EXECUTIVE SUMMARY

The whole project ia all about lending the credit by the banks to the needed one. It covered various aspects like how, what, how much, to whom etc. according to the requirement, resources, repayment ,reliability factors.

OBJECTIVE

To study the Indian Bank System of conventional Advances

SCOPE AND USES OF PROJECT As I pursuing post graduation diploma in banking and finance services .It provides me the practical knowledge about the a) b) c) d) Essence of the working environment in the bank Customer interaction Handle the various grievances under different authorities and How to follow the guidelines prescribed through mentor provided by the bank in their premises.

RELEVANCE OF THE TITLE India is a middle income level based economy. As the burning issue to take loan and its repayment is a big deal now-a-days.

COMPANY PROFILE

Indian Bank is one of the indigenous banks of India that emerged as a result of the Swadeshi Movement during the British Raj. The bank was established on 15th of August, 1907. One of the prime figures associated with the establishment of the bank was V. Krishnaswamy Iyer, a lawyer from Madras (Now Chennai). The bank soon spread its wings outside India too, and opened its branch in Colombo, Sri Lanka in the year 1932 and Rangoon, Burma in 1940. The bank was further nationalized by the Government of India in the year 1969. Total Business crossed Rs.1,81,530 Crores as on 31.03.2011 Operating Profit increased to Rs. 3291.68 Crores as on 31.03.2011 Net Profit increased to Rs.1714.07 Crores as on 31.03.2011 I have been worked in the Connaught place branch, New Delhi established In and deals in following Services: Card To Card Money Transfer, Currency Exchange, Demat Services, Direct Tax Payment, Electronic Clearing Service, Mobile Phone Banking, Multi City Cheque Facility, Net Banking, Over Draft Facility, Pension Disbursement, Personal Tax Assistance & Investment, Portfolio Management, Retail Sale Of Gold Coin, Wealth Management Service Bonds, Equity, Fixed Deposit, Flexible Deposit, Insurance, Mutual Fund, Stock Invest Business Loans, Professional Loan, Project Finance, Term Finance, Trade Finance Corporate Credit Card, Credit Card, Debit Card Current Account, Demat Account, Fixed Deposit Account, Recurring Deposit Account, Saving Account Agricultural Loan Schemes, Commercial Vehicle Loan, Consumer Goods Loan, Educational Loan, Four Wheeler Loan, Home Improvement Loan, Housing Loan, Loan Against Deposit, Loan Against Gold, Loan Against Property, Loan Against Share, Loan Against Vehicle, Personal Loan, Two Wheeler Loan

Investment Products: Business Loans: Cards: Account Types:

Personal Loans:

Global Presence The modest beginning made by the Bank has come a long way since then, with 1642 branches located nationwide within India and Overseas branches in Singapore and Colombo as of April 2009. The bank also has 40 Overseas Correspondent banks in 70 countries, giving a strong presence internationally. A 22,000 strong workforce of dedicated employees takes pride in serving the Indian Bank.

METHODOLOGY

LIMITATION

According to the Bank secreacy Act , Sec 13 bank are not able to disclose the details of the customer accounts and their various policies, disclosures etc.

PRINCIPLES OF LENDING

Lending of credit should be done on the following basis which will be discussed as below a) Safety of the funds It is necessary for the bank because he has to disburse depositor s money, to safeguard the monies of others, find the right type of borrowers because bank has to repaid with interest after serving an useful purpose in trade, industry and agriculture etc. b) Identification of the borrower It includes character, integrity and business acumen (observation, market enquiry etc.) c) Purpose Purpose of lending should be clear, sources of repayment , socially and economically for liquidation of prior borrowings. d) Liquidity/repayment Sources and methods of repayment should decide upon while disbursing credit. For recycle the funds and make available these to needy borrowers, deposits raised all required to be paid on demand at short notice. e) Security It acts as an insurance, life boat in a ship, where passengers take recourse to it only in times of emergency. Securities may be personal, tangible, primary and additional/ collateral. f) Remuneration/profitability Banks have to pay interest on deposit, incur expenses on establishment rent, stationery, make provisions out of profit. g) Risk management Principles of good lending are diversification of advances for taking calculated advances for taking calculated risks or mitigated risk. h) National interest Even if an advance satisfies all the aforesaid principles, it may not be suitable if it runs counters to national interest. Norms on credit exposure As per RBI of India guidelines, the ceiling on credit exposure for the bank should not exceed 15% of owned funds of the bank in case of single borrower and 40% in case of a borrower group. Fair lending practices code (FLPC) a) it comes into existence w.e.f 1st November,2003 b) it is for Retail Credit facilities up to Rs. 2 lacs c) FLPC purpose is to render courteous and speedy services to all borrowal customers.

d) All necessary information like range of loan products available, securities, interest service charges, other terms and conditions etc. should be furnished to a prospective borrowal customer. e) General terms and conditions for advances and schedule of service charges as advised by HO from time to time along with application Form f) The chart showing interest rates and service charges for advance to public should be displayed through notice board. g) On receipt of loan application complete in all respect, branches should give an acknowledgement as per the format h) If any additional details required while processing the application i) On sanction of the loan, branches should obtain customer s signature for acceptance of the terms and conditions of the sanction in the copy of the sanction ticket etc. j) FLPC provides for Grievances Redressal Mechanism by which any grievances of customer shall be attended with in time frame . Bank s loan policy Loan policy is formulated by HO with long prospective to achieve a well structured loan portfolio. Policy is based on following factors: a) RBI s monetary and credit policy b) RBI s new thrust on risk management c) Our bank s strategy for profit through qualitative credit expansion. An analytical study of the industries their present positions and future prospects. d) The view and suggestions as solicited and received from HO executives and the field level functionaries. e) Comparative market forces emerging in the economy due to Liberalization of the market. f) Targets prescribed by RBI in regard to social and other lending. Types of credit In Indian bank, we consider the following types of loan and advances. Advances are made by bank to eligible borrowers in the following forms a) b) c) d) e) Temporary overdrafts/Clean Cash Credit Demand loan Cash Credits Bill discounted and purchased which included LC bills receivable (LCBR) Term loans

Advances to industrial sector, SME, Agriculture, FX business, Retail borrowers etc. are dealt with separately. Pricing of loan products

Various terms in price mechanism as below a) Benchmark prime lending rate It is come in to existence w.e.f 01.02.2004. In tune with RBI guidelines bank adopts a single BPLR which is determined by taking in to account cost of funds, cost of operations and appropriate requirement for provisioning /capital charge and profit margin b) Card rate It is the quoted price/lending rate on our loans and advances to public. c) Commercial rate Card rate applicable for public or staff without any relaxation. For staff, commercial rate means the rate quoted for loans other than concessional loans. d) Penal interest Penalty charges over the contracted, for the overdue/irregular part as per guidelines issued from time to time e) Fixed interest rate If interest quoted at time of sanction/disbursement will not undergo any change despite change in BPLR e.1) it can be offered only for the schemes/products/category for which it is specifically permitted by HO. EMI will not undergo any change through charging int ofout the repayment period, unless there is a major policy change like periodicity of charging interest. e.2) fixed rate account, for overdues, Penal interest is to be charged at contracted rate. e.3) FIR may also undergo change whenever bank exercise the interest reset option.

f)

Variable rate of interest Changes along with change in BPLR or spread g) Finer rate of interest Customers having high volume/Hi-tech facilities may be considered for FROI from the card/commercial rate as per rating of borrowals. Accounts, business consideration, value addition, cost of servicing the advances and other internal parameters. Branches shall take up with appropriate authorities furnishing their recommendation as per Credit Rating system. h) Bank rate Bank rate at which RBI is prepared to lend to banks or rediscount bills of exchange or buy other commercial papers eligible for purchase. i) Call money rate Prevailing interest rate for overnight/short duration borrowing by banks in interbank market.

Charging of interest on monthly compounding

a) As per RBI guidelines banks switched over to charging of interest on loans /advances at monthly rests w.e.f April 01,2002 b) Accounts brought under this system are all loans/advances such as loans on deposit, personal loan products, structured loan products (for both fixed and variable rate of interest) demand loans such as WCDL, staff loans etc. exceptions in agricultural loans.

RBI Regulation and restrictions on loan and advances Reserve bank of India has, from time to time, issued a number of circulars containing guidelines/instructions, directives to banks on loan and advances. These guidelines on the aspects of eligible borrowers, securities, bankable purposes, margin stipulations, creation of charges over securities etc. 11.2 Statutory Restrictions 11.2.1 Advances against bank s own shares a) A bank cannot grant any loan or advance on the security of its own shares in terms of section 20(1)of the banking Regulation Act,1949 either during the initial public offer or thereafter. b) Lending should not be made against the shares of our own subsidiaries. 11.2.2 Advances to bank s directors Banks are published from entering in to any commitment for granting any loan or advances to or on behalf of any of their directors or any firm/company in which any of their directors is interested as Directors or as partner, manager, employee or guarantor. However, the restrictions shall not apply to Loans and advances made against Govt. securities, LIC policies, fixed deposits. A credit limit granted under credit card facility provided by a bank to its Directors to the extent the credit limit so granted is determined by the bank by applying the same criteria as applied by it in the normal conduct of the credit card business. Such loan and advances which can be given to any of its Directors in his capacity as an employee, prior to becoming a Director. Loans and advances to Chairman and Managing Director/Executive Director for the purpose of purchasing furniture, car, personal computer or constructing/acquiring house for personal use. Festival advances can be given with the prior approval of RBI and on such terms and conditions as may be stipulated by RBI. 11.2.3 Restrictions on holding shares in companies

