[BANKING FINANCE: PRE & POST SANCTION

MONITORING-CHALLENGES & SOLUTIONS]

A Summer Internship Project Report submitted for the partial fulfillment of the Master
of Business Administration Degree in MBA (Finance)

BY
[SUMANA DAS]

(ROLL NO: 10400918011, REGISTRATION NO: 181040710166 OF 2018-2019)

Under the Guidance of:

Mr. N. Mohan Rao
[EXTERNAL (COMPANY) PROJECT GUIDE’S NAME]

Prof. Anuradha Saha

[INTERNAL (IEM) PROJECT GUIDE’S NAME]

Department of Finance

For the Academic Year 2018-2020

Institute of Engineering & Management

Y-12, Salt Lake, Sector-V, Kolkata-700091

Affiliated To

Maulana Abul Kalam Azad University of Technology

BF-142, Salt Lake, Sector I, Kolkata-700064

Page | 1
 CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that the project report entitled “[BANKING FINANCE: PRE & POST
SANCTION MONITORING-CHALLENGES & SOLUTIONS]”, submitted by

[SUMANA DAS]

(Registration No. 181040710166 of 2018-2019 Roll no.10400918011),

of INSTITUTE OF ENGINEERING &MANAGEMENT, in partial fulfillment of

requirements for the award of the degree of Master of Business Administration in
[FINANCE], is a bonafide work carried out under the supervision and guidance of Prof.
Anuradha Saha [DEPARTMENTAL PROJECT GUIDE] during the academic session of
2018-2020.The content of this report has not been submitted to any other University or Institute
for the award of any other degree.

It is further certified that work is entirely original and its performance has been found to be
quite satisfactory.

_______________________________ ____________________________

Prof. Anuradha Saha Prof. Dr. Sujit Dutta

Project Guide H.O.D
Dept. of Finance Dept. Of Management
Institute of Engineering & Management Institute of Engineering &Management

Prof. Dr. Indraneel Mukhopadhyay

Principal - Management
Institute of Engineering & Management
Sector-V, Salt Lake Electronics Complex, Kolkata-700091

Page | 2
 ACKNOWLEDGEMENT

I would like to take this opportunity to extend my gratitude to the following revered persons
without whose immense support, completion of this project wouldn’t have been possible.

I are sincerely grateful to my External Guide [Mr. N. Mohan Rao] and Internal Guide [Prof.
Anuradha Saha] of the (Department of Finance), IEM Kolkata, for her constant support,
significant insights and for generating in me a profound interest for this subject that kept me
motivated during the entire duration of this project.

I would also like to express my sincere gratitude to Prof. Dr. Satyajit Chakrabarti
(Director, IEM), Prof. Dr. Indraneel Mukhopadhyay (Principal-Management, IEM) and
Prof. Dr. Sujit Dutta, HOD of (Management) and other faculties of Institute of Engineering
& Management, for their assistance and encouragement.

Last but not the least, I would like to extend my warm regards to my family and peers who
have kept supporting me and always had faith in my work.

Name of the Student

Reg. No: 181040710166
Dept. of Management
Institute of Engineering & Management, Kolkata

Page | 3
 EXECUTIVE SUMMARY
This project mainly concerns itself with the study of pre and post sanction credit monitoring
practices of Bank of Baroda, Barrackpore Branch, Kolkata with regards to retail loans. The
pre sanction appraisal involves the evaluation of the credit worthiness of the borrower. The
internal and external credit ratings accorded to the individuals are also studied. Track records
of repayment for capacity to repay are being checked. The compliance of terms and
conditions by the borrower is studied and any deviation thereafter is reported. Legal audit
reports are studied to understand the nature of the securities (stocks, equitable mortgages,
land, residences etc.) entrusted with the bank. Drawing Limits of various borrowal accounts
are calculated on monthly basis.
As post sanction monitoring, regular monitoring of the operations in the borrowal accounts is
done to keep a tab on the fluctuations in the account. Few review/ renewal proposals are
taken up to study the nature of an ongoing borrower. Finally, a study on NPA accounts is
carried out to understand the nature of the non-remunerative borrowers and suggest possible
remedial measures to prevent slippage of an account into substandard category.
The main challenges of banking sectors are the loan accounts which are asset for the bank
turning into Non Performing Assets. The primary aim of monitoring exercise is to ensure that
account is conducted in the manner normally expected & the account continuous as
performing assets. But there are many internal and external factors for which the accounts
turn into NPAs
NPAs result from what are termed “Bad Loans” or defaults. Default, in the financial parlance,
is the failure to meet financial obligations, say non-payment of a loan installment. These
loans can occur due to the following reasons:
 Usual banking operations /Bad lending practices
 A banking crisis (as happened in South Asia and Japan)
 Overhang component (due to environmental reasons, business cycle, etc.)
 Incremental component (due to internal bank management, like credit policy, terms of
credit, etc.)
The principal concern of their project is to ascertain to what extent banks can manage their
large retail credits, what tools or techniques are used for appraisal, disbursal and following up
with the borrowers and to what extent their performance can be augmented, by analyzing and
suggesting possible remedial measures to identify early warning signals in the quality of the
asset.
The methodology followed in this project is in accordance with the guidelines prescribed for
sanction, follow up and monitoring by the Bank of Baroda. The Head Office is quite specific
about the steps that are to be taken to follow up with the borrowal account and reporting the
same.
It is necessary to have a proper credit monitoring system installed because in the growing
economy the banks will have to adhere to more important business rather than recovery of the
credits gone bad. This would mean that once the credit goes bad, the bank will lose on the
profitability frontier. However, it should be noted that mere one time preparation of a system

Page | 4
shall not suffice the cause. It will have to be regularly updated in the light of the recent
developments.
Bank of Baroda is a state owned bank and the third largest bank of India after State Bank of
India and ICICI Bank respectively. The bank has huge collection of deposits and has been
efficiently utilizing it for the growth of the economy. As explained earlier, the Bank has
formulated a system of credit appraisal and monitoring which are apt in tackling the
requirements of the lending procedure. The system is updated continuously.
While the Bank has a sound credit appraisal, disbursement and monitoring system at its
disposal, few recommendations can be cited to make the system more proactive in studying
the borrowal accounts and detect any early signal of slippage of borrowal accounts into NPA
category.

1. Review of the existing loans on a monthly basis (presently it is done on quarterly

basis).

2. To show a helping attitude and try to understand the genuine problems of the client
and suggest possible remedial measures.

3. To keep a check on the transactions in the borrowers savings or current accounts. Any
abnormal transaction may signal risk.

4. Legal mechanisms should be made strong as it has been seen that banks lending to the
doubtful debtors (willful defaulters) and losing their money.

5. A monitoring committee can be set up for the regular inspection of the borrowal
accounts so that credit risk can be avoided.

Page | 5
 TABLE OF CONTENT

PAGE
SN CONTENT
NO.

1. Introduction 7-10

2. Company Profile/Overview 11

3. Retail Loans 12

4. Research Methodology 13

5. Credit Appraisal 14-18

6. Credit Monitoring 19-26

7. Challenges and Solutions 27-41

8. Credit Risk Assessment 42-43

9. Willful Defaulter 44-45

10. Case Study 46-47

11. Conclusion 48

12. Limitations of the Study 49

13. Recommendations 50

14. References 51

15. Appendices 52-53

Page | 6
 INTRODUCTION

1. IMPORTANCE OF FINANCE:

Finance is the study of fund management and asset allocation over time. Funds consist of
money and other assets. There are many different types of finance, but all are fundamentally
concerned with studying how best to allocate assets in different conditions over time. Finance
is the study of how to optimally allocate assets- how individuals and organizations should
invest assets in order to get the highest possible return given changing conditions over time.
Finance is fundamentally a forward looking field, concerned with what an asset will be worth
in the future.
Corporate finance is the area of finance dealing with monetary decisions that business
enterprises make. When finance is talked about in the context of business decisions, it is
called corporate finance. All functions of a company need to be paid for one way or another.
It is up to the finance department to figure out how to pay for them through the process of
financing. Corporate finance deals with monetary decisions that business enterprises make
and the tools and analysis utilized to make the decisions. Corporate finance is concerned
primarily with making investment and financing decisions; that is, making sure that money is
being used in the best way.
In determining how to allocate money, the finance group must also figure out where the
money will be best utilized. This requires valuing projects and business functions. A large
element of finance is deciding how exactly to value a project. There are a number of variables
– inflation, expected revenues, expected costs, length of time required – that are all
incorporated into the valuation process. Finding the true value of a project is often wrought
with uncertainty, but without an accurate valuation, a company may allocate its resources
sub-optimally.
The corporate finance department must also determine how to finance projects. A company
can finance a project by using either internal funds (money the company already has),
borrowing, or selling equity. Each option carries a certain cost that can be quantified. It is the
job of the finance department to make sure that the overall cost isn’t too high and that the
company has an optimal mix of all three strategies.
One public job function of corporate finance is determining whether or not the company pays
a dividend, and if so, how much. The company has a responsibility to maximize shareholder
value, but that can be achieved in multiple ways. Paying a dividend puts cash directly in the
hands of shareholders, increasing shareholder value. However, paying a dividend means that
money is not being reinvested in the company. If a company doesn’t pay a dividend and
instead chooses to reinvest the money, the value of the company will presumably increase, in
turn increasing shareholder value. The finance department determines which option
maximizes shareholder value.
Lastly, the finance department must also ensure that there is a good balance between long-
and short-term goals. The company must have enough assets to cover short-term costs,

Page | 7
referred to as working capital management, and enough invested to ensure the company has
long-term growth.

