MANUAL ON WORKING CAPITAL FINANCE

For Internal Circulation only

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PREFACE We have pleasure in presenting the manual on working capital financing. The manual contains various procedural guidelines on working capital. It starts with the introduction of working capital and gradually proceeds towards classification of assets, methods of assessment, fixing various limits and finally broad guidelines on obtaining the documentation for the limits. It may please be noted that working capital advances are dynamic in nature and utilised for building up of current assets. These assets being floating in nature depletes rapidly in value if rotation of working capital cycle is not maintained. Therefore an effective monitoring mechanism is pre-requisite to ensure rotation of working capital cycle as envisaged for the specific purpose. Effective supervision and surveillance of the credit portfolio is an essential requirement for working capital financing. Therefore, for easy reference of the branches/offices, a whole chapter in the manual has been dedicated to monitoring of working capital financing. Given the dynamic nature of the financing, the branches/offices are, requested to also refer the following documents/circulars issued from time to time:

Credit Policy of the bank RBI Circulars FEMA guidelines Delegation of Power, issued by the bank Credmin Guidelines Any other internal guidelines issued by the management.
All endeavours have been made to make this manual comprehensive and up to date. At the same time due care has been taken that the manual does not become bulky. We hope that this manual will be handy and useful to all the branches/offices in the day to day management of working capital finance. Jitender Balakrishnan Dy. Managing Director
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Mumbai, September 18, 2007

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INDEX
Chapter Particulars Page Nos. No. 1 Basic Principles of Lending 7-8 Objectives of Lending Basic Principles 2 Introduction to Working Capital 9 11 What is Working Capital Operating Cycle or Working Capital Cycle 3 Management of Working Capital 12 15 Management of Working capital Current Assets Current Liabilities Working Capital Gap Net Working Capital Current Ratio 4 Methods of Assessment 16 45 Turnover Method MPBF System Classification of Current Assets and Current Liabilities Cash Budget System Structure of Cash Flow Statement Operating Activities Investing Activities Financing Activities Appendix I Working capital assessment based on MPBF 26 Method Appendix II - Cash Flow Statement 27 Appendix III - Profitability Statement & Projected Balance Sheet Profitability Statement (Form II Part A of CMA) 31 Analysis of Balance Sheet (Form III Part A of CMA) Analytical & Comparative Ratio (Form III Part B of CMA) Appendix IV - Credit Monitoring Arrangement (CMA) Data 40 Annexure I (Form I) Existing & proposed Working Capital limits Annexure II (Form II - Part B of CMA) Comparative Statement of Current Assets & Current Liability Annexure III (Form IV of CMA) - Funds Flow Statement

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2032032032032032034 4 Chapter Particulars Page Nos. No. 5 Analysis of Balance Sheet, Ratio and Holding Level 46 58 Some important concepts Long Term / Short Term Sources and Uses Bank Borrowings for Working Capital / Sundry Creditors Inventory Sundry Debtors Loans and Advances Investments Analysis and Interpretation of Financial Statements Inventory Holding Profitability Ratios Turnover Ratios Fund Flow Statement 6 Appraisal of Credit Proposal 59 72 Guidelines Computation of Net Worth Obtention of Personal Guarantees of Directors Credit Rating Pre-sanction Inspection and Credit Reports Appendix V - Indicative List of Documents / Information 69 to be called from Borrower Appendix VI - Suggested Format for Detailed Appraisal 71 (New / Renewal / Reduction / Enhancement) 7 Nature of Facilities and Fixing of Credit Limits 73 80 Fund Based Limits Overdraft and Cash Credit Computation of Drawing Power Assessing Letter of Credit (LC) Limit Assessing of BG Limit 8 Loan System for Delivery of Bank Credit 81 82 Loan Component and Cash Credit Component Export Credit Bills Limit Renewal / Roll-over of Loan Component 9 Lending Arrangement for Working Capital Facilities 83 84 Lending outside Regular Arrangement Sole Banking Arrangement Multiple Banking Arrangement Consortium Banking Arrangement

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2032032032032032035 5 Chapter Particulars Page Nos. No. 10 Trade Finance Products 85 129 Packing Credit Interest Rate Structure Advance against undrawn Balance on Export Bills Advances against Retention Money Post-Shipment Advances against Duty Drawback Entitlements ECGC Whole Turnover Post-shipment Guarantee Scheme Deemed Exports Concessive Rupee Export Credit Pre-shipment Credit in Foreign Currency (PCFC) Bills Purchased / Discounted Additional Guidelines for LCBD (Bank Risk bills) Core Operating Processes for Bill Financing Regulatory Aspects Non-Fund Based Limits Types of Guarantees & other related aspects Documentation of Guarantee Letters of Credit (L/C), types and parties to LC Constitution of Borrowers Caution List/Negative list/Defaulter list of Wilful Defaulters Prudential Exposure Norms Appendix VII - Interest Rate on Rupee Export Credit (Pre118 shipment) Appendix VIII - Interest on Post-shipment Credit 121 Appendix IX - Specimen of Registered A.D. Letter to be 125 sent to the Beneficiary for Cancellation of Expired Guarantees Appendix X - A Specimen of Letter of Request from 126 Customer to Issue Guarantee under a Guarantee Limit Appendix XI - Specimen of Letter of Appropriation where 127 Guarantee Limit if Partly / Fully Secured by Cash Margin / Term Deposits Appendix XII - Format of Counter Guarantee 129 11 Nature of Securities 130 149 Unsecured Advances Secured Advances Appendix XIII - Guidelines for Advances against Pledge of 140 Goods Appendix XIV - A specimen of stamped Letter of 145 Undertaking to be obtained from the Processing Unit Appendix XV Specimen letter of Negative Lien 147 Annexure IV Record of Pledge of Goods 148 Annexure V Particulars of Commodity 149

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2032032032032032036 6 Chapter Particulars No. 12 Documentation and Charge Registration Stamping of Document Important hints on security creation Safe Custody of Documents Registration of Charges with the Registrar of Companies 13 Insurance of the assets Scrutiny of Insurance Policies Renewal of Policies Steps in the Event of a Claim 14 Monitoring of Working Capital Advances Disbursement Stock Statements Statement of Book Debts Scrutiny of Financial Statements / Returns & other information Compliance of Terms and Conditions and EODs / Covenants Monitoring Operations in the Account Periodic Inspection Early Warning Signals Risk Minimisation Exercise Stock Audit by Panel Valuer Revival Letters Confirmation of Balances Appendix XVI - Specimen of Half Yearly Statement of Book Debts from Borrower Appendix XVII Specimen of QIS I/II/III Appendix XVIII - Proposed format for Stock Statement and book debts Appendix XIX - Scope of Stock Audit Appendix XX - Specimen of revival Letters 15 Income Recognition and Asset Classification (IRAC) Norms Income Recognition Policy Reversal of Income on Accounts Becoming NPAs Interest Application Asset Classification Guidelines for Classification of Assets 16 Renewal of Credit Facilities Process and Format Appendix XXI - Credmin Review Sheet Appendix XXII - Specimen of Letter to the Borrower Calling for Information for Renewal / Review of the Facilities Page Nos. 150 156

157 158

159 188

174 176 181 186 188 189 195

196 202 198 202

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CHAPTER 1
BASIC PRINCIPLES OF LENDING Objectives of Lending The basic objectives of lending are to grant credit facilities to the entities: i. ii. For a defined purpose. To deploy the Banks resources in a profitable manner and to achieve the statutory and regulatory norms. Basic Principles To achieve these objectives, the Bank has to follow a prudent policy and conduct the business on the basis of sound principles of lending namely, Safety, Liquidity and Profitability. These aspects are further elaborated below. Safety Safety of the funds lent has to be ensured with respect to: i. Borrower The Borrower should have the means, ability and willingness to repay the advance along with interest as per the terms of finance. These depend on factors like tangible assets, income generating potential, operational efficiency and integrity of the borrower. It is therefore imperative to make a thorough investigation into the means, character, antecedents, respectability and capacity of the borrower before allowing them any credit facilities and by keeping a close watch on their dealings and on the operations in their accounts during the period of advance. Character - Indicating the borrowers honesty, integrity, business ethics, regularity, dependability, reputation and promptness to keep promise. ii. Profitability Notwithstanding the socio-economic objectives of lending, the fact remains that banks are profit making institutions. They have to be run on commercial considerations to meet the expectations of the shareholders and ensure their healthy growth. The Bank should, therefore, have a proper mix of credit portfolio which would earn sufficient income to enable it to defray the cost of funds, meet

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establishment and other expenses, provide for contingencies and risky assets, build reserves and pay dividend to the shareholders. iii. Liquidity As the funds lent mostly belong to the depositors and as the Bank should always be in a position to meet the demands of the depositors, it is essential that the loans and advances are recoverable in full on demand or within a reasonable period. It is, therefore, necessary to ensure that the funds lent are backed by securities that are easily marketable and realisable. Matching of Assets and Liabilities is very critical from this point of view. iv. Security Though repayment in the ordinary course must come out of the surplus from business of the borrower, the security aspect cannot be neglected. Security serves as a cushion or comfort to fall back upon in the event on the borrowers failure or default in the repayment of advance. Adequate tangible security ensures safety of advance. The assets purchased out of the credit facilities are obviously the first to be taken. It is a safeguard against disposal/alienation of such securities. Wherever necessary, the advances could also be secured by obtaining collateral securities. *****

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CHAPTER 2 INTRODUCTION TO WORKING CAPITAL What is Working Capital For running an industry or a Concern, two types of capital are required viz., fixed capital and working capital. Fixed Capital is utilized for acquiring the fixed assets such as land, building, plant & machinery, etc., and to meet capital expenditure connected with the setting to keep the wheels moving up of the industry or Concern. But by themselves, these fixed assets would not produce / earn anything. They have to be run / worked for production. This requires enough liquid sources, viz., working capital Working Capital represents the money that is required for purchase / stocking of raw materials, payment of salary, wages, power charges etc, and also for financing the gap between the supply of goods and the receipt of payment thereafter. In other words, Working Capital Finance is the fund required to meet the cost involved during the working capital cycle or operating cycle. Operating Cycle or Working Capital Cycle Working capital cycle of a manufacturing activity starts with the acquisition of the raw materials / stores & spares and ends with realisation of cash for finished goods. The cycle is long in some cases and short in other cases depending upon the nature of business. In manufacturing units, Working capital cycle comprises of purchase of raw materials either in cash or credit basis, converting raw materials into stock in process and then into finished goods and transformation of finished goods into book debts / cash. In respect of trading concerns, operating cycle represents the period involved from the time the goods and services are procured and the same are sold and realized. capital cycle is illustrated as follows: The working

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Cash/Sundry Creditors

Sundry Debtors Raw Materials / Stores & Spares

Sales

Stock-in-Process

Finished Goods

The total working capital requirements for Industrial Units will depend upon the holding period of assets and the operation of the cycle. Thus, the stocking of raw materials may be equivalent to one or three months raw materials consumption for most industries, but say nil for a sugar mill. As regards the operating cycle, the duration of each stage of process cycle is first decided upon having regard to the function it is supposed to perform. The conversion of raw materials into finished goods depends upon the technical requirements and manufacturing facilities available. Similarly, the turnover of finished products and their transformation into book debts, bills or cash could be related to factors like delivery schedule, business customs and competition. Thus, the working capital cycle of a manufacturing activity starts with the acquisition of raw materials and ends with realization of cash for finished goods. The cycle is long in some cases and short in others, depending upon the nature of business. Cycle is fast in consumer goods industries and slow in capital goods industries. Cycle is short in case of perishables such as food articles, beverages, fruits, fish, eggs, etc. Cycle is long in the case of tobacco, distilling, timber, steel, etc. Seasonal industries like

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manufacturers of umbrella, woollen fabrics, fans, refrigerators, etc., require higher stocks in some months and bare minimum in remaining months. During the cycle, funds are blocked in various stages of current assets, viz., cash itself, inventory (consisting of raw materials, stock in process, finished goods) and receivables. These require finance. turnover and profitability. Working capital cycle vary from industry to industry depending upon its nature of business. Factors which affect working capital cycle are: 1) 2) 3) 4) 5) 6) Policy of the management on production and sales Inventory management/ Receivables management Nature of manufacturing activity/process Policy of extending credit for purchases as well as sales Government policy Type of product Finance involves costs. Quicker the cycle more is the turnover Stagnation in any area effects normally and longer the cycle, the less is the turnover.

The above factors are only illustrative and not exhaustive. *****

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CHAPTER 3
MANAGEMENT OF WORKING CAPITAL Management of working capital Management of working capital involves management of current assets, current liabilities and Net working capital. Current Assets Current Assets are convertible assets, liquid assets or floating assets. They change their form every now and then and ultimately are converted into cash. Current assets are such assets which are reasonably expected to be realised into cash within a period of 12 months. They indicate short-term deployment of funds and form Gross Working Capital. Current Assets mainly consist of: 1) 2) 3) 4) 5) 6) Cash and bank balance Stock in trade consisting of raw materials, stock in process, finished goods, stores, packing materials' Book debts: including bills purchased & discounting (only upto 180 days) Investments (Short term) Cash margin from non fund based limit (L/C / guarantee) may be treated as a part of current assets. and Other loans and advances, etc.

The quantum and period, for which each current asset is held, should be reasonable and related to the requirement. Any asset held in excess, burdens the business with unnecessary interest and costs on such borrowings. Cash and Bank Balance tied to or earmarked for long term use, for example for a future expansion / diversification programme or investment outside business, should be excluded from Current Assets. Such part of the Cash and Bank Balances should be shown under Other Non-Current Assets.

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Holding of Cash or Bank Balances (or marketable securities / investments) beyond the normal needs of business necessitates critical evaluation. It is a common banking practice that a business can not be granted bank credit, if it has surplus / idle cash lying with it. Book Debts, including Bills Purchased and Discounted outstanding within the normal credit period allowed by the firm or six months, whichever is lower, should be treated as Current Assets Receivables. A break-up of the Receivables age-wise and party-wise may be quite informative. Overdue debts, which are considered realizable, should be classified into Other Non-Current Assets. Debts which have doubtful realisability because of quality control disputes, depressed market conditions, or because the debtors are not financially sound and can not pay in the foreseeable future etc. should be shown under Intangible Assets, unless full provision has been made for them in the accounts. The basis of valuation of each item of inventory should be the invoice value / cost or market value, whichever is lower. The period of holding of each item should conform to its demand and supply position in the market, production requirements and ordering time. The quality of stocks should satisfy the requirements of a good security. "Dead Inventory" i.e. slow moving or obsolete items should be excluded. Only those stores and spares, which are of consumable nature and are linked to the operating cycle, should be considered as Current Assets. Machinery stores (with exception of certain items like consumable injection moulds etc. in some industries) should be a part of Other Non-Current Assets, since these items are included in the capital cost. The following items should not be treated as Current Assets and the same may be classified as Non-Current Assets. 1) 2) 3) 4) 5) 6) Investments / loans to subsidiaries / associates (non-trade investments) Other Investments (not marketable) Overdue book debts (generally those more than six months old) Deferred Receivables (maturity exceeding one year) Others fixed deposits with Government Departments, loans to directors / employees / partners, advances (machinery suppliers), machinery stores, tools etc. Cash margin held for deferred payment guarantee

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Current Liabilities Current liabilities are short term liabilities which are repayable within a year. They are normally raised for meeting the working capital needs and to acquire current assets. Current liabilities are the main source of finance for working capital and are normally identified with the operating cycle of the business. Current Liabilities normally consists of: 1) 2) 3) 4) 5) 6) Bank Borrowings for working capital Other short term borrowings like Unsecured Loans, Inter Corporate Deposits etc. Sundry Creditors (for goods, expenses and others including advance payment against orders) Term Loan / Debentures / Deferred Payments and Lease Rental instalments repayable within a period of one year Statutory Liabilities (due within one year) Other current liabilities and provisions (accrued expenses of wages, interest, unclaimed dividend and provision for taxation etc.) Working Capital Gap This represents excess of current assets over current liabilities excluding bank borrowings. A part of the Current Assets are financed by Current Liabilities (other than bank borrowings). The remaining portion of current assets which requires financing is called as working capital gap. Banks do not grant advance to the full extent of working capital gap. It is always desirable rule that the borrower has to finance a part of working capital gap out of either capital or long term sources which reflects his continued commitment to the business that is necessary for the survival of the unit. Net Working Capital This represents excess of current assets over current liabilities (including bank finance). It indicates the margin or long term sources provided by the borrower for financing a part of the current assets. For successful operation of a business, Current Assets should be more than the Current Liabilities. It ensures continuous liquidity (current assets are prone to price fluctuations and should, therefore, have an in-built margin to absorb changes) and owner's stake in the current business operations.

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Current Ratio The ratio of current assets to current liabilities is known as Current Ratio. It indicates the liquidity position whereby the capacity of unit to pay the creditors and short-term liabilities is determined. It is generally expected that the customer should meet about 25% of its Working Capital requirements or Current Asset from long term sources. Thus, normally, the current ratio should be minimum 1.33. The current ratio indicates only the quantitative coverage and by itself does not give any indication as to quality of current assets and current liabilities. The adequacy of the ratio should, therefore be judged by examining the quality of the components of current assets and current liabilities. Consideration of factors such as valuation of stocks and guidelines on inventory, sundry debtors, borrowing and marketability of investments would substantially assist in determining the quality of the ratio. If a scrutiny of current assets reveals that they contain slow moving/non moving stock of raw materials, work in process, finished goods and non recoverable debtors, and if there are current liabilities requiring urgent attention/payment, even a high current ratio cannot be deemed adequate as liquidity may be affected. Similarly, a certain fall in the price of materials would shrink the value of stocks thereby narrowing the margin of safety to creditors/banks. It is therefore always necessary to make an in depth study of the current ratio of the unit and not to take it at is face value. It is also essential that proper classification of current assets and current liabilities is ensured to arrive at need based permissible bank finance.

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CHAPTER 4
METHODS OF ASSESMENT Consistent with the policy of liberalization, in April 1997, RBI withdrew the prescription in regard to assessment of working capital needs, based on MPBF, enunciated by Tandon Committee. Thus banks are given greater operational freedom for dispensation of credit. Banks are also free to evolve their own method of assessing working capital requirements of the borrowers within the prudential guidelines and exposure norms already prescribed. However the banks continue to adhere to various guidelines under Credit Monitoring Arrangement (CMA) for sanction of credit proposals and classification of current assets and liabilities as they still hold good and valid. Working capital to business/industry is what blood is to human body. Short supply and excess supply will have adverse effects on the business. Effects of short supply: It shall bring crunch in the working of the unit and thereby failure to utilize the created capacities which result in short fall in production, short fall in sales, business failure, under utilization of men, materials, machinery and management, frustration of the objective of enterprise, inability to accept attractive opportunities etc. Effects of excess supply - Builds up huge inventory, book debts, which is not required for their normal operations. Diversion of funds, etc. The level of investment in an operating cycle depends upon changes in: 1) 2) 3) 4) 5) 6) Terms of production and sales other factors remaining constant The price of raw materials Lead time for producing raw materials The pattern of manufacturing expenses The process time Policy of extending credit (both on purchase as well as sales) etc. Complacency and deteriorating management efficiency, extravagance, unhealthy speculation unwarranted expansion, Liberal Dividend Policy,

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Assessment of working capital shall normally based on the following: 1) 2) 3) 4) 5) Production / Processing cycle of the industry Size of the business and quantum of working capital requirements Financial and managerial capability of the borrower and the various parameters relating to the borrower. Prevailing mandatory instructions of RBI The trade and industry practice prevailing and other objective factors

Assessment of the Working Capital requirement of a borrower shall generally be made under any one of the following three methods: 1) 2) 3) Turnover method (P R Nayak Committee recommendation) Maximum Permissible Bank Finance (MPBF) recommendation) Cash Budget System System (Tandon/Chore Committee

Turnover Method Under this method working capital limit shall be computed at 20% of the projected gross sales turnover accepted by the bank. This system is normally applicable to traders, merchants, exporters who are not having a pre determined manufacturing / trading cycle. Under the turnover method bank should ensure that maintenance of minimum margin on the projected annual sales turnover. Normally 25% of the estimated gross sales turnover value shall be computed as working capital requirements, of which 20% shall be provided by the bank and the balance 5% by way of promoter contribution towards margin money. However if the available net working capital (NWC) is more, the same shall be reckoned for assessing the extent of bank finance and lower limit/s can be considered. The turnover method may be applied for sanction of fund based working capital to the borrowers requiring working capital facility upto Rs 500 lakhs from the banking system for SSI units. In case of a traders, while bank finance could be assessed at 20% of the projected turnover, the actual drawals should be allowed on the basis of drawing power determined after deducting unpaid stocks. Under this method current ratio would be 1.25.

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Example Projected accepted annual Gross Sales Turnover 25% of the above Minimum margin to be provided by the borrower Bank finance Rs.10.00 lacs Rs. 2.50 lacs Rs. 0.50 lacs (or NWC, whichever is higher) Rs. 2.00 lacs (or lesser, in case NWC is higher) As the working capital requirement are linked to projected turnover, reasonableness of the projected annual turnover of the applicant company should be analysed by keeping in view of past performance of the unit, the orders on hand, installed capacity of the units, power, availability of raw materials and other infrastructural facilities . In respect of a new unit projected turnover should be analysed with regard to installed capacity, marketability of the products, performance of the similar unit in the industry, background of the promoters etc. The projected turnover / output value is the gross sales which include excise duty. The assessment of working capital credit limits should be done both as per projected turnover basis and traditional methods based on production/processing cycle (MPBF). If the credit requirement based on MPBF method is higher than the one assessed on projected turnover basis, the same may be sanctioned. On the other hand, if the assessed credit requirement is lower than the one assessed on projected turnover basis, while the credit limit can be sanctioned at 20% of the projected turnover, drawals may be allowed basing on actual drawing power after excluding unpaid stocks. In addition to the above, any other short term / adhoc Working Capital facilities to meet the emergent needs of the borrowers and other seasonal imperfections can be considered by the sanctioning authority, subject to the borrower submitting the required details in support of the need/justification and the sanctioning authority is convinced / satisfied with the borrower requirements. Such short term finance / adhoc facilities shall be permitted for short term, say upto 3-4 months.

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MPBF System Before the MPBF Method is explained, it is necessary to understand the erstwhile Second Method of Lending under Tandon Committee Recommendations. Under Method II, the borrower should bring in a minimum margin of 25% of all current assets from owned funds and long term liabilities, and the balance i.e 75% be financed by the Bank. The example given below will illustrate this:Current Liabilities Credit for purchase Other current liabilities Bank borrowings discounted including bill 100 50 150 200 Current Assets Raw materials Stock-in-process Finished goods Receivables including discounted Other current assets 200 20 90 50

bill

350 10 Method II 370 a. Current Assets 370 Less: b. Current Liabilities other than Bank 150 Borrowings c. Working Capital Gap 220 d. Minimum stipulated net working 92 capital i.e 25% of Current Assets 20 e. Actual / projected net working capital (total current assets 370 minus total current liabilities 350 incl. Bank Borrowings 200) f. Item c minus d 128 g. Item c minus e 200 h. Max. Permissible Bank Finance (Item 128 f or g whichever is lower) i. Excess borrowings 72 (representing shortfall in net working capital item d minus e) As per past practice, current assets and current liabilities for the next year are reckoned in accordance with the usually accepted approach of bank. The borrower is required to bring 25% of current assets. Against the MPBF of Rs. 128 lakhs the actual borrowing is Rs. 200 lakhs resulting in excess borrowing of Rs. 72 lakhs. This excess borrowing is required to be brought from the long term sources i.e. Equity, unsecured loans or long term borrowings. In absence of any support from the borrower, the deficit in long term sources may be treated as working capital Term Loan repayable by the borrower by installments to be fixed while sanctioning the next year's limits.

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The assessment of credit requirement of the borrower shall be made based on the total study of the borrower's business operations vis--vis the production/processing cycle of the industry, which shall represent a reasonable build up of current assets for being supported by bank finance. Based on Kannan Committee recommendations, RBI has allowed freedom to the banks to decide the holding levels of various components of current assets for financial support to ensure efficient functioning of the unit. The levels of inventory and receivables shall be based on industry trend and closely related market developments. Projected level of inventory and receivables shall be examined in relation to the past trend and based on inter firm comparisons. The existing norms are only indicative level of inventory and borrower specific operational needs to hold projected level of inventory and reasonable thereof, ability to absorb the cost of carrying such inventory and comparison of the other similar units in the industry shall be relied upon to decide the required and acceptable level for being supported by the bank. Classification of Current Assets and Current Liabilities

(A few important classifications are furnished hereunder)

1) All Short Term / Temporary investments in money market instruments like Commercial Paper, Certificate of Deposits can be considered as Current Assets. However, other investments like ICDs (inter Corporate Deposits), investment in listed Shares & Debentures including investment in subsidiaries and associates are to be considered as Non-Current Assets. 2) Cash margin for Non-Fund Based limits (like LCs / Guarantees) may be treated as part of current assets for the purpose of MPBF and Current Ratio. However, such margin held for Deferred Payment Guarantees should be considered as Non Current Assets. 3) All Term Loan instalments, Fixed Deposits, Debentures etc., repayable within next 12 months should be considered as Current Liabilities for computation of Current Ratio and MPBF. 4) Inter Corporate Deposits (ICDs) taken are to be treated as Current Liabilities.

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In order to have flexibility in inventory and receivable norms and ensure adequate finance for industrial and other activities, MPBF method has been revised. In order to rectify the deficiency of rigidity of the norms in the erstwhile MPBF, the projected levels of inventory and receivables would now be based on actual level in the past 2-3 years. Combined limits against stocks/book debts may be fixed to have flexibility with suitable sublimits for book debts/inventory etc. The level of the book debts for drawing limits/bills limits should correspond to the level of receivables accepted for MPBF. However, the level of book debts/receivables should be uniform for computation of both MPBF and drawing power. In other words, if the level of book debts accepted is 3 months for MPBF, quantum of said level of book debts minus stipulated margin should be the sub-limit for drawing limit purposes. Assessment of working capital limits of over Rs. 5 cr. but upto Rs. 25 crore shall be assessed based on the MPBF system. The Bench mark current ratio for borrowers whose working capital limit is assessed under MPBF system shall be 1.33. Summary of assessment of working capital on the basis of MPBF System is indicated at Appendix I. Cash Budget System In the case of borrowers enjoying /requiring credit facilities of over Rs. 25 cr., the same can be assessed on the basis of Cash Budget system or MPBF system, at the option of the borrowers. However conservative approach has to be followed. However, in the case of specific industries / seasonal activities such as software export, construction activity, tea and sugar, normally, the system of assessment based on the cash budget may be adopted. Further, in the case of specific industries like tea, wherever for specific reasons, the borrower opts to avail the Working Capital facility under MPBF system, the same may be permitted by the respective sanctioning authority after necessary evaluation and justification.

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Structure of Cash Flow Statement The cash flow statement shows the movement of cash and bank balances during a certain period, the reasons for increase (+) or decrease (-) in the bank borrowings, the level of cash holding between 2 intervals of time. The cash flow statement is a historical statement that depicts the flow of cash in the system. A cash budget statement depicts the projected movement of cash and bank balances at a future period. It shows the expected inflow and outflow of cash and deficit and surplus in generation of cash. The statement covers most of the details needed for assessment of the financial needs of the borrower. The statement of cash flow is made more meaningful and useful for assessment of working capital by grouping the cash flows under three heads viz., Operating, Investing and Financing. i) The principal cash flows arising out of the above three main groups are described below: Operating Activities These activities involve producing and delivering goods and providing services. Cash inflows from operating activities include receipts from customers for sale of goods and services, including receipts from collection of debtors. Cash outflows from operating activities include payments to employees for services, payment to suppliers of goods, payments to Governments for taxes and duties and services etc. ii) Investing Activities These activities involve extending and recovering loans and acquiring and disposing of debt and equity instruments and fixed assets. Cash inflow from investing activities include receipts from loan collections, receipts from sales of debt and equity instruments of other enterprises and receipts from sale of fixed assets. Cash outflows from investing activities include disbursements of loans, payments to acquire debt and equity instruments of other enterprises and payments (including advances or down payments) to acquire fixed assets. iii) Financing Activities These activities involve obtaining resources from owners and providing them with a return on and return of their investment, borrowing and repaying amounts borrowed, and obtaining and paying for other resources obtained from creditors on long term

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credit. Cash inflows from financing activities include proceeds from issuing equity instruments, debentures, mortgages, bills and from other long and short term borrowings. Cash outflows from financing activities are payments of dividends, repayments of amounts borrowed and principal payments to creditors who have extended long term credit. Assessment of the limit under the cash budget system is done by arriving at the deficit between cash inflow and cash outflow during a period of time. The various segments of cash budget are as under: 1. Cash inflow (a) (b) (c) (d) (e) 2. Realisation from debtors Cash Sales Receipt by way of trade advances Miscellaneous receipts Long term sources in the form of TL, equity induction TOTAL CASH INFLOW Cash Outflow (a) (b) (c) (d) (e) (f) (g) Payment to Sundry Creditors (Trade Creditors) Payment of Sundry Creditors (expenses) Cash expenses Cash purchases Deposits and Investments Advances to suppliers Other outflows like repayment of TL, Debentures, ICDs, CPs and other obligations. TOTAL CASH OUTFLOW 3. 4. 5. Deficit (-) Surplus (+) (1 -2) Add Opening Balance (Deficit/Surplus) Amount of Deficit to be Financed (NET OF 3 + 4 or 3-4) (3) (4) (5)

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In the case of borrowers whose credit limits are to be assessed on the basis of cash budget system, the bank shall obtain the following data from the borrower along with applications. (a) (b) (c) Cash Flow Statement Projected Balance Sheet and Profitability Statement Credit Monitoring Arrangement (CMA) data

In addition to the cash budget statement, the bank shall obtain following additional information to scrutinise the cash budget statement. (a) (b) (c) (d) (e) (f) (g) (h) Credit sales during the quarter Credit purchase during the quarter Opening Stock of the finished goods Closing Stock of the finished goods Receivables outstanding at the beginning Receivables outstanding at the end Creditors outstanding at the beginning Creditors outstanding at the end.