The banks should not hold shares in any company, whether as pledge or mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital and reserves, whichever is less .this, holding stipulation is reckoned for the bank as a whole. 11.2.4 Restrictions on credit to companies for buy-back of their securities Banks should not provide loans to companies for buy-back of their own shares/securities. 11.3 Regulatory restrictions 11.3.1 Granting loans and advances to relatives of our Bank Directors ,Directors of other Public sectors, Private sectors ,Scheduled co-op banks and subsidiaries and their relatives a) without the approval of the Board ,loans should not be granted to relatives of Bank s Chairman/Managing Directors or other Directors, Directors of other banks and their relatives ,Directors of scheduled Co-operative Banks and their relatives ,Directors of subsidiaries/trustees of Mutual funds/Venture capital Funds set up by the financing or other banks. Hence, proposals of Rs.25 lakhs and above of the said category is to be placed to the Board/MC. b) Proposals for credit facilities for an amount less than Rs. 25 lakhs may be sanctioned by the appropriate authority in the financing bank under powers vested in such authority, but the matter should be reported to the Board. c) For the above Regulatory restrictions, the following loans are exempted: c.1 loans against Govt. securities c.2 loans against Life insurance policies c.3 loans against fixed and other Deposits c.4 loans against stocks and shares c.5 TOD up to Rs.25000/c.6 casual purchase of cheques up to Rs. 5000/-at a time c.7 housing loan, car advance etc. granted to employees of the Bank under any scheme applicable to employees in general 11.3.2 Restrictions on grant of loans and advances to officers and relatives of senior officers of Banks a) No Officer or a Committee in which the officer is a member shall sanction any credit facility to his/her relative. Such a facility shall ordinarily be sanctioned only by the next higher sanctioning authority. Credit facilities sanctioned to senior officers of the financing bank should be reported to the Board. b) Credit facilities sanctioned and contracts awarded to the relatives of Senior Officers of the bank or any firm/company in which they are interested should be reported to the Board.

c) The loans that may be sanctioned and exempted from reporting to the Board are c.1 Government securities c.2 Life insurance policies c.3 fixed or other deposits c.4 temporary overdrafts for small amount i.e. up to Rs. 25000 and c.5 structured loan products which are generally made available to all staff/staff relatives shall also be categorized herein as exempted e.g. IBHLS, IBVLS, and IBELS to wards of staff. d) In case of consortium arrangements, the above norms relating to grant of credit facilities to relatives of senior officers of the bank will apply to the relatives of senior officers of all participating banks. 11.3.3 Declaration by borrowers about relatives in the lending bank In order to ensure compliance with the directives 11.3.1 and 11.3.2 mentioned above, branches have to obtain a declaration as per the format f 172 from every borrower. 11.3.4 Restrictions on grant of financial assistance to industries producing/consuming ozone depleting substances (ODS) Banks should not extend finance for setting up of new units consuming/producing ozone depleting substances. 11.3.5 Advances against sensitive commodities under section credit control a) The commodities, generally treated as sensitive commodities are a.1 food grains i.e. cereals pulses a.2 selected major oil seeds indigenously grown viz groundnut, mustard, cotton seed etc. and all imported oils and vegetable oils. a.3 raw cotton and kapas a.4 sugar/gur /khandsari a.5 cotton textiles which include cotton yarn, manmade fibers and yarn and fabrics made out of manmade fibers and partly out of cotton yarn and partly out of man made fibers. b) Presently, there is no regulatory restriction for lending against any of the commodities under sensitive sector listed above under SCC on quantum or ROI or on ceiling of advances or as to prior approval etc. other than the margin stipulation given below.

c) minimum margin of 10% should be stipulated on unreleased stocks of sugar with sugar mills representing levy sugar .margin on credit for free sale sugar will be decided by banks on their commercial judgment .none of the earlier stipulations made for the commodities covered under SCC are presently applicable, expect for the margin stipulation to buffer stock and unreleased stocks of levy/free sale sugar. d) Operational stipulations for SCC a.1 the banks should not allow the customers dealing in SCC commodities any credit facilities which would directly or indirectly defeat the purpose of the directive. Advances against book debts/receivables and collateral securities like LIC policies, shares and stocks and real estate should not be considered in favor of such borrowers. a.2 although advances against security of or by way of purchase of demand documentary bills drawn in connection with the movement of the SCC commodities are exempted ,the bank should ensure that the bills offered have arisen out of actual movement of goods by verifying the relative invoices as also the receipts issued by transport operators ,etc. a.3 usnace bills arising out of sale of SCC commodities should not be discounted expect to the extent specifically permitted in the directives issued. a.4 clean telegraphic transfer purchase facility may be allowed to a reasonable extent on certain conditions specified in directives. a.5 priority sectors advances are also covered by/under SCC directives. a.6 where credit limits have been sanctioned against the security of more than one commodity and/or any other type of security, the credit limits against each commodity should be segregated and the restrictions contained in the directives made applicable to each of such segregated limit. a.7 the banks are free to determine the ROI in respect of advances covered under SCC. a.8 the bank could grant loans to borrowers dealing in SCC commodities provided the term loans are used for the purpose of acquiring block assets like plant and machinery and normal appraisal and other criteria are followed by the banks. d) the RBI authorizes limits to the food corporation of India and state governments for procurement of food grains; at prices fixed by the GOI, for the central pool and for the distribution of the same under the public distribution systems (PDS).As the limits are authorized without margin, credit cannot be drawn against credit sales, book debts ,Government subsidies ,etc. e) Banks should ensure the purpose of directives issued to prevent speculative holding of essential commodities and it should not be defeated while considering loan proposals for this sector. 11.3.6 Restrictions on payment of commission to staff members including officers

Section 10(1) (b) (ii) of banking regulation act, 1934, permits payment of commission to any person who is employed only otherwise than as a regular staff. Therefore, banks should not pay commission to staff members and officers for recovery of loans in violation of the act. 11.4 Restrictions on other loans and advances 11.4.1 Loans and advances against share, debentures and bonds a) The restrictions are as under: a.1 no loans to be granted against partly paid shares a.2 no loans to be granted to partnership/proprietorship concerns against the primary security of shares and debentures a.3 banks and their subsidiaries should not undertake financing of Badia transactions. 11.4.2 Advances against money market mutual funds Bank is to be guided by the SEBI regulations in this regard. 11.4.3 Advances against fixed deposit receipts (FDRs) issued by other banks Banks should not sanction advances against FDRs, or other term deposits issued by other banks. 11.4.4 Advances to agents/intermediaries based on consideration of deposit mobilization Banks should not grant loans to intermediaries based on consideration of deposit mobilization. 11.4.5 Loans against certificate of deposits (CDs) Banks cannot grant loan against CDs. 11.4.6 finance to NBFCs Banks should not grant any finance to NBFCs for/towards Bills discounted/rediscounted (expect arising from sale of commercial vehicles,two wheelers and three wheelers), Investments made by NBFCs in shares, debentures, advance to subsidiaries /group companies, in other companies and inter-corporate loans. Bridge loans to NBFCs/RNBCs against capital/debentures issues. Unsecured loans/inter-corporate deposit by NBFCs to/in any company. All types of loans/advances by NBFCs to their subsidiaries, group companies/entities, Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs). 11.4.7 Banks finance to equipments leasing companies

Banks should not enter in to any lease agreements departmentally with equipments leasing companies as well as other NBFCs engaged in equipments leasing .banks may finance lease rentals receivables against assets owned and leased by NBFCs. 11.4.8 Finance of infrastructure projects under budgetary support

Finance should not be provided by banks for construction of buildings or infrastructure projects undertaken by PSUs etc. meant for government /semi government offices in lieu of or to substitute budgetary resources .however, banks may grant loans for activities which will be refinanced by institutions like NABARD. Projects undertaken by public sector entities which are not corporate bodies (PSUs which are not registered under the companies act or which are not corporations established under the relevant statute) should not be financed by banks. Even in respect of projects undertaken by corporate bodies, as defined above, banks should satisfy themselves that the project is on commercial lines and that bank finance is not in lieu of or to substitute budgetary resources envisaged for the project .the loan could. However, supplement budgetary resources if such supplementing was contemplated in the project design. In case of housing projects which the government is interested in promoting either for weaker sections or otherwise, a part of the project cost may be met by the government through subsidies m de available and/or contributions to the capital of the institution taking up the project .in such cases, bank finance should be restricted to the project cost excluding the amount of subsidy/capital contribution from the government .the bank should ensure the commercial viability of the project. 11.4.9 Issue of bank guarantees in favour of financial institutions i) issuing/guaranteeing bank Banks may issue guarantees favouring other banks/FIs/other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions. The delegated authority for sanction of said guarantee limits (other than for the issue of deferred payment guarantee for which powers have been delegated to various functionaries) favouring other banks/FIs for lending by the other banks shall be at H.O. only. At the level of ED / CMD/MC. The guarantees shall be extended only to the customers of the bank to avail of additional credit facility from other banks/ FIs for lending agencies. The bank shall assume a funded exposure of at least 10% of the exposure guaranteed. Banks should not extend guaranteed or letters of comfort in favour of overseas lenders including those assignable to overseas lenders expect for the relaxation permitted under FEMA.

The guaranteed issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight as per the extant guidelines. Banks should ensure compliance with the recommendations of the gosh committee and other internal requirements to obviate the possibility of frauds in this area. ii) Lending banks Banks extending credit facilities against the guarantees issued by the other banks/FIs should ensure strict compliance with the following conditions: The exposures assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the extant guidelines. Exposures assumed by way of credit facilities extended against the guarantees issued by other banks should be reckoned with in the interbank exposures limit prescribed by the Board of Directors (refer our bank s credit risk policy). Banks should monitor the exposure assumed on the guaranteeing bank/FIs ,on a continuous basis and ensure strict compliance with the prudential limits/sub-limits prescribed by our bank board s and prudential single borrower limits prescribed by RBI for FIs. Banks should comply with gosh committee recommendations to obviate frauds in third area. iii) However, the above conditions will not be applicable in the following cases: In respect of infrastructure projects, issuance of guarantee in favour of other lending institutions provided, if the bank takes funded share in the project at least to the extent of 5% of the project cost. Normal credit appraisal, monitoring and follow up of the project to be undertaken. Issuance of guarantees in favour of various development agencies/boards, like Indian renewable energy, national horticulture board etc. for obtaining soft loans and other forms of development assistance subject to the conditions stipulated. Issue of guarantees favouring HUDCO/SHBs for loans granted by them to private borrowers, after assessing the repayment capacity of the borrower. Issuance of guarantees by consortium member banks unable to participate in rehabilitation packages. iv) Banks should not grant co-acceptance /guarantee facilities under buyer s lines of credit schemes introduced by IDBI, SIDBI, EXIM bank, power finance corporation (PFC) or any other financial institution, unless specifically permitted by the RBI. 11.4.10 Discounting /Rediscounting of bills by banks a) Banks should not extend fund based (including bills financing) or non fund based facilities like opening of LCs ,providing guarantees and acceptances to non constituent borrower or/and non constituent member of a consortium/multiple banking arrangement.

