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A REPORT ON CREDIT APPRAISAL SYSTEM IN THE BANKS

By
Rajeev Bokadiya (06BS0837)

A REPORT ON CREDIT APPRAISAL SYSTEM IN THE BANKS By


Rajeev Bokadiya (06BS0837)

A report submitted in partial fulfillment of the requirements of MBA Program of ICFAI Business School

Distribution List Jyotika Saxena Faculty, ICFAI Business School, Mumbai

ACKNOWLEDGEMENT
Many individuals encouraged and potentially supported in this report. I would like to express my appreciation first to the following individuals who served as my mentors firstly at ICFAI Business School: Proff. Y. K. Bhushan, Senior Advisor and Dr. S. Easwaran, Dean and Jyotika Saxena who have been the inspiring force. Without the dedicated guidance of Jyotika Saxena, Faculty Guide for MRP, this report could not have been completed.

INDEX
Abstract 1. Introduction 1.1 Purpose 1.2 Proposed Methodology 1.3 Scope of the Study 1.4 Limitations the Study 2. Main Text 2.1 Overview of the banking sector and the project 2.2 RBI Norms 2.3 Credit Appraisal Process (Working Capital Loan) 9 11 15 7 7 8 7 5

References

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Abstract
The study starts with explaining why the credit provided by the bank has become such an important driver for the Indian economy. It also gives an overview about the banking sector in India, how much important the role of risk management is there in current scenario and how my study is related to it. My project credit appraisal system of the bank forms a part of credit risk management, which says how to appraise a Working Capital loan, what are the method of assessment, how much limits are to be proposed and analysis of the financial statements of the company in order to determine liquidity and financial health of the company. While doing the appraisal it is very important to keep in mind the RBI and government guidelines relating to the credit policy and in that concern I have given a brief description of the RBI Norms. The project in the latter part explains about the different components which are to be taken under consideration while doing Credit Appraising of Working Capital Loan and the references which were helpful in completing my project.

1. Introduction
Credit provided by commercial banks is an important driver of national economy. The financing needs of the manufacturers of goods, and the industry in general were met by traditional financers during the olden days. However, the present day economy is vastly different from old economy. The modern economy is driven by technology, and the most important variables of the economy are the consumption demands of the vast populations as well as the supply machineries to meet the demand. With the improvement in transport and communication system, the demands can be easily met by supplies made from sources located in far-flung areas. Today, the total output of our industrial and non-industrial sector is very large, the finance requirements of which cannot be possibly met by traditional financers alone. The role of modern commercial banks as providers of credit to the economy begins at this point. Even during the post-independence period, commercial banks were controlled by large industrial houses. This resulted in a large amount of bank credit flowing to a few activities. As a result, banks were exposed to concentration risks besides this was also against the policy of the sovereign India. After nationalization of banks, commercial banks were given targets to provide a minimum level of credit to the priority sectors like Small Scale Industries, Small business and transport operators, agriculture, food sector, housing, education, venture capital etc. Service sector, consumption loans, housing loan and general loans in the retail segment have emerged as favorite sectors in which banks are vying for providing commercial credit. Decision making in credit may be done in a subjective or objective manner. While subjective decision making is generally impressionistic in nature, an objective decision making process makes an attempt to quantify the various aspect of risk contained in the credit proposal, to the extent possible. Present day risk assessment in commercial banking is highly objective in nature. A credit officer in a bank has always been undertaking risk analysis in course of taking a lending decision, but the present day emphasis on credit risk management is all about objective analysis of a given scenario, quantifying the risk and take proper precaution properly.

1.1 Purpose
The project will help to give a detailed overview of the banking sector and their credit policy of the bank. The project helps to find the difference in the credit appraisal process while sanctioning the loan in different types of activities. The project will help in providing an in depth knowledge about the assessment of the working capital limits, the term loan for the long term requirement and the method of calculating them. The project will help me in making me understand how to do the analysis of balance sheet, fund flow and cash flow of the companies who applies for a loan in the bank. The project makes me familiar with the RBI norms and government guidelines in relation with the credit appraisal process. The project will help me in finding out the areas of improvement in the credit appraisal process.

1.2 Proposed Methodology


The project will start with study of banking sector. Study of the credit policy vis--vis with the RBI Norms and government guidelines. A comparative study among the different industry in terms of the assessment of the working capital limits, term loans and credit rating. Analyzing the balance sheet, fund flow and cash flow of the companies who applies for a loan in the bank. Preparing the Final Report & Final Presentation.

1.3 Scope of the Study


Credit Appraisal System of a bank forms an important part of Credit Risk Management in the banks. The Appraisal System has been carried on by the bank in almost each and every activities handle by the bank. There has been a see change in the manner in which India commercial banking has been dispensing credit during the last decade. A credit portfolio is recognized as non-performing assets in the books of the bank if the borrower has not serviced the service the interest or repayment obligation. This is regardless of whether the borrowing enterprise is a profit making entity. Credit appraisal methods are therefore increasingly focusing on the assessment of the repayment capacity of the borrower, which in term depends on his cash generating capability. Mere assessment on accounting profit is no more the important criteria of credit assessment. Today, the credit appraisal has emerged as an area which requires adequate domain knowledge on the part of the appraising officer, with a mix of experience and the ability to see through the maze of financial statements.

1.4 Limitations of the Study


Data generated would be purely based on the information provided by the different websites on the Internet, Bank& Books, so in some cases its authenticity is not guaranteed. Decisions to provide credit, allocate are subjective, and are the result of considerable discussion within the bank based on first hand knowledge which is not available to outsiders. Analyzing the quality of a banks loan portfolio is inherently difficult as it is a time consuming process.

