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Revised Edition July 2012

To be read with the Banks Lending Policy and extant guidelines / instruction issued or to be issued by
the RBI / Bank, and the same to be updated time to time.

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INTRODUCTION

TOPIC PAGE NO

1.1 Basic principles of lending

1.2 Collection of Credit Information

1.3 Credit Information Report

1.4 Advance Proposal Received Register

1.5 Decision making process

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1.1 Basic principles of lending

1.1.1. Two prime functions of any bank are acceptance of deposit and lending of fund. Lending
is always the prime source of earning for a bank. As such, for growth and progress,
extension of credit on sound basis is essential. The quality of advance will chart out the
path of success and failure.

1.1.2. Although receipt from non-interest income contributes a fair amount of profits, the
earnings of banks are mainly derived from interest charged on loans and discounts. It is,
therefore, necessary to consider carefully the loans and advances of a bank. For this
purpose a general principle of lending is to be followed within the lending policy of the
bank for building up good quality loans and advances portfolio.

1.1.3. During the year 1992-93, Report of the Committee on the Financial Systems
(November, 1991), popularly known as Narasimham Committee-I Report, was
implemented. In the context of the norms laid down for income recognition, asset
classification and provisioning for impaired loans, quality lending has become more
important. Since than, RBI has been giving regulatory IRAC norms in its annually
published master circular which must be followed.

1.1.4. In the context of the changed circumstances, the prime principle of lending should be
safety of the loan and the perception of risk. It is not enough that the loan is safe now it
should continue to remain safe during the entire period of the loan account. We have to
consider certain aspects before we decide to sanction or decline a proposal in the line
of our Credit Policy to be declared from time to time.

1. Applicant : Applicant is the key person for success or failure of an enterprise.


Honesty and integrity of the borrower is of prime importance. The information
about the applicant is required to be collected from the market, from the banker
and from other sources. One information we must collect is his reputation to meet
his commitment in time. Visit to the place of business will tell us about the
managerial efficiency. Upkeep of the premises/factory is an index of efficiency. By
visiting the place of business and the residence of the applicant we will know
whether he/she has the tendency to live beyond his/her own means. In case of a
new entrepreneur his/her age, academic qualification, experience and social
status is to be enquired of.

2. Purpose of advance : The loan should be sanctioned for a purpose that is


permitted by the Bank. The purpose of the advance should be in tune with the
corporate goal.

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The branch should ascertain that the proposal that the borrower wants to take up
is reasonable and is not too ambitious or of a speculative nature. If the unit is an
existing one and the proposal is for expansion of the unit, it has to be ensured
that the expansion is not too rapid a rate that may prove to be fatal for the unit.

The branch should ensure that the loan should be utilised for the purpose for
which it was sanctioned. The branch should closely supervise all accounts after
disbursement to ensure utilisation of the limit for the sanctioned purpose.

3. Source of Repayment: Fund based limits granted by the bank will normally be of
the following types :

(a) Term Loan to acquire fixed assets where the repayment is done over a
period of time.
(b) Working Capital finance
(c) Bridge loan to sound companies against public issue of equity/expected
proceed of NCDs, ECB, Global Depository Receipts on satisfaction that firm
arrangement has been made to raise such resources.
(d) Unsecured personal loan
Whatever may be the nature of the loan, the borrower will have to repay it. The
bank desires the loan to be repaid from the income generated, if it is a productive
loan. It has to be ascertained that for all types of loans the borrower after drawing
enough fund to maintain himself and his family, will be left with sufficient surplus
from operations to meet banks commitment. However, if the borrower has other
source of income that can be apportioned towards repayment of loan, it will be a
collateral advantage for the bank.

While projecting the repayment, it should be ascertained that the projection is


realistic and it has been worked out taking all factors including margin for
contingency into consideration. It should also be ensured that the applicant would
not depend heavily on depreciation for repayment. The long-range projection
prepared by the borrower or a consultant should be interpreted based on
independent study and analysis.

4. Risk rating of the account: To decide whether to sanction a proposal or not and to
price the loan risk rating of the account has to be done. The Bank will issue
circulars on this exercise from time to time and the branches will follow the
guidelines in this respect. Not a single account shall be sanctioned without
assigning the risk rating of the account.However the following categories of
advances are exempted from computing risk rating (a) schematic and

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structured loan (b) staff loan (c) all standard advances having credit limit
upto 10 lacs as stated in the Lending Policy (Page 43- Vol II)

5. Security: The bank sanctions loan after proper appraisal of the proposal. The
assets created out of bank loan remain charged to the bank as primary security.
Nevertheless, there is always an element of uncertainity. To take cover of the
uncertainty, additional securities are obtained. In case of priority sector advances
and Government Sponsored Schemes, the quantity of collateral security is
prescribed. For all other loans, the amount of collateral security will depend upon
the borrower and the risk perception, as assessed by the recommending and the
sanctioning authority.

1.1.5. Role of Manager/ Officer of Advance Department :

Manager is the sanctioning authority at the branch. All the proposals received at the
branch are either to be sanctioned or to be declined. The decision to sanction or to
decline a proposal is to be taken by the Manager. Before sanctioning of the proposal it
is to be processed by an officer of the Branch as entrusted by the Manager and should
be placed to a committee in case of extra large and very large branches and for other
Branch procedure is described below:
For proposals under financial power of DGM/AGM/Chief Manager of Extra Large and
Very Large Branches committee will consist of the following members:
Chief Manager (in case of DGM/AGM headed branches)
Sr. Manager (Advance)
Sr. Manager (Operations)
Manager / Officer (Advance)
In case of non-availability of any of the above mentioned members, officer in the
Branch immediately below the above hierarchy may also represent the committee.

In Scale III/II/I branches the Committee approach may be dispensed with. However,
processing and sanctioning of loans (except non-mortgage based loans upto Rs.5 lacs)
must involve two officers including Branch Manager. If there is no separate processing
/appraising officer available, any other officer of the branch shall verify the facts and the
securities offered and shall submit the comments under his/her signature to the Branch
Manager to facilitate the processing and disposal of the proposal.

If the permissible amount of loan is more than the discretionary power of the Manager,
the proposal with recommendation shall be forwarded to the Regional Office/Head
Office for necessary consideration at Regional Level Credit Committee / Head Office
Level Credit Committee/ Credit Aproval Committee etc. as the case may be according to
the DP of the committee.

All loan proposals are to be disposed of as early as possible and within the time frame
prescribed from time to time.

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1.2 Collection of Credit Information

1.2.1. There are different sources of credit information. The designated officer should collect
information with regard to various points discussed above from as many sources as
possible. All aspects of information must be investigated.

1.2.2 Personal Interview: Appraisal of the proposal starts with the assessment of the
applicant. Personality of the borrower should be objectively assessed before a credit
decision is taken. Personal interview of the applicant should result in assessment of the
traits of his / her personality. The borrower himself is a very good source of
information. The designated officer should prepare the questionnaire before the
borrower is invited for interview. The officer, during the interview, should probe into the
past history, present activities and future plan of the borrower. As the interview of the
prospective borrower is a very important element of loan proposal appraisal, the
interviewing officer should create a climate so that the applicant speaks freely as much
as he desires, and pass on maximum information.

1.2.3 Market Report: Information regarding character and integrity and particularly about the
servicing of market borrowing should be carefully collected from the market. Such
information should always be cross verified as the informer may be biased in passing on
the information. After collecting information from more than one source, a balanced
opinion is to be formed about the applicant.

1.2.4. From other Banks: If the applicant has dealings with other banks, confidential report
from the banker must be obtained. The designated officer may also visit the bank to
elicit opinion of the Manager of that Bank through discussion.

1.2.5. a. Reserve Bank of India publishes list of defaulter borrowers of Rupees one crore and
above every half year. . Bank-wise account-wise information contain the name(s) of the
proprietor/partners/directors. The branches should go through the list to verify whether
the applicants name or the name of any of the partner/director of the firm figures in that
list. If the branch does not have the list published by RBI with them, they may search at
the website [http://www.rbi.org.in] or they may write to the Regional Office.

b. CIBIL and other Credit Information Agencies (accredited by RBI) publishes list of suit
filed defaulter borrowers of Rupees one crore and above with Bank-wise account-
wise information on loan availed along with the name(s) of the
proprietor/partners/directors. The branches should go through the list to verify
whether the applicants name or the name of any of the partner/director of the firm
figures in that list. The Branch / offices has to verify the status of loan if availed by the
applicant from CIBIL website (ID & Password provided to the Branches / offices) and
website of other Credit Information Agencies before taking decision on loan proposals.

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1.2.6. For almost all types of activities there are trade associations.

Such associations are of good use to the bankers. From the office bearers of such
associations the branches may collect information, particularly the present trend and
prospect, on the proposed activity as well as of the applicant. Study of Financial
Statements will provide information not only about the financial health of the unit, these
statements will also throw light on the managerial efficiency and the Auditors Report will
tell us the quality of the accounts maintained. In case of all credit proposals (both existing
& new), submission of audited Balance Sheet & Profit & Loss account is mandatory for
(i) all corporate entities, (ii) entities like trust, society, (iii) entities formed under statutes,
(iv) individual/firms having turnover of Rs.60 lacs and above [Rs.40 lacs and above upto
31.03.2010], (v) professional firms having turnover of Rs.15 lacs and above [Rs.10 lacs
and above upto 31.03.2010], where audit is must as per IT Act.
However, notwithstanding to the mandatory audit requirement as stated above, to
enforce discipline and ascertain true financial position of the borrowers no credit
proposal (except schematic lending) of Rs.10 lacs & above from individuals/firms shall
be entertained without audited financials.
1.2.8. A visit to the place of stay and the place of business will tell us about the lifestyle of the
applicant. The lifestyle led by the applicant is an index of the propensity of the applicant
to live beyond his own means.

The branch official during the visit should try to find out among others:

(1) Is the area where the unit is located or proposed to be located suitable for the
activity?

(2) Whether the real estate is owned by the borrower and whether there is enough
spare land for future expansion?

(3) What is the companys policy regarding replacement of machinery and


equipment?

(4) What is the general get up of the factory workers?

(5) What is the condition of inventory? Whether storage arrangements are proper and
adequate?

1.3 Credit Information Report

1.3.1. The decision of Branch Manager to grant advance is based upon a lot of information
which is collected from various sources about the borrower and his business. All these
information are to be processed to arrive at a logical conclusion. The Branch will
prepare the opinion sheet on the borrower. Preparation of opinion sheet has been
discussed in Chapter X.

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1.4 Advance Proposal Received Register

1.4.1. In our Bank there is a Register known as Register of Advance Proposals (in the format
of Book No. 226). All the loan applications received by the Branches/offices are to be
entered in this Register.

1.4.2. Maintenance of this Register is very useful for the branch. Many queries can be replied
from this Register. If this Register is maintained, the Branch/Office can cross check with
the Discretionary Power Register whether all the accounts sanctioned have been
reported through the DP Statement or how long a proposal has been pending for
disposal.

1.4.3. Particulars to be written under columns are self explanatory. Under column number 2, 5,
7 & 8 Branches will fill in the code numbers required to be put in Book Debt Statement.
All these information are to be filled in for all the proposals received, whether sanctioned
or declined.

1.5 Decision Making Process

1.5.1. After obtaining all the information as discussed above, the Manager will have to take a
decision on whether to sanction the proposal or to decline it. The procedure is
described under para 1.1.5 above.

1.5.2. Sanctioning proposal will depend upon the amount of the loan and discretionary power
of the Manager. If the loan amount falls within the DP of the Manager, it shall be
disposed of without any avoidable delay. We should never give an impression that the
applicant is not welcome even if we have already decided to decline the proposal. If the
proposal can be sanctioned, it should be sanctioned without getting the applicant
annoyed due to our response or attitude.

1.5.3. If the proposal is to be forwarded to the Regional Office or to Head Office through the
Regional Office, the Branch will forward the proposal along with their recommendations.
All necessary papers required for making the decision should be sent along with the
application. Similarly, if the decision is to be taken at Head Office level or Regional
Office level, Branch will forward the proposal to Regional Office with its
recommendations.

1.5.4. Rejection of proposal:

In case any proposal for advance has to be declined, the guidelines are to be followed.
The sanctioning authority should put forth cogent reasons for turning down the proposal
and should not be apologetic or tentative or evasive in his approach. If the proposal has
to be declined due to poor credit record, the matter should be handled carefully and
nothing should be said or given in writing casting aspersion on the integrity of the party.

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CHAPTER-II

TYPES OF BORROWERS

TOPIC PAGE NO.

2.1 Proprietorship Firm

2.2 Minor

2.3 Pardanashin Lady

2.4 Joint Account

2.5 Joint Hindu Family

2.6 Club, Society, School

2.7 Co-operative Society

2.8 Partnership Firm

2.9 Limited Company

2.10 Govt. Company

2.11 Foreign Company

2.12 Self Help Group

2.13 Lunatics and Insolvent

Annexure 1

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CHAPTER II

TYPES OF BORROWERS

2.1 Proprietorship Firm

2.1.1. When an individual as proprietor carries on a business, either in his own name or a
trade name, the business is a proprietary one. For advance in such a case it is usual to
obtain a declaration of sole-proprietorship (Form S-Documentation Manual) to the effect
that as the proprietor the person concerned is solely responsible for the liabilities of the
firm.

2.2 Minor

2.2.1 A minor is a person who has not completed 18 years of age. However, in the case
of a minor for whose person or property, or both, a guardian has been appointed
or declared by any court of justice before the age of 18 years, and in case of
every minor the superintendence of whose property has been assumed by the
Court of Wards, age of majority will be 21 years and not 18.

2.2.2 In terms of the Indian Contract Act, 1872, a minor cannot enter into a contract and a
contract by a minor is void abinitio. A contract made by a minor cannot be ratified even
on attaining majority, as the contract is void.

2.2.3 In term of section 26 of the Negotiable Instrument Act, 1881 a minor can bind all parties
except himself.

2.2.4 In terms of subsection (3) of Section 26 of the Indian Partnership Act, 1932 only the
minors share in the partnership firm and its profit is liable for the acts of the firm.
Neither the minor personally nor his other personal property are liable for the acts of the
firm.

2.2.5. From the position of different relevant sections of different acts it is evident that the loan
given to a minor cannot be recovered from him as the contract for the loan is void
abinitio and if any security has been provided for the loan, by the minor, the same
cannot be enforced. If the loan to a minor is backed by personal guarantee, the same
cannot be invoked as the minor as the principal debtor is not liable to repay the loan.

2.3 Pardanashin Lady:

2.3.1 A contract by a Pardanashin lady is voidable at the option of the lady on account of
undue influence. The onus of proving the absence of undue influence is on the Bank.
Further, there may be chance of impersonation. Following formalities are to be observed
in case of advance to Pardanashin ladies:

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a) Pardanashin lady borrower is to be identified by a person to whom she is known
and before whom she normally appears (Annexure-I),

b) Such a borrower should be introduced and identified by a person known to the


bank and a declaration in the banks standard form to be obtained from the said
introducer,

c) A photograph of the identifier should also to be submitted if the introducer is


illiterate,

d) The photograph is to be attested by the Manager of the Branch or any other


officer so authorised,

e) Particulars of the identifier, his/her whereabouts and standing should be kept on


record duly certified by the officer making the enquiry,

f) The bank need not insist upon the production of photograph of the concerned
borrower where other safeguards such as proper identification of the parties
concerned, obtaining sureties and their photographs etc. have been duly
observed.

2.4 Joint Accounts

2.4.1 When two or more individuals join together to avail of loan from the branch of a bank,
the account is known as a Joint Account. Although number of such loan account is likely
to be small, there may be some such cases.

2.4.2 All the joint account holders will sign the application form and all the documents to be
executed by them jointly.

2.4.3. Instructions, under the signature of all the joint account-holders, should be obtained,
before disbursement. In the absence of any such instructions, securities are to be
delivered against discharge of all the joint account-holders.

2.4.4 In the event of death of any of the Joint Account-holder:

(a) In the event of death of any of the joint account holders, in case of an operative
account like cash credit and overdraft, operation of the account should be stopped
immediately so that the estate of the deceased could be made liable for the debt
due to the Bank. Operation in the account should be stopped in the event of one
of the joint borrowers becoming insolvent or insane.

(b) Future operations should be routed through a new account opened specially for
this purpose.

(c) The branch should review the account within a fortnight and shall decide whether
the existing credit facility should be continued based on various factors such as

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Credit worthiness of the remaining borrowers, future prospects of the business,
effect of death of the person on the unit etc.

(d) In case it is decided that the credit facility would not be renewed, necessary
steps should be taken to realise the outstanding debit balance in the account.

(e) In case it is decided that the credit facility would be renewed and continued, a
fresh sanction should be accorded in favour of the surviving account-holders and
all formalities including documentation should be completed.

(f) When a limit is sanctioned, the outstanding balance in the old account, if any,
should be repaid by a cheque drawn on the new account

2.5 JOINT HINDU FAMILY

2.5.1. Great care shall be taken in dealing with a Joint Hindu Family advances due to certain
legal complexities involved. No advance to a Joint Hindu Family shall be granted unless
it is for the purpose of carrying out with the family business for the interest of the family
as a whole.

2.5.2 In case of an advance to a Joint Hindu Family the application in Banks standard form
shall be signed by the Karta and other major coparceners. On behalf of the minor
coparceners, their guardians will sign. In the application form, it should be clearly
mentioned that the advance required is for the ordinary purpose of family business.

2.5.3 All the documents are to be signed by the Karta on behalf of the firm or family and also
in his personal capacity undertaking joint liability not only to the extent of his share in
the family property but also personal liability for the entire debt contracted by him on
behalf of the family.

2.5.4. The liability of all coparceners is limited to the extent of their respective share in the
family assets. The major coparceners and guardians of the minors, whether born or
unborn, shall sign the documents in their personal capacity.

2.5.5. The names and dates of birth of the minor co-parceners, if there be any, shall be
mentioned in the Joint Hindu Family letter (Form No. 306) and the application for
advance shall be signed on their behalf by their respective guardians and the same
shall be ratified by such minors on their attainment of majority.

2.5.6 As a measure of further pre-caution an undertaking shall be obtained from all the major
coparceners to the effect that the liability of coparceners is limited to the extent of their
shares in the family assets. It shall also be mentioned in the undertaking that in the
event of separation on closure of the family business, a written notice will be given to
the bank and until such notice is given all of them shall be liable for the advance granted
to the family.

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2.6 Club, Society, School etc.

2.6.1 Club, Society, School etc. if not, incorporated within the laws governing them, have no
power to enter into agreement as they have no legal entity. They cannot be sued.
Members of such bodies are not liable for any credit/facility even if they sign the
cheques in their representative capacity.

2.6.2 In case a proposal is entertained, it has to be ascertained from the bye laws of the body
that the Managing Committee has the power to charge the assets of the club etc. and
raise loan. Appropriate resolutions have to be adopted by the Managing Committee.

2.6.3. Advances to such bodies are to be made as a very special case. Proposals sanctioned
under the discretionary power of the Branch Manager will be disbursed with the
approval of the Regional Manager.

2.7 Co-operative Societies

2.7.1. Certificate of Registration

In order to be eligible for Bank advances Co-operative Societies must be registered


under the Co-operative Societies Act in force in various States. A certificate of
registration signed by the Registrar is the conclusive evidence that the Society is
registered, and must be produced for inspection before an advance proposal can be
entertained.

2.7.2 Rules and Bye-Laws

As co-operative societies are governed by their respective rules and bye-laws, it is


necessary to examine the Rules or Bye-laws for-

(a) Borrowing powers

(b) Power to charge assets

(c) Authority of office bearers.

It is also necessary to examine whether any restriction is imposed on opening and


operation of Bank accounts.

2.7.3. Restriction on borrowing

A registered co-operative society shall receive loans from persons who are not
members only to such extent and under such conditions as may be prescribed by the
rules or bye-laws. In certain states the Co-operative Societies Act does not permit
opening of Bank accounts by Co-operative Credit Societies except with Co-operative
Banks without the permission of the Registrar of Co-operative Societies. It is, therefore,
necessary that the restrictions imposed on borrowing shall be carefully studied before
entertaining any advance proposal.

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2.7.4. Inspection of Affairs

In case of an existing advance where inspection of books of indebted society becomes


essential, the Registrar shall, on payment of a prescribed fee, inspect or direct some
person authorised by him by order in writing on his behalf to inspect the books of the
society. 2.7.5. Registered Address of Societies

Every registered office shall have an address registered in accordance with the rules, to
which all notices and communications may be sent.However, a lending banker has the
authority to inspect the books of accounts of a Socity.

2.8 PARTNERSHIP FIRMS

2.8.1. The number of partners in a partnership firm should not exceed 20 except in case
of banking business where the number of partners should not exceed 10.

2.8.2 If the partnership firm includes one or more firms as partners, the number of partners of
those firms should be individually added up to determine the number of partners of the
new firm [example : ABC & Co. is a partnership firm with 10 individuals and 2
partnership firms as partners. Number of partners in these 2 firms is 9. So, total number
of partners of ABC & Co. will be taken as 10 + 9=19]. If a limited company is partner in
a firm, it should be treated as one partner. In case if Hindu Undivided Family, all the
major coparceners are to be individually treated as partners.However if HUF is a
partner, the proposal must not be entertained.

2.8.3. Liabilities of the partners are joint and several. The partners are liable both as a partner
and as individual. Their liability is limited to their share as partner and unlimited as an
individual. For a limited Company, their liability is unlimited in meeting the liability of the
firm. However, no director or shareholder of the company is personally liable for the
liability of the company.

2.8.4. PARTNERSHIP AGREEMENT

A Partnership is the relation between persons who have agreed to share profits of a
business carried on by all or any of them acting for all (Section 4 Indian Partnership Act,
1932). A partnership agreement which deals mainly with the constitution and
relationship between the partners may be created verbally or in writing. A partnership
deed in writing is not always available neither it is required to be produced for the
purpose of the Bank. In case, however, a copy of the partnership deed is in record of
the Bank, it will be useful to note whether there are any special clauses restricting the
authority of any of the partners to borrow on behalf of the firm.

2.8.5. PARTNERSHIP LETTER

The declaration of partnership as on the reverse of the account opening form No. 303
shall be obtained under signatures of all the partners in their individual capacity. It is

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essential to note from the partnership letter that there is no restriction imposed on the
authority of a partner to raise a loan on behalf of the firm.

N.B. : The Bank shall not be affected by any restriction imposed on the authority of a
partner undisclosed in the Partnership letter.

2.8.6 REGISTRATION OF A FIRM

Registration of a partnership firm under Section 69 of the Indian Partnership Act 1932
must have to be made if loan or advances is allowed in the firms account. Registration
of a firm can be effected any time during the continuance of the business by submitting
a statement to the Registrar of Firms in a prescribed form which contains amongst
other particulars of the names and addresses of all the partners. When considering an
advance proposal the Bank is required to verify who the partners are. This can be best
done by reference to the Registrar of Firms, where the names of partners recorded in
the register are regarded as conclusive.

In certain states, it is mandatory to register a partnership firm within a certain period of


time from the date of the constitution of the firm. Branches should ascertain the position
in this respect in respective states and shall act accordingly.

REMEMBER: REGISTRATION OF DEED IS NOT REGISTRATION OF FIRM.

2.8.7 ON DEATH, INVOLVENCY AND RETIREMENT OF A PARTNER

In case of death, insolvency or retirement of a partner, the account, if it shows a debit


balance, shall be stopped at once to retain the Banks recourse against the deceased,
insolvent or retiring partners estate. This is done to avoid operation of Claytons Rule.
Further operations should be recorded in a fresh account on a separate page of the
ledger getting the confirmation of the continuing partners.

In case of death or retirement of a partner the surviving partners shall not be allowed to
draw the unavailed portion of the limit on the date of death or retirement until fresh
sanction is granted to the reconstituted firm on the basis of credit rating of the partners.

In case of insolvency of a partner, the securities held against the debit balance, shall be
frozen in order to retain the Banks rights against the insolvents estates. Operation in
any personal account in the name of the insolvent partner shall be stopped.

The Banks claims in the event of insolvency of a partner shall be filed within the
stipulated period notified by the official Receiver/Assignee for recovery of its dues.

2.8.8 EXECUTION OF DOCUMENTS

All documents for an advance shall be executed by all the partners in their capacity as
partners and individually. This has the effect of making the partners as principal debtors
jointly and severally liable for the firms indebtedness to the Bank. Joint and several

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liability of the partners will give the Bank the right of set-off on any private account of a
partner in respect of firms debt.

In case of mortgage by deposit of title deeds of the partnership property the


concurrence of all the partners must be obtained and the letter of admission shall be
signed by all the partners.

2.8.9 INDEMNITY OR GUARANTEE

Any indemnity or guarantee on behalf of a partnership firm must be executed by all the
partners jointly to indicate their joint and several liability. No partner can bind his co-
partners by giving a guarantee or indemnity unless such guarantee or indemnity is a
routine job normally undertaken by the firm in the usual course of business.

2.8.10. APPLICATION FOR ADVANCE

Application for advance may be made by the partners jointly or any other partner/s
singly on behalf of the firm. It may also be made by an agent on behalf of the principal
on the strength of a power of attorney executed in his favour by all the partners. The
powers delegated in such cases shall be properly checked up and confirmation from the
principal that the power of attorney is in force shall be obtained.
2.8.11. LIMITED LIABILITY PARTNERSHIP FIRM

LLP is a limited liability partnership firm incorporated under LLP Act 2008. LLP is a body
corporate registered with Registrar of Companies, which is the administrating authority
for LLPs. In LLP there is no limit of maximum number of partners and resignation/death
of partner does not lead to dissolution of LLP. LLP can be wound up under law.

2.9. LIMITED COMPANY

2.9.1 Of the different types of Companies registered under the Companies Act, companies
limited by shares are more common. They are again classified as Public and Private
Companies and are required by law to add the word(s) Limited or Private Limited as
the case may be at the end of their names. Generally advance proposals received from
companies engaged in manufacturing and trading business fall under either of the two
classes of companies referred to above. The following paragraphs deal mainly with
advances to companies limited by shares both public and private.

2.9.2 A private company means a company which, by its articles (a) restricts the right to
transfer its share, (b) limits the number of its members to fifty (minimum being two) and
(c) prohibits any invitations to the public to subscribe for any shares in or debentures of
the company.

2.9.3 A Public Company means a company which is not a private company. In a public
company, minimum number of shareholders should be seven.

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2.9.4 Every company is required to have two documents, one called Memorandum of
Association and the other Articles of Association.

The Articles of Association contains the regulations framed for the internal management
of the company and by it the objects and powers of the company are carried into effect.
The Arcticles usually deal with the following points: (1) Share Capital, (2) Rights
attached to the different classes of share and various other matters related to share, (3)
Directors, their number, power, duties, qualification, remuneration etc. (4) Proceedings
at meetings, (5) Voting rights, (6) Accounts and Audit etc.

Private companies limited by shares, an unlimited company or a company limited by


guarantee must register its Articles of Association along with the Memorandum. For
other companies, it is not mandatory to register the Articles.

A Memorandum of Association is the document of utmost importance required to be


registered on the formation of the company. It is a document for the guidance of the
outside public, defining the companys powers and limiting the scope of its operations.
Any act done outside the purposes stated in the Memorandum is null and void. Objects
clause of a companys memorandum of Association should be specific; main objects
have to be listed separately from the subsidiary objects. Memorandum also describes,
except in case of trading companies, the state or states to whose territories the objects
extend.

2.9.5 In terms of Section 34 of the Companies Act, on the registration of the memorandum of
the Company, the Registrar shall certify under his hand that the company is
incorporated and in the case of limited company that the company is limited.

2.9.6 A companys borrowing power is regulated u/s 293(1) (d) and the provision for
borrowing is incorporated in the Article of a company. This is to be ensured
before granting loan.

2.9.7 Under Section 293 (1) (d) of the Companies Act, 1956, the Board of Directors of a
public company or of a private company which is subsidiary to a public company, cannot
borrow in excess of the aggregate of paid up capital and free reserves i.e. reserves not
set apart for any particular purpose. In arriving at the aggregate borrowings, the limits of
temporary loans received from the companys bankers in the ordinary course of
business in the shape of demand loan/overdraft/cash credit/bills purchased and
discounted limits or advances on short term basis repayable on demand or within six
months shall be excluded provided the proceeds of such borrowing are not used to
acquire capital assets. In case of advance to a public limited company a certificate that
the companys total borrowings are within the powers of the Director (as per Form F,
Appendix II, and Documentation Manual) shall be obtained signed by the Chairman

17
every year during the continuation of the Advance. The restrictions as to the limit of
borrowings under the Section aforesaid do not apply to a private limited company.

2.9.8 Any borrowing in excess of the paid up capital and free reserves requires the prior
consent of the shareholders in a general meeting. In such cases, a copy of the
shareholders resolution in a general meeting specifying the total amount upto which the
directors are authorised to borrow shall be obtained certified by the Chairman of the
General Meeting.

2.9.9 Any borrowing arrangement must be authorised by a resolution of the Board of


Directors passed at a duly convened meeting of the Board. To be effective such
resolutions should be in conformity with the provisions of the Memorandum and Articles
of Association of the Company. It is desirable to have the resolution approved by the
Bank before being passed in the meeting in order to ensure that they conform to the
arrangements. The resolutions which may be drawn in the manner as shown in Form A,
Appendix II of the Documentation Manual suitably modified whenever necessary
shall specify amongst other things the date when the resolution was passed, the limit of
borrowings, specific securities to be charged thereagainst and the names of persons
delegated with authority to borrow and execute necessary documents. The power to
borrow can be delegated to (a) Managing Director, (b) Committee of Directors, (c)
Manager or to any person as may be authorised by the Board.

2.9.10 For entertaining an advance proposal from a limited company, the copies of the
following documents need be produced :

i) Certificate of Incorporation

The original certificate should be inspected and returned.

ii) Certificate of Commencement of Business

The original certificate should be inspected and returned. No proposal for advance
from a public limited company shall be considered until it has obtained the
Certificate of Commencement of Business. A private limited company requires no
commencement certificate.

2.9.11 BALANCE SHEETS :

Copies of the companys balance sheets including profit and loss account for the last
three years shall be studied in the manner detailed in Chapter III relating to analysis of
financial statements. One copy of each of the balance sheets shall be retained at the
branch and the other to be sent to the Regional Office/H.O. as the case may be along
with the proposal. In case of existing advances and in case of all new proposals
sanctioned, two copies of balance sheets for each subsequent year shall be obtained,
one copy of which is retained at the branch and the other sent to the Regional Office or

18
Head Office as the case may be. Any adverse trend in business as revealed from the
study of balance sheets should be forthwith brought to the notice of the Regional
Office/H.O. as the case may be.

2.9.12 DEBENTURE :

If the company, where proposal is under consideration, has issued debentures, the
relative trust deed shall be inspected to ascertain that no charge has been created on
the assets offered as security against the proposed advance. When a company having
an existing advance issues debentures, the matter must be reported to the Regional
Office and care taken sufficiently in advance to safeguard the interest of the Bank.

2.9.13 SEARCH AT THE REGISTRARS OFFICE:

The Registrar of Companies maintains a Register of charges and also an Index to this
Register, both of which are open to public inspection. Before an advance is made a
search shall be caused to be made in the Office of the Registrar of Companies through
a branch office located in the vicinity or through a lawyer, to ensure that there is no
existing charge on the assets offered as a security for the advance. Similar search shall
be conducted at the time of filing the charge for registration and 37 days after such filing
to ascertain whether any other prior charge on the assets of the company has been
registered. Subsequent searches shall be made every time the advance is reviewed or
renewed. Now a day on line facility is available for searching and registration of
charges.

2.9.14 REGISTRATION OF CHARGES

The particulars of the undernoted charges created by a limited company together with
the instruements, if any, by which the charges are created must be filed with the
Registrar of Companies for registration within thirty days of their creation.

(a) a charge for the purpose of securing any issue of debentures;

(b) a charge on uncalled share capital of the company;

(c) a charge on immovable property wherever situate;

(d) a charge on book debts of the company;

(e) a charge, not being a pledge , on any movable property of the company;

(f) a floating charge on the undertaking or the property of the company including
stock-in-trade;

(g) a charge on the calls made but not paid;

(h) A charge on goodwill, on a patent or license under a patent, on a trademark or on


a copyright or a license under a copyright.

19
Provided that the Registrar may allow the particulars and instrument or copy as
aforesaid to be filed within thirty days next following the expiry of the said period of thirty
days on payment of such additional fee not exceeding ten times the amount of fee
specified in schedule- X as the Registrar may determine, if the company satisfied the
Registrar that it had sufficient cause for not filing the particulars and instrument or copy
within that period.

Notwithstanding, arrangement for registration of all charges within the specified period
of 30 days shall be ensured by the branches. If for any reason, beyond the control of
the branch, it appears that the charge cannot be registered within 30 days, the branch
shall bring this to the notice of the Controller within 21 days after the date of creation of
the charge by execution of documents. The Controller will then assist the branch in filing
the application for registration of charge within the specified period of 30 days since
timely registration of charges establishes the right of the bank.

2.9.15. CHARGES EXEMPTED FROM REGISTRATION

A charge by way of pledge of moveable properties such as

i) goods pledged to the Bank

ii) G.P.Notes, Debentures and Shares

iii) Documentary D.P. and D.A. Bills accompanied by Negotiable Instruments i.e. a
bill of exchange need not be registered with the Registrar of Companies. In case
advance to any company is secured both by any of the aforesaid securities and
hypothecation of or charge upon other assets of the company such as Book
Debts, Moveable assets, Plant & Machinery etc. such charges (other than pledge)
must be properly registered.

N.B. The original instruments creating the charge need not be filed for registration.

True copies of such instruments certified, as such by an officer of the borrowing


company, will serve the purpose equally well.

2.9.16. PRESCRIBED FORMS TO BE FILED FOR REGISTRATION

Creation of charge and any subsequent modification in charge shall be filed for
registration within 30 days after the date of creation/modification in Forms Nos. 8 and 14
respectively as prescribed under the Companies Act, 1956. When registration has been
effected the Registrar shall issue a certificate of registration which is sent to the Bank
along with the instrument of charge. The certificate is the conclusive evidence that the
requirements of the Act as to registration have been complied with.

On repayment of the advance satisfaction of charge requires registration within 30 days


from the date thereof in Form No.17 prescribed under the Companies Act, 1956.

20
2.9.17. REGISTRATION OF CREATION OF CHARGE:

The prescribed form i.e. Form No. 8 (vide Form B, Appendix- II, in the Documentation
Manual) has to be completed and the signature of the borrower obtained thereon.

Under item 1 date and description of the instrument creating charge, such as
hypothecation of goods, hypothecation of debts and moveable assets etc. should be
given serially. If there is no instrument, as in the case of a mortgage by deposit in the
following manner:

No instrument, Deposit of title deeds made on to create an equitable mortgage


in favour of the Bank.

Under item 2, the amount secured by the charge shall be written.

Under item 3 short particulars of the property charged should be written from the
instrument/s. In the case of Hypothecation of Goods (vide Form No.1, Appendix I,
Documentation Manual) the narration should be as follows:

The whole of the Borrowers stock consisting of (Description of Goods to be given)


whether raw or in process of manufacture and all products, goods and moveable
property of any kind wherever situate including any goods in course of transit.

In the case of Hypothecation of Debts & Moveable Assets (Form J, Appendix- I, and
Documentation Manual) the narration should be:

All the Borrowers present and future book debts outstanding moneys receivable claims
bills contracts engagements securities rights and moveable assets.

In the case of Hypothecation of Plant and Machinery (Form K, Appendix- I,


Documentation Manual) the narration may be as follows:

All plant, machinery, engines, boilers, appliances, tools and implements described in
general terms

The Plant & Machinery wherever situate and in course of transit.

In the case of charge created by deposit of title deeds without any instrument the
particulars may be given as under or in a similar manner considered appropriate.

Mortgage by way of deposit of title deeds in respect of the Companys property being
premises No comprising all lands and buildings, structures, erections,
fixtures and fittings thereon and therein.

Under item 4 of the Form, gist of the terms and conditions and extent and operation
against the instrument of charge shall be stated. For instance in the case of
Hypothecation of Goods the description may be given as under:

21
Stocks as described under item 3 which now or hereafter from time to time shall be in
possession of the borrower shall remain hypothecated to the Bank by way of first charge
to secure a demand cash credit limit of Rs.. with interest @ percent per
annum(quarterly or monthly rests) or at such other rate as may be
communicated to the borrower from time to time.

Where a number of instruments creating charge are to be registered under cover of


Single Form 8, the total amount of charge to be registered shall not exceed the overall
sanctioned limit irrespective of the aggregate of sub-limits under different instruments.
In such cases terms and conditions of sanction including limit thereof shall be given in
brief at the top of the column followed by gist of the terms and conditions and extent and
operation against each instrument of charge, in order to prevent any confusion on the
part of the Registrar as to the amount of charge to be created.

Under item 5 the name and address of the Bank as also Head Office address shall be
given.

Item 6 is applicable only in case of issue of debentures.

2.9.18. REGISTRATION OF MODIFICATION OF CHARGE

Whenever there is a modification in the terms or conditions or the extent of operation,


particulars of such modification shall be sent for registration in the prescribed Form
No.14 (vide Form C, Appendix II, Documentation Manual) within 30 days from the date
of execution of the documents. The form shall be completed for the signature of the
borrower. Under Item 1 of the Form the date and brief description of instrument creating
the original charge as also the date on Form 8 i.e. the date of registration shall be
written. Under item 2 i.e. date and brief description of instrument modifying the charge
such as

Supplemental Deed of Hypothecation Agreement (Form X, Appendix II, Documentation


Manual) dated in favour of the Bank modifying the charge from Rs
to Rs

Should be written or in a similar manner suitably worded.

Under item 3, the details of the modification shall be given. As an illustration, an


enhancement of Rs.1,00,000/- having been sanctioned in an existing cash credit limit of
say Rs.10,00,000/- the particulars under item no.3 may be given as follows:

An additional limit of Rs.1,00,000/- has been granted to the company thereby raising the
total limit to Rs.11,00,000/- in the cash credit account on with other
conditions remaining the same.

The details of all modifications shall be given in brief for registration purpose.
Modification of interest rate is not however required to be registered in the case of

22
instruments where variations in the rate of interest are covered by the insertion of
clause.

At such other rate as may be communicated to the borrower from time to time.

or similar such clause, and registered as such in the form no.8 for the registration of the
original charge.

2.9.19. REGISTRATION OF SATISFACTION OF CHARGE

On repayment of the debts for which the charge was created Satisfaction of Charge in
the prescribed form no. 17 (Form D, Appendix II, and Documentation Manual) has to be
filed within 30 days. The procedure to get the form completed requires no elucidation.

2.9.20. NEGATIVE LIEN:

A negative lien on the companys fixed assets which are not charged to the Bank or
elsewhere, shall be obtained in Banks standard form (Form L, Appendix- II,
Documentation Manual) to the effect that they are free from encumbrances and shall
not be encumbered in any way during the period the advance shall continue without the
written consent of the Bank. This declaration is usually incorporated in a resolution of
the Board of Directors and a certified copy of such resolution shall be duly obtained.

2.9.21. COMPANYS REGISTERED OFFICE:

All notices and documents meant for a limited company shall be served at its
Registered Office (Section 51 of the Companies Act, 1956). But statements of accounts
paid cheques and routine correspondence may be addressed and delivered to any
office of the company under mutual agreement.

2.10 GOVERNMENT COMPANY

2.10.1 A company in which not less than 51% of the paid up capital is held by the Central
Government or by any State Government or partly by Central Government or and partly
by one or more State Government is called a Government Company. All the provisions
of Indian Companies Act shall apply to such Government Companies subject to such
exemptions or modifications that have been notified by the Central Government from
time to time.

2.11 FOREIGN COMPANY

2.11.1 A Foreign Company is a company incorporated outside India and having business in
India. A foreign company should file with the Registrar of Companies, New Delhi and
the state in which the principal office of the foreign company is located, certified copies
of principal documents in English and particulars in forms 44. They will furnish the
foreign address of the company, particulars of directors and secretary of the company,
particulars of the officers resident in India who would accept service of notice and

23
documents on behalf of the company and the address of principal office in India. Any
change in the above particulars shall be intimated to the Registrars of Companies in
form 49 or 52. The foreign company has to file a report in form 54 about the places
where it carries on business in India.

2.11.2 If any charge is created on the assets of a foreign company (i.e., a company
incorporated outside India having a branch office in India), the charge has to be filed for
registration within 30 days after the date of its creation with the Registrar of Companies,
New Delhi (Sec. 600(4) of the Companies Act, 1956). As a measure of abundant
caution it is desirable also to file the particulars with the Registrar of Companies of the
State where the charge is being created even though the law does not require this step.

2.12 SELF HELP GROUP

2.12.1 A self help group is a small economically homogeneous and affinity group of rural poor,
having a common perception of need and impulse towards collective actions and
voluntarily formed to save and mutually agreed to contribute a common fund to be lent
to its members as per group decision, to meet the emergent needs of the members both
for productive & consumption purposes. The group should work democratically such
groups may be registered or unregistered.

2.12.2 Size of such groups is normally between 5 to 20. The group should maintain proper
records & accounts. They should maintain Membership Register,

2.12.3 Attendance Register, Proceedings Books, Savings Ledger, Borrowing/Deposit Ledger,


and Loan Ledger.

