected and verified, the official in charge of the
credit section in the branch will appraise the proposal to find out its worthiness to
sanction. The appraisal note shall discuss on technical feasibility, economic
viability and bankability. The note shall also contain ratio analysis, cash flow and
fund flow statement. The appraisal shall also discuss the availability of raw
materials, demand for the product. The bank shall ensure that the proposal
generates adequate income towards repayment of the interest and instalment
leaving reasonable surplus for the livelihood of the borrowers.
CLASSIFICATION OF BANK ADVANCES:
 Bank Advances are broadly classified as (a) Fund based (FB) and (b) Non-Fund
based (NFB) Credit facilities, considering the immediate flow of bank’s funds or
resources. While Cash Credits, Overdrafts, Bills & cheques discounted/purchased
and loans are Fund-based credit facilities, Issue of Bank Guarantee and Letter of
Credit, Acceptances etc. are example of Non-Fund based credit facilities.
 Considering the security, the Bank advances are classified as (a) Secured
Advances and (b) Un-secured Advances or clean advances.
 Further Bank credit facilities on the basis of tenure of repayment have been
classified as: Demand Loans, Short Term Loans and Long Term Loans.

CREDIT RISK:
In the process of financial intermediation, the Banks are confronted with various
kinds of financial and non-financial risks such as credit risk, interest rate risk,
foreign exchange risk, liquidity risk, operational risk, reputation risk etc.
What is credit risk?
Credit Risk is defined as the possibility of borrower/counterparty default. It refers
to the possibility of loss that the bank or financial institution may suffer as a
consequence of inability of the borrower, who is operating in an environment
having many uncertainties resulting in threat to the viability and sustainability of
the activities, to keep-up his credit commitments.

16
The different kinds of credit risk
 Transaction or default risk.
 Intrinsic and concentration risk.
 Counterparty risk.
In order to safeguard the Banks against the above risks, the Banks have put in place
risk management techniques at every stage of the credit sanction.
SECURITY ANALYSIS:
It is important to look at the credit proposal on the following managerial angle:
Character, capacity, capital, collateral and case history (5 C’s). Similarly, the credit
proposals have to be examined 5 P principles such as person, purpose, prospects,
profitability and project also to be looked into in addition to managerial angle on
aspects mentioned below: Safety of funds, profitability, liquidity, purpose, risk
spread and security.
After examining the above, the security offered shall have to be analysed to know
whether the same is acceptable to the bank and has the marketability. Banks
provide loans against certain securities so that in case of default the money
advanced can be recovered by realising the securities.
The securities are classified as,
1) Primary security
These are securities or assets which are created with the help of finance made
available by the Bank. Eg: loan granted for the purchase of sewing machine is a
form of primary security.
2) Collateral security:
It is the security against which the Bank has not made any advance. It is rather
additional security. Collateral security will help the Banks to recover the dues if
the value of the primary security is not sufficient to recover the dues.
This can be illustrated as under:
A grocery merchant has been sanctioned a cash credit limit against hypothecation
of stock held in his shop as primary security. He also assigns Life Insurance Policy
in favour of the Bank as collateral security. Land, building, fixed deposits, shares
etc. can also be accepted as collateral securities.
3) Liquid securities:
These are securities which can be immediately converted into cash. Eg: fixed
deposit receipts, gold ornaments, bonds, treasury bills, shares, Trust Securities.
Features of good securities:

17
The very objective of obtaining the security while granting the loan is to ensure that
in case of loan default, the securities can be adjusted/sold easily for recovering the
dues.
The characteristics of good securities are:
 Marketability.
 Ascertain ability.
 Stability.
 Transferability.
The above features of the securities are also known as the principles of MAST.
SECURITY AND GUARANTEE NORMS OF RBI:
Reserve Bank of India (RBI) has issued directions to the Banks on Security and
Guarantee for the loans to be availed by the public. These norms are specific in
respect of priority sectors and weaker sections. For other categories of borrowers,
the banks can themselves bring out security and guarantee norms with a prior
approval of their board. Important norms are summarized below:
1) Margin:
No margin for loans to weaker sections up to Rs. 1 lakh. The subsidy / margin
money received from the government shall be treated as margin. For loans
above Rs. 1 lakh, 15% to 25% is insisted.
2) Security:
The banks shall not insist for security for loans up to Rs. 1 lakh. The assets
created out of the loan shall only be taken as security. Hypothecation of assets
or mortgage of properties can be taken as security for the loans above Rs. 1 lakh.
No security should be asked for the loans availed by SHG’s, JLGS’s etc up to Rs. 3
lakhs. In the case of educational loans, security will not be insisted for loans up to
Rs. 4 lakhs. Third party guarantee will be required for loans above Rs. 4 lakhs and
up to Rs. 7.5 lakhs. Tangible security is required for loans above Rs. 7.5 lakhs along
with third party guarantee.
In the case of KCC loans, bank shall sanction loans up to Rs. 3 lakhs against
hypothecation of crops.
In the case of borrowers under General Credit Card, security and guarantee is not
insisted up to Rs. 25,000/-. No penal interest in chargeable for loans up to Rs.
25,000/-.

TYPES OF BORROWERS:
All transactions relating to deposit and loan customers of a bank are in the form of
accounts maintained in the books of the Bank. The nature of the relationship in
each type account calls for differing degrees of care on the part of the banker. For

18
example the legal requirements in establishing a contractual relationship and in
transactions in the account are vastly different as between an individual’s account
and a Trust account. In dealing with loan accounts, the banker should additionally
be conversant with the legal provisions of various Acts as applicable to different
classes of borrowers.
In any contract two essential wings are: (a) capacity to enter into contract and (b)
enforcement of the contract. Both these aspects are important and are
complementary in nature. One without the other is legally useless.
Capacity: Section 11 of the Indian Contract Act, 1872 stipulates “a person is
competent (to enter into a contract) provided he has attained the age of majority
according to law to which he is subject, he is of sound mind and he is not otherwise
disqualified by any law to which he is subject”. Banks should not deal with persons
/entities who are not having legal capacity. The only exception could be deposit
accounts for minors subject to certain conditions.
Enforcement: Enforcement relates to the situation where the contractual
obligations are not met through mutual acts required to achieve the contract
objective. The terms of the contract empower either party to seek legal recourse to
ensure that the terms of the contract are complied with. When legal action is
initiated to this end, it is called “enforcement.”
Different types of borrowers of a Bank are:
1. Individuals- (a) Major (b) Minor (c) Married Woman (d) Purdahnashin
Woman; ( e) Illiterate Person.
2. Agent
3. Attorney.
4. Joint Borrowers.
5. Hindu Undivided Family (HUF).
6. Proprietary Firms.
7. Partnership Firms.
8. Companies- (a) Private Ltd. (b) Public Ltd. (c ) Unlimited.
9. One Person Company. (OPC)
10. Limited Liability Partnership (LLP).
11. Other Entities: Societies, Associations, Trusts etc.
The account opening and lending formalities vary from the simple in respect of
individual accounts to complex for limited companies, trusts etc. Regulatory
guidelines need to be kept in mind by banks in respect of loan/credit facilities of
different types of borrowers.

