General Banking - I

Credit Process

Credit Process involves the following stages:

Credit Sourcing
Credit Appraisal
Credit Sanction
Credit Monitoring and Administration

There is a need to ensure that credit growth takes place along select sectors/ products, in line with
Corporate Policy while maintaining a balanced sectoral and geographic distribution of assets. Further, in
a rapidly changing environment, there is also a need for responding promptly to emerging market trends
and opportunities. Need to achieve enhanced growth rates in view of the growth plans envisaged
necessitates focused attention on marketing the right products to carefully targeted clients under the
following segments:

1) Large Corporate & Mid Corporate

2) Small & Medium Enterprises
3) Agriculture & Micro Credit
4) Retail Assets

Credit appraisal involves collection of detailed data, assessment of the requirements, financial analysis,
verification of credentials, security, rating of the applicant/proposal, risk analysis and mitigation,
exposure norms and industry scenario in addition to compliance with the KYC/AML guidelines prescribed
and regulatory requirements.

Asset liability Management (ALM) -ALM is an important management function of a bank aimed of
ensuring that the bank does not face a liquidity crisis. RBI requires banks to monitor their structural
liquidity on a daily basis and submit a statement to the RBI once in a month.

A Bank cannot lend below MCLR which is arrived on the basis of its cost of funds operational cost and
risk perception.

On the aspects of safety, liquidity and profitability it must be said that an important indicator of
management effectiveness of a bank is whether or not deposits are raised at the lowest possible costs and
are lent with adequate margin consistent with Risk. Managing the risks in lending is a care function of
the lending dept of a bank.

Diversification is another important principle governing lending. A banker should avoid concentration risk
i.e. not expose the bank to a single group of borrower’s purpose of geography.

Prescribing caps on lending (exposure limit) to each sector eg. Steel, Cement, Tetiles, Pharma, Sugar,
Chemicals, Fertilizers etc.

Banks are the custodians of public funds and they carry twin obligations of i) return of the deposits on
demand or on maturity date ii) payment of interest on deposits at agreed rates. Adequate need to be
maintained to meet these commitments.

Credit Rating

Credit rating is a grade that is attributed to a person, an institution or a state in order to measure the
recipient/borrower ability to repay the debts at a specific point of time. This grade will be high or low
depending on the financial health of the borrower because the credit rating is an indicator of the riskiness

General Banking - I
of a borrower, it impacts several aspects of terms of credit primarily the twin issues of whether to lend
and the minimum interest rate lenders will demand.

Ratings Agencies - CARE, CRISIL, FITCH, ICRA, SMERA

Distinctive features of PVT Ltd Co and Public Ltd. Co

Private Ltd Public Ltd

Restrictions on the Right to

transfer Shares There is no such restrictions
Minimum Paid up capital Rs.1 lakh Min paid up capital Rs.5 lakhs

Mini number of Members 2

maximum 200 Minimum 7 and maximum no limit

What is paid up capital?

Paid up Capital is the amount of money a company has received from the shareholders in exchange for
shares of stock. Paid up capital is created when a company sells its shares on the primary market,
directly to investors.

What is authorized capital?

The authorized capital of a company is the maximum of share capital that the company is authorized by
its constitutional document to issue to shareholders.

What is reserve Capital?

Capital reserve means the part of profit reserved by the company for a particular purpose such as to
finance long term projects or to write off capital expenses.

Borrowing powers of the company: Every company has implied power to borrow money for the purpose
of carrying on its business. Such power is specified in the Memorandum Of Association.

Short term loan: Loans are given for WC purposes or onetime payment purposes for periods ranging
from 3 months to one year and rarely for period exceeding one year but less than 3 years.

Term Loans: Loans issued but repayable over a Medium or Long term period are usually called Term
Loan.

Sole banking: This is a banking relationship where the entire credit needs of a borrowing unit are met by
a single bank.

Multiple banking: Is an arrangement where a borrower avails of the finance independently from more
than one bank. Thus there is no contractual relationship between various banks of such borrower.

Consortium lending: The entire credit needs of a borrowing unit are financed by a group of banks by
forming a consortium. Consortium helps spread risk amongst consortium members.

No officer or any Committee comprising, inter alia an officer as member shall sanction any credit facility
to his/her relative but only by the next sanctioning authority.

