Sole Banking

Arrangement &
Multiple Banking
Arrangement,
Consortium Lending
Sole banking
Sole banking is a lending by single bank to a large borrower, subject to the resources
available with it and limited to the exposure limits imposed by the Reserve Bank of India.

Multiple Banking
It is an arrangement where a borrower takes loan amount from several banks. In this case
no bank knows that his borrower has taken loan from other banks too. There is no
contractual relationship between various banks like that in consortium banking and each
bank holds its individual security and own credit rates.
There are various loophole sin multiple banking arrangements, and also it can lead to
frauds. Each banker is free to do his own credit assessment and old security independent of
other bankers.

Consortium Lending
Consortium Lending is also known as joint financing or participation financing. In
Consortium lending several banks (or financial institutions) finance a single borrower. In
this case there is a common documentation, joint supervision, and follow up exercises
between all banks / financial institutions. So the participating banks form a new
Consortium. The whole loan amount is divided among these banks so the risk also gets
divided.
As per the approach, the group of banks would have a common agreement where the lead
bank (bank that bears major risk) would assess the borrower’s fund requirements, set
common terms and conditions and share information about borrower’s performance to
other lenders.
Loan Syndication
It refers to a lending process wherein a borrower approaches a bank for a loan
amount that is comparatively heavy and also involves international transactions and
different currencies. When a bank is approached by a client for availing a loan, the
said bank fixes up the interests and other borrowing terms and conditions of the loan
with the client and itself approaches other banks for selling of this loan. The other
banks, if agree, “Purchase” a part of the loan on the same or different terms and
conditions. In a Loan Syndication process, the client deals with one Bank only. The
bank approached by the borrower to arrange credit is referred to as Managing
Bank that is responsible for negotiating conditions and arranging the loan amount.
The Managing Bank need not be the “Majority lender” or “Lead bank” but only
plays the role of manager in arranging the loan amount in association with other
banks. Depending on the terms and conditions of the agreement any bank can play
the role of Managing Bank. The lead bank acts as recruiting bank of other sufficient
banks in the process of producing of loan, negotiating the terms, negotiating details
of the agreement and preparing documentation. The bank that is awarded/ given the
mandate by prospective borrower and is responsible for placing and managing the
loan process, its terms and conditions and finalizing the same is known as Lead
Manager, Lead Bank, Syndicate Bank. They are entitled to arrangement fees and
undergo a reputation risk during this process.
The banks that participate in process of lending a portion of total loan amount
entitled to receive interest and participation fees are Participating Banks.
Credit Thrust
Credit thrust drives deposit growth.
The bank’s growing retail deposit base has helped lower the cost of
funds. The retail push has helped deliver industry-leading growth on
the lending front and has also helped the banks build a stable deposit
base.
The banks continues to focus on current, savings and retail term
deposits.
Strong retail focus continues to support the performance of Banks.
The banks has significantly increased its exposure to retail lending in
the last few years, thus de-risking its business model. This segment
now constitutes a third of the bank’s overall loan portfolio. The banks
has been able to build a healthy savings deposit base by leveraging its
branch presence in the metros. This segment now constitutes a third of
the bank’s overall loan portfolio. The government has instructed banks
and the State administration to ensure that all eligible borrowers are
provided credit limit.
Credit Priority
Priority sector lending is lending to those sectors of the economy which may not otherwise
receive timely and adequate credit.
Priority Sector refers to those sectors which the Government of India and Reserve Bank of
India consider as important for the development of the basic needs of the country. They are
assigned priority over other sectors. The banks are mandated to encourage the growth of
such sectors with adequate and timely credit.
It enables better credit penetration to credit deficient areas, increased lending to small and
marginal farmers and weaker sections, boost credit to renewable energy, and health
infrastructure and allied sectors that need credit boost, which is otherwise difficult to avail.

