SUMMER TRAINING PROJCT REPORT

ON

ANALYSIS OF CREDIT APPRAISAL AND TRADE FINANCE

AT

BANK OF INDIA
PUNE

UNDER THE GUIDANCE OF: SUBMITTED BY:

Mr. Ravi Gupta PINKY CHOUDHARY

(IB09-7030)

BATCH- 2009-11

As a Partial Fulfillment of PGDM Programme of BIIB

Balaji Institute of International Business
Pune
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ACKNOWLEDGEMENT

This project report is guidance and knowledge imparted to me by various mentors

at Bank of India, Main Branch Pune during my summer internship. It was very
valuable learning experience for me.

I would like to thank

Mr. Gupta Assistant General Manager

Mrs. Gangakhedkar Chief Manager
Mr. Kajale Senior Manager
Mrs. Baria Manager
Mr. Jitturi Manager
Mr. Choudhary Manager
Mrs. Seetha Bhaskar Manager

I would like to give special thanks to our project guide Mr. Gupta, because of whom I
was able to gain the insights of various departments in Bank of India within a short time
period of two months. Last but not the least I would like to thank each and every staff
member & entire non staff members of Bank of India family for their support and help
as and when required.

My special thanks and gratitude to Prof.(Col) A.Balasubramanian, Dean- BIIB,

Dr.Satish Inamdar,Director- BIIB, who were instrumental in granting this project to
me.

Pinky choudhary

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Preface

It gives me great pleasure in presenting the project titled “Analysis of Credit Appraisal
and trade finance” at Bank of India, Main Branch, Pune.

This project has helped me in gaining valuable knowledge in the field of Bank
Finance(Credit Department), Credit Appraisal and proposal processing, forex
department. Also an understanding of various products offered by bank at branch level
and functioning of Capital market Department, Basics of Risk Management.

Though my interaction with the corporate employees, this training has served as a
guiding platform for my foray into the corporate world.

I thank Bank of India for providing me this opportunity to complete my internship.

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Content

 Executive summary………………………………………………………………………………………………………5
 Introduction
a) Company’s Profile……………………………………………………………………………………………..6
b) Vision………………………………………………………………………………………………………………10
c) Mission…………………………………………………………………………………………………………….10
d) Quality policy…………………………………………………………………………………………………...10
 Export finance
a) Concept of export finance…………………………………………………………………………………..12
b) Need for export finance……………………………………………………………………………………..12
c) Guidelines for banks dealing in export finance……………………………………………………13
d) Pre shipment finance………………..……………………………………………………………………….14
e) Methods of pre shipment finance……………………………………………………………………....16
f) Schemes in pre shipment finance……………………………………………………………………….18
g) Post shipment finance………………..………………………………………………………………………23
h) Different types of post shipment advances………………………………………………………....24
i) Letter of credit………………………………………………………………………………………………….26
j) Export credit in foreign currency………………………………………………………………………29
 Credit appraisal
a) Introduction…………………………………………………………………………………………………….38
b) Credit management at bank………………………………………………………………………………39
c) Credit delivery………………………………………………………………………………………………….41
d) Corporate credit rating……………………………………………………………………………………..44
e) Credit appraisal………………………………………………………………………………………………..46
f) Risk rating………………………………………………………………………………………………………..57
g) Credit rating (SBS model)…………………………………………………………………………………61
 Conclusion…………………………………………………………………………………………………………………..66
 Limitation of study………………………………………………………………………………………………………67
 Bibliography……………………………………………………………………………………………………………….68

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EXECUTIVE SUMMARY

Bank of India has seen a phenomenal increase in their deposits and advances over the
years. This report highlights various norms and policies followed by the bank before
granting bank finance and monitoring of account and also a study of banks credit Loan
Policy, Branch Banking, Forex Department and Risk Management.

The project has been divided into two parts. Initial chapters of the project are
concerned with the whole concept and mechanism of Trade Finance and the later part
deals with the general concept and fundamental principles of credit appraisal of
proposals. The method of study was fully based on the secondary sources of data and
the various information provided by the staff members in the Bank of India.

Banks provides various services to the importer and exporter for carrying out
International Trade. The report mentions the functioning of Forex Department and how
the various departments under Forex are inter-linked.

Offering credit is an operation fraught with risk. Before offering credit to an

organization, its financial health must be analyzed. Based on the financial health of an
organization, banks assign credit ratings. These credit ratings are used to fix the interest
rate and quantum of installment.

This study aims to analyze the credit health of organizations that approach Bank of
India for foreign exchange credit facilities. After analyzing credit health, the credit rating
is determined. On the basis of credit rating, the interest rate guidelines circular is
consulted to fix a price for the credit facilities i.e. determine the interest rate.

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INTRODUCTION
Company profile
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it
was nationalized along with 13 other banks. Opening of our Bank in 1906 is an unique
event in the sense that it was promoted by Parsis, Hindus, Muslims and a Jew – all
Indians. Truly a secular bank floated by businessmen. Prior to this all banks in this
country had either been promoted by Europeans or were small community banks. At
the time of establishment, our Bank’s aim was to do “safe business which would give a
safe return and to establish the reputation and credit of the Bank on a affirm and sound
footing “

Bank of India commenced operations on 01.11.1906 from the registered office at

Oriental Building, Esplanade Road, Fort. First Board of Directors consisted of Sir
Sassoon David, Sir Cowasjee Jehangir, Sir Frederick Leigh Croft, Mr. Ratanjee Dadabhoy
Tata, Mr. Gordhandas Khattau, Mr. Lalubhai Samaldas, Mr. Khetsey Khaisey, Mr.
Ramnarain Hurnundrai, Mr. Jenarrayen Hindoomull Dani and Mr. Nooriddin Ebrahim
Noordin.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a
mighty institution with a strong national presence and sizable international operations.
In business volume, the Bank occupies a premier position among the nationalized
banks.

The Bank has 3207 branches as on 31.03.2010 in India spread over different
states/ union territories including 201 specialized branches. These branches are
controlled through 48 Zonal Offices. There are 29 branches/ offices abroad which
include five representative offices. The Bank came out with its maiden public issue in
1997 and follow on Qualified Institutions Placement in February 2008. . Total number of
shareholders as on 31/03/2010 is 218752 and total no. of shares as on 31.03.2010 was
525175500.

While firmly adhering to a policy of prudence and caution, the Bank has been in
the forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most
modern infrastructure. The Bank has been the first among the nationalized banks to
establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at
Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It
pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its
credit portfolio.

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Bank has sponsored five Regional Rural Banks operating in five states. These RRBs are
operating in 46 districts with a network of 1018 branches. The Bank's association with
the capital market goes back to 1921 when it entered into an agreement with the
Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association
that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to
extend depository services to the stock broking community. Bank of India was the first
Indian Bank to open a branch outside the country, at London, in 1946, and also the first
to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a
network of 29 establishments (including five representative office ) at key banking and
financial centers in 18 countries viz.,.Hong Kong, Singapore, Japan, Indonesia, Vietnam,
Cambodia, China, U.A.E., USA, United Kingdom, Channel Island, West Indies, France,
Belgium, Kenya, Zambia, South Africa, Tanzania.

Head Office : Star House, C-5

‘G’ Block, Bandra Kurla Complex

Bandra (East), Mumbai – 400 051.

Depository Services : Depository Offices affiliate to CDSL

Depository Office affiliated to NSDL

No. of Directors in the Board: 14 (including CMD and Executive Directors)

Registrar & Transfer Agents: Share Pro Services

Satyam Estate, Cardinal Gracious Road

Andheri(E), Mumbai-400099

Bank’s Subsidiary / Associates:

1. Regional Rural Banks. (RRBs)

2. BOI Shareholding Ltd. ( BOISL)

3. Securities Trading Corporation of India Ltd. ( STCI)

4. Star Union Dai- ichi Life Insurance Company Ltd. ( SUDLIC)

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Strategic Investment / Alliances :

1. Central Depository Services ( India) Ltd. ( CDSL)

2. ASREC (India) Ltd.
3. Credit Information Bureau ( India) Ltd. ( CIBIL)
4. Multi Commodity Exchange of India Ltd. ( MCX)
5. National Collateral Management Services Ltd. ( NCMSL)
6. SME Rating Agency of India Ltd. ( SMERA)
7. MCX Stock Exchange Ltd.
8. United Stock Exchange Ltd.
9. Equifax Credit Information Services Ltd.
10. U.V.Asset Reconstruction Co. Ltd.
11. Indo Zambia Bank Ltd.
12. PT Bank Swadeshi Tbk, Indonesia
13. Bank of India (Tanzania) Ltd.

Major Strategy & Process Initiatives:

1. Strategic Business Process Re-engineering for making the Organization more

efficient, productive and customer centric.
2. Emphasis on Centralization and automating the back-office processes. Twenty four
retail hubs across the country for faster sanction and processing of Retail Loans.
3. 503 strong ‘feet on street’ sales force for business acquisition.
4. Dedicated Relationship Managers and Diamond Customers lounges in 700 branches.
5. Lead Management Systems and Complaint Management System being put in place.
6. Relationship Managers, assisted with specific tools, for large Corporate Borrowers
introduced.

Accolades & Awards:

1. Bank of India won NDTV Profit Business Leadership Awards 2009 – Best PSU Bank.
2. Outlook money NDTV Profit Awards 2009 – Best Education Loan Provider – Runner
Up.
3. Bank received the Winners Award in International Banking Technology Award 2010
from IBA in the Best Business Enablement Initiative category in recognition of its
achievement in Banking Technology for the year 2009.
4. Dun & Bradstreet – Rolta Corporate Awards 2009, Best Bank under Banking
Category.
5. FE-EY Most Efficient Public Sector Bank Awards 2010 by Dalal Street.

