Professional Documents
Culture Documents
1 Quality Lending
1 Quality Lending
1 Quality Lending
Banking is both an art and science, which cannot be guided by merely a set of rules. It is to be guided by
general principles only. Even then there is no rigidity in the application of the set of principles in banking.
As one has to sift the chaff from the grains, so also the banker has to sift good things out of the elements
which he comes across and in it lies his skill and diligence. No set of uniform rules can be invariably applied
even in two similar circumstances. In other words, he cannot be static. He should be changing according to
the changing types, times and conditions.
Principles of Lending
The banker should take into consideration the following aspects while dealing with a lending
proposition.
Purpose
Purpose for which the loan is required is very important. The banker should be clear about the purpose
for which the loan is required and the sources wherefrom the borrower is expected to repay the loan. If the
advance is for hoarding stocks or for speculation, it should be discouraged. These are anti-national and anti
social activities. Again, if the money required is for liquidation of prior borrowings or to make good the loss
incurred or for unproductive expenditure, then the banker should cautiously appraise the proposal.
The borrower may require stop-gap finance till the money from other sources flows in (for example,
issuing of share capital/debentures likely to be subscribed to by the public). Such proposals may be
favourably considered for good parties depending upon merits of each case and subject to RBI guidelines
from time to time.
After nationalisation financing of agriculture, small scale industries and rural economy had gathered
momentum. Banks were asked to extend credit facilities to new classes of people namely professionals, self
employed persons, retail traders, agriculturists and transport operators for productive purposes and
generation of employment. With emphasis by government on export growth, banks have been instructed to
allocate at least 12% of their total credit to export sector.
Bank's lending has to be purpose oriented and the purpose shall be socially and economically desirable.
Liquidity/Repayment
2.5.1 Due emphasis on repayment should be there. The sources and method of repayment should be decided
upon while disbursing credit and the borrower should adhere to it. The security offered should be preferably
easily realisable and/or self-liquidating. The reason why banker attaches more importance to repayment is to
recycle the funds and make available these funds for other needy borrowers apart from the fact that deposits
raised are required to be paid on demand or at short notice. For example, an advance of Rs.50 lakhs on the
security of legal mortgage of a posh building in the heart of a Metropolitan City with a market value of
Rs.100 lakhs is safe indeed. If however, the recovery is to be made through a Court process, it may take a
few years, in which case the loan is not liquid. In essence, the
borrower should pay-off the loan at short notice and the banker should reserve the right to call back the
advance at any time.
In short term loans, there is more liquidity than in medium or long term advances. Although much of the
credit extended by banks is in the forms of CC/OD/loans repayable on demand and mostly for the purpose of
Working Capital, they also evince interest in providing Term Loans for machinery etc. The refinance facility
offered by RBI/SIDBI/ NABARD etc. have been* helpful to banks in providing liquidity in their term loans.
However, refinance is availed from respective refinancing agencies for all eligible advances subject to the
interest spread and bank's liquidity position.
In recent times, commercial banks have been increasing their term lendings either singly or in
participation with financial institutions. Banks should ensure that such increased participation in term loans
does not result in any asset liability mismatch i.e.. the maturity of term loans should commensurate with the
maturity period of deposits and/or any borrowings made.
2.6 Security
The banker should take into consideration the security aspect also. Security is considered as an
insurance to fall back upon in case of an emergency. It can be compared to the lifeboat in a ship, where the
passenger takes recourse to it only in times of emergency and extreme difficulty. Likewise, under
circumstances which affect the safety and liquidity of the advance, the banker grabs the security, realises it
and reimburses himself. It is incorrect to approach an advance from the point of view of security alone.
Credit is granted on its own merits with regard to safety, liquidity, purpose etc., after looking into character,
capacity, capital etc., of the borrower.
Securities may be classified as personal and tangible as well as primary and collateral.
Personal security means personal liability of the borrower and or guarantor. The banker has got a right
of action against the borrower and it is not a tangible security.
Tangible security is something that can be realised by sale or transfer (example: shares, stocks, lands
and goods).
Primary security is that which is regarded as the main cover for an advance; generally, the assets
generated out of the credit disbursed and against which the advance is made. e.g.. Stocks for OCC,
machinery for term loans.
Additional/Collateral security is the security other than the primary security created out of the advance
and lodged by the borrower or by a third party.
2.6.3 Characteristics of Securities
Marketability
The main consideration which weighs with the banker is the ready marketability of the security.
Articles of necessity, primary commodities, seasonal goods, raw materials etc., are generally in good
demand. Articles of luxury or valuables (example: pearls, diamonds) have a limited market. A rich person
might have constructed a bungalow at a heavy cost in a remote place but it will fetch a low value in a
distress sale.
