ramya canara bank project final report

CREDIT MANAGEMENT UNDER WORKING CAPITAL

EXECUTIVE SUMMARY

Credit management is the management of the credit portfolio of banks and financial

institutions.

Credit management is no longer a rule-of-thumb game .In a highly competitive and

deregulated environment, banks and financial institutions have to evolve better

systems and procedures to manage the credit needs of highly demanding customers,

particularly in the corporate and retail sectors. The developments of the past decade

have totally changed the perspective of management of credit .Credit management of

canara bank:-

Capital adequacy norms

Risk management including asset-liability management

Exposure norms

Risk pricing policy and credit risk rating

Asset classification, income recognition and provisioning norms

Appraisal, credit-decision making and loan review mechanism

Hence a study is done to evaluate the credit management at canara bank. They are

various parameters, techniques and strategies to evaluate the credit management of

any bank.

The principles of lending, which include the aforesaid parameters, form part of bank-

specific loan policies. With progressive computerization of front-office and back-

office and net working of bank branches, software programmes are being introduced

and developed for risk management are based on various models suggested by the

canara bank.

To study the pattern and procedures followed in canara bank regarding credit

management, and to indicate the performance of credit management a research was

taken up and various techniques are used to solve various problem areas in the area of

credit management.

Pooja Bhagavat Memorial Mahajana P.G Centre Mysore-16 1


1. INTRODUCTION

1.1 INDUSTRY PROFILE

In the present scenario service sector plays an important role in the country.

Among service sector banking industry is one. Banking is one of the classical

economic functions and plays a vital role in economic development.

India has a well developed banking system. Most of the banks in India were

founded by Indian entrepreneurs and visionaries in the pre-independence era to

provide financial assistance to traders, agriculturists and budding Indian industries.

Indian banks have played a significant role in the development of Indian economy by

inculcating the habit of saving in Indians and by lending finance to Indian Industry.

Indian Banks can be broadly classified in to Nationalised Banks, Private

Banks and Foreign Banks. Currently, India has 88 scheduled commercial banks 28

public sector banks (that is with the Government of India holding a stake), 29 private

banks (these do not have government stake; they may be publicly listed and traded on

stock exchanges) and 31 foreign banks.

The commercial banking structure in India consists of scheduled commercial

banks and unscheduled Commercial Banks and unscheduled Banks. Schedule

Commercial Banks Constituted those banks. Which have been included in the second

schedule of Reserve Bank of India (RBI) Act 1934 RBI includes only those banks in

the schedule which satisfy the criteria laid down vide section 42(6)(a) of the Act.

The government’s policy for Indian bank since 1969 has paid rich dividends

with the nationalisation of 14 major private banks of India. Not long ago, an account

holder had to wait for hours at the bank counters for getting a draft or for withdrawing

his own money.

Today he has a choice. Gone are days when the most efficient banks transferred

money from one branch to other in two days. Now money transaction to any corner of

the country within a few minutes is possible by the advent of technology.



The milestones of Indian banking industry are:

The first bank in India, though conservative was established in 1786. From

1786 till today the journey of Indian Banking system can be segregated into three

distinct phase. They are as mentioned bellow.

Early phase from 1786 to 1969 of Indian Banks

Nationalisation of Indian Banks and up to 1991 prior to Indian Banking sector

reforms.

New phase of Indian Banking system with advent of Indian Financial and

Banking sector reforms after 1991.

Phase 1

The General Bank of India was set up in the year 1786. Next was come Bank

of Hindustan and Bengal Bank. The East India Company established Bank of Bengal

(1809). Bank of Bombay (1840) and Bank of Madras (1843) as independent units and

called it Presidency Banks. These three banks were amalgamated in 1920 and

Imperial Bank of India was established which started as private share holders banks

mostly Europeans Shareholders.

In 1865 Allahabad Bank was established and first time exclusively Indians,

Punjab national Bank Ltd, was set up in 1894 with head quarters at Lahore. Between

1906 and 1913, Bank of India central, Bank of India, Bank of Borada, Canara Bank,

Indian Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and bank also experienced periodic

failures between 1913 and 1948. There were approximately 1100 Banks, mostly small

to streamline the functioning and activities of commercial Banks. The Government of

India came up with the banking companies Act, 1949 which was later changed to

Banking Regulation Act 2949 as per amending Act of 1965 (Act No.23 of 1965).

Reserve Bank of India was vested with extensive powers for the supervision of

banking in India as the Central Banking Authority.



During those day’s public has lesser confidence in the Banks. As aftermath deposit

mobilisation was slow. A breast of it the savings bank facility provided by the postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase 2

Government took major steps in this Indian Banking sector Reform after

independence. In 1955, it nationalised Imperial Bank of India with extensive Banking

facilities on a large scale especially in rural and semi-urban areas. It formed

State Bank of India to act as the principal agent of RBI and to handle Banking

transactions of the Union and state Governments all over the country.

Seven Banks forming subsidiary of state Bank of India was nationalised in

1960 on 19th July, 1969, major process of nationalisation was carried out. It was the

effort of the then Prime Minister of India. Mrs. Indira Gandhi 14 major commercial

Banks in the country was nationalised. Second Phase of nationalisation Indian

banking sector reform was carried our in 190 with seven more Banks. This step

bought 80% of the Banking segment in India under Government ownership.

The following are the steps taken by the Government of India to regulate Banking

Institutions in the country.

1944: Enactment of Banking Regulation Act.

1955: Nationalisation of State Bank of India

1959: Nationalisation of SBI subsidiaries

1961: Insurance cover extended to deposits.

1969: Nationalisation of 14 major Bank.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural Banks

1980: Nationalisation of seven Banks with deposits over 200 crore.



After the nationalisation of Banks, the branches of the public sector bank India

rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit

faith and immense confidence about the sustainability of these institutions.

Phase3

This phase has introduced many more product and facilities in the Banking

sector in its reforms measure. In 1991, under the chairmanship of M. Narasimhann a

committee was set up by his name which worked for the liberalization of banking

practices.

The country is flooded with foreign Banks and their ATM stations. Efforts are being

put to give satisfactory service customers. Phone Banking and Net Banking is

introduced. The entire system became more convenient and swift. Time is given more

importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian

countries suffered. This is all due to a flexible exchange rate regime, the foreign

reserves are high, the capital account is not yet fully convertible, and banks and their

customer have limited foreign exchange exposure.

Core Banking System (CBS)

Every Bank is targeting in reduction of its transaction costs. All branches of

the Banks are switching for live transaction mode. This system integration of Core

Banking was implemented and supported by software companies like Infosys, TCS,

WIPRO people soft etc. Until now CBS is adopted by most of the Banks like Canara

Bank, SBI, HDFC, City Bank, UTI Bank etc.



2. PROFILE OF THE BANK

BACK GROUND AND INCEPTION OF THE COMPANY

Canara Bank was founded in 1906 by Sri, Ammembal Subba Rao Pai. The

bank was initially named as Canara Bank Hindu Permanent Fund. It blossomed in to a

limited company in 1910 and was renamed as Canara Bank Ltd, in 1969 the bank was

nationalised and thereafter came to be known as Canara Bank.

Today Canara Bank is one of the premier Banks in the country with a network

of 2,578 branches spread all over the country. The Bank has many distinctions to its

name. It was the first Bank to be conferred FICCI award for contribution to rural

development Canara Bank was the first among Banks to launch networked ATMs and

obtain ISO certification.

Canara Bank has covered a niche for itself in providing IT based services with 100%

computerization of the branches .The Bank provides a wide array of services, such as

Networked ATMs Anywhere banking, Tele Banking, remote access terminals,

internet and mobile Banking, debit card etc. For the year 2004-05 Canara Bank

clocked the highest net profit (Rs1110 crore) among nationalized Banks, with

significant improvement in capital adequacy ratio (12.78%) and asset quality (net

NPA ration of 1.88%).My sore Canara Bank Regional Office (CBROM) was

upgraded from Regional Office on April1998. The functions of Circle Office have

been laid down by the Bank. However, on account of changing times, a review of

these functions has been made, rather than replicating existing ones. Sections at

Regional Offices will look for policy support from Head Office. All operational and

administrative work relation to their functions shall be handled by the respective

sections within the policy parameters set out by Head Office. Mysore Canara Bank

Regional Office has a network of 111 level Branches scattered over 4 districts. Which

Mysore, Mandy, C.H nagar, Hassan. In addition to these 5 currencies chest are

functioning in all four districts catered to the cash requirements of these branches.



NATURE OF THE BUSINESS CARRIED:

Canara Bank group’s principal activities are to provide a full range of Banking

and other financial services through 2,578 Branch Offices in India and Abroad. The

service includes accepting deposits, commercial and institutional credit, treasury,

investment, risk management and other related financial services. It operates through

two segments. Banking operations consist of corporate Banking. Retail Banking,

personal and commercial Banking, Cash management services, Deposits and other

allied services. Treasury operations consist of dealing in SLR and Non-SLR securities

and Money Market operation.

VISION, MISSION AND QUALITY POLICY

"A good bank is not only the financial heart of the community,

but also one with an obligation of helping in every possible manner to improve the

economic conditions of the common people" - A. Subba Rao Pai.

CORPORATE VISION:

To emerge as a world class Bank with best Practices in realms of asset portfolio,

Customer orientation, product innovation, Profitability and enhanced value to

stake holders.



CORPORATE MISSION:

Augmenting low cost Deposits

Threat on Retail lending

Toning up Asset Quality

Assent on cost control

Product innovation and marketing

Customer Centric focus

Leveraging IT for comprehensive MIS

Maximising stake Holders Value.

CORPORATE OBJECTIVES:

Efficiency

Profitability and Productivity

Organisational Effectiveness.

Customer Centric

Hi-tech Banking



DEPOSIT SCHEMES:

1. SAVING DEPOSIT

Saving deposit is available to all individuals, non trading organisations,

permitted institutions, etc. Minimum balance can be fixed as per requirements.

2. CURRENT DEPOSITS

It is a perfect account to do business operations. It is available to traders,

businessmen, and corporate bodies etc. who operate the account frequently. Bank

given all facilities like, pass book, pass sheet, standing instructions, cheque collection.

3. FIXED DEPOSIT

It is a safe way to solid returns method. Minimum deposit should be Rs.

1000/- and Maximum no ceiling. Period deposit is given minimum 15 days and

maximum 120 months, 7-14 days period for deposit of 5 lakh and above. Interest

should be pay monthly, quarterly, half-yearly or annual intervals at depositor’s choice.

4. KAMADHENU DEPOSIT

It is high returns deposit scheme interest will be compounded every quarter.

Fixed deposit should be deposit minimum of Rs. 1000 and maximum-no ceiling.

5. CANBANK AUTO RENEWAL DEPOSIT (Card)

Canara Bank is giving high returns in shorter terms through CANBANK

AUTO RENEWAL DEPOSIT scheme. It is an auto renewal system, card has built-in

features for automatic renewal of these deposits, with or without interest accrued.

6. CANFLEXI DEPOSIT

It is a combination of Savings Account and Fixed Deposit, CANFLEXI

enables customers to earn maximum interest.

7. ASHRAYA DEPOSIT



This scheme is available to all individuals. Who have completed the age of 60

years and above, in single or joint names.

8. RECURRING DEPOSIT

It is monthly deposit minimum to Bank Rs. 50/- per month. Interest will be

compounded every quarter.

9. CANSARAL SAVINGS ACCOUNT

This Savings Account scheme is available to every common man. Its initial

deposits Rs. 25/- Account can be maintained even with zero balance. Here Bank has

not restriction on number of credits, and Bank will give free ATM-cum-Debit Card

facility.

10.CAN-TAX SAVER DEPOSIT

It is a safe way to solid returns. A term deposit scheme under the Fixed

Deposit and Kamadhenu streams of the Bank. The benefit of Deduction is get from

income upto Rs. 1 lakh under sec.80C of the INCOME TAX Act1961, for individuals

only.

11.CANRELAX

Deposit under the scheme can be opened by individuals. Minimum deposit

amount Rs.1,00,000/- and in the multiples of Rs.10,000/- thereafter. Rate of interest

will be given of interest 0.50% over the rate applicable

PRODUCT/SERVICE PROFILE



CANARA BANK RETAIL PRODUCTS:

1. CANARA BUDGET PERSONAL LOAN

Can budget personal loan is to fulfil only personal needs of salaried

employees. This loan facility is available to any Central/State Government

Employees, Lecturers/professors of colleges/universities/research institution.

