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Study of Corporate Credit Sanction Process

and Credit Risk Management at UTI Bank Ltd

Submitted By

Urvashi Prasad

Roll No: 051098

FMG 14

FORE School of Management

New Delhi


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CERTIFICATE

This is to certify that Ms. Urvashi Prasad Roll No.051098 has completed her summer internship

at UTI Bank, Bangalore and has submitted this project report titled Study of Corporate

Credit Sanction Process and Credit Risk Management towards partial fulfillment of the

requirements for the award of the Post Graduate Diploma in Business Management (FMG-XIV)

2005-2007.

This Report is the result of her own work and to the best of my knowledge no part of it has

earlier comprised any other report, monograph dissertation or book. This project was carried outunder my overall supervision.

Date: 19th June2006 Dr. Binod Kumar

Place: New Delhi (Chair Professor, OB & HR.)


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Table of Content

1 Executive Summary ......................................................................................................................7

2 Need for Business Finance ...........................................................................................................8

3 Sources of Finance ....................................................................................................................... 9

3.1 Equity Financing ................................................................................................................... 9

3.2 Promoter/Partner Investment ................................................................................................ 9

3.3 Employee Investment ..........................................................................................................10

3.4 Debt Financing ....................................................................................................................10

4 About UTI Bank ..........................................................................................................................11

4.1 Introduction ..........................................................................................................................11

4.2 Products and Services Offered .............................................................................................12

4.3 Shareholding Pattern ............................................................................................................12

4.4 Key Financials .....................................................................................................................13

5 Corporate Banking Business Unit of UTI ...................................................................................14

5.1 Products and Services Offered ............................................................................................145.2 Segmentation of the Corporate Credit Department at UTI Bank .........................................18

6 Credit Sanction Process ..............................................................................................................20

6.1 Credit Selection: Issue of Credit Application form and initial scrutiny ...............................21

6.2 Credit Appraisal: Preparation of Credit Proposal/Appraisal Note .......................................24

6.3 Negotiation: Pricing ............................................................................................................. 33

6.4 Sanction and Noting .............................................................................................................35

6.5 Documentation and Creation of Security .............................................................................39

6.6 Disbursement, Monitoring, Renewal / Review ....................................................................39

7 Risk Management at UTI Bank ...................................................................................................44

7.1 Credit Rating System ...........................................................................................................45

7.2 Risk Mitigation Techniques ................................................................................................. 47


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8 Management of Non-Performing Asset (NPA) .........................................................................48

9 Conclusion ...................................................................................................................................50

10 References .................................................................................................................................51


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Acknowledgements

At the outset I sincerely thank Mr. Anil Kumar, Branch head, UTI Bank Ltd for giving me the

opportunity to work for UTI Bank Ltd on the project titled Study of Corporate Credit Sanction

Process and Credit Risk Management at UTI Bank Ltd.

I would also like to thank Mr. Venkiteswaran, Vice President, Relationship Management

Department; Mr. Padmanabhan, Asst. Vice President, Corporate Banking; Mrs. Kalpana

Krishnamurthy, Manager, Corporate Banking Department; for their time, valuable discussions

and constant encouragement which helped me complete the project successfully & also for their

expert guidance and advice in the duration of my summer internship.

With Thanks,

Urvashi Prasad

Roll No: 051098

FMG 14

FORE School of Management

New Delhi


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Objective of the Project

To understand/analyze the various phases of the Credit Sanction Process employed at the

Corporate Credit Department, UTI Bank and to study the tools & techniques employed by the

Bank for managing the Credit Risk as a part of overall risk management.

Methodology Adopted

The various phases involved in the Credit Sanction Process have been studied on the basisof the study of credit records of five large corporate clients of UTI Bank, Bangalore Branch.

All these businesses belong to different industries of the manufacturing sector and have

distinct credit requirements governed by the nature of their businesses. This enabled an

objective study of the processes involved in the credit sanction process as the weightage

given to different appraisal parameters differed from case to case depending upon their

credit requirements. The clients studied are:

Mangalore Chemicals and Fertilizers Ltd.

Sami Labs Ltd.

Shree Renuka Sugars Ltd.

Strides Acrolab Ltd.

M/s Stumpp, Schuele & Somappa Ltd.

Apart from the above, the internal records, instruction manuals, documents and websites ofthe Bank have been studied to understand in detail the credit sanction process and credit risk

management of the Bank.


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1 Executive Summary

This report titled Study of Corporate Credit Sanction Process and Credit Risk Management at

UTI Bank Ltd. outlines in detail the Credit sanction process at Corporate Credit Department at

UTI Bank. The process of credit sanction involves a series of activities covering collection of

information, due-diligence or objective assessment of information using several parameters,

deciding on the quantum of credit to be granted and the final phase of sanctioning and

disbursement. The report contains a detailed account of all the phases, processes and terms &

conditions involved in the credit sanction process. It also contains details on the delegation of

powers and documentation formalities associated with each of the processes.

The report also deals in brief with the need for business finance and the various methods of

financing a business available. Credit risk is one of the most important components of the overall

risk that the banks are faced with. Therefore keeping this risk within safe limits plays a key role

in determining the profitability of the Bank. The report further on outlines the risk management

tools employed by the bank and details non-performing assets of the bank that indicate the

objectiveness of credit selection at the bank.

By

Urvashi Prasad

Roll No. 051098

FMG XIV


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2 Need for Business Finance

Firms are needed to create manufacturing capacities for the production of goods and services that

they sell to their customers to earn profit. In order to create these manufacturing and other

facilities every firm in turn needs to raise funds that form the lifeblood for setting up and

carrying on a business. Every business firm is involved in essentially three most important

activities that are:

Production Activities Marketing Activities Finance Activities

A business firm secures the capital required and employs it (Finance Activity) in its activities

which over a period of time generate returns on the invested capital( production & marketing

activities).Therefore a firms need for finance is a continuous process that is right from the time

when it is capital gains. A firm can obtain equity funds also by retaining a portion of earnings

available for shareholders first established till the business firm is operational.

The profitability of an enterprise depends on the right source of business finance. However

securing finance depends upon several important factors such as the cost of funds, the credit

worthiness of the borrower, lenders risk etc. All these considerations form inputs for designing

the correct credit sanction process so that the financial transaction is mutually beneficial to both

the parties


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3 Sources of Finance

Every firm needs two kinds of finance i.e. Long Term Finance & Short Term Finance for

carrying on its activities smoothly. Long tem finance is required for acquiring the productive

assets of the firm such as plant & machinery and short-term finance is required mainly for the

day-to-day conduct of business activities such as procurement of raw materials etc. The various

means of financing an enterprise represents the financial structure of an enterprise. Traditionally

the short-term borrowings are excluded from the list of methods of financing the firms capital

expenditure and therefore the long-term claims are said to form the capital structure of an

enterprise i.e. the proportion of debt and equity employed.

