CREDIT POLICY

(Supplemented by Retail, SME & Recovery Policies)

2006

TABLE OF CONTENTS
Pag e 1. 2. 3. 4. 5. 6. 7. BANKING SCENARIO CONTOURS OF CREDIT POLICY PRIORITIES OF CREDIT POLICY OBJECTIVES OF CREDIT POLICY SCOPE OF CREDIT POLICY CREDIT POLICY COMPLIANCE & DEVIATIONS REGULATORY COMPLIANCE 7.1. 7.2. 7.3. 7.4. Fair Practices Code (FPC) KYC Norms CIBIL (Credit Information Bureau (India) Ltd. CREDIT DELIVERY SYSTEM 1 3 4 5 6 6 8 8 8 9 10 10 10 10 11 12 13

7.4.1. Asset Liability Management 7.4.2. Bridge Loans 7.4.3. Off-Balance Sheet 7.4.4. Loan system for Delivery of Bank credit 7.4.5. Consortium / Multiple Banking Arrangement 8. DIRECTION OF CREDIT

8.1. 8.2. 8.3.

Credit Planning & Budgeting Thrust Areas New Avenues of Credit Deployment

13 13 14 14 15 15 16 16 16 17 17 17 18 18 21 22 22 22 22

8.3.1. Channel Financing 8.3.2. Acquisition of assets through assignment of debts/ IBPCs/ Securitisation etc. 8.3.3. Securitisation of assets 8.3.4. Composite Credit Limit (Line of Credit) 8.3.5. Corporate Loans 8.3.6. Project Finance 9. CREDIT RESTRICTIONS 9.1. 9.2. 9.3. 9.4. 9.5. Prohibitions List Restrictions in terms of the Section 20 of the Banking Regulation Act, 1949 Restrictions on Credit to Companies for Buyback of their securities Regulatory Guidelines on credit restrictions Restriction on Advances against Sensitive Commodities under Selective Credit Control (SCC) Inter-institutional Guarantees Advance against Gold/Silver Bullion Other credit restrictions Negative & Discretionary Lists

9.6. 9.7. 9.8. 9.9.

10.

CREDIT RISK MANAGEMENT POLICY 10.1. 10.2. 10.3. 10.4. Credit Risk Identification Credit Risk Measurement Credit Risk Rating System Credit Risk Mitigation Methodology

24 24 24 24 25 25 26 29 29 29 30 31 32 32 33 33 33 34 35

10.4.1. Guidelines for Operational Units 10.4.2. Portfolio Risk Diversification Methods- Exposure Norms 10.5. Exposure to Capital Market

10.5.1. Statutory Limit Share Holding in Companies 10.5.2. Regulatory Limit Advances against Shares and Holding of Shares as Investments 10.5.3. Margin Requirements - Capital Market Exposure 10.5.4. Sub-ceilings on exposure to Capital Market 10.5.5. Financing for Initial Public Offering (IPOs) 10.5.6. Bank Finance to employees to buy shares of their own companies 10.6. 10.7. 10.8. 10.9. Investment by way of Venture Capital Exposure to Leasing, Hire Purchase and Factoring Services Exposure to Indian Joint Ventures/Wholly-owned subsidiaries abroad Bank Loans for Financing Promoters Contribution

10.10. Bank Financing to PSU Disinvestments

10.11. Acquisition of Equity in Overseas JVs/Subsidiaries 10.12. Safety Net Schemes 10.13. Fresh exposure on Compromise Accounts 10.14. Advances to borrowers appearing in Defaulters List/Caution List 10.15. Credit Risk Management for Takeover of Advances 10.16. Specific Industry/ Sectoral Limits (Credit Concentration) 10.17. Unsecured Loans 10.18. Industry wise Lending Guidelines 10.19. Exit Policy 11. CREDIT MONITORING POLICY 11.1. 11.2. 11.3. 11.4. 12. Credit Portfolio Monitoring Borrower wise Monitoring Loan Review Mechanism Monitoring through MMS

35 36 36 36 37 38 40 41 42 43 43 43 43 44 45 45 45 46 47

CREDIT PROCEDURES & PRACTICES AT A GLANCE 12.1. 12.2. 12.3. 12.4. Credit Approval Authorities Group Concept Interchangeability Timely Disposal of Credit Applications

12.5. 12.6. 12.7. 12.8. 12.9.

Credit Committee Credit Appraisals Strategy for Credit Management Appraisal cum proposal memorandum Other General Guidelines

48 48 49 51 51 52 52 53 55 55 59 59 60 60 61 61 62 63 63 64

12.10. Preventing slippages for Technical Reasons 12.11. Short Review Technical Renewal/Review of limits 12.12. Techno economic viability study norms 12.13. Methods of assessment 12.14. Compliance to financial parameters 12.15. Credit Disbursal Norms 12.16. Post Disbursement Monitoring 12.17. Monitoring End-use of Funds 12.18. Stock Audit Norms 12.19. Inspection of stocks/book debts 12.20. Scrutiny of Control Returns 12.21. Security norms 12.22. Valuation of Collateral Securities 12.23. Personal Guarantees of promoters 12.24. Risk Based Pricing Interest Rate Policy

12.25. MIBOR linked Advances 12.26. Quoting of Interest Rates 12.27. Authority to fix interest rate/s 12.28. Commitment Charges & Processing Fees 12.29. No Objection Certificate 12.30. In-principle Approval 13. CREDIT RECOVERY POLICY 13.1. 13.2. 14. 15. 16. 17. 18. 19. 20. Management of Credit Assets Loan Recovery Policy

65 65 66 66 67 67 69 69 69 70 71 71 72 72 72 72

QUICK MORTALITY STAFF ACCOUNTABILITY GUIDEPOSTS OPERATIONAL GUIDELINES INSIDER ABUSE TRAINING CONCLUSION VALIDITY

ANNEXURE

1. 2. 3. 4. 5. 6. 7. 8. 9.

Parameters for financing to Diamond Exports Group Concept Multiple Banking Arrangement Procedural guidelines for Purchasing/ Discounting/ Negotiating/ Rediscounting of Bills Approved State Level Consultancy Organisations for Conducting Techno Economic Viability Study NBFCs CGFTSI TUFS Policy Guidelines for buy-out/sell-out of Loan portfolio from other Banks/ Financial Institutions by way of assignment
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Credit Policy 2006

CREDIT POLICY 1. 1.1 BANKING SCENARIO The accelerating factors of liberalization and globalization have set the Indian economy to full throttle, which is being fuelled by multi-dimensional changes adorned by the banking industry of the country. During the last decade, our country witnessed a series of reformist measures almost in all areas of economic and social concerns, to realign the standards of a developing economy with the developed ones. During this period of transformation, Banking is one of the core areas, which got redefined from being the business of mobilizing deposits for the purpose of lending to identified & viable profitable pockets of the economy to a business of risk and return. With this changed definition of banking, the new age bankers started visualizing every micro and macro level aspects of contemporary banking in terms of risk-return matrix without sacrificing the age-old spirit and essence of Indian banking, which resisted all upheavals of economic turmoil since its inception. In this process of transformation and consolidation, with financial sectors reforms implementation, the microenvironment of banking sector has undergone a radical change. With the passage of New Financial Sector Reforms phase I in 1991 and second phase of reforms in 1997, the Indian Banking has metamorphosed and has an altogether new look. The market developments kindled by liberalization and globalization has resulted in changes in the intermediation role of banks. Financial Sector would be opened up for greater international competition under WTO. Banks will have to gear up to meet stringent prudential Capital Adequacy Norms under BASEL II. Banks will also have to cope with challenges posed by technological innovations in banking. There has been paradigm shift in operational, functional, environmental and technological spheres.

1.2

1.3

1.4

1.5

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1.6

Apart from competitive environment, there has been deregulation as to rate of interest, declining spread, benign interest rate policy and inflation. The cost cutting exercises, increase in efficiency and non-interest income, building the brand equity has become the order of the day. PSU banks gearing up to face the challenges posed by i) Stiff BASEL II norms ii) Continuance of their development role iii) Maintenance of prudent profitability and efficiency levels iv) Forays into relatively alien segments like Infrastructure projects, bancassurance etc. v) Reap economies of large size vi) Absorption of Infotech advancement vii) Dilution of Govt. Stake and stiff capital standards viii) Privatisation and accountability for governance ix) Volatility in domestic and global economy Government of India in its India Vision 2020 envisages a market oriented, competitive and productive national economy with average annual GDP growth of 8.5% to 9%, which calls for strong financial sector in general and banking sector in particular. Keeping in view the India Vision 2020 a road map for the banking sector in form of Banking Vision - 2010 has been drawn which attempts to visualize the future landscape of the Banking industry. The vision is of an integrated banking and finance system catering to all financial intermediation requirements of customers. Strong market players will strive to uncover market and provide all services, combining innovation, quality, personal touch and flexibility in delivery. The growing expectations of the customers are the catalyst for the vision. Indian banking is stepping into a new era, a time of change and challenges. In the emerging banking and financial environment there would be an increased need for self-regulation. Development of best practices in various areas of banks' working would evolve through self-regulation rather than based on regulatory prescriptions. Dena Bank Vision 2010 Desirous of chartering its future growth path to properly position itself as a mid sized profit making and dividend paying banking company, committed to

1.7

1.8

1.9

1.10

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high standards of customer service, our Bank has initiated an exercise to lay down a clear vision for the medium term i.e. upto 2010 with a view to make available a guidance note to all functionaries to make them understand their roles in growth process and also to set up viable strategies designed to achieve the vision. 2. 2.1. CONTOURS OF CREDIT POLICY

A cornerstone of safe and sound banking is the design and implementation of written policies and procedures related to identifying, measuring, monitoring and controlling credit risk. Credit Policies establish the framework for lending and guide the credit granting activities of the bank. The credit culture has to be facilitated by a strong and clear sense of objective.The Banks extant credit policy has been updated and modified from time to time to meet the changing environmental demands. Now taking into account the developments within the Bank as well as external factors, the revised credit policy is framed. The Credit policy of the Bank has in-built flexibilities 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 Instruction circulars, Periodic guidelines, and Manual of Instructions on Advances etc. Most significant challenge before the Bank is the maintenance of rigorous credit standards, especially in an environment of increased competition for new and existing clients. Compensation through profit-booking through sale of investments is not going to support the Bank forever. Large-scale efforts are needed to upgrade skills in credit risk identification, measuring, mitigating and monitoring as also revamp operating procedures. The emphasis in future would be towards more of fee based services - Value added services to the customers. Financing of Infrastructure Projects is a specialised activity and would continue to be of critical importance in the future. India Infrastructure Report (Rakesh Mohon Committee-1996) placed financing of infrastructure as a major responsibility of banks and financial institutions in the years to come.

2.2.

2.3.

2.4.

2.5.

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2.6.

Agriculture and Retail lending would receive greater focus. The Bank will strive to provide full range of financial services to this segment using multiple delivery channels to suit the requirements and tastes of customers. Concept of social lending would undergo a change. Rather than being seen as directed lending such lending would be business driven. With SME sector expected to play a greater role in the economy, Bank will give greater overall focus in this area. The Bank will endeavour to find an effective niche in the asset-risk spectrum and strive to generate superior risk- adjusted returns in order to move ahead in the race to maintain and enhance its core profitability. 3. PRIORITIES OF CREDIT POLICY

2.7.

2.8.

3.1.

The Banks Credit Policy is framed in such a manner as to cater to the business objectives, Credit Prioritising, Objectives, Scope, Credit Delivery System etc. A credit exposure has an in-built element of risk and reward is dependent on the amount and kind of risk taken by the Bank. Higher the Risk the Reward is Higher, if the risk turns out to be successful and vice-a-versa. Hence, the Bank believes in adopting a system of calculated risk-taking and following a Risk Matrix as detailed in the policy. The Bank would prefer direct lending & whenever opportunities arise it might invest in debt instrument or other investment instruments. A customers ability to service its liabilities in time will be of utmost importance in the policy framework. This will depend upon the viability of the operations of the borrower with adequate income generating capacity. In case of financing of individuals for Housing loans, consumer durable & other Retail Banking areas, borrowers savings and income will be of primary consideration. It is expected that this aspect will be examined by the sanctioning authority/ies before Credit decisions are made.

3.2.

3.3.
3.4.

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4.

OBJECTIVES OF CREDIT POLICY To strengthen the credit delivery system and to clearly lay down the preferred deployment area of credit keeping in view the socio-economic obligations and the past experience of asset impairment and with greater focus on retail banking; To aid building up and maintaining a well diversified and fairly high yielding credit portfolio To set up a Credit Risk Management System with parameters for risk identification, measurement, monitoring and mitigation; To address issues of credit concentration and to set up prudential credit exposure norms; To set up standard and uniform credit evaluation procedures, systems & procedures to monitor portfolio performance and set up guideposts to augment income from non fund exposures; To provide for dissemination of information to enable informed credit decision making at all levels and to enable proper training of field staff of credit appraisal and monitoring; To provide for adequate delegation of discretionary authority at all levels consistent with the canons of this Policy Document; To provide for Loan Review Mechanism; and To set up a risk based Loan Pricing Policy. To gain sizeable market share in the identified areas of business by adopting inter-alia the following strategies: By maintaining continuous contacts with the top identified clients to know their business/expansion plans, banking requirements & arrangements etc. By obtaining reference from such identified top clients for increasing the customer base and cross selling of the products. Such references may also be obtained from various associations of merchants/ industries / traders etc. By acquisition of new customers/accounts for business development, for which potential non-customers should be identified and contacts be established for bringing them in our fold after making due diligence /market enquiries. By leveraging the technological advantage of the Bank

a) b)

c)

d)

5.

SCOPE OF CREDIT POLICY

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Credit Policy 2006

5.1.

The Provisions of this Credit Policy shall be applicable to the Credit portfolio of the Bank, if otherwise not prescribed for specific schematic /non-schematic advances. The Bank has separate supplementary policy documents in respect of Retail, SME and Loan Recovery. The scope of credit policy is restricted to:

All Working Capital Facilities (including all types of demand loans, short term loans, bills facilities, ad-hoc limits, bridge loans etc); All term finance facilities including term loans (with repayment terms of over 3 years, deferred payment guarantees, etc); All non-fund based facilities (financial/performance guarantees, Letters of Credit (inland and foreign), acceptances, coacceptances of bills & endorsements etc.)

6. 6.1.

CREDIT POLICY COMPLIANCE & DEVIATIONS

All the functional divisions (Branches, ROs & GMO) are expected to comply with the policy guidelines laid down in this document. In case of any doubt about the applicability of any aspect of these policies to any situation, clarification, approval shall first be sought from Credit Administration Department prior to committing on behalf of the Bank. This policy contains necessary provisions indicating the authority that is authorized to permit deviations from various provisions in respective provision itself. In the case of all other provisions, where such authority level is not prescribed, the Board of Directors / Management Committee or any Committee of Directors authorized by the Board of Directors in its behalf shall be the competent authority to permit any deviation from such provisions. The Board of Directors or the Committee of Directors on Integrated Risk Management or any other Committee of Directors authorized by the Board of Directors in its behalf shall be the competent authority to revise or amend or modify or annul any or all of the provisions contained in this Policy at any time. Any exception or deviation from these policies and criteria shall be referred to Credit Administration Department, Head Office, who shall put up such matters to the Competent Authority for approval

6.2.

6.3.

6.4.

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6.5.

Micro level issues pertaining to credit in the area of fixation of credit limit, security coverage, margin requirements, as also fixation of interest rate (subject to regulatory guidelines, whenever applicable) and other operative guidelines are not dealt in detail in this document, however necessary guidelines have been captured by way of annexure to the policy document. These aspects are subject to frequent change and are decided within the broad policy framework, which is the domain of this lending policy document.
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7.

REGULATORY COMPLIANCE

7.1. Fair Practices Code (FPC) 7.1.1. In compliance to Reserve Bank of Indias directives the Bank has formulated its Fair Practice Code for Lenders. The basic tenets of the Code are as under: To provide professional, efficient, courteous, diligent and speedy services in the matter of retail lending. Not to discriminate on the basis of religion, caste, sex, descent etc. To be fair and honest in disclosures, dissemination of information and presentation while releasing information to public and marketing of Loan Products. To provide customers with accurate and timely disclosure of terms, costs, rights and liabilities as regards loan transactions. If sought, to render necessary assistance to customers applying for loans. To attempt with good faith to resolve any disputes or differences with customers by setting up complaint redressal cells within the organizations. To comply with all regulatory requirements in good faith. To spread general awareness about potential risks in contracting loans and encourage customers to take independent financial advice and not to act only on the representation from the Bank.
(Reference may be made to Circular No. 357/74/2004 dated 20-2-2004 issued by Priority sector & RBD Dept.)

