Bank guarantees protect both parties in a contractual agreement from credit

risk. For instance, a construction company and its cement supplier may enter
into a contract to build a mall. Both parties may have to issue bank
guarantees to prove their financial bona fides and capability. In a case where
the supplier fails to deliver cement within a specified time, the construction
company would notify the bank, which then pays the company the amount
specified in the bank guarantee.

 Shipping guarantees: This kind of guarantee is given to the carrier for

a shipment that arrives before any documents are received.4
 Loan guarantees: An institution that issues a loan guarantee pledges
to take on the financial obligation if the borrower defaults.5
 Advanced payment guarantees: This guarantee acts to back up a
contract's performance. Basically, this guarantee is a form of collateral
to reimburse advance payment should the seller not supply the goods
specified in the contract.
 Confirmed payment guarantees: With this irrevocable obligation, a
specific amount is paid by the bank to a beneficiary on behalf of the
client by a certain date.

Pre Sanction Process

 Collection, Compilation, Analysis and Presentation of Information and Data

 An Investigative Analysis on a prospective borrower to ensure that borrower is in a position to
discharge financial obligation as and when required. ( A look into the past, An assessment of
present , A peep into the future )
 Analysis of Character, Capacity , Capital, Cash Flows, Collateral & Conditions
For a proper sanction, a proposal must offer

1. An acceptable level of security

2. Acceptable level of profitability

3. Compliance to Bank and Reserve Banks lending norms

Pre-Sanction Credit Process

• Application from Borrower

• KYC on Borrower and Guarantor (s)

• Opinion Report on Borrower & Guarantor

• CIBIL,CIC check on Borrower & Guarantor

• ROC Search on Companies

• Finalisation of Security

• Title Investigation Report & Assessment

• Valuation Report & Valuation

• CERSAI Verification

• SAL / RBI Defaulters List

• Necessary Licenses & Approvals

• Nature of Industry / Technology

• Backward & Forward Linkage

• Competition

• Plans for future Sustainability

•For Existing Companies, Creditors & Debtors

•Availability of Labour & Technical Personnel

•VAT/ Excise/ IT Returns

•Associates & Subsidiaries

•Credit information Report

•Financial Statement & Projections

•CRMD Exposure norms

•Visit to Factory/ Godown/ Shop/ Office

•Declaration on concurrent Borrowing & Statutory Dues

FRAMEWORK

Client Requirements- Type of loan, collateral- Relationship Manager LCG

Gathering Information- Relationship Manager LCG

Financial Analysis- Balance Sheet, Income Statement, Cash Flow Statement (previous, current and
projected)-

Business Analysis- Industry Analysis, Market Analysis, SWOT

Management Evaluation- Team and Corporate Governance

Risk Assessment- Credit Risk and Business Risk- Risk Management Department

Collateral Evaluation

Legal Assessment- Legal Department

Credit Decision- Proposal and Review- LCG

Documentation and Disbursement

Monitoring and Review

Corporate Credit Risk Analysis

 Assess the borrower’s current and future ability to meet the obligations
under the loan agreement.
 Consider the cash flow from the ordinary business activities of the
borrower and, when applicable within the purpose of the loan
agreement, any proceeds on the sale of the assets are the primary
sources of repayment.
 Borrower’s realistic and sustainable future income and future cash
flow, and not on available collateral
 Analyse the financial position and credit risk of the
borrower-

CONSIDER
1. Both the current and the projected financial position, including
balance sheets and capital structure, working capital, income,
cash flow and the source of repayment capacity to meet
contractual obligations, e.g. debt-servicing capacity, including
under possible adverse. Items to be analysed should include but
not be limited to free cash flow available for debt servicing of the
facility under consideration.
2. Net operating income and profitability, especially in relation to
interest-carrying debt.
3. The borrower’s leverage level, dividend distribution, and actual
and projected capital expenditure, as well as its cash conversion
cycle in relation to the facility under consideration
4. Where applicable, the probability of default, based on credit
scoring or internal risk rating.