3.1 Equity Financing

Equity capital is the amount of money that the proprietor and/or partners of the firm put into the

business or raise from other investors known as shareholders. While investors share in the profits

or losses of the business, their investment is not a loan. The shareholders get their returns in the

form of dividend & capital returns. Equity funds can also be obtained by a firm by retaining a

portion of earnings available for shareholders. These funds are undistributed profits of equity

capital and are known as retained earnings.

3.2 Promoter/Partner Investment

Incase there is lack of adequate supply of funds needed to finance a business, sometimes the

promoters of the firm may have to pump in the required capital into the venture. In case of a


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partnership firm, partners contribute funds to the business in order to fulfill its financial needs.

This for of financing is known as Promoter/Partner Investment.

3.3 Employee Investment

Another way of raising funds is through employees investment in the business. A firm may

consider making the most talented and dedicated employees a partnership offer, or, if the

business is incorporated, it could sell stock in the form of ESOPS to employees to provide a form

of profit sharing. Employees may be willing to invest in the business because they understand its

products or services, trust the management, and are able to closely monitor their investment.

3.4 Debt Financing

With the equity capital of the firm well defined, it stands in a position to approach lenders for a

business loan. Debt capital is the money a business borrows from external sources. It must be

fully repaid with interest, over a specific time period. They can be in the form of loans, bonds or

debentures. While lenders do not share in business profits as investors do, they must be repaid

with interest whether the business is showing a profit or not. Potential lenders include the

following:

Banks and Trust Companies

Private Investors Commercial Finance Companies


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When determining the type of debt financing that is right for a business, the basic rule followed

is to finance day-to-day operations (working capital) with short-term operating loans, and long-

term fixed assets with long-term loans or mortgages.

4 About UTI Bank

4.1 Introduction

UTI Bank was the first of the new private banks to have begun operations in 1994, after the

Government of India allowed new private banks to be established.

The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit

Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance

Corporation Ltd. and its associates viz. National Insurance Company Ltd., The New India

Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd.

UTI Bank was set up with a capital of Rs. 115 crore, with UTI contributing Rs. 100 crore, LIC -

Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5 crore each.

UTI is the largest mutual fund in India. UTI presently occupies a strong position in Indian capital

market with a servicing and distribution network of more than 53 branch offices, 320 Chief

Representatives and about 90,000 agents that enables it to provide the complete range of services

to its investors.


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The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.

Presently the Bank has a very wide network of more than 450 branch offices and Extension

Counters. The Bank has a network of over 1891 ATMs providing 24hrs a day banking

convenience to its customers. This is one of the largest ATM networks in the country. The Bank

today is capitalized to the extent of Rs. 278.69 crores with the public holding (other than

promoters) at 72.28 %. It is committed to adopting the best industry practices internationally in

order to achieve excellence.

4.2 Products and Services Offered

The Bank has strengths in both retail banking and corporate banking with its diverse offering of

Products & Services comprising of the following:

Consumer Banking NRI Services Retail Loans Corporate Banking Treasury Capital Markets Financial Advisory Services

4.3 Shareholding Pattern

CATEGORY % Shareholding

Promoter's Holding

Promoters 27.72

Administrator of the specified undertaking of the Unit Trust of India -

Indian promoters27.72

Co-promoters


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Life Insurance Corporation of India 10.49

GIC & Four PSU Insurance Companies (New India Assurance,

National, Oriental, United Insurance Companies)5.50

Non- Promoters' Holding

Mutual Funds 6.84

Banks, FIs, Insurance Cos (Central/State Govt. Institutions Non-Govt.

Institutions)0.19

FIIs 35.29

Private Corporate Bodies 1.52

Indian Public 5.58

NRIs/OCBs 0.11

Any Other -FDI Route - GDRs Issue

The Bank of New York(Depositary for the equity shares representing

the underlying shares to GDRs issued to the investors overseas)

6.76

Total 100.00

4.4 Key Financials

UTI Bank announced its audited results for FY 2005-06 in a press release on 17th

April, 2006.The

key financial indicators of the bank as on 31st March, 2006 stood as follows:

Equity Capital: 278.69 crores Net Worth: 98.64 crores Capital Adequacy ratio: 11.08% Net Profit: 485.08 crores Net NPA: 075% EPS: Rs. 17.08


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5 Corporate Banking Business Unit of UTI

5.1 Products and Services Offered

5.1.1 Current Account

The Bank offers current account facility to the corporates under five different products i.e.

Normal Current account, Business Classic Current Account, Business Global Current Account

(exclusively for importers & exporters), Business Advantage Current Account and Business

Privilege Current Account. These products offer services such as intercity cash deposit and cash

withdrawal, demand draft facility, pay-order facility, check pick up facility, fund transfers,

account statements through courier & email at varying average balance requirements and limits

established for deposit and withdrawals for each of the above mentioned products.

5.1.2 Cash Management Services

This facility was started by UTI Bank in September 1999 to provide assistance to the corporate

firms for collection and payment of funds. It is a fee based service provided by the bank to help

the firms accelerate their cash collections by reducing the gap between the time a customer pays

his bill and the time that the cheque is collected and funds become available for use.

5.1.3 Fixed Deposits

Fixed Deposit is also known as Time/Term deposits that are accepted by the bank and are

repayable only after the expiry of the contract period. The interest rates payable by the banks on

Term Deposits are de-regulated by RBI .The interest rates as decided by the bank for different

maturities are conveyed by the Treasury Dept. and also revised from time to time.
http://www.utibank.com/corporatebanking/cmscontent.htmlhttp://www.utibank.com/corporatebanking/cmscontent.html


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5.1.4 Lending / Financing

UTI Bank offers a whole host of banking /credit products [both fund based and non-fund based]

to several large Indian groups /conglomerates covering asset backed lending/ bill

discounting/project finance/working capital finance etc.

5.1.4.1 Working Capital Finance

UTI Bank offers working capital financing products to finance the day-to-day production and

sales. Working Capital products include both fund-based and fee-based products. Fund-based

working capital products include cash credit, overdraft, bill discounting, and subscription to

commercial paper, short-term loans, export financing (post-shipment as well as pre-shipment),

medium term loans, preference shares, non-convertible debentures (both fixed and floating rate).

Fee based products include documentary credit and bank guarantees.

Cash Credit / Working Capital Demand Loan

The Bank offers a combination of operative cash credit and demand loan to meet the domestic

working capital requirements of corporates.

Loans against FCNR (B) Deposits

The Bank provides FCNR (B) loans for working capital and other productive purposes, for a

period ranging from 6 months to 36 months.