In the case of seasonal industries / industries having peak/non peak level operations, cash budget indicating the peak level/non peak level cash flows shall be obtained separately. Based on such peak level/non peak level cash deficit, peak level limits shall be arrived at. The quantum of bank finance for working capital to the borrower shall be the peak level of the annual cash deficit projected as per the projected cash flow statement. However, the working capital limits shall be in tune with the quarterly cash deficit of the borrower as revealed in the quarterly cash budget. To ensure sufficient liquidity, the projected balance sheet should reveal the minimum current ratio acceptable to the bank. The bank shall obtain the quarterly cash flow projections one month in advance before the commencement of the quarter for stipulating the operative limit. While fixing the limits based on the cash budget, the following points shall be borne in mind: (a) The cash budget is realistic and based on the operations in the business / similar business

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(b) (c) (d) (e) The cash budget statement tallies with the underlying financial statements viz., projected balance sheet and profit and loss account. Outstanding bank borrowings figured in the projected balance sheet tally with the deficit as shown in the cash budget statement. The closing balance of the debtors is correctly arrived at by summing up, opening balance of debtors + credit sales minus (-) realization of debtors. The expenses as indicated in the cash budget tallies with the expenses as reflected in the project profit and loss account. In the case of existing borrowers, the branches shall be in a position to scrutinize the projected cash flow statement with the actuals for the previous period and if necessary, obtain other explanation from the borrowers for variations. In the case of new clients, the projected cash flow statement shall be analysed based on the operating cycle / activities of the borrower / other similar borrowers. The bank shall obtain on a quarterly basis, the actuals of cash flow within a fortnight of the completion of the quarter and scrutinise the variations with reference to the projected cash flow obtained earlier, in the same format. During the review of the cash flow statement, if there are major variations between the projected and actuals, the same may be analysed. The reasons therefore should also be indicated and evaluated critically. Apart from the above, the bank should also obtain half yearly balance sheet and funds flow statement. Format of cash flow statement, projected balance sheet and profitability statement and data in respect of CMA are at Appendix II, III and IV respectively. CMA data comprises particulars of existing and proposed limits from the banking system, projected profitability and balance sheet statement, comparative statement of current assets and current liabilities, computation MPBF for working capital and fund flow statement. Computation of MPBF for working capital and Projected profitability and balance sheet statement are already furnished at Appendix I & III respectively. Hence rest of the statements are only included in Appendix IV.

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APPENDIX I Working Capital Assessment Based on MPBF Method (Rupees in Lacs) Sr. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Particulars Total Current Asset (TCA) Current Liabilities other than Bank Borrowings (OCL) Working Capital Gap ( Item 1 Item 2) Minimum Required NWC (25% of item 1) (Bills negotiated under L/C and Export receivables to be excluded) NWC Actual / Projected Item 3 Item 4 Item 3 Item 5 MPBF (Lower of Item 6 & 7) Excess borrowing (representing short fall in net working capital ) (Item 4 Item 5) NWC / TCA % (Item 5 / Item 1 %) MPBF / TCA % (Item 8 / Item 1%) OCL / TCA % (Item 2 / Item 1 %) Sundry Creditors / TCA % Previous Year Current Year Next Year

Comments 1) 2) 3) 4) 5) Whether estimates / projections for production and sales are realistic / achievable and are in tune with the present trends. Whether the levels of the inventory, receivables, other current assets and sundry creditors are realistic and in tune with projected production / sales figures. Are the build up in line with the past trends and our Bank's / Consortium banks' norms. Give reasons for material deviations, if any. Analysis of Funds Flow and Cash Flow Statements along with comments. How the MPBF is tied up and nature of fund based facilities proposed including bifurcation of the limits between Cash Credit and Demand Loan (WCDL) in terms of RBI's guidelines of Loan System of Delivery of Bank Credit, where applicable.

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APPENDIX II Cash Flow Statement (Rupees in Lacs)
Parti cu lars Quarter 1 Projections Actuals Quarter 2 Projections Actuals Quarter 3 Projections Actuals Quarter 4 Projections Actuals Total for the year Projections Actuals

1. A.

Cash Flow from Operating Activities Receipts Cash Sales Collection from trade debtors Other receipts relating to operations (specify) Total receipts from operations

B.

Payments Cash purchases inventories only Payment made to trade Creditors. Payment towards other

Manufacturing expenses
Power and fuel Wages and Salaries Other Factory expenses Administration expenses Payments towards selling & distribution expenses Excise duty Other Selling and distribution on Expenses including ST Payment of direct taxes Deposits towards LC and Guarantee margin Deposits made with Government departments Other deposits (specify) Loans to employees Other payment relating to Operating activities

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Total cash outflow from operating activities (B) Net cash flow from Operating activities (A-B) 2. A. Cash Flows from Investing Activities Receipts Dividends on investments Interest on investments Proceeds from sale of investments other than fixed assets Collection from Loans (other than employees) Others (specify) Total cash inflow from Investing activities (A) B. Payments Acquisition of fixed assets Advances to capital goods Shares Debentures Others (specify)

Loans made to parties other than employees Others (specify) Total cash outflow from Investing activities (B) Net Cash flow from Investing activities (A-B) 3. A. Cash flows from Financing Activities Receipts Proceeds from issue of shares capital Proceeds from long term borrowing Term loan from institution Term loan from banks

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Debentures Others Proceeds from short term borrowings other than bank borrowings including CPS CDs Others specify Margin money loan (specify) Total cash inflow from financing activities (A) B. Payments Interest paid Dividend paid Repayments of term borrowings: from Institutions from Banks from Others

Redemption of Debentures/Share capital Lease and HP payments Total cash outflow from Financing activities (B) Net cash flow from financing Activities (A-B)

STATEMENT OF BANK FINANCE FOR WORKING CAPITAL I II III Net cash flow from operating activities Net cash flow from investing activities Net cash flow from Financing activities ___________________________________

Total (I + II + III)

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Opening cash Add: Net cash inflow (I + II + III) Less: Closing cash Net Deficit ___________________________________ ___________________________________ ___________________________________ ___________________________________

All non-cash transactions will form part of cash flow statement as notes: Other information: 1) 2) 3) 4) 5) 6) 7) 8) Credit Sales during the quarter Credit Purchase Opening stock of Processed Goods Closing stock of Finished Goods Receivables outstanding in the beginning Receivables outstanding at the end Creditors outstanding in the beginning Creditors outstanding at the end

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APPENDIX III Profitability Statement & Projected Balance sheet PROFITABILITY STATEMENT (Form II - Part A of CMA) Sr. No. 1. Gross Sales (net of returns / excise) Job work Charges Domestic Export Gross Sales Less: Excise duty and Sales Tax Net Sales 2. 3. 4. Other operational income Net Sales Cost (i) of Sales (Net of Stock Adjustments) Raw materials (including Stores and other items use in the process of manufacture) Imported Indigenous (ii) Stores and Spares (iii) Power and Fuel (iv)Direct labour including job charges (v)Repairs and Maintenance Expenses (vi)Other Manufacturing Expenses (vii)Depreciation (viii) Sub-total (item i to vii) (ix)Add: Opening Stock in Process Particulars Previous Years Actuals Current Years Estimates Following Years Projections

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Sub-total (x)Deduct: Closing Stock in process (xi) Sub-total (xii)Add: Opening Stock of Finished Goods Sub-total (xiii)Deduct: Closing stock of finished goods (xiv) Sub-total (Total cost of sales) 5. 6. 7. Gross Profit (Item 3 minus item 4 ) Interest Selling: General and Administrative Expenses Sub-total (item 6 plus item 7 ) 8. 9. Operating profit (item 5 minus total of items 6 and item 7 ) Other income/expenses Add: Income Discount Interest Exchange Difference Others Sub-total (+) Deduct expenses Prior Period adjustments Preliminary Exp. Written off. Sub-total (-) 10. 11. Profit before tax/loss (Item 8 plus item 9 ) Provision for taxes/tax paid (Including tax on Dividend) Normal Tax Deferred Tax

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12. 13. Net Profit (Item 10 minus item 11) Less: Dividend Less; Dividend distribution tax Total outgo on account of dividend 14. Retained Profit ANALYSIS OF BALANCE SHEET ( Form III Part A of CMA) Sr. No. CURRENT LIABILTIES 1. Short Term borrowings from banks (including bills purchased and discounted and the excess borrowings placed on repayment basis) From Applicant Bank From others 2. 3. 4. 5. 6. Creditors Raw material (imported) Creditors Raw Material (indigenous) Creditors Expenses Short Term Loans from bank Advance/progress customers/deposits selling agents etc. 7. 8. 9. 10. 11. Interest and other charges accrued but not due for payment Market Borrowings Dividend payable Other Statutory Liabilities (due within one year) Instalments of Term Loans/Deferred payments from from dealers, Particulars Previous Years Actuals Current Years Estimates Following Years Projections

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Payment within one year) 12. Other major Current (due items to Liabilities within be one and year) provisions individually. Total Current Liabilities 13. Total current liabilities (Total of items to 1 to 12 ) TERM LIABILITIES 14. 15. Unsecured Loans from a bank Redeemable preference shares (not maturing within one year but of maturity not exceeding 12 years) 16. 17. 18. 19. 20. 21. Term Loan (exclusive of instalments payable within one year ) Advance against sale of land Term Deposits Other term liabilities Total term liabilities Total outside liabilities Deferred Tax Liability NETWORTH 22. 23. 24. 25. 26. 27. 28. Equity Share Capital General Reserve Development rebate reserve (investment allowance) Other reserves (excluding provisions) Surplus (+) or deficit (-) in Profit & Loss Account Net Worth Total Liabilities (item 21 plus item 27) Credit/Debentures

redeemable preference shares (due

specified

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CURRENT ASSETS 29. 30. Cash and Bank Balance Investments (other than long term investment e.g sinking fund. Gratuity Fund etc.) (i)Government and other Trustees Securities (ii) Fixed Deposits with banks 31. Receivable other than deferred and export bankers) Export bankers) 32. 33. Instalments of deferred receivables (due within one year) Inventory Raw materials (including stores and other items used in the process of manufacture) Imported Indigenous Stock in process Finished Goods (iv) Other consumable spares 34. Advance to suppliers of raw materials and stores/spares consumable and for expenses 35. 36. 37. Advance and Loans Other current assets/major items to be specified individually Total Current Assets receivables and (including discounted bills by purchased receivable and (including discounted bills by purchased

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FIXED ASSETS 38. Gross Block (Land and Building, Machinery construction in progress etc.) (Including additions during the year) 39. 40. Depreciation to date Net Block (item 38 minus 39) OTHER NON CURRENT ASSETS 41. Investments/Book Debts/Advances/Deposits, which are not current assets i) a) Investment in subsidiary companies/affiliates b) Others ii) Advances to suppliers of capital goods/spares and contractors for capital expenditure iii) Deferred Receivables (other than those maturing within one year ) iv) Others 42. 43. 44. 45. Non consumable stores and spares Other Miscellaneous assets including dues from directors Total other non current assets Intangible assets (patents, goodwill, preliminary and formation expenses, bad/doubtful debts not provided for etc. share issue expenses 46. 47. 48. Total Assets (Total of items 37,40,44 and 45) Tangible Net Worth (item 28 minus item 45) Net working capital (item 37 minus

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item 13) Additional Information Arrears of depreciation: Contingent Liabilities: Arrears of cumulative dividends Gratuity Scheme of Staff Other liabilities not provided for Notes: a) If the company is subsidiary, the extent and nature of interest of the holding company and its name. b) If the company is a holding company, extent and nature of interest in subsidiary company and their names. ANALYTICAL AND COMPARATIVE RATIO (Form III - Part B of CMA) Sr. No. 1. 2. Net Sales (Item 3 in Form IIA) %rise (+) or fall (-) in net sales during the year as compared to previous year 3. 4. 5. 6. 7. 8. Profit before Tax (+) or Loss (-) (item 10 in Form IIA) Net Profit i.e after tax (+) or Loss (-) Net profit/(Loss) appropriated Retained Profit as % of Net Profit Retained Profit as % of Net Profit Raw materials (including stores and Particulars Previous Years Actuals Current Years Estimates Following Years Projections

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other items used in the process of manufacture Imported (Item 33(i) (a) in the Form III) How many months' consumption do these represent? Indigenous (item 33(i)(b) in Form IIIA) How many months' consumption do these represent? Months 9. Stock-in-process (item 33(ii) in Form IIIA) How many months' cost of production do these represent? Months 10. Finished Goods (item 33(iii) in Form IIIA) How many months' cost of sales do these represent? Months 11. Other Consumable spares (item 33(iv) in Form IIA) What is the % of total inventory normal represent 12. Receivables other than Deferred receivables and Export receivables (incl. Bills purchased and discounted by bankers item 31(i) in Form IIIA) Export receivables (item 31(ii) in Form IIIA) How many months' export sales do these represent? 13. Sundry Creditors (Trade item 2 in Form IIIA) Indigenous How many months' purchase do these & how many do months' these consumption

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represent? (Trade item 3 in Form IIIA) Imported How many months' purchase do these represent? Expenses 14. 15. 16. 17. Net Working Capital (Item 48 in Form IIIA) Current Ratio (item 37/item 13 in Form IIIA) Tangible Net worth (item 47 in Form IIIA) Total outside liabilities/tangible* net worth (item 21/item 47 in Form IIIA) Total 18. Bank IIIA) 19. Net Sales/Total Tangible assets (item 3 in Form IIA/item 47 minus item 46 in Form IIIA) Term Liabilities/tangible net worth (item 20/item 47 in Form IIIA) Borrowings/Total Outside Liabilities (Item 1/Item 21 in Form

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Appendix IV Credit Monitoring Arrangement (CMA) Data (Other than Computation of Maximum Permissible Bank Finance for Working Capital and Projected Profitability and Balance-sheet Statement, which are at Appendix I & III respectively) Annexure I (Form I) Existing and proposed working capital limits Particulars of the existing / proposed limits from the banking system. (Limits from all Banks and Financial Institutions, NBFCs, Term Lending Institutions for WC Limit, Associates and subsidiary for inter corporate deposits taken and leasing finance from Leasing Companies as on date.) (Rupees in Lacs) Sr. No. Name of Bank / Financial Institution Nature Existing of facility Limits Extent to which limits were utilised during the last 12 months Max. Min. 1 A. Working Capital Limits Sr. No. Name of the Bank/ Financial Institutions Sanction Limit Outstanding as on Overdues, if any Remarks 2 3 4 5 6 7 8 Balance outstanding as on Limits now requested

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B. TERM LOANS DPGs (Excluding working capital terms loans) Annexure II (Form II Part B of CMA) Comparative statement of current assets and current liability (Rupees in Lacs) Sr. No. 1 i) Current Assets Raw materials (including stores and other items used in the process of manufacture) a) Imported [Months consumption] b] Indigenous [Months consumption] ii) Other consumable spares [excluding those included under item (i) above] [% of total inventory and month's consumption] iii) iv) v) Stock-in-process [month's cost of production] Finished goods [Month's cost of sales] Receivables other than export and deferred receivables [including bills purchased and discounted by bankers] [Months domestic sales excluding deferred payment sales] vi) Export receivables [including bills purchased and discounted by bankers] [Months export sales] Last Particulars year Current year Following years /

Actuals Estimates projections

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vii) Advances to suppliers of raw materials and stores/spares consumables viii) Other current assets excluding cash and bank balance and deferred receivables due within one year specified individually ix) Cash and Bank Balances TOTAL CURRENT ASSETS [to agree with item 37 in Form III A] 2 Current Liabilities (other than bank borrowings for Working Capital) i) Creditors for purchases of raw materials and stores and consumable spares a) Imported [Months purchase] b) Indigenous [Month's purchases] ii) iii) iv) v) Advances from customers Accrued expenses Statutory liabilities Other current liabilities [major items to be specified individually] Sub-total 3 Working Capital Gap [1 minus 2] Actual/projected bank borrowings for working capital including bills purchased and discounted and excess borrowing placed on repayment basis [to agree with sub-total (A) in Form III A] 5 Total Current Liabilities [To agree with item 13 in Form III A] 6 Net Working Capital (1 minus 5) [to agree with item 48 in Form III A]

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Annexure III (Form IV of CMA) Funds Flow Statement (Rupees in Lacs) Particulars Previous Years Actuals SOURCES Profit before tax (item 10 of Part A of Form II) Add: depreciation (item 4 (vii) of Part A of Form II) Add: Intangible assets written off Gross funds generated Less: taxes paid Total outgo on account of dividend (relating to the year) Sub-total - Net funds generated Increase in capital - Equity Capital Increase in capital - Quasi Equity Loans Increase in capital - Preference Capital / Application Increase in Term Loans/Debentures/deferred payment liabilities Increase in Public deposits/Unsecured loans Decrease in fixed assets Decrease in inter-corporate investments & advances Decrease in Other non-current assets Sub-total Increase in short-term bank borrowings Current Years Estimates Following Years Projections

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(including bills purchased and discounted by bankers) Increase in other current liabilities Decrease in inventory Decrease in receivables (including bills purchased and discounted by the bankers) Decrease in other current assets(including cash and bank balances) Sub-total TOTAL FUNDS AVAILABLE (A+B+C) USES Increase in fixed assets Decrease in Term Loan/Debentures/Deferred payment liabilities Decrease in public deposits/Unsecured loans Decrease in Equity/Quasi Equity Loans Increase in Other non-current assets D. Sub-total Decrease in short term bank borrowings (including bills purchase and discounted by bankers) Decrease in other current liabilities Increase in inventory Increase in Receivables (including bills purchase and discounted by bankers) Increase in other current assets (including cash and bank balances) E. Sub-total Less: (Item 10 of Part A form II) Less: Depreciation (item 4(vii) of part A of Form II Balance i.e Gross funds lost (-) Or Gross funds generated (+)

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Add: Taxes paid/payable (relating to the year) Add: Dividend paid/payable (relating to the year) F. Sub-total net funds lost Total funds used (D+E+F) SUMMARY Long term sources Long term uses Surplus (+)/shortfall(-) Short term sources Less: Short term sources Less: Short term uses Surplus (+)/short fall (-) Notes Under the items "increase in term loans, debentures, deferred payment liabilities", each of the term loans and deferred liabilities, together with the names of the concerned lending/guaranteeing Institutions, should be indicated separately. Similarly, under the items, "Decrease in term loans, debentures deferred payment liabilities" the repayment of each of the term loans and deferred liabilities, together with the names of the lending/guaranteeing institutions should be indicated separately. In the case of term loan proposals, this statement should be furnished for the entire period of the term loan. Wherever there is a significant movement of funds, the banks should give their comments.

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CHAPTER 5
ANALYSIS OF BALANCE SHEET, RATIO AND HOLDING LEVEL Balance Sheet and Profit & Loss Account are the key financial statements of a company / firm / organisation. The ability of those managing a business is often reflected in the Balance Sheet. It is also indicated in the Income (Profit & Loss) Statement. The main objective of analysis of Balance Sheet and Profit & Loss Account is to clearly find out the present solvency and probability of continuing solvency and trend of fortunes of the business enterprise. Study of Balance Sheet and Profit & Loss Account over a period of a few years gives approximate idea of the financial position of the enterprise. It is, therefore, necessary to make a comparative and comprehensive study of these statements for at least 2-3 years immediately preceding the date on which an application for an advance is made. It is also necessary to make such study of financial estimates for the current year and projections for the following year. The Balance Sheet and Profit & Loss Account statements can be sourced from the borrower. However, to enable the Bank to carry out a meaningful analysis, it is necessary that all the items are classified properly. There may, some times, be a doubt as to the heading under which a particular balance sheet item should be placed. The Bank has to deal with items in a Balance Sheet from a lenders point of view and in case of doubt, it should accordingly be placed under appropriate heading. For the purpose of arriving at the quantum of Current Assets and Current Liabilities and arriving at the Working Capital gap which needs to be financed, it is necessary to analyse the Balance Sheet. The figures furnished in a Balance Sheet are to be re-arranged to enable an analysis as per our requirement. classification: LIABILITIES CAPITAL FIXED ASSETS & Fixtures, vehicles, ASSETS The following chart indicates an illustrative

(includes money invested by partners, Land and Building machinery balance in Current Accounts of Partners, Furniture

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share capital of companies) RESERVES & SURPLUS Profit & Loss Account i.e. Profits). TERM LIABILITIES year) payable within one year) one year. CURRENT LIABILITIES Short term borrowings from Banks (including bills purchased) (unsecured loans) Sundry Creditors (Trade) Advance payments received customers / Deposits from dealers computers and other Fixed Assets. NON CURRENT ASSETS affiliates. Deferred receivables (maturity exceeding One Year) nature of such holdings) Non consumable stores & spares. Inventory / Stock in trade Sundry / Debtors and Bills receivable (including Discounted). Cash and Bank Balance in Fixed and Deposits, quoted Government investments. from Advances to suppliers of raw materials / stores and spares. Current Assets like interest Securities Bills Purchased and

(All types of reserves and Balance in Investment in subsidiary companies /

Debentures (Not maturing within one Loans / Advances (depending upon the Term Loans (Exclusive of instalments Unquoted Investments Deposits / borrowings payable beyond CURRENT ASSETS

Short term borrowings from others Investments

Deposits / Debentures / Instalments of Advance taxes paid Term Loans / DPGs etc., due within one Other year. one year). accrued on investments etc nature of such holdings). INTANGIBLE ASSETS Preliminary and pre-operative expenses Accumulated losses Goodwill, Patents Bad/Doubtful debts not provided for

Other Provisions/ liabilities (due within Loans / Advances (depending upon the

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Some important concepts Net Worth - Net Worth is the total of Capital and Reserves and surplus of a Company excluding revaluation reserves. If there is a deficit in P&L Account (Loss) or any intangible assets, the same has to be deducted for arriving at Net Worth. Net Worth should show an increasing trend and it should be sufficient to cover the borrowers stake / contribution to the business. Long Term / Short Term Sources and Uses The total of Capital, Reserves and Surplus available and Term Liabilities represent Long Term Sources, Bank borrowings for Working Capital and other Current Liabilities and Short Term Sources. Similarly, Fixed Assets are treated as long term uses and Current Assets are short term uses. Normally, Long Term Sources are to be utilized for acquiring Fixed Assets as well as meeting the margin on Working Capital. Short term sources (Bank borrowing for WC) should not be diverted for long term uses like acquiring Fixed Assets etc. Such diversion will result in deterioration of Net Working Capital (NWC) and Current Ratio. In such cases, guidelines relating to diversion of funds are to be enforced. Where outside borrowings are declared, it should be ascertained whether these are taken on long term (not repayable within one year) for considering as a long term source. Such borrowings are to be subordinated to our advances. Bank Borrowing for Working Capital / Sundry Creditors As Working Capital Finance is extended against the inventories (Raw materials, work-inprocess, finished goods and stores & spares) and Receivables of the borrower, it should be ensured that the value of inventories and receivables declared are sufficient to cover our finance extended as well as the margin stipulated. Sundry Creditors (Trade) represent the amount of credit available to the borrower. The level of Sundry Creditors should be

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compared with the earlier accepted level. Higher level of Sundry Creditors indicates that the borrower is getting more credit period fro the goods purchased. Inventory Non-moving items and slow moving items should be netted off from the total inventory and it should be treated as non current assets or intangible assets. Sundry Debtors The bills discounting / book debt limits are fixed based on the level of Sundry Debtors. In respect of bills which are not discounted and book debts, age-wise classification should be called for to ascertain that the debtors are being realized promptly and there are not bad/doubtful debits declared as Current Asset. Further, it should be verified from the list of debtors to ensure that the debtors declared are on account of genuine trade transactions and do not include accommodation bills. Bills drawn on allied / sister concerns are to be carefully reviewed to ensure that they have been drawn on account of genuine transactions. Doubtful, old and unrecoverable debtors to be treated as non current assets or intangible assets. Loans & Advances Items outstanding under loans & advances are to be carefully reviewed and it is to be ensured that there is no diversion and items stated under Current Assets are realizable within a period of one year. An item on advances recoverable in cash or kind to be reviewed critically with detailed analysis of the groupings. Particularly loans and advances to subsidiaries/associates to be analysed along with the performance of each such companies. In case the performance of those subsidiaries/associates companies are found to be deteriorating or unsatisfactory, the same has to be classified as non current or intangible assets. Investments The outstandings under investments in Subsidiaries/Associates to be critically reviewed and normalcy is to be ensured. If the investment is made in the listed securities then market value of the same is to be ascertained. If the market value is less than the book value, the difference be treated as non current assets or intangible assets.

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Analysis and Interpretation of Financial Statements Though the method to be adopted for analysis of a Balance Sheet cannot be generalized and each case has to be dealt with depending upon various factors, the following are some hints: Obtain the Audited financial statements for the last two years for the purpose of comparison / study. Arrive at the Net Worth (Capital + Reserves excluding revaluation reserves +-Surplus / deficit in P&L Account Intangible Assets if any). If it shows a declining trend, call for the steps being taken to improve the situation. Arrive at the Net Working Capital & Current Ratio. minimum current ratio of is achieved. A negative Net Working Capital indicates liquidity crunch. Examine the causes Call for Whether there is a diversion of short term funds to long term uses or the Net Worth has deteriorated due to losses / withdrawal from Current Accounts by partners. corrective measures from the borrower. Compare the levels of Current Assets over the years. MPBF. If funds invested outside including in Subsidiary Companies / affiliates have resulted in deterioration of current ratio below prescribed level, borrower should be asked to bring back the diverted funds immediately. Examine whether the borrower has made any other diversion by way of investments in quoted / unquoted securities / stocks indulged in inter-corporate deposits etc., during the year. If the current ratio is unfavourable, borrower should be asked to bring in funds to improve the position. Performance of the subsidiaries/associates to be reviewed critically to ensure that the investments are realizable. Compare the Cash, Bank Balance and Deposits and ensure that the borrower is confining the dealings with us only. If the same are kept with other banks, call for the reasons. Analyse Other Current Assets declared and ensure that these are of current nature only. Particularly and item, Advances recoverable in cash or Kind necessitates thorough scrutiny. Identify and ascertain the chargeable Current Assets and exclude Non-Current Assets for the purpose of arriving at If the same has deteriorated, borrower should be asked to bring in additional long term funds so that a prescribed

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Compare the level of stocks declared with previous year and levels accepted by us while fixing MPBF earlier. If there is any abnormal variation, satisfactory explanation to be called for. Ascertain whether Bank borrowings declared are within the limits permitted by us and tally with the liabilities as per our books approximately. As the borrower to reconcile if there is abnormal variation. If there are any other outside borrowings, ascertain the terms, rate of interest etc, to ensure that there are no high cost borrowings which affects the profitability of the borrower. Compare the level of Sundry Creditors declared with the accepted level and reported to us in feedback statements. If there is abnormal variation, ascertain the reasons. Analyse any other current liabilities and ensure that there are no long outstanding statutory dues to be paid by the borrower. Call for the reasons for non-payment in such cases. Compare the sales achieved and profit earned over the years. If there is decline, call for the reasons. Inter-firm/inter group sales are to be reviewed and commented upon. Sales to the production are to be compared and manufacturing sales and trading sales are to be segregated. Compare the individual items of expenditure as per the Profit and Loss Account with the figures of the previous year. Where abnormal variation is observed, call for the reasons. Examine whether depreciation on Fixed Assets is fully provided for. Compare the interest paid as per P & L Account with the figures as per our books (Interest debited to the borrowers accounts with us). If it includes interest on any other loans, ascertain the details. Off balance sheet items like contingent liabilities are to be critically reviewed and commented upon. Companies offering their corporate guarantees., are to be reviewed. Auditors remarks and notes to accounts are to be carefully gone through and disputed statutory liabilities etc., are to be reviewed and its impact on the financials of the Company in case the payment devolves are to be examined. It is sometimes observed that the Balance Sheet and Profit & Loss Accounts submitted by the borrower relate to all their units, whereas the facility proposed is only for one or a few units. In such cases, a separate Balance Sheet and Profit & Loss Account for the units to be

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financed should be called for and the analysis should be carried out for the company as a whole, as well as the units proposed to be financed by the Bank. The annual accounts also contain Auditors Certificate and explanatory notes and schedules providing information on several vital matters, which may affect the future prospects of the firm. These include: Details of Contingent Liabilities like guarantees issued and outstanding bills discounted. Details of any expansion/diversification programme on hand, any outstanding commitments on account of capital expenditure. Arrears of taxes, dividend, etc., if any. Provision for bad & doubtful debts. Particulars of payments / receipts in dispute. Indication of any changes in accounting policies (accounting period, stock valuation, method of charging depreciation etc.). Claims against the firm / company not acknowledged as debts. Appropriate note of these comments may be taken while analysing the financials and the effect of these on the Balance Sheet, P&L Account analysed. The Directors Report in case of a Company account may provide vital information on trading conditions, plans for the future, labour relations, impact of Government policies, changes in management etc. Relevant points of the reports may be taken into consideration and commented upon briefly while carrying the analysis. The Ratio Analysis provides a useful mechanism by which inter-relationship of various items can be established. It provides valuable interpretation of financial strengths and weaknesses of the concern. Studied over a period of time (a few years), the analysis reveals trends in the financial position and operational efficiency of the business. An adverse or deteriorating trend is an early warning of impending financial trouble. Ratio analysis has its own limitations. The analysis does not fully reveal the quality of Assets and Liabilities. As the economic conditions and the operating environment vary from period to period and from one geographical location to another, the ratios can not be strictly

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compared in isolation. Also, financial statements are often subject to window dressing, which an external analyst may not always be able to identify. Though the Ratio Analysis is an extremely important tool for assessing the financial and operational strength and efficiency, it must be remembered that the ratios are relative measures and by themselves do not provide a full picture of the state of affairs. Inventory Holding Analysis of inventory holdings on balance sheet dates provide insight into holding of various items of inventory as well as the creditors and debtors over a period of time. It also enables one to compare these trends with the industry as well as the suggested/generally accepted norms. It helps in assessing whether the projections of the inventory, debtors and creditors on the basis of which the working capital requirements are assessed, are reasonable / realistic. Details of the Inventory Holding Ratios are as under: 1) Raw Materials (Months Consumption) Calculation of this ratio is as follows: Actual Raw Material Holding Raw Material Ratio = --------------------------------Consumption This ratio gives average holding of Raw Materials by the concern in Months. 2) Work in Process (Months Cost of production) Calculation of this ratio is as follows: Actual Goods in Process Holding Goods in Process = ------------------------------------Cost of Production This ratio gives average holding of goods in process by the concern in Months. 3) Finished Goods (Months Cost of sales) Calculation of this ratio is as follows: Actual Finished Goods Holding Finished Goods Ratio = ------------------------------------X 12 Cost of Goods Sold (i.e. cost of sales) X 12 X 12

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This ratio gives average holding of Finished Goods in Months. 4) Receivable to Sales (Months sales) Calculation of this ratio is as follows: Actual Receivable Outstanding Receivables Ratio = -------------------------------------- X 12 Gross Sales This ratio provides collection period or the length of credit allowed in months. Whenever the period of credit is lengthened, it could be a sign that the products of the firm are not being sold as before. probed, vis--vis the industry trend. 5) Sundry Creditors to Purchases (Months Purchase) The ratio is also called Creditors Ratio. Calculation of this ratio is as follows: Actual Creditors Outstanding Creditors Ratio = ------------------------------------ X 12 Purchases This ratio provides period of credit received in months. A significant reduction in the period would be sign of suppliers losing confidence in the Company. On the other hand, significant increase would be due to the Company not being able to pay the creditors on time. Major variations in the ratio should, therefore, be probed, vis--vis the industry trends. Profitability Ratios Profitability ratios indicate the financial health and earning capacity of the company. There can not be any standard norms or a minimum for a project. A comparison with other similar projects may reveal competitive edge and better management or higher productivity. However, in Profit Ratios, the most important aspect is their comparison over a period of time and comparison with other ratios of profit to net sales. An increase in sales is not sufficient if margin of profit is declining. Variations may necessitate in-depth study into causes and also peer comparisons may be done. Details of Profitability Ratios are as under: Reasons for increase in ratio should be

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Operating Profit/Sales (%) Ratio of Profit before other income and income tax to net sales indicates the average profit margin on sales of the concern. Ratio of Profit before Depreciation, Interest and Tax to Sales (PBDIT) may also be worked out to ascertain the impact of depreciation on profit as in many cases depreciation is provided upto the levels permitted in Income Tax and can be very significant. Net Profit /Sales (%) Ratio of Net Profit (i.e. Profit After Tax - PAT) to Sales indicates the actual net profit margin in percentage terms. Interest to Sales (%) This ratio gives the ratio of Interest paid on borrowed funds to Sales in percentage terms. EPS (in Rupees) Earnings Per Shares (EPS) is worked out by dividing Net Profit (Profit After Tax) by numbers of equity shares. Preference dividends, if any, should be deducted from Net Profit (PAT). This indicates the net profit/earnings of each share. Return on Net Worth (%) This ratio is arrived at by dividing the Net Profit (i.e. Profit After Tax) by Tangible Net Worth in percentage terms. Return on Net Working Capital (%) This ratio is arrived at by dividing the Net Profit (i.e. Profit After Tax) by Net Working Capital in percentage terms. Retained Profit/Net Profit (%) Retained Profit is Net Profit (Profit After Tax) less Dividend paid. The ratio of Retained Profit to Net Profit is worked by dividing the Retained Profit by the Net Profit in percentage terms. The ratio indicates the extent and trend of ploughing back the profit by the concern into the business.