2. OVERVIEW OF THE BANKING SYSTEM:

Banks are the financial institutions whose main purposes are borrowing and lending. Banks
are establishments which are authorized to accept deposits from the public, long term and
short term and create money by lending that to the borrowers who are in need of it and they
charge interest for that. In short they can also be called money creator. Banks accept deposits
by paying lower rates of interest while they lend those deposits at much higher rates of
interest. The difference between both is the profit/revenue for the bank. This lending activity
of the bank involves a lot of risks, if the borrower somehow fails to repay the borrowed
money, Banks have to face the loss, and therefore the interest charged for it is also high. They
have nothing of their own, all the money used by the banks for lending purpose are the
publics’, so they have to be very cautious while lending and after that also till the money is
fully recovered. This report takes a fast look on Banking and Credit management and further
probes into bank risk exposure, borrower’s assessment, effective pre &post-sanction
management and control. An attempt will be made to unfold the use of some credit
management, evaluation and assessment tools, models, and techniques.

Credit creation is the main income generating activity for the banks. But this activity involves
huge risks to both the lender and the borrower. The risk of a trading partner not fulfilling his
or her obligation as per the contract on due date or anytime thereafter can greatly affect the
smooth functioning of a bank’s business. On the other hand, a bank with high credit risk has
high bankruptcy risk that puts the depositors in problem. Among the risk that face banks,
credit risk is one of great concern to most bank authorities and banking regulators. This is
because credit risk is that risk that can easily and most likely prompts bank failure.

Credit management is a structured approach of managing uncertainties through risk

assessment, developing strategies to manage it, and mitigation of risk using managerial
resources. The strategies include transferring to another party, avoiding the risk, reducing the
negative effects of the risk, and accepting some or all of the consequences of a particular risk.

The principal concern of their project is to ascertain to what extent banks can manage their
large retail credits, what tools or techniques are used for appraisal, disbursal and following up
with the borrowers and to what extent their performance can be augmented, by analyzing and
suggesting possible remedial measures to identify early warning signals in the quality of the
asset.

Page | 8
 3. OBJECTIVES OF THE PROJECT:

 Study on Retail Advances.

 Credit monitoring practices of Bank of Baroda.
 To ensure,
 Proper end use of funds
 Operations in the accounts are on expected lines
 Borrower repaying statutory dues
 Terms and conditions are compiled with
 Security charge continue to be in order

 To test the assumption of lending such as capacity utilization, cost incurred, etc.
 To anticipate problems and reorient plans of action in order to solve such problem
effectively
 To detect early warning signals
 To identify measures, monitor and control the risk

4. JUSTIFICATION FOR CHOOSING THE ORGANIZATION:

Bank of Baroda is one of the largest Public Sector Banks in India with total assets in
excess of Rs. 3.58 trillion and a network of 9,500 branches functioning all over the
world (including 104 overseas branches) and more than 13,400 ATM facility centers
across India. Being a student of MBA Finance and looking forward to a career in the
Banking Sector, I thought Bank of Baroda to be the most suitable organization for my
Summer Internship Project.

5. RESEARCH METHODOLOGY:

Case Study approach has been used as the research methodology for the completion
of this project. We have taken up a loan account as our case and performed the study
on its credit appraisal process.

6. ARRANGEMENTS OF CHAPTERS:

This study is divided into several parts:-

 General introduction, objective of the study, and layout of the study.
 Brief introduction on the profile of Bank of Baroda in which organization the thesis
work is done
 Research Methodology- Credit Appraisal, Post-sanction Monitoring, Non-Performing
Assets (bad debts).
 Credit Risk Assessment in the Bank.
 Financial Appraisal

Page | 9
 Willful defaulter
 Comprehensive practical case study on the credit appraisal process of a borrower
seeking Home Loan from the bank.
 Conclusions reached after the careful study of the findings of the research.
 Limitations of the study
 Recommendations related to various issues involved in credit monitoring and NPA
control.
 References used for the present work
 Annexure

Page | 10
 COMPANY PROFILE: BANK OF BARODA

Bank of Baroda (BOB) is an Indian multinational, public sector banking and financial
services company. It is owned by Government of India.

Established in 1908, Bank of Baroda is the second largest nationalized bank having its
headquarters in Vadodara in Gujarat and corporate office in Mumbai. The Maharaja of
Baroda, Maharaja Sayajirao Gaekwad III, founded the bank on 20th July 1908 in the princely
state of Baroda, in Gujarat. The Government of India nationalized the bank, along with 13
other major commercial banks of India on 19th July 1969; the bank has been designated as a
profit-making public sector undertaking (PSU).

The bank provides services relating to banking and finance. Currently, it has 9,500 branches
functioning all over the world (including 104 overseas branches) and more than 13,400 ATM
facility centers across India. BOB caters to more than 78 million customers in around 25
countries all over the world. Its services include debit and credit card facilities, loans, and
wealth management. Vijaya and Dena Banks were amalgamated with Bank of Baroda on
April 1, 2019.

Based on 2019 data, it is ranked 1145 on Forbes Global 2000 list. BOB has total assets in
excess of Rs. 3.58 trillion (making it India’s 2nd biggest bank by assets). The government of
India announced the merger of Bank of Baroda, Vijaya Bank and Dena Bank on September
17, 2018 to create the country’s third largest lender. The amalgamation is the first ever three
way consolidation of banks in the country, with a combined business of Rs. 14.82 lakh crore,
making it the third largest bank after State Bank of India (SBI) and ICICI Bank.

As many as 10 banks have been merged with Bank of Baroda to date.

Page | 11
 RETAIL LOANS

Bank of Baroda offers an array of various retail loan products such as home loans,
automobile loans, personal loans (such as loans for marriage, medical expenses, etc.), credit
cards, consumer loans (for TV sets, personal computers, etc.) and loans against time deposits
and loans against shares. All of them come under the umbrella of retail loans. The target
market for retail loans are the consumers in the middle and high income segment, salaried or
self-employed. Banks participate in the credit scoring programme to judge the
creditworthiness of individuals. While granting such loans, banks use reports from agencies
such as the Credit Information Bureau (India) Limited (CIBIL).

Retail loans are those loans which are given by the banks to individuals so as to meet their
personal needs, retail loans are smaller in size as compared to corporate loans. Given below
are various types of retail loans which are given by the banks:-

I. Housing Loans- Most individuals take housing loans and when it comes to retail
loans, housing loans is right there at the top. Banks give housing loans to individuals
so that they can buy or construct a house.
II. Educational Loans- This type of loans is given by the banks to students so that they
can pay for the tuition fees, hostel expenses, foreign education and other such
expenses.
III. Vehicle or Auto Loans- This type of loans is given to individuals who are looking
for buying cars whether new or second hand, auto loans are also given for two
wheelers to individuals.
IV. Personal Loans- Personal loans are the loans which are given to individuals for
purposes such as marriage, traveling to abroad, loans for covering hospital expenses
and other such loans which an individual may need depending on his or her needs and
situations.
V. Loan Against Securities- Loan against Securities is a loan where you pledge your
shares, Mutual Funds or Life Insurance policies as collateral to the bank against your
loan amount. Loan Against Securities are typically offered as an overdraft facility in
your account after you have deposited your securities
VI. Loan Against Fixed Deposits- Loan against Fixed Deposit is a secured loan, where
you can pledge your Fixed Deposit as collateral, in return for the loan amount.

Page | 12
 RESEARCH METHODOLOGY

Case Study approach has been used as the research methodology for the completion of this
project. We have taken up a loan account as our case and performed the study on its credit
appraisal process.

The methodology followed in this project is in accordance with the guidelines prescribed for
sanction, follow up and monitoring by the Bank of Baroda. The Head Office is quite specific
about the steps that are to be taken to follow up with the borrowal account and reporting the
same. The project was done with few large borrowal accounts of the bank. Through the
project we will have an idea about the methods of credit appraisal process, disbursement and
post sanctioning monitoring.

This chapter is mainly divided into three sections:

Section I
Credit Appraisal

 Pre-sanction
verifications
 Appraisal
 Documentation Section II
 Disbursement
Post sanction monitoring
and analysis
Section III
Challenges and solutions

 SMAs
 NPAs
 Recovery

Page | 13
 I. CREDIT APPRAISAL:

The main methods of credit appraisal are done by the Bank of Baroda loan policy guidelines.
The methods by which credit is appraised are as follows:

A. Pre Sanction Verifications:

After receiving the application from the applicant applying for a loan, the credit worthiness is
checked. It is checked through vigorous checking of the borrower’s background, occupation
and all other things that are relevant to know the credit worthiness.

1. Purpose of the loan and type of facilities required:

Purpose: The purpose or the need for which the loan is required by the borrower should be
very clear and the bank should also have the knowledge from where the borrower is expected
to repay the loan back. The sanctioning of loan is restricted for several cases. Thus, the
banker must cautiously appraise the proposal.
Types of facilities required: While appraising a credit proposal, the bank has to evaluate and
then decide different types of credit that the borrower requires.
2. Site inspection:
Site inspection is done to know whether the project for which the loan application is made,
exists or not. It may happen that the borrower may falsify and fudge data and come up with a
false project which do not even exists in real to procure money from the market. Therefore to
know the existence of the project site inspection is done.
3. Defaulters/willful defaulters:
While evaluating the proposal for credit appraisal it should be checked whether the name of
the borrower entity or guarantors of the borrowing entity are listed in the caution list/
defaulters’ list. It is also checked in CIBIL if there is any default by the borrower in the past,
the present status of the loans taken in the name of the borrowers and details of that. As per
RBI rules, no additional facilities shall be granted to the willful defaulters whose names
appear in the willful defaulters’ list.
4. Internal and external credit rating:
A very important step is to find out the suitable credit rating to the borrower. A credit rating
estimates the credit worthiness of an individual or corporation. It is evaluated by the credit
bureaus of a borrower’s overall credit history. Typically, a credit rating tells a lender or
investor the probability of getting the money back. Internal credit rating is done by the bank
itself whereas the external ratings are given by professional credit rating agencies.

