Manual Sme

ROL E GU I D E CU M CE RT I F I CATION MA NUAL
CP SME CREDIT LEVEL 1 - 2020

For internal circulation only
FOREWORD
Dear Role Holder,
Banking Industry is witnessing changes at an unprecedented pace. It has, therefore become

imperative that we continuously update and upgrade our skills relating to our profession. Each
one of us should not only understand his/her role and responsibilities but also
continuously equip oneself with latest guidelines in related areas. This will improve
professional effectiveness and also lead to enhanced customer satisfaction.
With these objectives in mind, Bank has introduced role-based certification programs for
employees across all levels.
We, at STU, have made an effort in this direction by compiling a Role Guide cum Certification
Manual which will provide insight into the role you are currently performing. This booklet may
be referred to whenever you need clarity in your day to day working.
We are confident that this manual will provide you conceptual clarity and also help in
mitigating associated risks.
We wish you all the best for a successful and enriching journey in your current role.
With Best Wishes,

Chief General Manager (STU)
INDEX
Chapter Chapter Name Page No.
1 POLICY MATTERS 01
2 SME DELIVERY MODEL 67
3 PRE SANCTION CREDIT PROCESS 83
4 A TYPES OF BORROWERS 126
B VALUATION OF ASSETS
C TIR
D SME DOCUMENTATION
ECREATION OF EQUITABLE MORTGAGE
FCERSAI
5 ANALYSIS OF FINANCIAL STATEMENTS 171
6 OVERVIEW OF WORKING CAPITAL ASSESSMENT 214
7 TERM LOAN 254
8 CREDIT RISK ASSESSMENT AND CUE RATING 269
9 A LETTER OF CREDIT 300
BBANK GUARANTEE 313
10 PREPARATION OF PROPOSALS AND COMMON MISTAKES 351
OBSERVED IN PROPOSALS
11 SME ADVANCES PRODUCTS 373
12 POST SANCTION PROCESS 442
13 A IRREGULARITY : IDENTIFICATION AND REPORTING 484
BSPECIAL MENTION ACCOUNTS 490
C RESTRUCTURING OF ADVANCES 504
DNPA POLICY, IRAC AND PROVISIONING NORMS 515
E EXIT POLICY FOR STANDARD ASSETS INCLUDING SMAs 543
14 ASALE OF PROPERTIES UNDER SARFAESI ACT 554
B RECOVERY OF BANK DUES THROUGH CIVIL COURTS 567
C RECOVERY OF BANK DUES THROUGH DRTs 572
D SETTLEMENT OF DUES THROUGH LOK ADALATS 586
E COMPROMISE SETTLEMENT POLICY 590
F INSOLVENCY AND BANKRUPTCY CODE 2016 599
15 A EXPORT FINANCE 613
B IMPORT FINANCE 624
CHAPTER 1
POLICY MATTERS
The Loan policy, at a holistic level, is an embodiment of the Bank's approach to sanctioning of
loans, managing and monitoring credit risk, and aims at making the systems and controls effective.
It is guided by the highest standards of commercial prudence and ethical business practices. While
formulating the loan policy, the overall risk appetite of the Bank has been taken into consideration.
The loan policy provides a broad framework for management of the loan portfolio of the Bank with
emphasis on creating products and services as well as maintaining asset quality. It helps our
customers in achieving their goals and fulfilling the Bank’s vision ‘Be the Bank of Choice for A
Transforming India’.
The provisions of the loan policy are applicable to the domestic as well as international operations of
the Bank. Based on the Bank’s loan policy, the foreign offices have their own loan policies taking
into account the regulations and lending practices of the host country.
ORGANISATION OF BUSINESS
The Bank recognizes the need for a differentiated approach to marketing, risk management and
service delivery to different categories of borrowers. Taking this into account, different business
verticals have been created, and rules framed in regard to the type of the business that they will
normally handle. While the benchmarks and business rules are reviewed from time to time based on
administrative requirements, the business verticals are allowed flexibility so that issues relating to
customer convenience are taken care of.
Major verticals are:
1. Retail & Digital Banking Group (R&DBG)

2. Commercial Clients Group (CCG)
3. Corporate Accounts Group (CAG)
4. International Banking Group (IBG)
5. Stressed Assets Resolution Group (SARG)
6. Project Finance Strategic Business Unit (PFSBU)
7. Retail Loans in Personal Segment (PBBU/REHBU)
8. Agriculture Business Unit (ABU)
However, the following facility shall be exempted from the above norms, if availed on
Standalone basis:
i. Bills discounting limits against letters of credit (outside the ABF)
ii. e-DFS/WHR proposal.
iii. Builder Finance- (Residential Projects), up to certain approved limits.
iv. Portfolio Purchase of Asset Backed Securitisation for which separate policy is in
place.
Group Accounts: Group accounts should preferably be housed in one branch or, at the most, within
the vertical which has the highest exposure on the group. Based on business considerations,
DMDs/MDs of the two Business Verticals involved would jointly agree on migration of accounts
which cross the prescribed threshold limits. Retention of accounts at variance with the prescribed
threshold limits can be approved by the DMDs/MDs of Business Verticals concerned.
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A specialized structuring team is put in place to initiate shift towards ‘Originate to Distribute’ business
model. The structuring team will be a part of PFSBU. It will serve the structuring needs of all
Business verticals by playing the role of bringing different Business Verticals of the bank together –
CAG, CCG, IBG, GMU, etc., with focus on all new large proposals of high value corporates (>
Rs.1000 Cr from banking system).
DUE DILIGENCE, STATUTORY AND OTHER RESTRICTIONS ON LOANS &

ADVANCES
All credit proposals are subjected to due diligence processes in regard to the credentials of the
borrower, purpose of the loan, financial position of the borrower, need based requirement of credit
facilities for working capital and capital expenditure, capability to service the loans and security
offered. The loan proposals should normally be supported by a request letter/ application duly signed
by an authorised person of the borrowing unit. In case of renewal at existing level/reduced level, if
request letter is not available, arrangement letter/letter of continuity is to be exchanged with the
borrower(s) / guarantor(s).
Financial Due Diligence

i. The financials of the main company and its major associate / sister concerns should be
reviewed, as far as possible, on the basis of audited financials of the concerns on a common
date.
ii. Balance Sheet should be free from any material adverse remarks of the auditors. Any
adverse comments must be separately discussed in the evaluation / appraisal process.
iii. Verification of Income Tax, GST returns etc. must also be ensured.
iv. Authenticity of the documents/ reports/ certificates etc. issued by Chartered Accountants is to
be verified from the link https://udin.icai.org with UDIN and key field provided by the
certifying Chartered Accountants.
Dealing with Wilful Defaulters

Pursuant to the instructions of the Central Vigilance Commission for collection of information on
wilful defaults of Rs.25 lacs and above by RBI and dissemination to the reporting banks and FIs, a
scheme was framed by RBI with effect from 1st April 1999 under which the banks and notified All
India Financial Institutions were required to submit to RBI the details of the wilful defaulters. The
scheme was modified in May 2002, based on recommendations of Working Group on wilful
defaulters, which was also revised from time to time as per the recommendations of the Committee
on Data Format for Furnishing of Credit Information to Credit Information Companies and various
feedbacks received from different stakeholders.
No fresh limit / enhancement may be sanctioned. However, an authority not below CCCC/IBGCC
may approve renewal/ continuation of earlier sanctioned limits.
Bank’s approach towards extension of credit facilities to applicant companies, whose name
appears as defaulters in CICs reports, is as under:
Credit facilities to units whose name appears as defaulters in CICs
Existing Accounts:
a. The renewal / continuation of the limit at the existing levels may be considered by the sanctioning
authority based on proper Justification/ mitigation/Corrective Action plan provided.
b. Normally, no additional (including ad-hoc / enhancement) facilities are to be sanctioned to the
applicant company till the name is removed from the defaulters' list. However, enhancement/
additional facilities may be considered by the authority not below RCCC for proposals below
RCCC. For RCCC and above, it will be the Sanctioning Authority. In such cases, the reasons for
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default/ continuing nature of default during past 12 months should be critically examined and based
on justification/ mitigations provided, a view may be taken on a case to case basis.
New Connections: Not to be considered till the name of the unit is removed from the defaulters'
list and the reasons for the default should be ascertained and satisfied.
Bank’s approach towards extension of credit facilities to applicant companies, whose proprietor/
Partners/ Directors (excluding Nominee/ Professional/ Honorary/ Independent/ Elected)/ guarantor’s
names appear as defaulter on account of loans/ credit card payments, in their
personal/individual capacities is as under:
Existing Accounts:
a. The renewal / continuation of the limit at the existing levels may be considered by the sanctioning
authority based on proper Justification/ mitigation/Corrective Action plan provided.
b. Normally, no additional (including ad-hoc / enhancement) facilities are to be sanctioned to the
applicant company till the name is removed from the defaulters' list. However, enhancement/
additional facilities may be considered by the authority not below RCCC for proposals below RCCC.
For RCCC and above, it will be the Sanctioning Authority. In such cases, the reasons for default/
continuing nature of default during past 12 months should be critically examined and based on
justification/ mitigations provided, a view may be taken on a case to case basis.
New Connections: Not to be considered till the name of the unit is removed from the defaulters' list
and the reasons for the default should be ascertained and satisfied.
Non-Cooperative Borrowers
Definition: A Non-Cooperative Borrower is one who does not engage constructively with the Bank,
defaulting in timely repayment of dues while having ability to pay, thwarting Bank’s efforts for
recovery of their dues by not providing necessary information sought, denying access to assets
financed/collateral securities, obstructing sale of securities, etc. In effect, a Non-Cooperative
Borrower is a defaulter who deliberately stone walls legitimate efforts of the Bank to recover their
dues.
Authority Structure: Bank has prescribed a two-tier authority structure for

classification/declassification of Non-Cooperative Borrowers. The first tier is responsible for
classification/declassification and the second for review of such classification/declassification.
Statutory and Other Restrictions

The regulator provides a framework of the rules/regulations/instructions on statutory and other
restrictions on loans and advances which need to be implemented and adequate safeguards adopted
by the Bank/ FOs.
Advances against Bank's own shares

In terms of Section 20(1) of the Banking Regulation Act, 1949, the Bank cannot grant any loans
and advances on the security of its own shares.
Credit facilities are extended for financing genuine commercial activities. Any speculative purposes
and/or any unlawful activity shall not be considered for financing.
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Restrictions on Holding Shares in Companies: While granting loans and advances against shares,
statutory provisions contained in Sections 19(2) and 19(3) of the Banking Regulation Act,
1949 must be strictly observed.
19(2): The Bank shall not hold shares in any company, whether as pledgee, mortgagee or absolute
owner, of an amount exceeding thirty per cent of the paid-up share capital of that company or thirty
per cent of its own paid-up share capital and reserves, whichever is less.
19 (3): Bank Shall not hold shares, whether as pledgee, mortgagee or absolute owner, in any
company in the management of which any managing director or Manager of Bank is in any manner
concerned or interested. Reporting mechanism for the above is put in place.
Restrictions on Credit to Companies for Buy-back of their Securities

Bank shall not provide loans to companies for buy-back of their shares / securities.
Application of the Guidelines in case of Consortium Arrangements

In case of consortium arrangements, the above norms relating to grant of credit facilities to
relatives of senior officers of the Bank will apply to the relatives of senior officers of all the
participating banks.
Scope of certain expressions

i) The scope of the term ‘relative’ is Spouse, Father, Mother (including step-mother), Son (including
step-son), Son’s wife, Daughter (including step-daughter), Daughter’s Husband, Brother (including
step-brother), Brother’s wife, Sister (including step-sister), Sister’s husband, Brother (including step-
brother) of the spouse and Sister (including step-sister) of the spouse.
ii) The term ‘Senior Officer’ will refer to -
a. any officer in Senior Management level in Grade IV and above in a nationalised bank, and
b. any officer in equivalent scale – in the State Bank of India and in any banking company
incorporated in India.
iii) The term ‘credit facility’ will not include loans or advances against
a. Government securities
b. Life Insurance policies, Fixed or other deposits
c. Temporary overdrafts for small amount i.e. upto Rs. Twenty five thousand and casual
purchase of cheques up to Rs. Five thousand, at a time.
d. Credit facility will also not include loans and advances such as housing loans, car loans,
consumption loans, etc. granted to an officer of the Bank under any scheme applicable
generally to officers.
e. The term ‘substantial interest’ shall have the same meaning assigned to it in Section
5(ne) of the Banking Regulation Act, 1949, as under:
“Substantial interest”
i)in relation to a company, means the holding of a beneficial interest by an individual or his spouse
or minor child, whether singly or taken together, in the shares thereof, the amount paid upon which
exceeds Rs. 5 lacs or ten per cent of the paid-up capital of the company, whichever is less;
ii)in relation to a firm, means the beneficial interest held therein by an individual or his spouse or
minor child, whether singly or taken together, which represents more than ten per cent of the total
capital subscribed by all the partners of the said firm.
Restrictions on Grant of Financial Assistance to Industries Producing / Consuming

Ozone Depleting Substances (ODS)
Bank shall not extend finance for setting up of new units consuming/producing Ozone Depleting
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Substances (ODS) and to small/medium scale units engaged in the manufacture of aerosol units
using chlorofluorocarbons (CFC) and companies not complying with environmental laws prevailing
in the country/host country.
Restrictions on Advances against Sensitive Commodities (#) under Selective Credit Control
(SCC)
i. Bank is free to fix prudential margins on advances against sensitive commodities. However,
in case of advance against Levy Sugar, a minimum margin of 10% will apply.
ii. Valuation of sugar stocks
a. Unreleased stocks of the levy sugar charged as security shall be valued at levy price fixed by
Government.
b. The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the Bank as
security shall be valued at the average of the price realised in the preceding three months
(moving average) or the current market price, whichever is lower; the prices for this purpose shall
be exclusive of excise duty.
(#) Commodities generally treated as sensitive in this context are: Food grains (cereals and pulses),
selected major oil seeds indigenously grown (groundnut, rapeseed /mustard, cotton seed, linseed and
castor seed, oils thereof, vanaspati and all imported oils and vegetable oils.
Restrictions on other loans and advances

Loans and Advances against Shares, Debentures and Bonds
Policy prescriptions covering Loans and Advances against Shares, Debentures and Bonds shall duly
reckon the regulatory general guidelines and specific restrictions in relation to Individuals, Share and
Stock Brokers, Commodity Brokers, Market Makers, Financing of IPOs, Financing of employees to
buy shares of their own companies, financing to meet promoters’ contribution to equity of new
companies, Advances against Units of Mutual Funds, Margin Trading, Acquisition of Equity in
Overseas Companies.
Arbitrage Operations
No credit facility directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges
shall be extended by the Bank.
Advances against shares to Individuals and other than individuals

Loans against security of shares, convertible bonds, convertible debentures and units of equity
oriented mutual funds to individuals from the banking system should not exceed the limit of Rs.10
lacs per individual if the securities are held in physical form, and Rs. 20 lacs per individual if the
securities are held in dematerialized form. Such loans are meant for genuine individual investors and
the Bank shall not support collusive action by a large group of individuals belonging to the same
corporate or their inter- connected entities to take multiple loans in order to support particular scrips
or stock- broking activities of the concerned firms. Detailed operating guidelines are provided in the
Manual on Loans and Advances.
The ceiling on single/borrower group exposure limits is not applicable:
i. In case of existing / additional credit facilities (including funding of interest and
irregularities)
ii. granted to weak/sick industrial units under rehabilitation packages.
iii. In case of borrowers to whom limits are allocated directly by the RBI for food credit.
iv. In cases where the principal and interest are fully guaranteed by the Government of India.
v. In case of Loans against Bank’s own Term Deposits, to the extent that the Bank has a specific
lien on such deposits.
vi. To exposure assumed on NABARD. The Bank will be free to determine the size of the
exposure to NABARD, subject to Board approval.
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Loans and advances to Real Estate Sector
While appraising loan proposals involving real estate, it has to be ensured that the necessary
approvals have been obtained from government / local government / other statutory authorities viz.,
RERA registration etc. for the project, wherever required. No deviation to be permitted in this regard.
Shell Companies: Bank shall not grant any advance to any company which is found to be a shell
company in terms of its features resembling to those as advised by AML CFT Department. The
guidelines with regard to treatment of shell companies issued by MCA/FIU/SEBI etc., from time to
time shall be complied with meticulously.
Restrictions on number of Layers of Subsidiaries:

The Guidelines issued by MCA on Companies (Restriction on number of layers) Rules 2017 which
states that on and from the date of commencement of these rules (20th September 2017), no
company, barring those exempted under the guidelines, shall have more than two layers of
subsidiaries. The Borrowal company (existing & proposed) will submit an undertaking in this regard
confirming that they are in compliance with the guidelines.
TAKEOVER OF ADVANCES
In the competitive and liberalised financial environment, it has become important for the Bank to
aggressively market for good quality advances. One of the strategies for increasing good quality
assets in the Bank’s loan portfolio is to take over advances from other Banks/FIs.
Laying down of uniform take-over norms in an international environment where financial products,
systems and risks vary from centre to centre is neither desirable nor feasible. Each Foreign Office
would thus lay down certain broad parameters in respect of takeover of accounts in their Credit
Policy Document. While laying down Centre specific norms, the Offices may keep in mind the
guidelines mentioned in the Bank’s loan policy.
Norms for Takeover of Advance Accounts

Careful selection of borrowers is essential to maintain asset quality. All credit proposals are
subjected to due diligence processes in regard to the credentials of the borrower, financial soundness
of the borrower, ascertaining need based requirement of credit facilities, capability to service the
loans and security offered etc. Besides these usual due diligence, some additional safeguards are
prescribed for takeover of advances. Accordingly, a set of norms/ guidelines for C&I, SME and AGL
(Agro based industrial activities) segments have been laid down for takeover of loans. These are being
reviewed from time to time. The Broader guidelines in this regard are as under:
Rating criterion
i) For exposure from Rs. 25 lacs - upto Rs. 50 crores/ upto USD 10 Mio or its equivalent (for FO):
[obtaining ECR is made mandatory only for exposures of above Rs. 50 crores/ USD 10 Mio or its
equivalent and it is optional upto Rs. 50 crores/ USD 10 Mio or its equivalent]
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Where ECR isnot Upto Rs. 10 Cr: The CRA of the borrower should be SB-7 or
available better, and the proposed total exposure must be backed by
minimum 75% Collateral Security.
Above Rs. 10 Cr and upto Rs. 50 Cr where ECR is not
available:
a. The CRA of the borrower should be SB-7 or better and
b. Incremental exposure, if any, must be backed by min. additional
proportionate Collateral Security with the existing Bank (except
cases where total exposure is backed by more than 100% collateral
Security).
Where ECR is available* CRA should be SB-9 or better and ECR should be BBB or better.
ii) For exposures above Rs. 50 crores/ USD 10 Mio or its equivalent:
Where ECR is not The CRA of the borrower should be SB-5 or better.
available
Where ECR is available* CRA should be SB-9 or better and ECR should be BBB+ or
better.
* Wherever Credit Rating Agency is changed, ECR is to be obtained from two rating
agencies and lower of the two ratings is to be considered.
4.1.3 Collateral Security: It must be ensured that the existing security with the Bank (from where
the account is being taken over) is maintained and no dilution in existing security coverage is
permitted for the amount taken over, by releasing the existing security charged to the existing
banks. In case Takeover is with enhancement/sanction of additional facilities, the collateral cover
for additional credit facilities sanctioned should be as per the norms prescribed by the Bank.
Substitution of existing security given to other Banks may be permitted for justifiable reasons by the
sanctioning authority, provided the realizable value of the security offered is not less than the value of
existing security with other banks. Specific approval of appropriate authority will need to be obtained.
EXPOSURE NORMS AND CREDIT RISK CONCENTRATION
While prudential guidelines for avoiding concentration of risk serve as broad indicators, continuous
evaluation of other elements such as market conditions, government policies, legal framework,
economic indicators, stock market movements, etc., is made to assess transaction risk intrinsic to a
single borrower, group of borrowers, segment of industry as well as to sectoral exposures in order
to formulate short term exposure restrictions where considered necessary. The Loan Policy
recognizes the need for measures aimed at better risk management and avoidance of concentration of
credit risk at the whole-Bank level and at the FOs. To this end, limits have been prescribed for
Bank’s exposure to single borrower, borrower groups, specific industry/ sector etc. RBI has recently
released a framework on large exposure on single borrower and close related group of borrowers. It
recognizes that the off-balance sheet exposures should also be subject to normal credit appraisal and
discipline.
Definition of Exposure
Exposure shall include credit exposure and investment exposure. The sanctioned limits or
outstandings, whichever are higher, shall be reckoned for determining the exposure to an entity.
However, in the case of fully drawn term loans, where there is no scope for re-drawal of any portion
of the sanctioned limit, the outstanding shall be reckoned as the exposure.
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Credit Exposure
i) All types of funded and non-funded credit limits,
ii) Credit Exposure on account of derivative products using credit conversion factor;
iii) Facilities extended by way of equipment leasing, hire purchase finance and factoring services.
Investment exposure
i) Investments in shares and debentures of companies
ii) Investments in PSU bonds
iii) Investments in Commercial Papers and similar commitments.
The ceilings on single / group exposure limits would not be applicable to existing / additional credit
facilities (including funding of interest and irregularities) granted to stressed assets under resolution.
Definition of Single/ Groups of Connected Counterparties

a. Single Counterparty: The exposures to a group of counterparties with specific relationships or
dependencies such that, were one of the counterparties to fail, all of the counterparties would very
likely fail. A group of this sort, referred to in this framework as a group of connected counterparties,
must be treated as a single counterparty.
b. Group of Connected Counterparties (GCC): Two or more natural or legal persons shall be
deemed to be a group of connected counterparties if the control criteria are satisfied i.e., one of
the counterparties, directly or indirectly, has control over the other(s). While assessing the control
relationship, the control relationship criteria is satisfied if one entity owns more than 50% of the voting
rights of the other entity. In addition, the other control criteria to assess connectedness are as under:
i. Voting agreements (e.g., control of a majority rights pursuant to an agreement with other
shareholders)
ii. Significant influence on the appointment or dismissal of an entity’s administrative, management or
supervisory body, such as the right to appoint or remove a majority of members in those bodies, or
the fact that a majority of members have been appointed solely as a result of the exercise of an
individual entity’s voting rights
iii. Significant influence of senior management (e.g., an entity has the power, pursuant to a contract
or otherwise, to exercise a controlling influence over the management or policies of another entity
viz., through consent rights over key decisions.
Further, the criteria specified in the extant accounting standards shall also be considered for
qualitative guidance while determining control.
Regulatory Guidelines (on Exposures and Relaxations / Restrictions)
Exposure norms: The regulator has prescribed the following caps, which the Bank shall comply
with at all times:
Prudential Exposure Norms.

Nature of borrower / exposure Cap on Exposure (Prudential
Norms)
Exposure Ceiling Limits in case of a Single Counterparty 20% of Bank’s Tier I Capital **
Exposure Ceiling Limits in case of a Group of 25% of Bank’s Tier I Capital
Connected Counterparties.
Exposure to a Single NBFC 20% of Bank’s Tier I Capital
Exposure to a Group of Connected NBFCs 25% of Bank’s Tier I Capital
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Note:
** In exceptional cases, Board of the Bank may allow an additional exposure of the 5% of
Bank’s Tier I Capital to a Single Counterparty.
Any breach of the above Large Exposure Limits shall be under exceptional conditions only and
shall be reported to RBI (DBS, CO) immediately and rectified at the earliest but not later than a
period of 30 days from the date of breach.
5.4 Large Borrower

Large borrower is defined as the sum of all exposure values of the bank to a counterparty or
a group of connected counterparties is equal to or above 10% of the Bank’s Tier- I
Capital. The aggregate exposure to all “large borrowers” should not exceed 800% of
Bank’s Tier I Capital. CRMD will monitor exposure under Large Exposure Framework
and put up review to RMCB at quarterly intervals.
5.4.1 In order to align the exposure norms for Indian banks with the BCBS standards, RBI
has issued guidelines on Large Exposure Framework (LEF) to be implemented with effect
from 01.04.2019. Large exposure is defined as the sum of all exposures of a Bank to a
counterparty or a group of connected counterparties is equal to or above 10% of Bank’s
eligible capital base. i.e., Tier I capital (instead of total capital funds as hitherto).
Under LEF framework, an exposure to a counterparty will constitute both on balance sheet
(accounting value of exposure) and Off-Balance Sheet (by applying CCF with a floor of
10%) exposure included in either the banking or trading book and instruments with
counterparty credit risks. Business Units should look at this while taking exposure on
large borrowers. The proposed LEF norms (w.e.f. 01.04.2019).
Enhancing Credit Supply for Large Borrowers through Market Mechanism:

1.The Bank has to keep future incremental exposure to large “specified borrowers” within a
“Normally Permitted Lending Limit) (NPLL).
2. Specified Borrower: Means a borrower having Aggregate Sanctioned Credit Limit
(‘ASCL’) of more than:
a. Rs. 25,000 Cr at any time during FY 2017-18
b. Rs. 15,000 Cr at any time during FY 2018-19
c. Rs. 10,000 Cr at any time from April 1, 2019 onwards
The date on which the borrower becomes a specified borrower is termed as

reference date.
CRMD will monitor the accounts of Specified Borrowers under Enhancing Credit Supply
for Large Borrowers through Market Mechanism and put up review to RMCB at quarterly
intervals. Guidelines in this regard have been put in place.
Exposure on Single / Borrower Group

Based on market conditions, government policies, legal framework, economic indicators,
stock market movements, and ease of doing business, an internal exposure limit has been
set according to constitution of borrowing unit. The details of current exposure levels
prescribed are as under:
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Constitution of Maximum ceiling on Exposure prescribed by Bank (Excluding
Borrower facilities granted against specified securities)
Individuals as Maximum aggregate exposure of Rs.100 cr or its equivalent.
borrowers
Non-corporates Maximum aggregate exposure of Rs. 250 cr or its equivalent
($) The above ceilings will also be applicable to the aggregate of all facilities
sanctioned to partnership firms which have identical partners.
Corporates (#) As per the Prudential Exposure Norms prescribed by RBI (Refer 5.3.1).
Norms for the BankMaximum aggregate exposure is governed by prudential norms of RBI as well
Exposure and sharingas Internal Prudential Exposure Limits fixed by the Bank. With a view to
of exposure with diversifying exposure of the Bank to a particular company, the following
other banks norms may be followed.
Exposure Exposure limit set for the Bank

of
Bankingand
Below No Restrictions
sector
up to
Rs.500 cr
or its
equivalent.
Above Rs. 500 Cr
Single (Rs. In Cr)
Counterparty
External Maximum
Rating * CRA * Exposure # CRWA #
AAA 10,000 2,000

AA SB-1 to 6,000 2,000
A SB-5 4,000 2,000
SB-6 to
BBB SB-8 2,000 2,000
SB-9 &
Unrated/Belo SB-10 500
w BBB SB-11 &
below 250
*In the above table, Rating include both + (plus) or – (minus) signs.
*ECR or CRA whichever is lower shall be considered for exposure purpose
# Maximum Exposure or CRWA whichever is lower
#Group Borrowers: Maximum Rs. 30,000 Cr or 2% of Bank’s CRWA as on 31st March of
previous year, whichever is lower.
Note:
1. Exposure of the Borrower from the Banking System above Rs.500 Cr:
a. New Accounts: Consortium Arrangement is Mandatory. Minimum Share in
consortium shall normally be 10% of the total exposure from Banking system i.e.,
normally maximum 8-10 members.
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b. Existing Accounts: It is to be endeavored to bring such accounts under Consortium
Arrangement within a time period of 2 years, i.e. by 31.03.2021.
2. Norms for Bank’s Exposure and Sharing of exposure with other Banks (*):
a) ECR A & better: Normally not to exceed 60% and
b) Others: Normally not to exceed 40% of the total exposure of the borrower from the
Banking System.
3. The exposure to ECR below BBB/Unrated shall be limited to Max. Rs. 500 Cr. (also linked to
internal rating)- The product under schematic lending shall be guided as per the Scheme. Further,
Hurdle rate SB-10 has been prescribed under internal risk rating model for considering new
connection or enhancement in credit limits. In case account is having CRA SB-11 and worse,
subject to exceptions like availability of Central Govt. Guarantee (Sovereign Guarantees) and / or
availability of a Corporate Guarantee of parent / Group Company which should have a CRA rating
of SB-9 and better, necessary approval is to be obtained from the competent authority.
4. In case of SPVs/ Project funding where ECR is not available, ECR of Sponsor/ Parent or CRA of
SPV whichever is lower shall be considered for
5. Normally, the above exposure norms not to be exceeded. However, in exceptional
circumstances (Domestic/IBG Proposals), the exposures in excess of the above norms are to be
considered, the same is discussed and justified in the Proposal and specific template approval has
to be obtained.
6. Wherever exposure exceeds on account of downgrade of rating, the reason for downgrade to be
examined and required corrective measures to be put in place.
7. The review shall be put up by CRMD to ECCB on Quarterly basis.
*Exposure limit to Central PSUs with Maharatna/ Navaratna status or SPV promoted by
Central PSUs and Listed companies of the group identified by Bank from time to time shall be
governed by RBI Prudential Norms & Credit supply to Large borrower through Market
Mechanism and above cap will not be applicable. The identification and recommendation of
such companies/ groups for waiver shall be done by the respective vertical and approved by
CPPC.
$Non-corporates will include Partnerships, Trusts, HUFs, Associations and REIT (Real Estate
Investment Trust) if not listed on stock exchange.
#Corporates will include Companies, Societies, REIT if listed on stock exchange, Govt.
Departments, Institutions and Statutory Corporations and Limited Liability Partnerships (LLP).
5.5. For FOs, Ceiling for Non-Indian Corporate Group borrower shall be US$ 150 mio or its
equivalent for credit proposals falling within the discretionary powers of committees below
Corporate Centre Credit Committee (CCCC). (This is not applicable for Direct Exposure on
Banks and DFI’s in respect of which AGEL has been approved by ECCB). The deviations,
if any, necessitated for business considerations, would require specific approval of the ECCB.
Foreign Offices should, while fixing Single and Group Level Ceilings, take into account the
local regulatory guidelines in this regard for local assets. For India based Company, Domestic
guidelines shall be applicable.
5.6 Substantial Exposure Limit: With a view to mitigate credit concentration risk, the Bank has
fixed substantial exposure limits for the Large Borrower aligning with the regulatory prudential
exposure norms. Substantial Exposure Limits are not deemed as caps but are intended to serve as
triggers to Business Groups for closer monitoring. Therefore, breach of Substantial Exposure level
would not be construed as waiver. In respect of aggregate substantial exposures, CRMD would be
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monitoring Substantial Exposure norms on a quarterly basis. The aggregate exposure levels indicated
[at (ii) and (iii] below are the maximum.
Types of Substantial Exposure Stipulation (Exposure over and

above the following)
i) Large Borrower (Single Counterparty or Group of 10% of Tier I Capital
Connected Counterparty)
ii) Aggregate of substantial Exposures to Single Borrowers Not to exceed 300% of Tier I
Capital
iii) Aggregate of substantial Exposures to Borrower Groups Not to exceed 600% of Tier I
Capital
5.6.1 As different entities of a Single Group may be enjoying facilities from more than one SBU,
CRMD at Corporate Centre would serve as the nodal point to monitor the substantial exposures at
the whole-bank level. Reports on all substantial exposures will therefore be collated by the CRMD
and submitted for information at annual intervals to Central Board and at quarterly intervals to RMCB.
The periodic review is intended to serve as an internal control mechanism to prevent excessive
concentration of high value assets.
Further, the benchmarks will serve as a trigger to the respective SBUs for closer scrutiny.
5.7 Internal Prudential Exposure Limit (IPEL)

Bank has further set in place a framework on Internal Prudential Exposure Limits (IPEL) based on
Internal Credit Rating i.e. CRA ratings of Single Borrowers and Portfolio Quality Index (PQI) for a
Borrower Groups. As IPEL in all the accounts other than Maharatna or Navaratna with Credit rating
of SB1 to SB-5 and SB-1&2/PQI <=3, will be lower than the regulatory caps, these will also ensure
that regulatory Prudential limits are not breached. Notwithstanding this, in all proposals, exposure
of the company/group vis-à-vis the IPEL will be mentioned and discussed with a view to avoiding
any breach. The guiding principles of the framework are listed as under:
i) Internal Prudential Exposure Limits are the limits expressed as percentage of the Bank’s Tier I
Capital.
ii) Prudential Exposure limits as per regulatory guidelines will be the highest Internal Prudential
Exposure Limit in the Bank and will be made available to the borrowers in the highest CRA rating
band i.e. Maharatna or Navaratna with Credit rating of SB1 to SB-5 and SB-1 and SB2.
iii) Internal Prudential Exposure Limit is tapered down for lower ratings.
iv) Exposures- either new or by way of enhancements – exceeding Internal Prudential Exposure
Limit will require sanction of the ECCB.
v) Exclusions: The framework will not be applicable to the following cases:
a. Borrowers, to whom limits are allocated directly by the Reserve Bank of India for food credit, and
b. Loans against Bank’s own deposits to the extent that the Bank has a specific lien on such deposits.
5.7.1 CRMD will review compliance of IPEL norms in respect of Single and Borrower Group and
review shall be submitted to RMCB at quarterly intervals.
5.8 Exposure at Portfolio Level
5.8.1 Unsecured Exposure:
RBI has defined unsecured exposure as an exposure where the realizable value of the security
(primary plus collateral), as assessed by the Bank / approved valuers / RBI’s inspecting officers, is
ab-initio not more than 10% of the outstanding exposure. Security will mean tangible security
properly charged to the Bank and will not include intangible securities like guarantees, comfort letters
etc. The Bank has adopted the above definition and it has been decided to restrict unsecured
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exposure (Domestic + IBG) so defined to 25% of Bank’s outstanding total exposure (Domestic +
IBG). CRMD will submit quarterly reviews in this regard to the RMCB.
5.8.2 Term Loan Exposure:

The CRMD will review term exposures (loans with residual maturity of over three years) at half
yearly intervals with a view to ensuring that there is no Asset – Liability mismatch beyond the
permissible limits and appropriate ceilings may be fixed in case of potential mismatch breaching the
tolerance limits. The ALCO will decide the quantum of term exposures which can be taken in
various time buckets, in April & September each year. The tenor for scheme specific term loans
(e.g., Housing Term Loan, Education loans etc.) should be as per the approved schemes which can be
a maximum of 30 years. In other cases, it will be 20 years or life of the Project whichever is lower
(with a minimum tail period of 15%). The tenor is to be considered from the day of first drawdown.
Further, Average maturity should invariably be calculated for all the term loans individually
and mentioned in the template while seeking sanction from the Sanctioning Authority. It is not
applicable for term loans having EMI based repayment programme.
The average maturity of any term loan, including moratorium, normally should not exceed 10 years,
except loans under / Rehabilitation / Core Industry / Infrastructure / Renewable Energy Projects /
Securitization of Rent and Toll receivables.
Term Loans (loans with residual maturity of over three years) at any point of time should not in
aggregate exceed 40% of the total advances of the Bank. A trigger for review is set when this limit
reaches to 38 % of the total advances of the Bank. CRMD will put up the review to CRMC at Half
Yearly intervals.
5.8.3 Exposure to Real Estate Sector

Bank’s exposure to real estate including residential mortgages, commercial real estate and indirect
finance, etc., will not exceed 30% of the Bank’s total advances. The exposure to entities for setting
up Special Economic Zones (SEZs) or for acquisition of units in SEZs which include real estate
would be treated as exposure to Commercial Real Estate sector for the purpose of risk weight
and capital adequacy. Half Yearly review shall be submitted to ACB by CRMD.
5.8.4 Intra – Group Exposure

To contain concentration and contagion risks arising out of Intra Group Transactions of Exposure
(ITEs), certain quantitative limits on financial ITEs and prudential measures for the non-financial ITEs
have been imposed as under:
i) Exposure should include credit exposure (funded and non-funded credit limits) and investment
exposure (including underwriting and similar commitments). However, exposure on account of
equity and other regulatory capital instruments should be excluded while computing exposure to
group entities.
ii) Prudential Limits on Intra-Group Exposure:
I) Single Group Entity Exposure
5% of Paid-up Capital and Reserves in case of non-financial companies and unregulated
financial services companies
10% of Paid-up Capital and Reserves in case of regulated financial services companies.
II) Aggregate Group Exposure
i) 10% of Paid-up Capital and Reserves in case of all non-financial companies and unregulated
financial services companies taken together
ii) 20% of Paid-up Capital and Reserves in case of the group i.e. all group entities (financial and non-
financial) taken together.
[Intra-group Exposures exempted from the Prudential Limits (financial and non-financial) in terms
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of RBI guidelines to be excluded].
A quarterly report of Intra Group Transactions of Exposures (ITEs) of the Bank will be submitted
by the Enterprise and Group Risk Management Committee (EGRMC) to the Risk Management
Committee of the Board (RMCB).
5.8.5 Non Fund Based Exposure

Non Fund Based facility (ies) not to exceed 100 % Bank’s total fund based exposure. Review of
NFB facility to be carried out by CPMD at quarterly intervals, as hitherto.
5.8.6 Sectoral/ Industry Exposure

The Bank shall endeavor to restrict domestic exposure to a particular industry to a maximum of 15%
of the Bank’s total domestic exposure. Review shall be done by CRMD at yearly intervals or at a
lesser frequency if significant change occurs in the industry profile, as hitherto.
Further, considering the long gestation periods in the infrastructure sector, it is considered prudent
to cap exposure to that sector at 30 % of the Bank’s total domestic exposure. Any waiver is to be
approved by ECCB. Half yearly review shall be submitted to CRMC by CRMD.
FOs shall endeavor to restrict fund based and non-fund based exposure to a particular industry within
the ceiling of 15% of Bank’s total fund and non-fund based exposure. FOs may, after considering
the prevailing economic scenario and industry outlook as also host country regulations and Risk
Department (IBG) guidelines, workout industry wise threshold/ceiling accordingly.
Considering the risks involved in exposure to Commercial Real Estate (CRE) and Hospitality
Sectors, prior administrative approval for taking / continuing exposure under these sectors should
be obtained by FOs as per the laid down structure. Considering the high level of exposures to certain
industries / areas of business at certain centres, prudential exposure norms have been set for the FOs
concerned.
5.8.7 Industry Exposure settings and Monitoring of Industry Exposures

CRMD (Industry Research) conducts study of industries/ sectors, where the Bank’s exposure is
0.25% or above of the Bank’s total domestic exposure. It prescribes exposure ceilings for these
industries/ sectors along with outlook and policy prescriptions based on risk and performance of
portfolios in large / significant sectors, and issues advisories on a periodic basis for guidance of the
business verticals. As of now, CRMD (Industry Research) conducts study of 39 such
industries/sectors. Approved exposure ceilings are within the formula driven exposure limit called
Risk Adjusted Exposure Limits (RAEL) for each industry. CRMC has the authority to deviate from
the RAEL upto + 10 bps. Any wavier in the exposure ceiling beyond + 10 bps shall require approval
of RMCB. In case of IBG, the exposure reckoned for the purpose would be that in relation to Indian
Corporates lying within the identified industries/sectors.
A “Risk Committee (R Com)” at each important Overseas Centre, having representation of Credit
and Treasury Sections of the FO would study the market / environment on a regular basis to monitor
all risk exposure settings and compliance with control measures.
5.8.8 Monitoring of country exposure

The Bank is required to make provisions for country risk exposures as per RBI guidelines. The data
on country exposures is collected and monitored with respect to the country exposure limits at
periodic intervals by the CRMD. Fixing of the country exposure limits and adherence to the same
are reviewed and reported to the Board at quarterly intervals.
CRMD, while reviewing the country risk management policy and practices annually, assesses the
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status of compliance with the regulatory and internal limits, results of stress tests and the exit options
available to the Bank in respect of countries belonging to the “high risk” and “very high risk”
categories.
5.8.9 Capital Market Exposure

The Bank’s aggregate exposure to the capital markets shall not exceed 40% of its net-worth as on
March 31 of the previous year. CRMD, at quarterly intervals will undertake review of actual capital
market exposure under the ceiling of 40% and submit to ACB. Within the overall ceiling of 40%,
Bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds
and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] shall not
exceed 20% of Bank’s net-worth as on March 31 of the previous year. Also, within the overall ceiling
of 40%, the Bank’s exposure to stockbrokers shall not exceed 10% of its net-worth as on March 31
of the previous year.
5.8.10 Exposure to Factoring Services

Exposure under this activity should be restricted to 10 per cent of the Bank’s total advances as at the
close of the immediately preceding financial year.
5.8.11 Exposure to Indian Joint Ventures/ Wholly-owned Subsidiaries Abroad and

Overseas Step-down Subsidiaries of Indian Corporates:
i) While extending credit facilities to Indian Joint Ventures/ Wholly Owned Subsidiaries abroad or
extending Buyers’ Credit /acceptance finance to overseas parties for facilitating export of goods and
services from India, the Bank will ensure that such exposure is restricted to 20% of the Bank’s capital
funds. For higher limits, Bank would approach RBI on a case-to-case basis. Bank would also, inter
alia, comply with Section 25 of the BR Act, 1949 (i.e. the assets in India shall not be less than 75%
of Bank’s demand and time liabilities in India).
ii) The cap of 20% is not applicable to credit extended from overseas operations i.e. when the funding
is out of resources raised abroad (such resources are mobilized by our foreign offices through their
customers/brokered deposits or inter- bank reciprocal credit lines and borrowings etc.). However,
the concentration risk exposure (single borrower and group borrower) would apply to the Bank as a
whole.
iii) Bank can also extend financial assistance to Indian companies for acquisition of equity in
overseas joint ventures / wholly owned subsidiaries or in other overseas companies, new or existing,
as strategic investment under the approved policy. Such acquisition(s) should be beneficial to the
company and the country. The finance would be subject to compliance with the statutory
requirements under Section 19 (2) of the Banking Regulation Act, 1949. Exposure to this activity will
not exceed 10% of the Bank’s net-worth. Further, such advances will form part of the capital market
exposure and will be considered for the overall ceiling of 40% of Bank’s net-worth prescribed for
capital market exposure.
iv) The above provision would not include offshore SPVs / Companies financed by the foreign offices
for acquisition of equity in overseas entities.
v) Even when the collateral security of shares is obtained against exposure to Indian companies, the
same would be reckoned as Capital Market exposure only in case the value of primary security does
not fully cover the advances.
vi) Indian parties are prohibited from making direct investment in an overseas entity (set up or
acquired abroad directly as JV/ WOS or indirectly as step down subsidiary) located in the countries
identified by the FATF as “non co-operative countries and territories” as per list available on FATF
website www.fatf-gafi.org or as notified by the RBI from time to time.
5.8.12 Review of implementation of exposure ceilings as listed above would be undertaken by the
Departments as indicated in Annexure to Loan Policy.
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PERFORMANCE/FINANCIAL ANALYSIS AND CREDIT RISK
ASSESSMENT
6.1 The primary objective of financial statement analysis is to understand and diagnose the
information contained in financial statements with a view to judge the profitability, financial
soundness, and operational efficiency of management of the firm to make forecast about its future
prospects.
As part of Bank’s appraisal process, financial statements – profit and loss account, balance sheet and
cash flow statement of the borrowing units are analysed to determine its solvency, liquidity and
profitability as well as its sources and applications of funds. In addition, financial analysis involves
extrapolating the past performance of a borrowing entity so as to arrive at an estimate of its likely
future performance. Various ratios are calculated by studying past 2 years’ performance of the unit
and comparing them to analyse the trend. Inter firm comparison should also be done to determine
performance and financials of the unit vis-à-vis its peers.
6.2 Audited Financials

The Audited financials, Tax Audit Report (i.e. Form 3CA, Form 3CB or 3CD) and annual reports
covering Auditor’s Report are to be obtained from the Borrowing unit each year and analysed as part
of due-diligence and monitoring.
For New Connections: The Audited Financial Statements should not be more than 12 months old
from the date of close of the relative Financial Year. In case the latest audited financials are more
than 9 months old, provisional financial statements not more than 6 months old are to be obtained
and analysed and to be satisfied that the activity level, profitability, liquidity and solvency ratios are
broadly in alignment with the estimates/ projections.
If the Audited Financials are more than 12 months and upto 18 months old, the Provisional
financials for the previous year (i.e., as on 31st March of previous year) duly signed by the
Proprietor/ Partner (s)/ Authorised Signatory of the company in respect of MSMEs (subject to a
cap on exposure of Rs. 25 Cr enjoyed by the Borrower from the Banking System) and by
Statutory Auditors/ Chartered Accountants in respect of all other Borrowers should be obtained.
The timelines in respect of Audited Financials, as specified above (i.e., 12 months and 18 months)
are not applicable in respect of Central and State PSUs and Central and State Government
Guaranteed Accounts.
For Existing Connections: In case of listed companies, review/ renewal shall be carried out based
on audited financials not more than 15 months old and unaudited financials not more than 6 months
old. in case of unlisted borrowers, review/ renewal shall be carried out based on audited financials
not more than 18 months old and provisional financials not more than 5/6 months old.
No review/ renewal is to be permitted if audited financials are more than 15 months old for listed
companies and 18 months old for unlisted borrowers as the case may be and only continuation of
working capital limits may be permitted. The detail guidelines have been put in place.
In respect of exposures to PSUs/ Government undertakings review / renewal of limits can be carried
out based on the Audited Financials/ certified by Internal Auditors and there is no need to wait for
the completion of Comptroller & Auditor General Audit, wherever applicable. The non obtention of
Audited financials should be discussed as a part of the assessment with proper justification along
with the timeline for its obtention. No specific approval from competent Authority is required to be
obtained.
In all such cases, Audited financials has to be obtained subsequently and CRA is to be worked out.
6.2.1 Ministry of Corporate Affairs, on 16.02.2015 notifies the companies (Indian Accounting
Standards) Rules, 2015 to converge the current Indian Accounting Standards (AS) with the
International Financial Reporting Standards (IFRS) and Ind AS is made applicable to companies in
Page 16 of 632
a phased manner as under:
a) All companies with net worth>= Rs. 500 Cr: FY 2016-17
b) All companies with net worth>= Rs. 250 Cr: FY 2017-18
c) Listed companies with net worth< Rs. 250 Cr: FY 2017-18
d) Unlisted companies with net worth < Rs. 250 Cr: Not applicable
6.3 Performance and Financial analysis

The Bank has a unified CRA System for different Industry/ Sector, which is used for assessing the
credit risk of borrowers as well as facilities. Each CRA Model has specified Ratio Band for each
Financial Parameter for assigning Score. The Ratio Band at which the highest Scores are awarded
shall be considered as Desirable level.
Desirable level is indicative level as there cannot be a definite benchmark, as desirable levels are
case specific, guided by the nature, size and scope of projects and activities. The operating
functionaries shall provide justification as part of the proposal for all the financial parameters where
the unit has not achieved the desirable level. The sanctioning authority shall consider variations, if
any, from these levels based on the justifications placed before them. No specific approval from the
Sanctioning Authority is required to be obtained in this regard.
In respect of eleven specific industries viz. Hydrocarbon, Power, Iron & Steel, Textiles, Electrical
Equipment, Telecom, Construction, Aluminium, Food Processing, Real Estate and Fertilisers where
the Bank has exposure of Rs. 10,000 crores (FB+NFB) and above, separate sets of benchmarks for
financial parameters have been set. In case there is any variation from the acceptable and the actual
levels, such deviation shall be discussed as part of proposal with proper justification. No specific
approval from the Sanctioning Authority is required to be obtained in this regard
6.3.1 The Following are to be implemented w.e.f 01.10.2019:

➢ Investment in Associates/Subsidiaries normally to be permitted only upto the extent of
TOL/Adj.TNW does not breach the desired level of 4 in case of manufacturing sector and 5
in the case of Trade and Services sector.
➢ Further, 20% of the Corporate Guarantee extended by the company in favour of
Associates/Subsidiaries or any other companies for securing credit facilities or otherwise to
form part of total outside liabilities for the purpose of calculating financial ratios.
6.3.2 Promoter’s shares in the borrowing entity (Listed Companies) should not be pledged to any
Bank/NBFC/Institution without Prior consent of the Bank. This is a mandatory covenant and should
be tested Half Yearly. Any breach should trigger Dynamic Review of Rating.
6.3.3 In the wake of subsidiarisation, analysing financials of the group at the consolidated level in
addition to the standalone entity is necessary. In the case of companies with subsidiaries, the
adjusted TNW could be lower for the parent company and the rating may suffer on account of the
investment. In all such cases where the group consists of large number of companies the leverage
should be measured by Consolidated TOL/Consolidated TNW. In those cases, where the loan is
being taken in the books of Parent/Holding Company but subsidiary companies are the operating
units, the standalone financial statements of subsidiaries (if available) should also be analysed and
commented upon in the loan proposal.
6.4 Review/ Renewal of Advances

6.4.1 Working capital facilities are granted for a period of one year from the date of sanction. Regular/
ad hoc credit limits are to be reviewed/ regularized not later than three months from the due
date/date of ad hoc sanction. In case of constraints such as non-availability of financial
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statements and other data from the borrowers, the branch should furnish evidence to show that
renewal/ review exercise is in progress. However, where the regular/ad hoc credit limits have not
been reviewed/renewed within 180 days from the due date/ date of ad hoc sanction, it will render the
account as NPA. In this context, other guidelines are as under:
i) Renewal of working capital limit is carried out every year on the basis of audited financials. In case
working capital, limits are not renewed for valid reasons, approval from the sanctioning authority
needs to be sought for review (continuation of limits) for a maximum period of 180 days from the due
date. In respect of working capital limits sanctioned by ECCB, such approval needs to be sought
from CCCC.
ii) In case even after expiry of this period of 180 days a full-scale renewal is not completed, approval
needs to be sought from the sanctioning authority for review (continuation of limits) for a further
period of maximum 90 days. Within this time the regular renewal proposal must be completed.
iii) The maximum period for which the credit facilities extended to a unit may be continued, based on
reviews, will thus generally not exceed 270 days from the due date.
iv) Even after the expiry of this period of 270 days from the due date a full-scale renewal is not found
feasible, administrative clearance is required to be obtained from the next higher authority of the
sanctioning authority (in case sanction falls upto RCCC/FOCC VII) for repeating a review/
continuation of limits. If sanction falls within the delegation of financial powers of CCSC and
above, no administrative clearance/approval is required, and approval is to be obtained from the same
credit committee for review/ continuation of limits in lieu of a full-scale renewal of limits.
v) While undertaking review /renewal, sanction for continuation of limits shall indicate date of
validity of such limits.
vi) In the case of all listed companies, a brief review is to be put up on the basis of quarterly working
results published by them in the Quarterly Results Report (QRR) format, duly incorporating
comments such as extent of exposure, conduct of the account etc. Such review is to be submitted
(a) to the Heads of Verticals in respect of ECCB sanctions, (b) to the CGM (Circle)/ CGM (CAG)/
CGM (CCG)/ CGM (SARG)/ CGM (IBG) in respect of IBGCC/ IBGCC-II/ CCSC & CCCC
sanctions and (c) to the GM (Network/ CCGRO or CCG Branch/ SARG)/ Head of FOCC in all other
cases.
vii) In cases where term loans as well as working credit facilities have been sanctioned to a borrower,
review of TL should form a part of the review/renewal of working capital facilities.
ix) Builder Loans (sanctioned as CC/OD limits) and standalone TLs are also to be reviewed annually
based on the audited financials.
viii) In respect of syndicated loans, apart from annual review, these loans are required to be reviewed
quarterly or at earlier intervals, wherever warranted at Foreign Office Credit Committee level, based
on the credit ratings/market reports, quarterly results, status of compliance with financial covenants
etc., and exception report submitted to IBG where necessary.
ix) The Guidelines have been put in place for processing the request for large enhancement in
working capital within 12 months of last sanction or during next renewal. Repeated enhancements
between two renewals (within 12 months) to be avoided.
6.5 Inter Firm Comparison

There are several agencies which have built databases on companies and industries which serve as
useful sources of information on business profiles, promoters, industries and sectors and for inter firm
comparison. Use of reports or data should be from reliable sources like CMIE, CRISIL etc., and their
names should be mentioned in the loan proposals.
6.6 Internal Credit Rating – Credit Risk Assessment (CRA)

For each credit proposal, a credit rating is assigned using the internal credit rating system. The Bank
as of now has a unified CRA System, which is used for assessing the credit risk of borrowers as
well as facilities (facility rating applicable for exposures beyond Rs.5 crores/ USD 1 Mio or its
equivalent) viz., working capital, term loan and non-fund based exposures etc., to C&I, SME and
Page 18 of 632
AGL segments for total exposure of Rs.50 lacs/ US$ 100 K and above and scoring models for all
products with exposure of less than Rs.50 lacs/ US$ 100 K.
Based on the CRA score, risk rating (SB-1 to SB-15) is awarded to the entity. The SB-16 rating is
assigned to NPA accounts by default.
6.6.1 CRA- Minimum scores / Hurdle rates
The CRA models adopted by the Bank take into account various risks categorized broadly into
financial, business, industry and management risks as well as the environmental, demographic and
governance aspects of borrowing entities. These risks are rated separately.
Hurdle rate SB-10 has been prescribed under internal risk rating model for considering new
connection or enhancement in credit limits. In case account is having CRA SB-11 and worse, subject
to exceptions like availability of Central Govt. guarantee (sovereign guarantees) and / or availability
of a Corporate guarantee of parent / Group Company which should have a CRA rating of SB-9 and
better, necessary approval is to be obtained from the competent authority. However, no specific
approval from Competent Authority is required to be obtained for continuation of limits at existing
or reduced levels when CRA is below hurdle rate. This should be discussed as part of the assessment
with proper justification.
Further, where a unit has not obtained minimum scores in Financial Risk, Business & Industry Risk
and Management Risk under CRA are to be discussed in the loan proposal and
justifications/mitigation are to be placed before the sanctioning authority for taking informed decision.
No specific approval from competent Authority is required to be obtained in this regard.
The actual models used, the minimum scores under each head, the hurdle rates, etc. are reviewed at
regular intervals by CRMD.
6.6.2 Validation of Risk Rating

The credit risk rating will be arrived at by the respective Branch/ Foreign Office or the Credit
Processing Cell, as applicable, as soon as the audited balance sheet of the Company is received. The
internal credit risk rating thus arrived at will be independently validated and approved by a separate
Committee / Risk Rater as the case may be, set up for this purpose. This process of validation and
approval is completed prior to sanction/ renewal/ enhancement of the credit facilities, and is distinct
from the loan sanction process. This facilitates independent and objective risk rating, without being
influenced by operational/ budgetary considerations.
6.6.3 CRA Rating for Restructured/ NPA Accounts

i) Restructured accounts under standard category need to be rated under appropriate CRA models as
per extant instructions as long as they are classified as standard assets. However, CRA rating
exercise is not required to be carried out when such restructured accounts turn NPA and default
grade rating of SB-16 shall be assigned directly.
ii) All non-performing assets (NPA) shall be directly assigned with the rating of SB-16 or respective
default grades in case of other rating/ scoring models. In such cases, regular CRA exercise is not
required to be carried out. However, when the status of the account is upgraded to standard, full-
fledged CRA exercise needs to be carried out as being done in regular manner.
6.6.4 Dynamic Review of Rating

With a view to capturing deterioration in credit quality through the process of internal credit rating
in timely manner, framework for dynamic review of internal rating has been introduced. Dynamic
Review of Internal Rating of borrowers who are enjoying aggregate limits of Rs. 500 Crores/ USD 80
Mio or its equivalent and above in all Business Groups, including those in IBG, is to be ensured at
half yearly intervals (without trigger). In case of borrowers with exposure of Rs. 10 Crores & above
but below Rs. 500 crores, Dynamic Review of the rating to be conducted as and when triggers are
Page 19 of 632
observed. In respect of IBG, USD 2 Mio or its equivalent and above but below USD 80 Mio or its
equivalent and all restructured exposure, irrespective of the amount, where the warning indicator has
been triggered dynamic review has to be conducted. This is to enable the operating units to initiate
corrective action including exit from the exposure and ensure correct pricing as per the risk
undertaken etc. All review reports including SMA reports should be put up after dynamic review
rating in all applicable cases. Borrowers having ECR of AAA, AA and PSUs with Maharatna or
Navaratna status are exempted from the purview of non- trigger based dynamic review of ratings
provided there is no change in their rating and status (In respect of ECR as well as Maharatna or
Navaratna Status). These limits may be reviewed from time to time by CRMD.
6.6.5 Review of CRA

CRA of borrowal units is required to be reviewed periodically. For units which are assigned CRA
rating upto SB-10, CRA is to be reviewed annually. For units having CRA SB-11 and worse, the CRA
shall be reviewed at half-yearly intervals, except the accounts those are covered under Dynamic
Rating. Annual review based on audited financial statements will continue to be done for all
exposures as per original time schedule, irrespective of dynamic / half yearly review. These
benchmarks may be reviewed from time to time by CRMD.
In respect of exposures on Indian corporates, the Foreign Offices would not be required to carry out a
separate CRA exercise. The CRA assessment and validation done by the domestic office would be
relied upon by the Foreign Offices. The renewal exercise can proceed simultaneously or follow
subsequently.
6.7 External Credit Rating (ECR)

Besides, the internal risk rating (CRA), it is mandatory to obtain External Credit Rating (ECR) of
borrower for all exposures above Rs. 50 crores from Banking System from any one of the accredited
ECRAs. However, product specific schemes (e.g., Lease Rental Discounting Scheme, Asset Backed
Loan, e-VFS etc.), will continue be governed by the specific norms of the scheme. In respect of
exposure of Rs. 50 crores and below, if rated, concessionary pricing may be extended to BBB- &
better rated borrowers. The ECR is also to be incorporated in the proposal.
All eligible exposures above USD 2 mio or its equivalent should ideally be rated by any one of the
approved International Credit Rating Agencies (IRAs) viz. Moody’s, Standard & Poor and FITCH.
In case rating by IRAs is not available, FOs should endeavour to obtain rating from a domestic
rating agency approved by the local regulator. Guidelines in this regard have been put in place.
6.7.1 At present there are seven (7) ECR Agencies namely CARE, CRISIL, India Ratings and
Research Private Limited (India Ratings), ICRA, Brickwork, SMERA and INFOMERICS are
accredited by RBI for the purpose of risk weighting the Bank’s claim for computation of Capital
adequacy. Any waiver for non-obtention of ECR is to be approved by the sanctioning authority not
below RCCC. In case of ECCB sanction, such waiver is to be sought from CCCC.
6.8 Credit Risk Assessment Model for Inter Bank Exposures

As per RBI guidelines, Bank uses a separate rating model “BERI” to assess the credit risk associated
with lending to banks. PGEL for banks has also been set. The limits set are reviewed periodically by
CRMD.
6.9 The Bank maintains a list of “Approved Banks” on whom exposures can be undertaken by FOs
as under:
a. Exposures on Foreign Banks with Bank Exposure Limits: Exposure can be taken up to the
allocated limit and within the product wise sub-limits.
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b. Approved Foreign Banks: Bills drawn under fully compliant LCs can be negotiated up to
Permissible Global Exposure Limit (PGEL) of the
Bank.
In respect of Indian Scheduled Commercial Banks, DFIs and IIFCL, exposure may be taken upto
Approved Exposure Limit (PGEL) of the Bank and within product wise sub limits and indicative
allocations among the user groups.
****
**
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ASSESSMENT OF CREDIT
FACILITIES
7.1 The Bank has in place a well-established process of credit appraisal that has developed and
evolved over a period of time. The fundamental purpose of credit appraisal in the Bank has been
two fold. First, to be able to take an informed decision as to the credit worthiness of any proposal;
that is, whether it is prudent, worthwhile and desirable for the Bank to take a credit exposure on the
applicant entity. Thereafter, where a positive decision is arrived at in this regard, to be able to assess
the extent and nature of such credit exposure, the conditions on which such exposures is acceptable
and the pricing at which it is considered prudent to operationalize such a credit relationship.
7.2 A decision as to the credit worthiness of a proposal is arrived at after considering a combination
of several factors including:
i) an assessment of the promoter, covering their background and relevant experience in the area
of the proposed entity,
ii) the previous experience of the bank with the promoters or their group,
iii) Complete information on Take Over/ New Management including regulatory compliance and
impact of Change in Management Control,
iv) the perceived prospects of the industry or activity proposed,
v) the already existing extent and quality of the exposure of the Bank to the industry or activity on
the one hand and to the promoters/ group on the other,
vi) policy relating to exposure levels and norms prescribed by the regulators and by the bank for the
proposed activity / industry,
vii) the perceived financial strength and the risk rating of the promoters, the borrowing entity and / or
the group,
viii) the extent and nature of credit risk mitigants proposed, etc.
7.3 Having decided that the proposal, as a reasonable and acceptable business risk, is a ‘bankable’
proposition, the next step involves assessing the nature and extent of the proposed exposure. The
Bank provides a range of debt instruments including all types of term and working capital facilities,
each of which can be structured either as fund based products or non-fund based products or a
combination of both. It is our effort to combine these with a range of ‘payment and collection
platforms’ that are off the shelf or tailor-made to meet individual requirements and seek to provide
our customers with a complete solution to all their financial requirements.
7.3.1 With a view to avoiding `Lenders’ Liability’, no branch/FO should give any verbal or in-
principle commitment to lend to a prospective borrower, FB or NFB facilities, unless detailed
appraisal has been made and proper sanction is in place. However, an in-principle quote/broad term
sheet could be given in deserving cases with the approval of DMD of the vertical.
Guidelines in this regard have been put in place.
We refer to our e-Circular Department: CREDIT POLICY AND PROCEDURES DEPARTMENT

Sl.No.: 1204/2019 – 20 Circular No.: CCO/CPPD-ADV/ 129/ 2019 – 20 Date: Fri 22 Nov 2019
The existing process flow has since been reviewed and the competent authority approved for
discontinuation of the requirement of obtention of in-principle approval for all new proposals,
with immediate effect.
However, Project Finance proposals of above Rs 1000 crore shall continue to be put up to Interim
Committee for in-principle approval.
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Credit Review Department (CRD) has been set-up (at Circle level and Corporate Centre level) to
look at micro-level risks at an individual proposal level and strengthen role of credit risk by moving
from advisory to risk clearance (i.e. “Go/No-Go”) based on pre-defined metrics on risk appetite.
7.4 Methods of Assessment of Credit Facility (ies) i)
The assessment of working capital is done through
a) Turnover Method
b) Projected Balance Sheet Method (PBS)
c) Cash Budget Method.
ii) Under the turnover method, working capital requirement is computed at a minimum of 25% of
turnover, of which, at least four-fifths is provided by the Bank and balance one-fifth represents the
borrower’s contribution towards margin for working capital. This method is applicable for sanction
of fund based working capital limit of up to Rs.5 crores or equivalent, as per recommendations of
Nayak Committee which had looked into issues relating to financing of Medium & Small
Enterprises.
iii) Under the PBS method, the fund requirement is computed on the basis of borrower’s projected
balance sheet, the funds flow planned for the current/ following year and examination of the
profitability and financial parameters etc. The key determinants for the limit can, inter-alia, be the
extent of financing support required by the borrower and the acceptability of the borrower’s overall
financial position including the projected level of liquidity. The projected Bank borrowing thus
arrived at, is termed ‘Assessed Bank Finance’ (ABF). This method is applicable for borrowers who
are engaged in manufacturing, services and trading activities and who require fund based working
capital (WC) finance of above Rs.5 crores or equivalent.
iv) Cash Budget method is used for assessing working capital finance for seasonal industries like
sugar, tea and construction activity. This method is also used for sanction of ad-hoc WC limits. In
these cases, the required finance is quantified from the projected cash flows, and not from the
projected values of current assets and current liabilities. Other aspects of assessment like
examination of funds flow, profitability, financial parameters etc., are also carried out.
v) Project Vivek: This is applicable for all eligible SME proposals up to Rs. 50 Cr in R&DBG.
SME loan proposals eligible under Project Vivek shall be processed in LOS or LLMS. CUE is a new
Risk Rating model for computing borrower rating on the basis of PD (Probability of Default). All
credit decisions, limit assessment and pricing are to be based on the CUE rating wherever applicable.
The CUE Rating Scale (CUE1 to CUE 15) has been mapped to existing CRA rating scale (SB1 to SB
15) one-to- one. Guidelines in this regard have been put in place.
7.4.1 The advance payments received by the contractors should normally be used for the specific
project against which it has been received. Utilisation of funds otherwise should be allowed only with
prior arrangement with the Bank. Waiver may be considered only very selectively for reputed
contractors.
7.4.2 After due appraisal and assessment, the appropriate authority, as laid down in the Scheme of
Delegation of Financial Powers for advances, sanctions the credit facilities. The working capital
facilities sanctioned but not availed within a period of six from the date of sanction would lapse and
require revalidation.
7.5 Letter of Credit for Working Capital (Manufacturing/Trade)
Some of the aspects to be kept sight of while opening Letters of Credit (LC) are:
i) Cash budget should be obtained, where considered necessary, to ensure that the borrower would be
able to retire the bills drawn under the LC on their respective due dates.
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ii) It is also to be ensured that the LC limits sanctioned for regular requirements of the borrower such
as purchase of Raw Materials are not used for CAPEX or other purposes.
iii) The LCs issued/limits sanctioned should be commensurate with the borrower’s turnover and Cash
Credit limits, and should be for genuine trade / manufacturing activity.
iv) The usance period of the LC should ordinarily have relation to the working capital cycle.
v) Level of inventory is to be commensurate with industry norms / past trends.
vi) Appropriate cash margin depending on the applicant’s means, creditworthiness, other liabilities,
etc. may be prescribed. Further, wherever warranted, a lien may be maintained on the unutilised
portion of the cash credit account for the value of the bills to be received under the LC.
7.5.1 Discounting of Bills under Letter of Credit

i) Discounting of bills under Letters of Credit should be only in relation to LCs issued by us / First
Class Banks (Domestic) and Correspondent Banks (Foreign) and should not exceed the approved
exposure limits on these banks.
ii) Purchase/discount/negotiation bills under LCs should be done only in respect of genuine
commercial and trade transactions of the borrower constituents who have been sanctioned regular
credit facilities by the bank.
iii) The prescription would not, however, prohibit the Bank from accepting bankable business from
non-borrower constituents such as Govt. / Research / Defence / Educational organizations and other
statutory organizations who have no borrowing arrangements with any FI / bank.
iv) It is also not the intention of the Bank to turn down acceptable bill discounting business against
LCs of First Class banks / correspondent banks, from borrowers who may not be dealing with us for
their other banking requirements. However, in the interest of fostering better lending discipline as
also in the overall interest of the Bank, SOP on the subject is put in place in Manual on Loans &
Advances for further reference.
v) It is further to ensure that
a. Limits against bills discounted under LC is sanctioned by the appropriate authority,
b. Bills are in strict compliance with the guidelines
c. SOP is to be followed strictly.
7.5.2 Exposure against Bills Discounted under Letter of Credit (LC)

In cases of bills discounted/purchased/negotiated under other bank LC, and where the payment to
beneficiary is not made ‘Under Reserve’, the exposure shall be treated as being on the LC issuing
bank and not on the third party / borrower. In the case of negotiations ‘Under Reserve’, the exposure
should be treated as on the borrower. In cases where the bills are discounted / purchased / negotiated
under LC issued by one of our own branches, the exposure shall be reckoned as being on the third
party/borrower.
7.6 Letters of Credit for Capex

LCs can be established for payment to suppliers of capital goods, within the sanctioned term finance.
Since such LCs are a mode of disbursement of sanctioned term finance, there is no increase in the
Bank's exposure. Lien is to be marked in the term loan account for the outstanding LC and, ideally,
the margin on such LCs should be the same as per the accepted financing pattern.
7.6.1 In cases where LC is partially or fully backed by the LC / funding commitment from other banks/
financial institutions, such commitment should be irrevocable and unconditional. If such LC /
funding commitment is in relation to Import LC, the risk on account of forex rate risk shall also be
to the account of the other bank / FI, and there should not be any ambiguity in this regard. Further
such LCs should be within the approved exposure limit for the banks.
7.6.2 For institutions, specific approval for taking exposure needs to be obtained from sanctioning
authority.
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7.6.3 For import LCs, unless liability under LC is to be settled out of foreign currency funds arranged
by the borrower, requisite hedging must be in place.
7.7 Bank Guarantees

Bank guarantees are required to be issued for various purposes- a few examples being Bid Bonds
for bidding for projects or contracts, advance payment guarantees for mobilisation money received
by contractors, performance and retention money guarantees, guarantees in favour of government
and statutory bodies, courts etc.
7.7.1 There is no difference between due diligence for bank guarantees as compared to other credit
facilities and the instructions in regard to credit rating, proper assessment of nature and quantum of
bank guarantee facility, cash margin, collateral security, standing and means of the borrower/
promoters/ directors/ guarantors etc. are applicable. A few other instructions are as under:
7.7.2 Bank can issue both financial and performance guarantees. However, before issuing
performance guarantees, operating units are required to exercise more than ordinary caution in
assessing capability of the applicant in term of fulfilling the underlying performance.
7.7.3 BGs will generally be issued / renewed for a period not exceeding 18 months at any one
instance. For longer periods, authority structure for according administrative clearance is in place.
Should a BG originally issued for a lesser period require extension beyond 18 months, administrative
clearance therefor will also be necessary. No BG should normally have a maturity of more than ten
years. Bank may consider issuing BGs beyond maturity of 10 years only against 100% cash margin
or with prior approval of the competent authority specified in this regard.
7.8 Guarantees and co-acceptances favouring FIs / banks /other lending agencies
I) As guaranteeing Bank
i) As per RBI guidelines, Banks may issue guarantees favouring FIs/ other banks/ other lending
agencies for loans extended by them. However, given the funding capabilities of our Bank, such
guarantees are not proposed to be issued for domestic operations. The Bank will also not undertake
the business of co-acceptance of bills of its constituents.
ii) Bank may freely give on behalf of their customers and overseas branches and correspondents,
guarantees in the ordinary course of business in respect of missing or defective documents,
authenticity of signatures and for other similar purposes for domestic operations only.
iii) In case of defective documents, BGs may be issued in cases of a) Discrepant documents, and b)
Document issued without proper authority.
iv) In all other cases which are not covered in iii) (a) & iii) (b) above, the BGs may be issued only
after obtaining prior approval of the sanctioning authority.
II) As Lending Bank
i) Bank may extend fund based and non-fund based credit facilities against guarantees issued by
other Banks /FIs.
ii) The exposures assumed against such guarantees will be deemed as an exposure on the
guaranteeing banks / FIs and would be subject to PGEL on other banks and FIs in place in the
Bank. A sub-limit for such exposures may be fixed within the overall PGEL as part of the exercise
being undertaken annually. Annual review exercise is to be undertaken by Credit Risk Management
Department and put up to CRMC. However, the review of PGEL may also be carried out as and
when required.
7.9 Guidelines for extending NFB facility to Non-Constituent Borrowers

Non-constituent borrowers can be sanctioned Letters of Credit (LC) (Inland & Import) and Bank
Guarantee (BG) (Domestic & Foreign). In this regard, operating guidelines are in place and provided
Page 25 of 632
in Manual on Loans and Advances.
7.10 Interchangeability between Fund Based Limits and Non-Fund Based Limits / Investment Limit
is also available for borrower companies.
7.11 Stand by Letter of Credit: RBI has authorized dealers to open Stand by Letter of Credit on
behalf of its constituents for import into India any goods, import of which is permissible under the
EXIM Policy. Instructions as such for issuance of stand by letter of credit are being issued by the
FEDAI, RBI and GMU from time to time. Detailed guidelines in this regard have been provided in
Manual on Forex operations of GMU Kolkata.
7.12 Term Loans

i) The tenor for scheme specific term loans (e.g., Housing Term Loan, Education loans etc.) should
be as per the approved schemes which can be a maximum of 30 years. In other cases, it will be 20
years or life of the Project whichever is lower (with a minimum tail period of 15%). The tenor is to
be considered from the day of first drawdown.
Normally, the average maturity of any term loan, including moratorium, should not exceed 10 years,
except loans under Rehabilitation / Core Industry / Infrastructure / Renewable Energy Projects /
Securitization of Rent and Toll Receivables.
Average maturity should invariably be calculated for all the term loans individually and mentioned
in the template while seeking sanction from the Sanctioning Authority. It is not applicable for term
loans having EMI based repayment programme.
ii) In cases where average maturity of term loan exceeds 10 years (except in case of exempted
categories mentioned above), the deviation may be permitted by the Sanctioning Authority. However,
it will not require specific template approval and it should be discussed as part of the assessment
with proper justification in the proposal.
Longer period project loans, where average maturity period exceeds 10 years, the sanction should
specifically provide for refinance option (call/ put). Such refinancing should normally not be more
than 7 years.
iii) In respect of term loans, the computation of cost estimates is scrutinized very carefully to ensure
that the total project cost arrived at is accurate, comprehensive, reasonable and realistic and
benchmarked against projects of similar nature. The cost should be verified on the basis of proforma
invoices and, wherever required, support from Bank empanelled consultants should be taken to
verify the reasonableness of the cost of project.
iv)Term Loans sanctioned and not availed within six months from the date of sanction need
revalidation.
v) Normally, term loan may be financed in the ratio of 70:30 for debt and equity, though ideally 67:33
is preferred. The sanctioning authority may consider variation from these levels based in justifications
provided. No specific approval is required for divergence between the accepted and actual levels.
7.13 Guidelines for Financing Infrastructure Projects

In view of the importance attached to infrastructure development, its criticality to economic
development of the country, the potential for large volume business and the special skills required
for credit appraisal / assessment, the Bank has set up a separate Project Finance Strategic Business
Unit (PFSBU) for financing infrastructure projects and a separate manual for project finance has
been prepared by PFSBU.
i) Infrastructure would include broad categories viz., Transport and Logistics, Energy, Water &
Sanitation, Communication and Social and Commercial Infrastructure, covering 34 sub-sectors,
which are notified by the Gazette Notifications issued by the Department of Economic Affairs,
Ministry of Finance, Government of India, from time to time.
ii) Financing of infrastructure projects is characterized by large capital costs, long gestation period
Page 26 of 632
and high leverage ratios. Bank can sanction term loans to infrastructure projects within the overall
ceiling of the prudential exposure norms.
iii) RBI have put in place guidelines to accelerate credit disbursement to infrastructure. These
guidelines cover criteria for financing, types of financing, appraisal, regulatory compliance /
concerns, asset – liability management, administrative arrangements and inter-institutional
guarantees. The Bank, while lending to this sector, will comply with these guidelines.
iv) The following guidelines shall be complied with, while appraising the project finance proposals:
a) DE ratio to be with a minimum Equity of 65:35 for SPVs and 70.30 for Balance Sheet funding
except AAA rated companies & Maharatna PSUs.
b) IDC shall be a part of project cost but to be fully funded by the promoter/sponsor. Flexibility in
margin for components of project cost may be permitted so that overall DE is maintained as
mentioned above. c) Minimum DSCR not to fall below 1.10 in any year during the currency of the
loan. d) The Bank shall not sanction any sub-debt as a substitute for promoter’s equity.
e) During construction period, preferably fixed interest rate to be charged with a view to de-risk the
project.
f) Minimum upfront equity shall be
i) AAA/ AA ratings and Maharatna PSUs- 25%,
ii) A rating: 40% and
iii) BBB and below and unrated: 50% of the Promoters equity.
Sector specific higher upfront equity, if any prescribed, shall be applicable as per respective Policy.
g) Projected/estimated internal accruals may be considered only for the existing Brownfield projects
having proven track record of cash accruals as part of promoter’s contribution, subject to proper
validation and justification.
h) The above norms shall be applicable only for the new loans and not to the loans already
sanctioned.
i) Justification for accepting the financial ratios below the Benchmarks prescribed as above to be
discussed in the proposal invariably.
7.14 Loan System for Delivery of Bank Credit

In respect of Domestic borrowers having aggregate fund based working capital limit of Rs. 150 Cr
and above from the Banking System, drawing shall be allowed first from Working Capital loan
component, up to a minimum threshold level. Drawings in excess of minimum Working Capital
loan component shall be the from of cash Credit facility.
7.15 Take-out Financing:

Take-out financing structure is essentially a mechanism designed to enable the Bank to avoid asset
– liability maturity mis-matches that may arise out of extending long tenor loans to infrastructure
projects. Under the arrangement, bank financing the infrastructure projects will have an arrangement
with any other financial institution for transferring to the latter the outstandings in their books on a
pre-determined basis.
7.16 Portfolio Purchase

Bank sees good business opportunity in Portfolio Purchase of Asset Backed Securitisation, brought
to the market by various players. The Policy in this regard has been put in place.
The authority for approval of Bank’s investments in Inter Bank Participation Certificates (IBPCs)
etc., to meet the shortfall in priority sector lending, the proposal shall be approved by ECCB.
7.17 Syndication of Loans

The market for syndication of loans is active. When a corporate approaches the Bank for funding its
project and where the Bank may not meet the entire financial needs of the borrower, the balance
term loan / working capital finance would be syndicated. The Bank on its own, or jointly with other
Page 27 of 632
State Bank Group companies would undertake the syndication. Given the syndication capability of
the Bank and the related Group synergies, the Bank would also attempt to market syndication of
loan / treasury products as a stand-alone product.
7.18 Hunting Limits

Approach comprising pre-approved lines of credit for booking quality business of corporates rated
AA & better, and preferably in the top quartile of their respective segment / line of activity has been
put in place. The Financial powers for sanctioning credit facility under the scheme are vested with
CCSC & above.
7.19 Investment in Commercial Papers/Short Term NCDs and other Corporate Bonds of Non-
Borrower Companies:
i) In case of non-borrower companies, Universe of Companies will be drawn up by Global Markets
and appropriate limits will be sanctioned by the competent authority.
ii) However, in case of borrower companies, the investment limits/inclusion in universe has to be
approved at the time of sanction of credit limits.
7.20 Adhoc limit:

Adhoc limits will be considered in cases where stand by line of Credit is inadequate either in terms
of quantum of finance (15% of sanctioned limits) or in respect of time span or where SLC is not in
place. Guidelines in this regard have been put in place.
7.21 Export Credit

7.21.1 Export sector is recognised as a thrust area considering the importance of its contribution to
the economy. Therefore, the sector is supported with finance at concessional rates, with flexibility
in financing norms.
7.21.2 Export finance is by and large regulated through the directives / guidelines issued by the
Reserve Bank of India (RBI), Director General of Foreign Trade (DGFT) and the Foreign Exchange
Dealers’ Association of India (FEDAI). Export finance is broadly classified into two categories:
i) Pre-shipment finance and
ii) Post-shipment finance
7.21.2.1 Pre-shipment finance

i) Often referred to as ‘Export Packing Credit (EPC)’, pre-shipment finance is extended as working
capital for purchase of raw materials, processing, packing, transportation and warehousing of goods
meant for export.
ii) Both, manufacturers as well as merchant exporters, are eligible to avail Rupee Packing Credit at
concessional rate of interest. Pre-shipment credit is available in foreign currency also.
iii) It has two essential features, viz., (a) existence of an export order and / or letter of credit and (b)
liquidation of the credit by submission of export documents within a stipulated period. In case of
exporters of proven standing, the facility can also be extended on a running account basis provided
the conduct of the account is satisfactory and orders are lodged subsequently within a reasonable
time. Substitution of contracts/ export orders is also permitted in case of running accounts.
iv) EPC can also be provided to units established in SEZ / EPZ / AEZ / EOUs for supply to units in
the same or another SEZ / EPZ / AEZ / EOU even though in such instances no movement of
merchandise takes place across the borders of the country.
V) There is no fixed formula for determining the quantum of finance to be granted to an exporter
against specific orders / LCs. The guiding principle to be applied in all such cases is the concept of
need-based finance. The period for which the Bank gives packing credit depends on the
manufacturing / trade cycle or specific requirements of the individual export, normally not exceeding
180 days. The percentage of margin is determined depending on the nature of order, commodity,
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capability of exporter, etc. keeping in view the spirit behind RBI guidelines for liberal finance to the
export sector.
vi) Since packing credit loans are concessional and purpose oriented, it will be necessary to ensure
proper end use of amounts disbursed to the exporters. RBI has laid down guidelines for disbursal
of loan amounts, maintenance of accounts, follow up and monitoring and liquidation of packing credit,
which form the basis of our policies and procedures. As the advance is granted on concessionary
rates and on relaxed terms and conditions, it is obligatory on the part of the exporter to comply with
the terms and conditions of the advance. In case of any default, the advance will attract commercial
rate of interest ab- initio.
7.21.2.2 Post- Shipment Finance

i) Post Shipment Finance can be extended upto 100 % of the invoice value of goods. The maximum
period usually allowed for realization of export proceeds is nine months from the date of export, for
all exporters including Units in SEZs, Status Holder Exporters, EOUs, etc.
ii) RBI have issued guidelines in regard to eligibility for post-shipment finance, basis of post-shipment
finance, maintenance of accounts by banks, follow up of export bills, liquidation of post-shipment
finance, etc.
iii) Post-shipment finance is also available both in Rupee and specified foreign currencies. Very
often, export business takes place without support of documentary Letters of Credit and the Bank
normally extends finance to the exporters, after due sanction, by purchasing the bills drawn by them
on foreign buyers or granting advance against bills sent on collection basis. While appraising the
arrangement, the Bank takes into consideration the track record of the exporter, country risk, nature
of merchandise, terms of payment, payment record of the drawee, etc. Advances against Duty
Drawback receivable are also granted under Post-Shipment Finance.
iv) More than ordinary caution is to be exercised in respect of bills covering sales within / between
group/associate concerns and those drawn by front companies of industrial groups. Sales through
Associates or sister concerns and bills drawn on them should be monitored with extra care. It is also
to be noted that ECGC Ltd. Provides insurance cover only up to the extent of 50 % of claim amount
in respect of bills drawn on Associate concerns, under WTPS.
7.21.3 Countries have been placed in 11 risk categories as per the risk perception viz. Insignificant
Risk, Very Low Risk, Low Risk, Low Medium Risk, Low Medium Risk Under Caution, Medium
Risk, Medium Risk Under Caution, High Risk Under Caution, Very High Risk and Under
Caution, Restricted & Under Caution and Off Credit categories. In respect of countries placed under
“Caution”, branches are required to seek prior clearance from GMU-Kolkata for all primary
exposures on these countries.
7.21.4 The Non-LC Export bills drawn on counterparties in countries in Restricted Cover Group
published by ECGC should be discounted only if the Borrower has obtained specific Buyer wise
cover or Bank is to obtain prior approval from ECGC for discounting of bill.
7.21.5 RBI has been traditionally pursuing a policy to make available export credit at reasonably low
interest rate with a view to helping the exporters to be competitive vis-à-vis their competitors. RBI
have rationalized the interest rates on export credit which are indicated, periodically, in their
Monetary & Credit Policy as ceiling rate in respect of all categories of export credit so that interest
rate charged by the Bank can actually be lower than the prescribed rate. Such ceiling rates will be
linked to MCLR, as applicable to other domestic borrowers.
7.21.6 As far as deferred exports are concerned, RBI has allowed banks to charge their normal term
lending rate based on the credit rating of the borrower. In this connection, deferred exports are those
where the realization period exceeds 180 days, with certain exceptions. All deferred exports are
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subject to regulatory guidelines contained in Project Export Manual (PEM) published by RBI.
7.21.7 ECGC- Bank’s export credit portfolio (pre-shipment or Packing Credit/ post-shipment
credits) is insured under Export Credit Insurance for Banks Guarantee Scheme (ECIB WTPC
/WTPS) of ECGC Ltd. This helps in risk mitigation and conservation of Bank’s capital provisioning
requirement. The prescribed procedures and other guidelines advised through Circular instructions
are to be complied with.
7.21.7.1 To encourage export, Bank is bearing the premium cost under WTPC for borrowers with
external credit rating of ‘A-’ & better, while premium from those rated BBB+ and worse, and from
unrated entities continues to be recovered from them. In case of ECIB-WTPS covers, the premium
cost will be fully borne by the Bank irrespective of credit rating of the exporter borrowers. In order
to derive the benefit of higher coverage, the operating units have to ensure that requirements of the
ECIB Policy such as, Drawee-wise limit, timely premium payment, prompt reporting of any adverse
developments etc. are complied with meticulously.
7.21.7.2 The complete list of exporters and their associates placed in the Specific Approval List (SAL)
is available on the website of ECGC Ltd. Each export credit advances branch needs to obtain a ‘login
name’ and ‘password’ from ECGC Ltd for visiting the site and verifying the details. Such access
will be provided free of cost on the basis of an application.
7.21.7.3 As regards post-shipment credit, Bank may stipulate Individual Shipment Policy (ISP) from
ECGC Ltd or similar nature of policy from other General Insurance Companies, on a case-to-case
basis depending on the risk perception.
7.22 Guidelines regarding hedging of FOREX exposure

As mandated by RBI, the Bank has a separate Board approved ‘Hedging policy’. The main features
of the policy are as under:
7.22.1 All forex exposure upto USD 5 Mio or its equivalent (other than those extended for meeting
forex expenditure) should be covered by procured hedge unless such customers have uncovered
forex receivables to cover the loan amount.
7.22.2 In respect of forex exposure above USD 5 Mio or its equivalent and those extended for
meeting forex expenditure, the approach would be as under:
Purpose of Size of exposure Approach

Forex Loan
Forex loans Exposure above Determine Adopt appropriate hedge
extended to finance USD 5 Mio or coverage under technique(s) for the portion of
exports its equivalent natural hedge loan in excess of natural hedge
component first cover.
Forex loans Exposure of all Indian corporates should have well defined Corporate
extended for sizes Hedging Policy or the corporates should have been
meeting forex included in the Bank’s direct exposure list for Foreign
expenditure. offices.
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Forex loans Exposure upto the Determine Ensure procured hedge for the
extended for ceiling under coverage under portion of loan in excess of
meeting Rupee Automatic Route natural hedge natural hedge cover, before draw
expenditure under component first down
Automatic Route.
Forex loans Exposure above Adopt appropriate hedge techniques.

extended for all USD 5 Mio or its
other purposes. equivalent.
7.22.3 In respect of public sector corporates on the Bank’s direct exposure list for foreign offices
which are predominantly importers, there would be no cap on unhedged exposure but it should be
ensured that the said corporates have well laid down corporate policy for hedging.
7.22.4 In respect of blue chip private corporates that are in the Bank’s direct exposure list and have
a well defined corporate hedging policy, as a prudent measure, it should be ensured that at least
50% of their total forex borrowings from the banking system are hedged through the techniques of
natural hedge, pass through status and procured hedge. However, the unhedged exposure of their
total forex borrowings from the banking system should not exceed USD 200 Mio or its equivalent.
7.22.5 Waiver of Hedging requirements for foreign currency loans would be subject to approval by
the credit sanctioning authority not below RCCC/FOCC VII.
For sanctions by CCSC/ IBGCC II and above, sanctioning authority (for ECCB proposal- CCCC) is
the authority for waiver in this regard.
7.22.6 The policy on Hedging of Forex Exposure is to be reviewed by GMU annually and put up to
Central Board
7.22.7 Un-hedged Foreign Currency Exposure (UFCE)

Detailed guidelines on capital and Provisioning requirements on capital and provisioning
requirements for exposures to entities with UFCE have been circulated. The review in this regard
shall be put up by CRMD to CRMC at quarterly intervals
7.23 Asset Reconstruction Companies (ARCs): Bank will not take any exposure on ARCs.
7.24 Partial Credit Enhancement (PCE) to Bonds issued by NBFCs and Housing Finance
Companies (HFCs): RBI has permitted banks to provide PCE to Bonds issued by Systemically
Important Non- Deposit taking Non- Banking Finance Companies (NBFC-ND-SIs) registered with
RBI and HFCs registered with National Housing Bank (Bank). Guidelines in this regard have been
put in place.
7.25 Advances to Services Sector

7.25.1 The Service Sector is that segment of an economy which contributes to the GDP of a nation
by way of value of services rendered – as opposed to contribution by way of value of goods
produced. Individuals and business enterprises engaged in this Sector produce services and not
products. Examples of service sector jobs include retail trade, banking, hotels, real estate, education,
health care and medical services, social work, legal services, accounting services, computer
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services, recreation, media etc. By the very nature of their engagement, providers of service face
challenges that a manufacturing entity, for instance, does not normally face – in as much as services
are essentially intangible and it is often difficult, both for the provider as well as the receiver of the
service, to attribute a value to the service. With integration of the Indian economy with the global
economic order, the share of the services sector in the GDP and its contribution to future growth is
outpacing that of the industrial and primary sectors.
7.25.2 The Bank has been innovating new marketing and product strategies so as to tap the potential
offered by this sector. Recognizing the special nature of the asset and liability profile, output etc. of
such units, operating guidelines on lending to various activities of services sector are in place.
7.26 The Bank has put in place Policy guidelines on financing of various industries/ sectors.
7.26.1 Policy on Financing Renewable Energy Projects

With increasing focus on renewable energy and the Bank’s commitment to the sector, the Bank has
put in place a policy on financing of renewable energy related projects. The policy covers the various
segments of renewable energy viz. Ground Mounted Solar Power Projects, Wind Energy, Grid
Connected Rooftop Solar Power Projects, Small Hydro (upto 25 MW) and Biomass/ Co-generation/
Waste to Energy that are normally handled by the Bank. The policy covers key characteristics, typical
risks and their possible mitigants, Debt/ Equity and other financial ratios, power generation
estimates, features of PPAs, Statutory clearances, and other associated aspects.
7.26.2 Non-Banking Financial Companies (NBFCs)

The Bank’s approach to financing NBFCs is as under:
i. Bank will extend finance only to Asset Finance Companies (AFCs), which are either Deposit Taking
NBFCs (NBFC-D) or systemically important Non-Deposit Taking NBFCs (NBFC-ND-SI) and
NBFCs engaged in Micro Finance activity.
ii. Further, to increase its outreach to a large number of low-income people, Bank is also financing
MFIs/NGOs including NBFCs engaged in microfinance activities, and Housing Financing Companies
(HFC) which are regulated by the National Housing Bank (NHB) for on-lending to SHGs/JLGs and
Individuals. FOs shall frame approach to financing NBFCs based on local practices, host country
regulatory guidelines and the Bank's approach to financing NBFCs in their policies. In absence of
such approach, Bank’s operating guidelines as placed in Manual on Loan and Advances shall
be applicable.
7.26.3 Policy on Financing Gems and Jewellery Industry

Gems and Jewellery industry is characterized by High dependence on imports volatility in raw
material price, large dependence on short term working capital to fund upfront payment to suppliers,
changing customer, preferences towards machine made jewellery etc. The guidelines in respect of
financing of Gems and Jewellery business including Metal Gold Loan, have been circulated. Further,
the procedures on Advances against Gold ornaments have also been detailed in Manual on Loans
and Advances, Part-6 (Agriculture) and Part-8 (PBBU).
7.26.4 Policy on Financing Diamond Industry

Diamond industry is characterized by High dependence on import of rough diamonds by sightholders
from RBI/GJEPC approved Mining Companies and from other suppliers based abroad. Large
dependence on short term working capital to fund upfront payment to suppliers of rough diamonds
is another feature specific to the industry. The policy also covers guidelines on this feature.
7.26.5 Policy on Financing Ship Breaking Industry

The breaking of Ship results in recycling of metal components mainly metal scrap (in the form of re-
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rollable ferrous sheets, meltable ferrous scrap, cast iron scrap and non-ferrous metals) and other
reusable materials such as wiring, machinery, wooden furniture, oil & lubricants etc.
7.27.6 Financing to EPC Contractors

EPC contractor engaged in execution of construction phase of an infrastructure/ industrial project on
the basis of EPC contract awarded directly by the Government Bodies/ Project Developer/ owner of
the project.
7.27.7 Policy on Intra day limits to Mutual Funds

Providing IDL to MFs for meeting the redemption payments and it also help mobilise custodial
business for SBI-SG Global Securities Pvt Ltd in addition to Cash Management (CMP) business for
the Bank. The guidelines in this regard have been put in Place.
7.27 FOs to classify India based assets broadly as under:
7.27.1 Long Term Foreign Currency Term Loans to Indian Corporates are basically External
Commercial Borrowings (ECB) which are required to be complied with RBI
guidelines.
7.27.2 Foreign Currency Term Loans to overseas subsidiaries/ overseas joint ventures of Indian
companies are the loans sanctioned for the purpose of Overseas Capex/ Mergers/ Acquisitions/
Investment which is permitted under the reverse FDI policy of RBI. Such loans should comply with
the RBI guidelines.
7.28 Secondary market purchase of assets:

FOs may also book loan assets through secondary market purchase subject to compliance with Loan
Policy guidelines and the Scheme of Delegation of Financial Powers The detail guidelines have been
put in place. In respect of secondary purchase of loans to Indian corporates, FOs would need to seek
in-principle clearance of IBG, even in respect of proposals falling under powers of the FOCC.
****
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PRICING OF LOANS
8.1 Pricing of Bank’s funds and services while being basically market driven, is also determined by
two important considerations, i.e., minimum desired profitability and risk inherent in the transaction.
At the Corporate /FO level, the applicable price for a particular advance or service is fixed taking into
account the actual/marginal cost of Bank’s/FOs’ funds and desired rate of return as calculated from
indices like profitability levels and return on capital employed. In case of corporate relationship where
the value of connections and overall potential for profitability from a particular account are more
important than a particular transaction, the price is fine-tuned even to breakeven level for the
transaction. For long term exposures, the factors that weigh are the rate charged by the financial
institutions / other banks, the period of exposure, the pattern of volatility in interest rates and
expected movement of the rates in the long-term perspective. The card rates for interest and Service
Charges are linked to External Credit Rating and internal risk rating whereby better rated companies
get cheaper rates. In select cases, the Bank may also use external Benchmark for fixing interest rates.
8.2 The Bank has also adopted an appropriate authority structure to facilitate competitive pricing of
loan products. The authority concerned while exercising the discretion takes into consideration the
risk rating of the loan asset, the trends in movement of interest rates, market competition and overall
business considerations. Various Credit Committees/ Sanctioning Authorities and other officials
have been vested with powers for approving competitive pricing within the respective areas of
operation. The quantum of delegation depends on factors such as degree of competition, market
developments, target group, purpose, value of connection, income from cross sell, accounts under
restructuring/corrective action plan etc. Benchmark ROCC / RAROC is the other consideration in
pricing of fund based and non-fund based credit facilities. All competitive/concessional pricing on
credit facilities need to be approved by the Appropriate Authority. The policy on competitive pricing
is reviewed from time to time based on changes in market conditions. Authority is delegated to Credit
Committees / BVs for extending concession in pricing / service charges for well rated corporates
which will be reviewed from time to time.
8.3 Marginal Cost of Funds based Lending Rate (MCLR)

All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 are priced with reference to
the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark for such
purposes. Actual lending rates are determined by adding the components of spread to the MCLR.
Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked
to that benchmark.
8.3.1 Exemption
The following categories of loans shall be priced without being linked to MCLR as the benchmark for
determining interest rate:
i) Loans against Bank’s own Term Deposits.
ii) Loans to Bank’s own employees including retired employees.
iii) Loans granted to the Chief Executive Officer / Whole TimeDirectors.
iv) Loans linked to a market determined external benchmark.
v) Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of
the rectification/restructuring package.
vi) In specified schemes, as advised by RBI/GoI/GoI’s undertakings, wherein Bank have to charge
interest rates as per the scheme.
vii) Fixed rate loans of tenor above 3 years.
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8.3.2 The above list of exception is subject to review by the RBI from time to time. The existing
borrowal accounts {as on the said reference date of 01.04.2016, linked to Base Rate} may continue
till next Review/ Renewal / Reset / Maturity. On the date of renewal, the interest rate will automatically
shift and be linked to applicable MCLR. The existing borrowers have option to move to MCLR based
dispensation before full repayment/renewal, on mutually acceptable terms. Such instances shall not
be treated as foreclosure of the existing facility.
8.4 Computation of MCLR/Base Rate/SBAR

ALM Department is responsible for computation of the MCLR/ Base Rate/SBAR. Approval is
accorded by the Asset – Liability Management Committee of the Bank. Review of MCLR of
different maturities is done every month.
8.5 Spread
The applicable spread for a particular lending arrangement would broadly depend on the perceived
risk as evidenced by the borrower’s External Credit Rating / Internal Credit Rating, as well as the
size of the exposure under consideration. The detail of various components of spread is as under:
i) Business strategy
The component shall be arrived at taking into consideration the business strategy, market
competition, embedded options in the loan product, market liquidity of the loan etc.
ii) Credit Risk Premium
The credit risk premium charged to the customer representing the default risk arising from loan
sanctioned shall be arrived at based on an appropriate credit risk rating/scoring model and after
taking into consideration customer relationship, expected losses, collaterals, etc.
8.5.1 The spread should not be increased except on account of deterioration in the credit risk profile
of the customer in terms of deterioration in ECR or ICR or Breach of covenants. Any such decision
regarding change in spread on account of change in credit risk profile should be supported by a full-
fledged risk profile review of the customer. Whenever there is a change in spread on account of
reviewing the Bank’s pricing policy, the effect of the changes shall be prospective from the date of
reset of interest rate in the existing borrowal units.
8.5.2 The guidelines contained 8.5.1 above shall not be applicable to loans under consortium /
multiple banking arrangements.
8.6 Transition to Base Rate from SBAR

Existing loans based on the SBAR system shall run till their maturity. In case the existing borrowers
desirous of switching to the Base Rate system it is permitted, on mutually agreed terms, before
expiry of the existing contracts. In such cases, no fee is charged.
8.7 Transition to MCLR from Base Rate/BPLR

i) Banks shall continue to review and publish Base Rate as hitherto.
ii) Existing loans and credit limits linked to the Base Rate/BPLR shall continue till repayment or
renewal, as the case may be.
8.7.1 The existing borrowers shall have the option to move to the Marginal Cost of Funds based
Lending Rate (MCLR) linked loan at mutually acceptable terms. Such switch-over shall not be treated
as a foreclosure of existing facility.
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8.8 Reset Periodicity
The reset periodicity of all floating rate loans shall be one year or lower. The exact periodicity of reset
should form part of the terms of the loan contract. In case of Cash Credit accounts MCLR is reset
after one year or at the time of renewal of the account, whichever is earlier; whereas in case of Term
Loans the reset of MCLR is applicable only after one year from the date of first disbursement. The
Bank may use the option for linking the interest rate with MCLR of different maturity
(lower/higher) depending upon the economic environment and the resultant Bank’s views on interest
rate.
8.8.1 The interest rate reset periodicity should correspond to the maturity period of MCLR. It means,
if interest rate is linked to 1 year MCLR then reset period should be 1 year.
8.9 Fixed rate loans upto 3 years shall be priced with reference to MCLR.
8.10 Interest rates for loans extended under schematic lending are determined by respective business
units viz. PBBU /REHBU/SMEBU/RBU based on market conditions.
8.11 Loans can be sanctioned on fixed or floating interest rates. Where loans are granted on fixed
rate basis, the rate of interest on such loans will continue to remain the same for the entire tenor of
the loan, notwithstanding any change in MCLR pursuant to its monthly review. In case fixed rate
loans sanctioned upto tenor of 3 years (as fixed rate above 3 years is exempted from Base
Rate/MCLR), such fixed rate should not be below the MCLR at the time of sanction. If the MCLR
is revised upward thereafter, and in the process the fixed rate falls below the new MCLR, it would
not be construed as violation of the guidelines.
8.12 Penal Provision in respect of Breach of Mandatory (Financial) Covenants:

8.12.1 Term Loan
i) Applicable for Term Loans of above Rs 50 cr limit – Covenants (in relation to the undernoted
parameters) (i.e. DSCR, Int. Coverage, FACR, Debt/EBIDTA) are to be stipulated for all term loans
and these are required to be tested annually on the basis of Audited Balance Sheet (ABS). Penal
interest will be charged in case of breach of any two of the four parameters vis-à-vis values as
approved by the sanctioning authority in the sanction note.
The penal interest will apply from the day after the date of ABS and shall continue till the breach is
cured. The details are as under:
Benchmark for annual

testing of financial Benchmark for annual testing of
Parameters covenants financial covenants
DSCR To be mentioned as per i)Upto 10 % Nil

sanction note.
Interest Coverage
Ratio ii) More than 10 % 50 bps p.a.
FACR
Debt/EBIDTA
ii) For the period that interest/ instalment is overdue in respect of term loan, penal interest/ charges
at applicable rates as per guidelines on advances related service charges shall be recoverable.
Not applicable for Syndicated Loans, which shall be governed by covenants stipulated in the
respective deal.
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8.12.2 Each of the following events will attract penal interest as applicable, at rates circulated from
time to time, over and above the normal interest applicable in the account. However, penal interest
is not to be charged in respect of loans upto Rs. 25,000 under priority sector. Foreign Offices should
include, host country restrictions/ regulations, if any, while putting penal interest provision in the
branch policy.
i) Irregularity in Cash Credit Account/Term Loans.

ii) Non-Submission/delayed submission of a) Stock Statements, b) Audited Balance Sheet, c)
Renewal Data within the stipulated time period
iii) Non-renewal of insurance policy (ies) in a timely manner or inadequate insurance.
iv) Non-Submission/delayed submission of FFRs, wherever stipulated, within due date.
v) Diversion of funds
vi) Breach of any other covenants/conditions as stipulated by sanctioning authority.
vii) EPC advance where exports do not materialise
viii) Non renewal/ Expired ECRA (beyond 15 months from the date of ECR) wherever applicable
(Exemption: Government undertakings and PSUs)
Ix) Non- completion of Perfection of Security even after extended time period permitted by the
appropriate authority.
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DELEGATION OF FINANCIAL
POWERS
9.1. The Bank has a well-defined system of delegation of financial powers, duly approved by the
Board of the Bank, to sanction/approve credit facilities. The terms and conditions/covenants
governing any lending arrangement are also well defined. No credit facility can be extended to any
borrower unless duly sanctioned by the designated sanctioning authority/committee. All loans and
advances in the Bank are to be sanctioned by the designated sanctioning authority. In exercising the
powers, the authorities concerned are required to ensure compliance with the relevant provisions of
the State Bank of India Act and the State Bank of India General Regulations, regulatory guidelines
of Reserve Bank of India and any other regulations, and any rules/ regulations/ instructions/ orders
issued from time to time by the Bank.
9.2. The three significant principles around which the scheme of delegation of financial powers
revolves are:
i) powers are exercisable only in relation to the duties and responsibilities specially entrusted to a
functionary;
ii) all sanctions are subject to report to the next higher authority;
iii) No sanction/approval should be given beyond the delegated powers. In case of an emergency
situation, where it is not possible to obtain prior sanction/approval of the designated sanctioning
authority and a delay in taking decision may not be in the interest of the Bank, sanction/approval
beyond the delegated powers may be accorded judiciously, with prior administrative approval of
controlling authority. For sanctions/approval of ECCB, prior administrative approval of Chairman
has to be obtained. Post facto sanction/approval of the designated sanctioning authority should be
obtained along with confirmation of action, without any delay (within maximum 30 days). The
above enabler is to be used only in exceptional circumstances and should not be used
indiscriminately or frequently.
9.3 The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a
graded authority structure. The Executive Committee of the Central Board (ECCB) has full powers
for sanctioning credit facilities. The sanctioning powers have been delegated down the line to
‘Committees of officials’ viz. CLCC at Circle level, FOCC IV, FOCC V, FOCC VI, FOCC VII at
FO level, IBGCC II, IBGCC, RCCC, CCSC, CCCC at Corporate Centre. A committee viz.,
‘CCCCC’ is constituted at Corporate Centre for controlling all approvals of CCCC, except in the
matter of enhancement and fresh sanction of limits, which will continue to be put up to ECCB for
control.
9.4 The delegation of financial powers for sanctioning credit facilities by various authorities is based
on total exposure of the Bank to the borrower.
9.5 Higher discretionary powers have been made available in the case of top rated borrowers
(usually AAA rated units whose industry outlook is positive and /or SB1 to SB5) and functionaries
across the hierarchy are vested with such dual powers depending on the risk rating of the borrower
as detailed below:
i) AAA rated units where Bank’s Industry Outlook is Positive (CRMD): Credit Committees
shall exercise 125% of the financial powers vested with them.
ii) AAA rated units/ Govt. of India guaranteed accounts/ GoI Departments/ GoI undertakings: The
financial powers of various Credit Committees as applicable to SB-I to SB-5 rated borrowers shall
be applicable to AAA rated units/ Govt. of India guaranteed accounts (only where the entire exposure
is guaranteed) /GoI Departments/ GoI undertakings of Maharatna category only, irrespective of their
CRA ratings.
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9.6 Deviation/Waiver
The sanctions should normally be accorded as per Specific products/ Schemes. However, waivers in
general norms such as eligibility criteria, quantum of finance, tenor of the loan, etc., other than those
to be approved by ECCB, albeit within the provisions of loan policy guidelines are required to be
permitted, at times for business or strategic consideration. In case of financing to specific
schemes/products like, Real Estate, Lease Rental Discounting, Corporate Loan etc., where Authority
Structure for waivers has been specified, the authority/Credit Committee concerned only are
empowered to approve the waivers, if any. Any deviation/ waiver should be only in highly deserving
cases on a selective basis so as to keep it at the minimum.
9.7 Deviation/Waiver, except those to be approved by ECCB/ Various Delegated Authorities and
where specific Authority structure has not been specified, the authority for approving such deviations/
waivers shall be as under: -
a. R&DB (SME & RE (Builder Finance)/ CCG and CAG proposals:

Sanctioning Authority below RCCC/ FOCC RCCC/ FOCC VII
VII
RCCC/ IBGCC II & above Sanctioning Authority
ECCB CCCC
b. For Agri, Per & REH (other than Builder Finance): DMD of the Vertical.
9.8 Organizational Planning and Systems & Procedures (OP & SP) Department will review the
delegation of financial powers from time to time, as necessary, to factor in the demands made on
account of organizational restructuring, emerging challenges, forces of competition, etc.
****
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SECURITY, INSURANCE, COVENANTS AND
DOCUMENTS
10.1. Primary Security

Primary security is the asset created out of the credit facility extended to the borrower and / or which
are directly associated with the business / project of the borrower for which the credit facility has
been extended. For example, hypothecation of stocks, book debts etc. Stocks include Raw Materials,
Stock in process, Finished Goods, Spares etc. Book debts are based on invoices and delivery
challans. Hypothecation is the established practice whereby a borrower offers to the lender charge
on an asset as security for a loan, while retaining ownership of the asset and enjoying the benefits
therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot
service the loan as stipulated by the terms in the loan agreement.
10.1.2 Collateral Security

Collateral security is any security, other than Primary Security, offered to additionally secure the
credit facilities sanctioned by the Bank. Collateral security is normally obtained as a risk mitigating
measure and to sustain the promoters’ interest in the venture.
10.1.3 For MSE Sector (both Manufacturing and Services enterprises) no collateral security is to be
obtained for loans upto Rs. 10 lacs, and for loans up to Rs. 15 lacs the sanctioning authority may
consider waiving collateral security subject to compliance with certain conditions. For this sector, the
Bank has decided to cover all eligible SME advances upto Rs. 200 lacs (manufacturing and services)
and upto Rs. 100 lacs (retail trade) under CGTMSE scheme. The cost of guarantee i.e., Annual
Guarantee Fee (AGF) shall be borne by the borrower for all loans (CC &TL) sanctioned on or after
01.07.2017 (irrespective of the amount, including renewal of Cash Credit facilities). The matter of
recovery, or absorption, of guarantee fee by the Bank is reviewed from time to time.
CGTMSE has introduced “Hybrid Security” product, wherein collateral security can be obtained for
a part of the credit facility whereas remaining part of credit facility, upto a maximum of Rs. 200 lacs
(manufacturing and service) and upto Rs. 100 lacs (retail trade) can be covered under CGTMSE.
Other borrowers may be sanctioned credit facilities under Bank’s regular schemes.
10.1.4 As regards Agriculture segment, waiver is generally permitted for loans upto Rs. 1,00,000/-
(Rupees One Lac only) though there are scheme specific ceilings in this regard. In other cases,
with exception of specified categories like trade advances where obtention of collateral security is
prescribed as a part of the scheme, obtention/ waiver of collateral security is a discretion to be
exercised by the sanctioning authority. This decision is required to be taken on a case-to-case basis.
While doing so, the following points need to be kept in view:
i) Viability of the project per se will be the paramount requirement and available collateral may be
taken.
ii) A distinction may be made between new and existing connections while deciding/ insisting on
collateral / additional collateral security.
10.1.5 Pledge of Shares

Section 19 (2) of the Banking Regulation Act, 1949 states as under: -
“Save as provided in sub-section (1), no banking company shall hold shares in any company,
whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent of the
paid-up share capital of that company or thirty per cent of its own paid-up share capital and reserves,
whichever is less”. The detailed guidelines on cases requiring mandatory pledge of shares have
been put in place.
Section 19 (3) of the Banking Regulation Act, 1949 states as under: -
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“Save as provided in sub-section (1) and notwithstanding anything contained in sub-section (2), a
banking company shall not, after the expiry of one year from the date of the commencement of this
Act, hold shares, whether as pledgee, mortgagee or absolute owner, in any company in the
management of which any managing director or manager of the banking company is in any manner
concerned or interested”. Reporting mechanism for the above has been put in place.
10.1.6 Bank’s export credit portfolio (pre-shipment / post-shipment credits) is insured under Export
Credit Insurance for Banks Guarantee Scheme (ECIB WTPC /WTPS) of ECGC Ltd. This helps in
risk mitigation and conservation of Bank’s capital provisioning requirement.
10.1.7 Assessment of Valuation of Multiple Properties dispersed over various locations-

Discount to assessed realizable value of the Collateral Security:
There are instances where the collateral offered is an aggregation of charge on several properties at
various locations. In such cases, where the number of properties is in excess of 10 (ten), a notional
discount @ 5% is to be applied on the aggregate “Realisable Value” of the properties and the
discounted value should be considered while calculating the security coverage in the credit proposal.
Discretion in regard to acceptance of larger numbers of property as well as the discount to be
notionally reckoned, has been vested with the Sanctioning Authority.
10.2 Insurance cover of security charged to the Bank

10.2.1. Stocks/fixed assets under hypothecation/pledge to the Bank must be kept fully insured to the
extent of market value of the security unless the Bank has agreed to dispense with insurance. The
cost of insurance will be borne by the borrower. The Insurance policies are required to be obtained
in the joint names of the Bank and the Borrower or in the sole name of the Borrower if the policy
contains the Agreed Bank Clause where under any monies becoming payable under the policy shall
be paid to the Bank. Further, in terms of the security documents executed by the borrower, it is the
primary responsibility of a borrower to insure the assets and keep the policy alive and only if the
borrowers fail to do so, the Bank shall insure the movables and assets and debit the charges and
premium to the account of the Borrower. The expiry date of the respective insurance policies must
be diarized in the daily list in order that their renewal, when necessary, may not be overlooked.
In some of the geographies, either based on practice in the country or restrictions from the regulators,
above mentioned instructions relating to insurance cover on stocks/ fixed assets are not applicable.
FOs shall review such issues based on the general applicability and suitably incorporate the same in
branch/ country specific loan policy for approval from DMD (IBG).
10.2.2. Units handling hazardous substances, so notified by the Government from time to time, in
quantity equal to or exceeding a stipulated quantity of each substance should take out insurance as
per the provision of the Public Liability Insurance Act, 1991.
10.2.3. Insurance of mortgaged properties

The buildings, factories land & building, their fittings and fixtures, and machinery (which form part
and parcel of the mortgaged immovable property) must be kept fully covered by insurance against
the risks of fire as well as lightning (instead of fire alone, as the insurance companies do not admit
claims against damage caused to the buildings by fire due to lightning unless the risk is specifically
covered by the policy). The mortgaged properties should also be covered against riots, strikes, civil
commotion, cyclone, earthquake, and other natural calamities whenever such risks are apprehended
and insurance cover against them is deemed necessary by the Bank. (Terms and conditions of
sanction). All insurance policies should be taken out in the joint names of the Bank and the borrower.
Bank’s interests may also be protected by instruments such as ‘key man’ insurance policy when the
borrowing entity is highly dependent on a few persons. Arrangements (e.g., assignment) should be
made so that the proceeds of insurance cover, when invoked, would be routed through the Bank.
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10.3 Covenants
All sanctions of credit facilities are subject to certain covenants, including financial covenants, which
need to be adhered to by the Borrower/ Guarantor. The covenants are classified into two categories
keeping in view their nature viz. Mandatory Covenants and Mandatory Negative Covenants. The
covenants applicable to the borrowing arrangement are articulated in the Arrangement Letter, as are
the penal provisions for non-compliance therewith.
Based on the above covenants, FOs shall formulate such types of covenants based on the host
country regulations/ law, legal advice and general applicability, which shall be part of their branch/
country specific loan policy for approval from DMD (IBG). In the absence of specific
covenants stipulated by the FO, Mandatory and Mandatory Negative covenants as above shall be
applicable. These covenants, however, shall not be applicable for syndicated deals / India based loans
and such deals will be governed as per agreed terms and conditions.
10.4 Documentation Standards

The Bank/ FOs has in place well established systems and procedures for documentation covering all
types of credit facilities. These have been drawn up, and have evolved, over a period of time,
keeping in view the ultimate objective of documentation – which is to serve as primary evidence of
the debt owed by the borrower, or obligation guaranteed by the guarantor, to be relied upon in the
event of any subsequent dispute between the Bank and the borrower and/ or guarantor. Documents
also form the basis for enforcing the Bank’s right to effect recovery through legal recourse where all
other avenues have failed. Documents should cover the total exposure/dues to the borrower during
entire duration of advance. Operating units should ensure validity and enforceability of these
documents in the court of law till liquidation of debts by the borrower.
10.4.1 Documentation is a continuous and ongoing process covering the entire duration of an
advance comprising the following stages:
i) Pre-execution formalities:
These cover, mainly, searches at the Office of Registrar of Companies and search of the Register of
Charges (applicable to corporate borrowers), to ascertain the capacity of borrowers to borrow and
formalities, if any, to be completed by the borrowers in this regard. Searches at the office of the sub-
Registrar of Assurances or Land Registry to check the existence or otherwise of prior charge over
the immovable property offered as security, etc., as also taking other necessary precautions before
creating equitable / registered mortgage, including obtention of the lawyer’s opinion as to the clear,
absolute and marketable title to the property based upon the genuineness, completeness and
adequacy of the title deeds provided.
ii) Execution of Documents

It covers obtention of proper documents, -main and ancillary, appropriate stamping as required and
correct execution as well as recording thereof as per terms of sanction of the advance. This also
ensures compliance with requirements, if any, of corporate borrowers contained in the Memorandum
and Articles of Association, relevant resolution of the Board, etc. A copy of the loan agreement along
with all its enclosures will be delivered to the borrower (s) at the time of sanction/disbursal of loans
and acknowledgement of receipt thereof obtained.
iii) Post – execution formalities
This phase covers the completion of formalities in respect of mortgages, if any, registration with the
Registrar of Assurances, wherever applicable, and the registration of charges with the Registrar of
Companies within the stipulated period, etc. All existing mortgages and forthcoming mortgages have
to be registered, on an ongoing basis, with the Central Electronic Registry under SARFAESI Act,
2002 – (CERSAI).
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iv) Protection from Limitation / Safeguarding Securities
These measures aim at preventing documents from getting time-barred through limitation and at
protecting the securities charged to the Bank from being diluted by any subsequent charge that might
be created by the borrower to secure his other debts, if any. These objectives are sought to be
achieved by:
i) revival letters being obtained within the stipulated period, from borrower / guarantor;
ii) obtention of ‘Balance Confirmation’ from the borrower / guarantor at least at annual
intervals;
iii) making periodic searches in the records of the Office of the Registrar of Companies/ Registrar of
Assurances;
iv) insuring Assets charged – (unless specifically waived) to safeguard the Bank against the risk of
fire, other hazards, etc.;
v) carrying out periodical valuation of securities charged to the Bank;
vi) periodic inspection of charged assets.
10.4.2 Keeping the above broad objectives and the documentation process in view, Bank/ FOs has
devised standard documents in most cases, for various types of loans given to the borrowers, either
by the Bank alone or as part of a ‘Multiple Banking’ arrangement. Wherever standard specimens
have not been devised, these are suitably drafted on a case-to-case basis with the help of in-house
legal experts, on occasions, where warranted, through reputed law firms and approved by the
competent authority. Furthermore, changes in the documentation procedures and the implications
involved are circularised from time to time to all the branches/offices so that those who are
responsible for obtaining and safeguarding the documents are made fully conversant with
requirements in this regard. This is further strengthened through training imparted by the Bank from
time to time.
10.4.3 In respect of consortium/ participation/ syndicated loans and advances, the documents are
generally executed in consultation with the other member banks in accordance with the guidelines
laid down by RBI /IBA in the matter. Similarly, where advances are extended jointly with the
financial institutions, documents are specially drafted in consultation with the solicitors / in-house
legal experts to ensure perfection of pari-passu charge and / or second charge, as applicable, of the
movable / immovable assets of the borrower to protect the banks’ interests.
10.4.4 While it is the Bank’s endeavour to standardize documents for all types of facilities, in cases
where documents have to be specially drafted, the Local Head Offices / CAG/ CCG are authorized
to vet and approve such documents for facilities sanctioned up to CCSC. For facilities requiring
sanction of CCCC / ECCB or for special schemes drawn up by BUs under R&DB, such specially
drafted documents need to be cleared by the Law Department at Corporate Centre.
10.4.5 The sanctioned credit facility can only be disbursed on execution of standard loan documents
in the specified form, or as specially drafted by an approved law firm and duly approved by the
Appropriate Authority.
10.5 Unconditional Cancellability

Unconditional Cancellability clause, which gives the Bank the right to cancel the sanctioned limit
without reference to the borrower at any time, needs to be accepted by borrowers. Effective from
April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the Borrowers having
aggregate fund based working capital limit of Rs. 150 Cr and above from the banking system,
irrespective of whether unconditionally cancellable or not, shall attract a credit conversion factor of
20%.
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10.6 Security Creation/ Perfection
10.6.1 A valid and enforceable charge in respect of security for the credit facility (ies) as specified in
the terms of sanction must be perfected before disbursement – unless disbursement pending
completion of these formalities has been specifically permitted by the sanctioning authority / as per
delegated authority structure.
10.6.2 If sanctioned facilities are sought to be released on the basis of standalone documentation,
pending Consortium documentation, approval for such arrangement should be obtained from the
sanctioning authority.
10.6.3 Non adherence to the time given for perfection of security will invite penal provisions, which
should be clearly mentioned while conveying approval for extension in time. Waiver of penal
provisions should be avoided.
10.6.4 The registration of transactions of creation of security interest, securitization and asset
reconstruction (CERSAI) is made mandatory in respect of all mortgages across all business
segments.
10.6.5 Security transactions secured by creation, modification or satisfaction of security interest in

plant and machinery, stocks, debts including book debts or receivables and intangible assets whether
existing or future, by way of hypothecation, shall be filed on CERSAI portal.
10.7 Ceding of Second Charge to other banks/financial institutions

10.7.1 Ceding of charge should not be viewed only from the point of dilution of security but also from
the angle of need / justification for the additional borrowing and the possible impact on the financials/
performance of the borrowing unit, and a decision taken based on normal business prudence. The
principle of sharing the available securities of the borrowers as between the t erm lending banks and
institutions should be that no bank/institution over-secures its position at the cost of the other banks/
institutions.
****
*
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FOLLOW UP, SUPERVISION AND MONITORING OF
ADVANCES
The Bank has in place comprehensive post-sanction processes aimed at enabling efficient and
effective credit management. Broadly, the objectives of post-sanction follow up, supervision and
monitoring, and some of the key areas that need to be kept sight of are:
i) Where sanctions are based on projections, periodic comparison of projections with actuals is most
important.
ii) Ensuring end use of funds for which sanction has been accorded. While requisite instructions and
procedures to this end have been laid down, it would be the primary responsibility of the borrower to
ensure that the funds borrowed have been utilized for the purpose for which they have been lent by
the Bank. To this end, the Bank may seek verification, by way of auditor’s certificate, Board
Resolution and by way of any other acceptable means.
iii) Comparing the account outstanding to the assets level on a continuing basis.
iv) Detecting non-compliance/ waivers, from terms and conditions of the sanction and taking
appropriate action to safeguard the Bank’s interest.
v) Ensuring recovery of installments of the principal in case of term loans as per the scheduled
repayment programme.
vi) Examination of exception reports and reports in the nature of early warning signals.
vii) If the Early Warning Signals indicate possibility of any fraudulent transaction, such accounts may
be considered for classification as Red Flagged Accounts and reported as per RBI guidelines.
viii) Compliance with all internal and external reporting requirements for credit
discipline.
ix) If irregularity in an account persists for longer period, or occurs repeatedly, the credit facilities
may need to be re-assessed and the issues appropriately addressed.
x) In case of Consortium/Multiple Banking Arrangements, there must be regular exchange of
information by and between the banks involved.
xi) Ensuring that the borrowing entity does not have un-authorized current account with other banks.
11.2. The undernoted are a set of broad, general guidelines that have a bearing on the monitoring,
supervision and follow up aspects of credit administration, and thus need to be complied with care: i)
Each and every sanction should be reported for control to the next higher authority/ designated
authority.
Going forward, in order to have a more robust system which can help in Portfolio Level Control, the
existing format of individual control report shall be replaced with a consolidated system generated
“Sanction Analysis Report” covering details of sanctions/ approvals accorded by a credit committee
in a particular meeting. SAR shall be put up as one single agenda item to the next higher committee
(as in case of control report) for perusal and recording their observations/ suggestions to the
sanctioning committee concerned.
ii) Safe preservation of security documents and ensuring their validity and enforceability in a court of
law are areas that must not be lost sight of.
iii) Before disbursement of loans/ credit facilities, a certificate regarding compliance with terms and
conditions of the sanction should be placed before the branch head, as per laid down instructions
without fail.
iv) Monitoring of large withdrawals with a view to ensuring that they are not unrelated to the
unit’s normal activity.
v) Follow up for timely submission of Statements of Stocks and Book Debts, and their careful
scrutiny, for correct computation of Drawing Power.
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vi) Verification of assets
vii) Where Lender’s Independent Engineer (LIE) has been appointed, clarity in scope of work must
be ensured and reports are to be submitted directly to the Bank. Reports are to be examined carefully
and any developments / observations of note / material significance brought to the attention of the
borrowing unit, as well as of the branch head.
viii) Where limits have been allocated, allocatee branch must strictly adhere to the terms and
conditions advised by the home branch.
ix) Follow up for timely submission of FFRs/QRRs/ Management Information Reports and their
scrutiny and analysis to see that performance is in line with estimates / projections. If at significant
variance, appropriate corrective steps to be initiated.
x) Seeking cash flow statements on quarterly or more frequent basis and their careful analysis in
respect of units financed on cash budget method.
xi) Provisional Financials for the immediate preceding quarter to be obtained, analysed and
comments furnished in proposals.
xii) Adhering to the norms for conduct of Stock and Receivable Audit.
xiii) Engagement of agency for conduct of Forensic Audit in identified cases warranting such
measure.
xiv) Review and Management of Stressed Assets
xv) Corrective Action Plan for Stressed Assets (CAPSA): Reporting irregularity for confirmation
and Review of SMAs.
11.3. Early Review of Sanctions (ERS)

With a view to improving the quality of sourcing, pre-sanction process and capturing at an early stage
the critical risks in sanction, a system of quick review of sanctions has been put in place. ERS is
overseen by the Internal Audit Department and covers review of all loans. It has been covered in two
Variants:
a. Early Review of Sanction (Small Loans- SL): It covers sanctions above Rs. 1.00 Cr and upto Rs.
20.00 Cr.
b. Early Review of Sanction (Large Loans- LL): It Covers sanctions above Rs. 20.00 Cr.
Loan Review Format that are in use for both the variants shall continue, subject to periodical review/
revision, as deemed fit.
11.4 Credit Audit

Covers all Credit Auditable Accounts (CAAs) (including LC Bill Discounting limits whether it is on
stand-alone basis or sanctioned as part of the existing limits) with total credit exposure (FB+NFB
limits) above Rs. 20 Cr/ USD 2 mio or its equivalent and above. However, take over advances
(accounts with exposure of Rs. 10 Cr and upto Rs. 20 Cr) are to be covered under Credit Audit for
the first audit and will be subsequently covered under RFIA. The audit covers both Pre-sanction
processes like Appraisal, Assessment and Sanction, and post sanction processes like Documentation,
Follow-up, Monitoring and compliance with terms of sanction. If accounts of sister concerns/ group/
associate concerns of a CAA are in the books of the same auditee unit, they are also covered under
the Credit Audit process, even if their credit exposure is Rs. 20 Crores/ USD 2 mio or its
equivalent or less.
11.5 Legal Audit is mandatory for all exposures of Rs 5 crores and above, to verify the title deeds
and other loan documents.
11.6 Nominee Directors: The Policy on Appointment of Nominee Directors on the Boards of
Companies assisted by the Bank and guidelines are in place.
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11.6.1 The Bank may appoint Nominee Directors on the Boards of borrower companies in the
instances- i) Where Bank’s credit exposure to the company exceeds Rs. 500 crores, or ii) Where
Bank’s credit exposure exceeds Rs. 50 crores and the account has become SMA/NPA, and/ or iii)
Where mismanagement or inefficient / recalcitrant management has been observed, and/or iv)
Available evidences indicate that the unit / management is functioning in a manner detrimental to
the interest of the Bank.
11.6.1.1 Board approves the policy on Appointment of Nominee Directors (ND) on the boards of
assisted companies. The decision on requirement of appointment of ND in a company shall be taken
by the MD of the respective BVs. If decided to appoint, the authority structure for appointment of
ND is as under:
(i) If the appointee is from the list of retired officials displayed at the CPPD Site: DMD of the
respective BVs.
(ii) If the appointee is from outside the list of retired officials displayed at CPPD site: MD of the
respective BVs.
List of retired officials eligible for such appointment is maintained by CPPD.
11.6.1.2 In addition to serving and retired officers of the bank, reputed professionals from Banking,
Finance and Accountancy fields like Chartered Accountants having experience of minimum 10 years
as Statutory Auditors in Public Sector Banks and/or senior faculty from IIMs or reputed Management
Institutes may also be considered for such appointment.
11.6.1.3 Legal support to Nominee Director:

Where a Nominee Director has been identified as an ‘Officer in default’ and legal proceedings have
been initiated against him/her, legal support shall be provided by the Bank to defend such a director,
on prima facie satisfaction that he/she had acted in good faith in discharging his/her responsibilities
diligently as a representative of the Bank on the Board of the assisted Company. Such cases should be
referred to the Law Department at Corporate Centre, along with proper recommendations from the
Heads of Business groups/verticals. Law Department shall examine the case thoroughly and arrange
for legal support to defend the Nominee Director concerned.
11.6.1.4 Remuneration to Nominee Director:

The Company concerned shall be required to pay the Nominee Director his /her sitting fees as
prescribed by the Bank, and actual conveyance charges / other incidental expenses on par with other
Directors on the Board/as per his/her entitlement in the last grade while in service. However, if the
Company does not pay/is not in a position to pay/ pays less than the prescribed fee structure, the
Bank shall make the requisite payment of incidental/conveyance expenses.
11.7 Exit Policy for Standard Accounts (indicating signs of Stress): The policy is applicable to
standard accounts (including SMA-0, SMA-1 and SMA-2) irrespective of External rating with
exposure of Rs. 5 Cr and above. Guidelines in this regard have been put in place.
11.7.1 Policy on Taking/ Retaining/ Exiting from exposure of Borrowers with External Rating of
“D” is in place.
11.8 Management Information System based on a reliable database and development of faster
communication as tools for better overall credit risk management should be accorded due priority by
all FOs.
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11.9 Churning of Assets: FOs should also explore the possibilities of churning their loan assets
with a view to increase the profitability and liquidity to invest in other profitable assets and effect
exit from assets showing warning signals. FOs must keep track of the development in the market
and churn out assets preferably at premium to generate additional income and unlock the funds
keeping in the view the local regulatory guidelines.
11.9.1 For monitoring of loan books, an appropriate Management Action Trigger Policy should be
framed by Each FOs in their Loan Policy and this should be ensured in periodical RCOM (Risk
Committee) meetings. Further, Foreign branches should include in periodic loan reviews factors such
as default risk of guarantor, change of credit-worthiness of borrower, concentration risk, exchange
risk and migration risk in a liquidation approach.
11.10 Bank’s approach for handling Accounts of a Group where instances of Fraud/ Willful
default / Non-Cooperative Borrower/ promoters absconding/ Fugitive Economic Offenders:
There are instances of group of companies banking with us where some of the accounts of the group
are satisfactorily conducted, while one or more accounts of the group may be showing signs of stress
or their conduct may not be satisfactory.
The application of the proposed approach for ring fencing our exposure will be triggered in the
following instances:
a. Fraud
b. Wilful Defaulter
c. Non Co-operative Borrower and
d. Promoters of the Borrower Company are Absconding/ Fugitive offenders.
No new units of a group having the aforesaid triggers in other units / companies to be onboarded.
11.11 Issue of Look Out Circulars:

The recourse under LOC shall be taken in all cases of fraud where the amount involved is Rs.50
Crore & above with SBI and where the conditions stipulated hereunder are fulfilled:
a. Fraud alleged to have been committed / perpetrated against the Bank by the said borrower /
promoter/ whole-time directors / proprietor / partners / guarantors / whole-time director of
Corporate guarantor has been prima facie established during the investigation conducted by
the Bank;
b. Declared as fraud by the Fraud Identification Committee of the concerned Circle/ Vertical
(Circles/Business Groups); and
c. Complaint has been filed with CBI against the said borrower / promoter/ whole-time directors
/ proprietor / partners / guarantors / promoters / whole-time director of Corporate guarantor
about the commission of the cognizable offence (fraud) under IPC or other penal laws.
In respect of the cases which have been declared as fraud more than 5 years ago, as CBI would have
initiated investigation, such cases may be exempted from taking recourse under LOC. Further, cases
of fraud where compromise with the borrowers/guarantors for settlement has already been
sanctioned by the Bank and the settlement terms are being duly complied with by the them as also
cases where borrowers/guarantors have already paid/settled the dues to the satisfaction of the Bank
may be exempted. In all such cases, criminal proceedings pending against the accused persons
would continue till the logical conclusion.
****
**
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INCOME RECOGNITION, ASSET CLASSIFICATION. MEASUREMENT AND
IMPAIRMENT OF LOANS
12.1 The income recognition policy is objective and is based on the record of interest recovery rather
than on any subjective consideration. Likewise, the classification of a bank’s assets has to be done on
the basis of objective criteria which would ensure a uniform and consistent application of the norms.
Provisioning is also to be made based on the classification of assets, availability of security and
realizable value thereof. Food Credit advances are subject to the usual IRAC norms and Capital
Adequacy requirements.
12.2
DEFINITIONS
12.2.1 Non Performing Assets: An asset becomes non-performing when it ceases to generate
income.
12.2.2 An NPA is a loan or an advance where:

i) Term Loan: Interest and/or instalment of principal remain overdue for a period of more than 90
days.
ii) Overdraft/Cash Credit: Account remains ‘out of order’- if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power for a period of 90 days or outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power but there
are no credits for 90 days as on the date of Balance Sheet or credits are not enough to cover the
interest debited during the same period.
iii) In case of bills purchased / discounted – the bill remains overdue (any amount is overdue to the
Bank when not paid on the due date) for a period of more than 90 days.
iv) The instalment of principal or interest thereon remains overdue for two crop seasons for short
duration crops (Agriculture segment).
v) The instalment of principal or interest thereon remains overdue for one crop season for long
duration crops (Agriculture segment).
vi) The amount of liquidity facility remains outstanding for more than 90 days, in case of a
securitisation transaction undertaken.
vii) In case of derivative transactions the overdue receivables representing positive mark-to-market
value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due
date for payment.
viii) In case of interest payments, an account should be classified as NPA only if the interest due and
charged during any quarter is not serviced fully within 90 days from the end of the quarter.
ix) In addition, an account may also be classified as NPA in terms of paragraph 12.4.2 below.
12.3 INCOME RECOGNITION POLICY

12.3.1 The income recognition policy is based on the record of recovery. Income from NPAs is not
recognized on accrual basis but is booked only when actually received. Therefore, the Bank shall not
charge and take to income account interest on any NPA. This will apply to Government
guaranteed accounts also.
12.3.2 Interest on advances against Term Deposits, NSCs, IVPs, KVPs and Life Insurance policies
may be taken to income account on the due date, provided adequate margin is available in the
accounts.
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12.3.3 Fees and commissions earned by the Bank as a result of renegotiations or rescheduling of
outstanding debts should be recognized on an accrual basis over the period of time covered by the
renegotiated or rescheduled extension of credit.
12.3.4 Reversal of income

i) If any advance, including bills purchased and discounted, becomes NPA, the entire interest
accrued and credited to income account in the past periods, should be reversed if the same is not
realized. This will apply to Government guaranteed accounts also.
ii) In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed with respect to past periods, if uncollected.
12.3.5 Appropriation of recovery in NPAs

i) Interest realized on NPAs may be taken to income account provided the credits in the accounts
towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.
ii) Appropriation of recoveries in NPAs (i.e. towards principal or interest due), as per the Bank’s
extant instructions is done in accordance with following priority.
a. Charges
b. Unrealized Interest
c. Interest
d. Principal
12.3.6 Interest Application

On an account turning NPA, Bank shall reverse the interest already charged and not collected by
debiting to Profit and Loss account, and stop further application of interest. However, it may continue
to record such accrued interest in a Memorandum account in Bank’s books.
12.4ASSET
CLASSIFICATION
12.4.1 Categories of NPAs: NPAs are to be classified into the following three categories based on
the period for which the asset has remained non-performing and the realisability of the dues:
12.4.1.1 Substandard Asset: An asset which has remained NPA for a period less than or equal to
12 months.
12.4.1.2 Doubtful Asset: An asset which has remained in the substandard category for a period of
12 months.
12.4.1.3 Loss Asset: A loss asset is one where loss has been identified by the Bank or internal or
external auditors or the RBI inspection team but the amount has not been written off wholly.
12.4.2 Accounts with Temporary Deficiencies: An account should not be classified as NPA merely
due to the existence of some deficiencies which are temporary in nature such as non-availability of
adequate Drawing Power based on the latest available stock statement, balance outstanding
exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits
on the due date etc. subject to compliance of the following guidelines:
i) Drawings in the working capital accounts are to be covered by adequate value of current assets.
DP is to be arrived at based on the current stock statement, not to be older than three months. DP
computed based on the stock statements older than three months, would be deemed irregular.
ii) A working capital account will become NPA in case of irregular drawings for a continuous period
of 90 days even though the borrowing unit is working or the borrower’s financial position is
satisfactory.
iii) Regular and Adhoc credit limits need to be reviewed/ regularised not later than three months from
the due date/ date of ad-hoc sanction. In any case, an account where the regular / Adhoc credit limits
Page 50 of 632
have not been reviewed/ renewed within 180 days from the due date/ date of Adhoc sanction will be
treated as NPA.
12.4.2.1 Up-gradation of loan accounts classified as NPAs: If arrears of interest and principal
are paid by the borrower in the case of loan accounts classified as NPAs, the accounts should no
longer be treated as non-performing and may be classified as standard. Standard accounts that are
classified as NPA, and NPA accounts that are retained in the same category on restructuring, will be
upgraded only when all the outstanding loan / facilities in the account perform satisfactorily during
the specified period (@) i.e. principal and interest on all facilities in the account are serviced as per
terms of payment during that period.
(@) {Specified Period shall mean a period of one year from the commencement of the first payment
of interest or principal, whichever is later, on the credit facility with longest period of moratorium
under the terms of the restructuring package}.
12.4.2.2 Any additional finance may be treated as “Standard Asset” during the specified period
under the approved restructuring package. However, in the case of accounts where the pre-
restructuring facilities were classified as ‘Sub- standard’ and ‘Doubtful’, interest income on the
additional finance should be recognised only on cash basis. If the restructured asset does not
qualify for upgradation at the end of the above specified period, the additional finance, too, shall be
placed in the same asset classification category as the restructured debt.
12.4.2.3 Asset classification shall be borrower-wise and not facility-wise.
12.4.2.4 Advances under Consortium Arrangements: Classification shall be done based on the
record of recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances.
12.4.2.5 Accounts where there is erosion in the value of security/ frauds committed by
borrowers: In cases of such serious credit impairment, the asset should be straightaway classified as
doubtful or loss asset as appropriate:
i) erosion in the value of the security- if the realizable value of security is less than 50% of the
value assessed by the Bank or accepted by RBI at the time of last inspection, it may be classified
under Doubtful category,
ii) if realizable value of the security as assessed by the Bank/ approved valuers/ RBI, is less than
10% of the outstanding in the borrowal accounts, the asset shall be straightaway classified as Loss
asset.
12.4.2.6 Advances against Bank’s own Term Deposits, NSCs, KVPs, IVPs, surrender value of
Life Insurance Policy etc.: Such accounts would not be classified as NPAs provided adequate
margin is available. However, advances granted against gold ornaments, government securities and all
other securities shall not be covered by this exemption.
12.4.2.7 Loans with moratorium for payment of interest: Payment of interest becomes ‘due’ only
after the moratorium or gestation period is over.
12.4.2.8 Agricultural advances: An account will turn non-performing when the instalment of
principal or interest thereon remains overdue for two crop seasons, for short duration crops, and one
crop season for long duration crops. These norms shall be applicable only to Farm Credit. In regard to
agricultural loans to other than the above category of borrowers or term loans given to non-
agriculturists, identification of NPAs will be done on the basis of 90 days delinquency norm.
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In case of natural calamities impairing the repaying capacity of agricultural borrowers, Bank may
convert short term production loan into a term loan or reschedule the repayment period subject to
RBI guidelines issued from time to time in the matter. Such loan accounts shall be treated as current
dues and need not be classified as NPA and would be governed by the revised terms and conditions.
Thereafter, IRAC norms will apply to those accounts as well.
12.4.2.9 Government guaranteed accounts: Central Government guaranteed credit facilities may
be treated as NPA only when the Government repudiates its guarantee when invoked. However, this
exemption shall not be available for the purpose of recognition of income. State Government
guaranteed advances and investments in State Government guaranteed securities would attract asset
classification and provisioning norms if interest and/or principal or any other amount due to the Bank
remains overdue for more than 90 days.
12.4.2.10 Project under implementation: For all project loans the ‘Date of Completion’ and the
‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt
out at the time of financial closure of the project. These should also be documented in the Bank’s
appraisal note during sanction of the loan.
12.5 Provisioning Norms

In case a bank fails to report SMA status of an account to CRILC or resorts to methods with the
intent to conceal the actual status of the account or evergreens the account, it will be subjected to,
inter alia, accelerated provisioning for that account. The n o r m a l provisioning requirement, and
the accelerated provisioning in respect of such non-performing accounts are as under:
Asset Period as NPA Normal provisioning (%) Accelerated

Classification provisioning
(%)
Sub- standard Up to 6 months 15 15
(Secured) 6 months to 1 year 15 25
Sub-standard Up to 6 months 25 (other than Infrastructure 25
(Unsecured ab- loans)
initio) 20 (infrastructure loans)
6 months to 1 year 25 (other than infrastructure 40
loans)
20 (infrastructure loans)
Doubtful I 2nd year 25 (secured portion) 40 (secured
portion)
100 (unsecured portion) 100
(unsecured
portion)
Doubtful II 3rd & 4th year 40 (secured portion) 100 for both
secured
And unsecured
portions.
100 (unsecured portion)
Doubtful III 5th year onwards 100 100
12.5.1 Provisioning in respect of Exposure to Wilful Defaulters

The provisioning in respect of existing loans/exposures of t h e B a n k to companies having director/s
(other than nominee directors of government/financial institutions brought on board at the time
Page 52 of 632
of distress), whose name/s appear more than once in the list of willful defaulters, will be (a) 5%
in cases of Standard accounts and (b) in case of NPA account accelerated provisioning shall apply.
12.5.2 Provisioning in respect of fresh exposure to Non-cooperative borrowers

Any fresh exposure to Non-Cooperative borrower will by implication entail greater risk necessitating
higher provisioning. Therefore, we have to make higher provisioning as applicable to substandard
assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any
other company that has on its board of directors any of the whole time directors/promoters of a
non-cooperative borrowing company or any firm in which such a non-cooperative borrower is in
charge of management of the affairs. However, for the purpose of asset classification and income
recognition, the new loans would be treated as Standard assets.
12.5.3 Provisioning in respect of exposures of fraudulent borrowers

In case of accounts classified as ‘fraud’, the Bank will normally make provisions to the full extent
immediately. The provision may also be spread over four quarters, normally within the same
Financial Year i.e. up to 31st March of the Financial Year in which the account is identified as fraud,
provided there is no delay in reporting. The option of providing fully for fraud accounts over a period
not exceeding four quarters will not be available to accounts classified as “loss accounts”. In case of
delays, the Banks under Multiple Banking Arrangement (MBA) or member Banks in the Consortium
Arrangement are required to make the provision in one go. Delay for the purpose would mean that
the fraud was not flashed to CFMC, RBI or reported on the CRILC platform, RBI within a period of
one week from its (i) classification as a fraud through the RFA route which has a maximum time
period of six months or (ii) detection/declaration as fraud ab initio by the bank as hitherto.
12.5.4. Valuation of security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of
security, in cases of NPAs with balance of Rs. 5 crores and above, stock and receivable audit at
annual intervals by empanelled Stock and Receivable Auditors is to be got done in order to enhance
the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the
Bank should be got valued once in three years by Bank’s empanelled valuers.
12.5.5 Loss Assets

Generally, loss assets are to be taken off Balance Sheet and to be parked in Advances Under Collection
Account (AUCA). In case loss assets are permitted to remain in the Bank’s books for any reason, a
provision equivalent to the outstanding (100 percent of outstanding) in the account shall be made.
12.5.6 Standard assets

Bank shall make general provision for Standard assets at the following rates for the funded
outstanding on global loan portfolio basis:
i) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 per
cent;
ii) Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
iii) Advances to Commercial Real Estate – Residential Housing Sector (CRE-RH) at 0.75 per cent;
iv) All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.
v) With regard to FOs, some of the local regulatory norms on provisioning and NPAs are more
stringent than RBI norms. Accordingly, these branches will follow the stricter of the two regulatory
norms (RBI/local) as applicable.
Page 53 of 632
12.6. Extension of DCCO
Projects where implementation has been stalled primarily due to inadequacies of the existing
promoters and where subsequent change in ownership of the borrowing entity has been effected – in
such cases, banks may permit extension of DCCO up to a further period of two years in addition to
the existing regulations on DCCO, without any change in asset classification of the account. The
detailed guidelines on DCCO of project loans are put in place.
12.7. Restructuring of Assets

With assets continuing to be under stress, there are several instances that require critical examination
from the point of view of possible viability pursuant to restructuring of facilities.
Accordingly, detailed guidelines are in place for restructuring loan accounts that are under stress.
12.7.1 General Principles and Prudential Norms for Restructured Advances

The principles and prudential norms laid down are applicable to all advances.
12.7.2 Eligibility criteria for restructuring of advances

While the Bank/ FOs may restructure accounts classified under ‘Standard’, ‘Sub- standard’ and
‘Doubtful’ categories, we are precluded from rescheduling / restructuring / renegotiating borrowal
accounts with retrospective effect. While a restructuring proposal is under consideration, the usual
asset classification norms would continue to apply. The process of re-classification of an asset
shall not stop because restructuring proposal is under consideration. Some illustrative criterions
for restructuring are i) No account will be taken up for restructuring unless the financial viability is
established. Ii) B orrowers indulging in fraud and malfeasance will continue to remain ineligible for
restructuring.
12.7.3 Asset classification norms

Restructuring of advances could take place in the following stages:
i) before commencement of commercial production / operation;
ii) after commencement of commercial production / operation but before the asset has been classified as
‘sub-standard’;
iii) after commencement of commercial production / operation and the asset has been classified as
‘sub-standard’ or ‘doubtful’.
12.7.4 The accounts classified as ‘Standard assets’ should be immediately re-classified as ‘sub-
standard assets’ upon restructuring. The NPAs, upon restructuring, would continue to have the same
asset classification as prior to restructuring and slip into further lower asset classification categories
as per extant asset classification norms with reference to the pre-restructuring repayment
schedule.
12.7.5 Provision on restructured advances
i) We are required to hold provision against restructured advances as per the extant provisioning
norms.
ii) Restructured accounts classified as Standard advances will attract a higher provision (as
prescribed from time to time) in the first two years from the date of restructuring. In cases of
moratorium on payment of interest/principal after restructuring, such advances will attract the
prescribed higher provision for the period covering moratorium and two years thereafter.
iii) Restructured accounts classified as non-performing assets, when upgraded to Standard
category will attract a higher provision (as prescribed from time to time) in the first year from the
date of upgradation.
Page 54 of 632
12.8 Insolvency and Bankruptcy Code-2016 (IBC)
With a view to enhance credit availability, promote entrepreneurship, balance the interest of all
stakeholders and reduce the time of resolution for maximizing the value of assets, need of an efficient
insolvency regime was felt. Hence, the Insolvency and Bankruptcy Code (IBC), 2016 was introduced
(notified in the official Gazette in May 2016) to consolidate the existing frameworks and create a new
institutional structure.
The IBC brings a paradigm shift from ‘debtors’ in possession to ‘creditors in control’, creates time
bound processes for insolvency resolution of companies and individuals. It moves from “Erosion of
Net-Worth” to “Payment Default”. The minimum default amount to initiate the procedure is
Rs.1.00 lac. Insolvency Professional will take over management and control of the Corporate Debtor
(Borrowing Company). Government dues would rank below the claims of other creditors. It also has
provisions to deal with concealment, fraud and/or manipulation leading to fine and/or imprisonment.
The application under the proviso can be filed anyone of: i) Financial creditors, ii) Operational
creditors, (including Government & employees/workmen), and iii) Corporate debtor.
The IBC framework is regulated by ‘the Insolvency and Bankruptcy Board of India (IBBI)’. It
has constituted two following Adjudicating Authorities to handle the cases:
i) National Company Law Tribunal (NCLT) – to deal with Corporate Persons (including
LLP).
ii) Debt Recovery Tribunal (DRT) – to deal with Individuals and Partnership Firms.
All appeals from NCLT and DRT shall lie with NCLAT and DRAT respectively. However, the
Supreme Court of India shall have Appellate jurisdiction over NCLAT and DRAT.
In this regard, a detailed policy on applicability and invocation of provisions under the Code has been
put in place.
12.9 e-Auction
All auctions through DRTs and SARFAESI should be conducted electronically to help break
cartelization in auctions, by using the following modules:
i) Receipt of online technical bids
ii) Reverse e Auction – to be used for procurements
iii) Forward e Auction – to be used for disposal of assets by the Bank including those under DRT and
SARFAESI.
12.9.1 Even after adopting e-auction, if it is found that the response is not adequate or for any other
reason, the Tribunals are free to choose other method it may consider appropriate for sale of property of
the defaulters.
12.9.2 Bank can resort to sale through private treaty when sale through e-auction fails. The minimum
number of attempts of sale through e-action before going for sale through private treaty is as under:
Value of property No. of attempts

Upto Rs. 1 Cr 1
Above Rs. 1 Crore 2
The guidelines for sale through private property have been put in place.
12.9.3 Bank can participate in Auctions for Purchase and sale of Immovable properties charged to
the Bank under the SARFAESI Act 2002 and other auctions by DRTs/ Courts. Guidelines in this
regard have been put in place.
Page 55 of 632
12.10 Sale of SMA-2/ NPA/AUCAs to ARC
Sale of SMA-2/NPAs/AUCA to ARCs/Banks/FIs/NBFCs may be treated as one of the options for
resolution rather than as the last option. The Bank has also laid down a policy in accordance with the
RBI guidelines. However, such sale may preferably be considered in the following circumstances: i)
Realization of security difficult and time consuming.
ii) Disputed/defective title deeds/documents.
iii) Low compromise offer vis-à-vis total dues.
iv) High costs associated with continuing the asset.
v) No acceptable resolution option is in sight.
12.11 NPA Management Policy

The Bank has adopted well defined measures for controlling fresh NPA accretion and resolution of
existing NPAs. The policy has been drawn up by SARG and is reviewed periodically. Necessary
guidelines are issued to operating units from time to time.
12.11.1 Review of NPAs / AUCAs

The Bank has formed various committees headed by Chairman/ Managing Directors/ Deputy
Managing Directors/ Chief General Managers/ General Managers/ Deputy General Managers to
periodically review SMAs/NPAs/AUCAs and suggest resolution and turn around strategies.
12.11.2 The first focus in management of SMAs will be possible upgradation of the loan asset
through rectification, re-phasement, restructuring or rehabilitation of borrower’s business. If the
branch level review indicates that the problems of the unit are not temporary, viability studies need to
be undertaken on a case-to-case basis. Restructuring of the account as an alternative, needs to be
explored at the early stages of stress in the account. Viability of the unit and the promoters’ interest
(and stake) are the basic prerequisites for the Bank to undertake restructuring/ rehabilitation. However,
right of recompense will be incorporated in every rehabilitation proposal.
12.11.3 Scheme of outsourcing of recovery through Recovery Agents/Agencies (RAs) has been
reviewed and aligned with RBI Guidelines for Outsourcing of Financial Services. The detailed
guidelines for appointment of Recovery Agents/Agencies and monitoring of their conduct include:
i) Model Code of Conduct to be adopted by RAs.
ii) Declaration- cum- undertaking to be obtained from RAs.
iii) Model Policy & Operating Guidelines for Repossession of Security.
iv) Application Form for appointment of RAs.
v) Grievances Redressal Mechanism.
12.11.4 The Bank has also put in place a mechanism for outsourcing of recovery efforts, to
supplement the efforts of the Bank’s staff.
12.11.5 Viable units and where promoters show genuine interest in reviving the unit will continue to
be supported. Sale of non-core assets in case of over-leveraged companies to be pursued
vigorously with the promoters to bring down the interest cost. In other cases, especially where
promoters are not cooperating, options to exit or reducing exposure will be actively explored, where
feasible. Where despite our best efforts in this regard, it is not possible to exit an account or at-least to
reduce our exposure, a reassessment of the situation will be done and if necessary Bank will consider
either an acceptable OTS or in its absence, even consider recalling the account. Bank will examine
the various options and initiate measures as appropriate in a time-bound manner, as delays in such
situations far from helping matters are likely to lead to erosion of security and increase in the ultimate
quantum of the NPA.
Page 56 of 632
12.11.6 Settlements through compromise (i.e. one time settlement of dues) will be a negotiated
settlement under which Bank endeavours to recover its dues to the maximum extent possible. The
Screening Committee (with panel comprising of external members) for scrutiny & Recommendation
of compromise proposal which falls under the sanctioning powers of SAMCC-I and above has been
created. Detailed guidelines for compromise settlements have been put in place. Compromise
settlements are permitted where cases are pending before Courts/DRTs subject to consent decree
being obtained from the concerned Court/DRT.
12.11.7 If settlement of dues through compromise is being negotiated with one unit of a Group
banking with us, it shall be the endeavor to minimise the sacrifice by seeking support from the parent
company / other Group companies. The response of the Group towards such effort on our part will
be a major contributing factor in deciding further exposures to the Group or to other individual units
within the Group.
12.11.8 In a compromise, as the Bank agrees to accept an amount less than the total amount due
under the relative loan contract, in full and final settlement as a general policy, it is tantamount to
cessation of lender-borrower relationship with the borrowing unit, its promoters and guarantors.
Ordinarily, no fresh finance will be considered either to the existing unit or to any new unit being
promoted by the same promoters / guarantors. However, exceptions may be made in respect of
settlements under various One Time Settlement Schemes of RBI and similar Schemes of the Bank
(e.g. SBI OTS), for which separate guidelines are in place.
12.11.9 The Bank has laid down a policy on approach to sacrifices in case of transfer of financial
assets to Securitisation Companies/ Reconstruction Companies (SCs/RCs) as each asset is unique in
the context of circumstances necessitating consideration of transfer to SC / RC as a recovery option.
12.11.10 The Bank recognises that transfer of financial assets to third party entities such as SCs /
RCs would, in most cases, be at a substantial discount to the book value of the asset / ledger balance.
The Bank’s endeavour would be to optimise recovery while taking into account costs associated
with continuing the account in our books. As such, the quantum of sacrifice per se in terms of
percentage of loan being written off in such case would not hinder consideration of the offer.
12.11.11 The Bank would follow a policy of taking the NPAs of doubtful/ loss categories which are
either fully or substantially provided for, may be taken off the Balance Sheet and parked in Advances
Under Collection Account (AUCA). Detailed operating guidelines are in place. This procedure is not
expected to dilute in any way the follow-up for recovery. The structured mechanism prescribed for
follow-up of accounts parked in AUCA will be followed meticulously. All internal reviews of NPAs
will also include accounts transferred to AUCA.
12.11.12 Accounts sanctioned/ disbursed, and where repayment has been initiated during the
financial year and slipped into NPA category within the first two years of sanction/repayment
commencement fall in the category of Quick Mortality Accounts. Such accounts will be monitored/
reviewed. Appropriate steps to be initiated to bring them back to Standard Asset Category.
12.11.13 Bank has laid down specific instructions in the matter of classification / de-classification of
Non-cooperative borrowers.
Updates on loan policy upto 31.12.2019
Page 57 of 632
Updation Chapter 1: Policy matters for the month of April 2019 to Dec 2020
sl Chapter/ Topic changes Cir no
1 Chapter-4/ 2. It has now been decided that in case of takeover of eCircular

Takeover of borrowal units from other banks, where CIRs are not
Advance received from the transferor bank, in spite of all Department:
efforts by the operating functionaries, CIR may be CREDIT
compiled by the Credit Analyst/CSO on the basis of POLICY AND
information sourced from CRILC/ MCA/ CIBIL/ PROCEDURES
Other public forums as follows, after obtaining
DEPARTMENT
Takeover norms approval for compiling the CIR as below from the
Controller of the Branch: Sl.No.:
Obtention of 1174/2019 - 20
credit i. The CRILC portal of RBI provides credit
information information on all borrowers having aggregate Circular No.:
report (cir) of exposure of Rs.5 crores and above including CCO/CPPD-
the prospective information on Asset Classification, Current ADV/124/2019 -
borrower Accounts maintained with lenders etc. 20
ii. Basic details like Address, Names of Directors, Date: Tue 19 Nov
Capital Structure, Date of incorporation, Balance 2019
Sheet data are available in MCA site.
iii. Other information related to business activity
allied activities are available in public domain.
iv. In cases where information is not
available from the above sources (like non-
corporates and others with aggregate exposure of
below Rs.5 crores), CIC Commercial Credit Report
may be obtained.
v. CIR may be compiled on the enclosed Format
(Annexure-I) by the Credit Analyst/CSO and put up
to the Relationship Manager. The source of
information to be given against each item.
vi. In case the account is reported as SMA/ NPA
on technical grounds by any of the CICs/CRILC,
obtention of CIR from the lending bank(s)/FI(s) will
be mandatory.
3. All other instructions pertaining to takeover of
borrowal units from other Banks/FIs as mentioned in
above referred to Circular remains unchanged.
Page 58 of 632
2 Chapter-4/ 2. The guidelines on obtention of CIR have been eCircular
Takeover of reviewed by the competent authority. The revised
Advance guidelines are as follows: Department:
CREDIT
i. CIR(s) shall be mandatory for all Group POLICY AND
Concern(s) having borrowing arrangements from PROCEDURES
Banks/ FIs and having ECR of below BBB i.e. below
investment grade or are unrated. DEPARTMENT
OBTENTION
OF CREDIT ii. CIR(s) shall be mandatory also for all the Sl.No.:
INFORMATION Group Concerns whose names appear in any of the 1176/2019 - 20
REPORT (CIR) defaulters/SMA/Caution/RBI Fraud Registry/Red
ON GROUP Circular No.:
Flagged Accounts/CRILC list.
COMPANIES CCO/CPPD-
iii. For Group Concerns having borrowing ADV/126/2019 -
arrangements with Banks/FIs outside India and have 20
ECR below investment grade or are unrated, all out
Date: Tue 19 Nov
efforts have to be made for obtention of CIRs from
2019
their respective lenders. In case of inability to obtain
CIRs on account of secrecy/privacy laws/regulations
in those countries or any other genuine reason, CGM
(CAG/CCG/PFSBU/IBG) may permit waiver from
obtention of CIRs of Group Concerns. But in all such
cases Credit/Opinion Reports from Credit Agencies
like Dun & Bradstreet (D&B) has to be obtained.
iv. For others, CGM (CAG/CCG/PFSBU/ IBG)
may permit waiver from obtention of CIRs of Group
Concerns from Banks and FIs on a case to case basis,
provided the due diligence procedure (as outlined in
v below) to check the credentials/conduct of accounts
has been meticulously followed and recorded in the
proposal. Such groups will have to be pre- identified
with the approval of CGM (CAG/CCG/PFSBU/IBG).
v. As part of due diligence procedure mentioned
in 2. (iv) above, in cases where obtention of CIR of
Group concerns from Banks/FIs is waived, CIR may
be compiled by the Credit Analyst on the basis of
information sourced from CRILC/ MCA/ CIBIL/
Other public forums as follows:
a) The CRILC portal of RBI provides credit
information on all borrowers having aggregate
exposure of Rs.5 crores and above including
information on Asset Classification, Current
Accounts maintained with lenders etc.
b) Basic details like Address, Names of Directors,
Capital Structure, Date of incorporation, Balance
Sheet data are available in MCA site.
c) Other information related to business activity
Page 59 of 632
allied activities are available in public domain.
d) In cases where information is not available from
the above sources (like non- corporates and others
with aggregate exposure of below Rs.5 crores), CIC
Commercial Credit Report may be obtained.
e) CIR may be compiled on the enclosed Format
(Annexure-I) by the Credit Analyst and put up to the
Relationship Manager. The source of information to
be given against each item.
f) In case the account is reported as SMA/ NPA on
technical grounds by any of the CICs/CRILC,
obtention of CIR from the lending bank(s)/FI(s) will
be mandatory.
g) Further, the Branch should also verify whether
any of these Group Companies appear in any of the
Defaulters/SMA/Caution/RBI Fraud Registry/Red
Flagged Accounts list. This fact should be recorded
in the proposal.
3 Chapter 2 DUE The Bank’s approach to extension of credit facilities eCircular

DILIGENCE, to the companies, whose names or names of the
STATUTORY Promoters of those companies appear in the CIC Department:
AND OTHER Defaulters’ List has since been reviewed while CREDIT
RESTRICTIONS reviewing Bank’s Loan Policy for the year 2019-20. POLICY AND
ON LOANS & PROCEDURES
a. Bank’s approach to extension of credit facilities to DEPARTMENT
ADVANCES applicant companies, whose names appear as Sl.No.: 222/2019
defaulters in CICs reports. - 20
Circular No.:
CREDIT CCO/CPPD-
FACILITIESTO ADV/28/2019 -
COMPANIES: 20
CICs
Date: Thu 23
DEFAULTERS May 2019
LIST
Page 60 of 632
Credit facilities to Existing Accounts:
units whose names
appear as defaulters in A. The renewal /
CICs continuation of the
limit at the existing
levels may be
considered by the
sanctioning authority
based on proper
justification/
mitigations
/Corrective Action
plan proposed.
b. Normally, no
additional (including
ad-hoc /
enhancement)
facilities are to be
sanctioned to the
applicant company
till the name is
removed from the
defaulters' list.
However, proposals
in respect of such
enhancement/
additional facilities
to be put up to
authority not below
RCCC for proposals
below RCCC. For
RCCC and above,
it will be the
Sanctioning
Authority. In such
cases, the reasons for
default/ continuing
nature of default of
the Companies
during past 12
months should be
critically examined
and based on
justification/
mitigations proposed,
a view may be taken
on a case to case
basis by the
Sanctioning authority
New Connections:
Not to be considered
Page 61 of 632
till the name of the
unit is removed from
the defaulters' list
and the reasons for
the default should be
ascertained and
satisfied.
4 LARGE In order to align the exposure norms for Indian Department:

EXPOSURE banks with the BCBS standards and mitigate the CREDIT
FRAMEWORK Credit Concentration Risk, RBI has issued POLICY AND
guidelines for Large Borrowers under Large PROCEDURES
Exposure Framework (LEF) vide its Cir no. DEPARTMENT
DBR.No.BP.BC.43/21.01.003 dated 01.12.2016 and Sl.No.: 807/2019
DBR.No.BP.BC.31/ 21.01.003 dated 01.04.2019, - 20
applicable from 01.04.2019. Further, in order
to capture exposures and concentration risk more Circular No.:
accurately RBI has issued revised guidelines vide its CCO/CPPD-
Cir no. DBR.No.BP.BC.43/ 21.01.003/2018-19 ADV/89/2019 -
dated 03.06.2019 (enclosed as Annexure – I). The 20
major modifications from the Circular are as follows:
Date: Mon 16
a) Exclusion of entities connected with the Sep 2019
sovereign from definition of group of connected
counterparties.
b) Introduction of economic interdependence criteria
in definition of connected counterparties (Applicable
from 1st April, 2020).
c) Mandatory application of look-through
approach (LTA) in determination of relevant
counterparties in case of collective investment
undertakings, securitisation vehicles and other
structures (Applicable from 1st April, 2019).
5 FIXINGOF We refer to Circular No. CRO/RMD- Department:

EXPOSURE CRMD/1/2019-20 dated 8 th April 2019 vide RISK
CEILINGFOR which linkage of Industry Exposure to Tier-1 Capital MANAGEMENT
INDUSTRIES of the Bank has been circulated. DEPARTMENT
TRACKEDBY
RMD Background Sl.No.: 185/2019
- 20
2. In order to reduce Concentration Risk, Bank’s
Loan Policy restricts domestic exposure to an Circular No.:
industry/ sector upto 15% of the Bank’s Total CRO/RMD-
Domestic Exposure (TDE). However, based on CRMD/3/2019 -
Outlook, Portfolio Quality Index (PQI) and 20
Page 62 of 632
growth in Bank’s exposure to that specific Date: Mon 13
Industry/ sector, Risk Management Department May 2019
(RMD) prescribes approved exposure ceilings within
15% of the Bank’s TDE.
RAIL Framework
3. Based on the experience gained on the existing
Industry exposure setting framework and Industry
practices, we have revamped the Industry exposure
setting framework with the following amendments:
A. Maximum Industry Exposure ceiling is linked to
Tier- 1 Capital.
B. For further building capital sensitivity in
exposure framework, desired Risk Weighted Asset
(RWA) level would be used as a criterion for
taking further exposure. RWA is linked to ECR.
Therefore, ECR Thresholds also will be fixed for
onboarding of exposures (in addition to the
current Internal Rating Thresholds).
6 REVIEW OF The authority structure for sanction of new Department:

AUTHORITY exposure or enhancement in existing exposure CREDIT
STRUCTURE in deviation of prescribed ECR threshold for POLICY AND
FOR APPROVAL the industry segment is as below : PROCEDURES
OF DEVIATIONS DEPARTMENT
RAIL/INDUSTRY Sanctioning Deviation Approving Sl.No.:
EXPOSURE Authority Authority 1216/2019 - 20
FRAMEWORK
Below RCCC RCCC Circular No.:
CCO/CPPD-
RCCC & above Sanctioning Authority ADV/130/2019 -
20
Date: Tue 26
Nov 2019
7. INTERNAL Please refer to Circular No.: CCO/CPPD- RISK

PRUDENTIAL PRUDENTIAL/41/2016-17 dated 16th June MANAGEMENT
EXPOSURE DEPARTMENT
LIMITS (IPEL) 2016 and CRO/RMD-CRMD/11/2017-18 dated Sl.No.:
2nd November 2017 with regard to IPEL 1334/2018 - 19
framework.
Circular No.:
2. IPEL Framework fixed by the Bank is set as CRO/RMD-
graded exposure limits based on principle of CRMD/8/2018 -
exposure limits being inversely proportionate to the 19
Probability of Default. IPEL will be tapered down for
lower ratings. IPEL will be within RBI Prudential Date: Tue 1 Jan
Exposure norms and later on within Large Exposure 2019
(LE) framework effective from 1st April 2019.
Page 63 of 632
Existing IPEL Framework
3. Presently IPEL framework is aligned to RBI’s
Prudential Exposure norms in terms of category.
The framework consists of five categories of
borrowers, namely:
Single Borrower entities:
i. Single Borrowers.
ii. Single Borrowers engaged in Infrastructure,
iii. Oil Companies who have been issued Oil
Bonds (which do not have SLRstatus) by
Government of India, Group Borrower
entities:
iv. Group Borrowers, and
v. Group Borrowers engaged in infrastructure.
4. Borrowers in each category are segregated into
bands as mentioned below:
• Single Borrower entities – 5 bands based on

CRA.
• Group Borrower entities – 13 bands
based on Group PQI. (Group PQI is
calculated based on weighted average
CRA of Individual companies in the
Group, based on exposure).
• IPEL is calculated on the basis of the Bank's
Tier-1 capital as on 31st March of the
preceding Financial Year and is revised
annually.
• Branches to calculate the exposure for the Internal
Prudential Exposure Limits as per the Loan Policy
Guidelines.
Exposures- either new or by way of enhancements –
exceeding Internal Prudential Exposure Limit
Framework will require sanction of the ECCB.
• Internal Prudential Exposure Limits are not

to be treated as default eligibility limits or
headroom available for any borrower.
• Exclusions: The framework will not be
applicable to the following cases:
i. Borrowers, to whom limits are allocated
directly by the Reserve Bank of India for
food credit, and
ii. Loans against Bank’s own deposits to the
extent that the Bank has a specific lien on
such deposits.
Page 64 of 632
MCQ
1. Large borrower is defined as the sum of all exposure values of the bank to a counterparty
or a group of connected counterparties is equal to or above _____ of the Bank’s Tier- I
Capital. The aggregate exposure to all “large borrowers” should not exceed _____ of
Bank’s Tier I Capital.
a) 20%,200%
b) 10%200%
c) 10%,800%
d) 20%,800%
2. Maximum aggregate exposure ceiling prescribed by the Bank for Individuals as
borrowers is
a) Rs.25.00 Cr.
b) Rs.50.00 Cr.
c) Rs.75.00 Cr.
d) Rs.100.00 Cr.
3. Non-Fund Based facilities should not exceed ______ % of Bank’s total fund based
exposure
a) 50%
b) 20%
c) 125%
d) 100%
4. As per substantial exposure norms: Aggregate of substantial Exposures to Single
Borrowers not to exceed
a) 200% of tier I capital
b) 300% of tier I capital
c) 400% of tier I capital
d) 500% of tier I capital
5. As per the Loan Policy, the average maturity of any term loan including moratorium
should not normally exceed
a) 10 years
b) 9 years
c) 8 years
d) 7 years
Page 65 of 632
Case Let : Check your progress:
Company Alpha ltd approaches the bank for takeover of its account in March 2020. At present
borrower is banking with YESMAC Bank, having (FB+NFB) exposure of Rs.9.00 Cr, applicant
Company is also requesting for enhancement of Rs.3.00 Cr.; Company is ready to offer all the
collateral (valued as Rs.14.00 Cr) which at presently given to YESMAC Bank. Recently CRISIL rated
the company and assigned long term rating of BBB, during internal rating exercise
company rated as SB-9/CUE-4.
Kindly help Branch in takeover exercise, by attempting under mentioned questions.
1 Whether Branch can go for takeover, if yes, then what will be minimum collateral
requirement?
A yes, as it is backed by 100% collateral
B yes, as collateral coverage is 75% and more
C yes, as there is no stipulation of collateral above loan of Rs.10.00 Cr.
D no, Incremental exposure, if any, must be backed by min. additional proportionate
Collateral Security with the existing Bank
2 Minimum collateral requirement for the proposal would be?
A 75%
B 100%, as it is backed by 100% collateral
C 140%
D 125%
3 How much enhancement Branch can propose at the time of takeover?
A 15%
B Rs.30,00,000/-
C Rs. 3 Cr with deviation
D 1 and 3
4 Whether promoter requires to provide provisional balance sheet, if yes than provisional
prepared on which date can be asked for.
A 30th of June
B 30th of May
C 15th Aug
D 30th Sep
5 If borrower would have closed their accounts on 1st January from their own sources,
Whether takeover norms will apply on their account?
A yes, it will apply
B no
C No as exposure is less than Rs.50 Cr
D No as we are going for takeover after one month of account closure.
Page 66 of 632
CHAPTER-2
SME DELIVERY MODEL
The SME portfolio of the bank, especially upto Rs.50 Cr segment has been degrowing in the
last few years. To arrest this falling trend, the Boston Consulting Group (BCG), a
Management Consultancy Firm, was engaged by Bank for carrying out a review and advising
remedial measures. They were mandated to come out with a model that ensures business
ownership for enhanced customer engagement and have quality credit portfolio through risk
mitigation.
The revised SME Delivery Model was rolled out pan India in 2015. The guidelines were
further modified in the year 2016, 2017 and 2019. This model is applicable only to the
verticals falling under Retail & Digital Banking (R&DB) Group viz. Circles and Branches
under their control. The SME delivery model has been revised keeping in view the exposure
and location of branches (i.e. BPR/ non-BPR locations). The updated details on the SME
Delivery Model, applicable to various exposures, are as under:
Location Models Explained in
BPR Centre SME Centre: Exposure upto Rs. 50 lacs Annexure-1
RASMEC: Exposure upto Rs. 50 lacs Annexure-2
RM (SME): Exposure above Rs. 50 lacs Annexure-3
Non BPR Centre Branch/RACC: Exposure upto Rs. 50 lacs Annexure-4
RM (SME): Exposure above Rs. 50 lacs Annexure-5
Note:
- CMC of the Circle may take a call for reduction in the lower cut-off of Rs. 50 lacs, but
not below Rs. 25 lacs.
- With respect to Non-BPR Centres, in case RM (SME) is not posted in the centre/
locality, RACC should handle all SME Loan Proposals and obtain necessary approvals/
sanctions from appropriate authority and also monitor the accounts.
- SME business will be handled through limited number of branches and CMC to ensure
that such type of business is looked after by RM (SME).
ANNEXURE-1: EXPOSURE UPTO Rs. 50 LACS AT SME CENTRE
The structure of SME Centre for handling SME loans proposal upto Rs.50 lacs is as under:
- At BPR Centres, having multiple RBOs, SMEC will be headed by AGM and will
report to DGM (B&O). AGM will be supported by Chief Manager (Sanction) and
Chief Manager (Loan & Administration).
- At BPR Centres, having single RBO, SMEC will be headed by Chief Manager and
will report to Regional Manager of RBO. Chief Manager will be supported by
Manager (Sanction) and Manager (Loan & Administration).
- At SME Centre, two types of Asset Management Teams (AMTs) have been created,
who are handling SME Loans proposals upto Rs. 50 lacs as under. AMTs need to
Page 67 of 632
have budgetary targets and should provide end to end solution i.e. sourcing, pre-
sanction, appraisal, sanction, documentation, disbursement and post sanction
activities.
i. Government Sponsored Schemes Asset Management Team (GSSAMT): It will handle

all Govt. Sponsored Scheme loan proposals including MUDRA loans (end to end
relationship). AMT will consist of one Scale-II officer, one Scale-I officer and one customer
assistant and will handle 1000-1200 CIFs. The Renewal/ review of accounts will be
responsibility of AMT. The officials will work as a team. Each officer of the team will be
responsible for appraisal and assessment of the proposal. There will be no separate
responsibility of appraised by and assessed by. The accounts will be parked in the branches as
hitherto, for providing day to day services to the customers.
ii. Small Loans Asset Management Team (SLAMT): SLAMT to handle loans upto Rs. 50
Lacs for Bank’s regular scheme. AMT will consist of one Scale-II officer, one Scale-I officer
and one customer assistant. AMT will handle 200-250 CIFs. The renewal/ review of accounts
will be responsibility of AMT (end to end relationship). In view of large number of accounts
and also to expedite the renewals, appraisal and assessment can be done by any one of the
two officials in the AMT. The officials will work as a team and each officer will be
responsible for appraisal and assessment of the proposal. There will be no separate
responsibility of ‘appraised by’ and ‘assessed by’. The accounts will be parked in the
branches as hitherto, for providing day to day services to the customers.
iii. Collection Team: Collection Team will perform hard recovery for loans below Rs. 20 lacs.
NPA accounts of Rs.20 lacs and above will be migrated to SARB.
Roles Handling Structure

Sourcing & Sourcing of loan proposals upto Rs. 50 lacs will now be the
proposal writing responsibility of SME Centre/ MPST/ Branch.
Proposal writing/ appraisal will be done by officers at GSSAMT

and SLAMT depending upon the type of scheme i.e. Government
sponsored or Bank’s Regular Scheme. CRA/CUE (if applicable) to
be done by respective AMT.
CRA/CUE CRA/ CUE validation, if applicable, will be done by the
validation Sanctioning Authority.
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Sanction By CM (Sanction)/ Manager (Sanction) at SMEC.
Control reports for loans sanctioned by CM (Sanction) shall be put

up to AGM SME Centre and loan sanctioned by Manager
(Sanction) shall be put up to Chief Manager at SMEC. In respect of
SMEC headed by CM, the proposal sanctioned by Manager
(Sanction) will be controlled by Chief Manager, SMEC & proposal
sanctioned by Chief Manager, SMEC will be controlled by
Regional Manager of RBO concerned.
Documentation, Document creation, Document execution, Disbursement of loans,
Disbursement & and Maintenance and monitoring to be done by respective AMT at
Maintenance the SME Centre.
Monitoring of Leads All new loans will be entered in CRM/ CBS/ LOS.
Recovery of Loan Collection Team will perform hard recovery for loans below Rs. 20
lacs. NPA accounts of Rs. 20 lacs and above will be migrated to
SARB.
ANNEXURE-2: EXPOSURE UPTO Rs.50 LACS AT RASMEC
The structure of RASMEC for handling SME loans proposal upto Rs. 50 lacs are as under:
- Incumbency of the RASMEC will be decided on the basis of combined business of
SME & Retail and will be decided by REHBU.
- As opposed to two different types of AMTs to be formed at SME Centres, only a
single type of AMT will be formed in RASMEC, for loans with limits upto Rs. 50
lacs. The team will handle upto 400 accounts. If the number of accounts exceeds 400,
additional AMT will be placed/ posted for SME Business.
- AMTs to have budgetary targets.
- The staffing pattern will be as under:
No of Accounts Teams Loans to be sanctioned by
Upto 200 - One Scale II and CM/ Manager Sanction
- One Customer Assistant (common for SME and
Retail)
Above 200 to 400 - One Scale II CM/ Manager Sanction
- One Scale I (common for SME and
- One Customer Assistant Retail)
Above 400 upto 800 Two teams of: Manager – Team Leader
- One Scale II (only for SME)
- One Scale I
- One Customer Assistant
Above 800 upto Three teams of: Chief Manager/Manager –
1000** - One Scale II Team Leader (only of
- One Scale I SME)
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- One Customer Assistant
**CMC of the Circle may take a call to convert theses RAMSEC into SMEC
depending upon the volume. In that case, structure of SMEC will be followed.
- AMTs to provide end to end solutions from sourcing, pre-sanction, appraisal,

sanction, documentation, disbursement and post sanction activities (except custody of
documents).
i. Asset Management Team (AMT): SME Wing of RASME Centre will have only one type of
AMT. AMTs to provide end to end solution from sourcing, pre-sanction, appraisal, sanction,
documentation, disbursement, renewal, review and post sanction activities (except custody of
documents) of all types of SME loan proposals upto Rs. 50 lacs. The accounts will be parked
in the branches as hitherto, for providing day to day services to the customers.
ii. CM (Sanction)/ Manager (Sanction)/ Team Leader: All the loan proposals with limits up
to Rs. 50 Lacs will be sanctioned by CM/ Manager-Sanction (Common for SME and Retail
wing). RASME Centre having more than 400 SME accounts will have separate Manager/
CM-Team Leader for SME business. Manager/ CM will also be the overall in-charge/ Team
Leader of SME business in RASMEC. If the proposal falls above the financial powers of the
proposed SME Team leader, the proposal will be sanctioned by Chief Manager(Sanction)/
Head of RASME Centre.
iii. Maintenance/ Collection Cell: Maintenance/ Collection Cell of RASME Centre will be
headed by Chief Manager (Maintenance). The cell will be responsible for custody of SME
documents, attending to audit, furnishing replies and also follow up of NPA, AUCA
accounts. In case of SME NPA accounts is more than 100, each RASMEC will identify one
separate officer for SME Segment who will work under RASMEC Head. Maintenance/
Collection Cell will perform hard recovery for loans below Rs. 20 lacs. NPA Accounts of Rs.
20 lacs and above will be migrated to SARB. RASMEC Head will also be responsible for
SME NPA portfolio.