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Turnover Ratios Sales to Net Fixed Assets & Sales to Gross Fixed Assets These are worked out by dividing Net Sales by Net Block and Net Sales by Gross Block. An increase in the ratios will indicate that greater sales have been obtained without increasing investment in fixed assets. If a fixed asset is acquired and remains idle, these ratios may record a fall. It may however, be remembered that a company cannot adjust its fixed assets for short term market fluctuations. Sales to Raw Material and Sales to Inventory Inventory includes raw materials, stock in process and finished goods. Sales to Raw Materials is worked out by dividing Gross Sales by a Raw Materials while Sales to Inventory is calculated by dividing Gross Sales by the total Inventory. These ratios indicate whether raw materials/inventory have been efficiently used or not. A high ratio of turnover on raw materials and inventory is generally a desirable trend. The lower ratio is a negative indicator and the reasons should be probed into. Sales to Receivables The ratio indicates how many times the Debtors have turned over vis-a-vis the Sales made. Whenever the ratio is reduced it could be an indicator that the products of the concern are not being sold as before. The reasons for the reduction in the ratio should be probed. The ratio may be calculated separately for domestic and export receivables. calculated as follows: Gross Domestic Sales Receivables Turnover (Domestic) = -------------------------------------------------------Receivables* (Other than Deferred & Exports) Gross Export Sales Receivables Turnover (Export) = ------------------------Export Receivables* *Including Bills Purchased and Discounted by Banks These are

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Accounts Payable Turnover Accounts Payable (i.e. Sundry Creditors-Trade) Turnover can be calculated as follows: Purchases Accounts Payable Turnover = -----------------------------Sundry Creditors - Trade The ratio indicates how many times the trade creditors are disposed off vis--vis the purchases made. A significant increase in the ratio could be a sign of suppliers losing confidence in the company. On the other hand, significant reduction could be due to the company not being able to pay creditors on time. Major variations in the ratio should, therefore, be probed. Fund flow statement Funds are the cash and non-cash economic resources, which are listed in the Balance Sheet as Assets & Liabilities. During the operations of the business, these Assets & Liabilities keep changing from time to time. These changes either generate additional funds (sources) or lead to outflow of funds (uses). As a rule, an increase in asset is a use of funds, while a sale or depletion of an asset is a source of funds. And an increase in a liability is a source of funds, while decrease in liability is a use of funds. A compilation of sources and uses of funds called Funds Flow Statement can provide significant information on the managements ability in using the funds in the operations of the business in an efficient manner and getting adequate return on the investment made. The statement also helps to diagnose if the funds are not used properly so that quick remedial or corrective steps can be taken. The statement consists of two major parts: (i) (ii) Recording the changes that have taken place in the assets and liabilities from one Balance Sheet to other. Identifying the sources and uses of funds and regrouping them under the appropriate heads. Format of the Fund Flow Statement is at Appendix IV (Annexure III) in the previous chapter

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A critical examination of Funds Flow Statement would reveal the following: a) b) c) d) e) f) g) h) i) j) k) Whether the funds are used effectively (for required end use) Whether the funds raised from short term sources are used for assets or long term obligations? Is there undue build up of fixed assets? How the increase in the working capital is financed? What is the proportion of increase in owned funds and borrowed funds to the proportion of increase in working capital? Whether the surplus in long term sources is out of equity, long term borrowings or profits? Whether the funds are deployed in non-business assets, and how far they are justified? How the profits are apportioned? How the dividends are paid? How the cash losses, if any, are financed? How the proceeds on sale of fixed assets, if any are utilised? meeting long term

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CHAPTER 6
APPRAISAL OF CREDIT PROPOSAL Proposals have to be examined from various angles of safety, viability, feasibility, national priority and repaying capacity of each borrower. A critical study of the financial statements, project report and other information submitted by the borrower is necessary. Every credit proposal shall be subjected to an objective appraisal as per the policy and procedural guidelines laid down from time to time to establish technical feasibility, economic viability and bankability of the proposal. Appraising officers should visit the factory, godowns and business place/s and acquaint himself with the process of production and infrastructure available to the industrial unit and business condition of the borrower (in the case of traders) and correctly assess the requirements and financial implications involved, before the proposal is sanctioned / forwarded. If it is an entirely new project, the Appraising officer should try to understand the production process involved, the various stages of production, the proposed installed capacity, number of shifts to be worked, the raw materials required, easy availability or otherwise of it, availability of other external economies etc., all have to be taken into account. Following factors need to be evaluated: 1. 2. Goods / commodities offered as prime security to the Bank should relate to the borrowers line of business. Commodities satisfying the following qualities are generally acceptable for our advance: a) absence of wide fluctuations in price b) easy marketability c) free from the risk of early deterioration d) easy ascertainability of value 3. Wherever licence / permit is required to deal in certain commodities, before accepting such commodities Branch has to satisfy that borrower is having valid licence / permit. Copies of licence / permit should be obtained. 59 of 203

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4. 5. Advances on commodities covered under RBI Selective Credit Control should be governed by RBI directives issued from time to time. For Advances on commodities on which duty is not paid, rules governing such good should be adhered strictly. The proposed line of activity should be legal and not prohibited. The Government policies relevant to the industry should be found out. If it requires any licence / quota / permission, it should be ensured that it has been obtained. viii)If any clearance from the local government authority like Factories Inspector, Corporation / Panchayat etc., Electricity Board, Pollution Control Board, Sanitation Department etc., is required the same should be got. Following guidelines should also be adhered to: v. The request of the borrower is assessed properly and the Credit Proposal, including the terms and conditions proposed, conform to the basic lending principles, Banks credit policy and norms & guidelines of Reserve Bank of India / other regulatory authorities. vi. Balance Sheet, Profit & Loss Account and other financial statements are analysed properly. Items of Assets and Liabilities are classified properly and projections made are reasonable and realistic. vii. viii. ix. x. xi. xii. xiii. Level of inventory holdings (past and projections) Trends in sales & Profitability Production capacity and use past and projected Estimated working capital gap with reference to acceptable build-up of inventory/receivables/other current assets All relevant ratios are calculated. Reasons for major variations in the Balance Sheet and other relevant ratios have been ascertained and commented upon. Study the off balance sheet item, non credit items like contingent liabilities, deferred payment liabilities, pending claims, guarantees offered, forward contracts, swaps etc and its impact in the case of crystallization. xiv. xv. Diversion of funds Auditors Comments on the balance sheet

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xvi. xvii. xviii. xix. xx. xxi. Assessment of credit requirements is carried out by using appropriate formats, methods and as per the applicable norms and guidelines. Limits proposed are within the borrowing powers of the company. The information / comments about the borrowers, guarantors and the project given in the Proposal display a fair, complete and correct picture. Appropriate and adequate primary security is available for the advance. Adequate and suitable collateral security may be obtained as warranted. Norms and documents proposed are appropriate.

Computation of Net Worth For computing the outside networth and means branches should obtain the details of assets and liabilities of the proprietor / partners / directors etc., as also those of the co-obligants / guarantors at the time of sanction / renewal of limits. To ensure that the particulars relating to the assets declared are genuine, branches should obtain the tax paid receipt or such other documentary evidence in the case of immoveable properties, besides verifying the existence of such property, its market value, etc. Besides, for confirming the veracity of the declarations, branches should also call for IT/WT assessment orders wherever, such persons are assesses under IT/WT. value of the assets held by the assessee. However, the networth under WT Act is restrictive in nature and will not depict the correct picture of the In such cases, the branch should make an independent enquiry of the market value of the assets declared taking into account the nature of property, location, market value of similar properties etc. This is more relevant in the case of immovable properties where the value of properties continue to appreciate and declaring the original purchase value gives a distorted picture. Branches should verify and satisfy themselves every year, on an ongoing basis, preferably at the time of renewal of the limits / review of the accounts, the assets declared , so as to ensure that there is no erosion or dilution in the outside networth / means of the proprietor / partner / director / co-obligant / guarantor etc. For this purpose, branches should compare the latest declaration with the one earlier obtained form the borrower.

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For computing the networth, the following guidelines should also be adhered to: A. Individuals and proprietory concerns a) b) Moveable assets like Bank Deposits, Gold ornaments, jewellery, investment in shares, debentures, company deposits. Personal unencumbered immovable properties like self acquired property, share in the ancestral property acquired on division of Joint Hindu Family as per Hindu Succession Act / Indian Succession Act. c) d) Capital investment in the business including Investment in partnership. Out of the above properties / assets i.e. (a) to (c), existing borrowings, if any, should be reduced to arrive at the net value of assets. This net value of the assets shall be the net estimated worth or means of the borrower. B. Partnership & Joint Hindu Family (HUF) concerns a) b) c) Capital invested in the business by all the partners Undivided profits Total worth of individual partners i.e. total value of liquid assets of the partners; total value of self acquired immovable properties of each partner; investment; stock; cash deposits, etc., stake in sister concerns. d) e) Out of the above items, i.e. (a) to (c) deduct borrowings, accumulated losses, intangible assets, if any However, while computing the liquid assets of the partner the value of shares in the Private / Public Limited companies, held by partners, proprietor, etc., of these firms should not be included at the face value, if the scrip is not quoted in the stock exchange and / or is not readily marketable. The full face value of shares can be taken into account in assessing the holders means only if the companies whose capital these shares represent are first rate running concerns, which have been continuously making good profits in the past and whose existing liabilities do not our-weigh their easily realizable assets. f) Further while assessing the worth of a partner, his investments should be ignored, as the investment in such firm is included in the firm.

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C. Limited Companies a) Apart from paid capital and free reserves as appearing in the balance sheet, balance in the share premium account, capital and debenture redemption reserves, and any other reserves (not being the reserve created for repayment of any future liability for depreciation in assets, for bad debts or reserves created by revaluation of assets) shall also be taken into account. b) Accumulated balance of loss, balance of deferred revenue expenditure and other intangible assets should be deducted from the capital as in (a) above. Obtention of Personal Guarantees of Directors Wherever loans / advances are granted to corporate borrowers the sanctioning authorities are required to obtain guarantees from Directors (excluding nominee directors) and other managerial personnel in their individual capacity, wherever felt necessary. Managerial personnel are those who may not be called as promoters / directors but who have otherwise, a stake in the ownership / management of the company concerned. However, obtention of personal guarantee from such managerial personnel may be decided on case to case basis. Apart from this, wherever the sanctioning authorities feel that the guarantee from third parties is required (through such persons are not directors in the company), they may stipulate the guarantee of such persons, keeping in view the financial position of the borrowing company, stake of the proposed guarantor in the company, etc. It should be ensured that the system of obtaining the guarantee is not used by guarantors (not only by directors) as a source of income from company. An undertaking from the borrower company as also the guarantors should be obtained to the effect that no consideration, whether by way of commission, brokerage or fees or in any other form will be paid by the former or received by the latter directly or indirectly. The purpose of obtaining such guarantees is that the borrowers are more amenable to financial discipline if the directors / promoters or other persons interested in the borrowing concern have given their personal guarantee. memorandum to the branches should be incorporate. A suitable clause in the sanction

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When a director whose personal guarantee has already been obtained resigns from the directorship, the proposal should make specific mention as to the continued availability or otherwise of his personal guarantee. If the same is not available, the proposal to relieve him from the personal guarantee should be specifically mentioned in the proposal. When credit facilities are extended to borrowing units in the same group, guarantees of the parent / holding company may be insisted. Branches / offices, during their periodic inspection of the borrowers unit, should also verify their books of account / financial statements to ensure that the borrowing company has not paid any commission / brokerage / fees, etc., to the guarantors for extending such guarantee. This apart, the branches should also obtain from the borrowing company, an auditors certificate annually, to the effect that no commission, brokerage/fees, etc., has been paid to the guarantors by the company. Borrowers are required to furnish the documents indicated in the Appendix - V along with the application for financial assistance. A flash report on the proposal is prepared and submitted to Zonal Committee / Credit Committee depending upon the exposure. Flash report on the proposal is prepared basically to consider eligibility of the proposal for assistance. Once the committee decides that the proposal is "in principle" eligible for financial assistance. undertaken. Credit Rating All proposals brought before the Zonal Committee/Credit Committee for sanction to be assessed by Internal Rating System. Rating exercise to commence either outside or in house for new companies after flash report. For other cases, as soon as the request for assistance is received. Detailed appraisal is being

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Proposal with a rating of atleast BBB are normally considered for appropriate credit decision by the Sanctioning Authority. It may be mentioned that credit rating is one of the critical inputs considered for sanction of assistance. The various risk relating to the project (sponsor risk, participant risk, operating risk, engineering risk, supply risk, market risk, funding risk etc. ) needs to examined. The risks and the mitigation mechanism needs to be suitably highlighted. Presently, our internal risk rating is being done on the RAM (Risk Assessment Model) software, which has been devised by CRISIL. It is a software designed to assess credit risk in structured and comprehensive manner which ultimately helps in assessing the credit quality of the borrowers. The credit risk of the company is broken down into risk categories as under: 1. 2. 3. 4. 1. Business Risk Management Risk Financial Risk Industry Risk Business Risk It mainly covers market position factors such as access to patents, brand equity, consistency in quality, customisation of product/product design, distribution set up, diversity of markets, financial ability to withstand price competition, long term contracts/assured offtake, product range/mix, support service facilities/after sales service, project management skills and size related pricing advantages. It also covers operating efficiency factors such as availability of raw materials, Multi locational advantages, adherence to environmental regulation, capacity utilization, cost of effective technology, employee cost, efficient raw material usage, energy cost, extent of integration, management of input price volatility, selling costs, vulnerability of event risks, bargaining power with suppliers, proximity to customers and employee attrition rate.

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2. Management Risk This risk mainly covers Track Record, credibility, payment record and other factors like group support, management proactiveness 3. Financial Risk This risk is evaluated through a combination of the following ratios (both past and projected) 4. Interest Coverage Return on capital employed Operating Margins Operating income/short term borrowings Current Ratio DSCR Total Outside Liabilities/Total Networth Free cash flow from operations/Total debt.

Industry Risk The factors covered under industry risk are qualitative factors such as demand supply gap, Government Policy, Extent of competition, Input related risk and Quantitative factors such as Return on capital employed, operating margins, variability of operating margins, slope of operating margin trendline.

These risks are measured on a scale of 1-6 points, 6 being the highest score and results in ten grades as under: Grade Degree of safety with regard to servicing debt obligations Grade I (AAA) Very High The fundamentally strong debt servicing capacity of such companies is most unlikely to be adversely affected by changes in circumstances. Comments

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Grade Degree of safety with regard to servicing debt obligations Grade II (AA+) Grade III (AA) Grade IV (A) Grade V (BBB) Grade VI (BB+) Grade VII (BB) Grade VIII (B) Grade IX (CC) Grade X (C) Default Substantial Risk High Risk Low Inadequate Below Average Average Adequate High Adverse business conditions are unlikely to affect debt servicing capacity. Such companies differ in safety from those in Grade only marginally. Changes in circumstances are more likely to affect debt servicing capacity than for higher grades. Debt servicing capacity could weaken in view of changing circumstances. While such companies are less susceptible to default than those in lower grades, uncertainties faced by them could adversely affect debt servicing capacity. Uncertainty faced by issuer could lead to inadequate capacity to make timely debt repayments. Debt servicing capacity is highly vulnerable to adverse changes in circumstances. Adverse business or economic conditions are likely to lead to lack of ability or willingness to service debt obligations. Timely payment of debt would continue only if favourable circumstances continue. Debt servicing capacity in default and returns from this may be realized only on reorganization or liquidation. Pre-sanction Inspection and Credit Reports Pre-sanction inspection should be conducted and credit reports collected for considering the credit request. Comments

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The main objectives of conducting pre-sanction inspection are: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. To establish the identity of the customer. To validate market information with regard to means, standing, business integrity, experience and abilities of the parties concerned. To verify the correctness of particulars given in the Credit Application Form and its enclosures To verify / get information on the customer and their business unit. To understand the nature of activity. To evaluate standing (year of establishment, experience, reputation). To judge Management / business abilities (availability of technical / experienced staff, efficiency of operations). To ensure Proper maintenance of records / accounts. To verify adequacy of internal controls. To ascertain working of the unit (installed capacity, production, marketing facilities, targets, problems, prospects). To inspect immovable property (location, area, ownership, encumbrance, payment of taxes and dues, approximate value etc.), To verify machinery (original purchase invoice, present value). To verify / ascertain from records, the correctness of stocks, competitors, Working Capital cycle, Manufacturing Process, Suppliers, Buyers etc. To verify meeting of statutory obligations (income tax, excise, sales tax, licences etc.). To analyse conduct of business - sound or over trading (low current ratio, creditors exceeding debtors, frequent excess drawings etc.), under trading (lower trading than the resources may permit). Detailed appraisal of the credit proposal should broadly cover the items indicated in the Appendix VI

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APPENDIX V Indicative List of Documents/ Information to be called from Borrowers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Memorandum and Articles of Association of the Company Name of the Company and addresses of Registered Office/Corporate Office/Head Office/Factories. Constitution of the Company, when incorporated and when commenced business with copies of the relevant certificates. Copies of all Licences required from the Government of India, State Government and any other Statutory Body. Pattern of share holding like Names of major shareholders, Class of shareholders, Number of shares, Amount in Rupees, Percentage of shares. Names of the Stock Exchanges where the shares are quoted with prevailing prices and high and low prices of last 52 weeks. Name of the Directors with their Designations. Brief write up about the Promoters/Directors. Nature of Business. Brief write up about the history of the Company right from its inception to the present position, incorporating details of the progress made including diversification, increase in capacity etc. 11. 12. 13. 14. Market report of the products and the marketing strategy. Names of the companies from whom products/services are purchased and names of the companies to whom the products/services are sold or rendered. Details of local, export exposure etc. Management Profile in brief like who is at the helm of the affairs, his qualifications, experience and persons assisting him in executing the day to day business. A chart showing management hierarchy and the total number of employees. 15. Details of credit limits enjoyed with other banks and Institutions along with copies of the sanction letters and the sharing pattern. Present outstandings in various Banks and Institutions should also be furnished. 16. Names, addresses and brief write up about the group companies along with the latest Audited Balance Sheets.

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17. 18. Brief details of Activity Cycle including manufacturing process, capacity details, wherever applicable. What according to the Company are the Strengths, Weaknesses if any and how the Company proposes to overcome the weaknesses. Here highlights of the competitors with names, market shares etc., may be given. 19. The purpose for which the facilities are sought justifying the same supported by CMA data incorporating two years actuals, current years estimates and following years projections along with assumptions of achieving the income, profit, net worth and holding level of Current Assets and Current Liabilities position. (Copies of Audited Balance Sheet and Profit & Loss Statements/ published Annual Reports.) 20. 21. 22. If in Consortium, the Lead Banks Process Note justifying the limits and to wh+-at extent the facilities are sought from the Bank. Whether the Company has approached the Consortium/Lead Bank for joining the Consortium. If so, the details of the same. Details of the Collateral Securities that may be offered for the facilities sought from the Bank/consortium, like Pledge of shares, Equitable Mortgage of properties, their names and address, acquired value, date of acquiring the Asset, Area, Present market value/Traded Value as applicable. 23. 24. 25. Names and addresses of the Guarantors. Income Tax Returns, Wealth Tax Returns, Assets and Liabilities of Promoters Directors and Guarantors. Record of payment of Statutory dues.

Any other information that the company has on record which is material for the assessment of Credit facilities.

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APPENDIX VI Suggested Format for Detailed Appraisal (New / Renewal / Reduction / Enhancement) 1. 2. Present Proposal: Profile of the Borrower: a. Name of the Company b. Constitution c. Date of Incorporation d. Group Affiliation, if any and other groups companies e. Line of Activity f. Registered Office g. Corporate Office h. Works located at i. j. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Board of Directors Capital Structure and Shareholding Pattern

k. Share Price Movements Present Banking Arrangements Details of facilities availed from IDBI Bank. Bankers Reference and Rating by Rating Agency Credit Risk Rating and Asset Code Brief Background of the Company Management Product profile, Installed capacities and infrastructure facilities Major competitors and Market share Industry Profile and Prospects Future Plans Performance and Financial Indicators Comments on Financial Position Assessment of Limits a. Working Capital - Fund based b. Working Capital - Non-fund based 16. Limits Proposed

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17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. Rate of Interest Concessional Facility, if any Security - Principal & Collateral and Guarantees Risk perception / analysis Documentation Conduct and value of account Litigation Audit observations and their rectification Comments on stock/site/inspection Observations on Consortium Meetings Compliance of Statutory Obligations RBI/ECGC Defaulters List Conformity with the RBI/Banks norms Recommendations

Annexures 1. 2. Facility-wise details and terms and conditions including present position in case of existing accounts. Analysis of Balance Sheet and Profit & Loss Account, Funds Flow Statement, Ratio Analysis etc.

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CHAPTER 7
NATURE OF FACILITIES AND FIXING OF CREDIT LIMITS Credit facilities can be funded or Non-funded. The funded limits are those where outlay of the Bank's funds is involved. Non funded based limits are those where the Bank endorses the commitment / promise made by the borrower and the Bank need to meet only if the borrower fails to honour it. Main types of facilities under fund based limits and non funded based limits and the related guidelines for granting advances against them are discussed below in brief. Fund Based Limits Fund Based limits are generally granted by way of Overdrafts, Cash Credit and Bills Purchased / Discounted. Usually the security offered, the purpose and size of advance, repayment terms and requirements of a customer decide the type of facility to be granted. Though there is no hard and fast rule to determine this, there are well set practices. Overdraft and Cash Credit In Overdraft/Cash Credit, the borrower is allowed to carry out debit and credit transactions upto a limit. These are more operative accounts and have cheque book facility. The term "Overdraft" is generally used for continuing limits granted against the security of term deposits and other financial securities, occasional overdrawings / debits in current accounts and also for continuing limits granted for personal purposes. "Cash Credit" is generally used for regular limits granted for working capital requirements of commercial establishments. Cash Credit (CC) is granted against hypothecation of stock such as raw materials, work-inprocess, finished goods and stock-in-trade, including stores and spares. CC is granted by way of a running account, drawings to be regulated within the drawing limit permissible which is arrived at on the basis of composition of current assets and current liability based on the declaration in the stock statement in the prescribed format submitted by the borrower.

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Branch will obtain periodical stock statements at the stipulated intervals from the borrower to have a watch over the stock position and also will check the goods at irregular intervals to satisfy about the correctness of the declaration of the stock by the borrower. Borrowers to whom CC limits have been extended should maintain proper stock books. If proper books are not maintained, it would be difficult to check the stock at any time with reference to their books and stock statements. Borrowers enjoying CC limits should route all purchase and sale transactions through their CC accounts. In other words, these parties have to remit the sale proceeds to their CC accounts and payment for all purchases of stock are to be made by cheques drawn on these accounts. Branches are required to exercise utmost care while considering for CC limits as possession of the goods will remain with the borrower. Branches should bear in mind the following aspects while fixing / recommending CC limits. i. ii. iii. The borrower must be creditworthy The borrowers dealings with the Bank should be satisfactory The borrower must be prepared to submit the correct and authenticated stock statement as per the format prescribed by the Bank and at the periodicity stipulated by the Bank iv. v. The borrower must be agreeable to hypothecate the entire stock belonging to him and to insure the stock for its full value for fire and other risks at his own cost The borrower must agree for the periodical inspection of stock and the books of accounts maintained by him, by the branch officials and / or by the Inspecting Officials of the Bank as and when required. The limit upto which the drawings are allowed in the cash Credit / Overdraft account is called Drawing Limit. It is the lower of Sanctioned Limit and Drawing Power. Drawing Power is Value of Security less Margin. An illustration for this is given below: M/s. ABC is sanctioned a Cash credit limit of Rs. 500 lacs against hypothecation of stocks. The margin stipulated is 25%. The value of paid stocks as per the stock statement submitted by the borrower and verified by the Bank Officials at the beginning of three

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consecutive months were Rs. 600 lacs, Rs. 800 lacs and Rs. 400 lacs. The Drawing Limits (i.e. the extent to which the drawals can be allowed in the account would, thus be: For the 1st month Rs. 450 lacs (Lower of sanctioned limit Rs. 500 lacs and drawing power Rs. 450 lacs (value of security margin i.e 600-150) For the 2nd month Rs. 500 lacs (Lower of sanctioned limit Rs. 500 lacs and drawing power Rs. 600 lacs (800-200) For the 3rd month Rs. 300 Lacs (Lower of sanctioned limit Rs. 500 lacs and drawing power Rs. 300 lacs (400-100) Cash credit / overdraft limits are repayable on demand. However, unless a decision is taken to recall the advance, and subject to the stipulation of periodic (generally annual) review / renewal, the limits are of continuous nature. No repayment is generally stipulated for such limits. In certain cases, however, the seasonal limits (higher limits during the peak period of the activity / credit requirement of the borrower and lower limits during the slack season ) are stipulated. There are also cases when a phased reduction in limits is prescribed, based on the realization/working capital cycle of borrowers produce. In other words, Working Capital Finance is extended in different forms basing on the requirement as follows: I. Inventory Limits (Pre-Sales) i. ii. iii. iv. II. Cash Credit (CC) including WCDL wherever permitted Packing Credit (PC) Overdraft Vendor financing

Finance against Receivables (Post-Sales) i. ii. Book Debts Bills Purchased / Discounted/Negotiated

III. i.

Non-Fund based limits Letter of Credit (LC) Bank Guarantee (BG) ii.

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Working Capital finance is made available for financing Current Assets which consist mainly of: 1) 2) Inventory (Raw materials, stocks in process, finished goods, stores & spares etc) Receivables (Sundry Debtors)

After having assessed the Permissible Bank Finance (PBF) that could be extended to a borrower as per the method as applicable, the various types of limits that can be considered are arrived at as follows: The finance required would depend on the period between the purchase of raw materials / goods till the finished goods are sold and realized. remain in the working capital cycle. Out of the Permissible Bank Finance (PBF) assessed, the quantum pre-sales limits like CC, PC etc., are fixed basing upon the levels of Inventory held and the period between the purchase of raw materials and its sale as finished goods. For fixing the post sales limit, the average time taken for realization of sale proceeds be ascertained. provided. The following example will illustrate the above: M/s ABC has projected a sales turnover of Rs.2.50 lakhs per month. The following are the other financial parameters: Current Assets Raw Materials Rs. 3,00,000 Work-in-process Rs. 1,50,000 Finished Goods Rs. 4,50,000 Sundry Debtors Rs. 5,00,000 Cash Rs. 1,00,000 Rs.15,00,000 Current Liabilities Sundry Creditors Rs. 3,00,000 Working Capital Gap (CA-CL) Less 25% on CA PBF Holding Levels (Assumption) months consumption month cost of production months cost of sales months sales The level of Sundry Debtors in relation to sales will indicate the finance Further, the holding levels for raw materials, stock-in-process and finished goods depend on the lead periods for which they

2 1 2 2

2 months purchases

Rs.12,00,000 Rs. 3,75,000 Rs. 8,25,000

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In the above example, considering a margin of 25% on stocks, a CC limit of Rs.4.50 lakhs could be considered. Similarly, keeping a margin of 25% on receivables, bills limit of Rs.3.75 lakhs could be considered as follows: Total Stocks (inventory) Less Sundry Creditors Rs.9,00,000 Rs.3,00,000 Rs.6,00,000 Less 25% margin CC Limit Rs.1,50,000 Rs.4,50,000 Sundry Debtors Less 25% margin Bills Limit Rs.5,00,000 Rs.1,25,000 Rs.3,75,000

Computation of Drawing Power 1. Inventories Total inventory (excluding non usable non moving, slow moving stocks) (period to be specified) LESS; Unpaid stocks (on account of sundry creditors for purchases, DALC, advance payment guarantees / suppliers credit etc.) and stock hypothecated to any other facilities Value of paid stock (A B) LESS: Stipulated margin on stocks as per sanction DP / DL on stocks (C-D) 2. Book Debts Total amount of inland credit sales (debtors) not exceeding the period permitted by the sanctioning authority LESS; Value of bills (Supply Bill, SDB, BE) discounted by the Bank/Factors duly adding back the margin (on the date of stock statement) & advance received against suppliers Net bills receivables / debtors unfinanced by the Bank / Factors (F-G) LESS: Stipulated margin on book debts as per sanction DP / DL on Book Debts (H-I) or stipulated sub limit under Book Debt whichever lower H I J G F C D E B A

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The total drawing power / drawing limit against stocks and Book Debts shall be E+J or sanctioned limit whichever is lower. Margin on raw materials, semi-finished goods, finished goods and book-debts would vary depending upon nature of industry, period of operating cycle and standing of the borrower in the market. Normally margin on book-debts is kept higher than the inventory. Drawing should be within the permissible drawing limit as per the latest stock statement. Borrower must be asked to regulate drawings strictly within the limit available on the stock held from day to day. If there is reduction in the stock, the borrower should work within the reduced limit arrived at. However if they want to draw beyond the drawing limit of the previous statement before next statement falls due, they have to submit fresh statement declaring sufficient additional stock to cover the additional advance required. Such submission in between due dates should be permitted only on very very exceptional basis for meeting urgent business requirements as otherwise parties would be submitting stock statements every alternate day / very frequently which would result in difficulties in monitoring movement of stocks. Stock Statement is an important monitoring tool and non-submission of Stock Statements for a period of one month from the due date for submission are to be treated as irregularity and are to be followed up with the company for early submission. In case of persistent default, penal interest be charged and a suitable letter be addressed to borrower to bring in borrowing discipline. Assessing Letter of Credit (LC) Limit A limit for a letter of credit facility for working capital purposes enables an enterprise to procure raw materials and other important ingredients for production on credit terms. An alternative to the LC limit is to sanction a fund based credit facility in favour of the enterprise. However a letter of credit issued by the bank on behalf of its customer is an off balance sheet item in the books of the client which enables the latter to prepare a more appealing balance sheet. Further, the role of a commercial bank as an intermediary considerably enhances the level of comfort required for trading for buyer and seller. Therefore, if the supplier of material does not insist on advance payment, the customer

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(buyer of the material) would prefer an LC limit. The process of assessing LC limits is intimately related to the appraisal of other working capital facilities to the customer. There are always a number of factors at work which impact the computation of the LC limit as a part of the overall working capital credit requirements of an enterprise. It is therefore difficult to prescribe a standard method to work out the exact amount of LC limit to be provided to a manufacturing unit. However, following major factors should be taken into account in any quantitative method of assessment: A B C D Annual consumption of the material being purchased Lead time from opening of credit to shipments Transit period for goods till it arrives at the factory Credit Period available 120 (Rs lacs) (months) (months) 3 (months)

The sum of B, C and D can be called as purchase cycle. In the above case purchase cycle would be 4 months. We denote the purchase cycle by P (months). The cycle commences at the point of placement of order whereas the final payment is made at the end of the cycle. The quantum of LC limit may now be worked out using the expression (P X A/12), which would work out to Rs 40 lacs. This represents the cost of the material that will be consumed in one working cycle. Assessing BG Limit Banks usually issue guarantees in the following circumstances: 1) Enterprise participating in tenders, auctions etc are generally required to submit bank guarantees for a minimum stipulated amount in lieu of security deposits/earnest money deposit etc. 2) It is common practice to provide mobilisation advance by the principal to contractors/vendors executing turn-key projects or civil projects which may take considerable time for completion. Mobilisation advance may be provided both before the commencement of the project and at various stages of progress in respect of plant layout design, drawings, construction etc. As a security against funds provided in advance, the contractors are often required to submit bank guarantees. 3) Sometimes raw material ar supplied by the buyer to the manufacturing units with whom supply orders are placed by the former. In these cases, the buyer of goods

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(supplier of raw material) may require security in the form of bank supplying products/services to a parent company, where the latter suppliles raw material against submission of bank guarantee. 4) Even after the goods have been supplied in terms of the contract, the buyers may hold a portion of the supply bills till they are finally satisfied about the quality of the material supplied. The retained amount is released only after a bank guarantee for an equivalent amount is submitted by the supplier. 5) Supplier of goods and services often proved warranty period to the buyers of such products. In these cases, the suppliers may request the bank to issue performance guarantees in favour of the buyers. On submission of such performance guarantee, the suppliers receive the proceeds without waiting for the expiry of the warranty period. It is generally observed that guarantees are mainly required by the construction companies for the purpose of EMD, Bid Bond, APG, Machinery Advance etc. An indicative way of assessing the guarantee limits may be assumed as under: Sr. No. A B C D E F G H I J Particulars Value of contracts expected to be bid EMD Guarantee (generally 3% to 5% of A), Here we will assume 5% Expected value of the new contract (25% of A), It may vary from company to company Performance Guarantee (Normally 10% of C) Advance Payment / Security Deposit Guarantee (5% of C), This may vary from project to project. Fresh Guarantees required (B+C+D+E) Existing bank guarantees (Assumption) Guarantees expiring during the year Guarantees requirement (F+G-I) Total guarantees limits required 337.50 100.00 25.00 412.50 412.50 25.00 12.50 250.00 Amount 1000.00 50.00

In other cases where guarantees are to be issued for the procurement of raw materials, the assessment will be case specific and no formal way of assessment can be applied.