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 The Indian Companies Act, 2013 introduced new company concepts viz:
One Person Company and Small Company.
 An One Person Co. is one which has only one Director and one shareholder,
whereas ICA 1956 requires minimum two shareholders and two directors in
case of a private company. OPC is suitable for the first generation
entrepreneurs to run their business. An OPC may lose its status if paid up
capital exceeds Rs. 50 lakh or average annual turnover is more than Rs. 2
crore in three immediate preceding consecutive years.
 Benefits of OPC: Separate Legal entity. Limited Liability. Perpetual
Succession. Loan not the sole responsibility of the owner. Registration
required. Finance decided on credit record of the OPC. Whereas Sole
Proprietorship is not a separate legal entity, Has unlimited liability, No
perpetual succession. Loan sole responsibility of owner. Finance decided on
record of owner.
 A Small Company means a company other than a Public Company. The
paid up capital of a small company shall not exceed Rs. 50 lakh or such
higher amount as may be prescribed which shall not be more than Rs. 500
lakh or the turnover of which as per the last P & L account does not exceed
Rs. 200 lakh or such higher amount as may be prescribed which shall not be
more than Rs. 2000 lakh.
 Statutory Company: comes into existence under Special Acts enacted by
legislature. Ex: LIC of India, RBI, SBI, State Trading Corporations etc.
Provisions of Companies Act are applicable so far as they are not
inconsistent with provisions of the Special Act.
 Government Company is one where not less than 51% of its paid-up share
capital is held by Central and or State Govt. or Govts. and includes a
company which is subsidiary of such company.
 While entertaining credit proposal from limited company Bank has to be
careful and take the following steps:
 Examination of Documents: 1, Certificate of Incorporation and Certificate of
commencement of Business. 2. Memorandum of Association. 3. Articles of
Association.
 Verify the Borrowing powers of the Company, the powers of the directors in
conducting the affairs of the company, the procedure for borrowing and the
limit on borrowings, power vested with the Board of directors for company
borrowings, procedure and authority to draw and endorse cheques, bills etc. ,
stipulations as regards quorum of the Board meetings, procedure for
affixation of the Common Seal of the Company.
 Obtain Certified copy of the Board Resolution.
 Register the Charge of the Bank as per Section 77 (1) of ICA, 2013. Form No.
CHG -1 within 30 days of creation of charge.

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 Limited Liability Partnership (LLP) is a body corporate and a legal entity
separate from its partners having perpetual succession. The same is regulated
by The Registrar of Companies (under the Central Govt.) and the provisions of
The Limited Liability Partnership Act, 2008 are applicable. The LLP is an
alternative corporate business vehicle that would give the benefits of limited
liability but would allow its members the flexibility of organising their internal
structure as a partnership based on an agreement.
 A registered LLP shall be capable of (a) Suing and be sued; and (b) acquiring,
owning, holding and developing or disposing of property.
 Bank should verify the LLP Agreement which is the main document
governing the relationship between the partners inter-se and partners and
the LLP.
 Before financing an LLP banks must verify thoroughly the registers of LLP
containing the number and names of partners, the pattern and extent of liability
of partners, the charges created on LLP assets, Books of Account of LLP, Annual
Return and Statement filed with ROC etc.
SOCIETIES/ASSOCIATIONS/TRUSTS:
The required authority/ power to borrow and whether the bye-laws provide for
borrowing, mortgage/charge can be created and the requisite resolutions are
required to be obtained. Apart from these, it is necessary to verify from the
applicable laws/Acts/Rules and Control Regulations of the State wherein the
subject Trust/ Society/Association is formed.

TYPES OF CREDIT FACILITIES:

Banks finance working capital/term loan requirements of their customers. The
main methods of financing prevalent among banks in our country are:
1. Cash Credit Facility.
2. Overdrafts.
3. Purchase and discounting of Cheques/Bills.
4. Demand Loan.
5. Term Loan.
Each type of credit facility has its own merits and demerits. Banks should know as
to which type of credit facility is to be given to whom and for what purpose.
Cash Credit System or CC Limit is the most preferred form of lending and
accounts for a major part of the bank credit in India. It is a working capital
sanctioned to the borrower expressed in terms of limit say Rs. 5 crores. This means
that the borrower can se this account to draw funds to the extent of Rs. 5 crores.
The CC limit operates like a current account where the borrower can deposit and
withdraw an amount but within the prescribed limit/drawing power fixed.
 The Cash credit limit is secured by –primary security of stock-in-trade, Raw
materials, finished/semi-finished goods, book debts with prescribed margin as per