Priority sectors by Government:

• Agriculture
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
Priority sector lending has enabled many to avail the facilities of institutional credit, which
are otherwise difficult provided the exploitative non-institutional credit sources farmers,
share crop growers usually resort to as a last option. It has also given impetus to the
growth of small and micro enterprises, creating more enterprises, promoting
entrepreneurship.
With the government providing the necessary impetus to
green mobility, the Electric Vehicle(EV) sector is expected
to see a boom. In order to enable credit facilities and
promote faster adoption of the technology, institutional
policies and mechanisms are formulated.
In recent times, the Reserve Bank of India is said to be
considering a proposal from the government’s policy think
tank NITI Aayog to categorize loans to purchase electric
vehicles under the priority sector lending segment.
 What are the Weaker Sections under the Priority Sector?
Priority sector loans to the following borrowers are treated under the Weaker Sections
category.
• Small and Marginal Farmers.
• Artisans, village and cottage industries where individual credit limits do not exceed Rs 1
lakh.
• Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods
Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment
Scheme for Rehabilitation of Manual Scavengers (SRMS)
• Scheduled Castes and Scheduled Tribes.
• Beneficiaries of the Differential Rate of Interest (DRI) scheme.
• Self Help Groups.
• Distressed farmers are indebted to non-institutional lenders.
• Distressed persons other than farmers, with loan amounts not exceeding Rs 1 lakh per
borrower to prepay their debt to non-institutional lenders.
• Individual women beneficiaries up to Rs 1 lakh per borrower.
• Persons with disabilities.
• Minority communities may be notified by the Government of India from time to time
• Overdraft availed by PMJDY account holders as per limits and conditions prescribed by
the Department of Financial Services, Ministry of Finance from time to time may be
classified under Weaker Sections.
• In States (Punjab, Meghalaya, Mizoram, Nagaland, Lakshadweep and Jammu & Kashmir)
where one of the minority communities notified is found to be in majority, the above
covers only the other notified minorities.
Credit Acquisition
Fees other than interest charged by a thrift institution for making, refinancing or
changing a loan or a loan commitment. Acquisition credits are sometimes referred to
as loan origination fees.

Statutory & Regulatory Restrictions on Advances

As per Section 20 of the Banking Regulation Act 1949, there is a complete
prohibition on banks to enter into any commitment for granting loan to or on behalf
of any of its directors and specified other parties wherein the director is interested.
The master circular on loans and advances- statutory and other restrictions lays
down the limits and prohibitions.
• A bank cannot grant any loans and advances on the security of its own shares.
• Enter into any commitment for granting any loan or advance to or on behalf of-
(a) any of its Directors,(b) any firm in which any of its Directors is interested as
Partner, Manager, Employee or Guarantor.
• Under section 19 of Banking Regulation Act 1949, a bank cannot hold shares in
a company as (a) pledgee or mortgagee in excess 30 percent of paid up of that
company or 30 percent of bank’s paid capital and reserves whichever is less. (b)
in the management of which Managing Director or Manager of the bank is
interested.
• Bank’s aggregate investment in shares, certificate of deposits, bonds etc. shall
not exceed the 40 percent of banks owned funds as at the end of previous year.
Credit Appraisal
The process by which a leader appraises the creditworthiness of the prospective
borrower is known as Credit Appraisal. This normally involves appraising the
borrower's payment history and establishing the quality and sustainability of his
income.
Credit appraisal means an investigation/assessment done by the bank prior
providing any loans and advances/project finance and also checks the commercial,
financial and technical viability of the project proposed, its funding pattern and
further checks the primary and collateral security cover available for recovery of
such funds. Credit appraisal is a process to ascertain the risks associated with the
extension of the credit facility. It is generally carried by the financial institutions
which are involved in providing financial funding to its customers.

