ABC A session on Basics of

Credit

Importance of Credit

Credit Management is one of the

key functions of any bank
Loans and advances constitute over
2/3rds of Banks assets
The Interest and fees from advances make up
the biggest share of Banks income
The quality of Banks assets depends upon how
efficiently credit is managed

Client approaches you for credit

What is the first question we need
to ask internally?

If these pictures represent loan proposals,

what do they tell you?

What about this?

Can we take this?

Can we pick this one up?

Can we do this?

And this?

Finally, What about this?

If these pictures represent loan proposals,

what do they tell you?

You have decided that the request is

doable .
What next?

Principles of Credit

Why the facility? Check credit requirement

Who? Promoters, Constitution, Track record,
KYC, Sourcing, Credentials, Ref Checks
What for? Activity End Use
Where? Location, logistics, access
When? Implementation schedule Draw downs
How? Structuring, funding

(5 W + 1 H)

Processing Requirements
Statutory Compliance & Clearance
Constitution related papers, licenses, approvals,
tax asst. orders
Financials
Past 3 years audited B/S, Future
projections, Profitability estimates
Security
Documentary
Appropriateness

evidence,

Value,

Quality,

Credit Policy Guidelines

Some important contents of the Policy are

You decide to set up your

Lemonade factory
What makes you an
acceptable
Borrower to Banks?

Who is an acceptable borrower?

Is the customer asking for a loan acceptable?
This is decided based on
(i) Certain qualitative considerations and
(ii) Satisfaction of minimum financial characteristics

Qualitative considerations

What not to do

NO !NO! Bankers cannot

process these proposals.
Can you think of a NEGATIVE LIST?

Yes, But
Bankers need prior
permission to process.
Can you think of a Restricted LIST?

REGULATORY RESTRICTIONS

Statutory restrictions apply to :

(Governed by law)
Advances against banks own shares
Advances to banks directors etc.

Regulatory restrictions apply to :

(Decided by RBI)

Granting loans to relatives of directors of the bank

Loans to senior officers and their relatives
Loans to ozone depleting projects
Loans to sensitive commodities under selective
credit control

Credit Dispensation Process

Credit is dispensed through Branches

Approval process
Basically through Single Signature
approvals at the Branch levels,

(SS)

Dual Signature (DS) approvals at the Business

Unit (BU) level or
Jointly with Credit Risk Management (CRM)
Regional / Executive / Board level Credit
Committee

Financial Characteristics
Renewal/Enhancement/Fresh limits to be considered preferably on the
basis of audited financials. If difficult to obtain, provisionals can be
used and later validated with analysis of audited
If date of proposal is more than 6 months after date of financial
closure, audited statements should be insisted.
For all exposures of INR 50 lakh and above, Client Risk Rating (CRR)
should be computed.
New lending relationships should be CRR 5 or better. In case CRR
declines to 6 or below, the relationship shall be put on the watch and
viewed for exit.
6 financial thresholds to be tested for any client. They are: Profitability,
Current ratio, Interest Bearing Debt / Tangible Net worth or Total Outside
Liabilities / Tangible Net worth, Debt Service Coverage Ratio, Net Cash
from Operations and Interest Service Coverage Ratio

TAKEOVER ACCOUNTS
Only good quality accounts should be taken over
from other banks.
Only 50% of the delegated sanctioning powers can
be used for takeover of accounts
Takeover guidelines should be strictly followed
Any deviations should be permitted by appropriate
authority.
Takeover accounts should be monitored carefully
These loans should be reviewed with more
frequency
Quick Mortality

Creating a legal relationship with the Borrower - Loan

Documentation

Documentation establishes a legal relationship

between the lending banker and the borrower.
Documentation helps to put down in writing the
terms and conditions of loans, the securities
offered and rights and liabilities of the parties
Check points for good documentation:
- Execution or signing

- Registration under law as required

- Safe custody / Preservation

Payment of stamp duty

- Witnessing or attestation

- Enforceability (Limitation)

Handle documents !!!!

Handling Documentation
Documentation is handled by the Officer / back end
operations
Each Business Unit (Say, Business Banking, ARB,
Wholesale Bkg) has an Ops unit in case of new age
banks.
Trade finance related operations are handled by the
Trade Finance Unit (TFU) & Branches at some
specified centers
Credit customers serviced by Branch by Operations
Department.

Making sure Securities are there for the Bank

Creation of Charge
Creation of charge on different assets / securities creates
rights in favour of lending bank This will help get payment
of loan out of the security charged
Nature of Security

Types of Security

Kind of Charge

Relevant Law

Immovable property

Land & Building

Mortgage

Transfer Property Act

Sec 58

Actionable claims

Book debts, FDR,

NSC Life Insurance
Policy

Assignment

Transfer of Property
Act Sec 130

Movable Property /
Goods

Plant & machinery,

Stocks , Vehicle etc

Pledge or
Hypothecation or lien

Indian Contracts Act

Sec 172, SARFAESI
Sec 2 - n

Security Instruments

Shares, Debentures,
MF Units, Bonds

Lien

Indian Contracts Act

(Sec 170 & 171)

Personal Guarantees

Promoters & Third

parties

Personal Liability

Indian Contracts Act

(Sec 126)

SECRET OF KEEPING ASSETS

HEALTHY

CREDIT MONITORING AND FOLLOW-UP

Monitoring enables Healthy Assets maintenance

Some of the standard techniques used are:
- Ledger Page Supervision,
- Unit Visits, Client Calls,
- Study of stock/Book Debt
- Excess advances register, Use of Discretionary powers
- Credit Risk Rating
- Other financial statements
Ownership of each account
Asset classification Monitoring migration: Value / Numbers

Managing Working Capital Accounts Basics of

monitoring OD

Credit is all about Calculated risks

managed not avoided

THANK YOU