CATHOLIC SYRIAN BANK

The genesis of Indian Banking is associated to a large extent with Swadeshi Movement, which
inspired many Indians to promote Swadeshi Banks in the beginning of the 20th Century. The
enterprising founders of Catholic Syrian Bank Ltd also found this period to be a moment of
opportunity to promote the establishment of a bank. Thus was born The Catholic Syrian Bank
Ltd, Nine decades ago, on 26th November 1920 to be exact at Thrissur,which in later years
acquired the unique distinction of being a centre with the highest concentration of banks in the
South. The founder directors of the bank were people of eminence known for their foresight,
integrity and initiative. The policy they laid down has been consistently upheld by the successive
generations who guided the destiny of the institution. The bank commenced business on January
1st, 1921 with an authorised capital of Rs.5 lakhs and a paid up capital of Rs. 45270/During the first two decades of its functioning, the Bank concentrated only in Kerala. Banks and
credit institutions which proliferated especially in Kerala received a jolt and many of them came
to their doom following the crash of the Travancore National Quilon Bank in 1938 followed by
Palai Central Bank in1960. During the period many small banks came to the verge of collapse
shaking the confidence of the public and what followed was a process of consolidation. The
strategy of mergers and amalgamations of small banks with bigger banks brought the number of
banks within controllable limits, thereby making the industry's base strong. In 1964-65, The
Catholic Syrian Bank Ltd took part in taking over the liabilities and assets of five small/medium
sized banks in Kerala. The expansion programme initiated during these years gathered
momentum in the subsequent years.
In August 1969, the Bank was included in the Second Schedule to the Reserve Bank of
India Act 1934. In 1975, the Bank attained the status of "A" Class Scheduled Bank when its total
Deposits crossed Rs.25 crores. The necessity of imparting training to staff looked very important
and a modest beginning was therefore, made in setting up a Training College in 1975. In the
same year the Bank entered the field of foreign Exchange. At a very early stage, the Bank
recognised mechanisation as an effective tool of management and streamlined its accounting
procedures by introduction of Data processing system. From November 1975, reconciliation of
inter-branch accounts was mechanised by using IBM Data processing machines.

The decade of the seventies saw the evolution of a new culture in Indian Banking.
Nationalisation of banks imposed "Social Control" and imparted new ethos to commercial
banking . What followed was a massive expansion of bank branches with a distinct thrust on
remote rural belts. Special schemes were formulated to cater to the diverse credit needs of small
scale industries, road transport operators, agriculturists,and other self employed entrepreneurs.
The Catholic Syrian Bank Ltd did not lag behind in taking up the challenge and more than
75% of its clientele belong to small and economically weaker strata of Society. The Bank has a
strong rural base with around 80% of the branches in rural and semi- urban areas.
Investments in money market and capital market instruments are being expanded and steps
are being taken to have an in house equity research wing so as to face the challenges of the
future. The Bank has also geared up its machinery to increase its market share of corporate
finance in the days to come.
The real inner strength of a growing organisation lies in its staff resources. The Bank has
been singularly fortunate all these years in creating an environment in which the employees at all
levels could play their role.
Their contribution to the growth of this institution has been invaluable. The Bank has a
very dynamic team on its Board of Directors who are guiding the destiny of the Bank leading to
growth and prosperity.
At present, the bank has a network of 431 branches and 231 ATMs across India. The
Bank also plans to open more number of branches in a phased manner.

Corporate Values, Vision and Mission

Corporate Values
Corporate values reflect what , the bank an organisation, hold to be important to everything it
does. These values guide banks relationships with customers, employees, shareholders etc.
Banks corporate values are:
Fairness and Trust
Integrity and Transparency
Dignity and Respect
Equity and Justice
Performance effectiveness and Efficiency
Corporate Mission

The Banks long experience in banking has given them a valuable insight that financial strength
is best achieved through customer trust. The mission is to keep thriving on this philosophy while
infusing sustainable practices for the future. And the goal is to produce predictable earnings for
our shareholders by rallying employees through a dynamic and challenging environment. With
such ideals in place, bank trust that it can outgrow the industry average growth level and climb to
a business volume of Rs 34,000 crore, and also reach a net worth level of above Rs 700 crore by
2015. Besides, they have geared to increase the branch presence to 500 centers, covering all
prominent locations in India by 2015.

INTRODUCTION TO LOANS
Lending money is one of the two major activities of any Bank. Banks accept deposit from public
for safe-keeping and pay interest to them. They then lend this money to earn interest . In a way,
the Banks act as intermediaries between the people who have the money to lend and those who
have the need for money to carry out business/agriculture/personal requirements. The difference
between the interest paid and charged on loans, is called the "spread".
Loans are advances for fixed amounts repayable on demand or in installment. They are normally
made in lump sums and interest is paid on the entire amount .The borrower cannot draw funds
beyond the amount sanctioned.
A key function of the Bank is deploying funds for income-yielding assets.A major part of Banks
assets are

loans and advances portfolio and investments in approved securities.Loans and

Advances refer to long term and short-term credit facilities to various types of borrowers and
non-fund facilities like Bank Guarantees, Letters of Credit, etc.
Banks extend credit facilities by way of fund based long term and short term loans and
advances as also by way of non-fund facilities and classified into two categoriesFund based and Non Fund Based
Fund based refers to the type of credit where there is delivery of banks funds. Bank provides
money to the borrower in anticipation of getting it back. Where as in a Non-fund Based, Bank
doesnt provide funds directly but gives assurance or takes guarantee on behalf of its customer to
pay if they fail to do so.
In case of Fund Based there are different categories of loans which are discussed as follows
TERM LOANS
All loans with original contracted tenure in excess of one year are termed as term loans. Loans
for acquisition of fixed assets (outright purchase, construction and/or repairs/renovation of
building(s), purchase of machinery and equipments, commercial vehicles etc) shall be normally
sanctioned by way of term loans only.

Under term loans banks sanction as:

Retail Loans
Retail banking in India is not a new phenomenon. It has always been prevalent in India in
various forms. For the last few years it has become synonymous with mainstream banking for
many banks. The typical products offered in retail segment are:

Housing loans(Sanction as Domestic and NRI Housing loans)

Consumer loans for purchase of durables

Auto loans(Both as Vehicle Loans (Public) and Vehicle Loans (Private)

Educational loans(For studies in India and abroad)

Personal loans .CSB has various schemes under Personal loan schemes
1)Casy Mithra Loan
2)Casy Cash Loans
3)CSB Women Support Scheme
4)CSB Senior Citizen Support Scheme
5)Medicash Scheme for doctors
6)Profession Plus
7)Tax Payers' Liquidty Scheme

Retail loans are granted in Priority and Non Priority sectors

In the Priority sector bank has schemes for :
a)Agriculture & allied activities
i)CSB Kissan Raksha Scheme

ii)CSB Farm Support Scheme

iii)project schemes finances
b)Term loans under SME
c)Advances to weaker sections
Retail loan is the practice of providing money to individuals rather than institutions.
Retail lending is done by banks, credit unions, and savings and loan associations. These
institutions make loans for automobile purchases, home purchases, medical care, home repair,
vacations,and other consumer uses. Retail lending has taken a prominent role in the lending
activities of banks, as the availability of credit and the number of products offered for retail
lending have grown. The amounts advanced through retail lending are usually smaller than those
disbursed to businesses. Repayment of term loans are in monthly /quarterly/halfyearly/yearly
installments. Certain term loans have repayment holiday depending on their nature.
Retail loans are disbursed as short term & long term loans . Short term are for a period of 36
months and long term for a period in excess of 36 to 240 months
Eligibility for term loans:
Bank should be satisfied with the repayment capacity of the borrowers. For personal loans CSB
insist for Income tax returns/salary certificates. For priority sector advances ,bank depends on
income generation from the schemes/projects. In such cases we insist for project report to assess
the profitability,DSCR,Cash flow, Fund Flow and break Even Point.
WORKING CAPITAL
Working capital is the operating funds required for carrying on day to day operations.Operating
funds that are required for procurement of raw materials, spares and tools and also to make
ongoing operating payments, so that the activities are carried on without break.
A significant portion of csbs credit portfolio is in the form of various types of workingcapital
facilities to industries, trade etc. The following types of facilities/ creditinstruments are normally
offered, depending on the nature of activity:

(a)Overdrafts/ Cash credit / Key loans etc.(ODM,ODH, Cash Credit, OD on FD, Clean ODS,OD
on Pledge, Key Loans)
(b) Cheques/ bills purchasing/ discounting
(c) Loans against warehouse receipts
(d)Foreign Currency Loans
e)Export Finance
As explained earlier, advances are classified as Term Loans and working capital loans. Bank
accommodate the following categories in their loan portfolios. Such accommodation are either as
term loan or running accounts.
a)Gold loans
b)Short term corporate loans
c)Foreign currency term loans
d)Advances to capital market
e)Advances to commercial real estate
f)Non banking Finance Company
g)Advances to Infrastructure projects.
Non Fund Based Limits:
a)Bank Guarantees
b)Inland LCs
c)Foreign LCs
These are the different types of loans in banks.