2. HOME IMPROVEMENT LOAN

Home Improvement loan is available to who already own homes. Loan will be

giving to house hold furniture items, air conditioners, wardrobes, kitchen cabins etc.

Loan is available along with a housing loan or even independently.

3. CANARA MOBILE VEHICLE LOAN

Can Mobile vehicle loan is available to purchase any vehicle. It may be new

vehicle or a used vehicle. Repayment period is given to four wheelers up to 84 months

and two wheelers upto 60 months.

4. CANARA TECH

CANTECH loan facility is available only to IT/BT professional’s loans upto 6

months gross salary with a maximum of Rs. 2 lakh. Higher quantum considered

selectively. Repayment period is given up to 56 months.

5. CANARA TRAVEL

CANTRAVEL loan scheme is available to travel in India or abroad.

6. CANARA RENT



CANRENT loan is available to who are owners of the property to meet their

business and personal needs.

7. CANARA MAHILA

This is an exclusive loan scheme for women who are working and non working

persons are able to get loan and fulfil their personal financial needs.

8. DOCTORS CHOICE

Doctor’s choice loan scheme is to fulfil the Doctor working capital and term

loan requirements. Loan is available only to qualified registered medical practitioners.

9. CANARA JEWEL PERSONAL LOAN

CPL is to fulfil the expenses of marriage and jewellery expenses.

10. HOUSING LOAN

Loan is available to purchase of ready built house or flat construction of house

or flat purchase of site and construction there on, repairs and renovation and take over

of the liability from other Banks.

11. CANARA SITE

CANSITE loan is available to who are individuals aged upto 55 years of age at

the time availing the loan. Those people must have above 1 lakh annual income or

more eligible.

12. CANARA MORTGAGE

This loan scheme is available to against security of mortgage of property

(building). Only able to get Professionals, businessmen, salaried persons/individuals

for meeting genuine needs.

13. TEACHERS LOAN



This loan scheme is to meet the genuine personal needs of teaching or non

teaching staff of schools or colleges.

14. CANARA PENSION

This loan scheme is available to pensioners for drawing their pension through

Canara Bank branches. Loans are for meeting medical expenses and other genuine

personals needs.

15. CANARA TRADE

This Loan scheme is available to Traders, Whole sale and Retail business,

Business Enterprises, Commission Agents, Service sector, Professionals and self

employed persons. It is fulfil the working capital of business.

16. CANCASH

CANCASH will get when we need it without selling our blue chip portfolios,

to meet the investments/domestic/personal needs (not to be utilized for speculative

purposes) quantum upto Rs. 5 lakhs.

17.SWARNA LOAN

SWARNA LOAN is available to any individuals against Gold Jewellery to

meet the medical expenses and other unforeseen commitments/ contingencies etc.

18.EDUCATIONAL LOAN (VIDYASAGAR)

Educational loan is available to who are needy and meritorious students for

pursuing higher education in India and Abroad, and fulfil for payment of fees to

school/college and for purchase of books, hostel fees, examination fees etc.

NRI SERVICES:



1. BANK ACCOUNTS AND DEPOSITS

a) NRE Accounts: This is term deposit scheme. Here customers are able to

get saving, current and term deposits scheme in Indian rupees.

b) FCNR (B) (Principal/Interest Repatriable): This is term deposit

scheme available to foreign currencies only. Interest shall be paid in the

currency of deposit.

2. REMITTANCE FACILITIES

Canara Bank has rupee drawing arrangements with 20 exchange Company’s

and 18 Banks for remitting funds by NRI’s working in the Middle East to India.

3. OTHER FACILITIES TO NRIs

NRIs are permitted to avail all types of retail rupee loan, international Credit

Card facility with the Bank, housing loan, financial services etc.

OTHER SERVICES:

1. DEPOSITORY SERVICES

This is the best way of holding Securities in electronic form. Purchase and sale

of securities can be through the account with very reasonable charges.

2. SAFE DEPOSIT LOCKERS

Lockers are available at select branches where Safe Deposit vaults are

installed. Bank lets on hire safe deposit lockers to individuals (singly or jointly),

Firms, Companies, Association or Clubs, Trustees on nominal rent.

3. SAFE CUSTODY SERVICES

This subsidiary service is rendered by the Bank to most valued customers.



4. ELECTRONIC FUND TRANSFERS

Canara Bank has National Electronic Fund Transfer system at minimum charges.

5. INSURANCE

Canara Bank has Life and Non life Insurance products also.

6. SAVINGS SURAKSHA

Group insurance has been availed to who are deposit account holders of

Saving Bank Accounts and Term deposit accounts.

7. CAN-MEDICLAIM

An exclusive Mediclaim cum Personal Accident policy scheme is available to

Bank Account holders.

8. CREDIT CARDS (CANCARD)

CANCARD is affiliated to VISA International and Master Card. Bank has

been distributed Domestic and International and Master Cards through cash

withdrawal facility at ATMs. Free accident Insurance, baggage insurance, purchase

protections are availed to credit card holders.

9. ATM CUM DEBIT CARD

Card holder customers are provided the convenience of accessing their

accounts from several locations like all ATMs Point of Sale Member Establishments

(POS MEs) having logo and avoids the risk of carrying cash, as Debit card is a

combination of an ATM card as well as a charge card.

10. MUTUAL FUND PRODUCTS

Canara Bank is the corporate agents for selling the Mutual fund products of

Canbank Mutual Fund and HDFC Mutual Fund.



11. INTERNET BANKING UNDER CBS

Canara Bank has been giving services to customer through Online Banking in

real-time basis. It is catered to both Retail and Corporate Customers. Online give

more facilities like Online transfer of funds to own accounts or from third party

accounts, Opening of Term deposits, Loan account repayments, Initiation of standing

instructions, Online stop payment instructions etc.

12. ANYWHERE BANKING

Once customer have an account with any of Canara Bank designated branches

customer can operate it from any other designated branches, with AWB customers

have a host of facilities to make banking with banker pleasure.

13. ON-LINE TAX ACCOUNTING SYSTEM (OLTAS)

Total 423 Canara Bank authorised branches across the country are handling

Direct Tax collections i.e., Corporate tax, Income Tax Wealth Tax, Fringe Benefit tax

etc.

14. CANBANK e-TAX: e-PAYMENT OF INDIRECT TAXES

This facility is available to the customers of Core Banking Solution (CBS)

branches, who are registered with Canara Bank’s Internet and Mobile Banking.

15. SPECIAL SERVICES

These services are aimed at caring for the personal needs of the customer and

enhancing customer satisfaction. Courtesy and impartially, secrecy, safety and

security are available from Canara Bank.



16. TAX ASSISTANCE SERVICES

Bank gives Taxation services to both customers and non customers.

17. ESTATE AND WILLS SERVICES

Canara Bank is giving wills services through appointing some executors.

18. TRUSTEE SERVICES-PRIVATE AND CHARITABLE

The Bank acts as Trustees for public, charitable religious and other trusts. It

also act as trustees of a settlement, Trustees of a minor’s legacy, custodian trustee of

properties held under Trusts of any description like pension, provident and gratuity

fund.

19. ATTORNESHIP

Accounts, Opening of Term deposits, Loan account repayments, Initiation of standing

instructions, online stop payment instructions etc.

20. ANYWHERE BANKING

Once customer have an account with any of Canara Bank designated branches

customer can operate it from any other designated branches, with AWB customers

have a host of facilities to make banking with banker pleasure.



21. ATTORNESHIP

Canara Bank power of attorney service is a specialized service to help both

their non-resident and resident customers, who find it difficult to operate/monitor their

accounts/investments personally. After the Bank obtains power of attorney from the

customer in their favour, bank executes customer’s instructions regarding customer’s

investments promptly and carefully.

NEW PRODUCTS AND SERVICES



Canara Bank has been introduced several deposit products during Financial

Year 2007. Can Tax saver, a term deposit scheme, was introduced under the

Kamadhenu and fixed deposit mode with tax benefit under Section 80C. CanChamp-

an exclusive SB deposit product was launched for aspiring children upto the age of 12

years for inculcating the habit pf savings, as well as making them eligible for

education loans. A term deposit scheme, namely, Canara Centenary Deposit was

also introduced during the year, offering attractive rate of interest for the depositors.

During the year, the bank also launched a SB-Gold deposit scheme, targeting the HNI

clients.

In the sphere of new loan products, the Bank introduced ‘Kisan Tatkal’ for

enabling farmers to meet emergent requirements and ‘Kissan Mitra’ scheme for

funding tenant farmers. Gramin vikas Vahini, a vehicle for inclusive growth in rural

areas was also introduced during the year, to promote SME sector, the Bank launched

SME Gold Card and a Term Loan Scheme for reimbursement of their capital

expenditure.

AREA OF OPERATION-GLOBAL/ NATIONAL/ REGIONAL

Mysore Canara Bank Regional Office was upgraded from Regional Office in

April 1998. The functions of Regional Office have been laid down by the Bank.

However, on account of changing times, a review of these functions has been made,

rather than replicating existing ones. Sections at Circle Offices will look for policy

support from Head Office.

Regional Wise Spread: According to CBROM Regional Office Mysore has 53

branches.



District-wise Spread: According to CBROM Mysore has 30 Branches, Kodagu

has 23 Branches, Chikmaglure has 24 Branches and Shivmoga has 34 Branches.

OWNERSHIP PATTERN

The Canara Bank is Mainly Public company minority of the shares which

were held by the general public, the remaining portion which will invests in the hands

of Government of India. Canara Bank shares are listed at Bangalore, Mumbai and

National stock exchanges. Ownership pattern is shown below;

Distribution of Share Holding

Category wise (31-03-2007)

Category # No. of shareholding % of Shareholding

Government of India 300000000 73.17

Banks and Financial Institution 3473116 0.85

Mutual Funds 7047429 1.72

Bodies corporate 3228833 0.79

NRIs/OCBs 138402 0.03

Resident Individuals/HUF/Trust 25539091 6.23

Foreign Institutional investors 70573129 17.21

TOTAL 410000000 100

(# Nominal Value of each share is Rs. 10/-)



COMPETITORS INFORMATION

There are many competitors in Mysore District viz., Nationalised Banks are

State Bank of India, Allahabad Bank, Bank of India, Punjab National Bank, Vijaya

Bank, Corporation Bank and Syndicate Bank. Private Banks are ICICI Bank, HDFC

Bank, UTI Bank, ING Vysya Bank. Co-operative Banks are HDCC Bank and

KSCARD Bank. These are all Banks offered similar product.

According to Mysore Lead Bank observation District wise performance of

different Bank as bellow.

Mysore District as a whole, Deposits have increased to Rs.1796.42 crore from

Rs.1512.17 crore as on 31-03-2006 growth of 18.80%.

State Bank of Mysore is leading under deposits with Rs.400.94 crore which is

followed by Canara Bank with Rs. 302.94 crore.

Market share of Deposits of State Bank of Mysore is 22.32% followed by

Canara Bank 16.86%, Karnataka Bank, 13.97%, Corporation Bank 9.64% and Vijaya

Bank 7.45%. Share of these five Banks under total deposits is 70.23%. Majority of the

Banks have shown negative growth.



ACHIEVEMENT/AWARDS

CBROM has achieved many targets apart from their strategic plan.

Regional has achieved Aggregate Deposits Target with comfortable

margin.

Regional has achieved Total Business Target.

Regional has achieved twin Term Deposit Target.

NR Deposit Target Achieved.

SSI Credit Target Achieved.

March’2007 Target under SRTO, RT, SBE, EDUCATION LOAN,

ADVANCES TP SC/ST achieved.

Export Credit & FBT Target for Mar’2007 achieved.

Target achieved under Non Interest Income.

Target achieved under internet Collected, Total Income, Interest Paid,

Establishment Expenditure, Total Expenditure and Profit before HO Interest.

Productivity per employee is improved to Rs. 2.27 crs, as against Rs. 1.94 crs

at Mar ‘06(YOY).



Performance Highlights March 2007

Achieved aggregate deposit target with comfortable margin.

Achieved total business target by adding Rs.470 Crores over March’2006.

Low cost deposits sustained-19.90%.

Achieved Twin term Deposit Target by marketing a growth of 19.80%.

NR deposit Target achieved.

Average Deposit and Average Advances grew by 13.90% and 17.50%

respectively.