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Progress at a glance of Bank’s performance

(Balance Sheet data as on 31st March)
2002(In 2003 2004 2005 2006 2007 2008 2009 2010
cr)
Paid up capital * 488 488 488 488 488 488 526 526 526
Reserves & Surplus* 2357 3053 3521 3976 4495 5407 10063 12969 13704
Total Deposits * 59589 64454 71482 78821 93932 119882 150012 189708 229762
Gross Advances* 38311 42633 45855 56012 66662 86791 114793 144732 171317
Branch/EC Network 2529 2541 2567 2594 2622 2845 2974 3091 3264
No. of Employees 43420 43141 42950 42635 42206 41511 40616 40155 39676
Credit Deposit Ratio 64.29 66.14 66.56 72.46 70.97 72.40 76.52 76.29 74.56
Operating Profit* 1412 2030 2242 1460 1701 2395 3701 5457 4705
Net Profit * 505 851 1008 340 701 1123 2009 3007 1741
Gross NPA (%) 9.37 8.62 7.86 5.48 3.72 2.42 1.68 1.71 2.85
Net NPA (%) 6.02 5.59 4.50 2.77 1.49 0.96 0.52 0.44 1.31
Business Per 2.18 2.42 2.76 3.20 3.81 4.98 6.52 8.33 10.11
Employee*
Capital Adequacy Ratio 10.68 12.02 13.01 11.52 10.75 11.58 12.95 13.21 12.63
( Basel I)
Dividend (%) 25 30 30 20 30 35 40 80% 70%
Earning Per Share 7.91 17.43 20.69 6.98 14.39 23.04 40.83 57.26 33.15
Profit Per Employee 1.16 1.97 2.35 0.80 1.66 2.71 4.95 7.49 4.39
(amount in lakh)
2003(%) 2004(%) 2005(%) 2006(%) 2007 2008(%) 2009(%) 2010(%)
Yield on Advances NA 8.80 7.45 7.11 7.58 8.52 9.34 9.78 8.42
Yield on Investment NA 8.59 8.03 7.68 7.21 6.59 6.83 7.14 7.46
Yield on Fund NA 8.10 7.18 6.71 6.78 7.03 7.71 8.09 7.14
Cost of Deposit NA 5.50 4.57 4.17 4.05 4.31 5.23 5.76 5.16
Cost of Funds NA 5.32 4.45 4.22 4.24 4.32 5.07 5.37 4.84
Spread NA 2.78 2.73 2.49 2.54 3.20 3.11 N.A.
Return on Asset NA 1.16 1.25 0.38 0.68 0.88 1.25 1.49 0.70
Asset Utilisation Ratio NA 2.17 2.78 1.62 1.64 1.89 2.31 2.70 1.88
Return on NA 28.32 28.04 8.63 16.28 22.28 28.44 30.42 14.76
averageNetworth
Operating exp. to NA 2.25 2.17 2.15 2.04 2.05 1.65 1.53 1.47
average working fund
Staff expenses to NA 1.54 1.45 1.41 1.28 1.27 1.03 0.96 0.92
average working fund
Book value per share NA 68.78 78.57 82.93 93.77 112.75 164.05 211.89 236.84

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VISION

To become the "Bank of Choice" for corporates, medium businesses and upmarket retail
customers and developmental banking for small business, mass market and rural
markets.

MISSION

To provide superior, proactive banking service to niche markets globally, while

providing cost-effective, responsive service to others in our role as a development bank,
and in so doing meet the requirements of our stakeholders

QUALITY POLICY

Bank of India, is committed to become the Bank of Choice by providing

SUPERIOR

PRO-ACTIVE

INNOVATIVE

STATE OF THE ART

Banking Services with an attitude of Care and Concern for the Customers and Patrons

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TRADE FINANCE

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CONCEPT OF TRADE FINANCE

Credit and finance is the life blood of any business whether domestic or international It
is more important in the case of export transactions due to the prevalance of novel non-
price competitive techniques encountered by exporters in various nations to enlarge
their share of world markets. The selling techniques are no longer confined to mere
quality, price or delivery schedules of the products but are extended to payment terms
offered by exporters . Liberal payment terms usually score over the competitors not
only of capital equipment but also of consumer goods. The payment terms however
depend upon the availability of finance to exporters in relation to its quantum, cost and
the period at pre-shipment and post-shipment stage.This project is an attempt to throw
light on the various sources of export finance available to exporters , the schemes
implemented by ECGC and EXIM for export promotion and the recent developments in
the form of tie-EXIM tie-ups , credit policy announced by RBI in Oct 2001 and TRIMS .

Export finance is a short term working capital finance allowed to an exporter.Finance

and credit are available to help not only export production but also to sell overseas
customers on credit

Need for Trade Finance

 To cover commercial & Non-commercial or political risks attendant on granting

credit to a foreign buyer.
 To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank which consider the ensuing
factors:-

 Availability of the funds at the required time to the exporter.

 Affordability of the cost of funds

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GUIDELINES FOR BANKS DEALING IN TRADE FINANCE

When a commercial bank deals in export finance it is bound by the ensuing guidelines:-

a) Exchange control regulations.

b) Trade control regulations.

c) Reserve Bank’s directives issued through IECD.

d) Export Credit Guarantee Corporation guidelines.

e) Guidelines of Foreign Exchange Dealers Association of India.

Bank now have a look at the different types of export finance.Basically the point
separating the two types of finances is related to whether the financial assistance is
granted to an exporter prior to or after the shipment of the goods. Thus, as indicated
above the two types of export finances are as follows:-

 Pre-shipment finance
 Post-shipment finance

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Definition of Pre-shipment finance

Financial assistance extended to the exporter from the date of receipt of the export
order till the date of shipment is known as Pre-shipment credit. Such finance is
extended to an exporter for the purpose of procuring raw materials, processing,
packing, transporting, warehousing of goods meant for exports. Pre-shipment finance is
available in the form of packing credit and advances against receivables from the
Government like duty drawback, etc.

Definition of Post-shipment finance

Credit facility extended to an exporter from the date of shipment of goods till the
realisation of the export proceeds is called post-shipment credit.

Post-shipment finance is available in the form of :

 Duty Export bills purchased / negotiated / discounted.

 Advances against bills sent on collection basis.
 Advances against exports on consignments basis.
 Advances against undrawn balances.
 Advances against drawback.

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Pre-Shipment finance.
Pre-shipment finance which is generally called packing credit is essentially a working
capital advance made available for the specific purpose of procuring or processing or
manufacturing of goods meant for export.

Two essential features of packing credit advances are:-

a) There should be an export order or a letter of credit.

b) The advances to be liquidated from the relative export proceeds.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:

 To purchase raw material, and other inputs to manufacture goods.

 To assemble the goods in the case of merchant exporters.
 To store the goods in suitable warehouses till the goods are shipped.
 To pay for packing, marking and labelling of goods.
 To pay for pre-shipment inspection charges.
 To import or purchase from the domestic market heavy machinery and other
capital goods to produce export goods.
 To pay for consultancy services.
 To pay for export documentation expenses.

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FORMS OR METHODS OF PRE-SHIPMENT FINANCE

1. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit
advantage initially on unsecured basis. Subsequently, the bank may ask for security.

2. Advance against Hypothecation: Packing credit is given to process the goods for export. The
advance is given against security and the security remains in the possession of the exporter. The
exporter is required to execute the hypothecation deed in favour of the bank.

3. Advance against Pledge: The bank provides packing credit against security. The security
remains in the possession of the bank. On collection of export proceeds, the bank makes
necessary entries in the packing credit account of the exporter.

4. Advance against Red L/C: The Red L/C received from the importer authorizes the local bank
to grant advances to exporter to meet working capital requirements relating to processing of
goods for exports. The issuing bank stands as a guarantor for packing credit.

5. Advance against Back-To-Back L/C: The merchant exporter who is in possession of the
original L/C may request his bankers to issue Back-To-Back L/C against the security of original
L/C in favors of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on
the basis of which he can obtain packing credit.

6. Advance against Exports Through Export Houses: Manufacturer, who exports through
export houses or other agencies can obtain packing credit, provided such manufacturer
submits an undertaking from the export houses that they have not or will not avail of
packing credit against the same transaction.

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7. Advance Against Duty Draw Back (DBK): DBK means refund of customs duties paid
on the import of raw materials, components, parts and packing materials used in the
export production. It also includes a refund of central excise duties paid on indigenous
materials. Banks offer pre-shipment as well as post-shipment advance against claims for
DBK.

8. Special Pre-Shipment Finance Schemes:

 Exim-Bank’s scheme for grant for Foreign Currency Pre-Shipment Credit

(FCPC) to exporters.
 Packing credit for Deemed exports.

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SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE

1. PACKING CREDIT

SANCTION OF PACKING CREDIT ADVANCES:

There are certain factors, which should be considered while sanctioning the packing
credit advances viz.

 Banks may relax norms for debt-equity ratio, margins etc but no compromise in
respect of viability of the proposal and integrity of the borrower.
 Satisfaction about the capacity of the execution of the orders within the
stipulated time and the management of the export business.
 Quantum of finance.
 Standing of credit opening bank if the exports are covered under letters of credit.
 Regulations, political and financial conditions of the buyer’s country.

DISBURSEMENT OF PACKING CREDIT:

After proper sanctioning of credit limits, the disbursing branch should ensure to inform
ECGC the details of limit sanctioned in the prescribed format within 30 days from the
date of sanction.

 To complete proper documentation and compliance of the terms of sanction

i.e.creation of mortgage etc.
 There should be an export order or a letter of credit produced by the exporter on
the basis of which disbursements are normally allowed.

In both the cases following particulars are to be verified:

 Name of the Buyer.

 Commodity to be exported.
 Quantity.
 Value.
 Date of Shipment / Negotiation.
 Any other terms to be complied with.

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2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC)

The FCPC is available to exporting companies as well as commercial banks for lending
to the former.

 It is an additional window to rupee packing credit scheme & available to coverb

both the domestic i.e. indigenous & imported inputs. The exporter has two
options to avail him of export finance.
 To avail him of pre-shipment credit in rupees & then the post shipment credit
either in rupees or in foreign currency denominated credit or
discounting/rediscounting of export bills.
 To avail of pre-shipment credit in foreign currency & discounting/rediscounting
of the export bills in foreign currency.
 FCPC will also be available both to the supplier EOU/EPZ unit and the receiver
EOU/EPZ unit.
 Pre-shipment credit in foreign currency shall also be available on exports to
ACU(Asian Clearing Union) countries with effect from 1.1.1996.

Eligibility: PCFC is extended only on the basis of confirmed /firms export orders or
confirmed L/C’s. The “Running account facility will not be available under the scheme.
However, the facility of the liquidation of packing credit under the first in first out
method will be allowed.

Order or L/C: Banks should not insist on submission of export order or L/C for every
disbursement of pre-shipment credit , from exporters with consistently good track
record. Instead, a system of periodical submission of a statement of L/C’s or export
orders in hand, should be introduced.

Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the
disclaimer from the export order.

QUANTUM OF FINANCE
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On the basis of the above particulars, the quantum of finance will be fixed. Normally, the
quantum will be fixed on the FOB value of the contract or the LC or the domestic value
of the goods whichever less after deducting the profit margin is. If the contract or the LC
is on CIF basis, the FOB value will be arrived at by deducting 13 to 14% from the CIF
value if the dispatch is through sea and around 25% if the dispatch is by air. After
arriving at the FOB value the usual margin i.e. profit margin stipulated in the terms of
sanction to be deducted.

PERIOD OF FINANCE

This is decided on the basis of the production cycle or up to the date of shipment
mentioned in the order / LC whichever is earlier. But in no case it should exceed 180
days. For reasons beyond the control of exporter, if the shipment could not be made
within 180 days from the date of advance, a further extension of 90 days can be granted
by the banks themselves without referring to Reserve Bank.

Extension of any packing credit beyond 360 days requires ECGC’s approval. In order to
have proper control over the granting and settlement of pre-shipment credit allowed to
exporters at concessive rates of interest, it is necessary for the banks to maintain
separate accounts in respect of each packing credit advanced to the exporter. Packing
credit advance should also be followed up properly at all stages like submission of stock
statements and inspection of stocks at regular intervals, adequate insurance cover for
the stocks etc.

Packing credit advance will always be liquidated with the export proceeds of the
relevant shipment. At this stage the pre-shipment liability of the party is converted into
post-shipment liability.

APPRAISAL

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While appraising an export credit proposal as a commercial banker, obligation to the

following institutions or regulations needs to be adhered to:

To RBI under the Exchange Control Regulations:-

Obligations are:-

 Appraisee to be the bank’s customer.

 Appraisee should have the exim code number alloted by the Director General Of
Foreign Trade.

Party’s name should not appear under the caution list of the RBI.

To the Trade Control Authority under the EXIM policy:-

Obligations are:-

 Appraisee should have IEC number alloted by the DGFT.

 Goods must be freely exportable i.e. not falling under the negative list. If it falls
under the negative list, then a valid license should be there allowing the export.
 Country with whom the appraisee wants to trade should not be under trade
barrier.

To ECGC:-

Obligations are:-

Verification that appraisee is not under the Specific Approval list (SAL).

3. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME:

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The exporter has the option of availing of export credit at the post-shipment stage
either in rupee or in foreign currency under the rediscounting of export bills abroad
(EBRD) scheme at LIBOR linked interest rates.

This facility will be an additional window available to exporter along with the exiting
rupee financing schemes to an exporter at post shipment stage. This facility will be
available in all convertible currencies. This scheme will cover export bills upto 180 days
from the date of shipment (inclusive of normal transit period and grace period) .The
scheme envisages ADs rediscounting the export bills in overseas markets by making
arrangements with an overseas agency/ bank by way of a line of credit or banker’s
acceptance facility or any other similar facility at rates linked to London Inter Bank
Offered Rate (LIBOR) for six months.

Prior permission of RBI will not be required for arranging the rediscounting facility
abroad so long as the spread for rediscounting facility abroad does not exceed one
percent over the six months LIBOR in the case of rediscounting ‘with recourse’ basis &
1.5% in the case of ‘without recourse’ facility. Spread, should be exclusive of any
withholding tax. In all other cases, the RBI’s permission will be needed.

Post-shipment finance

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It is essentially an advance against receivables which will be in the form of shipping

documents.

DEFENITION:

Credit facility extended to an exporter from the date of shipment of goods till the
realization of the export proceeds is called Post-shipment Credit.

IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE:

 To pay to agents/distributors and others for their services.

 To pay for publicity and advertising in the overseas markets.
 To pay for port authorities, customs and shipping agents charges.
 To pay towards export duty or tax, if any.
 To pay towards ECGC premium.
 To pay for freight and other shipping expenses.
 To pay towards marine insurance premium, under CIF contracts.
 To meet expenses in respect of after sale service.
 To pay towards such expenses regarding participation in exhibitions and trade
fairs in India and abroad.
 To pay for representatives abroad in connection with their stay board.

Some of the major exchange control regulations concerning export finance at the post-
shipment stage are as follows:-

 Exporter should have the code number and each shipment should accompany
the prescribed declaration form in which the value of export will be declared and
duly certified by the customs authority.
 Shipping documents along with relative GR form must be submitted to an AD
within 21 days from the date of shipment.
 The payment should be received in an approved manner within the prescribed
time limit. i.e. within six months from the date of shipment.

Different types of post-shipment advances

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 Export bills purchased / discounted

 Export bills negotiated
 Advances against bills sent on collection basis.
 Advances against exports on consignment basis.
 Advances against undrawn balances.
 Advances against duty drawback.

Export bills purchased / discounted: Proper limit should be sanctioned to the

exporter for purchase of export bills facility. Since the export is not covered under LC,
risk of non-payment may arise.

Export bills negotiated (bills drawn under LC): When export documents are
presented to the bank for negotiation, they should be scrutinized carefully with the
terms and conditions of the LC. The operation of letter of credit is governed by Uniform
Customs & Practices for Documentary Credits (1993 revision) of the International
Chamber of Commerce, Brochure no. 500.

Advances against bills sent on collection basis: At times, the exporter might have
fully utilized his bills and in certain cases the bills drawn under the LC may have some
discrepancies. In such cases the bills will be sent on collection basis. In some cases, the
exporter himself may request for sending the bills on collection basis anticipating the
strengthening of the foreign currency. Banks may allow advance against these collection
bills to an exporter. Concessive rate of interest can be charged for this advance upto the
transit period in the case of DP Bill and the transit period + usance period +grace period
(if any) in case of usance bills.

Advance against goods sent on consignment basis: Goods are exported on

consignment basis at the risk of the exporter for sale abroad. Eventual remittance of
sale proceeds will be made by agent / consignee.

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Advances against undrawn balances: In certain line of export trade, it is the practice
of the exporter to leave a part of the amount as undrawn balance. Adjustment will be
made by the buyer for difference in weight, quality etc. ascertained after arrival and
inspection or analysis of the goods.

Advances against receivables from Government such as Duty Drawback: Where

the domestic cost of production of certain goods is higher in relation to international
price, the exporter may get support from the Government so that he may compete
effectively in the overseas market. Export incentives are provided under the Export
Promotion Scheme by the Government of India and other agencies. This can only be in
the form of refund of excise and customs duty known as Duty Drawback

Period of finance

Post –shipment advance against demand bills will be for a period upto normal transit
period. In case of unasked bills the advance will be for the transit period + usance
period + grace period if any, but in any case not exceeding 180 days from the date of
shipment.

Quantum of finance

In case of post-shipment advances, normally no margin is maintained for bills drawn

under LC’s. Only in case of export bills purchased against contracts / firm orders,
depending upon the additional security available, some banks prescribe certain amount
of margin.

Letter of Credit

INTRODUCTION:

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This is one of the most popular and more secured of method of payment in recent times
as compared to other methods of payment. A L/C refers to the documents representing
the goods and not the goods themselves. Banks are not in the business of examining the
goods on behalf of the customers. Typical documents, which are required includes
commercial invoice, transport document such as Bill of lading or Airway bill, an
insurance documents etc. L/C deals in documents and not goods.

A letter of credit is a banking mechanism which allows importers to offer secure terms
to exporters.

A Letter of Credit can be defined as “an undertaking by importer’s bank stating that
payment will be made to the exporter if the required documents are presented to
the bank within the validity of the L/C”.

PARTIES INVOLVED IN LETTER OF CREDIT:

Applicant: The buyer or importer of goods

Issuing bank: Importer’s bank, who issues the L/C

Beneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods.

Advising bank: Issuing bank’s branch or correspondent bank in the exporter’s country
to whom the L/C is send for Onward transmission to the beneficiary.

Confirming bank: The bank in beneficiary’s country, which Guarantees the credit on
the request of the issuing Bank.

Negotiating bank: The bank to whom the beneficiary presents his Documents for
payment under L/C

All letters of credit contain these elements:

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 a payment undertaking given by the bank (issuing bank)

 on behalf of the buyer (applicant)
 to pay a seller (beneficiary)
 a given amount of money
 on presentation of specified documents representing the supply of goods within
specific time limits
 these documents conforming to terms and conditions set out in the letter of
credit
 documents to be presented at a specified place.

Put simply, the issuing bank's role is twofold:

 To guarantee to the seller that if compliant documents are presented, the bank
will pay the seller the amount due. This offers security to the seller - the bank
says in effect "We will pay you if you present documents (XYZ)"
 To examine the documents, and only pay if these comply with the terms and
conditions set out in the letter of credit. This protects the buyer's interests – the
bank says "We will only pay your supplier on your behalf if they present
documents (XYZ) that you have asked for"

ADVANTAGES OF LETTER OF CREDIT

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ADVANTAGES TO THE EXPORTER:

 No blocking of funds.
 Clearance of import regulations.
 Free from liability.
 Pre- shipment finance.
 Non-refusal by importer.
 Reduction in bad-debts.

ADVANTAGES TO THE IMPORTER:

 Better terms of trade.

 Assurance of shipment of goods.
 Overdraft facility.
 No blocking of funds.
 Delivery on time.
 Better relations.

DISADVANTAGES OF LETTER OF CREDIT:

 Lacks flexibility.
 Complex method
 Expensive for importer
 Problem of revocable L/C

Export Credit In Foreign Currency

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Both Pre-shipment & post shipment credits are available in foreign currencies under 2
schemes:

1. Foreign currency pre-shipment credit (FCPC) Scheme

2. Rediscounting of Export Bills Abroad (EBR) Scheme

Foreign currency pre-shipment credit (FCPC) Scheme : The FCPC is available to

exporting companies as well as commercial banks for lending to the former. It is an
additional window to rupee packing credit scheme & available to cover both the
domestic i.e. indigenous & imported inputs. The exporter has two options to avail
himself of export finance. To avail himself of pre-shipment credit in rupees & then the
post shipment credit either in rupees or in foreign currency denominated credit or
discounting /rediscounting of export bills. To avail of pre-shipment credit in foreign
currency & discounting/rediscounting of the export bills in foreign currency.
FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ
unit. Pre-shipment credit in foreign currency shall also be available on exports to ACU
(Asian Clearing Union) countries with effect from 1.1.1996.