A STUDY ON THE CREDIT POLICIES OF THE BANK

The bank has an elaborate credit policy list taking into consideration each minute aspect of the
borrower and his dealings including the maximum benefit that can be offered to the borrower to
retain the prospective customers as well as to attain profit. The credit policies of the bank has
been

studied

and

brief

overview

of

the

general

credit

policies

vision,mission,objectives,strategies and the policies regarding credit appraisal process

,its
is

mentioned below.
Main functions of the banks are accepting deposits for the purpose of lending to earn profits for
its shareholders. Traditional profit making source was through advances, commission and
discounts. However economic reforms brought about in early nineties have provided banks
ample scope for growth, simultaneously casting upon them greater responsibility of increased
self governance. Freedom from the decades old practice of identical products, administered
prices and insulation from developments abroad, widened the scope of banking in India. At the
same time, this welcome change has paved way for heightened competition from within and
outside the industry. The immediate outcome is evolvement of new products and practices,
narrowing of margins, mobility of customers and the like. In tune with the changing needs of
customers, varied products with varying degree of complexity have come into existence,
warranting more competitiveness and professionalism.
Therefore lending function carries additional responsibilities of evaluation of risk and its
management. Attracting and retaining good clients require flexible use of interest rates in tune
with the market trend. While identifying and canvassing prime customers requires sharpened
marketing skills supported by an overall knowledge of business environment in the areas of
operation, retaining them requires persuasive skills backed by timely and effective response to
their needs with professional approach and care.
1.The objectives of Credit Policy are:
a) Utilization of resources in a prudent manner
b) Diversification of credit risks
c) Ensuring optimum returns

d) Maintainence of quality portfolio

e) Minimizing maturity mismatches and
f) Adherence to all statutory and regulatory requirements.
2.Vision
With a view to create an impact in the competitive environment in mobilising and
maintaining prime clientele, a vision with five pronged thrust is set out as the core
theme of the credit policy, as follows:
1. Augmentation and maintenance of quality assets
2. Ensuring adequate and timely returns
3. Skilful evaluation with updated knowledge
4. Emergence as a FINANCIAL DOCTOR and TRUE FRIEND of the clients.
3.Mission
3.1Strategy
Credit growth in tandem with growth in deposits and in tune with Corporate Policy
framed each year.
Prudent selection of borrower through market report and objective
evaluation of the party and purpose.
Quick response to customer needs by conveying decisions in a time bound
manner.
Use of skill and experience in processing credit applications with a wholesome approach
balancing risk and return. Competitive pricing with due regard to risks, cost of
funds/services, market factors, etc
Periodical customer interfaces by our senior level functionaries to
understand and address operating problems of the borrowers.
Development of customer friendly and flexible loan products/special credit
schemes and marketing the same with will and vigour. Prescribing general
norms/bench marks for various parameters in order to maintain and upgrade
borrower standards.

 Thrust to the industries and activities having niche markets as a measure of

portfolio diversification.
Emphasis to credit marketing and developing sustainable relationship banking with
periodical review of market trends.
Constant monitoring to ensure quality of assets through risk management
systems and Loan Review Mechanism (LRM)
3.2 Approach
Developing a team of credit officers by imparting adequate training.
Quick decisions without compromising on the quality of appraisal, through onetime
collection of data using check list.
Introduction of flow chart for movement of proposals at different tiers to spot the
areas of delay, if any, and to redress the same.
Periodical qualitative review of all borrowal accounts in order to address
deficiencies, wherever noticed.
Maximum utilization of electronic media for faster communication and credit
delivery.
4. INITIAL STEPS FOR CONSIDERING A CREDIT FILE
a)Selection of borrowers
General selection norms
Activity of the borrower should be legally permissible.
Financial strength of the borrower client shall be adequate vis-a-vis the project
size/volume of operations proposed to be undertaken and risks involved therein.
Information should be gathered through discreet enquiries about the applicant,
promoter(s), and proposed guarantor(s) regarding their financial strength,banking
behavior, antecedents etc.
Applicants and proposed guarantors of credit facilities are required to disclose the
details of litigation, if any, in which they are involved. Such disclosures and if there

are no litigation, a statement to that effect should be incorporated in the process

note.
In the case of applications under consortium or multiple banking arrangement,
satisfactory status/credit report should be obtained from other banks/financial
institutions participating in the lending arrangement, before granting any credit
facility.
b) Adherence to KYC and AML norms
As in the case of all banking transactions, credit operations are also subject to strict adherence to
directives on Know Your Customer and Anti Money Laundering norms issued by Reserve Bank
of India and Government of India. Beginning with proper identification of the prospective
borrowers,these norms stipulate various procedures to be followed while allowing transactions
in the account.
c). Reference to Defaulters List etc.
. As required under Credit Information Companies (Regulation) Act, 2005 the Bank has enrolled
itself as a member of Credit Information Bureau of India Ltd (CIBIL). Till the functions of
Credit information companies are fully operationalised in India, the Bank will continue to make
reference to Defaulters List and Willful Defaulters List provided by RBI from time to time,
wherever required.
d)Study of project report in the case of term loans or fresh advance file
Term Loans:
Cash Flow/Fund flow/profitability statement for Five years/DSCR/Break Even Point analysis
e)Balance Sheet analysis / credit rating mechanism
f)Focus on Priority sector lending
The Bank continues to give emphasis in lending to various categories of borrowers and activities
identified by Reserve Bank of India as Priority Sectors from time to time.Activities/ categories of
borrowers classified under Priority Sectors as per the norms in force now are the following:
(i) Agriculture and allied activities (direct and indirect finance)
(ii) Small Enterprises (including micro enterprises as defined under MSMED Act)
manufacturing and service (direct and indirect finance)

(iii) Retail trade

(iv) Micro credit
(v) State sponsored organizations for Scheduled Castes/ Scheduled Tribes
(vi) Education
(vii) Housing
(viii) Weaker sections
Weaker sections:
a)Khadi &village industries whose credit needs do not exceed Rs.50000.00
b)Small & Marginal Farmers, agriculture labourers, tenant farmers, share croppers etc.
c)SGSY loans
d)SJSRY loans
e)DRI loans
f)Self help Groups
g)Loans and advances to the poor upto Rs.1.00 Lac to redeem the high cost outside borrowings
h)Housing loans upto Rs.50,000.00.

POLICY ON LENDING TO SELECT SECTORS AND TYPES OF EXPOSURES

8. 1. Capital Market Exposure
8. 2. Commercial Real Estate
8. 3. Non-Banking Finance Companies (NBFCs)
8. 4. Infrastructure
CREDIT APPRAISL AND SANCTION
All credit proposals should be appraised using the appropriate appraisal formats, prescribed
based on amount and nature of credit facility. In the case of facilities for trade, industry and other
businesses and applicants other than individuals, financial position should be analysed based on
Balance Sheet and Profit & Loss Account/Income & Expenditure Account/ Receipts & Payments

Account (based on the constitution/legal status of the applicant) for the immediate past three
years, estimates for the year during which the analysis is done and projections for the next year.
In case the applicant entity is in existence for less than three years, financials for all the
completed years should be furnished and analysed.
Credit Risk Assessment (CRA) and rating
The Bank has a comprehensive risk rating system that serves as a single point indicator of
diverse risk factors of a borrower / counter party, for taking credit decisions in a consistent
manner. The risk rating system reveals the overall risk of lending, necessary in-puts for pricing
the loan and setting non-price terms and conditions and provide meaningful information for
review and management of the loan portfolio. It provides necessary indications to the credit
sanctioning authority as to the asset quality.
All the proposals involving Rs 25 lakh and above should be rated using the credit risk
assessment (CRA) format applicable for the nature of activity and/or category of borrower,
prescribed from time to time. As per Basel II guidelines, a qualifying IRB system must have
facility wise rating (or Loss Given Default (LGD) rating) besides a borrower-specific obligor
rating system.
For this purpose, marks shall be awarded for various parameters, subject to ceiling and
appropriate facility rating to be assigned ranging from CFR-1 to CFR-8 as follows:
Marks awarded(as% to marks Credit rating
applied)
75 % and above

