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m AP Ds g xOO oM BT qxU STATE BANK OF MYSORE


zs Pbj, 0Ug mkl Mrsr, oas HEAD OFFICE, BANGALORE

DGM AGM CM MGR DY.MGR AM STAFF

CPPD Circular No. 01 / 2015-16 Date: 09.04.2015


(Credit Policy & Procedures Department)

To: ALL OFFICES OF THE BANK

LOAN POLICY-2014-15

The Loan Policy document of the Bank has been revised taking into consideration
changes in our operating environment, changes in RBI regulations and the changing
priorities of the Bank. The revised Loan policy document will remain operative until the
next review. The Policy provides for the Banks approach to sanctioning, managing and
monitoring credit risk and applies to all types of lending.

2. Branches are advised to retain the Loan Policy Document as part of their branch
document.

Please bring the contents of this circular to all concerned and be guided accordingly.

M.P. SRIDHARAN
GENERAL MANAGER (RM & CPP)

INDEX UNDER:
L Loan Policy 2014-15 Credit Policy & Procedures Department
R Revision of Loan Policy Circular No.001/2015-16 dated 09.04.2015

9221 TGB 259 CPP 01 20150409


LOAN POLICY
2014-15

STATE BANK OF MYSORE

HEAD OFFICE: BANGALORE 560 254.

CREDIT POLICY & PROCEDURES DEPARTMENT

Loan Policy 2014-15 2


Chapter Chapter Name Page Nos.
No

1 Introduction 6

Exposure levels 8

2.1 Prudential Exposure (RBI Stipulations) 8

2.2 Exemptions from prudential guidelines 8

2.3 Definition of exposure 9

2.4 Substantial exposure 9

2.5 Other exposure ceilings for different 10

category of borrowers

2.6 Exposure under term loans 11

2.7 Individual industry exposure 11/12


2
2.8 Exposure for Infrastructure 13/14

2.9 Exposure to real estate sector 15

2.10 Lending to non banking financial


Companies (NBFCs) 16/17

2.11 Sensitive sector exposure 17

2.12 Non fund based exposure levels 20

2.13 Unsecured exposures 20

2.14 Loans & Advances Statutory and other


restrictions 21

3.1 Credit Appraisal Standards 22

3.36 Fair Practices Code For Lending 29


3
3.37 Advances to Directors of other Banks 29

4.1 Documentation standards 31


4
4.6 Unconditional Cancellebility 33

5 Credit Monitoring and Supervision 34

6 Credit Risk Management 37

Loan Policy 2014-15 3


Chapter Chapter Name Page Nos.
No

7 Review/renewal of advances 41

Takeover of borrowal accounts 44

8.1 Take over norms 44


8 8.2 Takeover of P segment loans 47

8.3 Takeover of Advances under Agricultural


47/48
Segment

9 Delegation of powers 49

10 Maturity of Banks advances 50

11 Pricing (Factors deciding interest rates and 51

other charges)

NPA Management 54

12.1. Key Definitions


54
4

12.2 Rephasement of Term Loans 55

12.8 Adoption of E-Auction 56


12
12.14 Restructure of Advances 57

12.15 Treatment of restructured a/cs for IRB


58
purpose

12.16 Data collection & reporting for IRB purpose 58

12.17 Out sourcing 58

Credit facilities to companies whose


59
directors
13
Are in the defaulters list

13.2 Wilful default and action there against 60

14 Major and Minor deviations 62

15 Advances to Mid-corporates 66

16 Micro, Small and Medium Enterprises 67

Loan Policy 2014-15 4


Chapter Chapter Name Page Nos.
No

17 Advances to service sector 69

18.1 Advances to rural sector 71

18.2 Banks role under Lead Bank Scheme 72

18.3 Employment generation programmes of


72
18 GOI

18.4 Micro credit 72

18.5 Financial Inclusion 73

19 Advances to personal segment 74

19.2 Loan Origination System (LOS) 74

Export credit 78

20.11 ECGC Cover 79


20
20.12 Letter of Comfort 79/80

20.13 Forward Contracts 80

21 Advances to large corporates 81

22 Corporate Loans 82

Annexure 1 : Norms and approach for


83
extending unsecured loans to corporates

Annexure II : Classification of exposures as


Commercial Real Estate along with 85u
illustrative examples

Loan Policy 2014-15 5


CHAPTER 1: INTRODUCTION

1.1 State Bank of Mysore (SBM) Loan Policy (hereinafter referred to as The Loan
Policy or The Policy) is aimed at accomplishing its mission of all round growth
with maximum profits, a position of pre-eminence in banking, committed to
excellence in customer service, shareholder and employee satisfaction, with
continuing emphasis on its Development Banking role, achieved through a skilled
and committed workforce and technological upgradation.

1.2 The Loan Policy of the bank has successfully withstood the test of time and
with its in-built flexibility, been able to meet the challenges in the market place.
The policy exists and operates at both formal and informal levels. The formal
policy is well documented - in the form of circular instructions, periodic
guidelines and codified instructions, apart from the Book of Instructions, where
procedural aspects are covered in detail.

1.3 The policy, at the holistic level is an embodiment of the bank's approach to
sanctioning, managing and monitoring credit risk and aims at making the
systems and controls effective. It is guided by the best practices of
commercial prudence, the highest standards of ethical norms and the
requirements of national priorities.

1.4 The basic tenets of SBM's Loan Policy are as follows:

i) The Policy applies to all kinds of lending, subject to the general or special
directives of RBI / Government of India, as also to the prudential and other in-
house guidelines applicable to all corporate credit exposures of the Bank.

ii) It aims at spotting and seizing opportunities and revamping our products
and delivery mechanism as well as innovating new products ahead of
competition.

iii) The Policy establishes a commonality of approach regarding credit basics,


appraisal skills, documentation standards and awareness of institutional
concerns and strategies, while leaving enough room for flexibility and
innovation.

iv) It envisages an effective training system in all areas of "Credit


Management" which reflects SBM's commitment to upgrade skills of all
members of staff on a continuous basis.

Loan Policy 2014-15 6


v) Computerisation, management information system based on a reliable
database and development of faster communication as tools for better overall
credit risk management are accorded due priority in the policy.

vi) Optimum/ maximum exposure levels are set out in the Policy to different
sectors in order to ensure growth of assets in a balanced and orderly manner.

vii) The Policy provides for a comprehensive Credit Risk Assessment system
that rates each potential / existing asset above a cut off level and also lays
down maximum risks / hurdle rates (in terms of Credit Risk Assessment
parameters) for new/ additional exposures.

viii) Bank's approach to Export Credit and Priority Sector Advances and to
specific groups of advances covering emerging opportunities such as Mid-
Corporates, Retail, etc are set out in the Policy.

ix) The Policy lays down norms for take over of advances from other
banks/FIs.

x) Bank's stand on granting credit facilities to companies whose directors are


in the defaulter's list of RBI/CIBIL are.0 covered in the Policy.

xi) The Policy aims at continued growth of assets while endeavoring to ensure
that these remain performing and standard. It simultaneously also aims at
continued improvement of the overall quality of assets at the portfolio level.

1.5 The Board of the bank is the apex authority in formulating all matters of policy
in the bank. The Board has approved setting up of Credit Risk Management
Committee (CRMC) of which Top Management are members, to deal with all
the issues relating to credit policy and procedures on a bank-wide basis.

1.6 The power to make any amendment to the loan policy vests with the Banks
Board.

1.7 The Loan Policy is based on guidelines issued by Reserve Bank of India from
time to time. Not withstanding the provisions contained in the Loan Policy,
RBI guidelines would be effective as and when they are revised.

Loan Policy 2014-15 7


CHAPTER 2: EXPOSURE LEVELS

2.1 PRUDENTIAL EXPOSURE (RBI Stipulations)

2.1.1 Loan Policy recognizes the need for measures aimed at better risk
management and avoidance of large concentrations of credit risks. With this in
view, limits have been prescribed for Banks exposure to a single borrower, group
of borrowers, specific industry / sector, etc.

2.1.2 The primary guiding factors for fixing ceiling on exposures are the
prudential norms prescribed by RBI, which currently stand at 15% of capital
funds (Tier-I and Tier-II capital) for single borrower and 40% of capital funds for a
group (up to 20% for single borrower and 50% for a group provided the
additional exposure is on account of infrastructure projects in specified sectors).
However, in respect of Oil Companies who have been issued Oil Bonds (which do
not have SLR status) exposure ceiling of twenty five percent of the capital funds
has been prescribed by RBI. The Bank may also, in exceptional circumstances,
with the approval of the Board, consider enhancement of the exposure to a
borrower up to a maximum of further 5% of capital funds, subject to the
borrower consenting to the Bank making appropriate disclosure in the Annual
Report.

2.1.3 Capital Funds would comprise of Tier I and Tier II capital as on 31st March
every year and any fresh capital infusion as per RBI norms.

2.1.4 The exposure limits will be applicable even in the case of lending under
consortium arrangements.

2.1.5 The group to which a particular borrowing unit belongs will be decided on
the basis of relevant information available to the bank, the guiding principle
being commonality of management and effective control. In case of a split in
the group, if the split is formalised, the splinter groups will be considered as
separate groups. In case of doubt regarding bonafides of the split, a reference
will be made to RBI for a final view in the matter to preclude the possibility of a
split being engineered in order to prevent coverage under the group approach.

2.1.6 Exposures between Bank and other banks, which are outside the prudential
exposure norms, would be determined, bank-wise, as per the Bank Exposure Risk
Index (BERI) model. A review as per the model would be undertaken at yearly
intervals.

2.1.7 Exposure on Primary Dealers would be subject to single borrower exposure


limits set within the prudential exposure norms as per Institutional Risk
assessment model.
Loan Policy 2014-15 8
2.2. EXEMPTIONS FROM PRUDENTIAL EXPOSURE GUIDELINES

2.2.1 Rehabilitation of Sick / weak industrial units: The ceilings on single / group
exposure limits would not be applicable to existing / additional credit facilities
(including funding of interest and irregularities) granted to weak / sick industrial
units under rehabilitation packages.

2.2.2 Food Credit: Borrowers to whom limits are allocated directly by Reserve
Bank, for food credit, will be exempt from the ceiling to the extent of such
allocation.

2.2.3. Guarantee by the Government of India: The ceiling on single / group


exposure would not be applicable where principal and interest are fully
guaranteed by the Government of India.

2.2.4 Loans against own Term deposits: Loans and advances granted against the
security of banks own term deposits may be excluded from the purview of the
exposure ceiling.

2.2.5 The ceiling on single/group borrower exposure limit would not be


applicable to Banks exposure on NABARD.

2.3 DEFINITION OF EXPOSURE

2.3.1. Exposure shall include credit exposure (funded and non-funded credit
limits) and investment exposure (including underwriting and similar
commitments) and off-balance sheet exposure namely viz. Foreign Exchange
forward contracts and other derivative products i.e. interest rate contracts and
gold contracts etc.

2.3.1a The sanctioned limits or outstanding, which ever are higher shall be
reckoned for arriving at exposure limit. Non fund based exposure will be
reckoned at 100 percent of the limit or outstanding whichever is higher, except
off-balance sheet items where exposure should be considered on the basis of
credit conversion factors advised by RBI from time to time. In respect of fully
disbursed TLs only outstanding are reckoned without any reference to the limit.

2.3.2. Forward contracts in foreign exchange and other derivative products (like
currency Swaps, options etc) would need to be included at their replacement cost
value to arrive at borrowers exposure, for which RBI has prescribed that Current
Exposure Method need to be followed, for which operative guidelines are being
issued.
2.4. SUBSTANTIAL EXPOSURES (Exposure limits of the bank)
2.4.1 While prudential exposure norms would be the guiding factor for
monitoring credit concentrations in terms of exposure as defined by RBI, the
following levels of exposures will be deemed to be substantial exposures for
triggering internal monitoring mechanism:
Loan Policy 2014-15 9
Single borrower in excess of 7.50% of Banks capital funds Tier I plus Tier
II

Group in excess of 15% of Banks capital funds Tier I plus Tier II

2.4.2 Substantial exposures norms are in-house norms set within the prudential
norms and are intended to help in monitoring credit concentrations. These
norms should not be deemed as a cap on further exposures and should not come
in the way of booking bankable business. The substantial exposure norms should
be indicated in the loan proposals but no separate sanction is deemed necessary.

2.4.3 Aggregate substantial exposure to single borrowers should not exceed


300% of Banks capital funds (Tier I plus Tier II).

2.4.4 Aggregate substantial exposure to group of borrowers and to single


borrowers not included in exposure to groups of borrowers shall not exceed
600% of banks capital funds (Tier I plus Tier II)

2.4.5 It should be our endeavor to subject all substantial exposures to a greater


scrutiny from prudential angle. Monitoring reports duly collated are to be
submitted to the Board at half-yearly intervals by the Credit Risk Management
Department (CRMD) as part of the report of Compliance to Loan Policy Ceilings.
Such periodical review is intended as a useful internal control mechanism to
prevent excessive concentration of high value assets.

2.5 Other exposure ceilings for different categories of borrowers.

2.5.1. In addition to the above the following exposure levels have also been
fixed.

While prudential guidelines for avoiding concentration serve as broad indicators,


continuous evaluation of other elements such as market conditions, government
policies, legal framework, economic indicators, stock market movements, etc. is
made to assess transaction risk intrinsic to a group of borrowers/segment of
industry, as well as to sectoral exposures in order to formulate short term
exposure restrictions where considered necessary. The constitution of an entity is
also a determining factor owing to varying levels of compliance requirements of
legal/statutory/ accounting standards, etc. for arriving at exposure limits. Based
on current perceptions covering all these matters the following exposure levels
are prescribed:

Individuals as borrowers/ Maximum aggregate credit facilities (Fund


Based and Non-Fund Based) of `25 crores (other
Proprietorships than against specified securities for which there
is no restriction)

Loan Policy 2014-15 10


Non Corporates Maximum aggregate credit facilities (Fund based
and non-fund based) of `75 crores (other than
(Partnerships@, Trusts, JHF, against specified securities for which there is no
Associations ) restriction). The above ceiling will also be
applicable to the aggregate of all facilities
sanctioned to partnership firms which have
identical partners.

Corporate Maximum aggregate credit facilities as per


prudential norms of RBI on exposures
(Companies, Societies, Govt
Departments, Institutions and
Statutory corporations)

@ Partnerships when converted into Limited Liability Partnerships (LLP) may be


included under Corporates

2.5.2 The caps include aggregate of fund-based and non-fund based (excluding
facilities against specified securities but including off-balance sheet
derivative exposures.)

2.5.3 The above exposure ceilings under (i), (ii) and (iii) will not include LC bill
discounting limits that may be sanctioned to constituent borrowers and
which will be considered as exposure beyond the specific ceilings
proposed above.

2.5.4 For exposure beyond this ceiling, specific approval of the EC of the Board
has to be obtained on a case to case basis.

2.5.5 The exposure limits will be applicable to lending under consortium


arrangements, wherever formalised.

2.6 EXPOSURE UNDER TERM LOANS

2.6.1 Term Loans (loans with residual maturity of over 3 years) should not in the
aggregate exceed 35 percent of total exposure (Fund based and Non-fund based)
of the Bank. Term loans include all term loans irrespective of the segment but
with a residual maturity of over three years. Banks term loan exposure to a
single project would be guided by prudential / internal substantial exposure
norms, asset liability management policy and the ceiling of 35% of total exposure
(Fund based and Non fund based) for aggregate term loan.

2.6.2 Long Term loans with residual maturity of 10 years and above should not
exceed 30 % of total Loan Book (as ALM Policy)

2.6.3 Credit Risk Management Department would review the term loan portfolio
with reference to the above ceiling (to the Board) at half yearly intervals.

2.7 INDIVIDUAL INDUSTRY EXPOSURE

Loan Policy 2014-15 11


2.7.1 The Bank shall endeavour to restrict fund based and non-fund based
exposure to individual industry to 10% of the Banks total Fund and Non-Fund
based exposure, except where exposure caps are specifically stipulated.
Periodical review of individual industry exposure ceilings will be undertaken by
Credit Risk Management Department and will be placed before the Board.

2.7.2 Specific industry wise ceiling as a share of total Fund and Non-Fund based
exposure of the Bank is furnished in the following table.
However all the operating units will verify the ceiling as may be revised by IRMD
from time to time.

INDUSTRY WISE EXPOSURE CEILING

Horticulture 7%

Sugar 2.50%

Diamond, Gems & Jewellery 5%

Cement 5%

Textiles 8%

Iron & steel and alloys 10%

Automobiles 5%

Petrochemicals 5%

Petro-refining (Petroleum) 5%

Vegetable oil & vanaspati 5%

Paper & Paper products 5%

Pharmaceuticals 5%

Coal 5%

Food Processing 5%

Leather 5%

Metal (Non-ferrous) 5%

Hotel 5%

Loan Policy 2014-15 12


INDUSTRY WISE EXPOSURE CEILING

Infrastructure 20%

Sub sectors Sub Limits%

a).Power* (under power sub limit for 12%


renewable energy)

b).Hospitals 1%

c)Telecom 2%

d) Road & Bridge 3%

e) Ports 0.75%

f) Education 1.5%

g) Infrastructure -others 2.5%

*Out of (a) i.e. Power, sub limit to renewable energy is 2%

Rubber 5%

Engineering- Electricals - Electronics 10%

Fertilizer 2.50%

NBFC (including HFCs) 7.5%

Granite & Ceramics 5%

Other Industry (Tea, Tobacco &Mining) 5%

Information Technology 5%

Service Sector (others) 5%

Service sector (medicare & diagnostic 5%


services other than Hospitals)

Road Transport Corporations 4%

Loan Policy 2014-15 13


INDUSTRY WISE EXPOSURE CEILING

Entertainment (Film) 1%

2.8 EXPOSURE FOR INFRASTRUCTURE

2.8.1 Exposure to infrastructure industry (fund based and non fund based) not to
exceed 20% of total Fund and Non-Fund based exposure of the Bank of which
term loans to infrastructure shall not exceed 17.5% of total Fund and Non-Fund
based exposure.

2.8.2 Reserve Bank of India has defined infrastructure lending as follows:

Any credit facility in whatever form extended by lenders (i.e. banks, FIs or
NBFCs) to an infrastructure facility as specified below falls within the definition of
infrastructure lending. In other words, a credit facility provided to a borrower
company engaged in,

developing or

operating and maintaining, or

developing, operating and maintaining.

Any infrastructure facility that is a project in any of the following sectors, or any
infrastructure facility of a similar nature:

1.Transport

i. Roads and bridges


ii. Ports
iii. Inland Waterways
iv. Airport
v. Railway Track, tunnels, viaducts, bridges (includes supporting terminal
infrastructure such as loading/unloading terminals, stations and bridges)
vi. Urban Public Transport (except rolling stock in case of urban road
transport)

2. Energy

i. Electricity Generation
ii. Electricity Transmission
iii. Electricity Distribution
iv. Oil pipelines
v. Oil/Gas/Liquefied Natural Gas (LNG) storage facility (includes strategic
storage of crude oil)
vi. Gas pipelines (includes city gas distribution)

Loan Policy 2014-15 14


3. Water & Sanitation

i. Solid Waste Management


ii. Water supply pipelines
iii. Water treatment plants
iv. Sewage collection, treatment and disposal system
v. Irrigation (dams, channels, embankments etc)
vi. Storm Water Drainage System
vii. Slurry pipelines.

4. Communication

i. Telecommunication (Fixed network) includes optic fibre/cable net works


which provide broadband/internet

ii. Telecommunication towers

iii) Telecommunication & Telecom services

5. Social and Commercial Infrastructure

i. Education Institutions (capital stock)


ii. Hospitals (capital stock)(includes Medical colleges, Para Medical Training
institutes and Diagnostic Centres)
iii. Three-star or higher category classified hotels located outside cities
with population of more than 1 million
iv. Common infrastructure for industrial parks, SEZ, tourism facilities and
agriculture markets
v. Fertilizer (Capital investment)
vi. Post harvest storage infrastructure for agriculture and horticultural
produce including cold storage
vii. Terminal markets
viii. Soil-testing laboratories
ix. Cold chain (Includes cold room facility for farm level pre-cooling, for
preservation or storage of agriculture and allied produce, marine products
and meat.)
X) Hotels with project cost of more than `200 crores each in any place in
India and of any star rating.
xi) Convention Centres with project cost of more than `300 crores

each.