2.12.4 The group is sanctioned loan in proportion to their savings and the proportion should
initially be 1:1 ratio and will be increased to 1:4 depending upon rating of the group.
Such loans can be sanctioned directly to the SHG or through NGO/VA.

2.12.4 Documents are to be executed by the authorised persons on behalf of the group. All the
members of the SHG in all cases will execute an interse agreement.

2.13 LUNATICS AND INSOLVENT

2.13.1 Lunatic and insolvent are not competent to enter into a contract, so they are also not
eligible for any loan.

For all the above types of borrowers KYC norms are to be complied.

24
ANNEXURE 1

The Manager
United Bank of India
__________________ Branch

Dear Sir,

Re : Introduction of the account of Km/Smt. _____________________


_____________________ for the purpose of opening account with you
and obtaining borrowing facilities

This is to keep on record that at my request and introduction you have opened an account in the name
of ________________________________ who is a Pardanashin lady and who had applied to you for
opening account as also for borrowing facilities. Then Pardanashin lady above named is personally
known to me and I am acquainted with her and her requirements.

You have at her request agreed to grant her credit facility of Rs.__________ lac for which she has
submitted to you necessary application and has also executed loan documents as noted below. She
has affixed her signature on the loan documents, in my presence and her signature on the loan
documents, which is in conformity with her usual signature and also the signature as recorded on this
letter, has been attested by me on this letter evidencing for her execution of the loan documents in
your favour.

Yours faithfully,
(Signature)
A) Particulars of the loan documents Name :
Executed by ________________________ Address :
________________________ in my presence. _________________________
Occupation _______________
1.
2.
3.
4.
B) Signature of _____________________________

Attested : ________________________________
(Signature of Introducer)

25
CHAPTER III

ANALYSIS OF FINANCIAL STATEMENTS, RATIO ANALYSIS AND INTERPRETATION

TOPIC PAGE NO.

3.1 Introduction

3.2 Balance Sheet

3.3 Assets

3.4 Classification

3.5 Profit & Loss Account

3.6 Ratio Analysis

3.7 Ratios to Judge efficiency of operational management

3.8 Ratios to judge efficiency of financial management

3.9 Ratios to judge efficiency of debt service management

3.10 Example

3.11 Limitations of Ratio Analysis

3.12 Cost volume Profit Analysis

3.13 Fund flow analysis

Annexure I Format of Balance Sheet

Annexure II Abstract of balance Sheet

Annexure III Format for analyzing PL account

Annexure IV Exercise on abstract of balance sheet

Annexure V Exercise on analyzing PL account

26
CHAPTER III

ANALYSIS OF FINANCIAL STATEMENTS, RATIO ANALYSIS AND INTERPRETATIOIN

3.1 INTRODUCTION :

3.1.1 Credit decisions are to a large extent based on financial position of the borrowers. This
chapter is restricted to the assessment of a business concern based on financial
statements. These are powerful analytical tools for reaching sound credit decisions.

3.1.2 Financial statements, as required by a banker, comprise of Balance Sheet, Profit and
Loss Account and Fund Flow Statement. The key questions answered by these three
statements are :

Balance Sheet: What is the financial position of the firm at the end of an accounting
year?

Profit and Loss Account: How did the firm perform during the accounting year?

Fund Flow Statement: What have been the sources and uses of funds during the
accounting year?

3.1.3 The Companies Act requires that the Annual Report of the Company, a public document
that is sent to share holders, contain the balance sheet, the profit & loss account, the
Directors report and the Auditors report. Though not presently required by law, many
companies present sources & uses of funds statement as well in the Annual Report.

3.2 BALANCE SHEET

3.2.1. Balance Sheet is a statement of position of Assets and Liabilities of a business firm on a
given date i.e. at the end of an accounting year.

3.2.2. The liability side of the Balance Sheet indicates sources of funds. Depending on the
types of sources, liability can be divided into three parts :

(a) Net worth: This is a permanent source of fund to the firm and consists of Equity
(owners capital) and Reserve & Surplus. Reserve is created out of profit earned
from the business and capital surplus resulting from profit on sale of fixed assets,
revaluation of fixed assets, capital subsidy, premium on share issue etc. However,
revaluation reserve should not be considered for arriving at the Net Worth
position. Similarly, such reserve should also be deducted from Net Block to arrive
at the position of net block (net of revaluation reserve).

(b) Term Liability: This is a source which is not permanent and is repayable over a
period of time beyond one year. Examples of such items are :

27
Term Loans from Banks, Financial Institutions.

Loans from associates, friends & relatives

Deferred Payment Credit

Debentures, Fixed Deposits.

Preference Shares etc.

(c) Current Liability: Current liabilities originate from current or short-term promises
made to non-owners of the business. Such liabilities are to be repaid/fulfilled
within 12 months from the date of the balance sheet. Different items under this
category are trade creditors, accrued liabilities i.e., the expenses which have been
contracted but not paid till the finalisation of the balance sheet viz., dividend
payable, taxation liabilities (accrued liabilities are the items that have been
debited to Profit & Loss account but not actually paid and transferred to liabilities
account), deposits from customers, bridge loan, cash credit/overdraft from banks,
commercial paper, short term borrowing (including bills purchased & discounted)
and that part of the long term liability that is repayable in a years time.

Besides, there may be Contingent Liabilities which are not actual liabilities and may
crystallize at a future date on happening of a certain event. As these are not
actual liabilities and extent of the same cannot be specified, they do not figure in
the balance sheet, but these are reported by way of note in the Balance Sheet.
These are known as off balance sheet items. Branches will study these liabilities
and try to assess the possibility of their being crystallized and its consequent
impact on the balance sheet. Some examples of contingent Liabilities are:

(a) Demands by different agencies like Income Tax, Sales Tax, Customs &
Excise contested by the party & pending before the court or appellate
authority.
(b) Bonds/Guarantees issued in favour of different beneficiaries.
(c) Probable claims against suit pending, if any, unclaimed liabilities for partly
paid shares, arrears of unclaimed dividends etc.
3.3 ASSETS

The asset side of the balance sheet depicts the use of fund in different types of assets.
Assets can be classified into four different types as under :

3.3.1. Fixed Assets: Fixed assets are those assets which are not normally disposed of within a
short period, but are carried over to the following years for productive use, while a
fraction of their value is charged to expenses every year as depreciation. Examples of
such assets are Land and Building, Factory Shed, Plant & Machinery, Motor Vehicles,

28
Furniture and Fixtures etc. Fixed assets provide the lifeline of the business. A lender,
whether he is financing fixed assets or not, must therefore, make a thorough analysis of
the fixed assets of an enterprise, because it is only on the proper functioning of fixed
assets that the ultimate repayment capacity of the borrower lies.

3.3.2. Current Assets: They represent short-term use of fund. This category consists of cash
and other resources, which get converted into cash during the operating cycle of the
firm. Current Assets are held for a short period of time as against fixed assets, which
are held for relatively longer periods. The major components of Current Assets are:
Cash, debtors, inventories, loans and advances.

(i) Cash: Cash denotes funds readily disbursable by the firm. The bulk of it is usually
in the form of bank balance; the rest comprises of currency held by the firm.

(ii) Debtors: This is also called accounts receivable. This represents the amounts
owed to the firm by its customers who have bought goods and services on credit.
Debtors are shown in the balance sheet as the amount owed less any allowance
for the bad/doubtful debts. Total debtors are segregated into two components
(a) Debts outstanding for more than six months (b) other debts (a debt within 6
months). If the amount owed to the company is evidenced by written bills of
exchange or Hundi, these would appear under the caption Bills Receivable
rather than accounts receivable. Normally such bills are for a specified period in
case of usance bills and the payment is to be received on demand in case of
demand bills.

(iii) Inventory: Inventory is the most important element of Current Assets and bulk of
working capital finance is given for inventory. Different components of Inventory
are Raw Materials and spares, work-in-process (also known as Stock-in-Process)
and Finished Goods. While manufacturing firms generally hold all three types of
inventories, distribution or trading firms hold mostly finished goods. Need for
inventory requires no emphasis. But what should be the optimum quantity of
holding level will depend on the type of activity and location of the unit. Other
aspects influencing the inventory of a firm are: (1) Whether they follow Economic
Order Quantity (EOQ) Policy to order raw materials, (2) Order point and lead time
in days for procurement, (3) Pricing of raw materials and (4) Monitoring and
control of inventory. Amount of inventory to be maintained will also depend upon
anticipated scarcity, expected price change, obsolescence risk, government
restriction and marketing consideration.

iv) Loan & Advances : Under this head are included prepaid expenses, loans and
advances and various deposits, both statutory & trade, which are not directly
related to production, but incidental to business. Except advances made to

29
suppliers of fixed assets, all other advances are in the nature of prepaid
expenses. But in the former case, the amount should be treated as non-current
assets and not current assets.

3.3.3. Non-current Assets : (NCA) :

Non-current Assets are those types of assets which are neither classified as Fixed
Asset nor Current Asset. For example, Loans made to employees for house building or
purchase of conveyance repayable over a long period. Deposits made with various
statutory authorities or earnest money deposit or security deposit which are more or
less permanent in nature, investments in subsidiary companies/affiliates/others, sundry
debtors over six months, advance to suppliers of capital goods etc.

3.3.4. Intangible Assets :

From the accounting point of view, a loss represents a decrease in owners capital.
Hence, when a loss occurs, the owners capital is required to be reduced by that
amount. However, as per Company Law, the share capital cannot be reduced when a
loss occurs. So, the share capital is kept intact on the liability side of the balance sheet
and the loss is shown on the asset side of the balance sheet as intangible assets to be
adjusted from future profit, if any or some time it is adjusted from Reserves if available
without the requirement of showing the loss as intangible asset. Besides, Patents,
Goodwill, preliminary expenses/bad/doubtful assets (not written off) also should appear
as Intangible assets.

3.4 CLASSIFICATION:

Classification of the various items as above relating to Balance Sheet and Profit & Loss
statement into components of groups and sub-groups for the analysis of the balance sheet and
income statement may sometimes lead to doubt as to the correct grouping of some items under
proper heads and therefore according to Section 210 of the Companies Act, Companies are
required to prepare their Balance Sheets at the end of each accounting year. Section 211
requires the balance sheet to be prepared in the prescribed form. The form of the Balance
Sheet as given in Schedule VI of the Companies Act is furnished under Annexure- I.
Assessment of the financial position of an entity based on its Balance Sheet may be made on
analysis of the same on the basis of various important parameters/ratios computed from the
abstracts as per Annexure- II.

3.5. PROFIT & LOSS ACCOUNT (P&L A/c) :

An entrepreneur is in business to earn profit. Sales generate revenues which net of expenses
for the business will give either profit or loss. Apart from the revenues, in some cases there may

30
be nonoperating surplus which is represented by gains arising from sources other than normal
operations of the business. Its major components are income from investments and gains from
disposal of assets etc. Similarly, non-operating deficit represents losses from activities
unrelated to normal operation of the enterprise and the same also feature the P/L Account.

Sales are the sum of the invoice price of goods sold during the period. Excise duty refers to the
amount paid to the Government. Net sale means sale minus excise duty (if any).

Cost of production consists of direct material cost, direct labour cost and factory overheads and
depreciation plus opening stock-in-process minus closing stock in process. Cost of sales is
represented by cost of production so arrived plus opening stock of finished goods minus closing
stock of finished goods. Gross Profit is the difference between net sales and cost of sales and
operating profit is the difference between gross profit and Selling, General & Administrative
Expenses and interest. As a measure of profit it reflects operating performance and is not
affected by non-operating income or loss, tax factor and financial leverage.

Profit before taxes is the sum of operating profit and non-operating surplus/deficit.

Tax represents the income tax payable on the taxable profit for the year. Profit after tax
represents profit after payment of income tax. Retained profit denotes Post-tax Profit after
making provision for dividend, if any.

A format for analysis of P&L Account to represent the above is enclosed in Annexure-III.

3.6. RATIO ANALYSIS

3.6.1 Ratios on the basis of various parameters obtained from analysis of Balance Sheet and
P&L Account are used according to the need. However, while appraising any proposal
care should be taken that all the pertinent ratios prescribed in the lending policy of the
Bank are analysed and interpreted.

3.6.3 The relationship between items or groups of items as classified in the analysis of
balance sheet and P/L statements are examined by ratios. A ratio expresses the results
of comparison between two figures in the same units. Ratios are calculated by dividing
one number by another and results obtained are expressed as a pure ratio or a pure
number or a percentage say (2:1) or (2) or (200%) respectively.

3.6.3. A banker is normally interested to know the following three efficiency aspects of the
borrowers business:

1) Efficiency of operational management

2) Efficiency of financial management

3) Efficiency of debt-service management.

31
3.7. RATIOS TO JUDGE EFFICIENCY OF OPERATIONAL MANAGEMENT

(a) Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

This ratio determines fixed asset utilization.

(b) Return on Investment=PBIT/Total Operating Assets


This ratio determines profitability on total assets employed.
(c) Gross Profit Ratio = Gross Profit/Net Sales
This ratio determines the operating efficiency of the business in keeping the rate of
gross profit stable or increasing.
(d) Inventory Turnover Ratio = Cost of Production/(Inventory of raw materials + work in
process + Finished Goods).
This ratio determines the efficiency of utilisation of inventory.
(e) Operating Leverage = (Net Sales Variable Cost)/PBIT
This ratio determines the sensitivity of relationship of sales and operating profit

3.8. RATIOS TO JUDGE EFFICIENCY OF FINANCIAL MANAGEMENT

(a) Debt Equity Ratio = Long Term outside liability/Shareholders Fund


This ratio determines the level of permanent stake of the borrower.
(b) Total Outside Liabilities/Tangible Net Worth(TOL/TNW) = Total Debt/Shareholders Fund
This ratio determines the level of borrowers overall stake in the business.
(c) Current Ratio = Current Assets/Current Liabilities.
This ratio determines the general liquidity of the business.
(d) Debtors- turnover ratio =Debtors x 365 /Gross sale
This ratio determines the saleability of the product and efficiency of the collection.
(e) Creditors-turnover ratio = Trade Creditors x 365/ Purchases
This ratio determines the ability of the firm/company to obtain market credit.
(f) Loan to Value ratio = Bank Borrowing/Working Capital Gap
This ratio determines the contribution of bank borrowing in meeting working capital gap.

Net Working Capital


(g) Diversion ratio = -
Working Capital Gap
This ratio indicates contribution of margin towards working capital gap.

3.9. RATIOS TO JUDGE EFFICIENCY OF DEBT-SERVICE MANAGEMENT

32
(a) Debt Service Coverage Ratio = (Profit after tax + Interest + Depreciation)/(Interest +
Annual installment for term loan).
This ratio determines the ability of the firm to service its total debt-service obligation.

(b) Interest Coverage Ratio = Profit before interest and tax/Annual interest obligation.
This ratio determines interest paying capacity of the firm.

(c) Priority Obligation Ratio = Net Operating Cash Flow/Priority Outflow

This ratio determines the cash position of the business to meet priority obligation.

3.10. EXAMPLE : All these ratios will now be computed and discussed on the basis of an
example.

XYZ CORPORATION LTD.

Balance Sheet as on 31 March, ________


(Rs in thousand)
Liabilities Amount Assets Amount
Paid Up Capital 2840 Gross Fixed Assets at cost 13470
Share Premium 10 (including Rev.Res.1660)
Revaluation Reserve 1660 Less Depreciation upto date 9430 4040
General Reserve 3730 Capital work-in-progress 310
Debentures 280 Investment 230
Loan from IDBI 140 Housing Loan to employees 420
Loan from Holding Company 530 Advance to suppliers 480
Security Deposits 420 Deposits with NABARD 160
Trade Creditors 6050 Security Deposit 180
Closing Stock
Bills Payable 440 Raw materials 7050
Fixed Deposits from Public 1040 Work-in-progress 1420
Bank borrowings 2300 Finished goods 5010
Interest accrued but not paid 60 Sundry Debtors
(more than 6 months old ) 130
Tax liability 1550 Sundry Debtors
(less than 6 months old ) 1950
Proposed Dividend 750 Amount due from Holding Company 20
Unclaimed Dividend 30 Preliminary Expenses 230
Cash in hand 20

33
Cash at Bank 180
21,830 21,830

Note : 1) Out of total debenture, Rs.70,000 due for redemption within 12 months
2) IDBI Loan Rs.35, 000/-, due for repayment within 12 months.
3) Out of Fixed Deposit of Rs.10, 40,000, a sum of Rs.1, 40,000 will mature within 12
months.
Abstracts of the above Balance Sheet as per format is given in Annexure- IV

34
Trading & Profit & Loss Account
st
For the year ended 31 March, 200X

To Opening Stock: By Sales : 51,680


Raw materials 6750 Less: Excise Duty 5,130
Work-in-progress 1260 46,550
2910
46,550
10,920 Closing Stock
Raw materials 7,050
Purchase of raw materials 35,370 Work-in-progress 1420
Finished goods 5,010
Wages including Bonus 1,240
Carriage Inward 30
Power, fuel, water 1, 890
Spares & Stores 360
Repair plant 220
Rent & Taxes 320
Insurance 20
Depreciation 470
(Plant & Machinery etc.)
Gross Profit 9190
----------- -----------
60,030 60,030

To By
Salaries 1760 Gross Profit 9,190
Contribution to PF & Gratuity 270 Interest & Dividend 140
Welfare expenses 120 Miscellaneous Income 220
Advertisement 460
Carriage & Freight outward 1580
Commission & Brokerage 260
Travelling Expenses 350
Postage, Telegram & Telephone 130
Printing & Stationery 50
Interest 1580
Audit Expenses 10
Provision for bad debt 60
Taxes 680

35
Net Profit transferred
to Profit & Loss
Appropriation Account 2240
-------- ------
9550 9550

An analysis of the above P/L A/c is given in Annexure- V

CALCULATION OF RATIOS:

Net Sales
(a) Fixed Assets turnover ratio =
Operating Fixed Assets

Sales = 51680
Excise duty = 5130
Net Sales = 46550
Net fixed assets = 4040
Less Revaluation Reserve = 1660
Operating Fixed Assets = 2380
46550
. . The Ratio = = 19.56
2380
Net sales is calculated by subtracting Excise Duty from Gross Sales. Operating Fixed
Assets is arrived at by subtracting Revaluation Reserve from Net Fixed Assets. Any
revaluation of fixed assets is to be ignored, because, it does not, in any way, augment
the produceability of fixed assets. Capital expenditure made for partly completed plant
etc. which are yet to be commissioned should also be excluded.
The higher the ratio, the better is the efficiency of fixed assets or, in other words, the
higher the capacity utilization. A low fixed assets-turnover ratio may be reflected in low
profit and a low level of net working capital. A low and falling ratio indicates outdated
technology.

PBIT
(b) Return on Investment =
Total Operating Assets (i.e.operating Fixed asset
plus Current Assets)
This is a combination of operating profit ratio and assets turnover ratio. Profit here
means Profit before interest and taxes (PBIT), which should exclude non-operating
income.

36
Net Profit - 2240
Add Taxes - 680
Add interest - 1580
4500
Less Non-operating income 360
PBIT 4140

The ratio = 4140 = 22.39%


(2380+16110)
This ratio is normally expressed in percentage.
The ROI is the key factor of profitability of a business. It matches the operating profit
with the assets which earn this profit. Efficient utilization of assets will have a relatively
high return, while less efficient use will have a low return.

Gross Profit
(c) Gross Profit Ratio = x 100
Net Sales
This ratio is expressed in percentage.

Gross Profit - 9190


Net Sales - 46550
9190
The Ratio - x 100 = 19.74%
46550
This is the standard method of calculation of this ratio. The branches may calculate the
ratio with reference to cost of goods sold instead of Net Sales. This is better because by
taking cost of goods sold, price fluctuation is neutralized to a great extent.
Cost of goods sold = Opening stock of finished goods + cost of production closing
stock of finished goods.
Cost of production = Prime cost + Manufacturing expenses + opening stock of work-in-
process closing stock of work-in-process.
Prime Cost = Opening stock of raw materials + purchase closing stock of raw
materials + wages including Bonus.
For a trading concern,
Cost of goods sold = Opening stock of inventory + purchase closing stock of inventory
+ Expenses related to purchase.
Prime Cost = 6750 + 35370 7050 + 1240 = 36310
Cost of Production = 36310 + 3310 + 1260 1420 = 39460

37
Cost of goods sold = 2910 + 39460 5010 = 37360

9190
The Ratio = x 100
37360
= 24.59 %
As the cost of goods sold consists mainly of variable expenses, the Gross Profit Ratio
should be more or less stable from year to year. Any variation on the lower side is
dangerous. Any downward movement in this ratio suggests that the cost of production is
increasing but the same cannot be passed on to the consumers due to competition.

(d) Inventory Turnover Ratio = Cost of Production/(Inventory of raw materials+ work in


progress+ finished goods)

= 39460/13480 = 2.93%

(e) Operating leverage = (Net Sales Variable Cost)/PBIT

= (46550 39460)/4140= 6979/3168 = 1.71 : 1

Long Term Outside Liability


(f) Debt-equity Ratio = -
Shareholders Fund

Shareholders Fund (net of revaluation reserve) = 6350

Long Term Outside Liability = 2165

. 2165
. . Debt Equity Ratio = = 34.09% or 0.34 : 1
6350

The Debt-equity ratio has undergone much devolution both in respect of definition of
debt and also the standard since the classical days of credit analysis. With the
liberalisation of the financial sector, which provided a level playing field between the
financial and real sectors of the economy, banks and financial institutions are working
towards lowering the Debt- Equity Ratio to 1.5:1 to fall in line with present day
international standards.

This ratio of 0.34:1 signifies that the outside long-term creditors have only 34% stake in
the long-term resources of the company. On the face of it, this is an extremely
favourable situation.

(g) Total outside liability to tangible networth ratio = Total Debt/Sareholders Fund
Total outside liability = Long Term Debt + Current Liability

= 2165 +11425= 13590

38
Shareholders Fund = 6350

. 13590
. . The Ratio = -
6350
= 2.14:1
This ratio of 2.14:1 means that the total debt is 114% higher than equity. In other words,
equity and total debt have contributed 32 per cent *and 68 percent respectively towards
the total resources of the company.

Current Assets
(h) Current Ratio =
Current Liabilities
16110
= = 1.41:1
11425

This means that the current asset of every Rs.1.41 is financed through borrowings/other
current liabilities to the extent of Re 1 and the balance through long term sources.

Gross sales
(i) Debtors turnover ratio = -
Trade debtors

The Ratio =51680/2080= 24.85 or 365/24.85 = 15 days (approx)


The value of this ratio suggests that debtors turnover approximately 26 times in a year.
On an average, the debt is realised within 14 days. This low holding of debtors suggests
that the companys products are in good demand and /or the debt recovery machine is
very efficient.

(j) Loan to Value Ratio = Bank Borrowing/Working Capital Gap X 100%

= 2300/(16110 9125) X 100 = 32.92%

Working Capital Gap = (Current Liability Bank Borrowers)

(k) Diversion Ratio :

Net Working Capital


= x 100
Working Capital Gap

4685
= x 100
9125
= 51.34%

39
Profit after tax + Interest + Depreciation
a) Debt Service Coverage Ratio =
Interest + Annual repayment of term Loan

Annual Repayment:
Debenture (remaining period of redemption = 4 years) = 70
Loan from IDBI (remaining period of repayment 4 years) = 35
Fixed Deposits = 140
245

2240 + 1580 + 470 4290


The Ratio is = = = 2.35 : 1
1580 + 245 1825

Debt Service Coverage Ratio of the company is good. Higher is this ratio, better is the
repayment possibility. DSCR in this case is high because the long-term fund of the
company is low in comparison to the total liabilities..

Profit before interest & tax and depreciation


(b) Interest Coverage Ratio = -
Annual Interest Obligation

2240 + 1580 + 680 + 470


=
1580
4970
= = 3.14:1
1580

We have taken profit before depreciation, interest and tax because we want to know
how many times the interest payment could be covered by cash profit. Tax has not been
considered because interest is a deductible expenses under the Income Tax Act. A ratio
of 3 or more is considered to be good. The ratio in this case is high because the
company depends more on its net worth and current liabilities than on long-term loan
and debenture.

(c) Priority Obligation Ratio = Net Operating Cash Flow/Priority outflow

Gross Sales : 51,680

Less : Increase in sundry debtors : Nil

Add : Decrease in sundry debtors : 1,685

(A) Operating Cash Inflow : 53,365

40
Consumption of Raw materials: : 35,070
(Opening Stock of Raw materials + Purchase Closing Stock)
Other manufacturing expenses (excluding depreciation) : 4,080

Excise Duty : 5,130

Other General Expenses (Administrative + selling etc.) : 5,050

Income Tax : 680

Add: Increase in closing stock of raw materials : 300 50,310

Less : Increase in creditor 1,100

Add : Decrease in creditor -

Less : Opening balance of Cash and Bank 220 (-) 1,320

(B) Operating Cash Out Flow 48,990

Note : 1) Opening balance of debtors was 3765. Hence difference between Opening
Balance and Closing Balance of debtors comes to (-) 1685.

2) Opening Balance of creditors was 4,950.

3) Opening Balance of Cash was 220.

Net Operating Cash Flow (A B) 53365 - 48990

= 4375

Net Operating Cash Flow


Priority Obligation Ratio =
Priority outflow (i.e. Intt.+ T/L instalment +Redemption of Debenture+ FD Payment etc.)
4375 4375
= = -
(1580 + 35+ 70+140) 1825

= 2.39
Higher the ratio, the capacity to comply with the priority obligation is better and vice-
versa.

3.11 LIMITATIONS OF RATIO ANALYSIS:

1. Ratios are not standard formula for judging the performance. These are only guide,
since management problems are so complex that they can not be reduced to a formula.

2. Since the analysis is based on financial statements, this will have all the limitations
which the financial statements themselves have (e.g. Balance Sheet is on a particular
date and hence there is possibility of window dressing; it has distortion in value of

41
assets acquired at different points of time; non-financial changes, though very important
from the point of view of business, are not reflected etc.)

3. No individual ratio will depict any picture and we have to select a group of ratios to make
the analysis meaningful.

4. While ratios are compared on a historical basis, the time period may be of equivalent
duration, but price level changes between the periods may distort the results.

5. Ratio based on profit, which is generally used as an indicator of effectiveness and


efficiency, has certain limitations. For example, profit measures short term rather than
long-run performance. There is also no reliable way of measuring the profit potential of
a business so as to compare the reported profit with the profit that could have been
earned under the circumstances. Generally accepted accounting principles give wide
latitude in measuring profit as well as methods relating to depreciation, inventory,
valuation, costs, expenses etc. in a company. This lessens the validity of inter-firm
comparison.

6. Unless the classification of various items in the balance sheet is properly done, the
ratios arrived at are liable to be faulty.

Nevertheless, ratio analysis is a useful aid and could be used along with other
quantitative techniques in financial management to assess the financial health of an
organisation.

3.12 COST VOLUME PROFIT ANALYSIS:

Cost volume profit (CVP) analysis is popularly known as Break-even analysis. This analysis
helps in answering questions like: How do costs behave in relation to volume? At what sales
volume would the firm break-even? How sensitive is profit to variation in output? How much
should the firm produce and sell in order to reach a target profit level?

CVP analysis is based on several assumptions. These assumptions are:

Costs of the enterprise can be divided into two components; fixed cost and variable costs.

Fixed cost remains unchanged for a given period of time. Variable cost varies proportionately to
volume.

The unit selling price is constant over a given period of time.

Volume of sales is equal to volume of production during the accounting period.

Variable cost: Variable cost per unit is fixed. It includes direct wages, raw materials power &
fuel etc. All these expenses are dependant on volume of production. If there is no volume,
these expenses would be nil.

42
Fixed Cost: Examples of fixed cost are salaries, administrative expenses, rent, taxes and all
other expenses that are not linked to production. These expenses will be incurred even if there
is no volume.

Contribution: This is a term used in calculation of break-even sales. Contribution is defined as


sales minus variable cost. Contribution per unit is defined as Sales Price per unit minus
variable cost per unit.

Fixed Cost
Break-even sales = x Sales
Contribution

Fixed Cost
Break-even quantity =
Contribution per unit

Break-even sales will give us a sale figure on attainment of which the enterprise will reach a
position of no profit no loss where as break-even quantity is the number of units to be sold to
attain such a position.

Margin of safety = The margin of safety indicates the amount by which the volume of sales
exceeds the break-even point. The margin of safety is a tool by which one can estimate the
sensitivity of the business to variation in sales. It is calculated as

Profit
x 100
Contribution

Profit-volume Ratio = This ratio indicates the intrinsic strength of a production. It is calculated as

Contribution
x 100
Sales

If this ratio is declining, the conclusion could be that the product is losing the market due to one
or more reasons like general obsolescence, price etc.

Let us take one example:

25 Per 50 Per
Units Unit Units Unit
Sale price per unit Rs. 60 - Rs. 60 -
Total sales Rs.1500 Rs. 3000 -
Variable Cost Rs. 1000 Rs. 40 Rs. 2000 Rs. 40
Contribution Rs. 500 Rs. 20 Rs. 1000 Rs. 20
Fixed Cost Rs. 400 Rs. 16 Rs. 400 Rs. 8

43
Total Cost Rs. 1400 Rs. 56 Rs. 2400 Rs. 48
Profit Rs. 100 Rs. 4 Rs. 600 Rs. 12
Break-even Sales 80% - 40%
Break-even quantity 20 20

As we can see, the break-even sales in percentage form will change on the basis of
number of units produced. However, the break-even quantity will remain unchanged. In
the first instance, the unit will earn profit if it achieves 80% of the sales target of
Rs.1500/- whereas in the second instance, the unit will earn profit if it achieves 40% of
the sales target of Rs.3000/- Both these amounts are one and the same i.e. Rs.1200/-.

Profit
Margin of safety = x 100
Contribution

100
= x 100 = 20%
500

600
or = x 100 = 60%
1000

It indicates that in case of 25 units produced and sold, if the volume of sales of the
business falls by 20 percent, the company will be able to withstand it because it can still
pay for the full cost without making a loss. In case of 50 units produced, the margin of
safety is 60% and it means that the company will be able to withstand a fall in sales up
to 60% without making a loss. A higher ratio is always preferable.

500 1000
Profit volume Ratio = x 100, x 100
1500 3000

= 33 1/3%

When a company is producing more than one product, the profit volume ratio becomes
a very useful tool to analyse the relative strength of a particular product. A Company
should choose to increase the sales of the product having higher profit volume ratio.

3.13 FUND FLOW ANALYSIS

Fund Flow analysis is another tool to evaluate the managerial efficiency of an enterprise. This
analysis will tell us how funds were mobilised and its uses. In any business, funds come first
and then come assets. Prudent use of fund is the key to success in any commercial activity.

44
Fund means purchasing power which is either cash or credit. Hence fund flow is defined as flow
of total purchasing power of the business arising out of cash or credit.

Sources and uses of Funds

1. Capital = Capital is the primary source of fund. All the components of capital like
subscribed capital, preference share, share premium account etc. will be considered.
Any increase in the capital between two periods of time is a source of fund and any
decrease is a use of fund.

2. Term Loans and Debentures = Any increase in term loan or debenture is a source of
fund even if no cash is received. Machinery purchased with term loan is an example of
increase in term loan and it is a source of fund. Any decrease, like repayment of term
loan or debenture is use of fund.

3. Current Liabilities = Any increase in current liability is a source of fund even if there is no
transaction of cash. Inventory purchased on credit is the use of source arising out of
increase in creditors.

4. Fixed assets and Non-current Assets = Acquisition of assets is use of fund and their
disposal is source of fund. Any increase in long term assets is utilisation of fund.

5. Current Assets = Any increase in current assets would mean utilisation of funds, and
any decrease, source of fund. Even reduction of cash is source of fund. This may
appear to be confusing but an example will clarify this. Cash is reduced and the amount
is utilised to repay term loan. Reduction of cash is source of fund and the reduction of
term loan is use of fund.

Source and use of fund can be graphically presented as under:

Source of fund Use of fund

Increase in liabilities Decrease in liabilities

Decrease in assets Increase in assets

The following example will illustrate the fund flow:

nd
Liabilities Ist Year 2 Year Change Source/Use
Share Capital 1300 1300 - -
Reserve & Surplus 1250 1380 + 130 Source
Long Term Loans 670 610 - 60 Use
Current Liabilities 1100 1190 + 90 Source

45
Total 4320 4480 +160

nd
Assets Ist Year 2 Year Change Source/Use
Net Fixed Assets 1180 1140 - 40 Source
Non-Current Assets 980 1070 + 90 Use
Current Assets 2160 2270 + 110 Use
Total 4320 4480 + 160
Changes can be grouped as sources and uses of funds as illustrated below:

Sources

Increase in Reserve & Surplus = 130

Increase in Current Liabilities = 90

Decrease in Net Fixed Assets = 40

260

Uses

Decrease in Long Term Loan = 60

Increase in Non-Current Assets = 90

Increase in Current Assets = 110

260

From the analysis of the above mentioned fund flow statement, the following
interpretations can be made:
(a) There is increase in Reserve & Surplus; a part (or may be full) of the profit has been
retained in the business. This will increase shareholders fund.
(b) There is increase in Current Liabilities; this may increase cost, if the increase is in Cash
Credit/Overdraft, or may not be so, if the increase is in provisions or creditors.
(c) Reduction in Net Fixed Assets due to depreciation/disposal is a source of fund.
(d) The fund so mobilised has been utilised for repayment of long term loan. This will
reduce cost and hence will increase profit.
(e) There is increase in Non-Current Asset; a look into the actual component will tell us
whether it will increase income or not.
(f) Increase in Current Assets may increase production if the increase is in raw materials. A
look into the actual item and its interpretation will reveal whether this use of fund is
beneficial.

46
Fund Flow analysis will depict the prudence of the management decision in mobilising fund and
its uses.
A Fund Flow Statement can be used for various purposes but the primary ones are as under:
a) It recognises major financial decisions made by the company which is reflected in the
uses of fund and the sources of fund to finance them.
b) To evaluate the short-term and long-term implications of the financial decisions made by
the company in terms of the change in net working capital.

c) To note the extent of deviations between the plan and the actual.

47
ANNEXURE- I

Balance Sheet of ......................................................


As at ........................................................................

LIABILITIES ASSETS

SHARE CAPITAL FIXED ASSETS


1. Authorised _______ Shares Original cost
of Rs.__________ each Add additions

2. Issued _________ shares of less deduction


Rs. ____________ each less depreciation up to the
end of the year
3. Subscribed _______ shares INVESTMENTS
of Rs. _________ each (1)Investments in Government or
Trust Securities
(1)Investments in Shares, debentures
or Bonds
(2)Immovable properties
(3)Investments in the capital of
Partnership firms
CURRENT ASSETS, LOANS AND ADVANCES
RESERVES AND SURPLUS (A) CURRENT ASSETS
1. Capital Reserve 1. Interest accrued on Investment
2. Capital Redemption Reserve 2. Stores & Spare Parts
3. Shares Premium Account 3. Loose Tools
4. Other Reserves specifying 4. Raw materials
the nature of each Reserve 5. Stock-in-trade/
and the amount in respect thereof Work-in-process
5. Surplus, i.e., balance in profit and 6. Finished Goods
loss account after providing for 7. Sundry Debtors
proposed allocations, namely- a) Debts outstanding for a period not
Dividend, Bonus or Reserves. exceeding six months.
6. Proposed addition to Reserves b) Other debts
8. a) Cash balance on hand
b) Bank balances-

48
a) With scheduled banks and
b) With others

SECURED LOANS
1. Debentures B. LOANS AND ADVANCES
2. Loans & Advances from Banks FIs 1. Advances & Loans to subsidiaries
3. Loans & Advances from 2. Advances and loans to partnership firms
Subsidiaries in which the company or any of its
subsidiaries is a partner
UNSECURED LOANS 3. Advances recoverable in cash or in kind
1. Fixed Deposits or for value to be received viz.., Rates,
Taxes, Insurance etc.
2. Loans & Advances from subsidiaries 4. Advance to customers/others, if any
3. Short term loans & advances from
4. Other loans and advances from
(a) Banks (b) Others

CURRENT LIABILITIES AND MISCELLANEOUS EXPENDITURE


PROVISIONS (to the extent not written off or
A. CURRENT LIABILITIES adjusted)
(1) Acceptance 1. Preliminary expenses
(2) Sundry Creditors 2. Expenses including commission or
(3) Advances payments and unexpired brokerage on underwriting or sub
discounts for the portions for which scription
Value has still to be given 3. Discount allowed on the issue of shares
(4) Unclaimed dividends or debentures
(6) Other liabilities (if any) 4. Interest paid out of capital during cons-
(7) Interest accrued but not due truction.
on loans. 5. Development expenditure not adjusted.
6. Other items (specifying natures)
B. PROVISIONS PROFIT AND LOSS ACCOUNT
1. Provision for Taxation (if loss)
2. Proposed dividends
3. For contingencies
4. For Provident Fund Scheme, if any
5. For insurance pension and
similar staff benefit scheme, if any
6. Other provisions
A foot note to the Balance Sheet

49
may be added to show separately-
(1) Claims against the company not
acknowledged as debt.
(2) Uncalled liability on shares
partly paid
(3) Arrears of fixed cumulative
dividends
(4) Estimated amount of contracts
remaining to be executed on
capital account and not provided
for
(5) Other money for which the company
is contingently liable

50
ANNEXURE- II

ABSTRACTS OF BALANCE SHEET

3.6.1 Branches/offices may classify individual items into groups according to the following
form of analysis of Balance Sheet.