21
sanction terms, and collateral security of mortgage of fixed assets, assignment of
LIC policies, charge on company’s fixed assets and other assets.
 CC limit is fixed after taking into account several features of working of the
borrower viz. Production, Sales, Inventory levels, past utilisation of such limits
etc.
 Advances under CC limit are technically repayable on demand and there is no
specific date of repayment. In practice the limits are rolled over at the end of the
period i.e. limit expiry date, after review of the financials of the borrower entity.
The Banker has to make cash available to the borrower upto the limit sanctioned
although the borrower may draw only what he requires.
 Banks may levy a commitment charge for the unutilised portion of the CC limit.
 Advantages of CC system: Flexibility; Operative convenience. Banks may
grant stand-by limit and or stand-by line of credit to some borrowers.
 Weaknesses of CC system: (a). Fixation of large CC limits than are required for
most part of the year. Possibility of diversion of funds. (b). Bank’s inability to
verify end use of funds. (c ) Lack of proper cash management.
 Term Loans: Credit is given for a definite purpose and for a predetermined
period. Loans are repayable in monthly, quarterly, half-yearly or yearly instalments
or bullet repayment.
 Advantages of Loan system: (a) Financial discipline on the Borrower; (b)
Periodic Review of Loan account
 Drawbacks of Loan system: Inflexibility; to be re-negotiated with the bank
every time a loan is required. Borrowers may resort for excess borrowings.
 Types of Term Loans:
 Short term loans; Medium and Long-term Loans; Bridge Loans, Composite
Loans; Retail Loans.
 Purchase and Discounting of Bills : Domestic and Foreign.
 Non-fund based limits: Bank Guarantees ; Letters of Credit; Deferred Payment
Guarantee; Co-acceptance of Bills. Etc.

CREDIT DELIVERY:
Banks have continued their focus on ensuring the availability of banking services
throughout the country and instituting an efficient and comprehensive credit
delivery mechanism catering to the productive sectors of the economy. The main
objective of an efficient credit delivery system is to ensure that timely and
adequate credit is available to deserving and vulnerable sections of society.
Banks have evolved various types of facilities within the ambit of regulator’s
directions/ guidelines. The credit facilities can be delivered in one of the following
methods:
 Sole Banking Arrangement.
 Multiple Banking Arrangement.
 Consortium Lending.
 Syndication.
22
KYC NORMS TO BE FOLLOWED WHILE GRANTING CREDIT FACILITIES
Banks are required to follow Know Your Customer identification policy for all
banking transactions including loans and advances. Banks have to gather
information of the borrowers by visiting the market place and obtaining reports
and documents. The following KYC norms shall be followed.
1. Individuals:
Visit the workplace and gather information and cross-verify them with the help
of RBI defaulters list, public opinion etc. In addition to this, copies of the PAN
card, Ration Card, IT assessment order etc. can also be obtained.
2. Partnership concern:
 Copy of the partnership deed.
 Copy of the registration certificate if the firm is registered.
 Copies of the PAN card, voter ID and ration cards of all the partners.
 Bank account details of all partners.
 Licence issued by the municipality/Panchayath to start the business.
3. Company:
Memorandum and Articles of Association, Certificate of Incorporation,
Certificate of commencement of business, search report in respect of charges
created with registrar of companies. PAN card, voter ID and other
identification proof of the directors, bank account details.
4. Co-operative societies:
 Bye- laws.
 Permission from the registrar of co-operative society for opening Bank accounts
and also to borrow from Bank.
 ID proof of all Managing Committee members.
 Bank account details.
5. Trusts:
 Trust deed.
 Resolution of the Trust for operating Bank accounts and to borrow from the
Banks.
 ID proof of all Trustees.
6. Industrial units
 Project report
 Licences and all necessary clearances from various departments.
 Id proofs of all the directors.
The above documents are obtained with a view to confirm the identity of the
borrowers and their genuinity.
CREDIT INFORMATION BUREAU INDIA LIMITED (CIBIL):
- CIBIL is India’s first Credit Information Bureau.
- CIBIL report will minimise adverse selection of borrowers.