Ascertainment of title
The borrower's title to the security must be clear and undisputed. It has to be verified, if there are
any prior charges or encumbrances. The solicitors have to verify the title of the borrower to the property.
Stability
The banker must make sure that the value of the security does not fluctuate violently over short
periods. Due to hoarding, commodities like pepper, onion, chillies, cement are at times subject to heavy
variations in prices. In such cases, the margin taken will be such as to cover the extra risk.
Storability
Certain securities such as Life Policies, Government Promissory Notes(GPNs), can be easily stored
even in the smallest place. Large logs of timber, iron girders etc., present peculiar problems of storage. Film
and certain chemicals are to be stored in air-conditioned godown.
Transferability
Physical Transfer
The security must be transferable from one place to another without much difficulty. For example,
cloth bales of certain varieties, which do not find a favourable market in a place can be moved quickly to
another ready market by rail or road transport. But some securities such as heavy girders or machinery are
not easy to transport.
Legal Transfer
The title to the security should be easily transferable. In case of LIC policy, shares etc. the transfer
formalities are simple/quick. In case of immovable properties the transfer is comparatively cumbersome.
Yield
Certain securities are a source of income (example: shares and Government Promissory Notes
(GPN) yield dividend and interest.)
vii. Durability
Vegetables, mutton, fruits, etc., are perishables. Gur, cement etc., require special care. Otherwise,
they deteriorate in quality. Grains and oil seeds last for one or two seasons. In other words, the
goods stored should not be perishable during the period of advance.
Remuneration/Profitability
Equally important is the principle of profitability in bank's advance. Banks have to pay interest on
deposits, incur expenses on establishment, rent, stationery, make provision for depreciation of fixed assets
and Non Performing Assets. After meeting all these items of expenditure which enter the running cost of
banks, a reasonable profit must be made.
Different rates are charged depending upon the borrower's Credit Rating, nature of security, mode of
charge, etc. The Term Loan and other Working Capital limits of the borrower including those under Priority
Sector shall be aggregated and the applicable interest rate be determined. Direct personal loans against our
own deposits and Government securities need not be taken into account for determining the size of the
credit. The transaction on the whole must be profitable to the Bank.
In the present context of liberalisation, integration with global economy, which leads to more
competition among various financial intermediaries, banks should pay more attention on their profitability
and viability.
Risk Management
Another important principle of good lending is the diversification of advances. An element of risk is
always present in every advance and the banking business is one of taking calculated risks.
A successful banker is keen on mitigating the risks, by lending to a large number of borrowers in a
number of industries and areas and against different types of securities. If the Bank has many branches, it
gets a wide assortment of securities. A business slump in particular sphere does not affect all these
borrowers simultaneously.
National interest
Even if an advance satisfies all the aforesaid principles, it may not be suitable if it runs counter to the
national interests. RBI may issue directives restricting advances against commodities such as food grains,
cotton, oil etc. In the changing concept of banking, factors such as purpose of the advance and national
interest are also of greater importance like adequacy of security.
Due to liberalisation measures recently initiated by the government, banks have to operate in a
competitive environment. More emphasis should therefore be given to aspects of increasing market share of
business, profitability, diversification of advance and investment portfolio etc.
Norms on credit exposure
As per Reserve Bank of India guidelines, the ceiling on credit exposure for the bank should not exceed
15% of owned funds of the bank in the case of single borrower and 40% in the case of a borrower group.
While determining the exposure ceiling, the following points should be taken into account:
The exposures both at domestic and overseas branches, in case of borrowers resident in India should be
taken into account irrespective of the currency in which they are denominated. It should also be ensured that
companies have obtained requisite approval under FEMA.
No distinction is to be made between borrowers in the private sector and public sector undertakings for
the purpose of exposure limits. In other words, single borrower limit will also apply to exposure assumed on
public sector borrowers in India.
The exposure limit on a borrowing company in India should include exposure on subsidiaries and joint
ventures in which the Indian company has majority stake or management control and the total limits for the
entire group companies in India and abroad should not exceed 40% of the owned funds of the bank.
Advances made under Letters of Credit established by Indian branches or guaranteed by them but
booked at and funded by foreign branches should be included for the purpose of computing exposure
ceilings.
In the cases of exposure at overseas branches the host country norms shall prevail, if they are more
conservative than the norms laid down in India.
The single / group exposure norm of 15% / 40% may however be exceeded to the extent of 5% / 10%
provided the additional exposure is for the purpose of financing infrastructure projects viz., projects in the
area of power, telecommunications, roads and ports.
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5Types of Credit
6.1 In our Bank, we consider the following types of Loans and Advances:
Advances are made by the Bank to eligible borrowers in the following forms:
Temporary overdrafts /Clean Cash Credits
Demand Loans
Cash credits
Bills 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
seperately in the respective Manuals of Instructions.