Eligibility: PCFC is extended only on the basis of confirmed /firm export orders or
confirmed L/Cs. The “Running account facility will not be available under the scheme.
However, the facility of the liquidation of packing credit under the first in first out
method will be allowed.

Order or L/C: Banks should not insist on submission of export order or L/C for every
disbursement of pre-shipment credit, from exporters with consistently good track
record. Instead, a system of periodical submission of a statement of LCs or export orders
in hand , should be introduced.

Sharing of FCPC : Banks may extend FCPC to the manufacturer also on the basis of the
disclaimer from the export order

Rediscounting of Export Bills Abroad (EBR) Scheme:The exporter has the option of
availing of export credit at the post shipment stage either in rupee or in foreign

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currency under the rediscounting of export bills abroad (EBRD) scheme at LIBOR linked
interest rates. This facility will be an additional window available to exporter along with
the exiting rupee financing schemes to an exporter at post shipment stage. This facility
will be available in all convertible currencies. This scheme will cover export bills up to
180 days from the date of shipment (inclusive of normal transit period and grace
period) .The scheme envisages ADs rediscounting the export bills in overseas markets
by making arrangements with an overseas agency/ bank by way of a line of credit or
banker’s acceptance facility or any other similar facility at rates linked to London Inter
Bank Offered Rate (LIBOR) for six months. Prior permission of RBI will not be required
for arranging the rediscounting facility abroad so long as the spread for rediscounting
facility abroad does not exceed one percent over the six months LIBOR in the case of
rediscounting ‘with recourse’ basis & 1.5% in the case of ‘without recourse’ facility.

ECGC (Export Credit Guarantee Corporation of India Limited)

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Export Credit Guarantee Corporation of India Limited was established in the year 1957
by the Government of India to strengthen the export promotion drive by covering the
risk of exporting on credit.

Being essentially an export promotion organization, it functions under the

administrative control of the Ministry of Commerce, Government of India. It is managed
by a Board of Directors comprising representatives of the Government, Reserve Bank of
India, banking, and insurance and exporting community. ECGC, the fifth largest credit
insurer of the world in terms of coverage of national exports. The present paid-up
capital of the company is Rs.340 crores, which is expected to be enhanced to Rs.500
crores by the year 2002.

What does ECGC do?

 provides a range of credit risk insurance covers to exporters against loss in

export of goods and services, and also
 Offers guarantees to banks and financial institutions to enable exporters obtain
better facilities from them.
 Provides Overseas Investment Insurance to Indian companies investing in joint
ventures abroad in form of equity or loan.

How does ECGC help exporters?

ECGC provides

 insurance protection to exporters against payment risks

 guidance in export related activities
 provides information on credit-worthiness of overseas buyers
 provides information on about 180 countries with its own credit ratings
 makes it easy to obtain export finance from banks/financial institutions
 assists exporters in recovering bad debts

When should an exporter approach ECGC?

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The point at which cover normally begins is the date of dispatch i.e. shipment Proposal
for a Standard Policy may be made at any time. For specific policies ECGC should be
approached well before shipments begin, preferably before concluding a contract.

PRODUCTS :

The covers issued by ECGC can be divided broadly into four groups:

1) Standard Policy 2) Specific Policies

3) Financial Guarantees 4) Special Schemes

STANDARD POLICY

Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard

Policy, is the one ideally suited to cover risks in respect of goods exported on short term
credit; i.e. credit not exceeding 180 days. The policy covers both commercial and
political risks from the date of shipment.

Risks covered under the policy:

Under the Shipments (Comprehensive Risks) Policy, the Corporation covers, from the
date of shipment, the following risks:

1) Commercial Risks

 Insolvency of the buyer

 Failure of the buyer to make the payment within a specified period, normally 4
months from the due date
 Buyer's failure to accept the goods, subject to certain conditions

2) Political Risks

 Imposition of restrictions by the Government of the buyer's country or any

Government action which may block the delay of transfer of payment made by
the buyer.
 War, civil war, revolution or civil disturbances in the buyer's country
 New import restrictions or cancellation of a valid import license
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 Interruption or diversion of voyage outside India resulting in payment of

additional freight or insurance charges which cannot be recovered from the
buyer.
 Any other cause of loss occurring outside India, not normally insured by general
insurers and beyond the control of both the exporter and the buyer.

Shipments Covered

The shipments (Comprehensive Risks) Policy is meant to cover all the shipments that
may be made by an exporter on credit terms during a period of 24 months ahead. In
other words, an exporter is required to offer for insurance each and every shipment that
may be made by him in the next 24 months on DP, DA or Open Delivery terms to buyers
other than his own associates. The Policy cannot be issued for selected shipments.
selected buyers or selected markets.

Maximum Liability

As the policy is intended to cover all the shipments that may be made by an exporter in
a period of 24 months ahead, the Corporation will fix its Maximum Liability under each
policy. The Maximum Liability is the limit up to which ECGC would accept liability for
shipments made during the policy period for both commercial and political risks. It will
be advisable to estimate the maximum outstanding payments due from overseas buyers
at any one time during the policy period and to obtain the policy with maximum liability
for such a value. The maximum Liability fixed under the Policy can be enhanced
subsequently, if necessary.

Credit Limits

Commercial risks are covered subject to a Credit Limit approved by the Corporation on
each buyer to whom shipments are made on credit terms. The exporter has therefore to
apply for a suitable Credit Limit on each buyer. On the basis of its own judgment of the
creditworthiness of the buyer, as ascertained from credit reports obtained from banks
and specialized agencies abroad, the Corporation will approve a Credit Limit which is
the limit up to which it will pay claim on account of losses arising from commercial
risks. The Credit limit is a revolving limit and once approved it will hold good for all
shipments to the buyer as long as there is no gap of more than 12 months between the

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two shipments. Credit limit is a limit on the Corporation's exposure on the buyer for
commercial risks and not a limit on the value of shipment that may be made to him.
Premium has, therefore, to be paid on the full value of each shipment even where the
value of the shipment or the total value of bills outstanding for payment is in excess of
the credit limit.

Premium Rates

Depending on the combination of the payment term and the country group, the
premium may range from 0.07% to 3.5%. ECGC's premium rates are one of the lowest
among credit insurers in the world.

When does a claim become payable?

A claim could arise when the exporter suffers loss arising from any of the insured risks
and will be paid to the exporter immediately upon the loss being ascertained by the
Corporation. In case of insolvency of an overseas buyer, losses will be ascertained one
month after the exporter's claim is admitted to rank against the insolvent's estate or
after four months from the due date, whichever is earlier. In case of default by the buyer
and in all other cases, loss will be ascertained four months from the due date. Expenses
incurred by the exporter on account of additional handling, transport or insurance
charges because of interruption or diversion of voyage out side India could also form
part of the insured loss.

The Corporation normally pays 90% of the loss, whether it arises due to the commercial
risks or political risks. A lower percentage of cover may be offered in certain cases.

Sharing recovery with ECGC

All amounts recovered, net of recovery expenses, should be shared with ECGC in the
ratio in which the loss was originally shared. Receipt of a claim from ECGC does not
relieve an exporter from obligations to the Exchange Control Authority for recovering
the amount from the overseas buyer.

Special Schemes

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Transfer Guarantee meant to protect banks which add confirmation to Letters of Credit
opened by foreign banks, Insurance cover for Buyers Credit and Lines of Credit, and
Exchange Fluctuation Risk Insurance.

Exchange Control Relating to Exports:

1. Export Import Code Number: every person/firm/company engaged in export import

business should obtain an Export Import Code number issued by the DGFT. The
exporter should invariably quote the code number in all declarations/forms which are
explained below:

2. Export Declaration forms: As per Section 7 (1) (3) of FEMA , any export of goods from
India should be declared in the prescribed forms to the effect that full value of exports
will be realized within the prescribed period in the prescribed manner.

The prescribed forms which are used for the purposes are given below:

 GR Form: Exports made otherwise than by post.

 PP Form: Exports made by post parcel.
 Softex Form: Exports of software in non-physical form.
 SDF Form: On account of introduction of electronic data inter change system at
certain customs offices where shipping bills are processed electronically.

3. Prescribed Time: The maximum time prescribed by RBI for realization of export
proceeds is six months from date of ship-ment. If the bills are not realized within this
time stipulated, the exporter should apply to RBI for extension of time in a form called
ETX form . All overdue bills which are not realized within the due date will be reported
to RBI in a half yearly statement.

4. Prescribed Method: The payment for export proceeds should be received through the
medium of Authorized Dealers (ADs). In exceptional cases where the track record of the

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exporter is good, Ads will accept the amount received by exporters direct by cheque, DD
etc.

The currency of the receipt of payment should be appropriate to the final place of
destination of the shipment as declared in the GR form irrespective of the country
residence of the buyer.

5. Submission of export documents: The exporter has to declare the value of the goods
of export to the customs in GR form and submit the form in duplicate to them. After
certication, the original will be retained by the customs for onward transmission to RBI
& the duplicate will be handed to the exporter.

As per exchange control regulations, the duplicate copy of GR form along with the
shipping documents should be submitted to the Authorized Dealers (ADs) within 21
days of shipment. If the exporter receives advance payment for exports for the full
value, the ADs will release the GR form accordingly.

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CREDIT APPRAISAL

INTRODUCTION

Lending is banking industry's 'dharma'. In reconfirmation Bank has adopted the policy
Mission & Vision statements:

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Mission "To provide superior, proactive banking service to niche markets globally,
while providing cost-effective, responsive service to others in our role as a development
Bank, and in so doing meet the requirements of our stakeholders."

Vision "To become the Bank of choice for corporates, medium businesses and up
market retail customers and developmental banking for small business, mass market
and rural markets."

Credit disbursement at Bank of India

This project was undertaken at the main branch Bank of India, Pune at the Credit
Department. Financial requirements for Project Finance and Working Capital purposes
are taken care of at the Credit Department. Companies that intend to seek credit
facilities approach the bank. Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for mega projects
3. Non-fund based Limits Like Letter of Guarantee, Letter of Credit

Companies present audited balance sheets of the current and previous years. These are
used to determine the financial health, turnover trends and rise and fall of profitability.
Then credit rating is done. The financial health and credit rating are theoretical methods
for determining the right interest rate. However, in practice, banks consider other
factors such as history with client, market reputation and future benefits with clients.
Thus, a difference exists between theory and practice.