Analysis of Balance Sheet


Name of Company : _________________________________
(Rs. in Lakh)
Sl.No Item For the year ended on

200__ 200__ 200__ 200__


1. Share Capital
2. Reserve & Surplus (Excluding
Revaluation Reserves)
3. Share Application Fund
4. Intangible Assets
5. Tangible Net Worth (1+2+34)
6. Deferred Liabilities
7. Net Block (excluding Revaluation
Reserves, if any)
8. Net Current Assets
9. Current Assets
10. Current Liabilities
11. Net Working Capital (9 10 )
12. Sales (Net of Excise Duty, if any)
13. Profit (Pre-tax)/Loss
14. Profit (Post-tax)/Loss
15. Depreciation

51
16. Cash Generation (14 + 15)
17. Current Ratio (9/10)
18. Total Outside Liability/
Tangible Net Worth (6+10)/5
19. Details of Current Assets
(a) Cash & Bank Balance
(b) Loan & Advances
(c) Advance Tax paid
(d) I.T. Deducted at source
(e) I.T. Refundable
(f) Sundry Debtors (upto 6 months)
Sl.No Item For the year ended on

200__ 200__ 200__ 200__


(g) Raw materials
(h) W.I.P.
(i) Finished goods
(j) Others
20. Details of Current Liabilities
(a) Sundry Creditors for goods
(b) Sundry Creditors for expenses
(c) Accrued interest in Term
Loan
(d) Instalment for T/L payable
within one year
(e) Provision for Tax
(f) Provision for others
(g) Adv.from customers
(h) Others
(i) Short Term Borrowing from Bank(s)
TOTAL :
21. Details of Non-Current Assets:
(a) Security Deposit
(b) Term Deposit against Bank
Guarantee
(c) Investment -
(i) In sister concern

52
(ii) Others
(d) Sundry Debtors more than
six months
(e) Others, if any
22. Details of Deferred Liabilities:
(a) Term Loan with Bank
(b) Term Loan with Financial
Institutions
(c) Unsecured loan from Directors
(d) Unsecured loans from others
(e) Interest accrued and due on
(c) and (d) above
(f) Others, if any
23. Details of Intangible Assets:
(a) Accumulated Loss
(b) Preliminary Expenses
(c) Others, if any

53
ANNEXURE III

Format for analyzing P/L A/c

Name :

As per audited Figure at the


end of a year (Audited)
1. Gross Sales
i) Domestic sales
ii) Export sales
Total
Add: Export Inventory & others
2. Less Excise Duty
3. Net sales (1 2)
4. % age rise (+) or fall (-) in net sales
as compared to previous year
5. Cost of sales
i) Raw materials (including stores
and other items used in the process
of manufacture)
a) Imported
b) Indigenous
ii) Other spares
a) Imported
b) Indigenous
iii) Power & Fuel
iv) Direct Labour
(Factory wages & salaries)
v) Other mfg. expenses
vi) Depreciation
vii) Sub-Total (i to vi)
viii) Add: Opening stock-in-process

54
Sub-Total
ix) Deduct : Closing stock-in-process
x) Cost of Production
xi) Add : Opening Stock of finished goods
Sub-Total
xii) Deduct Closing stock of finished goods
xiii) Sub-Total (Total cost of sales)
6. Selling, general and administrative expenses
7. Sub-Total (5 + 6)
8. Operating profit before interest (3 7)
9. Interest
10. Operating Profit after interest (8 9)
11. i) Add : Other non-operating income
a) Dividend offer
b)
Sub-Total (income)
ii) Deduct other non-operating expenses
a) Loss on sale of Fixed Assets/Mutual Fund
b)
Sub-total (expenses)
iii) Net of other non-operating income/expenses
(net of 11 (i) & 11 (ii)
12. Profit before tax/loss
10 + 11 (iii)
13. Provision for taxes
14. Net Profit/loss (12 13)
15. a) Equity Dividend paid & Dividend Tax
b) Dividend Rate
16. Retained Profit (14 15)
17. Retained profit/Net profit (%)

55
ANNEXURE- IV

Abstracts of Balance Sheet of XYZ Co. Ltd

31.3.2012
(Audited)

1. Share Capital 2840

2. Reserve & Surplus 3740


(excl.Rev. Reserve)

i) Share Premium 10

ii) General Reserve 3740

3. Less : Intangible Assets


(Prel.Expenses) 230

4. Net Worth(Tangible) TNW 6350

5. Deferred Liabilities 2165

6. NetBlock(incl.capital work- in-process but


excl.Revaluation Reserve ) 2690

7. Non-Current Assets 1140

8. Current Assets 16110

9. Current Liabilities 11425

10. Net Working Capital (8- 9) 4685

11. Sales (net of excise) 46550

12. Profit (Pre-tax)/(Loss) 2920

13. Profit (Post-tax)/Loss 2240

14. Depreciation 470

15. Cash Generation (Post-tax) 2710

16. Current Ratio 1.41

17. Total Outside Liab/TNW


(TOL/TNW) 2.14

56
Current Assets Current Liabilities
Raw material 7050 Sundry Trade Creditor 6050
Work-in-progress 1420 Bills Payable 440
Finished Goods 5010 Tax Payable 1550
Sundry Debtors (Less than 6 months) 1950 Proposed Dividend 750
Advance to supplier 480 Unclaimed Dividend 30
Cash in hand & bank 200 Accrued Intt. not paid 60
16110 Instalments payable to
IDBI 35
Debenture 70
FD 140
Bank borrowing 2300
11425
Non-current Asset Deferred Liability
Debenture 210
Housing Loan to Employees 420 Loan from IDBI 105
Deposit with NABARD 160 Loan from Holding Co. 530
Security Deposit 180 Fixed Deposit 900
Investment 230
Debtors over 6 months 130 Security Deposit 420
Amount due for Holding Co. 20
---------- -------
1140 2165
------------ ---------

57
ANNEXURE - V

Analysis of P/L A/c of XYZ Corpn. Ltd

(Rs.in thousand)
Estimates for the year ended/ending

Name :

As per audited Figure at the


end of a year (Audited)
1. Gross Sales
iii) Domestic sales 51,680
iv) Export sales -
Total 51,680
2. Less Excise Duty 5,130
3. Net sales (1 2) 46,550
4. Cost of sales
i) Raw materials consumed (including stores
and other items used in the process
of manufacture)
a) Imported
b) Indigenous 35,070
ii) Other spares
a. Imported -
b. Indigenous 360
iii) Power & Fuel 1,890
iv) Direct Labour 1,240
(Factory wages & salaries)
v) Other mfg. expenses 590
vi) Depreciation 470
vii) Sub-Total (i to vi) 39,620
viii) Add: Opening stock-in-process 1,260
Sub-Total 40,880
ix) Deduct : Closing stock-in-process 1,420

58
x) Cost of Production 39,460
xi) Add : Opening Stock of finished goods 2,910
Sub-Total 42,370
xii) Deduct Closing stock of finished goods 5,010
xiii) Sub-Total (Total cost of sales) 37,360
5. Selling, general and administrative expenses 5,050
6. Sub-Total (5 + 6) 42,410
7. Operating profit before interest (5+ 6) 4,140
8. Interest 1,580
9. Operating Profit after interest (3 7) 2,560
10. i) Add : Other non-operating income 360
a. Dividend offer
b.
Sub-Total (income) 2,920
ii) Deduct other non-operating expenses -
a) Lost on sale of Fixed Assets/Mutual Fund
b)
Sub-total (expenses)
iii) Net of other non-operating income/expenses 2,920
(net of 11 (i) & 11 (ii)
11. Profit before tax/loss 2,920
10 + 11 (iii)
12. Provision for taxes 680
13. Net Profit/loss (12 13) 2,240
14. a) Equity Dividend paid & Dividend Tax -
b) Dividend Rate
15. Retained Profit (13 14) 2,240
16. Retained profit/Net profit (%) 76%

59
CHAPTER IV

ADVANCE AGAINST GOVT. SECURITIES

TOPIC PAGE NO.

7.1 Government Securities

7.2 Promissory Note

7.3 Advance under Discretionary Power

7.4 Endorsement on Promissory Note

7.5 G. P. Notes

7.6 Renewal of GP Notes into marketable lots

7.7 Advance against Govt. Securities Precautions

7.8 Margin, Rate of Interest, Repayment

7.9 On repayment of the advance

Annexure 1

60
CHAPTER-IV

ADVANCE (OVERDRAFT/LOAN) AGAINST GOVT. SECURITIES

7.1. GOVERNMENT SECURITIES:

7.1.1. Government Securities mean the borrowing of the Central and State Governments
from time to time. These borrowings are popularly known as Public Debt and are
managed by Reserve Bank of India. Govt. Securities are issued generally in the
following two forms :

(a) Promissory Note;

(b) Inscribed Stock (Stock Certificate).

7.2. PROMISSORY NOTE :

7.2.2.1.This is the most usual form in which Govt. Securities are issued both by the Central and
State Governments. A promissory note contains a promise by the President of India or
Governor of a State to pay a certain sum of money to a certain person or to his order
either on a specified date or after a certain notice and to pay interest thereon at a
certain rate half yearly on specified dates. A promissory note is transferable by
endorsement and delivery.

7.2.2.2.The reverse of the Govt. Promissory Note is vertically divided into two portions. On the
left hand portion, half yearly interest payments are recorded and the right hand portion
is reserved for endorsements. The right hand portion is divided into rectangular cages,
each cage being meant for only one endorsement. The Promissory Note on which all
the rectangular cages have been utilised shall be renewed into a fresh Promissory Note
by the last holder. The last holder has to complete the form of receipt at the bottom right
hand corner (on the reverse side) of the Note and lodge it for renewal with the nearest
Public Debt Office of the Reserve Bank of India. The request for renewal should be
accompanied by the prescribed renewal fee.

7.2.3 INSCRIBED STOCK (STOCK CERTIFICATE)

7.2.3.1 It is issued by the same authorities in token of having registered the name of
the owner as the proprietor of a certain amount of a specified loan of the
particular Government.

7.2.3.2 The form of a Stock Certificate is different from that of a Promissory Note and
is not a negotiable instrument. Therefore, the property contained therein
cannot be transferred by mere endorsement and delivery. The holder of a
Stock Certificate is therefore required to execute a regular transfer deed which

61
is printed in the reverse of the Certificate. The transfer deed is exempt from
Stamp Duty. A new Stock Certificate will be issued by Public Debt Office of
Reserve Bank of India, in the name of the transferee on receipt of the original
Stock Certificate on which the transfer deed has been duly completed by the
transferor and transferee.

7.2.3.3 Stock Certificate can be held by one or more persons jointly but not severally
and any one or more of them can receive interest thereon under a joint
holders power of attorney which is free of Stamp Duty.

7.2.3.4 Interest on Stock Certificate is always remitted to the registered holder directly
by the Public Debt Office of Reserve Bank of India, by their Pay Order, at the
place where the interest payment is enforced.

7.3 ADVANCE UNDER DISCRETIONARY POWER:

Advances against Govt. Securities may be made by the authorised Officers within the limits of
their individual discretionary power sanctioned by the Head Office from time to time. Such
advances shall be restricted to well-known customers or to customers satisfactorily introduced
to the Bank.

Note : Concerned branches should get the powers of Attorney, together with specimen
signatures of their officers registered at all Public Debt Offices so that any securities which such
officers might endorse are not returned by any Public Debt Office on the ground that Power of
Attorney are not registered with them.

7.4. ENDORSEMENT ON PROMISORY NOTE :

To be acceptable as security for advance endorsements in the G.P. Notes shall be regular and
in proper form. They should satisfy the following requirements:

a) Each cage on the reverse of G.P. Notes shall contain a pay order in the name of the
endorsee and signature of the endorser.

The pay order may be worded as follows:

Pay to ..

Pay to .. or order

Endorsement may be single, joint and alternatively payable to the order, or joint order or
to the order of either or any one or more persons according to the wishes of the
endorser.

b) All endorsements shall be legible and agree letter for letter with the name of the payee
written on preceding cage.

62
c) The chain of endorsements, if any, should be regular, unbroken and shall not bear any
cross endorsement i.e., endorsement other than on the allotted cage meant for the
purpose.

d) Endorsement in an Indian language other than that of the State should be attested by a
Justice of Peace or a Magistrate under his Court Seal.

e) Endorsement of limited companies, partnership firms and registered or unregistered


firms or associations shall be certified by the Public Debt Office.

f) In case of an illiterate person the endorsement must be signed by a magistrate in the


presence of the holder and enter below his signature a certificate to the effect that the
endorsement has been signed at the request of the holder after being read over to him
and that he is satisfied that the effect of endorsement is fully understood by the holder.

g) When a Promissory Note is held by two or more persons jointly, for purposes of
transferring the note by endorsement, the signature of each of the joint holders is
essential and their signatures should tally letter for letter with their names already
appearing on the Promissory Note.

7.5. G.P. NOTES :

Lodgment of G.P. Notes as security against advance shall be made by a Take Delivery letter
(Form No. D-9 Documentation Manual) (Annexure I). The G.P. Notes issued originally in the
name of the customer shall be duly endorsed in favour of the Bank as Pay to United Bank of
India or order and retained in the branch. In case the securities are endorsed in favour of the
customer it must be seen that all previous endorsements are regular and verified, if necessary.
In case of any doubt as to the validity of any endorsement the customer should be asked to
renew the security in his own name and endorse it to the Bank. While accepting the securities,
besides the scrutiny of endorsements, as stated above, the concerned officials must ensure:

a) that interest has been collected up-to-date

b) that the G.P. Notes are not amongst those which are in the stop list.

c) That the upper and lower halves of the securities are firmly joined and none of them are
mismatched.

d) That there is a blank renewal cage and at least one blank endorsement cage for the use
of the Bank.

e) That interest is payable in the local office of RBI/SBI/Treasury

7.6. RENEWAL OF G.P. NOTES INTO MARKETABLE LOTS :

63
In the case of large limit against G.P. Notes it is advisable to get the small denomination Notes
consolidated into marketable lost of Rs. 25,000/- each at the time of renewal. When more than
one note is required to be consolidated in one note at the time of renewal, the usual wordings in
the renewal cage will be as follows:

Received in lieu hereof a new note, payable to (Name of holder) for Rs. by
consolidation with promissory notes Nos. . (mentioning the number and amounts of the
other notes desired to be consolidated with it specifying the loan) with interest payable at
. Treasury.

Signature of the holder

7.7. ADVANCE AGAINST GOVT. SECURITIES-PRECAUTIONS

Before granting such advance, the following points are to be kept in mind:

i) No advance should be made against security of Promissory Note/Stock Certificate


standing in the name of third party.

ii) The margin at the rate prescribed is to be maintained on the prevailing market rates and
not on the face value of securities.

iii) No advance should be granted against Zamindari Abolition Bonds, Compensation


Bonds or securities which are on the Stop list. Bearer Bonds presently are also not
acceptable as security.

iv) Since Stock Certificate is not transferable by endorsement, it is necessary to get the
stock transferred in the Banks name from the concerned Public Debt Office before an
advance is granted there against. This is done by signing a special form of transfer
printed on the reverse of the certificate both by the transferor and the transferee in
presence of a witness. Alternatively intending Govt. Promissory Note to be
subsequently endorsed in favour of the Bank before any advance is granted
thereagainst.

v) The Promissory Note should be in the name of the borrower as the original holder or
endorsed to him by approved bank of standing. In all other cases, the borrower should
be advised to have the securities renewed in his name before acceptance as security
for advance unless the Bank has taken delivery of the securities directly from another
bank under instructions from the borrower. Only in special cases as for example in
brokers accounts, securities with prior endorsement may be accepted.

vi) Endorsements on Promissory Note should be in order and complete as specified in


para 7.4.1 above. In case of cross endorsement, new Promissory Note should be got
issued by Public Debt Office and then only advance should be made.

64
vii) The promissory Note should not be defaced or torn and two halves are not mismatched.
If it is torn, defaced or two halves are mismatched, a new Promissory Note should be
got issued from the Public Debt Office before any advance is made.

viii) In case of advance to a limited company against G.P. Notes it must be ensured that the
power of attorney of the authorised signatories endorsing the securities on behalf of the
company has been registered with the concerned Public Debt Office, treasury or sub-
treasury as the case may be. In the case of partnership firms the constitution and
signatures of the partners and in the case of a proprietary firm, an affidavit in the form of
sole proprietorship declaration shall be similarly registered.

ix) Acceptance of Promissory Notes as security against advance shall be made upon
compliance of the provisions indicated at para 7.5 above.

x) Besides usual advance documents, Letter of Lien should be obtained.

xi) Particulars of documents relating to advance and Promissory Note/Stock Certificate


shall be entered in Security Register and Loan Ledger duly checked and initialled by the
officer concerned.

xii) Details of Promissory Notes/Stock Certificates shall be entered in the Drawing Power
Register. Value of Securities as per current market rate should be worked out and after
providing stipulated margin, drawing power is to be ascertained. It should be checked
and initialled by an authorised officer.

xiii) A regular watch should be kept on the price fluctuation of securities. All the securities in
any advance should be revalued once in a month in the Drawing Power Register and if
the stipulated margin falls short, necessary amounts should be arranged for deposit to
maintain the required margin. Valuation should also be done forthwith, if at any time
there is a steep fall in prices of securities owing to adverse political, economic factors or
for any other reasons.

xiv) A due date diary for collection of interest on securities held at the Branch should be
maintained and interest should be collected promptly and regularly on due dates.

xv) An interest collection register should be maintained to keep records on the particulars of
securities sent for collection of interest, encashment, renewal etc

xvi) Where interest warrants are received from Reserve Bank of India, the amount less tax
should be credited to the account of the borrower(s) under advice to him/them. The
relative Income Tax Deduction Certificate should be delivered to the borrower(s).

7.8. MARGIN, RATE OF INTEREST AND REPAYMENT: As may be prescribed by the Head
Office from time to time.

65
7.9. ON REPAYMENT OF THE ADVANCE

When the advance is repaid, the Branch shall endorse the Promissory Note in favour of the
borrower and deliver the same to him against proper acknowledgement. In case of Stock
Certificate, the transfer form on the reverse of it should be completed and signed and delivered
to the borrower against proper acknowledgement.

66
ANNEXURE I

TAKE DELIVERY LETTER

Address ____________________
Date _______________________

The Manager
United Bank of India
_________________ Branch

Dear Sir,

I/We hand you herewith the undernoted securities, which please hold as cover against my/our
indebtedness to the Bank from time to time.

Yours faithfully,

______________________________________________________________________________
_________________________________________________________________________________
_______________________________________________________________

67
CHAPTER V
Advance against Shares, Bonds & Debentures
TOPIC PAGE NO.

8.1 Eligibility
8.2 Purpose of advance
8.3 Type of advance
8.4 Basis for accepting shares as security
8.5 Precautions to be taken in accepting shares as security
8.6 Eligibility
8.7 Margin
8.8 Valuation of Shares
8.9 Repayment Period
8.10 Taking of Security
8.11 Blank Transfers
8.12 Transfer of Shares
8.13 Ceiling on total holding of Shares of any one Company
8.14 Drawing limit
8.15 Third Party Shares
8.16 Authority to collect Dividend
8.17 Shares in Private Limited Companies
8.18 Interest
8.19 Penalty Clause
8.20 Office Record and Book keeping
8.21 Drawing Power Register
8.22 Ex-custody Register
8.23 Custody of Securities
8.24 Delivery of securities
8.25 Enforcing of security
8.26 Reporting
8.27 Conclusion
Annexure I
Annexure II

68
CHAPTER-V

ADVANCE (OVERDRAFT/LOAN) AGAINST SHARES, BONDS & DEBENTURES

1. (a) To be eligible for advance against quoted shares the customers should be well known or
satisfactorily introduced to the branch. Advances against security of shares/debentures /bonds
may be given to individuals, share and stock brokers and market makers and Corporate
Houses.
b) While considering grant of advances against shares / debentures /bonds the Bank must follow
the normal procedures for the sanction, appraisal and post sanction follow-up.
c) Advances against the primary security of shares / debentures / bonds should be kept distinct,
separate and not combined with any other advance.
d) The Bank should be satisfied about the marketability of the shares / debentures and the
networth and working of the company whose shares / debentures / bonds are offered as
security.
e) Shares / debentures / bonds should be valued at prevailing market prices when they are
lodged as security for advances.
f) Bank should exercise particular care when advances are sought against large blocks of shares
by a borrower or a group of borrowers. It should be ensured that advances against shares are
not used to enable the borrower to acquire or retain a controlling interest in the
company/companies or to facilitate or retain inter-corporate investments.
g) No advance against partly paid shares shall be granted.
h) No loans to be granted to partnership / proprietorship concerns against the primary security of
shares and debentures.
i) Bank should not undertake financing of Badla transactions.
j) Bank should not extend credit facilities directly or indirectly to stockbrokers for arbitrage
operation in Stock Exchanges.
k) Advances against share/debenture in physical form to be discontinued.Securities are
held in dematerialised form, the requirement relating to transfer of shares in bank's name will
not apply. However, the Bank should avail of the facility provided in the depository system for
pledging securities held in dematerialised form, under which the securities, pledged by the
borrower, get blocked in favour of the Bank In case of default by the borrower and on the bank
exercising the option of invocation of pledge, the shares and debentures get transferred in the
bank's name immediately.
l) Bank should not be a party to transactions such as making advances or issuing back-up
guarantees favouring other banks for extending credit to clients of Indian nationality / origin by
some of their overseas branches, to enable the borrowers to make investments in shares and
debentures / bonds of Indian companies.

69
Advances against the Security of Shares, Debentures or Bonds to Individuals

A. Purpose
For meeting contingencies and needs of personal nature or for subscribing to rights or new
issue of shares / debentures / bonds or for purchase in the secondary market, against the
security of existing shares / debentures / bonds held by an individual in dematerialized (demat)
form.

B. Eligibility
Any individual customers (existing / new) with proper introduction and complying KYC norm
can avail the loan either singly or jointly.
A large group of individuals belonging to the same corporate or their inter-connected entities
shall not be allowed to take multiple loans in order to support particular scripts or stock-broking
activities of the concerned firms.
A declaration from the borrower is to be obtained mentioning the following:
(a) details of loans availed by him from other banks/branches against security of shares/
debentures/bonds (both in physical and demat form);
(b) such accommodation/s from different banks/ branches is/are not obtained against shares of
a single company or a group of companies;

C. Facility & Tenure:


Loan against security of shares, debentures, or bonds in demat form may be in the form of
Overdraft (to be reviewed/renewed once in every 12 months) or Term Loan for a maximum
period of 12 months.

D. Loan Amount
For securities under Capital Market exposure
Aggregate loans of the borrower (including proposed one) against the shares, convertible
bonds, convertible debentures and units of equityoriented mutual funds from the banking
system should not exceed the limit of Rs. 20 lakhs per individual if the securities are held in
dematerialized form.

(The components of Capital Market Exposure are detailed in Para 11.21.3 of Vol.1 of the
Lending Policy)

For securities under non-Capital Market exposure


Aggregate loans of the borrower (including proposed one) against preference shares / non-
convertible debentures and bonds should not exceed the limit of Rs. 20 lakhs per individual if
the securities are held in dematerialized form.
(The components of Non-Capital Market Exposure are detailed in Para 11.21.4 of Vol.1 of the
Lending Policy)
In case of existing loan/advance against securities in physical form, immediate arrangement
should be made to convert such securities into demat form.

E. Security:
Pledge of the equity shares/debentures/bonds (in demat form) held in the name of the
borrower/s only against which the loan is granted.

70
Transfer of securities (in demat form) in banks name may not be insisted upon provided it is
ensured that the securities pledged by the borrower get blocked in favour of the bank by
availing the facility provided in the depository system for pledging securities held in demat
form.

Although collateral security is not mandatory for sanctioning loan, sanctioning authority may
stipulate, if felt necessary, additional security subject to availability and enforceability.

G. Eligible Securities
i. The shares/ debentures/ bonds offered as security should be listed with NSE/BSE.
ii. The shares/ debentures/ bonds offered as security should be in dematerialized (demat)
form.
iii. Securities which are under lock in period will not be eligible.
iv. Shares, debentures, bonds offered as security should be fully paid.
v. Equity shares should be listed under BSE 100 &/or Nifty 50 Index and/or Bank Nifty Index
vi. Debentures/Bonds/Preference Shares must have AA or higher rating by
CRISIL/ICRA/CARE/ FITCH.
vii. Before sanction, approval of the I&FM Department &/or Treasury Branch at H.O. is to be
obtained on acceptability of the proposed securities along with valuation of the securities.
viii. Substitution of security during the tenor of the facility may be allowed, if requested by the
borrower, subject to compliance with the norms stated under i-vii above and maintenance
of margin.

H. Margin
a. For securities held in demat form under capital market exposure for existing loan only:
Minimum margin of 25% of the market value of the securities and the stipulated margin is
to be maintained throughout the tenure of the loan.
b. For securities held in physical form under capital market exposure:
Minimum margin of 50 percent of the market value (for existing loans only) and the
stipulated margin is to be maintained throughout the tenure of the loan.
Early arrangement for conversion of such securities in physical form to demat form should
be initiated.
c. For securities, not under capital market exposure, held in demat form:
Minimum margin of 20% of the market value and the stipulated margin is to be maintained
throughout the tenure of the loan.
d. For all above categories,
Availability of stipulated margin is to be ascertained on fortnightly based on valuation of
the securities to be obtained from the I&FM Department &/or Treasury Branch, H.O.
However, it should be topped up immediately in case the price of the securities moves in
adverse direction by more than 10%.
The borrower will be given one days notice for topping up as required or to bring down
the outstanding balance within the eligible drawing power.
In case the borrower fails to top up or bring down the outstanding balance as above, the
Bank shall sell the securities on next day and adjust the proceeds with the loan.

I. Repayment
In case of Overdraft facility, unless the limit is reviewed and renewed, outstanding amount is to
be liquidated at the end of the tenure.

71
In case of term loan, the principal amount is to be repaid in monthly/quarterly/half-yearly
instalments or by bullet payment at the end of the tenure. Interest is to be serviced on monthly
basis.
In case the borrower defaults in servicing interest and/or repayment of loan instalments, on
due dates the securities are to be sold and proceeds to be appropriated with the overdues.

J. Sanctioning Authority:
Branches headed by Scale-IV and above officers, RLCC and HLCC as per H.O. Circular on
Delegation of Financial Power to be issued by the CPPMI Department, H.O. from time to time.

Financing of Initial Public Offerings (IPOs)


Banks may grant advances to individuals for subscribing to IPOs. Loans/advances to any
individual from the banking system against security of shares, convertible bonds,
convertible debentures, units of equity oriented mutual funds and PSU bonds should not
exceed the limit of Rs.10 lakh for subscribing to IPOs.
The corporates should not be extended credit by banks for investment in other companies
IPOs.
No finance should be provided to NBFCs for further lending to individuals for IPOs.
Finance extended by a bank for IPOs should be reckoned as an exposure to capital
market.
A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs

Bank Finance to assist employees to buy shares of their own companies:


Bank may extend finance to employees for purchasing shares of their own companies
under Employees Stock Option Plan(ESOP)/ reserved by way of employees' quota under
IPO to the extent of 90% of the purchase price of the shares or Rs.20 lakh, whichever is
lower.
Finance extended by the bank for ESOPs/ employees' quota under IPO would be treated
as an exposure to capital market within the overall ceiling of 40 per cent of its net worth.

Note: These instructions will not be applicable for extending financial assistance by the
bank to its own employees for acquisition of shares under ESOPs/ IPOs, as banks are not
allowed to extend advances including advances to their employees / Employees' Trusts set
up by them for the purpose of purchasing their own banks shares under ESOPs / IPOs or
from the secondary market. This prohibition will apply irrespective of whether the advances
are secured or unsecured.
A declaration should be obtained from the borrower indicating the details of the loans /
advances availed against shares and other securities specified above, from any other
bank/s in order to ensure compliance with the ceilings prescribed for the purpose.
Follow up Public Offer (FPO) shall also be included under IPO

Advances against shares to Stock Brokers, Market Makers:

Advances to Share and Stock Brokers


(a) The Bank shall grant advances only to entities registered with SEBI as share and stock brokers
and who comply with capital adequacy norms prescribed by SEBI / Stock Exchanges.
However, advance against primary security of shares can only be granted to corporate entities
not to proprietorship/partnership firms.

72
Total credit facilities (fund+ non-fund) should normally not exceed the tangible net worth of the
broker as per the balance sheet of the last accounting year of the borrower.

(b) Track record, credit worthiness of the broker and financial position, operations on his own
account and on behalf of clients, income earned, the average turnover period of stocks and
shares and the extent to which the broker's funds are required to be involved in his business
operations are also to be carefully assessed. A status report (issued by Exchange) indicating
dealings of the brokers account must be obtained.

(c)Credit Facilities

i) Overdraft/Line of Credit against Stock in Trade


Share and stock brokers may be provided need based overdraft facilities / line of credit against
shares and debentures held by them as stock-in-trade. A careful assessment of need based
requirements for such finance should be made taking into account the financial position of the
borrower, operations on his own account and on behalf of clients, income earned, the average
turnover period of stocks and shares and the extent to which the broker's funds are required to
be involved in his business operations. Large scale investment in shares and debentures on
own account by stock and share brokers with bank finance, should not be encouraged. The
securities lodged as collateral should be easily marketable. Please also refer Lending Policy
clause no.11.21.6(h) page 132

ii) Working Capital Facility for DVP Transaction


Banks may grant working capital facilities to stock brokers to meet the cash flow gap between
delivery and payment for DVP transactions undertaken on behalf of institutional clients viz. FIs,
Flls, mutual funds and banks. The duration of such a facility will be short and would be based
on an assessment of the financing requirements keeping in view the cash flow gaps, the
broker's funds required to be deployed for the transaction and the overall financial position of
the broker. The utilisation of loan fund under the limit is to be monitored on the basis of
individual DVP transactions as under:

The borrower furnishes details of the scrips to be purchased on behalf of his client under
DVP basis (e.g. total no. of scrips, estimated purchase price per scrip and total value,
brokerage payable and date of payment by the client to the broker) backed by the contract
between the borrower and its client in this regard.
The borrower shall ensure that the full consideration amount from its clients related to each
DVP transaction, financed by the Bank, should be credited directly to the borrowers
designated account with the Bank.
The borrower submits requirement of fund for purchase of such scrips under DVP duly
supported by the instruction of the concerned clearing house to the borrower for remitting
funds to the specified bank account along with the settlement status report. Funds are to be
remitted only to the specified bank account only.
The outstanding loan amount under each DVP transaction is to be liquidated as soon as the
whole lot of scrips under a particular DVP transaction stands transferred in the name of the
client or latest by the date of payment by the client to the broker as per the contract.
If the particular DVP transaction outstanding is not liquidated within the stipulated period, the
collateral securities held by the Bank will be sold to the extent required and proceeds will be
adjusted in the loan account.

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iii) Bank Guarante

Banks may issue guarantees on behalf of share and stock brokers/commodity brokers in
favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of
bank guarantee as laid down by stock exchanges. Banks may also issue guarantees in lieu of
margin requirements as per stock exchange regulations. The bank should assess the
requirement of each applicant borrower, observe usual and necessary safeguards including the
exposure ceilings. Maximum tenure of BG will be 12 months.

(d) While processing proposals for loans to stock broker, the details of facilities enjoyed from other
bank by the broker and all his connected accounts should be obtained.
(e) The general guidelines on advances against shares/debentures/bonds are also to be followed
as far as applicable.
(f) To any single stock broking entity, including its associates / inter-connected companies, the
fund based advance shall not exceed Rs.100 lakh and non-fund based facility shall not exceed
Rs.1000 lakh.
(g) Total credit facility (fund & non-fund based) to all stock brokers/ market makers shall not
exceed 0.50% of the total advance as on 31 st March of previous year. Aforesaid 0.50% sub-
ceiling shall be within the overall ceiling of 40% of the net worth of the Bank as on 31 st March of
the previous year.

(h) Pricing:
For fund based facilities, at applicable interest rate as per Banks extant interest rate circular.
Deviations may be allowed by the competent authority as per the provisions of the Lending
Policy.
For non-fund BG facility, as per H.O. Circular on Service Charges issued by CPPI Department,
H.O. from time to time.

(i) Security:
(i) Overdraft/Line of Credit
To be fully secured by way of primary security in the form of shares/debentures/bonds held
by the borrower as stock-in-trade and hypothecated to the Bank.
Collateral @ 50% of the fund based limit in the form of eligible shares/debentures/bonds (in
demat form) pledged to the Bank which should be easily marketable and/or any other
tangible security with easy liquidity.

(ii) DVP Transaction


To be fully secured by collaterals in the form of eligible shares/debentures/bonds or any
tangible securities with easy liquidity acceptable to the Bank.

(iii) For Bank Guarantee


Bank guarantee is to be secured in full by collaterals in the form of eligible
shares/debentures/bonds and/or any tangible securities with easy liquidity acceptable to the
Bank.
Counter guarantee of the company.

(iv) Personal Guarantee of promoter(s) covering entire limit would be preferred

(v) Eligible Shares/Debentures/Bonds


Shares listed under BSE 100 Index and/or Nifty 50 Index and/or Bank Nifty Index;

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Debentures/Bonds having CRISIL AA rating or equivalent rating from CARE, ICRA, FITCH,
Brickwork or any SEBI approved rating agencies.

(j) Margin:
A uniform margin of 50 per cent shall be maintained on fund based and non-fund limits during
the tenure of the facility/ies.
Minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect
of guarantees issued by banks for capital market operations.
(k) Drawing Power (D.P.):
D.P. for Overdraft/Line of Credit/DVP limit will be allowed only on the eligible
shares/debentures/bonds.
Drawing Power (D.P.) will be computed on Second and Last Friday of each month.

In case there is shortfall in margin/D.P., the borrower is to be advised immediately to make


good the shortfall in the next 2 working days, failing which the security shall be invoked /
enforced and adjusted against the outstanding. For outstanding BG, the proceeds out of sale
of securities is to be kept in FD under lien as security for the BG till expiry. No fresh BG will be
issued until the shortfall in margin is made good.

(l) Valuation of Securities


Valuation of shares (both primary as well as collateral) are to be valued on Second and Last
Friday of each month at closing price or current market price, whichever is lower.
Debentures/Bonds (both primary as well as collateral) are to be valued on Second and Last
Friday of each month based on valuation available on FIMMDA website.

Valuation of securities is to be done by the Banks I&FM Department &/or Treasury Branch at
H.O. and intimated to the concerned Branch. The concerned departments at H.O. may arrange
for a system for daily notification of previous days closing price for the eligible securities.

(m) The requirement relating to transfer of shares in bank's name in respect of shares held in
physical form mentioned at Sl. No. (xi) of paragraph 11.21.6 shall not apply in respect of
advances granted to share and stock brokers provided such shares are held as security for a
period not exceeding nine months. In the case of dematerialised shares, the depository system
provides a facility for pledging and the bank may avail themselves of this facility and in such
cases there will not be need to transfer the shares in the name of the bank irrespective of the
period of holding. The share and stock brokers are free to substitute the shares pledged by
them as and when necessary. In case of a default in the account, the bank should exercise the
option to get the shares transferred in its name.
(n) Sanctioning Authority: At Head Office level and operation through designated branches.

11.21.8.2 Bank Finance for Market Makers


(a) A company approved by stock exchange as Market Maker will only be eligible for grant of
advances by the Bank for the purpose of its market making activities.
(b) Market Making may be for equity and/or debt securities including State and Central Government
securities. Bank should exercise commercial judgement in determining the genuine need based
working capital requirements of Market Makers by taking into account their Market Making
Operations. Assessment of need based requirements for such finance should be made taking into
account the track record, credit worthiness of the Market Maker and its financials.
(c) The general guidelines on advances against shares/debentures/bonds are to be followed as far as
applicable.

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(d) Market Makers may be provided with overdraft facilities / line of credit (fund-based) facilities and
non-fund bank guarantee on behalf of market makers, for a tenure upto one year.
(e) To any single market maker entity, total fund and non-fund based limits shall not generally exceed
Rs.50.00 crores.
(f) Total credit facility (fund & non-fund based) to all market makers / stock brokers shall not exceed
0.50% of the total advance as on 31st March of previous year. Aforesaid 0.50% sub-ceiling shall be
within the overall ceiling of 40% of the net worth of the Bank as on 31 st March of the previous
year.

(g) Pricing:
For fund based facilities, at applicable interest rate as per Banks extant interest circular.
Deviations may be allowed by the competent authority as per the provisions of the Lending Policy.
For non-fund BG facility, as per H.O. Circular on Service Charges issued by CPPI Department,
H.O. from time to time.

(h) Security:
The total limit (fund / non-fund) to Market Makers is to be secured by way of collateral in the
form of scrips other than the scrips in which the market making operations undertaken.

Eligible Securities:
Shares listed under BSE 100 Index and/or Nifty 50 Index and/or Bank Nifty Index;
Debentures/Bonds having CRISIL AA rating or equivalent rating from CARE, ICRA, FITCH,
Brickwork or any SEBI approved rating agencies.
Such collateral securities should be in demat form and duly pledged in favour of the Bank. The
securities lodged as collateral should be easily marketable.

Counter guarantee of the company for BG.


Personal Guarantee of promoter(s) covering entire limit would be preferred.

(i) Margin:
Uniform margin of 50% on all advances / financing of IPOs / issue of guarantees on behalf of
Market Makers. A minimum cash margin of 25% (within the margin of 50%) shall be required to
be maintained in respect of guarantees issued by banks for capital market operations.

(j) Drawing Power/margin computation:


Drawing Power (D.P.) for Overdraft/Line of Credit will be allowed only on the eligible
shares/debentures/bonds.
Drawing Power (D.P.) will be computed on Second and Last Friday of each month.

In case there is shortfall in margin/D.P., the borrower is to be advised immediately to make good
the shortfall in the next 2 working days, failing which the security shall be invoked / enforced and
adjusted against the outstanding. For outstanding BG, the proceeds out of sale of securities is to be
kept in FD under lien as security for the BG till expiry. No fresh BG will be issued until the
shortfall in margin is made good.

(k) Valuation of Securities


Valuation of shares are to be valued on Second and Last Friday of each month at closing price or
current market price, whichever is lower.
Debentures/Bonds (both primary as well as collateral) are to be valued on Second and Last Friday
of each month based on valuation available on FIMMDA website.

76
Valuation of securities is to be done by the Banks I&FM Department &/or Treasury Branch at
H.O. and intimated to the concerned Branch. The concerned departments at H.O. may arrange for
a system for daily notification of previous days closing price for the eligible securities.

(l) It is to be ensured that advances provided for Market Making are not diverted for investment in
shares other than the scrip earmarked for Market Making purpose. For this purpose, before each
drawal, it is to be ensured that-
The borrower furnishes details of the scrips on which market making operation will be
undertaken.
Funds are released only for those scrips selected for market making operations after the
borrower submits requirement of fund duly supported by (i) the instruction of the concerned
clearing entity to the borrower / to the borrowers broker (if the borrower itself is not a broker)
for remitting funds to a specified bank account. Funds should be remitted to said specified bank
account only; (ii) the settlement status report issued by the concerned clearing agency for such
scrips.
The borrower furnishes monthly statement on its position of holding scrips including market
making scrips supported by copy of the statements issued by the exchange/s.

(m) Sanctioning Authority: At Head Office level and operation through designated branches.

On the basis of the above broad guidelines, the Banks CPPI Department at H.O. shall formulate
detail operative guidelines on Advances to Market Makers covering, inter alia, mechanism for
monitoring utilization of individual transactions, maintenance of margin, creation of security,
substitution of security, sale of securities, designated branch, etc.
The CPPMI Department at H.O. shall put up, at least on a half-yearly basis, to the Board of
Directors a review note on the aggregate portfolio, its quality and performance.

11.21.9 Advances to other borrowers against shares/debentures/bonds


Granting advances against primary security of shares and debentures including promoters shares
to industrial, corporate or other borrowers should not normally be there. However, such securities,
only in dematerialized form, may be accepted as collateral for secured loans granted as working
capital or for other productive purposes from borrowers other than NBFCs.

In the course of setting up of new projects or expansion of existing business or for the purpose of
raising additional working capital required by units other than NBFCs, there may be situations
where such borrowers may not be able to find the required funds towards margin, in anticipation
of mobilizing long-term resources. In such cases the Bank may obtain collateral security of shares
and debentures by way of margin. However, such arrangements would be of a temporary nature
and shall not continue beyond a period of one year. Before granting such facility the capacity of
the borrower to raise the required long-term funds and to repay the advance within the stipulated
period (max. 1 year) is to be ensured. Such type of advances shall be considered only at H.O. level.

11.21.10 Bank finance to individuals against shares to joint holders or third party beneficiaries:
While granting advances against shares held in joint names to joint holders or third party beneficiaries, it should be
ensured that the objective of the RBI regulations is not defeated by granting advances to other joint holders or third
party beneficiaries to circumvent the above limits placed on loans/advances against shares and other securities
specified above.

11.21.11 Finance for Margin Trading


Banks may extend finance to stockbrokers for margin trading, subject to the following parameters:

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i) The finance extended for margin trading should be within the overall ceiling of 40% of net worth prescribed for
exposure to capital market.
ii) A minimum margin of 50 per cent should be maintained on the funds lent for margin trading. If the stock broker
fails to meet the margin calls, the Bank should liquidate the collateral / shares purchased immediately and adjust
the loan.
iii) The shares purchased with margin trading should be in dematerialised mode under pledge to the lending bank. It
should be ensured that 50% margin is maintained on an ongoing basis.
iv) Margin trading should be spread out by the bank among a reasonable number of stockbrokers and stock broking
entities. Stock brokers availing of margin trading facilities from the Bank is prohibited from lending, directly or
indirectly, to their own connected entities, relatives or business associates or to Directors of the Bank through this
facility.
v) The end-use of funds lent under margin trading is to be monitored by way of ensuring submission of appropriate
monthly statement by the stock broker to the sanctioning authority / controlling Region and to the Branch.

The audit Committee of the Board should monitor periodically the Banks exposure by way of financing for margin
trading and ensure that the guidelines formulated by the Banks Board are complied with.

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8.3 Type of Advance

Bank may allow loan or overdrafts against shares on merits on being satisfied about the end
use of funds. The advances should be generally payable on demand or on short term basis
subject to a repayment programme.

8.4 Basis for accepting Shares as security

While accepting the shares as security, the net worth position of the company alongwith the
following points are to be considered:

i) Marketability of shares whether the shares are quoted in a recognised stock exchange
or not ;

ii) Dividend record of the company;

iii) Range of price fluctuations in its shares

iv) The details of the managements caliber and integrity;

v) The assets and the product line of the company;

vi) Age of the company;

vii) Intrinsic or break up value of the share concerned.

Granting advances against shares forming a security composite with any other security is
prohibited. Where an advance has been granted or renewed against the composite security of
shares and other types of securities, the advance limit against shares will require to be
segregated from the advance limit against other types of securities. However, when shares are
held as co-lateral security and no specific limit is fixed thereagainst, the question of segregation
of limits shall not arise.

8.5. Precautions to be taken in accepting shares as surety:

8.5.1. No advance shall be made:

(i) against shares which are not quoted on any recognised stock exchange

(ii) against shares where the right to transfer is restricted

(iii) against temporary receipts or letters of allotment unless these are exchanged for
share certificates and scripts;

(iv) against shares held in safe custody account unless they are first transferred to
advance account;

(v) against shares in private limited company;

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(vi) against partly paid shares.

8.5.2 Care and caution should be exercised when advances are sought against large block of
shares by a borrower or a group of borrowers from the point of view of borrowers
capacity to repay such advances and also from the point of view to ensure that such
advances are not utilised for other than short term productive purposes and genuine
business needs or meeting immediate genuine and urgent personal needs. It should
also be ensured that loans/advances against shares are not used to enable the
borrowers or a group of borrowers to acquire or to retain the controlling interest in
company/companies or to facilitate or retain inter corporate investment.

8.5.3. The bank shall ensure while granting advances against shares that there is no
restriction imposed as to the exercise of voting rights by the bank or requiring the bank
to issue proxies in respect of such shares.

8.6. Eligibility :

8.6.1. Advances to individuals :

i) Purpose : Loans against shares, debentures and bonds of Public Sector


Undertakings (PSUs) may be granted to individuals to meet contingencies and
personal needs or for subscribing to rights or new issues of
shares/debentures/bonds or for purchase in the secondary market.

ii) Amount of Advances :

a) The advances to individuals against security of shares and debentures shall


not exceed Rs. 10 lac against physical shares and Rs. 20 lac against
dematerialised shares.
b) The maximum amount of finance to an individual for Initial Public Office
(IPO) is Rs. 10 lac.
No loans to be granted against partly paid shares.
No loans to be granted to partnership/proprietorship concerns
against the primary security of shares and debentures.

8.6.2. Advance to share and stock brokers :

i) Purpose: Advances to share and stock brokers may be provided by way of need-
based overdraft facilities/line of credit against shares and debentures held by
them as stock-in-trade. A careful assessment of need based requirement for such
finance should be made taking into account the financial position of the borrower,
operation on his own account and on behalf of clients, income earned, the
average turnover period of stocks and shares and the extent to which the brokers
funds are required to be involved in his business operation.

