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Syndicate Institute of Bank

Management, Manipal

Training Program on High Value Advances

13 to 18th September, 2010

Credit Appraisal for Large and

Corporate Advances

Prof Chowdari Prasad, TAPMI, Manipal

Sept 13, 2010

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9/13/2010 High Value Advances 2

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Financial Results March, 2010

Parameters Year endedMar 09

Year endedMar 10

Quarter ended

Mar 09

Quarter ended

Mar 10

Operating Profit 1671 1873 466 552

Net Profit 913 813 207 168

Net Interest Income 2548 2740 547 861

Net Interest Margin 2.75 2.35 2.37 2.89Capital Adequacy Ratio (%) 12.68 12.70 12.68 12.70

Gross NPA Ratio (%) 1.93 2.19 1.93 2.19

Net NPA Ratio (%) 0.77 1.07 0.77 1.07

Business 198380 208476

Deposits 115885 117026Advances 82495 91450

Cost of Deposits (%) 6.98 6.14

Yield on Advances (%) 10.73 9.40

CASA Share (%) to Dom. Dep 28.89 32.86

Credit- Deposit Ratio (%) 71.19 78.15 Rs. In Crore9/13/2010 High Value Advances 3

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About Syndicate Bank 2010

www.syndicatebank.in Rs. In Cr

Parameters Quarter endedJun 09

Quarter endedJun 10

Operating Profit 516 587

Net Profit 262 265

Net Interest Income 565 964

Net Interest Margin (%) 2.12 3.09Capital Adequacy Ratio (%) 13.39 12.37

Gross NPA Ratio (%) 1.91 2.31

Net NPA Ratio (%) 1.02 1.06

Earning per Share 20.04 20.34

Business 199686 202622Deposits 116317 108560

Advances 83367 94062

Cost of Deposits (%) 6.62 5.27

Yield on Advances (%) 9.71 9.08

9/13/2010 4High Value Advances

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About TAPMI in 2010

www.tapmi.edu.in

Founded by late Shri TA Pai in 1980 as MIM

Renamed as TAPMI after his demise

First Batch of 2 year PGP commenced in 1984

Completed 25 plus years of Excellence inManagement Education as on date

Fully residential top-class Campus in 2009 Eminent Personalities visit TAPMI in 26 years

Expansion, diversification & collaborations


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TAPMI : Vision and Mission

VISION: to make TAPMI an excellent institution in theIndia / Asia-Pacific region, a place that is intellectually exciting, financially and academically autonomous, withsustainable competitive advantage in all its activities.

MISSION: "We are committed to excellence inmanagement education, research and practice bynurturing and developing global wealth creators andleaders. We shall continually benchmark ourselvesagainst the best-in-class institutions. We shall fostercontinuous learning and reflection, achievement-orientation, creative interdependence, and respect fordiversity with a holistic concern for ethics, environmentand the society"


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About me Four decades of service in Public / Pvt Orgns (1971)

Post Graduate in Commerce, Osmania University plusCAIIB, CIF, Dip TD, Dip MB, Dip IR, CompHindi (GOI)

Worked in Andhra Bank, SBI, VBLL 25 years

Vice President in a 100% EOU for 3 years in Hyd, AP

Teaching at TAPMI, Manipal since May 1999

<3 years break in Alliance B-School (2006-2009)

Academic Admn, Training, Research, Consulting etc.

Life Member IIBF, ISTD, AIMA, Director LC, 2 BOS

Reach : [email protected] or 9482549472

Find me in google.com; scribd.com; or wiziq.com


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Agenda for Today

Advances Portfolio

Lending Policies

Credit Management

Credit Policy in a Bank

Regulatory Framework

Prudential Norms

Types of Borrowers

Credit Evaluation : WC

Credit Evaluation : TLs Dynamics of Foreign Exch

EXIM Bank, ECGC

Types of Credit Facilities

Documentation

Monitoring & Follow Up

Prudential Norms on

Capital Adequacy andCredit Risk Management

Recovery Management

Microfinance

Credit Rating, Credit

Scoring and CreditInformation Bureau

Comprehensive Case Study


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Advances Portfolio1. Working Capital Advances Cash Credit a/cs