CFR-1

60% and above but less than 75%

CFR-2

50% and above but less than 60%

CFR-3

40% and above but less than 50%

CFR-4

35% and above but less than 40%

CFR-5

30% and above but less than 35%

CFR-6

25% and above but less than 30%

CFR-7

Less than 25%

CFR-8

Inference
On default very
recoverability

good

On
default-good
recoverability
On
default-moderate
recoverability
On
default-average
recoverability
On
default-poor
recoverability

In the case of Borrower Rating,accounts shall be rated on a scale of 8 (eight), with CSB-1 in the
highest slab and CSB-8 in the lowest grade,based on the marks awarded as percentage to marks
applied. Distribution of rating under various grades,vis a vis marks awarded, is as follows
Marks awarded(as% to marks Credit rating

Inference

applied)
80% or more

CSB-1

Entry level

70% or more,but less than 80%

CSB-2

60 %or more,but less than 70%

CSB-3

55%or more,but less than 60%

CSB-4

50%or more,but less than 55%

CSB-5

45%or more,but less than 50%

CSB-6

40%or more,but less than45%

CSB-7

Less than 40%

CSB-8

Slippage
quality

in

asset

Exit level

If the rating assigned is CSB-5 or worse, fresh proposals shall not be considered. The Bank shall
endeavour to come out of the exit level accounts as early as possible.Nursing programme with
additional funds shall be considered only in exceptional circumstances and shall be sanctioned
by General Manager or higher level functionaries only.
Marks for financial parameters shall be awarded based on the analysis of audited financial
statements for the immediate past three years, the latest of which shall not be more than 18
months old. Any rating assigned to the borrower is valid for a period of one year from the date of
rating or 18 months from the date of audited financial which has been considered for the rating,
whichever is earlier.
Lending powers have been conferred on various functionaries, ranging from Principal
Officers of branches to Credit Committee of Board, depending upon nature, size and purpose of
advance and value of security available. These powers are subject to review and revision
periodically and will be communicated through circulars from time to time.

Organisational structure for credit appraisal is set in accordance with the lending
powers of various functionaries, as follows:
Sanctioning Office

Centre for credit appraisal/ processing

Branch

Lending branch except for loans under

specialized schemes.Processing of proposals
for loans under specialized schemes will be
done by the Centralised Processing Cell(s)
set up for the purpose. Principal Officers of all
branches are empowered to sanction credit
facilities under specialized schemes, subject to
the respective upper ceiling, based on
a Certificate of Compliance of Eligibility

Zonal Office

Norms to be issued by the CPC.

Lending branch to submit the applicable
appraisal format together with all required
supporting documents. Zonal Office will
process the proposal in detail and issue
sanction letters to branches with copy endorsed
to Head Office.

Head Office sanction

Branches will submit one copy each of the

proposal

(application

and

supporting

documents and process note in the appropriate

format) to Zonal Office and Credit Dept., HO.
Zonal Office will submit its Forwarding Note
and Unit Visit Report (if applicable), in the
prescribed formats to Credit Dept., HO. Credit
Department at Head Office will conduct
detailed appraisal. Sanction letter will be issued

by Credit Department, HO to the branch

concerned under advise to Zonal Office
Reporting of credit sanctions
Details of all sanctions accorded by various functionaries should be reported to higher
authorities, in the specified formats, on monthly basis, as follows:
Sanctioning authority
Principal Officers of branches
Deputy Zonal Managers and Zonal Managers
Deputy General Manager (Loans and

To be reported to:
Zonal Manager
General Manager
Chief Executive Officer

Advances)
General Manager
Chief General Manager
Chief Executive Officer
Credit Committee of Board

Chief Executive Officer

Chief Executive Officer
Credit Committee of Board
Board of Directors

Post disbursal monitoring

Basic functional responsibility of post lending monitoring rests with the lending branch
concerned. In addition to that, offsite monitoring of borrowal accounts will be done by higher
level functionaries, based on input returns submitted by branches. For this purpose, accounts are
classified based on aggregate exposure per borrower entity and entrusted to various offices, as
follows, as per extant norms:
Above Rs 10 lakh, not exceeding Rs 50 lakh: Zonal Office
Above Rs 50 lakh: CMD
A committee consisting of senior executives (Large Advances Committee- LAC) is
constituted at Head Office. LAC will meet at quarterly intervals and review all accounts above
Rs 50 lakh, based on the report furnished by Circle Office/Branches in Kerala. Further, a subcommittee of the LAC will review all accounts that require close monitoring and those which
exhibit symptoms of delinquency, on a monthly basis. Credit Monitoring Dept (CMD) at Head
Office will co-ordinate the functions of LAC and its sub committee.
Stock audit and Credit Audit: The system of stock audit and credit audit will be monitored by
CMD. While appointment of stock auditors is entrusted to Zonal Offices concerned, credit audit
will be undertaken by the field level officers attached to CMD directly. Rectification of
irregularities reported in both stock audit and credit audit will be monitored by the respective
Zonal Offices under report to CMD.

DOCUMENTATION
Execution of documents
1. Credit facility(ies) shall be disbursed only after execution of necessary security documents as
prescribed for the type of facility, nature of security(ies) and the category of borrower. A
compendium of various formats required to be used for execution of documents is prepared and
made available to all concerned.
2. In the case of credit facilities granted under consortium or multiple banking arrangement
wherein common security (current or fixed assets) is to be shared along with other lenders on
pari passu basis, it is preferred to have joint documents including inter-se agreements before
disbursal. However, the sanctioning authority for the credit facilities concerned shall permit
waiver of joint documentation or disbursal pending joint documentation, based on individual
documents executed in our favour, provided no objection letter for ceding pari passu charge has
been received from all other participating lenders separately or consortium of banks has taken a
decision to thateffect unanimously. Letter ceding pari passu charge or joint documents, as the
case may be, according to the terms of sanction, shall be obtained, as far as possible, within 3
(three) months from the date of disbursal
Verification of assets hypothecated or pledged
In the case of working capital facilities secured by hypothecation or pledge of inventory and/
or receivables, statements of stock and/ or book debts shall be obtained from the borrowers in the
following manner:
(i) Statement of stock with data related to opening stock, production/ purchases,consumption/
sales and detailed description of stock on hand shall be obtained monthly (or at other periodicity
specified by the sanctioning authority).
(ii) Statements of book debts hypothecated/ assigned to the Bank with age-wise classification
shall be obtained at monthly intervals ensure the veracity of the contents of the stock statements/
ensuring adequate security. Principal Officer of the lending branch shall verify the book debts
statement submitted with the records available with the borrower at periodical intervals and the
same shall be recorded in a register at the branch. Further, the statements of book debts charged
to the Bank shall be certified by the statutory auditors of the borrower/independent Chartered
Accountant at quarterly intervals. However, the sanctioning authority concerned (not below the

rank of Zonal Manager) may permit relaxation in the case of certification, if found necessary, in
case the amount of drawing power arising out of book debts is not more than Rs 100 lakh
3. Machinery and vehicles hypothecated to the Bank as well as registration certificate
of such vehicles shall be inspected/ verified periodically.
4. In case of delay, if any, in submission of statements of stock/ book debts or balance
remaining outstanding in excess of drawing power, penal interest shall be charged at
the rate and the manner prescribed from time to time. Similarly, penal interest shall
also be levied in case of non-production of vehicle for inspection upon request.
Symptoms of delinquency- detection and action thereon
Early warning signals and symptoms of delinquencies, if any, shall be diagnosed at
the beginning itself and suitable remedial measures initiated forthwith. The following is
an illustrative list of such symptoms that warrant immediate attention:

Continuous irregularities in cash credit/overdraft accounts such as inability to

maintain underlying current assets such as inventory and/ or receivable with
stipulated margin, non-servicing of interest debited periodically in time,
transactions in the account not commensurate with the limit sanctioned/ sales
turn over projected etc.

Failure to make timely payment of installments of principal and interest of term

loans

Complaints from suppliers of raw materials about non payment or delayed

payment of their dues, continuous delay in payment for utilities like power, water,
communication facilities etc

Delayed or erroneous submission of stock/ book debts statements and other

control statements or non submission them

Attempts to divert sale proceeds through accounts with other banks

Frequent return of cheques and bills

Steep decline in production, sales and/ or profit

Disproportionate increase in inventory turn over ratio and/ or debtors velocity

Frequent return of documentary bills negotiated/ sent for collection and/ or

allowing large discount on sales

Failure to pay statutory liabilities in time

Diversion of working capital to acquire fixed assets and/ or diversion to associate

concerns.

Requests for ad-hoc facilities or temporary enhancements frequently

Devolvement of LCs or invocation of BGs

Non-submission of application, financial statements etc for review/ renewal in

time.

Extension of accounting year frequently.