2.8.3 In the case of individual and group of borrowers, the prudential and internal
substantial exposure norms will be applicable.

2.8.4 In the case of individual educational institutions exposures ceiling under


both fund based and non fund based limits is pegged at `25 Crore.

2.8.5 The Banks Credit Risk Management Committee (CRMC) will continue to
review the arrangement from time to time, and further revisions will be

Loan Policy 2014-15 15


considered whenever warranted and the EC will have the discretion to approve
deviations, if any, on the above.

2.9 EXPOSURE TO REAL ESTATE SECTOR

2.9.1 The Banks exposure to real estate including residential mortgages,


commercial real estate and indirect finance etc., should not exceed 25% of the
Banks total Fund based and Non-Fund based exposure, out of which exposure to
commercial real estate is capped at 5 percent of total Fund and Non-Fund based
exposure. Detailed operative guidelines and other regulatory prescriptions
regarding the quantum of loan, tenor, security, margin etc., to be considered
while financing the real estate sector are in place.

Maximum exposure per borrower restricted to `300 crores, subject to maximum


exposure ceiling of `100 crores per project. Exposure beyond `300 crores per
borrower shall have to be sanctioned by the Executive Committee of the Board.
Promoters should have prior experience and have built a minimum 50000 sq ft.
Any new CRE projects should have an investment grade rating or in the absence
of which 50% additional collateral to be obtained. The internal rating should be a
minimum of SB 8.

2.9.2. Reserve Bank of Indias guidelines on Commercial Real Estate is furnished


in Annexure II.
2.9.2(a) Policy on adherence to National Building code(NBC) formulated by the
Bureau of Indian Standards on exposures to real estate.

The Bank generally assumes exposure on highly reputed builders who adhere to
National Building code (NBC) formulated by the Bureau of Indian Standards for
safety of buildings, especially against natural disasters.

2.10. LENDING TO NON-BANKING FINANCIAL COMPANIES (NBFCS)

2.10.1 The Banks approach to financing NBFCs is as under:

Bank will extend finance only to Asset Finance Companies (AFCs),


which are either Deposit Taking NBFCs (NBFC-D) or Systemically
Important Non-Deposit Taking NBFCs (NBFC-ND-SI) and NBFCs
engaged in Micro Finance Activity.
Further, to increase its outreach to a large number of low-income
people, Bank is also financing MFIs / NGOs including NBFCs engaged
in micro finance activities, for on-lending to SHGs / JLGs and
individuals.
Bank also finances Housing Finance Companies (HFCs)
The company should have been in operation for at least three years
on the date of application. Exception may be considered in this
regard for those NBFCs that are sponsored by existing reputed
customers of the Bank. The sponsoring Company must be rated at
least SB 5 in the new CRA system.

Loan Policy 2014-15 16


The extent of finance to NBFC will not exceed 3 times the NOF of the
company in the case of SB1 to SB5 rated companies and 2 times the
NOF for others or 10% of the Banks capital funds whichever is lower.
The ceilings on overall limit of bank credit mentioned above would be
within the overall ceiling of borrowings (including public deposits and
all other borrowings) of up to ten
times the NOF of such companies in the case of SB1 to SB5 rated
companies and 8 times the NOF in the case of others
The company should follow ICAI guidelines on standard accounting
procedure.
The company should comply with the regulations prescribed by RBI.
Current ratio should not be less than 1.33.
The leasing/hire purchase/loan receivables over dues must not be
more than 5%.
In the case of an existing company, non-performing assets must not
be more than 5% of its L&HP/Loan assets.
The company must have been prompt in repaying maturing deposits,
where applicable.
Only on-lending made for creation of physical assets supporting
productive / economic activity will be considered for computation of
MPBF, without adjusting the projected NWC, for supporting other
activities of the NBFC.
Credit facilities may be granted by way of cash credit or term loan
only.
In respect of existing borrowers not complying with the above
guidelines, enhancement in credit facilities will not be considered in
general. The possibility of exiting such accounts in terms of the Banks
extant exit policy on standard assets will be explored, where felt
necessary and found feasible.
As Govt. owned NBFCs are also being brought under the ambit of RBI
regulations, Banks guidelines on NBFC will be made applicable to
such entities also.
Bank will continue to extend finance to NBFCs against the second
hand assets financed by them subject to the stipulations laid down in
this regard.
Deviations in the above guidelines within the RBI prescriptions, may
be considered for credit proposals requiring sanctions by HOCC II and
above.
Given the special features of NBFCs as different from manufacturing
units, a separate Credit Risk Assessment (CRA) model for NBFCs is
implemented for assessment of NBFCs.
Branches/Operative Units to review all NBFCs with ratings SB-5 and
below at half yearly intervals.

2.10.2 The exposure of the Bank to a single NBFC/ NBFC- AFC (Asset Finance
Companies) should not exceed 10% / 15% respectively of the Banks Capital
funds as per its last audited balance sheet. Bank may however, assume
exposures on a single NBFC/ NBFC AFC upto 15%/ 20% respectively of its
capital funds provided the exposure in excess of 10% / 15% respectively is on
account of funds on-lent by the NBFC / NBFC-AFC to the infrastructure sector.

Loan Policy 2014-15 17


2.10.3 RBI has introduced another category of NBFCs Infrastructure Finance
Companies (IFCs). The exposure of the Bank to the IFCs should not exceed 15%
of its capital funds as per its last per its last audited balance sheet, with a
provision to increase it to 20 percent if the same is on account of funds on-lent
by the IFCs to the infrastructure sector.

2.10.4 NBFCs not to be partners in Partnership firms:

In view of risks involved in NBFCs associating themselves with partnership firms,


it has been decided to prohibit NBFCs from contributing capital to any
partnership firm or to be partners in partnership firm.

2.10.5 Partnership firms having NBFCs as partner should not be financed.

NBFC Company, which is accepting public deposit and which had already
contributed to the capital of a partnership firm or was a partner of a partnership
shall seek early retirement from the partnership firm.

2.10.6 Exit policy on NBFCs.

Options to exit or reduce exposure will be actively explored, where feasible.


Where despite our best efforts in this regard, it is not possible to exit an account
or at least to reduce the exposure, a reassessment of the situation will be done
and if necessary, Bank will consider either an acceptable OTS or in its absence
even considering recalling the account. Bank will examine various other options
and initiate measures as appropriate in a time bound manner, as delays in such
situations far from helping the matters are likely to lead to erosion of security
and increase in the ultimate quantum of NPA.

2.11 SENSITIVE SECTOR EXPOSURE

2.11.1 In terms of Reserve Bank of India guidelines, a special appraisal and


review mechanism is called for in respect of exposure to sensitive sector. The
sensitive sector includes exposure to Capital Market, Real Estate & Commodities.

2.11.2 In order to have a review mechanism, a review of exposure to the


sensitive sectors, covering overall exposure, no. of accounts, NPA portfolio, if
any, quality of assets under specific commodities / sectors, besides a review of
the specific industry scenario will be carried out and reported to the Audit
Committee of the Board at quarterly intervals by G.M (O) Secretariat.

2.11.3 Capital Market Exposure

Banks exposure to capital market shall not exceed 40 percent of its net worth
(as defined by RBI) as on 31st March of the previous year. This ceiling of 40%
would apply to both fund based and non-fund based exposure to capital market
in all forms, as indicated by RBI in the guidelines issued in this regard.

A minimum margin of 50% is prescribed on all advances against shares and a


minimum cash margin of 25% (within the margin of 50%) is also prescribed in
respect of guarantees issued for capital market operations. Margins higher than
those prescribed above will be insisted upon, on a case-to-case basis.
Loan Policy 2014-15 18
2.11.4. Within the overall ceiling of 40%, referred to in para 2.11.3 above,
Banks investment in shares, convertible bonds / debentures, units of equity
oriented mutual funds and all exposures to Venture Capital Funds (VCFs)[both
registered and unregistered] shall not exceed 20% of Banks net worth as on
March 31 of the previous year.

Also within the overall ceiling of 40%, the Banks exposure to stock brokers both
fund based and non-fund based shall not exceed 10% of its net worth as on
March 31 of the previous year.

2.11.5. Loans to individuals against equity-oriented securities shall not exceed


`10 lacs if securities are held in physical form and `20 lacs if held in demat form.

2.11.6 The Bank will formulate from time to time lending schemes/ policies
relating to:

Grant of advances to individuals against shares debentures and bonds

Grant of advances to individuals for subscription to rights/new issues of


shares, debentures and bonds

Advances against shares to stockbrokers, market makers

Loans for financing promoters contribution and

Bank finance to employees to buy shares of their own companies

Bridge loans and

Financing acquisition of equity under GOIs disinvestments programme.

2.11.7 The exposure norms for investment in shares, bonds and debentures of a
corporate, subordinated debt instrument, venture capital, underwriting of
corporate shares and debentures, underwriting of bonds of PSUs etc. would be
guided by Banks investment policy.

2.11.8 Commodity Exposure: quantitative ceilings fixed for exposure under both
fund based and non-fund based limits, in respect of exposure to the following
sectors / industries are as follows:

Commodity Ceiling (`Crores)


Exposure to sensitive commodities:
Lending against buffer Stock of sugar with Sugar 300.00
mills and unreleased stocks of sugar with sugar
mills representing levy sugar and free sale sugar

Loan Policy 2014-15 19


2.12 NON-FUND BASED EXPOSURE LEVELS

2.12.1 The total non-fund based exposure, at the whole-bank level, will not
exceed twice the level of the total fund based exposure. Periodical review of the
non-fund based exposure shall be carried out by the Credit Risk Management
Department, along with Portfolio analysis by the Risk Management Department.

2.12.2 Interchangeability of limits

Interchangeability between Fund Based and Non-Fund Based Limits:

a. Generally, interchangeability is not permitted between fund based and non-


fund based limits. However, in special cases, whenever it is permitted, proposals
for permitting such interchangeability, shall be approved by an authority one
step higher than the sanctioning authority except in the case of proposals
sanctioned by the HOCC-II HOCC-I and EC which should be dealt with by HOCC-II,
HOCC-I and EC respectively.

b. Interchangeability between fund based limits (i.e. between two fund based
limits) and also between non-fund based limits is permitted subject to detailed
operative instructions issued from time to time.

Authority structure for permitting interchangeability:

Limits sanctioned by HOCC1 or EC : HOCC 1

Others : Sanctioning Authority

2.12.3 Banks exposure to non fund based facilities in the form of buyers credit /
suppliers credit / letter of comfort (LoC) not to exceed 25% of Banks capital
funds.

Capex related LoC may be issued over and above the ceiling prescribed with prior
sanction, by obtaining higher cash margin

The operative guidelines in respect of buyers credit / suppliers credit / letters of


comfort are in place.

2.13 UNSECURED EXPOSURES

2.13.1 Banks Board will from time to time formulate a policy on unsecured
exposures and inter alia fix, a quantitative ceiling for such exposures. RBI has
defined unsecured exposure as an exposure where the realizable value of the
security (primary plus collateral), as assessed by the Bank/approved valuers
/Reserve Banks inspecting officers, as ab-initio not more than 10% of the
outstanding exposure.

2.13.2 Exposure shall include all funded and non funded exposure (including
under writing and similar commitments)

Loan Policy 2014-15 20


2.13.3 Security will mean tangible security properly charged to the bank and will
not include intangible securities like guarantees, comfort letters etc.

2.13.4 Banks Policy: Unsecured exposure (as defined by RBI) should not
exceed 25% of Banks outstanding total exposures. Quarterly reviews in this
regard will be submitted to the Board by the CPPD Department.

2.13.5 The norms and approach for extending unsecured loans to corporates
are as per Annexure-1.

2.13.6 Advances to companies in which the members of the Banks Board


are directors will be subject to the relevant provision in Banking Regulations Act
(BRA), 1949 and State Bank Subsidiaries Act, 1960.

2.14 LOANS AND ADVANCES Statutory and other restrictions

Bank would be guided by the RBIs DBOD.No.Dir.BC. 16/13.03.00/2014-15 dated


01.07.2014, for details of statutory and other restrictions regarding loans and
advances, which is available in SBM Nest under External Links.

Loan Policy 2014-15 21


CHAPTER 3: CREDIT APPRAISAL STANDARDS

3.1 General

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

3.2 A decision as to the creditworthiness of a proposal is arrived at after


considering a combination of several factors including:

an assessment of the promoter, covering their background and relevant


experience in the area of the proposed entity.
the previous experience of the bank with these promoters or their group.
The perceived prospects of the industry or activity proposed.
the already existing extent and quality of the exposure of the bank to this
industry or activity on the one hand and to the promoters/group on the
other.
policy relating to exposure levels and norms prescribed by the regulators
and by the Bank for the proposed activity/industry.
the perceived financial strength and the risk rating of the promoters, the
borrowing entity and/or the group.
the extent and nature of credit risk mitigants proposed etc.
complete information on take over/new management including regulatory
compliance and impact of change in management control.

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

3.4. While the Bank plays a key role in providing working capital finance, the
share of term loans in the advances portfolio is also on the increase, forming a
significant base as the Bank continues to exhibit robust appetite for project and
retail lendings.

Loan Policy 2014-15 22


Assessment

3.5 The assessment of working capital is done through the Projected Balance
Sheet Method (PBS), Cash Budget Method or Turnover Method.

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

3.7 Cash Budget Method is used for assessing WC Finance for seasonal industries
like sugar, tea and construction activity. This method is used for sanction of ad
hoc WC limits. In these cases, the required finance is quantified from the
projected cash flows and not from the projected values of current assets and
current liabilities. Other aspects of assessment like examination of funds flow,
profitability, financial parameters, etc, are also carried out.

3.8 Under the turnover method, working capital requirement is computed at a


minimum 25% of output value, of which, at least four-fifths is provided by the
Bank and balance one-fifth represents the borrowers contribution towards
margin for working capital. This method is applicable for sanction of fund bases
working capital limit of up to `5 crores.

3.9 In respect of term loans, the computation of cost estimates is scrutinized


very carefully to ensure that the total project cost arrived at is accurate,
comprehensive, reasonable and realistic. Then the proportion of debt and equity
components i.e., the project debt/equity gearing, envisaged in the tie up of the
means of financing of the project is examined to ascertain whether it is
reasonable and acceptable. There is not standard project debt / equity (D/E)
ratio that can be prescribed for any project. The stipulation of this ratio for a
particular project will be based on a number of factors such as the nature and
size of the project, location, capital intensity, gestation period, promoters
capacity, state of the capital markets, importance to the national economy,
government policies, etc. Though there are no rigid norms for the project
debt/equity ratios, however, one of the deciding factors of the D/E ratio will be
the debt servicing ability of the project. After taking into consideration the
above-mentioned factors and the suitability of the various sources of finance
with due regard to the financial leverage envisaged for the project, the term
finance arrived at is validated and accepted.

Loan Policy 2014-15 23


3.10.Validity of sanctions:

After due appraisal and assessment, appropriate authority, as laid down in the
Scheme of Delegation of Financial Powers for advances, sanctions the credit
facilities.

3.10.1 For Working Capital facilities:

The validity of sanction will be 6 months where we are a member of the


consortium, whereas, if we are sole bankers, leader of the consortium or are
financing under multiple banking arrangement, sanctions will have a validity of 3
months.

Such sanctions, if not availed within the time period specified, would lapse and
require revalidation. Such revalidation to be approved by the respective
sanctioning authority except in the case of sanctions by EC, where HOCC-I is
vested with the powers to revalidate such sanctions. If documentation has been
completed, the same is to be treated as disbursed and no further revalidation is
required.

Working Capital Demand Loan (WCDL): The carving out of WCDL within the
overall CC /FBWC limit sanctioned is vested with the GM Network, in respect of
EC/HOCC/NWCC sanctions. However, with respect to pricing the matter is to be
put up to the Pricing Committee.

3.10.2 For Term Loans:


The validity of sanction will be 6 months from the date of sanction.

Such sanctions, if not availed within time period specified, would lapse and
require revalidation. This provision has been introduced in order to ensure
against changes in market conditions and/or industry prospects adversely
impacting on terms of sanction such as quantum of exposure, security
covenants, pricing, etc.; especially pricing.

Use of provisional / unaudited data:


3.11 Further, provisional / unaudited data is made use of for taking credit
decisions, in respect of existing borrowal accounts, where there is likely to be a
delay in obtention of audited financial statements from them and the reasons
adduced therefore are acceptable to the Bank. In respect of such cases, a review
of the accounts is undertaken on the basis of audited financial statements within
a period of six months from the date of renewal/ enhancement. In cases where
deviations on the negative side are observed as compared to unaudited data
submitted earlier, the controllers, to whom the review is submitted, will issue
appropriate directions where considered necessary. Such directions normally
include specifying additional covenants, placing restrictions on the drawing, etc.

Loan Policy 2014-15 24


Collateral security
3.12 Collateral security is normally obtained as a risk mitigating measure and to
sustain the promoters interest in the venture. Bank also promotes collateral free
loans to eligible borrowers of MSME segment. The Bank will cover all eligible loans
under MSME segments up to `100 lacs mandatorily under Credit Guarantee
Scheme of CGTMSE. However, exceptions may be permitted in deserving cases on
business considerations by the competent authority after taking into account the
adequacy and realizability of the collateral security offered by the borrower which
should not be less than the amount equivalent of the coverage under CGTMSE
guarantee.

3.12 a. As regards Agriculture segment, the waiver is generally permitted for


loans upto `100,000/-, though there are scheme-specific ceilings in this regard.
In other cases, with exception of specified categories like trade advances where
obtention of collateral security is prescribed as a part of the scheme, obtention /
waiver of collateral security, discretion is to be exercised by the sanctioning
authority. While this decision needs to be taken on a case-to-case basis,
collateral security of a minimum 25% should be ensured in respect of general
trade advances. While doing so, the following points must be kept in view:

Viability of the project per se will be the paramount requirement and


available collateral may be taken.

A distinction may be made between new and existing connections while


deciding /insisting on collateral / additional collateral security.

Quantitative standards

3.13 The basic quantitative parameters underpinning the Banks credit appraisal
and the levels that are desired are as under :

Sector / parameters Mfg. (*Unsecured loans


Others brought in by
Liquidity 1.33 1.2 (for FBWC limits the promoters and
above` 5 crs.) their close friends
Current Ratio and relatives may be
1.0 (for FBWC limits treated as quasi
up to` 5 crs.)
equity highly
Financial soundness 3:1 5:1 selectively , except
(TOL/ TNW (max.) in the case of non-
corporates, on a case
DSCR Net (min.) 2:1 2:1 to case basis.

Gross 1.75:1 1.75:1

Gearing D/E (max.) 2:1 2:1

Loan Policy 2014-15 25


Promoters 30% of 20% of equity
contribution * (min.) equity

3.14 While these are indicative levels, there cannot be a definitive benchmark, as
acceptable levels are case specific, guided by the nature, size and scope of the
project. .

3.15: Financial Parameters Quantities Standards Deviations

While CRA takes care for the financial risk elements / parameters, additional
approval for variation in the prescribed parameters need not be obtained
separately. As such, the following procedures to be adopted while financial ratios
are below the prescribed level:

Necessary justification, mitigation and recommendation for the variation in


financial parameters should be given in loan proposals by the appraising
authority to enable the sanctioning authority to take a credit decision.

Separate template seeking approval for deviation in financial parameters need


not be made in the proposals;

Variation in financial ratios is not to be treated as Major/Minor Deviation, as


these are indicative.

However, the prescribed financial parameters applicable for Schematic /


Product Specific Schemes are to be adhered, as hitherto.

Letters of Credit, Bills Discounting

3.16 Letters of Credit are essentially instruments that provide comfort to the
seller in a commercial transaction and facilitate availment of sundry credit from
the market. Letters of credit give ones borrowers option of availing credit
directly from the market, when the cost and conditions of credit from the market
are more advantageous and hence preferable to fund based bank finance. It is
therefore necessary, while sanctioning a borrower the facility of letters of credit
that aggregate of fund based working capital finance and LC facility is
commensurate with the projected build up of chargeable current assets.