CREDIT MANAGEMENT AT BANK

Over the years banks credit priorities have undergone changes to cope with the
environmental changes, tap the available opportunities, achieve its commercial
objectives, fulfill social obligations and adhere to mandatory directed lending norms.

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The policies adopted towards this end have stood the test of time and have been
operating at both formal and informal levels.

This has resulted in following below-mentioned credit priorities concurrently:

I. Maintenance of asset quality;

II. Maintaining growth and reasonable risk adjusted returns on credit exposures;
III. Retaining/improving our market share;
IV. Thrust on priority sector lending with focus on direct agriculture credit, retail
advances SME segment and export credit.

With the kind of transformation that is taking place in the banking industry and in the
country, it is imperative to be conscious of our earnings and asset quality. Further, as
profit is reward for risk bearing capacity, the spread available in case of high quality
assets are thin. Therefore, there is a need for the Bank to judiciously complement
priority of asset quality with that of profit maximization. With the ushering in an era of
liberalization in the economy, new opportunities are available and for a Bank of our size
it is important that we realize the market share through better understanding of these
developments. In view of the fast changing needs of customers, the Bank has to have an
open ended policy so as to foray into hitherto unfocussed assets.

The Bank would be concerned with the purpose for which the credit exposure – both
Fund based and non-fund based - is to be utilized. While sanctioning any credit
exposure, it should be ensured that the purpose for which the exposure is taken is an
approved one. The Bank would not entertain requests for credit exposures for financing
highly speculative activities or those, whose financial viability cannot be reasonably
ascertained.

The Bank would also adhere to the laws of the land and directives issued by Regulatory
Authorities (GOI, RBI and others) on credit matters. In regard to guidelines (not having
the force of law) issued from time to time by the authorities, the Bank would follow
them in all their aspects. However, if these permit varying interpretations, the Bank will
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adopt a reasonable interpretation, as determined by Credit Risk Management

Committee without deviating from the spirit behind the guidelines.

The Bank has over the years, designed and adopted the Best Practices Code which are
enshrined in the Manual of Instructions that are amended from time to time. This, in
effect, represents the Bank's Philosophy towards effective corporate governance.

Credit Delivery through Bank's branches

The Bank has adopted a segmented approach to deliver credit through

specialized/specially identified branches, in order to develop a focused approach that

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will develop credit appraisal skills for speedy credit decisions and disposal of credit, as
given below:

C & P Branches : These branches will dispense loan against fixed deposits and other
paper securities, personal loans including Consumer Loans, Housing Loans, Priority
Sector Credit including transport operators, retail trades, small businesses,
professionals & self employed persons, educational loans, etc.

Retail Hubs: These branches have been opened especially for all types of retail loans viz.
housing, mortgage, education loans etc.

Housing & Personal Finance Branches: Housing Finance and Consumer Loans.

SME Branches: The SME branches are required to cater to the credit requirements of
SME segment in these centers while continuing extending other advances. These
branches would also have adequate operational flexibility to extend finance/render
other services to other sectors/borrowers.

Agri-Hi-Tech Branches: These branches will specialize in Hi-Tech Agriculture projects,

large volume agriculture businesses.

Main Branches/Profit centre branches in cities/towns: Trade finance, small and

medium enterprises – working capital, term loan requirements.

Large Corporate/Corporate Banking Branches: Two Large Corporate Branches have

been established to cater to the specific credit requirements of Corporates.

CREDIT DELIVERY

Types of Facilities
The types of facilities would comprise of Term Loans, Demand Loans, Overdrafts, Cash
Credits, WCDL, Advances against Bills (both DP/DA) with/without L.C., Channel Credit,

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Invoice Discounting/financing, Discounting of future cash flows/rent receivables and

Line of Credit, L/Cs, Guarantees, Acceptance facilities, CPs, Cash Management Services
etc.

Modes for delivery of Credit facilities

The credit requirements may be dispensed by any one of following modes –

 Sole Banking Arrangements

 Multiple Banking;
 Consortium Lending or
 Syndication

Sole Banking

In "AAA" (LC1 to LC2) and "AA" (LC3 to LC4) rated accounts where we are sole bankers,
we should endeavour to retain such accounts. Borrowers shall normally obtain our
prior approval in case they would like to switch over to Multiple Banking Arrangement
or consortium lending.

Whenever a customer's credit requirements exceed 50% of the exposure ceiling or

Rs.100 crores whichever is higher, the borrower would be encouraged to scout for
another Bank/institution to share the credit facility/ies under Multiple Banking,
Consortium or syndication arrangement.

Multiple Banking

Where we are the sole bankers and the borrower desires to avail of credit limits from
Other bank/s without a formal consortium arrangement, the reasons for the borrower
wanting to Shift to another bank should be ascertained and recorded.

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We may decide to permit the borrower to bank elsewhere provided the borrower
agrees to furnish from time to time details of the various facilities availed from other
bank/s and also provided that the total working capital limits availed by the borrowers
are within a 0% tolerance of the working capital limits assessed by us. Acceptance of
distinct and separate security or otherwise may be considered by the sanctioning
authority on the merits of each case. In such cases, Bank's exposure for working capital
needs should normally not exceed 75% of the total working capital requirements of the
borrower.

Where it exceeds this limit, justification for the same shall be mentioned in the
Appraisal note.

Consortium Lending

Banks have been given the freedom to frame the ground rules for lending under
consortium arrangement. The ground rules are given in Annexure I. Addition/
modification in this regard may be considered and approved by the Credit Risk
Management Committee. In case of accounts where we are members, we may accept the
rules framed by the leader, provided they do not jeopardize Bank's interest and
generally conform to Bank' policies.

Syndication

A syndicated credit is an arrangement between two or more lending institutions to

provide a credit facility using common loan documentation. We shall encourage
financing under such arrangements. Bank will also act as syndication leader whenever
such opportunity is spotted.
Corporate Credit Rating

Ratings can be assigned to short-term and long-term debt obligations as well as

securities, loans, preferred stock and insurance companies. Long-term credit ratings
tend to be more indicative of a country's investment surroundings and/or a company's

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ability to honor its debt responsibilities. The ratings therefore assess an entity's ability
to pay debts. There are various organization who perform credit rating for various
business organization.

Bank of India follows a finely defined Credit Rating Model for assessing the
creditworthiness of the applicant. The credit rating model asses various aspects of the
projects and assigns scores against them thereby determining the risk level involved
with the project.

Credit Rating Framework

A Credit-risk Rating Framework (CRF) is necessary to avoid the limitations associated
with a simplistic and broad classification of loans/exposures into a “good” or a “bad”
category. The CRF deploys a number/ alphabet/ symbol as a primary summary
indicator of risks associated with a credit exposure. Such a rating framework is the basic
module for developing a credit risk management system and all advanced
models/approaches are based on this structure.

Broadly, CRF can be used for the following purposes:

 Individual credit selection, wherein a borrower or a particular exposure/ facility

is rated on the CRF.

 Pricing (credit spread) and specific features of the loan facility. This would
largely constitute transaction-level analysis.

 Portfolio-level analysis.

 Surveillance, monitoring and internal MIS

Assessing the aggregate risk profile of bank/ lender: These would be relevant for
portfolio-level analysis. For instance, the spread of credit exposures across various CRF
categories, the mean and the standard deviation of losses occurring in each CRF

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category and the overall migration of exposures would highlight the aggregated credit-
risk for the entire portfolio of the bank.

The following step-wise activities outline the indicative process for arriving at
risk-ratings:

Step I Identify all the principal business and financial risk elements
Step II Allocate weights to principal risk components
Step III Compare with weights given in similar sectors and check for consistency
Step IV Establish the key parameters (sub-components of the principal risk elements)
Step V Assign weights to each of the key parameters
Step VI Rank the key parameters on the specified scale
Step VII Arrive at the credit-risk rating on the CRF
Step Compare with previous risk-ratings of similar exposures and check for
VIII consistency
Step IX Conclude the credit-risk calibration on the CRF

The risk-rating process would represent collective decision making principles and as
indicated above, would involve some in-built arrangements for ensuring the consistency
of the output. The rankings would be largely comparative. As a bank’s perception of the
exposure improves/changes during the course of the appraisal, it may be necessary to
adjust the weights and the rankings given to specific risk-parameters in the CRF. Such
changes would be deliberated and the arguments for substantiating these adjustments
would be clearly communicated in the appraisal documents

CREDIT APPRAISAL
General
The process of credit appraisal would begin with the selection of the proponent. It
would involve appraising the background of the proponent/management, commercial,
technical and financial appraisal. Appraisal of credit facilities would comprise two
distinct segments:

 Appraising the acceptability of the customer.

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 Assessment of the customer's credit needs.

Both the aspects need to be examined simultaneously at the time of the initial
entry of a customer to the Bank as also subsequent periodic renewals.
The appraisal would be different in respect of:

 personal loans for consumer durables, houses etc ;

 loans to tiny business enterprises ;
 loans to agriculturists ; and,
 Credit facilities to firms, corporates and others for business/trade/ industry.

Background of the proponent/management

The identification of the borrower needs to be done properly through scrutiny of his
antecedents, experience, competence, integrity, initiative etc. This may be done by
obtaining status reports from previous bankers or meaningful assessment of his
dealings with us, if banking with us. In case of corporates, the management structure,
the background of the top management, needs to be scrutinised. We should be careful if
the names of prospective borrowers/promoters appear in the list of defaulters
published by RBI/ ECGC etc or in any other list of undesirable customers. To strengthen
the credit appraisal further details of the status report received from another bank may
be ascertained by the appraising officer by personally visiting his counterpart in the
other bank remitting the report for a personal discussion. The gist of such oral
discussion may be recorded in the file of the borrower and brought out in the proposal.
KYC guidelines as framed by RBI and adopted by Bank are to be followed by the
branches.

Commercial appraisal
The nature of the product, demand for the same, the existing and perceived competition
in the segment, ability of the proponents to withstand the same, government policies
governing the industry, etc. need to be taken into consideration. The trade practices in
respect of the product should be thoroughly understood.

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Technical appraisal
Technical appraisal of the project needs to be carried out for industrial activity1
proposals beyond the cut-off limits prescribed from time to time. Such appraisal may be
carried out in-house by Technical Officers working in Technical Appraisal Department/
Technical Appraisal Cells or officers having technical expertise for the same or by an
outside agency as determined by the appropriate authority. Where technical appraisal
is carried out by All India Financial Institutions. PSU Banks/other leading banks having
expertise in the area and the same may be accepted for an appraisal purposes.

