• CREDIT MANAGEMENT –

LOAN POLICY
• CREDIT POLICY AND CREDIT PLANNING:
• A Policy is a deliberate plan of action, usually based on
certain principles indicating the priority of decision of
makers about allocation of resources for achieving
rational income. It is a written statement that
communicate management’s intent, objectives,
requirements, responsibilities and or standards.
• Lending is core activities of the banks. Banks earning,
profitability, reputation, net asset value etc. depend on
its credit portfolio. A sound and healthy portfolio is must
for bank’s survival.
• Reserve Bank of India issues guidelines from time to
time relating to flow of credit and directives about
credit discipline by the borrowers and banks.
• Keeping in view the economic conditions, fiscal deficit
position of the country, Government of India/ Ministry of
Finance too issue directives to banks about credit. RBI
announces monetary and credit policy in April and
October (Recently on quarterly basis and more recently
every 45 days) each year keeping in view the significant
changes in the regulatory framework for financial
markets. The policy has a direct impact on the lending
policy of the bank.
• Why Credit Policy : In the process of financial
intermediation banks are confronted with various kinds
of financial and non-financial risks. These risks are highly
interdependent. One area of risk can have ramifications
for a range of other risk categories. Banks attach
considerable importance to improve the ability to
identify, measure, monitor and control
 the overall level of risks undertaken. To mitigate the
risks banks prepare credit policy which contain
guidelines for the entire credit process, from credit
origination to problems in loan management and
cover areas like mechanism for loan review,
interbank exposure, country risk, credit risk, credit
rating framework, portfolio management and risk
adjusted return on capital. Credit policy gives
valuable guidance to the operational units in credit
dispensation, building up a diversified portfolio of
quality assets and credit monitoring.
• The policy laid down by the top management deals
with the following:
• Exposure levels
• Credit Risk Assessment
• Credit Appraisal Standards
• Documentation Standards
• Delegation of Powers
• Pricing
• Review and Renewal of advances
• Takeover of advances
• A MODEL CREDIT POLCY
• PRUDENTIAL NORMS: The primary guiding factors for
ceiling on exposures are prudential norms prescribed by
RBI, which currently stand at 15% of capital funds for
single borrower and 40% of capital funds for group (up
to 20% for single borrower and 50% for group provided
the additional exposure is on account of infrastructure
projects).
• Exposure = credit + investments or
Exposure=funded+Non-funded limits. Sanctioned limit or
outstandings, whichever are higher shall be reckoned to
arrive at the exposure. Non-funded exposure shall also
be reckoned at 100% of limit or outstandings.
• The ceiling on exposure would not be applicable to
additional credit limits being granted to weak /sick
industrial units under rehabilitation package.
• Loans granted under Bank’s own term deposit
receipts will be excluded from the purview of
exposure ceiling.
• Forward Contracts in foreign exchange and other
derivative products like currency swaps, options etc.
would need to be included at their replacement cost
value to arrive at borrowers exposure, for which
operative guidelines are in place.
• The group to which a particular unit belongs, the
guiding principle being commonality of management
and effective control. In case of a split in the group,
the splinter groups will be regarded as separate
groups. If the bank has any doubt about the
bonafides of the split, a reference will be made to
RBI for a final view.
• Following exposure levels are prescribed for the
borrowing entities: Individuals – Rs.20 crs, Non-
Corporates (e.g. Partnership, JHF, Associations etc.)-
Rs.80 crs; Corporates-As per RBI prudential exposure
norms.(Particular Bank’s loan policy)
• Term Loans with residual maturity of over 3 years
should not in the aggregate exceed 35% of the total
advances of the Bank.(Particular Bank’s Loan Policy)
• The Bank should endeavour to restrict fund based
exposure to a particular industry to 15% of the
Bank’s total fund exposure.(Particular Bank’s Policy)
• The Bank should restrict the term loan exposure to
infrastructure projects to 10% of the Bank’s total
advances.(Particular Bank’s Policy)
• The Bank shall endeavour to restrict exposure to
sensitive sectors(i.e. capital market, real estate and
sensitive commodities listed by RBI) to 10% of Bank’s
total advances. (RBI instructions)
• The Bank’s aggregate exposure to the Capital
Markets shall not exceed 5% of the total outstanding
advances (including commercial paper) as on March
31 of the previous year.(RBI insturctions)
• CRA- MINIMUM SCORES/HURDLE RATES
• The CRA model adopted by the Bank take into
account the factors which go into appraising the risks
associated with the loan. These have been broadly
categorised into Financial, Business, Industrial and
Management Risks and are rated separately. To
arrive at the overall risk rating, the factors duly
weighted are aggregated and caliberated to arrive at
a “Single Point Indicator of Risk” associated with the
Credit Decision.
• Financial Parameters: The assessment of Financial
Risk involves appraisal of the financial strength of the
borrower on performance and financial indicators.
The Overall financial risk is assessed in terms of static
• Ratios, future prospects and risk mitigation(Collateral
Security/financial strength). The following ratios are
usually used for CRA purpose:
• Current Ratio, TOL/TNW, PBDIT/INTEREST (times),
PAT/Net Sales(%), ROA/ROCE(%), (Inventory/Net
Sales + Receivables/Gross Sales) x 365, DSCR
• INDUSTRY PARAMETERS: Competition, Industry
Outlook, Regulatory Risk, Contemporary issues like
WTO
• Management Parameters: Integrity (Corporate
Governance), Track Record, Managerial
Competence/Commitment, Expertise, Structure &
Systems, Experience in the industry, Credibility(ability
to meet sales projections), Credibility (Ability to meet
• Profit projections), Payment Record, Strategic
Initiatives, Length of Relationship with the Bank
• The Risk parameters as mentioned above are
individually scored to arrive at an aggregate score of
100 ( Subject to qualitative factors – negative
scores). The Overall score thus obtained (out of a
maximum of 100) is rated on an 8/10 point scale, to
categorise the loan.
• The CRA model also stipulates a minimum score
under financial, business, industry and management
risk parameters :
Risk Segment Working Capital Working Capital
for existing units & Term Loan for
new a/cs/new
Comapnies

