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SUMMER INTERNSHIP PROJECT REPORT CREDIT AND RISK MANAGEMENT OF
PARABOLIC DRUGS LIMITED
Submitted by: Pankaj Juneja MBA finance UBS(PU)
ACKNOWLEDGEMENTA journey is easier when we travel together. Interdependence is certainly more important than independence. It will always be my pleasures to thank those who have helped me in making this project a lifetime experience for me. I would like to express my heartiest gratitude to UCO Bank, for giving me an opportunity to work with its Zonal office situated at Sector 17, Chandigarh, in the Credit & Risk Department, my Institute and important persons associated with this project as without their guidance I would have never ever have got a chance to have real life experience of working with a Public Sector Bank of such a great repute and learn practically about the Credit Appraisal Process. I am indebted to my mentor Mr. Rajeev Gupta, Manager, Credit & Risk Department, UCO Bank for his constant support and guidance. This project would not have been half as meaningful if it hadnt been for his personal interest towards the project. He assisted me with time, patience and made my experience truly worthwhile. I would also like to take the opportunity to thank the rest of the staff of Credit & Risk Department, UCO Bank for their help throughout the duration of this project. My heartiest gratitude extends to my faculties who have helped me in every aspect of my work. The greatest credit goes to the blessings bestowed upon me by Almighty God without whose yearning; I could not have even moved a step forward and to my parents who are always a constant source of inspiration in all my endeavors.
PROJECT TITLE:Submitted by: Pankaj Juneja MBA finance UBS(PU)
The project undertaken by me bears the title, Study of Credit Appraisal at UCO Bank. STUDY TYPE: Exploratory- It aims at understanding the topic being researched and defining the identified problem, which involves evaluating the existing studies on the related topic, discussing the problem with experts, analyzing the situation etc. This would also involve gathering the detailed knowledge about the customers and the products and services provided by the organization. Analytical in Nature
LITERATURE REVIEW (Data Collection) Primary data: 1. Informal interview with manager and other staff members at UCO Bank. 2. Documents available at UCO Bank Secondary data: 1. Books 2. Websites 3. Database at UCO Bank OBJECTIVES OF STUDY: 1. To understand the Credit Appraisal Process of a Bank. 2. To understand the financial intricacies of a corporation. 3. To get an exposure of the financial world. 4. To get an understanding about the loan granting procedure at a bank & the requirements needed to be fulfilled by a company. 5. To get an overview of a pharmaceutical industry named PARABOLIC DRUGS. 6. To understand the commercial & financial viability of the proposal Proposal.
Submitted by: Pankaj Juneja MBA finance UBS(PU)
Summer training is an integral part of our academic curriculum. During the training a student gets an opportunity to set the practical aspects of theory. Theory makes the concept clear. I feel great pleasure in submitting this piece of work as my summer training project, undertaken at UCO Bank, Chandigarh. I have tried my best to cover nearly all the aspects related to Credit Appraisal of Bank of India. The working title of the project is CREDIT APPRAISAL PROCESSS. For understanding this, an understanding of the Loan Policy of the Bank, the Monitoring process & the risk mitigation activities is required. A bank extends credit to a number of companies falling under various industries & sectors. With minor alterations, the credit appraisal process for each remains the same. For the purpose of the project, credit extension to a manufacturing partnership firm of textile industry & belonging to SSI Sector has been studied. Various aspects that go into the loan proposal have been studied in detail & conclusion and recommendations have been given based on the same.
Submitted by: Pankaj Juneja MBA finance UBS(PU)
CHAPTER 1 INTRODUCTION Banking A BANK is a financial institution that serves as a financial intermediary. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. The term "bank" may refer to one of several related types of entities: A central bank circulates money on behalf of a government and acts as its monetary authority by implementing monetary policy, which regulates the money supply. A commercial bank accepts deposits and pools those funds to provide credit, either directly by lending, or indirectly by investing through the capital markets. A savings bank ( is similar to a savings and loan association (S&L). They can either be stockholder owned or mutually owned, in which case they are permitted to only borrow from members of the financial cooperative. Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy.
INDIAN BANKING INDUSTRY: AN ANALYSIS 1. Introduction a) Industry definition: The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. Bank of Hindustan, set up in 1870, was the earliest Indian Bank. Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." b) Classification of the Industry i. Public Sector Banks: ii. Private Sector Banks: iii. Foreign banks: UCO Bank HISTORY & HERITAGE: UCO Bank is a commercial bank established in 1943. The idea to establish the bank was first conceived by G.D. Birla (the famous industrialist), after the historic 'Quit India Movement' in 1942. The idea was culminated on the 6th of January 1943, when The United Commercial Bank Ltd. was born with its Registered and Head Office at Kolkata. This all-India character of the Bank has been assiduously maintained till this day not only in the composition of its Board but also in the geographical spread of its 1700 odd branches in the country as well as in its overseas centres in Singapore and Hong Kong. Along Submitted by: Pankaj with 13 other major commercial banks of India, United Commercial Bank was nationalized on 19th July, Juneja 1969, by the Government of India. This historic event brought about a sea-change in the entire fabric of the MBA finance UBS(PU) bank's thinking and activities, commensurate with the government's socio-political approach of mass banking as against class banking hitherto practiced. Branch expansion started at a fast pace, particularly in rural areas, and the bank achieved several unique distinctions in Priority Sector lending and other social
ORGANISATION STRUCTURE: Headquartered in Kolkata, the Bank has 35 Regional Offices spread all over India. Branches located in a geographical area report to the Regional Office having jurisdiction over that area. These Regional Offices are headed by Senior Executives ranging up to the rank of General Manager, depending on size of business and importance of location. The Regional Offices report to General Managers functioning at Head Office in Kolkata. DISTINCTIVE FEATURES: A commercial bank and a Government of India Undertaking, it comprises of government representatives as well as renowned professionals like accountants, management experts, economists, businessmen, and so on, in its Board of Directors. United Commercial Bank has stretched out to of all segments of the economy - be it agriculture, industry, trade and commerce. A distinctive feature of UCO bank is its introduction of 'NO HOLIDAY' branches. These bank branches work on all the 365 days of a year. With the age of global banking, UCO bank has also changed to be adept with the newest technology, boasting of specialized computerized branches in both India and overseas. With a countrywide network of more than 2000 service units which includes specialised and computerised branches in India and overseas, UCO Bank has marched into the 21st Century matched with dynamism and growth! PRODUCTS & SERVICES The bank offers various deposit products such as: 1. Nofrills savings bank account, 2. Money back recurring deposits, 3. Fixed deposit with cheque facility, 4. Two way deposits, 5. Long term fixed deposits, 6. Current account in foreign currency, 7. Fixed deposits in foreign currency, 8. Tax saver term deposits and 9. Current accounts with free remittance facilities. Banks loan products include: 1. Housing loan, 2. Education loan, 3. Personal loan, 4. Car loan, 5. Trade loan, 6. Cash rental loan, 7. Working capital financing and 8. Term loans for agriculture and 9. Other loan schemes. In addition the bank offers various international banking services, which comprise: 1. Foreign currency loans,Submitted by: Pankaj Juneja MBA finance UBS(PU)
2. Finance/services to exporters and importers, 3. Remittances, forex and treasury services, 4. Resident foreign currency deposits, 5. Correspondent banking services, and 6. Various general banking services. It provides international banking services for customers including corporate, non-resident Indians, overseas corporate bodies and foreign companiesindividuals OWNERSHIP: In 2003, the bank made its initial public offering resulting in dilution of GOIs ownership. As on December 31, 2010, GOI had a 63.59% stake in the bank. UCO bank is engaged in providing commercial banking services to individuals and corporates. VISION STATEMENT: To emerge as the most trusted, admired and sought-after world class financial institution and to be the most preferred destination for every customer and investor and a place of pride for its employees. MISSION STATEMENT: To be a bank that HONOURS the TRUST of the CUSTOMER To be a Top-class Bank to achieve sustained growth of business and profitability, fulfilling socio-economic obligations, excellence in customer service; through up gradation of skills of staff and their effective participation making use of state-of-the-art technology. Global banking has changed rapidly and UCO Bank has worked hard to adapt to these changes. The bank looks forward to the future with excitement and a commitment to bring greater benefits to the customer. SWOT ANALYSIS: Strengths Country-wide presence Overseas Presence with Profitable Overseas Operations Strong Capital Base High Proportion of Long Term Liabilities A Well Diversified Asset Portfolio A Large and Diversified Client Base Fully Computerised Branches at Major Centres Branch representation in Top 100 Centres (as per deposits) in the country Weaknesses: The existing hierarchical management structure of the bank, although strength in some respects, is a barrier to change. Modernisation: Uco lags with respect to private players in terms of modernisation of its processes, infrastructure, centralisation, etc. Significant security breaches in their computer systems and network infrastructure and fraud could adversely impact their business.Submitted by: Pankaj Juneja MBA finance UBS(PU)