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ii) Amount: To any single stock broking entity, the fund based advance shall not
exceed Rs.20 lac and non-fund based limit shall not exceed Rs. 30 lac.

8.6.3. Loan/Advance against shares to corporate for meeting promoters contribution:

i) For existing corporate borrowers/deposit holders :

a) The account, where advance is sought, should be under the category of


Standard Assets based on the latest available information which should
not be older than 6 (six) months.
b) The credit rating of the corporate should be minimum of UBICR3 based on
latest available Balance Sheet and other performance parameters as per
banks credit rating policy not older than one year.
c) The corporate have good track record as regards financial performance and
its financial position based on the latest available Balance Sheet should be
satisfactory.
d) General conduct of the corporate borrower should be satisfactory and there
should not be any major adverse inspection comments pending in the
account.
e) Profile of the new company to be promoted by the corporate
borrower/promoter should be submitted to the bank for scrutiny and should
be found satisfactory. The name of the promoter should not appear in RBIs
latest published defaulters list.
ii) For new corporate borrowers:

a) The name of the corporate must not appear in RBIs latest published
defaulter list.
b) Credit report from the corporates existing bankers, if any, does not indicate
any adverse comment.
c) Profile of the new company to be promoted by the applicant
corporate/promoter should be submitted to the bank for scrutiny and should
be found satisfactory.
d) The company should submit its audited Balance Sheet for the last three
years and on its scrutiny it should be ensured that current ratio has been
maintained at minimum 1.33:1 and TOL/TNW at not more than 2:1.
iii) In case of both categories of corporate borrowers mentioned under (i) and (ii)
above, they have to satisfy the bank about their capacity to raise the required
funds to meet their Promoters contribution towards equity of the new company,

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about the source of such funds and that they will be able to repay the advance, if
granted, within the stipulated time.

Amount of loan :

The loan amount to be guided by instructions from Head from time to time.

8.7. Margin :

i) To individual : Minimum 50% of the market value of equity shares/convertible


debentures held in physical form and 25% in case of dematerialised form.

ii) To share and stock brokers: This will be decided in the Banks policy to be formulated
for this type of advance from time to time.

iii) Corporates: 50% of the market value of the shares proposed to be lodged/transferred.

Note : Bank may stipulate higher margin for shares whether held in physical form or
dematerialised form depending upon the quality of shares ; margin requirements for advances
against preference shares/non convertible debentures and bonds shall be determined by the
bank depending upon the merit of the proposal and the nature of such securities.

8.8. Valuation of shares :

8.8.1. Shares/Debentures/Bonds lodged as security for advance shall be valued at prevailing


market prices on the basis of the lowest of last 52 weeks quoted price. For the purpose
of valuing quoted securities reference should be made to newspapers which give
market quotations of Govt. securities, shares and debentures dealt in on stock
exchanges. Fluctuations in prices should be periodically recorded in Market Report
Register Book No.175. In making advance, a mixed portfolio of shares in leading
Companies forms the most acceptable security. The price should be updated every
fortnight on the basis of published list of stock exchange or published in standard
papers like Economic Times/Business Standard/Financial Express and other reputed
and authentic News dailies and journals.

8.9. Repayment period :

i) Individuals and share/stock brokers: To be repaid within a period of 3 years


commencing from the date of availment of the loan along with accrued interest.
Repayment instalments may be decided in consultation with the borrowers.

ii) Corporates : The loan will be repayable within a period of one year OR within such time
the borrower is able to raise funds equivalent to Promoters Contribution whichever is
earlier.

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8.10. Taking of Security

8.10.1.Lodgment of shares by way of security against advance shall be made in the Take
Delivery Letter signed by the borrower. The shares offered as security shall be
scrutinized to ensure:

1) that the shares stand in the name of the borrower;

2) that the transfer endorsements on the back of the share scrips are duly
authenticated with date;

3) that the shares are lodged in the marketable lots;

4) that the certificates bear the common seal of the company, the certificate number
and the distinctive number of shares and there is no sign of tampering;

5) that the shares are not partly paid up;

6) that the shares are accompanied by adequate number of blank transfer deeds
duly signed by the borrower and witnessed;

7) That the share are prima facie in order and they are not in the list of shares
reported lost, stolen or forged

8) That the time limit for transfer has not expired.

8.10.2 Branches should send and obtain confirmation of securities held by them from the
concerned borrowers at the end of each half-year and compare the details of securities
with those appearing in the Security Register. A suitable note should be made in the
register and the confirmations be kept alongwith the documents. It should be ensured
that the borrowers return the confirmation letters duly signed.

8.11. Blank Transfers

When taking shares as security it is customary to obtain the borrowers signature in the blank
transfer deed duly witnessed. The following matters are filled in details of shares concerned the
borrowers name as transferor and the name of the Bank as transferee. The deed shall be
undated and unstamped. The object is to get the securities transferred in the name of the Bank
without recourse to the borrower. Blank share transfer deeds may be witnessed by an Officer of
the Bank or by a person who is known to the Bank. The complete address of the witness shall
be given in the form. Witnessing the signature of the husband by the wife or vice versa should
be avoided. In case the transfer deed is signed by an attorney on behalf of the borrower the
power of attorney shall be called for and verified.

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8.12. Transfer of Shares :

i) Individuals: If the shares/debentures are in physical form and the shares and
debentures are held by the bank beyond 3 months, then it should be ensured that the
shares and debentures are transferred in the name of the bank.

ii) Shares/stock brokers: If the shares/debentures are in physical form and the shares and
debentures are held by the bank beyond 9 (nine) months then it should be ensured that
the shares and debentures have been transferred in the name of the bank.

iii) Corporates: If the repayment schedule is more than 3 months, the shares should be
transferred in the banks name without exception.

8.13. Ceiling on Total holding of shares of any one company

Under Section 19 (2) of the Banking Regulation Act, 1949 the Banks total holding of shares in
a company whether as a pledgee, mortgagee or absolute owner shall not exceed 30% of the
companys paid-up capital or 30% of the Banks own paid-up capital and reserve whichever is
lower. To avoid any infringement of this provision large blocks of shares of one company should
not be accepted without the prior approval of Head Office/Regional Office. Periodical returns for
advances against shares whether they are held as direct security or collateral security excluding
shares covered under documentary bills purchased or discounted (unless dishonoured) or
shares held in safe custody should be submitted to H.O. for consolidation and putting a check
to any infringement to the holding restrictions.

8.14. Drawing Limit :

Drawing limits should always be calculated up-to-date on the basis of valuation as stated under
item 8.8. Any deficiency in margin or shortfall shall be at once demanded and made good.

8.15. Third Party Shares :

Advances against third party shares shall be limited to share brokers only. Third party shares
which are received against payment on behalf of a customer should be promptly transferred to
the borrowers name or Banks name.

8.16. Authority to collect Dividend :

8.16.1. In case of advance against shares where there is no stipulation to get the shares
registered in the name of the Bank, a letter of mandate to collect dividend on the
pledged shares and to credit the dividends to the borrowers account with a request that
where share are to be registered in the name of the Bank as per terms of sanction or
directives from Head Office, collection of dividend is an automatic procedure.

18.6.2. The branches shall keep watch over the company notices regarding declaration of
dividend and apply for dividends as and when the concerned companies declare

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dividends. The dividends when collected shall be credited to borrowers loan/overdraft
account under the usual advice.

8.17. Shares in Private Limited Companies :

The shares of private limited companies due to their limited marketability and transfer
restrictions are not acceptable as securities. In exceptional cases when it is considered
necessary to accept such shares as collateral security, proposal may be sent to the Regional
Office with copies of the balance sheets of the company for the past three years. The paid-up
value, market value (if available) and the break up value should be stated in the proposal. The
break up value of the shares is arrived at by deducting the companys liabilities from the assets
on a break-up basis and dividing the resultant figure by the number of shares. In cases it is
decided to accept the shares, a resolution by the Board of Directors of the company must be
obtained undertaking to transfer the shares in the name of the Bank. Such shares if at all
accepted by the Bank are regarded as evidence of means, rather than as a security which can
be readily turned into cash.

8.18. Interest :

For all categories of borrowers, the rate of interest will be declared by Head Office from time to
time.

8.19. Penalty Clause

If there is any default in payment of any instalment towards repayment of loan dues against
shares and if the default amount is not cleared within 15 days even after issuance of notice (to
be issued within 7 days of the due date), then that default amount will carry a penal rate of
interest of 2% over the stipulated rate of interest subject to maximum of PLR + 4% till the
default amount is liquidated.

8.20. Office Record and Book-keeping

8.20.1 Lodgment of all securities whether G.P. Notes, debentures or shares must be made
under cover of delivery letters in the prescribed form (appendix- I), Form No.Z(3),
Documentation Manual). The delivery letters shall be serially docketed and filed party-
wise.

8.20.2. The securities shall then be recorded in the Security Registers (Party-wise) Book
No.123 in the respective accounts of the borrowers. The rulings of the security Register
(Party-wise) as under:

Name ..........................Nature of a/c Sanctioned limit

Address... Account No....................

Margin.. Interest ..

85
Date of Particulars Distinctive Folio No. of To whom Initials Remarks
Receipt of securities Numbers of Security Stock delivered
or documents Shares, Register or
G.P. Notes company-wise
etc. register

They will also be entered in the Security Register (Company-wise) Book No.126 in
separate openings according to the name of company or dates of maturity as per
rulings given hereunder.

Name of Securities
Date of Distinc- Face Place of If Signature Date of How Signa-
Receipt tive No. Value enface- renewed Disposal dispos- ture
ment in the ed of
name of
the Bank

8.21. Drawing Power Register

Daily price fluctuations shall be observed and the securities frequently valued. Limits shall be
marked in the Drawing Power Register against security along with each delivery, lodgment and
revaluation. The drawing limit must always be kept ready for convenience of all concerned.

8.22. Ex-custody register

When securities or shares are taken out for collection of interest, transfer, sub-division,
inspection for realising dividend or for any other purpose they shall be recorded in the
Security/Shares Ex-custody Register (Book B, 129). When the securities are received back they
are kept back in the security portfolio after recording the date of return in the Register.
Securities outstanding in the ex-custody Register and the securities in the security portfolio
shall agree with the total securities in the Security Register.

8.23. Custody of Securities :

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The shares, G.P. Notes shall remain in the separate security portfolio in the name of each
customer in the strong room or fire resistant safes under the joint custody of two authorised
officers.

8.24. Delivery of securities :

Delivery of shares, G.P. Notes lodged as security against advances may be given to the
customer or his authorised representative under his written instructions only provided the
position of the account permits such delivery. The borrowers letter shall be docketed duly
authenticated and shall be filed party-wise. Delivery of shares/G.P. Notes shall be made
through the Securities Delivered Day Book under the authentication of the authorised Officer-in-
Charge against the recipients signature in the Day Book. The delivery shall be marked off in
the Security Register under proper authentication and the drawing limit suitably revised.
Delivery to the customers broker shall be effected through messenger against receipt.

8.25. Enforcing of Security :

In case the Branch has to resort to forced selling of securities to realise the outstanding dues in
the account, due notice should be given to the borrower preferably through banks lawyers. The
security should be sold after the expiry of the notice through a respectable broker of a
recognised Stock Exchange or through approved broker of the bank (list of approved brokers of
the bank can be obtained from I&FM Department). It is important to ensure that no further
security in lieu of repayment is accepted during the period. This acceptance makes the demand
notice ineffective and unless fresh notice is given, sale of security cannot be enforced. Forced
sale of security to square up an existing advance shall always require prior approval of one step
higher authority.

8.26 Reporting

Bank should submit in the enclosed Format (Annexure-II) details of advances granted by them
against shares and debentures as on the last Reporting Friday of each Quarter viz. March,
June, September and December. The Returns should be submitted to the concerned Regional
Office for onward transmission to Head Office so as to ensure submission of the consolidated
Return for the bank as a whole to Reserve Bank of India, DBOD, Central Office not later than
the 15th of the succeeding month of the Quarter to which it relates.

Advance against Shares/Debentures/Bonds to the borrowers should be dealt with keeping in


mind the following points in addition to the general guidelines indicated in the preceding
paragraphs

8.27. Conclusion :

General guidelines applicable to advances against shares/debenture/bonds.

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1) Statutory provisions regarding the grant of advances against shares contained in
sections 19(2) and (3) and 20(1) (a) of the BankingRegulation Act, 1949 should be
strictly observed. Shares held in dematerialised form should also be included for the
purpose of determining the limit under Section 19(2) and 19(3) ibid.

2) Branch should be concerned with what the advances are for rather than what the
advances are against. While considering grant of advances against shares/debentures
banks must follow the normal procedures for the sanction, appraisal and post-sanction
follow up.

3) Advances against the primary security of shares/debentures/bonds should be kept


distinct and separate and should not be combined with any other advance.

4) Branch should satisfy themselves about the marketability of the shares/debentures and
the networth and working of the company whose shares/debentures/bonds are offered
as security.

5) Shares/Debentures/bonds should be valued at prevailing market prices based on the


lowest of last 52 weeks price when they are lodged as security for advances.

6) Branch should exercise particular care when advances are sought against large blocks
of shares by a borrower or a group of borrowers. It should be ensured that advances
against shares are not used to enable the borrower to acquire or retain a controlling
interest in the company/companies or to facilitate or retain inter-corporate investments.

7) No advance against partly paid shares shall be granted. Whenever the limit/limits of
advances granted to a borrower exceed Rs.10 lac, it should be ensured that the said
shares/debentures/bonds are transferred in the banks name and that the bank has
exclusive and unconditional voting rights in respect of such shares. For this purpose the
aggregate limits against shares/debentures/bonds granted by a bank at all its offices to
a single borrower should be taken into account. Where securities are held in
dematerialised form, the requirement relating to transfer of shares in banks name will
not apply and banks may take their own decision in this regard. Bank should however
avail of the facility provided in the depository system for pledging securities held in
dematerialised form under which the securities pledged by the borrower get blocked in
favour of the lending bank. In case of default by the borrower and on the bank
exercising the option of invocation of pledge, the shares and debentures get transferred
in the banks name immediately.

8) Bank may take their own decision in regard to exercise of voting rights and may
prescribe procedures for this purpose.

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9) Branch should ensure that the scrip lodged with them as security is not
stolen/duplicate/fake/benami. Any irregularities coming to their notice should be
immediately reported to controlling office.

10) The Board of Directors may decide the appropriate level of authority for sanction of
advances against shares/debentures. They may also frame internal guidelines and
safeguards for grant of such advances.

11) Bank should not be a party to transactions such as making advances or issuing back-up
guarantees favouring other banks for extending credit to clients of Indian
nationality/origin by some of their overseas branches to enable the borrowers to make
investments in shares and debentures/bonds of Indian companies.

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Annexure I

TAKE DELIVERY LETTER

Address : _________________
Date _______________ 200__
The Manager
United Bank of India
____________________ Branch

Dear Sir,

I/We hand you herewith the under noted securities, which please hold as cover against my/our
indebtedness to the Bank from time to time.

Yours faithfully,

....

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CHAPTER VI

OPINION SHEET

TOPIC PAGE NO.

10.1 Purpose of Opinion Sheet

10.2 Where detailed Opinion Sheet need not be maintained

10.3 Opinion Sheet in Loose Leaves

10.4 Components of Opinion Sheet

10.5 Sources of Credit Information

10.6 Market Reports

10.7 Managers Opinion

10.8 Periodical Check-up and Revision of Opinion Sheet

10.9 Need of constant vigilance

10.10Withdrawal of Opinion Sheet

10.11Annexure

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CHAPTER VI

OPINION SHEET

10.1. PURPOSE OF OPINION SHEETS:

Proposals for advances shall ordinarily be entertained from proponent borrower(s) who have
been properly introduced and whose creditworthiness has been properly established. In
assessment of creditworthiness the financial solvency, earning capacity, standing and integrity
of the intending borrowers, whether individuals or partnerships or corporate bodies are all taken
into consideration by the Branch Managers and judged in their proper perspective. Opinions
formed by such assessments are usually recorded systematically in precise manner in Opinion
Sheets (Annexure I). It is the responsibility of the Branch Manager to prepare opinion sheets
relating to all customers who are either direct borrowers or co-obligants or on whose behalf
Bank enters into financial commitments or executes guarantees and keep them up-to-date by
periodical revisions.

10.2 WHERE DETAILED OPINION SHEETS NEED NOT BE MAINTAINED:

The risk involved in advances granted against readily realisable securities with adequate
margins being marginal, detailed opinion sheets need not be maintained for advance against:

i) Banks own Fixed and other Term Deposits.

ii) Surrender value of Life Policies.

iii) Gold ornaments.

iv) G.P. Notes and other Trustee Securities

v) Approved shares and debentures upto Rs.50,000/-

vi) Post Office Savings Certificates.

vii) All other advances upto Rs.25,000/-

For convenience of branch administration and records a brief opinion of the Manager may be
recorded in such cases in the credit appraisal note.

10.3 OPINION SHEETS IN LOOSE LEAVES :

The Opinions shall be recorded in loose leaves with dates and signature of the Manager. The
Opinion Sheets shall be indexed alphabetically in the names of the parties reported on e.g. A1,
A2, B1, B2 etc. and to be kept in the binder known as Opinion Book. If the proposal has to be
referred to Regional Office/Head Office for sanction, one copy of the opinion sheet should
accompany the proposal forwarded to the higher authority.

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Branches shall not be required to send copies of Opinion Sheets to the Head Office or the
Regional Office on borrowers to whom advances have been made under the Managers
discretionary powers.

10.4 COMPONENT OF OPINION SHEETS

10.4.1. Constitution, duration and other particulars of business:

The Opinion Sheet shall be compiled with adequate and reliable information about the
constitution, duration and nature of business. In the case of newly established firms
length of experience of the proprietor or each individual/partner/director and the
qualification he possesses for the business undertaken by the firm shall be brought out.
In other cases the manner in which the firms business has been conducted in the past
shall be stated on the basis of available credit information collected from independent
sources. Generally the Opinion Sheet shall contain

i) In case of an individual/proprietorship

(a) The name and address of the individual/firm


(b) (i) The bio-data i.e. parentage, age, education and /or technical
qualifications etc. of the individual/proprietor;
(ii) His experience in the trade, or industry, business integrity etc; and
(c) The particulars of trade licence, if any.
ii) In the case of a partnership

(a) The names and addresses of the partners including working partners, if any,
and relationship between the persons, if any, constituting the firms.
(b) The bio-data of each partner, capability and reputation.
(c) The date of partnership letter.
(d) The age of the minor, if any, admitted to the benefits of partnership and how
he is represented.
(e) If the firm is registered, the particulars of registration and
(f) The extent of the partners respective interests in the firm.
iii) In the case of Hindu Joint Family the names of the Karta and other members of
the family including the minors with their dates of birth and date of Hindu family
letter obtained.

iv) In the case of a limited company

(a) the names of the directors

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(b) the bio-data of the Managing Director and where possible other prominent
directors, as well as management set-up.
(c) The names & addresses of major share-holders & percentage of their
holding
N.B. If the borrower is in service, the name of his employer with address, his
designation and salary should be recorded.

10.4.2. Head office, branch office, associates:

The address and style of Head Office and the year of establishment shall be indicated.
In case of branch firms or associate firms, if any, their respective addresses as also the
style under which business is carried on and the years of their establishments shall be
specifically brought out. Credit reports on the associate firms and if possible of the
individual branches shall be obtained from their respective bankers and contents of the
reports incorporated in the opinion sheet.

N.B. Associate firms are firms where some (not all) of the partners are common and
which have separate net estimated means. Firms are said to be identical or Branch
firms where all the partners are common to both.

10.4.3 Particulars of immovable properties:

If the customer owns any immovable property whether in the name of the firm or in the
individual name or names of the proprietor and partners, a full description of such
property stating address, particulars of municipal record and of registration, size,
number of storey, construction as well as valuation and mode of valuation thereof
shall be recorded in the opinion sheet. Specific mention shall also be made whether the
property is free from encumbrances or not and if encumbered, to what extent.

In the case of Partnership or Joint Hindu Family the ownership between the partners
or the copartners shall be clearly indicated. In the case of a limited company, a
description of the properties owned by the Managing Director and other important
directors should be noted separately.

The Manager shall endeavor to inspect the properties personally and make his own
conservative estimate of the value which should be noted in the opinion sheets.

10.4.4. Total liabilities:

The amount of total liabilities shall be arrived at on a liberal basis. Besides other things
the amount should usually include

i) Limits sanctioned to the customer by the branch or any other branch of the bank.

ii) Limits granted by other banks where such information is available.

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iii) Liabilities of others for which the borrower is directly or indirectly liable as a co-
obligant.

iv) Taxation liabilities

v) Other liabilities, if any.

10.4.5. Net estimated worth of individuals /firms:

In case of individuals the net worth shall be arrived at by deducting total liabilities from
the aggregate of assets. The break-up of the assets into cash and bank balances,
business investments, long term investments and landed properties should be given.

In case of firms both proprietorship and partnership the total worth of the proprietor or
partners represents the worth of the individual firms. The financial statements do
usually indicate the position of investments in a particular trade or industry by the
proprietor or partners thereof and not their individual or combined worth. The assets
and liabilities of the firm should not be mixed up with the individual worth of the
proprietor or partners. A separate report on the worth of each individual should be
drawn up exclusive of his personal share of investment in the firm and their associates.
The total worth of a firm is, therefore, the net worth as reflected from statement of
financial position plus the net worth of the individual proprietor or partners after allowing
for all liabilities.

N.B. : i) If minor is a partner, his share of worth should be excluded.

ii) In computing the liquid assets of firms, the value of shares in private limited
limited companies held by the partners, proprietors etc. of these firms should not
be included at face value particularly if the scrip is not quoted on the stock
exchange and/or is not readily marketable. While calculating net worth the value
of investment should be considered at market price or book value whichever is
lower.

iii) Self acquired properties of individual co-paraceners should not be taken into
account in arriving at the net means of a joint Hindu Family firm. These properties
may be detailed in the particulars of the firms assets indicating that they belong
individually to the members concerned but the value thereof should be deducted
at the end when arriving at the net worth of the firm.

iv) Before including the immovable properties standing in the individual names of co-
parceners in the means of joint Hindu Family firms, Branch Managers should
satisfy themselves, after making the necessary enquiries that the properties in
question are in fact family properties. In addition, they should obtain a declaration
from the concerned co-parceners in the form appended below and make an
appropriate note to that effect in relative opinions. In this connection, it is quite

95
conceivable that the co-parceners of a joint family may acquire certain property
out of their independent means without intending it to be a part of the joint
family property. In such an event the property will not form part of the joint family
property but the independent property of the co- parceners.

We. (here state the names of the persons making the declaration).
declare that the following property/properties standing in our names and in the name(s)
of our minor male co-parcener(s) and included in the assets of the joint family firm
.. (here state the name of the firm) is/are the absolute property/properties is/are
held by us as some of the co-parceners of the joint family for and on behalf of and for
the benefit of ourselves and all other members of the family. We further declare that no
interest of a widow or any other limited interest holder, which would mature into an
absolute interest by virtue of the provisions of the present Hindu Succession Act or
otherwise exists in respect of this/these property/properties.

10.4.6. Net worth in case of limited companies :

In case of limited companies, net worth is made up of (a) Paid up capital, plus (b) free
reserve and (c) surplus (i.e. undistributed profits) minus (d) intangible assets.

A report on the personal worth of the Managing Director and other prominent directors
should also be drawn up specially when they are made personally liable for the advance
of the company. While compiling opinions on a company director, whose guarantees are
obtained for an advance granted to a company, his investments in the company should
be ignored, as such investments will form part of the companys tangible net worth.

10.5. SOURCES OF CREDIT INFORMATION :

10.5.1 In compiling an Opinion Sheet, all the relevant information shall be collected in the first
instance from the customer himself and or his co-obligant if there be any. Success in
lending is to a large extent dependent on the assessment of character of the borrower.
Personal interview with the customer not only facilitates discussion about the advance
proposal but also paves the way for gaining an insight into the character of the customer
himself. It is with these two-folds ends in view, discussions shall be made in a cordial
atmosphere exercising discretion and tact and without in any way irritating or hurting his
susceptibility

10.5.2 The information obtained from the customers shall be verified with the information
collected through other independent sources by the Manager and if so authorised by
him, by the Deputy Manager or any other official of the branch. If the borrower or his co-
obligant already has business connection and/or borrowing arrangement with any other
branch of the Bank, the credit report from the Branch concerned shall be obtained for
brief record in the Opinion Sheet. In case the customer is a new introduction,
information shall be obtained from the introducer as also from his/their bankers, if any.

96
Confidential reports from other bankers shall be recorded in the Opinion Sheet as a
matter of course.

10.6. MARKET REPORTS :

At least two reports regarding the net estimated worth and credit of the party shall be obtained
from independent sources preferably in the same line of business uninfluenced by the
customers. Such reports may reasonably differ or at times may even be contradictory in nature
but they are to be endorsed on the Opinion Sheet mentioning the source of information.

10.7. MANAGERS OPINION :

It is the duty of the Manager to collect all the credit information received from various sources,
with them independently and form his own balanced opinion on a conservative basis which
shall be reflected in the opinion sheet.

10.8. PERIODICAL CHECK UP AND REVISION OF OPINION SHEET

Opinion Sheets shall be kept upto-date by periodical revision and check up say once a year or
earlier if warranted by circumstances. Fresh checking should, as a rule, be made whenever a
review or renewal of a proposal is recommended. A fresh credit report should be prepared only
if there have been significant changes in the means and the standing of the borrower.
Otherwise, a remark should merely be recorded on the earlier opinion sheet stating that the
borrowers position remains substantially unchanged or briefly indicating the minor changes that
have occurred. A suitable remark to the identical effect shall be communicated to the Regional
Office in the proposals for revision or renewal. A fresh opinion sheet should, however, be
prepared at least once in two years.

10.9. NEED OF CONSTANT VIGILANCE :

In order to ensure that the position of borrowers or their co-obligants is not adversely affected
the Branch Manager shall remain in constant touch with the market and in addition peruse the
local Govt. Gazette or newspapers for notices of insolvency, changes in the constitutions of
firms etc. and ascertain from local enquiry or periodical searches in the Registrars Office as to
whether any of partners under credit obligation with the Bank have been mortgaging or selling
their properties. In other words, it is the duty of the Branch Manager to keep the information
about such constituents always upto date.

10.10. WITHDRAWAL OF OPINION SHEET:

When an advance account is closed the opinion sheet maybe withdrawn from the Branch
opinion book under intimation to the Regional Office and other Offices concerned stating the
reason for such withdrawal.

97
Annexure
SPECIMEN OPINION SHEET

Branch Date of Report INDEX NO.:

1. Name of the party

2. Head Office & Style

3. Branch firms with Address

4. Associate Firms with Address

5. Partners with Address

6. Nature of Business of the firm

7. a) Assets of the firm


7. b) Immovable property of the firm (Land & Building)
7. c) Less : Total Liabilities of the firm
7. d) Net Worth of the firm

8. a) Assets of the partners


8. b) Less : Liabilities of individual partners (other than
the business of the firm)
8. c) Net estimated individual worth of the partners after
allowing for all Liabilities

9. a) Assets disclosed as per wealth Tax Return


9. b) Income-tax paid

10. Combined net worth [column No. 7 (d) & 8 (c)] Rs..

11. Manner in which the firms business has been conducted in the past

12. Credit in which the firm is held

13. Remarks

14. Through whom report verified

15. (a) Branch Reports :

15. (b) Bankers report on associate firm

98
CHAPTER VII

Advance/Loan against Gold and Gold Ornament

TOPIC PAGE NO.

9.1 General Policy

9.2 Advances under discretionary power

9.3 Eligibility for advances

9.4 Purpose of advance

9.5 Security

9.6 Appraisement

9.7 Guidelines on Appointment of Tester-cum-Assessor

9.8 Basis of valuation

9.9 Margin & Rate of Interest

9.10 Form of Advance

9.11 Documents

9.12 Disbursement

9.13 Terms of Repayment

9.14 Procedure of Gold Loan & Book Keeping

9.15. Precaution to be observed for lending against gold ornaments

9.16 Advance against gold & silver bullion

9.17 Handing over charge

9.18 Final Notice

9.19 Intimation to the borrower on completion of sale

9.20 Balance in the account on application of sale proceeds.

Annexure I

Annexure II

99
Chapter VII

ADVANCE (LOAN) AGAINST GOLD AND GOLD ORNAMENT (GOLD LOAN SCHEME)
(Other than Direct Agriculture Loan by pledging of gold Ornaments under Swarna Krishi yojana)

9.1 GENERAL POLICY :

Advance against gold ornaments which are likely to be utilised for non-productive purposes are
generally discouraged by the Bank. Advances should not be given against primary gold (gold in
any unfinished or semi-finished form and includes ingots, bars, slabs, billets, shorts, pellets,
rods, sheets, foils and wires) and gold articles (gold other than ornaments like gold coins and
gold biscuits).

9.2 ADVANCES UNDER DISCRETIONARY POWER :

Advances against gold ornaments upto a specified limit as imposed by Head Office from time to
time are extended under the discretionary power of the Manager of a Branch and other named
officers to whom such powers have been delegated. The policy of Head Office and the
restrictions imposed in the matter of such advances shall always be kept in view.

9.3 ELIGIBILITY FOR ADVANCES :

To be eligible for advance any well introduced customer of the Branch and the following
categories of existing borrowers will get preference over others. It should be ensured that the
loan is for productive purposes or medical expenses and meeting unforeseen liabilities.

i) Small and marginal farmers;

ii) Village Artisans;

iii) Persons engaged in cottage industries;

iv) Small Traders;

v) Road Transport Operators;

vi) Professionals and self-employed persons.

9.4 PURPOSE OF ADVANCE

9.4.1 Advances shall be granted to the above borrowers under priority sector for all productive
purposes viz. Agriculture, Village and Cottage Industry, Village Artisan, Small Business,
Road Transport Operator and Self Employed Enterprise upto a ceiling limit prescribed in
Discretionary Power circulated by Head Office from time to time

9.4.2 Consumption credit to all categories of well introduced customers towards medical
expenses, educational needs, marriage ceremonies, funerals etc. can be extended

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against the security of gold ornaments subject, however, to a ceiling limit per borrower.
to be fixed up by the Bank from time to time .

9.5 SECURITY :

9.5.1 Security shall only be in the form of pledge of gold ornaments. Customers title to the
ornaments and right to pledge shall be verified. Advance can be made only to the true
owner or a true owner and another individual jointly. Advances against ornaments which
are Stridhan should not be allowed unless the owner i.e., wife/daughter is made a co-
borrower. A declaration that the ornaments are his/her own property shall be signed by
the true owner as borrower in the Banks standard form (Form No. 425, Annexure 1).

9.5.2 Advances against gold coated ornaments and also against ornaments which are hollow
with infillings and jewellery settings should also be avoided. It has to be ensured that
the name(s) if any other than the borrower(s) are not inscribed in the gold ornaments to
be kept as security.

9.5.3 In the case of money lender or a shroff, no advance shall be made against re-pledge of
ornaments held as security against loans made by him.

9.6 APPRAISEMENT :

The Gold/Gold ornaments offered as security is to be weighed assessed and valued by the
approved tester-cum-Assessor in the presence of the authorised bank officer (Branch Manager/
Dy Manager) and the borrower. A certificate is to be given by him (Assessor) stating
description, number of ornaments, type of metal (i.e., Carat) and estimated value as per
prevailing market price of gold. The draft certificate containing the Tester-cum-Assessors
Certificate is in Annexure 1. It should be signed by the borrower (offering for pledge), Tester-
cum-Assessor and to be counter-signed by the Branch Manager/Dy Manager/Authorised Officer
in whose presence testing was carried out.

9.7 OPERATIONAL GUIDELINES ON APPOINTMENT OF TESTER-CUM-ASSESSOR :

9.7.1 Every branch should appoint at least three Testers-cum-Assessors. The branch shall
invite applications from reputed and registered gold-smiths residing or having their place
of business close to the Branch to be appointed as Tester-cum-Assessors of Gold.

9.7.2 The appointment of the Tester-cum-Assessor will be made by the concerned Regional
Manager on the basis of recommendation of the Branch Manager. The approved Tester-
cum-Assessor should be a licensed Gold-smith/Assessor and shall execute a deed of
agreement to the effect to safeguard banks interest, till the currency of the loan.

9.7.3 In case where three registered Gold-Smiths are not available for appointment as Tester-
cum-Assessor, reputed Gold-Smiths of the area may be appointed with the approval of
the Regional Managers (as per H.O. Circular No. P&D/SB/GL/35/78 dated 10.5.78).

101
The appointment of Tester-cum-Assessor shall be made as per the guidelines of Head
Office in the matter and the appraisal fees which will be 0.5% of the loan subject to a
minimum of Rs.50/- to be paid to the Tester-cum-Assessor at the prescribed rates are to
be realised from the borrower.

9.8 BASIS OF VALUATION :

In making advance against ornaments the value of net weight of gold contents shall only be
taken into consideration. Value of jewels or stones inset in the ornaments shall be ignored. The
value of gold offered as security shall be estimated on the basis of the extent of purity assessed
as against the value of 24 carat gold. The valuation shall be made at the market price or the
ceiling price as may be prescribed by Head Office from time to time, whichever is lower.

9.9 MARGIN AND RATE OF INTEREST :

The margin to be maintained and interest to be charged shall be fixed by Head Office from time
to time. The money lent shall not exceed a fixed percentage of value assessed subject to
ceiling limit prescribed by Head Office.

9.10 FORM OF ADVANCE :

Advance against gold ornaments shall ordinarily be in shape of loans with fixed repayment
terms.

9.11 DOCUMENTS :

The following documents shall be obtained prior to disbursement of loan :

i) Promissory Note

ii) Pledge of Gold Ornaments

iii) Stamped Letter of Lien

iv) Declaration as per Annexure 1

9.12 DISBURSEMENT :

9.12.1 Disbursement may be made in cash or as agreed upon with the borrower to ensure the
end-use of loan for productive purposes as far as practicable as enumerated under para
9.4.2.

9.12.2 Declaration of purpose in the loan application form can be considered sufficient as far
as the end-use of the loan is concerned.

9.13 TERMS OF REPAYMENT

102
These loans are repayable in equal monthly instalments commencing from the third month of
the date of disbursement and the entire loan with interest will be repaid within a maximum
period of 3 years.

9.14. PROCEDURE OF GOLD LOAN AND BOOK KEEPING :

9.14.1 An application as per standard application-cum-processing sheet vide Annexure- II and


the documents as prescribed shall be obtained duly signed by the borrower(s).

9.14.2 Gold ornaments offered for pledge to bank should be put in a cotton bag along with a
copy of the assessment certificate in original from the assessor in standard form. The
Gold Loan A/c Number shall be distinctly marked on the body of the bag. The bag shall
be tied with good quality thread. A tag (made of thick paper to ensure durability) bearing
the name of the borrower and the Gold Loan A/c No. shall be tied with the bag. The bag
and the tag should together be properly sealed. On the other side of the tag, the
Manager and the borrower will sign towards satisfaction of sealing the bag.

9.14.3 These sealed bags are to be kept in the drawer at the bottom of the cash safe. Custody
of such bags will remain jointly with the officer in-charge of cash and the Head Cashier.
Where the number of such bags is more in respect to the space available in the drawer,
a separate fireproof steel Almirahs with double lock facility should be placed in the
strong room for safe keep of such bags. In that event, the custody of the bags
containing gold ornaments will remain jointly with the Manager and another officer as
may be decided by the Manager. In single officer branches, the Manager will be the
sole custodian.

9.14.4 When ornaments are offered as security, three sets of assessment certificate are to be
obtained in the standard form. One copy of the certificate is to be kept along with the
ornaments in the respective cotton bags, one copy shall be retained along with the
documents and the third copy should be retained by the borrower. The joint custodians
of the bag should sign the borrowers copy towards receipt

9.14.5 All usual entries should be made in the loan Register. A detailed description of
ornaments/number of ornaments/weight of each ornament is to be properly recorded in
the Security Register duly authenticated by the Branch Manager. The name and
address of the Tester and Assessor, date of assessment and date of release of the loan
should also be entered in the Loan Register. The loans should be shown as priority
sector advances and reported in statements under Agriculture, Small Scale Industry,
Road Transport Operator, Retail Traders, Professionals and Self-employed persons as
the case may be. If the bags are kept in cash safe, a register of ornaments in safe is to
be maintained by the Cashier like the Cash-in-safe register and the same should be
entered and counter-signed by the Branch Manager or in-charge of advance as
authorised by the Branch Manager after every in and out. The insurance cover for the

103
ornaments in safe should also be increased or decreased accordingly. When such bags
are stored in the Almirah, the joint custodian other than the Manager will maintain the
Register of Ornaments.

9.14.6 Periodical revaluation of the pledged ornaments shall be made depending upon the
price fluctuations in gold prices.

9.14.7 Delivery should generally be made to the borrower only on liquidation of the loan and on
production of requisition along with the Assessors certificate. The borrower must sign in
the disposal column in the security register and all the three copies of assessors
certificates should be cancelled, kept in the closed loan accounts file and retained.
Delivery should be effected in presence of the Branch Manager. No part delivery shall
be allowed.

9.15 PRECAUTION TO BE OBSERVED FOR LENDING AGAINST GOLD ORNAMENTS :

i) The identity of the borrower and the introducer is to be ascertained and more specially
when any one of them is not known to the Branch Manager;

ii) Members of the staff of the Bank are not eligible for such advances irrespective of
purposes whatsoever may be, unless otherwise sanctioned by Head Office;

iii) No advance should be made against primary gold (i.e., standard bar, billets, blocks,
slabs, rods etc) and such ornaments where name has been inscribed other than that of
the borrower.

9.16 ADVANCE AGAINST GOLD AND SILVER BULLION :

The Bank should not give any advance against bullion/primary gold. The Bank should desist
from granting advances to the silver bullion dealers which are likely to be utilized for speculative
purposes.

9.17 HANDING OVER CHARGE

9.17.1 When an incoming Manager will take over the charges of the branch he will ensure that
the number of bags are equal to the number of loan accounts as per Gold Ornament
Register and Gold Loan Ledger. He will also see and verify that all the bags are sealed
and there is no evidence of tampering. He will countersign on the tag in presence of the
outgoing Manager as a token of verification and satisfaction. If any of the tags is found
to be tampered or misplaced the borrower should be called and a fresh seal to be
obtained like at the time of giving the loan. If the borrower does not co-operate, a fresh
tag is to be sealed under the joint signature of the incoming and the outgoing Managers
without removing the old seal and the remaining part of the old tag.

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9.17.2 When it is considered to recall the loan due to non-payment of interest and/or
instalments a demand notice shall be served on the borrower or each of the borrowers if
the account stands in the joint names of more than one person.

9.17.3 In the event of the borrower failing to comply with the requirement contained in the
notice (issued as per 9.17.2) on the expiry of the notice period the branch shall proceed
to dispose off the securities in the following manner:

Notice

Offers are invited for purchase of the under noted articles pledged to the bank, which
may be inspected by appointment. Offer should be made to the undersigned in writing,
to be kept at least 15 days and for the entire quantity of each item. Sale will be on AS
IS WHERE IS basis according to the Banks record and the purchaser is to make his
own arrangement for weighing and verification. The undersigned reserves the right to
withhold sale of the whole or part of the articles and to accept or decline to accept any
offer without assigning any reason. Delivery will be made only against advance payment
for the entire lot purchased by the buyer. Other terms and conditions will be as per
discussion with the undersigned.

Description of Goods

9.18 FINAL NOTICE

After obtaining the offers, if they are found to be reasonable., final notice will be served on the
borrower by registered mail with acknowledgement due on the following lines :

Your ..A/C

Further to our letter No. . Dated we advise having received offer for purchase
of the undernoted items of articles pledged on your account at prices noted thereagainst.

If you do not repay your dues in the account within four days from the date hereof we shall be at
liberty at our absolute discretion to proceed to sell these articles at the said rates if still available
or at such rates as will be available on the date or dates of sale. You will be informed further in
the matter if and when the sale is effected.

Description Price offered

9.19 INTIMATION TO THE BORROWER ON COMPLETION OF SALE

If the borrower still fails to pay, the pledged gold are to be sold to the highest bidder and the
sale proceeds less all expenses of sale, will be credited to the borrowers account. Only such
part or portion of the pledged gold are to be sold as will cover the banks dues. Full details of
the sale are to be recorded in the appropriate register of the Bank. Thereafter the borrower shall
be written on the following lines:

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Your .A/C.

Further to our letter No. . Dated we advise having credited your captioned
account with Rs as detailed below being the sale proceeds of your pledged goods.

After the above credit, the balance in your aforesaid account stands at Dr/Cr Rs.. with
interest charged up to ..

Memo
Description of Sale price Less Expenses Amount Date on which
goods realised for sale Credited to credited
youre a/c
1 2 3 4 5

9.20 BALANCE IN THE ACCOUNT ON APPLICATION OF SALE PROCEEDS

If the account turns into a credit balance the borrower may be allowed to take delivery of the
unsold goods, if any, and withdraw the credit balance only after he confirms in writing the final
balance in the account and the sales effected. If there is a shortfall in the account the position
shall be reported to the Regional Office in details informing in particular the other assets of the
borrower, if any, which could be attached.

