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PUNJAB & SIND BANK

(A Govt. of India Undertaking)


H.O. Credit Monitoring & Policy Department
21, Rajendra Place, New Delhi Ph. No. 25860693
HO Credit Mon. Deptt. Circular NO. : 1656 /2012-13 Dt. 29.05.2012
Deptt. Code No. : H-9002
Number of Pages of Circular : 95 ( Ninety five )
Running Circular No. of the Bank : 90/2012-13

TO: ALL BRANCHES & CONTROLLING OFFICES


REG: LOAN POLICY OF THE BANK


The Loan Policy of the Bank, presently in vogue, was circulated vide ID Circular No. 1640
dated 1.04.2011

The Annual Review of Loan Policy of the Bank has been approved by the Board of Directors.

The changes/ additions in the Loan Policy, are as per Annexure 1 and Revised Loan Policy of
the Bank ,in supersession of HO ID circular no.1640 dated 01.04.2011 , is as per Annexure 2.

The revised Loan Policy consolidates the guidelines on advances contained in ID circular no.
1640 dated 01.04.2011 with modifications/changes as suggested by the field functionaries and
RBI/MOF guidelines or otherwise and duly approved by the Board.

All the branches and controlling offices are advised to strictly follow the guidelines, as given
in Loan Policy of the Bank.




( Deepak Maini )
Dy.General Manager (Credit Monitoring)











LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
2
ANNEXURE 1
CHANGES APPROVED IN LOAN POLICY OF THE BANK
Sr. No Existing Amendments
1. Chapter 5.1.i.j (Credit Products)















































Chapter 5.1.i.j (Credit Products) Page 15
[New Credit Product added]

SHORT TERM LOAN :
Short Term Loan may be considered for period
up to 12 months for clients to meet emergent
business requirements of corporate clients having
external credit rating from Accredited Rating
Agency with minimum rating AA and Public
Sector Undertaking ( PSU ) based on audited
balance sheet not older than 15 months/or rating
is based on last half yearly/quarterly published
results.

STL may be considered under project financing
for meeting temporary mismatch of funds. In case
of consortium borrower, all consortium members
to be informed.

For pricing of Short term loans of the borrower
whose Short Term Ratings by External Credit
Rating agencies are available will not be rated on
Banks Internal Credit Rating Models and would
be assigned internal credit rating based on
mapping as per the HO RMD CIR NO. 183 dated
23.12.2010 for fixing the price. If rating of 2-3
rating agencies/ short term instruments is
available, then the lowest rating of any
instrument by any of the agencies should be taken
into account for such mapping.

The powers to improve ROI up to Base Rate from
prescribed rating linked pricing under Price
Improvement System shall vest with the
authorities as proposed in note regarding
Review of Policy on delegation of Lending
Powers for Advances to Branch Heads and to set
up Credit Committees at Head Office/Local
Head Office/Zonal Office level in terms of Govt.
of India, Ministry of Finance, Department of
Financial Services letter no. 13/1/2006-BO.1 dt.
03.04.2012dt. 03.05.2012 , appendix XV which
is also being placed beforeThe Board for
approval.
Timely repayment of STL is to be ensured by
doing due diligence and scrutinizing/matching
the future cash flows.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
3
Sr. No Existing Amendments
2. Chapter 7-(v

DEFINITION OF GROUP (Para 41
Exception 1 of Appendix XIII of ID
Cir.1639)
1. Two entities shall not constitute as
allied/associate of another merely because of
having a common guarantor, if the guarantor
is not enjoying any credit facilities from the
bank as individual or as a proprietor/partner/
director of a firm/ company.

Chapter 7-(v)-P22

DEFINITION OF GROUP (Para 40 Exception 1
of Appendix XIII of ID Cir.1657)

1. Two entities shall not constitute as
allied/associate of another merely because of
having a common guarantor, even if the guarantor
is enjoying any credit facilities from the bank as
individual or as a proprietor/partner/ director of a
firm/ company.


3 9.2 Present Exposure ceilings for various
industries:
Film Industry:
Total exposure to Film industry capped at
Rs.50.00 crores.

Diamond Industry:
Total exposure to diamond industry capped at
Rs.200.00 crores with exposure in new
account not to exceed Rs.10.00 crores and
upto Rs. 30.00 crore in existing account.

9.2 Present Exposure ceilings for various industries
Film Industry :Page 25
Total exposure to Film industry capped at Rs.100.00
crores with exposure to single borrower not to exceed
Rs.20.00 crores.
Diamond Industry:
Total exposure to diamond industry capped at
Rs.500.00 crores with exposure in new account not to
exceed Rs.20.00 crores and upto Rs. 50.00 crore in
existing account.
4 Chapter 13.2 Page-39
A.FORMATION OF CREDIT APPROVAL
COMMITTEE OF THE BOARD (CACB)

The Board has approved the formation of the Credit
Approval Committee of the Board with the following
executives as members-

1) The Chairman & Managing Director
2) The Executive Director (s)
3) The General Manager, dealing with the credit
proposal
4) The General Manager (Investment)/Finance
5) The General Manager (RMD)

The Credit Approval Committee of the Board(CACB)
shall exercise the powers of the Board with regard to
considering Credit Proposals up to Rs 250.00 crore
(Rs Two hundred fifty crore only) [Funded and Non
Funded], exceeding the delegated powers of Credit
Committee headed by ED. It was desired by the Board
that cases with deviation as per policy to be put up to
the Management Committee
Credit Committees at Head Office/Local Head
Office/Zonal Office level have been set up.

With the setting up of these committees, the powers
vested in officers above the Branch level would

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
4
Sr. No Existing Amendments
cease to exist. However specific time limits
prescribed by the bank as per ID circular no. 1648 dt.
26.09.2011 for decision on credit proposals at the
Branch level and in case the said matters/ credit
proposals are not disposed off within the prescribed
time limit , the same should be reported to the next
higher committee for review.

5 Obtaining Audited Balance sheet where
credit facility is Rs.10.00 lac or above
and\ or turnover of the party is more than
Rs.40.00 lacs, is required.
Chapter 14-C-(iv)-P 43
Now as per Sec 44 AB of Income Tax Act the
firms having turnover of Rs.60.00 lacs must
submit their Balance Sheet along with their
return. In view of the same, it is proposed that
obtaining Audited Balance sheet where credit
facility is Rs.20.00 lac or above and\ or
turnover of the party is above Rs.60 lacs in
case of persons carrying on business and above
Rs.15.00 lac in case of persons carrying on
profession.
6 Chapter 14-J

Non Fund Based Credit limit to
Constituent Borrowers:

Borrowers can purchases raw materials,
stores and spares, equipment etc. on the
strength of the LC / Guarantee issued by
their banks, rather than by paying cash
up-front. As such, LC/ guarantee facilities
are appraised as a part of overall working
capital requirement in relation to the
levels of relative materials projected and
the terms offered by the suppliers.
Further, these facilities are granted to
meet only the genuine commercial
transactions of the borrowers who are
constituents of the Bank.

Bank has comprehensive guidelines in
place for Appraisal of proposals for non-
fund facilities and their monitoring
circulated vide HO Adv Circulatory letter
no. 30/2004 dated 15.09.2004. Further,
HO Adv. Deptt. has issued ID Circular
no. 1580 dated 19.07.2005 & Cir. letter
no.22/2006 dated 03.11.2006 with regard
to Strengthening of Appraisal &
Monitoring of Non-funded facilities. The
above guidelines are prescribed for
borrowers constituents



Chapter 14-J (P-47)

Non Fund Based Credit limit to Constituent
and Non Constituent Borrowers:

Borrowers can purchases raw materials, stores
and spares, equipment etc. on the strength of the
LC / Guarantee issued by their banks, rather than
by paying cash up-front. As such, LC/ guarantee
facilities are appraised as a part of overall
working capital requirement in relation to the
levels of relative materials projected and the
terms offered by the suppliers. Further, these
facilities are granted to meet only the genuine
commercial transactions of the borrowers who
are constituents of the Bank


Bank has comprehensive guidelines in place for
Appraisal of proposals for non-fund facilities
and their monitoring circulated vide HO Adv
Circulatory letter no. 30/2004 dated 15.09.2004.
Further, HO Adv. Deptt. has issued ID Circular
no. 1580 dated 19.07.2005 & Cir. letter
no.22/2006 dated 03.11.2006 with regard to
Strengthening of Appraisal & Monitoring of
Non-funded facilities. The above guidelines are
prescribed for borrowers constituents

In addition to above basic aspects, the
following guidelines are proposed to be
observed for opening of LCs on behalf of non-
borrower constituents :

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
5
Sr. No Existing Amendments





















































a. More than ordinary care should be exercised
while opening LCs for customers who do not
enjoy credit facilities with the bank but only
maintain a current account.

b. If any request is received from such a
customer,the(branch)sanctioning authority should
subject the proposal to thorough scrutiny and
satisfy itself about the genuine need of the
customer. The reason for approaching the Bank
for opening an LC should be ascertained and
invariably, reference should be made to his
existing bankers with whom he is enjoying credit
facilities, if necessary.

c. Before establishing the credit, it( branch)
should also be satisfied through proper credit
appraisal that customer would be in a position to
retire the bills when received under the credit and
not approach the branch for credit facility in this
regard. For this purpose, the branch should
enquire into the financial position of customer,
the source of funds from which he would be in a
position to retire the bills, and prescribe a margin
and obtain other security, as necessary.( it may
also call for the detailed financial statements and
wealth tax/income tax returns of the customer to
satisfy itself of his financial status). The
observations of the branch in respect of all these
points should be recorded in the relative appraisal
note.

ii) The customers under Government and
Institutional sub-segments, which have valuable
relationship with the Bank in terms of substantial
deposits or other ancillary business, would also
be issued LCs/ guarantees, on ad hoc basis,
notwithstanding the absence of regular credit
limits sanctioned in their favour based on detailed
financial appraisal. Documentation for lien on
their deposits or other securities would be
obtained to protect the Banks interests and also
to avoid treatment of such facilities as
unsecured for the purposes of Prudential
Exposure norms and Capital Adequacy
requirements. Such business would augment the
Banks fee-based income.




LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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Sr. No Existing Amendments
7 Chapter 19 .3.2

The assets charged to the Bank would be
adequately insured against all applicable
risks to protect the Banks securities. The
Banks lien would be duly registered with
the insurance companies and recorded in
the respective insurance policies. The
insurance policies would be renewed
periodically until the Banks charge
subsists on the securities.

Chapter 19 3.2 ( Page 65)

The assets charged to the Bank would be
adequately insured against all applicable risks to
protect the Banks securities. The Banks lien
would be duly registered with the insurance
companies and recorded in the respective
insurance policies. The insurance policies would
be renewed periodically until the Banks charge
subsists on the securities in performing, NPA
accounts including T.W.O. accounts where the
securities have been charged to the Bank.
8 Chapter 20. 1.5.i)
1. Pre-execution Process: It is
aimed at ensuring that the documents
cover the creation of valid security in
favour of the Bank over the intended
assets and cover all the credit facilities
sanctioned, including quasi-credit
facilities. Suitable searches with the
Registrar of Companies / Sub Registrar of
Assurances or Land Registry must be
conducted, before execution of documents
to ensure that the required charge in
favour of the Bank can be validly created.

Chapter 20. 1.5.i) ( Page 68)

i) Pre-execution Process: It is aimed at ensuring
that the documents cover the creation of valid
security in favour of the Bank over the intended
assets and cover all the credit facilities
sanctioned, including quasi-credit facilities.
Suitable searches with the Registrar of
Companies / Sub Registrar of Assurances or Land
Registry must be conducted, before execution of
documents to ensure that the required charge in
favour of the Bank can be validly created. BM to
release the credit facility only after obtaining
1
st
stage vetting certificate from the advocate
as per extant guidelines of the Bank
9 Chapter 21.6
Stock audit
In order to review the position of assets
financed by the Bank, detect and adequately
respond to early warning signals and initiate
corrective measures, yearly stock audit would
be conducted in all cases of advances above a
cut-off level (The stock audit shall be carried
on yearly basis of accounts of Rs. 50 lac and
above by external CAs. However, in branches
under concurrent audit, external CA to
conduct stock audit in second half of the
year.). The external or internal auditors would
carry out the stock audit as the Bank may
decide.
Chapter 21.6 ( Page 72)
Stock audit
In order to review the position of assets financed by
the Bank, detect and adequately respond to early
warning signals and initiate corrective measures,
yearly stock audit would be conducted in all cases of
advances above a cut-off level (The stock audit shall
be carried on yearly basis of accounts of Rs.100 lac
and above by external CAs. However, in branches
under concurrent audit, external CA to conduct stock
audit in second half of the year.). The external or
internal auditors would carry out the stock audit as the
Bank may decide.










LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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ANNEXURE 2


Loan policy

of


Punjab & Sind Bank















LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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INDEX
S.NO./
CHAPTER
SUBJECT Page No.
1
LOAN POLICY FRAMEWORK
(Preamble, Objectives, Scope, Governance Framework)
9-10
2
BUSINESS SEGMENTS
11-13
3
PREFERRED INDUSTRY/ KEY TARGET SEGMENTS
13
4
INDUSTRIES UNDER CAUTION LIST
14
5
FINANCIAL PRODUCTS
15-17
6
PRUDENTIAL EXPOSURE LIMITS
18-20
7
DEFINITION OF CERTAIN TERMS AS PER RBI
21-23
8
MATURITY-WISE EXPOSURE LIMITS
24
9
INDUSTRY EXPOSURE LIMITS
25-26
10
UNSECURED EXPOSURES
27-29
11
STATUTORY & OTHER RESTRICTIONS ON LOANS &
ADVANCES
30
12
PRIORITY SECTOR ADVANCES (PSAs)
30-36
13
CREDIT APPRAISAL SYSTEM
(including guidelines on appraisal of Term Finance)
37-40
14
CREDIT APPRAISAL STANDARDS
41-48
15
RBI BASEL II GUIDELINES ON RATING OF CORPORATES
49-50
16 CREDIT RATING OF LOANS & ADVANCES 51-52
17
CREDIT PRICING
52-56
18
CREDIT APPROVALS & DENIALS
56-63
19
MARGIN AND SECURITY (COLLATERAL) MANAGEMENT
63-66
20
CREDIT DOCUMENTATION
67-69
21
CREDIT ADMINISTRATION AND MONITORING
70-73
22
CONSORTIUM/ SYNDICATED/ MULTIPLE BANK LENDING
74-76
23
EARLY ALERT SYSTEM
77-80
24
CAPITAL MARKET EXPOSURES
80-87
25
CREDIT DERIVATIVES
87-89
26
CREDIT RISK MANAGEMENT (CRM)
90-91
27
MISC. ISSUES
91
28
DEVIATIONS OF LOAN POLICY
91
Ann.I
GOVERNANCE FRAMEWORK FOR CREDIT RISK MGT.
91-95






LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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LOAN POLICY

1. LOAN POLICY FRAMEWORK

1.1. PREAMBLE

The last Loan policy of the Bank was circulated vide ID Circular No.1640 dated 01.04.2011.
1.2. OBJECTIVES OF THE LOAN POLICY:

i) To ensure that Loan Policy of the bank is in conformity with corporate business plan
ensuring suitable risk return environment, under available scopes & opportunities

ii) To ensure growth in Loans & Advances in line with RBI/ Government directives &
distribution of credit in different sectors of economy, in line with corporate business plan
and to avoid concentration of credit in any sector/ industry/ group

iii) To ensure improvement in credit delivery system for prompt and quick disposal of
credit proposals, customising product offerings (fund based and fee based) & providing
need based finance to the existing /new borrowers with good track record, to maximise
customer satisfaction

iv) To improve the quality of credit portfolio by strengthening the credit appraisal/
monitoring system & secure good credit proposals, including taking over of accounts from
other banks/ FIs, complying with benchmark parameters of the Bank

v) To provide relief and financial support to sick but viable units, complying with RBI/
Bank norms, packages approved by BIFR, CDR mechanism etc.To undertake restructuring
in financial viable units as per RBI and Banks own operating guidelines.

vi) To provide effective tools/ parameters for measuring & monitoring credit risk of
individual accounts & porfolio as a whole

vii) To ensure commonality of approach regarding credit basics, appraisal skills,
documentation standards and awareness of institutional concerns and strengths

1.3. SCOPE OF THE LOAN POLICY:

i) The Loan Policy would apply to domestic and cross-border, balance sheet and off-
balance sheet credit exposures undertaken by the Banks branches.

ii) The Loan Policy would be confined to credit risk management and not relate to market
and operations risk management, which have separate policies.

iii) The Loan Policy would be reviewed from time to time so that it remains in line with the
changes in the regulatory requirements, macro economic environment, business conditions,
business strategy, and its risk appetite.


LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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1.4. GOVERNANCE FRAMEWORK FOR CRM

The Bank has structured its Governance framework for ensuring effective credit risk
management as depicted below. The credit policy framed in this document reckons the
Governance framework and other structures laid down by the Bank for credit risk management.
The constitution and roles of various parts of Credit Risk Governance Framework is detailed in
Annexure I.


Board


RMC


RMD

CRM Group ALCO Support Group ORM Group
(Credit Risk) (Market Risk) (Operational Risk)


1.5. Constitution of New Business Group

New Business Group has been formed at Head Office i.e a Committee of GMs headed by
CMD/ED to whom all fresh credit cases falling under HO Powers shall be placed by a Short
Office Note containing brief and relevant information. The Format for Short Office Note has been
devised and sent to the branches/ ZOs. On the basis of this information, the New Business Group, will
take a view based on broad parameters, for taking decision whether to take exposure in the
Company/Group/Sector and will give expression of interest /in principle clearance. After the expression
of interest is given to field functionary(ies), Branches/Controlling Offices to send the complete loan
proposal on prescribed format along with all the requisite papers/ information.(HO Adv. Cirulatory
Letter no.37A/11-12 dt. 16.11.2011)
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
11

2. BUSINESS SEGMENTS

2.1. GOVERNING PRINCIPLES:

The business segmentation and financial product offerings to the target customers will be
governed mainly by the Banks Business Strategy, including the following:

i) Identifying key business/ industry segments for credit extension will be mainly based
on high growth potential and domain knowledge/ expertise of the Bank. Within the target
business/ industry segments, clients having a profile/ risk acceptable to the Bank will be
identified for credit extension.

ii) Cluster-based approach to lending in identified growth areas, particularly in the Small
& Medium Enterprises (SME) segment and small-value loans under RBIs Priority Sector
Advances, to facilitate effective credit monitoring and also cost saving in loans follow-up.

iii) The Banks key differentiators to attract target customers would be:

a. Offering innovative financial solutions by leveraging the Banks domain
knowledge/expertise in the specific industry and by providing value added products along
the entire value chain to the target customer segments.

b. Customised product offering to meet fully the customer-specific requirements within
the ambit of Banks credit policy and risk norms.

c. Providing efficient credit delivery and high standards of customer service.

d. Providing a wide range of fund-based and fee-based services to the customers.

iv) The Bank would maintain at all times high quality and diversification in its credit
portfolio.

2.2. BUSINESS SEGMENTS:

The Banks borrowers are broadly divided under following segments and sub-segments for
reporting requirements, MIS, marketing and other purposes:

I) Large borrower Segment : It will comprise of corporate and non-corporate borrowers
(firms, HUF businesses, associations, trusts, societies etc.), which are not covered under
MSME segment. This segment will also include Govt. companies and PSUs at Central and
State levels, Financial Institutions, Mutual Funds, Insurance companies, banks etc.






LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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II) Micro, Small & Medium Enterprises (MSME) Segment:-

i) Medium Enterprises: Enterprises engaged in:

a) manufacture / production, processing or preservation of goods, where investment in
Plant & machinery (as specified in RBI guidelines) is more than Rs.5 crore but does not
exceed Rs.10 crore.
b) providing or rendering of services, where investment in equipment (as specified in
RBI guidelines) is more than Rs.2 crore but does not exceed Rs.5 crore.

ii) Small Enterprises:

A) Direct Finance in the small enterprises will include credit to :

a) Enterprises engaged in manufacture/ production, processing or preservation of goods and
whose investment in Plant & machinery (as specified in RBI guidelines) :-

Small (Manufacturing ) Enterprises Micro (Manufacturing ) Enterprises
Is more than Rs.25 Lacs but does not
exceed Rs.5 crore
Does not exceed Rs.25 Lacs

b) Enterprises engaged in providing/ rendering services and whose investment in equipment (as
specified in RBI guidelines) :-

Small (service ) Enterprises Micro (service ) Enterprises
Is more than Rs.10 Lacs but does not
exceed Rs.2 crore
Does not exceed Rs.10 Lacs

As per RBI guidelines, the micro and small (service) enterprises shall include small road &
water transport operators, small business, professional & self-employed persons, Advances to
Retail Traders and all other service enterprises, as per the given definition.

c) Khadi & Village Industries Sector (KVI) - All advances granted to units in the KVI sector,
irrespective of their size of operations, location and amount of original investment in plant and
machinery. Such advances will be eligible for consideration under the sub-target (60 %) of the
small enterprises segment within the priority sector.

B) Indirect Finance to small (manufacturing & service) enterprises sector, as per RBI
guidelines

III) Retail Segment: This is a residuary segment of customers which are neither classifiable
under Large borrower segment, nor under MSME segment. It comprises loans to consumers or
individuals of lower value as compared to the other two segments. Retail segment may also be
divided in two sub-segments as follows on the basis of applicability or non-applicability of the
RBI lending norms of Priority Sector:



LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
13


i) Priority Sector Retail Sub-segment: The loan limit and terms (pricing, collateral, etc.)
prescribed by RBI for Priority Sector Advances require to be complied with for these loans,
including:


Crop loans and developmental loans for Agriculture and allied agri-activities.

Advances/ loans to Retail Traders dealing in essential commodities (fair price
shops), consumer co-operative stores and private retail traders with credit limits
not exceeding Rs. 20 lakh

Educational loans

Housing loans

Loans to Self Help Groups/ NGOs


ii) Other retail loans: RBI does not prescribe the loan limit and terms for these loans,
including:

Loans to High Net-worth Individuals (HNIs)
Loans for automobiles/ consumer durable goods
Other personal loans

3. PREFERRED INDUSTRY/ KEY TARGET SEGMENTS:


S. NO. PREFERRED / KEY TARGET SEGMENT
1 Food & Agriculture
2 Life Sciences, Pharma
3 Infrastructure (except loans to Educational Institutions)
4 Construction & Urban Infrastructure Devlt.
5 Education
6 Energy
7 Retailing
8 Hospital
9 Hotel
10 Automobiles Ancilliaries




LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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4. INDUSTRIES UNDER CAUTION LIST(HO RMD Cir No. 211 dt.27.06.2011)

1. Jute

RMD will undertake industry studies to determine/ review the Preferred Industry segements
and caution list from time to time. Exposures to the caution listed industries will be taken
with due care. If an advance is to be granted to any industry on the Caution List, the reasons
for making exception shall be recorded.