2. Main Text
2.1 Overview of the banking sector and the project
The Indian Banking has come of age in the past few years. Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. Overall, it has been a period when banks have thrived. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The emerging Indian rural market is playing a big role in charting out a trend for the growth of banks. With the economy surging, the income levels have increased in rural areas. Agriculture income is on the rise. Rural market is not just for micro credit, it also possess tremendous potential for commercial banking. Till now rural banking was the forte of public sector banks which was more of an obligation than a well thought out banking initiative for the same. The dynamics of the rural market are changing, and so must the strategy of banks which has to inculcate the spirit of microfinance, credit for small enterprises along with commercial banking. The pace of transformation has been more significant in recent times with technology acting as a catalyst. Increased activity in the sector, globalization and deregulation of financial markets have resulted in enhanced volatility in interest and exchange rates, rapid growth of innovations and a reduction in barriers relating to business diversification. This has made managing risk the core activity of a banker. As someone has very well said What matters is management of risk and not elimination of risk. The quantification and accounting of various risks would result in a more robust risk management system in industry. There are mainly four types of risks and these are: 1. Credit Risk 2. Market Risk 3. Liquidity Risk 4. Operational Risk

My project is about studying the process of credit appraisal system of the bank which I am doing in one of the premier bank of our country i.e. Bank of India (Andheri Corporate Banking Branch) forms a part of credit risk management of the bank. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. Credit risk emanates from a banks dealing with individuals, corporate, financial institutions or a sovereign. For most banks, loans are the largest and most obvious source of credit risk. In the credit appraisal process the decision takes place firstly in order to find that whether the borrower requires fund and what are its credentials. If the answer to the first question is positive, the second question arises is all about the extent of his requirement and the ways and means to fund the requirement. In respect of financing of projects undertaken by Government owned entities, banks/Financial Institutions should undertake due diligence on the viability of the projects. Banks should ensure that the individual components of financing and returns on the project are well defined and assessed. State Government guarantees may not be taken as a substitute for satisfactory credit appraisal and such appraisal requirements should not be diluted on the basis of any reported arrangement with the Reserve Bank of India or any bank for regular standing instructions/periodic payment instructions for servicing the loans/bonds. This is also used to determine the loan repayment capability of the borrowers, with increasing loan applications, banks can definitely run into credit risk while lending out lakhs of rupees to borrowers. Hence, evaluation of loan applicants becomes critical. Appraisal of credit facilities would compromise two distinct segments and those are 1) Appraising the acceptability of customer. 2) Assessment of the customers credit needs. Both of the aspects need to be examined simultaneously at the time of the initial entry of a customer to the bank as also subsequent periodic renewal. The process of the credit appraisal would begin with the selection of the proponent. It would involve appraising the a) Background of the proponent/management: - The identification of the borrower needs to be done properly through scrutiny of the past history, experience, competence, integrity, initiative etc.

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b) Commercial appraisal:- The nature of the product, demand for the same, the existing and perceived competition in the segment, ability of the proponents to withstand the same, government policies governing the industry, etc. need to be taken into consideration. The trade practices in respect of the product should be thoroughly understood. c) Technical appraisal: - This appraisal needs to be carried out for industrial activity proposals beyond the cut-off limits prescribed from time to time. Where technical appraisal may be carried out by All India Financial Institutions and the same available for perusal, it may be accepted for an appraisal purposes. Where the sanctioning authority deems it necessary, additionally, reports may be obtained from other agencies or from technically qualified officer of the bank. d) Financial appraisal: - The scrutiny of the financial aspects needs to be carried out. Apart from ascertaining the need based character of the limits requested for, the financial health of the proponents, ability to absorb unanticipated financial costs needs to be look into. Ascertaining the need based character of the limits would include scrutiny of the cost of the project, means of financing, financial projections etc. Where higher limits are considered, detailed analysis of the financial health would be made and the important ratios computed like 1) Current ratio 2) Total outside liabilities/ equity ratio 3) Profit before interest and taxes/ interest ratio 4) Profit before tax/ Net Sales Ratio 5) Inventory + receivables/ Sales ratio e) Strength and Weaknesses: - The feasibility of the project can be determined by analysing the strength and weaknesses of the project. A lot of factors have to be taken into consideration like financial, business, management, project risk etc. in order to judge the strength and weaknesses of the project. The project how it is contributing to the welfare of the society is also to be kept in the mind while appraising the project.

Before giving the description about the details of the work that has to be done in credit appraisal system it is important to know the Reserve Bank of India and government guidelines which is mentioned in the credit policy of the bank.

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2.3 Types of loans/advances


Bank Credit is made available in the form of loan and advances. Loans are extended in accounts in which no drawings are permitted to the borrower. Generally there is only one debit of the principal amount to the loan account, through disbursal of the loan in stages is possible depending upon the needs of the borrower. Subsequent debits to the loan account normally relate to the interest and other charges recoverable on the loan. However, for operational purposes the proceeds of the loan can be credited to a special account from which the party can withdraw from time to time depending on his requirements and up to the drawing power generated by the security charged to the loan account. In case of advances accounts, the sanctioned limits placed at the disposal of the borrower subject to the term of sanction, in running accounts which can be drawn upon by cheques by the borrower. Banks extend two types of credit facilities to their customers:

a) Working Capital Finance It is extended to meet the day-to-day short term operational
requirements (sale and purchase of commodities, purchase of raw materials which are processed and finished and subsequently sold etc.) of the borrower. Working Capital finance in the form of a loan is known as demand loan; as an advance it is commonly called as cash credit. Cash Credit facility can also be extended with the hypothetication of book debts, receivables and other claims of the customer. Working Capital finance is normally payable on demand.

b) Term Loan It is the type of finance that can be provided in the form of short term or
medium term loan to the customer to meet his long term capital requirements for setting up a new project, expansion and diversification of the existing project and so on. This type of loan is generally not payable on demand. However, some banks have included in their documents a provision that if an instalment is defaulted, the entire term loan falls for payment on demand. The security for a term loan can be either a hypothetication of movable property or mortgage of immovable property.

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2.2 RBI Norms


As a prudential measure aimed at better risk management and avoidance of concentration of risks Reserve Bank of India has advised banks to fix limits on their exposures to: 1. Individual borrowers and group borrowers in India. 2. To specify industry or sectors. 3. Unsecured guarantees and unsecured advances. The exposure ceilings in respect of various categories of borrowers, in terms of guidelines of RBI are to be reckoned in relation to Banks capital funds as per the published balance sheet date can also be taken into account subject to certain conditions. Banks exposure should not exceed 1. Individual borrower including public sector undertakings 15% of Banks capital funds (20% in case of exposure on account of infrastructure). 2. Group borrowers 40% in case of Banks capital funds (50% in case of the additional 10% exposure on account of infrastructure projects, i.e. power, telecommunication, roads and ports). 3. Board of Directors can approve additional exposure upto 5% of capital funds in case of single borrowers and group of borrowers provided the borrower is willing to Banks disclosure of their name in Banks Balance Sheet. Effective the 31.03.02 the concept of capital funds has been broadened to comprise the total capital as defined under capital adequacy standards (Tier I and Tier II capital). Exposures include: Credit exposure Funded Non Funded at exposure limit. : : 100% 100%

The sanctioned limits and outstanding whichever is higher are to be reckoned for arriving

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Investment Certain types of investments in companies and underwriting and similar commitments. Non-fund based exposures also include forward contracts in foreign exchange and other derivative products like currency swaps, options etc. at their replacement cost value.