106
Annexure- I

Form G

(Gold Delivery & Appraisers Certificate)

___________________ 200__
Address : __________________________

The Manager
United Bank of India
______________________ Branch

Dear Sir,

Please take delivery of the following Gold Ornament(s) etc. which please hold as Security for
all moneys now owing or which shall at any time hereafter be owing from me/us at any manner
whatsoever : -

Description Gross Weight Net Weight of Valuation Rate Market Value


in Gms. Gold contents per Gms.
in Gms.

I certify that this/these Ornament (s) etc. is/are my/or bonafide property and no other person
has any claim against it/them.

Yours faithfully,
___________________________
(Borrower)

Certified that the within written weights and valuation rate(s) have been verified by me and are correct.

____________________________
(Appraiser)
F.No.425

107
Annexure- II
Form - A

APPLICATION FOR LOAN/OVERDRAFT AGAINST FIXED AND OTHER DEPOSITS, G.P. NOTES,
BULLION, GOLD OR GOLD ORNAMENTS, SHARE, LIFE POLICIES,ETC.

(Not for those dealing in G.P. Notes, Shares or other Securities)

To
The Manager
United Bank of India
_______________________ Branch

Dear Sir,

I/We shall be obliged if you kindly grant me/us a loan/overdraft of Rs. ________________
Rupees __________________________) only, against pledge of undernoted securities for a period of
___________months to be duly repaid in full with interest at the rate of _______% over Bank Rate
minimum _______% with ________rests and incidental charges on demand by your Bank.

1. Name in full _________________________________________________________________


2. Names of partners, in case of a firm and names of the Directors, in case of a Joint Stock Co.
i) __________________________________________________________________________
ii) __________________________________________________________________________
iii) __________________________________________________________________________
3. Fathers/Husbands name _______________________________________________________
4. Occupation of the applicant _____________________________________________________
5. Permanent Address____________________________________________________________
6. Present Address _____________________________________________________________
7. Whether the applicant is indebted to any other Branch of the Bank, if so particulars_______
____________________________________________________________________________
8. When and how repayment is proposed ____________________________________________
____________________________________________________________________________
9. Particulars of securities offered __________________________________________________
____________________________________________________________________________
____________________________________________________________________________

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10. Purpose of the Loan/O.D. ______________________________________________________
11. Name of Depositor, G.P. Notes holder, owner of bullion, gold or gold ornaments__________
____________________________________________________________________________
12. Whether the securities or security are free from any prior charges and under the sole and
unencumbered properties of the applicant(s) ______________________________________
____________________________________________________________________________

Yours faithfully,
Address _______________________________________
______________________________________________
______________________________________________
Date : _______________
_________________________________________________________________________________
In case of Govt.Papers, mention the nature of the papers, date of redemption, rate of interest,
denomination of papers, when interest was last collected. In case of F.D. Receipts name of the issuing
Branch for what amount beneficiarys name at what rate and the date of maturity. In case Bullion, gold
or gold ornaments full particulars thereof giving the weight (gross and net) in case of share Name of
the Co., face value, paid up value and present market value in case of Life Policy, name of the
beneficiary, nature of Policy whether whole-life or endowment, Date of maturity, whether age
admitted, present surrender value etc.

109
CHAPTER VIII

ADVANCE AGAINST DOCUMENTS OF TITLE TO GOODS

TOPIC PAGE NO.

11.1 Documents of Title to Goods

11.2 Bills of Lading

11.3 Railway Receipt

11.4 Motor Transport Receipt

11.5 Delivery Order

11.6 Advances against PDOs

11.7 Advance against Tea Delivery Order

11.8 Warehouse Receipts Notified Commodities

11.9 Advance against Warehouse Receipts issued by Central


and State Warehousing Corporation.

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CHAPTER VIII

ADVANCE AGAINST DOCUMENTS OF TITLE TO GOODS

11.1 DOCUMENTS OF TITLE TO GOODS :

11.1.1 A document of title to goods, according to the Indian Sale of Goods Act, 1930,
includes :

(a) Bill of Lading

(b) Dock Warrant

(c) Warehouse Keepers Certificate

(d) Warfingers Certificate

(e) Railway Receipt

(f) Warrant or Order for the delivery of goods

11.1.2 And any other document used in the ordinary course of business as proof of the
possession or control of goods or authorising or purporting to authorise either by
endorsement or by delivery, the possessor of the documents to transfer or receive
goods thereby represented.

11.1.3 Though almost all documents used in mercantile transactions are covered under this
definition; between those documents there are some that give title to the goods by
endorsement and delivery and other documents are mere receipts acknowledging
lodgement of goods in a warehouse and are not transferable as such. Delivery Orders,
Warehouse Receipts come under the latter category, where the goods covered under
them must be registered in the name of the pledgees in the books of warehouse
authorities. Mere possession of such documents without registration of charge is of no
avail in case of insolvency of the customer, as in that event the goods covered under the
documents are regarded in possession of the warehouse keeper on behalf of the
insolvent as reputed owner and vest in the official assignee.

11.1.4 While some procedural matters relating to advances against principal documents of title
to goods are explained below it must always be remembered that the real security lies in
the goods themselves covered by the documents and usual precautions with regard to
advance against goods must be observed at every stage. Above all, honesty, integrity,
experience and credit of the customer must always come in the forefront in entertaining
any proposal for advance against documents of title to goods.

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11.2. BILLS OF LADING :

In case of advance against bills of lading, the following precautions shall be usually taken :

i) All the parts of the bills of lading constituting the complete set should be obtained by the
Branch from the borrower. In case this is not possible the concerned shipping company
or the captain of the ship shall be notified about the Banks charge over the goods as
pledge as soon as the advance is made.

ii) The insurance policy or certificate of insurance shall always accompany the bills of
lading and the description of the goods in the bill of lading shall tally with that in the
policy. The policy shall be taken out in the name of the Bank duly assigned.

iii) The bill of lading shall be endorsed in blank and deposited with the branch along with a
letter of pledge.

iv) The Branch must be satisfied before making an advance that there are no onerous
conditions in the documents prejudicial to the interest of the bank.

11.3 RAILWAY RECEIPTS

Advance against the security of Railway Receipts can only be made by a Branch provided it is
located at the destination where the goods are booked. In making advance against railway
receipts, the following precautions are considered necessary :

i) The railway receipt shall be in the name of the consignor endorsed in blank and shall be
deposited along with a letter of pledge.

ii) A notice of lien shall be sent to the concerned Station Master in Form No. 457 by
registered post with acknowledgement due and the acknowledgement slip then received
back shall be duly preserved in the security folder.

iii) The Railway Receipt should not be stale.

11.4 MOTOR TRANSPORT RECEIPTS :

Motor Transport receipts, whether they can be regarded as documents of title to goods or not,
are by usage accepted as security for advances to a limited extent provided they conform to the
conditions laid down by the Indian Banks Association which are as follows :

i) The Transport companies shall be in the recommended list of the Indian Banks
Association as circulated by Head Office from time to time.

ii) The Lorry Receipts shall be in the Special Form with the Code Numbers of the
Transport Companies printed thereon.

iii) Only the Consignee Copy of the Lorry Receipt with the Bank shown as the consignee
shall be accepted.

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iv) The Lorry Receipts shall contain the Endorsement and Notice in red within two parallel
lines as follows :

Endorsement

It is intended to use the Consignee Copy of this set for the purpose of
borrowing from the consignee Bank

v) The Lorry Receipts shall contain the prescribed conditions of carriage.

11.5 DELIVERY ORDER

A Delivery Order is a document in writing addressed to the proprietor of the Warehouse


where the goods are lodged conveying owners instructions to deliver to the order of a person
named therein a specific quantity of the goods. Such delivery orders are generally issued on
warehouses belonging to third parties such as shipping companies, dock companies etc. but at
times may be issued by the owners on their own warehouses as well as in the case of Pucca
Jute Delivery Orders in Calcutta. Pucca Jute Delivery Orders or P.D.O.s as they are commonly
known are issued by Jute Mill Companies in Calcutta on their own warehouse and are
considered as documents to title by local custom and usage. The delivery orders are
transferable by endorsement and delivery. Unless attornment is made by the warehousemen,
mere possession of such documents by the Bank as pledge will not give title over the goods in
the event of insolvency of the customer.

11.6 ADVANCE AGAINST P.D.O.s

Advance against P.D.O.s covering specified quantity of hessian, gunny, jute bales etc., issued
by approved jute mills may be made with the prior approval of the Regional Office. While taking
such documents as security, the Branch Manager must ensure that they have been issued in
respect of goods actually stored with the warehousekeeper and the orders stand registered in
the names of the pledgor. Before any advance is made the relative P.D.O.s shall be registered
in the books of the mill company in the name of the Bank as pledgee. No advance against
P.D.O. shall be allowed to remain outstanding for more than six months. A P.D.O. once
released should not be accepted as a security for further advance either in the same account
or in a different account. The market report should be verified regularly to ascertain the drawing
limit or margin.

11.7 ADVANCE AGAINST TEA DELIVERY ORDER

Advance against Tea Delivery Order issued by Tea Brokers in the approved list of the Bank in
respect of tea sold at auction may be made by the Calcutta Main Branch or any other office
selected by Head Office. Immediately on making an advance against Tea Delivery Order, the
Tea Broker concerned is to be notified and the delivery order be registered in the name of the
Bank with the Tea Warehouse. Such advance shall be generally for a short period not

113
exceeding a month or two. Valuation of tea should be made on the basis of the tea market
report from time to time to ensure cover for the advance with requisite margin.

11.8 WAREHOUSE RECEIPTS NOTIFIED COMMODITIES

11.8.1. A Warehouse Receipt is a document issued by a warehousekeeper certifying that


certain goods described in the receipt are held in the warehouse at the disposal of the
named depositor. Advance against warehouse receipts issued by warehouses
established by the Central and State Warehousing Corporations covering Notified
Commodities may be made by the Branches subject to restrictions imposed under
selective credit control of the Reserve Bank of India from time to time provided of
course they are in the approved list of commodities and produce of the Bank. The
following are some of the notified commodities eligible storage in the warehouses of
the Warehousing Corporation :

Foodgrains

Oil Seeds

Edible oils

Fertilisers

11.8.2 The Wasrehousing Corporation classifies all goods stored with them into Grade I to IV.
Grade-I represents good quality whereas Grades II, III and IV represent fair, average
and poor quality respectively. Only such stocks which have been given Grade-I and
marked accordingly in the receipts should be considered eligible for advance.

11.9 ADVANCE AGAINST WAREHOUSE RECEIPTS ISSUED BY CENTRAL AND STATE


WAREHOUSING CORPORATION

In making advances against warehouse receipts issued by Central and State Warehousing
Corporation, the precautionary measures outlined below, in addition to those indicated in para
11.8.1. and 11.8.2. above, should be observed by the Branches.

(a) Warehouse Receipts should be of recent dates. This is necessary to avoid advance
being made against old stocks. The stocks which have been lying in the warehouse for
long periods should not be taken as security.

(b) Where warehouse receipts are not transferable by endorsement or in case of


transferable receipts if they stand in the names of third parties, which are duly
endorsed, fresh receipts shall be issued in the name of the Bank before making any
advance.

(c) Where the warehouse receipt offered as security has not been made out in the Banks
name, the particulars of the receipt shall be reported to the warehouseman with a
request to note the Banks charge on the relative goods. It is necessary to obtain an

114
attornment from the concerned warehouseman that the goods are being held by him on
account of the Bank and that no duplicate receipt would be issued without the written
consent of the bank.

(d) No duplicate warehouse receipt shall be ordinarily accepted as security for advance
except without proper search and enquiry from the warehouse authorities.

(e) Part deliveries of goods covered by warehouse receipts as security for advance shall be
made by the warehouseman against delivery orders issued by the Bank. The relative
receipts shall be sent to the warehousemen for suitable endorsements thereon before
effecting deliveries and return to the Bank.

(f) Periodical inspection of the warehouse should be made to ensure that the goods
covered under the relative receipts are in order and kept properly.

(g) Goods deposited in a Warehouse are generally insured by the Warehousing


Corporation. In that event no separate insurance need be taken but a letter stating the
amount of cover earmarked for the goods pledged to the Bank be obtained from the
Warehousing Corporation. The stocks are required to be insured for full cost price or
market value whichever is higher.

(h) On repayment of the amount of advances the warehouse receipts shall be released to
the borrower and the warehouseman should be suitably advised about the cancellation
of the Banks charge thereon.

(i) Besides usual documents, Agreement of pledge of goods (Manual of Documentation


Appendix I Form E, Form No. 338) should also be obtained.

(j) In addition to the above instruction, the Branches should take usual precautions
required for advance against pledge of goods.

115
Chapter IX

Credit And Risk Rating


PRICING OF ADVANCE ACCOUNTS AND CREDIT RISK RATING
12.1. Pricing of advance accounts
A. General
a) Bank shall charge interest on loans/advances or discount usance bills in accordance with
directives on interest rates on advances issued by RBI/Bank from time to time.
b) As per RBI guidelines (vide Master circular on Interest Rates on Advances dated 1 st July 2011)
the interest at the specified rates should be charged at monthly rests and rounded off to the
nearest rupee. Charging interest at monthly rest shall not be applicable to agricultural advances.
Charging/compounding of interest on agricultural advances shall continue to be linked to crop
seasons. Interest on advances for long duration crops shall be at annual rests. As regards other
agricultural advances in respect of short duration crop and allied agricultural activities such as
dairy, fishery, piggery, poultry, aviary, etc, the interest shall be charged at half-yearly
rest/aligned with harvesting/marketing season, as circulated by CPPMI Dept from time to time.

B. Base Rate System


a) For fixing interest rates the Base Rate system has replaced the BPLR system w.e.f.1 st July 2010.
The information on Base Rate should be disclosed transparently at all branches and also on
website. The Base Rate should be reviewed at least once in a quarter with the approval of the
Board of Directors or Asset Liability Management Committee (ALCO).
b) For loans sanctioned upto June 30, 2010 BPLR will be applicable. Existing loans sanctioned
upto 30th June 2010 based on BPLR system may run till their maturity as per contracts, unless
the Borrowers want to switch over to new system, before expiry of existing contracts,
exercising option given by Bank, on mutually agreed terms. However, for those loans
sanctioned upto 30th June 2010, which come up for renewal/reset from July 01, 2010 onwards,
Base Rate would be applicable. If in the existing contract reset parameter is defined in relation
to BPLR, to switch over to Base Rate at the time of reset consent from Borrower is required.
c) From 1st July 2010 all categories of loans shall be priced only with reference to Base Rate
except (i) DRI advances (ii) loans to Banks own employees and (iii) loans to Banks depositors
against their own deposits.
d) The Base Rate will be the minimum rate for all loans [except the exempted categories listed at
c.(i)(ii) & (iii) above]. Accordingly, the existing stipulation of BPLR as the ceiling rate for loans
upto Rs.2 lacs stands withdrawn.
e) Even after introduction of Base Rate system, Bank can offer all categories of loans on floating
or fixed rates. Where loans are offered on fixed rate basis, notwithstanding the quarterly review
of the Base rate, the rate of interest on fixed rate loans will continue to remain the same during
the contract/till next contractual reset of interest, subject to the condition that such fixed rate
should not be below the base rate prevailing at the time of sanction. If the Base Rate is revised
upward thereafter and in the process the fixed rate falls below the new base Rate, it would
not be construed as a violation of the guidelines on Base Rate. At the time of reset, fixed rate
for the next tenure till subsequent reset shall not be below Base Rate prevailing at the time of
reset. Where loans are offered on floating rate apart from Banks Base Rate, external market
benchmark rates/other banks base rates can also serve as reference benchmark rates. The
floating interest rate based on external market benchmark rates/other banks base rates should,

116
however, be equal to or above the Banks prevailing Base Rate at any point of time during the
contract. In case of existing loans of longer/fixed tenure, the Bank should reset the floating rates
according to the above method at the time of review or renewal of loan accounts, after obtaining
the consent of the concerned borrowers.
f) For better interest management in fixed rate products under Base Rate regime, provision for
periodical reset may be kept, wherever possible.
g) The rate of interest (floating/fixed) on all types of advance, including rupee export credit but
excluding the exempted three categories, should be linked with Base Rate. For advances over
Rs.10 lacs (over Rs.25 lacs in case of micro-enterprise/small-enterprise/agriculture) the rate
shall be linked with Base rate with reference to internal Credit Risk Rating. However, rates for
certain advances, e.g. rupee export credit, advance against shares, etc, irrespective of limit, may
be fixed without reference to Credit Risk Rating. CPPMI Department, H.O. will continue to
circulate rate of interest for different categories of advance on every change/review of Base
Rate.
h) The interest under DRI Scheme continues to be 4% as per RBI guidelines.
i) The interest rate on rupee export credit (both pre-shipment and post-shipment) shall be at or
above Base Rate. CPPMI Department will continue to fix rate of interest for rupee export credit
based on the volume of export turnover routed through Bank, LC coverage, etc. For export
credit in foreign currency the Bank was permitted to stipulate any rate with reference to
ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable, subject to all cost
ceiling of 350 bps over LIBOR, EURO LIBOR or EURIBOR as prescribed by RBI
(DBOD No.DIR. 91 /04.02.001/2011-12 dt.30.03.2011). However, to increase the availability
of foreign currency to the exporters RBI, vide circular DBOD.DIR.No. 100/ 04.02.001 /
2011-12 dt.04.05.2012, has deregulated the interest rate on export credit in foreign
currency with effect from May 5, 2012 and the Bank is now free to determine the interest
rates on export credit in foreign currency.
j) In case of restructured loans if some of the WCTL, FITL, etc need to be granted below the Base
Rate for the purpose of viability and there are recompense etc clauses, such lending will not be
construed to be violation of the Base Rate guidelines.

k) In those cases where subvention is available to the borrowers, it is clarified that


i. Interest Rate subvention on crop loans
1
In case of crop loans upto Rs.3 lacs, for which subvention is available, Bank should charge
farmers the interest rates stipulated by the Government. If the yield to the Bank (after including
subvention) is lower than the Base Rate, such lending will not be construed to be violation of
the Base Rate guidelines;
2
As regards the rebate provided for prompt repayment, since it does not change the yield to the
Bank [mentioned at (1) above] on such loans, it would not be a factor in reckoning compliance
with the Base Rate guidelines.
ii. Interest Rate subvention on Export Credit
Interest rates applicable for all tenors of rupee export credit advances will be at or above the
Base Rate. In cases where subvention is available, Bank will have to reduce the interest rate
chargeable to exporters as per Base Rate system by the amount of subvention available. If as a
consequence the interest rate charged to exporters goes below the Base Rate, such lending will
not be construed to be violation of the Base Rate guidelines.

117
iii. Government of India, Ministry of Renewable Energy has formulated a scheme on financing of
Off-Grid and decentralized Solar (Photovoltaic and thermal) applications as part of the
Jawaharlal Nehru National Solar Mission (JNNSM). Under the scheme Bank may extend
subsidized loans to entrepreneurs at interest rates not exceeding 5 percent where refinance of 2
percent from GoI is available. Such lending at interest rate not exceeding 5 percent per annum
where refinance of GoI is available, would not be considered to be a violation of the Base Rate
guidelines.
iv. Under Micro Credit Scheme of the National Scheduled Tribes Finance & Development
Corporation (NSTFDC) the Bank may extend subsidized loans to elligible
beneficiaries/SHGs for undertaking self employment ventures/activities at interest rates
not exceeding 6% / 8% where refinance at 3% / 5% from NSTFDC is available. Similarly,
the Bank may extend subsidized loans to eligible beneficiaries under the various schemes
of National Handicapped Finance & Development Corporation (NHFDC) at interest rates
prescribed therein where refinance from NHFDC is available. Such lendings to the extent
refinance is available, even if it is below the Base Rate, would not be considered as a
violation of the Base Rate guidelines. However, interest rate charged on the part not
covered under refinance should not be below Base Rate.

l) In case of consortium/multiple banking arrangement, where interest rate is aligned with lead
/principal /other lenders rate, such rate shall not be below our Banks Base Rate and suitable
covenant to that effect should be incorporated in terms & conditions of sanction. For flexibility,
suitable exit option may be considered by incorporating Put and Call option.

C. Continuation of BPLR system for loans sanctioned upto 30.06.2010


a) Interest rates under BPLR system will continue to be applicable to all existing loans sanctioned
upto 30 June, 2010 till maturity of contract &/or till come up for renewal/reset unless the
borrower(s) give consent for switch over to Base Rate system from BPLR system before
maturity &/or before the time of reset.
b) In view of this, the guidelines for rate of interest with reference to BPLR, as existing, will
continue for loans sanctioned prior to 1 July 2010 and the Bank will have to declare its
Benchmark Prime Lending Rate as well as applicable interest rates with reference to BPLR
from time to time. The Asset Liability Management Committee (ALCO) of the Bank fixes the
BPLR from time to time computed on the basis of (i) actual cost of fund, (ii) operating expenses and
(iii) a minimum margin to cover regulatory requirement of provisioning / capital charge and profit
margin.
c) After deregulating rates of interest on advance in general, under BPLR system RBI continues to
control the rate in respect of (i) advances to small borrowers with limit upto Rs.2 lacs (ii)
advances under Differential Rate of Interest (DRI) Scheme and (iii) export credit upto specific
tenor.
d) In terms of RBI guidelines under BPLR system the rate of interest for loans to small borrowers
with limit up to Rs. 2.00 lac should not exceed the Benchmark Prime Lending Rate (BPLR); interest
under DRI scheme is 4 percent per annum and a ceiling rate of 2.5% below BPLR is set for all
categories of pre shipment credit up to 270 days, post shipment export credit up to 180 days and
post-shipment export credit up to 365 days for Gold Card holders. Such ceiling is also applicable for
pre & post shipment credits against incentives receivable from Government (covered by ECGC

118
Guarantee) upto 90 days, post shipment credit upto 90 days against undrawn balance as also against
retention money (for supply portion) payable within one year from the date of shipment.
e) The rates of interest on advances above Rs.2 lacs upto Rs.10 lacs (for agriculture upto Rs.25
lacs) are presently fixed with relation to BPLR (without relating to Credit Risk Rating) by
CPPMI Dept from time to time. For advances with limit over Rs.10 lacs (for agriculture upto
Rs.25 lacs), rates shall be fixed on the basis of credit risk rating (UBICRR) with reference to
BPLR.
f) As per extant RBI guidelines (vide Master Circular on interest rates on advances dated 1 st July
2011) under BPLR system the Bank is free to determine rates of interest without reference to
BPLR and regardless of size in respect of the following loans;
Loans for purchase of consumer durables
Loans to individuals against shares and debentures/bonds
Other non-priority sector personal loans including credit card dues
Advances / overdrafts against domestic / NRE / FCNR(B) deposits with the bank, provided that
the deposit(s) stands/ stand either in the name(s) of the borrower himself / borrowers
themselves, or in the name of the borrower jointly with another person
Finance granted to intermediary agencies (as mentioned in RBI Master Circular on Interest
Rates on Advances dated 1 July 2011) for on-lending to ultimate beneficiaries and agencies
providing input support;
Discounting of bills
Loans/advances/cash credit/overdrafts against commodities subject to Selective Credit Control
Loans to co-operative banks or to any other banking institution
Loans to its own employees
Loans covered by refinance schemes of term lending institutions.

D. Other guidelines
a) Interest on advances to tea, rice mill, cold storages, will be as per extant guidelines issued by the
bank from time to time.
b) Interest on advances to Agriculture & MSME sectors will be guided as per HO circular to be issued
from time to time
c) Interest rate for foreign currency loans shall be set/reset by the sanctioning authority with written
concurrence from the General Manager in charge of IBD considering availability of foreign currency
fund, cost of fund, LIBOR, hedging cost, etc. In cases of the accounts under powers of
MCBOD/CAC, the rate on FC loans can be set/reset by HLCC-1 on the basis of written
observations from the General Manager in charge of IBD on the proposed rate considering all
related factors.
d) All consortium advances where our bank is not a leader, rate of interest charged shall be as per
decision of the consortium, subject to the floor ceiling at Banks Base Rate. In all multiple banking
arrangement cases rate of interest shall be in line with other banks / institutions, but not below Banks
Base Rate, subject to the approval of the competent authority. In case of new accounts coming to us
and which are availing credit facilities from other banks, interest rates lower than that being charged
by those banks may be considered to bring the business to our bank provided other criteria for taking
over of accounts are fulfilled and approved by the competent authority.

119
e) As per extant RBI guidelines, proviso enabling the Bank to charge the applicable interest rate in
conformity with the directives issued by RBI from time to time, should be incorporated in the loan
agreements of all advances, including term loans.
f) Relaxation of interest rates
To fall in line with the industry rate and going market scenario the Bank may allow
relaxation in rate of interest below applicable rate to exporters or other creditworthy borrowers
including public enterprises on the lines of a transparent and objective policy approved by the bank.
All proposals for reduction in the rate of interest [except for advances against Banks own Term
Deposit (including 3rd party deposit)] below the applicable rate will continue to be considered at the
Head Office only.
Authority to approve relaxation in interest rate
i) Under Base Rate system
CAC : Upto Base Rate
HLCC-1 : Upto Base Rate +1.00%
HLCC-2 : Upto Base Rate +2.75%

ii) Under BPLR system


Reduction of rate below BPLR :
MCBOD : Reduction by more than 5% below BPLR
CAC : Upto BPLR-5%;
(3% below MCBOD approved rate, subject to maximum BPLR-5%)
HLCC-1 : Upto BPLR-4%;
(3% below MCBOD approved rate, subject to maximum BPLR-4%)
HLCC-2 : Upto BPLR-1%

Reduction of applicable rate upto BPLR :


Such reductions in respect of all credit proposals (i) within the power of MCBOD/CAC/HLCC-1
will be considered by HLCC-1; (ii) within the powers upto HLCC-2 will be considered by HLCC-
2.
Relaxation of rate for limits above Rs.2 lacs & upto Rs.1 crore in Priority sector & Retail Credit
Any reduction in the rate upto 1.5% below the applicable rate (except for United Housing Loan), will
be decided by the HLCC-2. Any reduction beyond 1.5% will be considered by HLCC-1.

Any reduction in the rate of interest prescribed for the United Housing Loan will be decided by
HLCC-1.
iii) In case of advances against Banks own Term Deposit (including 3rd party deposit) discretionary
power for reduction of spread in interest will be as follows:
RLCC 0.50% below applicable rate
HLCC-2 0.75% below applicable rate
Depending on money market condition, liquidity, etc, reduction beyond 0.75% may be allowed by
HLCC-1
In case of advance against 3rd party deposit interest rate cannot be below Base Rate.
iv) In case of LC backed bill discounting, HLCC-1, is authorized to reduce the card rate upto Base Rate.
v) Concession in the rate of interest may also be allowed in certain potentially viable units under
approved rehabilitation packages drawn up on basis of RBI parameters or BIFR directives or CDR

120
mechanism. However, the possibility of recompensing such sacrifices by the borrowers once it
turns around may be explored in deserving cases. Concessional rates for sick SSI (now MSE), non-
sick SSI (now MSE) and sick/weak other units (including Medium) will be given in interest rate
circular from time to time keeping the extant RBI guidelines in view. Any reduction from such
applicable concessional rate shall be allowed only at H.O. level as under;
HLCC-2: upto 1% below applicable concessional rate, with a floor of Base Rate.
HLCC-1: more than 1% below the applicable concessional rate with a floor rate of 0.50% below
Base Rate (in WCTL, FITL, etc for restructured accounts provided such reduction below Base Rate is
required for viability, subject to stipulation of recompense clause)
CAC: any reduction below Base Rate, in cases as stated above, exceeding 0.50% but not exceeding
1.50%.
g) Penal rates of interest
As per RBI guidelines the policy on penal interest should be governed by well accepted principles of
transparency, fairness, incentive to service the debt and due regard to genuine difficulties of
customers.
In view of the above guidelines Bank may stipulate terms for levying penal interest @ 1% p.a. at
monthly rest per default for the period of default, subject to a cumulative maximum of 3% p.a. at
monthly rest, over and above normal interest rate for (a) default in repayment of loan instalments
and/or servicing of interest; (b) overdrawing/excess drawing in CC/OD account beyond the drawing
power or sanctioned limit including ad hoc/ temporary sanctions, whichever is lower; (c) non-
perfection of security as per stipulated terms within stipulated time frame without any valid reason
acceptable to the competent authority of the Bank; (d) non-submission of Stock/Book Debt
Statements within the stipulated time period; (e) non-submission of QIS/MSOD Statements,
wherever applicable, within the stipulated time period without any valid reason acceptable to the
competent authority of the Bank; (f) non-submission of Balance Sheet & P/L accounts (audited
wherever applicable) within 6 months from the date of Balance Sheet without any valid reason
acceptable to the competent authority of the Bank and (g) non-compliance to any financial covenant,
if specifically mentioned in terms of sanction that such non-compliance would attract penal interest.
[Competent authority means respective sanctioning authorities. However, CAC shall be the competent
authority for sanctions accorded by MCBOD]
The Borrower should be communicated terms of sanction containing a suitable clause defining each
type of default attracting penal interest and rate of penal interest. No penal interest should be charged
for loans up to Rs.25,000/-.
It may be ensured that charging penal interest is not treated as a routine source of revenue, but as a tool
for implementing discipline in the account.

12.2. Credit Risk Rating & Pricing


i) As per RBI guidelines on Risk Management Systems, bank has since introduced loan pricing
mechanism based on risk return principle. Under the risk return principle, borrowers with weak
financial fundamentals are categorised in relatively higher risk category attracting higher rate of
interest.

ii) Credit Risk Rating should be computed based on latest audited balance sheet and other available non-
financial data including conduct of the account (in case of existing ones). However, while examining a
credit proposal during the interim period between closure of a financial year and publication of
audited financials, rating exercise may also be done, if possible, on provisional/unaudited financial

121
data beside rating based on last audited financials for judging the actual risk perception on the basis of
performance during just concluded year.

iii) Presently the Bank is following a manual system of computing Credit Risk Rating with a 0-8 rating
scale for above Rs.10 lacs upto below Rs.1 crore as well as a software based Credit Risk Rating model
(IMaCS) with the technical know-how of M/s ICRA for accounts with limit of Rs.1 crore and above.
The existing system will continue.

iv) The IMaCS model has been developed for generation of the Credit Risk scoring for borrowal accounts
/ proposals pertaining to six segments namely Large Corporates (LCs), SMEs, Large / Infrastructure
projects. Green field projects, NBFCs and projects on Agro Industries and Food Processing Units.

The model evaluates a borrower by generating risk score in the range of 01 to 10. The risk score of
01 is assigned to borrowal accounts with the least likelihood of default and risk score of 10 is assigned
to the firms having most likelihood of defaults. The Risk Score generated by the model on scale of 01
to 10 has been mapped to our in-house risk rating scale of UBICR 0 -5 (for Standard Assets) as stated
under point v below.

RBI, vide its circular DBOD.BP.BC.No.76 /21.04.103/2011-12 dt.02.02.2012, has advised


that the banks should evaluate the risks arising out of unhedged foreign currency
exposure of the corporate and price them in credit risk premium. The IMaCS model for
credit risk evaluation takes care of exchange volatility risk by factoring the corporates
foreign currency exposure parameters in repect of its hedging status vis--vis volatility of
the market. Hence, pricing based on such risk rating includes credit risk premium related
to unhedged foreign currency exposure of the corporate.

v) The manual as well as IMaCS scoring vis-a-vis Credit Risk Rating with Risk description along with
extant Rating related pricing (the mark up spread over Base Rate(BR)/BPLR is subject to change
from time to time) are given below

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IMaCS Manual Credit Risk Applicable Rate of Interest*
Score Score Risk Description Base Rate BPLR
(Rs. 1 core (Rs.10 lacs Rating System System
& and to below Over Over
above) Rs.1 crore) Rs.10 lacs Rs.25
to Rs.25 crores
crores
1.00 2.00 UBICR 0 Minimum BR+4.00% BR+3.75% BPLR
Risk
>2.00 3.50 UBICR 1 Moderate BR+4.50% BR+4.25% BPLR+ 0.50%
Risk
>3.50 5.00 80% and UBICR 2 Acceptable BR+5.00% BR+5.00% BPLR+1.50%
above Risk
>5.00 6.00 70% to less UBICR 3 Acceptable BR+5.50% BR+5.50% BPLR+ 2.50%
than 80% risk with
care
>6.00 8.00 60% to less UBICR 4 Tolerable BR+5.75% BR+5.75% BPLR+ 3.
than 70% risk 25%
>8.00 10.00 Below 60% UBICR 5 Risk BR+6.00% BR+6.00% BPLR+ 3.50%
requires
managemen
t attention
Substandard asset UBICR 6 Very high -
risk
Doubtful asset UBICR 7 Very high -
risk
Loss asset UBICR 8 Very high -
risk
* Note
1
Rating wise applicable rates for Micro and Small Enterprises including Retail Trade upto Rs.20 lacs,
Agriculture and other Prisecs are guided by extant circulars, issued by CPPMI Dept, H.O. from time
to time.
2
As per Manual Risk Rating system highest rating, for accounts having limits above Rs.10 lacs to
below Rs.1 crore, is UBICR2 (score 80% & above). Accordingly, for such accounts rates related to
UBICR0 & UBICR1 will not be applicable.

vi) The existing manual rating format for above Rs.10 lacs to below Rs.1 crore is to be used.. The
broad parameters considered for the purpose of ascertaining the risk involved are shown below:

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ITEM WEIGHTAGE
1. Business Risk 45
1.1) Financial Risk 20
1.2) Operational Risk 10
1.3) Sales Risk 15
2 . Borrower Risk 55
2.1) Management
25
Capability
2.2) Conduct of the account 30
TOTAL 100

vii) Categories of advances exempted from computing risk rating:


Out of total credit portfolio of the bank, the following categories of advances are presently
exempted from computing risk rating:
(a) Schematic and structured loans
(b) Staff loans
(c) All standard Advances having credit limit up to Rs.10 lakh and below (reasons being that it is
difficult to compute risk rating for small accounts since authentic financial statements are usually
not available in such cases.

viii) Irrespective of credit limits (subject to ceiling limit under the respective scheme):
a) Advance against Bank's own term deposit, NSC, KVP, RBI Bonds and LIP and advance
guaranteed by the Government shall be rated at UBICR-0 i.e. Minimum Risk.
b) Advance of any sort sanctioned to employees of the Bank shall be rated at UBICR-0 i.e.
'Minimum Risk'.
c) Advance to Landlord for Bank premises shall be rated at UBICR-0 i.e. 'Minimum Risk'
d) Advance under the Bank's Retail Credit products shall be rated at UBICR-2
e) Advance under all schematic lending like PMEGP, SGSY etc. under Government Sponsored
programmes shall be rated at UBICR-3 i.e. 'Acceptable Risk with Care'

ix) Assigned Credit Risk Rating of accounts (other than those mentioned above) having credit limit
upto Rs. 10.00 lacs):
a) All Priority Sector advances (other than Schematic lending and Retail Credit Products of the
Bank) shall be rated at UBICR-3.
b) Advances through PACS/ LAMPS/ FSS shall be rated at UBICR-3
c) All other standard advances having limit up to Rs.10.00 lacs shall be rated at UBICR-3.
x) For advances to Agriculture and MSME sectors, limits up to Rs.25.00 lacs will be rated as UBICR-3.
Rating exercise should be undertaken in accounts with credit limit of above Rs.25.00 lacs as per
applicable rating model.
xi) The interest rates in the accounts with assigned ratings as stated above shall be guided by interest
circulars issued from time to time.

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xii) For advance classified as NPA shall be rated at UBICR6, UBICR7 and UBICR8 as per risk rating
scale as stated above.

12.3. External Bank Loan Rating

Under Basel II norm Bank is to assign risk weights to each credit exposures for the purpose of
computing Capital Adequacy. As per RBI guidelines on Prudential Guidelines on Capital
Adequacy and Market Discipline, vide Master Circular dt.01.07.2011, claims on corporates,
exposures on Asset Finance Companies (AFCs) and Non-Banking Finance Companies-
Infrastructure Finance Companies (NBFC-IFC), shall be risk weighted as per the ratings
assigned by the rating agencies registered with the SEBI and accredited by the Reserve Bank of
India.

Claims on corporates will include all fund based and non-fund based exposures other than those
which qualify for inclusion under sovereign, bank, regulatory retail, residential mortgage,
non performing assets and Specified categories (viz. Fund based and non-fund based claims
on Venture Capital Funds, Consumer credit, including personal loans and credit card
receivables but excluding educational loans, Capital market exposures, Non-deposit Taking
Systemically Important Non-Banking Financial Companies (NBFC-ND-SI), other than AFCs
and NBFC-IFCs and any other high risk exposure which may be identified by RBI from time
to time).

Initially, in Master Circular dt.01.07.2008, RBI prescribed a threshold limit of Rs.10 crores for
unrated claims on corporates with reference to single counter party for the bank as a whole with
effect from April 1, 2009. Accordingly, the Bank decided to rate all corporate exposures
exceeding Rs.10 crores by external rating agencies for allocating risk weight for computing
capital adequacy w.e.f.01.04.2009. However, subsequent master circulars dt.01.07.2009,
01.07.2010 and 01.07.2011 did not contain the respective clause in relation to the threshold
limit for unrated claims on corporates.

Accordingly, the system of external bank loan rating by CARE/ CRISIL/ ICRA/ FITCH/
Brickwork Ratings India Pvt Ltd (Brickwork)/ any other rating agencies accredited by RBI
from time to time will continue for all exposures on corporates, as defined above, /NBFC-AFC/
NBFC-IFC.

To be eligible for risk weighting purposes, the rating should be in force and confirmed from the
monthly bulletin/website of the concerned rating agency. The rating agency should have
reviewed the rating at least once during the previous 15 months.

Capital charge on individual counterparty exposures is presently guided by RBI Master Circular
on Prudential Guidelines on Capital Adequacy and Market Discipline dt.01.07.2011.

125
However, capital charge on exposure to banks will be determined by capital adequacy of the
respective banks. Hence external rating of exposures to banks may not be a must.

Exposures to central/state governments attract a Zero risk weight. Counterparty exposures fully
guaranteed by Central Govt / State Govt will attract zero / 20% risk weight respectively. Hence
external rating of such exposures may not be a must.

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CHAPTER X
TERM CREDIT AND FINANCING PROJECT

TOPIC PAGE NO.

13.1 General 13-2

13.2 Coordination between Banks and Financial 13-2


Institutions in extending Term Finance

13.3 Application for Term Finance 13-3

13.4 Project Appraisal 13-4

13.5 Management 13-4

13.6 Commercial 13-6

13.7 Technical 13-8

13.8 Financial 13-11

13.9 Estimated Cost of the Project 13-11

13.10 Means of Financing 13-14

13.11 Project cost of Production and Profitability 13-15

13.12 Break Even Point 13-15

13.13 Projected Fund Flow Statement 13-15

13.14 Projected Balance Sheet 13-16

13.15 Important Ratios for Project Appraisal 13-16

13.16 Sensitivity and Risk Analysis 13-16

13.17 Economics 13-17

13.18 Decision 13-18

13.19 Disbursement, supervision and follow-up 13-19

Annexure I : Questionnaire for Financial Assistance 13-21

Annexure II : Example on Break-Even analysis 13-26

Annexure III : Pre-sanction Inspection Report 13-27

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Chapter X

BANK FINANCE : TERM CREDIT AND PROJECT APPRAISAL

13.1. GENERAL:

13.1.1 Banks are permitted to provide term finance/loans for technically feasible, financially
viable and bankable projects including projects involving creation of infrastructural
facilities.

13.1.2 The basic set up of an industrial project comprises of land, building, plant and
machinery and utilities. For acquisition of these fixed assets, financial institutions and
banks provide them finance which forms an important/major component of the means of
finance of the project. Banks (and some financial institutions) also issue deferred
payment guarantees for procurement of indigenous plant and machinery on credit terms
offered by the manufactures/suppliers and also in respect of foreign currency loans
provided by foreign banks for import of plant and machinery, equipment, technical
know-how etc. Term Loans granted by the banks normally fall in the following two broad
categories:

(a) Loans granted for setting up new units.

(b) Loans granted for expansion/modernisation/backward or forward integration


(including acquisition of balancing equipments /diversification/ rehabilitation).

13.2. CO-ORDINATION BETWEEN BANKS AND FINANCIAL INSTITUTIONS IN EXTENDING


TERM FINANCE/LOANS :

13.2.1. RESERVE BANK OF INDIA GUIDELINES:

(a) Extent of Banks participation :

The stipulation regarding the ceiling/sub-ceiling on the quantum of term


finance/loan that banks individually or in consortium/syndicate for a single project
has been dispensed with vide RBI, IECD Circular dated 2 nd September, 1997 and
Banks now have the discretion to sanction term finance loans to all projects within
the overall ceiling of the prudential exposure norms prescribed by the Reserve
Bank of India as given under item 4.6. of Chapter IV.

(b) For lending to public sector units, banks are to ensure that such public sector
undertakings are registered under the Companies Act, 1956, or are established as
corporations under the relevant Acts, Further, such public sector undertakings
must be run on commercial lines and repayment of term finance/loans should be

128
made out of the income to be generated by the project and not out of subsidies
made available to them by the Government.