Sourcing & Sourcing to be done by the AMTs created at RASMECs/ Branches/
MPSTs.
proposal writing
Proposal writing/ appraisal, CRA/ CUE (if applicable) will be done
by officers in AMTs formed at RASMEC.
CRA/CUE CRA/ CUE Validation (if applicable) will be done by Sanctioning

Authority.
Validation
Page 70 of 632
Sanction Sanction will be done by a common official either Chief Manager or
Manager (sanction) in RASMECs where number of SME accounts
is upto 400.
RASMECs having more than 400 SME accounts will have a
separate Manager or CM as a Team leader who will sanction the
proposal within their financial powers. The proposals over and
above their financial powers will be sanctioned by Chief Manager
(Sanction)/ RASMEC Head.
Team leader, wherever posted, will also be responsible for overall
SME business in RASMEC.
Documentation, Documentation, Disbursement of loans, maintenance and

Disbursement & monitoring to be done by the AMT at the RASMEC to be done by
Maintenance AMT. Custody of all SME documents will be with the maintenance
cell at RASMEC.
Recovery of Loan Collection Team will perform hard recovery for loans below Rs. 20
lacs. NPA accounts of Rs. 20 lacs and above will be migrated to
SARB.
ANNEXURE-3: EXPOSURE ABOVE Rs. 50 LACS (Handled by RM- SME)
- RM (SME) AMT will handle SME loans above Rs.50 Lacs in BPR Centre. In Circles,
where adequate number of units in the range of above Rs. 50 lacs is not available, the
CMC of the Circle may take a call for reduction in the lower cut-off of Rs. 50 lacs,
but not below Rs. 25 lacs.
- RM (SME) may be preferably of scale II to IV with CSO/s of Scale I/II.
- Circle can take a view to preferably assign lower ticket size portfolio to junior RM
(SME) and higher ticket size portfolio to senior RM (SME).
- The RMSME team will be stationed at branch under both the models viz. Branch
Model and Sales Hub Model. Branch Model means sitting at a branch and handling
accounts of that branch only. Sales Hub Model means sitting at a branch and handling
more than one branch’s accounts.
- Circle may decide benchmark (number of CIFs) for handling proposals by RM (SME)
based on their ticket size of the portfolio handled by them.
- Circle may assign targets to RM (SME) viz. number/amount of sanction and portfolio
growth etc.
- RM (SME) should operate under direct supervision of BM (Branch Manager/Branch
Head) where they are placed. The Branch Manager will be the joint signatory (1st
additional assessment) of the proposals of RMSMEs. The Branch Manager will also
be responsible for pre-sanction/post sanction processes/approval for disbursement etc.
with joint ownership of Customers/accounts with RMSMEs. All RM (SME) accounts
will be migrated to one branch wherein RMSME has maximum number of accounts.
Page 71 of 632
However, for the convenience of the customer, a part of limit may be allocated to
branch of customer’s choice/ near to his workplace/ office, etc. and no allocation
charges will be levied for the said allocation.
- All SME intensive branches/ MSME branches need to be covered by posting of RM
(SME)

Sourcing & RM (SME) AMT to handle end to end management for loans
proposal writing above Rs. 50 Lac. Sourcing to be done by the RM (SME) AMT/
Branches. Appraisal/ Assessment to be done by RM (SME)
AMT and the 1st additional assessment will be done by the
concerned Branch Manager.
2nd additional assessment is not required for proposals sanctioned
by CLCC & below functionaries. In other cases, 2nd additional
assessment will be done by Branch Head/ RM/ DGM (B&O)/
Branch depending upon exposure/ Branch incumbency of the
respective RM (SME).
CRA/ CUE validation CRA/CUE Validation will be done by Risk Rating Official
posted at RBO for proposals submitted to Regional Managers/
DGM (B&O). For proposals, over and above the financial powers
of RM/ DGM, Risk Rater posted at LHO.
Proposal Confirmatory The proposals shall be referred to CRD/ CCRD where it will be
Check reviewed based on pre-defined risk matrix. CRD/ CCRD will
evaluate the proposal from the angle of risk and will sign-off with
“Go/ No-Go” decision before submission of the proposal to
respective committee.
The secretariat of sanctioning committee would be responsible
for performing conformity check on the proposal to ensure it is
meeting bank’s policies and guidelines.
Sanction RM/ AGM (Branch)/ DGM (B&O)/ DGM (Branch)/ CLCC/
RCCC/ CCSS/ CCCC/ ECCB depending upon the exposure/
financial powers/ constitution/ facility/ categorisation of the
branch of respective RM (SME).
Documentation & RM (SME) will be responsible for documentation/ collateral
Collateral Security creation and will also retain the documents/ collateral with them
at respective branches.
The 2nd check of documentation/ collateral and its physical
verification will be done either by Branch Manager or any other
officials with that RM (SME).
Disbursement & Disbursement by RM (SME) AMT on completion of all the
Maintenance formalities and approval of Branch Manager.
Maintenance and all post sanction activity of accounts will be the
responsibility of RM (SME) AMT including soft recovery. NPA
Page 72 of 632
accounts to be migrated to SARB/ SAMB as per Bank’s extant
instructions.
The Branch Manager will also be responsible for pre-
sanction/post sanction processes/approval for disbursement etc.
with joint ownership of Customers/accounts with RM (SMEs).
In case of Sales Hub Model, the responsibilities for maintenance
would be shared between the RM (SME) AMT and linked
Branch Manager as detailed below. Apart from the indicated
responsibilities, RM (SME) will be responsible for all customer
interfacing activities.
Split of duties between linked branch and RM (SME) AMT under Sales Hub Model
Frequency Activity Person responsible

A/C opening
Loan Disbursal
One-time Signature Scanning Linked branch
Issue of Cheque Book
Commencement of internet banking
Decision regarding referred RM (SME)
cheques/Temporary Over Draft
Processing of Limit RM (SME)
Day-to-day Enhancement
transactions Issue of LC/BG, post limit sanction Linked branch
Invocation of LC/BG Linked branch
Any other day-to-day transactions Linked branch
Unit Inspection RM (SME) Team
Periodic Stock Statement collection, approval RM (SME) Team
(monthly/ Drawing Power Approval RM (SME)
quarterly/ Drawing Power Updation Linked Branch
yearly) Document revival RM (SME) Team
Limit Renewal RM (SME) Team
Irregularity report RM (SME) Team to prepare
report
RM (SME) and linked
Branch Manager to sign
Collection of No-lien letter from RM (SME) Team
customer
Issue of Balance confirmation letter to RM (SME) Team
customer
Page 73 of 632
ANNEXURE-4: Exposure upto Rs. 50 lacs at NON BPR CENTRES
- Retail Asset Credit Centre (RACC) will handle SME loans upto Rs. 50 lacs. If the
branch is not mapped with RACC, SME loans upto Rs. 50 lacs will be handled by
Branches.
- RM (SME) will handle SME Loans > Rs. 50 lacs (End to End) and will obtain
sanction from appropriate authority as applicable, as per delegation of financial
powers.
- Circles may lower the minimum threshold of Rs. 50 lacs to Rs. 25 lacs for non BPR
RM (SME), based on the potential of business and number of CIFs that can be
handled by a RM (SME). In such case, RACC will handle SME loans below non-BPR
RM (SME) cutoff/ threshold.
- In respect of Non-BPR Centres, in case RM (SME) is not posted in the Centre/
locality, RACC should handle all SME Loan Proposals and obtain necessary
approvals/ sanctions from appropriate authority and also monitor the accounts.
- In RACC model, branches are categorized as under:-
1. Spoke Branch- spoke branches are non-BPR branches upto Scale IV linked with
RACCs for sanctioning/ maintenance of their loans.
2. Hub Branch – Hub branch is the branch where RACC is functioning. Hub branch
will be treated like any of Spoke branch for RACC.
3. RACC – RACC will be the centralized processing/ sanctioning/ maintenance
centre for its linked (spoke) branches.
- The RACC will be headed by the Chief Manager (Scale IV) of the Hub branch, (in
addition to his role as the Branch Head).
- Processing & Sanctioning Team will be led by Manager (Sanctions), to handle
processing & sanction of New loans as well as renewal/enhancement of existing
limits.
- Monitoring & Maintenance Team will be led by Manager (Credit Monitoring), who
will take care of maintenance & follow up of the existing loans.
- A dedicated filed visit team for Pre/ Post Sanction Inspections, compilation of opinion
reports etc. of only template loans.

Sourcing Accounts to be sourced at the Branches by FO/ BM and BC/
BF.
Appraisal / Assessment Proposals within the sanctioning power of Branch
Manager/ RACC: Credit appraisal, proposal examination and
CRA/ CUE creation (if applicable) to be done at the Branches/
RACC.
Proposals outside the sanctioning power of Branch Manager:

Credit appraisal, proposal examination and CRA/ CUE creation
(if applicable) at the LPC/ RACC.
Page 74 of 632
CRA / CUE validation CRA/ CUE validation (if applicable) to be done by Sanctioning
Authority.
Sanction Sanction by Branch Head, RACC/ LPC/ CM (Credit) at RBO/
RM based on their financial powers. Financial Powers of Chief
Manager (Branch) in Non-BPR Centre stands revised to Rs. 50
lacs in respect of SME Loan Proposals. Financial Powers being
exercised by RACC/ LPC upto Rs. 50 lacs will remain
unchanged. Loan Proposal above Rs. 50 lacs are to be
sanctioned by RM (RBO).
Documentation & Document preparation (by Branch/ LPC/ RACC), execution
Collateral Security and charge creation at the branches/ RACC.
The loan documents can be executed at either place – RACCs

or Spoke branches as per the convenience of the customers.
However, as soon as the execution of documents and
disbursement of loan is completed, migration of eligible loans
documents should be ensured to RACCs at the earliest.
Disbursement & Disbursement will be done by the branch/ RACC after
Maintenance completion of documentation and charge creation.
Maintenance and all post sanction activity of accounts will be

the responsibility of the Branch/ RACC including soft
recovery. NPA accounts to be migrated to SARB as per Bank’s
extant instructions.
ANNEXURE-5: EXPOSURE > Rs. 50 lacs at NON BPR CENTRES
- RM (SME) will handle SME Loans > Rs. 50 lacs (End to End) and will obtain
sanction from appropriate authority as applicable, as per delegation of financial
powers.
- Circles may lower the minimum threshold of Rs. 50 lacs to Rs. 25 lacs for non BPR
RM (SME), based on the potential of business and number of CIFs that can be
handled by a RM (SME).
- SME business will be handled through limited number of branches and CMC to
ensure that such type of business is looked after by RM (SME).
- In respect of Non-BPR Centres, in case RM (SME) is not posted in the
Centre/locality, RACC should handle all SME Loan Proposals and obtain necessary
approvals/sanctions from appropriate authority and also monitor the accounts.
- The structure/model of RM (SME) AMT, roles & responsibilities, split of duties
between linked branches and RM (SME) AMT are same as per BPR Model.
Page 75 of 632
MIGRATION OF ACCOUNTS BETWEEN VARIOUS SALES CHANNELS
I. Redistribution/migration of accounts among SME Centre/ RASMEC AMTs, RMSMEs, and

Branches may be necessitated in accordance with the cut-off prescribed for them, due to
changes in exposure of the accounts as a result of reduction/ enhancement in limits.
Therefore, in order to ensure smooth distribution/migration of accounts amongst them and
to avoid ambiguity in this regard, a uniform policy in this respect has been decided, as
detailed below:
II. Distribution/migration of accounts will take place once in a year at the beginning of the
Financial Year and cut-off date for exposure will be 31st March of the previous Financial
Year.
III. All eligible accounts will be distributed/ migrated at the earliest but not later than 31st of
May of every year.
IV. Till the time the account is actually migrated to the other team, the ownership will remain
with the respective existing team, where the account is presently being handled and all
the customer requirements, including request for enhancement/ fresh loan, should be
addressed by the team till such time the account is migrated to other team.
V. In case the total exposure requested by the existing borrower on account of enhancement/
additional loan is beyond the threshold for the team handling the account, the process to be
followed, will be as under:
a. The existing team will handle the enhancement/ additional loan request upto120% of their
respective maximum threshold for exposure [e.g. if the maximum threshold for exposure
for an AMT to handle the account is Rs.50.00 lac, it will process the enhancement/
additional loan request upto maximum 120% of Rs. 50.00 lac, i.e. upto Rs.60.00 lac
(including the enhanced portion/ additional loan)] and the account will be migrated to
appropriate team as per the timelines proposed under para III above.
b. If the exposure on account of enhancement /additional loan requested by the borrower is

beyond 120% of their maximum threshold, the proposal will be processed by the higher
team prescribed to handle the account, as per extant guidelines. In such cases,
i. If the amount sanctioned is more than the threshold level of exposure applicable to
the existing team, the unit will be migrated to the team which has processed the
enhancement / additional loan proposal immediately and the post sanction process will be
done by it.
ii. If the enhancement/additional loan proposal is not sanctioned, the unit will continue with
the existing team, as the exposure to the unit will remain within the threshold limits
prescribed for the existing team.
Page 76 of 632
VI. Renewal of credit limits / processing the customer’s request/ dealing with audit reports/
arranging inspection/ insurance, maintaining asset quality, etc. till migration, should
continue to be done by the team handling the accounts.
VII. All Group Accounts should preferably be housed with the team having highest exposure on
the group.
VIII. The borrower will be given 15 days’ advance notice before actual migration, in case of
change in the maintenance branch/ office, etc.
IX. Any deviation in this regard will require specific approval from GM of the network.
Marketing to SME Loans through MPST:
- Bank has now approved utilisation of the services of the MPST for the conversion of
e-DFS leads.
- The marketing team will consist of two members: One Officer and one clerical staff
- The team to be located at the Zonal officer under DGM B&O in centres where
multiple Regions are present.
- They may also be located at the RBO depending upon the convenience.
- The teams will report to the CM Credit of Zonala /RBO who will be responsible for
effective utilization of the marketing force for furthering credit growth & will review
their performance regularly as per their roles and KRAs.
- Performance of MPST will be overall under the supervision of DGM (SME) at LHO.
Page 77 of 632
Process Flow of RMSME proposals upto Sanctioning Authority CLCC at BPR
Centres
Scale I to IV Branches AGM Headed Branches DGM Headed Branches
Schematic Non Schematic Non Schematic Non
Schematic Schematic Schematic
i) Amount >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to
Rs. 3 Cr. Rs. 1 Cr. Rs. 3 Cr. Rs. 1 Cr. Rs. 3 Cr. Rs. 1 Cr.
Appraisal CSO/FO CSO/FO CSO/FO
Assessment RM (SME)/RMRE RM (SME)/RMRE RM (SME)/RMRE
Additional Branch Head DBM/Other RM (SME) Head of Division/DBM
Assessment
Sanctioning SME: RM (RBO) SME: Branch Head SME: Branch Head
Authority P&REH: AGM P&REH: AGM P&REH: AGM
(RACPC/RASMEC)# (RACPC/RASMEC) (RACPC/RASMEC)
ii) Amount >Rs. 3 Crs. >Rs. 1 Cr. To >Rs. 3 Crs. >Rs. 1 Cr. >Rs. 3 Crs. >Rs. 1 Cr.
to Rs. 5 Cr. Rs. 3 Crs. to Rs. 5 Cr. To Rs. 3 to Rs. 5 Cr. To Rs. 3
Crs. Crs.
Appraisal Credit Analyst/CSO/FO Credit Analyst/CSO/FO Credit Analyst/CSO/FO
Additional Branch Head Branch Head Head of Division/DBM
Assessment
Sanctioning DGM (B&O) DGM (B&O) Branch Head
Authority
iii) Amount >Rs. 5 Crs. >Rs. 3 Cr. To >Rs. 5 Crs. >Rs. 3 Cr. >Rs. 5 Crs. >Rs. 3 Cr.
to Rs. 30 Cr. Rs. 30 Crs. to Rs. 30 To Rs. 30 to Rs. 30 To Rs. 30
Cr. Crs. Cr. Crs.
Additional Branch Head Branch Head Branch Head
Assessment
Credit Proposals to be put up to CCRD for Credit Review
Review
Sanctioning CLCC CLCC CLCC
Authority
#In case SMEC/RASMEC is of Scale-IV incumbency, loan proposals of the Branch will be
sanctioned by respective Regional Manager (RBO). If the Branch is controlled by DGM
(B&O), then the loan proposal will be sanctioned y DGM (B&O). Financial Powers as
advised by REH/PBB shall be followed.
Page 78 of 632
Process Flow of RMSME proposals upto Sanctioning Authority CLCC at Non-BPR
Centres
Scale I to IV Branches AGM Headed Branches DGM Headed Branches
Schematic Non Schematic Non Schematic Non
Schematic Schematic Schematic
i) Amount >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to >Rs. 50 L to
Rs. 3 Cr. Rs. 1 Cr. Rs. 3 Cr. Rs. 1 Cr. Rs. 3 Cr. Rs. 1 Cr.
Appraisal CSO/FO CSO/FO CSO/FO
Additional Branch Head DBM/Other RM (SME) Head of Division/DBM
Assessment
Sanctioning RM (RBO) Branch Head Branch Head
Authority
ii) Amount >Rs. 3 Crs. >Rs. 1 Cr. To >Rs. 3 Crs. >Rs. 1 Cr. >Rs. 3 Crs. >Rs. 1 Cr.
to Rs. 5 Cr. Rs. 3 Crs. to Rs. 5 Cr. To Rs. 3 to Rs. 5 Cr. To Rs. 3
Crs. Crs.
Additional Branch Head Branch Head Head of Division/DBM
Assessment
Sanctioning DGM (B&O) DGM (B&O) Branch Head
Authority
iii) Amount >Rs. 5 Crs. >Rs. 3 Cr. To >Rs. 5 Crs. >Rs. 3 Cr. >Rs. 5 Crs. >Rs. 3 Cr.
to Rs. 30 Cr. Rs. 30 Crs. to Rs. 30 To Rs. 30 to Rs. 30 To Rs. 30
Cr. Crs. Cr. Crs.
Additional Branch Head Branch Head Branch Head
Assessment
Credit Proposals to be put up to CCRD for Credit Review
Review
Sanctioning CLCC CLCC CLCC
Authority
Learning Points:
➢ Rolled out pan India during 2015
➢ Designed on the recommendations of BCG
➢ Applicable only to R&DB Group – Circles & Branches under their control
➢ As per locations of Branches – BPR/Non BPR
➢ AT BPR Centres:
➢ SME Centre – Exposure upto Rs. 50 lacs – Two types of AMT (GSS-AMT &
SLAMT)
➢ RASMEC – Exposure upto Rs. 50 lacs – One type of AMT
➢ RM (SME) – Exposure above Rs. 50 lacs – In Circles, where adequate number of
units in the range of above Rs. 50 lacs is not available, the CMC of the Circle may
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take a call for reduction in the lower cut-off of Rs. 50 lacs, but not below Rs. 25 lacs.
Two Models – Branch Model and Sales Hub Model. Branch Model means sitting at a
branch and handling accounts of that branch only. Sales Hub Model means sitting at a
branch and handling more than one branch’s accounts.
➢ RM (SME) Operates under direct control of Branch Manager, where he has been
placed. The Branch Manager will be the joint signatory (1st additional assessment) of
the proposals of RMSMEs. The Branch Manager will also be responsible for pre-
sanction/post sanction processes/approval for disbursement etc with joint ownership
of Customers/accounts with RMSMEs.
➢ At Non BPR Centre:
➢ Branches / RACC – Exposure upto Rs. 50 lacs – RACC are Headed by CM of the
Hub branch (in addition to his/her role as the Branch Head), Processing &
Sanctioning Team led by Manager (Sanction), Monitoring & Maintenance Team led
Manager (Credit Monitoring), Dedicated field visit team for Pre/Post sanction
➢ RM (SME) – Exposure above Rs. 50 lacs
Check Your Progress:

1.MUDRA loans are processed by _____ at SMEC ?
a SLAMT b GSSAMT c Chief Manager d Chief Manager
(Sanction) (L&A)
2. Who is responsible for sourcing of proposal upto Rs.50 lacs at BPR Centre?
a Collection Cell b Maintenance Cell c AMT at SME d RBO
Centre/MPST/
Branch
3. At RASME Centre, who will process the SME Advances proposal for Rs.10 lacs?
a GSSAMT b Chief Manager c Branch d AMT at
(Sanction) RASMEC
4. The documentation/collateral creation and its archival of RMSME account is done by
_______.
a SMEC b RASMEC c RBO d RM (SME)
5. RMSME to handle advances accounts with limit above Rs.______ at BPR Centre.
a Rs. 5 Crore b Rs. 1 Crore c Rs. 3 Crore d Rs. 50 lac
ANSWERS OF OBJECTIVE QUESTIONS:
1-B 3-D 5-D
2-C 4-D
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Case Let-1: (SME Delivery Model)
Mr. Ritesh Kumar, proprietor of M/s. Ritesh Hardwares, has been maintaining current
account with our XYZ branch (BPR Centre) since 2016. The unit is engaged in trading of
Hardware items since 2015. Presently, he is running the business without any credit
facilities. This branch is linked with SME Centre. With the increase in the turnover, he has
decided to avail some credit facilities from your branch and requested you for a loan of Rs.
10 lacs for purchase of furniture and fixture and Rs. 25 lacs for purchase of stocks and
extending credit to his buyers.
XYZ branch is headed by Chief Manager and branch is also having one RM(SME) Team.
Mr. Ritesh Kumar contacted the RM (SME) posted at the branch who has shown his inability
to process the request of the borrower and advised him to meet Branch Head.
Question 1: Who will process the proposal?
a. RM (SME) Team
b. Branch Head
c. SME Centre
d. Regional Business Office.
Option (c) SME Centre
Question 2: Who will sanction the proposal?
a. Chief Manager Branch

b. Chief Manager (Sanction) at SME Centre
c. Chief Manager (L&A) at SME Centre
d. Chief Manager (Rural) at RBO.
Option (b) Chief Manager (Sanction) at SME Centre
Question 3: Who will be responsible for documentation and charge creation after sanction of
loan?
a. GSS-AMT at SME Centre

b. SL-AMT at SME Centre
c. Chief Manager (L&A) at SME Centre
d. RM (SME) Team at branch
Option (b) SL-AMT at SME Centre
Question 4: Who will be responsible for post sanction activities related to the account?
a. Branch
b. RM (SME) at Branch
c. SME Centre
d. RASMEC
Option (c) SME Centre
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Question 5: After sanction of loan, which of the following activity will be performed by the
Branch?
a. DP Calculation/feeding
b. Renewal of limits at existing level
c. Enhancement in limits
d. None of the above
Option (d) None of the above
Reference: For detailed guidelines, please refer to:

1. Circular No. NBG/SMEBU-SME DELIV/52/2014-15 dated 23.12.2014
5. Circular No. NBG/SMEBU-SPLPROJ/76/2016-17 dated 06.01.2017
6. Circular No. NBG/SMEBU-SME DELIV/18/2017-18 dated 10.07. 2017
9. Circular No. CCO/CPPD-ADV/166/2018-19 dated 08.02.2019
13. Circular No. NBG/SME/SCFU-SCF/48/2019-20 dated 19.07.2019
14. Circular No. NBG/SMEBu-SME DELIV/33/2019-20 dated 01.08.2019
15. Circular No. NBG/ABU/BP-RACC/3/2019-20 dated 01.11.2019
16. Circular No. CCO/CPPD-ADV/134/2019-20 dated 07.12.2019
Page 82 of 632
CHAPTER-3
PRE-SANCTION CREDIT PROCESS
The extant credit process for providing any credit facility offered by the bank can be
bifurcated into broadly two processing stages i.e., Pre- sanction credit process and Post
sanction and Follow up. As the name envisages the Pre-Sanction credit process means, the
process involved up to sanction. Right from enquiry of loan till the sanction of the
proposal, the entire process involved is called pre-sanction credit process. The pre-sanction
credit process comprises three stages viz., APPRAISAL & RECOMMENDATION,
ASSESSMENT and SANCTION. In this chapter, we will understand following aspect
related to pre sanction credit process:
- Know Your Customer
- Preliminary Appraisal and Due Diligence
- Compilation of Opinion Report
1.1 Know Your Customer:
KYC is the process of a business verifying the identity of its clients and assessing their
suitability, along with the potential risks of illegal intentions towards the business
relationship. KYC is also important to identify the Shell Companies.
KYC DOCUMENTS – Individuals:
1 Individu Branches/Business units shall obtain the following documents:

. als i. Copy of PAN Card (or Form 60) And
(Docume ii. Certified copy of Officially Valid Document (OVD)
nts containing Identity and Address
acceptab
le as a. Passport
proof of b. Driving License,
identity/
address) c. Proof of possession of Aadhar Number
d. Voter’s Identity Card
e. NAREGA Card
f. NPR letter
2 Minors If minor is less than 10 years of age, ID proof of the person

who will operate the account be obtained.
In cases where minor can operate the account independently,
KYC procedure for identification/address verification as in the
case of any other individuals would apply.
3 NRIs Passport and Residence Visa Copies, duly attested by

. (i) Foreign offices (ii) Notary Public (iii) Indian Embassy (iv)
Officers of correspondent banks whose signatures are
verifiable through an authorized (A/B category Forex handling
branch) branch of the Bank.
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KYC DOCUMENTS - Non-Individuals
1 Proprietary Minimum 2 documents issued in the name of

concerns Proprietary concern from the following list of
documents along with PAN of the proprietor as a
Beneficial Owner, in case PAN or Form 60 shall be
Proof of the submitted:
name, address
(i) Registration certificate (in the case of a
and activity of
registered concern).
the concern
(ii) Certificate/license issued by the Municipal
authorities under Shop & Establishment Act.
(iii) Sales and Income Tax Returns
(iv) GST/ CST Certificate, Certificate/ registration
document issued by Sales Tax/ Service Tax/
Professional Tax authorities as applicable.
(v) License/ certificate of practice issued in the
name of proprietary concern by any professional body
incorporate under statute (e.g. Certificate of Practice
issued by Institute of Chartered Accountants of India,
Institute of Cost Accountants of India, Institute of
Company Secretaries of India, etc.
(vi) IEC (Importer Exporter Code) issued to the
proprietary concern by the office of DGFT
(vii) The complete Income Tax return (not just the
acknowledgement) in the name of the sole proprietor
where the firm's income is reflected duly authenticated/
acknowledged by the Income Tax Authorities.
(viii) Utility bills such as electricity, water, and
landline telephone bills in the name of the proprietary
concern.
In cases where the Branches/Business units are satisfied
that it is not possible to furnish two such documents,
Branches may, at their discretion, accept only one of
those documents as proof of Business/activity. In such
cases, the Branches would, however, have to undertake
contact point verification, collect such information and
clarification as would be required to establish the
existence of such firm, confirm, clarify and satisfy
themselves that the business activity has been verified
from the address of the proprietary concern.
2 Partnership (i) PAN Card of the Partnership Firm.
firms (ii) Registration certificate (in case of registered
firms).
(iii) Partnership deed.
(iv) Permanent Account Number or Form 60 issued
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to the person holding POA on its behalf.
(v) A Declaration containing the name of all the
beneficial owners together with their
shareholding/controlling interest/ stake duly signed by
the authorized signatory.
vi) PAN of all partners & Beneficial Owners.
3 Companies (i) Certificate of incorporation
(ii) Memorandum & Articles of Association
(iii) A resolution from the Board of Directors
and power of attorney granted to its managers, officers
or employees to transact on its behalf; and
(iv) PAN or Form 60 issued to Managers, officers or
employees holding an attorney to transact on its behalf
v) A Declaration containing the names of all the
Beneficial Owners together with their shareholding /
controlling interest / stake duly signed by the authorized
signatory.
vi) Certificate of Commencement of Business
vii) CIN No.
viii) PAN of Company
ix) Proof of Current Address
Legal Entity Identifier (LEI)

- Legal Entity Identifier (LEI) has been introduced
as a key measure to improve the quality and accuracy of
financial data systems for better risk management.
- The list of entities eligible to apply for LEI
codes are Sole Proprietorships, LLPs, Partnership Firms,
Trusts, Pvt. Ltd. Co. Public Ltd. Co., Govt. Companies,
OPC, Insurance companies, HFCs, NBFCs, Non-profit
companies etc.
4 Limited (i) PAN Card or Form 60.
Liability (ii) Certificate of incorporation.
Partnership
(iii) LLP Agreement.
(iv) A resolution from the L L P f o r power
granted to its partners, managers, officers or employees
to transact on its behalf; and
(v) An officially valid document in respect of
Partners, managers, officers or employees holding an
attorney to transact on its behalf.
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5 Trusts & (i) PAN Card of the Trust.
foundations (ii) Certificate of registration.
(iii) Trust Deed; and
(iv) PAN or Form 60 issued to the person holding POA
and in case PAN is not submitted An officially valid
document.
(v) A declaration containing the name of all the
Beneficial Owners together with their shareholding/
controlling interest/ stake duly signed by the authorized
signatory.
vi) PAN of Trustees, Executors, Administrators, etc. of
all related persons, or beneficial owners.
6 Society i) PAN Card.
ii) Certificate of registration.
iii) Society Bylaws; and
iv) A resolution from the Society and power of
attorney granted to its managers, officers or employees
to transact on its behalf; and
v) An officially valid document in respect of
managers, officers or employees holding an attorney to
transact on its behalf.
vi) PAN of Chairman/ MD/ Chief Promoters/ Secretary
etc. of all Related Persons or Beneficial Owners.
7 Accounts of (i) Resolution of the managing body of such
Unincorporate association or body of individuals.
d association (ii) Power of attorney granted to him to transact on its
or body of behalf.
individuals
(iii) PAN or Form 60 issued to the person holding POA
on its behalf and in case of PAN is not submitted an
officially valid document Such information as may be
required by the bank to collectively establish the
legal existence of such an association or body of
individuals.
(iv) PAN of all Related Persons or Beneficial Owners
together with their shareholding/controlling
interest/stake duly signed by the Authorised Signatory.
8 Hindu i. PAN card of Karta.
Undivided ii. PAN of adult coparceners.
Family (HUF)
iii. PAN Card of Joint Hindu Family.
iv. Declaration from the Karta.
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v. Proof of Identification of Karta.
vi. Prescribed Joint Hindu Family Letter signed by
all the adult coparceners.
As per CKYCR (Central KYC Registry) guidelines, the data (Customer Information,
Photograph, Signature, KYC Documents) in respect of all account based relationships
established by the Bank are required to be uploaded on CKYCR portal within T+2 days of
such establishment of relationship. Account based relationship includes all types of loan
accounts, non fund based accounts like Bank Guarantee, Letter of Credit etc. and all type of
deposits accounts. PAN Number of all Borrowers under MSME/ C& I is also required to be
obtained and verified with Income Tax Portal. PAN Number of Guarantor/ Director/
Partner/ Proprietor may also be obtained wherever required and verified with income tax
portal for its genuineness. Wherever proof of address varies from the identification details
submitted by the Borrower/ Guarantor/ Director/ Partner/ Proprietor, separate proof of
address should be obtained. Document accepted for proof of identity and address of
individual / Non individual should be verified through internet on related website wherever
such information is available online to ascertain its genuineness.
1.2 Preliminary Appraisal and Due Diligence:

When a branch/ AMT/ CPC/ RM (SME) receive a loan proposal, it should find out
whether it is prima facie acceptable. If the original application does not contain all the
basic data/ information, the branch/ AMT/ CPC/ RM (SME) concerned may interview
the applicant(s) to elicit necessary data/information with a view to form an overall idea
about the general feasibility of the project/loan proposal.
In order to establish the prima facie acceptability of the proposal, the branch/ AMT/ CPC/
RM (SME) should examine the following aspects in the light of the instructions in force:
• Bank’s lending policy and other relevant guidelines/RBI guidelines:
• Prudential Exposure norms
• Advisories of CRMD in respect of approach towards lending.
• Industry Exposure restrictions
• Group Exposure restrictions
• Industry related risk factors
• Credit risk rating
• Whether the activity being performed by the company is legal and profitable
• Profile of the promoters/senior management personnel of the project,
• List of defaulters, (RBI list of defaulters/wilful defaulters, CICs)
1.2.1: Illustrative list of steps under due diligence of borrower

Due diligence on all Borrowers/ Promoters/ Directors/ Guarantors needs to be carried out
with a view to being satisfied about their credentials, and for ensuring compliance with the
guidelines on KYC and AML under Prevention of Money Laundering Act.
Page 87 of 632
i. CICs Defaulters’ List/Wilful Defaulters’ List (suit filed as well as nonsuit filed) as well
as verify Credit History by means of Credit History Reports provided by them.
ii. For all loan accounts above Rs. 5 crores, banks are required to report particulars of
account and account classification including SMAs to Reserve Bank of India through the
reporting system commonly known as CRILC (Central Repository of Information on Large
Credits). These details must be checked at the time of appraising prospective new
connections, as well as at the time of processing renewal/enhancement proposals in respect
of existing borrowers by undertaking a search in CRILC database.
iii. Employees PF Organisation Site for defaulting companies.
iv. ECGC caution list / Specific Approval List etc.
v. Banned List of Promoters of SEBI.
vi. Loan Rejections / CRA Slippages in CPPD site
vii. List of Disqualified Directors available on the website of Ministry of Corporate
Affairs (MCA) i.e. http://www.mca.gov.in.
viii. Credit Information Companies
ix. i-Probe report.
x. List of Non-Cooperative borrowers.
xi. IBG defaulters list.
xii. Audited financials submitted by the unit should be independently verified as under:
a) For Corporate Borrowers, independent verification with website of MCA
shall be done.
b) For Non-Corporate borrowers with respective Statutory Auditor/Chartered
Accountant.
Turnover of the Units as mentioned in the audited balance sheet need to be
verified with GST returns and Income Tax returns of the customer for the
respective financial year. Moreover, along with the audited balance sheet,
the borrowing Units need to submit usual KYC documents in respect of the
auditor firm viz. copy of address proof and identity proof like PAN card,
Driving license, Aadhar Card etc. or alternatively, a copy of GSTN Invoice,
issued by the Auditor which he would have submitted for payment of the
bills to the customer. This will ensure genuineness of the Auditor.
xiii. Reasons for change in the accounting year as well as in auditors, if any, should be
ascertained.
xiv. ROC Search.
xv. In case of existing accounts: Where the above due diligence measures, as applicable,
have not already been ensured, appropriate steps must be taken to be in compliance with the
requirements. Further, there are many established groups having multiple companies/SPVs/JVs
dealing with the Bank - CIR on group companies.
xvi. In case of prospective new connections: For prospective new connections, in addition to
the foregoing measures in respect of existing accounts, operating units shall ensure:
- Scrutiny of bank account statements, covering loan accounts and current accounts.
For the purpose, transactions over a period of one year should be reckoned. In case
Page 88 of 632
any lead translates to a new business connection, a view must also be taken as to
whether the unit’s current accounts, if any, with other bank(s) may continue to be
maintained or not. Borrowers are not suppose to open Current Account with non-
lenders Banks without obtaining NOC from lender Banks. In case of need, if
borrower’s request finds merit, approval from the competent authority be obtained
as under:
Business Vertical Designation of the Official authorized to approve opening of

current account of borrowers with non-lenders
R&DB/CCG/CAG/ For units whose proposals are Not below the rank of GM
SARG sanctioned by CLCC & below (network)/ CCGRO/
Branch)
RCCC & above Sanctioning Authority
- Obtention of declaration, duly certified by a Chartered Accountant, that (a) there are no
other credit facilities in any bank/ FI/ NBFC which is irregular, and that (b) there are no
overdue statutory payment obligations.
- Obtention of declaration regarding credit facilities availed by its Associates and
Subsidiaries from the banking system, confirming also that there are no irregular features in
conduct of their account(s).
- Verification of credentials of all groups/ connected companies as well as joint ventures
from various sources.
- Financial support for setting up of new ventures or expansion of existing ventures
should not be extended in case the concerned unit belongs to a group which comes under
either of the following categories:
a. Any company within the group has been declared as Wilful Defaulter;
b. Any company in the group is not co-operating with the Bank in finalising settlement of
the Bank’s dues.
- In case of split in a group, the splinter groups will be regarded as separate groups.
xvi. Prescreening of prospective new connections by making a reference to the borrower
profiling reports from M/s Cubictree Technology Solutions Pvt. Ltd (CTSPL) has been
made mandatory in the Bank, in all cases where our estimated exposure is Rs. 5 crore and
above (aggregate of fund based and non-fund based exposures).
xvii. Central Fraud Registry of RBI is also to be examined while processing every loan
proposal.
xviii. Acceptability of the promoter and his ability to bring his margin/promoter’s stake.
xix. Compliance regarding transfer of borrower accounts from one bank to another, if
applicable.
xx. Government regulations/legislation impacting on the industry; e.g., ban on financing of
industries producing/ consuming Ozone depleting substances.
xxi. Applicant’s status vis-à-vis other units in the industry,
xxii. Financial status in broad terms and whether it is acceptable.
xxiii. Scrutinise carefully the borrowers Memorandum and Articles of Association / Partnership
Deed/ Trust Deed/ Society Byelaws/ etc. to (i) ensure that there are no clauses prejudicial to the
Bank’s interests, (ii) ascertain whether any limitations have been placed on the Company’s
Page 89 of 632
borrowing powers and operations and (iii) the scope of activity of the company.
xxiv. For Project Finance/Term Loan, branch should additionally examine the following:
- Whether project cost is prima facie acceptable

- Debt/equity gearing proposed and whether
acceptable
- Promoters’ ability to access capital market for
- debt/equity
Whethersupport
critical aspects of project demand, cost of
production, profit-ability, etc. are correct
xxv. After undertaking the above preliminary examination of the proposal, the branch will
arrive at a decision as to whether to support the request or not. If the branch finds the proposal
acceptable, it will call from the applicant(s), a fully comprehensive application in the prescribed
performa, along with a copy of the proposal/project report, covering specific credit requirement
of the company and other essential data/information. The information, among other things,
should include:
(a) Organisational set up with a list of members of Board of Directors and indicating the
qualifications, experience and competence of the key personnel in charge of the main
functional areas e.g., purchase, production marketing and finance; in other words a brief on
the managerial resources and whether these are compatible with the size and scope of the
proposed activity.
(b) Demand and supply projections based on the overall market prospects together with
a copy of the market survey report. The report may comment on the geographic spread of
the market where the unit proposes to operate, demand and supply gap, the competitors’
share, competitive advantage of the applicant, proposed marketing arrangement, etc.
(c) Current practices for the particular product/service especially relating to terms of
credit sales, probability of bad debts, etc.
(d) Estimates of sales, cost of production, and profitability.
(e) Projected profit and loss account and balance sheet for the operating years during
the currency of the Bank assistance.
(f) If request includes project financing, branch should obtain additionally (i)
appraisal report from financial institutions in case appraisal has been done by them, (ii)
‘No Objection Certificate’ from term lenders if already financed by them and (iii) report
from Merchant bankers in case capital market is being accessed, wherever necessary.
(g) No objection certificate from the existing lenders, if any, for ceding pari-passu
charge, should be stipulated as a pre-disbursement condition at the time of sanction of
Corporate Loans. However, for new connections in the case of Corporates rated investment
grade and above (i.e. BBB & above), sanctioning authority may consider waiving this
condition on case to case basis.
(h) Time to obtain NOC from existing lenders and to create pari-passu charge
should be considered by the sanctioning authority in respect of existing connections on a
case to case basis. However, in respect of new connections, such request should be
considered only where the customer is externally rated as Investment Grade.
(i) Borrower may engage services of Chartered Accountants/Cost Accountants/Financial
Consultants/Merchant Bankers etc. for preparation of financial statements, CMA data etc.
for submission to the Bank for availing loan facilities. Operating units are required to
obtain the mandate, duly filled in and signed, along with the application form and other
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requisite details at the time of pre-sanction/appraisal/engagement of intermediaries by
borrowers.
xxvi. In respect of existing concerns, in addition to the above, particulars regarding the history
of the concern, its past performance, present financial position, etc. should also be called for.
This data/ information should be supplemented by the supporting statements such as:
a) Audited profit loss account and balance sheet for the past three years. The audited
financials should generally be not more than 12 months old. As per extant instructions, if
the Audited financials are more than 9 months and upto 12 months old then provisional
financials not more than 6 month old are to be obtained and analysed. If the Audited
financials are more than 12 months and upto 18 months old, the Provisional financials for
the previous year (i.e. as on 31st March of previous year) duly signed by the Proprietor/
Partner(s)/ Authorised signatory of the Company in respect of MSMEs (subject to a cap on
exposure of Rs. 25 Cr. Enjoyed by the Borrower from the Banking System) and Statutory
Auditors/Chartered Accountant in respect of all other borrowers should be obtained. For
non-corporate borrowers, irrespective of market segment, enjoying credit limits more than
Rs.25 lacs from the banking system, audited balance sheet in the IBA approved formats
should be submitted by the borrowers. The financial statements being submitted by the
borrower should invariably be verified with the statements filed with Registrar of
Companies (ROC)/respective Statutory Auditor/Chartered Accountant at the time of
sanction/review/renewal of the limits from the website of Ministry of Corporate Affairs i.e.
www.mca.gov.in.
b) The Provident Fund contribution deducted from the employees of an establishment/
firm during a particular month are normally remitted to the Employees Provident Fund
Organisation (EPFO) by the 20th of the following month by the company/firm concerned.
In view of increasing high value frauds in advances, the Top Management has desired that
operating functionaries also peruse the Employees Provident Fund Organisation (EPFO)
web site for ascertaining the commitment of promoters of the unit towards timely
remittance of Provident Fund (PF) contribution deducted from the salaries of their
employees to the EPFO, as this will provide an indication of the health of the
establishment/firm.
c) Details of existing borrowing arrangements, if any,
d) Credit information reports from the existing bankers in IBA format on the applicant
Company, and
e) Financial statements and borrowing relationship of Associate firms/Group Companies.
f) In respect of Group Companies, the following to be ensured:
a. CIR(s) shall be mandatory for all Group concern(s) having borrowing arrangements
from Banks/ FIs and having ECR of below BBB or are unrated
b. CIR(s) shall also be mandatory for all Group Concern(s) whose names appear in any of
the defaulters/ SMA/ Caution/ RBI Fraud Registry/ Red Flagged Accounts/ CRILC list.
c. Group concerns having borrowing arrangements with Banks/FIs outside India and have
ECR below investment grade or are unrated.
d. For others, CGM (CAG/CCG/PFSBU/IBG) may permit waiver.
e. In cases where Obtention of CIR is waived, CIR may be compiled by the Credit Analyst
on the basis of information sourced from CRILC/MCA/ CIBIL/Other public forums..
xxvii. Financial Due diligence (Both for existing and new connections)
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a) The financials of the main company and its major associate/sister concerns should be
reviewed, as far as possible, on the basis of provisional financials of the concerns on a
common date.
b) Balance Sheet should be free from any material adverse remarks of the auditors. Any
adverse comments must be separately discussed in the evaluation/appraisal process.
c) Verification of Income Tax, GST, Sales Tax, Excise Returns, etc. (for the years as
applicable) must also be ensured.
d) Frequent changes in management structure. All dealing Officials are advised to be
more vigilant and exercise more than ordinary care in completion of the due diligence
process in respect of such borrowing companies. In all such instances, the fact must also be
recorded in appraisal memoranda and brought to the attention of credit committees.
e) Searches in the books of the ROC with regard to charges created and satisfied on the
assets of the unit, change in directors, capital structure and major share holders etc along
with verification of audited financial statements should be carried out.
f) Searches in the books of the Sub-Registrar of Assurances should be carried out.
▪ In view of the increase in number of high value frauds, the Top Management have
directed that operating functionaries, while scrutinising should verify and cross check few
major items of Profit & Loss and Balance Sheet with the regulatory returns such as GST,
sales tax, excise duty, VAT, etc. (for the years as applicable) to ensure that prima facie the
figures are in order. Verification of Audited Financials- As part of due diligence on
borrowal accounts, operating functionaries should ensure verification of Financial
Statements at the time of fresh sanction/renewal/review of the account.
▪ The Institute of Chartered Accountants of India (ICAI) has implemented the system of
Unique Document Identification Number (UDIN) to secure the certificates/documents
attested/ certified by practicing Chartered Accountants. This measure help in detecting
forged documents and misrepresentations, as only Chartered Accountants are authorized to
generate UDIN. The facility of UDIN is to be utilized as part of due diligence.
▪ An indicative list of the important items in Profit and Loss Account and Balance Sheet
which are to be verified/cross checked with the statutory returns mentioned there against
are mentioned below:-
S. No Item in P&L Returns filed by the unit, with which the figures have
Account/ Balance to be cross checked
Sheet
i. Capital Balance Sheet available with Registrar of Companies

(ROC).
ii. Increase in e form SH-7 (Return as per Companies Act, 2013).

Authorised Capital
iii Allotment of shares e form PAS-3 (Return as per Companies Act, 2013).
.
iv. Domestic Sales VAT/GST return. (for the years as applicable)
v. Export Sales GR Form/Softex Declaration Form (SDF).
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vi. Purchases Credit claimed in the VAT/GST returns.
vii Receivables As detailed in Circular No. CCO/CPPD-

ADV/59/2013-14 dated 28/08/2013.
viii. Quantitative details Tax Audit Report 3CA (Auditor’s Certification of

of Raw Materials/ 3CD)/ 3CD.
Finished Goods/
Bye products/
Goods traded.
ix. Salary and wages Quarterly statement of TDS on Salary (Form

expenses No.24Q) filed with IT Department. b)
PF/ESI/Professional Tax Registers/Returns.
x. Interest payment to Quarterly statement of TDS (Form No.26Q) filed with

outside borrowings IT Department, under Section 194-A – tax deducted at
source from interest other than interest on securities.
xi. Payment to Quarterly statement of TDS other than Salary filed under
Contractors Section 194-C (Form No.26Q) with IT Department.
xii. Net Profit Income tax return and other related documents submitted
to IT Authorities.
xiii. Income received by ST-3/GST return filed with Service Tax authorities.
a service provider
(services industry)
▪ Verification of Income Tax, Sales Tax, Excise, GST Returns, etc (for the years as
applicable) as part and parcel of strengthening due diligence and as a preventive vigilance
measure also must be carried out. (These may be carried out through empanelled
TPEs/Other professionals such as Chartered Accountants, Company Secretaries, and
Advocates etc., wherever necessary).
▪ While the above list is illustrative, the operating officials must undertake the due
diligence exercise as warranted and considered relevant, ensuring to guard against entry of
marginal assets on to our books.
xxviii. Concurrent borrowing: Before sanctioning any credit limit, the Branch should
ensure that the applicant is not enjoying similar or ANY other credit facilities with
other banks. Normally, multiple borrowing/multiple facilities to the same borrower
from two or more banks should not be allowed. If the applicant is found having any
credit facility from any other bank or financial institution, detailed information
should be called from the concerned bank/FI. The applicant should submit along
with the loan application a declaration regarding the existing credit arrangements
and an undertaking that stocks financed by us will not be hypothecated to any other
bank without prior approval of the Bank. Such multiple borrowings by persons /
firms, without the Bank’s written consent, should be viewed as financial indiscipline.
The advances will be recalled immediately in case it was subsequently found that the
borrower had made a false statement in this regard. As far as possible, parties should
be advised to restrict their borrowings to one bank only.
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xxix. Applicants seeking credit facilities of Rs.25 lacs and over should furnish in the
loan application information about all pending litigations, which have been initiated by
another financier including banks against applicants, their partners, directors, etc. for
recovery of dues. Similarly, in the loan proposals this information should also be furnished
in the appraisal submitted for sanction of credit limits of Rs.25 lacs and above under other
details, along with information on RBI defaulters list/ECGC caution list.
1.2.2 Credit Information Company’s (CIC) reports:

i. As per Credit Information Companies (Regulation) Act, 2005, collection of information
on borrowers of all Banks and Financial Institutions and its dissemination in the form of
Credit Information Reports is being done by four Credit Information Companies (CICs)
registered with RBI. The four CICs are:
a. TransUnion CIBIL Limited (TCL)
b. Equifax Credit Information Services Private Limited (ECISPL).
c. CRIF High Mark Credit Information services Private Limited(CHMISPL)
d. Experian Credit Information Company of India Private Limited (ECICIPL)
ii. CICs are providing Consumer Report for individuals and Commercial Reports for
Non-Individual entities. Whereas TCL, ECICIPL, and CHMISPL are offering CIRs under
Consumer and Commercial, ECISPL is offering only Consumer related CIRs and not
Commercial CIRs. CIBIL and CRIF High Mark have been identified as preferred CICs for
obtaining report for proposal pertaining to MSME / C&I segment and obtaining report from
one or two CICs for these segments will be decided as per following parameters:
Type of Advances Report from one CIC Report from two CICs
Unsecured Loan Limit upto Rs.2 lacs Limit > Rs.2 lacs
Secured Loan* Limit upto Rs.10 lacs Limit > Rs.10 lacs
(* Not applicable for Loans against Specified Securities)
iii.While sanctioning / renewing loans to a borrowal unit, any default of a Proprietor /
Partner / Director (excluding Nominee / Professional / Honorary directors) / Guarantor, in
payment of dues, though in his personal / individual capacity, cannot be ignored altogether.
In order to have a uniform approach across all Business Verticals and to facilitate better
customer service by improving TAT, Bank has put in place the authority structure to
approve acceptability of the proposals involving disputed defaults appearing in the Credit
Information Reports of Proprietors / Partners / Directors (excluding Nominee / Professional
/ Honorary directors) / Guarantors, on account of loans / credit card payments, in their
personal / individual capacities:
iv. No fresh limit / enhancement may be sanctioned to units in the 'Wilful defaulters' list
of RBI/CIBIL and other Credit Information Companies (CICs). However, an authority not
below CCCC may approve renewal/ continuation of earlier sanctioned limits.
1.2.3 i-Probe
i. Bank has come across instances where the promoters / key persons of some bad loans in
any branch of SBI, are forming new entities and approaching other branches of the Bank
for new credit facilities. In some cases, they have also been successful in getting new
facilities sanctioned despite existence of bad loans in another branch. To guard against such
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eventualities, bank has developed an application named “i-probe”. Through this
application, it will be possible to ascertain whether the key persons mentioned in a new
loan application are associated with any of the existing bad loans at any of the branches of
SBI. The application is web based and can be accessed through State Bank Connect by
using the link https://commercial.cibil.com/sbi/iprobe.aspx.
ii. While scrutinizing a new loan application, the processing officers will need to obtain i-
Probe report from the above portal by keying the details of the unit and its key persons.
Since the system will throw a list of loan accounts including probable matches (i.e. not
exactly matched), it will be the responsibility of the Processing Officer to note the relative
account numbers and make appropriate searches in CBS through regular CBS enquiry
methods to ascertain the exact position. While the search through i-probe can be carried out
for any non-individual loan application, the search will be mandatory for all loan
applications for Rs.10 lac and above. In case of all loan applications for Rs.10 lac & above
in the non-individual category, branch users / credit officers hence forth will have to
access the “i-probe” application and attach printout of the search result. Any new loan
proposal should be recommended for sanction only after ensuring that the new applicants
are not linked to any existing bad loan in our books (including AUCA).
iii. The i-Probe search facility should also be used by the branches while issuing “No Dues
Certificate” to any current account holder and such certificate should be issued only after
ensuring that the person, in whose favour the NOC is being issued, is not linked to any loan
in any branch of the Bank.
1.2.4 Due diligence on guarantors
With a view to streamlining procedures, and bringing in uniformity of approach, guidelines
have been laid down for ensuring proper scrutiny / due diligence in respect of Guarantors
(individual as guarantor, corporate entity as guarantor, NRI/PIO or OCI (overseas citizen of
India) as guarantor, non-individual overseas entity as guarantor & third party guarantors).
i. Individual as Guarantor:
Apart from obtaining proof of identification and address as per KYC norms, the details of
income, assets, liabilities, etc. is also required to be obtained as per following indicative
list:
a. Bank Account Statement – last 6 months
b. Credit Card Statement -- not more than 3 months old
c. Salary Slip (Recent date)
d. Income Tax Returns
e. Income/Wealth Tax Assessment Order
f. Details of movable and immovable properties
g. Details of liabilities with its terms and conditions
In case of Non-Resident Indian (NRI) or Person of Indian Origin (PIO} or Overseas Citizen
of India (OCI} as guarantor, following due diligence must be done:
a. Passport and Residence Visa Copies
b. Copy of PIO/OCI Card issued by Govt. of India.
c. Copy of relevant pages of passport of parents or grandparents, establishing them as
NRI/ being of Indian origin.
d. Copy of marriage certificate establishing the spouse as NRI/ being of Indian origin.
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e. Where face to face interaction is not possible with the guarantor, branches must insist on
certification of documents for photo ID and proof of residence by any one of the following:
i) Banker (our branches/Offices overseas)
ii) Notary Public
iii) Indian Embassy
f. Further, branches may also accept verification of documents by officers of
correspondent banks whose signatures are verifiable through an authorized (A/B category
Forex handling branch) branch of the Bank.
g. Before accepting Third Party Guarantees, branches are advised to exercise more than
ordinary care in view of our experience that several frauds that have been detected are
found to be having links to fake title deeds of property purportedly belonging to third party
guarantors. Some of such Third Party Guarantors have no connection whatsoever with the
borrowing entity / promoters and have merely offered their guarantee / fraudulent title for
consideration.
h. In addition to the steps, as applicable depending on constitution of the guaranteeing
entity indicated above, the following due diligence is to be ensured while accepting third
party guarantees:
i. Where the third-party guarantor –individual or non-individual - offers charge on
property standing in their name as collateral, carrying out of Search, Title Investigation and
Valuation, just as applicable to property of promoters and promoter directors, must be
ensured by operating units.
j. In case of new loans, photograph of the guarantor should be pasted on the relevant
guarantee agreement. In respect of existing loan accounts, a letter, on which photograph of
the guarantor is affixed and signed across the photograph, is to be obtained and kept as part
of security documents.
k. If the individual furnishing the guarantee is not already covered in course of search /
due diligence carried out for the borrowing entity, separate search for the guaranteeing
individual in RBI Defaulters’ List / ECGC Caution List / Credit Information Company etc.
is to be ensured.
l. Separate CIF is to be created for guarantors and linkage to Borrower CIF in CBS is to be
ensured.
m. In cases where mortgage of property is created/extended at the time of initial grant of
facilities and/or at the time of enhancement of limits, “Income Tax Act– Guidelines for
obtaining Prior Permission under Section 281 to create a charge on the assets of Business”
are to be complied with.
ii. Corporate as Guarantor

a. Memorandum and Articles of Association (MAA). MAA is to be examined to ascertain
whether the company is authorized to provide guarantee. The Common Seal of the
company is required to be affixed in the guarantee, if so required under the MAA.
b. Certificate of Incorporation
c. Certificate of commencement of business (in case of Public Limited Company)
d. CIN Number
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e. Copy of PAN of Company
f. Proof of Current Address
g. The guarantee should be executed by the director or some other officer of the company
duly authorised to do so by a resolution passed by the Board of Directors of the company.
h. Photograph and identity documents of the functionary so authorised.
i. PAN / DIN of all Directors.
j. If the guaranteeing corporate has borrowing arrangements, “No Objection”
certificate(s) from the lending banks.
k. Search, as is carried out in RBI Defaulters’ List / ECGC Caution List / MCA Site/
Credit Information Company etc. for a borrowing entity and its Promoters / Directors is to
be ensured, mutatis mutandis.
l. The provision of the Companies Act, 2013 regarding providing guarantee or security by
companies should be considered before accepting the guarantee and to be ensured that the
same is valid and enforceable under law.
m. All foreign entities are governed by the laws of their respective countries. As such,
constitutional documents for such entities may differ from country to country. In such
instances, D&B report on the entity is to be obtained. Further, in case of complexities,
legal opinion on individual cases is to be sought – covering, inter alia, opinion on
constitution of the entity, its powers and authority in law to stand guarantee, to what extent
jurisdiction of Indian Courts may hold and related other issues.
Note: In case NRI/PIO/OCI/Non-Individual foreign entity stands guarantor to an advance,
the following clause is to be incorporated in the Guarantee Agreement,
“Courts in India will have exclusive jurisdiction to t ry suit or any other claim arising
out of this guarantee.”
iii. The legal standing as well as precautions to be taken before accepting

guarantee of the following category of guarantors is furnished below
a. Proprietorship Firm: In a proprietorship, one person / individual conducts the business
in the trade name and owns all the assets of the business. A sole proprietorship is not a
separate and independent legal entity. The proprietor and the proprietorship business is a
single entity in the eye of law. As such, the individual who is the proprietor may execute
the guarantee for a loan sanctioned by the Bank to any person or entity in his separate /
individual name.
b. Partnership Firm: A partnership does not have a separate legal existence distinct
from its partners. Hence, all the partners, or one or more partners of the firm may, with the
specific and definite authority of the remaining partners, execute a guarantee agreement in
the name of the firm. The partnership deed is to be perused/examined to ascertain the
authority of the partners to execute the guarantee. In the case of death, insolvency or
retirement of a partner or admission of a new partner to the firm, to prevent the operation of
Clayton’s Rule, the liability of the partners should be determined and a fresh guarantee
should be obtained from the re-constituted firm, with the approval of the competent
authority.
c. Limited Liability Partnership (LLP) Firm: A LLP is a body corporate formed and
registered under LLP Act, 2008, and is a separate legal entity distinct from its partners.
Therefore, a LLP may provide guarantee for the loan granted by the Bank to a person/
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entity. The incorporation document/LLP agreement is to be examined to verify that the
execution of the guarantee is authorised and in accordance therewith. The designated
partners/other partners empowered/authorised in the LLP Agreement may execute the
guarantee. The LLP shall pass a Resolution for the execution of the Guarantee as
may be provided in the LLP Agreement. A copy of the Resolution is to be obtained
and kept on record as part of security documents.
d. Hindu Undivided Family (HUF): Members of a joint Hindu family constitute the
HUF. Debt can be contracted on behalf of the HUF for the purpose of family business, and
the properties of HUF can be charged only for the beneficial interest / necessity of the
family. A guarantee executed on behalf of the HUF can be challenged on the ground that it
is not for the beneficial interest of the family. Therefore, it is not advisable to obtain the
guarantee of HUF for a loan granted to third party. However, individual members of the
HUF may execute guarantees in their personal capacity, which will bind them in their
respective individual capacities.
e. Trust: Public Trusts are usually constituted for social and charitable purposes, and
Trust property cannot be used for the private advantage of individuals/ trustees or for a
purpose in which trustees have personal interest. Hence, it is generally not advisable to
obtain the guarantee of a public trust for any loan granted to a person/ entity. In a specific
case where the guarantee of a trust is sought to be provided, the purpose of the loan and the
trust deed should be examined and legal opinion should be obtained for considering such
proposal.
f. Society: A Society registered under the Societies Registration Act is a separate entity
capable of entering into agreements and contracts. However, as a Society is normally
constituted for welfare activities, the bye laws of the Society and purpose of the loan
should be examined before considering the proposal for guarantee of a Society. Specific
legal opinion should be obtained on a case to case basis where a Trust or a Society
proposes to provide a guarantee for an advance.
g. Associations/ Clubs: If the Association or Club is not registered under the Societies
Registration Act or any other law, it will be treated as un- incorporated body. Hence, it is
not advisable to obtain guarantee from such un-incorporated bodies as the individual
members of such institutions cannot be made liable in their personal capacity.
1.2.5 Compilation of Opinion Reports on Borrower / Guarantor
i. Opinion Reports should invariably be compiled and updated annually for borrowers in
CAG, CCG, SME and before migration of accounts to SARG. In case of loans under
PBBU and REHBU, Opinion Reports would be compiled once at the time of sanction.
ii. Compilation of detailed opinion report has been exempted in following cases:
- On constituents with personal loans /overdrafts against Bank’s own Fixed Deposits,
government securities, company debentures or shares, units of mutual funds, life
insurance policies, etc.
- Borrowers availing loans against pledge of Gold, Auto Loans upto Rs. 20 lacs, Xpress
Credit, Pension Loans, Education Loans upto Rs. 7.5 lacs
- Borrowers availing loans upto Rs.3.00 Lacs in case of AGL and SME segments.
- On petty co-obligants to bills whose liabilities to the Bank do not exceed Rs.2, 500 or,
such other figure as the Bank may decide.
- On co-obligants to usance bills discounted.
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- In cases where the Bank so advise, on borrowers against pledge of produce for small
amounts not aggregating Rs.5,000 per party
iii. Form of Opinion Report: Opinion reports are divided into two parts viz. i) loans upto
Rs.25 lacs ii) loans above Rs.25 lacs. It consist of basic information on the borrowers/
guarantors, description and value of immovable property(ies), other assets – (movable)
including cars etc., liabilities, self-certification of borrower/guarantor, etc. It also consists
of information on the proprietor / partner / Director / Guarantor of the firm / company with
their PAN / DIN / TAN numbers. Details of family members also required to be provided
in the opinion report. This report also provides the information on immovable properties
(specifying share of applicant in case of joint property & details of owners), Movable
Assets, borrowings other than discussed under Immovable / Movable tables, details of
guarantees given to cover liabilities of others, Means (Tangible Net Worth) of the
firm/company which is offering guarantee/ corporate guarantee. It also includes the
estimate of the Branch Manager/ Manager of the Division/Relationship Manager/ Unit
Head about the total Net Worth of borrower and guarantor. Bank’s official is also supposed
to write his name, PF number and put his signature with date.
iv. Periodic revision of opinions: In respect of a firm dissolved and subsequently
reconstituted, or constituents whose position has suffered deterioration, opinions should be
revised as soon as the facts are known. All other opinions should be revised at least once a
year. Wherever the position of the proprietors/partners also undergoes substantial changes,
a fresh opinion report is to be compiled. Each opinion should be signed by the Branch
Manager and where the revision discloses no alteration in the borrowers’ position the
words ‘No Change’ should be entered, dated and signed.
v. Periodic verification of the government gazette: In order to ensure that the position of
parties under liability to the Bank is not adversely affected without the Bank’s knowledge,
in addition to the precautions related above, the local Government gazette must be
regularly perused for notices of insolvency, changes in the constitution of partnership
firms, etc.
vi. Opinions to constituents and others: Opinions on local parties who are not
constituents of the Bank should not be furnished to other banks established locally.
a. As a rule, opinions should be given orally except to banks, Central and State
Governments and government sponsored institutions and to parties approved by the
Controlling Authority for this purpose. In this connection, when a Branch Manager is asked
by Government or by the local Chamber of Commerce or other public body for a report or
opinion on any matter of public importance or any subject affecting the Bank, he should
submit a draft of his proposed reply, with connected papers, to his controlling authority for
approval. Parties who are not constituents of the Bank should be directed to make their
enquiries through their bankers.
b. The estimated means, details of the property, etc. of the party reported on should not
be stated in absolute term. For this purpose, the following code should be adopted by the
branches / operating units / processing cells.
When a party’s means are estimated at He should be reported as having
Upto Rs.1.00 lac Very small means

Above Rs.1.00 lac to Rs.4.00 lacs Small means
Above Rs.4.00 lacs to Rs.10.00 lacs Moderate means
Above Rs.10.00 lacs to Rs.25.00 lacs Fair means
Above Rs.25.00 lacs to Rs.1.00 crore Good means
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Above Rs.1.00 crore to Rs.10.00 crores. Very good means
Above Rs.10.00 crore to Rs.25.00 crores Large means
Above Rs.25.00 crores Very large means
c. The abovementioned “Rating” is to be recorded in the Opinion Reports under the

Column “We estimate the net means (including/excluding investment in Borrowing
Company) of Shri. /Smt. ------ at Rs.------- and therefore his/her rating is --------.
d. For sharing of information amongst Banks on Net Means, credit worthiness and asset
classification of any Borrower/Firm/Company, the Credit Information Report (CIR) format
which is designed by Indian Banks’ Association (IBA) should be used invariably. It is
further clarified that the Net Means of proprietor /firm /company should be shared by way
of rating (excluding in investment in Borrowing Company) only and not disclosed in
absolute terms.
e. Branches / operating units / processing cells should ensure that the reports issued by
them about their customers to other banks depict true state of affairs. Statements that are
likely to mislead the other banks should be avoided. Any deviation in this regard will be
viewed seriously and appropriate action would be taken against the official(s) responsible.
f. Credit information on the borrowers is customarily shared by banks on a specific request
received from another bank. Branches / operating units / processing cells should use the
format prescribed by the Indian Banks’ Association (IBA) for sharing credit information
with other banks. The report should not be signed but forwarded under cover of a letter and
acknowledgement sought. Credit information received from other banks should be
acknowledged.
vii. Confidentiality of information regarding defaulting borrowers: Branches/ operating
units / processing cells should ensure that such information is treated as “Strictly
Private& Confidential” and that under no circumstances the information should be
shared and the source disclosed to outsiders. Any further enquiries in this regard should
be made with the reporting Banks/FIs and not with the defaulters or any other persons.
viii. Obtaining Separate Assets & Liabilities Statement: For all loans of above Rs.25 lacs,
branches / operating units / processing cells should obtain statement of assets and
liabilities with following documents:
- Copies of Documentary evidence in respect of assets of Borrowers/ Guarantors
- Copy of IT return filed along with a copy of latest available IT assessment order
- Self-Certification will be the basis for the Opinion Report (if not an IT Assesses)
- Bank account statement with all the Banks for the past one year to be obtained.
- Other assets to include cars, jet, yachts etc
- Detail term and conditions of liabilities reported including sanction letter, if any.
ix. The statement of assets and liabilities is required to be obtained in the form of
notarised affidavit in case of the following types of loans:
New loans For all loans rated (SB-9) and worse.
Existing loans - renewal / enhancement For all loans rated (SB-9) and worse.
Existing loans - rehabilitation / In all cases

restructuring
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After filling in the affidavit format with all particulars and after duly stamping at the rate in
force in each state for affidavit as well as for an agreement and with additional stamp duty
for notarial act, the affidavit may be got sworn before a notary public. At places where
notary public is not available, the affidavit may be sworn before a Magistrate duly
authorised for the purpose.
x. Other Instruction related to compilation of Opinion Report:
a. To assist Branch Managers / Managers (Division) / RM (SME) in compiling their
opinions, Field Officers/CSO/Cash Officers will furnish them with detailed reports on local
parties on the Bank’s standard form. These reports should be clearly and properly worded.
Such reports would be kept by the Branch Managers in loose-leaf binders. The reports, the
accuracy of which will be the responsibility of the concerned Field Officer/CSO/Cash
Officer, as the case may be, should contain brief particulars of the business conducted by
the parties, their creditworthiness, the profits earned in the recent past and the respectability
and integrity of the partners. The Branch Managers / Managers (Division) / RM (SME)
should scrutinise each such report before compiling the final opinion sheet to ensure that
the statements made therein are correct. In this connection, it is essential that Branch
Managers should impress upon employees concerned the paramount necessity for
compiling opinions on a very conservative basis. The estimates of the worth arrived at by
the Cash Officer/CSO/Field Officer should be conservative and lower than the assessment
of the outside parties.
b. Branch officials, while making enquiries, should exercise tact and discretion and avoid
irritating well-known constituents of good standing by calling for inquisitorial details.
c. Compiling fresh Opinion Reports during change in incumbency of Field Officer/CSO/
Cash Officer/Branch Manager has since been dispensed with.
d. All opinion reports should contain a signed summary of the Branch Manager’s /
Manager’s(Division) / RM (SME) own estimate of the borrower’s standing, total means
and the break-up worth of his immovable properties. In the case of partnership firms, the
total means and the break-up worth of individual partners should be separately detailed.
The summary should be the principal item in each opinion sheet and should be recorded
afresh annually in the manner laid down.
e. The names of partners or the family members, as the case may be, should be furnished
at the place provided in the opinion sheet.
f. The total value of both the immovable properties and liquid assets of each partner
should be given separately.
g. In estimating means, separate conservative estimates of immovable and movable
properties should be made and the total worth arrived at by adding both figures. In the case
of the latter, investments, stocks, cash, etc., should be detailed as at the date of the opinion.
Investments in units on account of land and machinery or working capital should be
specified and names of the particular unit recorded.
h. In computing the liquid assets of firms, the value of shares in limited companies held
by the partners, proprietors, etc., of these firms should not be included at face value,
particularly if the scrip is not quoted on the stock exchange and/or is not readily
marketable. The full face value of shares can be taken into account in assessing the
holder’s means only if the companies, whose capital these shares represent, are first class
running concerns which have been continuously making good profits in the past and whose
outside liabilities do not outweigh their easily releasable assets.
i. While compiling opinion on a company director, whose guarantees are obtained for an
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advance granted to a company, his investments in the company should be ignored as such
investments will form part of the company’s tangible net worth.
j. Full details of the movable and immovable properties, in whose names the properties
stand, status of ownership, municipal survey numbers of buildings (where available), very
conservative estimates of their value and realisable value, whether they are free from
encumbrance, etc. should be given for proper identification and assessment of the estimated
net worth.
k. The location of the immovable properties and in the case of land, the acreage should
be stated. Enquiries must be made as to whether the properties are free from encumbrances
and the result of these enquiries should be recorded in the opinion sheets. If any of the
properties are encumbered, the fact should be clearly stated, as also the extent of the
encumbrance, which should in addition, specifically appears among the liabilities. As far as
possible, written statements of their properties should be taken from the
borrowers/guarantors.
l. Particular care should be taken in evaluating properties owned by parties jointly with
others; as a rule, such properties should be disregarded in arriving at the net means. In the
case of partnership firms it should be ascertained and recorded with properties, if any, are
the personal properties of the individual partners
m. In respect of agricultural land, the nature of land i.e., wet, garden and dry agricultural
lands should be mentioned and conservatively valued.
n. Valuation of house properties should be given by the Field Officer/CSO/Cash Officer
separately for each building. Where valuation of property by the bank officials is difficult,
it may be got done by a Government approved valuer / Banks empanelled valuer at
borrower’s cost which should be reasonable.
o. For loans above Rs. 1.00 Cr, valuation reports (not older than 3 months) from 2
empaneled valuers are to be obtained and the current market value and realizable value,
whichever is lower, is to be considered for arriving at the value of the property
p. Where valuations of properties have been increased as compared with the previous
report, the reasons therefore should invariably be given.
q. Properties standing in the name of a constituent/partner/proprietor jointly with others
should generally be disregarded. Properties should be valued individually and not in a
group. Where in exceptional circumstances the constituent’s/ partner’s/ proprietor’s share
in such properties is taken into account, the properties must be conservatively valued. The
names of the other joint owners and their respective shares should be indicated at the end of
the relative sheet by means of a foot-note.
r. Where a party owns properties in areas served by other branches / operating units /
processing cells of the Bank, a detailed report should be called for from the branches /
operating units / processing cells concerned with particular reference to the value of the
properties and whether they are free from encumbrances. The valuation of such properties
should be based on the report received from the Bank’s branches / operating units /
processing cells/offices concerned.
s. Joint Hindu Families
▪ The names of all members, including those of minors with their dates of birth and the
dates of joint Hindu family letters (in the Bank’s standard form) should be entered in the
opinion sheet. In the event of death of any member, his share in the family property should
be deducted in order to arrive at the fresh net means of the family.
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▪ The dates of birth of the minor members should be diarised and when a minor member
attains majority his signature should be obtained on the existing joint Hindu family letter
and a fresh Joint Hindu family letter should also be taken. Relevant noting should be made
on the relative opinion sheet.
▪ Self-acquired properties of individual coparceners should not be taken into account in
arriving at the net means of a joint Hindu family firm. These properties may be detailed in
the particulars of the firm’s assets indicating that they belong individually to the members
concerned but the value thereof should be deducted at the end when arriving at the net
worth of the firm.
▪ Before including the immovable properties standing in the individual names of
coparceners in the means of joint Hindu family firms, branch Managers and Field Officers/
CSO/Cash Officers should satisfy themselves, after making the necessary enquiries that the
properties in question are in fact family properties. In addition, they should obtain a
declaration from the concerned coparceners and make an appropriate note to that effect in
relative opinions.
▪ Properties of joint Hindu families are sometimes held in the individual names of
coparceners, in which case Branch Managers should satisfy themselves after making
necessary enquiries that the properties in question are in fact ancestral family properties
before taking them into account for arriving at the net means of the joint Hindu family firm.
In such cases, a suitable declaration should also be obtained from the concerned
coparceners stating that the properties (to be described in the letter) standing in their names
and included in the assets of the joint family firm are the absolute property of the joint
family of which they are members and that such properties are held by them on behalf of
and for the benefit of the joint family.
▪ As per judgment of the Supreme Court, it was held that an HUF directly or indirectly
cannot become a partner of a firm, because the firm is an association of individuals. The
matter of financing HUF has been referred to Law Department at Corporate Centre. The
Law Dept has opined as under:
- HUF cannot become a partner of the firm directly or indirectly. As such Karta in his
representative capacity cannot bind the HUF property. Bank cannot enforce the security of
HUF against the loan availed by the above firm as the property of the HUF is not at all
liable for the acts of the firm.
- Karta can act in his individual /personal capacity and become a member of a
partnership. In this case Karta’s rights and obligations are determined by Partnership Act
and not by Hindu Law. Karta will be personally liable for all acts done by the firm in the
above case. Karta’s personal property is liable for all the acts of the firm.
t. Firms
▪ The names of all partners of firms and the extent of their respective interests i.e., each
partner’s share in capital and profit, etc. should be entered in the opinion report. The names
and particulars of associate firms, i.e., firms having one or more common partners whether
partnership or joint Hindu family-together with their places of business, must be stated with
their respective index numbers.
▪ If a firm has a lady as a partner, it must be stated whether she is literate and not
purdanashin. It should also be indicated whether or not the lady is in a position to
understand the implications of the Partnership Letter signed by her and the business
transactions the firm is likely to enter into with the Bank.
▪ Minors cannot be partners in a firm; they can only be admitted to the benefit a
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partnership already in existence. The investments of minor partners should, therefore, be
deducted in arriving at the net means of partnership firm; the partners’ investment in
associate firms will also have to be accounted for in a similar manner.
▪ Whenever ancestral properties of any partner acquired by him on division of the Joint
Hindu Family to which he belonged are included in the means of the partnership firm, a
letter should be taken from the other coparceners of the partner’s family – which as a result
of the division would constitute a separate Joint Hindu Family – authorising the partner to
represent the family as its nominee and a note to that effect should be made in the relative
opinion sheet. In the case of registered partnership firms, the details of the partnership are
on record at the Registrar’s office. Short particulars of the partnership deeds, if available,
and the dates of the partnership letters should be recorded.
u. Associate concerns
▪ Associate and identical firms, if any, must be indicated in red ink at the top of the
opinion sheet with relative index numbers.
▪ For the purpose of compilation of opinion reports on the proprietor/partner, investments
in associate firms should be ignored in order to avoid double counting.
▪ When compiling opinions on firms associated with one another, it is essential to show
details giving the full worth of the firm reported on, less the amounts allocated as their
investments in other associate firms.
▪ The full worth will ordinarily consist of the total worth of all locally resident partners
together with the amount invested in the firm by outside partners. A deduction must be
made (and shown in the opinion sheet) of all amounts invested in other firms and allocated
to the worth of these firms. The allocation may be in the form of cash or properties and the
deduction under these categories should be shown separately.
▪ The same property, cash or other assets should not be included in the worth of more
than one firm.
v. Independent Parties’ Reports
▪ Branch Managers/ Managers (Division) / RM (SME) need not rely solely on the reports
submitted by their Cash Officers/Field Officers. They may obtain independent
confirmation of the information gathered by the concerned officers when advancing
the Bank’s money.
▪ Corroborating reports should normally be obtained from independent parties enjoying
good standing in the locality i.e., members, partners, or proprietors of respectable concerns
established locally and not from their paid employees.
▪ Third party reports must contain estimates of the immovable properties of the firm
reported upon. Where there is any wide divergence between the estimates of the Cash
Officer/ Field Officer and the corroborative reports from third parties, the reasons for the
divergence should be investigated and recorded by the Branch Managers/
Managers(Division)/ RM (SME) . Outside parties’ reports should contain their comments
on the subject firm’s creditworthiness, net worth estimates including immovable property
details, overall trustworthiness of the promoters/ proprietor/ partners.
1.2.6 Security for Advances:
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i. Obtaining security against sanction of advances is one of most common risk mitigation
practices of the bank. Normally, there are following two types of assets available to the
bank as security in case of financing an activity under SME
Primary Security: Security of those assets which will be created out of the proposed bank
finance (part or full value of assets).
Collateral Security: Security of those assets which will not be created out of the proposed
bank finance.
Apart from security, we are also obtaining personal guarantee of proprietor / partners /
directors / etc. of the entity or third party guarantee as risk mitigation practices.
ii. Though primary security is required to be charged in favour of almost in all the cases,
obtaining collateral its value depends on activity proposed to be financed, scheme under
which it is being financed and risk perceived in the proposed finance. The collateral
security norms for trade and services sector are as under:
- Collateral Security norms are linked to the Internal CRA/CUE rating of the borrower
instead of ECR Rating as under:
Loans upto Rs. 1 Crore:

Aggregate Minimum Collateral Security
Exposure (% of aggregate exposure)
Upto Rs. 10 Nil. Accounts to be mandatorily covered under
lakhs CGFMU/CGTMSE
>Rs. 10 lakhs and i. For Accounts covered under CGTMSE: NIL
upto Rs. 1 Crore ii. For Accounts not covered under CGTMSE: 50%
Loans above Rs. 1 Crore:

CRA/CUE Minimum Collateral Security (% of aggregate
exposure)
SB-7/CUE-7 & better 25%
SB-8,9/CUE-8,9 50%
SB-10/CUE-10 or worse 100%
Authority for approving relaxation in Collateral Security Coverage:

a. CGM (Circle)/CGM (BU) may permit relaxation upto 25% in collateral security
coverage for existing units having internal rating SB-9/CUE-9 and better on case-to-case
basis.
b. ECR of the borrower shall be reckoned for this purpose
c. No discretion for units rated SB-10/CUE-10 and worse
- For existing units, in case of shortfall in Collateral security coverage on account of

proposed norms, limits to be renewed at existing level only. A period of one year may be
permitted by the Sanctioning Authority to enable the borrowal unit to bring in the required
collateral.
iii. Personal Guarantee should be mandatory for all units. Any deviation is to be permitted
by an authority one step higher than the Sanctioning Authority.
iv. . In case of Term Loans, if Fixed Asset Coverage Ratio (FACR) is 1.25 or more, no
additional collateral security should be insisted upon, otherwise 25% collateral
should be taken.
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v. A cap of Rs. 3.00 Crs for Term Loan is stipulated where there is no asset creation.
vi. 100% Cash flow should be routed through the account maintained with our Bank.
vii. The above collateral security stipulations shall not be applicable to credit facilities
which are sanctioned under product-specific Schemes or covered under CGTMSE.
1.2.7 Time norms and other guidelines for monitoring disposal of credit
proposals:
The detailed guidelines on time norms as applicable to the MSME & C&I are as under.
Particulars Timeline for Loan Application

Disposal
All loans upto Rs.25 lac 14 days
Loans of Rs.25 lac and above upto Rs.50 lac 14 days
Sanction in case of takeover 14 days
Time norms for RM (SME)
Limits above Rs.50 lac upto Rs.5 Crore 22 days
Time norms for RM (SME)
Limits above Rs.5 Crore 22 days
For monitoring disposal of credit proposals within the above time frame, branches
should adopt the following procedure:
i) Loan applications received from units should be acknowledged by branches
immediately on receipt of the application and entered in the “Loan Applications Received
and Disposal Register” care being taken to ensure that a segment-wise serial number (i.e.,
C&I–1, C&I–2, …,SSI-1,.. etc.) given in the acknowledgement is also recorded on the
main application.
ii) After receipt of the loan application, an indicative check-list of data/ papers, etc.
required to be furnished may be given to the applicants. Further, in the context of
discussions held on the project during the initial meetings, the data/ information
requirements of the Bank should also be specified to the prospective borrowers so that they
submit applications complete in all respects. The credit appraisal officers may ask, as far as
possible, all relevant information in one installment and avoid piecemeal queries at various
stages. A definite date may be indicated for discussion, clarification, etc., if considered
necessary. The period for the purpose of the timeframe would be reckoned from the date
the application is received complete in all respects till the credit decision is finally
communicated to the applicant. The decision of the Branch regarding credit assistance
should be communicated to the applicant within the stipulated time period even though the
unit might go into production after some time.
iii) Every meeting/ interface with the applicants should be used to emphasis the need for
submission of complete particulars/data to facilitate quick and timely disposal of loan
proposals.
iv) The Branch Manager/ Manager of the Division should verify the ‘Loan Applications
Page 106 of 632

Received and Disposal Register’ at periodic intervals to monitor disposal of proposals
received/ pending at the Branch. Date and status of disposal of applications by way of
sanction/ rejection, if rejected the reasons therefore, should be recorded in the register. This
register should be scrutinised by the controlling authorities during their visits to the
branches.
v) Each branch will submit to its controlling authority a monthly status report on pending
loan applications indicating the reasons for the delay. The controller, in turn, will advise the
LHO the consolidated position each month.
vi) Branches should not indulge in any act such as verbal promise or issue any consent
letter to sanction loans pending formal sanction, etc., which may give false hopes to the
prospective borrowers.
vii) If credit facilities applied for are wholly or partially rejected, the reasons there for
should be briefly mentioned in the “Loan Applications Received and Disposal Register”.
The sanctioning authority may take decision to reject a loan proposal or curtail the existing
credit facilities and seek from the controlling authority confirmation of his action. Reasons
for rejection could include project not considered feasible, party’s experience in business
does not inspire confidence, credit risk rating is below acceptable grade, unsatisfactory past
dealings with the Bank or any other reason to be specified.
viii) Third Party Agencies such as surveyors, engineers, financial analysts, and other
verification agencies, etc. play a critical role in assuring financial information, proposals,
work completion status, application of funds, etc. Lenders rely significantly on the inputs
issued by such third parties. Reports are made as a routine, with little scrutiny. In some
situations, the reports may be drafted under the influence of unscrupulous borrowers. It is
therefore important that the selection of such third parties is independent, done in a
transparent manner and based on their capability and credentials
1.2.8 Standard Operating Procedure under Pre Sanction Credit Process:

Stage-I: Preliminary verification:
Sr. Topic Particulars
No.
1 Lead • Generate own leads / leads given by Corporate Centre / LHO /
Generation LMS leads, etc.
• Ideally, only such accounts should be targeted for take over
where the unit is in commercial operations, for at least two
years (one year in case of infrastructure projects); no major
green field / brown field project under implementation should be
targeted. The unit should have been earning profits for at least 2
preceding years except infrastructure project for which it will be 1
year after COD (applicable only in case of takeover of loans).
2
Market • Do due diligence on market reputation/standing of borrowing
Reputation entity.
3 Customer • Initiate contact over phone to convene a meeting with the
contact promoters, directors, partners, proprietor, etc.
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4 Customer • Meet the customer on the appointed day,
meeting
• Make a presentation on products / services offered by the Bank
to suit the customer’s needs,
• Explain the sanction process and
• Handover the check list of documents required at each stage of
processing of the loan application.
Documents to be obtained from the customer
5 Application • Obtain an application form/request letter from the customer (if
form/ KYC not taken already) along with KYC documents.
Documents
6 Sanction • Obtain sanction letter of existing bank(s) to know the terms
Letter and conditions particularly to know the details of primary &
(applicable collateral security.
only in case
of takeover
of loans)
7 External • Obtain copy of latest ECR report (from borrower / ECRA Web-
Rating site), if applicable. Wherever applicable and not available, advise
letter the applicant / borrower to initiate the process immediately. Where
not applicable but available, obtain it. Genuineness of ECR should
be checked from the website of the rating agency.
8. Constitution Memorandum & Articles of Association/ Partnership deed / Trust
documents deed/ Bye-laws of society, as the case may be, to be obtained and
verified
9 Statements • Download statement of unit’s Current Account(s) with our
of Bank Bank for the immediately preceding 12 months and for the period
accounts of the latest audited / provisional balance sheet.
• Request unit to provide bank statements for all current/cash
credit accounts of the unit maintained with all the other banks.
For example, if the customer has Current Accounts with SBI and
other banks, then download the bank statement of the account of
the unit maintained with our Bank from CBS in .txt format and
obtain from the unit statement of the CA accounts held by the unit
with other banks in .pdf format. For example, If the appraisal is
being prepared in July 2017, the statements of accounts for all CA
accounts of the customer with all banks from 1st April 2016 to
30th June 2017 will have to be obtained. However, at the time of
submission of proposal, the statements of bank accounts should
not be more than two months old.
• The statements must be collected in .pdf or .txt format to
facilitate automated processing in PACE tool available in LOS.
Preferred format for banks other than our Bank is .pdf. For
statements of accounts with us, please generate the same in .txt
format from CBS so as to process in the PACE tool.
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• Soft copes of bank account statements to be obtained via
official e-mail id of the applicant / borrowing entity.
A declaration to be obtained from the unit that it has provided
statements of all accounts maintained with Bank(s) for the period
required for the assessment of the bank finance.
10 Securities • Details of securities offered.
• A confirmation / assurance from the unit that the
securities made available to other banks will be made available to
our bank or substitution proposed, if any, will be as per bank’s
guidelines on takeover of the loan (applicable only in case of
takeover of loans).
The applicant to be advised that the application received will be processed

further if prima facie found in line with the bank's loan policy/ norms and
decision in this regard will be communicated verbally to the applicant within 7
working days.
Activities to be performed by RM(SME)/Branch

11 Scrutiny • Scrutinize the application form and enter the
application form in the Loan Application Received and Disposal
Register/IT Tool and to be branded with the reference number.
11 KYC • Complete KYC formalities in respect of the promoters,
A
borrowing entity, group companies, group, guarantors etc. on the
basis of documents provided by the customer.
12 Address • Verify Address & Locations of the company/unit/ firm,
promoters, and guarantors on the basis of documents submitted by
the applicant.
13 Initiate the SME loan proposal in LOS / LLMS as the case may be,
Verification
by filling up the required information in the fields provided for
of
compiling profile of the borrower/ promoters/ guarantors/
Defaulters associates (the TAT of the proposal shall be measured from this
lists and point)
knock-out • Trigger the Bureau report for Borrower, Promoters, guarantors,
List (based associates / group companies by clicking the link provided in
on CIBIL, LOS/LLMS.
SMA status, • Verify CIBIL / other CIC reports, RBI Defaulter list, Wilful
etc. defaulter list, ECGC Caution list, I-probe, CRILC data, Loan
rejection / slippage list, Banned list of promoters of SEBI, list of
non-cooperative borrowers, ROC site (financials and details of
existing charges).
• Peruse the output generated for confirming whether the proposal
passes / clears the knockout criteria for promoters, directors,
borrowing entity, other related parties and group concerns.
• If CIC Credit history/CIC Suit Filed Status based on CIBIL
Page 109 of 632

report is ‘Yes’, then proposal cannot be processed further.
However, in case of technical default (CIC Credit History) manual
adjustment is allowed in delinquency variable subject to the
written justification provided by customer, acknowledged by the
bank which has reported the default. Risk Rater is given the
authority to adjust bureau delinquency variable based on
justification provided by RM (SME). Specific approval for the
deviation to be obtained from the sanctioning authority as per
template of the proposal.
Note: Thus, the following will be the new knock-out criteria
(entry barriers) for any proposal:
(i) Integrity,
(ii) Environmental Clearances
(iii) Appearance of name in the CICs Suit Filed List
(iv) Appearance in the CICs Credit History-
➢ If for the borrower, no. of times SMA in last 12 months is>0,
then entity will be considered as defaulter under CIC-Credit
history.
If for the related parties, no. of times SMA/60 dpd or worse is > 3
in the last 12 months, then the party will be considered defaulter
under CIC-credit history.
On the basis of above documents, conduct a preliminary assessment of the

proposal, take a view, whether proposal conforms to the Bank’s Loan Policy
and other relevant circular instructions/ guidelines issued by the bank from time
to time and if found acceptable move to stage -2., otherwise, within 7 working
days of meeting with the customer, suitably advise the customer and controllers,
our inability to consider and process the application further.
Stage-II: Business Verification

Sr. No. Topic Particulars
Obtain the following documents from the customer

1 Financials • Full set of Audited financials for the last 3
years, CMA data duly signed by the
promoters/directors, partners, proprietor, etc.
2 Profile of the unit • Brief wri t e up on management, key persons,
industry, activity, etc.
3. Associate Concerns • Details of associates, brief profile of associates,
their banking arrangements & financials of
associates for the last year. Particulars of trade with
the applicant/ borrower
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4. Statutory approvals • MSME registration, License/ approval from
regulatory authority, Pollution control certificate,
VAT/ GST registration, etc. and confirmation from
the customer that statutory dues are regularly paid.
5. If Term Loan • Project report, sources of promoters contribution
with supporting documents, evidence of investments
made so far, project implementation schedule, etc.
6. Other Borrowing • A declaration from the prospective borrower
declaration about the existing banking/borrowing arrangements,
if any.
7. IT return • IT returns for the last 2 years.
8. VAT/GST Return • GST/VAT return for the last year and quarter(s)
completed during the current year.
9. Leased/Rented/owned • Copy of Lease agreement(s)/ Rent Agreement(s)/
premises Title Deed(s) – as applicable.
10. A & L Statement • Obtain Assets & Liability statement of
the promoters / guarantors as per bank’s
instructions and compile opinion reports.
11 Capital structure • Details of shareholding pattern.
12 TL with other Banks • If TL has been tied up with any FI or other
lender(s) obtain the details along with a copy of the
sanctioned letter.
13 Investments made so If any investment has already been made, obtain
far documentary evidence thereof.
14 Other documents Obtain letter of allocation of power supply,
certificate confirming utilities available, any other
documents required to arrive at CUE Rating and
answer QCA questions and to process the proposal,
etc.
15 Title Documents Obtain the original title deeds/certified copies (in
case of takeover), prior deeds, Land tax receipt,
Building tax receipt, possession certificate, Location
sketch and other relevant papers for TIR of the
properties
Valuation • Obtain cheque for requisite amount (to be pre-

16 Collateral
and TIR Fee decided by the Circle) towards payment of
professional fees on account of collateral valuation
and TIR
Note: Collateral valuation and TIR must be
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prioritized and initiated immediately after due
diligence/ Inspection/ pre-sanction visit at this
Stage.
17 Processing fee • Recover minimum applicable processing fee with
applicable Tax, as prescribed by CPPD from time to
time as advance and exchange a letter with the
applicant conveying that the fee recovered is non-
refundable, irrespective of sanction of loan or
otherwise
Activities to be performed by LPO/ AMT/ CSO/ RM (SME) / Branch/

Field Officer/ Credit Officer
18 Queries (applicable • Discreet enquiries should be m ade for cross

only in case of takeover checking the reasons given by the borrower for
of loans) moving the account.
19 Financials verification • Get independent confirmation of audited

financials from the borrower’s auditors who have
signed the balance sheet. In case of Corporates,
confirm genuineness of balances sheet from ROC
site.
19 CIR • Obtain CIR from the existing bankers on the

borrowing entity & its associates, if applicable.
20 Inspection • Inspect the unit, manufacturing activities/

showroom, godown, collaterals, etc., with the help
of the Digital Inspection Tab / Mobile.
• Interview concerned personnel of the unit/
related parties (wherever applicable) as per the
QCA guidebook who are in a position to answer
QCA questions
• Interview other parties like customers,
suppliers, and company professionals, etc. to
answer other QCA questions,
• Make discreet enquiries with local persons to
ascertain the ownership of the property(ies) and
answer the related QCA questions. .
On the basis of documents received so far, CRA/CUE, interest rate, securities offered,
Banks Loan policy, CRMD norms, etc., if the proposal is found to be acceptable and a
broad agreement has been reached on pricing & other terms & conditions with the
borrower, move to Stage-3; otherwise advise the customer of our inability to consider
the proposal.
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Stage-III: Appraisal:
Sr. No. Topic Particulars
1 Valuation of Arrange valuation report(s) of the properties from
empanelled valuer(s) as per the bank’s extant
Securities
guidelines.
TIR of the securities • TIR process to be initiated upfront and

2
prioritized along with valuation to ensure receipt
before proposal is submitted for Sanction.
3 Term Loan • In respect of suppliers of machinery, obtain
opinion report from their bankers; obtain original
requirement copies of invoices, quotations, arrangement of after
sales service etc. Have reports from D&B/any other
accredited agency of repute on the suppliers.
4 TEV Study, etc. • Arrange for TEV Study & cost verification, in
case of term loan as per the extant instructions /
requirements.
5 PACE and CUE • Complete PACE and CUE
6 CRA proposal • The following are need to be filled in CMA/CRA

validation proposal:
• Comments on y-o-y comparison of performance
of key financial ratios
• Comments on comparison of last year estimated
and audited financials.
• Estimated / projected financials for next 2 years
in CAM data for WC loans
of •
7 Submit the proposal for validation to Risk Rater
Submission
CRA/CUE Rating
validation to Risk
Rater
8 Pricing • RM (SME) to discuss / negotiate pricing, other
concessions etc. with the customer if not done
already.
9 Appraisal Note • Complete the Appraisal note and put upto
Appropriate authority
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1.2.9 Illustrative check list of activities under pre-sanction credit process
S. No. Activity Yes/ No/ Not

Applicable
01. Wherever prescribed, has loan application complete in all

respects been obtained on the standard format?
02. Have KYC document along with photos of

Proprietor/Partners /Promoters/ Directors/ Guarantors been
obtained and verified? Has the official who has verified the
documents subscribed his signature with name and SS No, on
all documents as a token of such verification?
03 Have copies of Wealth Tax/Income Tax

returns of Proprietor/ Partners/ Promoters/ Guarantors, duly
verified with their originals, been obtained and kept on record?
04. Have Statements of Personal Assets and Liabilities been

obtained from Proprietor/ Partners/ Promoters / Directors/
Guarantors and Opinion reports compiled?
05. Do they have any past connections with the Bank?
06. Have copies of Partnership deed/Trust Deed/Registration

Certificate from Registrar of Societies / Certificate of
Incorporation / Memorandum & Articles of Association etc
been obtained? Have they been verified with originals?
07. In case of Public Limited Co, has Certificate of

Commencement of business been obtained?
08. Have copies of licenses, permissions/ approvals by

Regulatory Authorities been obtained, wherever applicable?
Have they been verified with originals?
09. Has Pollution Control Clearance been obtained in applicable

cases?
10. Have copy of rating accorded by External Rating Agencies

like ICRA, CARE, CRISIL, FITCH, SMERA or
BRICKWORK been obtained for loans of above Rs.50 cr
11. Have reports from Credit Information Companies

on the Firm/ Company as well as Proprietor / Partners /
Directors / Promoters / Directors been accessed and verified
for their credit history?
12. Has CRILC site of RBI been checked for verification of

borrowings with other banks and their status, for all loans of
Rs.5 cr and above?
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13. Has a similar verification been done with the CIC
defaulters’ list/ECGC Caution list/banned list of
promoters (SEBI)/List of disqualified directors (MCA)/I-
Probe search etc.?
14. Have Credit Information Reports from the Firm/Company’s
existing bankers been obtained and verified?
15. Have VAT/GST Registration/Annual VAT/GST Returns from
the beginning of the financial year upto the month, except
in the case of exempted categories, been obtained?
16. Has the complete project report been submitted by the unit?
17. Have audited financials for the last 3 years in case of
existing Company along with the ITR been obtained?
18. Whether the financials have been verified with the website of
the Ministry of Corporate Affairs?
19. Has an independent confirmation of Certification of
Audited Financials been obtained by e-mail/fax from
the Company’s auditors?
20. Have the details of Banking arrangement been included in the
CMA data submitted by the unit?
21. In respect of new units, has the estimated/projected balance
sheet been submitted?
22. Is the project business level as per the industry average?
23. Has CMA data duly signed by the authorized
functionary, incorporating financials of past three years,
estimates and projections for CC limit for next financial
years & for the entire duration of TL, been obtained?
24. If term loan has been tied up with any FI or other lender(s),
have the details along with a copy of the sanction letter been
obtained?
25. In respect of suppliers of machinery, have opinion reports
been obtained from their bankers? Have original copies of
invoices, quotations, arrangement of after sales services etc.,
been obtained? Have reports from D & B/any other accredited
agency of repute been obtained?
26. If some portion of expenditure has already been incurred, has
the necessary proof been obtained?
27. Have Quality Control arrangements/copies of
certification (ISO Certificate) been obtained?
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28. Has schedule of implementation been called for?
29. Have the details as under been obtained for the purpose of
appraisal?
• Proprietor / Partners / Promoters / Directors’ name,
father/spouse’s name, address, telephone no., Mobile no,
Mail id, Academic qualification, Experience, Functional
responsibilities in the unit, Capital/Loan contribution in the
unit, any other concern with which he/she is associated with
particulars of the position held in that company, any litigations
pending against him/her etc.
• Qualification and experience of key managerial and
technical staff.
• Availability of Power, Water, Labour, Raw Material,
transport etc.
• Details of manufacturing process and technology
employed.
• Marketing arrangement, major players in the market, the
units Unique Selling Proposition, any strategies implemented
for promotion, etc.
• Orders on hand
30. Have the details of associate concerns, along with their
bankers’ details and CIRs from their bankers been obtained?
31. Has opinion report on the suppliers from their Banks been
obtained?
32. Where immovable properties are offered as security, have
all necessary documents viz., (a) Photocopies of Original
Sale Deed/Gift Deed (b) Mutation Order (c) Latest Tax paid
certificate (d) Non- encumbrance certificate etc., been
obtained and verified with originals?
33. a. Where immovable property proposed as security is
leased by the company/firm, does the lease agreement
provide for the proposed mortgage?
b. Where immovable property of any third party is proposed as
security, has the relationship with the third party been
ascertained?
34. Has search been conducted with Registrar of
Companies for the verification of existing charges on the
assets of the unit?
35. Has no objection certificate been obtained from the existing
lenders, for ceding pari-passu charge, wherever applicable?
Page 116 of 632

36. Have copies of liquid collaterals like LIC policies,
NSCs/KVPs/Fixed Deposits etc been obtained and verified?
37. Has legal opinion from Panel Advocate been obtained
on the Primary/Collateral security?
38. Has Valuation Report from our panel valuer been
obtained for all properties offered for mortgage?
39. If any corporate guarantee of some group company is
proposed, whether the company is authorized to furnish
guarantee? Has its Net Worth been ascertained?
40. In respect of taken over accounts have the copies of original
sanction, list of documents with the existing bankers, Credit
Information Report from the existing bankers, Bank Account
statement for the last 12 months, etc been obtained?
41. Has an independent visit to the property (not along with the
borrower) proposed to be financed/ proposed as security been
carried out and landmarks to the property been noted in the
records?
42. Have discreet enquiries been made with local persons to
ascertain the ownership of the property?
43. In respect of open land, has an independent visit been made
along with the local Ameen to ascertain genuineness of the
land vis-à-vis Plot No., Dag No., Khatiyan No. etc., as
recorded in title deeds and other relevant documents? Have
the following verifications been done and notings kept on
record?
a. Is the land a contiguous plot of land or is it in scattered
pieces?
b. Is the land properly demarcated and bound with pucca
boundary wall?
c. Is the land land-locked?
d. Is there proper access to the land by a road physically as
well as in approved plan?
44. If the property to be financed or proposed as security is a flat,
have the following details been verified and proper record
maintained?
• Is it an independent flat (i.e. it has a separate
and independent entry; not through another flat).
• Is the flat rented out? If yes, name of the tenant and
duration of his tenancy to be recorded
• If two or more flats are modified and made into one
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apartment, are all of these mortgaged to the Bank?
• If two or more flats are amalgamated, then has this been
authorized by and approved in writing by the residential
society of the flat owners and the Municipality?
• Is the flat rented out, partially or wholly?
• Has the flat been constructed as per the sanctioned plan?
• Is the upkeep of the flat proper?
45. If the property to be financed or proposed of security is a
leased property, have the following details been verified and
proper record maintained?
a. Is the lease a Government lease?
b. In case of Govt. lease, has NOC from concerned Govt.
office been obtained by the borrower, to mortgage the
property?
c. If the leased property is not Government lease, is the
lease deed accompanied by Original Mother Deed?
d. Has the mortgage been done by the lessor on
Original Mother Deed?
e. Has the lessor been taken as Guarantor?
46. If the property to be financed or proposed of security is a
building, have the following details been verified and
proper record maintained?
a. Is the building rented out, partially or wholly?
b. Has the building been constructed as per the sanctioned
plan?
c. Is the upkeep of the building proper?
47. In Kolkata, Howrah and other municipalities of West Bengal,
from the appearance of the building/structure, has it been
ascertained if it is a Thika Tenancy Land?
48. Has is it been ensured that mutation of the property in the
name of the owner done?
49. Has conversion of the property use been done? Is the
conversion certificate available on record?
50. Has it been verified as to whether there will be any challenges
in enforcing the property (i.e., taking possession, selling,
etc)?
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1.2.10 Illustrative list of Questions that may be asked while interacting with borrower
during pre-sanction credit process:
01. Is finance required for a unit which is yet to be established? Or has it

already been established earlier?
02. If it has been established earlier when is the unit established?
03. Where is the registered office of the unit located?
04. Are there any branches elsewhere? If yes, where are they located and what
is the activity being conducted at those places?
05. With whom the unit has been banking with previously? Why is the unit
seeking fresh finance from our Bank?
07. What is the line of activity?
08. Who are the promoters/partners/directors?
09. What is the qualification and experience of the management?
10. Whether the unit is involved in manufacturing or is it only trading?
11. How is the promoter/entrepreneur satisfied that the project is

technically feasible and economically viable?
12. What are the other similar units operating in the area?
13. Whether required infrastructure is available in the place of establishment of

the unit?
14. What arrangement has been made to meet the requirement of

professionals/technical and skilled labour?
15. From where is the raw material procured? What are the tie-up
arrangements?
16. Is any subsidy/margin money/support of any type available either from

Government or any other agencies?
17. Does the activity fall under priority sector?
18. How is margin to be met by the borrower?
19. What are other requirements for the project? Are all approvals for the
project in place?
20. What is the length of operating cycle?
21. What is the arrangement for marketing the products?
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22. Are the goods sold within the country? Or exported? If exports involved,
which are the countries to which exported?
23. What is the credit available on procurement of raw material?
24. What is the experience of recovery from Sundry debtors?
25. What is the industry profile and prospects?
26. Has the unit reached break-even? If not, what is the estimated time frame?
27. Are audited financials available?
28. Is there any change in the Directors/partners of the firm? If yes, what are the
reasons for the change?
29. Is there any change of Auditors of the Company/Firm? If yes, what are the
reasons for the change?
30. Is the unit maintaining a Current Account? If yes, with which bank?
31. What would be the end use of funds? What is the finance required for?
32. What is the amount of finance required?
33. What is the basis/justification of the proposed expansion/modernization, if

any?
34. What is the security offered for the Bank finance?
35. Does the unit belong to any group of Companies? If yes, what are the other
Companies in the group?
36. Whether any of the other Companies has/have availed finance from our
Bank?
37. Are there any intra-group obligations/transactions?
1.2.11 Illustrative check-list of documents to be obtained from the customer
Sr. No. Documents to be obtained
1 Audited Balance Sheet for the last 3 years
2 CMA Data duly signed by the promoters/partners/proprietor etc.
3 Ownership documents- viz. Memorandum & Article of Association/

Partnership deed/ Trust Deed/ Bye-laws of Society, as the case may be
4 Brief Profile of the unit, management, Key persons, Industry etc.
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5 Details of associates, brief profile of the associates, their banking
arrangement & financials of the associates for the last year.
6 Copies of Statutory approvals viz. MSME registration, License/

approval from regularity authority, Pollution Control Certificate, GST
registration, etc.
7 A confirmation that the statutory dues are regularly paid.
8 A declaration from the unit about the existing banking arrangements.
9 IT returns for the last 2 years.
10 VAT / GST return for the last year.
11 Assets & Liability statements of the promoters/guarantors.
12 If term loan required: project report, details/sources of promoters’

contribution, evidence of investments made so far, project
implementation schedule.
13. In case of rented premises, copy of lease agreement(s)
14 Details of shareholding pattern.
15 The customer be advised that part of processing fee will be obtained as

advance as per Bank’s extant guidelines.
16 If term loan has been tied up with any FI or other lender(s), details
thereof along with a copy of the sanction letter.
17 Obtain original title deeds/certified copies (in case of takeover of

limits), prior deeds, Land tax receipt, Building tax receipt, possession
certificate, Location sketch and other relevant papers for TIR of the
properties.
18 If some portion of expenditure has already been incurred, obtain

the necessary proof.
19 Obtain letter of allocation of power supply, certificates of utilities

availability, any other documents required to process the proposal, etc.
The above list is illustrative only, however, AMT/RM (SME) may request additional
documents, if feel necessitated, as per the nature of activity/business model of the unit.
Learning Points:
1) KYC- KYC is must. You must first identify the customer. It is better to approach the
customer rather customer approaches you. Sometimes borrower is not selected properly, he
is either new customer or introduced by another stranger or middlemen. Normally, do not
involve middlemen, talk to customers directly. Avoid giving multiple loans to single party/
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family or a group, to minors, lunatics or insolvents. It is compulsory to complete all the
KYC norms before even thinking of giving loan.
2) Understanding Credit Cycle
3) Verification of RBI’s Defaulter List/ Wilful Default list
4) CIC reports – search the CIC reports of the borrower and guarantors in all loan cases and
commercial CIC report in case of firms/ companies.
5) Search CERSAI site- if mortgage of property is involved in the loan then before
proceeding further search should be made on CERSAI site to ascertain that there is no
mortgage outstanding against the property in any other bank/ FI.
6) Loan safety- safety of loan is directly related on the basis on which decision was taken,
type and quantum of credit to be given and terms and conditions of the loan.
7) Pre-sanction Visit- next step is to visit the residence place of borrower, place of unit and
property to be mortgaged. Pre-sanction visit is basically to determine the “bank-ability” and
access related riskiness of the proposal. Identification of borrower and site must be
ascertained beyond doubt by inquiring from neighbors and other surrounding people. The
whole observations must be noted down and to be placed on the record.
8) Assets and liabilities Reports- assets and liabilities statements of all borrowers/
guarantors must be prepared on prescribed format mentioning full detail of assets &
liabilities duly signed by borrower/ guarantor and Relationship Manager/ Branch Head and
to take necessary proof of asset and liabilities.
9) Balance Sheets – in case of working capital limits 3 years’ balance sheets of the unit
along with income tax/ GST/ Sale tax returns etc., Estimated/ projected balance
sheets/CMA of next 2 years in cases of working capital limits and for the period of loan in
case of term loan. The balance sheets must be thoroughly analyzed and sanction-able limits
be assessed.
10) Project report- project report (for the proposed project if term lending is required)
containing details of the COP including machinery to be acquired, price, name of suppliers,
capacity utilization assumed, production, sales, projected profit and loss and balance sheets
for the period till the proposed loan is to be paid. Project report should be analyzed and
feasibility be ascertained.
11) Credit Rating/CUE rating- credit rating must be done in all the loan cases as per bank’s
guidelines. Rate of interest should be fixed as per credit rating. Credit rating should be done
judiciously based on analyzing balance sheets. Avoid sanctioning loan below Hurdle Rate.
12) Legal opinion- verification of title deed of property to be mortgaged is utmost
necessary. It must be ascertained that it is original not fake, scanned copy or duplicate one.
In respect of TIR, Empaneled Advocate should personally verify that title deed to be
mortgaged tally with the one kept with revenue records. Must get certified copy of the title
deed and tally it with original Title deed. Also, take certificate from advocate that certified
copy tallies with the original one. Thoroughly read the TIR given by the advocate and
observe that there is no objectionable clause which goes against the bank’s interest. Also
obtain all the documents mentioned in the TIR. Here it is also important to personally
verify that submitted title deed belongs to the property you visited earlier. Also make sure
that SARFAESI act 2002 is applicable on the property. Certificate of change of land must
be taken in case unit to be financed is to be built on agriculture land.
13) Any additional limit sanctioned against same securities already charged to the bank
ensure-
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a) To extend charge to such limits too.
b) All concerned should be kept informed.
c) Acknowledge debt/ balance conformation with the borrower.
14) Valuation- valuation of property to be mortgaged is to be done from valuer on banks
panel. Considered value is as per circle rate or realizable value, whichever is lower. After
that realizable value can be considered. Valuation report of the valuer must be thoroughly
analyzed that it should not contain any comment which may harm the bank’s interest on
later stage. The title deed, revenue numbers, area of the land must tally with deed/ legal
opinion and valuation report.
15) Filling of Appraisal note- after verifying all the documents the appraisal note should be
filled. Care should be taken that full detail should be filled and it should be complete in all
respects. Appraisal should reveal whether proposal is fair banking risk.
16) Repayment- detail of repayment mentioning number/amount of instalments, duration in
months must be mentioned. If moratorium period allowed, then it must be mentioned and
also mention date of first installment and last instalment.
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Check Your Progress:
1. A borrower can engage the services of intermediaries for preparation of financial
statements, CMA data etc. for submission to the Bank for availing loan facilities. The
intermediaries can be a ____?
a Chartered b Cost Accountants c Financial d Any of the
Accountants Consultants above
2. A shell company is an entity that has _____
a No active b usually exists c Both 1 & 2 d None of the
business only as a vehicle above above
for another
company
3. For loans above Rs. 1.00 Crores, how many valuation reports are to be obtained?
a 1 b 2 c 3 d As per the
discretion of the
appraising
officer
4. At the time of sanction of credit facilities, Valuation report should not be older than _____
months.
a 3 b 6 c 9 d 12
5. In case of Minor, less than 10 years, whose ID is required for KYC.
a Father b Mother c Minor d The person who
will operate the
account (Natural
Guardian or
Legal Guardian)
6. A company has approached us for sanction of credit facilities. What declaration we should
obtain from them before considering the request?
a Declaration b Declaration c Declaration d All the Above
regarding regarding regarding credit
whether any overdue statutory facilities availed
credit facilities in payment by its associates
any bank / FI / obligations and subsidiaries
NBFC and their from banking
status. system
7. A company has export sales turnover of Rs.50 crore. From which return it can be verified?
a GR Form / b GST / VAT c SEBI d None of the
Softex Return above
Declaration Form
8. What precaution we should take at the time of sharing of Credit information on our
constituents with other banks?
a It should be b It should be c The estimated d All the Above
shared only on a shared only on means should not
specific request the format be stated in
received in prescribed by absolute terms. It
writing from IBA. should be shared
other banks. by way of
prescribed rating.
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ANSWERS OF OBJECTIVE QUESTIONS:
1-D 3-B 5-D 7-A
2-C 4-A 6-D 8-D
References:
For further details, please refer the following:
1. RBI Master Direction on Know Your Customer (KYC) updated as on 09.01.2020
2. Manuals on Loans and Advances, Part-I, Chapter-5: Pre-Sanction Credit Process
3. Manuals on Loans and Advances, Part-2, Chapter-17: Opinion Report
4. CPPD E-Circular S. No. 1594/2019-20 dated 10.02.2020: Official authorized to approve
opening of Current Account of our borrowers with non-lenders.
5. CPPD E-Circular S. No. 1176/2019-20 dated 19.11.2019: Credit Information
Report(CIR) on Group Companies
6. CPPD E-Circular S. No. 296/2019-20 dated 07.06.2019: Legal Entity Identifier (LEI)
7. CPPD E-Circular S. No. 179/2019-20 dated 10.05.2019: Obtention of Financial
Statements
8. SMEBU E-Circular S. No. 1577/2018-19 dated 22.02.2019: Collateral Security Norms
for Trade & Service Sector
9. CPPD E-Circular S. No. 1264/2018-19 dated 18.12.2018: ICAI’s Unique Document
Identification Number (UDIN)
10. CPPD E-Circular S. No. 1172/2018-19 dated 29.11.2018: Opinion Report Format
11. SMEBU E-Circular S. No. 1267/2015-16 dated 13.01.2016: SOP for Sanction of Loans
12. SMEBU E-Circular S. No. 1448/2015-16 dated 25.02.16: SOP for Sanction of Loans
13. CPPD E-Circular S. No. 860/2015-16 dated 07.10.2015: Handbook on Pre-sanction and
Post Sanction – Due Diligence in Advances
14. CPPD E-circular S. No. 993/2015-16 dated 07.11.2015: End to End Credit Process
Page 125 of 632

CHAPTER 4
LEGAL ASPECTS OF ADVANCES
TYPES OF BORROWERS
While processing credit proposals the operating functionaries have to entertain different
types of borrowers or legal entities. Normally, the following are the types of borrowers
who approach the Bank for credit facilities.
i. Proprietorship Concerns
ii. Partnership firms
iii. Private & Public Limited Companies
iv. Limited Liability Partnership
v. Trust
vi. Hindu Undivided family
vii. Societies
While appraising a proposal of a particular type of borrower, some of the special provisions
applicable to that particular type of borrower has to be kept in mind.
Proprietorship firm as Borrower:
Proprietorship is perhaps the simplest form of a borrowing entity. As far as the legal status
is concerned, both the proprietorship and proprietor in individual capacity are considered
the same, though for accounting purposes a proprietorship has to prepare the
financial statements, viz., balance sheet and profit and loss account for an understanding
of the financial health of the concern. The amount invested by the proprietor in the firm
will be shown on liability side of the balance sheet as Capital.
While sanctioning credit facilities to proprietorship firms, it is not necessary to obtain

personal guarantee of the proprietor, as the proprietor is personally liable for any debt of the
proprietorship.
ADVANCES TO LIMITED LIABILITY COMPANIES
In dealing with a Limited Liability Company, the foremost requirement is the company’s
Memorandum and Articles of Association and Certificate of Incorporation. From a scrutiny
of the Memorandum & Articles of Association, it would be revealed whether the purpose of
borrowing is consistent with the stated objectives and whether the advance is within the
borrowing powers of the company. It has to be ensured that no prior charge exists over
any of the assets being offered as security and that the persons executing the security
documents and operating the account(s) are duly authorized.
A company’s borrowing powers are usually specified in the Articles of Association, but they
may not always be limited to a fixed amount. When no mention of borrowing is made, a
trading company may generally be presumed to have power to borrow for the purpose of its
ordinary business, but no advance should be sanctioned in such circumstances without
prior reference to the controlling office.
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The powers of a company (public or private) to borrow may be exercised by its Board of
Directors by means of resolutions passed at a meeting (and not by circulation). All
advances granted to companies must, therefore, be supported by resolutions so passed.
Proposals for a new advance to a company must be accompanied by copies of its last three
years’ (Audited) Financial Statements. Supplementary statements showing (a) details of
the Company’s borrowings from all sources and the securities offered and (b) the value
of the stocks of the company should also be submitted to the sanctioning authority with the
analysis of every balance sheet.
Before a term loan is granted to a company, a certificate should be obtained to the effect
that the total borrowings from all sources for the purpose of financing expenditure of
capital nature, including the loan applied for from the Bank would not exceed the limit
prescribed under section 180(1)(c) of the Companies’ Act.
Companies’ Act, 2013 – Sec. 180.1
“The Board of Directors of a company shall exercise the following powers only with
the consent of the company by a special resolution, namely:-
(c) to borrow money, where the money to be borrowed, together with the money already
borrowed, by the company will exceed aggregate of its paid- up share capital and free
reserves and securities premium, apart from temporary loans obtained from the
company’s bankers in the ordinary course of business…”
In terms of this section, the powers of a public company or a private company which is a
subsidiary of a public company to borrow by way of term loan together with money
already borrowed for capital expenditure are restricted to the amount of its paid-up
capital plus free reserves. Any borrowing in excess of this amount is subject to the
consent of its shareholders in a general meeting by means of a special resolution.
Before granting an advance in any form to a limited liability company, a search of the
records of the Registrar of Companies should be done to ensure that no prior charge exists
over the security offered.
If a company has issued debentures, it must be ascertained from the Debenture Trust Deed
that the assets the company proposes to charge to the Bank are not already charged to the
Debenture holders. If there is any doubt on the point, a deed of release must be obtained
from the Debenture Holders or their trustees in terms of the Debenture Trust Deed. When
debentures are issued by a company whose stocks etc. are already pledged or hypothecated
to the Bank, extra care should be taken to ensure that the Bank’s interest is not jeopardized.
Instructions regarding the registration of Bank’s charge over the assets of

Companies liable to Bank are detailed elsewhere in this manual.
Branches should not provide loans to companies for buy-back of shares / securities.
In terms of Section 68 of the Companies Act, 2013, companies have been permitted to
purchase their own shares or other specified securities out of their free reserves, funds in
securities premium account or the proceeds of any
Page 127 shares or other specified securities.
of 632
At the time of renewal / enhancement / sanction of an advance relating to a company that
has accepted public deposits, a certificate should be obtained from the company to the effect
that it has not defaulted in payment of interest / principal to small depositors and that the
company has complied with the provisions of Section 73 of the Companies Act, 2013 along
with a confirmation by the Statutory Auditors of the Company. It should also be
verified with the NCLT for any notice of default filed by the Company in terms of Section
73. This is to be done at the office of the NCLT having jurisdiction over the place where
the registered office of the borrowing company is located.
TYPES OF COMPANIES
Public & Private Company:

On the basis of number of members and capital, companies may be classified into (i) Public
Companies & (ii) Private Companies. As per the Companies Act, 2013 a private company
must have minimum of 2 members and a maximum of 200 members. One Person Company
is a private company with only one member. The Companies Act restricts the rights of
members of a private company to transfer its shares and also prohibits an invitation to the
public to subscribe to any shares or the debentures of the company.
A public company means a company, which is not a private company. A private company
which is a subsidiary of a public company is deemed to be a public company. A public
company must have a minimum of 7 members. A public company can issue shares to the
general public and the transferability of shares and related issues etc. are controlled by
SEBI. As per the Act, both the Private as well as Public companies can start its operations
only after obtaining Certificate of Incorporation and Certificate of Commencement of
Business.
 Minimum Paid-up Share Capital

 The minimum paid-up share capital requirement of INR1L (Pvt. Ltd.) and
INR5L (Pub. Ltd.) under Companies Act, 2013 has been done away with by
the Companies (Amendment) Act, 2015 which received the assent of the
President of India on 25MAY15
A COMPARISON OF PRIVATE & PUBLIC LIMITED COMPANIES BASED ON

FEATURES
Basis for comparison Public Company Private Company
Meaning Owned and traded publicly Owned and traded
privately
Minimum Members 7 2
Maximum Members Unlimited 200
Minimum Directors 3 2
Suffix Limited Private Limited
Start of Business After receiving certificate of After receiving certificate
incorporation and certificate of incorporation
of commencement of
business
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Statutory Meeting Compulsory Optional
Issue of prospectus / Obligatory Not required
statement in lieu of
prospectus
Public subscription Allowed Not Allowed
Quorum at AGM 5 members in person 2 members in person
Transfer of shares Free Restricted
HOLDING, SUBSIDIARY & ASSOCIATE COMPANIES
Companies are classified as Holding, Subsidiary or Associate companies on the basis of

control. A company is treated as subsidiary of another company if the latter controls the
composition of the Board of Directors; or holds more than half in face value of equity share
capital of the former. Thus if A Ltd has equity capital of Rs. 4 cr out of which B Ltd. holds
shareholding of Rs. 3 cr, then B Ltd. is a holding company and A Ltd. is the subsidiary of B
Ltd.
The Act defines an Associate company (say, A) of another company (say, B) where B
exercises a significant control over A (by controlling at least 20% of the total share capital of
A, or the business decisions under an agreement). If A is a joint venture partner of B, both
the companies enjoy the status of associate companies to each other. But, the company A will
cease to be an associate company of B, if it happens to the latter’s (B’s) subsidiary company.
Government company: A Government company is one in which not less than 51% of paid
up share capital is held by the Government (Central / State). A subsidiary of a Government
company is also a Government company.
Advances to non-corporate clients e.g., partnership firms
It is preferable to finance partnership firms which are registered with the Registrar of
Firms of the local area. The loan account should be opened in the name of the firm and not
in the name of the individual partners irrespective of the fact that one or more of the
partners may be authorized to operate the account. Apart from collateral security, if any, by
way of personal guarantee of a third party, personal guarantee of the partners should be
obtained especially when the firm is not registered as per the Partnership Act. This is to
make them jointly and severally liable to the Bank for the dues of the borrowing firm. The
partnership deed, which is an agreement between all the partners containing terms &
conditions of partnership as well as rights and liabilities of individual partners, must be
examined carefully.
No credit facility should be provided to a partnership firm for any activity which has not
been mentioned in the partnership deed as it may prove to be Ultra Vires (beyond the scope
or in excess of legal power or authority) of the executed deed between partners.
Whenever changes take place in the constitution of the firm either by death, retirement,
insolvency, expulsion or inclusion of partner, a new partnership is formed. In such cases,
the limits granted to the old firm should be cancelled and credit facilities extended to the
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reconstituted partnership firm after examining of 632the creditworthiness of the partners of
the firm and other relevant factors for taking a credit decision. Till the formalities
concerning reconstitution of the partnership of new firm are completed and necessary loan
documents are executed, as interim measure for the sake of continuity of business activity,
operations in the existing Bank account may be permitted only after obtaining a stamped
continuing letter of guarantee signed by all the outgoing partners as well as the incoming
partners. Where personal guarantee of third party has been obtained, confirmation from the
guarantor must also be obtained before allowing operations in the existing account. It
should be ensured that the necessary formalities are completed within a period of two
months.
In case a firm has been granted term loan, on reconstitution of the partnership, a
supplementary agreement owning up the liability and repayment of the outstanding loan
should be obtained.
Where reconstitution takes place in case of a partnership firm, which has created equitable
mortgage of immovable property of the partnership firm in favour of the Bank for
collaterally securing the loans, an agreement on prescribed proforma should be obtained
without disturbing the existing mortgage.
A person must have a distinct legal entity as recognized by law e.g., Individuals, Company
etc., to be a partner in a partnership, but a partnership firm cannot be one of the partners in a
partnership firm. Since the Bank insists on guarantee of all the partners, a company (as a
partner) may have to provide corporate guarantee and in which case section 185 & 186 of
the Companies Act 2013 shall be applicable. A company must pass a resolution for
executing necessary documents in this regard.
A minor can be a partner of a partnership firm, however he cannot be held liable personally
for any debt of the firm, so this aspect has to be kept in mind while granting credit facilities
to partnership firms.
To safeguard the Bank’s interest on account of a partner exceeding his implied authority, a
`partnership letter` must also be obtained.
A partnership firm is considered separate entity from its partners and taxed separately.
Limited Liability Partnership (LLP)
LLP is a new corporate form designed to provide an alternative to the traditional

partnership (with unlimited liability on part of the partners) and the corporate statute (statute
based governance with limited liability on part of the shareholders). The LLP form of
business is a hybrid structure between the two, which provides the benefits of limited
liability but allows the partners the flexibility of organizing their internal structure as a
partnership based on a mutually arrived agreement. The Limited Liability Act, 2008
allows two or more persons associating for carrying on a lawful business ‘with a view to
profit’ to set up an LLP.
LLP is a separate legal entity which is liable to the full extent of its assets, but the
liability of the partners is limited to their agreed contribution in the LLP. Like a corporate, an
LLP can continue its existence irrespective of changes in partners.
Page 130 of 632
In a traditional partnership, every partner is jointly and severally liable with all other
partners for all acts of the firm done while he is a partner. As against this, liability of a
partner is limited to his agreed contribution in the LLP structure.
One of the important differences between an LLP and a company is that the internal
governance structure of a company is regulated by statute (i.e. Companies Act, 2013),
whereas for an LLP, the internal governance is governed by a contractual agreement between
the partners.
There is no ceiling regarding maximum number of partners. Each LLP must have minimum
two designated partners, one of whom must be a resident of India.
The partners in an LLP agree and sign on an agreement known as ‘LLP Agreement’.
However, entering into an LLP agreement is not mandatory. In the absence of an LLP
agreement, the mutual rights and liabilities of an LLP and its partners are determined by the
provisions described under Schedule I to the Act.
Every LLP must register itself with the Registrar of Companies (ROC).
Unlike companies, LLPs do not attract ‘Dividend Distribution Tax’ and ‘Minimum
Alternate Tax’.
HINDU UNDIVIDED FAMILY (HUF)

An HUF is represented by the head of the family, known as Karta, and the members of the
HUF are known as coparceners. Karta represents the HUF and is authorized to transact on
behalf of the HUF by virtue of age old practice sanctified by law.
With t h e introduction of Hindu Succession (Amendment) Act 2005, from

September 6, 2005, daughters are also given the status of a coparcener.
Banks should obtain a letter of authority in favour of the Karta signed by all major
coparceners, which is commonly known as JHF letter. This letter contains the names of the
family members, the minors, and a declaration that any change in the family constitution
shall be duly brought to the notice of the Bank.
Karta manages the HUF property on behalf of his family members. However, his powers
are limited and a charge created by him is binding on the family property only when the
loan taken by him is:
For the purposes of the necessity of the family or,
For the benefit of the family or,
For repayment of a lawful antecedent debt due from the family.
The liability of the Karta is unlimited, though the liability of the coparceners is limited to
the extent of their shares in the HUF property. However, Banks act conservatively and
obtain documents executed by all major coparceners of the HUF including the Karta. This
makes the coparceners jointly and severally liable for all the loans and advances that may be
taken by the Karta.
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TRUSTS
The Indian Trusts Act, 1882 defines a Trust as an obligation annexed to the ownership of
property and arising out of a confidence reposed in an accepted by the owner, or declared
and accepted by him, for the benefit of another, or of another and the owner.
A Trust is formed for the benefit of certain person(s) or purpose. The Trust Deed contains
the aims and objectives of the trust. It lays down the duties and responsibilities of the
Trustees and also the restrictions/ limitations imposed on them.
In almost all the cases, the borrowing powers of the Trustees are severely restricted.
Trust deed generally permits borrowing by the Trust. The provisions of the Trust deed
relating to borrowings from Banks/ FIs must be interpreted in a very strict sense.
Operations of Trust accounts have to be strictly according to provisions of the Trust deed.
CO OPERATIVE SOCIETY
While considering credit facility to a co-operative society, it is necessary to examine the

rules or bye-laws of the society, especially the terms on which it can borrow under the
relevant section of the State Co-operative Societies Act, 2002.
The lending bank should obtain a certificate from the society stating that the credit facility
sought is within the overall borrowing limit authorized by the Registrar of Co-operative
Societies.
Questions
1. Why do we insist on financing a partnership firm which is registered? What may be

the implications of financing partnership firms which are not registered?
2. What are the key features of a Limited Liability Partnership?
3. How do we define Holding, Subsidiary & Associate companies? What is the

relationship between such companies?
Page 132 of 632

VALUATION OF ASSETS
The following is the gist of the guidelines on valuation of assets (CPPD/49/3JUL19)
General guidelines on valuation:
i) The valuation should always be conducted by an empanelled independent valuer i.e.,

the valuer should not have a direct or indirect interest in the asset being valued.
ii) All the necessary / relevant papers / documents should flow directly from the
branch to the valuer & vice versa without routing the same through the borrower/ guarantor
concerned.
iii) The Valuation Report to be submitted by the valuers stand invariably contains the Fair
Market Value, Book Value, Realizable Value and the Distress Sale Value of the property
being valued. However, for the purpose of determining the present value of the property
mortgaged/ to be mortgaged, the Realizable value should be taken into consideration. Also
in the case of Plant & Machinery, Realizable Value to be accepted for valuation purposes.
iv) For loans above Rs.1.00 Crore wherein primary/collateral offered as security is
valued above Rs.50.00 lacs, valuation reports (not older than 3 months for new connection)
from 2 empanelled valuers are to be obtained and in case value of the property is below
Rs.50.00 lacs, single valuation is to be obtained. However, in case of Housing loans above
Rs.1.00 Crore valuation reports (not older than 3 months for new connection) from 2
empanelled valuers are to be obtained irrespective of the value of the property. The fair
market value and realizable value, whichever is lower, is to be considered for arriving at the
value of the property. Both the valuation to be conducted simultaneously and time gap
between these two valuation reports shall not be more than a month.
v) Valuation report for Asset(s)/ property(ies) to be obtained once in 3 years.
vi) If the difference between fair market value and realizable value quoted by the two
valuers is more than 5%, and reckoning of lower of the two valuations is not acceptable to
the borrower, then valuation from third valuer is to be obtained. The lowest of the valuation
to be reckoned in such cases.
vii) Where the number of properties offered as security exceeds 10 (ten) and are located at
diverse/ various locations, a notional discount @5% is to be applied on the Realisable value
of the properties and the discounted value should be considered while arriving at the
security coverage.
viii) In case of variation of 20% or more between the fair market and realizable values as per
the valuation and the guideline value provided in the State Government notification or
Income Tax Gazette, justification on variation has to be furnished by the Valuer.
ix) Wherever the value of the Asset/property is more than Rs.50.00 Crore, two valuers of
Category ‘A’ may be appointed in order to get the valuation done. In case the difference
in the valuation arrived at by both the valuers is not more than 15 percent lower of the
value to be considered, but when the difference in value by both the valuer is more than 15
percent and reckoning of the lower value is not acceptable to the borrower, then a
third valuer, who shall be also be a senior valuer in the ‘A’ category, may be
appointed and valuation obtained. In such a case, the average of the lower two
valuation out of three valuations made will be taken as the notional market value of
the properties valued.
x) Property values reported in leading newspapers as well as property portals such as
magicbricks.com, 99acres.com, housing.com etc., wherever available are to be referred to
and quoted. Page 133 of 632
xi) Details of last two transactions in the locality are to be furnished in the valuation
report, wherever available.
xii) The values quoted by the valuers should be cross-checked by the branch official
concerned by making independent enquiries, property inspection, comparison with recent
sales of similar properties in the neighborhood and enquiries from parties having good
knowledge of the local property value, for ensuring that only realistic realizable values are
accepted.
xiii) The operating units should also ensure that properties offered as security for credit
facilities sanctioned are not purchased from the loan amount disbursed.
xiv) Valuation of properties purchased on a recent date, viz. for a period up-to one year
from the date of registration of the property, the lower of Registration Value or Realisable
Value shall be reckoned for arriving at the value of the property.
xv) The operating units should generally insist on property/ ies, which are purchased before
our disbursement. In other cases, operating units should ensure that the properties offered as
security are not purchased out of our loans by verifying end use of funds.
xvi) Further, following modalities should also be adhered to
• As soon as the valuation reports are obtained, it should be verified and ensured that
they contain all the details. Blanks and cursory reports should not be accepted. Further, all
the columns in the format of valuation reports should be duly filled in with remarks and
finding of the valuer and if column is not applicable then a notation to that effect should be
made. A valuation report containing blanks should not be accepted.
• As a measure of strengthening the Due Diligence of the applicable primary/
collateral securities which are Land & Building/ Land in nature/ Plant & Machinery/ Other
tangible assets, valuers to include photograph of owner with the property in the background,
in the report submitted to Branches.
• For easy identification of the applicable primary/collateral securities which are
Land & Building/Land in nature/Plant & Machinery/Other fixed tangible assets, valuers to
mention longitude/latitude and co-ordinates of the properties in the valuation report. Screen
shot (in hard copy) of Global Positioning System (GPS)/ Various Applications (Apps)/
Internet sites (eg. Google earth)/ etc. is to be included in the valuation report.
• Valuation Report must contain specific views/ comments on the impending
threat, if any, of Road Widening, Take-over of property for public service purposes,
Sub-merging, Attracting provisos of Coastal Regulatory Zone (CRZ) etc.
• In case of consortium/ Multiple Banking Arrangement (MBA) the valuation report

format prescribed by the Bank/ IBA is to be utilized. For valuation of properties valued
Rs.50.00 Crore and above, two valuations to be obtained i.e. one from valuer(s) empaneled
with lead bank and 2nd valuation from the valuer(s) empaneled with the bank having the
2nd highest exposure in the consortium.
xvii) Branches/ Offices to ensure that residual age of the immovable property should be at
least 5 years more than the tenure of the loan.
xviii) For valuation of assets/ properties pertaining to stressed assets account, Bank’s
guidelines issued on Resolution of Stressed Assets is to be followed.
Page 134 of 632

TITLE INVESTIGATION REPORT (TIR)
Master Circular on Title Investigation Report- Revision CPPD/70/25SEP17

Procedure for obtaining Title Investigation Report and creation of Equitable Mortgage
1. Introduction
1.1 Title investigation is to be conducted in respect of all types of immovable properties that
are to be accepted as mortgage security. Title investigation has the following aspects:
i. Getting the documents of title in respect of the property examined by a panel advocate;
ii. Scrutiny of the TIR report issued by the Panel Advocate by the Bank’s dealing officials
to decide the acceptability of the panel advocate’s report; and
iii. Physical verification of the property to ensure the factual correctness of the statements
in the document/ reports.
1.2.1 TIR is to be obtained only from the Bank’s Empanelled Advocate [Advocate is to be
identified through the Vendor Management System (VMS)] which has a Master Database of
TPEs regarding centralised monitoring, work order allotment, tracking the status of work
orders, performance tracking and evaluation of services offered before payment/renewal of
contract of TPEs.
In House Legal Teams have also been formed at certain places by the Bank. “Advocate”
i n d i c a t e s “Empanelled Advocate / In House Legal Team.
1.2.2 Obtaining two TIRs

If our exposure is collaterally secured by the following types of properties, a satisfactory
Title Investigation Report (TIR) from two different empanelled advocates should be
obtained, irrespective of amount in all segments (including Housing Loans):-
i. Properties offered by third party guarantors whether individual or non-
individual.
ii. Properties acquired through Gift deed.
iii. Properties sold by Power of Attorney holders to our
borrower/guarantor.
1.2.3 In case of Housing Loans where properties do not fall into the abovementioned
categories, a satisfactory Title Investigation Report (TIR) from two different empanelled
advocates (**) should be obtained in the following cases:
In respect of Housing Loans where the RERA Satisfactory TIR

registration is available and Loan amount is above Rs.5 from two different
crores. empanelled advocates
In respect of Housing Loans where RERA (**) should be
registration is not available and Loan amount is Rs.1 crore and obtained.
above.
Second Sales and Loan amount is Rs.1 crore and above.
** Wherever In House Legal Team has been created one TIR shall be obtained
from them and one TIR shall be obtained from the empanelled Advocate.
Page 135 of 632

1.2.4. Branches have to collect all details of the property including all the title
documents from the customer under proper acknowledgment (As per format
enclosed) and forward to the advocate from whom it has been decided to obtain the
Tile investigation Report (TIR).
Branches to correspond directly with the advocate and the direct correspondence
between the advocate and the borrower/ mortgagor should be avoided.
Advocate has to submit the TIR in the prescribed format to the Bank directly.
1.3 In respect of all cases where the loan amount is less than Rs.1.00 crore, the
advocate has to make search of the title of the property for not less than 13
years if it establishes clear and marketable title.
However, if the flow of title is not clear or in the event of any ambiguity about
the title after search for 13 years, the Advocate may make search for not less than
30 years.
In respect of all cases where the loan amount is Rs.1.00 crore and above, the
advocate has to make search of the title of the property for not less than 30
years irrespective of the fact that clear and marketable title is established by a
shorter search of 13 years.
In case of Builder Tie Ups (in case of Home Loans), for approval of the project
search of the title for not less than 30 years is mandatory.
1.4. Where TIR is to be obtained from two different Advocates and there is any
divergence in opinion of both the Advocates in TIR, regarding mortgage of
a property, matter has to be referred to Law Officer/ In house Legal Team, at
AO/LHO as the case may be, and act accordingly as per their guidance before
creation of mortgage.
1.5 In addition to the TIR prepared by the advocates, the branches have to search
the database of CERSAI (Central Registry) to ascertain the existing charges and
credit history of the borrower/ mortgagor. The results of such searches are to be
scrutinised as part of due diligence to rule out any doubtful circumstances in respect
of the genuineness of the security offered. Further, a copy of screen shot of search
report/ search report of CERSAI is to be attached with the loan proposal and
subsequently preserved with the security documents.
1.6 In respect of Home Loans in addition to the extant instructions,

instructions wherever modified for Housing Loans, as per Annexure-V,
should be complied with.
1.7 The format of the letter in which the advocate is to be requested for
submission of TIR is given in Annexure-A. The details of the Property offered as
security is to be prepared by the Branch as per Annexure-A1. The checklist cum
format for the preparation of the TIR by advocate is given in Annexure-B. Along
with the report as per Annexure-B, advocate has to submit a certificate on title as
per Annexure-C.
1.8 In case of take over loans from other banks/financial institutions, if the
original title documents are not available for scrutiny/verification by the advocate
branches may obtain an interim certificate as per Annexure-C1 along with
Annexure-B. However, in all such cases, after takeover of the loan is completed and
original title documents are received from such other Banks/ Financial
Page 136 of 632
Institutions, advocate has to complete the scrutiny/ verification of original title
documents and to submit the certificate of title as per
Annexure-C.
1.9 A Guidance Note for the advocates entrusted with the work of issuing TIR for
verifying the genuineness of the documents is given in Annexure-D, which can be
made use by the branch/bank officials also. Each Circle may issue necessary
additional instructions after examining the practice followed in the State(s) and if
necessary by getting an opinion from an Advocate specialized in this area for
guidance of the advocates in the respective Circles.
1.10 Verification of the TIR obtained from the advocate by the branch/ operating
officials is also important to determine the acceptability of property offered as
security. A thorough and meticulous scrutiny of TIR will help not only in
understanding the nature of title of the property but also in averting any chances of
fraud. A detailed checklist for scrutiny of TIR is enclosed as Annexure-E and the
Branch has to verify the TIR on the lines of the said Annexure.
1.11 Identification of the property by physical verification of the same is crucial. This
needs to be done at the time of accepting the security and cannot be postponed till to
the possible event of enforcement of security on a future date. A checklist for the
identification and physical verification of the properties offered as
securities is enclosed as Annexure-F.
1.11.1 Selfie of the Inspecting Official at the site, with or without the borrower
should be taken as an integral part of inspection and the same should be kept
along with the security documents. This exemption (with or without the
borrower) will apply in respect of all Loans (including Housing Loans), as the
inspection is required to be conducted independently. Digital date should be
imprinted on the photograph.
1.12 Certain important aspects relating to procedures, precautions and due

diligence for prevention of frauds, etc., in connection with the title
investigation creation of mortgage are covered in Annexure-G.
1.13 The original title deeds / related documents should be handed over to the
advocate (Annexure A / A1) by the operating unit only and intervention of the
borrower / guarantor should be avoided in the process. Original title deeds /
documents must be verified by the advocate before giving TIR and this fact has to be
mentioned in TIR. Further, advocate should submit the TIR along with all the
original title deeds / documents and certified copies of documents directly to the
operating unit concerned and in no circumstances the same to be handed over to the
borrower/guarantor or his/their agent/representative.
1.14 Advocates have an important role not only in advising the legal validity of the
title of the property in question but also to guide the branches in detecting the
fraudulent attempt by any unscrupulous persons. Advocate has to make an actual
and personal inspection of relevant books and indexes maintained / kept in the
office(s) of sub-registrar, office of registrar and other relevant offices wherever
applicable. The search should cover all the sub-registrar/ registrar offices wherein the
title documents are registered as well as such offices where such registration is
legally possible. Advocate has to obtain certificates of encumbrance (EC) from
the relevant offices (wherever such facility is available) to ensure that there are no
subsisting charges/encumbrance on the property offered as security. Advocate is also
required to obtain the certified copies of all the relevant title documents directly from
Page 137 of 632
the office of the concerned sub- registrar/ registrar office and compare the same with
the documents submitted by the customer. They have to attach along with the
Report(TIR) all such certified copies and the receipt for fees paid for obtaining
certified copies.
1.15 At no circumstances, the advocate should submit a Title Investigation