 Analyse the organisational structure, business model and strategy of

the borrower
 Determine and assess the borrower’s credit scoring or internal rating
 Consider all the borrower’s financial commitments, such as all drawn
and undrawn committed facilities with institutions, including working
capital facilities, credit exposures of the borrower and the past
 repayment behaviour of the borrower, as well as other obligations
arising from tax or other public authorities.
 Assess the structure of the transaction, including the risk of structural
subordination and related terms

Credit Appraisal Process Framework

1. Scouting/ Market Scoping- Find potential clients

2. Client Requirements and Information-
What the client needs
Clients-
 Company Itself (Subsidiary or Parent)
 Key Personnel
 Employees

Information- Know about the company

 Ask the client
 Websites
 Credit Rating
 Contacts
 Annual Report
 Investor Presentation
 Press Releases
 MCA Website
 Promoters

3. Analysis-
 Company Profile
 Proposal
  Financial Analysis
 Security
 Terms and Condition
 Conduct of Borrower
 Banking Arrangement of Borrower

4. Risk/Compliance/Product
5. Approval ----Sanction
6. Documentation----- Signatures----- Limit Setup
7. Disbursement
8. Monitoring and Review

Exposure limits refer to the maximum amount of credit or loan that a bank is willing to extend to a single
borrower or entity, while concentration limits pertain to the cap on lending to specific sectors or groups
of connected borrowers.

Risk diversification

Mitigating default risk: Concentration limits play a crucial role in mitigating the risk of significant losses
from a single default. By spreading lending across various borrowers and sectors, banks can reduce the
impact of any one borrower’s failure. This diversification is akin to not putting all eggs in one basket,
ensuring that the bank’s financial health isn’t heavily dependent on a few sources.

Sectoral diversification: Similarly, setting limits on exposure to specific sectors or industries helps in
mitigating sector-specific risks. For instance, a downturn in the real estate market would have a lesser
impact on a bank that has limited its exposure to this sector.

Regulatory compliance

Meeting prudential norms: Regulatory bodies often set guidelines for exposure and concentration to
promote systemic stability. Banks must adhere to these norms to avoid regulatory sanctions. These
guidelines are based on extensive risk assessment models and are designed to protect the banking
sector and the economy at large.

Maintaining market confidence: Compliance with regulatory standards also instills confidence among
investors and customers. It signals that the bank is managing its risks prudently, which is crucial for
maintaining its reputation and trustworthiness in the market.

Challenges in Setting Exposure and Concentration Limits

Quantifying exposures

Complexity in defining exposure: A significant challenge in setting limits is quantifying the

extent of indirect credit exposures, such as contingent liabilities and credit substitutes like
guarantees, acceptances, and letters of credit. The treatment of these instruments can vary,
adding to the complexity.

Valuation of collateral: Determining the size of an exposure often involves evaluating

collateral, which can be highly subjective. Banks must exercise prudence in not over-relying on
collateral value when setting exposure limits. As a matter of prudence, collateral should not be
considered when determining the size of an exposure.

Sector and geographic concentration

Sector-specific risks: Banks face the challenge of exposure to specific sectors of the
economy, like agriculture or textiles. Overexposure to a single sector can make a bank
vulnerable to sector-wide downturns.

Geographic concentration risks: Similarly, banks operating in narrow geographic regions or

countries with limited economic diversity are at risk of simultaneous failures among several
clients for similar reasons. Understanding and managing these risks are crucial, especially for
regionally oriented or specialized banks.

Identifying and managing connected exposure

Assessing connected clients: Determining the interconnectedness among clients is complex,

particularly when dealing with legal entities that are part of a larger group or have significant
mutual associations. This interconnectedness can lead to cumulative risk if multiple clients are
financially interdependent.

Adapting to changing conditions

Dynamic economic and market environments: Banks must continuously adapt their
exposure and concentration limits in response to changing economic conditions, market
dynamics, and the bank’s own risk appetite. This requires a flexible approach to risk
management, allowing for timely adjustments to these limits.
NOTE

ABOUT THE COMPANY

Name Existing/New

Rating- Internal/External

LEI

Date of Incorporation

ASSISTANCE DETAILS

What are we offering?

TYPE NAME TENOR SECURITY/COVER PRICING

Client Interaction

Don’t Sell immediately

Ask open ended questions

Be prepared about the client and the recent events if any

Ask questions which the client would want to answer. Frame questions that would help understand the
business and the client.

