Staff Training Centre, Bhopal

Credit Program for Officers Level II

10.11.2014 15.11.2014

Coordinators: Mr. Pushkar K Sinha

MR K L Batra

AIM i ASPIRE i ACHIVE

Index
Sl No

Topic

Page No

Scrutiny of Financial Statements

Formatting of Profit & Loss a/c

Ratio analysis

10

Cash & Fund flow statements

17

Working Capital Assessment FBF Method

29

Working Capital Assessment Cash Budget Method

34

Commercial Real Estate

35

Term Loan assessment Project finance

38

Consortium & Multiple banking

47

10

Debt Restructuring

50

11

Forex advances, LC mechanism, ECGC guidelines

65

12

Financial Derivatives

91

13

Treasury Management

94

14

CBS MENU OPTIONS :- ADVANCES

101

Disclaimer- This reading material has been prepared with utmost care. However the
participants are advised to refer to the Circulars and guidelines issued from time to time by
Central office and Administrative offices.

CLASSIFICATION OF CURRENT ASSETS & LIABILITIES

ASSETS:
Classified into 4 groups:
1.
2.
3.
4.

Current Assets
Other Non-current assets/Misc. Assets
Fixed Assets
Intangible Assets

Current Assets: Also called Liquid Assets/Circulating Assets/Floating Assets/Gross

Working Capital
Definition: Those assets which are reasonably expected to be converted into cash
during the operating cycle of the business. Assets however liquid which do not
form a part of operating cycle are not classified as current assets by bankers..
Three Categories:
Inventories (Stock-in-Trade)
Receivables (Trade Debts)
Other Current Assets
Examples:
Inventory:
a) Stock of rawmaterials on hand- indigenous, imported.
b) Stock of work-in-process (Semi finished goods)
c) Stock of finished goods on hand
d) Goods at stores and spares indigenous and imported
Receivables:
a) Sundry Debtors. (Trade Debts/Book Debts)
b) Bills Receivables (Bills accepted by Sundry Debtors.)
-

Inland Bills upto 6 months, including deferred receivables maturing

within one year (less reserve, for doubtful debts, less receivable
outstanding over six months, less due from sister concerns.

c) Export
Other Current Assets
a) Cash & Bank Balance
b) Investment
In Govt. & Trustee Securities (however, when investment in such
securities are made for long term purposes like Gratuity Fund,
Sinking Fund, they should be treated as ONCA)

 Investment in Fixed Deposits with Banks/MMFS/CPS/CD etc. (other

than long term) if they are encumbered/earmarked for known
liabilities they cannot be treated as CA)
Investment in quoted securities (if the investment is required for
/related to the business and is liquid or the securities are easily
marketable.
c)
Advance given to suppliers. for purchase of raw materials, stores, spares
and consumables items.
d)
e)
f)
g)
h)

Advance Tax payment (I.T) after adjusting reserves for taxation.

Advance recoverable in cash or kind.
Advance accrued on investments.
Pre-paid expenses
Cash margin on LG/LC

Other Non-Current Assets ( Miscellaneous Assets)

These assets cannot be included in Current assets as (i) as they are slow moving
(not readily realisable in cash) or as (ii) they are not acquired for normal
business purpose.
Examples:
i.
ii.
iii.
iv.
v.
vi.

vii.
viii.

Dead Inventory slow moving inventory obsolete items/slow-moving

items not readily realisable.
Deferred Receivables other than those maturing beyond/after one
year.
Amounts due from Associates/Subsidiaries/affiliates
Other loans and advances
Security Deposits Balance/Deposit with Govt.Dept./Statutory
Bodies/Tender Deposit irrespective of their maturity period.
Receivables not related to trade
a) Advance given to Staff members.
b) Advances given to directors, partners.
c) Advances given to companies not connected with business
d) Advance for purchase of fixed assets or advance to
supplier/contractor for capital expenses.
e) Investment in companies not related to trade.
Unquoted investments/Gratuity Fund/Sinking Fund for long term
purposes.
Other miscellaneous assets/CD etc.

Fixed Assets
Also known as Block Assets/Capital Assets/Capital Goods/Productive Assets/Tolls of Business

Definition: Assets which are acquired for long term use and are not meant for sale in the
normal course of business. They are least liquid.
Examples
i.
ii.
iii.
iv.
v.
vi.
vii.

Land (No depreciation is charged on land )

Building
Plant & Machinery
Furniture, fixtures & vehicles etc.
Construction awaiting completion
Other assets of long term nature.
Other fixed assets

Gross Block The total value of all fixed assets before depreciation is called Gross
Block.
Net Block Value of fixed assets after depreciation is called Net Block
Net Block = Gross Block Depreciation
Valuation of Fixed Assets = Fixed Assets are valued at original cost less depreciation.
Revaluation Where assets have been revalued the increase in their value due to
revaluation should be set off with revaluation reserve to make comparisons
meaningful.
Depreciation A company is free to charge depreciation on straight-line method (fixed
amount every year ) or written down value method (W.D.V.) ( i.e. reducing amount
year after year) or any other method. The depreciation amount in straight-line method
is higher compared to that in W.D.V. method. The income tax liability of the company
is calculated after providing depreciation in W.D.V. method at rates given in the I.T.
Act.
Intangible Assets (Fictitious Assets):
Definition: Assets which have no tangible existence (Physical existence) or certain
fictitious assets which are in fact capitalised expenses are classified as intangible
assets.
Examples:
i.
ii.
iii.

Good Will (value of reputation associated to a business)

Copyright (amount paid to the author to obtain copy right of a book)
Patents (amount paid towards obtaining patent over a new product)
5

iv.
v.
vi.
vii.
viii.
ix.
x.
xi.

Trade Mark
Franchise (Amount paid towards getting exclusive right for using a brand)
Preliminary expenses (Company formation expenses capitalised)
Deferred Revenue Expenditure
Debit Balance in profit and loss account (adverse profit & loss account)
Drawings by partners. (withdrawal of capital) in partnership firm
Bad & Doubtful debts not provided for
Pre-operative expenses/development expenses etc. to the extent not written
off.
Nature of these assets
A banker presumes that these assets are a drain on the capital. These assets
are not available for payment of debts as long as the business runs and they are not
realisable at the time of liquidation (as they hardly fetch any value in case of forced
sale).
LIABILITIES
Reclassified into 3 groups
1. Networth
2. Term Liability
3. Current Liability
Networth - Also known as Share holders. funds or owners. equity.
Items are almost permanent source of fund (need not be paid back as long as the
business runs)
Items represent the amount of funds (resources) given (or not drawn) by the owner
(share holders.) of the business.
They are permanent source of fund.
They represent the owners. stake in the business
They do not carry any fixed charge by way of interest.
They are not outside liabilities.
Networth are three categories:
Paid up capital ( Equity & Preference)
Free Reserves
Surplus
Examples:
-

Ordinary share capital (paid up)

General Reserves

Revaluation reserves

Share premium amount

Balance of profit

Preference share capital maturity after 12 years.

6

Other reserves.

Term Liability - Also known as long term liability or Deferred Liability

Definition: Liabilities which mature for payment after a period of one year from the
date of balance sheet are called term/deferred liabilities.
Examples:
-

Term Loan from Financial Institutions, Banks (excluding instalment payable

within one year)

Debentures payable after one year (not maturing within one year but
maturing within 12 years.)

Deferred payment credits (excluding instalments payable within one year).

Term Deposits payable after one year.

Preference shares redeemable after one year but before 12 years..

Working Capital Term Loan

Deposits from dealers. Which are refundable only on termination of

dealership are to be treated as term liability.

Other term liability (including ECB/ADR/GDR/FCNR (B) loans etc.

Debentures:
Current Liability:
Definition: Liabilities payable in short term (within a year) from the date of balance
sheet are classified as current liabilities. They represent short term source of fund and
should be utilised for financing current assets.
Examples:
-

Short term Bank Borrowing against stock, stores etc. ( cash credits,
overdrafts)

Sundry Creditors. for Trade (Creditors. on account of supply of raw

materials)

Advance/progress payment from customers. For supply of finished goods.

Sundry Creditors. For expenses.

Bills payable (bill accepted on account of sundry Creditors.)

Outstanding/Accrued expenses (expenses like rent, insurance due/accrued

but not paid)

Provisions (made towards payment of taxed, bonus etc.)

Dividend payable within one year of provision.

7

Deposits from Dealers. (not accepted with a condition to be repayable on

cancellation of dealership or agency)

Other statutory liability like PF dues etc.

Instalment of term loan, debentures, deferred payment, deposits or

preference share capital, DPG/DEB/RP (Redeemable preference)
shares/ECB/ADR/GDR due within one year.

Working capital term loan - Term liability ( for calculating MPBF, Term
Loan instalments falling due on next 12 months need not be treated as
current liability, but for calculating CR
it will be treated as current
liability)

Unsecured borrowings (including ICDS etc.) from the bank including bills
discounted.

Unsecured borrowings from others, where no period of repayment is

mentioned. Deposits maturing within one year.

Interest and other charges accrued but not due for payment.

Other current liability/provision, such as gratuity liability due within one

year of provision.

Total Outside liabilities = Current liabilities (+) Long Term liabilities

Total Tangible Assets = Current Assets (+) fixed assets (+) other non-current assets
Net Working Capital = Current Assets (-) Current liabilities
Tangible Net Worth = Net worth (-) Intangible Assets.
Formatting Trading & Profit/Loss Account

TERMS EXPLAINED

Net sales = gross sales [total sales] - excise duty

Raw material consumed = opening stock of raw materials + purchases during the year closing stock of raw material
Cost of production = raw materials consumed + manufacturing expenses including
depreciation + opening stock of stock in process - closing stock of stock in process
Cost of sales = [ cost of production + opening stock of finished goods ] - closing stock of
finished goods
Gross profit =net sales - cost of sales
Operating profit = gross profit - operating expenses
Net profit = [ operating profit + non operating incomes ] - non operating expenses

PROFIT AND LOSS ACCOUNT & TRADING ACCOUNT

The profit and loss statement is submitted for the relevant period as per the balance
sheet Date.
Proper format of operating Statement is used
8

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

Sales
Less excise duty
Net Sales
Opening Stock of raw materials
Add Purchases of RM during the year
Less closing stock of RM
Gives Raw materials consumed
Add Cost of Power
Fuel
Direct Labour
Other Mfg. Expenses
Depreciation

9. Add opening stock in process

10. This gives Cost of Production
11. Add Opening Stock of Finished goods and purchase of FG
12. Deduct Closing Stock of FG
13. This gives Cost of Goods Sold
14. Gross Profit
15. Deduct operation Expenses
Adm Expenses
Selling & distribution Expenses
Interest Expenses
16. This gives Operating profit
17. Add non operating Income
18. Deduct Non operating Expenses
19. This gives Net profit before Tax
20. Deduct provisions for Tax
21. This gives Net Profit After Tax

Closing stock should be valued at cost or market price whichever is lower

Verify large individual items and the Expenses relate to activity concerned
Compare Individual items like Electricity, Labour charges Etc. For last two/ three years
and relate them to business level.
Confirm that net profit is duly apportioned to capital account
Look for Depreciation rate and method of charging
Confirm that the Sales and Purchases accounts are properly drawn
Opening stocks
Add purchases
Less returns on purchases
Less Sales
9

Add returns on sales

Closing stocks

Details of purchases and sales of Individual items are given

Confirm that separate details are given for manufacturing sales and trading sales for
comparison with the previous year
The projected sales are in conformity with past trend they are justified/ reasonable and
achievable
If there is a fall reasons for the fall and plans of achieving the estimates for the current
year
The pricing/costing system followed by the concern is uniform at all stages
Ratio Analysis

Ratio is the relationship between two variables. It can be expresses as a ration (2:3) or as a percentage
(e.g.25%) or so many times (e.g.2.3 times). The purpose of ratio analysis is to facilitate comparisons with
reference to time periods or with the average of industry. An investor who is intending to invest money in
a company may like to know the risk and returns associated with the investment. As this involves future
activity, a doubt may arise as to how the analysis of the statements based on past performance will be
useful. However, past performance and trend do play a part, rather a significant part in the future
performance also.
The various ratios may be grouped under the following categories:
a) Liquidity Ratios
b) Activity or Efficiency ratio
c) Leverage or Stability ratio
d) Profitability ratio
e)
Although it is possible to calculate a number of ratios under each category, we shall discuss only some of
the important ratios both from the viewpoint of the management and bankers..
a)

LIQUIDITY RATIOS : (a.1) Current Ratio

(a.2) Quick or Acid Test Ratio

A.1 Current ratio of Working Capital Ratio

Current Asset
Current Liabilities
Since the ratio is the relationship between current assets and current liabilities, it is essential that the
current assets and current liabilities be correctly identified in the balance sheet. It is necessary that current
assets should be sufficient to meet the current liabilities. Another question is whether a current ratio of 1:1
is adequate. Here it is to be seen that the value given to the assets in the balance sheet is matter of
estimate. Although the current assets are valued at the releasable cost unlike fixed assets, it is possible
that the estimates may go wrong and the realisable value may be less than the estimated one. It is
therefore, desirable that CA are more than CL to keep a good margin of safety for the current Creditors..
Another question may arise, namely, what is the need to have more CA in relation CL as long as total
10

assets are more than the total outside liabilities. This can be easily answered considering the fact that
fixed assets are intended for long term use in business and if companies were to pay its current Creditors.
from the sale proceeds of fixed assets, it will be virtually in a state of bankruptcy liquidation.
Commercial solvency of the company depends upon the adequacy of current assets in relation to current
liabilities. To what extent CA should exceed CL depends on the operating cycle of the company. If it has
a faster turnover (short operating cycle), it may be able to manage with a relatively low current ratio. On
the contrary, if the operating cycle is longer, it will require a high margin of safety. Bankers now insist
that Current Ratio should be at least 1.33:1. However, a very high current ratio also does not indicate a
very healthy management pattern.
Ways of improving current ration
a)
b)
c)
d)

Sale of Fixed Assets to pay CL

Sale of Fixed Assets for investment in CA
Long term borrowing to pay CL
Long term borrowing to invest in CA

A.2 QUICK RATIO OR ACID TEST RATIO

It is calculated as follows:
(CA-Inventory)/ (CL-Short term bank borrowing). It has to be recognised that some assets are more liquid
than others. Inventory is the most illiquid of the CA because it might have to be firstly converted into
receivables. It is therefore, deducted from the CA. Similarly, short term bank borrowings though legally
payable on demand, are generally renewed if the company is doing alright and hence is treated as long
term liability. The acid test ratio will indicate whether liquid current assets are adequate to meet current
liabilities. Here again, the duration of the operation cycle is a crucial factor to examine the magnitude of
the ration. Normal/Standard 1:1
b)

ACTIVITY RATIOS :
Inventory Turnover ratio
Debtors Turnover ratio
Accounts payable or Creditors. Turnover ratio
Assets turnover ratio
Expenses ratio

Inventory Turnover Ratio:

Cost of goods sold/Average Inventory.
Inventory comprises of raw material, work-in-progress, finished goods and consumable stores and
packing materials, Inventory turnover ratio indicates how fast production cycle operates. If the ratio is
high, it indicates higher volume of sales per rupee invested in inventory. If for example, this ratio is going
down, it means that the companys production operation is being lengthened and inventory is getting
accumulate. In such a situation, it is necessary to examine the portfolio further. If there is accumulation of
finished goods, it required a careful analysis of the reasons for this build-up. It may be the result of a
11

decline in the demand for the product of the firm resulting from price, competition, availability of
substitute or changes in tastes, fashions, etc. The situation may not be so alarming if lit is arising from the
build-up of raw materials inventory unless it is obsolete.

Inventory build-up entails several costs-interest, rent, insurance, salaries, and loss due to obsolescence
and pilferage. All these costs can be avoided if there is no inventory. However, business cannot run
without a minimum of inventory. To ensure uninterrupted production and sales, a reasonable amount of
inventory has to be maintained. The inventory turnover further be sub-divided into the three following
categories with a different pattern.
RAW MATERIAL STORAGE PERIOD:
Average inventory of R.M./R.M. consumption x 365
This will indicate, on an average, how many days consumption of raw material is held by the company.
ii)
iii)

Work-in-progress period :
Average work-in-progress/cost of production* 365
This will indicate the amount of money involved in the semi finished goods by giving the number
of days inventory is held in the form of semi-finished goods.

iv)

Finished goods storage period:

= Average inventory of finished goods/cost of sales x 365

This ratio may be used to find out the period for which the company before sale holds finished goods.
ACCOUNTS RECEIVABLE (DEBTORS.) TURNOVER RATIO:
= Total Sundry Debtor + Bills receivable + Bills discounted outstanding/Credit
Sales X 365
The accounts receivable turnover ratio indicates at what interval the Debtors. of the company pay the
amounts due by them to the company. If a company is extending credit for sixty days against the industry
average of 30 days, it may imply anyone of the following:
a)
b)
c)
d)
e)

The company has liberal credit policies to increase it sales.

Its customers. are not having high credit rating and hence are not prompt in meeting their
obligations.
The realisation department of the company is not efficient to realise the debts in time.
The companys products are inferior so that they are forced to extend credit to buyers..
The company is facing customers. who can dictate terms to the company.

12

The age of the debts is also a significant consideration. The older the age of the debt, farther it will be
from being realised and hence the profits of the company may be eroded.
PAYABLES OR CREDITORS TURNOVER RATIO:
= Bills payable + Sundry Creditors for purchases x 365
Credit Purchases
This ratio indicates the time taken by the company to pay off the Creditors.. If the credit period increases
it means that the company is taking longer time to pay the Creditors. It may be strength of the company. If
it is a strong and reputed company, many may be willing to extend credit longer and therefore, the
company is enjoying the cost free finance for a longer period.
On the other hand, it may be a weakness of company. The longer period of credit may be owing to the
inability of the company to meet its obligations at the appropriate time because of liquidity problems.
Specially, if the current ratio is poor and the Debtors. and inventory period is declining. This situation
may arise following the investment of current funds for acquisition of fixed and non-current assets.
Assets Turnover Ratio:
Sales/Net operating assets

The assets turnover ratio will indicate the efficiency with which the assets are used. If the ratio is
increasing, it will mean increasing efficiency and vice versa. An enterprise invests in assets with a view to
increase the turnover. In case of growth of turnover to less than marginal increase in assets, the ratio will
come down which will indicate that the performance has been less than budgeted.
Expense Ratio:
Another measure for efficiency of an enterprise may be the way various expenses are behaving. The
following may be more pertinent:
a)

b)
c)
d)

Raw Material to cost of Production: This will indicate the efficiency of raw material usage. If it is
increasing it may either be because of more wastage, rejections etc., or because of a rise in raw
material price. In the former case, there is a decline in efficiency.
Cost of production to sales: This will indicate the overall production efficiency.
Selling and distribution expenses to Sales: This will indicate the efficiency of the selling and
marketing wing of the enterprise.
Administrative expenses to sales: This will indicate the efficiency of general administration.

C. LEVERAGE RATIOS :
Debt/Equity Ratio:

13

Debt represents the long-term liabilities and preference share capital due for payment within the next 12
years. Another concept of debt is both short term and long term debt. Equity on the other hand, refers to
the tangible net worth. It is calculated as follows:

Debt/Tangible Net worth

The ratio indicates the proportion in which the financing of the company has been done. If it works to 2:1,
it means that the long-term Creditors have provided Rs.200/- for every Rs.100/- of the owners
contribution. If a company has more of debt and less of capital, it may be problems with regard to
repayment of installments and payment of interest when it does not have enough profits. On the other
hand, if the entire amount is in the form of equity the return (dividend) to shareholders will be on the
basis of profits. However, by borrowing a part of the funds, the shareholders stand to gain if the rate of
return in the business is higher than the rate of interest on borrowings as will be clear from the following
example:
Suppose income i.e. PBIT is Rs.50/-. If the company is paying 60% tax, then ROE= 20/500 i.e. 4% Now,
let us assume that the company borrows Rs..200/- and pays interest at 4% (which is the rate of return on
funds employed). In this case, the return to the shareholders i.e. ROE = (50-8)=42 (60x42/100)25.2=16.8/300=5.6%. This increase in ROE is the result of operation of Financial Leverage. Financial
leverage is measured as:
DFL = Assets x Net operating income after interest
Equity X Net Operating income before interest
= 500 x 42 = 1.4
300

50

It means the rate of earning of equity holders. will increase by 1.4 times if borrowed funds are substituted
for owners funds.

Fixed Assets Coverage Ratio:

=

Net Fixed Assets

Long Term debt secured by Fixed Assets

The fixed assets coverage ratio indicates to what extent the funds of the long-term Creditors secured by
fixed assets. If it is 2:1, it means that even if the fixed assets are sold for half their book value.
Debt Service Coverage Ratio:
= Interest + PAT + Depreciation + Other non-cash expenses
14

Interest + Instalment of term loan

If an enterprise has borrowed funds, it is required to repay the same and also pay the interest. For this, the
company has the operating profits; in addition, it also has the funds from depreciation and other non-cash
expenses, which are not cash outflows. Some authorities exclude depreciation from the numerator arguing
that, after all, it is an expense for fixed assets and should not be included here. The above formula is
based on the concept the while interest is an admissible deduction, principal repayment will be done only
after payment of taxed. The ratio therefore shows to what extent the profits of the company will be
adequate to meet the fixed charges of the interest and repayment of the borrowed funds. If this ratio works
out to 2:1, it will mean the even if there is 50% fall in profits, the company will still be able to meet its
commitments. However, if it were very near to 1:1, then even a slight fall in profits may result in the
inability of the company to meet the obligations.
D. PROFITABILITY RATIOS :
1. Gross Profit Ratio
2. Operating Ratio
3. Return on investment
GROSS PROFIT RATIO = GROSS PLROFIT/SALES * 100
It is an indicator of the production efficiency as discussed earlier with slight difference. In the production
efficiency, we had taken the percentage of cost of production to sales whereas share we have deducted
from sales the cost of sales to arrive to gross profit. A low ratio may indicate high manufacturing
expenses, low price of inability to push up sales. An increasing ratio, on the other hand may indicate a
higher sales volume, low manufacturing expenses or ability to increase the selling price.
OPERATING RATIO (NET SALES MARGIN
Profit before interest and taxes

x 100

Net Sales
This ratio indicates the net margin on sales after taking into account all expenses, except financial
expenses (interest) and taxes. A higher margin will indicate that the company has higher percentage of
profit on sales to meet the payment of interest, dividends and other corporate needs.
RETURN ON INVESTMENT (ROI):
This is the most widely used ratio to measure the profitability of a company specially by the management
and Creditors..
The ratio can be worked out as under: A.