Pricing of Loan Products
7.1 Branches should be conversant with the concept of Pricing of our loan products. The various terms
involved in the pricing mechanism are explained below:
7.2 Benchmark Prime Lending Rate
In tune with RBI guidelines our Bank adopts a single Benchmark Prime Lending Rate (BPLR) which is
determined by taking into account
Cost of funds
Cost of operations
Appropriate requirement for provisioning /capital charge and
Profit margin.
BPLR concept was introduced with effect from 01 02 2004.
The BPLR is subject to revision from time to time. Banks are free to fix interest rates by adding Risk
Premium (RP) and /or Tenor Premium (TP) to BPLR.
In case of Term Loans ( i.e. tenor based loans), tenor premium is added to BPLR. This Tenor Premium
is added in addition to the applicable spread ( i.e. Risk Premium). The schedule of Tenor Premium is given
hereunder and it is subject to revision from time to time. Tenor Premium is to be reckoned as per the
contracted tenor and not as per the residual tenor of the loan.
7.2.5 The pricing for term loans is BPLR plus TP plus spread, if applicable ROI is above BPLR and BPLR
plus TP minus Spread for loans with ROI at Sub-BPLR.
Card Rate
7.3.1 It is the Quoted Price /lending rate on our loans and advances to public. The components that make the
card rate are BPLR, Tenor Premuim and the stipulated/applicable spread, if any, i.e., BPLR+ Tenor Premium
+ Risk Premium.
Commercial Rate
7.4.1 Commercial Rate is the card rate applicable for public or staff without any relaxation. For staff,
commercial rate means, the rate quoted for loans other than concessional loans such as SHL, Conveyance
Loan, etc., and shall be as applicable to public.
Penal Interest
7.6.1 It is the penalty charged over the contracted/card rate, for the overdue / irregular part as per guidelines
issued from time to time. It may be on account of financial irregularity or non-financial irregularity or both.
Bank Rate
7.10.1 It is the rate at which RBI is prepared to lend to Banks or rediscount Bills of Exchange or buy other
Commercial Paper eligible for purchase under Section 49 of RBI Act.
Bills Purchased
For all bill finance (DP / DA / Supply etc.,) recovery of interest should be on the date of
purchasing/discounting the bill, for the specific/notional number of days. For the front- end recovery, it
should not be compounded for every 30 days / calendar months. For Bills purchased /negotiated /discounted
(Inland /Foreign), besides recovering usual charges, the interest at applicable rate for the period from the
date of Purchase to the notional/committed due date (in supply bills) of the bill shall also be collected as Up
Front.
In case the bill is realised / reversed after the notional due date, the interest for the extended/delayed
period, at the penal rate, shall be compounded at monthly rests and recovered.
Agricultural loans
As the agricultural advances are linked to crop seasons, branches shall follow the periodicity of
charging /compounding of interest as per RBI / HO guidelines.
In respect of BIFR /Rehabilitation Package accounts, if longer rests than quarterly is prescribed, the
same will continue to be at the said longer rests. If the accounts are charged already under quarterly rests the
same shall be modified to monthly rests.
The monthly interest debited has to be recovered immediately as and when charged.
Customers shall be informed well in advance about the monthly charging of interest and to service the
same. However, on a case to case basis, Branch Managers can grant time upto 15 days for adjustment of the
interest, from the date of debit.
Statutory Restrictions
11.2.1 Advances against banks' own shares
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.
Also, lending should not be made against the shares of our own subsidiaries.
Advances to Banks' Directors
Banks are prohibited from entering into any commitment for granting any loan or advance to or on
behalf of any of their directors or any firm/company in which any of their directors is interested as
Director 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 loans 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 advance can be given with the prior approval of RBI and on such terms &conditions as
may be stipulated by RBI.
Restrictions on Holding Shares in companies
The banks should not hold shares in any company (subject to exception provided), whether as
pledgee or mortgagee or absolute owner, of an amount exceeding 30 per cent of the paid-up share capital of
that company or 30 percent of its own paid-up share capital and reserves, whichever is less. This holding
stipulation is reckoned for the bank as a whole.
sugar/gur/khandsari,
cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out of
man-made fibres and partly out of cotton yarn and partly out of man-made fibres.
Presently, there is no regulatory restriction for lending against any of the commodities under
sensitive sector listed above under selective credit control on quantum or Rate of Interest or on
ceiling of Advances or as to prior approval etc., other than the margin stipulation given below.
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 judgement. None of the earlier stipulations made for the commodities covered under
Selective Credit Control are presently applicable, except for the margin stipulation to buffer stock
and unreleased stocks of levy/free sale sugar.
iv. Operational stipulations for Selective Credit Contol
The banks should not allow the customers dealing in Selective Credit Control 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 favour of such borrowers.