Benefits of Credit Appraisal

The benefits of credit appraisal are as follows :
• Reduces risk involved in the loans provided for a project.
• Increase confidence among the corporate bankers and improved sales decision.
• Reduces NPA (Non-Performing Assets) and possibility of financial loss.
• Proper assessment is done with different options.
• A bank cannot grant credit facilities against Certificate of deposits, Term
deposits issued by other banks or money market mutual funds.
• Banks shall adhere to selective credit control directives of RBI while
releasing loans against sensitive commodities.
• Banks should not sanction a new or additional facility to borrowers
appearing in RBI’s list of Willful defaulters for a period of 5 years from
the date of publication of the list by RBI.
• There are certain restrictions on Grant of Loans & Advances or award
contracts to Officers and Relatives of Officers of Banks. No officer or any
Committee comprising, inter alia, an officer as member, shall, while
exercising powers of sanction of any credit facility, 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.
Validation of Proposal
In credit appraisal first step is to verify the factual
information with the documents provided by loan
applicant. For example, in case of applicant
company verification of registration of company by
check verification of incorporation and certificate of
commencement of business. Next step is to take
visit of all units (factory and office) of applicant and
verify all statutory required approvals and license
both on record and on display at the premises.
Invariably a note on the visit and observations
should be recorded and should be a part of the file
of the borrower.
 Dimensions of
Credit Appraisal
Factors Evaluated During a Credit Appraisal Process

A lender’s credit appraisal process will typically check and evaluate

the following important factors:
• Income
• Age
• Repayment ability
• Work experience
• Present and former loans
• Nature of employment
• Other monthly expenses
• Future liabilities
• Previous loan records
• Tax history
• Financing pattern
• Assets owned
Credit Appraisal
Process
The process of credit appraisal is as follows :

1) Credit Processing
Credit processing is the stage where all required information on credit is
gathered and applications are screened. Credit application forms should be
sufficiently detailed to permit gathering of all information needed for credit
assessment.
2) Credit-Approval/Sanction
A financial institution must have written guidelines on the credit approval
process and the approval authorities of individuals or committees. Approval
authorities should be sanctioned by the board of directors. Approval
authorities will cover new credit approvals, renewals of existing credits, and
changes in terms and conditions of previously approved credits, particularly
credit restructuring, all of which should be fully documented and recorded.
3) Credit Documentation
Documentation is an essential part of the credit process and is required for each
phase of the credit cycle, including credit application, credit analysis, credit
approval, credit monitoring, collateral valuation and realization of security. The
format of credit files must be standardized and files neatly maintained with an
appropriate system of cross-indexing to facilitate review and follow-up.
4) Credit Administration
Financial institutions must ensure that their credit portfolio is properly administered,
that is, loan agreements are duly prepared, renewal notices are sent systematically
and credit files are regularly updated. An institution may allocate its credit
administration function to a separate department or to designated individuals in
credit operations, depending on the size and complexity of its credit portfolio.
5) Disbursement
Once the credit is approved, the customer should be advised of the terms and
conditions of the credit by way of a letter of offer. The duplicate of this letter should
be duly signed and returned to the institution by the customer. The disbursement
process should start only upon receipt of this letter and should involve, the
completion of formalities regarding documentation, the registration of collateral,
insurance cover in the institution's favor etc. Under no circumstances shall funds be
released prior to compliance with pre-disbursement conditions and approval by the
relevant authorities in the financial institution.
6) Monitoring and Control of Individual Credits
A proper credit monitoring system will provide the basis for taking prompt
corrective actions when warming signs point to deterioration in the financial health
of the borrower. Financial institutions must have a system in place to formally
review the status of the credit and the financial health of the borrower at least once a
year.
Structuring of Loan
Documents
STRUCTURING OF LOAN DOCUMENTS
Structure of loan documents: It refers to the terms of a loan in respect to different
aspects with which a loan is made up of. It includes the maturity of loan,
repayment and the risk involved.
There are so many factors which need to be considered such as the purpose of the
loan, the time period involved and the borrower’s risk profile.
DOCUMENTS TO APPLY FOR A PERSONAL LOAN
Following are the main documents which are usually required when applying for a
personal loan:
• PAN Card
• Identity proof which could be Aadhaar Card, Driving license, Passport or Voter
ID, etc.
• Signature Proof such as Passport or PAN card, etc.
• Address proof could be a copy of Passport, Aadhaar card, driving license,
utility bill; Gas or electricity bill, Voter ID, ration card or even a rent agreement,
etc.
• Bank statement of the past 6 months