Return on total capital employed:

15

Return/Investment x 100
Where the return is not profit before tax, interest on term loan and interest on debenture and
investment means net worth of the shareholders. and term liabilities.
B.

Return on Tangible Net worth : (Return on owners. fund [ROE])

Net Profit after taxes/Net worth of share holders funds x 100

FORMULAE FOR COMPUTATION OF RATIO

CURRENT RATIO

CURRENT ASSETS
CURRENT LIABILITIES

DEBTORS. / RECEIVABLES TURNOVER GROSS SALES

RATIO
RECEIVABLES

DEBT-COLLECTION PERIOD

365

(DAYS OF SALES )

DEBTORS. TURNOVER RATIO

INVENTORY TURNOVER RATIO

NET SALES
AVERAGE INVENTORY

INVENTORY HOLDING PERIOD (DAYS

OF SALES )

365
INVENTORY TURNOVER RATIO

CREDITORS. TURNOVER RATIO

PURCHASES
CREDITORS.

Holding Period

____365___
Creditors turnover ratio

16

DEBT-EQUITY RATIO

TOTAL OUTSIDE LIABILITIES

RATIO
OF
TOTAL
OUTSIDE TANGIBLE NET WORTH
LIABILITIES / TANGIBLE NET WORTH.
(IE. TOTAL DEBT= SHORT TERM + LONG TERM
DEBTORS. )

GROSS PROFIT RATIO

GROSS PROFIT

x 100

NET SALES

OPERATING PROFIT RATIO

OPERATING PROFIT

x 100

NET SALES

NET PROFIT RATIO

NET PROFIT

x 100

NET SALES

RETURN ON ASSETS

OPERATING PROFIT
TOTAL ASSETS - INTANGIBLE ASSETS

FUND FLOW ANALYSIS

Funds flow analysis is a technique of financial analysis used to study the resources
deployment of business. This technique is based on the concept of business operation as a
series of resource deployment for profit, based on management decisions. The business
operation of any industrial or business unit consist of (a)

Investment of resources

(b)

Financing to provide these resources and

(c)

Operation of the business with the help of these resources with the objective of profit.

17

As is know, the balance-sheet presents a snap-shot picture of the financial position at

a given point of time and the income statement shows a summary of revenues and expenses
during the accounting period. The funds flow statement also referred to a Statement of
changes in financial position or the statement of sources or uses of funds drawing on the
information contained in the basic financial statements shows the sources and application of
funds during the period. The funds flow analysis provides insight into the movement of funds
and helps in understanding the changes in the structure of assets, liabilities and owners
equity.
Funds flow analysis presents a decisional view of the business and helps in answering
questions like:

Have capital investments been supported by long-term financing?

Have short-term sources of financing been used to support capital investments?
How much funds have been generated from the operations of the business?
How much has the firm relied on external source of financing
What major commitments of funds have been made during the year?
Has the liquidity position of the fund improved?

What are funds?

Very broadly, funds are defined as total resources. However, most commonly funds
are defined as working capital or cash. The word Working Capital here refers. to net
working capital (NWC) which is defined as current assets minus current liabilities. As such
funds flow statement can be prepared on the basis of these three measures: Total resources,
Working Capital and Cash.
Funds Flow Statement - Total Resources Basis
The preparation of the funds flow statement on total resources basis is fairly simple.
The successive balance-sheets are compared and changes in each of the balance sheet items
are noted and classiied as sources of funds or as use of funds as follows:
Sources

Uses

Increase in owners. equity

Decrease in owners. equity

Increase in a liability

Decrease in a liability

Decrease in an asset

Increase in an asset

Funds flow on total resources basis is prepared on two parts - Part A shows the changes under
various balance-sheet items & Part B classifies these changes into sources of funds and uses of
funds. It may be noted that when funds are defined as total resources, the sources of funds
are equal to the use of funds due to the double entry principle of book keeping. It may also
be appreciated that under the total resources method, only the successive balance sheets are
used and the income statements/profit and loss account are not put to use.
18

Amplified Funds Flow Statement

The amplification consists of providing details underlying changes in (I) reserves and
surplus and (ii) net fixed assets. This is done as follows:
I)

Changes in reserves and surplus is essentially out of retained earnings and is shown as
:Profit before Tax and Interest
-

Interest

Taxes

Dividends

Profit before tax and interest is shown as a source of funds while taxes, interest and
dividends are shown as uses of funds.
The depreciation for the year is shown as a source and increase of fixed assets is
shown as use of funds.
Funds Flow Statement - Working Capital Basis
The funds flow statement on a working capital basis presents
I)

Sources of working capital

ii)

Uses of working capital and

iii)

The net change in working capital (Working capital is defined here as current assets
minus current liabilities)
What are the sources and uses of Working Capital?
These can be depicted as under:
Sources

Uses
Dividend Payment Tax,
Interest

Operations

Issue of share capital

Long - Term Borrowings

WORKING POOL

Repayment of long-term
borrowings

Purchase of non-current
assets
19

Sale of non- current

assets

Sources of Working Capital

1.

Operations.

The operations of the business generate revenues and entail expenses. While
revenues augment working capital, expenses other than depreciation and other
amortizations decreases working capital. Hence the working capital increase on account of
operations is equivalent to:
Net Income
2.

+ Depreciation

Issue of Share Capital

As issue of share capital results in an inflow of working capital because it brings a cash

inflow.
3.

Long - term Borrowings

When a long-term loan is taken, there is an increase in working capital because of cash
inflow. The short-term loan, however, does not have any effect on working capital. The
reason being a short-term loan increases a current asset (cash) and a current liability (shortterm loan) by the same amount, leaving the working capital position unchanged.
4.

Sale of Non-Current Assets

When a fixed asset or a long-term investment or any other long-term asset is sold,
there is a working capital inflow represented by cash or short-term receivables.
5.

Uses of Working Capital

I)

Payment of taxes, dividend, interest etc:

These transactions result in cash (working capital) outflow.

ii)

Repayment of Long-term Liability.

The repayment of long-term loan, debentures and other long-term
liabilities involves cash outflows and hence a use of working capital. The
repayment of a current liability, it may be noted does not affect the working
capital position because it entails an equal reduction in current liabilities and
current assets.
20

iii)

Purchase of Non-Current Assets

When a firm purchases fixed assets, long-term investments or other
non-current assets; it pays cash or incurs. a short-term debt. Hence, working
capital decreases.
The funds flow statement - on working capital basis for Bharat Ltd. is
shown at Table V Part A shows the sources, uses and net change in working
capital and Part B shows the changes in the internal content of working capital.

Funds Flow Statement: Cash Basis

Funds flow statement on cash basis shows
(I)

Sources of cash

(ii)

Uses of cash and

(iii)

Net change in cash.

The sources of cash are the sources of working capital plus changes within the working capital
account which augment the cash resources of the business. The change in working capital
which augment the cash flow of the business are accounted for by decrease in current assets
other than cash. The use of cash is changes which use working capital plus changes within
the working capital account which deplete the cash resources of the business. These latter
changes are simply increase in current assets other than cash.
The sources and uses of cash are illustrated below :
Sources of Cash
-

Operations-Net Income, Depreciation

Issue of share capital

Long-term Borrowings

Sale of non-current asset

Increase in current liabilities

Decrease in Current assets other than cash

Uses of Cash
-

Payment of dividend

Purchase of non-current assets

Repayment of long - term borrowings

21

Decrease in current liabilities

Increase in current assets other than cash

The net effect of the movement of funds is easily discernible in each of the three
methods under which funds flow statements have been prepared. The funds flow system in a
business is often likened to a hydraulic system. The concept of flow implies an inflow, an
outflow and storage where the level is determined by the rate of inflow and outflow.

To summarise, the funds flow statement we observe, is very closely related to the financial
statements, the balance-sheets and profit and loss accounts, the funds flow statement is
related to a time span say one year or six months as the case may be. Thirdly, the funds flow
analysis is very closely related to the normal decision making process in the business decisions relating to investment, operations and finance as stated at para 1 above.
Projected Fund Flow Statement
A fund flow statement can be prepared either on the basis of past data or for a future
period of time provided the time span is specified. All the questions to which answers are
sought on the basis of past data can also be answered for future period of time provided the
projections are based on realistic assumptions. In fact, projected funds flow statement is of
great practical relevance to bankers. as some of the important questions pertaining to the
financial position, profitability and servicing of working capital/term loans etc. extended by
banks can be answered with a fair degree of reliability. This to a great extent relieves the
banker of his anxiety as to whether a credit decision to be taken at present is worthwhile
from a commercial point of view.
As bankers funds flow analysis is used mainly to find answers to:
a)
b)
c)
d)
e)
f)

How the long term and short term resources will be raised and used?
When and how much finance the unit would require?
When and how the business will repay the loan/s?
Are the financial policies followed by the unit proper and financial planning acceptable?
What is the dividend policy of the company?
What is the contribution of funds provided by internal sources to the growth of business?
(In the past and in Future)

A funds flow statement as a third financial statement in addition to the balance-sheet

and profit and loss account has a distinct role to play in evaluating the use of resources and
the pattern of financing them.
Cash Flow Statements

22

Objective
Information about the cash flows of an enterprise is useful in providing users of financial
statements with a basis to assess the ability of the enterprise to generate cash and cash
equivalents and the needs of the enterprise to utilize those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an enterprise to
generate cash and cash equivalents and the timing and certainty of their generation.

The statements deal with the provision of information about the historical changes in cash
and cash equivalents of the enterprise by means of a cash flow statement, which classifies
cash flow during the period from operating, investing and financing activities.
Scope
1. An enterprise should prepare a cash flow statement and should present it for each
period for which financial statements are presented.
2. Users of an enterprises financial statements are interested in how the enterprise
generates and uses cash and cash equivalents. This is the case regardless of the
nature of the enterprises activities and irrespective of whether cash can be
viewed as the product of the enterprise, as may be the case with a financial
enterprise. Enterprises need cash for essentially the same reasons, however
different their principal revenue producing activities might be. They need cash to
conduct their operations, to pay their obligations and to provide returns to their
investors.
Benefits of Cash Flow Information
A cash flow statement, when used in conjunction with the other financial statements,
provides information that enables users to evaluate the changes in net assets of an
enterprise, its financial structure (including its liquidity and solvency) and its ability to effect
the amounts and timing of cash flows in order to adapt to changing circumstances and
opportunities. Cash flow information is useful in assessing the ability of the enterprise to
generate cash and cash equivalents and enables the users to develop models to assess and
compare the present value of the future cash flows of different enterprises. It also enables
the comparability of the reporting of operating performance by different enterprises because
it eliminates the effects of using different accounting treatments for the same transactions
and events.
Historical cash flow information is often used as an indicator of the amount, timing and
certainty of future cash flows and in examining the relationship between profitability and net
cash flow and the impact of changing prices.
Definitions
The following terms are used in this Statement with the meanings specified.
Cash comprises cash on hand and demand deposits with banks.

23

Cash equivalents are short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the enterprises and
other activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets and other investments
not included in ach equivalents.
Financing activities are activities that result in changes in the size and composition of the
owners capital (including preference share capital in the case of a company) and borrowings
of the enterprise.
Cash and Cash Equivalents
Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other purposes. For an investment to qualify as a cash equivalent, it
must be readily convertible to a known amount of cash and be subject to an insignificant risk
of changes in value. Therefore, an investment normally qualifies as a date of acquisition.
Investments in shares are excluded from cash equivalents unless they are, in substance, cash
equivalents; for example, preference shares of a company acquired shortly before their
specified redemption date (provided there is only an insignificant risk of failure of the
company to repay the amount at maturity).
Cash flows exclude movements between items that constitute cash or cash equivalents
because these components are part of the cash management of an enterprise rather than part
of its operating, investing and financing activities. Cash management included the
investments of excess cash in cash equivalents.
Presentation of a Cash Flow Statement
The cash flow statement should report cash flows during the period classified by operating,
investing and financing activities.
An enterprise presents its cash flows from operating, investing and financing activities in a
manner which is most appropriate to its business. Classification by activity provides
information that allows users to assess the impact of those activities on the financial position
of the enterprise and the amount of its cash and cash equivalents. This information may also
be used to evaluate the relationships among those activities.
A single transaction my include cash flows that are classified differently. For example, when
the installment paid in respect of a fixed asset acquired on deferred payment basis includes
both interest and loan, the interest element is classified under financing activities and the
loan element is classified under investing activities.
Operating Activities
24

The amount of cash flows arising from operating activities is a key indicator of the extent to
which the operations of the enterprises have generated sufficient cash flows to maintain the
operating capability of the enterprise, pays dividends, repay loans and make new investment
without recourse to external sources of financing. Information about the specific components
of historical operating cash flows is useful, in conjunction with other
information, in
forecasting future operating cash flows.

Cash flows from operating activities are primarily derived from the principal revenueproducing activities of the enterprises. Therefore, they generally result from the transaction
and other events that enter into the determination of net profit or loss. Examples of cash
flows from operating activities are:
cash receipts from the sale of goods and the rendering of services;
cash receipts from royalties, fees, commissions and other revenue;
cash payments to suppliers for goods and services;
cash payments to and on behalf of employees
cash receipts and cash payments of an insurance enterprise for premiums and claims,
annuities, and other policy benefits;
cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities; and
cash receipts and payments relating to futures contract, forward contracts, option contracts
and swap contracts when the contracts are held for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which
is included in the determination of net profit or loss. However, the cash flows relating to such
transactions are cash flows from investing activities.
An enterprise may hold securities and loans for dealing or trading purposes, in which cash
they are similar to inventory acquired specifically for resale. Therefore, cash flows arising
from the purchase and sale of dealing or trading securities are classified as operating
activities. Similarly, cash advances and loans may by financial enterprises are usually
classified as operating activities since they relate to the main revenue-producing activity of
that enterprise.
Investing Activities
The separate disclosure of cash flows arising from investing activities is important because
the cash flows represent the extent klto which expenditures have been made for resources
intended to generate future income and cash flows. Examples of cash flows arising from
investing activities are:
25

Cash payments to acquired fixed assets (including intangibles). These payments include those
relating to capitalized research and development costs and self-constructed fixed assets;
Cash receipts from disposal of fixed assets (including intangibles);
Cash payments to acquire shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than payments for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than receipts from those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
Cash advances and loans made to third parties (other than advances and loans made by a
financial enterprise);
Cash receipts from the repayment of advances and loans made to third parties (other than
advances and loans of a financial enterprise);
Cash payments for futures contracts, forward contracts, option contracts and swap contracts
except when the contracts are held for dealing or trading purposes, or the payments are
classified as financing activities; and
Cash receipts from futures contracts, forward contracts, option contracts and swap contracts
except when the contracts are held for dealing or trading purposes, or the receipts are
classified as financing activities; and cash receipts from futures contracts, forward contracts
option contracts and swap contract except when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the
contract are classified in the same manner as the cash flows of the position being hedged.
Financing Activities
The separate disclosure of cash flows arising from financing activities is important because it
is useful in predicting claims on future cash flows by providers of funds (both capital and
borrowings) to the enterprise. Examples of cash flows arising from financing activities are:
Cash proceeds from issuing shares or other similar instruments cash proceeds from issuing
debenture, loans, notes, bonds and other short or long-term borrowings; and cash repayments
of amounts borrowed.
Reporting Cash Flows from operating Activities
An enterprise should report cash flows from operating activities using either; the direct
method, whereby major classes of gross cash receipts and gross cash payments are disclosed;
or the indirect method, whereby net profit or loss is adjusted for the effects of transactions
of non-cash nature, and deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash flows.
. The direct method provides information which may be useful in estimating future cash
flows and which is not available under the indirect method and is, therefore, considered more
appropriate than the indirect method. Under the direct method, information about major
classes of gross cash receipts and gross cash payments may be obtained either from the
26

accounting records of the enterprise; or by adjusting sales, cost of sales, (interest and similar
income and interest expense and similar charges for a financial enterprise) and other items in
the statement of profit and loss for; changes during the period in inventories and operating
receivables and payables; other non-cash items; and other items for which the cash effects
are investing or financing cash flows.

Under the indirect method, the net cash flow from operating activities is determined by
adjusting net profit or loss for the effects of changes during the period in inventories and
operating receivables and payables; non-cash items such as depreciation, provisions, deferred
taxed, and unrealized foreign exchange gains and losses; and all other items for which the
cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect
method by showing the operating revenues and expenses excluding non-cash items disclosed
in the statement of profit and loss and the changes during the period in inventories and
operating receivables and payables.
Reporting Cash Flows from Investing and Financing Activities
An enterprise should report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows
described in paragraphs 22 and 24 are reported on a net basis.
Reporting Cash Flows on a Net Basis
Cash Flows arising from the following operating, investing or financing activities may be
reported on a net basis: cash receipts and payments on behalf of customers when the cash
flows reflect the activities of the customer rather than those of the enterprise; and cash
receipts and payments for items in which the turnover is quick, the amounts are large, and
the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22(a) are:
the acceptance and repayment of demand deposits by a bank;
funds held for customers by an investment enterprise; and
rents collected on behalf of, and paid over to, the owners of properties
Examples of cash receipts and payments referred to in paragraph 22(b) are advances made
for, and the repayments of :
principal amounts relating to credit card customers;
the purchase and sale of investments; and

27

other short-term borrowings, for example, those which have a maturity period of three
months or less.
Cash flows arising from each of the following activities of a financial enterprise may be
reported on a net basis :
cash receipts and payments for the acceptance and repayment of deposits with a fixed
maturity date;
the placement of deposits with the withdrawal of deposits from other financial enterprises;
and
cash advances and loans made to customers and the repayment of those advances and loans.
Components of cash and cash equivalents:
An enterprise should disclose the components of cash and cash equivalents and should
present a reconciliation of the amounts in its cash flow statement with the equivalent
items reported in the balance sheet.
In view of the variety of cash management practices, an enterprise discloses the policy
which it adopts in determining the composition of cash and cash equivalents.
The effect of any change in the policy for determining components of cash and cash
equivalents is reported in accordance with Accounting Standard AS-5 Net Profit or loss
for the period, prior period items and changes in accounting policies.
Other Disclosures:
An enterprise should disclose, together with a commentary by management, the
amount of significant cash and cash equivalents balances held by the enterprise that
are not available for use by it.
There are various circumstances in which cash and cash equivalents balance held by an
enterprise are not available for use by it. Examples include cash and cash equivalents
balances held by a branch of the enterprise that operates in a country where exchange
controls or other legal restrictions apply as a result of which the balances are not
available for use by the enterprise.
Additional information may be relevant to users in understanding the financial position
and liquidity of an enterprise. Disclosure of this information, together with a
commentary by management, is encouraged and may include:
a) The amount of undrawn borrowing facilities that may be available for future
operating activities and to settle capital commitments indication any
restriction on the user of these facilities, and
b) The aggregate amount of cash flows that represent increase in operating
capacity separately from those cash flows that are required to maintain
operating capacity.
28

The separate disclosure of cash flows that represent increases in operating capacity
and cash flows that are required to maintain operating capacity is useful in enabling
the user to determine whether the enterprise is investing adequately in the
maintenance of its operating capacity may be prejudicing future profitability for the
sake of current liquidity and distributions to owners.

CONCEPTS FOR WORKING CAPITAL ASSESSMENT

WORKING CAPITAL:
Funds required acquiring the Current Assets for any Servicing, Trading or Manufacturing
concern for the day to day operations.
GROSS WORKING CAPITAL [GWC]:
Total of Current Assets [TCA]
NET WORKING CAPITAL [NWC]

Difference between Total Current Assets and Total Current Liabilities [ NWC = CA CL ]
Also it can be measured as total long term sources less Fixed Assets and other

Miscellaneous / intangible Assets

[NWC = LTS { FA + MA}]
MARGIN:
It is the amount contributed by the borrower from the Long Term Sources to Finance the
Current Assets. [It is also the net Working Capital available in the system]
WORKING CAPITAL GAP [WCG]:
It is measured by the difference between the Current Assets and Current Liabilities excluding
the Short Term Bank borrowings.
[WCG = CA CL {Excl STBB}]
PERMISSIBLE BANK FINANCE [PBF]:
It is arrived by deducting the stipulated Net Working Capital or available NWC in the system,
whichever is higher from the Working Capital Gap arrived.
PBF = WCG [Higher of stipulated NWC or available NWC]
WORKING CAPITAL ASSESSMENT
For assessment of working capital needs, the projections submitted for the following year are
relevant. This first step in assessing the quantum of working capital finance is to find out
whether the projections given by the borrower are reasonable. The reasonableness of
borrowers projections can be determined as under:

29

(1) The bank can use with advantage the past data given by the borrower as well as
the data available with it. What has been the banks past experience in dealing
with that particular borrower? To what extent the earlier projections have come
true? Did they compare favourably with the actual when the results were
compiled? If the earlier projections had compared favourably with the actual, in
that case it will increase the banks faith in that particular borrower and the bank
can presume that the borrower is following sound practices and he is having a
realistic view of the future. The borrower is also not trying to get higher bank
finance by inflating the figures. If in the past the projections did not compare
favourably with the results, the bank needs to be careful. The bank in such a
situation will also be required to look into the gap between the projections and
actual. Particularly, the aspect to be looked into is whether the gap between
actual is narrowing or widening over a period of time. If the gap is widening, this is
necessarily a cause of concern. Still greater care needs to be exercised in
accepting the projections in such cases.
(2) The projections should be studied in close conjunction with past data. How the
unit has fared in the past? What has been the rate of growth? What relationship the
different items of past bear to sales and cost of production? What has been the
level of current assets or the current liabilities, other current liabilities and net
working capital (NWC) etc.? the comparison has to be made between the past
performance and the future projections. If the future projections are markedly
different from the past trend in relation to projected rate of growth, the reasons
for the same have to be ascertained before accepting the various projections.
(3) The borrower bases his projections on certain assumptions as to various factors
affecting his operations, e.g. market demand, cost of raw materials, price,
availability of inputs and other environmental factors. The bank has to assess how
far these assumptions are likely to materialise.
(4) How the limits already sanctioned by the bank have been utilised by the borrower
in the past? Have the accounts been particularly conducted as per terms of
sanction or these have been frequently violated. Is the borrower particular in
honouring his commitments? What is the position of the various accounts? Did he
submit the required data for follow-up and renewal of his facilities in time?
(5) There is a limit upto which the operations of the unit can be efficiently carried
out. Beyond this the operations will start giving negative results. This level has to
be identified. There may be one single factor which may restrict further expansion
in operations notwithstanding the fact that all the facilities in other areas exist.
This factor inhibiting further growth has to be identified. While accepting the
borrowers projections, it has to be ensured that the projections do not go beyond
this factor which may be termed as the Choking Factor as this will choke further
expansion.
(6) In determining the quantum of bank finance, the projections relating to the
following have direct relevance:
a. Sales
b. Production
c. Cost of production
d. Cost of sales
e. Current assets
f. Current liabilities
g. Net working capital
30

