Contents
PAGE
Foreword I-3
Recommended Reading I-7
Bankers’ Handbook on Credit Management Syllabus I-9
Chapter-heads I-15

MODULE A : INTRODUCTION & OVERVIEW

OF CREDIT

CHAPTER 1
PRINCIPLES OF LENDING

1.0 Objectives 5
1.1 Introduction 5
1.2 Principles of Sound Lending 7
1.2.1 Safety 7
1.2.2 Liquidity 8
1.2.3 Profitability 9
1.3 Purpose of Loan 10
1.4 Diversification of Risk 10
1.5 Let Us Sum Up 11
1.6 Key Words 11
1.7 Check Your Progress 11
1.8 Answers to Check Your Progress 12

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CHAPTER 2
CREDIT POLICY

2.0 Objectives 15
2.1 Introduction 15
2.2 Policy Framework 16
2.3 Contents of a Credit Policy 17
2.4 Priority 28
2.5 Role 28
2.6 MIS and Review 29
2.7 Conclusions 29
2.8 Let Us Sum Up 30
2.9 Check Your Progress 30
2.10 Answers to Check Your Progress 31

CHAPTER 3
TYPES OF BORROWERS & TYPES OF
CREDIT FACILITIES

3.0 Objectives 37
3.1 Introduction 37
3.2 Individual 38
3.3 Agent 42
3.4 Attorney 43
3.5 Joint Borrowers 44
3.6 Hindu Undivided Family (HUF) 44
3.7 Proprietary Firms 47
3.8 Partnership Firm 47
3.9 Limited Companies 50
3.10 Registration of Charges under the Companies Act 57

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3.10.1 Effect of Non-registration 58
3.11 Limited Liability Partnership (LLP) 59
3.11.1 Precautions while granting credit facilities 61
to LLPs
3.12 Other entities 62
3.13 Types of Credit Facilities 62
3.14 Let Us Sum Up 71
3.15 Key Words 72
3.16 Check Your Progress 72
3.17 Answers to Check Your Progress 73

Chapter 4
Credit Delivery

4.0 Objectives 77
4.1 Introduction 77
4.2 Type of facilities 77
4.3 Modes of Delivery 78
4.4 Credit Thrust 86
4.4.1 Credit Priorities 87
4.4.2 Tenure of Credit 87
4.5 Credit Acquisitions 88
4.5.1 Primary Acquisitions 88
4.5.2 Secondary acquisition 88
4.6 Statutory & Regulatory Restrictions 88
4.7 Let Us Sum Up 88
4.8 Key Words 89
4.9 Check Your Progress 89
4.10 Answers to Check Your Progress 90

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CHAPTER 5
CREDIT APPRAISAL

5.0 Objectives 95
5.1 Introduction 95
5.2 Credit Appraisal 95
5.3 Validation of the proposal 97
5.4 Cardinal Principles of Lending 100
5.5 Creditworthiness of borrower 100
5.6 Purpose of the loan 103
5.7 Source of Repayment 104
5.8 Cash Flow 105
5.9 Collateral 107
5.10 Let Us Sum Up 108
5.11 Key Words 108
5.12 Check Your Progress 109
5.13 Answers to Check Your Progress 109

CHAPTER 6
CREDIT RATING

6.0 Objectives 121

6.1 Introduction 121
6.2 What is Credit Rating? 124
6.3 Objectives of Rating 124
6.4 Internal & External Ratings 125
6.4.1 Major Factors for Scrutiny 126
6.4.2 A simple Model Credit Rating 126
6.4.3 Methodology of Simple Credit Rating 127
6.5 Let Us Sum Up 131
6.6 Key Words 132

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6.7 Check Your Progress 132
6.8 Answers to Check Your Progress 133