Exemptions from fresh techno-economic appraisal shall be available in the following

categories:

Where appraisal has been carried out by all India Financial Institutions/Banks and such
FIs/Banks themselves would be taking up exposure.

Where appraisal has been carried out by leader of WC consortium (in respect of
accounts where our Bank is to have only WC exposure) and the branch / sanctioning
authority observing no serious differences with such appraisal.

In case of AAA (LC1 to LC2 or equivalent) /AA (LC3 to LC4 or equivalent) rated accounts
with other banks, where our bank proposes to join the consortium and /or sanction
limits under multiple banking arrangement for the existing activity of the
company/firm, and the sanctioning authority decides not to insist for fresh TEV Study.

In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2)and
AA (LC3 to LC4) where only additional working capital limits are sought and
diversification of the project is not proposed , and the sanctioning authority decides not
to insist for fresh TEV Study.

In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2)and
AA (LC3 to LC4) term loan requirements upto 25% of the working capital limits
sanctioned, provided expansion is in the same product line and without change in
technology , and the sanctioning authority decides not to insist for fresh TEV Study.

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Financial appraisal

Thorough scrutiny of the financial aspects of the request needs to be carried out. Apart
from ascertaining the need based character of the limits requested for, the financial
health of the proponents, ability to absorb unanticipated financial costs need to be
looked into. Ascertaining the need based character of the limits would include scrutiny
of the cost of the project, means of financing, financial projections etc. Important
performance indicators like profitability ratios, debt-equity ratio, debt service coverage
ratio, breakeven point, profit/volume ratio, payback period, benefit cost ratio, internal
rate of return, sensitivity analysis, etc. need to be within acceptable parameters for that
industries/ activities.

Where higher limits are considered, detailed analysis of the financial health would be
made
and the following ratios computed :-

 Current ratio
 Total outside liabilities/equity ratio
 Profit before interest and taxes/interest ratio
 Profit before tax/Net sales ratio
 Inventory + receivables/Sales ratio
 DSCR if the borrower enjoys any term loan with any bank/FI even if no TL is
being considered by our bank.

Such financial information may be obtained from the published results, internet or from
agencies providing such data.

Assessment of working capital credit requirements hinges normally on the projected

sales and other financial figures. Appraising officials should satisfy themselves about the
expected sales levels, creditors levels, holding levels. This is more specially needed
when projected sales are higher than achieved sales by 25% and more. They should

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clearly justify the acceptance of higher projections, capability to achieve projected levels
which may be corroborated by achievements so far, during the current year, orders on
hand/expected, etc.

There can be instances in case of proprietary and partnership firm, Pvt. Ltd. company
and closely held Public Ltd. company borrowers, where debt equity ratio is not at
acceptable level, but they hold investments from friends and relatives on a continuous
basis. In such cases we may accept the latter equivalent to the equity portion as quasi
equity and calculate the DER and other ratios.

All the above ratios would be compiled for the past two/three years including the latest
audited balance sheet. As the ratios would vary from industry to industry, services,
trade, etc. it is proposed not to stipulate any particular benchmark for the above ratios.
Wherever audited financials are not readily available for the accounting year just ended,
provisional figures (which should not vary by more than 10% from the final figures)
will have to be obtained and analyzed. Further, to make it more meaningful, the ratios of
the customer concerned would be compared with industry averages for the units in the
industry to the extent possible. His relative strengths in the market, technology
employed, availability of raw materials and other production factors as also the quality
of management need to be examined.

Therefore, the following aspects need to be looked into:

Whether investment in associates and subsidiaries form a very large portion of the
equity of the customer. The amount of investment in associates and subsidiaries
(including shares, loans etc.) that is in excess of 10% of the tangible net worth of the
investor company may be deducted from the net worth of the latter for computing
various ratios connected with net worth.
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Whether the customer indulges in financial jugglery to mask an otherwise poor

performance. Thus, any qualifying remark of the Statutory Auditor of the company
needs to be ascertained. Any change in accounting system shall also be critically
examined. Financial figures should be re-worked considering such adverse remarks of
the Company’s statutory auditor.

The position of contingent liabilities, status of disputed tax liabilities (especially if they
are in the second stage of appeal in which case the liability should be deducted from the
net worth) and their impact on the performance of the unit.

All the above scores would generally apply to working capital credit facilities. For term
credit facilities, a few more factors such as the funded debt/equity ratio, the Debt
service coverage ratio both for the project and the company, as a whole as also the
period of repayment should be given due weightage. Additionally cash flow statements
are to be obtained and analyzed in all accounts with limits of Rs.5 crores and above or
wherever needed.

Risks associated with borrower accounts like critical inputs risk, operational risk,
production process risk, marketing and labour risk are to be analysed and taken into
account in the assessment.

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Information to be obtained from the borrowers

We need to obtain all information necessary for a sound credit decision an indicative
check list of documents to be obtained is given in the annexure II. At times some of the
information required may not be forthcoming immediately from some borrowers due to
many factors. In such cases a view may be taken without the said information and
comments noted in the proposal.

ASSESSMENT OF WORKING CAPITAL LIMITS

At present the assessment of working capital requirements of concerns engaged in trade
business and industry are determined by the total working capital requirements of the
borrowers. They are broadly bifurcated into borrowers having working capital limits
(fund based) upto Rs.5 Crs. and those having more than Rs.5 Crs. working capital limits
from the Banking System. (D/A L/C limits are treated as a part of working capital limits.
We may continue to adopt the existing methods of assessment of working capital limits
as hitherto as follows :

Working Capital Limits Upto Rs.5 Crs. from The Banking System
Turnover Method

This may be applicable to all borrowers enjoying fund-based working capital credit
limits upto and inclusive of Rs.5 crores with the Banking System. The working capital
requirements of the borrower may be computed at 25% of the projected annual
turnover of which at least four-fifth (i.e. 20% of the projected annual turnover) should
be provided by the Bank as working capital finance, and balance one-fifth (i.e. 5% of the
projected annual turnover) contributed by the borrower, as margin towards working
capital.

These guidelines have been formulated assuming average production/ business cycle of
3 months. In reality, this cycle could be longer or shorter. The proponent's working
capital requirements may be discussed on the basis of traditional approach of
production/business cycle and limits may be considered in excess of 20% of the
projected annual turnover wherever warranted due to longer cycle, keeping a minimum
margin of one-fifth of the working capital requirements. On the other hand, in case of

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shorter production/ business cycle, working capital limits at 20% of the projected
annual turnover may be sanctioned and actual drawing should be allowed on the basis
of drawing power after excluding unpaid stocks/stocks acquired under D/A L/C.

a) For individuals other than those engaged in trade, credit facilities other than
temporary overdrafts, would essentially be based on suitable schemes evolved by the
bank from time to time. These would be in a sense formula based lending.

b) Similarly for tiny units requiring working capital/credit facilities upto Rs.5 lacs, a
simple model of assessment may be evolved. For such advances, the sales figure
for fixing limits on turnover basis, would be lesser of aggregate of sales tax returns
and credit summations in their accounts with us.

c) In respect of agriculturists, suitable procedures are already in existence and these

could be reviewed from time to time by the Credit Risk Management Committee

Margin requirements

In order to ensure continued interest of the borrowers/promoters in the enterprise it is

always desirable that appropriate contribution by way of margin is brought in by them.
An indicative list of the margin requirements is given in the 'Annexure III', keeping in
mind the aspects discussed in succeeding paragraphs.

Fund based limits : In case of funded limits, the amount of margin requirements may
be decided taking into account the purpose of the advance, size of the limit, the nature of
the facility, the experience of the promoters, the risk perception, etc. Margin is also
stipulated to take care of price fluctuation in the security and to protect the interest of
the bank for realising its dues fully. Generally margin would be in the range of 15% to
50%. Lower margins may also be considered by the sanctioning authority, bringing out
the justification for the same in the proposal. Nil margins may be considered for self
liquidating facilities like bill discounting under L.C.s, discounting of bill co-accepted by
another Bank etc.

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Non-fund based limits: In case of non-funded limits we may generally consider a

minimum margin of 20%. The sanctioning authority may consider lower margins taking
into account the nature of the underlying transaction.

Margin requirements may be relaxed where the borrower offers suitable collateral
security such as pledge of Bank's term deposit receipts or marketable shares, equitable
mortgage/hypothecation or pledge of applicants personal immovable/ movable
properties.

In case of lending against certain categories of securities, like commodities falling within
the purview of Selective Credit Control, directives of RBI, the specific margins
prescribed are to be adhered to (presently buffer stocks of sugar and unreleased stocks
of sugar with sugar mills representing levy sugar are under Selective Credit Control).

Margin requirements
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Purpose of finance Facilities normally considered Principal Security Margin

For acquiring land and Term Loan Equitable mortgage by deposit of title 15% to 50%
construction of shed/factory deeds. Legal mortgage where
building thereon or for purchase equitable mortgage is not possible.
of shed in Govt./co-op. Industrial
societies/ estates Clean Term Loan (where premises Pledge of share certificate 33 1/3%
are in co-operative industrial
societies/estates but mortgage can
not be created)

For acquiring movable plant and L/C (particularly in the case of Depends on terms of sanction; usually 10% to 20%
machinery and/or road transport imports). cash margin or pledge of FDRs.
vehicles for own use i.e. for
transporting raw Term Loan and Demand Loan Hypothecation of movable plant and 15% to 50%
materials/finished products, Jigs, machinery and/or road transport
Dies, tools, equipment etc. vehicles acquired for own use.