The most important area to be looked into is Sales. All other aspects are directly
related to the projected level of sales. Therefore, determining the projected level of sales is
first step in assessing the working capital needs of a borrower. Once the level of sales has
been determined, the other data can be easily determined in relation to sales. The projected
level of sales depends upon:
a) What is the installed and licensed capacity? Does it have any idle capacity which
can now be utilised?
b) Is the unit undertaking any expansion, modernisation or diversification program?
Have any funds been earmarked for the same in the projections? Are they going to
affect the quantum of production for the following year and to what extent? This
will be very relevant where the borrower is projecting more than normal rate of
growth in respect of production and sales.
c) Are essential inputs available to take care of projected production figure?
d) How the increase in production is going to affect the quality and cost of
production? Are the goods manufactured have quality certification or covered
under ISI specifications?
e) What are the present market conditions and terms of sales? What plans are there
to boost sales. Will the sales in future be on more favorable terms to the buyers? If
the period of credit is going to be extended is holding of increased levels of
receivables proposed to be financed? Will it be within the lower of past trends or
norms?
f) Is the unit proposing to launch an expert drive to capture international markets?
g) Are there any pending orders in hand? What has been the position in the previous
years? Was the unit forced to launch any distress sales in the past?
h) From what sources increase in NWC will be met?
A higher than normal sales estimate for the following year can be accepted only after
the bank is satisfied on the basis of the above scrutiny that the projected level of sales can be
achieved and the available past data and future plans give positive indications in this regard.
The bank has also to ensure that the borrower is willing to create the necessary support to
achieve the sales target.
(7) The bank having satisfied itself as to the projected level of sales can determine the
other data in relation to sales. The following steps can be taken for finalising other data:
a) The relationship between different items constituting cost of production can be
studied in relation to sales and cost of sales. It is to be ensured that the projected
increase in respect of any item is not out of proportion to the past relationship.
Preferably the projected increase in costs under the various heads should be looser
so as to reflect the benefits arising out of better capacity utilisation and economics
of scale.
b) After the projections relating the items constituting cost of production, the level
of production and sales have been finalised, the holding period of items of current
assets is to be determined. The holding period of chargeable current assets can be
determined based on the rule that the projected holding should be the lower of
norms or past practice. the borrower should confirm to this rule in his projection
of chargeable current assets.
c) Since the holding level of chargeable current assets is already governed by a rule
under TCR, there is a tendency on the part of some borrowers to inflate their
figures of other current assets to get higher bank finance as the quantum of bank
finance is depending to a great extent, on the levels of current assets and current
liabilities. The levels of other current assets can also be estimated on the basis of

31

the borrowers past practice. The linkage with projected increase in sales can also
be established.
d) The bank is to bridge the gap between current assets and current liabilities after
ensuring the borrowers contribution. Therefore, the quantum of bank finance is
very much depending upon availability of short term credit from other sources.
This we have earlier termed as other current liabilities. What some borrowers do
in order to get more bank finance is to project the level of other current liabilities
at a lower level so that the gap between current assets and other current liabilities
is more. The bank should ensure that the level of other current liabilities is
projected properly. The projected level of other current liabilities should show
increase keeping in tune with sales.
e) The projected level of NWC should at least be 25% of total current aspects under
second method of lending and 25% of working capital gap under first method of
lending. Further, the level of NWC should also be maintained in absolute terms,
i.e. it should not show any decrease in real terms compared to the previous
position excepting where expressly permitted by the bank.
(8) Once the borrowers overall projections for the following year have been accepted
by the Bank, the actual requirement of working capital and bank finance can be
worked out on the basis of steps given in CAS Form II (Part C). The steps broadly are :
a) The actual requirement of working capital can be arrived at on the basis of
position of current assets/other current liabilities.
b) The bank is to partly meet the difference between current assets and other
current liabilities depending upon under which method of lending the borrower is
covered.
c) If the available NWC is more than the minimum stipulated working capital under
the first or second method of lending, the available NWC is to be taken into
account for arriving at the permissible level of bank finance.
DANGERS OF INADEQUATE WORKING CAPITAL

IT STAGNATES GROWTH
FIXED ASSETS UNDERUTILISED
OPERATING INEFFICIENCY CREEPS IN
DIFFICULT TO ACHIEVE TARGETS OF BUSINESS FOR PRODUCTION AND PROFIT
BUSINESS REPUTATION AT STAKE
SITUATION OF TIGHT CREDIT TERMS
DIFFICULT TO MEET PAYMENT COMMITMENTS

DANGERS OF EXCESSIVE WORKING CAPITAL

ACCUMULATION OF UNNECESSARY INVENTORY
RISK OF LOSS BY THEFT, AND WASTAGE
MAKES MANAGEMENT COMPLACENT AND INEFFECTIVE.
RESULTS IN SPECULATIVE TREND
SCOPE FOR DIVERSION OF FUNDS
INDICATION OF DEFECTIVE CREDIT POLICY
SLACK COLLECTION OF RECEIVABLE
LEADS TO HIGHER INCIDENCE OF BAD DEBTS
32

OPERATING CYCLE
1.

Operating cycle is influenced by four key events

Purchase of raw materials
Payment for raw materials
Sale of finished goods
Collection of cash for sales

Time that elapses between the

Purchase of raw material and
Collection of cash for sales
Is called OPERATING CYCLE
3. Time length between
Payment for raw material and
Collection of cash for sales
Is referred as CASH CYCLE

Operating cycle is calculated by adding up the Inventory period and Debt collection
period.
Inventory period =
Avg. Inventory
Annual Cost of Goods sold/365

Debt collection period = Avg. Debtors

Annual Sales / 365
Cash cycle =

Operating cycle - Account payable (Sy. Cr.) period

Account payable period = Avg. Sy. Cr.

Annual cost of goods sold /365
ASSESSMENT OF WORKING CAPITAL BY Flexible Bank Finance Method
Example

Particulars

Year
previous
(audited)

Current
year2013
(prov)

2014

2015

(proj)

(proj)

2012
33

Total current Assets (A)

455.43

559.06

602.45

650.36

Less : current liability(other than

bank borrowing)(B)

166.94

24.85

31.51

38.22

Working capital Gap=(A-B)=C

288.49

534.21

570.94

612.14

80.64

99.67

136.40

178.53

207.85

434.54

434.54

433.61

Net sales

1098.81

1300.00

2907.40

3153.07

NWC to TCA %

17.70%

17.83%

22.64%

27.45%

FBF to TCA%

45.63%

77.73%

72.13%

66.67%

NWC Available in the system (D)

Flexible Finance Method

(C)- (D)

Normally, when CMA data is obtained for the total exposure of more than Rs.1.00 crores,
eligible amount of CC limit is arrived at in Form V of the VMA data, which is as above.
Further to ensure minimum margin (NWC) in the system, the percentage of NWC to TCA is to
be analysed and if it is less than 25% then, in terms and conditions, it is to be stipulated that
the borrower has to infuse additional capital.
FBF method is also known as holding period method of assessment of working capital. The
holding period of inventory , debtors and creditors are calculated and compared with the
past/actuals to ensure that the holding level for the projections is also acceptable. Then
based on the projections, the above table is used to arrive at the CC limit. In the proposal,
the holding period is to be justified very elaborately.

ASSESSMENT OF WORKING CAPITAL UNDER CASH BUDGET METHOD

Cash Budget is usually a forecast of receipts and payments of an enterprise drawn at small
intervals of time. It is a projection into future as against a cash flow statement that is usually
historical in nature. It is drawn for a specific period in near future in order to ascertain the
liquidity position of an enterprise at prescribed intervals . The position of liquidity is
determined by the level of closing cash at each prescribed intervals.
34

In the following cased, cash budget method is used:

A business enterprises requests for a short term loan

Before issuing LC, the bank has to ensure that a comfortable liquidity position exists
when the bills against LC are presented for payment.
When adhoc working capital is sanctioned, the banker has to ensure that adequate
cash surplus is likely to accrue during the period of repayment of the adhoc facility.
For financing construction activities
Peak and non-peak levels of working capital requirements, in case of activities like
firecracker manufacturing, printing & publication of text books, agricultural activities,
etc. limits may go high during the peak activity period of the year and may go down
during the non peak period.
Financing of software development activities as it is essentially financing of cash gaps.

Though the permissible level of bank finance is determined by the peak level of deficit in the
cash budget, the availability of finance is limited to the extent of deficit in the cash budget
for the respective months.

Commercial Real Estate:

Real Estate Sector is one which is always playing a crucial role in a nations economy.
Unimaginable upside potential during boom period and disastrous downslide risks when
economy slows down.
Due to significant growth in the sector, RBI has instructed all commercial banks to come out
with a policy of their own for this sector.
In our Bank the policy was implemented from the year 2006-07
Definition:
Real Estate is an immovable assets and the permanently attached improvements to it.
Commercial Real Estate is one where the repayments are out of the cash flows generated by
the asset financed by bank.
Commercial Real Estate is different from exposure to collateralized Real Estate properties.
Exposure is both credit and investment, also sanctioned limits or outstanding whichever is
higher.
Direct Exposure like Residential mortgage, Commercial Real Estate, Investment exposure.
Indirect exposure like NFB limits to NHB, HFCs Housing Boards and other Public Housing
agencies.

35

Residential mortgage up to two units normal and third unit onwards treated as Commercial
Real Estate.
Commercial Real Estate : where the prospects for repayment, recovery under default,
depend primarily on cash flows generated by the assets by way of sale or lease.
It is the substance of transaction rather than the form to determine CRE.
E.g., Building restaurant and hotel for sale is CRE whereas the same run by promoter himself
then it is not CRE.
Norms for lending:
Developers of Properties should have minimum 5 years track record with successful
completion.
Cost of entire project to be certified by independent valuation engineers.
All requisite clearances statutory approvals obtained upfront.
No purchase of plot except from Development authorities with a condition construction to
commence immediately.
Minimum Rating CR-4 with clear information about mortgage of bank to prospective buyers
Prohibitions for CRE:
No loan under CRE for construction of Government / Semi Government offices
Projects undertaken by PSUs which are not corporates and also legal enforceability and LTV
coverage must.
No private SEZ developers.
No loan for acquisition of land value i.e., 100% margin by promoters.
Indirect finance to housing corporation with restriction that houses are to be built within 3
years from allotment.
Loan to Value Ratio: (LTV)
LTV = Loan amount / Accepted value of the property
If we are financing Rs.0.80 lakhs for a property worth Rs.1.00 lakhs then LTV is 80%
LTV for PS is 90% others 80%
LTV for CRE 65% within which 50% for land (not for private financiers) 40% for time overrun.
LTV for Indirect Exposure is 65%

36

Collateral Security:
Collaterals of minimum 25% to be obtained from CRE. Where primary security is more than
200% no collateral insisted but the land cost should be at cost price if it is bought less than 1
year or fair value if more than 1 year.
Cost price of land is more than 10 crores or Project cost is more than Rs.25 crores then two
valuation from approved valuer and the lower value to be taken into account. The valuation is
only for asset coverage and not for project cost.
Unexpired lease in case of leasehold should be minimum 30 years.
Margin:
Minimum 35% excluding soft cost like IDC, Administrative cost, Vacancy creation cost, where
no tangible securities are created. Soft cost finance due to value addition should be a
maximum 10% of project cost.
For public sectors levies for conversion of land usage can be treated as project cost.
Advance money received to be received from the customers / buyers are also to be taken into
account.
Relaxation of margin in exceptional cases by CMD with ratification from Board subsequently
Tenor of Repayment:
CRE : 3 years for single construction and 7 years for multiple construction
Under sale or lease model repayment within 2 years from completion date and securitization
loan for lease model may be considered separately.
In securitization where the repayment is less than lock in period then, it is not CRE and
appropriate pricing.
For residential loans as per Loan Policy.
Personal guarantee is must and its waiver should be informed to the Board and ratified.
Group risk to be studied.
FACR min.1.50:1Minimum DSCR 1.50, DER 2:1
Escrow stipulation where it is possible.
Thorough vetting of project cost by chartered engineers.
Any deviation should be ratified by the Board.

37

Inspection of project progress at least once in three months. Comparison of financials with
projections.
No loan to be lent below BR + 200 BPS.
Any CRE proposal sanction rests with CO not field functionaries whereas for a normal standard
account FGMO can only renew.
Provisions:
For Housing loan at 0.40% but during interest hike increased to 2.00% brought down to 0.40%
after one year.
For CRE it is standard 1%
Any deviation in Real Estate other than CRE is always ratified by next higher authority,
separately not as a part of M-27 reporting.
Banks shall disclose the gross exposure to real estate sector as well as the details on the
break up of exposure to Residential and CRE in the Annual Report as per disclosure
requirements.
Independent valuation reports where the project cost exceeds or valuation is 25 crores are to
be submitted by RO/FGMO to CO.

TERM LOAN ASSESSMENT: PROJECT FINANCE

FINANCIAL APPRAISAL BIRDS EYE VIEW
Due Diligence on the Company and the Project Promoters / Consortium.
Appraisal of Project logistics and financial terms of key project contracts.
Creation of a bankable project structure with acceptable Debt-Equity Ratio.
Identification and allocation / mitigation of financial risks which would be addressed through
documentation and security package.
Financial Modelling for assessment of cash flows and financial viability.
CREDIT DUE DILIGENCE
Promoters track record, financial resourcefulness and implementation capability.
Review of Past banking relationships.
Bankers Certificate on existing banking relationships
Report from CIBIL / D&B Report / Credit Rating Report
Check RBI List of Wilful Defaulters / Negative List
CREDIT DUE DILIGENCE
Examination of Compliance issues
38

Constitution of company, authorised capital, MOA and AOA of the SPV and the sponsors.
Compliance under section 293(1)(d) of the Companies Act.
In case ECBs are envisaged, the relevant ECB Guidelines / RBI approval conditions.
FDI compliance matters
Procedural compliances such as Board Resolutions, shareholders resolutions etc.
VALIDATION OF KEY PROJECT ELEMENTS
Financial assessment of the Project Consortium. In projects under competitive bidding, the
project is awarded to the consortium that qualifies in the technical and financial bid before it
comes for fund raising.
Assessment of Shareholders Agreement and major financial clauses in the Concession
Agreement and other important agreements.
Assessment of licence fee and other parameters in PPP model.
Evaluation of financial parameters in project logistics.
VALIDATION OF KEY PROJECT ELEMENTS
Assessment of Financing Mix and Promoters Contribution in line with institutional norms.
Assessment of Project Contracts with suitability for financial risk mitigation and allocation so
as to increase bankability of the project.
Extent of recourse required from project developers (Sponsor Support Agreement). The
normal recourse is through direct equity, contingent equity support and stipulation of lock-in
period for promoters equity.
QUANTITATIVE ASSESSMENT OF THE PROPOSAL
Critical assessment of key financial assumptions based on qualitative analysis
Construction of a financial forecasting model that projects a base case of achievable financial
parameters.
Consideration of tax aspects and incentives if any for the proposed investment plan.
Viability analysis
on a stand alone basis both in full recourse and in a SPV structure.
Overall viability in full recourse model.
Proposing financial risk mitigation mechanisms.
FINANCIAL MODELLING
Fixation of Assumptions underlying Financial Model
Capacity Utilisation and assessment of ramp up phase
Selling Prices
Key raw material / contracted costs
Direct Conversion / other input costs
Indirect Production / operating costs
Administrative Costs
39

Selling and distribution costs

Depreciation rates
Under Straight Line method as per the rates prescribed under Schedule XIV of the Companies
Act.
Under WDV method as per the IT Act.
FINANCIAL MODELLING
Assessment of Working capital Requirements
Inventory and Receivable holding period
Credit period for key raw materials
Interest rates
For term borrowings
For working capital borrowings
Corporate Tax estimations for the Project
Stand-alone in the case of SPV projects
For the company as a whole in full recourse projects
Tax incentives / holiday
Other assumptions /estimations such as
Exchange rates
Implementation period
Draw down of term loans
Raising of Equity Finance
FINANCIAL MODELLING
Identification of Revenue Streams
Main revenue
Auxiliary revenue
Other Income
Value Addition and Product Mix
Break-down of Operating Costs
Direct Production Costs
Indirect Production Costs
Administrative Costs
Selling and Distribution Costs
FINANCIAL MODELLING
Main Computation Schedules
Project Cost Statement
Means of Finance Statement
Term Loans Draw Down Schedule and computation of Interest during Construction
Capitalisation Schedule
40

Term loans amortisation Schedule

Interest and Financial Cost Schedule for Operating Phase.
Working Capital Schedule
Depreciation schedule
Amortisation of deferred expenditure.
Tax Computation Statement
FINANCIAL MODELLING
Statements of Financial Forecast
Projected Operating Statement (P&L)
Projected cash Flow Statement
Projected Balance Sheet
Additional Statements for Full Recourse Projects
Divisional GP Statements for Project and Existing Operations separately
Combined Profitability Statement for the company
Combined Cash Flow Statement
Combined Balance Sheet
VIABILITY ANALYSIS

KEY APPRAISAL RATIOS

Return on Capital Employed (ROCE)
Debt Service Coverage Ratio (DSCR)
Internal Rate of Return (IRR)
Weighted Average Cost of Capital (WACC)
Overall Debt Equity Ratio
(For Full Recourse Projects. For the computation of this ratio, interest overdue and
instalments falling due in the next 12 months are not included. Preference Capital repayable
within 3 years is included as debt.)
Fixed Asset Coverage Ratio (FACR) (For Full Recourse Model)
Break Even Point / Cash Break-even
(Computed in terms of Capacity Utilisation)
Loan Life Coverage Ratio
DSCR
Profit after tax + Depreciation +/-Non- Cash items +Interest on LT Borrowings
--------------------------------------------Interest on LT Borowings + Annual Repayment
DER and DSCR
41

Presently DER around 1.5-2.33

DSCR to be measured for tenor of Debt
Average DSCR is actually Composite DSCR
Average DSCR to be about 1.5
Adjusted DSCR
DER and DSCR seen together
IRR
IRR obviates the need for adopting a Discount Rate. IRR is that discounting rate which equates
future cash flows from the project to the initial investment.
IRR is the overall capacity of the Project to generate a combined discounted cash flow return
for all capital providers to the project.
IRR for Total Funds is the Benchmark Rate to be compared to the WACC.
IRR measures the maximum external rate the Project can bear. The WACC has to fall within
the IRR
To be measured for 12-15 years in non BOT Projects
To be measured for the Concession Period for BOT Projects
No salvage assumed for BOT Projects
Periodic maintenance Costs for Infrastructure Projects to be considered
Cost of Capital
Post tax WACC
Cost of Debt Funds influenced by tax shelters
Effective Rate of Tax to be considered
Cost of Equity and Quasi Equity at 20%
Debt Servicing Reserve
Created for servicing debt obligations during the currency of the loans out of the free cash
flow (FCF) .
To cover both interest and principal repayment.
DSR to be sufficient to service two quarters of dues at any point of time.
The Cash Flow Statement to show allocation to DSR.
Project Life Ratio
Calculated as the NPV of the Cash Flows from the Project before interest and debt servicing
discounted at the Cost of Debt / Total Loan outstanding
Loan Life Ratio
Calculated as the NPV of the Cash Flows to the providers of Long Term Debt from the Project
through interest and debt servicing discounted at the Cost of Debt / Total Loan outstanding.
PLR / LLR = Loan Life Coverage Ratio (LLCR) = should be around 1.50 or above
PLR LLR = Residual Life Ratio (RLR) = should be above 0.50
42

VIABILITY MATRIX
Average DSCR to be a minimum of 1.50 to 1.75. In infrastructure projects this can be relaxed
to a minimum of 1.33 since additional cash flow safeguards are provided.
Minimum DSCR in any year to be atleast 1.33. In infrastructure projects, this can be relaxed
to 1.20
Minimum IRR to be 15%
IRR-WACC to be atleast 4-5%
BEP not more than 65 to 70%
RLR to be atleast 0.50
FACR to be 1.25 (not in limited recourse projects with cash flow based appraisal)
SENSITIVITY MATRIX
CASH FLOW BASED LENDING AND CASH LOCK BOXES
NEED FOR CASH FLOW BASED CREDIT APPRAISAL
Cash flow based credit is becoming more accepted due to the following reasons
With universal banking becoming more popular, there is a need to integrate the credit
approach for short-term and long term lending.
Long term financing is becoming riskier due to globalisation (increase in business risk) and
banking becoming market-oriented (capital raising and recovery management). Cash flow
approach helps in addressing debt servicing risk better.
With structured financing catching on at least in bigger financing deals, cash flow approach is
required for deal structuring, pricing and addressing debt servicing risk.
CONCEPT

OF

FUND

FLOW

CASH

FLOW

Fund Flow Is the total incremental or decremental flow of capital (resources) to the
company in a given period either as cash resources or as receivables and payables.
Cash flow Is the total incremental or decremental flow of capital (resources) to the
company in a given period in cash resources (Bank and cash balances and cash equivalents).
PRESENTATION

OF

CASH

FLOW

STATEMENT

Direct Method Under this method, the Cash Flow from Operations is arrived at from
individual components such as Collections from Debtors and Payments to Creditors and
Employees.
Indirect Method Under this method, the Cash Flow from Operations is arrived at from Net
Profit as adjusted for non-cash items in the P&L Account.
CASH FLOW BASED APPRAISAL - UNDERSTANDING THE FINANCING SITUATION
Is it a full recourse or limited recourse financing model?
Assessment of the generation and quality of cash flow. This would depend on the type of
43

business, payment mechanisms and receivable management.

Understanding the operating cash inflow and outflow and changes in working capital.
Estimation of cash flow generating capacity based on the above.
Assessment of cash flow gap if any (Should be distinguished from viability gap).
CASH FLOW BASED LENDING MECHANISMS
Project is financed on cash flow assessment as the primary security for debt servicing and
viability is determined on the basis of cash flow parameters.
Use of Cash Flow based ratios for viability analysis
DSCR / Overall DSCR
IRR and WACC
Loan Life Coverage Ratio
Future Cash flow gap is generally financed through equity. In larger projects it may be
financed in the same project. For e.g initial cash losses are included in project cost for
financing.
Risk analysis is done to identify cash flow risks in the project that could impair the generation
of expected cash flow.
Suitable cash lock boxes are provided by way of Debt Service Reserve, Escrow of cash flow
through Trust and Retention Account, Lien on cash flow through creation of charge on
designated receivables, assignment of escrow to ensure that control on escrowed cash flow is
available.
PAYMENT MECHANISMS
Revolving Letter of Credit mechanism
for the Off-take of finished product / service.
The revolving L/C has to be replenished every time it is invoked.
Usually used in power projects where the SEB is the buyer.
Can be used in cases where the Off-takers credit-worthiness is not satisfactory.
The Escrow Account mechanism
A special purpose account
Used for tracking and control of project revenues / cash flow
Has to be in place before attaining financial closure (where escrow is through a State agency
such as SEB).
In other cases, creation of escrow is part of financing documentation.
State Government Guarantee
Used very selectively especially where a Government undertaking is the project developer.
Government support
Revenue Shortfall loans
Shadow tolling
ESCROW MECHANISM
Escrow accounts are used to capture cash flows during project implementation and / or in the
operative stage.
The escrow account is used under a Trust and Retention (TRA) mechanism with a Waterfall
44

approach.
The amount that goes into escrow could be the receivable itself or the free cash flow.
If receivables are to be escrowed, these are identified and pooled.
The working capital bankers issue Letter of Ceding
first charge on the designated
receivables.
The off-taker bears the servicing cost of the escrow banker.
The number of escrow accounts would depend on the size and complexity of the project.