Financial 20/47 11/25

Business 11/20 10/25
Industry 4/8 5/10
Management 15/25 24/40
TOTAL 50/100 50/100
• Minimum scores under Management Risk:
Integrity/Corporate Governance, Track Record and
Managerial Competence/Commitment – An
applicant unit will be required to score minimum 2
marks each out 3 in the above 3 parameters tom
qualify for Bank’s assistance.
• Minimum Score under Business Risk: Compliance of
Environment Regulations – 2 out of 2 marks.
• HURDLE RATES: No new connections in respect of
accounts rated below Rating WC4/TL 4, subject to
exceptions like availability of Central Government
Guarantee/Guarantee of parent company with rating
WC3/TL3.
• No enhancement in credit limits are to be considered
in existing accounts rated below WC4/TL4(Deviations
• May be permitted by Credit Committee as provided
in the Loan Policy).
• Risk Management Department will issue advisories
on the general outlook of industries from time to
time.
• CREDIT APPRAISAL STANDARDS:
• (a) - Qualitative: The proposal is examined from
viability angle, Bank’s prudential level exposure to
the borrower, group and industry. Thereafter, a view
is taken about past experience with promoters (if
any). In case of new connection, If entrepreneurs are
already in business, opinion reports from existing
bankers and published data can be carefully perused.
In case of a maiden venture, an element of
subjectivity has to be perforce introduced
• As scant historical data will be available and
weightage has to be placed on impressions gained
out of the serious dialogues with the promoters and
his business contacts.
• (b) QUANTITATIVE: WORKING CAPITAL: The basic
quantitative parameters underpinning the Bank’s
credit proposal are:
• (i) Liquidity: CR of 1.33 will be considered as bench
mark. However, low CR or slippage should be
carefully examined and in deserving cases the CR as
projected should be accepted. In specific cases,
where warranted, sanction may be given with a
condition and undertaking by the borrower to bring
additional long term funds by a specific date.
• (ii) Net Working Capital: Movements in Net Working
Capital are watched to ascertain any mismatch of Long
Term Sources vis-à-vis Long Term uses.
• (iii) Financial Soundness: This will be dependent on
owner’s stake or the leverage. Here again the benchmark
will be different for manufacturing, trading, hire-
purchase and leasing concerns. For industrial ventures
TOL/TNW of 3 .0 is reasonable but deviations in selective
cases for understandable reasons may be accepted by
the sanctioning authority.
• (iv) Turnover: The trend in turnover is carefully gone into
in terms of quantity and value as also market share.
What is more important is to establish a steady output if
not a rising trend in quantitative terms because sales
realisation may be varying because of price fluctuations.
• Profits: While the net profit is the ultimate yardstick,
cash accruals, i.e. profit before depreciation and
taxation conveys the more comparable picture, in
view of change in rate of depreciation and taxation
which may have taken place in the intervening years.
However, for the sake of proper assessment, the
non-operating income are excluded as these are
usually one time or extra-ordinary income.
Companies incurring net losses consistently over 2
years will be given special attention, their accounts
closely monitored, and if necessary, exit options
explored.
• Credit Rating: Wherever the Company has been
rated by a Credit Rating Agency for any instrument
CP/FD, this will be taken into account, while arriving
at the final decision.
• Capital Markets: Where the Company’s shares are
listed on the stock exchange, the movement of the
price of the share, the market value of the shares vis-
à-vis those of its competitors in the same industry,
response to public/rights issue are also kept in view
as these are reflective of the Corporate image in the
eyes of the investors’ community.
• TERM LOAN/DPG
• (i) In case of Term Loan/DPG, the project report is
obtained whether compiled in-house or by a
Consultancy/Merchant Banking firm. The Technical
feasibility and economic viability is vetted by the