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CHAPTER 8
LOAN SYSTEM FOR DELIVERY OF BANK CREDIT In order to bring about an element of discipline in the utilisation of bank credit by large borrowers, instill efficiency in funds management, loan system for delivery of bank credit was been introduced for borrowers enjoying working capital credit limits of Rs.10 crore and above from the banking system and the minimum level of loan component for such borrowers was fixed at 80 per cent and cash credit component at 20 per cent. These guidelines have been revised by RBI as under, in the light of current environment of shortterm investment opportunities available to both the corporate and the banks. Loan Component and Cash Credit Component 1) Bank may change the composition of working capital by increasing the cash credit component beyond 20 per cent or to increase the loan component beyond 80 per cent, as the case may be, if it so desire. 2) Bank may appropriately price each of the two components of working capital finance, taking into account the impact of such decisions on its cash and liquidity management. 3) If a borrower so desires, higher loan component can be granted by the bank; this would entail corresponding pro-rata reduction in the cash credit component of the limit. 4) In the case of borrowers with working capital (fund based) credit limit of less than Rs. 10 crore, bank may persuade them to go in for the Loan System by offering an incentive in the form of lower rate of interest on the 'loan component' as compared to the 'cash credit component' The actual percentage of 'loan component' in these cases may be settled by the bank with its borrower clients. 5) 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. Bank may with the approval of its Board, identify such business activities which may be exempt from the loan system of credit delivery.

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Ad hoc Credit Limit The bank may consider the adhoc/additional credit for meeting temporary requirements only after the borrower has fully utilised/exhausted the existing limit and there are justifiable reasons for the adhoc limit. If the requirement is of long term nature or of continuous nature, then regular limits be assessed and processed. Rate of Interest Bank may fix separate lending rates for 'loan component' and 'cash credit component'. Period of Loan The maximum period of the loan for working capital purposes may be fixed by bank in consultation with borrowers but not more than 12 months. Bank may decide to split the loan component according to the need of the borrower with different maturity bases for each segment and allow roll over. Security In regard to security, sharing of charge, documentation, etc., bank may decide on the requirements, if necessary, in consultation with the other participant banks or necessity for credit enhancement based on the credit evaluation / due diligence. Export Credit Export credit limit would be allowed in the form hitherto granted. The bifurcation of the working capital limit into loan and cash credit components would be effected after excluding the export credit limits (pre-shipment and post-shipment). Bills Limit Bills limit for inland sales may be fully carved out of the 'loan component'. Bills limit also includes limits for purchase of third borrower (outstation) cheques/bank drafts. Branch should satisfy that the bills limit is not mis-utilised. Branch should also ensure that the same is not utilized for accommodation purpose or for non banking business purpose. Renewal/Roll-over of Loan Component The loan component, may be renewed/rolled over at the request of the borrower. However, bank may lay review the working capital limit annually and the same may be scrupulously adhered to.

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CHAPTER 9
LENDING ARRANGEMENT FOR WORKING CAPITAL FACILITIES Lending Outside Regular Arrangement With the objective of, inter-alia, ensuring that a borrower does not indiscriminately raise credit from the banking sector or avail of double financing or divert funds, RBI has directed that banks, which are outside the regular working capital banking arrangement of a borrower, should seek the NOC of the working capital banks before extending any credit facilities to the borrower. With the aim of complying with this discipline and at the same time to ensure that business does not go past the Bank in the current competitive environment, the following mechanism is suggested to be followed as regards obtention of the NOC. However, it has to be ensured that the borrowing is within the overall MPBF and available drawing power. Sole Banking Arrangement Under Sole Banking, the entire credit requirements of the borrower are met by one Bank only .Concerned functionaries will, on receipt of the borrower's request for / on marketing a credit line, immediately advise the sole banker of the Bank's intention to extend a credit line. Concerned functionaries will request the sole banker to convey its NOC within a period of 30 days from the date of receipt of the request. In the event that no response is received from the sole banker by the 30th day, it will be assumed that the sole banker does not have any objection to the extension of the credit facility. In the vent that the sole banker has an objection to the extension of credit facility, the Bank will seek the borrower's intervention in the matter. Multiple Banking Arrangement Borrowers can avail any credit facilities (both FB & NFB) from any number of banks without a formal consortium arrangement. So long as the total credit limits enjoyed by a borrower from the Bank is within the permissible resources of a single bank, or within the prudential exposure norms, such facilities can be extended by the individual banks without a formal consortium under MBA.

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In the case of a multiple banking arrangement, as the arrangement provides for flexible entry and exit of banks to lend to the borrower, the Bank may not be required to obtain the NOC from the other lending banks. However, bank may advise the multiple bankers about the extension of credit facility and seek NOC cum letter ceding pari-passu charge for sharing the security wherever warranted. Advising extension of credit facilities to other multiple bankers would also obviate the risk of double financing. Consortium Banking Arrangement The necessity of consortium / participating leading arises when the amount involved is very large and beyond the permissible resources of a single bank or beyond what a bank would like to risk under ordinary circumstances on a single borrower beyond the prudential exposure norms. In respect of a consortium banking arrangement, concerned functionaries will advise the lead bank of the consortium of the proposed extension of credit facility. It will request the lead bank to convey its NOC on behalf of the consortium within 30 days of receipt of the request. A protective clause to the effect that if no response is received from the lead banker by the 30th day, it will be assumed that the lead banker does not have any objection to the extension of the credit facility. In the event that the lead banker has an objection to the extension of credit facility, the Bank may seek the borrower's intervention in the matter. The requirement of obtention of NOC may not be necessary to facilities , which are not short-term working capital in nature illustratively, NCDs, term loans (including working capital term loans ), preference shares, structured exposures, derivatives, etc., unless the security is common. Further, functionaries concerned shall follow the arrangement/risk mitigants/credit enhancements mentioned below in respect of each type of facility to guard against diversion of funds / double financing. The under-mentioned list is only illustrative and not exhaustive. obtention and tracking of cash flow statements escrowing of receivables firm take-out by another lender etc. routing of cash flow CMS obtention of post-dated cheques

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CHAPTER 10
TRADE FINANCE PRODUCTS Packing Credit A packing credit is a pre-shipment advance granted to an eligible exporter / manufacturer/ export house for purchasing, processing, manufacturing, packing, transporting, warehousing etc. of goods meant for export. Packing Credit is a short term working capital finance made available to the exporter at the pre-shipment stage. The facility should be granted generally on production of a letter of credit opened in favour of exporter by the foreign buyer or against confirmed order for export. The limit may be sanctioned either as pledge, hypothecation, or in very special cases, as a clean limit in the form of bridge-finance for a limited period. In the case of a temporary clean limit (as for instance in the case of sea foods), the presence and security of goods should be proved within a maximum period of 30 days from time of the advance being made. In case of a borrower enjoying domestic as well as export credit facilities, the level of preshipment to be granted will depend upon the level of export sales out of total sales and average level of inventory and also manufacturing cycle for products meant for exports. For this purpose, segregation of raw materials and finished goods should be done for deciding pre-shipment export credit and presale domestic credit. Similarly level of post shipment credit will depend upon the level of export receivables. the level of pre-shipment credit also. Pre-shipment finance (packing credit) is of a self liquidating nature, as the same is to be liquidated out of proceeds of purchase / discount / negotiation of export/s bill/s. Therefore pre-shipment and post shipment facilities are to be considered by the dealing office simultaneously. The quantum of pre-shipment credit depends upon the manufacturing cycle of the products required to be exported i.e. from the date of purchase of raw materials till the date of 85 of 203 At

the same time post-shipment foreign bills purchase / discounting limit should be linked to

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shipment of finished products. Again advance should generally be supported by irrecovable L/C firm contract etc. subject to due diligence on exporter and L/C opening bank. Export credit may be disbursed in stages depending upon the length of production cycle, time taken for procurement operations etc. corresponding to shipment schedules. Bank may not insist 25% margin on export receivable from exporters. While calculating MPBF export receivable to be included in current assets and exclude the export receivable for calculating margin money. Period of Finance Packing credit advance is granted upto the last date of shipment as per the underlying sale contract/export LC or upto a maximum of 180 days whichever is earlier as RBI would provide refinance only for a period not exceeding 180 days. If export can-not be completed in time, a further extension of max. 90 days may be permitted by the branch after being satisfied about the reasons for such extension and for circumstances beyond the control of the exporters. Even thereafter export doesn't take place, a further extension of max. 90 days may be granted without approval of Reserve Bank of India. If export doesn't take place within 360 days the exporter will lose the benefit of concessional rate of interest. Preshipment credit may also be extended upto 270 days initially in the case of commodities, which would need a longer cycle of production. The period may further be extended upto 360 days without RBI permission from the date of drawal, where the branch is satisfied about the genuine needs of the borrowers. Packing credit limits are sanctioned against, irrevocable letter of credit opened by reputed international banks and advised by their correspondent banks in India and/or against firm contracts entered into by the exporter with overseas buyers of repute. The contract should stipulate the quality, quantity and price of goods to be exported, date/s of shipment, date of negotiation of documents, insurance coverage for transit risks, terms of payment and other factors relating to international trade practices. Relaxations Bank as a part of operational flexibility may extend the following relaxations, exceptionally, to its exporter clients who have a good track record: a) Repayment/liquidation of packing credit with proceeds of export documents will continue; however, this could be with export documents relating to any

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other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, bank should ensure that it is commercially necessary and unavoidable. Bank should also satisfy about the valid reasons as to why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any. b) The existing packing credit may also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. However, it is possible that the exporter might avail of EPC with one bank and submit the documents to another bank. In view of this possibility, bank may extend such facility after ensuring that the exporter has not availed of packing credit from another bank against the documents submitted. c) These relaxations should not be extended to transactions of sister/associate/group concerns. Running Account Facility I) As stated above, pre-shipment credit to exporters is normally provided on lodgement of L/Cs or firm export orders. It is observed that the availability of raw materials is seasonal in some cases. In some other cases, the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. In many cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit/firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorised to extend Pre-shipment Credit Running Account facility in respect of any commodity, without insisting on prior lodgement of letters of credit/firm export orders, depending on the banks judgement regarding the need to extend such a facility and subject to the following conditions: a. Bank may extend the Running Account facility only to those exporters whose track record has been good as also Export Oriented Units (EOUs)/Units in Free Trade Zones/ Export Processing Zones (EPZs) and Special Economic Zones (SEZs)

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b. In all cases where Pre-shipment Credit Running Account facility has been extended, letters of credit/firm orders should be produced within a reasonable period of time to be decided by the bank. c. Bank should mark off individual export bills, as and when they are received for negotiation/collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to add that, while marking off the pre-shipment credit in the manner indicated above, bank should ensure that concessive credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier. d. Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. II) III) If it is noticed that the exporter is found to be abusing the facility, the facility should be withdrawn forthwith. In cases where exporters have not complied with the terms and conditions, the advance will attract commercial lending rate ab initio. In such cases, bank will be required to pay higher rate of interest on the portion of refinance availed of by it from the RBI in respect of the relative pre-shipment credit. All such cases should be reported to the Monetary Policy Department, Reserve Bank of India, Central Office, Mumbai 400 001 which will decide the rate of interest to be charged on the refinance amount. IV) Running account facility should not be granted to sub-suppliers.

Disbursement of packing credit I) II) III) Ordinarily, each packing credit sanctioned should be maintained as separate account for the purpose of monitoring period of sanction and end-use of funds. Bank may release the packing credit in one lumpsum or in stages as per the requirement for executing the orders/LC. Bank may also maintain different accounts at various stages of processing, manufacturing etc. depending on the types of goods/services to be exported, e.g. hypothecation, pledge, etc. accounts and may ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount etc.

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IV) Bank should continue to keep a close watch on the end-use of the funds and ensure that credit at concessional fulfillment of export order The disbursement application should contain the following details: I) II) III) IV) Quality and value of goods to be exported Particulars of the Letter of Credit or firm order lodged with the bank Probable date of shipment Approximate date of negotiation of documents rates of interest is used for genuine requirements of exports. Bank should also monitor the progress made by the exporters in timely

The letter should contain an undertaking to submit the export documents within a period of 180 days or as per sanction or before the expiry of the Letter of Credit, whichever is earlier. The letter should also contain a declaration that the contract terms are valid and subsequent changes, if any, will be immediately notified to the bank. The application should be accompanied by documentary evidence of their export commitments, original, irrevocable, unrestricted Letter of Credit from a reputed/acceptable international bank in their favour and/or confirmed export contracts in original, duly signed by the seller/ exporter (who is our borrower) and the buyer. Where the advance is made against a confirmed contract, it should be ensured that the limit fixed for the overseas buyer by the E.C.G.C in the shipment policy is not exceeded. If the advance is against a Letter of Credit, it should be ensured that the L/C is irrevocable, not restricted for negotiation with some other bank and is in his favour for the specific goods mentioned in the application. Again, the terms of the contract/Letter of Credit should conform to the terms of sanction of the advance. Subject to the overall packing credit limit, actual disbursement should be linked to the cost of raw materials procured by the manufacturer-exporter for manufacturing/processing the goods he will be exporting, or FOB value of the export contract/letter of credit, whichever is lower, less margin, if any, stipulated in the terms of sanction,. In respect of merchantexporters, disbursal should be linked to the cost of procurement of goods meant for export

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and payment of freight charges etc. less margin, if any, stipulated. The amount relating to freight and insurance should be disbursed only at the time of shipment. In the case of Packing Credit Hypothecation the stocks should be inspected and their value be verified from suppliers' invoices. Where the arrangement is against pledge of goods, disbursement should be made only after taking into pledge, the goods intended for manufacturing/processing/export. Each time a firm contract or L/C is lodged with the bank with a request of a packing credit Menu against it, a separate loan account should be opened in the Packing Credit Register. Each of these loan accounts should be given a serial number and the L/C or Contract number and relevant details such as name of the foreign buyer, description value of goods, amount released, period for which loan is given, etc. should be noted in the account. Dun & Bradstreet Report Whenever export bills are discounted/purchased/negotiated, the credentials of the drawee has to be ascertained by obtaining the status report from M/s Dun & Bradstreet. The report has to be thoroughly perused to verify their line of activity, their financial capability and also the payment track records. Similarly these reports may be obtained to verify the credentials of beneficiary, while opening LC. Follow-up Stock statements should normally be called for every fortnight or at least every month from the borrowers. It should be ensured that the stocks for exports are clearly distinguishable from other stocks meant for domestic business and stored separately. If the exporter has not effected the shipment and also not submitted relative export documents to the branch on or before the due date, the advance will become overdue and necessary follow up should be made and the advance may attract charging of interest at commercial rates. If export is delayed beyond stipulated time and packing credit advance is not liquidated in time for any reason beyond the control of the exporter and he seeks extension of time for repayment of loan, permission from appropriate authority should be obtained wherever applicable. Simultaneously approval of ECGC should also be obtained wherever necessary by making application in prescribed form.

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If no response is forthcoming from the exporter, the effective follow-up be done and simultaneous steps to be taken for taking possession of securities with the approval of Delegated Authority and the matter be reported to ECGC and claims to be lodged with ECGC and further steps be taken for filing of suits etc. as may be required with the permission of competent authority. Interest on Packing Credit Interest rate structure with regard to packing credit is at Appendix-VII. Post- Shipment Export Credit 'Post-shipment Credit' means any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from India from the date of extending credit after shipment of goods/rendering of services to the date of realisation of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time. Types of Post-shipment Credits Post-shipment advance can mainly take the form of 1. Export bills purchased/discounted/negotiated. 2. Advances against bills for collection. 3. Advances against duty drawback receivable from Government. Liquidation of Post-shipment Credit Post-shipment credit is to be liquidated by the proceeds of export bills received from abroad in respect of goods exported/services rendered. Further, subject to mutual agreement between the exporter and the banker it can also be repaid/prepaid out of balances in Exchange Earners Foreign Currency Account (EEFC A/C) as also from proceeds of any other unfinanced (collection) bills. Such adjusted export bills should however continue to be followed up for realization of the export proceeds and will continue to be reported under XOS (Export bill outstanding for more than 6 months).

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Rupee Post-shipment Export Credit Period 1. 2. In the case of demand bills, the period of advance shall be the Normal Transit Period (NTP) as specified by FEDAI. In case of usance bills, credit can be granted for a maximum duration of 180 days from date of shipment inclusive of Normal Transit Period (NTP) and grace period, if any. However, banks should closely monitor the need for extending postshipment credit upto the permissible period of 180 days and they should influence the exporters to realise the export proceeds within a shorter period. 3. 'Normal transit period' means the average period normally involved from the date of negotiation/purchase/discount till the receipt of bill proceeds in the Nostro account of the bank concerned, as prescribed by FEDAI from time to time. It is not to be confused with the time taken for the arrival of goods at overseas destination. 4. An overdue bill a. in the case of a demand bill, is a bill which is not paid before the expiry of the normal transit period, and b. in the case of a usance bill, is a bill which is not paid on the due date. Interest Rate Structure Interest Rate Structure on Post-shipment Credit and relevant instruction in this regard are at Appendix VIII. Advance against undrawn Balance on Export Bills In respect of export of certain commodities where exporters are required to draw the bills on the overseas buyer upto 90 to 98 percent of the FOB value of the contract, the residuary amount being 'undrawn balance' is payable by the overseas buyer after satisfying himself about the quality/ quantity of goods. Payment of undrawn balance is contingent in nature. Banks may consider granting advances against undrawn balances at concessional rate of interest based on their commercial judgement and the track record of the buyer. Such advances are, however, eligible for concessional rate of interest for a maximum period of 90 days only to the extent these are repaid by actual remittances from abroad and provided such remittances are received within 180 days after the expiry of NTP in the case of demand bills and due date in the case of usance bills. For the period beyond 90 days, the rate of

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interest specified for the category Export Credit Not Otherwise Specified (ECNOS) at postshipment stage may be charged. Advances against Retention Money The following guidelines should be followed in regard to grant of advances against retention money: (a) (b) (c) No advances may be granted against retention money relating to services portion of the contract. Exporters may be advised to arrange, as far as possible, provision of suitable guarantees, instead of retention money. Bank may consider, on a selective basis, granting of advances against retention money relating to the supplies portion of the contract taking into account, among others, the size of the retention money accumulated, its impact on the liquid funds position of the exporter and the past performance regarding the timely receipt of retention money. (d) (e) The payment of retention money may be secured by L/C or Bank Guarantee where possible. Where the retention money is payable within a period of one year from the date of shipment, according to the terms of the contract, bank should charge prescribed concessive rate of interest up to a maximum period of 90 days. The rate of interest prescribed for the category 'ECNOS' at post-shipment stage may be charged for the period beyond 90 days. (f) Where the retention money is payable after a period of one year from the date of shipment, according to the terms of the contract and the corresponding advance is extended for a period exceeding one year, it will be treated as post-shipment credit given on deferred payment terms exceeding one year, and the rate of interest for that category will apply. (g) Advances against retention money will be eligible for concessional rate of interest only to the extent the advances are actually repaid by remittances received from abroad relating to the retention money and provided such payments are received within 180 days from the due date of payment of the retention money, according to the terms of the contract.

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Post-Shipment Advances against Duty Drawback Entitlements Bank may grant post-shipment advances to exporters against their duty drawback entitlements as provisionally certified by Customs Authorities pending final sanction and payment. The advance against duty drawback receivables can also be made available to exporters against export promotion copy of the shipping bill containing the EGM Number issued by the Customs Department. Where necessary, the financing bank may have its lien noted with the designated bank and arrangements may be made with the designated bank to transfer funds to the financing bank as and when duty drawback is credited by the Customs. These advances granted against duty drawback entitlements would be eligible for concessional rate of interest and refinance from RBI up to a maximum period of 90 days from the date of advance. Deemed Exports - Concessive Rupee Export Credit Banks are permitted to extend rupee pre-shipment and post-supply rupee export credit at concessional rate of interest to parties against orders for supplies in respect of projects aided/financed by bilateral or multilateral agencies/funds (including World Bank, IBRD, IDA), as notified from time to time by Department of Economic Affairs, Ministry of Finance under the Chapter "Deemed Exports" in EXIM Policy, which are eligible for grant of normal export benefits by Government of India. Packing Credit provided should be adjusted from free foreign exchange representing payment for the suppliers of goods to these agencies. It can also be repaid/prepaid out of balances in Exchange Earners Foreign Currency account (EEFC A/c), as also from the rupee resources of the exporter to the extent supplies have actually been made. Banks may also extend rupee: (i) (ii) pre-shipment credit, and post-supply credit (for a maximum period of 30 days or up to the actual date of payment by the receiver of goods, whichever is earlier), for supply of goods specified as 'Deemed Exports' under the same Chapter of EXIM Policy from time to time.

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Banks would be eligible for refinance from RBI for such rupee export credits extended both at pre-shipment and post-supply stages. Preshipment Credit in Foreign Currency (PCFC) With a view to provide preshipment credit to Indian Exporters at Internationally competitive rates of interest, a scheme of providing preshipment credit in foreign currency has been introduced. This scheme is in addition to normal packing credit schemes in Indian Rupees. This scheme is in addition to normal packing credit schemes in Indian rupees. This scheme can be availed of by an exporter in specific foreign currency. The PCFC scheme is available to cover domestic and imported inputs of goods to be exported from India. Once the exporter avails PCFC, he will not be eligible for post shipment credit in rupees. Such Pre-shipment credits (PCFC) are liquidated by foreign currency bills purchased (FCBP) / discounted (FCBD). PCFC will be available for initial period of maximum 180 days as in the case of rupee credit. The extension in period of PCFC for further 90 days may be granted. Extension of PC upto 360 days and rate of interest on such extension will be as per approval obtained from appropriate authority. ECGC cover will be available in rupee only whereas PCFC is in foreign currency. PCFC will be of self liquidating nature. PCFC should be liquidated by submission of export documents for discounting / Purchasing/negotiating. PCFC can be liquidated out of proceeds of export documents on their submission for discounting. It can also be repaid / prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent exports have actually taken place. Bills Purchased / Discounted Bills purchased / Discounted facilities are normally meant for financing working capital requirements in the post sale part of the operating cycle of a unit. The facilities are for purchasing / discounting bills drawn by the customer for goods sold. Policy on Bills Finance which has been approved by the Board is as follows:

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Scope The policy will cover banks finance against all bills inland and export bills, whether on customer risk or bank risk. Besides this policy, the conduct of bill finance will be governed by the banks corporate credit policy and the extant RBI /FEMA guidelines as well as other government policies / directives issued from time to time. In case of any contradiction, the Banks corporate credit policy and RBI / Government policies / directives will override this policy. General Guidelines a. b. The bank will sanction a bills limit (both LC backed and non-LC backed) to corporates after proper appraisal of their credit needs. The Bank will purchase / discount / negotiate bills only in respect of genuine commercial and trade transactions of borrowers who have been sanctioned regular credit facilities. Such bills should be accompanied by documents evidencing movement of goods. c. Good prudence will be exercised while discounting bills drawn by front finance companies set up by large industrial groups on other group companies. Specific approval of competent authority in such cases is to be obtained. Accommodation bills will not be purchased / discounted / negotiated by the bank d. e. f. The Bank will not re-discount bills earlier discounted by NBFCs, except in respect of bills arising from sale of LCVs and two/ three wheelers. The Bank will not extend bill financing facilities to non-constituent borrowers and / or a non-constituent member of consortium / multiple banking arrangement. Discounted inland bills will not, in the normal course, have original tenors exceeding 180 days. Export bills, however, can be taken up for longer tenors as per extant RBI guidelines. g. The Bank will not purchase / discount / negotiate bills bearing the clause "Without Recourse" or indicating in any other manner that the bills are without recourse to the drawer. h. The rate of interest to be quoted will be as per sanctioned terms for inland bills not backed by Letters of Credit. For LC backed bills, it will be based on the appropriate Fund Transfer Price (FTP) rates as advised by Finance Dept. periodically plus a mark-up decided by competent authority, from time to time. In respect of export bills, the rate of interest will be guided by RBI instructions.

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i. Interest for the un-expired period of usance will be recovered up front from the bill proceeds, from the drawer or drawee, as the case may be. Collection of interest on rear-ended basis should be with the prior approval of Head-Trade Finance. j. k. Borrowers enjoying the bill finance facility will be required to disclose ageing schedule of their overdue payables, quarterly or as decided by the bank. The Bank will not enter into repo transaction using bill discounting rediscounting as collateral. Additional Guidelines For LCBD (Bank Risk bills) The following additional guidelines will be applicable for bills negotiated / discounted under Letters of Credit: a) The letters of credit under which bills are to be discounted / negotiated should be subject to the current Uniform Customs and Practices for Documentary Credits of International Chamber of Commerce. b) Branches will discount, under LCBD, only those bills which are drawn under LCs, which are irrevocable and are opened by banks on which adequate lines exist. The LC should not be restricted for negotiation of documents to any other bank. In respect of export letters of credit, adequate country lines should be available before the documents are negotiated / discounted. c) Branches will collect and retain upfront a margin equivalent to 3 days interest (at discount rate plus 2%) for local bills and 7 days for outstation bills to cover possible delay in payment of bills by opening banks. This may be refunded proportionately after realization of bills. Branches should recover overdue interest in all cases without exception at the time of realization. d) There are instances where drawers, who do not have any working capital borrowings with any bank, approach the Bank. Such cases will be appraised after independently verifying (from the audited balance sheet, chartered accountants certificate, etc.,) that the drawer does not enjoy any working capital credit facility elsewhere. e) In case of LCBD, the authenticity of the original LC should be established. The Branch will arrange for scrutiny of documents under the LC. For documents, which are in conformity with the terms of credit, these should be sent to the opening bank with necessary instructions including those for payment. The branch will obtain a confirmation from the LC opening bank that the documents have been accepted and

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that payment will be made on due date. In case of CBD, the bill of exchange will be presented to the drawee for acceptance, on receipt of which the bill will be discounted. It is to be ensured that the acceptor of the bill has the necessary authority flowing out of a board resolution, a certified copy of which will be kept on record. In either case (LCBD / CBD) unconditional acceptance should be obtained before branches discount a bill. Exceptions to this require approval from HeadCorporate Banking. f) In case of pre-accepted bill of exchange, the genuineness/authenticity of signatory should be established. Further, in case of invoice discounting, the invoices should evidence the acceptance of goods. g) Branches will ensure that the bill amount is invariably endorsed on the reverse of the LC, before documents are discounted in case of LCBD. Procedure in the event of non-payment in LCBD a. In the event payment is not received on due date, the paying bank should be contacted on telephone and advised to expedite payment. In the case of outstation bills, depending on the normal transit period, the branch may await proceeds for a reasonable period not exceeding 5 days from due date. Trade Finance department at Corporate Office will be advised of non-payment immediately, with all details. b. When payment is not forthcoming, a registered letter should be sent to the bank asking them to pay forthwith. Interest should also be claimed for the delayed payment. A copy of such letter should be sent to the controlling office of the opening bank. c. If the payment is still not forthcoming, the branch will act in close coordination with Corporate Office. Core Operating Processes for Bill Financing a. b. The branch will collect information on the drawee and obtain a satisfactory bank opinion report on the drawee periodically (at least once a year). The discounting Branch will verify documents and the bill of exchange to ensure strict conformity with terms of the LC in case of LCBD. In respect of clean bill discounting the branch will scrutinize the documents for consistency and ensure that the documents do not contradict one another. Bills covering commodities falling within the purview of selective credit control should not be discounted except with

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the express written approval of Corporate Office. Presently, the following commodities are covered under stipulations of Selective Credit Control: Buffer stock of sugar with Sugar Mills Unreleased stocks of sugar with Sugar Mills representing levy sugar and free sale sugar. c. d. In case of export documents, compliance with FEMA / Exim policy should also be ensured. Some banks issue acceptance letters carrying the legend Not required to be signed by an officer. This is fraught with risk and should not act on such advices when discounting bills. They should always insist on acceptance letters manually signed by the opening banks authorized official(s). e. f. Every transaction will be recorded on the transaction memo, which will be originated by Branches. The transaction memo will contain all data relevant to the transaction. On receipt of application for LCBD / Clean Bills Discounted (CBD) the Branch will verify the signatures appearing on the Bill of Exchange, from the Banks records. There should be on record a specific letter addressed to the Bank by the drawer or drawee depending on who is the constituent borrower, requesting the bank for discounting of the bill. g. Payment of discounted proceeds will be made by bankers cheque favouring the drawers cash credit / current account with the main banker or credited into the account with our Bank. j. On discounting the bill, the asset will be booked by the Branch. Discount recovered upfront should be prorated over the tenor of the bill to reflect the income appropriately in the Banks books. As a general rule, no refund of interest will be made in the event of early retirement of bills. However, in exceptional cases depending on business considerations, the refund request may be considered and approved by Head-Trade Finance. k. On receipt of payment, the branch will liquidate the bills outstanding. It will recover the interest for delayed payment, where applicable, from the margin held and / or the constituents account. Refund of margin held / remaining, if any, may then be made to the constituents account.