INDUSTRIES/ SECTORS UNDER NORMAL SEGMENT(refer RMD cir. No.216
dtd.1.12.2011& 217 dated 31.12.2011)

1. Textiles & Ready-Made garments
2. Gems & Jewellery
3. Engineering
4. Computer software / BPO/IT
5. Minerals, Metals & Metallurgy
6. Financial Services
7. Leather & leather products
8. Commercial Vehicles
9. Two & Three Wheelers
10. Tea & Coffee
11. Paper
12. Handicrafts
13. Telecom
14. Media & Entertainment
15. Loans to Educational Institutions
16. Electricity/ Power sector
17. Poultry & meat products
Note :- Industries which are neither placed under Preferred / Key target segments nor under
caution List are treated as under Normal Segment. All branches / controlling offices are
advised to ensure strict compliance of the above amendments.











LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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5. FINANCIAL PRODUCTS :

5.1. The Bank would offer a wide range of products to the target customer segments to
satisfy their financial needs. The product range includes:

i.) Credit Products:

a. Trade Finance: Domestic and Export Finance at pre-shipment and post-shipment
stages.
b. Short-term Working Capital Finance (suggested term upto 3 year) : Cash credit,
overdraft, demand loan, bills purchase/ discounting/negotiation of bills under
Letter of Credit , channel financing, subscription to commercial paper.
c. Medium-term Loans (suggested term 3-5 years) for business expansion,
technology up-gradation, R&D expenditure, implementing early retirement
scheme, supplementing working capital, and repaying high cost debt.
d. Long-term Loans or Project Finance for new industrial/ infrastructure projects
(suggested term over 5 years).
e. Bridge Finance.
f. Off-balance sheet products: Letters of credit, guarantees, bill collection and
letter of comfort.
g. Securitisation (to increase liquidity in banking book) and Derivative products (to
hedge the risk in banking book).
h. Structured Products: e.g. Asset Securitisation, Corporate Debt Restructuring,
Acquisition finance, IPO finance, Rehabilitation, Restructuring,
Reschedulement etc.
i. Pre-approved Products/ Programmes (pre sanctioned lines of credit) for specific
company (ies)/ business(es).
j. Short term loan up to 12 months to meet the emergent business requirements
of Corporate clients having external credit rating from Accredited Rating
Agency with minimum rating AA and Public Sector Undertaking ( PSU ).
Short term loans (upto 1 year) of the borrower whose Short Term Ratings by
External Credit Rating agencies are available will not be rated on Banks
Internal Credit Rating Models and would be assigned internal credit rating based
on mapping as per the HO RMD CIR NO. 183 dated 23.12.2010. If rating of 2-3
rating agencies/ short term instruments is available, then the lowest rating of any
instrument by any of the above agencies should be taken into account for such
mapping. The powers to improve ROI will be as per Loan improvement
policy/Lending powers policy of the Bank.








LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
16



ii. Transactional Products: Bankers Acceptances, Documentary Credit,
Forfaiting, Cash Management, factoring

iii. Asset Products: Home loans, Auto Finance, Consumer Durable Finance, Personal
loans, both secured and unsecured, Advances against shares, Receivable financing
against credit card purchases,

5.2. The product mix offering will vary from one business/ industry segment to another. The
Bank would customize the product-mix to maximize customer satisfaction. The Banks
domain knowledge and innovativeness would be applied to make the product-mix a key
differentiator for building enduring and satisfying relationship with the C&IB and SME
segment customers. In retail segment, several specific purpose products would be
standardized for expeditious processing and delivery with value added services to gain
competitive edge.

5.3. PRE-APPROVED LIMITS:

Pre-approved limit is an exception to the general principle of making regular appraisal for
credit worthiness and need assessment described above. It would be applicable to well
established, reputed and highly rated companies for granting certain credit limits on
unsecured basis for meeting their non-project requirements. The approval of the appropriate
sanctioning authorities would be obtained, based on the published financials, market
reports, credit rating by reputed rating agency, and borrowing facilities with other banks,
etc. The Bank would also assess the rating of the borrower based on its own credit rating
system. The validity of such pre-approved limit to the specific company would be 6 months
from the sanction date, within which the credit facility for working capital can be allocated
to the company. Regular credit facilities would be sanctioned to the company in due course.
Pre-approved limits would need to be re-approved after the expiry of the validity period by
the appropriate sanctioning authorities. Appropriate caution is the key word in granting
such limits.

All such facilities shall be considered at HO level.

5.4. CORPORATE LOANS:

Corporate loans provide another exception to the general principle of need-based
assessment in credit appraisal. These are granted to sound and reputed companies for
omnibus purposes, including capital expenditure, repayment of high cost existing debt,
short-term liquidity problems.

Corporate loans, can be unsecured as well as secured and approved on the borrowers
request for meeting general business needs. Regular financial appraisal is made based on
the financial statements- historical and projected obtained from the borrower and the
appropriate authorities sanction the facility. Appropriate caution is the key word in granting
such limits. At present, borrowers with credit limits of Rs. 5 crore and above be covered
under the scheme.
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
17


5.5. OTHER CREDIT FACILITIES:

These can be granted to specific business entities or for special purposes, which are
deviations from the general principles of appraisal described in this chapter. The special
requirements for eligibility and appraisal for finance by the Bank are mentioned in the
Notes and other chapters in the Credit Policy document, including the following :-

Export Finance, Infrastructure Finance, Lease finance, Forfaiting, Bills Discounting & re-
discounting, Bridge Finance, Finance to NBFCs and Leasing Companies, Finance against
commodities covered by RBI directives on Selective Credit Control, Finance to Software
and I.T. Industries, Advances to priority sector, Capital market exposure

5.6 Bank shall undertake exposure in following Financial Products :-
- Securitization/ Assignment of rated pool of assets of other FIs like Banks, NBFCs etc.

- Inter Bank participation Certificates (IBPC) exposure for short term to reputed corporate
clients

Proposals for these products to be considered at HO Advances Deptt. only.

5.7. Bank may also issue Letter of Comfort in case of Project financing involving various
Banks under Multiple Banking Arrangement / Consortium. These LoCs are in lieu of LCs
issued by other Banks by earmaking our LC limits and payment of the documents under their
LCs are to be made by our bank by disbursing our share of sanctioned Term Loan.

5.8. Securitisation of Standard Assets

RBI has given guidelines on Securitisation of Standard Assets vide RBI No.2005-06/ 294,
DBOD.NO.BP.BC.60 / 21.04.048/2005-06 dated February 1, 2006.

a) Securitisation is a process by which assets are sold to a bankruptcy remote special purpose
vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying
pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a
two stage process. In the first stage there is sale of single asset or pooling and sale of pool of
assets to a 'bankruptcy remote' special purpose vehicle (SPV) in return for an immediate cash
payment and in the second stage repackaging and selling the security interests representing
claims on incoming cash flows from the asset or pool of assets to third party investors by
issuance of tradable debt securities.
b) Banks exposures to a securitisation transaction are referred to as securitisation exposures.
Securitisation exposures include, but are not restricted to the following: exposures to securities
issued by the SPV, credit enhancement facility, liquidity facility, underwriting facility, interest
rate or currency swaps and cash collateral accounts.

Bank while having securitization exposure will be guided by extant RBI guidelines.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
18

6. PRUDENTIAL EXPOSURE LIMITS

GENERAL :

i. The objective of the prudential exposure limits is to reduce credit concentration risk by
maintaining a balanced and well-diversified credit portfolio across the borrowers,
borrower groups, industries/ sectors, credit products/ tenors/ security etc. as per the
Banks risk management policy and the RBIs Prudential Exposure Norms.

ii. The prudential exposure limits/ guidelines will be set by the Risk Management
Committee (RMC) within the exposure ceilings prescribed by RBI, and as approved by
the Banks Board of Directors (these limits can be lower than one prescribed by RBI).
These limits will be reviewed periodically by RMC in the light of the changes in the
RBI guidelines on Exposure Norms and also in the light of Banks risk appetite and risk
profile of its credit portfolio. The required changes would be made by RMC in the
Banks prudential exposure limits/ guidelines with the approval of the Banks Board of
Directors.

RBI CEILING ON CREDIT EXPOSURES TO INDIVIDUAL/ GROUP BORROWERS
(Master Circular DBOD. No.Dir.BC.7/13.03.00/ 2011-12 dated 01.07.2011 )

As a prudential measure aimed at better risk management and avoidance of concentration
of credit risks, the Reserve Bank of India has advised the banks to fix limits on their
exposure to specific industry or sectors and has prescribed regulatory limits on banks
exposure to individual and group borrowers in India.

A) The exposure ceiling limits would be 15 % of capital funds in case of a single borrower and
40 %of capital funds in the case of a borrower group. The capital funds for the purpose will
comprise of Tier I and Tier II capital as defined by RBI under capital adequacy standards.

B) Credit exposure to a single borrower may exceed the exposure norm of 15 % of the bank's
capital funds by an additional 5 % (i.e. up to 20 %) provided the additional credit exposure
is on account of extension of credit to infrastructure projects. Credit exposure to borrowers
belonging to a group may exceed the exposure norm of 40 % of the bank's capital funds by
an additional 10 % (i.e.up to 50 %), provided the additional credit exposure is on account of
extension of credit to infrastructure projects.

The definition of infrastructure lending and the list of items included under infrastructure
sector shall be as given by RBI.

C) In addition to the exposure permitted under above paragraphs, banks may, in exceptional
circumstances, with the approval of their Boards, consider enhancement of the exposure to
a borrower (single as well as group) up to a further 5 % of capital funds subject to the
borrower consenting to the bank making appropriate disclosures in their Annual Reports.



LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
19


D) With effect from May 29, 2008, the exposure limit in respect of single borrower has
been raised to 25% of the capital funds, only in respect of Oil Companies who have been
issued Oil Bonds (which do not have SLR status) by Government of India. In addition to
this, banks may in exceptional circumstances, as hitherto, in terms of above para, consider
enhancement of the exposure to the Oil Companies up to a further 5 % of capital funds.

E) EXPOSURE TO NBFC : The exposure (both lending and investment, including off
balance sheet exposures) of a bank to a single NBFC / NBFC-AFC (Asset Financing
Companies) should not exceed 10% / 15% respectively, of the bank's capital funds as per its
last audited balance sheet. Banks may, however, assume exposures on a single NBFC /
NBFC-AFC up to 15%/20% respectively, of their capital funds provided the exposure in
excess of 10%/15% respectively, is on account of funds on-lent by the NBFC / NBFC-AFC
to the infrastructure sector. Exposure of a bank to Infrastructure Finance Companies (IFCs)
should not exceed 15% of its capital funds as per its last audited balance sheet, with a
provision to increase it to 20% if the same is on account of funds on-lent by the IFCs to the
infrastructure sector. Further, banks may also consider fixing internal limits for their
aggregate exposure to all NBFCs put together. Infusion of capital funds after the published
balance sheet date may also be taken into account for the purpose of reckoning capital
funds. Banks should obtain an external auditors certificate on completion of the
augmentation of capital and submit the same to the Reserve Bank of India (Department of
Banking Supervision) before reckoning the additions to capital funds. ( Pont No. 2.1.1.6 of
RBI Master Circular Exposure Norms dated 01.07.2011)

RBI in its monetary policy for 2012-13 declared on 17.04.2012 has advised that banks
should reduce their exposure ceiling in single NBFC from existing 10% to 7.5% of Banks
Total Capital Funds having gold loans to the extent of 50% or more of its total financial
assets and should have an internal sub limit on their aggregate exposure to all such
NBFCs. The above exposure can go up by 5% i.e. upto 12.5% if the additional exposure is
on account of funds on lent by NBFCs to infrastructure sector. The prudential exposure
limits/ guidelines will be set by the Risk Management Committee (RMC) within the
exposure ceilings prescribed by RBI and advised separately by HO RMD.

F) Lending under Consortium Arrangements :The exposure limits will also be applicable to
lending under consortium arrangements. ( Pont No. 2.1.1.7 of RBI Master Circular
Exposure Norms dated 01.07.2011)

G) Bills discounted under Letter of Credit (LC) : Bills purchased / discounted / negotiated
under LC (where the payment to the beneficiary is not made 'under reserve') will be treated
as an exposure on the LC issuing bank and not on the borrower. In the case of negotiations '
under reserve' the exposure should be treated as on the borrower. ( Pont No. 2.1.1.8 of RBI
Master Circular Exposure Norms dated 01.07.2011)






LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
20

Exemptions

a) Rehabilitation of Sick/Weak Industrial Units
The ceilings on single/group exposure limits are not applicable to existing/additional credit
facilities (including funding of interest and irregularities) granted to weak/sick industrial units
under rehabilitation packages.
b) Food credit
Borrowers, to whom limits are allocated directly by the Reserve Bank for food credit, will be
exempt from the ceiling.
c) Guarantee by the Government of India
The ceilings on single / group exposure limit would not be applicable where principal and
interest are fully guaranteed by the Government of India.
d) Loans against Own Term Deposits
Loans and advances (both funded and non-funded facilities) granted against the security of a
banks own term deposits may not be reckoned for computing the exposure to the extent that
the bank has a specific lien on such deposits.

e) Exposure on NABARD The ceiling on single/group borrower exposure limit will not be
applicable to exposure assumed by banks on NABARD. The individual banks are free to
determine the size of the exposure to NABARD as per the policy framed by their respective
Board of Directors. However, banks may note that there is no exemption from the prohibitions
relating to investments in unrated non-SLR securities prescribed in terms of the Master
Circular on Prudential Norms for Classification, Valuation and Operations of Investment
Portfolio by Banks, as amended from time to time. ( Pont No. 2.1.2.5 of RBI Master Circular
Exposure Norms dated 01.07.2011)

The exposure limits / caps are linked to the capital funds of the bank. Bank shall follow RBI
guidelines on Prudential Exposure Limits and fix its own limits, based on its Capital Funds.
The bank will make appropriate disclosures in the Notes on account to the annual financial
statements in respect of the exposures where the bank had exceeded the prudential exposure
limits during the year. It should also be noted that while computing exposure against any
counter party/ies, aggregate of exposure limitsof credit, investment & FOREX would be
reckoned for arriving at a total exposure for comparing against the limit prescribed.

The RMC would review annually the exposure ceilings and also the exposure to individual
borrowers and groups and initiate management measures to correct imbalances. It would
recommend changes and corrective action and place the review note to Banks Board. An
annual review of the implementation of exposure management measures may be placed before
the Board.

While the review of exposure limits would be done annually, review of exposure to individual
borrowers and groups would be done each quarter. This review does not in any way dilute the
responsibility of individual officers, handling the credit portfolio. Breaches, if any, would be
reported to the RMC/Board for confirmation and appropriate action.

For the industries / sectors under Bank's caution list, 50% of various prescribed prudential
exposure limits will be applicable.
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
21


7. Definition of certain terms (in brief) as per RBI Master circular on Exposure Norms
dated July 01, 2011 are as under :-

i. Exposure

Exposure shall include credit exposure (funded and non-funded credit limits) and investment
exposure (including underwriting and similar commitments). The sanctioned limits or
outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit.
However, in the case of fully drawn term loans, where there is no scope for re-drawal of any
portion of the sanctioned limit, banks may reckon the outstanding as the exposure.

ii.Credit Exposure
Credit exposure comprises of the following elements:

(a) all types of funded and non-funded credit limits.
(b) facilities extended by way of equipment leasing, hire purchase finance and factoring
services.

iii.Investment Exposure

A. Investment exposure comprises of the following elements:

(i) investments in shares and debentures of companies.
(ii) investment in PSU bonds.
(iii) investments in Commercial Papers (CPs).

B. Banks / FIs investments in debentures/ bonds / security receipts / pass-through certificates
(PTCs) issued by an SC / RC as compensation consequent upon sale of financial assets will
constitute exposure on the SC / RC. In view of the extraordinary nature of the event, banks /
FIs will be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-
case basis.

C. The investment made by the banks in bonds and debentures of corporates which are
guaranteed by a PFI will be treated as an exposure by the bank on the PFI and not on the
corporate.

D. Guarantees issued by the PFI to the bonds of corporates will be treated as an exposure by
the PFI to the corporates to the extent of 50 percent, being a non-fund facility, whereas the
exposure of the bank on the PFI guaranteeing the corporate bond will be 100 percent. The PFI
before guaranteeing the bonds/debentures should, however, take into account the overall
exposure of the guaranteed unit to the financial system.







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
22

IV. Capital Funds :

Capital funds for the purpose will comprise Tier I and Tier II capital as defined under capital adequacy
standards and as per the published accounts as on March 31 of the previous year. However, the infusion
of capital under Tier I and Tier II, either through domestic or overseas issue (in the case of branches of
foreign banks operating in India, capital funds received by them from their Head Office in
accordance with the provisions of Master Circular on New Capital Adequacy Framework as
amended from time to time), after the published balance sheet date will also be taken into account for
determining the exposure ceiling. Other accretions to capital funds by way of quarterly profits etc.
would not be eligible to be reckoned for determining the exposure ceiling. Banks is also prohibited
from taking exposure in excess of the ceiling in anticipation of infusion of capital at a future date.

( RBI Master Cir. Dated 01.07.2011 on Exposure Norms Para 2.1.3.5 )

v.Group

The concept of 'Group' and the task of identification of the borrowers belonging to specific
industrial groups is left to the perception of the Banks / FIs. Banks / FIs are generally aware of
the basic constitution of their clientele for the purpose of regulating their exposure to risk
assets. The group to which a particular borrowing unit belongs, may, therefore, be decided by
them on the basis of the relevant information available with them, the guiding principle being
commonality of management and effective control.

In the case of a split in the group, if the split is formalised the splinter groups will be regarded
as separate groups. If Banks /FIs have doubts about the bona fides of the split, a reference may
be made to RBI for its final view in the matter to preclude the possibility of a split being
engineered in order to prevent coverage under the Group Approach.

DEFINITION OF GROUP has been revised and incorporated in HO ID Cir. 1657 dated 29.05.2012
regarding Delegation of Lending Powers (Para 40 Exception 1 of Appendix XIII ) with amendment as
under:

Two entities shall not constitute as allied/associate of another merely because of having a common
guarantor, even if the guarantor is enjoying any credit facilities from the bank as individual or as a
proprietor/partner/ director of a firm/ company.















LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
23




Infrastructure Lending / Sector

Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an
infrastructure facility as specified below falls within the definition of "infrastructure lending".
In other words, a credit facility provided to a borrower company engaged in :

developing or
operating and maintaining, or
developing, operating and maintaining any infrastructure facility that is a project in any
of the following sectors, or any infrastructure facility of a similar nature :

i.a road, including toll road, a bridge or a rail system;
ii.a highway project including other activities being an integral part of the highway project;
iii.a port, airport, inland waterway or inland port;
iv.a water supply project, irrigation project, water treatment system, sanitation and sewerage
system or solid waste management system;

v.telecommunication services whether basic or cellular, including radio paging, domestic
satellite service (i.e., a satellite owned and operated by an Indian company for providing
telecommunication service), network of trunking, broadband network and internet services;
vi.an industrial park or special economic zone ;
vii.generation or generation and distribution of power
viii.transmission or distribution of power by laying a network of new transmission or
distribution lines.
ix.construction relating to projects involving agro-processing and supply of inputs to
agriculture;
x.construction for preservation and storage of processed agro-products, perishable goods such
as fruits, vegetables and flowers including testing facilities for quality;
xi.construction of educational institutions and hospitals;
xii.laying down and/or maintenance of gas, crude oil and petroleum pipelines;
xiii.any other infrastructure facility of similar nature.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
24
8. MATURITY-WISE EXPOSURE LIMITS:

The maturity-wise exposure limits in consonance with the Banks Asset-Liability Management
policy, e.g. for medium term loans for more than 3 years and for long term loans for more than
7 and upto 10 years shall be fixed by RMC in due course. However, the tenure for these loans
shall be as under:-

S Type of Loans Maximum period of repayment of such loan should
not exceed
1 Real Estate Loans
(excluding Housing Loans
to Public)
10 years or as per decisions of the consortium. Max.
extension up to 24 months can be allowed with same EMI
in case of increase in interest rates. However, in case of
consortium accounts, maximum extension will be as per
decision of the consortium.
2 Commercial / Industrial
Term Loans
10 years or as per decisions of the consortium.
3 Infrastructure Term Loans 20 years (Take out financing arrangements can be
arranged for infrastructure term loans of longer tenure)

4 Housing Loan The loan is allowed only in the shape of term loans for a
maximum tenor of 25 years with the criteria laid down
in Real Estate Policy.















LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
25
9. INDUSTRY EXPOSURE LIMITS

9.1 In order to diversify credit risk across industries/ sectors, the RMC may set an exposure
ceiling per industry/ sector, excepting the Priority Sectors for which RBI has prescribed a
higher minimum lending targets (e.g. 18 % of the Banks Net Credit to Agriculture sector).
RMC may prescribe higher/lower exposure ceiling for certain preferred/less preferred
industries/ sectors as per the Banks business strategy including issues relating to portfolio
diversification.

9.2 Present Exposure ceilings for various industries :-

A In any industry/ business activity upto 10% of total credit plus non SLR portfolio
B Sectors under cautious approach upto 5% of total advances plus non-SLR portfolio
C Exposure under unsecured
exposures
The Bank shall cap total unsecured exposure of the Bank at
33 % of total outstanding advances of the bank to PSUs &
AAA/AA rated companies (*), within which cap for other
than these companies can go upto 15 %
(*) i.e. companies having top two rating grades by rating
agencies recognized by RBI, of long term or short term
ratings of various debt instruments of these companies
or Bank Loan Ratings as per Basel II
D Film Industry Total exposure to Film Industry capped at Rs.100 crore with
exposure to single borrower not to exceed Rs.20.00 crores.

E Diamond Industry Total exposure to Diamond industry capped at Rs.500 crores
with exposure in new account not to exceed Rs.20 crores &
upto Rs.50 crore in case of existing accounts.

F Indian Joint ventures Abroad 10 % of the Banks Capital Funds and also the condition that
the aggregate assets of the Bank out side India do not exceed
25 % of its Demand and Time Liabilities as on the last
Friday of every quarter (vide Section 25 of the Banking
Regulation Act).