Report (TIR) certifying clear and marketable title of the property with conditions or
stipulations to be complied. Further, the TIR along with all the original documents
and certified copies of documents are to be submitted directly to the operating unit
concerned and in no circumstances the same to be handed over to the
borrower/guarantor or his/their agent/representative. Advocate has to submit the
TIR in the prescribed format only. Similarly professional fees/expenses charged
by the advocate should be paid by the Bank directly to them and recovered from
the concerned customer.
1.16 The work of TIR needs to be entrusted to those advocates who have the
competency and expertise in doing proper title investigation as above. Wherever
possible, legal firms having such facilities and expertise may be considered for
empanelling to Bank’s panel of advocates for conducting TIR.
1.17 A separate annexure about the advocates to be entrusted with TIR work is given
as Annexure-H. A copy of MOU to be obtained from the advocates who
are entrusted with the work of issuing TIR is given as Annexure-H1.
1.18 The procedure for creating EM of leased properties such as MIDCO,

CIDCO, HUDA, HSIDC and DDA etc. should also be discussed in the TIR by the
Advocate. Law Department at respective LHO/MCG-MCRO/CAG branch would
give clear guidelines to branches / operating units prevailing as on the date as a
onetime measure and keep them updated on an ongoing basis.
A reference may be made to Law Department at LHO / AO / BV concerned to

clarify the position regarding mortgageability of such type of properties before
accepting them as security.
1.19 Hindu Undivided Family (HUF):- Similarly, in view of the legal implications
involved, greater care should be exercised in mortgaging properties of HUFs.
Wherever considered necessary, branches should consult the Law Officer in the
Circle/Business Vertical concerned, in this regard.
1.20 Special care should be taken while scrutinizing title deeds which involve
Power of Attorney, Gift deed etc, as per Bank’s extant instructions.
1.21 If the title deeds are in a vernacular language, full particulars of the title
deeds in English signed by the Bank’s empanelled advocates/solicitors should be
obtained. A complete record must be kept of all such investigations and searches
carried out and the reports received from the local advocates / Bank solicitors.
1.22 Wherever Cooperative Housing society is yet to be formed, an undertaking

from borrower should be obtained stating that he/she would inform Bank and
submit share certificate along with NOC as and when the society is formed.
1.23 Branches will adhere to instructions/guidelines issued by respective

business units specifically with regard to delivery process viz. SME
Delivery model etc.
Page 138 of 632
Procedure and Precautions (Annexure G of CPPD/70/25SEP17)
A. General Procedures.
1. Procedure to be followed in handing over the documents to the
advocate.
1.1. The original title deeds of the property should be handed over to the
Advocate by branches / CPCs functionaries / officer and not by the
borrower/guarantor directly. Before handing over the original documents,
branches/CPCs have to retain one set of photocopies of the documents at
their end and also to enter the details as per para.1.2 below in the register
maintained in this regards. Any queries, clarifications of the Advocate
should be dealt with by the branch/CPC staff after getting suitable
clarifications from the borrower/guarantor /third party owning the property.
1.2. Appropriate registers are to be maintained at branches/ CPCs for handing

over and getting back the original documents from the Advocates. The
following details are to be mentioned in such registers:
1.2.1 Sl. No., Date, Name and signature of the Bank Official receiving the
documents from the borrower/guarantor;
1.2.2 Name and signature of the Bank Official handing over the
documents to Advocate;
1.2.3 The number, date, parties and description of the documents
received from Borrower/Guarantor and handed over to Advocate;
1.2.4 Date, name and signature of Advocate receiving the documents;
1.2.5 Details of document returned;
1.2.6 Date, name and signature of the advocate returning the documents;
1.2.7 Name and signature of the bank officer receiving back the
documents;
1.2.8 Remarks, if any by branch.
1.3. In exceptional cases, if the original title deeds are not available at the time of
conducting title investigation, but received at the Bank subsequent to the
obtaining TIR, the advocate has to verify/scrutinise the original title
deeds and to certify the genuineness of the original title deed and the report
already submitted will hold good for original documents
subsequently verified. In all such cases, a written confirmation from the
advocate needs to be obtained and kept on record before disbursement of
loan.
1.4. The Advocate has to take actual and personal inspection of the relevant books
and indexes maintained/kept in the office(s) of sub-registrar, office of
registrar and other relevant offices wherever applicable.
1.5. Reasonable time should be given to the Advocates to make proper
search and to conduct effective title investigation. In respect of loans other than
Home Loans, generally 10 days will be reasonable for submission of TIR.
2. Procedure to be followed in Creation of Equitable Mortgage.
2.1. Once the TIR is received from the Advocate, the same should be
scrutinised as per checklist given vide Annexure E.
2.2. Obtain all the title deeds in original from the borrower in the chain of
title. Page 139 of 632
Where all the originals as aforesaid are not available, minimum previous two
transactions/sale/ title deeds should be obtained from the borrower along
with a declaration explaining non availability of the original title
deeds in respect of past transaction to the satisfaction of Bank authorities.
2.3. All the original title deeds should be got deposited in the notified area and a
memorandum of entry as per prescribed format should be recorded for the
purpose of creation of mortgage.
2.4. Documents other than partition or family settlement deeds, wherever the
documents are registered in counterparts, all such counterparts available with
the mortgagor should be deposited along with the original documents to avoid
misutilisation of such counterparts.
2.5. For creating Equitable Mortgage of a flat/ independent house by a member of
Co- operative Housing Society, NOC is necessary to ensure that no dues
of the society are outstanding against such member, and a declaration that
the society has not created any prior charge over the property which is
subsisting.
2.6. A Search Report/ encumbrance certificate for the intervening period, i.e.
from the date of TIR to the date of deposit of original Title Deeds/ creation of
EM should be obtained and held on record, as part of equitable
mortgage documents.
2.7. It is to be ensured that the equitable mortgage confirmation letter by the
mortgagor is received and kept on records.
2.8. Timely execution of Sale Deed in favour of the purchaser/borrower and
completion of equitable mortgage formalities without delay, Bank’s charge on
property noted and possession of the property is taken by the borrower
wherever applicable are to be complied.
2.9. Building Plan approved by the Competent Authority should be obtained and
perused and evidence of Independent Site Verification should be
recorded.
2.10. A declaration-cum-affidavit should be obtained from the
borrower/guarantor/3rd party offering his/her/their property as security
declaring the following and to be kept along with mortgage documents:
2.10.1. He/she/they is/are absolute owner of the property offered as
security.
2.10.2.The title deeds deposited with/handed over to the Bank are original
title deeds in their possession and there is no title deed apart from the
deeds deposited with/handed over to the Bank.
2.10.3 He/she/they have not created any charge/mortgage or any other
encumbrance on the property offered as security to the Bank.
2.10.4. He/she/they have not entered into any transaction of any nature
whatsoever in respect of the property offered as security to the Bank.
2.10.5. There are no circumstances which adversely affect the mortgage and its
validity/enforcement.
2.10.6 . There is no tax liability, utility bills or any other dues pending in respect
of the property offered as security.
2.10.7. The property offered as security shall be available for the loan
sanctioned or to be sanctioned to the borrower.
2.11 Ensure the payment of stamp duty and registration of equitable mortgage
wherever applicable as per the relevant State laws.
2.12 Ensure the registration of equitable mortgages with the CERSAI under
SARFAESI Act as per the extant instructions in this regard.
Page 140 of 632

3. VERIFICATION OF RECORDS OF CENTRAL REGISTRY
3.1. Before creation of any mortgage the branches/ operating units have to
verify the records of the Central Registry of Securitisation, Asset
Reconstruction and Security Interest of India
(CERSAI) (www.cersai.org.in) to see that there is no pre-existing charge
registered with Central Registry. Such exercise is also to be conducted at the
time of renewal/ sanction of additional limits.
3.2. Immediately a f t e r c r e a t i o n o f m o r t g a g e s , b r a n c h e s h a v e to
ensure registration of such charges with Central Registry as per the
instructions in this regard.
4. IDENTIFICATION OF THE PROPERTY

Identification of the property is one of the most important steps to be
undertaken for creation of a valid security. Certain aspects to be kept in mind in
identification of the property are explained herein.
4.1. Demarcation: Demarcation of the property is important for its identification
and possible enforcement, if required on a later date. Hence, no property should be
accepted as primary security/ collateral security if the property cannot be demarcated.
The Advocates/ Valuers should also be sensitised in this regard.
4.2. Utility Bills : Strengthening of the due diligence process and proper identification
of the property are also a part of measures to avert frauds. Therefore, in addition to all
other existing procedures, the following additional aspects shall also be dully examined
and papers relating to at-least two of the following documents should be verified along with
the Title deeds:
(i) Electricity connection
(ii) Water Connection
(iii) Sales Tax Registration
Hence the above documents are also to be made available to the panel
advocate preparing the TIR and he shall furnish confirmation of having verified and
taken cognizance of the same in compiling TIR.
4.3. Approved Plans
The Valuer has to obtain a certified copy of the approved/ sanctioned plan wherever
applicable from the concerned office and to verify the same and attach it with the
valuation report.
Valuation report and certified copy of plan obtained by the Valuer should be made
available to the Advocate to verify description and boundaries of the property wherever
applicable. However, the obtaining TIR from the Advocate shall not be delayed for getting
the valuation report and certified copy of plan from the Valuer. Both the valuation and
search of title can be proceeded simultaneously and comments of the advocate on
valuation report can be obtained separately.
4.4. Mutation of the Property.
(a) The mutation of the property in the name of mortgagor should
normally be insisted upon. Exemptions should be satisfactorily
explained and efforts should be made to ensure the veracity of the reasons
given by the mortgagor for non- mutation of the property.
(b) In such cases the reasons for non-mutation should be cross checked
with Appropriate Authority (Government/Semi-Government bodies like Delhi
Development Authority-DDA, HUDA, etc.).
(c) Wherever the property is not mutated, without the personal visit to the property
by Branch Manager and/or Relationship Manager/Field Officer same should not
be accepted as security.
(d) The Panel Advocate should invariably offer his comments on non- mutation.
Page 141 of 632

5. Inspection of the property
Pre-sanction and post-sanction inspection of the property proposed to be

mortgaged is to be conducted as per laid down instructions. It should comprise of the
following:
i) Visit to the residence / business place of the borrower /guarantor / third party
who has offered to mortgage his property as a security.
ii) Discreet independent enquiries should be made regarding
borrower(s) /guarantor(s) /third parties, credentials and antecedents,
information about their loans, if any, availed by them from other branches /
banks / institutions etc. from the neighbourhood including the actual
possession/ownership of the property offered as a security.
iii) Third party property dealer/seller/builder must be contacted
independently to verify genuineness of their offer / transaction.
Credentials of third party dealer / seller / builders are to be verified
by discreet market enquiries and from other dealer / seller / builders in the
neighbourhood.
iv) Visit to site of the property proposed to be purchased / mortgaged for physical
verification independently without assistance of borrower/guarantor and make
discreet independent enquiries with neighbour(s).
v) The existence of the property mortgaged / to be mortgaged must be
verified independently.
vi) Full description of the property with boundaries should be on record so
as to have proper identification of the property.
vii) Verification of the antecedents of the prospective customers as also
the genuineness of the documents submitted as proof of identity, residence,
income and employment should be ensured.
viii) Physical verification of the properties mortgaged to the Bank
must b e meticulously followed in case of all loans.
6. Forged and Fake Documents

i) To eliminate or reduce the cases where the Bank is induced to grant finance
on the basis of forged/fake documents, one of the steps which can be
implemented is to direct the Advocate who gives TIR to procure certified
copies of the title deeds and compare the certified copies with the
original documents. The process of comparison of certified copies with the
originals can in a majority of cases, detect the fake or forged nature of
documents including encumbrance certificates and the same is to be followed
in all cases.
ii) The identity of the borrower should be verified.
iii) Wherever possible the genuineness of the documents, relating to the property
be got confirmed from the concerned offices/authorities.
iv) Re-verification of loan documents / securities in respect of loans
which have slipped into NPA within a short period should be
carried out to detect any possible fraudulent submission of forged / fake
title deeds.
v) Conditional search report about ownership should not be accepted
without compliance with the steps suggested by the Advocate for perfection
of title or the gaps.
vi) The charges created in Bank’s favor on the property should be got noted with
the appropriate authorities immediately after creation of charge/mortgage.
vii) Details regarding the verification for ensuring the genuineness of the
documents are explained separately in this circular.
Page 142 of 632
B. Special Precautions.
1. Mortgage by copies of title document

Precautions to be taken in case of mortgage by certified copies for the
reason that the original documents are lost are explained herein.
For creation of equitable mortgage (EM), the original registered Title Documents
should invariably be deposited along with other documents. If the original
registered Title Document has been lost / misplaced and the mortgage is proposed to
be created on the basis of certified copy of the Title Document, the certified copy
of the title deed should be accepted only in exceptional cases where the original
is conclusively proved to have been destroyed or lost and after obtaining prior
approval from the controlling authorities. (In no case photocopy / laminated
photocopy of the title deed is to be accepted. Laminated original documents
should also receive a more cautious approach.) Besides, the Operating Units /
Branches have to also follow strictly the undernoted procedure in all such cases.
a) It may be confirmed that the FIR has been lodged in respect of the lost title
deed. Proof of complaint to the Police Department explaining with reasons as
to when and under what circumstances the Original Title Deeds were lost
need to be obtained.
b) Give notice to the public at large in a leading National daily and in one
Regional News Paper clearly stating that the Original Title Deeds have been
lost , giving full details of the property, and further stating that he/she wish
to create charge on the said property for availing loan/credit facility.
c) An affidavit-cum-declaration of the borrower/ guarantor is to be taken
declaring that the title deed has been lost. The affidavit should also
contain i) full particulars of the property, ii) reference to the FIR lodged
and iii) the details of advertisement published in a prominent newspaper.
d) Independent verification/ identification the property and mortgagor must be
ensured.
Creation of Mortgage by deposit of certified copy of the title deeds is fraught
with risk. Cases where the Original title deeds are not available, should receive more
cautious approach.
2. Mortgage by Gift Deed

Precautions in case of creation of mortgage based on gift deed are as
explained herein. Whenever any property is taken as security (primary/
collateral) based on gift deed as the principle title deed, clearance must be
obtained from the Law Department. This is in addition to obtaining TIR from the
Panel Advocate as required in the normal course. A suitable confirmation to this
effect must be invariably provided in the credit proposal submitted to the
Sanctioning Authority, as a foot note under Security column. Independent
verification/ identification the property and mortgagor must be ensured.
3. Document by Power of Attorney (POA)

Precautions in case the title document of the property is executed through Power
of Attorney are explained herein
A. Legal Position of POA
Legal position in respect of execution of documents by Power of Attorney
Holder is as under:
(i) The relationship between the owner of the property and the Power of
Attorney holder is that of a Principal and Agent.
(ii) The Power of Attorney holder acts on behalf of the owner of the property as
Page 143 of 632
per the authority (power) conferred on him by virtue of the power of attorney
executed in this regard. The Power of Attorney may be executed for a specific
purpose or for general purpose.
(iii) All the acts done by the Power of attorney holder in pursuance of the
powers conferred by the deed during the life time of the owner of the
property (principal) are valid and binding on the owner and as per the terms of the
power of attorney, the owner is also duty bound to ratify the same as if is done by
him.
(iv) All the acts which are not within the scope of power of attorney executed in this
regard are not valid and binding on the principal (owner) even though the acts are
said to be done on behalf of the owner.
(v) When a Power of Attorney holder executes a Sale Deed, record shall be had to
the validity of the power of attorney in this regard. So long as the power of attorney
is in force and not revoked, the power of attorney holder can bind the principal i.e.,
owner.
(vi) The Power of Attorney executed stands automatically revoked on the death of the
principal. As such during the life time of the owner / principal only the power of
attorney holder can act / execute the sale deed on this behalf.
(vii) Any sale deed executed by the Power of attorney holder after the death of the
principal is not valid and binding.
(viii) Even if the Sale Deed is executed by the Power of attorney without the
knowledge of the death of the principal / owner. It is not valid and binding.
(ix) Mere execution of Power of Attorney in favour of a person does not deprive the
original owner of his right to deal with the property independently.
(x) Notwithstanding the execution of Power of attorney, a principal (owner) can
alienate the property.
(xi) Power of attorney coupled with an interest such as the PoA
embedded in a registered Development Agreement wherein the builder/
developer is also authorized to sell/execute sale deeds in respect of the flats/ units
developed as part of such Development Agreement stand in a different legal footing
from the normal POA. Such POA coupled with interest is covered under section
202 of the Contract Act and hence irrevocable and not terminated by the
insanity or death of the principal.
B. Precautions in case of title documents executed by POA
Cases where the title document is executed by POA holder, the complexities
involved need to be factored into the TIR obtained from the Bank’s
empanelled advocate. Keeping in view these complexities, the undernoted
safeguards are required to be taken care of in transactions involving POAs, to
mitigate against occurrence of frauds.
The power of attorneys are categories into (i) Builder’s POA and (ii) Common POA
for the purpose of verification of the same in preparation and scrutiny of TIR.
Separate procedures are stipulated in each of the said cases. Further, a third category
of (iii) Development Agreement-cum-Power of Attorney is also explained.
i) Builder’s POA
If the POA is executed by Builders viz. Companies/Firms/Individual or Proprietary

Concerns in favour of their Partners/Employees/ Authorized Representatives to
sign Flat Allotment Letters, NOCs, Agreements of Sale, Sale Deeds, etc. in favour
of buyers of flats/units, the following instructions while handling the loan proposals,
should be complied with:
Page 144 of 632

(a) Where the builder is a company
(i) Where a particular person or two or more persons have been authorized by way
of a Board Resolution by the Company, a certified copy of the Board Resolution
should be obtained from the Builder Company along with a letter confirming that the
Resolution is still in force and has not been rescinded, modified or withdrawn.
(ii) However in cases, where two or more persons have been authorized by execution
of a Power of Attorney under the Common Seal of the Company, a certified copy of
the Power of Attorney should be obtained along with a confirmation letter that
the said Power of Attorney is still valid in force and has not been revoked or
withdrawn.
(iii) The verification/comparing the certified copy with the original Power of
Attorney can be done either by the operational functionaries or by the
Advocate issuing the TIR.
(b) Where the builder is a partnership firm

(i) In case of Partnership firms it is necessary that all the partners execute the Power
of Attorney in favour of the one or more persons who are authorized to sign and
execute Agreement of Sale, Sale deeds, etc. in favour of the purchaser of the
flats/units. Alternatively, one p a r t n e r can be authorized specifically by the
remaining partners to execute a Power of Attorney on behalf of the firm in favour
of one or more persons. This authorization by the remaining partners in favour
of one partner should be specific and in writing. (ii) If the Power of Attorney, issued
on behalf of the firm, has been executed in compliance of what is stated above, a
certified copy of the same should be verified with the original Power of Attorney
and a confirmation letter should be obtained from the Firm, confirming that the
Power of Attorney is still valid/in force and has not been revoked or withdrawn.
(iii) The verification/comparison of the certified copy with the original Power of
Attorney can be done either by the operational functionaries or by the Advocate
issuing the TIR.
(c) Where the Builder is an Individual / Proprietary Concerns:

(i) In case of Individuals or Proprietary Concerns whenever a Power of Attorney is
executed in favour of one or more persons, a certified copy of the same should be
obtained and verified with the original Power of Attorney. Further, a letter
should be obtained from the Builder confirming that the Power of Attorney
executed in favour of the person/s is still valid and has not been revoked or
withdrawn.
(ii) The verification/comparison of the certified copy with the original Power of
Attorney can be done either by the operational functionaries or by the Advocate
issuing the TIR.
ii) Common POA
If the POA is not a Builder’s POA as mentioned above, the following
instructions are to be followed.
a) Wherever sale of the property is being executed by the POA holder,
registration of POA is mandatory in all cases and the Bank’s Advocate should
mention in the TIR that POA is alive and not revoked by any subsequent
registered document.
b) Advocate should verify registered Power of Attorney and to be mentioned in the
TIR.
c) The advocate should verify the genuineness of Power of Attorney (POA) in all
such cases where sale of the property is being executed by the POA holder.
d) Even when power of attorney has been registered, confirmation of the
principal should be obtained that he/she has granted the power of attorney which
is still in force and transactions already entered on the basis of power of
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attorney are valid and binding on him. It is advisable to obtain a written
confirmation from the Principal confirming the sale.
e) The documents, submitted for identification of the principal, should be
carefully scrutinized. Every effort should be made to contact the Principal in
person by Bank’s dealing staff for ascertaining the fact that the person who
executed the power of attorney is alive or was alive at the time of execution of
document.
f) If the Principal is residing in a foreign country, POA holder should submit a
copy of the passport of the principal for photo identification duly attested by the
Notary public along with the proof that the principal is alive.
g) A w r i t t e n communication / confirmation from the principal should be
obtained invariably with regard to the power of attorney executed by him/her.
h) All Title Investigation Reports (TIR) furnished by the Bank’s empanelled
advocate in respect of PoA sales, shall be vetted by the Bank’s Law Officer for
their genuineness and enforceability. However, in respect of loans upto an
amount of Rs.30 Lacs, the vetting by Bank’s Law officer can be waived subject
to the condition that TIR being furnished in respect of POA transactions is vetted
by two empanelled advocates for all centres.
i) In the light of the recent Supreme Court Judgment on POAs which ruled
that General Power of Attorney sales together with delivery of possession cannot
be treated as a sale deed conveying the title, necessary precautions need
to be taken to avoid lending against such transactions.
j) POAs shall be duly registered except in case of NRIs whose POA shall be attested by
Indian Embassy or notarised thereat.
k) Verification of chain of POAs is not necessary in respect of properties where:
i. Property is mutated in the name of the present owner

ii. All the relevant utility bills are transferred in the name of the present
owner
iii. There should not be any dispute / litigation persisting on the POA relating to the
property under consideration
iv. Physical verification of property reports are prepared by officials
l) If any payment is to be made to POA holder, the POA must contain the clause
that any payment made to POA holder shall be deemed to have been received by
the principal.
m) In respect of builders where sale transactions take place on the basis of
POAs for each project, it is required to obtain confirmation from the principal of
the POA each time. DGM (B&O) is vested with discretion to permit relaxation.
n) Title investigation shall be done based on the original POA only.
o) TIR should contain unequivocal opinion on its nature i.e. special POA or general,
enforceability and validity.
p) Ensure that same documents are deposited for mortgage as were scrutinised by
Advocate and Bank’s Law Officer to avoid the risk of duplicates being submitted.
q) Verify whether the POA is executed for carrying out bonafide
transaction of conveying the title to the property.
r) Verify whether the POA executed in this regard is not in lieu of the Conveyance Deed
as stated by the Honourable Supreme Court in its recent judgment.
s) Verify whether the principal/owner acted in his own right and disposed / alienated
the property notwithstanding the execution of POA which act of the Principal will
render the POA infructuous. Page 146 of 632
iv. Development Agreement cum Power of Attorney
In certain cases the builders enter into Development Agreement-cum-Power of
Attorney with a group of land owners, which is duly registered in the sub- registrar
office, and develop a residential project after getting necessary approvals from
different statutory authorities. The nature of Development Agreement-cum-Power
of Attorney is altogether different than the standalone POA. POAs in such cases are
embedded within the Development Agreement and are usually coupled with some
consideration. Normally builders/developers would have either paid monetary
consideration to the land/property owners or have agreed to give them flats or
bungalows as the case may be, in the property to be developed. Such POAs are
irrevocable and applicability of POA does not get affected due to death of the Power
of Attorney granter.
In respect of Development Agreement-cum-Power of Attorney, the TIR by the

advocate should specifically state the fact of such registration of the Development
Agreement with the embedded POA therein and that it has created an interest in
favour of the builder/developer and as such is irrevocable as per law. Such TIRs may
be obtained in respect of the project as a whole, from two advocates empanelled
with the Bank. In such circumstances, Bank’s officials contacting the granter of the
POA, embedded in such registered agreement, is neither warranted nor be insisted
upon. Also the condition that POA granter is alive and POA has not been
revoked also need not be insisted upon. However, all other safeguards
stipulated above need to be complied in respect of Development Agreement-cum-
Power of Attorney.
4. Mortgage of flats/ units in Building/ Development Project for Housing

Loans
a) To mitigate the risk, Master Search of the proposed project should be carried
out by verification of original title deeds.
b) Incorporate Builder’s name along with his Bank’s name and A/C No. on
DD/Banker’s cheque.
c) Sale consideration be remitted directly to seller in his account through
RTGS/ NEFT.
d) While carrying out post sanction inspection, directly ascertain from the
e) Builder / Society the genuineness of the document noting Bank’s Lien /
f) transfer of share in borrower’s name.
g) Noting of Bank’s charge on property in Society record in cases of Housing
Loans to members of Housing Society.
h) If there are number of housing loan cases of same type in an area, it should be
handed over to different Advocates/valuers and Branches/CPCs should not rely
upon single Advocate/valuer.
i) In case of flats/unit of building, the original title deed(s) of the land on which
the building/project is built on/developed (mother deed) is/are may not be
available for creation of mortgage of individual flat/unit. In such cases in addition
to the original title documents in the name of first allotee/ purchaser of the flat/unit
and all the subsequent title documents, certified copy of mother deed may be
deposited for creation of mortgage. Nevertheless, in such cases, the advocate
has to scrutinise the original of the mother deed. Further, a certificate from the
Society/ Flat Owners Association/ Builder/Developer need to be obtained to see
that no prior charge/ mortgage are created and existing on the landed property
covered by the mother deed.
Page 147 of 632
5. Additional precautions in high value loans
i. In respect of all loan proposals, while conducting TIR in respect of
property offered as security, the Advocate has to obtain certified copies of
title deeds including minimum two previous chain title documents and/or
all chain title documents executed within three years from the date of the
current title deed directly from the office of the concerned sub-registrar
within whose jurisdiction the property is situated or from the sub-registrar
where the documents are registered and the Advocate has to compare all the
particulars in the original documents with the certified copies so obtained to
ensure that the documents are properly registered and there is no alteration or
modification in the original documents submitted by the borrower/
guarantor giving rise to suspicion of genuineness of the original documents.
ii. The certified copies so obtained should also be got deposited along with
the original documents while creating the equitable mortgage.
iii. In respect of all loan proposals above Rs.1.00 crore and above,
mandatory search of title/ encumbrances for a period of not less than 30 years
are to be made by the panel advocate.
iv. In respect of loan proposals above Rs.1.00 crore and above,
satisfactory search report from two different panel advocates are to be
obtained.
6. Agricultural Land as Security
i.
Whenever agricultural land is involved, or is offered as a security, the TIR
must cover issues such as necessary permission for non- agricultural
use, or creation of mortgage of agricultural land for non- agricultural
advances.
ii. In agriculture advance, the prospective mortgagor produces khasara
and khatauni/ jamabandi/computerized revenue record as evidence of his
title, and if no other original title deeds are available, a declaration in the form
of affidavit should be obtained explaining loss/absence of title deeds
including as to how the borrower/ guarantor became the owner of the
property. In such cases, 7/12 extract khasara and khatauni/land record
of the land with all mutation entries should be obtained. Since 7/12
extract/ khasara and khatauni/land record is not a title deed, registered
mortgage of the land should be insisted upon and after creation of mortgage,
the mutation to this effect should be got entered into the revenue record.
iii. In case of agriculture property proposed for the purpose to secure
non- agricultural advances, the opinion of Bank’s Law Department/
empanelled advocate should be obtained regarding validity and enforceability.
iv. In case of registered mortgage of agricultural property, noting of
Bank’s charge on property in revenue record is to be done.
v. End use of fund must be ensured Loans Sanctioned on the basis of the
security of Agricultural Property.
C. Due Diligence and Prevention of Frauds
1. Need for proper due diligence.
Proper due diligence of the mortgagor by branch officials is important in

ensuring that there is no fraud in creation of security. The following are
certain aspects of due diligence.
i. Bank’s extant instructions from time to time in respect of KYC are to be
complied in case of all borrowers/mortgagors/ mortgagors. The copies of KYC
Page 148 of 632
documents must be verified with original copy of identification/address proof
by the dealing official under his signature.
ii. KYC of the seller / builder / promoter also to be obtained as per laid
down guidelines.
iii. Branches should conduct thorough due diligence in matters like investigation
of title to the properties / verification of identity of borrower and/ or
guarantor and more so, where the mortgagor is not related to the business/
family of the borrower.
v. While accepting the guarantee of an individual, his/her identity and address
should be verified as per KYC guidelines and photograph should be obtained
and pasted on the relevant guarantee agreement, so that cases of impersonation
by the guarantors can be avoided. The photograph of the guarantor has
to be affixed on the guarantee agreement in the space provided, if any,
or on the first page of the guarantee agreement. Apart from the existing
procedure of signing the guarantee agreement, the Guarantor has to
additionally sign across the photograph pasted on the Guarantee agreement in
such a way that part of the signature is on guarantee agreement.
vi. Wherever PAN Card is available it should invariably be verified from
CBDT website.
vii. Due diligence in matters like investigation of title to the properties /
verification of identity of borrowers and/or the guarantors should be
followed meticulously.
viii. Pre-sanction survey which is mandatory plays a vital role and hence needs
to be strictly followed not only in letter but spirit too. It should comprise of
the following: a. Visit to the residence/business place of the borrower
/guarantor / third party who has offered to mortgage the property as a security.
b. Discreet independent enquiries should be made regarding
borrower(s) / guarantor(s) / third parties, their credentials and antecedents
from the neighbourhood and also about the possession/ownership etc.
c. Third party dealer/supplier/builder must be contacted independently to
verify genuineness of their offer/transaction.
d. Visit to site of the property proposed to be purchased / mortgaged for
physical verification must be done independently.
2. Certain shortcomings leading to mortgage frauds.
Certain shortcomings noticed/ observations made in respect of
investigation of title leading to frauds in mortgage are the following:
i) Investigation of the title to the properties (offered as security to the Bank) was
not properly done by the Advocates/Solicitors.
ii) Gross negligence of advocates in the scrutiny of title, particularly in respect of
housing loans.
iii) The concerned officer (s) of the branches also failed to verify the report of
the advocate properly.
iv) The securities created by the borrowers and /or guarantors turned out to be not
enforceable in the Court of law.
v) On many occasions, mortgages were created on fake/forged documents
of title. (Certain steps to be followed to ascertain the genuineness of the documents
are given separately in this circular).
vi) The identity of the borrowers and /or the guarantors was not properly verified and
mortgage by way of deposit of title deeds was created by a fake person who had no
interest in the property..
vii) The mortgage was created on the basis of certified copies of the title deeds while
prior mortgage was already created on the basis of the original title deeds.
viii) Third party guarantor who created equitable mortgage of properties of
which he had no title.
Page 149 of 632
ix) Failure to verify the genuineness of the documents to the title of the property
mortgaged at the time of its acceptance and deferred such verification till the time
of initiation of recovery proceedings.
x) Certain unscrupulous b u i l d e r s execute multiple sale deeds/ agreement to sale in
respect of the same flat/unit to different persons which can be avoided by
conducting proper due diligence on the builder, inspection of the property and
wherever possible by finding out the total number of registered documents
executed in respect of the entire project from the office of sub-registrar.
xi) Lamination of the documents is a highly suspicious circumstance as in some
cases frauds have perpetrated based on the laminated colour copies of the original
title deeds.
Questions
1. Can a laminated original title deed be accepted for a mortgage? If yes, what
are the precautions suggested by the Bank in this regard?
2. What are the guidelines for obtaining Encumbrance Certificate? In which
scenario, TIR needs to be repeated after the third year?
3. Can a mortgage be created based on a Certified Copy extracted from the Sub
registrar office if the original title document is lost? If yes, what are the Bank’s
guidelines in this regard?
Page 150 of 632

DOCUMENTATION
The SME documentation scheme has been set out in Circular No. : NBG/SMEBU-
SMEDOC/7/2005 -06 dated July 23, 2005. The set of security documents and operating
guidelines has been introduced in the Bank with effect from 1st August 2005.
The set of documents has 12 documents which are grouped under 6

categories:
1. Initial Documents
SME -1 Letter of Arrangement
SME-2 Agreement of Loan cum Hypothecation
SME -2A Letter furnishing the particulars of assets acquired after the execution of
SME-2
SME-3Guarantee Agreement
2. Supplemental Document
SME-4 Supplemental Agreement of Loan-cum-Hypothecation
3. Documents / Recital for creation of Equitable Mortgage

SME-5 Memorandum for recording creation of mortgage by deposit of title deeds
SME-6 Letter of confirmation for creation of mortgage by deposit of title deeds
4. Documents / Recital for Extension of Equitable Mortgage

SME-7 Memorandum for recording extension of mortgage by deposit of title deeds
SME-8 Letter of confirmation for extension of mortgage by deposit of title deeds
5. Documents for creation / Extension of Regd. Mortgage
SME- 9 Deed of Mortgage

SME-10 Deed of further charge
6. Complementary Documents
SME - 11 Revival Letter
SME - 12 Link Letter
Initial Documents
SME-1 Letter of Arrangement
The Letter of Arrangement is divided into two parts, i.e. Annexure A, which contains the
Terms and Conditions of sanction of particular facilities / limits to a Borrower, while
Annexure B contains the Bank’s standard Terms and Conditions of sanction.
The modified format in respect of the Letter of arrangement has been given by the bank
vide Circular number CCO/CPPD-ADV/52/2017 – 18 dated 10 Aug 2017.
Further, a clause for Disclosure of nationality of borrower/ guarantor must be added as
per instructions contained in Circular number CCO/CPPD-ADV/75/2016 – 17 dated
September 17, 2016.
SME-2 Agreement of Loan cum Hypothecation
Under the SME documentation, all the credit facilities (Fund Based & Non-Fund Based)
granted to the Borrower(s) are to be totaled into an aggregate limit and covered by a
single set of documents. It is clarified that credit facilities like Pre-Shipment / Post-
Shipment Credit, Rupee Term Loans, Foreign Currency Loans and Deferred Payment
Guarantees are also to be included for arriving at the aggregate limit.
Page 151 of 632
Clause number 15 in SME 2 has been modified (as per Circular number NBG/SMEBU-
SME ADVANC/67/2015 -16 dated March 02, 2016), as under.
“The borrower hereby agrees that it shall not induct on its board a person whose
name appears in the list of wilful defaulters and in case such person is found to be on its
board, it would take expeditious effective steps for removal of such person from its board.
It is further agreed that in the event of failure of the borrower to remove a person whose
name is found in the list of wilful defaulters from the board, the Bank may at its sole
discretion treat the same as an event of default and may call up the advance or the
facilities as granted by the Bank”.
SME-2A Letter furnishing the particulars of assets acquired

This letter provides for furnishing the particulars of all types of assets acquired out of the
Bank's finance after the execution of SME-2 for the purpose of covering such assets under
the hypothecation charge created under SME-2 and also to provide for clear
identification of such assets.
SME-3 Guarantee Agreement

The agreement is to be executed by the guarantors. Under the simplified
SME Documentation, Supplemental Guarantee Agreement is not provided.
One additional clause has been incorporated in SME 3 (as per Circular
number
NBG/SMEBU-SME ADVANC/67/2015 -16 dated March 02, 2016), as below.
“I / We hereby acknowledge and agree that in the event of default on our part in
honouring the guarantee hereby provided for repayment of the Bank’s dues, despite
having sufficient means, the Bank shall be entitled to proceed against us to declare us as
‘Wilful defaulter’ in accordance with guidelines/instructions issued by RBI from time to
time”.
Supplemental Document
SME-4 Supplemental Agreement of Loan-cum-Hypothecation

This document is supplemental to the Agreement of Loan-cum-Hypothecation (SME-2)
Documents / Recital for creation of Equitable Mortgage
SME-5 Memorandum for recording creation of mortgage by deposit of title deeds

This Memorandum provides for creation of Equitable Mortgage by all types of
mortgagors, namely, Borrower(s) or Guarantor(s) or Third Party Mortgagor(s) who have
not joined as Guarantor(s).
SME-6 Letter of confirmation for creation of mortgage by deposit of title deeds

This letter of confirmation is to be sent by the Mortgagor(s) for confirming the deposit of
title deeds and intention to create Equitable Mortgage in favour of the Bank.
Documents / Recital for Extension of Equitable Mortgage
SME-7 Memorandum for recording extension of mortgage by deposit of title deeds

This Memorandum provides for:
(a) Extension of the earlier mortgage to cover additional facilities / limits beyond
Page 152 of 632
the mortgage debt.
(b) Creation of mortgage on the additional properties offered for securing the existing
facilities / limits and additional facilities beyond the mortgage debt.
SME-8 Letter of confirmation for extension of mortgage by deposit of title deeds

This letter of confirmation to be sent by the Mortgagor(s) for confirming
(a) The extension of the Equitable Mortgage on the existing property (ies) for
securing additional facilities / limits beyond the mortgage debt.
(b) The creation of Equitable Mortgage on the additional property (ies) for securing
the existing limits within the mortgage debt, and also for additional Facilities / limits
beyond the mortgage debt.
The formats of SME 6 & SME 8 stands modified in terms of Circular number
NBG/SMEBU- SMEDOC/88/2016 – 17 dated February 10, 2017.
Documents for creation / Extension of Regd. Mortgage
SME-9 Deed of Mortgage

The Deed of Mortgage provides for creation of Registered Mortgage by all types of
mortgagors, namely, Borrower(s) or Guarantor(s) or third party mortgagor(s) who have
not joined as Guarantor(s).
SME-10 Deed of further charge

The Deed of Further Charge provides for extension of the earlier mortgage to
cover additional facilities / limits beyond the mortgage debt.
Complementary Documents
SME-11 Revival Letter

The Revival Letter provides for extending the limitation period under The Limitation
Act, 1963, for a further period of 3 years in respect of Agreement of Loan-cum-
Hypothecation (SME-2) and Supplemental Agreement of Loan cum-Hypothecation
(SME-4), if any, executed till that date and Guarantee Agreement (SME-3).
SME-12 Link Letter

The Link Letter is to be obtained whenever a fresh set of documents is obtained
(For example, SME documents) in addition to the earlier set of documents (For
example, SSI / C&I documents). This letter provides for migration from earlier
segmental security documents to SME Documentation.
Waiver of SME 2 in case of ABL / ABL (CRE) in states attracting ad-valorem stamp
duty
In states which attract ad-valorem stamp duty in respect of ABL & ABL (CRE),
obtaining SME 2 is waived. SME-4 would necessarily get dispensed with when SME-2 is
dispensed with. SME 3, in such cases need to be taken on a modified format, the format
for which and other guidelines in this regard are available in Circular number
NBG/SMEBU-SBI ABL/34/2016 – 17 dated July 16, 2016.
CREATION OF CHARGE
Definition of Charge:
 Companies Act, 2013, SEC.21(6)
 An interest or lien created on the property or assets of a company and / or
undertakings as security and includes a mortgage
 Transfer of Property Act, 1882, SEC.100
Page 153 of 632
 Where the immoveable property of one person is by the act of parties or
operation of law made security for the payment of money to another (not a
mortgage), the latter person is said to have a charge on the property
Essential elements of Charge
 There should be two parties, the creator and holder of charge
 The subject matter of charge may be current or future assets / properties
 Intention to offer assets / properties as security for borrowed money / interest
manifested by an agreement with the lender
PRIORITY OF CHARGE
 When the same assets are charged for a second or subsequent times, the question of
priority in respect of the charges in favour of different institutions arise.
 By obtaining consent of the earlier lender(s) for creation of second or subsequent
charges on the same assets, the charges of all lending institutions rank pari passu
(on the same footing)
AFFIXING COMMON SEAL

 The Indian Companies Act mandates affixation of the Common Seal on any Power
of Attorney or Certificate of Shares issued. In addition, the MAA may stipulate
affixation of common seal on any document required to be authenticated by the
company.
 Indian Companies Act, 2013 made the requirement of having a common seal
optional and allowed Authentication of documents by 2 directors, or by 1 director &
Co. Secy.
Accordingly, the legal requirement as advised by the Bank vide Circular

CPPD/153/6MAR17, in cases where the company opts to maintain a common seal and does
not opt to maintain a common seal is as under
a. IN CASE THE COMPANY OPTS TO HAVE A COMMON SEAL
Branches should continue to get the Common seal affixed on all documents as detailed
above authenticated by affixing the common seal.
b. IN CASE THE COMPANY OPTS NOT TO HAVE A COMMON SEAL

i. The company should be advised to amend its Memorandum and Articles of
Association to do away with the common seal and the requirement of affixing of
common seal and also indicate its option i.e., execution of documents either by two
directors or by a director and the Company Secretary.
ii. Thereafter, the documents as detailed above may be allowed to be authenticated as

per the option exercised by the company. Branches should not insist upon affixing of
common seal in such cases.
Income Tax Act– Guidelines for obtaining Prior Permission under Section 281 to
create a charge on the assets of Business
Section 281 of the Income Tax Act, 1961 requires an assessee to obtain the permission of
the assessing officer before creating a charge on or transfer of certain assets, including land,
building, machinery, manufacturing facilities and others.
Page 154 of 632

BANK’S INSTRUCTIONS - CPPD/149/14JAN15
In the TIR, if the advocate suggests that No Objection Certificate is required from the
Income Tax department with respect of the property, the following action may be taken:
Action required (at the time of initial grant of facilities by

Category
the bank and / or at the time of enhancement of the limits
(wherever mortgage is to be created / extended)
I. A declaration is to be executed by borrower.
For loans <INR1CR
II. Declaration should also be obtained from the guarantor, in
(under all segments)
instances where the guarantor mortgages his / her property
and Per- Segment
loans of any amount
For loans TIR obtained from the Bank’s empanelled

=>INR1CR (other Advocate to be scrutinised properly to ascertain
t h a n Per-Segment whether No Objection Certificate (NOC) under the IT
loans) Act is required or not.
a. If NOC is not required:
i. Obtain same declaration(s) as above
ii. In a d d i t i o n t o o b t a i n i n g declaration(s), if, in
some instances, it is considered appropriate and necessary,
borrower / guarantor may be advised to submit copies of the
assessment orders of the previous three years and / or a
certificate of Statutory Auditor or a Chartered Accountant
about non-pendency of any proceedings and notice under
Second Schedule to the IT Act.
iii. In such cases, reasonable timeline for submission should
be advised, along with the penalty that may be levied in case
of delay.
b. If NOC is required:
The borrower should be asked to clear the dues, if any,
and then submit an undertaking/ declaration, that there
are no dues/proceedings pending or contemplated with/by the
IT department, along with a copy of the application for
issuance of NOC, duly acknowledged by the IT authorities.
Necessary follow up should be made to obtain the NOC.
REGISTRATION OF CHARGES WITH REGISTRAR OF COMPANIES (ROC)
TYPES OF CHARGES TO BE REGISTERED

(CREATED WITHIN OR OUTSIDE INDIA ON PROPERTIES WITHIN OR OUTSIDE
INDIA)
 Charge on Book Debts, not being pledge on movable property
 Floating charge on the undertaking or any property
 Charge on immoveable property
 Charge on Goodwill, Patent, Trade Mark, Copy Rights, License…
PURPOSE
 For Creation, Modification or Satisfaction
Page 155 of 632

CHAPTER VI – Companies Act, 2013, Sec.77 Duty to Register Charges etc. -
(1) It shall be the duty of every Co. creating a charge without or outside India, on its
property or assets or any of its undertakings, whether tangible or otherwise and situated in or
outside India, to register the particulars of the charge signed by the Co. & the charge holder
together with the instruments, if any, creating such charge in such form, on payment of such
fees and in such manner as may be prescribed, with the Registrar within 30D of its creation.
The Registrar may, on an application by the company, allow such registration to be made
within a period of 300D of such creation on payment of such additional fees as may be
prescribed. If registration is not made within 300D of such creation, the Co. shall seek
extension of time in accordance with Sec.87. Any subsequent registration of charge shall not
prejudice any right acquired in respect of any property before the charge is actually
registered.
87. Rectification by Central Government in register of charges.
(1) The Central Government on being satisfied that—

(i)
(a) the omission to file with the Registrar the particulars of any charge created by a company
or any charge subject to which any property has been acquired by a company or any
modification of such charge; or
(b) the omission to register any charge within the time required under this Chapter or the
omission to give intimation to the Registrar of the payment or the satisfaction of a charge,
within the time required under this Chapter; or
(c) the omission or mis-statement of any particular with respect to any such charge or
modification or with respect to any memorandum of satisfaction or other entry made in
pursuance of section 82 or section 83, accidental or due to inadvertence or some other
sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders
of the company; or
(ii) on any other grounds, it is just and equitable to grant relief,
It may on the application of the company or any person interested and on such terms and
conditions as it may seem to the Central Government just and expedient, direct that the time
for the filing of the particulars or for the registration of the charge or for the giving of
intimation of payment or satisfaction shall be extended or, as the case may require, that the
omission or mis-statement shall be rectified.
(2) Where the Central Government extends the time for the registration of a charge, the
order shall not prejudice any rights acquired in respect of the property concerned, before the
charge is actually registered.
REGN. OF CHARGE (AMENDMENT to SEC.77)

GAZETTE OF INDIA EXTRAORDINARY
NEW DELHI, WEDNESDAY, JULY 31, 2019/SHRAVANA 9, 1941 (SAKA)
In section 77 of the principal Act, in sub-section (1), for the first and second provisos, the
following provisos shall be substituted, namely:—
“Provided that the Registrar may, on an application by the company, allow such registration
to be made––
(a) in case of charges created before the commencement of the Companies (Amendment)
Act, 2019, within a period of 300D of such creation; or
(b) in case of charges created on or after the commencement of the Companies
(Amendment) Act, 2019, within a period of 60D of such creation, on payment of such
additional fees as may be prescribed:
Page 156 of 632
Provided further that if the registration is not made within the period specified—
(a) in clause (a) to the first proviso, the registration of the charge shall be made within 6M
from the date of commencement of the Companies (Amendment) Act, 2019, on payment of
such additional fees as may be prescribed and different fees may be prescribed for different
classes of companies;
(b) in clause (b) to the first proviso, the Registrar may, on an application, allow such
registration to be made within a further period of 60D after payment of such ad valorem fees
as may be prescribed.”.
TIME LIMIT FOR REGISTRATION OF CHARGES WITH ROC
Earlier provision of Companies Act, New Provision of Companies Act, for

Comparison for registration of Charge registration of Charge
Charge is created before Charge is created on or after
commencement of the Companies commencement of the Companies
Particular (Amendment) Ordinance, 2018, i.e., 2 (Amendment) Ordinance, 2018, i.e., 2
Fee Nov. 18 Nov. 18
Within 30 days from the date of
Normal Fee creation Within 60 Days
Additional Within 270 days after expiry of 30
Fee days from the date of creation NA
Advalorem After expiry of 300 days from the Within 60 days after expiry of 60 days
Fees date from the date of creation
CONSEQUENCES OF NON REGISTRATION OF CHARGE
According to Sec.77 of Companies Act all types of charges are to be registered with ROC; If
not, it would be:
Void against the Liquidator

The liquidator on winding up of the company can ignore the charge (creditor becomes
unsecured)
Void against Creditor

If any subsequent charge is created on the same property, the earlier charge would have no
consequence.
Questions:
1. Is Common Seal mandatory in Company documentation? Explain the

Bank’s guidelines in this regard?
2. What precautions should be taken while obtaining letter of Confirmation a s
p a r t o f creation of Equitable Mortgage?
3. What points should be kept in mind while stamping of loan documents?
Page 157 of 632

MORTGAGES
Creation of Equitable Mortgage
TRANSFER OF PROPERTY ACT, 1882: Sec.58(a) “A mortgage is the transfer of an
interest in specific immoveable property for the purpose of securing the payment of
money advanced or to be advanced by way of loan, an existing or future debt, or the
performance of an engagement which may give rise to pecuniary liability.”
“The transferor is called a mortgagor, the transferee a mortgagee; the principal money
and interest of which payment is secured for the time being are called the mortgage-
money, and the instrument (if any) by which the transfer is effected is called a
mortgage-deed.”
Sec 58(f): Mortgage by deposit of title deeds – Where a person in any of the towns
notified or in any other town which the [State Government concerned] may by
notification in the Official Gazette, specify in this behalf, delivers to a creditor or his
agent, documents of title to immoveable property, with intent to create a security
thereon, the transaction is called a mortgage by deposit of title deeds.
GUIDELINES FOR CREATION OF EQUITABLE MORTGAGE

1. Once the TIR is received from the advocate, the same should be scrutinized as per
checklist given vide Annexure-E of Circular CPPD/70/25SEP17.
2. Obtain all the title deeds in original from the borrower as per the chain of title. Where
all the originals are not available, minimum previous two transactions / sale / title
deeds should be obtained from the borrower along with a declaration explaining the
non-availability of the original title deeds in respect of past transactions to the
satisfaction of Bank.
(a) EM created based on Certified Copies of Title Deeds, where the Original
Title Deeds are lost, destroyed etc.:
The original title deeds are to the deposited for creation of a valid Equitable Mortgage.
In exceptional cases, where the original title deeds are not available (lost / destroyed /
misplaced etc.) and the Equitable Mortgage is proposed to be created based on the
certified copies of title deeds, extra caution has to be exercised and the following
procedure is to be adopted:
i. Prior approval from the Controlling Authority to be obtained

ii. A First Information Report (FIR) is lodged with the Police Authorities
in respect of the lost title deeds. If an FIR has not been recorded by the
Police Authorities, a duly recorded and acknowledged Diary Report
(DR), Daily Diary Report (DDR) or a report recording the fact of lost
title deeds filed in any other book with the Police Authorities (as
prescribed by the respective State Government), may be acceptable. The
latter (other than FIR) should be accepted only in such cases and for
such reasons as should be specified in writing by the intending
mortgagor in the Affidavit-cum-Declaration (mentioned below), as are
acceptable to the Bank. Proof of filing FIR / DR / DDR with the Police
Authorities explaining the circumstances under which the original title
deeds are lost, should be obtained.
iii. The intending mortgagor should give a public notice in one
leading national and in one regional newspaper stating that the original title
deeds have been lost, giving full details of the properties and further stating
the intention to create a charge on the said properties for securing the loan /
credit facility from
State Bank of India , (Branch), (Code).

Page 158 of 632
iii. The fact that an FIR / DR / DDR has been recorded with the Police
(Station) has also to be stated in the public notice.
iv. A duly stamped affidavit-cum-declaration from the mortgagor is to be
obtained declaring that the original title deeds have been lost. The affidavit
should also contain the following details:
a) Full Particulars of the properties
b) Reference to the FIR / DR / DDR lodged with Police. If FIR was not
filed and a DR / DDR has been recorded, specific reasons for the same
to be given
c) The details of public notice in national and regional newspapers
v. Independent verification / identification of t h e property / mortgagor should

be done, as usual.
(b) Equitable Mortgage based on Original Laminated Title Deeds
Laminated original title deeds would also attract greater caution as EM created by
deposit of laminated original title deeds also is fraught with higher risk. The
following procedure / precautions are to be adopted:
i. The int ending mortgagor must give a public notice in one leading
national and in one regional newspaper stating:
a) Intention to create a charge on the basis of laminated original

title deeds
b) Complete details of the properties
c) That the charge is being created for securing loan / credit
facility from State Bank of India, (Code) / (Branch),
d) That in case any party has any claim towards the properties, the
same should be lodged with the intending party and also with the
stated branch of SBI, within 15 days of publication of the notice.
ii. A duly stamped affidavit-cum-declaration of the mortgagor should

be taken declaring that:
a) The title deeds in question are the original and the only title deeds
of the property
b) The same has been laminated (for reasons)
c) Full particulars of the property
d) Details and copies of public notice stated above
e) Details / Copies of any claims / objections received in response to
the public notice and any replies given.
iii. Independent verification and identification of property /

mortgagor is to be done, as usual.
The option of Registered Mortgage may be explored in the above cases and the
relative merits may be advised to controlling office while seeking approval.
3. All the original title deeds should be deposited in a notified area and a Memorandum
of Entry as per prescribed format should be recorded for the purpose of creation of
mortgage.
Page 159 of 632
4. Other than partition or family settlement deeds, wherever the documents are
registered in counterparts, all such counterparts available with the mortgagor should
be deposited along with the original documents to avoid mis-utilisation of such
counterparts.
5. For creating Equitable Mortgage of a flat / independent house by a member of Co-

operative Housing Society, No Objection Certificate is necessary to ensure that no
dues of the society are outstanding against such member, and a declaration that the
society has not created any prior charge over the property which is subsisting.
6. A Search Report / (Non) Encumbrance Certificate for the intervening period, i.e., from
the date of TIR to the date of deposit of original Title Deeds / creation of EM should
be obtained and held on record, as part of equitable mortgage documents.
7. Confirmation letter regarding the Equitable Mortgage created by the mortgagor is to be
obtained and kept on records.
8. Timely execution of Sale Deed in favour of the purchaser / borrower and completion
of equitable mortgage formalities to be done without delay. Bank’s charge on the
property should be noted and possession of the property is taken by the borrower
wherever applicable are to be complied.
9. Building Plan approved by the Competent Authority should be obtained and perused
and evidence of Independent Site Verification should be recorded.
10. A d e c l a r a t i o n -cum-affidavit should be obtained from the b o r r o w e r /

guarantor / 3rd party offering his / her / their property as security declaring the
following and to be kept along with mortgage documents:
i. He / she / they is / are absolute owner of the property offered as security.

ii. The title deeds deposited with / handed over to the Bank are
original title deeds in their possession and there is no title deed apart
from the deeds deposited with/handed over to the Bank.
iii. He / she / they have not created any charge / mortgage or any other
encumbrance on the property offered as security to the Bank.
iv. He / she /they have not entered into any transaction of any nature
whatsoever in respect of the property offered as security to the
Bank.
v. There are no circumstances which adversely affect the mortgage and its
validity / enforcement.
vi. There is no tax liability, utility bills or any other dues pending in respect
of the property offered as security.
vii. The property offered as security shall be available for the loan sanctioned or
to be sanctioned to the borrower.
11 The particulars of the deposit must be recorded in the title deeds register and the
entries must be verified by the Branch Manager/ Divisional Manager and signed by him
and also signed by the two witnesses who may be Bank employees.
12 The mortgagor must not initial / sign / attest the register and/or the Memorandum of
Deposit recorded in the register; as otherwise, the mortgage would be construed as simple
mortgage which may fail for want of stamping and registering.
Page 160 of 632

13 Further, no writing whatsoever must be taken from the mortgagor(s) at the time of
deposit of the title deeds. However, to safeguard the interest of the Bank, a letter
(contents printed in an Inland Letter) confirming the deposit of the title deeds with
intent to create the mortgage in favour of the Bank as security for the advances should be
obtained from the mortgagor(s). This Inland letter should be obtained only subsequent
to the deposit of title deeds, say a day or two after the mortgage is created. It would be
preferable to arrange with the borrower to have this letter (Inland letter) sent by
Registered Post. This letter should be kept along with the title deeds. The Bank’s date
stamp should be affixed on this letter so that there would be no difficulty in proving later,
if the need arises, that the letter was received subsequent to the deposit of the title deeds.
13.1 However, where the mortgagor is a limited company, this confirmatory letter need not
be obtained. This is because in the case of limited companies, the mortgage will be
supported by a resolution passed by the Board of Directors authorizing the company’s
representative to make the deposit of title deeds. Further, the particulars of the mortgage /
charge will also be filed with the Registrar of Companies.
13.2 Particulars like the names of the borrower / guarantor, the date of deposit and the
documents deposited are entered on the left-hand side of the register, while the right-hand
side contains the recital of the deposit and the signatures of the two witnesses. The recital
in the register should be on the lines of the Bank’s standard format that should include a
list of the title deeds deposited as well as a detailed description of the mortgaged property.
14. In case of a simple deposit of title deeds, to further secure an already existing advance,
Standard Documents prescribed should be obtained.
15. When the mortgagor, who has already created an equitable mortgage in favour of the
Bank as security for existing advance, is granted additional / fresh advance sought to be
secured by extension of the existing mortgage, the following procedure should be
followed:
i. A supplementary recital on the lines of the Bank’s standard format should be
recorded in the title deeds register; and
ii. Supplementary confirmatory letter should be obtained from the
mortgagor confirming the deposit of title deeds pertaining to the properties made
earlier which shall continue as security for the enhanced
/ additional / fresh loan granted to the borrower.
16. Ensure the payment of stamp duty and registration of equitable mortgage wherever
applicable as per the relevant State laws.
17. Ensure the registration of equitable mortgages with the CERSAI under
SARFAESI Act, 2002
Question
1. What is the rationale for obtaining a Non-Encumbrance certificate for the

intervening period between date of TIR and date of creation of EM?
2. A property, on which charge is proposed to be created, is owned by a
Company, whether a confirmation letter is required for creation of EM? What other
precautions to be taken in this regard?
Page 161 of 632

CENTRAL REGISTRY FOR SECURITIZATION, ASSET RECONSTRUCTION
& SECURITY INTEREST OF INDIA (CERSAI)
Central Registry of Securitization Asset Reconstruction and Security Interest of India is a

Government of India Company licensed under section 8 of the Companies Act, 2013 with
Govt. of India having a shareholding of 51% and select Public Sector Banks and the
National Housing Bank also being shareholders of the
Company.
A Govt. initiative, U/s 20(1) of SARFAESI Act, 2002 and U/s 25 of Companies Act,
2013
The object of the Company is to maintain and operate a Registration System for
registration of transactions of securitization, asset reconstruction of financial assets and
creation of security interest over property, as contemplated under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act). CERSAI is providing the platform for filing registrations of
transactions of securitisation, asset reconstruction and security interest by the Banks and
Financial Institutions. At present the portal provides facility to file security interest in
immovable created through all types of mortgages and in units under constructions.
Besides, filing of Security Interests in movables, intangibles and factoring transactions
is also available on the portal.
More than a statutory obligation CERSAI is a risk mitigation tool for the Banks / Housing
Finance companies, FIs and public at large to prevent multiple financing against the same
property.
Online search is available to public to enable them to search and inspect the records
maintained by the Registry on payment of fees prescribed under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest (Central
Registry) Rules, 2011. The search can be made based on both Asset details as well as
Debtor's details.
VERIFICATION OF RECORDS OF CENTRAL REGISTRY

Before creation of any mortgage the branches should verify the records of the Central
Registry of Securitization, Asset Reconstruction and Security Interest of India (CERSAI)
(www.cersai.org.in) to see that there is no pre-existing charge registered with Central
Registry. Such exercise is also to be conducted at the time of renewal/ sanction of
additional limits. Further, a copy of the screen shot of search report / search report of
CERSAI to be attached with the loan proposal and subsequently preserved with the
security documents.
REGISTRATION OF CHARGES WITH CERSAI
Immediately after creation of mortgages, the security interest should be registered with
the Central Registry.
The Central Government has notified amendments to the Securitization and

Reconstruction of Financial Assets and Enforcements of Security Interests (Central
Registry) Rules, 2011 vide gazette notification dated January 22, 2016.
Page 162 of 632

TYPES OF SECURITY INTEREST TO BE FILED
Creation, Modification or Satisfaction of:
• Mortgages by deposit of title deeds

• Immoveable property by mortgage other than deposit of title deeds
• Hypothecation of P&M, Stocks, Debts including book debts or receivables whether
existing or future
• Intangible Assets, being knowhow, patent, copyright, trade-mark, license, franchise
or any other business or commercial right of similar nature
• Any under-construction residential or commercial building or a part thereof by an
agreement or instrument other than by mortgage
REGISTRATION OF SECURITY INTEREST ON VEHICLES
Circular R&DB/CERSAI/85/30OCT19
Government of India vide Gazette Notification dated 3MAY19 has identified 3MAY19 as
the date of integration of the registration system of Central Registry with the VAHAN
National Register, the registration system of the Motor Vehicles Act,1988.
Accordingly, CERSAI has advised all the Banks to file transactions relating to Security
Interest on Vehicles with VAHAN National Register only.
Clarification by GOI through RBI Letter No. DBR.CO.Leg.No.2781/09.08.020/2019-20

dated 4 OCT19 that any vehicle registered with VAHAN registry shall be deemed to be
registered with CERSAI for the purposes of SARFAESI Act, 2002.
SECTIONS 17 TO 19 OF SARFAESI ACT, 2002
Government of India vide Gazette Notification No.4133 dated 26-12-2019 has

appointed 24-01-2020 as the date on which the provisions of Section 17 to 19 (both
inclusive) of SARFAESI Act shall come into force. Brief details of Section 17 to 19 are as
under:
a) Section 17: In the earlier provision, the words “within thirty days after the date of such
transaction or creation of security, by the securitization company or reconstruction company
or the secured creditor, as the case may be” shall be omitted.
(b) Section 18: “Chapter IV A” (Registration by Secured Creditor and other Creditors)
shall be inserted from 24-01-2020. The brief details of Chapter IV A are as under:
26-B (1): The provisions of Chapter IV A relating to Central Registry will be extended to all
Creditors other than Secured Creditors as defined in clause (zd) of sub-section (1) of
section 2, for creation, modification or satisfaction of any Security Interest over any
property of the borrower for the purpose of securing due repayment of any financial
assistance granted by such creditor to the borrower.
26-B (2): Any Creditor including the Secured Creditor may file particulars of transactions
of creation, modification or satisfaction of any Security Interest with Central Registry in
such form and manner as prescribed.
26-B(3): A Creditor other than Secured Creditor filing particulars of transactions of

creation, modification and satisfaction of Security Interest over properties created in its
favor shall not be able to exercise any right of enforcement of Securities under SARFAESI
Page 163 of 632
act.
26–B(4): Central Government / State Government / Local Authority, entrusted with the
function of recovery of tax or other Government dues and for issuing any order for
attachment of any property of any person liable to pay the tax or Government dues,
shall file with the Central Registry such attachment order with particulars of assesse and
details of tax or other Government dues.
26-B (5): If any person having any claim against any borrower obtains an order or an
attachment for the property from any court or any authority empowered to issue such
orders, such person may file particulars of such attachments with Central Registry.
26-C (1): The registration in Central Registry shall be deemed to constitute a ‘public notice’.
26-C (2) : On registration of Security Interest / attachment orders with Central Registry
by Secured Creditors/ other Creditors, the claim of such Secured Creditors and other
Creditor shall have priority over any subsequent Security Interest created upon such
property.
The “priority” shall be with the secured creditor, who has registered his security interest
with CERSAI first, notwithstanding the prior ‘creation’ of the security interest.
ii) Registration of the relevant security interest with CERSAI by one of the banks shall be
prior in time (even if the same is happening on the same date) and in such a scenario, the
bank holding such prior registration will have the priority, as regards his ‘security interest’.
26- D: No secured creditor will be entitled to exercise the rights of enforcement of

securities available to it under by the SARFAESI Act, unless the security interest created
in its favor by the borrower, has been registered with CERSAI.
26-E: The debt due to any Secured Creditor shall be paid in priority over all other debts /
revenues / Taxes / Cesses and other rates payable to the Central Government or State
Government or local authority.
For the purposes of this section, it is has been clarified that on or after the commencement
of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy
proceedings are pending in respect of secured assets of the borrower, priority to secured
creditors in payment of debt shall be subject to the provisions of that code.
Section 19: Penalty provisions for default in filing, modifying and satisfaction of security
interest, shall be omitted w.e.f. 24-01-2020.
Questions:
1. What is the objective of setting up of CERSAI?
2. What are the types of charges that are required to be registered with
CERSAI?
Page 164 of 632

Types of Charges to be Registered
1. A charge on book Debts of Company

2. A charge not being pledge, on any movable property of the Company
3. A floating charge on the undertaking or any property of the Company
4. A charge on any immovable property
5. A charge on Goodwill, Patent, Trade mark, copy right, License etc
Purpose
1. For Creation of Charge

2. Modification of Charge
3. Satisfaction of Charge
Periodicity of Search
1. Pre-Sanction stage
2. At t h e t i m e o f f i l i n g Bank`s charge with ROC after documentation
/ disbursement
3. At every Review / Renewal stage and position should be commented in the proposal
4. For Stressed accounts search should be done at enhanced frequency, as deemed
necessary.
Exemptions
1. Pledge Advances (However filing is advisable under the head “Others”)

2. Corporate Guarantee
3. However if a company creates charge on any of its assets for performance of the
guarantee obligation under Corporate Guarantee, then charge is required to be filed.
Page 165 of 632

Types of forms:
There are eleven types of forms being used for different purposes
Sl. Form Purpose of Form
No. Number
1 CHG 1 Application for registration of creation, modification of charge (other than
those related to debentures)
2 CHG 2 Certificate of Registration of charge issued by the Registrar
3 CHG 3 Certificate o f Modification of charge issued by the Registrar
4 CHG 4 For filing Satisfaction of charge
5 CHG 5 Certificate o f r e g i s t r a t i o n of Satisfaction of charge issued by the
Registrar
6 CHG 6 For Intimation of appointment of Receiver or Manager
7 CHG 7 Company’s register of charges
8 CHG 8 Application to Central Government for extension of time for filing
particulars of registration of creation / modification / satisfaction of charge
OR for rectification of omission or misstatement of any particular in
respect of creation/ modification/ satisfaction of charge
9 CHG 9 Application for registration of creation or modification of charge for
debentures or rectification of particulars filed in respect of creation or
modification of charge for debentures
Questions:
1. What types of charges are required to be registered before ROC?
2. If charge is not filed with the ROC within 60 days of creation of charge, in what
ways lending bank may be affected?
Page 166 of 632

MCQs
1. What are the instances which warrant a second TIR in respect of proposed
mortgages?
a. Properties acquired through Gift Deeds, Properties acquired by our
Borrower / Guarantor transacted by POA holder of seller, and Properties
belonging to Third Party Guarantors
b. Properties belonging to Directors of Companies to which Bank is lending,
Properties belonging to Corporate Entities, Properties acquired through Power
of Attorney Holder
c. Properties which have been acquired within a period of one year, Third Party
Properties & Properties acquired through Gift Deed
d. Properties which cannot be certified as having clear title on examination /
search of chain of title for a period of 30 years, Properties acquired through
Gift Deeds, and properties transacted by Power of Attorney Holders
2. On enhancement of limit supplemental document is executed, instead of initial

documents for the enhanced amount; Why is this done?
a. To avoid stamp duty on the whole amount of the loan, when stamp duty has
already been paid for the original amount of loan
b. If the earlier charges are satisfied on registration of new charge for the
whole amount (instead of modification of earlier / original charge), the
priority of charge may be lost
c. Supplemental documents are taken to establish the continuity of the loan from
the original date, instead of treating the enhanced loan as a new loan from the
enhanced date
d. Contract Act prohibits altering the original terms of sanction and therefore
supplemental document is taken instead of initial documents for the whole
amount
3. What are the key characteristics of an Equitable Mortgage?

a. Delivery of title deeds clarifying intention to create a valid mortgage at a
centre notified by Government of India
b. Delivery of title deeds at the Bank’s Branch, Taking acknowledgement for the
documents delivered and sending a copy of the acknowledgment
(countersigned by the borrower and guarantor) to the Branch as evidence of
having created the mortgage
c. Sending the documents listed in TIR to the branch by Registered Post by the
mortgagor, visiting the branch to declare the intension of creating mortgage
and obtaining an acknowledgment for the documents delivered by Post
d. The mortgagor (owner) personally visiting the branch, delivering the
documents and taking a receipt for the documents delivered, from the branch.
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4. What does section 281 of Income Tax Act, 1961 deal with?
a. Section 281 of the Income Tax Act, 1961 requires an assessee to obtain
the permission of the assessing officer before creating a charge on or
transfer of certain assets, including land, building, machinery,
manufacturing facilities and others.
b. Section 281 of the Income Tax Act, 1961 requires a Bank or Financial
Institution creating a charge to obtain the permission of the assessing officer
before creating a charge on or transfer of certain assets, including land,
c. Section 281 of the Income Tax Act, 1961 requires an assessee to deposit an
equivalent amount of tax payable for the assessment year in which a charge
on the property is created and obtain the permission of the assessing officer
d. Section 281 of the Income Tax Act, 1961 requires an assessee to declare that
there are no tax arrears or disputed tax liabilities up to the assessment year in
which the charge is created and obtain the permission of the assessing officer
5. According to Sec.77 of Companies Act all types of charges are to be registered with
ROC; If not, it would be;
a. Void against the liquidator and void against the creditor
b. Void against the company creating charge and the Registrar of Companies
c. Void ab initio against the lending bank or financial institution
d. With the CERSAI registration of charge being made mandatory, the
registration of charge with ROC is now incidental and not mandatory.
Page 168 of 632

CASE LET : Check your progress
One of our branches financed a car purchased by Mr.X. The documentation was done and
the loan was disbursed to the dealer from whom the quotation was obtained. The
Relationship Manager inspected the vehicle after the delivery was taken by Mr.X and the
same was recorded in the Customer’s file.
The RM was aware that the Bank’s charge on the vehicle is to be noted with the Motor
Vehicles Department. Due procedures were followed and the Bank’s charge was registered
with vahan.nic.in portal and the certificate of registration of charge was generated evidencing
creation of charge.
The RM was not aware that the charge of Hypothecation was also to be registered with
CERSAI Portal. In the audit of the branch that took place subsequently, the auditor pointed
out to the fact that the charge on the vehicle was not registered on CERSAI Portal.
The RM was at a loss as to how the irregularity could be rectified, as preliminary enquires
with colleagues revealed that any charge on to be registered with the CERSAI portal has to
be done within 30 days of creation of charge. He was obviously getting worried over the
matter. Let us find out if there is a way to deliver the RM from is predicament.
Questions:
1 Is a hypothecation charge created on a vehicle financed by the Bank, required to

be registered on the CERSAI Portal?
a. No, it is not required to be registered on CERSAI Portal
b. Yes, it is required to be registered on CERSAI Portal
c. It is not required to separately register the charge on CERSAI Portal
provided the charge has been registered on Vahan National Portal
d. The charge is required to be registered on Vahan National Portal and then
CERSAI Portal, separately, as non registration of charge on CERSAI Portal
vitiates the right of the Bank to enforce security interest under SARFAESI
Act, 2002
2 Has the Relationship Manager Committed an act of omission in not registering
the Bank’s security interest on the vehicle with the CERSAI Portal?
a. Yes, the charge should have been noted with CERSAI Portal;
b. RBI has clarified that any vehicle registered with VAHAN registry shall
be deemed to be registered with CERSAI for the purposes of SARFAESI
Act, 2002.
c. There is no requirement of noting charge on CERSAI Portal for enforcement
of security interest under SARFAESI Act, 2002
d. The charge should have been noted with CERSAI Portal and then Vahan
National Portal in sequence.
3 What is the time period for registering a charge with CERSAI Portal, once a
charge is created?
a. A charge created has to be registered with CERSAI Portal within a period of
30 days of creation of Charge
b. A charge created has to be registered with CERSAI Portal, immediately
in order to retain priority of charge
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c. A charge created has to be registered with CERSAI Portal within a period of
60 days of creation of Charge and thereafter within 30 days with penalty.
d. None of the above statements are correct.
4 What is the effect of amendment of sections 17 to 19 of SARFAESI Act, 2002
with respect to enforcement of security interest under the Act?
a. As per Section 18, Chapter IV A, no secured creditor will be entitled
to exercise the rights of enforcement of securities available to it
under by the SARFAESI Act, unless the security interest created in its
favor by the borrower, has been registered with CERSAI.
b. As per section 18, Chapter IV A, 26-B (3), a Secured Creditor filing
particulars of transactions of creation, modification and satisfaction of
Security Interest over properties created in its favor shall not be able to
exercise any right of enforcement of Securities under SARFAESI act.
c. As per Section 18, Chapter IV A, 26-E, the debt due to any Secured Creditor
shall not be paid in priority over all other debts / revenues / Taxes / Cesses
and other rates payable to the Central Government or State Government or
local authority.
d. None of the above statements are correct
5 What is the priority of charge with respect to registration of Security Interest on
CERSAI Portal?
a. The “priority” shall be with the secured creditor, who has registered his
security interest with CERSAI first, notwithstanding the prior ‘creation’
of the security interest.
b. The “priority” shall be with the secured creditor (subject to Registration with
CERSAI) who has created his security interest first, notwithstanding the
subsequent registration of the security interest.
c. The “Priority” shall vest with the secured creditor who has created and
registered the security interest prior to any other security interest created or
registered on the Portal.
d. None of the above statements are correct
Page 170 of 632

CHAPTER - 5
ANALYSIS OF FINANCIAL STATEMENT
INTRODUCTION: Financial Statements (FS) are the backbone for any credit proposal. The
premise of any credit proposal is built upon the financial statements. These statements are the
formal records of the financial activities of a business / entity / person etc. and provide an
overview of the financial condition in short, medium and long term. Financial statements give
an accurate picture, to a great extent, about the financial health of the entity in a condensed
form and are used as a tool to assess the overall position and operating results of the business.
Ratio analysis shows whether the business entity is improving or deteriorating in past years.
Moreover, comparison of different aspects of all the entities can be done effectively with the
help of trend / ratio analysis.
Analysis and interpretation of the financial indicators does not always prove to be an easy
task as it requires multiple calculations and combined approaches. The knowledge and
understanding about the business is essential for proper analysis / interpretation of the
financial statements. It helps in determining the liquidity position, long term solvency,
financial viability and profitability etc. of the business entity. It also helps to decide in which
entity, the risk is less or in which entity one should invest to reap the maximum benefits.
Thus, the conclusions of the analysis carried out in a professional manner will enable to
correctly describe about the status of the entity and finally helps in taking an informed
decisions.
Financial statements are prepared by the management to cater to the needs of the various
users / stakeholders viz. Shareholders, Government Departments, Employee, Customers,
Lenders / Financial Institution etc. Each stakeholder has its own requirements / perspective
for understanding the financial statement. Analysis of the financial statements is very crucial
from the lenders’ perspective as their credit decision is broadly based on the financial
statements. After reading the chapter, you will be able to understand the following,
i. Importance of financial statements.
ii. Overview of Accounting Standards, Ind AS, IFRS
iii. Contents of financial statement and need for analysis
iv. Directors’ Report, Independent / Statutory Auditor’s Report, CARO
v. Classification of various items of Financial Statements
vi. Preparation of Credit Monitoring Arrangement (CMA)
vii. Fund Flow Statement, Cash Flow Statement
viii. Related Party Transactions
ix. Creative Accounting and Beyond Balance Sheet
x. Various Ratios, calculation and interpretation thereof and much more…..
Accounting Standards (AS) are formulated by the Accounting Standards Board (ASB),
constituted by the Institute of Chartered Accountants of India (ICAI) in 1977 with a view to
synchronize the diverse accounting policies and practices prevailing in the country. While
formulating AS, the ASB takes into consideration the applicable laws, customs, usages and
Page 171 of 632

business environment prevailing in the country. The ASB also take due consideration of
International Financial Reporting Standards (IFRSs) / International Accounting Standards
(IASs) issued by International Accounting Standards Board (IASB) and tries to integrate
them, to the extent possible, in the light of conditions and practices prevailing in India. The
objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the
preparation of financial statements within the bounds of rationality, thereby ensuring
comparability of financial statements of different enterprises, to provide meaningful
information to various users of financial statements and to enable them to take informed
economic decisions.
Accounting Standards are the written policy documents covering the aspects of recognition,
measurement, classification, presentation and disclosure of accounting transactions,
conditions and events in the financial statements. Accounting Policies are the specific
principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements.
Bank’s Policy on Audited Financials: As per extant instructions of the Bank, all borrowing
units which are in operation need to submit their Audited Balance Sheet to the Bank with in 6
(six) months of close of the Financial Year (F.Y.) i.e. last date for submission of ABS will be
30thSeptember if F.Y. closes on 31stMarch.Non submission of Audited financials within the
prescribed timelines would attract penal provisions as per extant instructions.
Need for analysis of Financial Statement: The fundamental question is what is the need of
analysis of financial statements which have been prepared in terms of the relevant statutes
and also audited by the qualified auditors who have scrutinized the transactions and also
pointed out the discrepancies (if any) in the statements. An analysis of financial statements
seems to be duplication of work. The answer is that the responsibility of preparation of
financial statements lies with the management and the Auditor’s role is only to opine on the
financial statements. Financial statements are prepared for the use of various stakeholders viz.
Shareholders/Investors, Government Departments, Employee, Customers and
Lender/Financial Institution etc. The stakeholders use/understand these financial statements
as per their need/requirement.
i. The shareholders / investors are the most important investors who provide capital
for the business. Any investment has an element of risk. The shareholders and
investors therefore look to the financial statements from the return point of view
to take a decision whether to buy/hold/continue/sell the investment.
ii. For Government, one of the main sources of revenue is tax collection from the
business enterprises and public. Government Departments undertake thorough
scrutiny of the financial statements in order to ascertain the actual earnings and to
calculate / verify the correctness of the tax amount payable on such earnings.
iii. Customers are interested in the financial statements to take strategic decisions on
maintaining short term / long term relationship with the entity.
iv. Employee’s concerns are somehow similar to the shareholders / investors. From
the analysis of financial statements, they would like to have a pulse of the entity.
Their concerns are generally limited to the extent of their interest in the entity.
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v. For Lenders, a critical analysis of the financial statements is of crucial importance.
A meaningful analysis helps to assess the prospects of the borrowing enterprise.
The lenders want to ensure that the liquidity prospects of the unit are strong and
equally concerned about the long term solvency and debt servicing capabilities.
The lenders have to analyze the financial statements from each and every
prospect.
The format for preparation of financial statements for the Companies is standard as per
Companies Act 2013. For other type of constituents viz. proprietorship / partnership etc., the
format for preparation of financial statements are being used more or less on the similar lines.
Thus, it is necessary for each stakeholder to analyze the financial statements from his own
perspective as per their requirement.
Contents of Financial Statements: The Companies Act, 2013 defines the term
“FINANCIAL STATEMENTS” to include:
i. A Balance sheet as at the end of the financial year,
ii. A profit and loss account, or in the case of a Company carrying on any activity
not for profit, an income and expenditure account for the financial year,
iii. Cash flow statement for the financial year,
iv. A statement of changes in equity, if applicable; and
v. any explanatory note annexed to, or forming part of, any document referred to
in (i) to (iv) above,
Provided that the financial statement, with respect to One Person Company, Small Company
and Dormant Company, may not include the cash flow statement.
One Person Company means a Company which has only one person as a Member.
Small Company means a Company, other than a public Company,—

(i) paid-up share capital of which does not exceed 50 lakh rupees or such higher
amount as may be prescribed which shall not be more than 5 crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed 200 lakh
rupees or such higher amount as may be prescribed which shall not be more than
20 crore rupees:
Provided that nothing in this clause shall apply to—
a. a holding Company or a subsidiary Company;
b. a Company registered under section 8; or
c. a Company or body corporate governed by any special Act;
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Dormant Company: Where a Company is formed and registered under the Companies Act
for a future project or to hold an asset or intellectual property and has no significant
accounting transaction, such a Company or an inactive Company may make an application to
the Registrar in such manner as may be prescribed for obtaining the status of a dormant
Company.
(i) “inactive Company” means a Company which has not been carrying on any
business or operation, or has not made any significant accounting transaction during
the last two financial years, or has not filed financial statements and annual returns
during the last two financial years;
(ii) “significant accounting transaction” means any transaction other than,
(a) payment of fees by a Company to the Registrar;
(b) payments made by it to fulfill the requirements of this Act or any other law;
(c) allotment of shares to fulfill the requirements of this Act;
(d) payments for maintenance of its office and records.
As per Section 129(3) of the Companies Act 2013, where a Company has one or more
subsidiaries, associate Company, joint venture, it shall, in addition to financial statements,
prepare a consolidated financial statement of the Company and of all the subsidiaries in the
same form and manner as that of its own.
Requirement of Audited Financials: As per Bank’s extant instructions, audited financials

are required for all the credit proposals with exposure of Rs. 25 lakh or above. As per Manual
on Loans & Advances (updated upto 31.03.2019), Part-2, Chapter-20, Para 3-20-4 “For
aggregate limits upto Rs.5 lakh, audited balance sheet need not be insisted upon. For non-
corporate borrowers, enjoying aggregate credit limit of Rs.10 lakh and above from the
Banking system, audited balance sheet in the IBA approved format (Annexure REVIEW-1 of
the Manual) should be obtained”.
Genuineness of Financial Statements: On receipt of the Audited Financials, first of all, the
credit officer should check the genuineness of the same and ensure verification at the time of
fresh sanction/renewal/review of the account, with those available on the website of Ministry
of Corporate Affairs (www.mca.gov.in). In respect of those Companies whose audited
financials are not available on the website for any reason, an independent confirmation
should be obtained from the Chartered Accountant firms directly by e-mail/fax to ensure
genuineness of their certification and the fact of receipt of such independent confirmation
should be recorded in the proposals. Ensure verification and cross checking of major items of
Profit & Loss account and Balance Sheet with the various statutory / regulatory returns.
Page 174 of 632

Apart from the above, in case of Non-Corporate borrowers, turnover of the units as
mentioned in the audited balance sheet need to be verified with GST returns and Income Tax
returns of the customer for the respective financial year. Moreover, along with the audited
balance sheet, the borrowing units need to submit usual KYC documents in respect of the
auditor firm viz. copy of address proof and identity proof like PAN card, Driving license,
Aadhar Card etc. or alternatively, a copy of GSTN Invoice, issued by the Auditor which he
would have submitted for payment of the bills to the customer. This will ensure genuineness
of the Auditor. Proper evidence of having verified the audited financials are to be ensured and
kept on record for verification by internal/ external Auditors.
For a true and complete understanding of financial statements, it is imperative and
prerequisite that the financial statements should not be read in isolation but should be read in
conjunction with the Independent / Statutory Auditors’ Report along with any explanatory
note annexed to or forming part of Auditors’ Report, which comments on the compliance
with various laws / regulations etc. and the quality of figures, shown in the financial
statements.
Directors’ Report: Directors’ Report is very important document. It is applicable in the case
of Companies. In case of other types of constituents, we have to collect the similar types of
information separately. Directors’ Report provides the following information,
i. Financial Results highlights
ii. Future plan of the Company
iii. Dividend
iv. Directors’ responsibility statement
v. Accounting Standards followed
vi. True & Fair view of Financial Statements
vii. Proper maintenance of books, safeguards toward assets/fraud
viii. Going Concern
ix. Adequate Internal Financial Control
x. Compliance of all applicable laws
Independent / Statutory Auditors’ Report: The Auditor’ report is the Auditor’s opinion on
the financial statement, based on their audit. The auditor makes his opinion on the true & fair
representation of the material facts and also opine on the material aspects of the units. There
are various types of Auditors’ Report. Clean reports do not contain any adverse remarks /
comments of the Auditors. Qualified reports are those reports where the Auditors qualify
their opinion / furnish adverse comments in case of any non compliance with any of the law /
rules / Acts / Accounting Standards or material departure from the accounting principles etc.
and these non compliances are having material impact on the financial statements. The
Auditors, may also furnish the facts / incidences, which could not be ascertained / quantified
at the time of audit but may have an impact on the financial statements in future and needs
attention of the users of financial statements under the head “Matter of Paragraph /
Emphasis”.
Page 175 of 632

Companies (Auditor's Report) Order, 2020 (CARO-2020):In exercise of the powers
conferred by sub-section (11) of section 143 of the Companies Act, 2013 (18 of 2013 ) and in
supersession of the Companies (Auditor's Report) Order, 2016, published in the Gazette of
India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O. 1228 (E), dated the
29th March, 2016, except as respects things done or omitted to be done before such
supersession, the Central Government, after consultation with the National Financial
Reporting Authority constituted under section 132 of the Companies Act, 2013, hereby
makes the following order.
It shall apply to every company including a foreign company as defined in clause (42) of
section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies
Act], except–
(i) a banking company as defined in clause(c) of section5 of the Banking Regulation Act,
1949 (10 of 1949);
(ii) an insurance company as defined under the InsuranceAct,1938(4of1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause(62)of section2 of the Companies Act and
a small company as defined in clause(85)ofsection2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public
company, having a paid up capital and reserves and surplus not more than one
crore rupees as on the balance sheet date and which does not have total borrowings
exceeding one crore rupees from any bank or financial institution at any point of
time during the financial year and which does not have a total revenue as disclosed
in Scheduled III to the Companies Act (including revenue from discontinuing
operations) exceeding ten crore rupees during the financial year as per the financial
statements.
It shall come into force on the date of its publication in the Official Gazette.
Auditor's report to contain matters specified in paragraphs 3 and 4.-Every report made by the
auditor under Section143 of the Companies Act on the accounts of every company audited by
him, to which this Order applies, for the financial years commencing on or after the 1st April,
2019, shall in addition, contain the matters specified in paragraphs 3 and 4, as may be
applicable:
Provided this Order shall not apply to the auditor’s report on consolidated financial
statements except clause (xxi) of paragraph 3.
Matters to be included in auditor's report- The auditor's report on the accounts of a

company to which this Order applies shall include a statement on the following matters,
namely:-
Page 176 of 632

Clause No. Matter
i(a)(A) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of Property, Plant and Equipment;
i(a)(B) Whether the company is maintaining proper records showing full particulars
of intangible assets;
i(b) Whether these Property, Plant and Equipment have been physically verified by
the management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
i(c) Whether the title deeds of all the immovable properties (other than properties
where the company is the lessee and the lease agreements are duly executed in
favour of the lessee) disclosed in the financial statements are held in the name
of the company, if not, provide the details thereofin the format below:-
Description Gross Held Whether Period Reason

Of carrying in promoter, held for
property value Name of director – not being
or their indicate held in
relative or range, name of
employee where company*
appropriate
- -- - - - *also
Indicate if
in dispute
i(d) Whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the year and,
if so, whether the revaluation is based on the valuation by a Registered Valuer;
specify the amount of change, if change is 10% or more in the aggregate of the
net carrying value of each class of Property, Plant and Equipment or intangible
assets;
i(e) Whether any proceedings have been initiated or are pending against the
company for holding any Benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made there under, if so, whether
the company has appropriately disclosed the details in its financial statements;
ii(a) Whether physical verification of inventory has been conducted at reasonable

intervals by the management and whether, in the opinion of the auditor, the
coverage and procedure of such verification by the management is appropriate;
whether any discrepancies of 10% or more in the aggregate for each class of
inventory were noticed and if so, whether they have been properly dealt with in
the books of account;
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ii(b) Whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of five crore rupees, in aggregate, from banks
or financial institutions on the basis of security of current assets; whether the
quarterly returns or statements filed by the company with such banks or
financial institutions are in agreement with the books of account of the
Company, if not, give details;
iii Whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or
any other parties, if so,-
(a) whether during the year the company has provided loans or provided advances
in the nature of loans, or stood guarantee, or provided security to any other
entity [not applicable to companies whose principal business is to give loans],
if so, indicate-
A The aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security to
subsidiaries, joint ventures and associates;
B The aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security to
parties other than subsidiaries, joint ventures and associates;
(b) Whether the investments made, guarantees provided, security given and the
terms and conditions of the grant of all loans and advances in the nature of
loans and guarantees provided are not prejudicial to the company’s interest;
(c) In respect of loans and advances in the nature of loans, whether the schedule of
repayment of principal and payment of interest has been stipulated and whether
the repayments or receipts are regular;
(d) If the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for
recovery of the principal and interest;
(e) Whether any loan or advance in the nature of loan granted which has fallen due
during the year, has been renewed or extended or fresh loans granted to settle
the overdues of existing loans given to the same parties, if so, specify the
aggregate amount of such dues renewed or extended or settled by fresh loans
and the percentage of the aggregate to the total loans or advances in the nature
of loans granted during the year [not applicable to companies whose principal
business is to give loans];
(f) Whether the company has granted any loans or advances in the nature of loans
either repayable on demand or without specifying any terms or period of
repayment, if so, specify the aggregate amount, percentage thereof to the total
loans granted, aggregate amount of loans granted to Promoters, related parties
as defined in clause (76) of section 2 of the Companies Act, 2013;
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iv In respect of loans, investments, guarantees, and security, whether provisions
of sections 185 and 186 of the Companies Act have been complied with, if not,
provide the details thereof;
v In respect of deposits accepted by the company or amounts which are deemed

to be deposits, whether the directives issued by the Reserve Bank of India and
the provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act and the rules made thereunder, where applicable, have been
complied with, if not, the nature of such contraventions be stated; if an order
has been passed by Company Law Board or National Company Law Tribunal
or Reserve Bank of India or any court or any other tribunal, whether the same
has been complied with or not;
vi Whether maintenance of cost records has been specified by the Central

Government under sub-section (1) of section 148 of the Companies Act and
whether such accounts and records have been so made and maintained;
vii(a) Whether the company is regular in depositing undisputed statutory dues

including Goods and Services Tax, provident fund, employees’ state insurance,
income-tax, sales- tax, service tax, duty of customs, duty of excise, value added
tax, cess and any other statutory dues to the appropriate authorities and if not,
the extent of the arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months from the date
they became payable, shall be indicated;
vii(b) Where statutory dues referred to in sub-clause (a) have not been deposited on
account of any dispute, then the amounts involved and the forum where dispute
is pending shall be mentioned
viii Whether any transactions not recorded in the books of account have been
surrendered of disclosed as income during the year in the tax assessments under
the Income Tax Act, 1961, if so, whether the previously unrecorded income has
been properly recorded in the books of account during the year;
ix(a) Whether the company has defaulted in repayment of loans or other borrowings
or in the payment of interest thereon to any lender, if yes, the period and the
amount of default to be reported in the format given
Nature of Nameoflender* Amount Whether No.ofdays Remarks,

borrowing, notpaidon principal delay or ifany
including duedate orinterest unpaid
debt
securities
*lender wise
details tobe
providedincase
ofdefaults to
banks,financial
institutions and
Government.
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ix(b) Whether the company is a declared wilful defaulter by any bank or financial
institution or other lender;
ix(c) Whether term loans were applied for the purpose for which the loans were
obtained; if not, the amount of loan so diverted and the purpose for which it is
used may be reported;
ix(d) Whether funds raised on short term basis have been utilized for long term
purposes, if yes, the nature and amount to be indicated;
ix(e) Whether the company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or joint
ventures, if so, details thereof with nature of such transactions and the amount
in each case;
ix(f) Whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies, if so,
give details thereof and also report if the company has defaulted in repayment
of such loans raised;
x(a) Whether moneys raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the purposes for
which those are raised, if not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported;
x(b) Whether the company has made any preferential allotment or private placement
of shares or convertible debentures (fully, partially or optionally convertible)
during the year and if so, whether the requirements of section 42 and section 62
of the Companies Act, 2013 have been complied with and the funds raised have
been used for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance;
xi(a) Whether any fraud by the company or any fraud on the company has been
noticed or reported during the year, if yes, the nature and the amount involved
is to be indicated;
xi(b) Whether any report under sub-section (12) of Section 143 of the Companies
Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13
of Companies (Audit and Auditors) Rules, 2014 with the Central Government;
xi(c) Whether the auditor has considered whistle-blower complaints, if any, received
during the year by the company;
xii(a) Whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the liability;
xii(b) Whether the Nidhi Company is maintaining ten per cent. unencumbered term
deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
xii(c) Whether there has been any default in payment of interest on deposits or
repayment thereof for any period and if so, the details thereof;
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xiii Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act where applicable and the details have
been disclosed in the financial statements, etc., as required by the applicable
accounting standards;
xiv(a) Whether the company has an internal audit system commensurate with the size
and nature of its business;
xiv(b) Whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
xv Whether the company has entered into any non-cash transactions with directors
or persons connected with him and if so, whether the provisions of section 192
of Companies Act have been complied with;
xvi(a) Whether the company is required to be registered under section 45-IA of the
Reserve Bank of India Act, 1934 and if so, whether the registration has been
obtained;
xvi(b) Whether the company has conducted any Non-Banking Financial of Housing
Finance activities without a valid Certificate of Registration (CoR) from the
Reserve Bank of India as per the Reserve Bank of India Act 1934;
xvi(c) Whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to
fulfil the criteria of a CIC, and in case the company is an exempted or
unregistered CIC, whether it continues to fulfil such criteria;
xvi(d) Whether the Group has more than one CIC as part of the Group, if yes, indicate
the number of CICs which are part of the Group;
xvii Whether the company has incurred cash losses in the financial year and in
the immediately preceding financial year, if so, state the amount of cash losses;
xviii Whether there has been any resignation of the statutory auditors during the
year, if so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors;
xix On the basis of the financial ratios, ageing and expected dates of realisation of
financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor’s knowledge of the Board
of Directors and management plans, whether the auditor is of the opinion that
no material uncertainty exists as on the date of the audit report that company is
capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date;
xx(a) Whether, in respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies Act
within a period of six months of the expiry of the financial year in compliance
with second proviso to sub-section (5) of section 135 of the said Act;
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xx(b) Whether any amount remaining unspent under sub-section (5) of section 135 of
the Companies Act, pursuant to any ongoing project, has been transferred to
special account in compliance with the provision of sub-section (6) of section
135 of the said Act;
xxi Whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor’s Report) Order (CARO) reports
of the companies included in the consolidated financial statements, if yes,
indicate the details of the companies and the paragraph numbers of the CARO
report containing the qualification or adverse remarks.
Notes Forming Part of Accounts: Notes to accounts contain explanatory material, which is
quite useful in understanding the factual position as well as impact of accounting treatment of
certain significant items. It provides the details for the individual items of the financial
statements. It is imperative that notes on accounts should be carefully understood and their
impact should be broadly and minutely examined. Some of the vital information, available in
the notes to accounts are,
i.Comments on / changes in accounting policies during the year.
ii. Details of Contingent liability
iii.Detailed breakups of sales, raw material consumption etc.
iv.Details of Related party transactions as per Accounting Standards (AS)-18
v.Segment wise reporting, details of transactions in foreign currency
vi.Details of Deferred Tax Liability / Assets
vii.Details and comments on revaluation reserve, if any
Analysis of Related Party Transactions: As per Accounting Standard (AS)-18, related
party transaction means ‘A transfer of resources or obligations between related parties,
regardless of whether or not a price is charged’ and Related Party means ‘One party has the
ability to control the other party or exercise significant influence over the other party in
making financial and/or operating decisions’.
Control means(a) ownership, directly or indirectly, of more than one half of the voting
power of an enterprise, (b) control of the composition of the board of directors in the case of
a Company or of the composition of the corresponding governing body in case of any other
enterprise, (c) a substantial interest in voting power and the power to direct, by statute or
agreement, the financial and /or operating policies of the enterprise.Control also includes
right to appoint a majority of directors or to control the management or policy decisions
including by virtue of their shareholding or managements or share holder agreement or voting
agreement
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Significant influence means Participation in the financial and / or operating policy decisions
of an enterprise, but not control of those policies.
Associate Company: As per Companies Act 2013 Section 2(6), a Company in which that
other Company has a significant influence, but which is not a subsidiary Company of the
Company having such influence and includes a joint venture Company. For the purposes of
this clause, “significant influence” means control of, at least 20% of total share capital or of
business decisions under an agreement.
Holding Company: As per Companies Act 2013 Section 2 (46), Holding Company in
relation to one or more other Companies, means a Company of which such Companies are
subsidiary Companies.
Subsidiary Company: As per Companies Act Section 2 (87), subsidiary is defined as a

Company in which holding Company holds more than 50% of share capital directly or
indirectly or controls composition of the board of directors.
Person/Entity not considered as Related Party: Following are not considered to be related
party:
➢ Financiers do not become related parties simply by virtue of their dealings with an
entity
➢ The customers, supplies, distributors etc. with whom unit has normal business
dealings only
➢ Government department and agencies, Public utilities, Trade Unions
Related party transactions may be the normal feature of business as some units are having
associate, subsidiaries, joint ventures, sister concerns to carry out various activities either as
backward or forward integration for the main unit.
Every business entity is required to make certain disclosures regarding its dealings with
related parties. There is nothing wrong as such in the related party transactions, if these are
being carried out to meet out the genuine business requirement and on the same terms and
conditions as these transactions would have been carried out with any other party that is not a
related party. However, preferential treatment given to the related parties gives reasons to
doubt such transactions as the ultimate objective behind such transactions may not be
genuine. Related party relationship can have an effect on the Profit & Loss or Financial
Position of the reporting entity. Chances are that transactions between related parties may not
be done on the same terms and conditions or price (Arm’s Length basis) as in case of other
parties with the ultimate objective of diverting / siphoning the funds or profits.
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Related party transactions are of significant importance for lenders in evaluating a borrower
customer and its dealings. Lenders are required to analyse the related party transactions with
due care. An enterprise is supposed to transact with its related party at arm’s length price.
However, if a Company wants to siphon off its profit, it may sell at a lower price or purchase
at a higher price to / from its related parties. Hence the lenders should satisfy themselves
about the transactions carried out with a related party with regard to the genuineness. In other
words, whether these transactions are genuine business needs? If the answer is positive and
the pricing is proper i.e. at Arm’s Length basis, it is OK but if the answer is negative and
there are doubts on the pricing, the reasons and the ultimate objectives for such transactions
must be ascertained and critically examined.
Credit Monitoring Arrangement (CMA)

The indicative format of CMA is given in Annexure-I.
In our Bank, we are using the CMA format for analyzing of financial statements. There were
6 forms in the CMA format. Later on, in 1997, when the Projected Balance Sheet Method or
Assessed Bank Finance Method of Working Capital Finance were introduced by the Reserve
Bank of India (RBI), form-V, which was used to calculate Maximum Permissible Bank
Finance (MPBF) under Tandon Committee norms, made optional / discontinued. Thus form-
VI became the form-V. Though some Banks are still using 6 forms CMA format but in our
Bank, the CMA format contains 5 forms viz,
i. Form-I Details of borrower and credit facilities (existing & proposed)
along with the details of Associate / Subsidiary concern
ii. Form-II Operating Statement
iii. Form-III Analysis of Balance Sheet (Liabilities and Assets)
iv. Form-IV Comparative statement of Current Assets & Current Liabilities
v. Form-V Fund Flow Statement
The CMA is being prepared for 4 years data i.e. last two years actual audited data, current
year estimates and projections for the next year. Generally, we are using excel sheets for
preparation of CMA. For preparation of CMA, the various items of the financial statements
are regrouped / rearranged in such a manner, which can provide the desired information /
ratios / results to the lender according to its requirement. The various steps involved in
preparation of CMA are as under,
Form-I, Details of borrower and credit facilities (existing & proposed) along with the details
of Associate / subsidiary concern is to be submitted by the unit.
Form-II, Operating Statement is being filled / prepared on the basis of Profit & Loss
account. In other words, the Profit and Loss account is to be converted into Operating
Statement as lenders’ focus is to find out the profitability from the operations i.e. the key
activity of the unit and also to know about the cost of production / cost of sales. Hence, the
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items not pertaining to operating activity e.g. interest income from the investment made (if it
is not an investment Company), income / loss from sale of fixed assets etc. are to be
segregated and should not be reckoned as operating income. Each and every item of Profit
and Loss account is to be analysed independently as well as with correlation with other items.
Any extra ordinary change during the relevant financial year over the previous year should be
examined in depth to ascertain the reasons and resultant consequences thereof. The purpose
of this analysis is to find out the trends of the business, future prospects, various ratios etc.
Sales: Sales / turnover is the most important and first item in the Profit and Loss Account.
The entire analysis of financial statements and assessment of estimates / projection moves
around sales figure. While analysing sales, following factors should be kept in mind,
i.Reasons for lower / excess achievement
ii.Changes in business model / market scenario
iii.Composition of sales from manufacturing and trading
iv.Analysis in terms of quantity
v.Break up between core and non-core activity
vi.Trends over 3-4 years
vii.Sale from scrap, goods sent for processing shown as sale
The above list is only illustrative and exhaustive. Detailed and deeper analysis of sales is to
be carried out wherever there is any abnormal / exceptional changes are observed in the trend.
Raw Material Consumption: Cost of Raw material consumption is one of the major
components in the cost of production. The relation of cost of raw material consumption is to
be checked with the cost of production as there is a direct relation between the two. Any
drastic change in percentage terms should be analyzed minutely and the reasons for the
change is to be ascertained. Practically, it is very difficult to reduce the cost of raw material
consumption in manufacturing unit unless the steps like, changes in technology, changes in
product mix, change in the use of imported raw material instead of indigenous and other cost
cutting measures etc. are taken by the unit to reduce the cost.
Depreciation and useful life: As per Companies Act 2013 (Schedule-II Para-1), an asset can
be used over a number of years for the benefit of the business and depreciation is the
systematic allocation of the depreciable amount of an asset over its useful life. The
depreciable amount of an asset is the cost of an asset or other amount substituted for cost less
its residual value. In simple terms, we can say that depreciation is the amount by which the
value of an asset declined because of its use and wear & tear over a certain period. The useful
life of an asset is the period over which an asset is expected to be available for use by an
entity or the number of production or similar units expected to be obtained from the asset by
the entity. The useful life of a depreciable asset should be estimated after considering the
expected physical wear and tear, obsolescence and legal or other limits on the use of the
asset.
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As per Accounting Standards, depreciation is a measure of the wearing out, consumption or
other loss of value of a depreciable asset arising from use, obsolescence through technology
and market changes. Depreciation is allocated so as to charge a fair proportion of the
depreciable amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortization of assets whose useful life is predetermined.
Assessment of depreciation and the amount to be charged in respect thereof in an accounting
period are usually based on the following three factors:
(i) historical cost or other amount substituted for the historical cost of the depreciable
asset when the asset has been revalued;
(ii) expected useful life of the depreciable asset; and
(iii) estimated residual value of the depreciable asset.
The laws governing the enterprise may provide the basis for computation of the depreciation.
The Companies Act, 2013 describes about the useful life of various assets. Where the
management’s estimate of the useful life of an asset of the enterprise is shorter than that
envisaged under the provisions of the relevant statute, the depreciation provision is
appropriately computed by applying a higher rate. If the management’s estimate of the useful
life of the asset is longer than that envisaged under the statute, depreciation rate lower than
that envisaged by the statute can be applied only in accordance with requirements of the
statute.
There are several methods of allocating depreciation over the useful life of the assets. The
most commonly used methods are Straight Line Method (SLM) and the Written Down Value
(WDV) Method. The management of a business selects the most appropriate method(s) based
on various important factors e.g., type of asset, the nature of the use of such assets and
circumstances prevailing in the business etc. A combination of more than one method can
also be used. In respect of assets, which do not have substantial / material value, depreciation
is often allocated fully in the accounting period in which they are acquired.
Change in the method of applying Depreciation: The method of depreciation is applied
consistently to provide comparability of the results of the operations of the enterprise from
period to period. A change from one method of providing depreciation to another is made
only if the adoption of the new method is required by statute or for compliance with an
accounting standard or if it is considered that the change would result in a more appropriate
preparation or presentation of the financial statements of the enterprise. When such a change
in the method of depreciation is made, depreciation is recalculated in accordance with the
new method from the date of the asset coming into use. The shortfall or surplus arising from
retrospective re-computation of depreciation in accordance with the new method is adjusted
in the accounts in the year in which the method of depreciation is changed. Such a change is
treated as a change in accounting policy and its effect is quantified and disclosed.
Cost of Production: Cost of production is the sum total of all direct expenses related to
production process i.e. cost of raw material consumed, stores & spares, power & fuel
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expenses, direct labor, other manufacturing expenses like repair & maintenance, depreciation
and any other cost (which is a direct factory of production). Then, we have to make
adjustments for opening and closing stocks of Stock in Process (SIP) or Semi Finished
Goods. This adjustment of SIP stocks is required because expenses on opening SIP has
already been incurred in the year before the accounting year but these SIP are converted into
finished goods in the accounting year. Similarly, the expenses on closing SIP has been
incurred in the accounting year but the same are not yet converted into finished goods during
the accounting year. Hence to find out the actual cost of production for the units,
manufactured during the accounting year, this adjustment is required.
Cost of Sales or Goods Sold: Cost of sales is the total of cost of production and adjustments
for opening &closing stocks of Finished Goods (FG). This adjustment of FG stocks is
required because the stocks of opening FG have been sold in the accounting year and the
stocks of closing FG have not been sold during the accounting year. It is not always possible
to sell exact number of unit produced so the units produced may be higher or lesser than the
units sold. The ultimate purpose of preparing operating statement is to find out the
profitability from the operations. We have taken the revenue from operations (i.e. units sold
multiplied by the rate per unit) and as we know that the apples cannot be compared with
oranges, we have to find out the actual cost of units sold. Hence this adjustment is required.
Deferred Tax Liability (DTL) and Deferred Tax Assets (DTA): Statement of Profit &
Loss contains number of items, one of them being taxes on income. The management
accounts for various items of revenue and expenses in the profit and loss statement and the
profit before tax is net off revenue and expenses. However, sometimes the Income Tax
authorities differ from the management as far as considering certain items as revenue or
expense for the relevant period. Under the circumstances the profit arrived at by the
management differs from the profit arrived at by the tax authorities. This results in taxable
income being different from the accounting income. Consequently the taxes paid in an
accounting period to the Income Tax authorities differ from the taxes provided on the
accounting income.
The issue is how to account for this difference. This difference is accounted for in the books
by way of DTL or DTA. Until the notification of the Accounting Standard (AS)-22, every
enterprise was forced to keep two sets of financial statements. One set for the income tax
authorities and the other set for information for Management, Bankers, shareholders and
other stakeholders. However with the implementation of AS-22, this problem has been
resolved and now the differential tax is accounted for by way of DTL or DTA.
The DTL or DTA can be created only when there is timing difference for payment of taxes, if
it is permanent difference then it has to be booked as an expense in the Profit & Loss account
for the year. The definition of the timing difference as per AS-22 is “Timing differences are
the differences between taxable income and accounting income for a period that originate in
one period and are capable of reversal in one or more subsequent periods.” The definition of
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the permanent difference as per AS-22 is “Permanent differences are the differences between
taxable income and accounting income for a period that originate in one period and do not
reverse subsequently.” For example, if for the purpose of computing taxable income, the tax
laws do not allow or allow only a part of an item of expenditure as business expense, the
disallowed amount would result in a permanent difference.
Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws,
DTAs should be recognised only to the extent that there is virtual certainty supported by
convincing evidences that sufficient future taxable income will be available against which
such DTAs can be realised. In other words, DTAs should be recognised and carried forward
only to the extent that there is a reasonable certainty that sufficient future taxable income will
be available against which such deferred tax assets can be realised.
R e m e m b e r
When, tax expenses as per accounting are greater than
the tax expenses as per income tax laws, DTL arise.
When, tax expenses as per accounting are less than the
tax expenses as per income tax laws, DTA arise.
Treatment of Deferred Tax Liability (DTL) and Deferred Tax Assets (DTA) in our
analysis: Deferred Tax Liabilities/Assets are shown under non-current liabilities/assets in the
annual financial statements. All the DTLs are not necessarily be non-current in nature. We
should apply the logic given under Schedule-III of the Companies Act 2013. The portion of
DTLs that are likely to be adjusted next year must be classified as current liabilities and rest
as non-current liability. DTA is created on account of advance payment of taxes with the
assumption that there will be sufficient profits in future (with certainty), against which it will
be adjusted, hence it should be treated as Intangible Assets as there is only a claim and no
tangible assets is being created. As per Bank’s extant instructions, DTL is to be treated as
liability (current or term, as the case may be) and not to be treated as part of Net Worth.
Similarly, DTA is to be treated as Intangible Assets and to be deducted from Net Worth while
calculated Tangible Net Worth.
Form-III, Analysis of Liabilities and Assets: Lenders want to check the liquidity and
solvency position of the entity. Lenders have to analysis/study each and every item of the
Balance Sheet to get the insight of it. The various items of the Balance Sheet should be
regrouped / reclassified / rearranged for classification under various heads.The liabilities
should be classified into 3 parts i.e. (i) current liabilities (ii) term liabilities and (iii) net
worth. Similarly, the assets should be classified into 4 parts i.e. (i) current assets (ii)fixed
assets (iii)non-current assets and (iv) Intangible assets.
Current Liabilities: As per Companies Act 2013, the Current Liabilities are defined as,“ A
liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the Company’s normal operating cycle;
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(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the Company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date. Terms of a liability that
could, at the option of the counterparty, result in its settlement by the issue of equity
instruments do not affect its classification.”
All other liabilities shall be classified as non-current.
Examples of Current Liabilities: Short term borrowings from Banks, Public
Deposits (maturing within next 1 year), Share Application Money, Advance /
Deposits from Dealers, Trade Payables, Installments of Term Loans etc. (becoming
due within next 1 year), Statutory Liabilities, Expenses Payables, Provisions etc.
Term Liabilities: Term liabilities are the liabilities, which are payable / become due for
payment after one year from the report date i.e. the date of financial statement.
Examples of Term Liabilities: Term Loans, Unsecured Loans or loans from friends
& relatives, Public Deposits (maturing after 1 year), Debentures, Bonds, Deferred
Tax Liabilities etc. As per our Bank’s extant instructions, If the remaining maturity
of Preference shares is less than 12 years, then it should be classified as Term
Liabilities instead of part of Net Worth.
Net Worth: Net worth consists of Paid-up Capital and Reserves &Surpluses including share
premium. Capital reflects the amount brought in by the promoters whereas the reserves &
surplus represents the capital, which is earned by the unit. Reserves & Surplus are created out
of profits. The fundamental rule for classifying anything under the head Net Worth is that the
fund should belong to the promoters and these funds should remain in the business on
perpetual basis. If the promoters of the unit bring funds on long term basis in any form (may
be own or pertaining to friends & relatives) other than capital and submit an undertaking to
the effect that these funds will not be withdrawn during the currency of loan, it cannot be
considered as part of net worth because these funds are not brought in on perpetual basis and
can be withdrawn any time despite the undertaking. Hence, unsecured loans or loans from
friends & relatives cannot be considered as part of net worth. Revaluation reserve arises on
account of revaluation of fixed assets, and classified as part of reserves. It arises only on
account of book entry without any actual transaction. Hence it should not be considered as
part of Net Worth despite the fact that this is permanent reserve.
Tangible Net Worth: Tangible Net Worth (Adj. TNW) represents the tangible funds,
available in the business to support the operations. For calculating Tangible Net Worth
(TNW), we have to deduct the total Intangibles assets from the Net Worth. Intangibles assets
are those assets, which are being created from the funds deployed in the business but do not
have any physical existence like, Preliminary Expenses, Patents and Goodwill etc. Thus as a
lender, we want to calculate the actual tangible funds, available in the business to support the
operations, that is why we calculate TNW.
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Adjusted Tangible Net Worth: Adjusted Tangible Net Worth (Adj. TNW) is calculated to
find out the availability of the actual funds in the business to support the operations. If the
management has made investments or given loans / advances in/or to any other business
entity (associate / subsidiary / joint venture etc.) then these investments, loans & advances are
not actually available to support the main activity. Therefore, all the investments, loans &
advances to associate / subsidiaries / joint ventures should be deducted from the TNW to
arrive at Adj. TNW.
Treatment of Unsecured Loans (USLs) as part of Net Worth or Quasi Equity: Quasi
means apparently but not really or seemingly or being partly or almost. It is clear from the
meaning that any USL with undertaking is neither equity nor loan but falls in between. Hence
for classification purpose in CMA and for carrying out CRA, USLs should not be treated as
part of equity or net worth because if we consider these USLs as part of equity or net worth,
the solvency ratios and other balance sheet related ratios will get affected either adversely or
favorably. However, for justification purpose, USLs may be considered as quasi equity if
these USLs are supported with subordination letters.
Preference Share Capital: Generally, the Companies are raising capital in two types of
instruments i.e. Equity Share Capital and Preference Share Capital. Equity Share Capital does
not have any unique features and no preferential treatment can be given in case of dividend
distribution, liquidation etc. Preference Share Capital raised by the Companies offers certain
unique features. Holders of preference shares enjoy prudential rights in respect of payment of
dividend vis-à-vis the equity shareholders. They also have preferential rights in respect of
realisation of their dues in the event of liquidation of the Company. However, unlike loan
instruments, return on investments (i.e. dividend on preference shareholdings) are paid to the
preference shareholders only if there is a distributable profit earned by the Company during
the year and the Board of Directors decide to pay the same. Thus, preference shareholders
carry a preferential right for dividend but this does not make them invariably entitled to the
fixed percentage of dividend per annum. The position of a preference shareholder is distinct
from the debenture holder, who has a right for payment of interest on the debentures
irrespective of the fact whether the Company has earned profit or not. The preference share
capital is a source of long term funds for the Companies with unique features attached to it.
As per our Bank’s extant instructions, if the remaining maturity of the preference share
capital is more than 12 years, it has to be classified as part of Net Worth otherwise as part of
term liabilities. In case, the remaining maturity is within 12 months, it is to classified as
current liability.
Revaluation Reserve: In a Balance sheet, fixed assets are shown on a historical basis i.e.
after netting off the accumulated depreciation from the original cost of acquisition.
Sometimes, business enterprises revalue the fixed assets in order to bring the reporting value
of these assets at par with the current market values. Technically, revaluation means both
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upward and downward adjustment in the book value of the fixed assets. In the normal
business scenario, the depreciation takes care of the downward adjustment of the fixed assets
values. Therefore when we talk about the revaluation, we usually mean upward valuation of
fixed assets. Revaluation creates profit, which is directly shown in the liability side of balance
sheet under the head Net Worth in the form of revaluation reserve, which is balanced by
increase in the value of fixed assets on the asset side of the balance sheet. The revaluation
reserve is created by passing an entry in the books of account, thus represents book entry
only, hence no actual funds are infused by the owners or available for the normal operations
of the business enterprise. Therefore, while analysing the financial statements, the amount of
revaluation reserve should not be considered at all and to be knocked off from both the side
of the balance sheet. Otherwise, many ratios like TOL/TNW, TOL/Adjusted TNW, Return on
Assets, Return on Capital Employed and similarly other balance sheet related ratios get
affected. The Companies Act and Accounting Standards require compulsory disclosure about
the revaluation reserve, if any. The Companies Act further suggests that the revaluation, if
required, should be done for a group of assets instead of individual item (s) of fixed assets.
Share Premium: Share premium amount represents the amount, paid by the investors over
and above the face value of the share. This generally happens in case of reputed Companies,
having strong financial position and commands good market perception in the views of the
investors. The presence of share premium in the balance sheet of any entity indicates that the
entity is doing well and the investors are ready to pay the premium for buying the shares of
the entity. The share premium amount can be utilised for any purposes except for declaring
any dividend out of it. The entity does not have any obligation for repayment of this amount
in future and no dividend is declared on this amount. Share premium is long term funds on
perpetual basis. The share premium amount is treated as part of Net Worth of the entity.
Contingent Liabilities: An entity may carry contingent liabilities apart from fund based
liabilities in its financial statements. The difference between contingent liabilities and fund
based liabilities, lies in the probability of occurrence and measuring the respective liability in
quantitative terms. Fund based liabilities are those liabilities, which have already been
crystallized / fixed and due for payment. Whereas, in case of contingent liabilities, it is not
sure when it will be crystallized and in case it happens, it may not be possible to forecast the
amount of liability, which may occur in future. A very common example of contingent
liability is a Bank Guarantee, issued by the Bank on behalf of its client. If the beneficiary
decides to invoke the guarantee, the Bank has to pay the amount without any delay and to
recover the amount from the client. The other examples of contingent liabilities are disputed
tax liabilities, claims lodged against the entity but not acknowledged by the entity, guarantee
offered by the entity for the security of loans taken by its associates / subsidiaries etc. It is
prudent that necessary provisions have to be made by the entity in the financial statements,
wherever the actual probability of occurrence is high. The probability of crystallization and
the amount of liability, which may occur in future, should be ascertained and to be taken into
consideration while, analyzing the financial statements.
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Current Assets: As per Companies Act 2013, the Current Assets are defined as,“An asset
shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the
Company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.”
All other assets shall be classified as non-current.
Examples of Current Assets: Cash &Bank balances, Trade Receivables (Other than
Deferred Trade Receivables), Raw Materials, Stores, Spares, Consumables, Stock in
Process, Finished Goods, Advance for purchase of Raw Material, Advance Payment of
Tax, prepaid expenses etc.
The operating cycle means the average time taken by an enterprise from procurement of
goods to realizing the proceeds to enable it to deploy the funds for starting another cycle. In
other words, the operating cycle commences when cash is initially injected into the system.
The system completes one cycle when cash is realized from the sale proceeds of finished
goods. The operating cycle is measured in terms of days / months. As per Schedule-III to the
Companies Act 2013, Operating Cycle is defined as “An operating cycle is the time between
the acquisition of assets for processing and their realization in cash and cash equivalents.
Where the normal operating cycle cannot be identified, it is assumed to have duration of 12
months”.
As per Bank’s extant instructions, if the trade receivables are more than 6 months old from
the date of invoice, it is treated as deferred trade receivables (unless otherwise specifically
approved in the sanctioned proposal) contrary to the provisions of Companies Act and to be
classified as Non-current Assets. There may be some cases where, Bank has allowed cover
period (the average period of realization) of more than 6 months.It happens generally in case
of receivables pertaining to the Government Departments. In such cases these may be
considered as current assets and the fact should be furnished in the proposal. Similarly if the
inventories are converted into slow moving/old/obsolete inventories and seems to be
unusable, are not considered as current assets (unless otherwise specifically approved in the
sanctioned proposal) and to be classified as Non-current Assets.
Fixed Assets: Fixed assets are those assets, which are of long term nature and can be used
during a period of more than one year. These assets generally supports the operating activities
and very well required for day to day functioning of the unit. The examples of fixed assets
are, land & building, plant & machineries, vehicles, furniture & fixtures etc. However,
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revaluation reserve arises on account of revaluation of fixed assets should not be considered
as part of fixed assets.
Gross Block and Net Block: Gross Block is the total of original value i.e. the total cost of
acquisition of fixed assets viz. Land & Building, Plant & machineries, Furniture & Fixtures,
Vehicles etc. Net Block is the total of fixed assets value after deducting the accumulated
depreciation (i.e. the total of depreciation applied from the date of acquisition of asset till the
closure of financial year, for which the financial statement are prepared) from the total value
of gross block.
Capital Work in Progress (CWIP): Capital Work in Progress represents the expenses
incurred for acquiring fixed assets and is under construction, till such period these assets are
ready to be used for commercial production. These expenses cannot be considered as part of
fixed assets under Gross Block because the moment, we consider anything under Gross
Block, it attracts depreciation and as per law, the depreciation is applicable from the date, the
asset put to use. Therefore, the expenses are classified as a separate item in the financial
statements as ‘Capital Work in Progress’. From the lenders’ perspective, we should treat
these expenses as part of fixed assets separately on the premise that the same will certainly go
to the fixed assets on completion. The CWIP is a part of assets side of the Balance Sheet and
shown below Gross Block. The presentation of these expenses in the CMA data will be as
under,
Gross Block
Add Capital Work in Progress
Less Accumulated Depreciation
Net Block
Non-Current Assets: Non-current Assets are those assets, which are not directly supporting
the operating activities generally but required for the operations. The examples of non-current
assets are security deposits, investment in associate/subsidiary concerns, long term
investments with a lock in period, deferred receivables / slow moving / old / obsolete
inventories (as discussed above).
Intangible Assets: Intangible assets are those assets which are invisible / cannot be touched
but having monetary value therefore considered as an asset. For classifying anything under
Intangible Assets, it should satisfy the following criteria,
(i) it is identifiable
(ii) it must be a non-monetary asset without physical substance
(iii) control of the assets with the unit
(iv) future economic benefits are expected to flow from such asset
Unless the above criteria are fulfilled, an asset cannot be recognised as intangible asset. The
examples of intangible assets are, Preliminary Goodwill, Patent, Licenses, Research &
Development Expenses, Licenses, Mining Rights, Brands, Trademarks, Deferred Tax Assets,
etc. Please refer Accounting Standard (AS)-26 for detailed information.
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Form-IV, Comparative statement of Current Assets (CA) & Current Liabilities (CL)contains
the data for movement of CA and CL and also indicates / calculates the holding level for
various items of CA and CL. The formulas for calculating holding level will be discussed in
other chapters.
Form-V, Fund Flow Statement is not an integral part of financial statements. The lenders will
have to prepare this statement on their own. The Fund flow Statement is prepared to check
the movement of long term funds between two Balance Sheet dates and the availability of
Long Term Surplus / Deficit, which must be equal to the difference in Net Working Capital
(NWC) during two Balance Sheet dates.
Liabilities are the sources for the business and assets represent the uses of funds for the
business. The funds raised on short term basis i.e. current liabilities are of short term nature
whereas the funds raised on long terms basis i.e. term liabilities and net worth are of long
term nature. Similarly, the funds deployed in the current assets are considered as short term
uses of funds and the funds deployed in fixed assets, non-current assets and intangibles are
considered as long term uses. While preparing the fund flow statement, the movement of long
term sources and uses is to be calculated. The purpose of this exercise is to know that whether
the unit is able to generate sufficient long term funds to meet out its long term requirement or
not. If not then from where the funds have been arranged to meet out its long term
requirement.
If the Long Term Sources is more than the Long Term uses, there will be Long Term Surplus
and if the Long Term Sources is Less than the Long Term uses, there will be Long Term
Deficit.
SNAPSHOPT OF A BALANCE SHEET (TRADITIONAL FORM)
LIABILITIES (SOURCES) ASSETS (USES)
SHORT
Current Liabilities SHORT
TERM Current Assets
TERM
This portion represents NWC
Term Liabilities LONG Fixed Assets

LONG
TERM
TERM
Net Worth Non-Current Assets
Intangibles Assets
TOTAL LIABILITES TOTAL ASSETS
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Net working Capital (NWC) means the difference between current assets and current
liabilities, in other words, the long term funds available to support short term uses. More the
long term funds available to support short term uses, more the unit will be comfortable in
honoring its short term sources. As we have already discussed that the current liabilities are
the short term sources and current assets are the short term uses, hence the difference between
Long Term Sources and Long Term Uses must be equal to difference between short term
uses and short term sources. As the fund flow statement is prepared for the movement of
figures between two balance sheet dates, hence only the difference between two balance sheet
date figures should be taken into consideration while preparing fund flow statement.The Fund
Flow Statement can be prepared through following steps,
i. Capture all the long term sources from the Operating Statement e.g. Profit After Tax,
Depreciation, Amortizations, Non Cash Charges etc.
ii. Capture all the long term uses from the Operating Statement e.g. Net Loss, dividend
payments, withdrawals etc.
iii. Capture all the long term sources / uses from the Balance Sheet as under,
a. All the liabilities are sources of fund for the business. There are two types of
liabilities i.e. Current and Non-current. Current liabilities are short term sources of
fund whereas non-current liabilities are long term sources of fund. Any increase in
non-current liabilities (Term Liabilities & Net Worth excluding surplus in P&L
account) will be the long term source and any decrease in non-current liabilities
will be the long term uses.
b. Similarly, all the assets are uses of funds in the business. There are two types of
assets i.e. Current and Non-current. Current assets are short term uses of fund
whereas non-current assets are long term uses of fund. Any increase in Fixed
Assets (change in gross block is to be considered as we have already taken the
depreciation as long term source from the operating statement), non-current assets
and Intangibles will be the long term uses and any decrease in non-current assets
will be the long term sources.
c. While considering the movement in Intangible Assets, it is to be kept in mind that
any reduction on account of amortization is not to be considered as the same has
already been considered from the operating statement. Hence, movement on
account of acquisition/disposal of intangibles will be considered as long term
uses/source.
iv. Now sum up the total long term sources and uses and find out the difference. If the
long term sources are more than long term uses, it will result in long term surplus and
vice versa.
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SNAPSHOT FOR PREPARATION OF FUND FLOW STATEMENT
LONG TERM SOURCES LONG TERM USES

Increase in Net Worth Decrease in Net Worth
Increase in Term Liabilities Decrease in Term Liabilities
Decrease in Fixed Assets Increase in Fixed Assets
Decrease in Non-current Assets Increase in Non-current Assets
Decrease in Intangibles Increase in Intangibles
Total Long Term Sources (LTS) Total Long Term Uses (LTS)
LTS > LTU LT SURPLUS Must be equal to

change in the NWC
LTS < LTU LT DEFICIT between two Balance Sheet
It is expected that the long term funds generated should be sufficient to meet out the long
term requirements of the unit. Apart from meeting the requirement of long term nature, there
should be sufficient long term surplus left to meet out the net working capital requirement.
Sometimes, it is found from the analysis of fund flow statement that there is long term deficit.
Long term deficit should not be treated as a negative sign always, rather the reasons for
deficit are to be analyzed critically. The deficit can be acceptable if the short term funds
(surplus liquidity) have been utilized for long term purposes to meet out the genuine business
requirement and the resultant liquidity of the unit has not suffered adversely, meaning
thereof, the current ratio and the position of absolute net working capital is comfortable and
in acceptable zone. Normally, it happens with the units, having conservative approach and do
not want to be over leveraged. These types of unit first accumulate the funds and keep them
in the liquid form and whenever the requirement arises, they use the funds as per the needs of
the business. If, the long term deficit is found in any unit, the reasons for the same are to be
critically analyzed and commented upon otherwise it will result into the liquidity crunch for
the unit.
The reasons for long term deficit or reduction in the Net Working Capital could be as
follows,
i. Losses: Leading to reduction in reserves, which is forming part of Net Worth,
resulting decline in generation of long term funds resulting decline in NWC.
ii. Conversion: Some of the Current Asset becoming Non Current (Book Debts
stretched, stocks become obsolete, etc.), resulting increase in non-current
assets i.e. long term uses.
iii. Diversion: Short term funds are used for long term purposes but the funds
remains within the business, resulting increase in non-current assets or decline
in the gap between current assets i.e. short term uses and current liabilities i.e.
short term sources.
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iv. Siphoning-off: The funds are used for unrelated activities or the long term
funds are withdrawn/taken out from the business, resulting decline in the long
term sources.
In all the above scenarios, the Siphoning off of funds is to be considered as most dangerous
sign because it is very difficult to bring back the funds in the system, which has already been
withdrawn/taken out from the business. In all other scenarios, position can be improved over
the period by initiating corrective steps.
Ratio Analysis
After analyzing the financial statements and classification of items in the CMA data, next
step is to calculate various ratios. There are number of methods being used for analysis of
financial statements. One of the traditional methods is to study the change in percentage
terms on any items of the financial statements but this method has its own limitations. The
most commonly used method for analysing the financial statements is computation of various
ratios.
Let us discuss about the important ratios, method of calculation and interpretation.
Categ Ratio Formula Interpretation
ory
This ratio has a direct bearing on the
RM Consumption profitability of the unit. The increasing trend
Raw Material
/ of the ratio should be examined critically
consumed
and the reasons should be identified along
Cost of during the year /
with the steps taken by the unit to maintain
PROFI Production (%) cost of
the profitability. A slight increase or
TABI production
decrease in the ratio will have the multiplier
LITY effects on the profitability of the unit.
PAT + This represents the cash profit generated by
Depreciation + the unit on accrual basis as the depreciation
Cash Accruals
All non cash is a non cash charge to the Profit & Loss
expenses Account. Higher the level, better it is.
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This represents the actual margins generated
from the operations to serve the various
stakeholders. This is very useful to compare
similar type of units and their margin
PAT + Interest
generating capacities. The variables used in
expenses +
calculation could be different in two similar
EBIDTA Deprecation +
types of units because of variance in debts,
Income Taxes +
investment in fixed assets and the level of
Amortization
intangibles, resulting change in PBT and
accordingly tax expenses. For comparing the
profitability of two units, this is the most
important and reliable item.
This ratio gives the clue about the
PBT / Net sales
Self explanatory profitability of the unit. Higher level, better
(%)
profitability.
This ratio gives the clue about the
PAT / Net Sales
Self explanatory profitability of the unit. Higher level, better
(%)
profitability.
Operating profit means the profit before
Operating Profit / considering non-operating incomes &
Self explanatory expenses. This ratio gives the clue about the
Net Sale (%) profitability of the unit from the operations.
Higher the ratio, better profitability.
In the Return on Capital Employed ratio,
return is considered as EBIDTA and Capital
Employed means total liabilities of the unit.
The liabilities are the sources of funds and
the unit has to service all the investors, who
EBIDTA / Total
ROCE (%) have invested in the business.ROCE
Assets
represents the capacity of the unit to serve
the various stakeholders e.g. short term
lenders, term lenders, investors etc. Higher
the level, higher the capacity of the unit to
serve the stakeholders.
Operating Cash The ratio tells about the availability of cash
Operating Cash
Flow / Total to service the debt of the entity. Higher ratio
Flow / Total
Serviceable is better.
Serviceable Debt
Debt
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The repayment of current liabilities is
envisaged from the realization of current
assets. This ratio represents the liquidity
Current Assets /
position of the unit. Higher the ratio, more
Current Ratio Current
the liquidity is available with the unit to
Liabilities
LIQUI serve its current liabilities. The current ratio
DITY should be read along with the movement in
NWC.
NWC means, the absolute surplus of long
Current Assets -
term funds to support the short term
NWC Current
requirement of the unit. Higher the level,
Liabilities
higher the comfort.
This ratio represents the promoter’s stake in
the business in tangible form. Lower the
TOL/TNW Self explanatory
ratio, more the stake of the promoters, which
gives comfort to the lenders.
This ratio represents the promoter’s stake in
the business in real terms i.e. the actual
TOL / Adjusted
Self explanatory funds available for business. Lower the
SOLV TNW
ratio, more stake of the promoters, which
ENCY
gives absolute comfort to the lenders.
The importance of Debt / Equity Ratio
(DER) arises at the time of financing to a
project. DER denotes the Promoters’
Debt Equity Ratio Debt / Equity
contribution in the project. More the
contribution more the sustainability of the
project.
EBIDTA / This ratio shows the capacity of the unit to
Interest (Interest Self explanatory serve the interest on borrowings. Higher the
coverage Ratio) ratio, better it is.
Long term loans This ratio gives the indication for the ability
COVE plus of the unit to service its long term debt. This
RAGE installments due ratio represents the time period i.e. no. of
Long Term Debt / within next 12 years to be taken by the unit to repay its
EBIDTA months) / ( entire long term debt, which can be
EBIDTA less compared with the remaining maturity of the
Interest on long term debts.
working capital
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DSCR tells about the capacity of the unit to
Cash Accruals serve the repayment obligation on Term
+ Interest on borrowings i.e. principal and interest.
Gross Debt Term Loans / Cash accruals to the extent of utilized in the
Service Coverage Installments of Project as margin, if any, is to be factored
Ratio (GDSCR) Term Loans + while calculating DSCR, meaning thereof,
Interest on these should not be considered as available
Term Loans servicing debt.
The indicative benchmarks for various ratios are given in the Loan Policy Document of the
Bank, which should be referred as and when required.
Ratios are a statistical benchmark to measure the relationship between two items of financial
data. The ratio is the quotient obtained by dividing the value of one variable of the financial
statements by another variable. The selection of variable is the most important, it is therefore
extremely important that the ratios are calculated in respect of variables, which are directly
related, are interdependent and gives meaningful information. Proper interpretation of the
ratios is an important key for decision making. The movement of one ratio should preferably
be read with the movement of another related ratio/financial parameter.
Creative Accounting and Beyond Balance Sheet
There are many definitions of Creative Accounting but in a common man’s language, the
technique by which financial statements are made to reveal a better picture than what they
really are is called creative accounting or window dressing. The people involved in such type
of accounting practices are called Creative Accountants. These accountants do not break any
rule but only play with it in a favorable manner. They present the transaction in an
imaginative manner. In real terms they do not create any wealth. In most of the cases, what is
highlighted as current year’s performance was either achieved during last year or would
materialize during the next year or might not happen at all in the foreseeable future. The
notes on Accounting Policies contain the clues to the most of the creations. A credit officer,
having good knowledge of the accounting principles and relevant legal frame-work can
understand the Creative or Window Dressed financial statements. Clues may be started with
the change of Independent/Statutory Auditors other than any statutory requirement. There are
various areas, where scope of creative accounting cannot be obviated. Let us see some of the
examples of creativity in the financial statements,
i. Recording bogus/fictitious sales in the last month of the accounting year and
showing the same as sales returns in the beginning of next accounting year. Thus,
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not only the performance of the current year is overstated but the unit also tried to
create wealth by booking unearned profit. To check this type of adjustments, one
has to check the trend of sales and profitability..
ii. Inflated value of stock or inclusion of obsolete stock will inflate profit whereas
undervaluation of stocks will reduce the profits.
iii. Manipulation of profit can be done by changing the method of depreciation or
inconsistency in applying minimum prescribed rate for depreciation.
iv. Non-routing the entries of amortization expenses through Profit and Loss account,
instead it is directly adjusted from the reserve and surplus. It is being done as profits
are not sufficient to absorb the same.
v. Revenue expenditure such as advertisement, repairs & maintenance etc. are
capitalized instead of charging them to P&L account.
Cash Flow Statement and Analysis

Manual on Loans and Advances, Part-2, Chapter-20 deals with the analysis of cash flow
statement. Currently almost the entire emphasis in the appraisal/ assessment in a credit
proposal are oriented towards the Balance Sheet and the P&L account (for analyzing the
financial standing of the enterprise) and Cash Flow Statements (CFS) are seldom analysed
/commented upon. In order to have a holistic and more analytical approach to credit
assessment process, it is equally critical to evaluate the ability of an enterprise to generate
cash and cash equivalents along with the timing and certainty of their generation. It is in this
context that a need has been felt to reiterate the insights which can be derived from proper
analysis of CFS in our credit assessment process. While the salient features of CFS & its
utility in credit assessment/monitoring have been furnished below as a guidance note, the
operating officials need to pay attention to the following critical aspects in particular to make
a more meaningful analysis of financials:
❖ The operating officials have to make a clear distinction between declared profits and
cash available and suitably factor it in credit assessment.
❖ While estimating free cash available with any entity, it is necessary to look into cash
needed for its own current requirements and its margins for further growth before it
utilises cash for investments.
❖ Where cash inflows are locked up in large non-cash items, quality of WC & other
assets created with the cash flows need to be carefully looked into, not withstanding
profits reported. This aspect has to be kept in mind in follow up/ supervision of the
account as well.
❖ Investment and financing cash flows are to be analysed in the context of their overall
impact on the entity’s current and future operations.
❖ Accordingly, it is suggested that analysis and comments on Cash Flow statement
should form an integral part of any credit assessment proposals in all large/ mid size
credit proposals being put up before the Credit Committees.
Guidance Note: Cash Flow Statement (CFS) Use in Processing of Loan Proposals
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a) Cash Flow:
• Cash Flow is the movement of cash and cash equivalents, into or out of, a business
over a given period of time.
• Cash comprises cash on hand and demand deposits with the Banks.
• Cash equivalents are short term and highly liquid instruments readily convertible into
cash at any time, without any significant erosion in value.
b) Components of Cash Flow:
(i) Operating Cash Flows: These comprise of cash received or expended as a
result of Company’s internal business activities, and include cash earnings in business
activities (principal revenue generating activities) plus changes in working capital.
Examples of operating cash flow are cash receipts from sale of goods & services, cash
payments made to suppliers of goods & services, employees, statutory dues paid etc;
The net operating cash flow must be positive if the Company is to remain solvent,
at-least over the medium term.
(ii) Investment Cash Flows: These comprise of the cash received from the sale of
long-life assets, or cash spent on capital expenditure and investment in Associates/
Subsidiaries or other investments of a long term nature. Interest and dividend received
on investments also form part of this cash flow for a business entity not in financing
business.
(iii) Financing cash flows: These are cash received by way of equity and long
term loans raised or cash paid out towards repayment of long term loans, share
repurchases and dividend paid.
c) Use of Cash Flow Statement (CFS)
● CFS examines the relationship between profitability and net cash flow.
● CFS presents a fair idea on cash available with the entity to meet its various
current & incremental future needs and for investment needs.
● CFS checks the accuracy of past assessment of future cash flows in terms of the
amount, timing and certainty of future cash flows. Thus, it offers insights into
operational efficiency of the enterprise during the relevant period in comparison to
that of the preceding year;
● CFS evaluates the ‘quality’ of income generated as per accrual accounting.
● For any ad-hoc loan requirement or while opening a usance LC, cash flow
statement for the loan/LC tenor is an important tool for assessment/monitoring.
● CFS evaluates the risks associated with a financial product.
d) Cash Flow and Cash Accruals
(i) Cash flow is movement of cash and cash equivalents into and out of business,
Cash Accruals are net profit of the enterprise plus non cash items charged to
Profit & Loss Account not representing cash out flow such as depreciation,
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preliminary & pre-operative expenses written off, amortisation expenditure
written off etc;
(ii) Cash flow is an alternative measure of a business’s profits as profits & cash
accruals reported on accrual accounting basis may not in all cases represent an
entity’s current reality. Cash Accruals measures profit reported on accrual
basis and is used to find out repayment capacity and ability to service debt of
an entity.
Thus, Cash Flow is the measure of the entity’s ability to convert reported profits into cash
available to meet its current requirements as also for further investments. Being profitable
does not necessarily mean being liquid. A Company may experience severe cash shortage
even while profitable. Clarity on this will emerge after carrying out a detailed scrutiny of
CFS along with other financial statements, as brought out in a subsequent para.
e) Important points to be kept in view:

While taking a holistic view on the financial statements, the following points relating to
cash flows need a special mention, from a lender’s perspective:
• Operating Officials need to critically evaluate available cash with the promoter group
units by testing their cash flows while accepting source of promoters’ margins for
their other commitments/projects.
• In cases where Companies report profits but are experiencing cash flow problems
despite activity levels remaining the same, it calls for proper diagnosis.
• If net cash flow from operating activity is negative, it means that profits reported as
per accrual accounting system are not converting in to cash at the right pace for
meeting demands on the entity. Quality of working capital assets needs to be
validated in such cases.
• If net cash flow from operating activity is positive and the entity is still experiencing
liquidity strain, the appraisal should take note of diversion of cash for repayment of
loans or for investment beyond acceptable level. The proposal should compare
actuals with the estimates made earlier and initiate appropriate remedial measures.
• Projects with long gestation periods will have negative operating cash flows in the
initial few years. This may be accepted if the actual cash flows are in line with the
original project assumptions.
• If investment cash flow is positive, the reasons should be ascertained as to why the
Company is selling the investments, apart from ascertaining utilisation of the cash
received.
• If the investment cash flow is negative, the appraising official may scrutinize the
investments made and its acceptability having regard to its impact on future cash
flows.
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• If the financing activity cash flow is positive, the appraising official is expected to
look at the uses of such positive cash flow in the context of its impact on overall
future cash flows having regard to repayment terms.
• If the financing cash flow is negative, whether repayment of loans and withdrawal of
long term funds earlier mobilized by the promoters was in line with our last sanction
terms or not and its consequent impact on movement in NWC (and adequacy of
NWC) may be critically examined.
f) Enterprises having the mandatory AS-3 Disclosure

With the introduction of Accounting Standards by the Council of Chartered Accountants
of India (ICAI), Accounting Standard (AS)-3 which relates to Cash Flow Statements has
come into effect, w.e.f. 01.04.1997. Presently, AS 3 is mandatory to the following
categories:
• Enterprises whose equity or debt securities are listed or in the process of being listed
whether in India or outside India.
• All business enterprises with a turnover of over Rs.50 crore, as per last audited
financial statements.
• All enterprises having borrowings, including public deposits, in excess of Rs.10
crore at any time during the accounting period.
• Financial Institutions, Banks including co-operative Banks and Insurance
Companies, and
• Holding and subsidiary enterprises of any one of the above The operating
functionaries, depending on the size of the exposure of the Bank and the financial
position of the borrower, may ask for a Cash Flow Statement on the lines of AS-3,
even though the borrowal account may not fall in any of the categories, mandated by
ICAI under AS-3, in view of the aforesaid.
Annexure-I
FORM - I
Particulars of Existing / Proposed Limits from the Banking System
(Limits from all Banks and Financial Institutions as on date of application)
Name of the Unit:
Extent to which Limits

Name of Bank Balance
Sr Nature of Existing Limits were requeste
/ Financial O/s as on
. Facility Limits utilized during d
Institution
last FY
31-03- 20… -
Page 204 of 632

20…. 20….
Max. Min.
A. Working
Capital Limits
1 Fund based Cash Credit
Letter of
2 Credit
Non-fund based
Bank
Guarantee
B. Term Loans Term Loan
Total
Information about Associate Companies
(Companies / Firms / Concerns in which Directors / Partners / Proprietor and / or their

family members or the borrower Company is / are associated with the other Unit as
Directors / Partners / Proprietor or has / have furnished guarantees).
Name of the unit:

Limits from all Banks and financial
institutions
Name of the Name of Working Capital
Date of
Sr Associate Bank / Overdue
Balance Term
. Company & Financia Non- s, if any
Sheet Fund Loan &
Activity l fund
based DPG
Institutio based
n
1
- - - -
2
3
4
- - - -
5
OPERATING STATEMENT FORM II

Last two years actuals Current Next Year
Name of the unit: Year
AUD AUD EST PROJ
1 2 3 4
1 Gross Sales
(i) Domestic / Export
(ii) Other Operating Income
Gross Sales
2 Less : Excise Duty
3 Net Sales (1-2)
4 Rise (+) or fall (-) in net sales as compared
to PY (%)
5 Cost of Sales
Page 205 of 632

(i) Raw Material Consumption (including
stores & spares and other items used in the
process of manufacture)
(a) Imported
(b) Indigenous
(ii) Other Consumables
Imported
Indigenous
(iii) Power & Fuel
(iv) Direct Labor (Factory wages & salary)
v) Repairs & Maintenance
(v) Other Manufacturing expenses
(vi) Depreciation
(vii) SUB TOTAL (i to vi )
(viii) Add: Opening Stock in Process
(ix) Deduct: Closing Stock in Process
(x) COST OF PRODUCTION
(xi) Add: Opening Stock of Finished Goods
(xii) Less : Closing Stock of Finished Goods
(xiii) COST OF SALES
6 Selling General & Adm. Expenses
7 SUB TOTAL (5+6)
8 Operating Profit Before Interest (3-7)
9 Interest
10 Operating Profit After Interest
11(i) Add : Other Non Operating Income
.
Sub-total Non operating Income
(ii) Deduct: Other Non Operating expenses
.
Sub-total Non operating expenses
Net of Non-Op. Income/Expenses
12 Profit / (Loss) Before Tax
13 Provision For Taxes
Current Tax
Deferred Tax
14 Net Profit / (Loss) After Tax
15 Dividend Paid including taxes on
Dividend*
16 Retained Profit
17 Retained Profit / Net Profit (%)
* in case of firms, drawings made by the proprietor / partners during the year
ANALYSIS OF BALANCE SHEET FORM - III

Name of the Unit: As per Balance Sheet as at 31.03….
LIABILITIES Last two years actuals Current Next Year
Year
AUD AUD EST PROJ
1 2 3 4
CURRENT LIABILITIES
1 Short-term borrowings from Banks
(including bills purchased / discounted)
(i) From applicant Bank
(ii) From other Banks
(iii) (of which BP & BD)
Bank Borrowings - Sub Total
2 Short term borrowing from others
Page 206 of 632

3 Sundry creditors (Trade)
4 Advance payments from customers/dep.
from dealer
5 Provision for taxation
6 Dividend payable
7 Other statutory liabilities (due within one
year)
8 Deposits/Installments of TLs / DPGs /
Debenture (due within 1year)
9 Other current liabilities & provisions (due
in 1 year) (Specify major items)
Other Current Liabilities(OCL) other
than Bank Borrowings Sub-total
10 Total Current Liabilities [total of 1 to 9
excl. item (1-iii)]
TERM LIABILITIES
11 Debentures (not maturing within 1 year)
12 Preference shares (redeemable after 1 year
and having maturity within less than 12
years)
13 Term loans (excl. installments payable
within 1 year)
14 Deferred Payment Credits (excl.
installments due within 1 year)
15 Term Deposits (repayable after 1 year)
16 Other term liabilities
17 TOTAL TERM LIABILITIES
18 Total Outside Liabilities (item 10 + 17)
NET WORTH
19 Ordinary share capital
20 General Reserve
21 Revaluation Reserve, if any
22 Other Reserves
23 Surplus(+) or deficit(-) in P&L account
24 NET WORTH (19+20+21+22+23)
25 TOTAL LIABILITIES (18+24)
ANALYSIS OF BALANCE SHEET FORM - III (Continued)

Name of the unit: As per Balance Sheet as at 31.03….
ASSETS Last two years actuals Current Year Next Year
AUD AUD EST PROJ
CURRENT ASSETS
26 Cash and Bank balances
27 Investments (other than long term investments)
(i) Fixed Deposits with Banks (LC, BG Margin
for working capital etc.)
(ii) Govt. & other Trustee Securities
28(i) Receivables other than deferred & export
(export including bills purchased and
discounted by Bank)
(ii) Export receivables (including bills purchased
& dis. By Bank)
Page 207 of 632

29 Installments of deferred receivables (due
within 1 year)
30 Inventory:
(i) Raw materials (including stores & other items
used in manufacture)
a Imported
b Indigenous
(ii) Stock-in-process
(iii) Finished goods
(iv) Other consumable spares
a Imported
b Indigenous
31 Advances to suppliers of raw materials
32 Advance payment of taxes
33 Other current assets
34 TOTAL CURRENT ASSETS (26 to 33)
FIXED ASSETS
35 Gross Block
Add: Capital Work-in-Progress
36 Less: Depreciation to date
37 NET BLOCK (35-36)
OTHER NON-CURRENT ASSETS
38 Investments / book debts / advance / deposits
which are not Current Assets
(i) Investments in associate / subsidiary
a Companies
b Others
(ii) Advances to suppliers of capital goods &
contractors
(iii) Deferred Receivables
(iv) Others
-Security deposit
-Any other Non-Current asset
39 Slow Moving / Old / Obsolete stocks
40 Other non-current assets
41 TOTAL OTHER NON-CURRENT
ASSETS
42 a. Intangible assets
b. Deferred Tax Assets [DTA]
43 TOTAL ASSETS (34+37+41+42)
44 TANGIBLE NET WORTH (24-42)
45 NET WORKING CAPITAL = (17+24) -
(37+41+42) or (34-10)
46 Current Ratio
47 TOL/TNW
48 TTL/TNW
FORM - IV
Comparative statement of Current assets & Current Liabilities
Name of the unit: Last two years actuals Current Year Next Year
AUD AUD EST PROJ
I. CURRENT ASSETS 1 2 3 4
1 Raw materials including stores & other
items used in the process of manufacturing
(a) Imported : Amount
: Month's consumption
(b) Indigenous : Amount
2 Other consumable spares, exc. those
included in (1) above
Page 208 of 632

(a) Imported : Amount
(b) Indigenous : Amount
3 Stock-in-process: Amount
:Month's cost of production
4 Finished goods : Amount
: Month's cost of Sales
5 Receivables other than export & deferred
receivables (Including Bill purchased &
discounted by Bank)
: Month's Domestic Sales( inc. deferred
payment sales)
6 Export receivables (inc. Bills purchased &
disc.)
: Month's export Sales
7 Advance to suppliers of RM / Stores etc.
8 Other current assets inc. Cash & Bank
balances receivables due within one year
(specify major items)
Cash & Bank balances
Investment except long-term investment
Others
9 TOTAL CURRENT ASSETS
II. CURRENT LIABILITIES
(Other than Bank borrowing for working
capital)
10 Creditors for purchase of raw materials,
stores, spares & consumable
Amount
Month's purchase
11 Advance from customers
12 Statutory liabilities & Prov. For Tax.
13 Other current liabilities
a) S T borrowing-others
b) Dividend payable
c) Installments of TL, DPG & public deposits
d) Other current liabilities & provisions
14 TOTAL CURRENT LIABILITES
FORM - V
FUND FLOW STATEMENT
Name of the unit: Last two years actuals Current Year Next Year
AUD AUD EST PROJ
1 SOURCES
a) Net profit after tax(+) Loss(-)
b) Depreciation
c) Increase in capital
d) Increase in term liabilities
e) Decrease in :
(i) Fixed assets
(ii) Other non-current assets
f) Others
g) TOTAL
Page 209 of 632

2 USES
a) Net loss
b) Decrease in term liabilities
c) Increase in:
(i) Fixed assets
(ii) Depreciation adjustment
(iii) Other non-current assets
d) Dividend payment
e) Others
f) TOTAL
3 Long term surplus / deficit
4 Increase/Decrease in current
assets as per details given
below)
5 Increase/Decrease in current
liabilities other than Bank
borrowings
6 Increase/Decrease in working
capital gap
7 Net surplus (+) / deficit(-)
8 Increase / Decrease in Bank
borrowings
INCREASE/DECREASE
IN NET SALES
*Break-up of (4)
(i) Increase/decrease in Raw
materials
(ii) Increase/decrease in Stock -
in - process
(iii) Increase/decrease in Finished
goods
(iv) Increase/decrease in
Receivables
(a) Domestic
(b) Export
(v) Increase/decrease in Stores &
spares
(vi) Increase/decrease in Other
current assets
C H E C K Y O U R L E A R N I N G
MCQ SAMPLE
Q.
Question Choice A Choice B Choice C Choice D
Sr.
1 Reasons for reduction Losses in Conversion Use of short Any of the
in Net Working business of current term funds above
Capital could be? assets into for long term
Page 210 of 632

non-current purposes
assets
2 The Raw Materials Months' Months' Cost Months' Cost Months'
holding level is Purchase of Production of Sales Consumption
compared in terms of?
3 The long term surplus Profitability
Excess Change in None of the
/ deficit in a funds of the unitMoney Net Working above
flow statement available at Capital
depicts? Management
disposal
4 A Company has forgot Earnings will Earnings are Earnings will Depreciation
to record the not be inflated be decreased is only an
depreciation in the its changes as book entry,
books. What could be the therefore will
the effects on the Depreciation not impact at
earnings of the is a non cash all on
Company? charge earnings
5 As on 31.03.2019, Rs. 264 lakh Rs. 314 lakh Rs. 307 lakh Rs. 200 lakh
Adjusted TNW was
Rs. 257 lakh, Deferred
Tax Assets
outstanding was Rs. 7
lakh, Investment in
associates was Rs. 50
lakh. Work out the Net
Worth of the unit?
Correct Answer
D D C B B
Question No.
1 2 3 4 5
Page 211 of 632

MCQs BASED ON CASE STUDY (SAMPLE)
The snapshot of the Audited Financials as on 31.03.19 of CPSME Pvt. Ltd., engaged in
trading of steels, is given below,
Profit & Loss Account

Rs. in crore
31.03.2019 31.03.2018
Revenue:
Revenue from Operations (Sales) 20.00 17.50
Other operating Income 0.60 0.50
Material Consumed 13.80 11.90
Other Mfg. Expenses 2.10 1.65
Interest Expenses 1.00 1.20
Depreciation 0.80 0.70
Selling, General & Adm. Exp. 2.00 1.75
Total Expenses 19.70 17.20
PBT 0.90 0.80
PAT 0.63 0.56
Balance Sheet
LIABILITIES 31.03.2019 31.03.2018

Share Capital 1.00 1.00
Reserves & Surplus 1.73 1.10
Term Loans 4.50 5.25
Deferred Tax Liabilities 0.30 0.30
Short Term Borrowings (CC account) 3.90 3.70
Trade Payables 3.30 1.85
Other Current Liabilities 0.62 0.30
TOTAL LIABILITIES 15.35 13.50
ASSETS
Fixed Assets Gross Block 8.00 7.00
Less Accumulated Dep. 2.45 1.65
Fixed Assets Net Block 5.55 5.35
Long Term Loans 1.50 1.00
Intangibles 0.15 0.15
Inventories 5.30 4.20
Trade Receivables 2.50 2.25
Cash and Bank Balances 0.15 0.10
Other Current Assets 0.20 0.45
TOTAL ASSETS 15.35 13.50
Long term loans were given to M/s ABC & Sons, a partnership firm, where Mr. Dinesh, the
director of CPSME Pvt. Ltd. is key partner.
Page 212 of 632

You are required to analyse the above and answer the following questions by selecting
the correct answer,
Q. Question Option-A Option-B Option-C Option-D

Sr.
1. The current ratio as Improvement Deterioration Improvement Deterioration
on 31.03.2019 is of 33 bps of 33 bps of 16 bps of 16 bps
improved /
deteriorated by….
bps.
2. What is Asset 2.56 1.30 1.34 1.32
Turnover Ratio for
FY 2018-19?
3. Calculate Long Deficit of Rs. Surplus of Rs. Deficit of Rs. Surplus of Rs.
Term Surplus / 82 lakh 82 lakh 19 lakh 19 lakh
Deficit during FY
2018-19.
4. For the FY 2018- Improved by Deteriorated Improved by Deteriorated
19, the Cash Rs. 20 Lakh by Rs. 20 Rs. 17 Lakh by Rs. 17 Lakh
Accruals are Lakh
improved (+) /
deteriorated (-) by
Rs. …....?
5. Is there any No Yes, Rs. 13 Yes, Rs. 63 Yes, Rs. 43
improvement in the Lakh Lakh Lakh
Adjusted TNW as
on 31.03.2019? If
yes by which
amount?
Correct Answer D B A C B
Question No. 1 2 3 4 5
***
Page 213 of 632

CHAPTER 6
OVERVIEW OF WORKING CAPITAL ASSESSMENT
WORKING CAPITAL FINANCE
Financial needs of modern business enterprise may be classified into two categories
(a) Fixed capital, and
(b) Working capital.
Overview of Working Capital Assessment
A. Meaning of Working capital

Working capital is the amount of funds necessary to cover the cost of operating the business
cycle of the entrepreneur. This refers to the investment of the business unit in short term
assets, cash, short term securities, account receivables and inventories. It is the level of fund
which a company must possess to finance its day to day operation.
Definition: Working Capital, in banking perspective, is defined as:

❖ Funds required for build up Current Assets generally for a period of one operating
cycle.
❖ Funds required for financing short term assets or Current Assets such as Cash, Debtors
and Inventories to enable business/industry to operate at the expected level.
❖ Funds required for meeting day-to-day operations like purchase of raw materials,
spares & stores, meeting manufacturing expenses like wages, power & fuel and
storage & selling expenses of finished goods etc. These expenses generally form part
of Working capital or that capital of fund which is required for keeping the wheels of
production going on.
❖ Thus working capital represents the total funds required for running the operating
cycle and finance manufacturing, production and sales. Therefore, it is called operating
Capital or Short term capital. Total funds required for the continuous operations of the
business on a going basis.
❖ Financed as Cash Credit, Overdraft, Short Term Working Capital Loan etc,
❖ Assessed for one year and renewed annually.
Basic Financial Concepts

1. Gross Working capital: In practice, the term Working Capital refers to the Total
Current Assets (TCA) of an enterprise. This sometimes is also called the Gross
Working Capital.
For a manufacturing enterprise, therefore, the Raw Material, Goods in process,
Finished Goods, Receivables, Cash and Other Current Assets, taken together constitute
the Working Capital.
Thus, the Gross Working Capital concept identifies Working capital with the Total
of Current Assets of a Business Enterprise engage in the manufacturing activities.
2. Net Working Capital: The Term Net Working capital mathematically refers to the
excess of Current Assets over Current Liabilities.
Page 214 of 632

In simple terms NWC is the difference between Current Assets and Current Liabilities.
NWC is also referred as Liquid Surplus or the margin.
The Net Working capital is a qualitative concept which indicates the liquidity position
of a firm and the extent to which working capital needs may be financed by permanent
sources of funds.
As a concept, however, NWC represents the portion of Current assets that has been
funded from the Long-Term Sources (such as Capital, reserves and Long Term
Borrowings).
NWC= Current Assets – Current Liabilities (Short Term Uses – Short Term
Sources)
NWC= Long Term Sources (LTS) - Long Term Uses (LTU)
(LTS represents the Long-Term Liabilities and LTU represents Long
Term Assets
= Capital+ Reserves+ Long Term Borrowings– (FA+ NCA+ Intangibles &
Fictitious Assets)
Balance Sheet Perspective

SOURCES USES
L I A B I L I T I E S A S S E T S
Current Liabilities
Current Assets
NET WORKING CAPITAL
Term Liabilities
Fixed Assets
Net Worth Non-Current Assets
Intangibles Assets
Illustration: Rs in Lacs
LIABILITIES (SOURCES) ASSETS (USES)
Current Liabilities 100.00 Current Assets 130.00
Long Term Liabilities 50.00 Non Current Assets 30.00
Net Worth 50.00 Fixed Assets 40.00
Total Liabilities 200.00 Total Assets 200.00
GWC (Total Current Assets) 130.00
NWC ( Long Term Sources-Long Term Uses) 30.00

Long Term Sources = Long Term Liabilities+ Net Worth (100-70)
=100
Long Term Uses = Non Current Assets + Fixed Assets
= 70
NWC (Current Assets – Current Liabilities)
Calculation of Gross and Net Working capital
Short term Uses
Page 215 of 632

Particulars Amt Amt Remarks
Rs Rs
Current Assets Current Assets are
• Cash & Bank balances XX those assets which
• Raw Materials (RM) XX are convertible into
• Stores and Spares XX cash within a period
• Work-in-process (SIP) XX of one year and are
• Finished Goods (FG) XX those which are
• Receivables (Other than Deferred XX required to meet the
Receivables) XX day to day
XX operations of the
• Investments
XX business.
• Advance for purchase of Raw Materials,
XX
etc.
• Others like advance payment of
tax, etc.
Gross Working Capital ( = Total XX XX
Current Assets)
Short term Sources (Current liabilities)
Less Current Liabilities Current Liabilities

• Short term borrowings from banks & others XX are those claims of
• Unsecured Loans XX outsiders which
• Public Deposits maturing within 1 year XX are expected to
• Sundry Creditors (Trade) XX mature for
• Interest accrued XX payment within an
• Expenses Payable/Salary payable/Dividend XX accounting year.
Payable XX These are to be
XX paid within one
• Deposits from dealers/Advance Payment
XX year out of Current
from Customers
XX Assets or out of
• Installments of Term Loans, etc. (Due
XX the income of the
within 1 year)
XX business.
• Provision for Taxes
• Statutory Liabilities and other Current
Liabilities
Net Working capital XX XX
3. Working Capital Gap

Working Capital Gap (WCG) is the difference between Current Assets and Other
current Liabilities (Current Liabilities excluding Bank Borrowings) of a business unit.
The WCG represents the working capital required to be funded by Bank Borrowings
and net working capital.
Page 216 of 632

Working Capital Gap (WCG) = Total Current Assets – Sundry Creditors - OCL.
OCL (Other Current Liabilities) =Advance Payment from Dealers/Customers,
Interest and other Expenses Payable, Installment of Term loan due within one year,
Expenses Payable, Provisions for taxes
The concept of Working capital Gap is based on the fact that

(a) ‘Other Current Liabilities (including Trade Credit, Installment of Long Term
Liabilities payable during the next one year, etc) are the first source of financing
Current assets i.e, Gross Working Capital.
(b) The residual part of “Current Assets” is the Working capital gap” i.e, (CA-OCL)
which is to be financed by way of NWC and Bank Borrowing (Assessed Bank
Finance )
Thus in banking parlance it is said that Working Capital Gap has to be financed
from the Net Working Capital ( NWC) and Assessed Bank Finance ( ABF)
The central concept of Working Capital and the pattern of financing current assets are as
follows:
Gross Working Capital Required Total Current Assets (TCA)
(Less) OCL + Sundry Creditors
= Working Capital Gap (WCG)
This working Capital Gap has to be
funded by
(a) (Net Working Capital (NWC)
(b)The residual amount by Bank The residual amount by Bank
Borrowings Borrowings
Factors determining need for Working capital

The working capital requirements of a business unit depends upon a large number of
factors such as the nature and size of business, the character of their operations, the length
of the production cycle etc.
The following are importance factors generally influencing or help to determine the need
for working capital.
1. Size of Business:
2. Production Cycle:
3. Production Policy:
4. Other factors:
Commercial Banks have traditionally been assessing working capital credit
requirements on the basis of the various components of chargeable assets held by a unit
(i.e raw material, stocks in process, finished goods , receivables, other current assets viz
advance payments to suppliers etc).
Page 217 of 632

➢ Concept of Operating Cycle in working capital assessment
Assets which are part of the operating cycle or which get converted into cash within the
operating cycle or within one year are as:
1. Cash & Bank balance
2. Raw Material, Stock-in-Trade, Work in Progress (SIP), Stores & Spares, Finished goods.
3. Trade receivables (Book Debts, Sundry Debtors)
4. Advance Paid to suppliers of RM/Stock in Trade
5. Advances recoverable in cash or receivables
6. Balance with customs, Tax Authorities, port authorities, municipal authorities etc
7. Other current assets required in operations for manufacturing and trading process activity.
❖ The day to day business operations of a concern of any nature and, size involves many
successive steps and final working results would depend on the effective combination of all
steps.
The Steps in general may include the following:
➢ Acquisition and storage of raw material, other stores & spares required for manufacture of
any product.
➢ Actual production process when the raw material is subjected to different process to bring
it to final shape of finished goods.
➢ Storage of finished goods awaiting for sales.
➢ Sales of finished goods and realization of sale proceeds.
Operating Cycle begins with acquisition of raw materials and ends with collection of
receivables.
Stages in terms of time period (months/days)
1. Raw materials ( RM/RM Consumption)
2. Work in process ( WIP/Cost Of Production)
3. Finished goods ( FG/Cost of Sales)
4. Receivables ( Debtors/ Gross sales)
5. Advance paid to suppliers ( Advance paid/ Annual Purchase)
The total of the above will give the Operating Cycle in time period (months/days)
It will be the time period from purchase of raw materials, creation of stock in process,
conversion into finished goods, holding them till sale, converting them into sundry debtors
and realization of debtors and receipts of cash. This calculates the total time required to
complete the operating cycle.
This method of assessment follows the operating cycle concept of working capital.
Operating Cycle Concept of Working Capital

The operating cycle concept of working capital envisages measurement of the average time
taken by an enterprise in manufacturing the goods and selling them for cash so that the funds
can be deployed for starting another batch of production. In other words, the operating cycle
commences when cash is initially injected into the system for purchase of the basic raw
material components required for production. The system completes one cycle when cash is
realized out of the sale proceeds of finished goods.
Page 218 of 632

The process of manufacturing unit has to pass through the following stages to complete its
operating cycle.
(i) Conversion of cash into raw material – Manufacturing enterprises have to procure
raw material either by payment in cash or on credit. The Unit has to ensure a optimum of
stock of raw material on the basis of holding period for smooth operation of the
manufacturing activity. This refers to the period of Acquisition and storage of Raw Material
(ii) Conversion of raw material into stock in process and to finished goods. The
processing time largely depends on the nature and specification of the final product. In the
course of processing, the manufacturing unit may generate stock of semi finished goods in
different stages of completion. We may call this as a pipeline stock or SIP. This relates to the
period and process of Converting RM into Finished Goods.
(iii) Conversion of finished goods into receivables/debtors or cash. When the finished
goods finally roll out after processing, these have to be stored. The enterprises have to store
an optimum level of finished goods so as to have the availability to meet the demand and to
ensure supply as per the delivery schedule. This actually refers to the average period for
which the Finished Goods are stored and kept before sale.
iv) Realization of Receivables into Cash: In most of the cases, not all the supplies are paid
immediately and thus a portion of sale proceeds may remain locked for sometime in the form
of receivables/Debtors. The receivables are realized by the business enterprise on due date as
per the credit period allowed to the customers as per the market trends. This reflects the
average collection period of receivables.
Thus every rupee invested in current assets at the beginning of the cycle comes back to the
promoter with the profit element added, after a lapse of a specific period of time. This length
of time is popularly known as the Operating Cycle or the working capital cycle. The cycle
may be diagrammatically represented in the following manner.
OPERATING CYCLE
Trade
CASH
Credit
Profit
RAW MATERIAL
RECEIVABLES
FINISHED GOODS STOCKS-IN-PROCESS
Operating Cycle has been defined in the Companies Act, 2013, Schedule III as “ An
operating cycle is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. Where the normal operating cycle cannot be
identified, it is assumed to have duration of 12 months.
Page 219 of 632

Illustrations: Case Let No 1 Operating Cycle method
Let us assume the operating Cycle as under
OPERATING CYCLE
RM 15 DAYS
S-I-P 2 DAYS
FG 8 DAYS
REC. 15 DAYS
TOTAL 40 DAYS
[Amount in Rupees]
PARTICULARS EXISTING PROPOSED
GROSS SALES 13,000 20,000
RAW MATERIAL
8,000 13,000
CONSUMPTION
EXPENSES 3,000 4,000
DRAWINGS 1,000 1,000
TOTAL MONTHLY EXPENSES 12,000 18,000
WORKING CAPITAL REQUIRED =
TOTAL LENGTH OF OPERATING CYCLE X MONTHLY EXPENSES

30
W/C REQUIRED : 40 X 18,000 = 24,000

30
LESS MARGIN -SAY- 4,000
BANK BORROWING 20,000
How to Measure Operating Cycle: The operating cycle is measured in terms of days of
average inventory need to be held for every major category of working capital components.
Holding periods of Working capital components can be expressed in term of number of
days/months and can be computed in the following manner
Holding period ( in days) Formula for calculation ( Expressions )
1. Raw material Holding Stock of Raw Material X 365
Annual Consumption of Raw material
2 Stock in Process holding Stock in Process Level X 365
Cost Of Production
3 Finished goods Holding Finished Goods Level X 365
Cost Of Goods sold
4 Receivables Holding level Bill Receivables Level X 365
Annual Gross Sales
Page 220 of 632

5 Trade Creditors Holding period Trade Creditors Level X 365
Annual Purchases
6 Advance Paid to suppliers Advances Paid against future supplies X 365
Annual Purchases
7 Advance received against future Advances received against future supplies X 365
sales Annual Gross sales
It is pertinent to mention here that for assuming the estimated/projected level of holding
period of every component of working capital, we should rely on averages (as stage wise
monitoring is not possible) so as to arrive at a realistic situation, as far as possible, for
calculating working capital for future year.
Valuation Benchmark Parameters

Type of current assets Valuation Benchmark parameter
Raw Material & Consumables Annual Consumption of Raw Material &
Consumables
Semi Finished Goods ( SIP/WIP) Cost Of Production
Finished Goods Cost of sales (Cost of Goods Sold during an
accounting period.
Receivables/Advance received Annual Gross Sales
Creditors/Advance to suppliers Annual Purchases
Computation of Important Concepts on the basis of Analysis of Financial Statements

(CMA)
Annual Consumption of Raw Material = Annual Purchases of Raw Material + Opening

Stock of Raw Material- Closing Stock of Raw Material.
Cost of production = Consumption of Raw Material ( Imported & Indigenous) +
Consumables Spares & Stores+ Power & Fuel+ Direct Labor + Repairs & Maintenance +
Other manufacturing Expenses + Depreciation+ Opening stock of SIP- Closing Stock of SIP.
Cost of production is treated as the denominator in computing the Holding Period in respect of
stock in process, while assessing working capital requirements of a manufacturing unit.
Cost of Sales (Cost of Goods Sold during an accounting year ) = Cost of production +
Opening Stock of Finished Goods- Closing Stock of Finished Goods. This is taken as
denominator in the computation of holding level of the stock of Finished Goods in the course
of assessment of working capital requirement.
Gross Sales: Gross Sales include excise component (tax levied on manufacture of goods).
There are various factors that need to be considered while accepting estimated Holding
levels of the various components of Working capital. These are indicative factors only.
Raw Materials : Factors such as Average Consumption/Holding, Lead Time, Economic

Order Quantity, Supplier– Govt/Local/Foreign, Seasonality, Perishability, Credit available,
Cost of holding, Criticality, Transport cost, Storage capacity etc.
Page 221 of 632

Stock in Process: Important Factors are Process / Processing Time, Technology, Product
Range, Capacity mismatch / Bottlenecks, Production Cycle, No. of shifts worked, etc.
Finished Goods: The various factors are Firm orders or anticipated orders (Order pattern),
Minimum Dispatch Quantity, Buyer profile – Govt. / Local / Foreign, Supply terms,
Availability of Transport, Seasonality, Marketing arrangements - Direct/Dealers, Demand for
the products, Carrying costs and impact of estimated profitability, Estimated turnover,
Availability at short notice, Availability of proper storage arrangements etc.
Receivables : The various factors that need to be taken into account are Trade practices /
Industry practices, Marketing arrangements – Direct / Dealers, Customer profile – Old / New /
Govt. / Local / Foreign, Market conditions / Market positioning, Credit Policy of the Unit,
Bulk orders / sales, Seasonality (E.g. Raincoats, Woolen products), Price advantage,
Competition, schemes offered by competitors, Credit received from suppliers in the market,
resources etc.
Sundry Creditors: Critical factors are Reputation of the Unit in the market, Cost, Trade
practices / Market practices,; Market positioning, Bulk sales, Credit Policy, Liquidity.
Conceptual Framework in respect of Holding period and its relevance.