7.2. KYC Norms 7.2.1. As part of Know Your Customer (KYC) principle, RBI has issued several guidelines relating to identification of customers and advised the banks to put in place systems & procedures to help control financial frauds, identify money laundering and suspicious activities and for scrutiny / monitoring of large value cash transactions. The objectives of the KYC framework is twofold To ensure appropriate customer identification To monitor transactions of suspicious nature.

7.2.2.

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7.2.3.

Branches are required to obtain all information necessary to establish the identity, legal existence of each new customer and to be vigilant while opening a/cs for new customers to prevent misuse of banking system for perpetration of frauds. KYC procedures are to be applied as per the extant policy guidelines for all existing accounts as well as new accounts.

7.2.4.

(Reference may be made to HO Circular Nos. 355/15/2003 dated 12-032003 and 359/26/2004 dated 10-12-2004)

7.3. CIBIL (Credit Information Bureau (India) Ltd. 7.3.1. With an aim to fulfil the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members. Banks, Financial Institutions, Non Banking Financial Companies, Housing Finance Companies and Credit Card Companies, CIBIL was set up in 2000 under aegis of RBI. Data sharing is based on the Principle of Reciprocity, which means that only Members who have submitted all their credit data, may access Credit Information Reports from CIBIL. The relationship between CIBIL and its Members is that of close interdependence. The establishment of CIBIL is an effort made by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors portfolio quality. CIBIL provides a vital service, which allows its Members to make informed, objective and faster credit decisions. In terms of the RBI guidelines for submission of details of all borrowal accounts to CIBIL for compilation of credit information database (performing & non-performing), it is required that i) Consent as per HO Circular No.226/36/2002 dated 12-112002 and 361/53/2003 dated 22-03-2003 be obtained, ii) CIBIL information is updated/provided as per D2K template, and iii) Submission of complete, comprehensive and correct information is ensured.
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7.3.2.

7.3.3.

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7.4. CREDIT DELIVERY SYSTEM

7.4.1.

The Bank looks upon its role in the economy as a financial intermediary whose prime responsibility is to provide working capital advance to all productive sectors and retail banking areas including housing and other requirements of credit worthy households, besides its socio-economic obligations in lending. The Bank will also take up term lending, subject to the requirements of management of its assets & liabilities normally for average periods not exceeding 5 7 years. In the case of lending to capital-intensive infrastructure projects, the Bank may take exposure for longer period after evaluating such credit needs from Asset Liability Management angle. In the case of export sector, the Bank will undertake both preand post-shipment lending in view of the need to encourage export sector. Bridge Loans As a matter of policy, the Bank will consider sanction of bridge loans for a period not beyond 1 year in accordance with the regulatory guidelines, Ad-hoc Limits etc only where exigencies on the part of the borrower necessitate sanction of such facilities, to the satisfaction of the Bank. No delegatee below the rank of General Manager shall exercise powers vested in him/her to sanction Bridge Loans. Bridge Loans can be sanctioned only for a period one-year. Following type of bridge loans can be considered by Bank: a) Bridge loan against commitment made by a financial institution and or another bank. b) Bridge loan to companies (other NBFC) against public issue of equity, whether in India or abroad. c) Bank should not grant bridge loan against issues of equity to be placed privately.

7.4.2. 7.4.2.1.

7.4.2.2.

7.4.3.

Off-Balance Sheet Exposures The Bank in the ordinary course of business, is required to extend non-fund based credit facilities to the customers like letters of credit, bank guarantees, forward contracts etc., such facilities get converted into funded exposure in the event of constituent failing to meet the commitment or reimburse the bank on
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invocation /crystallization of the facility. Off-balance sheet exposures also attract capital adequacy norms. It is therefore necessary to manage credit risk under non-funded facility with the same diligence as in the case of funded facility. 7.4.3.1. Non-fund based facility shall be extended to constituents after taking adequate care in the form of Credit Investigation and following KYC principles. The underlying nature of transaction must be fully understood and evaluated as part of approval process. Credit risk in non-fund based facilities shall be assessed in a manner similar to the assessment of fund based facilities. As for Deferred Payment Guarantees in lieu of Term Loans, the limits are to be considered subject to the viability, Debt Equity Ratio, Debt Service Coverage ratio etc., as in the case of assessment of term loans and evaluation of cash flows over the period of guarantee. Further, adequate cash margin be insisted for such facilities. No LC limit should be considered for procurement of capital goods without ascertaining the source of finance/ proper tie-up for Term Loan. The Bank will extend non-fund based credit facilities in view of the need to augment non-interest income by way of commission earnings from non-fund business. However, the Bank will follow a prudent policy of not permitting inter-limit flexibility from NFBL to FBL or vice versa without necessary permission at a level not lower than General Manager. The Bank will endeavour to get its proportionate share in respect of non-fund business in respect of borrowal accounts under consortium / multi-bank arrangements. Loan system for Delivery of Bank credit The system was introduced in April 1995. It has been extended in phases to cover large number of borrowers with the percentage of loan component of the working capital being gradually enhanced. In the case of borrowers enjoying working capital credit limits of Rs.10.00 crores and above from the banking system, the loan and cash
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7.4.3.2.

7.4.3.3.

7.4.3.4.

7.4.4.
7.4.4.1.

Credit Policy 2006

credit component shall be decided upon the merits of each case by the loan approving authority. For borrowing limits related to export credit, the bifurcation of the working capital limit into loan and cash credit components as stated therein above, would be effected after excluding the export credit limits (pre-shipment and post-shipment) (RBI circular No.IECD.No.9/08-12/01/2001-2002 dt.25.10.2001). 7.4.4.2. 7.4.4.3. The Loan system should be applicable to borrowal accounts classified as Standard or Sub-Standard In respect of certain business activities, which are cyclical and seasonal in nature or have inherent volatility, the strict application of loan system may create difficulties for the borrowers. For this reason, activities like Tea, Sugar, Contractor etc are exempted from the loans system of delivery. Bills limit for inland sales shall be fully carved out of the loan component. Bills limit also includes limits for purchase of third party (outstation) cheques / bank drafts. Operational authorities must satisfy themselves that bills limit is properly utilised. Renewal/Rollover of Loan Component The loan component can be rolled over periodically as per genuine needs of the borrower. The quantum of loan may vary according to the assessment of the credit limits. Consortium / Multiple Banking Arrangement Consequent to withdrawal of the guidelines relating to the Mandatory formation of consortium during the year 1997 by Reserve Bank of India, banks enjoy discretion to adopt consortium / syndication / multiple banking route. With a view to participating in financing of large borrowal accounts and at the same time to spread over the risks involved and also to ensure that the regulatory prescriptions on prudential exposure limits are generally not exceeded, it is proposed to increase Banks participation in consortium advances. In the case of multiple Banking Arrangements, it will be ensured that security is clearly defined to each Bank or else pari-passu charge should be created wherever it is required.
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7.4.4.4.

7.4.4.5.

7.4.5.
7.4.5.1.

Credit Policy 2006

7.4.5.2.

Generally, the Bank will abide by the Consortium Leaders decision with regard to security, margin, collaterals etc. though pricing of loans will be decided in accordance with the guidelines given in this document. Wherever the Bank is the Leader of the consortium, the Bank will be guided by this Policy and security, margin, collaterals etc will be decided and the ground rules shall be framed in consultation with the participating banks. Free flow of credit information will be facilitated among the lending Banks as to the additional credit facilities sanctioned / renewal of the existing facilities, legal actions, symptoms of weaknesses in the operations of the account etc. For this purpose the bank will insist upon consortium leader to share with all member banks all material information including "Asset Classification" at each quarter end. The Banks lending under multiple banking arrangements shall be in accordance with the guidelines set out at Annexure hereto. DIRECTION OF CREDIT

7.4.5.3.

7.4.5.4.

8.

8.1. Credit Planning & Budgeting 8.1.1. The Bank will endeavour to increase credit exposure in area of Corporate segment by extending credit to reputed Corporate / Large Borrower with Credit rating of good order and to mid Corporate/s. 8.1.2. The Bank will formulate credit budgets in consultation with field functionaries (i.e. GMO/Regional Offices, IFB, CBB) 8.2. Thrust Areas 8.2.1. The primary goal before the Bank is to scatter the credit risk in its portfolio and therefore, the Thrust Area concept will be utilized to channelise credit into low credit risk avenues. 8.2.2. Agriculture, SME and Retail Banking shall be the focus area and the Bank has separate policy guidelines for the same.
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8.3. New Avenues of Credit Deployment 8.3.1.Channel Financing

8.3.1.1.

The cardinal focus of Channel finance is to extend an integrated financial and commercial solution to the supply and distribution channel of a business unit. In these days of global availment of outsourcing in almost all walks of life, channel financing is an avenue for business concerns to outsource their financial back up. Through the channel financing the business concern can outsource a lion share of its Working Capital financial requirement. It need not avail credit from the bank to pay off the suppliers. The supplier gets the finance in his own name immediately from the bank for the raw materials supplied. Simultaneously, the processing business concern enjoys a credit period to replenish the bank directly. Similarly, bank gives credit to the dealer and the processing business concern gets cash immediately for the finished goods supplied. On expiry of the credit period, the dealers pay the amount due to the bank directly. The significant concept of channel financing is that the manufacturing business concern, who is the principal customer for a bank identifies and suggests the names of his suppliers and dealers to the bank and bank makes a due diligence assessment of the suppliers /dealers standing and credit worthiness. This is the concept of supply chain with the chain having three perceptibly distinct links pre-production, production and post-production. There is a proper continuity and coordination of all related issues like delivery channel of goods, services and finances. The finances required for the organisation transfused across the business cycles will have to be healthily circulated and supported, sustaining the supply chain of activities. This process of infusing the financial life blood of across the supply chain is normally the gist of channel financing. Bank has formulated separate policy guidelines on Channel Financing and Supply Chain Management

8.3.1.2.

8.3.1.3.

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8.3.2.Acquisition of assets through debts/IBPCs/ Securitisation etc. 8.3.2.1.

assignment

of

In addition to the above, Bank will also endeavor to expand the credit portfolio through acquisition of assets by way of assignment of debts/ IBPCs/ Securitisation. This will be more desirable when the Bank is having surplus liquidity. The market for assignment of debts is expected to grow rapidly given the current trend for churning loan assets. This gives the Bank an added opportunity for acquiring good quality loan assets and optimizing the loan portfolio. In view of various reasons like paucity of funds, asset liability mismatches as also with a view to de-risking certain segments of their credit portfolio, many private sector/ foreign banks are going in for securitisation deals by either outright sale or by way of Inter Bank Participation Certificates representing certain identified pool of assets. With a view to deploying our surplus rupee funds profitably the Bank will undertake exposure by way of IBPC/ assignment of loans. The rate of interest offered for the IBPC/assignment of loans was higher than the rate of interest on the money market instruments. The other banks too are benefited by offloading some of their excess exposure to certain industries/group as on the balance sheet date. The transaction carries normal credit risk as in the case of any normal sanction of credit limit. The exposure under the IBPC/assignment will be undertaken only after due study of their past working results, financials and credit appraisal. Bank has separate policy for acquisition of assets through assignment of debts.

8.3.2.2.

8.3.2.3.

8.3.2.4.

8.3.2.5.

8.3.3.Securitisation of assets 8.3.3.1. The market for securitised assets is expected to grow as various players in the Indian financial market look for higher liquidity and returns. This gives our Bank also an opportunity to identify homogenous pool of income producing assets in the loan book and to repackage them
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in marketable securities. The Bank may participate at both the legs of the securitisation deal i.e. as an issuer or acquirer. 8.3.3.2. Bank may securitise its credit portfolio by way of IBPC etc. and may take steps to increase lending by way of financing /securitising future rent receivables, other future receivables arising out of toll collections, credit card sales, cess collections by way of assignments of rights in favour of the Bank operated through escrow mechanism or arrangement of similar nature.

8.3.4.Composite Credit Limit (Line of Credit ) 8.3.4.1. Bank may extend a Composite limit to offer flexibility to clients to manoeuvre between the various working capital facilities sanctioned with relative ease compare to the prevalent system of restricting the usage of funds within the maximum limits available within the facility only. This system will essentially facilitate medium / large business units as a point of flexibility in managing their institutions borrowing arrangement without any additional cost. Under the Line of Credit, instead of considering / sanctioning separate limits for Cash Credit (Stocks), Cash Credit (Book Debts) and DA LC facilities, a combined limit for Cash Credit (stocks & Book Debts) cum DA LC limit is to be sanctioned, with a sub-limit for DALC facility. This facilty can be sanctioned by authority not less than the level of Asst. General Manager.

8.3.5.Corporate Loans 8.3.5.1. The Bank may extend corporate advances for General Corporate purposes by way of Demand Loan/ Overdraft / Cash Credit etc for a period ranging from 30 days to 5 year as per the scheme

8.3.6.Project Finance 8.3.6.1. Project Finance may be defined as an arrangement of financing long term Capital Projects, large in scale, long in life and generally high in risk. Usually projects cover life cycle of a minimum of 7/10 years although it depends on the nature, size and coverage of the projects etc.
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8.3.6.2.

All the project finance proposals, where project cost exceeds Rs 10.00 crore, shall be appraised exclusively by Corporate Branches/ IFBs/CBBs/Regional Offices before assessment at HO level. CREDIT RESTRICTIONS

9.

9.1. Prohibitions List 9.1.1. The Bank recognizes its socio-economic obligations and its role as a catalyst in furthering overall economic growth consistent with the policies of the Government of India and Reserve Bank of India. Accordingly, the Bank will channelise credit to areas indicated by GOI & RBI from time to time and in accordance with the laws of the land. More specifically, the Bank will draw and maintain a list of sectors/activities to which no credit will be considered in accordance with section 20 of the Banking Regulation Act, 1949 and other legal and regulatory guidelines issued from to time. The list will be termed as Prohibitions List. The list shall comprise of following sectors / activities: 9.2. Restrictions in terms of the Section 20 of the Banking Regulation Act, 1949 9.2.1. No Banking Company shall: a) Grant any loans or advances on the security of its own shares, or b) Enter into any commitments for granting any loan or advance to or on behalf of i) any of its Directors ii) any firm in which any of its Directors is interested as Partner, Manager, Employee or Guarantor iii) any company (not being a subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956 (1 of 1956) or a Government company, of which (or the subsidiary or the holding company of which) any of the Directors of the banking company is a Director, Managing Agent, Employee or Guarantor or in which he holds substantial interest, or iv) any individual in respect of whom any of its Directors is a partner or guarantor.

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9.2.2.

Clarification: RBI, DBOD has clarified vide its letter No. DBOD. NO. Leg.BC.98./09.11.013/2004-05 dated 24th June 2005 that for the purpose of Section 20 of the Banking Regulation Act, 1949 the term loans and advances shall not include loans or advances against Government Securities, life insurance policies or fixed deposits, facilities like bills purchased/ discounted, purchase of cheques, other non fund based facilities like acceptance/co-acceptance of bills, opening of LCs and issue of guarantees etc. Further it shall also not include line of credit/ overdraft facility extended by settlement bankers to National Securities Clearing Corporation Ltd. (NSCCL) to facilitate smooth settlement.

9.3. Restrictions in terms of Section 77A (1) of the Companies Act, 1956 on Credit to Companies for Buy-back of their securities 9.3.1. In terms of Section 77A (1) of the Companies Act, 1956, the companies are permitted to purchase their own shares or other specified securities out of their a) free reserves, or b) Securities premium account, or c) proceeds of any shares, or d) other specified securities subject to compliance of various conditions specified in the Companies (Amendment) Act, 1999. Therefore, the Bank shall not extend loans to companies for buy-back of its own shares / securities. 9.4. Regulatory Guidelines on credit restrictions a. The Bank shall not grant loans against primary security of Certificate of Deposits and deposits of other Banks. b. The Bank shall not undertake financing of Badla transactions c. The Bank shall not extend loans to partnership / proprietorship concerns against the primary security of shares and debentures d. The Bank shall not extend finance for setting up new units consuming /producing Ozone Depleting Substance (ODS) e. The Bank shall not extend advances for speculative purposes or extend advances against company shares to promoters of such companies during lock-in-period f. Grant of temporary credit facilities for adjusting overdues in other accounts.