Page | 14
B. Appraisal Process:

After verifications of the applicant, occupation and all the other documents, if the
documents are satisfactory then the application is accepted and if the documents are not
satisfactory then the application is rejected. Here a credit appraisal process for Working
Capital has been explained.

CREDIT APPRAISAL FOR HOME LOAN:

A borrower may require finance for purchasing a house/flat, construction of a new house or
extension of an existing house. The process for appraising a home loan is given below:
1. Application for credit facilities:

Whole process of credit appraisal starts with the receiving the application forms from the
applicant or the borrower. After the analysis of the documents submitted by the applicant
is verified and analyzed thoroughly, compilation of a Credit Report and determination of
the eligible quantum of advance, type of advance, securities to be obtained etc. At the
time of receiving the credit proposal, branches should obtain a declaration from the
borrowers about their relatives, if any, employed in the bank or in any other Bank/
financial institutions. Besides, facilities availed in other banks/branches should also be
furnished by them separately. The details of legal heirs of the borrower/guarantor (Name,
age, relationship, address, etc.) should be obtained in the loan application. These details
should be obtained from the borrower and the guarantor separately. The information
should be updated on an ongoing basis, even after filing suit against the borrower. A
separate Credit Proposal Received Register is maintained in the branch to record
information relating to all applications received for sanction of advances.

2. Analysis of collected information:

After receiving the information from the applicant and from other sources, they are
critically and carefully analyzed. After analysis the credit report is prepared of the
borrower/guarantors and the applicant’s request is presented in the form of a credit
proposal to the sanctioning authority. If the applicant is already a customer of the bank,a
scrutiny of the operations will reveal the trends, connections, nature of dealings etc. as far
as possible, before sanctioning a credit facility(in case of Home Loan) the site should be
visited.

3. Preparation of the credit reports:

Credit report is the basic document on the basis of which assessment of the borrower’s
character, capital and capacity (normally referred to as three C’s) is made by a banker.

Credit reports are compiled only after individual verification by a chartered accountant of
the information relating to the assets and liabilities furnished by them.

Page | 15
4. Calculation Of Tangible Net Worth (TNW):
The tangible net worth shall be calculated as written below:
Individual’s personal movable and immovable assets should be added and if any loan
taken against any of those assets should be deducted.
The review/renewal of proposal should contain Credit Report. Reasons for increase or
decrease in net worth should be indicated in the report. Reduction in net worth due to
disposal of fixed assets or incurring of loss can be a danger signal. If there is any increase
in fixed assets, source of acquiring them should be verified.

5. Assessment of Credit Limit:

The next process involved in the pre-sanction stage is assessment of the credit required by
the applicant. The assessment of the loan requirement and the amount of credit to be
provided to the borrower is evaluated. This evaluation can be done as follows:

6. Compilation of Proposal:
A fresh/renewal proposal should contain the following particulars:
A. Gist of the Proposal:
 Details of Credit Facilities
 Any concession to follow
 Deviations, modifications and conformation

B. Basic Data: This part of the proposal contains information about

 Asset classification, Credit ratings- internal and external, risk weight

age, details of the borrowing entity, type of loan, Credit Limit,
securities taken and Guarantors’ name.
 Banking arrangement details
 Name of guarantors and their net worth

C. Background of the borrower, inspection of irregularities report, RBI’s defaulter inspection

report, and comment of the monitoring department (in case of review) are mentioned in
the proposal.

D. Terms and condition.

At the end of the proposal justifications are given for accepting any variations or cause of the
variation. Any modifications or justifications for the modifications are given. This is how a
credit proposal is being compiled.

Page | 16
C. SANCTION, DOCUMENTATION AND DISBURSEMENT OF
CREDIT:

Sanction:

It is necessary that the terms and conditions contemplated are discussed with the borrower
beforehand to judge the feasibility of including them in
thesanctionticket. Aftersuchdiscussion and firming up, these terms andconditions should be
mentioned in the final recommendations made to the sanctioning authority along with the
reasons for instituting them. Those are mentioned at the end of the proposal.

Special conditions applicable to the respective loan/product depending on various factors like
the type of facility, type of security, period of repayment, method of charging interest
percentage of margin, etc., could also be specified in the sanctions in addition to these general
terms and conditions.

The sanction should be informed to the borrower in writing mentioning there in the terms
andconditions to be complied with. The sanctioncommunication should clearly divide the
terms and conditions into Pre-disbursement conditions and Post-disbursement conditions. The
advance will be released only upon completion of documentation in all respects as
perBank's rules. Processing fee and other charges like equitable Mortgagecharges are
collected before disbursement of credit. All fund based/non-fund based shall be routed only
through the account with the Bank.

Documentation:

Documentation is done before disbursement of credit. This step is a must because the bank
may not be able to enforce its rights in a court of law for recovery of the money due unless
the documents executed by the borrowers and guarantors are complete in all respects and are
in order (and kept alive). The documents are useful in:

i. Identification of the borrower,

ii. Identification of the security,
iii.Creation of a charge on the security,
iv. Settlement of the terms and conditions of a contract/arrangement,
v. Proving the transaction (like interest to be paid and repayment terms),
vi. Prevention of fresh charge on the security,
vii. Deciding the period of limitation,
viii. Settlement of the rights and remedies of the lending banker against the
borrower and
ix. Filing suits and enforcing the claim.

Page | 17
The documents should be current and it should be legally enforceable. It should have the
description of securities, the amount of loan or other facility, interest and overdue interest, the
date of execution, terms of repayment, major and important terms and conditions mutually
agreed upon, the place of execution etc.

The sanction is scrutinized, then documents appropriate with the terms and conditions are
listed out, procured, the blanks are filled in correctly without overwriting, cutting, erasing,
etc. Advances should not be released except when all the relevant documents are obtained
from the parties concerned and duly executed by them. The documents should be duly filled
in and properly stamped before obtaining the signature of the borrowers.

Disbursement:

 Loan to be disbursed as per the schedule approved by the bank

 Before any Disbursement of installments, actual progress in implementation of the
project should be confirmed by the provided LIE report.
 Progress in project implementation should be as per schedule, for any delay borrowers
view on steps taken for rectification should be taken into consideration
 Monitoring costs being incurred, borrower’s contribution, reasons for cost overruns

Page | 18
 II. Post-Sanction Monitoring and Analysis (Credit Monitoring):-

Post sanction measures plays an important role in ensuring that an account continues to be a
performing and the project continues to run in terms of the projections that are made because
economic developments and other changes may bring about changes that have an impact on
risk. Credit Monitoring is a process of safe guarding and keeping healthy advance portfolio.
It also includes anticipation of problems which may take place in the future and helps in
taking suitable corrective measure in consultation with the borrower to avoid that.
Banks should monitor their credit exposures continuously to detect such changes in time.
They should monitor internal and external factors which could have adverse effect on the
advances. In general, this is done by periodic and regular checks.
No loan account becomes sick overnight therefore a careful watch over the working of the
existing loans helps in tracking sickness in the very initial stage only. Close monitoring is of
high importance particularly because once a loan account slips into NPA; it becomes difficult
for the Bank to recover its advance in full or sometimes even part of it.

The basic objectives of Credit monitoring systems are:

 To understand the current financial condition of a borrower.

 For confirming that the credit is in compliance with the sanction terms.
 To ensure that the interests and principal-repayments are serviced on time.
 To ensure that the drawings are covered by adequate drawing power.
 To ensure that securities / collaterals are in conformity with the sanction terms and
have not deteriorated.
 To identify potential problem, external and internal, well in time for taking corrective
measures.
 Keep a watch over the changing policies of the Government, changing market and
change in management control of the account to sense a feature likely to cause concern
and take preventive measures before any problem takes place;
 To detect sickness at an early stage, to take timely corrective action and to improve the
quality of bank’s advances.
 To prevent emergence of NPAs which have an adverse impact on the bank

Page | 19
A. MAJOR TOOLS OF THE CREDIT MONITORING INCLUDE:

1. Tools of credit monitoring include verification of Assets, Periodical inspections,

verification of securities, etc. Field visits (on site monitoring) are useful for having
real idea of level of activity in case of Home Loan.

2. To reveal the conduct of a loan account reviewing of Operations of the account is

important which includes end use of the fund, payments to the creditors, repayment of
Term Loan installment / interest etc.

3. Reviewing the actual performance of the borrower i.e. transactions in the accounts,
timely servicing of Bank’s dues/ Interest/ Installments/ Liabilities/ Non Fund Based
commitments etc., should be done as it helps to track repayment record and to know
the actual condition of the loan account.

4. In addition to the above things, a continuous study of changes in Govt. Policies,

environmental factors and economic indicators should be done as they can affect the
health and performance of the Borrowing entity immensely.

5. For monitoring of the borrowing entity, regular customer contact should be kept,
Banker’s Meets should be arranged, review of the borrowal account is done, as they
are necessary to ensure the overall effectiveness of supervision of advances
accounts.

6. It is also necessary to have knowledge about the borrower, whether they are paying
statutory dues, electricity bills, telephone bills, etc. in time or not.

7. Review of Facilities: Regular review or renewal of credit facilities should be

undertaken to know the overall health of the accounts. Review / Renewal of facilities
should be taken up, 3 months before the due date. Submission of the proposal to the
competent authority should be made well in time, so as to ensure that no account is
shown as overdue for review. It is ensured that no slippage in any account takes place,
due to technical reasons.