G Indian Joint ventures Abroad
where the holding by the Indian
company is more than 51%/
wholly owned subsidiaries abroad
20 % of their unimpaired capital funds (Tier I and Tier II
Capital)

H Securitization/ Assignment of
Pools
Max. exposure Rs.1000 crores
I Inter Bank Participation Certificate Max. exposure Rs.1000 crores
J Various Capital Market Exposures Given under the chapter Capital Market Exposures












LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
26


EXPOSURE TO SENSITIVE SECTOR

Keeping in view the market scenario of Real Estate Sector including commercial real estate,
Commodity market and capital market exposure limits stand revised as under:

Sr. No. Category Exposure cap as %age of
Total Advances
1.
Total Sensitive Sector:
25%
A.
Real Estate including individual housing
loan
22%

Sub-Caps


i. Commercial Real Estate
10.00%
B.
Capital Market
1.50%
C.
Commodity Sector
1.50%
*not to exceed RBIs ceiling of 40% of Banks net worth as on 31
st
March of the previous year..

For the industries/ sectors under Bank's caution list, 50 % of various prescribed
industry exposure limits will be applicable.




















LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
27

UNSECURED EXPOSURES:

10.1. RBI has withdrawn its erstwhile exposure norm guideline for unsecured advances and
unsecured guarantees, viz. 20% of a banks outstanding unsecured guarantees plus total
outstanding unsecured advances do not exceed 15% of its total outstanding advances. Now
banks are free to formulate their own policy on unsecured exposures.

POLICY OF UNSECURED EXPOSURES

(I) With a view to ensuring uniformity in approach and implementation, the definitions of
unsecured exposure prescribed by RBI (vide notification dated 17.06.2004) and IBA
clarification vide its letter dated 13.12.2004 shall be followed as under:

Unsecured Exposure is defined as an exposure where the realisable value of the
security, as assessed by the bank /approved valuers / Reserve Banks inspecting officers, is
not more than 10 percent, ab-initio, of the outstanding exposure.
Exposure shall include all funded and non-funded exposures (including underwriting
and similar commitments).
Security will mean tangible security properly charged to the bank and will not include
intangible securities like guarantees, comfort letters etc.

In terms of extant guidelines, advances (both funded and non-funded) are generally reviewed /
renewed from time to time and also as part of preparation of financial statements. It would be
therefore be in order to revisit the classification of advances as secured or unsecured at the time
of such reviews.


(II) The Bank shall cap total unsecured exposure of the Bank at 33 % of total outstanding
advances of the bank to PSUs & AAA/AA rated companies(*), within which cap for other
than these companies can go upto 15 %

(*) i.e. companies having top two rating grades by rating agencies recognized by RBI, of long
term or short term ratings of various debt instruments of these companies or Bank Loan
Ratings as per Basel II

The RMC / Board may review the cap on unsecured exposures on the basis of the exact
position of total outstanding unsecured exposure as on March 31, to be collected as per format
suggested below from branches / zonal offices. The RMC / Board may adopt the Unsecured
Exposure limit subject to :









LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
28


a) The exposures covered by the guarantees or counter-guarantees provided by other acceptable
banks in favour of P&S BANK would be excluded for calculating the unsecured exposure.
b) The RMC / Board may relax, on merits, the Unsecured Exposure limit in individual cases.

(III) The following advances shall be treated as unsecured :

i.Clean overdrafts, clean bill/ cheque purchase, clean loan
ii.Temporary overdraft
iii.Withdrawal against uncleared effects in current accounts
iv.Advances against clean bills for collection /supply bills
v.Advances against other export Incentives (other than DDB)
vi.Education Loan where no collateral is taken.
vii.Consumption Loans
viii.Outstanding Credit Card dues
ix.Loans against securitization of future cash flows
x.The exposures including all funded and non-funded facilities, where the realizable value
of tangible security is not more than 10 % ab-initio of the outstanding exposure shall be
treated as Unsecured Exposure

However, the following facilities are not to be treated as unsecured:

a. LC DA/DP facility/ Buyers Credit facility
b. Purchase of demand draft
c. Non-fund based facilities like Bank Guarantee (Inland/Foreign), Deferred
Payment Guarantee (DPG), Derivatives, Forward Contracts, Underwriting and similar
commitments etc shall be treated as secured where the realizable value of security
(tangible security including margin) is more than 10 % of the outstanding exposure.

It is clarified that unsecured by nature facilities as above availed by borrower even on
temporary basis availing other secured facilities and the tangible security covers the temporary
unsecured facility are not be classified as unsecured e.g. a cheque purchased for a borrower
availing CC hypothecation facility may not be classified as unsecured or a temporary overdraft
given to a borrower availing term loan, provided total tangible security (primary, collateral and
margin) is more than 10% of the total outstanding exposure.

(IV) In order to monitor outstanding unsecured exposures on half yearly basis, the following
information / statement shall be submitted by branches /zonal offices :










LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
29



Sr.
No.
Particulars Amt. Rs.
in Lakhs
1. Total Advances (including due from banks and bills purchased and
discounted)

2. Out of (1) above, Unsecured Fund based Exposure (as defined below)*
3. Total Unsecured Non-fund based exposure (including underwriting and
similar commitments defined below)*

4. Total Unsecured fund based exposure + unsecured non-fund based
exposure ( 2+ 3)


i. Only those exposures are to be reported wherein the realizable value of tangible security
including margin was not more than 10% of the outstanding exposure as on the date of last
renewal/reviewal in terms of ID circular no. 1485 dated 26.08.1997.

ii. Non fund business will include bank guarantee (Inland & Foreign), deferred payment
guarantee (DPG), derivatives, forward contracts and under writings and similar commitments
etc where the realizable value of tangible security including margin is not more than 10%.
However, the LC facility whether DA or DP should be treated as secured, because the
underlying security is documents of title to goods or hypothecation of goods/ receivables.

iii. Purchase of demand drafts being prepaid instruments should not be included in the
unsecured exposure for the purpose of prescribing the ceiling.


Officer/Manager Branch Manager/Zonal Manager

The branches shall submit statement with in 10 days of close of half year as on 30
th
Sept. & 31
st

Mar. to their respective Zonal Office. Zonal Office in turn shall submit the consolidated
statement of the zone to HO Advances department within 15 days of close of half year. HO
Advances Department shall submit the consolidated position of Unsecured exposures to RMD
which will place the same before Risk Management Committee for review to ensure that the
same are well within the prescribed ceiling on half yearly basis.









LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
30
11. STATUTORY & OTHER RESTRICTIONS

RBIs Master Circular on Loans and Advances - Statutory and Other Restrictions
RBI/2011-12/59 DBOD No. Dir. BC 06/13.03.00/2011-12 dated July 1, 2011 suitably
updates the instructions issued up to June 30, 2011 and has been placed on the RBI website
(http://www.rbi.org.in).

Further, as per RBIs Master Circular on Wilful Defaulters - RBI/2011-12/73 DBOD No.
CID.BC. 1/20.16.003/2011-12 July 1, 2011 :


No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In
addition, the entrepreneurs / promoters of companies where banks / FIs have identified
siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent
transactions should be debarred from institutional finance from the scheduled commercial
banks, Development Financial Institutions, Government owned NBFCs, investment institutions
etc. for floating new ventures for a period of 5 years from the date the name of the wilful
defaulter is published in the list of wilful defaulters by the RBI.

12. PRIORITY SECTOR ADVANCES (PSAs)

Guidelines on Lending to Priority Sector are being circulated by HO Priority Sector Deptt.
from time to time. RBIs Latest Master Circular on Priority Sector dated July 01, 2011 has been
circulated vide HO P.S. Circulatory letter No. 49/2011 D a t e d: 27.12.11.

A) In terms of RBIs guidelines, major Targets & sub-targets are as under:

Targets Sub-targets
Total Priority
Sector advances
40 % of Adjusted Net Bank Credit
(ANBC) or credit equivalent amount of
Off-Balance Sheet Exposure, whichever
is higher
---
Total agricultural
advances
18 % of ANBC or credit equivalent
amount of Off-Balance Sheet Exposure,
whichever is higher
Of this, indirect lending in
excess of 4.5 % of ANBC, will
not be reckoned for computing
performance under 18 % target.
However, all agricultural
advances under the categories
'direct' and 'indirect' will be
reckoned in computing
performance under the overall
priority sector target of 40 % of
ANBC or credit equivalent
amount of Off-Balance Sheet
Exposure, whichever is higher




LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
31



Micro & Small
Enterprise
Advances ( MSE )





Micro Enterprises
within Small
Enterprises sector


Advances to Micro & Small enterprises
sector will be reckoned in computing
performance under the overall priority
sector target of 40 % of ANBC or credit
equivalent amount of Off-Balance Sheet
Exposure, whichever is higher



(i) 40 per cent of total advances to micro
and small enterprises sector should go to
micro (manufacturing) enterprises having
investment in plant and machinery up to Rs
5 lakh and micro (service) enterprises
having investment in equipment up to Rs. 2
lakh;

(ii) 20 per cent of total advances to micro
and small enterprises sector should go to
micro (manufacturing) enterprises with
investment in plant and machinery above
Rs 5 lakh and up to Rs. 25 lakh, and micro
(service) enterprises with investment in
equipment above Rs. 2 lakh and up to Rs.
10 lakh. (Thus, 60 per cent of micro and
small enterprises advances should go to the
micro enterprises).

(III) The increase in share of micro
enterprises in MSE lending to 60 per cent
should be achieved in stages, viz. 50 per
cent in the year 2010-11, 55% in the year
2011-12 and 60% in the year 2012-13



Advances to
weaker sections
10 % of ANBC or credit equivalent
amount of Off-Balance Sheet Exposure,
whichever is higher


Advances under
Differential Rate of
Interest Scheme
1 % of total advances outstanding as at
the end of the previous year.

It should be ensured that
not less than 40 % of the
total advances granted under
DRI scheme go to scheduled
caste/scheduled tribes.
At least two third of DRI
advances should be granted
through rural and semi-urban
branches


LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
32


Note :. [ANBC or credit equivalent of Off-Balance Sheet Exposures (as defined by Department
of Banking Operations and Development of Reserve Bank of India from time to time) will be
computed with reference to the outstanding as on March 31 of the previous year. For this
purpose, outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for
computation of ANBC for priority sector lending purposes. For the purpose of priority sector
lending, ANBC denotes NBC plus investments made by banks in non-SLR bonds held in HTM
category. Investments made by banks in the Recapitalization Bonds floated by Government of
India will not be taken into account for the purpose of calculation of ANBC. Existing and fresh
investments, by banks in non-SLR bonds held in HTM category will be taken into account for
the purpose. Deposits placed by banks with NABARD/SIDBI, as the case may be, in lieu of
non-achievement of priority sector lending targets/sub-targets, though shown under Schedule 8
'Investments' in the Balance Sheet at item I (vi) 'Others', will not be treated as investment in
non-SLR bonds held under HTM category. For the purpose of calculation of credit equivalent
of off-balance sheet exposures, banks may use current exposure method. Inter-bank exposures
will not be taken into account for the purpose of priority sector lending targets/sub-targets.]
[The net bank credit (NBC) should tally with the figures reported in the fortnightly return
submitted under section 42(2) of the Reserve Bank of India Act, 1934.]

B) BANKS APPROACH:

The directed lending to Priority Sectors involving the targets/ sub-targets prescribed by RBI is
aimed at alleviation of poverty and employment generation in the society. As a responsive
corporate citizen, the Bank would endeavour to build up Priority Sector Advances to the
desired level by adopting the following approach:

i. It will focus on direct finance to agricultural and small business sub-segments to build
up PSAs and the shortfalls would be met by indirect lending to various segments as per RBIs
eligibility norms for PSAs.

ii. It would prefer lending to entities that have stabilised formal structure e.g. corporates,
cooperative societies, NGOs, Self Help Groups (SHGs).

iii. It would focus on viable programmes for productive purposes.

iv. It would adopt area-specific cluster approach for Micro Credit (to low-income groups) by
offering standardized products. Such urban/ rural centres would be identified where NGOs /
SHGs have been operating with success stories. Support of such NGOs/ SHGs would be
sought in the Micro Credit programmes.









LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
33




(C) The weaker sections under priority sector include the following:

a. Small and marginal farmers with land holding of 5 acres and less and landless
labourers, tenant farmers and share croppers.
b. Artisans, village and cottage industries where individual credit limits do not exceed Rs.
50,000/-
c. Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY)
d. Scheduled Castes and Scheduled Tribes
e. Beneficiaries of Differential Rate of Interest (DRI) scheme
f. Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY)
g. Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavengers
(SLRS).
h. Advances to Self Help Groups
i. Loans to distressed poor to prepay their debt to informal sector, against appropriate
collateral or group security.
j. Loans granted under (a) to (i) above to persons from minority communities as may be
notified by Government of India from time to time.

In States, where one of the Minority Communities notified is, in fact, in majority, item (j) will
cover only the other notified minorities. These States/ UTs are Jammu & Kashmir, Punjab,
Meghalaya, Mizoram, Nagaland and Lakshadweep.

(D) DRI Scheme - Under the DRI Scheme, financial assistance is provided at concessional rate
of interest (4 % p.a. simple rate of intt.) to selected low-income groups, for productive
endeavours.

The limit of the loan under DRI scheme has been raised from Rs.6500/- to Rs.15000/- and the
limit of the housing loan from Rs.5000/- to Rs.20000/- per DRI beneficiary, in terms of HO PS
Cir.letter No.40/07 dated 23/06/2007 and HO PS Circular No.365 dated 7/5/2008.

(E) LABELLING OF PSAs :

PSAs as a group of the Banks loans portfolio would need to be distinguished from the non-
PSAs groups for monitoring, reporting and other purposes. In order to identify and track PSA
from the Banks loans portfolio, these advances would be suitably labeled. The main segments
of PSAs, e.g. Agriculture., Small-scale, Weaker Sections, DRI scheme would also be suitably
labeled for tracking purposes.







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
34

(F) The broad categories as per revised guidelines of priority sector lending are given
below:

S.
No.
Revised Guidelines
1. Agriculture (Direct finance)
Direct finance to agriculture shall include short, medium and long term loans given
for agriculture and allied activities directly to individual farmers, SHGs or JLGs of
individual farmers without limit. However, Finance to others (such as corporates,
partnership firms and institutions) for short term loans (viz. crop loans, loan against
pledge/hypothecation of agri. produce), working capital and term loans for
agriculture and allied activities and loans granted for pre-harvest and post harvest
activities up to an aggregate amount of Rs.1 crore per borrower and 1/3
rd
of loans in
excess of Rs.1 crore in aggregate per borrower shall be treated as Direct Agriculture.
2/3
rd
in excess of Rs.1 crore are qualified under indirect finance to agriculture.
2. Agriculture (In-direct finance)
Loans to food and agro-based processing units with investments in plant and
machinery up to Rs.10 crore, are now eligible under Indirect Finance to Agriculture

3. Micro & Small Enterprises

Small Enterprises (Direct) categorized on the basis of investment in plant &
machinery (Manufacturing) and in Equipment (Services):

Manufacturing Enterprises (Small & Micro)
Service Enterprises (Small & Micro)
Khadi & Village Industries Sector (KVI)

As per RBI guidelines, the micro and small (service) enterprises shall include small
road & water transport operators, small business, professional & self-employed
persons, Advances to Retail Traders and all other service enterprises, as per the given
definition .

Advances granted to retail traders dealing in essential commodities (fair price shops),
consumer co-operative stores are eligible for classification under Micro & Small
Service Enterprises within Priority Sector without any ceiling in credit limit provided
investment in equipment is as per definition of micro & small service enterprises as
per MSMED Act 2006.

However, Advances granted to private retail traders with credit limits not exceeding
Rs. 20 lakh are eligible for classification under Micro & Small Service Enterprises
within Priority Sector provided they satisfy the definition of Micro & Small service
enterprises in respect of investment in equipment is as per definition of micro &
small service enterprises as per MSMED Act 2006.




LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
35

4. Micro Credit:
Loans of very small amounts, not exceeding Rs.50,000 per borrower provided by
banks either directly or indirectly through a SHG/JLG mechanism for on-lending up
to Rs. 50,000 per borrower.

Bank credit to Micro Finance Institutions extended on, or after, April 1, 2011 for
on-lending to individuals and also to members of SHGs / JLGs will be eligible for
categorisation as priority sector advance under respective categories viz., agriculture,
micro and small enterprise, and micro credit (for other purposes), as indirect finance,
provided not less than 85% of total assets of MFI (other than cash, balances with
banks and financial institutions, government securities and money market
instruments) are in the nature of qualifying assets. In addition, aggregate amount of
loan, extended for income generating activity, is not less than 75% of the total loans
given by MFIs. ( Clause No. 3.1 & 3.2 of RBI Master Cir. Dated 01.07.2011 on
Priority Sector Lending )

5. Education loans:
Education loans include loans and advances granted to only individuals for
educational purposes up to Rs.10 lac for studies in India and Rs.20 lac for studies
abroad.

6. Housing loans:
Loans up to Rs. 25 lac to individuals for purchase/construction of dwelling unit per
family, (excluding loans granted by banks to their own employees) and loans given
for repairs to the damaged dwelling units of families up to Rs.1 lac in rural and semi-
urban areas and up to Rs. 2 lac in urban and metropolitan areas.


(G) Advances to Small Road Transport Operators: are covered under small and micro
(service) enterprises. In these cases, the investment in equipment means investment in vehicles
concerned. The Bank shall customize schemes for SRTOs and go for tie-up arrangements
with leading Auto manufacturers/ companies and go for rationalization of interest rate structure
to face market competition for portfolio growth.

(H) Professional and self-employed persons, where investment in equipment does not exceed
Rs.2 crore, are eligible for classification under Small (service) enterprises sector


Loan Applications for Micro and Small Enterprises(MSE) and assessment of
credit requirement ( PS Cir Letter No. 45/2011 dated 18.11.2011.

Credit flow to Micro and Small Enterprises has to be increased by 20% on Year to
Year basis and it has also to be ensured that there is 10% increase in number of micro
enterprise accounts.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
36


A study has been conducted on the rejection pattern of MSME applications reveals:-
1.The branches are generally not maintaining Loan Application Register.
2.In case of branches which maintain loan application register it is observed that only
such loan applications which fulfill all the requirements of the bank are entered into
Loan Application Register and as such no rejection is reflected.
3.The entrepreneurs are not aware of the existence of Customer Service Committee at
the branch level and as such they had not attended any of the meeting.
The field functionaries are advised to ensure that Loan applications register for MSE
applications be maintained properly and rejected applications are entered in the
register. Customer Service Committee meeting be held regularly on monthly basis,
feedback obtained from customers and some MSE customers be invited to each of the
meetings.
Further the Zonal Offices/ branches are advised to ensure that both Term Loan and
Working Capital requirements be assessed at time of sanction to avoid delay in
commencement of commercial production.












LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
37
13. CREDIT APPRAISAL SYSTEM

1. GENERAL PRINCIPLES:

1. A credit proposal originating from the Branch Manager (BM) would involve a
rigorous credit appraisal process before it is recommended for sanction of specific credit
facilities by the designated authorities. Certain broad guidelines would be followed by the BM
in appraising a credit proposal, irrespective of the nature of the credit facilities and the
business segment involved. These are briefly as follows:

Bankability of the Proposal: The first step in the appraisal process in any credit
proposal is to ensure that there are no regulatory restrictions as regards the borrower,
the security offered and the purpose of the loan and that the proposal conforms to the
Banks Prudential Exposure norms and other credit policy guidelines. Any proposal
which does not fulfill the eligibility criteria laid down by the Bank, would be
recommended accordingly for rejection, with specific reasons, to the appropriate
authority, without appraising the proposal from other angles. The proposal which meets
the eligibility criteria would be appraised further.

Due Diligence: The BM would conduct due diligence and make in-depth analysis
as regards the technical/ commercial/ economic/ financial/ managerial aspects of the
applicants business/ project; industry conditions; applicants past track record/ standing
in the industry and reputation in the market and other critical aspects of the proposal.
For technical/ economic/ commercial viability, the help of external consultants may be
sought, where necessary. In case of existing borrowing arrangements of the applicant
with other banks, their opinion reports on the borrower and conduct of his accounts
would be discretely ascertained. For new business, in the absence of any past history,
greater reliance will have to be placed on the financial analysis of the projections and
assessment of the managerial and entrepreneurial capabilities of the applicant While
conducting due diligence, independent inquiries would be made from the relevant
sources to verify/ know the information realistically, rather than relying solely on the
applicants averments/ version.

While appraising the loan proposals for financing to PSUs, Central & State Government
Undertakings including PSUs/Govt. Guaranteed exposures , the branches/ Z.O./ H.O. are
required to follow the prudential norms of lending , observe policy Guidelines and ensure due
diligence. Normal credit appraisal should be done in such cases like any other credit proposal
and no specific exemption should be given to PSUs.










LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
38



Certificate wrt Statutory Dues: Certificate from Borrowers auditors to be obtained
on annual basis at the time of sanction/renewal/reviewal that all the statutory dues
including EPF due have been paid by the borrower.

Genuineness of Title Deeds: Genuineness of title deeds in all the loan cases where the
property has been mortgaged as security is to be ascertained afresh. This exercise is to
be completed at the earliest so as to avert chances of fraud by unscrupulous elements.
Zonal managers to ensure compliance of HO guidelines strictly. It is proposed to
complete this task in a time bound manner.

Credit Need Assessment : This would involve determining the kind of credit facilities
genuinely needed by the applicant and the limits for each of the facilities. The specific
norms prescribed by the Bank and RBI for assessment of credit needs with reference to
the purpose of the loan (e.g. term loan, project finance, working capital finance, broking
business), nature of industry (e.g. seasonal, non-seasonal), scale of operations (large/
medium/small/tiny-scale), business segment etc. would be applied in determining the
nature of the credit facilities and their quantum. The prudential exposure limits/norms
for single/ Group borrowers and industry etc. prescribed by the regulators/ the Bank
would be kept in view and commented upon, while determining the quantum of the
credit limits for an applican

Role of Arrangers to be discouraged: It has been observed by the RBI IBA that middleman/
arrangers have become a forceful power in the banking Industry for approval of loan proposals
which has resulted in increase in levels of NPAs. In view of the observations of RBI/ IBA,
Field Functionaries are advised to ensure safety of banks funds being lent and role of
unauthorized arrangers/middlemans is discouraged. Bank had laid down comprehensive
guidelines in various other circulars issued from time to time with respect to processing,
appraising, assessment and sanction of loan proposal received by the branches from the
borrowers. Sanctioning authorities have been advised from time to time to consider credit
proposals on merits after doing in depth analysis wrt Bankability, technical, commercial,
economic, financial, and managerial viability and satisfying themselves with regard to
promoters track record, industry scenario, authenticity of data submitted by the borrower.