OVERVIEW OF SECURITY PACKAGE AND FINANCIAL CONTRACTS

SECURITY PACKAGE
For large sized Limited Recourse SPV Projects
First charge on project assets - (Fixed and Movable, both present and future). Not available
in road projects.
Assignment of project contracts /licences / documents / insurance policies to provide Stepin rights to lenders.
Project Completion Support from Sponsors.
Pledge/ non disposal of shares For shares held by sponsors / sponsoring companies
The Trust and Retention Account mechanism - For Escrow of Recivables, Cash Flow.
Charge on Designated Receivables
Creation of Debt Service Reserve
Revolving Letter of Credit
Other Credit enhancements as may be found necessary such as limited corporate guarantee,
letters of comfort, Government Guarantee etc.
SECURITY PACKAGE
For Full Recourse Projects
Pari Passu Charge on all assets including project assets - (Fixed and Movable, both present
and future).
Pledge/ non disposal of shares For shares held by sponsors.
The Trust and Retention Account mechanism - Optional
Creation of Debt Service Reserve Optional
Personal Guarantees of all Core Promoters
Asset Collaterals of Promoters
Other Credit enhancements as may be found necessary.
FINANCIAL CONTRACTS
Loan Agreement Could be a common loan documentation (Club Loan).
Deposit of title deeds - for creation of equitable mortgage on fixed assets.
Deed of Hypothecation For creation of charge on movable assets.
Substitution Agreement / Contract of Novation - Sometimes there are tripartite agreements
involving the Licensor, Licencee and the lenders.
Sponsor Support Agreement For project completion support
Deed of Pledge/ Non-disposal undertaking For shares held by sponsors / sponsoring
companies
Escrow and Disbursement Agreement for creation of TRA.
45

Security and Hypothecation Agreement - for creating charge on the designated receivables
Revolving Letter of Credit.
RBI GUIDELINES ON FINANCING OF INFRASTRUCTURE PROJECTS
The amount sanctioned should be within the overall ceiling of the prudential exposure norms
prescribed by RBI for infrastructure financing.
Banks/ FIs should have the requisite expertise for appraising technical feasibility, financial
viability and bankability of projects, with particular reference to the risk analysis and
sensitivity analysis.
Banks may lend to SPVs in the private sector, registered under Companies Act for directly
undertaking infrastructure projects which are financially viable and not for acting as mere
financial intermediaries. Banks may ensure that the bankruptcy or financial difficulties of the
parent/ sponsor should not affect the financial health of the SPV.
RBI GUIDELINES ON FINANCING OF INFRASTRUCTURE PROJECTS
In order to meet financial requirements of infrastructure projects, banks may extend credit
facility by way of working capital finance, term loan, project loan, subscription to bonds and
debentures/ preference shares/ equity shares acquired as a part of the project finance
package which is treated as "deemed advance and any other form of funded or non-funded
facility.
Banks are precluded from issuing guarantees favouring other banks/lending institutions for
the loans extended by the latter. This does not apply to FIs. However, for infrastructure
projects, banks are permitted to 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 per cent of the project cost and undertakes normal credit appraisal, monitoring
and follow up of the project.
Under the current ECB policy, guarantees cannot be provided by Indian banks to foreign
lenders.
RBI GUIDELINES ON FINANCING OF SPV PROJECTS
Infrastructure projects are often financed through Special Purpose Vehicles. Financing of
these projects would, therefore, call for special appraisal skills on the part of lending
agencies. Identification of various project risks, evaluation of risk mitigation through
appraisal of project contracts and evaluation of creditworthiness of the contracting entities
and their abilities to fulfil contractual obligations will be an integral part of the appraisal
exercise.
Often, the size of the funding requirement would necessitate joint financing by banks/FIs or
financing by more than one bank under consortium or syndication arrangements. In such
cases, participating banks/ FIs may, for the purpose of their own assessment, refer to the
appraisal report prepared by the lead bank/FI or have the project appraised jointly.
The long - term financing of infrastructure projects may lead to asset liability mismatches,
particularly when such financing is not in conformity with the maturity profile of a banks
liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability position
to ensure that they do not run into liquidity mismatches on account of lending to such
projects.

46

CONSORTIUM ADVANCES

MEANING:
Banks join together to finance the Working Capital requirements of a borrowing concern.
As of now,formation of consortium is not mandatory. It is voluntary.
WHY ?
Limitation in resources due to preemption of funds.
Spreading of risks.
Pooling of expertise.
Pooling of experience
Pooling of resources.
Threshold credit limit of Rs.50 crores is removed.
Exposure ceiling determined by prudential exposure norms will necessitate addition of one
or more Banks to finance the requirements of a borrowing company.
NORMS OF CONSORTIUM:
Membership Minimum 2
_ Maximum No ceiling
Minimum share: 5% of FB limit or
Rs.5.00 crore whichever
is more.
Maximum share: Generally 40%. If it exceeds
40%,endeavour to be made to
bring it down to 40%.
LEAD BANK:
Bank with maximum exposure.
Bank with second largest share is the Second Lead Bank.
Makes overall supervision of the A/c.
FUNCTIONS OF THE LEAD BANK:
Preparation of the appraisal note and its circulation.
Conduct quarterly meetings.
Joint documentation.
Joint inspections.
Exchange of information.
47

BENEFITS TO THE LEAD BANK:

Lead Bank charges.
Proportionate share of business.
As the borrowing company normally approaches the Lead Bank for adhocs/ one-of
transactions, the advances level can be increased.
EXIT ROUTE:
Minimum Two years for exit.
If one member bank cannot take the enhanced share, other willing bank/s can take the
additional share either partially or fully.
If none of the existing Banks come forward then,a new member can be admitted.
If no Bank takes the additional share in the event of one Bank quitting,it can after giving
an undertaking that the repayment of its dues will be deferred till the dues of other
Banks are repaid in full.
A member Bank can also sell its share at a discount.
Benefits available to the Borrower:
If the time frame for sanction is not adhered, they can approach a new Bank/consortium
for the limit.
The new Bank intending to sanction the limit should apply for NOC.
If NOC is not received within 10 days they can go ahead with the sanction/disbursement.
One off term loan can also be considered by a Bank who is not a member of the
consortium,if NOC is not received within 20 days.
JOINT DOCUMENTATION:
It has to conform to the SWCL (Single Window Concept of Lending) as prescribed by IBA.
Alternatively , the Banks can go in for individual documentation.
Paripassu letters have to be exchanged.
CONSORTIUM MEETINGS:
To be held quarterly.
To discuss about:
Performance of the company as per MSOD and QPR.
Availement of limits.
Expansion/diversification plans.
Details of funds raised,deployed,investments made during the quarter.
Joint inspection report.

48

Operational deficiencies observed.

Routing of proportionate share of business.
Schedule of Joint inspection.
PROBLEMS FACED:
Everybodys responsibility becomes nobodys responsibility.
Indifference in monitoring.
Conflicts and misunderstanding.
Pooling of skills do not take place.
Delay in taking decisions.
Unholy alliance sometimes with the borrower to stall the recovery efforts of member
bank/s.

MULTIPLE BANKING ARRANGEMENT (MBA)

IC.NO7806 DT.26.10.2002
More than one Bank finance a borrower simultaneously & independently.
No Common Assessment of Limits.
The Borrower under MBA is free to approach any Bank of his choice to avail credit
facilities.
No joint Documentation
The Term & Conditions such as Intt.rate, Margin Security, Documents etc are bilateral
issues.
No Lead Bank for taking decision on MPBF.
Structure of MBA

Decision making is faster

Risk of not sharing information is high.
Unscrupulous borrowers manipulate and Defraud the Banks.
No other formal arrangements to share the information.
No common Approach to assessment of limits

RBI Guidelines
With a view to introduce flexibility in credit delivery system & to facilitate smooth flow of
credit, RBI in Oct,1996 had withdrawn various regulatory prescriptions regarding conduct
of Consortium/ Multiple Banking/ Syndicate Arrangements.
In order to mitigate the Credit Risk and to ensure effective monitoring of Advance, Banks
adopt the IBA guidelines

49

IBA Panel Recommendation- Aug 2001

Bank with largest loan exposure will assess creditworthiness of the borrower.
Banks will be free to stipulate margin limits and interest rates.
Lenders must keep others informed about the developments.
Documentation to be done by the Banks individually.
Borrowers to furnish financial details on quarterly basis, duly certified by the Companys
Auditors.
All Banks to have paripassu charge over current Assets.
Coordination in Appraisal/Assessment Process in Information Sharing

RESTRUCTURING
Meaning of a restructured account
A restructured account is one where the bank, for economic or legal reasons relating to
the borrowers financial difficulty, grants to the borrower concessions that the bank
would not otherwise consider.

Restructuring would normally involve:

Modification of terms of the advances/ securities, (which would generally include, among
others)
Alteration of repayment period
Repayable amount
The amount of installments
Rate of interest (due to reasons other than competitive reasons).

The guidelines on restructuring are divided into the following 4 categories:

1.
2.
3.
4.

Restructuring
Restructuring
Restructuring
Restructuring

of
of
of
of

advances extended to industrial units.

advances extended to industrial units under the CDR Mechanism
advances extended to Small and Medium Enterprises.
all other advances.

In these four sets of restructuring of advances, the major difference in the prudential
regulations lies in the stipulation that subject to certain conditions the accounts of
borrowers engaged in industrial activities (under CDR Mechanism, SME Debt restructuring
Mechanism) continue to be classified in the existing asset classification category upon
restructuring. The benefit of retention of asset classification on restructuring is not
available to the accounts of borrowers engaged in non-industrial activities except to SME
borrowers. (IC No. 8160 dated 06.11.2008)
When restructuring is to be undertaken

50

The following are the normal grounds when an account requires restructuring:

Cost / time overrun resulting in increase in

Project cost
Failure to reach break-even levels
Inability to service interest / installments
Frequent excesses / return of cheques
Decline /stoppage of production
Decline in sales / profits
Rising levels of inventories with large portion of non moving items.
Failure to pay statutory dues or wages
Internal diversion of funds
Devolved LCs / invoked BGs.

Gains of Restructuring

Preservation of economic value of an asset

Employment generated by unit is retained.

Borrowers Gains

Comes out of financial mess (Inability to service the debts on existing terms)
Gets some soft terms
Gets additional funds
Gets some financial concession
Keeps the unit / business going.
Re-assesses business fortunes based on past experience which has led to the situation.

Bankers Gains

Retention of Asset Classification Status on certain conditions

Avoid extreme recovery measures
Prescribes revised repayment schedule, re-negotiate the terms and attempts to minimize the
losses, if any.
Wins customers goodwill
It is a win - win situation for the borrower, for the Bank and for the nation, if done systematically.

Eligibility criteria
The guidelines would be applicable to the following entities, which are viable or potentially
viable:

All the accounts classified under standard, sub-standard and doubtful categories.
All non-corporate SMEs irrespective of the level of dues to banks.

51

All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the
level of dues to the bank.
All corporate SMEs that have funded and non-funded outstanding up to Rs.10 crores under
multiple/consortium banking arrangement. The bank with maximum outstanding may work out the
restructuring package, along with the bank having the second largest share.
SME Debt Restructuring Mechanism will be available to all borrowers engaged in any type of
activity.
Accounts involving, fraud and malfeasance will not be eligible for restructuring under these
guidelines.
In case of wilful defaulters, the reasons for classification of the borrowers as wilful defaulters
specially in old cases where the manner of classification of a borrower as a wilful defaulter was not
transparent, are to be ascertained and if the borrower is in a position to rectify the wilful default,
restructuring of such accounts may be done with Boards approval.
Accounts classified as loss assets will not be eligible for restructuring.
In respect BIFR cases, restructuring is not permissible without their express approval.

Other RBI Guidelines

Banks cannot reschedule / restructure / renegotiate borrowal accounts with retrospective

effect.
Delay in sanctioning of the scheme shall not be permitted and if the Asset Classification status
of the account undergoes deterioration in the meantime, it would be a matter of concern.
Any Restructuring done without looking into a) cash flows of the borrower and b) without
assessing the viability of the projects/activity financed by the Bank, would be treated as an
attempt to suppress a weak credit facility.
The borrowers indulging in frauds and malfeasance will continue to remain ineligible for
restructuring.
Normally, restructuring cannot take place unless alteration / changes in the original loan
agreement are made with the formal consent / application of the debtor.
However, the process of restructuring can be initiated by the bank in deserving cases subject
to customer agreeing to the terms and conditions.
The accounts not considered viable should not be restructured and banks should accelerate
the recovery measures in respect of such accounts.

Viability criteria

No account shall be taken up for restructuring unless:

The financial viability is established and
There is a reasonable certainty of payment from the borrower as per the terms of restructuring
package.
The viability should be determined based on the acceptable viability benchmark determined by the
Bank, which may be applicable on a case-to-case basis depending upon the merits of each case.
The units may be regarded as potentially viable:
If they would be in a position, after implementing the debt restructuring package spread over a
period not exceeding 5 years in case of Non infrastructure projects and 8 years ) in case of
infrastructure projects from the commencement of the package, to continue to service its
52

repayment obligation as agreed upon including those forming part of the package, with the help of
the concessions after the aforesaid period.
The repayment period for structuring debt should not exceed 10 years and 15 years in case of non
infrastructure and infrastructure projects respectively from the date of implementation of the
package.

Parameters of viability
Minimum benchmark levels to assess the viability of the unit for restructuring:

Debt service coverage ratio (DSCR): Unit should have average DSCR of more than 1.25 and
improve that in the following years.
The breakeven analysis should be carried out and various breakeven points should be worked out
to assess whether the unit can service the interest/instalment as per restructuring.
The Companys past performance for 3 to 5 years and future projections for the period of
proposed re-payment should be examined.
Gap between the internal rate on return and cost of funds have to be worked out to assess
viability.
Current Ratio is to be maintained at a minimum level of 1.10 during 5 years operation after
implementation of the package, which is expected to improve to a level of 1.17 in subsequent
years.
TOL/TNW: At the initial stage the ratio may be considered up to 6:1 which is expected to improve
gradually over the years to reach the desired level of 3:1 after end of 6th year.
Deviation to the extent of 10% of the benchmark parameter at the above points may be
considered on merit /availability of security.
RBI has clarified that Banks will have freedom to extend relief and concessions beyond the laid
down parameters in deserving cases.
ROCE = 5 year G-Sec yield + 200 bps
LLR =1.40 = PV of total available cash flows during the loan life / maximum amount of loan

Delegation of powers: Branch heads up to Scale IV do not have power to restructure.

Otherwise, the authority empowered to sanction the loans and advances to the units including
the additional amount proposed under the restructuring package shall have the powers to
sanction the restructuring/rehabilitation package including other relief and concessions as per
Delegated Powers. However, in respect of all the proposals restructured up to ZLCC,
concurrence from next higher authorities is to be obtained before implementation.
Procedure and time frame
The restructuring follows the receipt of request along with restructuring proposal to that
effect from the borrowal units.
The branch would take immediate steps to analyse the performance based on facts and
circumstances and submit reports to the competent authorities for deciding the restructuring
as prima-facie feasible.

53

Procedure for restructuring an account

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

Application from the party

Future cash flows in support of repayment sought
Proper assessment on the request and viability
Proper sanction with terms and conditions
Sanction letter to the party communicating terms and conditions.
Accepted copy of the letter by the party
Proper
documentation
including
DBC
on
the
date
of
restructure.
(Cir. Letter no. 2713 dt 26th march 09)
Without the above the statutory auditors may not agree to treat the account as standard.

Asset Classification Norms:

Restructuring could take place in the following stages;

Before commencement of commercial production / operations

After commencement of commercial production / operations but before the asset has been
classified as Sub-Standard.
After commencement of commercial production / operation and the asset has been classified
as Sub-Standard or Doubtful.

In each of the foregoing 3 stages the reschedulement, etc. of principal and / or interest could
take place with or without sacrifice as part of the package.
The accounts classified as Standard Assets should be immediately reclassified as Sub
Standard Assets upon restructuring (exception: accounts where RBIs Special Regulatory
Treatment is applicable).
The Non-Performing Assets, upon restructuring, would continue to have the same asset
classification as prior to restructuring and slip into further lower asset classification
categories as per extant asset classification norms with reference to pre-restructuring
repayment schedule.
All Restructured Accounts which have been classified as Non Performing Assets, upon
restructuring would be eligible for up gradation after observation of satisfactory
performance during the specified period.
Specified period means one year from the commencement of the first payment of interest or
principal whichever is later on the credit facility with longest period of moratorium.
Satisfactory Performance during the specified period means adherence to the following
conditions during that period:
Non - Agricultural Cash Credit Accounts

54

The account should not be out of order anytime during the specified period, for duration of
more than 90 days. In addition, there should not be any overdue at the end of the specified
period.

Non Agricultural Term Loan Accounts

No payment should remain overdue for a period of more than 90 days. In addition, there
should not be any overdue at the end of the specified period.
All Agricultural Accounts
At the end of the specified period the account should be regular.
In case, however, satisfactory performance after the specified period is not evidenced, the
asset classification of the restructured account would be governed as per the applicable
prudential norms with reference to the pre-restructuring payment schedule.
Any Additional Finance may be treated as standard asset up to the specified period
If the restructured assets does not qualify for up gradation at the end of the above specified
one year period, the additional finance shall be placed in the same asset classification
category as the restructured debt.
Repeated Restructuring
In case a restructured asset, which is a standard asset, is subjected to restructuring on a
subsequent occasion, it should be classified as Sub-Standard.
If the restructured asset is a Sub-Standard or Doubtful asset, its asset classification will be
reckoned from the date when it becomes NPA on the first occasion.
Such advances restructured on second or more occasions may be upgraded to Standard
category after satisfactory performance as per the restructuring package during the
specified period.

SPECIAL REGULATORY TREATMENT FOR ASSET CLASSIFICATION

In partial modification to the provisions mentioned under Asset Classification Norms in the
previous slides, RBI has permitted special regulatory framework for asset classification other
than the advances extended to the following categories:

Consumer and Personal Loans

Advances classified as Capital Market exposure

55

Advances classified as commercial real estate exposure.

Elements of Special Regulatory Framework

The Special Regulatory Treatment has two components
1. Incentive for quick implementation of Restructuring Package

2. Retention of the asset classification of the restructured account in the pre-restructuring asset
classification category.

Incentive for quick implementation of the restructuring package

During the pendency of the application for restructuring of the advance with the bank, the
usual asset classification norms would continue to apply. The process of reclassification of
an asset should not stop merely because the application is under consideration. However, as
an incentive for quick implementation of the package, if the approved package is
implemented by the bank as per the following time schedule, the asset classification status
may be restored to the position which existed when the reference was made to the CDR
Cell in respect of cases covered under the CDR Mechanism or when the restructuring
application was received by the bank in non CDR cases:

Within 120 days from the date of approval under the CDR Mechanism.
Within 120 days from the date of receipt of application by the Bank in cases other than those
restructured under the CDR Mechanism.

Asset Classification Benefits

In partial modification of the existing guidelines
A Standard Asset will not be downgraded to Sub-standard category upon restructuring
The Sub-standard / Doubtful accounts will not deteriorate upon restructuring,.
The above benefits will be available subject to compliance with the following conditions:

The accounts are fully secured including collateral (not applicable to SSI Borrowers with
outstanding up to Rs.25 lacs and to Infrastructure Projects provided cash flows are adequate for
repayment of the advance and the Bank has in place an appropriate mechanism to escrow the cash
flows, and also have a clear and legal first claim on these cash flows).
Unit becomes viable in 5 years for non infra and 8 years for infrastructure.
Repayment period including moratorium does not exceed 10 years (15 years for infrastructure).
Promoters sacrifice and additional funds brought by them should be minimum of 20% of banks
sacrifice or 2% of restructured debt whichever is higher. It should be brought upfront in all the
accounts. It need not necessarily be brought in cash. It can be conversion of unsecured loan
brought by the promoter into equity and interest free loans.

56

Personal guarantee of promoter is offered in all cases even when affected by external factors
pertaining to the economy / industry.
The restructuring under consideration is not a repeated restructuring.
The special regulatory treatment is available only up to 31.03.2015.
However, as per the Mahapatara committee recommendations, mere extension of DCCO would not
be considered as restructuring it the revised DCCO falls within the period two years and one year
from the original DCCO for infrastructure projects and non infrastructure projects respectively.
Right to recompense clause is mandatory even in cases of non-CDR restructurings.

In any case minimum 75% of the recompense amount should be recovered by lenders and in
cases where some facility under restructuring has been extended below the base rate, 100%
of the recompense amount should be recovered.
OTHER ISSUES
Any change in the repayment schedule of a project loan caused due to an increase in the
project outlay on account of increase in scope and size of the project, would not be
treated as restructuring if:
The increase in scope and size of the project takes place before commencement of
commercial operations of the existing project.
The rise in cost excluding any cost overrun in respect of the original project is 25% or
more of the original outlay.
The bank re-assesses the viability of the project before approving the enhancement of
scope and fixing a fresh DCCO.
On re-rating, (if already rated) the new rating is not below the previous rating by more
than one notch.
Provisioning Norms
Bank will hold provision against the restructured advances as per the existing provisioning
norms. This apart, the Bank should also make additional provision for the sacrifice involved as
under:

Reduction in rate of interest and / or reschedulment of repayment of principal amount as part

of restructuring will result in diminution in the fair value of advance. Such diminution in value
is an economic loss to the bank and will have impact on the banks market value of equity.
Banks have to measure such diminution and make provision for it. Such provision shall be in
addition to the existing provisioning norms.
The erosion in the fair value of the advance should be computed as the difference between the
fair value of the loan before and after restructuring.