8. Credit Rating Guidelines: Credit Rating as per Credit Rating Model of the bank for
all the borrowers / accounts should be done, making sure that changes are made in
pricing if any, Risk Assessment, Incremental Exposure, etc. further external credit
rating from RBI approved agencies should be also completed for accounts for limit
of above Rs. 5.00 Crore .Any decline in credit rating of the borrower are examined
and reasons thereof along with remedial measures should be taken and they are
clearly stated in the Monthly Monitoring Report.

Page | 20
9. Relegation in Credit Rating: Any accounts, where relegation in credit rating
(downward) has taken place, special attention for timely corrective actions is given.
Strategies for restoration of credit rating and its upward migration are drawn and
implemented for improving the rating of the account. Appropriate loan pricing i.e.,
increase in interest with decline of the rating is done and is clearly mentioned in the
MMR.

10. Timely Recovery of over dues etc.: Follow up for expeditious and timely recovery
of interest / installments and other dues should be made to prevent any slippages. For
over dues the details are clearly mentioned along with the age (no. of days) and details
of follow up actions and estimated date of recovery.

11. Reschedulment / Rephasement and Restructuring: Accounts which show inherent

weaknesses are closely followed up. After establishing viability, they might
be considered for timely reschedulment / Rephasement / restructuring, as per
guidelines of the bank.

12. Credit Audit: Bank of Baroda has a Credit Audit Cell which is attached with Central
Inspection & Audit Division (CIAD), Baroda. The objectives of Credit Audit are:

i.To the improve the quality of credit portfolio

ii.For reviewing of Sanction process and compliance status of large loans
iii.For getting feedbacks on regulatory compliance
iv. For independent Review of Credit Risk Assessment
v. Also for picking up of early warning signals and for suggesting
remedial measures.
vi. To recommend corrective action to improve credit quality, credit
administration and credit skills of staff etc.,

Following accounts are covered under Credit Audit:-

i. All fresh sanctions / increase in limit whether Fund based and / or Non
Funded limits individually and combined of Rs.5.00 crore and above.
ii. Review of all existing accounts with sanctioned limit (Fund based
and/or Non-Fund based) of Rs.10.00 crore and above.
iii. 5% accounts of Region on random selection basis with sanctioned limit
of Rs.1.00 crore and below Rs.10.00 crore (from rest of the portfolio).
iv. Credit audit are conducted within 3 to 6 months of sanction/ review
v. Credit Audit of eligible accounts of one Region is carried out by
Officers of another Region within the Zone. Zonal Office identifies
Credit Auditors and eligible accounts.
vi. Credit Audit Report is submitted within a period of 15 days to Credit
Audit Department.

Page | 21
13. EXIT POLICY for High Risk Borrowers: Bank of Baroda has Exit Policy for High
Risk Borrowal Accounts. Under this exit policy bank can identify the potential
problem of credit accounts timely and undertake measures to systematically exit from
the account. This helps in ensuring downsizing of the high risk weighted assets and in
turn bank leverages on the capital released for buildup of good quality assets. The
early warning signals, market reports, government policies/guidelines etc are used for
identifying the accounts for exit.

14. RBIA: Risk Based Internal Audit: Inspection is one of the best control tool to
ensure that day to day activities of the branch, its management, lending decisions,
safety of the Bank’s funds are in conformity with the administrative instructions or
guidelines issued from time to time & in furtherance of corporate objectives. The
objectives of internal inspection are:

i. To scrutinize the completeness & enforceability of the documents taken

for advances & other facilities.
ii. To carry out physical checking, qualitatively and quantitatively of
securities and assets charged to the bank by pledge, hypothecation or
mortgage.
iii. To ascertain for sanction for advances
iv. To verify prompt & regular submission of periodical& statutory returns
v. To verify asset classification of advances
vi. To ascertain position of income recognition
vii. To ensure that qualitative rectification has taken place.

Besides, Statutory Audit carried by Statutory Auditor is a comprehensive feedback to

the management about the degree of compliance of Bank’s norms, classification of
assets, and quality of advance portfolio etc. The compliance is monitored through
rectification certificate.

5. ASCROM: It provides strong base for risk management and data

warehousing initiative of the bank. Some of the salient features ASCROM are:
i. Automatic Asset Classification of Advance and Calculation of provisions
as per IRAC norms.
ii. Computation of capital charge on credit risk as per BASEL II
requirements (standardized approach).
iii. Early Warning Reports – The system identifies Potential NPAs –3- months
in advance along with the Critical Amount Due (CADU).
iv. Generation of various MIS/ALM reports for in-house use and compliance.
v. The system identifies the Critical Amount in Default (CAD) in NPAs
which must be recovered to upgrade the account to standard category.
vi. Submission of CIBIL data

Page | 22
 6. PSR: Post Sanction Review: Post Sanction Reporting System is an important credit
monitoring tool in the hands of management.

i. It covers all sanctions and credit decisions viz., fresh/ increase/ renewal/
Rejection/Excess/ Modifications / Waivers etc., excluding sanction of staff
advances & LABOD (Loans against Banks Own Deposit).
ii. Broad parameters relating to sanction are only examined by the PSR
authority.
iii. Observations of PSR authority are to be attended immediately.
iv. Competent authority is required to clear the proposal from PSR angle
within 30 days.

20. Setting Up of Credit Monitoring Department: With the setting up of Credit

Monitoring Department, the strategy of Structured Institutional Mechanism has been
introduced which envisages zones should convene `Special Zonal Committee’
meeting every quarter for giving special focus for sharpening credit monitoring
process to improve the assets quality, identifying areas of concern /
branches requiring special attention, working out strategies and their implementation
in a time bound manner. Brief /precise minutes with action points to be sent to Credit
Monitoring department at BCC, Mumbai within three days of the meeting for further
follow up / action.

B. ACCOUNTS CAUSING CONCERN:-

For accounts which are causing concern, officials visit such accounts on case- to-case basis,
to conduct spot study of the unit and discuss with the borrower for taking timely remedial
actions to prevent slippage in the account. Illustrative lists of instances where accounts can be
termed as causing concerns are given below:

1. Creation of stipulated mortgage - first charge / second charge / pari-passu charge is

pending as on date.
2. Stock Inspection / Book Debts verification and / or submission of stock and Book
Debt statement pending for more than one month from the due date.
3. The credit rating score of the account is deteriorating for last two years.
4. The financial performance of the account is showing deteriorations in last two years.
5. The conduct of the account is showing unsatisfactory trends such as poor turn over,
return of cheques for financial reasons, consistent over dues in the account etc.
6. The quality or value of assets charged to bank is deteriorating steadily.
7. The name of borrower or its partners / directors are appearing in the defaulters list of
RBI / ECGC or any other regulatory authority.

Page | 23
8. There are disputes amongst the promoters / partners of the business.
9. There are adverse market reports on the borrower.
10. The borrower has started either defaulting on commitments or requesting repeatedly
for excesses.
11. Repeatedly advance Bills are outstanding for more than 10 days.
12. Invocation of any guarantee and liability / dues not settled.
13. The changes in the government policies are likely to have adverse effects on the
borrower that may jeopardize bank's interest.
14. The industry in which borrower is operating is sunset industry.
15. Account remaining overdue for review as on date.
16. Any other adverse development in the account seriously impairing the bank's interest
and quality of the credit.
17. Delay in Project Implementation schedule – Likely Time, Cost Over runs – and its
impact on the production / sales / operating profit / financials, adverse effect if any, on
servicing of Bank’s dues be mentioned. Proactive steps for reschedulment /
Rephasement, duly sanctioned by the competent authority, citing justification be
ensured and be maintained in the reports, ‘If applicable’.
18. Steep short-fall noticed in actual performance Vis a Vis projection – Quarter to
Quarter- Causes and remedial actions taken / proposed to be taken, be mentioned. The
above list is only illustrative and not exhaustive.

Page | 24
C. CREDIT MONITORING PROCEDURES FOR ADVANCE ACCOUNTS AT
VARIOUS LEVELS:

Serial Particulars of Advances Accounts Monitoring Authority

.No.
1. All advances accounts with aggregate credit Branch Head
facilities (Both FB+NFB) of less than Rs. 1 Crore.
2. All advances accounts with aggregate credit Regional Head
facilities (FB+NFB) of Rs. 1 Crore and above but
less than Rs. 5 crore.
3. All advances accounts with aggregate credit Zonal Head
facilities (Both FB+NFB) of Rs. 5 crore and above
but less than Rs. 10 crore.
4. All advances accounts with :
a) Aggregate credit facilities ( Both Fund Based & Competent authority at the
Non Fund Based ) of Rs. 10 crore and above Baroda Corporate Center.
b) Based on summary reports of High Risk -DO-
Borrowers (BBB / BOB 6 & below) accounts
monitored by Zones / Regions (1 to 10 crore)

Primary responsibility of monitoring the advance accounts are with the Branch / Regional
office / Zonal office.

D. MONTHLY MONITORING REPORTING SYSTEM OF ADVANCES

ACCOUNTS (MMR):

The monthly monitoring reporting system of advances accounts was introduced to ensure and
facilitate Qualitative Supervision of the Bank’s Credit Portfolio. This system of monthly
monitoring acts like an “Early Alert System”, which helps in taking action at an early stage
for ensuring prevention of slippage and impairment of Credit Quality.

Page | 25
The objectives of the MMR system are:

1. To prevent slippage in the Asset Classification and relegation in Credit Ratings.

2. To identify incipient sickness / Potential Default / weaknesses in the account at an
early stage.
3. To take suitable and timely corrective actions for preventing impairment in credit
quality of the Bank, as and when signals are noticed in any account like Decline in
credit rating, delay in servicing of interest / installment.
4. Taking necessary steps / regular follow up, for review of accounts and compliance of
all terms and conditions, thereby improving the quality of Bank’s advance portfolio.
5. Ensuring there is no loss to bank by revenue leakage in respect of ROI and Charges.
6. Endeavoring for upward migration of Credit Ratings.