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g. Purchase of cheques drawn in favour of borrowers by their associate concerns, friends or close relatives without trade transactions / considerations. h. The discretionary powers to sanction loans to relatives of staff members are as under: Advances to relatives of officers of Scale I, II, III will be sanctioned by respective sanctioning authority (Scale iv, v & vi) Advances to relatives of officers of Scale-iv, v & vi will be sanctioned by respective operational General Managers Advances to relatives of officers in the rank of General Manager will be sanctioned by ED / CMD
(Reference may be made to circular No.79/24/2001 dtd. 18/6/01)

i. In the matter of granting of loans and advances and award of contracts to the banks directors and their relatives and directors of other banks and their relatives, Reserve Bank of India has laid down guidelines as under which the Bank will adhere to subject to changes from time to time by RBI: 9.4.1.Unless sanctioned by the Board of Directors, banks should not grant loans and advances aggregating Rs.25.00 lakh 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. 9.4.2.Unless sanctioned by the Board of Directors, banks should not also grant loans and advances aggregating Rs.25.00 lakh and above to: a. Any relatives of their own Chairmen / Managing Directors or other directors b. Any relatives of the CMD or other Directors of other Banks c. Any firm in which any of the relative as mentioned at a) and b) above holds substantial interest or is interested as a Director or as a Guarantor

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d. Any company in which any of the relatives as mentioned in a and b above hold substantial interest or is interested as a director or as a guarantor includes directors of Schedules Co-operative Banks, directors of subsidiaries/trustees of mutual funds / venture capital funds. 9.4.3. Proposals for credit facilities of an amount less than Rs.25.00 lakh to these borrowers may be sanctioned by appropriate authority in the financing bank under powers vested in each authority but should be reported to the Board. The Chairman / Managing Director or other director interested in the proposal shall not, however, take part in the relative proceedings 9.4.4. The above norms related to grant of loans and advances will also equally apply to awarding of contracts. The above guidelines should also be followed in case of directors of scheduled co-operative banks or their relatives; directors of subsidiaries/trustees of mutual funds/venture capital funds set up by them as also other banks. 9.4.5. The term loans and advances will not include loans or advances against a) Government Securities, b) Life Insurance Policies c) Fixed or other deposits d) Stocks and shares e) Temporary overdrafts for small amount i.e. upto Rs.25000/- f) casual purchase of cheques upto Rs.5000/- at a time and g) housing loans, car advances, etc. granted to an employee of the bank under any scheme applicable generally to employees 9.4.6. The term substantial interest shall have the same meaning assigned to it in section 5(ne) of the Banking Regulation Act, 1949 i.e. (i) In relation to a company, means the holding of beneficial interest by an individual or his spouse or minor child whether singly or taken together in the shares thereof, the amount paid-up on which exceeds five lakh of rupees or ten percent of the paid up capital of the company, whichever is less. (ii)In relation to a firm means the beneficial interest held therein by an individual or his spouse or his minor child, whether singly or taken together which represents more than ten percent of the total capital subscribed by all the partners of the firm.

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9.4.7. In this context, every borrower should furnish a declaration to the Bank that o

where the borrower is an individual, that he/she is not a director or specified near relation of directors of a banking company. where the borrower is a partnership firm, that none of the partners is a director or specified near relation of a director of a banking company and where the borrower is a joint stock company, that none of its directors is a director or specified near relation of a director of a banking company.

9.4.8. In the light of the above, branches will take a suitable declaration from the borrower/s. In case the borrower/s is/are related to the Directors then they should furnish full details of the relationship of the borrower/s with the director. Besides this, the borrower/s also should give an undertaking that, where it transpires that the borrower has given a false declaration the Bank shall forthwith recall the loan. 9.5. Restriction on Advances against Sensitive under Selective Credit Control (SCC) Commodities

9.5.1. With a view to preventing speculative holding of essential commodities with the help of bank credit and the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, issues, from time to time, directives to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities. 9.5.2. Presently the following commodities are covered under stipulations of Selective Credit Control: Buffer stock of sugar with Sugar Mills Unreleased stock of sugar with Sugar Mills representing levy sugar, and free sale sugar

9.6. Inter-institutional Guarantees

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9.6.1. Banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank issuing the guarantees take a funded share in the project at least to the extent of 5% of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. For detail instructions on inter-institutional guarantee, a separate HO Circular shall be issued. 9.7. Advance against Gold/Silver Bullion (i) (ii) (iii) Banks should not grant any advance against gold bullion Banks should desist from granting advances to the silver bullion dealers, which are likely to be utilised for speculative purposes. Banks should desist from giving loans to finance Badla transactions in silver (i.e. buying silver ready and selling forward to earn interest).

9.8. Other credit restrictions 9.8.1. Advances to Agents / Intermediaries based on Consideration of Deposit Mobilisation Bank will desist from being party to unethical practices of raising of resources through agents / intermediaries to meet the credit needs of the existing / prospective borrowers or from granting loans to the intermediaries, based on the consideration of deposit mobilisation, who may not require the funds for their genuine business requirements. 9.8.2. The Board of Directors shall be competent authority to amend / modify /revise the Prohibitions List from time to time based on legal/ regulatory provisions/guidelines. 9.9. Negative & Discretionary Lists 9.9.1. With a view to restrict exposure to sectors and activities wherein the credit risk is perceived to be high or the Banks past experience has not been satisfactory, the Bank will draw and maintain Negative and Discretionary Lists. Negative List shall comprise of sectors and activities in respect of which the Bank proposes to minimize its exposure. In case of such sectors / activities, any credit proposal shall be sanctioned only at the level of Board of Directors / Management Committee, subject to availability of adequate collateral
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security, irrespective of the quantum of credit facilities (FBL & NFBL) to be considered. In exceptional cases ED/CMD may consider the proposals appearing in negative list on merits subject to ratification by Board of Directors / Management Committee. The Negative List shall comprise of following sectors / activities: Negative List i) Plantation firms in the nature of NBFCs ii) Unregistered NBFCs 9.9.2. Discretionary List shall comprise of sectors/activities in respect of which the Bank will exercise its discretion to finance or not. All credit proposals falling under Discretionary List shall be considered at the level of Executive Director or above only for sanction of credit facilities (both FBL & NFBL). In exceptional cases, General Manager (Credit) at H.O. may consider the proposals appearing in discretionary list on merits subject to ratification by next higher authority. At present, the Discretionary List shall comprise of following sectors / activities: Discretionary List i) Registered NBFCs ii) Marriage Hall iii) Film Industry iv) Cinema Hall v) Solvent Oil Extraction / Soya Industry vi) Vegetable Oil and Vanaspati Sector vii) Ship Breaking viii) Entertainment & Amusement Parks ix) TV Serials x) Manufacturing & Trading of Liquor xi) Real Estate (other than housing/infrastructure) development including construction of shopping malls /multiplex xii) a. Setting of sugar factories in co-operative sectorunits having minimum capacity of 2500 TCD of sugarcane. b. Setting of sugar factories in other than co-op sectorunits having capacity between 2500TCD-5000TCD of sugarcane. c. Units in either of the above sectors, having capacity of less than 2500 TCD of sugarcane, should not be considered for financing. (The above Industries have been brought under Discretionary list in view of the risk perception involved)

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10.

CREDIT RISK MANAGEMENT POLICY

10.1. Credit Risk Identification 10.1.1. The Bank recognizes that every credit decision, in respect of both FBL and NFBL, involves Credit Risk. Therefore, the Bank will frame an effective system for measurement, monitoring and mitigation of such risks in its credit portfolio. 10.2. Credit Risk Measurement 10.2.1. The measurement of credit risk in respect of borrowal accounts with credit limits (FB & NFB) of Rs 10 lakhs and above through a system of Credit Rating as approved by the Board of Directors and as amended from time to time. 10.3. Credit Risk Rating System 10.3.1. The Bank will follow Risk Rating system applicable to all borrowers with total exposure limit of above Rs.10.00 lakhs (Fund Based & Non Fund Based). The model will vary in the level of sophistication and complexity, depending upon whether the loans are for new units /projects or for existing units. 10.3.2. As per extant policy guidelines risk rating system is applicable to all borrowers with total fund based & non fund based exposure of above Rs.10.00 lakh. It is now proposed that the present requirement of carrying out credit rating exercise twice in a year will henceforth be applicable only in respect of borrowers enjoying credit facilities (FB & NFB) of Rs.5 crore and above once based on audited financial accounts and once based on provisional half yearly accounts as per extant guidelines. Even non fund based exposure needs to be rated and all proposals should be accompanied by the Credit Score Sheets duly approved by the Competent Authority. 10.3.3. In respect of borrowers with credit facilities of less than Rs.5 crore, credit rating exercise should be done once in a year based on audited financial accounts of the borrower within six months from the close of financial year.

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10.3.4. Exception: The Board at its meeting held on 31st January 2005 has approved the revised rates for negotiation of bills under L/C irrespective of Credit Risk Rating or regular rate of interest on other facilities.
{Reference may be made to HO Circulars No.288/9/2005 dated 12-12-05; 154/3/2005 dated 16-08-2005; 318/1/2004 dated 21/01/2004 and for SSI borrowers HO Circulars No.221/53/2005 dated 22-10-2005 143/29/2004 dated 21/7/2004}

10.4. Credit Risk Mitigation Methodology 10.4.1. Guidelines for Operational Units: 10.4.1.1. With a view to enable operational units to build up a credit portfolio of good quality, the Bank will adopt pro-active credit risk management policies like bringing out periodically industry monitors/updates, studies on mortality rate of assets etc. The Bank will also provide and periodically update its documents setting out credit origination and maintenance procedures (i.e. Manual of Instructions on Credit), guidelines on pro-active portfolio management and remedial management (rehabilitation/ re-structuring/re-schedulement of credit etc). 10.4.1.2. The control mechanism will have two dimensions, first, ensuring compliance of necessary additional monitoring terms and adhering to continuous follow up and supervision measures, secondly, adoption of suitable risk mitigation measures. In the later stage, the available options include: Insurance cover of assets against loss, damage, calamity etc. Institutional guarantee cover against default risk from Credit Guarantee Fund Scheme for small industries/ECGC etc. Avoidance by staying away from risky borrowers. Reducing exposure i.e. adherence to lower limit. Fixing higher level of margin. Obtaining guarantees and counter guarantees/ collaterals. Credit derivatives may be resorted to as and when available/required.

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10.4.2. Portfolio Risk Diversification Methods 10.4.2.1. Prudential Exposure Norms With a view to reduce the risk factors involved in assets portfolio, the Bank will adhere to following prudential norms: 10.4.2.2. Exposure: Definition Exposure shall include credit exposure (funded & non-funded credit limits) and investment exposure (including underwriting & similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstanding, whichever are higher, shall be reckoned for arriving at exposure limit. However, in case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, bank may reckon the outstanding as exposure. In the case of other term loans, the exposure shall be computer as usual i.e. sanctioned limits or outstanding, whichever is higher. In line with international practices, it has been decided that effective from April 1, 2003, non-fund based exposures should also be reckoned at 100% of the limit or outstanding, whichever is higher. 10.4.2.3. The Bank will adhere to the prudential exposure norms for taking exposure towards an individual borrower, group of borrowers and for infrastructure projects prescribed by the Regulator which at present is as under: 10.4.2.4. Prudential Exposure limit: (as per Regulatory Guidelines in force): (Rs in Crore) Prudential Exposure Limits Prudential Exposure Limits A) INDIVIDUAL BORROWER EXPOSURE LIMITS 195.87 (15% of capital funds of the Bank) B) For Infrastructure Projects (Individual Borrower 261.16 only) (20% of Capital Funds of the Bank
C)

D)

GROUP BORROWER EXPOSURE LIMITS (40%of Capital Funds of the Bank) For Infrastructure Projects (Group Borrower only) (50%of Capital Funds of the Bank)

522.31 652.89

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Based on Capital Funds of the Bank as of 31-03-2005

10.4.2.5. As the above limits are calculated as specified percentage/s of the Banks Capital Funds which may vary from year to year, the Bank will observe these limits as calculated for each financial year in the manner as stipulated by the Regulator after adoption of audited balance sheet. 10.4.2.6. Reserve Bank of India has discontinued the practice of case to case basis approval for exceeding the Individual/Group borrowers risk exposure ceiling of 15%/ 40% since May 2004. However, with the approval of the Board, Banks have been permitted to consider enhancement upto a maximum of further 5% of capital funds in exceptional circumstances subject to disclosure in Annual Reports with the consent of the borrower. 10.4.2.7. The exposure limits will be applicable even in case of lending under consortium arrangements, wherever formalized. 10.4.2.8. Further, as a matter of abundant prudence, the Bank will observe following Internal Exposure Limits for sanction of credit facilities to any borrower as under: 10.4.2.9. Internal exposure limits for Corporate Borrowers: For Individual Borrower Amt. in crore General 100.00 Specific Secured Advances to PSUs backed by Government 125.00 Guarantee AAA rated Corporate Borrowers 125.00 Infrastructure projects 125.00 For Group Borrower General 150.00 Infrastructure projects 250.00 10.4.2.10. For this purpose, the total credit facilities shall be reckoned as 100% of Fund based Limits (FBL) and NonFund based Limits (NFBL). For this purpose, all investments by way of shares, debentures, Commercial Paper etc and

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underwriting commitments, if any, shall be reckoned as part of FBL. 10.4.2.11. There is a need to ensure that off-Balance sheet exposure given on L/Cs, Guarantees, acceptance etc. are not unduly large in relation to the size of the Bank, considering the capital need for such liabilities. However, those secured by 100% cash margin / Fixed deposit will be excluded. The Bank as a whole maximum exposure should not exceed 100% of the credit exposure i.e. loan, investments in non SLR accounts etc. These prescriptions will not be applicable to an individual customer and nonfund facilities to individual customers can be need-based according to the type of industry / activity. 10.4.2.12. Further as a measure of abundant precaution, the Bank will further observe restricted exposure norms in respect of non-corporate borrowers as under: 10.4.2.13. Internal Borrowers: exposure limits for Non-corporate

Borrower Type Individuals (except where exposure is fully secured by fully liquid specified securities) Other non-Corporate borrowers like Partnership Firms/Group Firms, Association of Persons etc. EXCEPTIONS TO THE ABOVE: Ship Breaking Industry: Individual & partnership firms Group firms Diamond Industry -Individual & Partnership firms

(Rs in Crore) Exposure Norm Rs. 10.00 Rs. 50.00

Rs. 45.00 Rs. 90.00 Rs. 72.00

-Group firms Rs.150.00 Note: Exceedings in internal exposure limits but within the RBI exposure limits may be permitted by Management Committee of Board after recording due justification/reasons. 10.4.2.14. Exemptions

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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. Food Credit Borrowers to whom limits are allocated directly by the Reserve Bank, for food credit, will be exempt from the ceiling. Guarantee by the Government of India The ceilings on single/group exposure limits would not be applicable where principal and interest are fully guaranteed by the Government of India 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. 10.5. Exposure to Capital Market 10.5.1. Statutory Limit Share Holding in Companies 10.5.1.1. The extant guidelines on exposures restrictions to Capital Markets are as under: 10.5.1.2. In compliance to Section 19(2) of the Banking Regulation Act, 1949, the Bank will not invest in / otherwise deal in shares of any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty percent of the paid-up share capital of that company or thirty percent of its own paid up share capital and reserves, whichever is less. While granting any advance against shares, or acquiring any shares on investment account or even in lieu of debt of any company or while accepting as prime or collateral security, these statutory provisions should be strictly observed. 10.5.2. Regulatory Limit Advances against Shares and Holding of Shares as Investments 10.5.2.1. The Banks overall exposure to Capital Market Sector in terms of fund and non- fund exposures shall be limited to

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5.00% of the Banks gross credit as at the close of previous financial year. Further for internal control, the Banks exposure to individuals, share brokers and market makers shall be subject to a limit of 1.50% of Banks gross credit as reckoned hereinabove. 10.5.2.2. Aggregate Exposure for the purpose would mean the following: Direct investment in equity shares, convertible bonds / debentures and units of equity - oriented mutual funds. Bank finance for financing promoter's contribution towards equity capital of new companies. Bridge loans to companies. Advances against shares to individuals for investment in equity shares (including IPOs), bonds and debentures, units of equity-oriented mutual funds etc; Secured and unsecured advances to stock brokers and guarantees issued on behalf of stock brokers and market makers.
10.5.2.3.

Note: For computing the ceiling on exposure to capital market, direct investment in shares by banks will be calculated at cost price of the shares.