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Procedure in the event of non-payment in CBD a. In the event that payment is not received, within three days in case of local bills and seven days in case of outstation bills, Trade Finance will coordinate with the Relationship Manager (CB) for contacting the constituent for payment. b. If payment is still not received in the following three days, the Head-Corporate Banking will decide appropriate course of action. Regulatory Aspects Bill finance will be classified as an advance in the Banks balance sheet, and will be assigned a risk weight of 100% for capital adequacy, in accordance with current guidelines of RBI. However, LCBD financing where we take exposure on the banks will have a risk weight of 20% for capital adequacy. Non-Fund Based Limits Common Non fund based limits are Guarantees and Letters of Credit. A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his / her default. It constitutes a contingent liability which arises in the event of default by the customer. There are three parties to a bank guarantee: The Applicant Customer on whose behalf the guarantee is given, also known as Principal Debtor The Beneficiary to whom the guarantee is given The Issuing Bank who gives the guarantee, also called as the Surety Types of Guarantees Bank Guarantees are broadly of two types viz. Deferred Payment Guarantees and Ordinary guarantees. Deferred Payment Guarantees A Deferred Payment Guarantee is a contract or undertaking by the bank to the supplier that the price of machinery or goods supplied by them on deferred payment terms will be paid in agreed instalments with stipulated interest on the respective due dates, in case of default in

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payment thereof by the buyer. A deferred payment guarantee is akin to a term loan, and as far as the buyer is concerned, it serves the same purpose as that of a term loan. Ordinary Guarantees Ordinary Guarantees are of two types Financial Guarantees and Performance Guarantees. Though it may not always be possible to make a clear distinction between the two, the main features of these guarantees are given below: Financial Guarantee It is a contract of guarantee, whereby the bank becomes the surety for the applicant who is the principal debtor and assumes all the liability of a surety under the Indian Contract Act. If the applicant fails to repay the underlying debt, the bank as surety is called upon to repay the unpaid portion of the debt. Financial guarantees are given in lieu of purely monetary obligations. Financial guarantees may be of several types with varying degrees of risks. Some guarantees are of a "service" facility and are casual and temporary, and represent the Bank's certification of the financial ability of its constituents to meet certain payments or dues. Guarantees in lieu of earnest money or for payment of duties of freight are cases in point. Performance Guarantee It is a contract of indemnity, whereby the bank undertakes to indemnify the beneficiary to the extent of loss or damage suffered by the beneficiary as a result of non-performance or defective performance by the applicant during the warranty period. Although these guarantees are for performance of a contract or obligation, in case of default, the liability of the bank is to reimburse the loss or damage not exceeding the bank guarantee amount and not to step into the shoes of the applicant and complete the unfinished task / rectify sub-standard performance of their obligations. A performance guarantee involves an assessment of the customers technical ability and vocational experience. In view of the difficulty or complexity involved in appraising the technical capabilities of the customer in regard to performance of any non-financial obligation, performance guarantees should be executed for parties of undoubted standing and only to technically and managerially sound customers.

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Financial Guarantees and Performance Guarantees can be further classified into following sub-types: Secured and Unsecured Guarantees Secured guarantee means a guarantee, the amount of which is fully covered by market value of tangible securities obtained as cover against the guarantee. (If the tangible security in question is a prime security for some other facility, then only such portion of the security as in the excess of the value of the security required to cover the sanctioned limit of the latter facility fully with stipulated margin should be reckoned. Unsecured guarantee is that guarantee which is not a secured guarantee. Norms for Unsecured Guarantees In 2004, while giving freedom to the Banks in fixing the ceilings on unsecured exposures, RBI came out with the following definition of the unsecured exposure: Definition of unsecured exposure Exposures where the realizable value of security does not exceed 10% of the outstanding exposure are to be classified as unsecured exposure. Bank's Policy The above definition would be adopted for the following exposures: Fund based exposures, excluding investments Bank Guarantees Letters of Credit / Acceptances Forward contracts / derivatives Bank would monitor the unsecured exposures periodically Restrictions on issue of Bank Guarantees 1. In favour of other Banks / Institutions

(a) Banks may issue guarantees favouring other banks/FIs/other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions.

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i. The Board of Directors should reckon the integrity/robustness of the banks risk management systems and accordingly put in place a well-laid out policy in this regard. The Board approved policy should, among others, address the following issues: a. Prudential limits, linked to banks Tier I capital, up to which guarantees favouring other banks/FIs/other lending agencies may be issued. b. Nature and extent of security and margins c. Delegation of powers d. Reporting system e. Periodical reviews ii. The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies. iii. The guaranteeing bank shall assume a funded exposure of at least 10% of the exposure guaranteed. iv. Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders. However, AD banks may also be guided by the provisions contained in Notification No. FEMA 8/2000-RB dated May 3, 2000. v. The guarantee issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight, as per the extant guidelines. vi. Banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees to obviate the possibility of frauds in this area. (b) Lending Banks Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance with the following conditions: i. The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the extant guidelines. ii. Exposures assumed by way of credit facilities extended against the guarantees issued by other banks should be reckoned within the inter bank exposure limits prescribed by the Board of Directors. Since the exposure assumed by the bank against the guarantee of another bank/FI will be for a fairly longer term than those assumed on account of inter bank dealings in the money market, foreign exchange market and securities market, the Board of

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Directors should fix an appropriate sub-limit for the longer term exposures since these exposures attract greater risk. iii. Banks should monitor the exposure assumed on the guaranteeing bank/FI, on a continuous basis and ensure strict compliance with the prudential limits/sub limits prescribed by the Board for banks and the prudential single borrower limits prescribed by RBI for FIs. iv. Banks should comply with the recommendations of the Ghosh Committee and other internal requirements relating to acceptance of guarantees of other banks to obviate the possibility of frauds in this area. Exceptions In regard to rehabilitation of sick/weak industrial units, in exceptional cases, where banks are unable to participate in rehabilitation packages on account of temporary liquidity constraints, the concerned banks could provide guarantees in favour of the banks which take up their additional share. Such guarantees will remain extant until such time the banks providing additional finance against guarantees are recompensated. In respect of infrastructure projects, banks may issue guarantees favouring other lending institutions, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. In cases of Sellers Line of Credit Scheme (SLCS) operated by Industrial Development Bank of India Ltd.1 and all India financial institutions like SIDBI, PFC, etc for sale of machinery, the primary credit is provided by the sellers bank to the seller through bills drawn on the buyer and the sellers bank has no access to the security covered by the transaction which remains with the buyer. As such, buyers banks are permitted to extend guarantee/co-acceptance facility for the bills drawn under sellers line of credit. Similarly guarantees can be issued in favour of HUDCO/State Housing Boards and similar bodies/ organisations for the loans granted by them to private borrowers who are unable to offer clear and marketable title to property, provided banks are otherwise satisfied with the capacity of the borrowers to adequately service such loans. Banks may sanction issuance of guarantees on behalf of their constituents, favouring Development Agencies/Boards like Indian Renewable Energy Development Agency, National Horticulture Board, etc., for obtaining soft loans and/or other forms of development assistance.

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Infrastructure projects Keeping in view the special features of lending to infrastructure projects viz., the high degree of appraisal skills on the part of lenders and availability of resources of a maturity matching with the project period, banks have been given discretion in the matter of issuance of guarantees favouring other lending agencies, in respect of infrastructure projects alone, subject to the following conditions: (i) The bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project. (ii) The guarantor bank has a satisfactory record in compliance with the prudential regulations, such as, capital adequacy, credit exposure, norms relating to income recognition, asset classification and provisioning, etc. Reserve Bank of India has precluded issue of bank guarantees favouring financial institutions, other banks and / or other lending agencies for the loans extended by the latter, as it is intended that the primary lender should appraise and assume the risk associated with sanction of credit and not pass on the risk by securing itself with a guarantee. However, some exceptions are permitted for issue of guarantees, for certain specific purposes i.e. Infrastructure Projects, Rehabilitation of sick units etc. 2. Inter company deposits / loan As per Reserve Bank of India's guidelines, guarantees should not be executed to cover inter-company deposits / loans thereby guaranteeing refund of deposits/ loans (irrespective of their source) accepted by NBFCs / firms from other NBFCs / firms. Period of Guarantee The maximum tenor of guarantee, other than deferred payment guarantee, should not normally exceed 3 years including the claim period. However, in case the guarantee is to be issued for a period exceeding 3 years, the approval of the Sanctioning Authority as per the amount of guarantee should be obtained. Specific Areas of Appraisal for Bank Guarantees Although prima-facie, a bank guarantee may appear to be non fund based, it is fraught with high risk as it devolves on the Bank and gets converted into funded limit when the applicant is unable to perform.

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Thus, while considering guarantee business, besides taking precautions, which are usually taken while granting borrowing facilities, including that of obtaining a satisfactory status report on the customer, particular care should be taken as to how best a situation on receipt of claim can be tackled. Type of the guarantee which is sought, the track record of the customer in similar transactions earlier, etc, should be the guiding factors in deciding upon the type and quantum of security and extent of margin to be stipulated. Guarantees involving disputed tax payments etc. should normally be sanctioned with 100% cash margin. In the case of performance guarantees, especially large performance guarantees related to turn key jobs, not only the financials of the applicant should be analysed and critical inference drawn, but searching enquiries should also be made about the technical and managerial capability of the applicant. When there is no regular sanctioned limit for issuing a guarantee on behalf of a customer, the guarantee may be given on adhoc basis against a minimum of 100% cash collateral and stamped counter guarantee. When a customer is required to give, from time to time, guarantees to various Government departments, public authorities or other persons, companies etc., granting a "Regular Guarantee Limit" instead of issuing guarantees on adhoc basis should be considered. The contract of guarantee should be examined to ascertain the type of guarantee, onerous clause and the obligations incurred by the Bank there under. A copy of the guarantee to be executed by the Bank must always be obtained for examining carefully. Margin Depending upon the standing of the customer, a full deposit should normally be taken for the amount of margin. Alternatively, the amount may be earmarked against a current account balance or the drawing limit in an advance account or an express lien obtained on securities in safe custody. When customers provide for margin from limits in borrowing accounts, it is preferable that such margins should be actually drawn from the borrowing accounts kept in a separate Margin for Guarantees Issued Account.

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Commission Levying of guarantee commission depends upon period of guarantee, credit worthiness of the client in whose favour guarantee has been issued and nature of guarantee etc. Appropriate commission charges should be collected up-front at the applicable rates and as per the related guidelines for the "specified period of liability" (i.e the actual period of the guarantee, plus the additional period, if any, during which claims can be made on the Bank under the guarantee) or as per sanction terms. Text of Guarantee Normally guarantee should be issued in the form Standarised by the Bank / IBA. If a guarantee is required to be issued in a different format due to insistence of beneficiary, it should be ensured that the guarantee is: (a) (b) (c) (d) (e) (f) For a definite period For a definite object and enforceable on happening of a definite event For a specific amount In respect of a bonafide / commercial transaction. Without any onerous clause Without any clause providing for automatic renewal on its expiry.

The text of the Bank Guarantee should inter alia contain: i) ii) iii) iv) The name and address of the applicant at whose request the Bank is executing the guarantee The name and address of the beneficiary. A reference to the underlying contract between the applicant and the beneficiary to bring out the purpose of the guarantee. In the case of a performance guarantee, a clause to the effect that the Bank is liable only to the extent of loss or damage suffered by the beneficiary and not to perform the contract. v) vi) vii) The maximum liability of the Bank under the guarantee. The date of expiry of liability. Branches should ensure to add a limitation clause on the following lines to all the guarantees issued.

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"Notwithstanding anything contained hereinbefore, our liability under this guarantee is restricted to Rs._____________/- (Rupees _________________ only) in the aggregate and it will remain in force upto ____________. Unless a suit to enforce any claim under the guarantee is filed against us on or before ______________, all your rights under the said guarantee shall be forefeited and we shall be released and discharged from all liabilities thereunder". Other guidelines and precautions to be taken while issuing guarantees are as follows: 1. In order to prevent unaccounted issue of guarantees, as well as fake guarantees, as suggested by IBA, bank guarantees should be issued in serially numbered security forms. 2. The body of the guarantee, as per the requirements of the beneficiary / applicant, should be typed in continuation numbered sheets. 3. To have uniformity, the guarantees should be numbered giving code of the branch, year and serial number of the guarantee. 4. The guarantee should be adequately stamped 5. The guarantee should be signed by atleast two authorised signatories of the bank. 6. The signature on the letter of guarantee executed in India and requiring to be stamped under the Indian Stamp Act must not be attested. 7. The guarantee should be issued under the cover of a pre-printed numbered security form. Reversal of a Guarantee Liability The Liability under a guarantee may be reversed upon expiry of a guarantee. If in spite of repeated reminders, the beneficiary of guarantee ( including Government department ) neither returns the original guarantee for cancellation nor advises the Bank to cancel the expired guarantee, the following procedure should be followed. i. Soon after the expiry of the claim period stipulated in the guarantee, a "Registered Acknowledgement Due" letter as per specimen given in Appendix IX should be sent to the beneficiary requesting them to return the original guarantee for cancellation or to confirm to the Bank that the guarantee stands cancelled at their end, within a month. A letter should also be sent to the concerned customer on whose behalf the guarantee was issued, advising them to follow up the matter with

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the beneficiary for early return of the original guarantee for cancellation or for confirmation that the guarantee stands cancelled. ii. If the expired guarantee, or the confirmation to the effect that the guarantee stands cancelled at their end, or an advice to cancel it is not received from the beneficiary within one month from the date of dispatch of the "Registered Acknowledgement Due" letter or courier, the guarantee should be treated as cancelled and the liability entries should be reversed without insisting on execution of an indemnity by the customer. iii. The relative correspondence and the acknowledgement of the registered letter should be kept on record. Invocation of Bank Guarantee The beneficiary of a bank guarantee can invoke the guarantee at any time before the expiry period for lodgement of claims. Invocation can be done by telex / telegram/fax also. The Bank's liability under the Bank Guarantee is absolute and independent and exclusive of any other contract entered into by the applicant and the beneficiary. The fundamental principle to be borne in mind while dealing with demands under a guarantee is that the applicant customer is a favoured debtor and he/she cannot be held beyond the exact wordings of the guarantee. It is, therefore, essential to examine the wordings of the guarantee and see whether the terms of the guarantee warrant our accepting the liability and if so, whether the demand is strictly in accordance with the provisions of the guarantee. Whenever a bank guarantee is invoked by the beneficiary strictly in accordance with the terms and conditions of the guarantee deed, branch should settle the amount claimed thereunder without delay or demur, unless there is a court order restraining the Bank in this regard. When the guarantee is in the form of an unconditional undertaking, the need to honour the claim forthwith is all the more relevant, particularly when such guarantee is invoked by the Government or Public Sector Enterprise. Delay in settlement of a rightful claim on the part of the Bank may give an opportunity to the applicant to take recourse to courts and obtain injunction orders. This may tarnish the image of the Bank by giving impression of acting in collusion with the customer apart from exposing it to the risks of penal action from Reserve Bank of India and legal action from Court.

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Branches are not vested with any powers to postpone payment or refuse claim received under a guarantee. Such a decision can be taken only with the approval of Head Office. If any branch fails to settle the claim received under the guarantee, within two days from receipt of invocation, it should forthwith submit a full report to its Head Office, with the facts of the case and brining out reasons / justification for its choosing not to honour the claim, together with copies of relevant papers, such as the guarantee, invocation advice etc. The Head office, in turn would go into the issues quickly, if necessary, in consultation with legal experts and advise the decision to the branch expeditiously as to whether the claim should be settled immediately or not. The Branch should initially acknowledged the invocation advice and advise the decision so taken finally, to the beneficiary. There should not be a situation, where a branch despite receipt of an invocation advice, neither settles the claim immediately nor submits full report to Head Office for scrutiny, latest by the third day from receipt of invocation. The payment of guarantee claim should be made by debiting margin account or other account of the customer (by giving notice, wherever necessary). The balance amount, if any, should be debited to the "Claims against Guarantees Account". In case of debit to this account, immediate steps should be taken to recover the amount alongwith interest from the borrower. Only when the Bank has received an order of restraint / injunction from a competent / appropriate court, can the Bank withhold payment under the Bank Guarantee. Till the Court case is decided, the liability of the Bank under the Bank Guarantee will continue. Guarantee commission for the period of pending of court case has to be recovered. the time of issue of the Bank Guarantee. Advance Payment Guarantee Advance Payment Guarantee usually arises in the case of turn-key projects, or contracts for large value. In such cases, the terms of the contract provide for disbursement of advance A

clause to this effect has to be incorporated in the body of counter guarantee to be taken at

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payment, being a specified percentage of the value of the turnkey project / contract. The term of contract may provide for pro-rata adjustments of the advanced amount out of the progress payments made or for one time adjustment at the time of finalisation of the contract. It may also stipulate recovery of interest on the amount advanced from the applicant by the beneficiary. The term of the underlying agreement between the applicant and the beneficiary should, therefore, be perused to ascertain the nature of stipulation. If the terms provide for recovery of interest, the Bank's liability will be equal to the amount of advance payment, plus interest at the stipulated rate from the date of advance till the expiry period of the guarantee (excluding claim period) Liability period and commission should be reckoned on the basis of the Bank's liability computed as above. Guarantees on Behalf of Share and Stock Brokers Guarantees may be issued on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by stock exchanges. Guarantees may also be issued in lieu of margin requirements as per stock exchange regulations. A minimum margin of 50 percent presently as per RBI Guidelines (inclusive of cash margins) should be obtained while issuing such guarantees. The requirement of each applicant borrower should be assessed properly and usual and necessary safeguards including the exposure ceilings should be observed. Guarantees in respect of Foreign Exchange Business While giving the guarantees related to foreign exchange business the relative provisions of Foreign Exchange Management Act (FEMA), 1999 and the rules, regulations, directions made / issued thereunder should be followed. While giving guarantees in connection with import and export trade, the relative Rules of Foreign Exchange Dealers' Association of India (FEDAI) should be followed. Prior approval of Reserve Bank of India should be obtained for issue of guarantees in respect of caution listed exporters. Approval at appropriate level should be obtained before issuing a guarantee.

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Bid Bonds and Other Guarantees Against Commodity Exports Bid bonds and / or performance guarantees can be provided in favour of overseas buyers on account of bonafide exporters from India, subject to the conditions given below: 1. 2. Bonafides of the applicant and their ability to perform the contract are satisfactory. The value of the bid bond / performance guarantee as a percentage of the value of the contract / tender international trade. 3. The terms of the contract are in accordance with the Exchange Control Regulations. is reasonable and according to the normal practice in

With a view to boost exports, a flexible approach may be adopted in the matter of obtaining cover and earmarking of assets / credit limits, drawing power, while issuing bid bonds and performance guarantees for export purposes. Bank's interest may, however, be safeguard by obtaining an Export Performance Guarantee of ECGC, wherever considered necessary. Any cash margin need not be obtained in respect of bid bonds and guarantees which are counter guaranteed by ECGC. If such bond / guarantee is invoked, payment due thereunder may be made to the nonresident beneficiary, but a report should be sent to Reserve Bank of India. Guarantees for Project Exports Bid bonds and performance guarantees in respect of Project Exports should be given selectively after careful assessment of financial and technical demands involved in the proposals vis--vis the capability/competency of the contractors (including sub contractors) as well as the overseas employers. Such guarantees should not be executed as a matter of course merely because of the participation of Exim Bank and availability of counter guarantee of ECGC. Appropriate arrangements should also be made for post-award followup and monitoring of the contracts. ECGC Cover Export Credit Guarantee Corporation of India Ltd. (ECGC) provides counter guarantee to a bank under its Export Performance Indemnity scheme to protect the bank against losses that it may suffer on account of following types of guarantees given by the bank to the exporters:

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1. 2. 3. 4. 5. 6. Guarantees for Bid Bond Guarantees to foreign buyers to ensure due performance or against advance payment or in lieu of retention money Guarantees to foreign banks in case the exporter has to raise overseas finance Guarantees for obtaining import licenses. Guarantees to Customs, Central Excise, Sales Tax, Export Promotion Councils etc. ECGC cover should be obtained in appropriate cases by following the prescribed procedure Guarantees in Favour of Overseas Organisations Issuing Travellers' Cheques Guarantees can be issued in favour of overseas organisations issuing travellers' cheques in respect of blank travellers' cheques stocked for sale by us or on behalf of our customers who are full fledged money changers holding valid licences from Reserve Bank of India, subject to suitable counter-guarantee being obtained from such customers. In the event of the guarantee being invoked, remittance may be effected but a separate report should be sent giving full details to the Chief General Manager, Exchange Control Department (Forex Market Division), Reserve Bank of India, Central Office, Mumbai 400 001. Documentation of Guarantee A letter of request as per specimen given in Appendix X should be obtained from the customer every time whenever guarantee is required to be issued on behalf of the client under a regular guarantee limit. While issuing every guarantee branches should obtain the counter guarantee from the customer on the form as Appendix XII. In case the customer enjoys a regular bank guarantee limit, an omnibus guarantee would suffice. The form of counter guarantee should be stamped as an agreement at the rate of stamp duty applicable in the State where they are executed. The form should not be attested. The counter guarantee given by a partnership firm must be signed by all partners on behalf of the firm and in their personal capacities. A copy of the original contract of the guarantee certified as true over the signature of the customer concerned should be obtained and kept attached to the counter guarantee signed by the customer.

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Where a guarantee limit is sanctioned against the stipulation of earmarking the drawing limit in the cash credit account of the borrower, it is necessary to extend the security over the assets charged in cash credit account to the guarantee limit also. For this purpose, a suitable Supplemental Deed of Hypothecation or Supplemental Memorandum of Agreement of Pledge, as the case may be, should be obtained duly executed by the borrowers. In case of limited company customer, the details of supplemental charge, where applicable, should be filed with Registrar of Companies. Where a guarantee is partly/fully secured by cash margin/term deposit, in addition to the counter guarantee and indemnity, a suitable Letter of Appropriation (form as per Appendix XI) should be obtained from the customer authorising the Bank to appropriate the cash margin/amount of term deposit kept as margin money, in the event of a claim arising under the guarantee. A letter of Appropriation alone without counter guarantee or vice versa is not sufficient. Letter of Credit (L/C) Import L/C can be opened for import of capital goods and raw materials and Inland L/C for procurement of indigenous capital goods and raw materials. Features of L/C are as follows: Documentary letter of credit as any arrangement whereby a bank (Issuing Bank) acting at the request and in accordance with the instructions of a customer (applicant) is to make payment to or to the order of a third party (beneficiary) or is to pay, accept or negotiate bills of exchange drawn by the beneficiary or authorises such payments to be made or such drafts to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the LC are complied with. Parties to a Letter of Credit (a) Applicant Applicant is normally the buyer of the goods who has to make payment to the beneficiary. LC is initiated and issued at his request and on the basis of his instructions. (b) Issuing Bank Issuing bank is one which issues the credit i.e. it is the bank which creates a letter of credit and undertakes to make the payment.

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(c) Beneficiary He is normally the seller of the goods who has to receive payment from the Applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated documents and comply with the terms and conditions of the LC. (d) Advising Bank Advising bank advises the credit to the beneficiary, thereby assuring the genuineness of the credit. It is normally located in beneficiary's territory. (e) Confirming Bank Confirming bank adds its guarantee to the credit opened by another bank. thereby, undertaking the responsibility of payment / negotiation / acceptance under the credit, in addition to that of the issuing bank. (f) Nominated Bank The bank which is nominated and authorised by the Issuing bank to pay, to incur a deferred payment undertaking, to accept draft (s) or to negotiate. In a freely negotiable credit any bank is a nominated bank. (g) Reimbursing Bank It is the bank, authorised to honour the reimbursement claim in settlement of negotiation acceptance / payment lodged with it by the paying , negotiating or accepting bank. It is normally the bank with which Issuing Bank has account, from which payment is to be made. Types of Letters of Credit (a) Revocable Letter of Credit It is an LC which can be amended or cancelled by the issuing bank at any time prior to its expiry without notice to the beneficiary. (b) Irrevocable Letter of Credit It is an LC which cannot be cancelled or amended without the consent of the parties to the credit. (c) Confirmed Letter of Credit A confirmed letter of credit is an irrevocable LC to which another bank (usually the advising bank) has, at the issuing bank's request. added its confirmation. constituting a definite undertaking of the former.

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(d) Revolving Letter of Credit It is one where the terms provide for an automatic renewal of the amount for which the credit is opened. (e) Transferable Letter of Credit A transferable LC is a credit which the beneficiary has the right to give instructions to the negotiating bank to make the credit available in whole to third party or in part to one or more third parties. (f) Back-to-back Credit A Back-to-back credit is the term given to an ancillary letter of credit which arises when the beneficiary uses the letter of credit opened in his favour to support another LC opened by the seller's bank, favouring his supplier. Issuing letter of credit amounts to granting an advance to an importer. Normally letter of credit should be issued under regular letter of credit facility sanctioned to the customer. Before opening a letter of credit, account of the customer should be opened and limits set up in the system by using appropriate menus and related guidelines. For opening a letter of credit, an application-cum-agreement form should be obtained from the customer on the Bank's standard form. The application form, being request-cum-agreement, should be stamped in accordance with the Indian Stamps Act. It should be ensured that it is within the validity period of the stamp as per the rules prevalent in the State. The application must be signed properly by the Proprietor / Partner / Director. Their

signatures should be verified by the concerned official. Normally signature of the Managers and other constituted authorities should not be accepted unless their Power of Attorney specifically authorises them to sign such instruments and such Powers of Attorney are registered with the Bank. The underlying sale contract or purchase order, placed by importer or proforma invoice of overseas supplier duly accepted / countersigned by the importer or indent / offer from overseas supplier or his authorises agent should be verified to ensure that the details conform to those given in the letter of credit application.

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As the conditions and stipulation in the letter of credit application are incorporated in the letter of credit, it should be studied carefully. It should be ensured that the terms of sanction of the letter of credit facility, including obtaining appropriate margin (and crediting it to the appropriate account) maximum usance period permitted, etc. should be complied with before establishing the letter of credit. A proper scrutiny of letter of credit application, the import licence and the related documents should be made and the approval of appropriate authority taken. After completion of all the formalities, the letter of credit should be opened (and verified) into the system using appropriate menus and following the system's guidelines. The letter of credit number is generated by the system after the letter of credit is opened. Letter of credit should be advised to the beneficiary through our correspondent bank located in the place of beneficiary. If no correspondent is available in the place of beneficiary, the letter of credit may be advised through other conveniently located correspondent bank. Constitution of Borrowers There is no restriction regarding constitution of the concern which may be assisted by the bank. Caution List/ Negative list/Defaulter list of Willful Defaulters Based on the experience and advices received from regulatory and other authorities, caution list of promoters/borrowing companies / collaborators / machinery suppliers whose dealings in the past had been unsatisfactory has been compiled. This list should be checked before a credit decision is taken. Prudential Exposure Norms All credit proposals shall strictly comply with the various prudential norms / exposure ceilings put in place by the Bank and RBI from time to time. Details of exposure norms in respect of a single borrower, group, industry, substantial exposure, unsecured exposure and exposure to sensitive sector are given in the Credit Policy of the Bank.

*****
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APPENDIX VII Interest Rate on Rupee Export Credit (Pre-shipment) Interest Rate Structure The interest rate structure for rupee export credit applicable for the period up to October 31, 2007 (As per RBI Circular DBOD.Dir. (Exp.) BC. No. 79/04.02.01/2006-07 dated

April 17, 2007}

Type of Credit 1. Pre-shipment Credit (from the date of advance) (a) Up to 180 days Not exceeding BPLR minus 2.5 percentage points (b) Against incentives receivable from Government Not exceeding BPLR minus (covered by ECGC Guarantee) up to 90 days @ Note: below the ceiling rates. Interest rates for the above-mentioned categories of export credit beyond the tenors as prescribed above are deregulated and banks are free to decide the rate of interest, keeping in view the BPLR and spread guidelines RBI has made partial modification of directive DBOD. Dir. (Exp). BC.No. 79/04.02.01/200607 dated April 17, 2007 and informed that, with effect from April 01, 2007 up to December 31, 2007 the interest rates on Rupee Export Credit would be as indicated below. As per the existing guidelines, banks charge interest rates not exceeding BPLR minus 2.5% on pre-shipment credit upto 180 days. Banks will now charge interest rates not exceeding BPLR minus 4.5% on pre-shipment credit upto 180 days for the period April 1, 2007 to December 31, 2007 to all the exporters in the SME sectors and also the specified sectors as mentioned below. (i) Textiles (including Handlooms) (ii) Readymade Garments (iii) Leather Products (iv) Handicrafts (v) Engineering Products (vi) Processed Agricultural Products (vii) Marine Products (viii) Sports Goods (viii) Toys 2.5 percentage points Since these are ceiling rates, banks would be free to charge any rate Interest Rate @

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Definition of SME Enterprises engaged in the manufacture preservation of goods as specified below: i) or production, processing or

A micro enterprise is an enterprise where investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006 does not exceed Rs. 25 lakh; A small enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006) is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and A medium enterprise is an enterprise where the investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006) is more than Rs.5 crore but does not exceed Rs.10 crore.

ii)

iii)

In respect of other categories of exporters, the provisions of the circular dated April 17, 2007 would continue to apply.
Application of Interest Rates The revision in interest rates made from time to time is made applicable to fresh advances as also to the existing advances for the remaining period of credit. Interest on Pre-shipment Credit i) Bank should charge interest on pre-shipment credit up to 180 days at the rate to be decided by the bank within the ceiling rate arrived at on the basis of BPLR relevant for the entire tenor of the export credit under the category. The period of credit is to be reckoned from the date of advance. ii) If pre-shipment advances are not liquidated from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest ab initio iii) In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a period of 360 days from the date of advance, exporter would be eligible for concessional credit only up to the sanctioned period. For the balance period, interest rate prescribed for ECNOS at pre-shipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter.