Loopholes in the policies and practices followed by banks that can cause high level of NPAs in the balance sheet. Opportunities: Increasing trade and business relations and a large number of expatriate populations offers a great opportunity to further expand on foreign soil. The Indian economy is out of woods and the GDP growth is expected to be 8.5 and over 9 percent in 2011-2012 and the growth of financial sector is about 10 percent per annum. Threats: Advent of MNC banks: Large numbers of MNC banks are mushrooming in the Indian market due to the friendly policies adopted by the government. This can increase the level of competition and prove a potential threat for the market share of bank. Consumer expectations have increased many folds in last few years and the bank has not been responsive enough to meet them on time. Private banks have also started venturing into the rural and semi-urban sector, which used to be the bastion of PSU banks Strict norms and lending policies will tend to create financing gaps hampering the economy growth. Higher competition in the market will result into more fluctuations in the interest rates forcing bank to lend below BPLR resulting into less profits. Government has changed completely the fundamentals of lending by implementing the base rate lending system which is surely bound to cause the paradigm shift in the banking sector. KEY HIGHLIGHTS: Broad scale of operations UCO bank had an asset base of Rs.1373.5 bn as on March 31, 2010 which accounted for 2.7% and 2.4% of total deposits and advances respectively in India. The banks deposits and advances registered a CAGR of 23.6% and 20.6% respectively over the past three years. As on March 31, 2010 it had deposits of Rs.1224 bn and advances of Rs.825 bn. The bank has a panIndia presence with a healthy network of 2202 domestic and 4 overseas branches with 608 ATMs facilitating 1.33 mn card holders as on March 31, 2011.The banks entire branch network has now been covered under core banking solutions (CBS) which puts the bank in a position to compete with other larger banks. Moderate capitalization with modest resource profile UCO bank has moderate capitalization supported by capital infusion aggregating to Rs.15.73 bn by Government of India (GoI) through perpetual non cumulative preference shares in the past twoandhalf years. The banks TierI Capital Adequacy Ratio (CAR) under BaselII stood at 7.5% as on December 31, 2010. Currently, the CAR is 9%.The banks modest resource profile is marked by lowerthanindustry average share of current account and savings account (CASA) deposits in its total deposits. The bank continues to face challenges in improving the proportion of retail deposits (savings account and term deposits) in total deposits and is therefore highly dependent on bulk deposits and certificates of deposits (CDs) for its growth. The banks CASA deposits, at 24.8% as on December 31, 2010 was lower than the industry average of 35% on theSubmitted by: Pankaj Juneja MBA finance UBS(PU)
same date. The bulk deposits and CDs constituted 45% of the total deposits. 220.127.116.11 Government ownership provides stability GoI is the majority shareholder in UCO bank with shareholding of 63.59% as on December 31, 2010. This gives stability to the bank both on an ongoing basis and in the event of distress. In 201011, GoI has committed infusion of Rs.201.57 bn in PSBs as additional capital to help the banks maintain Tier I CAR of 8% and to increase its stake in a few PSBs to at least 58%. The government has stated it will maintain overall CAR of PSBs at 12%, so that the banks can grow their balance sheets and remain competitive. KEY RISKS: Risk of non payment by customers Average asset quality Credit risk on account of slowdown in economy FINANCIAL POSITION:
UCO bank witnessed a significant growth of 41.3% in its NII for FY10 and it stood at Rs.23.2 bn as against Rs.16.4 bn in FY09 backed by strong yoy growth in deposits and advances by 22.1% and 19.6% respectively. The bank recorded a strong growth of 27% in agriculture landing and 35% in MSME loans. Strong growth in PPP coupled with bringing down of the cost of funds substantially by shedding high cost deposits and improvement in yield on advances boosted PAT by 81.5% to Rs.10.1 bn in FY10 from Rs.5.5 bn in FY09. UCO banks yearly average cost of deposits dropped to 5.9% in FY10 against 6.6% in FY09 because of reduction in high cost deposits partly because of decline in interest rates. This helped to grow the net interest margin (NIM) by 30 basis points to 1.9% in FY10 from 1.6% in FY09. The bank is well capitalized, with a capital adequacy ratio (CAR) of 13.2% at the end of March 31, 2010 as per BaselII norms as, compared with 11.9% as on March 31, 2009. The bank has raised subordinated debt of Rs. 13 bn by issue of unsecured redeemable bonds of Rs.5 bn as Upper TierII capital and unsecured redeemable bonds of Rs.8 bn as subordinated debt under Tier II capital. The bank has also redeemed Rs.1.5 bn of subordinated debt instruments under TierII capital during the year.Key Stock Indicators Value Face Value per share Rs 10 Dividend Yield (%) 2.7 CMP asSubmitted by: Pankaj Juneja MBA finance UBS(PU)
on 11 May 2011Rs/share : 99.9 Market Cap as on 11 May 2011 (Rs mn) 62,658 P/BV (x): 0.9 Beta (2 year) : 1.1 Free Float (%) 31.9
Submitted by: Pankaj Juneja MBA finance UBS(PU)
Submitted by: Pankaj Juneja MBA finance UBS(PU)
COMPETITIVE FORCES MODEL (Porters Five Force Model)Submitted by: Pankaj Juneja MBA finance UBS(PU)
Credit Appraisal Process at UCO Bank Credit Appraisal ProcessSubmitted by: Pankaj Juneja MBA finance UBS(PU)
Credit Appraisal is the process by which a lender appraises the creditworthiness of the prospective borrower. It is a very important step in determining the eligibility of a loan borrower for a loan. Every potential borrower has to go through the various stages of a credit appraisal process of the bank. The Credit Appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk. DIMENSIONS 18.104.22.168 Basic types of credit There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges: 1. Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time. 2. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured. 3. Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the Loan. 4. Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free Loan- end of each month.-if you pay for the use of it in full at the The process of Credit Appraisal is multidimensional and includes1. Management Appraisal- The identification of the borrower needs to be done properly through scrutiny of his antecedents, experience, competence, integrity, initiative etc. This may be done by obtaining status reports from previous bankers or meaningful assessment of his dealings with bank. In case of corporates, the management structure, the background of the top management, needs to be scrutinised. Bank should be careful if the names of prospective borrowers/promoters appear in the list of defaulters published by RBI/ ECGC etc or in any other list of undesirablecustomers. In case of borrowers/promoters who have been identified as wilful defaulters by banks and advised by RBI, there are certain penal provisions applicable. Credit facilities may not be denied to any constituent merely on the ground that their directors (Nominee of Professional) not connected with the day to day management are appearing on the defaulters list of RBI. However, discrete enquiries may be made about their existing status with the defaulting company. Additionally, it should be ensured that directors of the borrowing company should not have been disqualified due to provisions of Section 274(g) of Companies Act. 2. Technical Appraisal - Technical Appraisal emphasizes on the technical feasibility of the venture and also finds out the possible economic life period of the present technology.Submitted by: Pankaj Juneja MBA finance UBS(PU)
3. Commercial Appraisal - Commercial Appraisal focuses on the commercial viability of the project .It tries to find matters regarding demand in market, the acceptance of product in market. It also focuses on the presence of other substitutes of the product in the market. It also focuses on the multiple scope of the product 4. Financial Appraisal - Financial Appraisal is done to find out whether the promoter is having the capacity to raise finance both own equity and debt? What are the sources of margin? Will the business generate sufficient funds to service the debt and other stakeholders? Is the capital structure optimal? 5. Economic Appraisal - Economic Appraisal examines level of cost/ benefit and IRR (Internal Rate of Return). CREDIT PROPOSAL The scope of credit structure is incomplete without examination of credit proposal. Credit proposal has to be examined from the point of 6 Cs viz: Character: - Antecedents -introduced by whom - Is it a takeover account? In which case, what does the status report say? - Background -Educational, Professional, Socio economic, Political Initiative and -Drive. Capacity: - Experience in the activity Track record Planning, budgeting and review handling production capacity - Capacity utilization - Professional capacity to handle men, material, money and minutes Capacities to handle contingencies and crises. Capital: - Extent of stake in business - Ability to raise finance both owned equity and debt - Ability to inspire and sustain investor confidence - Ability to absorb losses expected and unexpected Structuring and budgeting capital.
Condition: Condition of economy growing, stagnant or depressed - Numbers of competitors - Substitutes in the market - Demand vs. Supply - Government policies and regulations - Status of technology - Availability of manpower, material other resources - Pollution control and effluent treatment.Submitted by: Pankaj Juneja MBA finance UBS(PU)
Collateral: Risk perception and evaluation - Financial parameters - Debt/equity ratio - Asset - Interest Cover - DSCR - Availability, suitability and chargeability of security.