Growth in Aggregate Advances by 19.90%.

Growth under priority Credit improved 22.10%.

Growth under Agriculture Credit improved by 28.95% by contributing a major

share of 62.30% to Gross Credit.

Humbled SSI Target.

SME Credit registered a growth of 28.40%.

Achieved Retail Lending Disbursement and outstanding Target under OPL

portfolio.

WORK FLOW MODEL

The primary activities are accepting deposits and lending loans and advances.

Accepting deposits by way of savings, Current account, fixed Deposit and Recurring

Deposits. The collected money will be safeguarded according to regulation of the

RBI.



Besides these Canara Bank must concentrate on stationary control. The

stationary includes application Cheque Books, challans and some other stationery. It

must maintain a sound control on these to balance the activities and services.

The Circle will report to Head Office in respect of both functional and administrative

matters. The Circle shall handle credit proposals upto the delegated powers and also

handle other general administration and staff matters (including disciplinary matters)

as the existing Circles are doing now. The branches have been provided with adequate

operational flexibility and credit sanctioning powers by the policies/guidelines spelt

out by Head Office.

The circle is fixes with targets by the Head Office in all business

parameters.And in term the circle has fixed the target to the branches under its

administrative purview. The performance will be reviewed periodically at various

forums.Circle office before distributing target to the branches. They should consider

the size of the branches.

The service units like accounts section and currency chests attached to their

base branches and would continue to function under the same circle as the base

branch circle will report of both functional and administrative matters. Circle shall

handle credit proposal up to the delegated powers and also handle other general

administration and staff matter (including disciplinary matters). With this the bank

will be broadly moving into a three-tier system of administration of operation.

FUTURE GROWTH AND PROSPECTUS

The Mysore Canara Bank circle has good scope for lending to agriculture

sector and improves Micro Finance. The District under the circle has large number of



self help group and they will avail substantial credit. Then out of 4 districts 3 districts

are having substantial cultivation.

The coffee price is firming up and improving with this Circle can increase exposure to

coffee. Mysore city has a special economic zone. Few big industries have already set

up their units. Here more units are likely to come up within few years. As the

infrastructure is improving and this will help to circle increasing Business

substantially.

3. DESIGN OF THE STUDY

3.1 INTRIDUCTION

Any field of investigation or reporting requires a preliminary plan. The aim

and scope of the study must be understood at the outset. One has to present a clear

idea of the reporting procedure used in the study since the value of any systematic

research lies in its methodology. Any enquirer would prove unsuccessful if it is not

done along certain methodical lines. Thus the validity of study to a great extent lies in

its methodology.

Research is a process by which the researcher tries to analyze the data

available to him either to find a solution to an existing problem or to use an

opportunity available in the environment. There are various types of research

methods. Research design is like a blueprint for the researcher as to how he or she

should proceed. It specifies the statement of the problem, data sources, and objective

of the study, data analysis and interpretation. A good research design ensures effective

research and results in fruitful use of resources.

3.2 STATEMENT OF THE PROBLEM

The total requirement of working capital is met partly by the credit that the

suppliers of goods and services {i.e. trade credit} extend to the firm. The remaining



part is to be produced by the firm out of its own internal sources or short-term

borrowings from banks.

Banks are the main institutional sources of working capital finance in India.

After trade credit, bank credit is the most important source of financing working

capital requirements of forms in India. The fact that bank finance is the most

commonly negotiated source of working capital finance motivated my interest to

undertake this study.

3.3 OBJECTIVES OF THE STUDY

The main objectives of the study are as follows;

1. The role of credit management in finding up the financial status of the banks.

2. Analyzing, classification, recognition and provisions of income and assets

brought into action.

3. To know about the different kinds of credit facilities.

4. To understand the concept of credit policies in banks.

5. To understand the concept of credit management under working capital.

6. Analyzing the reasons for credit management and its profitability in banks.

7. To know about what precautions to be taken at the time of granting advances.

3.4 METHODOLOGY

The project has been successfully completed with the use of various sources of

information which has been bifurcated as primary source and secondary source.

The primary source is drawn up from the bank where the study has been done

by preparing questionnaires, face to face, discussion with the concerned people of the

bank, by the ideas received from them.



The secondary sources were collected from various periodicals i.e. journals,

manuals, circulars, reports, brochure and annual reports provided by the bank. Apart

from them the books, several websites of the bank and financial institutions was made

use for the study.

LOCATION OF STUDY

Canara bank, Mysore.

DURATION OF STUDY

The research was conducted for 6 weeks from March 2009 to April 2009.

3.5 SOURCES OF DATA

The data was collected through secondary source which was mainly.

Financial statements of CANARA BANK i.e. balance sheet and profit and

loss account.

Annual reports.

Journals.

Websites of canara bank.

Credit management test books.



3.6 SCOPE OF THE STUDY

CREDIT MANAGEMENT is nightmare for all banks and financial institution

especially for developing countries like India. It is the main core for descending up

the financial grades of banks. The strong motivation of for selecting up this topic was

that unfortunately a huge mass in the economy like executives, managers,

businessman, and a daily waged worker are unaware of the dangers arising from the

Non proper use of credit in financial institution. So here in my mere constitution for

all classified people to bring up the aspects of credit management under term loans to

time light.

3.7 LIMITATIONS

The uttermost limitation which minimized the theoretical issues of the report

is that there are no prescribed study materials or text book regarding the topic,

as it is a recent concept.

Therefore I was bound to manage with some test books, circulars, manuals,

articles, brochures and annual reports of the bank only.

Specific information had to be omitted because they were meant for

confidential purpose.



4. CREDIT MANAGEMENT

4.1 INTRODUCTION

Banks deal with public funds as they accept deposits from those who have surplus and

lend them to the needy in the form of Advances. Depositors have to be paid interest.

To meet the interest cost and the overheads (expenditure), a bank has to earn income

in the form of interest on money lent and fee for other services rendered. Banks

cannot just keep the money received as idle deposits. The same has to be lent to such

persons who are in a position to service the loans on time. if there is any laxity in the

selection of borrowers or at the time of disbursement of the loan of follow up of the

money advanced, the probability of the account becoming non-performing is greater.

Hence, ‘credit management’ gains vital importance in the functioning of any bank.

Credit Management – right from prospecting a client to the proposal sanction,

monitoring and follow up of advance. Recovery Measures – legal and non-legal in the

event of an account turning NPA despite all efforts taken by the bank. Risk

management has been gaining lot of importance since the last couple of years and

more so with the implementation of BASEL II norms.

4.2 OBJECTIVES OF CREDIT MANAGEMENT



Granting of advances to a prospective client involves various stages. Together, it is

called ‘Credit cycle’. The main principle of credit management is to see that the funds

are deployed in most yielding assets and at the same time, the chances of the accounts

becoming NPA are very low. Banker can ill afford to keep funds idle giving

importance to liquidity as he would be losing an opportunity of earnings income.

Similarly, if he lends more with profits in mind, the liquidity would be affected. Thus,

it is often said “A Baker’s position is between the devil and the deep sea in the sense

that he has to strike a golden mean between liquidity and profitability”.

Qualities of a good borrower

As seen earlier, the objective of credit management is to ensure that the fund

lent are repaid without default on the due dates. To ensure this, the selection of client

becomes very important.

From olden times, even a businessman who wanted to take a decision on

whether to sell goods on credit to a new prospect, used to follow “3 Cs of Lending”

viz., character, capacity and capital. These parameters hold good in case of bank too.

Over a period of time, three more Cs have been added i.e collateral. Conditions and

credit record. Thus, the banker has to evaluate any prospect on the basis of thee 6 Cs.

1. Character:

The client should possess good character. We all know character is a very difficult

thing to judge and not easily measurable. Character of person can be found out by

taking to the person his friends, business partners. Most important trait of any

gentleman a is ‘character’. Perhaps because of this the old saying was three if

character is lost every thing it lost one of the important traits to judge character of

a person is his sincerity in meeting commitments and honesty in all his deals we

believe that the most important requirement for granting facility to a customer is

his ‘Integrity. A person with high integrity will not report to dubious means and



will be committed to doing the business for which finance has been sanctioned.

Even if he were to foresee any financial difficulties in the future which would

affect his commitments to the bank, he would come in advance and keep the bank

appraised of the same. Therefore, in cases wheel the integrity of the client is

beyond doubt, the chances of the accounts becoming NPA are very remote. Only

in the event of unexpected changes in the market conditions which are beyond the

control of the client, the account may become non-performing.

2. Capacity:

Even though a prospective client may be very honest and his character is very

good, he may not be a good businessman if he does not possess the required skills

for doing the job. He should have the entrepreneurial abilities like knowledge of

the business process, the suppliers, market for the product, undertaking risk,

strategies to beat the competitors, etc. the unit that he is going to start should run

profitably and also generate sufficient cash flows.

3. Capital :

The commitment of any person to any Endeavour he undertakes would come only

when he has his share of money invested in the business. This is called capital or

owner’s stake. If the client did not invest any amount and the entire amount is

financed by the bank, the chances of the firm not being run professionally are

there. It is because of this reason; bankers always insist that the client has to bring

some portion of the total investment, which is technically termed ‘Margin’.

Bankers always finance only the gap between the total funds required for a project

and the funds already brought in by the borrower subject of course to the

minimum level that the borrowers is expected to contribute.

4. Collateral:



The word ‘collateral’ literally means ‘something additional but subordinate’. In

banking parlance, it means taking some security in addition to the primary

security i.e., the assets created out of bank loan. Banks take collateral security in

the form of mortgage of property, pledge of shares and securities, hypothecation

of movables, etc. the banks do not insist on collaterals for small amounts and also

where the risk perception is not high. In priority sector loans banks do end money

without taking any collateral security.

How much collateral should be taken (as a % of loan granted)? For this question,

we will not be in a position to give a definite answer. It varies from case – to –

case depending upon the risk perception of the bank. Banks do not give undue

importance to collaterals. Purpose of the loan receives greater importance while

assessing a loan proposal.

5. Conditions:

Conditions refers to the political stability of the country, the demand for the

product, the industry prospects, availability of raw materials, infrastructure

facilities etc.

6. Credit record:

What is the past record of the client regarding payments due for loans taken from

the same bank or other banks, credit card defaults etc. the availability of

information form the new agency CIBIL (Credit Information Bureau of India Ltd)

would help in knowing the credit record of the proponent



Principles of Good Lending

We have seen earlier that the major source of funds for lending comes from

‘Deposits”. These deposits could be of ‘demand’ nature or ‘time deposits’ customers

may come and demand their deposit, whenever they need it, without any prior notice.

The banker is expected to honour the customers mandate by paying the cheques

issued by the customer. If, for nay reason, the banker refuses to honour a cheque of a

customer having sufficient balance in the account, he runs the danger of losing the

trust reposed by the customer and this may lead to all customers of the Bank coming

simultaneously and demanding repayment of their deposits. This is technically termed

as run on the bank. No bank will be in a poison to face the run since the amounts the

bank has lent would have been given for a longer period and the borrowers cannot be

asked to repay on demand. In such extreme situations, the central banks of the country

(for example, RBI in India) come to the rescue of such a bank by providing funds and

issuing statements in the public media about the health of the bank.

1. Safety: First cardinal principle of lending is ‘Safety’. The banker should

ensure that the funds lent are safe and would be repaid by the borrower as per

the terms of sanction. Since the major source of funds for advances is

‘deposits’ that belong to the customers, the banker should be doubly sure that

the amounts lent would be received back with interest. The work ‘safety is a

subjective one but the credit policy and the guidelines of the bank help the



relationship managers (RMs) to take proper decision in ensuring safety of the

loans.

2. Liquidity: The second important quality of good lending is liquidity. By

liquidity we meant the ability of the bank to convert the assets into cash. In

simple terms, it means ‘how fast the bank can convert an asset into cash. As

been earlier, the entire amount that a bank mobilizes as deposits cannot be

lent. A portion of the deposits should be kept with Reserve Bank of India in

the form of Cash (Cash Reserve Ratio-CRR) and another sizable portion

should be invested in approved securities (statutory liquidity ratio –SLR). The

RBI changes the rates of CRR and SLR as part of the Credit Policy

announcements, every year, depending on RBI’s assessment about the money

supply in the economy. RBI is of the opinion that money supply is more, and

then it would increase the CRR/SLR so that the lendable funds with

commercial banks are reduced. RBI would reduce the CRR/SLR when it

wants to inject more funds to the economy. To honour the demands made by

its depositors in the form of cheques banks hold a percentage of demand

deposits in form of cash. In the olden days, commercial banks were lending

only for short term needs and long term loans were granted by Financial

Institutions (FIs) like IDBI, IFCI, ICICI, etc. this was perfectly in tune with

the principle of liquidity. Today, since almost all the FIs have been converted

into Banks, the long term needs of the borrowers are also financed by

commercial banks. Banks prefer to advance money for assets which are self-

liquidating in nature (Eg.., Bills of Exchange).