b) Banks should not open LCs and purchase /discount/negotiate bills bearing the without recourse clause. c) Banks should not enter in to Repo transactions using bills discounted/rediscounted as collateral. d) Accommodation bills should not be purchased/discounted/negotiated by banks. e) bills rediscounts restricted to usance bills held by other banks .banks should not rediscount bills earlier discounted by NBFCs except in respect of bills arising from sale of light commercial vehicles and two/three wheelers. f) Service sector bills are not eligible for rediscounting. Bank should exercise commercial judgment while discounting bills for service sector and ensure that actual services are rendered and accommodation bills are not discounted. Since discounts of service sector bills are treated as unsecured advance and should be within the unsecured exposure limit prescribed by the board (in the credit risk policy). 11.4.11 Advances against bullion/primary gold/silver bullion a) Banks should not grant any advance against bullion/primary gold. b) Banks should not grant advances to the silver bullion dealers which are likely to be utilized for speculation purpose. c) Banks should not give loans to finance badla transactions in silver. 11.4.12 loans and advances to real estate sector While apprising loan proposals involving real estate, banks should ensure that the borrowers have obtained prior permission from government/local government/other statutory authorities for the project, wherever required and the disbursements should be made only after the borrower has obtained requisite clearances from the government authorities. 11.4.13 Loans and advances to small scale industries SSI unit (new as well as existing) having working capital limits of up to Rs.5 crore from the banking system are to be provided working capital finance computed on the basis of 20 % of their projected annual turnover. 11.4.14 loan system for delivery of bank credit i) in 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 will normally be 80% .however, banks have the freedom to change the composition of working capital by increasing the cash credit component beyond 80%.as the case may be, if they so desire .In case of borrowers with working capital limits of less than rs.10 crore. Banks may persuade them to go in for loan system by offering an incentive. ii) Loan component and cash credit component

In the case of borrowers enjoying credit limits of rs.10 crore and above from the banking system, loan component shall continue to be maintained at the minimum level of 80%. In case of borrowers with limit less than the rs.10 crore from the banking system to go in for loan system and/or to have a higher percentage of loan component shall be readily agree to by the sanctioning authority at all levels, if the borrower so desires .similarly, if the borrowers with more than rs.10 crore limit desire to have higher loan component ,the same shall be agreed to. iii) To avail higher percent of cash credit (for working capital limit of rs.10 crore and above from banking system) For credit sanctions up to GM powers To permit a higher percentage of cash credit component by reducing the loan component , the respective sanctioning authority ,based on merit on a case to case basis ,shall permit up to 20 % i.e. from the 80% level to 60% on Loan component ,increasing the cash credit component to the extent. For all credit sanctions at the level of ED and above ED shall be the delegated authority to vary up to 20% from the existing level of 80% to 60% on loan component, by proportionately enhancing cash credit component. Reporting of the same shall be made while placing the note for review /renewal, etc. subsequently, to the respective sanctioning authority for having permitted the change in composition. iv) Consortium Accounts As a leader-in case of consortium accounts where we are leaders ,we shall insist our guidelines for all accounts coming under the purview. As a member-where we are member, we shall suggest our guidelines and a consensus can be arrived in line with the majority and we shall abide by the majority, in line with the consortium guidelines. If no consensus-if no consensus is arrived at in both the situations, each bank shall be at liberty to follow their own internal guidelines to determine the composition and pricing. v) Exemptions from loan system a) The following industries are exempt from the loan system in our bank Sugar Cotton pressing/griming including trading in cotton Rice, wheat flour mills, dhal mills Oil mills Tea and coffee processing plants Plywood Fertilizers Tobacco Cashew (predominantly export oriented) Fruit processing units, fruit pulp, juices etc.

To exempt more industries on a case to case basis based on requests/merits, the confirmation /approval of the Board shall be taken.

VI) Adhoc Credit Limit Adhoc/additional credit for meeting temporary requirements can be considered only after the borrower had fully utilized exhausted the existing limit. Vii) Sharing Of Working Capital Finance The ground rules for sharing of cash credit and Loan component may be laid down by the consortium, wherever formed subject to guidelines on bifurcation as stated above. The level of individual Bank s share shall continue to be governed by the norm for single borrower/group exposure. viii) Rate of Interest /Finer rate Our present card rate is at the maximum for both the loan and cc component. Based on rating parameters/business considerations Finer rate of interest is being affected by the appropriate sanctioning authority .for accounts sanctioned with finer Rate of interest also, the present guideline of uniform rate of interest for loans and CC components shall be continued .it shall be with an additional provision that the delegated authority may be stipulate a higher rate of interest for the CC component on a case to case basis, at this discretion. Any specific request for revision in rate of interest for WCDL component shall be considered only at the time of next rollover of the facility. ix) Period of loan The minimum period of the loan for we purposes may be fixed by sanctioning authorities in consultation with borrower .sanctioning authority may decide to spilt the loan component according to the need of the borrower with different maturity bases for each segment and allow roll over, though the sanction of the limits generally be for a period of one year. x) Security In regard to security, sharing of charge, documentation, etc. branches may take up the requirement, if necessary, in consultation with other participant banks. Wherever administrative approval is required, it is to be placed to the competent authority. xi) Export Credit The bifurcation of the working limit in loan and cash credit components, as stated above, would be effected after excluding the export credit limits (pre-shipment and post-shipment) .Export credit limit would continue to be allowed in the form neither to granted. xii) Bills Limit Bill limit for inland sales may be fully carved out of the loan component . Bill limit also includes limits for purchase of third party (out station) cheques/box. Branches must satisfy themselves that bills limit is not misutilised.

xiii) Renewal/rollover of loan component the loan component may be renewed /rolled over at the request of the borrower on need based requirements which shall be taken in to consideration while fixing the loan component in to different segments. xiv) Provision for investing short term surplus funds of borrower RBI has given discretion to Banks to permit the borrowers, at the request of the borrowers, to invest their short term temporary surplus in short term money market instruments like commercial papers(CP),certificate of deposit(CD) and in Term deposit with banks etc .the flow of such funds should be monitored to avoid diversion .Branches should ensure that such surplus funds are reckoned appropriately to avoid over-financing during subsequent assessments .permitting the investments will be at the level of GM and above. xv) While accounting modification in composition by increasing/reverting to cash credit system, sanctioning authorities to keep in mind that we will not be able to foresee the requirements of borrowers which will create difficulty in Assets Liability management. Further offerings concessional interest rate for a component has also not been favoured by HO as it would affect our profitability. xvi) Current guidelines on delegation of powers on certain credit approvals Nature of requirement Delegated authority Accounts with sanctioned aggregate fund based working capital limits of less than rs.10 crore(from the banking system) Fixing the composition of WCDL /OCC at any Respective sanctioning authority Need based level Accounts with sanctioned working capital limits of rs.10 crore and above (from the banking system) Permitting reduction in the percentage for 1.respective sanctioning authority up to GM sanction Loan component up to 60 % from the existing 2. ED for all other accounts (including sanctions Level of 80% and to enhance cash credit accorded by CMD and mc) Component proportionately. Exempting specific borrower from the purview CMD Of loan system Permitting loan component below the 60% CMD level and to enhance proportionately Exempting an industry from loan delivery BOARD system Permitting for investing short term/temporary surplus in short term money market instruments like CP,CD and in term deposit with banks etc. For accounts failing under the powers of General managers Sanctioning authorities up to the level of GM For accounts failing under the powers of ED Executive director And above

2 2.1

2.2 2.3 2.4 3 3.1 3.2

Notes * Permission as above can be given only if the borrower satisfies the following criteria a) The account is satisfactorily conducted for the last 3 years b) There shall not be any over dues/excess over limits/advances bill liability c) The liquidity position is comfortable * There should be adequate drawing power to cover the sanctioned limit though drawing may be less. xvii) Recovery of interest if the customer has not provided for in the WCDL account for absorption of the interest debited therein ,the interest amount shall be transfer from OCC account immediately. xviii) Applicability The loan system would be applicable to borrowal accounts classified as standard or sub-standard 11.4.15 Working capital finance to information technology and software industry Based on the recommendation of the National Task Force on Info Tech and Software Development .RBI Has framed guidelines for extending working capital to the industry .the salient features of the guidelines include the following: a) In case of borrowers with working capital limits of up to rs.2 crore assessments may be made at 20% of the projected turnover .however, in other cases the banks may consider assessment of MPBF on the basis of monthly cash budget system. for borrowers enjoying WC limits of rs.10 crore and above from the banking system the guidelines regarding the loan system would be applicable b) Reasonable amount as promoters contribution towards margin may be stipulated c) Banks may obtain collateral security wherever available first/second charge on current assets if available, may be obtained. a) The Rate of interest shall be as applicable to general category. Concessional rate of interest as applicable to pre-shipment /post-shipment credit may be envied, for export credit. b) Banks may evolve tailor made follow up system for such advances. 11.4.16 Guidelines for bank finance for PSU disinvestments of GOI a) Bank s proposals for financing the successful bidders in the PSU under a disinvestment programme should be approved by their Board

b) Bank finance should be for acquisition of shares of PSU under a disinvestment programme approved by GOI, including the secondary stage mandatory open offer, wherever applicable and not for subsequent acquisition of the PSU shares .Bank finance should be made available only for prospective disinvestment by GOI. c) The companies, including the promoters to which bank finance is to be extended should have adequate net worth and an excellent track record of servicing loans aviated from the banking system. d) The amount of bank finance thus provided should be reasonable with reference to the bank s size, it net worth, business and risk profile.