10.5.2.4. The said ceiling shall not include : Collateral of equity shares / bonds and debentures offered to the bank by corporate other than NBFCs for availing secured lending for Working Capital or other productive purposes which do not involve stock broking or investment in capital markets. Advances made by banks to individuals for personal purposes like education, housing, consumption etc. 10.5.3. Margin Requirements - Capital Market Exposure 10.5.3.1. A uniform margin of 50 percent shall be applied on all advances /financing of IPOs/issue of guarantees. A minimum cash margin of 25 percent (within the margin of 50%) shall be maintained in respect of guarantees issued by the Bank for capital market operations.

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10.5.3.2. Bank shall also comply with the following regulatory restrictions, inter-alia, on loans and advances against shares and debentures : No loans shall be granted against partly paid shares. No loans shall be granted to partnership / proprietorship concerns against the primary security of shares and debentures. Banks and their subsidiaries should not undertake financing of "Badla" transactions. 10.5.4. Sub-ceilings on exposure to Capital Market : 10.5.4.1.Advances to Individuals Against shares a. Advances to individual against shares to be considered for genuine individual investors and should not support collusive action by set of individuals, belonging to one group of interconnected entities enabling them to obtain multiple advances in order to support particular scrip or stock-broking activities of company/ies for their financial benefits. b. The maximum ceiling prescribed by RBI for Loans against the security of shares, debentures and PSU bonds to individuals, if held in physical form should not exceed the limit of Rs.10.00 lakh per individual borrower (Rs.20.00 lakh per individual borrower, if the securities are held in demat form). c. Advances against units of mutual funds including units of Unit-64 scheme would attract the quantum and margin requirements as applicable to advances against shares and debentures wherever stipulated. 10.5.4.2.Advances against shares to Stock Brokers and Market Makers : a. The Banks are free to provide credit facilities to stockbrokers and market makers on the basis of their commercial judgement, within the policy framework approved by their Boards. However, in order to avoid any nexus emerging between inter-connected stock broking entities and banks, the banks should fix, within the overall ceiling of 5 per cent prescribed a sub-ceiling for total advances to -

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I. All the stock brokers and market makers (both fund based and non-fund based i.e. guarantees) and II.To any single stock broking entity, including its associates / inter-connected companies. b. Our Bank has decided a ceiling of 1.50% for (i) above i.e . total advances to all the stock brokers and market makers (both fund based and non-fund based is granted) and ceiling of Rs.10.00 crore for (ii) above i.e. to any single stock broking entity, including its associates / inter connected companies. The General Manager (Credit) and General Manager (Gujarat) are authorised to sanction limit upto Rs.5.00 crore and ED/CMD is authorised to sanction limit above Rs.5.00 crore and upto Rs.10 crore within the respective discretionary powers and any advance above Rs.10 crore to any single stock broking entity including its associates /inter-connected companies shall be considered by the Management Committee but within the overall ceiling.

c.

Guidelines in respect of Capital Market Exposure are under revision with Reserve Bank of India and the same would be implemented on receipt of the detailed guidelines. 10.5.5. Financing for Initial Public Offering (IPOs) : 10.5.5.1. The maximum amount of finance that the bank can grant to an individual for IPOs is Rs.10.00 lakh. Corporates should not be extended finance for investment in other companies IPOs. NBFCs should not be provided finance for further lending to individuals for IPOs. Finance extended by the bank for IPOs would be reckoned as an exposure to capital market.
(Circular Nos. 132/37/2001 dated 17/8/2001, 126/16/2002 dated 2/8/2002 and 326/3/2004 dated 30-1-2004 issued by Credit Policy Dept)

10.5.6. Bank Finance to employees to buy shares of their own companies:

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10.5.6.1. Bank is following the RBI guidelines for financing of shares to individuals under ESOP / IPO of the company. The Bank has set a maximum limit of Rs.1.00 lakh or six months salary of the employee whichever is less for finance to assist employees to buy shares of their own company under the employees quota. 10.6. Investment by way of Venture Capital
10.6.1.

In order to encourage the flow of finance for venture capital, the banks investment in venture capital (including units of dedicated Venture Capital Funds meant for Information Technology) would be over and above the ceiling of 5 per cent of the banks total outstanding advances (including Commercial Paper) as on March 31 of the previous year. This would, however, be subject to the condition that the venture capital funds/ companies are registered with SEBI. On a review of the recent developments, including overall credit growth and growth of investment in venture capital vis--vis other sectors, the Reserve Bank of India vide its Circular No.RBI/200506/27 RPCD. No. Plan.BC.5/04.09.01/2005-06 dated 01-07-2005 has informed that

10.6.2.

the fresh investments that may be made by banks on or after July 1, 2005 in venture capital shall not be eligible for classification under priority sector lending; and that the investments, which have already been made/to be made by banks up to June 30, 2005, in venture capital shall not be eligible for classification under priority sector lending with effect from April 1, 2006.

10.6.3.

The Bank, therefore, shall align the priority sector lendings/investments suitably so as to comply with the above guidelines.

10.7. Exposure to Leasing, Hire Purchase and Factoring Services 10.7.1. Bank should maintain a balanced portfolio of equipment leasing, hire purchase and factoring services vis--vis the aggregate credit. Their exposure to each of these activities should not exceed 10% of total advances.

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10.8. Exposure to Indian Joint Ventures/Wholly-owned subsidiaries abroad 10.8.1. Bank is allowed to extend funded /non-funded credit facilities to Indian Joint Ventures/ Wholly-owned subsidiaries abroad. Bank is also permitted to provide buyers credit / acceptance finance to overseas parties for facilitating export of goods & services from India. The above exposure will be restricted to a limit of 10% of banks unimpaired capital funds (Tier I and Tier II capital) subject to the following conditions: Loan will be granted only to those joint ventures where the holding by the Indian company is more than 51% Proper systems for management of credit and interest rate risks arising out of such cross border lending are in place. To comply with Section 25 of Banking Regulation Act, 1949, in terms of which the assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than 75% of its demand and time liabilities in India. In other words, aggregate assets outside India should not exceed 25% of the banks demand and time liabilities in India. The resource base for such lending should be funds held in foreign currency accounts such as FCNR (B), EEFC, RFC etc. in respect of which banks have to manage exchange risk. Maturity mismatches arising out of such transactions are with in the overall gap limits approved by RBI The countries where the joint ventures/ wholly owned subsidiaries are located should have no restrictions applicable to these companies in regard to obtaining foreign currency loans or for repatriation etc. and should permit non-resident banks to have legal charge on securities /assets abroad and the right of disposal in case of need. 10.9. Bank Loans for Financing Promoters Contribution 10.9.1. Loans sanctioned to corporates against the security of shares (as far as possible demat shares) for meeting promoters contribution to the equity of new companies in anticipation of raising resources, should

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be treated as banks investments in shared which would thus come under the ceiling of 5% of the banks total outstanding advances (including Commercial Paper) as on March 31 of the previous year, prescribed for banks total exposure including both fund based and non-fund based to capital market in all forms. 10.9.2. These loans will also be subject to individual/group of borrowers exposure norms as well as the statutory limit on shareholding in companies detailed above. Bank Financing to PSU Disinvestments

10.10.

10.10.1. In the context if Government of Indias programme of disinvestments of its holding in some public sector undertakings (PSUs), it has been clarified to banks by RBI that Banks can extend finance to the successful bidders for acquisition of shares of these PSUs, subject to certain conditions. If on account of banks financing acquisition of PSU shares under the Government of Indias disinvestments programmes, any bank is likely to exceed the regulatory ceiling of 5% on capital market exposure in relation to its total outstanding advances as on March 31 of the previous year, such requests for relaxation of the ceiling would be considered by RBI on a case by case basis, subject to adequate safeguards regarding margin, banks exposure to capital market, internal control and risk management systems, etc. The relaxation would be considered in such a manner that the banks exposure to capital market, in all forms, net of its advances for financing of acquisition of PSU shares shall be within the regulatory ceiling of 5 percent. 10.10.2. RBI would also consider relaxation on specific requests from banks in the individual/ group credit exposure norms on a case by case basis, provided that the banks total exposure to the borrower, net of its exposure due to acquisition of PSU shares under the Government of India disinvestments programme, is within the prudential individual /group borrower exposure ceiling prescribed by RBI. 10.11.
10.11.1.

Acquisition of Equity in Overseas JVs/Subsidiaries

In terms of RBI Circular No.BDOD.DirNo.BC.93/13.07.05/ 2004-05 dated 7th June, 2005, banks are permitted to extend financial assistance to Indian Companies for acquisition of equity in overseas joint ventures/ wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment, under a Board
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approved policy containing overall limit on such financing, terms and conditions of eligibility of borrowers, security margin etc. Bank may extend such financing to Indian companies. Detailed procedure in this regard will be formulated in due course. 10.12. Safety Net Schemes 10.12.1. Often merchant bankers assume large exposures by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price. In some cases, such schemes were offered suo motto without any request from the company whose issues are supported under the schemes. Banks/their subsidiaries have therefore been advised by RBI that they should refrain from offering such Safety Net facilities by whatever name called. 10.13. Fresh exposure on Compromise Accounts

10.13.1. Bank may in appropriate cases, after being satisfied with the reasons of request for credit facilities by borrowers in whose accounts/group accounts, bank had earlier entertained compromise arrangement with or without sacrifice, consider need-based fresh financial assistance to such borrowers. However, the following conditions inter-alia be followed: Willful defaulters would not at all be entertained. Detailed Credit appraisal based on extant norms and guidelines to be undertaken. No prior commitment is to be made by Branch/Region and all such cases should be referred to concerned functional head at Corporate Centre for activity clearance. GM (Credit)/GM (Gujarat) may consider such cases for inprinciple approval for proposals falling under the power of Regional Manager/Dy. General Manager. Executive Director may consider the proposals falling under the powers of GM and all other cases may be considered by CMD. Guidelines of RBI, if any, from time to time in this regard will be followed scrupulously. 10.14. Advances to borrowers appearing in Defaulters List/Caution List

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10.14.1. No delegatee shall sanction fresh renew /review proposal of Rs.25.00 borrowers appearing in caution list / list. The authority to consider all such Management Committee / Board.

limit /enhancement in limit/ lac and above in respect of defaulter list / wilful defaulter cases shall vest at the level of

10.14.2. In respect of such cases with limit less than Rs.25.00 lakh, GM (Gujarat) and GM (Credit) shall be the delegated authority to take credit decision. Such authorities shall be guided by the following criteria: No proposal will be accepted in following cases. i. If he is defaulter as Proprietor / partner of a firm and proposes for loan in individual capacity / as partner of a firm. ii. If he is a promoter director or director having effective control over the management of defaulting company and proposes for loan in individual capacity / as partner of a firm or as director of a company. No prosecution should be pending against the proprietor / partners / director in connection with defaulting company. The borrower should have shown proper transparency in terms of proper disclosure of related facts. However, the above criteria may be relaxed wherever the sanctioning authority is satisfied that the borrower is co-operating with the Bank to repay the dues. 10.15. Credit Risk Management for Takeover of Advances

10.15.1. Bank has stipulated the following norms for taking over of advances from other Banks: The borrowal account should have been classified as standard asset with satisfactory track record for the last One Year. The financial ratios should be as per norms with the permissible deviations. Such borrowal accounts may be under consortium / sole banking / syndication / multiple banking arrangements. In case of taking over of an account from other Bank (fund based & non fund based facilities), the Bank should obtain satisfactory credit report of the borrower from their bankers. OR Alternatively The Branch Manager should obtain the Banks statement of accounts for the last one year (atleast one year) and certify that the operations in the account including servicing of interest/installments are satisfactory, which also should be confirmed by way of a certificate from the borrowers chartered

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accountants. However, Bankers Credit Report should necessarily be obtained, before release of the limits being taken over. Sanction letter from the existing bank/s shall also be obtained for verification of existing borrowing arrangements of the borrower with detailed terms of sanction. Branch Manager should carry out pre-sanction visit of the borrowers factory/office and submit report thereof including market information. Before taking over, our Bank should make an independent assessment of the credit requirements of the borrower by calling for complete financial, production and the sales data, as also latest annual accounts of the borrower, so that the borrowers genuine credit needs are fully met by our bank. If the names of the company and/or its associate concerns, its directors/ promoters etc. appear in the Defaulters List or Caution List of RBI/ECGC/CIBIL etc., the discretion regarding takeover lies with the Management Committee.

Specific Industry/Sectoral Limits (Credit Concentration) 10.16.1. With a view to avoid concentration of credit in some particular sectors, the Bank will observe the following ceilings in respect of total exposure by way of fund based limit as a percent to Gross Bank Credit, industry-wise as under : Ceiling as percentage to Sr Industry / Sector Gross Bank Credit Not to Exceed (of last quarter) 1 Infrastructure Finance a) Power 15.00% b) Roads /Bridges /Ports & Dams 7.50% c) Telecom 7.50% 2 Information Technology & Bio-Tech 5.00% 3 Gems & Jewellery 7.50% 4 Iron & Steel 7.50% 5 Metal & Metal Products 5.00% 6 Sugar Industry 1.00% 7 Advances against Shares & 1.50% Debentures 8 Advances to NBFCs 10.00% 9 Ship Breaking 0.50% 10 Construction including Builders & 7.50% Developers 11 Chemical & Petrochemical 5.00%
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Pharma 2.50% Textiles 2.50% Retail 2.50% Educational Institutions 2.50% Others-Advance to any other 5.00% Particular Industrial Sector 10.16.2. The ceilings as above are indicative only and it is not envisaged that any credit worthy proposal will be turned down only on the ground that above ceiling may be exceeded. In the event of such a situation, the Board of Directors or Management Committee of the Board may, at their discretion, consider such proposals beyond the prescribed ceilings on merits. 10.16.3. The sector-wise ceilings will be monitored at quarterly intervals and compliance thereto, along with details of deviations if any, shall be placed before the Board of Directors by Credit Risk Management Department, HO. 10.16.4. The RBI in its annual policy statement 2004-2005 has expanded the definition of Infrastructure Lending. 10.16.5. Definition of Infrastructure lending 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 : i) a road, including toll road, a bridge or a rail system ii) a highway project including other activities being an integral part of the highway project iii) a port, airport, inland waterway or inland port iv) a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid management system v) telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e. a satellite owned and operated by an Indian company for providing telecommunication

12 13 14 15 16

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service), network of trunking, broadband network and internet services vi) an industrial park or special economic zone vii) generation or generation and distribution of power viii) transmission or distribution of power by laying a network of new transmission or distribution lines ix) construction relating to projects involving agroprocessing and supply of inputs to agriculture x) construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality xi) construction of educational institutions and hospitals 10.17. Unsecured Loans: 10.17.1. The Reserve Bank of India had, vide circular DBOD No. BP.BC.No.97/21.04.141/2003-04 dated 17th June 2004, issued revised guidelines on unsecured exposures of banks replacing the earlier guidelines limiting commitments by way of unsecured guarantees in such a manner that 20% of a banks outstanding unsecured guarantees plus the total of its outstanding unsecured advances should not exceed 15% of its total outstanding advances. The revised guidelines allow banks boards to formulate their own policies on unsecured exposures. For the purpose of these guidelines, unsecured exposure has been defined as an exposure where the realizable value of security, as assessed by the bank/approved Valuers /RBIs Inspection Officers, is not more than 10%, ab-initio, of the outstanding exposure. Exposure shall include all funded and non-funded exposures (including underwriting and similar commitments). Security will mean tangible security properly charged to the bank and will not include intangible securities like guarantees, comfort letters etc.
10.17.2.

IBA Working Group on the matter after deliberations came to the conclusion that the term unsecured exposure should cover the totality of banks exposure to a borrower covering both funded limits as well as non-funded limits. If the tangible security (something, which is definite and real) covering the total exposure is not exceeding 10%, the entire exposure to the party has to be treated as unsecured. If the tangible security exceeds 10% of the total exposure ab-initio, the entire exposure has to be treated as secured.

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10.17.3.

RBI guidelines refer to ab-initio security cover in order to revisit the classification of advances as secured or unsecured at the time of such reviews. The IBA Working Group has prepared an illustrative list of secured & unsecured facilities generally considered by banks to meet credit needs of borrowers, which is as under: A) Illustrative list of secured facilities i) Advances secured by charge over inventory, bookdebts, bills, and lien on cash margins. ii) Advances against demand drafts or cash equivalent securities iii) Loans against land, building, plant and machinery. iv) Loans against hypothecation of standing crops v) Loans against Trust Receipts/ Lorry Receipts B) Illustrative list of unsecured facilities i) Guarantees, letter of credit, etc. where the cash margin is less than 10% ii) Cheques purchases iii) Outstanding Credit Card dues iv) Loans against Securitisation of future cash flows

10.17.4.