3. Security: Banker should be confident of recovering the loans from the

business income of the borrower. The assets acquired out of bank finance

constituted primary security for the loan. In some case where the banker

perceives higher risks in the finance, he may seek additional security in the

form of immovable property or shares/securities. These securities are termed

as ‘collateral security’. Before nationalization of banks in the year 1969,

bankers wre giving lot of importance to security and any person who could

offer collateral security was getting loans easily. The banker was not giving

that much importance to the purpose of the loan. Now, the focus of bank’s

lending has shifted to the purpose of the advance. Hence, for financing any

client banker does not solely rely on the collateral security but on the purpose

and end-use of the amount lent. Collateral security would be sold by the bank,

as a last resort, only if a borrower defaults in repayment, despite replacement

of the loan and various steps taken for rehabilitation of the unit.

4. Spread: We are all familiar with the old saying “Don’t put all your eggs in

one basket’s. This applies to a banker also. The banker cannot affords to grant

his entire advances to one particular individual or one type of industry. If he



does so, the future performance of the bank would depend entirely on the

success / failure of that particular individual or the industry.

A prudent banker follows this principle in two ways:

a) Financing of various industries:

Banks in their Credit policy detail the cap (maximum amount of exposure) on the

exposure to various industries based on the past experience and the present

exposure. Even RBI has prescribed maximum exposure levels for financing of

individuals and a group. As per the current guidelines, maximum exposure, per

individual, is restricted to 15% of the capital funds of the bank and 40% for a

Group. As a measure to encourage financing infrastructure projects, the exposure

limits have been kept a little high i.e., 20% for individuals and 50% for the group,

for such projects. These guidelines themselves ensure that the banks do not

concentrate their lending to a few individuals or one or two groups. The spread of

advance among various industries is desirable since recession or depression of any

particular industry would not adversely affect the position of the bank.

b) Geographical spread:

Banks also follow the practice of not concentrating their lending to one particular

geographical location, even though they might have financed to various industries



in that locality. Geographical spread helps at times of some calamities occurring

in a particular area not very badly affecting the performance of the bank. For

example, the earthquake in the Bhuj and satara areas or the Tsunami in coastal

Tamil Nadu have not affected any Bank adversely since the banks had followed

this sound principle of geographical spread.

5. Purpose: The loan granted should be for an approved purpose and should be

for a productive activity. Banks do not grant loans for activities which

promote anti-national interest or for speculative/gambling purpose. The

purpose of the loan should be for a business which is legally permissible and

economically feasible i.e. capable of generating surplus out of its activity.

Feasibility is also termed s viability of the proposal/project. As seen earlier, a

Banker expects the borrower to repay the dues form his business income and

in tune with this only, he gives importance to the viability of the project that

he is going to finance.

6. Profitability: It is general common sense that no body would do any

business to incur losses. This holds good even for a banker, who, by the very

nomenclature of commercial is there to do business for profits. Banker should

evaluate any proposal on this important aspect since there is no point in doing

business for the sake of business without earning any profits.

This aspect gains lot of importance in this modern cut-throat competitive age

where banks, in order to entire customers from other banks, are charging interest rates

that do not even cover the cost of funds. As part of the credit proposal of any client,

the details of the interest income and other income expected from the client have to be



estimated and all concessions/waivers requested by a client have to be brought in at

one place. The CBA (cost benefit analysis) should ultimately result in justifying the

Bank to finance the client generating sufficient profits.

4.3 CREDIT CYCLE


Prospecting (1)

Credit Monitori

ng (6)

Credit Investigati

on (2)

Credit disburseme

nt (5)

Credit proposal

(3)Credit

Approval (4)

CREDIT

CYCLE


1. Prospecting: The first stage in Credit Cycle is ‘Prospecting’. Prospecting is

looking for new clients who would be requirement bank finance. The sources for

acquisition of new client could be leads from existing borrowers or well operated

current account clients or a market survey.

2. Credit investigation: This is the most important stage in the credit cycle. If

the selection of client is good, half the battle is won in the entire credit process.

Here, a through study is conducted about the prospect his business, his dealings

with suppliers and customers, existing bankers. The relationship manage should

be very tactful in gathering information about a client since it is a very delicate

issue and if the client feels hurt at any stage, the chances of not getting the

customer to bank’s fold would be high. Most of the information should be

collected in discreet fashion. The relationship manage should acquire the skills to

collect information from the client in the course of a conversation and not by

filling any structured format. It should be ensured that the proponent’s name is not

appearing in RBI/ECGC/ Bank’s own defaulters’ / specific approval list of ECGC

(Export Credit and Guarantee Corporation).

Normal contents of the credit investigation report are name of he client, credit

facilities sought, existing bankers and borrowings, if any, opinion from the customers

and suppliers of the client, unit visit observations, any ratings from credit rating

agencies etc.

Client/customer acceptance criteria: After satisfying about the prospect’s

business standing in the market, how to proceed further? is there any tool which

would help a banker in taking a decision on acceptance rejection of the client’s



proposal? Yes. Each bank has its own parameters to rate a client if only he scores

minimum marks or gets a rating acceptable to the bank, the bank would proceed to

prepare the proposal. The tool is entirely based on the risk acceptance criteria of the

bank.

The parameters that are normally employed in banks to rate a

client (client Risk Rating) is:

1. Client’s business track record

2. Industry in which the client is doing business and the competition for the

product of the client.

3. Arrangements for supply of raw materials, etc. any long term arrangement

exists (supply chain management), dependence on one supplier? (Risk is high)

4. Customers for the product – is there wide customer – base or only one or two

customers (Risk grater if one or two customers).

5. Financial strengths on the basis of financial statements analysis (current ratio,

debt equity ratio, sales growth, operation profit & net profit ratios, debt service

coverage ratio).

6. Management structure – professionally qualified, skilled, succession planning

in place for the second line / the Top management etc.

7. Conduct of Account – Application only for customers who are already having

borrowing / other accounts with the bank. Promptness in servicing of loan

instalments and interest, average balance maintained in the current account,

other deposits with the bank, cross sell opportunities utilized (insurance /

mutual fund sold) etc.



Based on the above, the client will be rated. Rating varies form bank to bank (on a

5 point scale or 10 point scale). The customer rated 1 is excellent and as the rating

goes up 2,3,4 etc. the risk of the bank increases. Bank might make a policy that only a

customer upto a specific rating say 4-5 is acceptable.

The client risk rating exercise has to be done not only for a new client but also on

every review/renewal of facilities of an existing customer (at least annually).

Advantages of Client risk rating:

Firstly, it helps in taking the decision whether to finance a client or not

Secondly, it helps in rating the customer on the basis of his strengths

It helps in pricing decisions. A customer with CRR I would be charged a

lower rate of interest compared to one with CRR 4.

It helps in taking decisions regarding waiver of some credit policy guidelines,

if any case justifies

It also helps in deciding about approval of ad-hoc or temporary limits.

3. Credit Proposal: Once the banker is satisfied about the genuineness of the

client and the client risk rating is acceptable to the bank, the proposal is put up

for approval of the facilities. Irrespective of whether the limits to be approved are

within the branch powers or higher authorities, the proposal should be completed

in all respects with same commitment. We have found that in those cases where

the facilities are to be approved within branch, the quality of the proposal is very

poor with many important data fields left blank.

Each bank has its own structured formats (templates) to be used for various

facilities. The complexity of the formats increases with the increase in the bank’s

exposure. A clear understanding of the various items to b e filled in different columns

by the desk officer /RM will go a long way in preparing quality proposal. Developing



the skills of officers working in credit department in the preparation of proposals

becomes very important.

The following are the important things which are normally covered

in the proposal:

(a) Basic Information: Here, the name of the firm, Proprietor / Partners/

Guarantors / Directors of the company, address and contact details, share

holing pattern, share market data, ratings if any, and the facilities sought, find

a place. The data provided here are mostly of a static nature

(b) Risk Assessment: Here a discussion on political, environmental,

economic, managerial, financial and structural risks takes place. The important

pointes to be taken care of are:

Whether the company is manufacturing any hazardous substances and

has obtained environmental clearances.

Would there be any difficulty in the succession of business if the

proprietor is quite aged

Whether the supply chain management is in place with long-term

relationships having been signed with the suppliers.

What is the credit period allowed on the sales made (whether in turn

with the practices prevalent in that trade), etc.

A SWOT (Strength, weakness, opportunities & Threats) analysis of the

client should also be made.



In the end, it should be verified whether the parameters under the bank

credit policy are complied with.

(c) Justification for sanctioning the loan: A detailed write-up on the

purpose of the loan, security that are offered for the facilities, types of

facilities to b e sanctioned, interest rates and commission etc., important

covenants (turns and conditions of sanction), method of assessment of the

working capital with detailed calculations, sources of repayment for the loan,

an abridged analysis of important financial parameters, what are the benefits to

the bank (interest income, commission income, cross-sell benefits), if this

limit is approved, should be very clearly brought out in the proposal.

4. Credit Approval: The delay in disbursement of any facilities takes place

more because of the delay at this stage of the cycle. The approval authority

should be conversant with the delegation of powers of the bank, credit policy

of the bank and to a certain extent the profiles of various industries. While

approving any facility, the authorities concerned with the sanctioning of the

proposal should have a very practical and pragmatic approach and stipulate

conditions which are possible to comply with and not stipulate a covenant just

as a matter of abundant pre-caution. The RM should have good relationship

with the approval authorities and take them into confidence and discuss any

risks he perceive in a specific proposal and take the approval authorities

suggestions to mitigate the same in fact, if a perfect rapport exists between the

RM and the approval authority, the approval authority may be asked to join

the discussions from the preliminary stage and also accompany the

relationship manager for the unit visit. Seeing is believing and this would

avoid time taken for seeking clarification on certain issues about the proposal.



It is to be remembered that both the RM and the approval authority are

working for the same Bank and are interested in protecting the bank’s advance

by ring-fencing the anticipated risks and at the same time be helpful to the

borrower in augmenting his financial needs.

5. Credit disbursement: Disbursement means making available the amount

of facility that has been approved for a party. As soon as the branch gets

approval from the higher authorities for its proposal, the RM has to verify the

covenants and confirm that they are the same as were recommended. If any

new covenants are found, he should be sure that they are acceptable to the

client. If the client is not concurring with the new covenants. Then, the branch

should submit a modification of approval memo to the sanctioning authority

seeking waiver of such conditions.

The RM should prepare a sanction communication, in duplicate, covering the

details of the limits sanctioned, validity of sanction, types of facilities,

commission, interest rates, securities to be offered, statements to be submitted,

insurance of the property etc and advise the client. The RM should get the

signature of the client on the duplicate of the sanction letter and keep it with the

original security documents. It is to be noted that the letter should be singed by

authorized signatory and not by any representative of the client.

The best practice is to keep ready all the security documents duly filled, before

calling the client and the guarantors for signature. The client should also be given

a copy of the important security documents executed by him. There should be not

alternations in the security documents and wherever there are alterations, the

signature of all the executants should be obtained at those places authenticating

the corrections.



6. Credit monitoring:

‘Monitoring’ generally means, to be aware of the state of system, any account

requires close monitoring if you wish that the account should be a performing

asset through out its relationship. Actual work of the RM begins here since he

must have a close watch on the conduct of the account to find out if every thing is

OK. An account which was excellent at the time entry may become bad if there is

no adequate follow up. Follow up ensures that the funds sanctioned by the bank

are properly used by the borrower and there is no diversion.