MODULE B : ANALYSIS OF FINANCIAL

STATEMENTS

CHAPTER 7
ANALYSIS OF FINANCIAL STATEMENTS

7.0 Objectives 163

7.1 Balance Sheet 163
7.1.1 Definition 174
7.1.2 Balance Sheet and Banker 175
7.1.3 Classification of assets and liabilities for 176
analysis
7.1.4 Classification of Current Assets & Current 179
Liabilities
7.1.5 Balance sheet analysis 184
7.2 Trading and Statement of Profit & Loss Account (SPL) 186
7.2.1 Sales 186
7.2.2 Gross Profit and Net Profit 187
7.2.3 Auditors Note 188
7.3 Ratio Analysis 189
7.3.1 Classification of Ratios and their signifi- 190
cance
7.4 Other important Ratios 208
7.5 Some Important Ratios 211
7.6 Ratio Interpretation 214
7.7 Uses of Ratio Analysis 216
7.8 Funds Flow Statements 217
7.8.1 Preparation of Funds Flow Statement 218

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7.8.2 Nature of sources and uses of funds 220
7.8.3 Refining of the Funds Flow statement to 221
analyse net change in working capital
7.8.4 Analyzing the Flow of Funds by use of the 222
Profit & Loss Account
7.9 Cash Flow Statement 223
7.9.1 Change in current assets 225
7.9.2 Change in current liabilities 225
7.10 Fund flow and Cash flow Analysis 226
7.10.1 Classification of Balance Sheet items 226
7.10.2 Identification of ‘Flow’ of Funds 227
7.10.3 Statement of Changes in Working Capital 227
7.11 Let Us Sum Up 229
7.12 Key Words 230
7.13 Check Your Progress 230
7.14 Answers to Check Your Progress 231

CHAPTER 8
PROJECT APPRAISAL/TERM LOAN
­APPRAISAL

8.0 Objectives 235

8.1 Introduction 235
8.2 Why Project Appraisal 236
8.3 Aspects of Project Appraisal 236
8.3.1 Technical Appraisal 237
8.3.2 Commercial/Market Appraisal 242
8.3.3 Managerial Appraisal 243
8.3.4 Financial Appraisal 244
8.3.5 Environment Appraisal 245
8.4 Term Loan Appraisal 245
8.4.1 Analysis of past working results in case of 245
existing concerns

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8.4.2 Cost of project and means of finance 246
8.4.3 Estimates of Cost of Production and Prof- 250
itability
8.4.4 Debt Service Coverage Ratio (DSCR) 251
8.4.5 Sensitivity Analysis 252
8.4.6 Break Even Analysis 253
8.5 Capital Budgeting 254
8.5.1 Pay Back Period Method 255
8.5.2 Average Rate of Return 257
8.5.3 Time Value of Money - Discounting Tech- 258
nique
8.5.4 Net Present Value Method 260
8.5.5 Internal Rate of Return 263
8.5.6 Benefit-Cost Ratio (BCR) 264
8.5.7 Data needed for computation of NPV & 266
IRR
8.6 Let Us Sum Up 269
8.7 Key Words 270
8.8 Check Your Progress 270
8.9 Answers to Check Your Progress 271

MODULE C : WORKING CAPITAL

MANAGEMENT

CHAPTER 9
WORKING CAPITAL ASSESSMENT

9.0 Objectives 289

9.1 Introduction 289
9.2 Working Capital 290
9.3 Concept of working capital 291

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9.4 Working Capital Gap 292
9.5 Components of Working Capital 292
9.6 Source of Working Capital 293
9.7 Operating/Working Cycle 293
9.7.1 Computation of storage/retention period 294
9.7.2 Uses of Operating Cycle 296
9.8 Assessment of Working Capital requirements 296
9.8.1 Turnover Method 297
9.8.2 Micro, Small and Medium Enterprises 298
(MSME)
9.8.3 Maximum Permissible Bank Finance 300
Method
9.8.4 Cash Budget Method 303
9.9 Working Capital Finance to Information Technology 308
and software industry
9.10 Loan system for cash credits 309
9.11 Financial Ratios 310
9.11.1 Debt Equity Ratio 310
9.11.2 Current Ratio 311
9.12 Cash Flow Analysis 312
9.13 Investment in subsidiary and sister concerns 312
9.14 Commercial Paper 313
9.15 Slip back in current ratio 314
9.16 Bridge Loan facility by banks 315
9.17 CMA Data 316
9.18 Let Us Sum Up 320
9.19 Key Words 322
9.20 Check Your Progress 322
9.21 Answers to Check Your progress 323