Credit Rating and Risk Management

In recent times, the financial sector has undergone far-reaching changes in the operational arena of Banking both in respect of such approach and procedure. One important dimension is Credit Risk Management. In terms of guidelines of RBI on Credit Risk Management, head office formulation annual Credit Risk Policy focusing on improving the quality of the assets and healthy credit growth for overall business development of the bank .The policy document covers mainly on the architecture, entire process of Credit Risk Management like risk identification, risk measurement, risk control and mitigation. Credit risk will affect the position of overall liquidity of the bank, should there be default in repayment. Risks need to be Accurately (identification) Carefully selected (assessment for decision making) Adequately priced (risk based loan pricing) and Effectively monitored (risk control) Banks have various kinds of financial and non-financial risks on Credit Interest rate Exchange rate Liquidity Commodities Legal, regulatory and operational

While liquidity and interest rate risks are aspects broadly in the purview of overall Assets and liability management of the bank, specific related to credit are:

Intrinsic Risk - Intrinsic Risk is one which is inherent to the type of industry Concentration Risk- Concentration Risk is the risk incurred by the extent of exposure to a particular trade/industry in comparison with other industries/trade and total exposure of the bank as a whole. Credit Risk depend on both External a.1) state of economy a.2) wide swings in commodity/equity price a.3) exchange / interest rates a.4) trade restrictions / economic sanctions And internal factors b.1) deficiencies in loan policy / Administration b.2) absence of prudential credit concentration limit b.3) deficiency in loan appraisal b.4) absence of loan review mechanism 1 Aspects of credit risk 1.1 This approach is essentially long term for a Term loan proposal, short term view is essential for working capital limits. Any inadequate focus on credit risk assessment may adversely affect the quality of the credit portfolio. 1.1 The aim of risk assessment is to ensure that the borrowing company s prospect of earning profit continuously is so evaluated as to keep the account under standard assets category. 1.2 Competition /market risk Factors include i) Status/trends in the economy ii) Status/trends in the industry iii) Competitive factors in the industry a) Barriers to entry/exit b) Intensity of competition both in price and service front c) Pressure from substitutes d) Bargaining powers of buyers e) Bargaining power of suppliers 1.3 Technology risk 1.3.1 1.3.2 Risk of fast changing technology Risk of going stake or losing the market share

1.3.3 Incompatibility of foreign technologies under Indian conditions. 1.4 Financial risk 1.5.1 It is related to operational performance a) Sales growth b) Gross margins c) Operating expenses(percent) d) Accounts receivables(days) e) Inventory(days) f) Accounts payable(days) g) Investment in fixed assets 1.5.2 Judge the reasonableness of presumptions on various aspects e.g. sale price etc. 1.5.3 Risk shall be judge from factors peculiar to specific industry. 1.6 Exchange risk 1.6.1 includes monetary transactions involving currencies of other countries (risk of fluctuation in rupees value) means risk of depreciation of rupee against foreign currency to save on cost of funds. 1.6.2 Cautions about an un-hedged exchange risks of the borrower. 1.6.3 Buy back arrangement and advance remittances from overseas could mitigate these risks to some extent. 1.6.4 Import substitutes and outsourcing are also other ways to explore for an entrepreneur to get around foreign exchange risk. 1.7 Economic/political risk 1.7.1 Hostile/unfavorable conditions inside a country may affect like tourism industry etc. 1.7.2 Financial risk factors are closely interrelated with external environment in which the business functions. If the user industries are not doing well, the product manufacturer concerned will also be facing risk. 1.8 Change of government regulations 1.8.1 Involves like reduction in import duty etc. 1.8.2 Today world, ecological concerns, it is not surprising to see lending car models getting affected by stringent emission norms. Such developments cause sudden and adverse impact by way of loss of sales and profit generation. 1.9 Management risk

1.9.1 Prime factors of management are skill and integrity of promoters of project which involve as follows i) Aggressive and growth oriented approach ii) Well-developed and adequate facilities for research and development iii) Dynamism and flexibility in approach to problems 1.9.2 It requires constant vigilance to watch for management errors. It is difficult to eliminate all management risks. 1.9.3 Business risks arise out of managerial inefficiency. The indicative factors are i) Location ii) Shortage of raw material iii) Labour problem iv) Power cuts v) Pollution related issues vi) Failure of technology vii) Quality of technology etc. 1.9.4 When factories remain closed due to high incidence of labour unrest, there is risk of loss of production with harmful consequences on profitability and quality of bank credit. 2 Management of risk 2.1 perception of the risk This involves basic understanding of the element of risk in each industry/activity for which lending is undertaken. 2.2 Identification of various types of risks The process which is being assessed out of operations of normal banking. 2.3 Mitigation of credit risk 2.3.1 Management of risk involves scientific management of the risk aimed at mitigation adverse affect. The credit risk management would encompass: i) Measurement of risk through credit rating/scoring

ii) Risk pricing (based on past experience by quantifying the risk through estimation by expected and unexpected loan losses) iii) Control of risk through effective loan review mechanism and portfolio management. iv) Zero error documentation 2.3.2 It is a part of risk management concerned with monitoring various borrowal accounts on a ongoing basis. It involves strategy to assess the risk potential. 2.4 Managing of risk lie in hand of bank, every loan appraisal has to identify the risk involved and find out to what extent the risk is acceptable. It needs to be ascertained the extent to which borrower bear. 2.5 After carefully weighing the strength and weaknesses of the proposal, ultimately ,it will be possible to arrive at a balanced credit decision. 2.6 The risk assessment analysis of risk and its impact on the borrower would go a long way in ensuring the quality of loan and prevent slippages and reduce the incidence of NPAs and ultimately strengthen the Bank by preservation and growth of profitability. 3 Tools of credit risk management 3.1 Credit approving authority The essentially means that no credit proposal should be approved or recommended to higher authorities if majority of the members of the Approval Committee do not agree on credit worthiness of the borrowers. 3.2 prudential limits This will cover various aspects of credit like financial parameters, borrower/group wise exposure limits, and maximum exposure limit to industries. 3.3 Risk Rating The rating exercise would also facilitate the credit granting authorities some comfort in its knowledge of loan quality at any moment of time. The risk assessment would be say, at half-yearly intervals and possibly at quarterly intervals for low quality loans. 3.4 Risk Pricing 3.5 Loans portfolio management 3.6 Loan review mechanism This is a tool available to the bankers to identify loans which develop credit weaknesses, to evaluate portfolio quality and isolate potential problem areas etc.

3.7 Off balance sheet exposures The type of exposures are standby letters of credit, money guarantees, bonds etc .the current and potential credit exposures is measured on a daily basis to evaluate the impact of potential charges in market conditions, on the Bank s exposures. 4 Credit rating system and sanction of finer rate of interest 4.1 with deregulation of interest rate structure of advances and articulation of different financial instruments, the market has been opened up for the corporate instead of solely looking to Bankers so to determine the comfort level on advances and the spread over PLR taking in to account the quality of asset portfolio. 4.2 A Credit Risk Assessment rating system has been devised in our bank in consistent manner. 4.3 The concept of risk rating and the operational guidelines includes appropriate risk rating models. Following features i) All accounts with a sanctioned facility of Rs. 2 lakhs and above are subject to the rating system. ii) GMs at HO and GMs in charge of Circle offices are empowered to consider finer rate of interest as per delegated powers. iii) On receipt of audited balance sheet, the interim review of the account has to be made and applicable ROI shall be decided by the Sanction authority. iv) In case of large volume accounts of Rs. 10 crore and above, a half yearly review shall be made based on provisional results. v) Negative marks shall be allotted for deterioration under track record in financial parameters and wherever Group accounts are in sub-standard/doubtful category. 4.4 Branch managers/Circle heads have to be record the n the proposal, the merits of the account and the need for considering finer ROI while recommending the proposal to higher authorities. 4.5 Credit rating is not to be done in following i) Sick accounts under rehabilitation ii) Loans against deposits/NSCs/shares/Mutual Fund units/LIC policies etc. 4.6 The following categories of Advances are not eligible for finer ROI i) All staff loans under schematic lending ii) Export credit advances where ROI is determined by RBI iii) Where the applicable ROI itself is lower than the rate that may be arrived through rating system.

iv) Direct and indirect housing finance v) Credit facilities sanctioned to leasing/investment companies, hire purchase concerns, Multan bankers. 4.7 Applicability All borrowal accounts with credit limits of Rs.2 lakhs and above should be rated every year based on audited balance sheet. 4.7.1 Purpose of this as follows i) Ascertain the quality of advances in our fold ii) Ensure proper monitoring of advances that shows a tendency of slippage and iii) Manage the advance portfolio on the lines specified earlier in the note apart from pricing of advances. 4.8 consortium accounts 4.8.1 Where we are leaders 4.8.2 Where we are members 4.9 Rate of interest for adhoc sanctions/penal interest 4.9.1 In case of accounts where finer ROI has been sanctioned, the applicable ROI for adhoc facility shall be finer rate to +2%. 4.9.2 The finer ROI will not be applicable for irregularities and the stipulated Card rate should be charged without fail. 4.9.3 The finer ROI, if approved, will be valid for a period of 1 year from the date of sanction. In case where renewal of limits could not be taken up for various reasons, specific permission from the Sanctioning Authority should be obtained. 4.10 Interim Review 4.10.1 At the time of renewal, an interim review has to be made by Sanctioning Authority if subsequent audited balance sheet is received irrespective of 6 months from the date of renewal. 4.10.2 Inspectors of Branches /concurrent auditors will have to examine worksheets/registers relating to rating of accounts and list out their observations. 4.10.3 Credit rating of the field level authorities of the account as per the parameters is not below c i.e. less than 50%.

4.10.4 In existing accounts where the rating slips from C to below C branches must try to come out of the exposure in the particular account by adopting suitable exit policies. 5 Two-dimensional integrated Risk Rating/scoring models. 5.1 Credit rating models expected to achieve the following 5.1.1 Differentiating the degree of credit risk in different credit exposures of the bank. 5.1.2 Providing transaction based or borrower-based rating or both 5.1.3 Rating of all the exposures 5.1.4 Identifying the problem-credits before they become NPAs 5.1.5 Helping in pricing of credit 5.2 rating and scoring models In both models points/scores are awarded to various attributes of the borrower considered relevant i.e. Financial, managerial, industrial and operational parameters. The weighted value of such attributes are aggregated /added to arrive at a total score based on which ratings are assigned. Rating model is applicable where audited financial statements are required. Scoring model is applicable for individual borrowers and some cases SMEs The rating based on accepted level of projections, the following guidelines issued by Basel II 5.2.1 Bank must take a conservative view of projected information and analysis the data available. 5.2.2 The credit proposals should also detail the variations in the rating grade based on the last audited balance sheet and on accepted projections. 5.2.3 No credit proposal is to be taken up without rating 5.2.4 As per guidelines Borrowers and facilities must have their ratings refreshed at least on an annual basis. certain credits, especially higher risk borrowers or problems exposures must be subject to more frequent review .accordingly all the borrowal accounts are to be rated annually. 5.2.5 Accounts below the entry grade to be considered by the next higher authority by specifying the reasons. Obligor rating is considered to decide the entry level. If obligor rating is lower than b we require higher security. 6 Loan Review Mechanisms LRM is effective tool for constantly evaluating the quality of loan book and to bring about qualitative improvements in credit administration. Main objective of this are as follows: i) To identify promptly loans which develop credit weaknesses and initiate timely corrective action .