4.4 CREDIT POLICY IN BANKS

POLICIES ARE THE RESULT OF VALUES AND BELIEFS

A policy is a course of action or a guiding principle that influence our

decisions. Policies are the rest of underlying values and beliefs. For instance you may

decide that as a matter of policy you will buy only branded goods. This could be

because you value quality and believe that branded goods offer good quality. A health

conscious person may avoid processed and friend foods as policy because he values

his health and believes that such foods affect good health in the long run. Policies thus

help us in taking day-to-day decisions based on our underlying values and beliefs

without wasting time and effort. In the examples cited, every time unbranded goods

and processed or fried foods are offered, the individual involved does not weigh the

pros and cons. He simply refuses them, because both are unacceptable as per his

quality policy or health policy.

Credit policy reflects corporate priorities in lending

Similarly a bank while taking lending decision may adopt a set of values and

beliefs. The represent the credit policy of the bank. If the bank values prudent lending

and modest earnings it may have a policy of not lending without adequate securities to

secure the loan given. The policies on credit thus reflect the corporate priorities of a

bank. The credit policy also lay down the brand framework of rules and procedures

within which lending is to be done in a bank.



Credit policy determines the bank’s credit culture

The sum total of policies on lending makes up the credit culture of the bank.

Credit culture states. “This is the way credit is handled in this bank”.

Four types of credit culture

Depending on corporate priorities, Credit culture of a bank could be

one of four types;

1. If the emphasis is on the quality of loans given, the credit culture will be

values driven. The credit polices adopted will be conservative and prudent.

2. In on the other hand short-term gains are the priority of the bank, the credit

culture is likely to be earnings driven. The credit policy will then be focused

on maximizing earnings regardless or risk.

3. A bank concerned primarily about market share would adopt a size and

volume drier culture adopting policies that primarily promote market share

and loan growth.

4. If there are no clear priorities the culture will be unfocused. The policies will

most likely be ambiguous without a definite emphasis on any value or belief.



SOUND CREDIT POLICY CONTRIBUTES TO THE WELL

BEING OF A BANK

Loans constitute the most important assets of a bank. Therefore the policies, which

govern the dispensation of loans, should aim to promote both quality of loans and

earnings from the loan portfolio. Absence of a sound credit policy can be disastrous.

American banking history witnessed several credit induced bank disasters in the

1980s. Continental, sea first and Texan Banks were examples of such disasters. The

far eastern crisis of the 1990s and most recently the crisis experienced by some of the

banks in our country, which were forced to be merged with other banks, were also the

result of credit induced problems.

The common factors that crippled these banks were aggression in lending,

failure to diversify, risky practices and inadequate supervision. Usually these are the

outcomes of a credit culture created by poorly articulated or badly implemented credit

policy.

Having seen how important credit policy is, let us now look at what a good

credit policy aims to achieve.

Objectives of a sound credit policy

A sound policy on credit seeks to achieve a healthy balance between credit

volumes earnings and asset quality as discussed below:

(a)Credit Volumes: every bank is a competitive entity operating in a free

market. as such growth is important for all banks and efforts are need to retain

and improve market share. Hence one of the objectives of the credit policy



should be to promote the desired level of growth in the volume of loans and

advances.

(b) Earnings: Growth in business is meaningless unless accompanied by a

commensurate increase in earnings. Therefore the credit policy framework

should ensure that the rate of growth in the loan portfolio is matched by an

increase in interest and other earnings from the loan assets of the bank.

(c) Asset quality; The third most important objective of the policy pyramid is

the quality of the loans dispensed. Without quality the earnings will be

compromised. Bad loans not only stop earning interest, they also require

provisions, which eat into profits. So the credit policy should aim to create and

maintain quality assets.

It is easy to see that these three objectives can be sometimes conflicting with each

other if pursued singly. For instance concentrating only on volumes could lead to poor

quality assets and bring down earnings. On the

Other hand, if quality standards or pricing of loans is unrealistically high, growth

may suffer. A sound credit policy however optimizes these three objectives within the

framework of;

(1) Regulatory Prescriptions: The credit policy is formulated ensuring that

the norms and procedures detailed in the policy document conform to

guidelines and rules prescribed by RBI and Government.

(2) Corporate goals: Besides adhering to the guidelines and rules prescribed

by RBI and government, the credit policy also lays down the road map

necessary for achieving the business goals of the bank in the area of credit.



(3) Bank’s social responsibilities: Bank’s social responsibilities as a

corporate citizen in relation to lending activity are covered by the Credit

policy. This usually involves creation of policies that help in the flow of credit

to priority and other sectors that require bank assistance.

Credit policy mirrors regulatory requirements

A bank’s credit policy satisfies the requirements set out in RBI’s various

circulars and manuals by touching upon the following aspects;

1. Standards of presentation of credit proposals and terms and

conditions to be met by the borrowers:

The standards that are to be used in assessing the various requirement of credit

such as working capital, term loan, guarantees and letters of credit are referred to

in the credit policy. The basic financial parameters and ratios to be satisfied by

borrowers are also spelt out in the policy.

a) Standards of rating loans and advances:

The process of rating borrowers and the credit facilities availed by borrowers to

arrive at a risk score is referred to as credit rating framework (CRF). The credit

rating framework is useful in deciding on issues like whether to lend to a specific

borrower keeping in mind his risk score, what terms and conditions to offer to him

(concessional or normal), which accounts need special monitoring (the lower the

risk score the stronger the surveillance) and what is the overall risk profile of the

portfolio if the risk scores of all advances are aggregated.

b) Prudential limit on large credits and asst concentrations:



Most banks place restrictions on what should be the maximum size of a credit

facility, in line with the guidelines of RBI. This is linked to the capital of the

borrowing entity and that of the bank. The purpose of such ceilings is to ensure

that the failure of any large credits does not affect the bank seriously.

c) Standard for loan collateral, loan review mechanism:

The collateral securities to be obtained for loans, their valuation and the

methodology for reviewing loans and advances are spelt out in the credit policy.

d) Pricing of loans, risk monitoring and evaluation:

The criteria based on which interest rates and other charges are to be determined

for credit facilities are described in the credit policy. The methods used for

monitoring credit risk and evaluating its impact are described in the credit policy.

e) Legal and regulatory compliances:

Due diligence is the process of confirming all material information supplied by

the borrower which is critical for credit appraisal. The guidelines for completing

this process together with the other legal and regulatory requirements are provided

in the credit policy.

2. Credit policy defines restrictions and prohibitions:

Lending must conform to policies of government, RBI and Bank. Credit policy of

the bank therefore lists out restrictions and prohibitions on specific types of

sanction. Industries manufacturing ozone-depleting substances, for instance,

cannot be financed by a bank. So credit managers should frequently refer to this

negative list and satisfy themselves that the borrower does not fall in any of the

prohibited categories.

3. Credit policy also provides Do’s and Don’ts:



Sector specific guidelines are given in the credit policy, which contain Do’s and

Don’ts based on the current position of statutory and regulatory guidelines.

Financing of sensitive sectors like Real Estate, Capital markets and NBFCs are

good examples of sector specific loan policies where there are regulatory

guidelines / restrictions on financing.

4. Credit policy indicates thrust areas and off credit sectors:

The policy document is usually issued for a period 1-2 years. As part of the

bank’s business strategy for this short term period, the credit policy of a bank

usually identifies the focus areas to higher flow of credit. This identification in

done based on the prevalent macro economic trends; the regulatory stance and

bank’s own experience/ core competence in various sectors.

Retail for instance became a focus area for banks after the interest rate deregulation

and the slow down in corporate borrowings. SMEs, Agriculture and Micro Finance

are today perceived to be major business opportunities. This is attributable to the

policy emphasis on these sectors by the government. Therefore a credit manager

should refer to the policy every now and then to check whether the new businesses

being canvassed by him are in line with the business priorities of the bank. Similarly

high risk and low priority sectors identified by the bank are also listed in the credit

policy document.

Policy deviations – challenge of compliance Vs customer friendliness:

Bank being a commercial entity has to constantly strive for customer satisfaction.

Most banks have a customer base of huge size and variety. No policy can therefore

anticipate all the requirements of customers. Challenges arise when what the customer

needs are not provided for in the policy. Bank is then called upon to trade off between

policy and business considerations. Therefore credit polices of banks frequently

provide for exceptions to various guidelines. The conditions for permitting exceptions



and authorities vested with powers to give such permission are detailed in the policy

document. However while recommending deviations from the credit policy the credit

manager should assess the impact of the deviation sought on the risk profile of the

credit facility and furnish detailed justification for his recommendation in the

appraisal note.

Reserve Bank’s Credit Policies:

Banking policy is determined by the Government and the Reserve Bank of

India. The Reserve Bank derives its power from the Reserve Bank of India Act, 1934

and the Banking Regulation Act, 1949. The Banking Regulation Act in section 5(ca)

defines ‘Banking policy’ as any policy which is specified from time to time by the

Reserve Bank in the interest of the banking system or in the interest of monetary

stability or sound economic growth, having due regard to the interest of the

depositors, the volume of deposit is and other resources of the bank and the need for

equitable allocation and the efficient use of these deposits and resources.

The Banking Regulation Act empowers the Reserve Bank to control the

pattern, direction and extent of bank credit. The specific authority is vested under

section 21 of the Act. Sub-section (1) of section 2 stipulates that where necessary or

expedient in public interest or in the interest of depositors or banking policy, the

Reserve Bank may determine the policy in relation to advances to be followed by

banks generally or by any bank in particular, and when the banking policy is so

determined, all bank in particular and when the banking policy is so determined, all

banks or the bank concerned, as the case may be, shall be bound to follow the policy

so determined. sub-section (2) of the section further stipulat4es that the powers vested

in the Reserve Bank include the powers to issue directions either generally to all

banks or to a bank in particular as to:

The purpose for which advances mayor may not made:



The margins to be maintained in respect of secured advances;

The maximum amount of advances or other financial accommodation which,

having regard to the paid-up capital. Reserves and deposits of banking

company and other relevant considerations may be made by that banking

company to considerations may be made by that banking company to anyone

company, firm, association of persons or individuals.

The maximum amount up to which, having regard to the consideration sin

Clause (c) Guarantees may be given by a banking company on behalf of

anyone company, firm association of persons or individual.

Credit control measures are framed by the Reserve Bank in lie with the

Monetary Policy of the country.

The objectives of the monetary policy are two – fold:

1. To facilitate flow of adequate volume of bank credit to the various sectors

with specific reference to the weaker sectors.

2. To keep a control on inflationary pressures by ensuring restraint on credit

expansion and proper end-use of bank credit.

The three major instruments of credit control available with the Reserve Bank are the

Bank Rate, Open Market Operations and Variable Reserve Requirements or Rations.

The first two instruments can be operated by the Reserve Bank under the Reserve

Bank of India Act. Of the two variable reserve ratios, the Cash Reserve Ratio (CRR)

is subject to the Reserve Bank of India Act, while the Statutory Liquidity Ratio (SLR)

is covered under the Banking Regulation Act:

Section 49 of the Reserve Bank Act defines the Bank Rate as the standard rate at

which the Reserve Bank is prepared to buy or to rediscount bills of exchange or other

commercial paper eligible for purchase under the Act. Currently, the Bank Rate is 6

per cent per annum.



The Bank Rate is the rate at which the banks borrow from the Reserve Bank. When

the RBI desires to reduce liquidity in the monetary system, it uses Reserve Repo /

Repo (repurchases of securities. RBI accepts funds from bank sat affixed rate for one

day in one day repos or for 14 days in ’14-day repos’ against the collateral of

government securities or gilts from the RBI)

As a tool through which banks can sell-buy / buy –sell (sell today buy back tomorrow

etc.) securities at rates fixed by the central bank, under the window of Liquidity

Adjustment Facility (LAF). Internationally, the term “Repo” is used for central bank

operations that inject liquidity in the system, whereas the term “Reverse Repo” issued

for absorption of liquidity. It has been decided by the RBI that this international usage

of “Repo” and “Reverse Repo” terms should be adopted but from a future date to be

notified later in consultation with market participants giving them adequate time for

system changes.

The revised LAF scheme, announced recently, will be operational zed through (i)7-

day fixed rate repo conducted daily and (ii) over might fixed rate reverse repo

conducted daily, on week days. However, in order to achieve smooth transition to the

revised Scheme, the existing over might variable rate repo auction facility with the

existing features would also be available to eligible market participants till April 2,

2004. Thereafter, the over might rep auction will be discontinued and only the 7-

dayrepor auction will be available. Further, in order to enable market participants to

meet their prior commitments based on their existing operations, the 14-day repo,

conducted on a fortnightly interval, would also continue with the existing features.