(c) For infrastructural development projects, banks must additionally ensure that
these are being implemented without the support of budgetary allocation i.e.
projects funded out of budgetary resources, or where a firm commitment has
been made for tie-up of the financial arrangement.

(d) Banks must evolve an appropriate debt-equity ratio for each project.

(e) Rates of interest to be charged by Bank should be in conformity with the Banks
Lending Policy.

(f) Banks are free to decide on the maximum period of term finance/loan keeping in
view the maturity profile of their liabilities. Duration of the term loan should not
normally be over 7 years except in case of infrastructure and project finance
where it may extend upto 15-20 years. Housing loans are part of long term
loans and in some cases it may extend up to 25 years.

(g) Banks should ensure that they have the requisite expertise for appraising the
technical feasibility, financial viability and bankability of the project with particular
reference to risk analysis and sensitivity analysis.

Banks, if they so desire may take assistance of consultants approved by the IDBI
for appraisal of the project. Banks may also undertake such appraisal jointly with
an All India Financial Institution (AIFI).

(h) Banks must ensure that sanction of higher quantum of term finance for such
project which have a comparatively longer gestation period does not lead to any
asset-liability maturity mis-match.

13.3 APPLICATION FOR TERM FINANCE

The prospective borrower should be required to submit the following:

(a) Loan application in standard form.

(b) In case of existing units, Financial Statements of Accounts for the last three years.

(c) Technical Feasibility Report

(d) Market Survey Report

(e) Estimated Cost of Project and Means of Finance

(f) Projected Cost of Production & Profitability

(g) Projected Funds Flow Statement

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(h) Projected Balance Sheet.

A questioner as may be required to be filled in by the borrower at the time of approach is


furnished in Annexure I.

NOTE :

In case the borrower has submitted application for Term Finance assistance (Term Loan/DPG)
to All India Financial Institutions in their prescribed Format, a copy of the same shall be
obtained and the same shall generally cover the information/particulars mentioned above.

Broad guidelines in regard to the appraisal and follow-up of term loans are given in this chapter.
These guidelines are also applicable to deferred payment guarantees and guarantees covering
foreign currency loans obtained from foreign banks etc. as such guarantees constitute long
term commitment of funds on the part of the banks though contingent in nature.

13.4. PROJECT APPRAISAL :

13.4.1 Project appraisal is necessary for evaluation of the project from different angles namely,
management, commercial, technical, financial and economic. With such an evaluation
the bank could justify the long term investment made in a project. The relative
importance of the feasibility study stated above may vary from project to project
depending upon its nature and size. There is no standard criteria for appraising a term
loan proposal and each one has to be decided on merits setting weak points against the
strong points and with striking a balance, an integrated view has to be taken by a
banker.

13.4.2 An illustrative list of important check-points with a brief explanation of different analytical
methods, ratios, formulae etc. generally adopted is furnished below:

13.5. MANAGEMENT :

13.5.1 The most vital input for success of a project is an able management which has the
capacity to optimise the total benefits of investment and tie together the various inputs
to achieve the desired levels of production, sales and profit. Evaluation of the
management calls for qualitative and intuitive judgement and the following aspects,
inter-alia, has to be covered. The Promoter and Management of the Company must
have not only willingness to pay but also ability to pay.

13.5.2 The Promoter :

i) Whether the promoter is new or established one ;

ii) Background of the promoter educational, economic and experience. If the


promoters are established one, the history of evolution, financial position, style of
management, adherence to financial discipline, capacity to withstand adverse
developments, performance of associate/sister concern have to be studied and

130
analysed. Information from market sources, bankers, stock exchanges, published
reports of consultants/merchant bankers etc. have to be collected and studied.

iii) Character: The honesty and integrity of the promoters have to be critically
examined. This could be gauged from the compliance of financial discipline,
commitment kept to financial institutions/banks, transparency of operations,
willingness to provide the bank correct/factual information, disclosure of personal
property/holdings, due payment of income-tax and wealth tax etc.

iv) Entrepreneurial traits like initiative and drive, self-confidence, perseverance etc.

v) Whether the names of promoters/directors appear in the list of defaulters


published by RBI/Bank/CIBIL/SAL have to be checked.

vi) Capacity: This ability of the promoter is of vital importance as it would determine
whether he would be in a position to optimise use of all resources of men,
materials and machinery. It should also be evaluated whether he has the capacity
to implement and manage successfully the nature and size of the project
undertaken and to take moderate risk. His financial soundness to meet any effect
of time and cost overrun and to mobilise resources for completion of the project in
adverse circumstances has to be critically examined.

vii) Involvement in the Project: It is to be examined whether the promoters will have
full involvement in the project. Whether the project would ultimately become a
flagship/major company of the group (if applicable) is also to be looked into. The
involvement in the project shall be gauged from the extent of promoters
contribution, representation in the Board, participation in the day to day
management of the company etc.

viii) In case the project is promoted by any Group, the performance of the group
companies, their financial position, track record have to be analysed.

13.5.3 The Company, Organisation and Share-holding Pattern :

i) The company :

Board of Directors : The composition of the Board, the background and


professional experience of the directors, representation of promoters in the Board
etc. are to be looked into. The Board should be broad-based with a balanced and
homogenous composition of full time and other directors. Will the Board be
capable of acting as a well motivated consultative group comprising of well-knit
multi-disciplinary team of professionals ?

ii) Organisational structure : Whether the organisational structure is adequate and


appropriate to meet specific requirements of the project during implementation
and operational stages taking into account process, procurement, production,

131
marketing, training etc. have to be looked into. The Chief Executive should
possess requisite knowledge and experience in the field.

Delegation of adequate responsibility and authority to various levels of


management and accountability aspects should also be looked into. The internal
control system proposed to be adopted in the areas of production, inventory
controls, personnel etc. should be examined. The proposed accounting and
management information system should be adequate.

iii) Share-holding pattern : The distribution of total equity shares amongst


promoters/group, public institutions etc. and the list of top ten shareholders have
to be obtained and looked into.

13.6. COMMERCIAL :

13.6.1 The commercial viability of a project involves a thorough market analysis and getting
answers to the three basic questions :

i) How large is the market ?

ii) How much the market is likely to grow in future ?

iii) How much the project is expected to capture ?

With a view to enable the Bank to assess the commercial soundness, the following
aspects should be analyzed and the degree of emphasis to be laid on each of the
aspect and the depth of analysis would, however, depend upon the nature of project,
product-mix and size of the market.

13.6.2 Demand :

i) The reputation of the organisation which has conducted the market survey should
be looked into.

ii) The nature of product whether it is manufactured for final consumption (e.g.
foodstuff, edible oils, fans, refrigerators etc.) or for intermediate use (e.g. basic
chemicals like soda ash, HDPE or cement etc.) or capital goods (like machine
tools, earth moving equipments, turbines etc.) has to be ascertained.

iii) The volume of past and present demand for the product.

iv) What would be the likely future demand of the product and the basis of growth
assumed. The data should cover a reasonably long period say, 7 to 10 years,
depending upon the nature of the product and the product life.

v) What are the substitutes for the product proposed to be manufactured?

132
vi) All alternative methods for forecasting the aggregate demand by various models
and by different organisations are to be compared and the most appropriate
demand forecast has to be accepted.

Some of the methods available for demand forecast are past trend method based on
past data and future macro-level projections, end-use method (generally adopted in
respect of many consumer goods/intermediate products), comparisons of consumption
levels and trends, export possibilities or import substitution requirement using different
techniques such as Econometric Methods to measure the effect of price variation,
income variation or both on demand, co-relation and regression (whether demand is
related to some other line of activity, e.g. demand for cement or tiles depending on
construction activity) etc. The forecast of demand made by National Council for Applied
Economic Research, Planning Commission, Development Councils are sources of
market information for comparison with the demand projections made in the project
report.

13.6.3 Supply:

i) From the same, the current volume of supply of the product taking into account
both domestic production and imports have to be ascertained. For certain
products diversion towards captive consumption has also to be looked into.

ii) Information on the major manufacturers in the country for the product, their
installed capacity, capacity utilisation and production for last 3 or 4 years have to
be collected.

iii) The projects under implementation and the fresh licenses issued for new capacity
out of which capacities likely to be installed and their output have to be viewed
and the sum total of output from the existing units as well as new units should be
worked out for future 7 to 10 years. The Govt. Policy on imports has to be looked
into. The supply made out of imports should be added to the domestic production
to arrive at expected future supply position.

13.6.4 Consumers :

i) The list of potential buyers and consumers and intermediate users has to be
looked into.

ii) The consumer preference in regard to brand, quality, product range etc. should
also be seen.

iii) The geographical, sectoral or seasonal consumption pattern have to be


ascertained.

133
13.6.5 Market and Market Share :

i) The gap between present and projected demand (including exports) and supply
(including imports) for 7 to 10 years should be assessed.

ii) The ability of the project to face competition in the spheres of quality, pricing,
terms of sale and after sales service should also be looked into.

iii) Considering the total market size, gap between demand and supply, the realistic
share in the market the project is expected to capture could be assessed.

13.6.6 Market Environment :

The licensing and fiscal policy of the Government in relation to the industry, incentives
provided such as subsidies, exemption from duties, taxes etc. available for the project
have to be looked into.

13.6.7 Other Commercial Aspects :

The marketing plan, pricing policy and distribution policy of the project should also be
examined.

13.7 TECHNICAL :

13.7.1 Process Technology :

i) The reputation, qualification and experience of the consultants who have prepared
the technical feasibility report have to be looked into.

ii) While preparing the technical feasibility study whether the consultants have taken
all possible alternative production processes and uses of alternative raw materials
and the reasons behind the final choice of the technology has to be examined.

iii) It has to be found out whether the manufacturing technology proposed to be


adopted has taken into account the various factors such as location, climate,
availability of inputs and utilities, availability of standard plant and machinery,
quality of the product and product-mix.

iv) Whether the technology is conventional or modern has to be seen. If modern


technology is proposed to be adopted, the degree of obsolescence, as also
whether such technology has been used in the country successfully have to be
seen.

13.7.2 Technical know-how/consultancy :

i) The arrangement for securing technical know-how (both process and engineering)
and consultancy services has to be evaluated; the background of technical

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collaborators both Indian/foreign, their experience in operating standard of other
projects where they were associated are to be verified.

ii) The technical collaboration agreement should be comprehensive and the


following points are to be covered to the satisfaction of the Bank :
a) Mode of transfer of technology and upgradation of the same for the future.
b) Scope of services to be rendered for implementation and operation of the
project.
c) Training of personnel in India/abroad in similar plants.
d) Performance guarantees covering quality of engineering, per- formance of
the plant, operating level, output/input quality of raw materials and utility.
e) Wastage factors for raw materials and rejection rate of finished products.
f) Provision of penalty for delayed commissioning and adverse input-output
performance.
13.7.3 Size of the plant :

i) It is to be carefully ascertained as to whether the size of the plant is economic


(smaller plant size may make the plant unviable because of higher cost of
production while an extra-large plant may not be able to sell the output),
considering the type of industry, technology adopted, availability of
standard/proven plant size operating in the country/abroad etc.

ii) The flexibility of the plant in respect of forward or backward integration,


expansion, use of alternative inputs (i.e. use of natural gas or naphtha for fertiliser
production) and variation in product-mix have also be looked into.

13.7.4 Plant & Machinery :

i) The basis of selection of plant and machinery and other equipments have to be
examined. Whether such selection have been made after competitive bidding
taking into consideration capacity, price, quality and overall suitability for the
process technology proposed to be used and scale of output specified should be
evaluated.

ii) Section/division-wise capacity of various items of plant and machinery should be


ascertained and it should be seen that capacity of various sections are balanced.

iii) The procedure for procurement of plant and machinery and other equipments,
whether on turn-key basis or by placing orders with different manufacturers have
to be looked into.

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iv) Whether the list of machinery and other equipments is comprehensive and
whether all the auxiliaries and equipments for utilities have been included are also
to be seen.

v) The reputation of the suppliers of indigenous/imported machinery and timely


delivery are also important. Whether the agreement or contract, inter-alia, include
penalty clauses for late delivery and replacement conditions/uninterrupted supply
of spares and performance guarantee for workmanship, quality, output/input are to
be looked into.

13.7.5 Location : The suitability of the size of the project should be examined with reference to
its locational advantages such as infrastructural facilities, availability of raw materials,
skilled labour, nearness to the market, climatic conditions of the location, soil
topography, transportation facility proneness to the natural calamities. Social
infrastructural facilities such as housing, schools, hospitals, recreation etc. are also to
be looked into. The aspect of effective effluent disposal and pollution control etc. have to
be ensured. It should be seen that the site selected is the best one after taking into the
various factors stated above vis-a-vis other alternative sites.

13.7.6 Lay-out : As to whether the plant outlay proposed by the consultants have taken into
consideration aspects of smooth process flow and minimum manufacturing time,
economic movement of man and materials, suitability of the buildings and structure,
proper utility service systems, adequate storage and handling facilities at the production
point, overall integration and safety factors. The scope for future expansion should be
embodied in the plant lay out.

13.7.7 Raw materials and other inputs :

a) It has to be ensured that the raw materials and consumable in required quantity
and acceptable quality should be available for smooth production.

b) If the raw materials are agricultural products (for example, sugarcane, bamboo,
rice bran etc.) the procurement zones should be looked into and arrangements for
development of cultivatiion in the procurement zone should be taken into account.

c) If the raw materials are minerals, the estimated quantity of proven reserves have
to be ascertained and the same should be based on the reports of GSI, ONGC
etc. The arrangement for proposed lease of mines, quarries etc. should be
satisfactory.

13.7.8 Utilities : The requirements, sources, availability, reliability and cost of all the utilities
such as power, water, fuel etc. are to be ensured. Necessity for making provision for
alternate source of supply of vital utilities (say captive power plant/diesel generating set
for power) should be examined.

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13.7.9. Labour : The availability of skilled and supervisory manpower in the vicinity of the
proposed site is definitely advantageous. In case the technical and skilled manpower
have to be brought from distant places, accommodation and other infrastructural
facilities for their stay have to be provided.

13.7.10. Effluent disposal/pollution control :

a) The arrangements for disposal of effluents whether liquid or gaseous particularly if


the proposed project is a chemical plant have to be ensured.

b) It has to be ensured that adequate arrangement for pollution control has been
made to the satisfaction of statutory authorities.

13.7.11. Project scheduling and monitoring :

The timing and sequencing of various activities involved in project implementation i.e.
from the concept stage to the final commissioning should be properly planned and
scheduled. Adequate arrangement for monitoring and implementation of the project
should be drawn up.The company should adopt Project Evaluation and Review
technique (PERT) , Critical Path Method (CPM), barchart etc so that implementation of
the project remains on projected schedule and no time-overrun (and consequential cost-
overrun) takes place as the same may jeopardise the viability of the project altogether.

13.8. FINANCIAL :

13.8.1 General :

The examination of the financial viability of a project is done with the following
objectives :

(a) To ascertain that the cost estimates of the project are realistic.

(b) To ascertain that right type of finance in required quantity will be available at the
right time.

(c) To ascertain the likely earnings of the project from operations based on the
projected cost of production and profitability.

(d) To fix up the time limit after which the repayment should commence and the total
period of repayment in view of the cash accruals of the unit.

13.8.2 While examining this aspect, the following points should be looked into.

(a) Cost of Project.

(b) Means of Financing.

(c) Projected Cost of Production and Profitability.

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(d) Projected Funds Flow.

(e) Projected Balance Sheet.

13.9. Estimated Cost of the Project :

The cost of the project submitted by the party should be examined to see that it is as realistic as
possible and that nothing is left out which has got a bearing on the cost structure. A realistic
assessment of the project cost estimates at the initial stage is essential to ensure that the
forecasts of profitability and cash flow do not go astray. Experience has shown that very often
projects suffer from sizeable cost overruns, the one that is common in majority of the cases is
the adoption of adhocism at the time of working out the estimates.

The various items to be taken into consideration for estimation of the project cost are given
below :

13.9.1 Land

In case the entire land is purchased as a free hold property, the cost including
Conveyance charges should be taken into account. In case the land is taken on lease,
premium payable on the land together with the Conveyance charges as also the rental
to be paid till the period of construction is over (i.e. until the operation starts) should be
taken into the consideration.

Under this head, other costs with regard to development and levelling of land,
construction of approach road inside the factory, fencing gates etc. should also be
included.

13.9.2 Building

It should include cost of -

i) Factory buildings for the main plant & equipment ;

ii) Building for auxiliary services like steam supply, water supply, laboratory,
workshop etc ;

iii) Administrative buildings, godowns, warehouses and stores ;

iv) Miscellaneous non-factory buildings like canteen,guest house, time office,


quarters for essential staff;

v) Silos, tanks, wells, chests, garage etc ;

vi) Sewers, drainage,

vii) All other civil engineering works excluding the foundation of machinery; and

viii) Architects service

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The entrepreneur should be required to provide information in respect of type of
buildings, type of construction, numbers of floor, built up area, rate per sq. feet and
estimated cost. It is also desirable to go through the contracts entered into with different
contractors in respect of the construction of the buildings which may contain escalation
clauses which affect the cost of estimation at a later stage.

13.9.3 Plant & Machinery :

In case of imported machinery, the FOB value of the machinery together with ocean
freight, insurance, loading and unloading and inward freight to the site should be taken
into consideration.

In case of indigenous machinery, the cost and octroi and other taxes/charges, if any,
and inward freight to the site should be taken into consideration.

Adequate provision for the stores and spares should be made. Foundation and
installation charges on the imported as well as indigenous machinery should be
provided.

While examining the plant and machinery cost, tenders/quotations received from the
suppliers should be gone through to ascertain the extent of firm and non-firm estimates.

13.9.4 Technical know-how fees :

In case the company has entered into any technical collaboration with foreign or Indian
company, the fees to be paid and the expenses on the drawings etc., payable to the
collaborators should be taken into consideration.

13.9.5 Expenses on Foreign Technicians :

Expenses to be incurred on retaining the foreign technicians for installation of


machinery and commissioning of the plant and the expenses to be incurred on the
Indian technicians to get them trained either within India or abroad should be included in
the project cost.

13.9.6 Miscellaneous Fixed Assets :

Miscellaneous Fixed Assets usually include the items like furniture, office machinery
and equipments; miscellaneous tools and equipment including erection tools, cars,
trucks etc; railway siding; power requirement including cabling for distribution of power
and lighting for factory and colony, equipment and piping for supply and treatment of
water including cost of installation; as also for supply of steam and air etc; laboratory
equipment, workshop equipment, fire equipment and other fixed assets.

The expenditure on all the above accounts should be shown separately and included in
the project cost.

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13.9.7 Preliminary and Capital Issue Expenses :

Brokerage and commission on capital issue and other capital issue expenses like legal,
advertisement, printing and stationery etc. and other initial expenses for floating the
company should be taken into consideration while arriving at the total cost of the
project.

13.9.8 Pre-operative Expenses :

The expenses which are incurred till the plant goes into production are called pre-
operative expenses and include interest during pre-operative period and commitment
charges on borrowings, insurance during the construction, mortgage expenses., interest
on deferred payment,if any, and start-up expenses. It should be ensured that all these
expenses have been provided for in the cost of project.

13.9.9 Provision for Contingencies :

It would be observed from the above that all the expenses proposed to be incurred are
only estimates except for the one for which firm offers are obtained. In some cases, the
promoter company gets firm offers to which extent no contingency need be provided. In
case, contracts entered into by the company contains escalation clause, adequate
provision should be made towards contingency on non-firm estimates. Provision for
contingency on a judicious consideration may be made depending upon the inflationery
trend in the market and the period of project implementation.

13.9.10Margin Money for Working Capital :

Margin money has to be provided for availing of working capital facilities from the bank
and such margin money should be taken into account in the project cost.

Estimated requirements of the working capital should be based on realistic assumptions


concerning the amount of stock of raw materials, consumable stores, spares, goods-in-
process, finished products and receivables. 25% of the total current assets should be
financed by long term sources and included in the capital cost of the project.

13.10. Means of Financing :

13.10.1After appraisal of the cost of the project, the financing pattern proposed by the
promoters/entrepreneur has to be examined.

The usual sources of financing of the project are :

(a) Share Capital

(b) Internal Accruals for existing undertakings.

(c) Foreign Currency or Rupee Term Loans from Financial Institutions/Banks.

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(d) Deferred Credit.

(e) Public Deposit

(f) Convertible/Non-convertible Debentures

(g) Capital Subsidy or development loans/sales taxes loans

13.10.2The various sources could be broadly classified into two categories-equity capital and
borrowed capital. The ratio between the two categories of funds may vary considerably
depending on the nature of the project, project size, expected profitability and the
background/financial resources of the promoter/group which should comply the
benchmark level as enumerated in the Lending Policy.It is also to be seen whether the
internal accruals (in case of existing companies) as also availability and cost of funds
vis--vis profit earning capacity of the project have been kept in view while preparing the
financing plan. The promoters contribution as percentage of cost of the project should
be acceptable to the Bank. In the matter of raising capital by issue of share
capital/debentures/bonds, it is to be examined whether SEBI guidelilnes and listing
requirements of the Stock Exchanges would be fulfilled. Where foreign currency loans
are to be raised, the same should be adequate to meet the foreign exchange cost of the
project.

13.10.3An undertaking from the promoters of the project should be obtained to the effect that
they will meet the cost overrun, if any, during implementation of the project and its
commissioning. The sources from where they would meet the overrun has also to be
ascertained.

13.11. Projected Cost of Production and Profitability :

13.11.1 While preparing the projected cost of production and profitability, various
assumptions are made by the entrepreneur/promoter. The Bank should first see that the
basic factors taken into consideration to arrive at the production figure, such as installed
capacity per annum, number of working days in a year, number of shifts per day,
capacity utilisation level during initial years till optimum output of the projects reached,
are realistic and where applicable are comparable with the performance of similar
industries located in the country.

13.11.2While examining the cost of production, it should also be ensured that a realistic
assessment of the cost of various inputs like raw materials, consumables, powers,
water and fuel, wages and salaries, repairs, maintenance, other manufacturing
expenses has been made. Wastage factor for raw-material and rejection rate for
finished goods, where applicable should be assumed. There should also be provision of
say 5% to take care of possible increase in the various items of cost. Further, in respect

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of Wages and salaries a provision of say 5% increase at the end of each year should be
made to take care of the normal increase in wages.

13.12 BREAK EVEN POINT

13.12.1While looking into financial viability of the project, it is also desirable to look into the
Break-Even Point. Break even point indicates the production or price level at which the
project would balance its expenditure and sales. An illustrative example about
calculation of break even point is given in Annexure II.

13.12.2Break even point enables the project appraiser to determine the in-built margin of safety
in the project to take care of any fall in demand and/or fall in unit selling prices. A project
with a lower break even point in terms of capacity utilisation will have greater chances of
success than a project with a very high break even point. In other words, the project
with a low break even point is less riskier than a project with a very high break even
point.

13.12.3 While examining the profitability aspect, it should also be ensured that there will be
sufficient profit commensurate with the capital employed, the capability of the project to
cover the payment of interest and loan instalment should also be ascertained by
calculating the Debt Service Coverage Ratio and Priority Obligation Ratio (Explained in
detail in Chapter III: Financial Statements, their Analysis & Interpretation).

13.13 Projected Funds Flow Statement:

Funds flow projections help in keeping a track of the sources and uses of funds. It is important
to ensure that funds will be available when they are needed, be it during the construction period
of a project or the operation period. The quantum of share capital to be raised may have been
decided upon and the loan assistance may have been sanctioned by the financial institutions;
but if there is not sufficient flow of funds to meet the various claims as and when they arise, the
entire project may be in jeopardy resulting in delay, overruns and litigation. Likewise, a project
may be in danger of technical insolvency during the operational period if the proper estimates
of the receipts and disbursements of cash and the provision of their timely and adequate supply
is not made.

13.14 Projected Balance Sheet :

Based on the projected cost of production and profitability and funds flow statement, the
projected Balance Sheet is drawn. The position of share capital, term loans, sundry creditors,
bank borrowings, fixed assets, inventory, sundry debtors and the preliminary expenses (after
deducting the amount already written off) are ascertained at the end of each year.

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13.15 IMPORTANT RATIOS FOR PROJECT APPRAISAL

(1) Promoters contribution as Percentage of Project Cost :

The contribution made by the promoters by subscribing to the equity capital of the
company as percentage of cost of the project should be worked out. A minimum
promoterss contribution of 20% of the project cost is normally expected.

(2) Break-even Analysis :

This is an important tool to assess earning capacity of the project. Break-even point can
be expressed in terms of volume of production or sales value or percentage of installed
capacity. For purpose of project appraisal, however, banks/financial institutions
generally calculate the break-even point in terms of percentage of installed capacity.

i)BEP in unit = Fixed Cost/Contribution per unit ( sales- variable cost per unit)
II) BEP (sales) = BEP (unit) x sales price per unit
iii)BEP (unit)/Installed capacity x 100
The capacity utilisation should be above BEP level for the project to earn profit.

(3) Debt-Equity Ratio, (4) Fixed Assets Coverage Ratio, (5) Debt Service Coverage Ratio,
(6) Priority Obligation Ratio, (7) Current Ratio, (8) Other Operating Ratios are to be
calculated and interpreted (For details, please see the Ratio Analysis in Chapter III).

13.16 SENSITIVITY AND RISK ANALYSIS :

13.16.1Sensitivity Analysis :

The various items entering the cost-benefit stream of the project whose viability is being
appraised on the basis of estimates and forecasts are subject to various uncertainties.
Sensitivity analysis is a process by which the effects of assumed changes in the values
of key variables such as revenues, cost, size of outlays etc on the present value of the
project is worked out.

The objective is to assess the risks and uncertainties involved in the investment
decision of the Bank so that necessary corrective steps could be taken by the promoters
or the bank/financial institution assisting the project. The effect on break-even point
(BEP) and/or debt-service coverage ratio (DSCR) due to variation/change of a major
item could be ascertained through sensitivity analysis. For instance, if there is any
increase in the project cost say by 5%, the additional resources that have to be
mobilised and whether the same should by way of equity or funding through raising
additional term loan or a suitable mix of the two could be decided by the promoter/bank
looking at the changes in the break-even point or the DSCR so that these important
indicators remain within the acceptable level. Similarly, sensitivity analysis may be made
for ascertaining likely impact on viability arising out of some uncertain factors like fall in
demand and/or selling price, along with increase in the cost of production etc. For

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Example, in a sugar project of 1,250 tonnes a day of crushing capacity, the profitability
projections might be made on the basis of availability of say 2 lacs tonnes of cane with
11% recovery. The possibility of resistance from the farmers to switch over to sugar
cane cultivation, inadequate availability of irrigation facilities, lower recovery and of
diversion of cane towards the manufacture of jaggery etc., cannot be ruled out.
Consequently, parameters assumed for working out the profitability may not be
achieved and it would be desirable to prepare sensitivity study on the basis of reduced
availability of sugar cane and lower recovery etc.

From the point of view of the bank, while appraising a project, the sensitivity analysis is
of particular importance as the promoters of the project seeking financial assistance are
generally keen to establish high profitability of the project based on assumptions made
on a rather optimistic basis. The soundness of the project should, therefore, be
subjected to the scrutiny of sensitivity analysis to assess the effect of unfavourable
circumstances/factors thereon.

13.16.2Risk Analysis :

The main element of project-risks and the manner in which the promoters have
addressed their mitigation have to be studied. The list is only indicative and would vary
depending upon nature and size of the project. For detail guidelines the latest lending
policy of the bank to be followed.

13.17. ECONOMIC :

While appraising the project from economic aspect, the following points may be looked into

i) Does the project belong to a sector which has been accorded priority in the National
Development Plan ?

ii) Will the project save/contribute to foreign exchange earnings through import
substitution/exports ?

iii) What social benefits will accrue from the project ?

iv) What are the ecological hazards to be produced by the project?

v) What are the preventive and safety measures proposed?

13.18 DECISION :

1. The decision of the Manager about the credit request should be based on sound
analysis of factors mentioned in the foregoing pages and also subject to pre-sanction
inspection (Format for which is enclosed in Annexure III.

2. It should be noted that the above description represents comprehensive appraisal of the
project. The depth and dimension shall vary depending upon nature, size and outlay of

144
the project. The Manager shall have to decide on the points on which proper emphasis
has to be laid. In case the Manager feels difficulty in appraising the project, he may
seek advice and guidance from his Regional Head.

3. If the Manager decides favourably about the credit request then next step is to
determine the quantum of advance which should always be need based. The aspect of
dispersal of risks in case of consortium/multiple Banking arrangement should also be
kept in mind. As mentioned earlier, the requirements of an industrial unit falls into two
categories :

(a) Term Loan or Deferred Payment Guarantee Facility

(b) Working Capital Facility.

4. Term Loan or Deferred Payment Guarantee Facility is extended to finance the


acquisition of fixed assets. Therefore, quantum of term loan can be worked out by
deducting the margin amount from the cost of acquiring the fixed assets to be financed.
Generally, a higher margin in case of buildings and machinery may be insisted. Term
Loan should be subjected to a repayment programme which should be based upon the
fund flow statement. For large projects assisted by the All India Financial
Institutions/Banks jointly, uniformity in approach may be called for .

5. The assessment of need based working capital requirement of the unit may be made
carefully and reference may be made to Chapter XIV on Bank Finance/Working Capital.

6. If the amount involved is large, it is necessary to stipulate conditions regarding


ploughing back of earnings, restriction on dividends, strengthening the managerial
competence etc. The conditions are to be tailor-made depending on background and
financial soundness of the promoters, nature, size and outlay of the project, proposed
exposure of the Bank, security available etc. with a view to exercise proper control on
the account and safeguarding Banks interest.

Branches are advised to refer to the terms and conditions and covenents generally
stipulated by the Bank in handling of Credit proposals and to take a view on proposal -
specific terms and conditions and covenants suitably.

13.19. DISBURSEMENT, SUPERVISION AND FOLLOW-UP

13.19.1It is needless to emphasize that credit discipline in appraisal, sanction, monitoring and
end-use of bank finance has to be ensured. Even when a comprehensive appraisal has
been made and sanction accorded judiciously the same would be of no avail unless the
branches ensure post sanction close supervision and follow-up both during
implementation period and operative years.

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13.19.2 Once sanction is accorded on a proposal, the branch shall advise the sanction to the
borrower alongwith stipulated terms and conditions and obtain acceptance of the terms
and conditions by the borrower and keep the same along with the documents. The next
stage would be completion of documentation formalities, creation and registration of
charges etc. which have been dealt with in details in other Chapters. Disbursement
should commence only after sanction stipulations are duly complied with.

The Branches through periodical visits and obtention of information/data should ensure
that :

(a) the loan is disbursed according to the programme/in phases as approved by the
Sanctioning Authority after the pre-disbursement terms and conditions regarding
tie-up arrangements with other financial institutions/banks, broad-basing of the
Board, strengthening of the management set-up, etc. are complied with and the
promoters contribution stipulated is actually brought in at each stage, and that the
disbursement of instalments is related to the progress of implementation of the
Project. In general, pro-rata disbursement should be made by the Bank in case of
projects assisted jointly by All India Financial Institutions and banks ;

(b) The loan is used for the purpose for which it is intended, and incase of deviation in
respect of any aspect of the scheme, approval of the appropriate authority is
obtained ;

(c) The progress made in implementation and operation is according to the time
schedule drawn, deviation, if any, is for valid reasons and appropriate steps are
taken to reduce delays ;

(d) The cost incurred on the project is kept within the estimate and reasons for
overrun, if any, are examined carefully;

(e) The land, building, machinery etc. mortgaged/hypothecated are maintained in


good order by the borrower ;

(f) The inventory position is satisfactory;

(g) Required margins are maintained in the account at all times;

(h) The stipulated instalments/interest are paid regularly and promptly (in case of
defaults or delay in payment, the reasons should be looked into);

(i) The borrowing unit is functioning properly (to ensure this, the branch should have
a proper procedure of obtaining and scrutinising quarterly progress reports,
startement of expenditure incurred (with sources) and assets created out of the
same at quarterly intervals annual financial statements etc. as also
maintaining personal link with the management of the unit through periodical post-
disbursment inspection etc); and

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(j) The difficulties/deficiencies, if any, experienced by the unit in the course of
implementation of the scheme or in the smooth functioning of the unit after the
scheme has been implemented and any deviation from the stipulations made by
the Sanctioning Authority (major deficiencies could be absence of proper
organisational set-up, inadequate maintenance of plant and machinery, absence
of effective controls on purchase of raw materials, rejections, etc., lack of
appraisal of market potential, market fluctuations and other environmental factors
affecting sales).

13.19.3 In the event of any act of misfeasance/malfeasance on the part of the units
management coming to notice, the bank should safeguard its position by obtaining
additional security e.g., shares including shares of the company held by the promoters,
immovable property, personal guarantees of directors/third parties, etc.

13.19.4 The main purpose of supervision and follow up outlined above is to see whether
the project is progressing as originally scheduled and the working of the unit on
commissioning is satisfactory.

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ANNEXURE -I

QUESTIONNAIRE FOR FINANCIAL ASSISTANCE

1. General :

1.1. Name of Industrial Concern :

(BLOCK LETTERS)

1.2. Location : i) Regd. Office

ii) Head/Controlling Office

iii) Existing/Proposed factories :


1.3. Constitution :

1.4. Date of Incorporation:

1.5. Brief History of the concern :

1.6. Lines of manufacture :

(Furnish details for each division A B C D


If there are more than one)

1.7. Date of commencement of Commercial Production:

1.8. Authorised Capital :

Issued

Subscribed

Paid-up

Calls in arrear

(If changes proposed, please furnish details)

1.9. Particulars of top TEN shareholders of the company :

1.10. Financial Assistance required :

Nature of Facility :

(a) Grant of Term Loan.

(b) Guarantee for Deferred Payment arranged from machinery suppliers.

(c) Underwriting of Shares or Debebtures

(d) Working Capital Assistance

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1.11. If Term Loan is required please indicate amount of loan, how it is proposed to be drawn.

1.12. If Deferred Payment Guarantee is required, please describe in detail the arrangements
for deferred payment, including inter alia, the following :

(a) Name of beneficiary

(b) Goods covered by Deferred Payment

(c) Initial payment to be made by the applicant to the suppliers.

(d) Amount to be covered by Deferred Payment Guarantees. Principal and interest


figures to be separately indicated together with rate of interest.

(e) Period of the guarantee

(A copy of the agreement with the suppliers and a copy of Government approval of
Deferred Payment Agreement to be furnished, where applicable)

1.13. If the request is for underwriting, the following particulars are to be furnished :

(a) Details regarding Share/Debenture Issue.

(b) Other underwriting arrangement

(c) Listing arrangements made/proposed to be made with Stock Exchange

(d) Copy of sanction from the Controlling of Capital Issue.

(e) Copy of the Draft Prospectus.

1.14. If any other assistance is required, details thereof may please be given.

1.15. Particulars of applications made to other Financial Institutions/Banks for the project and
the latest position in respect of the same.

1.16. Borrowing powers of the company :

(a) Reference to the relevant Clause/Article of the Memorandum and Articles of


Association or bye-law which enables borrowing, may please be given.

(b) If the applicant is a company, please mention if necessary resolution has been
passed in terms of section 293 (1)(d) of the Companies Act if the total borrowings
of the company exceed its paid-up capital and free reserves.

2. Management :

2.1. Names and addresses of the promoters along with their educational/professional
background, business and industrial experiences.

2.2. Existing/proposed shareholdings of Promoters/Director ;

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2.3. List of concerns with which promoters are connected as proprietors/partners directors
and also particulars of associate/allied concerns and their principal bankers.

2.4. If the company belongs to a group of affiliated companies, please give brief particulars
of the group and the relationship of the company with it.

2.5. Particulars of credit limit enjoyed by the affiliated firms/companies with our Bank.

3. Past Performance of the Company :

3.1. Please furnish a statement for the last 3 years showing production in quantity and sales
in quantity and value (for individual units located within India).

Licenced/Registered Installed Production Sales Sales


Capacity Capacity (Quantity) (Quantity) (Value)

3.2. Estimated production and sales after implementation of scheme.

3.3. Please furnish three copies of the Audited Balance Sheet and Profit & Loss account for
the last three/five years.

4. The Project :

General :

4.1 Please state whether financial assistance relates to new project, expansion
modernisation or diversification. (Please enclose a project report/techno-economic
feasibility report prepared by a reputed consultancy bureau experts, if available).

4.2 Please enclose a certified copy of the Certificate of Registration/Lincence under the
Industries (Dev. & Regulation) Act, 1951, for undertaking the project/substantial
expansion of the existing unit.

Technical :

4.3 Please furnish the present installed capacity (mentioning shift basis) for each of the
products and installed capacity after the project is completed.

4.4 Please furnish the planned production capacity and the basis on which it has been
arrived at.

4.5 Please indicate the progress already made regarding planning, design, construction,
order placement etc

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4.6 Mention other arrangements made/to be made as regards acquisition of land, land
development, construction of buildings, shed, purchase of plant & machinery, import
licence formalities for implementation of the project. A detailed list of plant & machinery,
cost, sources of supply, manufacturers, specifications etc to be enclosed.)

4.7 Do you have technical collaboration/consultancy arrangement? If so, give details.

4.8 Please enclose Plant lay-out.

4.9 Describe briefly the Technical Process involved (submit process flow chart).

4.10 Indicate approximate time schedule for implementation of scheme.

4.11 Describe briefly proposed site/location along with the infrastructural facilities available. If
the unit is proposed to be located in a declared Backward Area, please state incentives
to be available from Central/State Government(s).

4.12 What is the estimate of indigenous/imported raw materials requirement and


arrangements made for ensuring regular supply of the same.

4.13 What is the estimated power requirement (in KWH) showing peak demand and sources
of supply and whether the necessary sanction has been obtained from the appropriate
authority, if so, a copy to be enclosed.

4.14 What is the estimate of water and fuel requirement and arrangements made for.

4.15 Please furnish requirement of skilled, unskilled labour and availability.

4.16 Please furnish qualifications and experience of Senior Technical Accounts and
Administrative Personnel along with an organisation chart

5. Cost of Project : Means of Finance :

5.1 Please furnish details of Capital Cost of the Project and Means of Financing as
mentioned in the application.

5.2 Details of financial arrangement proposed to be made with other Banks/Financial


Institutions.

6. Profitability of the Project (as per annexures) :

6.1 Please furnish Projected Profitability Statement.

6.2 Based on the indicated sources of finance and profit forecast, please submit projected
Funds Flow Statement. (This should indicate availability of adequate funds at various
stages during the full term of the loan.)

6.3 Based on the cost of production and sales estimates please furnish Break-Even Chart.

151
6.4 From the foregoing forecasts, please submit projected Balance Sheets for each year of
the currency of the loan.

NOTE : The projected Cost of Production & Profitability Statement, projected Fund Flow
statement and Projected Balance Sheet should be submitted both for the Project and
the company as a whole if there are other divisions also.

7. Working Capital Requirement of the Project :

7.1 Please furnish assessment of Working Capital requirement in different phases stating
clearly the basis of estimation and stocking policy.

8 Marketing :

8.1 Please enclose a copy of Market Survey Report, if available.

8.2 Sales/Marketing Network arrangements to be indicated.

9 Security :

9.1 Indicate the nature of security to be offered to the Bank against various facilities asked for.

9.2 Names and addresses of Guarantors and their estimated worth (as per wealth tax return, if
applicable).

10 Repayment :

10.1 Repayment schedule of Term Loan/Deferred Payment as proposed by the company.

Declaration

We hereby declare that the information given herein and the statements and other
papers enclosed are to the best of our knowledge and belief, true and correct in all
particulars.

..

(Signature)

Additional Enclosures :
Besides the forms and statements cited above, three copies each of the following to be enclosed
wherever applicable.
Governments & other Clearances/Approvals
It should be ascertained whether the borrower has obtained consents/approvals as below (wherever
applicable) in connection with the unit to be financed.
(a) Industrial licence/letter of intent/registration with DGTD.
(b) SEBI clearance for issue of Capital.

152
(c) Consent for technical collaboration arrangements.
(d) Clearance for capital goods.
(e) Import licence for plant and machinery
(f) Allocation of raw materials, imported/indigenous.
(g) Approval from State Pollution Control Board.
(h) Environmental clearance from Ministry of Environment & Forests.
(i) Commitment for supply of water and power.
(j) Any other approvals and consents, e.g., mining lease, foreign exchange permission etc.

153
ANNEXURE - II

Example on Break Even Analysis

Break-even point measures the operating strength of the business. To /measure break-even sales,
fixed cost, variable cost and contribution are to be calculated (example of Chapter-III).

Variable Cost

Account Head Amount (Rs)

Raw materials consumed 35,115


Wages & Bonus 1,247
Carriage Inward 29
Stores & Spares 358
Power, Fuel & Water 1,886
Excise Duty 5,106
43,741
Fixed Cost : 7,158
Total Cost : 50,899
Sales : 51,685
Variable cost : 43,741
Contribution : 7,944
Fixed Cost : 7,158

Total Fixed Cost 7158


Break-even Point = x 100 = x 100
Total Contribution 7944
= 90.11%
Break-even sales = 51685 x 90.11%
= 46573
Total Sales - Break-even sales
Margin of safety = x 100
Sales
51685 - 46573
= x 100 = 9.89%
51685

This means that if the volume of sales falls by 9.89 per cent, the company will be just at the break-
even point.