5.1.4.2 Term Lending:

The Bank offers short-term loans for a period ranging from 3 months to 12 months to sound

corporates for augmenting their working capital requirements and long-term working capital

loans upto 5 years. The funds are provided with interest rates either linked to its PLR or at a fixed

rate with varying repayment patterns, to meet temporary shortfall in working capital, arising out

of delay in realisation of receivables or to hold excess inventory for execution of extra orders.

Project Loans


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UTI Bank offers long term loans to both Industrial as well as Infrastructure sectors promoted by

strong business houses. It provides loans to sectors like Telecom, Chemical, Fertilizer, Cement,

Oil & Gas, Power, Ports, Roads, Railways, Housing and others. The loans provided by the bank

are for a period of 5-7 years with a moratorium period and interest rates, which could be a fixed

rate or floating rate that is linked to the banks prime lending rate (PLR).

5.1.4.3 Bills Finance - Supply / Purchase Bills:

This product enables corporates to fund their operating cycle right from the stage of procurement

to sale.

Export Credit Pre-shipment & Post-shipment

This product is used by the bank to provide export finance in domestic & foreign currency to the

corporates having global operations.

Channel Finance

This product is used to finance the dealers against their receivables and help improve the cash

flows of the corporates.

Asset Securitisation

Loans for asset securitisation comprising lease rental receivables, credit card receivables, other

receivables etc. are extended by the bank The future cash-flow receivables of the borrower are

discounted applying a discount rate and arrived at the Net Present Value (NPV) which is the

amount lent to the borrower in this case.

Line of Credit

This product provides flexibility to corporates to utilize the line of credit either as funded or non-

funded for approval purposes and tenure. The terms of the line of credit are either predetermined

or negotiated at an appropriate time.


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Bank Guarantees

This product is provided by the bank to secure trade performances or other obligations. It

provides the beneficiary with the access to guaranteed amount should there be a breach of

contract or performance.The guarantees executed by the bank are:

Performance Guarantee/Stand by letter of credit. Deferred payment guarantee.

5.1.5 Trade Services

5.1.5.1 Trade Finance

This Product includes the following:

Bills Discounting L/C Backed bill discounting Drawee Bill Discounting Drawer Bill Discounting

5.1.5.2 Additional Services

Apart from the above products the bank also provides treasury management, investments,

personal and corporate trust services, foreign trade, equipment leasing, corporate finance and

mezzanine capital as well as conventional commercial loans.

5.1.6 Salary Power

This is a centralized salary disbursement solution offered by the bank to the corporates. It is a

comprehensive Savings Bank Product targeting the salaried class and the companies in order to

expand its retail base. The objective o this product is to provide the employees customer friendly

value added services ensuring convenience, cost effectiveness and easy access to funds.


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5.2 Segmentation of the Corporate Credit Department at UTI Bank

The Credit Department at UTI Bank is divided into the following 3 sub-segments under mainly 2

product categories i.e. Channel Financing & Structured Products:

5.2.1 Large Corporate

Large corporate is further divided into 5 sectors comprising mostly of related industries, which

include the following:

Automobiles, Manufacturing, Pharmaceuticals, Information Technology & Infrastructure

The exposure of the UTI Bank (Bangalore branch) is almost 3 times the SME exposure. The

number of loans sanctioned by the bank under this form of credit facility is low however the

amount of such loans is large. Some of the key large corporate clients for UTI Bank (Bangalore

branch) are United Breweries Ltd, Sonata Information Technology, Scandent Solutions Corp.

and Strides Acrolab Ltd.

5.2.2 SME (Small and Medium Enterprises)

SME constitutes Small Scale Industries (SSIs), Small Scale Service and Business Enterprises

(SSSBE), Tiny Industries and Medium Enterprises (ME). The criteria for units/borrowers to fall

under each of the above-mentioned categories are as follows:

SSI:

Investment in Plant & Machinery upto Rs. 1 crore except in Hosiery and Stationary


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SSI Tiny industries:

Investment in Plant & Machinery upto Rs. 25 crores.

SSSBE:

Investment in Fixed Assets apart from Plant & Machinery from Rs.10 lakhs upto 1 crore .Itincludes Enterprises involved in activities such as Advertising, Beauty Parlours, Dental

Clinics, X-Rays & Sonography etc

ME:

Gross Turnover upto Rs.100 crores. Tangible Networth upto Rs.30 crores. Exposure upto Rs.15 crores.

Even if one of the criteria is not met, the borrower will be categorized as a large corporate. A

characteristic feature of SMEs is that they exist in clusters, which poses an opportunity to the

bank to target the entire value chain in which the SMEs operate. To give a thrust to SME

business, the segment was sub-divided into Schematic and Non-Schematic Lending. Several

SME strategies such as cluster study of industrial clusters at Ludhiana, Coimbatore and

Tirupur/Karur, launch of schematic products during 2004-05 (Power Trade, Power Rent and

Card Power) have been adopted by UTI Bank so as to design products to suit the needs of SMEs

and increase the exposure to this sector.

5.2.3 Agri-Business

Under this segment corporate loans in the form of agricultural advances are extended. Several

innovative products such as Trade Finance Scheme and Power Gold Scheme have been

introduced by the bank. The Bank has opened 3 rural branches in Punjab (in Ludhiana district),

and another 3 rural branches in Andhra Pradesh (in West Godavari district). It is expected that

these branches will provide added impetus to growth in direct agricultural lending. The bank has

also formed Agri-Business Clusters at select centres that present significant opportunities for

lending to this sector.


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6 Credit Sanction Process

Credit sanction caters to processes right from the time the customer walks into the bank with a

request for a credit facility, till the time the facility is finally disbursed. Each type of credit

facility goes through the essential phases with some variations depending upon the processes and

policies defined by the bank. The processes revolve around two key aspects:

Critically appraising the credit worthiness and, Analyzing the risk in lendingTracking these phases and the performance of the process is an underlying phase that runs across

the application processing cycle and is critical for monitoring and profitability which finally

completes the process of credit sanction. The basic phases involved in the Credit Sanction

Process are defined in the following schematic scheme:

Schematic Diagram of Credit Sanction Process

Negotiation (Pricing & Security)

Credit Selection

Credit Appraisal

Presentation

Sanction & Noting

Documentation/Creation of Security

Disbursement, Monitoring, Review/Renewal


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6.1 Credit Selection: Issue of Credit Application form and initial scrutiny

6.1.1 Issue of Credit Application Form

UTI Bank provides a Credit Application Form to the prospective customer, if the followingconditions are fulfilled:

The request is found to be in order, conforming to the credit policy and basic principles oflending.

The customer is agreeable to the Banks terms and conditions.

The customer is guided by the bank officials through the completion of the form. A list of

documents such as statements, reports, certificates, balance sheets, assessment orders, and forms

etc. is required to be submitted by the customer along with the form.