RBI Exemption on Ceilings on single/group exposure limits would not be applicable to:(a) Existing/Additional credit facilities (including funding of interest and in regularities) granted to weak/sick industrial units under rehabilitation packages. (b) Borrowers to whom limits are allocated by the Reserve Bank, for food credit. (c) Loans and advances granted against the security of banks own term deposits are to be excluded from the purview of the exposure ceiling. Exposure towards unsecured guarantees and unsecured advances The total exposures of accounts, in which the tangible security properly charged to the bank at the time of sanction is less than 10% of the exposures, should not exceed 30 % of the banks outstanding advances. Exposure to Leasing Hire purchase and factoring services Bank exposures to equipment leasing, hire purchase and factoring services are not to exceed 10% of total advances in each of the above categories. Exposure to capital markets Banks aggregate capital market exposure is restricted to 40% of the net worth of the bank. On a solo and consolidated basis; consolidated direct capital market exposures restricted to 20% of net worth to ensure compliance with RBI Guidelines. These RBI guidelines are subject to change and branches to comply with guidelines advised by head office from time to time. Banks Norms The exposures ceilings to various categories of the borrowers would be advised annually by the risk management department based on the capital funds of the bank and the same has to be adhered to by branches. The CMD and in his absence the ED would be authorized to approve of limits in excess of the ceiling mentioned but within the ceiling prescribed by the RBI. Whenever a customers credit requirements exceed 50% of the exposures ceiling or Rs. 100 crores whichever is higher, borrower 14

would be encouraged to scout for another bank/institution to share the credit facilities under multiple banking or consortium or syndication arrangement. The ceiling for units engaged in diamond industry in the non-corporate sector would be 150% of the ceilings mentioned above. It is desirable that at least in regard to exposure to Public Limited Companies and PSUs, the Bank should not, as matter of course, reach the ceiling in many cases. It should be ensured that the aggregate exposure to all of the customers enjoying substantial exposure or the top 20 customers enjoying the largest credit exposures does not exceed 300% of the banks capital fund. Food credit to be excluded for determining the aggregate exposure of the Bank to the top 20 borrower. The total contingent liabilities, which include Letter of Credit, Bank guarantees, Acceptances and similar other obligations, should not exceed 100% of the credit exposure of fund based facilities including loans, cash credits, overdrafts as also investment in equity/debt instrument such as Commercial Paper, Debentures etc. The ceiling would be applicable for the bank as a whole but need not to be extended to individual customers. While computing the quantum of contingent liabilities, those blocked by 100% cash margin will be excluded. This may be monitored by RMD. Industry Exposure The maximum credit exposure to a particular industry should not exceed 20% of the total credit exposure of the Bank. Within this overall ceiling, the fortunes of industries accounting for the top 10 credit exposures (in value) of the bank may be examined annually and limit for ensuring year set. In respect of other industries the same may be reviewed and limits for the ensuring, new opportunities/threats in a particular industry. As a general proposition, the banks total credit exposure to all the units in particular industries should not exceed 25% of the total of the banking industries exposure in India to such industry. Latest data as per Reserve Bank of India publication as of March every year shall constitute the basis for determining the general exposure level for the next year. In case of new industries where exposures are now being taken by bank we may initially exceed this limit. We may gradually say over a period of 3 years endeavour to attain this level. In case of term loans over Rs.50 crores, our exposure should not generally exceed 50% of the cost of project/maximum Rs. 250 crores per borrower. An exception can be made in respect of infrastructure projects whose requirements would be mainly by way of term credit and working capital needs may not be substantial. Management Committee may I deserving cases sanction term loans exceeding this limit of Rs.250 crores subject to reporting to the Board. The monitoring of the 15

industry exposures may be monitored by Risk Management department and fix the annual ceilings for specific industry exposures. Term Exposure The aggregate of term exposure in the form of term loans, deferred payment guarantees, term letters of credit (between 3 & 5 years), non-convertible debentures and other investments in corporate debt instruments (including redeemable preference shares) should not exceed 40% of the total credit exposure of the bank. The bank would assume exposures with an initial maturity of 10 years or less for industry, trade or business as also for infrastructure projects, the maximum initial maturity could extend upto 15 years. A further exception in this regard is personal loans for financing house etc. where a clear cut scheme has been evolved for granting loans maturity periods. In other cases where longer duration exposures are to be taken, the same may be approved by the Management Committee. Region wise Exposure Norms In regard to credit exposure in the various States/Region of the country, no quantum ceiling is proposed to be fixed. However, in view of the need to be a catalyst in the development of underdeveloped areas of the country, the bank would, as a conscious policy, prefer additional credit deployment in those States/Regions where the credit deposit ratio of the bank is low; this would, of course, be contingent upon viable, acceptable credit proposals forthcoming from those underdeveloped States/Regions. In Other words, if many acceptable viable credit proposals were available, preference will be given to proposals emanating from regions where our Credit Deposit ratio is low.

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2.7 Credit Appraisal Process (Working Capital Loan & Term Loan)
Bank has to prepare a Memorandum for Sanction under which the whole process of appraising the credit is carried on. It consist the important information which are valuable for the lending bank in order to determine the credential of the borrower and for the further use at the time of regular loan review process. The details of all the required information which a bank needs at the time of financing working capital loans are as follows: 1. Account Company Name. 2. Principal Person Name of the Chairman & Managing Director of the company. 3. Registered Head Office and the factory address of the company. 4. Nature of the Business/Activity of the company. 5. When the company is established. 6. Authority & Date of last sanction/Reporting has to be mentioned if there is any and if it is a new account then only New A/C has to be mentioned over there. 7. Advance with the bank since If it is a new account then New A/C has to be mentioned otherwise the month and the year when the account of the company has been opened in the bank. 8. Consortium leader In consortium lending, several banks pool together their banking resources and expertise in credit management and provide finance to a single borrower with a common appraisal, common documentation and a system of joint supervision and follow-up. The consortium selects a leader, which is also called the lead bank of the consortium. The other types of credit delivery are Sole Banking, Multiple Banking and Syndication which is applicable as per the loan that has been demanded by the company and several other factors.