The aggregate of all these holding periods represents the length of the operating cycle. This
concept of the operating cycle is used in the PBS and Traditional Method of Assessment of
WC limit
This can be explained with an illustration:

Let us assume that the holding period of the main component of working capital of a
manufacturing unit is as under:
Operating cycle and Holding period in number of days

Stage I : Raw Materials (RM) : 60 days
Stage II : Work-in-process (WIP) : 20 days
Stage III : Finished Goods : 10 days
Stage IV : Receivables : 30 days
Total Operating Cycle : 120 days ( nearly four months)
This means that there are 3 cycles (365/120) of operations in a year, i.e, the length of
operating cycle of is 4 months. Consider Sales is Rs 3.00 Lacs p.a., Operating Expenses is Rs
2.40 Lacs p.a.
Then the Working Capital Requirement (i.e total build up of Current assets) will be
=Operating Expenses/ No of Cycles per annum =2,40,000/3 = Rs 80,000.00
This level of Total Current Assets has to be financed by Sundry Creditor,OCL, NWC and
ABF.
Page 222 of 632

Sometimes, a question is raised whether the period of credit allowed to an enterprise by the
suppliers of raw materials and consumables should be subtracted from the above operating
cycle. i.e. Whether the Holding period of Sundry Creditors should be deducted from the
overall aggregate of all the above Holding periods to work out a Net Operating Cycle.
The answer to this is in negative. The availability of trade credit does not reduce the total
operating cycle of an enterprise. Trade Credit is a source of finance which impacts the
working capital credit requirements from Bank but it does not impact the total time involved
which is the basis of the operating cycle theory.
Though there are various methods used for assessing the quantum of Working Capital
Requirement for a Business Enterprise, the following are commonly used.
Broadly there are two types

(i) Balance Sheet Based (Working capital Cycle)
Under Balance Sheet Method comes, Traditional Method, Turnover method & PBS
(ii) Cash Budget Based
Under Balance Sheet Based, different categories of Methods and Application

SEGMENT LIMITS METHOD
SSI Upto Rs 5 cr Traditional Method & Nayak Committee Method
Above Rs 5 cr Projected Balance Sheet Method
SBF All loans Traditional / Projected Annual Turnover Method
C&I Trade & Upto Rs 1 cr Traditional Method for Trade & Projected
Services Annual Turnover
Above Rs 1 cr Projected Balance Sheet Method &
& upto Rs 5 cr Projected Annual Turnover Method
C&I Below Rs 25 lacs Traditional Method
Industrial
Units
Rs 25 lacs & Projected Balance Sheet Method &
over but upto Rs Projected Annual Turnover Method
5 cr
Working Capital Limit Assessment under various SME Schemes (Small Loans up to 25
Lacs) .
Product SEGMENT METHOD
SME SSI Nayak Committee ( 20% of Projected Annual
Credit Turnover)
Card SBF/Trading Turnover Method ( 20% of last year’s Turnovers per
Unit /P&SE Balance Sheet / Credit Summation in the CC/CA
account, whichever is higher)
SME SSI/C&I(Mfg) Nayak Committee ( 20% of Projected Annual
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Smart Turnover)
Score C&I Trade 15% of Projected Annual Turnover ( PAT Method
for Trading unit)
SSBL SSI/SBF/ 10 times of average Monthly Balance in Current
Trade /C&I account in previous 12 months ( Min : Above Rs 10.00
lacks, Max : Less than Rs 25 lacks)
Various Methods for Assessment of Working capital

1. Traditional method of Assessment of Working Capital Requirement
As Bankers we provide working capital finance for holding an acceptable level of current
assets, viz. raw materials, stocks-in-process, finished goods and sundry debtors for achieving
a predetermined level of production and sales.
Quantification of these funds required to be blocked in each of these items of current assets at
any time will, therefore provide a measure of the working capital requirement (WCR) of an
entrepreneur.
Let us discuss each of the components of Estimated/Projected level of Current Assets which
constitutes the Working Capital Requirement viz, finance for stocks, bill etc.
(a)Raw Material: An Industrial unit has to necessarily stock a minimum quantum of

materials used in production to ensure uninterrupted production.
The quantity of Raw Material ( as a part of Current Assets) is to be computed as under:

Stock of R M = RM Holding period ( no of days ) X Annual Consumption of Raw
material /365
The concept of arriving to the Holding Period/ level has already been discussed above.
(b)Stock in Process: Barring a few exceptional types of industries, when the raw materials
get converted into finished products within a few hours, there is normally a time lag or delay
or period of processing only after which the raw materials get converted into finished product.
The period depends upon completing of the production process. Lesser time is required in the
simple process and more time is required in complicated process.
The quantity of Stock in Process ( as a part of Current assets) required is to be computed as

under:
Stock in Process = SIP Holding period (no of days ) X Cost of production /365
The concept of arriving to the Holding Period/ level has already been discussed above. As
stated earlier stocking required.
( C ) Finished Goods : In manufacturing unit the holding of FG is required for sales and for
meeting demands of the buyer. Nature of FG, types of buyers and storage capacity are major
determinants of computing estimated level of Finished goods as a part of Current Assets . In
respect of Trading Unit, there will be only Finished Goods instead of RM & SIP.
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The requirement of funds against finished goods is computed as under:
Finished Goods = Finished Goods Holding period (no of days) X Cost of Goods Sold
/365
(d)Sundry Debtors: The period from the time of sale to the receipt of funds will have to be
reckoned for the purpose of quantifying the funds blocked in Sundry Debtors. The working
capital requirement against Sundry Debtors is to be computed against the annual gross sales.
Sundry Debtors = Receivables Holding period (no of days) X Annual Gross sales /365
(e) Expenses: It is customary in assessing the working capital requirement of industries, to

provide for one month’s expenses also. A question might be raised as to why expenses should
be taken separately, whereas at every stage the funds required to be blocked had been taken
into account. This amount is provided merely as a cushion, to take care of temporary
bottlenecks and to enable the unit to meet expenses when they fall due. Normally one month
total expenses, direct and indirect, salaries etc. are taken into account. In cases where the
operating cycle is very short say one month or 2 months the provision for expenses can be
reduced. Similarly, where the operating cycle is very long, say 12 months or more, the
provision for expenses may have to be increased, to take care of contingencies. Computation
of Expenses can be done as under :
Expenses = Power & Fuel + Labor+ Other manufacturing expenses + Finance Cost+ SG& AE
+ Provision for tax /12. All the expense taken from Operating Statement meant for full year.
While computing the working capital requirements of a unit, it will be necessary to take into
account two other factors, one is the credit received on purchases. Trade Credit is a normal
practice in trading circles. The period of such credit will vary from place to place, material to
material and person to person.
Secondly, industries often receive advance against orders placed for their products. The
buyers, in certain cases, have to necessarily give advance to producers e.g. Custom-made
machinery. Such funds are used for the working capital of an industry.
Computation of Trade Creditors and Advance received against future sales computed as
under:
Sundry Creditors = Trade Creditors Level Holding period (no of days) X Annual Purchases
/365
Advance Received against future sales = Advance Received Level Holding period (no of
days) X Annual Gross sales /365
Let us take a look at the working capital funds required by a unit and the source from
which these are met.
Components of Working Capital Sources of Financing the Working
Requirement capital
1. Raw Materials and Stores & 1.Sundry Creditors/Trade Payable for
Spares Purchase
2. Stock in Process 2. Advance payment received from
3. Finished Goods ( Inventory) customers
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4. Sundry Debtors/Trade 3.Net Working capital/Liquid Surplus
Receivables (Margin)
5. Cash for Expenses 4. Bank Finance against Stocks &
Debtors
While granting working capital advances to a unit, it will be necessary to ensure that a
reasonable proportion of the working capital is met from the long-term sources viz. NWC.
Normally, the liquid surplus or net working capital should be at least 25% of the working
capital requirement (corresponding to the benchmark current ratio of 1.33), though this may
vary depending on the nature of industry/ trade and business conditions.
Nayak Committee or Turnover Method ( PAT Method for SSI/C&I ):
Nayak Committee Method is applicable for Assessment of Working Capital Requirement for
the Limit amount up to Rs 5 Crores for SSI /C& I (Mfg) units.
Under this method, working capital requirement is computed at a minimum 25% of output
value of which at least four-fifths should be provided by the Bank and the balance one fifth
representing the borrower’s contribution towards margin for the working capital. In other
words, the working capital requirement will be assessed at 25% of Projected Annual Turnover
(PAT), of which 5% should be borne by entrepreneur as margin and 20% would be allowed as
Bank Drawings.
Turnover method shall be used for sanction of fund-based Working Capital limit up to Rs. 5
crore and it should be computed at a minimum of 20% of the Projected Annual Turnover
while assessing fund based working capital limits in favor of SSI borrowers, MSME
borrowers and all industrial borrowers under C&I segment.
The unit should be required to bring in 5% of their annual turnover as margin money and the
Bank shall provide 20% of the turnover as working capital finance.
While accepting projected turnover a cap of 25% over its immediately preceding year may be
set except where production capacity has been substantially increased.
For limits upto Rs. 5 crores, (i.e. turnover upto Rs. 25 crore) this norm should be generally
followed. Only where the borrower is able to establish that his need is higher, should the
other method of assessment be resorted to. In other words, calculation of both methods need
not be mandatory in all cases merely to find out which one is higher
Nayak committee Guidelines correspond to working capital limits as per the Operating Cycle
method where the average production / processing cycle assumed to be taken of 3 months (i.e.
working capital would be turned over 4 times in a year).
FINANCING MSE - ASSESSMENT OF WORKING CAPITAL LIMIT FOR MSMES

ENHANCEMENT IN ELIGIBLE WORKING CAPITAL LIMITS UNDER TURNOVER
METHOD FOR ENTERPRISES THAT TRANSACT DIGITALLY.
a. To raise the credit limit for small industry from minimum 20% of projected
turnover to 25%.
b. To increase WC Limits from 20% of turnover to 30%, for enterprises that transact
digitally
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In view of the recent developments on account of demonetization and to encourage the
MSME Units to shift to digital mode or cashless transactions it has been decided the Working
capital Limits of MSME units ( availing Fund Based Working capital requirements up to Rs 5
Crores ) will be assesses at 31.25% of the Projected Annual Turnover and unit will be
sanctioned limit to a minimum 25% of the projected annual turnover ( amount equivalent to
minimum 6.25% will be brought in as margin) as also need based on the
production/processing cycle of the relative units Later revised that WC limits of such MSME
units (availing Fund Based Working Capital limits upto Rs. 5 crores) be assessed at
37.50% of the projected annual turnover (as per Nayak Committee - increased from
25% to 37.50%) and the unit be sanctioned a limit of a minimum 30% of the projected
annual turnover (after stipulating a margin of 7.50% of the turnover to be brought in by the
borrower) Such units should have a minimum 25% of the sales transactions through digital
modes (other than cash and paper based instruments such as cheques, DDs, Pos, etc).
Illustrations: Case let no 2
PROJECTED ANNUAL TURNOVER (PAT) METHOD (NAYAK COMMITTEE

METHOD)
25% OF PROJECTED ANNUAL TURNOVER TO BE FINANCED AS WORKING
CAPITAL REQUIREMENT
OF WHICH 80 % BY BANK BORROWING
20 % BY BORROWER’S MARGIN
i.e. 20% OF PAT TO BE FINANCED BY BANK BORROWING
& 5% OF PAT TO BE FINANCED BY BORROWER’S MARGIN
Rs in Lacs
A Projected Annual Turnover - 1200.00 A
B WC required 25% of A 300.00 B
C Min. Margin long term sources 20% of B 60.00 C
D Min. Bank Borrowing 80% of B 240.00 D
E Actual NWC available ( Liquid (Assume Rs 50.00 50.00 E
Surplus) Lacs )
F Margin stipulated Higher of C or E 60.00 F
G Limit permissible B–F 240.00
BANK BORROWING: NET WORKING CAPITAL = 4: 1
Important Guidelines and Clarifications:

❖ Assuming an average production/ processing cycle of 3 months (i.e., Working Capital
would be turned over four times in a year), the RBI has stipulated that the working
capital requirement is to be assessed at 25% of the projected annual turnover to be
shared between the borrower and the Bank viz., borrower contributing 5% of the
turnover as long term margin (Net Working Capital [NWC]) and the Bank providing
finance to the minimum extent of 20% of the PAT.
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❖ Further, since the Bank finance is only intended to support the genuine requirement of
a borrower, if the available NWC is more than 5 % of the turnover, the whole amount
of NWC should be reckoned for assessing the extent of Bank finance.
❖ The assessment of WC limits should be done both as per projected turnover method
and the Traditional Method, wherever applicable as given in the Table on “Methods
and Application”; and the higher of the two is to be sanctioned as credit limit.
❖ If the credit requirement based on production/processing cycle or Projected Balance
Sheet Method is higher than the one assessed under Nayak Committee Method, the
same (meaning that the limit arrived as per Traditional/PBS method) may be
sanctioned, as Nayak Committee guidelines stipulate bank finance at a minimum of
20% of the projected turnover. On the other hand, if the assessed credit requirement is
lower than the one assessed under Nayak Committee method, while the credit limit
can be sanctioned at 20% of the turnover, actual drawals may be allowed on the basis
of drawing power to be determined by the banks after excluding unpaid stocks.
❖ The Projected Turnover/output value may be reckoned as projected “Gross sales”
While accepting the projected turnover a cap of 25% over its immediately preceding
year may be set, except where production capacity has been substantially increased.
❖ Working Capital limits above Rs. 5 crore for C&I Industrial units shall continue to be
assessed under the projected balance sheet method.
Projected Annual Turnover Method for Business Enterprises in Trade & Services
Sector
The Trading enterprises have a higher assets turnover ratio compared to that in respect
of enterprises in the manufacturing sector
For Trade & Services (T & S) sector in C & I segment the assessment of credit limit be
based upon annual turnover, rather than on build up of inventory and receivables.
Thus, an across the board credit limit equal to 15% of projected annual turnover should
be offered to Business Enterprises in the T&S sector.
It would be available for utilization generally as a cash credit limit. However, where
needed an LC limit (as a sub-limit of total), may also be allowed.
Illustration Case Let no 3

Assessment of Limit, as per Turnover method for WC finance to T&S
Sl. Particulars Amount (Rs in
No Lacs)
1 Projected Gross Turnover 2400.00
2 Working Capital Requirement (15% of 1) 360.00
5 FBWC CC Limit Recommended 360.00
MAXIMUM PERMISSIBLE BANK FINANCE (TANDON COMMITTEE METHOD)

The Tandon Committee has prescribed three Alternative method of computation of Maximum
Permissible Bank Finance (MPBF). All the three methods recognized that banks would lend
only a portion of the working capital Gap (WCG), which is the value of the acceptable level
of current assets after netting off the other sources of funding WC requirements. We discuss
two methods.
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FIRST METHOD:
The difference between the acceptable level of Current Assets and the projected quantum of
Other Current Liabilities will be computed and designated as Working Capital Gap.
Net Working Capital (NWC) of the Company should be at least equal to 25% of Working
Capital Gap and the bank could finance upto 75% of the Working Capital Gap.
SECOND METHOD:
NWC should be at least equal to 25% of the total value of acceptable Current Assets. The
remaining 75% would be met by Current Liabilities, including Bank Finance.
The three methods of lending may be tabulated in the following manner:

(Rs. in lacs)
Assumption
Acceptable level of Total Current Assets (TCA) 800
Projected level of Current Liabilities other then Bank Finance 120
FIRST METHOD
Total Current Assets 800
Less: Other Current Liabilities 120
Working Capital Gap (WCG) 680
Less: Minimum NWC at 25% of WCG 170
Assessed Bank Finance (ABF) 510
SECOND METHOD
Total Current Assets (TCA) 800
Less: Other Current Liabilities (OCL) 120
Working Capital Gap (WCG) 680
Less: Minimum NWC @ 25% of TCA 200
Assessed Bank Finance (ABF) 480
Rigidities in the MPBF method (Tandon Committee)

1. The stipulation of Current ratio of 1.33 with minimum NWC of 25% of TCA by the
promoter.
2. Mandatorily compliance of Prescribed Holding norms Period stipulated by RBI.
As the Banker experienced difficulty in complying with MPBF prescriptions, more so,
because they had to compete with other banks for quality lending business, RBI in 1997, made
it optional to use MPBF method prescribed by Tandon committee . Our Bank retaining the
basic structure of MPBF method of financing current assets , came up with PBS method.
PROJECTED BALANCE SHEET METHOD
The assessment will be carried out in the PBS method on the lines of the existing CMA
assessment but with certain modifications. The modifications are aimed at ensuring that
the specific requirement of each borrower is fully taken care of The projected Bank
borrowing thus arrived at is termed as ‘Assessed Bank Finance’ (ABF). This method is
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applicable for borrowers who are engaged in manufacturing, services and trading
activities and who require fund based working capital (WC) finance of above Rs. 5
Crores.
The guidelines and assessment procedures under the PBS method are as under:
➢ In the Projected Balance Sheet (PBS) method, the borrower’s total business operations,
financial position, management capabilities etc. are analyzed in detail to assess the
Working capital finance required and to evaluate the overall risk of the exposure.
The following financial analysis is also to be carried out:
(a) Analysis of the borrower’s Profit and Loss account, Balance Sheet, Funds Flow etc.
for the past periods is done to examine the profitability, financial position, financial
management, etc. in the business.
(b) Detailed scrutiny and validation of the projected income and expense in the
business, and projected changes in the financial position (sources and uses of funds) are
carried out to examine if these are acceptable from the angle of liquidity, overall
gearing, efficiency of operations etc.
➢ There will not be a prescription like mandatory minimum current ratio or maximum
level of a current asset (inventory and receivables holding level norms) under PBS
method. Under the PBS method, assessment of WC requirement will be carried out in
respect of each borrower with proper examination of all parameters relevant to the
borrower and their acceptability. The assessment procedure is as follows:
- Collection of financial information from the borrower
- Classification of current assets(CA) / current liabilities (CL)
- Verification of projected levels of inventory / receivables / sundry creditors
- Evaluation of liquidity in the business operation
- Validation of bank finance sought
- Assessment of limits for purchase of bills drawn under Letters of Credit (LCs)
- Fixing of sub limits,
-
➢ For working capital assessment, the required financial data is to be obtained from the
borrower in the following forms (please refer to Specimen-ABF- 1 to 5):
Form-I : Particulars of existing / proposed limits from the banking system
Form-II : Operating statement
Form-III : Analysis of balance sheet
Form-IV : Comparative Statement of Current Assets (CA) and Current Liabilities (CL)
Form-V : Funds flow statement.
Information provided in the Forms II, III. IV, and V serves the detailed financial
analysis.
In Form I, in addition to information relating to working capital and term loan
borrowings (existing and proposed) information regarding borrowings from NBFCs,
borrowings from term leading institutions for WC purposes, Inter Corporate Deposits
taken, lease finance availed will also be collected.
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➢ Peak and Non Peak Limits Separate limits, wherever feasible and necessary, may
have to be fixed for the normal non-peak level as also for the peak level credit
requirements along with the expected period of utilization.. For the purpose, the past
trends in the utilization of the facilities should be gone into. The projections furnished
by the borrowers, obtained separately for peak and non-peak periods are to be
scrutinized along with industry characteristics.
➢ CLASSIFICATION OF CURRENT ASSETS AND CURRENT LIABILITIES
(Form Ill – Analysis of Balance Sheet):

From the data presented in a published balance sheet of a borrower, their CA and CL
are now analyzed as per the classification given in Form III of CMA. The
classification is done to arrive at the current ratio and net working capital of the
borrower to evaluate their liquidity. As per RBI guidelines, for the assessment of
eligible Bank finance, a different classification of CA and CL was adopted: Under
MPBF some of the items of CA / CL were excluded for computation of MPBF. As
this dual approach causes confusion, it is decided that for PBS method of assessment,
only a single classification of CA and CL would be done.
Broadly speaking, current liabilities would include items payable or expected to be

turned over within one year from the date of balance sheet and the term is used
principally to designate obligations whose liquidation is reasonably expected to
require the use of existing resources properly classified as current assets or the creation
of other current liabilities. The term current assets is used to designate cash and other
assets or resources commonly identified as those which are reasonably expected to be
realized in cash or sold or consumed or turned over during the operating cycle of the
business usually not exceeding one year .
An asset is classified as current asset when it satisfies any of the following

criteria:
(a) It is expected to be realized in or is intended for sale or consumption in, the
company’s normal operating cycle.
(b) It is held primarily for the purpose of being traded.
(c) It is expected to be realized within twelve months from the reporting date.
(d) It is cash or cash equivalents unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.
Assets not falling under the above criteria are classified as non- current asset.
A liability shall be classified as current when it satisfies any of the following

criteria.
(a) It is expected to be settled in the company’s normal operating cycle.
(b) It is held primarily for the purpose of being traded.
(c) It is due to be settled within twelve months after the reporting date.
(d) The company do not have any unconditional right to defer settlement of the
liability for at least twelve months after he reporting date . Terms of liability that
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could at the option of the counter party, results in its settlement by the issue of
equity instruments do not affect its classification.
• Current Liabilities would include estimated or accrued amounts which are anticipated
to cover expenditure within the year. Known obligations, the amount of which can be
determined only approximately, as for example, provisions, accrued bonus payment,
taxes etc., are also classified as current liabilities.
• In cases where specific provisions have not been made for these liabilities and will be
eventually paid out of general reserves, estimated amounts should be shown as current
liabilities.
• Dead Inventory i.e. slow moving or obsolete items should not be classified as Current
Assets. It should be classified as Non Current Assets
• Amounts representing inter-connected company transactions (related party

transactions) should be treated as current only after examining the nature of
transactions and merits of the case. For example, advance paid for suppliers for a
period more than the normal trade practice, in spite of any other considerations such as
regular and assured supply should not be considered as current.
• Bills negotiated under L/Cs: The facility for purchase of demand and usance bills
drawn under LCs will be computed outside the main assessment of WC finance.
Therefore, receivables in the form of sale bills (inland / export) drawn under LCs need
not to be included in CA in Form III. Correspondingly, bank borrowings in the form
of LC bill purchase limits is also not be included in the form of sale bills
(inland/export) drawn under LC need not be included in CA in Form III. Bank finance
through LC bills purchased is shown separately as contingent liability (item B iv)
under the ‘additional information’ in Form III of CMA (Analysis of Balance Sheet).
• Cash margin for LCs and Guarantees: Margins deposited for LCs and Guarantees
relating to working capital will be included in the CA. However, LC Margin for
Project LC/LC for Import of fixed assets must be classified as NCA.
• Investments: Fixed deposits with banks and trustee securities (including units of UTI)
are now classified as investments under CA. In addition, from now on temporary
investments of a borrower in SBIMF, and money market instruments like MMMF, CP,
CD etc. which are for the purpose of parking short term surplus will also be classified
as current assets. All other investments like ICDs, investments in shares and
debentures (including investments in subsidiaries and associates) will be classified as
noncurrent assets. Investments in shares and advances to the firms/companies, not
connected with the business of the borrowing firm should be excluded from current
assets.
• ICDs taken: This will be part of current liabilities - item 2 (short term borrowings
from others). It should also be shown separately as item ‘D’ under ‘additional
information’ in Form III.
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• Deposits from dealers selling agents etc.
These deposits may be treated as term liabilities irrespective of their tenure if such
deposits are accepted to be repayable only when the dealership/ agency is terminated.
The deposits which do not satisfy the above condition should continue to be classified
as Current liabilities.
Security deposits/ Tender deposits made by the unit be classified as non-current assets.
• Advance/ progress payments from customers

Where on account of different accounting procedure progress payments received are
shown on the liabilities side without deduction from work in progress, the progress
payments may be set off against work-in-process. Outstanding advance payments
received are to be reckoned as current liabilities or otherwise, depending upon whether
they are adjustable within a year, or later.
• Provision for taxation, Sales tax, Excise etc.

Netting of tax provision and advance tax paid may be effected for all the years
uniformly and, as such, for the current year also the advances tax paid can be set off
against the provision, if any made for that year Provision for disputed excise duty, for
example, should be classified as current liability, unless the amount is payable in
installments spread over a period exceeding one year as per the orders of competent
authority like the Excise Department or in terms of the directions of a competent court.
In such cases, if the installments payable after one year are classified as long-term
liability, no objection may be taken to such classification. Where the provision made
for disputed excise duty is invested separately say in fixed deposits with banks, such
provision may be set off against the relative investment.
Verification of levels of Inventory/ Receivables/ Sundry Creditors:
i) The projected levels of inventory and receivables should be examined in the

assessment exercise in relation to the following.
● Trend of past levels of the unit and inter-firm comparison of the levels
ii) The levels should also be examined with reference to the borrowers’ specific
operational strengths and weaknesses, their need to hold the current assets at the levels
projected, and their ability to absorb cost of carrying inventory/ receivables at the
levels proposed. However, the levels of inventory and receivables prescribed for the
industry will not in any manner be treated as ceiling levels to be imposed on strict
terms; these will merely serve as historic reference levels. For verification of the level
of sundry creditors, past trend and inter firm comparison will serve as the basis.
iii) Branches should discern and guard against financing excessive current assets.
iv) The current assets should further be scrutinized to identify instances of slow-
moving or accumulated old stocks as also long standing receivables, say outstanding
for more than six months. These cases should be discussed with the borrower and
unless fully justified such assets should be excluded from current assets for the
purpose of computation of assessed bank finance.
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➢ Evaluation of Liquidity :
(i) Under Tandon Committee Regime, In the assessment of WC finance, the projected
level of liquidity in a borrower’s business was accepted was as normal if the CR
projected was 1.33 or more; further, in a case where slippage of CR was planned, the
projected level is accepted only if various guidelines of RBI in this regard were
complied with. However, under PBS method, the CR of 1.33 is considered as a bench
mark level of liquidity instead of the minimum acceptable level. In cases where the
CR is projected at a level lower than the bench mark or a slippage in the CR is
proposed, it alone is not a reason for rejection of the loan proposal or for sanction of
the loan at a lower level. In each such case, the reasons for low CR or slippage should
be carefully examined and in deserving cases the CR as projected may be accepted.
For this, among others, the following aspects of the business should be examined to
see whether or not the projected CR is acceptable:
(a) The size of the operations, the nature of the WC cycle, and the overall financial
position of the borrower: Normally the liquidity to be maintained in large scale
operations involving longer and multistage WC cycles will be higher than the liquidity
required for smaller operations with shorter WC cycles.
(b) Term Loan Installments falling due for payment in the next 12 months: In some
cases the lower level CR may be due to large amount of term loan installments falling
due next year being classified as CL. In such cases the low CR need not be seen as a
problem, if the borrower’s cash accruals are adequate to service the installments due
next year.
(c) Export oriented units: Earlier certain exemptions were given for the minimum net
working capital / CR requirements for borrowers whose operations were
predominantly export oriented. The spirit of previous approach is continued to be
adopted and the projected low CR is accepted in such cases.
ii) For an existing borrower, where a lower CR is projected, there is a need to examine
further, the overall quality of management of liquidity in the business in the past,
before a final view is taken regarding the projected liquidity. For such examination a
number of aspects of management of liquidity in the borrower’s business should be
looked into. After such an examination a view should be taken as to whether or not
the liquidity management is of a good order and whether the projected CR is
acceptable.
An illustrative list of the various aspects of liquidity management in a borrower’s

business is given below:
a) Whether cheques drawn on the cash credit/ current accounts were referred due to
insufficiency of Drawing Power/ funds; if so, how frequently and for what
reasons this happened.
b) Extent of devolvement of bills drawn under LC s opened by the borrower.
c) Frequency and nature of irregularities in the accounts and how these were set right.
d) Payment record in respect of inward bills (like LSCs).
e) Running up of current liabilities, especially statutory dues (to be seen from
MSOD, FF Reports and Balance Sheet)
f) Signs of lengthening WC Cycle ( to be seen from stock statements)
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g) Resort to outside borrowings (to be seen from FF Reports and Balance Sheet)
h) Adverse changes in the terms of purchases (reduction in credit period, switch from
credit terms to COD, denial of credit, etc.)
i) Status of the term obligations (extent of over dues, reschedulement requests made).
j) Cost or time overrun in projects undertaken by the borrower: whether these had
occurred, and if so, how these are managed.
k) Market reports, if any, on the borrower’s payment record.
l) Any other transaction/financial information indicative of the liquidity status of the
borrower.
iii) In the cases where projected CR is found acceptable, WC finance as requested may
be sanctioned. In specific cases where warranted, such sanction can be with a
condition that the borrower should bring in additional long term funds to a specified
extent by a given future date. Where it is felt that the projected CR is not acceptable but
the borrower deserves assistance subject to certain conditions, suitable written
commitment should be obtained from the borrower. Alternatively, where necessary, a
lower amount may be sanctioned in these cases subject to revision of the business and
financial plans.
(iv) In line, under PBS method, the Bank’s perception will be built up regarding a
borrower’s ability to operate in future without any liquidity constraint, based on
financial information as well as quality of the financial management of the borrower.
➢ Validation of Bank Finance Sought

• Under Tandon Committee method based on the MPBF concept, the amount of WC
finance is arrived at as a residual source after netting off from the working capital gap,
the available NWC or the required minimum of NWC whichever is higher.
A different approach is adopted under the PBS method for validating the quantum of
WC finance sought by a borrower.
• Working capital finance will not be computed using any rigid formula. The projected
bank borrowing shown in form III (item 1 under current liabilities) which reflects the
finance sought by the borrower, will be validated with reference to the
✓ Operating cycle of the borrower,
✓ projected level of operations,
✓ Nature of projected build up of CA / CL, profitability, liquidity etc.
Where these parameters are acceptable, the projected bank borrowing will stand
validated for sanction. This amount will be termed as ‘Assessed Bank Finance’
(ABF).
• The assessment exercise should be carried out with due focus on the specific nature
and needs of each borrower. As it happens now, under PBS method also in certain
cases it may become necessary to revise the business / financial plan of the borrower,
if in the opinion of the Bank these require changes, e.g. planned levels of CA or CL
are not realistic, a higher level of NWC is necessary, etc.. In these cases, the operating
officials should discuss in detail these aspects with the borrower to facilitate revision
of the business plan and financial projections.
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• The following information relating to WC assessment and ABF will be presented
under the head ‘Working Capital Assessment and Assessed Bank Finance’ ( in lieu of
WC assessment and MPBF calculation) in the Credit Appraisal Format.
Illustration: Case Let no 4

Assessment of Working capital Limit as per PBS Method
(Amt Rs in Crores)
Year 2015-16 2016-17 2017-18 2018-19
Assessed Bank Finance AUD AUD. ESTD. PROJ.
Net Sales 32.05 48.50 56.00 62.00
Total Current Assets ( TCA) 16.70 22.53 22.72 24.55
Other Current Liabilities 7.47 11.45 10.34 10.97
(OCL)
Working Capital Gap (WCG) 9.23 11.08 12.38 13.58
Net Working Capital (NWC) 2.29 3.83 5.88 7.08
Assessed Bank Finance (ABF) 6.94 7.25 6.50 6.50
NWC/TCA (%) 13.71 17.00% 25.88% 28.84%
BF/TCA (%) 41.56 32.18 28.61 26.48
OCL/TCA (%) 44.73% 50.82% 45.51% 44.68%
OCA/TCA (%) 7.96% 6.21% 4.14% 3.87%
LC/SC (%) 14.58% 15.17% 14.35%
While assessing the Limit as per PBS method in the appraisal format as discussed
above, we have to Analyze and Verify the levels of Inventory/ Receivables/Sundry
Creditors of the projections with the past trend and also complete the process of
validation of Projected bank borrowing i. e, ABF by operating cycle, profitability,
liquidity, projected level of operations, nature of projected build up CA/CL with the
detail worksheet as under:
Inventory & Receivable levels: (Amount) (Days)

Amt in Rs Crores
2017-
Year 2015-16 2016-17 18 2018-19
Particulars of WCR AUD. AUD. EST. PROJ.
Raw Material- Imported- Amount 5.83 7.78 8.00 8.50
RM- Imported- Days 120 141 117 104
Raw Material- Domestic- Amount 1.94 2.13 2.25 2.50
RM- Domestic- Days 120 46 43 46
Stock in Process - Amount 0.00 0.00 0.00 0.00
SIP- Days 0.00 0.00 0.00 0.00
Finished Goods- Amount 0.44 0.45 0.53 0.60
FG- Days 6 4 4 4
Receive.- Exports- Amount -
Receiv.- Exports- Days -
Receiv.- Domestic- Amount 7.16 10.77 11.00 12.00
Receiv.- Domestic- Days 78 79 70 69
Page 236 of 632

Sundry Creditor r- Amount 5.99 10.29 9.89 10.45
Sundry Creditor . Cr- Days 92 101 82 77
OCA- Amount 1.33 1.40 0.94 0.95
The above Table illustrates the trends of the past levels and projections of the unit in
terms of levels of Inventory and receivables along with calculation of the Holding
period of all the components of the Working capital requirement (Raw material. SIP.
FG, Receivables). Thus it reflects the operating cycles of the borrowing unit and it
need to be validated fro ABF.
The Credit Analyst need to compute and analyze the operating cycle and the holding
level of the each item of the components of the working capital and should arrive to
the projections level keeping in view the past trends and the nature and the genuine
requirement of the unit with the market information and in discussion with the
borrower.
Efficiency Ratio
Year 2015-16 2016-17 2017-18 2018-19
Particular/ Important ratios AUD. AUD. EST. PROJ.
Net Sales/TTA (times) 1.31 1.55 1.89 2.01
PBT/TTA (%) 2.72 2.96 3.98 4.26
Op Cost/Sales (%) 97.73 97.98 97.79 97.79
ABF/TCA (%) 41.56 32.18 28.61 26.48
Inventory/Net Sales + 187.63 173.12 153.91 149.68
Recv./Gross Sales (days)
Interest / Cost of Sales (%) 4.24% 2.92% 2.09% 1.66%
ABF/Gross Sales (%) 20.77% 14.59% 11.35% 10.26%
The assessment exercise should be carried out with due focus on the above key ratios.
The ratios need to be examined and projections and past trends should be analyzed.
Margin: While assessing the Working Limit, margin for each item has to be
computed
Illustrations: Margins: (For each facility as applicable):-

Cash Credit: Existing Proposed
Raw Material : Domestic 25% 25%
Raw Material Imported 25% 25%
Stock In Process 30% 30%
Finished Goods 25% 25%
Receivables (Cover period 90 days) 40% 40%
Letter of Credit 15% 15%
Bank guarantee N.A. N.A.
Page 237 of 632

Once the level of Total Current Assets is assessed, the next step involves computation of
the margin requirements against the individual items of Current asset. The margin
percentage is usually a function of the probability of recovery of cash from the sale
proceeds of the individual items of current assets. For example, selling raw material and
finished goods at reasonable prices is possibly easy as against the selling of the stock of
semi finished goods. Stock in process may not fetch a good amount, as it may not be
possible to readily use the stocks. Thus while raw material and finished goods attract a
lower margin (say 25%), banks usually stipulate a higher margin against semi finished gods
(say 30%).
Margin requirement against receivables also tend to be on the higher side on account of two
reasons. First receivables are generated out of gross sales made by the unit, which includes
profit. Since Banks finance against cost, and not profit, a higher margin is stipulated to
avoid lending against profit. Secondly, if receivables are in the form of book debts, and not
documentary bills, recovery by selling book debts may become quite challenging. Banks
therefore stipulates higher level of promoters’ margin against book debts limits which may
go beyond 50% at times.
This stipulation of margin requirement against each individual item of current assets is to
be taken into account at the time of Computation of Drawing power (D.P) on the basis of
Stock Statement of the unit. The margin stipulated should come from NWC available.
• Fixing of sub-limits
Usually sub-limits for inventory and receivables within the overall fund-based WC credit
limits are fixed for operational convenience. In cases where large build-up of any item of
inventory or receivables is required and the reasons therefore are acceptable, sub-limits
should be fixed in a flexible manner. In the case of borrowers with credit rating of SB-1 to
SB- 5, if the borrower so desires, sub-limits need not be fixed. The fixing of sublimit
between CC (Stocks) and Book Debts provides important tools in post sanction process for
monitoring purpose. D.P against individual items of RM, SIP, Finished goods and Book
Debtors stocks should be restricted to the level as per the estimated/projected taken at the
time of appraisal for effective monitoring.
Important Guidelines for improving quality of Credit Proposals for Working capital
assessment
• Issues pertaining to validation of projections :
(i) Sales Growth, if it is not comparable with the past trend: valid reasons to be given for
projecting higher growth in sales, for e.g. if the annual growth for the last 2 to 3 years is
10% and projected sales is much higher, say 25%, comments are to be provided justifying
the estimates and the assumptions made for projecting such a growth.
(ii) Build up of Current Assets : Under the PBS method, there is a flexibility in the
approach in the sense that assessment of the Working capital limit is based on the
borrower’s projected balance sheet , i.e WCG and ABF Level is computed on the projected
level of buildup of Current assets provided by the borrower (and accepted by Bank). There
may be cases where the increase in the projected level of build up of current assets is not
commensurate with the increase in sales, for example sales growth is 15% whereas the
buildup of current assets is much higher, say 30-35%, then it has to be examined properly
Page 238 of 632

and especially from the angle of holding period and working capital cycle of the business
unit in link with the profitability ratios and with a focus over the analysis of the cash flow
and fund flow statements. Increase in ABF Level just to support the buildup of current
assets because of increase in holding period of components of working capital requirement
(such as Stocks/ book Debts) needs to be examined properly and it can justified on the
ground that the market condition has changed with the change in business strategy.
• Issues pertaining to the acceptance of Estimated/Projected level of Sundry Creditor

Assessment of Sundry Creditors at Appraisal Stage and Assessment of Letter of Credit
While assessing LC limits, the level of creditors as a whole and on account of goods
purchased under LCs should be firmed up separately. The level of sundry creditors, usance
LC creditors and Buyers’ Credit estimated should be clearly specified in the computation of
ABF. To facilitate this, the table in Section B-2 (Para-j, Computation of LC limits for WC)
in the “S” Format has been modified as per specimen below.
Based on Operating cycle of the unit, the Maximum Usance period of Letters of Credit (
domestic / foreign) required by the company should be frozen by way of a template item in
the Proposal. While freezing the period, a small cushion may be kept to the extent
considered necessary.
Computation of LC Limits for Working capital Rs in Lacs
Foreign Domestic Total LC

Total estimated Purchases of RM ( FY--) 1570.00 1006.00 2576.00
Procurement of RM under LC (%) 85% 90%
Monthly RM purchases out of LC 111.21 75.45 182.47
a) Usance (average) 105 days 105 days 105 days
b) Lead time (average) 75 days 60 days
Total Time (a + b) 180 days 165 days
LC Limit required 667.26 414.98 1082.24
LC recommended A 665.00 415.00 1080.00
Level for which creditors not created (LC 278.00 151.00 429.00
backed-lead Time) (Monthly RM out of
LC*b/30) B
Level of Creditors (LC backed) (A-B) 387.00 264.00 651.00
Recommended LC limit 1080.00
Margin (%) Existing / Proposed: x / y
Usance / Sundry Creditors: x days / y days
Maximum Usance Period of LC estimated: No. of days

Domestic LCs:
Foreign LCs:
➢ Assessment of limits for purchase/discount of bills drawn under LCs

Limits for purchase of demand and/or discount of usance bills drawn under LCs
(foreign or domestic) opened by first class banks, approved by the Bank and advised
Page 239 of 632

by the Corporate Centre from time to time, will be assessed and sanctioned outside the
ABF.
Bills purchased/discounted under L/C within ABF

Bill financing is usually done as part of the need-based working capital credit limit.
For the purpose, it should be ensured that:-
i. bills facilities are not disproportionate in relation to the business of the borrower.
ii. the borrower is of good standing and creditworthy.
iii. the drawees are creditworthy and are not associates/related parties.
iv. the documents are genuine and represent underlying trade transactions in goods.
Bills purchased/discounted under L/C outside ABF

As per extant guidelines, Usance Bills Discounted and Demand Bills Purchased under
Letters of Credit (LCs) opened by own offices of the Bank or by First Class Banks
(Domestic Banks) and Correspondent Banks (Foreign Banks),where the documents
tendered comply fully with the terms of LC are classified as “Specified Security”
under Regulation 61 (d) (iii) of the SBI General Regulations. These Bills have been
approved as “Specified Security” for the limited purpose of excluding them from the
computation of total indebtedness and therefore, are treated outside the Bills Limit of
the Customer, which forms part of the ABF.
Cash Budget Method
Cash Budget is usually the forecast of receipts and payments of an enterprise, drawn at small
intervals of time, say monthly, weekly etc.
A cash Budget is therefore a projection into future as against cash flow statement that is
usually historical in nature.
The Cash budgeting technique helps a decision maker in situations especially where
borrower need short term credit.
A few examples are (i) Opening of letter of credit. (ii) Providing adhoc/contingent working
capital facility, (ii) bill financing, (iv) financing construction activities, and (V) financing
activities with seasonal fluctuations etc.
USAGES OF CASH BUDGET METHOD
Credit proposals involving Construction Industry

Credit proposals for financing construction activities would require application of cash
budgeting to ascertain the level of projected requirements at specific intervals. The amount
and periodicity may also be ascertained by cash budgets drawn for the purpose.
Assessment of Peak and Non-Peak Levels of Working Capital for Seasonal activities.
Activities depending on agriculture are generally seasonal in nature. Some other activities
can be fire cracker, text book printing, AC assembling. Credit decisions are usually taken on
the basis of carefully drawn cash budgets for a year. Limits may go high during the peak
activity period and may go down during non-peak period
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CASH BUDGET CALCULATION
• In Cash Budget method, only cash transactions occurred (both inflows and outflows)
during the period are considered and not expenses / revenues for the period (as done in P &
L statement).
• All cash items regardless of their classification (expense, asset, fixed cost, variable cost)
are accounted for in a cash budget. Non-cash items do not appear in a cash budget.
• In Cash Budget method, the quantum of finance required is determined from the projected
cash flows.
• Projected values of Current Assets & Current Liabilities are not used.
HOW TO MAKE CASH BUDGET

1. Identify all receipts (cash inflows). These include inflows from Financing Activities
like Bank Loans & Infusion of Capital, Operating Activities like Debtor realization
and Investment Activities like Interest & Dividend received.
2. Identify all payments (cash outflows). These include Financing Activities like
Repayment of Term Loan, Operating Activities like Interest paid and Investment
Activities like Fixed Asset acquisition.
3. Actual receipts and payments during the months should be shown separately.
4. The position of cash surplus/deficit is then computed at monthly intervals. A surplus is
generated if receipts exceed payment and a cash deficit occurs if payment is more than
receipt during the month.
5. The opening cash balance for the starting month is then adjusted with the cash
surplus/deficit generated during the month which will be the closing balance of the
month.
6. A cash surplus generated during a month results in a higher closing cash balance vis-
à-vis the opening balance of the month.
7. If an enterprise is enjoying Cash Credit facility from a bank, then cash surplus
generated during the month will result in reduction of outstanding in CC account at the
end of the month. Similarly, if cash deficit situation arises during the month, then it
will increase the outstanding in CC account at the end of the month.
CASH BUDGET ILLUSTRATION

Projections for a company for a year Rs. in Lacs
Sales 120.00
Raw Material Consumption 96.00
Manufacturing & other expenses 12.00
Interest 3.00
Depreciation 4.00
Total expenses 115.00
Profit before tax 5.00
Other Assumptions
Cash Opening Balance for February: Rs. 1.00 Lacs
Page 241 of 632

Monthly Sales (Rs. in Lacs)
January February March April May
10.00 10.50 11.50 11.00 10.50
• The Monthly purchase figures are expected to be in proportion of the sales for the
respective month and are computed by multiplying the monthly sales with a factor of
(96/120).
• A receipt of Rs. 10.00 lakh is made during February, which is realization of sales
receivables registered during the month of January. Similarly, receipts during the month
of March, April & May are Rs. 10.50 lakh, Rs. 11.50 lakh and Rs. 11.00 lakh
respectively.
• Rs. 8.00 lakh paid during February are payments made against purchases of the month
of January. Similarly payments made to suppliers during the months of March, April &
May work out as Rs. 8.40 lakh, Rs. 9.20 lakh and Rs. 8.80 lakh respectively.
Rs in Lacs
January February March April May
Sales 10.00 10.50 11.50 11.00 10.50
Purchases 8.00 8.40 9.20 8.80 8.40
Realization from Sales 10.00 10.50 11.50 11.00

Total Cash Inflows 10.00 10.50 11.50 11.00
Payment for Purchases 8.00 8.40 9.20 8.80

Expenses 1.00 1.00 1.00 1.00
Interest 0.25 0.25 0.25 0.25
Total Cash outflows 9.25 9.65 10.45 10.05
Surplus/ Deficit 0.75 0.85 1.05 0.95

Opening Cash Balance 1.00 1.75 2.60 3.65
Add: Surplus/ 0.75 0.85 1.05 0.95
Ded: Deficit
Closing Cash Balance 1.75 2.60 3.65 4.60
Cash Surplus of Rs. 0.75 lacs, Rs. 0.85 lacs, Rs. 1.05 lacs & Rs. 0.95 lacs is generated
during the months of February, March, April and May respectively.
SCENARIO 2
• The comfortable position as indicated in the table may undergo a sudden change, if
there occurs a change in the underlying assumptions.
Page 242 of 632

• Let us assume now that during the month of April, the supplier of raw material refuses
to allow credit for purchases made during the month.
• Besides, 50% of the debtors ask for extension of credit by another month on sales
made during the month of March.
Rs in Lacs January February March April May

Sales 10.00 10.50 11.50 11.00 10.50
Purchases 8.00 8.40 9.20 8.80 8.40
Realization from 10.00 10.50 5.75 16.75
Sales
Payment for 8.00 8.40 18.00 0.00
Purchases
Expenses 1.00 1.00 1.00 1.00
Interest 0.25 0.25 0.25 0.25
Surplus/ Deficit 0.75 0.85 -13.50 15.50
Opening Cash 1.00 1.75 2.60 -10.90
Balance
Add: Surplus/ 0.75 0.85 -13.50 15.50
Ded: Deficit
Closing Cash 1.75 2.60 -10.90 4.60
Balance
SCENARIO 3
• Let us consider a different situation, now the enterprise is able to sell 50% of its
produce in cash during the month of March & April.
• Besides, it is in a position to avail credit for 2 months for purchases made during
March.
Rs in Lacs January February March April May

Sales 10.00 10.50 11.50 11.00 10.50
Purchases 8.00 8.40 9.20 8.80 8.40
Realization from Sales 10.00 16.25 11.25 5.50
Payment for Purchases 8.00 8.40 0.00 18.00
Expenses 1.00 1.00 1.00 1.00
Interest 0.25 0.25 0.25 0.25
Surplus/ Deficit 0.75 6.60 10.00 -13.75
Page 243 of 632

Opening Cash Balance 1.00 1.75 8.35 18.35
Add: Surplus/ 0.75 6.60 10.00 -13.75
Ded: Deficit
Closing Cash Balance 1.75 8.35 18.35 4.60
CASH BUDGET METHOD-- POINTS TO REMEMBER

• If underlying assumptions undergo a change in tune with the market/production
realities, enterprises may have liquidity scenario totally different from projections.
• With the help of a suitable cash budget drawn, an enterprise can track its liquidity
position in a better way.
• Outstanding balance of Bank loan at the end of each month of the cash budget should
be covered by the value of the primary security less margin stipulated.
Assessment of working capital under project vivek

Assessment of Fund Based Working Capital (FBWC) Limits under Project Vivek is as under:
1. As per Turnover Method (Nayak Committee) for FBWC Limits upto Rs.5.00 crores
a) For Trade Units: 15% of the projected annual turnover
b) For SME Units: to encourage the SME units to shift to digital mode or cashless
transactions, units will be sanctioned limit of a minimum 25% of the projected annual
turnover as also need- based on the production / processing cycle of the relative units.
However, higher of the two assessed limits will be sanctioned to the SME units.
However, the projected annual turnover to be considered should be the one arrived
using the PACE tool.
2. Under Project Vivek, the following steps are required before arriving at the working capital
assessment (for exposures above Rs.50 lacs uptoRs.50 crores):
a) Consolidated turnover based on the cash flow in the units’ bank account statements of past
12 months to be computed;
b) Redraw profit & loss account and balance sheet after arriving at the consolidated turnover,
to be triangulated with the historic CMA and Industry Ratios.
c) Based on the redrawn financials, the estimated profit & loss account and the balance sheet
to be casted for the next 12 months.
d) Working Capital limit is then calculated based on the four Loan Policy Ratios, which will
be calculated as per the following formula:
1. Current ratio Working Capital limit = (Total Current Assets / Current

Ratio) - (Total Current Liabilities - Short Term
Borrowing from banks)
ii. Interest Coverage ratio Working Capital limit = [((EBIT Operating +
Depreciation) / Interest Coverage Ratio) - (Interest Rate
* (Term Liability + (Current portion of Long Term Debt
/ 2)] / Interest Rate
(*Interest Rate above is calculated as Interest expense /
Page 244 of 632

(Short Term borrowing from banks+ Current portion of
long term debt / 2 + term liability)
iii. Tol/TNW ratio Working Capital limit = (Adjusted TNW *
(TOL/Adjusted TNW)) - (Total Outside Liabilities -
Short Term Borrowings from bank)
(*Adjusted TNW above is calculated as NW –
Revaluation Reserve - Intangibles – Investment in
Subsidiaries)
iv. margin on inventory, Working Capital limit = ((Inventory + Receivables) *
receivables less creditors 80% - Trade Payables)
(Minimum Margin on Inventory and Receivables will be
20%)
Minimum of the working capital limits arrived on the basis of the above ratios will be ideally
recommended to the Sanctioning Committee.
LOAN SYSTEM FOR DELIVERY OF BANK CREDIT
With a view to promoting greater Credit discipline, RBI has issued guidelines on Loan System
for Delivery of Bank Credit, vide Notification No. RBI/ 2018 - 19/ 87 dated 5th December
2018, for ensuring a minimum level of ‘Loan Component’ as part of Fund Based Working
Capital finance extended to large borrowers.
The guidelines are to be implemented w.e.f. 01st April 2019 in respect of Borrowers having
aggregate Fund Based Working Capital limits of Rs.150 crore and above from the banking
system.
The Guidelines are as under:
a. Applicability: Borrowers having aggregate Fund Based Working capital limit of Rs 150
Crores and above from the banking system (including ad-hoc and temporary OD facilities,
if any).
b. Minimum Loan Component – Working Capital Limit (WCL)

A minimum level of ‘Loan component’ of 40% of the Fund based Working capital Limits
after excluding Export Credit Limits (Pre- and Post-Shipment) and Inland Bill Limits to be
ensured.
Drawings up to minimum of 40 percent of the total fund based working capital limits shall
be allowed by way of WCL only. Drawings b e y o n d 4 0 % m a y b e a l l o w e d b y w a y
o f C ash Credit facility subject to availability of Drawing Power.
Investment by the bank in the commercial papers issued by the borrower shall form
part of the loan component, provided the investment is sanctioned as part of the
working capital limit.
c. Effective Date of Implementation: The guidelines will be effective from April 1, 2019
covering both existing as well as new relationships. The 40 percent loan component will be
revised to 60 percent, with effect from July 1, 2019.
A working example of the same is indicated below:
Page 245 of 632

FBWC : Rs. 160 crore
Adhoc limit : Rs.10 crore
EPC Limit : Rs. 20 crore
W.e.f. 01.04.2019 W.e.f. 01.07.2019
WCL Rs. 60 crores Rs. 90 crore

(minimum) {(Rs 160 Crore +Rs 10 Crore – {(Rs 160 Crore +Rs 10 Crore –
Rs 20 Crore ) *40%} Rs 20 Crore ) *60%}
Cash Credit Rs. 90 crores Rs. 60 crore
d. Tenor and Repayment of WCL:

Minimum tenor of 7 days. Review/ Renewal of WCL limit will be co-terminus with
that of Fund Based Working Capital (Cash Credit) limits.
The Borrower shall have the option of availing the loan component in either one
tranche or avail the same in several tranches and with different maturity periods.
WCLs can be repaid by way of instalments or bullet payments. Rollover of WCLs may
be permitted at the request of the Borrower subject to compliance with the extant IRAC
norms. The interest on WCL shall be d e b i t e d to the C as h Credit Account, as
and when applied.
e. Loans under Consortium Arrangement:
Where our Bank i s leader: While sharing the DP, WCL component on overall
consortium level limits shall also be shared. A confirmation to this effect may be
obtained from member banks and kept on record.
However, all lenders in the consortium shall be individually and jointly responsible to
ensure that at the aggregate level, the ‘Loan component’ meets the above-
mentioned requirements.
Where our Bank is a member: Our Bank shall ensure WCL component out of the
limits enjoyed by the borrower from our Bank is always met (though our stand-alone
exposure is less than Rs.150 crore).
f. Loans under Multiple Banking Arrangement: Under Multiple Banking

Arrangements (MBAs), each Bank shall ensure adherence to these guidelines at individual
bank level.
g. Risk weights for undrawn portion of cash credit limits

Effective from April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned
to the aforesaid large borrowers, irrespective of whether unconditionally cancellable or not,
shall attract a credit conversion factor of 20 percent.
Page 246 of 632

Caselet : Check your knowledge
Calculation of Working Capital limit as per Project Vivek:
The Loan Policy Ratio, applicable to the case and required for calculation of working capital
limit under Project Vivek are as under,
Current Ratio 1.33
Interest Coverage Ratio 2.60
TOL/TNW Ratio 4.00
Margin for Inventory and Receivables 25%
Pertinent Financials from Estimated Balance Sheet of fin year of 2018-19, as under (Rs in
Lakhs)
Total Current 482.41 EBIT 159.12 Total Outside 1038.61

Assets Liabilities
Total Current 633.20 Depreciation 53.00 Net Worth 591.30
Liabilities
Short Term 350.00 Interest 100 Revaluation 81.31
borrowing reserve
Term Loan 370.40 Receivables 80.00 Investment in 267.54
Associates
Installment of 43.20 Inventory 330.00 Intangible 13.72
TL due in Assets
Total Liabilities 1629.9 Creditors 210.00 Total Assets 1629.91
1
I. Current Ratio
Working Capital limit = (Total Current Assets / Current Ratio) - (Total Current Liabilities -
Short Term Borrowing from banks)
(482.41 / 1.33) – (633.20 – 350.00) = 362.71- 283.20= Rs. 79.51 Lakh
This calculation represents that if the current ratio is to be maintained to comply with the per
loan policy guidelines assuming all other factors remained at same level, the unit is eligible
for Cash Credit Limit of Rs. 79.51 lakh only.
CHECK –
Current Ratio (CR) = CA/CL
Existing CA remained same i.e. 482.81
Revised CL will be Rs. 362.71 lakh (Existing CL – Existing CC Limit +
Proposed CC Limit i.e. 633.20-350.00+79.51)
Revised CR will be 482.81 / 362.71 = 1.33
Page 247 of 632

II. Interest Coverage Ratio
Working Capital limit = [((EBIT Operating + Depreciation) / Interest Coverage Ratio) -
(Interest Rate * (Term Liability + (Current portion of Long Term Debt / 2)] / Interest Rate
(*Interest Rate above is calculated as Interest expense / (Short Term borrowing from banks+
Current portion of long term debt / 2 + term liability)
[((159.12 + 53.00) / 2.60) - (13.48% * (370.40 + (43.20/2)] / 13.48%
[(212.12) / 2.60) - (13.48% * (370.40 + 21.60)] / 13.48%
[81.77 - (13.48% * 392.00)] / 13.48%
[81.77 - 52.84] / 13.48% 28.93 / 13.48%
Rs. 214.61 Lakh
Interest Rate Calculation

(100.00 / (350.00 + 43.20 / 2 + 370.40)
100.00 / (371.60+370.40) 100.00/742.00 = 13.477%
This calculation represents that if the interest coverage ratio is to be maintained to comply
with the per loan policy guidelines assuming all other factors remained at same level, the unit
is eligible for Cash Credit Limit of Rs. 214.61 lakh only.
CHECK –
Proposed Debt CC + TL = 214.61+392.00 = 606.61
Total Interest liability = 606.61 * 13.48% = 81.77
EBITD required to service interest liability = 81.77 * 2.60 = 212.60 lakh
Available EBITD = 212.12 Lakh
The difference is because of rounding off the interest rate.
III. TOL/Adj. TNW Ratio

Working Capital limit = (Adjusted TNW * (TOL/Adjusted TNW)) - (Total Outside Liabilities
- Short Term Borrowings from bank)
(*Adjusted TNW above is calculated as NW – Revaluation Reserve - Intangibles – Investment
in Subsidiaries)
(228.73 * 4) - (1038.61 – 350.00)= 914.92 – 688.61 =Rs. 226.31 Lakh
(Adjusted TNW = 591.30 - 81.31 – 13.72 – 267.54 = 228.73)

This calculation represents that if the TOL/Adj. TNW ratio is to be maintained to comply with
the per loan policy guidelines assuming all other factors remained at same level, the unit is
eligible for Cash Credit Limit of Rs. 226.31 lakh only.
CHECK –
Revised TOL will be 914.92 (existing TOL – existing CC limit + proposed CC limit i.e.
1038.61-350+226.31 = 914.92)
Adj. TNW is 238.73
TOL / Adj. TNW = 914.92/228.73 = 4
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IV. Margin on Inventory, Receivables less Creditors
Working Capital limit = ((Inventory + Receivables) * 80% - Trade Payables)
(Minimum Margin on Inventory and Receivables will be 20%)
((330.00 + 80.00) * 75% - 210.00)
(410.00 * 75% - 210.00)
307.50 - 210.00
Rs. 97.50 lakh
This calculation represents that if the company is required to maintain the inventory &
receivables of Rs. 410 lakh, it has already been funded by the trade payables to the extent of
Rs. 210.00 lakh and there is a requirement of 25% margin on inventory & receivables i.e. Rs.
102.50. Thus the unit is eligible for Cash Credit Limit of Rs. 97.50 lakh only.
Minimum of the working capital limits arrived on the basis of the above ratios – Rs.
79.51 Lakh
As per Nayak Committee, proposed turnover is Rs. 2000 lakh hence the proposed limit will be
Rs. 500 lakh i.e. 25% of the proposed turnover and the minimum Net Working Capital
(NWC) requirement will be Rs. 125 lakh whereas the actual & estimated NWC as on
31.03.2018 & 31.03.2019 is Rs. (-) 208.19 & (-) 150.79 lakh respectively. Thus, the Company
has to infuse long term funds to the extent of Rs. 275.79 lakh during the current year
considering that all the estimates will be achieved otherwise the requirement will be Rs.
333.19 lakh. The stipulation regarding infusion and its timing should be discussed with the
Company and must be clearly spelt out in the proposal.
Restriction on use of “Other Method”

Refer Circular No SMEBU/MKT/PV/2019-20/KKR/Cir-39 Date: 06.09.2019
It is observed that in many of the proposals processed under Project Vivek, the FBWC
limits have been assessed by choosing the option of “Other Method”.
It is to be noted that “Other Method” option under Project Vivek was provided only as a leeway
for deviating from Loan Policy Method in exceptionally deserving cases.
In this regard, it has now been decided to restrict the use of “Other Method” for assessment of
FBWC limits for products / schemes covered under Project Vivek other than those which are
already excluded.
Presently, FBWC limit of e-DFS is being assessed by using “Other Method” and with
addition of two more new products, following three products only will be assessed using
“Other Method”
i. Electronic Dealer Finance Scheme (e-DFS)

ii. SBI OD Product for Business Correspondents (BCs) (Limit: From Rs.25.00 lacs
to Rs.5.00 Crores)
iii. SBI “SME e-Biz Loan” (Limit above Rs.50 lacs to Rs.5.00 Crores)
No other product under Project Vivek will be processed using “Other Method” for
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assessment of FBWC limits and in case of any deviation for assessment of FBWC limits
under the “Other Method” for any other product other than the above 3 products, approval of
respective GM (Network) of the Circle should be obtained before sanction in line with the
deviation for “No Go” advised vide circular no. 1500 / 2018-19 dated 08.02.2019.
Multiple Choice Questions: Check Your Knowledge
1 Gross Working Capital is better known as

A Funds required for setting up of plant
B Total of Balance Sheet
C Current Asset – Net Working Capital
D Total funds required to complete an operating cycle
E Core Assets
2 Net Working Capital represents
A Long Term Funds, available to support the short term requirement of the
unit
B Promoters’ Margin
C Short Term Funds arranged by the unit from market
D Total Working Capital less Bank Finance
E Working Capital Limit- Working Capital Gap
3 Under Projected Annual Turnover (PAT) method as per Nayak Committee
recommendations, minimum contribution from the promoters or Net Working Capital
must be equal to?
A 5% of the Projected Annual Turnover
B 5% of the total requirement
C 5% of the Total Current Assets
D 20% of the Projected Annual Turnover
E 25% of the Projected Annual Turnover
4 For Trade & Services (T &S) Sector in C&I segment the assessment of credit limit for
FBWC Limit upto Rs. 5.00 crores is linked with Annual Turnover. Which one of the
following statement is incorrect in context of financing to such units.
A Across the board Credit limit equal to 15% of projected annual turnover should
be offered to business enterprises in the T&S
B The business enterprises should be established one and should be at least 2
years old.
C The business enterprises should be a profit making
D CRA of the unit must be SB-9 and better
E An interest rebate of 0.50% may be given to borrowers who offer mortgage of
property valued at over 75% of the credit limit.
5 For a manufacturing unit, the major source for financing the current assets are:
A Trade Creditors only
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B Trade Creditors and working capital limits from Bank only
C Trade Creditors , working capital limits from Bank and Net Working
capital
D Trade Creditors, working capital limits from Bank, Net Working capital and
cash.
E Trade Receivables
6 What is the net working capital (margin) requirement under second method of lending
prescribed by Tandon Committee ?
A 25% of total current assets
B 25% of total assets
C 25% of working capital gap
D 20% of Projected Annual Turnover
E 25% of Projected Annual Turnover
7 For Trade & Services ( T&S) Sector in C&I segment the assessment of credit limit be
based upon Annual Turnover, rather than on build up of Inventory and receivables .
Which one of the following statement is correct in context of financing working capital
to Trade & Services Sector in C & I Segment
A Across the board Credit limit equal to 15% of projected annual turnover
should be offered to business enterprises in the T&S
B The business enterprises should be established one and should be at least 2 years
old.
C CRA of the unit must be SB-7
D The upper cap of Working Capital Limit should be Rs 1.00 crore
E CRA of the unit must be SB-10
8 Given the acceptable level of Current Assets at Rs 1000.00 and Projected level of
Current Liabilities other than Bank Finance at Rs 200.00. In this situation what would
be Working Capital Bank Finance and Current Ratio, as per Second Method of lending
( Tandon Committee)
A Rs 500.00 and 1.50
B Rs 550.00 and 1.33
C Rs 600.00 and 1.25
D Rs 750.00 and 1.20
E Rs 800.00 and 1.00
9 The relationship between Working capital Gap(WCG), Bank Borrowing and NWC is
as under
A WCG = NWC+ Bank Borrowing
B WCG= Bank Borrowing - NWC
C Bank Borrowing = WCG + NWC
D NWC = Bank Borrowing – WCG
E Bank Borrowing = NWC- WCG
10 In respect to the calculation of NWC , which one of the following is incorrect
A NWC = CA-CL
B NWC= Long Term Sources –Long term Uses
C NWC= (Capital + Reserves + Long Term Borrowings) - (Fixed assets+ Non
Current assets )
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D NWC= WCG + ASSESSED BANK FINANCE
E NWC = Bank Borrowing – WCG
11 Raw Materials holding level is compared in terms of :
A Months' cost of Production
B Months' Cost of Sales
C Months' Purchase
D Months' Consumption.
E Months’ Gross Sales
12 Stock in process holding level is compared in terms of :
C Months' Purchase
13 Finished Goods holding level is compared in terms of :
C Months' Purchase
14 Trade Receivables holding level is compared in terms of :
C Months' Purchase
D Months' Gross Sales
E Months' Consumption.
15 Trade Payable ( Sundry Creditor) holding level is compared in terms of :
C Months' Purchase
16 Advance Received from customers holding level is compared in terms of :
C Months' Purchase
17 Advance Paid to Suppliers of Raw Materials holding level is compared in terms of :
C Months' Purchase
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18 While assessing the working capital limit, it was observed that level of receivables is
estimated to go up from existing Rs 6 Lacs to Rs 9 Lacs, whereas gross turnover of
the unit is also estimated to go up from existing level of Rs 36 Lacs to Rs.48 Lacs
What is the likely impact on approximate holding periods of receivables?
A It is estimated to decline from current 90 days to 75 days
B It is estimated to decline from current 80 days to 65 days
C It is estimated to increase from current 61 days to 75 days
D It is estimated to increase from current 61 days to 68 days
E It is estimated to increase from current 61 days to 85 days
19 Which of the following is NOT a component of the working capital cycle?
A Finished goods
B Trade Receivables
C Trade Payables
D Raw Materials
E Advance payment to suppliers of raw material
20 Which of the following factor does not affect the amount of working capital in a
business?
A Increase in Sales Turnover
B Seasonality in business
C The composition of sources to finance working capital
D Uneven pattern of sales
E Consumption of Raw Material
21 How is working capital financed?
A Short term sources only
B Long term Sources only
C Both Short Term and Long Term Sources
D It is not material as long as working capital is available.
E From Cash flows
22 How is working capital financed?
A Short term sources only
B Long term Sources only
C Both Short Term and Long Term Sources
D It is not material as long as working capital is available.
E From Cash flows
23 Company A has annual Gross sales of Rs 200 Crores and Account receivables of Rs 50
Crores at the year end. These amounts for Company – B for the same year are Rs 120
Crores and Rs 40 Crores respectively. All other things being equal, which company
has lower accounts receivables build up ?
A Company –B
B The build up is same in both the Company.
C Company -A
D The information is inadequate to draw a conclusion. .
E None of the above is applicable.
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CHAPTER-7
TERM LOANS
1. Introduction
A term loan is an advance, usually for purchase of fixed assets, for a fixed period to a
business or an industrial undertaking whether a proprietorship, firm, company or co-
operative society and may be drawn by the borrower either in a lump sum or in
installments.
The tenor for scheme specific term loans should be as per the approved schemes. In
other cases, it will be 20 years or project life whichever is lower (with a minimum tail
period of 15%). The tenor is to be considered from the date of first drawdown.
Average maturity should invariably be calculated for all the term loans individually. It is
not applicable for term loans having EMI based repayment programmes. The average
maturity of any term loan, including moratorium, normally should not exceed 10 years,
except loans under Rehabilitation/Core Industry/ Infrastructure/Renewable Energy
projects/Securitization of Rent and Toll Receivables.
Generally, the term loan is granted for the purpose of:

(i) acquisition of fixed assets required for new project or expansion/diversification of
existing project,
(ii) acquisition of balancing equipment,
(iii) replacement of high cost debt (for the residual period only),
(iv) merger and acquisition, etc.
Key Learnings:
1. Tenor of term loan.
2. Concept of Project Life / Useful Life of machinery.
3. Concept of Tail period.
4. Concept and utility of Average Maturity.
5. Purposes for which term loans can be given.
Check your progress:

i. What the maximum permissible door to door tenure of any term loan?
a. 8 years or project life whichever is lower.
b. 10 years or project life whichever is lower.
c. 20 years or project life whichever is lower.
ii. Term loan can be given for replacement of high cost: a. True b. False.
III. Tailperiod is the time period between the last scheduled date of repayment and the
last date of project life/useful life. A. True. B.False.
References: Circular dated 17.09.2018; Loan Manual Part 2 Chapter 11.
2. Appraisal of Term Loans

While appraising a term loan, its prima facie acceptabilityotherwise should be
examined extensively on the same lines as applicable for any other appraisal. It should
inter-alia; focus on Promoter /Management Appraisal and Industry/Activity Outlook.
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The purpose of term loan appraisal is to ascertain whether the project is sound -
Technically, Economically, Financially, Managerially and is ultimatelyviable as a
Commercial Proposition. Thus, the appraisal of a project thus, involves theexamination
of:
2a. Economic Viability:

• To determine the conduciveness of economic parameters for setting up the
project and their impact on the scale of operations.
• Relates to the earning capacity of the project, which depends on the volume of
sales.
• It is necessary to determine how much output of the unit or additional
production from an established unit the market is likely to absorb at given
prices.
Factors to be considered in Economic Viability are:
• Thorough market analysis
• Future trends in volume and patterns of Supply & Demand
• Demand forecast, Supply position, Gap
• Intermediate product
• Ancillary industry
MARKETING: This constitutes a crucial aspect of project appraisal as the basic

viability of the project and consequently the repayment of the Bank’s term loan depends
upon the marketability of its products. This aspect should, therefore, be studied in depth.
Wherever required, a specific study by an external consultant may be got carried out.
2b. Technical Feasibility:

• To determine the suitability of the technology selected and the adequacy of the
technical investigation and design.
• It consists of an assessment of the various requirements of the actual
production process.
• It is in short a study of the availability, cost, quality and accessibility of all the
factors required for production.
• To be vetted by the credit officer. If required, second opinion from the Bank’s
Technical Consultancy Cell / Bank’s empaneled Consultant/ SBI Caps may be
sought.
Factors to be considered in the Technical Feasibility are:

• Location of plant & accessibility to critical inputs
• Size of the plant
• Type of technology
• Production factors (power, water, utilities, transport etc.)
• Availability of Labor (Skilled / Unskilled)
If the project involves a new process or new technology, a technical feasibility report by
a competent outside agency, acceptable to the Bank will be essential. In case of a
project involving only expansion or modernization, a technical feasibility report by
an outside agency may not be insisted upon, provided that the technical expertise
available within the company is considered adequate for the purpose. The technical
feasibility of a new project should be examined from the following angles:
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- Suitability of the technology having regard to the local conditions and availability
of resources of men and materials. The borrower should opt for already proven
technology keeping in mind the performance of the already used technology. In
this regard, study of the performance of the existing units should be done. It should
be also be ensured that the both skilled & unskilled manpower is available in the
area of operation and there should not be additional cost to hire the manpower. The
availability material should also be taken into consideration viz. source of raw
material, distance from the plant site, logistic arrangements, optimum order
quantity etc. along with the market for finished goods.
- Optimal size of the plant.
- Location of the plant and accessibility to critical inputs and utilities.
- Arrangements made for obtaining the technical know-how, design and detailed
engineering of plant, and selection of suppliers of machinery/equipment.
- Manufacturing process.
Thus, technical report should consist about feasibility of project, profitability,

sufficiency of machinery, extent of competition, marketability and other factors etc.).
Production Factors:
Manufacturing Process: Describe briefly the manufacturing process to be adopted by
the company and furnish a simplified process flow chart wherever considered necessary.
Availability of components of production: Comment on the availability of raw

material, stores &spares, other utilities, essential services, cost thereof and the system for
inventory management. Examine the requirements of power, fuel, water, transport, any
railway siding and comment on the adequacy of the arrangements made by the company
to meet such requirements. Documentary evidence, wherever applicable, should be
called for and scrutinized.
Effluent Treatment: Examine arrangements made for treatment and disposal of

effluents and state whether they are adequate having regard to the manufacturing process
involved especially in respect of chemical units in compliance with environment and
pollution control stipulations.
Staff / Labor Position: Indicate the requirements of staff and skilled/unskilled labour
and comment whether the arrangements made by the company for recruitment and
training of these personnel are adequate.
2c. Financial Feasibility:

• To determine the reasonableness and accuracy of cost estimates, suitability of
the envisaged pattern of financing and general soundness of the capital
structure.
• Estimated project cost is reasonable and complete and has a fair chance of
materializing as per anticipations.
• Tie-up of Funds: Financial arrangement is complete, without any gaps, and
ensures cash is available as and when needed (Financial Closure).
• Estimates of earnings and operating costs are as realistic as possible.
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Under financial feasibility, we should examine and comment on the basically two
parameters viz. Cost of Project and Means of Finances. The detailed features are
furnished below;
Cost of the project: Accurate estimate of the total cost of the project is an important
part of the appraisal as it has a bearing on the means of financing and profitability. The
cost estimates should be scrutinized, item by item (wherever possible, by a comparative
analysis of the cost estimates of similar projects in the same industry), with a view to
ensuring that they have been arrived at realistically after taking into account all relevant
cost optimization factors. It is also essential that comments on the various components of
the total cost of project be given, as follows:
Land (including site development):
In case of leasehold land, examine the lease deed to ascertain whether the terms of the
lease provide for the lease rights being assigned/mortgaged to the Bank, whether the
residual lease period is sufficient(i.e., at least longer than the proposed repayment period
of the Bank’s term loan) and whether there are any clauses prejudicial to the Bank’s
interests. If the lease deed does not contain the clauses, which enable the lenders to
create its charge, it will not be possible to realize the proceeds in case of default of the
loan.
In the case of other items, branch should be satisfied that the cost estimates are
reasonable and acceptable.
Buildings: The items to be included under this head will broadly be (i) main factory
buildings, (ii) ancillary factory buildings, (iii) godowns/warehouses, (iv) canteen, guest
house, etc., (v) quarters for essential staff, (vi) compound walls/roads, (vii) silos, tanks,
wells etc., (viii) garages, van/truck sheds etc., (ix) sewers and drainages etc. Examine
whether the proposed buildings will be sufficient having regard to the nature/lay out, size
of the plant and the proposed scale of operations. The detailed cost estimates of the
proposed construction are to be obtained and examined for the reasonableness.
Plant and machinery: Furnish a list of the items of plant and machinery, which should
be classified in broad groups under two heads viz., imported items and indigenous items,
together with the names of the suppliers.
Technical know-how, engineering and consultancy fees: Examine the basis of

selection of the technical consultants for providing technical know-how/design
engineering. It should be ensured that there would be no diversion of funds from the
company to the promoters indirectly through selection of an associate/subsidiary concern
of the promoters as technical consultants.
Miscellaneous fixed assets: These will include items electrical installations, laboratory
equipment, workshop equipment, fire-fighting equipment, furniture, fixtures and fittings,
office equipment, effluent disposal plant, vehicles, railway siding and other assets not
directly involved in the manufacturing process but very much required for functioning of
the plant.
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Preliminary, capital issue and pre-operative expenses:
❖ Preliminary expenses are those expenses, which are incurred before the
incorporation of the company.
❖ Capital issue expenses are those expenses, which are incurred to raise capital from
the market.
❖ Pre-operative expenses are those expenses, which are incurred during the period
between incorporation of the company and commencement of commercial
production, which is after the trial run. Thus, the expenses during trial run can also
be considered under this head.
Provision for contingencies: This are required to take care of the following:
❖ Escalation in the cost of the items because of increase in prices, import duty, excise
duty, sales tax, transportation charges, and fluctuations in foreign exchange rates
etc.
❖ Delay in the implementation of the project owing to technical or other factors.
❖ Sundry items/expenses initially omitted, as they could not be envisaged at the time
of project formulation.
❖ Any other unforeseen expenses cropping up during project implementation, which
are necessarily required for completion of the project.
The cushion built into the cost of the project by way of contingency provision could be
in range of 5% to 15% of the cost of non-firm items in the project cost. The firm items
are those items, which has fixed price on the basis of quotations with all the terms &
conditions. Whereas, the non firm items are those items, where the price cannot be
ascertained at the time of appraisal and the tentative price is considered based on the past
experience, hence the chances of increase in cost could not be avoided. To take care of
any unforeseen increase in project cost, the provision for contingencies should be made.
Working capital margin: This represents the provision required to be built into the cost
of a project for meeting the working capital margin requirements at the peak level (i.e.,
when the level of gross current assets is at the peak) during the first year of operations
after commencement of commercial production.
Means of finance: Examine the proportion of debt and equity components, which is
called the project Debt/Equity ratio, envisaged in the tie-up of the means of financing of
the project. There is no standard project Debt/Equity ratios prescribed for any project.
The stipulation of this ratio for a particular project will be based on a number of factors
such as the nature and size of the project, location, capital intensity, gestation period,
promoters’ capacity, importance to the national economy, government policy etc.
Nevertheless, while appraising project financing proposals, the Bank’s loan policy
guidelines on Debt/Equity gearing should be kept in mind.
Where a project is being financed by a consortium of term lending institutions and the
Bank, the project debt/equity ratio is stipulated by the lead institution in consultation
with other lenders. Though there are no rigid norms for the project debt/equity ratios,
one of the deciding factors of the D/E ratio could be the debt servicing ability of the
project.
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In the appraisal memorandum of Term Loan, furnish the break-up of the means of
financing after examining the suitability of the various sources of finance with due
regard to the financial leverage envisaged for the project on the following lines.
Equity Component:
Share Capital: Indicate the composition of the share capital (the proportion of equity
shares and preference shares, if any, in the total share capital). In respect of the equity
shares, break-up of the extent of subscription by the promoters and the public is to be
mentioned. In case of preference shares, comment on the nature and type of the shares
and the special rights, if any, carried by them. Furnish detailed comment on the sources
of equity, time horizon for equity infusion (upfront or pro-rata), acceptability of the same
etc. Examination of equity visibility is very essential.
Internal Cash Accruals: The scope for utilizing internal cash accruals as one of the
sources of finance for a project, undertaken by an existing company, is limited because
of the following factors,
(i) The uncertainty involved in the cash generation/distribution by the existing units
upto the expected level during the construction period of the proposed project and
(ii) the pre-empting demands thereon such as payment of dividends to shareholders,
repayment of maturing term obligations and ploughing back of accruals to meet the
increased margin requirement arising from the increased scale of operations of the
existing units.
Further, the net working capital of a borrower in relation to the working capital gap
(current assets minus current liabilities other than short-term bank borrowings) should
not be allowed to deteriorate but should improve over a period of time. Accordingly,
borrowers who have built up their net working capital by ploughing back profits or by
infusion of long-term funds should not ordinarily be allowed to dilute the position.
Debt Component
Debentures: Examine the terms of the proposed issue of debentures such as nature, rate
of interest, date of redemption, security offered, any special rights to the debenture
holders etc.
Term Loans: While granting term loans/DPGs to companies, it should be ensured that
the same are within the upper ceiling of term borrowing as per the Companies Act.
Where the Bank is not the sole lender for the proposed project, comment on the
consortium arrangement indicating the amount of individual term loans extended by the
participating lenders. Obtain copies of arrangement/sanction letters issued by all the
participating lenders and scrutinize them with a view to ensure that the company will
have no difficulty in complying with them and that they are also in line with the terms
and conditions stipulated by our Bank.
Unsecured loans/deposits: The sources of the unsecured loans/deposits, rate of interest

payable, terms of repayment and the firm arrangement made for obtaining these funds
etc. must be verified.
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General comments:
Debt/equity gearing: The dealing should furnish detailed justifications on the
acceptability of pattern of the means of financing along with comments on the
acceptability of the project debt/equity ratio. The pattern of both means of finance and
debt equity ratio may vary in case to case basis. The acceptability of the same depends
on the many other factors like, collateral coverage, track record, management, long
relationship, capabilities to complete projects etc.
Promoter’s contribution to meet overrun: Comment whether the promoters have the
capacity to bring in proportionate or higher additional contribution to meet any possible
overrun in the cost of the project; an undertaking to that effect should be obtained from
the promoters and should be kept along with the application/documents.
2d. Commercial Viability – To determine the extent of profitability of the project and
its sufficiency in relation to the repayment obligations pertaining to term assistance. The
commercial viability parameters are discussed in details in the chapter.
Debt Service Coverage Ratio (DSCR): The ultimate purpose of project appraisal is to
ascertain the viability of the project, which has a direct bearing on the repayment period
and the quantum of installments. While the repayment programme will depend on the
profitability of a project, the quantum of annual installments has to be related to the size
of annual cash flows. The repayment schedule should, therefore, be fixed after
ascertaining the annual servicing capacity of the project, during the entire repayment
period, which is indicated by the debt service coverage ratio.
The debt service coverage ratio is the ‘core test’ ratio in project financing. This ratio
indicates the degree of viability of project and is a determining factor in fixing the
repayment period and the quantum of annual installments. ‘Debt’ in this context means
maturing term obligation viz., installment repayable during a year under all the term
loans/deferred payment guarantees and ‘service’ means cash accruals comprising net
profit plus depreciation and non-cash write-off. The debt service coverage ratio measures
the extent of cash accruals (service) available to cover the maturing term obligations
(debt) during each year.
Average Gross DSCR also needs to be calculated.
Calculation of Internal Rate of return (IRR)

Internal rate of return (IRR) has to be ascertained when we assess the term loan proposal.
The ‘Internal Rate of Return’ (IRR) is that rate at which the sum of the discounted cash
flows is equal to the investment outlay. In other words, IRR is that rate which makes the
present value of the benefits equal to the present value of costs or reduces the net present
value to zero. This ‘Internal Rate of Return Method’ gives the promoters a fair idea
about the rate of return that a project is likely to earn over its useful life.
Components of cash outflow: The total funds invested in a project are used for
acquisition of fixed assets as well as working capital assets. Cash outflow will, therefore,
comprise (a) capital expenditure of the project (total cost of the project minus margin for
working capital and interest during construction period), (b) yearly normal capital
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expenditure (expenditure on capital replacement and/or addition to fixed assets) and (c)
working capital requirement (increase in inventory and receivables).
Components of cash inflow: All the benefits received during the life of a project will
constitute the cash inflow. Cash inflow will comprise the following: (a) profit before tax
with interest added back, (b) depreciation, and(c) preliminary and pre-operative expenses
written off. The amount of interest and corporate tax depend on the project debt equity
gearing. If the debt: equity ratio is high, the amount of interest will also be high and,
consequently, as interest is a deductible item of expenditure for purpose of taxation, the
corporate tax will be low and vice versa. Thus, the amount of interest and corporate tax
vary with the pattern of debt equity gearing. Therefore, while calculating IRR for
purpose of comparative study of the income generating capacities of various projects,
profit before tax with interest (on long term and short term borrowings) added back is
taken into account. Similarly, as the amount of depreciation charged and preliminary/
pre-operative expenses written off remain within the unit, they are also added back to
arrive at the total cash inflow.
Terminal value of the project: The terminal value of a project is the residual or salvage
value of the assets at the end of the estimated life of the project. This terminal value of
the project is added to the cash inflow of the last year of the project life. For this
purpose, the value of land may be taken at its input cost less amortisation, if any. The
salvage value of the other fixed assets may be taken at 5% of the cash outflow shown on
account of them. The total cash outflow for inventory and receivable may be taken as the
terminal value of the working capital assets.
Net cash inflow: The net cash inflow will be the difference between cash outflow and
cash inflow for each year. In some projects, the net cash inflow may be negative in the
initial years owing to high cash outflow on investment in fixed assets and working
capital assets. With increased level of production and profitability, the net cash inflow
will become positive in the succeeding years.
Break Even Analysis
In a manufacturing unit, if at a particular level of production, the total fixed cost equals
the contribution (total sales revenue minus total variable cost), this point is known as
Break Even Point (BEP).
BEA is to be carried out for (i) the first full year of production and (ii) the year of
maximum capacity utilization.
The formula to calculate the Break Even Point is as under,
Fixed Costs / Contribution per unit * 100

(Where contribution is “Net Revenue – Variable Costs”)
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However, as a general rule, it can be said that the lower the break-even level, the higher
will be the profitability. In respect of break-even sales, the level should be considerably
low in relation to the projected sales as to leave a satisfactory margin of safety.
As a broad guideline the break-even at installed capacity, the level between 51% and
65% will be in the ‘low risk’ range, the level between 66% and 70% will be in the
medium risk range, the level between 71% and 85%in the ‘high risk’ range. The level
beyond 85% will represent ‘very high risk’ range.
The cash break-even (i.e. without considering ‘Depreciation’ as fixed cost) at installed
capacity should normally be below 50%. Break-even range for different industries/
sectors may be different. A peer analysis may be carried out to compare the break-even
level of a project with that of similar projects in the industry.
The formula to calculate the Cash Break Even Point is as under,

(Fixed Costs – Depreciation) / Contribution * 100
Cost-Volume Price or Sensitivity Analysis:
The purpose of the Sensitivity analysis is to study the cushion available in the
profitability of a project to withstand shortfalls in the expected results owing to
uncertainties i.e., the sensitivity of the project and the degree of resilience available to
withstand the adverse impact arising from minor/major changes/uncertainties in the
profitability parameters. The uncertainties could have a threefold impact on the
profitability of a project – by way of changes in the cost of production, volume of
production and change in selling price. The CVP analysis will reveal the ‘span of
resiliency’ of a project by testing the sensitivity of its profitability to a range of changes
in cost, volume and price. Sensitivity analysis is to be carried out for the year with
operating profit nearest to the average operating profit (total of the operating profits for
all the years divided by the number of years).
Security margin Ratios

Adequate and satisfactory security coverage should be maintained. SMCR is computed
to verify that the minimum margin stipulated is maintained.
Security Margin Coverage Ratio (SMCR)is represented in % terms and to be

calculated as under,
SMCR = WDV of Fixed Assets - Term Loan outstanding
WDV of Fixed Assets

Fixed Asset Coverage Ratio (FACR) is represented in ratio terms and to be calculated
as under,
FACR = WDV of Fixed Assets
Term Loan outstanding
Other important point(s) to be kept in mind and should be furnished in the

appraisal memorandum are as follows:
Repayment programme:While fixing the repayment programme, the annual cash

accruals should be taken into consideration. If an initial moratorium (start-up) period is
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required, reasoned recommendations should be incorporated indicating the basis on
which the period of moratorium has been determined. Repayment programme should be
furnished clearly mentioning the date of start of repayment, number of installments,
frequency of installments etc. preferably in tabular form.
Project Implementation Schedule: Examination of the project implementation

schedule is very important aspect. A cushion of reasonable period say 1-3 months could
also be considered on merits to counter any unforeseen delays in the implementation.
Managerial Competency: In a dynamic environment, the capacity of an enterprise, to

forge ahead of its competitors depends to a large extent, in the relative strength of its
management. Hence, to ascertain that competent men are behind the project to ensure its
successful implementation and efficient management after commencement of
commercial production, credit officer should critically examine the integrity, track
record, credit worthiness, initiative, competence and experience of the management.
Environmental, statutory and other concerns – To ascertain whether the project is in

compliance with various environmental statutory and other provisions in force. Branches
should carefully examine the aspects such as clearances required, their obtention status
and compliance to start the project and maintenance over the life of the loans.
Key Learnings:
1. Important parts of term loan appraisal viz Economic Feasibility, Technical
Feasibility, Financial Feasibility, Commercial Feasibility and Managerial
Competency.
2. Economic feasibility is about the marketability of the product, realistic
expectations of price realization and volume that can be sold.
3. Technical feasibility is about vetting the suitability of technology and tie-ups of
various production factors/linkages.
4. Financial feasibility is about vetting of project cost/capex and means of finance
including vetting of sources of equity.
5. Commercial viability is about verifying if the projected cash flows/accruals are
sufficient enough to meet the repayment obligations.
6. There are seven ratios which need to be calculated under commercial viability;
the most salient ones are DSCR, BEP and IRR.
Check your Progress:

1. Economic Feasibility is about the marketability of the product which the borrower
proposes to produce/sell. A. True B. False
2. Economic Feasibility is all about vetting the projected sales: A True B. False
3. Technical feasibility involves preparing projected cash flow statement:
A. True B. False
4. Financial Feasibility involves preparation of projected financial statements.
A.True B.False
5. Commercial Viability includes finalization of Debt/Equity ratio
A. Maybe B. Sometimes C.False D True
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References: Loan Manual Part 2 Chapter 11.
Circular date Topic

23.07.19 Monitoring of End Use of Funds.
15.12.18 Spl Monitoring of advances
20.04.18 Moratorium period in loans
06.08.19 SOP-Consultancy Cells at LHOs.
04.09.19 TEV Consultant - Assessing the capacity of promoters to
bring Equity.
22.05.19 Term Loans >50cr – Testing of financial covenants
06.07.18 Verification of source of funding of equity.
3. Disbursement of term loans

After loans have been sanctioned, the dealing officials must ensure that all
security/documentation formalities are completed before any part loan is disbursed.
The dealing officials should check the sources of funds for margin and ensure the
genuineness before disbursement in lumpsum in general and state wise sources of funds
for margin at different stages if it is in tranches.
The dealing officials should check the invoices, submitted with the request for
disbursement, with the quotations submitted at the time of appraisal. The payment terms
of the quotations should also be checked and it is to be ensured that the disbursements
are being made as per payment terms of the quotations.
Ensure compliances of pre disbursement conditions and obtain approval before

disbursement.
Ensure direct payment to suppliers through Online Payment.
Disbursement of term loans in installments: On being satisfied about the capital

expenditure already incurred and/or to be incurred as per the budgeted capital
expenditure programme, term loans may be disbursed in installment in a phased manner
according to the requirements of the physical implementation of the project and having
regard to the progress made by the borrower in the mobilization of the means of
financing tied up there for. A suitable disbursement schedule is usually drawn up at the
time of sanction of the term loan taking in to account the phased requirements of funds at
various stages in implementation of the project. Where the disbursements are required to
be made to the borrower to be utilized by him in conjunction with the disbursements to
be made by other participating banks/financial institutions, or otherwise, the dealing
officials should satisfy themselves that the funds so disbursed will be utilized by the
borrower only for the approved purpose. For large projects, support of technical and
legal consultants for carrying out the due diligence processes, TRA mechanism, etc. will
be in place.
FSMTL-1,2 & 3 formats must be used extensively to monitor progress of project and
link TL disbursement to it.
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Disbursement of term loan in lump sum: Disbursement of a term loan in lump sum
may be permissible only in the case of a project/scheme involving onetime acquisition of
isolated plant or machinery not forming part of a composite project subject to the
borrower also bringing in his contribution simultaneously at the time of purchase of the
fixed asset. The disbursement should preferably be made direct to the machinery
suppliers. In case advance payment is to be made, credentials of the supplier should be
carefully examined and risk mitigants like counter guarantee, etc explored to ensure
timely supply.
Disbursement of term loan on reimbursement basis: In the normal course, term loans
are intended to finance capital expenditure to be incurred. However, in special cases, the
appraising official may consider granting of term loans subject to the usual margin
requirements, for reimbursement of capital expenditure incurred by a unit from its own
resources (reserves, fresh infusion etc.) during the preceding period in accordance with
the Bank’s instructions in this regard from time to time, more particularly after seeking
approval from sanctioning authority. In this scenario it is very necessary to ensure the
source of funds from which the capital expenditure was done and the where the funds
(after reimbursement) will be utilized. Exceptionally due care is to be taken while
dealing such type of requests.
Key Learnings:
1. Importance of checking source of equity.
2. End use of funds.
3. Monitoring through FSM formats.
4. Disbursement options.
1. FSMTL-4 is an important format for monitoring of project: A. True B. False.
2. Pre Disbursement condition means the terms/conditions which the borrower needs
to comply with before execution of documents: A. True B. False
References:
1. Loan Manual Part 2; Chapter 11.
2. Loan Manual Part 1; Chapter 6.
3.
Circular date Topic
23.07.19 Monitoring of End Use of Funds.
15.12.18 Spl Monitoring of advances
04.09.19 TEV Consultant - Assessing the capacity of promoters to
bring Equity.
22.05.19 Term Loans >50cr – Testing of financial covenants
4. Miscellaneous:
Review of Term Loan:
• In cases where term loans as well as working capital credit facilities sanctioned to
a borrower, review of TL should form part of the review /renewal of working
capital facilities. Stand alone TLs also need to be reviewed annually.
• Term Loans which are irregular are required to be reviewed once in six months.
Such review of irregular Term Loans is to be included in the periodical review of
“Special Mention Accounts” (SMAs).
• FSMTL-1,2 & 3 formats must be used extensively to monitor progress of
project and link TL disbursement to it.
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Authority structure for review of irregular term loans at half yearly intervals is as per
Banks extant instructions.
Ongoing maintenance of project debt/equity ratio: Where a term loan is disbursed in

installments or in lump sum, the dealing officials must ensure that the project debt/equity
ratio stipulated for the project is maintained at all times while disbursements are being
made. In the case of disbursement of a term loan in installments, the borrower must
bring in his contribution in phases in accordance with the project implementation
schedule and the dealing officials should disburse the term loan in proportion to the
equity brought in so that all the while the project debt/equity ratio stipulated for the
purpose is maintained.
Utilization of term loans:

The proceeds of a term loan must be utilized for the purpose approved by the Bank while
sanctioning the loan. The funds should be credited to an account opened in the
borrower’s name, withdrawals there from being permitted for payment of expenses
incurred for the specific purpose of the loan. Wherever possible, payments may be made
direct to the suppliers/contractors by debit to the term loan account on obtaining the
borrower’s authority therefor. Borrowers should be requested to maintain a separate
register for the purpose, the entries wherein should be verified with the relative vouchers
on the occasion of the periodical inspection of the borrower’s factory/books of account.
The borrower is expected to keep the Machinery register for this.
TERM LOANS: STANDARD ASSETS DISPENSING WITH OBTENTION OF

REVIVAL LETTERS
(i) Remedy available to the Bank for taking legal action for recovery of the loan amount
(debt) due is limited as per the Limitation Act. Limitation periods for different types of
loans are furnished in the table below:
Type of loan Limitation Date of commencement of limitation
Period period
TL 3 years Default in the payment of any of the
instalments or from the date of
acknowledgement of debt/ liability in
writing by the borrowers and the
guarantors or his/her authorised agents.
Equitable Mortgage 12 years From the date when the mortgage debt
falls due, i.e. when a default takes place
and the Bank makes a demand on the
borrower
Personal Liability of the 3 years From the date of default of each instalment
mortgagor (other than of
mortgage security) mortgage loan as mentioned above.
Guarantor, under 3 years From the date of demand and refusal /
continuing guarantee breach on the part of the guarantor to carry
out the obligation.
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Key Learnings:
1. Term Loans reviews to be done periodically.
2. Stipulated D/E ratio to be maintained throughout the
implementation/disbursement period.
3. End use of funds is a very critical compliance issue.
4. Limitation period for various documents.

1. FSMTL-2 is an important format for monitoring of project : A. True. B.False.
2. The limitation period for Term Loan documents would be….years from the date
of default: A. 12 B.3 C. 4 D. 1
References:
1. Loan Manual Part 2;Chapter 11
2. Loan Manual Part 1; Chapter 6
MCQs : Check your Progress
1 Term Loans can be disbursed in

A Lumpsum
B Instalments
C Both of the above
D None of the above
2 The purpose of term loan is mainly for
A Acquisition of fixed assets
B Acquisition of balancing equipment
C Strengthening of NWC etc
D All the above
3 To calculate Gross DSCR , interest is added to both the numerator and denominator
A False
B Maybe
C Cannot say
D True
4 In the calculation of break even point, contribution means
A Fixed expenses
B Sales - Fixed cost
C Sales - All cost
D Sales – Variable cost
5 In a term loan , IRR stands for
A Interest rate of return
B Internal Reset return
C Indian rate of return
D Internal rate of return
Answers:
1 2 3 4 5
C D D D D
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Case Let : Check your Progress
Arvind Pipes is a light engineering company which is proposing capex of Rs 10.00 lacs.
Term loan required is Rs 7.50 lacs. The capacity of the machine is 3 lac units per annum
. Selling price per unit is Rs 25, variable cost per unit is Rs 15; fixed expenses is Rs
4,00,000 p.a (For first year). It payable is 35%. Rate of depreciation as per WDV
method is 25%. Capacity utilisation is 60% in first two years, subsequently to increase to
70%. Loan is repayable over 5 years in equal instalments. The projected figures are as
under : ( in thousands)
Sales 4500 4500 5250 5250 5250

Variable 2700 2835 3472.88 3646.52 3828.84
cost
Fixed cost 400 405 410 415 420
Dep 250 187.50 140.63 105.47 79.10
Interest on 189.00 147.00 105.00 63.00 21.00
TL
PBT 1150 1072.50 1226.50 1083.01 922.05
1. Calculate the BEP for the third year:

A . 36%B. 31%C. 32% D. None of the above
Answer : B
2. Calculate the margin of safety available in the first year:

A. 65% B. 69% C. 63% D. 64%
Answer : D
3. What is the lowest DSCR and in which year?

A 3.50 and 3rd year B. 3.47 and 2nd yearC 3.23 and first year.D 3.17 and first year
Answer : B.
4. Calculate Ave GDSCR :

A. 3.50 B. 3.75 C. 3.86 D 3.79
Answer : D .
5. Out of promoters’ contribution of Rs 2.50 lacs, if 1 lac were to come by way of USL (
repayable after 6 years) , what would be D/E ratio?
A. 5.67:1 B 3:1 C 2:1 D None of the above
Answer B.
Page 268 of 632

CHAPTER 8
CREDIT RISK MANAGEMENT
TYPE OF RISKS, CREDIT RISK MEASUREMENT ASSESSMENT & CREDIT

RISK MITIGATION
Risk is inherent in banking business, but the question before us is how we will define risk
and to identify what types of risk is being faced by banks.
Risk can be defined as the likelihood of an adverse deviation of the actual result from an
expected result. Banks that run on the principle of avoiding risks cannot meet the legitimate
credit requirements of the economy or the shareholders’ expectations of reasonable, normal
and adequate profits. On the other hand, a bank that takes excessive risks is likely to run into
difficulty. So a balanced approach is required to be taken, where a calculative risk is required
to be taken by the banks.
Types of Risks faced by Banks
Banks face a number of risks in different areas of their operations, some of the prominent
risks faced by them are Credit Risk, Market Risk, Operational Risk, Liquidity Risk etc. One
by one we will discuss some of the prominent risks faced by the banks.
Credit Risk has been defined as “The possibility of losses associated with diminution in the
credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright
default due to inability or unwillingness of a customer or counterparty to meet commitments
in relation to lending, trading, settlement and other financial transactions. Alternatively,
losses result from reduction in portfolio value arising from actual or perceived deterioration
in credit quality.”
Credit risk is the most common & predominant risk in banking and possibly the most
important in terms of potential losses. This risk relates to the possibility that loans will not be
paid or that investments will deteriorate in quality or go into default resulting into potential
loss for the bank. Credit risk is not confined to the risk that borrowers are unable to pay; it
also includes the risk of payments of the bills being delayed beyond the maturity time, which
can also cause problems for the bank. Some of the related risks to credit risk are
• Counterparty Default Risk: This refers to the possibility that the other party in an
agreement will default.
• Securitization Risk: Securitization is a process of distributing risk by aggregating
debt instruments in a pool and then issuing new securities backed by the pool.
There are two types of securities, viz. traditional and synthetic securitizations. A
traditional securitization is one in which an originating bank transfers a pool of
assets that it owns to an arm’s length special purpose vehicle. A synthetic
securitization is one in which an originating bank transfers only the credit risk
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associated with the underlying pool of assets through the use of credit-linked notes
or credit derivatives while retaining legal ownership of the pool of assets.
• Concentration Risk: A concentration risk is any single exposure or group of
exposures with the potential to produce losses large enough (relative to a bank’s
capital, total assets, or overall risk level) to threaten a bank’s health or ability to
maintain its core operations.
Market Risk: Market risk generally refers to risks which result from changes in market
variable viz. price changes in the currency, money and capital markets etc. Market risk also
results from sensitivity to foreign exchange fluctuations due to open foreign exchange
positions and (in the broadest sense) open term positions. Some of the types of market risk
are
• Interest Rate Risk (IRR): Interest rate risk (IRR) is defined as the change in investors’
portfolio value due to interest rate fluctuations. The IRR management system is
concerned with measurement and control of risk exposures, both in trading book (i.e.
assets that are regularly traded and are liquid in nature) and in banking book (i.e.,
assets that are usually held till maturity and rarely traded).
• Equity Price Risk: This risk arises due to fluctuations in market prices of equity due to
general market-related factors.
• Foreign Exchange Risk: This risk arises due to fluctuations in exchange rates.
Operational Risk: The risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events is called Operational Risk. This definition
includes legal risks, but excludes strategic and reputation risk.
• Compliance / Legal Risk: Compliance/Legal risk includes, but is not limited to,
exposure to fines, penalties or punitive damages resulting from supervisory actions,
as well as private settlements. Legal/compliance risk arises from an institution’s
failure to enact appropriate policies, procedures, or controls to ensure it conforms to
laws, regulations, contractual arrangements, and other legally binding agreements
and requirements.
• Documentation Risk: The unpredictability and uncertainty arising out of improper or
insufficient documentation which gives rise to ambiguity regarding the
characteristics of the financial contract is referred to as documentation risk.
Liquidity Risk: Liquidity risks arise from a bank’s inability to meet its obligations when they
fall due, and refer to situations in which a party is willing but unable to find counterparty to
trade an asset.
• Term Liquidity Risk: The risk arises due to an unexpected prolongation of the capital
commitment period in lending transactions (unexpected delays in repayments).
• Withdrawal / Call Risk: The risk that more credit lines will be drawn or more deposits
withdrawn than expected is referred to as withdrawal or call risk. This brings about
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the risk that the bank will no longer be able to meet its payment obligations without
constraints.
• Structural Liquidity Risk: This risk arises when the necessary funding transactions
cannot be carried out (or can be carried only on less favourable terms). This risk is
sometimes also called funding liquidity risk.
• Contingent Liquidity Risk: Contingent liquidity risk is the risk associated with finding
additional funds or replacing maturing liabilities under potential, future stressed
market conditions.
• Market Liquidity Risk: This risk arises when positions cannot be sold within a desired
time period or can be sold only at a discount (market impact). This is especially the
case with securities/derivatives in illiquid markets, or when a bank holds such large
positions that they cannot be sold easily. These market liquidity risks can be
accounted for by extending the holding period in risk measurements (e.g. the
holding period for VaR) or by applying expected values derived from experience.
Other Risks
• Strategic Risk: Strategic risk refers to negative effects on capital and earnings due to
business policy decisions, changes in the economic environment, deficient or
insufficient implementation of decisions, or a failure to adapt to changes in the
economic environment.
• Reputation Risk: Reputation risk refers to the potential adverse effects which can
arise from bank’s reputation deviating negatively from its expected level. A bank’s
reputation refers to its image in the eyes of the interested public (investors/lenders,
employees, customers, etc.) with regard to competence, integrity and reliability).
• Capital Risk: Capital risk results from an imbalanced internal capital structure in
relation to the nature and size of the bank, or from difficulties associated with
raising additional risk coverage capital quickly, if necessary.
• Earning Risk: Earning risk arises due to inadequate diversification of a bank’s
earnings structure or its inability to attain a sufficient and lasting level of
profitability.
• Outsourcing Risk: While there are many ways to categorize outsourcing risk, four of
the most convenient are operational disruption risk, data risk, quality risk and
reputation risk.
Though lot number of risks is faced by banks, but Basel Committee on Banking Supervision
(BCBS) in their Basel II accord has elaborated three types of risks viz. Credit Risk,
Operational Risk and Market Risk, under Pillar 1 (component on Minimum Capital
Requirements). However, their Pillar 2 (component on Supervisory Review Process)
involves bank management to develop systems that support the internal capital assessment
process and it should also allow for setting targets for capital that are commensurate with the
Bank’s particular risk profile and control environment.
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As under Basel II, the revised credit risk framework provides two main approaches for
calculating credit RWAs:
Standardised approach (SA) - Under the SA, banks use a prescribed risk weight schedule
for calculating RWAs. Similarly to Basel II, the risk weights depend on asset class and are
generally linked to external ratings, but enhancements have been introduced.
Internal ratings-based (IRB) approach - Under the IRB approach, banks can use their
internal rating systems for credit risk, subject to the explicit approval of their respective
supervisors. Similarly to Basel II, banks can use either the advanced IRB approach (ie use
their internal estimates of risk parameters such as probability of default (PD), loss-given-
default (LGD) and exposure-at-default (EAD)) or the foundation IRB approach (ie use only
their internal estimates of PD).
Risk Management today is more than Compliance of Regulatory Guidelines. It is about

building value by optimizing, rather than minimizing risk. Risk management is not about
avoiding risk. It helps banks to be aware of the risks inherent in the business and take
advantage of this knowledge to gain a competitive edge and enhance shareholders value.
Risk creates opportunity >>> Opportunity creates value >>> Value creates stakeholders’
wealth.
MEASUREMENT OF CREDIT RISK

As we discussed above credit risk is the predominant risk faced by the banks, as the most
traditional & widespread work a bank undertake is Lending. Once this credit risk has been
identified, the next step involved is to measure the Credit Risk. Traditionally bank was
assessing the Credit Risk through a process which was subjective in nature and the same was
being done by the credit Officials involved in the process.
However, with increased complexity in lending, judging the entire credit involved in a
particular proposal subjectively became more and more difficult. To overcome this problem,
some models were designed by the banks to capture the underlying risk in any proposal. So
our bank has developed a model to measure credit risk called Credit Risk Assessment
(CRA) Model.
The Credit Risk Assessment (CRA) is central to the credit appraisal drill and pricing of
the credit. Assets classified as ‘Standard Assets’ only are expected to be risk rated. A review
of Credit Risk Assessment(CRA)Models for Non-Trading & Trading Sectors was undertaken
with the objective of making them Basel-II compliant and meeting the requirements of
Internal Ratings Based (IRB) Approach.
It is reiterated that the CRA Model is mandatory for all accounts with Aggregate Exposure
(Fund Based + Non Fund Based) of Rs. 50.00 lacs and above for both Non-Trading Sector
(C&I, SSI and AGL segments), Trading Sector, Services and Construction Sector, which
includes lending under various schemes of the Bank.
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Bank has been developing scoring models for all products with exposure of less than Rs.50
lacs.
However for measuring of Risk for the proposal which are governed by `Project Vivek`
(Only applicable for exposures up to Rs 50 crores in NBG) apart from CRA , Risk will also
be captured through `CUE` (Credit underwriting Engine),detail guidelines of which will be
covered subsequently in the chapter.
Different Models for Risk Rating:

We have developed different risk rating models depending upon the special nature of our
different assets, some of the models are as under:
(a) Credit Risk Assessment Models for Trade, Non-Trade, Services and
Construction Sectors
(b) CRA Models for NBFCs/HFCs
(c) Rating Model for Infrastructure Projects (RAMIP)
(d) CRA for Residential Real Estate
Further depending upon the exposure, the following risk rating models are used to assess
credit risk under the CRA System,
S. No. Exposure Level (FB + NFB Limits) Model

(i) Over Rs.5.00 crore Regular Model
(ii) Rs.0.50 crore to Rs.5.00 crore Simplified Model
Type of Ratings:
S. No. Model Type of Rating

(i) Regular Model Borrower Rating
Facility Rating
(ii) Simplified Model Borrower Rating
Thus the main difference between Regular Model and Simplified model is computation of
facility rating applicable in Regular rating, where apart from Borrower rating , different
facilities enjoyed by the borrower like Cash Credit, Term Loan , LC,BG etc are also being
rated separately under facility rating exercise. For example, suppose a customer has been
sanctioned a Cash credit limit, Term Loan limit, LC limit and a bank Guarantee limit and
total exposure is Rs10 Crores, then this customer will be having one borrower rating and four
facility rating for each of the facilities(CC,TL,LC,BG) sanctioned to it.
TYPE OF RISK WHICH IS CAPTURED IN RATING MODELS:
In both the models the main types of risk which are captured are as under
i. Financial Risk: Mostly different type of financial ratio being used to evaluate
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financial Risk
ii. Business & Industry Risk: Factors related to Business & Industry (both Systemic&
Non systemic)
iii. Management Risk: Factors related to Promoters are captured in management Risk
Different weights have been assigned to the above three factors depending upon the exposure
and activity (Trade, Non-Trade, Services & Construction, however construction model is
applicable only in case of Regular model, which is meant for EPC contractors)
On the line of CRA, risk involved in financing to a borrower is also captured by way of
External Credit rating (ECR), which is mandatory in case of exposures of above Rs50 Crores
(Below cutoff it can also be obtained but not mandatory as per extant instructions of bank).
To give incentive to customers having better ECR, provision for giving additional scores for
better ECRs is also made in our internal models.
SALIENT FEATURES OF OUR RATING MODELS:
Entry Barriers:
In all CRA models except R e g u l a r Non-trade Model (Regular / Simplified and
Trade/Services/ Construction Sectors), all proposals are required to be rated first under
two parameters of ‘Compliance of Environmental Regulations & Local Laws’ and
‘Integrity’, called Entry Barriers. A new connection (a unit which at present does not have
any credit relationship with SBI) that does not clear both the entry barriers would not be
processed further and would be declined. No deviation is envisaged in the Entry Barrier.
For existing connections, in case of non-compliance, a separate treatment of downgrade to
below the hurdle ( SB-10 is the hurdle rating, where no fresh or additional exposure is to be
taken without obtaining approval from competent authority )rating or actual rating
whichever is lower will be done. For example, if an existing unit is assigned as SB-8 but
fails to clear entry barrier then its rating will be downgraded to SB-11(SB-10 is the hurdle
rating, where no fresh or additional exposure is to be taken without obtaining approval from
competent authority), similarly if rating assigned to the unit is SB-12 and it also fails to clear
entry barrier then rating will be left as SB-12 as it is already below hurdle rate.
Further, Group Approach under Integrity in entry barriers has been introduced in both
simplified and regular model and is stated as below:
a) For new units: If any of the of group entities attributed to the promoter of applicant
company has been reported as default, fraud, RFA or SMA-2, no further processing of the
proposal as a part of entry barrier.
b) For existing units: In case of default, reporting of RFA, Fraud by any of the group entities,
the final credit rating of the applicant company would be downgraded by 3 notches and
simultaneously operating functionary should explore to exit from the exposure.
Frequency of Assessment under Entry Barrier

Existing Connections:
● Annual Review or Renewal at Existing Level/Renewal with Enhancement;
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● Any Facility being assessed for sanction subsequent to Annual Review/Renewal e.
g., Working Capital/Term Loan/NFB Facilities.
New Connections:
i) First Sanction/subsequent review;
ii) Any Facility being assessed for sanction subsequent to First Sanction e. g.,
Working Capital/Term Loan/NFB Facilities;
Further to test the clearance of a unit of the entry barrier, all the units will be subjected to
under noted value statement and accordingly clearance of entry barrier will be decided.
i: Entry Barrier: Compliance of Environmental Regulations & Local laws
ii. Entry Barrier: Integrity
Qualitative Parameter (External Rating) :

As discussed above, the additional scores for better ECR will be given under Qualitative
parameter of our Internal models (CRA).
Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to

additional Score (Long Term Bank Loan Ratings given by the External Rating Agencies
would qualify). Following ECRAs recognized by RBI are considered for this purpose:
S. Type ECRA
No.
1 Domestic (a) CARE Limited ;
(b) CRISIL Limited;
(c) India Ratings and Research Private Limited (India
Ratings)
(d) ICRA Limited.
(e) Brickwork Ratings India Pvt. Ltd. (Brickwork)
(f) SME Rating Agency of India Limited (SMERA)
(g) Infomerics
2 International (a) FITCH (b) Moody’s (c) Standard & Poor’s
External Credit Rating Agencies (ECRAs) assign Bank Loan Ratings (BLRs) on long-term
and short-term rating scales for various credit facilities. Cash Credit exposures should be
reckoned as long term exposures and accordingly the long-term rating awarded by ECRAs
will be relevant. The BLR for Cash Credit facility should be reckoned for borrowers enjoying
Cash Credit facility and other facilities such as Term Loan, Bank Guarantee, Letter of Credit
facilities. If a borrower is enjoying long term facilities (other than Cash Credit) as well as
short term facility, BLR for long term facility be considered. However, if a borrower has
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availed only a short-term facility which has been rated by an ECRA, BLR for the same may
be considered. The Scoring Bands for factoring Bank Loan Ratings of ECRAs (Long
term/Short Term) are as under:
Long Short Standardized Additional Score Under New
Term Term Approach Risk CRA Models
Rating Ratin Weight
AAA A1+ g 20% 5
AA A1 30% 3.5
A A2 50% 2
BBB A3 100% 1
BB & below A4 & D 150% 0
Applicability of Issue Rating:
In circumstances where BLR in respect of a borrower is not available but a debt-issue
of the borrower has been rated by an ECRA, such issue rating can be considered for
awarding score if the Bank’s claim in respect of credit facilities ranks pari passu or senior to
the rated debt issue.
Multiple Ratings:
In case of borrowers having multiple ratings from recognized ECRAs, following procedure
is to be followed:
i)If there is only one ECRA rating for a particular claim, that rating would be used to
determine scoring;
ii)If there are two ratings accorded by ECRAs which map into different risk weights, the
rating corresponding to the higher risk weight would be taken cognizance of for scoring;
iii)If there are three or more ratings accorded by ECRAs, with different risk weights, the
ratings corresponding to the two lowest risk weights should be referred to and the rating
corresponding to the higher of the two risk weights should be taken cognizance of for
scoring.
Once score under the above mentioned risk factors (Financial, B& I, Management &
Qualitative parameter) is computed based on the overall score a rating is assigned to the unit.
Depending upon the overall score obtained by the unit, one borrower rating is assigned
against which can be from SB-1 to SB-15 for standard accounts (SB-16 is default ratings for
all NPA accounts). Similarly facility rating is assigned to all the facilities enjoyed/proposed
for the borrower which is again rated on a scale of total 16 grades starting from FR-1 to FR-
16. (The scores applicable for each grade both for borrower & facility ratings is attached as
Annexure I)
Downgrading the account consequent to turning NPA: In terms of circular vide

CCO/CPPD-ADV/123/2019 – 20 dated 18.11.2019
i. Downgrade the CRA rating of the Borrower to SB-16 upon account (s) becoming NPA
ii. Concession extended, if any, should be withdrawn and card rate shall be made applicable.
iii. Reset interest rate to the rate applicable to SB-15.
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iv. The operating functionaries should ensure that the following clause is included in the
arrangement letter cum sanction letter to be exchanged with borrowers and guarantors:-
“The Borrower agrees that upon the account of the Borrower being categorised as Non
Performing Asset (NPA) as per the extant Income Recognition and Asset Classification
(IRAC) norms of RBI, the Borrower shall pay interest at the default rate per month on the
entire outstanding amount of the loan for the period that the account shall remain NPA.
Default rate shall mean the rate of interest over and above the MCLR or others as shall be
applicable in case the Credit Risk Assessment (CRA) for an account is the highest
(presently interest rate applicable to SB-15) as per norms of CRA linked interest rate
applicable in the Bank.”
Country Risk:
Country risk is the risk that a borrower will not be able to service its obligations to pay
because of cross border restrictions on the convertibility or availability of a given currency.
It is also an assessment of the political and economic risk of a country. Country Risk is
assumed to exist when 25% or more of the borrower’s cash flow or assets are located
outside India. Country Risk Ratings are circulated by IBG.
Country Risk Assessment Applicability/Clarifications
i) Country Risk would be applicable to units having 25% or more of Cash flows
/Assets to countries starting from Medium Risk.
ii) If entire such exports fall under single category from ‘Medium Risk’ category to
any of the ‘Higher Risk’ Categories, Borrower Rating would
iii) In case of Unit having aggregate exports of 25% or more (of sales) to various
countries (under 4 categories of ‘Medium’ to ‘Higher Risk’ i.e. Medium Risk/High Risk &
under Caution/Very High Risk & under Caution/ Off Credit, Restricted & under Caution),
two categories would be identified which contribute maximum of such exports and rating
would be arrived for those two categories based on the table provided below. In such
case the lower of the two ratings as arrived above would be the Final Borrower Rating of
the Company. However, for a country to be included in the above calculation, a minimum
5% export criteria would be applied. For example, if a unit has a total of 26% exports to
risky countries, comprising of 23% to “High Risk & Under Caution” and 3% to “Off Credit,
Restricted & Under Caution“, then as per lower of the two rating rule, downgrade
corresponding to “Off Credit, Restricted & Under Caution” should be applied. However,
since export to this category is 3 % i.e. less than 5%, this would be ignored and downgrade
corresponding to “High Risk & Under Caution” would be applicable.
iv)Exports against advance payment would not be taken into consideration for Country
Risk Rating. Further, in cases where risk arising out of exports to ‘Medium Risk’ to ‘Higher
Risk’ category countries is mitigated by a L/C from a first class Bank recognized by SBI
or by ECGC cover, the Country Risk Rating would not be applicable. However, such
details of exposure along with the type of risk mitigation available will have to be explicitly
indicated in the CRA assessment sheet for validation by the CRA validation Committee or the
equivalent authority as the case may be.
Change in Rating based on Risk Category of Country*
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Country Rating/s Change in Rating
Insignificant Risk, Very low Risk, Low Risk, Low NIL
Medium Risk, Medium Risk
Medium Risk But Under Caution Down by 1 stage

High Risk & Under Caution Down by 2 stage
Very High Risk & Under Caution Down by 3 stage
Off Credit/Restricted & Under Caution Down by 4-stage
* Country Ratings are circulated by IBG from time to time for latest category of countries ,
please refer the latest available circular.
The downgrade in rating on account of country risk is not applicable in simplified model of
CRA rating.
v) If the borrower rating undergoes a downgrade of 2 or more stages on account of

country risk, the sanction of credit facilities (not deviation) would be required to be obtained
from a higher authority in the following manner:
Sanctioning Authority Sanction Required from higher authority
Below CLCC CLCC
CLCC, RCCC, CCSC, CCCC Sanctioning Authority
ECCB ECCB
Basis of Risk Assessment:

CRA rating of the unit is always one based on audited/Projected financials depending upon
the activity status, which is as under.
Activity Status Basis of Risk
Assessment
Newly incorporated unit where the Projected
production/commercial production is yet to begin Financials
Newly incorporated unit where the audited Projected

financials relate to less than 12 months of Financials
commercial production.
Newly incorporated unit where the audited financials
reflect minimum12 months of working after the start Audited
of commercial production. Financials
For rating purpose, a new unit refers to a newly incorporated Firm/Company which may
continue to be regarded as new for a period of three years after the start of commercial
production. However, in the case of Companies/Firms promoted by an established Group, a
view regarding their status as new or otherwise would be taken by the CGM of the
Circle/CAG/Mid- Corporate after one year’s performance
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OTHER IMPORTANT GUIDELINES RELATED TO CRA RATING
I. In case of Advances given in consortium arrangement, it is our share alone that would
determine the CRA model to be used.
II.CRA Models are applicable across the Bank for all exposures of Rs. 50 lacs and above.
These models do not provide for any exemptions (including that for schematic lending’s)
unless the exemption is specifically approved by CPPC.
III. For units engaged in both ‘Industrial’ & ‘Trading’ activities, the Risk Rating will be
done based on the predominant activity financed by the Bank and the relevant model used,
predominant activity being more than 50%.
IV. In a Multi Division Company, the thrust of scoring under ‘Industry Outlook’ would be
limited to the industry being financed by the Bank.
V. Wherever a parameter is not applicable, the score would be normalized.
VI. For a new unit, where value statements for some of the parameters appear to be out of
place for scoring, the Credit Analyst would assess whether the unit has any plans to measure
upto the levels indicated under those value statements and then score accordingly.
VII. While Borrower Rating of a unit will remain unchanged (unless dynamic review of
internal rating is not done) for a period up to one year, the different facilities would be rated
simultaneously with Borrower Rating or as and when the facility is sanctioned/reappraised.
A unit would carry several different Facility Ratings e.g. if a unit is enjoying one Working
Capital facility & two (say) Term Loan facilities, it will have one Borrower Rating & 3
Facility Ratings.
VIII. Borrower Rating would not be assessed each time a new facility is sanctioned to the
unit within the year.
IX. While working out the Facility Rating, the share of total security against that facility
will be worked out to score under Total Security (Primary + Collateral).
X. For bill discounting limits under Letters of Credit sanctioned outside the total
indebtedness at specified branches, risk rating under CRA system is not necessary. However,
such rating would be necessary for BD limits granted at non-specified branches in as much
as these limits would form part of the Assessed Bank Finance (ABF) and within the total
indebtedness ceilings.
XI. In case of loan proposals having Corporate Guarantor, CRA rating of the such
corporate guarantor will also be carried out and furnished in the appraisal
memorandum.
XII. CRA rating to be done annually, however for borrowers rated SB11 and below would
be rated at half-yearly intervals due to the risk severity of the loan for cases below total
exposure of Rs10 Crores.
XIII: While aggregating Score for Risk Grading, Score up to 0.4 to be ignored, Score of 0.5
or more to be rounded off to the next number
XIII. The rating of any new unit will be capped at SB-06 under CRA simplified model.
Similarly for regular model, for non trading model the same has been capped at SB-5 and for
others model under regular the capping is at SB- 6
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Forex Risk: Foreign exchange risk is a financial risk that exists when a financial transaction
is denominated in a currency other than the domestic currency of the company. The exchange
risk arises when there is a risk of an unfavourable change in exchange rate between the
domestic currency and the denominated currency before the date when the transaction is
completed. The borrower is required to hedge the forex business.
Unhedged Foreign Currency Exposure (UFCE): UFCE pertains to total unhedged

exposure of the corporate and is not limited to unhedged portion of bank’s
exposure to the corporate. UFCE in currencies other than USD may be converted to
USD at market rates and total amount of UFCE may be computed in USD. For the
purpose of UFCE, any natural hedge (foreign currency exposure may be treated as
naturally hedged if the corporate is having uncovered receivables to cover its
foreign currency exposure) available to the corporate should be excluded. The
amount UFCE will represent the portion of foreign currency exposure which is not
hedged using derivatives.
CRA rating models take into account Likely loss on account unhedged foreign
currency exposure as a percentage of EBID. Likely loss contained within 15% of
EBID is considered fetches full marks under this head. 15% is considered using
annual INRUSD volatility.
Group Risk: The borrowing entity may be subjected to financial loss on account of
any of its group, sister or associate entity. Thus group risk arises on account of
activities of group, sister or associate entity. CRA rating model assesses group risk
and assigns marks to it. The extent of risk is measured as a percentage of TNW of
the borrowing entity. One of the barometer of assessing this risk is the conduct of
the account of the group/ associate/ sister company with its lender. The risk is
obviously higher if any or all of the group/ associate/ sister company’s account is
classified as SMA1 or SMA2. The impact on the borrowing company can be
assessed based on the size, net worth and liabilities of the group/ associate/ sister
company.
Financial Statement Quality:

The credit analyst is to comment on the quality, adequacy and reliability of financial
statements/information irrespective of the Risk Rating. This includes consideration of the
size and capabilities of the accounting firm, compared to the complexities of the borrower
and its financial statements. The comments on the quality of financial statements should
include the quality of information provided to the Bank. The Quality is to be indicated as
Excellent/Good/ Satisfactory/Poor. This step is not instrumental in improvement of rating
but is helpful in defining the best possible Borrower Rating.
Risk Score/Rating Transition Matrix:
A major fluctuation in scores resulting in up gradation or deterioration in Rating by more
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than one stage is to be commented upon. Up gradation in Rating only on account of higher
score in parameters other than Financial Risk, is to be examined and commented upon. This
provides an additional risk awareness tool for the Credit Ana
SIMPLIFIED Model.
While appraising official will prepare the CRA proposal, assessing official would cross
check the inputs and scores awarded.
In respect of proposals from MCG/CAG/PFSBU, additional assessment would be done by
the head of the branch in respect of scores awarded under Business/ Industry and
Management Risk parameters.
Borrower Rating : Simplified Models

Sr. No. Maximum Score
Risk Non-Trade Trade Services
Category/
Sector
Existing New Existing New Existing New
Com- Com- Com- Com- Com- Com-
pany pany pany pany pany pany
i Financial Risk (FR) 55 25 55 25 55 25
ii Qualitative Factors (-10) (-10) (-10) (-10) (-10) (-10)
(-'ve')
Business &
iii Industry Risk (BR
& IR)/ Business 15 30 15 30 15 30
Risk (for Trading
Sector)
Management Risk 30 45 30 45 30 45
iv (MR)
Qualitative
Parameter (+5) (+5) (+5) (+5) (+5) (+5)
v (External
Rating)
Total Score 100 100 100 100 100 100
Borrower Rating SB- SB- SB- SB- SB- SB-
vi based on the Rating Rating Rating Rating Rating Rating
above score
Financial Statement
vii Quality Excellent/Good/Satisfactory/Poor
Risk Score/Rating
viii Transition Matrix Comments on Trend in Rating
* New Unit Risk Factor to be capped at SB-06.
Note on Scoring:
(i) Calculation under ‘Average of last 3 years’ includes latest year.
(ii) In order to qualify for scoring under ‘Average of Last 3 years’ sub-parameter ,
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minimum data for last two years including the latest year would be required.
(iii) In the event of non-availability of the minimum data as indicated in sub- para (ii)
above, ratio- wise normalization will be done.
(iv) Gross DSCR (for all loans) : Gross DSCR for next financial year (covering the year
in which rating is being done) is to be reworked at the time of rating to ascertain the
sufficiency of cash accrual or otherwise for continued repayment ability of the loan.
(v) For existing companies seeking additional Term Loan Facilities, Gross Average
DSCR (for all loans) would be calculated taking into account the proposed TL
Facilities.
Hurdle Scores & Hurdle Rating :

Under both CRA simplified & Regular models, hurdle scores (Minimum required score)under
all the three risk areas (Financial, B & I ,Management) as well as hurdle rating (Minimum
required rating) has been prescribed, which is given hereunder in the tabular form. For
borrowers rated below SB-10 (hurdle rating) no fresh/enhancement in existing exposure is
proposed without obtaining approval from appropriate authority. But for scores below hurdle
in Financials, B&I and management risk there is no bar on fresh/enhanced exposure but after
proper justification of the scores below hurdle rate is required to be given in the proposal.
REGULAR MODEL HURDLE SCORE & RATINGS
Risk Types Non Trading Trading Services Construction

Existi New Existing New Existing New Existin New
ng Unit Unit Unit g Unit
Financial Risk 23/60 10/25 21/55 10/25 21/55 10/25 23/60 10/25
Business & 9/15 16/30 6/10 16/30 9/15 16/30 9/15 21/40
Industry Risk
Management 13/25 22/45 18/35 22/45 15/30 22/45 13/25 17/35
Risk
Aggregate 45/100 48/100 45/100 48/10 45/100 48/100 45/100 48/100
Hurdle Score 0
Overall Hurdle SB 10 SB 10 SB 10 SB 10 SB 10 SB 10 SB 10 SB 10
Grade
For further guidelines on CRA regular model, please refer Circular no CRO/RMD-
CRMD/9/2019-20. Date : Friday-4th October 2019)
Simplified Model
Non Trading Trading Services

Risk Types Existi New Existin New Existing New
ng Unit g Unit Unit
Financial Risk 24/55 10/25 24/55 10/25 24/55 10/25
Business & Industry 8/15 17/30 8/15 17/30 8/15 17/30
Risk
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Management Risk 15/30 22/45 15/30 22/45 15/30 22/45
Aggregate Hurdle 47/100 49/100 47/100 49/100 47/100 49/100
Score
Overall Hurdle SB 10 SB 10 SB 10 SB 10 SB 10 SB 10
Grade
# Score Range 45-49 corresponds to SB10. Hence as per New CRA Models SB10 is the
new Hurdle Grade.
Framework for Dynamic Review of internal Ratings:

As per Bank’s Risk Rating Policy, higher risk borrowers or problem exposures, must be
subject to more frequent review. To implement the policy, framework for dynamic review of
internal ratings has been introduced. The salient features of Dynamic review are as under:
(a The frame work will be applicable for total exposure of Rs.10 Crores & above in all
Business Groups including IBG with triggers.
(b)Total exposures of Rs.500 Crs & above (half yearly dynamic review, without triggers)
(c) Dynamic Review of CRA is “purely subjective”, based on both qualitative and
quantitative information.
(d) Only downgrades as part of dynamic review. Upgrades will be based on full review of
annual audited financials
Objective:
Key objectives of this framework are:
• To protect interest of the Bank by reviewing the internal credit rating on an

ongoing basis
• To ensure that the internal borrower rating reflects the inherent credit risk in line
with broader risk perception.
• To capture deterioration in credit quality that may affect Bank’s interest.
• To initiate corrective action and facilitate correct pricing of risk.
Benefits:
Key benefits expected from implementation of this framework are as under:
• Early identification of deterioration in credit quality to facilitate timely corrective

action.
• Improvement in model performance and its predictability.
• Pricing appropriately commensurate with the changes in risk profile of the borrower.
Scope of Review & Rating Downgrade:
a. All material information available internally or externally which have significant

adverse effect on credit profile of the borrower to be considered. Factors / triggers that
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have “significant adverse impact” on credit profile of the borrowers are only
considered for dynamic review of rating. An illustrative list of key triggers for dynamic
review is given in circular in detail. Any other scenarios /triggers which may have
significant negative impact on operations of the units and repayment of credit
extended by the Bank, may be used for downgrade.
b. Further, these identified triggers are classified into four categories viz, Financial
Risk, Business & Industry risk, Management Risk and other Risk. Rating downgrade
framework is designed to assess the impact of such triggers. The minimum likely
notches to be downgraded in the internal rating are mentioned in the framework.
The rating downgrade framework is given in detail in the circular.
c. These minimum notches based on unit specific triggers, will be captured in

“Dynamic Review of CRA” format as per Annexure III to arrive at the resultant
revised CRA rating.
d. Only downgrades in internal rating should be done as part of dynamic review.