2. Recommendations

The proposal duly appraised by the BM would thus involve qualitative as well as quantitative
appraisal on the above aspects. Qualitative appraisal is based more on the evaluations and
judgments of the appraiser as compared to the quantitative appraisal. The credit rating based on
the prescribed risk parameters is largely quantitative and so is the need for quantification based
on turnover or cash budget method. A good appraisal would contain a blend of quantitative and
qualitative aspects to bring out a realistic appraisal of all the risk factors involved in the
proposal and recommend terms and conditions to mitigate or control them. On completion of
the appraisal process, the proposal would be submitted by the BM in the prescribed appraisal
format along with reasoned and precise recommendations to the appropriate sanctioning
authorities.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
39
The credit proposal would be examined in depth by the appropriate sanctioning authorities,
without involving the HO RMD/ ZO Credit Risk cells*. The credit worthiness and need
quantification would be re-evaluated and determined along with the Risk rating of the
borrower and the credit facilities, by the sanctioning authorities. The pricing (interest rates and
fees etc.) and other terms and conditions of the credit facilities would also be approved by the
sanctioning authorities.

* Presently fresh/enhancement credit proposals above Rs.2 crore, with some exceptions are
routed through HO RMD/ ZO Credit Risk cells, for Credit risk assessment, as per HO RMD
Circular No.153 dated 26/08/2010.

So, till the time RMD is strengthened to undertake Industrial reviews periodically and
circulate the same to field , the Bank will continue with the existing system.

A.FORMATION OF CREDIT APPROVAL COMMITTEE OF THE BOARD (CACB)

The Board has approved the formation of the Credit Approval Committee of the Board in terms of
MOF notification dt.05.12.2011, with the following executives as members-
6) The Chairman & Managing Director
7) The Executive Director (s)
8) The General Manager, dealing with the credit proposal
9) The General Manager (Investment)/Finance
10) The General Manager (RMD)

The Credit Approval Committee of the Board(CACB) shall exercise the powers of the Board with
regard to considering Credit Proposals up to Rs 250.00 crore (Rs Two hundred fifty crore only)
[Funded and Non Funded], exceeding the delegated powers of Credit Committee headed by ED. It was
desired by the Board that cases with deviation as per policy to be put up to the Management Committee

Similarly, In terms of Ministry of Finance, Department of Financial Services extant guidelines issued
vide their letter 13/1/2006-BO.1 dt.03.04.2012, Credit Committees at Head Office/Local Head
Office/Zonal Office level has been set up.The Detailed guidelines on the same have been circulated
vide ID circular no. 1657 dated 29.05.2012.

With the setting up of these committees, the powers vested in officers above the Branch level would
cease to exist. However specific time limits would need to be prescribed by the bank for decision on
cases at the Branch level and in case the said matters/ credit proposals are not disposed off within the
prescribed time limit , the same should be reported to the next higher committee for review.

3. GUIDELINES FOR APPRAISAL OF TERM FINANCE (WITH TENOR MORE
THAN ONE YEAR)

a) CASES OF TERM FINANCE BELOW RS. 1 CRORE

To be appraised by the concerned branch with the assistance of technical officer of the bank (if
available).

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
40


b) CASES OF TERM FINANCE OF RS.1 CRORE & ABOVE UPTO RS.10 CRORE

Cases of term finance of Rs.1 crore & above upto Rs.10 crore to be appraised by In - house
appraising team.

If Technical officer is not available, Technical viability Report of Registered Chartered
Engineer, empanelled by the Bank be obtained & considered by the In house appraising
team.

For cases of term finance of Rs.1 crore & above upto Rs.10 crores, sanctioning authority (ZM
& above) has been authorized to nominate suitable Registered Chartered Engineer to evaluate
Technical viability of the project where Technical official of the Bank is not available and/ or
where sanctioning authority feels that in house appraisal may not be sufficient, keeping in view
nature/size of business/ project.

c) CASES OF TERM FINANCE ABOVE RS.10 CRORE

Techno Economic Feasibility Report of Reputed External Agencies (#) viz. All India / State
Level Financial Institutions, SBI Caps, IL& FS, IL&FS Financial Services Ltd., PNB Gilts,
TFCI Ltd. & ITCOT Consultancy & Services Ltd., CB Richards Ellis, John Long Le Saffe,
Knight Frank and Cushman & Wakefield to be obtained for all types of Units/ Projects
seeking term finance above Rs.25 crore. For Manufacturing Units, this cut-off would be above
Rs.10 crore.

Due to additional requirements of existing borrowers, if the overall term finance exceeds Rs.10
crores but up to Rs.25 crores for Manufacturing units, the sanctioning authority not less than
the rank of Zonal Manager, can rely on the In-house appraisal committee report. In cases of
all other existing borrowers requiring term finance above Rs.25 crores, Techno Economic
Feasibility Report of Reputed External Agencies may be obtained.

The above guidelines shall also apply to consortium accounts where our Bank is Lead Bank.
However, such reports may not be obtained in case of Government guaranteed accounts /
Profitable PSUs and in cases under consortium/ syndication, where our bank is not the lead
bank, in which case, the report of Lead Bank / Appraiser may be accepted.

(#) HO Advances Deptt. to periodically circulate/ review the list of other such reputed
agencies, whose appraisal will be accepted by the Bank. Subsequently, if any other Reputed
Agencies not covered in the above list come to Bank's notice, the same may also be
accepted/included in the said list, after approval by Executive Director (ED). The criteria for
inclusion/ exclusion of such agencies in the Bank's list shall be decided by HO Advances Deptt.







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
41

14. CREDIT APPRAISAL STANDARDS

The Bank has a systematic credit appraisal methodology, which is being constantly reviewed in
the light of the experiences gained from time to time. However, the basic standards for working
capital facilities, both fund based and non fund based and term loan facilities are well
understood. Certain basic parameters, which have evolved over time, are broadly classified as
under :-

A. TERM LOANS/ PROJECT FINANCE:
Term loans/ Deferred Payment Guarantees (DPGs) and Project Finance are appraised on the
basis of project reports prepared by the borrower in-house or by external consultants/ agencies.
The following basic parameters are normally considered in case of Term Loans:

i) Project Viability Evaluation: The techno-economic viability of the project for which the
Bank has domain knowledge/ expertise would be examined internally by the Bank. In other
cases, assistance of suitable external consultants may be sought, as found necessary, depending
on the size of the exposure and project complexity etc. The appraisal report of Lead FIs/ Bank
may be relied upon after internal scrutiny. The commercial viability of the project and the
industry specific analysis would be considered while evaluating the financial risk and the
industry risk of the borrower in the Credit Rating Model

ii) Promoters Contribution : Generally, 25 % contribution by the principal promoters in the
total equity of the project is considered a benchmark level, whereas the overall equity itself is
expected to offer adequate levels as per the range of acceptable Debt Equity Ratio in the
financial risk evaluation of the borrower.

iii) Debt Service coverage ratio (DSCR) : Average DSCR of 1.75 would be the general
benchmark level but same may be accepted upto 1.50 (minimum 1.25 in any year),
depending upon the nature of business/ industry / project. However, DSCR below these
levels may be accepted only in exceptional cases, after careful consideration by the
sanctioning authorities, giving proper justification.

iv) Project Loan would mean any term loan which has been extended for the purpose of
setting up of an economic venture. Banks must fix a Date of Commencement of
Commercial Operations (DCCO) for all project loans at the time of sanction of the
loan/financial closure (in the case of multiple banking or consortium arrangements). (
H.O. Credit Monitoring & Policy Cir Letter 06/2011-12 )
B. WORKING CAPITAL FINANCE :- The following basic parameters are normally
considered in case of working capital finance:
i.Current Ratio (CR): The benchmark level of 1.33 will be generally applied (except Sugar
industry where the benchmark level of 1 may be applied & Export credit where lower/nil
margin is prescribed for post shipment limits). The Bank may accept a reasonable lower current
ratio upto 1.10 (except Sugar Industry & Export Credit), depending upon the nature of
business / industry/ project and/ or in cases where operations / conduct of account is good.
However, Current Ratio below the above levels may be accepted only in exceptional cases,
after careful consideration by the sanctioning authorities, giving proper justification
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
42

Sanctioning authority would also fully satisfy himself/ herself with regard to borrower's
capability of bringing in the minimum required margin(s), in case of any shortfall/ inadequate
margin & may also stipulate necessary terms & conditions in this regard

The trend component in evaluating the Current Ratio over the last 3 years would also have to
be considered. For example, the Current Ratio for the year of evaluation may be above the
benchmark level. However, there is a declining trend in past estimates of the Current Ratio.
This would imply that liquidity problems may arise for the borrower in the future, which needs
to be taken into account.

Some corporates are unable to comply with the current ratio norms due to :

o Classification of term loan installments, falling due within one year, as current
liabilities, and
o Investment of funds in expansion, de-bottlenecking which precludes improvement in
NWC.

This needs proper evaluation and appreciation, to ensure that the borrowers operation
generates adequate liquidity to sustain continued liability match / current assets surpluses over
current liabilities.

ii) Net working Capital (NWC): The NWC (the excess of current assets over current
liabilities) represents the long-term funds being available for running the business operations.
Higher levels of NWC indicate improving funds availability for operation. This also points to
the margin cover available on the current assets beyond the available current liabilities, which
must to be at benchmark 25% level which coincides with the benchmark 1.33 Current Ratio.
However, NWC and CR trends over a period of time have to be seen in conjunction, rather than
in isolation.

C. Some additional parameters considered for all type of Credit facilities :-

i) Financial Soundness Indicator : An indicative parameter to judge financial soundness of a
borrower / project is to ascertain the ratio of total outside liabilities to tangible net worth
(TOL/TNW ratio in case of Working capital/ Non fund facilities, or debt equity ratio-DER
in case of Term Loan). A ratio of 2 :1 would be benchmark for Trading units & 3:1 for other
than Trading units (though ratio below this level is considered welcome), but the same upto
3.50 (6 in case of Infrastructure projects & NBFCs) may be considered as acceptable,
depending upon the nature of business/industry/project.

However, this ratio higher than these levels may be accepted only in exceptional cases, after
careful consideration by the sanctioning authorities, giving proper justification







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
43

Adequacy of capital, retention of adequate profits into the business to strengthen the reserves,
or infusion of fresh capital, improve the borrowers Net Worth. Similarly, debt-containment
and timely repayments of liabilities symbolize good debt management practices. These factors
would also be evaluated along with TOL / TNW ratio or the DER to judge financial soundness
of the proposal.

ii) Turnover Growth: Growth trends in turnover indicate growing demand / acceptance of the
borrowers products / services in the market. However, with a growth trend in turnover, the
borrowers market share may be stagnant or even declining for the reason that the borrowers
turnover growth rate has been or is being outpaced by the growth rate of the industry.
Therefore the growth rates of the borrower in conjunction with that of the industry would be
examined. In case of a multi product / multi service borrower, introduction of a major product
line / service offering might lead to a spurt in turnover, even when the established product
range might be stagnating. Thus, the turnover trends would be carefully assessed over a
reasonable period of time for all product groups and the analyst should make proper
comparisons (peer level and industry level) to arrive at realistic conclusions.

iii) Profitability Parameters: Net Profit/ Turnover ratio offers a good yardstick for evaluating the
borrowers profitability. Gross Profit/ Turnover and Operating Profit/ Turnover ratios offer
better insight into the gross and operating margin creation propensity of the borrower.
Adequacy of cash accruals (Profit before depreciation, taxation and non-finance charges) over
the years helps companies undertake growth projects and plan future expansions more
systematically. In such evaluations, non-operating / one time profits need to be excluded as
they are, by nature, one time gains. Companies with losses / cash losses need closer appraisal
scrutiny.

iv) As per sec 44 AB of Income Tax the firms having turnover of Rs.100 lacs must submit their Balance
Sheet along with their return. As such Audited Balance sheet where credit facility is Rs.20.00
lac or above and\ or turnover of the party is above Rs.60 lacs in case of persons carrying
on business and above Rs.15.00 lac in case of persons carrying on profession, be obtained.

GUIDELINES IN RESPECT OF FRESH LIMITS / ENHANCEMENT TO
BORROWERS HAVING NEGATIVE NETWORTH / LOSSES

a) Existing Accounts of the Bank

In case of existing account of the Bank running in Net loss for last 2 years or having negative
Tangible Net Worth, any fresh exposure/ enhancement may be considered on merits, giving
due justification, by the competent authority, subject to the condition that borrower provides
collateral security of at least 150 % of the fresh exposure/ enhancement to be given, in addition
the collateral security already held. However, waiver of this condition of collateral security
may be considered by GM & above, as per their Lending lending powers.
The above guidelines will not apply in accounts put under restructuring/ reschedulement
scheme, Central/ State Govt. and PSUs accounts & accounts under Consortium / Multiple/
Syndication arrangement. In such accounts, competent authority to consider the case on merits.



LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
44

b) New Accounts proposed to be financed

No exposure to be considered by competent authority in case of New Accounts running in Net
loss for last 2 years or having negative Tangible Net worth. However, such cases may be
considered by GM & above, as per their Lending lending powers.

The above guidelines will not apply in case of Accounts under Consortium / Multiple/
Syndication arrangement, Central/ State Govt. and PSUs accounts & Greenfield projects, where
past profit record is not available. In such accounts, competent authority to consider the case on
merits.

Rate of interest in both the above cases, to be decided by respective sanctioning authority.

D. External Credit Rating: Wherever external credit ratings are available, such ratings need
to be factored in at the time of appraisal and reviews / renewal. Often such ratings are obtained
at the time of public offers / rights or preference issues. As such, the response to these offers as
well as market trends of the stock exchange(s) in relation to the companys shares, wherever
listed, and other peer group companies need careful evaluation, at the appraisal and review /
renewal stages. In case of no solicited credit rating from external rating agencies in respect of
corporate exposure is obtained within stipulated period, additional interest of 0.50% p.a. may be
charged.

E. Capital Markets: Where the applicants shares are listed on stock exchange, the share price
movements of the borrowing company vis--vis those of the peers would also be examined
and reckoned to assess the perceptions of the investors in the company and its growth prospects
etc. These perceptions would serve as an additional information in financial analysis.


F. WORKING CAPITAL FACILITIES:

Credit Need Assessment: The over-riding principle of meeting the genuine working capital
needs adequately for productive use would be applicable in all cases and the
proposed limit would be within the prudential exposure norms set by the Bank. As regards the
method of assessing the working capital requirements of the applicant, broad guidelines are as
follows :-

i) Maximum Permissible Bank Finance (MPBF) method: This method is no longer mandatory for
assessing the working capital requirements of large corporate, as prescribed by RBI until 1997. This
assessment method relates the bank finance to the current assets (inventory/ receivables) levels
along with the prescribed current ratio. It would be applied to the large/medium-scale
traditional manufacturing industries, which offer security of current assets (inventory,
receivables) for whose valuation the accounting practices are well established.






LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
45
ii) Cash budget method: In this method, the bank finance requirement is determined from the
projected cash flow deficit, and not from the projected values of current assets and current
liabilities (net working capital) or current ratio. Apart from the cash budget projections, the
usual financial statements (balance sheets, profit & loss accounts, funds flow statements)
both historical and projections - are also analysed to appraise the liquidity, profitability and
financial health of the applicant. This method would be typically applied to the seasonal
industries (like sugar, tea), construction industry and also for ad hoc temporary working capital
requirements.

iii) Turnover Method: This assessment method (based on RBIs Nayak Committee
recommendations) would be used for determining the fund-based working capital finance upto
Rs.5 crore. Under this method, working capital requirement is computed at a minimum 25% of
output value, of which the Bank would provide at least 80% and the balance 20% represents
the borrowers contribution towards working capital margin. In other words, the working
capital limit would be computed at a minimum of 20% of the projected annual turnover. The
usual financial analysis would also be undertaken.

iv) Projected Balance Sheet Method: Some industries, mainly non-traditional, carry current
assets for which valuation standards are not well established or practiced, e.g. media,
entertainment, software, information technology. For such industries, the projected balance
sheet method would be applied to determine the working capital requirements, in addition to
the usual financial analysis based on historical and projected financial statements.

v) Under a consortium arrangement, the working capital assessment would be made by the
Lead bank and circulated to the members. After discussion, the Lead bank would finalize the
overall working capital limit. The appraisal method adopted would be generally followed by
the Bank (but Banks officers would make an independent appraisal to ensure that lead banks
limits are rational) and allocation limit would be sanctioned by the appropriate sanctioning
authority.

vi) In Principal Sanction: In case of large credit proposals the bank may give in-principle
sanction, subject to submission of complete regular proposal with all financial papers and other
required documents for the process of due diligence.


G. Loan Delivery System of Bank Credit :

After determining the overall need-based credit limit, the following broad principles of credit
delivery would be implemented for allocation of limit into cash credit and demand loan, in line
with the RBI guidelines:









LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
46
i) Working capital limit of Rs. 10 crores or above from the banking system: The demand loan
component would normally be 80 % and the cash credit component at 20%; save in specific
cases, where a different mix may be allowed with approval of the sanctioning authority.

ii) Working capital limit below Rs. 10 crores from the banking system: The borrowers would
be encouraged to adopt the 80:20 Demand loan / Cash Credit system, for which an interest rate
benefit may be selectively offered, with the approval of the Sanctioning Authority.

iii) Where the borrowers business activity is cyclical or seasonal in nature, exemption from the
aforesaid credit delivery system would be permitted with the approval of the sanctioning
authority.

H. Relationship Value Assessment:

i) New Relationship: Where the Bank is entering into a new relationship with a borrower/
group, it is essential to assess the track record of the borrower as well as the group. Such
assessment would include their relationship records with other banks, standing in the
industry, market share, promoters reputation and industry standing, business growth
potential, prospects of ancillary business etc.

ii) Existing Relationship: In case of an existing relationship, apart from the aforesaid
factors, the experience of the Bank with the borrower / group would be examined with
reference to the various accounts deposits, borrowal and others with various branches of
the Bank or Nodal branch for the borrower/ group. Such evaluation would include the
conduct of their account (s), value of connection, growth potential, export / foreign
exchange earning potential, as also the growth prospects of the industries in which the
borrower / group are operating.

I. STRUCTURED FINANCE:

Structured Finance provides innovative financial solution to meet the unique financial
requirements of the applicant by offering a product-mix that suits his specific needs. The
appraisal norms are relaxed in structuring the product-mix and the securities for the credit
facility, but adequate care is taken to control or mitigate the risk factors. Approval of the
appropriate sanctioning authorities, including that of the Risk management Department and of
the Legal department would be obtained. The credit pricing would be suitably adjusted for the
structured products that are customized for the applicant and are not available elsewhere.












LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
47
J. LETTERS OF CREDIT/ GUARANTEES/ CO-ACCEPTANCES ETC:

i) Borrowers can purchases raw materials, stores and spares, equipment etc. on the strength of
the LC / Guarantee issued by their banks, rather than by paying cash up-front. As such, LC/
guarantee facilities are appraised as a part of overall working capital requirement in relation to
the levels of relative materials projected and the terms offered by the suppliers. Further, these
facilities are granted to meet only the genuine commercial transactions of the borrowers who
are constituents of the Bank.

Bank has comprehensive guidelines in place for Appraisal of proposals for non-fund facilities and
their monitoring circulated vide HO Adv Circulatory letter no. 30/2004 dated 15.09.2004. Further, HO
Adv. Deptt. has issued ID Circular no. 1580 dated 19.07.2005 & Cir. letter no.22/2006 dated 03.11.2006
with regard to Strengthening of Appraisal & Monitoring of Non-funded facilities. The above
guidelines are prescribed for borrowers constituents. In addition to above basic aspects, the following
guidelines are proposed to be observed for opening of LCs on behalf of non-borrower
constituents :

a. More than ordinary care should be exercised while opening LCs for customers who do not enjoy
credit facilities with the bank but only maintain a current account.

b. If any request is received from such a customer,the(branch)sanctioning authority should subject the
proposal to thorough scrutiny and satisfy itself about the genuine need of the customer. The reason for
approaching the Bank for opening an LC should be ascertained and invariably, reference should be
made to his existing bankers with whom he is enjoying credit facilities, if necessary.

c. Before establishing the credit, it( branch) should also be satisfied through proper credit
appraisal that customer would be in a position to retire the bills when received under the credit
and not approach the branch for credit facility in this regard. For this purpose, the branch
should enquire into the financial position of customer, the source of funds from which he
would be in a position to retire the bills, and prescribe a margin and obtain other security, as
necessary.( it may also call for the detailed financial statements and wealth tax/income tax
returns of the customer to satisfy itself of his financial status). The observations of the branch
in respect of all these points should be recorded in the relative appraisal note.

ii) The customers under Government and Institutional sub-segments, which have valuable
relationship with the Bank in terms of substantial deposits or other ancillary business, would
also be issued LCs/ guarantees, on ad hoc basis, notwithstanding the absence of regular credit
limits sanctioned in their favour based on detailed financial appraisal. Documentation for lien
on their deposits or other securities would be obtained to protect the Banks interests and also
to avoid treatment of such facilities as unsecured for the purposes of Prudential Exposure
norms and Capital Adequacy requirements. Such business would augment the Banks fee-based
income.

iii) Bills discounting limits would be granted to the borrowers within the overall working
capital limits sanctioned for meeting their genuine commercial transactions,
a
aan
nnd
dd n
nno
oot
tt against
accommodation bills drawn on associates/ group companies. Bills discounting limit to NBFCs
would be avoided.


LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
48
Appraisal notes for sanction/renewal/reviewal of credit limits/loans
The information in respect of cheques issued by the Bank borrowers which have been
dishonoured be considered while sanctioning/ renewing/reviewing the limits//loans of such
borrowers. Please incorporate the desired information in the appraisal note(s).
Take over of borrowal accounts from other banks
The Reserve Bank, as a part of ongoing supervision, had undertaken an assessment of the
practices being adopted by the banks while taking over borrowal accounts from other banks.
The review has revealed that the expected level of due diligence had not been exercised by
certain banks. They have, therefore, advised that the financial discipline in no way be
compromised while taking over/ transferring borrowal accounts. While doing so, extant
guidelines on take over of borrowal accounts circulated vide HO Advances Deptt. Cir.letter
no.20/10-11 dated 29.09.2010 be followed.
Further, extant guidelines circulated vide HO Credit Monitoring & Policy Deptt. Cir letter
08/2011-12 dated 26.05.2011 on take over of borrowal accounts from other banks and HO
Vigilance Deptt. Circular no. 463/2011 dated 23.05.2011 on Take Over Of Borrowal
Accounts-Extra Precautions to be taken be complied with.
Providing information to other banks in take over of our borrowal accounts
All the branches are advised to ensure that only factual/correct report ,when called for by
another bank in case of takeover of borrowal accounts, is furnished as per extant guidelines.
Issue of Certificate showing Deposit which in fact is created partly out of loan to enable
the Depositor to get a Visa :
No advance is to be allowed on deposits on the date of deposit itself. It is obligatory on the part
of the field fuctionaries to include the advance and date of deposit as well as the age of
relationship with the party in the certificate so that the foreign embassy may take decision in
the matter.








LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
49
15. RBI BASEL II GUIDELINES ON RATINGS OF CORPORATES

Prudential Guidelines on Capital Adequacy and Market DisciplineImplementation of
the New Capital Adequacy Framework (NCAF)

RBI had issued guidelines for implementation of NCAF vide RBI circular dated April 27,
2007. Subsequently, various amendments/ clarifications on the same were issued by RBI.
Now, RBI has updated guidelines vide Master circular RBI/2010-11/62 dated July 1, 2011
on Prudential Guidelines on Capital Adequacy and Market Discipline New Capital
Adequacy Framework(NCAF) and Circular dated October 13, 2011
Effective Date

Bank has adopted BASEL-II guidelines w.e.f. 31.03.2009 and extant guidelines for
implementation of the same have issued guidelines from time to time and the latest being
RMD Circular No. 215 dated 20.11.2011.

RBIs Basel II guidelines on Risk Weights based on Rating of Corporates

Claims on corporate, exposures on Asset Finance Companies (AFCs) and Non-Banking
Finance Companies Infrastructure Finance Companies(NBFC-IFC), shall be risk weighted as
per the ratings assigned by the rating agencies registered with the SEBI and accredited by the
Reserve Bank of India. The claims on corporate will include all fund based and non fund based
exposures other than those which qualify for inclusion under sovereign, bank, regulatory
retail, residential mortgage, non performing assets, specified category addressed separately
in these guidelines.

The Reserve Bank may increase the standard risk weight for unrated claims where a higher risk
weight is warranted by the overall default experience. As part of the supervisory review
process, the Reserve Bank would also consider whether the credit quality of unrated corporate
claims held by individual banks should warrant a standard risk weight higher than 100 %.

Reserve Bank of India has decided that banks may use the ratings of the following domestic &
international credit rating agencies for the purposes of risk weighting their claims for capital
adequacy :-
CREDIT RATING AGENCIES
DOMESTIC INTERNATIONAL
a) Credit Analysis and Research Limited a) Fitch
b) CRISIL Limited b) Moodys
c) FITCH India c) Standard & Poors
d) ICRA Limited
e) Brickwork Rating India Pvt.
Ltd.(Brickwork) (RMD cir. 224 dt. 27.4.12)







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
50

In view of above, Bank has signed MOU with all the above mentioned domestic credit
rating agencies to encourage its borrowers falling under corporate category (as per Basel
II guidelines) to get its claims rated.


Use of unsolicited ratings

A rating would be treated as solicited only if the issuer of the instrument has requested the
credit rating agency for the rating and has accepted the rating assigned by the agency. As a
general rule, banks should use only solicited rating from the chosen credit rating agencies. No
ratings issued by the credit rating agencies on an unsolicited basis should be considered for risk
weight calculation as per the Standardised Approach.

A better-rated exposure attracts lower risk weight and hence less capital charge. In the process,
Bank may be in a position to pass on the benefits to better rated corporates by offering facilities
at attractive/ competitive terms. On the other hand, unrated borrowers/ facility attracts higher
risk weight and higher capital charge, Bank may pass on the higher cost to unrated borrowers
by increasing rate of interest etc. Bank may also review its lending policy to link sanctioning/
pricing/ monitoring of loans etc. based on the credit ratings assigned by credit rating agencies.
Such ratings are also expected to help the borrowers to understand the inherent business risks
and to evolve suitable strategy to mitigate the risks & remain competitive in business.

















\





LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
51

16. CREDIT RATING FRAMEWORK
Bank has comprehensive Credit Rating Framework contained in RMD (CRG) Circular No.153
dated 26/08/2010. It comprises of Grading system, Credit Risk Rating models for Corporate
and Retail loans, Lending powers linked to Credit Risk Rating, Pricing of loans linked to Credit
Risk Rating etc.

Credit Rating of the borrower shall be intrinsic part of appraisal system i.e. credit rating of all
loans & advances above Rs.2 Lacs is to be done (except exempted categories) irrespective of
the fact whether rate of interest on such type of loan/ advance is linked with credit rating or not.

Bank presently has following internally developed Credit Risk Rating Models:

1) Rs. 1 crore & above RMD Circular No.153 For Corporate
Loans 2) More than Rs.2 Lacs but less than
Rs.1 crore
RMD Circular No.153

1) Housing, Consumer (including
vehicle) & Personal Loans
RMD Circular No.153
dated 26/08/2010
For Retail Loans
2) Education Loans RMD Circular No.153

For PSB Doctors Special Scheme RMD Circular No.153


Bank may adopt and implement a software based Credit Risk Rating Model for evaluating
credit risk of borrowal accounts at the facility level and at the borrower level to arrive at a
Facility Credit Rating and a Borrower Credit Rating respectively. These credit ratings will need
to represent an opinion on the inherent credit quality of the borrower and / or facility and act as
a summary of diverse risk factors to indicate the default probability of the borrower. Such a
model would also store borrower wise historic credit rating data for monitoring changes in
credit quality and generating transition probability information. The model would also need to
capture the data on the credit
quality of all borrowers across the bank thereby assisting the bank in evaluating the credit
quality of its portfolio as a whole.

Borrower Rating: The rating would reflect the credit risk involved in the borrower/
facility and it would also determine the pricing for the credit facilities recommended for
sanction by the appropriate authorities.

Facility Rating: The rating would consider the tenor of the loan, collateral
provided, value of the collateral, volatility of collateral, and enforceability of collateral.
Borrower credit rating and facility rating will be normalised and joint rating would be
put up to sanctioning authority.







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
52
Targets for fresh lending (amount-wise) linked to Credit Rating (CR) is as under:-
CR 1 to 4 80 % or more
CR 5 upto 15 %
CR 6 & 7 upto 05 %


17. CREDIT PRICING

17.1. GENERAL PRINCIPLES:

1. Every credit facility sanctioned/ renewed to a customer will have a pricing approved by the
appropriate authorities while sanctioning/ approving the credit facility. Pricing for fund-based
credit facilities will be interest pricing and for non-fund credit facilities it will be non-interest
pricing. The latter will comprise commission, exchange or other fee- based income to the
Bank. The fixation of the Prime Lending Rate (PLR) will be the responsibility of the ALCO as
per the framework provided in the ALM policy document. The fixation of spread will be based
on the credit rating system.

2. The Banks Board will approve the Banks policy regarding interest pricing and non
interest pricing including the maximum spread. The authorities will follow the pricing
policy while recommending / sanctioning /approving credit proposals.

3. In accordance with the RBI guidelines, the Banks Board/ALCO authorized by the Board
will approve the Banks Benchmark Prime Lending Rate (PLR) and Base Rate. The RMD
would be responsible for proposing the credit spread based on the credit rating model
proposed to be adopted by the Bank. Apart from approving the credit rating approach, the
Banks Board will also approve the maximum spread that can be charged over the Banks PLR
for loans.

4. Fixed Interest rates may also be offered, often in line with the market practice from time to
time, for partial or complete tenor of the credit facility. However, it would also involve rating
as per the credit rating model adopted by the Bank. Such fixed interest facility may be offered
on certain kinds of Retail segment loans to individuals or selectively to certain categories of
Large borrowers segment. The Banks Board would approve the policy guidelines in this
regard. Till such time the Bank may continue with the present floating rate system .

5. The non-interest pricing norms with scales of commission, exchange and other fees/ charges
would be laid down by the Bank, having regard to the guidelines of RBI/ FEDAI/ IBA and the
charges of the competitors. The Banks Board will also approve the scales of non-interest
pricing.








LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
53

17.2. REGULATORY PRICING: Will be as per RBI guidelines issued from time to time
on categories of advances like advances upto Rs.2 Lacs, advances where pricing not to exceed
PLR, Pre-shipment, Post-shipment, DRI Advances, Advances against security of commodities
covered by SCC directives of RBI etc.

17.3. Pricing without reference to Banks Base Rate : In the following types of advances, the
Banks Board may authorize interest rates without reference to its PLR:

DRI
Loan against Bank's own FDR
Loan to staff
Crop loan with interest rate subvention
Export Credit with interest rate subvention
Restructured loans with recompense clause.
Finance of off grid decentralised Solar applications ( Photovoltaic and Thermal )
Branches may charge ROI prescribed under the schemes of NSTFDC/NHFDC
to the extent refinance is available. ( RBI Cir No. DBOD Dir.BC.34/13.03.00/2011-
12 Dated 09.09.2011)


17.4. 17.4. 17.4. 17.4. BPLR/Base Rate Linked Loan Pricing:

The Bank has adopted Base Rate System w.e.f July1,2010 as per RBI Guidelines. The
Bank has laid down comprehensive guidelines on Credit Pricing under Base Rate
System which is applicable for all Loan proposals sanctioned after 01.07.2010. However, The
Bank will continue with Benchmark Prime Lending System for all TL borrowers who do not
switch over to Base Rate System at their own till the maturity of the TL.

1. The interest pricing would normally be linked to the Banks PLR/Base rate and the risk
rating allotted to the borrower/ facility, subject to the exceptions mentioned in above
paragraphs. The loan pricing would be spelt out objectively and transparently and approved by
the Banks Board. The PLR would be the floor rate for highest rated customers. The lower
rated customers would be asked to pay the specified spread over the PLR.The final rate quoted
to them would not exceed the maximum spread approved by the Banks Board.

2. The interest pricing under Base Rate System will be linked to Base Rate with exceptions as
per RBI guidelines. Bank will determine actual lending rates on loans & advances with
reference to Base Rate and by including such other customer specific charges as considered
appropriate .

The actual Lending rates charged would be transparent and consistent. The Bank may offer all
categories of loans on fixed or floating rates ,where loans are offered on fixed rate basis,
notwithstanding the quarterly review of Base Rate ,the rate of interest on fixed rate loans will
continue to remain the same subject to the condition that such fixed rate should not be below
Base Rate.
3. In respect of advances under a Consortium, where our Bank is not a leader, ROI approved in
the consortium will be linked to Base Rate of the Lead Bank subject to ROI is not less than the
Base Rate of our Bank. However, if any lender ( Bank/ institute ) charges higher ROI, the Bank
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
54
will also charge higher ROI. In all multiple finance case, ROI shall be in line with the other
Banks/ institutions and shall be linked with the Base Rate subject to ROI is not less than Base
Rate of our Bank.

17.5. PRICE IMPROVEMENTS:
While the pricing will be generally based on the risk rating of the borrower/ facility, an
improvement over the risk-linked pricing norm may be warranted in deserving cases on
account of market competition/conditions. Such exceptional cases for price improvement
would be carefully examined with respect to parameters viz:
1. Classification of the account with us or other bank at the time of take over;
2. Credit Rating ;
3. Overall Value of borrowal a/c;
4. Market Competition;
5. Availability of Security;
6. Repayment
7. Apart from existing/takeover a/cs, price improvement may also be considered for new
accounts based on credibility of borrower, market reputation, conduct of a/c of borrowers
group/sister concerns, CIBIL report etc.

The parameters for making price improvement and the authority to approve such proposals
would be prescribed by Banks Board.

However, such exceptions would be permitted only in justifiable cases with the prior approval
of the authorities as laid down by Banks Board.

Existing powers to improve ROI up to Base Rate from prescribed rating linked pricing under Price
Improvement System stand withdrawn for all sanctioning authorities except CGM upto 0.50% subject
to compliance of the following and compliance of other parameters given in appendix XV of ID
circular no. 1657 dt. 29.05.2012 regarding Delegation of Lending Powers:

a) 3 year old customer or second loan borrower will be given
concession of 0.25%.

b) 5 year old customer or third loan borrower will be given concession
of 0.50%

All other proposals to be considered by MC.

ROI in all fresh cases will be charged as per credit rating linked to Base Rate of the Bank.
Other guidelines contained in Appendix-XV on Loan Price Improvement policy of the Bank under
Base Rate(BR) System of ID Circular no. 1639 dated 01.04.2011 and 1647 dt. 26.09.2011to remain the
same with the exception of amendements as proposed in New guidelines issued on Lending powers as
under:.
Due consideration will be given to the clients who have been dealing with the bank for the
minimum period of 3 years and the quantum of price improvement may be considered taking
into consideration the past dealing with the branch and no. of times the borrower has
approached for sanction of credit facilities .



.RESTRUCTURED ACCOUNTS:
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
55

Existing guidelines Revised Guidelines
(i)In case of Restructured Loans ,if some of the
WCTL, FITL etc.need to be granted, below the
applicable rate, for purpose of viability where
there are recompense etc clause, including the
interest of Working Capital and Term Loan, but
not below the base rate of the Bank, then such
concession will be allowed by next higher
authority in terms of ID cir. No. 1639, than the
sanctioning authority in whose case restructuring
proposal falls..

(i)In case of Restructured Loans ,if some of the
WCTL, FITL etc. need to be granted including
the interest of Working Capital and Term Loan,
below the applicable rate but not below the Base
rate of the Bank, for purpose of viability where
there are recompense etc clause, then such
concession will be allowed by the sanctioning
authority in whose case restructuring proposal
falls..

(ii) In case of Restructured Loans where some of
the WCTL& FITL need to be granted below
Base Rate for the purpose of viability and there
are recompense etc clauses, such cases will be
allowed/ approved by next higher authority (
RBI has advised vide their Master Circular
dated 01.07.2010 on interest rates on Advances
that such lending will not be construed to be
violative of BR guidelines)


ii) In case of Restructured Loans where some of the
WCTL& FITL need to be granted below Base Rate
for the purpose of viability and there are recompense
etc clauses, such cases will be allowed/ approved by
next higher authority ( RBI has advised vide their
Master Circular dated 01.07.2011 on interest rate in
case of restructured loans if some of the WCTL,
FITL etc. need to be granted below the Base Rate for
the purpose of viability and there are recompense
etc.clauses,t such lending will not be construed to be
violation of Base Rate guidelines)


11.CONSORTIUM/MULTIPLE FINANCING:

iii)CONSORTIUM ACCOUNT;

In case of consortium accounts where our bank
is not a leader, ROI approved in the consortium
will be linked to base rate of our Bank subject to
ROI will not be less than Base rate of he Bank.
However if any lender (bank/institution)
charges higher rate of interest , the bank will
also charge higher rate of interest.



iii)CONSORTIUM ACCOUNT;

Banks need not charge a uniform rate of interest
even under a consortium arrangement. Bank will
charge rate of interest on the portion of credit
limits extended to the borrower subject to the
condition that such rate of interest is determined
with reference to the Base Rate of the Bank. In
case of consortium accounts where our bank is
not a leader, ROI approved in the consortium
will be linked to base rate of our Bank subject to
ROI will not be less than Base rate of he Bank.
However if any lender (bank/institution)
charges higher rate of interest , the bank will
also charge higher rate of interest.

iv)Multiple Financing:

In all multiple finance cases , ROI shall be in
line with other banks /institutions and shall be
linked with BR subject to ROI is not less than
Base Rate of our Bank.

iv)Multiple Financing:

In all multiple Finance cases, rate of interest
shall be determined on the basis of internal
credit rating of the borrower,e rate of interest
will be charged as applicable to the category of
the borrower.



17.6. RESET CLAUSE - Reset clause may be applied, depending upon the prevailing market
conditions. In case of Term Loan where any concession has been allowed in the applicable rate of
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
56
interest, reset clause should be stipulated invariably to review the ROI.

17.7. PENAL INTEREST RATE:

The Banks Board would also approve a policy for charging penal interest in an objective and
transparent manner, having regard to the genuine difficulties of the borrower, as required by
RBI. Penal interest represents additional interest charged over and above the normal interest
rate charged from the borrowers. Penal interest would be justified in following cases:

Default in repayment of the agreed installment by the borrower.
Non-submission of financial statements by the borrower for renewal/ review of the
credit facilities.
Non-submission of stock statements and other necessary data as per the terms of the
advance agreed by the borrower.


18. CREDIT APPROVALS AND DENIALS

18.1. GENERAL PRINCIPLES:
The system of credit approval and lending powers of various functionary has been revised in
terms of MOF notification/guidelines dt.05.12.2011 and 03.04.2011.Accordingly Board has
approved the new set up of Credit approval committee of the Board and credit committees at
HO level and ZO level.

As per new guidelines , only Branch Heads will enjoy the individuals Lending Powers of his
scale and Individual Lending Powers of all other functionary posted at ZO/HO level will cease
to exist w.e.f the date of implementation of new system as the Lending Powers have been
vested with various Credit Committees as appended below.

A. FORMATION OF CREDIT APPROVAL COMMITTEE OF THE BOARD (CACB)

The Board has approved the formation of the Credit Approval Committee of the Board in terms of
MOF notification dt.0512.2011, with the following executives as members-
11) The Chairman & Managing Director
12) The Executive Director (s)
13) The General Manager, dealing with the credit proposal
14) The General Manager (Investment)/Finance
15) The General Manager (RMD)

The Credit Approval Committee of the Board(CACB) shall exercise the powers of the Board with
regard to considering Credit Proposals up to Rs 250.00 crore (Rs Two hundred fifty crore only)
[Funded and Non Funded], exceeding the delegated powers of Credit Committee headed by ED. It was
desired by the Board that cases with deviation as per policy to be put up to the Management Committee




1. The meetings of CACB shall be attended by the CMD & the ED(Both mandatory). The
quorum for a meeting of the Credit Approval Committee of Board shall be three members.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
57
2.The said Credit Approval Committee will come into force with immediate effect. The
CACB shall meet on weekly basis on 1st, 8th, 15th and 22nd of every month In case of
holiday or exigency, it will meet on next working day. The Board Secretary will be
convenor of the CACB and will convene the meeting on said dates.

3.The credit proposals up to Rs.250 crore ( Rupees Two Hundred & fifty crore) will
henceforth be put up to Credit Approval Committee for sanction.

4. All work related to CACB will be looked after by the Board Deptt.. The minutes of the
Credit Approval Committee of the Board shall be laid before the Board in the ensuing Board
Meeting.


5.Save as otherwise provided in this clause, the provisions of clause 12 of The Nationalised
Banks(Management & Miscellaneous Provisions) Scheme 1980 relating to meetings of the
Board shall, mutates mutandi , apply to the Credit Approval Committee in respect to the
procedure in regard to transaction of business at its meetings as they apply to the Board. The
minutes of the Credit Approval Committee shall be laid before the Board as soon as may be
after the meeting.

18.2. While exercising their financial powers to approve/ sanction credit facilities, the specified
Committee or the functionaries will undertake due diligence and responsibility to ensure that
the relevant provisions of the Credit Policy (including the Regulatory restrictions on Prudential
norms for lending) and other guidelines/ instructions issued from time to time by the
appropriate authorities are adhered to.

18.3. The proposals for approval or sanction of credit facilities would be submitted by the
prescribed authority (Branch Manager/Zonal Manager) on the prescribed format, including the
financial appraisal, assessment of the credit requirements and reasoned recommendations. The
appropriate authorities, as per the structure/ delegation of Lending Powers, will accord their
sanction/ approval (with or without stipulating further conditions/ covenants) or denial on the
prescribed format.

18.4. A proper classified record of all sanctions and denials of credit facilities (e.g. branch-
wise, sanctioning authority-wise, business segment-wise, risk grade-wise) would be maintained
by a designated department (e.g. Credit Risk Management Department). An analysis of the
credit approvals and denials (giving reasons of denials) should be submitted periodically
(preferably monthly in the initial years) to the Risk Management Committee, for control
purposes. This analysis would help in review of the Lending Powers and also in credit risk
management.

After Core Banking Solutions ( CBS) are put in place the Bank shall build up data to keep
pace with industry accomplishment.




18.5.The financial powers delegated to a functionary will be exercised only by that functionary
and cannot be further delegated to another functionary or individual.
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
58

18.6. Credit exposure (fund-based and non-fund based) beyond the delegated power of CACB
or those in excess of the Prudential limits/ norms prescribed in the Credit Policy would be
sanctioned by the Management Committee or the Banks Board. Credit exposures within the
delegated powers of CACB or HO/ZO level Credit Committees would be recommended by the
Recommendatory Committee as proposed above. Sanction would be accorded by the
/committee having the delegated power.


18.7.ASSESSOR/APPRAISER AND RECOMMENDING SIGNATORIES FOR
SANCTION/ APPROVAL FOR PROPOSALS FALLING UNDER THE POWERS OF
BRANCH HEADS:

1.The above system would continue for approval of Loan proposals falling under the powers
of Branch Heads. It avoids credit approval based on the judgment of one functionary alone and
establishes line accountability for credit recommendations, decisions and combines credit
approval authorities and Lending Powers. Any credit exposure (fund-based and/ or non-fund
based credit limits) falling under the powers of Branch Head would be assessed/appraised by
Loan Incharge and recommended by the Second man.

2. The above system would be followed for sanction of new credit limit, additional credit limit,
changes in the sanctioned credit limit, renewal/ review of the existing sanctioned credit limit
mentioned in the following paragraphs, and also other matters requiring sanction or approval of
credit limit/ facility. In this context, guidelines, as contained in ID circular no. 1485 dated
26.8.1997 would apply for action to be taken after expiry of short review of 3 months in case of
credit proposals not renewed on due date.

In rural branches where there is only one officer/manager working as branch incumbent and
no second officer is available, this provision shall not be applicable.

18.8 Lending Powers as per Credit Risk Ratings/Exposure Norms :

1.The Bank uses a credit risk rating system to describe applicable credit exposure. The
Lending powers of credit approver for Rating category 1 to 5 are higher than Rating
category 6 & 7. This restriction would not be applicable to MC and BOARD. Lending













2. The delegated lending powers as per Appendix I and II will be exercised at the time of
fresh/renewal/ enhancement/restructuring/rehabilitation/revision/ extension in the validity of existing
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
59
credit limits in case of existing clients and sanction in case of new clients linked with the credit rating as
under.
EXTENT OF LENDING POWERS
Credit Rating For
Fresh/Enhancement
For Renewal/Reviewal
1 to 5 100 % 100%
Above 5 75 % 100%


The above powers may be exercised at the time of renewal/ enhancement/ revision/ extension
in the validity of existing credit limits in case of existing clients and sanction in case of new
clients.