Action Points taken by the bank to achieve the Objectives of MMR is:

1. Dedicated Monitoring cells, for close follow up of Credit Quality parameters and
prevention of slippages etc.

2. Close follow ups are made on Credit Monitoring. Timely review, Timely credit rating,
appropriate pricing/ Terms and conditions compliance, unit inspection/ weaker rated
accounts for timely preventive actions.

3. Continuous reviewing of the industry prospects/ regulatory guidelines, taking

appropriate remedial actions is necessary.

4. In respect of any account causing, which are likely to affect the health of the account
leading to decrease in credit quality, should be brought to the notice of corporate
office for advising remedial actions that to be taken with complete details as per status
note.

5. Ensuring timeliness, accuracy and completeness of MMRs is important.

6. Timely addressing the observations of higher authorities / Concurrent auditors /

Statutory Auditors / Inspecting Officer’s – Any outstanding observations, with actions
taken are stated in the Report.

Page | 26
 III. CHALLENGES AND SOLUTION:

The main challenges of banking sectors are the loan accounts which are asset for the bank
turning into Non Performing Assets. The primary aim of monitoring exercise is to ensure that
account is conducted in the manner normally expected & the account continuous as
performing assets. But there are many internal and external factors for which the accounts
turn into NPAs
NPAs result from what are termed “Bad Loans” or defaults. Default, in the financial parlance,
is the failure to meet financial obligations, say non-payment of a loan installment. These
loans can occur due to the following reasons:
 Usual banking operations /Bad lending practices
 A banking crisis (as happened in South Asia and Japan)
 Overhang component (due to environmental reasons, business cycle, etc.)
 Incremental component (due to internal bank management, like credit policy, terms of
credit, etc.)

A. NON-PERFORMING ASSETS:

A loan or lease that is not meeting its stated principal and interest payments becomes
non-performing assets. More generally, an asset which is not producing income is a non-
performing asset,
i. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, 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,

OUT OF ORDER STATUS:-

An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/ drawing power. In case where the
outstanding balance in the principal operating account is less than the sanctioned
limit/ drawing power, but there are no credits continuously for Ninety Days as on the
date of balance sheet or credits are not enough to cover the interest debited during the
same period, these account should be treated as 'out of order'.

Page | 27
I. INCOME RECOGNITION:
Income Recognition Policy
1. The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from nonperforming assets (NPA) is not recognized
on accrual basis but is booked as income only when it is actually received. Therefore,
the banks should not charge and take to income account interest on any NPA.
2. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin
is available in the accounts.
3. Fees and commissions earned by the banks as a result of renegotiations or
rescheduling of outstanding debts should be recognized on an accrual basis over the
period of time covered by the renegotiated or rescheduled extension of credit.
4. If Government guaranteed advances become NPA, the interest on such
advances should not be taken to income account unless the interest has been realized.
Reversal of income
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.
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.
Leased Assets
The finance charge component of finance income [as defined in ‘AS 19 Leases’
issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on
the leased asset which has accrued and was credited to income account before the
asset became nonperforming, and remaining unrealized, should be reversed or
provided for in the current accounting period.

Appropriation of recovery in NPAs

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.
In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due),
banks should adopt an accounting principle and exercise the right of appropriation of
recoveries in a uniform and consistent manner.
Interest Application
On an account turning NPA, banks should reverse the interest already charged and not
collected by debiting Profit and Loss account, and stop further application of interest.
However, banks may continue to record such accrued interest in a Memorandum
account in their books. For the purpose of computing Gross Advances, interest
recorded in the Memorandum account should not be taken into account.

Page | 28
II. ASSET CLASSIFICATION:
Categories of NPAs
Banks are required to classify nonperforming assets further into the following three
categories based on the period for which the asset has remained nonperforming and the
ability to realize the dues:
1. Standard Assets:
Standard Asset is one which does not disclose any problems and which does not carry more
than normal risk attached to the business. Such an asset should not be an NPA.
Provisioning norms for Standard assets will be as under:
From the year ended March 31, 2000, the banks should make a general provision of a
minimum of 0.25 per cent on standard assets.

2. Substandard Assets
With effect from March 31, 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 months. Such an asset will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
Provisioning norms for substandard assets will be as under:
A general provision of 10% on total outstanding should be made. The unsecured exposures
which are identified as substandard would attract additional provision of 10% i.e. a total of
20% on the outstanding balance. However, in view of the certain safeguards such as escrow
accounts available in respect of infrastructure lending, infrastructure loan accounts which are
classified as Substandard will attract a provisioning of 15% instead of the aforesaid
prescription of 20%.
3. Doubtful Assets
With effect from March 31, 2005, an asset would be classified as doubtful if it has remained
in the substandard category for a period of 12 months. A loan classified as doubtful has all
the weaknesses inherent in assets that were classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, – on the basis of
currently known facts, conditions and values – highly questionable and improbable.
Doubtful - I
The NPAs after completion of 12 months in Sub-standard category will slip to Doubtful –I
category.
Doubtful - II
The NPAs after completion of 24 months from date of NPA category will slip to Doubtful-II
category.
Doubtful-III
The NPAs after completion of 48 months from date of NPA category will slip to Doubtful-III
category.

Page | 29
 Provisioning norms for Doubtful assets will be as under:
i) 100 % of the extent to which the advance is not covered by the realizable value
of the security to which the bank has a valid recourse and the realizable value
is estimated on a realistic basis.
ii) In regards to the secured portion, provision may be made on the following
basis, at the rates ranging from 25% to 100% of the secured portion depending
upon the period for which the asset has remained doubtful.

Period for which the advances has remained in “doubtful” Provision requirement
category
Doubtful up to one year 25%
Doubtful one to three years 40%
Doubtful above three years 100%

4. Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly. In other words, such an
asset is considered uncollectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.
Provisioning norms for Loss Assets will be as under:
There should be a provision of 100% for loss assets.

B. SPECIAL MENTION ACCOUNTS (SMA)

Banks have placed an Early Alert System for identifying the weakness in an account at an
early stage which could capture early warning signals in respect of accounts showing first
signs of weakness. The accounts falling under this monitoring mechanism are termed as
Special mention Accounts. This system forms the integral part of the risk management
process of Banks.

Under the Early Alert System, branches are required to designate a time limit for overdue
accounts to determine the SMAs well before the account becomes NPA. This is to enable the
branch to assess whether the default is due to some inherent weakness or due to a temporary
liquidity or cash flow problem and accordingly calibrate its response. For example, where
there is a default in an account for 30 days, it may be shifted to a special category. Out of the
accounts, those that show promise may be considered for granting incremental facility for
specific purposes, such as for capital expenditure, by ensuring strictest possible end use of the
money. All the accounts displaying unsatisfactory features/early warning signals should be
put under potential NPA list for follow up and time bound action to prevent their slippage.

Page | 30
“Special Mention” or “Watch list” Accounts is a new asset category between “Standard” and
“Substandard” for Bank’s own internal monitoring and follow up. This would help Bank to
look at accounts with potential problems in a focused manner right from the onset of the
problem, so that monitoring and remedial actions can be more effective. Once these accounts
are categorized and reported as such, proper top management attention would also be
ensured.

Features in the Borrowal Account to Identify SMA:

An account must be regarded as SMA if any of the following features are observed,
1. In case of term loans where two monthly installments, one quarterly, one half yearly
or one annual installment have remained unpaid, and in case of Cash Credit/Operative
Credit facilities if the interest is not served for 2 months or there is not credit turn over
in the accounts for 2 months or facility is not renewed/reviewed within two months
from the due date such account be classified as Special mention Account (SMA).

2. Accounts with regular delays of payment of principal or interest of up to 2 months

that exhibit weakness in credit should also be classified as SMA/Watch list Accounts.

3. Accounts with deterioration of credit profile (example – external rating being BB+ or
below), payment defaults to other banks, management issues, external events such as
strikes, lockouts, industry issues, regulatory/tax constraints that can seriously affect
the credit quality also require the account to be classified as SMA/Watch list on an
immediate basis.
4. Serious deficiencies in terms of documentation, delayed / non-submission of Stock
Statements, other monthly information data for 2 months continuously. Non-creation
of Primary securities affecting the ultimate recovery prospects in the account.
5. Devolvement of LC / DPG installment and non-payment of the same beyond 15 days.

6. Persisting irregularity due to excess withdrawal beyond 30 days in Cash Credit

account/ Shortfall in Drawing Power in Cash Credit account not regularized within a
week.

Page | 31
Characteristics of Special Mention Account (SMA)

i. The asset has potential weaknesses which deserves close management attention and
which can be resolved through timely remedial action.

ii. If left un-corrected, the potential weaknesses in Special mention assets may result in
deterioration of the repayment prospects and subsequent adverse asset classification.

iii. Often a bank's weak origination/servicing policies are the reason behind classification
of an asset under the Special mention category though there may be cases where
technical or other factors are also responsible.

iv. Apart from continuing irregularities, Special Mention Accounts may also be
categorized on the basis of factors such as inadequate cash flows and management
integrity.

Categorization of SMA

All Special Mention Accounts are to be categorized into "A" or "B" or "C" as detailed below:

Category Type of Accounts

A Accounts that will be out of SMA category

B Accounts that will be restructured / proposed to be restructured

and hence will not become a problem account.

C Accounts where no scope of recovery and may require

provisioning and are categorized as potential NPA accounts.

Page | 32
Follow up of SMA Accounts.

1. In case of term loans if one installment remains unpaid for more than 15 days, the
borrower is personally contacted and a notice demanding the due installments be
issued simultaneously.

2. In case bimonthly, quarterly, half yearly or annual installment and the interest on the
account remain to be unpaid for more than 45 days, steps be taken for taking
possession of the securities for the loans with prior approval of Recovery Group.