ii) To evaluate portfolio quality and isolate potential problem credits. iii) To provide information for determining adequacy of loan loss provision iv) To assess the adequacy of adherence to, loan policies and procedures and to monitor compliance with relevant laws and regulations. v) To provide top management with information on credit administration including credit sanction process, risk evaluation and post sanction follow up. vi) Review of credit risk independently vii) Picking up warning signals and suggest remedial measures. Loan review policy 6.1 extent of coverage At least 30% to 40% of the standard borrowal accounts exposure is to be brought under LRM. 6.2 Accounts to be covered under LRM 6.2.1 All fresh proposals and renewal with enhancements for Rs. 5 crore and above shall be put under LRM within 6 months of sanction. 6.2.2 All existing standard accounts with sanctioned limit of Rs. 25 lakhs and above shall be the cut off limit. 6.2.3 From the rest of the accounts all accounts coming under HO powers with rating of C and below C under standard category. 6.2.4 in case the standard accounts with a limit of Rs.25 lakhs and above do not constitute about 30% to 40% of the circle office power exposures, accounts having exposures below Rs.25 lakhs may also be brought under LRM to cover 30% to 40% level fixing a suitable cut off limit within circle. 6.2.5 Review under LRM has to be undertaken within 6 months of sanction. 6.3 Frequency of Review The review of accounts rated BB and below as per our internal model can be under taken one more time in a year in addition to the annual renewal. 6.4 Reviewing Authority i) The accounts have to be reviewed under LRM by a committee.

ii) Borrowal accounts sanctioned at HO with a limit of Rs. 100 lakhs and above shall be taken up for review under LRM by HO. Risk management department and put up to LRM committee at HO for review. iii) Borrowal accounts sanctioned at Circle Office powers with a limit of Rs.25 lakhs and above and also under HO powers with limit below Rs. 100 lakhs are to be reviewed LRM committee. 6.5 Scheduling of accounts for review under LRM i) Accounts having a lower rating ii) Accounts which have not been reviewed under LRM during the previous year iii) Accounts showing warning signals and belonging to industries facing adverse conditions.

TYPES OF BORROWERS

MINORS Money lent can never be recovered against a minor, even after he attains majority .Any security given by a minor for a loan is also void ab initio .If a third party gives a guarantee to secure an overdraft to a minor ,the guarantor is not liable .Hence, no credit facility should be sanctioned to a minor. Loans can also be granted against fixed deposits standing in the name of a minor subject to precautions. JOINT ACCOUNTS All joint borrowers should join in the application for accommodation. Any security in joint names charged against the advance. Joint promise-the is obligation is single and entire and the creditor can bring one cause of action and several actions against the joint promissors .The joint liability can be enforced against all or any one of them but at one time. Account holders are jointly liable and in the event of the death of one of them the estate of the deceased is not released and the banker can look for payment to the survivors as well as to the legal representative of the deceased. Joint and several liabilities There is a right of action against all parties severally and successively, until the whole debt is recovered. Moreover, a right of set-off exists between a private account with credit balance and the joint overdraft. SOLE PROPRIETORSHIP Creditors of the business could look to the personal assets of the proprietor, should the business fail and should the business assets be insufficient to satisfy the debts. PARTNERSHIP ACCOUNTS A partnership should not consist of more than 10 persons, if it is engaged in banking business or more than 20 persons in any other class of business. It is not necessary that there should be a partnership deed between the partners; if partnership letter is taken .partnership deed should be carefully scrutinized to see that all the partners of the firm have signed it by the bank.

If a partner pays to the credit of his private account a cheque drawn by him on the firm s account there is no prima facie case for enquiry .the transactions may represents repayment of loan or share of profits etc .It is however, desirable that the drawer-partner and the payee-partner of cheque are different persons. Any of the partners has power to countermand payment of cheques drawn by him or another partner and the bank is bound to comply with such instructions. A partnership as such cannot guarantee the lending s to a third party, unless the firm carries on the business of issue of guarantees .Any partner in his individual capacity may give guarantee or secure third party s obligations without binding the firm. Limited company as a partner in a firm The liability of the limited company vis--vis the partnership is not limited in proportion to its share in the partnership. The entire liability of a partnership can be realized from the limited company alone subject to the extent of its assets. Minor admitted to the benefit of partnership A minor cannot be a partner but can be admitted to the benefit of the partnership. He cannot be made personally liable .However, his property in the firm is liable for the firm s debt. Neither the natural nor the legal guardian can enter in to agreements of partnership on behalf of the minor beneficiary. A minor may repudiate his liability as a partner within 6 months of his attaining majority or within 6 months of his obtaining knowledge that he was admitted to the benefit of the partnership whichever date is earlier .His silence after expiry of the above period will be taken to mean, in law, that he has been elected to be a partner. JOINT STOCK COMPANY A joint stock company is a legal entity and is regarded as a person in law with perpetual succession and a common seal with the capacity to contract or handle obligations or undertake transactions in its own name .The liability is limited to the share capital and the liability of the shareholder is to contribute unpaid value of shares. Private Ltd. Company A private Ltd. Company is a company which has a minimum paid up capital one lakh as per Companies act 2000 and by its articles. i) Restricts the right to transfer its shares ii) Limits the number of its members to 50

iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company or issue of prospectus. Public company A public company means a company which i) Is not a private company ii) Has a minimum paid up capital of rupees 5 lakh or such higher paid up capital as may be prescribed iii) Is a private company which is a subsidiary of a company which is not a private company . Other types of borrowers It includes Hindu undivided family (HUFs), societies, charities etc. Group Concept All types of borrowers are covered by this concept for the purpose of i) Computation of credit exposure ceiling ii) Sanction of credit facilities to group of borrowers, and iii) Sanction for filing suit

MODES OF CHARGE

Lein Lein is the right to retain securities/goods belonging to another, until a debt due from the latter is paid. There are two kinds of lein i) Particular-A particular lien is the right to retain security/goods in respect of which the debt was incurred. ii) General-Bankers have a general lien on all securities deposited with them as bankers by a customer .A general lein does not ,as a rule, carry with it the right to sell the security/goods. 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 the accounts of the debtor and the creditor so as to arrive at the net balance payable to one or the other. The right of set-off is a statutory right and can also arise out of agreement between the parties. The right to combine the accounts is, however, a right only of the banker and not of a customer and so a customer cannot expect his cheque on one account to be paid by combining the balance of all accounts which he maintains and the aggregate balance of which would have been adequate to pay the cheque unless, of course, he has asked the bank specifically to do so. Pledge i) Pledge is bailment or delivery of goods as security for payment of a debt or performance of a promise. ii) The pledgee gets the possession of the property but does not become its legal owner .Any kind of goods, documents or valuables of a personal nature, can be pledged as security .Government promissory notes, which are negotiable instruments, can also be pledged when duly endorsed and delivered. iii) A pledgee is entitled to the possession of the goods pledged till the debt is repaid with interest or the promise is performed. In the event of default, the pledgee can a) sue the pledgor, retaining the goods pledged as a collateral security

b) Sell the goods after giving a reasonable notice to the pledgor of his intension to sell. The notice need not specify the date, time or place of the intended sale etc. iv) The pledgee cannot retain the goods pledged for any debt or promise other than that for which the pledge has been contracted. Normally, it would also be covered by a letter of continuing security, in case of a fluctuating cash credit or overdraft account. v) If the pledgor has a limited interest in the goods pledged, the pledge is valid to the extent of that interest. vi) Bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. The burden of proof is on the bailee that there has been no negligence, when he fails to return the goods or returns them in a damaged condition and that the loss or damage occurred in spite of the fact that he took reasonable care of them. If goods are damaged or destroyed in anyway, the bailee is not liable for the loss, destruction of the thing bailed. Hypothecation i) When the possession of the property in the goods and other movables offered as security remains with the borrower and only an equitable charge is created in favour of the lender, the transaction is called hypothecation. ii) The charge which is normally created by an instrument in writing known as the letter of hypothetication is shifting in nature. iii) The hypothecator not only has the possession of the security hypothecated but he is free to deal with it. He can sell; transfer, process and substitute the security provided the value of the security continues to cover the advance in the manner agreed in the letter of hypothecation. Iv) After obtaining possession of the property hypothecated, in the event of any default or any breach of covenant of the borrower. The lender can sell the property without the intervention of the court. v) If the borrower is a joint-stock company, the charge has to be registered as in the case of moveable property. vi) Although the security is not in his possession, a hypothecate is a secured creditor and he would be treated as such in insolvency or liquidation proceedings. Mortgage i) A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, an existing of future debt or performance of an engagement, which may give rise to a pecuniary liability.

ii) A person who creates the mortgage is called Mortgagor, the person in whose favour the mortgage is created is known as Mortgagee and the principal money and interest, payment of which is secured for the time being is called Mortgage money and the instrument by which the transfer is effected is called Mortgage Deed. iii) A mortgage by a minor is void. It is created by individual, joint owners, partners of a firm, karta of HUF, a guardian of a minor after permission. In case of joint owners, all the co-owners must join creating the mortgage and in the case of a partnership firm all partners should join in creating the mortgage. I v) Consideration for mortgage may be a) payment of money by way of loan b) existing or future debt or c) Performance of an engagement giving rise to a pecuniary liability. v) Kinds of mortgage a) Simple mortgage a.1) The mortgagor does not part with the possession of mortgaged property. a.2) The mortgagor binds himself personally to pay the mortgaged money. a.3) The mortgagee has no power to sell the property without the intervention of the court. a.4) It will invariably be registered with the Sub-Registrar, where the principal money secured is Rs. 100 or more b) Mortgage by conditional sale It is a transaction in which the mortgagor ostensibly sells the mortgaged property on condition that b.1) on default of payment of the mortgage-money on a certain date, the sale shall become absolute b.2) on such payment being made, the sale shall become void or b.3) on such payment being made, the buyer shall transfer the property to the seller This type of mortgage is not usually taken by banks, as there is no personal covenant for repayment of the debt. c) Usufructory Mortgage c.1) where the mortgagor delivers possession or binds himself expressly or by implication to deliver possession of the mortgaged property to the mortgagee and authorize him to retain such possession until repayment of the mortgage-money and to appropriate the same in lieu of interest or in payment of the mortgage-money or partly of both.

c.2) the only remedy for the mortgagee is to remain in possession of the mortgaged property and pay himself out of the rents and/or profits of the mortgaged property. d) English Mortgage d.1) where the mortgagor binds himself to repay the mortgage-money on a certain date and transfers the mortgaged property absolutely to the mortgagee subject to the provision that the mortgagee will retransfer it to the mortgagor upon repayment of the mortgage-money as agreed. d.2) In it, the personal liability of the mortgagor remains notwithstanding the absolute transfer of the property to the mortgagee. e) Anomalous Mortgage e.1) A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructory mortgage, an English or a mortgage by deposit of title deeds . e.2) they are a simple-cum-usufructory mortgage and an usufructory mortgage accompanied by a conditional sale. f) Equitable mortgage where a person ,in any of the following towns, namely ,the towns of Kolkata, Chennai and Mumbai or in any other towns which the State Government concerned may ,by notification in the official Gazette ,specify in this behalf ,delivers to a creditor or his agent, documents of title to an immovable property with an intent to create a security thereon, the transaction is called a mortgage by deposit of title deeds. Assignment i) The transfer of the right, title and interest in a contract by a party to the contract to another person is called an assignment of the contract. An assignment can be absolute or by way of security. ii) Assignment may also be made by operation of law. Insolvency or death of a party to the contract , when the legal representative or the official assignee or the receiver steps in, are examples of assignment by operation of law. iii) A policy of marine or fire insurance can be assigned by endorsement on the back of the policy or by a separate deed of assignment .These policies constitute an exception to the general rule of giving notice, because they cannot be assigned without a transfer of the property insured.