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CHAPTER 10
NON-FUND BASED-CREDIT FACILITIES

10.0 Objectives 371

10.1 Introduction 371
10.2 Non-Fund based Limits 372
10.2.1 Advantages for bank 372
10.2.2 Advantages to borrowers 373
10.2.3 Risks 373
10.3 Letters of Credit 373
10.3.1 Types of Letters of Credit 376
10.3.2 Credit Implications of Letters of Credit for 382
Bankers
10.3.3 Usance Letter of Credit 383
10.4 Risk associated with opening Imports LC 384
10.5 Assessment of Letter of Credit Limit 386
10.6 Buyer’s Credit 389
10.6.1 Benefits of Buyer’s Credit 389
10.7 Supplier’s Credit 390
10.7.1 Benefits/Advantages 390
10.8 Bills Purchase/Discounting under LC 390
10.9 Bank Guarantees 394
10.9.1 Assessment of Guarantee Limit 398
10.9.2 Security 400
10.9.3 Period of expiry of Guarantee 401
10.9.4 Period of claim under the guarantee 401
10.10 Co-acceptance facilities 403
10.10.1 Co-acceptance of bills-RBI guidelines 403
10.10.2 Co-acceptance of bills covering supply of 404
goods (RM)

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10.10.3 Supply of machinery under deferred pay- 404
ment guarantee arrangement
10.11 Let Us Sum Up 405
10.12 Key Words 406
10.13 Check Your Progress 406
10.14 Answers to Check Your Progress 407

MODULE D : OTHER CREDITS

CHAPTER 11
EXPORT FINANCE

11.0 Objectives 415

11.1 Introduction 415
11.2 Pre-shipment Finance 416
11.2.1 Pre-shipment Rupee Export Credit 416
11.2.2 Pre-shipment Credit in Foreign Currency 425
(PCFC)
11.3 Post-Shipment Rupee Export Finance 430
11.3.1 Advances against Undrawn Balances on 432
Export Bills
11.3.2 Advances against Retention Money 432
11.3.3 Export on Consignment Basis 435
11.3.4 Export of Goods for Exhibition and Sale 435
11.4 ECGC Whole Turnover Post-shipment Guarantee 436
Scheme
11.5 Interest Rate on Rupee Export Credit 436
11.5.1 ECNOS 438
11.5.2 Interest on Post-shipment credit 438
11.5.3 Interest on Post-shipment Credit adjusted 438
from rupee resources

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11.5.4 Interest Equalisation Scheme on Pre and 439
Post-Shipment Rupee ­Export Credit
11.6 Post-Shipment Export Finance in Foreign Currency 442
11.6.1 Eligibility criteria 443
11.6.2 Source of On-shore funds 443
11.6.3 ECGC cover 444
11.6.4 Refinance 444
11.6.5 Interest rate structure on Export Credit in 444
Foreign Currency
11.7 Customer Service & simplification of procedure 444
11.7.1 Customer Service 445
11.7.2 Gold Card Scheme for exporters 445
11.7.3 Sanction of export credit proposals 447
11.7.4 Crystallization of Export bills 448
11.8 Other Points 448
11.9 Let Us Sum Up 450
11.10 Key Words 451
11.11 Check Your Progress 452
11.12 Answers to Check Your Progress 453

CHAPTER 12
PRIORITY SECTOR LENDING/GOVERN-
MENT SPONSORED SCHEMES/NABARD
SCHEMES

12.0 Objectives 465

12.1 Introduction 465
12.2 Categories of Priority Sector 466
12.2.1 Agriculture 467
12.2.2 Farm Credit 467
12.2.3 Agriculture infrastructure 469