If the credit facilities are to be sanctioned at the branch level then one copy of Credit Application

Form and the enclosures, otherwise two copies for facilities needing approval at higher level

need to be submitted by the customer. A tentative time frame after considering the urgency of the

customer and time required for processing the request is drawn up in the process of discussion

with the customer.

6.1.2 Receipt of Credit Application Form

After the Credit Application form is duly filled up by the customer and submitted to the bank, the

bank checks for the following details:

The form and the documents furnished along are in a proper form and all the applicabledetails are duly filled-in.

The form is duly signed by the borrowers and guarantors, if applicable.


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All the relevant documents/enclosures are submitted. If any discrepancy/deficiency of

information persists, the form may be returned /retained at the branch and is brought to the notice

of the customer.

6.1.3 Entry into Credit Application Received Register

All Credit Application Forms received are promptly entered into the Credit Application Received

and Disposal Register with all the relevant columns of the Register duly filled-in. Also periodic

reports on the progress of the request are made in the respective columns.

6.1.4 Initial Scrutiny

The Credit Application Form and enclosures submitted are scrutinized and the observations

contained in the note on discussions / interview with the customer is also referred to. The bank

after studying the papers makes an account of important notes, queries, observations and

information gaps if any.

6.1.5 Pre-sanction Inspection and Credit Reports

After the initial scrutiny a pre-sanction inspection of the credit requests is conducted by the bank

and credit reports collected for all the credit requests, except in advances against the Banks

Term Deposit Receipts and advances against Shares, LIC Policies, National Savings Certificates,

and other Government securities where the branch has directly registered its charge with the

issuing authority and the branch possesses the necessary proof of the same. The main objectives

of conducting pre-sanction inspection of credit applications are as follows:


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To establish the identity of the customer & correctness of information submitted. To validate market information with regard to means, standing, business integrity,

experience and abilities of the parties concerned.

To verify information with regard to the nature of activity, business standing, bankinghistory of the customer, management details, business abilities, maintenance of records /

accounts, adequacy of internal checks and immovable property of the customer.

To verify the correctness of key financial parameters, fulfillment of statutory obligations,conduct of business (sound/ over trading /under trading) and liabilities.

Pre-sanction inspection and credit reports incorporating all details are prepared and statements of

assets & liabilities of the borrowers and the guarantors is duly verified with regard to their

correctness and certified on the Credit Application Form.

6.1.6 Rejection of Credit Request

At any stage, during the processing or sanction of an advance, credit request can be terminated if

it does not merit consideration. The power of rejection is vested with the Branch Head however,

only with due permission from appropriate authority. The circumstances under which the request

can be rejected are as follows:

The borrower is undesirable / unacceptable. The request is not in accordance with the Credit Policy of the Bank. The RBI guidelines do not permit financing of such projects / activities. Project/activity is not technically feasible / financially viable. Project is risky. Inadequate Security

Wherever possible, the customer is advised regarding rejection of the credit request in writing

stating that The Bank is unable to consider your request for credit facilities and reasons for


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rejection is forwarded to the concerned authority. The authority vested for rejection of credit

requests is as follows:

Delegated Powers for Credit

Applications:

Authority to Approve Rejection

Dy. Managers/ Managers/Asst. Vice Presidents at

Branches and Zonal Offices

Vice Presidents/Sr. Vice Presidents

Managing Director/Committee of Executives/

Committee of Directors

Zonal Heads

President - Corporate Banking

Committee of Executives

6.2 Credit Appraisal: Preparation of Credit Proposal/Appraisal Note

Credit appraisal is the process by which a lender appraises the creditworthiness of the

prospective borrower. This is an important phase in the origination cycle as decisions made here

affect the health of the portfolio and determine the risk that the bank is exposed to.

Credit requests that pass the phase of initial scrutiny are processed further and a Credit Proposal /

Appraisal Note is prepared for considering the requests for a fresh advance or renewal / review of

the existing advance / facility. It is normally prepared by the branch staff however applications

involving large limits and complex projects they may be prepared by or with the assistance of the

officials at Zonal/Central Office.

There is no standardised format of the Credit Proposal followed by the bank because each credit

proposition may have its own peculiarities and as such depending on requirements of each case,

the proposal should be prepared covering all relevant areas.


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6.2.1 Guidelines for Preparing Credit Proposal/Appraisal Note

The Credit Application and other particulars submitted by the customer, credit reports of pre-

sanction inspection carried out by the Bank officials form the basic inputs for preparing the

Credit Proposal. The following details must be incorporated while preparing the credit proposal.

Proposal Number, Date and Branch Name New / Renewal, Reduction / Enhancement of facility

Existing and Proposed facilities for which sanction is sought Name of the Company Constitution - Individual, Proprietorship, Registered Partnership, Private Limited Company,

Public Limited Company, Public Sector Company, Trust, Institution, etc.

Date of Incorporation Group Affiliation, if any and Other Group Companies Line of Activity- nature of business / activities, processes / product

Registered Office & Corporate Office Factory Works Location Board of Directors Capital Structure and Share Holding Pattern Capital Market data: Latest quoted price, high and low prices during last 52 weeks and M-

cap.

Banking Arrangements: Details of fund based and non-fund based limits availed from each,

whether the financing is under a formal consortium arrangement or as multiple banking. Position of Existing Accounts with UTI Bank: Extent of present and proposed fund based

and non-fund based limits from the bank


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Bankers Reference and Rating by Credit Agency :Highlights of Bankers Reports, name ofthe Credit Rating Agency, rating obtained, nature of instrument/s for which rating is

obtained, date of awarding the rating and its validity

Credit Risk Rating and Asset Classification: Credit Rating as per the Banks Credit RiskRating system and confirmation of asset as a Standard account.

Brief Background of the Company: Business profile, key milestones achieved businesssegments and product profile, capacities and production facilities, technical collaborations,

marketing, group companies.

Management Analysis: Brief profile of the promoters and top management, vision andstrategy, managerial experience, management style, composition of the board, corporate

governance, management achievements and skills, key man risk and succession plan.

Product Profile, Installed Capacities and Infrastructure Facilities. Major Competitors and Market Share. Industry Profile and Prospects: Overall profile of the industry including size of the market,

growth rate, status of installed capacity, production, demand-supply position, regulatory

environment, industry outlook, impact of technology, success factors , trends and prospects.

Future Plans: Expansion /diversification and other plans in the process of implementation or

with the possible impact on functioning and income generation.