Upgrades in internal rating should only be done based on regular / full CRA review
based on annual audited financials.
E. Applicability:
There are two types of review under this framework namely trigger based review and
non-trigger based review.
a. Trigger based review: In case of borrowers with exposure of Rs. 10 Crores

& above, Dynamic Review of the rating to be conducted as and when
triggers are observed. This framework will also be applicable to borrowers
rated under CUE model.
b. Non-trigger based review: For borrowers enjoying aggregate limits of

Rs.500 Crores & above, Dynamic Review of the rating is to be conducted at half
yearly intervals even if there is no trigger.
PSUs with Maharatna or Navratna status, will be exempt from the

purview of non-trigger based dynamic review provided there is no
change in their status.
Triggers: A detailed list of triggers is given the circular CRO/RMD-CRMD/7/2019

- 20 dated 04.10.2019. Triggers given in the list are illustrative. Operating unit may choose
any other triggers, which may adversely impact the credit worthiness of the borrower
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Review Process:
a. Operating Units (BUs) to initiate review of rating and action based on triggers.
b. Review may also be initiated by the controllers / administrative offices as

under:
Business Group Administrative Office /Authority
CAG CGM (CAG)

CCG CGM (CCG)
NBG GM – Network
IBG CGM (IBG)
c. In case of Industry-wide impact, such triggers may also be highlighted by Risk

Management Dept., for BUs to take-up unit-wise reviews, within that industry.
d. Rating reviews to form integral part of Irregularity Report
e .In case of events where impact is not clearly perceptible, borrower may be put on
‘Rating Watch’. On further clarity on impact of that event, rating may be
downgraded.
There is no limitation on number of Dynamic Reviews for trigger based review and it
should be assessed on “as and when basis”.
Authority Structure:
a) If rating downgrade is proposed by operating unit:
Sanctioning Authority Approving Authority for Revised rating

Up to CCCC Sanctioning Authority
ECCB CCCC (Summary to be put-up to ECCB)
b) If rating downgrade is not proposed by operating unit:
Sanctioning Authority Approving Authority
Committees at Corporate Centre like CCSC, CCCC,

CGM Circle /BU
ECCB
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Committees like RCCC, CLCC Sanctioning Authority
• The reason for not downgrading despite trigger need to be articulated.
• Approving Authority has discretion either to approve the existing rating or

suggest downgrade.
• If downgrade is suggested by approving authority, dynamic review of internal
rating shall be put up to the sanctioning authority for approval.
Corrective Steps required to be undertaken:

In all cases of trigger based Dynamic review, the future course of action and
roadmap for improving the performance of the borrower has to invariably be
analysed and recorded. An illustrative list of corrective steps is detailed hereunder:
a. In line with increase in risk perception as reflected by rating downgrade,
pricing to be reviewed.
b. Risk Mitigants such as such as escrow of cash flows (if not already done)
additional collaterals / guarantees/ increase in margins commensurate with the
increased risk level may be called for.
c. Option of cancelling unavailed limits may be examined.
d. Exit option, in case of high risk borrowers, may be exercised.
(For further detailed guidelines ,please refer the latest Circular No. : CRO/RMD-
CRMD/7/2019 - 20 dated 04.10.2019.
MAPPING OF INTERNAL & EXTERNAL RATINGS:
Where ever both internal (CRA) &external rating (ECR) are available ,a mapping exercise is
required to be carried out to check whether both internal & external ratings are mapped(in
simple terms in line or not) or not.
The following approach has to be adopted with respect to the mapping exercise at the
time of Credit Risk Assessment as well as review of External Rating:
i. Internal Rating and External Rating match or External Rating is better than
the mapped Internal Rating: No action required.
ii. External Rating is worse than the mapped Internal Rating: Operating Units
have to review the internal rating, considering the additional information factored by
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external rating agency as triggers, which may have an adverse impact on the rating of
the unit / borrower, and take a decision either to downgrade or retain the internal
rating.
In case it is decided to retain the rating, justification along with the parameters
identified, has to be provided.
The review of Internal Rating should be validated as under:
a) If mapping is done at the time of annual review of Internal Rating: CRA
Validation committee.
b) If mapping is done subsequent to annual review of Internal Rating: As per the
framework for Dynamic Review of Internal rating.
The exercise is required to be carried for exposure more than Rs 50 crores and three
separate mapping tables for different limits/exposures for mapping the internal
and external ratings is provided
(For further guidelines, please refer Circular no CRO/RMD-CRMD/8/2019 - 20. Date :
Friday - 4th October 2019)
Features of Facility Rating:
i) Facility Rating Design

A Borrowing Company may be availing either one or more of Fund Based (FB) Facilities
such as Working Capital (WC)/Term Loan (TL) or/ and Non- Fund Based (NFB) Facilities
like, Letters of Credit (L C)/Bank Guarantee (BG). All the facilities are to be rated separately
viz., if a Borrowing Company has both WC & TL & two Bank Guarantee Facilities & three
different L/C Facilities; in total, the Company would have one Borrower Rating & seven (i.
e, 1+1+2 + 3 = 7) Facility Ratings.
The pricing of loans, in future, will be linked to Facility Rating after building up adequate
Loss Given Default (LGD) data base. For the present, pricing will continue to be linked to
Borrower rating only.
ii) Facility Hurdle Rate

All facilities are expected to meet the Facility Hurdle Rate of FR10. Reasons for not crossing
this Hurdle Rate would need to be commented upon by the Credit Analyst. Under Facility
Rating, if the score goes below the hurdle rate of FR10, the reasons for low score are to be
given.
iii) Loss Given Default (LGD)

Facility Rating would reflect the degree of severity of loss in the event of default on the
obligation. Facility Rating Grade will thus translate to a LGD Scale, indicating loss
percentage. The present Facility Rating Grades/ Scales are empirically designed to reflect
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LGD levels.
iv) Collateral
The Collaterals are an important ingredient of Facility Rating design; their quality and depth
affects the severity of LGD for any facility and hence the Facility Rating itself. As an
element of risk (uncertainty) is involved, prudence is required in assessing the value of the
collateral offered for obtaining credit facility. The security is to be valued as per the extant
instructions of the Bank.
Basel-II does not differentiate between Primary & Collateral Securities and all securities
charged for a loan are designated as “Collaterals”. Thus, while for monitoring of
Drawing Power (DP) or DP related issues in borrowal accounts, the securities charged would
continue to be segregated into Primary and Collateral securities, however, for the purpose of
risk assessment, all securities will be treated as collateral securities.
v) Scoring under Facility Rating
Scoring under ‘Total Security ‘Parameter under Facility Rating requires an in-depth look
into types of Collaterals and their recognition and valuation as per Basel-II/RBI Document
as discussed in Bank’s Collateral Management Policy. This would necessitate detailed
analysis of Collaterals to facilitate scoring.
Note on scoring:
(i) Calculation under ‘Average of last 3 years’ includes latest year.
(ii) In order to qualify for scoring under ‘Average of Last 3 years’ sub-parameter , minimum data
for last two years including the latest year would be required.
(iii) In the event of non-availability of the minimum data as indicated in sub- para (ii) above,
ratio-wise normalisation will be done.
(iv) Gross DSCR (for all loans) : Gross DSCR for next financial year (covering the year in
which rating is being done) is to be reworked at the time of rating to ascertain the sufficiency
of cash accrual or otherwise for continued repayability of the loan.
(v) For existing companies seeking additional Term Loan Facilities, Gross Average DSCR (for
all loans) would be calculated taking into account the proposed TL Facilities.
SALIENT FEATURES OF CREDIT UNDERWRITING ENGINE (CUE):
Under Project Vivek (New SME delivery model), the credit rating and appraisal process for
the SME portfolio of the Bank has been redesigned (applicable for exposures upto
Rs.50.00 Crores in NBG). One of the key elements of the redesign is the development of
new rating engine for credit decision, which is named as Credit Underwriting Engine
(CUE). A highly predictive credit-underwriting engine has been developed on the basis
of customer’s cash flows and other verifiable information sources such as demographic
information, past account behaviour (both internal as well as external) and objective
analysis of borrower’s qualitative parameters.
CUE rating is a customer centric rating to be used for credit decisions for SMEs across all
the exposure segments upto Rs.50 Crores in NBG i.e. (a) Exposures upto Rs.50 Lacs, (b)
Page 288 of 632

Exceeding Rs.50 Lacs to Rs.5 Crores and (c) Exceeding Rs.5 Crores to Rs.50 Crores.
CUE has been developed statistically using the historical data of our Bank from various
data sources viz. customer information, credit bureau (both commercial and consumer),
existing current account or cash credit account behaviour, financial ratios, and
qualitative questionnaire for general and industry specific activities.
Modular Structure
i. CUE has 7 independent modules (described below in detail) and applicability of
each module varies as per exposure segment / type of borrower
ii. These modules are normalized (switched-on and switched-off) as per the
applicability and availability of information in each module, depending upon type of

customer and exposure
These are the following 7 modules in the CUE (On the lines of Financial Risk, B&I Risk,
Management Risk in CRA exercise),
1. Customer information: The Customer information module quantifies key profile

factors pertaining to borrower’s demographic information such as constitution,
region and length of relationship with our Bank. This module is applicable for all the
three exposure segments, i.e. the PD of this module will be factored into the
borrower rating in all cases.
2. Commercial credit bureau (CIBIL): Information on borrower’s conduct of
accounts across all Banks, as per bureau report is used to determine the bureau
score. Borrower’s commercial related parties are also analyzed using the
commercial credit bureau module.
3. Consumer credit bureau (CIBIL): Borrower’s related parties that are consumers,
e.g. partners, proprietor, directors and guarantors are analyzed using the Consumer
credit bureau module.
4. On-us deposit/ current account behavior: For origination/ takeover cases, if the
borrower has an existing current account with us, its behavior information is
captured in the borrower rating.
5. On-us / internal account behavior of cash credit account: For renewal cases,
the information on behavior of existing cash credit account (which will be called as
cash credit module), is used to determine the PD
6. Financial information: Some of the key financial ratios, as per the latest
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redrawn financials from the PACE tool, are used to determine the PD of financial
module.
7. Qualitative Credit Assessment (QCA) module- The QCA captures qualitative
information of the customer in the form of multiple choice questions ranging from 9 to
31 questions, depending on the exposure segment, spanning across the
following 7 categories:
a) Owner / Management
b) Business Plan
c) Business Operations
d) Supplier / Buyer
e) Industry
f) Credit History
g) Relationship with Bank
OTHER IMPORTANT POINTS REGARDING CUE
1.For proposals with exposures exceeding Rs.50 Lacs for which the financial analysis
(PACE) is mandatory, the CUE rating date would be the end date of last month upto
which the bank statement has been collected and analysed through PACE tool.
2. For proposals <=50 Lacs, the CUE rating date would be the end date of the previous
month of processing commencement date in LOS.
3. CUE rating may be reviewed and re-computed in case the customer comes for an
early renewal/ enhancement after 6 months
4. The CUE rating once validated should not be reviewed /revised within 6 months
from validation
5. For Greenfield units, since the PACE tool is not applicable, hence the financial module
under the CUE will also not be applicable (it will be switched off automatically) and the
weight of the Financial module will get redistributed amongst the other applicable modules
in CUE
6. Risk Rater is authorized to adjust / over-ride bureau delinquency variable based on
justification / documentary evidence provided by RM (SME) in CUE rating proposal.
However Specific approval for the above deviation is required to be obtained from the
sanctioning authority by including the deviation in the template of the proposal
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7.In future all the pricing, deviations, hurdle etc norms as applicable to CRA rating will be
linked to CUE rating, however CRA rating will be continue on account of IRB
requirements.
Weightage of different individual module in CUE
Each module also has different weightage depending upon the exposure. The weights of
each module have been determined after a heuristic search across all possible
combinations with constraints on weights of each module. The combinations of weights
with the highest GINI coefficient (predictive power) have been finalized as indicated
below
New Connection/ Takeover Renewal

<=Rs.50 Rs.50L- <=Rs.50 Rs.50L-
Module >Rs.5Cr >Rs.5
L Rs.5Cr L Rs.5Cr Cr
Customer
15% 10% 10% 10% 5% 5%
information module
Credit Bureau
module 30% 25% 20% 30% 20% 15%
(combined)
On-us current
20% 15% 15%
account module
On-us Cash-credit N NA NA 40% 40% 35%
module A
Financial module N 20% 25% NA 15% 20%
A
Qualitative
Credit 35% 30% 30% 20% 20% 25%
Assessment (QCA)
module
Total 100% 100% 100% 100% 100% 100
%
ANNEXURE I:
Serial no Borrower Range of Serial No Facility Range of

rating Score rating Score
1 SB-1 94-100 1 FR-1 94-100
2 SB-2 90-93 2 FR-2 87-93
3 SB-3 86-89 3 FR-3 80-86
4 SB-4 81-85 4 FR-4 73-79
5 SB-5 76-80 5 FR-5 66-72
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6 SB-6 70-75 6 FR-6 59-65
7 SB-7 64-69 7 FR-7 52-58
8 SB-8 57-63 8 FR-8 45-51
9 SB-9 50-56 9 FR-9 38-44
10 SB-10 45-49 10 FR-10 31-37
11 SB-11 40-44 11 FR-11 24-30
12 SB-12 35-39 12 FR-12 17-23
13 SB-13 30-34 13 FR-13 11-16
14 SB-14 25-29 14 FR-14 5-10
15 SB-15 < or = 24 15 FR-15 1-4
16 SB-16 All NPA 16 FR-16 0
TEST YOUR KNOWLEDGE
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OBJECTIVE QUESTION:
1 In case an existing units enjoying credit facilities from us, fails to pass entry barrier,
what course of action is required
A Exit from the exposure
B Neither renewal nor enhancement is possible
C Rating should be downgraded to worse of actual CRA rating or SB- 11
D Penal interest of 2% is to be applied
E No action required, it will continue as usual
2 Under Credit Risk assessment exercise(CRA),Units are not assessed under which of
the following Risk
A Financial Risk
B Operational Risk
C Business & Industry Risk
D Management Risk
E They are assessed for all the above mentioned Risk under CRA
3 A proposal for sanction of various limits of ABC Pvt Ltd is being undertaken by
appraising Officer in December 2017.The unit will be involved in manufacturing of
moulds. The project is likely to start commercial operation by 31/05/2018.The CRA of
the unit will be based on which of the following Financial Statements
A Projected 31.03.2018
B Projected 31.03.2019
C Projected 31.03.2020
D Audited 31.03.2017
E For new units no CRA is required
4 A unit is having ECR of BBB-, given by rating agency ICRA. The unit has got total
score 67 under three parameters namely Financial Risk, Management Risk & Business
& Industry Risk based on audited financials as on 31/03/2017. What is the final score of
the unit for CRA rating purpose
A 67
B 68
C 69
D 70
E 72
5 A new unit involved in manufacturing of cables and having total exposure of Rs15 Crs is
rated as SB-4 based on balance sheet dated 31.03.2017.What will be final rating of the
unit considering New Unit risk factor
A SB-3
B SB-4
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C SB-5
D SB-6
E SB-10
6 What is the hurdle rating for New Trading/Non Trading units under CRA
A SB-6
B SB-8
C SB-10
D SB-11
E There is no hurdle rating for new Units
7 Credit Risk Assessment Models are applicable to all the following segments except
A C&I
B Agriculture(AGL)
C SSI
D SBF
E Personal
8 Dynamic review of CRA rating with trigger is required in which of the following cases
A Total exposure of Rs 5 crores & above
B Total exposure of Rs.10 crores & above
C Total exposure of Rs.50 crores & above
D Total exposure of Rs.100 crores & above
E Dynamic review is required only when CRA rating is below SB-10
9 Dynamic review without trigger is required to be carried out at what interval

A Monthly
B Quarterly
C Half –yearly
D Yearly
E without trigger Dynamic review is not required to be carried out for any exposure
10 Dynamic review without trigger is required to be carried out for all exposures of
A Rs. 50 Crores &above
B Rs 100 Crores & above
C Rs 200 Crores & above
D Rs 500 Crores & above
E Rs 1000 Crores & above
11 CRA simplified model is applicable for all exposures from Rs 50 Lacs and up to Rs.------
--
A Rs 1.00 Crores
B Rs 2.00 Crores
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C Rs 4.00 Crores
D Rs 5.00 Crores
E Rs. 10.00 Crores
12 Under CRA simplified model, the ratings for new units has been capped at
A SB-4
B SB-5
C SB-6
D SB-7
E SB-10
13 Which of the following models is used only in case of CRA Regular and not in case of
CRA Simplified
A Trade Model
B Non-Trade Model
C Construction Model
D Services Model
E All the above models are used in both CRA Regular & CRA simplified
14 Risk weight assigned for exposure rated BB and below under BASEL II guidelines
A 50%
B 75%
C 100%
D 125%
E 150%
15 The CRA of a unit under simplified model was calculated based on audited Financials of
31.03.2019 and rating was computed as SB-8. The collateral security available is 40%
.What will be the impact on final CRA rating
A It will be upgraded by one notch to SB-7
B It will be downgraded by one notch to SB-9
C It will be downgraded by two notch to SB-10
D It will be downgraded below hurdle rate to SB-11
E There will not be any downgrade as CRA is not linked to collateral value.
16 For awarding facility rating, how many rating grades have been created
A 4
B 8
C 10
D 12
E 16
17 Risk weight assigned for exposure rated A- under BASEL II guidelines

A 20%
B 30%
C 50%
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D 100%
E 150%
18 An ECR agency has given a rating of BBB- to a company, this is considered as

measurement of
A Market Risk
B Systemic Risk
C Operational Risk
D Credit Risk
E None of the above
19 A customer is enjoying One cash credit limit, two term loan, one BG limit & one LC
limit, which of the following option is correct regarding facility rating
A One borrower rating & one facility rating
B One borrower rating & two facility rating
C One borrower rating & three facility rating
D One borrower rating & five facility rating
E Two borrower rating & five facility rating
20 Credit Risk Assessment(CRA) to be reviewed at half yearly intervals for units having
CRA
A SB-5& below
B SB-7& below
C SB-10& below
D SB-11& below
E SB-15& below
21 Prudential norms have been prescribed to avoid

A Diversion of risk
B Mitigation of Risk
C Concentration of Risk
D Transfer of Risk
E All of the above
22 How many modules are there in the CUE rating

A 3
B 4
C 5
D 7
E 9
23 For green field Projects ,which of the following modules is not applicable in CUE rating
exercise
A Customer information
B Consumer CIBIL
C Commercial CIBIL
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D Financial Information
E All of the above are applicable
24 The pricing of the working capital limit of Rs 50 lacs is normally linked with
A CRA
B CUE
C ECR
D Financial Soundness
E None of the above
25 For renewal cases, which of the following module in CUE will have highest weightage
A Financial Module
B Current Account Module
C Cash Credit module
D QCA
E All of them have equal weightage
ANSWERS OF OBJECTIVE QUESTUIONS:
1-C 6-C 11-D 16-E 21-C

2-B 7-E 12-C 17-C 22-D
3-C 8-B 13-C 18-D 23-D
4-B 9-C 14-E 19-D 24-B
5-C 10-D 15-E 20-D 25-C
Page 297 of 632

Caselet
ABC Pvt. Limited is enjoying a cash credit limit of Rs. 2.00 crores from our SME Nagar
Branch. The promoters of the company have recently floated a new company viz. PQR Pvt.
Ltd. for setting up of a unit for manufacturing of Bread, Rusk and Buns. The new company
was incorporated on 01.01.2019 and has been maintaining a current account with our Branch.
The promoters have approached the Branch for sanction of a term loan of Rs. 3.00 Crores and
working capital of Rs. 0.50 Crores for their new unit. The company has procured land and
almost completed the construction of the factory building. The loan required by the unit is for
purchase of machinery. Mr. Meticulous obtained the relevant documents along with the
detailed project report from the applicant. As per the project report, the date of
commencement of commercial operation of the unit shall be 30.09.2020. Mr. Meticulous has
prepared the CMA and is now pondering over certain questions with plausible answers.
Please help him in arriving at the correct answer.
1 Which of the following modules shall not be reckoned for arriving at the CUE rating?
A Financial Module
B Current Account Module
C Customer Information
D QCA
2 The CRA of the unit will be based on which of the following Financial Statements?
A Projected 31.03.2023
B Projected 31.03.2022
C Projected 31.03.2021
D Audited 31.03.2020
3 The CRA rating of the unit arrived at by Mr. Meticulous is SB-4. What is the final rating
acceptable for the unit?
A SB-4
B SB-5
C SB-6
D Depends on the value of collateral
4 The CUE rating of the unit arrived at by Mr. Meticulous is CUE-8. He is now confused
as to which rating he should consider for arriving at the pricing of the proposed credit
facility?
A CUE Rating
B CRA Rating
C Worse of A & B
D Better of A & B
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5 The collateral being offered by the unit is 25%. This will result in downgrade of CRA
rating by how many notches?
A Downgrade by one notch
B Downgrade by two notches
C Downgrade by three notches
D There will not be any downgrade as CRA is not linked to collateral value.
ANSWERS
1-A 2-B 3-B 4-A 5-D
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CHAPTER 9A
LETTER OF CREDIT
A letter of credit or documentary credit is an undertaking issued by a bank (issuing bank), on

behalf of the buyer (the importer), to the seller (exporter) to pay for goods or services provided
that the seller presents documents which constitute complying presentation. Complying
presentation means documents must be as per:
(i) Letter of credit terms
(ii) As per UCPDC600 guidelines
(iii) As per international standard banking practices terms.
Apart from FEMA guidelines documentary credits are subject to UCPDC 600 guidelines
published by ICC Paris. Standby Letter of credit can be issued subject to ISP98 (International
Standby Practices) or UCPDC600.
1. Opening of Letters of Credit:— While issuing LC basic aspect to be observed

(i) Branches should ascertain the means, creditworthiness and standing of the applicant
for LC who should normally be a constituent and whose account has been satisfactorily
operated. Normally, the applicant is expected to confine his dealings only with the
Bank.
(ii) LCs should be opened only after preparation of an appraisal memorandum which
would cover, inter alia, the liabilities of the applicant to the Bank as also to third
parties, the means by which the applicant is expected to meet his commitment after the
bills under the LC are received, the margin the applicant is to deposit with the Bank and
details of other securities he is offering to the Bank.
(iii) Meaningful analysis of cash flow statements should be done at the time of opening of
LCs.
(iv) Cash budget should be obtained, where considered necessary, to ensure that the
borrower would be able to retire the bills drawn under the LC on their respective due
dates.
(v) The LCs issued/limits sanctioned should be commensurate with the borrower’s turnover
and cash credit/Export Credit limits and should be for genuine trade/
services/manufacturing activity.
(vi) The usance period of the LC should ordinarily have relation to the working capital
cycle.
(vii) The Opinion Report on the counterparty involved should be obtained carefully
scrutinized and held on record. Frequency of obtaining the opinion report on the
counterparties may be reviewed considering all the underlying risks involved.
(viii) Level of inventory is to be commensurate with industry norms / past trends.
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(ix) LCs for purchase of machinery / capital goods should be backed by borrower’s own funds
or firm sanction of term loan (either from the bank under sole banking/multiple
banking/ Consortium banking/from other term lending institution(s).
(x) A suitable margin (or incremental margin) depending on the applicant’s means,
creditworthiness, cash flows, his other liabilities etc. may be prescribed. Further,
wherever warranted, a lien may be maintained on the unutilised portion of the cash
credit account for the value of the bills to be received under the LC.
(xi) Where the applicant and the beneficiary are sister concerns or are otherwise linked, there
should ordinarily be no need for LCs. Branches should ensure that LCs do not serve as
a means of ‘kite flying’ between the applicant and the beneficiary. Wherever warranted,
branches may also ascertain the standing of the beneficiary.
(xii) Delivery against acceptance (D/A) facilities should be granted only to applicants
of undoubted standing and where the security available is much more than the value of
the LC since in DA case importer take delivery of the goods first then pay on due dates.
(xiii) LCs permitting payment against documents which do not confer on the Bank a full and
undisputed title to the relative goods e.g., transport documents of an unapproved
transport agency or incomplete set of documents of title to goods made out to the order
of the applicant, should be treated as clean credits and should not ordinarily be issued.
(xiv) Suitable insurance instructions safeguarding the Bank’s interest in the goods, on
warehouse to warehouse basis, should be invariably incorporated. In cases where
insurance is obtained by the applicant(i.e. LC with INCOTERMS F.O.B.), suitable cover
notes should be obtained at the time of opening of the LC in the joint names of the Bank
and the applicant and the cover notes and the insurance policies thereafter (i.e.
immediately upon shipment) should be deposited with the Bank.
(xv) Opening ‘revolving letters of credit’ requires greater care. The validity of such LCs
should not be for more than one year and the value of the LC should be based on the
value of material the borrower needs for his genuine manufacturing/trading
requirements during this period. A special limit for the “revolving” amount should
invariably be stipulated. For example, if the total LC is for Rs.10 lacs and it is expected
to revolve 10 times, the outstanding liability at any one time should not be for more
than, say, Rs.1 lac. The sub- limit of Rs.1 lac will be restored only after the beneficiary’s
bank receives the Bank’s advice that the earlier bill(s) for Rs.1 lac has been paid. In
sum, the validity period of the LC, number of times the LC is expected to revolve and
total LC limit amount to be specified.
(xvi) The application-cum-guarantee form should be adequately stamped as an agreement.
It should be ensured that the application for LC does not contain any contradictory
clause or any condition/clause impossible to fulfill and one which violates the laws of
the country.
(xvii) Where TFCPC module of Exim Bills is not available, LCs issued should be entered in
the LC Established Register and the LC Liability Register.
(xviii) The application-cum-guarantee form after issue of the LC should be kept in the
strong room/fire proof safe and in the custody of the authorised officials.
(xix) All inland LC has to be opened through SFMS and Foreign LC to be opened
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through SWIFT only.
(xx) Before transmitting SFMS or SWIFT message for opening of LC branch should ensure
LC contain the following:—
(i) Import license details if good are restricted in India
(ii) Full and correct address of the beneficiary
(iii) Precise description of the goods under import
(iv) Price of goods in figure and words
(v) Country of origin of the goods
(vi) Mode of transport-Sea/Air/Land/Rail
(vii) Last date of shipment of goods / negotiation of documents
(viii) Port of shipment and port of discharge
(ix) Whether part shipment and transhipment permitted
(x) Value of the goods with INCOTERMS
(xi) Tenor of the bill D/P or D/A (xii) Expiry date of LC
(xiii) Instructions regarding negotiation of documents and reimbursement
(xiv) Documents to accompany and in how many copies e.g. draft, invoice, B/L, Packing
list, Certificate of origin, insurance policy/certificates, Invoice.
(xxi) For issuing usance or capital goods LC special sanction should permit the same.
(xxii) LC limit for purchase of raw material should not be for CAPEX or any
other purpose.
2. Letter of Credit on behalf of non-customers:— Following additional precautions
apart from above should be taken while issuing LC on behalf of non-customers:—
(i) LC should normally be opened only for customers enjoying credit facilities
(ii) For issuing LC on behalf of non customers genuine need of the customer to be
ascertained and reference to be made to his existing banker.
(iii) Financial of the customer should be ascertained as how he is going to meet the
liability if bill received under LC.
(iv) KYC guidelines must be meticulously followed
(v) LC may be issued against cash margin as per sanction.
3. Issuance of Import Letter of Credit:— In addition to the above guidelines for issuance
of import LC following additional guidelines must be observed:—
(i) Import License:-License must be issued in the name of importer or must be properly
transferred to the importer. License must be scrutinized in respect of amount, quantity of goods,
validity period to ensure import is duly authorized.
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(ii)Where LCs are to be opened for the import of machinery for the project, the LC opening
branches should ensure that (i) the beneficiaries of LCs are well reputed as revealed by the
opinion reports on the beneficiaries, (ii) the LCs are established in favour of only those
beneficiaries who were indicated in the project report and/or financial institutions’ sanction
endorsement.
4. Onerous clauses in the letter of credit:— Any condition in the LC should not be
detrimental to the bank’s interest. Few examples of onerous clauses like sending all original
transport documents consigned to applicant directly to the importers, not seeking transport
documents etc.
5. Capex LC:— Opinion report on the supplier of such capital goods should be obtained and
analyzed. Lien should be marked in term loan account for outstanding LC. Overall funding from
the promoters at every stage of drawdown including capex LC should be ensured as per sanction
terms.
6. Negotiation of Bills under LC:— While purchasing/discounting bills under LC issued by
correspondent banks(in import LC) or first class banks(in inland LC) we should apply
following approach:-
(A)For Bank’s borrowers:- Limit fixation in such cases should essentially be based on the
assessment of volume of sales, which is expected to be backed by LCs and the terms thereof.
Fixing these limits should, as far as possible, coincide with the sanction/renewal of Assessed
Bank Finance (ABF). Whenever these limits are required to be fixed or enhanced subsequent to
the sanction of ABF, the assumptions in regard to the level of receivables made at the time of
sanction of limits should be reviewed and if required, ABF reassessed to ensure that there is no
over financing. It should be ensured that the receivables backed by LCs are excluded in the book
debt statement for the purpose of drawing power to ensure that there is no over financing. Non-
home branches will not discount bills in respect of a customer of another Branch without the
prior consent of the Branch Head of the home branch.
(B) For N o n - b o r r o w e r : -
In respect of non-borrowers, apart from CCG/CAG branches, branches authorized by DMD
(RB) under R&DB may also handle LC bills discounting business. Branches identified for
handling LC bills Discounting should either be Exim bill enabled or be linked to TFCPC/Exim
bill enabled Branch.
The bills discounting shall be done under Letter of Credit established by First class
Banks/ Correspondent Banks. (need not be restricted to our Bank)
Only genuine and trade related transactions are to be reckoned for bills discounting
under Letter of Credit.
No bills are to be discounted under reserve and only bills satisfying all the
requirements of the Letter of Credit can be considered.
All due formalities under the KYC guidelines are meticulously and fully complied
with.
It is reiterated that LCs received through either SWIFT/ SFMS only will be discounted (Cir
CPPD 164 dt 01.02.2019)
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Non cheque book type Current account is to be opened after satisfying all the KYC
norms, only for parking and transmitting the proceeds of bills discounting to the beneficiary.
No other transactions are to be routed through such accounts.
Credit Information on the beneficiary to be obtained and kept on record from approved
Credit Information Companies (CICs). Due diligence report on the beneficiary may also be
obtained wherever felt necessary.
The extent of requirement of additional working capital against such bill discounting is
separately assessed and appropriate bill discounting limits against letters of credit, sanctioned to
such borrowers.
The limit is to be related to volume of business under LCs proposed to be given to the Bank
and its terms thereof.
In case of non-borrowers of our bank, including borrowers of other banks, past financial
data should be called for and following aspects should be satisfied:.
i. Satisfactory conduct of account with existing lender / bank
ii. Experience regarding payment of bills negotiated/purchased is satisfactory.
iii. Net worth is adequate.
iv. There are no liquidity problems in the business.
In such cases, there will be no need to obtain NOC from the financing bank. A brief note
covering the above aspects and nature of transactions covered by the LC should be recorded for
this purpose.
The borrower’s existing Bankers are separately and duly advised of our Bank having
sanctioned this facility to the borrower.
The proceeds of the bills discounted should be sent by RTGS/ NEFT to the Bank for credit into
the beneficiary’s CC/OD account with the bank.
7. Eligibility of branches
The bills drawn under LCs can be purchased/ discounted only by those branches specifically
authorised by CGM (Circle). All CAG & CCG branches are authorised to do this business
Negotiation of bills under Inland LC opened by (a) Our Branches or (b) Domestic First-
Class Banks wherein documents tendered comply fully with LC terms are ‘Specified
Security’ for the limited purpose of excluding them from computation of total indebtedness
and is treated outside the purview of ABF.
Further, only Trade Finance linked, and enabled branches can engage in bills discounting
business. Other branches, if identified by Circle/ Business verticals must be linked to nearest
TFCPC or Branch having Exim Bills software available for transacting.
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8 Sanctioning Authority
Limits to be sanctioned as per the delegation of powers advised vide eCir no. Cir.
CDO/ORG-DFP/5/2019-20 Dt. 06.03.2020 as detailed below:
Authority Limits (in Cr)
AGM(Region)/ Branch* 100

DGM (B&O)/ Branch* 250
GM(NW)/CCGRO/Branch 500
CGM(Circle)/CCG/CAG/SME 1000
CCSC >1000
* Powers may also be exercised by functionaries of corresponding equivalent
grade in CAG/CCG verticals
9). Eligible Bills & parting of funds
Walk in/ sporadic requests for Bill Discounting under LC from New Customer (less than
one year old and non- credit) should not be entertained unless the LC is restricted to our
Bank.
(Revised guidelines vide CPPD 118 dt 18-11-2019)
For Borrowers
Under Inland Letter of Credit
In respect of non-discrepant Inland bills, drawn under LCs of First Class Banks, prior acceptance
may not be insisted upon before parting of funds.
Under Foreign Letter of Credit

In respect of non-discrepant Export bills drawn under LCs of Correspondent Banks/ banks on
whom we have global exposure limits, prior acceptance may not be insisted upon before parting of
funds.
For Non-Borrowers
For Non- Borrowers enjoying only Bills Discounting limit, prior acceptance is to be obtained from
LC opening Bank without any exception, as hitherto.
10) General
Branches should meticulously follow the “Know Your Customers (KYC)” policy
while purchasing/discounting bills.
KYC/AML and necessary due diligence are to be done by the authorised branches on all
counterparties.
Genuineness of the underlying transaction is to be verified by perusing the relative invoices,
contracts etc.
Past track record of payment of bills under LCs by customers to be taken note of.
Due caution to be exercised regarding bills covering sales within a city or locality and
between group/ associate concerns and those drawn by front companies of industrial groups.
The standing and credit worthiness of the borrower as well as the drawee of the bills are to
be carefully looked into.
No stray transactions to be undertaken.
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Where drawers of bills do not enjoy Cash Credit facilities with the Bank, they should open
Current Account with the branch for credit of proceeds of their discounted bills.
Specimen Signatures of all drawers of bills or their authorised agents must be recorded in
the presence of authorised officials of the branch.
All the bills for discount or purchase must be approved by authorised official of the
branch.
The entire process is to be restricted to designated branches and the conduct is to be either
at TFCPC or Branches having Exim Bills facility duly authorized to conduct such
business and approval for discounting of bills shall be by authorized officials only.
• In case Bill of Exchange is payable not more than three months after date/ sight OR
Bill of Exchange is drawn on a commercial bank/ made by a commercial bank, stamp duty is
exempted. All other Bills of Exchange presented for negotiation/discount should be
adequately stamped as applicable to the State
• Branches/ Operating Units shall not negotiate/ discount bills drawn under LCs bearing the
"without recourse to beneficiary" clause, except where the LC is issued / confirmed by our
own branches or by First Class Banks. (Banks’ Loan Policy)
• Branches shall n o t deal with financial intermediaries in mobilising bills

discounting business.
In line with Banks Loan Policy, in cases of bills discounted/ purchased/ negotiated
under other Bank’s Letter of Credit, and if payment is not made ‘under reserve’, the exposure
shall be treated as being on the LC issuing bank and not on the third- party borrower.
• For this purpose, the liability on account LC bills discounting shall be to the account of the
borrower/ non-borrower (beneficiary) and once acceptance is received, the liability will shift
to the LC issuing Bank.
For this purpose, discounting of bills under Letter of Credit shall be in relation to LCs
issued by our Bank/ First class banks (Domestic) and should not exceed the approved
exposure limits on these banks. Further, this facility shall be only in respect of genuine
commercial and trade transactions of the borrower constituents who have been sanctioned
regular credit facilities by the Bank.
• CAG customers
In respect of sanction of bills discounting facility by identified R&DBG / CCG branches for
customers enjoying credit facilities from the CAG vertical, prior intimation of the sanction is
to be advised to CAG branch where the account is parked to ensure that overall control,
supervision and follow up on such sanctions is maintained and to ensure correct
CRILC reporting.
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10 (A)
(Revised instructions vide Cir CPPD 122 dt 18-11-19)
T-Bill linked LC Bill Discounting:
It is proposed to re-align the T-Bill linked LC Bill discounting as well. Revised rates are
proposed as under :
Floor Rate
Domestic LC Export LC
Existing Proposed Existing Proposed
Upto 180 days 8.00% 7.00% 8.00% 7.00%
181 days to 360 days 8.25% 7.25% NA NA
DMDs of the BVs can offer 25 bps concession on the floor rate on case to case basis highly
selectively.
11 Important guidelines for negotiation / discounting of bills under Foreign Letter of Credit
1. Branches should not negotiate / discount bills drawn under LC issued by banks which are not
our correspondent bank/ banks upon whom we have global exposure limits
2. The date of shipment indicated on the documents should be on or prior to the last date
of shipment stipulated in the LC.
3. The description of goods given in the transport / shipping documents should not
conflict with the description of goods in the credit.
4. A full set of shipping documents and as many negotiable and non-negotiable copies
as stipulated in the LC should be submitted.
5. Shipping documents must be verified for their genuineness, through Custom’s portal
https://www.icegate.gov.in or with the Customs office. Evidence of such verification is to
be kept along with the copies of export documents retained at the branch.
6. Branches can also check genuineness of shipping bills in EDPMS (Export Data Processing
and Management System whereby shipping bills data from Custom Department to RBI is
made available) under trade finance module and/ or with International Maritime Bureau
(IMB) portal.
7 .In case of discrepancies, clarification should be sought from exporters and the responses
received are to be kept on record/ advised to LC opening bank and advice sought.
8. A "received for shipment" Bill of Lading (BL) is not to be accepted unless it is marked
"On Board" with the date and duly signed.
✓ The shipping documents are made to the order of the Bank or as per the LC terms.
✓ The port of shipment and the port of destination given in the transport/shipping
documents should correspond with those mentioned in the LC.
✓ The shipping documents should be signed by the shipping company or by their
authorised agents.
✓ In case of CIF and C&F terms, the shipping document should be marked "Freight Paid"
and in case of FOB it should be marked "Freight payable at destination".
✓ The shipping document should be "Clean" and not "Claused" or "Stale" unless
otherwise modified in the LC.
12. Common discrepancies (Illustrative):
➢ Credit expired.
➢ Absence of documents mentioned in LC.
➢ Late shipment.
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➢ Description of goods in invoice, unit price etc. differ from LC or transport/shipping
document.
➢ Inadequate insurance.
➢ Documents not signed. Alteration in LC documents not authenticated.
13. Indian branches of our correspondent banks can be treated at par with the first class banks.
First class PSU banks:— Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank
of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, IDBI
Bank, Indian Bank, IOB, OBC, PSB, PNB, Syndicate Bank, UCO Bank, Union Bank of India,
United bank of India, Vijaya Bank.
First class Private bank:—Axis Bank, Bandhan Bank, City Union Bank , HDFC Bank,
ICICI Bank, IndusIndbank, Kotak Mahindra Bank, RBL Bank, Yes Bank, Karur Vysya Bank,
IDFC Bank.
14. After the Bills are purchased/discounted by the Branch/Unit, for Customers and we have
parted with the funds, they are sent to the LC opening Bank which examines the documents for
compliance with the LC terms and discrepancies observed, if any, are advised to the
purchasing/discounting branch. As per UCPDC, LC opening Bank has been given time upto 5
working days to advise the discrepancy in the documents.
After discounting the bills under LC following procedure to be adopted:—
(i) After sending the Bills discounted under LC to the LC opening Bank, follow up has to be
made regarding obtention of confirmation from them to the effect that they (LC opening
Bank) would be making the payment on the due date. If discrepancies are advised by the LC
opening Bank, they should be taken up with the beneficiary of the LC (Our Customer) and
rectification of the discrepancies have to be done at the earliest. After addressing the
discrepancies, the matter should be followed up with the LC opening Bank till the discounting
Branch receives the payment confirmation advice from them.
(ii) The due dates for Bills discounted under LC are to be diarised and should be followed up with
the LC opening Bank.
iii) Submission of irregularity report to controller on crystallization of bills is to be ensured .
Requisite information on crystallization of bills must be provided in BMMC.
iv) Overdue interest is to be recovered correctly for overdue period . Further , reporting to RBI to
be ensured .
15. Separate limits for export bills and inland bills:— In the case of both borrowers and non-
borrowers, separate limits for purchase of bills under LCs will be sanctioned for export bills
and inland bills.
16. Treatment of stocks covered under usance LC:— The earmarking of the lien for the
outstanding usance LC bills against advance value of stocks ensures provision of margins on
the stocks covered by usance LCs right from the time the stocks are bought on credit backed
by the Bank’s commitment. This provision ensures that the margin is available well before the
CC a/c is debited for the matured LC bill. Where the unit is not in a position to provide the
required margins as above, the CGM of the circle may permit earmarking of lien for the value of
usance LC bills outstanding against the aggregate ‘market value’ of all the securities (including
the LC stocks).
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In cases where the bills drawn under LC are received but the relative goods are not yet received,
the sanction for cash credit limit may provide for facility of drawings against the documents of
title to goods received under the Bank’s usance LCs and lien for the full amount of the
outstanding bills may be earmarked against the advance value of the total stocks including the
documents of title to goods received under the Bank’s LC.
In cases where the lien has been earmarked for the outstanding usance LC bills against advance
value of stocks, cash margin against such LCs will be added back to advance value of
security. However, where the lien has been earmarked against market value of stocks, the
margin will not be added back to advance value of security.
17. Retirement of bills negotiated under LCs:—
Follow up:—
(i) Branches should scrutinise on receipt all documents negotiated under the Bank’s LC for any
discrepancies and non-compliance of terms and conditions. If necessary, they should consult
the applicant whether to retain the bills or return them in the event of discrepancies.
(ii) Branches should take immediate steps to protect Bank’s interest in the goods in case
payment is not made by the applicant on presentation of the bills. These steps will include
advising the railway authorities or the transport company of the Bank’s interest in the goods
and ensuring continuance of insurance covering the goods for the risks of fire, theft, etc. It
is observed that often the documents drawn under LC are parted with without obtaining
borrower’s acceptance, it should be ensured that the documents to title to goods are
parted only after the LC opener(applicant) accepts the draft drawn there under by giving
due endorsement on the reverse of the draft .
(iii) Bills drawn under letters of credit will be retired on receipt by debit to the applicant’s
account. Only a reasonable period should be allowed to importers for retirement of bills
drawn under letters of credit. A period of seven days is recommended for this purpose.
This stipulation should be advised to the customers and tie up of funds looked into at the
time of opening letters of credit.
(iv) Request for time for retirement of bills till the arrival of the goods can be entertained on
being satisfied that the bills would be paid immediately on the arrival of goods. In the
meantime, necessary confirmation of the drawees that the documents are in order and are
acceptable to them should be obtained and recorded at the branch. In case where
unsatisfactory features are noticed in the conduct of the facility such as the bills remaining
outstanding even after the arrival of the goods, the matter should be immediately reported
to the controlling authority.
In this connection, attention of the branches is invited to the following endorsement on import
licenses:
“It is a condition of this license that when an irrevocable credit is opened by the holder of the
license to finance the import of any goods covered thereby, then the authorised dealer in
foreign exchange through whom the credit is opened shall be deemed to be a joint holder of
this license to the extent of the goods covered by the credit”
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Thus, where letters of credit have been opened against a valid import license and on arrival of
goods, the license holder does not honour the bills drawn against the letter of credit and does not
produce the license for the clearance of the goods, the branch which has opened the LC will be able
to clear the goods through the Customs and remit foreign exchange to the foreign suppliers in
whose favour the credit was opened, by debit to the licensee in question. For the purpose of
clearance of goods, the branch will provide the customs with certificates together with the
exchange control copy of the licence to the effect that the import has been made and foreign
currency has been remitted by the branch under the authority of a valid import license and a
confirmed irrevocable LC.
18. Devolvement of LC Bills:— The following approach should be adopted by branches to

avoid problems arising from devolvement of LCs and the resultant excess drawings in the
relative accounts:—
(i) The limits for demand LCs and usance LCs should be assessed separately with ample
justifications. The usance period should not, generally, exceed the production cycle. In case
of bulk imports, establishment of LCs for longer usance period may be considered selectively.
(ii) When liability under LC is met by creating an irregularity in the Cash Credit account, the
relative LC limit should not be released for opening further LCs till the account is adjusted. In
other words, the liability should not be marked off in LC liability register merely because of
retirement of documents. The relative liability should be marked off only after the account is
regularized.
(iii) In case of devolvement, if the irregularity in the account is not adjusted within 15 days, for
borrowers having ECR of BBB concessions are to be withdrawn and card rates to be charged. In
addition to these penal measures, for BBB- & worse rated and unrated borrowers, no further LC to
be issued and where LC devolvement exceeds 10% of the LC limits, the limits have to be reviewed
immediately. Further, concessions once revoked can only be reviewed at the time of renewal. No
further LCs should be opened without adequate margin. A margin of 25% should be the
minimum applicable in such cases. In cases where borrowers are found to have defaulted without
sufficient reasons, margin should be stepped upto, say, 50% and above. In persistently defaulting
cases, cancellation of LC limits should be considered.
Devolvement of LC has been identified as a ‘trigger’ for dynamic review. A rating downgrade
would entail review of pricing, calling for additional collaterals/ guarantees/ increase in margins
etc., examining option of cancelling unavailed limits, and exercising exit option, in respect of high
risk borrowers. (Refer Cir CPPD 60 dated 31-07-2015)
(iv) Excess liquidity available during the usance period of LCs enables the borrowers to
divert short term funds which leads to devolvement. As per the extant instructions, lien has to
be marked for the outstanding usance LC bills on the advance value of stocks as a general rule
and the Circles have been permitted to mark lien on market value of stocks selectively. This
relaxation should be permitted by the CGM of the Circle on a case to case basis.
(v) Where usance LC facilities are sanctioned, this should be borne out by the appraisal data
relating to sundry creditors. As it would have a bearing on the level of sundry creditors,
this aspect will have to be examined from that angle, while assessing WC facilities.
(vi) The transactions in the account and the FFRs should be closely monitored to check
diversions.
(vii) Branches should not permit excess drawings in accounts which show persistent irregularity due
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to devolvement of LC bills. The practice of allowing excess drawings against the credits made
in the account, leaving the existing irregularity unadjusted, should also not be permitted.
(viii) In case of sick/weak units, requests for usance LC facility should be examined with greater
care.
(ix) Implementation of the above mentioned control measures to check the incidence of LC
devolvements should be monitored at periodic intervals by the Circle Management.
(x) Concessional/finer pricing if any may be dealt with as per the Bank’s instructions.
Crystallization of Import bills:—
(i) Sight bills Under import LC and in conformity with the terms thereof shall be crystallised if
not retired by the customer on the 10th day from the date of receipt thereof by converting the
foreign currency amount in to rupees at the Bank’s Bill Selling rate prevailing on the date of
conversion (crystallisation) or at the contracted rate, if a forward contract has been booked for
the purpose. The crystallisation should be done by debit to a General Ledger account
‘Advance made to customers against import bills’ in the books of the branches and the
corresponding credit is to be put through and reported as sales to Foreign Department.
(ii) Usance bills received under import LCs and in conformity with the terms thereof, may, on
acceptance, be held in foreign currency upto the date of maturity. In the event of non-payment
on the due date, the importer’s liability shall be crystallised by converting the foreign currency
amount in to rupees at the Bank’s Bill Selling rate prevailing on the due date or at the
contracted rate in case a forward contract has been booked. The crystallisation should be done
by debiting straight away the Cash Credit accounts of the importer- applicants. If the importer-
applicants do not have cash credit accounts, the relative debits should be raised to their current
accounts. The transactions should be reported as sales to Foreign Department indicating that
these relate to crystallisation of import bills.
(iii)Branches should refer to circulars issued by Global Link Office (Foreign Department),
Kolkata for detailed accounting procedure in regard to crystallisation of bills under import
LCs.
19. Interchangeability between LC and BG:— Generally, requests for interchangeability

between the two facilities will be entertained only when the purposes for which the facilities
have been sanctioned are similar. The extent to which such interchangeability can be
permitted. In this regard, various types of customers based on ECR/ Internal ratings, the
corresponding eligibility of interchangeability between NFBWC limits are classified under
three categories ,
Category-I
In respect of “AA” rated and better (without linking to internal ratings) units and PSUs
classified as Maharatna / Navaratna, 100% interchangeability shall be provided between
FBWC, NFBWC from FBWC to NFBWC (one way) facilities .
If the interchangeability between facilities in respect of units falling under above

category (i. e, Category-I) forms part of regular proposal, specific template
approval is not required. The requirement is only to be discussed as a part of the
assessment with proper justification
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Category -II
Type of Externally Unrated External Rated
Interchangeability (SB-1 to SB-7) ( A and BBB)
( includes -&+)
From BG to LC % of interchangeability permitted
( Limited to working 100 ( Limited to working capital BGs only)
capital BGs only)
From LC to BG 100
If the request for interchangeability as per the above table and within the
permitted limits forms part of regular proposal, specific template approval is not
required. The requirement is only to be discussed as part of the assessment
with proper justification
Category -III
In rest of the cases viz., externally unrated units having CRA rating of SB-8 or below / units
having ECR below BBB, the aforesaid interchangeability (between NFB WC facilities)
requires specific approval from the Sanctioning Authority (SA) as a template
item with adequate justification.
In all standalone cases (between renewals) the approval for such eligible
interchangeability falling under the categories I&II as detailed above may be approved by
the CGM of the Vertical / Circle.
Interchangeability from Non-fund to Fund based WC limits, in respect of all the units
(Category I, II&III) requires specific template approval from the Sanctioning Authority. As
per revised guidelines vide Cir CPPD 125 dated 19-11-2019 on Structure for
Approval of Deviations (ann-I) , wherever interchangeability from Non-Fund to Fund
Based limits has been approved, all such cases to be reviewed. No fresh permission (limits) for
interchangeability from NFB to FB facilities to be approved at the time of new
sanction/renewal of accounts.
The interchangeability from LC to BG and vice versa need to be considered with caution as there
would be change in quality of underlying exposure. Further, while considering requests for such
interchangeability, the undernoted factors may be kept in mind:—
(i) Time horizons of risk devolvement between the two facilities are different
(ii) Nature of risk is not the same i.e., the risk associated with a performance guarantee is
different from that of a financial guarantee or an LC
(iii) While examination of cash flows is vital at the time of opening an LC and working capital
BGs
(iv) A usance LC limit has a bearing on the level of sundry creditors available and hence on the
requirements of fund-based credit limit.
(v) The borrowing unit’s track record in meeting the obligations under Letters of Credit.
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CHAPTER 9B
BANK GUARANTEES
PERFORMANCE GUARANTEE, FINANCIAL GUARANTEES, DEFERRED PAYMENT

GUARANTEES, TYPES OF PERFORMANCE AND FINANCIAL GUARANTEES,
BANK GUARANTEE LIMIT, PERIOD OF CLAIM UNDER GUARANTEE.
BANK GUARANTEES: A contract of guarantee is defined as ‘a contract to perform the
promise or discharge the liability of a third person in case of default’. The parties to the
contract of guarantee are:
(a) Applicant: The principal debtor – person at whose request the guarantee is executed, so a
customer on whose behalf Bank Guarantee is issued.
(b) Beneficiary: Person to whom the guarantee is given and who can enforce it in case of default.
(c) Guarantor: The person who undertakes to discharge the obligations of the applicant in case of
his default. So bank is playing the role of guarantor in case of BG is issued by it.
Thus, the Bank guarantee (BG) is a collateral contract or secondary contract between bank &
beneficiary which is based on a primary contract between Beneficiary and applicant. Thus
before opening of a bank guarantee bank must try to understand the nature of the primary contract
between Beneficiary and applicant, by obtaining documents like copy of agreement, Tender
document etc. Bank Guarantee is a part of Non Fund Based limits (NFB limits) where immediate
outlay of fund is not involved, however outlay of fund may be involved subsequently in case of
invocation(demand of payment by the beneficiary) of Guarantee. Thus the limits assessment
should be done proper risk assessment and by taking some risk mitigating measures.
1. Purpose of Bank Guarantees: BGs are issued generally for the following purposes:
(a) In lieu of security deposit/earnest money deposits for participating in tenders;
(b) Mobilization of advance or advance money before commencement of the project by the
contractor and for money to be received in various stages like plant layout, design/drawings in
project finance;
(c) In respect of raw material supplies or for advances by the buyers;
(d) In respect of due performance of specific contracts by the borrowers and for obtaining full
payment of the bills;
(e) Performance guarantee for warranty period on completion of contract which would enable the
supplier to realize the proceeds without waiting for warranty period to be over;
(f) To allow units to draw funds from time to time from the concerned indentors against part
execution of contracts, etc.
(g) Bid bonds on behalf of exporters,
(h) Export performance guarantees on behalf of exporters favoring the Customs Department
under EPCG scheme.
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2. Classification of Bank Guarantees: All the bank guarantees issued by bank are
classified under two categories
a. Financial Guarantee
b. Performance Guarantee
The classification of Bank Guarantees into Financial or Performance is done based on the purpose
for which bank guarantee is being issued. The definition of two types of guarantees and
examples thereof is as under.
(a) Financial guarantees are direct credit substitutes wherein a bank irrevocably undertakes to
guarantee the repayment of a contractual financial obligation. Financial guarantees essentially
carry the same credit risk as a direct extension of credit i.e., the risk of loss is directly linked to
the creditworthiness of the counterparty against whom a potential claim is acquired.
An indicative list of financial guarantees, attracting a CCF (Credit Conversion
Factor) of 100 % is as under:
I. Guarantees for credit facilities;
II. Guarantees in lieu of repayment of financial securities;
III. Guarantees in lieu of margin requirements of exchanges;
IV. Guarantees for mobilization of advance, advance money before the commencement of a
project and for money to be received in various stages of project implementation;
V. Guarantees towards revenue dues, taxes, duties, levies etc. in favor of Tax/ Customs/ Port /
Excise Authorities and for disputed liabilities for litigation pending at courts;
VI. Credit Enhancements;
VII. Liquidity facilities for securitization transactions;
VIII. Acceptances (including endorsements with the character of acceptance);
IX. Deferred payment guarantees.
X. Guarantees in respect of raw material supply or for advances by the buyers.
The most commonly used financial bank guarantees are Guarantees for mobilization of
advance, Guarantees in respect of raw material supply

(b) Performance guarantees are essentially transaction-related contingencies that involve an
irrevocable undertaking to pay a third party in the event the counterparty fails to fulfill or
perform a contractual non-financial obligation. In such transactions, the risk of loss depends on
the event which need not necessarily be related to the creditworthiness of the counter party
involved
An indicative list of performance guarantees, attracting a CCF of 50 % is as under:

I. Bid bonds;
II. Performance bonds and export performance guarantees;
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III. Guarantees in lieu of security deposits / earnest money deposits (EMD) for participating in
tenders;
IV. Retention money guarantees;
V. Warranties, indemnities and standby letters of credit related to particular transaction.
VI. The most commonly used performance guarantees are EMD, Bid Bonds & Retention
money Guarantee.
It is essential that the Bank Guarantees issued are properly categorized. Incorrect classification
would result in incorrect applicability of credit conversion factor (CCF), the factor used to
convert the non fund based limit to funded limit, on which the bank provides applicable capital
charge. Higher the conversion factor, higher is provision of capital charge. Thus capital
requirement for a financial guarantee will be two times that required for performance guarantee.
It is therefore essential that the classification is error free.
3. Guidelines on conduct of Bank Guarantee (BG) business & validity period of Bank
Guarantee (BG)
3.1 Operating units should, as a general rule, limit themselves to the provision of financial
guarantees and exercise due caution with regard to performance guarantee business. The subtle
difference between the two types of guarantees is that under a financial guarantee, a bank
guarantees the customer’s (applicant’s) financial worth, creditworthiness and his capacity to
take up financial risks. In a performance guarantee, the bank’s guarantee obligations relate to
the performance related obligations of the applicant (customer).
3.2 While issuing financial guarantees, branches should satisfy themselves that customers would
be in a position to reimburse the Bank in case the Bank is required to make the payment under
the guarantee. In case of performance guarantee, branches should exercise due caution and
have sufficient experience with the customer to satisfy themselves that the customer has the
necessary experience, capacity, expertise and means to perform the obligations under the
contract and any default is not likely to occur.
3.3 Issuance of Bank Guarantees with long validity periods should be adequately examined
and monitored. Period Angle Clearance is necessary wherever the aggregate period of the
guarantee exceeds 18 months, irrespective of the amount. Bank Guarantees originally issued
for period less than 18 months but that have been subsequently extended, crossing in aggregate
the 18 months cut off (from its original/initial issue date) will also attract period angle
clearance (PAC) from competent authority.
Branches should not issue guarantees valid for more than 18 months without obtaining period
angle clearance from the appropriate authority through their respective controlling authorities.
Period Angle Clearance (PAC) need not be obtained in case of BGs (maximum period upto 10
years) with 100% or more cash margins (Revised instructions vide Cir CPPD 149 dated 31
Dec, 2019) except in case of Foreign BGs.
In case of Foreign BGs against 100% cash margins, minimum incremental cash margin of 10%
should be obtained to mitigate risk of exchange fluctuation i.e. total minimum margin of
110%. Margin on foreign BGs to be monitored on ongoing basis with minimum frequency of
quarterly intervals based upon RALOO rate to ensure that bank’s liability under BG remains
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covered. Breach in this available additional margin by over 50% , due to exchange fluctuation
is a trigger for restoration of margin to its original stipulated level.
Further, PAC should continue to be obtained for Foreign BGs against 100% cash margins.
As per revised guidelines a two-level authority structure for period angle clearance is in place,
as under: -
1. For BG with validity period beyond 18 months and upto 60 months
2. For BG with validity period beyond 60 months.
A) BGs with validity periods beyond 18 months and up to 60 months (excluding

Inland BGs issued with 100% cash margin):
Business verticals/ office/ Branch Authority for PAC Monthly report ( by listing
) to be controlled by
CAG DGM (COO)/AGM GM of the Branch
(COO)* of the Branch
PFSBU DGM (Branch Head) GM (PFSBU)
CCG (Branches Headed by DGM) DGM (Branch Head) GM (CCGRO)
R&DB Group (Branches Headed DGM (Branch Head) GM (Network)
by DGM)
R&DB Group (Branches DGM (B&O) GM (Network)
Headed by Officer below the rank
of DGM)
SARG # DGM ( Branch Head) GM ( Sector)
*In CAG/CCG branches (headed by GM), wherein AGM is posted as COO, the latter i.e.
AGM (COO) shall be the appropriate authority for according PAC for BGs beyond 18 months
and up to 60 months and the control noted by the GM of the Branch only.
B) BGs with validity periods beyond 60 months (excluding Inland BGs issued with
100% cash margin):
CAG GM of the Branch CGM (CAG)
PFSBU GM (PFSBU) CGM (PFSBU)
CCG Branches with incumbency GM of the Branch CGM (CCG)
of GM.
CCG (Branches Headed by DGM) GM (CCGRO) CGM (CCG)
R&DB Group (Branches Headed GM (Network) CGM (Circle)
by DGM & below)
SARG # GM (Sector) CGM (Sector)
# Authority structure for SARG Refer Cir CPPD 123 dt 04-12-2019
It is hereby clarified that Bank Guarantees for periods beyond 120 months
should be considered only against 100% cash margin. However, there could
be cases where BGs are issued against underlying long-term Project
Finance, where Business units may need to issue long term BGs at lower
margins. The authority for approving such cases is vested with the DMD of the
respective vertical.
# In respect of NPA accounts

i. BGs with validity periods beyond 120 months are to be approved by the CGM of the
respective vertical/Sector/ Circle and to be controlled by the DMD of the respective vertical.
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ii. The BGs with validity periods beyond 120 months may be renewed/ extended with margins as
per the original sanction.
3.4 Other guidelines relating to issuance/extension of BGs with validity periods beyond
18 months are reiterated below:
i. Issuance of Bank Guarantees for longer periods should be adequately examined and monitored.
PAC is necessary wherever the period of the guarantee exceeds 18 months, irrespective of
the amount. Bank Guarantees originally issued for period less than 18 months but that
have been subsequently extended, exceeding in aggregate the 18 months cut off (from
its original/initial issue date) will also require PAC from Appropriate Authority.
ii. Branches should not issue/extend guarantees with validity of more than 18 months
without obtaining prior PAC from the Appropriate Authority through their respective
Controlling Authorities.
iii. Guarantees falling within the delegated powers of Branch Managers but for periods
longer than 18 months should be referred to the Appropriate Authority for PAC in this regard.
iv. Bank Guarantees proposed to be issued for a period in excess of 18 months should be
under the regular sanctioned limits.
v. The period of 18 months’ does not include the period for lodgment of claim.
vi. It is further advised that at the time of appraisal of NFB facility to a prospective Client, the
nature of its business should be understood for requirement of BGs of more than 18 months’
tenor. In such cases, approval for issuing BGs of tenor exceeding 18 months should be obtained
at the time of sanction of Non-Fund Facility from respective Sanctioning Authority with proper
justification in the credit proposal regarding the need for higher tenor of BGs.
vii. For the purpose of exercise of powers under the Scheme of Delegation of
Financial Powers, no distinction be made between ‘Performance Guarantee’ and ‘Financial
Guarantee’ and functionaries may issue performance Guarantees in the same manner as
financial guarantees within their delegated powers, provided they are fully satisfied about the
integrity of the applicants / constituents and their competence for fulfilling their obligations
under the guarantee. Similarly, no distinction be made between Performance
Guarantee and Financial Guarantee, while exercising powers for according PAC.
3.5 No Bank Guarantee should, normally, have a maturity of more than ten years.
Bank Guarantee beyond maturity of 10 Years may be considered against 100% cash margin
with prior approval of the competent authority specified in this regard.
3.6 Branches should normally refrain from issuing guarantees on behalf of customers who enjoy
other credit facilities not with them but with other banks
3.7 The Guarantees issued by the branches for Rs.50000/- and above should invariably be signed
by two officials jointly with their SS numbers.
3.8 Branches will also ensure that all BGs are issued through SFMS mode only i.e all BGs are to
be advised through SFMS mandatorily and Bank Guarantee is to be delivered to the
Beneficiary along with “ BG Beneficiary Issuance Advice” generated by the Exim bills
software.
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3.9 All deferred payment guarantees (DPGs) should ordinarily be secured.
4. Appraisal of Bank Guarantee Limit

4.1 The appraisal of the proposals for guarantees should be done with the same diligence as in the
case of fund-based limits. Adequate cover by way of margin and security must be obtained so
as to prevent default on payments when guarantees are invoked.
4.2 Whenever a request for the issue of bank guarantee (or sanction of a regular bank guarantee
limit as part of working capital limits) is received, it is always advisable to be satisfied about
the following aspects:
(a) The need for the bank guarantee and whether it is related to the applicant’s normal
trade/business.
(b) Whether the requirement is one-time or on a regular basis.
(c) The nature of bank guarantee i.e., financial or performance.
(d) Applicant’s financial strength/capacity (through an analysis of his financial statements, cash/
funds flow position and opinion reports) to meet the liability/obligation under the bank
guarantee in case of invocation.
(e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of
invocation of bank guarantees, the reasons thereof, the customer’s response to the invocation,
etc.
(f) Present outstanding on account of bank guarantees already issued.
(g) Margin.
(h) Collateral Security offered.
(i) KYC of the borrowers & guarantors.
An illustration for assessment of BG is given below,

A customer may require BG limit for following purposes:
i. Deposit of earnest Money deposit (EMD) for participating in different tenders
ii. For security deposit on those tenders awarded to our Customer
iii. For Submitting Advance payment Guarantee on orders bagged by the Company
iv. For providing Retention money/Maintenance Guarantee on job completed by
our customer
v. For Miscellaneous purposes like Guarantee required to be submitted to different tax
authorities, disputed tax liabilities etc.
Further some of the existing guarantees already issued or those guarantees being issued in the
current year may be cancelled during the current year itself, so the amount of BGs likely to be
cancelled must be considered in mind while making the assessment of limit.
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An illustrative example, how a BG limit should be assessed is given hereunder.
Rs. in lacs
Opening balance of BGs as on 1.4.20….. 8.60
Guarantees required as under:
i) Earnest money deposits: 2% of additional tenders worth Rs. 100 lacs 2.00
during FY ….
ii) Security Deposits: 5% of tenders worth Rs. 80 lacs expected to be 4.00
awarded during FY …….#
iii) Advance Payment Guarantees: 10% of new orders worth Rs. 80 lacs 8.00
expected during FY ……
iv) Retention Money / Maintenance Guarantees: 10% of the jobs valued at 4.00
Rs. 40 lacs expected to be completed during FY …….
v) Guarantees on account of Sales Tax, Commercial tax and excise duty 1.50
payments
vi) Total 28.10
vii) Less : Bank Guarantees to be cancelled during FY…… including 2.80
those included above in (i) to (v), if any
viii) Limit required 25.30
ix) Say / Rounded off 25.00
# Normally expected tender awarded should be lower than tender participated and the same is
linked with success rate of the contractor.
5. Margins Requirement: Margin is defined as the amount to be kept by the applicant with the
issuing bank in liquid form, which is some defined percentage of the BG amount as per
sanction terms and conditions as mutually decided between bank & applicant.
Following are some of the factors to be kept in view by the branches while determining the
margins required:
(a) Cash margins provide a cushion against invocation. Margin money may be in the form of TDR
(under lien) or lien on balances in Current Account of Borrower. Cash margin in the form of Mutual
Funds of approved schemes can also be accepted as margins. As per revised guidelines vide Cir CPPD
149 dated 31 Dec, 2019 marking of lien on the Drawing Power (DP) i.e. on unutilised portion of
constituent’s cash credit account should not be permitted. In case of existing accounts, where specific
approval was taken from appropriate authority for marking lien on DP in constituent’s cash credit
account, it will allowed to continue till next renewal of facility. Margin in the form of lien on DP shall be
withdrawn at the expiry of BG/LC.
(b) The margin to be stipulated keeping in view the borrower’s means, resources,
creditworthiness, security available, past experience with regard to issue of BGs, nature of
guarantee and the nature of underlying transactions. If the applicant is an existing borrower,
margin on bank guarantee may generally be the same as on stock, receivables, etc. Where
reduced margins or no margins are stipulated, the reasons thereof must invariably be stated in
the proposal.
(c) As per revised guidelines vide Cir CPPD 149 dated 31 Dec, 2019 in case of Mobilization
Advance Bank Guarantees/Defect Liability/ Retention Money BGs, the money to be released in
such cases by Beneficiary of BG, is to be remitted to Borrowing Unit’s account number with
the Bank as mentioned in relative BG and current Bank Guarantee would be made operational
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on receipt of the funds. Operating Units to incorporate a clause in BG text in respect of
Mobilization Advance BG, for periodical advice of the quantum of advance money adjusted in the
invoices and consequent reduction in BG liability.
Note: Branch Heads / Controllers not below the rank of DGM may waive the incorporation of
the above clause stated in para (c) for justified reasons so that there are no business
impediments.
The period within which the amount (i.e. advance, retention money etc.) under BG is to be
received should also be specified in the BG itself, wherever feasible.
(d) In respect of non-borrower applicants, Banks’ approach should normally be to obtain full
margins. However, a credit risk can be taken on the applicants based on the financial
indicators, credit worthiness, security available etc.
(e) 100% margin should ordinarily be retained in respect of guarantees issued in connection with
disputed customs/central excise duties, unless otherwise specified in the sanction.
Others:
Invoice of LC/BG and stock statement / books of the unit are to be cross verified to ascertain
that stocks purchased under BGs/LCs are accounted in the books of the Company.
ii) Stock Statements are to be verified to ensure that the outstanding of BGs/ LCs / Buyer Credit etc.
are mentioned correctly and adjusted in the market value of the stocks while extending the DP.
iii) In case of takeover of limits, exceptional events wherein the other Bank from whom limits are
being taken over is not agreeable to accept our Letter of Undertaking (LOU), and accordingly,
requires issuance of BG in favour of beneficiary in lieu existing BG of another Bank, following
should be ensured.
• • BG advise and original text to suitably mention that : ---
This BG is issued in lieu of BG of ………. Bank issued vide BG number……………for

Rs………….for a period of …..……valid up to………..…..(including claim period for preferring
claim, if any)
• Copy of the release letter of existing BG of another Bank is to be obtained & kept on record. No
dues certificate is also to be obtained from other Bank.
• An application in writing should be obtained from borrower in this regard duly mentioning the
details of the BG proposed to be replaced, and wherever possible, advance concurrence of the
beneficiary is also to be obtained. An undertaking is also to be obtained from borrower stating
that:
‘I /We understand that bank is not responsible to verify whether existing BG has been released
or not, and shall be liable to make payment, whenever subject BG is invoked’.
(Undertaking proforma to be obtained from borrower in case of takeover, where other

bank is not agreeable to accept our Letter of Undertaking (LOU) and fresh BG is to be
issued by us in lieu of existing BG of other bank)
The Branch Manager, Date
SBI, …………………(Branch)
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Dear Sir,
We acknowledge that on our behest, Bank has issued following BGs to replace the existing
BG of the……………..Bank:
S No SBI … ….. Bank

New BG No Amount Validity Existing BG No Amount Validity
1
2
3
2. ‘I / We understand that Bank is not responsible to verify regarding discharge of liability of

…..Bank under their existing issued BG(s) in favour of the beneficiary.
3. Further, whenever subject new BG(s) issued by Bank is(are) invoked, Bank shall be liable to
make payment, and we shall reimburse the Bank under the BG as agreed under Counter Guarantee/
Omnibus Counter Guarantee submitted to the Bank.
Signature of the Applicant / Authorized Signatory/ies
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…contd .. point 5
ACCEPTANCE OF INVESTMENTS IN SELECT SBI MUTUAL FUND
SCHEMES AS CASH MARGIN FOR NFB (LC/BG) EXPOSURES
As per revised guidelines (Cir CPPD 42 dt 20-06-2019) some of the mutual fund
units can also be accepted as cash margin/Collateral security subject to following
guidelines.
As per extant instructions, investments in fourteen SBIMF schemes have been
approved for the captioned purpose.
However, the acceptance of SBIMF units in lieu of bank‘s deposit as cash margin
will be governed by following guidelines.
i. The value of approved SBIMF units accepted as collateral security/cash

margin will be based on the average of previous 52 weeks high and low NAV or
the NAV as on date of sanction whichever is lower.
ii. The value of collateral will be considered at 85% of the applicable NAV as
above of the approved MF scheme units offered as security.
iii. The previous 52 week average NAV/NAV as on date of sanction (whichever

is lower) of SBIMF units accepted as equivalent of cash margin for NFB
exposures should be equal to 125% of the cash margin stipulated.
iv. SBI Mutual Fund units will be accepted only in demat form.
v. The value of collateral will be considered at 85% of the face value of units offered as
security, uniformly for all accepted categories of Schemes i.e. the margin
requirements will be 15%.
vi.. In respect of Hybrid Funds (those with minimum 65% investment in Debt
portfolio), only the debt portion will be considered for acceptance as collateral
security/ cash margin..
Vii. NAV of mutual funds as at the end of each calendar month should be tested
mandatorily for determining the margin available. Borrowers must be advised to
supplement the short fall immediately, if NAV falls below the face value. In case
the borrower is not replenishing the shortfall created due to reduction in
NAV, SBIMF will be advised to redeem the Lien marked mutual funds of the
borrower immediately
viii. As an additional measure, SBIMF will be sending emails to branches
advising daily NAV position of the select 14 schemes. (For this
purpose, operating functionaries are advised to furnish their email IDs
to SBIMF at the time of sending their requests for noting of lien on
securities). SBI MF will be requested to send an alert to respective branch
(which notified Lien on the scheme) in case the NAV is decreased by 5%
or more. This would help effective monitoring of NAV of the selected MF
Schemes and enable the branch to take corrective action immediately.
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ix.. The face value of units accepted as the equivalent of cash margin for NFB exposures
should be equal to 125% of the cash margin stipulated.
Where margin money is tendered by way of MF instruments, the pricing should be
suitably increased by 25 bps.
The updated list of approved fourteen SBIMF (new names) schemes is as under :-
(vide Cir CPPD 42 dt 20-06-2019)
Sr.No Old Names of SBIMF Scheme New Names of SBIMF schemes

1. SBI Magnum Insta Cash Fund SBI Magnum Ultra Short Duration
2. . SBI Premier Liquid Fund SBI Liquid Fund
3. SBI Magnum Income Fund SBI
FundMagnum Income Fund
4. SBI Magnum Gilt Fund Short Term SBI Magnum Constant Maturity Fund
5. SBI Magnum Gilt Fund Long Term SBI Magnum Gilt Fund
6. SBI Corporate Bond SBI
FundCredit Risk Fund
7. SBI Savings Fund SBI Savings Fund
8. SBI Debts Fund Series ( popularly SBI Debts Fund Series ( popularly
known as Fixed maturity Plans) known as Fixed maturity Plans)
9. SBI Dynamic Bond Fund SBI Dynamic Bond Fund
10. SBI Ultra
known as Short
FixedTerm DebtPlans)
Maturity Fund SBI Magnum
known Low
as Fixed Duration
Maturity Fund
Plans)
11. Dual Advantage Fund (Hybrid Fund) Dual Advantage Fund (Hybrid Fund)
12. SBI Short Term Debt Fund SBI Short Term Debt Fund
13. SBI Treasury Advantage Fund
Fund) SBI Banking and PSU Fund
Fund)
14. SBI Regular Savings Fund SBI Medium Duration Fund
No other MF scheme should be accepted as collateral security for FB/NFB exposures

as also in lieu of cash margin for NFB exposures other than the schemes mentioned
above.
6. Security: Apart from the margin, bank guarantees are usually secured by an extension
of the charge on current assets obtained to cover working capital facilities. Adequate
collateral security by way of equitable mortgage/extension of charge on current/
fixed assets or third party guarantee should be taken depending on the merits of each
case.
7. Commission: Commission to be charged on the BGs issued, service charges, authority
for sanction of concession in service charges; refund of commission etc. shall be as
per the instructions issued by the Bank from time to time. As per Cir CPPD 132 dt
27-11-2019, the commission on BG would be recovered for the validity period of
BG and the claim period as per contract between applicant and beneficiary.
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Example: A customer applies for issuance of BG with a validity period of 15 months
and with a provision of 3 months of claim period. The commission would be
recovered for 18 months as per the sanctioned rate. However, the claim period in the
text of the BG would be mentioned as12 months. Thus, the validity plus claim period
in this case will be 27 months and the commission for 18 months would be recovered.
The liability in the books of the bank would be reversed only after 27 months or when
the original BG is returned along with the no claim letter from the beneficiary,
whichever is earlier as per extant instructions.
Further, as per guidelines vide Cir CPPD-ADV/178 dated 12 Feb, 2020

commission is generally to be recovered upfront for entire period of BG including
claim period. Recovery of commission may be made on quarterly/ half yearly/
annual intervals with approval from appropriate authority contained in Cir CPPD 22
dated 15-05-2019. With a view to improve liquidity position of borrowers, process
for recovery of commission has been streamlined (for entire of period of BG viz. BG
validity plus contracted claim period between applicant and beneficiary) as below:
Category of Periodicity of recovery of commission

BG
Fresh/New BGs BG commission to be recovered on “Quarterly Basis”. Where the
Renewal of BG validity period including contracted claim period is less than a
existing BGs quarter, then commissions to be recovered for actual period in
$ multiple of months, minimum period – 1 month. @
$ Commission already recovered shall not be refunded.
@ In respect of satisfactorily conducted account recovery of BG commission can be
considered on monthly basis with prior approval from CGM (CAG)/ Circle/ PFSBU/
IBG- for business handled by IBG domestic.
In case of NPA accounts, where it has been decided to renew the BG to avoid invocation
and the borrower is not in a position to bear the BG commission / charges, Bank may
defer the recovery of entire BG charges / commission to a later date.
8. Documents:
8.1 Whenever a guarantee is issued and/or guarantee bond is countersigned by the Bank
on behalf of a constituent, suitable Counter Guarantee should be obtained from the
constituent.. For each ad hoc bank guarantee issued, a separate Counter Guarantee is
necessary. In the case of a regular bank guarantee limit duly sanctioned, a stamped
omnibus Counter Guarantee for the bank guarantee limit will suffice. An omnibus
Counter Guarantee can be executed one time by the borrower to whom a limit for
issuance of guarantees up to a specific amount is sanctioned. Where such a limit is
sanctioned, guarantees can be issued within the limit favoring various beneficiaries.
8.2 In case of a partnership firm, Counter Guarantees should be signed/executed by all
the partners of the partnership firm. A partner of the firm is not competent to execute
Page 324 of 632

the Counter Guarantee for and on behalf of the firm unless he (managing partner) has
been specifically authorized to do so by all the partners under the deed of partnership
or otherwise.
8.3 In case of a joint stock company, a board resolution should be passed by the
company before executing the Counter Guarantee or omnibus Counter Guarantee.
The Bank’s charge in respect of the guarantees issued on behalf of the companies
should also be filed for registration with the concerned Registrar within the
stipulated period of 30 days.
8.4 Both the bank guarantee (to be executed by the Bank) and the Counter Guarantee or
Omnibus Counter Guarantee (to be executed by the applicant/borrower) are to be
stamped as agreements as per Stamp Duty required at the place of execution.
9. Format of Bank Guarantees
9.1 Bank guarantees should normally be issued on the format standardized by Indian
Banks Association (IBA). When it is required to be issued on a format different from
the IBA format, as may be demanded by some of the beneficiary Government
departments, it should be ensured that the bank guarantee is,
(a) For a definite period,
(b) For a definite objective enforceable on the happening of a definite event,
(c) For a specific amount
(d) In respect of bona fide trade /commercial transactions,
(e) Contains the Bank’s standard limitation clause
(f) Not stipulating any onerous clause, and
(g) Not containing any clause for automatic renewal of the bank guarantee on its expiry.
Some of the examples of onerous clauses, which are included in non-standardized
formats, are
i. The guarantor indemnifies to make good of the losses on account of supply of
inferior quality, without specifying any amount.
ii. Demanding payment of interest beyond guaranteed amount
iii. BG will continue till it is discharged by beneficiary, but any date is not
specified
iv. Guarantee will automatically be renewed upon after its expiry.
9.2 Bank guarantees should be issued with a pre-printed and numbered standard first
page of the guarantee form which contains the limitation clause. The pre-printed
form is to be used for all Bank guarantees. However, in the case of a guarantee
favoring a Government department if the concerned department objects to the use of
the pre-printed form, branches may issue the guarantee on non-judicial stamp paper.
The text of the guarantee will appear on the pages succeeding the printed first page.
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It should be ensured that while filling up the first page of the bank guarantee (the
pre-printed and numbered standard first page), Bank Guarantees issued through
Trade Finance Software, complete printed Bank Guarantee is generated in the
software, which is to be stamped and issued.
9.3 With the amendment in section 28 of the Indian Contract Act, 1872 by parliament
through passing the Banking Laws (Amendment) Act, 2012 and under Section 17 of
the Amendment Act , and following ‘Exception 3’ has been inserted in the said Act :
“Exception 3 - Saving of a guarantee agreement of a bank or financial institution: This
section shall not render illegal a contract in writing by which any bank or financial
institution stipulates a term in a guarantee or any agreement making a provision for
guarantee for extinguishment of the rights or discharge of any party thereto from any
liability under or in respect of such guarantee or agreement on the expiry of a specified
period which is not less than one year from the date of occurring or non-occurring of a
specified event for extinguishment or discharge of such party from the said liability.”’
(refer Cir CPPD 162 dt 01-02-2019)
a) Accordingly, the claim period of a minimum of 1 year from the date of expiry of
validity period of BG is to be specified invariably, irrespective of the type, original
tenure and/or lower required claim period by beneficiary in its request of BG.
b). Any further extension of the existing BG is to be made with a minimum claim
period of 1 year from the date of expiry of validity period of BG.
Now, In all the guarantees issued by the Bank, the limitation clause as given below,
should invariably be incorporated at the end of the text as concluding paragraph of
the bank guarantee
Notwithstanding anything to the contrary contained herein-

i. Our liability under this Guarantee shall not exceed Rs. [ ]/-
ii. This Bank Guarantee shall be valid up to [ ] (being the date of expiry of the
guarantee)
iii. The beneficiary’s right as well the Bank’s liability under this Guarantee shall stand
extinguished unless a written claim or demand is made under this Guarantee on or
before [ ] (being the date of expiry of claim period which in no case should
be less than 1 year from the date of expiry of validity period of BG as per
clause. ii above)
9.4 In case of guarantees issued favoring Government Departments, the above clause
should be included in the Model Bank Guarantee (MBG) form prescribed for bank
guarantees in favour of Government departments.
9.5. If the Government departments/quasi-Government institutions require guarantees as

per their format, the controlling authorities may permit the branches to issue
guarantees / extend guarantees as per their specimen forms, provided such forms
generally conform to the model guarantee form, contain the usual standard
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limitation and are free from any clause prejudicial to the Bank’s interest.
However, it should be ensured here that the date of expiry of claim
period is in no case less than 1 year from the date of expiry of validity
period of BG.
9.6 The guarantees/extension guarantees should be issued by signing in full on all pages
with SS number.
9.7 The guarantee may also be issued by the branches on a stamp paper on which the
name of the customer (on whose behalf the guarantee is issued) appears as the
purchaser thereof. It should be ensured that
a) Date of purchase of stamp paper is prior to the date of the bank guarantee, and
b) The parties to bank guarantee are identical with those mentioned in the BG.
9.8 The guarantees issued by the branches for Rs. 50000/- and above should invariably
be signed by two officials jointly with their SS numbers.
10. Extension/Renewal of Bank Guarantee

10.1 Request from the applicants for extension/renewal of guarantee to be entertained
provided there is no change in the amount and other terms and conditions of the
guarantee. The pre-printed forms prescribed for the purpose (Extension Guarantee)
will be used.
10.2 Expired bank guarantee may also be renewed with retrospective effect subject to the
condition that the Bank remains indemnified as against the contingent liabilities etc.
which may arise under the said guarantee i.e., the counter guarantee covers such
liabilities retrospectively so it should be amended as per requirement. It should be
also ensured that no such events that lead to invocation of guarantee has taken place
from the date of expiry to the date when guarantee is being renewed with
retrospective effect.
10.3 Normally, requests for extension should emanate from the applicants. In case,
however, the beneficiaries request the branches either to renew or pay the guarantee
amount, the branches should acknowledge such letters to the beneficiaries and
request the applicants to renew before the guarantees expire or deposit the guarantee
amount for honoring the commitment. If no request for renewal is received by the
branches in time, they should honor the guarantees invoked and recover the amount
paid from the applicants in the usual manner.
10.4 The stipulations pertaining to issue of guarantees apply equally to extension or renewal
of guarantees.
10.5 Bank will issue BGs with automatic renewal clause only to select beneficiaries such
as customs authority, courts and overseas project owners in respect of project
exports. Due precaution to safeguard bank’s interest like obtaining 100% cash
margin etc. should be taken before issuing such guarantees.
11. Amendment of BG : Bank Guarantee is a contract whereby the Bank agrees to pay
Page 327 of 632

the beneficiary the amount guaranteed in the Letter of Guarantee, if the guaranteed
obligations are not fulfilled by the applicant. It can be amended as in the case of any
other contract, with the consent of all the parties concerned and there is no restriction
under law or guidelines of RBI for such amendment.
12. Reversal of BGs/ Release of Margin or Collateral
a. BGs Issued/Extended with Claim Period of 1 Year and above:
i. After the expiry of each BG (including the time limit stipulated for
preferring claim, if any), a Registered Letter with A.D. is to be sent to the
beneficiary advising that the guarantee has expired and requesting the beneficiary
to return the original guarantee document along with no claim letter, and a
reminder is to be sent after one month by Regd AD, if the BG is not returned.
ii. The liabilities in branch books to be reversed ‘either after seven days of
expiry of the claim period of guarantee (which in no case should be less than
1 year from the date of expiry of validity period of BG) OR reversed after receipt
of the original BG along with no claim letter from the beneficiary (even before
expiry of one year of claim period)’.
iii. Margin/collateral, if any, taken exclusively for relative BG or BG limit are to

be refunded / released accordingly, post reversal of liability.
b. Existing BGs Issued with Claim Period below 1 Year:

i. After the expiry of each BG (including the time limit stipulated for
preferring claim, if any), a Registered Letter with A.D. is to be sent to the
beneficiary advising that the guarantee has expired and requesting the beneficiary
to return the original guarantee document along with no claim letter, and reminder
is to be sent after one month by Regd AD, if the BG is not returned.
ii. The liabilities in branch books may be reversed after seven days of expiry of the
guarantee. If the claim period is different from that of the validity period, the
entries may be reversed seven days after the expiry of the claim period.
iii. However, margin / collateral, if any, taken exclusively for BG or BG limit are to
be refunded/released and utilization of vacated BG limit in books is to be
permitted:
Only after return of the original guarantee document along with no claim letter
extinguishing beneficiary right under BG, or
After expiry of the limitation period i.e. three years in case of private parties and
30 years in case of Government departments.
12.1 Any expired bank guarantee allowed to be continued attracts capital charge as per
Basel norms so the operating units should periodically verify the outstanding guarantees
and take appropriate action for cancellation of outstanding guarantees beyond the
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respective dates of expiry/claims.
12.2 Bank guarantee can be cancelled prior to expiry of the period only with the written
consent of the two parties to the contract i.e., the beneficiary and the applicant, or on
the expiry of claim period. In cases where the guarantee duly cancelled is received
back before the expiry date, the liability will be marked off in branch books.
However, the commission for the balance period is not refundable if the purpose for
which the guarantee was issued has been fulfilled.
12.3 Others
a. No deviations are to be allowed for providing claim period of less than 1 year
from the date of expiry of validity period of BG.
b. In case of any invocation beyond the date of expiry (i.e. after the expiry of time
limit stipulated for preferring claim, if any) as mentioned in the guarantee, the
same should not be honored stating that the BG has already expired.
c. In case of the existing BGs issued with claim period below 1 year, operating units
are advised to arrange to preserve the related ‘Counter Guarantee’ and other
loan documents obtained for subject guarantee, during the limitation period i.e.
three years in case of private parties and 30 years in case of Government
departments
d. During sanction / renewal / review of the limits, operating units to analyze and
assess working capital requirement of the borrowers duly factoring impact of
proposed instructions.
e. The Counter Guarantee / Omnibus Counter Guarantee covers the aspect of

binding the applicant of the BG until discharge of the Bank of its liability
under BG by the beneficiary. The extract of the relevant clause (Omnibus
Counter Guarantee) is reproduced hereunder:
‘This Counter Guarantee will be continuing one and will remain in force until
you are finally discharged of all liabilities under all or any one of such Guarantees
and all subsequent renewal or renewals thereof and have had the discharge
confirmed in writing and received the Guarantees and any subsequent renewal or
renewals thereof duly redeemed
However, as an additional measure of caution, branches may add following

clause in the sanction/arrangement letter, and exchange the same on sanction /
renewal / review of limits:
‘All the Documents / Securities / Margin Money provided towards issuance of

Bank Guarantee shall continue to be in force in favour of the Bank until the original
Bank Guarantee along with ‘No Claim Letter’ confirming the discharge of
liability of the Bank is received from the Beneficiary.’
13. Invocation of Bank Guarantee
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13.1 The beneficiary of the bank guarantee can invoke in writing, the guarantee any time
before the expiry of the guarantee period. Invocation can be done by Telex/
Telegram/hand delivery also followed by mail confirmation. It should be ensured
that all valid claims received are settled promptly. In the case of any dispute, such
honoring, on invocation, will be done under protest and the matters of dispute should
be pursued separately.
13.2 The Bank’s liability under bank guarantee is absolute and independent and
exclusive of any other contract entered into by the applicant and beneficiary. It is,
therefore, obligatory on the part of the Bank to pay to the beneficiary without delay and
demur the amount of bank guarantee on its invocation in accordance with the terms and
conditions of the guarantee deeds. It is not necessary for the beneficiary to satisfy the
Bank, about the default or the amount of actual loss suffered by him. In this connection,
branch managers have been vested with necessary powers to honor the claims under the
guarantees issued by the Bank provided the guarantee was executed under sanction from
the competent authority and conditions stipulated for invocation of the guarantee have
been fully complied with. Delay in honoring the claim immediately may unnecessarily
put the Bank in problems pertaining to claim of interest, damages and at times injunction
orders from court.
13.3 Only when the Bank has received an order of restraint/injunction from a competent/
appropriate court, the Bank can withhold payment under the bank guarantee. Till the
court case is decided, the liability of the Bank under bank guarantee will continue.
Guarantee commission for the period of pendency of court cases has to be recovered. In
such cases, the beneficiary of the guarantee should be advised appropriately of the
reason for non payment of amount due under invoked guarantee.
13.4 Salient features of Standard Operating Procedure (SOP) have been issued by Bank
vide Cir CPPD 71 dt 01-08-2019 in case of Invocation of Bank Guarantee which
include as follows:-
i. Authority for payment of invoked BG is vested with the Branch Head or COO of the
Branch.
ii. In respect of BG invoked but the invocation is not as per the terms and conditions of
guarantee, the decision of non-honouring of the obligation under the guarantee is to be
approved by the Branch Head or Controller, not below the rank of AGM.
iii. The Beneficiary/ Beneficiary’s Bank (as the case may be) is to be advised that the
invocation is not as per the terms of the BG, duly specifying discrepancy/ies on account
of which the guarantee cannot be invoked, and copy of this communication is also to be
sent to the Applicant. No second intimation is required to be sent in this regard.
iv. In case an account is transferred to SARG/ Other Branch, any invocation notice
(including extend or pay request) relating to such account is to be dealt with by the
Transferee (SARG)/ Controlling Branch only. No transaction is to be carried out by
Transferor/ Operating Branch without concurrence/ approval from Transferee (SARG)/
Controlling Branch.
Stage-wise procedure involving invocation of BG is as below:
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a) Receipt of Invocation Notice/SWIFT Message: To be branded with date and time
stamp. Acknowledgement of receipt is to be issued to beneficiary. In case of Foreign
BGs, SWIFT message to be downloaded , authenticated and entered in SWIFT
register. Invocation Notice/ SWIFT message is to be handed over to Officer in
charge against acknowledgement. (Transaction is also to be routed through
workflow.) Invocation is to be advised to Relationship Manager concerned/ Branch
Head.
b) Verification of Invocation Notice : involves validity of Claim Period , amount of BG

invoked by desk officer and entering the same in Exim Bills and Template Note to be
generated for obtaining approval from competent authority. Further, invocation
notice can be received through e mail/fax/ Hand delivery or any other mode as
agreed by the parties. Even if nothing is specified about the mode of delivery,
invocation notice received can’t be neglected by Bank.
c) Approval for payment of invocation amount : Officer –in-charge to examine

whether invocation done as per terms of BG . In case invocation is in order then
payment is recommended to BM/ COO . Relationship Manager is also advised or
alternately recommendations can be put up by the Relationship Manager.
In respect of BGs invoked on the grounds/ reasons that are not as per the terms and
conditions of guarantee, the decision of non-honouring of the obligation under the
guarantee is to be approved by the Branch Head or Controller, not below the
rank of AGM and Beneficiary/ Beneficiary’s Bank (as the case may be) is to be
advised that invocation is not as per terms and copy also sent to the Applicant.
Non-payment of invoked guarantee due to an order of restraint/ injunction
from a competent/ appropriate court shall require no such approval, however
the facts of not honouring the invoked BG are to be reported to the Controller.
The reporting of above cases and withholding of payment under BG on
account of an order of restraint/ injunction from a competent/ appropriate court,
is to be done immediately to the Controller or next Higher Authority (as the case
may be) and Controller respectively, along with full particulars.
d) Invocation of Applicant’s Counter Guarantee: Applicant is to be duly advised

about the invocation of BG by Beneficiary and also about their Counter
Guarantee being invoked by Bank through e mail/ Regd post AD/ courier.
e) Payment of invoked amount : Payment of invoked amount has to be made

irrespective of available balance in the account (CC/OD) by overdrawing the
account.
f) Advising the Beneficiary and Applicant : A letter/ SWIFT message may be sent
to Beneficiary enclosing details of Inter Office Instrument (IOI) for the amount
remitted. Payment may be made through NEFT/RTGS in line with terms of BG
(or) as requested in invocation notice if nothing is specified in BG. Proper KYC
and authenticity of account of Beneficiary (wherein credit is to be afforded)
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is tobe ensured.
g) Verification by concurrent auditor ( wherever posted): Invocation of BG has to

be examined by concurrent auditor , wherever posted. The concurrent auditor has
to examine whether invocation has been approved by competent authority;
FEMA/RBI guidelines have been complied with; applicant customer’s omnibus
counter guarantee / specific counter guarantee has been invoked and claim
lodged; applicable charges are recovered; no undue delay in making payment .
Finally proper record and filing has to be ensured in respect of BGs invoked
with recording of Applicant details, date of payment, invocation notice,
message and relevant documents/ approved notes.
Applicability of SOP of invocation to Foreign BGs : SOP shall be applicable

to Inland BGs, and will not be applicable to Inward/ Outward Foreign BGs issued
subject to URDG 758/ Other Regulations to the extent it’s contravening with any
of the clauses contained in the URDG 758/ Regulations and/or otherwise agreed
in the subject BG.
In case of invocation of performance guarantees issued in favor of foreign
beneficiaries, branches should note that the Bank is responsible for paying
applicable taxes (including withholding tax, where applicable) on the payments
on account of such invoked guarantees. Failure to deduct tax will make the Bank
liable to pay the same. On the other hand when a BG is invoked the beneficiary is
entitled to receive the guaranteed amount. To ensure this aspect, in respect of
performance guarantees issued in favor of foreign beneficiaries, applicable Indian
Income Tax/ Withholding Tax, where applicable, will not be deducted by operating
units from the amount of Bank Guarantee upon invocation/remittance. Instead, while
obtaining counter guarantee from the applicant, the operating units will have to gross
up the guaranteed/counter-guaranteed amount and amount of applicable tax (i.e.
withholding tax at applicable rates). Undertaking to be obtained from the applicant in
such cases to recover such taxes from their account. This undertaking to remain valid
till the validity of BG (including extension, if any). Format of Undertaking as per
annexure to Cir CPPD 71 dated 01-08-2019.
13.5 In case of invocation of BG result in irregularity in account and if such

irregularity continues beyond 15 days following approach has to be adopted by the
operating functionaries (Reference : Cir CPPD 28 dt 15.06.2013 and Cir no
CPPD/ADV/ 71 dt 01.08.2019)
Category of Borrower
(i) i) ECR of AAA, AA & A ECR of ECR of BBB- & below
rated borrowers BBB+ & rated borrowers and
(ii) i i ) PSUs like BBB other unrated
Scenario Maharatnas, Navratnas, rated borrowers (except
Miniratnas etc. and borrowers those belonging
to the group of AAA /
(iii) i i i ) Borrowers having
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100% collateral security AA rated Companies)
BG invocation Concessions may be Concession No further BG to be
where account has allowed to continue with to be issued.
not been the prior approval of the withdrawn
regularized within Sanctioning Authority. and card rates
15 days. to be charged
forthwith.
Further the restitution of BG limits after the regularization of the account and
issuance of further BGs can be administratively allowed by an appropriate
authority/ committees. Please refer circular no CCO/CPPD-ADV/150/2013–14
dated, February 28, 2014 for further details.
14. Interchangeability between Letter of Credit and Bank Guarantee Limits

Generally, requests for interchangeability between the two facilities will be
entertained only when the purposes for which the facilities have been sanctioned are
similar. The extent to which such interchangeability can be permitted, subject to
detailed examination of circumstances requiring such interchangeability by the
competent authority.
The interchangeability from LC to BG and vice versa need to be considered with
caution as there would be change in quality of underlying exposure. Further, while
considering requests for such interchangeability, the undernoted factors may be
taken into account:
i) Time horizons of risk devolvement between the two facilities are different.
ii) Nature of risk is not the same i.e., the risk associated with a performance
guarantee is different from that of a financial guarantee or an LC.
iii) While examination of cash flows is vital at the time of opening an LC, it is not
generally considered as relevant in most cases of issues of BGs.
iv) A usance LC limit has a bearing on the level of sundry creditors available and
hence on the fund-based credit limit required.
v) The borrowing unit’s track record in meeting the obligations under Letters of
Credit.
vi) The authority for permitting such interchangeability will be as per the authority
structure (mostly sanctioning Authority).
Category-I
In respect of “AA” rated and better (without linking to internal ratings) units
and PSUs classified as Maharatna / Navaratna, 100% interchangeability shall be
provided
i. between FBWC facilities

ii. between NFBWC facilities and
iii. from FBWC to NFBWC facilities (one way)
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If the interchangeability between facilities in respect of units falling under
above category (i. e, Category-I) forms part of regular proposal, specific
template approval is not required. The requirement is only to be discussed as a
part of the assessment with proper justification.
Category-II
Type of Interchangeability Externally Unrated External

Rated
(SB-1 to SB-7)
(A and BBB)
(includes - &
+)
% of interchangeability permitted
Between two FBWC limits 100

(except stocks to BD / Clean
Bills)
From Stocks to BD / Clean Bills 50

From BG to LC 100
(Limited to Working Capital (Limited to Working Capital BGs only)
BGs only)
From LC to BG 100
If the request for interchangeability as per the above table and within the
permitted limits forms part of regular proposal, specific template approval is not
required. The requirement is only to be discussed as part of the assessment with
proper justification.
Category-III
In rest of the cases viz., externally unrated units having CRA rating of SB-8 or
below / units having ECR below BBB, the aforesaid interchangeability (between
FBWC facilities and between NFB WC facilities) requires specific approval
from the Sanctioning Authority (SA) as a template item with adequate
justification.
In all standalone cases (between renewals) the approval for such

eligible interchangeability falling under the categories I&II as detailed above may
be approved by the CGM of the Vertical / Circle.
b. Interchangeability from Non-fund to Fund based WC limits, in respect of all the

units (Category I, II & III) requires specific template approval from the Sanctioning
Authority.
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As per revised guidelines vice Cir CPPD 125 dt 19-11-2019 on Structure for Approval of
Deviations (ann-I) wherever interchangeability from Non-Fund to Fund Based limits
has been approved, all such cases to be reviewed. No fresh permission (limits) for
interchangeability from NFB to FB facilities to be approved at the time of new
sanction/renewal of accounts.
SPECIAL FEATURES OF DIFFERENT TYPE OF BANK GUARANTEES

15. Mobilisation of Advance // Advance Payment Guarantee
Advance Payment Guarantees are ordinarily required by construction companies/
contractors. The following monitoring mechanism has been prescribed in respect of
such guarantees for ensuring end use of funds. The undernoted guidelines should be
followed, while executing and monitoring advance payment guarantees:
(a) Submission by the applicant of a flow chart indicating the expected progress of work
in respect of each contract along with the application for issue of Advance Payment
Guarantee (APG).
(b) A schedule of utilization of the advance payment to be received, indicating the
expected date/month of utilization and its purpose. Withdrawal of the advance
payment received should normally be permitted in accordance with the utilization
schedule, which should be examined by the branch at the time of issuing the
guarantee.
(c) A periodical progress report should be submitted by the applicant of the guarantee to
enable the branch to monitor the end use of funds/the progress of the work vis-à-vis
the flow chart and the utilization schedule. The periodicity of the report may be
quarterly or half-yearly depending on the size of the contract and the period over
which it is spread.
(d) The progress of the work should be verified with the help of the flow chart and
periodical progress reports and if there is deviation in the progress of work in excess
of, say 15%, the matter may be reported to the controlling authority. The services of
outside consultants/architects may also be enlisted in cases where contracts are of
large value warranting vetting by such outside agency. This, however, would need to
be approved by the appropriate authority and the cost recovered from the applicant.
(e) Where advance payments for purchase of material (or for meeting other expenses)
are received by the customer against the Bank’s guarantee, the end use of these funds
should be monitored to ensure that adequate stocks are actually held and these are
not additionally financed by the branch under working capital facility. Stocks
procured out of advance money may be knocked off from the value of security
charged to the Bank mentioned in the stock statement. Alternatively, credit limit
may be impounded during the execution period/cycle of operation during the
currency of the guarantee.
16. Deferred Payment Guarantee (DPG)

Many times the manufacturers/Suppliers sale the plant & machinery to the buyer and
agree to receive the payment in Installments. For assurance of payment they expect a
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bank guarantee issued in their favour by buyer‘s bank. Such type of guarantee is
called Differed payment Guarantee. Thus
16.1 A deferred payment guarantee (DPG) is a contract to pay to the supplier the price of
machinery, supplied by him on deferred terms to the buyer, in agreed installments
with stipulated interest on the respective due dates in case of default in payment
thereof by the buyer.
16.2 Under the contract, the Bank executes a guarantee on behalf of the buyer in favour of
the seller’s bank who, on the strength thereof, discounts the seller’s bills drawn on
the buyer. The seller receives payment for the plant and machinery by his bills being
discounted by his banker, and the buyer repays his obligation in installments to the
seller’s banker by retiring those bills on the respective maturity dates.
16.3 DPG is also sanctioned in respect of deferred term commitments and obligations of
financing institutions/borrowers. A DPG is, in many respects, a substitute for a
term loan with the only difference in the mode of term assistance. The process
of appraisal is, therefore, the same as is applicable to term loans.
16.4 All the activities which are eligible for the purpose of granting term loans by the
Bank will be eligible for the purpose of issuing deferred payment guarantees.
16.5 The period of deferred payment guarantees should not ordinarily exceed 7 to 10
years, although it could be considered even beyond 10 years in exceptional cases
depending upon merits.
16.6 The standard covenants for DPGs are generally the same as those for term
loans.
16.7 Where both the buyer and the seller have common banking arrangements i.e., both
are Bank’s constituents, the deferred payment guarantees as such will not be required
to be executed. Instead the branch which handles the buyer’s account will issue a
letter of commitment to the discounting branch (which handles the seller’s account)
authorizing the discount of bills/notes without issuing a separate deferred payment
guarantee. The issue of such a letter of commitment on behalf of the buyer, however,
should be treated on par with a deferred payment guarantee for all purposes.
16.8 Installments due under deferred payment guarantees are payable out of cash accruals
generated by a unit. As cash accruals are part of the sales proceeds, which get routed
through the unit’s cash credit accounts, it is the usual practice to debit the cash credit
account with the amount of the installments under deferred payment guarantees,
provided there is adequate drawing power. However, such debits should not be
permitted, where these will result in over drawings in the cash credit account. Under
the circumstances overdue installments or installments in default (where the DPG
issued by the Bank has been invoked) should be debited to a separate account opened
in the Term Loans Ledger styled as under:
“Name of the unit……………………..(overdue installments due under deferred
payment guarantee No……………………….dated…………….For
Rs…………………………………..) account.”
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Transfer of the overdue installments in overdue DPG account may be transferred to
the cash credit account subsequently when it is regularized and sufficient drawing
power is available .The debit of TL/DPG installments to Cash credit account
presuming that unit is making/generating profits/cash flows as per projections.
However if the cash flows are not sufficient debit of overdue installments of
TL/DPG may result in liquidity crunch to the borrowing unit .Hence a
comprehensive view must be taken at this point of time .If required account must be
restructured.
16.9 The Bank’s commitments under a DPG facility should usually be secured by a
charge (exclusive/pari-passu/second charge) over the capital equipments acquired/to
be acquired by the buyer.
16.10 The liability of the Bank under DPG will be the amount for which the guarantee is
issued inclusive of interest. The liability should be reduced by the amount of
installments, inclusive of the interest component, as and when they are paid.
16.11 Bank also executes foreign DPGs covering import of plant and machinery on
deferred payment basis. A foreign DPG is in no way different from an inland
DPG and, therefore, the proposal for a foreign DPG has to be processed, in the
same way as the proposal for an inland DPG. Additionally, in the case of a
foreign DPG it has to be ensured that all the relevant Import Trade
Control/Exchange Control requirements in force from time to time are duly
complied with before the DPG is executed.
16.12 In the case of DPGs issued in foreign currencies, the conversion rate for control
entries will be BC selling rate for the currency concerned ruling on the date the
guarantee is issued. The entries will be reversed as and when the amounts are paid,
at the same rate at which the original entry was passed as in the case of other bank
guarantees
17. Export Performance Guarantees Favouring Customs

These guarantees are those which are executed favouring the Customs Department
for amounts linked to the customs duty relief availed by the exporter customers on
imports of capital goods under the Export Promotion Capital Goods (EPCG)
Scheme. Under the Scheme applicant is getting certain exemption in Custom duty on
import of Capital goods but with a obligation to fulfill certain level of export in next
few years.
In view of the nature of exposure involved in these types of guarantees, these
guarantees stand on the footing of long term financing of a project, like a DPG
commitment. In all cases of EPCG linked Bank Guarantees, following approach
should adopted by operating units:
i) Export Performance Guarantees given for availment of duty concessions on capital
goods will be considered as part of the long term project finance.
ii) The assessment of the guarantee will continue to be done on the lines as of now, viz.
the technical, financial and marketing ability of the project to achieve exports of the
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value within the time allowed under the duty concessions scheme, will be assessed.
iii) The guarantee should be supported by the same security which is available for the
TL and DPG commitments for the project i.e. the Bank should have the first
charge/pari passu first charge on the assets to be acquired. In addition, additional
security as necessary should be obtained for the facility including the Export
Performance Guarantee issued by ECGC.
iv) Where the value of these guarantees is substantial in relation to the TL and DPG
commitments from term lending institutions and banks, the risk under the guarantees
should be shared with the term lending institutions through appropriate counter
guarantees from them on the lines similar to issue of DPGs by the Bank on behalf of
a consortium of term lenders.
Comments on export performance are required to be given in the review/renewal
proposals, for units availing bank guarantees under EPCG Scheme.
In view of the above, it should be ensured that a suitable system in place for
monitoring the actual exports made by the customers vis-à-vis the commitments
made with prescription to retain higher cash margins.
18. Bid Bonds and Performance Guarantees on behalf of Exporters

Bid bonds are issued in favour of overseas buyers in lieu of earnest money. Such
guarantees have to be submitted by the exporters at the time they participate in
tenders for the supply of goods/services abroad. While issuing bid bonds, undernoted
guidelines should be followed:
i) A flexible approach may be adopted in the matter of obtaining cover and
earmarking of assets/credit limits/drawing powers, while issuing bid bonds and
performance guarantees for export purposes. In respect of bid bond and guarantees
counter-guaranteed by ECGC, operating functionaries may not ask for any cash
margin. In other cases where such counter guarantees of ECGC are not available, a
reasonable cash margin may be stipulated where it is considered absolutely
necessary, as generally they are required to satisfy themselves about the capacity and
financial position of the exporter while issuing such bid bonds/ guarantees.
ii) Sanction of separate limit for issue of bid bonds within the overall limits
may also be considered, bid bonds against individual contracts may be issued,
subject to usual precautions.
iii) Issue of bid bonds for project exports is subject to compliance with the
Exchange Control Regulations. Branches must comply with these regulations.
19. Bank Guarantee Scheme of Government of India

19.1 The Indian Banks’ Association (IBA) has, in consultation with the Reserve Bank of
India, and Ministry of Finance, Government of India, evolved a Model Bank
Guarantee Form in respect of guarantees to be issued in lieu of security deposit to
departments of the State/Central Governments and Public Sector undertakings.
While issuing such guarantees in lieu of security deposit, branches should adopt the
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aforementioned model guarantee form.
19.2 It will also be in order for branches to consider issuing guarantees in any other
suitable form, with the permission of the controlling authority provided the standard
limitation clause is retained and also the spirit behind the model guarantee form is
preserved and the Bank’s interests are not in any way jeopardized. However
inclusion of any additional clause or alterations in the clauses of the model bank
guarantee form are considered necessary owing to the peculiarities of certain
contracts, it should be ensured that these additions/alterations are not one-sided and
are not prejudicial to the interests of the Bank.
19.3 Branches should note that the guarantee bond is to be issued at the request of the
contractor(s)/supplier(s) and it can be renewed or its period of validity extended only
at the request of the contractor(s)/supplier(s) concerned.
19.4 Government of India has also clarified that
(i) The bank guarantee would be invoked only where there is a specific breach on the
part of the contractor of the terms and conditions of the relevant agreement and the
bank guarantee bond,
(ii) The decision to invoke the guarantee would be taken as far as possible, by an officer
higher in rank than the officer who accepted the guarantee, and
(iii) All claims under the guarantee bond should be made and lodged with the bank within
the period specified in the relevant guarantee bond.
20. Bank Guarantees favoring Government departments- correspondence with

President of India
In respect of guarantees issued by the branches favoring Government departments,
branches should not address any correspondence to the President of India, although
such guarantees are favoring the President of India. The correspondence relating to
such guarantees should instead be addressed to the concerned Government Ministry/
Departments.
21. Procedure to be followed when the judgments are delivered by Courts in

favor
of Government departments
21.1 The following procedure should be adopted when the judgments are delivered by
Courts in respect of guarantees issued in favor of Government Departments:
(a) Where the Bank was a party to the proceedings initiated by Government for
enforcement of the bank guarantee and the case was decided in favor of the
Government by the Court, branches need not insist on production of certified copy of
the judgment as the judgment/order was pronounced in open Court in presence of the
parties/their Counsels and the judgment would be known to the Bank.
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(b) In case the Bank was not a party to the proceedings, a signed copy of the minutes of
the order certified by the Registrar/Deputy or Assistant Registrar of the High Court
or the ordinary copy of the judgment/order of the High Court, duly attested to be true
copy by Government Counsel, would be sufficient for honouring the obligation
under the guarantee unless the Bank decides to file any appeal against the order of
the High Court.
21.2 To facilitate prompt identification of the guarantees with the concerned departments,
branches should mention in their correspondence with various State Governments,
the names of the beneficiary departments and the purposes for which the guarantees
were executed.
22. Issue of Bank Guarantees in favor of other banks/financial institutions.
22.1 Branches should not issue guarantees favoring financial institutions, other banks
and/or other lending agencies for the loans extended by the latter, as it is intended
that the primary lender should appraise and assume the risk associated with sanction
of credit and not pass on the risk by securing itself with a guarantee.
22.2 Exceptions are permitted in the following cases by Reserve Bank of India.
(a) Issue of guarantee in favor of another bank in cases where a bank is unable to take its
additional share in consortium account due to a liquidity strain and has temporarily
transferred the share to another bank in the consortium along with issuing a
guarantee in its favor.
(b) In the case of Seller’s Line of Credit Scheme (SLCS) operated by financial
institutions like IDBI, SIDBI, PFC etc. for sale of machinery, the primary credit is
provided by the seller’s bank to the seller through bills drawn on the buyer and
seller’s bank has no access to the security covered by the transaction which remains
with the buyer. As such, buyer’s banks are permitted to extend guarantee/co-
acceptance facility for the bills drawn under Seller’s Line of Credit. However, such
guarantee/co-acceptance facilities favoring financial institutions under their Buyers
Line of Credit Scheme (BLCS) should not be granted for the reason that under the
BLCS, the financial institutions assume the role of a primary lender by directly
providing credit to the buyer to facilitate purchase of machinery, equipments etc.
covered by the transaction. As the primary lender is required to make a proper
assessment of the proposal and secure a charge of hypothecation on the assets
financed, it would not be in order for the financial institutions to shift the risk of
repayment by obtaining a bank guarantee.
(c) Issue of guarantee in favor of different Development Agencies/Boards like Indian
Renewable Energy Development Agency, National Horticulture Board, Sugar
Development Fund, etc., on behalf of their clients/customers for obtaining soft loans
and/or other forms of development assistance from such Agencies/Boards. However,
such sanctions should be subject to the following conditions:
i) Banks should satisfy themselves, on the basis of credit appraisal, regarding the
technical feasibility, financial viability and bankability of individual projects and/or
loan proposals i.e., the standard of such appraisal should be the same, as is done in
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the case of a loan proposal seeking sanction of term finance/ loan.
ii) Banks should conform to the prudential exposure norms prescribed from time to
time for an individual borrower/group of borrowers.
iii) Banks should conform to the ceilings prescribed from time to time for sanction
of term finance/loans from the banking system.
iv) Banks should suitably secure themselves before extending such guarantees.
22.3 Branches should not execute any guarantee in favor of HUDCO in respect of loans
given to State sponsored bodies.
22.4 Branches should not execute guarantees covering inter-company deposits/loans.
Guarantees should not also be issued for the purpose of indirectly enabling the
placement of deposits with non-banking institutions. This stipulation will apply to all
types of deposits/loans irrespective of their source, e.g. deposits/loans received by
non-banking companies from trusts and other institutions.
22.5 It is not the Bank’s normal practice to grant credit facilities on the strength of
guarantees issued by other banks. But, in cases where branches entertain loan
proposals on the strength of the guarantees issued by other banks/financial
institutions, the undernoted points should be kept in view:-
i) The credit proposals should be subjected to usual scrutiny by the branches ensuring
that the proposals conform to the prescribed norms and guidelines and credit
facilities allowed only if they are satisfied about the merits of the proposal. The
availability of the other bank’s guarantee should not result in dilution of the
standards of evaluation of the proposal and financial discipline in lending.
ii) Branches should also enquire into the reasons as to why the other bank, instead of
itself granting the credit facility, is guaranteeing it. This should be recorded in bank’s
books.
iii) It should also be ensured that the officials of the Bank issuing the guarantee are
vested with the necessary powers and should insist on the relative powers being
registered with it before releasing the credit facility.
23. ACCOUNTING:
Those branches which are provided with exim bill facility should open all the Bank
Guarantees through exim bill only and corresponding contingent liabilities accounts
should be opened in CBS and overall bank guarantee issued on behalf of a particular
customer should be reflected in BG account of the customer maintained in CBS.
Alignment of balance as per report available through Exim bill software and CBS
should be done always. The alignment should be done customer wise.
Those branches where exim bill facility is not available should directly put through
the entry in CBS.
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STANDARDISATION OF FORMAT FOR ESTABLISHING LETTER OF
CREDIT (LC) / ISSUE OF BANK GUARANTEE (BG)
Bank has since introduced standardised proforma(s) for seeking approvals for issuance
of LC/BG by the branches/ operating units to TFCPC to comply with RBI
observations. (Refer Cir CPPD 136 dated 09-12-2019)
Each proforma is divided into two parts. Part-A of the format consists of the details relating
to Operational Angle Approval and Part-B consists of the details relating to Credit Angle
Approval.
MULTIPLE CHOICE QUESTIONS:

1. The Bank Guarantee is a collateral contract, consequential to a main contract between
the ……….
a. Banker and Borrower
b. applicant and the beneficiary
c. Banker and beneficiary
d. Borrower and Guarantor
2. Person to whom the BG is given and who has the right to enforce it, is called
a. Applicant
b. Guarantor
c. Beneficiary
d. Buyer
3. Bank guarantees can be classified in ……. Categories
a. Two
b. One
c. Three
d. More than three
4. BG issued in lieu of advance payment for Raw Material falls under…..
a. Performance Guarantee
b. Either Performance or Financial Guarantee depending upon deal
c. Financial Guarantee
5. Performance BGs attract Credit Conversion Factor of….
a. 0%
b. 150%
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c. 100%
d. 50%
6. Why proper classification of BGs is required?
a. To increase BG business
b. To increase commission
c. Both a & b
d. For correct calculation of Capital Charge
7. Maximum period for which a BG can be issued without prior administrative clearance
a. 24 months
b. 18 months
c. 36 months
d. Any period
8. Normally, BG should not have a maturity of more than ………… years.
a. 10
b. 5
c. 3
d. 7
9. What is the % of margin required for issuing BG related to disputed payments
a. 50%
b. 110%
c. 25%
d. 100%
10. Bank guarantees should normally be issued on the standard format issued by
……………
a. Reserve Bank of India (RBI)
b. Indian Banks Association (IBA)
c. State Bank of India (SBI)
d. Government of India
11. BG of Rs. 50000/- and above should invariably be signed by
a. Any authorized official
b. Branch Head only
c. Two officials jointly with their SS numbers
d. Any officer of the Branch along with the Controller of the Branch
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12. BG can be extended / renewed provided….
a. there is no change in the amount and other terms and conditions of the BG
b. Some change in the terms of BG is required
c. If enhancement in the BG amount is asked
d. BG cannot be extended / renewed at all
13. BGs can be renewed / extended at the request of ……..
a. Guarantor
b. Beneficiary
c. Applicant
d. Beneficiary & Applicant Both
14. Can BGs with automatic renewal clause be issued by the Bank?
a. Yes
b. No
c. Can’t say
d. Yes, only to select beneficiaries such as customs authority, courts and
overseas project owners in respect of project exports
15. Can a BG be amended after issuance?
a. No
b. Yes, with the consent of all the parties concerned
c. Yes
d. Not sure
16. After expiry of the validity of BG, margin should be released..
a. only after return of the original Bank Guarantee
b. Immediately
c. At the request of the Borrower
d. Release of margin is Bank’s discretion
17. In case of invocation of performance guarantees issued in favour of foreign
beneficiaries,
the
a. Bank is responsible
Full amount of BGfor paying
b. 90% of the BG amount
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c. Indian income tax (withholding tax, where applicable) on the payments on
account of such invoked guarantees
d. Tax applicable as per Foreign country
18. Deferred Payment Guarantee (DPG) is ……
a. a contract to pay the dues to the Government authorities
b. a contract to pay to the supplier the price of machinery as per the terms of
contract on the due dates if defaulted by the buyer.
c. Not at all contract
d. a contract to pay the price of raw material to the suppliers as and when asked by
them
19. DPGs issued in foreign currencies, the conversion rate for control entries will be
……………
a. BC buying rate
b. BC selling rate for US$ only
c. TT selling rate
d. BC selling rate for the currency concerned applicable on the date of issuance of
the guarantee
20 A bank guarantee of Rs100000 can be issued on a Stamp Paper of
a Rs10
b Rs100
c Rs1000
d Cant be determined based on information given
21 EPCG guarantee is issued on behalf of those customers considering its capacity to meet
a Import target
b Domestic Sales
c Export Sales
d Intra group sales
22 A BG of Rs100000 was issued on 01/04/2018 for 12 months , however customer has
again approached the branch on 01/09/2018 itself to extend the validity up to
31/03/2020. Is administrative clearance required
a No fresh extension is only for 12 months,
b Yes, 18 months period should be taken from date of issue
c Yes, remaining validity of the BG as on date of extension is more than 18
months
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d Both b & c
23 A BG of Rs100000 was issued on 01/04/2014 for 12 months ,however customer has
again approached the branch on 01/09/2014 itself to extend the validity up to
31/03/2016. Administrative clearance is required from
a Asst General Manager
b Deputy General Manager
c Branch Manager
d Can‘t say, authority to whom the power is vested is decided by respective
CGMs of Circle
24 A customer is asking for issue of a bank guarantee of Rs1.00 Crs to enable it to avail
loan from some other bank. Who is the approving authority?
credit
a facility from ICICI
Sanctioning bank, who will authorize for issuance of this BG
Authority
b CGM
c GM
d Such bank guarantee cannot be issued by us
25 Full interchangeability between LC & BG limit can be allowed to following category of
borrower subject to fulfillment of other criteria
a Having ECR of A and above
b Having ECR of Investment grade
c Having CRA SB-10
d Having CRA SB-7
26 Assessment of DPG should be done on the line of
a Working Capital Assessment
b LC assessment
c TL Assessment
d CEL Assessment
ANSWERS:
1-b 7-b 12-a 18-b 24-d
2-c 8-a 13-d 19-d 25-d
3-a 9-d 14-d 20-d 26-c
4-c xxxxx 15-b 21-c
5-d 10-b 16-a 22-b
6-d 11-c 17-c 23-b
Page 346 of 632

Case let 1: Bank Guarantee
• ABC Pvt. Ltd. is engaged in construction activities and banking with us since 2010.
The Company is enjoying FBWC (CC) limit of Rs. 40 crore , BG limit of Rs. 30 crore.
• As per ABS of as on 31.03.2019, the Company had achieved annual turnover of Rs.
215 crore. The Company is having pending orders in hand to the tune of Rs. 115 crore,
which are to be executed during FY 2019-20. As on 31.03.2019, the outstanding in CC
limit was Rs. 31.29 crore and Rs. 24.63 crore in BG account. During the FY 19-20,
existing BGs amounting Rs. 5.50 crore are expected to be cancelled. The present BG limit
is sufficient to meet out the existing requirement.
• The Company has planned to participate in the tenders of Rs. 300 crore out of
which it is expecting orders of Rs. 200 crore in 2-3 months time. The Company has
advised that it has to submit 2% as earnest money to participate in the tenders. As per
existing practice losing bidders get their BGs back immediately. Thereafter, it will require
BGs equivalent to 5% & 10% of the final orders for security deposit & advance payment
respectively. The Company will also require BG equivalent to 5% of the existing orders in
hand, which are to be completed during the year for retention money. The BG requirement
for miscellaneous purposes(Sales tax, Excise duty, Commercial Taxes etc) is Rs. 2.00
crore. In view of the above enhanced BG limit is required. Hence the Company has
requested for enhancement in BG limit from Rs. 30 crore to Rs. 70 crore.
Please assess the BG limit of the Company.
SOLUTION:
(Rs in Crore)
Opening balance of BGs as on 1.4.2019 24.63

Guarantees required as under:
i) Earnest money deposits: 2% of additional tenders worth Rs. 300 crores 6.00
during FY
ii) Security Deposits: 5% of tenders worth Rs. 200 crores expected to be 10.00
awarded during FY
iii) Advance Payment Guarantees: 10% of new orders worth Rs. 200 crores 20.00
expected during FY
iv) Retention Money / Maintenance Guarantees : 5% of the jobs 5.75
valued at Rs. 115 crores expected to be completed during FY
v) Guarantees on account of Sales Tax, Commercial tax and excise duty 2.00
payments
vi) Total 68.38
vii) Less : Bank Guarantees to be cancelled during FY including those (-) 7.50
included above in (i) to (v), if any i.e
( Rs. 5.50 Cr + 2% of Rs 100 Cr)
v Limit required 60.88
i
ii Say / Rounded off 61.00
xi
))
Page 347 of 632

Hence, limit of only Rs 61.00 Crs is justified and not Rs70.00 Crs as requested by
the customer.
CASE LET 2: Letter of Credit
Computation of LC Limit
ABC Limited is a Steel Major, with an integrated steel plant. The value addition
starts with Coal , Iron Ore and captive power , and on to sponge iron, mild steel, and
further on to structural.
They have been banking with SBI since inception and the relationship dates back to
over three decades. We are the consortium leaders with a share of 46% of the working
capital limits. The other consortium members are PNB, ICICI and Canara Bank.
The CRA rating is SB-4, based on audited financials as on 31.03.19.
The main performance and financial indicators are as under :
(Rs in lacs)
31.03.17 31.03.18 31.03.19 31.03.20 31.03.21

(Act) (Act) (Act) (Est)
Net Sales 2253.60 2439.07 2590.24 3343.37 (Proj)
4435.48
Op. Profits 672.18 757.19 700.61 922.82 1331.54
PBT 677.76 767.19 727.85 932.82 1341.54
PAT 601.43 639.63 638.97 820.25 1104.29
Cash Accruals 753.91 789.07 858.14 1096.66 1465.70
PBDIT 896.00 10001.62 1034.34 1368.03 1934.93
TNW 1531.63 2084.16 2118.21 2902.74 3962.22
Adjusted TNW 1262.10 1536.08 1705.50 2072.44 2924.19
TOL/TNW 1.26 1.68 1.62 1.59 1.55
TOL/Adj TNW 1.52 2.29 2.01 2.23 2.10
CR 1.08 1.14 1.29 1.14 1.15
The present FB limits are Rs 3.50 crores and the consortium has agreed in principle to
enhance it to Rs 4.80 crores, with the member banks being more than keen to take up
their share.
The present LC limits are Rs 5.00 crores. The unit wants an enhancement to the tune of
around at least Rs 4.00 crores. In the consortium meeting, it was outlined that the
increase is mainly being sought as the unit was earlier increasingly availing buyers
credit for raw materials. However, from current year the company’s suppliers have
made arrangements and they would be comfortable getting bills negotiated
against LCs due to which higher LC limits are required. Also on account of
foreign offices network of SBI, majority of LC business would be routed through
SBI.
Page 348 of 632

Due to the risk profile, and potential ancillary business, you are willing to consider the
enhancement in the LC limits. The added comfort is that there has been no occasion of
any devolvement of LCs in the entire history of the Company (neither any default even
during the worst phase of the Steel Industry in the late 90’s and later as well.
The estimated consumption of raw material and spares for the FY20 63% of net sales.
Of these, Rs 830 lac is projected to be imports and balance of Rs 1284.72 lacs is
estimated to be domestic consumption.
The unit has indicated that the entire imports and around 70% of the domestic purchases
would be under LC. The component is high in domestic as the purchases also
include purchases from suppliers who want LCs. They have indicated a lead plus
usance period of 270 days for imports and 120 days for domestic.
Please compute the LC requirements based on answers chosen from the best alternative.
(1) Total annual raw material/spares consumption

(a) 2206.32 lac
(b) 2106.32 lac
(c) 2006.32 lac
(d) 2306.32 lac
(2) What is annual raw material purchase under LC from domestic sources ?
(a) 793 lac
(b) 993 lac
(c) 893 lac
(d) 953 lac
(3) What is approx Foreign LC limit required for imports ?

(a) 682 lac
(b) 582 lac
(c) 552 lac
(d) 622 lac
(4) What is approx Inland LC limit required for domestic purposes ?

(a) 350 lac
(b) 300 lac
(c) 400 lac
(d) 450 lac
(5) Based on given data and as per computation, whether customer’s demand of Total LC
limit (Inland + Foreign) of Rs. 900 lac can be sanctioned?
(a) Yes
(b) No
Page 349 of 632

SOLUTION
The LC computation is given below :
Particulars Imports Domestic Total

Annual RM /Stores 830.00 lac 1276.32 lac 2106.32 lac
purchases
Annual RM purchases under LC 830.00 lac 893.42 lac 1723.42 lac
Monthly purchase under LC 69.16 lac 74.45 lac
Usance and Lead time 270 days 120 days
LC limit required (69.16/30*270) say (74.45/30*120) say 920.22 lac
622.42 lac 297.80 lac
Recommended LC limit 600.00 lac 300.00 lac 900.00 lac
=295.89 Say 300
Answers to Questions
1 B
2 C =613.97 Say 600
3 D
4 B
5 A
Page 350 of 632

CHAPTER-10
PREPARATION OF PROPOSAL
For detail appraisal & assessment of proposal and furnishing all the relevant information
required for taking a credit decision in a proper sequence, bank has designed standard formats,
where all the information related to the unit is provided and the same is presented to the
Depending upon the exposure and purpose for which the sanctioning authority is being
approached, under noted formats have been prescribed.
Sr No Format name Detail Purpose

1 Format S2 For Exposure from Rs. 25 lacs up to Rs1 Cr
2 Form DDS For total exposure above Rs 1 crore up to Rs 50 crore from the
banking system
3 Form DD (For total exposure of above Rs 50 crore, from the banking
system) Loan Proposal Due Diligence Format, a detailed appraisal
memorandum, which will remain with the recommending offices
4 Form S (For total exposure of above Rs 50 crore from the banking system)
(Extracted from form DD by LLMS
Loan Proposal Sanction Format, which will be put up to the
Sanctioning / Approving Authority
5 From M Loan Proposal Modification Format, is used for Modifications
etc., ( i.e. Change in terms and conditions ( Pricing / Security /
Margin / Covenants and other matters ), Sanction of Adhoc limits
and Interchangeability of limits)
However for R&DBG branches only, after the introduction of Project Vivek to simplify the
entire process the following formats have been used, which will be used only for those proposals
which are eligible to be processed under Project Vivek. Following formats have been prescribed
under Project Vivek for all exposures above Rs 50 lacs (Up to 50 lacs existing formats being
used will continue to be used).
Sr No 1 2 3
Name of Loan Quick Renewal format@ Thorough
the formats Origination renewal formats
formats
For new loan For renewal at existing level/enhancement up For thorough
proposal to 15 %, subject to satisfaction of specified /comprehensive
criteria. After 2 consecutive renewals of a renewal
proposal third renewal will be a
comprehensive one.
@ for detailed guidelines please refer circular no NBG/SMEBU-LIP/29/2017-18 dated

31/07/2017
Page 351 of 632

All the above-mentioned formats are now available in the operating platform i.e. LLMS/LOS
and proper format should be used depending upon the exposure and purpose.
Most of these formats have various sections and Annexure where different types of information
pertaining to the particular unit are required to be given in a sequential manner. For example the
form DD has following sections and annexure
Section Contents Page No.

A Borrower Units’ Profile and Details of Due Diligence
A1. Borrower Unit’s Profile
A2. Addresses & Locations of the Company / Firm /Unit
A3. Whether names of promoters, directors, Company and
group concerns figure in defaulter/willful defaulters list
A4. Capital Structure (Shareholding pattern)
A5. Credit Rating
A6. Whether subjected to any dynamic review
A7. External Rating
A8. Brief Background of the Company/Group &
Management
A9. Corporate Governance standards
A10.Brief write up on corporate actions
A11. Existing Limits with our Bank
A12. Particulars of losses incurred by Bank
A13. Conduct of Account
A14. Review of Cash Credit Account for previous year.
A15. Review of Term Loans.
B Present Proposal
B1. Proposal
B2. Credit Limits (Existing & Proposed)
B3. Individual items
B4. Credit Limits (Company & Group)
B5. Banking arrangement and sharing pattern
B6. Group Exposure Particulars
B7. Rating analysis of the Group
B8. Risk appetite of the Bank on the Industry.
C Performance and financial indicators
C1. Performance and financial indicators
C2. Interim Financials
C3. Market & Industry Analysis
C4. Ratio Analysis
C5. Synopsis of Balance Sheet
C6. Statutory dues/Other Contingent liabilities
C7. Movement of NWC / Liquidity / TNW
C8. Activity-wise Cash Flow Analysis
C9. Inter-firm comparison
Page 352 of 632

D Loan Policy / Deviations / Compliance / Regulatory
Prescriptions
D1. Deviations in Loan Policy
D2. Other deviations
E Summary of Critical Risk Factors / Mitigations
E1. Risks / adverse features and mitigating factors
E2. Comments on various other risks
F Assessment of Fund Based Limits
F1. Assessment of working capital limit
F2. Appraisal Memorandum for Term Loan
G Assessment of Non Fund Based Limits
G1. Computation of LC Limit
G2. Assessment of BG Limit
G3. Assessment of Credit Exposure Limit (Forward
Contracts/Derivative Limit)
H Capital commitment and Pricing
H1. Capital requirement
H2. Income Analysis / Value of Account
H3. Income / Loss on account of Concessions and Additional
Business during the period of reporting
H4. Proposed Pricing
H5. Other Concessions already extended / proposed
H6. Utilization of Limits
H7. Justification based on Cost Benefit analysis
I Security
I1. Primary
I2. Collateral (Ist Charge)
I3. Collateral ( 2nd Charge)
I4. Guarantees
I5. Additional Information on Security
I6. Security Coverage
J Other Terms and Conditions
K Justification and Recommendation
K1. SWOT Analysis
K2. Justification for the proposal
K3. Recommendation
K4. Certificates
Annexure-1 Earnings & ROCC / RAROC
Annexure-2 Details of Due Diligence
Annexure-3 Group/Associate Entities/Companies
Annexure-4 Consolidated financials of the Group
Annexure-5 Details of Diversion of Funds to Related/Unrelated Entities or
Unrelated Activities
Annexure-6 Details of approvals required in case of Project Term Loans
Annexure-7 Details of financials in case of proposals involving merger / de-
Page 353 of 632

merger
Annexure-8 Organogram
Annexure-9 Key Assumptions
Annexure -10 Annexure for incorporating compliance status of various loans viz.
5/25 scheme, Corporate Loan, loans under Schematic lending etc.
Annexure -11 Details of concessions extended

Annexure-A Addendum for Project Term Loans
Annexure-B Addendum for SMA-2 / Restructuring Proposal
(CDR/Non-CDR/CAP)
Annexure-C Addendum for IBG Proposals
Annexure-D Addendum for Finance to Banking Companies
Annexure-E Addendum for Fund Based Limits for NBFC
Annexure-F Addendum for Lease Rent Discounting TL
Annexure-G Addendum for Financing of Ship-Breaking Units
GUIDANCE NOTE ON PREPARATION OF LOAN PROPOSAL DUE DILIGENCE

FORMAT (FORM DD)
Sl. Item/ Item Write-up to cover the following…

No Heading no
1 Theme fonts Proposals should be prepared on A4 size paper With
“Bookman Old Style” theme font with size 12 and spacing
1.5.
2 Loan Proposal LLMS will generate loan Proposal Sanction Format
Sanction Format (Form S) based on the inputs provided in Form DD.
( Form S)
3 Loan Proposal Due Diligence Format (Form DD)
Borrower A1 Length of dealing with the Bank may be Expressed in
Unit’s Profile years, if exact date is not known.
4 Credit Rating A5 CRA & ECRA
& The following points need to be critically examined for
A7 ascertaining-
• any deterioration or major changes in CRA and
ECR ratings vis –a vis previous ratings and
variance in the movement of ratings – CRA and
ECR
• The exact excerpts given by the ECRA as rating
rationale should be mentioned.
5 Brief Back A8 To include competence/ reputation including recent
ground of development /news related to company/ industry and
the its impact on the company as well as involvement in
Company/ legal disputes, strictures passed against them by
Group & Government agencies.
Management
Page 354 of 632

In addition to background of the Company/Group
which will include brief information on the following
aspects, which are only indicative:
• Business of the company/Group.
• Key milestones achieved since incorporation
• Business Segments and Product
• Profile
• Capacities and Production facilities
• Technical Collaborations
• Marketing
• Group companies
• competence/reputation including recent
development/news related to company/industry
and its impact on the company as well as
involvement in legal disputes, strictures
passed against them by Government agencies
Background of the Management shall include brief
information on the following aspects:
• Promoters
• Vision and strategy of the management.
• Managerial experience to run the business/key
managers.
• Management style- managed by family/
professionally managed/mix Management’s
achievements and skil l s (project management
skills/ market share/shareholder value/ strong
marketing and production skills/operational
efficiencies / decision making skills/challenges
faced and their ability to overcome them etc.).
• Key man risk and succession plan.
Corporate A9 Corporate Governance includes issues such as:
Governance • The promoters have ever defaulted in the past
standards either in this company or in any of the group
companies and the reasons for the same
• Their market reputation
• Non-compliance of any regulatory
guidelines/compliance with clause49 of the listing
norms etc.
Further, details on the constitution of the company's board
with particular reference to the number of independent
directors(to comment on the independent nature of the
board or otherwise and whether family managed,
professionally managed etc.), number of board meetings
held and whether the company was involved in any
unsavory incidents vis- à-vis the
Page 355 of 632

government/regulators/investors in the immediate past
(During the period under review)should also be
commented upon.
Comments on A 13 Comments on adherence to Financial Discipline
adherence to To be spelt out objectively like
Financial • % of sales being routed through TRA/account
Discipline: • Investments/ loans and advances to
subsidiaries/ associates
• Any tax disputes with statutory/regulatory
bodies
• Auditor comments on the financials
discipline etc.
Review of A 15 Review of TLs to
Term Loans • Comment on reasons for over dues, if
any, and
• Testing of mandatory financial covenants
as on the date of audited financial statements viz
FACR, DSCR & Interest Coverage Ratio.
• Cross defaults (defaults with other
member banks/FIs) to be meaningfully
commented upon.
• Need for reset of interest spread.
LTV B3 LTV to be calculated as on the date of appraisal based on
stock statement, valuation report etc.
Group B6 This information is required only for those entities,
Exposure which constitute more than 20 % of Group’s turnover.
Particulars Details of exposure of other banks may be obtained
from the borrowers/latest Balance sheet of the unit.
Industry C3 The information will be made available by CMIE.
Analysis
Ratio C4 Industry Median figures will be made available by
Analysis CMIE.
Inter firm C9 Inter-firm comparison is an important tool to Gauge
comparison competitive advantage of the borrowing unit vis-a-vis
its peers in the industry. Therefore, current data
needs to be sourced from authentic sources like CMIE,
relating to relevant size and activity of the units. Source
of the information needs to be mentioned.
Deviation in D1& Approvals for deviation from Loan Policy guidelines
Loan Policy/ D2 wherever warranted are to be obtained from
Other Deviation Appropriate Authority and the same has to be mentioned
in the proposal as well Compliance with the laid down
takeover norms, has to be ensured and approvals for
deviation, if any, to be recorded in the proposal.
Overall market E2 Market perception gathered from interaction with the
Page 356 of 632

perception creditors/ debtors of the borrower, employees of the
borrowing unit, feedback from the peer groups to be
mentioned.
Environmental, E2 As a part of responsible financing,
Social and Environmental, Social and Governance issues takes
Governance centre stage in the process of financing to the companies.
practices It is prudent to adopt minimum set standard of ESG from
companies.
At the screening level of the proposal it is required to
check that the proposed investment does not cover
activities listed in the exclusion list (activities prohibited
under International agreement and national laws/
activities which may give significant environmental /
social problems/lead to adverse public reaction).Risk
based categorization also need to be done to rate the
projects into high, moderate and low risk investment.
Change in E2 This is indicative only. The information may be Sought
Capital market from SBI Cap Securities Ltd for accounts covered by
perception them or from available published brokerage house
reports.
Industry Risk E2 The information will be made available by CMIE.
Assessment Of F1 The purpose of WC may be incorporated for e.g.
Fund-Based • Enhancement o/a increase in sales
Limits • Enhancement o/a increase in capacity addition
• Enhancement o/a change in operating cycle.
• Enhancement o/a change in the product mix.
• Enhancement o/a abnormal / unprecedented
increase in prices of core raw materials / Cost of
production
Appraisal F2/ • Indicative list of Approvals/Clearances:
Memorandum Annex Land/Site availability, Environmental clearance,
for Term 6 Stack height clearance, Forest clearance, Power
Loan connection, Water connection, Chief Controller of
Explosives from Petroleum and Explosives Safety
Organization, NOC from Defence, Rail Route
Clearance, Customs landing Permit, Permission
from the State Government for extraction of
boulders from quarry, License from Inspector of
Factories or other competent Authority for setting
up Batching Plant, Permission from State
Government for cutting of trees, Any other
permission/clearances required under applicable
laws for the specific proposal
• Deal diagram to be furnished on the lines of
specimen given below
Capital H The cost recovered from the company on account of
Page 357 of 632

commitment RWA along with capital provisioning on account of
and Pricing UFCE to be factored in along with supplemental capital
required for UFC for reckoning ROCC.
Security Value I Security value should be taken as per Circular No. : CCO/
CPPD-ADV/133/2013 – 14 dated 18.01.2014
Critical J(g) Critical Covenants as mentioned in Loan Policy
Covenants
Consolidated Annex The information may be sought from CMIE.
financial of 4
the Group
Names of Annex Details to be given, if the LIEs/Consultants/ Counsels
Lender’s 6 have been appointed.
Independent PLT3 Reasons to be furnished, if TEV study is not done,.
Engineer/
Insurance
consultant/
Legal Counsel
Organogram Annex On the lines of Specimen given below
12
General Operating functionaries to take note of instructions
for furnishing additional information, if any, from
time to time.
Page 358 of 632

Sample Deal Diagram
Sample Organogram
Page 359 of 632

As per circular No : CCO/CPPD-ADV/128/2018 – 19 Date: Mon 10 Dec 2018, a table has
been provided in Certification Column (above the place provided for Signatures of the
Officials) in the proposal formats for recording continuation/ modification on major terms of
previous sanction. If changes in the existing terms and conditions are proposed and
recommended, para number of section or Annexure number, where justification has been
provided in the proposal, needs to be mentioned in the table. This is applicable for all
proposals. .
Following is the format discussed above
We certify that there are no other changes in the terms of sanction from the previous
sanction other than those mentioned below:
Major terms of Sanction Changes If “Yes”-

proposed Justification
from existing provided on Para
sanction number of Section
(Yes/ No/NA) or Annexure
number.
Security related: Collateral Security, Personal
Guarantee, Corporate Guarantee.
ECGC cover (Applicable for export Finance)
Insurance
Rate of Interest
Margins: Stocks (RM, SIP, FG), Spares/ stores &
consumables, Receivable
Cover period for receivables
Cash Margin for NFB facilities: LC, BG/DPG etc.
Interchangeability of limits
Inspection (frequency etc.)
Stock Statement (frequency etc.)
Standard Covenants
Change in Scope of Project if any (Applicable for
Term Loan/ Project loan)
Change in COD if any (Applicable for Term Loan/
Project loan)
Any Misc. Approval obtained after last sanction
Others, if any
Page 360 of 632

IMPROVING QUALITY OF CREDIT PROPOSALS
For improving the quality of Credit Proposals, which will help in faster decision making and
avoidance of unnecessary delays, some of the steps related to different areas, which are
required to be taken is listed here under. The list is only indicative and not an exhaustive one.
A. Issues pertaining to validation of Projections:

i. Sales growth, if it is not comparable with the past trend: Valid reasons to be given for
projecting high growth in sales; for e.g. If the annual growth for the last 2-3 years is 10% and
projected sales is much higher, say25%, comments are to be provided justifying the estimates
and the assumptions made for projecting such a growth.
ii. Buildup of current assets: for e.g. sales growth is 15% whereas the buildup of current assets
is much higher, say 30-35%, valid reasons are to be furnished in the proposal (There may be
instances where the unit has to build stocks for some specific reason or it may have to sell
more on credit basis with change in business strategy). The proposal should properly explain
the reasons for buildup of current assets.
iii. If projected profitability is not in tune with past performance of the unit, or with that of
peers
in the industry–appropriate comments are to be provided in the proposal.
iv. If working capital facilities recommended are higher than Nayak Committee Method
proper explanation to be offered.
v. Slippage in Credit Rating–Suitable explanation to be given in the proposal.
vi. In case enhancement is proposed within 6/9 months of previous sanction, proper
justification is to be provided.
vii. Variances in inventory, receivables, sundry creditors, other current assets with reference to
earlier trends are to be commented on.
viii. Sources of raising margin money proposed in case of new project/TL to be commented on.
B. I ssues pertaining to Loan Policy and other policy prescriptions:
i. Prior approvals, wherever required, to be in place.
ii. The proposal should contain copy of duly validated CRA resolution.
iii. In case of Schematic Lending –any deviation from the Scheme –requisite approval from
appropriate authority is to be obtained and should be commented upon.
iv. Any deviation from Loan Policy Guidelines –suitable comments/approval to be in place.
Page 361 of 632

v. Comments about compliance of previous RFIA observations are to be incorporated.
vi. Date of RBI defaulter’s list/ECGC Caution List/CIBIL Report–should have been referred to
in the proposal.
vii. In case of existing accounts, comments to be given on adverse remarks, if any, in Stock
Audit Report, wherever applicable.
viii. Movement of long term funds to be commented on, especially in cases where there is a
decline in NWC.
C. Security Related Issues:
i. Personal Guarantee of all partners/Directors to be stipulated.
ii. Personal guarantees of persons offering collateral security, to be stipulated.
iii. Two legal opinion reports (Title Investigation Reports) are to be obtained in the following
cases:
a) Properties offered by third party guarantors whether individual or non-individual.
b) Properties acquired through Gift deed.
c) Properties sold by Power of Attorney holders to our borrower/guarantor.
iv. Two valuation reports are to be obtained in case of loans above Rs.1Crore
D. Others
i. Opinion reports–compilation and updation.
ii. Furnishing comments on the associate concerns and their accounts.
iii. Wherever production processes are out sourced, or premises are leased, comments on
outsourcing/lease agreements.
iv. In the case of Export Packing Credit (EPC), comments on the nature of facility proposed,
whether as running account facility, or on order to order basis.
v. Comments on abstention of D&B Report on foreign buyers/suppliers.
Page 362 of 632

List of Common deficiencies, which is indicative & not exhaustive
i) Basic computation/arithmetical errors.

ii) Non-usage of standard texts and maintaining sequence in templates.
iii) The appropriate committees/ authorities to which the proposal is put up for sanction is not
correctly mentioned at the bottom of the template.
iv) All Policy level major deviations which form part of the proposal do not appear in the
template.
v) The primary and collateral securities offered to the Bank are often not clearly defined, like,
location, boundaries, area, ownership etc. Further, the securities either have not been valued by
the Bank’s empaneled valuer or the valuation reports are more than three years old.
vi) The observations on the borrowal unit/account pointed out in the last Credit Audit/RFIA
Report are not appropriately articulated. Instead, simply closure of the audit report / disposal is
recorded.
vii) The external credit rating exercise either has not been completed or if completed, has
expired and has not been renewed. No penalty clause is stipulated.
viii) The Net Means/TNW of the guarantors/corporate guarantors has not been updated.
ix) Approval for deviation is not obtained from the appropriate authority in specific cases
where the credit rating of the unit is below the hurdle rate in the specific line of activity. The
CRMD advisory reference given is not the latest one.
x) In correct industry classification.
xi) Details of associates/group concerns are not enclosed to the loan proposal. The status of
CIRs on associates of the borrowing unit is shown as ‘Called for’.
xii) Control Reports are not enclosed to the proposals submitted to the Credit Committee for
sanction.
xiii) Template for LC/BG is not as per the format advised by Corporate Centre.
xiv) Wilful defaulters’ list/RBI defaulters ’list/ECGC caution list/ CICs suit filed list/ banned
list of promoters (SEBI)/ List of disqualified directors (MCA) /I-Probe search etc. are not
verified with latest available lists.
xv) Administrative cl e a r an c e is not obtained from the appropriate authority for renewing
limits based on audited balance sheet which is more than seven month sold for listed
companies, and nine months old for non-listed companies.
xvi) Latest performance indicators (like figures of net sales and PAT) etc. are not furnished.
Similarly, under income analysis, income earned till the date of submission of proposal is not
shown.
xvii) Extent of non-compliance of earlier terms of sanctions is not explained.
xviii) Foreign currency exposure of the company and the extent of hedging by way of
financial hedge, natural hedge, and unhedged foreign currency exposure not provided.
xix) Annexure on compliance with guide lines on schematic lending not enclosed.
xx) All additional enclosures required for proposals to higher committees are not furnished.
Illustrative list is asunder:-
• Previous resolution
• Validated CRA(copy of resolution)
• Share price movement chart(for listed companies)
Page 363 of 632

Return on Capital Charge (ROCC) & Risk Adjusted Return on Capital Charge (RAROC)
Whenever bank is taking any credit exposure, they are deploying certain amount of capital for
taking the associated risk on that exposure. So it is important for banks to know whether they are
generating sufficient returns on the deployed capital thus the concept of ROCC was evolved
initially. However the calculation of Return as per ROCC was having some limitations as it was
not reflecting the true return because of expected losses associated with such accounts .To
measure risk adjusted returns on the deployed capital the concept of RAROC has evolved
subsequently. As per extant guidelines for all exposures of Rs5 Crores and above ROCC &
RAROC is required to be calculated.
Net Interest Income + Fee Income

ROCC = -------------------------------------------------- x (1-Tax Rate)
Regulatory Capital$
(ROI-Expenses)
Here, Net Interest Income = Interest Income x -------------------------
ROI
Net Interest Income in revised method is computed by replacing MRFTP with expense in line
with RAROC framework. Expenses include cost of funds and other operating costs, which are
aggregated and detailed below.
Expenses to be used for Domestic and Foreign offices are as under:
a) For Domestic Currency Exposures: existing

Exposure Expenses
Above Rs.500 Crs 55 bpsbelow1 year MCLR
Rs.50 Crs & up to Rs.500 Crs 30 bpsbelow1 year MCLR
Upto Rs.50 Crs 1 year MCLR.
Revised:
a) While arriving at the expenses, marginal cost of borrowings will be used in place
of marginal cost of funds and Return on Net worth will be excluded.
b) Expenses will be applicable uniformly across all the exposure bands. Same
expenses will be used for computation of RAROC at product level. The expenses
rates would be updated in LLMS as and when any changes take place.
b) For Foreign Currency Exposures

Type of Exposure Expenses(ason10.05.2017)
FCNR Loans 2.68%
Other than FCNR exposure 1.56%
(e.g. PCFC/EBR etc)
Expenses for Foreign currency exposure is taken from FD Kolkata on
th
the 10 of every month and updated in the template/LLMS.
$ Regulatory Capital is taken as per RAROC framework which includes both Credit Risk
Capital and Operational Risk Capital. Credit Risk Capital computed is same as Capital
charge in existing ROCC. Only Facility Limit is replaced with Average Utilization.
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n
Credit Risk Capital =∑ (Average Utilization x CCF (%) x Risk Weight (%) x CRAR (%))
u=1
u represents average utilization.
Here, average utilization is the average of quarter end outstanding during the year or
outstanding as at year end, whichever is higher, after adjusting eligible financial
collaterals. CRAR (%) is the minimum regulatory mandate (excluding D- SIB) i.e.,
10.875% as on 31.03.2018.
Operational Risk Capital is 15% of Gross Income (Basic Indicator approach). Here,
Gross Income= (Interest Income – Expenses) + Non Interest Income)
RAROC is defined as,
[(Interest Income-Expenses) + Non Interest Income)- EL@]

RAROC =---------------------------------------------------------------------------------x (1-TaxRate)
Regulatory Capital
@ Expected Loss (EL) =Probability of Default (PD) X Loss Given Default (LGD) x Exposure
at Default (EAD)
Operating Guidelines to compute ROCC and RAROC: Standard procedure for computing
ROCC and RAROC is detailed below:
Sr. No. Parameter Operating Guidelines

I. Interest Income Rate of Interest and Interest in come from the borrower
Under various facilities to be input in the Template/ LLMS
by operating units.
In case of advances disbursed in the middle of the year,

where interest has been generated for part period, the same
has to be annualized. However, actual income for part
period has to be provided under "Remarks".
EDFS: No identifiable income to the bank from the Industry

Major, hence not be considered for RAROC computation.
Income from EVFS accounts:
a) No exposure on Industry Major: treatment will be same
as in case of EDFS scheme and not to be considered for
RAROC computation.
b)Exposure on Industry Major: Where the EVFS facility is
sanctioned as part of exposure to the Industry major,
interest income and capital to be considered in RAROC
computation, in the same
Page 365 of 632

manner as any other fund based facility.
Bills discounted under LC: Interest income should be
taken like any other fund based exposure. 20% risk
weight will be applied
II. Expenses Expenses used for ROCC and RAROC are detailed above
And is embedded in the computation sheet. In case of standalone
Non fund facility, expense is taken as 5 bps of average
utilization. Operating units are not required to input any figure.
III. Non-Interest Only those incomes which are directly identifiable and Realized
against the borrower should be considered as Non- Interest
Income Income for RAROC computation.
Any kind of notional income should be detailed separately in

input sheet/remarks with factual figures like number of CSPA/Cs
with average balance, loans to the employees of the unit with
number and average outstanding, cross selling/any other income
generated from these employees etc. This income will not be part
of RAROC computation.
Income from NCD/CD/CP: Income as well as capital are

maintained in the books of Global Markets and therefore,
excluded from the scope of RAROC.
Fixed Deposits and CASA deposits of the borrower:
a) Fixed deposits kept as margin: is factored in effective

exposure hence not to be considered for RAROC computation.
b) FD (not as margin money): does not fetch any income or
reduce capital requirement to the Bank, hence not to be
considered for RAROC computation.
c) CASA: Benefit will be extended based on daily average
balance available in Current account. (Based on TPM after cost
adjustment. Currently taken as 5%).

Cash Management Product (CMP): Customer specific
Income shared by CMP department to the branch to be taken in
to account.
Forex Income:
a) Transaction based commission credited to branch as exchange

on forex transactions will be based on last year for actual and
annualized (based on actuals up to the month) in case of
estimated.
b) Incentive shared by GMU from volume margin based on

turn over: Since it is not identifiable, it should not be considered
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for RAROC computation.
Income from Cross Selling: Commission generated from

SBI Mutual fund, SBI Life, General Insurance policies generated
on account of the borrower only to be considered.
IV. Expected Losses EL = Exposure at Default (EAD)X Probability of Default (PD)
(EL) X Loss Given Default(LGD);

(Not part of ROCC)
Expected Loss is automatically computed by the template/LLMS
and applicable only for RAROC computation.
IV(a). Exposure at EAD has been computed based on average utilization after
Default(EAD) applying CCF.
IV(b). Probability of PD is based on External rating.
Default (PD)
I(c). Loss Given LGD calculation is based on Foundation IRB Approach.
Default(LGD) Minimum LGD, Required Minimum Collateralization and

Required Level of Over-collateralization are asunder:
Eligible Coll Min Reqd. min Reqd. level

LGD collateralizati of over- coll
on
Eligible
1 Financial 0% 0% NA
Collateral
Eligible
Financial
2 Receivable s 50% 0% 125%
3 CRE/RRE 50% 30% 140%
Other
4 collateral 60% 30% 140%
5 Unsecured 65%
Eligible Financial Collateral is adjusted while arriving EAD. List
of eligible collateral is given in Annexure- I.
V. Regulatory Credit Risk Capital and Operational Risk Capital as per page (2)‘$’
above and are automatically computed by the template/LLMS.
Capital Risk Weights for exposure guaranteed by Government/ ECGC/ Bank
are as under:
Operating units need to input the covered amount based on the
percentage of cover, not the entire exposure.
VI. Tax Rate Tax Rate is applied as per the existing tax structure. No
Inputting is required.
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After this alignment, Expected Loss (EL) would be the only differentiator between ROCC and
RAROC. Wherever EL is more, due to high PD and insufficient collateral, the gap between
ROCC and RAROC would be wide. No benchmark for RAROC has been stipulated. However,
for domestic exposures, acceptability of proposals with RAROC below 20% needs to be
justified. For overseas exposures, expected level of RAROC is to be advised by IBG. Operating
unit needs to provide justification for recommending proposals with RAROC below the
indicative benchmark and a detailed road map on how they propose to achieve the indicative
benchmark needs to be drawn up.
A Review of Risk Adjusted Return on Capital (RAROC) framework was undertaken and
comprehensive guidelines have been provided vide circular no. CRO/RMD-
CRMD/12/2019-20 dated 29.02.2020.
List of eligible collaterals
Financial collateral SBI Dep – in Core (not RD)

SBI Dep- in Core RD
Bonds & Debentures
Deposits of Other Branches
Gold Bond
Gold Bullion
Gold Ornaments
India Millenium Bond
Indira Vikas Patra
Kisan Vikas Patra
LIC Policy
MAGNUMMF
NABARD Bonds
NSC – VIII Issue
Other Govt Securities
Other Mutual Fund Investments
Paper based securities-PF bals
Postal Life Insurance
RBI Relief Bonds
Resurgent India Bond
SBI Life Policy
UTI Investments
FINR
Financial Receivables Book Debts
Commercial/Residential Real Com. Plot& Building Lease
Estate Commercial Building
Commercial Plot
Commercial/ Residential Building
Com-Res Plot
Residential Building
Residential Plot
Other Collateral (excludes physical assets
Other Collaterals acquired by the bank as a result of a loan default)
Page 368 of 632

ILLUSTRATIVE LIST OF DISCREPANCIES OBSERVED IN PROPOSAL:
1. Discrepancies in NFB pricing table and Service charges are being observed
regularly. On many occasions existing rates charged are not given and percentage of concession
is only mentioned.
2. FB WC limit is clean. However, approvals sought for Sell, assign, mortgage or otherwise
dispose of any other fixed assets charged to the bank.
3. There is mismatch in figures given in table (Performance and financials) and given in
comments.
4. Comments given in para "Performance and financial" is only movement of figures, which are
already given in the table itself. (Reasons for decline increase of previous two years and strategy
for achievement of estimated projected figures may be narrated)
5. Justification for waiver of periodical inspection is left blank.
6. Justification for Assessment of BG limit is not given.
7. Para related to Primary and collateral security is not been filled in.
8. Previous CRA, mentioned in the proposal, is not captured correctly as per CRA validation
report.
9. Template given is not as per prescribed template in the proposal.
10. Security deposit received from consumer is treated as "Capital”.
11. Approval for waiver of insurance sought, but there is no mention for obtention of
indemnity. -
12. Annexure for future plans and business potential related to cross selling and other
business is left blank.
13. Estimated RAROC is not calculated.
14. There is merger of two subsidiaries with the company, but its effects on the financials of
the company are not discussed in the proposal.
15. Conduct of various credit facilities is left blank.
16. Details of diversion of funds are left blank.
17. The company is availing SBLC limit also. But in the renewal of limit the approval for
continuation of the limits is not sought.
18.Assessed Bank Finance - e.g., Holding level of Domestic RM is 61 days as on
31/03/2015, while holding level of Domestic RM is estimated at 200 days for FY 2015-
16. Sharp hike in holding level is not discussed in the proposal.
19. Comments on consolidated financials of the Group are not discussed in the proposal.
20. Credit limit of the group is not incorporated.
21. Name of Promoter, Directors and company is not verified in RBI Defaulters list,
RBI Wilful Defaulters list, ECGC Caution list, CIBIL.
22.ln the SWOT Analysis, mitigating factors is not discussed in "Weakness and Threats"
columns.
23. Date chart for flow of proposal is incomplete.
24. Non achievement of estimated performance and financial is not commented upon
in the proposal.
25. No deviation is sought for name of directors appearing in RBI defaulters list.
26. The company is a listed company, but corporate governance is not discussed in the
proposal.
27. Consolidated financials of group is not discussed in the proposal.
Page 369 of 632

28. Name of promoter director, appearing in banned list of SEBI, but the same is not
incorporated in the template for noting to the committee.
29. Movement of TNW for the previous year is not incorporated in the proposal.
30. The company is engaged in construction activity. In the appraisal of term loan, cash
budget is not incorporated in the proposal.
31. Credit limits (Company and group) Group exposure given in the proposal is lower
than total company's exposure.
32. Too many templates given for renewal of FBWC and NFBWC limits. Separate
templates given for various sub-limits within FBWC limit. Similarly separate templates
given for renewal of LC and BG limit within the NFBWC limit at existing level.
33. Time for creation of charge on current assets is sought in the template, whereas the
hypothecation agreement is obtained while executing of documents, hence time for
perfection of charge should be sought.
34. Early warning signals not observed in spite of CR being below 1.
35. While giving details of associate companies in executive summary, credit facilities
availed by one associate shown as zero, whereas in annexure borrowing is mentioned.
36. Complete template seeking concession in NFB pricing not given.
37. ECR carried out for working capital limits only. TL availed is not rated.
38. No Assessment for BG Limit carried out.
39. While seeking concession in upfront fees, branch mentioned to recover upfront fee without
mentioning about the GST.
40. Early warning signals not observed by the branch despite of NWC being negative.
41. ROCC mentioned wrongly in performance financial table.
42. Column for comments on the ranking of the company within the segment left blank.
43. Total indebtedness as per CRILC data not given / commented upon.
44. Section / security sheet left blank whereas limit are secured by hypothecation of
current assets and collateral security.
45. Justifications for Items given in templates are not given.
46. While discussing Group / Associates: no comments given on the point • any dealing with
the borrowing company' and on 'any adverse features'.
47. Concession in upfront fees is not proposed while submitting the proposal for sanction of
term loan and subsequently steep concession sought after the proposal sanctioned by ECCB.
48.Entire banking exposure was not covered by External Credit Rating.
49.ROCC calculation was not correct and different numbers are mentioned at different places
for ROCC.
50.ln case of resubmission of any deferred or withdrawn proposal, the same should be routed
through the recommending authority.
51.The branch proposes sanction of Corporate Loan for Capital expenditure, the branch
should also explore to sanction Term Loan for Capex .
Page 370 of 632

Multiple Choice Questions: Check your progress
1. Name the loan proposal sanction format which will be put up to the sanctioning authority,
for total exposure of Rs 25 lac to Rs 1 cr.
a) Form S2 b) Form DDS c) Form S d) Form M
Ans ---(a)
2. Details of credit limits comes under which broad parameter
a) Section B- Present proposal
b) Section C- Performance & financial indicators.
c) Section F- Assessment of Fund based limits.
d) Section E- summary of critical risk factors.
Ans--- (a)
3. Brief background of the unit to cover:
a) Key milestones achieved since incorporation
b) Technical collaboration
c) Group companies
d) All of the above.
Ans—( d)
4. The purpose for enhancement of limits may be:
a) Change in operating cycle.
b) Change in product mix.
c) Increase in capacity addition.
d) All of the above.
Ans---- (d).
5 . The following should not be treated as non-interest income while calculating RAROC:
i) Income from NCD/CP/CD.
ii) Fixed deposits kept as margin.
iii) Fixed deposits ( not kept as margin)
a) (i) is correct statement.

b) Both (i) & ( iii) are correct statements.
c) All the above three are correct statements.
d) None of the above statements are correct.
Ans.------ (c ).
Page 371 of 632

Case let : Check your Progress
Mr. Timely, the Relationship Manager of the branch could sense that he has an account in his portfolio
with an exposure of Rs95.00 cr which requires to be renewed immediately. In the pre- renewal meeting
with the borrower, Mr. wise specifically conveyed to the borrower the necessity for submission of Asset
& Liability Statements. The team, however, went ahead with the preparation of the proposal although the
borrower did not submit the Asset & Liability Statement. During the last audit process, the Auditors had
pointed out that one of the property mortgaged to the bank was acquired through Gift deed and so proper
TIR to be in place. The branch thereby had a TIR on record and so documented it as position regularised.
RAROC was at 17 and the team thought it to be good enough. Let us find some of the facts of omission &
commissions.
1.Fresh A&L was not submitted. Does it affect our position during post-NPA stage?
a) As we are already in possession of a previous A&L Statement, no need to obtain afresh.
b) A&L Statement is required to be obtained every year to update opinion report. Opinion reports
are updated to form a view about the net means of the customer.
c) Opinion reports comes to our use to file ABJ.
d) Both (b) & (c ) are correct.
Ans- (d)
2.Is it necessary to take extra precaution for properties which are acquired through Gift deeds?
a) Yes, that is why the branch took one TIR.
b) Yes, so the branch should have obtained two TIRs.
c) No, TIR are not required at all.
d) Yes, the branch should not have taken the property as security.
Ans- (b)
3. Are you supposed to justify in the proposal if indicative level of RAROC is not achieved?
a) Yes
b) No
c) No such stipulation.
d) Depends on the person preparing the proposal.
Ans- (a).
4. In calculation of RAROC, External rating is factored under Exposure at Default (EAD).

a) The statement is correct.
b) External rating is not factored at all in calculation of RAROC.
c) It is factored under Probability of Default (PD).
d) none of the above is correct with respect to the statement.
Ans. – (c).
5. While calculating RAROC, Expected Loss (EL) is taken as Probability of Default (PD) * Loss Given
default (LGD) * Exposure at default (EAD). What specifically is taken under Loss Given default?
a) Outstanding of the unit on a specific date.
b) Average utilisation during the period.
c) Internal rating of the unit.
d) Collateralization.
Ans- ( d ).
Page 372 of 632

CHAPTER-11
SME ADVANCES AND PRODUCTS
CREDIT GUARANTEE SCHEME (CGS) OF CREDIT GUARANTEE FUND

TRUST FOR MICRO AND SMALL ENTERPRISES (CGTMSE)
1. Credit Facilities eligible under the Scheme:

Any collateral / third party guarantee free credit facility (both fund as well as non-fund
based) extended by the Bank to new as well as existing Micro and Small Enterprise,
including Service Enterprises, with a maximum credit cap of Rs.2 crore (Rupees two
crore only) and for retail trade Rs 1 crores per borrower are eligible under the scheme.
Credit facilities above Rs.50 lacs must be internally rated and should be eligible for
Bank finance.
Following credit facilities are eligible for coverage under Credit Guarantee Scheme of
CGTMSE.
a) Credit facilities to all new and existing Micro and Small Enterprises (both in the
manufacturing sector as well as in the service sector).
b) Both Fund & Non -fund based Credit facilities viz. Term loan, working capital,
composite credit, LCs, BGs etc. can be covered.
2. Conditions for coverage under the scheme:
a) No collateral security and / or third party guarantee is taken by the Bank. Under the
scheme, “Primary Security” shall mean the assets created out of the credit facility so
extended and/or existing unencumbered assets which are directly associated with the
project or business for which the credit facility has been extended.
b) Partial Collateral Security under CGS: w.e.f 01.04.2018: CGTMSE has now
introduced a new “Hybrid Security” product allowing guarantee cover for the portion of
credit facility not covered by collateral security. In the partial collateral security model,
the CGTMSE has allowed to obtain collateral security for a part of the credit facility,
whereas the remaining part of the credit facility, up to a maximum of Rs.200 lakh, can
be covered under Credit Guarantee Scheme of CGTMSE. CGTMSE will, however,
have pari-passu charge on the primary security as well as on the collateral security
provided by the borrower for the credit facility. All other covenants of the current CGS
would apply mutatis mutandis to such credit proposals with regard to other operational
modalities, etc. as modified from time to time.
There are two types of primary securities available for the Bank under the broad head
‘Primary Security’ on which the Bank can take a charge for the said credit facility to
qualify for CGTMSE guarantee. These are:
i) Tier-I: Assets created out of the credit facility so extended.
ii) Tier-II: Existing unencumbered assets which are directly associated with the
project/ business for which the credit facility is extended i.e. Land & Building of
factory office/godown which pertains to the unit and associated with the
project/business.
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A charge on assets acquired out of the loan sanctioned i.e. Tier-I assets is
necessary for invoking guarantee.
Extent of Guarantee Cover available: (w.e.f. 01.04.2018).