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12.2.4 Ancillary activities 469
12.2.5 Micro, Small and Medium Enterprises 470
(MSMEs)
12.2.6 Manufacturing Enterprises 471
12.2.7 Service Enterprises 471
12.2.8 Factoring Transactions 472
12.2.9 Khadi and Village Industries Sector (KVI) 472
12.2.10 Other Finance to MSMEs 473
12.3 Export Credit 473
12.4 Education 474
12.5 Housing 475
12.6 Social infrastructure 476
12.7 Renewable Energy 476
12.8 Others 476
12.9 Government Sponsored Schemes 485
12.9.1 Deendayal Antyodaya Yojana-National 485
Rural Livelihoods Mission (DAY-NRLM)
12.9.2 Deendayal Antyodaya Yojana-National 490
Urban Livelihoods Mission (DAY-NULM)
12.9.3 Prime Minister’s Employment Generation 492
Programme (PMEGP)
12.9.4 Self-Employment Scheme for Rehabilitation 494
of Manual Scavengers (SRMS)
12.9.5 Flow of Credit to SCs/STs 496
12.10 National Bank For Agriculture & Rural Development 500
(NABARD) Schemes
12.10.1 Agriclinic and Agribusiness Centres Scheme 502
12.10.2 Solar Schemes 504
12.10.3 Capital Subsidy Scheme for promoting Solar 504
Photovoltaic Water Pumping systems for
Irrigation and other purposes
12.10.4 MNRE Lighting Scheme 2016 505

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12.10.5 Agricultural Marketing Infrastructure 505
12.10.6 National Livestock Mission 507
12.10.7 Non-Farm Sector 507
12.10.8 Micro Credit Innovation 508
12.10.9 Self Help Group - Bank Linkage Programme 508
(SHG-BLP)
12.10.10 Financing of Joint Liability Groups (JLGs) 510
12.10.11 NABARD Financial Services Ltd. (NAB- 510
FINS)
12.10.12 Micro Enterprise Development Programme 510
(MEDPs)
12.10.13 Livelihood and Enterprise Development 511
Programmes (LEDPs)
12.10.14 Scheme for promotion of Women SHGs 511
(WSHGs) in backward & LWE districts
of India
12.10.15 Smooth transition of WSHGs promoted 512
in NRLM intensive blocks to SRLMs
12.10.16 NABARD’s Initiative EShakti 513
12.10.17 Kisan Credit Card (KCC) 513
12.10.18 For Marginal Farmers 516
12.11 Let Us Sum Up 526
12.12 Key Words 527
12.13 Check Your Progress 527
12.14 Answers to Check Your Progress 528

CHAPTER 13
RETAIL LOANS

13.0 Objectives 535

13.1 Introduction 535
13.2 Characteristics of Retail Banking 535

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13.3 Advantages of Retail Banking 536
13.3.1 Disadvantages 536
13.4 Retail Banking Products 537
13.5 A Model Home Loan 542
13.6 A Model Auto/Vehicle Loan 546
13.7 A Model Personal Loan 548
13.8 A Model Pensioner Loan Scheme 550
13.9 A Model Property Loan 553
13.10 A Model Holiday Loan Scheme 557
13.11 A Model Gold Loan Scheme 559
13.12 Education Loan (IBA) 560
13.13 Reverse Mortgage Loan 565
13.14 Reverse Mortgage Loan-enabled Annuity (RMLeA) 569
13.15 Let Us Sum Up 572
13.16 Key Words 572
13.17 Check Your Progress 573
13.18 Answers to Check Your Progress 574