Performance and Financial Indicators: In case of existing companies, figures pertaining tofour years i.e. last two years actuals based on audited accounts, estimates for the current

year and projections for the next year. If it is still in project stage and yet to take off,

projected figures for a period of 3 to 5 years may be given. The major items for which

information is to be furnished are as under:

Key Financial Indicators:

o Net Sales

o Other Income

o Operating Profit after Interest

o Net Profit before Tax


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o Net Profit after Tax

o Paid-up Capital

o Tangible Net-worth

Ratios

a. Profitability Ratios

o Operating Profit / Sales

o Net Profit / Sales

o Interest / Sales

o Earnings per Share (EPS).

o Return on Net Worth

o Return on Net Working Capital

o Retained Profit /Net Profit

b. Turn over Ratios

o Sales / Net Fixed Assets

o Sales / Gross Fixed Assets

o Sales / Raw Material Level

o Sales / Inventory

o Sales / Receivables

o Accounts Payable Turnover

c. Liquidity Ratios

o Current Ratio

o NWC / Current Liabilities

o NWC / Current Assets


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d. Leverage Ratios

o TOL / TNW

o TTL / TNW

o Interest Coverage ratio

Comments on Financial Position: Comments on ability to achieve the estimated / projectedsales, profit and profitability trend, adequacy of capital, change in Tangible Net Worth, Net

Owned Funds, Total Outside Liabilities / Tangible Net Worth, Current Ratio and any major

variances observed and overall performance and financial position.

Assessment of Limits

Term Loans and Deferred Payment Guarantee (DPG): The request for the

Term Loan limits should be accompanied by the detailed project report prepared

by the Borrower. The bank official should appraise the project from different

angles with the objective of justifying the investment. The major components of

project appraisal are as follows:

The important Ratios that need to be considered for appraising the project are as follows:

Debit Service Coverage Ratio (DSCR): It ratio provides the measure of the

ability of the project to service the repayment of its entire long term debt and a

guide to determine the period for repayment and the margin of safety for the

Project Appraisal

Managerial Competence Technical Viability Economic Feasibility


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Bank. A good DSCR should be two or more. When it is less than two, greater

care needs to be exercised.

Internal Rate of Return: This should be higher than the cut off rate for the project to

be acceptable.

Break Even Point (BEP): The Break Even Point helps in determining the surplus

generation of a unit at different levels of production / sales beyond the Break Even

Point which is significant for fixing repayment schedule of the term loan. It also helps

in indicating the actual percentage utilisation of a firms installed capacity. Units with

high Break Even Point percentage would be adversely affected with minorfluctuations in their performance.

Sensitivity Analysis: Sensitivity analysis indicates the degree of cushion available in

the profitability of the project to withstand changes with assumed conditions. The

financial projections of a unit are based on certain assumptions. If some of the

projections go wrong, the repayment of the loan may face difficulties. The

assumptions underlying the financial projections should therefore be properly verified

and the most sensitive items of the assumptions should be identified

Critical Project Information: Information on the following points is required to be

submitted in an appropriate format to the Bank by the customer for fresh / additional

Term Loans:

o Locational Advantage:

o Cost of Project

o Means of Finance

o Schedule of Implementation

o Project Requirements


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o Schedule of Implementation

o Loan Eligibility

o Margin

o Status of Government Clearance

o Financial Highlights

o Refinance

Working Capital - Fund Based: For working capital facilities, the summary of

assessment is given in an appropriate format required by the bank. Comments on

Funds Flow and Cash Flow Statements and projections for production and sales,

levels of the inventory, receivables, other current assets and sundry creditors is

included, details of the method of lending followed is also included.

Working Capital- Non-fund Based: Details of working of the assessment of Letter

of Credit limit and bank Guarantee (BG) is given. For this, ascertain the percentage of

business envisaged by way of L/Cs. Details of source, payment of liability arising out

of payment of L/C and the basic purpose of guarantees, nature of guarantees, existing

level of guarantees, guarantees due to expire during course of the year and the

proposed quantum of guarantee requirements are also required. The methods of

lending mentioned below are followed by the bank for working capital facilities.

o MPBF method of Tandon / Chore Committees

o Turnover method

o Cash flow method.

The entire fund based exposures to the SSI sector upto Rs.5 crores is assessed in accordancewith the Turnover method suggested by the Nayak Committee. The methods of lending

(Cash flow/MPBF) in other cases are based on the needs specific to the customer. In the

case of the MPBF method, the second method of lending will be applicable in general


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however; the first method of lending also may be followed in deserving cases with a clear

justification. In case of working capital lending the sanctioning authorities may waive the

bifurcation of facility into Cash Credit portion and WCDL portion.

Limits Proposed: List facilities which are proposed under the heads Term Loans / DPG,Working Capital - Fund based and working capital non-fund based, all existing and

proposed are indicated separately

Rate of Interest: Rate of interest / charges applicable and effective at the time of preparing /considering the proposal.

Concessional facility: Particulars of concession in commission on guarantees, collection ofcharges on cheques and instruments, if applicable.

Security-Principal, Collateral & Guarantees: Particulars of existing and proposed primarysecurity. Apart from the principal security, particulars of other securities in the nature of

pledge, hypothecation or mortgage of other assets of the concern or the guarantors.

Risk Perception / Analysis: Brief description of the major risks and the mitigation measuresproposed by the company. Attempts to downplay risks and to make the exposure look

attractive should be avoided. The following risk parameters are commented upon while

arriving at the risk analysis:

o Political

o Regulatory

o Finance

o Currency

o Marketing

o Manufacturing

o

Promoterso Cyclicity

o Technology

o Input Profile

o User Profile


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Documentation: Particulars of existing documents, documents proposed to be obtained anddocumentation formalities, pending if any.

Conduct and Value of Account: Brief account of banking relationship and experience withthe customer, highlights of account profitability, details of all litigations, if any, against the

concern and its promoters/ directors filed by other banks and financial institutions.

Audit Observations and their Rectification: Major observations on the account of thecustomer made by the concurrent, internal, statutory and Reserve Bank of India auditors

which have not been complied / rectified and the steps proposed by the branch for their

rectification.

Comments on Stock/ Site Inspection: Brief particulars of stock / site inspections conductedin the account.

Observations of Consortium Meetings Compliance with Statutory Obligations RBI / ECGC Defaulters List: Confirmation that the applicants/ directors and guarantors do

not appear in the Reserve Bank of India / ECGC Defaulters List and if they do appear in the

list, details and reasons for recommendation of the Credit Proposal despite such reference.

Conformity with the RBI / Banks Norms: Undertaking stating that the Credit Proposal is inconformity with the norms of RBI, other regulatory authorities and the internal policies,

norms and guidelines of the bank.

Recommendations: Summary of the assessment, views and specific recommendations as tothe facilities proposed to be sanctioned / reviewed.

Signatures: Signatures of the Branch Head, official incharge of credit portfolio, otherofficial, if any, involved in processing the request and preparing Credit Proposal

Annexures to the Proposal:

o Facility-wise details and Terms & Conditions covering nature of facility, amount,

principal security, collateral security, margin, validity/ period of facility, processing fee,

rate of interest/ commission, other terms and covenants etc.