3.17 It needs to be ensured that the Bank would open letters of credit (LCs),
issue guarantees/acceptances and discount bills under LCs only in respect of
genuine commercial and trade transactions of borrower-constituents who have
been sanctioned regular credit facilities by the Bank. In terms of RBI guidelines,
branches should not discount bills for non constituent borrowers.

In the case of Govt. / Research / Defence / Educational Organisations and other


statutory organizations who do not have regular borrowing arrangements with

Loan Policy 2014-15 26


any FI / bank, Bank would open L/Cs and undertake business other than bill
discounting.

In the case of non constituent borrowers, extant RBI guidelines for bill
discounting will apply. However, wherever L/Cs are restricted to our Bank, bills
under such L/Cs may be discounted under intimation to the existing bankers.

3.18 In the case of non constituent borrowers, the following requirements are to
be complied with so that these borrowers will be borrower-constituents of our
Bank who have been sanctioned regular credit facility by the Bank:

1. The extent of requirement of additional working capital against such bill


discounting is separately assessed and appropriate bill discounting limits
against letters of credit, is sanctioned to such borrowers.

2. The borrowers existing bankers are separately and duly advised of the
Bank having sanctioned this facility to the borrower.

3. All due formalities under the KYC guidelines are meticulously and fully
complied with.

3.19 Bank would not open LCs and purchase / discount / negotiate bills bearing
the without recourse clause. Bank would not ordinarily discount bills drawn by
front finance companies set up by large industrial groups on other group
companies. While discounting bills of services sector, Bank would ensure that
actual services are rendered and accommodation bills are not discounted.

Rediscounting of bills under LCs of other Bank with full recourse:

3.20 In respect of rediscounting of bills under LCs of other Bank with full
recourse, maximum ceiling to be fixed at `2500.00 crores, with a ceiling of
`1500.00 crores per Bank. Exposure to be taken only on PSBs and other Banks
with a minimum rating of AA.

At present the facility for availment is restricted to CAB Mumbai Branch

Bank guarantees

3.21 Bank as a general rule, will limit itself to the provision of financial
guarantees and exercise due caution with regard to performance guarantee
business. BGs will generally be issued / renewed valid for a period not exceeding
18 months at any one instance. If BGs are to be issued for a longer period an
authority structure for according administrative clearance for this is in place.
BGs originally issued for period less than 18 months but that have been
subsequently extended crossing in aggregate the 18 months cut off will also
attract administrative clearance. No BG should normally have a maturity of more
than 10 years. Bank may consider issuing BGs beyond maturity of 10 years only
against 100% cash margin and with prior approval of the competent authority
specified in this regard.

Loan Policy 2014-15 27


3.22 While sanctioning limits for BGs, factors such as the need for and the nature
of BG, whether the requirement is one-time or on a regular basis, constituents
financial strength, past record, margin, etc., will be looked into. In view of Basel
II Guidelines, operating offices will ensure proper classification of Guarantees into
Financial or Performance to reap the benefit of lower capital charge on
Performance Guarantees issued by the Bank.

3.23 Bank will issue BGs with an automatic renewal clause only to select
beneficiaries, such as customs authority, courts and overseas project owners in
respect of projects exports.

3.24 Normally all BGs will be secured by a charge on the assets (current and / or
fixed) of the applicant. Unsecured BGs, where considered exceptionally, will
generally be for a shorter period and for relatively small amounts.

3.25 Banks liability under BG is absolute, and independent and exclusive of any
other contract entered into with the constituent. Thus, the Bank is obliged to pay
to the beneficiary without delay and demur the amount of the BG on its
invocation in accordance with the terms and conditions of the guarantee deeds.
Only when the Bank has received an order or restraint / injunction from a
competent / appropriate court, will the Bank hold payment under the BG. In such
cases, the liability of the Bank under the BG will continue, till the court case is
decided, notwithstanding a shorter period of validity as may have been
stipulated in the guarantee itself.

3.26 The Bank will not execute guarantees covering inter-company deposits /
loans. BGs will also not be issued for the purpose of indirectly enabling the
placement of deposits with non-banking institutions.

3.27 Banks performance in regard to the non fund based business will be
reviewed at half yearly intervals by IBD and submitted to the Board.

Guarantees and co-acceptances favouring Fis / Banks / Other lending agencies, as


guaranteeing bank:

3.28 As per RBI guidelines, Banks may issue guarantees favouring FIs/other
banks/other lending agencies for loans extended by them. However, given the
funding capabilities of our Bank, such guarantees are not proposed to be issued
for domestic operations. The Bank will also not undertake the business of co-
acceptance of bills of its constituents. This approach would be reviewed from
time to time.

As lending bank :

3.29 Bank may extend fund-based and non fund-based credit facilities against
guarantees issued by other banks/FIs.

3.30 The exposure assumed against such guarantees will be deemed as an


exposure on the guaranteeing bank / FIs and would be subject to the Permissible

Loan Policy 2014-15 28


Global Exposure Limit (PGEL) on other banks and FIs in place in the Bank. A sub-
limit for such exposures may be fixed within the PGEL as part of the half-yearly
review exercise being undertaken by Credit Risk Management Department
(CRMD).

Financing of Infrastructure Projects

3.31 Infrastructure would include sectors such as power, roads, highways,


bridges, ports, airports, rail system, water supply, irrigation, sanitation and
sewerage system, telecommunication, housing, industrial park or any other
public facility of a similar nature, construction relating to projects involving agro
processing, supply of agricultural inputs, preservation and storage of processed
agro-products, educational institutions and hospitals as may be notified by RBI
from time to time.

3.32 Financing of infrastructure projects is characterized by large capital costs,


long gestation period and high leverage ratios. Bank can sanction term loans to
infrastructure projects within the overall ceiling of the prudential exposure
norms. Further, subject to certain safeguards, Bank is also permitted to exceed
the single borrower/group exposure norm to the extent of 5%/10%, provided the
additional exposure is for the purpose of financing infrastructure projects.

3.33 RBI has put in place guidelines to accelerate credit disbursement to


infrastructure. These guidelines cover criteria for financing, types of financing,
appraisal, regulatory compliance / concerns, asset liability management,
administrative arrangements and inter-institutional guarantees. Bank, while
lending to this sector will comply with these guidelines.

3.34 Policy for financing Carbon Credits

The Kyoto protocol which came into force on 16th Feb. 2005 established a
mechanism for companies and governments in developed countries to contribute
towards their fight against global warming by purchasing Certified Emission
Reductions (CERs), more commonly called as carbon credits, from developing
countries. The Bank has sensed a business opportunity in this development and
has approved a policy for financing carbon credits. An interest concession of 10
bps below the eligible / sanctioned pricing will be extended to projects that
contribute to sustainable development.

Finance to Clean Development Mechanism (CDM) projects, advisory services for


implementing CDM projects, loan against carbon credit receivables, carbon
delivery guarantee, escrowing of carbon credits, aggregating and/or bundling the
smaller projects to make the process of generating CERs viable through
economies of scale, etc are the carbon credit related services being considered
by the Bank.

3.35 Hedging of forex risks: As mandated by RBI, the Bank has a separate Board
approved Hedging Policy in place.
Loan Policy 2014-15 29
3.36 Verification of bonafides of Chartered Accountant firms and Chartered
Accountants: RBI has issued a letter stating that Chartered Accountants or the
firm on whose behalf the CA has issued the Certificate for having audited
financial statements of firms was found to be non existent in some cases. Hence
it should be ensured that Chartered Accountant and / or the Chartered
Accountant Firm who/ which certifies the audited financial of the borrower is in
existence and the details are furnished in C&I circular no.16/ 2009-10 dated
07.07.2009.

3.37 FAIR PRACTICES CODE FOR LENDERS (FPCL)

The Bank would continuously attempt to introduce transparent and fair


practices, as envisaged by RBI, in respect of acknowledging loan applications,
their quick processing, appraisal and sanction, stipulation of terms and
conditions, post disbursement supervision, changes in terms and conditions,
recovery efforts etc. Detailed guidelines are in place and have been issued to
the branches in the form of circular instructions and these cover time norm for
sanction and disbursement of credit limits as a part of lenders liability or Fair
Practices Code. Further, detailed circular instructions on definite time frame for
disposal of credit proposals in tune with Lenders Fair Practices Code have been
issued vide C&I circular No.31 dated 20.03.2009 and the circular is placed in
the Annexure.

An annual review of the compliance with the FPCL will be put up to the Board by
CPP Deptt.

3.38 ADVANCES TO DIRECTORS OF OTHER BANKS:

A. Unless sanctioned by the EC, Bank should not grant loans and advances
aggregating . `25.00 lacs and above to :

a) Directors (including the Chairman/Managing Director) of other banks*

b) Any firm in which any of the directors of other banks * is interested as a


partner or guarantor; and

c) Any company in which any of the directors of other banks* holds substantial
interest or is interested as a director or as a guarantor

B. Unless sanctioned by the EC Bank should also not grant loans and advances
aggregating ` 25 lakhs and above to

a) any relatives of the banks Chairman/Managing Directors or other Directors

b) any relatives of the Chairman/Managing Director or other directors of other


banks*

c) any firm in which any of the relatives as mentioned in (a) & (b) above is
interested as a partner or guarantor; and

Loan Policy 2014-15 30


d) any company in which any of the relatives as mentioned in (a) & (b)above
hold substantial interest or is interested as a director or as a guarantor

(*including directors of Scheduled Co-operative Banks, directors of


subsidiaries/trustees of mutual funds/ venture capital funds)

3.39: Access to Data Bases:

Branches/Processing Cells should access data base of :

I. Credit Information Companies like CIBIL etc.


II. RBI Defaulter/Willful Defaulters List ( suit and non suit filed accounts)
III. ECGC caution list etc.
IV. List of Disqualified Directors is available in the website of Ministry of
Corporate Affairs (MCA) i.e. http://www.mca.gov.in.
to trace the credit history of the borrower.

Loan Policy 2014-15 31


CHAPTER 4: DOCUMENTATION STANDARDS

4.1. SBM has well established systems and procedures for documentation in
respect of all credit facilities. These have been drawn up and have evolved over
a period of time keeping in view the ultimate objective of documentation which is
to serve as primary evidence of the debt owed by the borrower, and the fact of
the guarantee by the guarantor where applicable, for use in any subsequent
dispute between the Bank and the borrower and/or guarantor. Documents also
form the basis for enforcing the Banks right to recover the loan amount together
with interest thereon through a court of law or under SARFESI Act where all other
recourses have failed. Accordingly, correctly compiled, executed and maintained
documents ensure that the:

Owing of the debt to the Bank by the borrower is clearly established by the
documents.
Charge created on the borrower's assets as security for the debt is
maintained and enforceable, and
Bank's right to enforce the recovery of the debt through court of law is not
allowed to become time-barred under the Law of Limitation.

4.2 Documentation is a continuous and ongoing process covering the entire


duration of an advance comprising of the following stages:

(i) Pre-execution formalities:

These cover mainly searches at the Office of Registrar of Companies and


search of the Register of Charges (applicable to corporate borrowers),
capacity of borrowers to borrow and the formalities to be completed by the
borrowers, searches at the office of the Sub-Registrar of Assurances or Land
Registry to check the existence or otherwise of prior charge over the
immovable property offered as security, besides taking other precautions
before creating equitable/ registered mortgage including obtention of the
lawyers opinion as to the clear, absolute and marketable title to the property
based upon the genuineness, completeness and adequacy of the title deeds
provided.

(ii) Execution of Documents:


This covers obtention of proper documents, appropriate stamping and
correct execution thereof as per terms of the sanction of the advance and
the internal directives of a corporate borrower such as Memorandum and
Articles of Association, etc., A copy of the loan agreement along with all
enclosures will be delivered to the borrower(s) at the time of sanction/
disbursal of loans and acknowledgement of receipt thereof obtained.

(III) Post Execution formalities:

This phase covers the completion of formalities in respect of mortgages, if


any, registration with the Registrar of Assurances, wherever applicable, and

Loan Policy 2014-15 32


the registration of charges with the Registrar of Companies within the
stipulated period, etc.,

(iv) Protection from Limitation / safeguarding Securities:

These measures aim at preventing the documents from getting time-barred


by limitation and protecting the securities charged to the bank from being
diluted by any subsequent charge that might be created by the borrower to
secure his other debts, if any. These objectives are sought to be achieved
by:

a) Obtention of revival letter within the stipulated period from


borrower/guarantor

b) Obtention of Balance Confirmation from the borrower/guarantor at least at


annual intervals.

c) Making periodical searches at the Office of the Registrar of Companies/


Registrar of Assurances.

d) Insurance of Assets charged - (unless specifically waived) to insure the


bank against the risk of fire and other hazards, etc.

e) Periodical valuation of securities charged to the Bank.

4.3 Keeping the above broad objectives and the documentation process in view,
the Bank has devised standard documents in most cases for various types of
loans sanctioned to the borrowers, either by the Bank alone or as part of a
Multiple Banking arrangement. Wherever standard specimens have not been
devised, documents are suitably drafted on a case-to-case basis with the help of
in-house legal department, and on occasions with the help of reputed outside
solicitors. Furthermore, changes in the documentation procedures and the
implications involved are circularized from time to time to all the
branches/offices so that those who are responsible for obtaining and
safeguarding the documents are made fully conversant with them. This is
further strengthened through on-the-job training at the branches and through
formal training at the bank's Learning Centers.

4.4 In respect of consortium advances, the documents are generally executed in


consultation with the other member banks in accordance with the guidelines laid
down by RBI/IBA in the matter. Similarly, where advances are extended jointly
with the financial institutions, documents are specifically drafted in consultation
with the solicitors/in-house legal experts to ensure pari-passu charge and/or
second charge, whichever is applicable, of the movable/immovable assets of the
borrower to protect the Bank's interests.
Loan Policy 2014-15 33
4.5 While it is the bank's endeavor to standardize documents for all types of
facilities, in cases where documents have to be specially drafted, Offices are
empowered to utilize the services of Manager (Law), at the respective modules
or that of the Law department at Head Office to vet and approve such
documents for facilities which are sanctioned at their level. Specially drafted
documents are to be cleared by the Head Office in case of loans sanctioned
by any authority, whether at Head Office or at lower levels.

4.6 UNCONDITIONAL CANCELLABILITY:

Unconditional Cancellability clause which gives the Bank the right to cancel the
sanctioned limit without reference to the borrower at any time, needs to be
accepted by borrowers to give effect to the Internal Capital Adequacy Framework
guidelines of the RBI and would form part of T&C letter of the loan documents.

Loan Policy 2014-15 34


CHAPTER 5 : CREDIT MONITORING AND SUPERVISION

5.1 The Bank has in place an effective post-sanction process to facilitate efficient
and effective credit management and to maintain high level of standard
assets. Broadly, the objectives of post sanction follow up, supervision and
monitoring are as under:

(a) Follow up function:

To ensure the end use of funds.


To relate the outstandings to the assets level on a continuous basis.
To correlate the activity level to the projections made at the time of
sanction/renewal of the credit facilities.
To detect deviation from terms of sanction.
To make periodic assessment of the health of the advances by
noting some of the key indicators of performance like, profitability,
activity level, and management of the unit and ensure that the
assets created are effectively utilized for productive purposes and
are well maintained.
To ensure recovery of the installments of the principal and interest
in case of term loans as per the scheduled repayment schedule.
To identify early warning signals, if any, and initiate remedial
measures thereby averting the incidence of incipient sickness.
To ensure compliance with all internal and external reporting
requirements covering the credit area.

(b) Supervision function

To ensure that effective follow up of advances is in place and asset


quality of good order is maintained.
To look for early warning signals, identify incipient sickness and
initiate proactive remedial measures.
If irregularity in an account persists for more than six months the
limit should be re-assessed.

(c) Monitoring function

To ensure that effective supervision is maintained on loans /


advances and appropriate responses are initiated wherever early
warning signals are noticed.
To monitor on an ongoing basis the asset portfolio by tracking
changes from time to time.
Chalking out and arranging for carrying out specific actions to
ensure high percentage of Standard Assets.

In the case of Consortium/ Multiple Banking Arrangements, Bank to obtain and


exchange information with the consortium members / lenders at quarterly
intervals. Branches are also required to obtain information from the borrowers
duly certified by a professional, preferably a Company Secretary.
Loan Policy 2014-15 35
5.2 Detailed operational guidelines on the following aspects of effective credit
monitoring are in place:

Post sanction responsibilities of different functionaries


Reporting for control
Security documents, statement of stocks and book debts.
Computation of drawing power (DP) on eligible current assets and
maintaining of DP register.
Verification of assets including outsourcing of the activity
Inspection by branch functionaries frequency, reporting, register etc
Follow up based on information systems
Close monitoring during project implementation stage and post-
commercial production
Monitoring of large withdrawals
Allocation of limit
Detection and prevention of diversion of working capital finance
Conduct of special audit in case of default/diversion of funds
Review and Management of Stressed Assets
Submission of irregularity reports wherever applicable
Cash Flows
Operating Staff are precluded from disbursement of the sanctioned limits,
new or enhancements, without compliance of all the terms of sanction and
before obtaining the relevant documents duly complete in all respects.

Any loan, fresh or enhancement, should be disbursed only after sanction


communication is received in writing.

For Listed Companies:

Proposals to contain movement of Share Prices, Performance Indicators


etc.

Provisional Financials for the immediate preceding quarter to be obtained,


analysed and comments furnished in proposals.

5.3 End use of funds:

While ensuring the end-use of funds by borrowers, Banks should, not only rely on
certification from Chartered Accountants, but also ensure compliance with
measures, some of which are mentioned below by way of illustration:

1. Meaningful scrutiny of the periodical progress reports and


operating/financial statements of the borrowers.
2. Regular visits to the assisted units and inspection of securities
charged/hypothecated to the banks/
3. Periodical scrutiny of the books of accounts of the borrowers.
4. Introduction of stock audits depending upon the extent of exposure.
5. Obtention of certificates from the borrowers that funds have been utilised

Loan Policy 2014-15 36


for the purposes for which they have been lent.
6. Examination of all aspects of diversion of funds during internal
audit/inspection of the branches and at the time of periodical reviews.

In case of short-term corporate/clean loans, such an approach would be


supplemented by stringent due diligence on the part of the Bank. Detailed
operative instructions based on the RBI circulars are in place.

Bank will also retain the right to get forensic audit conducted whenever it is
prima facie satisfied that there is a case for such investigative audit, to detect
siphoning/diversion of funds or other malfeasance.

5.4 Credit Audit:

A system of loan review styled Credit Audit which interalia covers audit of
credit sanction decisions at various levels has been implemented. Presently all
accounts with total indebtedness of `2 crores and above are subjected to credit
audit. The Credit Audit system serves as an effective control on the system of
sanction of loans in the bank through appropriately delegated powers.

5.5 Stock Audit:

Eligibility

Exposures above `2 crore ( Working Capital Limits)

Frequency

a)Yearly:

Accounts with credit limits above `2 crore but below `25 crores.

b) Half Yearly ;

i) Accounts with credit limits of `25 crores and above.

ii) For all unlisted companies with ECR of BB.

iii) All other accounts of `5 crores and above with Credit Rating of SB-8 and
below, or accounts where Credit Rating slips by two notches or more, irrespective
of the rating.

Others conditions

a) Stock & Receivable Audit may be waived by the sanctioning authority on a


case to case basis when the external rating is BBB or better. However, in case
of externally unrated loan accounts, stock audit should be mandatory at the
stipulated periodicity as per the thresholds prescribed above.

Loan Policy 2014-15 37


b) In case of takeover advance, for limit above `5.00 crores, stock audit to be
conducted prior to recommendation of the facility.

Loan Policy 2014-15 38


CHAPTER 6: CREDIT RISK MANAGEMENT

6.1 The Bank has a well-defined Loan Policy and over the years our policy and
procedures in this regard have been enunciated, practiced and refined as a result
of evolving concepts and actual experience. Revised Credit Risk Management
and Credit Risk Mitigation and Collateral Management Policy approved by the
Board on 29.11.2014 is in place. Our policy and procedures have since been
aligned to the Standardized Approach for credit risk under Basel II from
01.04.2008 and the Bank is gearing itself to adopt Internal Rating Based
Approach. Simultaneously the Bank has also adopted Basel III guidelines with
effect from 01.04.2013 and is in transitional arrangement period. Basel III
guidelines are expected to be fully implemented by the year 2019.