MODULE E : M ONITORING, SUPERVISION/

FOLLOW UP & MANAGEMENT OF
IMPAIRED ASSETS

CHAPTER 14
DOCUMENTATION

14.0 Objectives 583

14.1 Introduction 583
14.2 Meaning of Document 583
14.3 Importance of documents 584

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14.4 Types of documents 585
14.5 Requisites of documentation 586
14.6 Selection of documents 586
14.7 Stamping of documents 587
14.7.1 Mode of Using, Cancelling Stamps 587
14.8 Time of Stamping Instruments 588
14.8.1 Documents for which Stamp Duty is same 588
all over India
14.8.2 Stamp duty on a document containing 588
several distinct matters
14.8.3 Documents executed in more than one State 589
14.8.4 Consequence of a document not duly 589
stamped
14.8.5 Remedy for a document not duly stamped 589
14.9 Documents of which registration is compulsory 590
14.9.1 Time limit for registration of documents 591
14.9.2 Effect of non-registration of documents 591
required to be registered under the Indian
Registration Act
14.9.3 Registration of charge under the Companies 591
Act, 2013
14.9.4 Procedure for filing particulars of charge 592
14.9.5 Consequence of non-filing of charge Form 593
for Registration with R.O.C.
14.9.6 Consequence of non-registration of charge 593
of a Motor Vehicle with R.T.A.
14.10 Execution of a document - Meaning 593
14.10.1 Process of documentation 593
14.10.2 Mode of execution by different types of 594
executants
14.10.3 Execution of Guarantee 596
14.11 Limitation of documents 597

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14.11.1 Law of Limitation to the Guarantor 597
14.11.2 Extension of the period of limitation 598
14.11.3 Exclusion of the Period of Limitation 598
14.11.4 Signing of acknowledgement by borrower 599
on behalf of Guarantor
14.11.5 Date of Unstamped Acknowledgement 599
14.12 Enforcement of Documents 599
14.12.1 Death of Borrower 600
14.12.2 Death of a Guarantor 600
14.13 Scrutiny of documents at the time of execution 601
14.14 Let Us Sum Up 602
14.15 Key Words 603
14.16 Check Your progress 603
14.17 Answers to Check Your Progress 604

CHAPTER 15
TYPES OF CHARGES

15.0 Objectives 607

15.1 Introduction 607
15.2 Various Types of Charges 608
15.2.1 What is a charge and what is its purpose? 608
15.2.2 Features 609
15.3 Types of security 609
15.4 Modes of charge 610
15.4.1 Lien 610
15.4.2 Negative Lien 612
15.4.3 Set-off 612
15.4.4 Assignment 613
15.4.5 Pledge 614
15.4.6 Hypothecation 616

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15.4.7 Precaution for Hypothecation 617
15.4.8 Risk of Double Financing 617
15.4.9 Mortgage 617
15.4.10 Mode of charge 619
15.4.11 Advantages of Equitable Mortgage 620
15.4.12 Precaution in case of Equitable Mortgage 620
15.5 Let Us Sum Up 623
15.6 Key Words 623
15.7 Check Your Progress 623
15.8 Answers to Check Your Progress 624

CHAPTER 16
FOLLOW-UP, SUPERVISION & CREDIT
MONITORING

16.0 Objectives 627

16.1 Introduction 627
16.2 Credit monitoring : Meaning 628
16.3 Monitoring Goals 629
16.4 Monitoring Process 630
16.5 Monitoring Tools 631
16.6. Other monitoring tools 631
16.7 Supervision & Follow-up 634
16.8 Let Us Sum Up 635
16.9 Check Your Progress 635
16.10 Answers to Check Your Progress 636

CHAPTER 17
MANAGEMENT OF IMPAIRED ASSETS

17.0 Objectives 655

17.1 Introduction 655

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17.2 NPAs and their management 656
17.2.1 Credit Monitoring 657
17.2.2 NPA why and how 659
17.2.3 NPA management policy 663
17.3 Definitions 665
17.4 Causes of sickness 670
17.5 Income Recognition 671
17.5.1 Income Recognition Policy 671
17.5.2 Asset Classification 672
17.5.3 Typical guidelines for classification of NPAs 672
17.5.4 Consortium Arrangement 674
17.6 Projects under implementation (Classification of NPA) 674
17.6.1 Project Loans 674
17.6.2 Project Loans for infrastructure sector 675
17.6.3 Project Loans for Non-Infrastructure Sec- 676
tor (other than Commercial Real Estate
Exposures)
17.6.4 Project Loans for Commercial Real Estate 677
17.6.5 Other Issues 678
17.6.6 Income Recognition 678
17.6.7 Take out Finance 679
17.6.8 Post-shipment Supplier’s Credit 679
17.6.9 Export Project Finance 679
17.6.10 Advances under rehabilitation approved by 679
BIFR/TLI
17.6.11 Credit Card Accounts 680
17.7 Provisioning Norms for NPA 680
17.7.1 Provisioning Coverage Ratio (PCR) 681
17.8 Options available to banks for Stressed Assets 682
17.8.1 Prudential Guidelines on Restructuring of 682
Advances