154
United Bank of India
Pre-Sanction Inspection Report

Date of Inspection :

Branch _________________

1. Applicants/Borrowers name in full with name of Unit

(a) Registered Address

(b) Office Address

(c) Units address

(d) Details of Telephone Nos.

(e) Age of the borrower/applicant

2. Fathers name of the applicant/borrower

3. Residential address of the applicant/borrower

4. Date of establishment of the unit

5. Whether rented/owned/under lease agreement

6. Terms of agreement

7. Line of business :

8. Trade License/Textile license/Driving license etc. as the case may be obtained?

9. Accessibility from the Road/Railway Station by vehicles

10. Provision for electricity, water supply etc.

11. Security aspect; distance from Police Station, boundary wall etc.

12. Availability of floor space. Whether the space is adequate to achieve the projected business ?

13. Possibility of Insurance Coverage.

14. Identical business in and around the unit :

(a) Nos.

(b) Their condition

(c) Whether any of them is our borrower

(d) If so, what is his present position

155
(e) Whether a feed back for the market obtained.

(f) Population of the locality.

(g) Others

15. Whether the location of the unit is conducive to growth?


Signature of the Inspector

156
FINANCING WORKING CAPITAL

TOPIC PAGE NO.

14.1 Assessment of working capital


14.2 Operating Cycle
14.3 Methods of Lending
14.4 Projected Turn Over Method
14.5 Assessment of Working Capital-under First
and Second Method of lending
14.6 Data-base required for Assessment of Working Capital
14.7 Norms for Inventory & Receivables
14.8 Classification of Current Assets & Current Liabilities
14.9 First Method of Lending
14.10 Second Method of Lending
14.11 Computation of MPBF for working capital
14.12 Excess Borrowing Defined
14.13 Exemptions from second Method of Lending
14.14 Relaxation
14.15 Treatment of Term Loan Instalments for assessment
of working capital requirement
14.16 Facility-wise sharing of working capital finance
14.17 Adhoc Credit Limit
14.18 Sharing of Working Capital Finance
14.19 Rate of Interest
14.20 Commercial Paper
14.21 Reporting of credit sanctions to large borrowers to RBI
14.22 Financing working capital under consortium arrangement
14.23 Syndication of Credit
14.24 Discount value of Bills
ANNEXURE I : Overall level of Inventory & receivables
for various industries

157
CHAPTER XI

BANK FINANCE: WORKING CAPITAL

14.1 ASSESSMENT OF WORKING CAPITAL

General

14.1.1 Besides long term fund to take care of the infrastructure (land & building, plant &
machinery etc.), a business organization needs short term fund to acquire different
inputs (raw materials, packing materials, labour, fuel, power, consumable stores &
spares and other miscellaneous expenses) which are absorbed in the process of
production. The produce is then sold and the sale proceeds come back to the pool at
different time intervals as and when paid up by the buyers, sale proceeds thus received
are then again invested in the business for the same purpose i.e., to support and
sustain the activities relating to production and sale.

14.1.2 The process is repetitive or cyclic for an ongoing business unit manufacturing/trading
or servicing etc. The cycle, however, takes definite time to complete, though it is
different for different business units. But what is common is that certain amount of fund
is always necessary to support such activities and the fund always remains blocked at
each stage of the cycle.

14.1.3 But on what factors, the quantum of such blocked fund depends?

The answer is : i) scale of production or level of activity , ii) requirement of different


kinds of inputs, services depending on scale of production, iii) availability of required
inputs, iv) length of the manufacturing process, v) companys policy regarding
maintenance of safety level of final products, vi) terms and conditions of credit granted
to the buyers.

14.1.4 This is so, because certain level of inputs like raw materials will always be there in the
store, certain quantity of semi-finished goods will always be there in the production
pipeline, certain volume of final output will always be there in the godown, certain
amount of accounts receivables will always remain unrealized.

14.1.5 The working fund so blocked generates a class of asset called Current Assets. In other
words, Current Assets are held by the unit to support activities relating to production
and sales. Its quantum depends on scale of production which in turn depends on
market demand of the products.

14.1.6 By definition, Current Assets are those which are expected to be converted into cash
within a period of one year from the date of balance sheet.

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The Current Assets have, therefore, time dimension for their liquidation.

14.1.7 Total Current Assets held by the company does not reveal how much of it has been
financed by way of profit retention or by way of long term funds. Bankers need to know
this aspect and hence the concept of Net Working Capital is important to them. Net
Working Capital (NWC) is the difference between Current Assets and Current Liabilities
including Bank Borrowings.

14.1.8 The net working capital is the extent of deployment of money from long term sources in
building up total current assets of the business. It is the cushion or buffer that provides a
certainly that current liabilities might be met up even if there is a fall in the market value
of current assets.

Gross Working Capital : Gross Current Assets

Net Working Capital : Current Assets Current Liabilities (inclusive of Bank


Borrowings)

It is always undesirable that Net Working Capital is zero or negative.

14.1.9 A firm must have arrangements for working fund which is just sufficient to meet the level
of production and selling. If the working capital is insufficient, production suffers. If it is
excess, there is misutilisation, which is unwholesome for the business.

14.2.1 A lending banker would need to work out the just requirement of working capital of a
given level of activities, on the basis of the assumption that it would make best and
productive use of the fund : Bankers calculation of working capital requirement is based
on operating cycle model.

14.2 OPERATING CYCLE/HOLDING LEVEL

14.2.1 Operating cycle/Holding levels of a firm begins with acquisition of raw materials and end
with collection of receivables. The stages of the cycle are :

- Purchasing of raw materials-for cash or credit.

- Processing them in the factory

- Converting stock-in-progress into finished goods

- Arranging the sale of this finished goods either for cash/credit,

- Finally collection of credit extended for sale.

14.2.2 While the cycle and its stages have got definite time dimension, the cycle would involve
blocking of funds. The duration of the operating cycle/holding level is the sum of the
duration of the stages and the quantum of fund blocked is the sum of the fund blocked
in each of the stages. The stages are :

159
a) Time period to procure raw materials Depends on regularity of supply,
& stores and the average period for transportation time, economy in
which they are in store. bulk purchase etc.

b) The process time required for converting Depends on technology and the
raw materials into finished products. duration of the manufacturing
cycle.
c) Average period for which finished Depends on production pattern,
goods are held in stores and market demand and sales
policy.
d) Average collection period for Depends on the credit policy of
receivables. the business unit and efficiency
of its credit collection
machinery.
The length of the operating cycle equals to (a) + (b) + (c) + (d).
14.2.3. How to calculate the individual components of the operating cycle/holding level :
a) Time period to procure raw materials etc. and their holding in store i.e. months
consumption :
Level of raw materials at the end of a year

Consumption of raw materials per month


b) Time period for which raw materials etc. remain in process i.e. work-in-process
Level of work in progress as at the end of the year

Cost of production per month * (COP)


c) Time period for which the finished goods are held in store
Level of finished goods at the end of the year

Cost of sales per month **

d) Time period for collection of receivables

Amount of book debt/receivables as at the end of a year

Gross sales per month

160
* for cost of production, please refer Annexure - V of Chapter III
** for cost of sales, please refer Annexure- V of Chapter III
Note : 1. The above computation shall have a relevance with the past trend and
may also be decided following the above principle in discussion with the
borrower with reference to actual level of holding required.
2. Stock of spares is generally taken at 5% of inventory level or with
reference to the past trend.
14.3. METHODS OF LENDING :

General :

14.3.1 While the above gives an idea about what is an operating cycle in the matter of
procedure for computation of individual components of the cycle and in the process for
computation of the working capital funds blocked in an operating cycle, RBI has from
time to time, based on recommendations of the various Working Groups/Committees,
issued instructions/guidelines to banks about methods of computation of Maximum
Permissible Bank Finance to borrowal units depending on the size of their credit
requirements.

14.3.2 The concept of Maximum Permissible Bank Finance (MPBF) was introduced in
November, 1975, as part of implementation of the recommendation of the Study Group
to frame guidelines for follow-up of Bank Credit (Tandon Working Group). Over the
years various improvements have been brought about in the system on the basis of
experience gained and suggestions received from Banks and the borrowers. Consistent
with the policy for liberalisation, greater operational freedom has been provided to the
Banks in dispensation of credit.

14.3.3 Reserve Bank of India decided in April, 1997, to withdraw the prescription in regard to
assessment of working capital needs on the concept of MPBF enunciated by the
Tandons Study Group and advised the Banks that proper system may be evolved by
the banks for assessing the working capital needs of the borrowers.

14.3.4 It may be clarified that though the Banks have been given freedom to adopt suitable
methods of assessment for working capital requirements, Banks are, in general, still
following broadly the Reserve Bank of India guidelines based on the concept of MPBF.
As per the said guidelines, for proper assessment, steps to be followed are outlined in
Para 14.11 covering First and Second Methods of Lending based on the norms for
inventories and receivables and classification of current assets and current liabilities as
directed in the lending policy of the banks issued from time to time.

14.4. Projected Turn-over Method (PTOM) :

161
14.4.1 With the object of simplifying the procedure for assessment of working capital
requirements of all the units, the instructions relating to the First and Second Methods
of Lending based on norms for inventories and receivables and classification of current
assets and current liabilities have been replaced by simplified assessment christened as
Projected Turn-over Method/Nayak Committee. This method is applicable for
assessment of the credit requirements of all Units (new as well as existing) whose
fund-based working capital limits are upto Rs.5 crore from the banking system and in
case of IT/Soft-ware sector Rs. 2 crore. As per the above guidelines issued by the
Reserve Bank of India, such units may be provided working capital limits by Banks on
the basis of a minimum 20 percent of their projected annual turn-over. The borrowers
would be required to bring a minimum margin of 5% of the projected annual turn-over. In
other words, 25% of the projected annual turnover should be computed as the total
working capital requirements of which 4/5th (80%) should be provided by the Banks and
the balance 1/5th i.e. 20% should be provided as margin by the borrower. The projected
turnover/output value may be interpreted as projected Gross Sales which will include
excise duty also. Additionally, the assessment of Working Capital requirement of such
unit should be done as per first method of lending and if the requirement so
computed is different than the one assessed on projected turn-over method basis, the
need based working capital finance should be considered by the Bank
judiciously. For Working Capital Assessment of MSME, reference may be made
to Vol-II of Manual of Instructions(MSME Chapter)

14.4.2 The above guidelines under projected turn over method have been framed assuming
an average working capital cycle (expressed in sales value) of 3 months i.e. the working
capital provided would be rolled over 4 times in a year. It is possible that in certain
industries/trade, the working capital cycle may be less than or equal to 3 months and in
all such cases the borrower will receive working capital finance from Bank based on
need base requirement.Where the cycle is longer than 3 months, then automatically
the assessment as per first method will be higher and the bank finance will be
fixed accordingly.

14.4.3 Actual drawings under the working capital limits may be allowed on the basis of drawing
power to be determined after excluding unpaid stocks.

EXAMPLE 1

M/s. X & Co.have submitted their projected turn-over/other financial figures for the next
financial year as under :

Projected Gross Turnover : Rs.100 lac


Raw materials consumption : Rs. 65 lac
Cost of Production : Rs. 75 lac
Cost of Sales : Rs. 80 lac

162
Other Current Assets : Rs. 10 lac
Creditors for goods : Rs. 6 lac
Other Current Liabilities : Rs. 2 lac

Assumptions:

1. The projected Turnover appears reasonable and hence acceptable.

2. Projected level of holdings are as under :

Raw materials : 1 months consumption

Work-in-process : months cost production

Finished goods : 1 months cost of sales

Receivables : 2 months sales

Creditors for goods : 1 months purchases

A. Working Capital Requirement as per Projected Turnover basis

Projected Turnover = Rs.100 lac

The Total Working Capital Requirement = Rs.25% of Rs.100 lac

= Rs. 25 lac

Minimum Margin to be provided by the


Borrower (5%) = Rs.5 lac

Margin available (say) = Rs.6 lac

MPBF = Rs.25 lac Rs.6 lac

= Rs.19 lac

In this case, if margin available is less than 5 lac, the borrower is required to bring
the shortfall portion. In other words, if margin is more than 5 lac, excess would
reduce MPBF whereas if it is less than the required margin (here 5 lac), the
borrower would have to meet up the shortfall.

B. Computation under First Method of Lending :

Raw Materials for 1 months consumption = Rs. 5.40 lac

Work-in-process for months cost of production = Rs. 3.12 lac

Finished goods for 1 months cost of sales = Rs. 6.66 lac

163
Receivables for 2 months sales = Rs.16.66 lac

Other Current Assets = Rs.10.00 lac



Total Current Asset Rs.41.84 lac

Less : Sundry Creditors : Rs. 6 lac

Other Current Liabilities: Rs. 2 lac = Rs. 8.00 lac



The Total Working Capital Gap/Requirement = Rs. 33.84 lac

It will be evident from the above two methods of assessment, the Working Capital
Requirement as arrived at by first method of lending the actual working capital
cycle is more than 3 months.

Minimum Margin to be provided by = 25% of Rs.33.84 lac

= Rs.8.46 lac

Margin Available (say) = Rs.6.00 lac

MPBF = Rs.33.84 (-)Rs. 8.46

= Rs.25.38

Here, the borrower should be given a limit of Rs. 25.38 lac since it is the need
based requirement of the borrower.

EXAMPLE 2

1. The Projected sales of Rs.100 lac appear reasonable.

2. The Projected level of holdings are acceptable as under :

Raw materials : months consumption

Work-in-process : 1/4 months cost production

Finished goods : months cost of sales

Receivables : 1 months sales

Creditors for goods : Rs. 6 lac

Other Current Liabilities : Rs. 2 lac

A. Computation of bank finance requirement under projected turnover method


remains the same as in the Example 1A i.e. Rs.19 lac.

B. Computation under First Method of Lending Method:

164
Raw materials ( months consumption) : Rs. 2.70 lac

Work-in-process (1/4 months COP) : Rs. 1.56 lac

Finished goods ( months COS) : Rs. 3.33 lac

Receivables ( months sales) : Rs. 12.50 lac

Other Current Assets : Rs. 10.00 lac

Rs. 30.09 lac

Less : Sundry Creditors : Rs. 6 lac

Other Current Liabilities: Rs.2 lac = Rs. 8.00 lac

Working Capital Requirement = Rs. 22.09 lac

Minimum Margin to be provided by


the borrower (25% of Rs.22.09) = Rs. 5.52 lac

Margin available (Say) = Rs. 6.00 lac

MPBF = Rs.22.09 Rs.6.00 lac

= Rs.16.09 lac

It is evident from the above, the actual working capital cycle being less than 3
months, the working capital requirements as arrived at under first method of
lending is lower at Rs.16.09 lac compared to Rs.19.00 lac under PTO and a limit
of Rs.16.09 lac may be considered for sanction from the Bank. Actual drawals
may be regulated on the basis of drawing power to be determined by the branch
after excluding unpaid stocks. In the case Selective of Credit Control
Commodities, the margin should conform to RBI directives.

14.5. Assessment of Working Capital Under First and Second Method of Lending:

As stated earlier, Reserve Bank of India has given freedom to the Banks to adopt suitable
methods of assessment of Working Capital requirements. The Banks in general, are still
following broadly the Reserve Bank of India guidelines based on the concept of Maximum
Permissible Bank Finance (MPBF) which have brought in an element of certain degree of
discipline in inventory and receivable holdings and proper use of banks funds. For all other
borrowers ( except certain seasonal industries as specified below) enjoying fund based
working capital limit over Rs. 5 crores, the Bank would continue to follow MPBF method
under 2nd method of lending with a minimum projected margin of 25% of total build up of
current asset which results in the desired level of current ratio of 1.33.

In case of certain seasonal industries like tea, sugar mill, cold storage , brick fileld etc
and certain specified sector like advances to borrowers engaged in construction

165
business and IT and soft ware sector Bank follows cash budget system for working
capital assessment.

14.6 Data-base required for Assessment of Working Capital:

14.6.1 In assessing the requirement of Working Capital for production needs, it is necessary to obtain
requisite information from borrowers and RBI have prescribed forms under its Scheme of Credit
Monitoring Arrangement(CMA). Separate set of forms has been prescribed for general
purpose , for traders and merchant exporters, for Hire Purchase and/or Leasing Companies
and diamond exporters. The revised set of forms has been brought into use from April 1, 1991
which formed the data-base for appraisal by the Banks. Information/particulars in case of
manufacturer borrowers have to be obtained in the following forms.

Form I : Particulars of existing/proposed limits from banking system


Form II : Operating Statement
Form III : Analysis of the balance sheet
Form IV : Comparative statement of current assets and current liabilities
Form V : Computation of maximum permissible bank finance
Form VI : Funds Flow Statement

14.6.2 Apart from the above, the borrower will submit Form VII which is relevant in the case of Term
Loan. The said Form-VII data relates to total cost of the project and sources of finance and the
contents have been taken care of in the Chapter- XIII (Bank Finance-Term Loan). Banks should
verify not only the arithmetical accuracy of the data furnished by the borrowers but also rationale
behind various assessments based on which the projections have been made. For this purpose
wherever necessary the Bank officials should hold discussions with the borrowers on projected
sales, level of operations, level of inventory and receivable etc. The data furnished should be
recast wherever necessary so that the projections on which the working capital assessment is
being made are realistic and acceptable to the Bank. The levels of holding for inventory and
receivable as enumerated in para 11.4.1 Vol I of the Lending Policy need to be considered

14.7 Norms for Inventory & Receivables :

Working capital is defined as the funds required to carry the required level of current assetto enable the
industry to carry on its operation at the expected level uninterruptably. These level of current assets again
hing on the activity level and type of activity. Working capital is thus the amount invested or blocked by
the unit in various current asset which takes the form of raw material , consumable goods, WIP , finished
goods and receivables.Banks have been given freedom to decide on the reasonable levels of holding of
each item of inventory and receivable.

166
14.8 Classification of Current Assets and Current Liabilities :

14.8.1 After estimating the acceptable level of Current Assets (inventory and Receivables) required for
smooth operation of a unit, the sources of financing the same are to be decided. Current Assets
will comprise of cash and other assets or resources commonly identified as those which are
reasonably expected to be realised in cash or sold or consumed or turned over during the
operating cycle of the business usually not exceeding one year. The Current Liabilities include
items payable or expected to be turned over within one year from the date of the balance sheet
and the term is used principally to designate obligations whose liquidation is reasonably
expected to require the use of existing resources properly classified as Current Assets or the
creation of other liabilities.

14.8.2 It is, therefore, extremely important to have proper classification of various items of Current
Assets and Current Liabilities with a view to calculate the projected net working capital, the
working capital gap and the Maximum Permissible Bank Finance (MPBF). Reserve Bank of India
from time to time has advised the Banks about treatment of these items and an illustrative list of
Current Assets and Current Liabilities is enclosed as Annexure-II of Chapter III.

The expected level of Current Assets (CA) are to be financed by :


a) Credit on purchase/Sundry Creditors
(Short Term Sources)
b) Other Current Liabilities = Current Liabilities (CL)
(Short Term Sources)
c) Bank Borrowings
(Short Term Sources)
d) Net Working Capital
(Long Term sources)
Net Working Capital (NWC) i.e. margin = Current Assets (CA) Current Liabilities (CL)
Working Capital Gap (WCG) = Current Assets (CA) Current Liabilities (excluding Bank
Borrowings).
In the context of the above approach, the Tandon Study Group has suggested computation of
the Maximum Permissible Bank finance as under :

14.9 First Method of Lending :

Under this method, the Maximum Permissible Bank Finance (MPBF) will be 75% of the Working Capital
Gap. The balance should come out of long-term funds i.e. Net Working Capital (NWC) subject to,
however, the fact that in case NWC is in excess of 25% of WCG, the MPBF will get reduced by the
excess amount. Under this method, the current ratio will be less than 1.33:1 but above 1.00:1. It is also
clarified that first method of lending is generally applied for assessment of Working Capital requirement

167
for sick/weak units under rehabilitation and for other units requiring working capital up to 5 crores
( for IT and software industries upto 2 crore) from the banking system is discussed under para
14.4.3

14.10 Second Method of Lending :

Under Second Method of Lending, the borrower should provide for a minimum of 25% of the total Current Assets out
of long-term funds i.e. the Net Working Capital (NWC). Sundry creditors for purchase of goods and other Current
Liabilities will be available to finance the part of the remaining amount and the bank will provide the balance.

The computation of Maximum Permissible Bank Finance (MPBF) under the above two methods would be as under.

14.11 COMPUTATION OF MPBF FOR WORKING CAPITAL

Under 1st Method of Lending Under 2nd Method of Lending

(A) Same (A) Estimated/Accepted Level of Current Assets


(B) Same (B) Less : Estimated/Accepted level of Current
Liabilities (other than Bank borrowing)
(C) Same (C) Working Capital Gap (WCG) (A-B)
(D) 25% of C (D) Minimum Margin Contribution (i.e. Matching
Contribution) from Long Term Sources
equivalent to 25% of the estimated Current
Assets (A)
(E) Same (E) Estimated NWC (which is equivalent to
Total Current Assets less Current Liabilities )
(F) Same (F) Item (C) Item (D)
(G) Same (G) Item ( C ) Item ( E )
(H) Same (H) MPBF : Item (F) or Item (G) whichever is lower

Excess Borrowing : This will arise when item (G) is less than Item (F).

The above two methods of lending may be illustrated by taking the following example of a
borrowers financial position estimated/projected as at the end of the Current/Next year :

168
Illustration :

(Rs.in lac)

Current Liabilities Current Assets


a) Creditors for purchases 440 Raw materials 836
b) Other Current Liabilities 220 Stock in process 88
c) Current Liabilities
(Other than Bank borrowings)(a+b) 660 Finished goods 396
d) Bank borrowings including Receivables including bills
bills discounted with banks 880 discounted with Bank 242
Other Current Assets 66
TOTAL 1540 TOTAL 1628
Current Ratio : 1.05:1
A. Total Current Assets 1628
Less :
B. Current Liabilities other than Bank borrowing 660
C. Working Capital Gap 968
E. Estimated Net Working Capital 88
First Method of Lending Second Method of Lending
C. Working Capital gap 968 C) Working Capital Gap 968
D.Minimum 25% of D) Minimum Margin contribution 407
working Capital gap from long from long term sources
term sources 242 equivalent to 25% of the
E. Estimated Net Working Capital 88 estimated current assets
F. C - D 726 E) Estimated Net Working Capital 88
G. C E 880 F) Item (C) (D) 561
G) Item (C) (E) 880
H. MPBF(Lower of F or G) 726 MPBF (Lower of F or G) 561
I. Excess borrowing (G-F) 154 Excess borrowing 319

169
It may also be observed from the above that in the First Method, the borrower has to provide a
minimum of 25% of the working capital gap from long-term funds (own funds and term
borrowings). In the Second Method, the borrower has to provide a minimum of 25% of the total
Current Assets from long-term funds (own funds and term borrowings).

While estimating the requirement of long term funds for new projects, Banks and Financial
Institutions should calculate margin for Working Capital on the basis of norms prescribed for
inventory and receivables and by applying the Second Method of lending. A project may suffer
if sufficient margin for Working Capital is not provided as per the Second Method of Lending
while funding new projects.

14.12 EXCESS BORROWING DEFINED :

The example cited above gives rise to a situation of excess borrowing as the Current Ratio is
lower than the minimum requisite level i.e. 1.33:1 as per Second Method of Lending. Such
excess borrowing can be taken care of as under :

Type (a) : The borrower may bring in additional long term funds by way of capital/future cash
accruals/long term borrowings etc. so that adequate long term surplus fund is available to
augment the projected NWC at least to a minimum requisite level and the element of Excess
Borrowing is extinguished.

Type (b) : Excess Borrowing projected can be adjusted by way of liquidation of the excess
current assets estimated, if any, taking into consideration the production/processing cycle of the
industry.

In the aforesaid context, it is to be clearly understood that while determining the ways of taking
care of the projected Excess Borrowing, a banker must ensure that the Bank does not
unwillingly become an instrument to finance an undue accumulation of inventory/receivables
etc. It is also to be ensured that there is no incident of diversion of the bank finance granted for
working capital purposes for other activities (e.g. inter-corporate deposits/investments,
investments in finance companies).

14.12 (A) Cash Budget

In case of seasonal industries like Tea, sugar mill, cold storage, brick field and other
specified activities like construction and IT, Bank follows cash budget system for
assessing working capital requirement.While following cash budget system para 11.4.1
of Vol I of the lending policy to be referred.

14.13 Exemptions from Second Method of Lending :

(a) Borrowing units engaged in export activities need not bring in 25% contribution from
long term funds in respect of export receivables.

170
(b) 25% contribution from long term funds in respect of receivables arising out of
domestic/inland sales by drawings bills of exchange under usance Letter of Credit
(whether revocable or irrevocable) and negotiated strictly in accordance with the terms
of Letter of Credit.

NOTE :(1) In case the receivables in the form of sale bills (Inland/export) drawn under
L/Cs are included in the build up of current assets for the purpose of
assessment of MPBF, then borrowings in the form of Inland/Export Bills
purchased/ Discounted/Negotiated under L/C are included in the
projected/assessed MPBF. However, in case such receivables arising out
of BP/BD under LC do not form part of build up of current assets, bank
finance against such receivables will not form part of the assessed MPBF
as per the Banks extant guidelines.

(2)Since minimum contribution by way of NWC from long term sources of


funds is not contemplated in respect of export receivables as also inland
receivables arising out of domestic sales made by way of bills drawn under
usance L/C (as discussed here-in-before), adherence to the prescribed
minimum current ratio of 1.33:1 as per Second Method of Lending may be
ensured after excluding the above items from the Current Assets and
corresponding Short-term

Bank Borrowings form the Current Liabilities in the balance sheet of the borrowing
company. For the purpose the bank may apply the above relaxation on case to case
basis, only after ensuring that projections made in regard to the aforesaid two items are
not only realistic but also in conformity with the overall level of Current Assets
estimated.

(c) Sick/Weak units under rehabilitation will be exempted from the application of Second
Method of Lending.

14.15 Treatment of Term Loan Instalments for Assessment of Working Capital

Requirement:

14.15.1. While assessing the MPBF, the entire amount of term loan instalments payable within
the next twelve months need not be treated as an item of current liabilities for the
following purposes :

a) for computation of MPBF

b) for computation of NWC

14.15.2. For the aforesaid purpose, the overdue term loan instalments should be treated
as current liabilities unless the loan is re-scheduled by the term lending bank/financial
institution.

171
14.15.3. The entire amount of term loan instalments payable within the next 12 months need
not be considered as an item of current liabilities for computation of MPBF and NWC.

14.16 FACILITY-WISE SHARING OF WORKING CAPITAL FINANCE (MPBF)

14.16.1 Once the Maximum Permissible Bank Finance (MPBF), which represents working
capital requirement of the borrower from Banks, is arrived at, the nature of facilities such
as cash credit, working capital demand loan. Bills purchase/discounting, pre-shipment
export, packing credit, post-shipment Foreign Bills Purchase/Negotiation etc. and the
limits for each of them have to be determined and allocated. The allocation should be
based on the nature of business, business cycle, holding levels of inventory and
receivables, export finance requirement depending upon the business needs of the
borrower. Seasonal factors and other factors like bulk purchase of raw materials
particularly by imports, bunching of sales etc. should also be looked into and flexibility
by way of interchangeability between the limits to the extent genuinely needed without
jeopardizing security and safety aspects of the particular facility may be permitted,
Similarly sub-limits within the limit, restriction in drawing power, margin for each facility
have to be decided. Limit against book debt should not normally exceed 75% of
the requirement of fund for financing credit sales.

14.16.2 In case of multi-division company, Data have to be obtained division-wise, and also for
the company as a whole. While the level of Current assets build-up as per
inventory/receivables norms, Working Capital Gap etc. are also to be worked out
division-wise and the company as a whole, the MPBF is assessed for the company as a
whole. The MPBF thus assessed is then allocated/shared to/between various divisions
on the basis of ratio of the division-wise Current Assets or Working Capital Gap to that
of the company as a whole, as may be considered more appropriate, depending upon
nature and working capital needs of various divisions, security available etc.

14.17 Adhoc Credit limit

As at present, adhoc/additional credit for meeting temporary requirement can be considered by


the financing bank only after the borrower has fully utilized/exhausted the existing limit.

14.18 Sharing of working capital finance

The ground rules for sharing of cash credit may be laid down by the consortium, wherever
formed. The level of individual banks share shall continue to be governed by the norm for
single borrower/group exposure.

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14.19 Rate of interest

The rate of interest shall apply as may be decided by the bank from time to time.

14.20 Commercial Paper (CP)

14.20.1 Highly rated borrower, Primary Dealers (PD/Satellite Dealers(SD) and All India Financial
Institutions (AIFI) are eligible for issuing CP to raise resources. A corporate shall be
eligible to issue CP provided (a) tangible net worth of the company as per last audited
Balance Sheet is not less than Rs. 4.00 crore, (b) the company has been sanctioned
working capital limits by banks/AIFIs and the borrowers account is classified as
Standard by banks/AIFIs.

14.20.2 Further all participants are also required to obtain credit ratings for issuance of CP from
either Credit Rating Information Services of India Ltd (CRISIL) or the Investment
Information & Credit Rating Agency of India Ltd (ICRA) or Credit Analysis & Research
Ltd (CARE) or Fitech Ratings India Pvt. Ltd or such other credit rating agency (CRA) as
may be specified by RBI from time to time. The minimum rating requirement shall be P(-
2) (pronounced as P minus 2 ) or such equivalent rating by other agencies. The rating
has to be current. CP can be issued in lot minimum of Rs. 5.00 lac or multiples
thereof.

14.20.3 Maturity : CP may be issued for maturities between a minimum of 15 days upto a
maximum of one year. However, maturity of the CP should not go beyond the date upto
which the credit rating of the issuer is valid.

14.20.4 Mode of Issuance : CP is to be issued in a dematerialised form through any of the


depositories approved by and registered with SEBI.

14.20.5 Limits and Amount of CP Issue :

14.20.5.1The aggregate amount of CP from an issuer shall be within the limit as approved by the
Board of Directors or the quantum indicated by the CRA for the specified rating
whichever is lower.

14.20.5.2Where CP is issued as a stand alone product, bank will have the flexibility to fix
working capital limits duly taking into account the resources pattern of issuers financing
including CPs.

14.20.5.3The bank may, however, have the flexibility to provide for a CP Issue, credit
enhancement by way of stand-by assistance/credit back-stop facility on merit where
necessary within the prudential norms as applicable.

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14.20.5.4Non-banking entities including corporate can now provide guarantee for credit
enhancement under stand-by/ back-stop arrangements for issue of CP provided (a)
the issuer fulfils all eligibility criteria prescribed for issue of CP, and (b) the guarantor
has a credit rating of at least one notch higher than the issuer from any approved CRA
and the offer document of CP discloses the net worth of the guarantor, names of other
companies to which similar guarantees have been issued, the extent of guarantee now
being offered and the conditions under which the guarantee will be invoked.

14.21 REPORTING OF CREDIT SANCTIONS TO LARGE BORROWERS (in lieu of CMA) TO


RESERVE BANK OF INDIA

14.21.1 In the context of major developments in the Banking Sector such as (a)
discretion given to banks to decide on the levels of holding of inventory as also of
receivables by the borrower (b) withdrawal of mandatory formation of consortium and
freedom given to banks to frame the ground rules even where consortium is formed on
voluntary basis, (c) operational freedom given to banks in the assessment of working
capital, reporting under CMA was no longer considered necessary and the same has
since been discontinued with effect from January, 1998.

14.21.2 However, in order to have data base in relation to the flow of Bank credit to
borrowers in various segments of industries, Banks are required to report to Reserve
Bank of India in respect of borrowers availing working capital credit or term loan
including deferred payment guarantee limit of Rs.10 crore or above from the banking
system on quarterly basis as or the last Friday of every quarter.

14.21.3 Branches should submit the above returns to their controlling offices promptly at
the end of quarter as applicable so that consolidated return could be submitted by Head
Office to RBI within the prescribed time limit.

14.22 FINANCING WORKING CAPITAL UNDER CONSORTIUM/MULTIPLE ARRANGEMENT :

14.22.1 Under the consortium arrangement a number of Banks join hands to meet the
financial requirements of large borrowers and share the risks involved in it. The benefit
of each others skill and expertise could be pooled together under the consortium
arrangement. Normally, the Bank providing largest quantum of working capital
assistance to the borrower is designated as the Leader Bank. It is also to be ensured
that such arrangement does not put the borrowers to inconvenience causing delays in
dealings with several Banks.

14.22.2 Reserve Bank of India Guidelines (April 1997) :

Reserve Bank of India advised the Banks in April, 1997, regarding withdrawal of the
hitherto existing mandatory requirement of formation of consortium for working capital
finance for corporate borrowers enjoying working capital facility of Rs.50 crore and

174
above. Banks have been advised that they may evolve appropriate mechanism for
adoption of sole bank/Multiple Banks/Consortium or Syndication approach by framing
necessary ground rules on operational aspects. It may be noted that the level of
individual Bank shall continue to be governed by the prudential exposure norms for
single borrower/group. Banks in their own interest should endeavour and ensure to have
an effective system of appraisal, flow of information on borrower among participating
Banks, commonality in approach and sharing of lendable resources under the single
window concept. As syndication is an internationally practiced model for financing credit
requirements, Banks are free to adopt syndication route, irrespective of the quantum of
credit involved, if the arrangement suits the borrower and the lending Banks.
Consortium Advance/Multiple Banking Arrangement

i) The Bank prefers consortium arrangement to share the inherent risks involved in credit
exposure. However, credit requirement of Bank's existing customers having fund-based
limit up to Rs.10.00 crore and under Bank's Credit Risk Rating UBICR2 or better, sole
banking arrangement will be preferred. In case of existing borrowers of the Bank having
working capital limit of Rs10.00 crores and above from the banking system under
consortium arrangement, the same will continue provided the borrower does not opt for
sole or multiple banking.

ii) Bank's own appraisal method of lending as mentioned above will be followed in case of
consortium arrangement where Bank is leader of the consortium. However, in cases where
Bank is not the consortium leader, the appraisal done by Consortium Leader will be given
due importance, but the Bank will also have to carry out its own assessment and if it shows
major variation from that assessed by the leader, necessary clarification should be obtained
from the leader and needs to be critically examined with justification.

iii) Bank will prefer to have, subject to prudential norm, minimum 5% share or Rs.10.00 crore
as a member of consortium for a meaningful participation in the consortium. It will be the
sole discretion of the Bank to take up enhanced share on pro rata basis irrespective of its
status in the consortium. Bank will take its own credit decision on the borrower.

Bank may consider opting out of the consortium in case it is not satisfied with the
performance/financial operations of the borrower.

iv) Pending execution of consortium documents, Bank's own documents should be executed
supported by exchange of No Objection Certificate (NOC) ceding pari-passu charge. Bank
will file its individual hypothecation charge based on such note. The Bank will follow other
operational formalities as agreed in the meeting of consortium members, subject to
approval from the sanctioning authority.

v) Bank will always prefer to have pro-rata share of the non-fund business of the borrowers
under consortium finance.

vi) In case of multiple division borrowers, division wise multiple banking arrangement may be
accepted provided the financial parameters of the division as well as the company as a
whole commensurate with the benchmark parameters as per prevailing lending policy of

175
the bank. However, compliance in respect of Credit Risk Rating (both internal and external)
may be considered in respect of company as a whole.

vii) In order to avoid delay in release of credit facility and creation of security, both in case
of Consortium Advance and Multiple Banking the required No Objection Certificates (NOC)
for ceding / creating charge on the securities, when asked for, by the Banks is to be issued
expeditiously.

In case of new sanction / enhancement / modification of terms of sanction execution of joint


documentation (wherever required) needs to be ensured at the earliest but preferably not later
than six months.

viii) Lenders / consortium meeting needs to be held at least once in a quarter. Immediately on
receiving the notice for consortium meeting the concerned branch will forward a copy of
agenda to the respective sanctioning authority and will ensure obtaining his views / stand
before attending such meeting. In case of HO / RO controlled account, wherever required
officials from such offices should also attend the meeting.

Regular exchange of information within lender banks to be ensured at least on quarterly basis
in RBI prescribed format (enclosed in Appendix-II under Annexure VI) as per HO Circular No:
CPPMI/ADV/180/OM-0620/08-09 dated 17.02.2009. A declaration from the existing borrowers
enjoying credit facility from the Bank for Rs.5.00 crore & above who are not under consortium /
multiple banking arrangement may be obtained mentioning whether they are enjoying any
credit facility from any other bank. If on the basis of such declaration any borrower is found to
be enjoying banking facility from other bank(s), exchange of information following above
mentioned HO circular is to be ensured.

The Bank should incorporate suitable clause in the loan agreement at the time of sanction /
renewal regarding exchange of credit information so as to address confidentiality issues.

In case of multiple/consortium arrangement the Bank should obtain regular certification, on


half-yearly basis, by a professional, preferably a Company Secretary, Chartered Accountant or
Cost Accountant, regarding compliance of various statutory prescriptions that are in vogue, as
per RBI format given in Appendix-III under Annexure VI.

14.23 SYNDICATION OF CREDIT

14.23.1 Syndication of loan/credit has become an internationally accepted model for


financing credit requirements of the borrower. Banks are free to adopt syndication of
credit limits irrespective of quantum of credit involved, if the arrangement suits the
borrower and the financing banks. It is easier to arrange syndication of credit limits for
those borrowers whose financial position is sound and credit rating is high. It may be
clarified that a syndicated credit is an agreement between two or more lending
institutions/banks to provide a borrower credit facility using a common loan
documentation.

14.23.2 A prospective borrower intending to raise resources through this mode may
award a mandate to a bank/Institution (commonly referred to as lead manager) to

176
arrange credit on its behalf. The mandate should give details regarding terms and
conditions of the proposed credit. On receipt of the mandate the lead manager prepares
an information memorandum about the borrower and distributes the same amongst the
prospective lending banks inviting their participation in the credit to be extended to the
borrower. The information memorandum may provide necessary and adequate
information to each prospective lending bank for making its own independent evaluation
of the borrower, if necessary, by seeking additional supporting information. The
information memorandum should also contain the evaluation made by the lead
manager. On receipt of the offers from the intending participating banks, a meeting of
the prospective lenders is convened by the lead manager to finalise the deal-timing,
charges towards management expenses, cost of credit, share of each participating
banks in the syndicated credit etc. A loan agreement is prepared and signed by the
participating banks.

14.23.3 The borrower is required to give prior notice to the lead manager or his agent for
drawing the loan amount to enable the latter to tie up disbursement with the other
lending banks. While a syndication is quite similar to the system of consortium lending
in terms of disposal of risk, a fixed repayment period is kept under syndicated credit
which is absent in the present system of lending through consortium arrangement.
Therefore, syndication of credit has already become a convenient mode of raising long
term funds by highly rated borrowers in the international market. It is also likely that
gradually this model would become a practiced model in our country.

14.24 DISCOUNTED VALUE OF BILLS CORRESPONDING TO AN EFFECTIVE RATE OF


INTEREST :

14.24.1 Branches have reported operational problems in working out the rate of discount
to be applied at the commencement of the usance period in such a manner as to
ensure that the effective interest rate remains the rate of interest specified in the terms
of sanction.

14.24.2Considering the operational difficulties, we indicate hereunder the formula prescribed by


the Reserve Bank of India for arriving at the discounted value of bills for varying usance
period. By applying this formula the branches should be able to work out the discounted
value of bills for the various unexpired usance period. The bank should scrupulously
observe the procedure set out hereunder. Branches should carefully note that when
discounting a bill the amount of discount has to be deducted at the time the bill is
discounted. Hence, recovering of interest by the branches at the end of the usance
period would not be in order. In addition to recovery of the discount on bills the
branches should recover the bill collection charges/commissions on bills discounted as
per extant guidelines of the bank.

177
14.24.3 Formula for Deriving the Discounted Value of Bills corresponding to an Effective
Rate of Interest

D : Discounted Value of the bills (Rs.)

F : Face value of the bill (Rs.)

I : Effective interest rate per cent per annum

N : Usance period i.e. number of days

Formula :

D = -

[ I x N
]

1+ [ ]

[ 100 x 365 ]

Illustration

For a face value of a bill of Rs.100 and effective rate of interest of 15.5 percent per
annum, the discounted value of bills of usance periods of 30, 60, and 90 days would be
as under :

Usance Discounted
(days) value (Rs.)