6.2 Credit risk Management encompasses identification, assessment,


measurement, monitoring and control of the credit exposures. The procedure
adopted by the Bank in this regard is detailed under:

Risk Identification and Assessment

6.3 The Bank undertakes the following function in the process of identifying and
assessing the credit risk underlying a proposal:

Developing and refining credit risk assessment models used for taking
Commercial banking and retail banking exposures.

Conducting industry research, which is integral to assessing the risk


associated with any loan proposal.

Credit Risk Assessment Process Commercial Advances

6.4 Before a credit facility is sanctioned to a client/obligor, the risk level is


measured, as per a Credit Risk Assessment (CRA) framework. The new CRA
models for Trading (applicable for Services and Trading activities) & Non-Trading
sectors (applicable for manufacturing activities) were implemented from
01.07.08, which would facilitate Banks transition from Standardised to Internal
Rating Based (IRB) Approach.

6.5 For each credit proposal, a credit rating is assigned using the internal credit
rating system. The Bank as of now has a unified Credit Risk Assessment (CRA)
System, which is used for assessing the credit risk of borrowers as well as
facilities viz., working capital, term loan and non-fund based exposures etc., to
commercial and institutional borrowers, MSME and agriculture segments for
exposure exceeding `25 lacs. The rating process reflects the risk involved in the
facility/borrower and would be an evaluation of the borrowers intrinsic strength.
The rating requires to be reviewed periodically and updated, atleast annually or
as specified in the loan policy.

6.5a. The rating scale would be used by the Bank to keep a close track of
deteriorating credit quality and decide on the remedial measures warranted.

Loan Policy 2014-15 39


Frequency of surveillance or review for accounts rated old rating grade SBM 5
and below and SB 10 and below in the case of new rating grades (subject to
Credit Audit) should be at half yearly intervals.

6.6 The credit risk rating will be worked out by the respective
Branch/Networks/Credit Processing Cells as applicable, as soon as the audited
balance sheet of the company is received. The internal credit risk rating thus
arrived at will be independently validated and approved by a separate
Committee, set up for this purpose. This process of validation and approval is
made prior to sanction / renewal / enhancement of the credit facilities and
separated from the loan sanction process. This facilitates an independent and
objective risk rating mechanism that is not influenced by operational/budgetary
considerations.

In the case of SME advances of exposures of `25 lacs and above in addition to
the SME smart score, CRA rating also has to be undertaken to facilitate
comparison and inclusion in the Banks Rating Transition matrix which will be
used for estimation of Risk Components under IRB Approach.

Credit Risk Assessment (CRA) Minimum scores/hurdle rates

6.7 The Bank has introduced a two dimensional rating model from 01.07.2008
with borrower rating and facility rating. The model includes a Simplified Model
for exposures from `0.25 crore to `5 crores and Regular Model for exposures
above `5 crore. While Simplified Model necessitates the computation of only the
borrower rating, the Regular Model provides both borrower rating and facility
rating.

6.7a. The CRA models adopted by the Bank take into account the various risks
categorized broadly into financial, business, industrial and management risks.
These risks are rated separately. The minimum score under various parameters
and hurdle rate below which increasing or taking exposures are normally not
permitted are specified. Currently no enhancements in credit limits or new
connections are to be considered in respect of accounts rated below SBM 4/SBM-
TL4 under the old CRA model and SB 9 (Hurdle Rate) under the new Models
subject to exceptions like availability of Central Government guarantees and / or
availability of a corporate guarantee of parent / group company which should
have a CRA rating of SB 9 and above (old rating SBM 4/ SBM TL 4 as against the
earlier hurdle rate of SBM 3/ SBM TL 3 and above). The actual models used, the
minimum scores under each head, the hurdle rates etc are reviewed and revised
at regular intervals.

Credit Risk Assessment Process Non Banking Financial Companies (NBFCs)

6.8 Given the special features of NBFCs, as different from manufacturing units, a
separate credit risk assessment model has been put in place for assessing the
risk of exposure taken against NBFCs.

Loan Policy 2014-15 40


Credit Risk Assessment Process Inter Bank Exposures

6.9.As per RBI guidelines, Bank uses a separate rating model to assess the credit
risk associated with lending to Banks. Such a rating model, called Bank
Exposure Risk Index (BERI) model has been developed and is operational in the
bank. The Bank has set Permissible Global Exposure Limits (PGEL) for Banks.
Credit Risk on Banks parent bank, SBI and other Associate Banks, is also assessed
as per this model to maintain arms length relationship with them as directed by
RBI.

Industry Exposure Settings

6.10 CRMD undertakes reviews of Industry/ Sector exposure Setting Exercises for
select Industries at periodical intervals, which give specific policy prescriptions
and contain Quantitative parameters for handling portfolio in large/important
industries.

Credit Risk Measurement Risk Components

6.11 Credit Risk Measurement involves estimation of risk components such as


probability of Default (PD), Exposure at Default (EAD), Loss Given Default (LGD),
Expected Loss (EL) and Unexpected Loss (UL) as described in the Basel II
document.

6.12 As the bank moves towards advanced approaches under the Basel II
document for credit risk, it would be necessary for the Bank to estimate the
above risk components based on the historical data of the Bank, construction of
transition matrix, application of appropriate conversion factors for unutilized
portion of the fund based exposures and non fund based exposures for providing
capital etc.

6.13 a. Preparedness for Migration to Advanced Internal Rating Based Approach


for Credit Risk

Bank has submitted its Letter of Intent to RBI for applying for migrating to
Advanced Internal Rating Based Approach for calculating Capital Charge for
Credit Risk. As a preparation for the application process, IRB compliant policies
relating to Credit Risk and the models needed for estimating values for risk
components have been developed. Suitable instructions regarding the conduct of
loans and advances portfolio in terms of IRB requirements shall be issued from
time to time.

Credit Risk Measurement Portfolio Exposure

6.14 The objective of credit portfolio risk management including setting up of


prudential exposure limits is to achieve a well diversified portfolio across
dimensions such as companies, group companies, industries, collateral type,
geography, etc.

Loan Policy 2014-15 41


6.15 Loan Policy recognizes the need for measures aimed at better risk
management and avoidance of concentration of credit risks. Hence, Bank
exposures are to be within the framework of the RBIs guidelines as well as
internal guidelines on prudential exposure norms in respect of individual
companies, group companies, Banks, Individual borrowers, non corporate
entities, sensitive sectors such as capital market, real estate, sensitive
commodities etc. Guidelines in this regard are detailed in the chapter on
Exposure Levels.

Credit Risk Controls and Reporting

6.16 The objective of setting risk based exposure limits in the portfolio is to
optimize the credit portfolio composition, after taking into account return
estimates and risk appetite defined by the Board.

Credit Risks in Off- Balance sheet exposures

6.17 Credit risk in non-fund based business of banks need to be assessed in a


manner similar to the assessment of fund based business since it has the
potential to become a funded liability in case the customer does not meet his
commitments. Financial guarantees are generally long term in nature, and
assessment of these requirements should be similar to the evaluation of requests
for term loans. As contracts are generally for a term of 2-3 years, banks need to
obtain cash flows over this time horizon, arising from the specific contract they
intend to support, and determine the viability of financing the contract. Off-
balance sheet exposures include derivative exposures viz., forex forward
contracts, interest rate and gold contracts and credit risk on such exposures is
assessed as per RBI instructions in this regard.

6.18 The strategy to sanction NFB facilities to increase earnings will be properly
balanced vis-a-vis the risk involved and extended only after a thorough
assessment of credit risk.

Monitoring Of Country Exposure

6.19 The Bank is required to make provisions for country risk exposures as per
RBI guidelines. The data on country exposures are collected and monitored with
respect to the country exposure limits at periodical intervals by the Risk
Management Department. Fixing of the country exposure limits are reviewed at
yearly intervals and adherence to the same are reviewed and reported to the
Board/ RMCB at quarterly intervals.

6.20 Risk Management Department while reviewing the country risk


management policy and practices annually assesses the status of compliance
with the regulatory and internal limits.

Loan Policy 2014-15 42


Credit Risk Mitigants

6.21 CRMD has framed a credit risk mitigation and collateral management policy
based on the RBI guidelines which addresses (i) classification of credit risk
mitigants, (ii) acceptable credit risk mitigants (iii) documentation and legal
process requirements for credit risk mitigants, (iv) custody of collateral, (v)
insurance etc.

Miscellaneous

6.22 Other aspects of Credit Risk Management such as pricing of Loans, credit
approval authority, documentation, credit monitoring, verification of end-use
funds, review and renewal of credit facilities, managing of problem loans, credit
monitoring etc, have been discussed in detail elsewhere in the Loan Policy
document.

Loan Policy 2014-15 43


CHAPTER 7: REVIEW / RENEWAL OF ADVANCES

7.1 Working capital facilities are granted by the Bank normally for a period of one
year except in cases where the scheme permits and thereafter they are required
to be renewed each year i.e., fresh sanctions is accorded for limits. Where,
however, renewal is not possible for some reason, sanction for continuance of
limits is to be obtained in each case by reviewing the facility.

7.1a. Regular and ad hoc credit limits need to be reviewed / regularised not later
than three months from the due date/ date of ad hoc sanction. In case of
constraints such as non-availability of financial statements and other data from
the borrowers, the branch should furnish evidence to show that renewal/ review
of credit limits is already on and would be completed soon. However, where the
regular / ad-hoc credit limits have not been reviewed / renewed within 180 days
from the due date / date of ad-hoc sanction, it will render the account as NPA.

7.2 As regards granting of ad hoc limits, it is considered only in exceptional


circumstances and for genuine short-term credit requirements arising out of
unforeseen contingencies faced by the borrowing company. Detailed operative
guidelines in this regard are in place.

7.3 .a) All term loans in the C&I and MSME segment with limits/outstanding of `25
lacs and above, irrespective of their credit rating, including standard assets have
to be reviewed to the sanctioning authority at yearly intervals. In cases where
term loans as well as working capital credit facilities have been sanctioned to a
borrower, review of TL should form a part of the review/renewal of working
capital facilities.

7.3. b). All term loans in the C&I and MSME segment, where the project is under
implementation, and is under progress, irrespective of their credit rating,
including standard assets has to be reviewed to the sanctioning authority at half
yearly intervals, until the project is completed. Where there is a delay in the
implementation of the project, the term loan has to be reviewed to the
Sanctioning Authority at half yearly intervals.

7.3. c). Term Loans with limits of `25 lacs and above which are irregular on six
occasions in a year will be reviewed once in six months thereafter. Such review of
irregular Term Loans is in addition to the periodical review of the Special Mention
Accounts. The review is to be put up to controllers in the case of branch level
sanctions and to sanctioning authority in the case of others.

7.3 d) Stand alone term loans also need to be reviewed annually.

7.4 Review of CRA Rated Accounts:

i) In the case of all listed companies with credit rating of SB 8 and below, a brief
review is to be put up on the basis half-yearly working results published by them,
duly incorporating comments such as extent of exposure, conduct of the account
etc. Such review is to be submitted to the sanctioning authority.

Loan Policy 2014-15 44


ii) All borrowal accounts rated SB 10 and below would be rated at half-yearly
intervals considering the risk severity of the loan, by branches / operative units.

7.5 Accounts showing adverse credit quality may be reviewed by sanctioning


authority and wherever necessary, half yearly review may be stipulated.

7.6 Stages of term loan sanction and disbursement

The sanction of term loans conveyed to branches shall be valid for six months
within which time the stages of acceptance of terms and conditions,
documentation and first disbursement will normally be completed.

If documentation is over:

i. Revalidation is not required unless there is a change in project


scope/projections.
ii. If there is change in the project scope* / projections revalidation to be
done before first disbursement

If documentation is not over:

i. Revalidation after 6 months is required.


ii. If for genuine reasons the availment of loan is delayed beyond this
period, the limits will be revalidated by the sanctioning authority. If the sanctioning
authority is the Executive Committee, revalidation will be done by HOCC- I.

*Mere change in the DCCO (Date of Commencement of Commercial Operation)


without any change in the project cost /projections need not be considered as
change in the project scope.

As far as stages of disbursement are concerned, stage-wise disbursement may


be made normally within a period of six months from date of first availment,
unless the project implementation envisages a longer period, which is set out in
the loan application/sanction. Except in such extended cases, if the final
disbursement is delayed beyond 6 months after the date of first disbursement,
the approval of the sanctioning authority will be obtained. (in the case of EC
sanctions, by HOCC I.)

Appropriate commitment charges/revalidation charges may be levied as may be


decided by the Bank from time to time for non-compliance with stipulated
disbursement terms.

7.7 In respect of new term loans and existing term loans, if and when they are
rescheduled, the following set of financial covenants is to be stipulated:

(a) Current Ratio/ Debt equity ratio


(b) TOL/TNW
(c) Interest Coverage Ratio/ DSCR ratio
(d) Default in payment of interest/installment

Loan Policy 2014-15 45


(e) Cross default (default in payment of installment / interest to other
institutions/ banks)

7.8 Default of these covenants would attract penal interest of 1% as under:

(a) Any adverse deviation by more than 20% from the stipulated levels in
respect of any two of the items (a) to (c) above penal interest to be
levied for the period of non adherence subject to a minimum period of one
year.
(b) Default in payment of interest/instalments to the Bank penal interest to
be levied for the period of such defaults.

Borrowing from other Banks

7.9 Bank to have the option to charge an additional interest at 1% if the


company/firm/individuals have borrowed from other banks without approval of
the bank.

Loan Policy 2014-15 46


CHAPTER 8: TAKEOVER OF BORROWAL ACCOUNTS

8.1. Takeover Norms:

A. In the liberalized environment, it has become important for the bank to


aggressively market for good quality advances. One of the strategies for
increasing good quality assets in the banks loan portfolio would be to take over
advances from other banks/FIs.

Keeping this in view and with the objective of adding only good quality assets, a
set of norms / guidelines for C&I, SME/MSME and for AGL segments have been
laid down for takeover of advances.

a. Borrowal account proposed to be taken over should be a Standard Asset in


the books of the transferor bank/ FI.

b. The Borrower should be rated not below SB 6 on the basis of the audited
Balance Sheet not older than 12 months with a stipulation that the financial
score shall not be less than 40 out of the possible 65 and External Credit
Rating, wherever applicable, shall have to be BBB (investment grade) or
above (Both CRA & ECR norms to be complied with, wherever applicable).

c. The Units CRA rating must be in consonance with the latest industry outlook
by the CRMD, wherever applicable.

B. We continue with our existing policy under which administrative approval is


required to be obtained in cases of takeover proposals, the authority structure for
which is furnished below.

PARTICULARS AUTHORITY

For takeover of units complying Prior approval by sanctioning authority with the
with all prescribed norms: minimum authority of Assistant General Manager.

C. The above norms for takeover be considered sacrosanct, in as much as no


deviation will normally be permitted by the Sanctioning Authority. However,
deviations, if warranted, may be considered judiciously in select cases on the
basis of following considerations only:

Loan Policy 2014-15 47


a. In respect of MSEs covered under CGTMSE scheme, CRA upto SB 8 may be
considered.
b. Units with credit enhancement by way of urban tangible immovable (Non-
Agricultural) collateral with a minimum of 40%, besides meeting credit
appraisal criterion and in no case have credit rating of less than SB 8.
c. Units with Corporate Guarantee of Group Company with acceptable ECR of
BBB & above, and CRA of SB 6 & above.

The authority structure for approving deviations in such cases is furnished below:

Advances Sanctioned by Administrative Clearance by

a. Take over proposals not Prior approval by one step higher than the
complying with prescribed sanctioning authority, with minimum
norms. sanctioning authority level at NWCC(*).

(*In case of take over proposals falling within the discretionary powers of the
Executive Committee, the deviations are to be approved by the EC only)

D. The operating units shall assess credit requirements of the unit to be taken
over independently by exercising more than the usual due diligence as
applicable to any credit proposal. Loans from Associate Banks and SBI are not to
be taken over. Besides, general guidelines as furnished below are to be
meticulously followed. Sanctioning Authority will take a call on non-compliance
with any of these guidelines, based on the reasoned recommendations made in
the appraisal/ assessment note.

E. General Guidelines for take over norms:

1. Operating units should assess the requirements of the borrower and obtain
sanction for the proposed limits before actually taking over the outstanding
liability of the borrower from their existing bank/ FI. While doing so, the following
aspects should invariably be examined in each case of take-over:

a. Reasons for take-over;


b. Market perception includes the existing banks/ FIs perception regarding the
unit and its management. (For this, the appraising officials may record briefly
on their enquiries with market sources/ other bank/ FI);
c. Potential ancillary business accruing to the Bank;
d. Terms and conditions stipulated by the existing bank and those proposed by
our Bank, particularly to ensure against dilution of security cover.

2. Information sharing formats currently in use for exchange of information among


member banks under Consortium / MBA arrangements shall be used in respect of
takeover of accounts from other banks also for obtaining Credit Information (or
Credit Information Report (CIR) in the IBA format to be obtained from the
transferor bank); the transferor bank, on receipt of a request from transferee
bank should share necessary credit information at the earliest. Wherever such a
Loan Policy 2014-15 48
demand is placed on our Bank, our CIR also shall comply with the regulatory
requirement.

3. Audited Financials should not be older than 12 months. But in all cases where
Audited Financials are older than 6 months, provisional financials not older than
3 months are to be obtained and analyzed to satisfy that the activity level and
profitability liquidity and solvency ratios are broadly in alignment with the
estimates/ projections important parameters such as Gross/ Net Sales, Inventory,
Receivables, Sundry Creditors, Unsecured Loans, Conversion of Share Application
Money into PUC, Additions to Gross Block may be certified by a Chartered
Accountant.

4. The unit should have earned net profits (post tax) in each of the immediately
preceding 3 years. If it does not have a track record for 3 years, it should have
earned profits for at least two years. In other words, units for takeover should
have at least two years of full fledged commercial operations backing their track
record.

5. Increasing our share either in a Consortium or Multiple Banking Arrangement


of which we are already a part, or where we join a consortium either as an
additional member or when another Bank exits, are not considered as takeover
of advances from another Bank. In all such cases, operating units should
ascertain IRAC status of the borrower from the existing bankers on the IBA
specified format. However, when we join a Multiple Banking Arrangement in
order to replace an existing member of such an arrangement either in whole or
in part, all the norms relating to takeover of advances will apply.

6. When TLs are also being taken over, such TLs should have a prompt
repayment track record, without any restructuring/ reschedulement for at least
two preceding years. For takeover of existing TLs, the terms of repayment with
the existing lender from whom the loan is being taken over, to continue.

7. Term loans from State Financial Corporations may be taken over only
selectively.

8. Generally, takeover of loans below `25.00 lacs is to be discouraged. However,


in case of exceptional circumstances, operating units may consider takeovers on
a case to case basis where product specific minimum scores shall be the
threshold for considering such takeovers. As and when New Scoring Models for
loans upto `25.00 lacs are rolled out, loans categorized / graded as Good Loans
Clear Lending Decision shall only be considered for take-over.

9. In all cases of take-over, branches should ensure completion of proper


documentation and other formalities within a period not exceeding a month or as
approved by the Sanctioning Authority, to protect the interests of the Bank.