bank, if it is necessary the credit officer would seek
the benefit of a second opinion from the Bank’s
• Technical Consultancy cell/consultants of the Bank.
• Promoter’s contribution of at least 20% in the total
equity is expected. But the promoter’s contribution
may vary largely in mega projects. Therefore, there
can not be a definitive bench-mark. The sanctioning
authority will have the necessary discretion to permit
deviations.
• The other parameters would be net debt service
coverage ratio i.e. exclusive of interest payable,
which should normally not go below 2. On a gross
basis DSCR should not be below 1.75. These ratios
are indicative and deviations may be permitteed
selectively by the sanctioning authority.
• As regards margin on security, this will depend on
• Promoters background/goodwill as also CRA /Cash
flows of the proposal.
• Debt : Equity gearing for the project which should
preferably be near about 1.5 : 1 and should not in
any case be above 2 : 1. Deviations may be
permitted by the sanctioning authority in selective
cases.
• Other parameters governing Working Capital
facilities would also govern TL/DPG
• FINANCING OF INFRASTRUCTURE PROJECTS:
Financing of infrastructure projects is characterised by
large capital cost, long gestation period and high
leverage ratios. Banks can sanction Term Loans to
infrastructure projects within the overall ceiling of the
prudential norms. Further subject to certain
safeguards, banks are also permitted to exceed the
single borrower/group exposure norm to the extent
Of 10% provided the additional exposure is for the
purpose of financing infrastructure project.
Policy also lays down rules & regulations regarding
financing to Non-Banking Finance Companies , Lease
Finance, Trade Finance etc.
• LETTER OF CREDIT, GUARANTEES AND BILL
DISCOUNTING
• Bank would open L/cs, issue guarantees & discount
bills in respect of genuine commercial and trade
transactions of borrower constituents, who have
been sanctioned regular credit limits by the Bank.
• However, such bankable business from non-
borrower constituents such as Govt./Research/
Defence/Educational organisations/other statutory
organisations, who have no borrowing arrangements
with any bank/FIs will also be acceptable on case to
case basis. Bank would not open L/cs,
purchase/discount/negotiate bills bearing the words
”Without recourse” or “Sans-Course” clause.
• Banks would not ordinarily discount bills drawn by
front finance companies set up by large industrial
groups on other group companies. While discounting
bills of service sector, Bank would ensure that actual
services are rendered and accommodation bills are
not discounted.
• DOCUMENTATION STANDARDS:
• Loan Documents serve as primary evidence in any
dispute between the Bank and borrower and for
enforcing the Bank’s rights to recover the loan
amount together with interest thereon through the
Court of Law in the event of all other recourses
proving to be of no avail. In order that this objective
is achieved, documentation process attempts to
ensure that:
• The owing of the debt by the borrower to the bank is
clearly established by the documents.
• The charge created by the Bank on the borrower’s
assets as security for the debt is maintained and is
enforceable.
• The Bank’s right to enforce the recovery of the debt
through court of law is not allowed to become time-
barred, under the law of limitation.
• (i) PRE-EXECUTION FORMALITIES: These cover mainly
searches at the office of the Registrar of Companies
and search of the Register of charges (applicable to
Corporate Borrowers), also capacity of borrowers to
borrow and the formalities to be completed by the
borrowers, searches at the office of the Sub-
Registrar of assurances or Land Registry to check the
existence or otherwise of prior charge over the
immovable property offered as security, besides
taking other precautions before creating
equitable/registered mortgage.
• (ii) Execution of Documents: This cover obtention of
proper documents, appropriate stamping and
correct execution thereof as per terms of sanction of
the advance and the internal directives of a