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9. Banks Share The percentage of the total limits sanctioned by the bank. In case if the bank is taking over the limits of the loan which is sanctioned to the borrower by their existing bank there are certain norms that banks has to keep in mind in relation to the position of the company and these are: Bank Norms 1. Standard A/C with the existing bank 2. Continiously profit making for three years 3. Incresing trend in Sales Volume 4. Debt Equity Ratio (Max. 3:1) 5. Current Ratio (Min.1.3) 6. Interest Service Coverage Ratio (Min. 1.75) 7. Debt Service Coverage Ratio (Min. 1.50) 8. Assets Coverage Ratio (Min. 1.50) Position of the company As per the status report (Yes/No) (Yes/No) ------

10. Limits The total limits of credit shared by the bank has to be properly mentioned. Both the existing and the proposed amount of the limits have to be mentioned clearly. Limits are of two types and these are: a) Fund based limits These credit facilities are provided by banks require immediate outlay of the funds which must be provided beforehand. The fund based limits can be in the nature of:

Working capital loans The term Working Capital refers to the current asset holding of a
company. This is also called Gross Working Capital or Circulating Capital. These are the short term loans required by a company which may vary over a period of time.

Term loans Unlike working capital credit which is short term in nature, term loans are
generally provided for a period of repayment of not less than three years. Long term loans are mainly provided for the acquisition of capital/fixed assets, as against working capital credit which aims at build-up of current assets. b) Non-Fund based limits These credit facilities are essentially in the nature of promise made by banks in favour of a third party to provide monetary compensation on behalf of their clients if certain situation emerge or certain conditions are fulfilled. These non-fund based facilities may be in the nature of:

Bank Guarantees There are three parties in a contract of guarantee i.e. the applicant
(the client on whose behalf the guarantee is being issued), the beneficiary (to whom the guarantee is issued) and the guarantor (the issuing bank). The liability of the issuing bank

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begins only after the default is committed by the principal debtor and such default is brought through the notice of issuing bank by the beneficiary, thereby demanding the compensation for the consequential loss suffered by the latter.

Letter of credit (LC) Banks provide another popular non-fund based credit facility by
way of issuing Letter of Credit on behalf of customers. LC facilities facilitate trade and commerce and help the customer engage in imports, export and trade in far-flung areas. LC facilities are also called Documentary Credit facilities.

Co-acceptance of bills Co acceptance of bills is a commitment provided by banks on


behalf of their customers to the supplier of goods for effecting payment of the consignment. It is generally extended by banks as an alternative to LC facilities provided to their customers. The maximum limit of the loan that is to be sanctioned by the bank to the company is calculated in the following manner: Pre Sales limits (Raw Material + Stock) Margin (25%) Post Sales limits Book debts Margin (40%) The Collaterals and the margins to be kept by the bank differs when they sanctioning the loan in different activities the specified norms of the bank in that context is as follows: Collateral The Bank would prefer to have its credit exposures backed by tangible' security, either primary or collateral, to the full extent of the liability. Wherever such security is not available for any reason, the concerned sanctioning authority would have to satisfy itself on the need for waiving partially or fully such tangible security. In any case, the assets created out of the Bank's credit exposure should, as a general rule, be charged to the Bank by way of first charge on sole/pari passu basis. The Bank may consider obtaining collateral security where the primary security is inadequate or for any other valid reasons like weak financials, risky ventures, untested projects/products, sunrise industries, etc. where primary security has limited market, etc. In case of SSI units we should not demand any collateral security for accounts with limits up to Rs 5 lacs. In case of accounts with limits above Rs 5 lacs but not exceeding Rs25 lacs, we may not insist on collateral security provided the financial position is good and the unit's track record is good. In case of certain categories of advances such as Diamond Exports, Software, etc., where tangible primary security is not available and advance is granted more on trust and track record

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of performance and conduct of the account it is advisable to obtain collateral security even if the same does not cover full amount of advance. Whilst considering collateral security, Bank should also explore possibility of obtaining 1st/2nd charge on block assets to cover working capital limits/all other facilities cash and cash like securities like Bank's Term Deposits, government securities, shares, debentures, commercial real estate, residential real estate, etc. In respect of the credit exposure to non-corporate enterprises, the owners are also personally liable to the Bank for the credit facilities enjoyed by the business unit. In regard to credit facilities to corporate enterprises, the guarantees of promoters/major owners/directors should be insisted upon except for widely held companies. The value of such guarantees is generally more related to ensuring the continued involvement of the main persons behind the organisation than as a financial cushion in the event of loss to the Bank. Where beneficial ownership/control lies with person/s other than the borrower himself, guarantee/s of such beneficial owner/ controller should be obtained. In case of all categories of the borrowers, third party guarantees should be explored except where it is prohibited by RBI/Government or resisted by highly rated widely held companies. There are occasions where borrowers are in possession of assets abroad which can not be made available as security. However, such borrowers are in a position to offer the comfort of Standby Letters of Credit of their bankers abroad in lieu of any collateral. Such security of Standby Letter of Credit' or guarantees will be acceptable to the bank subject to stipulation that such stand by Letters of Credit or guarantee are from Prime Banks. In certain instances of participation in take over or sale of assets where residual guarantees or DPGs are remaining while the securities are taken over by the bank, the bank will be required to issue or accept guarantee to/from the Bank in respect of the residual guarantee of DPG outstanding. It is proposed to formalise these practices through this policy documents. There should not be any dilution of standards of credit assessment because of the availability of the guarantee from another Bank/FI. In respect of credit exposures above RS.1 crore to partnership/ proprietary concerns, or unlisted closely held corporate, where the managerial and other key responsibilities are concentrated with one/two person/s we may need to obtain key man insurance cover and assign the same in favour of the Bank. Such cover may also be considered in certain categores of advances such as; diamond exports, software, film industry, etc. where tangible primary security is not available. The reasons for obtaining/not obtaining key man insurance may be recorded in the proposal. Similarly, the possibility of obtaining loss of production/business