Indicative Check list of Due Diligence:

Loan Policy 2014-15 49


a. Promoters/ group concerns/ partners/ director/ guarantors should not figure in
the RBI/ ECGC defaulters/ willful defaulters list either as borrower or as
guarantor.

b. CIC reports (Credit Information Companies) obtained on Promoters/ group


concerns/ partners/ director/ guarantors shall be satisfactory.

c. Balance Sheet/ Audit report wherever applicable should be free from any
material adverse remarks from the auditors. Bank account statements. of six
months to one year old of the prospective customer to be perused to satisfy,
that transactions in the accounts, support the recorded/ estimated turnovers
as also the conduct of account is satisfactory.

d. A declaration should be obtained from the applicant unit that it does not
have any other credit facility in any Bank/ FI/ NBFC which is irregular and
there are no overdue statutory dues. Such a declaration should be supported
by a certificate from a Chartered Accountant.

e. The applicant unit also to declare details of credit facilities of its Associates
and Subsidiaries from the banking system. Credit Information Reports (CIRs)
on the IBA format to be obtained from their respective bankers. Inter unit
transactions commercial or otherwise, to be examined to satisfy that there
are no adverse features that impact risk profile of the unit.

f. Searches in the books of the ROC with regard to charges created and
satisfied on the assets of the unit, change in directors, capital structure and
major share holders etc along with verification of audited financial statements
should be carried out.

g. Searches in the books of the Sub-Registrar of Assurances should be carried


out.

h. Verification of Income Tax, Sales Tax, Excise Returns etc as part and parcel of
strengthening due diligence and as a preventive vigilance measure also must
be carried out.
(These may be carried out through empanelled Technical Consultants/ other
professional such as Chartered Accountants, Company Secretaries and
Advocates etc., wherever necessary)

While the above list is illustrative, the operating officials must undertake the due
diligence exercise as warranted and considered relevant, ensuring to guard
against entry of marginal assets on to our books. The Operating Unit/ Branch
should record a note on due diligence carried out to their Controller, before
taking up the proposal for appraisal.

Loan Policy 2014-15 50


Note: Not complying with norms of takeover of credit facilities sanctioned by
another bank/FI is to be treated as deviation and requires approvals as indicated
in the chapter on Major & Minor Deviations

8.2 TAKE OVER OF P SEGMENT LOANS

While take over of P segment advances is not generally encouraged, taking


over of housing loans may be considered selectively after due diligence and
precaution. Where possession of the house / flat has been taken, repayment of
existing loan has already commenced and instalments have been paid as per
terms of sanction, it can be considered for take over, subject to each proposal
being approved by the authority as per the structure above. Houses/ Flats under
construction can also be considered for takeover after ensuring that there is no
undue delay in construction/ completion of the project. Takeover of home loans
of Government employees from the concerned State/ Central Government is also
permitted after due diligence.

8.3 TAKE OVER OF ADVANCES UNDER AGRICULTURE SEGMENT

In respect of Agri segment, all agricultural term loans agricultural cash credits
with other Banks and Agricultural Credit Societies, Co-operatives are eligible for
take over, subject to the fulfilment of the following terms and conditions of take
over:

i. The minimum amount eligible for take over would be as under:


ACC : `1.00 lakh
ATL for Allied Activities :. `10.00 lakhs
ATL for other than allied activities : `2.00 lakhs

ii. Only Standard assets and regular accounts are eligible for take over. The
account should have been a Standard Account in the books of the other
Banks/Financial Institutions (FI) during the preceding two years.
iii. The term loans of incomplete nature are not eligible for take over.
iv. ATL with a minimum two years repayment programme left are only
eligible.
v. Advances of the borrowers falling outside the service area of the branch
are also permitted for take over, subject to observance of other
instructions.
vi. Crop loan converted Term Loans and Term Loans which are rephrased, are
not eligible for take over irrespective of their quantum.
vii. Take over from Associate Banks and SBI is not permitted.
viii. No dilution in the security in take over proposals is permitted.
ix. The maximum amount eligible for take over would be `50.00 lakhs.
However, administrative clearance should be obtained from the respective
sanctioning authority in case, loans above `50.00 lakhs are required to be
taken over.
x. Wherever prescribed norms for take over are met, no administrative
clearance is needed for take over. Otherwise administrative clearance
should be obtained as above.
xi. Additional norms for take over of Loans above `25 lacs
Loan Policy 2014-15 51
The advances to be taken over should be rated SB 6 or above (the
unit should score at least 60% in the financial parameters).
The unit should have earned net profits post tax in each of the
immediately preceding two years.

Loan Policy 2014-15 52


CHAPTER 9: DELEGATION OF POWERS

9.1 A carefully formulated scheme of Delegation of Powers revised and


comprehensively documented in 1997 (originally documented in 1987)
and amended from time to time is in operation in respect of financial and
administrative matters for exercise by the various functionaries in the
Bank. This is based on the premise that an executive is required to
exercise only those powers which are related to the responsibilities and
duties entrusted to him / her. In exercising the powers, the authorities
concerned are required to ensure compliance also with the relevant
provisions of the State Bank (Subsidiary Banks) Act and the State Bank
(Subsidiary Banks) General Regulations and any rules, regulations,
instructions or orders issued from time to time by appropriate controlling
authorities.

9.2 The two significant principles around which the scheme of delegation of
financial powers revolve are:
Powers are exercisable only in relation to the duties and
responsibilities specially entrusted to a functionary;
All sanctions are subject to report to the next higher authority.

9.3 The Scheme of Delegation of Financial powers for advances and allied
matters in the Bank has a graded authority structure. The Executive
committee of the Board (EC) has full powers for sanctioning all credit
facilities. The sanctioning powers have been delegated down the line to
Committees of officials at various administrative offices and to individual
line functionaries.

9.4 The powers for sanctioning credit facilities by various authorities have
been vested with them in terms of total indebtedness of the borrower.
Computation of indebtedness will include off balance sheet exposures
arising from derivatives and forward exchange contracts in addition to
fund-based and non-fund based exposures (i.e., LCs, guarantees etc.,).

9.5 Higher discretionary powers have been made available in the case of top
rated borrowers (usually SB1 and SB5) and functionaries across the
hierarchy are vested with such dual powers depending on the rating of the
borrower.

9.6 The Scheme is constantly updated and reviewed to factor in the demands
made on account of organizational restructuring, emerging challenges,
forces of competition, etc.

Loan Policy 2014-15 53


CHAPTER 10: MATURITY OF BANKS ADVANCES

10.1 The maturity pattern of the Banks deposits and other liabilities ideally
determine the preferred maturity profile of its asset portfolio of which advances
are significant part. Traditionally, our resources have tended to concentrate
somewhat in the on demand to short and medium term deposits of 1 to 3 years
and 3 years to 5 years maturity buckets. In addition, we have CASA funds and
also float funds through drafts and similar transit funds. Correspondingly, our
asset maturity profile also ranges from WC finance, short term loans to loans of
longer maturity. Matching of varying maturity buckets in the Banks asset and
liability portfolios is done on an ongoing basis by the Banks ALCO.

10.2 Given the tilt towards shorter term maturities in liabilities against a
perceptible shift towards medium to long term lending, as a consequence of a
variety of emerging short term funding options available to corporate borrowers,
there is a felt need for regulated term lending.

10.3(i) Accordingly, the maturity of any term loan, including moratorium, should
not normally exceed 8 years except cases under CDR mechanism / rehabilitation
packages approved by the Bank, infrastructure loans, housing term loans (HTLs)
to individuals, education loans and agricultural term loans under approved
schemes. In case there are area specific schemes proposed by NABARD and
formulated by the HO, the Zonal Office committees may decide to add such
schemes also to the list of exempted category of agricultural term loans advised
by Agri Business Unit from time to time. The tenor is to be reckoned from the
day of first draw down.

(ii) In cases where maturity exceeds 8 years ( except in case of exempted


categories mentioned above), the loans should be administratively cleared by
authorities as prescribed in the section on deviations of the Loan Policy. Besides,
operating functionaries should also bear in mind the following:

i. The maturity of any loan should not normally exceed 8 years, (except in
the case of Housing Term Loans (HTLs) to individuals and Educational
loans, term loans for Infrastructure, restructured term loans).

ii. In cases where maturity exceeds 8 years (except in case of HTLs to


individuals/educational loans), the loans should be administratively
cleared by an executive who is one stage higher than the prescribed
authority for sanction of that loan, as per the scheme of delegation of
financial powers. However, in respect of sanction by the HOCC I/EC, the
appropriate authority may approve the tenor of the loan as part of regular
sanction.

iii. In case of infrastructure loans the maturity of the loans should not exceed
15 years including the moratorium period.
Loan Policy 2014-15 54
Loan Policy 2014-15 55
CHAPTER 11: PRICING

(FACTORS DECIDING INTEREST RATES AND OTHER CHARGES)

11.1 Pricing of loans / services in the Bank cover interest income and fee income.
In keeping with RBI guidelines, w.e.f. 01.07.2010, the Bank has decided to quote
a single base rate (i.e. BR) which is the reference rate below which the Bank will
not undertake any lending activity except the following permitted categories of
Advances.

a) DRI advances

b) Loans to banks own employees (staff)

c) Crop Loans upto `3 lacs

d) Export Credit for which subvention is available

e) Loans to banks depositors against their own deposits.

f) Restructured loans, if some of the WCTL, FITL etc., need to be granted below
the Base Rate for the purpose of viability and there are recompense clauses.

g) Scheme on financing of off-grid and decentralised Solar (Photovoltaic and


Theram) application as part of Jawaharlal Nehru National Rural Solar Mission
(JNNSM) of the Ministry of New and Renewable Energy (MNRE) for which
refinance is available

(This list is subject to review by the RBI from time to time)

11.2 Pricing of Banks loans and services are based on two very important
considerations. Minimum desired profitability and risk inherent in the
transactions. At the corporate level, the applicable price for a particular advance
or service is fixed taking into account the marginal cost of banks funds and
desired rate of return as calculated from indices like profitability levels and return
on capital employed. However pricing is also market driven. But the endeavour
shall be to see that pricing is invariably proportionate to risk. In case of
corporate relationship where the value of connections and overall potential for
profitability from a particular account are more important than a particular
transaction, the price is fine tuned even to breakeven level for the transaction. For
long-term exposures, the factors that weigh are the rate charged by the financial
institutions/ other banks, the period of exposure, pattern of volatility in the
interest rates and the expected movement of the rates in the long-term
perspective. The actual lending rates charged may be transparent and
consistent and be made available for supervisory review/scrutiny, as and when
required. Whenever concessions are to be extended, specific cogent reasons are
to be mentioned in the proposal along with the recommendations.

Loan Policy 2014-15 56


11.3 Banks are required to review the Base Rate at least once in a quarter with
the approval of the Board or the Asset Liability Management Committees
(ALCOs) as per the banks practice. Since transparency in the pricing of lending
products has been a key objective, Banks are required to exhibit the information
on their Base Rate at all Branches and also on their websites. Changes in the
Base Rate should also be conveyed to the general public from time to time
through appropriate channels. Banks are required to provide information on the
actual minimum and maximum lending rates to the Reserve Bank on a quarterly
basis, as hitherto.

11.4 Changes in the Base Rate shall be applicable in respect of all existing loans
linked to the Base Rate, in a transparent and non-discriminatory manner.

11.5 The Bank can price loans at Fixed or Floating rate basis linked to the Base
Rate. However, the effective rate to be charged should be equal to or above the
Base Rate at the time of Sanction/ Renewal. Bank may also price floating rate
products by using any other market rate in a transparent manner. The floating
interest rate based on such external rate should however be equal to or greater
than the Banks Base Rate at the time of sanction/ renewal.

11.6 Transitional Issues

The Base Rate system would be applicable for all new loans and for those old
loans that come up for renewal. Existing loans based on the BPLR system may
run till their maturity. In case existing borrowers want to switch to the new
system, before expiry of the existing contracts, an option may be given to them
(on mutually agreed terms). Banks, however, should not charge any fee for such
switch-over.

Pricing Committee: Bank has put in place two Pricing Committees to examine post
sanction modifications in pricing in respect of high value advances.

11.7 The Bank will have a certain corpus for CP/ MIBOR linked loan products as
approved by Executive Committee of the Board of Directors from time to time. In
such cases, the interest rate to be charged are linked to market benchmarks (e.g
G-Sec rates, MIBOR etc.,) in a transparent manner and without making any
reference to BR subject to minimum of Base Rate

11.8 Bank has put in place a policy for reset of interest rates of term loans
extended both on floating and fixed interest rate basis, to factor in changes in
the interest rate scenario. The periodicity of reset is two years and renegotiation
of interest rate is based on well-defined triggers mentioned elsewhere in the
circulars.

11.9 All other loans are to be priced on the basis of banks BR with the pricing
being linked to grade of the risk in the exposure, tenor of loans etc.

11.10 The Bank has also adopted an appropriate authority structure to facilitate
competitive pricing of loan products. The authority concerned while exercising
the discretion take into consideration the risk rating of the loan asset, the trends
Loan Policy 2014-15 57
in movement of interest rates, market competition and overall business
considerations. HOCC I and HOCC II are vested with full powers for approving
competitive pricing within their respective areas of operation and are empowered
under a board approved policy, to delegate a certain level of discretion in pricing,
relating to specific products/category of borrowers in the unrated segment, to
the Zonal functionaries. The quantum of delegation depends on factors such as
degree of competition, market developments, target group, purpose etc. The
policy on competitive pricing is reviewed from time to time based on changes in
market condition. Bank has put in place two Pricing Committees to examine post
sanction modifications in pricing in respect of high value C & I advances.

11.11 Loans under consortium arrangement. Banks need not charge a uniform
rate of interest even under a consortium arrangement. Each member bank
should charge rate of interest on the portion of the credit limits extended by it to
the borrower, subject to the condition that such rate of interest is determined
with reference to its Base Rate.

11.12 Charging of interest at monthly rests: Banks were required to switch-over


to the system of charging interest at monthly rests with effect from April 1, 2002.
Instructions on charging interest at monthly rests shall not be applicable to
agricultural advances and banks shall continue to follow the existing practice of
charging / compounding of interest on agricultural advances linked to crop
seasons. As indicated in circular RPCD.No.PLFS.BC.129/ 05.02.27/97-98 dated
June 29, 1998, banks should charge interest on agricultural advances for long
duration crops at annual rests. As regards other agricultural advances in respect
of short duration crop and allied agricultural activities such as dairy, fishery,
piggery, poultry, beekeeping, etc., banks should take into consideration due
dates fixed on the basis of fluidity with borrowers and harvesting / marketing
season while charging interest and compounding the same if the loan /
installment becomes overdue. Further, banks should ensure that the total
interest debited to an account should not exceed the principal amount in respect
of short term advances granted to small and marginal farmers.

11.13 Levying of penal rates of interest: Banks are permitted to formulate a


transparent policy for charging penal interest with the approval of their Board of
Directors. However, in the case of loans to borrowers under priority sector, no
penal interest should be charged for loans up to `25,000. Penal interest can be
levied for reasons such as default in repayment, non-submission of financial
statements, etc. However, the policy on penal interest should be governed by
well-accepted principles of transparency, fairness, incentive to service the debt
and due regard to genuine difficulties of customers.

11.14 Market related Service Charges and a discretionary structure that enables
branches to effectively face competition are in place. These are reviewed
periodically based on feedback from operating units and on changes in market
conditions.

Loan Policy 2014-15 58


CHAPTER 12: NPA MANAGEMENT

12.1 General

12.1.1The Bank has separate NPA Management Policy which seeks to lay down the
policy on management and recovery of NPAs and proactive initiatives to
contain net NPAs.

12.1.2The policy lays stress on a system of early identification and reporting of


all existing and potential loans as a first step towards management of
NPAs. Such an Early Alert System which captures early warning signals
an integral part of the Banks Risk Management process and would be
followed by time bound corrective actions comprising rehabilitation /
restructuring or an early exit.

12.1.3 In line with the RBI guidelines on preventing slippage of NPA accounts,
Bank has introduced a new asset category between standard and sub
standard, i. e Special Mention Accounts (SMAs) for internal monitoring and
follow-up in line with international practice.

12.1.4 Key Definitions:

Default: Default is considered to have occurred when an asset is classified


as non-performing asset (NPA).
All defaults will be recorded in accordance with the reference definition of
default detailed in the Credit Risk Management Policy.
Provisioning Coverage Ratio (PCR): Ratio of provisioning to gross NPAs. It
indicates the extent of funds the Bank has kept aside to cover loan losses.
Quick Mortality Loans: Accounts sanctioned/disbursed and where repayment
has been initiated during the financial year and slipped into NPA category
within the first two years of sanction/repayment fall in the category of quick
mortality loans. Such loans will be monitored / reviewed. Appropriate steps
to be initiated to bring them back to standard assets category.
The terms restructured account, standard assets, sub-standard assets,
doubtful assets and loss assets are defined as per current RBI guidelines.

Loan Policy 2014-15 59


12.1.5 The first focus in management of SMAs will be the possible upgradation of
the loan asset through re-phasement, restructuring or rehabilitation of borrowers
business. If the branch level review indicates that the problems of the unit are
not temporary, viability studies need to be undertaken on a case to case basis.
Viability of the unit and the promoters interest (and stake) are the basic
prerequisites for the Bank to undertake restructuring / rehabilitation. However,
the right of recompense will be incorporated in every rehabilitation proposal.
Given the pressures of globalisation, industry outlook needs to be given
adequate attention.

12.1.6 The Bank also has put in place a mechanism for outsourcing of recovery
efforts, in alignment with RBI Guidelines for outsourcing of Financial Services, to
supplement the efforts of the Banks staff.

The detailed guidelines for appointment of Recovery Agents/Agencies and


monitoring of their conduct include:

(i) Model Code of Conduct to be adopted by RAs.

(ii) Declaration- cum- undertaking to be obtained from RAs.

(iii) Model Policy & Operating Guidelines for Repossession of Security.

(iv) Application Form for appointment of RAs.

(v) Grievances Redressal Mechanism.

12.2 Re-phasement of term loans, including as part of rehabilitation/


restructuring exercise, where considered on more than two occasions during
the currency of the term loan will require prior administrative clearance as
under:
Sanctioning Authority Administrative Approval by

Below SMECCC / ZOCC One step higher than the sanctioning


authority

NWCC HOCC II

HOCC II & above Not required

However, restructuring done under Corporate debt restructuring mechanism,


Debt restructuring mechanism for SMEs, Borrowers affected by natural calamities
which are already covered by separate set of guidelines issued by RBI, would be
excluded from the purview of the above requirement.

12.3 a. The Bank has laid down a policy on approach to sacrifices in case of
transfer of financial assets to Securitization Companies and Reconstruction
Companies (SCs/RCs) as each asset is unique in the context of circumstances
necessitating consideration of transfer to SC / RC as a recovery option.

b. The Bank has also laid down a policy in accordance with the RBI guidelines, for
sale of NPAs to Banks / FIs / NBFCs other than SCs / RCs.
Loan Policy 2014-15 60
c. Policy for purchase of Non-performing Assets (NPAs) from other banks under
consortium/multiple banking has been put in place to facilitate timely
restructuring and rehabilitation in high value and potentially viable accounts.

d The Bank has also laid down policy for sale of Non Performing Retail Assets of
the SME sector to ARCs, Banks, FIs and NBFCs on portfolio basis.

12.4 Viable units and where promoters show genuine interest in reviving the unit
will continue to be supported. In other cases, especially where promoters are not
cooperating, options to exit or reducing exposure will be actively explored, where
feasible. Where despite our best efforts in this regard, it is not possible to exit an
account or at-least to reduce our exposure, a reassessment of the situation will
be done and if necessary Bank will consider either an acceptable OTS or in its
absence, even consider recalling the account. Bank will examine the various
options and initiate measures as appropriate in a time-bound manner, as delays
in such situations far from helping matters are likely to lead to erosion of security
and increase in the ultimate quantum of the NPA.

12.4a. The following are some of the options which are to be considered in
potential NPAs / SMAs where viability is suspect:

Avoid enhancements, additional facilities and new connections in high risk


industries. Deviations should be highly selective and on very strong
grounds.
Reduce exposure levels in a phased manner without affecting the units
day to day operations.
Encourage units to adopt multiple banking.
Tightening of conditions such as close monitoring of units cash flows,
increased margins, withdrawal of concessions, scaling up of collateral etc.
for safeguarding the Banks interests.
Negotiated settlements through compromises.

12.5 Settlements through compromises (i.e. one time settlement of dues) will be
a negotiated settlement under which Bank endeavors to recover its dues to the
maximum extent possible. Detailed guidelines for compromise settlements are
part of the NPA Management Policy.

12.6 If settlement of dues through compromise is being negotiated with one unit
of a Group banking with us, it shall be the endeavor to minimize the sacrifices by
seeking support from the parent company / other Group companies. The
response of the Group towards such efforts on our part will be a major contributing
factor in deciding further exposures to the Group or to other individual units
within the Group.