CREDIT EXPOSURE CEILING

Read through 9.1 to 10.6

CREDIT EXPOSURE CEILING

Read 12.1 to 12.3.2

CREDIT APPRAISAL PROCESS

INTRODUCTION
Main function of banks is accepting deposits for the purpose of lending with the view to make
profits for its share holders. Deposits belong to the public and it is the utmost concern of the
banks to safe guard the interests of the depositors. Funds received from the customers are
deployed in a judicious manner to earn profits.
Banks deploy the funds as follows:
a)Loans and advances
b)Investments
Of the two above Loans and Advances are most lucrative for the banks. However, while lending
banks are very vigilant because of the risks involved. Higher the returns, higher will be the risk.
Therefore , banks have formulated their own credit policies to be complied with the sanctioning
authorities. Minimizing credit risks and maximizing profits have become the objectives of Credit
Management, ever since the concept of NPAs were introduced. The health of an advance depends
on the vigilance shown at the time of pre-sanction scrutiny,disbursal and post-sanction follow up.
PRE-SANCTION SCRUTINY
A major part of the banks income is earned from interest and discount on the funds lent to
customers.The business of lending is not without certain inherent risks. To minimize the risks,
banks follow certain cardinal principles of lending noted below:
1) Safety:
Since the bank lends funds entrusted to it by depositors,it should be ensured that the loan goes to
the right type of borrower and is repaid with interest after serving the purpose for which it was
taken.
2) Liquidity:
Since Banks are essentially intermediaries for short term funds it should be ensured that the
borrower is able to repay the loan on demand or within a short period in accordance with agreed
terms of repayment.
3) Profitability:

To grow and survive, the bank must make profits which constitute the major source of income
for paying interest on deposits, to meet establishment expenses, salaries etc
4) Purpose
The purpose should be productive so that it will provide a definite source of repayment. We
should not advance money for transactions of anti-social nature such as for hoarding,speculative
activities etc.
5) Spread:
An important principle in sound lending is diversification of risks. The risks involved in lending
should be spread over a large number of borrowers,over a large number of industries and areas
and over different types of securities.
6) Security:
It has been the practice of banks not to lend as far as possible except against security. Security is
considered as an insurance or cushion to fall back upon in case of an emergency.
7) National Interest/Social interest.
Priority lending:

The purpose of the advance,viability of the proposal and national

interest,especially in advance to agriculture,housing,small industries,small borrowers and exportoriented industries are given high weightage.
2 .BORROWER STUDY AND REPORTS:
An appraisal of a proposal begins with the gathering of adequate background knowledge about
borrowers character, capital and credit worthiness. In credit appraisal, much importance is
placed on the credentials of the borrower. Therefore, there is necessity for evaluation of the
borrower in respect of his standing in the business. Elaborate scrutiny concerning all these
aspects is required to be put into a precise credit rating assessment report which helps in taking
decision to advance. Each individual case has to be examined in the light of its own
circumstances .The bank's credit policy, procedures and directives guide the credit assessment
process.

2.1 SOURCES OF BORROWER INFORMATION

Information regarding character,honesty and financial position has to be discreetly gathered from
following sources.
a. The borrower: The bank should develop as much credit information as possible during the
initial interview with the borrower/partners of firm/directors of company/proposed guarantor/coobligator and principal officials of firms/company ,nature of its business, past and expected
profitability, the degree of competition that the firm/company faces and whether or not it has had
or anticipated any difficulty etc. Information regarding its principal officers should be collected
during such interview.
b. Borrowers financial statements: for lending decisions, financial information is a significant
part of the total information system. It is derived basically from borrowers:
Trading and profit and loss statement
Balance sheet
Cash and fund flow statements
c. Banks own records: If he is an existing borrower, banks own records are a rich source of
additional information. Operations in the borrowers account and other dealings at the bank level
in regard to collections, discounting/retirement of bills etc. often useful clues to borrowers
operating and financial transactions. A review of the previous years operations in the account
and assessments of borrowers financial statements relating to that period will provide a rich
source of information about the borrower.
d. Opinions: Bank should compile opinions on their borrowers. They should contain full and
reliable records of the character, estimated means and business activities of all firms and
individuals who are under any form of liability to the bank, whether as direct borrowers or as coobligators. Full particulars of parties immovable properties where they are situated, whether they
are free from encumbrance and in the case of land,acre age should be recorded together with fair
estimates of their value. As far as possible written statements of their properties should be taken

in evaluating properties owned by parties jointly with others and as a rule such properties should
be disregarded in arriving at the net means.
e. From other banks : in respect of fresh proposals, enquiries with local banks should be made
before entertaining the proposal to avoid multiple financing without our full knowledge. In case
of new customer having dealings with other banks, confidential opinion of his banker has to be
obtained .
.f. Income tax assessment order - Income tax assessment orders agricultural income tax
assessment orders give an insight into the borrowers account and the extent to which it is
profitable. Comments thereon by the income tax office shall indicate the shortcomings (lacunae)
in the business. In the case of estate owners agricultural tax assessment orders to be obtained to
arrive at parties credit worthiness
g. Sales tax assessment orders : Sales tax assessment orders will reveal the turnover in business
and when read with trading/ manufacturing and profit & loss account, it may be possible to have
a fair assessment of tendencies in trade i.e., whether over-trading or carefully trading within
recourses at command or trading entirely on the borrowed funds.
h. Wealth tax assessment orders : wealth tax assessment order will indicate the net worth of
individuals and reveals the liquid source available to bring the required margin money for the
venture.
i. Market sources : Constant touch with the market will help to have firsthand information about
the gains or losses in particular business transactions of the borrowers.
j. Property statements: The property statement of borrower will give an idea of his worth,
liabilities and his income from real estates (immovable properties).
k. Municipal property registers reference to municipal property registers will give an idea of
building owned within the municipality, Rental Values and house tax payable.It may be noted
that the said registers are open for reference to all persons.
l. Other external sources other external sources ,if any , like stock exchange directory,business
periodicals/magazines/journals etc

TYPES OF CHARGES
The banks apply charges on the assets given by the borrower to the bank as a security for loan.
Thus, one of the following terms will be normally used whenever an individual or a business
firm avails any loan and the bank keeps some assets as a security, so that it will be able to sell the
same in case that individual or the firm defaults in repayments.
PLEDGE
Pledge is used when the lender (pledgee) takes actual possession of assets (i.e. certificates,
goods ). Such securities or goods are movable securities. In this case the pledgee retains the
possession of the goods until the pledgor (i.e. borrower) repays the entire debt amount. In case
there is default by the borrower, the pledgee has a right to sell the goods in his possession and
adjust its proceeds towards the amount due (i.e. principal and interest amount). Some examples
of pledge are Gold /Jewellery Loans, Advance against goods,/stock, Advances against National
Saving Certificates etc.
HYPOTHECATION
Hypothecation is used for creating charge against the security of movable assets, but here the
possession of the security remains with the borrower itself.

Thus, in case of default by the

borrower, the lender (i.e. to whom the goods / security has been hypothecated) will have to first
take possession of the security and then sell the same.

The best example of this type of

arrangement are Car Loans. In this case Car / Vehicle remains with the borrower but the same is
hypothecated to the bank / financer. In case the borrower, defaults, banks take possession of the
vehicle after giving notice and then sell the same and credit the proceeds to the loan account.
Other examples of these hypothecation are loans against stock and debtors.

[Sometimes,

borrowers cheat the banker by partly selling goods hypothecated to bank and not keeping the
desired amount of stock of goods. In such cases, if bank feels that borrower is trying to cheat,
then it can convert hypothecation to pledge i.e. it takes over possession of the goods and keeps
the same under lock and key of the bank].

MORTGAGE

Mortgage : is used for creating charge against immovable property which includes land,
buildings or anything that is attached to the earth or permanently fastened to anything attached to
the earth (However, it does not include growing crops or grass as they can be easily detached
from the earth). The best example when mortage is created is when someone takes a Housing
Loan / Home Loan. In this case house is mortgaged in favour of the bank / financer but remains
in possession of the borrower, which he uses for himself or even may give on rent.
ASSIGNMENT
An assignment constitutes an action taken with a contract. Assignment occurs when the owner
of a contract, known as the assignor, gives a contract to another party, known as the assignee.
The assignee assumes all responsibilities and benefits of the contract. When it comes to loans,
assignment can relate to life insurance policies and mortgage contract from one party to another.
Mortgages and other contracts sometimes contain provisions limiting or stipulating conditions
for assignment.
LIEN
In the absence of an agreement to the contrary , bankers may retain as a security for a general
balance of accounts, any goods and securities bailed . this right to retain goods is known as lien.
The bankers General lien confers upon him the right to retain securities etc . in respect of the
general balance due by a borrower to the banker. A banker can with notice to the customer draw
on such securities to liquidate a general balance due from him at any time,while the securities
lawfully remain in his hands.
SET OFF
Set off means the total or partial merging of a claim of one person against another, in a counter
claim by the latter against the former. It is in effect the combining of accounts between a debtor
and a creditor so as to arrive at the net balance payable to one or the other.