Category Maximum extent of Guarantee where credit facility
is
Up to Rs.5 lakh Above Rs.5 Above Rs. 50

lakh & up to lakh & up to
Rs. 50 lakh Rs. 200 lakh
Micro Enterprises 85% of the amount 75% of the 75% of the

in default subject amount in amount in
to a maximum of default subject default
Rs. 4.25 lakh to a maximum
of Rs.37.50
lakh
Women entrepreneurs/ Units 80% of the amount in default subject

located in North East Region to a maximum of Rs.40 lakh
(incl. Sikkim) (other than
credit facility up to 5 lakh
to micro enterprises)
All other category of 75% of the amount in default subject

borrowers to a maximum of Rs.37.50 lakh
Retail Traders up to Rs.100 50% of the amount in default subject

lakh to MSE borrower to a maximum of Rs.50.00 lakh
Salient Features:
a) Credit granted to Educational/ Training institutions and SHGs are not eligible for
coverage.
b) All fund/non-fund based facilities are covered.
The following are changes in Credit Guarantee Scheme of CGTMSE since
20/02/2018.
i. Charging Annual guarantee fees (AGF) on outstanding loan amount rather
than sanctioned limit.
ii. Expanding the Coverage of the Credit Guarantee Scheme to cover MSE
retail Trade segment upto Rs.1 Crore
iii. Allowing loans with partial collateral security under credit guarantee
scheme.
c) The main objective of the scheme is to give importance to project viability and secure
the credit facility purely on the primary security of the assets financed.
d) Absorption of Guarantee Fee (GF)/ Annual Guarantee Fee (AGF) by the Bank
for Credit Guarantee Coverage: It has now been decided that the Annual Guarantee
Fee (AGF) for all loans (CC & TL) sanctioned on or after 01.07.2017 (irrespective of the
amount, including renewal of Cash Credit facilities) must be borne by the borrower. (e-
Page 374 of 632

Circular SMEBU-CGTMSE/17/17-18 dated 05.07.2017)
e) Time norm for lodging of application for guarantee cover: Application for
guarantee cover can be lodged with the Trust for credit facilities sanctioned in a
particular calendar quarter, latest by the end of the next calendar quarter.
f) Time norm for payment of Annual Guarantee Fee (AGF):
i) Annual Guarantee Fee (AGF):
a) Date of payment of First Annual Guarantee Fee (AGF) is linked to
Disbursement/Demand Advise date, whereas subsequent payment of AGF is linked to
close of the financial year.
b) While taking a guarantee cover, Annual Guarantee Fee (GF) at specified rate is to
be paid to the Trust within 30 days from the date of Demand Advice Notice (DAN)
generated by CGTMSE or from the date of first disbursement of credit extended by the
Bank to a borrower whichever is later but within 30 days from the date of DAN. In
case of working capital, the payment is to be made within one month from the date of
demand advice.
g) Annual Guarantee Fee (AGF) : Payment of Annual Guarantee Fee (AGF) is
linked to close of the financial year.
h) Method of payment of Annual guarantee fee: All payment of Guarantee fee has to be
made through the NEFT/RTGS payment module.
i) Tenure of the guarantee: The guarantee cover commences from the date of payment of
guarantee fee and runs through the agreed tenure of guarantee.
j) Enhancements / Additional Credit Facilities and Renewal of Guarantee Cover for
working capital limits: All the enhancements/ additional credit facilities and renewal of
Guarantee Cover have to be notified in CGTMSE Site and AGF is required to be paid for
the enhanced portion.
(For details please refer to Circular No. NBG/SMEBU-CGTMSE/37/2019-20 dated

08/08/2019. )
Page 375 of 632

SMEe-SMART SCORE UNDER CONTACTLESS LENDING PLATFORM (CLP)
LOAN ( > Rs.10.00 LACS TO Rs.100.00 LACS SOURCED FROM CLP )
S. Parameter Description
No
1 Facility Cash credit and Term loan
a. 3-year ITR and Non-composite GST Return.

b. Presumptive tax: where borrowers have filled either ITR4 or ITR 4S
return.
c. 1 Year ITR: Where borrower is having at least one year ITR
2 Target All MSME Units including Proprietorship Firm/ Partnership Firm/
Group Closely held public & private limited company in Small & Medium
industrial manufacturing, trading and service sector under SSI, C & l
and SBF Segment having an in-principle sanction through
Contactless lending platform; currently at: URL for branch user login:
www.psbloansin59minutes.com/sidbi
Bank Specific URL for data entry:
www.psbloansin59minutes.com/sbi
Market URL for data entry: www.psbloansin59minutes.com/
3 Purpose To provide hassle free finance for financing their multiple requirements
including normal working capital/ Term loan related to their
business activity.
4 Eligibility a) Corporate Borrowers: Age criteria is waived.
b) Non Corporate Borrowers :The chief promoter /chief executive
should be 18 to 65 years of age.
c) All the deviations in financial parameters will be approved by
sanctioning authority. However, if the deviations fall within the
purview of the Circular No. CCO/CPPD-ADV/125/2019 – 20
dated 19.11.2019, leads to be rejected
d) The applicant must obtain a minimum overall score of 60% with
a minimum of 50% under each sub-head like Personal Details,
Business Details, Collateral Details of our internal scoring model.
5 Limit a. For new cases: If there is deviation in amount between in-principally
Assessment sanctioned on the platform and final assessed by processing
officer, deviation to be approved by sanctioning authority.
b. In case of renewal, if the in-principal amount is lower than the
existing limit enjoyed by the customer, then 1 year as advisory period
is given reduce the limit equivalent to in-principle amount.
6 Loan Minimum: > Rs. 10.00 lacs
Amount Maximum: Rs. 100.00 lacs
7 Interest Linked with EBR (CMR score would be applicable for interest rate
Rate calculation for loans upto Rs.100.00 lacs)
8 Security Primary Security:
• Working capital: Hypothecation/Pledge of stocks, book debts
and other current assets.
• Term Loan: Charge by way of hypothecation / pledge
/ mortgage of entire assets created out of bank finance..
Page 376 of 632

Collateral Security:
In eligible cases, Collateral Security n e e d not be i n s i s t e d as the

loans are to be covered under CGTMSE.
If the borrower chooses to opt of CGTMSE(not willing to bear the

guarantee fee & premium), then a written communication to be
obtained and kept on record and collateral security as per Bank's
norms need to be obtained.
Personal Guarantee:
Personal guarantee of all the promoters, directors, partners.
Third party guarantee in case property offered is in the name of a
person other than promoters / directors / Partners wherever
applicable.
9. Go/No Go SME e-SMART scoring model on

criteria CLP ( CMR based go/no go criteria would not be applicable for Go/No-
Go exercise)
10. Miscellane A) The rejection reason should be approved by GM (Network) before
ous marking of rejection in CLP portal and the rejection letter (to be
provided to the customer) should be signed by:
i. BPR Centre Limit up to Rs.50.00 lacs: CPC Head
ii. BPR Centre Limit above Rs.50.00lacs: Regional Manager
iii. Non- BPR Centre: Regional Manager
B) Finance under multiple banking arrangement should not be

permitted
11. Provisional Provisional balance sheet should be obtained from the applicant &
Data verified /cross checked as per the bank’s extant instructions.
Estimated/ Since the CLP portal will calculate the projected sales as 115% of the
Projected last year’s annualized sales, hence the submission of projected and
estimated financials to be waived.
financial data
12 Balance sheet For the leads of 1 Year ITR and Presumptive ITR, the balance sheet
from the customer will be taken for the purpose of CMA creation as
CMA and other financial data is not available in CLP.
For term loan, project report for the tenure of the loans to be taken
processed as per Bank norms for the processing of term loan.
13 Staff As the data is validated and pre- fetched from GST site, Income tax
accountability site, staff accountability will not be carried out for the following points:
a. Verification of IT returns
b. Verification of GST returns
c. Verification of Balance Sheet
d. Assessment of the loan amount
Page 377 of 632

SMEe-SMART SCORE UNDER CONTACTLESS LENDING PLATFORM (CLP)
LOAN ( > Rs.100.00 LACS TO Rs.500.00 LACS SOURCED FROM CLP )
S. Feature Proposed
No.
1 Name of product SME e-SMART score
2 Facility Cash credit & Term loan
a. 3-year ITR and Non-composite GST Return.
b. Presumptive tax: where borrowers have filled either
ITR4 or ITR 4S return.
c. 1 Year ITR: Where borrower is having at least one-year
ITR
3 Loan Limit >Rs.100.00 lacs to Rs.500.00 lacs
4 Go/no Go SME e-SMART scoring model on CLP
criteria CMR based go/no go criteria to be dispensed with.
5 Appraisal Working Capital: DDS CUE
Format Term loan: S2 format
Additional format “CLP DATA” as per annexure V to be added
in both formats
6 Interest Rate CUE based interest rate as per the circular no. CCO/CPPD-
ADV /202/2018-19 dated 30.03.2019 for CC and Circular No.
CCO/CPPD-INT/123/2017-18 dated 01.03.2018 for term loan
Any concessions to be extended as per the Bank’s extant
instructions
7 Sanctioning Regional Manager and if the Branch is headed by DGM/AGM,
Authority & then the loan proposal will be sanctioned by branch head.
Control The sanction to be controlled by next higher Authority.
8 Limit of a. 115% of the last year sales
Projected sale b. For annualizing current year sale, GST sale of minimum
(i.e. max. 3 months will be required. In case GST data is not available
projected sale) projected turnover 115% of last year GST sale will be taken
9 Eligibility a. Corporate Borrowers: Waived
Non-corporate Borrowers: The chief promoter /chief
executive should be 18 to 65 years of age.
b. Any deviations in parameters to be approved by
c. The applicant must obtain a minimum overall score of 60%
with a minimum of 50% under each sub-head like Personal
Details, Business Details, Collateral Details of our internal
scoring model.
10 Limit As per Annexure III of circular no. NBG / SMEBU-SME SMART
Assessment /39/ 2018-19 dated 21 Nov 2018.
For new cases: If there is any deviation in amount between
in- principle sanctioned on the platform and final assessed
by processing officer, deviation to be approved by sanctioning
authority.
In case of renewal, if the in-principal amount is lower than the
existing limit enjoyed by the customer, then 1 year as advisory
Page 378 of 632

period is given reduce the limit equivalent to in-principle
amount.
11 Security Primary Security:
• Working capital: Hypothecation / Pledge of stocks, book debts
and other current assets.
• Term Loan: Charge by way of hypothecation/pledge / mortgage of
entire assets created out of Bank finance.
In eligible cases, Collateral Security need not be insisted as the
loans are to be covered under CGTMSE.
If the borrower is not willing to bear the guarantee fee &
premium, then collateral security as per Bank's norms need to be
obtained.
Eligible units may be covered under CGTMSE as per
CGTMSE guidelines (i.e. Customer has to bear the Guarantee Fee).
Personal Guarantee:
Personal guarantee of all the promoters, directors, partners. Third
party guarantee in case property offered is in the name of a person
other than promoters / directors / Partners wherever applicable.
12 Repayment Working Capital: Repayable on demand. (to be renewed
annually)
Term Loan: Not more than 7 years including moratorium not
exceeding 6 months.
13 Documentation As per the SME Documentation.
CAM Report, CIBIL and account statement from CLP site to be kept
along with the documents.
14 Processing CC: Processing fee: 0.35% of the limit amount
Fee / upfront fee TL: Upfront fee: 1.10% of the limit amount
15 CLP Platform New Customer: to be borne by applicant
Fee Existing customer for Renewal / Enhancement: waived
16 Stock Statement Monthly
17 CCRD/SRA SRA shall be done (vide circular No.CCO/CPPD-
ADV/166/2018-19 dated 08.02.19)
18 Inspection Half yearly for standard accounts.
Monthly for SMA 0/1/2 accounts till the account gets
regularized.
19 CUE Rating To be carried out
20 CRA Rating Waived
21 Miscellaneous a. ERS-SL will be applicable as per bank’s extant
instructions.
b. TAT: within 21 working days.
c. The rejection reason should be approved by GM (Network)
before marking of rejection in CLP portal and the rejection
letter (to be provided to the customer) should be signed by:
i. BPR Centre Limit upto Rs.50.00 lacs: CPC Head
ii. BPR Centre Limit above Rs. 50.00 lacs:
Regional Manager
Page 379 of 632

iii. Non- BPR Centre: Regional Manager
d. Finance under multiple banking arrangement should not be
permitted.
e. Sanctioning authority to approve any deviation in the
parameters set by Bank in CLP.
22 Provisional Data Provisional balance sheet should be obtained from the
applicant & verified /cross checked as per the bank’s extant
instructions.
Estimated / Since the CLP portal will calculate the projected sales as 115%
Projected of the last year’s annualized sales, hence the submission of
financial data projected and estimated financials to be waived.
23 Balance sheet For the leads of 1 Year ITR and Presumptive ITR, the balance
sheet from the customer will be taken for the purpose of CMA
creation as CMA and other financial data is not available in
CLP.
For term loan, project report for the tenure of the loans to be
taken processed as per Bank norms for the processing of term
loan.
24 Staff As the data is validated and pre-fetched from GST site, Income
accountability tax site, staff accountability will not be carried out for the
following points:
a. Verification of IT returns
b. Verification of GST returns
c. Verification of Balance Sheet
d. Assessment of the loan amount
Glossary of Circulars
S. Circular No. Title of the Circular
No.
1 NBG/SMEBU-SME SMART/39/2018 - 19 dated Comprehensive Instructions
21.11.18
2 SMEBU-SME SMART/44/2018 – 19 dated 01.12.18 Interest rate
3 NBG/SMEBU-SMEADVANC/46/2018-19 dated Coverage in CGTMSE
11.12.18
4 NBG/SMEBU-SME ADVANC/50/2018-19 dated Renewals through CLP
02.01.19
5 NBG/SMEBU-SME ADVANC/21/2019-20 dated Reiteration of instructions
06.07.19
6 NBG/SMEBU-SME ADVANC/31/2019-20 dated Fetching of leads below
03.07.19 Rs.10lacs
7 NBG/SMEBU-SME ADVANC/26/2019-20 dated Increase in limit to Rs.5crs
17.07.19
8 NBG/SMEBU-SME ADVANC/36/2019-20 dated SOP for marking of rejection
08.08.19 on CLP portal
9 NBG/SMEBU-SME ADVANC/43/2019-20 dated Instructions for TAT
16.09.19
10 NBG/SMEBU-SME ADVANC/100/2019 – 20, Date: Tue 31 New Product CLP MUDRA (1 lac to Rs
Mar 2020 10 Lacs ) and Amendment above Rs 10
Lacs to RS 500 Lacs)
Page 380 of 632

STAND UP INDIA (SUI) SCHEME
The Stand up India scheme was launched by the Prime Minister on 05.04.2016. The
scheme endeavors to create an eco system for SC, ST and women entrepreneurs, which
facilitates and continues to provide a supportive environment for doing business.
The objective of Stand Up India scheme is to facilitate sanction of bank loans between
Rs. 10 lakhs and Rs. 1 crore to atleast one Scheduled Caste (SC) or Scheduled Tribe
(ST) borrower and at least one women borrower per Bank branch for setting up
a Greenfield enterprise in FY 2016-17. The enterprise may be in manufacturing,
services or the trading sector. In case of non-individual enterprises atleast 51% of the
shareholding and controlling stake should be held by SC / ST or Women entrepreneur.
The scheme, which covers all branches of Scheduled Commercial Banks, can be
accessed in three potential ways:
• Directly at the branch
• Through SIDBI’s interactive Stand up India portal called www.standupmitra.in
(accessible at home / branch / through LDM / Common Service Centres
(CSCs)).
The Bank’s guidelines of the Stand Up India scheme based on GOI’s guidelines are as
under:
S. Parameters Proposed Terms
No.
1. Target Group SC/ST and Women entrepreneurs
2. Purpose To meet all kinds of credit requirement for setting up
Greenfield Projects under manufacturing, services or
the trading sector.
3 Type of facilities Composite Loan (Working Capital facilities / Term
Loan)
4. Quantum of Minimum – More than Rs. 10 lakhs
Finance Maximum – Rs. 1 crore
5 Repayment for Maximum of 7 years
Term Loans (including moratorium period upto 18 months)
6 Margin Minimum mandatory margin is 10%. Maximum
Margin Money on composite loan would be upto 25%
which will be reduced through convergence with
Central / State Schemes.
7. RuPay Card RuPay Card to be issued for Cash Credit Component.
8 Interest Rate Interest rates will be linked to MCLR with 1 year reset
period.
Spread will Be MCLR + 3 %
9 Pre-Payment A unified charge for Processing / Upfront fees and
penalty, Inspection charges will be levied under SUI
Processing Fees /
Upfront fees,
Page 381 of 632

Inspection Loan Pre-payment Processing
charges Amount Penalty fees/ Upfront
fees, inspection
charges
Rs 10 Nil if Term Loan is 0.20% of loan
lakhs to prepaid on the amount) plus
Rs 100 anniversary date of taxes as
Lakhs MCLR else 1 % of applicable) No
the pre-paid other charges
amount. No charge are to be
will be levied if recovered.
credit facility is
sanctioned in
Individual name or
for pre-payment of
Working Capital
facilities.
10. Penal Interest CC Limits – 2% p.a. on entire outstanding for the

period of irregularity.
Term Loans – 2% p.a. on irregular portion for the
period of irregularity.
11. Security Primary: Hypothecation of stocks, machinery,
movables etc. purchased out of Bank’s finance
Credit Guarantee/ Collateral: A new scheme for
Credit Guarantee named ‘Credit Guarantee Scheme
for Stand Up India (CGSSI), for loans under SUI,
has been notified by GOI with NCGTC (National
Credit Guarantee Trustee Company Ltd.) on the lines
of CGTMSE. Details of the Guarantee Scheme are
provided in ANNEXURE – I
12. Insurance As per Bank’s extant instructions
13. Inspection CC Limits / Term Loans – Quarterly
However, if the account becomes irregular, inspection
to be done on monthly basis.
14. Documentation As per SME documents
15 Application Application form as approved by IBA
Form
Detail of the procedure is available in Credit Loan Manual Part 5.
Page 382 of 632

SBI ASSET BACKED LOAN
Target Group • All Business Units who want to avail loan facility for
manufacturing and services activities along with self-employed
and professional individuals covered by MSMED Act 2006,
wholesale/retail trade.
Purpose • For build-up of current assets and fixed assets needed for business
purpose, capacity expansion, modernization, short term working
capital (including shoring up of Net Working Capital, etc).
Nature of facility • Fund Based (FB)
and
• Non Fund based (NFB)
- NFB facility can be given; however, LTV ratio to be maintained
for the aggregate limits (FB+NFB) @ 60% of the realizable value.
- FB & NFB facilities have to be assessed separately in order to fix
repayment programme for the fund based facility.
- NFB facility should be reviewed annually along with FB limit.
- Minimum 25% cash margin for NFB facility.
- Usual charges for LC / BG will be applicable.
- NFB / FB facility can be converted into FB / NFB facility and vice
versa at the time of annual review/restitution, within the LTV
ratio.
- Cash flow to be examined at the time of opening LCs in order to
ensure honouring bills on due date.
- NFB facility to be used for the normal activity of the unit.
Type of loan • Drop-line Overdraft facility OR Cash Credit
Eligible i. Existing Customer already availing credit facilities from us.
Customers ii. New units with marketable assets to offer as security.
iii. Takeover of existing units from other Banks/ FIs with satisfactory
track record.(Credit information report to be obtained)
Take over Criteria • Credit Information Reports from CICs/CIBIL should be
satisfactory and
• Credit Opinion Report from other Banks to be obtained.
• Bank statements of all accounts of the constituent with other banks
for the last 12 months are to be mandatorily obtained and perused.
• The name of the promoters /directors/guarantors should not be
appearing in the list of defaulters/ wilful defaulters/ CRILC/
Caution lists, etc.
• Accounts restructured under CDR, JLF mechanism, MSME
restructuring Scheme, etc., and accounts under rehabilitation or
under OTS should not be taken over.
• NPAs / SMA should not be taken over
• i-Probe should also be verified.
• Bank’s other takeover norms will not be applicable under this
scheme.
Page 383 of 632

• Perfection of security: Creation of security: Simultaneously on
taking over the loan outstanding from the other Bank perfection of
security – within 30 days from the date of first disbursement of the
loan.
LTV% • Immovable property: 60% of the realizable value
Loan Amount • Minimum loan amount: >Rs 10 lacs

• Maximum loan amount: Rs. 20 crores
Sanctioning • As per delegation of financial powers
Authority
Interest Rate • MCLR one year (floating) + 230 bps
• 25 bps concession for obtaining ECR (only to the unit having ECR
of “BBB+ and above”.
• Discretion for further reduction upto 50 bps (to be exercised

judiciously by the sanctioning authority not below RCCC for all
sanctions falling within circle power on case to case basis).
• Discretion for further reduction upto MCLR one year (floating) +

130 bps (floor rate) - to be exercised by CCCC for all sanctions to
counter competition on case to case basis.
• Concessions sanctioned within delegated concessionary powers

will be reviewed every year at the time of review of the limits.
Eligible security • Immovable property (compliant under SARFAESI Act) belonging
to the unit, its proprietor/partners/ directors or their near relatives.
Near relatives will cover Father, Mother, Spouse, Son, Daughter,
real Brother & real Sister.
• Industrial property leasehold & freehold / land/plot not eligible as
security for ABL.
• Leasehold property cannot be taken as security. However –
- Deviation in respect of residential/ commercial property
constructed on land leased by statutory government bodies /
Government Development Authorities may be permitted.
However, deviation is not permissible in respect of industrial
property / land / plots
- Such property should have all the statutory approvals /

permissions such as Building Completion Certificate, Occupancy
Certificate. etc., and other approvals / permissions as per the local
legal rules and regulations.
- Mortgage of such property / flat should be permissible as per the

land lease deed and other applicable laws, if any.
Page 384 of 632

- The borrower / bank will have to comply with the provisions like
obtaining NOC from the lesser / building society and other
conditions, if any, in the lease deed, etc., for creation of mortgage
charge on the property / flat on leased plot in such cases, wherever
required.
- The residual lease period of the land on which the property is
situated should be more than 30 years or more at the time of
creation of mortgage.
- There should be provision in the lease agreement for the renewal
of lease after expiry of lease period.
- There should not be any restriction on the disposal of the property
in case the bank wants to recover the dues by disposal of such
property.
- Lease property should be SARFAESI compliant.
- In case of acceptance of leased property as collateral, it needs to
be ensured that lease amount has been fully paid or at least paid up
for the tenure of the credit facility.
- These instructions covers mortgage of leased property by the

lessee; it does not cover mortgage of leased property by the lessor
which is not permissible for ABL.
• Properties covered under social infrastructure such as
schools/colleges, hospitals, orphanage/old age homes etc., should
not be accepted for mortgage. In respect of other securities not
mentioned above sanctioning authority may decide acceptability
of such security subject to the property being SARFAESI
compliant and marketable.
• Agricultural land should not be considered as property for
mortgage.
• SEZ property not eligible.
• Property with Power of Attorney not permitted. However, POA
executed by Builders may be accepted subject to compliance with
guidelines detailed under “Builder POA” section of Circular no.
CCO/CPPD-ADV/30/2015-16 dated 04.06.2015.
• Open Land outside urban limits should not be considered as
property for mortgage. Open land means land which is not
properly demarcated with proper boundary. Demarcation of the
property is important for its identification and possible
enforcement, if required on a later date. Hence no property should
be accepted as collateral if the property cannot be demarcated.
Assessment of The need based assessment for the requirement of credit limits has
the credit limits to be done.
• Upto Rs. 5 crore, working capital credit limit to be computed at

minimum 25% projected turnover, subject to cash flow being
sufficient to repay the amount OR Assessed Bank Finance can be
Page 385 of 632

used for the units dealing in cold storage, export business and any
other activity in which working capital cycle is long, subject to
cash flow being sufficient to repay the amount.
• Above Rs. 5.00 crores, Assessed Bank Finance (ABF).
• Fixed Assets to be financed based on the actual expenditure
proposed.
• Borrower will submit cash flow for the entire tenor of loan, at the
time of initial sanction of limits and annually thereafter at the time
of review of the limits. Cash flow should justify the reduction in
drawing power (at each stage) in the account.
Repayment Drop-line Overdraft:
• Limits can be sanctioned for periods ranging from 12 months to

240 months with repayment on EMI basis.
• Moratorium under the scheme should not be more than 18 months
based on activity. Interest to be serviced monthly during the
moratorium period.
• The drawing power shall be reduced monthly so as to have the
overdraft liquidated at the end of the period.
• Regular transactions are permitted upto the available drawing
power.
• No over-drawings permitted.
• Concessions sanctioned within delegated concessionary powers be
reviewed every year at the time of review of the limits.
Cash Credit: On demand.

Pre-payment • 2% of the outstanding in the account. However, Circle CGM may
penalty waive or reduce pre-payment where Bank is going for exit option
• In case of pre-payment / pre-closure from internal accruals, pre-
payment / pre-closure penalty will not be levied.
Penal interest • 2% of outstanding amount, if overdue by >7 days
Security Collateral:
• Immovable property in the form of Equitable / Registered

Mortgage of land and building, by way of first charge.
• Industrial property both leased &freehold / land/plot cannot be
taken as security for ABL.
• Leasehold property can be taken subject to the conditions
mentioned above under the head “Eligible Security”.
• Property under Power of Attorney not permitted. However, POA
executed by Builders may be accepted subject to compliance with
• No Second Charge or Pari-Passu charge will be extended for other
Bank/FI.
• Further, security which will be provided as collateral should not be
Page 386 of 632

linked with other loan / liabilities i.e. collateral property should be
exclusive to ABL. Confirmation to this effect should be recorded
in the proposal.
• Property mortgaged needs to be within a radius of 25 km from the
Branch, wherein account is maintained (sanctioning authority may
decide going beyond 25 km on case to case basis).
• Facility is available only against the mortgage of SARFAESI
Compliant immovable property.
• CERSAI verification shall also be made on the collateral
Securities.
Valuation of • Valuation of property to be carried out as per the Bank’s extant
property instructions.
• Market information on real estate prices to be considered while
assessing the proposal.
• Fresh valuation of property to be carried out every 3 years and any
shortfall has to be topped up.
Processing Charges/ • 1% of the limits (Upper Cap: Rs.10 Lacs)
Upfront fee
Equitable • Up to Rs.5 Cr: Rs. 15000/-

Mortgage • >Rs. 5 Cr: Rs.25 per lac
Charges
• Min: Rs.25000/- Max:Rs.40000/-
Inspection • Limits upto Rs.1 Cr: Rs.1000/- per inspection
Charges • Limits above Rs.1 Cr: Rs. 3000/- per inspection
Commitment • Nil (more than 75% utilization)
Charges • 0.50% (50% to 75% utilization)
• 1% (for <50% utilization)
Facility Fee • Not applicable
Documentation • Arrangement Letter, DP Note, DP Note Take Delivery Letter,
yearly affidavit and SME Documentation as applicable.
• The undernoted documents will also be required for the Mortgage
of the property
• Original Title Deeds, House /Property tax payment receipts,
• Title Investigation report as per Bank’s extant instruction.
• However, TIR should be obtained from two different panel
advocates in case of loan is above Rs. 25 lacs.
• It is, reiterated that the mortgager should have absolute, clear and
marketable title as on the date of mortgage.
In view of the removal of primary security, SME-2 document may

be dispensed with in States where ad-valorem stamp duty is
applicable. However, in States where the loan agreement cum
hypothecation (SME-2) does not attract ad-valorem stamp duty,
branches/operating units may continue to obtain SME-2 document.
Page 387 of 632

SME-4 would necessarily get dispensed with when SME-2 is
dispensed with.
Further, in those States where SME-2 document is to be dispensed
with, on the ground of ad-valorem stamp duty, item no. 10 & 11
page 1 of SME-3 to be deleted and 1st para on page 2 of SME-3
also to be modified.
• In this connection, please be guided as per instructions

contained in SMEBU circular no. SME/Credit/Cir/GS/34
dated 16.07.2016.
Third party • Personal Guarantee from the Promoters / Partners / Directors of
Guarantee the Unit.
• Personal Guarantee of the owner of the Collateral Security offered
for Mortgage.
Submission of Stock • Quarterly Operational Data cum status of working capital funds
Statements statement on Quarterly basis. (May/Aug/Nov/Feb) as per
annexure-A.
• Drawing Power is not linked to Quarterly Operational Data cum
status of working capital funds statement. However, current assets
level as per quarterly operation data should be adequate to cover
the Bank Borrowings.
Stock Audit • Bank’s extant instructions with regard to stock and receivable
audit will be applicable (please refer to circular no. NBG/SMEBU-
SBI ABL/41/2016-17 dated 19.08.2016).
Renewal / Drop line Overdraft: No change.
Review
(Restitution) • No renewal of limit.
• Review has to be carried out annually and put up to sanctioning
authority under whose powers total/aggregate exposure to the
borrowing unit/entity falls.
• On request from the borrower, drawing power can be restituted to
the original level/level assessed by the sanctioning authority or
cancelled, subject to the LTV norms applicable at the time of
sanctioning/ restitution of limits. The restitution / sanction will be
subject to availability of adequate Cash Flow to service the
repayment during the residual period of the loan.
• Restitution of the limits shall be considered only for regular and
standard assets.
Cash Credit: To be renewed once in two years with yearly review
for all satisfactorily conducted accounts which are not in SMA
category during the last 12 months.
Enhancement in Can be considered subject to the following:
Limit • CRA of the borrowing unit is SB-8 or better and conduct of
account is fully satisfactory.
• Rating should not be more than 18 months old from the balance
Page 388 of 632

sheet date.
• Against additional collateral security (compliance with
SARFAESI act) provided by the unit and/or surplus available in
existing collateral securities (within the permissible LTV level)
subject to cash flow being sufficient to take care of repayment in
the residual period (ABL tenor will not be increased).
• Enhancement against surplus available in existing collateral
securities be allowed within the LTV ratio subject to cash flow
being sufficient to take care of repayment in the residual period
(ABL tenor will not be increased). However, the stipulation
related to revaluation of property once in 3 years to be complied
with.
• No enhancement will be considered for SMA accounts (Account
should not have been classified SMA since last review of the
account).
Inspection • Half yearly inspection of property and unit/activity.
• During inspection, the QOD cum status of working capital funds
statement as obtained from borrower shall be scrutinized at the
time of inspection only to confirm the level of activity and end use
of funds.
• Only digital inspection application to be used.
Monitoring, Follow Triggers:
Up & Exit Policy
• In case of no credits in a calendar month, the Borrower to be
contacted immediately.
• Though structured inspection is stipulated at half-yearly intervals,
inspection to be done immediately if there is no credit in a
calendar month. (This is important as it is observed that accounts
tend to become irregular and slip to NPA when there is no contact
between the branches and their borrowers).
• Current assets level based on the quarterly operation data is less
than the limits.
In case of above mentioned triggers, the matter should be reported
to controllers of the branch and corrective action be initiated.
Further, Operating units will adhere to ‘Exit Policy for Standard
Assets’ circulated vide SMEBU circular no. NBG/SMEBU-
OPER/74/2016-17 dated 14.12.2016
Undertaking from • Yearly affidavit from the borrower that funds have been /will be
the borrower utilised for the approved activities under MSMED Act 2006,
wholesale/retail trade and not used for speculative purpose like
investment in stock market, acquisition/development of land, etc.,
or for any activity not permitted by law.
ECR • ECR not mandatory
Hurdle and CRA • CRA to be done as per the extant instructions; however, CRA will
Rating not be linked with pricing.
Page 389 of 632

• Unit with CRA of SB-10and below is not eligible for finance
under ABL.
• In case, at the time of review, unit’s internal rating deteriorates to
SB-10 and/or lower, interest rate will be increased by 200 bps
from the date of last audited balance sheet, on the basis of which
CRA has been done. These instructions will be applicable to all
the accounts reviewed/sanctioned subsequent to these instructions.
However, in the event of up-gradation of CRA to SB-9 and above,
at the time of subsequent review, the enhanced interest rate be
withdrawn.
• Further, deterioration in CRA e.g. SB-10& below, is a sign of
stress, resultantly, affecting cash accruals, etc. As such, operating
units may opt for reducing the exposure/exercise exit option. The
operating units will incorporate the same in the Arrangement
Letter.
CRA Financial Score • Not applicable
deviation
CRMD guidelines • Not applicable
Can existing term Existing term loan or cash credit can be converted into ABL
loan or cash credit subject to:
loan be converted
into SBI ABL • CRA of the unit is SB-5 or better and conduct of account is fully
satisfactory.
• Discretion for further lower CRA of the unit up to SB-7 may be
exercised judiciously by the sanctioning authority not below CCC-
I. For sanctions falling below CCC-I powers administrative
approval will be obtained from CGM of the circle, in such cases.
• Rating should not be more than 18 months old from the balance
sheet date.
• SMA account will not be allowed for conversion (Account should
not have been classified SMA since last review of the account).
• Cash flow projected is sufficient to take care of the payment of
future interest and installment.
• No dilution in the existing security coverage i.e. Primary and
collateral security should not be released.
• Loan amount is restricted to 50% of the realizable value of the
collateral as per the scheme.
End use of funds • End use of funds to be ensured immediately upon disbursement of
loan, through inspection/verification of purchase bills, etc. In
addition, QOD cum status working capital funds statement to be
obtained from the borrower to confirm the level of current assets
and end use of funds.
Insurance • Insurance cover, both for the assets of the activity for which ABL
has been sanctioned and for the property against which loan is
given should be taken, as in the case of regular finance.
• However, in respect of the assets of the activity for which loan is
Page 390 of 632

taken, sanctioning authority may waive insurance cover depending
upon the nature of activity / assets.
Routing of • Transactions relating to the activity for which finance under ABL
transactions is granted should be routed through the Drop Line Overdraft
account maintained with the branch. If the credit summations in
the account are less than 65% of sales realization, penal interest @
0.25% will be charged till next review of the limits. Further, in
such cases, exposures should be reduced/exit option should be
explored.
Units financed • There should be exclusive charge on the property against which
under consortium ABL is sanctioned.
or multiple • Interest rate will be applicable as per ABL scheme.
Banking • Assessment should justify total exposure (limits with our bank as
well with other bank).
• NOC from the existing Banks in the consortium be taken before
disbursement of the loan.
• Cash flow in proportion to our share in the aggregate limit enjoyed
from the Banking system to be routed through the Drop-Line
overdraft account.
• Sharing of information will be done between the banks as per RBI
guidelines.
Service Charges • Other Service Charges which are not exclusively mentioned here
will be applicable, as per Bank’s extant instructions.
Service tax/GST • Service tax/ GST, wherever applicable, will be levied on all
charges, as per bank extant instructions.
Sanctioning • Sanctioning power will be as applicable to term loan in case of
Power acquisition / creation of fixed assets and working capital in case
the loan is for working capital.
Legal Audit • Bank’s extant norms with regard to legal audit will be adhered to.
Number of ABLs • Either loan can be restituted to original limit within the residual
on the same loan tenor. OR Fresh
property ABL can be sanctioned within LTV.
Appraisal Format • While restitution/enhancement in the limits requires a more

comprehensive appraisal and assessment, review may not require
such approach. Therefore, while the appraisal note may be used
for new cases and restitution/enhancement in the limits (in existing
accounts), the review format may be used for yearly review of
limits (without enhancement and restitution of limit).
Classification i) All manufacturing enterprises & service enterprises accounts
under priority under MSME Segment irrespective of the limit where the
sector investment in Plant & Machinery does not exceed Rs.10 Crs is to
be classified under priority sector lending.
ii) Bank loan to MSME Service enterprises with equipment cost
up to Rs.5.00 Crs are eligible for PSL qualification irrespective of
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the limit.
Deviations in the • No deviation under this scheme is allowed except
Scheme i) Interest rate
ii) Pre-payment penalty,
iii) Conversion of existing loans
iv) Distance between the branch and location of the mortgaged property
(Deviation structure for these items is defined in the respective
parameters).
Special Mention • The end use under “SBI Asset Backed Loan” does not include
“Commercial Real Estate”.
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SBI ASSET BACKED LOAN FOR COMMERCIAL REAL ESTATE
COMMERCIAL PROJECTS
Features
Name of the • SBI Asset Backed Loan for Commercial Real Estate –Commercial
Scheme Projects (ABL CRE-CP)
Target Group • Proprietorship/Partnership/Company
Purpose • Creation/acquisition of real estate such as office buildings, retail space,
industrial or warehouse space, multiplex, hotels, restaurants, gymnasium,
amusement parks, cold storage etc. where the prospect for repayment
would generally be lease or rental payment or sale of asset.
• For both working capital (including pre-operative expenses) and fixed
asset.
Nature of • Fund Based and
facility • Non Fund Based –
- NFB facility can be given; however, LTV ratio has to be maintained
for the aggregate limits (FB+NFB) @ 50% of the realizable value,
- FB & NFB facilities have to be assessed separately in order to fix
- NFB facility should be reviewed annually along with FB limit.
- Minimum 25% cash margin for NFB facility.
- Normal charges for LC / BG will be applicable.
- NFB / FB facility can be converted into FB / NFB facility and vice
versa at the time of annual review / restitution, within the LTV ratio.
- Cash flow to be examined at the time of opening LCs in order to
ensure honouring bills on due date.
- NFB facility to be used for the normal activity of the unit.
Type of loan • Drop-line Overdraft facility
Eligible • Existing Customer already availing credit facilities from us.
Customers • New units with marketable assets to offer as security.
• Takeover of existing units from other Banks/ FIs with satisfactory
track record.
(Credit Information Report to be obtained)
Take over • Credit Information Reports from CICs/CIBIL should be satisfactory
Criteria and Credit Opinion Report from other Banks to be obtained.
• The name of the promoters /directors/guarantors should not be
appearing in the list of defaulters/ wilful defaulters/ CRILC/ Caution lists,
etc.
• iProbe should be verified.
• NPAs / SMA should not be taken over.
• Bank statements of all accounts of the constituent with other banks for
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last 12 months are to be mandatory obtained and perused.
• Bank’s other takeover norms will not be applicable under this scheme.
• Accounts restructured under CDR, JLF mechanism, MSME
restructuring Scheme, etc., and accounts under rehabilitation or under
OTS should not be taken over.
• Perfection of security: Creation of security: Simultaneously on taking
over the loan outstanding from the other Bank and Perfection of security
– within 30 days from the date of first disbursement of the loan.
LTV% • Immovable property : 50% of the realisable value
Loan Amount • Minimum loan amount: >Rs.10 lacs
• Maximum loan amount: Tier I Branch: Rs.50 Crores
Tier II, III Branch: Rs.20 Crores
Tier IV,V, VI Branch: Rs.5 Crores
Margin • 25% margin both for working capital and fixed assets.
Required
Sanctioning • As per delegation of financial power.
Authority
Interest Rate • MCLR- One Year + 305 bps
• 25 bps concession for obtaining ECR (only to the unit having ECR of
“BBB+ and above”).
• Discretion power for further reduction upto 100 bps (To be exercised
judiciously by the sanctioning authority not below CCC-I/MCC for all
sanctions falling within Circle/MCC power on case to case basis)
• Discretion for further reduction upto MCLR- one year (floating) + 100
bps (floor rate) – to be exercised by CCCC for all sanctions to counter
competition on case to case basis.
• Concessions sanctioned within delegated concessionary powers will be
Eligible • Immovable property (compliant under SARFAESI Act) belonging to
Security Unit, its proprietor/partners/directors or their near relatives, in the name
of Associate units with common partners/directors or their near relatives.
Near relatives will cover Father, Mother, Spouse, Son Daughter, real
Brother & real Sister.
• Industrial property both leased & freehold / land/plot cannot be taken
as security for ABLCRE-CP.
• Leasehold property cannot be taken as security. However
– Deviation in respect of Residential/ commercial property
constructed on land leased by statutory government bodies/ Government
Development Authorities, may be permitted. However, deviation is not
permitted in respect of industrial property/ land/ plots.
–Such property should have all the statutory approvals / permissions such
as Building Completion Certificate, Occupancy Certificate. Etc., and
other approvals / permissions as per the local legal rules and regulations.
–Mortgage of such property / flat should be permissible as per the land
lease deed and other applicable laws, if any.
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–The borrower / bank will have to comply with the provisions like
obtaining NOC from the lesser / building society and other conditions, if
any, in the lease deed, etc., for creation of mortgage charge on the
property / flat on leased plot in such cases, wherever required.
–The residual lease period of the land on which the property is situated
should be 30 years or more at the time of creation of mortgage.
–There should be provision in the lease agreement for the renewal of
lease after expiry of lease period.
–There should not be any restriction on the disposal of the property in
case the bank wants to recover the dues by disposal of such property.
–Lease property should be SARFAESI compliant.
–These instructions covers mortgage of leased property by the lessee; it
does not cover mortgage of leased property by the lessor which is not
permissible for ABL (CRE-CP)
• Properties covered under social infrastructure such as schools/colleges,
hospitals, orphanage/old age homes etc., should not be accepted for
mortgage. In respect of other securities not mentioned above sanctioning
authority may decide acceptability of such security subject to the property
being SARFAESI compliant and marketable.
• Agricultural land should not be considered as property for mortgage.
• SEZ property not to be taken.
•Property with Power of Attorney not permitted. However, POA executed
by Builders may be accepted subject to compliance with guidelines
detailed under “Builder POA” section of Circular no. CCO/CPPD-
ADV/30/2015-16 dated 04.06.2015.
• Open Land outside urban limits should not be considered as property for
mortgage. Open land means land which is not properly demarcated with
proper boundary. Demarcation of the property is important for its
identification and possible enforcement, if required on a later date. Hence
no property should be accepted as collateral if the property can not be
demarcated.
• In case of loan taken for construction of commercial property, land
on which construction is to be done cannot be taken as collateral security.
In such cases collateral security should be freehold immovable property
other than the property on which construction is to be done.
Assessment of • Working Capital- Based on projected cash flow of the project.
the credit
limits • Fixed asset - Based on the project cost after deducting various
advances/deposit received/receivable from the project.
• Borrower will submit cash flow for the entire tenor of loan, at the time
of initial sanction of limits and annually thereafter at the time of review of
the limits. Cash flow should justify the reduction in drawing power (at
each stage) in the account.
• Limits can be sanctioned for period of 12 months to 72 months,
including the moratorium period, with either Equated Reduction in limit
or customised reduction in limit depending upon the cash accruals as per
Page 395 of 632

projections.
• Interest to be serviced monthly during the period of moratorium also.
• The drawing power shall be reduced so as to have the overdraft
liquidated at the end of the period.
• Regular transactions are permitted upto drawing power available.
• Concessions sanctioned within delegated concessionary powers be
Pre-payment • In case of pre-payment / pre-closure from internal accruals pre-
penalty payment / pre- closure penalty will not be levied.
• 2% of the outstanding in the account. However, Circle CGM/CGM
MCG may waive or reduce pre-payment penalty where Bank is going for
exit option.
Penal interest • 2% of outstanding amount, if overdue by >7 days
Facility Fee • Not applicable
Security Collateral:
• Immovable property in the form of Equitable/ Registered Mortgage of
land and building, by way of first charge.
• Industrial property both leased & freehold / land/plot cannot be taken
as security for ABLCRE-CP.
• Property with Power of Attorney not permitted. However, POA
executed by builders may be accepted subject to compliance with
• Leased property can be taken subject to the conditions mentioned
above under the head “Eligible Security”.
• No Second Charge or Pari-Passu charge will be extended for other
Bank/FI.
• Further, Security which will be provided as collateral should not be
linked with other loan / liabilities i.e. collateral property should be
exclusive to ABLCRE-CP. Confirmation to this effect should be recorded
in the proposal.
• Property mortgaged needs to be within a radius of 25 km from the
Branch, wherein account is maintained. (sanctioning authority may decide
going beyond 25 km on case to case basis)
• Facility is available only against the mortgage of SARFAESI
Compliant immovable property.
• CERSAI verification shall also be made on the collateral securities
Valuation of •Valuation of property to be carried out as per the Bank’s extent
property instructions.
•Market information on real estate prices to be considered while assessing
the proposal.
•The proposal should capture the realizable value and guideline value of
Page 396 of 632

the collateral security and large variance should be justified by the credit
analyst.
•Fresh valuation of property to be carried out every 3 years and any
Processing • 1% of the limits (Upper Cap: Rs.10 Lacs)
Charges/
Upfront fee
Equitable • Upto Rs.5 cr: Rs.15000/-
Mortgage • >Rs.5 cr: Rs.25 per lac
Charges
• Min: Rs.25000/-Max:Rs.40000/-
Inspection • Limits upto Rs.1 cr: Rs.1000/- per inspection
Charges • Limits above Rs.1 cr: Rs.3000/- per inspection
Commitment • Nil (more than 75% utilisation)
Charges • 0.50% (50% to 75% utilisation)
• 1% (for <50% utilisation)
Documentation • Arrangement Letter, DP Note, DP Note Take Delivery Letter, yearly
affidavit and SME Documentation as applicable.
• The undernoted documents will also be required for the Mortgage of
the property.
• Original Title Deeds, House /Property tax payment receipts.
• Title investigation report as per Bank’s extant instruction.
• However, TIR should be obtained from two different panel advocates
in case of all loan above Rs.25 lacs.
• It is reiterated that the mortgager should have absolute, clear and
marketable title as on the date of mortgage.
• Please also be guided as per instructions contained in SMEBU circular
no. SME/ Credit/Cir/GS/34 dated 16.07.2016.
Personal/ • Personal Guarantee from the Promoters/Partners/Directors of the Unit.
Third party • Personal Guarantee/Corporate Guarantee of the owner of the Collateral
Guarantee Security offered for Mortgage.
Cash Flow • Cash Flow statement for Builder Finance on Quarterly basis in the
Statement month May/ Aug/Nov/Feb.
• Drawing power is not linked to quarterly cash flow statement.
However, cash flow statement is must to confirm the level of
activity/status of the project/end use of the funds.
• Stock audit is not mandatory
Renewal / • No renewal of limit.
Review • Review has to be carried out annually and put up to sanctioning
(Restitution) authority under whose powers total/aggregate exposure to the borrowing
unit/entity falls.
• On request from the borrower, drawing power can be restituted to the
Page 397 of 632

original level/level assessed by the sanctioning authority or cancelled,
subject to the LTV norms applicable at the time of sanctioning/ restitution
of limits. The restitution/ sanction will be subject to availability of
adequate Cash Flow to service the repayment during the residual period
of the loan.
Enhancement Enhancement in the limit can be considered subject to the following:
in Limit • CRA of the borrowing unit is SB-8 or better and conduct of account is
fully satisfactory.
• Rating should not be more than 18 months old from the balance sheet
date.
• Additional collateral security (compliant with SARFAESI act)
provided by the unit and/or surplus available in existing collateral
securities (within the permissible LTV level) subject to cash flow being
sufficient to take care of repayment in the residual period (ABLCRE-CP
tenor will not be increased).
• Enhancement against surplus available in existing collateral securities
be allowed within the LTV ratio subject to cash flow being sufficient to
take care of repayment in the residual period (ABLCRE-CP tenor will not
be increased). However, the stipulation related to revaluation of property
once in 3 years to be complied with.
• No enhancement will be considered for SMA-1 & SMA-2 accounts
(Account should not have been classified SMA 1 & 2 in the last 12
months).
Inspection • Half yearly inspection of property and unit/activity.
• During inspection, the Cash Flow statement as obtained from borrower
shall be scrutinised only to confirm the level of activity/status of the
project and end use of the funds.
• Only digital inspection application to be used.
Monitoring • Obtention of quarterly cash flow statement for monitoring purpose.
and Follow Quarterly project and actual Cash flow statements to be analysed and
Up instruction reasons for variations to be ascertained from borrower. Higher interest
rates to be levied if variation is more than 25%.
Triggers:
• In case of no credits in a calendar month, the Borrower will be
contacted immediately.
• Though structured inspection is stipulated at half-yearly intervals,
inspection to be done immediately if there is no credit in a calendar
month. (This is important as it is observed that accounts tend to become
irregular and slip to NPA when there is no contact between the branches
and their borrowers).
Status of the project is not in conformity with quarterly Cash Flow
statement. In case of above mentioned triggers, the matter should be
reported to controllers of the branch and Corrective Action Plan (CAP)
be initiated.
• Further, Operating units will adhere to ‘Exit Policy for Standard Assets
Page 398 of 632

circulated vide SMEBU circular no. NBG/SMEBU-OPER/74/2016-17
dated 14.12.2016.
Undertaking • Yearly affidavit should be obtained from the borrower stating that
from the funds have been / will be utilised for the project for which ABLCRE-CP
borrower has been sanctioned and not used for speculative purposes like investment
in stock market, acquisition/ development of land etc., or for any activity
not permitted by law.
ECR • ECR not mandatory.
Hurdle & CRA • CRA to be done as per the extant instructions; however, CRA will not
Rating be linked with pricing.
• Unit with CRA of SB 10 and below is not eligible for finance under
ABLCRE-CP.
• In case, at the time of review, unit’s internal rating deteriorates to SB-
10 and/ or lower, interest rate will be increased by 200 bps from the date
of last audited balance sheet, on the basis of which CRA has been done.
These instructions will be applicable to all the accounts reviewed/
sanctioned subsequent to these instructions. However, in the event of
upgradation of CRA to SB-9 and above, at the time of subsequent review,
the enhanced interest rate be withdrawn.
• Further, deterioration in CRA e.g. SB-10 & below, is a sign of stress,
resultantly, affecting cash accruals, etc. As such, operating units may opt
for reducing the exposure/ exercise exit option. The operating units will
incorporate the same in the Arrangement Letter.
CRA Financial Not applicable
score deviation
CRMD Norms Not applicable
Can existing Existing term loan or cash credit can be converted into ABLCRE-CP
term loan or subject to:
cash credit
loan be • CRA of the unit is SB-5 or better and conduct of account is fully
converted into satisfactory.
SBI ABL
• Discretion for further lower CRA of the unit up to SB-7 may be
exercised judiciously by the sanctioning authority not below CCC-
I/MCCC.
•Rating should not be more than 18 months old from the balance sheet
date.
•SMA-1 & SMA-2 accounts will not be allowed for conversion (Account
should not have been classified SMA 1 & 2 in the last 12 months).
• Cash flow projected is sufficient to take care of the payment of future
interest and installment.
• No dilution in the existing security coverage i.e. Primary and collateral
security should not be released.
• Loan amount is restricted to 50% of the realizable value of the
collateral as per the scheme.
End use of • All the disbursements will be linked to stages of construction.
Fund • End use of funds to be ensured immediately upon disbursement of
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loan, through inspection/verification of purchase bills, etc. In addition,
Quarterly Cash Flow Statement to be obtained from the borrower to
confirm the status of the project/ level of activity and end use of funds.
• End use of funds may be ensued by obtaining CA certificate with
regard to utilization of funds and status of the project through Lenders’
Independent Engineer certificate on quarterly basis.
Unit is finance • There should be exclusive charge on the property against which
under ABLCRE-CP is sanctioned.
consortium or
multiple • Interest rate will be applicable as per ABLCRE-CP scheme.
Banking •Assessment should justify total exposure (limits with our bank as well
with other bank).
•NOC from the existing Banks in the consortium be taken before
disbursement of the loan.
• Cash flow in proportion to our share in the aggregate limit enjoyed from
the
Banking system to be routed through the Drop-Line overdraft account.
•Sharing of information will be done between the banks as per RBI
guidelines.
Sanctioning •Sanctioning power will be as applicable to term loan in case of
Power acquisition / creation of fixed assets and working capital in case the loan
is for working capital.
•Builder finance norms will be applicable in case of loan given to builder
which is as under –
–Working Capital – Real estate projects will be funded by way of
working capital finance if the advance is planned to be fully repaid within
a period of not exceeding 36 months from the date of first disbursement.
–Term Loan – If the repayment period including moratorium
exceeds 36 months, finance will be provided by way of a term loan.
Legal Audit • Bank’s extant norms with regard to legal audit will be adhered to.
Deviations in • No deviation under this scheme is allowed except
the Scheme i) Interest rate
ii) Pre-payment penalty,
iii) Conversion of existing loans
iv) Distance between the branch and location of the mortgaged property
(Deviation structure for these items is defined in the respective
parameters)
Page 400 of 632

SBI ASSET BACKED LOAN FOR RESIDENTIAL HOUSING (ABL-RH)
Parameter Consolidated Revised

Name of the SBI ASSET BACKED LOAN FOR RESIDENTIAL HOUSING (ABL-
Scheme RH)
Target Proprietorship/Partnership/Company
Group
Purpose Creation / Acquisition of Residential Real Estate.
Nature of Fund Based and Non Fund Based –
facility
• NFB facility can be given; however, LTV ratio has to be
maintained for the aggregate limits (FB+NFB) @ 60%.
• FB & NFB facilities have to be assessed separately in order to fix
• NFB facility should be reviewed annually along with FB limit.
• Minimum 25% cash margin for NFB facility.
• Normal charges for LC / BG will be applicable.
• NFB / FB facility can be converted into FB / NFB facility and vice
versa at the time of annual review / restitution, within the LTV ratio.
• Cash flow to be examined at the time of opening LCs in order
to ensure honouring bills on due date.
• NFB facility to be used for the normal activity of the unit.
Type of loan Drop-line Overdraft facility
Eligible • Existing Customer already availing credit facilities from us.
• New units with marketable assets to offer as security.
Customers • Takeover of existing units from other Banks/ FIs with
satisfactory track record. (Credit Information Report to be obtained)
LTV% Immovable property: 60% of the realizable value
Loan • Minimum loan amount: Rs.50 lakhs.

Amount • Maximum loan amount:
- Rs.100 crores Only at Mumbai, New Delhi and NCR,

Chennai, Ahmedabad, Bangalore, Hyderabad and Pune centres. Further,
these proposals / loans will be handled by RMREs and will be parked
only in identified branches where RMRE services are available.
- Rs.50.00 crores for other centres, where RMRE is posted or
RMME identified to handle REH business otherwise maximum loan
will be Rs.5 crores.
- Exposure above the Maximum Limit mentioned above is permitted
with the approval from the Group Head.
For funding at NBG, project size should be maximum of Rs.500
crores & Rs.1000 crores for Sole Banking arrangement and Consortium /
Multiple Banking arrangement respectively.
Page 401 of 632

Exposure above the Maximum Limit mentioned above is permitted with
the approval from the Group Head.
Processing Builder Finance Residential Project Loans under this scheme up to Rs.50
of crores and Group Exposure up to Rs.75 crores or up to the power
proposals of CCC-II (CHECK COMMITTEE), whichever is higher will be
under processed by RMREs at Branch level as per the normal process. The
ABL-RH loan proposals more than the above stipulations will be processed at
Builder Finance Cell, Corporate Centre, Mumbai in NBG.
Margin Margin should be minimum 25% of the deficit as per Project Cash Flow.
Required
Sanctioning As per delegation of financial power for Term Loan.
Authority
Interest ➢ MCLR-one year (floating) + 305 bps
Rate ➢ Additional 20 bps concession for the unit having ECR of “BBB” &
above.
➢ Under Sah-Nirman Arrangement, the additional concession can be
extended up to 25 bps for all other projects and for Affordable
Housing Projects, concession can be extended up to 35 bps and
should be extended to the Company back ended only on annual basis as
per Circular No e-Circular NBG/RE,H^HD-BF/15/2017-18 dated
19.06.2017 based on our Home Loan penetration in the project.
➢ Discretion power for further reduction to be exercised
judiciously by the sanctioning authority not below CCC-I on case to
case basis taking into account the additional concession extended under
Sah-Nirman & on account of external rating and linked strictly to
Home Loan penetration of minimum 50% of Home Loans
sanctioned / availed by all the Institutions (Banks/NBFCs, etc.)
in the project.
➢ Discretion for further reduction up to MCLR-one Year (To be
exercised by CCCC for all sanctions on case to case basis).
➢ All concessions will be withdrawn with immediate effect, if the
penetration of the Home Loan in the funded project is less than 50%
of total Home Loans sanctioned / availed by all Institutions (Banks /
NBFCs, etc.) and will be treated as non-compliance of our terms and
penal interest @1% will be charged from the date of 1st
Disbursement.
Eligible
security ➢ SARFAESI compliant immovable property belonging to the unit,
its proprietor/ partners/ directors or their near relatives. Near
relatives will cover Father, Mother, Spouse, Son, Daughter, real
Brother & real Sister.
➢ Industrial property both leasehold & freehold / land/plot not
eligible as security for ABL.
➢ Leasehold property cannot be taken as security. Except leased
Page 402 of 632

residential/ commercial property given on lease by statutory
government bodies / Government Development Authorities may be
permitted which are having all the statutory approvals / permissions
such as Building Completion Certificate, Occupancy Certificate. etc.,
and other approvals / permissions as per the local legal rules and
regulations.
➢ Mortgage of such property / flat should be permissible as per
the land lease deed and other applicable laws, if any.
➢ NOC from the lesser/building society to be obtained before
mortgage and get completed any conditions as per lease deed, if required.
➢ The residual lease period of the land on which the property is
situated should be more than 30 years or more at the time of creation
of mortgage.
➢ Provision in the lease agreement for the renewal of lease after
expiry of lease period.
➢ No restriction on the disposal of the property in case the
bank wants to recover the dues by disposal of such property.
➢ Lease property should be SARFAESI compliant.
➢ Properties covered under social infrastructure such as
schools/colleges, hospitals, orphanage/old age homes etc., should not
be accepted for mortgage. Agricultural land should not be
considered as property for mortgage.
➢ SEZ property not eligible.
➢ Open Land outside urban limits should not be considered as
property for mortgage. Open land means land which is not properly
demarcated with proper boundary.
Assessment The assessment for the requirement of credit limits:
of the credit
limits • Loan assessment will be based on the projected cash flow of the
project. The limit will be fixed at 75% of Peak deficit for the project.
The limit can be given by combining the existing ongoing projects.
Negative lien / NOC also to be stipulated for ongoing projects, cost
of which have been included for assessment of the credit limit.
• Financing for fixed assets required for construction activity along
with project loan is permitted.
The Cost estimates of the project are to be vetted by the Bank’s
empanelled Engineer.
Disburseme The loan will be disbursed after registration of the project with
nt
RERA authority as per acts of respective States / UTs, if applicable.
Page 403 of 632

Branch should ensure that all mandatory permissions / approvals for the
project are in place before disbursement.
• Limits can be sanctioned for a period of 12 months to 84
months including the moratorium with either Equated Reduction
in limit or customized reduction in limit depending upon the cash
accruals as per projections, size of the project and date of completion
of the project.
• Interest to be serviced monthly in case of moratorium.
• The drawing power shall be reduced so as to have the overdraft

liquidated at the end of the period in line with the projected or actual
cash budget and sale of flats / apartments.
• Regular transactions are permitted up to drawing power available.
• DSRA equivalent to 3 months’ instalments & Interest to be built

up during moratorium period and before commencement of instalments
in ESCROW account / STDR. Further, outstanding in the
ESCROW account / STDR should be 3 months’ interest on the
drawn outstanding at any point of time during the moratorium period.
Pre-payment In case of pre-payment / pre-closure from internal accruals pre-
penalty payment / pre-closure penalty will not be levied.
2% of the drawing power.
As per RBI Circular no. RBI/2014-15/72, Floating rate term loans
sanctioned to individual borrowers are exempted from levy of
foreclosure charges.
Penal 2% of outstanding amount, if overdue by >7 days
interest
Valuation Valuation of property to be carried out as per the Bank’s extant
of property instructions.
Market information on real estate prices to be considered while
assessing the proposal.
Fresh valuation of property to be carried out every 3 years and any
Upfront fee 1% of the limit and Upper cap is as under:
Rs.10 lakhs for loan up to Rs.50 crores.
Rs.20 lakhs for loan more than Rs.50 crores and up to Rs.100
Page 404 of 632

crores. However, discretionary power for concession in the upfront
fee to be exercised by the appropriate authority as per the extant
instructions on case to case bases.
Equitable Up to Rs.5 cr: Rs. 15000/-
Mortgage >Rs. 5 cr: Rs.25 per lac
Charges Min: Rs.25000/-Max:Rs.40000/-
Facility Fee Not Applicable
Inspection Limits upto Rs.1 cr: Rs.1000/- per inspection.
Charges Limits above Rs.1 cr: Rs.3000/- per inspection
Commitment Nil (more than 75% utilization)
Charges 0.50% (50% to 75% utilization)
1% (for <50% utilization)
Documentati • Arrangement Letter, DP Note, DP Note Take Delivery Letter,
on
Yearly Affidavit, MOU for Tie up of the Financed Project,
Document for Negative Lien on the project land and SME
Documentation as applicable.
• The under-noted documents will also be required for the
Mortgage of the property
• Original Title Deeds, House /Property tax payment receipts.
• Title investigation report as per Bank’s extant instruction.
• However, TIR should be obtained from two different panel
advocates in case of all loans above Rs. 25 lacs.
Third party Personal Guarantee from the promoters/Partners/Directors of the Unit.
Guarantee Personal Guarantee / Corporate Guarantee of the owner of the
Collateral Security offered as Security
Cash Flow • Cash flow statement on Quarterly basis. (May / Aug / Nov / Feb).
Statements • Drawing Power is not linked to Cash Flow statement.
However, Cash flow statement is obtained to confirm the level of
activity/status of the project.
• Stock audit is not mandatory.
• Copy of Report duly certified by Architect, Engineer & chartered
accountant submitted to RERA Authority for withdrawal from
RERA account to be obtained and verified to know the progress of the
Project.
Page 405 of 632

Renewal / • No renewal of limit.
Review
• Review has to be carried out annually and put up to the
sanctioning authority under whose powers total / aggregate exposure to
the borrowing unit / entity falls.
• Quarterly review of ABL-RH loans to be done till the
completion of the project and put up to GM (NW). In case of
delayed projects, this review should be on monthly basis.
• Restitution / enhancement in limits not permitted.
Enhancement Enhancement in limits not permitted. Fresh ABL-RH limit for another
in limits project can be sanctioned based on the cash flow of the new project,
subject to LTV at 60% of the Exposure [Outstanding of Existing
Loan + Proposed Fresh Limits). Borrower may also provide
additional property as collateral, if required in addition to the
existing collateral.
Inspection • Quarterly inspection of the property and project coinciding with
receipt of the actual cash budget.
• During inspection, the Cash Flow Statement as obtained from
the borrower shall be scrutinized to confirm the level of
activity/status of the project and end use of funds.
• Digital inspection should be started once it is stabilised
otherwise routine inspection to be recorded in the standard inspection
format.
Monitoring • Obtention of quarterly progress report of project along with
and Follow supported cash flow for monitoring purpose.
Up • Though structured inspection is stipulated at Quarterly
instruction intervals, branches shall ensure that each borrower under the
scheme is contacted/ visited regularly and in particular, immediately
on notice of delay in repayment of interest/instalment. This is important
as it is observed that accounts tend to become irregular and slip to
NPA when there is no contact between the branches and their
borrowers.
Triggers:
• The borrower is to be contacted immediately and the matter is to

be reported to the controller through SMA reporting in the following
cases:
• No credits in a calendar month after final disbursement.
• Delay in project beyond one month as per the estimate / LIE
report.
• Any adverse features noticed regarding negative news legal
cases / local developments impacting the construction / market.
• If the status of the project is not in conformity with Cash Flow
Page 406 of 632

statement or account becomes irregular, Branch should initiate the
following actions immediately:
• Ensure charging penal interest @2% of outstanding amount if
overdue by more than 7 days.
• Ensure charging penal interest @0.50% of outstanding amount if
there is delay in project implementation beyond 90 days as per the
estimate / LIE report.
• Issue notice to borrowers advising them to regularise the
account within 15 days.
• If not regularised within 15 days, withdraw interest benefit
under the scheme and CRA linked pricing should be made applicable.
(The product linked pricing be considered at the time of next review of
the account only)
• Penal interest over and above the applicable CRA linked
pricing (as mentioned above) be charged.
In case of above mentioned triggers, the matter should be reported to
controllers of the branch and corrective action be initiated.
Undertaking Yearly affidavit should be obtained from the borrower stating that
From the funds have been / will be utilised for the project for which ABL-RH has
borrower been sanctioned and not used for speculative purpose like investment
in stock market, acquisition/
development of land etc., or for any activity not permitted by law.
ECR ECR is mandatory for sanction of limits above Rs.100 Crores but will
not be a factor for pricing.
Hurdle & • CRA to be done as per the extant instructions; however, CRA
CRA Rating will not be linked with pricing.
• Unit with CRA of SB 10 and below is not eligible for finance
under ABL-RH.
• In case, at the time of review, unit’s internal rating is SB 10
and below, interest benefit under ABL-RH will be withdrawn and
CRA linked pricing will be applicable from the date of CRA
validation or 1 st October of each year whichever is earlier.
CRA Financial Not applicable
score deviation
CRMD Norms Not applicable
Can existing Existing Term Loans or Cash Credits are not permitted to be converted
term loan or into ABL-RH.
cash credit loan
be converted
into SBI
ABL-RH
End use of End use of funds to be ensured immediately upon disbursement of
Fund loan, through inspection / verification of purchase bills, etc.
Insurance • Insurance cover for the property against which loan is given
should be taken and Contractors’ All Risks (CAR) Insurance should
Page 407 of 632

be taken with Banks’ name in the policy for the project being funded
by us.
• However, in respect of the assets of the activity for which
loan is taken, sanctioning authority may waive insurance cover
depending upon the nature of activity / assets.
Routing of Cash flow of the project for which ABL-RH has been sanctioned
transactions should be routed through the separate RERA compliant current
account with us in case of sole banking or with the main Banker in
case of funding the project under Multiple Banking. Thereafter, it
should be routed through ESCROW account opened with the
Branch and Bank will have first charge on the same.
Service Charges which are not exclusively mentioned here, Bank’s
Charges extant instructions will be applicable.
Good & Goods & Services Tax (GST), wherever applicable, will be levied on
Services Tax all charges, as per bank extant instructions.
Sanctioning Sanctioning power will be as applicable to term loan.
Power
The type of facility will continue as Drop Line Overdraft.
RERA Project has to comply with all rules and regulations as per their
Compliances state’s / UTs’ notification on RERA.
Deviation in the No deviation is allowed under this scheme other than the items
Scheme which are mentioned in the proposal.
For further detail please refer to Credit Loan Manual Part 5
Page 408 of 632

e- DFS (ELECTRONIC DEALER FINANCE SCHEME)
SBI introduced e-DFS in 2009 to extend loans to dealers/distributors of Industry Majors, with
whom Bank has entered into tie-up for financing their dealers under various terms and conditions,
for the purchase of finished goods from Industry Majors.
The newly developed Dealer Financing system aims to automate the loan disbursal and interest
recovery process, and provide a repayment model through the Internet banking (INB) system of the
Bank. This system provides facilities like online access to dealers account, online remittance to the
Industry Major from Dealers account for the invoices, online tracking, repayment & monitoring.
The scheme offers loans under concessionary rate of interest and liberalized terms and conditions
on the strength of Industry Major's comfort in stopping further supplies to the dealer in case of non-
payment within due date. Bank has tie up with Industry Majors in all major Sectors like Auto (Tata
Motors, Maruti Suzuki, Hyundai Motors, Honda Cars), FMCG, Consumer Durables (Hindustan
Unilever, ITC, LG, Philips, Videocon), Oil (BPCL, HPCL, IOCL), Steel (Steel Authority of India
Limited, Tata Steel, Jindal Steel) to name a few.
Key Features
✓ Robust & secure electronic platform for financing.
✓ 100% invoice financing.
✓ Minimum Collateral/Nil collateral facility also available.
✓ Flow of transactions is on real time basis.
✓ Need based financing based on projected sales.
✓ Competitive pricing linked to MCLR.
✓ No financial recourse to Industry Major.
✓ Pre-approved Stand by Line of Credit (for seasonal requirements).
✓ User Friendly and customizable MIS reports.
✓ Reduced Intervention of Branches for transactions.
✓ Provision of grace period for repayment.
✓ Dedicated customer support over call and e-mail.
✓ Eligibility Criteria
✓ New /Existing dealers of Industry Majors with whom bank has a tie up.
✓ Comfort Letter to be provided by the Industry Major.
✓ 100% Hypothecation of stock financed by SBI and receivables related to such stocks including
advance remittance made to Industry Major.
✓ Personal guarantee of all partners/directors.
✓ Comfort from Industry Majors
✓ Company will recommend/introduce the Dealers after completing due diligence on the dealer
through the Comfort Letter/Introduction Letter, providing sales (actual & estimates), Indicative
limit & ad-hoc limit, Credit Period etc. recommended.
Page 409 of 632

✓ Stop supply of goods from all the channels in case of default to Bank / FI.
✓ In case of default, company will support the bank in recovery of dues on best effort basis.
✓ Company will arrange to divert the stocks of the defaulted Dealers/Distributors, to other
Dealer/Distributor for eventual sale and recovery on best effort basis as per the prevailing
market price.
✓ Any dues to the Dealer will be passed on to the Bank by Company in case of default by the
Dealer after satisfying the dues to them.
All the tie ups in e-DFS portfolio have been classified into 4 pricing categories (As given below).
Appropriate authority has approved the revised interest rates to all these category of tie ups, as given
in the table below.
IM A B C D
Category
With One Year One Year One Year IM specific rate
Collateral MCLR + MCLR + MCLR + as per respective
Security 0.55% 0.85% 1.00% tie up.
Without One Year One Year One Year IM specific rate as
Collateral MCLR + MCLR + MCLR + per respective tie
Security 1.00% 1.30% 1.60% up.
CGM of Circles/ CCG will have the discretion to offer (in case of individual dealer accounts, on
case to case basis), a finer rate of interest up to 35 B.P., over the applicable rate for the tie up,
indicated in the above table.
Latest E-DFS revised guidelines
Sr. Paramet Revised Instructions
No ers
1 Adhoc Limit i) Interest on Adhoc limit will be applicable as under.
Rate of
Interest With Without
Collateral Collateral
Rate of interest X% Y%
Adhoc X+1 % Y+1 %
Rate of Interest
X & Y rate of interest are applicable rate of interest.
ii) Further even if the regular limit has been sanctioned with collateral
security, dealers will have an option to avail Adhoc limits, without
collateral. ROI may be charged on Adhoc limit for without collateral
portion at a higher rate of interest i.e. Y+1%
2 Coverage Limits up to Rs.1.00 crores, can be covered under CGTMSE as per e-
of e-DFS Circular guidelines Circular No.: NBG/SMEBU-CGTMSE/70/2017 – 18
as per Dated: Sat 31 Mar 2018 and NBG/SMEBU / CGTMSE/42/2018-19
CGTMSE DATED 01.12.2018. CGTMSE coverage will be deemed to be Collateral
norms backed and ROI with collateral will be applicable in such cases. Annual
Guarantee Fee will be borne by the dealer/ borrower.
3 Repayment We propose to insert this clause in the term sheet-
Clause “The dealers will route the credit proceeds of the goods sold by them, if
any ,through the loan account .The amount received on account of sales
Page 410 of 632

relating to any invoices shall be credited immediately (in the e-DFS
account), without any delay, notwithstanding the availability of credit
period and/ or grace period”. In case dealer does not deposit invoice- wise
sales in the e-DFS account it may be treated as diversion of funds and
penal interest of 0.50% p.a. will be charged to the e-DFS account”.
This clause has to be incorporated in the Standard documents at the time of
renewal.
SCFU have issued different circular for different tie ups with Industry Majors. We have to
refer to the respective circulars for details like credit period and grace period, security and
interest rate details.
Page 411 of 632

SBI CONSTRUCTION EQUIPMENT LOAN (CEL)
Name SBI Construction Equipment Loan

Target group • Existing Construction Equipment Owners & Contractors Other Captive
Users: Mine Owner, Port Operator
Constitution • Individual/Proprietor/Firms/Companies/Trusts/Societies.
Purpose • Purchase of new Construction Equipments.
(Mining, Material Handling, Earth Moving, etc.)
Facility • Term Loan
• Drop line Overdraft facility
Eligibility • Minimum 3 years experience in business.
Criteria • Income Tax Assessee (Personal & Business).
• Satisfactory track record and has never been in NPA/SMA2 category.
• CRA/CUE of SB9 and above.
• Unit should have recorded profit during the last FY.
• Gross DSCR for last year is above 1.25%, in case of existing units.
• Retail CIR score of each of the promoters is above 680.
• Multiple Banking arrangement permitted, subject to compliance with the
norms applicable to MBA.
• Average of Sales/Revenue growth for last 3 years is positive.
• Percentage of default in Current Balance over Total Current Balance
reflected in Commercial CIR is below 10%.
• The customer will not be eligible, if more than 2 instances of 30 days past
due in last 12 months appear in the CIBIL-CIR. (Not applicable, if
commercial CIR is not appearing in CIBIL records)
Loan Amount Minimum: above Rs. 10 lacs
Maximum : Upto Rs. 10 crores
Drawals against aggregate limit sanctioned for purchasing vehicles can be
permitted up to 12 months from the date of sanction, beyond which unutilized
limit would lapse.
Interest rate
1) Limit above Rs. 10 lacs to below Rs. 25 lacs: MCLR (1yr) + 3.60%
2) Limit of Rs. 25 lacs and above to Rs. 10 Cr: No Change
CRA /CUE based pricing as below:

SB/CUE 1 to 5: MCLR (1 Yr) + 1.50%
SB/CUE 6 to 9: MCLR (1 Yr) + 2.50%
Page 412 of 632

✓ Powers to extend 25 bps concession given to CGM of the Circle.
Margin • Margin- Minimum 10%, where collateral is available.

• Margin-Minimum 15% , where no collateral is available (i.e.
CGTMSE/CGSSI covered loans.
Repayment • Tenor of the loan should not be more than 5 years and no deviation
in this regard to be entertained.
period
• Repayment should normally be through EMIs
• Customized repayment can be allowed depending on cash accruals.
Processing fee • 50% of the applicable upfront fee, currently the following upfront fee/
processing fee is to be collected:
Pre-Payment • For Individuals: NIL
• Others:
Fee
NIL, if prepaid on the MCLR Reset Anniversary date
ii. If prepaid ‘in between’ the MCLR reset date & date of limit
disbursement, 1% of the outstanding amount for the remaining period up to
anniversary date. Example:
Date of limit disbursement : 1/05/2018 MCLR reset anniversary date :
1/05/2019
Case 1:
Date of Pre Payment : 01/05/2019 (MCLR reset anniversary date) Pre
Payment Penalty : Nil
Case 2:
Date of Pre Payment : 01/09/2018 (8 months before MCLR reset
anniversary date) o/s amount as on date of pre -payment :Rs.1.00 cr (as on
01/09/2018)
Pre Payment Penalty : Rs.66,667/-
• [(Rs.1 cr) x (1/100) x (8/12)]
Penal Interest • 2% on the entire outstanding for the period of default.
Primary • Hypothecation of the Equipment (s) financed by the Bank. Registration of
charge with RTO is to be ensured wherever applicable.
Security
Collateral • Minimum 25%collateral. (In case, the loan is covered under
Security CGTMSE/CGSSI, no collateral security to be insisted upon, however, pricing
as mentioned above will be applicable).
• CGM of Circle can reduce the collateral requirement to 15% on business
considerations.
• Tangible collateral should be immovable property. Unencumbered
existing construction equipments should not be reckoned as collateral.
Guarantor • For individual/proprietors, third party guarantees to be insisted upon.
• In other cases, personal guarantee from the Promoters/Partners/Directors of
Page 413 of 632

the Unit will be mandatory. However, personal guarantee of Independent
Directors & Professional Directors need not be insisted upon.
Assessment • Term loan as per the requirement.
• Disbursements to be made within the 12 months from the date of sanction.
Commitment • NIL
charge
Insurance • Comprehensive Insurance with endorsement in favor of SBI as “loss
payee”
Other Points • SI / ECS to be obtained for entire repayment period at the time of
disbursement.
• Units with work orders on hand from reputed Industry Majors be
given preference. Wherever possible, escrow mechanism to be put in place.
Products to be • List of indicative equipments for which loan can be given: Excavators,
Backhoe Loader, Tippers/Dumpers, Transit Mixer, Compactors, Wheel
financed
loaders, Road Rollers, Fork Lift, Rock breakers, Crushers, etc.
• However, the list is indicative and Circles can finance other equipments
that can be used for construction activity.
Marketing • Circles on their own can source the quality business through various
promotional activities.
Appraisal • Form S-2 (for Rs.25 lacs to Rs.1 Cr) and form DDS (for Rs.1 cr and
above) will be used along with annexure for compliance with the scheme
parameters.
Restriction of In addition to SME Intensive branches, SMEC/ RASMEC, RACC: financing
Financing under the Product may also be extended by Scale –IV and above incumbency
Branches Branches in Non-BPR Centers, as per delegation of financial powers, where
there is no presence of SME Intensive Branch/RACC
Page 414 of 632

CORPORATE LOAN
Sr. Parameters Guidelines

No
1 Name of the product Corporate Loan
2 Nature of Facility Term Loan
3 Eligibility criteria ✓ Borrowers having CRA/CUE rating of SB1 to SB
5, if External Credit Rating is not available.
(In case of CRA & ✓ Borrowers with CRA/CUE rating of SB 6 to SB 10 or
CUE, CUE rating having
will be applicable) ✓ ECR of Investment Grade (i.e. BBB-) & better.
✓ Borrowers with satisfactorily conducted accounts and
should not have slipped even to SMA 1 during the last one
year period.
✓ Maharatna and Navaratna PSUs irrespective of
Credit Rating.
✓ ECR mandatory for exposures above Rs 50 crore.
✓ Only existing customers with minimum of three
years’ relationship with the Bank are to be considered..
4 Purpose Loan(s) can be considered only for the following
specific purposes:
• Shoring up of NWC: At any given point of time, for shoring

up of NWC, only one Corporate Loan can remain
outstanding. The following financial ratios have to be
complied with:
i. i. FACR minimum of 1.25 (To be calculated on WDV
basis, including the proposed loan. Tangible Collateral Security
is to be considered while arriving at FACR),
ii. DSCR minimum of 1.20 and
iii. Interest Coverage Ratio minimum of 1.50.
No deviation is to be permitted in respect of the above.
• Ongoing Capex: Exposure under the scheme is to be

capped at 20% of Gross Block of the Borrowing unit.
• Repayment of unit’s high cost debt.
• Research and Development expenditure (CL for R & D
expenses is to be capped at maximum 20% of fixed
assets).
• Implementing Voluntary Retirement Scheme.
• Infusion of equity in wholly owned Overseas Subsidiary/ JV:
• CL may be extended for infusion of equity in wholly
owned Overseas Subsidiary/ JV to those Corporates with
Page 415 of 632

minimum ECR of AA- & better and internal rating of SB 9 &
better.
• All the guidelines of RBI regarding investments in JVs and
Subsidiaries abroad are to be complied with. The borrowings
including guarantees issued shall not exceed four times the
TNW of the parent company investing abroad as per the
latest Audited Balance Sheet.
• Infusion in wholly owned Subsidiary/ JV should be in the
proportion of a maximum of 50% through Debt and
balance from Borrower’s own sources.
• The shares acquired through CL shall be pledged to the Bank
within the limits permissible under Section 19(2) and Section
19(3) of Banking Regulation Act, 1949.
• Any inflows from JVs / Subsidiaries are to be examined, if
considered as source of repayment.
• The facility shall be extended judiciously after

ascertaining the actual need of the Borrowing entity.
5 Quantum of loan Minimum: Rs 50 lacs
Maximum: Rs 10 cr for Non-Corporate
• For Central Govt PSUs enjoying Maharatna, Navratna status
and Oil Marketing companies owned by Central Govt. : As
per RBI Pridential exposure Norms
• Cap for Corporate borrowers as per Substantial Exposure
norms under Loan Policy:
The above ceilings are further subject to Normally Permitted
Lending Limit (NPLL) of the Borrower as per RBI’s
Enhancing Credit Supply to Large Borrowers through Market
Mechanism
6 Pricing Pricing to be approved by respective Sanctioning Authority
within the delegated powers.
7 Interest Reset As per the extant instructions for Term Loans, reset of interest
rate shall be as per the tenor of MCLR.
8 Repayment Maximum repayment period (including loans for shoring up of
NWC) will be 10 years or the useful life of fixed assets
(wherever applicable), whichever is lower, including
moratorium period of up to one year.
The repayment schedule may be fixed with quarterly or half

yearly instalments. Uneven or bullet repayments are also
permitted, if the cash accruals justify so.
9 Security Primary:
Page 416 of 632

First charge on assets created from financial assistance.
WCTL for shoring up NWC will be secured by extension of first
charge on current assets.
Collateral:
1. First / Paripassu charge on fixed assets.
2. Personal Guarantee of Promoters/ Partners/ Proprietor.
Pledge of Promoters shares to be explored and obtained
wherever possible.
10 Assessment & As applicable to term loans.
Monitoring
11 Sanctioning As per delegation of financial powers determined based on
Authority aggregate exposure inclusive of the proposed Corporate Loan.
12 Reporting of Irregularities, if any, in the Loan account on non-payment of
Irregularity interest / instalments are to be reported as per the authority
structure.
The report shall be submitted within 10th of the succeeding

month (in case of total exposure of Rs 2,000 cr and above
from the Banking system, irregularity report is to be submitted
immediately) and subsequently, at monthly intervals, till the
account is regularized.
13 Number of loans New Corporate Loan (when an earlier Corporate loan
sanctioned is outstanding), may be considered for Sanction,
subject to the following:
a) Number of Corporate Loans outstanding in the name of a

Borrower at any point of time, to be restricted to two loans. If
the loan is availed for shoring up of NWC, the number of
outstanding Corporate Loan not to exceed one at any given
time.
b) The loan should be strictly for genuine commercial purposes

in line with the regular business activity of the Customer.
c) However, in case of irregularities in the existing CL(s) on
more than 3 occasions in aggregate in the preceding 12
months, no new Corporate Loan to be considered even if the
borrower meets the eligibility criteria as set out under (3)
above.
14 Disbursement Each disbursement to be permitted only by Branch Head and
end use of funds to be ensured. A certificate from the
Chartered Accountant to be obtained to this effect and held on
Page 417 of 632

record. Relative Tax Invoices, Bills,Receipts, etc. are to be
obtained wherever applicable.
15 Deviations Deviation, if any, may be permitted only in respect of
Eligibility Criteria.
The authority for approving such deviation is CCCC.
Page 418 of 632

SME OPEN TERM LOAN (SME-OTL)
Product Consolidated Revised
Parameters
Nature of Pre-approved term loan facility with option of multiple
Product disbursements for multiple purposes
Target Group • All units under manufacturing sector and;
• Under Service Sector: Healthcare Industry )Hospitals, Doctors,
Pathological Labs and Nursing Home(, Hospitality Industry )Hotels,
Restaurants, etc(, and Transport operators with minimum 25 vehicles
Eligibility • The product will be extended upto CRA rating of SB-6/ CUE-6 or ECR
Criteria of BBB and above
• However, in respect of customers banking with us for more than 5 years

and having satisfactory track record i.e. the account has not slipped to
category SMA-1 and below in the previous 12 months )irregular for 31 to
60 days( will also be eligible for finance under Open Term Loan subjected
to:
i( CRA rating of SB-8 / CUE-8 & above, or
ii( ECR of BB & above
• Non-customers shall not be eligible
Purpose Any genuine commercial purposes in the same line of activity, with
regular business, of the customer. These would include:
• Expansion and modernization

• Substitution of high cost debts/high cost term debts of other banks/FIs
• Design and introduction of new-layouts in the factory to enhance
productivity
• Up gradation of technology & energy conservation schemes/
machinery
• Acquisition of software, hardware, consumable tools, jigs, fixtures,
vehicles, equipment, furniture upholstery, etc.
• Acquisitions of ISO & other similar certifications
• Visits abroad for acquiring technology, finalizing business deals,
participating in exhibitions/fairs for market promotion, etc.
• R&D activities of the units in overall business development
objective
• The above list is only illustrative. The spirit of the guidelines should be
followed and loans for any legitimate requirement connected with the
business activity of the applicant borrower )s( should be considered.
Page 419 of 632

Quantum of • Both manufacturing and services enterprises: 20% of total limit
loan )Min / sanctioned with a maximum of Rs. 8 crores
Max(
For expansion, modernization, technology up-gradation purposes:
i( For the purpose of creation of tangible assets: 20% of total limit
sanctioned with a maximum of Rs. 8 crores.
ii( For business development expenditure incurred for creation of

intangible assets applicable to both manufacturing and services sector:
20% of total limit sanctioned with a maximum of Rs. 2 crores
Rate of As per the credit rating of the borrower on floating rate )one year( basis
Interest linked to MCLR.
Margin )%( Margin at 25% uniformly
Primary Hypothecation/pledge of the assets proposed to be purchased out of term
Security loan
Collateral • Extension of charge over current assets, fixed assets, and other existing
Security collateral if any
• Obtaining additional tangible security such as immovable
property, bank deposits, etc., is to be explored wherever possible.
• Additional collateral should be obtained to maintain the collateral
coverage )%( at the existing level.
• In all cases personal guarantees of
proprietors/partners/promoters to be invariably obtained
• In case of corporate, obtaining pledge of promoter’s equity
should be examined
Repayment Repayment period generally not to exceed 5 years. Sanctioning
Period authority may selectively consider repayment period upto 7 years where
considered necessary or as permitted under Loan Policy.
Currency of 12 months from the date of sanction
sanction
Authorized SME intensive branches equipped with RM-ME/RM-SE and/or
Branches branches headed by officers in scale-IV and above
Assessment As applicable to term loan
& Monitoring
Discretionary As per extant delegation of powers applicable to term loan
Powers
Disbursal of Open Disbursement of the facility would be done by the branch/
Term Loan SMEC/RASMEC, on demand from the borrower, within the currency of
sanction, subject to scrutiny of basic financial information. However the
total amount disbursed will not exceed the overall limit sanctioned and
multiple withdrawals also can be done only within 12 months of the
original date of sanction of loan.
ii. Scrutiny of financial statements including FFR, if applicable, and
satisfy himself about financials, such as TOL / TNW, DSCR, in line with
projections assumed at the time of sanction.
iii. The documentation is to be obtained upfront for the sanctioned open
Page 420 of 632

term loan limit, in the usual manner.
iv. The limits are to be utilised within 12 months of sanction. If the limits
are not utilised or only partially utilised within twelve months of sanction
the limit or unutilised portion of the limit as the case may be, will lapse
and should not therefore be disbursed.
v. The branches can disburse the term loan for each component of sanction
listed under the “purpose” column mentioned above as sub limits.
vi. Such disbursals can be treated for accounting purposes as though they
were individual loans
vii. The period of repayment, will commence from the date of the first
draw down for each facility.
viii At the end of the twelfth month (from date of sanction) the branch
has to take stock and cancel the unutilised portion of term loan limit.
ix. Where multiple disbursals are done, the installments for each purpose
for drawal should be agreed to between the Bank and the borrower, by
means of exchange of letters between the Bank and the borrower. It may
however, be noted that the maximum repayment period will be restricted
to the period as per the terms of sanction of the loan.
x. The letters will form part of security documents and should be kept
attached to the General agreement for term loan with suitable legends
inscribed in the letters so exchanged. The legend could read as “This letter
forms part & parcel of the General Agreement for term Loan executed by
M/s. XYZ on --/--/----/” and authenticated by the authorised persons of the
borrower and the Bank.
xi. Documentary evidences regarding end use of funds should be
insisted upon and retained with the security documents for future
verification.
Page 421 of 632

SME Marble Plus
S. Parameters Features
No.
1 Product Name SME MARBLE PLUS
2 Target Group All SME units engaged in Marble and other stone activity such
as manufacturing, processing, carving, polishing, mining and
also trading.
Mining License/ other regulatory approvals to be place for units
to be eligible under the product
3 Eligibility 1. Existing and new units with credit rating SB-9 /CUE-9
and better.
2. Takeover of good units- Hurdle Rate for takeover of the
account will be SB-7/ CUE-7 subject to adherence of take over
norms as per Bank’s Loan Policy.
4 Purpose of loan To provide hassle free finance to the Marble, Flespar, Quartz
and other Stone Units for financing their multiple requirements
including normal working capital/ capital expansion (capex)
requirements/ other requirements related to their business
activity.
5 CRA/CUE Hurdle New Connections/ Enhancement: SB-9 /CUE-9
Rate Takeover: SB-7/ CUE-7
6 Type of facility Cash Credit / Term Loan / Dropline Overdraft
Non Fund Based Limits
7 Quantum of Minimum: > Rs. 10 lacs
Loan Maximum: Rs. 10 crores
8 Margin (%) Working Capital: Stocks: 25%; Receivables: 40%
Term Loan: 25%
LC & BG: Min. 25% Cash Margin
9 Rate of Interest CUE based Interest Rate linked to Collateral Coverage as
under:
CRA/CUE > 100 % >75% to 100 % >50% to 75%
SB/CUE 1-5 MCLR +1 MCLR +1.25 MCLR +1.50
SB/CUE6-7 MCLR+1.5 MCLR+1.75 MCLR +2
SB/CUE 8-9 MCLR +2 MCLR +2.25 MCLR +2.75
SB/CUE 10 MCLR +3 MCLR +3.25 MCLR +3.75
MCLR to be taken as One Year MCLR
Note:
For accounts covered under CGTMSE, Rate of Interest
applicable would be the Rate mentioned under Collateral
Cover > 50% to 75% in above table. Customer has to bear the
Annual Guarantee Fee as prescribed under CGTMSE guidelines
If the account turns to SB 10/ CUE 10 upon renewal/ review,
Page 422 of 632

then interest rate as mentioned in above table, will be applicable.
If the account turns to SB 11/ CUE 11 and below upon

renewal/ review, then Card Rates, as issued by CPPD from time
to time, will be applicable.
10 Repayment Term Loan / Dropline OD: Max. 84 months (including an initial
Period moratorium not exceeding 6 months) with Annual Review
Sanctioning authority may fix the repayment schedule on

monthly/quarterly/half early basis depending upon the cash
flows.
Working Capital: Annual Renewal

11 Security Primary Security: Working capital: Hypothecation/Pledge of
stocks, book debts and other current assets.
Term Loan: Charge by way

of hypothecation/pledge/mortgage of entire assets created out of
bank finance.
Minimum 50% of loan amount. Tangible SARFAESI enabled
collateral security (Non-agricultural property) belonging to the
borrower or guarantor. The tangible collateral security refers
strictly to realizable value of Collateral security. It should be
Equitable/Registered mortgage of non-encumbered
residential/commercial/industrial property in the name and
possession of the mortgagor. Third party collateral securities from
close relatives may be obtained.
No Second Charge or Pari-Passu charge will be extended to

other Bank/FI.
Eligible units may be covered under CGTMSE as per
CGTMSE guidelines (Trading units: upto Rs. 1 Cr; Services &
Mfg units: up to Rs. 2 Cr). Customer has to bear the
Guarantee Fee.
12 Stock Statement Monthly
13 Processing Unified Charges:
Fee/Upfront Fee,
Inspection 1% of the Sanctioned limit
Charges,
Equitable (Min: Rs. 10,000/-; Max: Rs. 50,000/-)
Mortgage
Charges, (The charges should be recovered manually, as the functionality is
Documentation currently not available in CBS for Unified Charges)
Charges
Page 423 of 632

14 Assessment of Loans up to Rs. 5 Cr: (Working Capital for MSME units)
Limit
Minimum 25% of the annual projected turnover
Minimum 30% of the annual turnover for units with min. 25%
of sales registered through digital transaction (as per e-Cir
No. NBG/SMEBU-WCDL/98/2016-17, dt. 31.03.2017)
For Trading Units: Minimum 15% of the annual projected

turnover
Loans above Rs. 5 Cr to Rs. 10 Cr: (Working Capital) As per

Assessed Bank Finance (ABF)
Term Loan: 75% of project cost for all loans
15 Insurance 1. Insurance is waived for Primary Security subject to obtention

of Insurance indemnity.
2. Insurance of other security/property, to be obtained with
Bank clause incorporated therein.
In case of term loan, comprehensive insurance for market value of

assets acquired out of Bank loan is to be obtained.
16 Inspection Quarterly for regular accounts.
Monthly for SMA1/ SMA 2 accounts, till the account turns

regular
17 Review/ As prescribed in Loan Policy from time to time
Renewal of
Advance
Page 424 of 632

Healthcare Business Loan
S.No. Parameters Consolidated Features

1 Target Group Hospitals/ Nursing Homes
Diagnostic Centres and Pathology Laboratories
Eye Centres, ENT Centres, Small and Medium size specialty
clients like skin clinics, dental clinics, dialysis centres, endoscopy
centres, IVF centres, poly clinics, X-ray labs etc.
Qualified Medical Practitioners
2 Purpose To finance qualified medical practitioners for setting up clinics.
For purchase of medical equipment including ancillary
equipment (For dentists, the loan also covers dental implants besides
equipment; for orthopaedists, the loan also covers various
replacements/ implants for hip/knee/shoulder/spine etc.)
For setting up Hospitals/ Nursing Homes, diagnostic centre,
pathology labs, drug store, ambulance, computers, vehicles,
physiotherapy centres, ayurvedic centres, acupressure centre, yoga
centre, other therapy centres under tie-up with/ employed qualified
doctors
For Expansion/renovation/ modernization of existing premises.
3 Eligibility Individuals/ Proprietorship Firms/ Partnership Firms/ Corporates/
Criteria Trusts (with powers to borrow)
Applicant should have minimum 2 years of operations of the
diagnostic centre, pathological lab, hospital, nursing home, etc.
irrespective of constitution.
In case of financing to Hospitals/ Nursing Homes, the promoter should
have required minimum qualification in the relevant discipline; like
MBBS, BDS, BHMS etc.
Should have the required approvals/ registrations from the
statutory/ regulatory authority.
ITR is mandatory in case of all existing units operating for more than
one Financial Year
Deviation Approving Authority:
In case of sanctions by CLCC and below, GM (Network) will have
the discretion to approve deviations in the eligibility criteria.
In case of sanction by RCCC and above committees, CGM
(Circle) will have the discretion to approve deviations in the
eligibility criteria.
Note: The proposals falling under the purview of Stand-Up India
Scheme (SUI) may also be processed under the scheme to pass on the
benefits of the scheme. However, reporting to be done on SUI portal.
For opening of accounts for these loans in CBS, Scheme code for SUI to
Page 425 of 632

be used while Product code to be used that of Healthcare Business Loan.
4 Nature of Term Loan and/or Cash Credit
Facility
Cash Credit facility is capped at Rs. 2 Cr only
Capex LC may be provided in respect of domestic/ overseas
suppliers within overall Term Loan exposure
5 Quantum of Minimum: Above Rs. 10 lacs
loan Maximum: Up to Rs. 20 Crores
Cash Credit facility shall be given for maximum limit of Rs. 2 Cr
only, for meeting recurring expenses.
6 CRA/ CUE SB/ CUE- 9. No deviation is to be permitted in this respect.
Hurdle Rate
7 Margin Term Loan - 15%
Cash Credit - 25%
8 Pricing
For loans to MSME units, Interest rate will be linked to External
Benchmark Based Lending Rate (EBLR).
For loans to Non-MSME units, Interest rate will be linked to One
Year MCLR.
o Limit above Rs. 10 lacs to below Rs. 25 lacs:
EBR/ One Year MCLR + 2.50%
o Limit of Rs. 25 lacs to Rs. 20 Cr: CRA/CUE based Pricing as under:
SB/CUE 1-5: EBR/ One Year MCLR + 2.00%
SB/CUE 6-9: EBR/ One Year MCLR + 2.50%
Concessions:
For borrowers availing one or more personal loans (Home

loan/Car loan) from SBI, with no default history for the previous
2 years, 15 bps concession in pricing will be given.
In case the collateral security offered by the borrower is 40% and
above, 25 bps concessions in pricing will be given.
In case borrower is eligible under both categories, 30 bps
concessions in pricing will be given.
Note: During renewal/ review of limits, if CRA/CUE rating goes below
SB/CUE- 9, then all concessions to be withdrawn from the due date of
renewal.
9 Primary
Hypothecation/mortgage of the assets financed by the Bank.
Security
10 Collateral Loans up to Rs. 2 Cr:
Security
Nil collateral, if covered under CGTMSE/CGSSI.
Page 426 of 632

Guarantee Fee to be borne by borrower.
For coverage under CGTMSE, partial collateral security
model is also applicable as per extant CGTMSE guidelines.
However, If the borrower is not willing to pay the guarantee fee or not
willing to cover the exposure under CGTMSE/CGSSI, then Min.
25% SARFAESI enabled collateral security needs to be obtained.
Loans above Rs. 2 Cr to Rs. 20 Cr:
Minimum 25% SARFAESI enabled tangible collateral security.
Discretion:
CGM of the Circle will have discretion to reduce collateral security
coverage up to 15% on a case to case basis on business
considerations.
11 Guarantor In all cases (other than individuals and proprietary concerns),
personal guarantee of the promoters/partners/directors of the unit will be
mandatory.
For individual/ proprietary concerns, other than doctors, third party
guarantee is mandatory, except for CGTMSE covered loans.
12 Repayment Cash Credit: Yearly Renewal. Repayable on demand.
Period
Term Loan:
Maximum period of 10 years including moratorium period.
Maximum moratorium 12 months (6 months in case of purchase of
equipment only)
Annual Review to be done
Repayment can be equated or customized as per the cash accrual
of the unit.
Interest to be serviced on a monthly basis during the moratorium period
13 Upfront Fee/
50% concession on card rates as per advance related service charges
Processing
e-Circular, issued by CPPD from time to time
Fee
14 Pre-Payment In case of individual borrower & MSE borrower: Nil
Penalty For others:
In case of pre-payment through internal accrual/own fund: Nil
In all other cases: 2.00% p.a. of the prepaid amount
15 5% p.a. over and above the existing rate of interest on overdue
Penal Interest
amount for the period of default (as per CPPD e-Circular issued from
time to time)
16 Documentation As per SME documentation
17 Equipment All Medical Equipment including ancillary equipment may be
Covered covered under the product in case of financing of medical
equipment
Page 427 of 632

18 RMD RMD guidelines will be applicable
Guidelines
19 Inspection Half yearly for regular accounts and monthly for accounts in SMA
category till account turns regular.
For collateral security, inspection to be done on yearly basis at the time
of review
20 Inspection 50% concession on card rates as issued by CPPD from time to
Charges time.
21 Disbursement Operating units can make multiple disbursements as per
requirements subject to:
For buying equipment and expansion/renovation/ modernization of
existing premises: Over a period of 12 months from the date of
sanction.
For setting up clinics, nursing homes, pathology labs, drug stores and
other infrastructure: Over a period of 24 months from the date of
sanction.
22 End Use of For ensuring end use of funds, the disbursement shall be made directly
Funds to the Equipment Supplier towards Equipment being financed, in case of
equipment financing.
In case of reimbursement, receipts of payments need to be obtained and
verified with the supplier.
23 List of The list of indicative manufacturers is mentioned as under.
indicative However, the equipment from other manufactures may also be
manufacturers considered as per genuineness of the equipment being financed.
for medical
GE, Philips, Siemens, Fuji, Carl Ziesss, BPL, Caresteam Health, Bosch
equipment
& Laumb, Vision X Ray, Hitachi, Toshiba, Lrbis, Janak/Metalbeds,
AGFA, Allengers, ALCON, AMO, Drager, Elekta, Esaote, Fresenius,
Samsung, Johnson & Johnson etc.
Page 428 of 632

SME Assist
S. No Parameter Revised
1 Facility Working Capital Demand Loan (WCDL)
2 Loan Amount i) Limit:
a) Maximum 20% of the existing fund based working capital limit
or
b) 80% of Input tax claim due on purchases
Limit: lower of a) & b) above.
ii) The above limit is over and above the Assessed Bank Finance and
SLC, if any.
iii) Chartered Accountant’s certificate to be obtained certifying the

amount of pending input tax credit under GST upto the month for
which returns have been filed (supported by electronic credit ledger
from GSTN).
Note: i) Chartered Accountant (CA) has to get the Unique Document

Identification Number (UDIN) of the certificate issued through UDIN
Portal (https://udin.icai.org). This UDIN should be mentioned on the
certificate issued by the CA and details to be verified on UDIN Portal
(https://udin.icai.org) by the RM (SME).
iv) The proposed ad hoc WCDL under SME Assist and the existing
working capital limits have to be covered by the advance value of
stocks and receivables plus outstanding input tax credit claim.
v) The ad hoc facility while granting to units in SMA-2 category need

to be scrutinized for regular cash flows and such units where cash
flows are regular only need to be considered.
3 Eligibility i) CRA rating SB-10/CUE-10 and better.
ii) Account should be standard.
iii) Satisfactory conduct of the account
4 Interest Rate As applicable to regular Cash Credit limit
5 Security i) Primary: Hypothecation of stocks and receivables.
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ii) Collateral: Nil
6 Repayment Moratorium: 3 months
Repayment:
a) 3 months (one bullet repayment immediately after moratorium)
OR
b) total 12 months (moratorium of 3 months, repayment in remaining
9 monthly instalments)
Interest to be serviced every month.
Drawing power to reduce in line with equated monthly instalments
every month after moratorium period is over.
7 Documentation SME 1 (letter of arrangement) and SME 4 (Supplemental agreement
of Loan cum Hypothecation)
8. Processing Upto Rs 50 lakhs- Rs 5000 (flat)
Fee Above Rs 50 lakhs- Rs 10,000 (flat)
9 Sanctioning WCDL facility to be sanctioned by all the Branch Managers of SME
Authority intensive branches which are headed by CM/AGM. For
other branches AGM of the region or AGM SMEC/ RASMEC
will be sanctioning the loans.
S.NO WCDL Limits Sanctioning Authority
1 Loan Upto Rs 0.50 CM of SME Branch
Crores
2 Loan upto Rs 1.00 AGM of SME Branch / RBO / SMEC/
crore RASMEC
3 Above Rs 1 Crore As per existing delegation of financial
power
However, as per the total exposure condition under the existing
scheme of delegation of financial powers, these sanctions wherever
applicable, should be put up to the appropriate authority within one
month for validation of sanction.
10 Other Invoices under Letter of Undertaking (LoU) in case of exports will
Conditions not be eligible under the product
Not more than 2 loans under the product shall be outstanding at a
given point of time
11 Validity of Till further instructions
Product
Page 430 of 632

SME Car Loan
S.No. Parameter Feature

a. Target Group Existing MSME/ Non-MSME Units only, having borrowing
arrangements with us. Loan shall be in Unit’s Name only.
b. Purpose To provide car loan in the name of MSME/ Non-MSME units,
having borrowing arrangements with the Bank for purchase of only
new cars viz. passenger cars, jeeps, multi utility vehicles (MUVs) and
sports utility vehicles (SUVs) etc. for use by its promoters / partners /
directors / employees.
Financing of Demo Cars in not permitted under the product.
c. Nature of Term Loan
Facility
d. Eligibility All MSME/ Non-MSME units, having borrowing arrangements with
us, are eligible under the product, subject to account not being in SMA
1 & worse category during last 12 months.
It has to be ensured that the eligible units, wherever applicable, have
obtained Legal Entity Identifier (LEI) number as per RBI’s extant
instructions (vide RBI/2017-18/82
DBR.No.BP.BC.92/21.04.048/2017-18 dt. 02.11.2017)
Hurdle Rate:
• CRA/CUE Hurdle Rate is SB/CUE-10, for units having existing
aggregate limits of > Rs. 50 lacs.
• For units with existing aggregate exposure of Rs. 50 lacs and
below, the criteria of CUE-Lite may be applicable with hurdle rate
of CUE-10. However, if CUE-Lite is not available, then the SME
Car Loan may be extended based on satisfactory conduct of
account.
e. Loan Amount 10% of the existing Sanctioned Limits of the unit (both Fund
Based & Non-Fund Based), subject to maximum loan amount of
Rs. 3.00 Cr
Note:
• There is no cap on number of vehicles to be financed, as long as the
above criteria is met.
• Vehicle should be registered in the name of unit only.
f. Authorized SMEC/ RASMEC/ RACC/ MSME Branches/ SME Intensive
Branches Branches
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(Upon disbursement of SME Car Loan, the documents shall be
parked at the main financing Branch of the unit)
g. Rate on Three Years MCLR + 0.75% (Fixed)
Interest
h. Assessment Loan amount to be assessed at maximum 10% of existing
Sanctioned Limits of the unit (both Fund Based & Non-Fund Based
Limits), subject to maximum loan of Rs. 3.00 Cr, as per edibility
criteria in point no. (d)
Note:
During sanction/ renewal, based on discussion, operating units may
consider sanction of pre-approved SME Car loan depending on the
future requirement of the unit in the next 12 months, subject to eligibility
norms and satisfactory conduct of account. Processing Fee for such
pre-approved loans shall be recovered at the time of disbursement of
each SME Car Loan.
i. Security Primary Security:
Only hypothecation of the vehicle(s) purchased will be taken as a
security.
• This hypothecation charge must be mentioned in the books of the
RTO.
• No additional security including the charge on the existing
collateral will be stipulated from borrowing units.
• Vehicle should be registered in the name of unit only.
• Operating units should obtain and keep the following with loan
documents after making necessary entry regarding vehicle
particulars in LOS/LLMS/CBS/Appraisal Format:
i. Copy of vehicle registration certificate with Bank‘s
charge noted therein
OR
ii. Extract from vahan.nic.in for the same
OR
iii. Form B extract from R.T.O. for the same
• Further, the verification of vehicle registration details from the
website ‘vahan.nic.in‘ should be made in all car loans after 30 days
from the date of disbursement. The information sheet printed from
the site duly verified by Bank official with full signature should be
kept along with loan documents
• Personal Guarantee of the promoter/ partners/ directors to be
obtained, as applicable to regular exposure
Collateral Security: Nil
Page 432 of 632

j. Margin Loans up to Rs. 10 lacs: 15% of the on road price of the car
Loan > Rs. 10 lacs to Rs. 3 Cr:

a) 15% margin on Ex-Showroom price of the car
Or
b) Margin of 20% on the On Road Price of the car, at the option of the
customer
• Sanctioning authority will have discretion to reduce the margin by
5%.
k. Repayment Maximum Repayment Period of 7 years through monthly/
quarterly instalments.
EMI will be determined on the basis of current rate of interest, and shall
be fixed till tenor of the loan.
Instalment shall be debited on due date from Cash Credit account/
Current account (where unit does not have working capital account or it
is export oriented unit) by way of Standing Instruction / Mandate.
l. Penal Interest 5% p.a. over and above the existing rate of interest on overdue
amount for the period of default (as per CPPD card rate).
m. Prepayment 2% of the prepaid amount in below cases:
Penalty
• The loan is taken over by any other Bank/FI, or
• The loan is repaid before expiry of half of the agreed
repayment period, or
• Partial repayment is being made in the 1st year.
However, no pre-payment charges in below cases:
• If the loan account is foreclosed for taking a fresh car loan for new
car from Bank.
• If borrower is MSE Borrower as per commitment to BCSBI.
n. Processing When loans are sanctioned: 0.50% of the loan amount (subject to
Fee min. of Rs. 500 and max. of Rs. 10,000 plus applicable taxes)
When loans are rejected: 25% of the ‘Processing Fee’ will be
retained if the application is rejected after pre-sanction survey (subject
to min. of Rs.500/- and max. of Rs. 2500/- plus applicable taxes)
o. Security As applicable under SME documents

Documentation
Page 433 of 632

p. Insurance The vehicle purchased is to be kept comprehensively insured in
the name of the borrower for the market value or at least 10% above
the loan amount outstanding, whichever is higher, and the Bank’s
interest as a hypothecatee should be noted in the certificate of
insurance and insurance policy. A copy of this is to be retained with the
loan documents.
q. Sanctioning a) For loan amount up to Rs. 50 lacs under SME Car Loan:
Authority
For loan requirement up to Rs. 50 lacs under SME Car Loan, shall be
sanctioned by AGM (SMEC/RASMEC) at BPR Centers and Regional
Manager at Non-BPR Centres, irrespective of the overall exposure, and
the same shall be put to the sanctioning authority within a maximum
period of 30 days of disbursement, for ratification of sanction, as
applicable to Schematic Lending.
b) For loan amount above Rs. 50 lacs under SME Car Loan:
For loan requirement above Rs. 50 lacs under SME Car Loan, need to
be clubbed with existing exposure of the unit and accordingly it shall
be sanctioned by appropriate sanctioning authority, as applicable to
Schematic Lending.
r. Mode of Wherever e-DFS facility is availed by the car dealer with SBI, it
Disbursement has to be remitted to the mapped a/c or amount should be transferred
by way of NEFT/ RTGS/ Transfer to the dealer’s account.
s. Inspection a) For Standard Asset accounts periodical inspections are waived

after the initial inspection.
b) Inspection should be carried out immediately 30 days after initial
default. In case of NPA accounts, inspections should be carried out at
quarterly intervals.
b) Inspection register is to be maintained properly.
t. Applicants This facility should not be extended in below cases:
restricted • The unit was in SMA 1 or worse category during the last 12
under this months.
facility • There is internal disparity among the partners/directors of the unit.
• Wilful defaulters, non-cooperative borrowers, compromise
settlement in the past for any other facility or group company
u. Other • SME Car Loan shall be under the tree of the unified CIF of the
Conditions borrowing unit. No separate CIF to be opened.
• It needs to be ensured that the outstanding is adequately
secured by way of primary security during tenor of the loan
• The documents shall be kept at one place at main financing
Branch along with other main documents (subject to
Page 434 of 632

provisions of State Stamp Act not infringed) to facilitate
verification during audit.
• For recovery/ seizure of vehicles, extant instructions issued by
PBBU, from time to time, shall be followed. (Present instructions
applicable vide PBBU Master Circular dt.
01.11.2018 on SBI Auto Loan Scheme)
• In case of loan sanctioned to CCG/ CAG borrowers, then the
extant guidelines as per CCG/ CAG instructions to be followed for
sanction/ follow up/ monitoring in conformity with the product
features of SME Car loan.
Page 435 of 632

Questions on SME Products
1 As per CGTMSE "Primary Security" shall mean :
A The assets created out of the credit facility extended

B Existing unencumbered assets which are directly associated with the project or
business for which the credit facility has been extended
C Both a & b
D Both a & b and Personal guarantee of Board of Directors.

2 Maximum extent of Guarantee cover ceiling where credit facility is above Rs 50 lacs and
up to Rs 200 lacs
A 85% of the amount in default.
B 75% of the amount in default
C 60% of amount in default subject to maximum of Rs.120 lakh
D 50% of amount in default subject to maximum of Rs.100 lakh
3 Annual Guarantee Fee (AGF) for Cash Credit limit and Term Loan sanctioned
under CGTMSE have to be borne by ?
A Government
B Bank
C Equally borne by Bank and borrower
D Borrower
4 Time norm for lodging of application for guarantee cover for a loan sanctioned on
01.01.2018 is
A 31.01.2018
B 31.03.2018
C 30.06.2018
D 30.09.2018
5 Method of payment of Annual guarantee fee for CGTMSE is
A By NEFT/RTGS only
B By Demand Draft only
C Either of A or B
D By online
6 Which is target group of Scheme Stand Up India
A Women
B Scheduled Caste (SC) or Scheduled Tribe (ST)
C Both A & B
D Tribes
7 Minimum and Maximum Quantum of finance available under Stand Up India is
A Minimum – More than Rs. 1 lakhs and Maximum – Rs. 50 Lakhs
B Minimum – More than Rs. 5 lakhs and Maximum – Rs. 2 crore
C Minimum – More than Rs. 1 lakhs and Maximum – Rs. 1 crore
D Minimum – More than Rs. 10 lakhs and Maximum – Rs. 1 crore
8 SBI ASSET BACKED LOAN scheme is available only for finance of
A Current Assets
B Fixed assets
C Both A & B
D Only A
Page 436 of 632

9 Type of loan available under ABL is
A Cash Credit facility
B Non Fund Based facility
C Drop-line Overdraft facility
D All of them
10 Loan to Value ratio (%) in ABL is

A 60 %
B 75 %
C 50%
D 65%
11 Minimum and Maximum Quantum of finance available under ABL is
A Minimum – More than Rs. 10 lakhs and Maximum – Rs. 20 crores
B Minimum – More than Rs. 10 lakhs and Maximum – Rs. 10 crores
C Minimum – More than Rs 5 lakhs and Maximum – Rs. 15 crores
D Minimum – More than Rs. 5 lakhs and Maximum – Rs. 10crores
12 Which type of immovable property not eligible as security under ABL
A Commercial Property
B Residential Property
C Mixed Land use property
D Industrial Property
13 Maximum repayment available under ABL is
A 10 yrs
B 15 yrs
C 08 yrs
D 20 yrs
14 Under SME SMART score scheme a trader can be sanction limits up to maximum Rs --
A < 50 Lakhs
B >10 Lakhs
C >25 Lakhs
D >5 Lakhs
15 What will be the frequency of submission of stock statement in ABL
A Monthly Operational Data cum status of working capital funds statement
B Annually Operational Data cum status of working capital funds statement
C Quarterly Operational Data cum status of working capital funds statement
D Half-yearly Operational Data cum status of working capital funds statement
16 Which option in ABL to be implemented when ABL account is under stress.
A Wake up option
B Run option
C Exit option
D Entry option
17 ABL CRE CP is for
A Residential Projects
B Commercial Real Estate
C Institutional Projects
D None of the above
18 How many days are available under Perfection of security in ABL CRE-CP
A 45 days
Page 437 of 632

B 60 days
C 30 days
D 15 days
19 Maximum Loan financed under ABL CRE CP scheme is
A 25 Crores
B 10 Crores
C 50 Crores
D 100 Crores
20 Assessment of Working Capital limits under ABL CRE CP scheme will be done as per
A Assessed Bank Finance
B Cash Flow of the project
C Turnover method
D Traditional Method
21 Loan to Value ratio (%) in ABL –RH scheme is
A 60 %
B 75 %
C 50%
D 65%
22 Under ABL –RH, which immovable property is not eligible as security
A Open Land outside urban limits
B SEZ Property
C Industrial Property
D All of the above
23 What percentage of invoices are financed under e-DFS ?
A 100%
B 90%
C 75%
D 50%
24 Which statement is not correct with respect to Corporate Loan
A Borrowers with satisfactorily conducted accounts and should not have
slipped even t o SMA 1 during the last one year period.
B ECR mandatory for exposures above Rs 50 crore.
C Only existing customers with minimum of three years’ relationship
with the Bank are to be considered
D At any given time, not more than three Corporate Loans to be
outstanding in respect of a borrower.
25 Which statement is not correct with respect to Open Term Loan
A 20% of total limit sanctioned with a maximum of Rs. 8 crores
B Non-customers shall not be eligible
C For creation of tangible assets 20 % of total limit sanctioned with a maximum
of Rs 3 crores
D Margin at 25% uniformly
26 Minimum and Maximum finance available under SME Marble Plus scheme
A Minimum > 10 Lacs and Maximum is Rs 10 crores
B Minimum > 20 Lacs and Maximum is Rs 5 crores
C Minimum > 20 Lacs and Maximum is Rs 20 crores
D Minimum > 10 Lacs and Maximum is Rs 20 crores
27 Minimum Collateral security norms under SME Marble Plus scheme is
Page 438 of 632

A Minimum 75 % of the loan amount
B Minimum 100 % of the loan amount
C Minimum 125 % of the loan amount
D Minimum 50 % of the loan amount
28 Which statement is correct regarding e-DFS?
A Upto One crores of limit can be covered under CGTMSE
B Upto Two crores of limit can be covered under CGTMSE
C CGTMSE cover is not available for EDFs
D All are incorrect
29 Term Loan facility with option of pre approved and multiple disbursement purpose is
A Corporate Loan
B SME Open Term Loan
C General Purpose Term Loan
D Composite Term Loan
30 Under SME Open Term Loan
i) Non – customers shall not be eligible.
ii) Units under Manufacturing and Service sector are eligible.
A Only Statement (i) is correct
B Only Statement (ii) is correct
C Both Statements are correct
D None of the Statements is correct
31 Under SME Open Term Loan quantum of finance is
A 20% of the total limit sanctioned with a maximum of Rs 8 crores
B 30% of the total limit sanctioned with a maximum of Rs 15 crores
C 40% of the total limit sanctioned with a maximum of Rs 10 crores
D 50% of the total limit sanctioned with a maximum of Rs 5 crores
32 Currency of sanction of SME Open Term Loan is
A 06 Months
B 12 Months
C 03 Months
D 09 Months
33 Under Stand By Line of Credit (SLC) what will be the quantum of finance
A 15% of the working capital facilities (Fund Based + Non Fund Based)
Maximum Rs.20 cr.
B 25% of the working capital facilities (Fund Based + Non Fund Based) Maximum
Rs.10 cr.
C 5% of the working capital facilities (Fund Based + Non Fund Based) Maximum
Rs.05 cr.
D 20% of the working capital facilities (Fund Based + Non Fund Based) Maximum
Rs.25 cr.
Page 439 of 632

Case let on SME Product (CP SME Level 1)
M/s Horizon Pvt Ltd is dealing with our SME Branch New Delhi for last 25 years. They are auto
ancillary unit and supplying their goods to Maruti Car plant at Gurugram and Manesar. They are
enjoying Rs 30 crores of credit facility including CC and TLs. The credit rating of the company is
CUE – 10 and ECR is BBB-. Total exposure is collaterally secured by 125 %. The company is
required to purchase two new robotic machines from Japan as the Maruti have launched two new
models and few parts of the same is required to be manufactured through those machines only. The
total cost of the machines and their instalment were around Rs 5 crores. The company’s current ratio is
also around 0.90 only. The TOL/Adj TNW is 4.90.
For the above mentioned expenses the company submitted their proposal to the branch for sanction of
term loan for Rs 4.00 crores.
After analysing the request, the RMSME advise the unit as under:
a) The current ratio of the unit is already below 1 and the proposed term loan will have more
negative impact on the current ratio and NWC.
b) The company has availed two term loan from NBFCs, whose instalment is also on the higher
side and most of the cash accruals is going towards their payment.
c) The company is required to infuse additional funds for Rs 2.00 crores minimum in the form of
capital immediately.
d) The Drawing power of the company is also on the line.
The company submitted their reply point wise as under:
a) The current ratio of the unit is below 1 mainly because of including the term loan instalment
payable in next 12 months in current liability. Excluding the loan instalment the current ratio is
1.1.
b) The loan availed from the NBFCs was on urgent basis as one of their main machine got
damaged and required to be replaced within 2 days to continue the production without delay.
c) The company is infusing 1 crores this year in the capital as margin for the above mentioned
machinery and to pay out some creditors. The remaining amount is not possible today but with
plough back of entire profit and not paying the dividend for next two to three years will further
improve the position.
d) After infusion of said capital the position will improve. The company is forced to go for the
purchase of the said machinery to meet out the Maruti requirements.
1 Under which scheme/product, the above mentioned application may be considered?

A Corporate Loan
B Open Term Loan
C Term Loan
D Not to be considered
2 Borrower with CRA of SB-6 to SB-10, are eligible for Corporate Loan, if having ECR of
Investment grade ?
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A BB- and better
B BB and better
C BBB- and better
D BBB and better
3 What is the Minimum Quantum of Loan under Corporate Loan Scheme ?
A Rs 25 Lacs
B Rs 50 Lacs
C Rs 100 Lacs
D Rs 5 Crores
4 What is the Maximum Quantum of Loan for Non Corporate Borrowers under Corporate
Loan Scheme ?
A Rs 1 Crore
B Rs 5 Crores
C Rs 10 Crores
D No Cap
5 For what purpose the Corporate Loan can be sanctioned ?
A Shoring up of NWC
B Ongoing Capex
C Repaymentofunit’shighcost debt, ImplementingVoluntaryRetirementScheme
D All of the above
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CHAPTER-12
POST SANCTION CREDIT PROCESS
The basic objective of any follow up system is to ensure safety of funds granted by the Bank
along with its proper use i.e. the funds are being used for the purpose it was given. The funds,
which are being used in lending, belong to the depositors and the credit officials have
tremendous responsibilities in safeguarding the interests of the millions of depositors. The
real challenge before a credit official after a credit facility is sanctioned and disbursed is the
challenge of maintaining the quality of the loan, which is possible to a large extent by
ensuring a meaningful follow-up, supervision and monitoring of the credit facilities in a
planned and structured manner. A weak and lackluster process / approach can lead towards a
disaster, which may result in a good loan account turning into a Non Performing Asset. It is
said that “Prevention is better than cure”.
The Bank has in place comprehensive post-sanction processes aimed at enabling efficient and
effective credit management. The post-sanction credit process can be broadly classified into
three stages viz., Follow-up, Supervision and Monitoring (FSM), which together facilitate
ensuring an efficient and effective credit management and maintaining high level of standard
assets.
Objectives of FSM
(a) Follow up function

➢ To ensure the end-use of funds.
➢ To relate the outstanding to the assets level on a continuous basis.
➢ To correlate the activity level to the projections made at the time of the sanction
renewal of the credit facilities.
➢ To detect deviation from terms of sanction.
➢ To make periodic assessment of the health of the advances by noting some of the key
indicators of performance like profitability, activity level, and management of the unit
and ensure that that the assets created are effectively utilised for productive purposes
and are well maintained.
➢ To ensure recovery of the installments of the principal in case of term loan as per the
scheduled repayment programme and all interest.
➢ To identify early warning signals, undertake SMA/SAR review and reporting, if any,
and initiate remedial measures thereby averting the incidence of incipient sickness.
➢ To ensure compliance with all internal and external reporting requirements covering
the credit area.
(b) Supervision function
➢ To ensure that effective follow up of advances is in place and asset quality of good
order is maintained.
➢ To look for early warning signals, identify ‘incipient sickness’ and initiate proactive
remedial measures.
(c) Monitoring function
➢ To ensure that effective supervision is maintained on loans/advances and appropriate
responses are initiated wherever early warning signals are seen.
➢ To monitor on an ongoing basis the asset portfolio by tracking changes from time to
time;
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➢ Chalking-out and arranging for carrying out specific actions to ensure high percentage
of ‘Standard Assets’.
Indicative list of activities involved in follow-up, supervision and monitoring
FOLLOW-UP
➢ Conveying sanction of advances to the borrower detailing the terms and conditions
and obtaining acceptance thereof
➢ Preparation and submission of returns on credit facilities sanctioned for control
purposes
➢ Completion of appropriate documentation before disbursement of loans/ advances;
keeping the documents in effective custody and maintaining validity by periodic
revival of the documents during the currency of the loans/advances.
➢ Creation of charge over security and completion of all relevant and applicable
formalities, including creation of Registered or Equitable mortgage, creation of
second charge and registration of charge with ROC. Subsequently, periodic search of
charge with ROC should be done to protect the Bank’s interest.
➢ Ensuring compliance by the borrowers of all pre-disbursal formalities and
requirements and continued compliance with the terms of sanction till loans/advances
are liquidated.
➢ Conducting pre-disbursal inspections and verifications (including verification of
subsisting charges on the assets of limited companies by search at ROC) as laid down.
➢ Conducting periodic inspection/visits at stipulated frequencies.
➢ Arranging for and supervising computation and recording of Drawing Power for
disbursal of the facilities.
➢ Obtention from the borrowers, and scrutiny/analysis of various financial and non-
financial statements viz., Stock statements, other control / MIS statements such as,
FFRs / QRRs, Cash Budget, annual and mid-term financial statements etc. and
initiating appropriate action thereon.
➢ Ongoing scrutiny of transactions in the various accounts by perusal of registers,
vouchers, etc. to watch for proper conduct of loan accounts, healthy turnover therein
and proper end use of funds.
➢ Ongoing verification of assets charged as security, to ensure availability and safety of
the assets and safety of the Bank’s advances.
➢ Maintaining ongoing contact with the borrower and co-lenders and keeping abreast of
developments in the borrower entities and business environment.
➢ Securing and ensuring ongoing availability of insurance cover for the security charged
to the Bank.
➢ Securing and maintaining CGTMSE/ECGC cover where applicable.
➢ Timely recognition of unsatisfactory features in the conduct of the advance, such as:
delays in project implementation, Unusual developments/changes in the business or
business environs, Shortfall in achievement of production/sales as compared to the
projections, Defaults in payments due under fund-based facilities/Defaults in the
commitments under non-fund based facilities, Non-fulfillment of financial obligations
to the Bank, co-lenders and creditors and nonpayment of statutory dues, etc. and any
other deficiency observed during periodic inspection visits.
➢ Advising borrowers to initiate required action to check/remove the foregoing
unsatisfactory features and submitting reports to controlling authority on further
developments in the matter.
➢ Operating units have to obtain a certificate from the auditors of the borrowing entities
on an annual basis to the effect that all Statutory dues including EPF dues have been
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paid by the borrower. This will be obtained annually at the time of submission of
Audited Financial Statements by the borrower. In case of new advances, the
certificate must be obtained alongwith the loan application as part of due diligence
process.
➢ Ensuring obtention of refinance from concerned agency, wherever applicable.
➢ Ensuring maintenance of proper records/files covering the advances to a borrower for
scrutiny/inspection by various internal and external authorities.
➢ Ensuring collation/maintenance of data as appropriate for submitting reports/returns/
reviews, etc. to various higher authorities in the Bank and to external agencies.
➢ Obtention of required data/proposal from borrower and preparation of review/renewal
of credit facilities, as prescribed.
➢ Processing requests for irregular drawings and reporting these to the controllers as per
procedure; and initiating steps to regularise the accounts and submitting reports
thereon.
➢ Follow-up of and rectification of irregularities pointed out in the various
inspection/audit reports, including RBI Inspection Report, RFIA, Credit Audit Report,
Verification Audit Report, Concurrent Audit Report, Stock Audit Report, Spot Audit
Report, Forensic Audit Report, Statutory Audit Report etc.
➢ Recovery of applicable charges/fees/penalties etc. as per extant instructions.
➢ Preparation of reviews of IRAC, identification of deteriorating assets/ potential NPAs,
recognising any early warning signals which may lead to asset quality deterioration,
SMA review and initiation of corrective action where warranted.
➢ Account-wise follow-up of NPAs for recovery/rehabilitation/restructuring,
preparation of related recommendations to appropriate authority for approval.
SUPERVISION
➢ Ensuring proper follow-up of advances and observance of systems laid down by the
Bank at the operating level. Periodic and random examination of registers, accounts
and books at the branch, scrutiny of periodic statements received, control registers and
files/records covering the advances will assist this process.
➢ Ensuring that security documents are kept current and that officials concerned observe
all related documentation formalities.
➢ Ensuring that the functions at the follow-up level are performed diligently and as per
extant instructions of the Bank.
➢ Ensuring that (i) proper arrangements are in place for the recovery of applicable
charges/ fees/penalties etc. and (ii) income leakage is checked.
➢ Engaging in ongoing interaction with the officials responsible for follow-up on all
critical matters relating to the loans/advances.
➢ Maintaining ongoing contact with borrowers and co-lenders and keeping abreast of
developments in borrower entities and business environment.
➢ Scrutiny of (a) periodical statements and financials received from the borrowers and
(b) control statements/reports prepared on the advances. Ensuring that corrective steps
as required are taken and reports to higher authorities, where necessary, are submitted.
➢ Periodic inspection of security at the intervals prescribed for the supervisor.
➢ Ensuring that compliance is maintained with instructions laid down regarding systems
and procedures; maintenance of books/registers is in order, and action is taken for
rectification of irregularities pointed out in the various Audit/Inspection reports.
➢ Conduct periodic assessment of the information thrown up by IRAC reviews and
ensure identification of deteriorating assets and initiation of corrective steps.
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➢ Exercise control over NPA management, Stressed Assets Review & Re-porting and
ensure effective follow-up for recoveries/rehabilitation/restructuring with approvals
from concerned/appropriate authority
➢ Ensure timely reviews/renewals of credit facilities.
➢ Initiate appropriate measures for upgradation of credit skills of lower level
functionaries.
MONITORING
➢ Ensuring that effective supervision is maintained on loans/advances by the lower level
functionaries responsible for follow-up and supervision. Scrutiny of returns/reports
received from these line functionaries, interaction with them, feedback from
customers, commentary in inspection/ audit reports etc. will assist this process.
➢ Monitoring of high value advances through specific focus on these in the
returns/reports received on loans/advances and by keeping watch on the developments
in the borrower company/industry.
➢ Ensuring non-recurrence at the operating levels of commonly noticed
lapses/irregularities pointed out in various audit reports.
➢ Extending guidance to down-the-line functionaries on the ‘follow-up’ and
‘supervision’ of the Bank’s credit exposures especially those at risk.
➢ Examination of NPAs with a view to recognising problem assets, drawing up
recovery/upgradation path for these and monitoring the recovery process.
➢ Redressal of customers’ complaints
➢ Ongoing evaluation of credit management skills at the branches and offices under
control, interaction with the supervisors and initiating appropriate interventions.
Responsibility of different functionaries in the post-sanction credit process: The tasks

associated with the post-sanction follow-up, supervision and monitoring & control in respect
of individual accounts shall be handled by the designated officials as decided by the
Circles/Business Units corresponding to the roles & responsibilities of various functionaries.
The GMs of the concerned networks will have responsibility for monitoring the overall credit
portfolio in their respective networks. The GM (network) shall be assisted in this task by
DGM & CCO at the respective LHOs, DGM (B&O) who shall be overseeing the various
credit CPCs and RM (RBO) who shall oversee the Credit Management in his region.
The various activities (listed above) under Follow-up, supervision and Monitoring
(FSM) can be broadly classified under four measure heads viz.,
1. Advising / Issuance of Sanction / Arrangement Letter
2. Documentation and Security Creation / Perfection
3. Disbursement of Credit Facilities
4. Various tools for FSM
5. Management of SMA and NPA
In this chapter, we will discuss about the other activities except management of SMA and
NPA as the detailed guidelines for the same are available in the separate chapter in this
manual.
Advising Sanction to borrowers and Guarantors:
Arrangement letter is required to be exchanged with the borrowers and guarantors in SME-1
for the unit falls under the category of MSME and for other, the format is advised vide
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Circular No. CCO/CPPD-ADV/52/2017-18 dated 10.08.2017. Before issuing the
arrangement / sanction letter, the credit official should read the sanction proposal thoroughly
& carefully and note down all important terms & conditions at one place. Thereafter, he
should prepare sanction letter in three copies (one for our record and two copies for the
borrower, out of which one he will return to the bank duly accepted by borrower and
guarantors) in Standard Format (as applicable) ensuring that all the T&Cs are mentioned.
Sanction / Arrangement Letter should covers,
➢ All the stipulations, conditions, covenants etc. both proposed by the credit officer or
stipulated by sanctioning authority
➢ Standard or Mandatory Covenants
➢ Complete/correct details of securities
➢ All applicable charges, penal provisions
➢ Draft copies of loan documents
As per e-Circular Sl. No. 1429 /2019-20 (COO/CPPD-ADV/153/2019-20 dated 06.01.2020,

operating units should insert a clause in the Letter of Arrangement/ Sanction Letter that the
recovery of Processing Fees on due date will be done automatically by the system.
Standard Covenants:
➢ Standard Covenants are classified into two parts i.e. Mandatory Covenants and
Mandatory Negative Covenants.
➢ There are 17 Mandatory Covenants and 15 Mandatory Negative Covenants.
➢ Mandatory Covenants are those activities, which the borrower should undertake
during the currency of the loan.
➢ Mandatory Negative Covenants are those activities, which restricts the borrower to
undertake during the currency of loan, without prior approval of the Bank.
➢ In case, the borrower want to undertake any negative activity or any relaxation in
them, the Borrower(s) shall give 60 day’s prior notice to the Bank for undertaking
any of the ne g a t i ve activities to enable the Bank to take a view. If, in the
opinion of the Bank, the move contemplated by the borrower is not in the interest of
the Bank, the Bank will have the right of veto for the activity. Should the borrower
still go ahead, despite the veto, the Bank shall have the right to call up the facilities
sanctioned.
Documentation and Security Creation / Perfection:
Security documents are necessary for different types of credit facilities and for different type
of segments. The standard sets of documents have been stipulated by the Bank for the various
types of credit facilities / segments. It is reiterated that any loan, fresh or enhancement, may
be disbursed only after the minutes of the Credit Committee Meeting are received.
Operating Staff are precluded from disbursement of the sanctioned limits, new or
enhancements without compliance of all the terms of sanction and before the documents have
been properly executed & stamped as applicable and security has been created/ perfected.
However, in cases where creation of mortgage or obtaining the documents related to a third
party guarantee is sought to be deferred beyond the date of release of credit facilities for
genuine reasons, prior approval of the sanctioning authorities for the deviation should be
obtained.
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Branches/ Operating Units need to verify the Articles of Association of the Company to
ensure that the Articles do not mandate the use of the Common Seal and that the Company
has opted not to have a Common Seal. Branches are not to insist upon affixing a Common
Seal/ Rubber Stamp if the same is specified in the Articles of Association of the Company,
particularly whilst opening a Corporate Bank account.
Controller of the branch may also permit time for perfection of security within a reasonable
period of say upto 6 months, in cases of enhancement, where the security is already charged
to the Bank and non-perfection for enhanced amount does not materially impact the recovery
of enhanced amount. Time required beyond 6 months, or where non perfection of security
materially impacts the Bank’s exposure, will need to be approved by the sanctioning
authority.
Specific approval of sanctioning authority must be obtained in case a new credit facility is
proposed to be disbursed without creating/perfecting the security.
If sanctioned facilities are sought to be released on the basis of standalone documentation,

pending Consortium documentation, approval for such arrangement should be obtained from
the sanctioning authority.
Non adherence to the time given for perfection of security may invite penal provisions, which
should be clearly mentioned while conveying approval for extension in time. Waiver of penal
provisions must be avoided.
Branches may provide true certified copies of security documents to a borrower/guarantor,

whenever a request for such copies is received.
The registration of transactions of creation of security interest, securitization and asset

reconstruction has been made mandatory in respect of all mortgages, across all segments (viz.
C&I, SME, PER) created on or after 31st March 2011.
The Central Government in exercise of the powers conferred by sub-section (1) and clauses
(c) to (g) of sub-section (2) of Section 38 read with the section 20 of the Securitisation and
Reconstruction of Financial Assets and Enforcements of Security Interests Act, 2002 (54 of
2002)has notified amendments to the Securitisation and Reconstruction of Financial Assets
and Enforcements of Security Interests (Central Registry) Rules, 2011 vide gazette
notification number GSR 102(E) (F. No. 3/2/2014- Recovery) dated January 22, 2016. In
terms of the notification the following types of Security interests are also required to be filed
on the CERSAI
Portal:
a. Particulars of creation, modification or satisfaction of security interest in
immovable property by mortgage other than mortgage by deposit of title deeds shall
be filed in Form I or Form II, as the case may be, and shall be authenticated by a
person specified in the Form for such purpose by use of a valid digital signature.
b. Particulars of creation, modification or satisfaction of security interest in

hypothecation of plant and machinery, stocks, debt including book debt or
receivables, whether existing or future shall be filed in Form I or Form II, as the case
may be, and shall be authenticated by a person specified in the Form for such purpose
by use of a valid digital signature.
Page 447 of 632

c. Particulars of creation, modification or satisfaction of security interest in intangible
assets, being knowhow, patent, copyright, trade mark, licence, franchise or any other
business or commercial right of similar nature, shall be filed in Form I or Form II, as
the case may be, and shall be authenticated by a person specified in the Form for such
purpose by use of a valid digital signature.
d. Particulars of creation, modification or satisfaction of security interest in any under

construction residential or commercial building or a part thereof by an agreement or
instrument other than by mortgage, shall be filed in Form I or Form II, as the case
may be, and shall be authenticated by a person specified in the Form for such purpose
by use of a valid digital signature.
Full time practicing Chartered Accountants are required to register the documents by visiting
https://udin.icai.org and generate UDIN by registering the certificates/ documents attested/
certified by them and providing 3-5 key fields of the relative certificate/ document. The
Regulators/Banks etc. shall be able to check the authenticity of the
documents/reports/certificates etc. with UDIN and the key fields provided by the certifying
Chartered Accountants. This can be cross checked through the link https://udin.icai.org?
mode = searchudin. For more clarifications on UDIN, you can access the link
https://udin.icai.org/FAQ-UID.pdf. This measure will help in detecting forged documents and
misrepresentations, as only Chartered Accountants are authorised to generate UDIN. The
facility of UDIN is to be utilised as part of due diligence.
Disbursement of Credit Facilities:
The disbursement of credit facilities is to be initiated only after execution of security

documents and creation/ perfection of security. Compliance of terms & conditions of sanction
is of paramount importance as these are being stipulated keeping in view the anticipated risk.
Ensuring compliance of Terms & Conditions of sanction before disbursement

(Circular No. CCO/CPPD-ADV/81/2017-18 dated 02.11.2017)
With a view to strengthening the underlying processes, a structure along with standard format
(available with the above referred circular) for ensuring compliance of terms and conditions
of sanction across the Business Verticals has been introduced. It will be applicable for all new
sanctions/ enhancement in credit facilities and/or other changes where supplementary
documentation and/ or other measures are required to be taken prior to release of facilities/
enhancements etc.
For units with exposures above Rs.1.00 crore (FB+NFB Limits), online checklist of various
activities to be checked is available in the LLMS. Operating units will need to take a print out
of the compliance certificate, generated from LLMS, which will be put up to appropriate
authorities for obtaining their approval for disbursement of loan. (Circular CCO/CPPD-
ADV/146/2018-19 dated 07.01.2019)
For units with exposures below Rs.1.00 crore (FB+NFB Limits) Branch Manager/ official
responsible for disbursement will have to ensure that terms and conditions of sanction have
been complied with, and a simple confirmation to this effect, as detailed below, would be
kept on record,
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“Confirmed that all pre-disbursement conditions and formalities have been complied
with, except …… (list out the pending items), for which approval of the appropriate
authority is on record.”
Till the stage of disbursement, whatever has been done by the credit officials, are simply
paper work and the Bank is not out of funds. In other words, the lending doesn’t take place.
But, when the credit official receives the request for disbursement, he should be extra
cautious as the moment disbursement took place, Bank is out of funds and the actual lending
started. The disbursing / credit official should take the following precautions (illustrative)
before disbursing the funds:
➢ Visit the unit before disbursement

➢ Verification of actual expenditure (part of margin already incurred)
➢ Certification by auditors / architects / engineers for the actual expenditure
incurred
➢ Whether the disbursement is actually required at this point of time
➢ Ensure margins as per sanction terms at each stage of disbursement
➢ Ensure genuineness of the suppliers and that the payment are going the correct
party and account
➢ Ensure direct payment to suppliers
➢ Obtain copy of Invoices and kept on record to ensure end use of funds
COMPLIANCE OF THE OBSERVATIONS / CONDITIONS OF SANCTION

(Circular No. CCO/CPPD-ADV/172/2019–20 dated 01.02.2020)
Loans in our Bank are sanctioned many a time with conditions/ observations of Sanctioning
Authority. Some of the conditions/observations are temporary in nature and applicable till
happening of certain events or compliance of other terms of sanction. Once these events
happen or terms of sanction are complied with, these conditions cease to be applicable. In
certain cases, it is observed that the operating functionaries approach the Sanctioning
Authority again for withdrawing such conditions, although it can be decided at Branch Head
level.
Similarly, if the condition/ observation is to initiate/ fulfill certain actions on completion of a

specific event, upon completion of that event, it is observed that the operating
functionaries again approach the Sanctioning Authority for initiating such actions,
although it can be decided at Branch Head level. The following example will illustrate the
scenario:
A loan is sanctioned with a condition that personal guarantee of the promoter is to be

obtained pending perfection of security. Once the perfection of security is completed, the
above personal guarantee of the promoters may be released with the approval of the
Branch Head and no approval from the Sanctioning Authority is required.
In this context, looking at the avoidable work involved and occurrence of repeated
sanctions, the Bank has approved that the operating units need not approach the
Sanctioning Authority again for withdrawing a condition or initiating / fulfilling certain
actions within the terms of original sanction. Such withdrawal or initiation / fulfilling of
those actions, within the terms of original sanction, can be carried out with the approval of
Branch Head.
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Various tools for FSM
Statement of stocks & book debts
Each borrower should submit a statement of stocks and book-debts, on the standard format,
available in the Manual on Loans and Advances, Part-1, Chapter-6, Annexure FSM-3, usually
at monthly intervals (within 20 days of the succeeding month) or as per the terms of
sanction/scheme. Non-submission of such statement in time would attract penal interest as
per instructions in force. While timely submission of stock statements should remain under
constant attention of the concerned field officers/RMSEs, Asset Verification Officers in
SMECCCs, RMMEs and AMTs for the purpose of supervision/monitoring, branch
managers/managers of division/CM (Maintenance) at SMECCC/RMMEs/Relationship
Managers at AMT should verify the register every month. The stock statements should be
filed unit-wise and in chronological order and retained as part of the record. The borrower has
to submit the stock statement, duly signed by an authorised person, at intervals as specified in
the sanction letter. Further, such statement as on the annual balance sheet date should be
obtained from every borrower enjoying advances against security of stocks/book debts.
Valuation of stocks: Borrowers should be advised to value stocks for the purpose of the
stock statement in the same manner and adopting the same basis as for annual financial
statements. In case of Consortium advances, stock statement may be in the format agreed to
by the member banks if it serves the Bank’s purpose.
Exception: The following categories of borrowers are required to submit stock statements in
different formats as prescribed below:
a) Trade & services sector: A modified statement of stocks and book-debts constituting the
primary security for the advances.
b) Construction, structural and heavy engineering: Formats of stock statements could be

modified to suit individual borrowers. This category of borrowers shall include in their stock
statements the following additional information.
➢ amount of original contract and time stipulated for its completion,
➢ work completed (certified and uncertified),
➢ work to be completed and period required therefore,
➢ cost already incurred in relation to estimates,
➢ Escalation in costs and the extent to which these are covered under the contract,
➢ Advances received from customers,
➢ Retention money,
➢ Work bills raised and outstanding from contractees, and
➢ Amount of outstanding guarantees.
c) To extend support to the borrowers who have receivables outstanding beyond 180 days
from Government Departments/ PSUs such as State Electricity Boards, other State/ Central
PSUs/ other Government Bodies, the cover period may be extended upto 360 days, subject to
the fulfillment of the following conditions:
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i. Outstanding receivables should be confirmed by paying Government
Departments/PSUs.
ii. Irrevocable consent from Government Department/PSU concerned to route the
proceeds of the bills through our Bank only.
iii. This facility may be extended to all borrowing units irrespective of their
CRA/External Credit Rating. It is also decided to do away with receivable
audit for this limited purpose. As this measure is going to elongate the
operating cycle of the unit, the operating units shall ensure that this will not
result in diversion of funds. Business Units shall monitor the utility of this
initiative and undertake a review after one year.
Drawing Power against Book Debts/ Receivables
Verification of Receivables: The position of book debts should be checked, specially where
advances have been granted there against. This again may have to be done on a sample basis
by reference to Debtors’ Ledger and other relevant records such as invoices and bills raised
and by checking position regarding :
➢ periodic confirmations from debtors
➢ age of book debts in relation to normal credit period
➢ system of control over book debts and periodic reports to top management of the unit.
Monitoring of Export Receivables: The branches are maintaining Export Bills Register, in
physical or electronic form, where details of export are recorded and relative returns
submitted to Reserve Bank of India. In spite of these, there have been many cases of export
related frauds, mainly by way of fake documents and diversion of export proceeds. To
strengthen the monitoring of advances at post shipment stage, it is advised that:
a) All export units enjoying post-shipment credit above Rs.10 crore and with credit
rating below SB-9 shall have their export receivables certified by a Chartered
Accountant at half-yearly intervals.
b) The Chartered Accountant shall certify the actual level of receivables in the books
of the borrower and age wise position.
c) The authority to waive the certification, considering the attendant circumstances,

shall be the CGM (CAG/CCG/Circles).
Detailed instructions on verification of receivables:
I. Where Cash Credit & Book Debt Limits (both) are below Rs.5 crore:
a) Where outstanding of individual debtor are below Rs.50 lakh

Extant instructions, as mentioned in verification of receivables to continue.
b) Where outstanding of individual debtor are Rs.50 lakh & above

In addition to the instructions mentioned in verification of receivables,
(i) A certificate from the Stock & Receivables Auditor about verification/
genuineness of receivables to be obtained at yearly intervals.
Page 451 of 632

(ii) ECR of the Debtor to be obtained. However, if the ECR is not available,
opinion report of the debtor be obtained from their banker at least at yearly
interval.
c) Based on satisfactory report, decision on continuation of allocating DP against the
debtor to be taken.
II. Where Cash Credit & Book Debt Limits (both) are Rs.5 crores and above
a) For BBB+ & better rated borrowers:

In addition to the extant instructions ,mentioned in verification of receivables above, a
certificate from the Stock & Receivables Auditor (wherever applicable) about
verification/genuineness of receivables is to be obtained at yearly intervals.
b) For BBB & worse rated borrowers:

i. For debtors below Rs.50 lacs: In addition to the extant instructions,
mentioned in verification of receivables above, a certificate from the Stock
& Receivables Auditor (wherever applicable) about
verification/genuineness of receivables is to be obtained at yearly interval.
ii. For debtors Rs.50 lacs & above: Along with extant instructions,
mentioned in verification of receivables, a certificate from the Stock &
Receivables Auditor (wherever applicable) about verification/genuineness
of receivables is to be obtained at yearly interval. Besides this, ECR of the
debtor is also to be obtained. If rating of the debtor is BBB or better, DP
against such debtors can be permitted. However, if the rating of the debtor
is worse than BBB-/unrated, opinion report should also be obtained from
their bankers at least at yearly interval. Based on the satisfactory opinion
report, decision on allocation of DP against the debtor to be taken.
The debtors, pertaining to the following class of units, are exempted from the above
guidelines:
a) Central Govt. / State Govt. / PSUs
b) Debtors covered under ECGC.
Instructions for verification of creditors:
➢ In the ‘Statement of Stock and Book Debts’ the borrower has to provide information
on Sundry Creditors in Part-C (other information) i.e. Creditors level at the yearend/
during the last month/ end of the month. (vide Annexure FSM-3, in Chapter-6 on Post
Sanction Credit Process in the Part 1 of Manual on Loans and Advances).
➢ In the ‘Inspection Report’ also, the reporting official has to provide comments and
observations on statutory liabilities and pressing creditors. (vide Annexure FSM-6, in
Chapter-6 on Post Sanction Credit Process in Part 1 of Manual on Loans and
Advances).
➢ For advances Rs. 10 crore and above, the borrowing units have to submit the
‘Financial Follow-up Reports (FFRs). In FFR-I, section-C, levels of sundry creditors
need to be provided and the same to be analysed with projected and actual level of
creditors.
➢ CIR on high value creditors has to be obtained from credit information agencies like
D&B, MIRA Inform Pvt. Ltd. etc., on case to case basis to ascertain the genuineness
and analysing the level of creditors.
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In addition to the above, the guidelines regarding conduct of Stock and Receivable Audit
should be complied with. Computation of Drawing Power (DP) is also one of the important
aspect in handling loans and advances. Hence, guidelines in this respect of Treatment of
Outstanding Sundry Creditors (SCs), Buyers’ Credit (BCs) and Unpaid Bills against Letters
of Credit (LCs) should also be implemented in letter and spirit.
Computation of Drawing Power (DP) and Maintaining DP Register
As assessment of working capital is based on the financial statements, the method of

valuation of current assets in the stock statement should be consistent with the norms
followed in preparation of the annual financial statements. While regulating drawings in a
cash credit (including WCDL) account within the drawing power (DP) of a borrowing
company, it should be ensured that the DP is not given against such assets which have not
been considered as current assets at the time of assessment and are accordingly ineligible for
DP. For example, where ‘plant spares` are classified as non-current asset for working capital
assessment, this asset should not be considered eligible for DP though included in the stock
statement. Stocks purchased under usance LCs should not be reckoned for the purpose of
drawing power. While allowing drawings in accounts on the basis of stock statements, it
should be ensured that there is no double financing involved. Similarly, drawing power may
not be given against old accumulated (non-moving) or slow moving stocks. Borrowers should
be advised to make special efforts to clear such stocks. Regarding treatment of outstanding
sundry creditors, outstanding bills under Usance Letters of Credit and Outstanding Buyers’
Credit, while computing Drawing Power based on the information furnished in the Stock
Statements, following methods will be adopted:
At Appraisal Stage: Assessment of Sundry Creditors: While assessing LC limits, the level
of creditors as a whole and on account of goods purchased under LCs should be firmed up
separately. The level of sundry creditors, usance LC creditors and Buyers’ Credit estimated
should be clearly specified in the computation of ABF. Based on Operating cycle of the unit,
the Maximum Usance period of Letters of Credit ( domestic/foreign) required by the
company should be frozen by way of a template item in the Proposal. While freezing the
period, a small cushion may be kept to the extent considered necessary.
At Follow-up & Supervision Stage: Computation of Drawing Power: The Drawing Power
should be arrived at by deducting the following from the “Market Value” of chargeable
Current Assets:
Sr. Item Procedure to be followed

i. If the actual level of Trade Payables Trade Payables need not be deducted from the
(other than LC/BC) is within the levelMarket Value of Stocks, if the following
considered for assessment of FBWC conditions are satisfied :-
limit. Conditions:
(a) There is no dilution in NWC or
deterioration of Current Ratio (CR);
(b) Drawings in the account are within
sanctioned limits/DP and the conduct of the
account is satisfactory.
Movement in NWC & CR to be scrutinised
from FFR-I & Stock Statements.
ii. If the actual level of Trade Payables Actual Trade Payables in excess of the level
Page 453 of 632

(other than LC/BC) is in excess of the considered in the FBWC assessment is to be
level in appraisal. deducted from the market value of Stocks.
Wherever LC/BC facilities are allowed and the
Sundry Creditors there against is estimated
separately, any excess in Other Sundry
Creditors from the level estimated in the
proposal is to be deducted from the market
value of stocks.
iii. Unpaid bills under Usance LC (within The amount of such unpaid bills under usance
the Maximum Stipulated Usance LC is to be deducted from the Market Value of
Period), where goods have been Stocks.
received / goods are already
converted to Receivables / Cash.
iv. If unpaid bills under usance LCs, The amount of such unpaid LC bills will be
where goods have been received, are deducted from Market Value.
outstanding beyond the Maximum
Stipulated Usance Period on account
of reasons like availing Buyers’
Credit.
v. In case where the bills drawn under Arrangement may be made to sanction cash
LC have been received, but the credit limit providing facility for drawings
relative goods are not yet received. against the document of title to goods received
under the Bank’s usance LCs and lien for the
full amount of the outstanding bills may be
earmarked against the Market Value of the
total stocks including the document of title to
goods received under the Bank’s LCs.
vi. If the outstanding Buyers’ Credit is The amount of such outstanding Buyers’
upto the Maximum Stipulated Period Credit is to be deducted from the Market
of Usance, as stipulated in Sanction. Value of Stocks.
vii. If the Buyers’ Credit is outstanding The amount of such Buyers’ Credit is to be
beyond the Maximum Stipulated deducted from Market Value.
Period of LC.
Other Areas requiring special attention:

i. While analysing FFR, it is to be seen whether the level of sundry creditors, NWC,
Current Ratio, Buyers’ Credit, etc. as declared therein is in tandem with the levels
considered in Appraisal and shown in monthly stock statements. Such verification
should be recorded and put upto RM/Branch Head. Any significant deviation is to be
examined carefully.
ii. The period of Buyers’ Credit should not exceed the Operating Cycle or Maximum
Usance Period of LC considered in the Proposal, while assessing LC limit.
iii. In case the account is rendered irregular on account of reduction of DP due to
deduction of BC outstanding, further Buyers’ Credit to be allowed by following the
approach applicable for establishment of fresh LCs in an account where LC
devolvements have taken place.
iv. Whenever, LOCs are issued by Domestic Offices (Dos) for availing Buyers Credit at
our Foreign Offices (FOs), the capital charge is to be calculated at FOs only. As LOC
is only an inter office arrangement for facilitating BC, no capital charge is required to
be provided at Dos, once BC is availed based on LOC.
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v. In case of units availing WC finance from a Consortium/Multiple Banking
Arrangement and SBI is only a member, the branch should engage with the leader of
the Consortium/member banks for obtention of necessary data required to follow the
aforesaid approach. Where we are the leader of the Consortium, we should follow the
above approach invariably i.e. arrive at the Drawing Power by meticulously following
the steps outlined above.
The format of Statement of Stock and Book Debts in respect of the Borrowers under
consortium can be discussed, approved and recorded at the Consortium meeting. This is to be
only mentioned in the proposal wherever the format approved by the consortium is other than
the Bank’s Standard format, and no specific template approval is required in such cases.
In case irregularities arise in borrowal accounts due to adherence to the approach outlined
above, first attempt would be to take up with the borrowing unit to regularise the account
within 90 days. In case this does not materialise, further course of action like carving out the
excess drawings into WCDL/WCTL with a repayment programme to be considered in
consultation with the Controlling Authorities.
Wherever we are only a member of the Consortium/Multiple banking Arrangement, we need

to first form an opinion based on Stock Statements/ FFR/other data where DP is being over
assessed. The matter then needs to be suitably taken up with the banks concerned for
resolution. If suitable response is not forthcoming, we need to assess the risks involved and in
cases wherever it is warranted take steps like restricting further exposures in consultation
with the Controlling Authorities.
In cases where cash credit limits are granted against book debts, a statement of book debts
with age-wise break-up should be obtained along with the stock statement. Such book debts
should be based on invoices and delivery challans. Drawing power should be allowed only on
such book-debts as are within the norms accepted at the time of sanction. Generally, book
debts of more than six months old should not be reckoned for giving drawing power.
Valuation of items of Stock Statement: For the purpose of fixation of drawing power,
different components of stocks may be valued as detailed below:
ITEM TO BE VALUED AT
Imported RM Landed cost (i.e., invoice value plus customs duty but
excluding demurrage, if any.) or market price whichever is
the lowest
Indigenous RM, Invoice price or market price or Govt. controlled price,
consumables, stores & whichever is the lowest
spares
Semi-Finished goods Cost of production or selling price or market price or Govt.
controlled rates, whichever is the lowest
Finished goods Cost of production or Cost of goods sold or selling price or
market price or Govt. controlled rates, whichever is the
lowest
Page 455 of 632

Variations in the prices of commodities, against which advances are granted, should be
carefully examined to ensure that the stock statements represent correct value of assets.
When stock statements are received at the branch, details like date of stock statement, date of
its receipt at the branch, brief particulars of the security held, the value thereof, the stipulated
margin and the resultant drawing power (i.e., value of security after deducting margin) should
be recorded in words and figures in the Drawing Power (DP) Register, a separate folio being
allotted to each account. It should be ensured that the drawing power in each account should
not exceed the corresponding sanctioned limit. Each drawing power must be dated and signed
by the branch manager/ CM (Maintenance) at SMECCC/RMMEs, by Relationship Managers
at AMT or any authorised official. Obsolete drawing powers at the same time being
cancelled. The DP as recorded in the Drawing Power Register shall be entered in the system
under due authentication of authorised officials.
Exceptions: In case of seasonal industries, the assessment is done on the basis of

monthly/quarterly cash budgets. Correspondingly, drawings should be regulated on the basis
of the periodic (monthly/quarterly as the case may be) cash budgets subject to the condition
that the outstanding should not exceed the advance value of the security charged or the
sanctioned limit, whichever is lower. For determining the advance value of security charged
(value of security minus stipulated margin) the stock statements may continue to be obtained
on the usual format. Similarly, considering the special features of tea, coffee and other
plantations, the drawing power should be fixed corresponding to the methods followed for
assessment.
In case of SSI units where working capital credit limits are sanctioned at 20/25/30 per cent of
the projected turnover, actual drawals may be allowed on the basis of drawing power to be
determined as explained above.
Regulation of Drawing Power: While regulating drawings in a cash credit (including

WCDL) account within the Drawing Power (DP) of a borrowing company, it should be
ensured that,
➢ The DP is not given against such assets which have not been considered as current
assets at the time of assessment and are accordingly ineligible for DP. For example,
where ‘plant spares` are classified as non-current asset for working capital
assessment, this asset should not be considered eligible for DP though included in the
stock statement.
➢ While allowing drawings in accounts on the basis of stock statements, it should be
ensured that stocks purchased under Usance LCs are invariably mentioned separately
and no DP is allocated against such stocks. This is necessary to avert any possibility
of double financing.
➢ Drawing power may not be given against old accumulated (non-moving) or slow
moving stocks.
➢ Where cash credit limits are granted against book debts, a statement of book debts
with age-wise break-up should be obtained along with the stock statement. Such book
debts should be based on invoices and delivery challans. Drawing power should be
allowed only on such book-debts as are within the norms accepted at the time of
sanction. Generally, book debts of more than six months old should not be reckoned
for giving Drawing Power.
➢ In case of seasonal industries, though the drawings are regulated on the basis of the
monthly/quarterly cash budgets, however, for determining the advance value of
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security charged (value of security minus stipulated margin) the stock statements may
continue to be obtained on the usual format.
➢ In case of SSI units where working capital credit limits are sanctioned at 20% of the
projected turnover, actual drawals may be allowed on the basis of Drawing Power
calculated as explained above.
➢ The Drawing Power in each account should not exceed the corresponding sanctioned
limit. Each drawing power must be dated and signed by the Branch Manager/CM
(Maintenance) at SMECCC/RMMEs/Relationship Managers at AMT or any
authorised official. However, at the same time these officials should ensure
cancellation of obsolete Drawing Power (DP) in the account.
➢ The D.P as recorded in the Drawing Power Register shall be entered in the system
under due authentication of authorised officials.
Stock and Receivable Audit (SRA): Units that are exhibiting symptoms of liquidity crunch
may be considered for stock audit. Some of the symptoms are as follows:
➢ Pressing creditors
➢ Overdue interest and term loan installments
➢ Stagnant stocks
➢ Undue delay in submission of stock statements
➢ Falsification of chargeable current assets
➢ Too many and significant qualifying remarks about stock/receivables in auditors’
report in the balance sheet, etc.
If on considerations of the above aspects, an unsatisfactory scene emerges, a stock audit may
be considered.
SRA would cover audit of stocks and receivables. The quantity, quality and value of the
current assets should be examined and compared with the buildup of current assets projected
at the time of assessment of the WC advances. The system of inventory and receivables
management followed by the unit should also be studied. Besides giving comments on
verification of stocks, bills etc by the auditors in the audit report, they should also verify the
concurrent borrowings of the borrowal unit & give comment on this in the audit report.
Wherever necessary, approved valuers or Chartered Accountants may be engaged for
conducting stock audit, but care should be taken to keep the cost reasonable and minimum, as
it is to be borne by the borrower. A comprehensive review has been undertaken covering the
Stock and Receivable Audit format itself and related other aspects like threshold limit,
frequency, time lines for submission and closure of report, and empanelment of auditors.
(i) Periodicity of SRA and Accounts covered
a. Yearly
i. Standard Accounts with FBWC Limit, TL Exposure (Outstanding) and NFB Limit
aggregating Rs.10 crores and above upto Rs.25 crores having Internal Rating of SB-10 &
better or ECR of “BBB- ” & better.(**)
ii. Standard Accounts with FBWC Limit, TL Exposure (Outstanding) and NFB Limit
aggregating above Rs.25 crores having CRA SB-8 & better or ECR “BBB” & better(**).
iii. NPAs with balance of Rs.5 crores and above.
b. Half Yearly
Page 457 of 632

i) Standard Accounts with FBWC Limit, TL Exposure (Outstanding) and NFB Limit
aggregating above Rs.5 crores and upto Rs.25 crores having CRA SB-11 & worse or ECR
of “BB+” & worse. (**).
ii) Standard Accounts with FBWC Limit, TL Exposure (Outstanding) and NFB Limit
aggregating above Rs.25 crores having CRA SB-9 & worse or ECR “BBB-” & worse (**).
(**) When both the external and internal ratings are available the worse of the two may be
considered for this purpose.
c. Quarterly
SRA would be conducted at quarterly intervals for the following category of borrowers,
having exposure of Rs.5 crores and above irrespective of the credit rating:
i) Financing to Gold and Jewellery Business
ii) Commodity Traders
iii) IT enabled services.
(ii) Accounts to be covered under SRA (Exposure is with reference to our share of exposure
in MBA / Consortium).
(iii) Sanctioning Authority is vested with discretionary powers for increasing frequency as
well as reducing the threshold limit for SRA based on the risk perception.
(iv) Waiver for SRA

a) All Central and State Public Sector Undertakings.
b) Loans granted against “Specified Securities”.
c) Loans granted under LRD, ABL and ABL (CRE) and e-VFS schemes.
d) All loans under “P” segment.
e) SRA can be waived in cases other than exemptions given under point no. (a) to (d)
above, by the Sanctioning Authority upto CCCC.
f) In case of ECCB sanctions, waiver can be approved by CCCC.
However, any relaxation / exemption / waiver must be highly selective, and whenever such
relaxation etc. is recommended to the appropriate authority for consideration, it must
necessarily be justified by adequate and acceptable alternate mitigants.
In case of consortium advances, the format for conducting SRA may be discussed, approved
and recorded in the minutes of the consortium meeting. This is to be mentioned in the
proposal wherever the format approved by the consortium is other than the Bank’s Standard
format, and no specific template approval in this regard is required to be obtained.
SRA is not applicable for stand-alone Term Loan facilities.
Guidelines in respect of Pre and Post Audit process
Pre-Audit Process / discussion

Sr. Instructions
i. The task of SRA should be assigned to an empanelled/approved Stock and
Receivable auditor.
ii. Repeat audit by same auditor should be restricted to two consecutive occasions with
a cooling period of one year.
iii. Assigning / offering of SRA to Bank’s empanelled Auditor: 30 days before the due
Page 458 of 632

Sr. Instructions
date of prescribed periodicity (yearly / half yearly / quarterly) as the case may be.
iv. Time line for the Auditor to complete the SRA: Within 45 days from the date of
acceptance of Bank’s offer.
v. Pre-Audit discussion
a) Before commencement of SRA, the RM / FO should have a discussion with the
Stock and Receivable Auditor, sharing detailed information on the behavioral pattern
of the account / concerns etc. Terms of reference / discussions should also include
critical verification of few randomly selected items of stocks, book-debts, invoices,
entries / transactions etc.
b) The time line for completing the SRA should be agreed upon by the Branch and
the Auditor.
vi. SRA should, inter alia, entail verification of debtors and creditors as under:-
a) 60 % of the value of debtors to be verified with a minimum of 10 debtors. In case
number of debtors are less than 10, the entire list of debtors to be verified i.e.100 %
of debtors in terms of amount involved.
Similarly, 60 % of the value of creditors to be verified with a minimum of 10
creditors. In case number of creditors are less than 10, the entire list of creditors to be
verified i.e.100 % of creditors in terms of amount involved.
b) Where outstanding of individual receivables is Rs. 50 lacs & above, a certificate
from the Stock & Receivables Auditor about genuineness of receivables is to be
obtained at yearly interval.
vii. Concurrent borrowings of the unit to be examined and commented upon.
viii. Certification of compliance of accounting procedure as per accounting standards is
part of SRA report.
ix. Verification of actual balances of stocks and book debts with book balances is to be
done.
x. Verification of charges registered with ROC and subsisting in favor of bank is also to
be done.
xi. In respect of all eligible accounts for Stock and Receivable, verification of Invoices
by the Stock and Receivable Auditors should be made part of the Stock and
Receivable Audit. Failure of verification of invoices should be suitably dealt with.
xii. The timelines for completing the Stock and Receivable Audit should be laid down
and expectation of the Bank from the Stock and Receivable Auditor should be
shared.
Post Stock and Receivable Audit process
Sr. Details
i. Follow-up for receipt of SRA Report
To ensure rigorous follow-up for timely submission of Stock and Receivable Audit
report. Where borrowers do not co-operate for SRA, such cases should be brought to
the notice of the controller at the earliest for necessary intervention.
ii. Post receipt of SRA Report
A suitable written communication should be sent to borrowal unit within 7 days from
the date of receipt of the SRA report, for rectification of deficiencies in a time bound
manner.
iii. Line of action to be done
i) List of illustrative Key Risk Matrix for closure of SRA Report, as per Annexure-
Page 459 of 632

III, to be examined and action to be taken accordingly.
ii) Preliminary action taken report is to be placed before the Branch Head by the
Relationship Manager of the account within 20 days from the date of receipt of the
report. Pending observations of SRA and timeline for completion is needs to be
highlighted in the ATR.
iii) If the inputs / observations of SRA Auditor contain any of the Early Warning
Signals or any other Key Risk Indicators attributing deterioration of health of the
underlying assets they may be dealt with duly complying with the bank’s extant
guidelines.
iv) Final ATR is to be submitted to the appropriate authority within 15 days from the
date of receipt of the report for its closure. The authority structure for closure of
report is as under:
Vertical Authority Structure for closure of SRA report