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iv) In cases where exports do not take place within 360 days from the date of preshipment advance, such credits will be termed as Export Credit Not Otherwise Specified (ECNOS) and banks may charge interest rate prescribed for ECNOS preshipment from the very first day of the advance. If exports do not materialise at all, banks should charge on relative packing credit domestic lending rate plus penal rate of interest, if any, to be decided by the banks on the basis of a transparent policy approved by their Board. *****

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APPENDIX VIII Interest on Post-shipment Credit The interest rate structure for rupee export credit applicable for the period up to October 31, 2006{As per RBI Circular DBOD.Dir. (Exp.) BC. No. 79/04.02.01/2006-07 dated

April 17, 2007}

Post-shipment Credit (from the date of advance) (a) (b) On demand bills for transit period (as specified by Not exceeding BPLR minus FEDAI) Against usance bills^ (for total period comprising usance period of export bills, transit period as specified by FEDAI, and grace period, wherever applicable) (1) (2) (c) (d) (e) Up to 90 days Not exceeding BPLR minus 2.5 percentage Points Up to 365 days for exporters under the Gold Not exceeding BPLR minus Card Scheme. ECGC Guarantee) up to 90 days Against undrawn balances (up to 90 days) 2.5 percentage points. 2.5 percentage points Not exceeding BPLR minus 2.5 percentage points Against retention money (for supplies portion only) Not exceeding BPLR minus payable within one year from the date of shipment 2.5 percentage points (up to 90 days) ^ @ Note: up to notional due date or actual due date, whichever is earlier Since these are ceiling rates, banks would be free to charge any rate below the ceiling rates. Interest rates for the above-mentioned categories of export credit beyond the tenors as prescribed above are deregulated and banks are free to decide the rate of interest, keeping in view the BPLR and spread guidelines 2.5 percentage points Interest Rate @

Against incentives receivable from Govt. (covered by Not exceeding BPLR minus

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RBI has made partial modification of directive DBOD. Dir. (Exp). BC.No. 79/04.02.01/200607 dated April 17, 2007 and informed that, with effect from April 01, 2007 up to December 31, 2007 the interest rates on Rupee Export Credit would be as indicated below. As per the existing guidelines, banks charge interest rates not exceeding BPLR minus 2.5% on pre-shipment credit upto 180 days. Banks will now charge interest rates not exceeding BPLR minus 4.5% on pre-shipment credit upto 180 days for the period April 1, 2007 to December 31, 2007 to all the exporters in the SME sectors and also the specified sectors as mentioned below. (i) Textiles (including Handlooms) (ii) Readymade Garments (iii) Leather Products (iv) Handicrafts (v) Engineering Products (vi) Processed Agricultural Products (vii) Marine Products (viii) Sports Goods (viii) Toys Early payment of Export Bills (a) In the case of advances against demand bills, if the bills are realised before the expiry of the normal transit period (NTP), interest at the concessive rate shall be charged from the date of advance till the date of realisation of such bills. The date of realisation of demand bills for this purpose would be the date on which the proceeds get credited to the banks' Nostro accounts. (b) In the case of advance/credit against usance export bills, interest at concessive rate may be charged only up to the notional/actual due date or the date on which export proceeds get credited to the banks Nostro account abroad, whichever is earlier, irrespective of the date of credit to the borrower's/exporter's account in India. In cases where the correct due date can be established before/immediately after availment of credit due to acceptance by overseas buyer or otherwise, concessive interest can be applied only up to the actual due date, irrespective of whatever may be the notional due date arrived at, provided the actual due date falls before the notional due date. (c) Where interest for the entire NTP in the case of demand bills or up to notional/actual due date in the case of usance bills as stated at (b) above, has been collected at the time of negotiation/purchase/discount of bills, the excess interest collected for the period from the date of realisation to the last date of NTP/notional due date/actual due date should be refunded to the borrowers.

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Overdue Export Bills (a) In case of export bills, the rate of interest decided by the bank within the ceiling rate stipulated by RBI will apply up to the due date of the bill (up to NTP in case of demand bill and specified period in case of usance bills). (b) For the period beyond the due date viz. for the overdue period, the rate fixed for Export Credit Not Otherwise Specified (ECNOS) at post-shipment stage will apply and no penal interest should be charged additionally. (c) Bank should ensure that the additional interest by way of overdue interest (ECNOS) should not be levied where there has been no advance (pre or post shipment) taken by the exporter. Interest on Post-shipment Credit Adjusted from Rupee Resources The following guidelines may be followed to ensure uniformity in charging interest on postshipment advances which are not adjusted in an approved manner due to non-accrual of foreign exchange and advances have to be adjusted out of the funds received from the Export Credit Guarantee Corporation of India Ltd. (ECGC) in settlement of claims preferred on them on account of the relevant export consignment: (a) In case of exports to certain countries, exporters are unable to realise export proceeds due to non-expatriation of the foreign exchange by the Governments/Central Banking Authorities of the countries concerned as a result of their balance of payment problems even though payments have been made locally by the buyers. In these cases ECGC offer cover to exporters for transfer delays. Where ECGC have admitted the claims and paid the amount for transfer delay, banks may charge interest as applicable to ECNOS - Post-shipment even if the postshipment advance may be outstanding beyond six months from the date of shipment. Such interest would be applicable on the full amount of advance irrespective of the fact that the ECGC admit the claims to the extent of 90 percent/75 percent and the exporters have to bring the balance 10 percent/25 percent from their own rupee resources. (b) In a case where interest has been charged at commercial rate or ECNOS if export proceeds are realised in an approved manner subsequently, the bank may refund to the borrower the excess amount representing difference between the quantum of interest already charged and interest that is chargeable taking into account the said realisation after ensuring the fact of such realisation with satisfactory evidence. While

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making adjustments of accounts it would be better if the possibility of refund of excess interest is brought to the notice of the borrower. Change of Tenor of Bill (a) In terms of para C.14 of the AP DIR series Circular No. 12 dated 9th September 2000 issued by RBI (FED), banks have been permitted, on request from exporters, to allow change of the tenor of the original buyer/ consignee, provided inter alia, the revised due date of payment does not fall beyond six months from the date of shipment. (b) In such cases as well as where change of tenor up to six months from the date of shipment has been allowed, it would be in order for banks to extend the concessional rate of interest up to the revised notional due date, subject to the interest rates Directive issued by RBI.

*****

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APPENDIX IX Specimen of Registered A.D. Letter to be sent to the Beneficiary for Cancellation of Expired Guarantees Date ______________ To Name and address of the Beneficiary Dear Sir, Cancellation of Expired Guarantee/s We find from our records the following guarantee/s has/have expired: Sr. No. Date of On account of Amount in Issue Rupees Date of Expiry

No claim/s has/have been lodged with us within the expiry period and the Bank is released and discharged of its liabilities under the said guarantee/s. Therefore, would you please, for the sake of good order, return to us the original guarantee/s (including amendments, if any) for cancellation or confirm to us that the/se guarantee/s stand/s cancelled at your end. If we do not hear from you within 30 days, we assume your concurrence to the foregoing. Please acknowledgement receipt of this letter. Yours faithfully, Branch Head

(This endorsement should not appear on the original of this letter)

Copy to: (Name and address of the customer) We would request you to arrange to return to us the ORIGINAL guarantee/s (including amendment, if any) for cancellation. Please however, note that unless you hear from us to that effect, this letter does not relieve you from your liability in terms of counter-guarantee/s executed by you in respect of aforesaid guarantee/s. Branch Head *****

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Appendix X A Specimen of Letter of Request from Customer to Issue Guarantee under a Guarantee Limit Date ________________ The Branch Head IDBI Ltd. __________________ Branch

Dear Sir, My / Our Guarantee Limit for Rs.___________________ My / Our General Counter Guarantee dated ___________ With reference to the above guarantee limit granted by you to me/us and the General Counter Guarantee signed/executed by me/us in connection therewith, I/We have to request you to sign and issue/return to me /us (i) a guarantee for Rs._____________ in favour of _______________ expiring in on favour _________________ of (ii) a guarantee expiring for on Rs.________________ __________________

____________________ as per the engrossment/s/form/s enclosed. I/We confirm that the said guarantee/s is/are covered by the said general counterguarantee dated _______________ executed by me/us in your favour. Please debit your charges in this connection to _____________ my/our Current Account with our/your ____________________ branch. Yours faithfully, Name of the Customer *****

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Appendix XI Specimen of Letter of Appropriation where Guarantee Limit is Partly/ Fully Secured by Cash Margin / Term Deposits Place: _______________ Date: _______________ To, IDBI Ltd.

Dear Sir, In consideration the guarantee/s issued/ to be issued by you from time to time to at our request on my/our behalf, I/we give you a lien on: My/our cash deposit of Rs._____________ (Rupees ___________________ only) with you. My/our fixed Deposit Receipt No.__________________ of your Bank for Rs.______________ (Rupees _______________) handed over to you duly discharged by me/us, which is/are to be held by you on my/our account as security against any liability that may arise under any such guarantee/s issued and to be issued by you. 2. You will be entitled to utilise: The said Cash Deposits Proceeds of the said Fixed Deposit Receipt or any other Fixed Deposit Receipt issued to renewal thereof either on its/their due date/s at your discretion. To reimburse yourself any amount that you may pay or may have to pay from time to time under or in respect of or in connection with the said guarantee/s issued/to be issued by you without reference to me/us and whether such payment be for principal interest, costs, charges and expenses.

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3. I/we undertake to execute such deeds and instruments as you may require hereafter

to further secure the Cash Deposit/Fixed Deposit or any renewal thereof if necessary and I/we shall bear the costs thereof. 4. I/we hereby declare that I/we have not encumbered assigned or otherwise dealt

with the said cash deposit/fixed deposit/s in any way and that the same are free from all encumbrances. Yours faithfully,

Name of the Customer *****

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Appendix XII Specimen of Counter Guarantee (to be stamped as an Agreement) Place: Date: IDBI Bank Ltd. In consideration of your having at our request agreed to execute a Letter of Guarantee (as per copy annexed hereto) for Rs._____ ( Rupees __________) in favour of the ____________ (hereinafter referred to as the "beneficiary") we hereby agree and declare that: a. We will hold harmless and indemnify the Bank against and will pay to the Bank on demand at IDBI Bank Ltd. ___________ branch, the amount of costs claims demands, damages, losses, expenses which may be made against or sustained by the Bank or for which the Bank may become liable by reason of the Bank having given and signed the said guarantee or otherwise in connection therewith AND we also agree to pay to the Bank at its __________ branch forthwith on demand any amount which the Bank may be called upon to pay under the said guarantee (and whether the bank shall have paid any such amount or not) plus all costs and charges which may be incurred by the Bank or become payable in connection with the fulfillment of the terms of the said guarantee AND any payment made by the Bank on demand from the beneficiary shall be deemed to an amount which the Bank has been called upon to pay under the said guarantee.] The Bank shall be at liberty to debit the Current/Cash Credit accounts maintained by us at the Bank's ____________ branch with any amount paid or payable by the Bank pursuant to clause (a) of this counter-guarantee. We further agree that this counter-guarantee will remain in force until the Bank is finally discharged of the liability under the said guarantee and has obtained confirmation in writing thereof from the beneficiary and received there from the said guarantee duly redeemed. Any notice by way of demand or the otherwise hereunder may be given by the Bank to the company by sending the same by post addressed to us at our registered office and the notice shall be deemed to have been given at the time when it would be delivered in the ordinary course of post and it will be sufficient in order to prove service of any such notice to prove that the envelope containing the same was posted and a certificate signed by the Branch Head of the Bank's _____________ branch that the envelope was posted shall constitute such proof. *****

b. c.

d.

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CHAPTER 11
NATURE OF SECURITIES Nature of Securities The basic classification under types of securities could be Unsecured Advances and Secured Advances. Unsecured Advances Unsecured or clean Advances are those which are granted without obtaining any primary tangible security. Unsecured advances are granted only to the borrowers of high integrity, undoubted reputation and high net-worth in proportion to the amount borrowed and their other liabilities. These are generally granted after satisfying about the reasons given for not offering any security or only part security and when the benefits which the Bank may derive directly or indirectly outweigh the risk taken by the Bank. Unsecured advances are generally granted by way of Overdraft. These should be provided for short term seasonal or occasional requirements and should not be allowed to continue for long. In case of unsecured advances, it is necessary to maintain a close watch on the financial position of the borrower, including the guarantors. If there are any adverse developments, immediate steps should be taken to have the advance secured or liquidated. Secured Advances Secured Advances are the advances fully secured by the assets financed by the Bank, commonly termed as primary security and/or the other assets of the borrower and/or the assets of the guarantor which are categorised as collateral security. The security charged for advances could be by way of pledge or hypothecation of goods, hypothecation of machinery or other movable assets, hypothecation of book debts, pledge of (state owned) warehouse receipts, pledge / lien on term deposit receipts of the Bank, assignment of life insurance policies, pledge of shares. Negative lien on assets, is also obtained in some cases to protect the Banks interest. Salient features of major types of securities are given below.

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Pledge of Goods Pledge is bailment of goods as a security for payment of a debt or for performance of a promise. In an advance against pledge of goods, the goods are given in exclusive possession of the bank or its approved clearing agents and remains in the custody and charge of the bank, until the debt is discharged. The bank (bailee) is required to take as much care of the goods bailed to it as a prudent person would, under similar circumstances, take care of his/her own goods of similar bulk, quantity and value of the bailed goods. On repayment of the advance, the bank is required to return or deliver goods according to the borrowers instructions. Due to operational difficulties, very few advances against pledge of goods are granted these days. The detailed guidelines for granting advances against pledge of goods are given in Appendix XIII. Hypothecation of Goods In the case of advances against hypothecation of goods, although the goods are charged to the bank (and the charge is also registered in case of limited company borrowers), since the custody and control of goods remain with the borrower, more than ordinary care has to be exercised. In case of advances against hypothecated assets, therefore, the means, standing and integrity of borrowers are of paramount importance. Further, such advances should be additionally secured by way of equitable/legal mortgages of fixed assets of the borrowers/guarantors or other collateral security, wherever necessary. commensurate with their scale of operation. Goods offered as security should be the goods in which the borrower normally deals. If a borrower offers security of other goods, the reason for such request should be ascertained. The amount advanced must bear a reasonable proportion to the borrowers resources and be

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As far as possible, only those goods, the prices of which do not fluctuate widely and which have a steady market and do not deteriorate due to passage of time and become unsaleable should be accepted as security. Licence of Municipal and other statutory authorities etc. required for storing and dealing in the goods should be verified and a copy kept on record. Verification of borrowers title to the hypothecated goods is very important, which should be established beyond doubt. The goods offered as security, should be free from any prior claim, lien, encumbrance and charges etc. The borrower should have the right to create a charge over goods in favour of the Bank. Goods received on credit or under D/A letter of credit opened by the borrower should not be considered as security for allowing drawings against such goods. Margin provides cushion against fall in prices or obsolescence or shortage etc. Adequate margin fixed, as agreed to by the sanctioning authority, should therefore be maintained at all times. In cases where multiple banking arrangement are allowed for valid reasons, it should be ensured that the stocks are segregated in different godowns or shops and that they are properly recorded in separate stock books for easy identification and verification by the Bank. Where due to practical difficulties it is not possible to do so, appropriate care should be exercised at the time of stock inspection for proper identification and verification of goods charged to the Bank. The safety of the advance depends on the value of the goods and their marketability. The basis of valuation should therefore be proper and there should be a satisfactory turnover of stock which is a pointer to their marketability. The goods should be valued at cost, invoice price or market price whichever is lower. Further, Stock Audit should be got done as per the approved policy. In some cases, borrowers may give goods to others for the purpose of processing or fabrication. Branches should obtain, in such cases, a stamped letter of undertaking from the processing firm to the effect that they (processing firm) will have no charge or lien on the

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goods lying with them for processing and that they hold the goods at the disposal of the Bank, free from any claim for any dues whatsoever owing to them by the borrower [Specimen Appendix XIV) If the borrower comes in possession of stocks of third parties for the purpose of processing, no advance can be granted against such stocks. In all such cases, the goods hypothecated to the Bank should be kept separate from the goods received for processing purposes. The Banks name board indicating that the goods are hypothecated to IDBI Bank Ltd., must be displayed prominently on godown / shop / factory premises etc., so as to obviate the possibility of the goods being hypothecated to more than one bank and serving as notice to third parties of the Banks charge over the goods. Requests for waiver of display of name boards may be considered in exceptional cases and for very cogent reasons and approved at the appropriate level. Hypothecation of Machinery A suitable name-plate indicating that the machinery is hypothecated to IDBI Bank Ltd., should be securely fastened to the machinery or the Banks name painted on the machinery. Hypothecation of Book Debts / Receivables When goods / services are sold on credit, either a Bill of Exchange is drawn on the buyer or the transaction is recorded in the books of the seller, i.e. the amount due is shown as Account Receivable which are also known as Book Debts. Book debts constitute one of the components of the working capital. Advances against book debts should not normally be considered in isolation but as part of working capital requirements. The terms of sanction usually stipulate the age of the book debts against which drawings may be allowed. Usually, the Bank does not advance against book debts that are more than six months old. All the book debts of the borrower irrespective of their age (and not only the book debts against which the Bank has granted advance) should be charged to the Bank.

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Where limits have to be granted for advances against hypothecation of stocks and/or other movable assets and also against hypothecation of book debts within the same overall limit, wherever possible, two separate accounts (styled Account no. I and Account no. II) should be maintained - one account for advance against stocks and other movable assets and the other account for advance against book debts. There should be a separate set of security documents for each account. In the case of such advances to limited companies, it is necessary to file two separate sets of particulars of charges with the Registrar of Companies after carrying out a search at the office of the Registrar of Companies. If it is not possible/convenient to do so, one account can be maintained and stocks and other movable assets and book debts can be covered and registered under a single charge. An agreement of Hypothecation of Book Debts should be obtained from the borrowers along with other security documents It should be noted that the form of Agreement contains a general power of attorney in favour of the Bank. The form should, therefore, be stamped as a power of attorney, in addition to being stamped as an agreement. Appropriate number of bills (sight or usance) drawn by the borrowers should be arranged in consultation with the borrowers, on their debtors in respect of large debts. Necessary care should be taken/exercised whether the borrower is availing credit from more than one source to finance the same transaction. Double financing should be avoided. Advance should not generally be granted against book debts of allied or associate concerns as there is scope for manipulation of accounts in such cases. In exceptional cases, where such advances are to be granted, specific sanction must be obtained for such debtors and the maximum limits fixed for each such drawee. An undertaking should be obtained from the borrowers to the effect that the proceeds of the bills arising out of book debts hypothecated to the Bank, when received directly by them, if any, will always be deposited in the relative borrowing account with the Bank. Where possible or essential, the borrowers invoices should be superimposed by a rubber stamp boldly indicating that payment be made directly to IDBI Bank Ltd.

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Sub-limits for book-debts may be fixed for individual debtors of the borrowers), taking into consideration their standing and credit worthiness based on the status reports obtained on such debtors. Lien Lien is the right of the creditor to retain property (which is in his/her possession) belonging to another, until a debt due from the latter is paid. A Particular Lien is the right to retain goods in respect of which the debt was created. A General Lien is a right of retainer not only for a debt incurred for particular goods but for the general balance due. Under Section 71 of the Indian Contract Act, 1872 the banker has the right of a General Lien. In fact the bankers lien is a special form of general lien. It is an implied pledge, which gives him not only the right to retain the goods and securities for the general balance due, but also gives him the right of sale upon default after reasonable notice is given without intervention of the court. However, the rights under bankers lien can be exercised only on such customers property as comes into its possession in the ordinary course of business as a banker (e.g. bills for collection) and unless of course there is no contract inconsistent with the lien. The bank has no lien on securities handed over to it for special purpose (e.g. securities kept in safe custody). Banks do not have a lien over credit balance lying in the customers accounts, their right in such a case is that of set-off. Set-off In set-off, a creditor is entitled to take into account a debt owing to him/her by debtor while settling mutual accounts. Though it is a statutory right, in practice, a letter is obtained from the borrower which gives banker specific right of set-off. For the purpose of set-off, all branches of a Bank are considered as one unit. A banker has right of set-off only under the following circumstances: The different accounts of the customer are in the same right. The debt against which set-off is sought is owing and accruing due and not contingent. The debts are for sums certain i.e. for known amounts.

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The right of set-off has to be exercised by giving notice, unless the customer is in breach of contract or is guilty of fraud. Assignment An assignment is the transfer by one person to another of a right, property or debt (existing or future). For a banker, the usual subject of assignment is an actionable claim. In practice, in cases where security is created by way of assignment, the debtor of the borrower should be promptly advised about the assignment by latter in the Banks favour. Upon execution of the assignment, the bank can sue or institute proceedings for the recovery of the debts against borrowers debtor in its own name without making the borrower a borrower. The assignment is used generally in respect of book-debts, supply bills being contract moneys due from Government/Semi-Government bodies and life policies. Negative Lien A negative lien on fixed assets and sometimes on liquid assets may be taken as an additional collateral security. In such cases the bank obtains a specific undertaking from the borrower to the effect that the borrower will neither create any encumbrance on specified asset nor sell them of without the prior permission of the bank so long as the advance continues. asset. Where an advance is sanctioned with negative lien as an additional security, the letter of negative lien should be obtained in accordance with the specimen given in Appendix XV. Third Party Guarantees Guarantee by the directors, third parties etc. are also often obtained for securing advances. A Guarantee is stipulated as a credit enhancement to seek moral commitment to reinforce the safety of the Banks funds. When guarantee is stipulated as one of the securities in an Such an undertaking is known as Negative Lien, which is binding on the borrower. It however, by itself does not confer any right on the bank to proceed against the

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advance account, the letter of guarantee should be obtained in the appropriate standard form of the Bank. The form of guarantee should be stamped as an agreement chargeable with stamp duty of the State in which it is executed. The executants signature on the form should not be attested. While taking the guarantee of an individual, his/ her Net Worth should be assessed by obtaining statement of assets and liabilities, duly certified by a Chartered Accountant, along with copies of latest IT and Wealth Tax returns. The Net Worth should be monitored on yearly basis and supporting documents obtained. Personal guarantees of promoters/directors tend to instill greater accountability and responsibility on their part, and induce the management to conduct the operations of the units on sound and healthy lines. This apart, the borrowers become more amenable to financial discipline. In view of this, guarantees may be obtained from directors (excluding nominee directors) in their individual capacity, wherever considered necessary. The Bank may also obtain guarantee from the parent/ holding company for credit facilities executed to units of a group. Also a suitable covenant should be stipulated, preferably as one of the terms and conditions of the advance, that no commission or any other consideration will be paid by the borrower to the guarantor for providing the guarantee. A guarantor is discharged from his liabilities: If there is any factor vitiating the contract e.g. misrepresentation, concealment of facts etc. If there is alteration in the terms of the guarantee or contract or any compromise with the principal debtor without the knowledge of the guarantor. By death, insanity or insolvency of the guarantor, as to future transactions. Under Section 295(1) of Companies Act, 1956, a company cannot, without the previous approval of the Central Government either directly or indirectly, give any guarantee or provide any security in connection with a loan made by any person to:

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A director of such company or of a company which is its holding company, or Any partner or relative of any such director, or Any firm in which such director or relative is a partner, or Any private company of which any such director is a director or member, or Any body Corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or manager whereof is accustomed to act in accordance with the directions or instructions of the Board or of any director or directors of the lending company. A guarantee given or security provided by the following classes of companies is exempt from the prohibition contained in Section 295 (1), namely, any guarantee given or security provided by: A private company - unless it is a subsidiary of a public company. A banking company - for which the instructions issued by Reserve Bank of India in this regard are applicable. A holding company - in respect of any loan made to its subsidiary. Under Section 370(1) of Companies Act, a company cannot give any guarantee or provide any security, in connection with a loan made by any other person to or to any other person by, any body corporate, unless the giving of such guarantee or providing the security has been previously authorised by a Special Resolution of the company which gives such guarantee or provides any security. A Special Resolution can be passed by a company authorising its Board of Directors to give guarantees or to provide security upto the limit specified in the resolution. These restrictions do not apply to any guarantee given or security provided (i) by a holding company, in respect of any loan made to its subsidiary or (ii) by a banking company or an insurance company in the ordinary course of its business or (iii) by a private company unless it is a subsidiary of a public company or (iv) by a company established with the object of financing industrial enterprises. Death of a Guarantor In the event of death of a single guarantor or of one of the joint and several guarantors, steps should be taken immediately to obtain a new guarantor in place of the deceased. Alternatively, on merits of the case, the guarantee of the deceased may, on a specific

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request in writing from the borrower and all the other guarantors to the advance, be waived and his estate discharged from liability without obtaining a new guarantor. In both the cases, suitable proposal for review of the advance should be submitted and approval of the Sanctioning Authority obtained for the proposed changes, before the release of the guarantor or the estate of the deceased guarantor.

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Appendix XIII Guidelines for Advances against Pledge of Goods General 1. 2. Pledge is bailment of goods as a security for payment of a debt or for performance of a promise. In an advance against pledge of goods, the goods are given in exclusive possession of the bank or its approved clearing agents and remain in the custody and charge of the bank, until the debt is discharged. 3. The bank (bailee) is required to take as much care of the goods bailed to it as a prudent person would, under similar circumstances, take care of his/her own goods of similar bulk, quantity and value of the bailed goods. 4. On repayment of the advance, the bank is required to return or deliver goods according to the borrowers instructions. Godowns 1. 2. The godowns where the goods charged to the Bank are stored should be approved by the Bank. The godown should be located in safe area, reasonably secure against theft/burglary, should be secure, leak proof, dampness proof, with strong door, good electrical fittings / wiring. 3. 4. If rented, it should have been lent in the name of the borrower and the rent should be paid regularly and up-to-date. The godown should have direct access for effective control over goods. Exception should be allowed only in case of known borrowers of high standing. For access through premises of borrowers or third parties a letter of right of access to Godown should be obtained from them. If the godown has more than one door, all except the one with normal access must be locked from the inside. 5. Banks name board, indicating that the stocks/goods stored in the godown are pledged to the Bank should be displayed prominently outside the godown (e.g. Goods/Stocks Pledged to IDBI Bank Ltd.).

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Control Over Locks / Keys Godowns should bear locks of well known manufacturers with name of the Bank engraved on them. 1. 2. Proper record of padlocks and keys should be kept in the Lock and Key Register with columns. Lock Number, Location of Godown, Key Number, Name of the Borrower. The keys of godown locks must be kept in proper custody at the branch and should be handed over to the concerned member of branch staff only at the time of deputing the staff for lodgment / withdrawal or inspection of the goods. The keys should be received back after the work is finished. A record of movement of the keys should be maintained in a Key Diary where signature of the concerned staff members should be obtained for the handing over and taking over the key. 3. Under no circumstances the keys of the godowns (where pledged goods are stored) should be handed over to the borrower nor the work of lodgment/delivery be entrusted to a peon. Stock Register 1. A record of pledged goods should be maintained on Annexure - IV (specimen provided at the end of the note) and Annexure - II (specimen provided at the end of the note). Annexure - IV is a summary sheet and shows the consolidated position of an advance. Annexure - V is used for recording various particulars of each commodity pledged. Separate Annexure V should be used for different commodities. If there are different grades or qualities or types of the same commodity, with different prices, they should be treated as different commodities and a separate Annexure - V should be allotted to each grade or quality or type of the commodity. 2. There should be a separate file of each pledge account to keep Annexure - IV and Annexure - V. The relative folio number of Advances Register and Ledger should be stated on each file. Annexure IV should be serially numbered. For instance, when the first Annexure IV in an account is fully used, a fresh Annexure IV inserted in the file would bear the number 2. The same procedure should be followed to number the Annexure - V. Fully used sheets should be removed and kept in separate account-wise files. 3. The market rate of each commodity should be recorded in the column provided in Annexure V. The rate should be discreetly ascertained from time to time, as the

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margin is generally stipulated as a percentage of the invoice value or cost price or market value, whichever is lowest. Whenever there is a change in the market rate, the revised market rate and the date should be entered Annexure - V. If the market rate goes below the invoice value or the cost price, the value of the goods would have to be revised. The revision in the market value of goods and the drawing limit on Annexure IV should be made in Balance columns only and no entries should be made in the Increase or Decrease columns. 4. The date of inspection of stocks must be entered regularly against the value of stocks checked and initialed by the inspecting officer on Annexure V. Lodgement and Deliveries 1. The staff dealing with the godowns must supervise all receipts and deliveries of goods. He should ensure that goods received or delivered are in accordance with the relative letters of lodgement or delivery orders. 2. At the time of lodgement of goods, the original invoices covering the goods should be verified (i) for the invoice value and (ii) to ascertain the goods referred to in the invoices are those being lodged with the Bank. The case or bale numbers and marks which appear in invoices should correspond to those on the relative cases or bales, (iii) where goods are valued per unit or weight, the weight of goods should be verified. 3. Letter of lodgment must bear the signature of the borrower or a person authorised by the borrower to operate the account. After the goods are received by the member of staff dealing with godowns, the staff should sign on the reverse of the lodgement letters stating that the goods mentioned in the letter are received. Any deficiency in the quantity, quality or packing should be immediately brought to the notice of the borrower and noted at the foot of the lodgement letter under the initials of the official in charge of advances. Appropriate changes in the valuation of goods received may be made, wherever necessary. 4. Letter from borrower (delivery orders) requesting the Bank to deliver pledged goods from godowns must bear the signature of the borrower or of the person authorised to operate on the borrowers account. Such letter (to deliver goods) should specify quality and quantity together with the price at which the goods are to be delivered. The amount to be received from the borrower against the delivery of goods must not, in any case, be less than the amount advanced against those goods.

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5. Delivery orders issued by the Bank must be made out in the name of the borrower only and any request to issue the delivery order in the name of third parties should be politely declined. 6. 7. 8. Delivery of goods pledged to the Bank must not be made by the staff dealing with the godowns without production of delivery order signed by the designated officer. The signature of the borrower or his authorised agent must be obtained on the back of the delivery order, as a receipt for the goods delivered to him. Borrower should not generally be allowed to store in the same godown goods not charged (i.e. pledged or hypothecated) to the Bank alongside the goods pledged to the Bank. In the event of the borrower going into liquidation or insolvency or of levying of attachment in execution of a decree against him, the Bank must be able to show that the goods pledged to the Bank were in its own exclusive possession. Also if goods which are not pledged are allowed to be stored with the pledged goods, the Bank may be unnecessarily undertaking responsibility for safe keeping and proper control of goods which are not pledged. 9. However, in special cases, pledged goods may be allowed to be kept with unpledged goods with specific sanction of the Controlling Authority subject to the conditions that: a) The unpledged goods are kept apart from the goods which are covered by the pledge in favour of the Bank. b) The borrower undertakes to remove the unpledged goods whenever called upon to do so, so that the rights and remedies of the Bank under the advance arrangement and the pledge are always safeguarded. c) With regard to the unpledged goods, the Branch will deal with the borrower only. d) The unpledged goods are also fully insured. e) The borrower agrees and undertakes that the unpledged goods will always be at his sole risk and responsibility in respect of the storage and also indemnifies the Bank against any loss arising from them.