IMPORTANT POINTS REGARDING PRE-LENDING FORMALITIES AND SECURITY

Remember 3Cs-Character,Capacity and Capital while assessing the applicant.

Purpose of advance-the facility should be need based.

Security Offered-Primary and Collateral, its value and quality to be

ensured,

marketability of the security

Guarantee-Personal Guarantee and others

Guarantors honesty,credit worthiness or in other words assess them under 3C

Ensure Margin norms and requirements

Technical Feasibility

Location of the project-Land and Building-Leased or Owned

Choice of technology and size-should be cost effective and scope for expansion

Technical tie ups

Selection of Machinery-brand new/second hand.

Manufacturing process, product mix, storage capacity, disposal of effluents

Project implementation schedule

Financial Viability
Credit Appraisal tools-Financial projections/forecasting should be reasonable
Analysis of financial statements,RatioA nalysis,Funds/Cash Flow,Working Capital/Term
Loan assessment, Break Even Point etc.

Estimated Capital Cost-realistic

Costing and Pricing should be appropriate

Debt service is adequately covered

Compare with Industry averages

Managerial Competence

Conduct a SWOT analysis with 5Cs of the promoter.

Promoters background/stake including family background

Compliance to KYC/AML norms

Applicant should not be in the Defaulters list

Previous borrowing-track record

Age, Professional qualification and experience

Family support

Whether he can handle production/marketing/sales/collection/accounting-all functions.

Conduct a stakeholder analysis-assess the importance of the people,groups of

people or institutions that may influence the success of the project
Commercial Viability/Marketability of the product

Ensure marketability-to sell whatever is produced and to produce whatever can be

Sold.

Where the unit is located-access to the market

Transportation-is cost/reliability

Infrastructure-power,water,roads

Raw material availability

Marketing and selling arrangements

Demand is located in a single market-dependence on long distance market

Present and future demand

Share of the product in the market

Change in consumer preferences

Legal angles-including security aspects

Socio/Cultural aspects of the projects

Environmental threat,if any

3)Analysis of financial statements:

Bank extends two types of funded facilities:
a)Working Capital Limits
Working capital is the operating funds required for carrying on day to day operations which is
given for a period of 12 months. The following types of facilities/ credit instruments are
normally offered, depending on the nature of activity:
(a) Overdrafts/ Cash credit / Key loans etc.
(b) Cheques/ bills purchasing/ discounting
(c) Loans against warehouse receipts
(d) Foreign Currency Loans
(e) Pre shipment credit in Indian Rupee or Foreign Currency (PCL or PCFC)
(f) Post shipment credit in the form of purchase of sight bills (FDBP), discounting of
usance bills (FUBD) and/or advance against export bills.

(g) Non funded facilities like Bank Guarantees (BG) and Letters of Credit (LC)
(inland or import) for procurement of raw materials, getting mobilization
Term Loans
Term loans are the loans funded for a period more than 12 months to 84 months extending upto
20 years .
(For purchase/installation of machineries/vehicles/ personal loans/Project loans/Long term
Agriculture

loans/Loans

against

shares,debentures/Loans

for

infrastructure

development/Commercial real estate etc.

As far as the credit appraisal is considered, we ask for the balance sheet when we get a new
account. If it is an existing concern, we'd go through the balance sheet and the profit and loss
statement for the past three years, analyze it, have the project report of the company to see how it
has been doing and then, on the basis of the project report, we would assess what the requirement
is - whether it is a term loan required to purchase plant and machinery etc. or it is just working
capital required for running the concern.
Most importantly, when we consider working capital loans, we take charge of the plant and
machinery and the mortgage of the land. The bank can also consider taking some collateral
security but this is just a comfort factor, not the main source of recovery for the bank. The main
source of repayment to the bank is from the operations of the company.

For Working Capitals

We consider:
a)Working caiptal----Financial statements
a)Balance sheets for the past three years
b)Projected balance sheets for the future 2 years
c)Analysis of balance sheets based on the data provided

(Bank consider DER, Current ratio,Interest Service ratio, Debtors Turnover Ratio, Creditors
Turnover Ratio and Net Profit Ratio for Working Capital )
Desirables:
a)DER---2:1
b)With Quasi Equity3:1
c)CR1.33:1
d)Debtors/Creditors Turnover 90days maximum
d)MPBF/Projected turnover method of lending
a)Second Method of Lending above Rs.500.00Lacs
b)Projected Turnover Method---Upto--Rs.500.00Lacs
For Term loans, we consider
a)DER, CR ,DSCR, Fund Flow and Cash flow, Break Even Point analysis for fresh Projects.
Project report to be submitted by the applicants
DSCR desirable is 1.5:1.
Personal Loans: Applicants to submit IT returns/ salary certificates to assess the repaying
capacity
Pre-sanction scrutiny in the case of companies,trusts and clubs
During the time of pre-sanction scrutiny for limited companies , it is important to make a search
at the office of the Registrar of Companies in their Register of mortgages and charges whether
any prior charge has already been registered under sec.125 of the Companies Act,1956.
Before considering an advance to a Company the banker should ascertain whether the Company
has powers to borrow and to create a charge on its assets and how these powers have to be
exercised. For this purpose , the memorandum and articles of association should be looked into.

All trading companies have implies powers toborrow. A non-trading company , however has no
borrowing powers unless they are specifically included in the memorandum of association.
The following papers should be carefully examined and a certified true copy of each should be
retained for banks records.
i)

The certificate of incorporation-it is infact the Birth Certificate of the Company.

ii)

The certificate of commencement of business

iii)

Memorandum and articles of Association

iv)

Balance sheets

v)

Confidential reports/Credit reports on directors

vi)

Board Resolution

In case of clubs,literary societies,schools etc , unless incorporated as a company under the

Companies Act ,1956, have no legal entity and as such have no powers to enter into contractual
relations. In case proposal is to be entertained as a special case, the bye-laws of the society or
club should be studied with a view to ascertaining the borrowing powers.
Likewise Trustees have no individual powers. They have all to act together and cannot delegate
their authority to any other person ,even to one among themselves unless provided in the trust
deed. Without any express powers in this regard they cannot pledge /charge the trust property.
(Explain the purpose of balance sheet scrutiny)
SANCTION ORDER
After process and sanction of credit facilities bank will issue sanction order to the party .
sanction order will contain formalities to be complied by the borrower for availing the loan and
other terms dictated by the bank. It includes
1. Amount of loan
2. Rate of interest

3. Repayment amount
4. Repayment tenure
5. Guarantee
6. Security for advances
a. Hypothecation
b. Mortgage
7. Other conditions prescribed by bank
Sanction order with the above stipulation will be sent to applicant and if he is satisfied
with banks terms and conditions of the loans will be called for to sign documents to
avail the loan.
DOCUMENTATION
Section 3 of the Indian Evidence Act,1872 states that document means any matter
expressed or described upon any substance by means of letters, figures or marks or by more
than one of these means intended to be the used for which may be used, for the purpose of
recording that matter.
The execution of documents in the proper form and according to Law is known as
documentation. The terms and conditions of the loans/advances , the securities charged and the
repayment aare reduced in writing. Adequate and proper documentation comes to the resque of
the banks in a Court of Law. If at any time the filing of a suit against a borrower becomes
necessary, the Court may not pass a decree if the documents are defective and the bank may lose
the case.
It helps to identify the borrower, security and it is used for the purpose of recording
transactions as a written evidence. It is also a means of creating charge over the security.
The docments that banks obtain generally are
i)promissory note for the loan amount.

ii)agreement for the loan

iii)guarantee agreement(if there are guarantors)
iv) Mortgage of property( if land and building is offered as security)
LAW OF LIMITATION
Section 3(1) of Limitation Act, 1963 provides that every suit or appeal or application
after the period of Limitation prescribed is to be dismissed even though limitation is not set up as
a defence.
Limitation period for some of the important Transactions:
1. TOD-3 years from the date of allowing First Overdraft.
2. AOD-3 years from the date of acknowledgement made by the borrower.
3. Mortgage-12 years from the date of creation of Mortgage for enforcement of security and
3 years from the date of the creation of Mortgage for personal remedy.
Various methods to keep alive the period of Limitation.
a. Renewal of full set of documents before the expiry of the original documents.
b. Obtaining acknowledgement of debt on requisite revenue stamp duly signed by all
the parties who have executed the documents before the expiry of the original
documents.
c. Part payment of debt or interest paid by the borrower/s under his/her signatures or
by his duly authorized agent before the expiry of the original documents.
Acknowledgement of debt/part payment after the expiry of the documents will not
extend the period of limitation.