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- CIBIL was established by SBI (40%), HDFC (40%), Trans Union(10%) Dun and
Bradstreet (10%).
- In addition to the above, few foreign and PSBs have also have share in CIBIL.
Members:
 Banks, All India Financial Institutions, NBFCs, Credit Card Companies,
Housing Finance Companies, State Financial Corporations.
 It is also called as Centralised Information Base for any Industry or Lender.
 All the credit institutions have to become members of any Credit Information
Company.
The following are the credit information companies:
1) CIBIL
2) Experian Credit Information Company of India Pvt Ltd.
3) Equifax
4) Highmark Credit Information.
Submission of data:
Every member Bank shall provide the data pertaining to the loans sanctioned by
them to CIBIL at regular interval for which suitable software has been developed.
Wilful defaulters:
Every member of Credit Information of Co. shall submit on quarterly basis data on
suit filed accounts of wilful defaulters having outstanding balance of ₹25 lakhs and
above.
CIBIL or any Credit Information Co will provide information on the proposed
borrowers to bank if request is made. For this purpose, the consent of the borrower
is not required as per the Credit Information Companies act 2005.
This will help the Banks to avoid financing defaulters of other Banks and the
Bank’s overall credit portfolio will be kept healthy.
The CIBIL will charge the banks at the rate of Rs. 50/- per query.
Procedure to be followed:
As soon as the borrower approaches the Bank for a loan, the financing branch can
request CIBIL report online seeking credit information of the customer who has
approached for loan. CIBIL in turn will provide the information in the structured
format to Banks. Further, the branches of Banks can also visit the RBI website to
verify with the wilful-defaulter borrowers’ list published by RBI.
GENERAL PRUDENTIAL NORMS: PERTAINING TO ASSET QUALITY:
Reserve Bank of India started implementing the prudential guidelines on asset
classification, income recognition and provisioning for loan assets based on
Dr.Narasimham Committee recommendations in a phased manner with effect
from 01-04-1992. The prudential norms were modified from time to time as a credit
risk management tool. At present in India all Banks are following the 90 days’
24
norm concept for classification of NPAs. RBI as Central Bank, from time to time
issues guidelines on the following matters which have to be followed/complied
with by all Banks and Financial Institutions.
- Income recognition.
- Classification of loan assets.
- Term loans.
- Bills purchased and discounted.
- Other accounts.
- Cash Credit/Overdraft – nonrenewal (out of order) credit insufficient to service
the interest – no operations – depletion in stocks.
- NPA status for agricultural loans.
- Short term loans – Short duration crops.
- Medium &Long term loans – repayment based on short duration crops and long
duration crops.
- NPA status for recovery not based on crop yield.
- All other types of loans.
- NPA status due to delay in the recovery of interest.
- NPA status for consortium advances.
- NPA status for loans granted against State Government guarantee.
- Central Government guarantee.
- NPA status for advances granted against the security of term deposits, NSC,
IVP, KVP, and Life Policies.
- NPA status where there is erosion in the value of securities.
Period of classification of NPAs:
Classification Period
Standard – regular Any period
Standard – irregular called Special mention accounts 90 days.
Sub-standard 12 months
Doubtful up to 1 year 12 months
Doubtful above 1year and upto 3 years 24 months.
Doubtful above three years Any period
Loss Any period

Definition of Gross NPA: This is nothing but actual NPA including interest
capitalized.

25
Net NPA:Net NPA is the amount of gross NPA minus provision held,
DICGC/ECGC claims received, part payment kept in suspense account, floating
provision etc.
Treatment of Credit Guarantee Trust Fund:
Loans granted under CGTMSE scheme are classified as NPAs if payment is not
received but provision is not made as they are guaranteed loans.

Provision Coverage Ratio (PCR): This is the ratio of total provision held to the
gross non performing advances of the bank. Additional provision for NPAs at
higher than prescribed rate voluntary/ excess provision, excess provision on the
sale of standard advances can be made. The excess provision held shall be
transferred to Profit and Loss account.
Summary of provision percentage:
Category of Loan Asset Provision required
Standard advances:
Standard general accounts 0.40%
Agricultural Direct and SME 0.25%
Commercial Real Estate Housing 0.75%
Commercial Real Estate 1.00%
Teaser Home Loans 2.00%
New restructured accounts 01-06-13 5.00%
Existing restructured up to 31-03-13
With effect from 31-03-2014 3.50%
With effect from 31-03-2015 4.25%
With effect from 31-03-2016 5.00%
Substandard secured 15%
Substandard unsecured 25%
Substandard infrastructure 20%
Doubtful up to 12 months 25% *
Doubtful > 12 months and upto 3 years 40% *
Doubtful above 3 years 100%
Loss Asset 100%
* On secured portion of the balance. 100% for unsecured portion/clean advance.