Debt Equity Ratio: Debt to equity ratio is a measure of the financial leverage of the company’s solvency.
Lower the ratio the larger the involvement of the company. A high debt is a sign of excessive dependence
on creditors over owned funds for the running of the enterprise.

General Banking - I
Cash Flow: The key feature of any loan application – does the proposed business have the ability to
generate enough cash to repay the loan. (Cash flow = Net Profit + non Cash expenses)

Collateral: Collateral does not make a loan viable. It does not add the financial viability of a proposal.
Collateral has a very definite place once an event of default occurs.

Current Assets: Those which are held for sale or conversion into cash within a period of 12 months.

Fixed assets: These are capital assets in a business, FA are long term assets like land and bldg, Plant
and machinery.

Non Current assets: Other assets are assets that are not expected to be converted into cash consumed
or sold within 12 months of the B/s and they are formally defined as anything not classified as a Current
Assets.

Current liabilities: All liabilities in B/s which are repayable with in a period of 12 months are grouped
under this category.

DSCR (Debt Service Coverage Ratio): DSCR is a measure of the unit’s capacity/ability to service its debt
obligations. Higher the coverage safer is the unit from the banker’s perspective.

DSCR= Net Profit+Deprecialtion+Interest on Term Loan / Interest on Term loan +Installment.

What is Working Capital – Any business needs funds for short term purposes such as purchase of raw
materials payment of wages and other day to day expenses etc. these funds are known as Working Capital

Registration of Charges of the Companies acts 2013: Under Sec 77 the following charges created by a
company are required to be registered with ROC within 30 days.

1. A charge on Immovable property

2. Book debts
3. Movable property
4. Floating charge including Stock in trade
5. Issues of debentures, uncalled share, Call made but not paid Goodwill, patent etc.

Beneficial owner’s details: The Rule 9 (1A) of the Prevention of Money Laundering Rules, 2005 requires
that every banking company, and financial institution, as the case may be, shall identify the beneficial
owner and take all reasonable steps to verify his identity. Each credit proposals should capture beneficial
owners KYC details. 'Beneficial Owner' means, the natural person who ultimately owns or controls a client
and or the person on whose behalf a transaction is being conducted, and includes a person who exercise
ultimate effective control over a juridical person.

Turnover method of assessment: as per Nayak Committee recommendations, for WC limits up to Rs.5
crores in respect of Micro &Small Enterprises (MSE units) and up to Rs.1 crore in respect of others.

Non-Fund Based Facilities: The Bank will consider granting following types of non-fund based facilities.

i) Guarantees
ii) Letters of Credit
iii) Standby Letters of Credit
iv) Letters of undertakings (LOUs) for buyers credit
v) Forward Exchange covers.

General Banking - I
Even though RBI has permitted issue of Bank Guarantee beyond 10 years (vide Circular RBI/2015-
16/76DBOD No.Dir BC 11/13.03.00/2015-16 dated 01.07.15), such guarantees are to be issued only in
exceptional circumstances such as in the case of project related requirements.

No Foreclosure Charges for floating rate Term Loans to Individual Borrowers

RBI vide circular no.DBOD.Dir.BC.No.110/13.03.00/2013-14 dt.07.05.2014, advised banks not to charge

foreclosure charges / prepayment penalties on all floating rate term loans sanctioned to individual
borrowers with immediate effect.

Legal and Recovery

Death of a Borrower: The legal heirs of the deceased borrower would be liable only upto the value of
assets inherited. They are not personally liable for any debt of deceased unless and until they are not
part of the facility.

Death of Guarantor: Account is to be reviewed and any guarantee is to be replaced by taking fresh
guarantee if the facility is to be continued.

In case borrower not settled the loan or Compromise does not materialize bank go for recovery proceeding.

 In case of Government Sponsored scheme can approach Govt authorities like village Officer.
 Civil litigation – Serving Recall notice to all parties who all part of loan document.
 Share full details with panel advocate of preparation for filing Suit
 Verification of plaint and get it approved from appropriate level
 Based on the nature of security and pleading to be made – account with no security Money Suit
and wherever loans are secured by mortgages – Motrgage Suit.
 To sign the plain the authorized person granted under Board Resolution of the bank else its
maintenance may pose a problem at a later date.
 Post filing stage – Appointment of receiver for attachment securities, interim sale of movable
goods, interim attachment of any other properties
 Follow up with Advocate

Filing of EP (Execution Proceedings): EP has to be filed for execution of decree – limitation period 12
years to be calculated from the date of money decree and date of final decree in case of mortgage/title
suits.