Cash flow: Pattern of cash generation - Liquidity risk - Break-even analysis - DCF Technique NPV IRR PV Index PROCESS OF CREDIT APPRAISAL The process of credit appraisal would begin with the selection of the proponent. It would involve appraising the background of the proponent/management, commercial, technical and financial appraisal. Appraisal of credit facilities would comprise two distinct segments: Appraising the acceptability of the customer. - Assessment of the customer's credit needs. Both the aspects need to be examined simultaneously at the time of the initial entry of a customer to the Bank as also subsequent periodic renewals. The appraisal would be different in respect of: a) personal loans for consumer durables, houses etc ; b) loans to tiny business enterprises ; c) loans to agriculturists ; and, d) Credit facilities to firms, corporates and others for business/trade/ industry.
Submitted by: Pankaj Juneja MBA finance UBS(PU)
Submitted by: Pankaj Juneja MBA finance UBS(PU)
2.1.6 TYPES OF LENDING ARRANGEMENTS Business entities can have various types of borrowing arrangements. They are: ne Borrower One Bank O One Borrower Several Banks (with consortium arrangement) One Borrower Several Banks (without consortium arrangements Multiple Banking One Borrower Several Banks (Loan Syndication) 2.2 CREDIT MONITORING & NPAS 2.2.1 Credit Monitoring Monitoring Objectives: A. Oversee delivery of credit initially after complying with the terms & conditions of sanction following laid down procedures & systems. B. Watch the conduct of advance account on the expected level. C. Identify weak accounts & advise the same to competent authority for prompt corrective action to protect the quality of the account. D. Keep track of the health of the credit portfolio of the bank. E. Developing adequate & appropriate systems & procedure to achieve the above. Monitoring tools: Indicative list of various monitoring tools:A. Branch Level: i. Search report from ROC ii. Information from market/newspapers iii. Factory visit reports iv. Annual financial statements v. Stock statements B. Controlling office level: i. Annual review of the account ii. Statutory audit report iii. RBI inspection report iv. Consortium meeting minutes v. Internal inspection rates C. On Site Tools: i. Inspection of books ii. Stock audit iii. Inspection of fixed assets iv. Interaction with borrowers & their employees v. Inspection of order book position D. Off Site Tools: i. Conduct of account ii. Credit audit report iii. Legal audit report iv. Promptness in paymentsSubmitted by: Pankaj Juneja MBA finance UBS(PU)
v. Special watch reportA. Pre disbursement:
It is to be taken care by Branches, ZOs & concerned sanctioning authorities. Depending upon the terms of sanction in each case, the following actions, wherever applicable, may be taken prior to disbursement: i. Seeking approval from the competent authorities for disbursal of loans/advances sanctioned at Head Office/ Zonal Office by submitting Post Sanction Compliance Report. ii. Completion of legal vetting of documents. iii. Collection of document proof like pro-forma invoice/quotation for the fixed assets to be financed B. During disbursement: All disbursements, whether in loan account or in running accounts, will be related to actual/acceptable performance of business unit. The following aspects wherever applicable, is to be considered for monitoring. i. For Loan Accounts: a) Actual implementation vis-a-vis project schedule b) Possibility of time or cost overrun ii. For Cash Credit Accounts: a) Compliance of sanction terms/stipulations b) Verification of the completion of the implementation of the project. C. Post-discbursement: i. Periodic inspection of stocks ii. Review of account iii. Scrutiny of operations in the account vis-a-vis the activity of the borrower Monitoring Process: A. Reporting of Sanction & Scrutiny by Review Authority B. Documentation C. Legal Audit D. Inspection of Stock & Book Debts E. Stock Audit F. Special Investigate Audit In cases wherein financial/accounting irregularities like diversion of funds outside business,etc, are noticed and/or suspected, Special Investigate Audit by independent C.A and/or competent officer of the bank may be conducted. G. Credit Audit H. Annual Review/Renewal of borrowal accounts I. Monthly Credit Monitoring ReportSubmitted by: Pankaj Juneja MBA finance UBS(PU)
J. Early Warning Signals & Watch Report For internal monitoring purposes under the system, threshold time limits for overdue accounts of different types are designated for a proactive intervention-well before the accounts become NPA. This is to enable the Bank to assess whether the default is due to inherent weakness or due to a temporary liquidity/cash flow problem. Table 5:
K. Slippage Ratio Zones should compute the slippage ratio of the branches under their control & classify them based on such slippage ratio. Branches classified poorly due to high accretion to NPA, should be monitored more closely to arrest further slippage. Slippage Ratio = (Fresh NPA accretion during a year * 100)/Standard advances as at the end of the preceding year. L. Follow up, Supervision & Monitoring of advances under consortium/ Multiple Banking arrangement. 2.2.2 MANAGEMENT of NPAs: Definition of NPA: An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. A Non Performing Asset is a loan or an advance where: A. Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan. B. The account remains out of order in respect of an overdraft/cash credit. C. The bill remains overdue for a period of more than 90 days in the case of bills purchased & discounted. D. The installment of principal or interest therin remains overdue for two crop seasons for short duration crops. E. The instalment of principal or interest therein remains overdue for one crop season for long duration crops. Review & Monitoring:.Submitted by: Pankaj Juneja MBA finance UBS(PU)
Cash Recovery: Once an account is classified as NPA, all out efforts should be made. Branch should immediately take the following steps: A. Borrower & all guarantors should be contacted over phone or by through letters or by visiting them with a request to regularize the account. In course of discussion, if it is observed that borrower is having a genuine problem due to temporary mismatch in fund flow or sudden requirements of additional fund which was not brought to the attention of the Bank before the account became an NPA, Branch should take up with the competent authority for restructuring, rehabilitation to overcome the temporary crisis/problem. B. If it is found that the account does not merit restructuring/rehabilitation, Branch should enquire with the borrowers & guarantors as to how they propose to settle the account &Submitted by: Pankaj Juneja MBA finance UBS(PU)
the time required therefore. In case the Branch is comfortable with the proposed liquidation programme the same should be put up to the Competent Authority expeditiously. C. However if the Branch feels that the irregularity is not of temporary in nature then they should immediately go for taking steps for recovery of Banks dues for regularization/upgradation of the account.
(POLICY DIRECTIVES ON STRATEGIES TO ACHIEVE THE TARGET) The Bank would seek to achieve the target set for credit expansion through emphasis on thrust areas as per Bank's business plan, distribution of targets across its branches based on credit deployment/ absorption capacity of branches and their command areas and delegation of discretionary powers across field functionaries. Additionally, the Bank would provide marketing support, products aligned with market demand, and competitive pricing. Effective client contact on a regular basis would be encouraged. The Bank would also seek to standardize its products, as far as possible, for ease of handling and to reduce operational costs. Monitoring of credit accounts will receive priority at all levels. Bank will take effective steps to constantly improve credit appraisal and account maintenance skills of its personnel. These steps would help the Bank to achieve its objective of minimizing slippage. The Bank has allocated segment wise targets to the Zones taking into account their capacity for credit expansion. The Zones further have distributed these targets amongst the branches under their control, keeping in view the potential of the branches. Quarterly review of the performance vis-a-vis targets allocated would be carried out and necessary follow up would be carried out to achieve over all target set for credit expansion. 22.214.171.124 Delegation of Discretionary Powers Suitable discretionary powers have been delegated to the field functionaries to enable them to accord sanctions on credit proposals without delay. However, suitable flexibility in the existing structure may be carried out to reflect the requirements specific to a scheme or product. This may be based on lower risk perception associated with products/ schemes or competitive requirements. 126.96.36.199 Alignment of Products and Pricing with Market Demand The Bank has adopted a strategy to design and market standardised credit products for various segments in the credit market. Additionally, Bank would also, based on its experience and feed-back received on market and demand, modify its products with a view to improve its market share. Bank would also recognize price competition and align its pricing, subject to other relevant factors, with the market. In case of credit proposals specific to a unit, the Bank would continue to take into account their specific needs keeping in view Bank's profitability, Loan Policy and other directives/ guidelines. 188.8.131.52 Product Development Banking product is a package of deliverables/services, which is specifically designed by the bank for a set of target customers with a purpose that customer and the bank are mutually benefited from it, on an ongoing basis. Bank from time to time develops various products relating to its different business dimensions and can broadly be classified into the following categories: Marketing Support The Bank will undertake product publicity through various modes available keeping in view the cost-benefit aspect, coverage and other relevant factors. This would be carried out to popularize our products and to convey information content.Submitted by: Pankaj Juneja MBA finance UBS(PU)
Bank has added officers with specialization in marketing to its resources. They would form the nucleus around which client contact strategy would be developed. Client contact would serve the objective of maintaining close liaison with existing and potential major customers for the purpose of business and feedback. 184.108.40.206 Standardisation in Credit Dispensation Retail / SE Departments at Head Office will take steps to standardize respective credit products to the extent possible. Standardization of various schemes incorporating process note, documentation, monitoring and follow up will be carried out to simplify credit dispensation process. This will also help in handling volumes by field functionaries and reducing costs. Zonal Offices would also be encouraged to develop schemes suitable to various groups of borrowers within their command area subject to approval by HO Retail/ SE Department as the case may be. 220.127.116.11 Credit Appraisal & Account Maintenance Skills As a long-term measure, the Bank would continue to recruit/identify officers for specialization in credit dispensation. Identified officers would receive exposure in credit processes at branches, controlling offices and Head office. They would also be imparted on-the-job training and classroom trainings at Bank's Staff Training College, B.T.C., and NIBM etc. Short-term measures would include deputing officers from Head Office and controlling offices to assist branch level functionaries in credit dispensation. Further, thrust branches shall be identified based on business potential for maintaining large borrower accounts. These branches would be provided with officers possessing required credit dispensation skills. 18.104.22.168 Marketing for High Value Corporate Accounts Considering the fact that a fair share of Credit Expansion has to come from Corporate Sector, marketing efforts in this segment will be intensified at all levels.