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interruption policies may be explored. This policy recognises that the collateral securities are a secondary source of repayment of the credit facilities. To this end, a periodical assessment of the condition of the collateral security/ (ies) and its/their value shall be undertaken minimum once in say three years and more frequently, if need be. Margin requirements: In order to ensure continued interest of the borrowers/promoters in the enterprise it is always desirable that appropriate contribution~ by way of margin is brought in by them. An indicative list of the margin requirements is given in the 'Annexure III', keeping in mind the aspects discussed in succeeding paragraphs. For special schemes like Artisan credit card and Priyadarsini schemes the board approved special margin norms will be applicable. Fund based limits : In case of funded limits, the amount of margin requirements may be decided taking into account the purpose of the advance, size of the limit, the nature of the facility, the experience of the promoters, the risk perception, etc. Margin is also stipulated to take care of price fluctuation in the security and to protect the interest of the bank for realising its dues fully. Generally margin would be in the range of 15% to 50%. Lower margins may also be considered by the sanctioning authority, bringing out the justification for the same in the proposal. Nil margins may be considered for self liquidating facilities like bill discounting under L.C.s, discounting of bill co-accepted by another Bank etc. Non-fund based limits: In case of non-funded limits we may generally consider a minimum margin of 20%. The sanctioning authority may consider lower margins taking into account the nature of the underlying transaction. Margin requirements may be relaxed where the borrower offers suitable collateral security such as pledge of Bank's term deposit receipts or marketable shares, equitable mortgage/hypothecation or pledge of applicants personal immovable/ movable properties. In case of lending against certain categories of securities, like commodities falling within the purview of Selective Credit Control, directives of RBI, the specific margins prescribed are to be adhered to (presently buffer stocks of sugar and unreleased stocks of sugar with sugar mills representing levy sugar are under Selective Credit Control). Definition of secured facilities : For the purpose of determining whether any advance is

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'secured' or 'clean' availability of tangible security either primary or collateral, shall constitute the basis. Availability of a guarantee would not make an advance a secured one. 11. Security The security provided by the borrower has to be mentioned over here in lieu of the loan taken from the bank. The different types of security that can be provided to banks are: i. Tangible which includes principal and collateral security. ii. Other which includes the Net Worth of the Proprietors/Partners and the guarantors on the basis of the valuation report or the balance sheet. 12. Value of the Account It include how much account value a borrower has in the bank. The different components are: i. ii. iii. iv. mention. 13. Total Exposure of the Company i. ii. iii. iv. v. vi. With the bank With other bank/s With Financial Institutions Under lease finance Banks Investment in the company Banks Exposure in the group Average Deposit Average Utilisation of FBLs (%) Income Interest & Others Forex Turnover Exports & Imports

Both the last year and current year amount of the above components has to specifically

From the Banks point of view

The last two points has to be checked whether these are falling within the Banks norms as per RBI guidelines if it is not then what is the reason for exceeding the norms has to be mentioned and a brief comment on the conduct of group account with the bank has to properly define in the annexure. 14. Banks Subsidiaries Exposure: i. ii. On the Borrower On the Group

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The Exposure of Banks Subsidiaries is there whether in equity, debentures or any other exposures has to be specifically mentioned in the annexure. 15. Any other benefit the company is getting from the Banks side has to be mentioned. 16. Any concessionary facilities allowed / proposed For Example Waiver of technical appraisal fees. 17. Performance and Financial Indicator After analyzing the Operating Statement and the Balance Sheet of the company for the past 2 years, the current year estimated figure and projected figures of the next year the important performance and financial indicators are being extracted which gives a clear picture about how financially sound the company is. The indicators which are used by the bank for above stated purpose are as follows: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. Total Paid Up share Capital Revaluation Reserves Tangible Net Worth (Excl. Revaluation reserve) Investment in Subsidiaries and Group Companies Total Net Sales / Income (% Rise/Fall over previous years) of the above ratio Total Non-Operating Income. Gross Profit Depreciation Total Provision For Taxes Other Provisions / Write Offs Net Profit/Loss After Tax Equity Dividend paid / Proposed Equity Dividend Rate (%) Net Block Total Contingent Liabilities Not Provide For Companys Equity Share Price

18. Ratio Analysis

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Classification of current assets and current liabilities:The current assets and current liabilities are as of past and projected balance sheet dates are analysed to arrive at the current ratio and net working capital to evaluate liquidity of the borrowers. The bank may continue to adopt the classification of current assets and current liabilities as being done hitherto i.e. based on RBI guidelines issued in this regard. However for the sake of uniformity in approach for arriving at current ratio and assessment of working capital requirement, the modifications may be made in asset classification for arriving at current ratio: i. Bills negotiated under L/Cs: As working capital requirements for the same are assessed separately, receivables under L.C.s need not be included in current assets. Similarly, banks borrowings under bills purchased/negotiated under L.C.s need not be included under current liabilities. They should be shown as contingent liability as additional information. ii. Cash margin for L.C.s and guarantees, cash/term deposit with banks as margin for LC and guarantees relating to working capital facilities to be included as current assets. iii. Investments: All investments of temporary nature like fixed deposits with banks, CP, CD, ICDs, Shares and Debentures are to be treated as other non-current assets. iv. ICDs taken: These are to be treated as short term borrowings from others under current liabilities. v. Term Loan instalments: Term Loan instalments/DPG instalments falling due for payment during the next 12 months may be included under current liabilities. The Important ratio has to be computed in order to know the financial health of the Company like:

Current ratio (Current Assets / Current Liabilities) At present the acceptable level of
current ratio is treated as minimum 1.33:1 and sanctioning authority is permitted to approve of certain deviations. However, current ratio of 1.33:1 may be treated as a benchmark rather than minimum. The reasons for a ratio lower than or higher current ratio to this benchmark need to be examined by this authority.

Debt / Equity ratio At present debt equity ratio of 3:1 is treated as the acceptable norm.
The bank may generally accept the following debt equity ratios as the acceptable benchmark:

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Tiny sector and SSI with W/C limits upto 5 Crs. SSI units with W/C limits with more than 5 Crs. Medium Scale Large Scale Other Ratios:-

4:1 3:1 2:1 1:1

Interest Coverage Ratio Profit before interest and taxes/ interest ratio Debt Service Coverage Ratio Profit After tax + Depreciation + Interest On loan
terms / Interest on term loan + Repayment of the term loan Profit before tax/ Net Sales Ratio Inventory + receivables/ Sales ratio Dividends / Cash accruals (%) Investment in Subsidiaries / Tangible Net Worth (%) Comments on the Performance & Financial Indicators After computing all the indicators and the important ratios the comments has to be made and some of most important components on which the comments has to be made are as follows: About the company past performance. Sales % rise/fall as compare to the previous years and what are the reasons for that. Profitability - % rise/fall in the profits vis--vis the sales made by the company. Paid Up Capital How much equity shares are fully paid up and how they are issued. Tangible Net Worth Whether any improvement is there or not. Dividend The dividend paid and the rate of the current year is compared with the previous years. Current Ratio. Debt Equity Ratio. The above two ratios of the current year estimated and the next year projected is been compared with the previous year as they indicate about liquidity and financial position of the company. Bank has to clarify some important details like: i. Method of Assessment of the working capital loan (Which will be covered in the later part of the main text).