10.17.5. Though the RBI has withdrawn ceiling on maximum exposure by way of unsecured guarantees and advances, as a prudent policy bank has decided to restrict as under: The outstanding unsecured guarantees plus the total of outstanding unsecured advances in terms of definition of unsecured guarantees & advances of RBI as stated above should not exceed 25% of total outstanding advances (including non fund based). 10.18. Industry wise Lending Guidelines:

10.18.1. The Bank recognizes that financing of certain industries like Diamond Exports etc and industries / sectors shifted from Discretionary List to Open List require specific and separate guidelines for taking exposure. In all such cases, where deemed necessary, the Bank shall frame, with approval of the Board of Directors / Committee of Directors on Integrated Risk Management, specific guidelines for adherence by operating units at all levels. For this purpose, the
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guidelines on financing of Builders & Developers, Educational Institution, Hospitals, Hotels and Restaurants, Diamond industry, film industry etc. to be adhered to.
10.18.2.

The industry specific guidelines approved by Board of Directors from time to time specify, inter-alia, norms for financial ratios like Current ratio, Interest Coverage Ratio, Debt Equity Ratio and DSCR etc. For convenience of operational units, it is clarified that such levels of financial ratios specified are Indicative Levels only as deviations may be considered by the sanctioning authorities with due justifications/reasons. 10.19. Exit Policy

10.19.1. In the case of borrower where the score obtained as per Credit risk rating system is less than 55, no enhancement is to be considered by any authority below ED/CMD and borrower should be advised to make alternative arrangement at the earliest so as to provide exit route to the Bank. 10.19.2. In case the borrower or its associate or group concern has failed / defaulted in meeting its financial obligation with our bank and /or with other banks /financial institutions, bank shall endeavour to exit from the existing exposures from all the concerned accounts, provided the default is not on account of external reasons. *****

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11. 11.1.1.

CREDIT MONITORING POLICY

11.1. Credit Portfolio Monitoring: The Bank will monitor its credit portfolio regularly with particular reference to exposures, industry wise and to sensitive sectors. Such monitoring will also focus on exposure by way of unsecured advances. All such reviews shall be on quarterly basis and shall be placed before the Committee of Directors on Integrated Risk Management / Board of Directors by Credit Risk Management Department, HO. 11.2. Borrower wise Monitoring: The Bank will strengthen its extant systems and procedures on monitoring of its advances, borrower wise. Specific attention will be paid to monitoring at, monthly intervals, of troubled exposures / weak credit i.e. Standard B category assets of Rs.10 lakh and above which exhibit signs of weaknesses. Large Accounts causing concern shall also be subjected to Special Audit by experienced firms of Chartered Accountants to identify areas of weaknesses in such accounts in order to take necessary corrective action. Further, the extant system of monitoring all irregularities in borrowal accounts with credit approvals or exposure levels of Rs 1.00 crore and above by Head Office will be adhered to. 11.3. Loan Review Mechanism The Bank views Loan Review Mechanism (LRM) as an important tool of credit risk control. The Bank will adopt a two pronged approach to LRM consisting of: 11.3.1.1. Credit Audit of borrowal accounts above Rs.10 crore every year with emphasis on Standard B category accounts, to ensure comprehensive scrutiny of the accounts which inter alia includes quality of management, financial position, risk perception, project viability, and operations etc with the Credit Audit Reports to be placed before Audit Committee of the Board along with views / suggestions of concerned General Manager by the Internal Audit & Inspection Department, HO 11.3.1.2. Control Returns System shall be strengthened to ensure constant monitoring of accounts. 11.4. Monitoring through MMS

11.2.1.

11.2.2.

11.3.1.

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11.4.1.

In the light of restructuring and/or up-grading of non-performing Assets, it is essential that review of large borrowal account/s is/are undertaken constantly and vigilantly to ensure that any warning signal regarding weakness of the borrowal accounts are identified and any irregularity/ies found in the operations of the account are arrested at the initial stage itself. The remedial measures will be taken by the operational units at the sight of first signal in the change of health of the borrowal account, which would be easily identified either through the conduct of the account at the operational level or non compliance of certain critical terms of sanction. The Monthly Monitoring Statement (MMS) would be a tool to identify such signals for taking corrective measures at the appropriate time. The yearly review / renewal would enable the branch to have a close look at the financial position of the borrowal account. Based on the MMS of borrower, any deficiency, noted in the conduct of the account such as frequent exceeding, non payment of quarterly interest/installments etc. and non co-operation / compliance as to submission of stock statements, inadequate insurance etc., besides status of documentation/ charge registration etc. could be easily identified by perusing the statement. The corrective steps / compliance etc. taken promptly based on such signals, statements will enable the branch to improve compliance levels besides placing the correct factual position while discussing with the Statutory Auditors/RBI inspectors as of the year end position. The Bank will ensure a continuous control over the large borrowal accounts to see that they remain standard and do not slip into NPAs. It will also be ensured that all the columns in the MMS are filled with accurate information at Branch level to enable the controlling offices to render scientific analysis of the data received on the borrowers transactions. Clarification: In view of the fact that there is fairly stable system of monitoring of advances of Rs.10 lakh and above at RO/HO level through Monthly Monitoring Statements of Credit Monitoring Cell. It is felt that the system of Quarterly Review Mechanism (QRS) may be dispensed forthwith.

11.4.2.

11.4.3.

11.4.4.

11.4.5.

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12.

CREDIT PROCEDURES & PRACTICES AT A GLANCE

12.1. Credit Approval Authorities: 12.1.1. The authority to approve credit, both fund based and non-fund based or a combination of both, including enhancements in respect of existing borrowers shall be as per the Banks Delegation of Discretionary Powers for Conducting Banks Business as approved by the Board of Directors from time to time. The Board of Directors shall be the competent authority to revise / amend / modify the Delegation of Discretionary Powers for Conducting Banks Business from to time. No delegatee shall exceed the powers vested in him/her for according credit approvals except as provided for in the Delegation of Discretionary Powers for Conducting Banks Business. Every delegatee under the Discretionary Powers for Conducting Banks Business shall report all credit approvals approved by him / her, in the manner provided therefor, to the next higher authority for NOTING by the end of next calendar month from the month of according of credit approval. No delegatee at the level of Regional Office / Branch (irrespective of the category of the branch or the cadre of the delegatee) shall exercise the powers vested in him/her for according credit approvals if the submission of Control Returns are in arrears for more than 30 days beyond the prescribed due date/s. The next higher authority may, at his discretion, provide an extension of further 30 days for this purpose in genuine cases where necessary. 12.2. Group Concept 12.2.1. 12.2.2. The Banks approach to Group borrowers shall be in line with guidelines set out at Annexure hereto. While dealing with cases involving extension of fresh facilities to the units belonging to various industrial groups, considering the possibility of intra-group transfer of funds, the following points be kept in view:
Financial assistance for setting up new venture or expansion of a

12.1.2.

12.1.3.

unit belonging to a industrial group which is a willful defaulter or non-cooperative shall not be extended so as to prevent any diversion of funds.

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In the event of any dispute or dissension within the group, any

attempt on the part of the group to unduly prolong/postpone a settlement on account of such dispute/discussion should not be permitted and should be sorted out amicably. While committing fresh or additional funds to a unit of any recalcitrant group, Bank will exercise necessary care and caution and obtain full information about the dealings of the concerned units and all other units of the group with the banks/financial institutions. 12.3. Interchangeability 12.3.1. Interchangeability of sanctioned limits under Fund Based and Non Fund based limits shall be allowed only by delegatees of the rank of Regional Managers/AGM and above as per respective discretionary powers. However, Interchangeability between LC and BG limits under non-fund based limits is not permitted, unless both the facilities are meant for same purpose. In exceptional cases, this may be permitted by GM & above within his discretionary powers. Authority to permit Conversion of Non-fund based facility to Fund based facility shall be restricted at the level of General Managers and above as per respective discretionary powers. In exceptional cases, Executive Director / Chairman & Mg Director may permit interchangeability in case of borrowers with total limits above their discretionary powers, subject to ratification by the Management Committee. Conversion of post-sale limits into pre-sale limit shall not be permitted except to exporters and 100% EOU. In other cases, wherever such interchangeability is required, the same shall be with prior approval of General Manager and above within their respective discretionary powers. Conversion of pre-sale limit to post-sale limit will be at the level of original sanctioning authority.

12.3.2.

12.3.3.

12.4. Timely Disposal of Credit Applications:

12.4.1.

Sanction of Facilities: 12.4.1.1. The Bank will endeavour to dispose all credit applications by its operational units in respect of various discretionary authorities as under:
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No A

Category / Sector Proposals under Anti Poverty Programmes / Government sponsored Schemes Proposals from SSI & Other priority sectors with limits of less than Rs 10 lakhs Proposals Schemes under Retail Banking

Maximum time limit for sanction 30 days

30 days

C D i)

30 days

Proposals for Export Finance Proposals for sanction of enhancement of credit limits. fresh/ 45 days 30 days 15 days

ii) Proposals for renewal of existing limits iii) Proposals for sanction of ad-hoc credit facilities E i) In all other cases: Proposals for sanction of enhancement of credit limits. fresh/

60 days 45 days 30 days

ii) Proposals for renewal of existing limits iii) Proposals for sanction of ad-hoc credit facilities 12.4.1.2.

The Bank recognizes that above time limits are outer limits only and expeditious disposal even before expiry of above time limits, preferably within 30 days from the date when the application, complete in all respects with usually required information and financial statements, is submitted to the Bank, will be endeavoured at all levels.

12.4.2.

Rejection of Loan Applications: 12.4.2.1. Any decision on rejection of loan application/s along with reasons therefore shall be communicated to the applicant/s expeditiously, in any case, within a reasonable time period.

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12.4.2.2.

Rejection of loan applications pertaining to Weaker Sections of the society, Scheduled Caste / Scheduled Tribe, Export Credit applicants shall be done only at the level of next higher authority.

12.5. Credit Committee 12.5.1. All credit proposals for approval of Executive Director / Chairman & Mg Director / Management Committee / Board shall be assessed from the angle of Risk factors & its mitigation and recommended by a Credit Committee. The Chairman & Mg Director shall be the competent authority to setup the Committee, to change the composition & quorum for the committee and other matters. 12.6. Credit Appraisals 12.6.1. The Bank will ensure that the industrial borrower obtains clearance certificate from Pollution Control Board and other statutory environmental requirements of the Government of India wherever applicable and the concerned Department of the State Government before releasing of credit limits. The same will form part of the terms of sanction. Pre-sanction visit / inspection will be conducted by the Banks branch level officials to ascertain the facts about infrastructure facilities available at the site of the unit/ project and assess all other aspects of the project. In case of multiple/ consortium arrangements close co-ordination with other banks/financial institutions at the time of the appraisal and disbursement and follow up of advances should be ensured so that timely exchange of data / information is made for effective monitoring and control of advance. The Bank shall carry out dynamic financial analysis by scrutinizing the audited accounts for previous years so as to ascertain the trend of growth in production, sales, profitability and improvement / impairment in all important financial parameters in order to know the overall health of the borrowal account.

12.5.2.

12.6.2.

12.6.3.

12.6.4.

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12.6.5.

The Bank will follow a policy of appraising financial position of a borrower (for sanction of new limits / enhancement of existing limits and for renewal / review) based on the audited financial statements of the borrower for previous financial year wherever available. Further, the Bank will follow a system of introducing disincentives to borrowers who fail to submit audited accounts in time by levying interest rate applicable to next lower credit rating than the one assigned to the borrower beyond six months from closure of a financial year for which audited accounts are not submitted. Where appraisal of financial health of a borrower (for sanction of new limits / enhancement of existing limits and for renewal / review) has been based on unaudited financial statements of the borrower for previous financial year, the Bank shall review the financial appraisal based on audited financial statements immediately on receipt. In case of adverse variations more than 10% or any significant deterioration in the financial health indicated by the Audit Report, a note shall be put up to the sanctioning authority for information and necessary direction within a month. 12.7. Strategy for Credit Management

12.6.6.

12.7.1.

The areas of the Banks credit management strategies would be: Credit plan for budgeting the envisaged credit expansion during the financial year Spread management with thrust on small & mid sized commercial segment accounts for credit growth with risk diversification through retail lending schemes. Foreign currency funds shall be made available to our exporters/other borrowers under the guidelines of our FCDL scheme. Identification of new avenues, assessment of existing product line & portfolio based on the risk-return profile and previous experience of the bank to update negative, discretionary and open list of the bank. With robust interest rate policy in place, selective deployment of credit on risk-return scale to maintain the earning /spread risk diversification of the Bank with sub PLR policies for maintaining & improving credit portfolio quality of the Bank. Improvement in credit dispensation system for quick & efficient service to credit clientele. Besides, our existing three-tier channel including Head Office, Regional Offices

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and Branches, the Bank will designate branches for directed lending to Corporate/SME/Retail/Agriculture and other identified sectors. Sector wise/industry wise diversification of credit portfolio with regard to macro economic scenario and the performance/ prospects /outlook of the sector/industries Export sector plays pivotal role in the countrys economy and the Banks thrust on export credit will be maintained /fine-tuned with specific references to the Gold Card Scheme in vogue and new potential export avenues. Management of fee-based income at micro and macro level by putting in concerted efforts towards non-fund based business of the Bank. Maturity wise diversification of portfolio with major thrust on Working Capital and short term finances which provides quick recycling of funds with exposure to medium and long term finance ranging between 5 7 years subject to exposure norms prescribed/directions of Asset-Liability Management Committee to have a balanced portfolio In a phased manner, all credit exposures shall be covered under credit rating framework of the Bank. The Bank will promote its credit products through the Banks publicity programme with services of Marketing Division and website to generate awareness and acceptability amongst end-users. Prudential credit risk management practices shall receive greater attention by timely identification, quantification, management and mitigation of various risks associated with credit, continuous basis. Compliance with all the Statutory and Regulatory stipulations/requirements shall be strictly ensured in credit operations of the Bank. Based on the credit expansion plans, the Bank shall assess, induct and develop through training and work experience, adequate number of credit officers for assessing, approving and managing credit risks.

12.8. Appraisal cum proposal memorandum 12.8.1. The appraisal cum proposal memorandum shall be placed before the competent authority for consideration with specific recommendations
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as to whether or not to approve the credit facilities. The recommendation for approval shall include nature and extent of credit facilities proposed, purpose, securities, margin, rate of interest, commission, repayment, tenor of bills, guarantee etc. Further, the Bank shall stipulate all necessary covenants to ensure that: the Bank funds are utilised for the purpose it is lent there is no diversion of funds the business entity maintains financial stability securities stipulated are charged properly the Bank is able to have proper monitoring and control over the exposure the borrower complies with laid down guidelines of the Bank/regulatory requirements 12.9. Other General Guidelines 12.9.1. In respect of sick/weak units, where the Bank has agreed to writeoff/waive whole or part of the dues, as per the compromise settlement approved, instead of rehabilitating the unit, no fresh finance in any form/manner shall be extended to such units except when there is a change in management/promoters of the unit, subject to the viability being established, proper sanction being obtained and compliance of guidelines /instructions issued in the matter by RBI/BIFR being ensured. These guidelines will also be applicable to any other borrower unit/entity wherein the Bank has agreed to write off/waive whole or part of the dues, as per the compromise settlement approved without rehabilitation of the unit and even where the name/s of such borrower/s does not appear in defaulters list/caution list circulated by RBI/CIBIL/ECGC from time to time. Establishment of facilities The credit facility shall be made available to the constituent only after ensuring complete documentation and compliance with the terms of sanction. The facility shall be released in the manner stipulated in the terms of credit approval ensuring end use of funds. Certificate of compliance of terms and conditions be submitted to the competent authority as per extant guidelines (HO Circular No.253/41/2002 dated 30-11-2002)

12.9.2.

12.9.3.

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12.9.4.

Legal Audit All the documents including mortgages shall be verified and vetted by Our legal officer /Panel Advocate to ensure enforceability and validity of the documents as per the extant guidelines and a certificate to this effect shall be kept on record. 12.10. Preventing slippages for Technical Reasons

12.10.1. In view of clarificatory guidelines by RBI making Income Recognition and Asset Classification norms more stringent, Branches shall ensure that the account does not slip into NPA category on account of the following technical reasons: Review/renewal of accounts overdue for 180 days or more from date of actual review/renewal of accounts Stock statements not received for three months or more. 12.10.2. Bank has issued detailed guidelines on the above aspects and branches shall ensure that no account shall slip to NPA due to technical reasons. 12.11. Short Review Technical Renewal/Review of limits

12.11.1. In case the regular renewal/review of limits gets delayed for some genuine reasons like non-availability of provisional /audited financial statements, a system of conducting short review to take a view on continuation of facilities, stipulating a deadline for conducting regular renewal of limits is prescribed. 12.11.2. As per extant guidelines, in the event of the borrower not furnishing the renewal papers along with the latest audited financial statements etc as and when limits are due for renewal, we resort to Technical Renewal of the existing facilities. The technical renewal is nothing but short review of the credit facilities, which should be followed by exhaustive full-fledged appraisal in the normal course. 12.11.3. The term Technical Renewal/Review is being rechristened as Short Term review to avoid confusion in interpretation.
12.11.4.