(POLICY Directives on PORTFOLIO Exposure) The Bank would adhere to the following guidelines in achieving its objective of portfolio diversification. 22.214.171.124 Definitions Exposure Exposure shall include credit exposure (funded and non-funded credit limits), investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies, in Indio or abroad and credit exposure of derivative products. The sanctioned limit or outstanding, whichever is higher, shall be reckoned for arriving at exposure limit. However, in case of fully drawn term loans, where there is no scope for redrawal of any portion of the sanctioned limit, the outstanding would be reckoned as exposure. Capital Funds Capital funds will comprise of Tier-I & Tier-II capital as defined under capital adequacy standards(percentage that defines the amount of maximum credit based on assets of theSubmitted by: Pankaj Juneja MBA finance UBS(PU)
bank) and as per the published accounts as on March 31 of the previous year. Tier II capital cant be more than 50% of Tier I capital. The infusion of Capital under Tier-I and Tier-II, either through domestic or overseas issue after the published balance sheet date, will also be taken into account for determining the exposure ceilings. Other accretions to Capital Funds by way of quarterly profits etc. would not be eligible to be reckoned for determining the exposure ceiling. The Bank is prohibited from taking exposure in excess of the ceilings in anticipation of infusion of Capital at a future date. 126.96.36.199 Prudential Exposure ceilings The Bank shall limit its Exposure on a single borrower and borrowers belonging to a group to the following limits: 1. Single Borrower 15% of Bank's Capital Funds 40% of Bank's Capital Funds Single borrower would imply individual borrower that may be an individual, a HUF, a proprietorship/partnership/private or public limited concern, trust etc., but should be a single unit. 2. Borrowers belonging to a Group a) Business entities, whether proprietorship or partnership or private limited company or public limited companies having one or more common Partner /Director. However, in case of Public Limited Companies, the group approach will be based on the concept of commonality of management and effective control on the basis of relevant information available with the Bank. In other words, if a professional (i.e. non-promoter) Director is common between two Public Limited Companies, who does not have substantial share holding / management control, such companies will not be treated as group companies merely on this ground, OR b) A limited Company, which is subsidiary of another limited company or closely held company with substantial interest
188.8.131.52.1 Prudential Exposure norms for NBFC: Single borrower NBFC 10% of Bank's Capital Funds Single Borrower NBFC 15% of bank's Capital Funds (In case additional 5% is on lent to Infrastructure) 184.108.40.206.2 Exemptions Single/Group Exposure limit will not be applicable on the following types of exposures: Limits allocated directly by the Reserve Bank of Indio for food credit. Existing/additional credit facilities (including funding of interest and irregularities) granted to weak/sick industrial units under rehabilitation packages. Exposures where principal and interest are fully guaranteed by Government of India. Loans and advances granted against security of Bank's own term deposits. 220.127.116.11 The indicative list of various forms of exposure: All types of funded and non-funded credit limits. Facilities extended by way of equipment leasing, hire purchase finance and factoring services. Advances against shares, debentures, bonds, units of mutual funds etc. Bank loan for financing promoter's contributions. Bridge loans. Financing of Initial Public Offerings (IPOs) / Employee stock Options (ESOPs).Submitted by: Pankaj Juneja MBA finance UBS(PU)
Underwriting obligations. Buy back Commitments. Investment in shares and debentures/bonds of companies acquired through direct subscription, devolvement arising out of underwriting obligations or purchased from secondary markets or on conversion of debt into equity. Investment in PSU bonds through direct subscription, devolvements arising out of underwriting obligations or purchase made in the secondary market. Investment in Commercial Papers (CPs) issued by Corporate Bodies/PSUs. nvestment in debentures /bonds /security receipts /pass through certificates (PTCs) issued by I a Securitization Company (SC)/ Reconstruction Company(RC). Credit exposure equivalent of derivative products 18.104.22.168.1 Measurement of Credit Exposure of Derivative Products For the purpose of computing credit exposure of all derivative products Current Exposure Method as given below should be followed. Under this method, credit exposure equivalent of off-balance sheet interest rate and exchange rate instruments shall be the sum of: 1. The total of replacement cost (obtained by "marked to market") of all contracts with positive value (i.e. when the Bank has to receive money from the counter party). 2. An amount for potential future changes in credit exposure calculated on the basis of the total notional principal amount of the contract multiplied by the following credit conversion factors according to the residual maturity:
The derivative products shall be marked to market at least on a monthly basis. The Bank would follow the internal methods of determining the marked to market value of the derivative products. The credit exposure for single currency floating / floating interest rate swaps would be evaluated solely on the basis of their mark-to-market value. 22.214.171.124 Infrastructure Lending According to RBI master circular on Exposure Norms, Infrastructure lending would include all credit facilities extended in any form to a borrower entity engaged in: 1. Developing. 2. Operating and maintaining 3. 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 . 126.96.36.199 Substantial ExposureSubmitted by: Pankaj Juneja MBA finance UBS(PU)
Sum total of exposures assumed in respect of single borrowers enjoying credit facilities in excess of a threshold (10% say) of Capital Funds was stipulated at 400% of Capital Funds in the Loan Policy Document approved by the Board for the year 2001-2002. However, a report on accounts, where the exposure has crossed threshold limit of 10%, shall continue to be placed before the Board every six months for review . 188.8.131.52 Unsecured Exposure Unsecured exposure is an exposure comprising all funded and non-funded exposures (including underwriting and similar commitments) where the realizable value of security, as assessed by the Bank/ approved valuers/ Reserve Bank's Inspecting Officers, is not more than 10 percent, abinitio, of the outstanding exposure. But the classification of advances as secured or unsecured would be revisited at the time of review of advances and also as part of preparation of final statements. Security will mean tangible security properly charged to the Bank and will not include intangible securities like guarantees, comfort letters, charge on rights, licenses, authorizations etc. 184.108.40.206 Capital Market Exposure Following exposures shall qualify as Capital Market Exposure: 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 or units of equity-oriented mutual funds etc. 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 security of shares /bonds/debentures or other securities or on clean basis for meeting promoter's 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 by the Bank in respect of primary issue of shares of convertible bonds or convertible debentures or units of equity oriented mutual funds. However, with effect from April 16, 2008, Bank may exclude its own underwriting commitments, also the underwriting commitments of its subsidiaries, if any, through the book running process for the purpose of arriving at the capital market exposure of the solo bank as well as well the consolidated Bank. ix) Financing to stockbrokers for margin trading. x) All exposures to Venture Capital Funds (both registered and unregistered). This exposure will be deemed to be at par with equity. All Such Exposures, as mentioned above, shall be governed in terms of Policy Guidelines on Capital Market Exposure Bank's funded and non-funded exposure on different countries would form country exposure. Such exposures shall be governed in terms of the Policy Guidelines on Country Risk Management. The Bank takes both funded and non-funded exposure of different maturities on different countries worldwide during the course of its operations. While taking such exposures the bank is required to consider the risk associated with the country where the underlying assets are created over and above the counter party risk. Country exposures for the domestic operations are taken by the designated branches in India. The overseas centres, Singapore and Hong KongSubmitted by: Pankaj Juneja MBA finance UBS(PU)
also take country exposures. RBI's guidelines on Country Risk Management are applicable to the bank as a whole. However, for Singapore and Hong Kong the stricter of the provisions for country risk management as prescribed hereunder or that prescribed by the respective monetary authorities of those countries shall apply. Country Risk Defined 1. Direct country risk: Direct country risk will imply the risk associated with the country where the underlying assets are created out of the exposure taken. 2. Indirect country risk: Indirect country risk shall arise in cases where a domestic commercial borrower has large economic dependence on a certain country. Large economic dependence for this purpose shall mean economic dependence of more than 50% on a particular country. Risk wise Classification of Countries The bank will use the seven-category classification followed by Export Credit Guarantee Corporation of India Ltd (ECGC) for the purpose of classification of country risk exposures as given hereunder:
Table 9: RISK ECGC
Such classification shall be updated with quarterly updates to be obtained from ECGC by Head Office. Any sudden change in classification of a country in the interim period as advised by ECGC shall also be reckoned. Computation of Exposure Submitted by: Pankaj Juneja MBA finance UBS(PU)
Exposures will be computed on a net basis i.e. gross exposure 'minus' collaterals, guarantee, insurance etc. Netting may be permitted for cash collaterals, bank guarantees and credit insurance available in/ issued by countries in a lower risk category than the country on which exposure is assumed. Indirect exposures shall be reckoned at 50% of the exposure for the purpose of these guidelines. For the present, only in respect of the country, where a bank's net funded exposure is 1 per cent or more of its total assets, indirect country risk shall be reckoned for measuring, monitoring and controlling. 220.127.116.11 Counter Party Exposure Bank's exposure on Clearing Corporation of Indio Limited (CCll), Scheduled Commercial Banks, Regional Rural Banks, Co-operative Banks, Mutual funds and Primary Dealers shall form counter party exposure. 18.104.22.168 Industry/Sectoral Exposure The Bank has undertaken a study on industry/sector correlation and the policy for allocation of credit exposure on various industries/sectors in the portfolio has been adopted with due approval of Risk Management Committee of the Board (RMCB) as under: I. Where industry specific exposure is less than 1 % of total credit exposure, the exposure limit would be 1 % of the total projected credit exposure. II. Where industry specific exposure is above 1 % but up to 2% of total credit exposure, the exposure limit would be 2.5% of the total projected credit exposure. III. Where industry specific exposure is above 2% but up to 4% of total credit exposure, the exposure limit would be 5% of the total projected credit exposure. IV. Where industry specific exposure is above 4% but up to 6% of total credit exposure, the exposure limit would be 7.5% of the total projected credit exposure. V. Where industry specific exposure is above 6% of total credit exposure, the exposure limit would be 10% of the total projected credit exposure. 22.214.171.124 Tenor Based Exposure Asset Liability Management Committee (ALCO) shall decide, every year, the incremental level of long-term exposure having tenor of 3 - 5 years and above 5 years considering structural liquidity position of the Bank and shall allocate the same across various authorities engaged in sanctioning credit proposals. Further, industries/sectors would be identified where the Bank would take medium/long term exposure and such level of exposure would be quantified. In doing so, the ALCO would take into account industry outlook provided by reputed agencies. This would be an annual exercise but may be reviewed from time to time. Further, the ALCO would also crystallize critical success factors in such identified industries and borrower's strength vis-a-vis crystallized critical success factors would be assessed in taking exposure on borrowers. Similarly Commercial Papers (CPs), because of their short-term nature and having impact on Asset Liability Management (ALM), total exposure & tenure and its allocation across various authorities engaged in sanctioning CPs would be determined by the ALCO from time to time. 126.96.36.199 Proposals Prohibited This lending policy prohibits loans & advances (including non-fund based facilities) for the following purposes or to the following categories of borrowers. 1. Loans & advances for speculative purposes 2. . 2. Proposals from defaulters of our Bank (excluding exempted categories). 3. 3. Loans and advances to borrowers dealing in sensitive commodities as notified by RBI from time to time, which directly or indirectly violate the spirit of the Selective Credit Control directives (presently applies to buffer stock of sugar with Sugar Mills and unrealized stocks of sugar with Sugar Mills representing levy sugar and free sale sugar).Submitted by: Pankaj Juneja MBA finance UBS(PU)
4. Loans against commodities, possession/ production of which are prohibited by the law of the land. 5. 5. Sanction of fresh loans to clear the NPA accounts in the group/ associates. 6. 6. Loans and advances against company shares to promoters of such companies (however, promoters holding given as additional collateral for specific approved purposes may not come under such prohibition). 7. 7. Purchase and discount of bills, which are accommodative in nature. 8. 8. Loans and advances to industries consuming/ producing ODS (Ozone Depleting Substance). 9. Loans and advances to industries, whose application for clearance from Pollution Control Board/s have been turned down or are under dispute/litigation. 10. Credit proposals from companies/borrowers whose name(s) appear in defaulters/ suit filed accounts lists published by the Reserve Bank of India from time to time and whose names appear in the ECGC caution list for exporters. 11. Loans and advances on the security of UCO Bank's shares and for the purpose of purchase/subscription to public issues of UCO Bank's shares. 188.8.131.52 Statutory and Regulatory Restrictions Statutory restrictions, regulatory restrictions, restrictions on other loans & advances have been advised by RBI. Statutory restrictions: a) Advances against Bank's own shares. b) Advances to Bank's Directors. c) Restrictions on holding shares in Companies. d) Restrictions on Credit to Companies for Buy-back of their securities. Regulatory Restrictions: a) Granting Loans and Advances to relatives of Directors. b) Restrictions on Grant of Loans and Advances to the relatives of senior Officers of Banks . c) Restrictions on grant of financial assistance to Industries producing/ Consuming Ozone Depleting Substances (ODS). d) Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC) e) Restriction on payment of commission to staff members including officers. Restrictions on other Loans and advances: a) Loans and advances against Shares, Debentures & Bonds. b) Advances against Money Market Mutual Funds. c) Advances against Fixed Deposit Receipts issued by other Banks . d) Advances to Agents/ Intermediaries for Deposit Mobilisation. e) Loans against Certificate of Deposits (CDs). f) Bank Finance to Non-bank financial Companies (NBFCs). g) Financing of Infrastructure/ Housing Projects. h) Issue of Bank Guarantees in favour of financial institutions. i) Discounting /rediscounting of Bills by banks. j) Advances against bullion/primary gold . k) Advances against Gold Ornaments & JewellerySubmitted by: Pankaj Juneja MBA finance UBS(PU)
l) Gold (Metal) Loans m) Loans and advances to Real Estate Sector n) Loans and advances to small-scale industries. o) Loan system for delivery of Bank Credit. p) Lending under Consortium Arrangement/ Multiple Banking Arrangement q) Working Capital Finance to Information technology & Software Industry. r) Guidelines for Bank Finance for PSU Disinvestments of Govt. of Indio. s) Grant of Loans for acquisition of Kisan Vikas Patras (KVPs) t) 7% Savings Bonds 2002, 6.5% Savings Bonds 2003 (Non-taxable) & 8% Savings (Taxable) Bonds 2003-Collateral facility u) Guidelines on Settlement of Non Performing Assets Obtaining Consent Decree from Court v) Project Finance w) Bridge Loans against receivables from Government 2.3.4 SECTION - 4 (POLICY Directives on CREDIT RATING) The Bank introduced, with approval of the Board, a rating Module developed by NIBM effective from 01.04.2003 for rating of accounts with limits of Rs 2 crores and above. Corporate Risk Management Committee of the Bank and Risk Management Committee of the Board (RMCB) suggested certain changes in this module. These changes had been incorporated in the module and the Bank adopted the module with approval of the RMCB. 184.108.40.206 Rating of accounts Rating has to be assigned to all the Credit accounts with the Bank in terms of the guidelines prescribed for the purpose. In addition, credit portfolio of the branches, Zones and the Bank as a whole are also to be rated. In rating individual accounts, the extant guidelines provide for rating of all individual accounts (excluding accounts under retail segment) having exposure above Rs 25 lacs. 220.127.116.11.1 Aggregate FB and N FB limit up to Rs 25 lac : Accounts with aggregate FB &NFB limit up to Rs 25 lac would be rated on portfolio basis. 18.104.22.168.2 Quarterly monitoring of rating of accounts in the private sector having short term unsecured exposure of rs.100 crore and above In order to have better control on unsecured exposure, the credit ratings of the accounts pertaining to short term unsecured exposure of Rs.l00 crore and above to private companies in FC segment would be re-drawn on quarterly basis, on the strength of latest available information on their financials and conduct. 22.214.171.124.3 Rating Nomenclature and its meaning: Rating carried out by using the above models shall have the following meaning of the rating nomenclature used: Rating Meaning A++ Indicates high position of (Negligible Risk) sustainable strength- absolute as well as relative over short to medium term A+ Indicates high position of strength (Very Low Risk) at relative level over short to medium term A Indicates moderate degree of (Low Risk) strength at relative level over short to medium term B+ Indicates moderate degree of (Medium Risk) strength with marginally uncertain stability over short to medium term B Indicates low degree of strength (Medium Risk) strength with uncertain stability over short to medium term B- Indicates low degree of strength (High Risk) with uncertain stability over short to medium term C Indicates fundamental weakness (High Risk) likely to affect performance in near future Note: i. The above rating is subject to correlation with structural changes in the economy. ii. As the risk rating efficiency of the model cannot be ascertained at this moment before it is put to useSubmitted by: Pankaj Juneja MBA finance UBS(PU)