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ii. iii. iv. v.

QIS Submission. Current Assets / Current Liabilities classification as per RBI Norms (Yes/No). a) Borrower/Company Exposure within RBI Norms (Yes/No) b) Group Exposure within RBI Norms (Yes/No). Conduct of Account a) With the bank b) With the other bank.

vi. vii. viii. ix. x. xi. xii.

Position of Account which the company is having with the bank. Compliance with the term of sanction Pollution Control Board Validity Date of last stock audit / inspection and adverse findings, if any and steps taken for rectification. Is the company regular in repayment of its liabilities to the Bank / Institution regarding the term loans / leasing / investments? Adverse comments of Statutory/Internal/Revenue/RBI Auditors and steps taken for rectification. a) Whether the Company/Directors/Proprietors/Partners/Guarantors are on Caution list/Specific Approval list/RBI Defaulters list/Banks own defaulters list (Yes/No). b) Whether associate Companies/Partners on ECGC caution list/Specific Approval List/Banks Own Defaulter list (Yes/No).

xiii.

Any other features observed in the conduct of the accounts not commented elsewhere in the proposals including comments on legal cases of any nature filed against the borrower/associates affecting the financial position substantially.

xiv.

Credit Deliver System Comments on the status.

Branch Recommendation: Under this head a detail about the company has to be stated like the business/activity is the company involved in, the address of the registered office and the factories and a brief about the principal persons of the company. The banking arrangements are also have to be mentioned under this head. The most important factor i.e. the performance of the company has also to be

mentioned, how the company is performing as a whole vis--vis with the performance of the industry. The market of the different products traded/manufactured by the company and the companys share in the emerging market has also to be clearly mentioned.

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Working Capital Assessment At present the assessment of working capital

requirements of concerns engaged in trade business and industry are determined by the total working capital requirements by the borrowers. They are broadly bifurcated into borrowers having more than Rs.5 crores and those having more than Rs.5 crores working capital limit from the banking system. L/C limits are treated as a part of working capital limits. Bank may continue to adopt the existing methods of assessments f working capital limits as hitherto as follows:a) Working Capital Limits Upto Rs.5 Crs. From the banking system 1) Turnover Method This may be applicable to all the borrowers enjoying fund-based working capital credit limits upto and inclusive of Rs.5 Crs. with the banking system. The working capital requirements of the borrower may be computed at 25% f the projected annual turnover of which at least four-fifth (i.e. 20% of the projected annual turnover) should be provided by the bank as working capital finance, and balance one-fifth (i.e. 5% of the projected annual turnover) contributed by the borrower, as margin towards working capital. These guidelines have been formulated assuming average production/business cycle for 3 months. In reality, this cycle could be longer or shorter. The proponents working capital requirements may be discussed on the traditional approach of production/business cycle, working capital limits at 20% of the projected annual turnover wherever warranted due to longer cycle, keeping a minimum margin of one-fifth of the working capital requirements. On the other hand, in case of shorter production/business cycle, working capital limits at 20% of the projected annual turnover may be sanctioned and actual drawing should be allowed on the basis of drawing power after including unpaid stocks/stock acquired under D/A L/C. For individual other than those engaged in trade, credit facilities other than temporary overdrafts, would essentially be based on suitable schemes evolved by the bank from time to time. These would be in a sense formula based lending. Similarly for tiny units requiring working capital/credit facilities upto Rs.5 lacs, a simple model of assessment may be evolved. In respect of agriculturist, suitable procedures are already in existence and these could be reviewed from time to time by the Credit Risk Management Committee. b) Working Capital Limits More Than Rs.5 Crs. from the banking system i. Level of Holding/MPBF and

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ii.

Cash Budget Method (Also used for certain seasonal activities and construction industry.

Borrowers enjoying working capital limits (fund-based) above Rs. 5 Crs. from the banking system may be given the option to choose between the system of lending based on holding level of inventory and receivables and the Cash Budget System of assessment would rest with the bank. 2) The method of lending on the basis of levels of inventory and receivables (MBPF method) It has been in existence for the past two decades. At present bank have the freedom to determine the level of holding and receivables for various industries. We may continue to accept those levels which are in conformity with the past levels of holding of the borrower (on the basis of actuals for last 2 years) the industry level in general as may be advised by RBI from time t time and level of activity. 3) Cash Budget System Customers enjoying working capital limits in excess of 5 Crs. may be given an option to adopt this method at the discretion of the bank. In case such borrower chooses the Cash Budget System of lending, they have to satisfy the bank that they have necessary infrastructure in place to submit the required information periodically in time. The scope of internal MIS should be satisfactory and commensurate with the level of operations. The borrower must have a finance professional and computerised environment. Under this method, the peak level cash deficit will be the level of total working capital finance to be extended to the borrower by the banking system. The peak level cash deficit will be ascertained from Projected Cash Budget Statement submitted by the borrower. Term Loan Assessment The following information has to be mentioned while assessing the term loan which is to be sanctioned to a company: 1) Project Appraisal done by the department (most of the times it is the Technical Appraisal Department)

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2) Project Particulars This gives the information about the project for which the company is demanding term loan and what are the different plant and machinery are going to be set up with that loan. 3) Cost and Source of Finance The detail structure of the estimates about cost of the project has to be mentioned, each and every component with their estimated amount has to be clearly stated in addition to this the means to finance the cost is also to be mentioned whether it is totally finance by the term loan which is been demanded from the bank or some other means like Equity, Unsecured Loans etc. 4) Amount of advance and purpose The part of the total project that is going to be financed through the term loan demanded from the bank and the estimated amount of that part has to be mentioned 5) Repayment Schedule The date of commencement of the repayment of the loan as well as interest, the number of instalments and the amount of those instalments has to be clearly mentioned. 6) Security A brief detail of about the security, value of the security and the margin has to be mentioned. In this case the source or the basis of the valuation of the values of security has to be mentioned. 7) Comments on project appraisal, viability, profitability, projections, DSCR (Debt Service Coverage Ratio) etc. has to be clearly stated. If the borrowers company is having a DSCR of more than 1.50 then that is to be considered satisfactory. 8) Project Implementation Schedule along with the present status of the project has to be mentioned. 9) Availability of Refinance Applicable or Not Applicable has to be mentioned.

Collateral Security The Company has to offer collateral security for the proposed limits if
the principal security is insufficient.