12.7 In a compromise (i.e. one time settlement of dues- OTD) as the Bank agrees
to accept an amount less than the total amount due to the Bank under the
relative loan contract, in full and final settlement of dues as a general policy, it is
tantamount to cessation of lender borrower relationship with the borrowing unit,
its promoters and guarantors. Under ordinary circumstances, no fresh finance will

Loan Policy 2014-15 61


be considered either to the existing unit or to any new unit being promoted by
the same promoters / guarantors. However, exceptions may be made in respect
of settlements under various One Time Settlement Schemes of RBI and similar
Schemes of the Bank as per guidelines which may be formulated by the Bank.
The Bank may also extend fresh finance / enhancement/ renewal of credit limits
to a unit where the Bank has entered into a compromise with the unit/another
unit of the same promoter/guarantor, with the approval of the Board. Such
proposals will require prior administrative approval by HOCC II for sanctions by
authorities below HOCC II.

Pursuant to the directives of Govt of India, the provision for re-lending to farmers
who have settled their dues under compromise / SBM OTS / RBI OTS / write off is
also in place.

12.8 Adoption of E- Auction for sale of immovable properties through DRT.

In terms of the Government of India directives, the Bank has adopted e-auction
for sale of assets charged to the Bank in respect of DRT proceedings to break
cartelization in auctions. Bank has put in place an e-auction platform for smooth
implementation and detailed operational guidelines are in place

12.9 The Bank recognizes that transfer of financial assets to third party entities
such as SCs / RCs would, in most cases, be at a substantial discount to the book
value of the asset / ledger balance. The Banks endeavor would be to optimize
recovery while taking into account not only the ledger balance but also other
aspects such as costs associated with continuing the account in our books
including cost of maintaining assets, loss on account of deterioration in the
quality of securities charged, opportunity loss due to non redeployment of locked
funds more profitably, etc. The quantum of sacrifice per se in terms of high
percentage of loan being written off in case of transfer/sale to such third party
entities would not hinder consideration of the offer.

12.10 Granting of loans to our borrowers / non-borrowers to settle OTS entered


into with other banks / FIs is generally not permitted. However, loans for such
purposes, administrative clearance to be obtained from HOCC-1, before being put
up to EC for sanction.

12.11 The Bank would follow a policy of write off, including partial write offs,
subject to review from time to time on the basis of experience gained. Detailed
operative guidelines are in place. The policy of write of is not expected to dilute in
any way the follow-up of recovery. Written off accounts are to be parked in
Advances Under Collection Account (AUCA) in accordance with laid down
instructions. The structured mechanism prescribed for follow-up of accounts
parked in AUCA will be followed meticulously. Further, accounts in AUCA would be
considered as part of NPAs for internal monitoring at all levels.

12.12 Accounts sanctioned/disbursed and where repayment has been initiated


during the financial year and slipped into NPA category within the first two years
of sanction/repayment fall in the category of quick Mortality Loans. Such loans

Loan Policy 2014-15 62


will be monitored / reviewed. Appropriate steps to be initiated to bring them back
to be initiated to bring them back to standard assets category.

12.13. Detailed guidelines on NPA management are in place in the Loan


Recovery policy of the Bank which also covers stock audit of NPA accounts with
balances of `5 crores and above.

12.14. Restructure of Advances:

Advances covered under the guidelines of Restructuring are classified into four
categories viz. advances extended to industrial units, advances extended to
industrial units under CDR, advances to SME and other restructured advances.

The major difference in the prudential regulations lies in the stipulation that
subject to certain conditions, the accounts of borrowers engaged in industrial
activities (under CDR Mechanism, SME Debt Restructuring Mechanism and
outside these mechanisms) continue to be classified in the existing asset
classification category upon restructuring. This benefit of retention of asset
classification on restructuring is not available to Consumer and Personal
Advances, advances classified as Capital Market and Real Estate exposures.

Detailed operative guidelines on restructuring of advances are in place.


(presently, the applicable instructions are contained CPPD Circular No.10/2013-
14 dated 28.06.2013)

12.15 Treatment of restructured accounts for IRB Purpose

For the purposes of capital adequacy, restructured accounts are required to be


treated as defaulted except where they are eligible for upgrade to the non-
defaulted category after observation of satisfactory performance for one year
from the date when the first payment of interest or installment of principal fell
due under the terms of restructuring.

Calculation of provisions for IRB purposes


While computing capital requirements under the IRB framework, the Bank will
compare existing provision levels with its internal estimates of EL, derived from
estimates of PD and LGD.

12.16. Data collection and reporting for IRB purposes.

Data on defaults reported by the branches and originating units, or through the
Banks systems, will be used by CRMD for the estimation of PD.
Recovery and cost data, including material direct (which can be associated with
an individual recovery, e.g. legal costs) and indirect costs (which cannot be
associated with an individual recovery, e.g. administration costs), will be used by
CRMD for the computation of economic loss, cure rates and estimates of LGD.
Loan Policy 2014-15 63
Where the cost of recovery cannot be assigned to an individual exposure,
averages of recovery costs based on discretion and experience are required to be
used.

12.17 Outsourcing

All outsourcing activities including appointment of Business Facilitators and


Business Correspondents are being done in strict compliance with RBIs
instructions and Board approved policy of the Bank.

Loan Policy 2014-15 64


CHAPTER 13: CREDIT FACILITIES TO COMPANIES WHOSE DIRECTORS ARE IN THE
DEFAULTERS LIST

13.1 The Directors of the company may be classified as promoter / elected /


professional / nominee / honorary directors. RBI has been collecting and
circulating information on defaulting companies among banks / FIs including
names of the directors of such companies. Though RBIs defaulters list is given
due cognizance in the appraisal process, a general policy on the issues relating
to the sanction / continuation of credit facilities to such companies whose
directors are in the RBIs defaulters list needs to be put in place. Accordingly, it
has been decided to adopt the following approach:

Director of applicant company if Approach

1. Promoter Director of a defaulting No adhoc / enhancement / additional /


company new credit facilities to be sanctioned to
the applicant company till the name of
2. Director of a defaulting company the director is removed from the
having role in the day- to -day defaulters list by RBI
affairs of its management. In case the performance and conduct of
the accounts of the applicant company
are otherwise satisfactory, renewal /
continuation of the limit at the existing
levels may be considered.
3. Promoter Director of a defaulting No adhoc / enhancement / additional
company having a role in day-to- new credit facilities to be sanctioned till
day affairs of its management, but the names are removed from the
who resigned from the Board of defaulters list by RBI.
In case the performance and conduct of
defaulting company, to circumvent
the accounts of the applicant company
any obstacle in getting credit. are otherwise satisfactory, renewal /
continuation of the limit at existing
levels may be considered.
4. Director in a defaulting company, Proposals to be considered on merits. If
but not connected in any way with the defaulting company is an associate
its day-to-day management. / subsidiary of the applicant company
or a group company, approach
mentioned in1 & 2 may be followed.
5. Nominee / professional / Proposal to be considered on usual
honorary director of a defaulting parameters as these directors are in
company ( including associate / their professional / honorary capacity.
group / subsidiary company)

6. Promoter / nominee / The above approach as applicable may


professional / honorary directors as be followed in such cases also, if
in / 1 to4 above, but whose information is available.
names are yet to be included in
RBIs defaulters list ( as the list is
published by RBI once in six
months only)

Loan Policy 2014-15 65


The above policy on defaulters will be a broad frame work for sanction /
continuation of credit facilities to companies whose directors are in the RBIs list
of defaulting borrowers of the banks /FIs with dues of `1 Cr. and above. When the
list of such defaulters it circulated by CIBIL (instead of RBI), the same policy
would continue to apply.

13.2 Wilful default and action there against Bank will fully comply with RBI
guidelines on wilful defaulters and action thereagainst in terms of RBIs
definitions of wilful default, diversion & siphoning of funds and end-use of
funds. These instructions apply without any exception to all loan accounts
where the outstanding are `25 lacs or more. The identification of wilful default in
the Bank will be done by a Committee constituted for this purpose. The
identified borrower will be provided an opportunity to make a representation
before the Grievance Redressal Committee. At the end of this process, the name
of the borrower will be included in the list of willful defaulters to be advised to
RBI, when a decision has been taken to that effect.

13.3 Where a letter of comfort or guarantee furnished by the companies within a


Group in favor of a willfully defaulting unit is unpaid when invoked by the Bank,
such Group companies also may be reckoned as willful defaulters.

13.4 Where possible, Bank shall adopt a proactive approach for a change of
management of the willfully defaulting borrowing unit.

13.5 Where FIs have significant stake and where the FIs take effective steps for
removal from the Board of a borrowing unit, a person identified as wilful
defaulter, the Bank shall also proactively support such steps.

13.6 No additional facilities shall be granted by the Bank to the listed willful
defaulters. Further, entrepreneurs/promoters of companies where the Bank has
identified siphoning/diversion of funds, misrepresentation, falsification or
accounts and fraudulent transactions shall be debarred from bank finance for
floating new ventures for a period of 5 years from the date the name of the
willful defaulter is published by RBI/CIBIL.

13.7 The legal process, wherever warranted, against the borrowers/guarantors


and foreclosure of recovery of dues will be initiated expeditiously. The Bank may
also initiate criminal action against willful defaulters, based on the facts and
circumstances of each case after careful consideration and due caution.

13.8 The approach envisages that the penal provisions are used in a transparent
manner and are not misused. A solitary or isolated instance will not be made the
basis for imposing penal action.

13.9 The Bank has also put in place a policy regarding extending finance to the
willful defaulters, in compliance with the guidelines issued by RBI from time to
time. Detailed operative guidelines in this regard are in place as under :

Loan Policy 2014-15 66


Willful defaulter No fresh limit/enhancement may be sanctioned.
unit as applicant
Renewal of limits sanctioned may be approved by an authority
not below HOCC-I

Applicant company Fresh limits and renewal/enhancement of limits may be


whose director is considered.
listed as director of
a willful defaulter
company Proposals otherwise within the powers of HOCC-II and below to
be sanctioned by HOCC-I. For others, it will be the sanctioning
authority.

13.10 The Bank has put in place a procedure for deletion of the names of the
borrowers from the list of willful defaulters through the mechanism of reference
to the Committee constituted for this purpose at Zonal Office.

Loan Policy 2014-15 67


CHAPTER 14: MAJOR & MINOR DEVIATIONS

14.1 Deviations from the banks Loan Policy have been classified as `major and
`minor based on

Criticality of the norms from asset quality angle


General Compliance levels
Need for flexibility

14.2 Proposals with major deviations from the Banks laid down policies would be
required to be sanctioned by a higher authority, as given below:

Sl. Norms Deviation approving authority


No.
Existing Modified

1 Fund based exposure to a Executive No change


particular industry in Committee
excess of ceiling
prescribed

2 Non fund based exposure Executive No change


at the whole-bank level not Committee
to exceed 2 times the fund
based exposure

3 Term Loans (loans with Executive ALCO/Executive


residual maturity of over 3 Committee Committee
years) should not in
aggregate exceed 35
percent of the total
exposure (FB+NFB) of the
Bank. Term loans include
all term loans irrespective
of the segment but with a
residual maturity of over
three years.

Loan Policy 2014-15 68


Sl. Norms Deviation approving authority
No.
Existing Modified

4 Maturity of term loan The authority one


generally not to exceed 8 step higher than
years (excepting housing the sanctioning No change
loans and educational authority with
loans & Infrastructure minimum authority
loans) being the Assistant
General Manager.

In respect of accounts HOCC-II NWCC


falling under the powers of
ZOCC

In respect of accounts
falling under the powers of
NWCC - HOCC-II

In respect of accounts
falling under the powers of
HOCC I & II, HOCC-1 No change

5 General exposure norms Executive No change


Committee
Individuals ` 25 cr.

Non-Corporate . ` 75 cr.

6. Borrowers with CRA rating below the hurdle rate *


Sanctioning Deviations approving authority
Authority
Existing Modified

Up to the level The authority one No change


of AGM step higher than
a. New Sanctions the sanctioning
authority with
minimum
authority level of

Loan Policy 2014-15 69


Sanctioning Deviations approving authority
Authority
Existing Modified

ZOCC

ZOCC HOCC-II NWCC

NWCC - HOCC II

Up to the level HOCC II NWCC


of ZOCC
b. Sanctions at
existing levels
(existing A/cs)
NWCC - HOCC-II

c. Existing Upto the level of - HOCC II


accounts NWCC
(Enhancements
)
HOCC II HOCC-1 No change

HOCC-1 EC No change

* As per new rating model, SB 9 is the hurdle rate for new connections and
enhancement. Though not normally envisaged, deviations may be permitted up
to SB 10 and may be approved by an authority as prescribed above. In respect of
borrowers rated SB 11 and below, no deviation is to be considered.

7. Deviations in respect of norms for CRA linked minimum scores:

Category Deviation approving authority

1. General The authority one step higher than the sanctioning


authority except in case of HOCC-1 or Executive committee
2. Management sanctioned advances where deviations can be permitted
and by the sanctioning authority itself
3.Business risk

8. Proposals not complying with norms of take over facilities sanctioned by


another Bank/FI

Takeover proposals Deviation approving authority

Loan Policy 2014-15 70


Existing Modified

i) Takeover proposals The authority one step higher No change


involving total limits up than the sanctioning authority
to `1 cr with minimum authority level
of ZOCC

ii) Takeover proposals


involving total limits of
above one crore and - HOCC-II
falling under the up to
the delegated powers
vested with NWCC
iii) Takeover proposals
falling under the powers HOCC-I No change
of HOCC II

iv) Takeover proposals


falling under the powers No change
of HOCC I and above HOCC-I

9. Defaulter List

Sanctioning Deviation approving authority


Authority
Existing Modified

I. Credit facilities to Upto the level HOCC II NWCC


companies whose of ZOCC
directors are in
the defaulters list
of RBI NWCC
- HOCC-II

II. Credit facilities to No deviations from RBI guidelines


companies whose
directors are in
the willful
defaulters list of
RBI
III. Credit facilities to
units in the willful
defaulters list of No deviations from RBI guidelines
RBI

14.3. Any deviation not specifically mentioned in this section and under various
heads will be considered as minor deviation. The minor deviation will be
approved by an authority one step higher than the sanctioning authority except

Loan Policy 2014-15 71


where a separate structure has been specifically laid down involving approval
thereof by some other authority.

14.4. In schematic lending, deviations in respect of

i. age of the borrower

ii. age of the building, and

iii. margin on loans against Banks own deposits to be approved by


ZOCC.

Other deviations in respect of specific products for business and strategic


considerations are to be approved by HOCC-II. No such approval required for
sanctions by HOCC / EC.

Loan Policy 2014-15 72


CHAPTER 15: ADVANCES TO MID-CORPORATES

15.1 Financing mid-corporates is a thrust area for the Bank. Mid-corporates


comprise all business enterprises (both corporate and non-corporate) with
annual turnover between `50 crores and `500 crores or enjoying aggregate
working capital limits (FB and NFB) of `10 crores or more or Term Loan of `10 crores
or more. It straddles primarily the MSME and C&I market segments. These
businesses exhibit fast rate of growth both in size and in numbers at specific
centers/ clusters across the country and the involvement of our Bank with such
borrower entities through branches across the country have been seen as an
available and desirable potential for increasing growth that needs to be fostered
and developed in a focused manner.

15.2 As a strategic initiative, the Bank has been and will identify select emerging
industries that are likely to grow further in the near term. Such industries will
receive sharper focus to enable them the scale up their exposure and garner a
greater share of bankable business. Depending upon the market size,
opportunities and potential available in various geographical areas, the desired
direction in lending to these industries at various levels are also being spelt out.

Loan Policy 2014-15 73


CHAPTER 16: MICRO, SMALL AND MEDIUM ENTERPRISES

16.1 MSME stands for Micro, Small & Medium Enterprises. The MSME
Development Act, 2006 has brought about changes in classification of
enterprises. The Act also provides for penalty to buyers for delayed payment to
SMEs and has also done away with the requirement for registration in the case
of Micro and Small Enterprises. The definition of MSME for Industrial and service
enterprises as under:

Business Original Investment Original Investment in


enterprises in plant and Equipment
Classification machinery

Industrial Enterprises Service Enterprises

Micro Upto `25 lacs Upto `10.00 lacs

Small > `25 lacs & > `10 lacs &

upto `5 crores upto `2 crores

Medium > `5 crores & > `2 crores &

upto `10 crores upto `5 crores

16.2 MSMEs are a very attractive segment for the Bank given their large number,
loyalty and potential for profitability. The primary needs of MSMEs are physical
proximity, timely credit availability, service and reliability, although different sub-
segments have different priority needs leading to differences in profitability
drivers.

16.3 With a view to increase our market share in MSME segment, by improving
our sales and marketing strategies and to meet the demand of our customers for
more sophisticated services at competitive prices and to increase our customer
base, more particularly in the higher end segment, a separate SME Department
is functioning to drive MSME banking services across the Bank.

16.4 Accordingly, the various initiatives that have been taken up by the Bank
towards realization of its objective are:

(i) Creation of value propositions for each sub-segment based on product


needs such as supply chain financing for dealers / vendors, cluster
financing, cash management for liability intensive MSMEs, specific
offerings for the services, etc.
(ii) Designing of bundled products and aggressively cross selling of P-
segment products.

(iii) Creation of relationship managers for medium enterprises (ME) as well


as for institutions and Multi Product Sales Force for Small Enterprises (SE).

Loan Policy 2014-15 74


(iv) Building of strong credit systems and processes

(v) Minimizing of servicing cost through improved operations, tie up at national


level with industry majors, leveraging of technology, etc.

(vi) Continuous product rationalization and simplification of appraisal,


documentation process.

16.5 Under these initiatives, the Bank will continue to give additional thrust to
financing MSME sector having recognized long back that the sector is crucial to
the growth and development of the Indian economy. The industrial policy
initiatives taken by the Government and RBI over a period of time have had a
favorable impact on the process of growth of MSMEs sector in terms of
production, employment and exports. However, the process of liberalization,
while providing tremendous opportunities, has also thrown open numerous
challenges for the Indian small scale sector. For some MSME units, the process
opens up opportunities to expand and grow, while for others, the process is a
threat from abroad. The challenges to MSMEs sector from de-reservation, WTO
obligations, removal of QR restrictions, etc are a matter of concern to commercial
banks as well, as the banks too have substantial stake in the growth and
prospects of the sector. The Bank will endeavor to continue to support the
MSMEs sector in these uncertain times and achieve the benchmarks set by RBI in
regard to priority sector lendings. Bank has issued detailed circular guidelines on
finance of MSME units wherein the allocation of sub-limits to large corporate
borrowers for payment of dues to MSME units for supply of materials to
borrowing corporate is specified.

16.6 Banks lending to Medium Enterprises will not be included for the purpose of
reckoning under priority sector. As per RBI instructions, all advances granted to
units in the Khadi & Village Industries (KVI) sector, irrespective of their size of
operations, locations and amount of original investment in plant and machinery
will be covered under priority sector advances and will be eligible for
consideration under the sub-target (60%) of the small enterprises segment
within priority sector.

Loan Policy 2014-15 75


CHAPTER 17: ADVANCES TO SERVICE SECTOR

17.1 The Indian economy gets integrated with the global economic order, the
share of the services sector in the GDP and its contribution to future growth is
likely to outpace that of the industrial and primary sectors. Already, the services
sector accounts for approximately 50% of the GDP. The pattern of development
of this sector has been in line with that of other developed countries of the world
and it is possible that by the end of this decade, India may largely get
transformed into a services economy.

17.2 As per the World Trade Organization (WTO) services can be divided in 12
different sectors:

a) Communication
b) Business Services, including professional and computer
c) Educational

d) Environmental

e) Health

f) Financial Services like Insurance and Banking

g) Tourism and Travel

h) Recreational and Cultural

i) Transport

j) Construction and Engineering

k) Personal, Community and Social

l) Miscellaneous and others

The inclusion of last item is a recognition on the part of WTO including that the
list cannot be exhaustive and new categories of services would emerge with the
pace of economic growth and modernization.