Deferred Payment Guarantee (as NIL

under Bill Rediscounting Scheme of
SIDBI/IDBI)

For purchase and holding stocks L/C (particularly in the case of Depends on terms of sanction usually 10% to 20%
of raw materials, bought-out imports). cash margin or pledge of FDRs.
components, stores, spares, etc.
Cash Credit Pledge/Hypothecation of stocks 15% to 50%

Acceptance of Usance Bills (As under Pledge/Hypothecation of stocks NIL

RBI’s New Bill Market Scheme)

Against stocks of work-in- Cash Credit Hypothecation of relative stocks 15% to 50%
process and semi-finished goods

Or financing inland sales Cash Credit Hypothecation of Book Debts 30% to 50%
receivables
Documentary Bills Purchase (D/P) Pledge of R/R, L/R etc NIL to 10%

Documentary Bill Discount (B/D) NIL to 10%

Documentary Bill Purchase (D/A)

Government Supply Bills Purchase 10% to 30%

For execution of export orders Packing Credit 10% to 25% of

(Pre-shipment export finance) (a) Export Trust Receipt L/C, firm order, or
(b) Hypothecation of stocks of the value of
(c) Deposit of irrevocable letter of goods purchased.
credit

For financing export sales Pledge of Bills of lading or air-freight NIL to 10%
receivables (Post-shipment Foreign Bills Purchase D/P consignment note
export finance)
Foreign Bills Purchase D/A Clean NIL to 10%

For guaranteeing repayment of Performance guarantee Depends on terms of sanction; usually NIL to 30%
third party loans or performance cash margin or pledge of FDRs
obligations (as in respect of sales
tax, excise duty, customs duty,
etc.)

Determination of Rates of Interest

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For fund-based credit facilities, the directives of Reserve Bank of India from time to
time would apply. For certain categories of credit like export credit, DRI advances, etc.
administered rates of interest are to be charged. Presently, Banks are required to fix
Bench Mark Prime Lending Rate (BPLR) taking into consideration cost of funds and
transaction costs. Bench Mark Prime Lending Rate (BPLR), and spread over the same
may be continued to be determined by Asset-Liability Management Committee (ALCO)
on the basis of notes submitted by Credit Department and confirmed by the Board, in
keeping with the existing practice. Bank is also permitted to offer Rates of interest
below BPLR rates to creditworthy borrowers including public enterprises on the lines
of a transparent and objective policy approved by the Board. In tune with market
realities, lending under Sub BPLR levels may be undertaken selectively as per policy
guidelines in place and reviewed from time to time.

BPLR would be equivalent to the aggregate of cost of funds and cost of capital plus,
subject to money market conditions, a suitable risk premium charge, etc. The BPLR
would be applicable to the borrower enjoying financially and operationally the best
health. For others, the interest rate would be suitably stepped up in stages, as per the
Credit/Risk Rating awarded to that customer. The difference between two consecutive
stages, between "AAA" (LC1 to LC2) and "AA" (LC3 to LC4) as also "A" (LC5 to LC6) and
"B" (LC7 to LC10) reflecting the higher risk profile of the borrower may be
varied/determined at the time of change in BPLR.

The Chairman & Managing Director and in his absence, the Executive Director will be
the highest authority to relax/ quote any rate of interest subject to the provisions laid
down by RBI regarding charging of interest for advances granted against particular
security/ purposes/facilities.

Borrower Specific Rates

The sanctioning authority would approve of the Credit Rating for the customer, which
in turn would determine the rate of interest to be charged on the fund based facilities,
commission levied on non-fund based facilities, etc. to the borrower. This would be in
keeping with the rates of interest prescribed by Head Office in this regard from time to
time. Where Credit Rating is not applicable, the interest rate prescribed for advance
against particular security, facility, scheme, etc. should be charged.

Relaxations/Concessions

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At times rates of interest lower than the rate of interest applicable as per the Cedit
Rating of the borrower/Scheme/Facility, etc. may have to be offered taking into
consideration the overall value of connections of the borrower, i.e. ancillary business
given, conduct of account, availability of tangible security, other special features of the
customer such as Group connections, potential for good earnings in the future, overall
reputation of the customer in the market etc.

In such cases the Chairman and Managing Director may permit a delegatee of the rank
of Zonal Manager and above to approve of a lower rate of interest upto a predetermined
extent backed by proper reasons/justifications.

Thus the possibility of two customers enjoying the same risk rate, being charged
different interest rates is not ruled out. As the rate of interest charged directly affects
the Bank’s profitability, it would be our endeavour to charge the best rates of interest
that the traffic can bear.

RISK RATING

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The assessment of financial risks would be made on the basis of the analysis of the
performance of the borrowers as obtained from the last audited balance sheet/profit &
loss account. Additionally, the trends for the past 2-3 years may be considered to give a
dynamic character to the variables selected.

A. Financial Profile-Static Parameters

1. Current Ratio
The benchmark Current Ratio would be determined for accepting any proposal for
financing. In order to recognize value of owned funds/long term sources of finance; we
may progressively increase the marks for higher levels of current ratio than the
benchmark.

2. Debt Equity Ratio

The ratio of Total outside liabilities to Tangible net worth is an indicator of gearing. We
may allot full marks for benchmark D.E.R. No marks may be allotted for high ratios.
While financing specific industries where higher level of debt/equity ratio is permitted
by RBI/Govt./Bank (industries such as NBFCs, Shipping etc), marks allotted to be
suitably modified to incorporate such relaxations.

3. Profitability (Gr.Profit i.e. PBD (after tax)/Net sales)

As profit is the source from which all debts are to be ultimately repaid and which also
provides funds for further growth, we would give adequate weightage to this
parameter. The ratio of cash profit after tax vis-a-vis net sales will be the criterion.

4. Interest Coverage Ratio

With the revised norms on income recognition and provisioning for non performing
assets, timely servicing of interest has assumed great importance. Interest coverage
ratio denotes the ability to service the interest and hence it would be given adequate
weightage.

5. Return on Capital Employed

Profit earned by a unit is the function of the total capital employed in the business. As
the sources of funding will determine the profit at net level, we may consider adopting
gross profit (before interest & depreciation) vis a vis the total capital employed,
inclusive of borrowed funds. A benchmark level of ratio would be determined for
allotting marks.

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B. Dynamic Financial Profile-Trends/Historical: It is recommended that comparison

of financial data over a period of 2-3 years with the past performance, as also the
Industry averages would be carried out. While comparison with the industry averages is
ideal and has to be done in due course, the suggestion cannot be immediately
implemented as the data gathering machinery is not in place. Besides the limitations at
present would be;

i. Availability of data relating to gamut of industries financed/to be financed so that the

risk rating can be put to use.
ii. Reliability and updatability of data,
iii. Comparability (comparison with units of similar size in the industry.

Till the infrastructure in this regard is in place, we may for the present compare the
unit’s own absolute figures/ratios to the trends as observed for the past 2-3 years.
Marking pattern would be determined for improvement in the parameters, same level
of financials and slippages. Once Economic Intelligence Wing is set up and we have
collated the industry data, we may additionally compare the data to the industry level
averages and revise the rating system. The trend comparison will give an element of
dynamism to the financial risk assessment.

C. Industry Risk Profile

The environment in which the Company operates needs to be considered while taking a
decision to finance its activities. While overweighing importance will have to be given to
these risks in case of new projects/new accounts in future, we will have to also consider
these risks while increasing the exposure/reviewing the existing limits. At present the
`negative` or restrictive list of industries is arrived at only as a response to experiences
already obtained. It is time that we create a system for more dynamic assessment of
such risks which enable us to predict the events than reacting to it. This will be in place
when Economic Intelligence is beefed up. Meanwhile we may consider the following
factors as industry risks.

1. Competition and Market risks (Demand/supply position, Market Share, level of

competition, etc.)
2. Product risk (Cyclical/consumer/durables/Niche market/specific product, etc.)
3. Technological status (Collaboration factor, Obsolesce factors, etc.)
4. Availability of inputs (Raw Material/Labour/Power)
5. Susceptibility to intervention from Govt. (Protection available through tariff
structure, regulatory framework/Administered price mechanism, taxation, etc.)

D. Management Risk Profile

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With the opening up of the Economy and the requirement of large capital funds, the
performance of various reputed groups/Management has not been very satisfactory.
The perceived level of comfort in financing companies belonging to large groups has
been replaced with concern over questionable management practices from the lenders
as well as investors. The management aspect therefore assumes greater significance. It
is, therefore, suggested that Management risks may be evaluated from the angle of
integrity, experience, delegation, professionalism and the capital market perception
towards the management. While these will be overriding factors in considering new
projects, we may also give due weightage while considering review/enhancements etc.

E. New Risk Rating Models

Bank has reviewed the existing guidelines as enumerated above in consultation with
ICRA and new models were approved in the Board Meeting dated 04.02.2005 which are
as follows:

• Large Corporate Model (all credit exposures on domestic corporates including

multiple banking, consortium advances ECBs and Syndicated Loans) (Fund/non-fund
based limits Rs.5 crores and above or Turnover over Rs.50 crores)
• Mid-segment Model (Fund/non-fund based limits of Rs.1crore and above but not
exceeding Rs.5 crore & Turnover below Rs.50 crores)
• SBS (including SSI up to the limits specified) Model (Fund/non-fund based limits of
Rs.10 lac and above but not exceeding Rs.1cr.).
• Star Home Loan (Retail) including Star Mortgage Loan
• Star Personal Loan (Retail) including Star Holiday & Star Autofin.

The Corporate Model and SBS model have already been rolled out for implementation.
As a transition arrangement, the ratings are denoted with existing as well as revised
(arrived with new models) in the appraisal notes. The position will be reviewed by Risk
Management Department as and when new models are stabilized.

F. Contingent Risks

1. The off balance sheet items like pending litigations, guarantees issued on account of
other group Companies, likely effect of foreign currency liabilities contracted etc. have
the potential to attain serious proportion in due course. These risks have therefore been
built up under Contingent Risk parameters.

2. The Credit Risk Rating pattern described above would be applicable to all existing
companies, whether already banking with us or not
3. The approach is expected to ensure that risk assessment of each unit on its
performance only. To ensure prompt compliances, we may adopt as standard covenant,
application of additional/higher rate for disbursements pending compliance of
stipulations relating to security, putting a time cap on this accommodation.

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4. Relationship with the client - The parameters suggested above do not give weightage
for the existing relationship of the client with the Bank. These factors cannot be ignored
in case of existing clients, particularly in the small and medium sector. It is, therefore,
suggested to incorporate weightage for relationship in case of existing companies on the
following lines.

i) Fee Based Income from the Company. (Net of concessional facilities)

ii) Deposits other than margin money deposits.
iii) Collateral Cover
iv) Satisfactory track record of compliances of
a. Security Covenants
b. Financial Covenants
c. Non Financial Covenants

Based on the above broad pattern, detailed system of Credit Risk Rating would be
devised and operational instructions would be issued there under from time to time.