R&DBG For proposals sanctioned up to the powers of ZCC. DGM (B&O)
For proposals sanctioned by all other higher credit DGM & CCO of the
Committees up to ECCB. Circle.
CCG DGM (Branch Head)
CAG GM (Regional Head)
iv) Post closure of SRA report, Relationship Manager must ensure that the adverse
features/practices, if any, pointed out in the report is addressed in subsequent stock
statements submitted to the Branch and Borrower also needs to confirm it in the
stock statements.
v) Pending observations: Pending qualifying remarks of SRA and their mitigation
should be incorporated in the Sanction format with the expected timeline for
completing the task.
Follow-up: To ensure rigorous follow-up for timely submission of Stock and Receivable
Audit report. Where borrowers do not co-operate for SRA, such cases should be brought to
the notice of the controller at the earliest for necessary intervention.
Other guidelines:
i. In case of takeover advance, Stock and Receivables Audit is to be conducted prior
to disbursement of any credit facilities above Rs.5.00 crore except for units having
ECR of “A-” and better.
ii. In case of CDR accounts, report regarding the quality of Stocks and Receivables
should be obtained from the Concurrent Auditor appointed by the lenders on a
quarterly basis. These instructions for conducting SRA would also be applicable
to CDR accounts.
PHYSICAL FOLLOW UP: INSPECTION OF THE UNIT
The principal objective of effective credit management is to maintain soundness of the loan
assets. The operative guidelines for inspection and follow-upto achieve the objective are
broadly outlined hereunder. However, dealing officials should adapt these suitably on merits
of each borrowing unit (e.g., its market performance, the management strength, reliability of
Page 460 of 632

its information system, etc.) with focus on an effective credit management in a cost effective
manner. Thus, the rigor of inspection and follow-up may be varied depending on the general
health of the unit and the conduct of advances. Periodic inspection and follow-up would
afford an opportunity to not merely assess the quantity, quality and value of stocks, but also
to,
➢ know the tempo of activity,
➢ have a look at the books of accounts and other relevant records/returns,
➢ hold discussions with the borrower,
➢ satisfy oneself that the borrower is alive to his responsibilities,
➢ supplement and constantly update the Bank’s knowledge about operations of the
borrower in particular and the industry in general,
➢ ensure that all the fixed assets charged to the Bank are not only intact and well
maintained but also put to optimum use and that the unit’s profitability is maintained,
at least, at the level projected at the time of sanction of advances,
➢ ensure that the security coverage is not diluted at any time for any reason and that the
servicing of the loan does not suffer under any circumstances.
The follow-up system consists of financial follow-up and physical follow-up. The financial
follow-up lays stress on monitoring of the unit’s performance based on the level of
production, sales and profitability, while physical follow-up consists of physical verification
of assets and ensuring end-use of funds lent.
The follow-up and supervision procedure delineated above involves monitoring on the basis
of relevant information/ data to be furnished by the borrowers. For this purpose, the
borrowers would need to have in place an information system. Though supervision is
basically based on the information system of the borrower, it is desirable that the central
discipline of financial analysis, inter-firm comparisons and study of variances between
projected and actual balance sheets, are always kept in view.
Monitoring receipt of the statements: For making use of the information system
successfully, monitoring timely receipt of the various statements is an essential pre-requisite.
What to carry while going for inspection: Inspecting officials may carry with them (i) a list
of the fixed assets charged to the Bank (ii) a copy of the latest monthly stock statement and
(iii) a copy of the latest half-yearly operating statement (FFR-II) as per Annexure-FFR-II
received from the borrowing units. The quarter/year-end stock statements should be
compared and reconciled with the corresponding items in the financial follow-up statements
such as FFR-I & II/and year-end balance sheet.
Verification of assets
Stocks pledged/ hypothecated to the Bank must be inspected at irregular intervals which
should ordinarily not exceed one month. The basic objective is to ensure that the stated stocks
are physically there and the advances are adequately secured. Wherever possible, all stocks
should be thoroughly verified and compared with that mentioned in the stock statement.
Where the number of items charged to the Bank is large, goods should be stacked according
to sizes, weight, lots, groups, etc., to facilitate inspection. The inspecting official should make
an ABC analysis of stocks and check all high value items during each visit. In other cases,
verification would be possible only on a random sample basis. Different items should,
however, be checked in different visits so that all the major items would be covered over a
Page 461 of 632

period of, say, four to six months. Checking on random sample basis should not, however,
rule out repetitive checking of certain items. Where goods are stored in different places,
inspection of all the godowns should be conducted simultaneously or on the same day.
Inspecting officials must see that the godowns are properly secured and that all the conditions
of the fire insurance policies covering them and their contents are being observed. Particular
attention should be paid to the effect on the insurance cover of any adjacent structures,
whether permanent or temporary, which are of an inflammable nature.
Whenever a godown cannot for any reason be inspected, a note must be made in the
inspection register in order to ensure that the contents of the godown are examined at the next
inspection.
Verification of stocks-in-process may present some difficulties. One may have to look for
fluctuations in their value over a period and verify the data in the context of production
capacity, production cycle, cross tally for raw materials and production figures in the stock
statement, records on input output at different stages and other relevant factors.
The available storage capacities for various items, including for stocks-in-process, should
also be examined.
Where goods are subject to other statutory controls, the stock statement could be
crosschecked with the relative records.
Checking quality of assets is another problem area and much would depend on the experience
and technical competence of the inspecting officials. A feel could be had by looking for –
➢ slow moving, old and accumulated stocks,

➢ rejections at the time of both purchases and sales by examining the relative records of
purchases and sales returns,
➢ records of quality control and scrap,
➢ book debts under dispute and age of book debts.
➢ Where doubts arise about quality or quantity, an expert opinion or even a stock audit
could be stipulated.
Verification of systems: All borrowers enjoying large value credit under SME and AGL
segments and all borrowers under C&I segment should be asked to give to the Bank a write-
up on their inventory control, verification and valuation systems. The branch officials will
have to familiarise themselves with the operation of such declared systems with reference to
the relative records and get satisfied about their efficacy, at least at quarterly intervals. A
reference to the cost records, where available, would also be of help in checking valuation.
Where internal cost audit reports are available, these too could be seen. Where such systems
do not exist or are not in operation, this in itself would be a major warning signal calling for
being circumspect about the functioning of the unit. The absence of any such system would
raise doubts about the competence and also perhaps about the integrity of the management
and call for urgent remedial action, if necessary by engaging consultants.
In order to ensure a meaningful follow-up and supervision of advances of the Bank, branches
should obtain on an ongoing basis, among other things, stock statement, cash budget, if any,
QIS statements or Financial Follow-up Reports (FFRs), as the case may be this monthly
statement serves as a follow-up format helping the concerned field staff to verify whether the
Page 462 of 632

borrowing industrial unit is attaining the planned production and its levels of inventory and
receivables are within the levels projected at the time of sanction of the working capital credit
limits. Further, borrowers enjoying aggregate fund based working capital credit limit of Rs.
10 crore and above from the Bank, should submit, apart from the periodic statement of
stocks, financial follow-up reports at stipulated intervals.
Inspection Report: On completion of the inspection, the inspection officials should set out
their observations in inspection reports as per Annexure-FSM-6 (Manual on Loans and
Advances, Part-1, chapter-6) commenting, inter alia, about the important issues taken up with
the borrower and the corrective measures proposed to be initiated by the borrower for
rectifying the aberrations. The inspection report should also cover comments about the issues
taken up with the borrower during the previous inspection and the impact of the corrective
measures initiated by the borrower on that basis. Copies of the half-yearly progress report,
half-yearly operating statements and the inspection report as above should be filed
chronologically and made available for scrutiny by the Bank’s Inspectors/Auditors. The
inspection reports would also help in the periodic review of accounts of borrowers.
Inspection & Follow-up by different branch functionaries: The Branch Manager/AGM

(SMECCC)/RMME/Relationship Manager has overall responsibility for the quality and
efficient management of the credit portfolio at the branch/CPC/AMT. He has, therefore, to
deploy his organisation Manager of the Division, Deputy Manager, Field Officers (FOs),
RMSEs, Customer Account Manager, Service Officers in such a manner that the total follow-
up coverage of all the units is achieved at the level of FOs/RMSEs/ CAMs, with each
successive higher level of managers covering the units selectively.
Frequency of inspection: The guidelines on periodicity of physical inspection/ verification

of assets/ sites/ operations have been reviewed and the modified guidelines in this regard are
furnished below:
a. Working Capital: The extant guidelines on monthly inspection have been

withdrawn. Considering the proposal in totality, sanctioning authority may decide on the
periodicity based on the specific recommendation made by the operating units. This is to be
mentioned in the proposal under terms and conditions and specific template approval is not
required to be obtained.
b. Term Loan: Existing guidelines on Inspection of Term Loan during project

implementation, after implementation of the project and other normal Term Loans shall
remain unchanged.
Further, it is reiterated that:

➢ The stipulated periodicity will be the minimum frequency required to be followed.
However, depending upon the criticality/ complexity/ early warning signals etc. of the
individual cases, the operating units may increase the periodicity, if warranted, to
protect the interest of the Bank.
➢ The existing scheme specific guidelines on periodicity of inspection shall remain
unchanged.
➢ It is to be ensured that all collateral securities are inspected at least once in a year.
Inspections as per stipulated periodicity must be carried out and any deviation/ relaxation
should be considered highly selectively, based on clearly justifiable grounds. Apart from
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what have been mentioned above, the inspecting official should also keep the following
guidelines in mind:
i) The Field Officer/RMSEs/Service Officers at AMTs must check the correctness of the
production and sales information supplied to him and which he has not had occasion to check
previously. Stocks of raw materials, etc., with the unit should be verified with the latest Stock
Statement.
ii) The Field Officer/RMSEs/Service Officers at AMTs must assess the level of activity from
various sources, such as the order book, the work on the shop floor, number of shifts of
working, accumulation of finished products and the general tempo of activity in the plant.
When there is a decline in sales, production, and profitability, the reasons there for should be
ascertained. Frequent visits to the same unit will automatically give him enough experience to
get a quick feel of the tempo of activity.
iii) The Field Officer/RMSEs/Service Officers at AMTs must check if the books of accounts
e.g., cash book, sales, purchase and stock registers are being maintained properly and kept
upto date. If he notices any slackness in this respect, he must impress on the borrower the
need to keep the books updated. Special attention must be given to the cash book. Invoices
may be checked at random to know the mode (credit or cash basis) and terms of purchase.
Sales through associates or sister concerns and bills drawn on them should be monitored with
extra care. Credit summations in the operative account should be compared with the amount
of realisation of sale proceeds during the relevant period. If the credit summations and the
amount of sale proceeds realised are not comparable, the reasons therefore should be
enquired into. Bills outstanding in the Bank’s books should be compared and crosschecked
with the unit’s bills receivable registers. If bills are returned or payments delayed, the reasons
therefore should be enquired into. Order position pending, being executed and anticipated
should be enquired into and matched with production and sales. This should be followed up
in the subsequent inspections. With the accent of follow-up on the activity level, the
inspections could be held on the basis of pre-arranged visits to the unit instead of surprise
visits. This does not rule out surprise visits altogether. The intention is that inspections based
on pre-arranged visits would be more meaningful and mutually beneficial to the Bank and the
borrowers. In cases where the unit has a separate administrative office, which maintains the
books of accounts, the Field Officer/RMSEs/ CAMs/ Service Officers at AMTs must give
advance intimation of his visit so that the necessary books could be brought to the factory for
his inspection, if the duplicates are not maintained there. Large transactions in the unit’s
books of accounts particularly payments to branch/ associate firms should be enquired into.
iv) The Field Officer RMSEs/CAMs/Service Officers at AMTs must discuss with the
borrower all factors that may have a bearing on the operation of the unit such as, potential
changes in the market conditions, raw material supply position, power shortage, transport and
labour problems, etc. Since the Field Officer has an opportunity of visiting a number of units
in the area, he would be better informed about the environmental conditions and be able to
guide the borrower, should the need arise. He could also be on the lookout for any possible
signs of dissension among partners.
v) The Field Officer RMSEs/CAMs/Service Officers at AMTs must impress on the borrower
the need for continued financial discipline. This can be monitored by the degree of
promptness in the preparation of annual balance sheets, submission of various statements
such as stock statement etc. to the Bank, submission of income tax and sales tax returns, etc.
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The Field Officer RMSEs/CAMs/Service Officers at AMTs must check the progress in the
preparation of these statements from time to time.
vi) The accounts of the units should be regularly scrutinised and in case of those found
irregular due to non-payment of installments or excess drawings, the concerned units should
be advised in writing to regularize the position. In view of the irregularity in the account, the
visit of Field Officer RMSE/ CAM/Service Officer at AMTs assumes greater significance as
he would then be required to monitor the actions being taken by the borrower towards the
adjustment of the irregularity. In fact, the visits to units whose accounts are irregular must be
accorded a priority in the timetable for Field Officers RMSEs/CAMs/Service Officers at
AMTs. He should act as a continuous channel of communication between the borrower and
the Branch Manager/CM (Maintenance)/ RMME/Relationship Manager during the period the
irregularity persists and provide the Branch Manager/CM (Maintenance)/RMME/
Relationship Manager with his personal assessment of the effectiveness of the action taken by
the borrower.
vii) The Field Officer RMSEs/Service Officers at AMTs will have special responsibilities
during his visits, if the unit has asked for enhancement either on account of receipt of a large
order or on account of the need to buy raw materials in bulk. The Field Officer RMSEs/
CAMs/ Service Officers at AMTs should follow-up the end-use of the additional facilities
granted in order to ensure that the terms thereof are strictly adhered to.
viii) A list of all items of machinery pledged/hypothecated to the Bank should be prominently
displayed in the factory premises and a legend ‘Pledged/ hypothecated to SBI, …………..
Branch’ boldly painted on the body of each machine. At the time of inspection, the field staff
should physically verify each item of the fixed assets with those listed as per the records with
the branch. The working condition of plant, machinery and equipment should be checked to
ascertain that none of them remain idle. The inspecting official should ascertain the reasons
for any machine lying idle. No item of machinery charged to the Bank should be removed
from the factory, even for repairs, without the permission of the Branch. Where any
machinery is taken out of the unit, prompt return thereof should be ensured and the relative
item checked during subsequent inspection of the unit.
ix) Surprise inspections Additionally, surprise inspections to be conducted and it should be

ensured that Bank’s name board is embedded/painted prominently on the inside walls at the
godown to avoid any chances of the same stocks being hypothecated to other Banks.
x) The Bank’s officials should not record their observations on the books/registers of the
borrowers, not even on the stock statements submitted by them. The observations, if any,
should be recorded on the prescribed inspection report (please refer to paragraph 1-6-9.9
above) on the unit on return to the branch and submitted to the Branch Manager. It should be
retained in the file of the respective unit after taking necessary action, where warranted. The
borrower should be advised in writing, about the irregularities observed, with a request to set
right the position immediately. During the next visit, attention should be paid to check the
progress made to rectify the irregularities observed during the previous visits.
Maintenance of Inspection Register has been discontinued vide e-Circular Sl. No. 1438
(CPP/ADV 159) dated 28.01.2019.
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Follow-up based on information system: A close scrutiny of various statements gives the
field staff an idea of the unit’s actual operations vis-à-vis the planned production and sales
levels and whether the levels of inventory and receivables are as projected at the time of
sanction of the working capital credit limits. If the level of actual production is significantly
lower than the level projected, i.e., if the actual level of production is lower by 10 per cent or
more compared to the projected level, branches must find the reasons for the same and satisfy
themselves as to the adequacy and efficacy of the corrective measure initiated by the unit.
The actual figures in respect of all the items of cost of production should be compared with
the respective figures projected for the period under review. If there are large variances, they
should be investigated. For this purpose, the respective item of cost of production may be
broken down into its constituent elements and the exact elements responsible may be
examined in detail and the borrower should be urged to take timely corrective steps, wherever
warranted. Where the estimated sales turnover is not realised and all the items of the cost of
production are not contained within the projected level, the indications are that there could be
serious aberrations in the working of the unit causing declining profitability.
Stocks should normally be regularly turned over. If there is any accumulation of finished
goods, semi-finished goods or raw materials, reasons therefore should be enquired into.
Stocks-in-process should be in proportion to the time for conversion of raw material into
finished goods. In case of wide variance in the turnover of inventory, not being
commensurate with the level of activity, explanation from the unit should be called for
inasmuch as inventory should bear a relation to the scale of operation of the unit. Level of
stocking should be compared with the value/ quantity assumed at the time of credit
assessment. Excessive stock holding not commensurate with the production requirements of
the unit could mean inefficient management of inventory or speculative intent of the
borrower.
Some of the unsatisfactory features, a few listed below, in the functioning of the unit financed
should serve as warning signals to the branch and the Branch Manager/ CM (Maintenance)/
RMME/ Relationship Manager concerned must be put on alert.
i) The actual level of production falls below the break-even point i.e., failure to sustain the
capacity utilisation level well above the break-even point.
ii) Cost of production is higher than that was projected at the time of sanction
iii) Not able to achieve the projected sales turnover.
iv) Excessive inventory holding not commensurate with the scale of operation
v) Rising trend of ageing receivables
vi) Failure to meet the repayment obligations like term loan installments, etc. In order to
ensure that the unit’s profitability is maintained at least at the level projected at the time of
sanction of the loans, branches should carefully analyse the half-yearly operating statements
and systematically follow-up the various issues (thrown up by such analysis) by taking up
those with the borrower during the periodic inspections. After ascertaining the exact reasons
for the variances, the borrower should be asked to initiate the necessary corrective measures
for rectifying the aberrations. During the subsequent inspections it should be verified as to
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whether the issues raised during the previous inspection are receiving the attention of the unit
and corrective measures have been initiated.
If the trend persists from quarter to quarter (say for more than two quarters), Branch
Managers/CM (Maintenance)/RMME/ Relationship Manager should study the unit’s
functioning to ascertain the reasons of the unsatisfactory features and take up the matter
appropriately with the borrowing unit at the highest level so that the necessary corrective
measures are initiated in time to ensure that the projected levels of operation and profitability
are achieved and the Bank’s interest is protected. If considered necessary, the branch may
take up the matter with the controlling office for guidance with a view to protecting the
Bank’s interest.
Where the Bank is the sole financier of working capital, the Bank’s name boards should
always be displayed at the godowns/shops where the hypothecated stocks are stored. The
display boards should be enduring and prominent so that these will serve as notice to the third
parties of the Bank’s charge. Godowns in which goods pledged to the Bank are kept should
be properly secured under custody of the Bank with locks made by well-known
manufacturers with the Bank’s name engraved on it.
In case of multiple banking arrangements where credit facilities against hypothecation of

stocks from various banks are permitted, the borrower should submit a stock statement
together with a statement of loan outstanding on the date of stock statement from other
concerned bank branches.
Additionally, in case of Borrowers with ECR of BB+ and worse, debit/credit summations of
accounts maintained with other Banks as well as other Branches of our Bank should be made
part of Stock Statement. Each bank’s name board should be invariably displayed at the
godowns/shops, where the stocks hypothecated to the concerned bank are stored, for public
notice of that bank’s charge, especially in case of advances to partnership/ proprietary
concerns and individuals.
Inspection of Term Loans: As a term loan is repayable out of cash accruals generated over a
period of time, it is essential that a project is monitored, supervised and followed up on an
ongoing basis throughout the currency of the term loan. The scope of post-sanction follow up
extends beyond merely ensuring the observance by the borrower of the terms and conditions
governing the advance. It involves performance evaluation of the borrowing unit to ensure
that the projected sales and profit are achieved and the loan is repaid as scheduled. The post-
sanction follow-up in case of term loans can be divided into two categories i.e., follow-up
during implementation stage and follow-up after commencement of commercial production.
A. Follow-up during the implementation stage: The main objectives of follow-up at this
stage are:
(i) To ensure that the borrower mobilises the means of financing tied up for the project as per
schedule and according to the requirements of the implementation of the project;
(ii) To ensure that all funds so raised are utilised for the approved purpose without any part
thereof being wasted or diverted for any other purpose;
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(iii) To ensure that the physical progress of the project is in accordance with the project
implementation schedule facilitating completion of the project in time without giving rise to
any overrun; and
(iv) To ensure that, in case any overrun arises for unavoidable reasons beyond the control of
the borrowing unit the promoters bring in their proportionate contribution to finance the
overrun, the balance being provided by the term lenders by granting term loans in the same
ratio in which the original term loan requirements were shared by them. Follow-up at the
implementation stage begins soon after sanction of the Bank’s term loan is communicated to
the borrower. During the implementation of the project, branches should obtain progress
reports as per Annexure-FSM-TL-1 (Manual on Loans and Advances, Part-1, chapter-6) at
quarterly intervals, conduct periodic site inspection. Branches should also obtain audited
annual financial statements i.e., balance sheet and profit and loss account, where the project
implementation extends beyond one accounting year.
(i) Periodic progress reports: From the periodic progress reports, the following aspects
should be carefully examined:
Physical progress in implementation of the project

(a) Position regarding obtention of consents from Government and others.
(b) Position regarding acquisition of land and development of site
(c) Progress made in construction of factory and other buildings.
(d) Position regarding placement of orders for plant & machinery, other equipments and their
delivery schedules.
(e) Position regarding installation of the plant, machinery and other equipments at site.
(f) Position regarding availment of technical know-how and engineering services, where
applicable.
(g) Position regarding the training of technical staff and other operating staff engaged in the
implementation of the projects,
(h) Position regarding completion of formalities for disbursement of term loans by financial
institutions and for public issue, if envisaged.
Progress in mobilisation of the means of financing

(a) Progress made in the mobilisation of the means of financing tied-up for the project viz.,
promoters’ contribution, public issue of share capital, loans from financial institutions/ banks,
Central/State subsidy, public deposits, etc.
(b) Position regarding the capital expenditure already incurred/to be incurred under various
heads and the sources from which they were/will be met.\
(c) Position regarding overrun, if any, in the cost of the project and the progress made in the
mobilisation of the means of financing tied-up therefor.
(ii) Periodic site inspection: During the project implementation stage upto the
commencement of commercial production, site inspection should be carried out by the
Manager of the Division/Branch Manager/CM (Maintenance)/RMME/ Relationship Manager
at quarterly intervals with a view to verifying the physical progress of the project (as
indicated by the borrower in the periodic progress reports) vis-à-vis the project
implementation schedule. In case of TL indebtedness of Rs.5.00 crore and above, verification
of assets to be conducted within 15 days from creation of assets. Machinery identification to
be done by seeking help from qualified staff/ specialised external agencies wherever required.
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Where Bar Chart or PERT/ CPM (Programme Evaluation and Review Technique/Critical
Path Method) Chart is used by the borrower for monitoring project implementation, Manager
of the Division/Branch Manager/ CM (Maintenance)/ RMME/ Relationship Manager must
familiarise himself with the Bar Chart or PERT/ CPM Chart techniques of monitoring project
implementation to be able to effectively monitor utilisation of bank loan and corresponding
progress in project implementation. In comparatively smaller projects, it may not be feasible
to make use of PERT/CPM techniques. In such cases, the Bar Chart may be used as an
effective technique for monitoring project implementation.
On completion of the site inspection on each occasion, the inspecting officials should set out
their observations in inspection reports as per Annexure-FSM-TL-2. If any adverse
developments in project implementation are noticed, branches should send a comprehensive
note to the controlling authority with their recommendation for future action to protect the
Bank’s interest. Copies of the Quarterly Progress Reports with enclosures thereto and the
inspection report as above should be filed chronologically and made available for scrutiny by
the Bank’s Inspectors/Auditors.
At the end of the implementation of the project, a final report thereon should be called for,
indicating (i) the items of capital expenditure constituting the total cost of the project and the
various sources of funds mobilised as the total means of financing, (ii) the details of the trial
runs conducted and (iii) the date of commencement of commercial production. On the basis
of this final report, a detailed analysis of all the items of the cost of the project and the means
of financing should be carried out to ascertain whether there were any major departures in the
actuals from the original estimates and whether the actual implementation of the project has
been in accordance with the project implementation schedule. All the significant variances
should be examined critically with a view to ensuring that the overall performance/success of
the project will not be impaired thereby. Abnormal variances should be reported to the
controlling authority for information. The office copies should be filed along with the
periodic progress reports and made available for scrutiny by the Bank’s Inspectors/auditors.
B. Follow-up post-commercial production: Once the commercial production commences,

the unit would be required to submit half-yearly progress reports as per format given in
Annexure-FSMTL-3 (Manual on Loans and Advances, Part-1, chapter-6). The follow-up at
this stage would primarily relate to the day to day operations of the unit i.e., the level of
activity, management, profitability, etc. such that in the long run, the loans are secured and
continue to be standard assets. To this end, the field staff should conduct regular inspections
diligently and intelligently using periodic financial statements, etc. At the end of every year,
the performance of the unit should be measured in terms of,
➢ predetermined benchmark levels for current ratio, TOL/TNW and interest coverage
ratio and DSCR,
➢ default in payment of interest/installment to the Bank and to other institutions/banks.
If the unit is not able to perform satisfactorily, penal interest may be charged in the term loan
account. In cases where term loans as well as working credit facilities have been sanctioned
to a borrower, review of TL should form a part of the review/ renewal of working capital
facilities. Stand alone Term Loans also need to be reviewed annually. Term Loans, which are
irregular, are required to be reviewed once in six months. Such Term Loans is to be included
in the periodical review of ‘Special Mention Accounts’.
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Maintenance of Daily list for various activities: Daily list should be maintained for
obtention of revival letters and recording due dates of bills, insurance policies, submission of
financial statements and stock statements, renewal of limits, payment of installments of term
loans, dates of hearing in respect of suits filed. Daily list should be scrutinised regularly for
initiating required action and borrowers reminded wherever necessary at the appropriate time.
Inspecting officials should focus on the following areas/ points (illustrative only) while
visiting the unit,
✓ Have the fixed assets intended to be purchased out of bank finance been acquired?
When are they likely to be put to use? If delayed, what are the reasons?
✓ Any other preliminary testing/clearance required before installation?
✓ Have they been insured against various risks?
✓ Are the stocks held at the estimated level? If not, what are the reasons?
✓ Is proper care taken of the stocks purchased out of bank finance?
✓ Are all the stocks available in the go-downs properly covered for various risks?
✓ Are the stocks moving as per the working capital cycle?
✓ Are there any non-moving / slow-moving / obsolete stocks? If yes, what are the reasons?
✓ Are there any adverse market developments? If yes, What could be the impact of such
developments on the business/project?
✓ Are the estimates expected to be achieved? If not, what are the reasons?
✓ Are any changes proposed in the operating processes to suit the market trends?
✓ Are there any plans of business expansion in the near future?
✓ Is the project progressing as per time schedule? Is there any delay?
✓ If there is delay in project implementation what could be the impact?
✓ What steps are being initiated to address the fall out of delayed implementation?
Financial Follow-up Reports (FFRs) & Quarterly Results Report (QRRs)
Supervision of large fund-based working capital advances of Rs.10 crore and above, or
simply stated large FBWC advances, is largely based on use of Quarterly Results Report (for
unlisted Companies) & Financial Follow-up Reports (FFRs) for unlisted Companies. The
financial follow-up, as a method detailed below, will be applicable to all types of activities
except for advances to NBFCs, seasonal industries such as tea and sugar, construction
companies, which are subject to different methods of follow-up and supervision. The
guidelines regarding follow up based on Information System applicable to the above
exceptional category of borrowers have been given in the respective chapters.
Applicability: The QRR-I, QRR-II & FFR-I, FFR-II, which are basically financial and
operating statements, will be used for financial follow-up of large FBWC advances in respect
of all industrial borrowers as well as trade clients and large agricultural advances.
Quarterly Results Report (QRR)
➢ QRR is applicable to all listed companies.
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➢ The data available in the published results of listed companies will be filled in QRR-I
(quarterly) and Part-I of QRR-II (half yearly) by the credit officer.
➢ The review / analysis of published results will be carried out in Part II of QRR II
where the branch functionaries will also offer their comments on the performance of
the borrower.
➢ For listed companies having only Term loans or Non-fund based limits, QRR analysis
will be done on a half-yearly basis, based on published results.
➢ For week / stressed companies, even if listed, Sanctioning Authorities may stipulate
submission of additional data for monitoring the advances.
➢ SEBI has stipulated a maximum of 45 days for publication of quarterly unaudited
accounts and 60 days for publication of audited annual accounts. Listed companies
should make available published data to the Bank within a maximum of 7 days from
the date of publication of results. If the published data is not made available to the
Bank within seven days after the SEBI stipulated timelines and the data is not also
available in the public domain, it should be treated as an early warning signal and the
operating units shall ask for submission of complete data on FFR, which shall be
subject to more than normal scrutiny. Request for extension of time made to any
regulatory authority would not be good enough reason for non- submission of
performance data to the Bank.
Financial Follow up Report (FRR)
➢ FFRs will be submitted by all borrowers having Fund Based Working Capital
exposure of Rs. 10 crore and above.
➢ Waiver from submission of FFR should not be allowed for unlisted companies, as it is
an important tool for monitoring financial health of the borrowal unit. Categories of
borrowal units exempted are: i) Central / State Government undertakings ii) PSUs of
Central / State Governments and iii) fully collateralized loans.
➢ Part I of FFR I and FFR II will be filled up by the customer.
➢ The review / analysis will be conducted in Part II of FFR I & FFR II where the branch
functionaries will also offer their comments on the performance of the borrower.
➢ The time line for submission of FFR I will be 52 days from the end of the reporting
quarter (to synchronize with 45 days plus 7 days provided for listed companies to
submit unaudited results) and FFR II within 67 days from the half year end / year end
(to synchronize with 60 days plus 7 days provided for listed companies to submit
audited results).
➢ In revised FFR I, borrower has to provide ‘Other Information’ like incurring of cash
loss, increase in investments / loans and advances to associates, overdue statutory
liabilities, any material change in raw material price, labour, power, etc., affected the
business. This will help identify stress in the account.
➢ In revised FFR II, data in respect of Half Yearly Operating Statement and Half Yearly
Statement of Assets and Liabilities have been aligned with information available in
the published results. Interest Coverage Ratio, Funds flow analysis etc., will be
worked out by the system.
➢ In case we are not leaders in Consortium, branch should try to obtain FFR by having a
separate arrangement, by way of exchange of letters, with the borrower.
Other guidelines: Feeding of data and analysis of QRR / FFR will be carried out through
LLMS. CSO /Credit Analysts will submit their remarks and put up to the Relationship
Manager. Relationship Manager will add his remarks and submit to the Branch Head. In such
Page 471 of 632

cases where the analysis shows any Early Warning Signals, the analysis with suggested
course of action should be put up to the Controlling Authority. In the case of all listed
companies, a brief review is to be put up on the basis of quarterly working results published
by them in the Quarterly Results Report (QRR) format, duly incorporating comments such as
extent of exposure, conduct of the account etc. Such review is to be submitted.
a. To the Heads of Verticals in respect of ECCB sanctions,
b. To the CGM (Circle) / CGM (CAG) / CGM (MCG) / CGM (SARG) in respect of
CCSC & CCCC sanctions and
c. To the GM (Network / CCGRO / SARG) in all other cases.
Post implementation of revamped Corporate Credit Structure and Systems, some of the CCG
branches are now headed by GMs. Thereby, in respect of CCG branches, the Competent
Authority has approved vesting of authority for review of QRR for sanctions below the
powers of CCSC (erstwhile WBCC-I&II) with the following functionaries:
Sl.no. Branch Incumbency Reviewing Authority of QRR
1. GM GM of the Branch
2. DGM or below GM (CCGRO)
However, it is clarified that if the analysis of QRR shows any Early Warning Signals, the
analysis with suggested course of action is to be put up to the Controlling Authority by the
concerned branch headed by GMs.
Operating units should undertake QRR / FFR analysis within 7 days from the date of
submission of data by the borrower at the branch.
Penalty for non-submission of FFR, as per existing instructions, will continue. In case of
listed companies, if the companies fail to publish the quarterly results by deadline prescribed
by SEBI and do not share the financial information in the standard format to the bank within
seven days from the due date, penalty will be levied. Branch should have a suitable
arrangement by way of exchange of letters with the borrowers in this regard.
Guidelines for Scrutiny of Financial Follow-up Reports
Financial Follow-up Report-I (FFR-I): Information given in FFR-I (items A, B & C) shall
be scrutinised to see the following aspects:
➢ If the performance in regard to production and sale upto the end of the quarter under
report is in line with the current year estimates..
➢ If changes in Net Working Capital and Current Ratio are in consonance with the
changes expected during the current year.
➢ If change in the level of bank borrowing is in tandem with the changes in the value of
inventory and receivables. In case the change in the bank borrowing is due to
increase/decrease in the sundry creditors or other current liabilities, examine whether
the position reported is acceptable.
➢ If there is any significant change in the pattern of individual sources of finance for
current assets and if so, whether it is acceptable.
➢ The levels of inventory, receivables and sundry creditors on the date of the report as
compared with the year-end estimates are also to be examined.
Financial Follow-up Report-II (FFR-II)
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Part-A: Information given on the operating results during the half-year should be examined
in relation to the current year estimates and with specific reference to (a) Net sales, (b) Cost
of sales, (c) PBT to net sales, (d) Cost of production to net sales, (e) Raw material
consumption to cost of production and (f) Salary and wages to cost of production. Such
examination would be carried out with a view to ascertaining whether the half-year results are
in order and the estimates for the current year achievable.
Part-B: A scrutiny of the funds flow would give an idea as to whether the contribution from
the different items of long term sources, and deployment in various long term uses during the
half-year are in line with the annual plan; if there is any short fall or variation in these,
especially in items like ICDs, investments in subsidiaries - its impact on the liquidity, gearing
of the company.
Further, changes in Current Assets and Other Current Liabilities i.e., CL other than bank
borrowings and changes in Net Working Capital will be examined to see which of these
contributed significantly to the change in bank finance. Where the information received
shows wide variations from what was planned, the matter should be discussed with the
borrower to ascertain the reasons therefore and the manner in which the position would be
rectified.
No penal interest will be levied on account of delayed submission or non-submission of

FFRs. However, Non submission/delayed submission of FFRs on due date attracts flat
penalty as per extant instructions.
Receipt of the statements should be monitored. Infringements, if any, in submission of the

relevant reports should be taken up with the borrower as a non-compliance with the term of
the advance. In the cases where such violation persists, branch should take appropriate action
in consultation with its controlling office.
Follow-up of advances given in consortium/multiple banking arrangements: The system

of FF Reporting will also be applicable to working capital finance given by the Bank in
multiple/ consortium banking arrangements. In the case of consortium arrangements,
problems may arise if a different supervision system is followed by other member banks.
Where the Bank is the leader of the consortium, in such cases, the consortium should be
persuaded to adopt the FF Reports. Where this is not possible, branches may, on their own,
adopt the reporting by FFRs by separate arrangement with the borrower. Alternatively, they
may adopt the system followed by the consortium if it effectively serves the purpose of
follow up after obtaining necessary approval from the competent authority.
Detection and prevention of diversion of working capital finance: Branches should ensure
that drawals for cash credit/ overdraft accounts are strictly for the purpose for which the
credit facilities have been granted. There should be no diversion of working capital finance
for acquisition of fixed assets, investment in associate concerns, acquisition of shares,
debentures, units of mutual funds, buy-back of own shares, etc. Such diversion should be
treated as misutilisation of working capital funds.
Branches should ascertain from the audited balance sheets of all corporate borrowers, the
details of the investments such as Inter-Corporate deposits/ investments made in associate
companies/subsidiaries/real estate, etc. It is quite likely that corporate borrowers may have
invested short-term surpluses in ICDs, money market instruments, money market mutual
Page 473 of 632

funds, etc. without affecting the working capital flow or reducing the original level of Net
Working Capital. Further, it is possible that in some cases such investments may not be
diversion of Bank’s working capital finance, but the funds have been invested only from
acceptable long term sources concurrent with full compliance with the projected current ratio
and NWC at the assessed levels. In these cases, branches may, subject to verification of the
actual sources of such investments, not treat such investments as diversion. However, in cases
of other investments of long term nature or poor liquidity, branches should prima facie treat
these investments as diversion of the Bank’s working capital finance and seek from the
borrowers recall of the amounts so invested and deposit of the funds in working capital
accounts. Recall of such amounts and deposit in working capital accounts will not call for
reduction in working capital limits; the borrowers may be allowed to continue to operate the
limits provided funds are utilised strictly for working capital purposes. The interest on funds
so diverted should be charged at 2% above the lending rate applicable to the borrower, for the
period involved.
In case a borrower is unable to repay the amount recalled as stipulated above, within a
reasonable period, the existing working capital limits should be reduced to the extent of the
amount of such investments. Drawings in excess of the resultant reduced limits should be
treated as irregular drawings and appropriate measures, restrictions on further drawings in the
account, etc. should be initiated till the account is regularised within the reduced limit.
A watch on the sales and level of sundry creditors should be maintained. It is not unlikely that
the level of sundry creditors is higher in some cases than originally envisaged at the time of
sanction of the limit, or that the actual sales are lower than projected. In such cases, there is a
distinct possibility of diversion of funds and the operating staff should be on guard. Where
full information is not forthcoming and where there is justification to conclude that the
borrower is guilty of a breach of trust and is withholding information deliberately, branches
should not hesitate to exercise the right to refuse drawings for unauthorised purposes.
Branches should also suitably bring down the drawing power in case there is definite
evidence of the borrower having run up disproportionately large credits on purchases. The
level of sundry creditors should be examined in relation to the pattern of individual sources of
finance for current assets accepted at the time of sanction of limits. Any disproportionate
increase in level of sundry creditors which leads to deterioration of NWC & Current Ratio
should be guarded against and DP should accordingly be reduced as per availability of paid
up stocks.
Monitoring End Use of Funds: Effective monitoring of the end use of funds lent is of
critical importance in safeguarding the Bank’s interest. Further, this would also act as a
deterrent to borrowers and prevent them from misusing the sanctioned credit facilities and in
the process, help build a healthy credit culture. RBI during its inspection of Bank branches
observed that the expected level of monitoring end use of funds has not been exercised in
some cases facilitating diversion of funds by the borrowers. The various instructions of the
Bank, issued for ensuring monitoring of end use of funds are listed out in the e-Circular Sl.
No. 551/2019 -20 (CCO/CPPD-ADV/60/2019-20) dated 23.07.2019.
Monitoring of large withdrawals: Branches should have in place a regular system of

scrutinising the large withdrawals in the borrowal accounts in all cases of borrowers enjoying
fund based working capital facilities of Rs.10 crore and above from the banking system. For
effective compliance, branches may take the following steps:
Page 474 of 632

(a) Adopt a practice of obtaining advance information from the borrowers about each
large drawing of Rs.50 lakh and above expected to be made during a coming period
and verify the purpose of these drawings. This will help the branch to monitor, in
advance, the end use of the funds.
(b) Where information, as above is not available in advance, branches should disallow
drawings of Rs.50 lacs and above in cases where any other information available with
the Bank and the apparent purpose of the drawings both establish without doubt that
the drawings are only for unauthorised diversion of working capital.
(c) In other cases, i.e., where information as in (a) and (b) above is not available,
branches should seek, wherever possible, information regarding the purpose of the
drawings (Rs.50 lacs and above) and satisfy themselves. Where such prior scrutiny is
not possible, branches may permit the drawings subject to post-facto scrutiny of the
purpose of the drawings and action thereon, as appropriate, where the drawings
constitute diversion.
Allocation of limit: Usually at the time of sanctioning credit limits, sanctioning authorities
may permit at the request of a borrower, allocation of a portion of the limit to other branches
of the Bank at different centers for the operational convenience of the borrower. However, in
case such approvals could not be obtained along with the sanction, necessary approval for
allocation of limits may be obtained from the competent authority. No control reporting
would be necessary in respect of such approvals. Under this arrangement, the allocating
branch will directly pass on necessary instructions to the allocattee branch with copies of
such communication endorsed to the concerned LHO/controlling authority of the latter. The
responsibility for the conduct and safety of the accounts of companies having advances in
more than one branch, as in the case of allocation of credit limits, rests with the branch in
which the principal accounts are maintained. Appraisal of the credit limit, obtention of
sanction from the appropriate authority, documentation, review/renewal of limits, reporting
of irregularities in accounts including those arising at the allocattee branch and other
functions relating to overall monitoring of the advance shall be the primary responsibility of
the allocating branch maintaining the principal accounts of the concerned borrower company.
The specific responsibility of the allocattee branch would be to (i) comply with the
instructions of the allocating branch covering periodic inspection, obtention of stock
statements, conduct of accounts on the terms prescribed, etc. and (ii) keep the allocating
branch informed of significant developments in respect of the conduct of the account.
Outstanding, when the allocated limit in the allocated accounts exceeds should be transferred
to the allocating branch. The latter should immediately respond to the relative advice by debit
to the borrower’s main operating account to have an effective overall control on the total
drawings. Further, the debits should be value-dated to avoid income leakage.
Freezing of accounts: Where even levy of penal interest does not evoke financial discipline,
branches may freeze the accounts of such borrowers. However, before doing so, the reasons
for violating financial discipline should be ascertained from the borrower. If there is no
acceptable reason for such non-compliance with the terms and conditions of sanction, a
decision to freeze the accounts may be taken only in consultation the controlling authority.
The accounts may be frozen only after giving due notice to the borrower by registered post
with A/D. Full implications of freezing must be considered, more so in the case of
consortium/multiple banking arrangement where in the absence of a consensus among all
banks, a freeze on any account will serve no useful purpose as the borrowers may transact
Page 475 of 632

further in another bank. Branches must be circumspect in freezing as a measure to enforce
financial discipline.
List of Registers to be Maintained: With advancement in the IT capabilities of the Bank, a

need was felt to rationalize the number of resisters to be maintained with a view to free the
valuable human resources at branches to concentrate on business development and better
customer engagement. Accordingly, the revised list of registers, to be maintained at
Branches/ CPCs has been issued vide e-Circular Sl. No. 1428/2018-19 (NBG/BRNWM-
BRANCHES/5/2018-190 dated 22.01.2019.
Various FORMATS used in Post Sanction
Formats Nature Action

FFR-I Financial Follow up report To be submitted by unit having FBWC
(Performance in terms of Production, limit of Rs 10.00 Crore and above,
Net sales, Status of Working capital submitted quarterly
funds/Inventory & Receivables
details/ Sundry Creditors)
FFR-II Financial Follow up report To be submitted by unit having FBWC
(Half yearly Operating Statements Limit of Rs 10.00 Crore and above,
and Balance Sheet) submitted half- yearly
QRR –I Quarterly Review Report-I To be submitted by Listed Companies,
submitted quarterly
QRR-II Quarterly Review Report-II To be submitted by Listed companies
submitted half-yearly.
FSM-3 Stock and Receivables Statements To be submitted monthly by the unit
Format
FSM-4 Follow up Register for monitoring To be maintained by branch for recording
timely receipt of FFRs /statements date of receipt of FFRs /Statements
FSM-6 Inspection Report Format Observations of the Inspecting official
FSMTL-1 Progress Report during To be submitted by the borrower at
Implementation of project (in case of Quarterly Intervals
Term Loan)
FSMTL-2 Progress report during Observations recorded by the Inspecting
Implementation of the project (in Officials on the basis of visit and progress
case of Term Loan) reports submitted by the unit.
FSMTL-3 Progress Report after Observations recorded by the Inspecting
Commencement of Commercial Officials on the basis of visit and progress
Operation (in case of Term Loan) reports submitted by the unit.
Page 476 of 632

POST SANCTION CREDIT PROCESS
Illustrative check-list of activities at various intervals

S. No. Activity Yes/ No/ Not
Applicable
Immediately on sanction of a loan
01. Have the agreements been executed by the borrower as per the terms of
sanction? Have all of them been filled up not leaving any blanks?
02. Was it ensured that the required stamp duty has been paid on the
documents executed?
03. Have photographs of borrowers wherever stipulated been obtained and
authenticated by the authorized official?
04. Have name and place of execution been recorded on the documents?
05. Has witness letter been obtained in respect of illiterate borrowers?
06. Has Company’s seal (wherever applicable) been affixed on all
the documents?
07. Have all the documents executed been noted in the document execution
register?
08. Have all the documents required to be submitted by the borrower been
obtained?
09. Has it been ensured that all the licenses/approvals required for the project,
have been asked for and copies kept on record?
10. Has the charge (hypothecation/ mortgage) over the assets of the
unit/ guarantors in favor of the Bank been created as stipulated in the
sanction? If done, has the same been filed with the Registrar of Companies
(wherever applicable) for noting in their books?
11. In such cases where the mortgage is to be created at a later date, has the
date been diarised for follow up?
12. Has noting of EM been done? ( wherever required by State Law)
13. Has the charges on securities been r egister ed with the Central
Electronic Registry (CERSAI) through their web portal?
14. Has the self-contained EM confirmation letter from the borrower on a date
subsequent to creation of EM been received through registered post and
kept on record? Has the date of receipt been recorded in the EM register?
15. Have the documents notifying the Satisfaction of prior charge, if any, of
other lenders wherever applicable, been obtained and filed with the
Registrar of Companies?
16. In case of landed property obtained as primary/ collateral security, have No
Objection Certificate, Lien Confirmation Letter and also share certificates
from the housing societies, wherever applicable been obtained and kept on
record?
Page 477 of 632

17. Have all details of securities charged to the Bank with their current value
been entered in CBS?
18. Has Consent been obtained from the borrowers/ guarantors for disclosure of
information to RBI/CICs in case of default?
19. Has letter been exchanged with borrowers for recovery of charges on
account of Unhedged Foreign Currency Exposure?
20. Has consent of borrower been obtained with regard to Unconditional
Cancellability of limits?
21. Has the site visit been carried out before disbursement of Term Loan and
loan disbursed as per terms of sanction?
22. In respect of disbursements representing payments to suppliers of goods are
the payments being made through RTGS/ NEFT to ensure proper end use of
funds? Are the receipts from the beneficiaries obtained and kept on record?
23. In respect of vehicle loans, has a copy of the RC book, Invoice and Insurance
policy with the Bank’s hypothecation charge noted thereon, along with blank
transfer forms been obtained and kept on record?
24. In case of acquisition of machinery, have quotations been obtained and
reasonableness of prices quoted been independently verified/ compared
from the market and other sources?
25. Have Opinion reports on the suppliers (domestic or foreign) of machinery
been obtained?
26. Are proofs of expenditure already incurred in the project on record?
27. Have all assets charged to the Bank been fully insured with Bank’s interest
noted thereon?
28. Have the required documents for release of subsidy/ refinance, wherever
applicable, been filed with the appropriate authority by the borrowal unit?
29. Have the required documents for coverage under ECGC/CGTMSE etc.,
been filed with the agency concerned?
30. Has intimation regarding start date of installment been sent to the borrower?
31. Has the Bank’s board been displayed at a prominent and appropriate place in
the borrower’s premises to notify the public about the Bank’s charge over
the assets of the unit? e.g. Hypothecated to SBI….
At Monthly Intervals
01. Has the Stock statement been obtained (in standar d for mat) from the unit
and fresh DP fed in CBS?
02. Has the monthly inspection of stocks been carried out and compared with
the Stock statement?
03. In respect of manufacturing units, whether the production is going on
uninterruptedly?
04. Are the power bills in line with the estimated production level?
05. Have the CAPSA report (ear lier irregularity reports) for the month been
put up to the appropriate authority?
06. Have you scanned the operations in the accounts (Debits and credits) to
ensure that the volume of purchases and sales being routed through the
account are commensurate with the business levels projected?
07. Has a letter been sent to the top debtors of our borrowers indicating the
amounts receivable from them?
08. Are monthly statements submitted to ECGC promptly to ensure coverage of
outstanding in eligible export credit exposures?
At quarterly intervals
01. Has the FFR-1 in respect of all large advances been obtained from the
Page 478 of 632

borrowal unit, analysed & reported to the appropriate authority?
02. Has Stock and Receivables audit been conducted for eligible accounts?
Have the observations of Stock Auditor been shared with the Company and
their comments recorded thereon?
03. Has site inspection been carried out In respect of all large projects stage-
wise, during the project implementation stage up to the commencement of
commercial production at periodical intervals, to verify the physical progress
of the project (as indicated by the borrower in the periodic progress reports)
vis-à-vis the project implementation schedule?
04. Have the Quarterly working results in respect of listed Companies been
reviewed and put up to the Appropriate Authority?
At Half-yearly Intervals
01. Has FFR-II in respect of all large advances been obtained, analysed and
reported to the appropriate authority?
02. Has verification of Credit Information Reports from Credit Information
Companies been carried out?
03. In respect of large projects, have the half- yearly progress reports been
obtained from the date of commencement of commercial production and
compared with initial project report?
05. Has review of term Loans, which are irregular been done?
06. Has the certificate from Chartered Accountant about the actual level of
receivables & the age-wise break-up been obtained, in case of all units
enjoying post-shipment credit of Rs.10 crore and above and CRA below SB-
10?
07. Has a Declaration been obtained from the corporate borrowers with details
of accounts held by them with other Banks? Have the details of investments
in stock markets, mutual funds, NBFCs, ICDs, associate companies,
subsidiaries, real estate, etc. made by the company also been obtained and
kept on record?
08. Has dynamic review of internal rating been carried out for all eligible
borrowers?
At Yearly intervals
01. Have all Working Capital limits been renewed?

02. Has review of all Term Loans been conducted and put up to the appropriate
authority?
03. Has search with the Registrar of Companies on the charges noted against the
assets of the borrowal unit been conducted and commented upon in the
review/renewal proposals?
04. Has a search been made in the CRILC site of RBI to know the indebtedness
of the borrowal unit with the entire Banking system and status of accounts
with other Banks and the same commented in the proposals?
05. Have the Reports from the Credit Information Companies on borrowers and
guarantors been verified at the time of review and renewal and commented
upon in the proposal?
Page 479 of 632

07. Has renewal of all insurance policies been done and entered in CBS?
08. Have the premium payment been done to maintain the cover
under CGTMSE/ ECGC etc.?
09. Have all applicable charges/ fees/ penalties etc. been recovered as per extant
instructions ensuring no income leakage?
10. Have Opinion Reports been compiled and updated?
11. Have all Statutory dues been paid by the borrower and a Certificate from their
auditors been obtained confirming the same?
12. Has debit confirmation been obtained and kept on record?
As per sanction terms
01. Are all control reports for all sanctions/ renewals/ deviations etc. in place and
kept on record?
02. Has inspection of the unit been carried out at stipulated intervals as per
terms of sanction?
03. Is timely payment of installments as per sanction terms being monitored?
04. Is a Daily list maintained for obtention of revival letters and recording due
dates of bills, insurance policies, submission of financial statements, stock
statements, renewal of limits, payment of installments of term loans, dates of
hearing in respect of suits filed accounts? Is the Daily list being scrutinised
regularly for initiating required action and borrowers reminded wherever
necessary at the appropriate time?
05. Is the Valuation of securities, mortgage to the Bank being carried out at
stipulated intervals?
06. Are the Consortium meetings in which our Bank is the Lead Bank being
conducted at stipulated periodicity?
07. Are Consortium members advised of the proportionate DP from time to
time?
08. Is it verified if the unit is routing funds through any other bank or other
members of consortium without the prior permission of the lender?
09. Is follow up for review of ECR diarised?
10. Is the interest being adjusted in respect of lapsed ECRs on par with
UNRATED?
11. Is the interest rate being reset in respect of units where the ECR is
downgraded?
12. Is dynamic review being conducted in respect of all eligible borrowal
accounts?
13. Is it being verified as to whether the credit summations in the account match
with the sales?
14. with
Are the sales shown
discreet in thebeing
enquiries booksmade
of the borrowal
at times unit?
with the workers/ finance
department employees in the unit, for gathering information on production,
sales, promptness in payment of their wages, payments for other services,
future prospects of Company etc.?
15. Is Information gathered from suppliers and buyers of the unit to get market
information on the unit?
Page 480 of 632

Check Your Progress
1. MCQ:
1. As per Stock Statement as on 31.10.2019, total Current Assets level was Rs. 250 lac.
Out of which, the chargeable current assets was 90% of total current assets. As per
terms of sanction, 20% margin on chargeable current Assets has been stipulated for
FBWC limit of Rs. 170 lac. What would be the drawing power for the month of
November 2019?
A Rs. 180 lakh
B Rs. 170 lakh
C Rs. 225 lakh
D Cannot be calculated from the given information
2. In case the borrower wants to undertake any activity, listed in the Mandatory
Negative Covenants, how much days’ notice is required to be given by the borrower?
A 15 Days
B 30 Days
C 60 Days
D 90 Days
3. ABC Ltd. is engaged in manufacturing of Plastic Bottles. The Company has invested
Rs. 85 lakh from working capital limit for acquiring plot of land for future expansion.
The investment made by the Company is to be considered as ………… ?
A Investment of funds
B Withdrawal of funds
C Siphoning of funds
D Diversion of Funds
4. FFR-II is to be submitted within how many days?
A 67 days from the end of quarter
B 67 days from the end of half year
C 52 days from the end of quarter
D 52 days from the end of half year
5. Semi-finished goods should be valued at?
A Cost of purchase
B Cost of production
C Cost of production or selling price or market price or Govt. controlled rates, whichever is
the lowest
D Cost of goods sold
Page 481 of 632

ANSWERS FOR MCQ
Q. No. 1 2 3 4 5
Correct
Answer
D
C
C
B
B
2. MCQ Based on Caselet
Case: M/s Anjuman Syringe Pvt. Limited is a unit enjoying a FBWC Limit of Rs. 50.00
Lakh. Margin stipulated against Stocks is 25% and for Book debts is 50% as per the
sanctioned terms and Condition. The Stock statement dated 31.01.2020 is received on
15.02.2020. As per the Stock statement, Value of Stocks is showing Rs. 40.00 lakh and value
of Book Debts is 30.00 lakh. Value of Sundry Creditors is Rs 10.00 lakh against projected
level of Rs. 15 lakh in CMA. The Borrower has also advised outstanding LC Backed Bills
discounted of Rs. 10 lakh. Based on these facts, please select the most suitable answer of the
following questions.
Q-1 What will be the Drawing Power for the company as per the given stock statement?
a) 20 lakh b) 25 lakh c) 30 lakh d) 40 lakh
Q-2 By what date Stock Statement should have been received?
a) 10.02.2020 b) 15.02.2020 c) 20.02.2020 d) 25.02.2020
Q-3 What will be the Treatment of Sundry Creditors as per the Bank’s guidelines?
a) Excess amount of Rs. 5 lakh will not be deducted from the value of Stocks
irrespective of adverse changes in CR and NWC
b) Full value of Sundry Creditor will be deducted from the Market value of Stocks
c) Full value of Sundry Creditor will be deducted from the Advance value of the
Stocks
d) As the actual level of Sundry Creditors, as per stock statement, is lower than the
projected level in CMA, it is not required to be deducted from Market value of the
Stocks provided CR does not declines and NWC do not deteriorate.
Q-4 What is the Net value of book debts that will be eligible for D P calculation?
a) 40 lakh b) 20 lakh c) 22.50 lakh d) 25 lakh
Q-5 What is the Advance Value of Security?
a) 20 lakh b) 40 lakh c) 30 lakh d) 25 lakh
Page 482 of 632