DISBURSAL OF LOAN
After complying with the pre scrutiny formalities and in compliance with the policies of the
bank, branch issue sanction letter to the party. Sanction letter contains the amount of loan, rate of
interest, period of repayment and other terms and conditions to be followed by the applicant to
avail the loan.If the applicant is satisfied with the terms and conditions contained in the sanction
order,he will be required to execute documents to avail the loan.
Precautions while disbursing the loan:
a)Documents to be taken is prescribed forms
b)Signatures to be obtained for borrowers/guarantors
c)End use to ascertained
d)Security property to be properly mortgagd/pledged/ assigned/hypothecated as per extant
guidelines.(creation of charge)
POST LENDING FOLLOW UP:
The main thing in post lending follow up

is to have regular contact with the customer.

Traditionally we say, know your borrower like the back of your palm.It's like having complete
knowledge of your customer. Even if we have the best account, everything won't go well all the
time. So you have to find out whether the promoter has the wherewithal to come out of a difficult
situation i.e. how resilient your borrower is. For this, we should need to know about everything,
not just the balance sheet. That means their expertise, their experience, the people who head their
departments, and their internal policies
a)End use of bank funds to be ascettained.
b)Periodical visit of site/verification of security/ books of accounts to bemade after disbursal
c)Funds are not divertedascertain
d)Watch the account transactiondo there any signss of slowness/interest not properly serviced/

delay in payment of installments/

e)Review/renewal done properly in time
f)Reporting disbursal to higher authorities
h)Reporting abnormalities to higher authorities. Also report irregularities.
i)Inform interest rate changes to the parties.
j)Watch the value of securities with the bank for the facilities and take timely action.
k)Include the loans in various statements as instructed and follow up by authorities.
l)Attention to safe guard the money interest in lending and future recovery.

CREDIT RATING METHODS AND CREDIT RATING ASSESSMENT SCRUTINY

Volatility of credit market,over dependence of extraneous factors and macro economic
climate,lack of reliable data,poor application of accounting standards,sizeable and basically
diversified market participants,comparatively very long time horizon etc are some of the
stumbling blocks in evolving an efficient credit risk assessment system in our country. At the
same time banks cannot be blind to the complexities and intricacies of the changes taking place
in the internal credit market and global economy. In view of these factors and to align Indian
Banks with international standards and best practices,RBI has advised that all banks should have
a comprehensive credit risk rating system that serves as a single point indicator of diverse risk
factors of a borrower/counter party,for taking credit decisions in a consistent manner. The risk
rating system should reveal the overall risk of lending,necessary inputs for pricing the loan and
setting non price terms and conditions. It should also provide meaningful information to review
and management of the credit portfolio. It should provide the credit granting authorities some
comfort by indicating the loan quality at any point of time.
RATING METHODOLOGY
The purpose of credit ratings for a loan proposal is not only to decide whether to reject or
sanction a proposal but also to determine rate of interest. Needless to say that borrowers with
better credit ratings will get credit facilities at comparatively lower rate of interest. Most of the
banks have set up their internal credit rating model. However many banks still prefer to get
ratings from specialized credit rating agencies. Care ,ICRA,CRISIL and SMERA are some of the
well known credit rating agencies.
Bank has a comprehensive risk rating system that serves as a single point indicator of diverse
risk factors of a borrower / counter party, for taking credit decisions in a consistent manner. The
risk rating system reveals the overall risk of lending, necessary in-puts for pricing the loan and
setting non-price terms and conditions and provide meaningful information for review and
management of the loan portfolio. It provides necessary indications to the credit sanctioning
authority as to the asset quality.
As part of Credit Risk Management and in compliance of Risk Management Guidelines

issued by the Reserve Bank of India, the Bank has introduced in-house developed Credit Risk
Rating Models for exposures, by way of Fund based and Non-Fund based limit, of Rs. 25.00 lakh
and above. Most distinguishing feature of the new model is the introduction of two-dimensional
structures for risk rating viz.(i) Borrower Rating and (ii) Facility Rating. Negative marks for
deterioration in the performance /conduct of the account have also been incorporated in the
Borrower rating score.
As per Basel II guidelines, a qualifying IRB system (Internal Rating Based Approach)must have
facility wise rating (or Loss Given Default (LGD) rating) besides a borrower-specific obligor
rating system. Facility Rating for standard accounts seeks to incorporate key factors affecting
recovery prospects in case of default. Probability of Default (PD) is to be estimated based on
Borrower Rating, whereas Loss Given Default (LGD) is to be estimated based on the Facility
Rating.
Facility Rating:
Features required for Facility Rating are already included in Bank's Credit Risk Assessment
(CRA) formats. To comply with Basel II requirement, Bank have made certain modifications in
the existing CRA format so as to arrive at a separate Facility Rating i.e. for each borrower,with
the same CRA format, both the ratings viz. Facility Rating and Borrower Rating shall be derived.
Security aspects which are already covered in the existing rating model will be segregated and
will form a part of Facility Rating. To enhance the coverage for Facility Rating, two fresh
parameters are introduced. viz. seniority of charge and nature of charge. Nature of charge is
applicable to the security of stock/receivables/machinery/vehicle and movable assets. Seniority
of charge is applicable only to the security of landed properties. Financial Parameters such as
Current Ratio and Debt Equity Ratio as per the latest Audited Balance Sheet are also considered
for Facility Rating.
Borrower Ratings:
In the Borrower rating we include Financial parameters, Market risk, Managerial risk, Track
Record and Compliance level

In terms of Reserve Bank of India guidelines and also in terms of Basel II guidelines, a bank
must have a meaningful distribution of exposures across grades with no excessive
concentrations, on both its Borrower Rating and Facility Rating. To meet these objectives, Basel
II prescribed that a bank must have a minimum of seven borrower grades for non defaulted
borrowers and one for those that have defaulted. A borrower grade is defined as an assessment of
borrower risk on the basis of a specified and distinct set of rating criteria, from which estimates
of PD are derived. There is no specific minimum number of facility grades for banks using the
advanced approach for estimating LGD. It is further specified that a bank must have sufficient
number of facility grades to avoid grouping facilities with widely varying LGD into a single
grade.

The risk rating methodology recommended by RBI cover both external and internal risks
as shown below
a.External Risk
-sector risk including government policy, exchange rate and interest rate fluctuations, political
risks etc.
b. Internal Risk
o

financial risk

business risk

management risk

project risk

It also includes concentration of credit to a particular industry or a particular geographical

location,low quality credit appraisal,inefficient recovery machinery,defective credit policy of the
bank etc.

The number of grades to be used for calibration of Credit Risk depends on the risk profile of the
bank and the anticipated level of diversification of the credit portfolio. A credit rating frame work
with alarge number of scales/grades will be more complex and costly. RBI has suggested a
structure with ,say,ninegrades of which 1 to 5 for representing acceptable levels of risk and 6 to 9
for unacceptable levels of risk. It is also recommended that all exposures are to be rated.
Catholic Syrian Bank rating structure has got 8 grades with CSB-1 to CSB-8 representing CSB-1
to CSB 3 as entry level ratings,CSB-4 and CSB-5 for nursing level ratios and CSB-6 o CSB-8
as exit level ratios. Elements of the Credit Risk Assessment and the Rating Chart are discussed
below.
FINANCIAL RISK ANALYSIS
While evaluating financial parameters, the risk assessing officer should take into account the past
financials of borrowers and future prospects and the risks associated. While the past financial
helps in tracing the trends,the future prospects will indicate the likely course of events to follow.
Under Financial Risk Analysis we are using five parameters,namely Debt Equity Ratio
with/without quasi equity, Current Ratio,Debt Service/ Interest

Service Coverage

Ratio,Profitability Ratio and Return on Tangible Net Worth.

Debt Equity Ratio
Owners contribution is the litmus test for the commitment and involvement of the promoters.
The higher the owners contribution ,the venture becomes the more attractive from the banks
point of view. Therefore the lower the DE Ratio,the better. However a DE Ratio above 3 cannot
be considered for fresh financing.
In many balance sheets ,we come across sizeable funds mobilized by the promoters from their
friends and relatives. These are interest free loans and deposits and will be in the business so
long as it functions. Therefore such loans and deposits can be considered as quasi equity. In order
to take care of such borrowers,we can consider Debt Equity Ratio with quasi equity. A DER of 2
and below after reckoning quasi equity is considered as low risk while 4 and above cannot be
considered for financing.