CREDIT RATING:
As per Standard and Poor a prominent Credit Rating Agency of USA, credit rating
can be defined as current assessment of credit worthiness of obligator (the one who
wants to get rated) with respect to specific obligation.
26
It can also be understood as an opinion of a Credit Rating Agency on the future
ability and legal obligations of the company being rated, to make timely payment
of principal and interest.
Credit rating is done in respect of the following entities:
Bonds issued by the Companies and Public Sector Undertakings, for issuing
commercial paper, CDs, FDs, debentures, future receivables, earning prospects of
companies, claims paying ability of Insurance Companies etc. and at times
borrowers as well.
Benefits:
There are number of benefits to the investors, corporate bodies and Government if
credit rating is obtained. Investor gets better information at low cost. Investor will
be able to take calculated risk and gets encouragement to invest his savings.
Corporate bodies can enter into capital market more confidently.
Agencies involved in credit rating:
1. Standard and Poor.
2. Moody’s
3. SMERA
4. CRICIL
5. ICRA
6. CARE
7. Rating India.
8. Brick wick

MECHANISM OF CREDIT MONITORING:

Post sanction supervision of advances sanctioned/renewed is an important facet of
credit risk management in Banks. The efficient and effective post-sanction
supervision system would facilitate the Bank to maintain high level of performing
assets (Standard Assets). The post-sanction supervision can be broadly classified
into three stages viz, follow-up, supervision and monitoring. The tasks involved in
each of the stages are outlined below:
Follow-up of loans to ensure the following:
 Phased disbursement to ensure end use.
 Compliance of the borrower with regard to terms of sanction.
 Noting the deviations.
 The security value covers the loan outstanding with interest.
 Timely commissioning of the project.
 Timely commencement of commercial production.
 Make sure that the assets are insured and the general insurance policy is in
force.
 Obtain periodical stock statements to fix the drawing power (D.P.).
27
 Visit the unit/borrowers place to gather information and to study the
performance of the unit.
 Examine the actual production and sales against the projections.
 Identify early warning signals.
 Report the progress of the unit to the higher authorities.
 Loans to be released directly to the suppliers of the equipment/machinery.
 Verify documentation/conduct legal audit.
 Ensure creation of mortgage and charge creation with Registrar of Companies.
 Create charge on land in the case of agricultural loans through online
registration.
 Obtain stock statements, debtor’s position.
 Advise the borrower to sell the finished goods and not to allow piling of stocks.
 Arrange for stock audit.
 Ensure validity of the Fire Insurance and other Risk Insurance is available for all
go downs, fixed assets and machinery.
 Also ensure that the borrower is paying the taxes such as service tax, trade tax,
income tax, excise duty etc.
 Examine whether the borrower promptly remits the PF and Insurance Premium
in respect of the employees to the competent authorities.
 Conduct valuation of the securities in two years from the approved valuer and
confirm that there is no erosion in the value of the securities.
 Obtain every year copies of the balance sheet, P&L a/c, receipts and payments
from the borrower and if the financials have become week suggest remedial
action.
 Detect diversification of funds and take preventive action.
 Closely watch the conduct of the account particularly the current and
overdraft/CC limit account and ensure that all the sales and purchases are
routed through the bank account only.
REVIEW/RENEWAL OF LOAN AND ADVANCES:
The working capital facility granted to the borrowers has to be reviewed
periodically in respect of stock position, finished goods, work in progress, sales,
creditors and debtor level. The periodical review also provides an opportunity to
re-examine and reassess the credit needs based on the past performance in running
the business and operational experience of the borrowal account.
Working capital limits are normally granted for a period of one year and the same
should be renewed before completion of one year so that the borrower will become
eligible to operate the limit. The borrowers should be reminded to submit the
application in the prescribed pro forma along with the financial statements, stock
statement etc. for the sanction.
28
The periodicity of review and renewal are as under:
1. Export credit of good parties: 3 years subject to conduct of annual review.
2. Other credit: 2 years subject to annual review.
3. KCC and other cards: 3 years.
4. Fully secured credit limits – once in 2 years.
5. Overdraft against FDs and term deposits: 2 years.
6. All other limits: once in a year.