over a period of time, the above meaning attached to the rating nomenclature is only provisional. The objective meaning of the nomenclature would be finalized only after the risk rating efficiency of the model is established. 126.96.36.199 Rating and Rating Review: Rating of all accounts, which are to be sanctioned at Head Office level, would be carried out by Risk management Department, Head Office. Credit Monitoring Department of Zonal Office shall forward the necessary details to Head Office, Risk Management Department for review of rating. Necessary details would include the following: Process Note Audited Financial statements for the relevant year MCMR in respect of the account (in respect of existing accounts) Project Report (in respect of green field accounts/projects) 188.8.131.52 Rating Based Action Points: 184.108.40.206.1 Review/Renewal of Accounts Short review in accounts rated '8' or below should be carried out every 6 month with emphasis on operations and primary securities. In other accounts annual review/renewal exercise should be carried out. 220.127.116.11.2 Stock Audit: Rating Amount of Exposure Frequency of stock audit: A and above (Rs 20 crore and above) - Once a year B+ (Rs 10 crore and above) - Once a year B and below (Rs 5 crore and above) - Once in six months A and above (Below Rs 20 crore) - Sanctioning authority may authorize conduct of stock B+ (Below Rs 10 crore) - audit depending upon the requirement B and below (Below Rs 5 crore) development in the account 18.104.22.168.3 Pricing: As pricing is related to rating, on review of rating by HO Risk Management Department/Credit Monitoring Department of Zonal Office, the pricing may require revision. This would be applicable to accounts sanctioned at branches and by Zonal Heads. However, revision in pricing, if any, on account of review of rating by Risk Management Department at Head Office would be decided by either of the Executive Directors or Chairman & Managing Director. 22.214.171.124.4 Concessionary Rate of Interest: In permitting concessionary rate of interest, the competent authority shall use the rating assigned/reviewed by Risk Management Department, Head Office/Credit Monitoring Department at Zonal Office as the case may be. 126.96.36.199.5 Portfolio Rating: Portfolio Rating (Exposure) is the weighted overage of rating-wise exposure (i.e., total limits, fund based as well as non-fund based). Similarly, Portfolio rating (Outstanding) is the weighted overage of rating-wise outstanding balances (i.e. total outstanding, both fund based and non-fund based). Portfolio ratings are a major determinant of portfolio quality and it needs to be monitored. Portfolio rating also provides an indication of available risk appetite of the Bank and can be used to optimize return on the credit portfolio. Accordingly, it is desirable that this is tracked on a regular basis. 188.8.131.52 Rating Guidelines 4.4.1 Rating of Accounts With Exposure Of Rs 25 Lacs Or Below & Accounts under Retail Segment:Submitted by: Pankaj Juneja MBA finance UBS(PU)
Credit rating of accounts having exposure of Rs 25 lacs or less and Bank's mid-market products such as UCO Shelter, UCO Mortgage, UCO Trader, UCO Objectives of Loan Policy: The Loan Policy Document-2010 seeks to respond to the present requirements in the light of expected environment. Its objectives are: Incremental credit deployment as per the Bank's business plan. Creating requisite capacity in the Credit Administration structure for credit dispensation and monitoring. A well diversified fully rated credit portfolio. Controlling credit quality such that default rate over the year is contained within 2% so as to achieve reduction in provision requirements. Optimizing profit from the portfolio. Rating of accounts with exposure of more than Rs. 25 lacs are to be carried for each account using an appropriate rating model. The rating process involves A) Selection of appropriate rating model B) Operational instructions C) Awarding score in terms of guidelines prescribed D) Total weighted score and rating
A. Selection of appropriate rating modelIt is clarified that credit rating of all the accounts cannot be carried out using a single rating model. Bank has developed various rating models depending upon the size, type and our experience with an account. Accordingly, appropriate rating model has to be selected. Size of the exposure Type of the exposure Whether the account is an existing account or a new account or a green field account or a green field project
Existing accountsThese are borrowal accounts of the business units which are already in existence and are having account with us. The business units would have annual financial statements i.e. balance sheet and profit & loss accounts and would also have the track record with the bank that enables us to assess them on conduct of accounts etc.
New accountsThese are borrowal accounts of business units which are already in existence but are not having account with us. The business unit should have financial statements but would not have the track record with the bank. This would make it difficult to assess them on conduct of account including that on non fund based facilities, performance in relation with projections.
Submitted by: Pankaj Juneja MBA finance UBS(PU)
Green field accountsThese are the new business accounts and therefore do not have past financial statements and also have no track record to assess them on conduct of accounts. This makes it difficult to assess them. Green field projects these are new projects started by a new company or projects of an existing company where investment in the asset of the new project is more than 50% of the tangible net worth of the company. Newly promoted NBFC/INFRASTRUCTURE Development corporation, industrial development corporation and financial & development institutions These are new accounts NBFC /infrastructure development corporation, industrial development corporation and financial & development institutions and therefore do not have past financial statements.B.
General Instructions1) Rating models enclosed provide for rating of existing, new and green field accounts. However, depending on the type of account, limit and tenure of the facility relevant rating model should be used. The maximum marks will be for existing, new and field accounts. Therefore, total marks scored are to be converted out of 100 for uniformity for management rating as well as rating of operational performance/ financial ratios. 2) Rating is to be based on financial data as on immediate past financial year closing. This would imply that if we are rating a business unit on 15th September 2005, rated should be based on audited financial statement as on 31st March 2005, assuming that financial year of the business units ends on March 31. 3) While rating a business unit there is no need to take into account proposed borrowing etc. The rating is to be carried out on the position as it exists on the immediate past financial year closing. This is for the purpose of rating only. 4) It is clarified that Entry Barriers may provide for certain bench mark ratios that may include proposed borrowings. Such ratios may be computed as has been provided for in Loan Policy. 5) In fact, with every new activity under taken by the business unit or with every additional dose of financial facilities, rating may undergo a change. This would call for re-rating of the unit based on revised data. But for the time being, this may not be carried out. Bank shall issue the necessary instructions in the matter in due course.
Rating and rating review:Rating all the accounts which are to be sanctioned at head office level would be carried by risk management department .similarly rating of all accounts, which are to be sanctioned at regional offices would be carried out by credit monitoring department at regional offices. Further in respect of accounts sanctioned by regional heads credit monitoring department of regional office shall forward necessary details at the head office risk management department for review of rating as and when called for. Necessary details would include the following
Submitted by: Pankaj Juneja MBA finance UBS(PU)
Process note Audited financial statements for the relevant year MCMR in respect of the account Project report In branches rating would be carried out at the appraisal level and confirmed by the sanctioning authority. Concerned regions credit monitoring department shall review the rating. The branch shall forward necessary details to SPC head of concerned regional office.
Rating based action pointsReview/renewal of accounts: This exercise in accounts rated B or below should be carriedout every 9 months. In other accounts annual review/renewal exercise should be carried out.
Stock auditStock audit of accounts shall be carried out in accordance with the extant guidelines of credit monitoring policy
PricingOn review of rating by HO risk management department / credit monitoring department at the regional office the pricing may require revision.
Concessionary rate of interestIn permitting concessionary rate of interest the competent authority shall use the rating assigned by risk management department.