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o Analysis of Balance Sheet and Profit & Loss Analysis, Funds Flow Statement

and Ratio Analysis: The main objective of analysis of Balance Sheet and Profit & Loss

Account is to clearly find out the present solvency and probability of continuing solvency

and trend of fortunes of the business enterprise. Study of Balance Sheet and Profit & Loss

Account over a period of a few years gives approximate idea of the financial position of the

enterprise. It is, therefore, necessary to make a comparative and comprehensive study of

these statements for at least 2-3 years immediately preceding the date on which an

application for an advance is made. It is also necessary to make such study of financial

estimates for the current year and projections for the following year.

6.3 Negotiation: Pricing

Pricing of credit facilities plays a very important role in determining the profitability of the bank.

Price risk forms a very important component of the overall risk that the bank is exposed to.

Therefore identifying and assessing this risk and mitigating it are of key importance. Pricing of

the credit facilities appropriately enables the bank in mitigating this risk. The pricing function is

closely related to the risk rating tool of the bank. The pricing norms followed by the bank for

each category of credit facility.

6.3.1 Pricing of Large Corporate Fund Based Advances

The Benchmark PLR (BPLR) of the bank as per RBI guidelines is 13% p.a. The BPLR is the

ceiling rate for loans upto Rs.2 lacs with a maximum spread of 3.50% over BPLR (excluding

penal interest). The large corporates indicative spread around BPLR based on the risk rating and

tenor followed by the bank is as follows:


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Tenor

UB-AAA

#

UB-AA+, AA

& AA-

UB-A+, A &

A-

UB-BBB+,

BBB & BBB

UB-BB, B, C

and D

Upto 3 months BPLR-6.30 BPLR-5.30 BPLR-3.30 BPLR-1.30

Above 3 months upto 6 months BPLR-6.00 BPLR-5.00 BPLR-3.00 BPLR-1.00

Above 6 months upto 9 months BPLR-5.50 BPLR-4.50 BPLR-2.50 BPLR-0.50

Above 9 months upto 1 year BPLR-5.20 BPLR-4.20 BPLR-2.20 BPLR-0.20

Above 1 year upto 2 years BPLR-5.00 BPLR-4.00 BPLR-2.00 BPLR

Above 2 years upto 3 years BPLR-4.75 BPLR-3.75 BPLR-1.75 BPLR+0.25


Above 4 years upto 5 years BPLR-4.30 BPLR-3.30 BPLR-1.30 BPLR+0.70Above 5 years upto 6 years BPLR-4.25 BPLR-3.25 BPLR-1.25 BPLR+0.75


Above 9 years BPLR-3.80 BPLR-2.80 BPLR-0.80 BPLR+1.20

BPLR+3.50%

OR Last

Contracted

Rate

Whichever is

Higher

# includes UBSO ratings also.

The bank may fix higher term premium for assets with credit rating of UB-A+, A, A-, BBB+,

BBB and BBB-. RMs and Central Office functionaries may negotiate higher rates wherever

possible and any downward deviation from the above rates should be approved by respective

sanctioning authorities in case of Large Corporate advances.

6.3.2 Pricing of Schematic and Non-Schematic SME loans:

Schematic SME loans are governed by the rates associated with the respective schemes. In case

of non-schematic loans the risk rating based pricing is followed. Any deviations on pricing of

SME advances need to be approved by the Zonal Head without reference to Central Office.

6.3.3 Pricing of Agricultural Advances:


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Schematic agricultural loans are governed by the rates associated with the respective schemes.

For non schematic / non corporate agricultural loans, the rate of interest is linked to the rating

arrived as per the rating tool for agricultural loans. The Zonal Heads are authorised to allow

reduction in the rate of interest by 2% on the rates indicated.

Credit Rating Indicative Rate of Interest

A1 2% below BPLR

A2 1% below BPLR

A3 At BPLR

A4 Not to be considered

For corporate loans upto Rs.15 crores, rate of interest should be linked to the credit rating. Zonal

Heads are authorized to allow for reduction in the rate of interest by 2% on the rates applicable to

the relative credit rating. For large corporate agricultural loans i.e. beyond Rs.15 crores, the rate

of interest should be approved by the sanctioning authorities at Central Office.

The respective sanctioning authorities at Central Office have powers to approve the deviations

from above rates. In case of limits sanctioned by Branches/Zonal Offices the Zonal Heads havepowers to approve deviations.

6.4 Sanction and Noting

The Credit Proposals duly recommended should are sent to the sanctioning authority. The Credit

Proposals falling within the powers of Central Office are sent directly to Central Office; with a

copy to the Zonal Office which then submits its observations on the proposal within a period of

3-4 days otherwise it is construed to have been duly passed by them. Appraising Officials at

Zonal Offices/ Central Office carry out a detailed scrutiny of Credit Proposals to ensure the

following:


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Credit Proposals are comprehensive. Adequacy of enclosures/documents. Proper assessment of the request, comprehensiveness of terms and conditions proposed,

conformity to basic lending principles, banks credit policy and norms & guidelines of

Reserve Bank of India / other regulatory authorities.

Proper analysis of Balance Sheet, Profit & Loss Account and other financial statements. Calculation of relevant ratios. Reasons for variations in the Balance Sheet and other relevant ratios and comments there

upon.

Proper assessment of credit requirements. Limits proposed are within the borrowing powers of the company. Assessment of technical feasibility, management ability, compliance of statutory

requirements and overall financial viability of the projects.

The information / comments about the borrowers, guarantors and the project given in theProposal display a fair, complete and correct picture.

Adequacy and suitability of collateral security Appropriateness of Norms and documents proposed are appropriate.

The officials also take into consideration the overall credit plan / policy of the bank, performance

and prospects of similar projects, market reports about the borrower and the group, industry

scenario, inter-firm comparisons, present exposure of the Bank to the industry, experience and

quality of exposure, assessment of credit risk etc.The officials then submit their comments along

with Credit Proposal to the Sanctioning Authority.

6.4.1 Sanctioning of Credit Proposal

The sanctioning authority studies the proposal and appraises the request for credit facilities from

all the angles with safety of the banks funds being the foremost consideration. The advance,

including over-limit business, casual facilities and one time transactions should be sanctioned as


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per the discretionary powers delegated to the sanctioning authorities by the Bank. The

sanctioning authority should exercise their power judiciously. It must be noted that they may

stipulate certain terms, conditions and covenants over and above those mentioned in the

proposal. An advance facility sanctioned should be availed within a period of six months from

the date of sanction or other date/period stipulated in this regard by the sanctioning authority. If

the borrower requests to keep the sanction of an advance in force beyond the period of six

months (or other period mentioned in the sanction), the relative proposal should be referred for

revalidation to the same authority which had sanctioned the original limit.