If you are a salaried individual, following documents are applied in addition to the
above-mentioned documents:
• Salary slips for the last 3 months
If you are a self-employed individual, additionally the below
documents will be need to submit (for self / business entity as
applicable):
• Financial statements for the last two years (balance sheet, profit and
loss statement)
• Income Tax Returns for the last 2 years
• Proof of Business i.e License, registration certificate, GST number
etc
• IT Assessment or Certificate of Clearance
• Challans of Income Tax or TDS Certificate (Form 16A) or Form 26
AS for income declared in ITR
Credit Risk
Ratings
Credit Risk Ratings involves the categorization of individual loans
based on credit analysis and local market conditions into a series of
categories of increasing risk. It is applied commonly to all loans.
Risk Rating should be conducted:
• At the time of application for all new or increased loan facilities
• As part of annual review process
• Where new information may materially affect the credit risk of
loan
Risk ratings assist the management in predicting changes to portfolio
quality and subsequent financial impact of such changes. It can also
leas to earlier responses to potential portfolio problems, providing
management with a choice of corrective actions and decreased
exposure to unexpected credit losses. Risk ratings are useful for
pricing loans and regulating the commercial portfolio exposure to
maximum levels of risk. Board should optimally set the maximum
credit risk allowed by credit classes and aggregate maximum
portfolio credit risk.
Creditworthiness, is how “worthy” or deserving one is of credit. If a lender is confident
that the borrower will honor the debt obligation in a timely fashion, the borrower is
deemed creditworthy. Sophisticated financial intermediaries perform assessments on
individuals, corporates, and sovereign governments to determine the associated risk and
probability of repayment.
Financial institutions use credit ratings to quantify and decide whether an applicant is
eligible for credit. Credit ratings are also used to fix the interest rates and credit limits for
existing borrowers. A higher credit rating signifies a lower risk premium for the lender,
which then corresponds to lower borrowing costs for the borrower. Across the board, the
higher one’s credit rating, the better. A credit report provides a comprehensive account of
the borrower’s total debt, current balances, credit limits, and history of defaults and
bankruptcies if any. Due to high levels of asymmetries of information in the market,
lenders rely on financial intermediaries to compile and assign credit ratings to borrowers
and help filter out bad debtors.
The independent third parties are called credit rating agencies. The rating agencies access
potential customers’ credit data and use sophisticated credit scoring systems to quantify a
borrower’s likelihood of repaying debt.
A limited set of credit raters are considered reliable, and it is due to the level of expertise
and data consolidation required, which is not publicly available. The so-called “Big
Three” rating agencies are and Fitch, Moody’s, and Standard & Poor’s. These agencies
rate corporates and sovereign governments on a range of “AAA” or “prime” to “D” or “in
default” in descending order of creditworthiness.
Purpose of Loan
The banker must be convinced that the customer has a well defined purpose
for requesting credit and a serious intention to repay it. Purpose of
requisition of a loan must be clarifies to lender’s satisfaction. It must also be
determined that granting of the loan falls under the lending institution’s
current loan policy. The banker must determine if the borrower has a
responsible attitude towards using borrowed funds, is truthful in answering
questions and will make every effort to repay what is owed. Responsibility,
truthfulness, purpose and intention to repay money and not indulge in
speculation would make up what is called ‘character’. If the banker feels the
customer is insincere in promising to use the borrowed funds as planned and
in repaying as agreed, the loan should not be made, or it will become a
problem credit.
Eg. In case of project financing following questions might arise:
• What is the project idea?
• What efforts have been used in designing the manufacturing process?
• What efforts have been used in efforts in selection of technology,
installing equipment, specifying material, material input and utilities,
product mix, plant capacity, location and site, machinery and equipment,
structure.
Sources of Repayment
Repayment of dues of lender should normally come from
cash flows of the company or more specifically from profits
of the company. The borrower’s firms profit should be
adequate to serve the interest, to repay the debt or agreed
installment, pay dividends and leave something to plough
back which will further strengthen the company’s financial
position.
What is a good rate of return on company’s investment
(total assets, own funds etc.) is usually decided by a
benchmark rate of return set by promoters. Various
measures like payback period, Net Present Value and
Internal Rate of Return (IRR) help to decide on the
acceptability of a proposal or project. If IRR is more than
the pre set threshold return, proposal may be accepted.
Cash Flow
Cash flow analysis is useful in understanding sources of borrower’s cash flow. Lenders
are concerned it would be ideal if most of cash comes from operations(sales).
To analyze whether the proposed business have the ability to generate enough cash to
repay the loan, business firms have 4 sources to draw upon:
• Cash flows generated from sales or other income
• Sale or liquidation of assets
• Funds raised by issuing debt or equity
• Additional capital infusion
Lenders would prefer that repayment comes from cash flow from business activity. This
is because asset sale can weaken the business capacity. Banks would not like repayment
from borrowings as it impacts the firm’s leverage and moves the firm into a higher debt.
Normally fresh capital is infused at the time of reworking the terms of credit as infusion
is a indication of difficulties in venture. Sale of assets and fresh equity are indicators of
troubled loan relationships.