The 14-day repo will, however, be phased out is due course.

In order to provide for any requirement arising out of unexpected temporary shortages

of funds and to help in stabilizing ovemight interest rates in an environment of

asymmetric distribution of liquidity, overmight reverse repo under LAF will be on a

fixed rate auction basis.

The repo rate will be fixed by the Reserve Bank from time to time. Considering the

present situation, the rate for the 7-day repo has been retained at 4.50 per cent per

annum. The reverse repo rate will continue to be linked to the repo rate. However, the

spread between the repo rate and the reverse repo rate is reduced by 50 basis points



from 200 basis points to 150 basis points with effect from March 29, 2004.

Accordingly, the reverse repo rate from that date will be 6.00 per cent per annum. In

future, as and when reserve bank changes the repo rate, the reverse repo rate will

normally change to 150 basis points over the repo rate.

CREDIT POLICY AS A RISK MANAGEMENT TOOL

The credit policy of a bank fulfils the following vital functions:

1. It serves a ‘Gate keeping’ role:

A credit portfolio is built one loan at a time. Loans are the building blocks that go

into creating a portfolio. The credit policy l like a faithful gatekeeper helps in

checking whether every now loan that is added satisfies the pre-defined standards

of credit laid down by the bank, thereby ensuring quality of new loans assets.

2. It defined thrust areas:

In relation to profit objectives and regulatory directions.

3. It sets acceptable levels of risk:

By identifying industry segments for fresh exposures.

4. It prevents risk concentrations:

It helps in diversification by setting sector wise and individual facility wise limits

on the amount of credit extended.

5. It provides pricing strategies:

Through the use of credit risk rating framework borrows with risk scores can be

offered a lower price while lower grade borrowers can be charged more.



6. It covers risks and empowers growth:

A well-crafted credit policy promotes a business environment conducive

for rapid growth of quality assets. it supports the business efforts and puts

in place appropriate control procedures and processes to ensure regulatory

and statutory compliances.

The credit policy is thus a potent tool for managing credit risks and for

accomplishing the business goals of a bank. It is at one go both a strategic vision

document and an operational manual for managing credit. The credit policy

document of the bank should therefore be a constant source of reference to the

banker who aspires to excel in credit management.



4.5 PRUDENTIAL NORMS

INCOME RECOGNITION, ASSET CLASSIFICATION AND

PROVISIONING NORMS

In line with the international practices and as per the recommendations made

by the Narsimham committee, the introduced, in a phased manner prudential

normal for income recognition, Asset classification and provisioning Norms Fro

the Loan assets of the Banks so as to mover towards greater consistency and

transparency in the published accounts. The objective of the policy is to recognize

income based on recovery rather than on accrual basis. Similarly, the

classification of assets of banks has to be done on the basis of objective criteria

which would ensure a uniform and consistent application of norms. Also, the

provisioning should be made on the basis of the classification of assets based on

the period for which the asset has remained non performing and the availability of

security and the realizable value thereof.

INCOME RECOGNITION NORMS

Income should be recognized on accrual basis only in performing asset i.e.,

standards asset. On classification of a loan account as Non-performing Asset

(NPA) nor only application of interest should be stopped on accrual basis, but also

such application on the unrecovered

Interest up to the date of classification of the loan accounts as NPA should be

reversed or provided for fully. From the date of classification as NPA, interest

should be taken into income account on actual recovery basis only.



Asset Classification

Standard Asset:

The loan account is operated as per the sanction terms and conditions. The interest

/ or instalments are serviced regularly by the borrower. It does not carry more than

the normal risk attached to the business.

Non-Performing Asset (NPA)

An answer which ceases to yield income is a non performing asset. The Basis

of treating a credit facility as NPA is as follows:

(1)Term loan :

If interest is in default for 90 days or, if principal instalment in default for 90 days.

The entire term loan outstanding inclusive of unpaid instalments should be treated

as NPA.


Total Assets (Advances)

Performing Asset Non-performing Asset

Standard assets Sub-standard Asset Doubtful Asset

Loss Asset


(2)Overdraft and cash credit:

If the account remains ‘out of order’ for 90 days. Out of order means.

The outstanding balance remains continuously in excess of sanctioned limit or

drawing power or

Where the outstanding balance in the account is less than the sanctioned limit

or drawing power but there is no credit in the account for continuously for 90

days as on the date of balance sheet of the bank or the credits are not enough

to cover the interest debited during the same period.

(3)Bills purchased and discounted:

If bills remain overdue and unpaid for 90 days. Banks cannot take overdue interest

to income unless realized. Even if one bill of a borrower is overdue for 90days,

the entire liability is to treated as NPA.

(4)Other credit facilities:

Where any amount to be received in respect of such a facility remains in default

for 90 days.



Other applicable guidelines for income recognition and asset

classification norms:

When a particular facility offered to a buyer becomes a NPA, then all other

credit facilities to the borrowers will be treated as NPAs.

The interest that is recovered partially on the NPAs will be taken into the

income account.

When a credit facility qualifies for the first time as NPA, then all the interest,

commission, fees etc., that remain as arrears during the previous year which have

still not been realized, will have to be provided for during the current year.

Security / net worth of borrower/ guarantor will not be considered while

qualifying an account as NPA.

Advances that are fully secured against term deposits, National Savings

Certificates, Indira vikas Patras, Kisan Vikas Patras and surrender value of life

insurance policies need not be treated as NPAs.

In the case of advances guaranteed by Central / state governments, such

advances will not be classified as NPAs until the time the guarantee is invoked

and the government repudiates. The asset will remain as standard asset. However,

for income recognition purpose, interest will be taken into account only if

realized.

Further classification should be based on:

Degree of well defined credit weaknesses;

Extent of dependence of collateral security for realization of dues;

Obtained by compressing existing eight Health Codes.



Sub standards Asset:

Asset classified as NPA are classified as sub standard asset for a period not exceeding

12 months. In these types of accounts there is a distinct possibility of bank incurring

loss if deficiencies are not corrected in time. the current net worth of

borrower/guarantor, current market value of security may not be adequate to recover

debt in full.

Doubtful Asset:

Asset which has remained NPT for a period exceeding 12 months and realization of

dues in full in highly improbable.

Rescheduling of loan accounts does not entitle the bank to upgrade the

Doubtful account into sub-standard or standard Asset.

Loss Asset:

A Loan account will be classified as Loss Asset if;

NPA not supported by any security or DICGC/ECGC cover,

Asset identified by the bank or its internal or external auditors or RBI

inspectors as loss assets but the amount has not been written off wholly or

partly;

Considered uncollectible and does not warrant continuance.

Existing bankable asset may have negligible salvage or recovery value

compared to the loan outstanding.



PROVISIONING NORMS

Based on the asset clarification of loan accounts, banks have to make the

provisioning. Amount and percentage of provisioning to be made is decided by RBI

from time to time. The provisioning will be made as on the date of balance sheet (i.e.

31st March of the respective year) and on the balance outstanding in the loan account.

The present provisioning norms are as follows;


Asset Percentage of

provision

Agriculture & SME sectors 0.25%

Housing loans above Rs. 20 lakhs 1%

Personal loans (including credit

card loans),

Loans qualifying as capital market

exposure

Commercial real estate

2%

All other advances 0.40%


Provision on doubtful assets:

Period Amount of provision

Up to 1 yr 20%

1-3 yrs 30%

Beyond 3 years 100% of the outstanding irrespective of the

security available.

100% of the extent to which the advance is not covered by the realizable value

of the security to which the bank has a valid recourse and the realizable value

is estimated on realistic basis.

With regard to the secured portion, provision is made on the following basis,

at the rates ranging from 20% to 100% of the secured portion depending upon

the period for which the loan asset has remained doubtful asset.



4.5 CREDIT FACILITIES-TERM LOANS, WORKING CAPITAL

TERM LOANS

Term loans are facilities whose repayment extends for a long period. They are

normally granted for purchase of fixed assets of a concern. The parameters for

assessment of term loan and that for working capital facility cannot be same. This is

because, the duration of the loan is long and hence, the risk that the banker takes

increases. Hence, while pricing the advances/ loans, a banker normally charges more

for a facility whose tenor (period of repayment) is more. While RBI classifies a

facility as Term loan if its repayment period 3 years or more, many banks classify any

loan for more than years as Term Loan. Normally these loans are extended for 3-7

years, for acquisition of capital assets or setting up of new units or expansion of

existing capacity, etc. the repayment comes from the revenue generated from the

usage of the asset in the course of the business of the unit. Sometimes, banks do grant

term loans to augment the working capital requirements of a unit.

Banks extend Credit facilities in the form of fund based and Non-fund based facilities.

Further, they are classified as Term loan (project financing) and working capital

facilities.

The loans are sanctioned both for productive purposes to business and non

productive purposes – personal loans, consumer loans, housing loans, vehicle loans,

etc. the term loans sanctioned for productive purposes are for capital investments like

purchase of plant and machinery, vehicles, furniture and fixtures etc.

In a loan account, the entire loan amount is disbursed to the borrower in a single

amount. Rate of interest is charged on fixed interest basis/floating interest basis. In the

fixed interest basis the same rate of interest is charged throughout the period of loan.

Floating rate of interest means, as and when there is change in the link rate (say PLR

of a bank) the rate of interest will change. Interest will be charged on the balance

outstanding (i.e., daily reducing balance method or balance outstanding at the

beginning of the month/quarter).



The term loans have a repayment period of say 3 years and above normally up to 8

years.

The loans are secured by primary security – assets purchased are charged to

banks (hypothecation/mortgage, etc). collateral securities in the form of additional

pledge/mortgage of assets and guarantees by 3rd parties are also insisted, where the

loan amount is very high.

Following are the popular fund based facilities:

Overdrafts

Cash credit

Bills finance

The non fund based facilities are:

Letters of Credit

Bank Guarantees

Deferred payment guarantees


Types of Facilities

Fund Based Non-Fund Based

Cash Credits/ Overdrafts

Bills Finance Bank

Guarantees

Letters of Credit

DPG


Overdrafts

An overdraft is a fluctuating account wherein the balance some times may be

in credit and at other times in debit. Overdraft facility is allowed as a running account

(current account). Many drawings and repayments are allowed in the account.

Drawings are normally made by the drawer by issuing cheques. The security is an

overdraft account may be either personal or tangible security insurance policies, fixed

deposits receipts, shares and debentures, book debts, etc.

Cash Credits

A cash credit is a drawing account against credit granted by the bank and is

operated in the same as a overdraft account. The bank will sanction limit based on the

working capital cycle of the business and the borrower has to operate within the limit

so fixed. The balance outstanding in the account should be within the liit or drawing

power. The drawing power means the value of securities less margin stipulated by the

bank. The borrower can save interest by reducing the debit balance whenever he is in

a position to do so. The borrower will provide securities as stipulated from time to

time. cash credit are generally allowed against pledge or hypothecation of goods.

BILLS FINANCE

Bills finance is a post sale credit facility granted to borrowers. Otherwise

borrowers (i.e. sellers of the goods, who supply the goods on credit basis will have to

wait for a specified period – say 3 months) this would help the borrower to increase

his business, as his working capital cycle is reduced. As the bank directly recovers the

money advanced from the buyer of goods. Bills finance is also known as self

liquidating finance.



Bills are classified as clean bill or Documentary bill. A documentary bill is

accompanied by documents of title to goods such as Railway receipts or bills of

lading. Clean bills are not accompanied by documents of title to goods. Banks are

secured if the bills financed are documentary bills. As the goods are pledged to banks,

in case of dishonor of bills, they can take delivery of the goods and recover the dues

by sales of the goods. Clean bills are unsecured bills.

Bills are further classified as ‘Sight bills and usance bills. Sight bills have to

be paid by the purchaser of goods immediately sights bills are purchased’.

Usance bills are payable by the purchaser of goods after a specified period of

time (say 3 months, etc). usance bills are discounted. In the case of usance bills, bank

will deduct the discount amount (say 20 ro 25%) and pay the balance to the borrower

and pay the discount amount on realization of the bill.

The Non funds based facilities: The working capital facilities can be sanctioned as

non-fund based facilities. Generally, the borrower has to pay cash and buy goods from

the seller. In that case, banks grant cash credit / overdraft facility. However, sellers

may sell the goods on credit basis (say 1 month or 2 months credit) to the buyer

(borrower). As a security, sellers insist for bank guarantee or ask the borrower to open

a letter of credit, so that the seller is assured of payment from the buyers

(borrower’s )bank in other words, instead of disbursing loan for buying goods, bank

will issue a guarantee or open a letter of credit.