The key functionaries posted at Branch, Zonal Office and Central Office have been delegated

with specific powers of sanctioning. The powers above the Sr. Vice Presidents are delegated toCommittee of Executives (COE) and the Committee of Directors (COD). The present committee

structure consists of the following:

Committee Members

Central Office Credit Committee (COCC) President (CB) (Chairman of the

Committee), SVP (Credit) and SVP (Risk).Committee of Executives (COE) ED(Chairman of the Committee), President

(CB), SVP (Cr.) and SVP (Risk).

Senior Management Committee (SMC) CMD (Chairman of the Committee),

President (CB), SVP (Cr.) and SVP (Risk).

Committee of Directors Select members of Board of Directors, with

CMD as Chairman of the Committee

The following table indicates the sanctioning authority, exposure limits (maximum permissible

limits comprising of fund based, non-fund based and other exposures including forward

contracts, derivatives and intra day exposures).


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Sanctioning

Authority

Exposure limits Limits against 100% Cash margin

Existing Proposed Existing Proposed

Manager Nil 50 Nil 500

AVP 100 100 1000 1000

Sector Heads

at Central

Office/VP

500 750 Full Full

SVP 1500 1500 Full FullSVP (Cr.) at

C.O.

1500 2000 Full Full

COCC 2500 3000 Full Full

COE 4000 5000 Full Full

SMC 6000 7500 Full Full

COD Over 6000 Over 7500 Full Full

6.4.2 Noting of Proposals

Credit Proposals sanctioned by sanctioning authority are Noted by the next higher authority.

The main objective of this is to ensure that sanctioning authority has taken the decision in

keeping with the Banks credit policy and the basic lending discipline. The Noting Authority

comments on the quality of the Credit Proposal, procedural gaps in information, if any. Noting of

the Credit Proposal should not be held up for unduly long period, for any reason whatsoever.


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6.5 Documentation and Creation of Security

Proper documentation is of utmost importance before disbursing an advance to a borrower as it

forms the basis for banks legal recourse in the court of law in case of default by the borrower.Documentation helps in establishing a contractual relationship between the bank and the

borrower. Adequate care should be taken to ensure that the security documents are

comprehensive in all respects. Proper drafting/format of the documents (including, ensuring that

they contain all the relevant stipulations of the sanction) and their correct stamping and execution

are the three essential requirements of proper documentation. While fulfilling the documentation

formalities the following should be considered:

Documents are in an appropriate format as prescribed by the bank. The documents are duly stamped. All documents are executed in presence of the branch official Documents are checked to ensure that they conform to the banks requirements and terms of

sanction and are complete in all respects.

Full particulars of the account and security documents are entered in the DocumentsExecution Register.

Safe keeping of security documents. Preservation of cancelled documents. Supply of duplicate copies of documents to borrowers.

6.6 Disbursement, Monitoring, Renewal / Review

6.6.1 Disbursement

Disbursement of advance is carried out after complying with all the terms and conditions of

sanction. Disbursement of any advance (credit facility) should be effected only after:


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Sanction of facility by the appropriate authority. Proper execution of security documents by borrower / guarantor and their checking and

verification.

Compliance with terms of sanction including creation and registration of charge oversecurities.

Completion of account opening formalities.

Necessary accounts are opened and limit set-up in the system (Core Banking Software) using

appropriate menus by entry and checking of relevant particulars. It is the primary responsibility

of the branch to monitor the end-use of funds, to ensure that the funds borrowed are used for the

purpose for which they are borrowed and there is no diversion of funds.

In all accounts with working capital limits exceeding Rs 1 crore, branches are required to obtain

information in the Quarterly Information System (QIS) form, which should be used for fixing

operative limits.

6.6.2 Monitoring

Monitoring of accounts should be on a regular basis for all accounts, irrespective of the risk

rating accorded to the account. Proper monitoring after sanction and disbursement of credit

facilities enables the bank to evaluate the following:

Performance of the assisted business and its financial health. Anticipate problems and prospects to initiate timely and appropriate corrective measures.

The major instruments for effective monitoring / exercising proper supervision and follow up are

as follows:

Scrutiny of financial statements / returns and other information.


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Monitoring operations in the account. Compliance with terms of sanction. Monitoring operations in the account. Periodic inspections. Early warning signals. Revival letters. Confirmation of balances.

6.6.3 Renewal / Review

The timely annual renewal/Review is an important step in the follow-up, supervision and

administration of credit. The Reserve Bank of India guidelines stipulate that if a credit limit has

not been reviewed/ renewed within 180 days from the due date / date of adhoc sanction, it should

be treated as NPA. The renewal / review should be carried out in the Banks Credit Proposal

form used for sanction of credit facilities. All credit facilities, other than ad-hoc guarantees /

letters of credit, are required to be renewed annually. The terminology is review for Term Loans

and renewal for other facilities repayable on demand. The main aim of the bank is to assess the

following:

The performance of the borrowers business. The utilisation of borrowed funds. The position of the Banks security. The borrowers financial position. Appropriateness of limits. Signs of incipient sickness and corrective.

All fund-based and non-fund based facilities, including term loans, are reviewed as per the

following schedule along with the monitoring tool:


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Large Corporate

Rating symbol* Review frequency

UB AAA Annual

UB AA+, AA, AA- Annual

UB A+, A, A- Annual

UB BBB+, BBB, BBB- Once in 6 months

UB - BB Once in 3 months

UB - B Once in 6 months

UB - C Once in 6 monthsAll project finance loans (in

case of new projects) Once in 6 months.

*(includes SO ratings also)

SME

Rating symbol Review frequency

SME 1 AnnualSME 2 Annual

SME 3 Annual

SME 4 Once in 6 months





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The concerned sanctioning/reviewing authority has discretion to increase the review frequency.

Downward migration of rating of assets at the time of review is to be reported immediately to the

Credit / Risk Departments by branches.


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7 Risk Management at UTI Bank

There are several risks involved in a financial transaction. Risk Management refers to identifying

the risks & understanding its implications both in terms of the likely hood of its occurrence and

its impact on the transaction in case the event occurs and subsequently structuring the transaction

accordingly. The key risks that need to be identified and understood for structuring any financial

transaction would fall into one of the following categories:

Credit Risk & Bankruptcy Risk: Ability of an entity to pay its financial obligations andsurvive as a viable entity during the tenure of the transaction.

Performance Risk: Ability to perform and fulfill contractual obligations. Asset/ Collateral risk: Variation in the value of the underlying asset. Interest Rate Risk: Variation in interest rate. Liquidity Risk: Ability to liquidate the underlying assets or collateral and generate liquidity

to service the investors in a timely manner.

Payment /Counterparty Risk: Ability of the other parties to the transaction, like swap-provider, paying bank etc., to meet their obligations.