Note: The exceptions to the above system would be allowed by the Bank in specific cases, e.g.
overdraft/ loan against the Banks Fixed Deposit Receipts (involving no credit risk); low value
Priority Sector Advances to Weaker Sections and advances under Differential Rate Interest
Scheme (RBI guidelines require sanction by the Branch level functionary without reference to
higher authorities).

3. The Lending Power of the sanctioning authority will be determined with reference to the
total credit exposure involving all the credit facilities recommended for sanction. The credit
limit(s) cannot be split or staggered for seeking piecemeal sanction of a functionary having
lower Lending Powers than the one who would have sanctioned the total credit limits, as per
three initial system. As a corollary to this principle, any additional credit limit, required by a
borrower over and above the credit limits already sanctioned by the Bank, may be sanctioned
by the functionary having Lending Power to sanction the total enhanced credit exposure
(existing sanctioned credit limits plus the additional credit limit), and not by the functionary
having the Lending power to sanction only the additional credit limit in isolation.

18.9.Renewal/ review of Credit limits:

1. Working capital facilities are sanctioned for a period of not more than one year. Before the
expiry of the last sanction, the working capital facilities of every borrower will be appraised
afresh as prescribed. Renewal for a further period not exceeding one year would be sanctioned
by the appropriate sanctioning authorities under the three initial system, with changes in the
credit limit and/ or terms and conditions of the facilities, as recommended and justified. The
guidelines for the original facility sanction would be applicable to the renewal sanction.

2. Wherever renewal of the working capital facility is not possible within the expiry of the last
sanction period, approval for an interim continuation of the existing or reduced credit limit for
a period not exceeding 3 months, may be sought from the appropriate authorities under the
three initial system, furnishing a review of the facility since the last sanction, brief analysis of
the borrowers financial position and the reasons for the delay in the renewal of the facility.
The regular renewal of the credit facilities based on the detailed assessment and financial data
would be submitted for sanction before expiry of the approval for the interim continuation of
the credit limit.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
60
3. For the medium/ long-term credit facilities, a review on completion of the assisted project
and on an annual basis thereafter would be submitted for approval of the appropriate
authorities.

18.10.VALIDITY PERIOD OF SANCTIONED CREDIT FACILITIES ARE AS
UNDER:

1. STLs having maturity up to one year :

S.No. Maturity period of STL Validity period of sanction
1. Upto 30 days 3 days
2. Above 30 days & upto 3 months 7 days
3. Above 3 months & upto 6 months 10 days
4. Above 6 months & upto one yea 15days

2. In-principle sanction - 1 month
3. All other types of regular credit facilities except infrastructure projects(Working Capital
and Term Loans having maturity of more than one year) 1 month
4. In case of Infrastructure projects which are usually large projects, the financial
closure takes longer time. Joint documentation by participating FIs/banks take time which
delays a availment. In such cases, the Bank often receives requests for revalidation of
sanctions. In order to streamline this process, the validity of regular sanction in case of
infrastructure exposures will be for six months.

The request of borrower for revalidation be considered by the sanctioning authority on merits
after considering prevailing interest rates. For cases sanctioned by the MC / Board, revalidation
to be allowed by the CMD.

18.11 ENHANCEMENT WITHIN 6 MONTHS OF SANCTION
1. Generally, no enhancement should be considered within 6 months from the date of sanction.
This is to ensure that appraisal at the time of original sanction should be thorough & taking
into account the future outlook/ prospects of at least one year

2. However, respective sanctioning authority may consider sanction of enhancement / fresh
facility to borrower, within 6 months of sanction, on merits of the case, after recording proper
justification.









LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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18.12. SPECIAL APPROVALS:

1. CREDIT APPROVAL COMMITTEE OF THE BOARD(CACB):

With the setting up Credit Approval Committee of the Board, henceforth all special
powers enjoyed by the CMD will vest with the CACB.

a. Due to the unusual risks involved in certain credit facilities as specified from time to time by
the Risk Management Committee, prior specific approval of the CACB would be obtained, in
addition to the sanction by the appropriate authorities. Such matters include:

ii) Credit transaction where equity participation is part of the Banks compensation.
iii) Whenever business consideration require speed of response, and it is not possible to
go to the Board/MC, the CACB would allow sanction in anticipation of Boards/MCs
approval but the proposal should be put up to the Board in immediate next meeting and
Boards/ MC post-facto confirmation should be obtained.
iv) Special powers accorded to CMD (as mentioned in ID Circular No.1625 dated
01/04/2010 ) and amended vide RMD Circular No.114 dated 13/4/2009.

b. Of the Banks Board: If the credit exposure of any borrower exceeds by 5 % the regulatory/
statutory limits prescribed by RBI under its Prudential Exposure norms, e.g. Single/ Group
borrower exposure or advances against shares, the sanction of the Banks Board would be
obtained.

18.13. OTHER APPROVALS:

Transactions approval:

Within the credit facilities sanctioned by the appropriate authorities, first debit transactions
in the borrowers accounts would be permitted only after obtaining the approval of the
Branch Head.

Changes in terms/ conditions:

The authorities competent to sanction such credit facilities, though no increase in the sanctioned
credit limit is required, would approve any material change in the terms and conditions of the
credit facilities already sanctioned except where special powers have been delegated to various
authorities to permit material change in terms & conditions of sanction e.g Change in Rate of
Interest.
Material change in terms and conditions of a credit facility would include such changes
which, if permitted, would result in change of the borrower/ facility risk rating, as defined by
the Bank (e.g. change in margin/ interest rate/ primary or collateral securities/ repayment
installment, dilution of some of the stipulated covenants, or increase in the tenor of the loan).
This is subject to the condition that the credit facility is `standard.

ii) Minor changes in the terms and conditions of a credit facility (i.e. which do not lower the credit
rating of the borrower/ facility as compared to the original credit rating) may be permitted by
the sanctioning authority, or the concerned General Manager, if the loan was sanctioned by him
or authorities superior to him.
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
62

Reallocation of credit limits:
The sanctioning authority may reallocate the credit limits into different facilities to the
borrower within the overall limit already sanctioned, provided the risk rating on the revised

facilities is not less than that for the originally sanctioned limits and he has the Lending Powers
to sanction the revised credit limits.

4. The Credit facilities already sanctioned to a borrower may be allocated to different branch or
branches, as per the borrowers requirements, by the sanctioning authority. In case where the
borrowers accounts are maintained at more than one branch of the Bank,
a Nodal Branch would be identified from such branches for centralizing/ coordinating
purposes.

18.14. EXCEPTIONS REPORTING:
All cases of exceptions where any of the sanctioned terms and conditions of the credit facilities
are deviated, would be promptly reported by the branch functionary to the next higher authority
with relevant particulars for approval/ ratification or other decision. These include:

i) Irregularities within sanctioned limits: All cases of over-drawings in excess of the
Drawing Power in working capital accounts (within the sanctioned limit) or non-payment of
the overdue installment/ overdue interest / overdue other liability by the borrower/ co-obligant
would require reporting/ to the appropriate authorities who sanctioned the original credit
facility.
ii) Irregularities above sanctioned limits: No drawings above the sanctioned credit facilities
can be permitted without the specific prior approval of the appropriate authority who has the
Lending Power equal to or more than the total credit limit involved (including the
overdrawings).

iii) Non-execution of Documents: If the required documents are not executed by the
borrowers/ guarantors on the prescribed formats, no drawings can be permitted in such
accounts without the prior approval of the appropriate authorities. Such cases if allowed, will
be subject to time frame for completion of formalities being clearly laid down, and penal
interest being prescribed by the sanctioning authority. In case formalities are not completed in
time, it should be treated as serious default, and action should be initiated to recover the
amount lent.
iv) Non-creation of charge over the securities: If the required charge (hypothecation/
pledge/ mortgage etc.) over the securities have not been created by the borrowers/
guarantors in favour of the Bank, no drawings can be permitted in such accounts without
the prior approval of the appropriate authorities for such deferral (ibid. iii above).








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18.15. CREDIT REFUSALS:

18.15.1. Credit proposals which fall under any of the following categories may be refused by
the appropriate authorities:

i) Statutory & other restrictions on lending, as specified in the Loan Policy: Refusal will be
authorised by B.M. under report to his next higher authority.
ii) Proposals not meeting the credit appraisal norms or involving credit rating below the
minimum standards: By the appropriate sanctioning authorities with Lending power equal to or
more than the credit limits applied/ recommended.
iii) Other kinds of credit proposals as laid down by the appropriate authority from time to time.

18.15.2. The reasons for refusal of the credit facility should be recorded by the authority
concerned and advised promptly to the next higher authority. The BM will submit monthly
reports of Credit denials along with the reasons to the Zonal Manager. Same procedure would
be applicable at other levels. These instructions will not apply to Credit committee at central
office and above.

19. MARGIN AND SECURITY (COLLATERAL) MANAGEMENT

1. GUIDING PRINCIPLES:

1. Security management involves creation of enforceable charge over the borrowers /
third party assets in favour of the Bank before disbursement of the advances/ loans and
ensuring their proper valuation/ storage/ maintenance and insurance at regular intervals,
so that the Banks advances/ loans remain fully covered by the realizable value of the
securities charged to it. To subserve this objective, the charged securities are valued at
periodic intervals on conservative basis and stipulated margins are maintained at all
times.

2. The absence/ inadequacy of the assets/ securities makes the advances/ loans
unsecured/ irregular (or out of order) and results in the application of stringent follow
up by the Bank and regulatory authorities. Substantially enhanced provisions are also
required for doubtful assets in respect of the unsecured portion of the advance as
compared to the secured portion.

3. The specific details of the securities charged should be clearly mentioned in the
security documents.

2. SECURITY CLASSIFICATION:

1. The Bank offers different credit facilities - fund based as well as non-fund based
(quasi credit limits) - on the basis of need assessment. The facilities should remain
secured by adequate value assets - current and / or fixed with the prescribed margin
cushions so that the drawing powers / net values fully cover the outstanding in the
account (s) at all times.


LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
64
2. Primary securities are taken to cover the full / core facilities, and suitable charge /
lien thereon are created in favour of the Bank. Generally, following securities are taken
for various kinds of credit facilities:
For working capital credit facilities (e.g. cash credit / overdrafts): Primary
security is a hypothecation or pledge charge over the borrowers stipulated current
assets, such as raw materials, stocks-in-process, finished goods, book debts.
For term-loans and Deferred Payment guarantees: Primary security is mortgage
of the specific fixed assets financed.

For Project loans: Mortgage of fixed assets and hypothecation of movable
assets of the project.
For Corporate loans: Hypothecation charge of movable assets of the borrower
plus personal guarantees of the promoters/ main directors plus other collateral, on
merits of each case.

3. With a view to strengthening the security cover in certain advances and also to
guard against an unexpected steep erosion in the value of the primary security, bank
shall obtain collateral security, having good realizable value. Such collateral security
(ies) would be enforceable in cases of default where the primary security is inadequate
to liquidate the Banks outstanding dues. Detailed operational guidelines on obtaining
collateral security & margin are contained in RMD Circular No.114 dated 13/4/2009.

4. Margin stipulations vary, based on the class of assets, category of advances, type of
borrower, and nature of facility (ies). The sanctioning authority would stipulate the
margins in respect of each security class for the advance/ loan. While calculating the
drawing power in the borrowal accounts on the basis of the stocks statements, it would
be ensured that the stipulated margins are indeed being maintained.

5. The stipulated margins on the securities constitute an essential term and condition of
the advances/ loans and as such these shall not be changed without the approval of the
appropriate sanctioning authority. In exceptional cases of liquidity constraint of the
borrowers and to enable them to meet pressing financial needs, the appropriate
authority may allow, on merits of each case, reduction in the margins for a temporary
period.

6. RBI have stipulated certain minimum/ maximum margins for advances under
specified schemes (e.g. sensitive commodities covered by the Selective Credit Control
directives, Export Credit, Priority Sector Advances). These would be stipulated in the
sanction and adhered to in the conduct of the accounts concerned.









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3. VALUATION AND INSURANCE OF SECURITIES:

1. The assets charged to the Bank would be valued in tune with prevalent banking
norms/ accounting standards/ practices. The valuation method would be prescribed in
the terms of the sanctioned advances. Stocks of raw materials are valued at cost or
realizable value, whichever is less. Fixed assets to be valued at realizable value to be
ascertained by approved valuer of the Bank, as per extant Bank guidelines. The
regulatory guidelines for valuation of commodities/ assets (e.g. sensitive commodities
covered by SCC directives) would be followed.

2. The assets charged to the Bank would be adequately insured against all applicable
risks to protect the Banks securities. The Banks lien would be duly registered with the
insurance companies and recorded in the respective insurance policies. The insurance
policies would be renewed periodically until the Banks charge subsists on the
securities in performing, NPA accounts including T.W.O. accounts where the
securities have been charged to the Bank.


4. FORMS OF CHARGE:
1. Hypothecation: defined in the securitization act 2002 as Hypothecation means a
charge in or upon any movable property, existing or future, created by a borrower in
favour of a secured creditor without delivery of possession of the movable property to
such creditors, as a security for financial assistance and includes floating charge and
crystallization of such charge into fixed charge on movable property

2.Pledge: defined as Bailment of goods for securing debts.

3.Mortgage: As per Transfer of property Act 1880 and Indian Contract Act 1872

5. MONITORING OF THE BANKS SECURITIES:

1. Branch Manager will closely monitor all aspects of security, margins, charge
creation and continued validity thereof, including insurance covers. Prescribed
guidelines in this regard, as operationally applicable, must be followed and deviations,
if any, brought to the notice of the next higher authority. Quick remedial measures must
be taken to set right the deviations, if any, as a control measure.

2. Monitoring values of security charged / collaterals too would be ensured, so that the
valuation reflects the true current values of the relative assets / depreciated value of the
fixed assets / cost of acquisition, whichever is lower. Periodic cross-verification of the
valuation of plant and machinery, by approved valuer/ engineer in consultation with
controlling/ Sanctioning Authority would be ensured by the Branch Manager.







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3. Sanctioning Authority must obtain specific confirmation from the Recommending
Authority, at the time of annual renewal of working capital advances, and at least once
every year in case of term loans / DPGs, to ensure that effective measures are in place,
at operating levels, to safeguard the Banks interest in terms of sufficient value of the
security, continued validity of the Banks charge / lien thereon, proper storage and
insurance cover thereon.

6. NATIONAL BUILDING CODE OF INDIA (NBC)

The National Building Code of India (NBC), a comprehensive building code, is a national
instrument providing guidelines for regulating the building construction activities across the
country. It serves as a Model code for adoption by all agencies involved in building
construction works be they Public Works Departments, other government construction
departments, local bodies or private construction agencies. The Code mainly contains
administrative regulations, development control rules and general building requirements; fire
safety requirements; stipulations regarding materials, structural design and construction
(including safety); and building and plumbing services. Revised NBC has now been brought
out as National Building Code of India 2005 (NBC 2005).

Bank while obtaining immovable properties as security for Loans, should get it ascertained
from bank's approved valuer that NBC 2005, as issued by Bureau of Indian Standards (BIS)
(as amended from time to time) has been complied with.

7. National Disaster Management

The Need for Making All New Constructions Earthquake-Resistant

Bank while obtaining immovable properties as security for Loans, should get it ascertained
from bank's approved valuer that Guidelines issued by National Disaster Management
Authority (as amended from time to time) has been complied with. ( RBI Master Cir dated
01.07.2011 Housing Finance 3.3.2 )














20. CREDIT DOCUMENTATION
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
67

1. GENERAL PRINCIPLES:

1.1. The objective of credit documentation is to clearly establish the debt obligation of the
borrower to the Bank. By serving as the primary evidence of the borrowers (obligors)
debt to the Bank, the documents would enable the Bank to recover its dues (including
interest) from the obligors through a Court of Law, in case the obligors dispute their
liability to pay the dues. This underlies the need for adherence to the standards and care
at various stages of documentation- pre-execution, execution and post-execution stages
as spelt out herein.
1.2 In consultation with its legal department/ external legal consultants and with the
approval of the Board or other designated authority/ committee, the Bank would
prescribe the Standardized documents/ sets of documents, for various kinds of:

A.Credit facilities: e.g. cash credit, overdraft, demand loan, export finance, term
loan, letter of credit, guarantees;

B.Borrower entities: e.g. company, partnership and proprietary firms, association,
society, individuals.

1.3. In most cases of credit facilities, the standardized sets of the documents would be used as
applicable, depending upon the type of the credit facilities sanctioned and the type of the
borrower entity. In cases of credit facilities for which standard documents have not been
prescribed or are not appropriate, the documentation would be done on case to case basis in
consultation with the HO Law & Recovery (L & R) Deptt., e.g. for structured finance or
customized credit facilities. The specifically drafted documents would be approved by the
designated authority/ committee.

1.4 Pending approval of the specially drafted documents by the designated committee/
authority, ad hoc approvals of such documents may be necessary to meet emergent
requirements. The authority competent to sanction the overall credit facilities to the borrower,
would be the authority to accord ad-hoc approval for the documents to be obtained in such
cases and also for modifications in the approved documents.

The draft documents/ agreements shall be first prepared by the concerned Departments in
consultation with Banks counsel and are subsequently vetted by HO Law & Recovery Deptt.

1.5 The primary responsibility for obtaining credit documents will rest with the Branch
Manager, who will ensure that the appropriate documents (standardized or specially
drafted and approved by the competent authority) are properly executed in time by the
appropriate parties (obligors/ guarantors). The BM will ensure that the following pre-
execution, execution and post-execution requirements are fully complied with.







LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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i)Pre-execution Process: It is aimed at ensuring that the documents cover the creation of valid
security in favour of the Bank over the intended assets and cover all the credit facilities sanctioned,
including quasi-credit facilities. Suitable searches with the Registrar of Companies / Sub Registrar of
Assurances or Land Registry must be conducted, before execution of documents to ensure that the
required charge in favour of the Bank can be validly created. BM to release the credit facility only
after obtaining 1
st
stage vetting certificate from the advocate as per extant guidelines of the Bank

ii)Execution of documents: The BM will ensure that all required documents are completed
and all relevant particulars are accurately incorporated, and execution is effected by the
borrowers/ guarantors or their duly authorized representative as the case may be. BM will
ensure that suitable enabling resolutions, wherever required, have been obtained, and
documents are executed in accordance therewith, and that only duly authorized signatories
execute the documents, on behalf of the borrowing entity.

iii)Post-execution Process: The security documents represent primary evidence of the grant /
release of the credit facilities, and govern the continuance thereof, in conformity with the terms
and conditions detailed therein. As such, BM will ensure that the required returns are filed,
where applicable, with the Registrar of Companies, within the stipulated time frame, to register
the charge created in favour of the Bank.

iv)The provisions contained in Section 23 of the SARFAESI Act require that the particulars of
every transaction of securitisation, assets reconstruction or creation of security interest shall be
filed, with the Central Registrar in the manner and on payment of such fee as may be
prescribed, within thirty days after the date of such transaction of creation of security, by the
securtisation company , reconstruction company or the secured creditor.

1.6Safekeeping: The documents would be kept in joint custody of loan officer and branch
manager, or any designated officer authorized by BM, after due recording thereof in the
prescribed registers, so that their retrieval is quick and no damage to them is caused. The
documents would be held overnight in F&BR safes or in the Banks strong room. They can be
taken out during the day but record of each withdrawal, including person, purpose, and
authority-allowing withdrawal of documents must be recorded. Under no circumstances the
documents be kept outside for any reason, the only exception being filing in court.

1.7 Protection from Limitation: Balance confirmation from the obligants (at least once
every half year), revival letters within the stipulated time periods (well before the documents
become barred under the law of limitation), searches at the office of the Registrar of
Companies / Registrar of Assurances would be done meticulously and timely by the officers
entrusted with these responsibilities.

1.8 Reviews: Periodically the documents would be reviewed and searches effected to ensure
continued safety and legal enforceability of the Banks documents. It would also be ensured
from the periodic reviews that the documents cover not only the entire credit facilities
originally sanctioned but also all the modifications / variations subsequently made in the
nature/ limits of the credit facilities and terms and conditions thereof.




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2. DEFERRALS:

2.1 Should the credit facilities require to be disbursed prior to the execution of the
prescribed / approved documents, specific prior approval of the sanctioning authority
would be obtained by the BM. Such deferrals would not exceed a period of 30 days
from the sanction date.

2.2 Any further extension in execution of the documents beyond 30 days would be allowed
only with the specific prior approval of the CMD , specifying the reasons for such
extension.

2.3.Details of the deferrals must be closely monitored by the BM / Zonal Manager/DGM of the
zonal office with a view to ensure that the prescribed / approved documents have been taken, post-
disbursement, within the allowed time frame.

The above system may be made operative only after the credit audit system gets well stabilized
for a year or two. This will help in checking /correcting deviations/misuse in time .

3. AUTHORIZATIONS / CHECK LIST:

3.1 Only the officials holding valid Power of attorney (PA) of the Bank to do so or an
authorized representative pursuant to Board Resolution would execute security
documents that are required to be signed on behalf of the Bank.
3.2 BMs would refer to the checklist of documents to familiarize themselves with the types
of documents / forms of security creation / registration of charge / modifications therein /
liquidation of charge, etc. to ensure compliance of the prescribed procedures.























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21. CREDIT ADMINISTRATION AND MONITORING

1. GENERAL PRINCIPLES:

1.1 Credit Monitoring involves follow-up and supervision of the Banks individual loans as
well as the entire loans portfolio with a view to maintaining the assets quality at a desirable
level by proactive and corrective actions aimed at controlling and mitigating the risk to the
Bank. The main objectives of Credit Monitoring are:
i) To ensure compliance with the terms and conditions of the credit sanction.
ii) To ensure the end-use of the Bank funds by the borrowers as per the sanctioned/
approved purposes and prevent diversion of the Banks funds for unauthorized purposes.
iii) To make assessment of the health of the borrowal units at periodic intervals with
reference to the key indicators of performance like activity level, profitability, management
standards and verify how far these are in line with the assumptions made in the credit
appraisals concerned.
iv) The Head, Credit to initiate appropriate steps after identifying early warning signals
in individual accounts. CRM group would analyze segment-wise early warning signals, if
any and formulate strategies to be initiated by HO Advances Department to mitigate
relevant risks.
v) To periodically review the loans portfolio of the Bank or of its specified segment to
find the overall assets quality/ risk and compliance with the prudential norms- regulatory
and internal, and take the necessary corrective steps.