Provisional extension:
If for any reason, the borrower is not able to submit the renewal application, the
limit can be renewed provisionally for 3 to 6 months.
However, the Bank will charge extra interest of 1% to 2% for the lapsed period till
the credit limits are renewed after the expiry date.
In the case of consortium advances, the decision of the entire consortium has to be
accepted by each of the member.
Early warning signals:
The early warning signals are easily noticed during the processes of annual review
of the account. Further the signals can be noticed during the periodic visit to the
site. Some of the warning signals are given below:
a) Continuous irregularities in cash credit/overdraft limit such as inability to
maintain margin exceeding in the limits, improper operation, failure to pay the
periodic interest.
b) Outstanding balance in cash credit account remaining continuously at the
maximum.
c) Failure to make timely repayment of loan instalment and interest.
d) Complaints from the suppliers of raw materials, water, power and non-
payment of bills.
e) Non-submission or delay in submission of stock statement.
f) Attempts to divert the sale proceeds by opening accounts in other Banks.
g) Downward trend in credit summations.
h) Frequent return of cheques/bills.
i) Steep decline in the production figure.
j) Downward trends in sales figures.
k) Raising level of inventories, slow and non-moving items.
l) Larger outstanding in bills accounts.
m) Large period allowed for debtors.
n) Resorting to discount sale.
o) Failure to pay statutory liabilities.
p) Diversion of funds.
q) Wide variation in sales.
r) Non-co-operation to inspect the stock.
29
s) Failure to remit the statutory payment of employees to the respective
authorities.
t) Frequent request for additional facility.
u) Devolvement of Bank Guarantee/Letter of Credit.
v) Employee’s non-cooperation.
w) Strike and lock out.

CREDIT SANCTIONS AT VARIOUS ADMINISTRATIVE

LEVEL AND SANCTIONING POWERS:
The sanctioning powers are delegated and vested with various functionaries for
different categories of advances depending upon the scale of the officials. The
powers are delegated by the board of directors of respective banks for ensuring
prompt sanction and disbursal of loans. About 90% of the loans are sanctioned at
the branch level. These loans are coming under retail sector.
While delegating the powers, the per-party sanctioning powers are indicated and
within that limit sub-limits for each purpose is also specified. For example, let us
presume that the per- party sanctioning power for a rural branch headed by Scale I
officer is Rs. 25 lakhs. Similarly, the said branch manager can sanction crop loans of
Rs. 5 lakhs, other agriculture loans Rs. 10 lakhs, retail loans Rs. 5 lakhs etc to a
party with in the overall per-party limit. However, the loans above Rs. 25 lakhs are
to be forwarded to the next immediate higher authority for sanction along with the
application and process note. Separate sanctioning powers for Secured and Un-
secured advances are also delegated to the Branch Heads, Regional Office
Executives, RO Level Credit Committees, Zonal Office Executives, ZO level Credit
Committees, and Corporate/Head office Executives, CO/HO Credit Committees.
Loans to the very large corporates, ultra mega projects, infrastructure proposals
etc., are sanctioned by a Committee of the Directors at CO/HO duly recommended
by the Committee of the General Managers.
The loans sanctioned by the Branch Managers are reported to the next higher
authority with full details during the first week of succeeding month for their
review. Similarly Loans sanctioned by the Regional Office, Zonal Office and
CO/HO are to be informed to the Credit Monitoring Department at CO/ Head
Office for review. Credit sanctioning review is intended to ensure that the
sanctioning authorities have taken due care of all the Bank’s/RBI’s guidelines
while sanctioning the credit proposal and also by following the internal exposure
norms of the Bank. It is one of the credit risk mitigating tools adopted by banks.

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