1. Against Stocks, Bills Receivables, etc.(Hypn/Pledge)

2. Bridge Loans, Overdrafts, Consortium, etc.

3. Pre-Shipment and Post-Shipment Advances

2. Term Loans for (with or without mortgages)

1. Land, Buildings

2. Plant & Machinery moveable or immoveable

3. Lease Financing, Hire Purchase of machinery4. Non-Fund Based

1.LCs 2.Guarantees 3.Deferred Payment Guarantees


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Lending Policies of Bank

Primary and Secondary Functions of a Bank

Directed Lending and Normal Lending

Wholesale and Retail Banking / Lending

Requirements for Effective Lending Various Laws like Contract Act, Partnership Act,

Companies Act, Sale of Goods Act, Transfer of Property Act, Stamp Act, Information Technology

Act, Income Tax and other Acts (Sales Tax, Excise& Customs Rules) Registration Act, IndustrialLaws (PF, Wages, Bonus, ESI etc), FEMA, etc


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Bank Lending Directed or Normal Lending

Retail or Wholesale Lending?

± Wholesale Lending is lending to Corporates

± Small number of Large Advances : Follow up is easy

± Products are customized and complicated too ± Cost of maintenance is low

± Personal attention can be extended; Relationship

± Risk is very high

± Yields may be low

± Highly demanding customers;

± Encourages concentration of wealth in few hands


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Principles & Objectives of

Credit Management

Objectives of Credit Management

Qualities of a Good Borrower : 6 Cs of a Bank

Cardinal Principles of Bank Lending

An Ideal Advance?

Stages in a Credit Cycle

Client / Customer Acceptance Criteria?

Modes of Credit Disbursement

Fair Practices Code


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PROJECT APPRAISAL

a) Market and Economic aspects.

b) Technical aspects.

c) Financial aspects.

d) Managerial aspects.

Post-sanction Supervision and Follow Up of Loans

Post-sanction, supervision and follow-up of loans is an important function as it

helps in keeping a watch on conduct and operational/financial performance of

the borrowal accounts.

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6 Cs

1. Character: difficult to judge / measure2. Capacity: To possess required skills

3. Capital: Owners stake in business or Margin

4. Collateral: additional / secondary security5. Conditions: Economy, Demand, Prospects,

availability of raw material/men,

Infrastructural facilities, etc.6. Credit Record: Track Record, Market Credit

Reports or through CIBIL sources.


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Ideal Advance

According to L.C. Mather, an ideal advance isone which is

± Granted to a reliable customer;

± For an approved purpose;

± In which the customer has adequate experience;

± Safe in the knowledge that the money will be usedto advantage and

±Repayment will be made within a reasonableperiod from Trading receipt or other knownmaturities.


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Credit Cycle

1. Prospecting: present customers/market survey

2. Credit Investigation: gathering information

3. Credit Proposal: Basic info, Risk Assessment, etc

4. Credit Approval: critical stage;

5. Credit Disbursement: related to progress of

work; Mode of Disbursement cash / kind.

6. Credit Monitoring: On an on-going basis thro

visits to unit, inspections, stock statements, bills

and transactions in the loan account..


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CONSIDERATIONS BEFORE MAKING OR

RECOMMENDING ADVANCESi. The means of the applicant and guarantors should be verified by

independent enquiries and if possible by examination of their books.

ii. The details of the assets of the applicant, with specific reference to his liquid

assets viz. cash, book debts, stocks etc.

iii. The details of the liabilities of the applicant ± whether short-term or long-term.

iv. The extent of the margin available with the applicant, which is indicated by

the excess of the liquid assets over the current liabilities.

v. The experience of the applicant in the business or the line of activity in which

he proposes to utilize the money to be borrowed from the bank.Pre-sanction and Post-sanction Follow Up Check List

In order to strengthen the pre-sanction appraisal and to avoid the quick mortality

cases, banks today have evolved check lists governing areas of pre-sanction

appraisal and post-sanction follow-up for meticulous compliance by all those

associated with the credit dispensation.