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Waiver of techno-economic viability study / fees to the company if the lending bank is agreed which is base on the terms and condition of the company with the bank and as well as how technically qualified the promoter/directors of the company are.

Commitment charges Availment of the working capital limits sanctioned, proper conduct,
timely repayment results in realization of interest income. We therefore need to consider levying commitment charge for non-utilisation of limits. It is charged if the borrowers enjoying fund based limits of Rs.1 Crs. and above (except SME and AFD sectors). These charges are to be levied on quarterly basis with tolerance level of 30% of the quarterly operating limit/drawing limit at the rates prescribed from time to time.

Credit Rating As per the extant guidelines the credit rating exercise can be carried on
and then on the basis of the rating (AAA, AA etc.) these following functions are performed: Determination of Rates of Interest: For fund-based credit facilities, the directives of Reserve Bank of India from time to time would apply. For certain categories of credit like export credit, DRI advances, etc. administered rates of interest are to be charged. "Presently, Banks are required to fix Bench Mark Prime Lending Rate (BPLR) taking into consideration cost of funds and transaction costs. Bench Mark Prime Lending Rate (BPLR), and spread over the same may be continued to be determined by AssetLiability Management Committee (ALCO) on the basis of notes submitted by Credit Department and confirmed by the Board, in keeping with the existing practice. Bank is also permitted to offer Rates of interest below BPLR rates to creditworthy borrowers including public enterprises on the lines of a transparent and objective policy approved by the Board. In tune with market realities, lending under Sub BPLR levels may be undertaken selectively as per policy guidelines in place and reviewed from time to time. BPLR would be equivalent to the aggregate of cost of funds and cost of capital plus, subject to money market conditions, a suitable risk premium charge, etc. The BPLR would be applicable to the borrower enjoying financially and operationally the best health. For others, the interest rate would be suitably stepped up in stages, as per the Credit Risk Rating awarded to that customer. The difference between two consecutive stages, between "AAA" , "A" and "B" reflecting the higher risk profile of the borrower may be varied/determined at the time of change in BPLR.

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The Chairman & Managing Director and in his absence, the Executive Director will be the highest authority to relax/ quote any rate of interest subject to the provisions laid down by RBI regarding charging of interest for advances granted against particular security/ purposes/facilities.

Borrower Specific Rates The sanctioning authority would approve of the Credit Rating for the cJstomer, which in turn would determine the rate of interest to be charged on the fund based facilities, commission levied on non-fund based facilities, etc. to the borrower. This would be in keeping with the rates of interest prescribed by Head Office in this regard from time to time. Where Credit Rating is not applicable, the interest rate prescribed for advance against particular security, facility, scheme, etc . should be charged. Relaxations/Concessions At times rates of interest lower than the rate of interest applicable as per the Cedit Rating of the borrower/Scheme/Facility, etc. may have to be offered tclking into consideration the overall value of connections of the borrower, i.e. ancillary business given, conduct of account, availability of tangible security, other special features of the customer such as Group connections, potential for good earnings in the future, overall reputation of the customer in the market etc. In such cases the Chairman and Managing Director may permit a delegatee of the rank of Zonal Manager and above to approve of a lower rate of interest upto a predetermined extent,. Thus the possibility of two customers enjoying the same risk rate, being charged different interest rates is not ruled out. As the rate of interest charged d rectly affects the Bank's profitability, it would be our endeavour to charge the best rcltes of interest that the traffic can bear. The actual rate charged would be based 011 the specific information/knowledge available with the sanctioning authority which mayor may not be available to the assessing/appraising officials.

The different parameters of credit and pricing ratings are as to be followed: Percentage Obtained = Marks Scored (Total Score Allotted) x Maximum Marks Marks Applicable to the particular customer 31

Percentage Obtained 80% and Above 65% and above but below 80% 50% and above but below 65% Below 50%

Final Rating AAA AA A B

Rating Given Depends on bank.

Stock Audit As per the extant guidelines stock audit is to be conducted on accounts with aggregate working capital limits of Rs. 100 lakhs and above. As per extant guidelines accounts with AAA rating are exempted from the stock audit. In view of the AAA rating assigned to the company the bank recommended the waiver of the stock audit for the present. The main documents needs to be analyzed for the credit appraisal process are mainly the financial statements provided by the company such as: Operating Statement- It is a rearrangement of the various items of income and expenses for the purpose of undertaking a meaningful analysis and taking a credit decision. This form was incorporated as an important statement in the Credit Monitoring Arrangement (CMA) for reporting to RBI by banks in respect of loan sanctioned in excess of cut-off limit. Balance sheet It is a summary of assets and liabilities of an enterprise at the close of an accounting period. It helps in ratio analysis and determining the financial position of the company. Cash Flow Statement Analysis of the cash flow of the borrower is also a monitored tool for diversion/siphoning of funds by the borrower. Such diversion/siphoning of funds should be constructed to occur if any funds borrowed from banks are utilized for purposes unrelated to the operations of the borrower to the detriment of the financial health of the entity or of the bank. The decision as to whether a particular instance amounts of siphoning of funds would have to be a judgment f the bank if such case is detected, it is t be considered as a willful default.

2.8 Loan Review Mechanism


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Loan Review Mechanism (LRM) is a comprehensive term which includes what is traditionally known as the function of supervision and control of bank loan/ advances granted to borrowers. LRM is an effective tool for continuous evaluation of the quality of loan book and bringing about qualitative improvements in credit administration. In order to implement LRM in its proper prospective, it is necessary to formulate loan review policies by the lending bank. Besides, the loan review policy itself should be reviewed annually. Such loan review policy may include the policy on the qualification and independence aspects of loan review officers soundness to knowledge in credit appraisal, lending practices and loan policies of the bank and the laws/regulation relating to general economy. LRM mainly focuses on:a) Credit Audit It examines compliance with extant sanction and post-sanction processes/ procedure laid down by the bank from time to time. The objectives of the Credit Audit are as follows: Improvement in the quality of credit portfolio Review sanction process and compliance status of large loans Feedback on regulatory compliance Independent review of Credit Risk Assessment Pick-up early warning signals and suggests remedial measures Recommend corrective action to improve credit quality, credit administration and credit skills of staff, etc. The most important area where credit audit focuses is on the loan review process. The frequency of review should vary depending on the magnitude of risk. All the existing accounts with sanction limits equal to or above a cut off depending upon the size of activity and the accounts of sister concerns/groups/associate concern of above account even if limit is less than the cut off.