Reinvestment Risk: Variability in the returns earned on reinvestments made out of fundsreceived from obligors.

Prepayment Risk: Variation in the maturity due to pre-payment by the obligors. Legal/ Regulatory/ Tax Risk: Risk involved in the changes and interpretation of laws &

regulations and tax laws.


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7.1 Credit Rating System

Credit risk is the major component of overall risk that the bank is exposed to and therefore its

effective management is a critical determinant of the Banks profitability. At UTI Bank anexhaustive credit rating system is followed in order to mitigate the credit risk. The salient

features of the credit rating system in the Bank for each sub segment are as follows:

7.1.1 Large Corporates

At present the Bank is following fourteen grade rating symbol system. In case of new projects,

the rating grade will be assigned three grades below the rating grade assessed using the rating

tool. However, in the case of infrastructure projects being set up by reputed groups, such

exposures need not be downgraded by three grades but restricted only to the exposures permitted

as per RBI guidelines.

The Banks rating grades are prefixed with letters UB _ The Banks rating grade lettering corresponds to the rating grade lettering awarded by

CRISIL and ICRA which facilitates a comparison of the Banks ratings with those of

external agencies.

The ratings for clients are upgraded on the basis of credit enhancementmeasures. Such ratings are suffixed SO.

7.1.2 SME

The Credit risk assessment of the SME exposures is different from that of large corporates

because of differences in the default behavioral patterns, granularity of exposures and higher

collateral usage to mitigate credit risk. The Bank follows a separate 8 grade scale rating

nomenclature for SME which is as follows:

SME 1 (Highest safety) SME 2 (High safety)


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SME 3 (Adequate safety) SME 4 (Moderate safety) SME 5 (Inadequate safety) SME 6 (High risk prone) SME 7 (Substantial risk) SME 8 (Default)The minimum acceptable rating grade for taking up exposures is SME 4(Moderate safety).

As a concluding part of the rating model, a monitoring tool was introduced during 2003-04,

making it a composite and comprehensive tool for rating and monitoring the Banks credit

exposures. The review frequency for each sub-segment of credit has been discussed before under

Disbursement, Monitoring, Renewal/Review. The monitoring tool has 39 parameters, which have

been allocated positive scores for favorable signals, zero scores for neutral signals and negative

scores for adverse signals. The signals emanating from the conduct of a borrowal account are

quantified by the tool and the rating is recomputed.

7.1.3 Agri-business

In case of agricultural loans (direct and indirect) a simpler rating model in the form of a score

sheet is being used by the Bank. This is because a comprehensive rating model is not suitable as

a result of non availability of financial & organizational data Separate score sheets, for

Traditional activities (for e.g. land development, minor irrigation scheme, crop loans, loans for

farm machinery and tractor loans; and Hi-tech projects (e.g. for floriculture, cold storage,

warehousing, vegetable farming and plantation) are used.

The following four ratings are used by the bank in case of agricultural loans:

A1 High safety A2 Moderately high safety


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A3 Adequate safety A4 Moderate safety

Rating below A3 is to be avoided. Incase of corporate agricultural loans upto Rs.15 Crores, the

rating should be done as per SME rating tool and corporate agricultural loans beyond Rs.15

crores, the rating as per large corporate should be done.

7.2 Risk Mitigation Techniques

There are two categories of credit products offered by the Bank - Channel Finance and

Structured Finance.

Structured Finance in simple terms, is a financial technique whereby a deal; contract or product

is designed, customized, or engineered to meet the customers specific financial or investment

objectives and the banks risk taking ability. It involves isolation of specific risks, evaluation of

the same, allocating the risks to various participants in the transaction based on mitigation of

risks through credit enhancement structures and pricing the residual risk borne by the bank. The

bank uses support mechanisms or credit enhancement products in order to minimize or mitigatepotential risks. Some of the frequently used support mechanisms are Letter of Credit, Bank

Guarantee, Swaps & Options and Securitisation which have been discussed in products and

services offered under Corporate Banking.


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8 Management of Non-Performing Asset (NPA)

The bank follows prudent NPA management which has been a result of a sound credit selection

and sanction process which has led to an improvement in the credit portfolio and earnings.

Advances/Assets are classified as performing or Non-Performing base on the record of recovery.

Availability of security or the net worth of the borrowers/guarantors is not taken into account for

the purpose of treating an advance as Non-Performing Asset. As per the norms of the RBI, a

Non-Performing Asset (NPA) is an asset in respect of which interest/installment has remained

unpaid for more than 90 days. The main criteria for treating different types of credit facilities as

NPA are as follows:

Term Loans: Interest and / or installment of principal remains overdue for a period of morethan 90 days

Cash Credit and Overdraft: The account remains out of order for a period of more than 90days.( Out Of Order: CC or OD account remains continuously in excess of sanctioned limit/

drawing power, No credit continuously for 90 days , incase the outstanding balance in the

principal operating account is less than the sanctioned limit/drawing power)

Bills Purchased and Bills Discounted: The bill remains overdue for a period of more than 90days.

Other Credit Accounts: The amount to be received remains overdue for a period 90 days. Short Term Agricultural Advances for Production and Marketing of Seasonal Agricultural

Crops like Paddy, Wheat, Oil Seeds, Sugarcane etc.: Interest and/ or installment of principal

remains overdue for two harvest seasons but for a period not exceeding two half years.

The bank follows a provisioning policy in conformity with the RBI guidelines. RBI has urged

banks to voluntarily set apart provisions much above the minimum prudential levels as floating

provisions. As per RBI guidelines, these floating provisions can be set off against specificprovisions required to be made against NPAs. The Net NPAs and the Gross NPAs as proportions

of Net and Gross Customer Assets were at 0.75% and 1.28% respectively as at end March06 and


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1.07% and 1.53% as at end March05.The provisions held together with accumulated write-offs,

as a proportion of Gross NPAs and accumulated write-offs, amount to 78% at the end March06.


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9 Conclusion

Each of the phases of the credit sanction process has its own significance. For example proper

credit selection is essential to ensure that the bank has a credible client base, objective due-

diligence determines the quality of the banks portfolio and its earnings, monitoring of credit

accounts help in identifying early signs of non-performance and helps in taking timely measures

to avoid losses. Overall a comprehensive and objective credit sanction process determines the

profitability of the Banks. The study of the credit sanction process through the study of the five

large corporate clients indicated that UTI Bank follows a comprehensive and objective

evaluation process of credit sanction.

The risk management tools for Large Corporates and SMEs have been working successfully for

the last three years. The rating model had been fine-tuned in 2004-05 so as to improve the quality

of credit portfolio and earnings. This is reflected in the improved risk-rated profile of corporate

credit compared to the previous year, lower level of non-performing asset compared to previous

year, significant growth of 47% yoy in fee income and growth in corporate credit.


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10 References