Cash flow = Net Profit + Non Cash Expenses

Cash Flow = Sales Revenue – Cost of Goods Sold – Selling, General and
Administrative Expenses – Taxes paid in Cash
Cash Flow = Profit after Tax + Non Cash Expenses (Depreciation, Provisions etc.)
If a substantial proportion of cash inflow happens due to sale of assets or borrowing or
issuing debt, borrower may find it difficult to generate cash in the future which will make
the bank loan more risky.
Collateral
Collateral is an asset pledged by a borrower, to a lender (or a creditor), as security for a
loan. If loan exposure is supported by collateral, it’s said to be secured credit; if it is not
secured by collateral, the exposure is said to be unsecured.
Before a lender issues you a loan, it wants to know that you have the ability to repay it.
That's why many of them require some form of security. This security is called collateral
which minimizes the risk for lenders. It helps to ensure that the borrower keeps up with
their financial obligation. In the event that the borrower does default, the lender can
seize the collateral and sell it, applying the money it gets to the unpaid portion of the
loan.
Loans secured by collateral are typically available at substantially lower interest rates
than unsecured loans. A lender's claim to a borrower's collateral is called a lien—a legal
right or claim against an asset to satisfy a debt. The borrower has a compelling reason to
repay the loan on time because if they default, they stand to lose their assets pledged as
collateral.
There are two ways to think about collateral “value.” The first is its relative desirability;
the second is its monetary value.
A useful tool to help conceptualize the overall desirability of collateral is the MAST
framework. MAST stands for Marketable, Ascertainable, Stable, and Transferable.
If an asset is Marketable, it implies an active secondary market for the asset.
Ascertainable asks how easy it is to quote or quantify a price (or market value).
How Stable is the asset’s value?
Is the asset Transferable? A logging company may wish to pledge
inventory as collateral, but much of its inventory may be located in a
remote location that’s difficult for third parties to access.

An asset’s monetary value could mean a number of things. Book value

is one measure that’s commonly used to understand what inventory or
accounts receivable are worth for the purposes of extending credit.
If a business is acquiring fixed assets (like property, plant and
equipment), it would be common to use the purchase price as the
“value” when calculating loan-to-value.