Short Review may be done for a maximum period of six months on the first occasion and if the situation demands, Short Review may be undertaken for another period of six months with proper justification

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to the satisfaction of the reviewing authority. Consecutive short reviews shall be restricted to two with a maximum period of six months for each short review. But in exceptional cases, the next higher authority (not below the rank of Chief Manager) may do more consecutive short reviews after satisfying himself about the need for the same and reasons duly recorded.
12.11.5.

Explanatory Note: Relaxation may be provided in case of restructured accounts and accounts under rehabilitation where for a variety of reasons, Short Review may have to be done till such time th eunit/account becomes normal and healthy. Where there is impairment of quality of borrower revealed through adverse features in the account, diminution in value of security etc., if need be, a Short Review should be placed before the competent authority for information and necessary direction. 12.12. Techno economic viability study norms

12.12.1. The Bank at present has term exposure at a fairly higher level. The Bank will endeavour to bring it down. Detailed appraisal of the term loan/project should be carried out by the Bank in respect of managerial capabilities, techno-economic viability, marketability of products & services etc. The Bank has approved following policy guidelines for availing services of leading agencies having technical expertise to conduct Techno-Economic Viability Studies / Market Studies. 12.12.2. In house appraisal by Bank of New Projects / Diversification where Project Cost is upto Rs.5.00 crores and Rs.10.00 crores in case of expansion of existing activities. 12.12.3. Bank has approved 17 State Level Technical Organisations promoted by FIs/ Banks/SIDCs engaged in assessing Technical & Economic Viability of the projects / Market Studies. The sanctioning authority / Appraising official is required to obtain complete appraisal report from the specified State level Consultancy Organisations and / or IDBI /FIs etc for - In case of New projects / Diversification where project cost is above Rs.5.00 crore and upto Rs.100.00 crore. - In case of expansion where project cost is above Rs.10.00 crore and upto Rs.100.00 crore.

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12.12.4. M/s.SBICAP may also be considered for this purpose in respect of projects above Rs.10.00 crore. 12.12.5. In case of projects costing more than Rs.100.00 crore, the appraisal is to be done by leading and reputed Banks/financial institution like IDBI Bank / ICICI Bank / FIs etc. 12.12.6. In case of Infrastructure projects where exposure is large, joint appraisal to be taken up with other / lead bank or broadly the appraisal report of lead financial institution may be accepted to avoid multiple appraisal and delay. 12.12.7. In-house appraisal by the borrower for expansion project and appraisal by agencies other than approved by Bank may be considered by sanctioning authority with due justification to be recorded in the approved proposal memorandum.
(Reference may be made to circular No.193/30/2002 dated 03/10/2002). However, the appraising officials should exercise due diligence in this regard.

12.13.

Methods of assessment NOF Method

For NBFCs

For Credit limits upto Rs.2 crore (Rs.5 Turnover Method crore in case of SSIs) In case working capital cycle is higher, the borrower will have the choice to be assessed under Turnover method of Modified MPBF method. For Credit limits beyond Rs.2 crore (Rs.5 For operating cycle is reasonably uniform and working capital remains more or less stable For industries, where operations are seasonal or project based in nature like, Tea, Sugar, Software, Contractors, Builders & Developers etc. crore in case of SSIs) Modified MPBF Method Cash Budget Method

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12.14.
12.14.1.

Compliance to financial parameters

A ratio is a statistical yardstick that provides a measure of the relationship between two variables or figures. The appraising official has to steer a careful course. His experience and objectives of analysis help him in determining which of the ratios are more meaningful in a given situation. Further, ratios do not provide a definite answer to financial problems. There is always the question of judgement as to what significance should be given to the figures. While some standards of reference and sources of background material may be found useful in this connection, in the final analysis, one must rely upon one's own good sense in selecting and evaluating the ratios.

12.14.2. The contribution from promoters / directors / borrowers is crucial for determining the quantum of lending by Bank. In order to ensure that promoters / borrowers stake in the business is maintained at healthy levels, indicative levels for various ratios are stipulated by our Bank. 12.14.3. The following are the desired / indicative levels fixed by the Bank for different classes of borrowers:
12.14.4.

Total Debt Equity Ratio: The indicative Debt Equity Ratio for different classes of borrowers are given below. Adherence to the same will help the Bank in maintaining a healthy credit portfolio. Sr. No. Category Borrower of the Indicative Total D/E Ratio In Case of 100% or more Collateral Security Indicative Total D/E Ratio

a) b) c) d) e) f)

Total Debt Equity Ratio Industries (Medium & Large) Industries (SSI) Traders Ship Breaking Service Industry Infrastructure Sector

3.5:1 4:1 5:1 6:1 5:1 5:1

4.5:1 5:1 6:1 7:1 6:1 6:1

12.14.5.Current Ratio:

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Sr.No. Assessment Method 1 2 Turnover Over Method Modified MPBF Method :i)Working capital limit upto Rs.10.00 Crore ii)Working capital limit above Rs.10.00 Crore

Ratio (Indicative) 1.10:1

1.17:1 # 1.25:1 #

# While working out MPBF, minimum margin to be taken @ 15% or 20% of total current assets so that minimum current ratios are maintained at 1.17 and 1.25 respectively. In case of item no 2 (i) & (ii), if the borrower has got good cash generation in future but the current ratio is lower than the minimum, the Bank may consider Working Capital Term Loan (WCTL) for a maximum repayment period of 3 years and comply with the current ratio.

12.14.6.

Interest Coverage Ratio: Interest Coverage is an indicator as to the number of times the profit covers the interest liability of the company. This is a risk parameter and an indicator to the extent to which the interest liability will be serviced on time. Profit for this purpose would mean the gross profit before interest. Indicatively Interest coverage will be between 1.50 and 1.75. Companies having term loan obligations should have higher interest coverage ratio to serve term liability. Example:- Total interest liability of the company is Rs.100/-. Gross profit means net profit plus depreciation plus interest is Rs.175/-. Interest coverage ratio will be 175 divided by 100 = 1.75 times.

12.14.7.

Debt Service Coverage Ratio (DSCR): The Bank normally considers projects having average DSCR between 1.50 to 2 as adopted by the FIs. The Bank proposes to continue with the same policy.

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12.14.8.

Current Assets Turnover Ratio: {Gross Sales/(Debtors+ Inventory)}: This ratio will indicate the turnover of the current assets in a year. Generally this will be above 1.75.
12.14.9.

PBIT to Total Assets: To have a better insight about the utilisation of assets, this ratio needs be examined to find out the comparative performance of the unit over a period of time. Internal Rate of Return on discounted cash inflow: In case of term loans of Rs.5.00 crores and above, this needs to be worked out and the same should not be lower than the cost of funds. Sensitivity Analysis: In case of term loans of Rs.5.00 crores and above, sensitivity analysis should be worked out.

12.14.10.

12.14.11.

.14.12.1.

12.14.12. Deviations: The sanctioning authorities shall look for sound financial parameters in terms of prescribed benchmarks. The stipulated parameter benchmarks for five ratios (TDER, Current Ratio, ICR, DSCR and CATO) as mentioned above will serve as suggestive and indicative tool for the sanctioning authorities to ensure a holistic credit decision. In case of existing borrowers whose dealings are satisfactory and limits are fully secured, sanctioning authorities at branch levels may renew the limits even if two parameters are not as per policy guidelines.

2.14.12.2. In case of deviations in respect of more than two parameters and / or in case where enhancement is involved, Regional authority shall consider all the proposals falling within the powers of branches.

2.14.12.3. In all other cases, where proposals fall within the powers of Regional Managers/AGMs and above, the respective sanctioning authority may permit deviations with due justification, on the merits of each case and having due regard to the business expediency, within their respective discretionary powers

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2.14.12.4. Though the deviations are allowed by the respective sanctioning authorities as prescribed above, there should be endeavour to ensure that the borrower attains the benchmark level of ratio/financial parameters with in a specified time frame.
12.14.13.

Explanatory Notes: 2.14.13.1. Current ratio varies from industry to industry. The sanctioning authority may take a view and satisfy himself /herself while accepting a lower current ratio and the reasons may be suitably recorded. Various options may be examined to improve the ratio.

2.14.13.2. Debt equity Ratio A higher ratio is generally allowed keeping in view activity of the borrower, industry, sectoral classification etc. In case of infrastructure projects and capital goods manufacturer, deviation may be considered keeping in view size of the project, funds outlay, gestation of period etc. 12.15. Credit Disbursal Norms 12.15.1. The Bank will ensure that the company/ borrower has achieved financial closure before disbursement of term loans. 12.15.2. No branch shall disburse funds or open Letters of Credit or issue any Guarantee in respect of any borrower unless all terms and conditions as per sanction terms are complied with. Branch, before disbursing funds under FBL or open Letters of Credit or issue any Guarantee under NFBL shall keep a certificate on record that all terms and conditions are complied with and that all required documentation is completed in respect of sanction at Branch level. In cases of sanctions by Regional Manager and above, the Branch Manager shall furnish such certificates to Regional Manager/ General Manager (Gujarat)/ General Manager (Credit). 12.15.3. Wherever disbursements under FBL or opening / issuance of Letters of Credit / Guarantee is necessary before full compliance to all terms and conditions, the permission of original sanctioning authority should be obtained giving justification for the same. In the case of sanctions by Managing Committee / Board of Directors, such permission shall be obtained from Chairman & Mg Director / Executive Director.
(Reference may be made to HO Circular No.253/41/2002 dated 30-112002)

12.16.

Post Disbursement Monitoring:

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12.16.1. Inspection of plant and machinery, land & building and other fixed assets should be done periodically. Any discrepancies and irregularities in value of securities should be rectified immediately. 12.16.2. Proper execution of Documentation including timely registration of charge with ROC should be ensured in accordance with the guidelines given in manual of instructions. 12.16.3. Conduct of the unit should be examined through Monthly Monitoring Statement for any symptoms of weaknesses in the health of the account, and the same should be rectified to set right the account. 12.17. Monitoring End-use of Funds

12.17.1. End use of funds should be monitored continuously. All actual drawings by the borrower for working capital should always be subject to the borrower maintaining sufficient security which is determined by the level of stocks / book debts and the prescribed margin. 12.17.2. Certificates ensuring end use of funds from competent authorities like Chartered Accountants /Chartered Engineers etc. shall be obtained, wherever stipulated. 12.18. Stock Audit Norms

12.18.1. For working capital limits (against stock/bookdebts including LC-DA facility) of Rs.1.00 crore & above and upto Rs.25 crore shall be conducted once in a year and twice in a year, if credit rating has declined from approved panel of auditors circulated by Inspection Department, HO. In case of limits beyond Rs.25 crore, the frequency of Stock Audit will be twice in a year.
12.18.2.

Where the account is causing concern, stock audit may be conducted irrespective of credit limits and frequency as decided by the bank. In case of Consortium account, Multiple Banking, the stock audit will be conducted by Lead Bank / as per consortium /Multiple Banking arrangement and reports will be obtained and examined.

12.18.3. In case of Diamond Industry, Book Audit will be conducted i.e. verification on the basis of books of accounts as per practice prevailing in the industry.
12.18.4.

The stock audit should:

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| | |

Ensure effective appraisal of securities for larger advances. Continuously monitor the weakness signs by way of independent verification. Initiate timely corrective steps through establishment of early warning signals.

12.19.

Inspection of stocks/book debts

12.19.1. Quarterly inspection of stocks/book debts & other securities should be conducted by officers from branches/controlling offices and external agencies (stock audits for large borrowal accounts). Observations of the visiting officers/stock/credit auditors observations and compliance thereon should necessarily find place in every renewal/enhancement proposal of the borrower. In view of implementation of 90 days norms for classification of assets, inspection is to be carried out more frequently wherever it is found necessary. 12.19.2. It will be ensured that the quality and quantity of the stocks are correct and in accordance with the entries in the records and the stocks shown do not include damage/ unsaleable /obsolete/old goods. While inspecting the book debts, age-wise and value wise evaluation of debtors, reason for non payment of old debts if any and verification of debtors with records should be done. 12.19.3. The inspecting officer should verify whether the rates given are based on cost price/market rate/invoice value less rebate/discount whichever is less. 12.19.4. The goods should be adequately covered by insurance against fire and other necessary risks. The official should enquire whether all premium on insurance policies have been paid and the policies are in force. 12.19.5. Stock Audit is considered as supplementary to Inspection of stocks by Banks Officials and therefore, notwithstanding Stock Audit, inspection of stocks/securities by Banks Officials needs to be carried out, per prescribed schedules. 12.20. Scrutiny of Control Returns:

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12.20.1. Control Returns received at the Regional Offices from the branches and received by General Managers (Gujarat)/(HO) from the Regional Offices should be scrutinised thoroughly and timely remedial steps should be initiated without fail.

12.21.

Security norms

12.21.1. The Banks policy with regard to security against credit will be one of obtaining a charge (by way of charge/lien/mortgage as the case may be) on the assets created out of Bank credit. The Bank will prefer to have its credit exposure covered by tangible security (either primary or collateral) to the full extent of its liability. In case, security is not available for any reason, the concerned sanctioning authority would have to get himself satisfied about the need for waiving security cover, partially. However, in any case, assets to be acquired out of credit exposure must, as a general rule be charged to the Bank by way of first charge. Collateral Security will be obtained to cover any shortfall in value of prime security in case of existing borrowers and in the case of new borrowers. The Banks policy for security shall be as under:
12.21.2.

Primary Securities Margin Norms: Bank has prescribed detailed guidelines for margins to be stipulated for various credit facilities/securities. The respective sanctioning authority at the level of the RM and above may deviate from prescribed margin with due justification. For sanction at Branch level, lower margin may be permitted by Regional Manager. Collateral Securities: The Banks policy with regard to Collateral securities shall be as under:
12.21.3.1.

12.21.3.

For New Borrowers: The Bank shall endeavour to obtain collateral security by way of fixed assets/ cash margin / shares etc.

10% to 20% of Fund based & Non Fund Based limits. However, in case of PSUs and borrowers with AAA, AA, and A rating as per our Bank's rating system no collateral may be insisted upon. In case of Consortium advances, the Bank will follow the decision on the Collaterals as agreed to by the Consortium bankers.

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Bank may insist on collateral security up to 10% in case of medium scale borrowers. Collateral Security for tiny sector and Small Scale Sector will be as per HO guidelines (Circular no.310/64/2004 dated 15-12004) and revision from time to time For existing Borrowers (upon sanction of enhanced FBL/NFBL limits): The requirement of collateral security shall be

12.21.3.2.

10% to 20% of Fund based and Non Fund Based limits Normally no collateral security may be insisted upon over and above existing collateral security if any, provided prescribed margins are maintained and the borrower is having good track record, sound financial position and satisfactory dealings with the Bank. In case of PSUs and borrowers with AAA+, AA, A rating as per our Bank's policy no collateral security need to be insisted upon. In case of Consortium advances, the Bank may follow the decision on the Collaterals as agreed to by the Consortium bankers.

12.21.3.3. In the case of industries / activities in respect of which separate lending guidelines are in force, the prescriptions as laid down therein for collateral security shall be applicable.
12.21.4.

Deviation Any non-conformity with the security norms may be considered by the sanctioning authority on merits after duly recording the reasons therefor. 12.22. Valuation of Collateral Securities:

12.22.1. The valuation of collateral security of fixed assets including landed properties is to be obtained from government approved valuers. As suggested by RBI valuation of collateral securities such as immovable properties charged to Bank should be taken once in three years. However it is desirable to obtain valuation of collateral securities once in two years.
(Reference may be made to circular no. 221/49/2001 dated 12/11/01 for details)

12.23.