Corporate Borrower, Memorandum & Articles of
Association, Certificate of commencement of
business (in case of Public Ltd. Cos.).
• Post Execution formalities: This phase covers the
completion of formalities in respect of mortgages, if
any, registration with the Registrar of Assurances,
wherever applicable, and the registration of charges
with the Registrar of Companies within the
stipulated period.
• (iv) PROTECTION FROM LIMIATION: These measures
aim at saving the documents from getting time
barred by limitation and protecting the securities
charged to the bank from being diluted by any
charge that might be created by the borrower to
secure his other debts, if any. These objectives are
achieved by
• (a) Obtention of revival letter within stipulated
period
• (b) Obtention of balance confirmation certificate
from the borrower at least at annual intervals
• (c) Making periodical searches at the office of the
Registrar of Companies
• (d) Insurance of assets charged (unless specifically
waived) to insure the Bank against the risk of fire,
theft, natural calamities (generally comprehensive)
• The Bank has devised standard documents in most of
the cases. In case, if necessiated specially drafted
documents from the Bank’s lawyers are also got
executed by the borrower.
• In respect of Consortium advances, the documents
are generally got executed by the Consortium Lead
Bank, in consultation with other member banks.
Pari-Passu letters are exchanged with other
Banks/FIS
• TAKE OVER OF ADVANCES:
• Bank needs to aggressively market for good quality
• Advances. One of the strategies for increasing good
quality assets in the bank’s portfolio, would be take
over advances from other banks/FIs. Keeping in view
this and with a view to add only good quality
advances, a common set of norms for C&I, SSI and
AGL segments has been laid down for takeover of
advances:
• The advances to be taken over should be rated
WC3/TL3 or above.
• The unit should score the minimum scores as
prescribed, under the various risk segments in CRA
• The account should be STANDARD A/c in the books
of the other Bank/FI for the last 3 years. However, if
a unit is not in existence for 3 years, track record of
shorter duration but not less than 1 year be followed
• The unit should have net profit (post tax) in each of
the immediately preceding 3years but if the unit has
been in existence for less period, it should have
earned net profit (post tax) in the preceding year of
operation.
• The Term Loan proposed to be taken over should not
have been re-phased, generally by the existing
bank/FI after commencement of commercial
production. However, if a rephasement was
necessiated due to external factors and the viability
of the unit is not in doubt, such proposals may also
be considered on case to case basis.
• The remaining period of scheduled repayment of the
Term Loan should be at least 2 years, when only TLs
are taken over.
• For takeover of existing Term Loans, while the
• Original time frame for repayment will be generally
adhered to, flexibility may be allowed in the
quantum of periodical repayments. If sanction of
fresh TL is also proposed along with takeover, the
schedule of repayment for the existing Term Loans, if
necessary may be permitted up to 8years.
• DELEGATION OF POWERS:
• A scheme of delegation of powers comprehensively
documented is in operation in the Bank in respect of
financial & administrative matters for exercised by
the various functionaries. This is based on the
premise that an executive is required to exercise only
those powers which are related to the
responsibilities and duties entrusted to him.
• An appropriate Control System is also in operation in
tune with the delegation structure. The powers
exercised by various functionaries, are required to be
reported to the next higher authority as laid down in
the Scheme of Delegation of Financial Powers.
• CREDIT FACILITIES TO COMPANIES WHOSE
DIRECTORS ARE IN DEFAULT: RBI has been collecting
and circulating information on defaulting companies,
including names of Directors of such Companies.
According the following approach has been adopted:

Director of applicant Approach

Company
(a) Promoter director of No ad
a defaulting Co. hoc/enhancement
/additional/new facility
(b) Director of defaulting In the case performance
Co. having a role in day and conduct of the
to day affairs of its accounts of the applicant
management Co. are otherwise
satisfactory, renewal
continuation of the limits

Directors in defaulting Co.
but not connected in any
way with its day to day
management
be considered.
Proposals may be
considered on merits. I f
the defaulting Co. is an
associate/subsidiary of the
applicant Co. or a group
company, approach
mentioned in (a) & (b)
above may be followed.
• Deviations from the above approach may be
permitted subject to approval of higher designated
authority.
• No additional facilities shall be granted by the Bank
to the listed wilful defaulters. Further,
entrepreneurs/promoters of Companies where the
Bank has identified siphoning/diversion of funds,
misrepresentation, falsification of accounts and
fraudulent transactions shall be debarred from Bank
finance for floating new ventures for a period of 5
years from the date name is published by RBI/CIBIL.
• The legal process, wherever warranted, against the
borrowers/guarantors and foreclosure of recovery
dues be initiated expeditiously.
• Wherever possible, Bank shall adopt proactive
approach for a change of management of the wilful
defaulting borrowing units.
• CREDIT MONITORING & SUPERVISION:
• Broadly The objective of post sanction follow up,
supervision and monitoring are as under:
• (a) Follow up function:
• To ensure the end-use of funds
• To relate the outstandings to the assets level on a
continuous basis
• To correlate the activity level to the projections
made at the time of the sanction/renewal of the
credit facilities
• To detect deviation from terms of sanction
• To make periodic assessment of the health of the
advances by noting some of the key indicators of
performance like profitability, activity level and
management of the unit and ensure that the assets
created are effectively utilised for productive
purposes and are well maintained.
• To ensure recovery of the instalments of the
principal in case of Term Loans as per the scheduled
repayment programme and all interest.
• To identify early warning signals, if any, and initiate
remedial measures thereby averting the incidence of
incipient sickness.
• To ensure compliance with all internal and external
reporting requirements covering the Credit Area.
• (b) SUPERVISION FUNCTION:
• To ensure that effective follow up of advances is in
place and asset quality of good order is maintained.
• To look for early warning signals, identify “incipient
sickness” and initiate proactive remedial measures.
• (c)MONITORING FUNCTION:
• To ensure effective supervision is maintained on
loans/advances and appropriate responses are
initiated wherever early warning signals are there
• To monitor on ongoing basis the asset portfolio by
tracking changes from time to time
• Chalking out and arranging for carrying out specific
actions to ensure high percentage of “Standard
Assets”.
• Detailed operative guidelines on the following
aspects of effective credit monitoring are in place:
• Post sanction responsibilities of different
functionaries
• Reporting for control
• Security documents, statement of stocks and book
debts
• Computation of DP on CA and maintaining DP
register
• Verification of assets
• Inspection by branch functionaries- frequency,