Fair Value of loan before restructuring

57

It will be computed as the present value of future cash flows representing the interest at the
existing rate charged on advance before restructuring and the principal, discounted at a rate equal
to the Banks Base Rate as on the date of restructuring plus appropriate term premium and credit
risk premium for a borrower category on the date of restructuring.

Fair Value of the Loan after restructuring

This will be computed as present value of cash flows representing the interest at the rate charged
on advance on restructuring and the principal, discounted at a rate equal to the Banks Base rate
as on the date of restructuring plus the appropriate term premium and the credit risk premium for
the borrower category on the date of restructuring.
The difference between the above two should be treated as sacrifice and should be provided at
100%.
In case of working capital facilities the diminution in the fair value of cash credit or overdraft
component may be computed as above reckoning higher of the outstanding amount or limit
sanctioned as the principal amount and taking the tenure of advance as one year. The term
premium would be as applicable for one year. The fair value of term loan components (WCTL /
FITL) would be computed as per the actual cash flows and taking the term premium in the discount
factor as applicable to the maturity to the respective term loan component.
The diminution in the fair value may be re-computed in each Balance Sheet date till satisfactory
completion of all repayment obligations and full repayment of the outstanding in the loan account,
so as to capture the changes in the fair value on account of changes in BPLR, term premium and
the credit category of the party. Consequently, the Banks may provide for shortfall in the provision
or reverse the amount of excess provision held in a distinct account.
The total provisions required against an account (normal provisions + provisions in lieu of
diminution of fair value of advance) are capped at 100% of the outstanding debt amount.
In case of advances extended by small / rural branches, Banks will be the option of notionally
computing the amount of diminution in the fair value under providing there for, at 5% of the total
exposure in all restructured account where the total dues to the bank are less than Rs.1.00 crore.
This will be applicable for a period up to March 2011.
1. Provisioning Norms:

Existing Accounts as on 31.3.2013:

(A) Provision on Standard Restructured advances for F.Y: 13-14 is 3.50%.
(B) Provision on Standard Restructured advances from F.Y: 14-15 will be 4.25%.
(C) Provision on Standard Restructured advances from F.Y: 15-16 will be 5.00%.

New Cases from 01.6.2013:

5% Provision on new Standard Restructured advances.

Restructured accounts classified as standard advances will attract a provision of 5%

w.e.f 01.06.2013 in the first 2 years from the date of restructuring. Where
moratorium is there, then provision at 5% for the period covering moratorium and 2
years thereafter.
Restructured accounts classified as NPA, when upgraded to standard category will
attract provision of 5% in the first year from the date of up gradation.
58

In addition to the above general provisioning, 100% of the sacrifice* amount on

restructured facilities and entire FITL amount (Wherever applicable) is to be provided.
*Sacrifice Explanation:
Is the difference of present value of future cash flows before restructuring and after
restructuring discounted at applicable rate of interest (B.R +Risk premium+ tenor
premium) as on date of restructuring.
The total provisions required against an account (normal provisions + provisions in
lieu of diminution of fair value of advance) are capped at 100% of the outstanding
debt amount.
Banks will have the option of notionally computing the amount of diminution in the
fair value and providing there for, at 5% of the total exposure in all restructured
account where the total dues to the bank are less than Rs.1.00 crore
Though provision is done at central office level, branches need to understand the effect of
restructuring on profitability of the bank due to the above provisioning
Income Recognition Norms
Standard Accounts
In case of restructured accounts classified as Standard assets, the income will be
recognised on accrual basis.
Non Performing Accounts
In case of restructured accounts classified as Non Performing Assets the income
will be recognised on cash basis.
Additional Finance
In case of accounts where the pre-restructuring facilities were classified as SubStandard and Doubtful, interest income on the additional finance should be
recognised only on cash basis.
Disclosure requirements
The debt restructuring scheme for SME will be displayed on the Banks website. The
following disclosure in respect of restructuring undertaken during the year under SME
accounts will be mentioned in the Balance Sheet under Notes on account. Not only the
restructured account to be disclosed, all other accounts of the borrower are also to be
disclosed in the annual report.
Relief & Concession
Interest Dues on Cash Credits and Term Loans
59

If penal interest has been charged it may be waived in the accounting year of the unit in which
it has started incurring cash losses continuously.
After this is done, the unpaid interest on Term Loan and cash credit during this period should
be segregated from the total liability and funded.
No interest should be charged on funded interest and repayment of such funded interest should
be made in within a period not exceeding 3 years from the date of implementation of the
package.

Unadjusted interest dues

Unadjusted interest dues such as interest charged between the date up to which rehabilitation
package was prepared and the date from which actual implemented may also are funded on
the same terms as per the previous slide.
Term Loans
The rate of interest may be reduced below the document rate where considered necessary as
under :
By not more than 3% in case of Tiny / Decentralised Sector units
No more than 2% for other SSI units.

Relief & Concession

Working Capital Term Loan
After the unadjusted interest portion of the cash credit account is segregated as indicated
earlier, the balance representing principal dues may be treated as irregular to the extent
it exceeds drawing power. This amount may be funded as WCTL with repayment schedule
not exceeding 5 years. The rate of interest applicable may be 1.5% to 3% points below the
prevailing fixed rate / PLR wherever applicable to all sick SSI units including Tiny and
Decentralised units.
Cash Losses
The circular also provides for funding cash losses in detail.
Working Capital
Interest on working capital may be charged at 1.5% below the prevailing fixed PLR
wherever applicable. Additional working capital limits may be extended at a rate not
exceeding the BPLR.
Contingency Loan Assistance
For meeting escalations in capital expenditure to be incurred under the rehabilitation
programme, where considered necessary, appropriate additional financial assistances upto
15% of the estimated cost of rehabilitation by way of contingency loan assistance may be
provided. Interest on this contingency assistance may be charged at the concessional rate
allowed for working capital assistance.
Reporting:
60

All advances restructured should mandatorily be marked under LONRSHDL menu, without
exception.
FITL must be opened with proper MIS codes as follows :46
:
Repayment period <1 Year.
47
:
Repayment period between 1 year to 3 years.
48
:
Repayment period >3years.

All Branches/Offices are advised to meticulously follow the above instructions while
taking up restructuring of advances. For further details, instruction circular issued from
time to time and Master Circular issued by RBI should be referred.
For additional details on SME Restructuring reference may be made to the following
circulars:

Instruction Circular No.9284 dated 16.05.2012

Information Circular No.11843 dated 13.07.2013
Circular letter No.552 dated 10.07.2013

RESCHEDULEMENT OF AGRI ADVANCES (IC9667 dated 30.7.2013)

A process considering genuine difficulties of the borrower to repay the banks dues
on prescribed due date.
Modifying the original repayment schedule to ensure regular future repayment as per
profit generation.
Reasons:
In case of droughts, floods, cyclones, tidal waves and other natural calamities there is heavy
damage to farmers.
The State and local authorities draw programmes for economic rehabilitation of the affected
people
The commercial and co-operative Banks provide active support in revival of the economic
activities while discharging their developmental role.
Process:

In case of a natural calamity, generally the state Government declares Annewari which indicate
the extent of damage to the crops.
In case the declaration of annewari is delayed for any reason, Dist., collectors certificate
supported by DCC that crop yield is below 50% of the normal yield may be taken as a base for
giving relief to farmers.
Immediately after the calamity the SLBC or the DCC convene a meeting to decide the quantum
of assistance to be given by Banks.
While determining the quantum of assistance required by a person affected by the natural
calamity, the banks may take into consideration the assistance/subsidy received by him from
the state Government and/or other agencies.

61

In case of natural calamity the financial assistance/relief measures to be given by Banks

will include:

Consumption Loan (wherever necessary) normally up to Rs.10000/- without collateral

security
Conversion of Short term loans to medium term loans
Conversion of installments and interest of TL falling due in the year of natural
calamity to a fresh term loan
Fresh Loans for resumption of normal business

Guidelines for reschedulement of Crop Loans:

Amount of principal & interest on Short term loans due in the year of natural calamity may be
converted into term loans in suitable repayment periods.
The period of conversion/reschedulement will depend upon intensity of the calamity, extent
of crop loss and distress caused to the farmers.
Amounts not collected during the year of occurrence of the calamity to be converted into
term loans as follows

In all cases moratorium of at least 01 year should be given

Where damage is less than 50% of assets repayment up to 03 years
Where damage is more than 50% of assets repayment up to 05 years
Extreme hardships repayment up to 07 years
In extreme hardship cases the repayment may be further extended to 10 years in consultation
with SLBC
No compounding of interest
Conversion to TL should be done before 03 months from the date of natural calamity, otherwise
the account may be classified as sub standard
Fresh loan sanctioned to such borrowers where ST loans are converted to MT loans will be
treated as standard assets, including the MT loan
62

 All short term loans, except those, which are overdue at the time of occurrence of natural
calamity, should be eligible for conversion facilities
Pending conversion of short term loans, banks may grant fresh crop loans to the affected
farmers
Conversion of short-term production loans may be taken up by banks at the time of sanction
of fresh crop loans to the affected farmers without waiting for the due dates, which are taken
into account in normal course of sanction of such loans

Similarly, installments of principal/interest falling due in the year of natural calamity may be
converted to a fresh TL repayable as follows

In all cases moratorium of at least 01 year should be given

Where damage is less than 50% of assets repayment up to 03 years
Where damage is more than 50% of assets repayment up to 05 years
Extreme hardships repayment up to 07 years
In extreme hardship cases the repayment may be further extended to 10 years in consultation
with SLBC

No additional collaterals should be insisted

Where relief in the form of conversion/reschedulement of loans is extended to the farmers,

such converted/rescheduled dues should be treated as current dues and banks should not
compound interest in respect of the loans so converted/rescheduled
Development Loans-Investment costs:
The existing term loan installments will have to be rescheduled/postponed keeping in view
the repaying capacity of the borrowers and the nature of natural calamity viz.
i)

Droughts, floods, cyclone etc. where only crop for that year is damaged and productive assets
are not damaged
Floods or cyclones where the productive assets are partially or totally damaged and borrowers
are in need of a new loan

ii)

In regard to natural calamity under category(i) the banks may postpone the payment
of installment during the year of natural calamity and extend the loan period by one
year subject to following exceptions:

a) Those who had misutilised the fund or had disposed of the equipments or machinery
purchased out of the loan
b) Those who are income tax payers
c) In case of drought where there is perennial sources of irrigation
d) Tractor owners, except in genuine cases where there is loss of income and consequential
63

impairment of their repayment capacity

Under this arrangement willfully defaulted installments in earlier years will not be eligible for
rescheduling
In regard to category (ii) i.e. where the borrower's assets are totally damaged the
rescheduling by way of extension of loan period may be determined on the basis of
a) Overall repaying capacity of the borrower including his repayment commitment on the old
term loans and towards the conversion loan (medium term loan) on account of postponing of
repayment of short term loans and fresh crop loan.
b) In such cases, the repayment period of total loan(including interest liability) less the
subsidies received from Govt. Agencies, insurance claim if any may be fixed maximum up to
15 years considering repaying capacity of the borrower, also considering type of investment as
well as the economic life of new asset financed-except in cases where loan relates to land shaping, silt removal, soil conservation, etc
In case of loans for agril. machineries, viz., pump sets and tractors, it should be
ensured that the total loan period does not generally exceed 9 years from the date of
advance
Apart from rescheduling existing loans, the Bank will be required to provide additional loans
to the affected farmers in the form of fresh crop loans, minor irrigation, bullocks, allied
activity loans etc., to ensure regular cash flow.

Any changes made in repayment schedule as above in respect of farmers affected by

Natural calamity should NOT be shown as restructured accounts while reporting to
RO/CO (IF 11413 dated 10.12.2010)
BENEFITS OF RESCHEDULEMENT

Viability is sustained
Genuine difficulties of borrower taken care, Bank's developmental/social
responsibilities discharged
Helps borrower to avoid outside costly borrowings and profitability improved

DOCUMENTATION

Application for rephasement of ST loans OR reschedulement of Term loan

Acknowledgment from the borrower and guarantors for fresh terms and conditions and
fresh repayment schedule
Fresh DBC as on date of conversion ie., prior to reschedulement
Letter of continuity AD 09 (M)
Consent of guarantors for restructuring.
Extension of EM for the restructured loans

64

ENHANCED TENURE TO NPA ACCOUNTS UNDER UNION EDUCTION:

(IC 9311 dt.21.06.2012)
Branches are permitted to restructure NPA education loans by offering revised maximum loan
tenure as applicable (only by adding the difference between existing tenure and new
maximum possible tenure):
-

Max. 10 years in case of loan up to Rs.7.5 lac

Max 15 years for loan above Rs.7.5 lac

Revised EMI to be calculated based on

-

current outstanding
interest held in dummy ledger
Rate of Interest as is being charged in the account
Remaining tenure after revision.

Such restructured NPA accounts shall continue in NPA category for one year. Account can be
upgraded after one year if the borrower pays the revised EMI regularly.
Branches to contact such borrowers take a request and convey the revised schedule against
acknowledgement.
THIS RESTRUCTURING IS NOT APPLICABLE TO REGULAR/STANDARD UNION EDUCATION LOAN
ACCOUNTS.
ENHANCED TENURE IN STANDARD EDUCATION LOAN (IC 9700 dt.13.09.2013)

Branches can extend the tenure of education loan repayment upto 10 years (in case of
domestic) and 15 years (study abroad) in the existing loans under model education loan
Scheme. This will not be treated as restructuring. However, this treatment is available only if
the education loan is standard as on the date of such extension of repayment. Further, such
extensions should be need-based; looking to the repayment capacity and this benefit cannot
be given with retrospective effect.

DOCUMENTARY CREDITS
A documentary credit is frequently the agreed method of settlement for international
trade. The buyer's bank reimburses the seller against presentation of documents in
65

compliance with conditions stipulated in the documentary credit by the buyer.

There are advantages to both the buyer and seller when settlement is arranged by
documentary letter of credit. Firstly, the buyer knows that payment will only be made if the
documents received comply strictly with the terms and conditions of the credit as stipulated
by the buyer. Secondly, the seller knows that payment will be received provided the terms
and conditions of the credit are strictly complied with.
DEFINITION OF A DOCUMENTARY LETTER OF CREDIT
In simple terms, a documentary credit is a conditional undertaking of payment given
by a bank. Expressed more fully, it is a written conditional undertaking issued on behalf of
the importer (applicant) by the issuing bank to the exporter (beneficiary) to pay for the goods
or services provided the terms and conditions of the credit are complied with.
From this definition it can be seen that there are basically three parties to a
documentary credit, i.e.
THE APLICANT
For the credit (the buyer/importer) who requires that a credit be issued in favour of;
THE BENEFICIARY
Of the credit (the seller/exporter) who requires that payment for goods or services is made by
means of a credit opened by an;
ISSUING BANK
Normally the importers bankers who undertake to pay the beneficiary the amount due
provided the terms and conditions of the credit are compiled with. The credit is usually, but
not always, advised to the beneficiary through a bank in the beneficiary's country (the
advising Bank).
TYPES OF CREDIT
There are various types of documentary credits. All documentary credits are
irrevocable whether expressly mentioned or otherwise (Art 3 of UCPDC 600)
An irrevocable credit can be amended or cancelled only with the agreement of the issuing
bank, the confirming bank (if the credit is confirmed) and the seller (beneficiary). The buyer
can request the advising bank to add its confirmation to an irrevocable credit. If the advising
bank agrees, the irrevocable credit becomes a confirmed irrevocable credit.
A revocable credit involves risks to the beneficiary as the credit may be amended or
cancelled while the goods are in transit and before correct documents are presented. The
seller would then face the problem, of obtaining payment directly from the buyer.
A revocable credit gives the buyer maximum flexibility as it can be amended or
cancelled without prior notice to the seller upto the moment of presentation of documents to
the bank at which the issuing bank has made the credit available.
An irrevocable credit gives the seller greater assurance of payment but is really only
dependant upon the undertaking of a bank abroad. A confirmed irrevocable credit gives the
seller a double assurance of payment, since a bank in the seller's country has now added its
own undertaking in addition to that of the issuing bank.
TRANSFERABLE CREDITS
A TRANSFERABLE CREDIT under Art.38 of UCP 600 is a credit under which the
66

beneficiary has the right to give instructions to the bank called upon to effect payment or
acceptance or any bank entitled to effect negotiation to make the credit available in whole or
in part to one or more parties.
A letter of credit can be transferred only if it is expressly designated as transferable by the
issuing bank and can be transferred once only (although if part shipments are not prohibited
fractions of a transferable credit may be transferred to more than one beneficiary).
When a credit is transferred to a secondary beneficiary or a number of second
beneficiaries, it must be transferred on the terms and conditions specified in the original
credit, except that :
a) The amount of the credit may be reduced
b) Any unit price maybe reduced
c) The validity may be curtailed
d) The specified period of time after the date of shipment for presentation of documents may
be curtailed
e) The latest shipment date may be curtailed
f) The name of the first beneficiary can be substituted
g) Insurance cover percentage may be increased in such a way as to provide the amount of
cover stipulated in the original credit.
h) The first beneficiary may request that payment or negotiation be effected at the place to
which the credit has been transferred, upto and including the original expiry date.
BACK TO BACK CREDITS
Two types of credit, by their very nature, cause bankers considerable trouble and
thought. They are Back-to-back and Transferable credits.
A back to back credit can be described as Credit and Counter credit. It is a method of
financing both sides of a transaction in which a middle man buys goods from one customer
and sells them to another, both settlements being made under Doc. Credit.
When the documents are received under the back to back credit by the bank, they will
advise the opener so that he may exchange his own invoices made out in the name of the
buyer and tender the documents for negotiation under the original letter of credit. The
opening bank of the back to back credit will then negotiate the documents attaching the draft
to the set of documents received under the back to back credit and honour the documents
submitted under the back to back credit. The difference if any, between the amount paid
under the back to back credit and amount reimbursed from the foreign bank will be paid to
the original beneficiary, less bank charges.
REVOLVING CREDITS
Revolving credits are those which renew themselves automatically. If the renewal is
not automatic but subject to reinstatement instructions the credit is not a true revolving credit
but rather a credit of fixed amount which has to be increased by means of amendment
instructions after each drawing or alternatively a credit of a fixed total amount is payable by
specific installments.
Under a Revolving credit, the drawings made under the credit will be re available to
the beneficiary, upon receipt of instructions from the opening bank to the effect that the
earlier drawings under the credit have been paid by the beneficiary and the amount has been
reinstated in the credit. A credit can be made revolving as to time or upto a maximum
amount of drawing.
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RED CLAUSE CREDITS

The object of the inclusion of the Red Clause in a documentary credit is to enable the
beneficiary to obtain pre finance from a bank in his country. It is so called because
historically it was usually printed in red on the credit advice.
The Red clause in the credit enables him to borrow money from the bank to pay for
the goods to be shipped. The beneficiary thus purchases the goods and effects the shipments.
After shipments are made, the documents are tendered to the bank. However, the bank
making payment under the Red clause credit will be reimbursed by the opening bank on date
of effecting payment to beneficiary. There are two types of Red Clause credits. One is
secured and other is unsecured. Under unsecured credit, the payment in advance will be
made to beneficiary against presentation of drafts only on the advising bank/opening bank.
Under Secured or Documentary Red clause credit, the advance will be made against
Warehouse Receipts or similar documents and the beneficiary's undertaking to deliver the
relative Bills of Lading upon shipment
A Green Clause Credit is one which envisages the granting of storage facilities at
the port in addition to the pre shipment payment to the beneficiary.
A Standby Letter of Credit while possessing all the elements of a documentary
credit subject to UCP it is often used in lieu of the performance guarantee. Basically, the
stand by credit is intended to cover a NON PERFORMANCE (default) situation instead of a
PERFORMANCE situation as with the traditional documentary credit. The bank authorized
to make payment under a standby letter of credit will do so on presentation of requisite
documents called for in the credit by the beneficiary, although the opener may claim
performance.
Credits are available for settlement by acceptance/payment/deferred
payment/negotiation. The negotiation under a confirmed credit is without recourse while
negotiation under an unconfirmed credit is with recourse to drawer.
Typically, a letter of credit nominated in any other currency other than the currency of
the beneficiary will be available by 'negotiation'.

EXPORT FINANCE PRE SHIPMENT

Exports pay a vital role in a developing economy. Apart from finding overseas market for
domestic goods and services, it also earns valuable foreign exchange. The employment
generation capacity of the export segment is also immense. Hence, over the years, several
measures have been taken by the Government / RBI to boost up exports of the country. One
such very important measure is export finance at concessive interest rate by commercial
banks.
Export Finance to exporters is done at two stages. One at pre-shipment stage and the other at
Post shipment stage. Financing of Exporters for procurement, processing packing of goods
meant for exports are called pre-shipment finance. The financing of Bills after the goods have
left the shores of the country is called post-shipment finances.

1) Credit norms of Pre-shipment :

Pre-shipment finance is granted as per the existing credit norms of the bank for working
capital assessment as per the borrowers requirement certain relaxation in credit norms has
been allowed while assessing the Working Capital requirements of the exporters.
a) While arriving Flexible Bank Finance (FBF) export receivables are also included in
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current assets. Financing of export receivables is permitted within FBF. However,

relaxation in current ratio up to 1.17 is permitted in these cases.
b) Additional credit limits for additional L/C / firm order permissible even it exceeds
the assessed FBF . Margin relaxation for such additional limit can be allowed.
c) Penal interest for excess over limit / adhoc limits not applicable.
d) Working capital demand loan need to be carved out only for limits excluding export
limits.