Personal Guarantees of promoters:

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12.23.1. With regard to obtaining personal guarantee of promoters, the Bank will be guided by regulatory guidelines issued from time to time. However, the Bank should invariably insist for personal guarantee of promoters in all borrowal accounts except in PSU, Large Customer having AAA, AA, A rating and under consortium arrangement. However, the sanctioning authority may take a view looking to overall credit worthiness of borrowal account. 12.24. Risk Based Pricing: Interest Rate Policy: 12.24.1. The Bank will follow a policy of Risk based pricing. All credit exposures should be priced appropriately. The Bank has adopted the Cost Plus pricing approach with Sub BPLR lending decision viewed in terms of pricing by market competitors. Basically, the pricing will be done taking into account the following: i) ii) iii) iv) v)
12.24.2.

Cost of Funds; Administrative Cost; Cost of Capital required to be maintained for that credit exposure; Reasonable Return on Capital; and Risk Premium

With increased competition amongst banks for garnering new business, interest rates have become a major tool to determine competitiveness of a bank for attracting new business and to retain the existing clients. Keeping in view business interest, undermentioned authorities are empowered to consider relaxation in rate of interest as under, provided such concession is supported with proper justification in business interest of the bank and/or overall yield for deployment of resources : DG M GM ED CM D

12.24.3. Designated Authorities for extending concessional interest rate 1% below the applicable rate as per Credit Rating and not less than BPLR within his discretionary powers 2% below the applicable rate as per Credit Rating and not less than BPLR1% within his discretionary powers 2% below BPLR irrespective of Credit rating and discretionary powers 4% below BPLR, irrespective of Credit rating and discretionary powers

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12.24.4. Concessional interest rates so sanctioned shall be reviewed with next credit rating based on audited/provisional financial statements as per the extant policy guidelines. Requests of companies for frequent reductions in rates should normally be discouraged.
12.24.5.

Exclusions: Bank will follow separate policy in respect of Export Finance, Units under rehabilitation, Retail finance, Priority Sector advances & SME Advances, which are under separate dispensation formulated by Regulator/Bank.

12.24.6. In all such cases, where sub-BPLR interest rates are permitted, comparison with the yield on Govt. Securities of corresponding maturities is also to be done. 12.25. MIBOR linked Advances

12.25.1. To facilitate better funds planning, limit utilization and considering the scope for credit expansion, Bank proposes to offer this short term credit products. The succinct difference in this product compared to other short term products is that this being linked to a market related Anchor Rate viz. the MIBOR for eligible corporates. The product is a top-notch for general corporate purpose including substitution of CPs, working capital limit etc., to be marketed very selectively to top rated large corporates after ascertaining the Banks funds position. The major features of the products being: i) Large corporate borrowers of the bank with credit rating of not less than AAA of our Bank and preferably P1 or equivalent by reputed credit rating agencies. ii) Generally would be with Call and Put option. iii) Overall exposure ceiling of Rs.250 crore prescribed with size of individual advance with minimum of Rs.5 crore and maximum of Rs.50 crore per deal restrictions. 12.26. Quoting of Interest Rates

12.26.1. The Bank, subject to adequately comfortable liquidity position and in cases where reputed PSUs and large Corporates with AAA, AA rating need quotes for their loan requirements, offer quotes to canvass quality bulk advances. Such quotes shall be at the level of ED/CMD, subject to ratification by the Management Committee.

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12.27.

Authority to fix interest rate/s

12.27.1. Board of Directors shall be the competent authority to effect changes, from time to time, in interest rates on advances, including fixation of BPLR, Maximum spread over BPLR, spread in respect of each slab based on credit rating etc and fixed rates in cases where floating rate is not applicable. 12.27.2. The authority to offer Fixed Rates in specific cases shall be at the level of Executive Director and above except retail lending schemes of the Bank where Fixed Rates are specified. 12.27.3. The authority to fix interest rates on Export Credit, in accordance with regulatory guidelines shall be at the level of Chairman & Mg Director or in his absence, Executive Director. 12.28.
12.28.1.

Commitment Charges & Processing Fees

Commitment Charges In case of account having sanctioned limit of Rs 1.00 crore and above, utilisation of limit should be made within 3 & 6 months of date of communication of sanction to the party for working capital and term loan facilities respectively. If the term loan facility remains fully unutilised beyond 6 months and average utilization is less than 75% in case of working capital facilities, commitment charges will be levied @ 0.5% p.a. at quarterly rests on the sanctioned amount. In case of genuine difficulties and or according to the merit of each case commitment charges may be waived/reduced. The authority to consider waiver/reduction in commitment charges lies with General Managers in case of sanctions upto the level of GMs. For sanctions by ED & CMD, the respective sanctioning authorities shall consider waiver/concession and for MC sanctions, the authority lies with CMD and in his absence with ED. Processing Fee In order to bring in only committed borrowers in its fold, Bank may require the prospective borrowers to pay, up-front, 50% of the processing fee on the indented amount. The balance 50% of the processing fee shall be payable on sanction of the loan. In case the loan application is rejected by the Bank, processing fee paid by the borrower will be refunded. The above clause will not be applicable to PSUs / AAA, AA rated companies and lending under specific schemes (where specific exemption is granted). Sanction will be communicated to the borrower, ONLY AFTER recovery of process fee as per the terms of sanction.

12.28.2.

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12.28.3.

Guidelines for entitlements in reduction / concession in Service charges / documentation charges / processing charges: Any concession or waiver of charges for valued customers may be considered by the respective General Manager / ED / CMD taking into account the business prospects, track record, other business consideration.
(Reference may be made to circular No.285/63/99 dated 7/10/99 for details)

12.29.

No Objection Certificate (NOC)

12.29.1. The Bank will maintain healthy relationship with its borrowers and will increase exposures to good rated clients. However, the borrower may request for granting of NOC to seek financial assistance from other banks and institutions, which may involve ceding charge on Bank's securities, thereby effecting modifications in the terms and conditions of sanction. 12.29.2. As granting of NOC tantamount to modification in the existing terms and conditions of the sanction, the NOC can only be granted by the sanctioning authority within his discretionary powers. In case of MC sanction, CMD and in his absence ED shall be authorised to grant NOC, which shall be placed before the Management Committee for information. 12.29.3. In case of takeover of the account by other bank/s, the respective sanctioning authority shall consider issuance of NOC. In case of MC sanctions, CMD and in his absence, ED shall be the competent authority. 12.30. In-Principle Approval

12.30.1. In this era of cut-throat competition, it is imperative that Bank should be in a position to communicate in-principle approval to the prospective borrowers expeditiously. In this regard, the sanctioning authorities may consider in-principle approval within their discretionary powers after examining the overall bankability of the prospective client and policy compliances. However, in case of sanctions within the purview of the Management Committee, the CMD and in his absence ED shall be the competent authority to consider in-principle approval followed by MC ratification subject to the following: Without any ceiling in case of PSUs

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Upto an exposure of Rs.100 crore in case of High rated corporates other than PSUs *****

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13.

CREDIT RECOVERY POLICY

13.1. Management of Credit Assets: 13.1.1. Non-performing assets may result on account of overall economic factors like recession, change of Govt. Policy etc and lack of monitoring etc. To ensure that no asset becomes NPA due to lack of monitoring or due to genuine difficulties faced by borrowers, the Bank will adopt a strategy of classifying its Standard Assets into A & B categories. A category assets are those which do not exhibit any signs of weaknesses while B category assets are those that are exhibiting signs of weaknesses. In the case of B category assets, the Bank will take all necessary steps like restructuring / rephasement of repayment, close monitoring etc. The details of every customer who has caused loss to the Bank should be recorded. The antecedents of the proprietors / borrowers are required to be verified while doing credit appraisal. By circulating information of Defaulter borrowers above Rs.1.00 Crore where suit have been filed or classified as Doubtful. ECGC, Caution / Specific approval list, Banks own defaulters list is to be considered while examining the credit proposal for Fresh, Review / Renewal and Enhancement. 13.2. Loan Recovery Policy
13.2.1.

The Bank has approved Loan Recovery Policy guidelines on Restructuring, Rehabilitation of Sick Units, BIFR, Corporate Debt Restructuring etc., which is being updated/modified on continuous basis by the Recovery Management Department, HO. With regard to Corporate Debt Restructuring, the Reserve Bank of India has come out with detailed guidelines vide its Circular No. DBOD.No.BP.BC.45/21.04.132/2005-06 dated 10-11-2005 based on the recommendations of High Level Group under the chairmanship of Shri Vepa Kamesam, then Deputy Governor, Reserve Bank of India, for facilitating timely and transparent mechanism for restructuring corporate debts of viable corporate entities affected by internal or external factors, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. While the Corporate Office is issuing necessary Circular in this regard separately, the major modifications made in the existing CDR mechanism are enumerated as under: a. extension of scheme to entities with outstanding exposure of Rs.10 crore and more

13.2.2.

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b. requirement of support of 60% of creditors by number in addition to the support of 75% of creditors by value with a view to make the decision making more equitable c. discretion to the core group in dealing with willful defaulters in certain cases other than cases involving frauds or diversion of funds with malafide intentions. d. linking the restoration of asset classification prevailing on the date of reference to the CDR cell to implementation of the CDR package within four months from the date of approval of package e. restricting the regulatory concession in asset classification and provisioning to the first restructuring where the package also has to meet norms relating to turn-around period and minimum sacrifice and funds infusion by promoters. f. convergance in the methodology for computation of economic sacrifice among banks and FIs g. limiting RBIs role to providing broad guidelines for CDR mechanism h. enhancing disclosures in the balance sheet for providing greater mechanism i. pro-rata sharing of additional finance requirement by both term lenders and working capital lenders j. allowing OTS as a part of the CDR mechanism to make the exist option more flexible and k. regulatory treatment of non-SLR instruments acquired while funding interest or in lieu of outstanding principal and valuation of such instruments 14. QUICK MORTALITY

14.1. It is obligatory on every person concerned to appraise the proposal with due care, take necessary steps to ensure that the borrower comply with all the terms of sanction, appropriate end-use of funds, adequate and close monitoring of accounts etc., so that quality of advance account does not deteriorate. However, instances of quick mortality have thrown light on inadequacy of proper care at various stages of the loan viz. Pre-sanction Appraisal, Post sanction Monitoring etc.,

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14.2. Branches shall take sufficient and utmost care in case of all new advances accounts, so that they do not become cases of quick mortality and extant guidelines with regard to compliance of terms and conditions should be strictly adhered to. 15. STAFF ACCOUNTABILITY

15.1. While the Bank recognizes that utmost care and due diligence needs to be exercised by all Officials of the Bank at every level, it is also a fact that demands of profitability have to be balanced against safety of Banks funds. Therefore, while the Bank will examine staff accountability when the asset classification of an asset changes from Standard to any category of non-performing asset, a discriminatory policy that distinguishes between mala-fide and bona-fide acts will be adhered to. 15.2. The Bank has framed a separate policy document on Staff Accountability on above lines duly approved by the Board of Directors which will be adhered to. 16. GUIDEPOSTS OPERATIONAL GUIDELINES:

16.1. The Banks Credit Risk Management Committee of Executives headed by Chairman & Mg Director will be the competent authority to develop and implement operational guidelines / guideposts on matters like Margin, Security including Collateral Security, Financial Ratios, appraisal areas etc in line with this Policy Document. 16.2. Where prior approval of the Board of Directors is required in such cases, the same may be placed for approval of the Board of Directors through the Committee of Directors on Integrated Risk Management.

17.

INSIDER ABUSE:

17.1. As a lender, the Bank get some information of sensitive and technical nature pertaining to the business of the
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Borrower and any unauthorised use of the same may affect his/her business. As such all the Officers of the Bank shall maintain secrecy of all relevant information to avoid allegations of insider trading. 18. TRAINING:

18.1. All officials working in credit related areas shall undergo appropriate training at least once in two years in credit and related matters. 19. CONCLUSION

19.1. The contours of the Credit Policy of the Bank have been stated in this document. 19.2. Operating instructions / guidelines arising out of the Credit Policy stated herein will be issued from time to time by the Bank. All the officers engaged in sanction & follow up of credit facilities will be mandated to get themselves familiarized with all facets of the Credit Policy. 19.3. The aspects not specifically covered in this policy document shall be governed by RBI guidelines issued /to be issued from time to time. 20. VALIDITY

20.1. The above policy document would be operative till further review by the Board. However, efforts will be made to update the policy document preferably on annual basis.
*****

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ANNEXURE 10. Parameters for financing to Diamond Exports 11. Group Concept 12. Multiple Banking Arrangement 13. Procedural guidelines for Purchasing/ Discounting/ Negotiating/ Rediscounting of Bills 14. Approved State Level Consultancy Organisations for Conducting Techno Economic Viability Study 15. NBFCs 16. CGFTSI 17. TUFS 18. Policy Guidelines for buy-out/sell-out of Loan portfolio from other Banks/ Financial Institutions by way of assignment *****

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Annexure

A.

Parameters for Financing to Diamond Exporters Parameter EPC:PSC Existing Bench Mark ratios/policy as per extant policy of Bank 1:1.50 for DTC exporters 1:2 for Non DTC exporters (interchangeability not to be permitted from PSC to PC) Direct Bills 30-40% for Non-DTC Consortium/Sole Facility Banking/Multiple Banking accounts who are Status holders, good track record. Direct Bills Collateral Security 50-60% for DTC holders, status holders, Consortium accounts having good track record. 10-20% for DTC holders

{Reference may be made to HO Circular No.198/31/2002 dated 08-10-2002 for detailed scheme for financing diamond exporters}

*****

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Annexure

B. Guidelines :

Group Concept

We propose to modify Group Concept as under: 1. Two firms having one or more common partner / proprietor, or
2. Proprietor or any of the partners in one concern is related to

proprietor or any of the partners of another concern as : i) Spouse ii) Father iii) Mother (including step mother) iv) Son (including step son) v) Sons wife vi) Daughter (including step-daughter) vii) Daughters husband viii) Brother (including step-brother) ix) Brothers wife x) Sister (including step-sister) xi) Sisters husband xii) Brother (including step-brother) of the spouse xiii) Sister (including step sister) of the spouse borrowing concern, ownership. holding interest over 10%

2. Any proprietor / partner / director of a concern is interested in the

by

way

of

4. Any of the directors of Pvt. Ltd. Company is director of another Private Ltd. Company or Limited Company or 5. A Ltd. Company is a subsidiary of another Ltd. Company i.e. if more than 50% of the equity shares of the company are owned by another company. 6. Two or more associations of Individuals, Firms, Trusts, Companies where one or more Individual / Firm or Partner / Trust or Trustee / Company or Director of one, guarantees the facilities in the other ones. 7. Companies registered under section 26(2) of MRTP Act, 1969.

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Annexure

Following advances to be kept out of Group approach : 1) Advances under Retail Banking Schemes. (Explanatory Note : It is observed that applications are received for advances to partners/ directors of Companies in their individual capacity under various Retail Banking Schemes. These are the advances considered as per the needs of the individuals, their repaying capacity and according to criteria laid down in the Scheme. We propose that advances to partners / directors in their individual capacity under Retail Banking Schemes may be kept outside the purview of the "Group" approach to ensure prompt servicing of the Target Group in the present day competitive market reducing avoidable hierarchical bottlenecks). 2) Public Sector Units under Central / State Govts. 3) Agriculture Advances In the case of a split in the group, if the split is formalised, the splinter groups will be regarded as separate groups. Where the operating unit have doubt about bona fides of the split, matter should be referred to Credit Policy Dept. at H.O. with full details, so that the matter could be taken up with RBI for its final view, to preclude the possibility of a split being engineered in order to prevent coverage under the Group Approach. *****

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Annexure

C.

Multiple Banking Arrangement (MBA)

In addition to our existing guidelines for Multiple Banking Arrangement (MBA) bank will follow the common code framed by the working group of bankers constituted by IBA for MBA. The approach of the Bank in case of MBA will be as under: A)Approach to appraisal/ assessment 1. Normally the Bank having the largest share will appraise the requirement of credit facilities of the borrowing entity and make available the appraisal note to other banks in MBA. Alternatively, Bank can assess the requirement, and make the assessment note available to other members of the MBA. 2.The Assessed Bank Finance would only be indicative. Bank will take its own decisions in regard to quantum of loan, other credit and noncredit products and decide on margins and pricing or any other terms on bilateral terms with the borrower . 3.Bank can consider grant of ad-hoc credit facility and the same should be promptly advised to the coordinating bank. B) Approach to information Sharing 1. The Banks in MBA shall exchange among themselves credit

information about the borrowing entity.

1. At the time of opening of current accounts or while considering

credit facilities, bank shall insist on a declaration from the party to the effect that he is not enjoying any credit facility with any other bank or a declaration giving particulars of credit facilities enjoyed with other banks. In the later case, the concerned lending bank(s) should be duly informed. C)Approach to documentation / security sharing 1) Wherever feasible, bank shall interse, evolve, adopt and complete

documentation in respect of creation of charge over securities and credit covenants by mutual negotiation and agreement. and exclusive charge over specified securities.