Although advances against security of or by way of purchase of demand documentary bills drawn
in connection with the movement of the Selective Credit Control 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.
Usance bills arising out of sale of Selective Credit Control commodities should not be discounted
except to the extent specifically permitted in the directives issued.
Clean Telegraphic Transfer Purchase facility may be allowed to a reasonable extent on certain
conditions specified in the directives.
Priority sector advances are also covered by/under Selective Credit Control directives.
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.
The banks are free to determine the rate of interest in respect of advances covered under Selective
Credit Control directives.
The bank could grant loans to borrowers dealing in Selective Credit Control 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.
Reserve Bank of India authorises limits to the Food Corporation of India and State Governments
for procurement of foodgrains; at prices fixed by the Government of India, for the Central Pool
and for the distribution of the same under the Public Distribution System (PDS). As the limits
are authorised without margin, credit cannot be drawn against credit sales, book debts,
Government subsidies, etc.
v. 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.
Banks extending credit facilities against the guarantees issued by other banks / FIs should ensure
strict compliance with the following conditions:
The exposure 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 within the inter bank exposure limits prescribed by the Board of
Directors (refer our Banks' Credit Risk Policy).
Banks should monitor the exposure assumed on the guaranteeing bank/FI, 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 Ghosh Committee recommendations to obviate frauds in this area.
However, the above conditions will not be applicable in the following cases:
a In respect of infrastruture projects, issuance of guarantee in favour of other lending institutions
provided, if the Bank takes funded share in the project atleast to the extent of 5% of the
project cost. Normal credit appraisal, monitoring and follow up of the project to be
undertaken.
b 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.
c Issue of guarantees favouring HUDCO/SHBs for loans granted by them to private borrowers,
after assessing the repayment capacity of the borrower
d Issuance of guarantees by consortium member banks unable to participate in rehabilitation
packages.
iv. Banks should not grant co-acceptance/guarantee facilities under Buyers 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.
As Leader: In the case of consortium accounts where we are leaders, we shall insist our
guidelines for all accounts coming under the purview
As Member: Where we are members, 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 guideline.
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.
b. 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 utilised/ exhausted the existing limit
Sharing of Working Capital Finance
The ground rules for sharing of cash credit and loan components 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.
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 offered by the appropriate
sanctioning authority. For accounts sanctioned with finer ROI also, the present guideline of
uniform rate of interest for Loan and CC components shall be continued. It shall be with an
additional proviso that the delegated authority may stipulate a higher rate of interest for the CC
component on a case to case basis, at his discretion.
Any specific request for revision in rate of interest for WCDL component shall be considered only
at the time of next roll over of the facility.
Period of Loan
The minimum period of the loan for working capital purposes may be fixed by sanctioning authorities
in consultation with borrowers. Sanctioning authority may decide to split 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.
Security
In regard to security, sharing of charge, documentation, etc., branches may take up the requirement, if
necessary, in consultation with the other participant banks. Wherever administrative approval is
required, it is to be placed to the competent authority.
Export Credit
The bifurcation of the working capital limit into 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 hitherto granted.
Bills limit
Bill limit for inland sales may be fully carved out of the 'loan component'. Bills limit also includes
limits for purchase of third party (out station) cheques/ bank drafts. Branches must satisfy themselves
that bills limit is not misutilised.
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 into consideration while fixing the loan component into
different segments.
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 Paper (CP), Certificates 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.
While according 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 Asset Liability Management. Further offering
concessional interest rate for a component has also not been favoured by Head Office as it would
affect our profitability.
11.4.15 Working Capital finance to Information Technology and Software Industry
Based on the recommendation of the "National Task force on Information Technology and
Software Development", RBI has framed guidelines for extending WC to the industry. The salient features
of the guidelines include the following:
In case of borrowers with working capital limits of upto Rs.2 crore, assessment 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 working
capital limits of Rs.10 crore and above from the banking system the guidelines regarding the
loan system would be applicable.
Reasonable amount as promoters' contribution towards margin may be stipulated.
Banks may obtain collateral security wherever available. First/second charge on current assets,
if available, may be obtained.
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 levied, for export credit.
Banks may evolve tailor made follow up system for such advances.
11.4.16 Guidelines for bank finance for PSU disinvestments of Government of India
Banks' proposals for financing the successful bidders in the PSU under a disinvestment
programme should be approved by their Board of Directors
Bank finance should be for acquisition of shares of PSU under a disinvestment programme
approved by Government of India, 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 disinvestments by Government of India.
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 availed from the banking
system.
The amount of bank finance thus provided should be reasonable with reference to the bank's
size, its net worth and business and risk profile.
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