reporting, register etc.
• Stock Audit
• Follow up based on information system
• Follow up during implementation stage
• Follow up post –commercial production
• Monitoring & Control
• Detection and prevention of diversion of Working
Capital
• Monitoring of large withdrawals
• Allocation of limit
• Handling of NPA accounts
• The policy lays stress on a system of early
identification and reporting of all existing and
potential loans as a first step towards management
of NPAs. Such an ‘Early Alert System’ which captures
early warning signals is an integral part of the Bank’s
Risk Management process and would be followed by
time bound corrective action comprising
rehabilitation/restructuring or an early exit.
• The first focus in management of Special Mention
Accounts (SMAs) will be possible upgradation of the
account through rehabilitation of borrower’s
business. If the branch level review indicates that the
problems of the unit are not temporary, viability
studies need to be undertaken on case to case basis.
• Tightening of conditions e.g. close monitoring of
units cash flows, increased margins, withdrawal of
concessions, scaling up of collaterals etc. for
safeguarding the bank’s interests
• Negotiated settlements through compromises under
which Bank will endeavour to recover its dues to
maximum extent possible.
• Calling up of the advance and initiation of legal
action under SARFAESI Act , 2002
• ADVANCES TO PRIORITY SECTOR: The formal
definition of priority sector came into existence in
1972, when retail trade, small business, professional
and self employed persons & educational loans were
• Also declared as priority sector in addition to SSIs,
agriculture & allied agricultural activities and
Transport Operators. Now Housing has also been
brought under the priority sector.
• According to benchmark laid down by RBI, 40% of
the net bank credit should be the priority sector
advances; out of which 18% to AGL & 10% to the
weaker section of the society.
• Further, Policy also sets norms for lending to SSI
Sector & Agriculture Sector.
• Policy also sets norms for lending to Foreign Trade
finance viz, Export/Import, SMEs, Corporates and
Retail Sector etc.
• ILLUSTRATION:
• Hemant Enterprises who have been sanctioned
credit facilities by ABC Bank limited, have following
Limits/DP/Outstandings as on 30/06/2010. Calculate
exposure of ABC Bank Limited on Hemant
Enterprises as on date: (Rs./Lacs)
Facility Limit DP Outstandings
TL - 1 300 240 240
TL - 2 200 150 130
Cash-Credit 100 80 70
Bill- 50 50 60
Discounting
L/C 30 20 25
Guarantees 10 10 08
• Exposure Calculation on Hemant Enterprises as on
30/06/2010: (Rs./Lac)
Facility Exposure
TL - 1 240
TL - 2 150
Cash-Credit 100
Bill-Discounting 60
L/C 30
Guarantees 10

Total Exposure = Rs.590 lac

• Ajanta Enterprises is enjoying following credit facilities with
XYZ Bank Ltd. whose Capital funds are Rs.300 cr: Rs./cr

Facility Limit DP
Term Loan 30 28
Cash-Credit 8 7.50
Bill Discounting 4 3.70
L/C 1 1
DL against Fixed 2 2
Deposit

Ajanta Enterprises has now submitted a TL proposal for

Rs. 5 cr to the Bank for purchasing a new machinery.
How much new loan can be sanctioned to the customer.
• Maximum exposure on individual borrower XYZ Bank Ltd.
can take is 15% of its Capital funds i.e.
• = 0.15 x 300 = Rs.45 cr
• Present Exposure on Ajanta Enterprises
• = 28 + 8 + 4 + 1 = Rs.41 cr (Credit against FD will not be
included as per regulations)
• Hence maximum new TL Limit can be = 45 -41 = Rs. 4 cr