1.2 Credit Administration encompasses various supportive, control and coordinating
functions at various stages of credit from sanction/ approval to pre-disbursement and to
post-disbursement stages, aimed at protecting the Banks interests at all times and
expeditious credit delivery to the customers. It facilitates and supports various credit
processes, credit delivery and credit follow-up and monitoring. The Credit department
at Central Office and Credit cells at zonal offices in respect of all the business segments
will look after the Credit Administration.

1.3 Credit Monitoring Department

Credit Monitoring Deptt. has been established at HO and detailed guidelines on creation
of the Credit Monitoring Infrastructure and system of follow up, have been circulated
vide I.D.Circular No.1619 dated 1.11.2009.













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2. PRE- DISBURSEMENT STAGE:

2.1. The BM would keep on record the detailed terms and conditions of the sanction and the
borrowers acceptance to these terms. Apart from the execution of the required documents by
the borrowers/ guarantors, the status of creation of the stipulated charges over the specified
assets, insurance of the charged assets with the Banks lien noted, the bringing in the margin
money/ promoters contribution, and compliance with other terms and condition of the sanction
would be ascertained / verified meticulously.

2.2. All regulatory compliance, including Board resolution under the Companies Act, 1956
for the borrowing from the Bank and authorization to the specified signatories for drawings
from the Bank accounts, etc. would be obtained/ on record. Necessary compliance report would
be obtained from the concerned functionary.

3. DISBURSEMENT STAGE:

3.1. Upon receipt of the confirmation of the officers responsible for completion of
formalities BM would issue clearance memo for release of the approved credit
facilities, after satisfying that all pre-release requirements have been met.

4. DEFFRRALS / WAIVERS

4.1. Should, for a good reason, deferral / waiver be required by a borrower for a prescribed
document, the following guidelines would apply:

Any such request must be recorded, critically examined by the BM and
recommended for approval of the appropriate authority. No deferral would be allowed
without the approval of the specified authority.

Regulatory / legal documents cannot be deferred.

Internal transaction documents may be deferred up to a maximum of 30 days by the
appropriate authority, in genuine cases of difficulty.

4.2. Any further extension / deferral beyond 30 days would be done only with the specific
prior approval of the CMD.










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5. POST- DISBURSEMENT SUPERVISION / FOLLOW - UP:

5.1. Off- Site follow up (without visiting the borrowers factory/ office/ godowns): It
includes:

Ensuring timely receipt of stocks/ assets statements at stipulated frequency and their
critical scrutiny and calculating the drawing power in the accounts after reckoning the
valuation, margins and liens.

Ensuring timely receipt of financial data from the borrower under the Quarterly
Information System (QIS), their scrutiny to check end-use of bank funds activity level,
profitability and liquidity etc. in the previous quarter and plans for the next quarter.
Conduct of the borrowers accounts with the Bank and taking corrective measures
for irregularities, if any, and their prompt reporting for ratification to the appropriate
authority. It would also be ensured that the drawings do not exceed the sanctioned
limits or prudential norms, without prior approval of the appropriate authorities.
Ensuring compliance of covenants, including repayments of agreed sums by the
borrowers.
Half yearly/Quarterly/Monthly review of the borrowal accounts would be carried
out depending upon the credit rating/health of individual accounts.

5.2. On- site Supervision: It includes:

Visit to the borrowers factory at stipulated intervals for dialogue with the
borrowers management on relevant issues of mutual interest, checking the assets
levels /accounts books and getting a feel of the activity level and general atmosphere in
the factory.
Gathering and documenting market reports on the borrowers credit standing /
product acceptance etc.
Attending consortium meetings and dialogue with co- bankers regarding the
borrowers accounts.

6. STOCK AUDIT:

In order to review the position of assets financed by the Bank, detect and adequately respond to
early warning signals and initiate corrective measures, yearly stock audit would be conducted
in all cases of advances above a cut-off level. The stock audit shall be carried on yearly basis
of accounts of Rs. 100 lac and above by external CAs.

However, in branches under concurrent audit , external CA to conduct stock audit in second
half of the year.). The external or internal auditors would carry out the stock audit as the Bank
may decide. Stock audits would include the following:






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73

Comparison analysis of two consecutive stock statements and reconciliation thereof.

Verification of details of purchases, issue and consumption of raw materials.

Verification of sales dispatches and sales-returns / rejections, as also qualitative
reports thereon.

Details of paid for / unpaid stocks, levels and trends of creditors.

Verification / reconciliation of bills details with the relevant statutory declaration /
returns filed by the borrowers.
Diversion of funds: Such checks and balances are also aimed at detecting and
preventing diversion of funds availed for an approved purpose, to another un-declared /
un-approved purposes.


7. CREDIT AUDIT:

Credit audit will examine compliance with extant sanction and post- sanction procedures
laid down by the Bank.
The system /monitoring for the credit audit to be followed will be as per HO Inspection
Deptt. circulatory letter no. 335/2011-12 dt. 30.06.2011.


8. OTHER ASPECTS OF MONITORING:

8.1. Ongoing customer contact is essential to closely monitor credit- related developments
and to tap new businesses. Loans must be closely monitored by periodic examination of
published / circulated / available audited and un-audited (reviewed) financial results;
covenanted performance vis--vis base covenants, payment record (timeliness), credit
needs, trigger events, general industry developments, market perceptions and
information sought from the clients.

8.2. The Loan shall be reviewed at least once a year for good accounts. Where there are
several clients belonging to one Group, efforts would be made to review all their accounts
together, at least once every year, even if various facilities have been approved at different
times. The consolidated financials of the Group companies on common date would be called
for to appraise the overall position of the Group, particularly when the banks exposure to the
Group is substantial.








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22. CONSORTIUM/ SYNDICATED/ MULTIPLE BANK LENDING

1. GENERAL:

1.1 RBI had issued mandatory guidelines in early 1970s to banks to form consortia in all
cases where there was more than one bank for a customer and the aggregate fund-based
credit limits were Rs. 5 crores or more (later increased to Rs.50 crores or more). The
rationale was the sharing of credit risk and/ or funding by the banks forming a
consortium. Mandatory formation of consortia has been dispensed with since 1997.
Suggesting syndication lending method, RBI have stated as syndication is an
internationally practiced model for financing credit requirements, banks are free to
adopt syndication route, irrespective of the quantum of credit involved, if the
arrangement suits the borrower and the financing bank.

2. SUGGESTED APPROACH:

2.1 As there are no RBI guidelines at present for mandatory formation of a consortium or a
syndicate for granting high value credit facilities to a borrower by more than one bank,
multiple bank lending can be freely adopted by the Bank, irrespective of the amount of
a credit proposal. However, the consortium/ syndicate approach for high value credit
(beyond a limit as laid down by the Banks Board) for new or existing borrowers could
be explored due to the following reasons, and if it is not found feasible multiple lending
method would be adopted:

i) The approach will help the Bank to adhere to the prudential exposure norms
prescribed by RBI for single / group borrowers.
ii) The approach will help achieving the Banks objective of dispersal of credit risk
across borrowers/ borrower groups/ industries/ sectors etc.
iii) The approach will help maintain the desired financial discipline on the
borrower, which may not be possible in multiple lending system in which the borrower
attempts to play one banker against the other.
iv) The approach would help build reciprocal business relationships with other
banks.

3. CONSORTIUM APPROACH :

The consortium approach is suitable for working capital finance where the primary
security for the advance changes frequently. It provides a single window concept for
delivery of credit, execution of documents, submission of data and recovery etc.
Following norms may be followed in consortium lending:

a) The Lead Bank (with the largest share of the advance) makes credit appraisal in
consultation with the members of the consortium. The overall credit facilities/ limits
from the banking system are jointly fixed for the borrower, with individual shares of the
members, which are later approved by the appropriate authorities




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b) Only one loan document (IBA specimen) is executed by the borrower, which is
signed by the Lead Bank on its own behalf as also on behalf of all other members of the
consortium. The sharing of the security and rights and responsibilities of the member
banks are set out in a separate Inter-se Agreement.

c) The Lead Bank makes disbursement of the required credit to avoid delay and
recovers the pro-rata share of the disbursed amount from other members (on
participation certificate or Bill of Exchange basis).

d) The borrowers entire ancillary business (bills, letter of credit, foreign exchange,
deposits etc.) is shared pro rata between the member banks and suitable distribution
method is evolved with consensus.

e) The borrower submits to all the members quarterly financial statements that are
discussed in quarterly meetings of the members for common financial follow up and
corrective action.

f) An inspection team comprising the Lead Bank (permanent member) and one member
do monthly inspection of stocks by rotation.

4. SYNDICATION LENDING METHOD:

4.1 Syndication lending method is suitable for long- term loans where the value of the security
does not change frequently. It allows dispersal of credit risk to the lenders, freedom to the
borrower in competitive pricing and discipline by way of fixed repayment schedule. However,
the mechanism of credit disbursement and repayment of Syndicated lending does not permit
cash credit type of advance, which is possible under Consortium method. Hence Consortium
lending method is more suitable for short-term working capital advances and Syndicated-
lending method is suitable for long-term loans of large size.

4.2. International practice for Syndicated lending would be followed. Some of the main
features of the practice are:

i) Mandate to the Lead Manager by a borrower.
ii) Information Memorandum containing all relevant financial data and credit
appraisal, prepared by the Lead Bank, is circulated to the prospective lenders, soliciting
their participation in the overall loan.
iii) The Loan Agreement (containing all the terms of the loan vis--vis the borrower
and rights and responsibilities of the Lead Bank, Agent Bank, participating banks, etc.)
is signed by all the parties.
iv) The drawdown of the loan takes place as per the agreed schedule.
v) The Lead Manager mainly does supervision and monitoring of the loan.






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5. RBI GUIDELINES ON STRENGTHENING INFORMATION BACK-UP ABOUT
BORROWERS ENJOYING CREDIT FACILITIES FROM MULTIPLE BANKS

5.1. Reserve Bank of India in October 1996 has withdrawn various regulatory prescriptions
regarding conduct of consortium / multiple banking / syndicate arrangements, with a view to
introducing flexibility in the credit delivery system and to facilitate smooth flow of credit.
However, Central Vigilance Commission, Government of India, in the light of frauds involving
consortium/multiple banking arrangements which have taken place recently, has expressed
concerns on the working of Consortium Lending and Multiple Banking Arrangements in the
banking system. The Commission has attributed the incidence of frauds mainly to the lack of
effective sharing of information about the credit history and the conduct of the account of the
borrowers among various banks.

5.2. The matter has been examined by RBI in consultation with the Indian Banks Association
who are of the opinion that there is need for improving the sharing/ dissemination of
information among the banks about the status of the borrowers enjoying credit facilities from
more than one bank.

5.3. Accordingly, RBI vide circular dated 19/9/2008 and 8/12/2008 have issued guidelines/
formats, to encourage the banks to strengthen their information back-up about the borrowers
enjoying credit facilities from multiple banks (which can be downloaded from RBI website). In
this regard, HO Advances Deptt. has already issued Cir.Letter No.23/08-09 dated
26/09/08 and Cir. Letter No.31/08-09 dated 01/01/2009.























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23. EARLY ALERT SYSTEM

1. Bank has in place an Early Alert System that captures early warning signals in respect
of account showing first signs of weakness. Under this system for internal monitoring purpose,
a time limit of 30 days has been prescribed for overdue accounts to determine the threshold for
a proactive intervention well before the account becomes NPA. This is to enable the Bank to
assess whether the default is due to some inherent weakness or due to temporary liquidity or
cash flow problem and accordingly calibrate its response. For example, where there is a default
in an account for 30 days, it may be marked as Special category account. All the accounts
displaying unsatisfactory features/ early warning signals should be put under potential NPA list
for necessary follow up and time bound action to prevent their slippage.

2. The account may be classified as potential NPA on account of one or more of following
illustrative list of features even though the account may be regular :

Delay in submission of stock statement/other control statement/ financial statements
Return of cheques issued by borrowers
Devolvement of DPG installment and non payment within a reasonable period
Frequent devolvement of LC and non-payment within a reasonable period
Frequent invocation of BGs and non-payment within a reasonable period
Return of bills/ cheques discounted
Non payment of bills discounted or under collection
Poor financial performance in terms of declining sales and profits, cash losses, net
losses, erosion of networth etc.
Incomplete documentation in terms of creation/ registration of charge/ mortgage etc.
Non compliance of terms & conditions of sanction
Non payment of interest due in the credit facilities & instalments of principal amount
Non renewal/ reviewal of credit facilities/ term loan


















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3. Special Mention Accounts (SMA) Asset category between Standard and sub-
standard for internal monitoring and follow up. An asset may be marked as SMA once the
earliest signs of sickness/ irregularities are identified. This will help Bank to look at accounts
with potential problems in a focused manner right from the onset of the problem, so that
monitoring and remedial actions can be more effective. SMA may briefly have the following
main characteristics:

The asset has potential weakness which deserves close management attention and
which can be resolved through timely remedial action
If left un-corrected, the potential weaknesses in Special Mention assets may result in
deterioration of the repayment prospects and subsequent adverse asset classification
Apart from continuing irregularities, Special Mention Accounts may also be
categorized on the basis of factors such as inadequate cash flows and management integrity.
Special Mention Accounts would not require provisioning, as they are not classified as
NPAs. The steps is mainly with a view to alerting management to the prospects of such an
account turning bad, and thus taking preventive action in time.

The detail guidelines on the above system are contained in I.D.Circular No.1542 dated
06/11/2002.

4. REHABILITATION AND DEBT RE-STRUCTURING:

4.1 If the review of the Special Mention Accounts (SMA) indicates that the business/ financial
problems of the Units are only temporary, viability studies of the identified Units may be
undertaken by the Bank with the help of external consultants, where necessary. The Units
which show long-term viability and are considered worth retaining the relationship, would be
the candidates for debt re-structuring/ rehabilitation, provided their management are
cooperative, trustworthy and are agreeable to abide by the restrictive covenants, including re-
compensation clause. Additional exposure may be
assumed by obtaining adequate collateral, including guarantees of good companies of the
Group. The other main conditions of the rehabilitation/ debt restructuring may include some or
more of the following (to be decided on merits of each case):

Sacrifice from the borrower and other stake holders commensurate with the Banks
sacrifice by way of concessionary package involving interest waivers, debt re-schedulement
etc. as per RBI guidelines.
Strengthening of the security package, including personal guarantees of the promoters/
Group companies.
Appointment of a Banks nominee as Financial Controller and concurrent auditor to
exercise the desired control over the cash flows and end-use of funds of the Company.
Appointment of certain professionals on the Board of the Company to strengthen the
management.




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Any re-structuring package would comply with all the applicable regulatory
guidelines and shall be approved by the respective sanctioning authority.

4.2 After the Unit is turned-around through the Banks rehabilitation programme and starts
generating profits, the account would be upgraded to Standard Asset as per RBI norm and the
borrower would be asked to execute the re-compensation clause retrospectively in favour of
the Bank.


4.3.The Bank shall follow RBI Prudential guidelines on restructuring of advances as per RBI
Master Circular dated 01.07.2011. The Bank has also laid down its own operational guidelines
for restructuring of advances vide I.D.Circular No.1612 dated 20.12.2008., ID CIR.1652 dt.
30.01.2012 and 1653 dt. 28.02.2012. The Banks guidelines on rehabilitation of sick small
scale industrial units are contained in HO L&R Deptt. Circular No.117 dated 27/2/2002. These
guidelines are applicable for both CDR and Non CDR accounts. The Bank shall take advantage
of provisions of Special Regulatory Treatment to keep accounts performing on restructuring.
The Bank shall keep provision equivalent to diminution in fair value of restructured account in
terms of RBI guidelines. The Bank shall also disclose the information of restructured
outstanding accounts in the Balance Sheet.

5.EXIT OPTION:

5.1.Exit option is a sensitive issue and would be exercised with due care and deliberation by the
appropriate sanctioning authority. The power to recall loans and initiate legal action is laid
down and the appropriate authority having the powers will approve the action. For determining
the authority level at which approval would be accorded, the amount would include all notional
interest and other charges incurred apart from principal and interest applied and not recovered.
The appropriate authority would look into undernoted factors before taking a
decision. If the business/ financial viability of a borrowal unit classified under Special
Mention Account (SMA) continues to be suspect and the account is likely to turn into a
Sub-standard Asset, exit option may be exercised by following one or more of these methods:

i) Freeze the exposure level in a phased manner without adversely affecting the Units
business operations.
ii) Encourage the borrower to adopt multiple banking, particularly when additional
facility is required.
iii) Gradually convert cash credit facility into bills purchase/ discounting facility or
short-term demand loan with repayment programme.
iv) Tighten terms of the facility, such as margin, collateral, cash budget system for
drawings.
v) Settle for a compromise with the borrower.
vi) Sell the asset to an Asset Reconstruction Company.




5.2. Non-problem accounts may also be candidates for exercising exit option by the Bank
for reducing over-exposure to a Group/ industry or when the specific accounts are
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80
considered undesirable by the Bank e.g. due to inadequacy of risk-return yield. In all
such cases BM would recommend the option and relevant sanctioning authority will
decide on the issue.


INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING

The Bank will follow the norms for Income Recognition and Asset Classification (IRAC
norms) as per RBI guidelines.

24. CAPITAL MARKET EXPOSURES

1. GENERAL PRINCIPLES:

Capital Market Exposure deals with credit facilities (cash credit, overdraft, loans, guarantees
etc.) against the primary/ collateral security of shares, debentures, bonds (also units of Mutual
Funds) to various kinds of borrowers (individuals, stock brokers, Market Makers, Promoters).

The Banks lending policy for Capital market exposures would be approved by its Board and
would comply with the statutory and regulatory restrictions/ norms/ guidelines issued by RBI/
SEBI. The Banks Board would prescribe an appropriate level of authority for sanctioning the
Capital Market exposures and lay down an aggregate Bank-wide ceiling for such exposure
within the statutory/ regulatory prescriptions. The aggregate capital market exposure portfolio,
its quality and performance would be reviewed and put up at least on a half-yearly basis to the
Board. The Bank would submit to RBI (DBOD) the particulars of its advances against shares/
debentures / bonds at quarterly intervals.

2. COMPONENTS OF CAPITAL MARKET EXPOSURE (CME)

Banks' capital market exposures would include both direct exposures and indirect exposures.
The aggregate exposure (both fund and non-fund based) of banks to capital markets in all
forms would include the following:

i. direct investment in equity shares, convertible bonds, convertible debentures and units of
equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt;

ii. advances against shares/bonds/debentures or other securities or on clean basis to individuals
for investment in shares (including IPOs/ESOPs), convertible bonds, convertible debentures,
and units of equity-oriented mutual funds;









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iii. advances for any other purposes where shares or convertible bonds or convertible
debentures or units of equity oriented mutual funds are taken as primary security;

iv. advances for any other purposes to the extent secured by the collateral security of shares or
convertible bonds or convertible debentures or units of equity oriented mutual funds i.e. where
the primary security other than shares/convertible bonds/convertible debentures/units of equity
oriented mutual funds does not fully cover the advances;

v. secured and unsecured advances to stockbrokers and guarantees issued on behalf of
stockbrokers and market makers;

vi. loans sanctioned to corporates against the security of shares / bonds/ debentures or other
securities or on clean basis for meeting promoters contribution to the equity of new companies
in anticipation of raising resources;
vii. bridge loans to companies against expected equity flows/issues;

viii. underwriting commitments taken up by the banks in respect of primary issue of shares or
convertible bonds or convertible debentures or units of equity oriented mutual funds; However,
with effect from April 16, 2008, banks may exclude their own underwriting commitments, as
also the underwriting commitments of their subsidiaries, through the book running process for
the purpose of arriving at the capital market exposure of the solo bank as well as the
consolidated bank. The position in this regard would be reviewed after an year.

ix. financing to stockbrokers for margin trading;

x. all exposures to Venture Capital Funds (both registered and unregistered).

3. LIMITS ON BANKS EXPOSURE TO CAPITAL MARKETS

I) Statutory limit on shareholding in companies

In terms of Section 19(2) of the Banking Regulation Act, 1949, no banking company shall hold
shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount
exceeding 30 % of the paid-up share capital of that company or 30 % of its own paid-up share
capital and reserves, whichever is less, except as provided in sub-section (1) of Section 19 of
the Act. Shares held in demat form should also be included for the purpose of determining the
exposure limit. This is an aggregate holding limit for each company. While granting any
advance against shares, underwriting any issue of shares, or acquiring any shares on investment
account or even in lieu of debt of any company, these statutory provisions should be strictly
observed.









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II) Regulatory Limit

i. Solo Basis

The aggregate exposure of a bank to the capital markets in all forms (both fund based and non-
fund based) should not exceed 40 % of its Net Worth, as on March 31 of the previous year.
Within this overall ceiling, the banks direct investment in shares, convertible bonds /
debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds
(VCFs) [both registered and unregistered] should not exceed 20 % of its net worth.

ii. Consolidated Basis

The aggregate exposure of the bank to capital markets (both fund based and non-fund based)
should not exceed 40 % of its net worth as on March 31 of the previous year. Within this
overall ceiling, the aggregate direct exposure by way of the banks investment in shares,
convertible bonds / debentures, units of equity oriented mutual funds and all exposures to
Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 % of its
consolidated net worth.

The above-mentioned ceilings are the maximum permissible and the Banks Board is free to
adopt a lower ceiling for the bank, keeping in view its overall risk profile and corporate
strategy. Bank is required to adhere the ceilings on an ongoing basis.


4. FINANCING OF EQUITIES AND INVESTMENTS IN SHARES

A) Advances against shares to individuals

Loan against shares, debentures and bonds may be granted to individuals to meet
contingencies and personal needs or for subscribing to new or rights issues of shares /
debentures / bonds or for purchase in the secondary market, against the security of shares /
debentures / bonds held by the individual.

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 lakh per individual if the securities are held in physical form and Rs. 20 lakhs per
individual if the securities are held in demat form. Maximum exposure in this segment is
capped at Rs.20 crore.

Such loans are meant for genuine individual investors and bank should not support collusive
action by a large group of individuals belonging to the same corporate or their interconnected
entities to take multiple loans in order to support particular scrips or stock-broking activities of
the concerned firms.






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A declaration from the borrower indicating the extent of loans availed of by him from other
banks as input for credit evaluation should be obtained. It would also be necessary to ensure that
such accommodation from different banks is not obtained against shares of a single company or a
group of companies.