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Stock Statements A statement prepared by the borrower of the goods pledged to the Bank and signed by person authorised to operate on the account must be obtained as of last Friday of each month except the month of September and March when it should be last day, in the prescribed form. It should not be prepared by the Branch and sent for the signature of the borrower. The statement must be tallied with the Branch Stock Register. Insurance Please refer to the instructions given in Insurance" chapter. Inspection Please refer to the instructions given under Monitoring in Chapter on Disbursement, Monitoring, Renewal / Review. Clearing Agent The Bank may have occasions, particularly in port cities, to engage services of Clearing Agents, not only for clearing and forwarding goods, but also for storage of goods charged to the Bank. Names of these agents should be approved by the Central Office. A Clearing agent taken on the Banks approved list has to execute a stamped agreement with the Bank. Where a clearing agent is approved for more than one centre, the agreement should be executed by the Branch at the place where the registered / main office of the clearing agent is situated. The agreement should be properly stamped. A Clearing agent taken on the Banks approved list has to execute a stamped agreement with the Bank. Where a clearing agent is approved for more than one centre, the agreement should be executed by the Branch at the place where the registered / main office of the clearing agent is situated. The agreement should be properly stamped.

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Appendix XIV A Specimen of Stamped Letter of Undertaking to be Obtained from the Processing Unit

(Where goods charged to the Bank are sent to the third parties for processing)
Date ____________________ IDBI Ltd. _____________________

Dear Sir, Re: Cash Credit Account of __________________ We understand that you have at the request of _____________ agreed to grant them credit facilities inter alia against hypothecation in your favour of their stocks which are at present lying or which may hereafter lie in our premises for processing purpose which hypothecation you have agreed to accept and make advances there against as a special case on our executing an undertaking and declaration in the manner hereafter appearing. In consideration of the premises and as requested by ______________ we, ____________ hereby agree, declare and irrevocably undertake with yourselves as follows: a) That the said stocks have always been and are the absolute property of ________ and that we have no right, title, interest, claim, demand charge or lien whatsoever thereon. b) That we hold and shall continue to hold the said stocks for and on behalf of and on account __________ and subject to the said hypothecation in your favour. c) That we shall return or deliver the said stocks to you whenever we are called upon by you to do so, during the continuance of the hypothecation in your favour, we shall not claim any title, right or interest in the said stocks or any part thereof whatsoever and howsoever.

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We hereby irrevocably agree and undertake with yourselves that we will from time to time and at all times hereafter so long as ___________ are indebted or liable to you in the above account or in any other account or manner, allow you, your officers, servants and agents, any receiver appointed by you and all persons authorised by you to enter upon, pass and repass from and over our aforesaid premises at all reasonable hours of the day or night for the purpose either of having access to or inspection or valuation of the said stocks or for the seizure recovery taking possession and appointing receiver thereof and/or for selling the same and/or in the exercise of all or any of your rights in enforcing your security over the said stocks conferred on you by the relative Agreement of Hypothecation executed by ____________ in your favour or any alteration or modification or extension or renewal thereof or under the law and that in particular and without prejudice to the generality of the foregoing we will allow you, your officers, employees and agents to remove the said stocks or any part thereof from our premises wherever they may be at any time so desire. Yours faithfully, ______________

(The Letter of Undertaking is to be stamped as an agreement according to the rate of stamp duty applicable in the State where it is executed.)

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Appendix XV Specimen of Letter of Negative Lien (Letter of Undertaking by Company Not to Create any further Charge over their Property and Assets including Uncalled Capital) To, IDBI BANK LTD. _______________________

As part of the consideration for your making or continuing advances to us ______________

(Name of the Borrower) _______________ Limited on Demand Loan/ Demand Cash Credit
or otherwise we hereby declare that no mortgage, charge lien or encumbrance of any kind other than ________________________________________________________________

(Brief details of existing charges in favour of third parties) __________________________ ___________________________________ has been made or allowed over or affecting our
undertaking (whether movable or immovable) and assets (including uncalled capital) or any part thereof and that we undertake no such mortgage, charge, lien or encumbrance shall be made or allowed while we remain indebted or liable to you in any manner without your previous written consent. Dated, the ____________

(To be signed by the company under seal) *****

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Annexure IV Record of Pledge of Goods

Sheet Sr. No. _____ Name of the Account: ___________________________________________________ Office Address: ________________________________________________Tel.____: Godown Address: __________________________________________________________Tel.:______ Sanctioned Limit Rs : _________________Authority: _______Date ______________ Date Brief Particulars Lodgement (Value of Goods in Rs ) Delivery (Value of Goods in Rs ) Balance (Value in Rs) Drawing Power (Amount in column 5, less margin or sanctioned limit whichever is lower) 6 Initials

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Annexure V Particulars of Commodity Sheet Sr. No. _____ Name of the Account:_ _________________________________Tel.: _____________ Type of Commodity: ___________________________________________________ Margin: ________________________ Date Particulars Lodgement (Value in Rs.) Weight Rate Delivery (Value in Rs.) Balance (Value in Rs.) Initials

Invoice No.

Case No./ Bale No./ Mark

Quantity (Nos.)

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CHAPTER 12
DOCUMENTATION AND CHARGE REGISTRATION Security documents helps establish the precise relationship between the Bank and the borrower and form the main basis for the Banks legal recourse in court of Law in case the borrower fails to repay the advance. Obtention of appropriate and correctly executed security documents before disbursing an advance to borrower is, therefore, utmost important. While obtaining the documents, it should be borne in mind that, if the Bank is faced with a situation of remedying any defects or irregularities in the security documents at the time of filing a suit, it would be difficult to get the co-operation from the borrower and guarantor/s, if need be, and the Banks action against them might be affected. Proper drafting/format of the documents (including, to ensure that the they contain all the relevant stipulations of the sanction) and their correct stamping and execution are the essential requirements of proper documentation. Needless to say that pre-execution formalities like ensuring that the securities to be charged are free from encumbrances etc. should be completed in appropriate cases by taking searches of office of Sub-Registrar of Assurances, Registrar of Companies, getting necessary title reports etc. Also, completion of post-execution formalities like registration of documents with appropriate authorities, where applicable should be carried out promptly. The Bank has standardised some basic documents. These documents are hoisted on the Intranet of the bank. The standard formats of the documents should be amended suitably, wherever required, by seeking guidance of the Legal Department at Head Office. It is to be noted that facility agreement is one of the basic documents, which has to be obtained for any credit limit sanctioned unless specific approval from Sanctioning Authority is received for waiver of the same. However, this Agreement is not applicable in the facilities like; LCBD, LER (Treasury Facility). Our CBSD has issued a detailed Circular No.85/CBSD/20/2006-07 dated October 11, 2006 which deals with the simplification of loan agreement, approval/vetting and execution of loan documents and draft of the model sanction letter etc.

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In case of facilities where standardised documents are not available, including in cases where the terms and conditions of granting them are tailor made to suit the requirements of the borrowers/ Bank (while ensuring that the regulatory requirements and other prudent norms are followed), these should be got drafted from Legal Department Head Office. Stamping of Document State Governments have rights to amend or remit the rates for various instruments, except the following which are governed by the Central Government Act: Bills of Exchange Cheques (exempted from stamp duty) Promissory Notes Bills of Lading Letters of Credit Policies of Insurance Transfer of Shares Debentures Proxies Receipts 1. It may thus be observed that most of the main security documents of banks, except the Demand Promissory Note and Acknowledgement of Debt are governed by the stamp duties prescribed by the State Governments. 2. Documents by which an advance facility is secured become inadmissible in evidence in the Court of Law unless they are properly stamped. Stamp Acts of various States also stipulate penalties / criminal prosecution against persons who execute or sign the documents not duly stamped with an intention to evade the duty. Such documents and related records can also be seized under the provisions of such acts. 3. Every instrument chargeable with stamp duty and executed by any person in India should, therefore, be stamped appropriately according to the value prescribed in the Indian Stamp Act or Stamp Act of the State, as applicable, before or at the time of execution.

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4. A document should bear the stamp of the State in which it is first executed. If any executant is in another State, the excess duty, if any, in the other State is to be paid there. 5. Instruments / documents, other than bills of exchange and promissory notes, executed out of India may be stamped within three months after being first received in India. 6. In case of instruments chargeable according to the State Stamp Act, the stamps should pertain to the concerned State. Stamp duty should be paid to the Stamp Office of the State where the documents are executed. 7. The stamp paper should normally be (stamp duty should be paid) in the name of the Bank or the customer. The instructions in this regard for specific types of transactions / instruments laid down in the Indian Stamp Act and/or the related State Act should be followed. 8. The date affixed on special adhesive stamps by the stamp authority or the date of sale of stamp paper, as the case may be, should not be prior to six months from the date of execution of the document. 9. All documents must be executed in presence of the Bank official. documents bearing dates of execution prior to the date affixed by the stamp authority on the special adhesive stamps are invalid. 11. All loan documents/security documents executed should be vetted by Legal Department/approved panel of advocate. Important hints on Security Creation Current Assets being moveable, a floating charge in the form of hypothecation is created by executing hypothecation agreement and registered with ROC. However, in case of multiple bankers/lenders sharing the same security, the pari-passu arrangements needs to be formalized carefully by exchanging NOC/Letter ceding pari-passu charge from all the lenders holding pari-passu charge on the specified assets, for the sanctioned amount. It is to be ensured here that all the lenders must exchange the said arrangement clearly mentioning the security, pari-passu letters / charge and the amount to enable proper enforcement, in case of eventuality. 10. Care should be taken to see that all documents are correctly dated. Security

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Movable Fixed Assets While the charge creation for moveable fixed assets i.e. hypothecation is similar to current assets except a schedule of the moveable fixed assets must be annexed to hypothecation agreement /deed. Immovable Fixed Assets Fixed Assets are generally in the nature of immoveable e.g. Land and building, fixed machinery etc. The procedure for charge creation in respect of immovable is generally creation of equitable mortgage for which broad procedural guidelines as outlined below should be followed: Search Report of the property, which is supposed to be mortgaged, should be got done from panel advocate to ensure that the property is free from any encumbrance. Valuation should be got done from panel valuer. In case of companys property, proper resolution should be obtained to the effect of creating the mortgage. Resolution 293 (i)(a) of the Company Act should also be verfied. Undertaking and declaration to be executed by the borrower. Letter from other banks (in case of multiple banking) for ceding pari-passu charge. Authority letter to the major lender to create security on our behalf and hold the title deeds. Letter ceding prior charge (wherever applicable) Writing of Memorandum of Entry (MOE) and proper records thereof. E-Filing of charge with ROC. Safe Custody of Documents All documents received should be entered in the register under the signature of borrower and banker. All security documents obtained from the borrowers should be held in cloth-lined / plastic Security Dockets only. Separate dockets should preferably be maintained for each facility of the borrower. The following information should appear on the outer cover: Name of the Account Account No. Type of Facility Limit Date of Sanction

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Copy of the Sanction Advice received from sanctioning authorities should also be kept attached to the security documents and placed in the Security Docket. Copies of advice/s conveying any subsequent changes in the terms of sanction should also be kept in the same docket. This will facilitate verification of the documents without difficulty. In respect of advances to limited companies, the certified copy of the companys resolution, a copy of relevant Form-8 acknowledged by the Registrar of Companies, along with the filing fee receipt should be kept with the respective security documents. . The original receipt should therefore be obtained and kept along with the documents. REGISTRATION OF CHARGES WITH THE REGISTRAR OF COMPANIES E-Filing E-filing is the online filing of various documents with Registrar of Companies (ROC) from any place, so as to avoid the hardship involved in physical filing. An e-form is nothing but a reengineered conventional form, and represents a document in electronic format for filing with MCA authorities through the Internet. The Ministry of Company Affairs has introduced the MCA21 e-Governance programme with a view to providing all services relating to ROC offices on-line in e-Governance mode. All filings from September 16, 2006 are being done only under the Digital Signatures of the authorised persons of the bank and the companies (MD/ Director/ Company Secretary as the case may be). There are various channels available to bankers to enable them to do the statutory filing with ROC offices across the country. The services available under MCA 21 are as under: Registration and incorporation of new companies. Filing of Annual Returns and Balance Sheet Filing of forms for change of names/address/Directors details Registration and verification of charges Inspection of documents Applications for various statutory services from MCA. The detailed information can be had on the internet site www.mca.gov.in

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Search of Files of the Company Advances to limited companies should be made only after a search of the files of the company in the Office of the Registrar of Companies (ROC) is taken to make sure that there is no outstanding charge on the security proposed to be given to the Bank. Time-limit for Registration Registration or modification of a change or mortgage should be effected within the prescribed time limit of 30 days from the date of creation of charge. Failure to comply with this requirement makes the charge void against the liquidator or any other creditor of the company. The relevant date is not the date when the advance is disbursed, but the date when the charge is created, i.e., the date of the document of charge. Registration of Modification of Charge Whenever terms, conditions, extent, or operation of any charge registered under Section 125 are modified pursuant to Section 135 of Companies Act, 1956, the particulars of such modification must also be filed with the Registrar of Companies in prescribed Form no.8. Registration of Complete Satisfaction of Charge For registration of satisfaction of charge pursuant to Section 138 of the Companies Act, 1956, Form no.17 (Memorandum of Complete Satisfaction of Charge) prescribed by the Rules under the Act should be filed by the borrower company within 30 days of the payment or satisfaction of the charge. Registrar of Companies, on receipt of intimation from a borrower of the payment or satisfaction in full of any charge, sends a notice to the holder to the charge calling to show cause within 14 days as to why payment of satisfaction should not be recorded. If no cause is shown within the prescribed time limit, the Registrar orders recording a Memorandum of Satisfaction. Where a notice of payment or satisfaction of a charge in full is received from the Registrar of Companies, it should be immediately ascertained whether or not the liability to which the charge pertains has actually been extinguished in full. If it is found that the liability has not been extinguished in full, a proper objection must be filed with the Registrar of Companies

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within the prescribed period. Particular care should be exercised in cases where the security in one account also constitutes security for other accounts. In such cases, a nominal debit balance should be retained in the account which is sought to be re-paid to keep the account running and to keep the security in force and no satisfaction of charge should be allowed to be registered until all advances covered by the same security are paid off. *****

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CHAPTER 13
INSURANCE OF THE ASSETS It is essential that adequate insurance cover is available for the prime security as well as collateral security offered, for an advance prior to granting the advance or at the time of disbursement of the amount of advance. Goods or property pledged, hypothecated or mortgaged to the Bank either as a prime or collateral security must be fully covered by appropriate theft, fire, strike and riot insurance. Scrutiny of Insurance Policies Insurance polices obtained for credit facilities must be scrutinised thoroughly and discrepancies, if any, should be got corrected from the insurance company under their authentication. Particular attention should be given to the following aspects: 1. Name: The policy should be in the joint names of IDBI Bank Ltd. and the borrower. 2. Mortgage Clause: All policies must bear a Bank Mortgage Clause. 3. Risk Coverage: Policy should mention coverage of all those risks, which are stipulated for the security charged to the Bank. 4. Amount: The amount of the insurance should cover the value of the entire security charged to the Bank. 5. Period of Insurance: Expiry date of the policy should be verified to ensure that the policy is current. Appropriate diary notes should be taken in all cases to renew the insurance policy in good time. 6. Location: Location of the godowns where goods are stored or of the property charged to the Bank should be correctly and precisely mentioned in the policy. 7. Description of Goods: Description of the goods or property appearing in the insurance policy should correspond with the description on documents creating the charge i.e. agreement of hypothecation / pledge. 8. Warranties and Conditions: All warranties and conditions on the policy should be scrutinised to ensure that nothing is permitted which will invalidate any claim arising under the policy due to non-fulfillment or non-compliance of any warranty or condition. It should be ensured that any changes of location or alteration of hazards or any other material change are intimated to the insurance company. In case of 157 of 203

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specific mention of certain conditions / warranties, it should be ensured that these are complied with by the borrower. A letter should be obtained from the borrower that they observe the terms and conditions spelt out in these warranties. 9. Storage of Goods: Terms of the policy should be scrutinised to ensure that the method of storage of goods is not likely to create any breach of warranties. Renewal of Policies It should be ensured that insurance policies held in all advance accounts are renewed in time. Borrower should be advised to arrange to renew the policy well in time before the expiry date. In case the borrower fails to renew the insurance cover in good time before the expiry of the policy, it is advisable to pay the premium direct to the insurance company with intimation to the borrower in writing and debit the account of the borrower before the date of expiry of the existing insurance policy. Where necessary, an undertaking should be obtained from the borrower authorising the Bank to arrange renewal of insurance cover and to debit the premium amount to their account. Steps in the Event of a Claim As soon as there is intimation about fire, riot, etc., at the place where the goods are stored, the Branch should get in touch with the borrower and the insurance company for early settlement of the claim. In the meantime, the insurance company should be advised that the Bank has insurable interest in the goods and property damaged or destroyed and that the claim amount should be sent to the Bank directly for the credit of borrowers account.

*****

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CHAPTER 14
MONITORING OF WORKING CAPITAL ADVANCES A sound monitoring system serves as a back-up mechanism for testing various assumptions made at the time of assessment of credit needs of the borrowers. It also enables the Bank to evaluate the performance of the assisted unit and its financial health, to anticipate and foresee problems and prospects and to identify danger signals with a view to initiate timely and appropriate corrective measures. Disbursement Disbursement of any advance (credit facility) should be effected only after: Sanction of facility by the appropriate authority. Proper execution of security documents by borrower / guarantor and their checking and verification. Compliance of all terms of sanction including creation and registration of charge over securities, where applicable. Completion of account opening formalities, where applicable. Necessary accounts may be opened and limit set-up in the Finacle system (Core Banking Software) using appropriate menus by entry and checking of relevant particulars. It is the primary responsibility of the branch to monitor the end-use of funds, to ensure that the funds borrowed are used for the purpose for which they are borrowed and there is no diversion of funds. Contribution of appropriate margin by the borrower, as prescribed, should also be ensured before disbursement. In respect of advances against inventory, stock statement should be obtained and verified. After proper verification of stocks, permissible drawing power may be worked out. Similarly, in case of advance against book debts, a detailed statement of book debts outstanding for not more than six months may be obtained and drawing power worked out.

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In case of cash credit account, there should be close monitoring of the operations for e.g. in a cash credit limit against hypothecation of stocks, if cheques are issued for purposes other than purchase of stocks / inputs, due enquiry must be made. A careful watch should be kept on cash withdrawals and the Branch should ensure that such withdrawals are genuinely required for bonafide purpose which is in conformity with the purpose for which the limits are sanctioned. Stock Statements Statements of stocks hypothecated to the Bank should be obtained in the prescribed form at stipulated intervals as per the terms of sanction. The stock statements are, sometimes, given by the borrowers on their letter heads. In such cases, they must declare in the statement that the goods are their property or they have such interest in them as entitles them to hypothecate the goods to the Bank and that the goods are not subject to any lien, claim or charge of any sort. Periodical stock statements, when received, must be scrutinised to ensure, in particular, that: i. ii. iii. iv. v. vi. vii. viii. They are signed by the person/s authorised to operate on the account. The composition and age of the hypothecated stocks are satisfactory. Pledged goods, if any, are not included in the statement of stocks hypothecated. The valuation of stocks conforms to the market price or cost price, whichever is lower. The stocks paid for is arrived at by deducting the Sundry/Trade Creditors for goods and stocks earmarked for Letter of Credits etc. The balance in the account as on the date of statement is within the drawing limit. Description of goods given in the stock statement, their value and the location of godown where these are stored are as indicated in the insurance policy. On receipt of the stock statement, if it is found that outstanding in the account is more than the available drawing limit, penal rate should be charged on excess drawings as per the guidelines in this regard. ix. The borrower should be advised suitably with regard to the composition of current assets. While renewing the advance against goods, the value of stocks shown in the borrowers Balance Sheet should be compared with that shown in the stock statement as at the date of the Balance Sheet or as at a date as near thereto as

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possible. This comparison would indicate whether or not the borrower is over-valuing the stock for the purpose of stock statements. If the stock statement figure is considerably higher than the Balance Sheet figure, clarification should be sought from the borrower. Statement of Book Debts Statements of book debts should be obtained at regular intervals as per the periodicity (monthly or quarterly) mentioned in the relative Credit Proposal and stipulated in the terms of sanction. In addition to the periodical statements of book debts, half-yearly statements of book debts should be obtained as on 30th September and 31st March along with declaration as per the specimen given in Appendix - XVI The statements of book debts submitted by the borrower should be scrutinised thoroughly. Particular attention should be given to the following aspects: a) b) The composition and age of book debts should be in accordance with the terms of sanction. The amount of advance or deposits received from the debtors or commission, discount or credit balances due to the debtors should be deducted from the figures of debts shown in the statement. In other words, the advance should be considered only against net realisable value of the eligible book debts declared in the statement. c) Statement of book debts should be certified by the Chartered Accountant periodically, wherever, stipulated in the terms of sanction. Scrutiny of Financial Statements / Returns and Other Information Borrowers are required to periodically submit to the Bank financial statements and other information including QIS related to the working of the unit and meeting statutory requirements. Timely receipt of these statements / returns should be ensured. The statements / returns on receipt, should be scrutinised to evaluate performance vis--vis projections and stipulations of sanction. Material unsatisfactory variations / deviations observed, if any should be reported to Central Office along with steps proposed / initiated. These returns should be examined from the point of view of: a) Testing the hypothesis on which the lending decision was taken.

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b) Whether the borrowers operations justify continued repose of faith and that there is no cause of anxiety. The QIS returns mainly consist of: Description Form I- Statement of Current Assets and Current Liabilities- Projections Form Assets Actuals Form IIIPart A- Operating Statement Part B- Funds Flow Statement Both Actuals and Projections The QIS statements containing past performance, i.e. Form II and Form III Actuals should be certified by the borrower's statutory auditors. This should be ensured in cases where the borrowing unit deals exclusively with us. In the cases of consortium accounts, the matter may be placed before consortium leader, for adoption of this practice. The format of the QIS-I/II/III is furnished in the Appendix XVII. Compliance of Terms and Conditions and EODs/Covenants Branch has to ensure that all the sanction terms and conditions stipulated by the Sanctioning Authority is complied with. Special care should be taken to check the breach of EOD (Event of default) and other covenants. If the branch finds any deviation, matter should be brought to the notice of the Sanctioning Authority along with necessary account strategy and directions should be obtained. Monitoring Operations in the Account The accounts of the borrower with the Bank should be monitored closely to ensure that: a) b) The account is operated within the limit. The account is used for genuine transactions for which the limits are granted and that there is no diversion of funds or any other undesirable features. Particular care should be taken in case of cash credit / overdrafts accounts to ensure that the Half Yearly Two months from the commencement of the half year to which it relates. IIStatement Current of Current Quarterly Periodicity Quarterly One Date of Submission month before the commencement of the quarter to which it relates. Within six months after the close of the quarter to which it relates. and Liabilities-

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drawings are strictly used for the purpose for which the credit facilities are sanctioned and no diversion of funds for investment in associate concern or acquisition of fixed assets/ acquisition of shares / debentures is allowed. c) d) e) Turnover in the account is commensurate with the projected sales and operative / financial statements are submitted by the borrower in time. Appropriate interest (including penal interest, where applicable) and other charges are debited to the accounts promptly. The borrower has paid the interest amount and instalments due, wherever applicable. Periodic Inspections Purpose and Coverage It should be ensured by way of periodic inspection that the securities charged to the Bank continue to be adequate, marketable and realisable. Apart from physical verification of the assets, as per the guidelines given in this regard, the inspection should also cover other equally important aspects like: a) b) c) Inspection of factory premises, production process, etc. Inspection of books of accounts, accounting procedures and system of financial planning and control. Discussions with the owners/key officials on issues like overall performance, problems and prospects of the unit, market trends, competition, quality and manufacturing process etc. d) Up-to-date payment/compliance of tax, rent, electricity, water charges and other statutory dues/requirements. Stock Inspection In all accounts where advances have been granted for trading purposes or for working capital, inspection of stock should be carried out quarterly or more frequently where necessary. As far as possible, inspection ought to be a surprise and should not be known in advance or anticipated by the borrower. The Branch Head should personally devise a system to ensure regular receipt of stock statements and inspection of stocks as per the terms of sanction. Date of receipt of stock

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statements and related details should be entered into the account records. Similarly, the date on which inspection was carried out and by whom should also be noted on records. Stock statements together with the Stock Inspection Reports of the inspecting official should be maintained in account-wise files. A format of stock and book debt statements given in Appendix XVIII. Where the stock statements are not submitted by the borrower as stipulated in the terms of sanction, measures should be taken such as charging penal rate of interest, freezing the account, etc., as per guidelines issued by Head Office from time to time. Suitable notice should be given to the borrower before adopting any severe measure in writing. Also a stock inspection should be carried out immediately. Before undertaking stock inspection, the Inspecting Official should glance through the borrowers account and get acquainted mainly regarding the turnover in the account for the relevant period. The official may also go through the latest sanctioned Credit Proposal and the terms of sanction. The inspection should not be mechanical and routine, but purposeful and critical. The danger signals detected during the course of inspection should not be taken casually. The borrower should be asked to explain the reasons and where warranted, suitable steps should be taken to protect the Banks security. Where serious irregularities such as inadequate stocks, inferior quality, old stocks, non-movement of stocks, etc., are noticed at the time of inspection of stocks, a special report should be sent to Head Office stating the irregularities and the steps taken /proposed by branch to protect the Banks interests. Often, constraints like very large stocks with many small items, sophisticated and technical nature of stocks, too short a time to undertake physical verification of stocks etc., impede a meaningful inspection. The guidelines set out below may be followed in this regard: i. Ascertain from the borrowers Stock Register / Records, the value of goods purchased during the period to which the stock statement relates and the value of goods sold during the period. ii. Ensure that the quality, quantity and the value appearing in the borrowers record agree with the statement of goods submitted by the borrower. Enquire into any variation between the two.

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iii. iv. The usual formula for valuation of stocks is cost (invoice/landed) price or market price, whichever is lower. Verify that the insurance cover held by the Bank is adequate for each godown or other location of the stock and the policy is current. Make a specific mention of this in the stock inspection report. v. Make appropriate enquiries / notes regarding the items which are old and not moving. If not satisfied with the reasons and in case of doubt whether the goods are saleable, inform the borrowers that no drawing limit would be allowed against such items. vi. vii. Besides verifying the stocks with the stock record, check, wherever necessary, with the records of Excise, production and despatch / delivery and tally the total stock. Make enquiries / obtain information about the borrower meeting the statutory liabilities such as Sales Tax, Provident Fund, Employees State Insurance contributions, payment of rent, power, water, fuel bills and dues of other creditors regularly. viii. ix. In case of a manufacturing unit, check whether it works to full capacity. If not, ascertain the reasons. Sometimes, the goods belonging to the borrower are held in godowns of thirdborrower, usually the processors. Ensure that such goods are properly stored and are adequately insured - their location correctly stated in the insurance policy. Ensure that the goods so declared by the borrower in the stock statement agree with the records maintained by the processors. x. Similarly, the borrowers engaged in processing, contracting and fabricating business may have with them goods of third borrower received for processing, fabrication etc. Ensure that the value of such goods is deducted from the total value of goods declared in the statement of stocks hypothecated, and such goods are kept distinctly and separate from the goods hypothecated to the Bank. xi. If the stocks are voluminous and assessment becomes difficult or where nature of stocks is technical, apart from monthly inspections, a detailed inspection may be carried out with the help of technical personnel or even by engaging stock auditor empanelled in the banks list outside consultants, quarterly or half - yearly, specially where the Banks stake is high. Outside consultants may be engaged by prior consultation with the borrower and after obtaining approval of Central Office. Consultancy charges should be recovered from the borrower.

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Inspection of Book Debts Inspection for advances against book debts should be carried out periodically as stipulated in the terms of sanction. The Agreement of Hypothecation of Book Debts to be obtained from the borrowers contains a clause that gives the Bank power of inspection of record of accounts of the borrowers. The purpose of inspection of book debts is to verify the items declared in statements of book debts submitted by the borrower to the Bank with the relative entries made in the records such as Debtors Record and Cash Book maintained by borrower. Inspecting official, apart from following the general guidelines given in respect of inspection of stocks, should examine the book debts to ascertain: If all debts are genuine - verify at random from invoices. Age of book debts - verify at random from invoices. There is no increase in overdue book debts- for example, book debts getting accumulated beyond 6 months - in relation to the sales of the period. For this, each months sales should be compared with book debts over a period of 3 to 6 months. The main parties on whom book debts are usually raised are of adequate worth. High value transactions to be verified for genuineness. Early Warning Signals Risk Minimisation Exercise It is to be noted that monitoring is essence in working capital financing. It helps in promptly identifying the signs of weakness developing in the account and initiate timely corrective action. Following are the indicative list of warning signals in the accounts: a. In financial statements Failure to get the financial statements on time Slow down in collection of receivables Deterioration / imbalance in cash position Increase in amount / percentage of accounts receivables Increase sharp in inventory Slowdown in inventory turnover Decline in current assets as percentage of total assets Deterioration in the Working Capital position Marked change in the mix of trading assets

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Increase in the percentage of fixed assets, unplanned acquisition / additions to the fixed assets Concentration on non-current assets / intangible assets Increase in the long term debt Changes in the balance sheet structure Qualified Auditors report Change in accounting year / system Under-utilisation of capacity Revaluation of fixed assets b. In Income Statement Declining sales / sharp increase in sales Major gap between gross/net sales, rising cost and narrowing margins, rising sales and falling profits Rising level of bad debts, disproportionate increase in overheads operating losses. c. In Receivables Ageing receivables, changes in credit portfolio, extended terms Replacement of accounts receivables with notes receivables Concentration of sales Compromise of accounts receivables Receivables from affiliated companies / subsidiaries. d. In Operations Frequent return of cheques deposited for credit into the account and/or cheques drawn on the account. Frequent return of bills discounted / purchased on behalf of the borrower. Larger and longer outstandings in the bill accounts. Longer period of credit allowed on sale documents negotiated through the Bank. Frequent requests for excess drawings by the borrower. Reduction in level of turnover in the account and/or outstanding balance in cash credit account remaining continuously at the maximum. Widening difference between outstandings and drawing power / sanctioned limit. Continuous irregularity in cash credit account. Attempt to divert sale proceeds through accounts with other banks and reduction in credit-summations in cash credit account.

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Inability to maintain stipulated margin on a continuous basis. Periodical interest debited remaining un-serviced. Failure to pay timely instalment of principal and interest on term loans. Financing capital expenditure out of funds provided for working capital purposes e. In general Non-submission by new borrower of No-objection Certificate from existing bankers in the case of takeover / additional finance. Opinion reports received from other banks are vague / non-committal about their experience with the borrower. Shortages in quantity of hypothecated goods. Over valuation of hypothecated goods in stock statements. Inferior quality of goods produced and/or unusually high frequency / quantity of return of goods from buyer. Value of hypothecated assets stated lower in insurance policies vis--vis values reported in stocks statements / balance sheet. Delay in first charge holders acceding to creation of second charge on fixed assets in favour of the Bank (possibly linking regularisation of their term loans to the creation of the charge). Complaints from suppliers of raw materials / water / power, etc. about nonpayment of bills and from buyers of finished goods about quality / after sales service, etc. Mismanagement, unethical or unfair practices indulged in by promoters. Low capacity utilisation. Profit fluctuations, downward trends in sales and stagnation or fall in profits followed by contraction in the share of market. Failure to pay statutory dues. A general decline in the related industry combined with many failures. Rapid turnover of key personnel. Existence of a large number of law suits against the company. Rapid expansion and too much diversification within a short time, or otherwise and/or dominated by one man / few individuals. Sudden / frequent changes in management whether professional or otherwise and/or dominated by one man / few individuals. Diversion of funds for purposes other than running the unit.