1) In case of needs bank may lend against individual documentation

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Annexure

The Bank will not do any act or omission which have the effect of depriving the other bank or banks of its (their) share in the security, property and other assets of the borrower available for liquidation of their dues.
1) Bank would have the freedom to extend credit with or without

sharing the security cover. Bank would be free to negotiate for any other security/ collateral and provide short term / long term loans or may proposed to lend on clean terms on a transaction / facility-wise basis or may also participate in service related products. Bank will provide description of such facilities to the other Banks in MBA.

D) Approach to exit option 1. Bank will enter and exist from MBA bilaterally with the borrowing entity. Bank may exist from the arrangement by selling its assets even at a discount to another bank willing to take the exposure.
2. In case of exit, bank will inform other banks in MBA and allow a

reasonable time (60 days) to enable the borrower to arrange for alternate funding arrangements.

D) Approach to rehabilitation : 1. The rehabilitation process under MBA would be a consultative effort of all the Banks. 2. The procedure and modalities would have to be worked out by the Banks on a case to case basis keeping in view regulatory guidelines, if any, in this regard. Normally rehabilitation plans should be finalised within a period of 60 days. 3. Where majority lenders (say 75%) agree to rehabilitation plan, the bank will ordinarily follow. In any case Bank will not file legal suit against the borrower leading to failure of the rehabilitation plan.

D) Approach to recoveries & control over cash flow

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1. In the event of default, necessitating legal action for recovery of dues by Bank against the borrower. The Bank shall give at least 60 days prior intimation to all other banks before resorting to legal action. 2. Bank would agree to equitable sharing of recoveries and other cash flows enabled through law suits, compromise settlement etc. to the extent of common securities. 3. Control over cash flow : Equitable control over the cash flow of a borrowing entity would be an integral arrangement of MBA in the interest of all the Banks. No Bank shall enjoy a superior charge over any other bank on the company's cash flow. However, banks including financing banks, providing cash management product or other similar services can set off their specific product related exposure from the cash flow before any apportionment among financial banks. *****

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D.

Procedural guidelines for Purchasing / Discounting / Negotiating / Rediscounting of bills 1. Bill purchased / discounted limit will be sanctioned after proper appraisal of the Credit needs of the borrower in-terms of receivables and in accordance with the credit policy of the bank. 2. Bank will open letters of credit (LCs) and purchase / discount /negotiate bills under LCs only in respect of genuine commercial and trade transactions of their borrower constituents who have been sanctioned regular credit facilities. Therefore, no fund based (including bills financing) limit or non-fund based facilities like opening of LCs, providing guarantees and acceptances will be extended to non-constituent borrower or / and non-constituent member of a consortium / multiple banking arrangement.
3. For the purpose of credit exposure, bills purchased /

discounted / negotiated under LCs or otherwise should be reckoned on the borrower constituent. Accordingly, the exposure will attract a risk weight appropriate to the borrower constituent (viz; 100% for firms, individuals, corporates etc.) for capital adequacy purposes.

4. The practice of drawing bills of exchange claused without recourse and issuing letters of credit bearing the legend without recourse should be discouraged because such notations deprive the negotiating bank of the right of recourse it has against the drawer under the Negotiable Instruments Act. Therefore Branches will not open LCs and purchase / discount / negotiate bills bearing the without recourse clause. 5. Bills rediscounts should be restricted to usance bills held by other banks. Branches will not rediscount bills earlier discounted by non-bank financial companies (NBFCs) except in respect of bills arising from sale of light commercial vehicles and two / three wheelers.
6. Discounting of bills of services sector will be approved not

below the authority of Regional Manager. However, while

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discounting such bills, it should be ensured that actual services are rendered and accommodation bills are not discounted. Services sector bills will not be eligible for rediscounting. Further, providing finance against discounting of services sector bills will be treated as unsecured advance and therefore, subject to ceiling prescribed for unsecured advances. 7. Special care should be taken to ascertain the bonafides of the party and the past record with the bank (or their previous bankers) in respect of realisation of Bills. 8. Borrowers enjoying cash credit facilities with other banks / branches should not be granted BP / BD limits since there is a possibility that the party may divert sale proceeds through the B.P. account. Again the borrowers to whom bills limit are to be sanctioned, should not be granted limits against hypothecation of book debts, as far as possible.
(Reference may be made to circular No.118/10/2003 dated 28/7/2003)

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E.

Approved State Level Consultancy Organisations for Conduction Techno Economic Viability (TEV) Study STATE Andhra Pradesh Bihar Gujarat Hariyana & Delhi Himachal Pradesh Tamilnadu & Pondichery Jammu & Kashmir Kerala Maharashtra, Goa, Daman & Diu Madhya Pradesh North Eastern States Nagaland, Manipur, Tripura & Mizoram North Eastern States Meghalaya, Assam & Arunachal Pradesh Northern States Punjab & Chandigarh Orissa Rajasthan Uttar Pradesh West Bengal, Sikkim and Andaman & Nicobar *****

NAME APITCO BITCO GITCO HARIDCON HIMCON ITCOT J&KITCO KITCO MITCON MPCON NECON NEITCO NITCON ORITCO RAJCON UPICO WEBCON

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F.

Bank Finance to NBFCs

Reserve Bank of India has been regulating the financial activities of the Non-Banking Financial Companies under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45 IA of the said Act, all Non-Banking Financial Companies have to be mandatorily registered with the Reserve Bank of India. In the context of mandatory registration of NBFCs with the Reserve Bank, as also consistent with the policy of bestowing greater operational freedom to banks in the matter of credit dispensation, the ceiling on bank credit linked to Net Owned Fund (NOF) of such companies has been withdrawn in respect of all NBFCs which are statutorily registered with RBI and are engaged in principal business of equipment leasing, hirepurchase, loan and investment activities. Accordingly, need based working capital facilities as well as term loans may be extended to all NBFCs registered with RBI and engaged in equipment leasing, hire-purchase, loan and investment activities. In the light of the experience gained by NBFCs in financing second hand assets, finance to NBFCs against second hand assets financed by them, may also be extended. Within the prudential guidelines and exposure norms prescribed by the Reserve Bank to extend various kinds of credit facilities to NBFCs, various facilities may be extended to NBFCs subject to the condition that the restricted activities are not financed. BANK FINANCE TO NBFCS NOT REQUIRING REGISTRATION

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In respect of NBFCs which do not require to be registered with RBI, [viz. i) Insurance Companies registered under Section 3 of the Insurance Act, 1938; ii) Nidhi Companies notified under Section 620A of the Companies Act, 1956; iii) Chit Fund Companies carrying on Chit Fund business as their principal business as per Explanation to Clause (vii) of Section 45-I(bb) of the Reserve Bank of India Act, 1934; iv) Stock Broking Companies/Merchant Banking Companies registered under Section 12 of the Securities & Exchange Board of India Act; and v) Housing Finance Companies being regulated by the National Housing Bank (NHB) which have been exempted from the requirement of registration by RBI], the Bank may take its credit decisions on the basis of usual factors like the purpose of credit, nature and quality of underlying assets, repayment capacity of borrowers as also risk perception, etc. BANK FINANCE TO RESIDUARY NON-BANKING COMPANIES (RNBCS) Residuary Non-Banking Companies (RNBCs) are also required to be mandatorily registered with Reserve Bank of India. In respect of such companies registered with RBI, bank finance would be restricted to the extent of their Net Owned Fund (NOF). Net Owned Fund (NOF) Banks should follow the definition of NOF as given in the explanation to Section 45-IA of the Reserve Bank of India Act, 1934, i.e., I. Net Owned Fund means (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom (i) (ii) (iii) accumulated balance of loss; deferred revenue expenditure; and other intangible assets; and

(b) further reduced by the amounts representing (1) investment of such company in shares of (i) (ii) its subsidiaries; companies in the same group;

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(iii) all other Non-Banking Financial Companies; and (2) the book value of debentures, bonds, outstanding loans and advances (including hire purchase and lease finance) made to, and deposits with (i) (ii) subsidiaries of such company; and companies in the same group, to the extent such amount exceeds ten percent of (a) above II. "subsidiaries" and "companies in the same group" shall have the same meanings assigned to them in the Companies Act, 1956 (1of 1956). ACTIVITIES NOT ELIGIBLE FOR BANK CREDIT The following activities undertaken by NBFCs, are not eligible for bank credit: (i) Bills discounted/rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from sale of a) commercial vehicles (including light commercial vehicles), and b) two wheeler and three wheeler vehicles, subject to the following conditions: the bills should have been manufacturer on dealers only; drawn by the

the bills should represent genuine sale transactions as may be ascertained from the chassis/engine number; and before rediscounting the bills, banks should satisfy themselves about the bona fides and track record of NBFCs which have discounted the bills.

(ii)

Investments of NBFCs both of current and long-term nature, in any company/entity by way of shares, debentures, etc. However, Stock Broking Companies may be provided need-based credit against shares and debentures held by them as stock-in-trade.

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(iii) (iv) (v)

Unsecured loans/ inter-corporate deposits by NBFCs to/in any company. All types of loans and advances by NBFCs to their subsidiaries, group companies/entities. Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs)

Leased and Sub-Leased Assets As banks can extend financial assistance to equipment leasing companies, they should not enter into lease agreements departmentally with such companies as well as other Non-Banking Financial Companies engaged in equipment leasing. OTHER PROHIBITION ON BANK FINANCE TO NBFCS Bridge loans/interim finance Banks should not grant bridge loans of any nature, or interim finance against capital/debenture issues and/or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies, i.e., equipment leasing and hire-purchase finance companies, loan and investment companies and also Residuary Non-Banking Companies (RNBCs). Banks should strictly follow these instructions and ensure that these are not circumvented in any manner whatsoever by purport and/or intent by sanction of credit under a different nomenclature like unsecured negotiable notes, floating rate interest bonds, etc., as also short-term loans, the repayment of which is proposed/expected to be made out of funds to be or likely to be mobilised from external/other sources and not out of the surplus generated by the use of the asset(s). Advances against collateral security of shares to NBFCs Shares and debentures cannot be accepted as collateral securities for secured loans granted to NBFCs borrowers for any purpose. Restriction on guarantees for placement of funds with NBFCs Banks should not execute guarantees covering inter-company deposits/loans thereby guaranteeing refund of deposits/loans accepted by NBFC/firms from other NBFC/firms. The restriction would cover all types of deposits/loans irrespective of their source, including deposits/loans received by NBFCs from trusts and other
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institutions. Guarantees should not be issued for the purpose of indirectly enabling the placement of deposits with NBFCs. Guidelines for operating units For the purpose of other guidelines related to financing of NBFCs viz. computation of MPBF, regulation of Drawing power, etc., operating units shall be guided by the Banks Manual of Instructions (Volume-3 Part-II, Advances) *****

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G.

Credit Guarantee Fund Trust for Small Industries (CGTSI)

In view of the constraints faced by banks like entrepreneurs inability to provide adequate security and low recovery rate, in lending to units of small scale sector, the Government of India and SIDBI have jointly set up a new institution called Credit Guarantee Fund Trust for Small Industries (CGTSI) to guarantee loans given to Small Scale Industries. The Scheme covers only fund based limits and cover is restricted upto Rs.25 lakh of Banks exposure to an eligible unit on payment of requisite guarantee and annual fee. The scheme provides 75% of risk cover, where the Trust pays 75% of the guaranteed amount on preferring of eligible claim by the Bank within specified days. The balance of 25% of the guaranteed amount will be paid on conclusion of recovery proceedings by the Bank. The detailed guidelines and operational modalities are circulated to operating and controlling units of the Bank vide various HO Circulars.
(Reference may be made to HO Circular No.392/52/2001 dated 10-01-2001 for details of the scheme with subsequent procedural guidelines vide HO Circulars No.31/7/2004 dated 05-05-2004; 268/58/2003 dated 03-12-2003}

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H.

Technology Upgradation Fund Scheme (TUFS)

The Government of India has launched a Scheme viz., Technology Upgradation Fund Scheme (TUFS) for Textile and Jute Industries with a view to provide a focal point for modernization efforts through technology upgradation in Textile, Jute and Cotton ginning and pressing industries. The scheme seeks to provide interest reimbursement of five percentage points on the interest charged by the Financial Institutions/ Banks for rupee loans given for a project of technology upgradation or cover for exchange rate fluctuations not exceeding 5% in respect of foreign currency loans. The detailed scheme has been circulated by the Banks Priority Sector & RRB Department at Head Office and the operating and controlling offices have been advised that in the cases of assisted units as per the eligibility of the scheme, interest reimbursement claims for rupee loans or exchange rate fluctuations in respect of foreign currency loans should be lodged with Nodal Agencies well in advance of due date.
(Reference may be made to HO Circular No.108/20/2004 dated 29-06-2004 & other procedural guidelines issued from the concerned department from time to time}

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I.

Policy Guidelines for buy-out/sell-out of Loan portfolio from other Banks/ Financial Institutions by way of assignment

Banks / Financial Institutions sell / buy loan portfolios to / from other banks / FIs as strategy for business development and profit planning. With a view to strengthen credit exposure by pruning/churning the credit portfolio through this route depending on opportunities and favorable conditions, the Bank has put in place a broad policy framework to deal with acquisition and / or sale of loan portfolios from / to other Banks / FIs. OBJECTIVE Buy Outs (1) Bank will have choice of wide asset portfolio and can cherry pick credits from basket of portfolio as per the risk profile and risk appetite of the organization. (2) There is an opportunity for fast inorganic asset growth. It reduces cost, effort and manpower. (3) The Bank can have supplementary deployment avenues to offload excess liquidity even if quality credit off take/ investment avenues in the market are low. (4) The buy outs/ sell out help the bank to bridge the various gaps in its asset liability like liquidity mismatch, interest rate gap etc and it helps to achieve the desired maturity and risk profile in the portfolio. Sell Outs Sale of loan portfolio in part or full would enable us to: 1. Prune the size of sectoral exposures, for any reason 2. Reduce exposure to particular / identified Industry / Company 3. Manage risk and return profile of the overall portfolio 4. Enhance profit by selling at a premium and redeploying the funds in other assets. Process It is necessary that the agreement with the borrower permits the selling institution to assign all its rights covered by the security documents. The buy / sell transaction is documented through the deed of assignment on as is where is basis and without recourse. The transaction will essentially involve transfer of All the receivables pertaining to the loan asset together with the underlying security and
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All the rights and title and interest of original lender under the documents pertaining to the loan asset, as applicable in each case Once the above loan is assigned to the buyer (say Dena Bank), the original lender would receive purchase consideration for the same from Dena Bank. Dena Bank in return would receive the original contracted instalments of principal and the interest from the borrower directly.

Method of Pricing Once a loan is chosen, the pricing is determined based on the following criteria: Credit rating Tenor of loan Market rate, if the borrower were to raise money at that point of time Prospects of other income from the prospective borrower, etc RBI GUIDELINES The Reserve Bank of India has not stipulated any regulatory guideline for sell out and buy out of Loan portfolio. Though, draft guidelines on securitasation of Standard assets have been issued vide circular no DBOD. NO.BP.1502/21.04.048/2004-05 dated 04/04/2005 which deals with Mortgage backed Securities and Take out deals vide its circular no DBS.FID.No/01.10.00/99-2000 dated 07/01/2000, which sets some guidelines for provisioning for take out finance for the infrastructure Projects. Appraisal and Documentation Appraisal o Appraisal of the proposal to be done as applicable for any fresh credit proposal strictly as per the extant policy/ rules of the Bank and arrive at credit decision on merits of individual case. o The assets to be acquired should be Standard assets and present status of the asset with regard to servicing of interest / principal to be verified by seeking adequate information including Statement of account from existing lender, borrower and any other possible source.

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Documentation o Entire documentation with existing Banker to be vetted by our legal department or advocate on panel in consultation with legal department. o The assignment deed for each individual case vetted by our legal department or advocate on panel in consultation with legal department. o The borrower to be intimated about the assignment in our favour by selling Bank and a draft of such letter to be finalized by our legal department or advocate on panel in consultation with legal department. o Modification of charge where ever applicable to be done jointly by seller, purchaser and the company. o Any further suggestion/ documents as may be advised by legal department Head Office to protect the interest of the bank. o Existing loan documents (under modification with legal department) to incorporate our right to assign the loan in favour of prospective buyers to enable our Bank to enter in to sale transaction at a later date. Discretionary Powers Discretionary powers for approval of the package will be vested with the Management Committee. *****

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