Lok Adalats: Banks do have an option to avail services of Lok Adalats for settlement of disputes involving
amounts upto Rs.20 lakhs.

SARFASEI

To speed up the process of recovery from NPAs, the SARFASEI act was enacted in 2002. The SARFASEI
empower banks/financial institutions to recovery their NPA without intervention of the Court.

 Debt is above Rs.1.00 lakh and more than 20% of the principal amount and interest thereon.
 The security to be enforced is not an agricultural land Issuance of demand notice [sec13(2)]

 Reply to the representation/ objection of the borrower, if any within 15 days from the date of
receipt of such representation/ objection [sec13 (3-A)]

General Banking - I
  Taking possession of secured assets or taking over management of the business of the borrower,
or appointment of any person to manage the secured asset by Authorized Officer

 Valuation of the secured assets

 Fixing the Reserve Price for sale of secured assets.

 Sale of secured assets.

 Issuance of sale certificate

Insolvency and Bankruptcy code 2016 IBC

The Insolvency and Bankruptcy Code 2016 is the bankruptcy law of India which is one-step solution for
resolving insolvencies which at present is a long process and does not offer an economically viable
arrangement.

The Insolvency and Bankruptcy Code was enacted in 2016 to find a time-bound resolution for ailing and
sick firms, either through closure (liquidation) or revival (resolution), while protecting the interests of
creditors.

Who can Initiate CIRP (Corporate Insolvency Resolution Process) ?

 Banks, NBFCs, other private financiers providing advances (Secured/Un secured Financial
creditors)
 Vendors or any service providers (Operational creditors)
 Employees or workmen or Central or state govt or any local authority who has claim for any tax
(Operational creditors)
 Company or person itself, who thinks that it cannot repay its debts. (Corporate Debtors)

IBC, unlike other recovery proceedings, time bound process (180+ extensions of 90days). Creditors can
directly get involved in the IBC proceedings in every stage. Moreover, we can suggest, guide and lead the
activities and decisions taken in Committee of Creditors guided by Resolution Professional unlike other
recovery tools in Court Of Law.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be
treated as NPAs. Advances against gold ornaments, government securities and all other securities are not
covered by this exemption.

A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest
there on remains overdue for two crop seasons. 􀂙 A loan granted for long duration crops will be treated as
NPAs if the installment of principal or interest there on remains overdue for one crop season (Long
duration crop would be crops with crop season longer than one year). The crop season for each crop,
which means the period up to harvesting of crops raised would be determined by the SLBC. Depending
upon the duration of crops raised by an agriculturist the above NPA norms would also be made applicable
to agricultural term loans availed by him.

PROVISIONING NORMS

LOSS ASSETS

The entire asset should be written off. If the assets are permitted to remain in the books for
any reason, 100 percent of the outstanding should be provided for.

General Banking - I
DOUBTFUL ASSETS

 100 percent of the extent to which the advance is not covered by the realizable value of the
security to which the bank has a valid recourse and the realizable value is estimated on a realistic
basis.

 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 25 percent to 100 percent of the secured portion depending upon
the period for which the asset has remained doubtful: Period for which it remained doubtful
Provision required.

D1 - Up to one year in Doubtful category 25 %

D2 - One to three years in doubtful category 40 %
D3 - More than three years in doubtful category 100 %

Reporting Of Willful Defaulters

Willful and intentional default or where prima facie fraud has been detected in the sanction and/ or
conduct of the advance account, it should be viewed very seriously and legal action to be initiated
immediately, without giving any further scope for the borrowers /co-obligants to remove /strip the assets.
Information on the willful defaulters having outstanding of Rs.25 Lakhs and above should be reported by
the branches to Regional Offices every quarter, in the prescribed format. Copy of the report also should be
submitted to Recovery Dept at CO.

Interest Suspense Account

As per the present practice at the time of classifying an account as NPA, the interest that has accrued up
to that date but has not been realized is reversed from the Interest Received account and credited to the
Interest Suspense account. Further accrual of interest is credited to the Interest Suspense account on
respective due dates by charging to the concerned NPA account. [In older NPA accounts classified as suit
/ RR up to the date of migration to present version of flexcube, interest used to be applied only up to the
date prior to the commencement of Revenue Recovery proceedings or filing of suit /DRT application and
interest application was frozen from that date onwards].

General Banking - I