Types of Pre-shipment Finance

i) Packing Credit :
a) To holders of export order / LC
b) Manufacturer supplying to exporter
c) Sub-suppliers to export order holder
d) Deemed exports
(ii) Advance against Govt. Incentives.
2) Eligibility :
a) Customer should be holding or applied for Importer Exporter code number from
Director General of Foreign Trade.
b) Exporter must have experience in the line he is exporting.
c) Commodity proposed to be exported should not be restricted/banned or subject to
control like quota/floor price etc. If so the guidelines of those restrictions to be
complied.
d) The customer sister concerns, their partner/Directors must not be in the exporters
caution list of RBI or specific approval list of ECGC.
e) Export must not be to a country in the restricted cover list
3) Disbursement :
The FEMA regulations and Exim policy norms should be taken care while dealing with
the application for packing credit. The exporter has to submit following:
a) Applications in Prescribed format.
b) Original order/LC. Where original has not been received evidence of the concluded
contract can be accepted from established customer. Original contract to be submitted
within 15 days
c) All stipulations in the sanctioned terms and conditions of credit should have been
fulfilled.
d) Stock statement, In case of fresh disbursement, Stock statement to be submitted
within 15 days.
Packing credit to be disbursed in stages depending upon the need as per schedule given in
order/production plans. LC or contract to be endorsed for the PC amount sanctioned.
As far as possible the amounts should be directly disbursed to supplies, after obtaining
a letter from exporter, for each contract separately. Running account facility is also
permissible for established exporters. A separate PC account with cheque book facility can be
opened and payments for the purpose of exports may be made. The outstanding in running
account should always be supported by valid contract/LC and also within the Drawing Power
as per Stock Statement. Over dues in running account are arrived on the basis earliest debit
outstanding not more than 180 days. Certain relaxation has been given for exporters with
good tract record while operating the running account.
4) Amount Eligible:
i) The amount of packing credit is released on the basis FOB Value or Domestic market
69

value less margin specification. Where the contract is on CIF or CNF basis, amount of
Insurance and Freight/Freight is reduced to arrive FOB Value.
ii) Where EEFC is required amount of order less EEFC amount or the amount as arrived in
( i ) above whichever is less is to be sanctioned.
5) Time Frame for disposal of Export credit applications:
New sanctions/ enhancements : 45 days
Renewal at existing level : 30 days
Sanction of Adhoc Limits : 15 days
GOLD CARD SCHEME FOR EXPORTERS:
As one of the several measures to promote exports, The Government in consultation with
RBI has proposed issuance of Gold Card to creditworthy exporters with Good track record
vide Exim Policy 2003-04.RBI has framed broad guidelines for Gold Card Scheme. The Gold
card holder would enjoy simpler and more efficient credit delivery mechanism in recognition
of his good track record
Our bank has put in place Gold card scheme for exporters in tune with the guidelines received
from RBI. The salient features of the scheme are:

Eligibility:
All credit worthy exporters with a rating of CR 1 / CR2 incase of large exporters and
up to CR3 in case of SME exporters and having minimum 3 years of satisfactory
relationship with the bank.
Exporters enjoying export credit limits of Rs 5 crs and above or annual export
turnover not less than Rs 100 crores will be treated as large exporters and those
enjoying export credit limit of Rs 1 cr to less than Rs 5 cr and export turnover of
Rs 25 cr to Rs 100 cr will be treated as Small and Medium exporters.
Accounts in Standard Category excluding EAS / SMA category are only eligible.
The scheme is not applicable to exporters blacklisted by ECGC / Caution listed by
RBI.
Sanctioning Authority:
General Manager (Field) / General Manager (Credit) / Zonal Heads are authorized to approve
issuance of Gold Card to exporters.
Benefits:
Sanction / renewal of limits will be for a period of three years & subject to Financial
soundness / Export realization track record / Background of promoters / Mgmt etc
There will be a provision for step up or step down of limits each year based on
achievement or otherwise of projections. Tolerance of 5 % variance from projections
is acceptable.
PCFC / FCL requirements of Gold Card holders will be met on priority subject to
availability of funds.
The time frame for disposal of credit applications under the scheme are
New sanctions/ enhancements : 25 days
Renewal at existing level : 15 days
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Sanction of Adhoc Limits : 07 days

A standby limit to the extent of 20 % of assessed limit may be made available to
facilitate urgent credit needs not exceeding 3 months.
Flexibility of interchangeability of limits between Pre & post shipment facilities up to
30 % at Branch Managers discretion for CR2 credit rating exporters
The gold card will be issued for a period of three years and will be automatically
renewed for a further period of 3 years unless there are adverse features in the account
Operational Guidelines for Other Types of Exporters
1) Manufacturer Supporting Exporters :
A) Request letter from the merchant exporter with following details:1. Back to Back L/C opened by export order holder in favour of manufacturer or Letter
from the direct exporter placing the order with the manufacturer with terms of
delivery and details of export order / L/C.
2. Letter from the direct exporter confirming that he has not / will not avail any
packing credit from his banker for this order and confirmation from his bank to this
effect.
3. Undertaking from the direct exporter that the documents once tendered to his
banker, the payment will be directly made to our bank by means of DD / P.O payable
at the place of manufacturer with a certificate that the goods financed are meant for
export drawn under L/C / purchase order.
B) Eligible for ECGC cover under WTPCG and concessional rate of interest for
export advance.
C) No post - shipment facility to be granted to the manufacturer. But DBP Bills
drawn on the Export order holder or under back to back L/C can be purchased.
It will continue to be reported in WTPCG.
D) Proof of export to be submitted by way of form 15 H./Certified Invoice from
Bank in case of non excise duty goods.
E) P.C.FC can also be granted to manufacturer supplier, which will be adjusted by
transfer of foreign currency funds from the export order holder.
2) Sub-Suppliers:Sub-Suppliers is one who provides raw material / components etc. to the
direct exporter to enable him to effect shipment. In terms of RBI guidelines
the sub-suppliers can also be extended packing credit on the following
terms:(1) On the basis of the export order or LC in the name of the export order holder,
export house /Trading House / Star Trading House etc. or manufacturer exporter, with
good track record. Running a/c facility not permitted
(2) Export order holder should open inland L/C through his banker in favour of the subsupplier
on the basis of export order / LC received by him. On the basis of inland L/C
the sub-suppliers banker can grant packing credit, subject to the condition that the L/C
mentioning the details of original L/C / order in the inland L/C.
(3) The export order / LC holder should confirm that he has not availed any packing credit
against this supply with his banker.
(4) Packing credit in IRS only.
(6) Charges for opening inland L/C as per FEDAI guidelines to the account of the
opener.
(7) On presentation of documents as per L/C by the sub-suppliers bank to the exporters
71

bank, the exporters packing credit A/c will be debited for honouring the LC
commitment.
(8) Sub-suppliers packing credit is eligible for concessional rate of interest. But Interest
Tax has to be charged.
(9) Similar PC granted is to EOUS/EPZ units supplying goods to another EOU/EPZ unit.
(10) No post-shipment credit facility to be granted.
(11) Advance is eligible for ECGC cover under WTPCG
3) Export Credit for Deemed Exports:Deemed exports refer to those transactions in which goods supplied do not leave the
country and the payment for such goods are made in India, by the recipient of the goods
Categories of Deemed Exports a) Supply of goods against duty free licenses issued under Duty exemption scheme
b) Supply of goods to EOUS/units in EPZs or software Technology Parks / Electronic
Hardware Technology park.
c) Supply of goods to license holders under EPCG subject to the condition that such supplies
will be eligible for benefits.
d) Goods supplied to projects financed by multinational or bilateral agencies / funds as
notified by the department of Eco. affairs, New Delhi.
e) Supply of goods and spares to the extent of 10% of FOB value to fertilizer plants if the
supply is made under the procedure of international competitive bidding
f) Supply of goods to any project or purpose in respect of which the Ministry of Finance by
notification permits import of such goods at Zero customs duty.
g) Supply of goods to the power, oil and gas sectors in respect of which a notification duly
approved by ministry of finance extends the benefit to domestic suppliers.
h) For participation in exhibition / trade fair abroad either directly or through ITPO or other
sponsor to manufacturer/procure goods export packing credit can be granted at
concessional rates.
Packing credit can be extended to the above category on the following terms :a] The duty free license holder should place the order with the domestic supplier with a
copy of license and undertaking that he will not be utilising the license. He may be advised
to open an inland L/C through his banker tendering the original license, in favour of the
deemed exporter for supply of goods.
b] EOUS / units in EPZ/STPS/EHTPS should place the order with the deemed exporter for
supply of goods based on the parent export order / L/C opened in their favour by the overseas
buyer/banker. An undertaking to the effect that they have not availed any packing credit
under this export order / LC should be enclosed along with proforma invoice and copy of
export order/LC.
c] Supplies effected to EPCG license holders should be backed by Inland L/C indicating that
the goods drawn under L/C are meant under EPCG license no; etc. The original EPCG
license should be surrendered to the ILC opening bank. ILC opening bank should not grant
any packing credit.
d] Copy of supply order issued by multinational / bilateral agencies/firms as notified by
Ministry of finance favouring the deemed exporter should be submitted. The agency should
also confirm that they have not availed any pre-shipment credit for this supply from their
banker and this letter should be confirmed/attested by their banker. Similarly ILC to be
opened in favour of the deemed exporter at sight basis
e] Supplies made to the Holders of License to import at Zero duty import eligible for packing
credit provided ILC is opened by the importer through his banker tendering the original
72

license, favouring the deemed/domestic supplier.

f] Copies of original orders in the name of power plants, oil and gas sector with notification
approved by Min. of Finance to accompany the request for PC and suppliers to be effected
against ILC at sight. The ILC should indicate the details of parent L/C /purchase order.
g] Packing credits for processing goods to participate in international exhibitions / Trade
fairs, the exporter will have to provide the original allotment letter by the respective agency
approving his participation. Initially the credit can be at normal rates and after the sale is
completed benefit of concessional rate of interest can be allowed as rebate. Such advances
are to be controlled separately.
Concessional Export Finance:
All categories of deemed exports are eligible for concessional interest of export finance both
for pre / post shipment. However concessional interest for post shipment is available for a
period of 30 days only.
Benefits for Deemed exports
Deemed exporters are eligible for
1) Special import license/Advance intermediate license
2) Deemed exports drawback scheme
3) Refund of terminal excise duty
PCFC FOR DEEMED EXPORTS:
PCFC may be allowed for deemed exports only for supplies to projects financed by
multilateral / bilateral agencies / funds. PCFC released for deemed exports should be
liquidated by grant of foreign currency loan at Post-supply stage for a maximum period of 30
days or up to the date of payment by the project authorities, whichever is earlier. PCFC may
also be repaid / prepaid out of balances in EEFC a/cs as also from rupee resources of the
exporter to the extent supplies have actually been made.

Export Finance Post Shipment

Post-shipment finance is essentially an advance against receivables, which will be in the form
of shipping documents. The responsibility of an AD will be felt more in case of post
shipment advances because Reserve Bank will be monitoring the realisation of full proceeds
of individual shipments through AD. Some of the major exchange control regulations
concerning export finance at the post shipment stage are as follows:
a) Exporter should have IEC No. and each shipment should accompany the prescribed
declaration (GR/SDF/PP/SOFTEX) form in which the value of export will be
declared and duly certified by the customs authority.
b) Shipping documents along with relative GR form must be submitted to the AD within
21 days from the date of shipment. If there is any genuine delay beyond the control of
the exporter, AD has been delegated with powers to condone the delay and accept the
shipping documents even after 21 days from date of shipment.
c) The payment should normally be received in an approved manner within the
prescribed time limit but within a maximum period of six months from the date of
shipment. (Please refer recent devts. in foreign exchange for latest guidelines)

Different Types of Post-Shipment Advances:

i) Export Bills Purchased/Discounted
ii) Export Bills Negotiated
iii) Advance against Foreign Documentary bills sent in Collection (AFDBC)
iv) Advance against exports on consignment basis
v) Advance against undrawn balances
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vi) Advance against Duty Drawback

i) Export Bills Purchased/Discounted- DA & DP bills : (Other than L/C bills)
The export bills, representing genuine international trade transactions, strictly drawn
in terms of the sale contract / live export order may be discounted or purchased by the
banks. Proper limit should be sanctioned to the exporters for purchase of export bills
facility. Since the export is not covered under Letter of Credit, risk of non-payment
may arise. The risk is more pronounced in case of documents under acceptance. In
order to safeguard the interest of the bank and also the exporter, ECGC offers
coverage of credit risks through their guarantees/policies at the post shipment stage.
The bank will be normally covering the advance under Whole Turnover Post
Shipment Guarantee scheme (ECIB WTPS). In addition to this, exporter should be
advised to go for a separate buyer wise policy also.
ii) Export Bills Negotiated : (Bills Drawn under Letter of Credit):
When export documents, drawn under LC, are presented to the bank for negotiation,
they should be scrutinized carefully with the terms and conditions of the LC. All the
documents tendered should be strictly in accordance with the L/C terms. It is to be
noted that the L/C issuing bank undertakes to honour its commitment only if the
beneficiary submits the stipulated documents conforming to L/C terms.
iii) Advance against Foreign Documentary bills sent in Collection (AFDBC)
At times, the exporter might have fully utilised his bills limit and in certain cases the
bills drawn under LC may have some discrepancies. In such cases the bills will be
sent on collection basis. In some cases, the exporter himself may request for sending
the bills on collection basis anticipating the strengthening of the foreign currency.
Bank may allow advance against these collection bills to an exporter.
Concessive rate of interest can be charged for this advance up to the transit period in
the case of DP Bill and transit period + Usance Period + grace period (if any) in the
case of Usance Bills. Beyond this period, the interest rate will be subject to the
various rates prescribed by RBI depending upon the Usance of the bill.
iv) Advance against Goods sent on Consignment basis:
Goods are exported on consignment basis at the risk of the exporter for sale abroad.
Eventual remittance of sale proceeds will be made by agent/consignee. The overseas
branch/correspondent of the bank will be instructed to deliver the documents against
Trust Receipt. Advances granted against the export bill covering goods sent on
consignment basis would be liquidated from remittance of the sale proceeds within six
months from the date of shipment, conforming to the Exchange Control Regulations.
In the case of exports through approved Indian owned warehouses abroad, the time
limit for realisation would be 15 months, from the date of shipment.
v) Advance against Undrawn balances:
In certain line of export trade, it is the practice of the exporter to leave a part of the
amount as undrawn balance. Adjustment will be made by the buyer for difference in
weight, quality etc. ascertained after arrival and inspection or analysis of the goods.
Authorised dealers can handle such bills provided the undrawn balance is in
conformity with the normal level of balance left undrawn in the particular line of
export trade subject to a maximum of 10% of the full export value.
The exporter should give an undertaking that he would surrender or account for the
balance of the proceeds within the period prescribed for realisation. A proper follow
up should be made for the realisation of the undrawn balance. The Authorised Dealer
will retain the duplicate copy of the GR form till the time the full export proceeds are
74

realised.
vi) Advance against Receivables from Government such as Duty Drawback
Where the domestic cost of production of certain goods is higher in relation to
international price, the exporter may get support from the Government so that he may
compete effectively in the overseas market. The Government of India and other
agencies provide export incentives under the Export Promotion Scheme. This can
only be in the form of refund of excise and custom duty known as Duty Drawback.
Banks will grant advances to exporters against their entitlement under above category
at lower rate of interest for a maximum period of 90 days. These advances being in
the nature of unsecured advances cannot be granted in isolation and could be granted
only if all other types of the export finance are extended to the exporter by the same
bank.
After the shipment, the exporters will lodge their claim supported with relevant paper
and documents to the Customs Authorities. The customs will process the claim and
disburse the eligible amount.
These advance would be liquidated out of the settlement of claims lodged by the
exporters. It should be ensured that the bank is authorised to receive the claim
amount directly from the concerned Government authorities.

Period of Finance:
Export bills can be drawn either on DP basis or on DA basis depending upon the
contract between the exporter and the overseas buyer. Concessional rate of interest on
this advance will depend upon the nature of bill.
If the bill is drawn on DP basis, concessional rate of interest will be for a period up to
normal transit period (NTP) and in case of usance bill up to notional due date (NDD)
/ actual due date

Maximum Eligible Finance:

In case of post shipment advance, normally no margin is maintained for bills drawn
under LCs. Only in case of export bills purchased against contracts/firm orders,
depending upon the additional security available, some banks prescribe certain
amount of margin.

Effective Date of Payment of an Export Bill:

In case of foreign currency bills, date of credit in the bank's nostro account and in
case of Rupee bills the date of debit in the vostro account will be taken as the
effective date of realisation of an export bill.

Extension of Time Limit:

If the export bill is not realised within 180 days from date of shipment the exporter
should apply for extension to the Reserve Bank in the prescribed format "ETX"
through the AD.

Crystallisation of Overdue Export Bills:

Exporters are liable for the repatriation of proceeds of the export bills
negotiated/purchased/discounted or sent for collection by the Authorised Dealers.
Authorised Dealers should take into account the exchange risk inherent in an unpaid
export bill negotiated/purchased/discounted and transfer the exchange risk to the
exporter by crystallising the foreign currency liability into rupee liability, on the 30th
day after the expiry of the Normal Transit Period in case of unpaid demand bills and
on 30th day after Notional Due Date / actual due date in case of unpaid usance bills.
In case the 30th day happens to be a holiday or Saturday, the export bill shall be
crystallised on the next working day.
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However, the bill may be crystallised by Authorised Dealers before the said period of
30th day with specific understanding and written request from the customer.
For crystallisation into Rupee liability the Authorised Dealers shall apply the ready
TT selling rate of exchange ruling on the date of crystallisation or the original bill
buying rate whichever is higher.
After receipt of advice of realisation, the Authorised Dealers will adjust the Rupee
liability on the bill crystallised as above by applying the TT buying rate of exchange
or the contracted rate in case a forward contract has been booked by the customer
after crystallisation. Any difference shall be recovered from / paid to the customer.
PAYMENT OF ECGC PREMIUM
Under ECGC's ECIB (WT PS) bank can cover both their contract bills and L/C
bills. Our bank covers only contract bills. Premium will depend upon the credit rating
of the exporter / policy holder / non policy holder. The bank absorbs cost of the
premium and will not be passed on to the exporter.

EXPORT CREDIT IN FOREIGN CURRENCY

INTRODUCTION:
In order to help the exporters to avail of export credit at Internationally competitive interest rates
RBI permitted Pre shipment Credit in Foreign Currency (PCFC) since November 1993. PCFC is
available to cover both domestic and imported inputs need for goods to be exported. Similarly,
Post shipment credit is also being granted in foreign currency at LIBOR related rate. However,
advances granted by way of PCFC are not eligible for refinance from Reserve Bank of India.

CURRENCY OF CREDIT :
Reserve Bank of India has permitted granting of PCFC in any of the convertible currencies.
However, for operational convenience PCFC is being granted in US Dollars , GB Pounds and
EURO only. It may be noted that export credit in foreign currency may be extended in respect of
the export orders in any of the other convertible currencies by applying the appropriate cross
currency rate.

GENERAL GUIDELINES:
All 'A' and 'B' category branches are authorised to make available export credit in foreign
currency. C Category branches desirous of granting this facility to their valuable customers
have to route the transactions through A or B category branches. C Category branches are
not allowed to control PCFC facility in their books. However, C Category branches will control
rupee converted portion of PCFC under PCFC Disbursal or PC II A/c. They will also maintain
a dummy ledger of PCFC account and report the amount as a footnote in W-1 Statement to
concerned Regional Office.

ELIGIBILITY CRITERIA:
i. Exporters account should be falling in Health Code 1/Standard Asset.
ii. Exporters should have a satisfactory track record in the conduct of export
business.
iii. Instances of adjustment of PC by other than in an approved manner
should be bare minimum and for genuine reasons.
iv. Export Bills realisation record should be satisfactory and instances of
overdue bills should not be there except for genuine reasons.
v. PCFC can be granted for deemed exports for supplies to projects, financed by multilateral
agencies/funds, subject to usual terms and conditions governing rupee credit for deemed
exports. At the post shipment stage the credit is restricted to 30 days or up to the date of
76

payment by the project authorities whichever is earlier.

LIMIT:
Authorised branches may consider requests for PCFC within the packing credit limits by
earmarking the rupee equivalent for the PCFC granted at the control rate.

AMOUNT OF CREDIT:
For operational convenience amounts under PCFC are restricted to a specified minimum,
presently US $ 10000/-.

PERIOD OF CREDIT:
Same as in the case of rupee packing credit i.e. maximum 180 days. It should be ensured that the
funds are not diverted for domestic purposes (other than domestic inputs)

MARGIN:
Margin should be as per sanction terms. Actual margin as per sanction terms or EEFC
component whichever is higher. Calculation of drawing power similar to Rupee Packing Credit.

RATE OF INTEREST:
The lending rate is fixed by International Service Branch (ISB) dealing room based on following
formula:The pricing is fixed by International Banking Division, Mumbai. For this a formal request along
with Branch recommendation giving full details of limits sanctioned and outstanding is required
to be sent to IBD. Thereafter IBD, on the basis of prevailing market condition will fix the
pricing linked LIBOR which valid for a period of one year only from the date of pricing.
Ongoing six months LIBOR + 350 basis points. Finer rates can be approved by IBD only.
Interest to be calculated on Foreign Currency balances.
The initial LIBOR quoted to the party at the time of disbursal of PCFC should be based on
the tenor of the advances. Branches should report the disbursals to the dealing room quoting
the tenor of PCFC.
Interest at monthly rest based on LIBOR conveyed at the time of disbursal of the loan should
be applied throughout the tenor of the PCFC.
Branches should disburse PCFC on contract wise basis since interest is based on the tenor of
the respective contract and each contract will be having a different rate of interest. The
adjustment of PCFC should also be ensured on contract wise basis.

RUNNING A/C FACILITY IN PCFC

The running account facility for PCFC may be extended in respect of all commodities to
exporters with good track record. The running account will be controlled currency wise for each
exporter as per the extant procedures for running PC a/c in rupees.

OVERDUE PCFC/EXTENSION:
Treatment of overdue advances is similar to that in case of rupee packing credit. Extension up to
180 days can be granted by Branch Head on the written request of the exporter subject to
underlying contract/L/C being valid. If Bank incurs extra cost in funding the extension, the same
should be recovered from the exporter. No gains are to be passed on. All extensions are to be
reported to Dealing Room who will inform the branch regarding recovery of extra funding cost.
Any extension beyond 180 days and up to 360 days can be granted by branch after getting
approval from concerned Regional office, subject to underlying contract/LC being valid. The rate
of interest on overdue PCFC i.e. beyond 180 days should be 2% above the maximum rate
applicable, for that particular PCFC account during the initial period of 180 days. (LIBOR + 350
77

bps +2%).
If no exports takes place within 360 days, PCFC should be liquidated at TT Selling rate
prevailing on date of liquidation. In case of cancellation of export order, PCFC should be
liquidated at prevailing TT Selling rate and interest recovered on the rupee equivalent of the
principal amount at the rate for packing credit adjusted not in an approved manner and interest
tax plus 1/8% commission. Branches should ensure that reason for adjustment of PCFC with
rupee funds is genuine. Against such export orders, Rupee Packing Credit is not to be granted
again.

ECGC Cover:
PCFC is covered under Whole Turnover Packing Credit Guarantee (WTPCG). Since ECGC
cover is available in rupee only, ECGC premium should be paid at applicable rate on similar
lines as in case of rupee packing credit. Separate declaration has to be submitted for PCFC and
rupee PC.

DOCUMENTATION:
Branches must obtain from the customers, a request letter in the prescribed format. Security
documents taken for Rupee Packing Credit should be obtained for PCFC also. However, DP
Note should be obtained in Foreign Currency.