C. Rating GuidelinesRating guidelines are given below for various exposure types as listed. 1) Accounts with aggregate FB and NFB limits over Rs. 25 lacs and up to Rs 5 crores. 2) Accounts with aggregate FB and NFB limits over 5 crores without term facilities or with term facilities of maturity not exceeding 5 years. 3) Accounts with aggregate FB and NFB limits over Rs. 5 crores with term facilities with maturity of more than 5 years. 4) Exposure on Green Field projects with aggregate FB and NFB limit over Rs. 5 crores with maturity of more than 5 years. 5) Exposure on NBFCs with aggregate FB and NFB limit of Rs 25 lacs and above. 6) Exposure on Accounts of infrastructure Development Corporation, Industrial Development Corporation and Financial and Development institutions with aggregate FB and NFB limits of Rs 25 lacs and above
All rating models have been designed to for evaluating Management, Operational Performance and Financial Ratios and Industrial Outlook or Project Rating. However,Submitted by: Pankaj Juneja MBA finance UBS(PU)
depending on type of exposure, relevant factors differ. All the relevant factors applicable for ratings have been detailed below:
1. Accounts with aggregate FB and NFB limits over Rs. 25 lacs and up to Rs 5 crores.The credit Rating model adopted by the bank for these accounts has taken into consideration the following relevant factors grouped under three heads:
A. Management Integrity/ commitment Financial Strength Technical / Finance Knowledge Organisational Structure / Succession Plan Selling and distribution network Experience of directors and promoters Pending litigations Market reputation and past track record.
Conduct of Bank AccountsAccounts running regular/ irregular Compliance of terms & conditions of sanction Discipline in timely submission of data/ information Inventory and receivables Management of Inventory and receivables Reliability of Receivables & Valuation of Inventory Comments given by Bank Inspectors/ Stock Auditors
Transparency in Accounting StatementsB. Operational Performance & Financial Ratios Sales/break even Sales Current Ratio Return on capital employed Debt Service Coverage Ratio (DSCR) Long term Debt/ Equity Total Outside Liabilities/ Tangible Net worth Achievement of Net Sales Projections Achievement of Net Profit Projections Operations in Non- Fund based Loan Limits Diversification of Funds Net Profit/ Net operating Cash Flow
Assessment on relevant factors is detailed below.
A. ManagementSubmitted by: Pankaj Juneja MBA finance UBS(PU)
In predicting performance of a business unit, assessment of management quality is a crucial factor. Single most important reason for business failure has been attributed to the inefficient management. Management in efficiency can stem from lack of integrity and commitment to lack of necessary expertise and inability to raise resources in time of need. Assessment of management is also difficult as quite a few of the attributes of efficient need qualitative assessment. Management efficiency reflects in the way they maintain their accounts with banks, manage business inventory and the accounting practices they follow. In predicting the success in managing business these factors have been found to be very relevant.
Integrity and commitmentThis is a qualitative assessment the promoter or top management in case of professionally managed companies. Assessment on this aspect of management should be based on market and bankers report willingness to offer securities to secure banks loan, commitment of the management towards business, managements track record in honouring its commitment in the past.
Financial StrengthFinancial strength under management rating should be carried out in the following manner:
1. Market value of the shares(on the date of rating) of the company to its nominal valueMarket value of the shares is the price at which the shares are traded in the market. Nominal value is the face value of the shares. Example: The market value of Rs. 10 shares of the company is say Rs 142 on the date of rating. In this case market value of the shares/ Nominal Value =142/10=14.2. The company will, therefore, score three marks on this parameter. In case the company is not listed or no shares have been issued or in case of companies where shares are not traded in the market or regular quotes are not available in the market, marks awarded should be 0. This is because such companies would not be in a position to raise additional funds from the market
2. Capacity of internal generation of funds.Return on equity should be taken as an indicator for the capacity of internal generation of Funds. This is defined as under: Return on Equity (ROE) = Profit after Tax/Total Equity (paid up capital) Allocation of marks: Example: In case of a company profit after tax is say Rs 50 crores. The company has a paid up equity capital of 200 crores. ROE= 50/200=.25 or 25%. The company will therefore score 0 on the above parameter.
3. Net worth of the promoters excluding stake in the businessThis will indicate the extent to which the promoters would be able to inject additional funds from their own sources whenever required. Example:Submitted by: Pankaj Juneja MBA finance UBS(PU)
The stake i.e. promoters equity in the business which is being rated is say Rs 50 lacs. The promoters net worth is say Rs. 80 lacs. Total Net Worth of the Promoters excluding Stake in the Business _________________________________________________________________ Promoters stake in Business =30/50 =0.6 Hence, score in this case would be 1.
Technical/Finance KnowledgeThis again is a qualitative assessment of promoter(s) or proprietor or partners or top management in case of professionally managed companies (i.e., public limited companies where majority of shares are held by public/FIs/MFs etc., like Larsen and Toubro, ITC etc.). This aspect of management is rated based on technical and financial qualification of the promoters/key personnel, their knowledge of financial and banking related aspects, their ability to manage funds in an optimum manner, their ability to manage manufacturing processes in an efficient manner etc. These attributes should be relevant to the line of business. A qualitative view in the management may be taken based on the attributes mentioned above and management can be categorized as excellent, good, average or poor.
Organisation Structure / Succession PlanThis is a qualitative assessment of the companys organisation and its functioning. This aspect of the management is assessed based on the type of organisation structure and hierarchy, qualification/ quality of persons holding key positions, employee turnover in the organization, coordination among executives of different departments, delegation of responsibilities and powers, succession plan for top management etc. A qualitative view on the management may be taken based on attributes mentioned above and management can be categorized as excellent, good, average or poor.
Selling and distribution networkThis is qualitative assessment of companys capability to sell what it produces. This aspect of the company is assessed based on its strength to reach its customers and how well it is placed to meet the market completion. Companys sales network, market plan including advertisement for its advertisement for its products and quality and sales are relevant factors here. Quality of sales here refers to the realization of cash within reasonable period from credit sales and relative share of cash sales.
Experience of directors and promotersThis is an assessment of experience in the line of business of top management in the case of professionally managed company .normally five years should be good enough for the highest rating .
Pending LitigationsAssessment on this respect is based on the number of cases pending against the company. Where litigations involve reputation of the company, wherein litigations means no compliance with theSubmitted by: Pankaj Juneja MBA finance UBS(PU)
requirement of regulatory nature such as tax related issues or environmental or licence related issue or where litigations involve
Market reputationMarket is the major source of reputation. Track record with bank is important so one should look up to the defaulters list with RBI and ECGC list
Conduct of bank accountsThis is an objective assessment of a companys behaviour pattern towards his banker and reflects management attitude towards honouring their commitments to the bank. Deviations from promised behaviour are penalized that brings down the rating. Assessment under this area is based on records that records that exist with the bank and therefore very transport assessment can be made.
Inventory & ReceivablesThis is assessed based on level of inventory maintained in relation to its sales and an assessment of realizabilty and valuation of inventories based on comments given by banks inspectors / stocks auditors. Assessment under this area is also based records that exist the bank and available in companys accounts and therefore very transparent assessment can be made in this area as wellB.
Operational Performance & Financial Ratios
Apart from management evaluation, operation performance and financial parameters can be used to predict the performance of a business organisation. The financial and performance ratios have high predictive power and have been taken into account in rating of borrowers as listed below. Note: For the purpose of credit rating, tangible Net Worth would be net of inter-corporate transfers i.e., investments in Loans and Advances to sister or associate concerns or subsidiaries or group companies. Investments in sister or associate concerns or subsidiaries or group companies, where such investments are by way of shares and such shares are quoted in share markets may not require netting off. Similarly Current Assets would also be net of Loans & Advances to sister or associate concerns or subsidiaries or group companies. Net Sales/Break Even Sales = (Net Sales Variable Expenses)/fixed Expenses Higher the sale to break-even sales ratio, higher is our margin of safety. Depending on the value of the ratio, this performance area may be assessed on a five point scale and marks may be awarded as given in the Rating Sheet. Note: Variable expenses may be taken as Cost of Sales and fixed Expenses as Total Expenses less Cost of Sales and Extraordinary Expenses, if any. Current Assets/Current Liabilities This ratio is popularly known as Current Ratio and indicates ability of business unit to meet its short term obligations. This indicates the Business Units ability to carry on its day-to-day business activities. A current ratio greater than 1.33 is considered as highly satisfactory. Depending on the ratio, this performance may be assessed on a five pint basis scale and marks may be awarded as given in the Rating Sheet Return on Capital EmployedSubmitted by: Pankaj Juneja MBA finance UBS(PU)
= (Profit after Tax + Interest)/ (Tangible Net worth + Long Term Borrowings+ Bank Borrowings). ROCE is a measure of efficiency of capital employed in business as also earning capacity of the business. ROCE should be higher than the cost of capital. Where interest rate is higher than the ROCE, it is losing proposition for equity holder. In other words, ROCE should be higher than the rate of interest chargeable adjusted for taxes. Assuming a tax rate of 30% and interest rate of 13%, the minimum ROCE, a company should earn is 9% i.e., [(1-0.3)*13%]. Depending on the value of this ratio, this performance area may be assessed on a five point scale and marks may be awarded as given in the Rating Sheet. Debt Service Coverage Ratio = (Net Profit + Depreciation + Interest on Term Loan)/(Annual Repayment of Term Loan + Interest on Term Loan) This ratio measures the capacity of a company to service its debts i.e., repay term loan instalments and interest on it in time. Higher the ratio, higher is our margin of safety. Depending on the value of the ratio, this performance area may be assessed on a five point rating scale and marks may be awarded as given in the Rating Sheet. Long Term Debt/Tangible Net Worth =Total Long Term Debt/Tangible Net worth The ratio is an indicator of promoters /shareholders stake in the business when compared to total long term debts. Low debt equity ratio means higher long term stability and in case the ratio is generally coming down, represents plough back of profits. Depending on the value of the ratio, this performance area may be assessed on a five point rating scale and marks may be awarded as given in the Rating Sheet. Total outside Liabilities/Tangible Net Worth =Total Outside Liabilities/ Tangible Net Worth (including subordinated interest free borrowings from promoters) This ratio is an indicator of promoters/shareholders stake in business when compared to total outside liabilities. Lower ratio means higher long term stability and in case the ratio is generally coming down, represents plough back of profits. Depending on the value of the ratio, this performance area may be assessed on a five point rating scale and marks may be awarded as given in the Rating Sheet. Note: It is clarified that only subordinated interest free borrowings from promoters can be treated as equity as no repayment obligation to promoter arises before outstanding debts are paid. Further, like equity capital, there is no charge on the operating surplus on account of interest. Achievement of Net Sales Projections =Actual Net Sales Achieved/Net Sales Projected for the year The level of net sales achieved as compared with what was projected indicates managements foresightedness that is so important in keeping their commitments. Depending on the value of the ratio, this performance area may be assessed on a five point rating scale and marks may be awarded as given in the Rating Sheet. Achievement of net profit projectionsSubmitted by: Pankaj Juneja MBA finance UBS(PU)
= Actual profit achieved /Net profit projected for the year The level of net profit achieved as compared with what was projected indicates managements foresightedness that is so important in keeping their commitment. Depending on the value of the ratio, this performance area may be assessed on a five point rating scale and marks may be awarded as given in the Rating Sheet.