3. In case of credit facilities like Cash Credit / Overdraft / Term Loans which are to be
renewed annually a notice be issued to the concerned borrower two months before the
due date advising to submit the papers required for the renewal of the limit. This
would help to judge whether the limit is going to be renewed or otherwise and to take
appropriate steps.

4. The documents of such loan accounts exhibiting such behavior should be thoroughly
examined and discrepancies therein if any rectified. Acknowledgement of debt should
be obtained from the borrower and the guarantor.

Monitoring of SMA accounts

1. Accounts are to be specifically classified under A, B and C categories based on

recovery prospects in tune with the narration under remarks column in the SMA
statements.

2. Accounts under SMA category with over dues for less than 90 days have to be
followed up for Recovery/Rehabilitation/Rephasement for retaining the accounts
under Standard category.

3. Accounts with over dues for more than 90 days have to be taken up for recovery /
enforcement of securities without further loss of time. Need based rehabilitation of
accounts with over dues beyond 90 days may be considered as per norms.

Page | 33
C. OVERVIEW OF PERFORMANCE OF BANKS AND THEIR NPA
ACCOUNTS:

As per Reserve Bank of India (RBI) data on global operations, aggregate gross advances of
Public Sector Banks (PSBs) increased from Rs. 18,19,074 crore as on 31.3.2008 to Rs.
52,15,920 crore as on 31.3.2014. As per RBI inputs, the primary reasons for spurt in stressed
assets have been observed to be, inter-alia, aggressive lending practices, willful default / loan
frauds / corruption in some cases, and economic slowdown. Asset Quality Review (AQR)
initiated in 2015 for clean and fully provisioned bank balance-sheets revealed high incidence
of NPAs. As a result of AQR and subsequent transparent recognition by banks, stressed
accounts were reclassified as NPAs and expected losses on stressed loans, not provided for
earlier under flexibility given to restructured loans, were provided for. Further, all such
schemes for restructuring stressed loans were withdrawn. Primarily as a result of transparent
recognition of stressed assets as NPAs, gross NPAs of PSBs, as per RBI data on global
operations, rose from Rs. 2, 79,016 crore as on 31.3.2015, to Rs. 8, 95,601 crore as on
31.3.2018, and as a result of Government’s 4R’s strategy of recognition, resolution,
recapitalization and reforms, have since declined by Rs. 89,189 crore to Rs. 8, 06,412 crore
as on 31.3.2019 (provisional data).

D. RECOVERY OF EXISTING NPA LOANS:

Better standards of credit appraisal and close monitoring of standard assets will enable the
branches to restrict the NPA to the minimum level. Concurrently recovery of existing NPAs
has to be given utmost importance in view of the likely impact on the profitability. Recovery
policy aims at expediting recovery while pegging the sacrifice at the lowest possible level.
With this objective in focus, the policy guidelines are revisited and refashioned at least once
in a year to equip the branches for efficient handling of the NPA portfolio. While framing
recovery policy guidelines , the feedback received from the field level functionaries, our
experience in handling proposals received from branches all over the country and the
corporate goals are factored in besides the market development, economic scenario etc.
The implementation of the prudential norms for income recognition, asset classification
(IRAC) and provisioning for credit portfolio of banks has brought in rapid reforms in the
Indian banking industry and the NPA management in banks has assumed greater importance.
Greater emphasis was laid for recovering the dues and keeping the NPA level at the lowest
possible level as it will have direct impact on the profitability of the bank.

Page | 34
1. OBJECTIVE OF RECOVERY:

A. Reduce NPA book by enhancing the level of credit monitoring and expediting
recovery of NPAs like,
1. Effective follow up/ monitoring of the borrowal accounts.
2. Regular recovery of periodical interest and installments due.
3. Proper classification of accounts under Special Mention Account (SMA) category and
close monitoring thereof.
4. Prompt recovery of critical amount to avoid slippage.
5. Procurement of stock statements from the borrowers in time/ inspection of securities
charged periodically.
6. Procurement of other financial statements and MSOD.
7. Timely review or renewal of the credit limits.
8. Rephasement/ restructuring of standard advances wherever applicable, within the
ambit of bank’s policy.
9. Timely revival/ rehabilitation of the potentially sick and viable units.
10. Corporate debt restructuring.

B. Reduce the level of NPAs through recovery by adopting various legal and other
measures:
1. Persistent contact/ follow up with the borrowers for recovery.
2. Enforcement of SARFAESI Act 2002 and recovery by selling the properties within
100 days of issuing notice.
3. Filling of suits in appropriate civil courts/ DRTs
4. Invoking provisions of Revenue Recovery Act wherever applicable.
5. Referring the cases to Lok Adalat for settlement through conciliation
6. Settlement through compromise.
7. Execution of decrees within one year from the date of decree.

C. Upgrade the existing NPAs by improving the quality of assets:

1. Upgrade the accounts by recovering the critical/overdue amount.
2. Rephasement/ restructuring/ rehabilitation of accounts wherever possible/ justified,
within the ambit of bank’s policy.
3. Recovery of amount as per approved scheme in respect of BIFR/ CDR accounts.

D. Recovery strategies:
1. Persuasion/ personal contacts with the borrowers and guarantors.
2. Seizure and disposal of securities through enforcement of SARFAESI Act 2002 in
chronic cases.
3. Engage detectives/ recovery agents for identifying/ locating non mortgaged
properties owned by the borrowers/ guarantors and attach them before judgment also.

Page | 35
 4. Settlement through compromise, which is the most time efficient tool for resolving
NPA. However, the amount of OTS should be acceptable and in terms of policy.

2. MONITORING OF THE NON PERFORMING ASSETS :

Following steps should be initiated once account has been identified as NPA.

i. All the fixed deposits obtained as security/collateral security for the loan/credit
facility is appropriated towards the outstanding immediately after the account is
identified as NPA.

ii. The borrower and the guarantor be vigorously followed up for recovery/regularization
of the account and in case no desired response is received, legal notice will be issued
to the borrower and the guarantor within 30 days from the date of identification of the
account as NPA with prior approval of the Recovery Group.

iii. In exceptional cases if there are genuine difficulties being faced by certain borrowers,
their accounts may be rescheduled or restructured preferably prior to such loans
becoming NPAs.

iv. In case borrowers difficulties are genuine and in case he is ready to pay the
outstanding in one lump sum if the penal interest is waived, his request may be
considered sympathetically and penal interest be waived on the merit of case. Such
proposals be got approved from Head Office.

v. The position of recovery in NPA accounts should be reviewed on a monthly basis by

the Recovery Group and the position of recovery be placed before the Management
Credit Committee (through the CRO) on a monthly basis.

vi. Recoveries affected in doubtful and loss assets be first appropriated towards principal.

3. COMPROMISE / SETTLEMENTS :

The basic guidelines governing compromise settlements of NPAs are listed below.

i. A compromise should be negotiated settlement, which would ensure recovery of the dues
to the maximum extent possible at minimum expense and within shortest possible time
frame.

Page | 36
 ii. While taking NPAs a proper distinction will have to be made between willful defaulters
and defaulters due to circumstances beyond their control. While in case of the former, a
tough stand has to be taken, in latter cases a moderated view is to be taken.

iii. Where security is available for assessing the realizable value, proper Weight age has to be
given to the location, condition, marketability and weather property is self occupied or
tenanted etc.

iv. Due weightage to be given to present activities of the borrower / guarantor, their present
means etc.

v. While arriving at a negotiated settlement, the advantage available to the Bank from
prompt recycling of funds should be weighted in comparison to the likely recovery be
following legal or other protracted course of action i.e. opportunity cost analysis be made.

vi. A compromise/settlement be made only if the account has been classified as doubtful or
loss assets. However, if there are any genuine reasons compromise/settlement be made in
case of a sub-standard account also.

vii. While compromising in any account only interest amount be sacrificed and no relief be
granted in principal amount. However, in deserving cases relief in principal amount also
be considered.

viii. Before entering into any compromise /settlement details of the assets of the borrower and
guarantor be collected and the relief be granted if the Bank deems fit.

4. WRITING OFF OF BALANCES IN THE BORROWAL ACCOUNTS:

The accounts, balances of which are to be written off must have been classified as Loss
Assets or Doubtful above three years. Balances in the account are written off only after
obtaining report from the Business Head/ Branch Manager about non possibility of recovery
in the account. The exercise of writing off of the balance is carried out in consultation with
the Accounts & Operations Department at Head Office and the aggregate amount to be
written off be finalized with the approval of the M. D. & CEO. Efforts for recovery be
continued even after the balance in the account is written off. In case of a suit filed account
where the balance has been written off, suit proceedings/execution proceedings be continued.
The court cost and other incidental charges for such recovery be debited to Branch's Profit &
Loss Account.

Page | 37
5. NORMS IN RESPECT OF FILING OF SUITS:
Considering the long drawn process in the litigation and difficulties in executing the decrees
action of filing of suit be taken as a last resort. Following norms be observed before filing of
a suit.

i. A suit be filed only after making all the efforts such as personal contacts, demand
notice from the branch or through advocate , proceeding under Securitizing Act etc.
and if the branch and the recovery department at Head Office comes to the conclusion
that there is no alternative but to file a suit for recovery.

ii. Before filing of the suit it should be ensured that the loan documents are complete in
all respects and that the suit is well within the limitation period. The position of
documents be got examined form the Bank's approved advocate.

iii. Before filing of the suit final notice through Bank's advocate be issued.

iv. All the deposits obtained as security and / or collateral security be got appropriated
towards the outstanding before filing of the suit.

v. All the assets such as machinery, vehicles, and shares in the custody of the Bank are
disposed of and the sale proceeds be appropriated towards the outstanding in the
account and the suit be filed for recovery of residual amount.

vi. Before filing of the suit information regarding movable/immovable assets of the
borrower and the guarantor be ascertained and steps be taken for attachment of these
properties before judgment.