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RBI Guidelines : Fair Practices

DBOD Leg.No.BC.104/09.07.007/2002-03 dated May05, 2003 to all the banks / AIFIs : Guideli nes on Fai r Pract i ces Code f or Lenders

DBOD No. Leg. BC.65/09.07.005/2006-07 datedMarch 06, 2007 to ASCBs/AIFIs : Guideli nes on Fai r Pract i ces Code f or Lenders

DBOD No. Leg.BC.28/09.07.005/2007-08 datedAugust 22, 2007 to ASCBs/AIFIs : Guideli nes on Fai r Pract i ces Code f or Lenders : F urni shi ng Copy o f Loan

Agr eement


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FAIR PRACTICE CODE

Credit Information Bureau (I) Ltd. (Cibil)

Loaning Powers And Responsibilities of Incumbents

Pricing of Credit (Interest Rates) and Credit Rating System

Advances to Limited Liability Companies

Advances To Partnership Firms

Advances to Hindu Undivided Families (Huf)

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Credit Policy in Banks

Meaning of Credit Policy of a Bank

Four Types of Credit Culture:

± 1. Quality of Loans

± 2. Short term gains are priority ± 3. Market Share and Growth and

± 4. No clear priorities or focus leading to ambiguity!

Objectives of a Sound Credit Policy

Regulatory requirements under Credit Policy

Credit Policy as a Risk Management Tool


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9/15/2010 Technology in Indian Banking 2010 21

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Regulatory Framework

Cash Reserve Ratio (CRR)

Methodology for maintenance of CRR

Statutory Liquidity Ratio (SLR)

Approved Securities for SLR

Penalty for Non-Maintenance of CRR / SLR

Priority Sector Lending @ 40% of Advances

Capital Adequacy Ratio at 9% and above

Basel I, II and now towards III

Asset Liability Management / Risk Management

Benchmark Prime Lending Rate / Base Rate?9/13/2010 23High Value Advances

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CREDIT RISK MANAGEMENT

"Credit risk," means the possibility of loss associated with diminution in the credit

quality of borrowers or counter parties. These counter parties may include an

individual, corporate, bank, financial institution or a sovereign.

In a bank's portfolio, losses stem from outright default due to inability or

unwillingness of a customer or counter party to meet, commitments in relation to

lending, trading, settlement and other financial transactions.

Banks have put in place "Credit Risk Management Division" to monitor credit

portfolio from time to time on a periodical basis besides enabling Technology-

based risk rating tools to assess the loan proposals and track deficiencies.

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Prudential Norms

Income Recognition & Asset Classification norms

Meaning of Standard Asset, Sub-Standard,

Doubtful and Loss Assets

Norms for treating an advance as Non-

Performing Asset

Provisioning norms for various classes of assets

RBI Guidelines on appropriation of recoveries

Concept of ENPA (Earnings to Net NPAs)


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Types of Borrowers

Various types of borrowers: Sole Prop; HUF; PartnershipFirms (AOPs, LLPs and LLCs); Societies / Clubs /Associations / Trusts / Multi-National Companies and

Private and Public Limited Companies MOA / AOA / Listof Directors /Cert of Incorporation/ Cert of

Commencement/ Common Seal/ Powers / Prospectus forIPO / Resolutions / AGMs and EGMs / Registrar of Companies requirements / Listing requirements / Q1-4

Special features of each type of borrower as above

Salient points to be noted while dealing with Minors

Limited Co formalities for creation of charge on assets

MCA 21e-Filing of returns of Limited Companies

Hindu Undivided Family precautions to be taken


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Types of Credit Facilities

Types of facilities

Overdraft, Cash Credit, bills facility, Term Loans

Fund-Based and Non-Fund Based facilities Bank Guarantees (BG)

Letter of Credit (LC)


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Credit Evaluation :

Working Capital Finance

Meaning of Working Capital

Kinds of Working Capital

Operating cycle Factors affecting the level of working capital

Assessment of Working Capital

Methods of Assessment of Working Capital Tools of financial statement analysis


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10 Factors affecting WC1. Nature of Business

2. Growth of Business

3. Seasonality of Business

4. Production Policy

5. Period of Conversion6. Selling Policy

7. Taxation Policy

8. Government Regulations

9. Ploughing back of Profits and

10.Business Cycles


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Working Capital Loan And Cash Credit System

Working capital lending still a major

functional area for commercial banks

Conventionally, working capital financing in

India is in the form of cash credit facility

Under the cash credit system, the lending

bank sanctions a maximum loan limit to a

customer Utilisation is subject to availability of

adequate assets pledged or hypothecated

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The drawing power is adjusted at regular

intervals (normally once a month) by

considering the level of current asset that

has been paid for and deducting margin(s)

therefrom at stipulated rate(s)

These margins are worked out in line with

the lending norms of Tandon Committee.