LETTERS OF CREDIT (L/CS)

LCs is the guarantee given by a bank to the seller of goods than on the due

date he will receive the sale amount (LC among). In this case, LC opening bank (i.e.

buyer’s bank) will not provide any fund based facility to the buyer. LCs are issued for

trade both within the country and for trade internationally.



BANK GUARANTEES

Banks issue guarantee on behalf of customers in favour of third parties

undertaking to pay the guaranteed sum of money to the third parties (beneficiary) in

the event of the (his) customer failing to perform the agreed obligations. Guarantees

are classified as financial guarantee and performance guarantee. Performance.

Guarantee is an undertaking by a bank that in the event of a failure by the applicant,

the guarantor bank will complete the original contract. In India, however performance

guarantee (as also financial guarantee) will obligate the guaranteeing bank to pay the

fixed amount only. Similar to LC, there is no fund based credit facility sanctioned.

DEFERRED PAYMENT GUARANTEE

DPG is a financial guarantee with the difference that these financial

guarantees are issued by banks that have a currency period in excess of twelve

months. This type of guarantees is generally issued by banks in favor of importers

who import raw materials and stores, plant and machinery from a foreign country.

The payments to be made by the importers are made in installments. If any

installment is defaulted or any terms of guarantee is violated, the guarantee is

invoked.



5. WORKING CAPITAL

5.1 INTRODUCTION

Finance is defined as the study of money management. In its overall sense,

finance embraces many areas other than money, banking and credit of various types

and classes, considered as whole finance, may be said to be the circulating system of

the economy body making possible.

Finance is that administration area or set of administrative functions in an

organization, which relate with the arrangement of cash and credit, so that the

organization may have the means to carry its objectives as satisfactorily as possible.

There are number of financial decisions to be taken by a Finance

manager in day-to-day process. Among them major financial

decisions are:

1. Capital Structure

2. Capital Budgeting

3. Working Capital Management

It is observed that working capital management is critical for success or failure of

working capital. It is also noted that most of N.P.A’s results out of ineffective use of

funds and ineffective working capital management. Therefore, it is proposed to study

as to how Public Sector Banks {PSBS} like canara bank.process and sanction

working capital funds.



Working capital is the funds required by a unit for its day-to-day working. In the

course of business which deals only in trading there is need for purchase of goods

meant for sale, payment of wages to workers employed, rend, lighting, locking up of

money in credit sales etc. in the case of manufacturing unit, money required for

purchase etc. in the case of a manufacturing unit, money required for purchase of raw

materials (RM), payment of wages / salaries, overheads like rent lighting money

locked up in raw material stock, work in process (WIP), finished goods (FG) held

constitute working capital requirement.

The composition of assets and the amount of funds invested in the Working

Capital keep changing from day-to-day. Hence, working capital is also known as

‘Fluctuating capital’.

Some people use the term ‘Circulating Capital’ to describe ‘Working Capital’

because the working capital keeps circulating around the fixed capital of the business.

If there is no circulation of funds or the speed of circulation is not normal, the

working of the firm would be affected. Working capital is like blood circulation in our

body. if there is no circulation of blood, we know we would almost be dead or if some

clot in the blood happens in one part of the body, then that part becomes numb and

not in a position to use. Similarly, if there is insufficient working capital in an

organization, the activity of the firm gets affected and in worst cases it chokes the

firm and might be the cause for the closure of the unit.

5.2 CONCEPTS OF WORKING CAPITAL

There are 2 concepts of working capital. They are

1. Gross working capital

2. Net working capital.



GROSS WORKING CAPITAL:

Gross working capital refers to the total of all current assets. It is also known

as circulating capital, because the current assets are rotating in their nature.

NET WORKING CAPITAL:

Net Working Capital = Current assets – Current liabilities

Net working capital can be positive or negative. A positive net working capital

will arise when current assets exceed current liabilities. A negative net working

capital occurs when current liabilities are in excess of current assets.

5.3 TYPES OF WORKING CAPITAL

There are 2 types of working capital:

1. Permanent or Fixed Working Capital

2. Fluctuating or Temporary Working Capital

Permanent working capital is the working capital, which is needed throughout

the life of the organization. It is the minimum amount, which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current

assets.

Fluctuating working capital is the extra working capital, needed to support the

changing production and sales activities. It is the capital required in addition to the

working capital.



5.4 SOURCES OF WORKING CAPITAL

The working capital required by a concern can be financed from internal as well

as external sources. The various sources of working capital are:

Retained Earnings

Issue of shares

Bank borrowings

Trade credit

RETAINED EARNINGS:

Net profits of the concern or the cash inflow from the operations constitute a

potential permanent source of working capital, as it does not burden the business with

external obligations.

ISSUE OF SHARES:

Funds raised from the sale of shares may be a potential permanent source of

working capital funds into the net profit. The share issue may not add to the interest

burden like the borrowings from bank but they mean a demand for divided and

sharing the ownership in the business with new investors.



BANK BORROWINGS:

The most widely used source of working capital is the bank loan taken

against the hypothecation or pledge of inventory or mortgage of fixed assets. Loans

against hypothecation of inventory may be called as short term but for all practical

purposes they are permanent.

Bank finance is the most commonly negotiated source of the working capital

finance. It can be availed in the form of overdraft, cash credit, purchase/ discount of

bills and loan. Each company’s working capital need is determined as per the norms.

These norms are based on the recommendation of the Tendon Committee and later on,

chose committee. The policy is to require firms to finance more and more of their

capital needs from sources and other than banks. Banks are the largest providers of

working capital to firms.

TRADE CREDIT:

It is an important source of working capital. In India, it contributes to about

one-third of the short term financing. Particularly small firms are heavily dependant

on trade credit as a source of working capital, since they find it difficult to raise funds

from banks or other sources in the capital markets.

5.5 NEED FOR WORKING CAPITAL



The need for working capital cannot be overemphasized. A successful sales

Programme is necessary for earning profits by any business enterprise. However,

sales do not convert into cash instantly; there is invariably a time lag between the sale

of goods and the receipt of cash. There is an operating cycle involved in the sales and

realization of cash. Thus, working capital is needed for the following purposes:

For the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day to day expense and overhead cost, such as fuel, power and office

expenses, etc.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customers.

To maintain the inventories of raw materials, work-in-progress, stores and spares

and finished stock.

5.6 APPRAISAL OF WORKING CAPITAL

The bank for assessment of working capital commonly uses the following methods;

1. Operating cycle method - For working capital limits up to Rs.25, 000

2. Usual or Traditional Method - For working capital limits Rs. 10 lakhs.

3. Tendon and Chose committee norms - i.e., maximum permissible bank finance

method - for working capital above Rs.10 lakhs.

4) Turnover method - for working capital limits: up to Rs. 400 lakhs.

5) Cash budget method.

6) Projected balance sheet method.

7) Operating cycle method.

Assessment of working capital under assessed bank finance



Projection:

1. Total Current Assets

2. Other current liabilities

. Working capital gap

4. Net working capital (Actual/Projection)

5. Assessed Bank Finance

6. Net working capital to Total Current Assets (%)

7. Sundry Creditors to Total Current Assets (%)

8. Other current liabilities to total current Asset's (%)

9. Inventories to net sales (Days)

10. Receivables / Gross Sales (Days)

11. Sundry Creditors to purchase (Days)



Assessed method of working capital used in various types of

advances:

1. Limits of Rs. 50 lakhs & above

For: - Small-scale industries

Borrowers and Limits of Rs.5 cores &

above for Small Scale industry

Borrowers.

Projected Balance Sheet method.

2. Small scale industry borrowers who

require working capital finance of Rs. 25

lakhs and above but up to Rs. 5 cores.

Turnover Method however working

under projected balance sheet, Method

and limits so assessed will be sanctioned

if it exceeds 20% of the turnover under

turnover method.

3. Limits up to Rs. 25 lakhs to Small

scale Industry Borrower.

Turnover Method

4. Limits below Rs. 50 lakhs for: Non-

small Scale industry Borrowers (other

than Trade & Service advance)

Simple assessment Method, which is in

use in Bank for assessing WC limits of

Rs. 2 to 15 lakhs for Small Scale Industry

Units.

5. Limits of Rs. 10 lakhs and below for

Trade & Service Sector borrowers.

Assessed Bank Finance method.

6. Limits of Rs. 10 lakhs & above: Up to

Rs.50 lakhs under Trade & Service

sector.

Simple assessment method.



Working capital advance by commercial banks:

Working capital advance by commercial banks represents the most important

source for financing current assets. Traditionally, industrial borrowers enjoyed a

relatively easy access to bank finance for meeting their working capital needs. Ready

availability of finance in a fairly convenient form led to over-borrowing by industry

and deprivation of other sectors.

The RBI had been trying particularly from the mid sixties onwards, to bring a

measure of discipline among industrial borrowers and to redirect credit to the priority

sectors of the economy. From time to time, the RBI has been issuing guidelines and

directives to the banking sector toward this end.

MARGINS PRESCRIBED BY R.B.I.

Margins on Agricultural advances:

TYPE OF LOAN MARGIN

1. Crop loans & short term loans:

For loans up to Rs. 10000/- No Margin

For loans above Rs.10000/- 15 to 25%

Margins on Commercial and Institutional advances:

Stock in Trade 20 to 25%

Book Debts 40 to 50%

Letter of Credit 10%



5.7 CREDIT MONITORING ARRANGEMENT {CMA}

The credit authorization scheme (CAS) introduced in 1965, was one of the

oldest amongst regulatory measures introduced by the RBI for monitoring bank credit.

The RBI withdrew the CAS on 10-10-1988. The role of RBI thereafter took the form

of post sanction scrutiny of proposals in respect of term loans and working capital

limits beyond stipulated limits. The RBI has renamed the scheme as Credit

Monitoring Arrangement.

The salient features of the reused scheme in relation capital limits are

as under

1. The banks should consider proposals for sanctions within the broad framework

of guidelines issued by RBI from time to time.

2. Initially, under CMA, the sanction / renewal of credit limits to borrowers

enjoying working capital facilities beyond Rs. 10 cores only needed to be

reported to RBI for the sanction scrutiny. It is now not necessary for the

commercial banks to scale formal post sanction. Approval from the RBI in

respect of sanctions and renewal of fund based working capital limits

exceeding Rs. 10 cores.

Where norms relating to inventory / receivables had been laid down by RBI credit

limits had to be determined according to such norms.Banks could sanction ad-hoc

limits to borrowers for temporary periods not exceeding 3 months. Such ad-hoc

sanction to borrowers enjoying working capital beyond Rs. 10 cores should be

reported to RBI in case where ad-hoc limits are needed for period should be

reappraised.



Working capital loans under single window to tiny and small-scale

industry unit (S S I):

a) Eligible financing institutions: Earlier the state-financing corporation

had twin function industrial development corporation. Now scheme is being

channelized through commercial banks also.

b) Eligible units: New tiny and small-scale units whose cost of project,

excluding working capital margins does not exceeds Rs.20 lakhs, (raised from

the earlier Rs. 10 lakh) and the total working capital requirements at the

normal level of operations is up to Rs. 10 lakhs (raised from the earlier Rs. 5

lakhs) provided the unit has been sanctioned term loans for fixed assets and

loan for working capital by the same institution. Project cost was later raised

to Rs.50 lakhs. Project with outlay up to Rs.1 core (raised from the earlier

Rs.50 lakhs) are now eligible for refinance under the single window scheme of

SIDBI.

c) Nature and Amount of Assistance: Working capital loans within

above ceiling to units for meeting the working capital requirements of tiny and

Small Scale units.

An advance is also granted against other securities: -

They are as follows;

1) Advances against government securities such as government promissory note,

stock certificates, bearer bonds, national savings certificates, Units of UTI public

sector bonds etc.

2) Advances against term deposits.

3) Advances against gold ornaments / silver ornaments to Agriculturist.



d) Assisted unit may approach the bank for meeting its existing working

capital requirements for additional working capital requirements at any

time during the currency of the loan.

e) The SFC in turn should immediately thereafter release its charge on

current assets and also concede, second change on fixed assets, if so

insisted upon by the bank.

f) To facilitate smooth interaction between the SFC/IDC should forward a

copy of its approval to the bank soon after the loans are sanctioned by it.