6. COLLECTION OF DUES AND SECURITY REPOSSESSION POLICY:

The debt collection of the bank is built around dignity and respect to customers where there
are genuine problems. Bank will not follow policies that are unduly coercive in collection of
dues. The policy is built on courtesy, fair treatment, persuasion and finding solutions. The
Bank believes in following fair practices with regard to collection of dues and repossession of
security and thereby fostering customer confidence and long - term relationship.

Page | 38
 i. Giving Notice to borrowers.

While telephonic reminders or visits by the Bank's representatives to the borrowers place
or residence will be used as loan follow up measures, the Bank will not initiate any legal
or other recovery measures including repossession of the security without giving due
notice in writing. First such notice will be sent immediately upon default by the borrower
or when telephonic reminders or personal visits fail to yield result.

The first notice while giving details of the amount in default will give 15 days time
period for the borrower to clear the dues and regularize the account. In case the borrower
fails to respond within the given period of time, a second notice will be issued explaining
the consequences of nonpayment and the borrower would be given a further period of 15
days to clear the dues. The consequence of nonpayment would include recall of entire
loan amount forthwith. In the event of the failure of the borrower to respond within the
time period, a final notice will be issued after which the bank will be free to initiate such
recovery measures as deemed fit.

ii. Repossession of Security.

Repossession of security is aimed at recovery of dues and not to deprive the borrower of
the property. The recovery process through repossession of security will involve
repossession, valuation of security and realization of security through appropriate means.
All these would be carried out in a fair and transparent manner. Repossession will be
done only after issuing the third and final notice as detailed above. Due process of law
will be followed while taking repossession of the property. The Bank will take all prudent
measures for ensuring the safety and security of the property after taking custody.

iii. Recovery through Sale of NPAs:

SARFAESIA besides facilitating enforcement of security without intervention of Court

has put in place a framework for growth of Specialized Institutions for securitization and
reconstruction of NPAs. These agencies purchase NPAs from Banks. Further RBI has
now permitted sale and purchase of NPAs by Banks. In line with these developments, our
Bank has put in place policies for sale of NPAs to Asset Reconstruction Companies,
Banks and other financial intermediaries. These policies are administered at Central
Office level.

iv. Valuation and Sale of Property.

Valuation and sale of property repossessed by the Bank will be carried out as per law and
in a fair and transparent manner. The valuation given by the approved values will be
conveying to the borrower before proceeding with sale of property.

Page | 39
 Even while finalizing sale of the property the offer(s) received by the bank will be
informed to the borrower and he will be have an opportunity to bring in a higher price
bid. The bank will have right to recover from the borrower the balance due if any, after
sale of property excess amount if any, obtained on sale of property will be returned to the
borrower after meeting all the related expenses.

v. Opportunity for the borrower to take back the security.

As indicated earlier in the policy document, the Bank will resort to repossession of
security only for the purpose of realization of its dues as the last resort and not with
intention of depriving the borrower of the property. Accordingly the Bank will be willing
to consider handing over possession of property to the borrower any time after
repossession and before concluding sale transaction of the property, provided the Bank
dues are cleared in full. If satisfied with the genuineness of borrower's inability to pay the
loan installments as per the schedule which resulted in the repossession of security, the
Bank may consider handing over the property after receiving the installments in arrears.
However, this would be subject to the Bank being convinced of the arrangements made
by the borrower to ensure timely repayment of remaining installments in future.
vi. Recovery Through Lok Adalat:

Lok Adalat is a legally constituted authority, for resolution of disputes through

conciliation. It functions under the aegis of Central, State and District legal services
Authority headed by judges from Supreme Court, High Court and District court
respectively. They have powers to settle both pending suit filed cases as well as pre
litigation cases. They grant awards, which are treated as decree and can be straight away
executed in a court of law. Govt. of India has permitted Banks to efforts settlement
through Lok Adalat for the dues up to rs.20.00 lakh.

vii. Outsourcing of Recovery –

Bank may also consider appointing Recovery Agents complying with the RBI guidelines
applicable with Recovery Agents.

Page | 40
7. DISSEMINATION OF INFORMATION ON DEFAULTING BORROWERS:

i. In terms of Reserve Bank of India guidelines the information regarding defaulting

borrowers be reported to Reserve Bank of India / Credit Information Companies like
CIBIL etc. periodically as prescribed by Reserve Bank of India.

ii. Before submitting the information the position of the concerned account should be
thoroughly verified and correct information such as outstanding, addresses, names of
the proprietors, partners, directors etc. are given.

iii. In case of willful defaulters, the position of the account be thoroughly verified and it
should be ensured whether the concerned borrower falls within the definition of
willful defaulter as prescribed by Reserve Bank of India.

iv. On identification of borrower as willful defaulter a 15 days Show Cause Notice be

issued to him seeking his say as to why he should not be treated as a willful defaulter.

v. In case the notice is not responded satisfactorily within 15 days, the name of the
concerned borrower be recommended to the committee for identification of willful
defaulters seeking permission of the committee for reporting the borrowers name as
willful defaulter.

vi. On approval by the committee for identification of willful defaulters the name be
reported as willful defaulter to Reserve Bank of India / Credit Information Company.

Page | 41
 CREDIT RISK ASSESSMENT:

It is very much important for financial institutions or a bank to assess credit risk associated
with lending the money to an organization. The risk perception of a borrowing unit is
considerably influenced by internal and external factors. If these factors are not favorable, a
performing unit may suffer with adverse risk situations. Each Bank develops its own Internal
Rating System to rate the Borrowers. All exposures have to be brought under Credit Rating
Framework (CRF). For the purpose of internal rating, the Bank has developed the Risk
Assessment Model (RAM), for Bank of Baroda it is BOBRAM model.
A credit rating estimates the credit worthiness of an individual or an organization or even a
country. It is an evaluation made by credit bureaus of a borrower’s overall credit history and
projections for future from current asset and liabilities and other financial projections.
Typically, a credit rating tells a lender or investor the probability of the borrower being able
to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan and leads
to high interest rate or the refusal of a loan by the creditor.
An individual’s credit score evaluates his or her ability to borrow money through financial
institutions.
The factors which may influence a person’s credit rating are:
i. Ability to pay a loan
ii. Interest
iii. Amount of credit used
iv. Saving pattern
v. Spending patterns
vi. Debt

Thus, credit rating helps in drawing up a Credit-Risk profile and saves the investors’ time and
enables him to take quick decision and provides him better choices among available
investment opportunities. Borrowing units having a higher rating gets loan at a lower interest
rate and units with lower rating have to pay high interest.

Categorization of Risk and Its Evaluation:

In the Credit Risk Assessment System, all possible factors that go into appraising the risk
associated with a loan proposal have been taken into account.

Page | 42
 Credit Rating Model of Bank of Baroda

Grade Nature of Grade Description

No

1 BOB-1 Investment Grade-Highest Safety

2 BOB-2 Investment Grade High Safety

3 BOB-3 Investment Grade High Safety

4 BOB-4 Investment Grade Adequate safety

5 BOB-5 Investment Grade Moderate safety

6 BOB-6 Investment Grade Moderate safety

7 BOB-7 Sub investment Grade Inadequate Safety

8 BOB-8 Sub investment Grade-High Risk

9. BOB-9 Default Substantial Risk

10 BOB-10 Default

Page | 43
 WILLFUL DEFAULTER

I. Definition:
Pursuant to the instructions of the Central Vigilance Commission for collection of
information on willful defaults of Rs.25 lakh and above by RBI and dissemination to the
reporting banks and FIs, a scheme was framed by RBI with effect from 1st April 1999 under
which the banks and notified All India Financial Institutions were required to submit to RBI
the details of the willful defaulters. Willful default broadly covered the following:
a) Deliberate non-payment of the dues despite adequate cash flow and good net worth;
b) Siphoning off of funds to the detriment of the defaulting unit;
c) Assets financed either not been purchased or been sold and proceeds have been utilized
wrongfully;
d) Misrepresentation / falsification of records;
e) Disposal / removal of securities without bank's knowledge;
f) Fraudulent transactions by the borrower.
Accordingly, banks and FIs started reporting all cases of willful defaults, which occurred or
were detected after 31st March 1999 on a quarterly basis. It covered all non-performing
borrowal accounts with outstanding (funded facilities and such non-funded facilities which
are converted into funded facilities) aggregating Rs.25 lakh and above identified as willful
default by a Committee of higher functionaries headed by the Executive Director and
consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of
willful defaults of Rs 1.00 Crore and above for filing of suits and also consider criminal
action wherever instances of cheating/fraud by the defaulting borrowers were detected. In
case of consortium/multiple lending, banks and FIs were advised that they report willful
defaults to other participating/financing banks also. Cases of willful defaults at overseas
branches were required be reported if such disclosure is permitted under the laws of the host
country.

Identification of willful defaulters’ accounts:

Banks and FIs will report all cases of willful defaults which occurred or detected after 31st
March, 1999 on a quarterly basis -(then and there without any delay) to RBI. A willful default
would be deemed to have occurred, if any of the following events is noticed.
i. The unit has defaulted in meeting its payment / repayment obligations to the lender
even when it has the capacity to honor the said obligations.

ii. The unit has defaulted in meeting its payment / repayment obligations to the lender
and has not utilized the finance from the lender for the specific purposes for which the
finance was availed of but has diverted the funds for other purposes.

Page | 44
 iii. The unit has defaulted in meeting its payment / repayment obligations to the lender
and has siphoned off the funds so that the funds have not been utilized for the specific
purpose for which the finance was availed of nor are the funds available with the unit
in the form of other assets.