30 100

1+[15.5x30/100x365] = 98.7421

60 100

1+[15.5x60/100x365] = 97.5154

90 100

1+[15.5x90/100x365] = 96.3188

APPENDIX-I
Minimum Information to be Declared by Borrowing Entities to

178
Banks while Approaching for Finance under Multiple Banking Arrangement

a. Details of borrowing arrangements from other banks


(institution-wise and facility-wise)
I. Name and address of bank/ institution
II. Facilities availed
A Fund-based credit facilities
(Indicate the nature of facilities e.g. working capital /
demand loan / term loan / short term loan) / foreign
currency loan, corporate loan / line of credit / Channel
financing, bill discounting etc. amount and the purpose)
B. Non-fund-based facilities other than derivatives
(Indicate the nature of facilities e.g. L/C, BG, DPG (I&F)
etc. amount and the purpose)
C. Derivatives contracts entered into with the bank

(Indicate the nature of the contract, maturity, amount and


the purpose)
III. Date of sanction
IV. Present outstanding

(In the case of derivatives contracts, negative MTM i.e.


which is not due for settlement may be indicated)
V. Overdues position, if any

(In the case of derivatives contracts, the negative MTM


i.e. amount payable to the bank under the contract but not
yet paid may be indicated)
VI. Repayment terms

(for demand loans, term loans, corporate loans, project


wise finance)
VII. Security offered

(complete details of security both primary and collateral


including specific cash flows assigned to project wise
finance / loan raised & personal / corporate guarantee, to
be furnished]
VIII. Requests for facilities which are under process
(The information to be given for domestic and overseas borrowings from commercial banks, Financial
Institutions and NBFCs)

b. Miscellaneous Details

179
(Rs. in crore)
I. CPs raised during the year and current outstanding
II. Details of financing outside banking system e.g. L/C Bills
discounting
III Amount of un-hedged foreign currency exposures (please
give currency-wise position in the format given below)
(i) Short term exposures (less than one year)
(a) Long positions
(b) Short positions
(c) Net Short term exposures (a-b)
(ii) Long term exposures (one year and beyond)
(a) Long positions
(b) Short positions
(c) Net Long term exposure (a-b)
(iii) Overall Net Position (i-ii) for each currency
(iv) Overall Net Position across all currencies
III. Main and allied activities with locations
IV. Territory of sales and market share
V. Details of financial aspects incl. DSCR Projections
wherever applicable as per requirement of bank-Imp.
Financial covenants, if any, agreed to/accepted with other
lenders.
VI. C.D A/cs. within / outside financing Banks, being operated,
if any
VII. Demands by statutory authorities/current status thereof
VIII. Pending litigations
IX. A declaration authorizing the bank to share information
with other financing banks

180
APPENDIX II
Revised Format under Multiple Banking Arrangement Credit Information Exchange
Part I
Bio Data of the Company

I. Borrowing partys name and address


II. Constitution
III. Names of Directors/Partners
IV. Business activity
* Main
* Allied
V. Names of other financing Banks
VI. Net worth of Directors / Partners
VII. Group affiliation, if any
VIII. Date on associate concerns, if ban king with the
same bank
IX. Changes in shareholding and management from the
previous report, if any

Part II
Major credit quality indicators

I. IRAC Classification
II. Internal Credit rating with narration
III. External Credit rating, if any
IV. Latest available Annual Report of the As on __________
borrower

Part III
Exposure Details other than Derivatives
(Rs. in crore)
I. Type of credit facilities, e.g. working capital loan/demand
loan/term loan/short term loan/foreign currency loan,
corporate loan/line of credit/Channel financing, contingent
facilities like LC, BG & DPG (I&F) etc. Also, state L/C bills
discounting/project wise finance availed).
II. Purpose of loan
III. Date of loan facilities (including temporary facilities)
IV. Amount sanctioned (facility wise)
V. Balance outstanding (facility wise)
VI. Repayment terms
VII. Security offered
* Primary
* Collateral
* Personal/Corporate Guarantees
* Extent of control over cash flow
VIII. Defaults in term commitments/lease rentals/Others
IX. Any other special information like court cases, statutory dues,
major defaults, adverse internal/external audit observations

181
Part IV
Exposure Details Derivation Transactions
(Rs. in crore)

Sr. Nature of the derivations Notional Weighted- Amount of Amount of Notional Major
No Transactions Amount of average positive MTM contracts Amount of reasons
contracts maturity of for the bank classified outstanding for
contracts (Not due for as NPA contracts restructur
settlement) which have ing (in
been brief)
restructured

A. Plain Vanilla Contracts)


1. Forex Forward contracts
2. Interest rate Swaps
3. Foreign Currency Options
4. Any other contracts
(Please specify)
B. Complex derivatives
including various types of
option combinations
designed as cost
reduction/zero cost
structures
1. Contracts involving only
Interest rate derivatives
2. Other contracts including
those involving foreign
currency derivatives.
3. Any other contracts
(Please specity)

182
Part V
Un-hedged foreign currency exposures of the borrower with currency-wise details
(Rs. in crore)

I Short term exposures (less than one year)


(a) Long positions
(b) Short positions
(c) Net short term exposure (a-b)
II Long term exposures (one year and beyond)
(a) Long positions
(b) Short positions
(c) Net long term exposure (a-b)
III Overall Net Position (I-II) for each currency (Please give
Overall Net position in this format for each currency)
IV Overall Net Position across all currencies

Part-VI
Experience with the borrower

I. Conduct of funded facilities (based on cash


management/tendency to overdraw)
II. Conduct of contingent facilities (based on payment history)
III. Compliance with financial covenants
IV. Companys internal systems & procedures
V. Quality of management
VI. Overall Assessment
(The above to be rated as good, satisfactory or below par only)
(*) Broad guidelines for incorporating comments under this head is furnished in the next page

183
Broad Guidelines for Incorporating Comments under Part VI
(Experience) of the Credit Information Report

Good Satisfactory Below Par


1. Conduct of funded facilities

* Over-drawings (No. of times) Upto 4 times 5 to 6 times Above 6 times


* Average period of adjustment Within 1 month Within 2 months Beyond 2 months

* Extent of overdrawings (% of limit) Upto 10% 10 to 20% Above 20%


II. Conduct of contingent facilities (Other than Derivatives)
* No. of Defaults Upto 2 times 3 to 4 times Above 4 times
* Average period of adjustment Within 1 week Within 2 weeks Beyond 2 weeks

III. Conduct of Derivatives Transactions


* No. of contracts where the positive MTM <25% of total number 25-50% of total >50% of total number
value due to the bank remained overdue of contracts number of contracts of contracts
for more than 30 days
* No. of contracts where the positive MTM <1% of total number of 1-5% of total number >5% of total number of
value due to the bank remained overdue contracts of contracts contracts
for more than 90 days and the account
had to be classified as NPA (but later on
regularized and is not NPA as on the date
of exchange of information)
Note: All cases where any of the contracts
has been classified as NPA and continues
to be NPA as on the date of the exchange
of information should be shown as Below
Par)
* No. of contracts restructured during the <25% of total number 25-50% of total >50% of total number
relevant period of contracts number of contracts of contracts
IV. Compliance with financial covenants
* Stock statement/Financial data Timely Delay upto 15 days Delay over 15 days
* Creation of charge Prompt Delay upto 2 months Delay over 2 months
V. Companys internal systems and procedures
* Inventory Management Adequate systems are Adequate systems are Adequate systems are
in place in place but not not in place
adhered
* Receivables Management -do- -do- -do-
* Resource Allocation -do- -do- -do-
* Control over Information -do- -do- -do-
VI. Quality of management
* Integrity Reliable Nothing adverse Cannot be categorized
in previous columns
* Expertise Competence /Commitments Professional & Have necessary -do-
visionary experience
* Tract Record Timely Executions -do

184
Appendix III
Part: I
DILIGENCE REPORT
To,
The Manager,
___________________ (Name of the Bank)

I/We have examined the registers, records, books and papers of ____________ Limited having its registered office
at as required to be maintained under the Companies Act, 1956 (the
Act) and the rules made thereunder, the provisions contained in the Memorandum and Articles of Association of the
Company, the provisions of various statutes, wherever applicable, as well as the provisions contained in the Listing
Agreement/s, if any, entered into by the Company with the recognized stock exchange/s for the half year ended
on . In my/our opinion and to the best of my/our information and according to the examination carried out by
me/us and explanations furnished to me/us by the Company, its officers and agents. I/We report that in respect of the
aforesaid period:

1. The management of the Company is carried out by the Board of Directors comprising of as listed in Annexure ., and
the Board was duly constituted. During the period under review the following changes that took place in the Board of
Directors of the Company are listed in the Annexure ., and such changes were carried out in due compliance with the
provisions of the Companies Act, 1956.

2. The shareholding pattern of the company as on ------- was as detailed in Annexure :


During the period under review the changes that took place in the shareholding pattern of the Company are detailed in
Annexure.:

3. The company has altered the following provisions of


(i) The Memorandum of Association during the period under review and has complied with the provisions of the
Companies Act, 1956 for this purpose.
(ii) The Articles of Association during the period under review and has complied with the provisions of the
Companies Act, 1956 for this purpose.

4. The company has entered into transactions with business entities in which directors of the company were interested as
detailed in Annexure.. .

5. The company has advanced loans, given guarantees and provided securities amounting to Rs. ____________ to its
directors and/or persons or firms or companies in which directors were interested, and has complied with Section 295 of
the Companies Act , 1956.

6. The Company has made loans and investments; or given guarantees or provided securities to other business entities as
detailed in Annexure .and has complied with the provisions of the Companies Act, 1956.

7. The amount borrowed by the Company from its directors, members, financial institutions, banks and others were within
the borrowing limits of the Company. Such borrowings were made by the Company in compliance with applicable laws.
The break up of the Company's domestic borrowings were as detailed in Annexure .. :

8. The Company has not defaulted in the repayment of public deposits, unsecured loans, debentures, facilities granted by
banks, financial institutions and nonbanking financial companies.

9. The Company has created, modified or satisfied charges on the assets of the company as detailed in Annexure.
Investments in wholly owned Subsidiaries and/or Joint Ventures abroad made by the company are as detailed in Annexure

10. Principal value of the forex exposure and Overseas Borrowings of the company as on are as detailed in the
Annexure under"

185
11. The Company has issued and allotted the securities to the persons-entitled thereto and has also issued letters, coupons,
warrants and certificates thereof as applicable to the concerned persons and also redeemed its preference shares/debentures
and bought back its shares within the stipulated time in compliance with the provisions of the Companies Act,1956 and
other relevant statutes.

12. The Company has insured all its secured assets.

13. The Company has complied with the terms and conditions, set forth by the lending bank/financial institution at the time
of availing any facility and also during the currency of the facility

14. The Company has declared and paid dividends to its shareholders as per the provisions of the Companies Act, 1956.

15. The Company has insured fully all its assets.

16. The name of the Company and or any of its Directors does not appear in the defaulters' list of Reserve Bank of India.

17. The name of the Company and or any of its Directors does not appear in the Specific Approval List of Export Credit
Guarantee Corporation.

18. The Company has paid all its Statutory dues and satisfactory arrangements had been made for arrears of any such dues.

19. The funds borrowed from banks/financial institutions have been used by the company for the purpose for which they
were borrowed.

20. The Company has complied with the provisions stipulated in Section 372 A of the Companies Act in respect of its Inter
Corporate loans and investments.

21. It has been observed from the Reports of the Directors and the Auditors that the Company has complied with the
applicable Accounting Standards issued by the Institute of Chartered Accountants in India.

22. The Company has credited and paid to the Investor Education and Protection Fund within the stipulated time, all the
unpaid dividends and other amounts required to be so credited.

23. Prosecutions initiated against or show cause notices received by the Company for alleged defaults/offences under
various statutory provisions and also fines and penalties imposed on the Company and or any other action initiated against
the Company and /or its directors in such cases are detailed in Annexure.. .

24. The Company has (being a listed entity) complied with the provisions of the Listing Agreement.

25. The Company has deposited within the stipulated time both Employees' and Employer's contribution to Provident Fund
with the prescribed authorities.

Note : The qualification, reservation or adverse remarks, if any, are explicitly stated may be stated at the relevant paragraphs
above place(s).

Place: Signature:
Date: Name of Company Secretary/Firm:
C.P. No.:

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Part II

CERTIFICATIONS OF BORROWAL COMPANIES BY CHARTERED ACCOUNTANTS / COMPANY


SECRETARIES / COST ACCOUNTANTS

i) Terms of reference for stock audit are to be spelt out clearly by the Banks, so that the Chartered Accountants
can give focused attention to such areas.

ii) End-use verification of funds lent, if certified by Statutory Auditors, will be a good comfort to the Banks.

iii) As Banks quite often deal with unlisted companies, disclosure requirements for such companies above a
specific turnover may be made akin to those for listed companies, viz. consolidated balance sheet, segmental
reporting etc. Information on large shareholding also will be useful.

iv) Further, the following additional certification either from Chartered Accountant or Company Secretary or Cost
Accountants may also be thought of :-
a) Company Directors not figuring in defaulters list (RBI/ECGC)/willful defaulters list etc.
b) Details of litigation above a specified cut off limit.
c) A specific certificate, probably from the Company Secretary, regarding compliance with Sec. 372 (a) of
the Companies Act.
d) Details of creation/ modification/satisfaction of charges on the assets of the company, position regarding
insurance, show cause notices received, finds and penalties awarded.

v) As regards rotation of Auditors, for the sake of operational convenience, it is suggested they may be changed
once every 5 years instead of every 3 years.

In order to avoid concentration, group companies may have different Statutory / Internal Auditors in case group turnover
exceeds Rs.100 crores.

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Chapter - XII

188
Different types of charges

TOPIC PAGE NO.

16.1 General

16.2 Assignment

16.3 Lien

16.4 Bankers Lien

16.5 Negative Lien

16.6 Set Off

16.7 Pledge

16.8 Hypothecation

16.9 Mortgage

16.10Various forms of Mortgage

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CHAPTER XII

DIFFERENT TYPES OF CHARGES

16.1 GENERAL

Bankers secure their advances by various securities. To make these securities available to
cover our advance, the assets/properties are to be charged to the bank. Such securities are
source of strength for the banks as the same would be crystallised for recovery of debt, if
necessary. When a charge is created on asset/property to cover a debt, the bank does not
become the absolute owner but has certain rights over the asset/property charged until the debt
is repaid. The common ways of charging a security are explained in the under noted
paragraphs.

16.2 ASSIGNMENT

16.2.1 An assignment is a transfer by one person of a right in property or debt existing or


future to another person. The person assigning the right is called the assignor and the
person in whose favour the assignment is made is called the assignee. The most
common types of assignment are those in respect of book debts, supply bills on
Government/Semi Government bodies and life policies. To be accepted as a security for
an advance the assignment of a book debt must be in writing signed by the assignor
and irrevocable notice in writing must be given to the debtor of the assignor (usually the
customer). At the same time the bank should ask the debtor to acknowledge receipt of
the notice and enquire whether he has any right of set off against the assignor and
whether the debtor has received notice of any prior assignment.

16.2.2 In banking, the usual subject of assignment is actionable claim. Section 3 of the
Transfer of Property Act, 1882 defines actionable claim as a claim to any debt other
than a debt secured by mortgage of immovable property, or to any beneficial interest in
movable property not in the possession, either actual or constructive, of the claimant,
which the Civil Courts recognise as grounds for relief, whether such debt is beneficial
or contingent. It is permissible under Section 130 and 136 of the Transfer of Property
Act, 1882, to assign Actionable Claim to anyone except to a judge, a legal practioner
or an officer of the Court of Justice. An assignment is valid, whether or not
accompanied by a separate agreement that the assignee would, on repayment of the
debt, reassign the subject matter of assignment to the assignor.

16.2.3 The value of the assignment of an actionable claim, say, a right or a debt as a banking
security depends not only upon the integrity of the borrower who offers the security but
also on the credit worthiness and integrity of the borrowers debtor whose debt is
assigned; ultimately the payment has to come from the latter source.

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16.3 LIEN

16.3.1. A lien is the right of a creditor to retain in his possession goods or securities belonging
to a debtor until the debt is repaid. The ownership remains with the borrower, the lender
has the possession. A lien may be either particular or general. A particular lien arises
when the right of retention of property is limited to a particular debt only. A general lien,
however, confers the right to retain the property not only in respect of the debt in
connection with the property but also in respect of general balances due arising out of
other transactions by the owner of the property.

16.4 BANKERS LIEN

16.4.1 A Bankers lien is more than a general lien-it is implied pledge. An ordinary lien does
not carry with it creditors right to sell a property. But a pledge does. The banker has
the power to realise securities such as bills, promissory notes, cheques, securities
against a loan left with the bank even after the payment without filing a suit,
subject, of course, to reasonable notice to the customer.

N.B. : From a strictly legal point of view there is no necessity to obtain a written
agreement for lien vide Section 171 of the Indian Contract Act, 1872. In practice,
however, the Bank usually obtains a stamped letter of lien from the customer.

16.4.2. It is to be considered as to what securities may be subject of a bankers lien. The lien
extends only to such securities as a banker ordinarily deals with for his customer. The
securities should also be owned by the customer in his own right. In deciding whether a
particular security is subject to a bankers lien, the test is how the said security came
into the hands of the bankers. If the security was handed over to him in the ordinary
course of business & not for a special purpose inconsistent with the lien, the banker can
exercise his right of general lien over the security.

16.5. NEGATIVE LIEN :

Under this, the bank does not get any right to retain any asset of the borrower. The borrower
here gives a declaration to the banker that his assets mentioned therein are free from any
charge or encumbrance and also that he shall not create any charge over such assets or
dispose of without the consent of the bank.

16.6. SET-OFF

16.6.1. Set-off is the statutory right under which in the absence of any agreement to the
contrary, the creditor is entitled to take into account any balance to the credit of a debtor
for adjustment of the debt of the latter either wholly or partially. For example, if a person
has a debit balance of Rs. 2,000/- in his overdraft account and a credit balance of Rs.
1,000/- in his Savings Account, the Bank shall have the right to apply the credit balance
for adjustment of the overdraft account unless there is express or implied agreement to

191
the contrary. In order that this right of set-off may be exercised, the debt must be
a sum certain, due by and to the same parties and in the same right. A debt accruing
due cannot be set-off against a debt already due. In case of a loan repayable on
demand or on a specified date, is not due for payment until demand notice is served on
the arrival of the due date. This loan cannot be set-off until it is due by application of the
amount of a fixed deposit in the borrowers name which has matured and is already
due.

16.6.2. The various ingredients of a set-off are as under :

(a) Mutual debts must be for sums certain : one person must be a creditor of another
person and vice-versa, for known amounts. All the branches of a bank are
considered as one for the purpose of the right of set-off. If X has a borrowal
account with Calcutta branch and a current deposit account with Mumbai branch
showing a credit balance, the bank has a right of set-off and can transfer the
credit balance at Mumbai wholly or in part to Calcutta branch for the adjustment of
the borrowal account.

(b) Debts to be due immediately. Only those debts can be the subject of set-off which
are due and recoverable on the date of set-off.

(c) Debts in same right : The parties must be mutually indebted in the same right. If
the customer has one account for his own money and another for trust money, the
bank cannot set-off a credit balance in his personal account.

(d) No agreement to the contrary : The creditor has a right of set-off under law
provided the conditions in (a), (b) and (c) are satisfied and further there is no
express or implied agreement to the contrary.

16.7. PLEDGE

16.7.1. Pledge, as defined in the Indian Contract Act, 1872, is the bailment of goods as
security for payment of a debt or performance of a promise. Bailment is the delivery of
goods by one person to another for some purpose under a contract that the goods shall
be returned or otherwise disposed of according to the direction of the bailor when the
purpose is accomplished. The person depositing the goods or securities is termed as
the pledgor and the party with whom they are left is called the pledgee.

16.7.2. In a pledge the pledgee is entitled to the exclusive possession of the property (without
ownership which remains with the pledgor) until the debt is discharged. Legal delivery of
the goods to the pledgee is an essential part of the contract. But it is not essential that
there should be an actual physical delivery. Constructive delivery, such as delivery of
the keys of the godown in which goods are stored or delivery of warehouse receipts will
be sufficient. Securities subject to pledge are goods (or the documents of titles thereto

192
such as bill of lading, railway receipt) and fully negotiable securities such as stocks,
shares etc.

16.7.3 In the event of failure by the pledger to repay the loan amount as per terms of
sanction Bank has the authority to sell the pledged goods after issuing a notice
to the defaulting borrower in this respect.

16.8. HYPOTHECATION

16.8.1. Hypothecation is a legal transaction whereby goods are made available as security for
debt without transferring ownership or possession to the creditor. Under the
arrangement the goods remain in the possession of the borrower under an equitable
charge to the Bank. As a security value it has got a low rating. As the lender does not
obtain actual or constructive possession of the goods, his measure of control over them
is often very limited, with the result that the borrower may have ample opportunity of
dealing with them for misuse. Limited Companies of good standing are generally
considered good for advances against hypothecation of goods as the registration of
the charge with the Registrar of Companies tantamount to a public notice. Advance
against hypothecation is also made to first class parties as well, especially in case of
industrial advances and advance to small borrowers, when it may be impossible for the
borrowers to give actual or constructive possession of the goods to the banker, which
may result in bottleneck in production or sale, hypothecation, is the only convenient
method of charge. The securities covered under hypothecation are generally goods
too bulky for storage in a godown or requiring frequent handling, transport vehicles,
plant and machinery, work-in-progress, raw materials, finished goods, book debts,
standing or future crop etc. Only moveable goods and book debts can be hypothecated.

16.8.2. STATEMENT OF STOCK

In case of hypothecation advances, statements of stocks are taken periodically, say,


once in a month or a fortnight, from the borrowers, with a declaration regarding their
clear title to the goods and the correctness of the quality, quantity and valuation thereof.

16.9. MORTGAGE

16.9.1. A mortgage is a transfer of a legal interest in specific immovable property as security for
the payment of an existing or a future debt or performance of an engagement which
may give rise to pecuniary liability.

16.9.2 The transferor is called the mortgagor, the transferee, the mortgagee and the money of
which repayment is secured by the mortgage, the mortgage money while the instrument
by which the transfer is effected is called the mortgage deed. The immovable
properties which can be mortgaged are land and buildings, machinery fixed to the earth
etc.

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N.B. : The word Interest denotes a real right. Whatever may be the form of a
mortgage, a mortgagor does not part with the whole interest-only an interest is
transferred subject to the right of redemption. Only in case of sale the whole interest is
transferred to the buyer.

16.10. VARIOUS FORMS OF MORTGAGE

The various forms of mortgage as described in Section 58 of the Transfer of Property Act,
1882 are given below :

(a) Simple mortgage

Where without delivering possession of the mortgaged property the mortgagor binds
himself personally to pay the mortgage money and agrees, expressly or impliedly, that
in the event of his failing to pay according to his contract, the mortgagee shall have a
right to cause the mortgaged property to be sold and the proceeds of sale to be applied,
so far as may be necessary, in payment of the mortgage money, the transaction is
called a simple mortgage and the mortgagee a simple mortgagee.

(b) English Mortgage

Where the mortgagor binds himself to repay the mortgage money on a certain
date, and transfers the mortgaged property absolutely to the mortgagee, but subject to
the proviso that he will retransfer it to the mortgagor upon payment of the mortgage
money as agreed, is called an English Mortgage. An essential characteristic of an
English Mortgage is the personal liability of the mortgagor notwithstanding the absolute
transfer of the property to the mortgagee.

(c) Mortgage by conditional sale

Where the mortgagor ostensibly sells the mortgaged property on the condition that in
default of payment of mortgage money on a certain date the sale shall become absolute
or on the condition that such payment being made the sale shall be void, or on the
condition that such payment being made the buyer shall transfer the property to the
seller, the transaction is known as mortgage by conditional sale.

(d) Usufructuary Mortgage

Where the mortgagor delivers the possession or binds himself expressly or impliedly to
deliver possession of the mortgaged property to the mortgagee and authorises him to
retain the possession until repayment of the mortgage money and to receive rents and
profits accruing from the property or any part of such rents and profits and to
appropriate the same in lieu of interest or in payment of the mortgage money, or party of
both, then the transaction is known as usufructuary mortgage.

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(c) Mortgage by deposit of title deeds

Where a person in any town, the Provincial Government concerned may, by notification
in the Official Gazette, specify on this behalf, delivers to a creditor or his agent
documents of title to immovable property, with intent to create a security thereon is
called a mortgage by deposit of the title deeds and is commonly known as Equitable
Mortgage. Notified towns for the purpose of clause (f) of Section 58 of the Transfer of
Property Act, 1882, are declared from time to time by the Provincial Governments. This
form of mortgage, which is valid only if made in notified towns, is not required to be
registered and though an unregistered transfer of property, it stands on the same footing
as a registered simple or English Mortgage.

The requisites of a valid equitable mortgage are :

(i) A debt (actual or contingent)

(ii) Deposit of the original title deeds to a creditor or his agent

(iii) Intention to create a security thereon

(iv) In the notified towns to which the provision is extended by the Provincial Govt.

There must be a deposit of title deeds with an intention that they shall serve as a
security for the debt. Mere delivery of the deeds is not enough when there is no existing
debt unless there is an intent to create a mortgage for a future debt. A mortgage by
deposit of title deeds is created by the deposit and it is not necessary that the terms on
which the deposit is made should be in writing. The transaction being an oral one there
is no question of registration. But as a measure of precaution it is usual for the deposit
to be accompanied by a letter of admission wherein the borrower confirms having
deposited the title deeds with intent to create mortgage.

If, however, the mortgage is created through the instrument of a suitably drafted
memorandum of deposit it comes under the operation of the Registration Act, and the
memorandum requires ad valorem stamp duty and has to be registered with the
Registrar of Assurances. If there is a deposit of title deeds independently of the writing,
it is the deposit that creates the mortgage and the letter of admission is as mere
confirmation and is not required to be stamped or registered.

(f) Anomalous Mortgage

A mortgage which is not a simple mortgage, a mortgage by a conditional sale, an


usufructuary mortgage, an English Mortgage or a mortgage by deposit of title deeds
within the meaning of Sec. 58 of the Transfer of Property Act 1882 is called an
anomalous mortgage. An anomalous mortgage is usually a combination of two or more
types of mortgages. For instance, if personal liability to repay is incorporated in a deed
for usufructuary mortgage, it results in anomalous mortgage.

195
Of the various forms of mortgages described above, simple mortgage and equitable
mortgage or mortgage by deposit of title deeds are more commonly acceptable to the
Bank.

For the purpose of creation of mortgage charge, searching and valuation etc are to be
done as per HO directives issued from time to time.

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CHAPTER XIII

WORKING CAPITAL FINANCE TO INFORMATION TECHNOLOGY (IT) AND


SOFTWARE INDUSTRY

TOPIC PAGE NO.

17.1 Introduction

17.2 Classification

17.3 Eligibility

17.4 Methodology for assessment of working capital

17.5 Papers to be submitted for credit appraisal

17.6 Nature of credit facilities

17.7 Security

17.8 Margin

17.9 Rate of interest

17.10 Monitoring & Follow-up system

17.11 Administrative Arrangement & Sanctioning Authority

17.12 Definitions

Form A

Form B

Form C

Form D

197
Chapter XIII

WORKING CAPITAL FINANCE TO INFORMATION TECHNOLOGY (IT) AND


SOFTWARE INDUSTRY

17.1. Introduction : Information Technology (IT) and Software Industry has gained considerable
importance in view of its high potentiality for contribution to rapid and all-round national
development. Bank credit is an essential input for the growth and progress of IT and Software
Industry.

17.2. Classification : Various segments of the Information Technology and Software Industry are
broadly classified into four categories.

17.2.1. Software services Staffing services and programming services

These services, which are also known as manpower exports, involve deputation of
professionals for delivering programming services at customers locations within the
country, as well as abroad, under different contracts. The working capital requirements
for these services would be in the form of initial travel costs for order canvassing and
mobilisation expenses, as also travel costs and living expenses of the personnel
deputed for executing orders. The party may, in a few cases, receive some amount by
way of advance payment from the clients which would be mentioned in the contract; the
contract would also indicate the mode of payment, i.e., whether by way of
monthly/periodical payments or payment in lumpsum after execution of the contract.
Thus, the working capital requirements of the party would, inter alia, depend upon the
gap in cash flows.

17.2.2. Project Services :

i) Customised software development

These services comprise providing solution to specific problems of the customer


which would be utilised by corporate main frame and mini computer users. These
services could be rendered either at customers location or delivered on physical
magnetic media (like floppies and diskettes) or through satellite communication
networks. This service is normally offered under special contracts which provide
for mile-stone payments. In these cases also, working capital requirements would
be for meeting the gaps as disclosed by the cash flow statements.

ii) Systems solution and integration

This involves providing a complete business solution using information


technology. In this, integrator addresses a business problem of the client and
offers an IT based business solution. The work involves programming, testing,

198
documenting customised software solution for clients and integration of this
programme with the clients existing IT system as well as with the systems of the
clients parties/associates.

Working capital requirements would arise mainly on account of expenditure on


professionals, products, purchase of software packages/tools.

iii) Maintenance of software

In this category, the party takes up an assignment for maintenance of clients


software. Typically, it takes on the complete responsibility for maintaining a suit of
software of the client. These contracts cover trouble shooting operations and at
times even updation of the software. Working Capital for this activity would be
needed mainly for meeting expenditure on professionals.

17.2.3. Software products and packages :

(a) These comprise of (i) systems software viz. Operating system software,
conversion of programmes and utilities which enhance the computers capabilities
and (ii) application software which lets the computer perform specific functions;
packages like word processing, graphic design, financial analysis etc. come under
this category.

(b) These products are prepared to meet standard requirements of end-users and are
sold as packaged units comprising software manual and other user aids
(tutorials). The development of these products involves fairly large scale
investment, the return on which can be realised only after the product is fully
developed and sufficient demand is generated. By and large, no payment by the
buyers would be involved at any stage of development and the developer would
be receiving payments only when the products are purchased by interested
buyers. In such cases, working capital requirements would be mainly for meeting
expenditure such as salaries and expenses of the professionals associated with
the development of the products. The period required for development would vary
and, in some cases, may extend up to 24 months.

(c) As regards the financing of this category, it would have to be funded as a venture
at considerable risk.

17.2.4. Information technology related services (IT service)

IT Services such as call centres, mentoring, teleconferencing, tele medicine etc. result
from the use of any IT software over a system of IT Products for realising value
additions. Working capital requirements may also arise for meeting the expenditure
incurred in providing these services. However, these may not be of a significant scale.

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17.3. Eligibility :

Application for credit facility should be considered on the basis of track record of the
promoters/their group affiliation, quality and competenence of the management team with
reference to academic/professional qualifications and work experience in software
programming/development/marketing besides infrastructural facilities available with the unit.
This would be based on business age of the borrower and the quantum of turnover achieved in
the previous year. An unit should have successfully run for a minimum period of one year and
its projected annual turnover should be Rs.100 lacs or above (Rs. 50 lacs and above where it is
operating as ancillary to established Indian Software Co.) backed by past performance before it
could be considered as eligible for working capital finance.

17.4. Methodology for assessment of working capital :

The working capital requirement of the IT and Software Industry would arise mainly on account
of expenditure on professionals (i.e. travel costs, salaries and other incidental expenses) for
utilising their intellectual proprieties and expertise in delivering programming service, providing
solution to specific problems or complete business solution for the customers or for
maintenance of clientssoftware or for development of software packages to meet standard
requirements of the end users. In the case of development of software package, the return can
be realised only after the product is fully developed and sufficient demand is generated for the
same. Thus, there would be no generation of any tangible goods and the value of the end
product depends upon its acceptability to client users. Only when specified mile-stones are
reached, assets in the form of receivables from buyers are generated and can be valued.

In view of above, the Cash Budget System would be convenient for arriving at the permissible
bank finance (PBF) where peak deficit in the Cash Budget would determine the PBF but credit
would be disbursed on the basis of deficit at relevant point of time.

The Cash Budget would be subjected to revision/modification in the event of change in the
basic presumptions and the credit limit would be modified accordingly. While Cash Budget
System would be followed in general for assessing the PBF, in case of borrowers requiring
working capital limit up to Rs.2.00 crores, such working capital finance may be assessed on the
basis of 20% of projected turnover. In other cases, assessment of MBPF should be done on the
basis of the monthly cash budget system. Borrowers enjoying working capital limit of 10
crore and above from banking system, the guidelines regarding the loan system for
delivery of banks credit would be applicable.

However, in order to ensure proper end-use of funds even when limit is sanctioned on the basis
of turnover, release of limits should be based on cash flow statement and taking into account
quarterly cash gaps.

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17.5. Papers to be submitted for credit appraisal

The borrower/applicant is required to submit the following papers in connection with appraisal
of the credit proposal :

a) Operating statement showing the actual /projected annual income and expenditure (as
per Format A).

b) Actual/projected Balance Sheet (as per format B)

c) Cash Budget showing the monthly projection of receipts and payments under different
heads for 12 months (as per Format C).

d) Statement of economics showing contract-wise value, manpower requirement, contract-


specific expenses, additional investment in hardware, equipment, software
tools/packages etc. (as per Format D).

e) Detailed project report and business plan specifying the short-term and long term goals
of the unit, strategies proposed to develop and market software, stage-wise financial
outlay and revenue/cost projection, and the basis on which the proposed limit is sought.

17.6. Nature of credit facilities

The credit facilities would be in form of Cash Credit/Overdraft and Bill Purchase/Discounted.

17.7. Security :

As already narrated in item 17.4 above, the process of development of software product and
service does not generate any tangible goods and value of the end project depends upon its
acceptability to the client/user. Thus, the book value of the end product may be different from its
real value in future. In view of above, the entire credit line to the borrower should be fully
secured by collateral securities in form of mortgage of property and/or charge on moveable
assets and debts besides personal guarantee of promoters/corporate guarantee from affiliate
concerns of the promoters.

17.8. Margin :

In view of uncertainty in the value of end product and its volatile nature, the margin
should be minimum of 50% in the form of promoters contribution. However, margin may
be reduced up to 25% on case to case basis when credit facility is allowed against
purchase/discounting of bills backed by L/C or otherwise. In deserving cases relaxation
of margin may, however, be considered on their merits having regards to the nature and
value of additional securities offered, market reputation of the applicant/borrower and its
group.

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17.9. Rate of interest :

The rate of interest would be governed by the guidelines on lending rate of the bank issued
from time to time.

17.10. Monitoring & Follow-up system :

Monitoring of the credit facilities should be done by obtaining from the borrower monthly cash
flow statement and comparing the same with the relative monthly cash budget so that
correction, if any necessary, can be made in the cash budget, before future fund release. In
case of software export business the relevant guidelines issued by RBI for the purpose of
exchange control should be adhered to.

17.11. Administrative Arrangement & Sanctioning Authority :

Keeping in view the unconventional nature of activities carried out and products dealt with in IT
& Software industry, financing of such activities/products and the aspect of monitoring of the
relative bank credit assumes special importance. In view of the above, it is proposed that all
proposals relating to IT and Software Industry emanating from any of our Regional Offices are
to be sanctioned by H.O. from the level of General Manager and onwards under their respective
overall Discretionary Power. The Regional Offices will identify the centres under their area of
control where IT Software & Services Units are sufficiently large in number and identify the
branches to approach prospective borrowers. The proposals received by the branches will be
sent to concerned credit departments at H.O. through the Regional Offices with their
recommendation/views for final disposal.

17.12. Definitions :

(a) Information Technology (IT) Product :

This means computer, digital/data communication and digital data broadcasting


products.

(b) IT Software :

It means any representation of instruction, data, sound or image (including source code
and object code), recorded in a machine readable form, and capable of being
manipulated or providing interactivity to a user, by means of an automatic data
processing machine falling under the heading IT Products.

(c) IT Service :

It is defined as any service which results from the use of any IT Software over a system
of Products, for realising value addition.

(d) IT Industry :

It will cover development, production and services related to IT Products.

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FORM A
OPERATING STATEMENT
(Consolidated)
(Rupees in lac)
Last 2 years Current Year Next Year
(Actuals) (Estimated) (Projections)
1. Income :
(i) from software services
- Export
- Domestic
(ii) from other activities/products
- Exports
- Domestic
(iii) Total
- Export
- Domestic
2. Contract/Specific Expenses
i) Salaries of software professionals
ii) Travelling expenses of software professionals
iii) Cost of softwares acquired
iv) Data Transmission charges
v) Other contract/project related overheads
3. Administrative, Marketing &
General Expenses
i) Salaries of office staff
ii) Travelling expenses
(not included in 2(ii) above)
iii) Telecommunication Expenses
iv) Other overheads
4. Depreciation
5. Interest
6. Change in work in progress
7. Operating Profit i.e. 1-(2+3+4+5+6)
8. Other Income
9. Other Expenses

203
10. Profit before tax i.e. (7+89)
11. Income Tax, if any
12. Net Profit i.e. 11-12

Note : For items 1 & 2 above, separate annexures giving information relating to each of the activities
(Staffing and Programming services, Project Services etc. ) should be given.

204
FORM B
ANALYSIS OF BALANCE SHEET (Rupees in lac)
(FOR THE UNIT AS A WHOLE)

Liabilities
Last 2 years Current Year Next Year
(Actuals) (Estimated) (Projections)
I. Current Liabilities
Bank Borrowings (including Bills discounted)
Other Current Liabilities
i) Advances Received
ii)
iii)
Sub-Total I
II. Term Liabilities
Term Loans
Suppliers Credit
Debentures/FDs
(Not maturing within 1 year)
Preference shares
(Maturity of more than 1 year
but not exceeding 12 year)
Sub-total II
iii. Total outside liabilities (I+II)
iv. Net Worth
Equity Share
Capital
Share Premium
Preference Shares
(maturity exceeding 12 years)
Free Reserves & Surplus
Sub-total IV
Total III & IV

205
FORM B

Assets
Last 2 years Current Year Next Year
(Actuals) (Estimated) (Projections)
V. Current Assets
Cash & Bank Balances
Fixed Deposits
(including margin money)
Receivables (including Bill Discounted)
Work in Progress
Other Current Assets
i) Advance payments
ii)
iii)
Sub total V
VI. Fixed Assets
Less : Depreciation
Net Fixed Assets
Sub total VI
VII. Other Non-Current Assets
Licenced Software packages
Investment in Associates/
Subsidiaries
Miscellaneous Assets
Sub-total VII
VIII. Intangible Assets
Sub-total VIII
Total V to VIII
i) TNW [sub-total (IV) (VIII)]
ii) BB/TNW -
iii) TOL (item III)
iv) TOL/TNW

206
FORM C

PROJECTED CASH BUDGET FOR A PERIOD OF 12 MONTHS

(Rs in lac)
Months 1 2 3 4 5 6 7 8 9 10 11
Receipts-Section I
1. Cash inflows from contracts

I. Receipts from contracts


executed (including Bills
Discounted with Bank)

II. Advance Receipts towards


order
Sub-Total (A)

2. Other Cash inflows

i) Miscellaneous income
ii) Other short term inflows
(to be specified)
Sub-Total (B)
3. Cash inflows relating to
working capital (A+B)

Payments- Section I

4. Cash outflows for Contract


Expenses

i. Expenses for contracts


under execution
ii) Expenses towards fresh
contract
(Execution not yet
started)
Sub-total (C)

207
5. Other cash outflows

i. Administrative,
Marketing and general
expenses
ii. Travelling expenses
(other than those
included in contract
expenses)
iii. Other overheads/
miscellaneous expenses
Months 1 2 3 4 5 6 7 8 9 10 11
iv. Other short term outflows
Sub-total (D)
6. Cash outflows relating to
working capital (C+D)

Receipts Section II
7. Cash Inflows from Long
Term sources
(a) Capital loans :
i. Share Capital &
Premium
ii. Preference share
capital/quasi-equity
iii. Term Loans
iv. Fixed Deposits/
Debentures
(b) Other long term sources
(to be specified)
Long term Cash inflows
Sub-total (E)
Payments Section - II

208
8. Cash outflows towards Long
Term uses
i. Acquisition of Fixed Assets
ii. Repayment of TL/
Supplier Credit/FDs/
Pref.shares
iii. Others (to be specified)
Long Term Cash outflows
Sub-total (F)
9. Cash deficit relating to
working capital(6-3)
10. Cash surplus from long
term source (7-8)

11. Overall cash deficit/


surplus(9-10)

12. Opening WC outstandings


(excluding bills discounted)

13. Closing WC outstandings


(excluding bills discounted)

209
FORM D

CONTRACT ECONOMICS
PROGRAMMING SERVICES/SOFTWARE PROJECTS ETC.

(Rupees in lac)

Contract No. Contract No. Contract No. Contract No.

Client
Country
Type of work
Duration of contract
Milestones & timeframes for
completion
Terms of payment including advance
payments, if any
Manpower requirement
Additional investments required
Hardware, other equipment, Premises,
infrastructure, Software tools/package,
Personnel
Value of the contract
Contract specific expenses
Other overheads appropriated for
the contract
Estimated surplus

210
Annexure-III

United Bank of India


Pre-Sanction Inspection Report

Date of Inspection : Branch _________________

1. Applicants/Borrowers name in full with name of Unit

(a) Registered Address

(b) Office Address

(c) Units address

(d) Details of Telephone Nos.

(e) Age of the borrower/applicant

2. Fathers name of the applicant/borrower

3. Residential address of the applicant/borrower

4. Date of establishment of the unit

5. Whether rented/owned/under lease agreement

6. Terms of agreement

7. Line of business :

8. Trade License/Textile license/Driving license etc. as the case may be obtained?

9. Accessibility from the Road/Railway Station by vehicles

10. Provision for electricity, water supply etc.

11. Security aspect; distance from Police Station, boundary wall etc.

12. Availability of floor space. Whether the space is adequate to achieve the projected business ?

13. Possibility of Insurance Coverage.

14. Identical business in and around the unit :

(a) Nos.

(b) Their condition

(c) Whether any of them is our borrower

(d) If so, what is his present position

211
(e) Whether a feed back for the market obtained.

(f) Population of the locality.

(g) Others

15. Whether the location of the unit is conducive to growth?


Signature of the Inspector

212

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