The amount of loan outstanding can vary

freely within the drawing power and at times

the balance in the cash credit account can

even be in credit

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Interest is payable based on the actual level of loan enjoyed on a daily product basis

Thus, a fixed limit is worked out for any loan

account by assessing the customer¶s peak

requirement on the basis of its projected holding of current asset

Once this limit is set, the borrower becomes

virtually entitled to draw, subject to sufficientcurrent asset holding, any amount up to the limit.

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The borrower hasthe option to draw at any point of time,

without any prior notice, up to the extent of

the limit

but no corresponding obligation either to

compensate the banker for this option or to

ensure an optimum utilization of the facility at

all points of time

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Tandon Committee Norms ± Style Of Credit

The first and the most substantial work in the fieldof working capital finance in India was done by the

Tandon Committee

The Committee aimed at inculcating in theborrowers the habit of making an effective financial

planning through a system of reward and penalty

It suggested that the working capital facility shouldbe bifurcated into two components

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(i) A fixed or demand loan component,interest on which is to be charged at a certain fixed

rate throughout the year

(ii) A variable or cash credit component,interest on which is to be charged at a somewhat

higher rate. This component would indicate by

what amount the level of borrowing for a particular

customer exceeds the demand loan component

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If a borrower projects the demand loan componentat a ³higher than necessary´ level, he would end

up paying interest on amounts not actually

required by it.

If he projects the demand loan at a low level, much

of its withdrawals will attract a higher rate of

interest and the overall interest cost over the year

would not be minimized.

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It would, therefore, be in the interest of theborrowing company to ensure an efficient financial

planning and to project correct levels for its

projected fund requirement

Once the monthly requirement of working capital is

submitted by a borrowing company, the lending

bank has to work out the optimum level for

demand loan that will minimize the annual interest

burden

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CHORE COMMITTEE

Recommendations of the committee are summarized below:-

I. Continuance of the existing system

II. No bifurcation of cash credit accounts

III. Separate limit for peak level and non peak level periods

IV. Regulation of drawal of funds/Qtrly Statements:

V. No frequent sanction of Adhoc or Temporary Limits.

VI. Enhancement of Borrowers contribution

VII.Compulsory implementation:

a) Exception

b) Encouraging Bill Finance

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WORKING CAPITAL ASSESSMENT

GROSSWORKING CAPITAL AND NETWORKING CAPITAL ± AN EASY UNDERSTANDING

Areas GrossWorking Capital NetWorking Capital

Meaning

Refers to the sum of current assets employed in the business for day-to-day operations and for utilizing the fixed assets at the optimum level. Total

of the current assets is not deducted from the total of current liabilities

Refers to the difference between current assetsand current liabilities. Excess of current assets

over current liabilities is net working capital

Components

Cash and bank balances,

sundry debtors and bills receivables, raw materials, work in progress,

finished goods, consumable stores ,

prepaid expenses, advances given to suppliers of raw materials

Total current assets said in the opposite sideminus

creditors for raw materials and consumable

stores bills payable advance payments received from customers

deferred installments payable within a year term loan and debenture payable within a

year Salary, wages, sales tax, excise duty, PPF,

ESI outstanding dividend and tax payable

Financing

Generally current assets are financed by both long

-term and short-term sources of funds. Long-term source of funds refer toshare capital, debentures, term loans and short-term sources refer to bankoverdrafts, cash credit and sundry creditors

Net working capital is financed only by long-

term sourcesFor e.g.; share capital, debtors,term loans

Sign conventionIt is always a positive figure which suggests that without current assets, acompany cannot run. Hence gross concept is nothing, but the sum of all

current assets

It may be positive or negative. Positive figuregives the company¶s financial strength.

Negative figure indicates the company¶s poor financial position.