FORWARD CONTRACT:
Forward contract can be booked for the portions of PCFC and/or FDBD/FUDBD which are to be
converted into INDIAN RUPEES. If the currency of underlying LC/order is other than USD, it
should be ensured that at the time of granting PCFC a cross currency forward contract with
appropriate maturity, after taking into account expected date of realisation of the export bill is
entered into so as to ensure that adequate funds in USD are available to adjust the PCFC.

PCFC in Special Cases:

PCFC cannot be granted in excess of FOB value like Rupee Packing Credit in case of export of
HPS ground nuts, de-oiled and defatted cakes. This is because export bills tendered will be
inadequate to liquidate the excess advance. Branches can grant Rupee Packing Credit against the
same contract to the extent of excess over FOB Value after keeping sufficient margin as per
sanction terms. Such Rupee Packing Credit is to be adjusted out of sale of oil within 30 days.
Branches can grant PCFC to manufacturer on the basis of disclaimer from the merchant exporter
on similar lines as in the case of Rupee Packing Credit, PCFC thus granted will be adjusted by
transfer of foreign currency funds from the merchant exporter by granting of PCFC to him or by
discounting of his bills FDBD/FUDBD by his banker.
PCFC can be granted to supplier EOU/EPZ units provided the receiver EOU/EPZ unit ultimately
ships the goods. PCFC will be adjusted out of foreign currency funds received from bankers of
receiver EOU/EPZ unit, who can grant PCFC at their end. The bankers to receiver EOU/EPZ
unit should open LC favouring supplier EOU/EPZ unit. Declaration is to be obtained from
receiver EOU/EPZ unit that goods will be eventually shipped by them. The PCFC granted to
receiver EOU/EPZ units should necessarily be liquidated out of export bills.

ADJUSTMENT OF PCFC:
Discounting of Export Bills in Foreign Currency:
As a logical sequence, PCFC availed has to be adjusted through foreign currency. As such export
bills presented under LC or contracts against which PCFC facility has been granted, are
discounted and controlled as FDBD/FUDBD in foreign currency.
Any surplus amount available (Net of EEFC, if any) after full adjustment of PCFC including
78

interest, should be credited to the customers account at TT Buying rate/Forward rate as the case
may be. Shortfall if any, in the delivery of foreign currency on discount of bills
(FDBD/FUDBD) should be recovered at TT Selling Rate.
Note: The benefit of credit to EEFC accounts will be available only after realisation of the
export bills and not at the stage of conversion of pre shipment to post shipment credit.

REPORTING IN R-RETURNS:
PCFC is to be reported in a schedule attached to R-Returns, showing the number of accounts and
the amount outstanding (currency wise) as on the reporting date.
The following transactions are not to be reported in R-Returns:PCFC disbursal for domestic inputs
Recovery of interest
Recovery of PCFC loans to the debit of CC/CD account.
The following transactions are to be reported in R-Returns
Remittances made out of PCFC fund for retiring import bills supported by Form A1.
Funds received under lines of credit for providing PCFC. (A Category branch)
Purchase (Non-export receipts) (A Category branch)
When PCFC granted out of funds availed under line of credit (A Category branch)
At the time of negotiation/discounting of export bill full amount purchased should be
reported. At the same time outstanding in PCFC limit should be liquidated and should be
reflected in R-Returns.
Liquidation of foreign line of credit and payment of interest should be reported in RReturns
as sales as non-import item supported by Form A-2 (A Category branch).

OPERATING GUIDELINES FOR PCFC:

On being satisfied of compliance with all requirements the designated branches should contact
Treasury Br., Mumbai, with the request and obtain exchange rates for Rupee conversion and
Interest rate for PCFC advance, to be followed by formal confirmation to them in the prescribed
format.
Distinctive reference numbers should be given for each disbursement and entries made in the
contract register and the PCFC ledger. Ledger to be maintained in dual currency at control rate as
advised by IBD. In case of import remittances, full details like TT No. Banks name etc. are to be
reported to A Category branch.
To monitor and use of funds in PCFC account a cheque book operated account designated as
PCFC Disbursal Account or PC A/c II (GL Code No. 206008) is to be opened. This account is in
rupees and PCFC funds converted into rupees for payment to domestic suppliers will be credited
to this account. PCFC disbursal account is to be reported under Current Deposit in the statement
of affairs (W-1). This account is to be maintained customer wise. In case of C Category branch
exporters this PC A/c II is to be maintained at B Category branch.
PCFC disbursal account should either be in credit or show a NIL balance. It should not have a
debit balance. Transfer small credit balance in the PCFC disbursal account (after full utilisation)
to the borrowers CC or CD Account.

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EXPORT FINANCE ECGC COVER

In order to provide insurance cover to exporters against risks involved in Export trade, the Govt.
of India formed the Export Risk Insurance Corporation Ltd during the year 1957.
Thereafter, in 1964, the name was changed to Export Credit and Guarantee Corporation Ltd
expanding its services by providing credit guarantee to banks against their export credit.
It works under the administrative control of Ministry of Commerce and has its head office at
Mumbai. It is now called as Export Credit Guarantee Corporation of India Ltd. ECGC
provides insurance cover to both Banks and Exporters.

(I) Export Credit Insurance for Banks:

To mitigate the risks involved in Export Finance by Banks, ECGC has introduced the Guarantee
Cover to all the Banks as mentioned below.
(1) Pre Shipment Stage : Export Credit Insurance for Banks (ECIB WTPC)
(2) Post Shipment Stage : Export Credit Insurance for Banks (ECIB WTPS)
Note: The above are earlier called as WTPCG & WTPSG respectively
RISKS COVERED
Insolvency of the Exporter
Protracted default by the Exporter to pay the amount due to the bank

(II) Export Credit Insurance For Exporters

ECGC also offers cover to exporters against various risks involved due to Political and
Commercial risks causing loss & to enable them to expand their overseas business without
fear.

RISKS COVERED
(A) Commercial Risks
Insolvency of buyer / LC opening bank
Protracted Default of buyer
Failure to take delivery of goods by buyer

(B) POLITICAL RISKS :

War/Civil War/Revolutions
Import Restrictions
Exchange transfer delay/embargo
Any other cause attributable to importing country

Insurance Products Offered to Exporters:

1. Standard Policy (Comprehensive)
2. Small Exporters Policy (Exp T/O: Rs 50 lacs)
3. Export Turnover Policy (cover on turnover)
4. Multibuyer Exposure Policy (cover on exposure)
5. Multibuyer (ITES) Policy
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6. Specific Shipment Policy

7. Specific Buyer Policy
Note: Exporters availing finance against export orders (without LC) are required to take any of
the policies as per their requirement unless specifically waived by Central Office.

Categorisation of Countries
ECGC categorised all Major Countries in to 2 categories Based on the Risk perception
Open Cover Countries : No permission of ECGC is required
Restricted cover countries: Prior permission of ECGC required
(Eg: Afghanistan, Iran, Iraq, Cuba, Somalia, Lebanon etc)
All countries are given a risk rating on Scale 1 to 7 ranging from Insignificant risk to Very
High Risk (A1 / A2 / B1 / B2 / C1 / C2 / D).

(I) Export Credit Insurance for Banks

(A) Pre-Shipment Stage ECIB (WTPC) - Whole Turnover Concept :
Covers the entire pre shipment export credit portfolio of the bank
Maximum liability under the Guarantee fixed by the Corporation based on Banks pre
shipment export credit portfolio and default rate. For Union Bank maximum liability
is Rs.1000.00 cr.
Certain categories of advances are exempted from the purview of (ECIB-WTPC)

Exempted Categories of advances :

Advances granted for exports made on deferred payment terms, turnkey projects,
constructions works and service contracts;
Advances granted to Government Companies;
Advances granted by OBU of the banks located in SEZ/FTZ/EPZ, as the case may be
Advances granted to exporters against their export entitlements like Duty Draw Back
etc at pre-shipment stage
Pre Disbursal Requirement
Not under SAL (Specific Approval List) (ascertain at pre sanction stage)
Confirmed Export Order
LCs from Prime Banks/Correspondent Banks
Quantum of PC - Eligible For Cover
On FOB value
If CIF, deduct standard 1% for Insurance and 10% for freight if not mentioned in the
order/LC.
If C&F, deduct standard 10% for freight if not mentioned in the order/LC. Less
margin stipulated, if any.
Period of PC
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As per shipment period in export order/LC

Maximum 180 days.
Extendable up to 360 with approval from Controlling Office.
Above 360 days with ECGCs approval.
Cover under ECIB WT(PC):
Loss Limit per exporter Percentage of cover
For all sectors including
existing limits of GJD* upto
30.06.2012
Fresh / incremental limits
of GJD* sector on or after
01.07.2012
For losses up to 100% of
premium paid by Bank in
the previous financial
year, i.e. Rs.3268.69 lacs
75%
50%
For losses beyond
Rs.3268.69 lacs
65%
*Gems, Jewellery and Diamond sector
Note: In respect of Packing credit advances granted to Small Scale exporters (Annual turn over
not exceeding Rs 50 lacs), the cover available will be 90 %.
Premium Rate:
Decided by the ECGC on either of the following principles :
Last five years Average claim premium ratio of the Bank.
Premium is payable on a monthly basis at 8.5 paisa per Rs 100 p.m. on the average daily
product irrespective of the credit rating of the accounts. The rates may undergo change every
year.
Premium payment
Premium is calculated on the basis of average daily product.
Premium is payable at specified rates to nearest office of ECGC before 15th of
subsequent month (of disbursal) along with monthly declaration
Premium on pre shipment advances is borne by the exporter only.

(B) Post-shipment Stage ECIB(WTPS) - Whole Turnover concept :

Covers the entire post shipment export credit portfolio of the bank except under LC
Maximum liability under the Guarantee fixed by the Corporation based on Banks pre
shipment export credit portfolio and default rate. For Union Bank maximum liability
is Rs.710.00 cr.
Certain categories of advances are exempted from the purview of ECIB WT(PS)

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Exempted Categories of Advances :

Advances granted for exports made on deferred payment terms, turnkey projects,
constructions works and service contracts;
Advances granted to Government Companies;
Advances granted against exports under Letters of Credit.
Advances granted by OBU of the banks located in SEZ/FTZ/EPZ, as the case may be;
Advances granted to exporters against their export entitlements like Duty Draw Back
etc at post-shipment stage

Cover under ECIB WT (PS) :

Percentage of cover applicable for all sectors including existing limits of GJD sector upto
30.06.2012
Policy Holders Non Policy Holders
Associates* Others Associates* Others
60% 90% 50% 60%
Fresh / incremental limits of GJD* sector on or after 01.07.2012
50%

Associates: means an overseas subsidiary or an associate of the exporter client of the

insured in which the exporter client has financial interest and or operational / managerial
control.

Premium Rate :
Premium is payable on a monthly basis at 6.5 paisa per Rs 100 p.m. on the average daily product
irrespective of the credit rating of the accounts. The rates may undergo change every year.

Policy Holders (PH):

Exporters holding any of the following Credit Insurance Policies (CIP) of ECGC will be treated
as Policy Holders
1. Shipment Comprehensive Risk Policy(SCR), popularly known as Standard Policy.
2. Small Exporters Policy.
3. Export Turnover Policy.
4. Multi Buyer Exposure Policy.
5. Multi Buyer (ITES) Policy.

Non Policy Holders (NPH):

Customers holding none of the 5 Credit Insurance Policies of ECGC will be treated at Non
Policy Holders and bank will be eligible for lower coverage and pay higher premium.
In addition to the 5 Policies, there are four more Policies recognized by ECGC in relation to
ECIB WT(PS). These four Policies are as under :
1. Buyer wise Policy
2. Specific Buyer Exposure Policy
3. Specific Shipment Policy
4. Consignment Policy
However, holding of any of these four policies by the exporters does not allow the Bank to treat
them as Policy Holders (PH) for the purpose of benefits of premium payment for PHs. But it
allows the Bank to claim higher coverage of 90% under the ECIB WT (PS).
Premium payment:
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 Premium is calculated on the basis of average daily product.

Premium is payable at specified rates to nearest office of ECGC before 15th of
subsequent month (of disbursal) along with monthly declaration
Premium under Post Shipment Limit is borne by Bank only

Compliance of Procedures under ECIB WT(PC) and ECIB WT(PS):

A. Precautions to be taken before sanction of Credit Limits to Exporters :
Whether the name of the exporter or any of its directors or guarantors appear in SAL
(Specific Approval List) of ECGC. If so, prior approval of ECGC is required to become
eligible under ECIB WT(PC/PS).
Whether the country to which export will take place is a Restricted Cover Country. If so,
ECGC prior approval is necessary.

B. Notification to ECGC
All the export credit limits sanctioned and covered Under ECIB WT(PC)/(PS) should
invariably be Notified to ECGC in the prescribed format within a period of 30 days
from the date of sanction.
Any subsequent amendment, enhancement, reduction in limit shall also be notified to
ECGC within 30 days from the date of such sanctions.

C. Discretionary Limit :
Limits not exceeding Rs. 100.00 lacs to any new exporter customer sanctioned by the
Bank at it own discretion will be eligible for cover by ECGC without any specific
approval This is known as Discretionary Limit.
Any limit above the Discretionary Limit have to be got approved by ECGC.
However, accounts classified as Standard Assets need not required prior approval
from ECGC within 60 days from the date of sanction/enhancement.

D. Other Important Procedural Steps (PC & PS):

Monthly Declaration and premium : to be sent to the nearest branch Office of ECGC
on or before 15th of the same month.
Approval of ECGC for any limit granted to any new exporter in excess of Rs.100/lacs shall be obtained within 60 days from the date of sanction provided that the
account is a Standard Account.
In case of accounts other than Standard Accounts, prior approval of ECGC is
mandatory

E. Extension of due date of advances :

I. Pre shipment Credit
Upto 360 Days : By Banks controlling authorities
Beyond 360 days: ECGCs prior approval is necessary along with Banks
recommendations.
II. Post Shipment Credit
Up to 180 days : By Bank
Beyond 180 days: ECGCs prior approval is necessary.

F. Report of Default - Both under ECIB WT(PC)/(PS),:

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To be submitted to ECGC in prescribed format within one month from the date of recall of
advances or within 4 months from the due date / extended due date, whichever is earlier.

G. Time for Filing of Claims :

Claim should be filed within Six Months from the date of Report of Default as per prescribed
format unless otherwise permitted by ECGC.

H. Time up to which Premium is Payable

Premium is payable up to and inclusive of the month in which Report of Default has been
submitted.

Post settlement action by the Bank :

Claim settled amount by ECGC is not directly credited to the account of the exporter. The
same is kept in a separate account under Sundry Head.
The claim settled amount may be credited to the exporters account in case of Prudential
Write off or Write off with ECGCs prior approval.
Bank is not absolved of its responsibilities of recovery proceedings in claim settled
account.
Any recovery made in the account after ECGC claim has been settled, should be shared
with ECGC in the same proportion in which the claim has been settled.

(II) Insurance Products Offered to Exporters

1. Standard Policy
2. Small Exporters Policy
3. Specific Shipment Policy (Short Term)
4. Export Turnover Policy
5. Specific Buyerwise Policy
6. Global Entity Policy
7. Single Buyer Exposure Policy
8. Multi Buyer Exposure Policy
9. Software Project Export Policy
10. IT Enabled (Single Customer) Policy
Shipments (Comprehensive Risks) Policy (Popularly known as Standard Policy)
Whole turnover principle all exports covered
Selective options for LC/Associates/Consignments
90% cover
Minimum premium of Rs. 10,000/Policy Period 2 years
Credit limit (Drawee wise) on all their buyers
Monthly declaration with premium due

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Premium rates schedule issued with Policy

No claim bonus every year 5% subject to maximum of 50%
Small Exporters Policy
Export turnover not exceeding Rs.50 lacs per annum
Minimum premium Rs. 2000/Policy Period 1 year
Cover for Commercial Risks 95% and for Political Risks 100%
No Claim bonus applicable
Quarterly Declaration
Premium payment as per standard premium schedule attached to the Policy
Export Turnover Policy
Minimum anticipated premium of Rs.10 lacs
Period of Policy 1 year
Monthly or quarterly declaration as per exporters choice
Higher Discretionary Limit of drawee wise limits on buyers (up to Rs. 100 lacs for DP and
Rs. 50 lacs for DA)
10% additional discount over the applicable no-claim bonus subject to minimum of 20% in
case of migration of cover to Turnover Policy
Premium payable upfront based on anticipated exports
5% cash discount for upfront payment of annual premium
Multi Buyer Exposure Policy
Cover on exposure as opposed to turnover
More than one buyer can be covered
Discretion to choose buyers for cover with exporter and shall be acceptable to ECGC
Processing Fee of Rs.5000/- to accompany application.
List of buyers to be given with proposal and any addition to be advised
Minimum 10% of past turnover will be fixed as Aggregate Loss Limit which will be
Maximum Liability
86

Exporter can opt for higher exposure than the 10% of turnover
Cover for each buyer is 10% of ALL and is known as Single Loss Limit (SLL)
Exporter to have access to ECGC website for checking defaulter buyer list
Coverage is 80% and for migrated policies from Standard Policy to MBEP it will be 90%.
Lower cover available with proportionate reduction of premium. Single premium rate.
Migrated Policies will have same No Claim Bonus rates as applicable
5% No Claim Bonus reduction on renewal
Upfront premium payable before issue or payable quarterly.
Consignment (Stock Holding Agent) Policy
Consignment exports covered under this exclusive cover
Processing fee of Rs.2000/- on application and credit assessment fee of Rs.500/- per
ultimate buyer to be covered
Policy period 1 year
Premium on shipments to the agent payable on the turnover
Upfront premium quarterly/annually
Coverage 80%. Exporters holding Standard Policy will get 90% cover
One Agent / Multiple Buyers
Cover on agent or on ultimate buyers as desired by exporter
Credit Limits (Drawee wise limits) to be obtained on ultimate buyers
Discretionary Credit limit available up to 5% of turnover with max of Rs.100 lacs
Longer period of 360 days realization of bills
Premium payable on the basis of country classification and tenor of 90/180/360 days.
Extension up to 540 days permissible with additional premium
5% No Claim Bonus reduction on renewal
Consignment Exports (Global Entity) Policy
Coverage for selling goods through exporters own subsidy or branch office abroad
Processing fee of Rs.2000/- on application and credit assessment fee of Rs.500/- per
ultimate buyer to be covered.
Policy period 1 year
Premium on shipments to the GE payable on the turnover
Upfront premium quarterly/annually
Coverage 80%. Exporters holding Standard Policy will get 90% cover
One Global Entity/Multiple buyers
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Covers on GE or on ultimate buyers as desired by exporter

Commercial cover of insolvency of GE only if Joint Stock Company and equity stake not
exceeding 49%; otherwise only Political risks covered.
Credit limits (drawee wise limit) to be obtained on ultimate buyers
Discretionary Credit limit available up to 5% of turnover with maximum of Rs. 100 lacs
Longer period of 360 days for realization of bills
Premium payable on the basis of country classification and tenor of 90 /180/360 days.
Extension up to 540 days permissible with additional premium.
5% No Claim Bonus reduction on renewal.
Software Projects Policy
Coverage for Single Project of Off-shore and / or on-site development on a case by case
basis
Cover available for exposure basis
Cover is 80%
Cover available for contracts to be done within a period of 360 days with provision for
extensions
Cover available for start up expenses at pre shipment stage
Application to be submitted with processing fee of Rs.1000/ In addition to normal Commercial and Political risks, additional risks are covered viz.
refusal of visa for reasons not attributable to buyer/ exporter, unjustified restraining of
personnel, increase in taxation, exchange fluctuation losses for realisations beyond 360
(max.25%)
Premium payable as per exposure Policies
Progress report monthly
Progress report basis for ascertaining loss
IT Enabled Services Policy - Single Customer/Multi Customer (Buyer)
Cover for one customer/many customers
Cover for ITES as defined viz. medical transcription and consultancy, Call centers,
engineering design, animation and serials, networking, secretarial services etc.
Cover available for repeat services
Period of cover : One year renewable
Coverage is 80%
Pre-shipment cover for start up expenses
Premium payable as per exposure policies, processing fee of Rs. 2000/-/Rs.5000/- for
Single / Multiple customer proposals.
Monthly declaration of services rendered
Ascertainment of loss based on services rendered as reported in monthly declaration

88

Special risks covered under software policies not covered

IMPORTANT GUIDELINES TO BRANCHES
1. ECGC CHECK POINTS
Branch to notify export limits sanctioned to ECGC within 30 days of sanction
All sanction terms to be complied with. Any deviation in sanction terms to be ratified by
sanctioning authority.
Monthly declaration of all disbursements made under PC / FDBP along with premium to be
sent to ECGC by 15th of every month
Premium as per credit rating of customer and policy / non policy holder to be calculated (on
principal amount only)and paid on all eligible advances under whole turnover policies
All disbursements under PC to be backed by valid export orders / LC / Stock statements
End use of disbursements to be strictly ensured
Inspections to be regularly carried out & reports held on record
Any modification of limits including adhoc to be reported to ECGC
Approval of limits by ECGC beyond discretionary limits (Rs 100 lacs) for new / takeover
a/cs to be obtained.
Extension of due date beyond 360 days (for PC), 180 days (for FDBP) to be obtained from
ECGC before expiry of due date
Report of default to be filed with ECGC within 4 months of advance becoming overdue or
within one month of recall of advance whichever is earlier
Premium to be paid up to and including the month of filing ROD
All the advance accounts to be recalled before submitting claim to ECGC
Claim to be filed within 6 months of filing ROD
Prior approval of ECGC required for Nursing / OTS / BIFR / CDR packages
Claim settled amount to be kept in Sundry deposits Claim settled till final closure of the
account
2. Lodgment of ECGC Claim & Settlement thereof by ECGC
In order to enable ECGC to process the claim, branches are required to follow all internal
procedures laid down by the Management. ECGC as Export Credit Insurance Agency
expects banks to safeguard its interest by exercising due care and prudence so that
procedural lapses do not come in the way of settlement of the claim.
3. How ECGC goes about settlement of claim
Upon receipt of claim, ECGC will process it with reference to:Whether the insurance cover is valid
Notification is made to ECGC in respect of the advance
All t&c of sanction are complied with by the branch and deviations, if any, necessary
89

approvals obtained from competent authority.