B) Financing of Initial Public Offerings (IPOs) Banks may grant advances to individuals for
subscribing to IPOs. Loans/advances to any individual from the banking system against
security of shares, convertible bonds, convertible debentures, units of equity oriented mutual
funds and PSU bonds should not exceed the limit of Rs.10 lakh for subscribing to IPOs. The
corporates should not be extended credit by banks for investment in other companies IPOs.
Similarly, banks should not provide finance to NBFCs for further lending to individuals for
IPOs. Finance extended by a bank for IPOs should be reckoned as an exposure to capital
market.

C) Bank finance to assist employees to buy shares of their own companies

Bank may extend finance to employees for purchasing shares of their own companies under
Employees Stock Option Plan (ESOP) to the extent of 90% of the purchase price of the shares
or Rs.20 lakh, whichever is lower. Finance extended by banks for ESOPs/ employees' quota
under IPO would be treated as an exposure to capital market within the overall ceiling of 40 %
of its net worth.

These instructions will not be applicable for extending financial assistance by bank to its own
employees for acquisition of shares under ESOPs/ IPOs, as bank is not allowed to extend
advances including advances to its employees / Employees' Trusts set up by it for the purpose
of purchasing its own shares under ESOPs / IPOs or from the secondary market. This
prohibition will apply irrespective of whether the advances are secured or unsecured.

Bank to obtain a declaration from the borrower indicating the details of the loans / advances
availed against shares and other securities specified above, from any other bank/s in order to
ensure compliance with the ceilings prescribed for the purpose.

D) Advances against shares to Stock Brokers & Market Makers

Within the total exposure to capital market of 1.5 % of total advances in aggregate portfolio,
Rs. 5 crores to any single Stock Broker and Market Maker & Rs.10 crores including its
associates (Group) may be allowed. Total exposure at no point to increase beyond 40 % of the
Net worth of the bank of the previous year financials.

However, the credit facilities should not be extended directly or indirectly to stock brokers for
arbitrage operations in Stock Exchanges.








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Advances to Share/ Stock brokers:

i) Eligibility: Advances can be granted only to share and stockbrokers who are registered with
SEBI and who comply with capital adequacy norms prescribed by SEBI/Stock Exchanges.
Further, the Bank would not undertake financing of `Badla transactions.

ii) Overdraft / line of credit against: This facility may be granted to stock brokers against
shares and debentures held by them as stock-in-trade after making a careful assessment of need
for such finance. An assessment of the borrowers financial position, operations on his own
account and on behalf of clients, income earned, the average turnover period of stocks/ shares
and the extent to which the brokers funds are required to be involved in his business
operations. Large-scale investment in shares and debentures on own account by stock and share
brokers with bank finance, should not be encouraged. The securities lodged as collateral should
be easily marketable.
iii) Working capital facilities: These may be granted to bridge the cash flow gap between
delivery and payment for DVP transactions undertaken on behalf of institutional clients viz.
FIs, FIIs, mutual funds and banks. The duration of such a facility will be short and would be
based on an assessment of the financing requirements keeping in view the cash flow gaps, the
brokers funds required to be deployed for the transaction and the overall financial position of
the broker. The utilization will be monitored on the basis of individual transactions. Margins
may be stipulated by the bank (at present minimum 50%) with adequate safeguards and
monitoring mechanism.
iv) Guarantees: These may be issued on behalf of share/ stock brokers in favour of stock
exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee
as laid down by stock exchanges. Bank may also issue guarantees in lieu of margin
requirements as per stock exchange regulations. The bank would assess the requirement of each
applicant borrower; observe usual and necessary safeguards including the exposure ceilings.
. The requirement relating to transfer of shares in banks name in respect of shares
held in physical form shall not apply in respect of advances granted to share/stock
brokers provided such shares are held as security for a period not exceeding 9
months. In sthe case of dematerialized shares, the depository system provides a facility for
pledging and bank may avail of this facility and in such cases there will be no need to
transfer the shares in the name of the Bank, irrespective of the period of holding. The share/
stockbrokers are free to substitute the shares pledged by them as and when necessary. In
case of a default in the account, the Bank would exercise the option to get the shares
transferred in its name.

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Finance to Market Makers:

The Bank may provide need- based finance to meet the genuine credit requirements of
approved Market Makers subject to the following guidelines.
i) Market Makers approved by the stock exchange would be eligible for grant of advances.
Market Making may not only be for equity but also for debt securities including State and
Central Government securities.
ii) Commercial judgment would be exercised in determining the need-based working capital
requirements of Market Makers by taking into account the Market Making operations of the
borrower.
iii) Prudential margin would be stipulated based on commercial judgment.
iv) Collateral for such advances may be scrips other than the scrips in which the market making
operations are undertaken. Securities offered as collateral may include
shares/debentures/bonds/units of mutual funds including UTI as well as securities of Central
and State Governments.
v) It would be ensured that such advances are not diverted for investment in shares other than
the scrip earmarked for Market Making purpose. For this purpose, a suitable follow-up and
monitoring mechanism would be evolved by the Bank.

E) Bank financing to individuals against shares to joint holders or third party
beneficiaries

While granting advances against shares held in joint names to joint holders or third party
beneficiaries, bank should be circumspect and ensure that the objective of the regulation is not
defeated by granting advances to other joint holders or third party beneficiaries to circumvent
the above limits placed on loans/advances against shares and other securities specified above.

F) Advances against units of mutual funds

While granting advances against units of mutual funds, the bank would adhere to the following
guidelines:

i) The units should be listed in the stock exchanges or repurchase facility for the units should
be available at the time of lending.

ii) The units should have completed the minimum lock-in-period stipulated in the relevant
scheme.

iii) The amount of advances should be linked to the Net Asset Value (NAV) / repurchase price
or the market value, whichever is less and not to the face value of the units.

iv) Advances against units of mutual funds (except units of exclusively debt oriented mutual
funds) would attract the quantum and margin requirements as are applicable to advances
against shares and debentures. However, the quantum and margin requirement for loans/
advances to individuals against units of exclusively debt-oriented mutual funds may be decided
by individual banks themselves in accordance with their loan policy.

LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
86
v) The advances should be purpose oriented taking into account the credit requirement of the
investor. Advances should not be granted for subscribing to or boosting up the sales of another
scheme of a mutual fund or for the purchase of shares/ debentures/ bonds etc.

G) Advances to other borrowers against shares/debentures/bonds

Advances against primary security of shares and debentures including promoters shares to
industrial, corporate or other borrowers should not be allowed. However, such securities can be
accepted as collateral for secured loans granted as working capital or for other productive
purposes from borrowers other than NBFCs. In such cases, bank would accept shares only in
dematerialised form. Bank may accept shares of promoters only in dematerialised form
wherever demat facility is available.

In the course of setting up of new projects or expansion of existing business or for the purpose
of raising additional working capital required by units other than NBFCs, there may be
situations where such borrowers may not able to find the required funds towards margin, in
anticipation of mobilizing of long-term resources. In such cases, bank may take collateral
security of shares and debentures by way of margin. Such arrangements would be of a
temporary nature and may not be continued beyond a period of one year. Capacity of the
borrower to raise the required funds and to repay the advance within the stipulated period to be
thoroughly appraised.


H) Bank Loans for Financing Promoters' Contributions

Loans sanctioned to corporates against the security of shares (as far as possible, demat shares)
for meeting promoters' contribution to the equity of new companies in anticipation of raising
resources, should be treated as a banks investments in shares which would thus come under
the ceiling of 40 % of the bank's net worth as on March 31 of the previous year prescribed for
the banks total exposure including both fund based and non-fund based to capital market in all
forms. These loans will also be subject to individual/group of borrowers exposure norms as
well as the statutory limit on shareholding in companies, as detailed in the policy.


I) Bridge Loans
Bridge loans to companies may be sanctioned for a period not exceeding one year against
expected equity flows/issues. Such loans would be included within the ceiling of 40% of the
banks net worth as on March 31 of the previous year prescribed for total exposure (fund-based
and non-fund based) to capital market in all forms.

J) Investments in Venture Capital Funds (VCFs)
Banks exposures to VCFs (both registered and unregistered) will be deemed to be on par with
equity and hence will be reckoned for compliance with the capital market exposure ceilings
(both direct and indirect).





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K) Margins on advances against shares/ issue of guarantees
A uniform margin of 50 % shall be applied on all advances / financing of IPOs / issue of
guarantees on behalf of stockbrokers and market markers. A minimum cash margin of 25 %
(within the margin of 50%) shall be maintained in respect of guarantees issued by banks for
capital market operations. These margin requirements will also be applicable in respect of bank
finance to stock brokers by way of temporary overdrafts for DVP transactions.
Computation of exposure
For computing the exposure to the capital markets, loans/advances sanctioned and
guarantees issued for capital market operations would be reckoned with reference to
sanctioned limits or outstanding, whichever is higher. However, in the case of fully drawn
term loans, where there is no scope for re-drawal of any portion of the sanctioned limit,
bank would reckon the outstanding as the exposure. Further, banks direct investment in
shares, convertible bonds, convertible debentures and units of equity oriented mutual
funds would be calculated at their cost price.
6. Items excluded from Capital Market Exposure & other guidelines are contained are
contained in RBIs Master circular on Exposure dated July 01,2011.

25. CREDIT DERIVATIVES
1. Credit Derivatives are financial instruments that the Bank can use to mitigate credit risk
exposure and risk based capital requirements. Credit Risk arises out of an obligors inability to
meet obligated payments on time. Hence it is also referred to as Default Risk. Credit
derivatives are contracts that enable a bank to unbundle the credit risk portion of its assets,
without transferring the assets.

2. In recent years, credit derivatives have evolved as a major risk management tool. Banks are
the most important players for credit derivatives among market participants which include the
various financial services providers. Credit derivatives have evolved due to the increasing need
for bankers to put their regulatory capital to more efficient use. With credit derivatives, the
Bank can convert a 100% risk weighted asset into a 20% risk weighted asset thereby giving an
80% capital relief. This freed up capital can be further put towards more productive banking
business by the Bank.


Modern day credit derivatives can be broadly classified in following categories.








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Credit Default Swaps:

3. A credit default swap is a mechanism of distributing the default risk of the securities
and loans. It is a swap in which one counterparty receives a premium at set intervals for
guaranteeing to make a specific payment should the credit default event take place.
Such credit default event is defined at the time of drafting the contract between the
buyer and seller of protection. The pricing of such derivatives would depend on the
quality of the underlying credit, demand and supply of underlying credit and the
prevailing credit spread. The Bank, if it decides to reduce or eliminate its exposure to a
particular loan or basket of loans, can buy a credit default swap without the borrowers
knowledge or consent. Credit default swap bears a close resemblance to financial
guarantee. The latter makes good any loss arising due to default of payment. However,
credit default swap goes a step further to enable the lender to be protected against other
events, such as, credit down- grade and apprehended default.

Mechanism of the Credit Default Swap:

------------------------------------>
Pays a periodic upfront premium

<-----------------------------------
Pays a predetermined amount in
case of a default event

The benefits to both the parties are:

The protection buyer is protected against down grading or default event, which in turn
reduces the risk profile of the investment. This releases some capital of the bank for other
business applications.
The protection seller gains exposure into a company, which was not previously available. It
also earns a premium, hence increases its non-funded income

However Credit Default Swaps cover only the credit risk in the asset, while risk on account of
other factors, say, interest rate movements continue with the originator.

Total Return Swaps:

4. The total return obtained from the credit asset is passed on to the protection seller in
return for a fixed predetermined amount periodically. The total returns can be affected
by various extraneous factors like interest rate fluctuations and exchange rate
fluctuations. However, the protection seller guarantees the predetermined returns to the
originator, who, in turn, agrees to pass on the entire collection from the credit asset to
the protection seller. This total return includes any interest payment or capital gains
over the swap settlement period. Typically, there is no exchange of principal. In this
arrangement the protection seller may gain amount of exchange rate volatility and
interest rate change.
Protection
Buyer


Protection
Seller
LOAN POLICY (ID CIRCULAR NO.1656 DT 29.05.2012)
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Mechanism of the Total Return Swap

------------------------------------>
Pays Total Return

<-----------------------------------
Pays a fixed predetermined amount.

Credit Spread Options:

5. A variation on the credit option is the Credit Spread Option. Buying or selling an option
on a borrowers credit spread, provides an opportunity to gain exposure to the
borrowers future credit risk. The Bank can lock in the current credit spread and earn
premium for the risk of adverse movement of credit spreads. It also presents a method
of buying securities on a forward basis at favorable prices. This option is normally
associated with bonds, which are priced and traded at a spread over a benchmark
investment of fixed maturities.


Credit Linked Notes:

6. This is a very important segment of the credit derivatives market. Under this structure,
the coupon or price of the note is linked to the performance of reference assets. It offers
borrowers a hedge against credit risk and the investor a high yield for buying a credit
exposure synthetically rather than buying it in the publicly traded debt.

RATIONALE:

7. The existence of the Bank may be impaired if the sector to which it is over-exposed
fails. This over-exposure to a particular sector may be mitigated by either:

selling off the loans to this sector in the secondary market; or
by diversifying loans to non-traditional sectors.

8. In the former case, the Bank runs the risk of potentially damaging its client relationship;
while in the latter case it may expose itself to an additional risk, wherein it has little
expertise. Credit Derivatives offer a solution in hedging this risk. Diversification,
through credit derivative contracts, will assist the Bank to meet its capital adequacy
requirement.

9. Diversification of portfolio risk without diversifying the inherent portfolio and the
ability to meet the capital adequacy requirements have become important motivators to
use credit derivatives. This instrument will lead to a more optimum distribution of risk
to those investors who are best equipped to manage them. Overall the credit market will
become more efficient, which will reduce the cost of credit for borrowers and pave the
way for an innovative credit management strategy in terms of risk mitigation.

10. The Bank may undertake transaction in credit derivative markets in terms of RBI
guidelines.


Protection
Seller
Protection
Buyer (YES
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26. CREDIT RISK MANAGEMENT (CRM)

The credit risk management structure and its required functions, roles and
responsibilities has been broadly described in the following paragraphs :

1. CRM STRUCTURE
The responsibilities for management of the Credit Function risks covered by this Policy
are divided amongst the Board , Risk Management Committee and Risk Management
Department and their functions are defined in Annexure I

2. CREDIT PORTFOLIO COMPOSITION AND MONITORING

The credit portfolio management at Bank should seek to optimize the benefits associated with
diversification and reduce the potential adverse impact of concentration of

exposures to a particular borrower, sector or industry. It should guide the decision-making
process.
i) Portfolio composition

Bank may seek to measure and manage the portfolio credit risk based on two key attributes:
Correlation; and
Volatility
Though the credit portfolio may be well diversified and fulfill the criteria laid down for counter
party exposure limits, a high correlation in potential performance between two counter parties
may impact the portfolio quality under stress conditions.

Bank may use following techniques to manage its credit portfolio:

Securitisation of Loan Assets: deployed mainly for asset acquisition or a hive-off or for
supporting liquidity.

Credit portfolio correlation: Credit portfolio correlation would mean the number of
times companies/ counter-parties in a portfolio defaulted simultaneously. To manage
credit portfolio, Bank shall correlate between defaults and bond-market spreads and
generalize this for assessing the correlation in a given portfolio.










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Macro-economic factor model: This approach involves projecting the performance
(volatility) of a credit portfolio under altering macro-economic environments. In specific
terms, this would involve a stress-test on the debt-servicing ability of a portfolio of
borrowers under alternative scenarios.

While these tools may be sophisticated, their findings may be limited due to lack of
representative data. Hence, Bank shall monitor its credit portfolio based on the various
prudential exposure norms, industry exposure norms, credit appraisal standards, credit rating
framework, credit monitoring mechanism etc. of the Bank

27. MISC. ISSUES :

(a) UNHEDGED FOREX EXPOSURE

Bank will monitor FCLs, FCDLs & unhedged forex exposure of its corporate borrowers by
seeking complete details of overseas borrowing (ECBs, ADRs/GDRs etc.), if any, along with
details of forex cover etc. Detailed operational guidelines in this regard have been issued vide
HOFEX Circular No.1604 dated 04/01/2011.

(b) STRUCTURED LINES OF COMMUNICATION

In order to have structured lines of communication between various departments like
credit, risk management department, inspection department etc., all important issues/
information, which need to be shared amongst various Deptt.s will be discussed in
forums such as ALCO, CMRC etc.

(c) POLICY FOR NORTH EASTERN REGION

The Bank intends to make special provisions for North Eastern Region in accordance with the
recommendations of committee on Financial Sector Plan for North Eastern Region (NER)
received from RBI. The detailed operational guidelines in this regard will be issued by HO
Priority Sector Deptt.

28. DEVIATIONS OF LOAN POLICY :-

While it is designed to be comprehensive, issues/ situations not addressed/ contemplated in this
Policy nevertheless occur. Under these circumstances, Bank is expected to use its judgment
and act in a manner consistent with sound banking practices. Rigid adherence to the provisions
of this Policy shall be considered to be less important than the prompt execution of risk
reduction measures. In such circumstances requiring prompt action but which is nevertheless
prudent, any deviation of the policy (which is within RBI regulations) will be approved by
CMD & the same shall be put up to Board for information.




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ANNEXURE - I

GOVERNANCE FRAMEWORK FOR CREDIT RISK MANAGEMENT

Board of Directors:

1. The Board of Directors of the Bank will have the overall responsibility for risk
management in the Bank, including credit risk management. It will approve the credit
exposure/ concentration limits, risk management policy (involving risk identification, risk
measurement/ grading, risk mitigation and control), credit risk management structure, credit
pricing policy, industry, country, and institution wise exposure limits etc., in accordance with
the regulatory guidelines.

In addition to its other responsibilities, the Board has the responsibility to:
Approve the business objectives and the high-level policy framework for the Credit
Function activities.
Approve business segments, financial products, prudential exposure limits, credit
approvals and denials process, margin and collateral management, credit documentation,
credit administration and monitoring, pricing the risks, NPA management and the overall
credit risk management as related to the Credit Function business.
Delegate broad risk surveillance and monitoring responsibility to the RMC.
Risk Management Committee (RMC):

2. The RMC will be a sub committee of the Board and will comprise of :


a) Chairman & Managing director
b) Executive Director
c) Three other members of the Board

The under noted executives of the Bank would be permanent invitees to the RMC

(i) GM(RMD), or in his absence , Deputy/Asst. General Manager( Risk Management) as
convener
(ii) Chief Economist( As and when appointed) and

If need be, any other General Manager shall participate as invitee only.








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3. The RMC will discharge the following roles :
A)
i) To set credit exposure/concentration limits to ensure adequate diversification of
risk across borrowers/ borrower groups, industries/ sectors, products, countries etc.
ii) To issue guidelines for a risk grading system that applies to all types of credit
exposures and facilities fund-based as well as non-fund based.
iii) To define broad pricing bands and link the bands with the calibration on the
rating scale.
iv) To link credit pricing (premium and discount) with the risk profiles of various
industries/ sectors.
The RMC may overrule decisions made by the RMD.
(All approvals will be reported to full board in its next meeting)

B) Other roles:

v) To update the Banks board at periodic intervals with an analysis of the overall
credit risk exposure profiles concentration risk (borrower groups/ industries/
sectors/product wise), borrower risk rating, assessment of new products from risk angle
including approving their introduction. along with the corrective measures taken and
recommended.
vi) To recommend changes/ modifications in the credit policy of the Bank and
ensure that it remains in tune with the changing business conditions, regulatory
requirements/ guidelines, and the Banks risk appetite.
vii) To receive and review risk, on the basis of reports put up by RMD (Risk
Management Department ) and approve/ disapprove the decisions of RMD.
viii) To review half yearly migration of credit ratings of loan accounts on banking
book and initiate corrective action to improve the quality of loans.

Risk Management Department (RMD):

The RMD will be headed by the General Manager (Risk Management) who will be assisted by
Assistant General Manager (Risk Management). The RMD will have a dotted line relationship
with Credit Department and credit-related departments at zonal offices. The G.M. (Risk
Management) will Report to C.M.D through ED. The Risk Management Department will not
be involved in the assessment, appraisal, and sanction of loans. The Risk Management
Department(RMD) will have Credit Risk Management group, ALCO support group and
Operational Risk Management as indicated below:









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4. The Risk Management Department (RMD) will:
Measure, manage and control credit-risk on a Bank-wide basis within the limits set by the
Board/RMC.
Enforce compliance with the risk parameters and prudential limits set by the Board/ RMC.
Lay down risk assessment systems, develop MIS, monitor quality of loan/ investment
portfolio, identify problems, correct deficiencies and undertake loan review/audit.
Be responsible for the overall monitoring of the quality of the entire loan/ investment
portfolio. The Department would undertake portfolio evaluations and conduct
comprehensive studies on the environment to test the resilience of the loan portfolio.

The position of the credit risk management group in the Risk Management Department
would be as follows :

Board


RMC


RMD

CRM Group ALCO Support Group ORM Group
(Credit Risk) (Market Risk) (Operational Risk)

5. The main role and responsibilities of Credit Risk Management section within RMD
will include:

i) To conduct bi-annual studies on industrial, retail and services sectors which constitute
portfolio of the bank or areas in which Bank wishes to enter, and put up detailed report
including recommendations to RMC about desirability or otherwise of financing the activity.
ii) To enforce compliance with the credit risk parameters and manage credit risk on Bank-
wide basis within the credit exposure and concentration/geographical limits set by the Banks
Board of Directors /RMC/ RBI.
iii) To lay down credit risk assessment systems in the Bank and develop appropriate MIS
both for loan/investment portfolio








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iv) To monitor and protect quality of the Banks loan portfolio by :

Undertaking portfolio evaluations on the basis of feedback of credit audit
conducted by HO Inspection Department

Undertaking loan/investment portfolio evaluations on the basis of the detailed
studies of the environment to test the resilience of the loan portfolio. Evaluate
performance of various industries , with the help industry studies available from the
market and Banks internal data base The industry evaluations so compiled to be to
be circulated to user departments, zonal offices and specialized branches. Develop
and review periodically portfolio rating models
To review the credit rating approach adopted by the Bank on a periodic basis
v) Credit Policy formulation and periodic reviews
vi)Assist the management in ensuring that consistent standards are followed for
origination, documentation and maintenance of credit. One of the important
functions in this regard would be creation and periodic updation of credit
manuals
vii) Develop and review periodically bank-rating model for monitoring group
exposure limits to various banks and monitor the portfolio.
viii) Develop and review periodically country risk model and monitor the portfolio
ix) Formulate clear and well-documented scheme of delegation of powers for
credit sanction
x) Prepare the bank for the Basle II accord
xi) To analyze new lending products ,both fund based and non-fund based , for
intrinsic risk and likely impact on the lending portfolio, risk return analysis, pricing etc.
xii) To disseminate the information/reports prepared by them from time to time to
user departments, zonal offices and specialized branches

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