Security

Security Creation

Security Perfection

CA and MFA- Bilateral agreement- MOE CHG and other documents

IMFA- If many banks involved, prefer 1st pari passu charge- TSR needed

If TSR-Title Search Report not available, take waiver from committee. Create security without TSR.
Note

Name

Industry and Industry outlook

Proposal

Tenor

Security

Bankers

Internal Rating

External Rating

ERM Limits- Enterprise Risk Management

Total Exposure to the company (including proposed sanction)

EWS Triggers- Early Warning Systems

Promoter Background- What Business? M Cap, Promoter Shareholding (pledge if any)

Brief Financial Information-

TOI

EBITDA

Interest

Depreciation

PAT

NCA= Net Cash Accruals

ATNW= Adjusted Total Net Worth

LTD

STD

WC

TD

NFA- Net Foreign Assets

TD: EBITDA

TD: NCA

CA

CL

Current Ratio

ROCE= (EBIT)/(Shareholders funds + Total Debt)

DSCR= (PAT + DEP + INT)/(Principal + Interest)

Industry Risk

Key Strengths
Key Issues

Covenants

Scenario Analysis- Base Case and Worse Case

Benchmarking (Comparison with Peers):

Parameters-External Rating, Internal Rating, TOI, EBITDA, PAT, NCA, TNW, Total Debt, TD/TNW

Physical Parameters

Working Capital Facilities

Classification:

 Fund Based- Involves an immediate cash outflow

 Non Fund Based- May or may not involve a cash outflow

Fund Based:

1. Cash Credit
 For short term working capital requirement.
 Based on stock statement provided by the client on a monthly/quarterly basis.
 Stock audit done (frequency decided by the bank).
 Tenure is generally 12 months and this facility includes the clause of ‘repayable on demand’.
 Drawing power is calculated based on latest stock statement and withdrawal is based on DP
limit and not on the Sanctioned limit.
2. Overdraft
3. WCDL (Working Capital Demand Loan)
 Sub-limit of Cash Credit-
4. Export Finance: 1. Pre-shipment finance- Packing Credit
2. Post-shipment finance

Non-Fund Based:

 Letter of Credit
 Bank Guarantee
1. Scouting/Market Scoping

Scouting and market scoping represent the initial phase of the credit appraisal process, crucial for
identifying potential clients in need of financial assistance. This involves exploration of the market
landscape to find businesses or individuals requiring credit facilities. It requires a deep understanding of
market trends, industry dynamics, and emerging opportunities. Through strategic market research,
financial institutions can identify sectors experiencing growth or facing challenges where their services
could be beneficial.

2. Client Requirements and Information

Once potential clients are identified, the next step involves understanding their specific requirements
and gathering pertinent information. This includes delving into the intricacies of the client's business
operations, organizational structure, key personnel, and workforce. Obtaining a comprehensive
understanding of the client's needs is fundamental for providing financial solutions that address their
unique challenges and aspirations. Various channels are utilized to collect relevant information,
including direct client interactions, corporate websites, regulatory filings, industry reports, investor
presentations, press releases and credit rating agencies. Additionally, analyzing the client's financial
health, market position, and growth prospects is imperative for assessing their creditworthiness. By
gathering and analyzing client information, informed decisions can be made regarding the suitability of
extending credit facilities and designing customized solutions that meet the client's objectives while
aligning with the financial institution's risk appetite and strategic objectives.

3. Analysis

Following the collection of client information, the analysis phase of the credit appraisal process involves
a comprehensive evaluation of various factors to assess the client's creditworthiness and the viability of
extending credit facilities. This multifaceted analysis encompasses several key dimensions:
Company Profile: Understanding the client's business model, industry dynamics, competitive
positioning, and growth prospects is essential. This involves assessing factors such as the nature of the
business, its market share, geographic presence, and strategic initiatives.

Proposal: Evaluating the purpose and feasibility of the credit request is crucial. This involves assessing
the intended use of funds, the potential impact on the client's operations, and the alignment with their
strategic objectives.

Financial Analysis: Conducting a thorough financial analysis is vital to gauge the client's financial health
and repayment capacity. This involves analyzing financial statements, cash flow projections, profitability
ratios, liquidity ratios, and leverage ratios to assess liquidity and solvency.

Security: Assessing the collateral or security offered by the client to mitigate credit risk is essential. This
involves evaluating the quality, value, and enforceability of the collateral provided to secure the credit
facility.

Conduct of Borrower: Evaluating the borrower's past behavior, credit history, and repayment track
record provides insights into their creditworthiness and risk profile.