While computing the quasi equity,we should ensure that only interest free loans from friends and
relatives, are reckoned and such loans and deposits are likely to remain in the business
throughout the currency of the limits. In the event of any repayment to be made,the borrowers
should bring in alike amount without bearing any interest costs. The borrower should be asked
to furnish the schedule of such loans from friends and relatives and an undertaking to the above
effect.
Current Ratio
Current ratio is one of the most important ratios always looked into by the lenders . Since bulk of
the finance is for the uninterrupted flow of funds for production purpose, a healthy Current Ratio
should always be maintained by the borrowers.
A Current Ratio of1.33 and above is considered as low risk while the benchmark is pegged at
1.10 below which,no fresh borrowers are entertained.
While evaluating the current ratio,the risk assessing officer should have an eye on the quality of
current asset. Damaged,non-saleable stock should be excluded. Branches will have to take into
consideration what they have observed during the stock inspection,the declarations given by the
borrower in the monthly stock statements, the observations in the Stock Audit Reports and the
quality of compliance of Stock Audit Comments. It is also to be remembered that a higher
current ratio need not be attractive in all situations, at times it may even be risky to finance a
venture with high Current Ratio .
Debt Service Coverage Ratio/Interest Service Coverage Ratio
In the case of Term Loans DCSR and in the case of working capital limits ISCR should be
considered for risk evaluation.DCSR denotes the repayment capacity of principal and interest
wheras ISCR provides the comfort level of interest servicing. The low risk levels are at 1.75 and
above in the case of DCSR and above 4 in the case of ISCR. The benchmark levels are 1.50 and
2.50 respectively below which no fresh limits can be considered. Here again the risk assessing
officer should take into consideration the composition of income generated by the unit. Other
income,or extra ordinary income generated in a particular year should be excluded while
calculating DSCR and ISCR.

Net Profit Ratio

The net profit to sales ratio indicates the operating efficiency and management quality of the
unit. 4% and above is considered as low risk level and less than 2.50 % as high risk. No entry
level for loss making units.
Return On Tangible Net Worth
A reasonable return for the investment is the basic expectation of any promoter. If the venture
does not provide a decent return,sustained interest of the promoters will be absent. Considering
the present inflation rate and alternate avenues for reasonable income generation,we have revised
the risk levels under Return on TNW according to which low risk starts with 7% and above with
the benchmark at 2%. The return on networth should be above cost of capital,atleast.
Inventory Turnover Ratio
Inventory turnover ratio shows the relationship between cost of goods sold and average
inventory. It indicates the number of times the stock is turnover or converted into sales.
Generally, a ratio of 5 times is considered satisfactory. A high ratio indicates that inventory is
sold fast and it is an indicative to profit. On the other hand , a low ratio reflects over investment
in inventories,dull business etc
Fixed Asset Turnover Ratio
For knowing whether fixed assets are effectively utilised or not,fixed assets turnover ratio is
used. Fixed asset turnover ratio establishes the relationship between net sales and fixed assets. It
measures the efficiency with which a firm is utilizing its fixed assets in producing sales.
Debtors velocity
Debtors turnover ratio explains the relationship between net credit sales and average debtors
including bills receivable.This ratio shows how quickly debtors are realised or converted into
cash. Debtors velocity is related with and dependent upon debtors turnover ratio. It means the
number of days or months for which debtors and B/R remain outstanding

MARKET RISK
There are four elements to be considered while evaluating Market risks of venture. They are
i.

Competition Risk

ii.

Industry Risk

iii.

Supply Risk

iv.

Regulatory Risk

v.

Technology Risk

i)Competition Risk
Certain activities/industries are operating in a monopoly/restrictive market. They face no
competition or near to nil competition. The product they are dealing may be in short supply.In
some cases the borrowers may be operating in a high competitive environment; but they may be
the market leaders or having high market share,large range of products and buyers or steadily
increasing market share. The bank should assess these aspects during the course of risk rating.
ii)

Industry Risk

The important matters to be considered in evaluating industry risk are the following
Whether the industry outlook is promising with long ter prospects.
a. Whether the required infrastructure is available
b.

Whether there is access to raw materials/selling points.

c.

Whether the industry is under recession.

d.

Whether the industry is susceptible for adverse feature in the near future.

e.

Whether of the products/raw materials are susceptible for seasonality/cyclicality.

iv)

Regulatory Risk

While assessing the Regulatory Risk,the areas to be critically examined are:

i)

The extend upto which the activity is affected by regulatory /legal stress.

ii)

Whether the company is having the capacity to tackle them

iii)

The level of skilled labour required.

iv)

Labour relation history of the company.

v)

Compliance level of Pollution Control Rules and Regulations.

Technology Risk
With the evolution of global market for every product,and the increasing quality
consciousness,technologyupdaton has become very important. If the technology adopted by the
borrower is atime tested one an no changes are required in the near future and the capacity
utilization is high,theisk level can be considered as low. In case the borroewer is having a well
developed research and development,it will be of great help for aligning the product quality to
the changes in the market. The expenditure on repairs to plant and machinery will be a ver good
indicator of the level of technology adoption. The availability of substitutes in plenty will
increase the Technology Risk.
Managerial Risk
a. While assessing the Management Risk of a borrowing company, a critical analysis is
essential on the following points.
b.

Integrity of the promoters

c.

Reputation of the unit.

d.

Reputation and acceptance level of the products.

e.

Whether the promoters belong to RBI caution list or known defaulters.

f.

Market report on the management.

g.

Whether the promoters are qualified professionals or whether the company is atleast run
by qualified professionals

h.

Whether the company is having a well delegated management

i.

Whether the management is committed to the goals of the company.

j.

Whether the diversification is with proper planning and to a related line of activity.

ASSESSMENT OF WORKING CAPITAL REQUIREMENTS

A unit needs working capital funds mainly to carry current assets required for its operations.
Inadequate levels of working capital may result in under-utilisation of capacity and serious
financial difficulties. Similarly ,excessive levels may lead to unproductive use of credit and
unnecessary interest burden on the unit. Consistent with the policy of liberalization,greater
operation freedom has been provided to banks in dispensation of credit. Reserve Bank has
decided in April,1997 to withdraw the prescription in regard to assessment of working capital
needs based on the concept of MPBF enunciated by Tandon Study Group. Banks were given
freedom to evolve appropriate system for assessing the working capital needs of borrowers
within the existing prudential guidelines and exposure norms. Accordingly , Bank came out with
following operational guidelines in April 1988.
Banks adopt any one of the methods viz.
i)

Turnover Method;

ii)

MPBF method based on inventory and receivables holding levels;

iii)

Cash Budget Method;

The method of assessment to be adopted may be determined by the total working
capital requirements of the borrowers. They may be broadly bifurcated into borrowers
having working capital limits upto Rs.5 crores and those having more than Rs.5.00
crores from the banking system.

TURNOVER METHOD:

This is applicable to all borrowers enjoying fund-based working capital credit limits upto and
inclusive of Rs.5.00 crores with the banking system. Under this method,the working capital
requirements of the borrower will be computed at 25% of the projected annual turnover of which
atleast four fifth i.e. 20 % of the projected turnover should be provided by the bank as working
capital finance and balance one-fifth i.e.5% of the projected annual turnover should be
contributed by the borrower,as his margin towards working capital. This has been formulated
assuming average production/business cycle of 3 months. In reality this cycle could be longer or
shorter.
However,where liquid surplus available with the borrower is more than 5% of projected sales
turnover,banks can fix limits lower than 20% of projected annual sales turnover. In case the
operating cycle is more than 3 months,the margin will increase proportionately. Further ,in such
cases ,small manufacturing enterprises/+ should be provided proper limits to operate at a viable
level considering that 20% of the turnover is the minimum stipulation and not the maximum.
This method was suggested by the Nayak Committee
Borrowers having working capital limits (fund based) above Rs.5.00 crores from the banking
system may be given the option to choose between
a.

Lending based on holding level of inventory/receivables and

b.

The cash budget system of lending.

The decision to allow the borrower to switch over to Cash Budget Systems of
assessment would rest with the bank.