Premium is paid upto date to make the claim valid
Whether bank ensured end use of funds disbursed and took proper care to safeguard banks /
ECGC interest in monitoring the advance
Extension of due date of advance by competent authority / ECGC up to the point of advance
becoming overdue obtained by the branch.
ROD is filed on time
Whether claim is lodged within the stipulated time
Arrive at the exact loss incurred by the Bank
Find out the percentage of claim to be paid
Upon clearance by the competent authority, send for audit clearance.
Upon getting clearance from Audit angle, settle the claim

4. Recovery Action after settlement of claim

Bank has to initiate necessary recovery steps including legal remedies. Generally it is
expected that banks should initiate recovery steps at the ROD stage itself in order to avoid
any deterrent in recovery chances. In other words, Bank has to act as if they are not insured.
Any recovery including interest less legal charges, should be shared in the same proportion in
which claim was paid. In case of normal recoveries out of exclusive securities charged to the
facilities covered under the guarantee, the recovery proceeds shall be applied to the principal
outstanding in the said accounts. However, if the securities are common for all credit
facilities, proportionate adjustments could be made against the principal outstanding of the
respective loan accounts.
5. Compromise/ One Time Settlement
If the recovery is made through OTS/Compromise settlement, for which Corporations
approval is necessary, the principal dues under various heads should be first adjusted on a
pro-rata basis and the share of ECGC determined on the basis of claim settlement ratio. In
such cases, normally banks try to recover their entire dues including interest that had accrued
on a specified date known as cut off date. There may be instances where the banks may
scale down the dues by waiver of the interest and there could be cases where a part of the
principal amount is also written off. The options available to the banks are as under:a. Full recovery including principal and up-to-date interest
b. Recovery of principal amount and reduction/waiver of interest
c. Recovery of full principal amount with interest applied at concessional rate
d. Waiver of part of the principal and entire interest amount
As regards Corporations share in such recoveries (a,b & c), since claims are entertained only
on the principal export credit, bank to remit back the entire claim paid amount.
6. Grounds on which ECGC Rejects Claims under ECIB (WT-PC & WT-PS)
Limits sanctioned / modified not notified to the corporation

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The limit was sanctioned when the account of the sister concern was irregular
Branch has not obtained prior approval of ECGC before granting advances when the exporter
/ guarantor / sister concerns / directors are under SAL list of ECGC
Branch has not called for latest credit report on borrower though it was one of the sanction
terms
The account was NPA at the time of giving advance
Prescribed collaterals as per sanction terms not obtained
All sanction T &C not complied and disbursals made
Drawing power was worked out from stock statement and not from contract, hence excess
packing credit was disbursed
Monthly stock statements not obtained and inspection of stocks never carried out.
Monthly premiums on disbursements made not remitted to ECGC
Copy of orders/ LCs against which overdue advances were granted not furnished
Branch has routinely allowed transfers from PC to CD / CC and allowed exporter to diversify
the funds. End use was not ensured.
Fresh PC was given when earlier PC has become overdue
Fresh advance was granted after issuing letter of recall
Enhanced limits released without recovering the over dues
Report of default is not submitted by the branch within the stipulated time
Claim is time barred i.e., not filed within 6 months of filing ROD
Prior approval of ECGC not obtained for Nursing programme undertaken by Bank
ECGC concurrence not obtained before entertaining OTS /CDR /BIFR settlements

DERIVATIVES AN INTRODUCTION
Derivatives, remain a type of financial instrument that few of us understand and fewer
still fully appreciate, although many of us have invested indirectly in derivatives by
purchasing mutual funds or participating in a pension plan whose underlying assets include
derivative products. This article attempts to familiarize the reader with financial
derivatives, their use and the need to appreciate and manage risk.
(1) What is a Derivative?
A derivative is a financial instrument:
(a) whose value changes in response to the change in a specified interest rate, security
price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or
credit index, or similar variable (sometimes called the 'underlying');
(b) that requires no initial net investment or little initial net investment relative to other
types of contracts that have a similar response to changes in market conditions; and
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(c) that is settled at a future date.

In short, a derivative is a contractual relationship established by two (or more) parties
where payment is based on (or "derived" from) some agreed-upon benchmark. Since
individuals can "create" a derivative product by means of an agreement, the types of
derivative products that can be developed are limited only by the human imagination.
Therefore, there is no definitive list of derivative products.
When one enters into a derivative product arrangement, the medium and rate of
repayment are specified in detail. For instance, repayment may be in currency, securities
or a physical commodity such as gold or silver. Similarly, the amount of repayment may be
tied to movement of interest rates, stock indexes or foreign currency.
(2) Why Have Derivatives?
Derivatives are risk-shifting devices. Initially, they were used to reduce exposure to
changes in foreign exchange rates, interest rates, or stock indexes.
For example, if an American company expects payment for a shipment of goods in British
Pound Sterling, it may enter into a derivative contract with another party to reduce the
risk that the exchange rate with the U.S. Dollar will be more unfavorable at the time the
bill is due and paid. Under the derivative instrument, the other party is obligated to pay
the company the amount due at the exchange rate in effect when the derivative contract
was executed. By using a derivative product, the company has shifted the risk of exchange
rate movement to another party.
(3) The Risks
As derivatives are risk-shifting devices, it is important to identify and fully comprehend
the risks being assumed, evaluate those risks and continuously monitor and manage those
risks. Each party to a derivative contract should be able to identify all the risks that are
being assumed (interest rate, currency exchange, stock index, long or short-term bond
rates, etc.) before entering into a derivative contract.
(4) Description of Common Financial Derivatives:
(i) Options.
An Option represents the right (but not the obligation) to buy or sell a security or other
asset during a given time for a specified price (the "Strike " price). An Option to buy is
known as a "Call," and an Option to sell is called a "Put. " You can purchase Options (the
right to buy or sell the security in question) or sell (write) Options. As a seller, you
would become obligated to sell a security to, or buy a security from, the party that
purchased the Option. Options are traded on organized exchanges and OTC.
(ii) Forward Contracts.
In a Forward Contract, the purchaser and its counterparty are obligated to trade a
security or other asset at a specified date in the future. The price paid for the security
or asset is agreed upon at the time the contract is entered into, or may be determined
at delivery. Forward Contracts generally are traded OTC.
(iii) Futures.
A Future represents the right to buy or sell a standard quantity and quality of an asset
or security at a specified date and price. Futures are similar to Forward Contracts, but
are standardized and traded on an exchange, and are valued, or "Marked to Market "
daily. Unlike Forward Contracts, the counterparty to a Futures contract is the clearing
corporation on the appropriate exchange. Futures often are settled in cash or cash
equivalents, rather than requiring physical delivery of the underlying asset. Parties to a
Futures contract may buy or write Options on Futures.
(iv) Swaps.
A Swap is a simultaneous buying and selling of the same security or obligation. Perhaps
the best-known Swap occurs when two parties exchange interest payments based on an
identical principal amount, called the "notional principal amount."
Interest rate swaps occur generally in three scenarios. Exchanges of a fixed rate for a
floating rate, a floating rate for a fixed rate, or a floating rate for a floating rate.
92

Swaps generally are traded OTC through Swap dealers, which generally consist of large
financial institution, or other large brokerage houses.
(5) Derivatives Markets
There are two distinct groups of derivative contracts:
Over-the-counter (OTC) derivatives: Contracts that are traded directly between
two eligible parties, with or without the use of an intermediary and without going
through an exchange.
Exchange-traded derivatives: Derivative products that are traded on an exchange.
(6) Participants
Derivatives serve a useful risk-management purpose for both financial and nonfinancial
firms. It enables transfer of various financial risks to entities who are more willing or
better suited to take or manage them. Participants of this market can broadly be
classified into two functional categories, namely, market-makers and users.
1. User: A user participates in the derivatives market to manage an underlying risk.
2. Market-maker: A market-maker provides bid and offer prices to users and other
market-makers. A market-maker need not have an underlying risk.
At least one party to a derivative transaction is required to be a market maker.
(7) Purpose
Users can undertake derivative transactions to hedge - specifically reduce or extinguish an
existing identified risk on an ongoing basis during the life of the derivative transaction - or
for transformation of risk exposure, as specifically permitted by RBI.
Market-makers can undertake derivative transactions to act as counterparties in
derivative transactions with users and also amongst themselves.
(8) Eligibility criteria:
(i) Market-makers: All Commercial Banks (excluding LABs & RRBs) & Primary Dealers
(PDs). Banks and PDs should develop sufficient understanding and expertise about
derivative products both in terms of staff and systems in order to undertake
derivative business as market makers.
(ii) Users: Business entities with identified underlying risk exposure.
(9) Broad principles for undertaking derivative transactions
The major requirements for undertaking any derivative transaction from the
regulatory perspective would include:
Market-makers may undertake a transaction in any derivative structured product
permitted by RBI and does not contain any derivatives as underlying;
Market-makers should be in a position to arrive at the fair value of all derivative
instruments, including structured products through various established approaches.
All permitted derivative transactions, including roll over, restructuring and novation
shall be contracted only at prevailing market rates.
All risks arising from derivatives exposures should be analysed and documented, both
at transaction level and portfolio level.
The management of derivatives activities should be an integral part of the overall
risk management policy and mechanism. It is desirable that the board of directors
and senior management understand the risks inherent in the derivatives activities
being undertaken.
Market-makers should have a Suitability and Appropriateness Policy vis--vis users
in respect of the products offered, on the lines indicated in these guidelines.
Market-makers may, where they consider necessary, maintain cash margin/liquid
93

collateral in respect of derivative transactions undertaken by users on mark-tomarket

basis.
(10) Permissible Derivative instruments
In India, different derivatives instruments are permitted and regulated by various
regulators, like Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI)
and Forward Markets Commission (FMC). Broadly, RBI is empowered to regulate the
interest rate derivatives, foreign currency derivatives and credit derivatives
At present, the following types of derivative instruments are permitted, subject to certain
conditions:
i. Rupee interest rate derivatives Interest Rate Swap (IRS), Forward Rate Agreement
(FRA), and Interest Rate Futures (IRF).
ii. Foreign Currency derivatives Foreign Currency Forward, Currency Swap and
Currency Option
To summarize, derivatives are like electricity. Properly used, they can provide great
benefit. If they are mishandled or misunderstood, the results can be catastrophic.
Derivatives are not inherently "bad." When there is full understanding of these instruments
and responsible management of the risks, financial derivatives can be useful tools in
pursuing an investment strategy. It is not a substitute, however, for seeking competent
professional advice before becoming involved in a financial derivative product.
********************

Treasury Management
MAJOR OBJECTIVES OF TREASURY
Compliance of regulatory requirements including ALM requirements
Liquidity management
Ensuring adequate liquidity
Optimal deployment of funds both in short and long term purposes
Profit maximization by ensuring a trading culture in various financial markets and
expertise in trading of exchange traded and OTC derivative instruments thus ensuring
better return on total portfolio
To manage price and interest rate risks on the portfolio
BROAD FUNCTIONS OF TREASURY
Front Office
Authorized to buy/sell foreign currency in inter-bank forex market for
propitiatory/merchant transactions
Domestic treasury operations covering money market, debt market and capital market
operations
Derivative operations
Back Office
Settlement of deals and their accounting
Revaluation of FC assets/liabilities
94

Reconciliation of Nostro accounts

Management of assets and liabilities
Confirmation of deals
FOREIGN EXCHANGE OPERATIONS
Front Office (Dealing Room) operations cover the trading/ risk and sale functions of the
treasury
Back office relates to the accounting aspects.
The Miscellaneous activities cover areas such as
Export Collections and Realization
Inward and Outward Remittances
EEFC and FCNR Deposits
Reconciliation
SWIFT

FRONT OFFICE OPERATIONS

Front office (Dealing room) is the area where the transactions are concluded. It is
provided with the state of the art technology, Tele-communication equipments and skilled
Dealers
SET-UP of the FOREX Side of the Dealing Room
Corporate Desk : For interacting with the corporate clients
Merchant Desk
: For quoting merchant rates to all branches covering
positions
Trading Desk
: For proprietary trading
Derivative Desk : For dealing in various derivative products
FUNCTIONS OF CORPORATE DESK
Study the foreign exchange market
Preparation and submission of treasury views
Keeping constant liaison with the corporate clients
FUNCTIONS OF MERCHANT DESK
Preparation of card rates of currencies
Quoting the card/merchant rates to Branches/ customers
Maintenance of Merchant Position Pad
Adherence to the prescribed limits
Transaction Flow
Merchant Deals
Inter-bank Deals
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Funding the Nostro Account and Gap management

Preparation of IC-5 statement
FUNCTIONS OF TRADING DESK
Currency trading desk is meant for proprietary trading in various currency pairs as
approved by the treasury policy.
The trading mainly takes place in following currency pairs: - USD/INR spot, USD/INR
SWAP, GBP/USD, EUR/USD, USD/JPY, USD/CHF, AUD/USD, EUR/GBP, EUR/CHF, EUR/JPY,
GBP/JPY etc.
The trading session starts with the writing of view
Analysis of currency market, both fundamental and technical and discussion takes place
The traders quote in their respective currencies and offer competitive quotes to
merchant/corporate desk and other banks as a part of market-making activity.
All the trading dealers are allowed to place intra-day and overnight orders for initiating
fresh position and squaring off their open positions as per their view

FUNCTIONS OF DERIVATIVES DESK

Study and analysis of derivative market
Interacting with the clients
Dealing in derivative products
BACK OFFICE OPERATIONS
Recording of all inter-bank deals
Sending confirmation for inter-bank deals
Receiving confirmation from counter-party banks for inter-bank deals
Settlement of all inter-bank deals
Ensuring receipts of all inter-bank payments
Follow-up with the counter-party banks in case of non-receipt and delayed receipts
Funding nostro accounts on day-to-day basis
Recording of all merchant forward contracts
On due date follow-up with the respective branch for utilization of merchant forward
contract
Recording of Derivatives and settlement thereof
Submission of periodical statements
DOMESTIC TREASURY OPERATIONS
THE MONEY MARKET OPERATIONS
THE DEBT MARKET OPERATIONS
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THE CAPITAL MARKET OPERATIONS

MONEY MARKET OPERATIONS
Money market operations relate to dealings in Money and Monetary Assets
Money market is characterized by instruments which have a maturity of less than one
year.
These operations are undertaken to maintain the liquidity position of the bank at an
optimum level.
Instruments of money market are
Call money
Treasury bills
Commercial paper
Term money
Repo / Reverse repo

DEBT MARKET OPERATIONS

The debt market operations will include the banks participation in debt issued by the
central government, PSU and Corporates.
Debt market can be broadly divided into SLR and Non SLR market.
SLR securities
Central Government Securities (G-Sec)
State Developments Loans (SDL)
Treasury Bills (TB)
OTS Central and State
Share of Central Government Corporations
Share of State Government Corporations
NON-SLR Securities
Non SLR is a segment of the debt market dealing with debt instruments issued by
Corporate, PSUs and State owned corporations.
These instruments are debentures and bonds
Derivative Operations
Over-The-Counter products
Forex Forward Contract
Forward Rate Agreement
Interest Rate Swap
Currency Swap
Coupon only Swap
Principal only Swap
Currency Option
Exchange Traded products
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Interest Rate Futures

Currency Futures

DERIVATIVES -OTC
LONG TERM FOREX FORWARD
Forward is a financial contract between two parties to exchange one currency for another
currency for a specified amount at a predetermined rate of exchange on a specified date
in a future
FORWARD RATE AGREEMENT
FRA is a financial contract between two parties to exchange interest rate payments on a
notional principal amount for as specified period of timer from start date to maturity date
INTEREST RATE SWAPS (IRS)
IRS is a financial contract between two parties to exchange a stream of interest payments
on a notional principal amount at a specified intervals of time during the tenor of the
contract

DERIVATIVES - OTC
CURRENCY SWAPS (CS)
It is a financial contract between two parties to exchange principal payments in one
currency for principal payments in another currency at a pre-determined rate of exchange
at a specified interval of time and to exchange interest payments in one currency with
that in another currency at predetermined rate of interest
COUPON ONLY SWAP(COS)
COS is a financial contract between two parties to exchange interest payments in one
currency for interest payments in another currency at pre determined rates of interest in
respective currencies which may be fixed to fixed, floating to floating or fixed to floating
at specified intervals of time without any principal exchange during the tenor of the
contract
COS is a product which helps the client to move from one yield curve to another yield
curve without taking any significant exchange risk between the two currencies except to
the extent of coupon payments in respective currencies
PRINCIPAL ONLY SWAP(POS)
It is agreement between two parties to exchange only principal payments in one currency
for principal payments in another currency at a pre determined rate of exchange at
specified intervals and does not involve exchange of interest.
The premium/discount embedded in the forward contract is converted into a rate of
interest and is amortized over the tenor of the forward contracts as per the requirements
of the client
CURRENCY OPTION(CO)
Options are entirely different types of derivatives in the sense that while all other
derivatives vest equal rights and obligations with the counter parties involved in the
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product, options typically impose unlimited obligations on the seller of the option and the
resultant rights with the buyer of the option
CO is a financial contract between the two counter parties in which the buyer of the CO
has the right but not the obligation to exchange one currency for another currency for a
specified amount at a pre determined rate of exchange at a specified date in the future
Currency options can be cross currency option or USD/INR currency option
Interest Rate Futures - Exchange
Background
Underlying- 10 Year 7% Notional coupon Bond
Limits
Gross open position should not exceed Rs. 50 crores (excluding Hedging and arbitrage
position)
Dealer wise stop loss limit- 25 bps based on weighted average Yield & absolute limit
(Dealer specific) whichever is higher
Currency Futures -Exchange
USD/INR Contract
Maximum maturity 12 months

Open Position Limits

Client level- 6% of the total open interest or 10 million USD whichever is higher
Trading Member level- 15% of the total open interest or 100 million USD whichever is
higher
Stop Loss Limit
Dealer wise stop loss limit is fixed by the Head Of Treasury and it is within the overall
limit allocated to Treasury Branch
Currency Futures -Exchange
Currency Futures -Exchange
Trading Profit of Treasury
The Way Ahead
Migration towards IMA
Implementation of banks own VaR model for market risk management and capital
calculation
VaR calculation, Back-Testing - From January 11 for Forex, G-Sec and Equity portfolio
(using Risk-Free old version)
Contacted NIBM and KPMG for Gap Analysis
Appointed PWC for model validation and preparation of internal audit practices and
procedures for Market Risk including IMA
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Formalized a stress-testing framework

Steps in migration to IMA
Installation of the Risk-Free software (new version)
Compliance with qualitative and quantitative criteria
Internal /External Validation of the model
Designing Stress testing process
Integration of the model output VaR into risk management systems
Regular validation of VaR results/models by internal validation team
Regular reports to ALCO and Board regarding VaR results, Backtesting, Stress testing
impact on banks CRAR, Comparison of capital charge based on SMM and IMA

IMA update for Market Risk

The Board has granted approval for applying to RBI for migration to IMA
Daily computation of VaR and Stressed VaR.
Validation carried out by KPMG:
Historical Simulation Method
Back testing of VaR
Stress Testing capability of KRM system
Tasks under completion for IMA project
Weekly reporting of VaR estimates/ Capital charge based on IMA approach to top
management
Validation of Risk Metrics and Monte Carlo methods by KPMG
Finalization of MR policy and MRM Dossier
Integration of derivatives with forex portfolio in KRM system for IMA and SMM capital
charge computation. For this, pre-requirement is to integrate the Treasury system with
that of CBS.
Daily computation of capital based on SMM approach on KRM system

100

Finacle Menus usefull for effective control

Sl.No.

Activity

Menu options

1.

Menu option for linking Aadhar No., as per IC

9416
Menu option through which details of
transactions and Intersol transactions can be
known.
Menu option through which details of RTGS
transactions can be known
Menu option for capturing ATM reconciliation of
cash at ATM account (on-site ATM)
Menu option for generation of reports regarding
impersonal accounts? (Subsidiary balancing in
regard to OAP/OAB)
Menu options for generating entry wise details
in impersonal accounts? (in regard to OAP)
Menu option for tracking documents
Menu option for knowing the accounts where
insurance is going to be expired
Menu option for knowing the accounts where
insurance is expired
Menu option for generation of Interest range for
a given period in Advances?
Menu option for knowing due dates for renewal
in Advances?
Menu option for generating Demand and
collection in loans

AADHAR.

2.

3.
4.
5.

6.
7.
8.
9.
10.
11.
12.

FTI/FTR

RTGSRPT
ATMREC
BRACMIS>CHOICE
18
(SUNDRY),
CHOICE 19 (POB), CHOICE 20 (SUSP)
BRACMIS> CHOICE 2 (SUNDRY),
CHOICE 3 (POB), CHOICE 4 (SUSP)
DOCTR
INSTOEXP
INSEXPD
ADTRPT>CHOICE 28
LAROR
DCBR

101

13.
14.
15.
16.
17.
18.
19.
20.

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.

32.
33.

34.
35.
36.

37
38
39
40
41

Menu option for knowing Interest demand

effective date in loans
Menu option for knowing changes in limits
done in limit records?
Menu option for knowing growth in business in
a particular parameter?
Menu option for knowing the accounts where
SRM record is not updated?
Menu option for knowing the accounts where
interest application is not done by the system
Menu option for issuing Housing loan Interest
provisional certificate
Menu option for knowing the account details
Menu option to know the details of sanction
date, disbursement, liability (Loans general
enquiry)
Security register lookup
Limit liability Report
Facility wise report
List of expired LG/ LC
Guarantees Invoked
Security Details Primary Security

ADTRPT>CHOICE 39

Menu option for posting transactions in NPA

accounts
Menu option for up gradation of NPA accounts
Menu option for viewing the amount
outstanding in Dummy ledger
Menu option for application of Interest in NPA
account
Menu option for reversal of unrecovered
interest to Accounts classified as NPAs prior
to 31.12.2011
Menu option for controlling other expenses of
NPA accounts
Menu option for generating reports in NPA
accounts regarding consolidated dummy
ledger, NPA Pass sheet, NPA listing reports
Menu option for knowing recoveries in NPA
accounts
Menu option for knowing the details of Interest
and products on interest calculation
Menu option for posting credits received under
one time special settlement scheme 2012-13
for NPAs upto Rs.10 lacs
Menu option for quick opening of loan against
Deposit (LNSEC) accounts
Menu option for opening Gold loan accounts

NPATM

Menu option for confirming cash transactions

by CASHIER
Menu option for monitoring individual accounts
on which KYC is not done
Menu option for prompt and fast resolution for
the issues in C B S

CHLMT
IOGLT
STKSTMT
INTCAL
LIPC
ACCDET
LAGI

SRL
LLIR
FACWR
GENR
GIPNP
SECDET

SASCL
NPAPSP
NPAINT
NPAREV

NPAEXP
NPARPT

NPARECO
AINTRPT
OTSTM
LADAO FOR OPENING
LADAV FOR VERIFICATION
GLAO -- FOR OPENING
GLAV -- FOR VERIFICATION
CASHCONF
KYCMIS
HDCL

102

42

43
44
45

Menu option for capturing additional data

requirements for Risk Weight computation for
credit risk
Menu option for merging the customer ID
Menu for changing the Interest in account
Menu for issuing interest certificate

BASEL

CCA
INTTM
INTCERTI

103