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Credit Evaluation : Term Loans

Meaning of Term Loan

Deferred Payment Guarantee (DPG)

Factors to be considered while considering a

Term Loan proposal

Technical, Economic and Financial Feasibility of a

Project

Use of Break Even Analysis, Sensitivity Analysis,Leverage, Interest Coverage and Debt Service

Coverage Ratios


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Dynamics of Foreign Exchange

Foreign Trade Policy in India : 2009-14

Foreign Exchange Rates : Direct / Indirect; (TT /

BC / TC /Currency) Buying/Selling; Spot/Forward

Pre-Shipment and Post-Shipment Credit Meaning and Types of Letter of Credit

Common Documents used in International Trade

EEFC., Exchange Earners Foreign Currency a/cs External Commercial Borrowing (ECB)


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Various Types of LCs

1. Inland and Foreign Letters of Credit

2. Demand and Usance Letter of Credit

3. Confirmed and Unconfirmed LC

4. Revocable and Irrevocable LC

5. Revolving LC

6. Red-Clause and Green Clause LC

7. Back-to-Back LC

8. Transferable and Non-Transferable LC


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Common Documents under L/C

1. Commercial Invoice

2. Consular Invoice

3. Packing Note / List

4. Certificate of Origin5. Insurance Certificate

6. Bills of Exchange orDrafts (DA or DP basis)

in 2 or 3 sets

7. Drawing arrangements

8. Bill of Lading

9. Airway Bill

10. Post Parcel

11. Railway/Lorry Receipt12. Bill of Entry

13. Exchange RegulationForms for Exports GR.

Or PP or VP/COD orSOFTEX Form

14. Customs Clearance.


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LETTER OF CREDIT

Definition

In simple terms, a letter of credit is an undertaking by a bank to make a payment to

a named beneficiary within a specified time, against the presentation of documents

which comply strictly with the terms of the letter of credit. The following diagram

shows those involved in a Letter of Credit transaction:

Issuing Bank

Importer

(Applicant) Underlying

contract

Advising/

Confirming Bank

Exporter

(Beneficiary)

Cont«.

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SWIFT www.swift.com Society for Worldwide Inter-bank Financial Telecommunication

HQ La Hulpe, Brussels, Belgium Provides reliable, fast tele-communication facilities for exchange

of financial messages all over the world between Banks and FIs

As non-profit making co-operative society in 1973 by 239 banksin 15 countries

Hubs in Brussels, New York and Netherlands

Rules in 1975; first message in 1977

>7,000 members in 200 countries now

Handles over 7 million messages every day

India a member since 1991

88 Indian banks are members as on date

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SWIFT contd...

Any Bank / FI can become a member Allots an address called Bank Identi-fication

Code (BIC) of 8 characters

Enables members to send secure and reliablemessages authenticated...

Correspondent bank arrangements...

Advantages: 24 hours service, system based fraud-free faster accurate confidential

funds/LCs/Guarantees

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Documentation

Meaning & Importance

Evidence

Steps involved in documentation

Procedure for execution of documents

Attestation / Registration of Documents

Time Barred / Renewal of Documents

Documents normally obtained from borrowers Types of Charges / Hypothecation/ Pledge/ Lien/

Assignment and / Different Types of Mortgages


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Monitoring and Follow-up

Meaning

Importance of Monitoring

Pre & Post-Disbursement Care

Off-Site and On-Site Monitoring

QIS Returns

Unit Inspection / Insurance of Assets

Early Warning Signals

Unfair Practices normally followed by borrowers


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Prudential Norms on Capital Adequacy

and Credit Risk Management

Narasimham Committee Recommendations

Basel I, II and now III norms

Approaches under Basel II

Tier I, II and III Capital

Meaning of Risk Weighted Assets

Mode of Computing the Capital Adequacy

Ratio of a Bank

Various Risk faced by a Bank


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Recovery Management

Legal and Non-Legal Methods of Recovery

Debt Recovery Tribunals (DRTs)

Compromise / One Time Settlements Corporate Debt Restructuring (CDR)

Asset Securitisation and Asset Reconstruction

SARFAESI Act, Provisions applicable to Banks Notices Issued to Borrowers under the Act


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Microfinance

Financial Problems faced by rural people in India

Meaning of Microfinance

Origin and Growth of Micro Finance in India and

abroad

Self Help Groups (SHGs) and their formation

Role of NABARD in Micro Finance

Assessment of Micro Finance Proposal

Grading of MFIs and NGOs


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Credit Rating, Credit Scoring & Credit

Information

Credit Scoring Mechanism of Syndicate Bank?