MAXIMUM PERMISSIBLE BANK FINANCE METHOD under Tandom-Chore Committee

report
The method of lending on the basis of level of inventory ,The study group headed by Shri
Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July
1974 with a view to study the entire gamut of Bank's finance for working capital and suggest
ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central
bank to organise the Bank credit. The report of this group is widely known as Tandon Committee

report. Most banks in India even today continue to look at the needs of the corporates in the light
of methodology recommended by the Group.
As per the recommendations of Tandon Committee, the corporates should be discouraged from
accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry should
be allowed to accumulate These levels were termed as inventory and receivable norms.
Depending on the size of credit required, the funding of these current assets (working capital
needs) of the corporates could be met by one of the following methods:
First Method f Lending:
Banks can work out the working capital gap, i.e. total current assets less current liabilities other
than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned
funds and term borrowings. This approach was considered suitable only for very small borrowers
i.e. where the requirements of credit were less than Rs.10 lacs

Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of
total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level
of credit for purchases and other current liabilities will be available to fund the build up of
current assets and the bank will provide the balance (MPBF). Consequently, total current
liabilities inclusive of bank borrowings could not exceed 75% of current assets. CSB follows
second method of lending or projected turnover method whichever is lower for limits above
Res.500.00Lacs
Third Method of Lending:
Under this method, the borrower's contribution from long term funds will be to the extent of the
entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing

the absolute minimum level of raw materials, process stock, finished goods and stores which are
in the pipeline to ensure continuity of production and a minimum of 25% of the balance current
assets should be financed out of the long term funds plus term borrowings.(This method was not
accepted for implementation and hence is of only academic interest)
CASH BUDGET SYSTEM
Customers enjoying working capital limits in excess of Rs.5.00 crores will be given option to
adopt the Cash Budgeting Method at the discretion of the Bank. In case such borrowers choose
the Cash Budgeting Method of lending,they have to satisfy the Bank that they have necessary
infrastructure in place to submit the required information periodically in time.
Under this method, the peak level cash credit will be the level of total working capital finance to
be extended to the borrower by the banking system. The peak level cash deficit will be
ascertained from the Projected Cash Statement submitted by the borrower. The cash budget
statement would comprise of projected receipts and payments for the next 12 months on account
of:i)

Business Operations;

ii)

Non-business operations;

iii)

Cash flow from capital accounts; and

iv)

Sundry items.

Loan system for delivery of bank credit

In the case of borrowers with working capital limit of Rs 10 crore or above(fund based)from the
banking system,the minimum level of loan component shall be 80 percent. If the borrower
desires to avail of a higher percentage of loan component,this can be agreed to by the bank. In
the case of borrowers with working capital limits of less than 10 crore,banks may persuade them
to go in for a loan system by offering them an incentive in the form of a lower rate of interest on
the loan component as compared to the cash credit component. The bank however decides on
the method of lending to a particular industry and to exempt from the loan system of credit
delivery.

NPA
Prudential accounting norms were implemented in banks in India on the recommendations of
Narasimhan Committee on financial sector reforms. These relate to income recognition,.asset
classification and provisioning.
Definition of NPA
With effect from March 31st 2004, a non performing asset(NPA) shall be a loan or an advance
where;
i)interest and /or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii)the account remains out of orderfor a period of more than 90 days, in respect of an
Overdraft/Cash Credit(OD/CC),
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounte,
iv)interest and/or instalment of principal remains overdue for two crop seasons in the case of an
advance granted for short duration crops ( which mature within 12 months) and one crop season
in case of long duration crops( which mature after 12 months)
v) any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
Income recognition Policy
1. The

policy of income recognition has to be objective and based on the record of

recovery. Internationally income from non performing assets (NPA) is not recognized on
accrual basis but is booked as income only when it is actually received. Therefore, the
banks should not take to income account interest on any NPA.
2. However, interest on advances against term deposits,NSCs,IVPs,KVPs and Life policies
may be taken to income account on the due date, provided adequate margin is available
in the accounts.

3. If government guaranteed advances become NPA, the interest on such advances should
not be taken to income account unless the interest has been realised.
ASSET CLASSIFICATION
Categories of NPAs
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:
a. Sub standard assets
b. Doubtful assets
c. Loss assets
Sub standard assets: a sub-standard asset is one , which was classified as NPA for a
period not exceeding 12 months. In such cases, the current net worth of the
borrower/guarantor or the current market value of the security charged is not enough to
ensure recovery of the dues to the banks in full. In other words,such an asset will have
well defined credit weaknesses that jeoparadisethe liquidation of the debt and are
charcterised by the distinct possibility that the banks will sustain some loss,if deficiencies
are not corrected.
Doubtful Assets:
A doubtful asset was one ,which remained NPA for a period exceeding 12 months. A loan
classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently known facts, conditions and values, highly questionable
and improbable.
Loss assets:
A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recovery value.
When an NPA account should straightway be classified as loss or Doubtfull?

When realizable value of both primary and collateral security falls below 10% of the
outstanding balance the account is straightway classified loss and when realizable value
is above 10% but less than 50% of the outstanding balance it is straightway classified as
doubtful.
How an account becomes non Performing:
An advance will be performing/standard asset at the time of disbursal.However it can turn
to NPA category subsequently. Various reasons can be attributed to this phenomena.
a)Lapses in pre scrutiny
b)Lack of proper follow up after disbursal of the loan
c)Change in Govt. policies which affect adversely the smooth functioning of the
concerns.
d)international factors
e)Natural calminities/adverse climatic conditions
f)Fund diversion by the borrowers
g)Wilful default in repayment/closure of facilities.
h)Inefficient management ,experience and market changes.
How to avoid slippage to NPA:
a)Early recognition of symptoms of sickness in the units by the bank and take steps to
redress it through proper channels
b)Closely monitor the advances
c)frequent contacts with the borrower and timely inspection of the units
How to reconvert an NPA account to Performing Asset:
a)Persuade the party to regularize the account

b)Restructuring loans
Early recovery of the NPA accounts:
NPA accounts shall not remain irrecoverable long in the balance sheets as it is huge loss
of income. Banks money is public fund and has to be refunded. Therefore it is the duty of
the bank to recover the same as early as possible.Banks resort the following for
recoveries:
a)Frequent contact with the defaulters and prompt them to repay
b)Filing of suit/ revenue recovery/initiation of SARFAESI Act
c)Steps to confiscate the movable assets under finance from the bank and its disposal
through auction

CREDIT APPRAISAL AND ITS IMPACT ON NPA

On a general study made ,it was found that one of the important reasons for the high NPAs was
faulty credit appraisal. There was no in-depth appraisal at all and in a large number of accounts,
people were being judged based on the fact that they were well known or that their company was
well known. Banking is not like that. An in-depth analysis is required.
Loans and Advances should be properly analyzed as per the guidelines prescribed by the bank.
Any shortfalls/deficiencies will lead to bad symptoms and finally result in slippage to NPA. In
this context, we have to differentiate between Performing Asset and Non- Performing Asset.
Banks disburse loans to get revenue. Income generating accounts are termed as Performing
Assets. Income Non Generating accounts are categorized as Non-Performing assets. Banks
therefore bestow utmost care and vigilance to prevent slippage of standard assets to NPA.
First symptom will be deflected as irregular. Loans and Advances become irregular under the
following circumstances:
a)Terms loans become irregular if one installment is overdue.

b)Working capital loans are overdue if monthly interests is not serviced.

c)CP/BP is irregular if it is not realised within 10 days after due date.
d)Short term agriculture loans become overdue if it remains unpaid after 30 days from due date.
Such nature of irregularity shall not continue. Bankers follow up vigilantly to regularise the
accounts. Regularization is possible through:
a)Close follow up with the borrowers and persuasion
b)Induction additional funds in case of shortage of funds.
c)Watch use of funds and take steps to avoid diversion of funds
Slippage to NPA
NPA occurs in the following cases:
a)Terms loans remain unpaid more than 3 months.
b)Working capital loans remains out of order since 90 days since:
1)Interest is not serviced
2)Renewal overdue
3)Stock statements not submitted
c)CP/BP is irregular if it is not realised after 90 days from due date
d)Short term agriculture loans become overdue if it remains unpaid after two crop seasons.
When borrowal accounts are slipped to NPA, it stops generation of income.
Consequences:
a)Interest is kept in interest suspense accounts and not to Profit and Loss account of the bank.
b)Provision to be provided for the NPA accounts

As a result ,instead of creation of revenue by advancing, bank suffer loss.

Therefore immediate steps to be followed are:
a)Contact the borrower and regularise the account and upgrade to NPA
b)Restructuring of loans for upgradation as per extant guidelines and eligibility.
c)Recover y measures through legal measures/ SARFAESI enforcement.
d)Confiscate movable assets through legal measures immediately.

NPA and Credit Appraisal:

As mentioned earlier appraisal should be done properly before disbursal of loans. Improper
selection of borrowers/activities/marketability/expertise/capital/competition /change in govt.
policies etc. can lead to irregularity in the borrowal accounts.
Banks should strictly follow the norms laid in :
a)Pre sanction scrutiny.
b)Disbursal
c)Primary security/ collateral security
d)Post sanction follow up.