PROCESSING OF CREDIT PROPOSALS

The management of credit portfolio at branches has three important stages i) Pre-sanction appraisal ii) Sanction and disbursal iii) Post sanction/disbursal follow up and monitoring Pre-sanction processes The pre-sanction includes obtension of application form from the prospective borrower, analysis of the financial statements, projections, etc. compilation of a credit report and determination of the eligible quantum of advance, type of advance, securities to be obtained etc. The Branch Manager shall have a personal interview with the borrower so as to ascertain the identity of the borrower as per KYC norms. i) Obtension of application for credit facility a) Written application complying with certain basic requirements as per KYC norms like identity of the applicant etc., should be obtained. b) The Branch Manager has to take in to the account the Loan policy of the Bank, before entertaining any proposals c) It has to be ensured that the application tendered is appropriate to the facility sought and all the columns in the form are properly filled up. d) Three copies of passport size photographs of borrowers, where they are individuals, should be obtained except in cases of advances against our own deposits, Govt. securities, gold ornaments etc. e) At the time of receiving the credit proposal, branches should obtain a declaration from the borrowers about their relatives, if any, employed in our Bank or in any other bank/financial institution. f) The details of legal heirs of the borrower/guarantor should be obtained in the loan application .These details should be obtained for the borrower and guarantor separately. ii) Credit proposals received register

The register should constitute a continuing record relating to applications for credit assistance and should contain information relating to the date of receipt of the application, date on which it was disposed off, either by sanction or by rejection at the branch level or at the circle/head office level. iii) Analysis of the information collected a) Analysis the data, the branch has to prepare Credit Reports of the borrower/guarantors and present the applicant s request in the form of a credit proposal to the sanctioning authority. b) Even for fresh/renewal proposals involving credit limits of below Rs.10 lakhs, branches should bring in all major aspects/particulars that are covered in the Board Memorandum Format, wherever warranted. c) If the applicant is already a customer of the bank, a scrutiny of the operations in the account will reveal the trends, connections, nature of business dealings etc . iv) Compilation of credit Report a) Credit Report is the basic document on the basis of which assessment of the borrower s character, capital and capacity is made by a banker. b) Before extending any credit facility whether fresh or additional, to any of the units belonging to a particular group, the branch should obtain a credit report/consent of the Lead Bank financing the main company. c) In preparing Credit reports, the branch should be careful about the following: c.1) Inclusion of assets not standing in the applicant s name c.2) Inclusion of other s share of property c.3) Suppression of encumbrances on the property c.4) Overvaluation of assets c.5) Suppression of liabilities. d) As the sanctioning authority relies on credit reports received from the Branch Manager .Only after independent verification of the information relating to the assets and liabilities furnished by them. e) The tangible net worth shall be arrived at as under e.1) for individuals/proprietorship concerns Add e.1.1) movable assets such as Bank deposits, gold ornaments/jewellery etc. e.1.2) Personal immovable properties

Less Loans taken against any of the above assets in individual name or offered as third party security. e.2) for partnership/joint Hindu family firms Add e.2.1) capital invested in the business e.2.2) undivided profits/deduct accumulated losses, if any e.2.3) total worth of individual partners e.3) Limited companies Add Paid up capital and free reserves Less Accumulated balance of loss, balance of deferred revenue expenditure and also intangible assets in all the above cases.

f) When the borrower s guarantor s declared Net worth exceeds Rs.50 lakhs, the following documents should be obtained f.1) Certificate from a chartered accountant f.2) Photocopy of the title deeds in case of immovable properties f.3) A declaration that any disposal of properties will be intimated to the bank f.4) A declaration that additional liability assumed will be intimated to the bank. g) The branch should indicate in the credit report both the fund based and non-fund based limits enjoyed by the party. If the borrower has stood as co-obligant/guarantor for any facility extended to a third party, such details should also be incorporated. h) A certified true copy of the same should be sent to the appropriate sanctioning authority along with the proposal. i) Particulars of all litigation against the borrowers /or their partners/Directors etc. should also be incorporated in the loan application/credit report.

j) It is necessary to obtain a separate statement on the contingent liabilities of a borrower /guarantor along with the assets and liabilities statement. Proposal should be verified whether it is due to any revaluation of the assets. v) Assessment of quantum of credit required Branches have to keep in view the purpose, the period for which the advance is required, type of facility, security offered, additional benefits that may accrue to the bank etc. The assessment of Working Capital shall be made, taking in to account reasonable projected level of activity, so as to avoid frequent sanction of adhoc limits and excess drawings. It involves 3 steps and done by Turnover and short term bank credit method. a) Assessment of the level of current assets required to be held for a given level of production. b) Determination of credit other than bank financial available to the borrower and c) Calculation of bank finance required

vi) Contents of credit proposals A fresh /renewal proposal should contain the following a) Name, address of the borrower/guarantor along with the asset classification assigned to the borrower b) Net worth of the borrower/guarantor along with the Assets and Liabilities statements and credit reports c) Purpose of advance/nature of facility d) Quantum of credit requirements of the borrower e) Basis on which projection of performance and reliability of such projection f) Margin proposed , sources from which the borrower would bring in such margin g) Nature and value of security offered, its title, the mode of charging such security h) Deposits/business connection already available from the borrower or from associate concerns or proposed deposit/business connection i) Scope of availability of refinance, if any, in case of term loans j) Availability of credit guarantee cover, in case of export credit facility or facilities granted to priority sector segments k) Detailed working of accounts/facilities in case of existing borrowers enjoying facilities with us along with the branch manager comments. l) The renewal proposals should also carry the particulars such as l.1) Date of inspection l.2) Name and designation of the officer who inspected l.3) Brief remarks with observation made during the inspection by the Branch regarding securities etc.

vii) Time norms for disposal of Credit Proposals a) For sanctions falling under the powers of Circle Office, proposals must be prepared in triplicate of which two copies shall be forwarded to Circle Office and the third copy retained for branch records. Of the two copies received, one copy will be returned by the circle office with their sanction or rejection order. b) For sanction falling under the powers of Head office, the proposal should be prepared in quadruplicate of which one copy shall be sent to HO, two copies to the circle office and the fourth copy retained for branch record. c) The circle heads should scrutinize the proposals and seek clarifications, if any, from the branch within 2 weeks from the date of receipt of proposals from the branch. Branches should answer the queries within 2 weeks from the date of such queries. d) Circle heads must convey their views /recommendations to HO within 10 days from the date of receiving the proposals from the branch. e) A proposal should not be kept pending beyond 3 months from the date of receipt from the branch.

SANCTION OF CREDIT

1. Issuance of Sanction tickets a) Terms and conditions should be mentioned in the final recommendations made to the sanctioning authority along with the reasons for instituting them. b) Special conditions applicable to the respective loan/product depending on various factors like the type of facility , type of security, period of repayment etc. could be specified c) Sanctioning authorities need not go in for printed sanctioning tickets comprising the set of terms and conditions .instead , they may keep these terms and conditions in their computers and generate sanction tickets containing only those terms and conditions which are appropriate for each credit limit sanctioned. d) In case of Export Credit, sanction should be reported by branches in the appropriate format within 30 days from the date of sanction to ECGC, irrespective of the acceptance of the sanction by the borrower. e) The sanction communication should clearly divide the terms and conditions into predisbursement and post-disbursement conditions. 2. General terms and conditions of a sanction a) All borrowers and guarantors must furnish their Passport size photos. b) Processing fee and other charges as per prescribed by the bank should be paid in time. c) Processing charges for renewal of facilities will be charged irrespective of whether the renewal papers are submitted or not. d) Bank is entitled to charge and recover interest, various fees, charges as per actual/prescribed tariff from the borrower as applicable from time to time. e) The limits shall be availed within the prescribed time limit from the date of communication of sanction. f) The working capital limits disbursed are valid for a period of one year from the date of sanction. g) Acceptance of immovable properties offered as security is subject to the unqualified legal opinion of the bank s approved lawyer conveying a clear, valid, subsisting and marketable title. h) Valuation of the property, wherever given as security, should be done by the bank s approved engineer/revenue authorities. i) In the case of immovable properties given as security, the borrower should furnish up-todate encumbrance certificate showing NIL encumbrance and up-to-date tax paid receipt at the time of documentation. j) Fixed assets charged to the bank shall not be leased /disposed/substituted/ relocated/mortgaged/assigned without the prior approval of the bank.

k) All the assets charged to the bank shall be adequately insured against all attendant risks at the expense of the borrower. The insurance policy with bank clause shall be lodged with the bank. l) Machinery, equipment, vehicles etc. charged to the bank should be painted with the bank s name or affixed with the bank s name board prominently both inside or outside the premises. m) Assets charged to the bank are subject to inspection by bank s officials from time to time n) Delayed submission of stock statement /financial statements etc. will attract levy of penal interest as par bank s rules in force from time to time. o) All fund based/non-fund based/fee based transactions shall be routed only through the account with our bank. p) Interest will be generally charged on the last working day of every month and should be paid as and when charged. q) Default in payment of interest/installments on the respective due dates will attract overdue interest on the defaulted amount at 2 % over and above the contractual/maximum interest rates or at such rates as applicable from time to time. r) Upon sanction, the duplicate copy of the sanction letter is to be returned duly signed by the borrower in token of acceptance of the terms and conditions. s) The bank may at its discretion recall the entire advance upon default of a single installment/interest. t) For advances to limited companies t.1) In the event of slippage in asset classification of the borrower s accounts, the bank will have the discretion to have a nominee director on the board of the borrower-company. t.2) Promoter directors/majority shareholders shall not sell/pledge their shares to the third parties without bank s prior approval. 3. Confirmation /approval of any deviation from sanctioned terms Wherever the deviation sought for approval imply simple changes and do not involve modifications beyond the minimum terms authorized in Discretionary powers, such cases could be dealt with at the level of sanctioning authorities themselves. 4. Relaxation in sanction terms Relaxations may be considered on merits by an authority at the level of Circle Head. 5. In-principle sanctions The in-principle sanction has to be obtained from the Circle Head , if the powers for sanction of the facility falls under his powers .In case of sanctions under HO powers, in-principle sanction should be obtained from the appropriate authority at HO. On obtention of in-principle sanction, full-fledged-proposal has to be submitted early with a view to get the regular sanction within a maximum period of 3 months .In-principle sanction shall not be a commitment to sanction and the bank reserves its right to decline the proposals after detailed appraisal.