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Any major change in the shareholdings. Decrease in working capital on account of: Increase in debtors and particularly dues from selling agents. Increase in creditors. Increase in inventories, which may include large number of slow or non-moving items. Diversion of funds It is to be ensured that drawals from Cash Credit / Overdraft accounts are strictly for the purpose for which the credit limits are sanctioned. There should be no diversion of Working Capital Finance for acquisition of fixed assets, investment in associate Companies / subsidiaries and acquisition of shares, debentures, units of UTI and other Mutual Funds and other investments in the capital market Wherever the current ratio is comfortable, investment in allied Companies for setting up new projects are also for modernization / expansion etc can be permitted by the sanctioning authority subject to the borrower obtaining prior permission from the bank. investments need not be considered as diversion of working capital facility. Stock Audit by Panel Valuer In terms of Banks extant guidelines, inspection of stocks hypothecated or pledged to the bank and verification of book debts charged to the bank are to be carried out at periodic intervals. The inspections as above are to be conducted as per the periodicity stipulated in the sanction. In addition to the above, Bank also gets the Stock / Book Debts audited in specific cases, wherever warranted. With the rise in number of borrowers financed working capital facilities, the bank propose to adopt policy in respect of Stock & receivable audit on following broad parameter: Applicability 1. Stock Audit (i.e. covering the period 1st April to 31st March every year), once in a year shall be applicable in accounts sanctioned working capital facilities, as under: Such

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a. Accounts rated A having Fund-based working capital limits (including Usance L/C limits) Rs. 25.00 crore and above. b. Accounts rated BBB having Fund-based working capital limits (including Usance L/C limits) Rs. 10.00 crore and above. c. Accounts rated below BBB having Fund-based working capital limits (including Usance L/C limits) Rs. 5.00 Crores & above. d. Accounts classified as NPA for the first time e. All accounts wherever warranted by the dealing branch or as directed by Credit Committee / Zonal Committee. 2. In case of Multiple Banking and Consortium Accounts where our bank is not leader, Stock/Book debts audit arranged by lead bank / any other bank may be relied upon and copy of such Stock / Book Debt Audit be obtained & scrutinized by the Credmin officials & RM / BH / Dealing Officer. 3. 4. Stock Audit shall include verification / authentication of book debts, wherever applicable. The above guidelines specify the type of accounts where stock audit is necessary but does not prohibit the stock audit in other cases if warranted. The stock audit is advisable in the following circumstances, to mitigate associated risks:a. Accounts having overdues in term loans or other accounts, where banks stake is high. b. Accounts where the case of cheque return / bills return unpaid / frequent (say more than 3 occasions in a month) overdrawals are high c. Accounts exhibiting evidence of pressure on the borrower from the creditors d. Where there are signs of stocks stagnating e. Wherever the borrower is irregular in submission of periodical stock statements / control returns f. Where there are grounds to suspect that the position of chargeable current assets indicated, may not be correct. g. Where there are too many qualifying remarks about stocks and receivables in the auditors report on the balance sheet of a borrower h. An errant borrower where stock audit is needed to supplement actions of the branch for recovery i. Any other valid reason such as mismanagement, heavy losses, lock-out, and strikes cases is referred to BIFR etc.

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5. The stock audit may not be necessary in following cases :a. Clients enjoying only project / term loan, pure LCBD, receivable buy out facilities/ other structured finance and only NFB facilities (except DA LC). b. Specifically waived by sanctioning authority 6. If in any case, waiver of Stock audit is required in any account, the request shall be submitted to sanctioning authority for appropriate decision. Eligibility criteria for appointment of Stock Auditor The appointment of the Stock Auditor shall be approved by Head - CRMG on recommendations of Head - Credit Administration, generally based on the following criteria: 1. The work of Stock Audit to be entrusted to the empanelled firm of Chartered Accountants / Cost Accountant with adequate experience of bank / company audit. Where no formal empanelment is there, the Credit Administration department shall appoint CA firm after satisfying about relevant experience of the firm. 2. 3. 4. 5. 6. The maximum number of stock audits per CA firm not to exceed 3 per annum. The Stock audit shall not be allotted to concurrent auditor of the branch where account is maintained The stock audit should not be entrusted to the same CA firm who has carried out stock audit in the immediate two preceding financial year. The stock auditor should not have any direct or indirect linkage / associations with the borrower company (e.g. internal audit, statutory audit, tax consultant etc.) Auditor to sign a Letter of Secrecy and Fidelity before taking up the assignment. Legal Department has been requested to draft a suitable letter. The Stock Auditor shall also give a declaration that he is not directly/indirectly related to the borrower company. Fees for Stock Audit 1. 2. The cost of audit i.e. Auditor fees & out of pocket expenses shall be borne by the borrower. The fees to be paid based on the companys turnover basis shall generally be restricted, as follows:

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Turnover of the company Upto Rs.100 crores Rs.100 crores to Rs.500 crores Above Rs.500 crores Fees to be paid to CA firm * Rs.15,000/Rs.20,000/Rs.25,000/-

(*) Excluding Service Tax and out of pocket reimbursement. Head Risk (CGMCRMG) may be authorized for variations in the fees to the extent 20% based on the criticality / nature of the audit, multiplicity of locations etc. Submission of the Audit Report The auditor shall submit the report within a week of conducting the audit, in a sealed envelope to the respective Credit Administration officials/Dealing Officer of the branch, after incorporating the gist of the discussions with the company management, wherever applicable. Since Code of Conduct does not permit the Auditor to part with the detailed workings, the Auditor is advised to preserve all the records for at least 5 years. A structured format of the report to be submitted by the Auditor is being drafted to ensure uniformity and to minimise omission of critical inputs. The Credmin officials/Dealing Officer shall scrutinize the same and shall immediately advise the shortcomings, if any to the Relationship Manager, Branch Head and Head - Credit Administration / CGM, before handing over the report to Relationship Manager and Branch Head / Dealing DGM. Actions to be taken on Stock Audit Report On receipt of audit report, the Relationship Manager of the account shall analyse the report and seek comments of client, wherever required. In any case maximum within 30 days from date of receipt of report, the concerned Relationship Manager / Dealing Officer through Branch Head / Regional Head / Zonal Head should submit their comments on action to HCB/ED and Risk Department for necessary action / closure of the report. In case of any significant and serious observations made in the report, the same should be put up to the respective Sanctioning Authority by the Branch. Wherever warranted, the Regional Heads/CGM will submit an ATR within a months time to the appropriate authority.

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Report on Stock Audit A memorandum encompassing the details viz. cases eligible for the Stock & Receivable Audit, cases where Stock & Receivable Auditor was appointed, Audit conducted, report submitted and analysed, submitted gist observations, if any, may be placed before the ICC by the respective Zonal Heads annually, in the month of May for the preceding Financial Year. An indicative list of the scope of stock audit and areas normally required to be covered by this exercise are given in Appendix - XIX The exact scope of the audit and areas of scrutiny may be prepared based on the nature and requirement of each account and should be communicated to the consultant engaged for the job. Revival Letters Documents executed by the borrowers and the guarantors (where applicable) should be kept in force by obtaining Revival Letters (Formats give in Appendix XX) form them. Revival Letters should be obtained once in two years, unless otherwise specified. Revival Letters should be stamped with revenue stamps of the same value as applicable to the promissory note. Confirmation of Balances Balance Confirmation Letters also constitute valid acknowledgement of liabilities and have the effect of postponing the period of limitation by 3 years from the date of such execution. Therefore, Balance Confirmation Letters, duly signed by the borrowers and the guarantors, should invariably be obtained as on 31st March of each year in all accounts, including Term Loans. Such Balance Confirmation Letters should be obtained in addition to Revival Letters *****

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Appendix XVI Specimen of Half yearly Statement of Book Debts from Borrower Place _______________ Date _______________ IDBI Ltd. _________________ Dear Sir, Re: Our Loan/Cash Credit Account - Balance Rs.______________ Debit Re: Statement of Book Debts hypothecated by us to the Bank We send herewith the list of debtors and the amounts due by them to us, on 30th September / 31st March 20_______. As appearing in our books and which debts are not more than ___________ months old and are hypothecated by us to you (details as per attached statement). We confirm that ALL book debts due by our debtors to us are hypothecated by us to you, although drawing limit will be allowed to us only against book debts not more than __________ months old. We hereby declare and certify as follows: That each of the debts listed is validly due to us and is good and recoverable in full in the usual and ordinary course of business. That the list does not include any debts which are bad and doubtful of recovery or for which there is any decree of any court, or any dispute or cause of action pending against the debtor/s. That the amount of each debts is the net balance i.e., the balance after deducting all amounts due by us to each of the debtors and after deducting all discounts, commissions, claims, set offs, etc. That each of the debts is free from any claim, lien, encumbrances, assignments, charges, etc., except the charge created in favour of the Bank.

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That each of the debts arose out of bona fide transactions in the ordinary course of our business. That each of these debts is entered into proper books of accounts maintained by us in the ordinary course of business. That the aggregate realisable value of the book debts listed above, in the ordinary course of the business is at least equal to the total amount at which they are stated in this certificate. We are aware and acknowledge that it is on the faith and strength of this declaration of ours and other similar declarations made and to be made from time to time that this advance is granted and will be continued by the Bank. In order to verify our statement of particulars of books debts, the Bank is at liberty to inspect our books of accounts and/or to make extracts or copies thereof at any time at our expense and we hereby agree to accept as conclusive proof the result of such inspection as certified by any officer of the Bank. Yours faithfully, __________________ *****

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Appendix XVII QIS - 1 NAME OF CO : PERIOD : JUNE'00 - SEPT'00 A. Estimates for the current accounting year indicated in the annual plan: Production Gross Sales Net Sales B. Estimates for the ensuing quarter Production Gross Sales Net Sales C. Current Assets and Current Liabilities for the ensuing quarter :(Rs in lacs) Particulars Estimates Levels as per CMA Comments Current Assets 1. Raw Materials a. Imported Months' consumption b. Indigenous Mths' consumption 2. Stock in process Mths' cost of prod. 3.Finished Goods Mths' cost of sales 4 Receivables Domestic Mths' sales Exports Mths' sales 5. Advances to Raw Material Suppliers 6. Other Current Assets Total Current Assets 0 0 Current Liabilities 1. Short Term Borrowings 2. Creditors Mths purchases 3. Advances from Customers 0 0 4. Accrued Expenses 5. Statutory Liabilities 0 0 6. Other Current Liabilities 0 0 Total Current Liabilities 0 0 Current Ratio NWC 0 0 NOTES *****

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QIS - 2 NAME OF CO : PERIOD ENDING SEPT'00 A. Estimates for the current accounting year indicated in the annual plan : Production Gross Sales Net Sales -

B. Actual production / sales during the current accounting year (data for completed qtr) Production Gross Sales Net Sales -

C. Data relating to the latest completed quarter ended Sept'00 Production Gross Sales Net Sales D Current Assets and Current Liabilities for the latest completed quarter ending Sept'00 (Rs in lacs) Projections as Actuals for the per QIS-I quarter

Particulars

Variance

Current Assets 1. Raw Materials a. Imported Months' consumption b. Indigenous Mths' consumption 2. Stock in process Mths' cost of prod. 3.Finished Goods Mths' cost of sales

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4 Receivables Domestic Mths' sales Exports Mths' sales 5. Advances to Raw Material Suppliers 6. Other Current Assets Total Current Assets Current Liabilities 1. Short Term Borrowings 2. Creditors Mths' purchases 3. Advances from Customers 4. Accrued Expenses 5. Statutory Liabilities 6. Other Current Liabilities Total Current Liabilities Current Ratio NWC 0 0 0 0 0 0

*****

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QIS 3
The Company's Name: Half Yearly Information - Form III For Half Year Ended 31st March ______ (Rs. Lacs) Actual Estimates

Estimates

Actuals Unaudited

Estimates

1. Sales & other Operating Income 2. Less: Excise Duty 3. Net Sales (Item 1 - Item 2) 4. Cost Of Goods Sold a) Raw Materials consumption (incl store & spares) b) other spares c) power and fuel d) salary and wages e) other manfg expenses (incl depreciation) SUB TOTAL Add: opening stock WIP & Goods SUB Total less: Closing stock WIP & F Goods Total Cost Of Goods Sold 5. Gross Profit(item3 - item4) 6. Interest & other overheads 7. Other income/expenses net (+/-) 8. PBT (Item 5 - Item 6+7) Actual B/Sheet Estimates B/Sheet Estimates Actuals Unaudited Estimates

1) RESOURCES Profit before tax Depreciation Increase in capital Increase in subsidy increase in term liability (incl public deposits) Increase in other non current liability (Adv. From ISRO Project) Decrease in FA Decrease in Non current assets others (Preliminary Exp) Sub Total (A)

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COMPANY NAME : Analysis of QIS III (Half Year ending 31.3.99) Estimate Production (MT) Manufacturing Sales Trading Sales Total Fund Flow Analysis is as follows : Cash Profit Term Loan etc Long Term Fund Generated Less Long Term Uses : Repayment of term loan Fixed assets added Inc in Non Curr Assets Shortfall in Long Term Sources Short Term Fund Generated Bank Borrowings Decrease in Current assets Uses of Short Term Fund Increase in Current Assets Decrease in Current Liabilities Used for Long Term Uses ***** Actual Variance

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Appendix XVIII

Ref.: __________________________ The Manager IDBI Bank Ltd. Branch Dear Sirs, Stock and Book _______________ Debts Receivables

Date: ___________________

Statement

for

the

month

of

We are pleased to enclose herewith the Stock and Book Debts Receivables Statements for the month of ______________20_____ for your information and records. Further we hereby certify that: The quantity and quality of the above noted stock and other assets pledged / hypothecated to the Bank are true and that the said stock and assets are the absolute property of the company at its sole disposal and that the said stock and assets are not subject to any prior lien, claim, charge or encumbrances whatsoever. The stock and other assets above noted have been valued in the same manner and on the same basis and principles as adopted for the companys last audited and published accounts for the year ended________________. In the case of the stocks lying with outside processors, included hereinabove and charged to the Bank, the company is in possession of valid documents of title thereto and stocks are the absolute property of the company at its sole disposal and are not subject to any prior lien, claim, charge or encumbrances whatsoever.
In the case of stocks and assets shown as being in transit and charged to the Bank, the company is in possession of valid documents of title thereto and that the companys title to such stocks and assets is not subject to any prior liens, claims, charge or encumbrances whatsoever.

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Book debts hypothecated to the Bank shown above are good and do not include any book debts which in the companys opinion are bad or doubtful of recovery. No order of attachment or any notice or process from any Court or any other statutory authorities has been received by the company in respect of the whole or part of the said stocks and assets charged to the bank. The above noted stocks and assets (excepting those which are subject to fire hazards) are fully insured against fire and other risks in the joint name of the bank(s) and the company, as per statement of insurance policies attached and that all the conditions and warranties contained in the insurance policies have been complied with and the said policies are valid and enforceable. The particulars of stocks and assets and all the other information furnished hereinabove have been taken from and are in agreement with the companys books of accounts maintained in the normal course of business and or other books and records maintained in the normal course of business and or other books and records maintained in accordance with statutory or other requirements. Yours faithfully, for __________________

Authorised Signatory

NAME OF COMPANY PROPOSED FORMAT FOR STOCK STATEMENT (TO BE SUBMITTED BEFORE 7TH OF EVERY MONTH) 1 NAME OF UNIT 2 ADDRESS OF UNIT: REGD. OFFICE ADDRESS FACTORY ADDRESS 3 DATE OF STOCK STMT : (Please give exact date of stock statement) 4 DETAILS OF STOCKS
(Amount in Rs.)

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I. RAW MATERIALS (Imported / Indigenous) NAME OF RM OPENING STOCK ADD : PURCHASES LESS : ISSUED CL. STOCK RATE VALUE MARGIN NET VALUE

List all materials item-wise

A B C Category Category Category 100% 50% 10% Total Summary

The value of materials should be taken as market value of actual cost, whichever is less. ADD DETAILS OF STOCKS RECEIVED UNDER L/C ALSO
II. STOCK IN PROCESS
NAME OPENING STOCK INCREASE DECREASE CL. STOCK RATE MKT. VALUE MARGIN NET VALUE

III. FINISHED GOODS

NAME OF FG OPENING ADDITIONS DESPATCHES STOCK CL. STOCK RATE MKT. VALUE MARGIN NET VALUE

TOTAL OF ALL STOCKS ELIGIBLE FOR DR.POWER STATEMENT OF DEBTORS

NAME OF DEBTOR O/S AS PER LAST STMT. BILLS RAISED DURING MONTH PAYMENT RECD DURING MONTH RETURN / NET UPTO 90 DAYS ABOVE 90 DAYS ABOVE 6 MONTHS REJECTION BALANCE

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ELIGIBLE DEBTORS LESS : MARGIN NET VALUE 5 MONTH-END O/S AS PER BOOKS OF CONSORTIUM BANKS (RS. IN LACS) BANK IDBI BANK XYZ BANK 6 TOTAL COLLECTIONS DURING THE MONTH DEPOSITED ACCOUNT 7 POSITION OF INSURANCE POLICY INSUR.CO. NO. AMT. INSURED DETAILS / TYPE OF STOCK COVERED RISKS COVERED EXPIRY DATE IN CASH CREDIT CASH CREDIT WCDL L/C

SALES DATA

DURING PREVIOUS MONTH

CUMULATIVE FIGURE FOR YEAR

SALES PURCHASES CREDITORS RECEIVED 9 UNDER L/C OTHERS TOTAL FOR THE MONTH IN WHICH STOCK STATEMENT AVERAGE LEVEL UPTO IS SENT THE CURRENT MONTH FOR GOODS

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10 CERTIFICATE (To be signed by the CMD of the company)

I/We hereby certify that: a) The assets as per above details are our exclusive property and on one else other than IDBI Bank and XYZ Bank has any interest, lien or charges thereon. b) The quantiy of raw materials, stock-in-process and finished goods shown above represent the true and accurate stocking positing appearing as on the date of statement and are in conformity with our permanent books of accounts. c) The rates of valuation indicated above truly reflect the market rates or the controlled rates or the purchase value, whichever is lowest. d) All the above stocks are insured against the stipulated risks and have been duly insured for the full market value and the relative insurance policies are in force and are held by the lead banker of the consortium.

For (Name of Company)

Place : Date : Authorised Signatory *****

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Appendix XIX Scope of Stock Audit General Indicative list (To be specified need based on case to case basis) 1. Verification of stocks and information furnished in the stock statement of the company as on the date of latest stock statement with the books and other records including, inter alia, excise records of the company held at the factory / Head Office and commenting on their quantum, value, realisability, verification of the systems and procedures followed and state of records maintained by the company at its office and the factory in respect of inventory and receivables. The stocks will need to be examined in terms of good for recovery and doubtful of recovery. 2. Verification of the system of valuation of stocks adopted by the company for drawing up the stock statements, with specific reference to the reasonableness or otherwise of valuation, which shall be commented upon in detail. 3. Physical verification of inventories including consignment stocks / stocks received on job work basis with reference to the books of the company and cross verification with reference to the stock levels at the beginning of the accounting year in relation to the activity levels at the factory and purchased during the period. The stocks of raw materials and furnished goods may be verified with reference to excise records also. 4. The correctness of valuation and physical quantity of semi-finished goods shown in the stock statements may be specifically commented upon. Verification of Book-debts. Detailed comments on their quality and realisability may be furnished together with aging analysis. 5. 6. Receivables not connected to the operations of the company will have to be commented upon specifically. Slow moving / obsolete stock details may be furnished, together with values. Sales (Domestic / Export) routed through companys sister concerns if any and the realisability of the dues from them. Further, group company transactions / dealings which have a bearing on the net worth, profitability and liquidity of the company are to be examined in detail. 7. 8. Comments on investments made by the company, if any, for expansion / diversification / acquisition of properties and source of funds for such investment. Adequacy of insurance coverage of inventories and fixed assets is to be examined and commented upon.

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9. Physical verification of inventories of press tools and dies, stores and spares shown in stock statement and examination of correctness of their value and reasonableness of the quantities held in relation to the size of operations. 10. The aspect of financing the inventories of press tools and dies and current assets may be examined with respect to the nature of expenses incurred on manufacturing these items, consumption patterns and obsolescence. 11. Detailed verification of inventories / book debts and advances written off as on the date of last audited balance sheet and comments on the actual position thereof as on date, indicating realisation, if any, under each head between the date of writing off and now. Comments on nature and quantum of advances to sister concerns written off, and reasonableness thereof. 12. 13. 14. 15. 16. 17. 18. 19. 20. Unhealthy accounting, practices noticed, if any, and any other aspect having a bearing on items mentioned above may be brought in the Report. Comments on accounting methods followed and validation of the same with respect to the Banks exposure. Comments on the quantum of scrap generated in the operations and reasonableness of the valuation / accounting thereof. Comments on the quantum of job work placed with the sister / associated concern and reasonableness of the payments made. Inter Corporate links with sister concern and the nature and quantum of inter locking of funds. Evaluation of companys MIS / MCS procedures in detail. A detailed report with respect to the companys current financial status / statements on the basis of the last audited Balance Sheet and subsequent provisional accounts. Any other matter of relevance to the Bank which may arise during the course of the audit. Systems followed by the company to avail bill finance. *****

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Appendix XX Specimen of Revival Letters To IDBI Ltd. (Branch Address) Acknowledgement of Debt and Confirmation of Security We, _________________________ (the Borrower) and _________________ (the Guarantors) refer to the various credit facilities granted to us by IDBI (the Bank) with a total limit of up to Rs.__________________ (Rupees _____________________ only) in terms of Facilities Agreement for Overall Limit dated ____________ and further documents executed by us pursuant thereto as stated below: 1. 2. 3. We do hereby confirm that all the above documents including Security Documents executed by us in favour of the Bank in respect of such facilities are subsisting, valid and effective and are fully enforceable against us. Further, we acknowledge our indebtedness to the Bank to be as follows as on date: Facility Balance Outstanding as on Sr. ___________ No. 1 2 We do hereby acknowledge for the purpose of section 18 of the Indian Limitation Act, 1963 and in order to preclude any question being raised on limitation regarding our liability to your Bank and the Member Banks for the payment of the outstanding amounts in respect of the present as well as the future indebtedness and liabilities under the said Cash Credit Account(s) or other Account(s) together with interest, compound interest, additional interest, liquidated damages, costs, charges, expenses and other moneys in terms of the said Working Capital Consortium Agreement, our liability shall remain in full force with all relative securities, agreements and obligations as mentioned therein. Dated: Place: Common Seal of _____________________ is hereunto affixed pursuant to the resolution passed in a duly conveyed meeting of its Board of Directors held on ________________ in the presence of ____________________________ and __________________________, Company Secretary of the Company.

For and on behalf of __________

Authorised Signatory (Name & Designation) Guarantor(s) (Name & Signature)

*****

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CHAPTER 15
INCOME RECOGNITION AND ASSET CLASSIFICATION (IRAC) NORMS In order to reflect a bank's actual financial health in its balance sheet and as per the recommendations made by the Committee on Financial System (Chairman Shri M. Narasimham), the Reserve Bank has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the bank so as to move towards greater consistency and transparency in the published accounts. Income Recognition The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become 'overdue' and thereby NPA, the interest on such advances should not be taken to income account unless the interest has been realised.

Definitions of Nonperforming Assets An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.

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A nonperforming asset (NPA) is a loan or an advance where; i. ii. iii. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, the account remains out of order Overdraft/Cash Credit (OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. Out of Order' status An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. Overdue Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. Reversal of Income on Accounts Becoming NPAs as indicated below in respect of an

a)

If any advance including bills purchased and discounted becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This

will apply to Government guaranteed accounts also.

b) In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

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Interest Application There is no objection to the banks using their own discretion in debiting interest to an NPA account taking thesame to Interest Suspense Account or maintaining only a record of such interest in proforma accounts. Appropriation of recovery in NPA I. Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/additional credit facilities sanctioned to the borrower concerned. II. In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Broad Guidelines for Classification of Assets Basic Considerations a) Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and extent of dependence on collateral security for realisation of dues. b) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. c) Accounts with temporary deficiencies The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-

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renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: i. Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. ii. Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA. d) Asset Classification to be borrower-wise and not facility-wise i. It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. ii. If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrowers principal operating

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account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. e) Accounts where there is erosion in the value of security/frauds committed by borrowers In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate. a) Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. b) If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank. f) Advances against Term Deposits, NSCs KVP/IVP etc. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. g) Accounts regularized near about the balance sheet date. The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. Inother genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status.

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h) Advances under consortium arrangements. Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.

Asset Classification and provisioning The asset classification and provisioning based on the classification should be done as under: Classification Standard Assets Criteria Standard Asset is one, which does not disclose any problems and which does not carry more than normal risk attached to the business. A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months Provision SME sectors at 0.25%. Other Corporate advances 0.40%

Sub-standard Assets

General Provision of 10% on total outstanding without making any allowance for securities available and ECGC Guarantee cover. The unsecured exposure would attract additional provision of 10% i.e. a total of 20% on the outstanding balance.

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Classification Doubtful Assets Criteria An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months Provision 100% of the outstanding to which the advance is not covered by the realisable value of the security. With regard to the secured portion, provision may be made on the following basis: Period for which Provision advance has requirement remained in (%) doubtful category Up to 1 year 20 1 to 3 years 30 More than 3 years 100 A loss asset is one where 100% of the outstanding. loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. *****

Loss Assets

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CHAPTER 16 RENEWAL OF CREDIT FACILITIES All credit facilities, other than ad-hoc guarantees / letters of credit, are required to be renewed annually. The Annual Renewal exercise gives the Bank an opportunity mainly to assess: i. ii. iii. iv. v. vi. vii. The performance of the borrowers business activity. How well and effectively the borrowed funds were utilised. The position of the Banks security. The borrowers position with regard to plough back of profits. Whether the limits are appropriate. Whether the operations of the borrower reveal any signs of incipient sickness and if so, what corrective steps can be taken. To validate the assumption under sanction.

It may thus be observed that timely annual renewal is an important step in the follow-up, supervision and administration of credit. Non renewal / non review of an account at laid down periodicity is considered as an unauthorised exposure. Further non renewal beyond 90 days (exceptionally with justified reason 180 days) from the due date shall cause the account to be treated irregular and IRAC norms. Dealing officers shall, therefore, ensure timely renewals. Process and Format The renewal should be carried out in the Banks Credit Proposal form used for sanction of credit facilities. Renewal / Review Credit proposal should be prepared in the same manner as for original sanction and put up to the Sanctioning Authority for renewal proposal should also accompany the Credmin Review Sheet. Format of the Credmin Review Sheet is as per Appendix XXI. The exercise with regard to renewal of credit facilities should be started sufficiently early, say in the tenth month after the month of sanction. For this purpose, a due date record may be maintained to ascertain the Credit Proposals falling due for renewal. This record should be up-dated as and when Credit Proposals are received duly sanctioned / renewed. The

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Branch Head should closely monitor the renewal position. In respect of proposals falling due for renewal in a particular month, letters [specimen as per Appendix XXII should be sent to the concerned borrowers at least two months before the due date for renewal, calling upon them to furnish all particulars / documents / financial papers necessary for review of the facilities. Receipt of information / replies from the borrowers should be kept track of. The intention is that no credit facility should be allowed to become overdue for whatever reason. While it is not the intention to stop all operations in overdue credit facilities, it should be brought to the notice of all borrowers whose facilities are overdue that the Bank may be compelled to suspend all withdrawals from their account if they do not comply with the Banks requirements. If the borrower does not co-operate with the Bank in submitting the required documents, despite follow-up, branch shall take steps to suspend the operations in the account and charge penal interest over the stipulated rate on such overdue account, as per the guidelines in this regard.

*****

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APPENDIX XXI

CREDMIN REVIEW SHEET

BRANCH NAME OF THE CLIENT CLIENT ID LINE OF ACTIVITY SECTOR BANKING ARRANGEMENT IF CONSORTIUM DATE OF LAST SANCTION SANCTIONED BY Comments on Conduct of Account Particulars Interest servicing Devolvement of LCs (No (% of total), amount and days within which regularized) Overdues / Non-regularized TODs Payment of Inward / Outward Bills BGs invoked, if any Utilisation of limits Facility (please list out all facilities provided) Cash Credit STL Working Capital Demand Lona LC / BG / Buyers Credit LER Forwards LER - Derivatives Total Limit Limit Average Utilisation (Rs. in Lacs) In %age terms Remarks PRIORITY / NON-PRIORITY SOLE / MULTIPLE / CONSORTIUM LEADER OUR SHARE RATING

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Comments on Excess Drawings / TODs and their regularization Excess/TODs From To Reasons and Comments on Regularisation

Bills History (including LCs) (Rs. in Lacs) Particulars Export documents Purchased / Thruput Delayed realization Negotiated / Discounted Export docs sent on collection basis Import DC's Opened Import Bills (Not under DC) Submission of Financial Data Name of Statement Stock Statement Quarterly results & MIS QIS / FFRs Branch Actions Security Creation and Documentation Facility List out all facilities provided Details record Details of Pending Documents (including Underlyings for Derivative Deals) of Documents on Security Stipulated Regular / Irregular Last Report Received Remarks

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EOD Monitoring EODs stipulated Triggered, if any as per audited B/S as on __________ Comments on action taken by Branch & CO

Insurance Assets covered Amount in INR Crores Value of assets (Peak) Risks covered Deviations from sanction, if any Insurance Validity Date

Comments on Inspection done by the Branch Date of last Inspection Inspection Frequency Carried out by Comments in brief

Exchange of information with Multiple Banks and Consortium Banks (Comments in brief)

Total Summations in the Account in the Financial Year

Debit

Credit

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Audit remarks Audit Internal Concurrent RBI / LFAR Non-compliance of any other stipulated Terms and conditions Stipulations Reasons for Non compliance Auditors remarks Branch comments

Ratification required for

Details of Break-clause to be reviewed

Signature Name Designation Date Credmin Relationship Manager Branch Head

*****

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Appendix XXII Specimen of Letter to the Borrower Calling for Information for Renewal / Review of the Facilities Ref. _______________ To, IDBI Ltd. __________________ Branch Dear Sir/s, Re: Your Cash Credit/Bills Purchased Limit of Rs.__________________/The captioned facility was sanctioned to you on _____________, subject to review during the month of __________. 2. To enable us to review the facility, please let us have the following documents/information. a) A copy each of your latest (audited) Balance Sheet and Profit & Loss Account, together with all schedules. b) Two copies of enclosed C.A./C.M.A. forms duly filled in and signed by you. c) A copy of the latest wealth tax/income tax returns of firm/company and its Partners/Directors. d) A copy of the latest Sale Tax Assessment Order. e) Certified copies of the licenses, renewed during the past one year. f) Month-wise details of sales and purchases made from _________ till date. Date _____________

3. Please pay your urgent and personal attention to this matter and let us have the above documents, as early as possible, but in any case within one month of the date of this communication. 4. If we do not receive any response from you within one moth from the date hereof, we will be reluctantly compelled to treat your advance as overdue and levy an additional overdue interest of 2% p.a. over and above the normal rate of interest, with effect from _____________. We seek your co-operation. Yours faithfully, Branch Head

*****

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Notes / Updations

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