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Credit Rating Agencies in India

Rating and Methodology

Regulatory frame : SEBI

CRISIL

ICRA

CARE

Fitch (formerly Duffs & Phelps)

ONICRA SMERA

Brickwork Ratings

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www.brickworkratings.com


1 2 3 4 5

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No

Initial

contact by

issuer

Introductory meet

of CRA & Issuer

Supply of data by

issuer

Rating Exercise by

analysts team

Analysis of new facts and

enlisting new unresolved

questions

Analysis of new

data on

company

Locating

possibility of

rating

Credit watch

Notification to

issuer

Detailed analysis

meeting with issuer

Meeting withissuer resolving

questions or

site visit by

analyst

Preparation of rating profile

for rating

committee

Rating committeediscussion & vote

to determine

rating

Notification of rating decision to

issuer

Issuer appeals

against rating

Formal

notification to

issuer

Additional facts

are presented

to rating

committee for

decision

Rating

surveillance

system

Yes

1 2 3 4 5

6 7 8

1 2 43

9

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9/15/2010 Credit Information Bureau 56

C I B I L : Background

October 1999 : Working Group constituted by

RBI recommends

Imperative Need for C I Bureau

To be in the private sector

To be of world class

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Membership of CIBIL

Banks : Public, Private, Foreign etc

All Financial Institutions

Non-Banking

Financial Companies

Housing Finance Companies

Credit Card Companies

Members will also be Customers !

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C I B (India) Ltd.

March 2000 : MOU signed by SBI, HDFC, TransUnion International Inc., and Dun & Bradstreet

Information Services P Ltd.

January 2001 : Shareholders Agreement signedto establish

SBI : HDFC : T U : D & B

40% : 40 % : 10 % : 10 % Authorised Cap Rs 50 cr; Issued Rs 25 cr

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THANKS


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Comprehensive Case Study


Ab id d B/S f MMC Ltd

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Abridged B/S of MMC Ltd.( as on 31st March, 2xx0) Rs in Lakhs

Liabilities Amount

Capital 900

Reserves 50

Profit and Loss a/c 90

Term Loan 150

Bills Payable 40

Deposits Short Term 125

Trade Creditors 250

Bank Borrowing 110

Total 1715

Assets Amount

Goodwill 200

Land and Building 200

Plant and Machinery 400

Furniture and Fixtures 200

Stocks 400

Trade Debtors 300

Cash at Bank 15

Total 1715


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B/S of MMC Ltd2

Other Information: ± Projected Sales for next year Rs. 1,200 lakhs

± Term Loan Instalment for next year Rs. 15 lakhs

Required:1. Regroup the B/S as per Bankers requirement

2. Calculate Current Ratio, Quick Ratio, Long Term

Debt Equity Ratio and TOL / TNW

3. What points you would take into account while

preparing the proposal recommending the limits

requested?


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B/S of MMC Ltd3

4. Work out the Working Capital Requirement of the Company under MPBF (Method 2) andProjected Turnover Methods.

5. What are the terms and conditions you would

prescribe when the request is favourablyconsidered?

6. What are the securities you insist and how theywill be taken as security for the banks facilities?

Mr M, one of the Directors has agreed to offerhis residence as a security for the proposal.


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B/S of MMC Ltd4

7. List out the important documents to be obtainedand procedure for creation of the banks interests onthe securities.

8. After two months of disbursement, you visit theunit. What points do you look for before, during andafter the visit?

9. After a couple of years, you find that the account isalways overdrawn, the borrower is not able toservice the interests, the cheques are bouncing,

Stock Statements not being submitted, despitebeing repeatedly followed up. How would you reactto the situation?


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B/S of MMC Ltd510. The bank is forced to classify the a/c as NPA. The

particulars of the account are:-a. Sanctioned Limit Rs. 2 cr

b. Balance Outstanding Rs. 2.20 cr

c. Interest debited / not recoveredRs. 0.10 crd. Value of stocks Rs. 1.00 cr

e. Value of Residential Building Rs. 0.50 cr

Find out the provisioning required during the

satisfactory conduct of the a/c; in the yearfollowing the a/c becoming NPA (Assuming thatthere is no recovery after declaring it as a NPA)


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B/S of MMC Ltd6

11. If a dialogue with the borrower and its

directors / key personnel fails, what measures

should the bank adopt to recover its dues?


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Any Questions Please?