6. Allowing Excess over sanctioned limit Credit disbursed beyond the sanctioned level or drawing limit in a working capital account is termed as Excess. Resultant Excess The excess may be caused in any working capital account by any one or combination of the following factors: a) Depletion of stocks under hypothecation leading to reduced drawing limit. b) Erosion in value of stocks under hypothecation /pledge c) Non-servicing of interest, other charges debited to the account and default by the borrower to conduct the account properly. Branches should desist from the practice of granting excess over the sanctioned/drawing limits .If there is a need to allow excess based on business requirements it may be permitted strictly within delegated powers. Guidelines on allowing excesses Branch managers are empowered to allow excess drawing in an account subject to the prescribed tolerance level and monetary ceiling, if the following conditions are fulfilled: Account is of standard category Group accounts, if any, are also regular All terms and conditions of sanction have been compiled with Accounts have regular sanctioned limits in force duly received/renewed or for which proposals have already been submitted and The track record and the operations in the sanctioned working capital limits are good.

a) b) c) d) e)

Proposal for prior approval for excess beyond the discretionary powers Branches should take up with the sanctioning authority through Circle Office in advance with the following particulars a) b) c) d) e) f) g) Key financial indicators of the firm Availability of drawing power in the account The latest balance under all facilities sanctioned The overdue (if any) in any of the sanctioned facilities Justification for additional financial accommodation Time frame within which the excess will be adjusted and Cash flow source for repayment of the excess proposed

Overdue Excess/Out of order

RBI defines that an account should be treated as Out of order if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. Situations/requests may come to allow operations in an out of order/overdue excess account with the approval of the competent authority. Penal Interest Penal interest at 2 % over the contracted rate should be levied for the excess portion for the period permitted .If it has become overdue, the maximum Card rate shall be levied. 7. Sanction of adhoc limits Adhoc limit is sanctioned to meet unforeseen bulk orders/bulk purchases or other contingencies, for a short period .It is always based on due appraisal and sanction by the competent authority for a specific period, generally not exceeding 3 months. This makes the difference between Excess allowed and adhoc limits sanctioned. Eligibility criteria for considering adhoc limit in borrowal accounts a) Accounts shall be continuously of Standard category, at least for 2 half years in the immediate past. b) Accounts for which limits are in force by regular review/renewal sanctions. c) All the sanction terms and conditions for the existing credit facilities should have been compiled with d) Group accounts (if any) should be regular e) There should not be any over dues in other institutional loans such as Term Loans with Term Lending Institutions f) All excess drawings as well as adhoc limits granted to any single borrower should not exceed the f.1) Stipulated percentage of the sanctioned working capital limits or sectors as the case may be f.2) Delegated credit powers of the authority for the purpose of Excess /Adhoc limits g) There should not be any over lapping of sanctions h) The period of adhoc facility should not exceed generally 3 months Other guidelines a) b) c) d) e) C over documents must be obtained for the facilities extended Proportionate processing charges should be recovered The stocks/securities/asset created out of adhoc limits, if applicable, should be inspected Stock statements should be obtained, wherever applicable If not adjusted on due date, it becomes overdue and appropriate ROI for overdue shall be applied.

MONITORING OF ADVANCES

Monitoring and follow-up play a crucial role in ensuring that the account continues to be a performing asset. Once at unit slips in to sickness, it becomes difficult for the Bank to recover its advance in full or even part of it, at times. Security Monitoring Bank borrowings must be adequately secured by core current assets. For ensuring this, margins are prescribed on each of core current asset. Irregularity in the cash credit account arises when bank borrowings exceed the Drawing power and the security position is adversely affected. The branch should ensure that a) The security conforms to the terms of sanction, is adequate, in good condition and readily enforceable b) All the legal formalities have been compiled with and a valid charge on the security in the bank s favour has been created c) The movable property such as goods, stock exchange securities, documents of title to goods etc., pledged to the bank are in the effective possession of the branch. d) Where the security is not so held, the branch has obtained adequate legal documents for taking effective possession of the property in case of need. e) In cases where the securities are held with other branches, their confirmation of holding is obtained periodically f) All the securities are received and entered in Securities Register against the authentication of Branch Manager or the officer concerned g) The securities are always kept in the joint custody of two officers against their joint signature. h) A close watch is kept by the branch on the market price of the security held. i) The goods pledged or hypothecated to the bank are according to the specifications furnished for their prices. Collection and analysis of Data Following are important returns/statements in the monitoring of working capital advances: a) b) c) d) e) f) g) h) Monthly stock statement and Monthly Data on Production and Sales Inspection of stocks Operations in the account Statements under quarterly information system (QIS) Annual Audited Accounts Review/renewal of advance Asset classification under IRAC and other norms Credit Rating

i) j)

Review during quarterly consortium meetings wherever applicable Stock audit and concurrent auditor s report, comments by external auditors and the reports of Credit Monitoring Officers. k) Reports on unit inspection

Scrutiny of stock statements a) Borrowers should submit a stock statement showing quality and value of hypothecated to the bank. The stock statement should clearly show the value of unpaid stock. b) On obtention of stock statements, branch should scrutinize the same keeping in view the following: b.1 valuation of stocks should be done in the same manner and adopting the same principles as for annual financial statements. b.2 stocks-quantity and value should be reconciled from month to month showing opening stock, receipts, issues and closing stock b.3 while arriving at drawing power on stocks, trade creditors should be deducted. b.4 wherever book debts are financed b.5 In case no specific tenor is fixed by the sanctioning authority, only book debts up to 180 days are to be taken c) For advances to construction companies, stock statement should include data on contract, extent of work done, amount of advance received and value of bills raised etc. Inspection of stocks a) Stock inspection is usually done on a monthly basis with an element of surprise maintained at the time of inspection. b) Where there are large volumes of stocks, through stock inspection should be taken up on a small portion in quantity but significant in value. c) All the establishments of the borrower in the same city like factory, go down and office should be inspected on each inspection d) Stocks shown in the stock statement shall be cross verified with those in the books of accounts and the records maintained for the purpose of excise and other statutory authorities. e) Valuation rates adopted for stocks with market rates/cost shall be verified to ascertain whether the company follows the same basis of valuation as disclosed in the audited Balance Sheet. f) Insurance on stocks shall be examined for its adequacy and coverage and to ensure that all the policies are in force. g) Power supply, alternate of power supply if any. Utilization of power shall be verified from meter reading. If through alternate supply the fuel consumption etc., shall be crossed checked

h) Wherever shortfall in stocks/book debts is noticed, the matter should be reported to controlling office. i) Internal reports of the company as to age and quality of book debts, sales returns of finished goods may also be scrutinized. j) Consignment stocks in and out to be supported by proper records k) Wherever any additional construction/other capital expenditure is noticed/incurred during unit inspection. It should be cross checked for source of funds to finance such activities.

DISBURSEMENT OF CREDIT

Documentation process a) The purpose of documentation is to enforce Bank s legal rights when it becomes difficult to recover an advance in the normal course. b) Branches should scrutinize the sanction, list out documents appropriate to the advance with reference to the terms and conditions, procure them and fill in the blanks correctly without overwriting, cutting, erasing etc. c) It must be ensured that all documents/undertaking letters as stipulated in the sanction, letter are obtained. d) A separate declaration from the borrower should also be obtained that the documents were executed by him/her/them, only after they are duly filled in and understood by him/her/them. e) All fresh disbursements under consortium shall be effected only after the documentation is completed, which shall be certified by the Circle Head under whom the Branch falls. f) In the process of documentation, it should be ensured that f.1) the set of documents are those stipulated for the category of borrower, nature of facility, nature of charge and securities involved. f.2) the stamping is adequate for the state concerned. f.3) the executants are duly empowered to execute the documents. f.4) the mode of execution as prescribed in the documentation f.5) DPN / D-11 are stamped adequately with adhesive revenue stamps and signed by the executants across the stamp. g) Printed documents are stamped for appropriate values at the stamp office of the state concerned. h) Any correction/addition/deletion/interlineations in documents are authenticated by all the executants. i) Before actual release/disbursement, a note of compliance shall be prepared indicating whether all terms of sanction have been compiled with. Registration of charges in case of limited companies a) In case of advances to limited companies charges as required by companies act should be filed with Registrar of companies

b) Before creation of charge on land, buildings, plant and machinery, share securities, FDs etc income tax certificates should be obtained in all cases where borrowers are assesses to income tax. c) The advances sanctioned shall be secured by the personal guarantee of all financially involved Directors. d) Charge by way of hypothecation /mortgage must be registered with the Registrar of Companies within 30 days from the date of execution of the documents and receipt for payment of necessary fees for filing the same must be furnished. Conduct of Pre-release Audit a) Pre release Audit is stipulated in respect of advances with limits of Rs. 10 lakh and above in order to bring in discipline with regard to compliance of terms and conditions of credit sanctions, zero error documentation and conduct of accounts. b) For structured loan products pre-release audit is to be conducted for advances of above Rs 50 lakhs. c) Pre-release audit shall cover only pre-disbursement conditions and completeness documentation Valuation and verification of securities Fixed assets Acceptance of immovable properties offered as security is subject to a) An unqualified legal opinion of the Bank s approved lawyer conveying a clear, valid, subsisting and marketable title. b) Valuation of the property by the Bank s approved Engineer/Revenue authorities. c) Furnishing of up-to-date encumbrance certificate showing NIL encumbrance and up-to-date tax paid receipt at the time of documentation d) In respect of landed property, the valuation may be obtained from the Revenue Authorities. e) In case where first charge on fixed assets is in favour of other banks/financial institutions, it should be ensured that second charge on such assets is made in our favour, unless waiver of the same has been permitted by the sanctioning authority. f) Machinery, equipment, vehicles etc. charged to the bank shall be painted with the Bank s name or affixed with the bank s name board. g) Securities offered for one or more facilities and charged to the Bank shall also stand as additional security for all other facilities already granted or shall be granted from time to time. h) Fixed assets charged to the bank shall not be leased/disposed/substituted/re-located without the prior approval of the bank. Stocks under hypothecation/pledge