17.3 All the above service segments offer tremendous potential for the Bank
finance. Bank has been innovating new marketing and product strategies so as
to realize the potential offered by this sector. Recognizing the special nature of
the asset and liability profile, output etc. of such units, guidelines on lending to
various activities of services sector are in place. Liberalized norms in respect of
credit appraisal standards, collateral security, rigor of assessment are permitted.
The generally indicative norms, subject to suitable modifications for specific sub
segments within the service sector are:

i) The current ratio and TOL/TNW ratio (as per audited balance sheet not
older than 12 months) should be as per the indicative levels as given under:

Current ratio not below 1 is acceptable for units with FBWC limit of up to `5
cr.

Loan Policy 2014-15 76


Depending upon the activity, for units with FBWC limits of above `5 cr, a
current ratio lower than 1.33 and up to 1.20 may be considered
acceptable.
TOL/TNW ratio higher than the generally accepted ceiling of 3 and up to 5
would be permissible depending on the type of activity.
ii) The unit should have earned profits (post tax) in each of the immediate
preceding 3 years. However, if the unit has been in existence for a lesser
period, it should have earned net profit (post tax) in the preceding year of
operation in which it has been in existence.

17.4 Detailed administrative instructions regarding lending to services sector are


in place and are reviewed from time to time. Specific authority structures for
deviations, where considered appropriate, from these indicative levels for select
financial parameters indicated above have also been laid down.

Loan Policy 2014-15 77


CHAPTER 18: ADVANCES TO RURAL SECTOR

18.1. GENERAL

18.1.1 With its predominant presence in the rural and semi urban areas, the
bank has been a pioneer in agricultural banking in the state of Karnataka. The
Agricultural Development Branches (ADBs) and Agriculture Banking Divisions
(ABDs) specialise in agricultural finance.

18.1.2 However, with the changing demographics and lifestyles in rural India, a
strong need for providing comprehensive financial services encompassing
savings, credit remittance, insurance and pension product to the rural populace,
has been felt by the Bank.

Agriculture:
18.1.3 The Credit Policy and procedures for agricultural segment are by and large
determined by RBI and NABARD and State Level Bankers Committee (SLBC). The
policies and procedures substantially differ from those of other segments.
Lending to this sector is characterized by the twin features of Service Area
Approach (SAA) and scale of finance.

18.1.4 SAA is now applicable only to Govt. sponsored schemes. The Bank will
leverage on this relaxation for new lending and also go for takeover of quality
assets from other Banks. The Bank has put in place separate guidelines for take
over of Agri. Advances.

18.1.5 The scale of finance for crop loans is worked out by the District Level
Technical committee (DLTC) for various crops grown locally. Such scale of finance
is uniformly adopted by all commercial banks. However, with a view to improve
the flow of credit to the agri borrowers and meet their credit requirements
adequately, DGMs (Module) in the Bank are empowered to approve realistic scale
of finance with the scale of finance approved by the Technical Committee as
the floor for various crops assessed by the Banks Technical officers.

18.1.6 The Bank's branches support agriculturists involved in a wide range of


agricultural activities such as crop production, horticulture, plantation crops,
floriculture, farm mechanization, land development and reclamation, digging of
wells, tube wells and irrigation projects, forestry, construction of cold storages,
storage godowns and processing of agricultural products. The Bank also supports
allied Agri activities such as dairy, fisheries, livestock, rearing of silk worms,
poultry, piggery etc.

18.1.7 The following loans and advances for agricultural and allied activities are
considered as priority sector advances:

Direct finance
Loan Policy 2014-15 78
Short Term Loans for raising crops (Crop Loans)
Medium and Long Term Loans for agricultural production and development
needs

Indirect Finance

Credit for financing distribution of fertilizers, pesticides, seeds etc.


Loans to electricity boards for rural electrification
Loans to farmers through PACS, FSS and LAMPS.
Deposits held by the banks in rural Infrastructure Development fund (RIDF)
maintained with NABARD.
50% of the amount of refinance granted by the sponsor banks to RRBs.
Subscription to certain bonds issued by Rural Electrification Corporation
(REC).
Subscription to certain bonds issued by NABARD, etc.

18.1.8 The lending under indirect finance should not exceed one-fourth of the
agricultural subtarget of 18% i.e. 4.5% of net bank credit.

18.1.9 Waiver of collateral security in agricultural segment is generally


permitted upto `50,000/- , though scheme specific ceilings have been prescribed.
The ceiling of `50,000/- has been revised to `1 lac for agricultural loans

18.1.10 Bank has recognized that setting up high value / hi-tech agricultural
projects has been engaging the attention of entrepreneurs of late, and projects
covering agro/ food processing , biotechnology etc., are now being set up in the
country. With a view to respond to these emerging opportunities, the Bank
extends support in a planned way to these unfolding avenues. Further, Bank has
identified following thrust areas for short term business opportunities with low
incidence of NPAs:

Kisan Credit Cards (KCCs)


Seed growers and processors
Warehouse receipts
Gold loans
Pulses, oilseeds and spices

18.2 BANKS ROLE UNDER LEAD BANK SCHEME

The bank has lead bank responsibility in three districts in Karnataka. The annual
credit plans for these districts are prepared and launched at the beginning of a
financial year. The progress of various State sponsored poverty alleviation/
employment generation schemes is reviewed in DCC / DLRC meetings. The Bank
also has to achieve the allocated targets by substantial participation in the
Annual Credit Plans (ACP) in the remaining districts in Karnataka.

18.3 EMPLOYMENT GENERATION PROGRAMMES OF GOI

Swarnajayanti Gram Swarozgar Yojana (SGSY), Swarna Jayanti Sahari Rozgar


Yojana (SJSRY) Scheme for Liberation & Rehabilitation of Scavengers (SLRS) and
Prime Ministers Rozgar Yojana (PMRY) are the four important poverty alleviations

Loan Policy 2014-15 79


and employment generation programmes launched by GOI. Of these schemes,
as the names suggest, while SGSY (which replaces IRDP) is operative exclusively
in the rural areas for the rural poor, SJSRY is for the urban poor operative in
urban centers. SLRS and PMEGP schemes cover both urban and rural
centers. All these schemes are being enthusiastically implemented by the
Bank.

18.4 MICRO CREDIT

Of late, micro credit has evolved as an economic development approach for the
benefit of low-income individuals in society. The term refers to extension of
financial services to the low-income groups including those who are self-
employed. These services include savings, credit, skill upgradation, etc. In these
endeavors the bank has been supporting many NGOs who are active in this field,
especially in the formation and development of volunteer groups known as Self
Help Groups (SHGs). The bank is committed to timely and adequate credit to
SHGs engaged in the upliftment of low income groups. Further, to increase its
outreach to a large number of low income people, Bank is also financing Micro
Finance Institutions/ Non Government Organizations including NBFCs engaged in
micro finance activities, for on-lending to Self Help Groups and to individuals.

18.5 FINANCIAL INCLUSION:

Despite commendable expansion of branch network by commercial banks in


rural areas and their concerted efforts to reach out to the rural populace, large
sections of the rural population still remain outside the coverage of the formal
banking system. Bank, therefore, recognizing the need for and emerging
opportunities in financial inclusion, has been channelizing its focus and efforts
towards provision of affordable financial services to those who tend to be
excluded and are remaining excluded from the formal financial system, Bank, in
realizing this objective, has been invigorating not only the existing branch
network but also is leveraging on alternative delivery channels such as by
engaging business facilitators/correspondents and through wider application of
technology.

18.6 Lending to Priority Sector: As per RBI guidelines.

Loan Policy 2014-15 80


CHAPTER 19: ADVANCES TO PERSONAL SEGMENT

19.1 The Banks Personal Segment Advances aim at providing affordable loan
products for meeting credit needs of the Indian nationals, NRIs and Persons of
Indian origin, to people belonging to every economic strata, for fulfilling their
lawful aspirations in accordance with the Banks judgment of loan repayment
capacity and risk perception of the borrowers in line with RBI/Government
policies.

The Bank has introduced the. Loan Origination System (LoS) in the Bank and the
salient features are as under.

19.2 LoS is an effective tool which allows the Bank to bring the best in its loan
approval mechanism. It also compliments effectively in our existing retail lending
systems with minimum amount of rework and additional follow up with
customers which is crucial to satisfying the discerning customers.

LoS brings loan processing to a central processing unit scenario through a web
based module integrating the sourcing, field investigation and processing units.
It incorporates work flow based processing to cater to the multi-tier approval and
deviation processes of the Bank. The work flow model divides the data entry of a
customers application in to various sub stages till the application is pending for
final authorization. It enables the user to track down all the different stages of a
customers application at any given point of time.

19.3 Urbanization, increase in disposable incomes along with growing aspiration


levels and consumerism provides significant business potential to market
Housing and other P-segment loans. Our brand image, fully computerized
extensive branch network and large customer base also enable us to leverage
these strengths to garner a higher share of the tremendous growth potential in
this sector.

19.4 Personal banking asset products encompass product lines like (i) Home
Loans (ii) Auto Loans (iii) Education Loans (iv) Personal Loans. The first three
product lines are for acquisition /financing of a specific product. The fourth
product line is general purpose or non-specific, including loans like flood loans.
Similarly, Education Loans, Reverse Mortgage Loan, Loan against Pension, etc
address the credit needs of different age groups of the population. However, the
Bank does not give loans for speculative purposes. The Bank aims at being a
leading player in Karnataka in Retail Loan market by adopting the following
strategies :

Launching innovative and customer friendly products with value added


features to improve our product profile and to suit the specific
requirements of various target clientele.
Ongoing review and modification of existing schemes
Periodic updation of instructions, scheme-wise, to improve awareness
about the products at the branches
Periodic training of operating personnel on an ongoing basis to hone their
product awareness as also marketing skills
Loan Policy 2014-15 81
Thrust on marketing High Value and Big Ticket loans
Special focus to establish tie-ups with Central / State Governments,
reputed corporations and other important institutions for granting P-
segment loans to their employees
Entering into tie-ups with various reputed builders, auto manufacturers,
auto dealers, etc
Schemes targeted at specific customer groups with concessional interest
rates, processing fee and margin
Special delivery platforms like Personal Banking Branches, Multi Product
Sales Team (MPST) for aggressive marketing
Centralized Processing Centers (RACPCs / RASECs) set up for quick
processing and sanction of loan
Adequate discretionary powers with various functionaries for sanction as
also for improvement in pricing to reduce the Turn Around Time
Effective media strategy to give wide publicity about the various products
Strengthening of business sourcing capabilities through development of
new business sourcing channels including cyber channels, individuals and
institutional marketing consultants, marketing associates, loan counselors
on fee payment basis
Leverage cross marketing channels through Credit, SME and Agricultural
Banking Departments

19.5 The loans and advances under personal segment have several distinct
features as compared to loans to other segments. Some of the distinct features
of lending to this segment are given below:

(i) Eligibility Criteria: The eligibility criteria of borrowers under each


scheme are different depending upon the nature and purpose of the
scheme.

(ii) Purpose of Loan: Varies from scheme to scheme e.g. housing, car
loan etc., are meant for acquisition of assets whereas personal loans
are generally availed for consumption. Educational loans are
extended for pursuing studies in India and abroad. The Educational
loan scheme has been formulated as per IBA/ RBI guidelines. Housing
loans schemes would aim at facilitating achievement of objectives spelt
out in the National Housing and Habitat Policy of Government of India.

(iii) Appraisal / assessment: The assessment is primarily based on


the repayment capacity of the borrower, the current verifiable income
of the borrower (except in respect of educational loans) and availability
of required margin (except in respect of personal loans) etc. Risk
Scoring Models are being made use of for assessing/rating the
borrowers in certain schemes. The model scores the applicant on the
basis of information on personal data, income, net worth, organization
(employer) and banking history etc. The income of the spouse and
other family members can also generally be reckoned to arrive at the
repayment capacity of the borrower, provided the spouse/ other family

Loan Policy 2014-15 82


members join as co-borrowers or a guarantors. The credit decision is
not linked with the risk scoring model in case of Educational Loan.

iv) Delegation of financial Powers: Adequate powers are delegated to the


various functionaries and the powers are different under each scheme.

(v). Disbursing branches: Sanction and disbursal of loans under


certain schemes is restricted to specialised/ computerised/ identified
branches. Suitable branches are identified for this purpose.

(vi) Nature of facility: The loans are made available by way of overdraft
demand loan or term loan (medium or long term). These could be clean
or secured, depending upon the scheme.

(vii) Pricing: The pricing could be either on a floating rate or fixed


interest rate. If on floating rate, the pricing will be linked to Banks base
rate. The spread may vary depending on the scheme, tenor and amount.
Further, the spread would be higher in the case of clean loans and loans
which carry higher risks due to relative illiquidity of security. To an
extent, the pricing is also market determined. Discretionary powers are
vested with various functionaries to quote improvement in pricing on a
selective basis having regard to tie-ups with corporates/builders, High
Value Loans, market compulsions, etc. Such discretionary powers for
pricing improvements are reviewed from time to time. Discretionary
powers are also vested with various functionaries to permit relaxations in
margin and processing fee on Home Loans.

viii) Fixed Interest Rates: Fixed interest rates are a special feature
of P-segment Loans. Loans are granted on fixed interest rate basis up to
certain ceilings only i.e. Housing Laons up to `1 crore. Further, Housing
Loans on fixed interest rate basis are granted subject to a force majeure
clause authorizing the bank to change the rates suitably and
prospectively in case of any major volatility in interest rates. Housing
Loans on fixed interest rates are also subject to interest rate reset clause
in terms of which fixed rates may be reset at the end of every two years
on the basis of the then prevailing interest rate scenario. To withstand
competition in the market, scheme for sanctioning loans at fixed interest
rates can also made available to certain category of borrowers.

ix) Maturity of Advances: While the maturity of term loans should not
normally exceed 8 years, in respect of Housing Loans, the repayment
period is now permitted upto 30 years. In respect of Educational Loans,
the loan is normally repayable in 5 to 8 years after commencement of
Loan Policy 2014-15 83
repayment. As the repayment would commence after a moratorium
period, which generally covers course period plus 6 months or 1 year
after getting employment, whichever is earlier, the tenure of Education
Loans may also extend beyond 8 years. Further extension of tenure can
be permitted upto a maximum of 5 years if interest rates on the existing
loans go up and the EMIs are left unaltered.

(x) The extension of repayment period in case of rise in interest rate


for floating rate loans, so as to keep the EMI unchanged is applicable to a
whole class of accounts viz. Housing/Educational/Car loans etc.,
uniformly.

(xi) Repayment: Unlike in other segments, the repayments in term loans


are on the basis of equated monthly installments (EMI), covering
repayment of both the loan and interest.

The Bank may use repayment option through stepped up / stepped-down


monthly installments, balloon repayments etc., in sync with the
anticipated income of the borrower during the loan tenor
In case of Reverse Mortgage Loan scheme, repayment of loan is not
insisted upon during the lifetime of the borrower. The loan is recovered
through sale of mortgaged property if legal heirs do not come forward to
repay the loan.
Rephasement of installment(s)/ interest is permitted in genuine cases of
borrowers inability to adhere to repayment schedule.

xi) No prepayment penalty for all loan schemes under Personal Segment
advances.

xii) Security: This differs from scheme to scheme depending on the purpose of
the loan.

xiii) Take-overs: Takeover of personal segment advances is permitted in respect


of Housing loans and Car loans. Detailed guidelines for takeover of
housing loans from other banks/ FIs have been prescribed.

xiv) Asset quality: Bank will take appropriate initiatives within the scope of
regulatory guidelines for keeping asset quality at acceptable levels.

xv) Priority sector classification: As per RBI instructions from time to time.

xvi) Outsourcing: Some of the processes viz., Income verification etc., may be
outsourced (KYC compliance would not be outsourced as it is a core
banking function).

19.6 In view of the Banks thrust on lending to P segment and the expected
high rate of growth, the Bank would periodically undertake assessment of risk
concentration in P segment advances. The risk management parameters i.e.
Credit risk/Market risk/Operational risk in respect of lending to P-segment
Loan Policy 2014-15 84
borrowers will also be examined and reviewed annually by the P&SB Department
in consultation with the Risk Management Department.

19.7 In Retail Scoring proposals are given 10 grades from 1 to 10 and classified
into three categories i.e. (a) Clear sanction (b) may be considered after credit
enhancement or application to be referred to next higher authority and (c) Decline

CHAPTER 20: EXPORT CREDIT

20.1 Export Sector has been recognised as a thrust area considering its
importance and its contribution to the economy. Therefore, the sector is being
presently financed at lower rates, with flexibility in financing norms.

20.2 Export finance is by and large regulated through directives / guidelines


issued by the Reserve Bank of India (RBI), Director General of Foreign Trade
(DGFT) and the Foreign Exchange Dealers Association of India (FEDAI).
Export finance is broadly classified into two categories:

(i) Pre-shipment finance and


(ii) Post-shipment finance

20.3 Pre-shipment finance, often referred to as Rupee Export packing Credit


(EPC) is extended as Working Capital for purchase of raw materials, processing,
packing, transportation and warehousing of goods meant for export. Both
manufacturers as well as merchant exporters are eligible to avail Rupee Packing
credit at concessional rate of interest. Pre-shipment credit is available in foreign
currency also. It has two essential features, viz., existence of an export order and
/or letter of credit and liquidation of the credit by submission of export
documents within a stipulated period. In case of exporters of proven standing,
the facility can also be extended on a running account basis provided the
conduct of the account is satisfactory and orders are lodged subsequently within
a reasonable time. Substitution of contracts / export orders are also permitted in
case of running accounts.

EPC can also be provided to units established in SEZ/EPZ/AEPZ/EOUs for supply


to units in the same or another SEZ/EPZ/AEPZ/EOU although no movement of
merchandise takes place across the borders of the country.

20.4 There is no fixed formula for determining the quantum of finance to be


granted to an exporter against specific orders/LCs. The guiding principle to be
applied in all such cases is a concept of need-based finance. The period for which
the bank gives packing credit depends upon the manufacturing /trade cycle or
specific requirements of the individual export, normally not exceeding 180 days.
The percentage of margin is determined depending on the nature of order,
Loan Policy 2014-15 85
commodity, capability of exporter, etc., keeping in view the spirit behind RBI
guidelines for liberal finance to export sector.

20.5 Since packing credit loans are concessional and specific and purpose
oriented advances it will be the responsibility of the bank to ensure proper end
use of amounts disbursed to the exporters. RBI has laid down norms for disbursal
of loan amounts, maintenance of accounts, follow up and monitoring and
liquidation of packing credit. As the advance is granted on concessionary rates
and on relaxed terms and conditions, it is obligatory on the part of the exporter
to comply with the terms and conditions of the advance. In case of any default,
the advance will attract commercial rate of interest ab initio.

20.6 Post-shipment finance can be extended up to 100% of the invoice value of


goods. It can be short term or long term finance depending upon the payment
terms offered by Indian exporters to overseas buyers. The maximum period
usually allowed for realisation of export proceeds is 180 days from the date of
shipment, with certain exceptions. RBI has issued guidelines in regard to
eligibility for post-shipment finance, basis of post-shipment finance, maintenance
of accounts by banks; follow up of export bills, liquidation of post-shipment
finance, etc. Post shipment finance is also available both in rupees and specified
foreign currencies. Very often export business takes place without a support of
documentary letters of credit and we normally finance the exporters by
purchasing the bills drawn by them on foreign buyers. While purchasing the bill,
the bank takes into consideration the track record of the exporter, country risk,
nature of merchandise, terms of payment, payment record of the drawee, etc.
Advances against duty Drawback receivable are also granted under Post-
shipment Finance.

20.7 RBI has been traditionally pursuing a policy to make available export credit
at reasonably low interest rate with a view to helping the exporters to be
competitive vis-a-vis their competitors. RBI have rationalised the interest rates
on export credit which are indicated by RBI periodically in their Monetary &
Credit Policy as ceiling rate in respect of all categories of export credit so that
interest rate charged by the banks can actually be lower than the prescribed
rate. Such ceiling rates will be linked to Base Rate of respective banks, as
applicable to other domestic borrowers. The measures will reduce the interest
costs for exporters besides improving quality of service by ensuring competition.