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17.8.2 Eligibility criteria for restructuring of ad- 684
vances
17.8.3 Asset classification norms - Restructured 685
assets
17.8.4 Income recognition 687
17.8.5 Provision for diminution in the fair value 687
of restructured advances
17.8.6 Up-gradation of loan accounts classified 687
as NPAs
17.8.7 Mahapatra Committee Recommendations 688
17.8.8 Revised Prudential Guidelines on Restruc- 688
turing of Advances
17.8.9 General Provision on Restructured Standard 690
Accounts
17.8.10 Criteria for Up-gradation of Account Clas- 691
sified as NPA on Restructuring
17.8.11 Risk-Weights 692
17.9 Viability Period 692
17.9.1 Benchmarks on Viability Parameters 692
17.9.2 Promoters’ Sacrifice 693
17.9.3 Conversion of Debt into Equity/Preference 693
Shares
17.10 Wilful Defaulter 694
17.10.1 Penal Measures 695
17.10.2 Mechanism for identification of Wilful 696
Defaulters
17.10.3 Compromise 697
17.11 Legal Action 697
17.12 Lok Adalats 705
17.13 Debt Recovery Tribunal 706
17.14 Securitisation and Reconstruction of Financial Assets 709
and Enforcement of Security Interest Act, 2002
(SARFAESI)

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17.15 Resolution of Stressed Assets - Revised Framework 714
17.15.1 Early identification and reporting of stress 715
17.15.2 Reporting to Central Repository of Infor- 715
mation on Large Credits (CRILC)
17.15.3 Joint Lenders’ Forum (JLF) 716
17.15.4 Formation of Resolution Plan 717
17.15.5 Implementation Conditions for RP 717
17.15.6 Timeframe for large accounts to be referred 718
under IBC
17.15.7 Supervisory Review 719
17.15.8 Norms Applicable to Restructuring 719
17.15.9 Additional Finance 721
17.15.10 Income recognition norms 721
17.15.11 Conversion of Principal into Debt/Equity 722
and Unpaid Interest into ‘Funded Inter-
est Term Loan’ (FITL), Debt or Equity
­Instruments
17.15.12 Change in Ownership 722
17.15.13 Non-applicability of the framework 723
17.16 Framework for Revival and Rehabilitation of Micro, 723
Small and Medium Enterprises (MSMEs)
17.16.1 Committees for Stressed MSMEs 725
17.16.2 Committee for a Corrective Action Plan 725
17.16.3 Corrective Action Plan by the Committee 727
17.17 Insolvency and Bankruptcy Code, 2016 731
17.18 Let Us Sum Up 741
17.19 Key Words 742
17.20 Check Your Progress 742
17.21 Answers to Check Your Progress 743

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CHAPTER 18
FAIR PRACTICES CODE ON LENDER’S
LIABILITY

18.0 Objectives 749

18.1 Introduction 749
18.2 To whom applicable 750
18.3 Practices to be adopted 750
18.3.1 Loan Processing 750
18.3.2 Loan Assessment 751
18.3.3 Loan Disbursement 752
18.3.4 Loan Administration 753
18.4 Recall/Repayment of the Loan 754
18.5 Grievance redressal Mechanism 754
18.6 Conclusion 754
18.7 Let us sum up 755
18.8 Key Words 755
18.9 Check your progress 755
18.10 Answers to Check Your Progress 756
Appendix A : Exposure Norms 757
Appendix B : Examples & Problems 764
Appendix C : Glossary 786
REFERENCES 799

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