Some Important clarification of Working Capital:

a) Working capital exceeding 20% of Projected Annual

Turnover (PAT):

Where the working capital requirement of S.S.1 units exceeds 20% of PAT

higher quantum of bank finance can be produced to them. (If it is found

necessary to do so on the basis of need based requirement)

b) W. C. Below minimum level: The WC below the minimum level may be

justified special circumstance in which the retirement is demonstrable lower

than the minimum level as in the case of an ancillary unit with assured supply

of inputs and off take of outputs.

c) Higher liquid surplus: Since the bank finance is only intended to support

need based requirements of borrowers, if the available net working capital is

more than 5% of the turnover, the former should be reckoned for assessing the

extent of bank finance.



d) Short WC cycle: The same approach as indicated in the preceding

paragraph should be adopted. It should, however be ensured that the genuine

credit requirements of the unit adequately.

e) Efficient WC management: If the unit has been having an efficient WC

management and thus managed with lesser working capital, the limits can be

set a lower level, subject to (c) and (d) above.

f) Peak season: In case or seasonal industries, the peak season and off-season

turnover, instead of annua1 turnover can be separately considered for

determining the respective 20% levels.

g) Creditor / Advance payments: These continue to be treated in the same

manner as earlier. These are among the sources of funds required for building

up the current assets. These should not be reckoned towards margin. Only the

liquid surplus available reckoned for the purpose of margin.

Traders: In case of traders, while bank finance could assessed at 20% of

project turnover, the actual draws should be allowed on the basis of drawing

power to be determined by the bank after ensuring that unpaid stocks are

excluded.

h) Lower margins: As a general rule, there should not be dilutions in the

stipulations of margin requirements except under the circumstances where it is

otherwise permitted e.g. under the entrepreneur scheme, in case of

rehabilitations of stock units.

i) Limit / Sub-limits: The banks have to fix the limits and sub limits taking into

account all the relevant factors.

j) Monthly sales figures: The existing system of regulating drawings in the

account continues. However it is also necessary to obtain the sales data f) Peak

season: In case or seasonal industries, the peak season and off-season

turnover, instead of annua1 turnover can be separately considered for

determining the respective 20% levels.



6. DATA ANALYSIS AND INTERPRETATION

Evaluation of working capital advances:

The Bank's {Bank's here refers to canara bank}, advances (Advances here

refers to working capital advances) to different sectors.

1. Current Ratio

Current assets Current Ratio = Current Liability

Table-1

Showing the current Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Current Assets 161431.30 188061.49 258936.78

Current liability 157961.75 184022.32 257013.22

Ratio 1.02 1.02 1.00

Graph-1



Showing the current Ratio of the CANARA BANK

Analysis:

The above ratio shows that there was constant growth in current ratio in 2006 and

2007 was 1.02 and it was slightly declined in 2008,that is 1.00.It indicates that the

bank having sufficient cash to meet its current liabilities and the bank is using its

current assets efficiently and profitably. So over all ratios of current assets and current

liabilities is satisfactory.

2. Debt Equity Ratio:

Debt



Debt Equity Ratio = Equity

Table-2

Showing the Debt-Equity Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Debt 19230.05 20334.79 36789.77

Equity 360 360 360

Ratio 53.41 56.48 102.00

Graph-2

Showing the Debt-Equity Ratio of the CANARA BANK



Analysis:

The above chart shows that there is a debt e.g., Ratio in 2006 is 53.41% it was

increased to 56.48% and in 2008 it is 102.00% it shows that in each year e.g., capital

is same but debt capital is increasing generally 2/3 ratio is good for any capital

structure. Thus in first 2 year debt is not more thus the bank is not given any interest

on debt and in that period for e.g., share holders are got benefited and in third year

2008 .The debt e.g. ratio is 102.00% it is not a good capital structure the bank is need

to pay heavy interest an debt thus the bank is need to reduce the debt capital and wise

it is very it is very much burden in future.

3. Fixed Assets to Net worth Ratio Fixed assetsFixed assets to net worth ratio = Share holder fund



Table-3

Showing the Fixed Assets to Net worth Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Fixed assets 4094.90 4330.01 9489.72

Share holder fund

360 360 360

Ratio 11.97 14.75 26.36

Graph-3

Showing the Fixed Assets to Net worth Ratio of the CANARA BANK



Analysis:

By observing the above ratios the fixed assets to net worth ratio is increasing per year

that is in 2006 it is 11.97% it was increased to 14.75% and in 2008 it is 26.36. It

shows that at what extent the e.g. share capital is contributing to net worth, higher the

ratio better is the net worth.

4. Return on Share Holder Investments

Net profit (after interest and tax) Return on share holder investment= Share Holder fund



Table-4

Showing the Return on Share Holders Investments Ratio of the

CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Net profit 20625.80 21671.67 24922.90

Share holder fund

360 360 360

Ratio 5.73 6.01 6.92

Graph-4

Showing the c Return on Share Holders Investments Ratio of the

CANARA BANK



Analysis:

The ratio is continuously increasing it is in 2006 id 5.73% and it was increased to

6.01% and 6.92% in 2008. Higher the ratio the shareholder will get more benefit and

higher the return on investment to share holders.

5. Equity Ratio

Share holders fund Equity Ratio = Total assets



Table-5

Showing the Equity Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Share holders fund

360 360 360

Total assets 165526.20 193374.50 268426.50

Ratio 0.002 0.018 0.0013

Graph-5

Showing the Equity Ratio of the CANARA BANK



Analysis:

This ratio shows that at what % the share holders fund included in total asset lesser

the ratio better is for the shareholders in this ratio the equity ratio is 0.002% in 2006

and was decreased to 0.018% and in 2008 it is 0.0013% it is better for the company

and also for the shareholders finally the ratio of the bank is satisfactory.

6. Solvency Ratio

Total liability to outsiders Solvency Ratio= Total assets

Table-6



Showing the solvency Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Total liability to outsiders

22100.05 20334.79 36789.77

Total assets 165526.20 193374.50 268426.50

Ratio 0.13 0.10 0.13

TABLE 6

Showing the solvency Ratio of the CANARA BANK



Analysis:

The ratio indicators the part of total liabilities on total assets lesser the ratio better for

the bank because the obligation of paying liabilities is less. In this ratio the solvency

ratio in 2006 is 0.13% and was decreased to0.10 in 2007 and in 2008 it is again 0.13%

thus solvency ratio is satisfactory for doing the bank transactions.

7. Earnings per Share Ratio:

Net profit available for equity share Earnings Per Share Ratio= Number of equity share



Table-7

Showing the Earning per Share Ratio of the CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Net profit available for equity share

20625.80 21671.67 24922.90

Number of equity share

275994 275994 275994

Ratio 0.07 0.078 0.09

Graph-7

Showing the Earning per share Ratio of the CANARA BANK



Analysis:

The ratio of earning per share in 2006 was 0.07% and was decreased to 0.078% it is

again increased to 0.09% in 2008. The higher ratio better for the share holders and it

is also better for the bank. When bank incurring loss because no obligation of paying

ratio on equity-shares.

8. Return on Gross Capital employed:

Adjusted Net Profit Return on gross capital employed= Gross capital employed

Table-8



Showing the Return on Gross Capital employed Ratio of the

CANARA BANK

Year 2005-2006 2006-2007 2007-2008

Adjusted net profit

2062.58 2161.16 2492.92

Gross capital employed

165526.20 193374.50 268426.50

Ratio 1.20 1.10 0.92

Graph-8


CANARA BANK



Analysis:

The ratio indicates percentage of profit for the capital employed higher the ratio

better for the bank. The ratio is 1.20% in 2006 and was decreased 1.10% and 0.92% in

2007 and 2008 respectively. The ratio is decreased every year. It is not satisfactory for

the bank.

9. Return on Net Capital employed

Adjusted net profit

Return on Net Capital employed = *100 Net capital employed

Table-9



Showing the Return on Net Capital employed Ratio of the CANARA

BANK

Year 2005-2006 2006-2007 2007-2008

Adjusted net profit

2062.58 2167.16 2492.29

Net capital employed

143416.15 173039.71 231636.73

Ratio 1.43 1.25 1.07

Graph-9


CANARA BANK



Analysis:

The ratio is decreasing every year. It is not satisfactory for the bank. The ratio is

1.43% in 2006 and was decreased to 1.25% and 1.07% in 2007and 2008 respectively

higher the ratio higher the profit and benefit to bank.

FINDINGS AND RECOMMENDATIONS

Findings:

1. During the study to be observed that CANARA BANK has functioning effectively

and one of the lending commercial bank in India.

2. From the year 2003-07 there was a continuous increase in profit in CANARA

BANK.

3. Sanction of loans and advances are increasing in every year.



4. Major part of loans are going out in the form of SME Loans, Retail loans and

Housing loans.

5. The major part of its income is in the form of interest from investments and loans

and advances.

6. The total banking transaction are fully computerized, ISO 9001 Single window

operations

7. The Bank follows and complies with all the RBI guidelines in granting various

types of advances. The Bank not only caters to the need of the priority sector

borrower and also to the Trade, Industry and commerce but also provides various

types of loans to students, professionals and to self employed people.

8. The bank is giving a lot of emphasis on providing excellent customer services.

9. DER of the Bank was increasing from last 3 previous years. The ratio was rising

from 56.48 to 102.00 in the year 2005-06 to 2006-07.

10. Solvency ratio was increasing from 0.10 to 0.13 in the year 2005-06 to 2006-2007.

11 W.C.A was increasing from year to year. Its advances use to give more to the

small scale industries and agricultural sectors, for that its W .C.A is more.

12. Earnings per share of the company was increasing from 0.078 to 0.09 in the year

2005-06 to 2006-07. Because of its net profit was a key on increasing from last 3

years.

Recommendations:

1. Working capital advances to small business is low compared with advances to

other sectors. The bank is suggested to introduce new schemes for providing

more and more credit facilities to this sector.

2. The bank should have better and rational credit appraisal system so as to avoid

bad debts.

3. The bank is suggested to take some new measures to speed up its recovery

proceedings though standing as unrecovered is decreasing from year to year.



4. The bank should continue to permit drawings for working capital purpose

based on the statement received under the quarterly / monthly information

system, depending on the regularity / reliability of the information.

5. The bank should set up more ATM’s, especially in rural areas to help the

customers to draw the money easily.

6. To meet urgent requirement of customers, arrangement should be made even

after business hours.

CONCLUSIONS/APPRISAL:

Canara bank was established by sir Ammembal subba rao pai.in a remote village of

the south

canara with a vision to reach the common and poor man with banking facilities. It

has grown to one of the premier banks of India and catching speed to achieve the top

slot. The bank is well established and managed by dynamic and rich experienced

personalities.

The bank has traveled a long way since the journey from 1906. the bank has

completed more than 100 years after the establishment and has earned enormous



name in the modern society in India. It has earned a name in the economic

development of our nation. The bank has strived hard to reach the rural mas and under

privileged community of our nation. The bank has much prospects to grow still better

and to compete with global market. The bank has well knit and dedicated to staff

under the experienced leadership for further growth ,progress, development and

performance in the coming years.

With the planned lending and calculated assessment we can conclude that the

working capital advance to different segments of the economy particularly to SME

sector and agricultural sector the bank has taken all necessary steps to expand its

lending to priority sector and thus evolved varies new products. The banks lending to

retail sector will get boost by vigorous marketing dully introducing young and

efficient marketing executives. The bank has evolved various result yielding methods

for recovery of Naps. the bank has also introduced latest technology like ATM, Tele

banking, Electronic fund transfer, Internet banking etc. which are gaining popularly

among its customers.

With the above canara bank will certainly become number one bank in India. soon.

SUPPLIMENTARY PAGES

BIBLIOGRAPHYBIBLIOGRAPHY

Books Referred:

S.Murali and K.R.Subbakrishna, ‘Bank credit management’,

Himalaya Publishing House Pvt.ltd., First Edition: 2008.

Prassanna Chandra, ‘Financial Management’, Tata McGraw

Hills.



I.M Pandey, ‘Financial Management’, Vikas Publishing House Pvt

Ltd., Ninth Edition: 2005.

Arun chatterjee Credit Management In Particle Approach,

Skylark Publications., First Edition:2004.

Other sources:

Bank Broachers

Annual reports

Bank websites

Journals


ramya canara bank project final report

Documents