a) Bank s name board with specific mention of the branch name shall be displayed prominently both inside and outside the premises where the stocks pledged/hypothecated to the bank are stored. b) Where our borrower has given goods/stock to third party for processing, the said third parties processors /their bankers should furnish a no-lien certificate on the stock lying with them on behalf of our borrowers .A list of such third party processors /location should be held on record for registration at their sites. c) While arriving at the drawing power against stocks/book-debts in the monthly statements, sundry creditors for goods are to be deducted from the value of stocks declared. Precautionary Measures for different types of facility a) No advance payments should be made to the suppliers of machinery. While making disbursements of the term loan for purchase of assets including machinery, payments should be made directly to the suppliers. b) Disbursements towards cost of construction should be made in stages depending on the progress made .For valuation up to Rs 5 lakhs, Bank s approved valuation need not be insisted at each stage and the assessment could be done by the Branch manager himself. Where the valuation exceeds Rs. 5 lakh, certificate from the approved engineer should be obtained at each stage, before making further disbursements. c) Any shortfall in margin/cost overrun shall be met by the borrower from his own sources. d) The bank may at its discretion recall the entire advance even upon default of a single installment. e) In case of advance against vehicles, Bank s hypothecation shall be noted in the RC book and a copy of the RC book along with the duplicate keys of the vehicle shall be lodged with the bank. Comprehensive insurance cover must be obtained for the purchase value and renewed thereafter annually. Export credit In case of exporter borrowers will a) Apply for suitable credit limit, buyer-wise and get them approved by ECGC. b) Obtain prior approval of ECGC for any extension of usance under DA or conversion of DP bill into DA bill and c) Obtain specific approval of ECGC for each shipment or contract in advance where exports are to be made to countries placed by ECGC under restricted cover. Feedback Report a) The feedback report system is applicable to all fresh/enhancement/renewal sanctions to borrowal accounts of structured loan products below Rs 50 lakhs and other borrowal accounts below Rs 10 lakhs sanctioned by circle/head office.

b) The feedback report system is not applicable to loans sanctioned under Loan against deposits, staff loans and jewel loans. c) Feedback report has to be submitted by the branch to circle office within a month from the first disbursement of the sanctioned facilities. d) In case of sanctions accorded by HO, a copy of the report should be submitted to HO by the branch and Circle office has to summit their consolidated views on the report to HO within 15 days from the date of receipt of the report from the branch. Ensuring endues of funds The branch should take utmost care to verify whether the advance granted is used for the purpose for which it is raised. In case of advances for purchase of equipment /machinery/vehicle/other movable assets, the cost price of such articles should be sent directly to supplier of goods. The cash receipt/bill should be kept with our records. In case of advances given to construction activity the disbursal should be made in stages in accordance with the progress of construction already achieved. Submission of QIS/MSOD statements In case of working capital limits of Rs. 1 crore and above,QIS statements in Form I,II and III /MSOD statements shall be submitted within the prescribed time limit and any delay in submission will attract levy of additional interest for the period of default at 1% over the contractual rate or at the rates stipulated by the bank from time to time. In case non-compliance of this stipulation continuously for 6 months, Bank may at its discretion withdraw/cancel the facilities sanctioned. Financial Discipline a) All fund based/non-fun based /fee-based transactions shall be routed through the account with our Bank only, unless specifically exempted. In case of consortium accounts pro-data share shall be routed through our Bank b) The borrowers shall submit audited/unaudited financial statements on quarterly/half yearly/annual basis. c) All dues to SSI units shall be paid within 90 days of their creation. d) Entering into leasing will be subject to Bank s prior approval and ability of the borrower to generate sufficient surplus to secure the liabilities. General a) Changes ,if any made to the structure of ownership/management of the borrowing concern shall be promptly informed to the bank b) The bank reserves to itself the right to cancel/suspend/reduce any or all the limits sanctioned and to alter/amend/vary the terms of sanction including ROI at its sole discretion without assigning any reason whatsoever.

c) In addition to these terms and conditions, all the facilities sanctioned shall be subject to the Bank s rules as well as the directives issued by RBI from time to time. Transfer of loan/advance accounts from one branch to another a) For transfer of advance accounts from one branch to another branch within the same Circle, Circle heads shall accord approval where the credit sanction is made by the Branch Manager or by the Circle Head. b) For sanctions accorded at the level of Branch Managers/Circle Heads, the Circle heads shall authorize inter-branch transfer of accounts, provided b.1) The concurrence and credit advice for taking the account to be obtained from the transferee branch with the approval of the Circle head Concerned of the transferee branch. b.2) the account should be in standard asset category b.3) the renewal documents should have a residual life of minimum 6 months b.4) the renewal/review sanction should not be older for more than 3 months b.5) the review/renewal Note copy should accompany the transfer documents. b.6) the inspection and documentation irregularities, if any, should have been rectified and b.7) there should be justifiable reasons for transfer of the accounts. c) For transfer of advances accounts from one branch to another branch situated in another Circle and for inter-branch transfer of accounts sanctioned by higher authorities, the approval shall be given as per the following schedule: Advance falling under the powers of Branch Circle head Head office -GM -Executive Director -CMD/MC Authority for approving the transfer Circle head Circle head GM concerned Executive Director Chairman and Managing Director

MONITORING OF ADVANCES

Monitoring and follow-up play a crucial role in ensuring that the account continues to be a performing asset. Once a unit slips in to sickness, it becomes difficult for the Bank to recover its advances in full or even part of it, at times. Security Monitoring Bank borrowings must be adequate secured by core current assets. For ensuring this, margins are prescribed on each of core current assets. Irregularity in the cash credit account arises when bank borrowings exceed the Drawing Power and the security position is adversely affected. Collection and analysis of data Following are important returns/statements in the monitoring of working capital advances a) b) c) d) e) f) g) h) i) j) Monthly stock statement and Monthly data on production and sales(MSOD) Inspection of stocks Operations in the account Statements under Quarterly Information System(QIS) Annual Audited Accounts Review/renewal of advance Asset classification under IRAC and other norms Credit rating Review during quarterly consortium meetings wherever applicable Stock audit and concurrent auditor s report, comments by external auditors and the reports of Credit Monitoring Officers k) Report on unit inspection

Scrutiny of stock statements Borrowers should submit a stock statement showing the quantity and value of stocks hypothecated to the bank. The stock statement should clearly show the value of unpaid stock. Inspection of stocks Stock inspection is usually done on a monthly basis with an element of surprise maintained at the time of inspection. Such inspections are besides Stock Audit exercise for fund based and non-fund based working capital limit of Rs.1 crore and above Stock Audit

Stock audit covers in its ambit the quality of stocks and Book debts, their value and their conformity to the criteria of current assets holding levels. It is remedial measure which is crucial in improving the quality of loan assets of the Bank. Eligible Accounts and Frequency/Periodically valuation of securities Stock audit has to be conducted once in a year for accounts with fund based and non-fund based working capital limit of Rs.1 crore and above. The gap between two successive Stocks Audits should not exceed 15 months and not less than 6 months. If such excess drawings could not be recovered immediately, a report of such excesses should be made to controlling authority and efforts made for regularization of the account early. Coverage Stock audit should cover Book Debts, pledge stocks, fixed assets (charged to Bank either as primary or as collateral security) and goods. Periodical Inspection of units and verification of securities Periodical inspection and verification may also be undertaken of machineries and immovable properties taken as security for term loans. It is to be noted that the purpose of inspection is not only to ensure the availability of sufficient security cover for the advances but also to have a firsthand knowledge about the borrower s current business position, his problems etc. so that necessary corrective measures can be taken immediately. Quarterly Information System (QIS) Periodical return should be submitted in time to the controlling authority who should scrutinize them effectively. For borrowal accounts having aggregate working capital limit of Rs. 1 crore and above, statements under QIS should be obtained as per time schedule prescribed, scrutinized, submitted to QIS at Circle/HO Office with the observations of the Branch Manager/Circle Head. Early Warning Signals The performance of the borrowing company should be regularly monitored without compromising on the supervision of the security. Some of the warning signals that may help in detecting the slippage of borrowal accounts into NPA category and the proactive measures required at the operational level are given below: a) Frequent excess/devolvement of commitments under letter of credit/non-servicing of interest/request for release of margins etc. b) Cheques issued getting dishonoured for wants of fund c) Delay in submission of MSQD/QIS statements d) Year ending being postponed/non finalization of accounts e) Attachment orders from sales tax/IT/central excise authorities

f)

Opening and operation of accounts with other banks without our permission resulting in our bank s account g) Bills purchased/discounted becoming overdue etc.

Keeping the documents alive for legal action Acknowledgement of debt should be obtained from borrowers /guarantors once in a year. This will afford an opportunity for the Branch Managers to have a discussion with the borrower about the advance account. Branch Managers should take priority basis renewal of cover documents where the documents are aged 30 months and over below 3 yrs. Monitoring recovery of periodical interest and installments Proper notices should be sent to the borrowers before the due date of term loan installments. Irrevocable authority to debit loan installments to cash credit/Current account should be obtained before disbursing the amount. Identification and reporting of willful defaulters to CIBIL A willful default would be deemed to have occurred, if any of the following events is noticed a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations. b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which the finance was availed of but has diverted the funds for other purposes c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been, utilized for the specific purpose for which the finance was availed of nor are the funds available with the unit i9n the form of other assets. The scheme of Reporting Willful defaulters came in to force with effect from April 1st,1999 covering all NPAs with outstandings aggregating Rs. 25 lakhs and above.

BIBLIOGRAPHY

y y y

Manual of the Indian bank on conventional advances of 2006 Website of the bank Indian-bank.com Circulars, advertisements published on the staff web-site provided by the bank.