ANSWERS FOR MCQ (CASE)
Q. No. 1 2 3 4 5
Correct
Answer
D
C
B
~~~
Page 483 of 632

CHAPTER- 13 A
REPORTING OF IRREGULARITIES
Irregularities in borrower’s accounts should not be permitted as a matter of routine. Borrowers should be
impressed upon that it is not in the ordinary course of banking to permit irregular drawings and such
overdrawing should be resorted to only in exceptional circumstances. However, irregularities occur due to
any one or several of the following reasons:
• Sudden increase in level of activity in excess of that estimated at the time of sanction of credit
limits
• Bunching of Orders
• Excessive inventory / receivables build-up
• Poor cash management i.e., temporary mismatch of cash flow
• Overall mismanagement leading to cash losses and liquidity crunch
• Delay in realisation of receivables
• Delay in collection of Cheques
• Diversion / siphoning out of funds
• Diversification in unrelated areas
• Devolvement of letters of credit/ invocation of bank guarantees.
1. System of allowing excess drawings:
i. Necessary efforts need to be made both at the Branch level and at the level of the controlling office
to ensure that excess drawings are not resorted to or permitted frequently or easily. To meet
contingencies, the units may be sanctioned facilities like SME Credit Plus or Standby Line of Credit
etc. If no such facilities are available, sanction of ad-hoc limits / temporary overdrawing may be
resorted to after taking usual precautions. In accounts handled by SME Centre / RASMECCs, the
concerned Branch Head / SME Centre / RASMECC Head is permitted to allow overdrawing on
business considerations. In all other accounts, the concerned Branch Head with the consent of
Relationship Manager is permitted to allow overdrawing on business considerations. Overdrawing
should be allowed only in special circumstances and following terms and conditions must be
observed:
- Based on a written request of the borrower, the branch should ensure that the conduct of the
account is satisfactory, the account is regular and free of any adverse features in its conduct
before permitting the over drawings.
- The overdrawing is permitted only against un-cleared effects and for payment of statutory
dues and utility bills, up to a maximum period of one month.
- A proper analysis of the reasons for such over-drawings should be placed on record.
- The Branch head after permitting such over drawings should immediately advise the
concerned Relationship Manager regarding the same along with the reasons for permitting
such over drawings, to avoid returning of cheques in clearing in the mean time.
- The Relationship Manager should invariably report the overdrawing to the appropriate
designated authority as per the extant instructions and in accordance with the ‘Scheme of
Delegation of Financial Powers’ in force at the material time.
- The prescribed system of reporting of irregularity should be followed.
Page 484 of 632

ii. Any excess drawing should be permitted only against the written request of the borrowing unit,
citing the reasons for such excess drawings and the time frame for regularizing it. Drawings in exc
ess of the sanctioned limits may be permitted only in exceptional circumstances and not in a
routine manner. As and when excess drawings are permitted, this should normally be done after
the borrowing unit submits a request letter along with an appropriate resolution of its Board (in
case of Company, LLP, etc. wherever applicable) seeking excess drawing from the Bank. In
exceptional cases, it might become necessary to permit over drawings without a resolution but, in
all such cases, a ratificatory resolution must be obtained. It may be noted that overdrawing
permitted in the account without an appropriate resolution of the Board would be ultra vires
(Beyond the powers) of the company.
iii. Branches should take adequate care to protect the Bank’s interests and obtain appropriate
documents in consultation with the controlling authorities. While deciding about the necessity
for documentation, the considerations that would come up are the financial position of the
company, the usefulness of the formality i.e., whether there is a security worth a further charge
thereon, the position of outside creditors who may jeopardise our interests, the conduct of the
account, particularly, a study of the utilisation of the limit in the past 12 months and frequency of
excess drawing, etc.
iv. Once a decision is taken to obtain documents, it must be followed up carefully. A suitable
exchange of letters should take place with the company to make it clear that the documentation
does not entitle the company to the enhanced level of drawings. The date agreed upon, if any, for
restoring the drawings to the limit should be diarized and followed up both at the branch and
controlling authorities level. The excess drawings should continue to be treated as irregularity and
reported as before until its regularization. The fact that additional documents have been taken
should be reported to the concerned authority along with the report of excess drawings. Efforts
should be made to recover the excess drawings expeditiously.
v. While confirming the irregularity, suitable directions regarding time frame for regularization,
renewal of credit facility, special monitoring instructions, if any, in case of potential SMAs,
submission of financial and other data, calling up of advance or initiating recovery process
whichever applicable, should be clearly stated and conveyed through the controller to the
operating unit. Wherever necessary a proactive intervention that requires examination of fresh
financial sanction be taken up on priority even though the irregularity in the account may not
have persisted for over 3 months.
vi. The irregularity that occurred due to technical reasons such as connectivity problems or for
reasons for which the Borrower could not be held liable, but adjusted subsequently when the
connectivity is restored or adjusted after removal of technical snag, need not be reported for
confirmation. However, an irregularity of this nature is required to be reported to the Controller
of the Branch for information and record detailing the circumstances under which this temporary
/ technical irregularity has occurred.
vii. Where irregularity persists for more than a month, sanction of standby line of credit/ ad-hoc
limit should be resorted to, if permissible.
viii. If the need/ requests for overdrawing persist for a period exceeding six months, borrower will
be advised to submit proforma balance sheet and the limits should be re-assessed afresh and
sanctions obtained, immediately.
Page 485 of 632

2. Objectives of reporting
The objectives of the system of reporting irregularity are as under:

i. To keep the concerned authority informed of the position of irregular accounts at
branches/operating units/processing cells at periodical intervals for the purpose of
control/monitoring.
ii. To seek confirmation, where required, of the appropriate authority in respect of

irregularity in individual accounts, in accordance with the requirements of the ‘Scheme of
Delegation of Financial Powers’ in force at the material time.
iii. To put forth/ evolve plan of action for regularizing irregularity in loan account.
3. System of reporting of irregularities
i. It is necessary to report irregularities in working capital limits, Term Loans, non- fund based limits
(included), occurring during a month in the subsequent month and at monthly intervals thereafter,
till the account is regularized. However, in case of irregularities occurring only in non-fund based
facilities, initial reporting alone would suffice and no subsequent reporting is necessary, where no
fresh exposure is contracted in the facility.
ii. Branches should invariably report irregularities in Borrowal accounts to the appropriate
authorities before 10th day of succeeding month, without waiting for regularization of the
accounts at periodic intervals till the accounts are fully regularized or when a decision is taken to
recall the advance and initiate recovery proceedings.
4. Authority Structure for reporting/confirmation of irregularities:
Irregularity reporting to be done in Corrective Action Plan for Stressed Assets (CAPSA)
format as circulated vide CPPD Circular No.204 dated 30th March, 2019. The authority
structure for review of irregular accounts is as below:
Default Category Business Proposed Periodicity

Vertical
Sanctions by / Sanctioned To be submitted to Monthly
Limit
Irregular (In the case R&DB Limits above Rs.1.00 crore, Controller, not below the rank
of revolving credit Group and sanctions below RCCC of AGM or DGM-Branch Head
facilities like cash (as applicable)
credit etc, as system
RCCC & Above Controller, not below the rank
of classifying as SMA-
of DGM (B&O)
0 has been dispensed
with. They are still CCG All Committees GM (CCGRO) / GM of the
irregular) Branch
CAG All Committees CGM (CAG)
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5. Reporting of Irregularity in NPA Accounts:
i. Irregularity reports in case of NPAs with outstanding up to Rs.500 crore will be

submitted to sanctioning authorities competent to approve such exposure (as per
delegation of financial power for advances) as per following periodicity and guidelines:
Sl. Particulars of Irregularity Periodicity
a. Immediate reporting (i.e. on loan account being To be submitted to Sanctioning Authority within
classified as NPA). 10th day of subsequent month.
b. Subsequent reporting including variation in Yearly reporting to Sanctioning Authority for

irregularity / outstandings on account of accrued information.
but unapplied interest (quantum of unapplied
interest to be shown separately) or otherwise.
Note: In cases where during a quarter the NPA account is regularized and IRAC status is
upgraded, operating units will be required to submit irregularity report to sanctioning
authority competent to approve such exposure within the delegated authority structure,
with the observation “Regularized during the quarter under report”.
ii. The accounts which become due for annual review during the reporting quarter will be
reported at the end of the quarter.
iii. Where limited operations are proposed to be permitted in such cases, approval for
the holding-on operation (HOO) detailing the manner in which the operations would be
permitted is to be obtained from an authority having financial powers for sanctioning the
aggregate exposure comprising the outstanding and the interest accrued but not applied.
Once such approval has been obtained and the drawings are being permitted as per the
arrangement there would be no need for submission of irregularity reports.
However, for permitting holding on operations in respect of potentially viable SMA or

substandard accounts would not require any administrative clearance / approval / sanction
and would need only to be reported to the reviewing authority.
The reviewing authority would take the report on commencement of holding on operations
on record and would give necessary directions to the branch on the proposed action plan. If
holding on operations continued beyond the initial period of 3 months, the same has to
be approved by the sanctioning authority.
In cases where holding on operations are proposed as part of restructuring package, along
with other terms, prior approval should be taken from the authority that approves the
Restructuring package before implementing holding on operations. Subsequent extensions,
if considered necessary, also require prior approval of the sanctioning authority.
iv. For the purpose of confirmation of irregularities involving outstanding exceeding

sanctioned limits in respect of accounts classified as NPA, the balance outstanding should
be taken together with the amount of interest of accrued till the date of the report but not
applied, to decide the authority to whom the relevant report should be submitted for
confirmation as per the ‘Scheme of Delegation of Financial Powers.
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6. Instructions for compiling the irregularity reports
i. The statement should be properly filled in and crucial information like the specific reasons as
to why the irregularity occurred, the steps initiated to regularise the accounts, etc. should
invariably be furnished. The purpose/ reasons for the irregularities indicated should contain
full description of the exact end use of the funds and why the borrower could not work
within the facilities sanctioned. Routine statements such as ‘for urgent working capital
requirements’, ‘due to depletion of stocks’, ‘due to depletion of drawing power’, ‘for
obligatory payments’, ‘to meet clearing cheques received’, etc. should be avoided.
ii. In the irregularity report, the latest position of the account on a date as close to the date of the
date of submission of irregularity report as possible should be furnished duly indicating the
date of such information.
iii. The steps taken by both the company and the Branch to have the position regularised should be
clearly indicated In the irregularity report.
iv. General remarks should contain brief comments about assessment of the position, general
health of the borrowing company, their financial position, whether the excess drawings are
recoverable in the short run, number of occasions and number of days the account was irregular
during the financial year, etc. Where the irregularities have been continuing for a long time, say,
more than three months, the comments should be sufficiently detailed on the following aspects
- Existing viability of the unit

- Any need for initiating fresh viability study of the unit
- Quality of the company’s management
- Any need for modernization
- Environmental factors affecting unit’s working (if any)
- Consultants’ recommendations where available
- Company’s plans to set right the position of operations of the unit as well as irregularities
in the accounts and the branch views on the same
- Action taken report on the observations of the sanctioning or controlling authorities, etc.
- If necessary, the matter should be followed up by a separate letter giving a full picture of
the working of the unit, whether any viability study would need to be initiated, etc.
7. Penal interest:
Cash Credit Account: 5.00 % per annum on the irregular portion for the period of irregularity.
Term Loan Account:

i. Non-payment of interest / installment: 5.00 % per annum on the irregular portion for the period
of irregularity.
ii. Cross default (Default in payment of installment/ interest to other Institutions/ Bank): 1.00%
p.a. on the entire outstandings with us for the period of non-adherence subject to a minimum
period of 1 year.
===============
Reference: For detail guidelines and formats, please refer to:
1. Manual on Loans and Advances as on 31.12.2017, Part3, Chapter 21
2. Circular No. CCO/CPPD-ADV/63/2017 – 18 dated 15 September 2017
3. Circular No. CCO/CPPD-NPA/145/2016-17 dated 13 February, 2017
Page 488 of 632

Test your knowledge
1. It is not in the ordinary course of banking to ……….. irregular drawings
a. occur
b. report
c. permit
d. decline
2. Standby Line of Credit is normally sanctioned along with regular limits to ensure that the borrower
a. resorts to over drawings in case of need
b. is restricted to draw within the sanctioned limits
c. anticipates contingency requirements in advance
d. uses the assessed bank finance limit exhaustively
3. The objectives of the system of reporting irregularity are:
a. Comply with the guidelines contained in Bank’s Manual on Loans and Advances Part-3, Chapter 21A and
instructions contained in Bank’s various circulars on CAPSA.
b. Reporting for control, obtaining confirmation and evolve action plan
c. Evolve a Corrective Action Plan, implement the same and seek confirmation of the plan
d. In simple words, reporting of irregularities and confirmation thereof superimpose the occurred irregularity by a
‘Corrected’ stamp from the delegated authority.
3. M/s. ABL Enterprises enjoys a cash credit limit of Rs.10 crore (DP Rs.10 crore) with the Branch. The account has
turned irregular due to application of interest of Rs. 20 lac at end of last month. The present outstanding in the account
is Rs.10.19 crore. The Branch has received a cheque in clearing for payment of electricity dues of Rs.10 lac. The
borrower deposits Rs.10 lac in the account and requests the branch for payment of cheque. The borrower also promises
to pay the interest amount within 2 days. Please discuss in details on followings aspects:
- Whether the Branch can allow payment of cheque?

- What are the formalities / precautions branch has to adhere before payment of cheque?
- If the customer regularize the account within 20 days of application of interest and branch has not allowed any
drawings beyond the interest applied amount, whether irregularity report is required to be submitted?
4. M/s. Welman Pvt. Limited enjoys a cash credit limit of Rs.20 crores (DP Rs.20 crore) and term loan of Rs.30 crore
(Theo Balance Rs.25.48 crore). An interest amount of Rs.30 lacs and Rs.40 lacs applied in the Cash Credit and Term
Loan account respectively at the end of last month. The Cash Credit was regularized on 5th day of this month and the
term loan was regularized on 25th of this month. Please discuss in details with reasons on followings aspects:
- If the branch has not allowed any drawing in the Cash Credit account before regularization of account, for which of the
account branch has to submit irregularity report?
- If the branch has allowed drawing in the Cash Credit account to the extent of interest due in the account in lieu of
credits, for which of the accounts branch has to submit irregularity report?
5. Credit was regularized on 5th day of this month and the term loan was regularized on 25 th of this month. Please discuss
in details with reasons on followings aspects:
- If the branch has not allowed any drawing in the Cash Credit account before regularization of account, for which of the
account branch has to submit irregularity report?
6. Credit was regularized on 5th day of this month and the term loan was regularized Credit account was regularized on on
5th day of this month and the term loan was regularized on 25 th of this month. Please discuss in details with reasons on
followings aspects:
- If the branch has not allowed any drawing in the Cash Credit account before regularization of account, for which of
the account branch has to submit irregularity report?
Page 489 of 632

CHAPTER- 13 B
SPECIAL MENTION ACCOUNTS
1. SMAs- Definition and Classification
i. Early Warning System is an integral part of a bank’s Risk Management process as it

provides an opportunity for early identification of potential NPAs, review and reporting
of problem loans and initiation of time-bound corrective action including
rehabilitation/restructuring. Keeping the above in view, RBI introduced an asset category
viz., Special Mention Accounts (SMAs), between ‘standard’ and ‘sub-standard’
categories of assets, for the accounts which show tendencies for possible default or
delinquency or ‘signs of incipient stresses. Some of these early warning signals or sign of
incipient stress in conduct of the loan accounts may have impact on the asset quality of
the account. It may be mentioned that for the time being SMAs would not require
provisioning as they are not classified as NPAs. However, till such time a decision is
made by RBI, all irregularity reports, control reports and proposals should clearly specify
whether the account under report has been identified as a SMA and the category thereof.
ii. The underlying idea for the new asset category is to exhort banks to put in place a
mechanism for own internal monitoring and follow up of problem loans (potential NPAs)
in line with international best practices so that banks can initiate preventive measures
well in time to prevent slippage of such Special Mention accounts to NPAs. We have to
identify incipient stress in term loan accounts, immediately on ‘default’, by
classifying stressed assets as special mention accounts (SMA) as per the following
categories.
SMA-0 Principal or interest payment or any other amount wholly or partially overdue between
1-30 days
31-60 days
61-90 days
In the case of revolving credit facilities like cash credit, there will be no SMA-0 and the
SMA sub-categories will be as follows:
Outstanding balance remains continuously in excess of the sanctioned limit or drawing

SMA-1
power, whichever is lower, for a period of 31-60 days
Outstanding balance remains continuously in excess of the sanctioned limit or drawing
SMA-2
power, whichever is lower, for a period of 61-90 days
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iii. Default means non-payment of debt when whole or any part or installment of the
amount of debt has become due and payable and is not repaid by the debtor or the
corporate debtor, as the case may be. For revolving facilities like cash credit, default
would also mean the outstanding balance remaining continuously in excess of the
sanctioned limit or drawing power, whichever is lower, for more than 30 days.
iv. Some of the signs of financial difficulties in stressed assets are as under:
• Irregularities in cash credit/overdraft accounts such as inability to maintain
stipulated margin basis or drawings exceeding sanctioned limits, periodic interest
debited remaining unrealized;
• Failure/anticipated failure to make timely payment of installments of principal and
interest on term loans;
• Delay in meeting commitments towards payments of installments due,
crystallized liabilities under LC/BGs, etc.
• Excessive leverage;
• Inability to adhere to financial loan covenants;
• Failure to pay statutory liabilities, non- payment of bills to operational
creditors, etc.;
• Non-submission or undue delay in submission or submission of incorrect stock
statements and other control statements, delay in publication of financial statements
and adversely qualified financial statements;
• Steep decline in production figures, downward trends in sales and fall in
profits, margin erosion etc.;
• Elongation of working capital cycle, excessive inventory build-up;
• Significant delay in project implementation;
• Downward migration of internal/external ratings/rating outlook.
2. Management of SMAs:
i. The management of SMAs essentially involves the following critical steps:

- Timely identification of SMAs at initial stage where account is either regular or
temporary irregular but showing the signs of incipient stress or early warning signals.
- Evolving a detailed action plan and preventive measures well in time to prevent
slippage of such SMAs to NPAs.
- Initiating Holding-on operations
- Reporting and monitoring of the progress made
ii. The basic strategy underlying the Bank’s approach to SMAs is initiation of appropriate
corrective actions at the right time. Soon after an account is identified as SMA, the
Branch should take immediate steps to analyse the problems based on facts and
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circumstances by means of a review at the Branch as per CAPSA Format and submit the
same to the appropriate reviewing authority.
iii. The important parameters of the Branch level review would be the following:
- Diagnose reasons for the account being identified as SMA /deterioration in asset quality.
- Revalidate the assumptions made at the time of credit sanctions particularly with regard
to assessment of credit risk. Verify completeness and correctness of documentation
including revival position, creation / registration of charges, insurance cover etc. and
rectify deficiencies, if any.
- Discuss the unit’s problems with the promoters / guarantors and find out whether they
have a future plan for the unit.
- Identify and study the existing primary and secondary sources of cash flow and determine
whether the unit is intrinsically viable.
- Determine whether the problems faced by the unit are of a temporary nature or whether
any proactive action from the bank is required to sustain its viability.
- Assess whether the promoter(s) / management has genuine intent to rehabilitate the unit.
- Assess the ability of the promoters / management to turnaround the unit.
3. Resolution Plan for SMAs:
Bank is required to explore various options to resolve the stress in the account and to arrive at an
early and feasible solution to prevent the account from turning to NPA and to preserve the
economic value of the underlying assets as well as the lenders’ loans including restructuring and
recovery. These options available to Bank are formalized as Resolution Plans (RP). The
following options for RP are available:
i. Rectification:
- To obtain a specific commitment from the borrower to regularise the account so that the
account comes out of SMA status or does not slip into the NPA category.
- Commitment should be supported with identifiable cash flows within the required time
period and without involving any loss or sacrifice on the part of the existing lenders.
- Need based additional finance may be considered, if proposal is found viable by Bank.
However, it should be strictly ensured that additional financing is not provided with a
view to ever-greening the account.
- If the existing promoters are not in a position to bring in additional money or take any
measures to regularise the account, the possibility of getting some other equity/strategic
investors to the company may be explored in consultation with the borrower.
- These measures are intended to turn-around the entity/company without any change in
terms and conditions of the loan.
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ii. Restructuring:
- To consider the possibility of restructuring if the unit is prima facie viable and the
borrower is not a wilful defaulter and there is no diversion of funds, fraud or
malfeasance, etc.
- Commitment from promoters for extending their personal guarantees along with their net
worth statement supported by copies of legal titles to assets may be obtained along with a
declaration stating that they would not undertake any transaction which could alienate
assets without the permission of the Bank. Any deviation from the commitment by the
borrowers affecting the security/recoverability of the loans may be treated as a valid
factor for initiating recovery process.
- Restructuring cases will be taken up by the Bank only in respect of assets reported as
Standard, SMA, Sub-Standard or doubtful.
- Wilful defaulters will normally not be eligible for restructuring as aforesaid. However, in
cases where the existing promoters are replaced by new promoters, and the borrower
company is totally delinked from such erstwhile promoters / management, we may take a
view on Restructuring such accounts based on their viability, without prejudice to the
continuance of criminal action against the erstwhile promoters / management.
iii. Recovery - If the first two options of rectification and restructuring are considered as not
feasible or accounts fails to perform as per agreed terms under these options, due
recovery process may be resorted to. The branch may decide the best recovery process to
be followed, among the various legal and other recovery options available, with a view to
optimize the efforts and results.
4. Central Repository of Information on Large Credits (CRILC):
RBI observed a communication gaps between different lending institutions resulting in financing
the same borrower without factual details of its operation with other lenders. Therefore, a need
for common approach by all institutions in a multi-creditor situation is felt when exposure is
under stress. The first step towards any such situation is that all the lending institution should
have information about borrowers banking with others and their present status of the account.
Hence, CRILC has been set up by RBI with a view to improve credit discipline. All lending
institutions are required to provide following data to CRILC:
- Details of all borrowers having aggregate fund-based and non-fund based exposure of
Rs.5.00 crore and above mentioning classification of an account as Standard / SMA /
NPA. Above exposure pertaining to a borrower either availed at domestic branch or
overseas branch should be reported. Aggregate Exposure (AE) means total outstanding
plus undisbursed / undrawn portion of fund based and non fund based facilities, including
investments, pertaining to a borrower as on reporting date from all lenders. The above
details are required to be reported on monthly basis as end of every month.
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- Details of Current Accounts / Current Account overdraft with outstanding balance (debit
or credit) of Rs.1.00 crore and above to be reported on monthly basis as end of every
month.
- To update the duly validated PAN details of borrowers
- In case of borrower entities in default (SMAs / NPAs), with aggregate exposure of Rs.5
crores and above, the details are required to be submitted to CRILC on a weekly basis at
the close of business on every Friday or the preceding working day if Friday happens to
be a holiday.
- In case, Bank fails to report SMA status of accounts to CRILC, accelerated provision or
supervisory actions as deemed appropriate by RBI will be resorted to against defaulting
bank.
- Banks are also required to report classification of borrower as Non-Cooperative

Borrowers to CRILC as and when any borrower is classified as Non Cooperative
Borrowers.
- In our Bank, operating units (Branches through circle authorities) will report above
details to their respective Business Unit (NBG, MCG, CAG, SAMG). Business unit in
turn will submit these reports to CPMD at Corporate Centre and CPMD will report
consolidated details to CRILC.
- The above consolidated data will be made available to all lending institution by CRILC to
be used in their lending decision making process.
5. Holding on Operation:
After taking a view on the viability of the unit / feasibility of rectification / restructuring, the
Branch should also decide on the need to implement holding on operations. If the branch is
satisfied that the unit needs to be put on holding on operations, pending finalization and
implementation of the rectification / restructuring package, the branch may extend the same
immediately. The details about of Holding On Operation (HOO) are as below:
i. The holding on operations (HOO) would consist of freezing the bank’s exposure
at the sanctioned limit or average daily exposure during the previous one month
prior to the date of reporting, whichever is higher and allowing operations within
such frozen limit.
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ii. Holding on operations would commence from the date branch identifies an SMA or
a Sub- standard account as ‘potentially viable’. Such holding on operations (HOO)
would not require any administrative clearance / approval /sanction and would
need only to be reported to the reviewing authority. The reviewing authority would
take the report on commencement of holding on operations on record and would
give necessary directions to the branch on the proposed action plan. If holding on
operations continued beyond the initial period of 3 months, the same has to be
approved by the sanctioning authority.
In cases where holding on operations are proposed as part of restructuring package, along with
other terms, prior approval should be taken from the authority that approves the Restructuring
package before implementing holding on operations. Subsequent extensions, if considered
necessary, also require prior approval of the sanctioning authority. The cash budget prepared by
the borrower should be supported by an undertaking of the borrower stating that no unauthorised
depletion or diversion of assets would take place. The operating Officials need to critically
evaluate available cash with the promoter group units by testing their cash flows while accepting
source of promoters’ margins for their other commitments / projects. Once cash budget is
prepared, approved and put into operation, it is necessary that all operations are governed by the
cash budget details. A close watch on the running of the company based on the cash budget will
have to be maintained to ensure that undue and unnecessary deviations are not permitted.
With the introduction of Insolvency & Bankruptcy Code, cases are now being referred
to NCLT. In these cases, “Holding-on-Operations” becomes necessary till finalization of
the Resolution plan and approval thereof by the Committee of Creditors. And any delay
in permitting “Holding-on-operation” may affect its value / performance. Therefore, it has
been decided that:
1) The Screening Committee that approves the reference of the cases to NCLT,
will henceforth, as part of the decision, also approve Holding-on-Operations of
such referred accounts and proposals to the Screening Committee,
seeking reference to NCLT need to include the aspect of Holding-on-Operations
as well. Such Holding-on-Operations will continue till Resolution Plan is
finalized and implemented.
2) However, in cases where Holding-on-Operations is considered as part of

the Resolution Plan, such Holding-on-Operations shall be approved by
the sanctioning authority, as part of the Resolution Plan.
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The above guidelines will not be applicable for cases where Bank is dragged to NCLT by other
creditors. In such cases, the existing guidelines applicable to other than NCLT referred case as
detailed above will be followed for initiating Holding-on-operations.
6. Monitoring of SMA account on cash budget basis
The operating units have to ascertain the reasons for default in borrowal account and finalize
the remedial action in consultation with the borrowers. If the irregularity in the account is of
temporary nature and operating unit is a prima facie viable, the first remedial action should
be put the account under holding on operation.
On finalization of the period up to which holding on operation is intended to continue, the

conduct of account during this period has to be regulated through the system of cash
budget. Even though the initial period for conduct of holding on operation should be
restricted to three months, it would be expedient to draw cash budget on month to month basis to
have better control on the account.
7. SMA – Review and Reporting:
SMA reporting to be done in Corrective Action Plan for Stressed Assets (CAPSA) format as
circulated vide CPPD Circular No.204 dated 30th March, 2019. The authority structure for
review of SMAs is as below:
1) Reporting of Irregularity / Default: Accounts classified as SMA-0.

Default Business Proposed Periodicity
Category Vertical
Sanctions by / To be submitted to Monthly
Sanctioned Limit
SMA-0 R&DB Limits above Controller, not below the

rank of AGM or DGM-
Group Rs.1.00 crore, and Branch Head (as
sanctions below applicable)
RCCC.
RCCC & Above Controller, not below the
rank of DGM (B&O)
CCG All Committees GM (CCGRO) / GM of
the Branch
CAG All Committees CGM (CAG)
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2) Reporting of Irregularity / Default: Accounts classified as SMA-1 & 2
Default Business Proposed Periodicity

Category Vertical Sanctions by / To be submitted to Monthly
Sanctioned
Limit
SMA-1/2 R&DB Limit > Rs.1.00 Controller, not below
Group crore ≤ Rs.3.00 the rank of DGM
crore (B&O)
Limit > Rs.3.00 Jointly by GM (NW)
crore, and sanctions and DGM & CCO
below
RCCC
RCCC/CCSC CGM(Circle)
CCCC DMD (RB)
ECCB MD & Group Head
CCG/CAG Below CCCC CGM (CCG/CAG)
CCCC DMD (CCG/CAG)
ECCB MD & Group Head
Note: For limits up to Rs.1.00 crore, reporting of irregularity / default is to be made by way of
simple listing (as per Annexure-V) to the AGMs of Credit CPCs / Controller, not below the rank
of AGM (in case of CPC with Scale-IV incumbency) at BPR Centres, and RMs/AGMs at non-
BPR Centres (as the case may be), irrespective of category of default SMA-0/1/2 and/or
Sanctioning Authority.
3) For all accounts with aggregate exposure from Banking System of Rs. 1,500 crore and
above (irrespective of sanctioning committee), reporting of tracing of Indicators of Financial
Difficulty (IFD) / irregularity / default will be required to be made to the Deputy Managing
Director of the business vertical within one week of such event, ie tracing of IFD or from the
date of 1st default i.e. immediately on classification of account as SMA-0, and thereafter on
monthly intervals i.e. by 10th day of subsequent month. Once a decision on financial
difficulty has been taken, then a review is to be put up to the MD & Group Head on CAPSA
format for further action.
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4) In case an account (limit above Rs.1.00 crore) is continuously running SMA-0 for 3
consecutive months, reporting of irregularity / default in such accounts is to be made to the
appropriate authority defined for SMA-1/2.
5) In respect of sanctions by ECCB {i.e. where outstanding is in excess of sanctioned limit
(Both Working Capital & Term Loan)}, quarterly report has to be submitted to ECCB for
information (by way of simple listing on the lines of Annexure – III to CPPD circular dated
30-03-2019), and this would be in addition to monthly CAPSA report to be submitted to
appropriate authority.
6) Actions after reporting
i. The reviewing authority would take the SMA Report on record and give necessary
directions to the Branch on the recommended resolution plan. If the unit is considered
intrinsically viable and if the reviewing authority concurs with the branch’s views in this
regard, the holding on operations already initiated by the Branch would continue and the
Branch would proceed with the action plan, subject to directions of the reviewing
authority. The purpose of the structured review is only to examine the viability and
approve the action plan for proceeding with required actions. The financial sanction for
the enhancement/additional loan/restructuring proposal would be separate as per extant
Delegation of Financial Powers.
ii. If after the SMA review, the unit is not considered potentially viable, recovery efforts
are to be immediately initiated. The speed with which problems are diagnosed and the
package is implemented is vital for the success of any rehabilitation plan.
Similarly, in cases where restructuring is not considered feasible, the speed with which
recovery steps are initiated is equally critical. The following time norms have been
prescribed for review of SMAs and for obtaining sanction for enhancement/additional
loan/rehabilitation package:
Process Time Frame
Submission of Report(SMA- 2 / 1 / 0 as on last day of calendar month and report by 10 days

th
10 of the following month)
Approval for action plan (by reviewing authority) 10 days
Completion of viability study, if necessary, and submission of restructuring/ 40 days

rehabilitation package/appraisal memorandum and obtention of sanction from
sanctioning authority
Total 60 days
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iii. The controller of the branch is to monitor the progress in implementation of the approved
action plan. A monthly progress report required to be submitted by the Branch to the
controllers.
iv. As accounts with outstandings below the cut off level of Rs.1 crores are not covered by
the structured reporting norms and R&DBG would have large numbers of SMA accounts
with outstanding upto Rs.1.00 crore, Circle authorities will need to formulate suitable
mechanism for review of such accounts.
v. The system of identifying and classifying accounts as SMAs is in addition to and not in
substitution of the asset classification under IRAC norms.
vi. With implementation of above guidelines on review of SMAs, the review of standard
assets has since been dispensed with.
8. Early Warning Signal
i. Early Warning System (EWS) has been conceptualized in our Bank and its
customization and phased implementation was taken up in CAG / MCG / SME. The
Bank has developed an “Early Warning System” software solution which will aid the
operating units for early detection of stress in its loan assets before they become NPA.
Early Warning System (EWS) is a solution to pro-actively identify borrowers in the
bank’s portfolio showing early signs of stress and enable timely corrective action
planning. The objective of the EWS as an intelligent monitoring solution is not only to
enable the bank implement best practices in early warning, but, over the long term, also
help fine-tune its credit policy, product portfolio and lending processes in a bid to
improve quality of assets. EWS is to identify the building of stress in an account
having an exposure of Rs.1.00 cr and above in an incipient stage and alert the
operating functionaries well ahead of time to take corrective action and thus prevent the
slippage. The same is available in the Bank’s intranet and the URL is
https://ews.statebanktimes.in/ewsweb/. The highlights of EWS software is as below:
- The EWS will throw up alerts, which will enable the Bank to identify assets at the
incipient stage of stress and facilitates the Bank to act immediately in resolving /
taking corrective action in respect of the stressed assets.
- The software is made compatible with CBS in triggering signals pertaining to
“conduct of account” eg. Return of cheques, devolvement of LCs, invocation of
BGs, overdrawing, crystallization of export / import bills, request for adhoc limits
etc.
- The EWS also takes into account the data available in public domain (viz., RBI,
Page 499 of 632

MCA, News websites etc.) and factors them for assigning scores.
- The EWS integrates data from multiple systems, departments, and business
entities and has the capacity to pull data over the Internet. The EWS ensures that all
activities are carried out electronically through Intranet with adequate access
controls so as to monitor and provide for MIS / Dashboards, generate event
based SMS / Email alerts as per requirement of the Bank.
- The EWS Solution is made capable of identification of accounts / portfolios
exhibiting warning signals at a very early stage and track corrective action taken in
each account or the portfolio, including internal escalations.
- The software is made capable of identifying standard accounts with Low risk,
Medium risk and High risk.
The EWS system receives structured data such as daily transactional data from the Integrated
Data Strategy, Processing and Management (IDSPM) Dept and financial data from LLMS and
LOS as daily feeds. This data is then churned into the CRISIL’s “BRECON” system to reach for
a score for a particular customer. This value is added with the score arrived from the
unstructured data to reach at a final score of a borrower
The EWS system receives unstructured data from Web portals and news sites prescribed by the
bank. Keywords are being searched from the portals and all related news/ information are
scanned by Oracle “Endeca”. Depending about the positivity or negativity of the news, a
sentimental score analysis is done by the “Endeca” and a score is reached upon for a particular
customer, which is added to “Brecon” score. Important websites like Ministry of Company
Affairs (MCA), Money Control, NDTV Profit etc., are crawled daily to detect any pending
statutory dues and health of the company. The total score arrived by computing structured data
and unstructured data is said as S1 score.
DATA FEEDS Internet
Data Warehouse
Extraction &
Transformation
Unstructured Data
LLMS Structured
Integration and Web
Data
Acquisition
Integration
Framework
HRMS Endeca Application
Manual
Brecon
Database Web Browser
Repository/
Brecon Application
End Users
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The borrower risk is assessed by the daily score generated by the EWS system. The score ranges
from 0 to 100 and is divided into three categories, where 100 means highest level of Risk.
Sr No. Color Risk Category Score
1 Green Low Risk 0 to 37.49
2 Amber Medium Risk 37.5 to 42.49
3 Red High Risk 42.5 to 100
All the accounts of borrowers are mapped to their respective Relationship Managers and Branch
Heads with their PF Ids as identifiers. The data are received from LLMS, HRMS and manually
from the branches on regular intervals and updated in the EWS system.
Whenever a borrower’s score breaches the threshold score of 42.5 i.e enters into RED category,
an email alert as well as SMS alert is forwarded to the respective Branch Head and the
Relationship Manager. Here the Branch Head needs to log in into the EWS system and check the
pre-watch list box for the alerted accounts. The Branch Head has an option either to send the
borrower account for further assessment to the RM or to remove the alert from the pre-watch list
box with his comments.
An alert is also forwarded to the Branch Head and Relationship Manager whenever the
borrowers fall into SMA1 and SMA2 category. In such cases the score may be less than 42.5.
If the borrower account is forwarded to the RM for further assessment, the RM of the account
needs to reply to certain questions asked by the EWS system in form of Yes/ No. This
assessment by the RM is checked by the Branch Head and a new score S2 is computed. If the S2
score is less than 42.5 and the Branch Head agrees with the RM’s observation, he removes the
account from the pre-watch list box. If he does not agree with the RM’s comments or the S2
score further increases, the Branch Head decides for the Corrective Action Plan for the account
and gives the time frame for the actions to be completed by the Relationship Manager.
A summary dashboard is now available in EWS application for the users and officials of
Controlling offices. Users can have reports as per the selected filters eg BV/Circle/ Module/
Region. The users can view the following reports under summary.
• High risk borrowers alerted by EWS

• High risk borrowers due to SMA1/ SMA2
• High risk borrowers due to RBI triggers
• SMA2 reported by other FI/ Banks
• Status track of high risk borrowers
Page 501 of 632

Reference: For further details please refer to:
1. Manaul on Loans and Advances, Part-3, Chapter-21A / 22A / 23
2. Circular No.NBG/SMEBU-RBI GUIDEL/33/2016-17 dated 16 July 2016.
3. Circular No. CCO/CPPD-ADV/78/2016 – 17 dated 27 September 2016
4. Circular No. CCO/CPPD-ADV/63/2017 - 18 dated 21 September 2017
5. Circular No.NBG/SMEBU-RBI GUIDEL/54/2018 – 19 dated 16 Jan 2019
6. Circular No. CCO/CPPD-ADV/204/2018-19 dated 30 March2019
7. Circular No.CCO/CPPD-ADV/79/2019 – 20 dated 21 Aug 2019
Check Your Knowledge
1. Default day-1 for a revolving credit facility is:

a. the day on which the account is identified as SMA-0
b. when whole or any part or of debt has become due and payable and is not repaid
by the debtor or the corporate debtor, as the case may be.
c. 31st day of outstanding remaining in excess of limit or drawing power, whichever
is less
d. day on which outstanding exceeded limit or drawing power, whichever is less and
remains unpaid.
2. Resolution Plan for SMA can be:
a. Stress Analysis, TEV Study and Stress Test
b. Tracing triggers of EWS, Red Flagging and Reporting
c. Rectification, Restructuring and Recovery
d. Reporting, Confirmation and CAP
3. M/s. Iris Moto Scrolls Pvt. Limited, a dynamo manufacturing unit, enjoying cash credit
limit of Rs.30 crore and Term loan limit of Rs.40 crore (Total outstanding CC + TL = 29
+ 26=Rs.55 crore). The unit is banking with us since last 5 years. The unit is one of the
valued customer of the Branch and their past record of dealing with the bank is
satisfactory. The unit has met their interest and installment repayment obligation almost
on time in the past but sometimes with delay of 5 to 10 days. Last month the unit
informed the branch that there was a fire in the unit and one of the machinery has been
destroyed and production has stopped. On verification and discussion with borrower, it
came to notice of the bank that machinery is required to be replaced for the starting the
production. As the machinery is required to be improted, it will take atleast two month to
procure and install the machinery. Furhter, one more month will require for stabilizing
the production. Therefore, the unit may not be in the position to repay interest /
installment for atleast next 3 to 4 months. Though the unit has paid interest applied at the
end of the last month in both the cash credit and term loan accounts but 2 installments
(monthly installment repayment) of the term loan has fallen due which is yet to be repaid.
Page 502 of 632

The unit has asked the bank to grant time for payment of overdues. Please discuss in
details with reasons on followings aspects:
- Whether the credit facilities granted to the unit is required to be classified as SMA? If
yes, under which category?
- Is there any requirement for SMA reporting for this account?
- Whether the unit come under the perview of identification of Red Flag Accounts?
- What resolution plan Resolution Plan (RP) will be suitable for the unit?
- Whether ‘Holding On Operation’ will be applicable to the unit?
- Whether the account is required to be reported to CRILC?
Page 503 of 632

CHAPTER 13 C
MSME RESTRUCTURING
1. Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises:
RBI has designed a framework in order to provide a simpler and faster mechanism to address the
stress in MSME accounts and to facilitate promotion and development of MSMEs. This framework
has been adopted and brought into effect by the Bank. The Main features of the framework are as
below:
a) Framework shall be applicable to all stressed MSME accounts having exposure up to Rs.25
crore, including accounts under Consortium or Multiple Banking Arrangement (MBA).
b) For resolution, a Committee headed by AGM (SMEC) in respect of accounts handled by SMEC
and the Regional Manager (RBO) in respect of accounts handled by RASMEC and accounts
outside the purview of SMEC will be formed. The other members of the committee are:
i. an independent expert in MSME ( to be nominated by the RM (RBO) / AGM (SME),

ii. a representative from the concerned State Government and
iii. Member(s) from the Consortium / MBA, in case of consortium / MBA advances.
In the absence of State Government nomination, RM (RBO) /AGM (SMEC) can induct an
independent expert in the Committee, namely a retired executive of another bank of the rank
of CM and above.
c) While decisions of the committee will be by simple majority of members, the Chairperson shall
have the casting vote, in case of a tie.
d) Based on the extant guidelines on Early Warning Signals / SMAs, the branch / SMEC /
RASMEC maintaining the account shall forward the stressed accounts with aggregate loan
limits above Rs.10 lac to the designated committee for a suitable Resolution Plan (RP)
within 5 working days.
e) The eligible accounts up to an exposure of Rs.10 lac will be handled by Branch Manager /
SMEC / RASMEC.
f) However, recovery option under RP by Branch / SMEC / RASMEC is to be approved by the

designated Committee.
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g) The eligible accounts of other Business Verticals – CAG / MCG, are to be submitted to the
respective Committee under the jurisdiction of which the account is falling, for resolution.
h) The cases under Consortium / MBA are to be referred to the Committee of the bank which is
having the largest exposure to the borrower.
i) The Committee shall decide on appropriate Resolution Plan (RP). In case of restructuring,
TEV study is to be got conducted mandatorily by the Committee for accounts with
aggregate exposure of Rs.10 crore and above.
j) The committee shall make su i t a b l e provisions for payment of tax or any other statutory
dues in the RP and the enterprise shall take necessary steps to submit such plan to the concerned
taxation or statutory authority and obtain approval for such payment plan.
k) During operation pe ri od of R P, the unit shall be allowed to avail both secured and
unsecured credit for its business operations as envisaged under the terms of RP.
l) The options under RP by the Committee may include :

(i) Rectification (ii) Restructuring and (iii) Recovery
m) in case of consortium / multiple banking arrangement, would be considered as the basis for
proceeding with restructuring of the account by the designated committee, and will be binding
on all lenders.
n) In case of recovery option, the minimum criteria for binding decision, if any, under any
relevant laws or Acts shall be applicable.
o) Provision of additional financial resources to restructure or revive, can be worked out.
p) If the promoters are not in a position to bring in additional funds, the Committee
may allow the unit to raise secured or unsecured loans.
q) In case of failure of ‘Rectification’ or ‘Restructuring’ options, Committee shall initiate

recovery option.
r) Wilful defaulters shall not be eligible for restructuring. However, the Committee may
review the reasons for classification of the borrower as a wilful defaulter and satisfy itself that
the borrower is in a position to rectify the wilful default. The decision to restructure such
cases shall have the approval of ECCB.
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s) Cases of fraud and malfeasance are not eligible for structuring. However, in such cases
where the existing promoters are replaced by new promoters, the proposal shall be put up to
CCCC.
t) In case the Committee decides for recovery action, the enterprise can seek a review of the
decision and it will be examined and decided by the Committee.
u) Where an application is filed by a bank and admitted by the Committee,

the Committee will notify the concerned borrower about such application within 5 working
days.
Within 15 working days of receipt of such notice, borrower is required to respond or make
a representation before the Committee.
Borrower is also required to disclose the details of all its liabilities, including the liabilities
owed to the State or Central Government and unsecured creditors, if any. If the borrower
does not respond within the above period, the Committee may proceed ex-parte (with respect
to or in the interests of one side only ).
v) On receipt of information relating to the liabilities of the borrower, the Committee may
send notice to such statutory creditors as disclosed by the borrower as it may deem fit,
informing them about the application under the framework and permit them to make a
representation regarding their claims before the Committee within 15 working days
of receipt of such notice. It is clarified here that these information are required for
determining the total liability of the unit in order to arrive at a suitable RP and not for
payments of the same by the lender.
w) Within 30 days of convening its first meeting for a specific borrower, the Committee will
take a decision on the option to be adopted under the RP and notify the borrower about such
a decision within 5 working days from the date of such decision.
x) If the RP decided by the Committee envisages restructuring of the debt of the enterprise, the
Committee will arrange for Techno-Economic Viability (TEV) study and finalize the terms
of the restructuring in accordance with the extant prudential norms for restructuring within
20 working days (for accounts having aggregate exposure up to Rs.10 crore) and within
30 working days (for accounts having aggregate exposure above Rs.10 crore).
y) Upon finalization of the terms of the RP, implementation of that plan h a s t o be

completed by the bank within 30 days from the date of decision (if the R P is
Rectification) and within 90 days from the date of decision (if the RP is restructuring). In
case recovery is considered as RP, the recovery measures should be initiated at the earliest but
not later than 30 days from the date of decision.
Page 506 of 632

z) The administrative approval for RP will be given by the following authorities in our Bank:
- For loans upto Rs.50 lacs handled by SMEC / RASMEC: CM (Sanction) of
SME/RASMEC
- For loans upto Rs.50 lacs handled by Branch : Branch Manager
- For loans falling under the discretionary power of RCC: RM (RBO) / AGM(SMEC)
- For loans above the discretionary power of RCC: DGM (B&O)
2. Special Restructuring Window 2019: Pursuant to RBI Circular No. DBR.NO.BP.BC.18/

21.04.048 /2018-19 dated 1st January 2019, and amendments thereto, Bank approved a scheme
for Restructuring of stressed MSME accounts having aggregate exposure (FB+NFB Limit) not
exceeding Rs. 25.00 crore. The scheme will cover all Stressed MSME units having
aggregate exposure (FB + NFB limits) not exceeding Rs. 25.00 crore as on 01.01.2019 /
2020 and banking with us under Sole Banking / Consortium / Multiple Banking
arrangement. The unit must be MSME as per MSMED Act 2006 and shall not be
downgraded to NPA on restructuring.
a) Eligibility Conditions:
i. The unit should not have diverted working capital funds. Current account,
if any, with other banks would need to be closed as a pre-condition for
rehabilitation.
ii. The borrower/ promoter/ promoter directors should have an
impeccable record of dealing with the banks, other than the current
default / overdues which is proposed to be rectified through
rehabilitation.
iii. The account should have been under stress [SMA-0 (RG-1), SMA-1 (RG-2)
and SMA-2 (RG-3)] (means account in default, but are Standard Asset
as on 01.01.2019 /2020 and continues to be classified as a Standard
Asset till the date of implementation of the Restructuring.
iv. The reasons of stress in account are on account of extraneous reasons
and of temporary nature but the units are prima facie viable.
v. The borrowing entity is GST-registered on the date of implementation of
the restructuring or should be exempted from GST-registration.
vi. The unit can be EBIDTA negative as on the cut-off date but should be
able to have positive cash accruals position within 12 months from
the date of implementation of rehabilitation package, subject to the
following conditions:
1. Contribution per unit of production should be positive.

2. Projected contribution (per unit) should not be more than the
current level.
3. Unit should achieve break-even level at a capacity
utilization, not exceeding 85%.
Page 507 of 632

vii. Viability of the unit should not be contingent upon major CAPEX
investment. Major Capex would mean investment in fixed assets
exceeding the requirement of additional funds as per para Additional
exposure below and implementation period exceeding 6 months.
viii. Provisional balance sheet certified by a chartered accountant is not
more than 3 months old and last audited balance sheet should not be
15 months old. However, additional period of 3 month for Audited
Balance sheet may be given if time period of 15 months is not being
aligned as per the provisions contained in the Company’s Act in
relation to the time permitted to place annual financial statements
(Section 96 and Section 129 (2) of the Company’s Act 2013).
ix. The unit shall start generating positive cash accruals within a moratorium
of maximum 12 months and shall be able to meet all repayment
obligations.
x. Cases of willful default, fraud and malfeasance will not be eligible for
the Rehabilitation package.
xi. The customers who have not complied with the terms and conditions of
the previous loan will not be eligible for restructuring/rehabilitation
package.
xii. Units, not meeting with the above criteria, may be considered for
rehabilitation/restructuring under the bank’s existing scheme given in
Circular No. NBG/SMEBU-RBI GUIDEL/33/2016 – 17 dated July 16,2016
xiii. MSME exposure above Rs.25 crore will be covered by Prudential
Framework.
b) Time frame and Mechanism of restructuring: The scheme is operative from

01.01.2019 till 31.12.2020. A restructuring would be treated as implemented if
the following conditions are met:
i. All related documentation, including execution of necessary agreements
between lenders and borrower/ creation of security charge/ perfection of
securities are completed.
ii. The new capital structure and/ or changes in the terms and conditions of
the existing loans get duly reflected in the books of the borrower.
c) Salient features of the Restructuring/ Rehabilitation Scheme:
A) Viability: This restructuring facility will be available to the units that are
economically viable but are facing temporary stress. The operating units
shall ensure that, borrowers unit is technically and economically viable.
a. TEV study is dispensed for the loan proposals up to Rs 25.00 crore.

However, Bank shall have right to carry out TEV study if any additional
exposure is granted by the Bank for capacity expansion.
b. The viability of the identified units shall be determined on the basis of
the following parameters:
Page 508 of 632

i. Long term debt to EBIDTA to be 4:1 or better. For this purpose,
the following are to be excluded from the computation of long term
debt:
• The proposed FITL/WCTL, during the moratorium period, for
interest and principal of the said FITL/WCTL.
• Long term unsecured loans from promoters subordinated to the
bank’s loan, (provided the same are interest free) throughout the tenor
of the rehabilitation package.
ii. Minimum FACR of 1:1 to be ensured. For this purpose, tangible

collateral security by way of first charge on SARFAESI compliant
immovable property plus primary security by way of first charge on
Fixed Assets of the company will be considered to determine the
FACR. (However this has been dispensed with for advances up to
Rs.10 lakh).
iii. DSCR should be minimum 1:1 during the first 2 years of

rehabilitation and 1.25:1 thereafter (at maximum capacity utilization
of 85%, contribution at the current level of prices and performance).
iv. Interest coverage ratio of min 1.25:1 in the second year of

operation.
v. Current ratio of minimum 1.1:1 as a result of rehabilitation package

to be ensured so that the unit does not face liquidity problem once
the rehabilitation package has been implemented.
B) Additional Capital infusion: The borrower units shall arrange additional capital
infusion (by way of capital or quasi capital) of minimum of 15% of additional
exposure other than WCTL & FITL. The additional infusion to be made upfront in
an escrow account as on the date of release of package by the bank. It is
clarified that as FITL & WCTL are carved out of the current outstandings,
they need not be treated as additional exposure, though they are not
supported by drawing power (DP).
C) Additional Bank exposure:

a. Total additional exposure, by way of FITL, WCTL, other term loans, NFB
facilities and additional Working capital, if any, from the bank, shall not
exceed as shown in the table below:
Total indebtedness Maximum permitted additional exposure as % of
(pre rehabilitation) [A] total indebtedness (B)
Up to Rs. 1 Cr 25% of [A]
> Rs. 1 Cr to Rs. 5 Cr Rs. 25 lacs or 20% of [A] whichever is higher
> Rs. 5 Cr to < Rs. 10 Cr Rs. 1 Cr or 15% of [A] whichever is higher
> Rs. 10 Cr to < Rs. 25 Cr Rs. 1.5 Cr or 15% of [A] whichever is higher
Page 509 of 632

b. Letters of Credit limit can be set up as a sublimit of working capital limits.
Other non-fund based limits may be considered as per the need within the
overall cap as mentioned above.
c. Term loan for fresh minor CAPEX within the overall cap of additional bank
exposure mentioned above may be considered with a moratorium of 2
years from the date of first disbursement. A minimum margin of 15 % to
be brought in by the promoters.
d) Relief and Repayment Period
i. Waiver of penal rates of interest and damages: If penal rates of interest

or damages have been charged, such charges should be waived from the
accounting year in which the unit started incurring cash losses.
ii. Unpaid interest: Unpaid/unapplied interest, if any, as on the cut-off date to

be funded by way of Funded Interest Term Loan (FITL). This FITL will have
to be repaid in maximum 3 years with a maximum moratorium of 12
months.
iii. Working Capital Term Loan (shortfall in Net Working Capital): The
shortfall in Net Working Capital will be calculated as on the cut-off date by
working out realizable current assets (excluding obsolete inventory,
receivables which are unrealizable/can’t be realized within cover period of
say maximum 6 months, any other items classified as current but not
realizable within one year, etc.) minus the unpaid creditors (beyond the
normally available credit period), unpaid statutory dues, installment of
term loan payable in the next 12 months, overdue term loan installments
etc. An audit of stock & receivables to be done in all cases of loan
amount above Rs. 5.00 crore, invariably, to ascertain the realizable value of
stock & receivables. WCTL should be repaid in not more than 7 years with a
maximum moratorium of 12 months.
iv. Existing working capital limits: After carving out of FITL and WCTL as
above, the remaining working capital limits at the existing sanctioned level be
renewed. Enhancement in working capital limit may also be considered
subject to the condition that total exposure of the bank does not increase
beyond the ceiling proposed above.
v. Margin: Margin on stocks & receivables may be reduced up to 15 % and

gradually stepped up once the liquidity improves as a result of the
rehabilitation package after 12 months.
vi. Rephasement of Existing term loans: After the unpaid interest portion is
funded as FITL and the overdue instalments have been funded as WCTL,
the repayment of the balance dues may be suitably rephased so as to align
with the repayment capacity as projected under the rehabilitation package.
Additional period of 12 months along with the tenor specified in the
scheme may be given for repayment of balance dues.
vii. Funding of Future Cash Loss –maximum time 12 months: It is

envisaged that unit may continue to incur cash losses for a period of 12
months once the rehabilitation package has been implemented.
Necessary support will be required to fund the estimated cash loss, which
may be funded as below:
Page 510 of 632
a) Waiver of interest for moratorium period of maximum 12 months
on FITL and WCTL granted under the rehabilitation package.
b) Balance amount if any, shall be funded through WCTL 2, to be

disbursed in a phased manner after review of the progress made
under the rehabilitation package. Repayment of WCTL 2 to
commence 12 months after the date of first disbursement.
c) Promoters to contribute 15 % of the amount disbursed under
WCTL 2.
d) WCTL 2 will also be within the overall cap as proposed under
para Additional Bank exposure above.
viii. Concessionary rate of interest:
Relief Measure for Concessionary interest rate

facility
Funded Interest Term 0% interest rate during moratorium and 1 year
Loan MCLR thereafter
(FITL)
Working Capital Term 0% interest during the moratorium period (12months)
Loan (I & II) and 1 year MCLR plus 50 basis points thereafter
Existing working capital Interest rate of 1 year MCLR plus 150 basis
limits points. Spread to be reset linked to credit rating of the
unit on the second anniversary date*.
Term loans, existing Interest rate at 1 year MCLR plus 150 basis
& points. Spread to be reset linked to credit rating of the
Proposed unit on the second anniversary date*.
* On completion of 24 months from the date of implementation of rehabilitation package.
NFB pricing : 25 % concession on the card rate or existing concession whichever is

higher .(Not to be taken for calculating ROR)
ix. Holding on operations: Holding on operations may be allowed by the

branches, for the identified units pending sanction of rehabilitation package.
The need for permitting holding on operations arises for the reason that
banks are required to continue such operations for potentially viable units to
prevent suspension of their business activities. Where holding on operations
are conducted, the operations should be subjected to a strict monthly
review. For each case, a report should be submitted to the controlling
authority as per prescribed format. After deciding on permitting holding on
operations to the unit, the outstanding as on the date of starting the holding
on operations would be segregated into,
Page 511 of 632

i. Regular portion, which is covered by advance value yielded by the
current assets.
ii. Irregular portion, which is not covered by advance value of current

assets, would be transferred to a separate account pending
sanction of working capital term loan.
After segregation of the irregularity as above, operations would be

allowed only in the regular account.
x. Sacrifice: Reduction in the rate of interest and / or re-schedulement of the

repayment of principal amount, as part of the rehabilitation, will result
in diminution in the fair value of the advance. Sacrifice is the
difference between the fair value of the loan before and after
rehabilitation.
Fair value of the loan before rehabilitation will be computed as the

present value of cash flows representing the principal and interest at
the existing rate charged on the advance before rehabilitation and
discounted at a rate equal to the rate of interest applicable to the
various facilities extended to the borrower, on the date of rehabilitation.
Fair value of the loan after rehabilitation, will be computed as the present
value of cash flows representing the principal and interest at the rate
charged on the advance on rehabilitation discounted at a rate equal to
the rate of interest applicable to the various facilities extended to the
borrower as on the date of rehabilitation.
xi. Right of Recompense (ROR): Right of recompense will be determined

upfront and will be equal to the sacrifice calculated as per para (x)
above.
i. The Bank’s right to exercise recompense which would be

included in the sanction letter to the borrower. Suitable clause
should be added in the sanction letter requiring the unit to
show the recompense amount due to the Bank as a contingent
liability in the unit’s balance sheet every year.
ii. In case a decision is taken to call up the advance due to

failure of the package, the loss sustained by the Bank on
account of reliefs/concessions extended would also be claimed
along with other dues.
xii. Exercising right of recompense: Once the unit has been revived and
surplus cash accruals are available after meeting the repayment
obligations under rehabilitation package, the right of recompense may be
exercised from the second anniversary date of the rehabilitation
Page 512 of 632

package. Recovery may be aligned with the repayment capacity of
the unit with the unit maintaining a minimum DSCR of 1.10 including
the repayment obligation towards ROR. Since interest can be reset on
working capital & term loans on the second anniversary date, ROR will be
reduced to the extent of the additional earnings on account of increase
in spread over 150 basis points.
e) Other Restructuring covenants:
i. The borrowing unit shall not distribute the dividend during the tenor
of additional Bank exposures granted under restructuring package.
ii. The borrowing unit shall not undertake any major expansion of the plant
during the tenor of Bank exposure. However, if minor capital expenditure
is required that may be arranged with the prior approval of the Bank.
f) Process: After sanction of restructuring/ rehabilitation package, relief will be

released to the borrowing units on execution of the documents and
compliance of all terms and conditions of the sanction.
g) Sanctioning authority: The proposals will be sanctioned as per the extant

delegation of financial powers.
h) Asset Classification and IRAC norms and Other guidelines:

i. SMA-0, SMA-1 and SMA-2 accounts restructured shall be continued to classify
as
ii. Standard Assets. This is a onetime exercise for MSME account.
iii. A provision of 5% in addition to the provisions already held, shall be made in
respect of accounts restructured under these instructions. Banks will, however,
have the option of reversing such provisions at the end of the specified period,
subject to the account demonstrating satisfactory performance during the
specified period.
iv. It is clarified that accounts classified as NPA can be restructured; however,
the extant asset classification norms governing restructuring of NPAs will
continue to apply. Post-restructuring, NPA classification of these accounts shall
be as per the extant IRAC norms.
v. As a general rule, barring the above one-time exception, any MSME account
which is restructured must be downgraded to NPA upon restructuring and
will slip into progressively lower asset classification and higher provisioning
requirements as per extant IRAC norms. Such an account may be considered
for upgradation to ‘standard’ only if it demonstrates satisfactory performance
during the specified period.
vi. ‘Specified Period’ means a period of one year from the commencement of the
first payment of interest or principal, whichever is later, on the credit facility
with longest period of moratorium under the terms of restructuring
package. ‘Satisfactory Performance’ means no payment (interest and/or
principal) shall remain overdue for a period of more than 30 days. In case of
Page 513 of 632

cash credit / overdraft account, satisfactory performance means that the
outstanding in the account shall not be more than the sanctioned limit or
drawing power, whichever is lower, for a period of more than 30 days.
vii. All other instructions applicable to restructuring of loans to MSME borrowers
shall continue to be applicable.
i) Repeated Restructuring will be outside the purview of Special Window.
j) MSMEs’ Accounts up to Rs.25 crore, which are not covered by the scheme shall be
restructured as per guidelines contained in the first circular referred to below. They shall
be downgraded, if SA to SSA on restructuring. MSME units having collective aggregate
exposures above Rs.25 crore from Banks, FIs and NBFCs have to be restructured within
the ambit of Prudential Framework for Resolution of Stressed Assets.
Reference:
For further reading, please refer:
1. Circular No. NBG/SMEBU-RBI GUIDEL/33/2016 – 17 dated July 16,2016
2. Circular No. NBG/SMEBU-RBI GUIDEL/54/2018 – 19 dated Jan 2019
3. Circular NBG/SMEBU-RBI GUIDEL/66/2018 – 19 dated 13th Feb 2019
4. Circular No.: NBG/SMEBU-RBI GUIDEL/70/2019 - 20 dated 5 Dec 2019
XYZ Limited is enjoying credit facilities from your branch and has a CC Account of Rs.10 crore
(outstanding Rs.10.14 crore and DP of Rs.8 crore) and Two Term Loan Accounts of sanctioned
limit of Rs.5 crore and 4 crore. The Theo Balance in TL-1 is Rs.3 crore and shows an
outstanding of Rs.3.65 crore. The irregularity comprises of interest unpaid Rs.15 lac and unpaid
instalments of Rs.50 lac. TL-2 has an outstanding of Rs.1.50 crore against Theo Balance of
Rs.1.20 crore, of the irregularity, Rs.25 lac is towards unpaid principal and Rs.5 lac as unpaid
interest. The account were in irregular position as on 01-01-2019 but was not NPA on 31st
August 2019 when a restructuring was undertaken.
- Under what conditions would the account remain a standard asset?

- Had the TL-1 slipped into SSA on 31-03-2019 and one unpaid instalment, which made
the account NPA, was remitted by the Company on 02-04-2019, would there be any
change in position.
- If the unit is an Indian Made Foreign Liquor manufacturer, is it eligible for restructuring
without being classified as NPA under the Special Window?
- Post restructuring, the unit started showing financial weaknesses and the accounts were
RG-1 category as on 01-01-2020. Will the Special Window come to help the account be
restructured without slipping into NPA?
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CHAPTER- 13 D
BANK’S POLICY ON NPA, IRAC AND PROVISIONING NORMS
1. Bank’s Policy on NPA
1.1: The Bank’s policy is to ensure containment of NPAs to the least in conformity with
international standards. The ‘Management of NPAs’ which is both preventive and curative in
nature, seeks to achieve the containment of NPAs through a combination of measures such as:
i) Selection of quality assets through proper credit approval process
ii) Maintaining the quality of existing standard assets and initiating effective
measures to upgrade their quality whenever deterioration in their quality is
apprehended or noticed,
iii) Upgradation through rehabilitation or restructuring,
iv) Recovery through legal process involving effective follow up of suit filed cases,
v) Recovery through compromise settlements in appropriate cases and
vi) Writing off the loss assets in cases where prospects of recovery or upgradation are
perceived to be bleak.
1.2: NPA Management Policy of the Bank: The Bank has a separate NPA Management Policy
which seeks to lay down the Policy on management and recovery of NPAs and proactive
initiatives to contain net NPAs in conformity with the international standards by implementing
following guidelines:
- The Bank has formed various committees headed by Chairman/ Managing Directors/
Deputy Managing Directors/ Chief General Managers/ General Managers/ Deputy
General Managers to periodically review SMAs/NPAs/AUCAs and suggest for
resolution and turn around strategies.
- System of early identification and reporting of all existing and potential loans by having
‘Early Alert System’ as integral part of Risk Management which captures early warning
signals and followed by time bound corrective actions comprising rehabilitation /
restructuring or an early exit.
- Bank has introduced categorization of asset category between ‘standard’ and ‘sub-
standard’, i.e. Special Mention Accounts (SMAs) for internal monitoring and follow-up
in line with international practice of SMAs and RBI guidelines.
- The first focus in management of SMAs will be possible upgradation of the loan asset
through rectification, rephasement, restructuring or rehabilitation of borrower’s business.
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If the branch level review indicates that the problems of the unit are not temporary,
viability studies need to be undertaken on a case-to-case basis. Restructuring of the
account as an alternative, needs to be explored at the early stages of stress in the account.
Viability of the unit and the promoters’ interest (and stake) is the basic prerequisites for
the Bank to undertake restructuring/ rehabilitation. However, right of recompense will be
incorporated in every rehabilitation proposal.
- Viable units and where promoters show genuine interest in reviving the unit will
continue to be supported. Sale of non-core assets in case of over-leveraged companies
to be pursued vigorously with the promoters to bring down the interest cost. In other
cases, especially where promoters are not cooperating, options to exit or reducing
exposure will be actively explored, where feasible. Where despite our best efforts in this
regard, it is not possible to exit an account or at-least to reduce our exposure, a
reassessment of the situation will be done and if necessary Bank will consider either an
acceptable OTS or in its absence, even consider recalling the account. Bank will
examine the various options and initiate measures as appropriate in a time-bound
manner, as delays in such situations far from helping matters are likely to lead to erosion
of security and increase in the ultimate quantum of the NPA.
- The Bank has also put in place a mechanism for outsourcing of recovery efforts, to
supplement the efforts of the Bank’s staff. Scheme of outsourcing of recovery through
Recovery Agents / Agencies (RAs) has been reviewed and aligned with RBI Guidelines
for Outsourcing of Financial Services. The guidelines for appointment of Recovery
Agents/Agencies and monitoring of their conduct also include:
i) Model Code of Conduct to be adopted by RAs.

ii) Declaration- cum- undertaking to be obtained from RAs.
iii) Model Policy & Operating Guidelines for Repossession of Security.
iv) Application Form for appointment of RAs.
v) Grievances Redressal Mechanism.
- Settlements through compromise (i.e. one time settlement of dues) will be a negotiated
settlement under which Bank endeavors to recover its dues to the maximum extent
possible. Detailed guidelines for compromise settlements have been put in place.
Compromise settlements are permitted where cases are pending before Courts / DRTs
subject to consent decree being obtained from the concerned Court / DRT.
- If settlement of dues through compromise is being negotiated with one of the unit of
Group banking with us, it shall be the endeavor to minimize the sacrifice by seeking
support from the parent company / other Group companies. The response of the Group
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towards such effort on our part will be a major contributing factor in deciding further
exposures to the Group or to other individual units within the Group.
- In a compromise, as the Bank agrees to accept an amount less than the total amount due
under the relative loan contract, in full and final settlement as a general policy, it is
tantamount to cessation of lender-borrower relationship with the borrowing unit, its
promoters and guarantors. Ordinarily, no fresh finance will be considered either to the
existing unit or to any new unit being promoted by the same promoters / guarantors.
However, exceptions may be made in respect of settlements under various One Time
Settlement Schemes of RBI and similar Schemes of the Bank (e.g. SBI OTS), for which
separate guidelines are in place.
- The Bank has laid down a policy on approach to sacrifices in case of transfer of financial
assets to Securitization Companies / Reconstruction Companies (SCs / RCs) as each
asset is unique in the context of circumstances necessitating consideration of transfer to
SC / RC as a recovery option.
- The Bank recognizes that transfer of financial assets to third party entities such as SCs /
RCs would, in most cases, be at a substantial discount to the book value of the asset /
ledger balance. The Bank’s endeavor would be to optimize recovery while taking into
account costs associated with continuing the account in our books. As such, the quantum
of sacrifice per se in terms of percentage of loan being written off in such case would not
hinder consideration of the offer.
- The Bank would follow a policy of taking the NPAs of doubtful / loss categories which
are either fully or substantially provided for, may be taken off the Balance Sheet and
parked in Advances Under Collection Account (AUCA). This procedure is not expected
to dilute in any way the follow-up for recovery. The structured mechanism prescribed
for follow-up of accounts parked in AUCA will be followed meticulously. All internal
reviews of NPAs will also include accounts transferred to AUCA.
- Accounts sanctioned and disbursed, and where repayment has been initiated during the
financial year and slipped into NPA category within the first two years of
sanction/repayment commencement fall in the category of Quick Mortality Loans. In
such loans, appropriate steps to be initiated to bring them back to Standard assets
category.
- Bank has laid down specific instructions in the matter of classification / de-
classification of Non-cooperative borrowers.
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2. RBI Guidelines on NPA pertaining to Loans and Advances including IRAC and
Provision Norms:
The primary guiding factor for recognizing an NPA will be the Prudential Norms on Income
Recognition and Asset Classification (IRAC) implemented by Reserve Bank of India (RBI). In
line with the international practices and as per the recommendations made by the Committee on
the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has
introduced, in a phased manner, prudential norms for income recognition, asset classification and
provisioning for the advances portfolio of the banks so as to move towards greater consistency
and transparency in the published accounts. The classification of assets has to be done on the
basis of objective criteria which would ensure a uniform and consistent application of the norms
and the provisioning should be made on the basis of the classification of assets based on the
period for which the asset has remained non-performing and the availability of security and the
realisable value thereof. It has to be ensured that while granting loans and advances, realistic
repayment schedules may be fixed on the basis of cash flows with borrowers. This would go a
long way to facilitate prompt repayment by the borrowers and thus improve the record of
recovery in advances.
2.1 ASSET CLASSIFICATION:

In terms of Reserve Bank of India guidelines, all advances are required to be reviewed and
classified into two principal categories at regular intervals as under:
(a) Performing Assets or Standard Assets i.e. where the advances are earning interest income on
an actual realization basis. This includes regular and temporarily irregular accounts, as specified
from time to time by the RBI.
(b) Non-Performing Assets (NPA) i.e. where advances are not earning interest on an actual
realisation basis. An asset, including a leased asset, is considered as non-performing when it
ceases to generate income for the bank. This includes irregular accounts and sticky accounts with
deep-seated irregularities. A loan or an advance accounts will be considered as NPA where:
i. interest and/ or installment of principal remain overdue for a period of more than
90 days in respect of a term loan.
ii. The account remains ‘out of order’ in respect of an Overdraft/Cash Credit
(OD/CC).
iii. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. the installment of principal or interest thereon remains overdue for two crop
seasons for short duration crops in respect of agriculture loan and advances,
v. the installment of principal or interest thereon remains overdue for one crop
season for long duration crops in respect of agriculture loan and advances,
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vi. in respect of derivative transactions, the overdue receivables representing positive
mark-to-market value of a derivative contract, if these remain unpaid for a period
of 90 days from the specified due date for payment.
vii. In case of interest payments, banks should, classify an account as NPA only if the
interest due and charged during any quarter is not serviced fully within 90 days
from the end of the quarter.
Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it is not
paid on the due date fixed by the bank.
Out of Order: An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power for 90 days. In
cases where the outstanding balance in the principal operating account is less than the
sanctioned limit/drawing power, but there are no credits continuously for 90 days as on
the date of Balance Sheet or credits are not enough to cover the interest debited during
the same period.
Accounts with temporary deficiencies: The classification of an asset as NPA should be

based on the record of recovery. An advance account should not be classified as NPA
merely due to the existence of some deficiencies which are temporary in nature such as
non-availability of adequate drawing power based on the latest available stock statement,
balance outstanding exceeding the limit temporarily, non-submission of stock statements
and non-renewal of the limits on the due date, etc. In the matter of classification of
accounts with such deficiencies, the following guidelines are required to be followed:
- Drawings in the working capital accounts are required to be covered by the adequacy
of current assets, since current assets are first appropriated in times of distress.
Drawing power is required to be arrived at based on the stock statement which is
current. Stock statements relied upon by the banks for determining drawing
power should not be older than three months. The outstanding in the account
based on drawing power calculated from stock statements older than three months,
would be deemed as irregular. A working capital account will become NPA if
drawing power calculated from stock statements older than 180 days even
though the unit may be working or the borrower's financial position is
satisfactory.
- Regular and ad hoc credit limits need to be reviewed/ regularised not later than three
months from the due date/date of ad hoc sanction. In case of constraints such as non-
availability of financial statements and other data from the borrowers, the branch
should furnish evidence to show that renewal/ review of credit limits is already on
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and would be completed soon. An account where the regular/ ad hoc credit limits
have not been reviewed/ renewed within 180 days from the due date/ date of ad-hoc
sanction will be treated as NPA.
2.2 Categories of NPAs:
2.2.A: Banks are required to classify non performing assets further into the following three
categories based on the period for which the asset has remained non performing and the
reliability of the dues:
i. Substandard Assets
ii. Doubtful Assets
iii. Loss Assets
i. Substandard Assets: A substandard asset would be one, which has remained NPA for a period
less than or equal to 12 months. Such an asset will have well defined credit weaknesses that
jeopardise the liquidation of the debt and are characterized by the distinct possibility that the
banks will sustain some loss, if deficiencies are not corrected. Internally, Bank has decided that
no Recalled Asset shall remain in SSA(Substandard Assets) category, irrespective of age, and
shall, on transfer to RAA an account would become Doubutful Asset- category 1 and further
aging provision shall be based on the date of transfer to RAA.
ii. Doubtful Assets: An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as sub-standard, with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
iii. Loss Assets: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its continuance as a
bankable asset is not warranted although there may be some salvage or recovery value.
2.2.B: Effect of erosion in security value/frauds on classification of NPAs:

In respect of accounts where there are potential threats for recovery on account of erosion in the
value of security or non-availability of security and existence of other factors such as frauds
committed by borrowers it will not be prudent that such accounts should go through various
stages of asset classification. In cases of such serious credit impairment, the asset should be
straightaway classified as doubtful or loss asset as under:
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- When the realizable value of the security is less than 50 per cent of the value
assessed by the bank or accepted by RBI at the time of last inspection, as the case
may be, such NPAs may be straightaway classified under doubtful category.
- If the realizable value of the security, as assessed by the bank/ approved valuers/ RBI
is less than 10 per cent of the outstanding in the borrowal accounts, the existence of
security should be ignored and the asset should be straightaway classified as loss
asset
2.2.C: Loans with moratorium for payment of interest:

i. In the case of bank finance given for industrial projects or for agricultural plantations etc.
where moratorium is available for payment of interest and payment of interest becomes 'due'
only after the moratorium or gestation period is over. Therefore, such amounts of interest do
not become overdue during moratorium. They become overdue only after due date for payment
of interest, if uncollected, for the purpose of classification of NPA.
ii. In the case of housing loan or similar advances granted to staff members where interest is
payable after recovery of principal, interest need not be considered as overdue from the first
quarter onwards. Such loans/advances should be classified as NPA only when there is a default
in repayment of installments of principal or payment of interest on the respective due dates.
2.3 Other Guidelines related to Asset Classifications:

2.3.A: Accounts regularized near about the balance sheet date:
The asset classification of borrowal accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and without scope for
subjectivity. Where the account indicates inherent weakness on the basis of the data
available, the account should be deemed as a NPA. In other genuine cases, satisfactory
evidence should be furnished to the Statutory Auditors/Inspecting Officers about the
manner of regularization of the account to eliminate doubts on their performing status.
2.3.B: Asset Classification to be borrower-wise and not facility-wise:

a) In one facility granted by a bank to a borrower classified as NPA, all the facilities
granted to that borrower and investment in all the securities issued by the borrower will
have to be treated as Non Performing Assets (NPA)/Non Performing Investment(NPI).
b) If the debits arising out of devolvement of letters of credit or invoked guarantees

are parked in a separate account, the balance outstanding in that account also should be
treated as a part of the borrower’s principal operating account for the purpose of
application of prudential norms on income recognition, asset classification and
provisioning.
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c) The bills discounted under LC favoring a borrower may not required to be classified
as a Non-performing assets (NPA) despite the fact that any other facility granted to the
borrower may have been classified as NPA. A bill discounted under LC is not an
exposure on borrower but on the LC issuing bank if all documents obtained for bill
discounting is as per LC terms and it is considered outside the indebtedness of the
borrower. However, in case documents under discounted LC are not accepted or not paid
on due date by the LC issuing bank for any reason and the borrower does not
immediately make good the amount disbursed, the outstanding bills discounted will
immediately be classified as NPA with effect from the date when the other facilities had
been classified as NPA.
d) Derivative Contracts: The overdue receivables representing positive mark-to-market

value of a derivative contract will be treated as a non-performing asset, if these remain
unpaid for 90 days or more. In case the overdues arising from forward contracts and plain
vanilla swaps and options become NPAs, all other funded facilities granted to the client
shall also be classified as non-performing asset following the principle of borrower-wise
classification as per the existing asset classification norms. Similarly, in case a fund-
based credit facility extended to a borrower is classified as NPA, the MTMs of all the
derivative exposures may be treated as NPA subject to remaining overdues for 90 days
and other exemption allowed by RBI.
2.3.C: Advances under consortium arrangements:

Asset classification of accounts under consortium should be based on the record of
recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances. Pooling of remittances by the borrower under consortium
lending arrangement with one Bank and not sharing of pooled amount with other bank
will also not have any bearing on NPA classification with other bank. The account with
other bank if not serviced as per assets classification norms, it will be treated as NPA.
The banks participating in the consortium should, therefore, arrange to get their share of
recovery transferred from the lead bank or get an express consent from the lead bank for
the transfer of their share of recovery, to ensure proper asset classification in their
respective books.
2.3.D Advances to Primary Agricultural Credit Societies (PACS)/Farmers’ Service

Societies (FSS) ceded to Commercial Banks:
In respect of agricultural advances as well as advances for other purposes granted by

banks to PACS/ FSS under the on-lending system, only that particular credit facility
granted to PACS/ FSS which is in default for a period of two crop seasons in case of
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short duration crops and one crop season in case of long duration crops, as the case may
be, after it has become due will be classified as NPA and not all the credit facilities
sanctioned to a PACS/ FSS. The other direct loans & advances, if any, granted by the
bank to the member borrower of a PACS/ FSS outside the on-lending arrangement will
become NPA even if one of the credit facilities granted to the same borrower becomes
NPA.
2.3.E: Advances against Term Deposits, NSCs, KVPs/IVPs, Gold Loan, etc:
i. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life
policies need not be treated as NPAs, provided adequate margin is available in the
accounts. Term deposits, NSCs, KVPs/IVPs and Life Insurance policies are considered as
cash security as they are payable on demand to the extent of surrender value. Therefore,
when an advance against these securities becomes overdue, Bank has full authority to
encash it and to close these advances account closed from the proceeds.
ii. Advances against gold ornaments, government securities and all other securities are
not covered by this exemption. A loan granted against the security of the gold ornaments
for non-agricultural purposes will be treated as NPA if the account remains overdue
for more than 90 days. However, if the loan is availed for agricultural activities (Agri
Gold Loans), the account will be treated as NPA if it remains overdue for 2 crop seasons
in case of short duration crops and one crop season in case of long duration crops.
2.3.F: Government guaranteed advances:

The credit facilities backed by guarantee of the Central Government though overdue may
be treated as NPA only when the Government repudiates its guarantee when
invoked. This exemption from classification of Government guaranteed advances as
NPA is not for the purpose of recognition of income. For example, if an amount of
interest/installment has fallen overdue for credit facilities backed by central
government guarantee and on invocation of the guarantee, the Central Government
has been refused to pay the dues for any reason, account will be classified as NPA if
it remains unpaid for a period of more than 90 days from the due date of the payment of
installment/interest. Further, if on invocation of Central Government guarantee, it has
been accepted by the central government and payment will be made to the bank in due
course, the account need not to be classified as NPA despite remaining overdue for more
than 90 days. However, banks are not allowed to book any interest and other income on
accrual basis in above accounts and it can be book only when it has actually been paid by
the borrower/central government.
The credit facilities backed by guarantee of the State Government are not exempted from
asset classification norms as applicable to Central Government guaranteed accounts as
above. State Government guaranteed advances and investments in State
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Government guaranteed securities would attract asset classification and
provisioning norms if interest and/or Installment/principal or any other amount due
to the bank remains overdue for more than 90 days.
2.3.G: Projects Loans:

i. As per RBI Guidelines, , 'Project Loan' means any term loan which has been extended
for the purpose of setting up of an economic venture. Project loan has also been defined
as transaction where the lender is usually paid solely or almost exclusively out of the cash
flow generated by the new economic venture being financed. As per BASEL, Project
Loan is a method of funding in which the lender looks primarily to the revenues
generated by a single project, both as the source of repayment and as security for the
exposure. For this purpose, all project loans have been divided into the following two
categories:
(a) Project Loans for infrastructure sector
(b) Project Loans for non-infrastructure sector
ii. Sectors classified under Infrastructure Sector has been listed in Harmonized Master
List of Infrastructure of RBI. Loan to infrastructure sector means a credit facility
provided to a borrower company engaged in ‘developing’ or ‘operating and maintaining’
or ‘developing, operating and maintaining’ any infrastructure facility which includes
Transport (Roads, bridge, ports, airport, Railway infrastructure, Urban Public Transport,
etc.), Energy (Electricity, Oil, Gas, LNG, etc. related infra), Water & Sanitation,
Communication, Social & Commercial Infrastructure sectors as notified by Government
of India from time to time. (RBI Circular No.DNBS.PD.CC.No.362 /03.10.001/2013-14
dated November 29, 2013)
iii. There are two distinct basic aspects, while appraising any long term loan
project , especially in the infrastructure sector.
“Date of Completion” of a project: It is the date, on which all the structures and physical
infrastructure of a project has been erected. The project is physically & technically ready
for start of commercial production but has not started yet. Normally, it is to be certified
by LIE [Lenders Independent Engineer], or any other similar expert who is competent to
certify the same.
“Date of Commencement of Commercial Operation” (DCCO): The proposed date on

which the borrowing entity will start operating commercially. So generally no
capitalization of interest is possible after this date and every expense to be marked to its
P&L account for the assets which are already commissioned.
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iv. Achievement of DCCO should be certified by appropriate authority who is
competent to certify the same for such sector/industry. For example, in a Power Project,
suitable certificate may be obtained from Central Electricity Authority etc. whereas in
case of a Road Project, NHAI or corresponding State Agency may issue certificate
regarding achievement of DCCO. Alternatively, Independent Technical Agency like
Independent Engineer or Lenders’ Independent Engineer or Bank’s Empanelled
Consultants who have necessary expertise in the sector/industry, can also certify that the
Plant has commenced commercial operations.
v. For all projects financed by the FIs/ banks either infrastructure or non-infrastructure
sector, the ‘Date of Completion’ and the ‘Date of Commencement of Commercial
Operations’ (DCCO), of the project should be clearly spelt out and formally documented
at the time of financial closure of the project and the same should also be mentioned in
the sanction appraisal note at the time of sanction of the loan. There are occasions when
the completion of projects is delayed for legal and other extraneous reasons like delays in
Government approvals etc. All these factors, which are beyond the control of the
promoters, may lead to delay in project implementation and involve restructuring /
reschedulement of loans by banks. Accordingly, the following asset classification norms
would apply to the project loans before commencement of commercial operations:
a. Deferment of DCCO and consequential shift in repayment schedule for equal or

shorter duration (including the start date and end date of revised repayment schedule)
will not be treated as restructuring provided that:
o the revised DCCO falls within the period of two years and one year from the
original DCCO stipulated at the time of financial closure for infrastructure
projects and non-infrastructure projects(including commercial real estate
projects) respectively;
o and all other terms and conditions of the loan remain unchanged.
o These project loans will be treated as standard assets in all respects
The above benefit has been extended to banks as the economic value of the project has
not changed despite change in DCCO. In other words, project will be able to generate
similar or higher cash during the same period after DCCO as originally envisaged at
the time financing.
b. Banks may restructure project loans, by way of revision of DCCO beyond the time
limits quoted at paragraph (a) above and retain the ‘standard’ asset classification, if the
fresh DCCO is fixed within the following limits, and the account continues to be
serviced as per the restructured terms:
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o Infrastructure Projects involving court case: Up to another two years in case
the reason for extension of DCCO is arbitration proceedings or a court case
(beyond the two year period quoted at paragraph (a) above i.e. total extension of
four years).
o Infrastructure Projects delayed for other reasons beyond the control of

promoter: Up to another one year in case the reason for extension of DCCO is
other than court cases and is beyond the control of promoters (beyond the two
year period quoted at paragraph 1(a) above i.e. total extension of three years),
o Non-Infrastructure Sector Projects (Other than Commercial Real Estate

Exposures): Up to another one year (beyond the one year period quoted at
paragraph (a) above, i.e. total extension of two years).
o The asset classification benefits provided above are not applicable to commercial
real estate sector.
vi. It is reiterated that a loan for a project may be classified as NPA during any time
before commencement of commercial operations as per record of recovery i.e. if interest
or installment has to be paid before DCCO as per terms of sanction and it remain overdue
for a period of more than 90 days, in this case account has to be classified as NPA. This
normally may happen only when we have stipulated payment of interest during project
implementation and borrowers fails to pay the same. It is further re-iterated that the
dispensation at paragraph is subject to the condition that the application for restructuring
should be received before the expiry of DCCO (Original or revised) and when the
account is still standard as per record of recovery. The other conditions will be:
- In cases where there is moratorium for payment of interest, banks should not
book income on accrual basis beyond two years and one year from the original
DCCO for infrastructure and non-infrastructure projects respectively,
considering the high risk involved in such restructured accounts.
- The following additional provisions has to be made on these accounts as long as these
are classified as standard assets in addition to provision for diminution in fair value
due to extension of DCCO:
If the revised DCCO is within two years/one year from the original 0.40% as applicable to normal
DCCO prescribed at the time of financial closure for infrastructure standard accounts.
and non-infrastructure projects respectively.
If the DCCO is extended: 5% per cent – From the date of
i) For infrastructure projects -Beyond two years and upto four years such restructuring till the revised
from the original DCCO DCCO or 2 years from the date of
ii) For non-infrastructure projects Beyond one years and upto two restructuring whichever is later.
years from the original DCCO
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vii. In case of infrastructure projects under implementation, where Appointed Date
(as defined in the concession agreement) is shifted due to the inability of the Concession
Authority to comply with the requisite conditions, change in date of commencement of
commercial operations (DCCO) will not be treated as ‘restructuring’ for NPA
classification subject to following conditions:
- The project is an infrastructure project under public private partnership model

awarded by a public authority;
- The loan disbursement is yet to begin;
- The revised date of commencement of commercial operations is documented by way
of a supplementary agreement between the borrower and lender and;
- Project viability has been reassessed and sanction from appropriate authority has been
obtained at the time of supplementary agreement.
viii. Projects under Implementation – Change in Ownership: In order to facilitate

revival of the projects stalled primarily due to inadequacies of the current promoters, if a
change in ownership takes place any time before original or revised DCCO, banks may
permit extension of the DCCO of the project up to two years in addition to the periods
quoted at paragraph 2.3.H.ii above without any change in asset classification of the
account subject to the following conditions:
- Implementation of the project is stalled/affected primarily due to inadequacies of the
current promoters/management and with a change in ownership there is a very high
probability of commencement of commercial operations by the project within the
extended period;
- The project in consideration should be taken-over/acquired by a new promoter/
promoter group/ Special Purpose Vehicle with sufficient expertise in the field of
operation.
- The new promoters should own at least 51 per cent of the paid up equity capital
of stake in the acquired project.
- If the new promoter is a non-resident, and in sectors where the ceiling on foreign
investment is less than 51 per cent, the new promoter should own atleast 26 per cent
of the paid up equity capital or up to applicable foreign investment limit, whichever is
higher, provided banks are satisfied that with this equity stake the new non-resident
promoter controls the management of the project;
- Viability of the project should be established to the satisfaction of the banks.
- Intra-group business restructuring/mergers/acquisitions and/or takeover/acquisition of
the project by other entities/subsidiaries/associates etc. belonging to the existing
promoter/promoter group will not qualify for this facility.
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- The new owners/promoters are expected to demonstrate their commitment by
bringing in substantial portion of additional monies required to complete the project
within the extended time period.
- While considering the extension of DCCO (up to an additional period of 2 years)
banks shall make sure that the repayment schedule does not extend beyond 85 per
cent of the economic life/concession period of the project
- This facility would be available to a project only once and will not be available
during subsequent change in ownership, if any.
ix. Any change in the repayment schedule of a project loan caused due to an increase in
the project outlay on account of increase in scope and size of the project, would not be
treated as restructuring if:
- The increase in scope and size of the project takes place before DCCO of the existing
project.
- The rise in cost excluding any cost-overrun in respect of the original project is 25% or
more of the original outlay.
- The bank re-assesses the viability of the project before approving the enhancement of
scope and fixing a fresh DCCO.
- On re-rating, (if already rated) the new rating is not below the previous rating by
more than one notch.
x. Multiple revisions of the DCCO and consequential shift in repayment schedule for
equal or shorter duration (including the start date and end date of revised repayment
schedule) will be treated as a single event of restructuring provided that the revised
DCCO is fixed within the respective time limits stipulated above and all other terms and
conditions of the loan remained unchanged.
xi. Banks, if deemed fit, may extend DCCO beyond the respective time limits stipulated
above. However, in that case, banks will not be able to retain the ‘standard’ asset
classification status of such loan accounts.
Page 528 of 632

Illustration of deferment in DCCO
S. Non Infra Projects
No Infrastructure Projects (including CRE) Provisioning requirement
1. For first deferment
T+ 2 years T+1 year 0.40% as per “Standard”
asset
Infrastructure Projects Non Infra Projects Provisioning
categrequirement
(excluding CRE) ory
2 Deferment due to reasons beyond control of 5.00% – From the date of
promoter such restructuring till the
T+2 years (as above) +1year T+1 year (as above) +1 year revised DCCO or 2 years
i.e. Total : T+3 years i.e. Total : T+2 years from the date of
3 Deferment due to arbitration or court case restructuring, whichever is
T+2+2 years T+2 years only later.
i.e. Total : T+4 years (as above)
4 Deferment when promoter is changed #
T+4 years (as above) + T+2 years (as above) + 2
2 years i.e. Total 6 years years i.e. Total 4 years
2.3.H: Restructured Assets other than project loans:

i. Restructuring of advances could take place in the following stages:
(a) before commencement of commercial production / operation;
(b) after commencement of commercial production / operation but before the asset has
been classified as 'sub-standard';
(c) after commencement of commercial production / operation and the asset has been
classified as 'sub-standard' or 'doubtful'.
ii. Accordingly, the following asset classification norms will be applicable for
restructured accounts:
- The accounts classified as 'standard assets' should be immediately reclassified as
'sub-standard assets' upon restructuring and slip into further lower asset
classification categories as per the extant asset classification norms, except MSME
units having exposure up to Rs.25 crore under RBI’s special dispensation.
- The non-performing assets, upon restructuring, would continue to have the same asset
classification as prior to restructuring and slip into further lower asset classification
categories as per extant asset classification norms with reference to the pre-
restructuring repayment schedule.
- The FITL/WCTL/debt or equity instrument created by conversion of unpaid
interest/principal will be classified in the same asset classification category in which
the restructured advance has been classified.
- Any additional finance may be treated as 'standard asset' during the ‘specified period’
(defined at para 2.4 below) under the approved restructuring package. If the
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restructured asset does not qualify for upgradation at the end of the above specified
period, the additional finance shall be placed in the same asset classification category
as the restructured debt.
- If a restructured asset, which is a standard asset on restructuring in terms special
regulatory treatment and is subjected to restructuring on a subsequent occasion, it
should be classified as substandard.
- If the restructured asset is a sub-standard or a doubtful asset and is subjected to
restructuring, on a subsequent occasion, its asset classification will be reckoned from
the date when it became NPA on the first occasion.
- The existing credit facilities sanctioned to a unit under rehabilitation packages
approved by BIFR/TLIs will continue to be classified as substandard or doubtful as the
case may be and as applicable to restructured accounts as above.
2.3.I: Post-shipment Supplier's Credit:

In respect of post-shipment credit extended by the banks covering export of goods to countries
for which the Export Credit Guarantee Corporation’s (ECGC) cover is available, EXIM Bank
has introduced a guarantee-cum--refinance programme whereby, in the event of default, EXIM
Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the
bank invokes the guarantee after the exporter has filed claim with ECGC. Accordingly, to the
extent payment has been received from the EXIM Bank, the advance may not be treated as
a non performing asset for asset classification and provisioning purposes. The payment
received from EXIM Bank is required to be kept in separate account and required to be refunded
to EXIM Bank on receiving ECGC claim. Further, the post shipment credit provided under
EXIM Bank refinance has also required to be kept in separate account for the purpose of
reconciliation and keeping its asset classification as standard. All other credit facilities of the
borrower will be classified as NPA if any credit facility other than EXIM Bank refinance facility
has turned NPA as per IRAC norms.
2.3.J: Export Project Finance:
In respect of export project finance, there could be instances where the actual importer has paid
the dues to the bank abroad but the bank abroad in turn is unable to remit the amount to us due to
political developments such as war, strife, UN embargo, etc. In such cases when we are able to
establish through documentary evidence (letter/authenticated message from bank abroad) that the
importer has cleared the dues in full by depositing the amount in the bank abroad but the
importer's country is not allowing the funds to be remitted due to political or other reasons,
the asset classification of post shipment accounts will remain as standard (if it is already
standard) for the period of one year from the date of deposit of amount by importer in the bank
abroad.
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2.4: Upgradation of loan accounts classified as NPAs
2.4.A: If an NPA account which have not been restructured and the arrears of interest and
principal are paid by the borrower, the account may be re-classified as ‘standard’ accounts.
2.4.B: A restructured / rescheduled NPA account should be upgraded only on demonstration of

‘satisfactory performance’ of the outstanding loan / facilities accounts during the
‘monitoring period’.
2.4.C: Any default by the borrower in any of the credit facilities with any of the lenders
(including any lender where the borrower is not in “specified period”) subsequent to upgrade in
asset classification as above but before the end of the specified period, will require a fresh RP to
be implemented within the stipulated timelines as any default would entail. However, lenders
shall make an additional provision of 15% for such accounts at the end of the Review Period.
This additional provision, along with other additional provisions, may be reversed as per the
norms laid down at paragraph 21 of the RBI Circular dated 09-06-2019.
“Specified period” means the period from the date of implementation of RP up to the
date by which at least 20 per cent of the sum of outstanding principal debt as per
the RP and interest capitalisation sanctioned as part of the restructuring, if any, is
repaid.
Monitoring Period: Monitoring period’ means the period from the date of
implementation of restructuring up to the date by which at least 1 0 percent of the
outstanding principal debt as per the restructuring and interest capitalisation sanctioned
as part of the restructuring, if any, is repaid. Provided that the specified period cannot
end before one year from the commencement of the first payment of interest or principal
(whichever is later) on the credit facility with longest period of moratorium under the
terms of restructuring.
Satisfactory Performance: Satisfactory performance during the specified period means

the payments in respect of borrower entity are not in ‘Default’ at any point of time
during the ‘specified period’. Default means non-payment of debt when whole or any
part or installment of the amount of debt has become due and payable and is not repaid
by the borrower. For revolving facilities like cash credit, default would also mean the
outstanding balance remaining continuously in excess of the sanctioned limit or
drawing power, whichever is lower, for more than 30 days.
i. In case, satisfactory performance after the specified period is not evidenced, the asset
classification of the restructured account would be governed as per the applicable
prudential norms with reference to the pre-restructuring repayment schedule.
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ii. For accounts with aggregate exposure of Rs.100 crore and above,
in addition to demonstration of satisfactory performance,

the credit facilities of the borrower shall also be rated as investment grade (BBB- or
better) as at the end of the ‘specified period’ by CRAs accredited by the Reserve
Bank for the purpose of bank loan ratings to qualify for an upgrade.
While accounts with aggregate exposure of R s . 500 crore and above shall require
two such ratings from two CRAs and aggregate exposure below RS . 500 crore wi l l
require one rating.
iii. In case satisfactory performance during the specified period is not demonstrated,
the account shall, immediately on such default, be reclassified as per the repayment
schedule that existed before the restructuring. Any future upgrade for such accounts
shall be contingent on implementation of a fresh resolution plan and demonstration of
satisfactory performance thereafter.
2.5 INCOME RECOGNISATION:
2.5.1: Income Recognisation Policy:

i. The actual realization concept of accounting convention means that if a loan made by a
bank fails to fetch a return in the form of interest realised from the borrower, the bank has
no right to book that interest chargeable as income in its balance sheet. In that event it
signifies that the asset is not performing i.e., not yielding any income to the bank. This
will apply to Government guaranteed accounts also. This is the essence of income
recognition norms.
ii. Thus an asset, which ceases to yield income for the bank, should be treated as NPA,
and any income from such loan asset should not be booked as income until it is actually
recovered.
iii. However, interest on advances against term deposits, NSCs, IVPs, KVPs and
surrender value of life insurance policies may be taken to income account on the due
date, provided adequate margin is available in the accounts.
iv. If any advance, including bills purchased and discounted, becomes NPA, the entire
interest accrued and credited to income account in the past periods, should be reversed if
the same is not realised. This will apply to Government guaranteed accounts also.
Therefore, interest charged to such loan accounts should be reversed and parked in “Un-
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Realised Interest (URI)” until recovery. On recovery reverse it from URI and credit
Interest Account. Further application of interest also has to be stopped in NPA accounts.
However, accrued interest for NPA accounts may continued to be calculated and
recorded in the CBS system. The accrued interest calculated for NPA accounts will
not be part of Bank’s gross advances.
v. In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed with respect to past periods,
if uncollected.
iv. Fees and commissions earned by the banks as a result of renegotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over the
period of time covered by the renegotiated or rescheduled extension of credit if it is not
paid in cash at the time of restructuring. It is subject to condition that the rescheduled
amounts are being paid as per renegotiated terms & conditions.
2.5.2: Income recognition: Project Loan
i. Banks are allowed to recognise income on accrual basis in respect of the projects under
implementation which are classified as ‘standard’.
ii. Income recognition in respect of the NPAs, regardless of whether these are or are not
subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement,
should be done strictly on cash basis, only on realization. Further, if any funding of
interest in respect of NPAs (FITL), if recognised as income, should be fully provided for.
iii. If the amount of interest dues is converted into equity or any other instrument, and
income is recognised in consequence, full provision should be made for the amount of
income so recognised to offset the effect of such income recognition.
iv. In case of conversion of principal and /or interest in respect of NPAs into debentures,
such debentures should be treated as NPA, ab initio, in the same asset classification as
was applicable to loan just before conversion and provision to be made as per norms. On
such debentures, income should be recognised only on realisation basis.
v. The income in respect of unrealised interest which is converted into debentures or any
other fixed maturity instrument should be recognised only on redemption of such
instrument.
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2.5.3 Appropriation of recovery in NPAs
i. Interest realised on NPAs may be taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned.
ii. In the absence of a clear agreement between the bank and the borrower for the purpose
of appropriation of recoveries in NPAs (i.e. towards principal or interest due), booking of
interest on account of partial recovery in NPAs can be made as under:
- First, the unrealised interest (URI) is treated as recovered to the extent of recovery
made.
- When URI is fully recovered, further interest good for the balance amount of
recovery is can be booked as income to the extent of reduction in irregularity
between two Balance Sheet dates as explained in the following examples.
Booking of Recovery in NPA: Example-1:

(Rs. In crore)
Account NPA as on 31.03.2018 Position of the Account as on 31.03.2019
Limit 50.00 Limit 50.00
Drawing Power 50.00 Drawing Power 40.00
- - Recovery during the 10.00
8 Cr.
year 2015-16
Outstanding 55.00 Outstanding 47.00 2 Cr.
Unrealised Interest 2.00 Unrealised Interest* 0.00
IRREGULARITY 5.00 IRREGULARITY 7.00
Accrued Interest 5.00 Accrued Interest 11.00 DP-OS=47-
Reduction in irregularity between two balance sheet date: Nil- NO booking of interest income 40
*Recovery first used for reversal of Unrealised Interest to book income then in reduction of
outstanding principal.
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Booking of Recovery in NPA: Example-2:
(Rs. In crore)
Account NPA as on 31.03.2015 Position of the Account as on 31.03.2016
Limit 50.00 Limit 50.00
Drawing Power 50.00 Drawing Power 40.00
- - Recovery during the 15.00
year 2015-16 2 Cr.
13 Cr.
Outstanding 55.00 Outstanding 42.00
Unrealised Interest 2.00 Unrealised Interest* 0.00
IRREGULARITY 5.00 IRREGULARITY 2.00 DP-
Accrued Interest 5.00 Accrued Interest 8.00 (11-3) OS=42-40
Reduction in irregularity between two balance sheet date: Rs.3 crs (5-2). Therefore, Rs.3 crs can
be booked as interest income by applying accrued interest in the account to that extant.
*Recovery first used for reversal of Unrealised Interest to book income then reduction of
outstanding principal.
2.6 PROVISIONING NORMS

i. In conformity with the prudential norms, the Banks are required to make certain amount of
provision on various kinds of assets on fund based outstanding as under:
Assets Provision to be held

Standard Assets i. Farm credit for Agriculture Activities: 0.25%
ii. Advances to Small and Micro Enterprises: 0.25%
ii. Advances to Commercial Real Estate (CRE) Sector: 1%
iii. Advances to Commercial Real Estate-Residential Housing
Sector (CRE-RH): 0.75
iv. All other loans and advances not included above including
advances to Medium Enterprises: 0.40%
Sub-Standard Assets Secured Advances: 15%
Unsecured Advances: 25%
Infrastructure project with escrow accounts: 20%
Doubtful Assets upto 1 year 25% on secured portion and 100% on unsecured portion
Doubtful Assets more than 1 year to 40% on secured portion and 100% on unsecured portion
3 years
Doubtful Assets more than 3 years 100% of the outstandings
Loss Assets 100% of the outstandings
Unsecured advances: An exposure (FB+NFB) where the realizable value of the

security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is
not more than 10 percent or ab-initio unsecured advances accounts.
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Unsecured Portion: Outstanding less the realizable value of the security to which the
bank has a valid recourse and the realizable value is estimated on a realistic basis.
Security: Tangible security properly discharged to the bank and will not include
intangible securities like guarantees, comfort letters etc.
Valuation of Security: For stocks and receivables charged in favor of bank, stock audit
at annual intervals by empanelled Stock Auditor for NPAs with balance of Rs. 5 crore
and above. Immovable properties charged in favor of the bank should be valued once in
three years by empanelled valuers. For valuation of securities please also be guided by
CPPD Circular No. : CCO/CPPD-ADV/22/2015-16 dated 20.05.2015.
ii. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, gold ornaments,
government & other securities and life insurance policies would attract provisioning
requirements as applicable to their asset classification status.
iii. In respect of advances under rehabilitation package approved by BIFR/term lending

institutions, the provision should continue to be made in respect of dues to the bank on the
existing credit facilities as per their classification as substandard or doubtful asset. However,
provision on additional facilities sanctioned as per package finalised by BIFR and/or term
lending institutions, need not be made for a period of one year from the date of disbursement.
iv. In respect of additional credit facilities granted to SSI units which are identified as sick and
where rehabilitation packages/nursing programmes have been drawn by the bank solely or under
consortium arrangements, no provision need be made for a period of one year.
v. Advances covered by ECGC guarantee: In the case of advances classified as doubtful and
guaranteed by ECGC, provision should be made only for the balance in excess of the amount
guaranteed by the Corporation. Further, while arriving at the provision required to be made for
doubtful assets, realizable value of the securities should first be deducted from the outstanding
balance in respect of the amount guaranteed by the Corporation and then provision to be made as
illustrated hereunder:
(Rs. in crore)
Example: ECGC Guaranteed account as on 31.03.2019
Limit 10.00
Outstanding Balance 8.00
ECGC Cover 50%
Value of Security held 2.00
Asset Category Doubtful more than 1 year
Page 536 of 632

Provision Required to made as on 31.03.2019
Less: Value of Security 2.00
Unrealisable Balance 6.00
Less: ECGC Cover (50% of unrealisable 3.00
balance)
Unsecured Balance 3.00
Provision for unsecured portion of advances 3.00 (100% of unsecured portion of Rs.3 crs)
Provision for secured portion of advances 2.00 (40% of secured portion of Rs.5.00 crs)
Total Provision required as on 31.03.2016 5.00
vi. Advance covered by guarantees of CGTMSE/CRGFTLIH(Credit Guarantee Fund Trust for

Low Income Housing): In case CGTMSE or CRGFTLIH guaranteed accounts become non-performing,
no provision need be made towards the guaranteed portion. The amount outstanding in excess of the
guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing
assets. An illustrative example is given below:
(Rs. in lacs)
Example: CGTMSE/CRGFTLIH Guaranteed account as on 31.03.2016
Limit 50.00
CGTMSE/CRGFTLIH Guarantee 75% of limit/outstanding amount or
or 75% of the unsecured amount or Rs.37.50 lakh,
whichever is least
Value of Security held 20.00
Asset Category Doubtful more than 2 year
Provision Required to made as on 31.03.2016

Less: Value of Security 20.00
Unrealizable Balance 20.00
Less: CGTMSE/CRGFTLIH cover (75% 15.00
of unrealizable balance)
Net unsecured and uncovered portion 5.00
Provision for unsecured portion of 5.00 (100% of unsecured portion of Rs.5.00 lacs)
advances
Provision for secured portion of advances 8.00 (40% of secured portion of Rs.20.00 lacs)
Provision for CGTMSE/ CRGFTLIH Nil
covered portion
Total Provision required as on 31.03.2019 13.00
Page 537 of 632

vii. Restructured Accounts: Provision against the restructured advances will be held as per the
extant provisioning norms. However, Restructured accounts classified as standard advances
will attract additional provision of 5% for two years from the date of restructuring or end
of moratorium period (given at the time of restructuring for account where moratorium ends at
last) whichever is later. Restructured accounts classified as non-performing assets, when
upgraded to standard category will attract a higher provision of 5% in the first year from the date
of upgradation.
viii. Provision for diminution in the fair value of restructured advances:
a. Reduction in the rate of interest and / or reschedulement of the repayment of principal

amount, as part of the restructuring, will result in diminution in the fair value of the
advance. Therefore, provision for diminution in fair value should be held in addition to
the provisions as per existing provisioning norms. For this purpose, the erosion in the fair
value of the advance should be computed as the difference between the fair value of the
loan before and after restructuring. Fair value of the loan before restructuring will be
computed as the present value of cash flows representing the interest and principal
payment at the existing interest rate, discounted at card rate applicable to customer
including term premium as on the date of restructuring. Fair value of the loan after
restructuring will be computed as the present value of cash flows representing the interest
and the principal payment as proposed interest rate on restructuring, discounted at card
rate applicable to customer including term premium as on the date of restructuring.
b. In the case of working capital facilities, the diminution in the fair value of the cash
credit / overdraft component may be computed as above, reckoning the higher of the
outstanding amount or the limit sanctioned as the principal amount and taking the tenor
of the advance as one year.
c. The diminution in the fair value required to be re-computed on each balance sheet date
till satisfactory completion of all repayment obligations and full repayment of the
outstanding in the account. On account of recalculation consequently, banks may provide
for the shortfall in provision or reverse the amount of excess provision held in the distinct
account.
d. Bank have the option of notionally computing the amount of diminution in the fair
value and making provision @ 5% of the total exposure, in respect of all restructured
accounts where the total dues to bank or banks (including consortium or multiple banking
exposure) are less than rupees one crore.
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e. The total provisions required against an account (normal provisions plus provisions in
lieu of diminution in the fair value of the advance) should not exceed 100% of the
outstanding debt amount.
f. Where a viable Resolution Plan in respect of a borrower is not implemented within the
timelines given below, all lenders shall make additional provisions as below:
Additional provisions to be made as a % of
Timeline for implementation of viable RP total outstanding, if RP not implemented
within the timeline
180 days from the end of Review Period 20%
365 days from the commencement of Review
15% (i.e. total additional provisioning of 35%)
Period
a. The additional provisions shall be made over and above the higher of the following,
subject to the total provisions held being capped at 100% of total outstanding:
I. The provisions already held; or,
II. The provisions required to be made as per the asset classification status of the
borrower account.
b. The additional provisions shall be made by all the lenders with exposure to such
borrower.
c. The additional provisions shall also be required to be made in cases where the lenders
have initiated recovery proceedings, unless the recovery proceedings are fully completed.
d. The above additional provisions may be reversed as under:
(a) Where the RP involves only payment of overdues by the borrower – the additional
provisions may be reversed only if the borrower is not in default for a period of 6 months
from the date of clearing of the overdues with all the lenders;
(b) Where RP involves restructuring/change in ownership outside IBC – the additional
provisions may be reversed upon implementation of the RP;
(c) Where resolution is pursued under IBC – half of the additional provisions made may
be reversed on filing of insolvency application and the remaining additional provisions
may be reversed upon admission of the borrower into the insolvency resolution process
under IBC; or,
(d) Where assignment of debt/recovery proceedings are initiated – the additional
provisions may be reversed upon completion of the assignment of debt/recovery.
====================
References: For further reading, refer to:
i) RBI Master Circular No. DBOD.No.BP.BC.9/21.04.048/2014-15 dated July 1, 2015
ii) Bank's Loan Policy for 2018-19
iii) RBI Circular No.RBI/2018-19/ 203 dated June 7, 2019
iv) Circular No.CCO/CPPD-ADV/79/2019 – 20 dated 21 Aug 2019
Page 539 of 632

An account with a cash credit limit of Rs.23.40 crore turned NPA on 15.12.2015. Before NPA
classification, the account had an outstanding of Rs.23.47 crore (as on 14.12.2015) including
unpaid interest of Rs.1.50 crore. Branch was having a TDR of Rs.0.50 crore in the name of the
borrower which was credited to the account on 15.12.2015 itself. As the account was not
regularized, Branches recalled the advances and transferred it to recalled assets as on 31.03.2016.
Branch made a recovery of Rs.4.10 crore from the borrower as on 28.02.2018. Branch has
incurred expenses of Rs.0.20 crore as legal and other expenses in the recovery and legal action
process against the unit which has been paid from charges account of the branch. The present
value of stocks as on 31.03.2018 is nil. The value of collateral security (Land & Building in the
name of unit) is Rs.12.10 crores as per valuation report dated 30.04.2017. Please discuss in
details with reasons on followings aspects:
- At the end of the day of NPA classification (15.12.2015) what will be outstanding get
reflected in the account and what will be amount of Unrealized Interest (URI)?
- How the appropriation of recovery will be done?
- What will be the remaining outstanding in the account as on 31.03.2018?
- What will be the asset category of the unit as on 31.03.2018 as per RBI’s IRAC Norms?
- How much provision is required to be made as on 31.03.2018?
Page 540 of 632

MCQ
1. The irregularity that occurred due to technical reasons such as connectivity problems or
for reasons for which the Borrower could not be held liable, but adjusted subsequently
when the connectivity is restored or adjusted after removal of technical snag, needs to be
reported to:
a. No need for reporting
b. Controller for information
c. Appropriate Authority as per Scheme of Delegation of Powers for confirmation
d. Circle CCO for noting and apprising CMC
Ans: (b)
2. In case an exposure slips into NPA without being reported in CRILC as defaulted
account, the penalty shall be:
a. Accelerated Provision
b. Financial Penalty
c. Both (a) and (b)
Ans: (c)
3. Additional Provision, over and above IRAC provision created for delayed
implementation of resolution by means of rectification outside IBC may be reversed
when:
a. the borrower is not in default for a period of 6 months from the date of clearing of
the overdues with all the lenders
b. the borrower is not in default to any lenders after clearing of the overdues with all
the lenders
c. individual lender can reverse such additional provision created for delayed
implementation when the borrower is not in default for a period of 6 months from
the date of clearing of the overdues with it.
d. the borrower is not in default.
Ans (a)
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4. Additional finance sanctioned as per of the restructuring package of an existing exposure
of Rs.26 crore shall remain Standard Asset during:
a. Specified Period
b. Monitoring Period
c. Review Period
d. Additional finance sanctioned as part of the restructuring package will have the
same asset classification as that of the existing accounts as Asset Classification to
be borrower-wise and not facility-wise.
Ans: (b)
5. Interest income on additional finance sanctioned as per of the restructuring package of an

existing exposure of Rs.26 crore shall be booked on:
a. Cash Basis
b. Accrual Basis
c. Additional finance sanctioned as part of restructuring package needs to be

interest-free during the Specified Period
d. On cash basis if backed by an evidence of assured cash flow
Ans: (a)
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CHAPTER- 13 E
EXIT POLICY FOR STANDARD ASSETS INCLUDING SMAs
1. Exit Policy of the Bank:

In the light of the broadened scope of Early Warning Signals (EWS) and proactively
capturing other signals of stress, a comprehensive Exit Policy for Standard Assets
indicating signs of stress has been formulated for accounts. The Policy aims at
providing a defined structure and timeline for identification of accounts where “Exit”
option is to be exercised.
2. Salient Features of the Policy:

The salient features of the exit policy are as under:
- Applicable to Standard Assets indicating signs of stress.
- Accounts with total exposure (FB+NFB) of Rs.5crs. and above (across all Business
Verticals), are to be covered.
- Remedial/corrective measures to be explored and stipulated for identified accounts.
Units failing to show improvement even after corrective measures, will be recommended for
exercising “Exit” option by the Bank.
- Controllers of the Branch will be the Authority for approving “Exit” from an
exposure. The authority may approve “Exit” with additional conditions/ steps that will
facilitate exit or may extend the time-period for compliance of corrective
measures.
- The Business Units have to plan and prepare an ‘Exit Budget’ in respect of
Standard Assets indicating signs of stress, for their respective vertical as part of Annual
Budget exercise at the beginning of the financial year.
3. Eligible Accounts:
All Standard accounts (including SMA–0, SMA-1 and SMA-2) irrespective of External
rating (for “D” rated accounts a separate Policy is in place). The Policy shall be applicable to
accounts with exposure of Rs.5 crs. and above across all Business Verticals.
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4. Indicative Signs of Stress in the Account:
The warning signals enumerated below are to be reckoned in order to identify an

exposure for an exit option.
- Drastic fall in the performance of the Company.

- Non-adherence to financial parameters / covenants of sanctions.
- Critical observations in RFIA / Credit Audit / Stock & Receivable Audit etc.
- Adverse market reports / disputes amongst Promotors / lack of commitment on the
part of Management.
- Industry / Sector (in which the Unit is engaged), is on a declining trend, and RMD
approach paper/ norms too indicate accordingly.
- Borrower declared as Wilful Defaulter / Non-Cooperative Borrower by our Bank or
any other Bank.
- Group accounts declared as fraud or RFA by our Bank or any other Bank / Group
accounts which are in distress or are NPA / Cross Default / Any of the associates or
group account declared as Wilful Defaulter by our Bank or any other Bank /
Exposure to an individual entity of a Group is high risk.
The above is an indicative list and not exhaustive. Apart from the above, guidelines on Early
Warning Signals / Financial difficulty / Incipient Sickness and a combination of any such
signals, may be considered as triggers for examining the exit option.
5. Process Flow:
The Relationship Manager / Officer maintaining the account(s) will scrutinise the
portfolio being handled by him at regular intervals and identify accounts showing signs of
weaknesses that require remedial measures, based on the level of stress. Branch to take
cognizance of the warning signals and to examine and decide on exiting from such an
exposure. The Operating units, will submit proposal , discussing various warning signals
and providing detailed reasons thereof to their Controllers, as also suggesting/ proposing
remedial measures for improving the position of the account.
Network Proposal to be put up by Approving Authority

a. R&DB CSO + RM(ME) + Br. Head DGM (B&O) through the
respective Regional Manager
b. CCG CSO + RM + Br. Head (AGM
GM (CCGRO) / GM (Branch
/ DGM) Head)
c. CAG Service Officer + RM GM (Branch Head)
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6. Remedial Measures:
The Approving Authority may prescribe remedial measures to be undertaken by the
Borrower/ Promotor(s) / Guarantor(s) immediately. The remedial / corrective measures may
include:
- Infusion of fresh capital preferably with reduction in exposure. Reduction in exposure to
be more than the funds infused.
- Change in Management, induction of strategic partners / investors.
- Induction of new lenders / formation of Consortium / Multiple Banking arrangement
resulting in reduction in our exposure.
- Enhancing collateral coverage by obtaining additional collateral security, Corporate

Guarantee of a group Company which is financially stronger and/ or better rated /
Personal Guarantee / Pledge of shares.
- Any other measures contemplated by the Approving Authority depending upon the
exposure, nature, industry etc.
The Operating units shall ensure that the measures initiated at an early stage will enable the
Unit to avoid a slippage. The steps initiated shall not be cosmetic as the underlying
approach is to exit the account if the underlying remedial measures are not complied with.
The remedial measures approved by the Controllers are to be complied with by the
borrower within a maximum of 90 days from the date of approval. After the expiry of 90 days,
the Branch will examine the compliance position and the measures taken by the Borrowing
Unit. If no improvements are effected in terms of adherence to the remedial measures, the
account is to be recommended for exit. The recommendations will be submitted by the Branch
Head, to the Controllers within the next 15 days.
The Controllers may allow an additional time of 3 months from the date of approval for
compliance by the Borrower/ Promoter/ Guarantor.
6. Additional Remedial Measures:

While recommending an exposure for exit, the Branch may consider the following
additional remedial measures, if necessary:
- Freezing the limit at its existing level.
- Withdrawal of the concessions in pricing.
- Higher margins for non-fund based facilities.
- Increasing the margins on Stocks and Receivables.
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- Recovery of penalties, if any.
- Withdrawal of Corporate INB, if provided to the Borrowing Unit.
- Withdrawal of the allocated limits, if any.
- Appointment of Nominee Directors in the Board of the Company.
- Examination of conduct of Forensic Audit.
The Sanctioning Authority may also consider exploring the “Exit” option while review/
renewal of accounts put up by Branch. The Controller of the Branch will be the Authority
to approve an exit option for the account.
7. Immediate Action on Approval for Exit:

On receipt of approval for Exit, the Branch has to immediately initiate steps as advised by the
Controllers and the Borrower(s)/ Guarantors are to be advised accordingly with requisite
timeline. If no positive result emerges out of the above mentioned remedial measures,
the following steps are to be considered:
- Borrower Credit limits may be frozen at the existing level.
- Suitable Holding-on-operations to be imposed and transactions/ drawings be
allowed with cut-back from the overall proceeds.
- Further, considering the assessed potential loss in future, loans may be sold with an
appropriate haircut provided sale is at a higher price than assessed NPV (based on loss
expectations in future).
- If a suitable buyer is not found or the Borrower fails to shift to another Bank within
the above period, usual steps to recover the Bank’s dues shall be taken by calling up
of the account.
8. Budgeting for Exit Option:

Each Operating unit are to identify accounts for exit based on EWS alerts and Red Flag and
other triggers mentioned in the Exit Policy. Each Business Unit is to have an exit budget
which is to be allocated to Operating unit at the time of budget allocation extending up
to Branch level. A mid-year review of budget allocated to Operating units is to be conducted.
In CAG / CCGs, at the beginning of the financial year, ‘Exit Budgeting’ is to be carried out
along with the annual budget exercise. In R&DB, list of accounts identified to be exited are
to be submitted by the Branches to DGM (B&O) through the Controllers and once finalised,
the approved list is to be provided to the Branches.
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The aggregate of the approvals of accounts for exit approved by the Competent
Authority (Controllers) will form the Exit budget for that Operating unit. Accordingly,
budgets for Relationship Managers / Branches / RBOs / B&Os / Circles / BUs are to be
finalized using a bottom up approach.
9. Renewal of Identified Accounts:

If the account is due for renewal /review, usual due diligence of account and detailed
assessment of the limits is to be carried out and the renewal /review memorandum
should contain recommendations for exit. In case Renewal is not due, Operating units to seek
approval for exiting the exposure. The Sanctioning Authority may also consider exploring the
“Exit” option while review / renewal of accounts put up by Branch.
10. Review Frequency:

The status / review of accounts identified for Exit should be put up to the Controllers, every
month from the date of approval for Exit.
11. Pre-Payment Penalty:

Wherever the branch is exiting an exposure, no pre-payment charges are to be levied.
12. Dropping Accounts from Exit List:

After approval of Exit, if the stress in the account eases, the Operating unit may
approach the CGM of the Circles / Business Verticals for easing / removing the remedial
measures and restoring the normal terms and conditions. The proposal is to be put up on
Format “M”, with proper justification for the same.
13. Exiting from “D” Rated Accounts:

The Bank should examine and explore the option of exiting from “D” Rated accounts as the
possibility of such accounts turning into NPAs is high. The Guidelines for
taking/retaining/exiting from exposure on “D” Rated Corporates (Sole, Multiple or
Consortium Banking arrangement ) are as below:
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S. Guidelines
No.
i. The continuation of limits can be done at the existing level for a period of 6
months and after that a review has to be done. Enhancement, if any, may
be permitted only selectively. “if limits are renewed at the existing / reduced
level, no specific template approval is required to be obtained. The same
may be discussed in the proposal with proper justification for
continuation of the limits”.
ii. Advise the Company to improve financials within 6 months, failing which it should
be made clear to the Company that the Bank would exit from the exposure.
iii. Wherever possible, the Promoters should be advised to infuse fresh capital to
improve the financials.
iv. Promoters should arrange for improvement of rating by attending to the
observations of External Credit Rating Agencies.
v. The concessions in pricing, L/C, B/G e t c . would stand withdrawn during this
intervening period.
vi. For accounts rated “D” by the External Agency and CRA Rating
(Internal Rating) SB-9 and better: -
- If the Company’s financial position improves and External Rating

improves by one notch, appropriate concessions in pricing, L/C,B/G
etc. could again be considered, by the Sanctioning Authority.
- In case of new accounts, Bank can take exposure if the account
belongs to a reputed group, with the approval of appropriate authority.
vii. For accounts rated “D” by the External Agency and CRA Rating
(Internal Rating) SB-10 and worse: -
- If the Company’s financial position improves, atleast by one notch, i.e.
upto “C” and or “SB-9”, appropriate concessions in pricing, L/C,B/G etc.
could again be considered, by the Sanctioning Authority.
- If the Company’s position does not improve but the Company
belongs to a reputed group renewal with enhancement can be
considered selectively by the Sanctioning Authority.
- If the Company does not belong to a reputed group, the Bank can start the
process of exiting from the account.
- In case of new accounts, Bank can take exposure if the account
belongs to a reputed group, with the approval of appropriate authority.
viii. In case of takeover, extant instructions on takeover would apply.
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Other - Restructured Accounts and NPA would be exempt from this policy.
Guide - The decision to exit from each “D” Rated unit has to be approved b y
lines appropriate authority.
- Deviation in the form of additional exposure to “D” rated Corporates has
to be approved by appropriate authority.
The authority for approval of i. Exposure in new D rated accounts, ii. Exit from D
rated accounts and iii. Deviation in the form of additional exposure to D rated accounts
have to be approved by the following authority:
Sanctioning Authority Approval By

Upto RCCC CCSC
CCSC & CCCC Sanctioning Authority
ECCB CCCC
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MCQ: Check your progress
1. The irregularity that occurred due to technical reasons such as connectivity problems or
for reasons for which the Borrower could not be held liable, but adjusted subsequently
when the connectivity is restored or adjusted after removal of technical snag, needs to be
reported to:
a. No need for reporting
b. Controller for information
c. Appropriate Authority as per Scheme of Delegation of Powers for confirmation
d. Circle CCO for noting and apprising CMC
Ans: (b)
2. In case an exposure slips into NPA without being reported in CRILC as defaulted
account, the penalty shall be:
a. Accelerated Provision
b. Financial Penalty
c. Both (a) and (b)
Ans: (c)
3. Additional Provision, over and above IRAC provision created for delayed
implementation of resolution by means of rectification outside IBC may be reversed
when:
a. the borrower is not in default for a period of 6 months from the date of clearing of
the overdues with all the lenders
b. the borrower is not in default to any lenders after clearing of the overdues with all
the lenders
c. individual lender can reverse such additional provision created for delayed
implementation when the borrower is not in default for a period of 6 months from
the date of clearing of the overdues with it.
d. the borrower is not in default.
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Ans (a)
4. Additional finance sanctioned as per of the restructuring package of an existing exposure

of Rs.26 crore shall remain Standard Asset during:
a. Specified Period
b. Monitoring Period
c. Review Period
d. Additional finance sanctioned as part of the restructuring package will have the
same asset classification as that of the existing accounts as Asset Classification to
be borrower-wise and not facility-wise.
An: (b)
5. Interest income on additional finance sanctioned as per of the restructuring package of an

existing exposure of Rs.26 crore shall be booked on:
a. Cash Basis
b. Accrual Basis
c. Additional finance sanctioned as part of restructuring package needs to be

interest-free during the Specified Period
d. On cash basis if backed by an evidence of assured cash flow
Ans: (a)
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CASELET: Check your Progress
XYZ & Co, a partnership firm sole banking with us, is enjoying FBWC limit of Rs.6 crore, LC
Limit of Rs.2.50 crore and has a Term Loan with outstanding of Rs.3.60 crore. As on 31st March
2019, the CC had a balance of Rs.6.20 crore against DP of Rs.5.50 crore and the Theo Balance is
TL was Rs.3.20 crore. LC limit utilization was Rs.2.20 crore. Following the irregularity a
Resolution Plan has been drawn up to restructure the accounts and the same stands fully
implemented as on 31st May 2019. As part of the restructuring, additional finance by means of a
new term loan of Rs.0.50 crore was also sanctioned to the Company towards installation of
certain cost-cutting equipments, with a moratorium of 6 months. As per revised repayment plan,
the existing term loan is to be repaid in 36 equal monthly instalments commencing from 13th
month from the date of restructuring.
Q1. What will be Asset Classification of pre-restructuring accounts as on 31st Dec 2019?
a. Restructured Standard Assets

b. Sub Standard Assets
c. Special Mention Account
d. Restructured Assets of MSME units having exposure up to Rs.25 crore are immunized
from Asset Classification norms if implemented on or before 31-12-2020
Ans: (a)
Q2. What will be Asset Classification of additional term loan account as on 31st Dec 2019?
a. Sub Standard Asset

b. Standard Asset
c. The additional term loan shall have the same Asset Classification as that of the pre-
restructured accounts as IRAC norms are borrower-wise and not facility-wise.
d. As restructuring makes Standard Assets into Sub Standard Assets, if we sanction
additional finance to such unit, that account will be Sub Standard Assets ab initio.
Ans: (c)
Q3. When will the Specified Period end?
a. 16th Month from restructuring

b. 30-04-2019
c. 31-05-2020
d. 31-05-2021
Ans: (d)
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Q4. What are the conditions over and above continued interest of the promoter to run the
business and acceptable viability parameters to accept a Resolution Plan for implementation in
this case?
a. Infusion of fresh capital matching with sacrifice by the bank

b. Cash budget
c. Evidence of assured cashflow
d. There should not be any fraud or willful default
Ans: (d)
Q5. “A restructured asset can be upgraded to Standard Asset on satisfactory performance during
the Specified Period” subject to (in this case):
a. Additional finance sanctioned continues to be Standard Asset

b. Achievement of revised financial projections
c. In this case, there is no question of upgrading as there is no downgrading on restructuring
d. The actual viability parameters exceeds the minimum mandatory
Ans: (c)
Reference: For further details please refer to:

1. Circular No.CCO/CPPD-ADV/184/2018-19 dated 12.03.2019
2. Circular No.CCO/CPPD-ADV/72/2018–19 dated 17.09.2018
3. Circular No.CCO/CPPD-ADV/100/2018–19 dated 24.10.2018
Page 553 of 632

CHAPTER- 14 A
SALE OF PROPERTIES UNDER SARFAESI ACT, 2002
SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest) Act was passed in the year 2002 to enable Banks to enforce the secured assets without
intervention of the court. The Act empowered Banks to enforce the secured assets charged for
credit facilities sanctioned by them enabling faster resolution of stressed assets.
The earlier law available for resolution was the RDDBFI (Recovery of Debts due to Banks and
Financial Institutions) Act passed in the year 1993 which was a focused court for recovery
matters of banks. RDDBFI Act has been rechristened as RDBA (Recovery of Debts and
Bankruptcy Act) Act.
The objective of this chapter is to enable the reader to have an understanding of the entire
process through which the provisions of the Act may be enforced for charged assets.
Eligibility Criteria:
Action under SARFAESI Act, 2002 can be initiated in the following cases:
i. The account should be an NPA as per RBI guidelines.

ii. The claim amount (including accrued interest) should be for an amount not less than Rs.1.00
lac.
iii. The amount due (including interest) should be more than 20% of the principal amount and
interest thereon.
Action Required Before Issuing Notice :

i. In NPA accounts identified for SARFAESI action, the loan documents including EM
documents pertaining to securities held should be legally enforceable and within the period of
limitation.
ii. Assets charged to the bank should be inspected and identified.
iii. Approval for issuing notice under section 13(2) of SARFAESI Act, 2002 to be obtained from
the Competent Authority as per following authority structure:
Exposure up to Rs.25.00 cr: Branch Head of incumbency Scale IV and above and Controllers in
case of branches of incumbency Scale III and below.
Exposure above Rs.25.00 cr: GM (Network/CCG/CAG/SARG)
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However, before initiating action under Section 13(4) of SARFAESI Act, the Branch should
invariably obtain approval of the appropriate authority as per the authority structure for transfer
to Recalled Assets.
iv. Authorised Officer has the authority to initiate action under the Act and issue notices. As per
the Security Interest (Enforcement) Rules, 2002 (the Rules), ‘Authorised officer’ means an
officer not less than a Chief Manager of a public sector bank or equivalent. Where such officers
are posted at Administrative Offices, they may act as Authorised officer for any of the branches
under the control of the Administrative Office, as decided by the Controller of the Branch.
Process and Precautions for Issuance of Notice:
I. Preparation of Notice
i. Postal addresses of all Borrower(s) and Guarantor(s) to be verified and correctly mentioned in
the notice.
ii. Notice should contain full details of the amount payable by the Borrower(s) (such as account
wise outstanding balance, interest accrued but not debited calculated on compounded basis at
stipulated rests, aggregate principal amount, overdue interest, other charges if any etc) and the
secured assets to be enforced. Interest calculation to be done correctly as per contracted rate of
interest.
iii. Particulars of loan documents executed by the Borrower(s) i.e. Term loan agreement, cash
credit agreement, supplementary documents and revival letters, balance confirmation letters,
deposit of title deeds confirmation letter etc should be mentioned in the notice. In case, 13(2)
demand notice is issued against both mortgaged and hypothecated properties, details must be
provided for mortgaged and hypothecated properties under.
iv. The date on which the account was classified as Non Performing Asset (NPA) should be
correctly mentioned in the 13(2) notice.
II. Mode of Dispatch of Notice
Service of Demand Notice under Sec.13(2) shall be made by delivering or transmitting at the
place where the borrower or his agent empowered to accept the notice or documents on behalf of
the Borrower(s), actually and voluntarily resides or carries on business or personally works for
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gain, by Registered Post with Acknowledgment Due addressed to the Borrower or his Agent
empowered to accept the service or by Speed Post or by Courier or any means of transmission of
documents like fax message or electronic mail service. Acknowledgment card received should be
kept on record carefully to be used as evidence when required.
Rule 3 has been amended to provide that the demand notice under Section 13(2) can now be
served by hand delivery also, in addition to the service of the notice by registered post, speed
post, courier, fax message or electronic mail service.
III. Return of Notice
i. If Demand Notices could not be served on the Borrower(s)/Guarantor(s), as per the SARFAESI
Rules, the service should be effected by affixing a copy of the demand notice on the outer
door/other conspicuous place where the Borrower(s) /Guarantor(s) reside, photographs of the
same should be taken and kept on record to be used as an evidence in case of need.
ii. Returned cover should be preserved carefully on record to be used as evidence, when required.
Branch should make all endeavors in serving the notice in person and taking the
acknowledgment on the duplicate so as to avoid the publication of notice.
iii. Contents of the notice to be published in two leading news papers, one in English and one
vernacular, having sufficient circulation in that locality. Two copies of each of the newspaper
should be purchased from the market and kept on record.
IV. Handling of Objections Raised by the Borrower

If the Borrower makes any representation or raises any objection on receipt of the demand
notice, Authorized Officer shall consider such representation or objection carefully and if he
comes to the conclusion that such representation or objection is not acceptable or tenable, he
shall communicate the reasons for non- acceptance within 15 days of receipt of such
representation or objection.
If there is a need to make changes/modifications in the demand notice, the Authorised Officer
shall modify the notice and issue a fresh notice within 15 days from the date of receipt of the
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representation or objection. If the Borrower(s)/Guarantor(s) makes fresh objection/representation
after issuance of fresh notice, those will be considered afresh as stated above.
V. Cases Pending/ to be filed before Courts / DRTs

DRT/Civil Court to be informed suitably in consultation with the Advocate handling the matter
regarding initiation of action u/s 13(2) of the Act, where, suit is pending at DRT/Civil Court. In
other Cases after issue of notice under the Act, legal action to be initiated in DRT/Court, as
appropriate. In the said proceedings before DRT / Court, the fact of action taken under the Act
should also be stated.
3. TAKING POSSESSION AFTER EXPIRY OF 60 DAYS OF NOTICE UNDER

SECTION 13(2) OF THE ACT
a. Action Under section 13(4) of the Act:
If the amount mentioned in the demand notice is not paid within the time specified i.e. 60 days
from the date of notice under section 13 (2), the Authorised Officer may take possession of the
secured assets of the borrower including the right to transfer by way of lease, assignment or sale
for realizing the secured asset.
Part payment, if any, made by the Borrower(s)/ Guarantor(s) will not affect the right of the Bank
to continue with further proceedings under the SARFAESI Act, till the recovery /payment of the
entire amount due in the account with interest and cost.
i. Consent in Case of Consortium / Multiple Banking Accounts

When security which is held by more than one Secured Creditor or jointly financed by Secured
Creditors, action under section 13(4) can be taken if exercise of rights under the Act is agreed
upon by the Secured Creditors, representing not less than 60 % in value of the amount
outstanding as on a record date. Where our Bank is the Lead Bank, consent for taking action
under section 13 (4), from all other secured creditors to be necessarily sought before issue of
notice.
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ii. Services of Resolution Agents for Initiating Action Under SARFAESI Act, 2002
The branch may avail services of Approved Resolution Agent for taking various recovery actions
viz preparing notices u/s 13(4), affixing the same, taking photos, assistance in procuring Chief
Metropolitan Magistrate (CMM) / District Magistrate (DM) order, attending CMM/DM hearings,
arranging for police protection, taking symbolic and physical possession, sealing of
property/inspection of property, showcasing of property after sale notice etc.
b Filing of Caveat:
i) When action under Section 13(4) of the Act is taken by the Bank, the
Borrower(s)/Guarantor(s) may file a Securitisation Application before the DRT u/s 17 of the
SARFAESI Act within 45 days challenging such action. Therefore, a Caveat may be filed before
the DRT to avoid passing of any interim order/injunction order restraining further action, without
hearing the Bank.
ii) If a Securitisation Application is filed by the Borrower(s) and dismissed by the DRT or if the
DRT refuses to pass an interim order restraining further action, the Borrower(s) may prefer an
appeal before the DRAT u/s 18 of the SARFAESI Act, within 30 days of the order. In such
cases, the branches should file a Caveat before the DRAT to avoid any restraint order being
passed against the Bank, without hearing.
c Possession of Movable/Immovable Properties :

After expiry of 60 days from the date of notice u/s 13(2), action should be initiated for taking
possession of the property:
i. Immovable Properties
a) The Authorised Officer shall take possession of such property in the presence of two
independent witnesses by delivering a possession notice to the Borrower(s) and affixing the
possession notice under section 13(4) of the Act on the outer door or at such conspicuous place
of the property, take photograph thereof and keep the same on record.
b) Notice regarding possession of the immovable property with full details of the property and
name of Borrower(s) / Guarantor(s) should be published within 7 days of taking possession in
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two leading news papers, of which one should be in vernacular language having sufficient
circulation in that locality.
ii. Movable Properties

i. Where the possession of the movable property in possession of the Borrower(s) is to be taken
by the Bank, the Authorized Officer shall take possession of such movable property in the
presence of two independent witnesses after Panchnama is drawn and duly signed by the
witnesses.
ii. After taking possession, the Authorised Officer should prepare the inventory of the property
and deliver a copy of such inventory to the Borrower(s)/Guarantor(s) or any person authorised to
receive on their behalf.
iii. Rule 4 has been amended by incorporating Rule 2A to provide that after possession of the
secured movable property is taken by the secured creditor, the borrower shall be intimated by a
notice enclosing the Panchanama drawn in Appendix I to the Rules and the inventory made in
Appendix II to the Rules.
iv. If any problem is foreseen in taking physical possession, the Authorized Officer should
approach CMM/DM for obtaining order u/s 14 of the Act.
v. For obtaining DM/CMM order, Authorized Officer should apply to DM/CMM giving details
as prescribed. Authorized officer may utilise services of approved Resolution Agent, if
necessary.
vi. When DM/CMM order is obtained, Authorized Officer should initiate action for obtaining
police protection by approaching the local police authority.
vii. Authorized Officer should inspect the property and take a view as to whether posting of
guard is required.
viii. Arrangements should be made for presence of independent witnesses. Borrower’s (or his
representative’s) presence is also advisable.
ix. While taking possession of the property, if there are movables not charged to the Bank,
separate inventory for movables not charged to Bank has to be prepared and a copy of the same
is to be delivered to the Borrower(s). The Borrower(s) should be called upon by notice to remove
the said goods forthwith and made clear that the Bank shall not be responsible for any loss or
damage to the said goods nor shall Authorised Officer get the said goods insured.
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x. The Authorized Officer would lock the property and put Bank's seal on the lock in the
presence of two independent witnesses, take photograph of the same and keep the same on
branch record to be used as evidence in case of need.
xi. A suitably worded notice regarding possession should be painted on conspicuous part of the
property. The notice should contain advisory to the public in general not to deal with or tresspass
the property.
xii. The property under possession should be kept in the custody of the Authorised Officer or in
the custody of any person authorised or appointed by him.
xiii. The Authorised Officer or his custodian should take as much care of the property as a man
of ordinary prudence would, under similar circumstances take of his own property. The attached
property should be inspected regularly and adequately insured till it is sold or otherwise disposed
of.
xiv. Wherever the securities taken possession are covered by insurance, the fact of possession of
the security and present location and address, etc. is to be informed to the concerned insurance co
immediately.
4. POST POSSESSION PROCESS AND SALE OF PROPERTY THROUGH E-

AUCTION
a Valuation of the Movable and Immovable Assets :
i. The Authorised Officer should arrange for valuation of the assets by an approved valuer
immediately after taking possession and in any case before sale. Valuation Report should be less
than 12 months old for fixing Reserve Price. Two valuation reports to be obtained for properties
valued above Rs.1.00 Crore.
ii. The branch should always use services of empanelled SARFAESI valuer for taking Valuation
Report for fixing Reserve Price.
iii. The Branch Head / Authorised Official should satisfy himself with the valuation given by the
valuer before recommending Reserve Price.
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b Fixation of Reserve Price:
Reserve Price of the assets to be sold should be determined on the basis of valuation report
obtained. Sanction for Reserve Price has to be obtained from the appropriate Committee at Zonal
Office/ Local Head Office/Corporate Centre. The following points are to be considered for
fixation of Reserve Price of movable/immovable assets:
i. Reserve price is to be fixed at realisable value of the securities and the reasons viz.
defects/issues involved in sale of the securities have to be furnished where the difference
between market value & realisable value is more than 15%.
ii. It should be ensured that the valuation report is less than 12 months old based on which the
Reserve Price is proposed to be approved.
iii. Valuation reports should be obtained from two empanelled valuers in case of securities
having value of Rs. 1.00 crore and above and higher of the two valuations shall be taken into
account for fixing the Reserve Price.
iv. No sale should be finalized below the Reserve Price. In case, it is found that the Reserve Price
cannot be realized, the Authorised Officer may submit fresh recommendations to the committee
for a lower Reserve Price, and property may be put up for sale again following the same
procedure.
c. Sale Procedure for Movable/ Immovable Property through e-auction :

i. Property to be sold through e-Auction and Agency for conducting e-Auction to be identified.
ii. The sale can be conducted only after expiry of 30 days-notice given to Borrower(s)/
Guarantor(s)/legal heirs of Borrower(s)/Guarantor(s).
iii. Ensure that the auction notices do not contain any discrepancy in respect of security details,
relating to Borrower(s)/Guarantor(s), date of NPA, outstanding/dues etc. so that no auction fails
for want of such particulars or challenged on such technical grounds.
iv. Full sale notice has to be uploaded on the designated websites and a copy of the notice must
be dispatched with covering letter to the Borrower(s)/Guarantor(s)/Mortgagor(s) under Regd.
Post.
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v. The bidder will submit an application to the Authorised Officer to participate in e- Auction
along with the requisite documents.
vi. Bidder should remit the Earnest Money Deposit (EMD) for credit to designated account
before the date of bidding as mentioned in the notice for sale.
vii. On Receipt of EMD and above papers, the branches to complete the verification of KYC
Papers and to make a request to the Vendors by email to create user ID and password for the
eligible bidder.
viii. E-Auction agencies to provide user ID and password to eligible bidders. The vendor to
impart training to the bidder to participate in the auction.
ix. On the date of auction, the bidders are reminded by Authorized Officer to go into the
vendor's site at the specified time. The progress of auction is viewed by the Authorized Officer
from the branch using the allotted login ID and password. The e-Auction is to be conducted as
per rules of e-Auction notice published in newspapers.
x. On the date and scheduled time of e-Auction, the bidder should login to the website by
using his/her user ID and password already allotted. In auction, the bidders will be able to see
his rank and the highest bid amount but not the names of other bidders.
xi. The option of bidding will be available to the bidders till the time for bidding prescribed
for e-Auction is over. After the bidding time is over, the bidding time will be extended for -----
minutes (as decided by the bank) or enhancing the bid by other bidders. Thus, any bidding is
open till the position reaches when there is no bid / enhancement for ----- minutes from the last
bid as per sale notice. The increment from last bid has to be in multiples of the prescribed
increment specific to the auction (mainly depending upon the value of the auctioned asset).
xii. Once the auction is over, the highest bidder will get the message through email. The name
of the highest bidder will not be visible to anybody. Only the value of highest /successful bid will
be visible to all.
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xiii. The successful bidder is advised by Authorized Officer about acceptance of his bid for the
property and to make payment of the remaining sale value within stipulated time as per terms of
sale.
xiv. The EMDs of the other bidders will be returned by the Branch.
xv. After immediate payment of 25% of sale price, the winning bidder has to pay balance
amount on or before 15th day of confirmation of sale or such extended period as agreed upon in
writing between the purchaser and the branch, in any case such extension should not exceed 3
months from the date of Auction [Rule 9 (4)]
xvi. On confirmation of sale by the secured creditor and compliance of the terms of payment,
the Authorized Officer shall issue a Certificate of Sale for the properties in favor of the
purchaser
xvii. Where the immovable property sold is subject to any encumbrances, the Authorized
Officer may allow the purchaser to deposit with him the money required to discharge the
encumbrances and any interest due thereon.
xviii. Sale proceeds should be appropriated towards Bank’s dues after deducting expenses
incurred on the auction process and priority statutory dues. Residual amount, if any, is to be
refunded to the person entitled thereto in accordance with his rights and interest.
xix. The Authorized Officer shall deliver the property to the purchaser free from
encumbrances known to the secured creditor and the same to be mentioned in the Certificate of
Sale. The Authorized Officer should also obtain receipt of possession and original Title deeds.
xx. The Authorized Officer shall ensure registration of Sale Certificate on making payment as
per stamp Act, and charges as applicable in the respective State, cost of which will be borne by
the purchaser.
xxi. If the sale conducted by the Authorized Officer fails and sale is required to be conducted
again, the Authorized Officer shall serve, affix and publish notice of sale of not less than 15
days to the borrower for any subsequent sale by publishing the sale notice as per the procedure
as mentioned in the above paras.
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Notification of Chapter IV–A of the SARFAESI ACT
Chapter IV A of the SARFAESI Act, 2002, notified w.e.f. 24.01.2020, contains the following
important provisions:
Section 26 B: Attachment orders issued by any Government authority for recovery of Govt. dues
may be filed with CERSAI.
Section 26 C: Security interest or attachment orders filed with CERSAI shall have priority
over any subsequent security interest created upon such property. Filing of security interest
with CERSAI shall be deemed to constitute a Public notice from the date & time of filing with
CERSAI.
Section 26 D: Secured Creditors shall be entitled to enforce securities under SARFAESI Act
only if the security interest is filed with CERSAI.
Section 26E: After registration of security interest with CERSAI bySecured Creditors,
their dues will be paid in priority over Govt. dues.Section 26 E empowers the Bank to claim
priority over the debts due to Central Government, State Government and local authorities by
way of revenue, taxes, cesses and rates from the borrows / guarantors.
The above said Authorities cannot claim any priority over the amounts recovered by bank by
sale of secured properties of the borrower/guarantor under SARFAESI Act provided charge
(mortgage & Hypothecation) created over the said properties in favour of the Bank is
filed/registered before CERSAI.
Private Treaty
Sale of immovable secured assets through private treaty, should beresorted only when the other
more transparent methods of obtaining quotations/ inviting tenders or public auction etc., have
not been successful.
Minimum number of attempts prescribed for sale by public auction by the Bank, before resorting
to sale by private treaty with threshold limits is as under:
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Value of Property No. of Attempts
Upto Rs. 1 Cr One
Above Rs. 1 Cr Two
As per Rule 8(8) of the Security Interest (Enforcement) Rules 2002, sale by anymethod other
than by public auction or public tender shall be on such terms as may besettled between the
secured creditor and the proposed purchaser in writing.
It is mandatory that the sale consideration offered by the proposed purchaser towhom the
property is to be sold by private treaty should be higher than the reserve price fixed by the
Authorised Officer in the last failed public auction.
When the Bank decides to sell the immovable secured assets through private treatyafter failure of
sale under public auction, notice of not less than 15 days to the borrowerbefore the date of sale
through private treaty is mandatory.
Questions:
1. What are the preconditions for taking action under SARFAESI Act?
2. What precautions must be taken at the time of initiating the process and preparation of
notice under Section 13(2) of the Act?
3. If a notice under Section 13(2) of the Act is returned undelivered, what steps are to be
initiated by the branch?
4. What are the provisions of Section 13(3A)? If an objection received from the borrower/
guarantor is not replied within stipulated timelines, what are the repercussions for the
Bank?
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5. If an account is upgraded subsequent to issuance of notice under Section 13(2), what
further steps/ precautions must be taken, especially if notices are also issued to
guarantors?
6. What are the precautions that must be taken by dealing branches before initiating action
under Section 13(4) of the Act?
7. What is the responsibility of the secured creditor, if a theft occurs in the premises taken
into bank’s possession? What precautions should be taken to prevent such incidents?
8. What is a sale by “Private Treaty”? How do you compare sale by “Private Treaty’ and
sale through ‘Public auction’?
For detailed reading and relevant formats, the following may be referred:
1. Manuals on Loans and Advances as on 31.03.2019, Part 3, Chapter 24.
2. SOP on Sale of Assets through SARFAESI Act, CCO/CPPD-ADV/46/2019 – 20 dated 26 Jun
2019.
3. Sale of Properties Under SARFAESI Act, 2002 (Review of Standard Operating Procedure):
Addendum CCO/CPPD-ADV/85/2019 – 20 dated 9 Sep 2019 containing amended annexures
6,9,10,12,18 and 19 of the SOP dated 26.06.2019.
4. Notification of Chapter IV –A of the SARFAESI ACT CCO/CPPD-ADV/166/2019–20
dated18 Jan 2020.
4. Sale of Secured Assets through Private Treaty, CCO/CPPD-ADV/83/2017 - 18 dated 3 Nov
2017 and CCO/CPPD-ADV/95/2018 – 19 dated 19 Oct 2018.
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CHAPTER- 14 B
RECOVERY O F BANK’S DUES THROUGH CIVIL COURTS

A suit for recovery of Bank’s dues can be filed before the Civil Court in cases where recoverable
amount from the borrower if less than Rs. 20.00 lacs. In cases where recoverable amount is Rs.
20.00 lacs and above, the recovery suit must be filed before the respective Debt Recovery
Tribunal (DRT) as per the area of jurisdiction.
This chapter details the entire process to be followed for filing a recovery suit before a Civil
Court, follow up of suit filed, filing of Execution Petition, etc.
1. Steps prior to filing a Civil Suit: Ascertaining facts and arranging

documents
i) The amount of total debt due from the borrowers should be less than Rs.20 lacs.
ii) Documents should not be time barred and should be in order.
iii) A brief history of case after examining files of the borrower should be prepared.
iv) Copies of relevant records/documents have to be kept ready.
v) Latest addresses and details of properties of the Borrowers/Guarantors,
including the legal heirs of the deceased Borrower/ guarantor(s), if any, have to be
ascertained and kept on record.
vi) Permission for filing of suit and transfer of outstandings to Recalled Asset
account from the Competent Authority to be obtained.
2. Issue of Notice
The branch should arrange to issue notices by registered post with AD through
the advocate, to the borrowers/guarantors recalling the advances and claiming dues,
costs, charges etc. as the first step for a civil suit for recovery of Bank’s dues.
3. Entrusting the Matter to the Advocate

i) Branch should engage an advocate who is in the panel of the Bank and who
practices in the Civil Court.
ii) Branch should fix the professional fees to be paid to the advocate as per Bank’s
instructions.
iii) The Branch has to hand over the case history and copies of following
documents to the Advocate for his study.
• Loan application forms signed by the borrowers and guarantors.
• Sanction Letter/Arrangement Letter.
• Board Resolution in case of companies.
• All the security documents executed by the Borrower(s) and the
Guarantor(s), namely the Loan agreements, Security creating documents and
Guarantee documents.
• Form 8 and 13 filed before the ROC in the case of company advances.
• Memorandum of deposit of title deeds.
• Letter of confirmation of deposit of Title Deeds in case of Equitable Mortgage
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or Mortgage Deed in case of Registered Mortgage.
• Board resolution for availing enhanced facilities.
• Sanction letter/Arrangement letter for enhancement.
• Security documents obtained for enhancement of limit/facilities
(Supplemental documents).
• Letter of confirmation for extension of mortgage.
• Memorandum of deposit of title deeds for extension of mortgage.
• Revival letter and balance confirmation letters.
• Title deeds/title documents.
• Valuation Reports and Stock Statements.
• Correspondence exchanged between Borrowers, Guarantors and the Bank.
• Statement of Accounts upto the date of account became NPA and unapplied
interest and statements for the period thereafter upto the date of filling the
application.
• Legal notice and reply notice, if any.
• Whether SARFAESI action is initiated, copy of section 13(2) notice issued
to the Borrower(s) and the Guarantor(s) and other related correspondence.
• Certificate under the Bankers’ Books (Evidence Act,) 1891.
• Vakalatnama in favour of the advocate.
iv) Time line for filing of suit(s)

• Civil suit is to be filed immediately on approval but in any case within a
maximum period of 3 months from the date of approval.
4. Drafting and Vetting of Plaint: Format, Parties, Claims, Reliefs
i) Facts contained in the draft plaint are to be verified by the Branch official
concerned. Legal aspects have to be verified by the Bank’s Law Officer.
ii) All parties to be included as defendants have to be joined in the suit.
iii) Interim reliefs which can be filed in the suit to protect Bank’s interest to be
included in the plaint.
iv) The plaint shall contain the following:
• The name of the Court where the suit is filed.

• The name, description and branch address of the Bank.
• The name, description and place of residence of the defendants.
• Where the defendant is a minor or a person of unsound mind, a statement
to that effect.
• The facts constituting the cause of action and when it arose.
• The facts showing that the court has jurisdiction.
• The statement of the value of the claim.
• The precise Suit amount.

• Description of the mortgaged properties including boundaries and survey
numbers.
• Other documents relied upon by the Bank.
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Applications/interim relief which can be moved/sought during pendency of Civil
Suit/Executions are as under:
a) Application for interim stay of disposal/removal of property by the debtor

with a view to defraud the creditor.
b) Application for interim sale of any movable property which is subject to
speedy or natural decay or which for any other just or sufficient reason is
desirable to be sold at once.
c) Application for detention, preservation or inspection etc. of any property
which is subject matter of such suit.
d) Application for attachment before judgement.
e) Application for decree on the basis of admissions.
f) Application for appointment of Court Commissioner/Receiver for
possession or sale of the property where necessary.
g) Application for attachment of debt, share and other property not in possession
of judgement debtor.
h) Application for examination of judgement debtor to disclose his property
or assets or means of satisfying the money decree.
i) Application for attachment and sale of immovable property of the
judgement debtor.
j) Application for arrest and detention of judgement debtor.
k) Application for attachment of salary and allowances of the
Borrower(s)/Guarantor(s).
5. Filing of the Plaint

Plaint is to be signed by the authorized Branch official. Demand Draft for court fees,
process fees and copying fees has to be prepared. Affidavit of Branch official has also
to be filed along with the plaint, in duplicate. The case number allotted by the Court has
to be obtained from the Court by the Branch.
6. Service of Summons
i) Adequate number of copies of the plaint as directed by the Court have to be made
available.
ii) Service of Summons is to be effected to each defendant through Court by the Bank as
per Court’s orders.
7. Action to be taken on the Date of First Hearing
i) Attendance of the Branch official on each date of hearing with the advocate has to
be ensured.
ii) Written statement filed by the Borrower(s)/Guarantor(s) and the documents relied
upon have to be examined.
iii) If any claim for set off or counter claim is made in the written statement, a counter
affidavit has to be filed.
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8. Subsequent Steps for pursuing the Case
i) Documents relied upon by the Borrower(s)/Guarantor(s) are required to be inspected

or discovered and steps are to be taken for the same.
ii) Whether any document relied upon by the Borrower(s) needs to be denied.
iii) List of Documents and witnesses to be relied upon by the Branch have to be provided.
iv) Issues have to be framed by the Court in terms of the judgement required.
v) Frequent adjournments either for filing written arguments or otherwise have to be
opposed by the Bank’s Advocate. Examination and cross examination of witnesses
have to be completed. After recording of evidence of plaintiff and defendants,
arguments from both sides shall be heard by the Court.
vi) In case of death of defendant Borrower(s)/ Guarantor(s), steps have to be taken
for making legal representatives of the deceased as a party.
vii) Decree has to be obtained after the judgement has been pronounced. In case of any
apparent mistake in judgement/ decree, the matter has to be discussed with the
Advocate, as to whether a rectification petition needs to be filed for correcting the
errors.
9. Filing of Execution Petition

i) Application for execution of decree has to be filed with the help of the Advocate.
The application must contain the following particulars.
• Number of the Suit

• Names of the parties.
• Date of the decree.
• The amount with interest (if any) due upon the decree, or other relief(s)
granted thereby.
• The amount of the costs (if any) awarded.
• The name of the person against whom execution of the decree is sought.
• Attachment and/or sale of any property.
• Description of the immovable property sufficient to identify the same and
the judgement debtor’s share or interest in such property, along with certified
extract, pertaining to such property.
ii) An application to the Court to be made for directions to the

Borrower(s)/Guarantor(s) to file particulars of their assets.
iii) If the Borrower(s)/Guarantor(s) die pending execution of the decree, application
to the same Court is to be filed to execute the decree against the legal
representatives. The Court shall issue notice to the legal heirs and fix dates for
hearing.
iv) Details of assets in the names of judgement debtors along with their valuation reports
have to be provided to the Court for arranging sale thereof, by public auction.
v) On receipt of sale proceeds, the amount net of expenses has to be credited to the
borrower’s account(s).
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Questions:
1. What are the key steps to be initiated by a branch before filing a Civil Suit?
2. In case of death of a guarantor during pendency of the suit, what steps need to be initiated
by the branch?
3. What is an Execution Petition? What details must be contained in the EP application

filed by the Bank?
For further details the undernoted instructions may be referred:

1. Circular number CCO/CPPD-SAM/181/2018 – 19 dated 8 Mar 2019.
2. Clarification on Govt Of India notification regarding enhancement of pecuniary jurisdiction
Of DRTs Under RDDBFI Act, 1993, CDO/LAW-LB/1/2019 – 20 dated 16 Aug 2019.
Page 571 of 632

CHAPTER 14 C
RECOVERY OF BANK’S DUES THROUGH DEBT RECOVERY TRIBUNALS (DRTS)
Debt Recovery Tribunals were constituted under the Recovery of Debts Due to Banks and
Financial Institutions (RDDBFI) Act, 1993, which has been now rechristened as Recovery of
Debts and Bankruptcy Act (RDBA), 1993. Earlier to enactment of this Act, the recovery process
was handled by the Civil Courts who were handling various other matters apart from recovery
suits filed by the Banks. Now DRTs have been established which are handling the recovery cases
exclusively for the Banks. Cases where recoverable amount is Rs. 20.00 lacs and above are filed
before DRT as per their area of jurisdiction. DRT’s are also the designated court for filing appeal
by borrowers under Section 17 of SARFAESI Act, who are aggrieved by bank’s action under
Section13(4) of the Act.
This chapter takes the reader through the entire mechanism of filing the suit before DRT and
handling the same thereafter.
1. Before filing Original Application (OA)
i) JURISDICTION
a) Pecuniary jurisdiction:
Original Application (O.A.) in DRT is to be filed where the total amount of debt due to the Bank
is Rs. 20.00 lacs & above.
b) Territorial jurisdiction:
Branches should make an application to the Tribunal within whose local limits of jurisdiction, the
cause of action wholly or partly arises i.e. the defendant or each of the defendants, where there are
more than one, at the time of making application actually or voluntarily resides or carries on
business or personally works for gain.
ii) Verification of enforceability of documents

a) Documents should not be time barred.
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b) Bank’s empanelled Advocate should also verify the enforceability of documents including those
related to creation of Equitable Mortgage.
iii) Physical verification of security

Properties held as Security should be physically verified by the Branch Officials.
iv) Contact details

Branch officials to update the addresses and other contact details of borrowers/guarantors.
v) Death of Borrower(s)/Guarantor(s)
In case of death of Borrower(s) / Guarantor(s), Branch officials to identify the legal heirs of the
deceased.
vi) Service of call up notice

Call up notice is to be served on the Borrower(s)/Guarantor(s) through Bank’s empanelled
Advocate demanding payment of the Bank’s dues within 30 days. The call up notice should also
contain Bank’s intention to realize the dues by sale of securities and / or filing of Original
Application (O.A.) for recovery of the shortfall, if any.
vii) Transfer of outstandings to Recalled Assets Account (RAA)

The outstandings in borrower’s various accounts have to be transferred to Recalled Assets account
after obtaining approval from the Appropriate authority as per the Scheme of Delegation of
Financial Powers in force.
viii) Timeline for filing of OA

i) Original Application (OA) is to be filed in DRT immediately on approval but in any case within
a maximum period of 3 months from the date of approval.
ii) Where documents are getting time barred, Original Application (OA) in DRT is to be filed 2
months before expiry of documents.
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2. Procedure for filing of Original Application (OA) in DRT:
i. Preparation of Original Application (OA):

a) An Original Application in the prescribed format is to be drafted by the Bank’s empanelled
Advocate based on the facts/figures/documents provided by the branch within 7 days from the date
of handing over the facts/figures/documents. Photocopies of the documents/papers are to be given
to the Bank’s empanelled Advocate for preparation of the Original Application.
b) Proceedings of the Tribunal are in English or Hindi.
c) Facts/figures/documents and addresses of the defendants [(Borrower(s)/Guarantor(s)]
mentioned in the application should be correct and all relevant material to strengthen the Bank’s
case has to be included and specific reliefs have to be claimed in respect of the relevant securities
available to the Bank, including legal costs.
d) OA must highlight all the events/incidents where Bank supported the borrowers with timely
help/overdrawing/ad hoc limits etc. Similarly all events/ incidents where the borrowers made false
promises or did not keep their word should also be highlighted to prove non-reliability of the
borrowers.
ii. Interim Reliefs which can be prayed in Original Application (OA) :
In the Original Application, following interim reliefs can be prayed, supported by the Affidavit,
incorporating the appropriate reasons for these: -
a) Seeking injunction restraining the defendants from transferring, alienating or dealing with their
movable and immoveable assets in any manner without prior permission of the Hon’ble Tribunal.
b) Attachment Before Judgment (ABJ) of assets in the name of Borrowers / Guarantors.
c) Sale before judgment in case assets charged are of perishable nature & the value of the assets is
going to diminish.
d) Seeking direction to the defendants for filing statement of assets on oath by them.
e) Impounding of Passports where Branch officials fear that Borrower(s) / Guarantor(s) may
proceed abroad.
f) Issuance of Partial Recovery Certificate based on the admission of debt by the Borrower
(s)/Guarantor (s) on the basis of latest Audited Balance Sheet or any other written communication
to the Bank.
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iii. Vetting of Original Application (OA) by the Bank’s Law Officer:
Original Application (OA) prepared by the Bank’s empanelled Advocate is to be vetted by the
Bank’s Law Officer and any suggested modifications are to be carried out.
iv. Enclosures with the Original Application:
a) The Original Application (OA) is to be filed in DRT along with the following documents :-
• Loan application forms signed by the Borrower(s) & Guarantor(s).
• Sanction Letter / Arrangement Letter.
• Board Resolution in case of Companies.
• All the security documents executed by the Borrower(s) and the Guarantor(s) namely the loan
agreements, security creating documents and guarantee agreements.
• Form 8 and 13 filed before the ROC in case of company advances.
• Memorandum of deposit of title deeds.
• Letter of confirmation of deposit of Title Deeds in case of Equitable Mortgage or Mortgage Deed
in case of Registered Mortgage.
• Board resolution for availing enhanced facilities.
• Sanction letter / Arrangement Letter for enhancement.
• Security documents obtained for enhancement of limits/facilities (Supplemental documents).
• Letter of confirmation for extension of Mortgage.
• Memorandum of deposit of Title deeds for extension of Mortgage.
• Revival letters and balance confirmation letters.
• Title deeds/ title documents.
• Where credit facilities have been sanctioned by our Bank and erstwhile subsidiary banks either
under consortium or multiple banking, in such cases one O.A. has to be filed for the entire
amount due to all banks as referred to above.
• Valuation Reports and Stock Statements and to provide estimated value of secured asset.
• Correspondence exchanged between Borrowers/Guarantors and the Bank.
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• Statement of accounts up to the date the account became NPA and unapplied interest and
statements for the period thereafter up to the date of filing of the application.
• Legal notice and reply notice, if any.
• Wherever SARFAESI Action is initiated, copy of section 13 (2) notice issued to the Borrower(s)
and Guarantor(s) and other related correspondence.
• Certificate under the Bankers’ Books ( Evidence Act,) 1891.
• Vakalatnama in favour of the Advocate.
b) While the aforesaid are the basic documents which are required to be filed, along with the
Original Application (OA) before DRT, any other related document(s) necessary for the case
should also be filed depending on the facts of each case. It is also to be noted that the practice
prevalent in each DRT should be observed in the matter of filing the application and in subsequent
proceedings, to avoid delay.
c) The Original Application (OA) is to be filed in two sets alongwith an empty file size envelope
bearing full address of the defendant and where the number of defendants is more than one,
sufficient number of extra copies of the application alongwith empty file size envelopes bearing
full addresses of all defendants are to be filed.
v. In respect of Consortium advances:
Where State Bank of India is a Leader in the Consortium, we have to send the draft Original
Application (OA) to all the Banks for vetting and obtain their written approval for filing the
Original Application.
Where State Bank of India is not a Leader but one of the members in the Consortium, we have to
provide the copies of our loan documents. The draft Original Application is to be obtained from
the Leader of the Consortium and is to be vetted by the Bank’s Law Officer before filing of
Original Application (OA) by the Leader of the Consortium.
3. AFTER FILING OF ORIGINAL APPLICATION (OA) IN DRT:

i. Registration of Original Application in DRT:
a) On receipt of the Original Application (OA) at DRT, Registrar of the DRT will scrutinize and
if found in order, it will be registered and given a Serial Number.
b) If any defect in the Original Application (OA) is brought to the notice of the Branch by the
Registrar of the DRT, it is to be rectified immediately.
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c) Immediately after filing of OA in DRT, the particulars thereof are to be uploaded in the
Litigation Management System (LMS) online portal (SAMG Branches) and the outcome of the
subsequent hearings are also to be updated therein on an ongoing basis.
d) Other Branches where the facility of LMS (online portal) is not available have to maintain a
Suit Monitoring Register. The outcome of each hearing has to be recorded on an ongoing basis in
the Suit Monitoring Register by the officials concerned and to be put up to the Branch Head for
information.
e) Branch should initiate efforts to locate assets of Borrower(s) /Guarantor(s) by
i. Personal contacts with friends/relatives/business associates/dealers/suppliers of Borrower(s)
/Guarantor(s).
ii. Going through account statements where lump sum payments might have been made.
iii. Engaging Investigative agencies.
iv. Writing to banks in the city so that current accounts / fixed deposits, if any, maintained with
them can be unearthed.
ii. Issuance and Service of Summons by DRT:
a) On receipt of the application, the DRT shall issue summons requiring the Defendant (s) to show
cause, within 30 days, of the service of the summons as to why the reliefs prayed for in the Original
Application (OA) should not be granted
b) Registrar of DRT will send Summons by Registered Post and if it is undelivered twice, service
of Summons can also be made by publication in newspaper having wide circulation.
iii. Interim order during first Hearing in DRT:

During the first hearing in DRT, empanelled Advocate should argue for granting the Interim Relief
(s) prayed for and obtain the same.
iv. Provisions for non-compliance of the Interim order issued by the DRT:
Where the DRT issues interim order for injunction against the Borrower / Guarantors to debar him
from transferring, alienating or otherwise dealing with the property / assets, orders to furnish
security or attachment of the properties, orders to appoint a receiver, orders to remove any person
from the possession or custody of the property, appointing a Commissioner, and if the Borrower /
Guarantors disobeys the said interim order or commits breach of any of the terms on which order
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was made, an application can be filed for detention of the Borrower / Guarantors in Civil Prison
or for attachment of their properties.
v. Filing of Written Statements by the Defendants:

a) The defendant (s) on service of summons are required to file their reply within one month from
the date of service of Summons. The defendants shall file two complete sets of the reply to the
Original Application (O.A.) along with documents in a paper book form, with the Registrar of
DRT. The defendants shall also serve/ provide one copy of reply to the Applicant (Bank).
b) The DRT may, in exceptional cases and in special circumstances to be recorded in writing,
allow not more than two extensions to the defendants to file the written statement. On failure to
file reply by the defendant (s) or on the date fixed for hearing, the DRT may proceed to pass an
order on the application as it deems fit.
c) In cases where there is undue delay in disposal of Original Application (O.A.) in DRT on
account of granting extension for filing written statements by the defendants against the provisions
of the DRT Act and also frequent adjournments of the hearings, branches should submit suitable
applications in DRT.
vi. Hearings in DRT:
a) Summary procedure is adopted by the DRTs for adjudication of dispute. Evidence is taken on
affidavit and cross examination is not permitted except in deserving cases.
b) Bank’s advocate should remain present on the dates of hearing and should arrange for proper
reply to all the issues raised by the Defendant’s counsel.
c) The Nodal Officer or Case Lead Officer (CLO)/Case Officer (CO) (SAMBs) or Chief
Manager/City Case Officer (SARBs) should be present at DRT on each date of hearing to
supplement the Bank’s empanelled Advocate in presenting the Bank’s side in an effective manner.
Page 578 of 632

CLO/CO should be present invariably in all hearing of high value cases. He should carry all
documents pertaining to his cases. No adjournment should be sought by the Bank.
d) After hearing of the Original Application (O.A.) has commenced as per the DRT Act, branches
should pursue the matter with DRT that it is continued from day-to-day until the hearing is
concluded.
vii. Issuance of Order by DRT:

a) After giving the Applicant and Defendant (s) an opportunity of being heard, DRT shall pass
such Interim or Final Order directing payment of the amount with interest which is found due upto
the date of realisation or actual payment.
b) The DRTs shall send a copy of every Order passed by it to the Applicant and the Defendant (s).
c) On receipt of the Order passed by the DRT, Branch should immediately file Caveat before
DRAT.
d) The Presiding Officer, DRT shall issue a Recovery Certificate under his Signature to the
Recovery Officer for recovery of the amount of debts specified in the Certificate containing :-
a) No. of Original Application (O.A.)
b) Name & Designation of Parties.
c) Particulars of claim.
d) Terms of payment of Decreed amount.
4. Execution of Recovery Certificate by Recovery Officer, DRT:
a) The Recovery Officer, DRT shall proceed to recover the amount of debt specified in the
Recovery Certificate by one or more of the following modes: -
• By attachment and sale of movable / immovable properties of the Certificate Debtor (s) /
Borrowers, and / or Guarantors. Recovery Officer will issue sale proclamation notice and will
arrange for e-auction on the scheduled date.
• By arrest / detention of the Judgment Debtor (s) in Civil Prison where they have sufficient means
to repay the Bank’s dues but deliberately avoiding the same.
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• Appointing a Receiver for the management of the movable or immovable properties of the
Certificate Debtor (s) / Borrower(s), and / or Guarantors.
b) By issuing a Garnishee Order against any person from whom any amount is due to the defendant
directing him to pay the whole or part of the amount to the Recovery Officer.
c) The Branch should submit Form no. 13 (Proclamation of Sale) along with latest valuation report
of the properties to the Recovery Officer of DRT. Any assets unearthed by the Branch should also
be advised to R.O.
d) The Recovery Officer, DRT on receipt of Form no. 13 along with latest valuation report of the
properties will issue sale proclamation notice and thereafter shall conduct the e-auction.
e) The Sale-Certificate will be issued by the Recovery Officer, DRT to the successful Bidder on
deposit of the bid amount.
5. Appeal:
i. Filing of Appeal against the Order of Presiding Officer, DRT:
a) The Bank, Defendant (s) [(Borrower(s) / Guarantor(s)] or even third party aggrieved by an order
of DRT may file an appeal to the Appellate Tribunal (DRAT) having jurisdiction over that DRT.
b) The appeal is required to be filed with Appellant Tribunal (DRAT) within a period of 30 days
from the date on which copies of the orders made by the DRT are received.
c) Where an Appeal is preferred, the Borrower / Guarantors are required to deposit with the
Appellate Tribunal, 50% of the amount of debt due as determined by the DRT so that the Appeal
is entertained by the Appellate Tribunal (DRAT). But the Appellate Tribunal (DRAT) may waive
or reduce the amount to be deposited with the reasons recorded in writing for such waiver or
reduction.
d) If the Bank decides to file an appeal against the Order of DRT, it should be filed in the prescribed
format and requisite fee is to be paid.
e) However, the Appeal can be filed even after the expiry of 30 days by filing an application for
condonation of delay. Appellate Tribunal may entertain appeal in such cases, if satisfied with the
reasons for delay.
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f) The Appellate Tribunal after giving notice to the parties, an opportunity of being heard pass
such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed
against.
ii. Filing of Appeal against the Order of Recovery Officer, DRT:

a) The Bank, Defendant (s) [(Borrower(s) / Guarantors)] or even third party aggrieved by an order
of Recovery Officer may file an appeal to the DRT.
b) The appeal is required to be filed with DRT within a period of 30 days from the date on which
a copy of the order made by the Recovery Officer is received.
6. Closure/settlement of Accounts/cases
After the suit amount is recovered with costs or account is closed under Compromise settlement
as applicable, branch has to file a Satisfaction memo in DRT for closure of the Recovery
Proceedings.
AMENDMENTS
Salient features of the amendments made to the Debt Recovery Tribunal (Procedure)
Rules, 1993:
• The definition of ‘Agent’ has been newly incorporated as under:
“An A g e n t means a person duly authorized by a party to present application or to give

reply on its behalf before the Tribunal.”
• The definition of the ‘Presiding Officer’ has been amended to include Presiding
Officer of any other Tribunal authorized by the Central Government to discharge the functions
of Presiding Officer of DRT.
• Once an application is registered by the Registrar of DRT, the Tribunal shall issue
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summons to the Defendant in Form-IV.
• Rule-5A of the captioned Rules has been amended to reduce limitation period for filing
an application for review against an order of the Tribunal, on account of some mistake or
error apparent on the face of the record, from 60 days to 30 days.
• Rule-6 has been amended to provide that :
(a) The Original Application to be filed by the applicant Bank/FI can now also be filed in DRT
within whose jurisdiction any branch or other office of the Bank/FI is functioning and
maintaining an account in which debt claimed is outstanding for the time being.
• In cases where the Bank has to file any application as Debenture Trustee for any claim
against any company for redemption of debt securities, application can be filed in DRT in
whose jurisdiction the secured asset is located or within whose jurisdiction the principal place of
business of the debenture trustee, i.e. the Bank is situated. So far as the Bank is concerned,
the principal place of business is situated at Mumbai and hence, such application can be
filed in DRT, Mumbai also.
• Rule-12 of the captioned Rules dealing with filing of written statement and reply
statement has been substituted. The substituted Rule-12 now provides for the following:
a) The defendant is required to file two complete sets of written statement including claim for
set-off or counter-claim, if any, along with the documents in the paper book form within a period
of 30 days from the date of service of summons.
b) A copy of the written statement is also required to be served on the applicant bank/FI.
c) If the defendant fails to file written statement including claim for set-off or counter-claim
within 30 days, the Presiding Officer can, in an exceptional case and in special circumstances,
to be recorded in writing, extend the period for further 15 days.
d) In cases where the defendant has filed a claim for set-off or counter-claim, the applicant
bank/FI is required to file reply statement answering claim for set-off or counter-claim within
a period of 30 days from the date of filing such claim for set-off or counter-claim by the
defendant.
e) If the applicant bank/FI fails to file reply statement not answering to claim for set-off or
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counter-claim within 30 days, the Presiding Officer, in an exceptional case and in special
circumstances, to be recorded in writing, extend the period for further 15 days.
f) The written statement of the defendant including claim for set-off or counter-claim as well
as any other pleading by the defendant or applicant bank/FI is required to be supported by an
affidavit sworn in by defendant/applicant/witness and such affidavits are required to be filed
simultaneously with the written statement of the defendant or application/reply of the
applicant bank/FI.
g) Along with the Original Application relied upon, the Bank/FI has to file true copies of all
documents and evidence of witnesses with an index of such documents in duplicate.
h) In case the defendant/applicant bank/FI fails to file written statement/reply statement,
the Tribunal may proceed further to pass an order as it thinks fit.
i) If the defendant has admitted claim in full or part of the amount claimed by the bank/FI, the
Tribunal shall order the defendant to pay the amount admitted within a period of 30 days,
failing which the Tribunal may issue a certificate to the extent of debt admitted by the
defendant.
j) The Tribunal at its discretion, at any time, for sufficient reason, order that particular
fact(s) shall be proved by an affidavit or that any such affidavit shall be read at the hearing, on
such conditions, considered reasonable by the Tribunal.
k) If the applicant or defendant desires to cross examine any witness whose affidavit has been
filed, the Tribunal, for sufficient reasons to be recorded, order the respective witness to be
present for the cross examination. In case the witness does not appear or remain present for the
cross examination, the affidavit of such witness shall not be considered in evidence and no
oral evidence in connection with such witness can be permitted.
• Rule-16 has been substituted to provide that every final order passed and the recovery
certificate issued shall be communicated to the applicant and defendant either in person or by
registered post free of cost and can also be uploaded in the website of the Tribunal.
The applicant or defendant can obtain certified copy of any other order passed by the Tribunal
upon payment of requisite fee or alternately order may be downloaded from the website of the
Tribunal.
• Form-I, i.e. form in which the Original Application is required to be filed by the
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Tribunal, has been amended to incorporate the details of the secured assets, estimated value
of the secured assets, the details of the properties or other assets of the defendant known to the
applicant bank/FI but not secured or charged in favour of the Bank/FI and amount of unsecured
portion of the debt not covered by estimated value of the secured asset and assets and properties
which are not secured.
The amended Form-I also provides for interim orders to be prayed by the applicant bank for
directing the defendant to disclose particulars of other properties or assets owned by the
defendant, not charged or secured in favour of the applicant bank/FI.
Salient Features of the Amendments made to the Debts Recovery Appellate Tribunal
(Procedure) Rules, 1994
• The words ‘Presiding Officer’ wherever occurring in the Rules shall be substituted
by the word ‘Chairperson’.
• The definition of ‘Chairperson’ has been modified to mean ‘Chairperson’ of the

Appellate Tribunal and includes any other Appellate Tribunal established under any other
Law and authorised by the Central Government to discharge the functions of Chairperson
of the Debt Recovery Appellate Tribunal (DRAT).
• Sub-Rule 2 of Rule 6A has been amended to reduce the limitation period for filing an
application for review by any party aggrieved by an order passed by the Appellate Tribunal on
account of some mistake or error apparent on the face of the record from 60 days to 30 days.
• Rule 9 of the Rules has been substituted to provide that no appeal shall preferred by
a person against the order of the Debt Recovery Tribunal shall be entertained by the Appellate
Tribunal unless such person has deposited 50% of the amount of debt so due from the said person
as determined by DRT.
Powers have been given to the Appellate Authority to reduce the amount to be deposited up to
25% of the amount of such debt due from the person for reasons to be recorded in writing.
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Questions:
1. An NPA account is having an outstanding of Rs. 18.74 lacs and total dues of Rs. 20.57 lacs
as on 31.01.2020? Can the case be filed in DRT?
2. What are the steps to be initiated by the branch before filing the case in DRT?
3. What is key advantage of DRT action over SARFAESI action? In other words, what is the
key differentiator between actions initiated under these two mechanisms?
4. In case of death of a guarantor during the pendency of the case, what steps need to be
initiated by the branch?
5. What is the role of a Recovery Officer in DRT?

2. Amendment to DRT & DRAT Rules, CDO/LAW-SA AND DRT/3/2016 – 17 dated November
22,2016.
3. SOP on DRT, CCO/CPPD-ADV/187/2018 – 19 dated 19 Mar 2019.
4. Clarification on Govt Of India notification regarding enhancement of pecuniary jurisdiction
Of DRTs Under RDDBFI Act, 1993, CDO/LAW-LB/1/2019 – 20 dated 16 Aug 2019.
Page 585 of 632

CHAPTER- 14 D
SETTLEMENT OF BANK’S DUES THROUGH LOK ADALAT
Introduction:
Lok Adalat is a forum where the disputes pending in the court of law or at pre-litigation stage
are settled amicably. Lok Adalat has been given statutory status under the Legal Services
Authority Act, 1987. An award made by the Lok Adalat is deemed to be a decree of a civil court
and is final and binding on all parties.
Lok Adalat is a mechanism through which a large number of smaller NPA accounts can be
settled in one go as the monetary ceiling of cases to be referred to the Lok Adalat organized by
Civil Courts is Rs. 20 lacs.
This chapter takes the reader through the entire process to be followed while settling of cases
under Lok Adalat.
I. Identification of cases which can be referred to Lok Adalat

i. Cases pending before courts and cases likely to be filed before any court where borrowers are
willing to settle Bank’s dues to avoid lengthy court procedures. In suit filed cases, approval from
the concerned court for referring the case to Lok Adalat has to be obtained.
ii. Monetary ceiling of cases to be referred to the Lok Adalat organized by Civil Courts is Rs. 20
lacs. Further, our branches can participate in Lok Adalats to be organised by DRTs/DRATs
irrespective of the amounts involved in the cases.
iii. Where the account is NPA and there is no suit or proceeding initiated but there is a likelihood
of a settlement, then the Bank or the Borrower may make an application to the Lok Adalat for
taking up the matter before the Lok Adalat.
iv. A list of identified accounts, with relevant details, is to be submitted to the Lok Adalat for
sending notices to borrowers for appearing before Lok Adalat.
II. Preparations for Lok Adalat:

i. The branches should send notices to borrowers to have a meeting for amicable settlement of
dues through Lok Adalat.
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ii. The branches should hold intensive pre-Lok Adalat meets with borrowers/guarantors and
educate them on advantages of settling dues through Lok Adalat.
iii. The borrowers/guarantors must be encouraged to participate in Lok Adalat.
iv. Branch should send a list of identified accounts to Lok Adalat.
v. The date and place of Lok Adalat must be fixed in advance and maximum publicity must be
given through newspapers, electronic and social media and through Bank branches by circulating
pamphlets, hand bills etc.,
vi. The Bank should coordinate with the officials of Lok Adalat for sending notices to borrowers
for appearing before Lok Adalat.
III. Settlement at Lok Adalats:

i. The settlement in a Lok Adalat would be arrived at on the basis of factors such as dues
transferred to the Recalled Assets account, interest and other costs incurred thereafter, value of
the security available, repaying capacity of the borrower, cost of recovery etc.
ii. Powers for settlement of dues through ‘Lok Adalat’ may be exercised within the powers
delegated for writing off net losses including cases arising out of compromise proposals in terms
of the scheme of Delegation of powers approved by the Bank. An in-principle approval for
compromise settlement from the appropriate authority for scaling down the dues is to be obtained
before participating in the Lok Adalat. The official representing the Bank would be authorised
for scaling down of the dues to the extent permitted under in-principle approval.
iii. The Controlling Authority may authorise competent officials to represent the Bank in the Lok
Adalats and act within the in-principle approval accorded by the competent authorities in respect
of the specified cases. The in-principle approval will consist of the maximum concession that
may be offered and the maximum repayment period and down payment that can be accepted.
iv. After hearing both borrower and Bank officials, Lok Adalat will pass the Award. A certified
copy of the award is to be given to all the parties.
v. Formal sanction of the competent authority will have to be obtained. The proposal for such
sanction will record the confirmation of the in-principle approval.
vi. All decrees awarded by Lok Adalats must be for the full amount with amount less recovered
shown as discount. Decrees must have a default clause in terms of which if any violation of the
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terms of the settlement by the defendants occurs or if due instalments are not paid regularly in
cases where repayment of dues in instalments has been agreed upon, the entire debt shall fall due
for repayment and the Bank shall proceed legally without further reference to the borrower.
vii. Where the suit was also for enforcement of the mortgage, the decree on settlement by Lok
Adalat would be the final decree to enable the Bank to file execution in case of default by the
defendant.
viii. The compromise amount may be agreed to be paid in monthly/quarterly instalments or
depending on the income generation of the defendant. However, such repayments should be
made within a period not exceeding a total period of 36 months.
ix. The proceedings in Lok Adalat will be recorded and borrowers / Guarantors and Bank
officials must put their signature on the Award as token of acceptance.
x. The borrowers / Guarantors should be encouraged to pay maximum amount as upfront
payment on the day of Lok Adalat itself.
IV. Following up for settlement:
i. Borrowers/Guarantors are required to make payment as per the terms and conditions of the
Award. Hence close follow up with them is needed to ensure prompt repayment.
ii. In case Borrowers/Guarantors fail to make payment as per Award, Legal proceedings must be
initiated by filing Execution Petition before the competent Court through Bank’s advocates.
iii. If a pending case is settled at Lok Adalat, application should be filed for refund of court fee
already paid.
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Questions:
1. Which type of cases can be referred to a Lok Adalat?
2. What are the advantages to the bank for settlement of accounts under Lok Adalat?
3. What may be the basis for deciding the settlement amount under Lok Adalat?

2. SOP on Lok Adalat, CCO/CPPD-ADV/199/2018 – 19 dated 30 Mar 2019.
Page 589 of 632

CHAPTER- 14 E
COMPROMISE SETTLEMENT POLICY
A compromise settlement is one of the methods for resolution of NPA accounts. However, it is a
two way process, as availability of an offer from a borrower or guarantor is the first step towards
exploring the possibility of settlement in an NPA account.
Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the
Bank agrees to accept in full and final settlement of its dues an amount less than the total amount
due to the Bank under the relative loan account. Thus, the compromise settlement invariably
involves certain sacrifice by the Bank (by way of write off and/or waiver) of a portion of its
dues.
Compromise settlements can be done either under a bank’s specific scheme which may be valid
for some specified period or under bank’s compromise settlement policy.
This chapter details the bank’s compromise settlement policy guidelines. The policy details the
broad guidelines. Further, the settlement for any loan account depends on the account specific
factors/ situation.
1. Basic principles for Compromise Settlement proposals
i. Bank’s Approach: The compromise will be a negotiated settlement under which the Bank will
endeavour to recover its dues to the maximum extent possible with minimum sacrifice and this
process will be initiated after the Bank has exercised its right to set off or lien against any
deposits of the borrower/guarantor lying with the Bank.
ii. Realisable Value of Securities, and NPV of compromise amount & Securities: The
realisable value of security charged to the Bank as also the Bank’s ability to take possession of
the security and sell it will be the basic factors which would decide the compromise amount.
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While assessing the realisable value of security, proper weightage would have to be given to
its location, condition and marketability. For this purpose, services of approved valuers may be
engaged and it should be ensured that the valuation reports are not more than twelve months
old. In case value of property is above Rs.1cr, two valuation reports from Bank’s approved
valuers have to be obtained and the higher value has to be taken into account for deciding
the compromise amount. The NPV of settlement amount should generally not be less than
Net Present Value (NPV) of the realizable value of the available securities. In case of lower
value, the same has to be justified with valid reasons.
For calculation of NPV, the rate of discount should be taken as the Prevalent Benchmark
Rate (presently MCLR) for one-year tenor with annual rests and the maximum estimated time
to realize the securities may be taken as 5 years from the date of notice under section 13(2)
in case of SARFAESI action and 7 years from the date of filing suits in case of DRT / Court
cases.
iii. Influence of Group Companies: In case the borrower has other group companies, influence
of these companies or the parent company may be used for a better settlement.
iv. Initial Deposit : Normally along with the compromise offer letter, an initial deposit of at least
5% of the offer amount may be taken from the borrower under no lien account as an evidence of
the borrower's bonafide intention to pursue the compromise settlement with the Bank.
v. Terms of Payment : Time Period for Payment & Charging of Interest on Compromise
Settlement amount : It will be the endeavour of the Bank to get the entire compromise amount
paid up in lump sum. In cases where the amount is agreed to be recovered in instalments,
normally at least 15% of the approved settlement amount (inclusive of initial deposit) would be
payable upfront with the balance instalments spread over a maximum period of 12 months.
Repayments exceeding 12 months should not generally be considered unless the
repayment source is assured to the satisfaction of the Bank. Further, repayment period shall not
be extended beyond a period of 18 months without obtaining administrative approval from an
official not below the rank of Chief General Manager. Efforts should be made in such cases to
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tie up the payment directly to the Bank. The sources from which the borrowers and/or
guarantors will raise funds to pay the compromise amount will be identified and recorded,
particularly in those cases where the payment is proposed to be made in instalments. In case,
the compromise amount is not paid as per terms of sanction, the Bank will be entitled to
treat the compromise settlement as cancelled. However, the sanctioning authority (of
original sanctioned OTS/Compromise) may restore failed OTS in special circumstances if
the sanctioning authority is satisfied with reasons that the failure was beyond the control of
the borrower (s). The sanctioning authority has to specifically mention the circumstances
and the rationale for accepting the reasons given (in writing) by the borrower. The failed
Compromise may only be restored within six months from date of failure of the
compromise. i.e., the due date when the borrower fails to pay any instalment of the
compromise subject to interest being charged as per the approved compromise for the
delayed period.
To incentivise early payment, no interest is to be charged on the compromise amount paid within
four months from the date of approval of compromise conveyed to the borrower even in cases of
compromise settlement on instalment basis. If the entire compromise amount is not paid within
four months, interest at Prevalent Benchmark Rate (presently MCLR)* + 2% on the balance
amount paid after four months shall be charged from 30th day from the date of letter conveying
approval of the compromise to the borrower.
*Prevalent Benchmark Rate (presently MCLR) applicable for tenor 6 month, 1 year & 2 Year
will be applicable for repayment fixed in 6 month, 1 year & more than 1 year respectively. The
interest to be charged will be compounding with monthly rests.
vi. Cases of wilful defaulters: In the matter of settling compromise amount, distinction will
need to be made between willful defaulters and the borrowers defaulting for reasons beyond
their control. In case of the former, a tough stand has to be taken and the proposal should be put
up after obtaining in-principle approval of the GM (NW/CCG/CAG/SARG) based on a review
of such cases. Further, in case of willful defaulters, initial deposit under no lien accounts will
be 15% of offer amount and on approval of the compromise, upfront payment including initial
Page 592 of 632

deposit will be 25% of the approved compromise amount. If the compromise amount is payable
in instalments, interest at Prevalent Benchmark Rate (presently MCLR) for 6 month tenor is to
be charged on the compromise amount paid within three months from the date of approval of
compromise conveyed to the borrower and interest is to be charged on balance amount paid
after 3 months from 15th day of the date of letter conveying approval of compromise to the
borrower at minimum Prevalent Benchmark Rate (presently MCLR)* + 2%. * Prevalent
Benchmark Rate (presently MCLR) applicable for tenor 6-month, 1 year & 2 Year will be
applicable for repayment fixed in 6 month, 1 year & more than 1 year respectively. The interest
to be charged will be compounding with monthly rests.
vii. Default Clause: Compromise settlement will be arrived at with borrowers / guarantors
subject to the condition that in the event of any failure to honour any of the terms of the
compromise settlement, the Bank will be entitled to exercise against the borrowers / guarantors
all the rights and remedies available prior to the compromise settlement. This will include
collection from the borrowers/guarantors of the entire amount due prior to the compromise
settlement, together with interest thereon at the applicable rates. Suitable clauses in this regard
are to be included in the letter conveying approval for compromise.
viii. Consent Decree: An application for obtaining Consent Decree from the appropriate
Court/DRT should be filed immediately on sanction of the compromise proposal incorporating
therein a clause that in the event, the borrowers / guarantors fail to adhere to the terms of
compromise, the compromise settlement shall stand automatically cancelled and the Bank will be
entitled to recover the entire outstanding amount together with interest at the contractual rate. A
consent decree/recovery certificate should be obtained from the competent court/DRT recording
the settlement. In case the borrowers / guarantors do not adhere to the settlement terms, the Bank
can proceed with the execution of the decree/recovery certificate.
ix. Position of other recovery action: The sanctioning authority must satisfy itself that all
possible steps to recover the dues have been explored and that compromise settlement is in the
larger interest of the Bank.
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x. Opportunity cost analysis : While arriving at a negotiated settlement, the advantage available
to the Bank from prompt recycling of funds should be considered in comparison to the likely
recovery by following legal or other protracted course of action i.e. opportunity cost analysis to
be made.
xi. Uncharged assets of the borrowers / guarantors: Before entering into any compromise
settlement, details of uncharged assets of the borrowers and guarantors should be collected by
either engaging the services of investigative agencies or otherwise.
xii. Compromise settlement proposals from Guarantors: Compromise Settlement proposals

from guarantors should be treated on par with proposals from borrowers.
xiii. Dealing with Third Parties: It has been observed in some cases that third parties
are approaching the branches either in person or telephonically for settling the dues of
defaulters. It may be noted that when third parties are involved in this process, there are
possibilities that the process and the outcome of the negotiations may not be
communicated to the Borrower(s) / Guarantor(s) correctly by them. The third parties may
create communication gap between the Bank and the defaulters. They may even resort to
mis-representation of facts to the defaulting borrowers which may adversely affect the Banks’
image.
In view of the above, the operating units / branches are advised to deal directly with the
Borrower(s) / Guarantor(s) only, for settlement of dues through compromise. Third
parties should not be entertained and involved in this process, unless they are duly authorized
by the Borrower(s)/ Guarantor(s), or accompany them.
xiv. Compromise settlement involving a fraudulent borrower: Compromise

settlement involving a fraudulent borrower will be allowed only with the condition that the
criminal complaint will be continued even after settlement of compromise case. The terms and
conditions will be those applicable for Wilful Defaulters.
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2. Analysis of Bank’s strengths and weaknesses
Bank's approach to compromise as a recovery option will be based on an analysis of the Bank's
strengths and weaknesses in a given case. Some of the parameters for such an analysis are:
i. Value of securities charged to the Bank and their saleability;

ii. Other assets of the borrowers / guarantors;
iii. Status of legal action;
iv. Ability of the Bank to enforce the security.
v. Time that may be involved in realising the security.
3. Screening Procedure
All proposals for compromise will be first processed by the Prescribed Screening Committees
who have to scrutinize the compromise proposal and certify that the compromise settlement
proposal is in conformity with RBI directives and bank’s compromise settlement policy except
deviations as mentioned in the proposal.
External Screening Committee

A close and independent scrutiny of compromise proposals which falls under the sanctioning
powers of SARCC-I/CCSC and above is required as the amount of sacrifice involved is very
high. In order to bring greater transparency/independence, an External Screening Committee has
been created to scrutinize and recommend Compromise proposals which falls under the
sanctioning powers of SARCC-I/CCSC and above to the concerned Credit Committee. The
committee is mandated to examine compromise proposal for verification of various aspects of
the proposal to ensure that it is as per the Bank’s and RBI guidelines and recommend/ or reject
the same for further consideration by the Credit Committees.
The External Screening Committee comprises of external members from the categories of
Retired High Court Judges, Retired IPS Officers, Retired RBI officers of the Rank of General
Manager and above and Retired Vigilance Commissioners. The committee will have a total of 5
external members. One of them will be the Chairman of the Committee. The quorum required to
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conduct the Screening Committee Meeting will be 3 external members (including Chairman).
The DGM (OTS, AUCA & Policy at SARG) is a non-member secretary of the committee.
4. Approving Authority: Power to write off net loss
The appropriate authority to approve the compromise proposal will be as per the
Scheme of Delegation of Financial Powers based on the net loss involved in the
account excepting that such authority should not be the one who sanctioned the
advance in question in his individual capacity. The amount of net loss to be written
off will be the criteria to decide the competent authority irrespective of the
outstanding in the account. While arriving at the net loss for the purpose of
compromise exercise, the accrued / notional interest is to be calculated at Prevalent
Benchmark Rate (presently MCLR) for one-year tenor with annual rests from the
date of NPA. In case of decreed cases, the decreed rate has to be used. However,
the accrued/notional interest will also be calculated as per contracted rate of
interest as hitherto and the net loss at contracted interest rate should also be
mentioned in the compromise proposal. In case of non- payment of Bank’s dues as
per approved terms of compromise, the Bank will be entitled to recover the total
dues including accrued/notional interest as per terms of sanction of advance.
5. Compromise Settlement in cases referred to NCLT:
In cases where Bank is CIRP applicant and CIRP not yet admitted / CoC yet to be
constituted
A. In case where Bank has filed the CIRP application and CIRP is yet to be admitted by NCLT
or CIRP admitted but CoC is yet to be constituted, if the borrower/ Corporate Debtor (CD)
comes forward for a compromise settlement, following instructions may be followed: -
i. The compromise proposal must pay minimum 25% of total offered compromise amount plus
actual CIRP filing expenses upfront.
ii. Balance compromise amount must be paid within a period of 6 months from the date of
compromise approval.
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iii. The Branch, while accepting compromise offer should also ascertain that no other CIRP
application filed by any other creditor is pending before NCLT.
B. However, in situation A above, in case the payment of dues / compromise amount is proposed
to be made by the guarantors or a third party source without affecting Corporate Debtor(s)’s
assets or funds, the Bank may accept the same and may withdraw the CIRP application from
NCLT after receipt of 25% compromise amount plus CIRP application expenses. If funds are
received from sources other than Corporate Debtor, it will not come under the purview of
Preferential Transactions under Section 43 of IBC.
C. In cases where CIRP is filed / initiated by other financial creditor or operational creditor, but
not yet admitted, Bank may enter into a compromise settlement. Such transaction will be in
normal course of business and hence out of purview of Sector 43 of IBC.
D. However, in cases where CIRP initiated by another financial creditor or Operational creditor
and is admitted but CoC yet to be constituted, a moratorium comes in place. Hence, no
compromise settlement must be entertained at this stage.
E. If guarantors or third party failed to repay the compromise amount, the Bank will be at liberty
to recommence the CIRP by moving an application with NCLT.
In case a CIRP is admitted and CoC has been constituted
No compromise offer may be accepted by the Bank in such cases. The borrower/Corporate
Debtor may however be advised to approach the CoC with a compromise offer. It is the
discretion of the CoC to accept any such compromise proposal and to decide with minimum 90%
majority vote to withdraw CIRP under Sec 12A of the Code.
In case where liquidation order has been issued by NCLT
No compromise proposal can be accepted in cases where NCLT has already issued a liquidation
order as the Code bars the liquidator or the secured financial creditor to sell assets to a person
who is not Sec 29 A compliant. Any deviation from these provisions can be approved only by
SANCTIONING AUTHORITY.
6. Documentation
After concluding the compromise arrangement, the settlement should be documented on the
basis of terms & conditions of sanction including default clause, consent decree etc.
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Questions:
1. Why upfront amount is mandated at the time of considering a compromise settlement

offer? What is the treatment of such upfront amount till the proposal is approved by
appropriate authority?
2. What is the rationale behind calculating the Net Present Value of the realizable value of
available securities and its comparison with the settlement amount?
3. What is the importance of negotiation in compromise settlements?
4. What is the rationale behind obtaining consent decree subsequent to sanction of

compromise by the Bank in cases where recovery suit is pending?
5. Can a compromise settlement be done with a “Wilful defaulter’? If yes, what is the
additional step involved in this case?
For further reference, kindly refer as under:
1. Manual on Loans & Advances as on 31.03.2018, Part 3, Chapter 25

2. Review of Compromise Settlement Policy Circular number CCO/CPPD-ADV/167/2019 –
20 dated 18 Jan 2020.
Page 598 of 632

CHAPTER- 14 F
THE INSOLVENCY AND BANKRUPTCY CODE, 2016
The Insolvency and Bankruptcy Code, 2016 is a new law which has been implemented for
Corporates w.e.f. 01.12.2016 and is targeted towards resolution of stressed assets in the
banking system. The law shall also be implemented for Non-Corporates and individuals in
due course. The law gives immense powers to the banks in the resolution process.
This chapter takes the reader through the background of this code and the entire mechanism
through which the code can be utilized towards resolution of stressed assets in the banking
system.
The Insolvency and Bankruptcy Code, 2016 (“Code”) seeks to significantly overhaul the
existing state of legal regime in relation to insolvency and bankruptcy processes in India.
The Code is being viewed as one of the most significant legislative reform towards
“ease of doing business in India” – one of the main objectives of legislative and policy
reforms by the central government.
1.1 Background
i) Until now the law relating to insolvency and bankruptcy in India has been scattered
over several statutes with each of such statute having its own distinct objects and purpose, as
well as procedures and mechanisms resulting is a dispersed approach of recovery. The Code
however, seeks to bring uniformity in the jurisprudential approach and also standardise the
processes for the treatment of bankrupt or insolvent borrowers. The Code has been
formulated with the broad objective to consolidate all existing laws relating to insolvency
and bankruptcy for companies and individual under one umbrella.
ii) Multiplicity of adjudicating forums, overlapping insolvency and restructuring laws,
lower monetisation of liquidated assets and the absence of a time-bound insolvency
process are some of the key challenges that the Indian economy faces today. The Code has
been enacted at a time when stress in the Indian banking sector has become evident.
To ensure stability and economic efficiency of the Indian credit market, it is critical that
these issues be addressed. It comes with an objective to enhance credit availability, promote
entrepreneurship, balance the interest of all stakeholders in an entity and reduce the time of
resolution for maximizing the value of assets.
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iii) The Code brings a paradigm shift from ‘debtors’ in possession to ‘creditors in
control’ which creates time bound processes for insolvency resolution of companies and
individuals. It moves from “Erosion of Net-Worth” to “Payment Default”. Insolvency
Professional will take over management and control of the Corporate Debtor (Borrowing
Company). Government dues would rank below the claims of other creditors. It also has
provisions to deal with concealment, fraud and/or manipulation leading to fine and/or
imprisonment. It also provides confidence to lenders and investors in the debt market.
iv) Insolvency- is a situation where liabilities of a person/firm exceed its assets and
is unable to pay debt obligations as assets may be illiquid and cash flows are not sufficient to
pay debts.
v) Bankruptcy- occurs when a court recognises the insolvency which is beyond resolution.
A bankrupt entity is a debtor who has been adjudged as bankrupt by an Adjudicating
Authority by passing a bankruptcy order. The court appoints a trustee who will be
responsible for selling the property and discharge obligations to the creditors. It has
primarily to give relief to the debtor from the harassment by his creditors whose claims are
not paid
1.2 Ecosystem of the Code

A. Regulatory Authority
The Insolvency and Bankruptcy Board of India (“IBBI”) has been established under the
Code as the primary regulatory authority having wide powers to regulate the Insolvency
Professional Agencies, Insolvency Professionals and Information Utilities constituted under
the Code.
B. Adjudicating Authority
As per the Code, the National Company Law Tribunal (“NCLT”) is the
adjudicating authority for the insolvency matters concerning corporates, LLPs and other
limited liability entities incorporated under any law in force. The Debt Recovery Tribunal
(“DRT”) is the adjudicating authority for the bankruptcy of partnerships and individuals. All
appeals against the orders of NCLT and DRT will respectively lie with the National
Company Law Appellate Tribunal (“NCLAT”) and the Debt Recovery Appellate Tribunal
(“DRAT”) respectively. Lastly, the Supreme Court of India has the appellate jurisdiction
over the NCLAT and DRAT.
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C. Insolvency Professional Agencies
These are specialised bodies/agencies that will be entrusted with the task of registering and
governing the Insolvency Professionals. Three agencies viz. i) The ICSI Insolvency
Professional Agency, ii) The Indian Institute of Insolvency Professionals of ICAI and iii)
The Insolvency Professional Agency of Institute of Cost Accountants of India, have been set
and registered under the Code.
D. Insolvency Professionals
Insolvency Professional (“IPs”) are licensed professionals who undertake the role of an
interim resolution professional, resolution professional, liquidator and/or a bankruptcy
trustee under the resolution process initiated under the Code.
E. Information Utilities
Information Utilities (“IUs”) are entities who will be registered with and licenced by the
IBBI. These will be a storehouse for financial information of companies, LLPs, partnerships
and individuals under the Code. The records available with the IUs will be inter alia utilised
to prove default, security interest and existence of a dispute in respect of a debt. National
e-Governance Services Limited became the first IU under the IBC.
1.3 Compulsory Corporate Insolvency Resolution (CIR) Process to precede liquidation

The Code provides for a time bound CIR process for all corporates prior to liquidation,
during that period creditors have to consider measures to resolve the financial distress of the
corporate and to maintain and preserve its continued business operations by framing a plan
referred to as a resolution plan (“Resolution Plan”). Only upon the failure of the CIR
process the corporate can be liquidated under the Code.
1.4 Moratorium and Limitation Period

Once an application for CIR process is admitted by the NCLT and the insolvency has
commenced, the Code stipulates that a moratorium be declared by an order passed by NCLT
in respect of the underlying CD.
The moratorium is effective from the date of the order till completion of CIR process. In
view of such moratorium, the Code states that, when the limitation period is being computed
for any suit or application by or against a corporate debtor, the period of such moratorium
shall be excluded.
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1.5 Resolution process against Guarantor
i) Corporate Guarantor
The Code does not restrict or put a moratorium on a lender to initiate invocation of guarantee
proceedings against a corporate guarantor where the underlying borrower is under a CIR
process. In addition to the above, the moratorium placed on the underlying borrower will not
restrict the lender to enforce security interest created by such corporate guarantor on its own
assets. Consequently, if a borrower is under a CIR process, Bank may continue to take actions
and seek recourse against the guarantors or its assets.
ii) Personal Guarantor

Where a lender intends to initiate insolvency resolution process against a personal guarantor,
the provisions of Section (60) of the Code are of relevance. As per Section (60):
a. Where a CIR process or liquidation process against the underlying corporate debtor is
pending before the NCLT, an application relating to the insolvency resolution or bankruptcy
of a personal guarantor of such corporate debtor will need to be filed before such NCLT
which is adjudicating upon the CIR process against the corporate debtor.
b. The insolvency resolution process or bankruptcy process of a personal guarantor of the
corporate debtor pending in any court or tribunal shall stand transferred to the NCLT dealing
with the CIR process of the corporate debtor.
c. The provision pertaining to enforcement of guarantees against the individual guarantors
under IBC have not yet been notified. Hence, any action against individual guarantors can be
initiated under Recovery of Doubtful-debts of Bank (RDB) Act with DRT. However, on
notification of part III of the Code pertaining to individual bankruptcy, these cases against
guarantors can be clubbed / migrated to NCLT hearing CIRP case against the Corporate
Debtor on the basis of request in this regard.
d. Notwithstanding the limitation period available, suits may be filed against the
guarantor(s) in respect of cases which are under process in NCLT. However, a decision to
this effect will be taken by the BU keeping in view of the interest of the Bank, on a case to
case basis. If BU decides to file a suit against the guarantors pending the outcome of CIR
process, a simple call up notice to be served from the Bank’s side to facilitate filing of suit.
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2. Initiation of the CIR process
Trigger for initiation
The CIR process under the Code can be triggered in the event a corporate has committed a
default of Rs. 1,00,000 (Rupees One Lac) or more in respect of a debt. The CIR process
can be initiated by filing an application before the NCLT by either:
a. financial creditors, being creditors to whom financial debts are owed
b. operational creditors, being creditors to whom operational debt is owed ;

or
c. the corporate itself.
In addition to the above, where the CIR process is being initiated by an Operational
Creditor, the application for CIR process made before the NCLT will not be accepted if:
a) the corporate debtor has issued a reply to the demand notice of the Operational
Creditor within 10 (ten) days, furnishing proof of repayment or dispute, as the case may be;
or
b) the corporate debtor has made the requisite repayments to the Operational Creditor
within 10 (ten) days of the demand notice being issued by the Operational Creditor.
Time-limit for completion of insolvency resolution process. –

(1) The corporate insolvency resolution process shall be completed within a period of one
hundred and eighty days from the date of admission of the application to initiate such
process.
(2) The resolution professional shall file an application to the Adjudicating Authority to
extend the period of the corporate insolvency resolution process beyond one hundred and
eighty days, if instructed to do so by a resolution passed at a meeting of the committee of
creditors by a vote of [sixty-six] per cent. of the voting shares.
(3) On receipt of an application, if the Adjudicating Authority is satisfied that the subject
matter of the case is such that corporate insolvency resolution process cannot be completed
within one hundred and eighty days, it may by order extend the duration of such process
beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding
ninety days. Any extension of the period of corporate insolvency resolution process under
this section shall not be granted more than once:
Page 603 of 632

The corporate insolvency resolution process shall mandatorily be completed within a period
of three hundred and thirty days from the insolvency commencement date, including any
extension of the period of corporate insolvency resolution process granted under this section
and the time taken in legal proceedings in relation to such resolution process of the corporate
debtor.
Initiation of Liquidation
The Provisions of the Code need to be read with Companies Act, 2013 when dealing
with the liquidation process.
1. Triggers where liquidation process can be initiated under the Code
i) Where the CIR process fails and no resolution plan is approved by the COC;
ii) creditors representing 66% of the outstanding financial debt resolve to
liquidate the corporate debtor; or
iii) the corporate debtor contravenes the CIR process, in which case, anyone
prejudicially affected can apply for liquidation.
2. NCLT will order liquidation and make a public announcement and cause
intimation to be sent to the Registrar of Companies/Ministry of Corporate Affairs with
whom companies/Limited Liability Partnerships are registered.
3. Where the NCLT passes an order for liquidation of the CD, the
resolution professional appointed for the CIR process is required to act as the liquidator for
the purposes of liquidation.
4. Rights of a secured creditor during liquidation
A secured creditor in the liquidation proceedings may:
i) Stand within the liquidation process – A secured creditor has the right to
relinquish its security interest to the liquidation estate and receive proceeds from the sale of
assets by the liquidator as per the waterfall set out under the Code; OR
ii) Stand outside liquidation process – Realise its security interest by informing the
liquidator of such security interest and identifying the asset subject to such security
interest to be realised. A secured creditor will be able to realise security interest over only
such assets which have been verified by the liquidator based on the records available
with the IU. Once the secured creditor has enforced its security interest, it is required to
apply the proceeds to recover its own debt.
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iii) Stand as unsecured creditor for unrealised amounts – Where the secured
creditor has stood outside the liquidation process to realise its own security interest, if the
proceeds of such realisation of secured assets are not adequate to repay its own debt,
then the unpaid debt of such secured creditor will stand 5th in priority i.e pari passu
debts owed to Government.
5. Where the secured creditor stands outside the liquidation process to realise its own
security interest, and the proceeds of such sale yield an amount in excess of the debts
owed, then in such case the secured creditor shall (i) account to the liquidator for such
surplus; and (ii) tender to the liquidator such surplus amounts received from the
enforcement.
6. Priority of debts under the Code- proceeds are to be distributed as per

the following waterfall mechanism:
(i) the insolvency resolution process costs and the liquidation costs to be paid in full;
(ii) debts owed to a secured creditor in the event such secured creditor has
relinquished security and workmen’s dues for the period of 24 months before liquidation
ranking equally (pari passu)
(iii) wages and any unpaid dues owed to employees other than workmen for the period of
12 months before liquidation;
(iv) financial debts owed to unsecured creditors;
(v) dues to the Governments in respect of the whole or any part of the period of two years
preceding the liquidation commencement date and debts owed to secured creditors for
unpaid amounts following the enforcement of security interest, ranking equally (pari passu)
(vi) any remaining debts and dues
(vii) preference shareholders, if any; and
(viii) equity shareholders or partners, as the case may be.
7. Time line prescribed for completion of liquidation process

The liquidator is required to liquidate the CD within a period of 2 years. In the event the
liquidator fails to liquidate the debtor within such 2 years, he/she is required to make an
application to the NCLT to continue such liquidation along with a report explaining why the
liquidation has not been completed and specify the additional time that will be required for
the same.
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D. Stages of the CIR Process
Set out below is a snapshot of the CIR process under the Code.
The corporate commits a default of Rs. 1 lac or more.
FINANCIAL CREDITOR OPERATIONAL CREDITOR CORPORATE DEBTOR
The Financial Creditor An operational creditor to send a A defaulting corporate debtor

individually or jointly with other demand notice to the corporate itself may also file for initiation
creditors files an application to debtor and if the corporate of a CIR process with the NCLT.
initiate the CIR process against debtor fails to pay or reply in
the corporate debtor before the lieu of such demand notice
NCLT. within 10 days, the operational
creditor can file for application to
initiate the CIR process against
the corporate debtor before the
NCLT.
Within 14 days of the Within 14 days of the application, if Within 14 days, the NCLT either
application, if the NCLT is the NCLT is satisfied that the accepts the application or rejects
satisfied that the application is application is complete, there is a it provided that before rejecting
complete, there is a default default and there is no disciplinary application, 7 days are given to
and there is no disciplinary proceedings pending against the IRP, rectify the defect in the
proceedings pending against it can accept the application or application.
the IRP, it can accept the reject it provided that before
application or reject it provided rejecting application, 7 days are
that before rejecting given to rectify the defect in the
application, 7 days are given application
to rectify the defect in the
application.
If application admitted - commencement of the CIR Process
NCLT declares a Appointment of the Interim IRP makes public

moratorium Resolution Professional (IRP) Announcement for the
initiation of the CIR process
and calls for submission of
creditor claims and appoints
valuers for calculation of
liquidation value of the
company
Constitution of Committee of Creditors
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Confirmation of the IRP into a resolution professional (RP) or appointment of a new RP that is acceptable to the CoC
(having minimum 66% majority favourable vote).
1. RP prepares the information memorandum.

2. The Resolution applicant (can be any person including promoters, corporate, creditors or any unrelated
third party) prepares the resolution plan and submits to RP.
3. RP examines all the resolution plans and submits them to the CoC, after they meet the applicable criteria.
CoC at any time during the CIR CoC rejects all the
CoC accepts one of the
process resolves to liquidate the resolutions plans placed
resolution plans placed
corporate before them.
before them.
RP submits the finalised resolution plan to the NCLT
NCLT accepts and confirms NCLT rejects

the resolution plan. the resolution
plan
The accepted resolution plan is then Corporate Debtor goes into liquidation.
implemented.
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Questions:
1. What is the background which led to the formulation of this new law, IBC 2016? How
it is different from the prevailing laws on resolution of stressed accounts?
2. What is the difference between ‘Insolvency’ and ‘Bankruptcy’?
3. What is the role of an Insolvency Professional? What is the difference between RP, IP
and IRP?
4. What are the trigger points for initiation of action under this code? Is classification as
NPA a must for initiating process under the Code?
5. What is the Waterfall Mechanism mandated in IBC?
6. Who is an ‘operational creditor’? What steps needs to be initiated by such operational

creditor before filing an application under IBC?
7. What are the options available for a secured creditor under the liquidation process?
For further reading please refer as under:
1. Manual on Loans and Advances as on 31.03.2019, Part 3, Chapter 24B.

2. SOP on IBC, Circular no. CCO/CPPD-ADV/22/2018 – 19 dated 18 May 2018.
Page 608 of 632

CP SME L1 Chapter 14 MCQs
1 Our bank is having exposure in the account of M/s ABC Pvt. Limited, the credit facilities
of which were classified as NPA on 31.01.2020. Notices under the provisions of
SARFAESI Act were issued on 17.02.2020. However, notices sent to one of the
guarantors was returned undelivered. What step needs to be initiated by the handling
branch ?
A No further steps to be undertaken.
B Pasting of notice at a place wherein the said guarantor will come to know that
such notice has been issued on him.
C Pasting of notice at a place wherein the said guarantor will see that such notice
has been issued on him and publishing the contents of 13(2) in two newspapers,
out of which one newspaper must be vernacular.
D Receipt of notice by the borrowing entity is only mandatory.
2 An appeal is preferred by the borrower in DRAT against the final order given by DRT.
Which of the undernoted statement is correct in this regard?
A Where an Appeal is preferred, the Borrower / Guarantors are not required to
deposit any amount with the Appellate Tribunal.
B Where an Appeal is preferred, the Borrower / Guarantors are required to deposit
with the Appellate Tribunal, 60% of the amount of debt due as determined by the
DRT so that the Appeal is entertained by the Appellate Tribunal (DRAT). But the
Appellate Tribunal (DRAT) may reduce the amount to 25% with the reasons
recorded in writing for such waiver or reduction.
C Where an Appeal is preferred, the Borrower / Guarantors are required to deposit
DRT so that the Appeal is entertained by the Appellate Tribunal (DRAT).
D Where an Appeal is preferred, the Borrower / Guarantors are required to deposit
DRT so that the Appeal is entertained by the Appellate Tribunal (DRAT). But the
Appellate Tribunal (DRAT) may waive or reduce the amount to be deposited with
the reasons recorded in writing for such waiver or reduction.
3 Normally along with the compromise offer letter, an initial deposit of at least ______ of
the offer amount may be taken from the borrower under no lien account as an
evidence of the borrower's bonafide intention to pursue the compromise settlement
with the Bank.
A 5%
B 2.5%
C 10%
D 12.5%
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4 Credit facilities sanctioned to M/s XYC and Company Limited were classified as NPA on
15.02.2018. The promoter Directors as well the Company have been declared as Wilful
Defaulters strictly following the guidelines prescribed by RBI. Now the promoter has
offered to settle the bank’s dues under compromise. Which of the undernoted
statement is correct in this regard?
A Compromise settlement with a Wilful Defaulter is not permitted as the same is
not in line with the Bank’s compromise settlement policy.
B In case of Wilful Defaulters, a tough stand must be taken and the proposal should
be put up after obtaining in-principle approval of the GM (NW/CCG/CAG/SARG)
based on a review of such cases.
C The sanctioning authority for settlements may take a considered view in the
matter considering the facts of the case.
D Such settlement proposal may be considered by the bank but the sanctioning
authority for approval of such settlements is CCCC irrespective of exposure.
5 The CIR process under the Insolvency and Bankruptcy Code can be triggered in the
event a corporate has committed a default of Rs. ___________ or more in respect of a
debt.
A 10 lacs
B 1 lakh
C There is no minimum default amount stipulated under IBC in the given situation.
D 5 lacs
Answers:
1 2 3 4 5
C D A B B
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Case let on SARFAESI Action
M/s XYZ and Company Pvt. Ltd. was sanctioned credit facilities to the tune of Rs. 155.50
lacs (CC- Rs. 135 lacs, TL- Rs. 17.00 lacs, BG- Rs. 3.50 lacs) in September 2008. The unit
was involved in manufacturing of marbles. As the business of the unit expanded, the credit
facilities were enhanced several times by the bank. The last sanction was at aggregate level of
Rs. 477.50 lacs (CC- Rs. 352.00 lacs, TL- Rs. 12.50 lacs, TL 2 - Rs. 100.00 lacs - BG- 13.00
lacs).
Due to delayed realization of receivables and possible diversion of funds, the credit facilities
sanctioned to the unit were classified as NPA on 31.12.2019. Outstanding as on 31.01.2020 is
Rs. 481.50 lacs for fund based facilities and Rs. 2.50 lacs for BG.
The credit facilities are guaranteed by Mr. A, B & C. The details of collaterals available and
their realizable value is as under:
Property details Ownership details Realisable value

Property 1 Jointly owned by Mr A & B RV: 8.75 lacs
Property 2 Owned exclusively by Mr A RV: 3.54 lacs
Property 3 Owned exclusively by Mr B RV: 2.75 lacs
Mr. C is a guarantor to the credit facility sanctioned to the Company but has not offered any
of the immovable assets owned by him as a collateral security.
The controller had directed the branch to initiated SARFEASI Action in the account
immediately.
1 If the notice under Section13(2) of SARFAESI Act is prepared on 10.03.2020 should the
BG outstanding of Rs. 2.50 lacs be a part of total dues to be demanded from the
borrowing entity?
A This liability may fall on the bank in future so must be added to the total dues.
B BG outstanding of Rs. 2.50 lacs may be added to the total demand made on the
borrowing entity only after taking controllers’ approval.
C No, this liability is yet to be crystalized as such cannot be demanded from the
borrower as on 10.03.2020.
D All FB & NFB dues to be demanded from the borrowing entity as per the
provisions of SARFAESI Act.
2 A separate notice to guarantors shall be sent to which of the undernoted guarantors while
issuing demand notice under Section 13(2)?
A Mr A & Mr B only
B Mr A, Mr B & Mr C
C Mr B only
D Mr A only
3 Notices under the provisions of SARFAESI Act have been issued on 10.03.2020.
However, notice sent to one of the guarantors Mr. A is returned undelivered. What
action needs to be initiated at the branch level?
A Notice should be pasted at the residence of Mr A and contents of 13(2) to be
Page 611 of 632

published in 2 newspapers, out of which one newspaper must be vernacular.
B No further action is required to be taken by the branch.
C Contents of 13(2) to be published in 1 newspaper which must be a national daily.
D Contents of 13(2) to be published in 2 newspapers, out of which one newspaper
must be vernacular.
4 Notice sent to the Company and its guarantors was challenged by one of the guarantors
Mr. B under Section 13(3A), and the same was received at the branch on 19.03.2020.
What action needs to be initiated at the branch level?
A Such representation received must be replied by the Authorized Officer within 7
days of receipt of representation from the guarantor and reply should go Mr. B with
a copy to the borrowing entity and other guarantors.
B No action is required to be taken by the branch.
C Such representation received must be replied by the Authorized Officer within 7
days of receipt of representation from the guarantor and reply should go to Mr. B
only.
D Such representation received must be replied by the Authorized Officer within 15
days of receipt of representation from the guarantor.
5 Is any approval required by the handling branch before issuance of notices under Section
13(2) in the instant case? The handling branch is headed by a Scale III official.
A No approval is required for issuance of notices under Section 13(2) of the Act.
B Approval is required to be taken from GM(Network) in the instant case.
C Approval to be taken from the branch’s controlling authority before initiating
action under Section 13(2) of SARFAESI Act.
D Approval may be taken by the branch head in this case.
Answers:
1 2 3 4 5
C A A D C
Page 612 of 632

Chapter 15
EXPORT AND IMPORT FINANCE
EXPORT FINANCE
India is a trade deficit country. We need to promote exports to contain the deficit.
Ministry of Commerce through DGFT regulates Foreign Trade Policy and takes other
initiatives to boost India’s exports. RBI also comes up with various guidelines for
boosting exports.
Accordingly, Export finance has been included in Priority sector lending, subject to
incremental export credit of up to two percent of Adjusted Net bank Credit (ANBC) or
credit equivalent amount of off balance sheet exposure, whichever is higher, wef 1st
April 2015. Only sanctioned limit of up to Rs 25 crore per borrower having turnover of
up to Rs 100 crore to be treated as priority sector.
Export finance can be broadly classified into-

Rupee export Credit-
a) Pre-shipment credit or Packing credit (EPC)
b) Post –shipment Rupee export credit (PSC)
Export credit in Foreign currency-
a) Pre-shipment Export credit in Foreign currency(PCFC)
b) Post- shipment Export credit in Foreign Currency(EBR)
'Pre-shipment / Packing Credit' means any loan or advance granted or any other
credit provided by a bank to an exporter for financing the purchase, processing,
manufacturing or packing of goods prior to shipment / working capital expenses
towards rendering of services.
Packing credit advance is generally available to the eligible exporter against
lodgment of irrevocable LC established/transferred in his favor by the foreign buyer
through the medium of a First Class bank or confirmed order/contract placed by the
buyer for export of goods from India. However, branches may grant advances without
insisting on lodgment of LC or confirmed order/ contract at initial stage, in case of
exporters with good track record and if the reasons for delayed submission of
LC/orders are genuine.
Packing credit is normally granted to the following categories of exporters:

a. Manufacturer Exporter, i.e., an exporter who actually manufactures the goods and
exports in his own name.
b. Merchant Exporter, i.e., an exporter who is a trader (intermediary), and who does not
manufacture the goods himself but buys the same from another supplier (domestic or
foreign) who is the actual manufacturer, and exports the same in his name. The exporter
in such cases is also called the Export Order Holder (EOH).
c. Export House, i.e., a Manufacturer Exporter or a Merchant Exporter with minimum
export turnover prescribed under the prevailing Foreign Trade Policy.
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Quantum and period of Finance
There is no fixed formula for determining the quantum of finance to be granted to an
exporter against specific orders / LCs. The guiding principle to be applied in all such
cases is the concept of need based finance.
The period for which the Bank gives packing credit depends upon the manufacturing /
trade cycle or specific requirements of the individual export, normally not exceeding
180 days, extendable by another 90 days i.e., 270 days so that the period is sufficient
to enable the exporter to ship the goods/ render the services.
The percentage of margin is determined depending on the nature of order, commodity,

capability of exporter, etc. keeping in view the spirit behind RBI guidelines for liberal
finance to export sector.
EPC loans are usually restricted to the lower of 90% of FOB value of the contract or the
domestic cost of production.
In exception cases, packing credit can be made available to the extent of domestic
market value of the goods even though such value is higher than the FOB value of the
goods, provided the goods are covered by Export Incentive Scheme of Government of
India/ Duty Drawback Scheme. In such cases, excess advance should be liquidated from
the Cash Incentive/ Duty Drawback received.
Procedure for disbursement of EPC and other related formalities

Export orders/letters of credit should be deposited with the Bank prior to the
disbursal of the packing credit advance except when the advance is sanctioned on
“running account’ basis. Branch will affix on the export order/letter of credit lodged
with them a rubber stamp reading ‘Export finance granted’.
Where it is not possible for the exporters to lodge the letters of credit or firm orders
initially, statements of export orders/LCs in hand may be obtained at monthly intervals
in lieu of submission of individual export orders/LCs under Running Account Facility.
While disbursing the Packing Credit, following guidelines of RBI need to be
meticulously followed.
i. Ordinarily, each packing credit sanctioned should be maintained as separate account for
the purpose of monitoring the period of sanction and end-use of funds.
ii. Branch may release the packing credit in one lump sum or in stages as per the
requirement for executing the orders / LC.
iii. Branch may also maintain different accounts at various stages of processing,
manufacturing etc. depending on the types of goods / services to be exported e.g. hy-
pothecation, pledge, etc., accounts and may ensure that the outstanding balance in ac-
counts are adjusted by transfer from one account to the other and finally by proceeds of
relative export documents on purchase, discount, etc.
iv. Branch should continue to keep a close watch on the end-use of the funds and ensure
that credit at lower rates of interest is used for genuine requirements of exports.
Banks should also monitor the progress made by the exporters in timely fulfillment of
export orders.
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Running Account Facility
Pre-shipment credit to exporters is normally provided on lodgment of LCs or firm
export orders. It is observed that the availability of raw materials is seasonal in some
cases. In some other cases, the time taken for manufacture and shipment of goods is
more than the delivery schedule as per export contracts. In many cases, the exporters
have to procure raw material, manufacture the export product and keep the same ready
for shipment, in anticipation of receipt of letters of credit / firm export orders from the
overseas buyers.
Having regard to difficulties being faced by the exporters in availing of adequate Pre-
shipment credit in such cases, branches have been authorized to extend Pre- shipment
Credit ‘Running Account’ facility in respect of any commodity, without insisting on
prior lodgment of LCs/ firm export orders, depending on the branch’s judgment
regarding the need to extend such a facility and subject to the following conditions:
a) Branches may extend the ‘Running Account’ facility only to those exporters whose track
record has been satisfactory as also to Export Oriented Units (EOUs)/ Units in Free
Trade Zones / Export Processing Zones (EPZs) and Special Economic Zones (SEZs).
(b) In all cases where Pre-shipment Credit ‘Running Account’ facility has been
extended, letters of credit / firm orders should be produced within a reasonable period
of time to be decided by the banks.
(c) Branches should mark off individual export bills, as and when they are received for
negotiation / collection, against the earliest outstanding Pre- shipment credit on ‘First In
First Out’ (FIFO) basis. Needless to add that, while marking off the Pre-shipment credit
in the manner indicated above, banks should ensure that export credit available in
respect of individual Pre-shipment credit does not go beyond the period of sanction.
(d) Packing credit can also be marked-off with proceeds of export documents against
which no packing credit has been drawn by the exporter.
e) If it is noticed that the exporter is found to be abusing the facility, the facility should be
withdrawn forthwith.
f) In cases where exporters have not complied with the terms and conditions, the
advance will attract commercial lending rate ab initio. In such cases, please note that
banks will be required to pay higher rate of interest on the portion of refinance availed
of by them from the RBI in respect of the relative Pre-shipment credit. All such cases
should be reported to the Monetary Policy Department, Reserve Bank of India, Central
Office, Mumbai 400 001 which will decide the rate of interest to be charged on the
refinance amount.
g) Running account facility should not be granted to sub-suppliers.
h) All amounts disbursed as packing credit advances should be debited to the relative
packing credit account and credited to the borrower’s operative account. Operations on
the packing credit accounts by cheques should not be permitted. Where warranted,
disbursement may be in stages.
If the advance is given on order to order basis, the amount advanced should be recorded
in the relative order/letter of credit under the signature of authorized official. The
particulars of each order/letter of credit must be entered in the packing credit (orders)
register at the time the advance is granted.
The particulars of each order/letter of credit must be entered in the packing credit
Page 615 of 632

(orders) register at the time the advance is granted.
Branches should maintain a packing credit drawing power register wherein the
drawing power available to each borrower should be recorded under the signature of an
authorised official. Amounts of orders/letters of credit lodged and repayments of the
advance granted there-against should be recorded in this register.
Monitoring and control

Since packing credit loans are at concessional rates of interest and specific purpose
oriented advances, it is the responsibility of branches to ensure proper end use of the
amounts disbursed by the exporters. Amounts may be released in one lump sum or in
stages as per the requirement for executing the orders / LC.
As far as possible, to ensure the end-use of funds, loan amount should be

disbursed directly by the branches by issue of pay orders/drafts in the name of
suppliers, for which necessary authorisation letter is to be taken from the borrower.
Where direct disbursals are not possible, the proceeds may be credited to borrower’s
account and disbursals therefrom should be supervised. If loan proceeds are credited to
the current account or cash credit account, cash withdrawals for small
payments/labour payments may be allowed. Barring this, all payments should normally
be made by pay orders /drafts drawn in favour of suppliers except in cases where trade
practice (as in some agricultural or marine products) demands that cash payments be
made usually. In such cases, the sanction accorded by the Sanctioning Authority should
provide for it.
Packing credit advances may be granted upto the full value of export orders, but in
stages corresponding to the actual requirements of finance for the execution of the
orders. When disbursement is to be made in stages (depending upon the needs of the
exporter), the schedule of disbursement may be called for before granting the advance.
For a proper control over the Pre-shipment credit granted to exporters, other than on
‘running account’ basis, it is necessary for the branches to maintain separate accounts in
respect of each packing credit granted to an exporter. The Pre-shipment credit is required
to be liquidated from the proceeds of the relative export bill when purchased, negotiated
or discounted as the case may be. However, if the exporter who has availed of Pre-
shipment credit, is confronted with the cancellation of the export order against which
he obtained the advance and is therefore not in a position to tender export documents for
adjustment/ liquidation of the advance by the relative export proceeds, the outstanding
advance can be adjusted against the export bill drawn on some other importer either in the
same country or in any other country, provided the relative export bill is in respect of the
same goods for which Pre-shipment credit was originally granted.
A contract or an export order can be substituted with another order even

if the commodities covered differ, subject to the condition that there is no
change in the terms and conditions as applicable for pre-shipment and post-
shipment credit with reference to period, rate of interest etc. This facility of
substitution of order / commodity is allowed only in the running account facility
Page 616 of 632

and when it is considered that the substitution is commercially necessary
and unavoidable. This relaxation is not allowed for the transactions of
sister / associate / group concerns.
Adjustment of Pre-shipment credit when exports do not materialize

Concessionary rate of interest linked to MCLR on the basis of credit rating of the
account will be charged up to 270 days. If shipment takes place after 270 days from
the date of advance, the advance will cease to qualify for concessional rate of interest
ab initio and interest rate applicable to domestic lending cash credit rate as
applicable for their CRA rating from date of crystallization. In case,
however, exports do not materialize at all, branches should charge on the relative
packing credit, domestic lending Cash Credit rate as applicable for their CRA rating plus
penal interest not exceeding 2 per cent per annum, from the date of advance.
Post shipment Rupee Export Credit

As the name suggests it is extended by the banks after the shipment of goods till the
date of realization of export proceeds.
Post shipment credit can be in the form of

a)Export Bills purchased / discounted /negotiated.
b)Advances against bills for collection
c)Advance against duty drawback receivable from Government
Liquidation of post shipment credit has to be done from the proceeds of export bills
received from abroad in respect of goods exported or services rendered. This can also be
prepaid/ repaid out of balance in EEFC (Exchange earners Foreign currency) Account
or from proceeds of any unfinanced bill. However, the export bill will be continued to
be followed up for realization of export proceeds.
Goods and services moving from Domestic Tariff area (DTA) to Special Economic
Zone (SEZ) area are treated as deemed export and are eligible for export credit facility.
In case of Deemed Exports, packing credit should be adjusted from free foreign
exchange representing payment for suppliers, out of balance in EEFC account or from
rupee resources of exporter to the extent supplies actually made.
Export credit in Foreign Currency

Reserve Bank of India introduced the PCFC scheme to avail packing credit in
foreign currency and EBR ( E x p o r t B i l l s R e d i s c o u n t i n g ) a s post-
shipment credit at international rates of interest through A u t h o r i z e d Dealer.
PCFC
Authorized Dealers have been permitted to extend pre-shipment Credit in Foreign

Currency (PCFC) to exporters for domestic and imported inputs of exported
goods at LIBOR/EURO LIBOR/EURIBOR related rates of interest. All
exporters, having firm export orders/confirmed letter of credit is eligible for
PCFC, subject to satisfying other credit norms. PCFC can be carved out of the
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EPC limits available to them subject to the outstanding under both the
Rupee and foreign currency facilities not exceeding the limit sanctioned. There
is no need for sanction of a separate sub-limit for PCFC. The instructions
regarding rupee export credit as discussed above also apply to PCFC mutatis
mutandis unless otherwise specified.
EBR
All Export Bills, demand and usance ( maximum period of 180 days including
grace and transit periods) c a n b e d i s c o u n t e d under the EBR .All
exporters are eligible to cover their Bills drawn under L/Cs, o p e n b i l l &
c o l l e c t i o n b i l l wi t hi n t he sanctioned Post shipment limits.
To avail export finance either in rupee or foreign currency, the following
options are available to exporter –
a) Avail pre-shipment credit in foreign currency and discount export bills in
foreign currency under EBR scheme.
b) Avail pre shipment credit in rupees and post shipment credit either in rupee
or discount export bills under EBR scheme.
Choice of Currency
• The facility may be extended in any of the convertible currencies- USD, GBP, JPY,
EUR.
• To provide operational flexibility to exporter, bank can extend PCFC in any convertible
currency in respect of export order invoiced in another convertible currency. e.g. PCFC
can be availed in USD against export order in Euro. But the risk and the costs
associated with cross currency transactions are to be borne by exporter.
Designated Branches
The Scheme i s a v a i l a b l e at selected designated Forex b ranches only.
GMU Kolkata designates the branches. Exporter/customers of non-designated
branches (NDBs) can avail of the PCFC facility at the nearest Designated Branch
(DB).
Funds Angle Clearance

For all fresh disbursements of PCFC/EBR (excluding disbursement of
EBR for liquidation of PCFC) irrespective of the amount, it is necessary to
take Fund angle clearance from GMUK. The validity of FAC is one day.
PERIOD OF CREDIT
PCFC will be available as in the case of Rupee credit initially for a maximum
period of 180 days from the date of first disbursement; any extension of credit
will be subject to same terms and conditions as applicable for extension of
Rupee Packing Credit and it will have additional interest cost of 2 % plus the
original spread (charged initially), above 6 months LIBOR prevailing at the time
of extension for the extended period. If no export takes place even within 360
days, PCFC will be adjusted at the ruling TT Selling rate for the currency
concerned. Interest right from the date of disbursement till the date of
Page 618 of 632

payment, should be recovered at 2% over the interest rate applicable for the
cash credit of the exporter and the interest earlier recovered at LIBOR
related rates should be adjusted therefrom. Remittance of Foreign Exchange
for repayment of principal with interest does not require RBI's prior approval in
such cases.
TRANSACTION CHARGES
A transaction charge of USD 30 is to be levied for each PCFC disbursal and
EBR transaction.
INTEREST RATES
A. Pre-shipment Credit in Foreign Currency
i) Upto 180 days - applicable LIBOR/EUROLIBOR /EURIBOR+ 200 bps
iii) Beyond 180 days and upto 360 days Rate for initial period of 180 days
prevailing at the time of extension plus 200 basis points.
iv) If no export takes place within 360 days PCFC to be adjusted immediately
by sale of foreign currency against rupees at prevailing TT Selling rate. Interest
to be recovered at 2% over the rate applicable to the cash credit a/c of borrower
from the date of advance. Interest Recovered earlier at LIBOR related rates to
be adjusted.
Rate of Interest applicable on EBR
i) On demand bills for transit period (as specified by FEDAI) 6 months LIBOR/
EURO LIBOR / EURIBOR +200 bps
ii) Usance bills (for total period comprising usance period of export bills, transit
period as specified by FEDAI and grace period wherever applicable) up to 6
months from the date of shipment – applicable LIBOR/EURO LIBOR/EURIBOR
+200 bps
iii) Export Bills (demand and usance) realized after due date but up to the
date of crystallization. Rate for B (ii) above plus 200 bps
* (Please refer latest e- circular for any change in interest rates)
OTHER PROVISIONS
o In case the Exporter avails Suppliers Credit in respect of his imports, he will
not be eligible for PCFC only for purchase of domestic inputs.
o PCFC can be granted in respect of exports under ACU mechanism.
o Before granting PCFC, it should be made clear to the exporters that the
LCs should not be restricted to other Banks and that the bills should be
invariably discounted by us under EBR scheme. Exporters availing PCFC at
our branches should not be allowed to book forward / cross currency
forward contracts with any other bank in respect of the relative bills.
o Designated branches should not send any messages relating to debits / credits
in the PCFC and EBR nostro loan accounts of GMUK, to the foreign offices
concerned directly. The foreign offices will act only on the instructions of
GMUK (nodal centre) and ignore the messages relating to PCFC / EBR
transactions, if received from the domestic offices.
Page 619 of 632

o To enable a large number of small and medium exporters to avail the scheme,
no minimum amount has been prescribed for drawal of PCFC.
o Exporters who have not availed PCFC / EPC can avail the EBR scheme.
Exporters who have availed PCFC have to necessarily avail EBR and can
not avail Rupee post shipment finance for discounting the relative bills.
DISBURSAL OF EBR AND REPAYMENT OF PCFC AT BRANCHES

The PCFC has to be normally liquidated out of the EBR disbursed to the
customer. Exceptionally, it can be liquidated by the proceeds of an advance
remittance / separate inward remittance. The EBR loan is disbursed on the
day the export bill submitted by the customer is discounted by the branch at
ruling spot TT Buying rates irrespective of the tenor of the bill. The bill
discounting is reported on-line, irrespective of amount, in the same manner
as a bill of exchange discounted is reported for obtention of firm rates at
branch.
The discounting is done by purchasing the export bill at ruling spot TT

Buying rate by debit to Export Bills Discounted Account. The Rupee value of
the full bill amount is held as EBD loan to the customer. From the face value of
the bill, recoveries are made in foreign currency towards (i) PCFC principal
loan amount and (ii) interest on the EBR loan realised up-front, on the basis
of notional due date. The balance of the foreign currency amount is paid to the
customer in Rupees at the ruling spot TT Buying Rate.
REPAYMENT OF PCFC OTHER THAN BY GRANTING OF EBR OR

REALISATION FROM OVERSEAS SOURCES
On certain occasions, if customers who have availed PCFC are unable
to submit relative export bill or bring any foreign currency from abroad for
liquidation of the loan, then they have no other option but to buy foreign
currency equivalent of the PCFC loan already availed, from the domestic
market. Such transactions will be treated as PCFC crystallization.
EBR LOAN REPAYMENT AT BRANCHES

The debit in the Export Bills R e d iscounted Account is reversed on receipt
of realisation advice of the underlying export bill. The branch credits the EBR
account and debits the Nostro Mirror Account where realisation is received.
Since interest on EBR loan is recovered up-front, it is not required to be
realised at this stage. However, if the actual date of realisation of the export bill
is at variance with the notional due date reckoned for recovery of interest at
the time of discounting, an adjustment for interest is required either by refund
or further recovery.
RECOVERY OF INTEREST ON PCFC / EBR LOANS AT BRANCHES

In the case of EBR loans given to customers, interest is to be recovered up-
front on the date of discounting. However, in case of PCFC loans to
customers, with effect from 01.04.2002, interest shall be recovered at monthly
Page 620 of 632

intervals i.e. on the last working day of the month, on the basis of daily
products on outstanding balances in customer’s PCFC loan accounts. The
amount of interest calculated in foreign currency shall be recovered at the
ruling TT selling rate from the current account of the customer and credited
to Branch Interest Account. Branches shall not report a sale to GMUK for
recovery of interest. In this connection, it is necessary for the branches to keep a
correct record of PCFC loans disbursed at difference rates of interest
for purposes of computation of interest in the account.
FORWARD CONTRACTS
Forward contracts can be booked in respect of future PCFC drawals. Forward
contracts can also be booked in respect of the Exports Bills to be
submitted under the EBR scheme except for the portion to be credited to PCFC
a/c in foreign currency.
Cross Currency Forward Contracts can also be availed in any of the
permitted currencies against the invoiced currency in which PCFC is availed.
CRYSTALLISATION
For units rated SB 8 and below and non-borrowers - 15 days from the due date/ no-
tional due date
For units rated SB 7 and above - 21 days from the due date/ notional due date
It would be in order for the branches to extend the crystallisation period, upon
written request received before the prescribed bench mark / standard period
SB 8 and below and non-borrowers – up to a maximum period of 30 days from the
due date / notional due date
SB 7 and above – up to a maximum period of 45 days from the due date/ notional
due date subject to the conditions that:
• The branch is satisfied that the exporter has not been able to realise
export proceeds in spite of best efforts and for reasons beyond his control.
• The exporter has submitted a declaration that he will realise the proceeds
during the extended period.
• conduct of the account is satisfactory.
• Crystallisation history of the exporter.
• Percentage of overdue export bills.
• The exporter has not been caution listed .
• Request for crystallisation before the standard / benchmark period will be
acceded to by the branches.
Gold Card scheme for Exporter- Govt of India, ministry of commerce and Industry ,
in consultation with RBI introduced the concept in Foreign trade policy 2003-04.This is
meant for creditworthy exporters with good track record to avail export credit on better
terms. Eligible exporters include those in small and medium sector. Exporters
blacklisted by ECGC or having overdue export bills in excess of 10 percent of previous
year’s turn over are not eligible.
Page 621 of 632

Interest Equalisation scheme on pre and post shipment rupee export credit -
Interest equalization scheme earlier known as Interest subvention scheme) was
approved by Govt of India with effect from 1st April 2015 for a period of 5 years. With
latest modification in the scheme in January 2019, at present it provides interest
equalization rates of 3 percent on pre and post shipment rupee credit to all merchant
and other than MSME exporters for 416 identified tariff lines (first four digits of HS
code) and 5 percent for manufacturer exporters in MSME sector. Banks pass on
benefits of interest equalization to eligible exporters upfront and submit claim to RBI
for reimbursement.
Practice Questions
Q1 PCFC is an export finance extended for------------ in----------------------
a) Post shipment, foreign currency

b) Pre shipment, foreign currency
c) Post shipment, rupee
d) Pre shipment, rupee
Q2 Packing credit is normally granted to the following categories of exporters:

a) Manufacturer Exporter
b) Export Order Holder
c) Merchant Exporter
d) All of the above
Q3 Running Account facility is permitted to

a) All exporters
b) Exporters with satisfactory track record
c) Manufacturer Exporter only
d) All of the above
Q4 Interest equalization is applicable on

a) Pre shipment in any currency
b) Post shipment in any currency
c) Pre and post shipment Rupee credit only
d) Pre and post shipment in any currency
Q5 Interest equalization applicable on manufacturer exporters in MSME sector

a) 3%
b) 5%
c) Depend on rating
d) 5% for 416 HS code items at 4 digit level
Page 622 of 632

Q6 Time frame prescribed for crystallisation of overdue export bills for units rated SB
8 and below is -------------- days from due date/ notional due date
a) 15 days
b) 21 days
c) 30 days
d) 45 days
Q7 To avail export finance either in rupee or foreign currency, the correct options
available to exporter is
a) Avail pre shipment credit in foreign currency and discount export bills in foreign
currency under EBR scheme.
b) Avail pre shipment credit in rupees and post shipment credit either in rupee or discount
export bills under EBR scheme
c) Both are correct
d) None of the above
Q8 Gold card to Exporters is to be issued by

a) AD Bankers
b) RBI
c) Export promotion councils
d) Any of the above
References
RBI/2015-16/47
DBR No.DIR.BC.14/04.02.002/2015-16 July 1, 2015
IBG/IBG- Domestic(IBD)/15/2019 -
20 Date: Sat 29 Jun 2019 for Gold card
Interest rate circulars updated time to time
Page 623 of 632

IMPORT FINANCE
India is a trade deficit country. Boosting Export is a priority area for Government.
Unlike many other competing countries in international trade landscape, Indian export
is hugely dependent on imports. Both raw material and capital goods need to be
imported for processing and manufacturing. To make Indian export competitive it is
imperative to make imports competitive. Import finance helps importers get fund at
globally competitive rates .An import finance strategy helps Exporter be competitive in
import and processing leg and prevent tying up of cash flow till receipt of goods
Import finance products can be Non Fund based constituting Letter of Credit and
Guarantee or Fund Based mainly in Foreign Currency constituting Suppliers credit and
Buyers credit.
Letters of Credit and Guarantee are dealt with in separate chapters. In this chapter we
shall deal with Suppliers and Buyers credit.
Buyers Credit and suppliers credit together are called Trade credits . As per RBI, Trade
Credits are credits extended by overseas suppliers, Bank and financial institutions for
maturity upto three years for imports into India. Suppliers credit relates to credits for
import to India extended by overseas suppliers, while buyers credit refers to loans for
payment of imports into India arranged by importer from overseas bank or financial
institution.
BUYERS CREDIT (BC)

Buyers’ credits are trade credits and availed for import of raw materials/ capital goods
from a Bank/FI outside India with maturity up to three years. In terms of regulatory
guidelines of External Commercial borrowings, Banks may approve BCs up to USD 50
million per import transaction with a maturity period up to one year (not exceeding
operating cycle) for importing raw material and upto three years for import of capital
goods. For amounts above USD 50 million per transaction, Borrower can seek approval
of RBI. No roll-over/ extension is to be permitted beyond the permissible period.
Benefits of Buyer’s credit

 The exporter gets paid on due date; whereas importers gets extended date for making an
import payment as per the cash flows.
 The importer can deal with an exporter on sight basis, negotiate a better discount and
use the buyer’s credit route to avail financing
 The importer can use this financing for any form of trade viz open account, collections
or LCs
 The currency of import can be different from the funding currency which enables im-
porters to take a favourable view of a particular currency.
Page 624 of 632

At SBI, we are arranging Buyers credit using two methods
➢ Issuance of Standby LC
➢ Non –LC Reimbursement Finance(NLRF)
The purpose of trade credit is to make Indian importer access import funding at a rate
lower than domestic rate. Hence RBI has put a upper cap or ceiling on all in cost of
such funding. Presently the all in cost ceiling that can be charged by the foreign bank
offering the credit is capped at applicable Libor plus 250 basis points. (LIBOR plus 2.5
percent) including the cost of arrangement and other fees. However this does not
include the charges of domestic branch arranging the credit for the importer.
If an importer decides to pay on sight or due date, its account is debited for Rupee
equivalent of FC import bill at the exchange rate prevailing on that date. But when it
decides to go for Buyers credit, the repayment including interest will happen on a future
date. This entails a movement of currency rate that can be adverse, i.e., the importer
may have to pay more rupee for the same amount of Foreign currency. To avoid such
situation it is normally expected that the customer hedges its import liabilities through
Forward contract or other available instruments. Of course the requirement of hedging
can be waived by appropriate sanctioning authority based on certain considerations
including availability of natural hedging.
A decision regarding whether to avail Buyers credit or not will be based on comparison
between rupee interest rate charged to the customer and buyers credit interest rate
charged by foreign bank plus domestic banks charges plus hedging cost ( say forward
premium in percentage term).
BUYERS CREDIT UNDER STANDBY LC ROUTE (SBLC)
Process Flow
➢ Importer imports the goods either under LC/Collection basis

➢ Importer requests for the Buyer’s credit from his banker before the due date of the bill.
Only Documentary Bills routed through the Branch are to be considered for SBLC
funding.
➢ Branch to sanction the Non-fund based limits for issuance of SBLC for the importers
who requires the buyers credit facility through our Foreign offices
➢ the branch would get the best quote from the FOs through BCQP (Buyers Credit Quotes
Portal) including offer letter. Branch shall add the arrangement fee (approved LoU issu-
ing charges) and advise the rate to the importer.
➢ If the quote is acceptable to the customer, a request letter for buyer credit will be
Page 625 of 632

sent by borrower to the lending FO through the DB.
➢ FO to get the limits and a sanction letter will be issued by FO to the borrower and a
bipartite agreement between the funding FO and Importer will be executed
for the transaction amount
➢ Branch will issue a standby LC in favour of the funding FO for the buyer’s credit
Amount
➢ SBLC tenor to be equal to total permissible credit period i.e. the buyers credit tenor +
15 days. Tenor of Buyer’s credit shall be maximum 1 year from the date of shipment or
operating cycle whichever is lower for import of raw material. Tenor for import of capi-
tal goods would be maximum 3 years from the date of shipment.
➢ The contingent liability proforma entries will be passed at the domestic branches before
the SBLC message is transmitted.
➢ Domestic branch will send a separate SWIFT message MT 799 to the
Funding FO to make payment of the import bill to beneficiary directly through the
Supplier’s Bank or to the credit the NOSTRO account of the SBLC issuing bank
➢ Scanned copies of documents evidencing shipment of goods and invoice need to be
sent to the FO
➢ A SWIFT message confirming the funding, due date, interest payable including
delayed period interest rate and other charges will be sent by FO to domestic
branch immediately after funding.
➢ On Buyers credit maturity date, the DB recovers the amount from the Importer
and makes the payment to the NOSTRO of the FO.
➢ The Transactions will be reported to RBI as hitherto done under the LOU/LOC
Transactions vide TC I and TC II.
FINANCING IMPORTS NON-LC REIMBURSEMENT FINANCE (NLRF)
This product is exclusively for corporate rated AA/AAA banking with us. This product
is similar to SBLC with a slight variation in approach, i.e. instead of issuing SBLC the
Domestic Branch would allocate the Fund based Limit (NLRF Limit) carved out of the
total FBWC limits, transaction-wise to the funding FO.
In terms of regulatory guidelines of External Commercial borrowings, Banks may

approve BCs up to USD 50 million per import transaction with a maturity period up to
one year (not exceeding operating cycle) for importing raw materials. As the NLRF
limits are carved out of WCFB limits, the product is not available for import of Capital
goods.
NLRF Limits are to be assessed as sub-limit to the overall working capital limits at the
time of sanction of credit limits.
➢ Importer imports the goods either under LC/Collection basis
➢ Importer requests for the Buyer’s credit from his banker before the due date of the bill.
Only sight Documentary Bills routed through the Branch are to be considered for fund-
ing.
Page 626 of 632

➢ NLRF Limits are assessed and sanctioned as a sub limit of the overall fund based work-
ing capital limits (FBWC) of the Corporates.
➢ The branch would get the best quote from the FOs through BCQP (Buyers Credit
Quotes Portal) including offer letter. Branch shall add the arrangement fee (approved
LoU issuing charges) and advise the rate to the importer.
➢ On acceptance of the quote by the Domestic Branch, the funding FO will generate an
Offer Letter
➢ The domestic branch will send authenticated SWIFT message to the identified funding
FO advising allocation of limit under NLRF and payment instructions for funding.
➢ On receipt of authenticated SWIFT message, the concerned FO would screen and upon
satisfactory screening report, the FO carries out a simplified standard appraisal in the
prescribed for the limit allocated by Domestic Branch and sanction is obtained from the
➢ After issuance of NLRF and transmission of MT 799 to the FO, copies of the transac-
tion documents and MT 799 issued are sent / referred to the Risk Clearance Cell (RCC)
identified specifically for this product for Clarence.
The RCC clearance includes

a. Confirmation that the requisite NLRF Limits for the applicant are in place and the
contra entries are put through in CBS for the said transaction
b. NLRF amount in the MT 799 corresponds to the Contra Entries in CBS
c. Ensures that the Due Diligence on the underlying counter parties has been done.
d.The Risk Angle Clearance is advised by the RCC to the funding FO through BCQP.
➢ Funding by FO is done only after receipt of Risk Angle Clearance from RCC
➢ The FO will collect from the Domestic Branch copies of the trade documents viz., Bill
of Lading/Airway Bill, Invoice, Bill of Exchange, Applicant KYC, Due Diligence re-
ports on the Beneficiary etc through registered email of the Domestic Branch, for their
record.
➢ A SWIFT message confirming the funding, due date, interest payable including delayed
period interest rate and other charges will be sent by FO to domestic branch immediate-
ly after funding.
➢ On Buyers credit maturity date, the DB recovers the amount from the Importer and
makes the payment to the NOSTRO of the FO.
Page 627 of 632

➢ The Transactions will be reported to RBI as hitherto done under the LOU/LOC Transac-
tions vide TC I and TC II.
Suppliers Credit
Suppliers credit is an offer of credit extended to a buyer by a seller or supplier. This

allows the buyer to receive the product now and pay for it later in accordance with the
terms and conditions agreed upon with the seller. The supplier may issue a line of credit
to the importer provided the supplier feels that the importer is credit worthy.
Process of Suppliers Credit
• Bank in India (Importers country) ascertains from a bank in suppliers country the rate at
which the usance bills for specific period would be discounted by them.
• Underlying contract between Exporter and Importer provides for a usance draft.
• L/ C to be opened strictly in accordance with payment terms of underlying contract and

to be restricted for negotiation at concerned bank abroad.
• L/ C provides for reimbursing bank abroad to claim reimbursement on due date of the
bill.
• Rate of interest negotiated and kept at reasonable level considering market condition,
competition and overall RBI prescribed ceiling.
Major Differences between Suppliers credit and Buyers Credit are-
Difference between Suppliers’ Credit and Buyers’ Credit

CRITERIA SUPPLIERS’ CREDIT BUYERS’ CREDIT
Mode of Can be used only in case of LC Can be used for payment
Payment transactions mode like LC, LC
usance, DA, DP, &
Direct Doc
LC Clauses At the time of opening LC or No additional clauses or
amending LC clauses given by Amendment is required
Suppliers Credit bank needs to be in LC
changed. Like Negotiation
Clause, Confirmation Clause, Re-
imbursement Clause
Arrangement Has to be arranged at the time of Can be arranged after
opening LC or before shipment of documents have reached
goods the bank or documents
are received by importer
directly
Page 628 of 632

Costs LC Advising Cost, LC Interest Cost
Amendment Charges, Document
Processing Charges, Courier
Charges, Conformation Cost and
Interest Cost
Practice Questions
Q1 Trade Credits are credits extended by overseas suppliers, Bank and financial
institutions for maturity up to -- years for imports into India
a) 3
b) 5
c) 1
d) 2
Q2 Banks may approve Buyers credit up to USD ---------- million per import transaction
a) 20
b) 30
c) 40
d) 50
Q3 The all in cost ceiling that can be charged by the overseas bank offering buyers
credit is capped by RBI at
a) L+350
b) L+250
c) L+150
d) L+450
Q4 Tenor of SBLC for obtaining buyers credit is to be equal to total permissible credit
period i.e. the buyers credit tenor plus ------ days
a) 30
b) 15
c) 45
d) 60
Q5 After issuance of NLRF and transmission of MT 799 to the FO, clearance to be

obtained from
a) RCC
b) RCCC
c) ZCC
d) ROCC
Q6 Suppliers Credit is available only in case of

a) LC backed transactions
b) Collection documents
Page 629 of 632

c) Direct documents
d) All of the above
Q7 BCQP is
a) Buyer’s credit quote portal
b) Banker’s credit quote portal
c) Buyer’s credit quality portal
d) Banker’s credit quantity portal
Q8 NLRF Limit for buyers credit is carved out of the ------------------ limits.
a) Fund based working capital limit
b) Non Fund limit
c) Total FB+NFB
d) Total FB
Q9 NLRF is available only for ------- rated customers

a) A
b) AA
c) AAA
d) AA/AAA
Q10 Buyers’ credits are trade credits and availed for import of raw materials from a
Bank/FI outside India with maturity up to------
a) One year or operating cycle whichever is less
b) Three year or operating cycle whichever is less
c) One year or operating cycle whichever is more
d) One year
1. Caselet on preshipment to service exporter
M/s Infotech Service Exports is providing online maintenance services to a big enterprise in
USA. The customer has been dealing with the branch since last four years and its track record is
satisfactory. Earlier, their invoices were paid within a month and they were not availing any
finance. Due to sluggish markets, their payment terms has increased to 90 days leading in
enhanced fund requirements. The firm has requested for packing credit against their outstanding
service export invoices.
Q1 Can packing credit be granted to the customer as per request?
a) Yes
b) No
c) Information insufficient to answer question
d) Can’t say
Q2 Packing credit in this case will be subject to norms of
Page 630 of 632

a) Export of goods
b) Export of services
c) No packing credit
d) Export of software
Q3 Exporters of services qualify for working capital export credit (pre and post shipment) for
consumables, wages, supplies etc subject to
a) The item of service export is covered under Appendix 10 of HBPv1.

b) he exporter is registered with the Electronic and software EPC or Services EPC or FIEO
as applicable
c) There is a valid Working Capital gap i.e. service is provided first while the payment is re-
ceived some time after an invoice is raised
d) All of the above
Q4 The period of packing credit sanctioned in this case will be
a) It will depend on the operating cycle of the firm as per assessment

b) Maximum period can be 270 days only
c) Both of the above
Q5 The packing credit will be disbursed after deducting a margin of
a) 25%
b) 10%
c) Margin is need based
2.M/s Balaji Exports Pvt Ltd has approached the Bank for sanctioning preshipment finance to
the tune of Rs 75 lacs against an export order of Rs 65 lacs of processed cashew nuts from a
European Country. The exporter has requested to allow repayment of Rs 10 lacs from his rupee
resources. He has further submitted that he will be able to generate this much revenue from
domestic sale of non exportable grade/wastage.
Q1 Can preshipment credit higher than export value be granted in this case?
a) No, not permissible

b) yes, subject to norms
c) can’t say
Page 631 of 632

Q2 What are the norms for preshipment in agro based exports?
a) exporter has necessarily to purchase a somewhat larger quantity of the raw agricultural
produce in case of agro based exports and grade it into exportable and non-exportable va-
rieties and only the former is exported.
b) The non-exportable balance is necessarily sold domestically.
c) For the packing credit covering such non-exportable portion, banks are required to charge
the rate of interest applicable to the domestic advance from the date of advance of pack-
ing credit.
d) All of the above
Q3 Can we grant Rs 75 lacs to the exporter as per his request?
a) It can be granted subject to banker assessment of exporter’s requirement.

b) Discounted ROI will be charged after deducting the amount of wastage or domestic sale
of any by product involved
c) Domestic ROI will be charged on domestic usage portion
d) All of the above
Q4 The period of preshipment in this case will be
a) The period depends on the total processing cycle sometimes including time taken for crop
production and its processing
b) Maximum period stipulated is 360 days
Q5 Being agro based, its not necessary to ensure end use of funds in this case
a) End use is ensured in this case by directly disbursing funds to farmers in this case
b) End use needs to be ensured in all cases of preshipment
References
Circular No.: IBG/IBG-GTD/20/2018 – 19 Date: Mon 13 Aug 2018
Circular No.: IBG/IBG-GTD/34/2018 – 19 Date: Fri 19 Oct 2018
RBI/FED/2018-19/67 FED Master Direction No.5/2018-19 March 26, 2019
Page 632 of 632

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ROL E GU I D E CU M CE RT I F I CATION MA NUAL

CP SME CREDIT LEVEL 1 - 2020

Dear Role Holder,

Banking Industry is witnessing changes at an unprecedented pace. It has, therefore become

With Best Wishes,

1. Retail & Digital Banking Group (R&DBG)

DUE DILIGENCE, STATUTORY AND OTHER RESTRICTIONS ON LOANS &

Financial Due Diligence

Dealing with Wilful Defaulters

Authority Structure: Bank has prescribed a two-tier authority structure for

Statutory and Other Restrictions

Advances against Bank's own shares

Restrictions on Credit to Companies for Buy-back of their Securities

Application of the Guidelines in case of Consortium Arrangements

Scope of certain expressions

Restrictions on Grant of Financial Assistance to Industries Producing / Consuming

Restrictions on other loans and advances

Advances against shares to Individuals and other than individuals

Restrictions on number of Layers of Subsidiaries:

Norms for Takeover of Advance Accounts

EXPOSURE NORMS AND CREDIT RISK CONCENTRATION

Definition of Single/ Groups of Connected Counterparties

Prudential Exposure Norms.

5.4 Large Borrower

Enhancing Credit Supply for Large Borrowers through Market Mechanism:

The date on which the borrower becomes a specified borrower is termed as

Exposure on Single / Borrower Group

Exposure Exposure limit set for the Bank

AAA 10,000 2,000

Types of Substantial Exposure Stipulation (Exposure over and

5.7 Internal Prudential Exposure Limit (IPEL)

5.8.2 Term Loan Exposure:

5.8.3 Exposure to Real Estate Sector

5.8.4 Intra – Group Exposure

5.8.5 Non Fund Based Exposure

5.8.6 Sectoral/ Industry Exposure

5.8.7 Industry Exposure settings and Monitoring of Industry Exposures

5.8.8 Monitoring of country exposure

5.8.9 Capital Market Exposure

5.8.10 Exposure to Factoring Services

5.8.11 Exposure to Indian Joint Ventures/ Wholly-owned Subsidiaries Abroad and

6.2 Audited Financials

6.3 Performance and Financial analysis

6.3.1 The Following are to be implemented w.e.f 01.10.2019:

6.4 Review/ Renewal of Advances

6.5 Inter Firm Comparison

6.6 Internal Credit Rating – Credit Risk Assessment (CRA)

6.6.2 Validation of Risk Rating

6.6.3 CRA Rating for Restructured/ NPA Accounts

6.6.4 Dynamic Review of Rating

6.6.5 Review of CRA

6.7 External Credit Rating (ECR)

6.8 Credit Risk Assessment Model for Inter Bank Exposures

We refer to our e-Circular Department: CREDIT POLICY AND PROCEDURES DEPARTMENT

7.5.1 Discounting of Bills under Letter of Credit

7.5.2 Exposure against Bills Discounted under Letter of Credit (LC)

7.6 Letters of Credit for Capex

7.7 Bank Guarantees

7.9 Guidelines for extending NFB facility to Non-Constituent Borrowers

7.12 Term Loans