Operation in non fund based facilitiesNon fund based facilities include letter of guarantee, letter of credit deferred payment guarantee, letter of credit deferred payment guarantee where L/C and B/G limit taken together is less than 5% of the fund based limit, this may be ignored and need not taken into account in rating a borrower L/C and B/G do not involve extending any fund or money but involve commitment by the banks on behalf of their customers to pay in the event of default by the customers .the borrower is less risky if L/C and B/G do not devolve or invoke or if he arranges funds whenever any non fund based limit devolve or invoke.
Diversion of fundsFund diversion may affect the companys liquidation position and operation.itb also impacts debt equity ratios. This performance area may be assessed on a four point scale. Net profit / net operating cash flow This ratio determines quality of earnings. Its actually the cash that pays interests and instalments. Usually it is less than one indicating net profit after tax as well as positive net profit after tax as well as a positive net operating cash flow. Usually it is less than one indicating net profit at less than net operating cash flow. If the ratio is more than one, then it indicates sales achieved through more than usual receivables. This parameter may be assessed on a four point scale. NOTE: net operating cash = +/ (-) operating profit / (operating loss) before extraordinary items +depreciation -taxes +/ (-) increase / (decrease) in net working capital =net operating cash flow. 2. Accounts with aggregate FB and NFB limit over 5 crores without term facilities
or with term facilities of maturity not exceeding 5 yearsThe credit rating model adopted by the bank for these accounts have taken into consideration all the relevant factors applicable for accounts with aggregate FB and NFB limits over Rs. 25 lacs and up to 5 crores. In addition the model takes into consideration the industry outlook.
Industry outlookImpact of expected industry performance would be taken into account. For this latest industry scores would be factored into the rating model. 3. Accounts with aggregate FB and NFB limit over 5 crores with term facilities
with maturity of more than 5 years.This model takes into consideration the PROJECT RATING INDEX. In case industry critical success factor is desired on any industry that is not covered in the annexure.
Project Rating IndexSubmitted by: Pankaj Juneja MBA finance UBS(PU)
Business Units may have different strengths vis-a-vis the industry specific attributes. In view of this, in case of projects/term finance that repays over a longer period, Project Rating Index (PRI) is estimated and factored in lieu of simply incorporating industry rating. Based on the environment and industry analysis, 7 to 10 factors may be identified that are most likely to impact the success probability of the project under examination. These are called Critical Success Factors or Indicators for Industry Attractiveness. A list of such factors is given as follows: Market size Market growth rate Cyclicality Competitive structure Barriers to Entry Industry Profitability Technology Inflation Regulation Workforce availability Social issues Environmental issues Political issues Legal issues
Strategic group behaviour analysisThis would basically include an analysis of strengths and weaknesses and core competencies of the borrower group in relation to critical success factors identified for the product/service/industry. The capacity of the borrower group to respond to changes in the environment and industry characteristics would be a critical input. Project rating index/ industry business attractiveness index This is a matrix developed based on identified CSFs and its relative weight is as applicable to the industry vis-a-vis groups/borrowers strengths on each of the CSFs on a scale of say 10. A weighted score indicates an objective measurement on the project. This is as shown: CSFs Identified A B C D E F TotalJuneja MBA finance UBS(PU)
Relative Weight .30 .25 .20 .12 .08 .05 1
Groups Performance 7 8 5 4 6 5
Weighted Score 2.10 2.00 1.00 0.48 0.48 0.25 6.31Submitted by: Pankaj
The PRI in the subject case is 6.31 on a scale of 10. The PRI may change as the external factors change. It may also change as a groups strengths or weaknesses undergo changes due to proactive approaches adopted by them or due to lack of it. The above analysis, it may be noted that is an approach to objective measurement which is akin to SWOT analysis that are carried out. Strengths and weakness are internal to the organisation and are captured through strategic group analysis. Threats and opportunities are external to the organisations and are captured under environment and industry analysis. The Project Rating Index (PRI) would be factored into the rating model.
4. Exposure on Green Field Projects with aggregate FB and NFB limit over Rs. 5 crores with maturity of more than 5 years.The credit rating model adopted by the bank for these accounts has taken into consideration the following relevant factors: A. Management Integrity/Commitment Financial Strength Technical/Finance Knowledge Organisational Structure/Succession Plan Selling and Distribution Network Experience of Directors & Promoters Pending Litigations Market Reputation and Past Track Record B. Project Financial Evaluation Project Debt Equity Ratio Timing of Capital Infusion Cash Flow from other sources C. Project Rating Index Assessment of management may created out as applicable for accounts with aggregate FB and NFB limit over Rs 25 lacs and up to 5 crores . Similarly assessment of PRI may be carried out in accordance with the guidelines provided in case of accounts with aggregate FB NFB limit over Rs 5 crores with term facilities with maturity of more than 5 years Assessment of factors under Project Financial Evaluation Project debt equity ratio Lenders comfort in project finance comes from owners stake in the project. Where the stake of the owner is higher the comfort level is higher. Higher the ratio comfort lesser is the risk. Timing of capital infusion Where owners bring in the share in the project upfront lenders comfort is more as compared to the situation where lender brings in funds in equitable positions. The comfort is least where capital contribution of the owner is infused in the project at a later date. Cash flow from other sourcesSubmitted by: Pankaj Juneja MBA finance UBS(PU)
In standalone project financing banker depends primarily on the revenue generated by a single project as a source of repayment and on the collateral value of the projects assets for security. Project finance may take the form of financing of the construction of new capital installation or refinancing of an existing installation with or without improvement. The examples are power plant projects, infrastructure projects etc. Payment of the interest and repayment of principal is out of money generated by the project. For instance, revenue generated from electricity sold by a power plant would provide the source of revenue for repayment of interest and principle lent. However , where a project is not entirely on a standalone basis for instance expansion of an existing capital installation for increased capacity or for the purpose of forward or backward linkages , repayment of interest and principal would also come in addition to the cash flow generated by the project undertaken , from the cash flow generated by the existing installation. To this extent a project stand alone may be more risky than an existing project. Riskiness of latter would depend upon the size of the expansion vis-a-vis the size of the existing project.
5. Exposure on NBFCs with aggregate FB and NFB limit of Rs 25 lacs and aboveThe credit rating model adopted by the bank for these accounts has taken into consideration the following relevant factors: A. Management B. Operational Performance & Finance Ratios C. Industry Outlook Assessment of Management may be carried out as applicable for accounts with aggregate FB and NFB limit of Rs 25 lacs and up to Rs. 5 crores However, assessment of Operational Performance and Finance Ratios differs as in evaluating the same for NBFCs the following factors are taken into account Operating Profits/Average Assets Investment as % of outstandi