CREDIT RATING (SBS MODEL)

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Introduction of New Credit rating Model 'SBS Model

Head Office has recently introduced a new rating model for the limits between Rs. 10 lac
and less than Rs.1 core. This new model should be used for all new / review of limits.
While preparing review of the accounts, branch should also carry out the rating exercise
based on the new rating model for annual accounts for the last two years i.e. 2002-03
and 2003-04 in addition to 2004-05.

The above model will be applicable to all borrowers with aggregate limits less than Rs.
1 crore Small Business and Services (SBS) obligors who are involved in Trade and
Services and manufacturing with aggregate limits between Rs.10 lacs to less than Rs.1
crore. Small Scale Industries (SSI) accounts with aggregate limits between Rs.10 lakhs
and less than Rs.1 crore.

The following advances will not be covered by the model -

 All advances up to Rs.10 lacs (fund based +non fund based)

 Certain Agriculture/Other priority sector advances.
 Advances against deposits/ NSC/LIC policies/Relief bonds etc.
 All Staff loans.
 All other personal loans. For Housing Loans, separate model has to be applied
and will be provided to branches shortly.
 Education Loans.

The Model is based on calculating risk weights for Financial, Management and Business
Score and is risk graded on a 1 to 10 scale as specified in the score sheet. Branches
should use only the excel format for rating. Incase branch has not been provided with
excel software, the rating sheet should be used with manual calculations. A composite
rating totaling up above three risks will be calculated and assigned to the account.

The risk grade indicates: -

SBS 1 to SBS 3 Good quality credit

SBS 4 to SBS 6 No immediate concern
SBS 7 Require intensive monitoring
SBS 8 to SBS 10 NPA/could turn NPA over the medium term

The following risk grades are to be treated as minimum grades for considering sanction
of advance to a borrower-

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For SBS borrowers, an entry grade of SBS 5.5 (total score of 196)
For SSI borrowers, an entry grade of SBS 5.0(total score of 180)

For charging interest to the borrowers, where the interest is linked to credit rating the
process is as under:

Grade Quality Representation Spread applicable

SBS 1 to SBS 3 Good quality credit As applicable to existing
‘AAA’ rated accounts
SBS 4 to SBS 6 No immediate As applicable to existing
‘AA’ rated
SBS 7 Require intensive monitoring As applicable to existing ‘A’
rated accounts
SBS 8 to SBS 10 NPA/Could turn NPA over As applicable to existing ‘B’
the medium term rated accounts

The following guidelines are to be adhered to during the credit rating exercise-

Aggregate of both FB+NFB limits to be taken into account for applicability of model.
Borrowers enjoying only NFB will also be covered.

All new accounts will also have to be rated. In case of new units, the quantitative
parameters (financial ratios) will be based on realistic projections and the qualitative
parameters (like management quality, business/industry factors) will be completed
wherever applicable.

The rating will be completed by the credit proposal preparing officer (level 1)-front
office. All signatories to the credit proposal will countersign the rating sheet. All
authorities recommending the proposal including the Relationship Managers at various
levels and supervisory staff at controlling offices will in their note specifically mention
confirmation of the Credit Rating exercise or otherwise. Credit rating will be
calculated /confirmed during the Loan Review

The frequency can be changed in case of need to once in six months even in smaller
accounts. Credit rating exercise to be undertaken in case of any major
event/report/development etc. Credit Rating should invariably be mentioned in all
related correspondence/reports/ audit report etc. Pricing will generally be according to
the rating assigned.

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All rating sheets where there is a downward rating (except marginally) should be
commented upon in detail in the covering letter/memo and be exhaustive enough to
come to a decision on further exposure.
Branches are expected to maintain data on rating wise classification of borrowers.

DETAILS OF THE MODELS :

This model uses three components viz. Financial, Management and Industry parameters
which are given different weightings as detailed below and converted into a risk score
by multiplying the factor tier by the respective weight assigned to that factor.

Components Weightage
Financial Risk Score 24%
Management Risk Score 52%
Business Risk Score 24%

The aggregate score is then used to arrive at the final grade of the borrower.

A)Financial risk score

The financial risk score is an objective measure as under;

1. Sales growth
2. Profitability: PBITDA/Sales
3. Leverage: TOL/TNW
4. Liquidity: Current Ratio
5. Coverage: [a] DSCR.
[b] Interest Coverage

Each parameter is filled in by considering 1 as the best tier and 4 as the worst tier.
Each financial factor is given a weightage of four percent.

B) Management Risk Score:

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Management factors Sub factors Sub factors

Management Character Diversion of Funds 4

Integrity 4
Business Commitment 4
Management Capacity Financial Strength 4
Competence 2
Business Experience 2
Internal Controls 2
Employee Quality 2
Management Succession Successor Identification 4
Successor Preparedness 4
Management Reputation Business Loan History 4
Credit Track Record 4
Firm's age 8
Reputation with Customer 4
and suppliers

Total 52

C) Business Risk Score

Business Factors Weightage

Customer Quality and Concentration 4
Supplier Quality and Concentration 4
Impact of competition on GP margins 4
Sales trend (product) 4
Regulatory/fiscal risk - Impact of duties 4
(Product)
Technology dependence (product) 2
Environmental impact (product) 2
Total 24
Aggregate fund based/non-fund based limits of Rs.1 crore and less than 5 crore (for
traders). and Aggregate limits over Rs.2 lakhs & less than 5 crore where they are
proposed to be taken over from another bank (for traders)

Score obtained and rating to be assigned –

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Score obtained Rating to be assigned

80% & above AAA
65% to 79% AA
50% to 64% A
Below 50% B

This rating process basically attempts to quantify the risks that are being inherited by
virtue of lending to a customer. It is understood that the rater's own judgment and
experience plays an important role and subjectivity cannot be eliminated altogether. It
is, therefore, necessary that the rater should bear in mind the qualitative description of
each rating and ensure that object of the process is not lost.

AAA: Quality of lending is considered to be high and risk is at its minimal. Probability of
default and perceived loan loss is minimal. Historically, it is recorded that the borrower
is maintaining liquidity and financial strength consistently for the last 3 to 4 years.
Business is having enough potential to service the debt and interest thereon.
Management is known for sharing the factual position of business happenings with
Bank and honoring their commitments in time. Risk mitigators are sound enough to
safeguard Bank’s interest in the unlikely event of default.

AA: Well established borrowers with financial liquidity, strength and stability. The
probability of default and risk perception among this group of clients is a little higher
than that of AAA borrowers. They share the business results freely with the Bank and
are known to honour their commitments in a reasonable time. Risk mitigators’ value is
lower than in case of AAA customers.

A: This group belongs to the lower end of quality range. Their financial liquidity,
financial strength and stability are relatively weak. Lending to such borrowers is, no
doubt, sound but for temporary disruptions. More likely to be affected by fluctuation in
business cycles and thereby may look for intermittent support by way of additional
funds etc. They demand for constant monitoring.

B: Borrowers of average liquidity, financial strength and stability. Unless they are with
us for long with satisfactory dealings, it cannot be said that they are risk free.

Conclusion

Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The
funds of depositor’s i.e. general public are mobilized by means of such advance
/investment. Thus it extremely important for the lender bank to assess the risk
associated with credit; thereby ensure the security for the funds deposited by the
depositors.

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This project revolves around trade finance and a detailed study of credit appraisal in the trade
finance market.

In BOI the credit appraisal is done by thorough study of the project which involves
following:

1) Evaluation of Management: A detailed study about the promoters is carried out in

order to ensure promoters are experienced in the line of business and are capable to
implement and run the project

2) Technical Feasibility: A detailed study about the technical aspects is done to

determine the technical soundness of the project

3) Financial Viability: A detailed study relating to financial viability of the project is

done; thereby ensuring that project will generate sufficient surplus to repay the lan
installment and interest

4) Risk analysis: It determines the risk associated with the project this is done by
performing a Sensitivity analysis and Credit Rating. Credit rating,provides rating for
various parameters like management, financial, market and so, thereby determine the
credit worthiness of the borrower
5) It is on the basis of the credit risk level, collateral securities to be given by the
borrower are determined.

This shows Bank of India has sound system for credit appraisal.

Bank of India, Mid Corporate is one of the largest public sector banks in the country and is a
major player in the trade finance market. This project gives a detailed overview of the legal and
technical aspects of trade finance and correlates economic and financial theory with the
practical aspects of work. Overall this document helps in analyzing the different issues related
to trade finance and applying such concepts to real life situations.

Limitations of the study

 The selected project is massive in itself, in order to gain a clear understanding of the
trade finances mechanism, time is the biggest constraint and the toughest challenge of

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the project is to understand the International Trade Finance, Risk Management and
credit appraisal within this small period of time.

 Many documents, information’s and financial statements which would have aided us to
implement the project better are not available as they are highly confidential and are not
available as per the rules and regulations of the bank.

 Most of the transactions relating to the trade finance are implemented through
specialized software’s like Finacle, a core banking solution software’s. But as per the
company’s rule only the employees of the bank have the right to use the software.

 Since most of the trade credit sanctioning is done in the head office of the bank in
Mumbai, it prevents us from gaining a clear understanding of the policies of the bank
with respect to financing of international trade.

 There is complete reliance on secondary research data.

Bibliography
1. Books:

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i) C. JEEVANANDAM, 2010. FOREIGN EXCHANGE PRACTICE, CONCEPTS & CONTROL.

New Delhi. Sultan Chand & Sons.

ii) PAUL R. KRUGMAN and MAURICE OBSTFELD, 2003. International Economics

Theory and Policy, SIXTH EDITION. New York. Pearson Education International.

iii) GHASSEM A. HOMAIFAR, 2004. Managing Global Financial and Foreign

Echange Rate Risk. New Jersey. Wiley Publication.

iv) JOHN C. HULL, 2006. OPTIONS, FUTURES, AND OTHER DERIVATIVES, SIXTH
EDITION. New Jersey. Pearson Education Inc.

v) Manuals and journals of Bank of India

2. From Websites:

i) Export Import Policies of India,

Link: http://www.eximpolicy.com

ii) Reserve Bank of India,

Link: http://www.rbi.org.in

iii) Ministry of Finance, Governement of India,

Link: http://www.finmin.nic.in

iv) Director General of Foreign Trade, Governemnt of India,

Link: http://dgft.gov.in

v) Pages from Yahoo,

Link: http://yahoo.finance.com

vi) Indian Chamber of Commerce,

Link: www.iccwbo.org

vii) Foreign Exchange Delears’ Association of India,

Link:www.fedai.org.in

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