For accomplishing this, the willful defaulters’ list in the website: www.cibil.comshould be
checked to identify names of the borrowers, directors, promoters or proprietors. In case, a
similar name happens to occur in the list, the concerned party should be asked to give
justification.

Reporting to RBI / Credit Information Companies

Banks/FIs are required to submit to Credit Information Bureau (India) Ltd. (CIBIL) the list of
Suit-filed accounts of willful defaulters of Rs.25 lakh and above as at end-March, June,
September and December every year and a quarterly list of willful defaulters where suits have
not been filed to RBI.

Banks and FIs need not report cases where outstanding amount falls below Rs.25 lakh and
cases where banks have agreed for a compromise settlement and the borrower has fully paid
the compromised amount.

Banks and FIs take suitable steps to report the names of current directors as also the directors
Who were associated with the company at the time the account was classified as defaulter to
put other banks and FIs on guard. The names of independent and nominee directors are also
be included with suitable distinguishing remarks as applicable.

Page | 45
 PRACTICAL CASE STUDY: HOME LOAN OF SHANTANU DAS &
DEEPALI KUMARI

The credit appraisal method mentioned earlier has been applied to appraise a credit proposal
for Shantanu Das and Deepali Kumari (names changed). The applicant Mr. Shantanu Das is
employed with Bharat Petroleum Corporation Limited as Manager Grade B since last 7years
and is receiving average monthly salary of Rs. 92563.00 as per latest salary slip submitted.
The Co-applicant Mrs. Deepali Kumari is employed with TATA Steel Limited as manager
since last 6years. She is receiving average monthly salary of Rs. 109926.00 as per latest
salary slip submitted.

Mr. Shantanu Das, aged 27 years has approached the bank with his wife Mrs. Deepali
Kumari, aged 25 years for Home loan of Rs. 100.00 Lakh for purchase of flat.

CIBIL report of Applicant-I is generated on 23.03.2019 and the obtained score is 851. Two
credit cards are reflecting in standard status. No adverse remarks found. CIBIL report of
Applicant-II is generated on 23.03.2019 and the obtained score is 783. One Auto Loan of Rs.
– is reflecting in closed status from Bank of Baroda. No adverse remarks found. Equifax has
been generated on 23.03.2019 for the borrowers and no adverse remarks found, same entries
of CIBIL are reflecting. Their average CIBIL score is therefore, 817.

A. Assessing the Credit Worthiness:

The first step towards Credit Appraisal is analysis of the Credit worthiness of the borrowers/
guarantors are verified. It is very much important to have a detailed knowledge of the project
because the primary focus of the credit analyst is the qualitative factors rather than
quantitative factors of the project. Therefore bank collects all the information and verifies
them at the very initial stage.

B. DETAILS OF THE PROJECT/ DESCRIPTION OF MORTGAGED

IMMOVABLE PROPERTY:

All that undivided proportionate share of land out of 64.93 Acre along with an Apartment No.
2705 on 27th floor, measuring 1965 sq. ft. super built up area of the building “INSIGNIA
TOWER-4, in URBANA” and a car parking at Mouza Madurdaha, J. L. No. 12, Plot No.
345(P) & 441(P), Municipal Premises No. 783, Anandapur within Kolkata Municipal
Corporation, P.S. Anandapur, District- South 24 Parganas, West Bengal.
The land is butted and bounded as follows:
On the North: Others’ Property
On the South: Others’ Property
On the East : Others’ Property
On the West: 40 Feet Wide Road.

Page | 46
C. DETAILS OF THE LOAN SANCTIONED:
Date of Sanction: 27.03.2019
Name of Product: Purchase of House Flat Apartment, etc.
Name of the specific scheme: Baroda Home Loan
Facility: Term Loan
Total Cost: Rs. 1,56,82,250.00/-
Limit Requested: Rs. 1,00,00,000.00/-
Permissible Limit: Rs. 1,00,00,000.00/-
Actual Margin: 36.23%
Rate of Interest: Applicable Rate of Interest is 8.75%, per annum with rests, i.e. Credit Spread
0.00%, Risk Premium 0.05%, Current one year MCLR 8.70%
Total Period: 360 months
Moratorium: 0
Repayable in: 360 equated monthly installment (EMI).
EMI: Rs. 78,671.00/-
Commencing From: One month after disbursement of Loan.
Processing Charges: Rs. 0.00/-
Upfront Charges: Rs. 8,850/-
Deviation Charges: Rs. 0.00/-
Disbursement: Disbursement of Rs. 100.00 Lakh shall be by way of Demand Draft/Banker’s
Cheque to the Builder on the day of registration of the property for purchase of flat,
recovering applicable margin and adhering to the terms and conditions of the sanction:

1. Branch to ensure to create a valid equitable mortgage of the property.

2. Branch to complete vetting of documents by their panel advocate. Latest EC report to
be obtained after creation of mortgage and confirm the same.
3. Branch has to verify all the original documents of the property mentioned in the legal
opinion before disbursement of the loan and keep on record all the documents
mentioned in legal opinion report point No. 18 and 19 before disbursement of loan.
4. Draft sale deed to be approved before disbursement as per norms by their empanelled
advocate.

Page | 47
 CONCLUSION

The financial services market is changing rapidly. Competition is getting tougher day by day
and with financial liberalization under the WTO, banks in India will have to benchmark
themselves against the best in the world. A strong and growing economy needs a very good
banking and financial system. For a strong and resilient banking and finance system, banks
need to go beyond peripheral issues and tackle significant issues like improvement in
profitability, efficiency and technology while achieving economies of scale through
consolidating and exploring available cost effective solution. These are some of the issues
that need to be addressed if the banks are to succeed, not just survive, in the changing time.
Riding on the momentum of competitiveness, the banks are forced to grant credit on a much
larger scale. This results in lesser time per proposal. To add to this, there is no room for
mistakes. Hence, it requires that the banks have to maintain and continuously update their
credit appraisal and monitoring system.
It is necessary to have a proper credit monitoring system installed because in the growing
economy the banks will have to adhere to more important business rather than recovery of the
credits gone bad. This would mean that once the credit goes bad, the bank will lose on the
profitability frontier. However, it should be noted that mere one time preparation of a system
shall not suffice the cause. It will have to be regularly updated in the light of the recent
developments.
Bank of Baroda is a state owned bank and the third largest bank of India after State Bank of
India and ICICI Bank respectively. The bank has huge collection of deposits and has been
efficiently utilizing it for the growth of the economy. As explained earlier, the Bank has
formulated a system of credit appraisal and monitoring which are apt in tackling the
requirements of the lending procedure. The system is updated continuously.
The future for any bank lies in properly allocating its funds. For this a sound credit
management system is necessary. With a liberalized economy in India, the banks are now in a
race in which only the most disciplined, committed and innovative shall win.

Page | 48
 LIMITATIONS OF THE STUDY

In spite of immense opportunity of learning the various aspects of credit appraisal and
monitoring practices for large borrowers, there are some inherent limitation in the study
which are unavoidable and can be best explained in the light of the duration and scope of the
study. Some of them are:
 In depth study of the documentation part and having a thorough exposure
in the vast and complex procedure of post sanction follow up require a
substantial amount of time which is beyond the scope of this project.
 Confidentiality policy of the Bank makes certain files inaccessible to the
study.
There are few more limitations in the study that can be seen from the limitations of the credit
appraisal and monitoring itself. Such as:
 The clients, while drawing the financial statements do resort to window
dressing. Thus, the financial statements show a better picture than the
actual situation. This is done to obtain the applied loan.
 Credit monitoring involves analyzing the projected financial of the
company. Moreover, the analyst also tries to look into the future
economic and industrial scenario. But these are all forecast and forecasts
may turn to be wrong.
 In interpretation of the financials of the company, the analyst has to use
his own judgment. Besides, in estimating the industrial and management
risk, the analyst has to choose from the defined value statements. This
involves his personal opinion too. Thus there are possibilities of personal
bias.
 Rating models only give the estimated level of risk. The factors in these
credit rating models, based on which the risk is calculated, may change
very rapidly making the whole process futile. These factors are also
affected by all foregoing limitations and therefore, the calculated risk may
be incorrect. Some factors may be difficult to judge.

Page | 49
 RECOMMENDATIONS

While the Bank has a sound credit appraisal, disbursement and monitoring system at its
disposal, few recommendations can be cited to make the system more proactive in studying
the borrowal accounts and detect any early signal of slippage of borrowal accounts into NPA
category:

1. Review of the existing loans on a monthly basis (presently it is done on quarterly

basis).

2. To show a helping attitude and try to understand the genuine problems of the client
and suggest possible remedial measures.

3. To keep a check on the transactions in the borrowers savings or current accounts. Any
abnormal transaction may signal risk.

4. Legal mechanisms should be made strong as it has been seen that banks lending to the
doubtful debtors (willful defaulters) and losing their money.

5. A monitoring committee can be set up for the regular inspection of the borrowal
accounts so that credit risk can be avoided.

Page | 50
 REFERENCES

https://www.gktoday.in/gk/types-of-loans-in-india/

https://www.bankofbaroda.in/

http://cab.org.in/Lists/Knowledge%20Bank/Attachments/87/Supervision%20and%20Follow-
up%20of%20Advances.pdf`

http://www.investopedia.com/

https://en.wikipedia.org/wiki/Bank_of_Baroda

https://pib.gov.in/newsite/PrintRelease.aspx?relid=190704

Page | 51
 APPENDICES

Table 1: Performance of Banks – Aggregate:

Page | 52
Table 2: Performance of Public Sector Banks (PSBs):

Table 3: Performance of Private Banks:

Page | 53
Thank You
Page | 54