20.8 In accordance with RBI guidelines, Bank has introduced Exporters Gold card
Scheme (EGCS) for credit worthy borrowers with good track record. The EGCS is
on highly competitive terms with concessionary rate of interest, limits available
for a period of three years with annual reviews, additional 20 percent stand by
limit etc.

20.9 As far as deferred exports are concerned, RBI has allowed banks to charge
their normal term lending rate based on the credit rating of the borrower. In this
connection, deferred exports are those where the realization period exceeds 180
Loan Policy 2014-15 86
days, with certain exceptions. All deferred exports are subject to regulatory
guidelines contained in Project Export Manual (PEM) published by RBI.

20.10. Circular with regard to fast track clearance of export credit in terms of
paragraph (v) of Reserve Bank of Indias Master Circular on Rupee/Foreign
Currency Export Credit and Customer Service to Exporters dated July 1, 2014
that dealt, inter alia, with facilitation mechanism, time-frame for disposal of
export credit proposals, joint appraisal, intervening layers of approval, setting up
of credit committee, etc has been issued separately.

20.11 ECGC Cover: Bank has obtained whole turnover Guarantee for Export
Credit ECGC, with a view to safeguarding Banks as well as borrowers interest as
also to reap the benefit of Risk Weight related concession available to ECGC
guaranteed accounts.

20.12 Letter of Comfort (LoC): In order to promote investment activity and to


further liberalize the procedure relating to trade credits for imports, Authorised
Dealers have been permitted by RBI to issue guarantees / Letters of Undertaking
/ Letters of Comfort in favor of overseas suppliers, banks and financial
institutions, up to USD 20 million per transaction for a period of up to one year
for import of all non-capital goods permissible under Foreign Trade Policy (except
gold, palladium etc) and up to three years for import of capital goods, subject to
prudential guidelines issued by RBI from time to time. The period of such Letters
of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit,
reckoned from the date of shipment.

As per the extant instructions of RBI, Letters of Comfort issued have to be


treated as Financial Guarantee and therefore attract 100% Credit Conversion
Factor (CCF) for the purpose of Risk Weight computation. Suitable operative
guidelines and Service Charges to be levied are in place for conduct of LoC
business by the operating units / branches.

In view of the higher CCF and consequent higher capital allocation, LoCs are to
be issued only to high rated borrowers (SB-7and above) and on a selective basis.
For the lower rated borrowers, if the LoC request is to be entertained, higher
cash margin has to be stipulated with a view to cushioning the impact of higher
risk weight. A minimum cash margin of 25% for Term loan (project finance)
related LoCs and 10% for working capital related LoCs for poorly rated borrowers
need to be ensured over and above the normal LC margin already held.

As per the extant instructions of RBI, Letters of Comfort issued have to be


treated as Financial Guarantee and therefore attract 100% Credit Conversion
Factors (CCF) for the purpose of Risk Weight computation. Suitable operative
guidelines and services charges to be levied are in place for conducting of LoC
business by the operating units / branches.

20.13 Forward Contracts: Authorized Dealer (AD) branches are permitted to allow
importers / exporters to hedge their foreign currency exposure by booking
forward contracts. Forward contracts can be booked on the basis of declaration

Loan Policy 2014-15 87


of an exposure and based on past performance upto the average of the previous
three financial years (April-March) actual import/export turnover or the previous
years actual import / export turnover, whichever is higher, subject to conditions
if any stipulated by the RBI from time to time. Bank has put in place a Board
approved hedging policy and operative guidelines for booking / cancellation of
forward contracts are issued from time to time.

The exposure under forward contracts has to be computed under current


exposure method and the same has to be reckoned for over all exposure of the
borrower.

Loan Policy 2014-15 88


CHAPTER 21: ADVANCES TO LARGE CORPORATES

The financial environment has changed rapidly since 1991, with liberalization in
the areas of trade, industry, services and exchange control, deregulation of
interest rates, removal of entry barriers for new banks, widening and deepening
of financial markets, entry of mutual funds, FIs, FIIs and insurance companies.
Further, significant changes have come about in the way, Corporates
conceptualize business models and operating processes, to improve efficiency of
their inventory / receivables management procedures resulting in reduced
dependence on bank borrowings.

With the interest margins on funded exposures of top corporates coming under
pressure, the fee-based transactions provide the much needed alternative.
Hence, concerted efforts and continuous exploration of emerging opportunities
are made to increase income in fee-based business covering the areas of Trade
Finance and Forex. To capture the fee-based business, it is also considered
essential to continue the credit exposures especially the short term exposures
at very competitive rates. It is necessary to retain the relationship by leveraging
it to capture the funds flow of the corporates and the related business
opportunities, which feed the various business groups.

The advanced technology developed by Cash Management Products and


Corporate Internet Banking Departments are utilized to address the needs of the
entire value chain such as handling payments and collections, products such as
salary payments, vendor and other counterparty payments, dealer collections,
vendor and dealer finance, multi-city cheques, dividend and interest warrants
business.

As the terms and conditions governing the advance may differ from customer to
customer depending upon its requirements, Banks policy permits customer
specific documentation specially drafted by the legal experts and duly vetted by
the Banks Law Officer (in Head Office).

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CHAPTER 22: Corporate Loans

Corporate Loans as a product has been in existence in the Bank since 1999. The
scheme is applicable to corporate customers if C&I (Mfg) and SME (SSI)
segments with borrower rating SB7 and higher. Scheme details and detailed
operative guidelines are in place.

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Annexure 1

NORMS AND APPROACH FOR EXTENDING UNSECURED LOANS TO CORPORATES.

Sl.N Parameter Benchmark


o

1. Customer whether Exposure should be restricted to existing customers


existing or fresh only. Proposals from new customers may also be
customers entertained selectively considering the potential value
of the connection with stringent norms and takeovers
may be permitted only by the Credit Committees, above
ZOCC.

2. Purpose Any purpose related with the commercial activity of the


borrower.

3. Minimum Quantum As per our delegation of financial powers for ZOCC the
powers for sanction of clean and unsecured advance is:

a. SB 1 to SB 5 (NR) customers `30.00 lacs.

b. Others `25.00 lacs.

Above this, the respective sanctioning authority i.e. EC/


HOCC-I, II / NWCC will sanction based on their
sanctioning powers. Hence, we need not stipulate
minimum quantum.

4. Banking with us At least for the previous three years in case of existing
units.

5. IRAC status Standard accounts only.

6. RMD prescription on Positive, Moderately positive or Neutral. Credit rating


industry outlook prescription is linked to industry outlook.

7. Credit Rating Not below SB-10 for units in industries where outlook is
Positive or Moderately Positive and SB-8 for industries
where outlook is neutral.

8. External Rating Not below AA or equivalent. Wherever applicable.

9. Tenor Not to exceed 3 years.

10. Rate of interest Floating linked with SBMPLR but not below 1.25%

Loan Policy 2014-15 91


below SBMPLR.

11. Performance Current Ratio > 1.00


Parameters
TOL/ TNW < 3.00

PBT/ Sales > 5%

DSCR (including proposed exposure, if applicable) >


1.75

12. Deviations from the As deviation in rating comes under major deviation,
Loan Policy or approval for permitting deviation should be as per the
parameters authority structure laid down in the Loan Policy.
prescribed above However, any deviation in respect of other norms
prescribed herein needs approval by the authority one
step higher than the Sanctioning Authority for all the
loans falling within the discretion up to HOCC-I

Loan Policy 2014-15 92


Annexure II
Classification of exposures as Commercial Real Estate with illustrative examples

Section I: Classification of exposures


Reserve Bank of India has issued guidelines on Classification of Exposures as
Commercial Real Estate (CRE) vide DBOD.BP.BC.No.42/08.12.015/ 2009-10 dated
September 09, 2009. RBI has mentioned that the guidelines contained in the
circular would be applicable with immediate effect.
2. Approach followed by RBI
2.1 The definition of Commercial Real Estate exposure is closely aligned to Basel
II definition.
A loan should be classified as an exposure to CRE if the following conditions are
satisfied
a. Where the loan results in the creation / acquisition of real estate (such as
office buildings to let, retail space, multifamily residential buildings, industrial or
warehouse space and hotels)
b. The prospects of repayment would depend primarily on the cash flows
generated by these assets (lease or rental payments or the sale of assets)
c. The prospect of recovery in the event of default would also depend on the
cash flows generated from such funded asset.
It follows that a loan would not be classified as CRE if the repayment primarily
depends on other factors such as operating profit from business operations,
quality of goods and services, tourist arrivals etc.
2.2 As regards financing of land acquisition by banks the extant instructions are
as follows:
Banks may extend finance to public agencies, and not to private builders, for
acquisition and development of land provided it is a part of the complete project
including development of infrastructure such as water systems, drainage, roads,
provision of electricity, etc. In terms of the above circular, where land is acquired
and developed by State Housing Boards and other public agencies, banks may
extend credit to private builders on commercial terms by way of loans linked to
each specific project. However, banks are not permitted to extend fund based or
non fund based facilities to private builders for acquisition of land even as part of
a housing project.

Loan Policy 2014-15 93


Finance can also be granted to individuals for purchase of a plot, provided a
declaration is obtained from the borrower that he intends to construct a house on
the said plot, in due course as laid down by the Bank vide P&S circular no.42/
2002-03 dated 16.01.2003.
2.3 The CRE exposures collateralized by eligible credit risk mitigants would be
reduced to the extent of risk mitigating effects of the collateral as per the
provisions of para 2.1.1 of RMD circular no 21/2007-08 dated 30.12.2008 on
BASEL II - THE NEW CAPITAL ADEQUACY FRAMEWORK - Guidelines for
implementation.

2.4. CRE exposures to the extent secured by Commercial Real Estate would
attract a risk weight of 100 per cent. In cases where a part of the CRE exposure
is not covered by the security of commercial real estate, that part would attract a
risk weight for CRE exposure or as warranted by the external rating of the
borrower, whichever is higher.

2.5 CRE-RH segment will attract a lower risk weight of 75% and lower standard
asset provisioning of 0.75% as against 100% and 1.00%, respectively for the
CRE segment (Presently, the applicable instructions are contained in RMD
Circular No.18/2013-14 dated 24.03.2014)

3. Simultaneous classification of CRE into other regulatory categories


It is possible for an exposure to get classified simultaneously into more than one
category, as different classifications are driven by different considerations. In
such cases, the exposure would be reckoned for regulatory/ prudential exposure
limit, if any, fixed by RBI or by the Bank, for all the categories to which the
exposure is assigned. For the purpose of capital adequacy, the largest of the risk
weights applicable among all the categories would be applicable for the
exposure.
For instance lending in respect of Special Economic Zones (SEZs) has been
defined as one of the categories eligible for classification as Infrastructure
Lending. Detailed definition of Infrastructure Lending as contained in section
2.8 of the Loan Policy Document. Since certain types of exposures in respect of
SEZs (please see item No. 4 in Part A of Section 2) would have the characteristics
of CRE Exposure as per the approach outlined above, these would simultaneously
be classified as both CRE Exposure and Infrastructure Lending. In such cases,
the risk weight applicable would be that for CRE exposure and not related to
borrowers rating. However, the exposure would be eligible for all the regulatory
concessions available to Infrastructure Lending as per extant RBI guidelines.
Similarly, an investment in the equity of a real estate company or a Mutual
Fund/Venture Capital Fund (VCF) / Private Equity Fund (PEF) which invests in the
equity of real estate companies, would be sensitive to the movement in prices of
real estate, in addition to having a correlation with the general equity market.
Therefore, these would be reckoned both as capital market exposure (for the
purpose of compliance with the regulatory ceiling fixed by RBI) and the internal
ceiling for real estate exposure fixed by the bank itself, as required in terms of
extant RBI guidelines. At present, such exposures would attract a risk weight of
Loan Policy 2014-15 94
125 per cent (as applicable to equity exposures) /150 per cent (as applicable to
exposure to VCFs), as the case may be, as these risk weights are higher than
that applicable to CRE at 100 per cent. The exposure should also be reported to
RBI under both the classifications with an appropriate foot note to avoid double
counting. Branches could deal with any other instances of dual classification of
exposures involving exposure to CRE, based on these principles.
4. In order to assist branches in determining as to whether a particular exposure
should be classified as CRE or not, some examples based on the principles
described above are given in Section 2. Based on the above principles and
illustrations given in Section 2 branches hould be able to determine, whether an
exposure not included in Section 2 is a CRE or not and should record a reasoned
note justifying the classification.

Section 2: Illustrative Examples

A. Exposures which should be classified as CRE.


1. Loans extended to builders towards construction of any property which is
intended to be sold or given on lease (e.g. loans extended to builders for housing
buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping
malls, office blocks, theater's, amusement parks, cold storages, warehouses,
educational institutions, industrial parks)
In such cases, the source of repayment in normal course would be the cash flows
generated by the sale/lease rentals of the property. In case of default of the loan,
the recovery will also be made from sale of the property if the exposure is
secured by these assets as would generally be the case.

2. Loans for multiple houses intended to be rented out.

The housing loans extended in cases where houses are rented out need to be
treated differently. As per Basel II Framework, loans secured by a single or small
number of condominium or cooperative residential housing units in a single
building or complex also fall within the scope of the residential mortgage
category and national supervisors may set limits on the maximum number of
housing units per exposure. Therefore, such loans need not necessarily be
classified as CRE Exposures. However, if the total number of such units is more
than two, the exposure for the third unit onwards may be treated as CRE
Exposure as the borrower may be renting these housing units and the rental
income would be the primary source of repayment.
Loan Policy 2014-15 95
3.Loans for integrated township projects

Where the CRE is part of a big project which has small non-CRE component, it
will be classified as CRE exposure since the primary source of repayment for
such exposures would be the sale proceeds of buildings meant for sale.

4. Exposures towards development of SEZ

Bank finance for acquisition of land to private developers for setting up of SEZ is
not permissible as per extant instructions as stated in para 2.2 of the Annex to
this circular. Banks can finance cost of land development, which will be classified
as CRE for the reason that the source of repayment would be the lease rentals of
the developed plots / sheds.
The following, may however, be noted:
In cases where there are arrangements to insulate the lease rentals from
volatility in the Real Estate prices by way of lease agreements for periods
not shorter than that of the loan and there is no clause which allows
downward adjustment in the lease rentals, such cases need not be treated
as CRE from the time such conditions get fulfilled.

Branches should keep in mind the substance of the transaction rather than
the form. For example, it is possible that a SEZ may be developed by a
single company entirely or mainly for its own use. In such cases the
repayment will depend on the cash flows generated by the economic
activities of the units in the SEZ and the general cash flow of the company
rather than the level of real estate prices. It should not then be classified
as CRE.

There can be co-developers in an SEZ who undertake a specific job such as


provision of sewerage, electrical lines etc. If their repayment are not
dependent on the cash flows generated by the CRE asset, such exposures
would not be classified as CRE. This illustratively would be the case where
the co-developer is paid by the main developer based on progress in work.

5. Exposures to real estate companies

In some cases exposure to real estate companies is not directly linked to the
creation or acquisition of CRE, but the repayment would come from the cash
flows generated by Commercial Real Estate. Such exposures illustratively could
be:
Corporate loans extended to these companies
Investments made in the equity/units/debt instruments of these
companies
Extension of guarantees on behalf of these companies
Derivatives transactions entered into with these companies.

6. Exposures to MFs/VCFs/PEFs investing primarily in the real estate companies

Loan Policy 2014-15 96


Exposure to MFs/VCFs/PEFs investing primarily in the real estate companies
would be classified as CRE exposure though the exposure would not be directly
linked to the creation or acquisition of CRE, because the repayment would come
from the cash flows generated by Commercial Real Estate.

7. General purpose loans where repayment is dependent on real estate prices

Exposures intended to be repaid out of rentals/ sale proceeds generated by the


existing CRE owned by the borrower, where the finance may have been extended
for a general purpose.

B. EXPOSURES WHICH MAY NOT BE CLASSIFIED AS CRE

1. Exposures to entrepreneurs for acquiring real estate for the purpose of their
carrying on business activities, which would be serviced out of the cash flows
generated by those business activities. The exposure could be secured by the
real estate where the activity is carried out, as would generally be the case, or
could even be unsecured.
a) Loans extended for construction of a cinema theatre, establishment of an
amusement park, hotels and hospitals, cold storages, warehouses, educational
institutions, running haircutting saloons and beauty parlors, restaurant,
gymnasium etc. to those entrepreneurs who themselves run these ventures
would fall in this category. Such loans would generally be secured by these
properties.
For instance, in the case of hotels and hospitals, the source of repayment in
normal course would be the cash flows generated by the services rendered by
the hotel and hospital. In the case of a hotel, the cash flows would be mainly
sensitive to the factors influencing the flow of tourism, not directly to the
fluctuations in the real estate prices. In the case of a hospital, the cash flows in
normal course would be sensitive to the quality of doctors and other diagnostic
services provided by the hospital. In these cases, the source of repayment might
also depend to some extent upon the real estate prices to the extent the
fluctuation in prices influence the room rents, but it will be a minor factor in
determining the overall cash flows. In these cases, however, the recovery in case
of default, if the exposure is secured by the Commercial Real Estate, would
depend upon the sale price of the hotel/hospital as well as upon the maintenance
and quality of equipment and furnishings.
The above principle will also be applicable in the cases where the developers /
owners of the real estate assets (hotels, hospitals, warehouses, etc.) lease out
the assets on revenue sharing or profit sharing arrangement and the repayment
of exposure depends upon the cash flows generated by the services rendered,
instead of fixed lease rentals.
b) Loans extended to entrepreneurs, for setting up industrial units will also fall in
this category. In such cases, the repayment would be made from the cash flows
generated by the industrial unit from sale of the material produced which would
Loan Policy 2014-15 97
mainly depend upon demand and supply factors. The recovery in case of default
may partly depend upon the sale of land and building if secured by these assets.
Thus, it may be seen that in these cases the real estate prices do not affect
repayment though recovery of the loan could partly be from sale of real estate.
2. Loans extended to a company for a specific purpose, not linked to a real estate
activity, which is engaged in mixed activities including real estate activity.
A company has two divisions. One division is engaged in real estate activity, and
other division is engaged in power production. An infrastructure loan, for setting
up of a power plant extended to such a company, to be repaid by the sale of
electricity would not be classified as CRE. The exposure may or may not be
secured by plant and machinery.
3. Loans extended against the security of future rent receivables
Bank has formulated the Rent Plus scheme, where the owners of existing real
estate such as shopping malls, office premises, etc. have been offered finance to
be repaid out of the rentals generated by these properties. Even though such
exposures do not result in funding/acquisition of commercial real estate, the
repayment might be sensitive to fall in real estate rentals and as such generally
such exposures should be classified as CRE.
However, if there are certain in built safety conditions which have the effect of
delinking the repayments from real estate price volatility like
i. the lease rental agreement between the lessor and lessee has a lock
in period which is not shorter than the tenor of loan
ii. there is no clause which allows a downward revision in the rentals
during the period covered by the loan
Branches classify such exposures as non CRE. Branches may, however, record a
reasoned note in all such cases.
4. Credit facilities provided to construction companies which work as contractors
The working capital facilities extended to construction companies working as
contractors, rather than builders, will not be treated as CRE exposures because
the repayment would depend upon the contractual payments received in
accordance with the progress in completion of work.
5. Financing of acquisition / renovation of self-owned office / company premises
Such exposures will not be treated as CRE exposures because the repayment will
come from company revenues.
6. Exposures towards acquisition of units / to industrial units in SEZs
(a) Exposures towards acquisition of units in SEZ were specifically included in
the definition of CRE in order to prevent speculative dealings in such units.
However, since there are restrictions on transfer of such units and require
Government permission, the speculative activity in sale and re-sale of units is
unlikely to be there. Therefore, such cases should be more like financing of
industrial units or the projects and if such is the case, these would not be treated
as CRE Exposures.

(b) The exposures to industrial units towards setting up of units or projects and
working capital requirement, etc. would not be treated as CRE Exposures.

Loan Policy 2014-15 98


7. Advances to Housing Finance Companies (HFCs)

Banks advances to those HFCs, which are mostly lending to individuals for
residential housing as per the norms fixed by National Housing Bank (NHB) and
also fulfill the eligibility criteria to draw refinance from NHB, would not be treated
as CRE Exposure.

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