b) Physical Control through Stock Audit The lending bank require to be satisfied with the quantity, quality and value of various items of current assets charged to it as security for the loan/advance extended to the borrower. Periodical verification reports are required by the bank, particularly with regard to the following matter:

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Stock Receivables End-use of bank finance. Physical verification of the stocks and verification of the recoverability and reliability of receivables is an important function of the operating staff of the branch office. The function is carried out fairly successfully in respect of firms which have small to medium size single location activities. The visit report submitted on the completion of the verification provides critical information needed fr taking a view on the safety of the banks loan extended to the firm. The visit report should incorporate a stock and receivables reconciliation statement between the stock and the receivables declared by the borrower in the statement submitted by him to the bank earlier and the statement prepared as on the date of the verification visit. Any shortfall or inconsistencies is to be suitably accounted for by the borrower.

c) Financial Control through : Periodical Statements such as stock statements, book debts statements, creditors statement, quaterly information system (QIS), etc. Regular reviews and renewals Review of credit rating of the borrower and the industry sector to which the borrower company belongs to. Special Audit

As per the extant guidelines stock audit is to be conducted on accounts with aggregate working capital limits of Rs. 100 lakhs and above. As per extant guidelines accounts with AAA rating are exempted from the stock audit. In view of the AAA rating assigned to the company the bank recommended the waiver of the stock audit for the present. The present norms of the review process of the bank are as follows: The review exercise was being done as an annual exercise, irrespective of the status of the account. Today, the relationship is seen as matter of convenience with cost and speed being major determining factors. As an incentive to reduce processing cost to the borrower and save

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on manpower cost at our end, it is proposed to change the periodicity of review for selective borrowers as under -

Prime and AAA -

Once in a year .Short Form Review will be permitted for a period not

exceeding 6 months. AA and A - Once in a year B and below Once in 6 months However, the above amendments will be subject to : In Prime & AAA borrowers, assessment can be done for a period of 2 years and validity of sanction conveyed accordingly. This will facilitate a short term review after 1 year. In case of consortium accounts, the consortium member accepting the method adopted. Where sanction of limits is done for a longer period processing charges to be recovered initially for 1 year. Upon review of credit rating on annual date of review proportionate processing charges may be recovered for the remaining period. Where review is done for 6 months, proportionate processing charges may be recovered for 6 months.

The risk rating modules are being revised in consultation with consultant ICRA and as and when the modules are rolled out the review of relationship may be revised if found necessary. For purpose of review of the account, various documents, including, inter alia, audited Profit & Loss Accounts and Balance Sheets for past 3 years, projections for next 3 years and other relevant information is obtained. The projections for current/next year should be critically examined on the basis of actual performance for the past year/so he comparison of data submitted by borrowers in CMA forms with the Audited financial statements including comments of auditors is the principal responsibility of the dealing officer and his/her next higher authority. They have to certify in the proposal to the effect that they have verified the above and that the assets and liabilities have been classified as per RBI norms.

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In case of listed companies where publishing of quarterly results are mandatory a copy of such results may be obtained. While undertaking review of the borrowal accounts, references should also be made for some important aspects listed below a. Compliance of terms of earlier sanction/s; b. Out-of-order position of the account during the year; c. Adhoc limits granted during the year and frequency thereof; d. Any request for relaxation in the terms of sanction already considered which might be pending for confirmation by appropriate authority; e. Cheques returned unpaid - frequency and minimum/maximum amount thereof; f. Any devolvements of letters of credit/guarantees;

g. Any diversion of funds for unauthorised uses; h. Statutory liabilities not paid or provided for; i. j. Any pending litigation/s against the borrower; and Compliance with audit observations.

Many times, review may be delayed due to assessment by consortium etc. Although, delay beyond 6 months is not considered desirable as a general discipline, regular and adhoc limits need to be reviewed/regularised not later than 3 months/ date of adhoc sanction. In terms of recent guidelines of RBI, an account where the regular/ad hoc credit limits have not been reviewed within 180 days from the due date/date of adhoc sanction will be treated as technical NPA. In view of this steps should be taken by the branches/ Zonal Offices to undertake review of all accounts (regular and adhoc): a. On their own without waiting for consortium's assessment wherever undue delay is observed on their part; b. In short form review where it is found warranted. In partial modification of reporting of loans and advances sanctioned during a month, Bank has

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introduced a post sanction mechanism for review of accounts. Under this, all proposals sanctioned are to be submitted to the next higher authority for a review on a monthly basis.

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3.Conclusion
In the changing scenario, which is highly competitive, banks are evolving newer approaches to extending credit to their customers. Lending, in general requires the bank to ensure that the borrower has a bankable proposal, particularly in respect of commercial loans. However, bankability of a loan proposal does not depend on the quantum of security offered by the borrower: the bank has to determine the credit risk that the proposal holds and within the parameters of that risk, the decision to lend has to be taken and here the credit appraisal process holds the key to the bank. It includes the appraisal of the background of the borrowers and the companies from different aspects whether it is commercial, financial and technical and at last helps in taking a decision whether to sanction loan to a borrower or not. The three factors which develops during the credit appraisal process include 1. Prospects 2. Future risk profile 3. Repayment capacity. The tools for determining these three factors include: 1. Financial Analysis past and projected. 2. Credit rating 3. Assessment of credit needs 4. Terms of sanction 5. Documentation and creation of security interest 6. Post-lending supervision 7. Repayment and/or rollover.

Credit Appraisal system of a bank is the combination of all these above mentioned tools which helps the bank to eradicate the credit risk and making the correct decision. The more

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comprehensive the system is the better it is for the bank. As far as about the credit appraisal process of Bank of India it is in a complete well-structured form which makes the job of the credit officer easier. The appraising parameters whether it is of the assessment of the loans or of the credit rating are very much comprehensive as compare to some of other banks of India. The loan review process is also done in a very detailed manner which helps the bank and the borrower in maintaining and improving their relationship. The corporate banking of the bank is already in a good structure what they need to do is to follow strictly follows the RBI Norms and the government guidelines which will help the bank to nurture more.

References: Books: 1) Credit Appraisal, Risk Analysis and Decision Making D.D Mukherjee. 2) Basel II norms. 3) Book on Risk Management in Indian Banks by K.M.Bhattacharya.

Websites: 1. www.rbi.org.in 2. www.thehindubusinessline.com 3. www.wikipedia.org 4. www.bizjournals.com 5. www.researchandmarkets.com

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